have turned a little lower they had been hanging in there in positive territory through most of the session this morning. right now, dow futures off by about 10 nasdaq down by 60. >> i blame amtrak. >> andrew is out in aspen. he's going to be coming back very soon. that does it for us today. right now, it's time for "squawk on the street. ♪ good wednesday morning, welcome to "squawk on the street," i'm carl quintanilla with david faber, mike santoli at post nine of the new york stock exchange cramer has the morning off big day for macro as powell and other bankers speak on a panel moderated by you are own sara eisen. our road map begins with chip stocks under pressure, reports of a potential new u.s. ban on a.i. chip exports to china. plus, microsoft versus the

ftc or the other way around continues today, satya nadella, microsoft's ceo and activision's ceo will testify in court as the ftc tries to block that merger as recession risks linger, president biden is looking to claim credit for the post-pandemic economic recovery in a so-called major economic speech that will be later today let's begin, though, with nvidia and other chip makers falling in the premarket according to "the journal" today, the biden administration is considering new restrictions on exports of a.i. chips to china. the commerce department would put the curbs into effect as soon as early july, and this comes amid concerns that china could use those chips for weapons development, hacking, and this budding story about a black market for the chips where they can't get them legitimately, but players are willing to pay a lot more to get them on the secondhand market. >> the street, trying to run the numbers in terms of potential impact on nvidia, varying, saying 10 to 15% of revenue might fall under this category details, not determined.

we don't know what kinds of products are going to be included to me, the main, immediate takeaway is that semis have been a leading sector nvidia has been the absolute, you know, vehicle for enthusiasm over a.i that's been the thing that's gotten the market to this point in terms of the market cap weighted indexes it was already in somewhat pullback mode, trying to cool off, massively overought, like 22 times forward sales we can all talk about what the wild evaluations are in the trillion dollar market cap, so this is another excuse on a day that micron is going to be reporting to say, what have we already priced into this area? that's the challenge at the open after yesterday's decent rally and very broad one in terms of the overall market and the nasdaq included. >> meantime, keeping our eye on not just the recovery that isn't happening in china, but some fresh data this morning on industrial profits there running at a -- down 18.8% on an annual basis, youth unemployment up to

20%-plus so, they've got challenges beyond export curbs. >> it's been, really, the part of the global bullish story on economically that coming into this year has just simply been absent i think almost, in a sense, the market has tried to move beyond it and started looking toward, okay, what is it going to mean for china stimulus, and how is that going to recharge things? for now, it hasn't had much of a bite in terms of the overall case here because u.s. numbers continue to hold up okay people are figuring, okay, looks like shallow recession in europe we've gotten these before. so, not great, not a great situation, but i think, to me, it's more about, you know, semis have punched above their weight in terms of what the market has done nvidia has punched above its weight in terms of what semis have done, so that's the immediate challenge. it's all very orderly, even the pullback of the s&p we got over the prior week or so from the 14-month high was, like, not even 3% on an intraday basis,

probably has a little more to go sideways or chop lower if you look at the way the market's accrued its gains this year, it's four-week sprint higher than pullback, sideways we have had the four-week sprint i don't think a week and down 2% is enough, necessarily , to reload >> when it comes to the so-called chip war, if you want to call it that, between the u.s. and china, it does involve, does sort of get m&a wrapped into it. these are two not large deals but one that people are keeping an eye on, in part because they end up being part of the back-and-forth between the two countries. remember, intel, back in february, said they were going to acquire a company called tower semiconductor. $5.4 billion deal, all cash, 53 bucks a share in cash. you can see where that's trading. it's not doing well, is it why? the chinese antitrust regulators really going to give the go ahead to intel to acquire this country? there have been reports saying chinese regulators are looking

to approve one, by the way that's 53 on the one deal, a deal to acquire max linear was announced on may 5, 2022 just -- this battle involves a lot more than just nvidia and their h-800 or whatever the chip that they have fabricated to be okay for the chinese market. >> to try to get in there. yeah and meanwhile, it's happening when the entire kind of buildout of domestic semi capacity is going full speed, and you have the president wants to take credit for bringing the business back, and so everyone seems to be kind of going to their corners, you know? >> you saw scott cohen's report on new york and micron and the big investment he made by that company in the state of new york to spend who knows how much over time >> yeah. >> and by the way, in arizona and ohio, in particular, enormous funds being spent, mike, and partially funded by the chips act, of course

one of the many different pieces of legislation that have been passed by the biden administration that i guess we can expect tonight or later today the president will be discussing far beyond the american rescue act, but the i.r.a., and the infrastructure bill and the chips act. >> it's going to be interesting to watch the president take some victory laps while powell tries not to take victory laps and maintain some discipline, at least on the rate environment, but yeah, as for the -- if you look at the g7, the u.s. has the highest post-pandemic gdp growth we have the lowest inflation, core and headline, and as for the factory construction that david mentions, construction spending by manufacturers has gone 2x in the last year the reaction function has been right out of the legislation >> it accounts for a tremendous amount of the gap between the expectations of overall economic slowdown and what we're getting. that's been something you would have expected to have had an

impact from 500 basis points of fed rate hikes is commercial construction and it's just gotten overwhelmed by that new capital mandate going that direction >> yeah. there are those who question whether we needed the american rescue plan, the first piece of legislation that was passed at, what, $1.8 trillion when the economy already seemed to be recovering from the worst of the pandemic but he's going to be, it would seem, carl, taking, as you say, taking a lot of credit for those other three pieces of legislation as well. the chips act, i mean, back to that, you know, it is a government intervention in an important market, the likes of which we haven't seen that often, or at least in some time, but certainly one we see from countries we compete with all the time >> i love this note, speaking of nvidia, deutsche today, i'll be totally honest, i have no idea how to value nvidia given it's already the world's sixth largest company. it does matter to macro. while i think a.i. will be transformative, the valuation

does look stretched, and i think we're going to cycle back here to about a trillion dollar market cap this morning. >> he was talking about, i think, the trailing price to sales, which is like above 40 and now of course they've raised their revenue guidance, and so, like, it's in the 20s, which for a trillion dollar company, that's a sales ratio clearly, it's just kind of, you know -- >> although, as the bulls will say, they can't ever remember a company raising its guidance by $4 billion in a quarter. >> but at this point, the stock is saying, that's going to continue on that trajectory. it's not just, oh, this one-step function, we got this huge windfall of orders and people wanting to, you know, we can't sell enough of our stuff because everyone wants to show scale in a.i. who knows? but yeah, that's where we are. you know, tesla's at $800 billion and at a fraction of that price to sales >> one of the questions becomes, what does nvidia -- the endless demand for their product, what

does it displace in the datacenter what do you not buy if you're microsoft or azure or alphabet or, of course, amazon and aws or oracle what don't you buy because you are stacking up on these h-100s? are they up to the h-200 yet i need jim here to tell me >> that's not my game. >> mike, come on you're not on top of this? >> cramer, from wherever he is, has tweeted about his worries about these markets for chips, yeah >> yeah. >> where is he >> i don't even have a dog >> where in the world? >> you don't even have a dog you have cats. >> we should mention, by the way, nasdaq, as we wind down the first half of the year, on pace for the, what, the third best first half on record, and that's coming off of, obviously, last year's first half, which was abysmal. >> exactly well, the nasdaq and the nasdaq 100 had, like, peak to trough last year, down 36%. in, you know, 10 or 11 months.

