>> i think the fed needs to be market based and not academic base. >> they need to cut before they risk staying higher for too long. >> we expect data forthcoming to give them confidence and it is

the fed's job to take the data at face value. >> the best thing is to look at the data and standby that. no matter what they do they will get criticized. >> i'm not concerned about the fed cutting rates. >> this is "bloomberg surveillance" with jonathan ferro, lisa abramowicz, and annmarie hordern. jonathan: ending q1 with equities all-time highs and high yield spreads at multiyear highs. if bramo was here she would say what could go wrong? the third hour of bloomberg surveillance great -- begins right now. we are together with peter tchir of academy securities. lisa will be back tomorrow morning. let's get straight into q2. this is what we are looking for. monday pmi's, the ism. tomorrow the jolts report. adp on wednesday together with chairman powell speaking.

thursday jobless claims. friday the payroll report. next week, cpi and bank earnings on deck. equities kicking off q2 look like this on the s&p 500. futures positive .25%. yields higher by a single basis point. coming up this hour, peter tchir of academy securities on why the water -- on why the market could be headed for a big rotation. bill dudley singh last year's bank runs could happen again, and former fed vice chair at randy quarles on the path forward. the equity market rally continuing after the s&p posted its fifth straight month of gains. peter tchir saying he is ready for rotation. he writes "i'm so sick of hearing about the magnificent seven, fab four, or whatever. it is time -- i am looking for

anything to steer me away from that. the russell 2000 suddenly outperforming is interesting." peter joins us around the table for more. is it more than just interesting? is it the real deal? peter: i've been thinking about this market as anything deputized into ai has been driving the market. for the last week the russell 2000 is little bit better. people are starting to say maybe banking is ok, commercial real estate, biotech has had its ups and downs. unlike november when we saw the rotation with strong gains, this time we might get tepid gains in the russell 2000 and a small pullback in the nasdaq. jonathan: is the rotation about losing less or making more? peter: i think it will be about losing less. where a lot of the froth is his in the nasdaq 100. it is really unchanged in about a month. it keeps coming up.

maybe it is a new high. unlike the s&p. there is room for that to topple as people question whether we have overextended on ai? ai will drive the future but the question is are you getting in a in today's pricing and i'm not sure everyone is getting that. if you see a pullback there it'll be the russell 2000. people are looking where to put money at all-time highs. annmarie: i will ask you the question i asked lori calvasina. we had so many rotational fall starts. what makes you have the conviction this could be at? peter: in the fall we had a 22% rise in the russell 2000 versus 11 and the nasdaq. that is the sort of thing i'm looking at. people are getting tired about the same story. i have committed to ai, where will i put my money? you start putting money elsewhere. you see energy do well, mining

is doing well. we have bank earnings next week. regionals do well. that is what drives it. annmarie: jay pelosky was talking about energy. he also like soft commodities. are you seeing the entire commodity landscape push higher? peter: i am hard commodities. energy has been the big focus. we are understanding that if we want sustainable energy we have to build up sustainable energy more rapidly and that will require commodities. we also understand we need traditional energy for the next 20 to 30 years. that will be billed out. that is why think hard commodity and energy is better. i'm not sure about the acts stuff. -- about the ag stuff? jonathan: are you doing this through the equity market? peter: i prefer the equities. our story has been energy companies of the future of the energy companies of today.

people say it will all be about wind farms -- people realizing the traditional companies have the resources to provide energy today and the skills to provide energy in the future, that is where the big bet is. jonathan: starting to see energy pick up 10%. you have an interesting take on the federal reserve. we have heard echoes of this. they have not officially change their target but they seem to be willing to ease monetary policy even while inflation remains closer to 3% than 2%. what is 100 basis points between friends? peter: i do not think it changes that much. we started the year at six rate cuts and went down to as low as 2.5. we can manage around that. there is little bit of froth and maybe it is deserved as you see powell shift his narrative to things that allow him to cut. nobody is talking about the marketing the work. in november when the yields were high -- now the market has

