jonathan: live from new york

city, for our audience worldwide, "bloomberg real yield" starts now. we begin with the big issue, a messy week in markets. >> all of those being parts. >> it didn't smell right or feel right. >> it is really bad. >> inflation was supposed to be moderating. >> unfortunately, the data are pointing to a more systemic issue, which pressures pushing into markets and going into extra innings. >> as long as the data comes strong and surprised to the outside, you are still going to get the market responding to this. >> it is brutal. >> this is a chance for the fed and broader economy. >> without the fed made a one-off adjustment to get to policy rates of the 4.75%. >> i think we will see another 75 basis point move in december. >> the question we have to ask

is, is a 4.7% policy rate enough? jonathan: we will ask that question. a great lineup george bory, , james athey, and priya misra. many people looked at the cpi and change the call for the fed here you didn't why not. priya: we were already looking for 5%. that 75 basis points in september that was baked in the cake for the report is what happens in december. we are calling for 50. at some point the fed has to downshift, even 50 is enough, the going to 75 in december is still a tricky one. the fallout from the u.k., the fact that it is a less liquid treasury market, the fed has to take this into account. and if they get it and we are looking for some downshifting in the next and we have two more before the december meeting that the fed does 50.

i think they can signal they have more hikes to go maybe five or higher than five. they don't have to go clips of 75 and that is the message we need to hear. we were already looking for the 5%. jonathan: let's start with the november meeting. how does he do what you just said when we had the cpi number we just had? priya: he has to let the data do the talking. at least we won't have another revision period every dot plot has had massive revisions. it won't be that in november. i think he does the 75 and doesn't give any guidance and says, we are data dependent. if there is any slowdown, that is how the fed uses that to say, we are not saying we are done but we just don't have to go at 75 clips. that message will come after the data rather than pre-committing.

jonathan: you set higher for longer. how much higher and longer? george: the fed is stuck in a position and need to keep raising rates. there are two components. one is the peak of where they are going to get to and how did they get there. the timing, as you point out, a deceleration of rate hikes. in our opinion, it is not a pivot, but a deceleration and there is a meaningful difference. there is a good argument that the fed will continue to be in tightening mode into the end of this year and into next. they don't really need to go with such an extreme case. that in and of itself would signal to the market that they are starting to get control of the system, of inflation, expectations, and of the bond market. liquidity is very thin.

it is available but thin and that is another major consideration that the fed needs to contend with as we go into the end of the year. compounded with what is happening around us, the fed needs to be very sensitive to the functioning of the market so it can't implement its strategy. jonathan: james, how do they manage the message next month? james: that is when the biggest challenges. the fed has learned it can't be too honest about expectations, not months into the future because the market will get policy easing at the time you need to keep your foot on the front of this inflation. i will agree with both of the speakers are the timing is difficult. we are seeing a tentative science that is emerging. some participants talking about

the extent of tightening in the system and is not affecting key variables. the important part is the correct steps in terms of policy to a percent or april 5% on the funds rate is not -- of eight or 8.5% on the funds rate. we can start to think about them dialing down the pace of hikes possibly to the end of the year. jonathan: we often talk about when neutral is and what is restricted. how useful is that conversation? james: we have to play the game because the central banks like to play the game. in terms of an economic and quality and usefulness, i would try to throw it out. chairman follow -- chairman powell tried two that.

they weren't going to guide policy and that did not end well at this point. last four or five fed hiking cycles, it has never been the u.s. economy's speed limit in the way. something is broken in the financial system or global economy sumer -- sooner than anything is broken in the u.s. economy. it is probably a different mutual rate for various aspects affected by fed policy and quite often that speed limit is slower and the global financial system that the u.s. economy. jonathan: is something breaking now? i want to return to the point you made about liquidity in the treasury market. latest reporting, the treasury departments quarterly survey has asked for views on merits and limitations of a buyback program. we know this is not qe.

