>> inflation is intolerably high. >> the fed is raising rates because the economy looks good and they have run way to do so. >> we will still be experiencing pressure to the downside. >> we have a higher chance of going into recession next year and stacked ration. >> i think really easily beat that. >> this is bloomberg surveillance with tom keene, jonathan ferro, and lisa abramowicz. lisa: the sting of inflation amid a strong corporate america. this is a special edition of

bloomberg surveillance. tom keene and lisa abramowicz. we are in washington, d.c. at the international monetary and headquarters on a busy morning. we got citigroup's first quarter earnings, well-received, the shares popping after that. such a moment for us to be at the imf ahead of the ecb press conference, the head of retail sales, as we see this conflict between inflation and [indiscernible] tom: there has never been a year like this. the amount of stories, the cacophony. bank earnings coming up in a moment on citigroup. far more, it is the urgency in the last 48 hours that we see. the russian headline just came out for the bank of russia. lisa: banks may lose half of their capital. also, interesting that vladimir

putin saying there is no alternative for russian gas in europe right now. how much will they leverage that when that is really financing some of their war effort? tom: i said to the imf director, strategy, do we know what the russian reserves are? i got the boilerplate answer. let's ask again, do we know what the russian reserves are? lisa: right now we are looking at a lot of turmoil internationally which is being reflected by the banks as they report earnings, ease and as some of them report better than expected numbers. you are seeing a bit of a deterioration across the board. yields are lower as you see the rate hikes around the world, bigger than expected. the ecb coming up with a more dovish statement. 2.65 on the 10 year.

crude coming up a little bit, 102.93. it's important to look at bank earnings as a reflection of the economy as well as what may happen in financial markets. tom: the image is the international bank, citigroup, and that is changing in the competitive landscape of american banking. sonali basak on the new citigroup. sonali: you are seeing them beat on fixed income trading, equities trading. they are really shocked that they will hold on strong to this trading environment. like every other ceo this morning, jane fraser talking about the volatile market environment, how that has led to lower capital market activity. however, she will still invest in that investment bank, even though revenue is a little bit short of expectations. on russia, you have about a $1.5 billion reserve build related to that exposure. that is in line with what was

expected by at least mike mayo. a bigger sense of exactly how much will be lost relative to the russia exposure. lisa: as we get headlines from multiple disciplines here, what is the take away as we get the bulk of the bank earnings? is there a theme emerging for you that you think will be the story over the first quarter? sonali: we now have five of the six banks reporting, and you have some strength in the consumer, some optimism but uncertainty about how that looks as rates continue to rise. that will be telegraphed quarter after quarter because there is a greater revenue expectation as that income rises relative to rates. but what will charge-offs look like in the future? wells fargo warning that those could rise. tom: what is the impatient meter

right now on citigroup and the strategic plan? what is the level of impatience that the sell side has? sonali: they had their investor day earlier this year, and the question was how they would contract the bank but also where they would expand. a lot of investment in investment banking, where citi is number four or five, competing with bank of america. there is a little bit of patience here because citigroup is still a behemoth, regulatory challenges to contend to. tom: thank you so much. three banks out this morning. much more throughout the week. lisa: i've been looking at the banking story, other stories we have been seeing with earnings, trying to tell which story is the important want to pay attention to. tom: there is only one story, nobody has a clue. lisa: some people are paid to

have a clue, and one of them is nadia lovell. you are being paid to come up with some sort of outcome at a time of record uncertainty. i wonder what your takeaway is so far of this earnings season? nadia: we actually moved to a neutral on financials, about to be overweight, for 18 months. of course the higher short-term interest rate will help those [no audio] wealth management, mortgage volumes, those will face headwinds. we are a bit concerned about a potential are credit quality deterioration. we are seeing some of the major banks build back up reserves for credit losses for the first time since the early days of the pandemic. this is something that we will closely watch. more broadly for the earnings season, we are cautiously optimistic. we think companies will modestly be expectations.

