Apr 20, 2021
John Authers and Mohamed El-Erian on What Comes After Reflation
, Bloomberg News
(Bloomberg) -- Here’s a complete transcript of the live blog event “What Comes After Reflation: Q&A With El-Erian & Authers.” The blog entries are in the order they were originally posted.
04/20 02:39 ETWelcome to our TOPLive Q&A on reflation, how to trade it and what comes next. Join us at 1:30 p.m. New York time as Bloomberg senior markets editor John Authers and Bloomberg Opinion columnist Mohamed A. El-Erian take your questions.
The Q&A will be moderated by markets columnist Kriti Gupta.
If you have questions for John and Mohamed, please send to in advance and we’ll pick some to ask when the Q&A begins.
John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of “The Fearful Rise of Markets” and other books.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is president of Queens’ College, Cambridge, chief economic adviser at Allianz SE, the parent company of Pimco where he served as CEO and co-CIO and chair of Gramercy Fund Management. His books include “The Only Game in Town” and “When Markets Collide.”
All opinions expressed by John Authers and Mohamed A. El-Erian are their own.
Marc Perrier TOPLive Editor
04/20 13:28 ETHello! I’m Kriti Gupta, markets columnist and audio squawk on the Markets Live team in New York. Nearly 40 years after Volcker broke the back of inflation, the Fed has changed its tune. Now, it’s embracing it. But what sources of inflation could the Fed be missing? And if indeed an eventual exit strategy is in the cards, how brutally could that play out in financial markets? Joining us with their take is John Authers and Mohamed El-Erian.
But we want to hear from you too! Send your questions to .
Kriti Gupta Markets Reporter, New York
04/20 13:30 ETLet’s get started: Inflation used to be a taboo word and ever since Paul Volcker “broke the back of inflation,” there hasn’t been much of it. Until now with a total narrative shift in which the Fed is embracing inflation (of course under different circumstances). To what extent is Powell the opposite of Volcker?
Kriti Gupta Markets Reporter, New York
04/20 13:31 ETUntil very recently, the inflation challenge facing Jerome Powell was very different from that confronted by Paul Volcker. Powell inherited a Fed that had consistently undershot its inflation target while Volcker had to deal with the extreme opposite with regards to both recorded inflation and inflationary expectations.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 13:33 ETAlso of note, the Fed under Powell has pivoted to a materially different policy reaction function that replaced the traditional forecast-based approach with an outcome-based one. With that, the adverse consequences of a policy mistake are greater, both for the economy and for the credibility of the world’s most powerful central bank.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 13:35 ETWith so much else changing in the economy, the challenge of anchoring inflationary expectations at 2% is considerable, and the balance of risks is tilting in favor of an overshoot. Thus, the chatter in some circles that Powell risks being remembered as the reverse-Volcker – though I feel that’s quite an extreme characterization.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 13:37 ETA lot depends on circumstance. It’s not long since Powell was insisting that the Fed would keep raising rates while shrinking its balance sheet “on auto-pilot.” I don’t think he entered the office with any intention of being the “anti-Volcker”. If anything, he set out with the intention of proving to everyone that the Volcker model still reined, and that the punch bowl could still be removed.
It’s also interesting that in a way Powell is almost an accidental chairman of the Fed, as Volcker was. Volcker got the job under Carter, because his predecessor had been moved to the Treasury and there was a need to fill the vacancy in a hurry. Then he stayed on under Reagan. Powell got the job under Trump because he seemed to want to make a point of removing the Obama appointee Janet Yellen (I don’t know if it’s really true that he thought she was too short). In both cases, they’ve had a change of president, which brings political forces more strongly behind the monetary policy they’re trying to enforce.
So to that extent he’s almost another Volcker....
John Authers Bloomberg Opinion, New York
04/20 13:41 ETThat said, the circumstances are important, and they are conspiring to make Powell the anti-Volcker. When Volcker took over, both parties were fed up with inflation, and there was immense political will behind breaking inflation, even at the cost of employment. Volcker’s aggressively tight monetary policy was possible because the politics made it credible; not just Reagan but many Democrats in Congress were in favor.
Powell takes over at a time when slow growth and the growing inequities that have accompanied it have created powerful populist forces, with many in the political center now inclined to believe that something has to happen to spark stronger growth. Not just Biden and the Democrats but also the Trump wing of the Republicans (which appears to be most Republicans) is now prepared to take the risk of inflation to spark some growth.
That means that Powell is sending the message that he is prepared to let inflation rise, providing he gets unemployment under control, which is the exact opposite of Volcker. If he succeeds (if that’s the word) in bringing back inflationary psychology, then he will indeed be the anti-Volcker.