so, clearly, you know, that's extreme on the downside. a lot of what we got is a recall look at an aggregate point level. we've regained in the nasdaq 100 about three quarters, not quite three quarters of what was elasticity year. so, a lot of that has just been recovery, things like meta sliding into this really good fundamental story that all the portfolio managers are now completely hitched to, and some of it is the nvidias and even the apples of the world where it's just piling on market cap because we love it, we appreciate the story, we think it's predictable it's going to continue great balance sheet, and it feels good to participate. by the way, if you're a mutual fund manager, you're not allowed to own a full compliment of apple to reflect the index weight because the rules prohibit it. there's almost this constant pullback you need to add back to it >> citi today, scott chronert, all the second-half playbooks coming out, but scott chronert

says they're keeping their year-end target but we don't want to be painted as overly bearish. there's also a lot of discussion about holding the august ties of 43.25, something >> that was the level at which jay powell was not happy with and said, we have to, you know, inflict some pain on the economy, and the market doesn't reflect that we have some room down to that, i suppose. i think it's more like over 4,200 that would keep the uptrend intact that's the 50-day average. that's where we kind of broke out of that prior sticky range chronert has been saying he thinks earnings are going to be more resilient than you would expect, even in an economic slowdown, that the s&p 500 is just less cyclically geared in terms of profitability than it used to be i think that's what he's saying. maybe it's already happening, the street is going to be looking at 2024 numbers. seems like there could be either -- they could either come

through or have some upside to them, and so don't get too cute about waiting for the market to trade down into the 300s if we have disappointing earnings -- 3,000s >> dan ives from wedbush weighing in on the single largest market cap contributor to the s&p, that being papapple, saying he does see it getting to $3 trillion. i forgot it hit it once prior. at least he says it did. >> wouldn't we have made a deal of that? >> i think we would have he said in january of 2022, first hit the $3 trillion mark i don't remember that, mike. >> i suppose because the share count would have been higher and the stock was at, like, $181, maybe. i don't remember >> dan's point is that they're playing chess while others play checkers, and he does point to the, in particular, the service revenue, which he says is on a jaw-dropping trajectory to reach

$100 billion by fiscal year '24, and of course, we have talked for quite some time about the multiple of the market is willing to accord that because it is recurring revenues as opposed to being out in the market with a device that you never know, although, we can imagine it's got pretty good uptake >> it has played out, i have to say. that the when the multiple expansion really did kick in, once services got to a certain threshold. >> remember when we were washing k neutral arr neutral ratings on apple speaking of giants, when we come back, the ftc versus the microsoft-activision deal. the ceos of both companies are expected to testify in court today. take a look at the premarket here we'll be looking for signs of volatility as this ecb panel meets in portugal, and we'll watch the president's address later on today get to general mills and google and tesla and a bunch of labor news today when "squawk on the street" comes back you know doug, ever since switching to workday

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day four of the ftc versus microsoft-activision activision stock continues to move higher, closer to that deal which microsoft is very much trying to get through and past the finish line. the current challenge, of course, is having a judge say, no, ftc, you don't get an

injunction against this deal, and in court today will be two of the bigger names, microsoft ceo satya nadella, activision ceo bobby kotick things are expected to go well for the -- for microsoft today, not for the government it's hard to imagine they won't in terms of these witnesses. there will also be microsoft's witness in terms of talking about sort of the economics of the deal as well and from those who have been in the court the last couple of days, and again, they've only got today and tomorrow, you know, their expectation is today is going to go fairly well for microsoft. we shall see, of course. yesterday, you did have the government's key witness or one of them, anyway, in terms of an economist who had done a lot of study of the potential deal, but was questioned firmly by microsoft, not to mention the

judge sort of occasionally weighing in as well. and he hedged a lot, didn't give a lot of, perhaps, credibility to the court because of that hedging that took place. again, that and the opinion of a number of people i have spoken to who were in the courtroom remember, they did not actually -- the expert testimony was really on redirect they didn't present the actual findings in the court of the analysis of the transaction by the government's witness ftc is running out of time here to present its case, really, is what this amounts to, and there are, again, what i continue to hear is there's a belief they haven't done so. we will see. we'll see what the judge things, but they're running out of time, and today is not going to be the day, and then you get final arguments tomorrow so, wow. the judge has asked for findings of fact and law by june 30th, leading some to believe that she

could rule as soon as next week. that would be news that would be unexpected in some way, but five-day trial was also unexpected and again, we'll have to wait and see where this goes. if, in fact, microsoft does prevail, and the government is unable to get a preliminary injunction or an injunction to stop the transaction, then it's on to the cma and that appeals process, which continues in the uk, which a lot of people don't have a great deal of visibility on in terms of what's really got to happen. best i can sort of surmise at this point is there is a hope, guys, that there's a remittal by the so-called c.a.t., the tribunal, essentially, that's listening to microsoft's appeal back to the cma that says, you know, your market definition, for example, was really not correct, and that will provide an opening for microsoft to somehow renegotiate a transaction that is acceptable to the cma but not a great deal of visibility there i'm discounting for now all of these -- this talk that they

would somehow close the deal around the cma's objections. it does not seem likely. but first and foremost is the ftc and as we said, mike, this is going to have as much if not more of an impact on the ftc if they were to lose than on microsoft if they were to win. >> i was going to say, microsoft's, in a sense, fighting a bigger war in terms of what policy's going to look like and the prospects against the ftc for other companies trying to do deals >> exactly if it was a significant loss for the ftc, you know, would it give them pause in terms of bringing future litigation in we don't know again, we can't -- certainly not going to pass judgment, but judge corley will, and we may know as soon as a week or so from today >> we'll watch that. coming up, a lot of news on the banks after the stress tests due out after the close of trading today. meantime, take a look at the premarket here as we get a vy er busy wednesday under way

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take a look at s&p laggards this morning general mills at the top, down 4% with what goldman says is the biggest quarterly sales miss in eight years. they did take about 10 points of price and margins were up with more concerns about what that does to volume, which was negative in the quarter. we'll watch that opening bell coming up in a few minutes. and also ahead, the ecb central banking forum in portugal, our sara eisen about to moderate a panel featuring the fed chair, the ecb president, and governors of the boe and the boj. don't go anywhere.

>> announcer: the opening bell is brought to you by nuveen, a leader in income, alternatives, and responsible investing. we mentioned a bunch of news regarding financials today the stress test later on tonight, punchbowl with a piece about elizabeth warren putting

together some consortiums to take on banks in various ways, and of course regionals getting some attention >> and goldman-sachs has a big scene-setter for the regionals as looking ahead to their results as well as net interest is going to be going for the rest of this year. pretty, i would say, mixed but down beat, essentially saying this is not about, as we've been talking, not about aggressive deposit flight but all of the regional banks continue to see, you know, greater repricing of their own deposit rates than they had anticipated, so they're essentially projecting as the year goes on a greater squeeze on net interest. and i think that it's in the context of a market that's already more or less braced for it look at the kre regional bank etf has been -- it's 18% off the lows it's been holding above these levels or above 40 that a lot of people have been using as a little bit of a toggle between, yes, we're in a stress condition or we're okay, so it seems to me the market's no longer worried that this is going to be some

kind of a quick, unexpected contraction of credit. it's more about, what do you want to pay for these banks? also, wells fargo weighing in on jpmorgan today, essentially mike mayo saying it deserves the premium, but that premium's getting really fat i was just looking at it jpmorgan's traded 1.5 times book value. bank of america on trailing book value -- bank of america is under 90% of book. that's a spread that is about as wide as it's got engine a while. so, they're basically saying, this is an environment where balance sheet liquidity is worth that much more >> yeah. i know you guys know as well, always sort of gives a little sense as to what we can expect from the -- some of the bigger firms, not a great quarter as you'd expect, we believe, but our second quarter results reflect a cyclically low period in a particularly challenging environment. they are quoted as saying -- they go on to say, though,

challenges included fallout from a regional banking crisis, mike, and the government-supported forced merger of credit suisse and ubs. i've said this before, the month of june has brought green shoots in our investment banking and capital markets business, and we are growing increasingly optimistic about the return to a more normal environment. obviously, we've talked a lot about that cava ipo, but it's far beyond that. i'm hearing green shoots when it comes to m&a as well we'll see how that plays out jeffries, always the first >> they're reporting to all of those kind of stress events as essentially just putting a total chill on new issues and m&a, especially more mid-size, you know, below the very large deals that other banks do. i mean, stock trades at like tangible book value. >> and they have some investment from semi that's going to go up. they have ballast on the capital side, but still a tough road to

getting returns on equity. >> with that, let's get ready for the opening bell here at the cnbc realtime exchange at the big board today, it is steel manufacturing company, and at the nasdaq, the go project, helping new york city public school students. we mentioned some small and medium-size businesses, mike boldman out today looking at the russell, saying it should rise 14% in the next 12 months. little more risk, but they do see some action happening here speaking of green shoots >> yes, and that would really just be a continued kind of reversion to the mean-type trade because that's how much underperformance there was in the small caps now, what has to happen for that to play out is probably, you know, continued easy financial conditions or at least no great tightening of financial conditions and a general sense out there that nominal gdp growth is going to hold together, so all those things come back from the average stock against the big ones

