>> eight third day of gains. in the market. i am pretty group to this is bloomberg markets starting now. resale risk off approach ahead of the federal reserve meeting specifically in the stock market. third day of gains. s&p 500 is higher by 4%. -- .4%. we see curve movement specifically on the 2s/10s and and in version --you see a big

out of the long end. we will see how that pairs as we hear comments from chairman powell and the future of the american economy. we get all the movement in yield and we see movement in the dollar. the currency taking the signal from the bond market. it is back about .2%. but oil and energy inflation. brent crude is at $82 a barrel. it is crucial of how it is factoring into the fed reserve. we will dive into it with our panel of guest shortly but let's hear from mark burnell we ask him what he is watching from the fed reserve. >> there are three things we are expecting. the balance of 50 basis points. and the terminal peak in the fed funds rate around 5%. and for the chair to reiterate that it is too early to declared victory on inflation.

>> joining us ahead of a crucial decision is deutsche bank chief u.s. economist matthew luzzetti and bloomberg economist to u.s. economist. and i want to start with you. you are out front in terms of calling a peak policy rate at 5%. now it looks like the market is pricing in a slight pullback. you see some differentiation in terms of do we see a 4.8% policy rate or five .3% in february where do you stand? >> our call remains the same as it was in july. we expect that the fed funds rate will peak at 5% on the upper end in march of 2023. we are looking for the dot plot to show peak rate of that number around 2023 as well.

but i want to emphasize that we did forecast disinflation gathering momentum this year -- earlier this year looking at the sector prices. it is happening. i think there will be more chatter about the fed approaching the timeline where it is going to pause rate early next year. >> let's bring you into this conversation. the peak policy rate is all the rage. and how it shows up in the dot plot. but we are starting to see a pullback and deceleration in the drawback we see in an inflation. does that mean a step down for february happens faster? mr. luzzetti: that is our expectation. we expect that after the fed delivers 50 basis points we expect them to step down to 25 in february.

going down to 25 to maximize the potential of a soft landing and it also reduces the risk of possibly having a rate hike. that will be a difficult thing to do to condition the market in that direction. the latest cpi data we got yesterday allows them to step down 25 basis points. in the february meeting. i do not inspect chair powell to signal that in this meeting he will say what the interest rate looks like but we do expect them to step down 25 basis points in february. >> you reference the 3.2% market reaction in the cpi print. with the disinflation we are seeing it as it sell rating, but is that a temporary phenomenon? will be be here in a year talking about a repeat of the 70's and that inflation is not coming down and that was a temporary move? what you think? mr. luzzetti: we know some

components will be low specifically within cpi with health care inflation week over the next couple of months. they will probably be lower than where it is today in 12 months. i think that leaves you with the category that chair powell is focused on witches core services and shelter where a lot of uncertainty is. within the pce and the switch of fed targets there is a lot of inside inflation pressures from health care specifically. that is where we focus on the labor market. we have disinflationary numbers coming in as well but we expect chair powell to -- reiterate today that inflation is too high and they need the market to come into better balance. >> these words inflation and the labor market. one thing i have not heard from the fed reserve is the chinese component. for the markets it is a big

worry in terms of where nation is heading next. where supply chain constraints are headed next. and the fed reserve conferences i have not heard chair powell or anyone address the covid zero policy we see in china and the unraveling of it. you have experience at the fed reserve how should they think about this? >> yes i covered china in the fed reserve in my previous life. and it does play a role in terms of how external environment affects the u.s. economy. and in the fed they are talking about it. and i agree that everything that matt said about inflation next year but i believe the wildcard is energy prices. and a lot of the energy prices will be china next year and whether they have a successful exit from covid zero policy. the best case will be a

disorderly covid exit from china and commodity prices could be in the lows in the first half of 2023. however, in the second half, china stimulus will come aboard and affect global commodity prices. i think there is a risk that in the second half of next year we will see commodity prices resurge and inflation will edge up in the u.s.. >> that is a big risk here. matt way and how that will we are supposed to get the summary of economic projections will be and what the slowdown will look like. we see volatility in the rate pricing how will that show up in the u.s. economy today? mr. luzzetti: there's expectations that if you use temporary market pricing for oil prices and gas prices over the next year it is attracting from inflation. but we are right to highlight that as a key risk of that as

