>> more communication from the fed about their intentions. >> we need to see how the fed interprets what's going on with inflation. >> they just have to turn the spec it off -- spigot off. >> the fed can win this battle, but the economy is going to see the cost. >> this is bloomberg "surveillance" with tom keene, and lisa abramowicz. tom: a fed day, we will be with

you this afternoon. what everyone wants to know is if david ortiz, hall of famer, can change a game. can jerome powell change a game today? jonathan: this market has done a ton of work year-to-date, since this middle of december. bond yields up 30 basis points, nasdaq down more than 13%, credit spreads are wider, and financial conditions are tightening. it is far too early to tell that story yet. tom: a quick opening on radio and tv to get to bob michele of jp morgan. i want to go to the basic ideas. i say that this will be usually choreographed. do you look for surprises? jonathan: i think we are always looking for surprises. when it comes to these numbers you have to be careful. deutsche bank, these numbers are getting lost in the conversation. we are having a conversation

about $1 trillion balance sheet reduction in 2023 and half a trillion in the back half of 2022. we haven't done this at this kind of level from this kind of size on the balance sheet. what is it mean for this? does the fed know? i don't think anybody knows. tom: what matters to me is he said earlier the great slowdown of the american economy. to me that is the overlay off of the parlor games, plural, that we are looking at. lisa: how long does the hiccup last and do we see a rebound if the omicron wave subsides? that has been something a lot of people have been deeming out. this meeting will be so fascinating, the declaration in terms of where the balance for risks for markets is. does the fed indicate an overly hawkish stance or the opposite, that they don't go far enough

and there is the projection of inflation getting more carried away on the backend? tom: i will focus, brent crude $89.27, not to $90 a barrel. $90 a barrel is not $89 a barrel. jonathan: of 1.4% on the s&p, nasdaq 100 up more than 2%, in the bond market the curve is getting flatter. what does balance sheet reduction mean, can they control it to some degree? the question that i've asked repeatedly this week, has this federal reserve chairman given up on the word transitory, yes. has he given up on the essence of the argument behind the word? i'm not so sure. i'm looking for clarification. tom: on the ukraine watch, all we know is that it is front and center at 1600 pennsylvania avenue.

my barometer shows a weaker swiss franc ever so slightly. we are trying to frame out a good conversation that we will do with bill dudley this afternoon. really interested in a more quiet fed. then the chief investment officer and head of global fixed income and commodities at jp morgan, the senior vice president of headaches and estimates for all of jp morgan. jonathan: i think that means that he is busier than you and i. we will talk about football later. why do you want to sit in cash in this market in this backdrop? >> there are number of things going on. i think that the fed has played this month perfectly. given the chaos that may seem to be a conundrum to a lot of people, but think about it. they got last year wrong, inflation got away from them. they admitted that they got it wrong, all of the members talked about the tools and play, then

they went quiet and let us in the market hash it out. they come into today's meeting knowing what the expectations are, march lift off, four rate hikes, qed ends in march, and some conversation about qt at the end of the year. they didn't have that information a few weeks ago and are now playing it smartly. my concern is that won't be enough. the inflation genie is out of the bottle and they will try to thread the needle and go with the market consensus. we have heard they don't want to surprise the markets. they've got enough for this meeting, but we think down the road they will have to accelerate a number of things, including rate hikes. we think they will have to go 25 basis points. qt we hope is a jackson hole conversation. that might be pulled forward. you have to watch the caps.

jonathan: it is really nuanced and we need to spend time on that. you are looking at potentially a hike at every meeting, balance sheet reduction that could come earlier maybe totaling $1.5 trillion through the end of 2023, and you think that is what it will take to get inflation down? what will the market look like if they deliver everything you said? >> you have to understand, central banks broke a 30-your promise to us. they told us the one mistake they would never make is to let inflation get away from them and it has in every part of the world in every economy. you listen to the fed at the start of this month and they are on their heels and they have a fight ahead of them because inflation is getting entrenched. it is in the price of shelter, employment. they have a couple of tough months ahead to look at