John Authers Bloomberg Opinion, New York
04/20 13:43 ETOne last point on whether Powell is the opposite of Volcker: the great legacy of the Volcker years is the banishing of inflation psychology, and that shows up in the remarkable still uninterrupted decline in long-term bond yields which has gone on ever since.
If we are indeed at the beginning of a lengthy bear market in bonds, to follow the four-decade bull market, then Powell probably will go down in history as the opposite of Volcker. It’s the bond market regime that will be the ultimate test.
John Authers Bloomberg Opinion, New York
04/20 13:45 ETIf you have a question for Mohamed and John, please send it to .
Kriti Gupta Markets Reporter, New York
04/20 13:46 ETAnother question for both of you: Are geopolitics still relevant as contributors of inflationary pressures given ongoing issues with China, Russia and several other nations? Is the market accounting for those risks?
Kriti Gupta Markets Reporter, New York
04/20 13:47 ETThey are relevant in so far as they contribute to supply bottlenecks and other production uncertainties. This is particularly true for China-U.S. tensions which, already, have led some companies to consider rewiring some of their supply chains. You can, and should, add to the list other non-economic factors such as the blockage in the Suez Canal.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 13:50 ETSuch factors tend to amplify what is already being noticed in a growing number of places in the economy: supply bottlenecks, labor shortages, and the start of a process of pass-through of these increased costs to higher prices for consumers.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 13:51 ETThe market has noted these developments, but with an important qualification. It is reassured, at least for now, by the Fed’s assertions that the associated inflationary pressures will prove “transitory” – that is, a one off price increase rather than the start of a recurrent process.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 13:53 ETGeopolitics are certainly relevant in terms of supply bottlenecks, as Mohamed says. There’s something about the shortage of chips at present which is at least faintly reminiscent of the oil shocks of the 1970s. They are very important building blocks for the economy, and the chip shortage could yet lead to more inflation.
Where I think geopolitics can be overstated is in the notion of de-globalization. The arrival of cheap Chinese labor in global markets in the 1990s and 2000s certainly helped to dampen inflation; there’s no question about that. But those gains are largely over, and some companies have been moving production away from China again because wages there are rising. It would be unwise to expect globalization to keep helping to push prices lower; but it’s questionable whether there’s truly a risk that the last two decades will be unwound and prices will be forced up.
John Authers Bloomberg Opinion, New York
04/20 13:56 ETAnother question for both of you if I may: What about sources of inflation we’re not seeing? Food inflation, gas prices, building materials. There’s even a global chip shortage that is already impacting several industries with 10-year breakevens tracking the SOX Index. Could semis for example be the new oil circa 1970’s especially with the chips supply chain extending into Asia?
Kriti Gupta Markets Reporter, New York
04/20 13:58 ETThere are certainly a number of pockets of inflation clearly visible in the wake of the pandemic. There is really no dispute that this year there will be significantly higher inflation than usual. The question is how long these effects will last. It is possible that they will be merely “transitory”, to use the Fed’s key phrase.
The really dramatic inflation is showing up in sectors that virtually shut down during the pandemic, and where supply had been constricted. This is how prices of rental trucks and cars have moved over the last 20 years, compared to the main CPI index:
Inflation of almost 60% since last summer is obviously quite something. It’s hard to believe that it will be more than transitory.
John Authers Bloomberg Opinion, New York
04/20 14:00 ETThere is certainly a lot of inflation in the pipeline as the question suggests. And we will see this reflected in the data over the next few months. Along with the base effects, the result will be a jump in the CPI inflation rate to over 3% as the year proceeds. The PCE will follow suit, albeit more gradually.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:02 ETAll of this will intensify a debate that is already heating up: What exactly is meant by transitory inflation; how long will market and wage setters respect the Fed’s view of the inflation dynamics; and how does the balance of risk evolve for a new monetary framework that bets a lot on structural dis-inflationary forces prevailing over a clear surge that is mainly cyclical but could well develop secular roots. It will be an interesting year on this front -- that’s for sure.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:04 ETThat’s certainly true; very much depends on the sense in which this inflation is “transitory.” In particular, can these one-off but significant and painful price rises that everyone knows will be coming this year be converted into an upward shift in inflation expectations? And that ultimately depends on the labor market. It’s customary these days to point out that the Phillips Curve (the trade-off between unemployment and inflation) is flat; but will 2021’s price rises be enough to prompt unions to negotiate for, and win, higher wage rises? If it does, then that could be the transmission mechanism by which a transitory shock turns into an upward shift in inflation psychology.