the disinflationary story. there are a lot of things out there globally that could lower energy prices. -- oil prices. while distracting supply chains was disinflationary i think re-opening will be disinflationary as well. due to the fact that it has an impact on commodity prices even as supply chains are healed. from the fed perspective there is a concern of what happens with inflation expectations and do they move higher, that is where the energy prices could play a key role. we know the expectations are sensitive with what happens with the energy prices. that is what i would focus on. do we get higher prices depending on what happens with inflation expectation. >> i feel like you are hearing that disinflation the markets are celebrating that it may be transitory in a years time, how

will be look back at this? we will -- will we say we are in repeat of the 1970's era? >> i think we will talk about the inflationary risk because in a years time we think that is when the u.s. recession will begin. and that is where partners would standoff and when that would happen over the debt ceiling. that is when china would fully reopen. and oil prices would rise. >> that is something to keep an eye on. in a years time we will see if you hold to that view. thank you for joining us. time now for bloomberg's first word news with mark crumpton. >> thank you china has given up counting all covid cases after ending mass test -- the country will only report symptomatic -- symptomatic cases from now on. with the end of the covid zero

approach there are signs the virus is spreading rapidly in beijing. hospitals have been overwhelmed. president biden will try to fix the perception of the u.s. with africa while russia and china make inroads. he has a summit for african leaders the president will meet with leaders of 50 african countries and the african community. train strikes and freezing weather has left business districts deserted this week. workplace data tracking company says the occupancy plans at 19% monday down from 33% a week earlier. thousands of financial professionals chose to work from home to avoid disruptive commutes. 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 mark crumpton. this is bloomberg.

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>> this is bloomberg markets. i am kriti. just an hour left before the fed decision. what we can expect from the fed and chair jay powell. there is a lot to digest here and interesting meeting going

into what we will hear from in february. walk us through what we can expect. mike: if you are digesting what the fed will do this is a meal where the chef will tell you what you will get and what it will taste like. we know they will do 50 basis points because they pretty much all said that that is a range of four 25% and 45% area they will continue to raise rates and keep rates high for a long period of time. the question is how much and how long? then we will get a new summary of economic projections and a new dot plot and wall street will get interested of how high the fed thinks it needs to go and when it thinks it will give. >> what is interesting about this meeting is this is the meal that has already been pres decided in sense of what we can get but there are a lot of game changers. it felt like the market specifically thought the cpi

report that the income will come later than we thought. do you have insight on that? mike: the fed has been cautious. they do not want to repeat the air or they had in the past. slowing down too soon and stopping and having inflation accelerate again. they will not say that to cpi reports will have make a trend but they say if there is a trend that continues they will revisit what they think about the idea of a pause or cut depending on what happens with inflation of the time. kriti: port of the game changers what could surprise the markets? mike: i think the chairman is perceived -- if he is perceived as dovish which i doubt he will be but if he leans to the idea that the fed is almost done and

inks are going well on the inflation front. that would surprise the markets. if he suggested that they will go over 5% that would surprise the markets. remember going into this one of the reasons the fed officials talk so much as they do not want to surprise the markets when it comes to the time of the meeting. we see a reaction in the markets in particular at 2:00 when the decision comes out and 2:30 when fed powell starts speaking a lot could change. that is not their goal. we will see if there are surprises. kriti: a little optimism baked into the stock market. bloomberg michael mckee thank you. still ahead stick with us and all-star panel. david miracle chief economist at goldman sachs and other guest will tell us what they expect in the game changers and the plot

twist could be. stick with us. this is bloomberg. ♪

kriti: this is bloomberg markets. the stakes are high for jay powell. we are joined by david barrett coal goldman sachs cheap economist of what to expect from the fed reserve at the top of the hour area thank you for

joining us. one of the most striking things after the cpi report seven point 1% is what we got and it is how the markets reacted. the peak policy expectations went from 5.3% in march up to 4.8% in may. what about that change adjusts the timing of these hikes? david: i think the inflation information has been encouraging. we have the fed taking the funds rate up to 5% and five point 5%. that is higher than the market is pricing. i think the nation news we saw out of the report is meaningful and will last but entire year. the reaction is warranted and recovery on the supply side generated decline in goods prices and last month's report. i think that story can last in 2023.