undone all of the work. it seems to me they are constantly looking to pivot to some excuse to be easy. if you are the person in charge of the fed you do not want to be the one who drives us into recession. now he has figured out a new rationale. you think jonathan: jonathan: -- do you think the fed is working against the market or the market is working against the fed? peter: i think we are ok right now. there is a decent balance. know what is going crazy. we are saying it is probably the end of the hiking cycle. having said that, as some of this data comes through, we might see a resurgence. the other topic is as we are seeing inflation coming down, people are questioning did we ever manage to monitor inflation for last three years? are we heavily understating? you go to the stores and it is not look like things are up 3% or 4% and people are questioning

the starting level from this decline. annmarie: if the fed is trying to find an excuse to cut, what could they use in june? say they wanted to cut in june but inflation is still on this path where it is not exactly where they want it to be but it is moderating. is that enough? peter: i think it could be. they will say it is long lag times that we have to get ahead of this. behind the scenes, if they can avoid cutting in september and november they would prefer to do that. if you want to get two cuts done early this year you do june and july and let the markets adapt than the next one comes in december if we are still there. annmarie: john asked earlier, what is more important, the payrolls numbers on friday or inflation next week? peter: i think it is the payrolls. the market has been driven much more by the growth in the economy and is about the spending on the ai. our companies benefiting from

the ai, rai companies growing? annmarie: what about for the fed? peter: i think for the fed it will be the jobs number. i think they are in the mode where they will close their eyes and say it is good enough. jonathan: that was my sense of things as well. that is not the answer i got. the answer i got was cpi was important. ed was talking up cpi being more important than payrolls. what i am hearing from chairman powell's he could be willing to move earlier if you see something happen with the labor market. what you see with that in terms of the shift of emphasis? peter: one of our theories into the end of this year is in 2023 he was happy to cause a recession. it was not his first choice but if he got a recession now. there is no way he wants to create an election -- to create a recession in election year because that hands the incumbent

a loss. that is why the balance this year is it is much more about jobs. jonathan: you introduce politics. do you think he is worried about the incumbent losing? peter: i think he wants to be as independent of causing an election result as he possibly can, so keeping the economy on a steady flow. jonathan: thinking about politics so he does not have to think about politics? peter: kind of. annmarie: your timeline says they need to move so they do not look like the care about politics, but not moving to look like politics, they do care about politics. peter: you have elizabeth warren writing letters, you have the current president, new of the former president on social media. let politics take care of itself. jonathan: a big part of this is the big rotation, whether it is making more or losing less.

you said it is potentially about losing less. which part of the market do you think is most vulnerable? the way we are set up, and commodity markets we have things at multi-year highs. gold is at an all-time high. equities at record highs. what you think is vulnerable? where will the losses be? peter: i think the nasdaq 100 is the most susceptible. you will have individual stocks. they trade leveraged etf's, which seems insane to me. it is there. people are trading this. jonathan: is there because people want it. peter: it seems like meme stock stuff. i think those things start pulling back. i think credit is fine. i think credit is good. separate from everything else people should be allocating to credit in terms of munis, agency

debt, then credit. you've technically better governance at these entities than you do at of d.c.. jonathan: you will stick with us. that raises the question about treasuries we will hit later. equities pulling back the touch. let's get you in update on stories elsewhere. here is your bloomberg brief. yahaira: a massive salvaging effort is underway with crews clearing debris from the destroyed francis scott key bridge in baltimore. this as ports along the u.s. east coast are moderating their operations to absorb cargo diverted from baltimore harbor. the fallout is expected to be contained as neighboring facilities with spare capacities tweak their schedules. ups announces is expanding its partnership with the u.s. postal service. after a transition period it will become the primary air

carrier. this as fedex says it was unable to reach an agreement to extend its contract with the u.s. agency. gold is hitting another record on bets the federal reserve is getting closer to cutting rates this year. jumping as much as 1.6% from thursday's close. strong buying from central banks, particularly in china. consumers dragging up demand to make ongoing problems in the world's second-largest economy. jonathan: a series of all-time highs over the last month. up next, preventing the next banking crisis. >> we feel very good. there been thousands of banks that fail. that is what happens. on the other hand, the quality of the banking system is strong. jonathan: that conversation just around the corner. live from new york, this is bloomberg. ♪