inflation data. we think that the inflation battle is much bigger than they are estimating or admitting. yes, they should -- if they do four rate hikes this year a year from now we are looking at a 1.5% beds funds rate. that is -6% to 8%. lisa: a lot of people buy into the transitory idea that this will be a passing surge in inflation. that is the market expectation if you look at forward indicators in terms of breakeven rates. what is the market getting wrong and what data points should traders be looking at to confirm the view that you have put out there? >> they have been brainwashed by the last 20 years that inflation never goes higher than 2.5%. i agree that it is transitory and things will slow down and inflation will come down, but where will the economy slow down

to? still above trend. you have closed the output gap, so you have that inflationary pressure as well. where will inflation slowdown? 2.5%? i don't think so. i think over 3%. the oil shocks in the 70's proved to be transitory, but it took a lot of central-bank ammunition to contain them. tom: can they stay on a measured dialogue, measured cadence, measured set of speeches? or do they say, as you stated, we will move up four rate hikes but along the way we will monitor and adjust and change if we have to? why can't they say that? >> i think they will but today's meeting would be a lost opportunity if they just did that. the next couple of months of data will put them back on their heels again before it slows down. i will give you that. why not do something?

why not come in and say we put out the schedule of large-scale asset purchases, that is the last one. a month early is kind of halfway priced into the market, go with the four rate hikes but leave the optionality to go to every meeting. i've heard a lot of discussion about 50 basis points. i think 50 basis points is pretty destructive. that reminds me of the end of the titan regime in 1994 and 1995. jonathan: i promised you time, the balance sheet reduction that a lot of people expect is one point $5 trillion from the middle of this year to the backend of 2023. on the balance sheet at the moment there are a ton of t-bills. you mentioned caps. how do they manage the rolloff? >> when they were doing quantitative tightening they had

caps at 50 billion per month. that's a good starting point but they should go to 100 billion in caps because the balance sheet is bigger. they actually don't belong in meddling in the markets to the extent they have, they don't belong owning as much of the mortgage and treasury market as they have. that should be left to free market participants like myself to price, not the fed and not in a recovery. jonathan: conviction trade now, what is it? >> my conviction, there has been a lot of repricing in the market, but i am still a selloff rally. can i add that i heard bill dudley will be on later? i think the question you have to ask is he brought financial conditions indices to the fed, which is really a private market concept. thus in the market love them,

but is that something that belongs at the fed? is that how they missed inflation? they were too concerned about people like me throwing our toys out of the baby carriage? tom, i know that you were around when volker raised rates from 5% to 20%. i was there also. can you imagine if you looked at financial conditions indicators? what do you think that he would have said and done? tom: this goes back to the landmark work of michael rosenberg, this wonderful indices. i agree, bob. it has been a new certitude with these indices that doesn't work in crisis or pivot points. >> and i love bill dudley, i have known him for years. jonathan: i am glad that you slipped that one in. if you want a final comment on your beloved liverpool? >> they are coming on strong and i would be proud for them to

have the david ortiz number applied to them in their next match. jonathan: thank you, sir. j.p. morgan asset management's bob michele. from new york, this is bloomberg. ♪ >> policymakers at the federal reserve are set to signal plans for the first interest rate increase since 2018. the rate hike is not expected until march but the fed is all but certain to hold interest rates near zero for now. policymakers discussed shrinking their balance sheet in the midst of the highest inflation of almost 40 years. a warning from russia's foreign minister. he says that moscow will respond to what it considers aggressive action by the u.s. and its european allies. he told lawmakers that nato countries are conducting provocative exercises near

russia's borders. in the u.k. boris johnson supporters holding their fire against the embattled prime minister saying that johnson's opponents in his own party may delay efforts to outstanding until the police investigation into the pandemic parties is complete. in parliament today johnson again insisted that he wouldn't resign. boeing, for the first time rising deliveries of that 737 max jet bolster the company's finances against mounting losses from the 787 dreamliner. the prophets have been wiped out because -- global news, 24 hours a day on-air and on quicktake, powered by more than 2,700 journalists and analysts in more than 120 countries. this is bloomberg. ♪

>> i do think that diplomacy has a real chance. we think that it probably will in the end lead to some level of de-escalation in the coming months, but this will be a challenge, slow going, and to a certain degree the escalations you've seen over the last couple of days. jonathan: before i turn to price action, futures up on the s&p, the cameraman had other ideas. let's get. to the real story.

