Blinder: Markets 'Overreacted' to Fed

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Bloomberg 09:58 · 1608 Views

Alan Blinder, professor of economics at Princeton University and a former vice chair of the Federal Reserve, says he thinks markets should have interpreted the Fed's messaging as "slightly hawkish." He speaks with David Ingles and Annabelle Droulers on "Bloomberg: The China Show."

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00:00 Let's bring in the former Fed Vice chair, Alan Blinder.
00:03 He's currently professor of economics at Princeton University.
00:06 And,
00:06 and
00:07 Alan, I think we got
00:09 a bit of a, a sense of, of your reaction just as we were talking to you in the outbreak there.
00:13 But
00:13 suffice to say, you think that maybe we've, we've got an overreaction in markets this morning.
00:19 Way, way overreaction.
00:21 Many years ago I coined the aphorism that in
00:24 calm markets they generally react 3 times as much as they should,
00:28 and in not
00:30 panicky markets they react 10 times as much.
00:33 This look like a 10 to me
00:35 if you divided the
00:37 movement since
00:39 oh I should have said at the outset, the direction is usually right.
00:43 But if you took the decline in
00:45 the S&P say today and divided by 10,
00:48 that would strike me as a rational
00:51 reaction to the slightly hawkish news that the market got.
00:57 Yeah, Alan, David here.
00:58 I think maybe to your point and hopefully this continues for the bulls.
01:01 I mean S&P futures currently in the Asia Pacific are are steady which might indicate there is some buying taking place.
01:07 How do you think market should have interpreted
01:10 everything that took place
01:12 out of that statement and also the briefing out of the the Fed chair?
01:15 I think they should have read it
01:17 slightly hawkish, but I would emphasize this slightly.
01:20 This was not a big change in the Fed's stance or their attitudes about
01:25 inflation.
01:25 It was a reflection
01:28 of
01:28 two underlying realities and maybe a third.
01:32 The two that are clear
01:33 is that the economy, the US economy has been
01:37 growing more strongly lately than most people would have thought six or nine months
01:42 ago, certainly that the Fed thought
01:45 six or nine months ago.
01:46 And so growth is
01:47 growth is higher.
01:49 Secondly,
01:50 the steady down, down down of the inflation rate seems to have stopped in the last few months.
01:57 That doesn't mean we're worried about an acceleration of inflation back to 7%
02:02 on the PCE.
02:02 Nothing, nothing
02:04 at all
02:05 like that.
02:06 But instead of sort of falling every month, it's
02:09 it's sort of
02:10 constant and rising
02:12 the last few months.
02:14 That also argues for less Fed
02:17 rate cutting.
02:18 So those are the two
02:20 fundamentals that the Fed is looks at when it talks about being data
02:24 dependent.
02:25 The third thing, which may be on some people's minds that the Fed
02:29 but they would never say out loud
02:32 is
02:33 president-elect Trump's
02:35 promise policies,
02:37 and I am emphasize promise because who knows what he'll actually do,
02:41 are very clearly inflationary.
02:44 I don't mean hyperinflation.
02:45 Again,
02:46 we're not going back to double digit inflation or anything like that,
02:50 but somewhat inflationary.
02:52 I'm talking about tariffs and restrictions on Labour's
02:55 supply and things like that.
02:58 That's in the back of the Fed's head.
03:00 It's something the central bank is not going to talk about.
03:05 Yeah,
03:06 it seems like
03:07 and to quote in the current here
03:09 who was on our our blog about this, but there's a lot of different loose ends as we head into
03:14 2025, not just about the outlook for for inflation also as you said about the the outlook for Trump tariffs and and the inflationary impact of those.
03:24 Do you think there's a chance then that maybe
03:26 there's even fewer cuts than than 50 basis points of easing
03:30 there?
03:31 There is a chance.
03:32 As I said a moment ago,
03:34 nobody knows what Trump will actually do.
03:36 He has a lot of authority over tariffs.
03:38 It's a bit of a disgrace
03:40 that the Congress has ceded to the president that much
03:43 authority over
03:45 tariffs, but they have,
03:46 and he has it.
03:48 And while he's not usually worried about obeying the law, in this case, there's no question about violating the law.
03:54 He has the authority
03:56 to do more or less anything he wants to
03:59 with tariffs.
04:00 What we don't know is what will he actually do?
04:02 I mean, will he have a,
04:04 a call with
04:06 the Chinese and
04:07 they'll say some nice things about how good he looks on TV