run me through what you think needs to happen and how you would respond to that question. priya: i would say it is absolutely not qe, monetary policy. it is something the issuer as they are trying to fund the deficit at the lowest talks -- price for the taxpayer, can they buy some lower bounds and get richer bonds. it is trying to restore market functioning in an iron -- environment of dealers being restrained. i don't think the dealer restraints are changing. this is the u.s. treasury saying, and they just post the question, i remember when they have a buyback program in 2000 because the deficit was shrinking. this would have to be a program where they switch an issue or another issue. it is a great idea. if there is false with nations,

we saw what happened in the u.k. . if there is selling that has to come, who is the largest buyer of treasuries? it is a question we have been debating. at least the u.s. treasury provides the draft -- backs up for the -- treasury provides the backstop. this is the u.s. treasury saying, can we restore market function of u.s. treasuries as a whole. jonathan: do you think that would improve liquidity and with that have to be done in a predictable manner, at a set time, place, amount? how would you execute it? priya: i think the devil is in the details. i would say a more regular backstop and a that exists and that the offset it not bite issuing more bonds because there isn't enough demand for

twenty-year, there is a scarcity of people in the front end. if they want to keep the big window, have a window for a while and come in when you need to buy and be clear at what time of day. as much pretty debility as they can provide, keeping a window open and offset it with supply. that is the way i would structure it. it will be when it is announced and will it happen. it is a big lift. it happens two years from now, it is too late. i think it has potential for improving market functioning. i think they have to do something with dealer constraint. i think it takes the risk away that if there are false liquidations, where should that be and who is the backstop? i think this is just removing that danger.

jonathan: we have a market functioning issue and is it something we need to address? george: clarity is important and so is pretty debility. there is a clear distinction between functioning and monetary policy and that is what the bank of england is trying to achieve and what the fed may need to clement. -- to implement. it is that over-the-counter market and is still an over-the-counter market. we have seasonal issues as well and given the size of the market, considerable liquidity needs to exist to facilitate these transfers of risk. it is very important to make sure there is a clear delineation between trying to move the economy up and down and an orderly functioning market. a little bit of pretty debility and clarity would help markets restore some of the liquidity. the fed should not be trying to

establish a price floor. it is actually simply trying to sort of facilitate the transfer of risk. the last point i would make is that they need to be in a position to do it when necessary, preemptive may not be the best course of action or they may need to wait until something breaks. but being prepared, ready, willing, and able to facilitate that orderly transfer will be critical. jonathan: was ruled you think is to fix this? james: that is a good question. i question whether we have a problem whether we -- when we sit here today whether bonds are less liquid. i don't think that in and of itself is an imminent danger. you've got regulation which does constrain balance sheet usage in the primary dealers.

that probably makes them less willing we had huge amount of one-way flows. it is no surprise dealers don't want to bid aggressively on bonds they can't find anyone to sell them to because there has been a deluge of selling. in my opinion, we just need to be careful. it is understandable in times of extreme that authorities want to shore market functioning and in extreme times that is the right action but they have longer-term consecration when they believe they can take on more leverage or risk. jonathan: coming up on the program, another volatile week in the u.k. ♪

>> we need to act now to reassure the markets of our fiscal discipline. i have therefore decided to keep the increase in corporation tax that was planned by the previous government. i have asked jeremy hunt to become the new chancellor. he will deliver the fiscal plan at the end of the month. i want to be honest, this is difficult, but we will get through this storm and will deliver strong and sustained growth. jonathan: are wheat reassured, -- are we reassured, failed to

deliver. >> the terminal rate for policy has gone to 6%, which is a clear reflection of the panic in the markets in terms of the policies . we are probably in contraction territory as we speak, and that is consistent with market dislocation problems, recession. recession, we are already there. jonathan: how much does this bank of england need to do at its next meeting? james: i mean, it has dragged its feet so long, it has allowed the situation to be much worse than it needed to be. it needs to get some grip on the situation. the market was priced at 115 for the next two meetings not long ago. i don't think the bank will deliver hikes of that magnitude.

