Should the Federal Reserve Fear Inflation?

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June 30 (Bloomberg) -- Drew Matus, deputy chief U.S. economist at UBS, and Brad Hintz, bank analyst at Sanford C. Bernstein, discuss the work ahead for the Federal Reserve as it faces subdued growth, high unemployment and the prospect of increasing inflation. They speak on “Bloomberg Surveillance.”

On bad weather between january and march and not fixated enough on what the rapid expansion of credit that we're seeing is going to mean for the economy and also this affective quantitative easing which is still in place in which janet yellen will tell you will continue with the growth going forward.

The risk is she is right and when the fed actually goes to exit, they're sitting on a four dollartrillion balance sheet.

Will we look back and say, that was silly?

I think so.

I think we're going to look back and think it was silly because i think we're arty beginning to see wages pick up.

Unemployment rate above 6% and everyone is talking about the participation rate as if we don't have a retiring baby boomers in the world.

What really troubles me is the economist seymour willing to brief does believe what comes out of recession and entrepoèt. an algebra is better.

July 30, october 29 for the summer 17. you can get that at fomcgo.

Which of the states to care about?

I don't care about any of them.

He's taking it out until 2015. inflation we found out last month of 2.1%, cpi.

One-month aberration or is this legitimately starting to build?

We've been talking about this that ubs for a while.

It is coming from many sources.

Less disinflation more from overseas.

More wage inflation.

If you want to be a monetarist, yet the giant balance sheet -- you have the giant balance sheet.

Almost any way try to avoid having to look at inflation and think it is a problem, you end up staring at another thing moving higher.

Rents are another great example as our medical costs.

I'm glad you bring that up.

The affordable care act has been shown was not good for the gdp, at least in the first quarter.

Is it good for the labor market?

No, it's not.

What we know from the massachusetts experience is that in massachusetts, the implement something like the affordable care act and we saw a reduction in small business hiring and the one thing we don't know about is whether it cause more part-time employees.

We have this huge number for time employees janet yellen is coming on being slack in the labor market.

It might be they are permanently , structurally part-time employees because of the affordable care act.

Help us understand, why is it as we talk about inflation, why is this to 10 spread that is a measure of fort inflation grant out 10 years, why is it narrowing?

I wonder how long you can keep a flat yield curve with inflation rising.

Is is a fundamental issue.

You think about fixed income, trade volumes are down.

People are buying any credit they possibly can and taking more risk.

The yield curve keeps getting lower and lower and lower.

What my colleague points out, usually the market doesn't respond until about three months before the first rate hike.

We have the taper to get through and maybe by the end of the taper, people will build a look and anticipate the rate hike.

You may be looking at a q4 event.

Brad hintz, can your banking business run in the quiet that dres matus suggests?

You need yield movement to make the machine know, right?

That is the oil.

We all took the same investment courses.

If you get a yield curve fitting back-and-forth, you get a duration shift -- [indiscernible] that isn't happening right now.

People are buying bonds and putting them away.

A critical question, do agree with bill gross?

I think the key thing to bear mine, one of the reasons we're seeing the behavior we are seeing is because of zero interest rate and this idea they're going to be there forever.

You get better returns for things like dividends and buybacks and no one and fast.

Now you're seeing people beginning to invest.

Why?

They see the end is coming.

The rate hikes will eventually show up.

Everyone can see them six to 12 months out.

And you begin to see normalization of some activity like m&a. i have to get you in trouble here.

Does ubs advocate the token rate increased to show normalcy by the fed?

I would hope they would have been doing rate hikes for the last year.

I think we would be much better shape.

Brad, what would a rate hike do to the banking system?

It would cause trade volume.

A couple of banks it would be very good.

People like schwab or cme or all of those guys would do extremely well with the short and coming up.

But on the fixed income side, the short and coming up is going cause everyone was still on the long end of the curve to move it all down.

Trade volume would go through the roof.

Typically, you get a couple two, three quarters of very good fixed income because the clients are moving their positions around.

It is only later as the yield curve rises that you see fixed income going to a permanent -- scarlet, two guys from two different worlds, banking and economics.

Keep doing it.

Later on we want to get -- there are squared ends.

.92. oh, my god.

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