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Stewart: Welcome to another edition of the InsuranceAUM.com Podcast. My name's Stewart Foley. I'll be your host. Welcome back and thanks for joining us. We've got a great podcast for you today. One of the great things about what's been going on lately is that the quality of our guests continue to elevate, and we're thrilled today to have Blerina Uruci, who is the Chief Us Economist in the Fixed Income Division of T. Rowe Price. Blerina, welcome. It's so nice to have you. I can't wait to go over this because this is an incredibly interesting time to be talking about macroeconomics. So welcome, and I can't wait to hear what you have to say.
Blerina: Well, thank you for inviting me. It's a pleasure to be here. I'm excited to dig into it.
Stewart: So before we get going too far, we always want to get to know our guests a little bit. So if you could tell us kind of where you grew up and what was your first job, not the fancy one, and a little bit about your background and how you got to T. Rowe Price.
Blerina: All right. So I'm from Albania. That's where I grew up. I left Albania for my studies, moved to the UK where I did both my college degree as well as grad degrees. My first job was actually in a call center when I left home. It was a way to support myself while studying. Man, it was not easy. We had a list on a whiteboard where the top performers and the bottom performers were always named and shamed. So yeah, that's the first job. Then how did I get to T. Rowe? It's been a journey through three continents. I left home, I studied in the UK, I worked in Africa as a development economist for some time, I worked in the city, and then decided to try out the US. I was always curious about the labor market here. So I moved to New York to work on Wall Street, and eventually wound up with this job at T. Rowe.
Stewart: Wow, that's a great story. I've spent some time in a call center of sorts as well, and that's heavy lifting for sure. So congratulations on your... You are on television, you're on podcast, you're speaking all over the place, and we're thrilled that you had time to talk with us today. I want to get right into some of the key topics here, which is what are your views on the election's impact on the US economy, both in long term and short term, and how do you see that influencing investors' sentiment?
Blerina: So this is very important for us. It's top-of-mind for us at T. Rowe, and we have conversations with investment professionals every day on what will the policy agenda for the US economy look like next year. The key, I think, message is that this new administration wants to disrupt the status quo, and I think this we are very much aware of and really very much take at heart. And so my job is to figure out the areas in which this administration will be disruptive and how it will communicate and how we'll implement those policies. So the four key areas for us are trade, immigration, fiscal policy, and deregulation. And I think this is a lot. The new administration will want to do a lot in the near term in the first 100 days, but this is a lot to be achieved through the legislative agenda.
The calendar can get pretty full on, so I think we are expecting a mixture of executive orders in some areas, and then using the House and the Senate for things like tax extension and fiscal policy. So I think before we discuss individually these areas, I think the general consensus before the election and after is that both candidates didn't have a concrete plan to reduce the fiscal deficit. I think that still remains the case for the new Trump administration so far. We hear of many policies that would eventually reduce tax revenues, but not necessarily of other policies that would make this about raising revenues. What this means for us is that the deficit is wider, that's on net positive for growth because of the fiscal impulse, but also, there is a lot of supply of treasuries. I think this kind of robust supply eventually puts upward pressure on yields, because of the mismatch of the buyers and sellers.
So that's I think the way in which the market has traded so far, although we saw some retrenchments in the long end of the yields in recent days, but we'll discuss that in more detail later. So then I think for us is we're thinking about trade and immigration policy as something that the new administration can address through executive orders, and we're hearing that there are many executive orders in this direction that have already been prepared and will be announced in the first couple of weeks. But fiscal is something that the administration will try to do through the budget reconciliation process. It will try to push through an extension of the TCGA tax cuts that Trump implemented in his first mandate as president, but we may see there some further tax cuts which would on net be a positive for growth. They will make the fiscal impulse slightly more positive.
And then deregulation is a big question mark. We know that the administration wants to push for less red tape. We have a department, a new department that will drive efficiencies in the government. But for me, the big question is do we drive efficiencies by simply reducing red tape? I think long-term, this can be a positive on growth and investor sentiment. Or do we implement efficiencies through cutting employment by the state and local government and cutting spending on procurements. If we do austerity in this way, I think we should be looking at the example in Europe during their austerity drive because this can be a net negative on growth.
Stewart: It's interesting you mentioned trade. Yesterday, there was a lot of headlines around Trump announcing that he was going to put a 25% tariff on Canadian and Mexican imports, and I quote him, "on day one." I can understand how that, long run, brings business back in the US. I can also see how, short run, that could be pretty disruptive. What's your take on that if you've had a chance to come up with one? We don't have to talk about it, but it made headlines yesterday. Today's the 26th of November. This was just yesterday. So just to kind of level set it.
