So. Is this guy falling.
The sky is not falling but markets are adjusting to very changing
circumstances. If I said that right.
Very changed circumstances. What we are doing is seeing an
adjustment that is very very significant because what the Fed and other central
banks are doing as you mentioned in the intro is very very significant.
This is the analogy I'd use if you're lactose intolerant.
You have a half a cup of milk. It's a little painful if you have a
gallon milk. It's extraordinarily painful for a few
hours. And we just drank a gallon of milk and
we're lactose intolerant. Well to continue that analogy a little
bit crazy we were told we're going to have to drink a gallon of milk.
Why didn't we believe it. This is what I don't get.
So I think one of the reasons this week is so significant is because it really
seems to me like investors have woken up to this pain messaging that Jerome
Powell and other Fed members have been trying to transmit for many many months
now. I mean we even had the Minneapolis Fed
president Neel Kashkari come on and say pretty much explicitly I would like to
see stocks lower. I was happy when stocks fell after
Jackson Hole. Tighter monetary policy works through
financial conditions. They need financial conditions to get
tighter. But for some reason the market has been
reluctant to take on that messaging. I really think this week is sort of the
moment that everyone woke up. Now I'm a journalist and I'm not allowed
to have official opinions. But I would say that anyone who still
believes in the soft landing prospects they need to be getting worried.
At this point the path to a soft landing seems narrower and narrower almost by
Fed design. And as a journalist you've talked to a
lot of you are saying something just like that.
You're being a good reporter there. But Christina what did you want to say.
I was just going to say in fairness the Fed didn't think it was going where it's
going. It has it's its view of inflation has
evolved dramatically. If we go back to the dot plot from
December of 2021 the median expected Fed funds rate for the end of twenty two was
point nine percent. Now we're at four point four percent.
So we've seen the Fed do an incredible turnabout in terms of its views on
inflation. So that's why I think we had the market
reaction. We did not everyone expected it because
we didn't exactly know what the Fed was thinking.
The whole purpose of Tracy Alloway is to get our arms around inflation which we
have not had. We lost control of without a doubt.
I think the Fed would admit that as well.
What is that going to take. What is your reporting tell you about
going to take. And do we believe the Fed is up to the
task. Because as Christine just said it had to
change their theory here. Well I think you are starting to see
some signs of deceleration. And I hate to do the sort of line by
line CPI analysis. It's probably boring for everyone
involved. But there are some technical changes
coming up to health care for instance that are expected to take some of the
acceleration out of the inflation index. But I think the big issue here going
back to the Fed and what Christina was saying is they've misjudged the lag
between rate changes and the impact on the economy and they misjudged that
going into the crisis or coming out of the immediate pandemic the worst of the
pandemic in March of 20 20. I mean if you look at early 2021 CPI was
still at one point seven percent. You can kind of see why they were a
little bit sanguine about what was happening.
Now they're raising rates and they seem very emphatic about doing it as quickly
as possible. Which begs the question of whether or
not they're going to misjudge the lag this time around as well.
So the story us is dramatic enough but we're not in a vacuum.
We see some form shedding having pretty much around the world with the exception
of Japan and China and China. But let's talk about what other places
are doing. The U.K.
had extorted development. Is they up their interest rate at the
same time their new government come in and say look stimulate with cutting a
lot of taxes. Well that is certainly adding to the
complexity of the situation. Monetary policy is a blunt instrument.
The best we can do is try to calibrate it but it becomes that much harder when
you have other impulses. And so it's a difficult situation now.
I will say that this kind of environment that we're in is rather unique.
The World Bank came out last week with a big warning about how this is the most
synchronised tightening among central banks that we've seen in five decades.
And that was of course a stark warning about what could happen.
And we're seeing it play out certainly in markets.
I'm not sure if the bond markets get a vote.
But if they've got a vote especially the U.K.
they voted pretty firmly on Friday. What happened with the guilty.
It was pretty extraordinary. It was absolutely extraordinary.
And I think the biggest impact we've ever seen to a mini budget proposal like
this. And what is really extraordinary is to
see the U.K. government basically unveiling the most
regressive of tax cuts in an effort to boost growth at a time when the Bank of
England is clearly worried about inflation.
And the really worrying thing about today's.
Action was when we saw the currency fall while bond yields are spiking.
That is a classic hallmark of emerging market crises and we saw a bunch of
analysts and investors make exactly that point.
It's kind of crazy that we're treating a developed market economy with a very
very important financial center like an emerging market.
And the big concern now is it passes the buck or passes the baton onto the Bank
of England to try to handle this. And then you start getting worries about
fiscal dominance which again is a very E.M.
thing to be saying about one of the world's most advanced economies.
So Christine the one winner. I'm not sure it's winning is the dollar.
I mean the dollar is just on a tear and it just keeps going.
Japan tried to intervene a bit. Maybe it helped a little bit at the
moment. Not sure in the long term.
Well what is the strength of the dollar mean for the economy.
United States and elsewhere. Well it's a good thing for consumers in
terms of purchasing goods from outside the U.S.
It's great for for tourism of U.S. citizens abroad.
But it can be very very problematic for multi-national companies.
The U.S. companies that derive at least part of
their revenues outside the U.S. So we've got a lot out there.
There's a lot at stake with a very strong dollar.
And of course there are implications for all the other economies as well.
So it's it's it's it's a difficult time but not surprising given the kind of
dynamics we're seeing and the kind of factors that have driven the U.S.
dollar higher treasury. Any impetus to try to get it under
control. I mean this was the thirty seventh
anniversary on Thursday of this week of the Plaza Accord.
Yeah. Any notion will I try that again.
It's a little bit different this time around.
I think the dollar going into the Plaza Accord had appreciated by something like
40 percent. It's 10 percent now.
Slightly different conditions. But that said I really think the dollar
is kind of driving everything at the moment.
And you know the market has taken on this mantra of the Fed is going to hike
until something breaks. We should probably caveat that by saying
until something American breaks because we're already seeing things shatter
around the world. Right.
Japan coming in to intervene in its currency for the first time since 1998.
What happened to U.K. in sterling today.
Euro going further under a parity with the dollar.
These are signs of the dollar coming in like a wrecking ball.
The dollar is the weapon of higher interest rates in the US.
And it's problematic at a time when much of the world is experiencing for
instance an energy crisis. And a lot of those commodities are
invoiced in dollars. It's difficult but ironically it dampens
inflation in that state. The stronger dollar it's you know it's a
privileged position. It should be in the US and to have the
world's global currency. But it is difficult for investors.
I mean again to this point of the dollar kind of ruling everything.
If you think back to inflation hedges earlier this year it was mostly
commodities and the strong dollar has taken a lot of the air out of
commodities now and it's making it difficult for investors to hedge.