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jonathan: looking forward to having lisa with us tomorrow morning going to payrolls on friday. the estimate 200,000. goldman forecasts payrolls rose 215,000 in march. more coverage on that throughout the week. equities on the s&p 500 just about positive .1%.

yields creeping a labatt higher in the last 30 minutes or so, up three basis points. on the 10 year, 4.2359. preventing the next banking crisis. >> commercial real estate is a slow burn. it is a classic burn. late 80's and early 90's we had a commercial real estate recession. does that mean banks might fail? there been thousands of banks that fail over last 30 or 40 years. that is what happens. on the other hand the quality of the banking system is strong. jonathan: the latest this morning. one year on from silicon valley bank worries linger over a crisis in the financial sector. bill dudley singh and other run could happen, saying "regulators have been focused primarily on securing loss absorbing capital at the largest financial institutions. less attention has been paid to the problem that precipitated

last brings banking crisis." bill is with us for more. let's start there and then we can lean into monetary policy. let's start with the stress of the spring of 2023. what was behind that and what haven't we done to address it? bill: the problem with silicon valley bank failed. the problem with the contagion is that generated in other banks. what we foresaw at the time was depositor outflows were much faster than anyone had anticipated. it was the most rapid demise of a bank we've ever seen in terms of money going out the door. everyone was focusing on increasing capital. they were not focused on how to do with that contagion problem. we need to build up the fed's lender of last resort function sodas positive said they do not run. one way to do that is to pledge to the discount window of the fed equal to liabilities.

if you let your depositors know that is the case they do not have a reason to run. the contagion issue we need to address last march. jonathan: do you think the keys to answering that question are at the fed or elsewhere? i am thinking more about deposit insurance. is that something we need to change quickly? peter: you could raise insurance but that would require congressional regulation. the other problem is that increases what congress calls the moral hazard. we saw during the savings-and-loan crisis that savings and loans with lots of insurance deposits takes lots of crazy risks. i think addressing contagion in the underlying function is a better way to go to guard against that risk-taking. peter: my question would be while the fed is somewhat reactionary, my sense is they learn from 2007 2008 to ask more aggressively and more quickly. does that fix the problem or should there be more done

preemptively? bill: i like to fix questions before rather than after the fact. we saw an awkward result in march 2023 when we had this issue of the systemic risk perception that could only be invoked after a bank failed to ensure all the depositors. janet yellen and jay powell were saying the banks were strong and resilient but they cannot guarantee all deposits should be insured. they can only be evoked when a bank fails on a case-by-case basis. this is the way of reassuring people a solvent bank will not be subject to runs that deplete its cash. the reason people run is it is inexpensive and does not cops much to run -- does not cost much to run. if banks have enough collateral to cover their deposits there's no reason to run. peter: is there any risk we have pushed too far in terms of some

of the regulations where we are forcing banks to have more treasury which causes some of the problems in silicon valley bank but has turned the private credit industry around where that is where more people are turning to as banks are restricted or uncomfortable with the current regulations? bill: you are on a very important point. one way you could respond is to raise liquidity buffers banks have to hold. if you do that then they have to hold a lot more. securities become less like banks and cannot perform their role. piling on more and more regulation on banks is not the way to go because it makes banks less competitive with the non-bank financial sector. annmarie: the date regulation -- did the deregulation regulation 2018 have a meaningful impact on the failure of silicon valley bank? bill: silicon valley bank would've been more tightly regulated if it had to roll back the size, the sizes where you

are subject to potential regulation. that contributed. what surprised people is how fast this happened. typically take several weeks for a bank to go from failed to trouble. silicon valley bank was a couple of days and they were gone. jonathan: can i talk to about everything else? i am seeing equity markets all-time highs. how do you think this fomc is thinking about financial conditions beyond what they look at? looking at equity markets and high yield spreads. when you hear the chairman talk about financial conditions, he says they are tight. market participant say something else. bill: i was surprised to his answer at the press conference. he did not really want to talk about financial conditions where in the past he is talked about financial conditions a lot and implied financial conditions were still tight. i do not see that. the stock market is up