Blerina: Right. And so I think tariffs are going to be a powerful tool that President Trump will use both for economic policy as well as foreign policy and border security. So I think we need to really understand tariffs and have a framework for thinking about them. I would say, as far as the US economy is concerned, tariffs tend to be a one-off shock to the price level. So if you put 25% tariffs on goods that we consume in the US but we import from abroad, the price of that good will increase. It doesn't mean that inflation will increase on a sustained basis, but the price will shift higher. Now, how much the price will change is uncertain because there are some other factors we need to consider. Typically, when the US puts tariffs, and we know this from the 2017, 2018 experience, the dollar appreciates, and so some of that price increase will be absorbed by the dollar strength.
Another element is that the US is a large market. We are one of the biggest importers in the world. The consumer market in the US over the last three years has been one of the strongest, fastest growing. So exporters may want to absorb some of those price increases in order to maintain market share in the US, and then some of the retailers in the US may want to do the same and absorb the shock in their profit margins. So it's unclear. There is a question mark as to how much I think will be passed through to the consumers. We could assume maybe at least a half or a third will be passed on.
And so that's the frame through which I will think about the effect of tariffs on inflation. Of course, higher prices also have the effect of dampening demand for those imported goods, and this is where the long-term effect in the economy comes, because then it gives a chance to domestic economies to over time compete at a more level playing field and build production. But I think given the wage differentials between the US and, say, countries like China, it's questionable how long and what level of tariff we need to really change the playing field for the US. But in the near term, I certainly think there will be winners and losers, and it'll be a disruptive policy that has the potential to push inflation higher.
Stewart: Thank you, that's super helpful. Chair Powell's future at the Fed is a hot topic. When I learned this in school, the Fed chairperson was not like, "This is not a political appointment," blah blah, blah. There's no politics at the Fed. Well, our president-elect has shown his willingness to not necessarily stick to those protocols, if I could just be diplomatic about it. I can completely see how there is direct pressure on the Fed chair, whoever it is. Can you talk a little bit about, from the standpoint of like what do you think that looks like and how do you see the Fed's rate-cut trajectory? And just for whatever it's worth, I think there's a lot of focus on that, and it's not necessarily... It sort of ebbs and flows with the economy, and we've got this sort of arbitrary 2% inflation target. It's a long rambling question, I'm sorry, but give it your best shot.
Blerina: I love this question. There is so much ground to cover. So I think what we can do here is split it in two parts. Let's put some context around Powell's mandate and the interaction between the Fed chair and the president, and then we can move on to the outlook for policy and discuss whether this dynamic between the president and the Fed chair can affect the rates outlook. So with respect to Fed chair, the mandate of the Fed is set by Congress, and the Fed chair has to be approved by Congress committees. His term in office expires in May of 2026. Now we've all heard that President-elect Trump is unhappy with Powell's track record and would like to fire him and replace him with somebody that is more aligned with him in monetary policy. And this really puts us in unchartered territory. I think you can only remove a fed chair if you fire them for cause, and this hasn't happened before.
I think if the administration goes down that path, Fed Chair Powell has said that he would not step to the side and probably take this to court. So I think this could be a drawn-out process. And so I don't know if there is much benefit for the new administration to go down this course, especially if you know that in about a year or so, they'll have the opportunity to have a clean slate and nominate their candidate. But I think it remains to be seen. And this dynamic is so unusual. I think what the new administration is also trying to do is perhaps nominate a shadow Fed chair, and this is where life becomes a bit trickier for me who is a Fed watcher, because then, for investors and market participants, it'll become a bit confusing whose remarks and whose speeches do we monitor and what's giving us a better idea of where monetary policy will be in two years or in three years' time, which matters for the long end of the yield curve.
And so with that in mind, what do I think Fed policy will be over the coming year or so when Powell is likely to be the chair still? Well, I think they will still go ahead and cut interest rates in December, by 25 basis points. For the terminal rate for this business cycle, I'm thinking something around 4%, which is slightly higher than market expectations. So my idea is that we are going to be in this higher-for-longer-rate environment because the US economy has remained fairly resilient. Yes, the labor market has been cooling and employment growth is slowing, but not to levels that would warrant monetary policy to go to accommodative and rates to be below neutral straight away. And so then the question that I get a lot is, well what is the neutral rate for this economy and how do we think about it?
Well, we can do this through a couple of ways. We can have a model-based approach, and most models are telling us that the nominal neutral rate is about 3.5%, but we can also look at where the economy is at. We've been, for over a year now, with interest rates above 5%, but growth has been above potential. The unemployment rate at historical lows, inflation is coming down but is not at target yet. And so my comeback would be, well, this economy is telling us that perhaps the neutral rate is higher than it's been historically, and perhaps the Fed needs to pause at 4% for some time, see the evolution of the economy and then decide whether they need to cut further or not.