it's been under way for a few weeks right now. so, we'll see if it does play. >> that kind of fits with goldman's house view, and that is recession risk is low they went back to 25% odds in the next 12 months they, yesterday, upped their gdp for q2 to 2.2% so they have been constructive on what the back half of the year is. >> they have, and the numbers have been coming to them, to a degree, in the first half of thising to hold up soft landing, if any, is now the premise. so, if we already kind of -- enough of the investor crowd migrate to that position, whereas at the beginning of this year, in january, that was a kind of lonely maverick position, to say that we're going to avert a recession indefinitely nobody says you're going to invert it forever, or all parts of the economy are going to escape it, but at this point, you're staying clear of the broad downturn that many

thought. manufacturing doesn't get worse, you know, other things have to give way for the overall economy to fail. >> yeah. by the way, also, oil where it is, you know, there was pretty fashionable on the way up with oil to say, every u.s. recession has been preceded by a doubling in oil prices. now, has the doubling in oil prices after the ukraine war expired as a signal or as an influence for recession? so, who knows? this cycle has, i think, broken a lot of the rules and made some of the patterns of the past seem a little bit that they don't apply. so, we'll see how it goes. >> yeah. the surprise out of ukraine was that we had a forced seller in a sense of oil >> that's right. >> and that was russia a lot of the supply disruption watchers were not counting on that you mentioned housing, by the way. the housing surprise index better than the summer of 2020 when people were moving like mad. and rh, david, i don't know if you've noticed, back above $300, curling higher, to use mike's words.

maybe that's a sense of how the consumer is faring or feeling right now. >> and lowe's and home depot have kind of, this month, gone up like 10% each to sort of chase the home builders, so it started out with the pure home builders,people feeling like it was a unique situation where supply was so constrained that they had a window. now, those guys getting a little bit overheated, so the secondary plays are starting to participate. rh, among them i did see some -- i think it was renaissance macro talking about inflows into housing or the home builder etfs is looking a little bit hot right now, so maybe the market is already, you know, kind of gotten to that place where things are better, and there's not much immediate upside we'll see how that goes. >> rh? nothing? >> you know, what's interesting is how often i feel lately we've been hearing more bullish consumer statistics. i don't know if it's just the conversation lately, but sort of pushing back on this idea that the consumer is somehow

exhausted, talking about how much, you know, equity they may have built up, talking about, obviously, we know where things are in jobs, but as well, consumer deposits or even when it comes to just their continued ability to actually spend. >> yeah. i mean, yardeni yesterday, and we mention yardeni quite a bit, but yesterday, he called it milk and honey data, whether it was housing or confidence. he says, we're moving to a period where it's not about a rolling recession, it's about a rolling expansion. >> sure. and you know, again, that could be one of these kind of false dawns. you don't know i mean, people have been talking about how durable goods, they were really good yesterday you have had really good durable goods prints the moment before a recession started in the past, so things do chop around on the way, and i think there's also a lot of focus, david, on the net worth in aggregate of consumers. so, it's not evenly, to say the least, distributed ed bastian at delta yesterday highlighting that the customer base of a commercial airline or

its customer base is $100,000 income households and above. and they're doing fine and they're still there. they want to travel. so, in aggregate, and by the way, somebody owns all these bonds that are kicking off 5 and 7% i mean, it's an underappreciated thing that they don't necessarily roll them all into new bonds. it's spent it goes to bolster future borrowing. you know, there's money flowing through the system for now that is supporting some stuff i think the big question now is going to -- we're going to hear from the central bankers is, are they okay with that? are they okay with an economy that's going to run hot enough to keep growth where it is if inflation grows sticky at some level? >> yeah, although, we got decent overnight prints in italy. cpi was at 8, now 6.7. australia, which did pause, cpi there now a 13-month low if you did pause -- >> well, they paused -- >> and then they went again, but this feeds their initial

instinct, at least >> granted, nothing right now is saying that the disinflationary tide is shifting, but i to think if you want to kind of look around the corner, that might be the conversation we're having if the economic numbers here continue to surprise to the upside >> it's been a very long streak of upside surprises. citi surprise index is riding above zero for a long stretch this year. >> guys, sort of taking a look at the broader market and groups within it, i mean, pharma is not overly weak but down, but i would note, shares of eli lilly just continue to power higher of late they're not -- they're only up two bucks right now, half a percent, but we talked about these -- this revolution in weight loss drugs, obviously, novanordisk but also one that's only been approved for diabetes from lilly but may soon be approved for eiweight loss and then what may be following it,

even more powerful drugs, perhaps to be delivered in oral form as opposed to through injection, and what that will mean this has powered lilly's stock to an all-time high, $242 billion market cap, and you know, i don't know that we've perhaps talked enough about the long-term ramifications of these drugs, if they are widely taken. they are expensive, of course, at this point. questions about whether they will be paid for, always by health insurers, but long-term savings to the -- to the overall system >> the broader medical costs, yeah >> given what obesity does in terms of bringing on so many other diseases >> lilly's outperformance, year to date, the overall pharma sector is flat year to date, up like 4% on the one-year basis. lilly is up 40-something so we have been -- we're isolating the winners in these

categories overall, it's not big business the longer-term medical -- i do wonder, you know, there was a disappointment from pfizer, halting the trial of the one oral treatment what the estimates are for total market prospects for the injectable version in other words, people clearly believe it's capped at some level of uptake, and an oral would expand the market. >> you're talking about also a thousand bucks a month right now, and then there are people who just don't want to inject themselves, but there will be an oral there doesn't seem any doubt about that how long that takes is a question and then what follows? again, lilly is working on a compound that may be even more powerful in terms of the weight loss it induces than moderna it's amazing to watch what has happened to that stock, of course >> our sara eisen, by the way, we mentioned, is speaking with the world's top central bankers in portugal right now. that includes the fed chair and the ecb's christine lagarde.

let's listen in. >> thank you so much, sara it's very nice having you in this closing moment. i'll take this opportunity to thank all the contributors, those who have prepared papers, those who have worked with the presenters and all the panel members. it's been really, really a rich conference, and i want to thank you. so, as far as the european central bank is considered and the euro system at large, we have covered a lot of ground we have increased our interest rates by no less than 400 basis points in a very short order, less than a year, and we still have ground to cover and i think that, as i said earlier on, we are data dependent. we will decide on a meeting-by-meeting basis, but we know that we have ground to cover, and if our baseline stands, then we also know that we will very likely hike again in july. >> what about september?

>> that, i will not tell you, and for a very simple reason that i just mentioned. we are data dependent. we'll decide meeting-by-meeting, and we'll tell you for the september meeting, we will have received a lot more data information, survey results, and it's going to be another projection meeting prepared by the staff of the ecb, so we will have a lot in our hands to make our decision then. >> governor bailey, you surprised the market recently, raising interest rates by 50 you did a double why did you feel the need to do that >> well, it really picks up on the theme that christine has just developed first of all, i'm in the uk economy, has turned out to be much more resilient, and that's a good thing there's many good aspects to that but what goes with that resilience is signs of a very tight labor market, which is showing through in pay, pay awards, but also showing through -- i mean, we've got an

unemployment rate at the low end. the resilience is coming through that way but when we looked at the, to christine's point, when we looked at the data, because we too are being driven by evidence at the moment, the cumulative data, both particularly on the labor market and on the inflation release we had, which to us showed clear signs of persistence, caused us to conclude that we had to make really quite a strong move at that point it was justified my own view on that was, if we were really of the view that we were going to do 25 and then we were really sort of baked in for another 25 based on the evidence we'd seen, it was better to do the 50 and then we will, as christine said, we will be evidence-driven. so, we will wait for the next set of evidence for our next meeting, which, to christine's point again, will also be one where we won't have a full forecast >> have you received a lot of flak for the move? >> well, i think at the moment, i can understand why there are critics of us in central banks

