Viktor Shvets on How the Fed Has Become a Prisoner of Its Own Making

SPEAKER_1 (0:03)

Bloomberg Audio Studios, podcasts, radio, news.

Tracy Alloway (0:20)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:24)

And I'm Joe Weisenthal.

Tracy Alloway (0:26)

Joe, did you watch the FOMC Presser recently?

Joe Weisenthal (0:29)

No, I did not. We were recording an episode of the Odd Lots Podcast.

When it happened. So I know that you didn't watch it either, unless you watched it on video afterwards, in which case you are a better journalist than I am.

Tracy Alloway (0:40)

I didn't, just to clear that up. What I did was I read a bunch of analysis of the Fed meeting and a bunch of news summaries of what happened. And I have to say, there was one term that I really liked, one description. I think it was in the FT, and they sort of described the Fed as a monument to stasis.

Joe Weisenthal (0:59)

I mean, that could be a good thing. First of all, by the way, plug, there's the other thing you can do if you miss a presser on the Bloomberg terminal. And I forget the code right now, but they produce transcripts very fast. And the transcripts aren't published of the press conferences. Like they don't appear anywhere. So plug for our terminal here. But yes, look, it's been a weird year for the Fed, right? Because I mean, inflation continued at least through Q1 of the year, inflation hotter than expected, all these expectations of cuts keep getting priced out.

Everyone's higher for longer. It's unclear whether the sort of simple models that we use, like, I mean, I think everyone sort of knows this. Nobody really knows how inflation works, but everything seems to be okay, right?

Tracy Alloway (1:40)

I think one of the issues that the Fed might be facing is they put so much emphasis on data dependency that it kind of means that, like, every monthly reading of CPI can generate a completely different response. So when CPI comes in stronger than expected, everyone starts panicking about a lack of rate cuts and maybe even you get a rate hike at some point. When it comes in weaker than expected, you know, as it was doing up until fairly recently, everyone gets very excited and we get that kind of Goldilocks moment inequities.

Joe Weisenthal (2:17)

There does seem to be, like, this weird tension between, I know they don't use, like, formal forward guidance anymore, but in a way, the dots sort of serve that purpose and sort of imply the Fed's so-called reaction function. And so we're supposed to sort of take all of these data points, plug them into this black box reaction function, and then sort of implicitly see what that means for policy.

But it does seem like things move a lot from data point to data point, so it becomes very present-oriented, maybe.

Tracy Alloway (2:44)

Yes, that's a great way of putting it. And then the other thing I would say is, in addition to all the complexity around what's going on with the US economy, and it's kind of phenomenal in many ways that we're still having intellectual arguments about what the impact of higher interest rates actually is and whether or not it actually does anything to bring down inflation. But beyond that, the other thing that's starting to happen is we are seeing international consequences, and we've been talking about them on the show, of the higher for longer stance. So the dollar has been rising. I think the spot dollar index is up almost 4% so far this year.

And then against specific currencies, like the Japanese yen, it's surged even more. And so we are seeing those tensions between strength in the US economy, ongoing inflationary pressures, higher rates for longer potentially kind of meet emerging markets and also developed economies in the wider world.

Joe Weisenthal (3:43)

Totally. We had that interview recently with Hugh Hendry, extremely colorful character to say the least. But one of the points that I found very interesting was like, we're not really used to an environment in which it's the US that's lapping everyone else, growing much faster than G7 or G10 or G whatever peers, sort of powering ahead all this domestic investment. And so we get this upward pressure, higher rates, higher dollars, stress elsewhere.

It's an interesting environment.

Tracy Alloway (4:13)

G whatever is a good term. They should have a G whatever conference.

Joe Weisenthal (4:16)

Can I coin that? Because I know Ian Bremmer has the G zero, but like, I don't, I like G whatever.

Tracy Alloway (4:23)

The G whatever summit, that should be a thing.

Joe Weisenthal (4:26)