dramatically. mortgage rates are down. since october we have had a dramatic easing in conditions. monetary policy versus the easing of financial conditions. if you want to figure out the impulsive monetary policy you have to figure out the balance. my feeling is monetary policy is not exerting that much strain on the economy and that is why the fed has been on the path of having to stay higher for longer. another aspect is the neutral policy rates policy is higher than fed officials are assuming. the fit thinks the federal funds rate will go back to 2.6%. if you look at the market expectations of where it sure it's will go. they have them coming down 3.6%. there is a 100 basis points gap between where the market thinks it is heading in where the fit

thinks it is heading. jonathan: this was wonderful. a great piece on bloomberg opinion and the bloomberg terminal. that was the former new york fed president bill dudley. let's talk about the spread where the fit thinks we are coming down to and where the market thinks longer-term neutral is. peter: the fed has a long history of being overly optimistic, whether it is transitory or inflation long-term averages. we are in the business of being optimistic. they believe their policies will work. i will bet against them. jonathan: you think there's a difference between what they believe in what they want to publicly express? if they start flirting with 4% it could run counter to what they are trying to achieve. peter: when they did the dot plot it seemed legit and then all of a sudden you have all of these cuts. they commuted -- they communicated let's not go crazy on the cuts. everything out of the fed is a messaging tool.

i think you get what they want to believe mixed in with what they really believe. jonathan: i get the sense they have been wrong about so many things, as we all have been, because it has been a difficult cycle to read. this is not a topic they're prepared to engage with. peter: i agree with you they have had an incredibly difficult job. i am always bashing the fed -- i think they do the best they can. it is a difficult economy. one thing economists get wrong more than anything else is starting conditions matter. we are trying to look at these historical things. 20 years ago this happened. china is emerging. technology is changing. we are going through deglobalization. the starting conditions are changing dramatically and i think the starting conditions are it is negative as we have seen in a long time. jonathan: is that a low bar for

upside surprises? peter: to be the biggest disconnect in the economy is people still want to believe it is globalization and china's working with us. i am on the other seida that. -- i am on the others of that. jonathan: peter will stick with us. live from new york city come equity futures positive. this is bloomberg. ♪

jonathan: beginning q2 in positive territory on the s&p by 0.1%. the russell up by about .3%. a little bit of outperformance. it was bigger earlier in the session. i can tell you about the long end of the curve, up four basis points this morning. you theory is later this year, supply reasserts itself. one? why? >> we go back to the stories that drove us to 5%. you see all those things playing together. i think commodities will continue to be a good story. when you start looking at all

the things going on, the energy usage is increasing in this country. it is the first time in a while we have had energy increases in demand that is largely ai and datacenter related. i think that will be a continuing story. i think that is going to push on yields. i do not see that changing. the front end will be controlled by the the feds. i would like to see twos and tens get back to zero. jonathan: ai you are saying will be bullish for energy and be producing high-yield. can you develop that further? peter: the amount of energy being consumed by data centers is very high. there is a lot of shifts where people are looking to locate these data centers where cheap energy is so i think you might see geographic shifts of how and

where people do business. the amount of data being used is growing exponentially with ai. that is creating huge demand for utilities and energy away from oil. ev's, same sort of thing. it has been slowing but is still a growing market. you will have more demand for electricity. i think that will push energy rises higher. most of our energy is still traditional sources so that is great for commodities. that will be down to ai near term. with crypto, crypto could go global. i think people are much more aware of the risk of having a datacenter not in the u.s. or canada, someplace you can trust you are not going to see data centers pop up all over the globe as people are becoming more concerned, why is my data in that country? i want it domiciled here. that sort of national security

the energy market a lot. jonathan: what do you want to own? peter: you want to only hard commodities and energy. we are in the midst of rebuilding society. a lot of it will be domestic. that will create underlying inflation pressure. that is what you want to own as we become more independent across the board. jonathan: nothing happening in foreign exchange can rival the conversation we have had. the euro against the dollar, -.1%. the austrian central bank governors earlier in europe talking about the ecb saying the european economy is growing at a slower pace than the u.s. i think that is in line with consensus going 324. the u.s. and israel set to meet virtually today to discuss the alternative proposals to an invasion of rafah.