hi single-digit growth over the quarter versus the consensus of 5%. we have to watch those costs, how they manage apply chains, labor shortages, and europe, the potential for a slowdown there. lisa: within the banking sector, we are seeing a shift. originally we had a focus on wells fargo outperforming this year, but now we are seeing the wall street investment banking trading revenues coming in stronger than expected of the banks. are you starting to shift back to some of the morgan stanley and goldman sachs of the world, to wells fargo who are more hinged into the consumer at a time of rising to liquid sees? nadia: i think both areas have their headwinds. you mentioned that the liquid see on the consumer side but investment banks had great years last year, a hot ipo market, m&a

activity, over all trading activity, so comparisons are tough this year. that is what gives us pause on the entire space. we prefer to take a more neutral stance because the benefits are offset by the potential headwinds. tom: the buyback chat. how has that changed the ubs bracket of optimism of single-digit return in equity markets? how has that changed how you set that bracket of returns? nadia: corporate buybacks are important to the overall market. we were pleased to see in the first quarter that we had many new buyback announcements and that increase in buybacks. we think that will provide a floor to the market, but whether it helps to get the market through double digits remain to

be seen. a lot of it will depend on the overall economic environment which we have all noted is certain to slow. tom: thank you so much, nadia lovell with ubs. we have a little window where lisa and i can set up our reading on this important day of the international monetary fund. i think it is something that we will see addressed at the ecb with christine lagarde at the bottom of the hour, maybe even addressed in the conversation with john williams that michael mckee will have. that is inflation, not the idea of gas inflation or airline inflation. it is food in america where we are blessed, but food in the rest of the world where it can be 60, 70% of your income. lisa: economies don't have the same resources that they would have had three years ago, thanks

to the pandemic, to offset some of the increases in bread and fuel. you are seeing that across the world. subsidies can only go so far. which is where the imf comes into play. how far can money get at a time when these are real goods? tom: i would even take it to the ecb, much more affluent than what we are talking about that here in the imf, those domestic stability controls. indonesia is controlling the price of rice or gasoline, or egypt is controlling the price of bread and wheat. great. but the modern institution don't deal with controls, the deal with incentives. how do they class together? lisa: at a time when there are a multitude of other uncertainties. gita was talking about how the

band of outcomes has never been wider, and we keep hearing about that. we heard from citigroup, they actively cut their total russia exposure by $2 billion. all of this leading to what is the follow-up from the ukraine more? tom: for those of you just joining us, on the warfront, the united states committing much more material to ukraine. coming up, a very special rest of the hour with bloomberg surveillance. michael mckee in conversation with the president of the new york fed, john williams. also, daniel yergin and angela stent will join us. from washington, good morning. ♪ ritika: keeping you up to date with news from around the world, i'm ritika gupta. let's get to first word news. twitter plans to review elon musk's proposal to buy the company.

he says the company has extraordinary potential and he can unlock it. he also called his bid his best and final offer. president biden is sending in the heavy weapons to ukraine. 800 million dollars in firepower to the ukrainians including artillery, armored personnel, and helicopters. the suspect in the new york city subway shooting will also face a federal terrorism charge. frank james was arrested a day after the attack in a subway station injured more than two dozen people. police say james has an extensive arrest record. pfizer beyond tech says a third dose of their vaccine increases production by 36% in kids. they say no new safety issues arose in their trial. jp morgan has unveiled plans for

its new global headquarters in manhattan. the bank says it demonstrates its commitment to new york city. they are offering a lot of amenities to entice employees such as yoga, cycling rooms, and a state-of-the-art food hall. the building is set to be completed in 2025. global news 24 hours a day, on-air, and on bloomberg quicktake, powered by more than 2700 journalists and analysts in over 120 countries. i'm ritika gupta. this is bloomberg. rg.

