INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. I'm joined today by three of my colleagues. My two co-hosts Cris deRitis, Cris is the deputy chief economist, I can see him smiling there in his office and Ryan, Ryan Sweet, director of real-time economics. Ryan never really smiles, but no, even there, there's a frown.

Ryan Sweet:                      I [crosstalk 00:00:36] smile.

Mark Zandi:                      I see a frown. Okay.

Ryan Sweet:                      Mm-mm (negative). It's not a frown.

Mark Zandi:                      Then we've got Damien, Damien Moore. This is a colleague of ours at Moody's Analytics. Damien, this is your first time on this podcast. Welcome.

Damien Moore:               Hey, Mark. Thanks for inviting me and hi everyone.

Mark Zandi:                      Everyone can tell you have a accent, an Aussie accent, where from Australia are you from?

Damien Moore:               I grew up in the capital city, Canberra. I did all my education and undergraduate education in Canberra. I moved to Sydney for about five years. In part, while I was doing my graduate studies in the US, I studied at Northwestern in the United States. Then I've been back and forth to the US and Australia ever since.

Mark Zandi:                      There's this spy TV series. It was Netflix or... Centered in Canberra. Have you seen this?

Damien Moore:               I haven't seen it, still have to check it out.

Mark Zandi:                      It's the dynamics between Australia and China and Russia and US mixed in there as well. It's the vexed relationship that the spy community has, I think, with each other.

Damien Moore:               It's very interesting times right now.

Mark Zandi:                      The reason I bring it up is, Canberra is really a beautiful place. I've never been, but judging by the TV series, looks great. There's a river-

Damien Moore:               It's great if you like to exercise, because there's bike paths everywhere. It's a planned city and it was originally planned for lot of foot traffic. You can jump on a bike and ride pretty much anywhere. It's a big sprawling city too. It doesn't have a really built-up central business district or anything, so it is great for exercise.

Mark Zandi:                      The weather? Weather good?

Damien Moore:               It's definitely a little cooler than Sydney. See, it's inland so you don't have the temperature effect of the ocean and so on. It's little further south than Sydney too. It's nice pretty much year round. It's a little cooler in the winter time, but you get the four seasons much more than you do further north.

Mark Zandi:                      Very nice. You went to Northwestern, is that where you got your PhD, in Northwestern?

Damien Moore:               It is. It is an extended thing because I took an academic job in Australia for a while during that process, so then I was back and forth to the US and back to my job at Sydney, while I was teaching.

Mark Zandi:                      You're an financial economist, did-

Damien Moore:               Yes, I was in a business school when I was teaching. I taught in a finance department, taught the standard financial stream courses, corporate finance, investment theory, options pricing, type stuff.

Mark Zandi:                      Right. The way we met, a long time ago now, was you were at the Congressional Budget Office, the CBO, the nonpartisan group that does the budgeting for the US. How did you get there?

Damien Moore:               That's right. Well, I always had an interest in policy. I'd actually done some time at a consulting shop in Australia, in Canberra, who did a lot of the budget estimate. I had some familiarity with that type of work. Then my dissertation advisor, Debbie Lucas, had worked with CBO on and off.

Mark Zandi:                      I didn't know Debbie was your... I guess I knew that and I forgot that. Oh, I see.

Damien Moore:               That's right. She was chief economist at CBO for a while and then left. Then I told her I was interested in getting out of academia and she said, "Well, you should look at this policy shop because it's a great place to work." I interviewed with them and it went well and spent 10 years with them, more than 10 years.

Mark Zandi:                      Well, Debbie is the godfather of... I guess that's okay to say, the godfather of fair value accounting. Isn't she?

Damien Moore:               That's right.

Mark Zandi:                      Are you a disciple of the fair you accounting method?

Damien Moore:               In part.

Mark Zandi:                      I can't-

Damien Moore:               Probably, a large part.

Mark Zandi:                      One of these days. I got to tell you my theory on fair value and how to improve it. Maybe I've already told you this and you looked at me. Have you noticed guys, Damien never disagrees with you. He just looks at you and doesn't say anything and then looks away. That's the way he handles it, have you noticed that?

Ryan Sweet:                      [crosstalk 00:04:44].

Damien Moore:               That's when you know you're wrong.

Mark Zandi:                      That's when you know you're wrong. Exactly right.

Damien Moore:               I'm an agreeable person as a-

Mark Zandi:                      [crosstalk 00:04:50] polite.

Damien Moore:               It's hard for me to openly dismiss an opinion.

Mark Zandi:                      Well, since we're on TV series, have you guys watched, and I'm not saying I like this all that much, but every once in a while, The Witcher, have you seen The Witcher?

Damien Moore:               Mm-mm (negative). Nope.

Mark Zandi:                      It's a little too fairy tail for me, but The Witcher, you remind me a little bit of the Witcher. The Witcher, he doesn't say very much and he grunts. By the way, that's a compliment, you want to be the Witcher.

Damien Moore:               Okay. All right. Well, good to hear. I haven't seen that show.

Mark Zandi:                      Very smart. He kills all the monsters, so that's all good. Then you joined us, how long ago now has it been?

Damien Moore:               It's coming up for five years, unbelievably. It's gone pretty quick.

Mark Zandi:                      No way. Oh, that's amazing. I know your youngest is five, right? It's got to be five, right? I remember you-

Damien Moore:               Turning five this year, so he's four.

Mark Zandi:                      Oh, he is four.

Damien Moore:               He turned four back in November.

Mark Zandi:                      Oh, that's right. Okay. [crosstalk 00:05:49]-

Damien Moore:               He came during my first year and he came early.

Mark Zandi:                      I remember that, you just joined us and then all of a sudden you were in a difficult time, but it all worked out. That's good.

Damien Moore:               That's right.

Mark Zandi:                      Very good. Well, we're just thrilled to have you here on Inside Economics. I know I've been trying to get you on for a while, but you've been resistant, but you're you're here.

Damien Moore:               You have me doing lots of other things and I juggle a lot of responsibility for our market risk clients.

Mark Zandi:                      That is true. Absolutely. You're a busy guy. I appreciate you taking the time out. Hey, we're going to do a few things here. One is we're going to talk about while the statistic of the week is the consumer price inflation. It feels like hair on fire. We got to talk about that. Then we're going to go into our statistics game. I'm guessing a lot of that's going to revolve around this consumer price ice index as well, but who knows. Damien's definitely going to try to trip us up here on the game.

                                             Everyone knows the game. Each of us come up with a statistic, the rest of the group tries to figure that out. The statistic can't be too hard, too easy, got to be related to the topic of the day and come out in the past week. Although, for the guests, they don't need to stick to that religiously. Ryan has to follow those rules, everyone else can do what they want. Then we're going to talk about interest rates and that's... Wow, do we have a lot to talk about there? I mean, just looking at that 10-year Treasury yield over 2%, that's something to talk about. That's the game plan.

                                             Let's dive right in. Hey Ryan, give us the lay of the land on the... Well, whatever you think is important, but I'm guessing it's the consumer price index.

Ryan Sweet:                      It is. The consumer price index for January came out this week, and it increased a lot more than economists were anticipating. The consensus was for a four tenth of a percent increase, month-over-month, so December to January came in at six tenths, that raised the year-over-year growth from 7% to 7.5%, that's what's getting a lot of the attention in the press. When you dig through it, price pressures are broadening. The only components that fell in January were energy-related. That's temporary because energy prices have moved back up in February. We should see energy add to inflation over the next couple of months. If you strip out volatile food and energy prices, so the so-called core CPI, that was still up 6% year-over-year, which is the highest since the early 1980s, that's garnering a ton of attention.

                                             Mark, I knew you would want me to update this. Remember the average increase in household expenditures, with inflation at 7.5% Versus 2%?

Mark Zandi:                      Yeah.

Ryan Sweet:                      Two hundred and seventy-six dollars per month now. There are real economic costs to inflation.

Mark Zandi:                      Well, that's good to know you got to 276, because I got exactly to 276, but I rounded to 275.

Ryan Sweet:                      You got to go... Precision.

Mark Zandi:                      Got to be precise. Two seventy-six. Okay. All right. That's the typical American household. That's the household making, let's say, the median income, which is probably close to 70K, 65, 70K is now spending $275 more a month to buy the same goods and services that they were buying a year ago.

Ryan Sweet:                      Correct.