the meeting following comments from benjamin netanyahu saying they are preparing to move more than one million palestinian civilians out before launching an attack on the city. i want to talk about what the generals are telling you. what are they saying? peter: from day one, we said this would be a difficult thing. fallujah was a difficult battle for us to win. we had it easier because civilians had been taken away. you knew most people or hostile combatants. there was not the tunnel system. none of this is surprising it is that difficult. i think it is a good step if they can move the civilians out. if israel is intent on destroying these fighting forces, it will be a long and probably brutal process unfortunately. >> if they are able to remove civilians, and biden has made that a redline condition for israel to go into raw for, how long until israel can say it its

victory, we have gotten rid of hamas? peter: you can do things. the only way to know is you have to go door to door checking houses. it is a very slow process, especially if you have tunnels so people can shift around. it will not be easy. even when you think victory is achieved, it will take months to clear it out. any hope this will end quickly is out of place. that is why we think this is laughing longer and one reason i remain worried we are going to drag iran into this and that will jack the prices of oil higher. jonathan: base case? peter: you watch what is going on with the houthis. they have been very successful. we have launched attacks against them but they are still attacking shipping. they have become very good at what they do. they take unsophisticated

weaponry, they move it around, they hide, they launch, they disappear. we are spending million dollar missiles trying to shoot down $10,000 drones. they are very good at this. unless something changes where we strike fear into these countries, these proxies, this continues unfortunately. jonathan: what does that look like? build that out a little more. continuation of tension with proxies? peter: i think it continues tensions with proxies. we would like to keep it that way as long as possible. iran is a significant part of keeping oil prices lower. no one wants that coming into election year. everyone is like let's keep this to proxies and play it even if we know there is more involvement pretty jonathan: fascinating.

commentary from the fed every day this week. another round of jobless claims thursday followed by on friday. gregory daco saying the economy is gently decelerated. inflation stickiness is a risk but not our base case. greg, good morning. this runs counter to what we heard from bill duffy. you think we are on the path to 2% inflation? greg: we are seeing signs of deceleration in the labor market. we are seeing labor demand ease, whether it is the hiring rate, the pace of job growth with revisions. we were talking about noise and is in the data. we saw it in revisions.

all of those factors point to a gently easing u.s. economy that puts more pressure on consumers when it comes to spending. peter: when you cut in may, june, not cut? greg: i think it is more likely now we will see the fed easing june. given what we saw in the march projections and dot plot, we have a number of policymakers still leaning on the hawkish side. we know the dot plot is close to moving back to two rate cuts this year. we think the onset will be june. there might be signaling in the policy statement from a negative statement saying the committee will not consider easing to saying the policy committee will start to ease when it see is sufficient confidence we are moving in the right direction. peter: that is interesting. i like to be contrarian.

they were pricing in six or seven cuts and now we are down to two or three. will it be fewer or more? do we have it right for a change? greg: the volatility is interesting to note. every data lease is scrutinized with too much attention in my opinion. january volatility means there is rapid repricing happening on a day to day basis pretty that is not a normal environment. at the data starts to stabilize, we will see markets in the fed realign toward a more gradual easing of monetary policy and i would still expect about three rate cuts this year. i do not buy the story inflation is entrenched nor the story the economy is rick sell rating and that will feed into higher inflationary pressures. >> the rise in commodity prices, how much cannot hurt the fed has they try to have the soft

landing? greg: we used to say commodities prices were transitory. we are in an environment where because inflation is higher than 2%, we are seeing pressures lead to potentially tighter fed policy down the road. it is not just the fed. it is the ecb and other central banks affected by higher commodities prices because they put pressure on inflation. if we see an environment where commodities prices continue to push up, that will lead to higher energy price inflation and will lead to higher headline inflation which will be a concern for the fed. jonathan: some people do not buy it after chairman powell's performance in the news conference. some people believe maybe this fed is willing to tolerate higher inflation which is why we have gold at all-time highs,

whether it is the conversation about going higher and starting to price in 3% inflation for longer. why are those people wrong? greg: i do not think it is wrong. we are coming from above the 2% target when it comes to inflation. it is true we will see more time before we get down towards the 2% target. because we are starting from above the target and policy is restricted at this stage, this environment where you moderating growth and more pricing sensitivity does allow the fed to gradually ease policy and focus on core inflation which has been a key focus of the fed. we are seeing core inflation move down toward 2.5%. it has been a key pillar of attention for fed policymakers.

