Rick Rieder: Inflation Isn’t the Biggest Risk for Markets

[00:00:00] Speaker 1: We start with the bond market caught between fears of inflation and long term fiscal risks. Rick Reeder is BlackRock's chief investment officer of global fixed income and head of the global allocation investment team. Rick we got CPI numbers this week and there was good news in the fact that they're not going up. On the other hand it's not 2.0 the way we've been promised. So which is more [00:00:23] Speaker 2: important the good news or the bad news. Well I would say markets have been more nervous about this number and I would think there was a collective industry-wide sigh of relief when this number came out because it wasn't you know this is one of those numbers if it comes in high then all of a sudden now you put the Fed in clear hiking mode and you're starting to see consistent numbers so that so if you go back into the last 10 numbers that we've gotten in core CPI eight of the 10 have been 0.2 rounded or below that. So it's still a bit elevated relative to where the Fed's long-term objective is but I think the markets felt pretty good about whoo we got through it and it wasn't that high. And then if you go through the component parts otherwise it was a number pretty close to expectations in only almost every regard. You are seeing still things like lodging away from home, hotel, airlines. You're seeing in leisure experiences think about the World Cup effect and otherwise. You're still seeing some pricing pressure around that but overall it was uh it was it was an okay number but yeah we're not certainly not a target yet. [00:01:22] Speaker 1: So pull back a little bit and give us a longer term view over the years of how it's bounced around and [00:01:28] Speaker 2: where we are today compared to where we've been. So I mean the the big deal for me is the Fed's mandate is price stability. It's not two but you'd like to get it. There is real efficacy around two percent is a normalized equilibrium for what an economy should run out. So you want to get to that number. We haven't gotten there in a long time. By the way you could take the two decades before it's pretty hard to get it as high as two. You're in the ballpark today and you know when you were running certainly post-COVID you're running at numbers five six. That was scary. But if you look at inflation expectations today you think about where we've come from it's pretty stable particularly when you've got an economy that's running with a lot of debt on it that the thing you really can't have happen you can't have a deflating dynamic because it enhances the the true cost of the debt. Today I would argue it's the number we'd like to see a little bit lower but it's certainly not daunting by any stretch [00:02:18] Speaker 1: relative to anything we've seen in history. So take COVID out of it for a moment go back to like 2024 for example. Where are we in core? What's the trend line? Yeah so you know the thing I find interesting is [00:02:28] Speaker 2: is Chairman Warsh is focused on the left side of the decimal place and the right and I think you have to take that to heart. Meaning if you're in and around the twos you're okay but when you actually zoom in closer where the markets tend to focus on there's this been this maniacal focus on the right side and you know since you know certainly over the last year or so the trend is pretty good and that it's coming down but it moves around and you know the markets tend to focus on the tenths of a percent in terms of these movements. By the way I always get a kick on the first thing I saw this morning while Chairman Warsh talked about the left side of the decimal place and the number was it printed at 0.2154 and people talk about the rounding. You think about for a broad economy like this does anybody really care about the 0.4 other than the market participants do? So you know part of when you zoom out and you say okay that's a pretty good we're in a pretty good place we'd like to see a trend lower for me I actually think we are trending a bit lower we think core PCE by the end of the year is around 2.8 next year we think it gets to 2.5 and core CPI is running lower than that core CPI is running at 1.6 the last six months 2.4 when you strip shelter out it's actually running at about half that so not bad I you know I'm pretty relaxed about where we are there are other things I worry about but I but you know I don't think that's going to be the thing that disrupts the markets. [00:03:45] Speaker 1: And in fairness to some of the commentators and analysts I understand Chair Warsh has said we care about what's left of that he also has said we're not done yet I mean if he really is just happy with the left side and given the numbers you just gave us he would say mission accomplished job [00:04:00] Speaker 2: done. So I think there's a real nuance to that I mean I think the Fed what the Fed needs to accomplish is get to that two percent number but that two percent doesn't have to happen today it doesn't have to be next week it's that is a long run number and I think quite frankly if you are any head of any monetary policy authority you have to be committed to that two number the long end of the yield curve every tick of it is dependent on how you articulate that thesis in terms of where you're trying to get to it doesn't mean you have to raise rates to get there and I think why these task forces are a very elegant way to get there these are complex issues when people