John Authers Bloomberg Opinion, New York
04/20 14:07 ETThat prompts another thought that the political context could be important for Powell, just as it was for Volcker. 40 years ago, there was a new president who was prepared to play hardball with the air traffic controllers when they wanted a raise, and that helped to cement the impression that inflation really was the number one enemy.
Now, we have a self-professed “union guy” from Scranton, Pa., in the White House. Will that make a difference? Amazon.com saw off the threat of a unionized workforce in Alabama, but the degree of political support for unions could yet be critical in determining whether inflation expectations really shift higher.
John Authers Bloomberg Opinion, New York
04/20 14:10 ETMohamed, you’ve discussed in your book (published five years ago) the concept of an inevitable bumpy exit from the Fed after years of supporting the markets. The concerns you voiced then could easily have been written yesterday. What might that eventual rough departure resemble? Are we talking about a taper tantrum or something bigger like the Lehman or LTCM crises?
Kriti Gupta Markets Reporter, New York
04/20 14:11 ETThe good news is that there is still a window for the Fed to exit in a relatively orderly manner, though it is getting smaller and smaller by the day. Indeed, the longer the Fed delays signaling a moderation of its uber loose monetary policy, the smaller the window and the greater the immediate and longer-term risks to the economy, the markets and the credibility of the Fed.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:13 ETAs to what ultimately may happen if the Fed misses the window, I suspect it is somewhere between a May 2013 taper tantrum and a 2008 Lehman moment. Specifically, we would have significant market volatility and a risk of market malfunction, as we experienced during the taper tantrum. Together these could act as a headwind to the economic recovery. But I don’t think we would repeat the sudden stop for the financial system, for banks and for the payments and settlement system (all of which followed the Lehman moment).
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:15 ETI think we’ve already had something very much like the 2013 taper tantrum with the way bond yields rose during the first quarter. That was the worst quarter for bonds in several decades.
Admittedly this was from historically low levels, but the effect on emerging market portfolio flows and currencies was still quite dramatic. Yes, this tantrum did not bring any emerging markets into true crisis conditions, but it was also disappointing to see that the moves many countries had made to reduce their exposure to the dollar didn’t stop a Pavlovian move for the exit by investors when Treasury yields increased.
John Authers Bloomberg Opinion, New York
04/20 14:16 ETI also don’t see the ingredients for a true repeat of Lehman. That financial crisis relied on the genuine shock that Lehman was allowed to go bankrupt, followed by the shock of realizing that this meant that British bankruptcy laws meant that many funds using Lehman as a prime broker were effectively frozen out. I don’t want to sound Pollyanna-ish because there are a lot of risks, but a Lehman moment should be avoidable.
John Authers Bloomberg Opinion, New York
04/20 14:18 ETMohamed, several client questions are rolling in on spikes in yields if that exit strategy is put into motion. Can you provide some color on the extent of the bond reaction, what yield on the 10-year could we be looking at?
Kriti Gupta Markets Reporter, New York
04/20 14:20 ETThere would be a spike in yields... and I suspect that it would happen under all of the following Fed policy scenarios: timely exit, delayed exit, and slamming the breaks. The differences would be in timing and in the shape of the yield curve. In terms of numbers, it would be a 2% to 2.25% 10-year yield initially under the first scenario, more of a hockey stick under the second scenario, and higher than both under the third scenario.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:21 ETI would also add that the response of endogenous (market-based) flows -- important as they serve as stabilizers -- would be highest under the first and weakest under the third. I am thinking here of foreign buying, liability-matching flows, etc...
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:22 ETJohn, a client has asked how wages play out in the inflation debate? If the demographics argument you’ve made is for the long-term, what pressures apply to this economic cycle?
Kriti Gupta Markets Reporter, New York
04/20 14:25 ETI’ve had a lot of fun discussing the demographic argument in my newsletter. In short, virtually all advanced economies face a fall in the working age population, combined with a relative rise in the number of retirees. The argument that this is inflationary, at its simplest, is two-fold; fewer workers means tighter labor supply means greater wage inflation, while more retirees means less saving and more spending, which means greater price inflation.
For a huge discussion of exactly this issue, please take a look at this TOPLive blog from earlier this year, for the Bloomberg book club, when we quizzed Manoj Pradhan about The Great Demographic Reversal, which he co-authored. He strongly argues that demographics helped push inflation downwards over the last four decades, and will now push it up. Others disagree.
John Authers Bloomberg Opinion, New York
04/20 14:27 ETMohamed, a client is asking if markets have concluded there will be an inflection point in which the economy can outgrow market valuations further pricing out excessive value in certain assets?