>> if you are thinking about a target of 2% and your question is how long it will take to come down to the 2% target number, we are looking at the war end of next year. it will take many months before we see inflation coming down. tom: the first deputy managing director of the international monetary fund. a piercing interview making global headlines in the last hour or so. really strident comments on a reset of global growth. we will know more a lot in the

world economic outlook. the blue book will be coming out. i remember a decade ago when it was joined by the green book. lisa: maybe the beige book can hang out over there. tom: a running joke at surveillance. i want to make clear right now, with the data checks today, not much going on, but we did see some movement off the european central bank headlines and the christine lagarde comments. we will have a conversation with john williams with the new york that with michael mckee. the 10-year yield, 2.66 speaks of these unusual times. this is the most important conversation of the day.

the person that gita gopinath and others listen to. tobias adrian joins us now, director of monetary and capital markets at the international monetary fund. he has to pieced together in this time of uncertainty where the epsilon is. there is an algebraic equation. it has never been like this. tobias: these are very unusual times, tremendous uncertainty globally. what we have seen is that monetary policy was expected to tighten already prior to the invasion of ukraine by russia. then commodity prices shot up. that has brought forward a tightening of monetary policy globally. financial conditions have tightened, but today, it looks fairly orderly. tom: you grew up in the

mathematical rigor of m.i.t.. i want to talk to you about when you tear apart -- within the media, we have these big overarching things. the world is coming to an end. i have never heard that come out of anyone's mouth in the media. which factors help you in this time of uncertainty? tobias: very nice that you mention my advisors from m.i.t.. that was from 20 years ago that i was at m.i.t.. tom: but they did not face but they did not face what you are facing now. tobias: these are unusual times. volatility is high, uncertainty is high. geopolitics and the war has shock waves around the world. these are very challenging times for monetary policymakers as well as policymakers in every other shade.

it is a tremendous privilege to be a part of the in these unusual times. lisa: you have an incredible past studying financial risk, systemic risk. you talk about the incredible volatility. we have been stress tested incredibly over the last couple of months. the fact that we have not seen more commodity houses go bust is telling. are you getting comfort from the fact that things have not broken down on a financial level over the past six months? tobias: absolutely. we saw a tremendous stress test in the round of commodity prices and trading. of course, it is all followed in detail what is happening at the london metal exchange where market functioning was off. outside of that fairly isolated event around the nickel market, commodity markets have functioned fairly well. that is despite the fact that these are highly concentrated markets.

there are a handful of players on the commodity trading side and on the dealer side that are dominating the market. we have seen margins go up, haircuts and requirements going up, but the market has been fairly resilient. lisa: will the market be as resilient if we see another sovereign debt crisis? tobias: very good question. we see many countries already in distress primarily low income and smaller countries. for the moment, markets can absorb the shock. with the economy potentially growing lower, potentially more adverse shock sitting, we could see a broader debt crisis. to date, markets have absorb those losses fairly well. lisa: which emerging markets are you focused on right now? tobias: particularly focused on smaller countries, sub-saharan africa, middle east, latin

america, caribbean, etc. over time, there could be wider distress in other countries. tom: thank you so much for joining us. cannot say enough about what we will see in a week with the financial stability analysis of the capital markets part of the international monetary fund. i look at where we are heading toward this conversation with the managing director, and when you take the framework of economics, financial stability, fiscal soundness, you mentioned something important which is the given that fiscal soundness is still there. that is the assumption right now. i wonder if you are saying something different, that at some point it catches up with you. lisa: it catches up with you if you are a smaller and stressed economy. what about the bigger ones? we will get a read on the u.s.

consumer. any other day, it would matter. today, it is the busiest day that we think we've seen before, and is being lost amid this sea. but all of these indicators speak to the fragility. what is the breaking point for consumers? what is the breaking point for some of these economies? tom: this is to be to, the angst of inflation. which deciles are being crushed? delta airlines talking about packed airplanes, but there is a whole part of america that is not worried about getting on airplanes. lisa: especially when using negative real wages, the most negative going back decades. you look at that, and to your point, many people are taking this in a massive way. tom: later on, we will hear from

christine lagarde in frankfurt. coming up, michael mckee with john williams of the new york fed. stay with us from washington, the headquarters of the imf. this is bloomberg.