Mark Zandi:                      That's a lot, just think about that for a second.

Ryan Sweet:                      Adds up quickly. That's why, I mean, we saw the Michigan Consumer Confidence came out this morning. That dropped a lot. Some of it, if you look at the details, is inflation, the other part's interest rates.

Mark Zandi:                      Okay. You were a bit surprised by CPI. You had expected, and you're really good at this, you put expectations together, four tenths of a percent month-to-month increase in CPI, consumer price index, and a 7.3% year-over-year, or was it 7.4?

Ryan Sweet:                      Correct.

Mark Zandi:                      Something like that. I mean, I think we're stretching this a little bit, but I'm just curious, what in the report came in more hot than you expected? It had higher rates of inflation than you expected when you go into the specific goods and services?

Ryan Sweet:                      I thought you're going to get a lot of weakness in some of the services that were tied to the pandemic. Airfares, for example, I thought they were going to drop, they increased. Lodging away from home wasn't as weak as I was expecting. It doesn't seem like the Omicron variant was as disinflationary as the Delta wave was on some of these components of the CPI. Then the other thing is, amateur mistake, I didn't use the updated weights. If you did that, I would've been a little bit closer, still wouldn't gotten six tenths, but it would've been closer.

Mark Zandi:                      Just to bring folks up to speed, so the Bureau of Labor Statistics, the agency that puts the data together every year, I guess, or is it every two years?

Ryan Sweet:                      Every two years.

Mark Zandi:                      Every two years, updates the weights that they attach to each of the individual components of the CPI for all the various goods and services. Those weights are determined by consumer spending patterns. If I am spending more on a car or a consumer electronic or going out to a restaurant, it gets a higher weight and something else has to reduce, because it adds up to a hundred percent. With the January 2022 CPI report that came out yesterday, on Thursday, the BLS updated the weights using 2019 and 2020 average consumer spending patterns, and that's what you're referring to.

                                             The reason that had an impact was because that includes the pandemic 2020. We spent a lot more on stuff, goods, a lot less on services. Of course, goods prices are rising a lot faster than services. It causes this measurement change and that's what you're referring to. By my calculation, that was worth a couple tenths of a percent on year-over-year CPI. That could simply be the difference between the seven five [crosstalk 00:12:05]-

Ryan Sweet:                      It is the difference. [crosstalk 00:12:06] I had seven three, add those two tenths in and you get seven five, which is what we got.

Mark Zandi:                      Right. Here's a good place to say it. We are going to record what we're going to call a mini podcast or a data deep dive. It's going to be 10, 15, 20 minutes where we're going to go deep into the bowels of a report. First one's going to be on the CPI. We'll probably go over this again when we do that mini podcast that we'll post tonight, along with the podcast that we're recording right now. This is an experiment. I'm really curious what people think. It's really, really wonky. Damien, and you'll love this. I know you'll love it.

Damien Moore:               It sounds good. I hope there's video.

Mark Zandi:                      There's definitely video.

Ryan Sweet:                      Oh, there's always video.

Mark Zandi:                      Definitely. I guess we got to change what we're wearing for the deep dive? I'm not sure.

Ryan Sweet:                      No.

Mark Zandi:                      No? We're good as we are?

Ryan Sweet:                      We're good.

Mark Zandi:                      Okay.

Ryan Sweet:                      Want some charts, Damien? What do you mean? You just want to see us [crosstalk 00:13:08]?

Damien Moore:               Oh, [inaudible 00:13:08], if we're going to talk numbers, we got to have some tables, right?

Mark Zandi:                      Oh, that's a good idea. He's got a point. Maybe we'll whip that up. We'll whip up a couple charts.

Ryan Sweet:                      We'll figure it out.

Damien Moore:               [crosstalk 00:13:18], maybe you give a link-

Ryan Sweet:                      Oh, give a link.

Damien Moore:               [crosstalk 00:13:20] check it out and-

Ryan Sweet:                      [crosstalk 00:13:21] still a podcast though.

Damien Moore:               Right.

Mark Zandi:                      We should have him more often. He's like a fountain of ideas. You notice this?

Ryan Sweet:                      Yeah. I have a feeling of all these ideas are going to end up on my plate [crosstalk 00:13:32].

Damien Moore:               [crosstalk 00:13:32] where they belong.

Mark Zandi:                      That is actually a pretty good point. That's right. Hey Ryan, can you help us out with that?

Ryan Sweet:                      Yeah. Let's get some tables.

Mark Zandi:                      Put some tables together. You're good at that. Okay. No promise, I won't do that.

Ryan Sweet:                      One last thing on the CPI, I think we're at the peak. If it doesn't peak in February or seven and a half, wasn't the peak in January, February will be the worst [crosstalk 00:14:00] the worst of it.

Cris deRitis:                       Even with energy?

Mark Zandi:                      I was going to ask about that.

Ryan Sweet:                      That's why I'm thinking February. Initially we were thinking January was going to be the peak. I think February is the peak. Then after that, we'll be on the down slide.

Mark Zandi:                      By the way, I say that we've already peaked, that this year-over-year stuff is very misleading.

Ryan Sweet:                      Oh, it is.

Mark Zandi:                      There's base effects. I mean, last year, this time we were coming out of the depths of the pandemic, businesses were still slashing prices, inflation was incredibly low, close to 1%. You get these year-over-year, what economists call base effects, which by the way, is going to be working in the opposite direction a year from now, pushing down measured inflation. When people are trying to gauge, are we moving in the right direction, your inflation, we should be looking at month-to-month, I think, changes in inflation. That actually peaked back in October. That was in the depths of the Delta wave of the virus. That goes to my narrative.

                                             I'm curious what you guys think, but my sense is that the acceleration in inflation that we've observed in the last several months, the last six months or so, it's gotten uncomfortably high, this is top of mind high, is related to the supply side disruptions to the economy due to primarily, the Delta wave of the pandemic. When that happened back in the summer and fall last year, it completely upended global supply chains because that creamed Asia, Southeast Asia, where all the supply chains began. It really disrupted labor markets. Again, because people got sick or had to take care of sick people or were fearful of getting sick. That created all these labor shortages, caused wage growth to accelerate, particularly for low wage workers and industries that had gotten directly hit by the pandemic, think restaurants or at leisure, hospitality, recreational activities, that kind of thing. Also, just scrambled demand and supply dynamics in other markets like the oil market and the natural gas markets. That's what's behind the current, very high inflation.

                                             If you buy into the idea that the pandemic is going to wind down going forward, that is each new wave of the virus, and we'll probably see more waves, is less disruptive than the previous wave to the economy, to the healthcare system, that we'll see inflation moderate. Not quickly, because ironing out these supply chains and labor market and dynamics are... or it's going to take some time because it's a mess out there. Other things are adding to the mess. Think the Canadian truckers, stopping stuff coming over the Ambassador Bridge. As the pandemic fades, inflation will fade. That is the core to... or least my thinking about where we're headed on future inflation. What do you think of that narrative and anyone disagree with that, or want to push back on that?

Ryan Sweet:                      No, I think the data supports that view. If you look at US manufacturing surveys, they have a component called a supplier delivery index. When that is increasing, that indicates slower deliveries. All of them are improving. They're heading in the right direction. We maintain this US supply chain stress index, which basically just takes a bunch of indicators that are related to supply chain, so shipping costs, commodity prices, match them up, make an index out of it, and that's coming down. We do the same thing for APAC, Asia Pacific, and that's improving as well. I may or may not have another number for you that supports your view.

Mark Zandi:                      Okay. Well, that makes sense. Cris, anything you wanted to say on that?

Cris deRitis:                       I would say, in broad strokes, I agree, in terms of the pandemic, but there are other risks that are emerging.

Mark Zandi:                      There it goes.

Cris deRitis:                       There you go.

Mark Zandi:                      Here comes the pushback. Go ahead. Fire away.

Cris deRitis:                       The energy, as we mentioned. You got Russia, Ukraine, you got some other risks, geopolitical risks out there that are building. I think that that's going to cause energy prices to remain high for a while. I don't see that being resolved quickly. Then, more technically, I'm focused on rental prices. Rents continue... They're going to continue to support inflation or drive inflation higher for a while, so that maybe I could buy in. If there's no other wave and the energy doesn't get too far out of whack, we could be at peak and things continue to fall. I think it'll be a slow gradual decline versus something very immediate.

