NEC Director Kevin Hassett Talks US Debt

0:00HSBC corporate and institutional banking connects capital with opportunity even in the most complex industries Set your business up for success. Search grp.hspc forward slash uscib Bloomberg Audio Studios Podcasts, Radio, News We welcome our Bloomberg TV and Radio audience world wide joining us now is White House National Economic Council Director Kevin Hassett, Kevin as always great to see you looks like the weather is still good down there The jobs are on that side. Job in port today looks to be like a classic case of at least for the White House. Bad news being good news. Unemployment rate goes up not many jobs created average hourly earnings or our week And yet it makes it much less likely that the Fed raises interest rates this month Right well I think that also there's been a lot of news this week that's been very very positive

1:03The last job support was through the roof and it's natural as you know to be a little bit of negative serial correlation Like at a big number and then you get a slightly smaller number The bottom line is that if you go back to the last couple of days we had massive upward revisions to gdp growth A lot of it capital spending which means it's supply side growth which is disinflationary Then we got a PCE numbers where right now if you look three month moving average Then core PCE is running at 2% exactly the Fed's target And top line PCE is running at 1% so food and energy prices are actually helping now rather than hurting And so against that backdrop this jobs report was just about as expected because one thing that maybe folks haven't been factoring it Is that we've reduced federal government employment by more than 300,000 workers And so like private sector jobs were up a lot and the thing that I look for and you and I have talked about for years Is just that the construction of factories factory construction workers was up about 12,000 this month Which means it's up 112,000 since President Trump took office so think about it 112,000 people

2:07Like that's what about the Michigan football stadium And that many people are out there building factories to create future jobs in the US And that's about as bullish as I've seen for the economy since I've been watching it since the 90s Well we like to say context changes everything and while we may have the big house in terms of construction There are still 150, 160 million jobs out there And 46,000 private sector jobs I mean we're hearing also stories that companies are planning to hire fewer people for the holiday season Yeah the economy is growing faster than perhaps expected and maybe picking up some momentum But companies just don't seem anxious to add a lot of people Well don't forget that right now initial claims run employment insurance are the lowest they've ever been all the way back to World War 2 And so companies are holding on to their people and they're holding on dearly because the labor market is so tight And if all of a sudden they have a vacancy it can cost them a lot to replace it

3:08And so the gross flow is down a little bit because everybody's keeping their employees right now And so I think that if you're going to bet against the retail sector going into the holiday season You're probably going to lose your money because I've been talking to the big banks and what's going on with the consumers And also looking back at the literature and what you can say about the consumer is when they feel like they're not going to lose their job And when they feel like the economy is booming they're secure then they're willing to spend They're willing to borrow the buy a new card so odd and we're seeing that very clearly of the data The consumer is very very strong, default rates are low, credit is at a really good place And so all of that stuff says it's going to be a strong holiday season not a week but Some people in this market might disagree with you Kevin just considering the ride they've been through It happens every now and then the terminal bros is your colleague likes to put it But this has been a really punishing bond market it's not just the United States it's globally But here in the US we just witnessed the highest level in 10 year and long 30 year bond yields since 2002

4:09How worried is this government about bond yields and do you plan to do anything about it? Right well obviously in the near term the bond yields are more or less a function of fed policy We respect their independence We think the president thinks and I think Chris Valle and the CTA thinks that we can actually be lower we could talk about that But in the long run looking at like 20 or 30 year things that when economic growth is really really strong Then the real return on capital goes up if you look at say the 30 year tip right now it used to be that You would get inflation but nothing else if you bought a 30 year inflation protected bond Now you're getting 3% and that's because the real return on capital goes up when the economy is booming When the golden age happens and so longer rates perhaps have some upside because of real return being so high But in the end that's very very good for the economy because you have to look at the whole thing And so the only reason those longer rates would go up it's a general equal of room thing is that the economy is so strong Well you know expected inflation in the 30 year is it 2% right now?