breaking news from our editorial chief, who just sent me this. we will be changing our style when referencing european football ahead of our planned u.k. website launch in april. while bloomberg news style is to use standard american english, use football in any story specifically referencing the european sport and the u.s. legal still be referred to as soccer. going forward on tv and radio it has to be football. tom: on bloomberg surveillance we give you usage here as lesser will play nottingham forest in football. that is the usage, just so you got that. jonathan: points clarified. it is lester. that is a good example, tom. tom: do they usually play

nottingham forest? jonathan: they are in a different league. they might to get together in a cup game sometimes. if they had a cup tournament that involved major league baseball in the lower leagues. tom: should we move on? jonathan: i suggest you should. tom: the codirector of ucl where football reigns supreme. julie norman, you are truly an expert at the calculus of troops with russia. you have done that in the middle east with syria and others. when people give you troop estimates for russia, do you believe them? >> for now what we do know is that there is a lot of troops amassed on the border, at least 100,000. the estimates have been consistent for weeks or months and echo estimates from earlier this year. we are pretty reliant on those. what we are seeing is a pretty good reference point for preparing for all kinds of scenarios.

i think that is why we see the movements we do in terms of heavy diplomacy can continuing between france, germany, russia, and ukraine and the u.s., but also deterrents building up. tom: 4000 troops here, 4000 troops there. the russian mathematics is 100,000. how do you respond when you see the troop differentials? >> the 100,000, from what i've seen, has been accurate. if anything it has been above that. when you look at the troop placements on the ukrainian border and deeper into russia and now belarus, the numbers are looking pretty accurate. the 4000 numbers elsewhere are some of the locale based. the troops amassed are consistent across the board. lisa: what have we learned about

the relationships between the u.s., europe, and how much president biden has revived the pre-trump alliance? >> biden came in wanting to do that to build up the sense of multilateralism. overall he has done that. there have been pretty serious missteps like to withdraw in afghanistan, but overall they have been pretty united. on the issue of ukraine and nato biden has been trying to work very closely with nato allies, with nato and eu partners on monday, in close coordination. despite his gaffe last week suggesting a lack of coordination there has been close coordination even though interests vary. lisa: what is the main casualty economically that you see is relatively likely or the most likely outcome if tensions continue to rise? >> we are already seeing it in

the energy sector. that is the big worry for european allies now. europe depends on russia for about 40% of their energy supply, especially natural gas. that is an area where there is a different level of concern and interest for european partners than the u.s.. biden and his administration are trying to shore up those concerns, hosting qatar officials to ensure that natural gas can get to europe as necessary. there is obviously areas for europe now. jonathan: as always, come back soon and stay close. joining us from ucl on the situation at the moment. we have a bounce back going into the federal reserve meeting with chairman powell. we will catch up with the former richmond fed president. the former officials have been much more hawkish than they were

when they were sitting on the committee? tom: this is really important and a great selection by our team. this is a guy steeped in caution, a more conservative voice, a more measured voice. it will be interesting to see the nuances. jonathan: we had a clue of what he would like to see the last time we spoke to him. he is looking for the fed to do more. lisa: he said three to four fed rates would not be surprising and this is the same rhetoric reheard out of bill dudley. how high can the benchmark rates go before you have a serious problem in markets, not just the nasdaq and correction. more of a credit problem considering that the u.s. and corporations have incurred as much debt as they have. jonathan: back to 2018? is that the wrong benchmark? do you think widening in a small

amount of time would make them nervous? lisa: i am concerned we are in a new paradigm where a lot of companies have refinanced and don't face massive maturity laws or liquidity crises. what happens if you see a wholesale repricing based on benchmark rates going up? how do you revalue high-yield that has not been high-yield for years? this is a valuation question to me that could potentially be for something bigger. jonathan: given the carnage -- can we call it carnage? this market is not discounting a three handle on the fed funds rate. not yet. tom: i say this is not carnage, it is carnage among less profitable, nondominant companies including small caps. there you have carnage. we have to do a surveillance correction, it is lester plays the reds in football.

jonathan: this is how football would be used in a sentence? we are doing this? training here at bloomberg news. how that would work out. to the bar. lisa: yep. ♪