Kriti Gupta Markets Reporter, New York
04/20 14:30 ETJudging from the price action in different segments, the markets have been attempting a transition from a dominant liquidity paradigm (that is, ample and predictable liquidity injections, with even more available should market volatility arise) to one that is underpinned more by fundamentals. A continued improvement in fundamentals would help accelerate this transition provided inflation risk remains contained, the Fed avoids a policy mistake, and there are no big market accidents due to excessive risk taking (we have already had three near accidents this year).
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:32 ETOne need only look at what happened last week -- Thursday in particular -- to see the possible upside. Virtually every asset class went up in price as markets embraced the trifecta of rapidly improving fundamentals (remember retail sales and initial jobless claims data), continued policy support (remember Powell’s comments), and greater investor inflows.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:34 ETLet’s take this conversation global. Europe seems to be stuck in a doom loop -- low growth environment paired with negative rates and a weaker banking system. If the region has become “Japanified,” how limited is the ECB? Could we see another version of the sovereign debt crisis? And how key is the health of Europe to the global picture?
Kriti Gupta Markets Reporter, New York
04/20 14:35 ETThe ECB has fewer policy options, that’s for sure. Having already adopted negative rates, and with questionable benefits if any, it is hard pressed to do more on rates. Its large-scale asset purchase program is starting to face some supply constraints in some countries. The alternative of starting to exit is a non starter there given the weakness of the economy.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:38 ETAll of which is to say that unleashing the considerable potential of the euro zone is not in the hands of the central bank. Rather, it involves reinvigorating the regional fiscal policy energy that we saw last year and doing a lot more on structural reforms at the national level. Absent that, Europe will again lag in its recovery and the ECB will risk being dragged even deeper into helping the weaker countries avoid debt traps.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:40 ETEurope’s banking system was central to the euro zone crisis, as they had hefty holdings of European government bonds. As the FTSEEurofirst-300 euro zone banks index still trades at only 60% of book value (after hitting a record low only 33% of book at the pit of despair last year), the weakness of the banking sector remains a critical handicap. The ECB continues to use the TLTRO (targeted long-term refinancing operations) to back the banks, which are central to the European economy as it is much more reliant on banking finance than is the U.S. So the banking system could still be a significant force for deflation.
John Authers Bloomberg Opinion, New York
04/20 14:42 ETThe critical point for Europe will be fiscal policy. Last year, the EU managed to thrash out a recovery fund that will effectively mean that the richer countries subsidize poorer ones that tended to be hit worse by the pandemic. That was a huge deal for the future of the EU; but it is still working its way through the various legislative sausage-making machines of the EU’s member countries. The EU has been suffering from slow growth ever since the crisis, and it may well be that this attempt at a coordinated fiscal response is critical in executing a recovery.
To borrow from the title of Mohamed’s book, the ECB really cannot be the “only show in town”; elected politicians need to help out as well.
John Authers Bloomberg Opinion, New York
04/20 14:45 ETA reader is asking what rate of inflation would the Fed need to see - and how long at those levels - before it is forced to act? Several clients have also asked about the unintended consequences for let’s say stocks or emerging markets?
Kriti Gupta Markets Reporter, New York
04/20 14:46 ETIt’s hard to tell as the Fed has refused to provide much operational details about the new policy framework. But reading between the lines and based on what top Fed officials have said recently, I would guess a 2.5% to 3% rate that persists for the last six months of this year would force the Fed’s hand.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:48 ETMany markets, including equities and EM, have benefited from record loose financial conditions and, more generally, investors’ full embrace of the liquidity paradigm underpinned by central banks’ ultra supportive policies. The good news is that this has allowed many companies and corporates to refinance themselves, delaying debt challenges and enabling quite a bit of financial engineering that has benefited Wall Street much more than Main Street. But it does expose market segments to liquidity risks and, as we have seen on a few occasions in the recent past, this is not just an issue for the traditionally less liquid segments.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:52 ETIn terms of a rate of inflation that would force the Fed to raise rates, I think they mean what they are saying about FAIT (Flexible Average Inflation Targeting). It can hit 3% this year without prompting a response, but probably can’t stay there very long.
Round numbers matter a lot for psychology - of consumers, workers, and central bankers alike. If inflation gets much above 3% and stays there into next year, I think we would see a swifter tapering of asset purchases, and earlier rate rises. The most immediate effects would be felt in emerging markets, particularly Latin America (‘twas ever thus).
