Bloomberg Surveillance: 'Enormous' Bond Market Volatility

Mohamed El-Erian, Bloomberg Opinion Columnist, guests hosts the show and says the 'enormous volatility' in the bond market needs to be corrected in order to restore the Fed's credibility . Stephanie Kelton, Stony Brook University Professor of Public Policy & Economics, says the Fed has effectively put fiscal policy on autopilot. Steve Chiavarone, Federated Hermes Head of Multi-Asset Solutions, describes the Fed's policy trajectory as headed for a "rocky landing." Stephen Schork, The Schork Group Principal, says traders have become skeptical about supply levels of oil and jet fuel heading into a major travel season . Jeannette Lowe, Strategas Managing Director of Policy Research, says the meeting between President Biden and Xi Jinping won't change the dynamic between the two countries in a major way. Get the Bloomberg Surveillance newsletter, delivered every weekday. Sign up now: https://www.bloomberg.com/account/newsletters/surveillance Full transcript: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. Why don't we move on to what doctor Olrium cares Mohammed, We've got to sit on crude, the idea that crude has essentially collapsed into a bear market, down more than twenty percent from the September highs. We spent this week talking about soft lending, hopes and dreams. Do we have to start thinking about an economic downturn in the not too distant future, well some of them. Some people are talking about this. I mean to see oil prices down more than twenty percent from the highs at the time that there's a conflict going on in the Middle East. It's quite quite and that's feeding into the soft landing. And we're going to talk a lot about this. But the market has now fully embraced not just that the fat has finished this hiking cycle, which I think is correct, but that we're going to see deeper and deeper cuts next year without a recession, and that's the critical assumption that's now built in across markets. I want to get the money question out of the way right away. As CEO of a major two million employee company in America called Walmart, yesterday brought up a d word deflation seared into the fabric of Cambridge, Oxford in the London School of Economics as a study a British deflation of the thirties and forties. America has never faced that have they They haven't, and we've had Japan recently. And the problem with deflation is it discourages people from buying today. However, I want to stress the US is deflation in certain products, food being the primary example, and that's why Walmart we decited it. We don't have general deflation, and I doubt we're going to have general deflation. I mean, I look at the an inflation question and it is a vector of disinflation in place. Clearly we see that. What is your optimism of getting back to John Williams two point zero percent? Richard claired is two point x percent. I think Richard is more likely to be right than John. I think we're going to get stuck in the high twos, and the FED is going to have to make a very difficult decision. Does it live with inflation higher than target because the target itself is too low, or alternatively, does it acknowledge that two percent is the right target and then crushes the economy. I think that's the choice the FED is going to have to make. What's your best guess right now? I think it's going to go for the format. I think the FED will understand that pressing two percent inflation in a world where there's insufficient structural supply is not the right thing to do. So where do you think it leaves this bond market? Let's go through this course right now. We've got a two year at the moment at about four eighty, a ten year at about four forty. Think about where we've been in the last month of Summerhammet had a two year pushing five twenty five high set of cycle, ten year through five percent high set of cycle. How are you thinking about what we come back down to, bearing in mind what we're pricing for right cuts next year. I think we've come down too far to tell your truth. I understand why some people think that we're going further, but if you look at the inflation dynamics, that's harder to get unless we go into recession. If we go into a recession, then the stock market is mispriced, so you can't have both at the same time. Has something changed? I think this is what it goes back to. Has something changed post pandemic? That means we don't go back to the pre pandemic world. That debate, I think is still on going. Mohammed, where'd you come down on it? I think the pre pandemic world was exceptional. It was a world of qui. It was a world of insufficient aggregate demand. And when you have in