we have a job to do. i'm very clear that our job -- all of us are clear, i think, that our job is to return inflation to target, and we will do what is necessary i understand the concerns that go with that, but i'm afraid i always have to say that it is a worse outcome if we don't get inflation back to target >> something i know you've all been saying. chair powell, you've said it many times, and yet, you paused, but you're not calling it a pause, and you're not calling it a skip so, what are we calling it >> well, first of all, sara, thank you, and christine, thanks for hosting us here in sintra. so, what we're calling it is maintaining the level of the federal funds rate at its current level for this meeting thank you. thank you. and we did that -- if you think about it, we've raised the federal funds rate by 500 basis points since a little more than a year ago, and we think -- so,

we've come a long way. we also think that there's more tightening power coming through. really, policy hasn't been restrictive for very long. we started at, you know, negative real interest rates, and we've now moved up to where we actually are in restrictive territory. but we haven't been there very long, so we believe there's more restriction coming and what's really driving it, you know, to andrew's point and christine's as well, is very strong labor market. we've got a labor market that -- where jobs are being created there's strong wage gains, and that's driving spending, driving real incomes and driving spending, which is driving more demand and continuing to drive labor markets. so, the labor market is really pulling the economy, and my colleagues and i, as you well know, wrote down in our sep two more additional rate hikes the median was quite a strong majority, actually, wanted two or more rate hikes, and the reason for that was, if you look at the data over the last quarter, what you see is stronger than expected growth, tighter than expected labor market, and higher than expected

inflation. so, so, that tells us that although policy is restrictive, it may not be restrictive enough, and it has not been restrictive for long enough. >> so, i don't get why you didn't raise rates at the last meeting, especially, i think, it was a surprise that it was a unanimous decision to hold rates steady when you said a majority think that they still need to go farther on raising rates >> it's really just, as you get closer and closer to the goal, what we're aiming for is a policy that's effective to bring inflation down to 2% over time as you get closer to that, you get closer to the place where the risks become more imbalanced so, we did four 75-basis-point hikes in a row in december, we moved to 50. then we did three consecutive 25-basis-point hikes so this is a continuation we're going to move the decisions a little bit, make them a little bit with a little bit more time in between them in an effort to get more information from the data to see

how much restraint is really coming from these -- through the pipeline from rate hikes that we only made now, in many cases, six, eight, nine months ago. that's why we did it >> so, maybe an every other meeting hike >> we've not decided that. the only thing we decided was not to raise rates at the june meeting. we have not made a decision to go to that it may work out that way it may not work out that way, but i wouldn't take moving to consecutive meetings off the table at all >> i'm trying. governor, first of all, it's great to talk to you we haven't heard much from you outside of your policy meetings in japan i think the world wants to know why you're the global outlier here you have decided to maintain your easier monetary policy in the face of rising inflation why? >> so, simple answer will be, although the headline rate of inflation is above 3%, which is well above the 2% inflation target, we think underlying

inflation is still a bit lower than 2%. that's why we're keeping policy unchanged at the moment. >> even though we've seen measures, including -- including core, right, higher than the 2% level? >> score also above 2% but let's say -- let's look at the rate of increase in wages. which is an important feature of underlying inflation it has risen, but it's in and out running at around 2% now, if you want a 2% inflation rate, wage inflation that's consistent with that would be slightly or well above 2%. if you are seeing productivity growth rate is positive. so, there's still some distance to go, we think. >> and and as a result of your policy being different than

those of your colleagues, the yen has gotten very weak is it too weak >> well, the yen is in -- being influenced by many factors other than our monetary policy, chug t including the policies of these three banks. so, we'll see. we monitor the situation very carefully. >> monitoring the situation? >> yes >> for intervention purposes >> no, no. it's the jurisdiction of the ministry of finance. >> president lagarde, how much would you like to see inflation moderate from these levels we've already seen a nice moderation for you to feel comfortable taking a pause or potentially going the other way? >> well, this is not what we're considering at the moment. okay but if i look back at what we've covered, inflation was, i think, the highest reading we had was

10.3%. we are now at 6.1%, headline core has moved a bit down, but we are really looking at both headlines, which is the measurement that we have agreed in our strategy and that is visible for people, for the consumers of europe, but we're also looking at underlying inflation, and on that front, you know, we are not seeing enough tangible evidence of the fact that underlying inflation, particularly the domestic prices, are stabilizing and moving down. so, we're looking at as many measurements as we can because we want to be in sufficiently restrictive territory for long enough so that we are confident that we reach our 2% medium term target >> why is it so sticky, governor bailey why is your inflation rate higher than that of europe's >> well, let me distinguish headline and core for a moment so, with headline inflation, i do expect it to come down

markedly this year >> the world central bankers in portugal talking to our sara eisen. what a textbook case right now of the asynchronicity in rate cycles around the world. as for the u.s. interest, powell with a great joke about how it's neither a pause nor a skip, but making the broader point not taking anything off the table, including hikes at consecutive meetings and this idea that rates may not be restrictive enough or restrictive for long enough, and they're expecting more >> i think his message was meant to say, we're going to let time do the work for a while, so time at this level of rates or near this level of rates is restrictive enough, and that more than, you know, moving every meeting to tighten further should do the job. and the ecb, of course, data dependent. that's the message there >> interest. we'll see. i mean, i'm sure sara will eventually get to how policy decisions have affected various decision cycles, particularly in the uk, where brexit continues to get a lot of discussion of

how it altered the labor market for one thing. >> without a doubt just was put on the spot there, bailey, about why inflation is just exactly so high in the uk, and it's inflaming a lot of the political frictions. >> we did lose a little ground on powell's comments about maybe consecutive moves, dow session lows moves session lows down 128. still holding on the s&p, we'll watch that closely, have more from the ecb forum later this morning. let's watch bonds as we said, treasury reacting to some inventory data today but mostly the commentary we'll be right back.

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talk of the day is the central banks and the panel in portugal. we'll continue to monitor. mike thanks to you we'll talk soon. back in a minute

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good wednesday morning welcome to another hour of "squawk on the street" i'm carl quintanilla with david faber leslie picker here all eyes are pinned right now to the central bank forum in portugal moderated by our sara eisen where the tone has been arguably net hawkish. fed chair powell saying policy has not been restrictive enough for long enough. listen. >> the labor market is not as tight as it was a year or two ago. so you're seeing job creation is beginning to come down, a number of indicia that would suggest we're getting the softening we need, we're getting it slower than we expected but it's still happening so still a possibility there it's so uncertain right now. in my view, the least unlikely case is that we do find our way to better balance without a really severe downturn i think there's a significant probability that there will be a downturn as well, though

but it's not, to me, the most likely case. >> that's the hard landing scenario. >> i wasn't thinking of hard landing. i was think of even a recession. to me it's not the most likely case but certainly possible and many forecasters do predict that >> is europe in recession, president lagarde? we've seen two negative quarters of gdp. >> i think the first quarter was flat, wasn't negative. so technically you can argue we did not see a recession. but it's stagnant to say the least. and the expectations for q2, particularly in the industrial sector if i look at pmi numbers are not particularly -- are not giving us great hope there will be a strong recovery we see a second half of '23 up from the first half but moderate we have a 0.9 forecast for the

whole year. >> do you agree with chair powell you can get away with the tightening cycle without dragging europe into a recession? >> our baseline does not include recession but it's part of the risk out there. >> are you willing to tolerate a recession? >> if you go back to last autumn, last november when we did a forecast, we were predicting quite a long but shall row recession. and the economy has turned out to be much more resilient so far. i think you can point to a number of things that underlie that the number one we had energy prices in europe and that has helped with the question in terms of trade shock that we've been having it's done quite a bit to reverse that term of trade shock so i'm not surprised that we've had this reversal in one sense what was surprising but helpful was we did have this, in a

better window than we thought we would have we're going through this year now in a more resilient position than i expected. so we're not currently forecasting it but obviously we have to watch it carefully. >> how is the japanese market faring it's exciting if you look at the market, at a 30-year high. how is it doing fundamentally? >> it's doing well apart from contribution of inventory investment, domestic economy expanding slightly above potential, i think, by pent up demand, relaxed pandemic-related restrictions in may. and this is stimulating consumption and investment there's also green gx dx related business investment taking place, so investment is fairly strong at the moment

we think the economy is going to expand slightly above potential for some time. but this, of course, a lot of uncertainty going forward. including what may happen in europe and the united states >> i asked if you guys coordinated or talked about monetary policy before is that -- does that happen? >> should it be more coordinated? because you're all doing different things right now >>. >> obviously what we don't do is say what do we do, what do you dodo because we're all setting policy for our areas that's the law in our areas, actually but we do talk a lot, it's important at all times but particularly in the moment because we're facing global shocks we have common shocks. they differ a little bit in terms of their impact and effect