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jonathan: is fed decision day and we have a bounce back. alongside tom keene and lisa abramowicz, i'm jonathan ferro. higher on the nasdaq by 334, up 2.4%. the s&p come up 1.6%. yields up one basis point to 1.70 7062 -- 1.7762. on the year we are down hard, on the session we have a bounce. tom: as we go to this wednesday fed meeting -- join us this afternoon, great lineup -- it is more enthusiasm to get to the message to see what jerome powell says. we get informed by a gentleman from the richmond fed.

jeffrey lacker came out of the university of wisconsin madison and had to step into the biggest shoes, biggest cultural moments in fed america, that was all of the heritage at the conservative fee those of the richmond fed. -- conservative ethos of the richmond fed. jeffrey lacker joins us. if i threw have my books out because i'm blind, i kept all of the textbooks. there all of these great books, including what you studied at wisconsin. is any of this fed moment theory, is any of this fed process in the textbooks? jeffrey: i think so. i think the empirical record of the federal reserve for the last 100 years or more shows repeated instances of them pivoting from

concern about promoting demand and growth to concern about trying to fight inflation. there record is not that great. less than half of the time have they done it without successfully reduced inflation without pushing the economy into a recession by overdoing it. it is hard to do because of the lag involved they have set a course for themselves this year and they have a tough job this year. tom: are they going to move forward and you have confidence they can move forward and recalibrate and adjust with stability, or do you suggest there is instability risk? jeffrey: i think they are threading a needle. i think they have to tighten rapidly enough to ease demand and ease inflation. i think they are going to be

mindful of not going too fast and pushing the economy into a recession. they will all be mindful of this amazingly consistent -- the unemployment rate never rises more than .5% without rising two or 3%. they will be on eggshells this year. jonathan: what would it take to slow things down? clearly that number has shifted in the last 10 years. it has shifted quite a lot. inflation at 7% compared to inflation down to 2%. what would it take? jeffrey: they would have to get the real rate positive, up to 1% or 2%. they do not have to get there

overnight. to lay out the expectations so that markets understand that is about where the fed funds rate aims -- is likely to be at the end of 2023. jonathan: that is well north of where the dot plot is. i wonder how you would think the balance sheet reduction would play into that. is that something that complements that effort, something that replaces it? jeffrey: i have been in the camp of thinking the balance sheet is small beer relative to the funds rates. i think they ought to roll off the balance sheet and get about it rapidly and soon. i do not think that is the major determinant of monetary policy right now. i think they need to focus on the funds rate. lisa: do think jay powell has been a good communicator through

all of this? jeffrey: given the hand he has been dealt in terms of what to communicate, yes. there have to be a lot of my former colleagues on the fed that i feel bad for who are looking back at the last year and feeling as if the fed did not play its hand very well. lisa: can you elaborate on that? can you elaborate on which moves they made that you think in retrospect were big mistakes? jeffrey: two were three things. they hamstrung themselves by placing them under this tactical constraint of giving the market a huge amount of notice before they started tapering. jay powell said we are not talking about talking about tapering. that means we have to talk about it. i think that delayed their reaction and they felt compelled to go through this steady margin

releasing discussions and they put on the constraints they will not raise rates until they stop purchases. that set them back materially. you can see around august and september they realized they needed to start raising rates. they could have done it in october and november but they were on this tapering thing. the second thing is the way they think about maximum employment. they think of it as 3.5% unemployment in the labor force participation rate backup to trend. i think that cause them to misinterpret inflation in the first half of last year. they assumed there is a lot of slack in the economy. it can be a persistent inflation surge. they were wrong. maximum employment was --

maximum employment varies and depends. tom: this is a delicate question because we speak to all of these people with immense respect. paula krugman -- paul krugman and jeffrey lacker on the same page, we have to go back to traditional economics. is the regret of the fed looking at john williams and richard florida that the fed is getting to mathy they have to get more conceptual about the real economy? jeffrey: this idea about maximum employment varying over the cycle, that has been around a while. i don't think of that as a new idea. what i think they ought to go back to is before the last framework was introduced, i

think the last framework was a mistake. it took preemptive rate increases off the table. in hindsight last year would have been the ideal time to engage in that. nudge the rate up a bit just to hedge your bets about whether inflation is persistent and transitory rather than putting all of your aches in the transitory basket. -- all of your eggs in the transitory basket. jonathan: is this a failure of ex post monetary policy after all of the effort to shift in that direction, are you saying it has failed and we should go back to what we used to do? jeffrey: i do not think the new framework was a constructive step forward. i think people took for granted the price stability we had from 1995 on and i did not think they appreciated the extent to which small preemptive moves establish