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tom: good morning, everyone. bloomberg surveillance from washington and new york. lisa abramovitz and tom keene at the international monetary fund. chris taylor neri georgie ava will join us here in the 10:00 hour. right now on the american economy, the backbone of the american consumer, and this time of inflation, michael mckee with the retail report. mike: some good news and bad news. retail sales on a month over month basis coming in half a percentage point higher. when you look at the retail sales control group, it is down by 0.1. that factors out autos, gasoline, building supplies. that follows a -1.2% drop in

february, which has now been revised to 0.9. two months in a row of retail spending that essentially goes into gdp, lower than anticipated. that will not be seen as particularly good news for the economy overall. gasoline stations is always the issue that we want to look at, given the situation right now. gasoline up by just 0.2%. i am looking at the wrong one. hang on. up by 8.9%, which makes more sense. that is where most of the strength in the headline number comes from. we all paid a lot more for petrol over the past month. the import price index up to .6% on the month, that is significant. that pushes the year-over-year import price number up to 12.5%.

it was 10.9% in the month of february. initial jobless claims bounce back a little bit, 185,000 from 106 he 6000 the prior month. that is still in such low territory, hearts know what to make of it, other than the labor market is healthy. with retail sales, are we starting to see a pullback in consumer demand? it is marginal but maybe. we will have to keep our eyes on this for the next few months. tom: we can see michael mckee has his interview suit on as he speaks to john williams. dressed to the nines this morning. retail sales are important. i don't know what to make of it as a picture of the optimism or gloom that any of our viewers have. lisa: right now it markets you are not seeing much of a reaction.

yields are basically, coming in bouncing around. future still in the green and red not with much conviction, though down a little bit more on the screen. i wonder why is there not greater emphasis on the fact that retail sales are declining? when you factor in inflation, declining quite ugly. mike: people have not focused on that yet. we have to deflate these numbers by the inflation rate. each category has its own inflation rate. much of this is price driven. interesting stat, not store retailers, your amazon and walmarts, down 6.4% in the month. the question is are we going to stop buying goods and start buying more services? that may be an early sign of that. automobiles were down 1.9%. they do this on a dollar basis

as opposed to the unit basis that we all quote at the beginning of the month, but also suggests some declining demand. tom: the interview coming up with john williams of the new york fed. as gita gopinath said, the pandemic is still tangible. i believe we are going to christine lagarde in frankfurt. here is madame lagarde. >> largely owing to pandemic related restrictions. several factors point to a slow growth also in the period of hedge. the war is already weighing on the confidence of businesses and consumers including through the uncertainty that it brings. with energy and commodity prices rising sharply, households are

facing a higher cost of living and firms are confronted with higher production costs. the war has created new bottlenecks, while a new set of pandemic measures in asia is contributing to supply chain difficulties. some sectors face growing difficulties enforcing their inputs which is disrupting production. however, there are also offsetting factors underpinning the ongoing recovery, such as compensatory fiscal measures and the possibility for households to draw on savings that they accumulated during the pandemic. moreover, the reopening of those sectors most affected by the pandemic, and a strong labor market, with more people in jobs, will continue to support incomes and spending.

fiscal and monetary policy support remains critical, especially in this difficult geopolitical situation. in addition, the successful implementation of the investment and reform plans under the next generation eu program will accelerate the energy transitions. this should help enhance the long-term growth and resilience in the euro area. turning now to inflation. inflation increased to seven .5% in march from 5.9% in february. energy prices were driven higher after the outbreak of the war and now stands at 45% above their level one year ago. they continue to be the main reason for the high rate of inflation.

market-based indicators suggest that energy prices will stay high in the near term and will then moderate to some extent. food prices have also increased sharply due to elevated transportation and production costs, notably the higher price of fertilizers which are in part related to the war in ukraine. price rises have become more widespread. energy costs are pushing up prices across many sectors. supply bottlenecks in the normalization of demand as the economy reopens also continued to put upward pressures on prices. measures of underlying inflation have risen to levels above 2% in recent months. it is uncertain how persistent the rise in these indicators will be given the role of

temporary pandemic related factors and the direct effects of higher energy prices. the labor market continues to improve with unemployment falling to an historical low of 6.8% in everywhere he -- february. job postings across many sectors still signal robust demand for labor, yet, wage growth remains muted overall. over time, the return of the economy to full capacity, to support faster growth in wages. while various majors of long dated inflation expectations arrive from financial markets and expert surveys largely stand at around 2%, initial findings