but there are huge global events going on affecting all of us but we do talk a lot and see each other quite a bit so it's porntd and we share wisdom on how we're interpreting the things going on around us. >> i guess we are in a flexible trade, so we do policies independently, but, of course, we exchange information which is very, very valuable. >> governor ueda do you think they are overtightening? >> no. >> no, you don't, you approve of the policy you've had a tight labor market for a long time in japan, even before covid. >> yes demographics demographics is working in a way to tighten the labor market. >> it's going to continue this way for a while. >> the economic conversation it

gets into an interesting question chair powell where now we're wondering, easier to fight inflation last year when the economy was doing better we're seeing signs of softness and weakness in manufacturing and you mentioned the labor market starting to cool off, about overdoing it and the risk of overdoing it. do you wonder about that or still just focused on inflation? >> let me say the u.s. economy has been resilient the data we're still seeing, including since the last meeting still is consistent with, you know, with an economy that's growing, albeit at a modest pace as i mentioned earlier, yes, there was no question -- the first question was how fast should we go we went pretty fast and we got to a level we believe is restrictive. we're in restrictive territory if you take federal funds rate and sub strakt a forward looking measure of inflation you'll get a positive real rate meaning

we're in restrictive territory i think we have steadily slowed the pace of our moves and it's appropriate to do so, one because the more information we get the better decisions we'll make the risks of doing too much versus doing too little become more in balance. i believe they're getting closer to balance, and the committee believes there's more work to do, more rate hikes likely appropriate. >> so you believe there's doing too -- of course, inflation expectations are well anchored, i don't have to tell you. >> the thing with risks is there may be social cost with price stability. the social cost will be higher in all likely cases. we've seen what it looks like. it's something that we have to do it's one of the principle things

that society counts on us to accomplish i think we all feel committed to accomplishing it it's a good thing that inflation expectations have remained anchored all this time our understanding of inflation expectations is not a precise one. the longer inflation remains high, the more risk there is that inflation will become entrenched in the economy. so the passage of time is not our friend here. >> what about a higher inflation target i know none of you want to talk about that but on wall street, there's this idea that a lot of things are changing in oureconomy, the on shoring of supply chains and chip plants and all of that is going to be expensive and could create higher inflation rates permanently. couldn't it, president lagarde >> at this point in time and the fight against inflation, the

strategy we agreed, the expectations we have, and the inflation targeting as has been said there's no way that any of us, i think, would consider changing the gate post halfway -- more than halfway through the journey. it's wonderful to have a forum which brings together academics and other than policy makers to actually consider those ideas and to explore them and weigh the cost and benefit and all the rest of it but at this point in time, i think we have to be as persistent as inflation is persistent and we have to be resolute and decided and determined in reaching the target that we have set and not debate the target as we are running the race. >> it does raise the question, governor bailey, about how far inflation will come down too. >> it does, but let me reinforce what christine said. what is the inflation target it is the definition and

practice of price stability. in our legislation, it is the -- it is what price stability is taken to be. that is the 2% target. i don't think anything has changed in terms of what we mean by price stability i think that's an important point to starting with it's the anchor we have to maintain in terms of bringing it down, yes, we have faced and are facing the biggest challenge for a very long time but we have to meet that challenge. i don't think it is the right thing to do to say, this is all a bit difficult. let's change the target. i really don't think that is the right thing to do, that would be a bad thing to do. i think, although i very much agree, as christine was saying, there are things we understand about inflation expectations and things we don't understand about inflation expectations, i think taking risks of that nature with inflation expectations but also fundamentally changing what we mean by price stability when there's no good reason to do

that i think it would be the wrong thing. >> how do you read the inflation expectations governor ueda because they crept up in japan as well. >> we've been for a long time trapped in zero expectations e kwibly briup so we've been trying to hard to move it to 2% inflation expectation. to do so we had to deanchor expectations from zero raising inflation expectations and in the future we have to re-anchor them at 2% this is a formidable task and now we are seeing signs that inflation expectations are rising but as i said, not to the extent that we are fully in the 2% inflation expectations >> it also raises the question, you mention the labor market and

the post covid changes about just how covid has distorted the data and has made travel, for instance, so strong for so long. i wonder, you know, chair powell, how you look at the covid impact on the economy and how it's changed the way you make forecasts and you think about what's happening right now? >> well, i think there are -- there are changes and we don't know how persistent they will be, certainly work from home, you can see the effect on commercial real estate, particularly office real estate and retail around suffering in major cities we don't know how long that will last, feels like so some of it will be persistent and will last you mentioned data as well i guess the response rates to a lot of the data we collect and other organizations collect, the response rates have gone down and you're seeing a lot of volatility in these data series.

more so i would say than we've seen historically. so the data are even a little bit foggier than they usually are. but we'll be -- you know, in terms of what the effects of covid, it's going to have long-term effects on the economy, maybe loss of productivity certainly has been for a generation of kids some loss of education and training i think it's hard to say how persistent this will all be. >> what's your level of concern of commercial real estate since you mentioned it in the u.s. >> it's something we, of course, are watching carefully the way it lays out is, the large banks don't have large concentrations of commercial real estate, so that's a good place to start a good part -- a surprisingly large part of exposure to real estate is the banks under 100 million, the banks with high concentration and they're relatively few

so it's something we're carefully monitoring with bank supervision as a play book for this. so they're talking about their concentration of real estate, what can they do, how do they manage themselves out of this. it's not a surprise we're aware of it and cautious of it generally speaking, you know, it was -- at the last meeting it was about what's in the pipeline, how far we've come, what's in the pipeline and also say that the bank stress that -- part of the decision in my thinking anyway, was the bank stress we experienced earlier in year there's a fair amount of research showing when something like that happens, credit availability and credit can move down a little bit with the bit of a lag so we're watching carefully to see whether that does appear of course, tightening and financial conditions is what we

'doing intentionally so we have seen bank credit conditions tighten. that's what we're trying to achief t achieve the question is the is there a greater channel of that coming from what happened in march. that's in the back of my mind whether we do see that. >> how long are lags, governor bailey do you expect to see more? >> interesting question, in terms of the transmission of policy decisions so if i can illustrate it with the uk case. obviously it's not the only part of the transmission, to be clear. it's an important part -- >> fascinating peek at the thinking of central bankers around the world as sara eisen tries to pin at least chair powell down why maintain a hawkish tone there appear to be risks of letting inflation stick we need

better supply balance in the labor market have seen goods for the past six months or so and new rents coming in with little to know increases but talks about the societal cost of letting the monster out of the box. >> you can read between the lines as potential job losses and up tick in unemployment rate as a result to the collateral damage to the tone he said two consecutive rate hikes not off the table despite what he wouldn't call a pause but he said a consistent rate policy this time around >> sara is doing a great job but interesting back and forth around commercial real estate, dismissing it as a key reason for why he was particularly cautious or around his comments at the last meeting, press conference, but he's brought it up any number of times talking about covid and the long term impacts of behaviors, particularly work from home and what it means in the longer term

which seems is already the case. >> he did address the events in march already saying there's so much research that shows there can be a lag after events like that in terms of credit restraint. already seeing that on the ground of course but additional credit restraint -- >> we are but not as much as we thought we would immediately and that still is a key question what position the regional banks and community banks are in in terms of their willingness to lend for commercial real estate probably not at all. and then the question is restructuring that needs to happen withcurrent borrowers o some of the deals. but ultimately making capital scarce, new capital anyway. >> if liquidity comes from the banks themselves. >> right. >> as opposed to nonbank lenders and others out there -- >> those without deposits. and what you can as a result of the 500 basis points increase in

rates over the last year. >> helping us react to this this morning is richard fisher, now barclay senior adviser thanks for the help today. maybe you can help our viewers understand how much of powell's tone this morning is insurance as he continues to sort of alert us to the dangers of inflation spiking again. >> he's been constant. i hope everybody understood across the board with all four of those central bank leaders, they're not going to fore sake the 2% target. and they're all pretty much on the same plain japan has a different situation as ueda explained. but i see a consistent theme and i hope market may venns are paying attention to it and that is there are determined all of it, particularly england, the ecb, and the u.s. under powell, to slay the inflation