this has been the problem for most of the year is that we are not getting much in the way of communication, certainly not anything consistent. the fed has been an a when compared to the bank of england at end at -- at an f. jonathan: my question is, even though this is a somewhat reversal, you haven't done a full 180 on the package unveiled. how much scarring do you expect there to be on sterling assets? priya: i think a lot i think permanent damage has been done. look at the flip-flop in policy. market liquidity was already challenged. maybe rethinking any strong

asset to invest -- any sterling asset to invest. they are not stress testing 200 basis points in today's. i think there is definitely -- 200 basis points in two days. i think there is definitely permanent damage done. the bank of england has stepped away and we were hoping for some envelope to stay for a couple of weeks. it is not. if the market is still under deleveraging, then the question is what more -- can they quicken that, the median term plan? i think we need certainty. we need more from the government. what we got today was already in the price and that is light it

reversed. there is a near-term problem. i think there has been a lot of damage done institutionally to the government assets. jonathan: how is qt going to work at the end of the month for the bank of england? priya: exactly. if we are waiting for october 31, i think the bank of england has to push out or be thought qt was priced in, but not now. i am started to see how the gilt market starts to stabilize. i think we will get something between now and october 31, so maybe qt exists but we would've had more details from the government as to if they are sticking to the other parts are other more u-turns to come. qt is a week stress point for october 31 but let's see. jonathan: i think a week is a

long time and it is two weeks away. something happened this week and i can't remember it happening. the last time is when the thai baht -- bond -- when the italian bond market crashed. is this difficult transition we need to get used to? george: the backstops are gone. there is certainly an upsurge of selling, and much of what we have seen has been forced selling the central message for us is twofold. number one, fiscal policy matters and that came through loud and clear over the last couple of weeks. the central banks can provide some degree of a buffer, but the buffer is at best they can the silicate somewhat of an orderly market.

when we look at, what is the bondholder doing, a bondholder will certainly vote against a port fiscal policy on top of the fact that will put significant pressure on the domestic system because liquidity is thin and the backstops have been removed and importantly, trying to delineate orderly market and monetary policy is rapidly becoming critically important. they want to avoid the moral hazards of letting a bailout. this is not a bailout. the tools we use to facilitate, so it is easily confused. that should not be the assumption. telling a country whether it votes for at or against it, markets -- governments will have to listen.

jonathan: that is the changes. george bory, james athey, and priya misra are staying with us. coming up, the final spread of the week ahead, featuring bank earnings and busy fed speak. that conversation is coming up next. ♪

jonathan: this is "bloomberg real yield." coming up, the bank of england governor will be speaking on saturday. he spoke a couple of days ago and said you have three days. you get more fed speak through the week, bullard and then evans. oldman on tuesday.

plus a rate decision, eurozone cpi on wednesday and jobless claims on thursday. let's end with a rapidfire. it is november 75 basis point hike the last 75 of this cycle? yes or no? priya: yes. james: nope. george: yes. jonathan: next question, peak fed funds, pick a number but i will offer two options. four or five. james: five. george: four. priya: five. jonathan: does qt make it to 2023? it is a yes or no. george: it's a great question be a yes, we think it does. priya: it does but not all year

because the fed will be using in 2023. james: yes, just. jonathan: thank you. what a week for us all. from new york city, for real yield, same time, same place, different person week. this was "bloomberg real yield." this is bloomberg. ♪ at fidelity, your dedicated advisor will work with you on a comprehensive wealth plan across your full financial picture. a plan with tax-smart investing strategies designed to help you keep more of what you earn. this is the planning effect.

millions have made the switch from the big three designed to help you keep more of what you earn. to the best kept secret in wireless: xfinity mobile. that means millions are saving hundreds a year with the fastest mobile service. and now, introducing, the best price for two lines of unlimited. just $30 per line. there are millions of happy campers out there. and this is the perfect time to join them... add a line to your existing plan, or see for yourself how easy it is to save by talking to our helpful switch squad at your local xfinity store today. hi, i'm denise. i've lost over 22 pounds with golo in six months and i've kept it off for over a year. i was skeptical about golo in the beginning because i've tried so many different types of diet products before. i've tried detox, i've tried teas, i've tried all different types of pills, so i was skeptical about anything working because it never did. but look what golo has done. look what it has done.

i'm in a size 4 pair of pants. go golo. (soft music)

jon: welcome to bloomberg markets. scarlet: that's get a look at the markets. macro concerns outweigh big bank earnings in the s&p 500, only banks are higher on the day, uncomfortably high inflation expectations putting a damper on equities.