i think we will eventually see alteration in shelter inflation as well. that will take a long time in the official data, but that is coming through clearly as alternative data. there is good news, but ultimately the fed needs to rebalance supply and demand in the labor market and get wage growth and inflation in neighbor intensive services and target compatible rates. that will take some time. and i think that is premature to rally as strong as the market has. kriti: stick with us i will bring in andrew patterson vanguard senior economist. in your view what has changed in that one hour with cpi? andrew: we agree with david that there may be a market overreaction to the cpi report. what the fed would like to do today is push back on the e-zine financial conditions -- the

easier financial conditions because they do not want to be in a situation where the financial conditions are slowing the pace of disinflation. kriti: the number really catches my attention. we will get a summary of economic projections. david, what is the game changer in these productions? david: we probably won't see any big surprises. the fed has been telling us from october that they plan to pay her the slowing pace of rate hikes with a higher peak rate. i think it is a close call between raising the 2023 rate hike 25 versus 50 basis points. that is the main event we knew was coming for a long time. as andrew said, the purpose of hearing those things is to prevent easing financial conditions. it obviously has not worked out exactly the way they plan because the market responded more strongly to this case and in part because of asaph inflation news. i share andrew's concern that

financial conditions -- have needs too much. we need to keep the economy on bloomberg growth trajectory so the supply demand can balance. but i think there is not a time chair powell can do this to effectively reverse the easing of financial conditions we have seen recently. kriti: i want to get back to the topic of financial conditions but andrew, quickly what is the difference between 25 and 50 basis point move coming in february. what is a game changer they are? andrew: it is getting rates at 5%. just as important as the terminal rate, will be how long the fed stays there. chair powell today in his communications in the press conference had an opportunity to emphasize how long the fed will have the 5% or 5.25 percent rate and push back on the rate cuts in the financial markets. kriti: david, hopped in on the

concept of rate cuts. the easing you see is because of the pricing in rate cuts is the market getting that wrong? david: not necessarily market pricing is a -- based on scenarios. many forecasters see higher recession odds than we do. i do not inspect they would likely cut. market pricing should reflect that. i think chair powell could reflect -- could imply whether or not they would cut without a recession because inflation is softening. my own sense would be that they at would not be good enough to have cuts. not enough to see it in 2023. it is possible it would have an impact on work it pricing but if

they insist on keeping the funds rate higher for longer it is a good idea in voucher it will have a large impact. kriti: a crucial point on disinflation i will ask you a question, david, we ask michael mckee this early this morning. is the disinflation we see right now transitory? david: it is somewhere in between. these are not one-off things these are themes developing that will last i think all through 2023. in particular, a amount of what we saw yesterday is from the auto sector a decline in used car prices as promotions and discounting came back. why is that happening? the supply side is recovering. it is putting downward pressure on prices as competition kicks back in. that is not a one month thing that will impact disinflation year after year but

it can last a wild. what you want to see in 2024 is a handoff of goods inflation -- disinflation as services coming down as the labor market gets in balance and wage growth comes down to a rate that is compatible with the market. kriti: do you think you say we will be in for a bullish repeat? andrew: i think if it is closer to 5% at the end of the year next year we will have an unforeseen supply shock or a failure in the fed. the fed has little control over the latter so they will emphasize the former in their resilience and drive to get inflation down. that is why they are looking to raise the policy rate. and hit home on how long they will be at the higher terminal rate. kriti: thank you david merkel in goldman sachs and andrew

patterson at vanguard group. thank you for joining us. stick with us. the fed decides is next. this is bloomberg. ♪

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