dragon and they're not going to give up. even at, as powell said, what may be a significant social cost what he's referring to there is unemployment and employment. but there is room to go. you have to remember we're still having, as was mentioned with the bank of england. we in the united states are having historically high employment and there's still further room to go. one other comment about what i just washed and i've been watching since sara started the great interview. bailey has great eyebrows. did you notice how dark -- >> don't under estimate those eye eyebrows, richard, you're right. >> he also argued that brexit is not a function of the inflation problem they have right now which i think raised some eyebrows among some who were watching >> he did refer to the energy

situation. but again, the british economy is charging forward. how long have, again, the market may venns and analysts been predicting recession in the united states. how long has this been going on? the spread we talked about forever. if you come away with anything from that panel, the likelihood of recession isn't upon us there's a lot of concern in the marketplace about a weakening economy. sara referred to it in her interview, you all have referred to it. we saw weakness in retail, the goods sector and yet in our case, the service sector propels the u.s. economy and consumption propels the u.s. economy. and i keep saying over and over and over again, as long as people have jobs they will consume as they get paid and we have historically high employment rates

across all segments. look at african american women the highest employment rate in history at least for the last 20 years we've been tracking those breakdowns if you go across the board that means continued consumption. it softens somewhats, sends higher incomes into the walmart and dollar generals and the like, but we're still driven by consumption and services and they remain fairly strong. so what i heard from that panel is, no one is expecting a severe recession. and everybody seems to be expecting a soft landing at some point but it hasn't happened yet. europe is -- europe i worry more about than anybody else. >> richard, i'm just curious going back to that earlier point. you know, one thing that chair powell did say is that they're getting to this place where the

risks become more imbalanced those are the words he used. and that is the thinking behind being more thoughtful. the data has been volatile he said, the inputs they're looking for. so it's a foggier picture for them when he says the risks have become more imbalanced, what do you think the risks that he's talking about are? >> he's talking about how to -- obviously the tradeoff in their mandate between employment and inflation. and they're becoming more balanced in the sense that his, quote, restrictive policy, which is what it is, is finding the right balance between the two. i think what caught my ear, of course, is he said it's not restrictive enough yet and i've never seen a fed chairman, and i served under greenspan and yellen and powell

sat to my right for three years. i've never seen a fed chairman articulate what they're likely to do going forward. it's very, very rare and i think he's signaling giving as much information, forward guidance to the markets as possible. >> richard, follow-up on what you said earlier you're more worried about europe why? >> obviously they have a unique situation, their budgets are being strained their defense budgets are rising, as are ours, as our if japans, as a koreas, australia's, canadas i think this is the key thing for you all to focus on, a lot of paper is about to be issued we know about the u.s., a trillion coming to market, probably more in the next six months, already started. every country in europe, in

asia, the significant ones, and the deep south, australia, new zealand, even north of us in canada, is spending more money on defense because of what russia did in ukraine because of xi jinping because of north korea and the case of the japanese, and ourselves. they're going to float more paper, it's more costly. the cost of financing the u.s. government right now has risen almost threefold who's going to buy that paper and at what price? that's the big thing i like to worry about right now. and i wouldn't be surprised to see this move out of the yield curve. based under one year is 5% plus. we saw little movement in the two-year today the ten-year keeps sort of trying to break out from the 4.7 and rise excuse me, 3.7 and rise. i wouldn't be surprised to see

the ten year in the forecast i wouldn't be surprised to see the ten year in 4% there was a reference to the real estate market here. you talk to any construction loan request, anybody in the business, they cannot get construction loan money for less than 12% that's a tripling of where they were last year so there's going to be -- it is restrictive to use powell's term and the question is, how does this work its way through the economy and what the fmc has to judge but he left the door open to do more and make it more restrictive and we should heed that warning. >> that's a huge help trying to dissect and process what we've gotten the last 20 minutes thanks so much good to see you. we'll take a quick break and continue to monitor the ecb forum in portugal as the fed chair continues to speak don't go anywhere.

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welcome back we're monitoring that ecb forum, moderated by our own sara eisen. let's get to bob who's been watching the market here seeing if there's any reaction. i don't know if there has been to powell's comments >> very little we're in a 10, 15 point trade. that's lower than you would expect on a normal day trade but powell said interesting things and the trading community are focussed on this, they're watching the live stream right now. everyone i call they're watching the live stream. should be watching us, but

here's the key point, he was asked about rate hikes said it's appropriate to do that the only time the market reacted to what he's saying, 15 minutes in he said he won't take hiking at consecutive meetings off the table. very emphatic about that andth market did move down about that. that was new information but not much he repeated the possibility that recession might happen but not likely he said this before he wants to say the recession is not the most likely case but it's possible and he reiterated he could have a soft landing he didn't endorse a soft landing. he said there is a path for labor market conditions to soften without the large job losses that have happened in many prior cycles that's the soft landing inflation he was asked about what's bothering him about inflation. he again mentioned the very strong jobs market and the strong nonhousing service cost, this is a very specific subset

of the pce, it's hotel, food, travel, health care, this is essentially wages still high he said here's the source of the problem we need to see these particular areas moderate before we're happy that inflation is coming down to our target levels christine lagarde over at the ecb was asked if europe was in a recession. she declined to specifically answer the question but said europe was stagnant close to saying a recession but didn't say that the s&p, modest moves as i mentioned, 10, 15 point trading range. in a normal day, the first hour of trading you would see more vol volatility here even on today. the problem, hawkish, higher for longer, inflation still sticky anyone who wanted to sell based on this information already would have done so this is a good example of

efficient market hypothesis. all of the information is already in the market and nothing really new has been said here, even though it's important he said we're not taking two consecutive rate hikes off the table. >> thanks, bob let's get back to portugal >> this is what businesses tell me we're going to see a fall in the rate of food price, for example, it's just taking longer than expected. >> it's not just russia, governor ueda, we're following the tensions increasing between the u.s. and china, europe and china. do you think that's having a material impact on global growth >> at least there's tendency to relocate production sites out of say, china into other asia

countries, including to some extent, japan. so in the short run this is having a small positive effect on the japanese economy through business mixed investment. but in the longer run there will be inefficiencies all over the place so we'll see. >> so japan is a beneficiary of the flight out of china. >> in one sense and in the short run but in the long run i'm not sure. >> chair powell how do you think about, it's obviously a risk and hurts trade how do you think about the u.s./china relationship as it impacts economy? >> we don't have any role to play in the relationships between the countries. but china is a large trading partner, mainly consisting of us purchasing things made in china

and china's economy came out of c covid strong but now it doesn't look like that point it means a little less global demand but i wouldn't say it's a first order consideration for us >> how does chair powell reference the disappointing nature of the chinese economic recovery how does that play into europe's recovery or the global picture >> we have to be attentive to the emerging market economies at large. at the moment they're producing about 60% of global growth some of which is more focused on domestic development and consumption and less on trade. but if you look at the trade volume numbers from china to many other countries, particularly the advanced economies, that has not changed significantly. so the trade volume is still significant. and the -- you know, i'm not

breaking any news here the chinese authorities themselves say that they're likely to have a 5% growth this year in '23 rather than the 6% they had initially forecasted. so that will have an impact given the size of the chinese economy on global growth at large. we have to -- you know, when we do our projections, when we look at the economy, we look at the global economy and then sort of narrow down and zoom on the european economy but everything that happens in china and the united states and the uk and japan and emerging economies matter for us because we are strongly interrelated and trading with each other for a long time. and we learned from covid, in addition to the pain and suffering for many, is the fact that we are vastly dependent for the supply of rare earth and various metals that will be critical for the development of the economy of tomorrow if we

decide to firmly two towards the green economy that we should be aiming for >> as an open economy one of the things as christine says in terms of how we do our process, one of the things we spent quite a bit of time on is world export prices in the recovery from covid we saw a big contribution to good price inflation. we're now seeing the prices definitely start to weaken so that will be another determinant going forward of policy. >> as central bankers do you plan for the worst case scenarios on the geopolitical front? if china invades taiwan, then what what does a central banker do? is there a contingency for that? >> we use our tools to adhooef our legal mandates if that happens. >> got that fed feed down.

