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Speaker 1: Earlier today, my co host Kathleen Hayes sat down with

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Speaker 1: the Jim Bullard. He is the President of the and

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Speaker 1: Chief executive of the Federal Reserve Bank of St. Louis.

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Speaker 1: She spoke with him at the Jackson Hole Economics Imposium

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Speaker 1: in Wyoming, and Mr Bullard discussed the current economy, also

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Speaker 1: a potential rethink in the way that the Federal Reserve

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Speaker 1: is approaching monetary policy. Also, we talked about negative interest rates.

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Speaker 1: We asked him about negative interest rates. I'm not a

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Speaker 1: fan of negative rates. I don't think they're likely in

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Speaker 1: the US because we have other things that we have,

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Speaker 1: other firepower that we can use if if necessary. So

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Speaker 1: I'm not I'm not thinking in terms of negative rates.

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Speaker 1: I'm anxious to hear what This is an international conference here,

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Speaker 1: so we're gonna hear a lot about the experience overseas,

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Speaker 1: and I am anxious to hear what they have to say.

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Speaker 1: You know what I've been thinking about negative rates, it's

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Speaker 1: really attacks on the banking system because the rate of

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Speaker 1: return that they get on their UH, on their deposits

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Speaker 1: at the FED UH, if you push that into into

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Speaker 1: negative territory, then you're really you're really taxing them. This

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Speaker 1: was the whole idea of paying interest on reserves. Over

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Speaker 1: the last the debate over the last thirty years, the

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Speaker 1: banks always argued that they couldn't get interest on reserves

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Speaker 1: and that this created a dead asset. And then they

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Speaker 1: were this is costing them, and they said they should

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Speaker 1: at least be able to get the market rate to

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Speaker 1: return on that holding those reserves. And so finally they

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Speaker 1: got interest on reserves in two thousand eight in the

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Speaker 1: United States. In other countries they had it before, but

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Speaker 1: in the United States we've never had it until two

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Speaker 1: thousand and now people start to say, well, instead of

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Speaker 1: paying you the market right, we're gonna we're gonna put

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Speaker 1: it down in the negative territory, so that that is

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Speaker 1: could be interpreted as attacks on the banking system. And

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Speaker 1: then the banking system that has to pass that on

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Speaker 1: to somebody who are they going to pass that on

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Speaker 1: to either the shareholders in terms of profits, uh the

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Speaker 1: borrowers in terms of rates that the borrowers from the

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Speaker 1: bank can get or u to the depositors of the

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Speaker 1: bank and start paying them negative rates. And uh so,

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Speaker 1: anyway you look at it, that you know, if you

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Speaker 1: think about negative rates as attacks on the banking system.

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Speaker 1: That doesn't sound very stimulative when you describe it that way,

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Speaker 1: and maybe that's why we've had very mixed results in

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Speaker 1: Europe and Japan. A lot of critics out there of

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Speaker 1: the FED, too many FED speakers at once, what's being communicated.

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Speaker 1: But I think really at the heart of it, one

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Speaker 1: of the most fundamental criticisms is this, look, you've you've

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Speaker 1: tried all these keeping rates low indefinitely, You've tried bond purchases,

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Speaker 1: and the economy is still mired in slow growth and

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Speaker 1: businesses don't want to invest. Some people argue that in fact,

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Speaker 1: it's the FED policy, it's uncertainty about it. It's the

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Speaker 1: fact that rates are so low they're gonna have to

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Speaker 1: move up more at some point. Why go into any

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Speaker 1: long term investment? That is one of the big factors

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Speaker 1: whole dam back investment, which has been such a weak

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Speaker 1: engine of growth right now. How do you answer those

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Speaker 1: critics and how do you analyze that well? On the

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Speaker 1: idea that there's too much talk about the FED, I mean,

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Speaker 1: one thing, one idea I've always had is that the

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Speaker 1: private sector has probably a thousand people that talk about

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Speaker 1: the FED all day every day around the world. It's

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Speaker 1: a twenty four hour a day talk about the FED

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Speaker 1: policy world, and the FED only has a handful of

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Speaker 1: people that that can respond. So I felt like it's

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Speaker 1: important for the policy makers themselves to talk about all

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Speaker 1: kinds of issues that come up about uh FED policy,

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Speaker 1: all legitimate issues. And we're talking about a macro economy,

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Speaker 1: which is a big complicated object. So they're gonna be

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Speaker 1: all kinds of issues all the time, and that's the

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Speaker 1: way it's going to be. So I felt it was

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Speaker 1: very important for the FED to be involved in this debate.