The stock market stands be the ultimate arbiter of how quickly the Fed feels it can step up rates. The chastening experience of the “Christmas Eve massacre” of 2018 showed that there was a limit to how much of a stock sell-off the Fed could withstand. Personally, I’ve been surprised that stocks have weathered the sharp rise in bond yields as well as they have so far this year. If they don’t repeat that trick, and stage a sell-off, that is when we’ll find out a lot about the Powell Fed.
John Authers Bloomberg Opinion, New York
04/20 14:54 ETOne more attempt to answer the question. I don’t usually go in for technical analysis, but in both 2007 and 2018, when the downward trend in the 10-year yield was briefly interrupted (and widely noted by bond traders), we almost instantly saw a stock sell-off.
The trend line at present is at about 2.6%. So I suspect that the real Alamo-like, I am Spartacus, line in the sand moment comes when the 10-year yield hits 2.6%.
John Authers Bloomberg Opinion, New York
04/20 14:56 ETStocks at record highs, frothiness, tech at extreme valuations -- these are all issues we were discussing in January 2020 pre-pandemic. After a ten year expansion, how likely is it that we’ll see shorter economic cycles as central banks address inflation? Or perhaps longer, but shallower cycles as they don’t? A client has even asked how fragile you think the market is right now?
Kriti Gupta Markets Reporter, New York
04/20 14:58 ETFirst and foremost we have learned that, with committed dovish central banks and markets that are conditioned accordingly, a liquidity cycle can go on for a very long time. But, to quote Herbert Stein, what is unsustainable will prove not to be sustained. Of course, the timing remains especially difficult and, absent clear evidence that the moment of unsustainability has arrived, investors will stay in what has been an incredibly remunerative trade.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:59 ETAll this speaks to the importance of a comprehensive hand-off to more durably improved fundamentals. A successful hand-off can sustain an economic recovery and narrow the disconnect with elevated asset prices over time. Without such a hand-off, economic cycles will become shorter and market levels will be harder to maintain and build on.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 14:59 ETLastly, and this may be the most crucial (but fun!) question -- what are both your thoughts on the creation of the European Super League? What side of the debate do you stand on? I’m sure our readers would love to know...
Kriti Gupta Markets Reporter, New York
04/20 15:01 ETOn football, as the sport which revolves around contact between the foot and the ball is properly known, I am disgusted by the attempt to establish a super league. I’ve written about this in my newsletter; contrary to perception, American sports are socialist, with salary caps, no possibility of relegation, and a draft to let the weakest teams get the best new recruits, while European soccer is capitalism red in tooth and claw; get money and you can buy the best players, lose money and you can get booted out of the league altogether and go bust.
John Authers Bloomberg Opinion, New York
04/20 15:02 ETThe super league has been billed as an excess of greed, but in fact it’s a betrayal of the European soccer dream, which is very similar to what we think of as the American Dream; the Lowell Spinners or the Toledo Mud-Hens are never going to win the World Series, but Brighton & Hove Albion (playing Chelsea in the premiership these days) or Accrington Stanley or Plymouth Argyle just might. People want to have that dream, and they’re prepared to take the risk of annihilation, like good capitalists. And the profiteers who want to set up the new league don’t understand that and want to take away that dream. I hope they fail.
John Authers Bloomberg Opinion, New York
04/20 15:04 ETI have been totally fascinated by this debate. It’s not just an issue of the powerful teams trying to assert themselves more, for their own monetary advantage of course. It also has all sorts of other dimensions: The teams versus the establishment. The privileged versus the less well off but aspiring. The regional dimensions versus the national team and leagues. This can develop into quite a mess. I suspect that circuit breakers will be triggered and that we will end up with the status quo but with the more successful teams getting a bigger share of the pie.
Dr Mohamed Aly El-Erian Bloomberg Opinion
04/20 15:05 ETWe are going to wrap it up shortly. To read more about inflation, markets and monetary policy, click here for a curated First Word channel of actionable news from Bloomberg and select sources. Customize your preferences by clicking “Actions” on the toolbar, or hit the HELP key for assistance.
Kriti Gupta Markets Reporter, New York
04/20 15:07 ETAnd on that note, that’s a wrap! Thank you to our readers for tuning in! Due to the high volume of client questions, we weren’t able to incorporate everyone’s questions into this panel, but we are very grateful for your submissions. We’ll certainly have to have John and Mohamed return for more! In the meantime, feel free to send your own thoughts on the inflation debate to the Markets Live team at and follow the Markets Live blog. And check out Bloomberg Opinion for more of Mohamed El-Erian and John Auther’s analysis.
Kriti Gupta Markets Reporter, New York
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