the credibility of the fed. tom: this is fiery language. did they catch up and be preemptive at 2:00 this afternoon? jeffrey: i think they can. it will play out over a couple of meetings. at the next meeting they will release a summary of economic projections. that is in opportunity for them to spell out that they anticipate a more aggressive path. i think they could be more realistic about their inflation forecast. i do not think 2.6% is at all plausible at this point. i think inflation is likely to be 4% or north of that this calendar year. i think they can spell out the extent -- how they will respond to incoming data. are they going to discount

blips? are they going to get on top of inflation and move the right path up if inflation comes in stronger than expected for the first half of the year? jonathan: jeffrey lacker, formerly of the richmond fed. fantastic to catch up with you as always. i imagine when we hear from bill dudley, his views will not be too different. bill dudley road on bloomberg opinion the last few weeks that the fed's forecasts were in fantasyland. when you hear jeff lacker talk of a fed funds rate getting close to four, you hear the same thing from bob michele. the dot plot for the fed in 2024 has the fed funds rate just north of 2%. you hear the former fed officials say let's go. we are nowhere near where we need to be. tom: there was some real nuance.

you had a wonderful question about the what if of the past. this is a really important conversation and gets to the immediacy of 2:00 this afternoon. if you recalibrate the dot plot halfway to 4% it is a new discussion. jonathan: and how quickly do we need to get there? lisa: and what has changed to get us out of this low flation environment. a lot of people think we will go back to that. what jeff lacker just said about the idea we have all been brainwashed by recent history and something is different. what has changed. jonathan: this sounds like the bramo argument of the last 10 years. lisa: low blow. jonathan: i am deadly serious. lisa: i wonder how much is an international story with china as well. jonathan: futures higher.

on the s&p up 1.5%. a brilliant lineup later. special coverage, the fed decides. the three of us from 1:30 eastern time. ritika: the federal reserve is in the spotlight at the end of their two day meeting. policymakers are expected to signal plans to raise interest rates for the first time since 2018. that rate hike is not likely to happen until march. the fed is trying to contain the highest inflation in four decades. president biden has ramped up the effort to deter russia from more. he says he would consider personally sanctioning vladimir putin. president biden it has already threatened some of the most severe economic penalties the u.s. and its allies can muster if ukraine is invaded. intel has won a historic victory. the eu regulatory court has

ruled regulators make mistakes when they slapped the chipmaker with an antitrust fine. opec and its allies are expected to stick to their plan and ratify another modest production increased next week. the 23 nation coalition will rubberstamp the height of 400,000 barrels a day in march, trading close to a seven-year high. global news 24 hours a day, on air and on quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries. i am ritika gupta. this is bloomberg. ♪

>> we are in the early stages of running out of raw material. we live on a finite planet.

there's only a certain amount of cheap oil, cheap copper come and we are beginning to hit some of those boundaries. we will live in a world of bottlenecks and shortages and price spikes and we have to get used to it and learn to manage our way around. tom: by immense affection and respect for the gentleman from boston, jeremy grantham. a good conversation. front row wednesday at 10:00 a.m.. they'll be on the terminal like global wall street. whether you are cautious or not, it is must listen. it is must listen on this time of day when every jeffrey lacker considers 4% inflation, that lisa and i should parachute in will kennedy. he is in houston with our leading texas oil team. we are near $90 brent. is that an important benchmark? will: i think it will be quite a

signal to go through $90 for the first time in eight years. it would get people talking about the possibility of $100 oil it will mean the cost of oil and the cost of gas will come straight back up the political agenda. tom: it is something in the vicinity of $110 a barrel. his oil elevating near $100 or 110 for the same reasons since last time? will: slightly different reasons. last time was before shale and what ended that period was the shale revolution in texas and elsewhere in the u.s. that revolution is still going in u.s. production is rising. the problem the market has is they're not getting much investment in the oil industry worldwide. we are not developing new discoveries. that has been driven by decisions on capital allocation,