of above target revisions in those measures warrants close monitoring. looking at the risk assessment now. the downside risks to the growth outlook have increased substantially as a result of the war in ukraine. while the risks relating to the pandemic have declined, the war may have a stronger effect on economic sentiment and could further worsen supply-side constraints. persistent high energy costs contender -- together with a loss of confidence could drive down demand and constrain consumption and investment more than expected. the upside risks surrounding the inflation outlook have also intensified, especially in the near-term. the risks to the median term inflation outlook include above

target moves in inflation expectations, higher than anticipated wage rises, and a durable worsening of supply-side conditions. however, if demand were to weaken over the medium-term, it would lower pressure on prices. financial markets have been highly volatile since the war began and financial sanctions were imposed. market interest rates have increased in response to the changing outlook for monetary policy. the macro economic environment and inflation dynamics. bank funding costs have continued to increase. at the same time, so far, there have been no severe strains in money markets, no liquidity shortages in the euro area banking system.

although remaining at low levels, bank lending rates for firms and households have started to reflect the increase in market interest rates. lending to households is holding up, especially for house purchases. lending close to firms have stabilized. our most recent survey reports that credit standards for loans to firms and housing loans tightened overall in the first quarter of the year, as lenders are becoming more concerned about the risks facing their customers in an uncertain environment. credits are expected to tighten further in the coming months, as banks factor in the adverse economic impacts of russia's aggression toward ukraine, and higher energy prices. in conclusion, summing up, the

war in ukraine is severely affecting the euro area economy and has significantly increased uncertainty. the impact of the war on the economy will depend on how the conflict evolves, on the effect of current sanctions, and on possible further measures. inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs. we are very attentive to the current uncertainties and are closely monitoring the incoming data in relation to the implications for the medium-term inflation outlook. the calibration of our policies will remain data dependent and reflect our evolving assessment of the outlook. we stand ready to adjust all of

our instruments within our mandate, incorporating flexibility if warranted to ensure that inflation stabilizes at our 2% target over the medium-term. we now stand ready to take your questions. thank you. tom: christine lagarde channeling gita gopinath. we will have those headlines in all the coverage, we have a wonderful digital set up. i would center around alivego, where you can follow the q&a. some important press conference and q&a, perhaps the most important we have ever had before. fascinating to see christine lagarde echo what we heard from gita gopinath, the idea of 2% inflation as a target. adam posen really pushing

against that, looking for something much higher. right now, it's an extreme a timely moment. michael mckee speaking to a fed official, john williams. mike: we want to welcome president williams, the president of the new york fed, to bloomberg television worldwide. you were also the vice chairman of the open market committee. second in command for the group that makes interest rate decisions. you have to decide what you are going to do and how fast you will do it going forward with the data you have. we just got retail numbers. inflation boosted sales happy percent. i know you have looked a little bit at the numbers. have we seen any decline in demand? john: first of all, nice to be here in person. like to do this today. i think we are seeing some early

signs that consumers are shifting their purchasing patterns coming out of the pandemic, away from all the purchases of goods over the past few years and more into services. i will not respond too much to one month of data, but that is the pattern i'm expect to see continued during the year. i think it's an important part of the story, to see consumers as we get past the pandemic, moving back to more normal patterns of spending. we will have to watch the data carefully but that is a trend that i'm looking forward to this year. mike: over the past week, a number of your colleagues have seemed more concerned about the pace of inflation suggesting they are changing her mind about how quickly you should do that. do you still believe that you can do this at a measured, slow pace? john: i don't think we will do our policy adjustments in a measured, slow pace. with very high inflation, we need to focus on bringing

inflation down to our 2% longer run goal, to do that over the next few years. that is the number one focus. i say that because the economy is strong, the labor market is close to where it was before the pandemic, with the on appointment right around 3.5%, other indicators showing we have strong demand for labor. from a monetary policy point of view, it makes sense for us to move expeditiously toward more normal levels of the federal funds rate, also moving forward on our balance sheet reduction plans. mike: if there was one phrase that sums up where your colleagues are, it is get to neutral by the end of the year. would you be on board on that? john: i do think we need to get back to a more neutral level of the federal funds rate, whether at the end of the year, exactly when that happens depends on the data. given where the economy is, especially given where inflation is, we do need to reverse the