5:09You know it's my job to find the black cloud circling your silver lining Yeah that may be like look at the black clouds too That may be the case that we're seeing real rates rise because the economy is doing better But it certainly increases the cost to the government in terms of paying its interest payments And that's one of the big reasons bond market people tell us that we're seeing rates where they are The Treasury Secretary said some time ago that he was going to come out with a plan to start cutting back on US deficits When do we get that and how do you do it? Well well first of all your characterization of what bond markets think I just disagree with Again if you think about a core inflation at PCE right now is running 2% top line 1% And the 30 year inflation protected security is saying that expected inflation is 2% So if there's movement in rates that's saying it's because there's a problem right now with inflation I think is incorrect No no no we're saying here Kevin is that people are worried about the US having to pay so much money in interest about to address that part of it too

6:18So the point is you're absolutely right the interest payment on debt is a very unacceptable high share of government spending right now And of course if you look at the President's budget we have lots of plans to address that But think about this because we've reduced federal employment by more than 300,000 workers That saves us about half a trillion dollars over 10 years So this President is very very serious about deficit reduction and we're taking active steps to make sure it happens But certainly we look forward to working with Congress of the future to make even more progress I do just want to point out that the economist consensus for full year course CPI is something like 3.3% which is above the target But I know you disagree on that point so maybe we set that aside We did hear from the President speaking to time magazine saying certain levels of inflation will also pay off that debt very rapidly Does this White House does some degree plan to inflate its way out of the debt? No, absolutely not And the bottom line is that when you talk about the sort of what the typical economists have been saying You know as you've heard we say on your show over the last few months that it seems like every time I come on

7:21And talk about economic numbers we say every single one surveyed in Bloomberg was wrong And so you have to start to think about like why was it that there wasn't a single economist who saw anything close to within a two standard deviation So the last most jobs ever Well director I just wonder what you what you make of the president's comments then on certain levels of inflation helping to pay off the deficit Well obviously it's a mechanical thing but what I'm saying is that the people who are expecting who are saying that inflation is going to be really really high right now They're just not looking at the right model so they don't understand they're Keynesians They don't understand that a supply-side economy could be great And right now if you go back and look at the monthly treasury statement or something that we're doing a great job We got a lot more revenue because of laffer curve effects We're cutting spending because of reducing government employment And so we're very serious about the deficit and that's very positive for inflation in the long run As long as we're picking on your boss He has recently that it is not Kevin Hatt Kevin Worsh's fault that interest rates are going up He's got a democratic liberal fed board that is against Donald Trump

8:25Do you agree with that and has he given up on the idea or his demand for lower rates? You know I know that Kevin Worsh has a sort of unusual circumstance to manage Which is Jay Powell and what I view as a highly partisan move has refused to resign And he's staying there and so there's basically a majority of Democrat appointees who have in the past voted to increase interest rates And so Kevin's going to manage that, he's going to fix the problem And we have a really really high confidence that he'll do that And I think that right now if you look at federal funds, futures looking at the data And saying that we don't think the fed is going to move in the future I think that's a real positive sign of Kevin Worsh making progress Because I think that Jay Powell fed would have hiked rates right into the election like they've done before Do you leave that Powell should be on the board? What is your view on that Dr. Husset? Well the history of it is that a chairman when his term is up leaves In part to help a new chairman be successful

9:25So you see that in corporate America when there's a new CEO, the old CEO doesn't sit in the room next to him Should the White House ever roll in that? Dr. Husset? No, it's the decision for Jay Powell right now All right, Kevin Husset, thank you so much for joining us We appreciate your time this morning That is the NEC Director, Kevin Husset on everything from where inflation and jobs market are to Powell saying that perhaps that's a job for Kevin Worsh to do something about Powell AI is entering its most consequential phase where scale, safety and sovereignty will determine who leads and who lags Join Bloomberg Tech in London on November 2nd and 3rd as global leaders across business, finance and policy examine the defining trade-offs shaping the future of AI Thank you to our presenting sponsor, Sarah's Force and Supporting Sponsors, IDA Ireland and Schneider Electric Learn more at bloomerglyve.com slash tech London