whether we should keep investing in oil. it is constraining supply at a time demand is recovering strongly and that is why we are seeing these elevated prices in many expect prices could stay around these elevated levels for a longer period. lisa: what kind of demand are people pricing in when they start looking at $100 a barrel? will: it is fair to say we have recovered. demand book -- demand remains where it was -- below where it was before pandemic, but the drivers of oil demand, chemicals come industry, gasoline and diesel, we are back to where beat we were before the pandemic and probably ahead of it. a lot of people expect we will see record oil commands. -- oil demand. that is not something everyone thought we would get to so quickly if we think about 18 months ago when prices had gone

negative. the demand has been stronger in the may issue is people expect it to continue rising. lisa: you talked about the shelf hatch and how they've been disciplined. they have not been ramping up as quickly as you would expect given how prices have increased. is that set to change? will: i think it depends on who the shale producer is. the public shale producers are under pressure to concentrate on returns. smaller companies, private equity owned companies, family owned companies, they are investing to grow. it is $90 a barrel, maybe higher. people will be making a lot of money and we will get more shale this year. the eia is predicting u.s. production will be at a record sometime in 2023.

it is a question of how quickly that happens. tom: a completely unfair question come up rigidly with a british accent. is america ready -- a completely unfair question, vertically with a british accent. is america ready for five dollars a gallon gas? will: it is possible. now, most of the gas stations we are at three dollars. certainly higher in other parts of the country. it would be a huge shock. you know that better than i. what is interesting is the auto industry is changing. the production of electric vehicles around the world is forecast to grow 70%. consumers will have alternatives. how far that drives the switch to electric vehicles will be one of the interesting questions the plays out while we have these

elevated oil prices. lisa: we got news opec-plus is going to continue boosting output on a slow basis. what you think it would take for them to accelerate some of the recovery in the oil reserve based on the pre-pandemic and where we are now? will: the real issue with opec come as we get towards 100, they will come under huge pressure from the u.s. as they did last year to try and do more. they'll will be speaking to abu dhabi and say can we do more. one of the problems markets are focused on is there is not that much more opec can do. they will be back to close to maximum production, lots of opec countries are struggling to meet their current commitments. saudi arabia has been a capacity but washington and the rest of the world should be concerned about not using it up too quickly. that is the buffer the world

has. we are talking about crisis in ukraine at the moment. that is the buffer the world has against unexpected political and economic events. we do not want to use that up too quickly. the oil market becomes tight. tom: will kennedy on short notice from houston, greatly appreciate it. what i find fascinating is in the last 24 or 26 hours we have heard will kennedy on $90 brent crude. a discussion of oil and gasoline in the four dollar range, and separately damian sassower talking about the real estate persistency he is perceiving. if you combine real estate up with oil up how you have inflation become quiescent? i do not understand. lisa: and you add to that the employment cost which was the trigger for the fed to shift their view. how much does this figure into what jeffrey lacker was speaking

about? on the counterpoint, do we see some economic boom disappoint this or is this time different? how much can we see this inflationary trend before we get to slow down? before it becomes contractionary in itself. tom: jp morgan says we are there. they are modeling -- lisa:, does that have to do with the omicron pickup? how much does that have to do with the recent slow down versus something more restrained because of the consumer not spending. this is uncertain. tom: bob michele was trashing me to death saying i actually remember paul volcker. lisa: he said he remembered him to. tom: is this the most interesting fed meeting in ages? will: it is fascinating -- lisa: it is fascinating, they have a difficult task ahead of them. tom: we will have wonderful

guests with us to get perspective. i'm looking forward to a conversation with priya misra. we will also hear the conversation with jerome powell. all this conversation led by michael mckee. he will be in the press conference. stay with us. bloomberg radio, bloomberg television. good morning. ♪

jonathan: your equity market is bouncing into this one. higher on the s&p by 1.6%.

"the countdown to the open" starts right now. >> everything you need to get set for the start of u.s. trading. this is "bloomberg: the open" with jonathan ferro. jonathan: we begin with the big issue. counting down to chair powell. >> the issue is how strong a signal to they want to send? >> i am sure jerome powell will peppered with questions. >> everyone is trying to figure out what is the fed going to do? >> they give a little bit more color about tapering. >> the press conferences are more interesting than what we first year at 2:00. >> you will hear hawkish messages for the next months if not the year. >>