ask are you restrictive or not well in housing you're not you're clearly restrictive you have a you have a dormant housing market then you look but then you look at the amount of spend on capex like that's you were not restrictive that but but you think about what would you have to move rates for the big hyperscalers not to spend on AI I you'd have to raise rates hundreds of base ones before to get your IRR to a level it didn't make sense so I think he is committed to it I think he's going to think about the tools you have the balance sheet you have the money supply you have a lot of things a lot of tools at your disposal raising the overnight funds rate in my mind is not terribly effective way to bring that number down and I think I think if you really think about a sophisticated way which I think they will what are the tools and how do we get there and what's the time frame to try and achieve it so you say the long end of the yield curve [00:05:24] Speaker 1: really needs to believe the fed monetary authorities if you look at what happened with the 30-year yield during and after that news conferences they were not buying it it went up to the highest level it's [00:05:34] Speaker 2: been what since 2007 or something so I think it's a dead right I think there are a couple things to think about there one you know he didn't say hike and I think the markets the back end of the curve was like we could get a hike here which would obviously show maybe a stronger near-term commitment to inflation so there was a little bit of that second thing that I think proved it to be a bit untethered was this idea of gosh we didn't hear a lot of the metrics markets want to hear the reaction function and how are you going to interpret data and then how will you react to it I don't think you need more forward guidance I think actually pulling back on forward guidance a good idea I don't agree with the ethos that people have put out there that less forward guidance means more volatility actually if you go back to 21 22 there was a lot of forward guidance it wasn't right as long as markets understand and can interpret here are the metrics you're looking at here's what your reaction function is going to be to the data and I think it's quite sincere when the when Chair Worsh says let the markets determine where should you be and then they could react and that's a good piece of data for the fed so I know I think that's really important going forward and I but I think the long end of the yield curve is a very important thing how you manage that and you know oftentimes I think you need to use the balance sheet to actually keep the long end down and we'll see how [00:06:49] Speaker 1: that goes the markets certainly react to what they think is going on the monetary policy are they also taking into account fiscal policy and how big a risk is it that actually we won't be able to pay all these debts back if you look at the term premium for example how big a factor is that in keeping this above two to the right or the left at this point David I actually think you hit on [00:07:09] Speaker 2: exactly the right point in that I actually don't think I think the markets will talk about on the day that maybe the long end backed up and what does that mean for credibility I think that was overstated and unfair however you do have something going on that we have not just in the U.S. you have fiscal burdens that are significant and by the way alongside of the amount of financing this week there was 673 billion of U.S. treasury debt you know it's like issuing Indonesia in a week it's uh it's an awful lot of debt plus you have an immense amount of supply coming through that is AI related so you're pushing into the system an awful lot of financing to me that's why real rates are pressing higher is the cost of finance is going up driven by fiscal deficits around the world not just U.S. but also we've got to push a load of financing in the market and the markets are saying okay these real rates are attractive but boy maybe they have to back up a bit more to get all this financing done and that that that to me is is a big one give us a little more detail on how you are [00:08:08] Speaker 1: balancing your portfolio I took a look at some of the numbers it looked like high yield and securitized [00:08:13] Speaker 2: you've got a fair amount of and there's some other stuff so my fixed income or further so bink is our big big ETF you know bonds are very different than equities in bonds they my upside is they pay you back so I know I just got to create a portfolio of people that is as boring as possible that's as stable as possible what is incredible about today's environment you can create almost a seven percent yield so we're running about a 680 yield at an average rating of a minus and and by the way with interest rate exposure that's under three years that is I've lived my much of my career never being close to decades for not being able to do that so then what do I do with it high yield emerging markets some securitized assets I own more Europe than the U.S. and I just try and keep the quality of portfolio in good shape and diversify it like crazy and and you know today you don't have to stretch because these real rates are so high high yields should be trading 150 200 base points lower in yield it's not because we have real rates high because of we have an inflation issue or we have these real rates that are that are you know which make corporate investing pretty attractive today