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Speaker 1: Otherwise you're letting the private sector entities drive the debate,

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Speaker 1: and they have are taking positions there. You know, they

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Speaker 1: have positions in the markets and and they're making bets

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Speaker 1: and stuff like that. I don't mind them commenting, but

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Speaker 1: you know, I don't think you want them driving policy.

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Speaker 1: So anyway, so that's one thought on it. That's one

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Speaker 1: of the best defenses i've heard of that, right, the

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Speaker 1: voice of the thousands versus the voice of the few.

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Speaker 1: But again on this question then of uncertainty, weak spending,

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Speaker 1: businesses that don't want to step up, and the FEDS

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Speaker 1: saying being at the at the heart of the matter,

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Speaker 1: they have distorted and disrupted through the natural workings of

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Speaker 1: the financial system and what drives investments, and that that

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Speaker 1: is one of the problems right now. I think the

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Speaker 1: threat to increase the policy rate, say two basis points

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Speaker 1: over the next two years or or a little bit longer, UH,

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Speaker 1: that has been looming out there as a threat has

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Speaker 1: not been a good description of what we're actually doing,

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Speaker 1: and so I have felt like that's distorting investment decisions

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Speaker 1: and distorting market pricing in various ways. We're in the

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Speaker 1: middle of the second year after Keewee ended, so we

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Speaker 1: had all often we moved once at the very end

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Speaker 1: of the year. We've had all of sixteen and we

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Speaker 1: haven't moved so far this year, and markets have us

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Speaker 1: only moving once probably by the end of the year.

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Speaker 1: So we're just not moving at a pace. You know,

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Speaker 1: moving once a year is not really normalization. That's really

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Speaker 1: not a normalization program. That's kind of nothing. So I

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Speaker 1: think you should have you should have a better description

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Speaker 1: of what's actually going on than what we've got. And

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Speaker 1: that's why I came with this other, uh, this other

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Speaker 1: conception of what's going on. But I do think it's Uh,

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Speaker 1: you can make a case that's distroying investment decisions. Earlier today,

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Speaker 1: Federal Reserve Chair Janet Yellen in her remarks, she left

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Speaker 1: open the door for Federal Reserve rate increase at its

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Speaker 1: September one policy meeting, but she also hedged her comments

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Speaker 1: in ways that give the bank well an economic data

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Speaker 1: dependent out if indeed the economic data is less than sanguine.

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Speaker 1: Earlier today, also my co host kathen Hey spoke with

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Speaker 1: Jim Bullard, President and Chief Executive of the Federal Reserve

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Speaker 1: Bank of St. Louis, and she asked whether there was

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Speaker 1: a need for a Federal Reserve rethink on monetary policy uh,

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Speaker 1: and wondered if that is what is actually happening. I

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Speaker 1: think there is something of a rethink going on. Uh.

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Speaker 1: And I think it is because inflation has surprise to

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Speaker 1: the low side. Uh. You would have thought I would

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Speaker 1: have thought five years ago if you told me where

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Speaker 1: we are today with a balance sheet over four trillion

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Speaker 1: and a policy rate still uh, you know, under fifty

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Speaker 1: basis points, I would have said, oh, you must be

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Speaker 1: you know, you must have five percent inflation or something

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Speaker 1: like that. And that hasn't turned out to be the case. So,

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Speaker 1: uh so, I think there is a rethink about about

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Speaker 1: models Phillips curve in particular, which has long been at

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Speaker 1: the heart of a lot of thinking about the economy.