policy action that we have put into place in march of 2020, move that forward, move the federal funds target to neutral. whether it is by the end of the year, exactly when that happens, that will depend on the path of the economy. mike: so, 50 basis points on may 4? john: not a decision we have made yet. mike: you can make that decision right now. john: [laughter] that is a reasonable option for us. federal funds rate is very low. we do need to move policy back to more neutral levels through this year. i think that is a very reasonable option. mike: speaking of neutral, what do you think neutral is these days? you are sort of the guy who greeted ther star measurement, the key indicator for what neutral may be. john: it is hard to know about the neutral interest-rate, it is

an uncertain thing, something we don't measure directly. we have to infer from other indicators. most estimates of neutral were quite low, and that is consistent with my colleagues, the fomc's view that a nominal fed funds rate is around 2.5%. i think about where it is today. the economy is being pushed around by supply and demand dramatically, the pandemic, invasion of ukraine, other factors are moving the economy around. then i go back to what are the longer run drivers of a neutral rate? economists have identified demographics, productivity growth, global demand for safe assets like the u.s. dollar. i don't think those have fundamentally changed since before the pandemic. my baseline assumption is that a nominal federal funds rate is in the low 2%, 2.5% range.

we have to have an open mind and see, follow the data. mike: how far above that do you think you have to go to bring inflation down? john: that's a really important question as we get back to neutral, nominal neutral levels. i think we have to do two things, keep focus on real interest rates. it is not just a nominal interest rate, the federal funds rate, but where is inflation? i think we will need to get nominal interest rates adjusted for inflation, expecting inflation, back to more normal levels by next year. and we may need to go a little bit about that, depending on where inflation is. i think the economy right now has a lot of good momentum. i think the economy can withstand real interest rates at neutral or a bit above. but those decisions will be made in the future depending on how the economy evolves. mike: where is inflation these

days? the general consensus of analysts coming out of the cpi report is that inflation has peaked. john: i will not make a production about whether inflation has peaked. clearly, food and energy prices have been volatile, affected by the situation in ukraine. oil prices could go back up, they are volatile. i don't know about peeking. -- peaking. reducing the imbalance of supply and demand in the economy by bringing interest rates back to normal levels, that will bring demand closer to supply, with some of the supply chain issues gradually being resolved. and also this rebalancing between goods and services. i think the underlying trend in inflation will peak soon and start coming down later in the year. mike: the black rock interest -- analysts say that you cannot raise rates high enough to bring

inflation down to 2% in the short run without and on except of the level of unemployment. how high are you willing to go on employment? they also suggest that you may just learn to live with 3% inflation instead of 2. john: i will start with the last part, we don't agree with that. we have a 2% longer goal. that is our long run goal, but we will stay with. we will get inflation back to 2%. in terms of the unemployment and the risks there, clearly this is a time of uncertainty, challenging circumstances to conduct monetary policy, bringing inflation down while keeping the labor market strong. i think we have a couple of advantages over previous episodes. where is the economy the strongest, where are we seeing demand exceeds supply? it is really in the interest sensitive sectors, durable goods, autos, housing. as we brought up expectations of interest rates, as yields have

moved up, mortgage rates have come up. that will help to bring down that excess demand for that sector relative to supply. our monetary policy tool this time is really well-suited for the imbalance we have in the economy. i think that is an important point to remember. the second thing is, we have a unique situation with the demand for labor much stronger than supply, so the goal here would be to reduce that excess demand. we see it in the record number of job openings, for example. let's get the number of job openings down to a level consistent with maximum employment. i don't think we have to decrease employment, but just take a froth out of the economy and get on a more sustainable basis. mike: so you disagree with your predecessor bill dudley said you cannot achieve a soft landing? john: i think we can achieve a soft landing, this is a unique set of circumstances with the pandemic, the russian invasion