And now with more of a question mark about fiscal policy next year, if we'll get extra tax cuts or not, and more uncertainty about inflation because of tariffs, it really feels like an environment where the Fed needs to proceed very cautiously, because at this time we're coming at inflation from above the target. So I think their credibility is, I think, much more sensitive than it was back in 2017 or 2018 when we had the first round of tariffs. So I think for Powell and the FOMC is the committee that decides interest rates at the Fed, it'll be important to basically proceed cautiously, focus on the economy, but really also take on board that uncertainty about fiscal policy and trade policy has increased significantly.
Stewart: That's super helpful. And when I hear you say that Fed will cut rates and inflation is... we've got tariffs coming and whatever else, that sounds like a bear steepener, where the back end of the curve goes up. Do you have an opinion about curve shape given all these policies?
Blerina: So certainly when we think about two factors, higher for longer, that should keep actually the front end and the back end both anchored. And then if we think about fiscal policy where deficits are wide and supply is going to be pretty ample, that should increase the risk premium or the term premium for the long end of the curve. You add to that the fact that inflation uncertainty has also increased, because we've been in a higher inflationary environment for longer, but also because we have this expected tariff shocks and who knows how consumer inflation expectations will react, and we've certainly seen break-evens go higher in the last couple of months indicating markets are expecting a more inflationary environment.
So given all these factors, if we put them together, they point to more upward pressure to the long end of the curve, and also a bear steepening. So I think this is how we are thinking about it. Of course the curve trade has been quite tricky this year, but we're keeping our eye on the medium term, right? We are long-term investors, and looking for opportunities that way.
Stewart: There's been a lot of discussion about US exceptionalism. I'd love to get your... just if we can define what we mean when we say US exceptionalism. But do you think it's losing momentum? How do you see this playing out in terms of economic growth versus slowdown, and how might this compare to trends in non-US markets?
Blerina: I think this is a very interesting question, honestly, and I think we really need to remind what do we mean by US exceptionalism, and here I'll give you an economist definition of it, which is, basically, I'm looking at the growth performance of the US economy over the last three years or so. It's been about 3% annually. When I compare that with similar economies in the Euro area, the UK or Canada, the pace of growth here has been two to three times higher. And then I dig deeper into what are the drivers of that outperformance of growth, and a large chunk of it is the US consumer. This is about 70% or so of US GDP, and we've seen the consumer go out and spend time and again because it's being supported by the labor market, with positive wage growth and also positive employment growth and job security, generally.
And when I look at the labor market over the next 12 months, I see some softening there, but I'm not seeing signs of companies wanting to do mass layoffs. So the unemployment rate will probably stay stable around this historical low rates, and so the consumer will continue to spend and support US growth. So this is what I mean by US exceptionalism. There's also been an element of fiscal support here because the deficits are so large, they're about 7% to 8% of GDP, and you compare that with Europe or Canada where they are 2% to 3% of GDP. So we've had this support, and now what is fiscal going to do next year? We discussed a lot the uncertainty around the new administration, but also, we have tax credits embedded in the CHIPS and IRA that are due to disperse support to US businesses over the next 10 years or so. And it's tricky to see how some of those measures will be reversed by the new administration because they support some of their constituencies as well.
And so this is basically an environment where I think the US can continue to outperform the rest of the world. I think we are also seeing in the US a very strong outperformance of productivity growth. Even before some of this deregulation or reduction in red tape measures that the new administration wants to bring in place, we've seen increased CapEx, we've seen increased labor productivity, and this point to a more sustained pace of growth going forward. So I'm optimistic on the US economy, and I think because of this good trajectory of growth, we can also sustain higher interest rates here as well.
Stewart: It's interesting too that with regard to productivity, I mean, we don't have any data or any history about the impact of AI. It's impossible to know. But I can just tell you, I mean for myself, it just seems like my productivity has gone up, and the things that I can learn, I can learn things more quickly. And so that's a really interesting... is kind of my... leading into my next question, which is related to macro. And when you look at the macro picture, I hear less talk about recession these days, but it's not out of the realm of possibility. So how do you see the risk of recession? How do you see this productivity shaping the economy? And you've touched on inflation, but if you want to expand on it, it would be welcome. And then I've got a couple of fun questions for you on the way out the door, but I have learned so much about macro to this point, and look forward to your outlook.
Blerina: So yeah, let's touch upon these areas one by one. Recession, my probabilities about a US recession remains low, and again, I'll go back to this idea that for me, we watched the US consumer closely, we watched the leading components of the US labor market and measures of labor market momentum and activity, and all those are suggesting that recession probabilities should be low. I think it'll be unusual for an economy that is just coming out of elections where we've had a lot of stimulus and we have some evidence that in election quarters consumer spending increases as well, so it would be unusual for the US economy to enter a recession. Also, we have had this period of easing in financial conditions because the stock market is doing so well, credit spreads have tightened. And so again, I think I don't see a shock there that could cause a recession.
