taylor: let's look at how markets performed on the day. i need to say another day,

another day of volatility. that is what you saw today. up as much as 2% on the s&p 500 and erased all those gains, first time since april 2020, all on a maybe more hawkish federal reserve. on the board, you see the movement in volatility across assets because it is a dollar strength kind of day as we think about movement in the federal reserve. and it is all about a yield story. big moves on the front end of the yield curve, biggest since march 2020. check out the board, it is fed day. this is how markets are now pricing in more than one filled -- more than one point. that is the market wrap on this day. the news continues now. ♪

caroline: i'm caroline hyde. the hawkish signal from the fed is here, taylor laying out market reaction as fed chair jay powell says the fed will unwind stimulus. tesla and whirlpool signaling ongoing supply strength and price increases they have to pass on to consumers. investors, fed watches, global policymakers, we are going to hear from john ryding and john taylor in a moment with lift off set for march. romaine: at 2:00, we got a balanced statement out of the fed. at two: no night, our senior editor here said it is up to jay powell now not to mess this up. here's what he had to say. >> the federal open market committee kept its policy interest rate near zero and stated its expectation that an increase in this rate would soon be appropriate.

the economy has shown great strength and resilience in the face of the pandemic. we expect inflation to decline over the course of the year. in light of remarkable progress in the labor market, inflation well above our 2% goal, the economy no longer needs sustained, high levels of monetary support. we need to be nimble so that we can respond to the full range of plausible outcomes. the committee is of a mind to raise the federal funds rate at the march meeting, assuming conditions are appropriate for doing so. taylor: let's parse through today's fed news and bring in cross asset reporter katie gry failed. he said nimble, but marcus -- markets are focused on markets that could be moving more frequently. it was a hawkish tone. katie: nimble in this case may be means moving more aggressively that we have gotten used to in past fed hiking

cycles. powell had multiple chances to say this is going to be gradual, and he did not, he passed up every opportunity. he said they are of a mind to raise in march, the phrase world -- the phrase heard around the world. he did not rule out a specific 50 basis point hike in march. romaine: that is what people seem to be concerned about, the idea of 100 basis point hikes this year. if you don't start in march, that means there has to be some degree of acceleration. the eyes -- these are not going to be the hikes we saw a few years ago, every other meeting, they can't do that, can they? katie: it doesn't seem like. if you look at the market, 115 basis points hikes this year, and if they are going to start doing that and marches the lift off and they are hiking every consecutive meeting after that, it would have to lay that groundwork.

this fed very much doesn't want to upset the apple cart. they have been very transparent in their communications. romaine: the apple card is upset -- apple card has got upset. caroline: they got inflation wrong, accelerating much more than the market was anticipating. but they didn't suddenly start saying, we are changing the balance sheet, they are staying on course until march. katie: staying on course until march. some people expected it to maybe wrap up sooner. that is not the case. the balance sheet, it seems they are following a much more well-trod path when talking about the balance sheet. that messaging is very consistent. the rate hikes though, it seems like they want that to be the primary to lend you are seeing this in the pricing right now. investors are scrambling to price in a more aggressive fed. romaine: have they gotten the

memo? katie: this is moving so fast, expectations. a few months ago, we were talking about maybe getting a hike by the end of 2022. look at now. romaine: economic conditions have changed and it will be interesting to see how severely they reacted how severely the market reacts to that reaction. cross assets reporter katie by feld will be all over that. let's keep this conversation going with john ryding, chief adviser at brean capital who has a wealth of experience. i want to get your general take on communication coming out of jay powell and the fed. the statement seemed standard from the fed, very balanced. conversation during the press conference seemed to rattle folks and i am not so sure it should have rattled of them. john: i think you are right on that. what was the fed trying to signal? it is time to signal rate hikes

coming in march. the markets at that price tint. the fed is trying to signal, they haven't had yet discussions of details for running up the balance sheet, but that was go to come soon after they begin to raise rates. and there was nothing there to change those expectations. what did change was, i think it produced the draghi of confidence. we have been saying the fed could not have that confidence, that inflation was going to come down to the extent that they wanted. the chair said that if he had submitted an inflation forecast today, there was no sep projections today, it would have moved his forecast up by a few tenths got his words -- a few tenths, his words. with that, that would have changed a few people's assessments on the committee, perhaps what the funds rate would be. so, the signal is, we don't know where the fed funds rate is going to be. it is going to depend on data. i think inflation data are not