Mark Zandi:                      Those are good points about energy. In fact, it seems like another advertisement, sorry, but we've got a podcast coming on Tuesday on the Ukraine, Russia carfuffle. I guess that's not... Conflict, we're going to be talking [crosstalk 00:18:49] certainly, about what it means for energy markets and prices. That's coming on Tuesday. I hear you on rent growth. That's clearly going to be an issue for a while, given the very severe shortage of housing, which is just juicing up rents. Hey Damien, anything you want to add on that? Any pushback on our, I guess, generally sanguine view on inflation?

Damien Moore:               Maybe more of a question is, do you think the latest, the month-over-month, is that roughly in line with where you're thinking it would come out, or is it a little higher, a little lower? Is it giving you a sense that the price pressures will come off sooner than you might have thought or take longer?

Mark Zandi:                      Well, no, I'd say, like Ryan, I was a bit surprised by the six tenths of a percent increase month-to-month in January. I thought it would be, I think it was, four or five tenths of a percent, but I do think part of that is that measurement issue. I mean, it's two tenths of a percent year-over-year, so that's a bit of an add every month along the way. It probably had more of an impact on January. I'd call out the one thing that I was surprised by, in ex post I probably shouldn't have been, but I was surprised, was the big increase in electricity prices, which totally makes sense. Electric utilities are facing higher input costs, higher natural gas prices and not a lot of oil-fired electricity. It adds to the pressures. We saw a really large increase in electricity prices that was-

Cris deRitis:                       Also, weather.

Mark Zandi:                      Oh, you think... Oh, I didn't [crosstalk 00:20:35]-

Cris deRitis:                       Weather can factor into that.

Mark Zandi:                      Weather. You're right. It was probably weather too. I hadn't thought of that. That surprised me a little bit. I explained the gap between what I expected. My thinking about where inflation is headed as a result of that January report, has not changed. When I say that, when you're forecasting and you're thinking you're at an inflection point for anything, it's really tough. You're in the middle of the data and the data's screaming something, and you're saying, "No, it's going to change." It just makes you uncomfortable and makes you less confident in what you're saying. I'd have to say I'm less confident. I'd say that's just a natural state of affairs when you're at an inflection point for something you're thinking is going to turn, like inflation.

Damien Moore:               I hear that, definitely. What about wage pressures? Do you think that wage pressure pressures won't start to kick in and push inflation further?

Mark Zandi:                      Well, I'm worried about it, but I'd say my baseline view, this goes back to the disruptions to the labor market, related to the pandemic, as the pandemic fades and people get back to work, particularly in those industries where wages have really gotten juiced. It's all in the leisure, hospitality, restaurant, recreational activity, healthcare, education. These are where people have not gone to work because they're on the front lines. I mean, those are the folks that are interfacing with... They're not you and I, sitting in our office in our home, and not being exposed, but they're exposed every day. As that settles in, I expect that wage growth to decelerate. If you look at the Atlanta data, the Fed Wage Tracker data, which is in my view, among the best wage data we have, the acceleration wages has really been in the bottom half of the wage distribution for young workers, for workers that are less educated in those industries.

                                             As the pandemic fades, I expect that wage growth to moderate. Having said all of that, that's definitely a worry that the longer inflation remains high and persistent and particularly those gasoline prices because we can see that really affects people's thinking. I'm sure they're going back to their boss and saying, "Hey, you got to pay me more. I just filled my gas tank for 50 bucks. If you want me to come to work, you got to pay me more." The longer that sticks around, the more I worry that wages and price start to feed on each other and then that's a whole different world [inaudible 00:23:12]. We're not there yet, but I worry about that, for sure.

Ryan Sweet:                      That's my main worry.

Mark Zandi:                      That's your main worry. I agree with you. Okay. A lot there, and we can keep going and we probably will, when we come back to talk about interest rates, but let's go to the game. Let's go to Cris. Cris, let's go to you first. What's your statistic this week?

Cris deRitis:                       All right. We're going to have some fun, 12.2% and 2.8%.

Mark Zandi:                      Twelve point two percent and two point eight percent. Okay. Does it have to do with the CPI report?

Cris deRitis:                       Yes, it does.

Mark Zandi:                      Okay. Is it your inflation for certain components of the CPI?

Cris deRitis:                       Yes, it is.

Mark Zandi:                      Okay, so he's got to be clever here in some way, he can't pick some wacko, esoteric, down into the bowels... Okay. Would the 12.2 and the 2.8 define certain points in the distribution of price growth across goods and services? Boy, that's a mouthful. Oh you understand what I'm saying though?

Cris deRitis:                       Sort of.

Ryan Sweet:                      Did you go coffee again?

Cris deRitis:                       I did not go coffee, but nine point [crosstalk 00:24:27]. What the heck?

Mark Zandi:                      [crosstalk 00:24:31] some food price. Okay. He's being clever. He's being clever. [crosstalk 00:24:34] to be clever.

Cris deRitis:                       Yes. It is two food prices.

Mark Zandi:                      Oh, it is two food prices, and so-

Ryan Sweet:                      Meats. Is it meats?

Cris deRitis:                       Meats is one, 12.2%.

Ryan Sweet:                      That's what [inaudible 00:24:43].

Mark Zandi:                      Hot dogs?

Cris deRitis:                       Nope.

Mark Zandi:                      You have kids at home, right? When I was a kid-

Cris deRitis:                       Oh.

Ryan Sweet:                      Here we go.

Mark Zandi:                      I'm telling you, this is true. This is a true story. When I was a kid, I have three brothers and a sister. I'm in a big family and my dad made a good living. He wasn't a wealthy guy. He'd get paid, I think, once a month. Then by the end of the month, we're running out of money. The reason I know that is because I'm having hot dogs. Four days out the last week, I'm having hot dogs. By the way, I love hot dogs.

Cris deRitis:                       Hot dogs are the best.

Mark Zandi:                      They're the best. They are the best, but we're not talking hot dogs. Okay. What are we talking? Okay. Damien, do you know what he's talking about? What food is 12.8%, food item is up?

Cris deRitis:                       Two point eight.

Mark Zandi:                      Oh, 2.8.

Cris deRitis:                       Twelve point two and two point eight.

Ryan Sweet:                      Twelve point two was meat. Wine?

Mark Zandi:                      Ice cream?

Cris deRitis:                       No.

Mark Zandi:                      I heard ice cream-

Cris deRitis:                       I was trying to be clever. I'm not just some random [inaudible 00:25:44].

Mark Zandi:                      Something in Wawa. Think Wawa. I think you'd buy these two-

Cris deRitis:                       No, not [crosstalk 00:25:51].

Mark Zandi:                      Huh?

Cris deRitis:                       Do you give up?

Ryan Sweet:                      I give up because went wine, then we went coffee.

Mark Zandi:                      Wine? What are you talking about, wine?

Cris deRitis:                       Cris?

Mark Zandi:                      Oh, is it-

Cris deRitis:                       Wine is close. Wine is a good one. Alcohol beverages were 2.7.

Mark Zandi:                      Was that what you meant? That was 2.7.

Cris deRitis:                       No, I said 2.8.

Ryan Sweet:                      Are you going early Valentine's day? Are you going chocolate?

Cris deRitis:                       No, I think you're way off.

Ryan Sweet:                      Oh.

Mark Zandi:                      Oh, that would've been good though.

Cris deRitis:                       That would've been good.

Ryan Sweet:                      That is a good one. Is chocolate a category? I don't think [crosstalk 00:26:19].

Mark Zandi:                      Damien, any idea here?

Damien Moore:               I don't know, what about produce? Fruit and vegetables?

Cris deRitis:                       There you go.

Mark Zandi:                      Hold on, wait.

Cris deRitis:                       Vegetables. He got it. I think there's a cow bell.

Mark Zandi:                      No, wait, hold on what? I'm way behind here.

Ryan Sweet:                      What is that?

Mark Zandi:                      What is that? What are you talking about?

Cris deRitis:                       Produce? Vegetables? Fresh vegetables.

Mark Zandi:                      Oh, fresh vegetables. I thought-

Cris deRitis:                       Produce.

Mark Zandi:                      I didn't hear Damien say that. I-

Ryan Sweet:                      Oh, I thought he said perogies.

Mark Zandi:                      I thought that's what he said too. You said perogies.

