00:00The implications of events in the Middle East for the U.S. economy are uncertain.
00:04In the near term, higher energy prices will push up overall inflation,
00:08but it is too soon to know the scope and duration of the potential effects on the economy.
00:15Let's bring in Bloomberg MLive strategist Mark Cranfield. Mark, did Powell strike the right
00:20tone? Did he sound hawkish enough? I mean, he basically said the U.S. economy was doing fine
00:25before this and we don't know how long this is going to last or we don't know anything about
00:28the impact it's going to have. I think he threaded the needle pretty well as investors would have
00:35expected. Really, he's not going to be in a position where he wants to jump the gun on this.
00:41There's always the possibility that Trump finds an off ramp and that the war ends a little bit quicker
00:46than people are expecting. And then, of course, he would look a bit foolish for being too hawkish
00:51about it. And he'll also want to see what other central banks have to say. As you've been talking
00:56about earlier, we've got European Central Bank, Bank of England. European Central Bank in particular
01:00will be one that he'll be watching very closely as well. If there's any need to change interest
01:06rates, particularly in an upward direction, traders would be surprised if the Fed did that before the
01:11European Central Bank did it. So it's a very careful path that he needs to tread. And he also
01:16bear in mind that he's recently seen some jobs data, which was pretty horrible from the United States
01:20as well. And that's the other side of his mandate. It's not just about the inflation side as well.
01:24So, of course, he would want to tread as carefully as possible. But if in three months' time we're
01:30still talking about oil prices, $100 or even higher, then the situation changes dramatically.
01:35And that's why traders have priced out any chance of an interest rate cut in the near future
01:40from the Federal Reserve. They're going much back to a neutral stance. And if you look at the,
01:44as you've got on the screen there, those yields, if you look at that two-year yield, 380 or so,
01:48it wasn't too long ago that we had a 3.3 handle. It's just in the last few weeks. That's
01:52an
01:52incredible change in the two-year. And it's because the private sector, they can see that the
01:58inflation data in the numbers that they can see off the, not so much the ones that reported
02:04officially by the government, but in the private sector, their inflation numbers is already show
02:07they're starting to bite, particularly when you get diesel at $5 a gallon. People know that it's going
02:13to get a lot worse. So Powell has to tread very carefully. And of course, the White House is watching
02:17over his shoulder as well. So he has to pick his language carefully. But it's heading in that
02:22direction where if it stays this way for much longer, the Fed is going to have no choice.
02:26They're going to have to start seriously thinking about raising interest rates.
02:30Well, and he did allow for the fact that tariff inflation had been a little more persistent
02:34than he had been thinking too. Mark, that bear flattening move that you referenced was pretty
02:38violent yesterday. Does it continue or have we done the repricing now and that's it until we get more
02:45signals? This is really the only early stages, really. The jumping in oil prices is so significant.
02:52When you get a $40 to $50 change in oil over a very short period of time, that is going
02:57to play out in
02:58the inflation numbers for quite a while, not just for a space of a couple of weeks. It's going to
03:01stay
03:02there for some time. So the move that you've seen in terms of flattening, if it's anything like what we
03:07saw in
03:072022, there's a lot more flattening to come. That is kind of the benchmark that people will be
03:12thinking about. The last time that inflation changed so quickly as it is now was about four
03:18years ago and the flattening was quite dramatic. This is nothing compared to that so far. We could
03:22even have a situation where you get almost a flat curve right the way from the short end to the
03:28long
03:28end and that would need a massive adjustment from where we are now. That would need oil prices to stay
03:33up for a few months. But considering the fact that we don't have any immediate signs of off ramps,
03:38people won't be discounting that totally. But at the moment, it's very much a week by week basis.
03:44People won't be looking too far ahead. But there's understandably a lot of caution from investors
03:49as much as there is from Jerome Powell.
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