of ukraine creating a unique set of circumstances. it will not be easy. i will not pretend this is monetary policy, everything goes exactly according to plan, but we are in a good place with monetary policy. we have seen a significant movement in yields of financial conditions over the past several months. that is already positioning policy well to get the supply and demand back into balance and to set us up for bringing inflation down over the next couple years. mike: i have to ask about the balance sheet. lael brainard suggested that you announce in may, starts in june. is that your anticipation? john: not the decision we made but that is what i would expect, getting the balance sheet reduction process underway. we have set up the principles around that. we worked hard on coming up with a good plan for that. so, yes, if we make the decision at the may meeting, technically,

that process would begin at the beginning of june. it could continue for quite some time. mike: two quick follow-ups. what is your estimate on the impact of rates on reducing the balance sheet? two, what would trigger sales of mortgage-backed securities? you said you might do that. john: this question about how you convert balance sheet reduction, how big of a change in the federal funds target is that equal to? that is hard. to calculate that number given all the uncertainty, given the balance sheet policy has affected the economy in different ways. the way i think about it, as we reduce the balance sheet, as we announce doing that, you are seeing upward pressure on longer-term interest rates, term premium. we are seeing that in the data. if you are looking at five-your forward treasury rates, 10-year

rates, we have seen over the past several months, movements up in those rates, which i think reflect the market expectation that we will conduct a balance sheet reduction. i see that as the channel by which it affects things, raises mortgage rates, affecting borrowing costs. i think a lot of it has happened through the expectation of our future action. that is in parallel with our short rate, the path of the federal funds rate, which is also removing monetary accommodation. both of these are being adjusted pretty significantly with both of these tools. in terms of mbs sales right now, the first part of the plan is, does not incorporate sales. it is more about letting the balance sheet fall organically, be reduced through inorganic process. that is where we need to be processed.

the first stage is getting the size of the balance sheet down. there is a longer-term issue. we also want to get the composition of the balance sheet to be primarily treasuries. once we have the balance sheet reduction well underway, is the time we can contemplate, do we want to add to the mix some sales to really give the long-run composition right? but that is not a decision for now. mike: john williams, president of the new york federal reserve, thank you for coming in this morning. now, we will send it to you. tom: michael mckee, thank you. on radio and television, bloomberg surveillance.

market and data check, the euro at a 1.08 handle. coming up later, the managing director of the imf, kristalina georgieva will join us. among the events in economics today, not greater then in frankfurt, the european, where christine lagarde is in question and answers. let's join christine lagarde. >> you had the second question, yes. you had a question on wages, possible second round effects. i think i have told you at the last press conference we had that we were particularly attentive to wages. we continue being so because that is a critically important component to assess inflation outlook in the medium-term, to help us determine our monetary policy stance and the need to move at a certain pace. we also look at inflation expectations very carefully. the wages, we are looking at this very carefully. what we are seeing is a relatively muted wage,

generally, wage increases. if you look at the latest numbers available from january, it points to a 1.6% increase. this is looking backward, and we have to be particularly attentive to movements as they develop. and we know that the longer inflation numbers are at the high level where they are, the more likely it is that wages, salary levels, renegotiations of existing agreements will take place. we had a good discussion on those issues at the governing council meeting. there are differences between countries. in some countries, it seems that unions, employees, employers are

reaching agreement to take into account the risk of redundancy, threat to the economy. in other countries, there are much higher demands for wage increases and wage renegotiations. so, we will continue to look at that extremely carefully and be attentive to potential second affects effects as a result of that. >> thank you, president lagarde. the next question is for alice weber of bloomberg. >> good afternoon, president lagarde. thank you for taking my question and best wishes from outside. personally, i want to ask how confident are you about the ecb's forecasting models, how accurately they can capture the current situation created by the war? on the new crisis tool that you just talked about, that the ecb is studying, how exactly would

it complement the flexibility of investments and other measures like oit that already exist? christine: do we have trust in the work that we do? yes, we do. do we get our forecasts and projections perfectly right all the time? no, we do not. i spent a few years of my life operating with other forecasters, top-notch projectionists who didn't always get it right -- get ir g -- get it right either. but do we monitor all we can monitor, apply all the economic wisdom we can, use all the possible models available, that we try to