Damien Moore:               Really? My headset [inaudible 00:26:45].

Cris deRitis:                       You got to be tuned into the accent. Come on.

Mark Zandi:                      Oh, you said vegetables?

Damien Moore:               Yes.

Mark Zandi:                      Oh, I thought he said perogies. I thought it was some Italian thing.

Ryan Sweet:                      I have [inaudible 00:26:56].

Mark Zandi:                      What? Perogies?

Damien Moore:               My wife is vegetarian and she hasn't been complain about the price of anything so far, but the bills have been somewhat expensive lately. Nonetheless,-

Cris deRitis:                       That's exactly the point. If there was ever a time to be a vegetarian...

Mark Zandi:                      What was I saying? What was I thinking? Oh, we got to get the high price, the 12 point-something.

Cris deRitis:                       That was meats.

Damien Moore:               That was meats.

Mark Zandi:                      Oh, hold it. Just generic meats?

Cris deRitis:                       Catch up here. It's meat, poultry and eggs, if you want the full category.

Mark Zandi:                      Geez. See, here's my problem, I thought he was going to be a lot more clever than that. Didn't you, Ryan?

Ryan Sweet:                      Yeah. I mean, I thought [crosstalk 00:27:37] maybe flowers.

Mark Zandi:                      Some generic vegetable and some generic meat, kind of thing.

Cris deRitis:                       All right. If you want one for the super bowl, 11.6%.

Mark Zandi:                      Wings? Chicken wings?

Cris deRitis:                       Exactly. They're frozen chicken parts.

Ryan Sweet:                      All right.

Mark Zandi:                      Oh, this-

Ryan Sweet:                      It's a wing shortage.

Mark Zandi:                      I know. Why, do we know?

Ryan Sweet:                      I don't know.

Mark Zandi:                      All right.

Ryan Sweet:                      Probably something to do with processing.

Cris deRitis:                       Probably.

Mark Zandi:                      Anyway. We're having too much fun. I am.

Cris deRitis:                       There you go.

Mark Zandi:                      I don't know why I'm having so much fun. Okay. All right. Hey Damien, do you want to play this game?

Damien Moore:               Yeah, sure. I can have a shot. It's going to be a little specialized because financial markets guy, so you can maybe pick the genre. It's going to be inflation-related of course, and related to the main topic.

Ryan Sweet:                      Oh, here we go. [inaudible 00:28:29].

Mark Zandi:                      That's what I thought. My mind immediately went there.

Damien Moore:               Let's go real time.

Mark Zandi:                      Okay. Real time. Oh, he's looking at his screen, by the way. When he says real time, he's looking at his screen.

Cris deRitis:                       As of 11:00 AM on Friday.

Mark Zandi:                      Sixty-three point seven percent has override now.

Cris deRitis:                       Is that the probability of a fed rate hike in February?

Mark Zandi:                      No.

Ryan Sweet:                      No, of 50-basis-points in March.

Mark Zandi:                      Fifty-basis-point hike in March, right?

Damien Moore:               Correct. Nailed it.

Mark Zandi:                      Oh, that is embarrassing, I'd have to say, for Ryan. That's totally embarrassing.

Ryan Sweet:                      Are you using Feb? No, it's a hundred percent in March.

Cris deRitis:                       Feb in March?

Mark Zandi:                      No, 50-basis-points point hike in March. It's 100%.

Cris deRitis:                       Oh yeah.

Damien Moore:               [crosstalk 00:29:12] It's 100% of any increase, but then-

Cris deRitis:                       Any increase rate. Oh, I see what you're saying.

Mark Zandi:                      Right.

Damien Moore:               Thirty-six percent of a 25 to 50-basis-point increase in 63.7% of a 50... Sorry. I'm talking about the range, the 25 to 50-basis-point range versus 63.7% chance of a 50 to 75-basis-point increase. Now, these same numbers yesterday, the market said 93.8% of a 50 to 75 range. Then a month ago they said 4.8%. Things have moved a lot.

Ryan Sweet:                      They got whipsawed by Bullard.

                                             That's all good. What does Damien Moore say though? That's what I want to know.

Damien Moore:               In the short-term, I agree with the market. Short-term, I always agree with the market. We're maybe looking out to a quarter. I think the market indicators are great for predicting, just aggregating all the information that's out there, and coming up with a good clean forecast signal.

Cris deRitis:                       Do you think they're going to go 50 or 25 in March sitting here today based on what [inaudible 00:30:22].

Damien Moore:               I think I'm going to say, 50.

Cris deRitis:                       Oh, okay.

Mark Zandi:                      What do you think, Cris?

Cris deRitis:                       I'm sticking with 25.

Mark Zandi:                      Twenty-five.

Cris deRitis:                       I think 50 is a panic signal.

Mark Zandi:                      That is a panic signal. Do you agree with that, Ryan?

Ryan Sweet:                      I'd say 25. Markets got whipsawed by St. Louis Fed President. Bullard, yesterday said that the Fed should go 50 in March or do an intermediate rate hike, which they only do that in crisis. It's the opposite. They're easing.

Mark Zandi:                      The only time that happens... Last time was pandemic, when it hit, right?

Ryan Sweet:                      Right. Then you had other regional Fed presidents come out today saying that we can go 25 in March. Unless Powell's buying into the 50 argument, they're going [inaudible 00:31:06].

Cris deRitis:                       What do you think, Mark?

Mark Zandi:                      Well, I think 25, although I would be willing to have a nice debate about whether it should be 50. My sense is that financial conditions remain too easy, relative to current expectations, the markets have with regard to future of monetary policy. Markets are fully anticipating, at this point, four rate hikes I think, right this year. Would that [crosstalk 00:31:42]-

Cris deRitis:                       I looked at it, it was seven hikes, fully priced in by January of next year.

Mark Zandi:                      Seven rate hikes by January. Okay. That's what is embedded in equity prices? That's what's embedded, in theory, in credit spreads in the bond market. That's what's embedded in cap rates for commercial real estate and markets have reacted a little bit. I mean, stock prices may be down, what? Six, seven, eight percent from their all time high, at the beginning of the year. Credit spreads, tell me if I'm wrong, but they haven't really risen all that much, have they? Cap rates in the commercial real estate market remain incredibly low.

                                             Monetary policy affects the real economy, the economy, which is what they're trying to do here, slow things up, through financial conditions. Also, adding to the mix, I don't sense any tightening and underwriting standards in the banking system. I mean if you go look at the Senior Loan Officer Survey from the Federal Reserve that was released, I think last week, a survey of bank credit officers. They say they're still easing policy for seeing [inaudible 00:32:51] commercial industrial loans and consumer loans and credit cards and everything else. It feels to me that the Fed needs to really send a strong signal to investors, "Hey guys, we got to we're this is we're moving rates a lot more quickly to get those asset markets to react, to tighten up financial conditions so that it actually has an impact on the real economy." [crosstalk 00:33:18]-

Cris deRitis:                       They're still easing because quantitative easing is still going on.

Mark Zandi:                      Well, that's a good point. That's actually a good point. I mean, right now they're still buying bond, a lot less bond. This winding down's going to end next week or a couple weeks, three weeks from now, but you're right [inaudible 00:33:33]. I say a quarter point, I mean, I think that's what they're going to do. If I were in that room, I'd be debating, "Maybe we should go stronger in surprise markets, guide them to a different place so that we get some tightening in financial conditions because they're not tightening enough to get the kind of growth rates we need." I don't know. What do you think of that argument, hey, buddy?

Cris deRitis:                       The rates have risen though. Mortgage rates are rising. They're going to have an effect. There's some delay or lag, I would argue, but it's not as [crosstalk 00:34:07].

Mark Zandi:                      There's been some tightening in conditions. The 10-year yield has gone from, it was 1.3, 1.4 back a couple months ago, we're now 2. Mortgage rates are up about the same. They were sub 3% for [inaudible 00:34:19], they are now 3.65, 3.7. They're moving up, but-

Cris deRitis:                       The two year jumped just on the talk of potential 50- basis-point hike. If the market's doing the work for the Fed...

Mark Zandi:                      That's what I'm saying. Are they really doing the work? I'm not sure, are they doing enough work?

Cris deRitis:                       They're not doing enough work, you're saying. [crosstalk 00:34:39] some.