filing the way we had hoped and are not likely to fall the way that we hope. another thing i think was significant, we are but to see the fed come back to this -- they have lift off that said they have to be at maximum employment and inflation had to be at 2% and be on track to be moderately above 2% for some time, and those conditions are now no longer relevant. he really made that explicit. so, how does the fed now implement its policy framework? and if the concern is about being policy dependent and inflation is going to be three and a half percent this year, there is going to be more rate hikes than the fed has signaled. taylor: if the fed is data the pendant, why are we still buying bonds march? john: i think that is a great question. and the fed, i think, is in this

mode of surprising markets. why do the extra 30 billion? because not doing it would have been a surprise. i think that answers questions about yes, we didn't rule out doing 50. but if you are not going to buy 30 billion, it seems unlikely coming out of the gates raising rates that the fed is going to do a 50 basis point rate hike. maybe near-term interest rate futures are running ahead of where the fed is likely to be, but katie was spot on with all the things powell did not rule out that in the past may have been ruled out. there is no mention of gradualism. there was no mention of moving every other meeting. the fed doesn't know because it doesn't know where inflation is, and the sense that the inflation outlook and the fed's mind is more in certain that was before. caroline: when he did signal was a strong jobs market and i

am interested in whether we can orchestrate a soft landing of this economy. it seems the fed is dealing with supply side constraints rather than being driven over demand-side issues. we have demanded a strong economy, but we can't keep up on the supply side. john: this is a key point in making the outlook for 2022. there are excess demands in all kinds of markets and one is the excess demand for labor. there is more than 1.6 available jobs for every unemployed person. that is more than 10 million jobs. let's say the fed did reduce that excess demand and took 2 million or 3 million potential jobs out of the market, you would still be in a situation where there is more than one job available for every and lead person. -- every unemployed person. it may not have a material impact on jobs. and i think the fed was absolutely correct when he

stressed that what happens to labor force participation, that maximum employment could grow over time as people returned to work because as he said, they are finally coming back slowly. and i think the fed is recognizing come a lot more, these supply constraints in the economy. but the inflation is arising out of monetization of excess demand and that is where the fed is supposed to operate. so, the fed is going to take some demand out of the economy, but it may not have a material impact because that demand was in excess of what the economy could produce, the jobs it could create, and so on. caroline: john ryding, always great to have your expertise, cheeky -- chief economic advisor at brean capital. we are going to talk now with our star, we are talking our taylor riggs rule, but it is another man's john taylor's rule

on the federal reserve. and when you read john ryding's thoughts, he says if you're looking at the taylor rule nowadays, you would have to have interest rates at 5%. taylor: had there are conversations about the fed may be acknowledging they are behind the curve. does this conversation show how far they are behind the curve? one of our guests last week, the fact we had 7% inflation was already a policy mistake. romaine: that was already a policy mistake and the other part of the equation is gdp. you have to start wondering about moderation there and how that effectors into the equation going. caroline: a painful lesson the the market is currently having to stomach. we will have the answer in a moment from john taylor. this is bloomberg. ♪

♪ romaine: today's triple take is focused on the fed, talking about what jay powell should do and may be more importantly, what he should have done. in simpler times, we could have an equation, plug it in and he gives you more guidance. left tried that in the past, taylor, and it has not been without controversy or debate. but you sort of wonder what is guiding the fed right now. taylor: that age-old saying, garbage in, garbage out, the data you put in will be the date that you put out. not garbage is the taylor rule. we have a cool chart on the bloomberg showing the famous taylor rule formula the targets inflation related to the actual inflation rate and re-levels of employment, all of which are under discussion about what are the real numbers, but to those

numbers look like? let's talk about this and more with the founder of that taylor rule, professor john taylor at stanford university and senior fellow in economics at the hoover institute. great to have you. talk to us first about some shifts the fed has seen relative to what you are looking up. a lot of people have said the fed is clear, they are behind the curve. how do you think we have gotten so far behind the curve? professor taylor: we are behind the curve. that's one of the reasons we have seen inflation picking up. the reason is, it was a serious hit to the economy. and it was a shock. but at least for the last three quarters of a year, it is clear that they needed to start moving. and i think they had to see the data to look at it, and i think that is the reason for the

slowness. depending on how you read jay powell's statement today, i think they are beginning to see that and take action. romaine: there has been a lot of talk about flexibility the fed and fomc members want to have to look at data, react to it or in some cases, not react to it if they think it is going to be transitory. do think flexibility as it currently stands with fed policy is a little too flexible? professor taylor: i think it is off. it is flexible in the wrong direction. if you look at the history of rules like the so-called taylor rule, you see when they have gone off, it hasn't worked out so well. when needed -- when they are on track, it works pretty well. does the lesson. by any measure, they are off track now and have been for a while. they need to make that adjustment. i think it would be better for the economy if they make the adjustment sooner rather than later, and smooth and is for