Inflation is an interesting one. We have done tremendous progress, right? We've gone from about 8%, 9% inflation to somewhere around 3%, the high 2’s, but we're not at target yet. And so you mentioned earlier we have this 2% inflation target that might sound arbitrary to many, and I think the way the Fed is thinking about it is that if it doesn't bring inflation down to 2% and changes the goalposts halfway through this inflationary period, it will lose credibility and it'll make it harder for future generations to anchor inflation expectations. So I do think we eventually get down to 2%, but it takes longer. It takes until the end of next year, perhaps first half of 2026. And perhaps the way we get to the 2% inflation target more easily is if the increase in productivity growth we've seen recently is sustained. Again, as economists, it's really hard to predict a positive productivity shock.
But in this episode, in this moment in time, some of the key ingredients seem to be there that have preceded productivity shocks historically. So one of them is a very tight labor market and very expensive labor. We've seen wage growth really pick up a lot, and wage growth in the last, I don't know, four to six quarters has actually been positive net of inflation. Real wage growth has picked up. We've also had a strong technological shift with the rise of AI, and the way we're approaching AI in the US seems to be fairly different from how it's being approached in Europe where it's being regulated more heavily, so that means there's going to be more business adoption.
And so I think with stronger productivity growth, we can have stronger growth or GDP increases that are not necessarily inflationary. And the way to think about it is that the way you get inflation is if demand picks up, but supply can't increase a lot, and so you need a new price to balance demand and supply. But with strong productivity growth, supply increases at the same time as demand, and when both shift higher, you don't necessarily need to change prices in order to ration demand, because we're all more productive. We can all produce more to meet the increased demand in the economy.
Stewart: That is super interesting. I'm such a geek when it comes to the macro side of things, and I've really enjoyed talking with you and getting to know you. You've been a wonderful professor for a day and I certainly appreciate that, and so does our audience. I've got a couple of fun ones for you on the way out the door if you'll play along, if you will. One of the things that struck me was that you said when you left Albania, you went to the UK for your education, and I wonder if you could go back and talk to yourself when you were coming out of school, and early in your career. What advice would you give someone that was around that age today as you look out on the opportunity set that is the US economy, and what advice would you give someone who was interested in the financial services industry as an example?
Blerina: Great question. Let's see if I can start with any wisdom here. But what I would say is what has helped me is to always focus on the long game. And I approached my career with the expectation that early on I wanted to learn as much as possible, I wanted to be closest to the cleverest people I could find, to the best mentors could find, and also not to be afraid to take a step back so that you can take two steps forward. So when I moved from... I had a very senior position in the city of London when I was living in the UK in financial markets, but I decided to take a step back in order to enter the US labor market, and that's been one of the best bets I took, because there's been a clear divergence in the performance of those economies and of those labor markets, and coming here to the US opened up a different set of opportunities for me, a larger set of opportunities.
Stewart: That's really great advice, and good color. I appreciate that. So my last one is you can have a lunch or dinner with three guests. So it would be you, a table of four, you and three guests. You don't have to use all three. It could be one, two, or three. Who would you most like to have lunch with or dinner with, alive or dead?
Blerina: So I can mix and match different...
Stewart: Absolutely.
Blerina: ... eras, right? So I wonder, I'm going to be a geek here and I wonder if I can bring together someone like Janet Yellen, who I think is one of the greatest economists, and she's somehow managed to combine academia, monetary policy, and then be at the Treasury. Not very many people have, men or women, have managed to pull that off, and I wonder if I could put her together with Milton Keynes and Friedman, and see what areas-
Stewart: Wow.
Blerina: ... the three of them would agree or disagree on. I think we could all learn a lot from listening to those three debate.
Stewart: That's the Super Bowl of economists right there. That's a really interesting... would be a really interesting table. This is great. Cool answer. So thanks so much for being on. I've learned a tremendous amount today, and certainly appreciate your views, and I know you're super busy, and thanks for taking the time with us.
Blerina: Thank you so much for having me. This has been really fun.
Stewart: We're very glad you were on. So we've been joined today by Blerina Uruci, Chief US Economist in the Fixed Income Division of T. Rowe Price. Thanks for listening. If you have ideas for podcast, please drop me a note at stewart@insuranceaum.com. Please rate us, like us, and review us on Apple Podcasts, Amazon, Spotify, or wherever you listen to your favorite shows. My name is Stewart Foley. We'll see you next time on the Insuranceaum.com Podcast.
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