Mark Zandi:                      I'm a little confused why we haven't seen more of a market reaction. I would expect stock prices to be off more than what we've seen. I think it goes to the lot of liquidity out there. A lot of cash sitting in people's accounts and they are jumping in when prices go down. I guess I just feel like the Fed's going to have to give a stronger push to investors and say, "Hey, this isn't enough. We need to see more of a reaction here."

Damien Moore:               Ryan, do you think they can do anything on the QE side to tighten up more rapidly, and that they would do anything at the next meeting?

Ryan Sweet:                      Well, quantitative easing is going to end in a few weeks, like Mark said. I mean, what they could do is start letting the balance sheet run off. Some of the treasuries or MBS on their balance sheet, as they mature, just don't replace them right. Then their balance sheet would start to contract. They could do that, a meeting, two meetings after the first rate hike.

Mark Zandi:                      I mean, we've blended into the topic that we wanted to talk about, interest rates, and we'll come back to the game. Since we're on the topic of monetary policy, I've been starting to get some questions about the so-called quantitative tightening. QE is quantitative easing, they buy bonds to help bring down longer term interest rates. That's coming to an end. Then the question is, do they start quantitative tightening? That means allowing their balance sheet, the securities they own that they bought, Treasury securities, mortgage securities, to start to run off, mature or prepay if they're a mortgage security, or if they really wanted to go into extreme tightening mode, actually selling securities, that would be-

Ryan Sweet:                      That's a panic move.

Mark Zandi:                      That's a panic move. Do you think the going from QE to QT, is that big a deal? I mean, in terms of what it means for interest rates in the markets? I mean, is there something that... I've heard questions that QT is unusual in some way and therefore is going to be more disruptive. Do you-

Ryan Sweet:                      No, we've done this before.

Mark Zandi:                      We've done this before. Right.

Ryan Sweet:                      We've done it before. The only difference is this time, rates are going to be moving higher, at the same time that they're doing QT.

Mark Zandi:                      Oh, so if you go back to 2013-

Ryan Sweet:                      They were paused. I think they were paused for a while.

Mark Zandi:                      They were still paused. Of course, Bernanke spooked markets when he started the [crosstalk 00:37:10]. He linked that to interest rate hikes, I guess, the QT, to interest rate hikes and that spooked markets. That was now deemed to be a mistake, the way manage that transition from quantity easing into quantity tightening, coming out of the financial crisis.

Ryan Sweet:                      I think QT will move long-term rates. The term premium is still negative. Usually when the Fed's reducing its balance sheet, it's going to be positive. The 10-year can go even higher.

Mark Zandi:                      Well, let's come back to that because a lot of people wouldn't understand what you just said. We want to flesh that out, but we'll come back to that.

Cris deRitis:                       Do we know how much the runoff would be if they didn't replace treasuries or MBS?

Mark Zandi:                      A hundred billion a month.

Cris deRitis:                       A hundred billion?

Mark Zandi:                      A hundred billion. They have like 9 trillion on the balance sheet right now, or don't they? ... or something close to that? A normalized balance sheet, meaning where they would actually want it to see in the long run would be half that, really, right?

Cris deRitis:                       Yeah. We won't get back down that far [inaudible 00:38:06].

Mark Zandi:                      That would be the bogie, wouldn't it be? Four and a half trillion or something like that. A hundred billion a month, that's 1.2 trillion a year, that gives you a sense of how long it would take to get... At least take four years, five years of that to get back to where they would want it, I think. Okay. Ryan, what's your statistic?

Ryan Sweet:                      All right. I'll give you guys a choice. I have one up Damien's alley, or I have one that's related to the CPI.

Mark Zandi:                      We can do both.

Ryan Sweet:                      All right.

Mark Zandi:                      I think, let's get Damien a win here. He needs a cow bell. He's never gotten a cow bell, as far as I know. Damien, you're ready? I'm pretty quick on these things, so you got to move fast.

Ryan Sweet:                      There's two numbers-

Damien Moore:               All right. Go for it.

Ryan Sweet:                      Okay. Twelve percent and 8 trillion, and they're related.

Mark Zandi:                      Twelve percent, 8 trillion. This is to do-

Ryan Sweet:                      It's tied to the big topic, rising interest rates, but is having an impact on this.

Mark Zandi:                      Okay, 12% and 8 trillion.

Ryan Sweet:                      All right. For context, it was 18 trillion at the end of 2020.

Mark Zandi:                      Oh, 18 trillion at the end of 2020. This has something to do with their emergency [crosstalk 00:39:26].

Ryan Sweet:                      Don't think Fed.

Mark Zandi:                      Oh, don't think Fed.

Cris deRitis:                       [crosstalk 00:39:29] came out this week?

Ryan Sweet:                      Yes.

Mark Zandi:                      I think it's real time, maybe. Comes out all the time.

Ryan Sweet:                      [crosstalk 00:39:37] keep calculating it.

Cris deRitis:                       Okay.

Mark Zandi:                      Damien, do you have any idea what he's talking about? Eight trillion and 12%?

Damien Moore:               Is it public debt-related?

Ryan Sweet:                      Oh, you're close. Not public debt. A lot of it's in Europe.

Mark Zandi:                      Oh, in Europe.

Ryan Sweet:                      Where interest rates recently turned positive.

Mark Zandi:                      These aren't like the outstanding covered bonds [crosstalk 00:40:01]?

Ryan Sweet:                      Oh, [inaudible 00:40:02].

Mark Zandi:                      Well, huh?

Cris deRitis:                       I was going to say negative... Or debt with a negative interest rate.

Ryan Sweet:                      Yep.

Mark Zandi:                      Oh.

Ryan Sweet:                      Cris.

Mark Zandi:                      That's a good one though, Cris. Definitely.

Cris deRitis:                       Yep. The market-

Mark Zandi:                      Okay. Can you just explain that then to everybody. Explain it-

Cris deRitis:                       The market value of all bonds with negative yields, so that at negative interest rate policy, has dropped an enormous amount, given the increase in global interest rates. Now, only 8 trillion of bonds have a negative yield.

Mark Zandi:                      What was it at its peak, roughly?

Cris deRitis:                       Close to 20, give or take.

Mark Zandi:                      I'm surprised it's still 8. I saw a 10-year German bonds are positive 20, 25-basis-points, a quarter point, something like that. You're saying... Oh, this is outstanding. These are outstanding.

Cris deRitis:                       Outstandings. Yep.

Mark Zandi:                      Okay. That makes more sense. Right. Well, no. Oh, that's interesting, it's still at 8 trillion. Is that mostly in Europe or is that Japanese debt or what-

Cris deRitis:                       It's in those two areas, most of it.

Mark Zandi:                      Those two areas. Wow. That is-

Cris deRitis:                       [crosstalk 00:41:05] I was paying attention to is, you are starting to see some movement in high yield, US corporate bond spreads. Now with that search for yield is diminishing. I wonder if we're going to see corporate bond spreads start to widen out.

Mark Zandi:                      Well, so what's the 12%?

Cris deRitis:                       Well, that's the value of all bonds outstanding.

Mark Zandi:                      That's global, non-sovereign debt. Twelve percent of global, non-government debt has a negative interest rate.

Cris deRitis:                       ... has a negative yield. Mm-hmm (affirmative).

Mark Zandi:                      You're saying, I guess, that must be down from a third or something.

Cris deRitis:                       It's down a lot.

Mark Zandi:                      Down a lot. Interesting. Oh, that's a great one. That's a perfect one. What's your other one? You said you had another one on the CPI.

Cris deRitis:                       This one's easy. You should get this one, 3%.

Mark Zandi:                      Three percent?

Cris deRitis:                       Mm-hmm (affirmative).

Mark Zandi:                      Oh, I know what that is.

Cris deRitis:                       What is it?

Mark Zandi:                      You take the CPI, 7.5, you X out the amount related to supply chain disruptions.

Cris deRitis:                       Okay.

Mark Zandi:                      That's 2.5 or something like that. Then you take out the amount that's related to the mess in energy markets, supply demand imbalance. That's probably another 2.5.

Cris deRitis:                       Two.

Mark Zandi:                      Two. You go 7.5 minus 2.5 minus 2 gets you 3, did I get that right?

Cris deRitis:                       You got it right.

Mark Zandi:                      Okay. Excellent. Where's the cowbell?

Cris deRitis:                       It's right here.