castable -- forecastable as possible. but we haven't gotten to that point yet. caroline: the fed's new framework implied was going to drift away from these sorts of rules, they decided they wanted that flexibility particularly to overshoot inflation and have a more inclusive labor market. but it is felt inflation has run to art and increases in the labor market perhaps isn't the main focus when the world is upended from a supply chain perspective. should they have never built in that flexibility? what do you make of the newer framework of the fed? professor taylor: they made this adjustment, this average inflation targeting idea. but you can plug that into a rule and see what it implies. and it is also about the so-called equilibrium interest rate, john williams has done a lot about that. when you put those in, it looks like the right is too low.

and if you assume inflation comes down, it is still too low. i think people have to take into account, it is not one particular strategy or rule, it is a whole set. and the fed actually publishes things, monetary policy, page 44, i wrote it down. and the most recent one, they are sitting there, the taylor rule and others. and you can see that they are behind the curve. taylor: what about the structural shift created from the pandemic? we heard from the fed chair, i believe last year, when he said maybe the natural rate of unemployment is a lot higher than it has been in previous cycles. do you see those structural shifts underway as well? professor taylor: it is certainly possible and i think that will -- that is what the fed is banking on. again, the magnitudes are not nearly large enough to have this rate near zero, as jay powell put it. and he used the words very, very

strong labor market. the federal funds rate is the primary means of adjusting policy, he said that as well. those suggest it is time to be clear, more systematic, about the rate increase. and people are writing about that, i think they are concerned. there wasn't much discussion about that in the press conference, but people are talking about it all the time, you see it in the "financial times" and the newspapers, "the wall street journal" and they are beginning to see a problem here. romaine: when you talk about rules and the fed policy report, they talk also about on employment gaps and with regards to the gap between expectations and trends that we see, can we blame part of the leg in the fed response to the idea -- lag in the fed response to the idea that these were supply-side issues happening in areas of the

economy that don't necessarily show up immediately in headline inflation numbers. is that a valid excuse? professor taylor: i don't think it is. we have seen this in the past. that was one of the excuses raised in the 1970's, that it was supply-side, not monetary policy. but i think it is monetary policy because we have evidence that the rate is low compared to what history would show you. your chart shows that. we have never seen it like this in the past. so, they need to make an adjustment. i don't think it is that unusual. of course, the pandemic was very unusual and still there, but i don't think it is efficient by any means to justify the near-zero rate. caroline: while cost-of-living costs continue to spiral, especially rent, is there anyway they can orchestrate now a soft ending to what has been an economy running hot? professor taylor: by all means and that is what we hope they will do, they will begin to make

the adjustments, maybe it will take more than once. i think it should take more, but again, it is advertised, it is clear. it doesn't need to be a contractionary effect. it should focus on inflation and that is what the fed should aim for. the economy doesn't need a downturn at all. it needs to be stronger it will be stronger if we deal with this inflation problem. taylor: we will wait to hear more from fed chair jay powell on inflationary comments in the months ahead. stanford professor john taylor, really appreciate your time and comments. we have a lot to discuss and will do that next and final thoughts. -- in final thoughts. this is bloomberg. ♪

♪ ♪ romaine: fed day, our triple

take about the fed, we heard from john writing, john taylor, great conversation. taylor: we are thinking about a fed that is maybe behind the curb. romaine: maybe? we had a lot of talk about apple card's. caroline: this isn't unique to the u.s., we have seen inflation run higher in new zealand, the numbers have just come out. we saw yields spike here in the u.s., other yields currently up, significant spike up 11 basis points at one point. global repercussions. romaine: but you are not necessarily saying a coordinated approach among global central banks the way we did the last rate hiking or even rate tightening cycles. talk about with the ecb is going to do. is there any sense christine lagarde is found her come to jesus moment? taylor: and i ratio, china says

they are going to ease. no more of that coordination we saw post-financial crisis. caroline: meanwhile, companies see pain from supply chain issues, problems for tesla and were moral -- tesla and whirlpool, you name it. "bloomberg technology" is up next in the u.s.. this is bloomberg. ♪

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♪ >> from the heart of where innovation, money and power collide, in silicon valley and beyond, this is "bloomberg technology," with emily chang. ♪ emily: r.i.m --i am emily chang in san francisco and this is "bloomberg technology," tesla says supply chains will continue the rest of the year -- supply chain