i think we will continue to do so. peter: the market seems to view the slowing chinese economy might be good and provide deflation. i do not think it is talking and off about india's rise. what surprises do you see that could create a big inflation spike or deflationary? abigail: i think week -- greg: i think from a cyclical perspective, we are seeing slowing growth in the u.s. we are seeing fairly moderate growth across the globe. that is disinflationary short-term. in the longer run, we have factors likely to be more inflationary. we are seeing supply chain shocks like in baltimore. these in the past might not have as much of a consequence. add that to other issues, we have structural inflation with genai and capital inflation that are all inflationary.

we will likely list inflation over the 2% target which is why i think the fed may consider adding a band around the 2%. it might be 2%. we might need a band around it. >> 2.5% or 3%? greg: we do not know but the fed will be implementing the revision of the framework put in place before which it has done at the worst time. we are likely to seek some kind of wiggle room, perhaps around 2% which would offer more flexibility. jonathan: if they do that, does it make it harder to hit 2%? greg: you do not want to be moving the goalpost closer. but you do want to consider that when you have achieved some form of being close to the 2% target,

that is why i think this is not a story for 2024. this is a story for 20 when we are closer to the fed target of around 2%. -- this is a story for 2025 when we are closer to the fed target of 2%. >> at&t down in premarket trading after the telecom giant said current and former customer data was leaked onto the dark web. this includes personal information such as social security numbers. at&t says the source is being investigated and it is not known whether it came from the company or a vendor. it is not the first issue this year for at&t. in february, it variants a widespread outage now being investigated by the federal government. the north carolina state men's team continuing their sucking run with the -- shocking wrong with the -- shocking run with

the win over duke. in the women's tournament, caitlin clark and angel reese face-off tonight in a rematch of last year's national championship game. liberty media will buy the motorcycle racing league and a $3.8 billion deal. they are buying the exclusive rights holder. the deal may draw scrutiny from antitrust regulators given it will merge two influential sports businesses. liberty says it is funding the deal was a mixture of cash and debt and expects to close by the end of this year. jonathan: basically, we are going to get another netflix shell but this time about motor gp. >> liberty will not be the first

company to own both. a private equity firm owned both first. motor gp and f1. the e.u. and he regulators said you have to break it up. jonathan: next, the balancing act for chair powell. >> my personal opinion is small monetary policy is not exerting much restraint on the economy that is why the fed is on the path of higher for longer. jonathan: that conversation up next. ♪ yeah, and dr. xichun even takes your sketchy insurance. xi-chun, xi-chun, xi-chun! you've got more options than you know. book now. so, what are you thinking? i'm thinking... (speaking to self) about our honeymoon. what about africa? safari? hot air balloon ride? swim with elephants? wait, can we afford a safari? great question.

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jonathan: the first trading day of q2 42 minutes away. equity futures positive 5.1%. up .4% on the s&p. the balancing act for chair powell.

>> right now, there is a battle going on with monetary policy versus the easing of financial conditions. monetary policy is not exerting much restraint on the economy. that is why the fed has been on the path of having higher for longer. the fed thinks the federal fund rate is a good projection in the long run. they end up coming down to about 3.6%. jonathan: jay powell sent to speak wednesday at of the jobs report friday. he said the fed is in no hurry to cut rates after hotter than expected prints to start the year. randy, great to catch up with you. fantastic to get your thoughts on a major issue. the conversation we have been having is whether the federal reserve is beginning to drift towards accepting a higher inflation rate. is that your sense of things or