Mark Zandi:                      Okay. That's a really good thing for people to hear because that is consistent with what we were saying about the outlook for inflation, right?

Damien Moore:               Right.

Mark Zandi:                      Right. A big chunk of the 7.5% CPI inflation is directly related to the supply side disruptions to the economy [crosstalk 00:43:01]-

Cris deRitis:                       Particularly for vehicles. If you look at the month-to-month growth in new and used car prices, it's moderating. I think that's another reason why we're going to see inflation start to decelerate.

Mark Zandi:                      Well, that was a good one. Those were both really good ones. Okay. All right. I got one for you, 61.7%.

Cris deRitis:                       [crosstalk 00:43:18] something in Michigan. You violated the first [crosstalk 00:43:28].

Mark Zandi:                      Too easy.

Cris deRitis:                       University of Michigan.

Mark Zandi:                      Okay. I knew that was going to be easy. Therefore that wasn't the end of what I was going to say. You jumped the gun. Not really fair. When's the last time it was 61.7?

Cris deRitis:                       Oh God.

Mark Zandi:                      I violated the second rule. That's too hard.

Cris deRitis:                       Wait, did it get down there during the pandemic?

Mark Zandi:                      It did not. It's lower than it has been throughout the pandemic.

Ryan Sweet:                      Great recession?

Mark Zandi:                      Yeah. I was going to ask because I'm confused by it, there was a big drop in sentiment in the summer of 2011, August of 2011. Obviously, we were coming out of the financial crisis and there was still a lot of angst and uncertainty. Does anyone remember what happened there?

Cris deRitis:                       It could have been a hurricane.

Mark Zandi:                      Oh, maybe that was something like that.

Ryan Sweet:                      Was that the high gas price summer?

Mark Zandi:                      Oh, I think we did have higher gas prices then. That maybe played a bit of a role, but I don't think they spiked, at that point.

Cris deRitis:                       It was Hurricane Irene.

Mark Zandi:                      Here's another one. You ready? Ninety-seven point one.

Cris deRitis:                       Are we still in U-Mich?

Mark Zandi:                      No. Related though.

Ryan Sweet:                      Oh no. Did you see an end back to normal index?

Mark Zandi:                      That would've been a good one, but no, that was 89%. That is foundering, floundering. I've always wondered, is it floundering or foundering. Can you-

Ryan Sweet:                      Floundering.

Mark Zandi:                      Floundering? Can you say floundering?

Ryan Sweet:                      I don't think that's a word.

Mark Zandi:                      In your [crosstalk 00:45:01] language, can you say floundering?

Cris deRitis:                       Maybe in Philly.

Damien Moore:               I think so.

Mark Zandi:                      I think you can say foundering. Anyway.

Damien Moore:               Then you're not a fish.

Mark Zandi:                      That's why floundering, I always thought was related to a fish. Exactly. All right. You guys give up, 97.1?

Cris deRitis:                       It came out this week?

Mark Zandi:                      Indeed, it did.

Cris deRitis:                       All right. It's not U-Mich.

Mark Zandi:                      I'm surprised... Oh, okay. Not U-Mich-

Ryan Sweet:                      Related.

Mark Zandi:                      Related, in the same genre of statistics. That's a big hint.

Ryan Sweet:                      NFIB.

Cris deRitis:                       Oh, You went NFIB.

Mark Zandi:                      Oh, NFIB. Very good. NFIB and that was down and that's not quite a new low in the pandemic. There was one month in the teeth of the pandemic, early on, when we were lower. That goes to a broader point. That sentiment is pretty weak. I mentioned you U-Mich, the University of Michigan survey, the NFIB, that's the National Federation of Independent Small Business Survey. Then we have our own business survey that we been doing every week. It's down a lot. Actually, we ask nine questions to the respondents and then we create a diffusion index. The percentage of positive response less negative. We were firmly positive, from March of last year to basically last week, a couple weeks ago. We are now negative again, so people are nervous. Sentiment is on edge. That just shows you the corrosive nature of high inflation. I mean, that really bugs people, really makes them nervous. It's almost like that I think people feel, and maybe they're right, they're just getting ripped off. Right. They go, "I'm paying 275 bucks more a month now for the same stuff I was buying a year ago. How's that possible?" That just goes to show you how worried people are.

Damien Moore:               Well, U-Mich got the double whammy because it's really sensitive, the questions they ask to personal finances. The stock market down and gas prices are up and that just is going to crush U-Mich.

Mark Zandi:                      Just crush U-Mich, the University of Michigan.

Cris deRitis:                       One year outlook for inflation was 5%. Right?

Mark Zandi:                      It was, the one year[crosstalk 00:47:15]-

Cris deRitis:                       Consumers are thinking, this is-

Mark Zandi:                      That goes back to gas prices though. Again, very, very tied to gasoline prices and food.

Cris deRitis:                       Food prices.

Mark Zandi:                      Food. Very good. Okay. That is the game. I actually had another pretty good one, but we're getting short on time. Should I do the other one? No. We'll move-

Cris deRitis:                       Yeah.

Mark Zandi:                      Should I, really?

Damien Moore:               We'll do it quick.

Mark Zandi:                      Okay. I'll make it easy. It's related to inflation and there's four parts. Each part is a little harder than the previous part. Okay. Damien, are you playing? I see you're looking away. I don't know.

Damien Moore:               No, I'm listening. I'm just [crosstalk 00:47:55].

Cris deRitis:                       He's concentrating.

Damien Moore:               It's my thinking [crosstalk 00:47:57].

Cris deRitis:                       Damien's playing [crosstalk 00:47:59].

Mark Zandi:                      All right, 7%... Oh, excuse me. Seven and a half percent. Sorry. Okay. What's that?

Cris deRitis:                       Headline [crosstalk 00:48:08].

Mark Zandi:                      Headline consumer price inflation, year-over-year through January, 6%.

Cris deRitis:                       That's core.

Mark Zandi:                      Five point four percent.

Cris deRitis:                       Median.

Mark Zandi:                      No, that's a good guess though.

Ryan Sweet:                      Are you sure?

Cris deRitis:                       Oh, trimmed?

Mark Zandi:                      That's trimmed.

Cris deRitis:                       Okay. Trimmed.

Mark Zandi:                      I take off the goods and services whose price increases were in the top 8% of the distribution and the bottom 8% of the distribution, that's called the trimmed mean, and that was five, four. The thinking is, you got some of these outliers that month-to-month might screw up the underlying message in the data, so throw those out. Five point four. Four and a quarter. Four and a quarter percent.

Cris deRitis:                       Median.

Ryan Sweet:                      Median.

Mark Zandi:                      Median. Very good.

Ryan Sweet:                      Do you know what else was also four and a quarter?

Mark Zandi:                      What?

Ryan Sweet:                      The sticky CPI. That just looks at-

Mark Zandi:                      Explain that one. Explain what that is.

Ryan Sweet:                      That looks at the CPI based on components that moves... Price changes moves slowly. This is a persistent inflation that's going to linger for a period of time.

Mark Zandi:                      Rent would be in there, for example, [crosstalk 00:49:18] talking about. Okay. That gives you a sense of things. Obviously, things are all juice are going to come in, but it does feel like the underlying rate of inflation is certainly moving north here. Something to worry about.

                                             All right. Let's talk about interest rates. We talked about monetary policy. Just to round that out, in our baseline, this is our collective view, I'm just going to lay it out, tell me if you were all... We talked about it, but we have four. We have the Fed ending QE, bond buying soon, next few weeks. We have the QT, the quantity tightening, laying their balance sheet run off beginning in June. We have the first rate hike, quarter point percentage point at the March meeting of the Federal Open Market Committee, the policy committee of the Fed, that's mid-March. Then they raise each quarter a quarter point.

                                             Actually, we have that in our forecast in 2023 and first part of 2024. They get the funds rate, target the key rate, they control up to 2.5% by mid 2024. That's the long-run equilibrium rates, so-called r-star. That's where things settle in.

                                             Okay. That's our baseline. Anyone think that we should change that? I don't think anyone would say, "Make it less aggressive," at this point, but that's where we are. Damien, do you have a view on that or Cris, Ryan?

Damien Moore:               Well, you already pinned me down on my next quarter forecast.

Mark Zandi:                      You're in your term, so you don't feel comfortable going beyond that.