>> hold a special meeting. it's a volatile world we live in, right? >> we do have -- every cycle we look at our staff works up six or seven or eight alternative simulations and simulate different things, it's not so much geopolitical it's ways the economy can play out all of those participants read them and talk about them. it's helpful because you can't get too focused on the path in a world it's hard to predict the economy. even in normal times it's hard to predict the economy let alone today. >> what sort of scenarios do you talk about >> i'll leave that to your imagination. >> chair powell talked about -- i don't know if there was a simulation of, we had a few bank failures in the u.s. this year and it forced some of you into action to shore up banking

systems. are we in good shape now have we healed >> i can only speak to the banks which we have supervision and those are the european banks but i'm looking at the area specifically we have been, you know, enforcing three to the higher banking sector, the capital ratios are very high, 15.3% if i recall the leverage -- the liquidity coverage ratio very high as well so we have not experienced, you know, the turmoil or the difficulties in europe and europe does not include switzerland thank you very much. but we are intennive, reinforce the stress testing constantly, i'm very pleased to see the basal three agreement has been reached between parliament, the

council and commission so we can rule out basal 3 as limited exception as possible. and we have to continue doing that job >> any lessons that you took, governor bailey, from what happened earlier this year >> let me start with a backdrop. it's drawing on what christine was saying i think it's important to in a sense reflect the fact that the regulatory changes we made after the global financial crisis have paid off in the sense that we've been and going through huge economic shocks and the banking system, i can speak for the uk banking system, is resilient and doing what we want it to do, which is support the economy not the other way around, to be honest that's the crisis. so that's an important starting point. now i think there are important lessons from -- important issues we have to reflect on from what happened

christine made her subtle reference to switzerland it's a huge sense of irony with the british, christy look, there is obviously a question posed by credit suisse handling, which is are the resolution plans for the major banks that we spent 15 years developing fit for purpose or not fit for purpose? >> are they? >> coming to that. if they're not fit for purpose then we cannot sit here and say all is fine because clearly, you know, regrettable though it would be after 15 years of work we have to ctear them up and start again. i'll give you my view on it. i have not heard the case made to me which suggests they are not fit for purpose. i'm going to state that. but i'm not going to leave it there. we have to have -- in a sense we have to have this out and decide whether it's one way or the

other. my starting point is, i remain to be convinced of that assertion but we can't let it rest there i think we've all got the question of how our banking systems handle a steep rise in interest rates we do stress tests to test that. we have capital provisions for, you know, related to that. and we've all got to think hard. i think the third thing we say is we have to think about the speed of run question. but i think we have to think pretty carefully about that, because if we go to extremes on that argument, we're essentially heading to narrow banking. and i don't think that's an accessible place to head to. so we have to think carefully and creatively about how we maintain the banking system that does what we want it to do which is create credit and the economy, creates assets that are naturally a liquid and deal with the speed of run question. and we have to take that one on.

>> lk we're going to get stress tested this afternoon in the u.s., but i won't ask you about that chair powell but i'll ask if you think the regional banks are resilient? >>ing i do i think banking system is resi resilient, double the levels they were at and then some before the crisis. so the inknow violations that we put in place, the regulatory changes and higher capital, those are all in place in the united states as well. so when it comes to the events we had earlier this year with three banks that had pretty idiosyncratic business models and funding models as well we need to learn lessons. we're not hiding from that we understand there needs to be strengthening of regulatory and supervisory practices as related to institutions of that general size i would say. >> you got a lot of questions on that from congress last week.

>> that's mostly what they wanted to talk about. >> they want to make sure that you aren't, in part, not going to increase capital levels and sort of choke off the small and regional banks in this country and make it hart for them to compete. >> so the u.s. has something like 4,500 banks, the most banks by a pretty big margin of any major economy. we think it's a benefit to have banks of different sizes and business models that serve local communities and offer different products as well as having the large banks and the large banks are strong, well capitalized, a lot of liquidity and a source of strength through the last couple of events. so i think it's important that whatever changes we do make, keep in mind the need to preserve the business models of smaller banks and not just the largest banks. >> any concerns for you governor ueda on the strength of the global financial system at this

point as we go through this, i don't know, once in several decades tightening period? >> i can only talk about japanese banks i think they are well, capitalized. they have enough liquidity it's true that some smaller banks, regional banks, are sitting on non-negligible amounts of holdings, but on average that's about 1% of their capital, so it would be okay but if we do get to normalize our monetary policy because we get into -- go into the 2% inflation liquidity in the sense i discussed earlier, then rates may go up by large margins and we'll have to be careful we'll have to be carrying out

all sorts of stress tests, i think. >> i also wanted to ask you if you go into a more normalization stance away from rates and a yield curve how you manage the risk of the government's enormous financing needs and whether that's a concern you think about? >> we say that's the business of the government and the diet to create a sustainable government. >> fiscal policy in general, i'm curious if you guys will bite on this is it helpful right now or hurtful? president lagarde? >> everything has to do what everybody has to do. a man's got to do what a man's got to do. mop tea monetary policy makers have to decide on monetary policy and

fiscal policy makers have to do their job. it is true that there are circumstances where working hand in hand and supporting each other has proved helpful i think we had a very good demonstration this morning in one of the lectures we had i think what we have very clearly stated, as a governing counsel of the whole euro system is governments, please, it's time now to roll down the measures that you had decided for covid and energy purposes. and that you adopt a part that will take you to better sustainability of your public finance. so we hope to see that and the fiscal space that has been allowed for the various nonconventional fiscal support that were decided back in '22 and '23 very much should be

rolled back in the course of '23 and should not be expanded in '24, bearing another major shock but that's -- that's our recommendation and we make it very clear in our monetary policy statement and have made it clear in the last statement we issued. >> we learned in the uk, what was it last year, when monetary and fiscal policy don't work together it can be a big problem. >> what we had to do within the uk was a financial stability issue and we dealt with it it was clear that was the issue we dealt with. we didn't deal with anything more than that it's not our job to get involved with fiscal policy in that sense we always take fiscal policy as announced, as a conditioning assumption for our decisions so i don't go beyond that in terms of commenting on the stance of fiscal policy. one thing i said in recent times and don't mind saying it again i welcome the fact that the chance of very much using fiscal policy to trief to address the

structural issues in the economy. that's not a comment about the stance of fiscal policy more or less it's a comment about the fact going back to the point i made about labor markets and actually the -- the low potential rate of growth in the uk, the more we can do to tackle that, frankly, the better. >> what about you, chair powell, there's been a lot of physical lar jess, in the united states and now things filtering through, the inflation reduction act, chips, still the american rescue plan act money getting dolled out isn't that making your life harder >> our assignment is to deliver price stability regardless of the stance of fiscal policy. we don't play a role, formal and informal in advicing the physical authorities there are other agencies in washington that do that and that's really not our job. i will add, though, without

crossing any lines that, you know, the spending during the pandemic was very high and it's come down. so we look at the fiscal impulse from the level of spending and it's really not material it may be slightly contr contractionary let's say it's flat you mentioned some of the bills and you i think you are seeing those numbers showing up in construction money, particularly the infrastructure bill. but if you look at inflation in the economy i wouldn't think that's an important driver of inflation. >> you mentioned the consumer, the excess savings you think have come down where do you think the u.s. consumer is headed >> there were two sources one people couldn't travel or spend money on services. that was a lot of f it and also the fiscal transfers that happened. many different estimates i would say for people at the lower end

of the income spectrum with a high marginal propensity to consumer, so there is support for spending in that, in laws that passed during and at the beginning of the pandemic. if you look at the strength of the labor market, still creating more jobs than there are new entrants to the labor market and wages are still high so driving up disposable income and that is driving consumption and that's driving the economy. >> wanted to also ask about the balance sheet, hot topic governor ueda how do you think about the expansion of the balance sheet and how much is too much >> it's a tough question to answer at the moment we are using government security purchases to hit the range for the long-term

interest rate we have set, which is 0 plus minus 50 basis points. so the highs of the balance sheet are indulgindulging. >> the rest of you are in shrink mode on the balance sheet. you've been more aggressive governor bailey. has it gone smoother than you expected >>ing >> so far. i don't want to tempt fate we have a longer duration of government bonds in our portfolio. so leaving it to an organic runoff -- >> that's why you're outright selling. >> that's why we're selling. the 80 billion target was the sum of the natural runoff plus the difference between the target we set. it's that element we're doing as active sales so that's gone actually very smoothly so far. happy with the way it's gone