04:11 and he'll decide not to go lightly?
04:14 Or will they do something that makes him a little angry and
04:17 he'll go much more heavily on bigger tariffs?
04:21 I have no idea.
04:22 I think it's anybody's guess.
04:25 Yeah.
04:26 And Alan, I think,
04:27 you know,
04:27 you're one of the very few people who can take us inside that room and just help us understand how the Fed looks at something as binary as this.
04:34 To your point, we don't know if he's going to
04:36 actually push through it.
04:37 But do you think there will be
04:39 this might push some FMOC officials to learn more hawkish
04:45 than they would otherwise.
04:46 Really, given the threat of most of the things I can see on the horizon are inflationary.
04:52 Yes I do, but I want to emphasize what I said before
04:55 but not talk about it in public.
04:58 The last thing a central bank wants?
05:00 To do
05:00 is to second guess either a sitting president or someone who's about
05:05 to be president.
05:06 So they know Trump got elected, they know what he's saying about tariffs.
05:10 It's got to be on their mind.
05:12 And they know tariffs are inflationary, even if
05:14 Trump says they aren't.
05:16 So it's got to be on their minds, but not on their mouths.
05:22 I want to go back to to some breaking news that we had at the top of the hour from the House Majority Leader Steve Scalise, who said that there's
05:32 the current stop gap bill is officially dead.
05:34 There's no new deal just yet.
05:35 But there is that
05:36 question and there's that push from president-elect Trump to to raise the debt ceiling.
05:41 How is that also going to complicate the Fed's balance sheet run off?
05:44 Then
05:46 I think probably only a little bit, What usually happens with this, as you probably know if you've been watching this
05:52 for years, is at the 11th or sometimes the 13th hour,
05:57 a settlement is reached
05:58 and they kick the can down the road for a few months
06:01 and then they argue about it
06:03 again.
06:04 That's by far the best guess about what will happen
06:08 this time.
06:08 It was good news yesterday, I think it was yesterday
06:12 that they had reached an agreement.
06:13 I said, boy, that's nice.
06:15 There's still 24, no more.
06:18 There's still like
06:20 48 or 72 hours to go.
06:22 That's a little early for the Congress
06:25 to settle it.
06:26 It turns out
06:27 that while they settled it, Trump
06:29 unsettled it.
06:31 So I think there won't be anything untoward there.
06:35 If there is,
06:36 it's a it's a tiny negative on growth.
06:39 It will subtract something from
06:41 growth.
06:42 And if I said a tiny negative on growth, it would be a
06:46 tiny, tiny negative on inflation.
06:51 Alan,
06:51 just back to the the other point you're making too, and I think this is quite important.
06:55 You know, the markets seem to be overreacting to a hawkish Fed
07:00 unless, so if the Fed is leaning dovish.
07:02 And
07:03 my guess is someone in the market or there's a camp out there that
07:07 is starting to smell that.
07:10 And, you know, it might be too early to talk about this, but the next hiking cycle might just be closer than we think.
07:15 I mean, do you think in 2026 we'll be closer to the last cut
07:21 or nearer to, you know, the first hike?
07:23 You know, where do you think the conversation will be, say, in 16 months time?
07:29 The honest answer is I don't know.
07:31 If you want to ask
07:32 me my hunch,
07:34 My hunch would be a little closer to talking about when is the next rate hike
07:39 going to start,
07:41 especially if by 2026 you mean later in the year, not January, but
07:45 sometime well into 2026.
07:49 That's a guess, but
07:50 I don't have to tell you that 15 things that 15 surprising things could happen between now and then.
08:00 Last question, Alan, on the
08:02 neutral rate and there's maybe the the indication that it could be higher than than previously thought.
08:10 Where do you see that and and what's your interpretation of how the Fed's looking at that question as well?
08:16 I think they think the neutral real rate
08:19 is around 1%,
08:21 which is a little bit higher than they thought a while ago
08:25 than when they were seen to be congealing on 50 basis
08:29 points.
08:30 If you add to that where inflation is likely to be
08:34 rather than where they wish it was,
08:36 so where they wish it was was two.
08:39 We seem not quite to be getting to 2.
08:41 So if it was 2 1/2 say
08:44 that would give you a neutral rate
08:46 of
08:47 in nominal terms of 3 1/2
08:50 or maybe a pitch higher
08:52 than that.
08:53 That's that's where I would
08:55 guesstimate it is
08:56 right about now.

Blinder: Markets 'Overreacted' to Fed

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