Damien Moore:               Historically, I've always thought we've been too aggressive in anticipating rate increases. This time around, I think maybe we are too slow. I feel like the inflation concern is real and that is, it could be a lot quicker than we think and probably will be.

Mark Zandi:                      Fifty-basis-points in March and maybe more rate hikes through the [crosstalk 00:51:19]-

Damien Moore:               I'm definitely on the fence about March, but I feel like it's probably going to be a bit quicker through the summer.

Mark Zandi:                      That's an interesting observation. I think in my mind's eye, it feels right, that in other cycles we were a little quick to expect the Feds... Certainly, that was the case after the financial crisis. No doubt about that. Okay. That makes sense. Ryan, Cris, are we, I guess, similar to what Damien...? Okay.

Ryan Sweet:                      [crosstalk 00:51:48].

Mark Zandi:                      The risks are more rate increases more quickly than we have in our baseline view. That makes sense. Okay.

Ryan Sweet:                      I mean, they're in a bind in March. They can't win this one. If they raise by 50, it looks like they're panicking. They raised by 25 then market concern is that they're behind the curve even more so March is just a no-win situation for them.

Cris deRitis:                       Unless they start telegraphing now. Right. If they-

Ryan Sweet:                      They could-

Cris deRitis:                       ... control the communication.

Mark Zandi:                      Right. They still have time. We're a month away. There's still plenty of room here for them to do that. Let's turn to 10-year Treasury yield and let's talk about that. Damien, did you wanted to give us the lay of the land on the 10-year, where are we, where we've been?

Damien Moore:               I'm not really a lay of the land guy. I think Ryan is better [crosstalk 00:52:40].

Mark Zandi:                      Ryan should do it? Okay. Ryan, where are we? I didn't look today.

Ryan Sweet:                      See what he does? I told you, he just threw more work my way.

Damien Moore:               Under the bus, Ryan.

Mark Zandi:                      Hey, do we really want Cris to do this, Ryan?

Ryan Sweet:                      Damien's just got to be careful.

                                             Damien lives right down the street from me. I know where he lives.

                                             The long-term interest rates. The 10-year Treasury yield has jumped recently. I don't know the exact increase off the top of my head, but we've talked about this in past podcasts. We you break down or decompose the 10-year Treasury yield into its three main components, so inflation expectations is market-based inflation expectations. The expected path of the real short-term rate and then something called the term premium, which is the extra compensation that investors need to hold long-term treasuries versus short-term months. When you break it down, the recent increase is mostly, almost entirely, because of an adjustment in the expected path of real short-term rates. Then that gets back to monetary policy, Fed signaling that we may have to be a little bit more aggressive to curb inflation. What's really driving both ends of the yield curve, the long end and the short end, is monetary policy.

Mark Zandi:                      Right. The 10-year is Treasury yield, the benchmark interest rate, long-term interest rate, the sitting around 2, let's just use 2, give or take. That's up a lot. I think it rose 10th of a percent, 10, 12-basis-points yesterday. That's a big, big move in the bond market. If you decompose it, the 2%, inflation expectations are sitting just south of 2, I think. One in three quarters percent, I believe. By the way, that's come down right from where it was. I want to come back to that in a second. That means that real short-term interest rates plus the term premium are still negative, right?

Ryan Sweet:                      They are.

Mark Zandi:                      They're still negative, which seems a little weird. There's a lot of weird things in that decomposition. First weird thing is, why are inflation expectations going down? By the way, adding to my confusion, historically, and you are the one who pointed this out to me, Ryan, is that those market-based expectation are closely tied to oil prices. When oil prices go up, you would've expected inflation expectations to go up and we've always found that mysterious, but that is definitely true. I heard a really good bond guy yesterday, when I was talking to that group of economists mentioning this anomaly. What do you think is going on there? I mean, why are inflation expectations [inaudible 00:55:31] in the bond market going down when everything's screaming that they should be going up? Do you have any idea? I don't know. I'm confused by it. Does anyone-

Ryan Sweet:                      Damien?

Mark Zandi:                      Damien, you have any sense of that?

Damien Moore:               No, it's a really puzzle. I think it's an enduring puzzle. Inflation expectations, in the long run, haven't really moved at all. The numbers you are quoting are, I guess, the tips.

Mark Zandi:                      Well, I was thinking 5-year, 5-year Forward.

Ryan Sweet:                      Five year, five year Forward. The 5-year, 5-year Forward is pulling out just the part of inflation expectations that look ahead in five years time, basically. I think some of that speaks to the secular stagnation type argument that we have a temporary transitory bout of inflation that we need to address. We have an overheating economy where relative to where it needs to be today, but over the longer term, we still have all these other demographic and other factors that are slowing growth that will keep inflation pretty low.

Mark Zandi:                      That makes sense. It's almost like what the bond market is saying. When I say bond market, investors who are putting their or money where their mouth is and 5-year, 5-year Forwards, just to explain it again, you look at the 10-year yield and it's inflation five years from now over that the subsequent five year period. This is abstracting from all this mess that we're in right now, it's in the long run, where will inflation be? That has not moved up and has actually moved down. Could it be the case that this is a signal that bond [inaudible 00:57:09] were going to have a recession or some really tough economic times down the road because they're saying, "Okay, we got all this inflation now." That's the reason to think that the Fed's going to step on the brakes really hard, misstep, misfire, push too hard and push us into recession. Somewhere down the road, inflation is actually going to be lower than it is now. Am I reading way too much into that?

Ryan Sweet:                      I don't think so. Your favorite recession indicator, the yield curve is flattening out.

Mark Zandi:                      That's right, but it's not-

Ryan Sweet:                      It's not negative, but it's flat.

Mark Zandi:                      It's not negative. Short rates have not risen above long rates by a long shot. You're saying that has flattened, short rates have gotten closer to the long rates. That's a signal that bond market investors are thinking the economy is going to be weaker down the road. Then that would be consistent with the idea that inflation expectations are tame and gone down. They think the Fed... Well, the charitable interpretation is the Feds got control over this, they've got us. They got our back on inflation. They're going to figure this out one way or the other. They're going to get their target. The non-charitable or the more worrisome interpretation is that they're thinking they're going to step too hard and push us into some kind of really weak economy or even a recession down the road. Maybe that explanation squares the circle here. Does that make sense?

Cris deRitis:                       At least the probability is higher. Doesn't have to be binary. If they just think that the odds are higher now, that would...

Mark Zandi:                      Just the odds are higher. That would [crosstalk 00:58:43]-

Cris deRitis:                       That would be sufficient.

Mark Zandi:                      All right. Well, here's the other thing, and this goes to the outlook for 10-year Treasury yields, inflation expectations are where they are. I don't think they go lower. They're pretty consistent with where the Fed would want to see them, but to have the real short-term interest rate and the term premium negative, that doesn't make sense in the long run. In the context of everything we know, I think, that's a statement, I'm curious, what you think about that. In terms of Fed policy, it feels like it shouldn't be negative real rates, should it? I mean, that should be moving higher in terms of the term premium, that's a compensation that investors get for investing long-run versus short-run. That shouldn't be negative, should it? Doesn't everything I just say, argue for even higher, long-term interest rates? [crosstalk 00:59:39].

Ryan Sweet:                      Higher than today? Yes.

Mark Zandi:                      They're going to be moving up. Hey [crosstalk 00:59:48]-

Damien Moore:               Let me just jump in real quick on the term premium part. We used to think, before the financial crisis, that the term premium was basically this pretty stable thing, and it was always positive, maybe around 100-basis-points of spread between short-term rates and long-term rates over a business cycle where the moves in the different rates even out. Post-crisis, that term premium, by all estimates, went negative, or at least went much lower than 100-basis-points and it stayed very low and negative for over a decade. One of the explanations for that, a very financy sort of explanation, is it's related to inflation risks, and that when inflation risks dip towards... The pessimistics are where inflation might become deflation, then it's actually good to hold treasuries and you'll be willing to accept a lower term premium or even a negative term premium because you're sort of going to receive a payoff in fixed normal dollars that become more valuable if inflation underperforms. That's one explanation, so the balance of [inaudible 01:01:03] remain tilted towards the downside will keep the long-term Treasury yields lower than they should be.

Mark Zandi:                      Oh, I thought... Okay. Sorry, go ahead.