i think the second question we're looking at actively, of course, is, just how far will we go -- and i look at it in in terms of the stock and reserves before we hit the equally briup reserve. before we shift operations around i expect to do that but it's important to focus on where we think the natural level of balance sheet -- where we think the natural level of the balance sheet is relative to where we are today. >> how do you think about it president lagarde? is there pressure building for you to go faster when it comes to shrinking >> i would say the interest rate is the primary tool we're using at the moment. second, there is a -- almost a contractual reduction of the balance sheet of the ecb because there is a reimbursement of the tell toe that we have put in place during the pandemic and

the -- that is actually happening now if not yesterday or the day before. third, as of the first of july we will stop any investment under the asset purchase program. so there is a natural declining of the balancea first step we are discussing our operational framework. hopefully we'll be able to complete that work in the next six to nine months and that will really determine the size of our balance sheet which is always a factor of also the circumstances and the situation we are in. but that is coming. >> is it going smoother than you thought it would chair powell? >> i would say it's working as we hoped and expected it would work we have a passive program as treasuries and mortgage caps mature they roll off and it's moving along at a pace -- the

underlying pace if you hit the cap is about a trillion dollars a year and reserves appear to be quite ample. so a ways to go. >> is there anything that would make you speed that up or slow that down? >> we always say that we're prepared to adjust in light of evolviing conditions but i us to want to do that right now >> so in the moments that we have left, we've talked about a lot of the risks, we've talked a lot about some of the concerns -- >> all right, we've been of course watching and listening to our own sara eisen with fed chair powell, the ecb's lagarde, of course, governors of the boj and the bank of england as well, all at that ecb forum in portugal, but conducted in english. joining us to react, goldman sachs chief global equities strategist, peter oppenheimer. i know you've been listening as well, peter. give me your take. anything you heard there that was of particular interest >> well, i think that, you know, they were keen to demonstrate the separation between fiscal and monetary policy and how

important that was for them. and i think were very clear in their guidance that they must continue to do what is necessary to control inflation, which is, you know, of course, consistent with what they've been saying recently and i think being slightly more on the hawkish side, the markets have been pricing. so while on the good side of the ledger, we have economies which we believe will avoid rece recessions, inflation rates are likely to be stickier than markets have been pricing and they're really recommitting their resolve in that direction. >> they seem to committed to slaying the dragon, so to speak, of inflation what do you believe that will mean in terms of future policy and/or the impact, of course, on what you follow closely, namely the economies and markets of these countries in question? >> well, the good news is that inflation is coming down, but it's coming down slower than i think that we would like to see, particularly core inflation. and for us, that means interest

rates have got further to go but probably stay higher for longer than the markets are still pricing. so wile we are confident that we will get soft landings across all of the main economies, i think that, you know, rates are going to be at a higher level through most of the next few months, into the middle of next year, at least and that really, i think, when you translate it into financial markets, you know, means that there is really a cap on risk assets from here we've seen a big rally in equities, of course, over recently months. and much of that, i think, is reflecting an increasing degree of confidence that we can avoid recessions and that inflation has peaked. and we're seeing some increase in some of the tail risks that people worried about earlier in the year, whether it be the u.s. budget or indeed, the regional banking issue.

but nonetheless, that rally has been very narrowly driven by a few companies. and the average company has been relatively flat and we think that will probably continue for some time, in equity markets >> yeah, i like that point in your latest note, peter, where you talk about just the narrowness and i think it's important to put that in context of, you know, other nations, as well, especially, as we watch this ecb forum. you say that, you know, the 15 biggest companies have driven 86% return in the u.s. year-to-date 100% in asia and europe's market breadth has been somewhat healthier. but given kind of the optimism that you laid out, do you think that this is going to continue this kind of narrow market optimism throughout the remainder of the year? or do you think that it does kind of widen out from here? >> i think it probably will broaden out a little bit but that's more in the context, really, of still relatively, what we call a flat and fat market range

what we mean by that, point-to-point, we're not getting a loss in appreciation of index levels for the average company, but we are seeing quite a large range, trading range, which is reflecting, you know, this sort of trade often fears or hopes around peaks of inflation in interest rates and troughs in growth. i do think it will broaden out, mostly if we look at historical periods of very narrow leadership generally, equities have held up in the 12 months or so that have followed those very narrow periods of leadership. and generally, more often than not, it is because you've seen some broadening out of returns and that's what i think wie'll probably see moving forwards but again, i would emphasize, if you look at the median company, in most markets, there's been very little change in value this year and we would expect to see relatively modest returns over the next few months. bearing in mind that profit

growth is pretty pedestrian in most markets, a little bit better in japan, i would say, than the u.s. or europe. we still have high interest rates, and that's a higher bar for equities and other risk assets to beat and valuations are not that cheap, particularly in those leading companies, which have generated most of the rally. >> all right peter, we're going to stop there and get back to our ecb forum, as well. certainly appreciate your insights, thank you. >> a pleasure, thank you >> let's get back to sarah in portugal >> i wouldn't use "optimism," but i would say this in answer to your first question, which is, when inflation first arrives, it's really due to very strong demands for goods and goods and shortages. it wasn't abouk it will be significantly about

getting the labor market, supply and demand, back into line and we still have a very strong labor market, but nonetheless, one that is, in fact, cooling in just the way we would have hoped, which is to say through things like lower job openings job openings are coming down the qix level has returned to its pre-pandemic level if you look at average hourly earnings, they've moved down towards 1%, towards a more sustainable level that's consistent with 2% inflation so i would just say that that's the makings of -- if that process continues in a gradually way, the longer that goes on, the better in a way, that's -- i take that as a very constructive path. it is not guaranteed, but the fact that this is really there, and that's what's been happening for a year -- more than a year into our tightening cycle, i would take as a positive thing

and perhaps a hopeful one for the future >> just be careful not to overdo it, right? >> right right. >> what about you, governor? >> let's see, as other central banks are thinking of pursuing digital misunderstand we are taking a different route and we have decided to issue new currency bills starting next year >> going all in paper? >> hopefully this will cheer up public confidence in the boj more seriously, as i said, wages have started to rise at 2% or so for the first time in three decades. more importantly, we are seeing as a sign of changes in expectations, changes in price ways setting behavior, so

prev previously, businesses have hesitated to raise prices, because if they did, others would then follow suit now they are raising wages, because if they didn't, they would have trouble recruiting workers, because others are raising wages. we think this is a good sign for us >> the topic of sentra of this ecbu forum is inflation, volatility, so now it's prediction time. in one year, when hopefully i'll be invited back, president lagarde, inflation rate in the uk is what >> well, our last forecast, we expected inflation to come back to target towards the end of the next year. but we're going to start the next forecast in about two weeks' time. >> i was trying to jump on that. >> do you get to 2% by this time

next year, president lagarde. >> you said a year from now, right now? >> yes >> the projection we have is 3% for next year. headline >> will you be satisfied with that >> i want it to be timely. we all want it to be timely. >> chair powell? >> i don't see us getting back to 2% this year or next year >> you don't >> no. i see us making steady progress, but for core inflation, i don't see us getting to 2% this year or next year i see us getting there the year after. >> 2025, core inflation, 2%. so you'll be restrictive for a long time? >> we'll be restrictive as long as we need to be, but if you're -- if rates -- if inflation is coming down sharply and we're confident that it's on a path to 2%, you know, that would be a different situation you would begin to think about -- about loosening policy.

but we're a long way from that that's not something we're thinking about now or in the near future. >> governor weyda, are you going to get to the 2% by your measure? >> so our projection as of april, inflation projection, has for '23 fiscal year, 1.8%. 1.8 headline 2.0% for '24 now, this makes my job of justifying -- >> world central bankers talking to our sara eisen no portugal. pretty interesting comments about infrastructure spending in this country, at least, obviously, quantitative tightening, when we finally get back to 2% target. good wednesday morning, everybody. welcome to another hour of "squawk on the street. i'm carl quintanilla with leslie picker the heads of the four largest banks are sitting down with sarah at the ecb