do you push that? randy: i do not think that is even likely or consistent with the fed communication. just before disinflationary surge started, the fed went through a comprehensive review of its monetary policy framework. meetings all over the country. it took a year. as part of the process, the fed reaffirmed the 2% inflation target as part of the framework. it would be [indiscernible] jonathan: i believe we might have lost our connection to randy quarles. peter, your thoughts? this is a big debate. it seems to be split. the early indication from randy is he did not agree. why are you closer to 3% when they are sticking to 2%? peter: they seemed to change their attitude. right before covid, we had inflation under 2% and finally,

we were getting above 2%. at the time, they were saying we are looking at multiyear averages. i think they change the case sometimes to allow them to be easing. at that point, we were going above. they said no. everything was transitory. then we reacted. they seem to create messaging that allows them to position for the easy side. we are at 2.5% but we think we might get to 2% so we can start cutting. even if we do not, we will still cut for a little bit. jonathan: this is purely observational from my standpoint. i think people who believe it is closer to 3% now observed what chairman powell said in august of 22 which is you will have pain, we will get inflation back down to 2%. now, they sense unwillingness and the willingness to stretch the timeline to get to 2%.

that is different from putting the emphasis on pain to get to 2%. is that a shift? peter: it is a shift. in their defense, people were saying they were behind the curve and should stop hiking earlier. you have some lag effect. their favorite metric is really above 2%. they picked a pretty easy metric that is kind of in their favor. jonathan: i'm pleased to say we have reestablished the connection with randy quarles print you were mid-thought and got cut off. you believe they are still committed to 2%? randy: sorry about that. just before this inflationary surge began, there was a comprehensive review of the monetary policy framework and the fed reaffirmed the 2% target. it would be very surprising and not be good for the fed future credibility for them to say 3%

is close enough for government work and so we are done. that would mean the next time there was an inflationary surge with a new 3% target and inflation goes up to 9% in the fed says we are headed back down to 3%, folks would say, why should we believe you now? it is important for the fed. the fed has been consistent communicating 2% is the inflation target. i do not think it has to come all the way down to 2% before the fed starts using but it has to be their preferred measure which is core pce has to have come down closer to 2% and have stayed there for a while. other factors in the economy that could be inflationary, particularly tightness in the labor market, have to adjusted enough for the fed to feel comfortable cutting.

randy: one question i have is, in the market, you took the time to mention the market had done a lot of work for them. peter: treasury yields were at 5% print credit spreads wobbly. now all of a sudden, you have yield back to 4.25% roughly. credit spreads are tight and he chooses not to mention financial conditions. is that a signal or how he is thinking about it? that is confusing me and seems to be pointing to a person who wants to be dovish. >> we are at an inflection point in the fed policy past and communications. outside of this process, there were two hypotheses, that interest rates would not have to go as high as in the past to contain inflation and that interest rates would not have to stay as high for as long to continue this inflation.

the first of the hypotheses has been borne out. the taylor rule, a guideline central banks have used to guide interest-rate policy, would have suggested at the outset you needed short-term interest rates to go under 10%. we did not get there. the inflation rate has significantly subsided pay the second hypothesis was wrong. it will take a longer time than many ovens leaved at the outset -- many of us believed at the outset for policy to work. it was clear interest rates had to go higher. it was not clear how long. everybody agreed we had to do something paid we are now at the inflection point where there would be differences among the committee and different medications from members of the committee. the job of the chair is to try to maintain consensus and direct the committee to an outcome

which complicates his communication task as well. it is going to be confusing. i think people will take wrong signals by hearing what they want to hear as the tone from the fed communicators differs. jonathan: we have to go. my apologies for the technical collections -- connections. randy quarles, appreciate it. tomorrow, our guests. from new york city this morning, good morning, this was "bloomberg surveillance." ♪

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>> from new york city, a very good morning. i am manus cranny in four jonathan ferro. goldman sachs's evaluations are not exceptionally stretched. the countdown to the open kicks off right now. announcer: everything you need to get set for the start of u.s. trading. this is "bloomberg markets: the open" with jonathan ferro. ♪ manus: futures move higher after five consecutive monthly gains. big china data reinforces the economic recovery hopes. gold hits a recorg