Damien Moore:               No, there's another factor, which is, we've had a big regulatory shift after the financial crisis, that's created all this extra demand for Treasury debt. I'm sure that has to have some impact on where yields come out, where long-term yields come out relative to short-term yields.

Mark Zandi:                      I thought you were going to say something a little bit different on inflation. My sense is that, built into the term premium is some compensation to investors for the volatility of inflation. Post-financial crisis, inflation was low and there was no volatility, we weren't even thinking about it, but now volatility is the name of the game. There's a lot of volatility. You would think that would add to the term premium. Then on your point about Treasury demand, due to banks and other financial institutions needing liquid assets on the other side of the financial crisis that's in the market, that can't be getting bigger, can it? I mean, that would be getting smaller. Both of those things you just said, I think are... Well, you said something a little bit different about inflation, the inflation part of the term premium, but everything seems to suggest that instead of being a drag on the term pyramid, making it more negative would be less of a drag allowing it to go more positive.

Damien Moore:               The unfolding, the latest sort of data where we have this idea that we're going to have this bout of inflation, that should be bringing the term premium up and it's not, and that's a puzzle.

Mark Zandi:                      That's a puzzle. All right. Well, we are running out of time, but I want to run one other thing by you. This goes again to the forecast for long-term 10-year Treasury yields, long-term interest rates, the way. If you look at our forecast, we have the 10-year Treasury yield rising in an orderly way, over the course of the next two and a half years, similar to the increase in the funds rate. The 10-year old settles in, in the long run, at 4%. We are 2 now, we double over this period. Obviously, interest rates don't move in a straight line. They go up down, they go all around, all over the place. This is not going to be straight from 2 to 4, but that's where we're headed. That's where we're going to settle.

                                             The anchor here has been, at least my thinking is that in the long run, when the economy is at full employment, inflation is at target, we're growing at potential, the world is orderly in equilibrium, that the 10-year Treasury yield should equal the nominal potential GDP growth in the economy. Empirically, in the long run, that holds, if you go back 60 years and you say, "What's nominal potential GDP growth?", and you look at the average of the 10-year Treasury yield, I'll tell you, it's equal to the basis-point, 4.6, 2%, they're exactly equal. That's where we have things going. Does that framework about thinking about long-term interest rates and where the 10-year Treasury yield has [inaudible 01:04:33], does that resonate with you? Does that make sense to you?

Damien Moore:               I think in what you are saying very much lines up with the natural rate models and the story and the natural rate models.

Mark Zandi:                      Exactly. Natural rate model.

Damien Moore:               ... that when growth is strong, interest rates should be strong too, growth is high interest rates will be high, but then you look at the last decade of what the natural models predict, and there's a real break in the linkage between growth and what the natural rate models are saying. Interest rates are so much lower than what the long run growth outlook looks like. Long run growth rate has come down since the great recession began, but not by as much as the natural rate has really come down.

Mark Zandi:                      Okay, let me say, agreed. There can be long periods of time when 10-year Treasury yields do not equal nominal potential growth. Go back into the 70s and 80s, the last time we were suffering and wage-price spiral inflation was out of control, the Fed said, "Enough of this." Paul Volcker was chair of the Fed. He said, "I'm going to crush this thing." You had interest rates that were above nominal potential growth. As the Federal Reserve worked hard to get inflation expectations down, flip of that is after the financial crisis, we were deleveraging. The banking system has to gain liquidity. That's a global event. That's not just a US event. The central banks, the Fed, were working hard to get inflation back up. It was too low. Interest rates were low, but the 10-year yield was consistently below nominal GDP growth.

                                             Agreed, you can have long stretches of time when these things too, don't things lined up, but in the sufficiently long run that these things roughly equal each other. That's the anchor in terms of what's in our long-term forecast for long-term interest rates. Does that resonate?

Damien Moore:               I certainly would agree that growth rates should be called a core part of what your long run view of long-term interest rate should be. Then there are some other factors like the relative value, safe haven value of the dollar relative to other currencies, might have impacts on that over long-term. Some people think the dollar's going to lose some of its value there. That would tend to raise interest rates a little bit, but then there are countervailing factors that might go the other way.

Mark Zandi:                      Okay. Well, we are at the end of the podcast, but before we end, we're going to go on the record... By the way, I think in one of these early podcasts, we were talking about 10-year Treasury yields and we were doing the same forecasting. I think I was on the right side of this compared to... Well, Cris was in the middle, Ryan, you were... I was saying rates were going to be higher. You said they were you lower? Did I have that right?

Ryan Sweet:                      We got to go back and check. I don't know about that. It was lower than you and Cris, but you were-

Mark Zandi:                      All right. Fair enough.

Ryan Sweet:                      You were definitely lower.

Mark Zandi:                      We are definitely going to go back and check.

                                             April marks, the one year anniversary of our podcast.

Ryan Sweet:                      We'll go back and look.

Mark Zandi:                      Oh, okay. Let's do the forecast. You heard my forecast. The funds rate goes from 0 to 2.5%, in an orderly way, between now in mid-2024. The 10-year Treasury yield goes from 2 to 4%, not in a nice orderly way, but up and down and all around, but gets to 4% by mid-2024. What do you guys think in terms of that outlook for your interest rates? Anyone want to take another side?

Cris deRitis:                       I'll take the low. I think-

Mark Zandi:                      You'll take the low.

Cris deRitis:                       I think your rule of thumb where 10-year equals nominal GDP, I think that applied 50 years ago, but times have changed, market's much more global. I think it's going to be less than that. I would average in say, the rates on bonds, for example, as an example.

Mark Zandi:                      That's reasonable.

Cris deRitis:                       Something south of that maybe 3, let's go with 3.8.

Mark Zandi:                      Oh, geez.

Cris deRitis:                       Right. All right. 3.5, [crosstalk 01:09:00], somewhere there.

Mark Zandi:                      Talk about prices is right. Okay. Fair enough. That's a reasonable argument. Damien, any perspectives on that? On the outlook? Do you have a view?

Damien Moore:               You talking about the 10-year, specifically?

Mark Zandi:                      Yeah. The funds rate at 2.5, that's our star equilibrium and 4% on the 10-year, long run. [crosstalk 01:09:26].

Damien Moore:               Long run. I think its low. I think it's going to stay low. I think it's going to stay under... I have a hard time believing we're going to see 10-year rate above 3% anytime soon.

Cris deRitis:                       Okay. Wow.

Mark Zandi:                      Very interesting.

Damien Moore:               Part of the reason is sovereign debt globally is massive. I think there's going to be a strong push to keep interest rates low and manufacturing in a way that doesn't cause inflation to explode.

Mark Zandi:                      Okay.

Ryan Sweet:                      I'll say 2% Fed Funds Rate, 3% 10-year.

Mark Zandi:                      Okay. You're in the Damien camp?

Ryan Sweet:                      Yeah. I'll give you a non-trivial possibility that the Fed Funds Rates back down to 0 by mid-2024.

Mark Zandi:                      I'm on board with that actually. I mean, because-

Ryan Sweet:                      This is a boom bus cycle.

Mark Zandi:                      The boom bus. I mean, we talked about this last week or the week before, but you're right. That's definitely got a probability to it. Then we'll never get the 4. Geez [crosstalk 01:10:30].

Ryan Sweet:                      No.

Mark Zandi:                      Okay. All right. Well, we got a lot to think about we're on the record again, so we'll see how this plays out. Damien, we're going to have you back. Thank you for participating. Very good of you. Guys, any parting words?

Ryan Sweet:                      Mm-mm (negative).

Mark Zandi:                      You know what? I didn't hawk my @Markzandi, did I? The Twitter [inaudible 01:10:55]. Ryan, you're tweeting a lot, I've noticed.

Ryan Sweet:                      I've gone down a rabbit hole. You pulled me into this rabbit hole.

Mark Zandi:                      Well, you got to be careful about that. You got to be very disciplined about not going into that rabbit hole too far.

Ryan Sweet:                      I have scheduled... At the end of the work day, I'm like, "All right, I'll put up two or three tweets."

Mark Zandi:                      See, I don't do it that often. That feels like too much to me. You're a young guy, you can do it.

Ryan Sweet:                      Not that young.

Mark Zandi:                      What's your Twitter handle?

Ryan Sweet:                      @realtime_econ.

Mark Zandi:                      There you go. Okay. Thanks so much. Take care. We'll talk to you soon. Bye-bye.