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Speaker 1: Those relationships don't say to be very good. Um, over

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Speaker 1: the last several years, the economy seems to behave differently

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Speaker 1: at extremely low interest rates. You've got the Japanese example

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Speaker 1: sending out there. You've got the double dip recession in Europe.

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Speaker 1: So there's over the last five years. So you've got

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Speaker 1: a lot a lot going on to think about and

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Speaker 1: to adjust to in the world of monetary policy, which

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Speaker 1: I find to me, I find it fascinating because it's

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Speaker 1: an endlessly fascinating subject. But it's you know, it's not easy. Jim,

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Speaker 1: what do you think about inflation that's persistently low inflation

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Speaker 1: even though central branks around the world have thrown so

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Speaker 1: much at it, low to negative rates, endless bond purchases,

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Speaker 1: buying corporate bonds, you know, buying e t f s.

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Speaker 1: You know, is you getting a feeling that low inflation

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Speaker 1: is somewhat incurable? Well, I doubt that I've thought about

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Speaker 1: giving a speech about inflation around the world. Let's check

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Speaker 1: out Venezuela. Let's check out, Argentina, Let's check out you know,

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Speaker 1: other countries that have had very high inflation, right, so

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Speaker 1: they seem to have been able to break out of

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Speaker 1: the mold of the low inflation environment globally. Uh. Now,

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Speaker 1: usually when that happens, there are other problems in the country,

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Speaker 1: and both of those countries have a political upheaval of

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Speaker 1: various kinds and um usually governments that uh that you

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Speaker 1: know want or need revenue from other sources other than

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Speaker 1: their tax base, and and so uh, it's definitely they're

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Speaker 1: showing the way. Though it's definitely still possible to have inflation.

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Speaker 1: I'm not sure we really want to go down that

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Speaker 1: kind of a route. So the inflation that, you know,

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Speaker 1: when we say we want to hit two percent inflation,

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Speaker 1: we want to hit it through you know, very conventional methods,

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Speaker 1: and and that seems to not be working quite as

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Speaker 1: well as it did in the past globally. In the

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Speaker 1: last FOMC minutes, the FED was concerned about a number

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Speaker 1: of different areas or from China debt, did you DP

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Speaker 1: exchange rate instability, European banks. Let's start with China in

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Speaker 1: in a nutshell, are you worried what it was. What

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Speaker 1: are you and your your team seeing and how much

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Speaker 1: is that influence the fed's next decision on an interest

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Speaker 1: rate increase. I don't put as much weight on these

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Speaker 1: global factors as other people. So let me give you

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Speaker 1: my argument. Um. People say that because the world is

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Speaker 1: more globalized now, we're going to start paying attention to

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Speaker 1: the shock in a remote province of China or something

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Speaker 1: happens in Latin America or something like that. That is

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Speaker 1: not what economic theory says. Economic theory says, if you've

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Speaker 1: got the flexible exchange rates between countries as we do

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Speaker 1: between Japan, Europe, and the US, which are the main

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Speaker 1: blocks and most of the other main blocks, then then

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Speaker 1: when there's a shock in one part of the world,

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Speaker 1: the exchange is supposed to move, and that's supposed to

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Speaker 1: adjust uh most of you know, offset most of the shock,

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Speaker 1: and that then you can conduct independent monetary policies in

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Speaker 1: the various countries. And this is the way that you

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Speaker 1: stabilize all the economies of the various countries. And I

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Speaker 1: think on the whole, that's still the right model to

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Speaker 1: have in mind. If you look at some of the

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Speaker 1: things I've been talked about over the last year. Let's

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Speaker 1: say we're at Jackson Hole. Last year you had the

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Speaker 1: Chinese devaluation and big you know, scare about that. I

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Speaker 1: said that I didn't not think it was that big

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Speaker 1: of a deal. I turned out to be right about that. Um.

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Speaker 1: Then we came into January and again people brought up China.

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Speaker 1: Something's going on in China. I said, it wasn't that

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Speaker 1: big of a deal. It was right about that. Again,

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Speaker 1: we have Brexit. People say, oh my god, if they

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Speaker 1: vote no on Brexit, that's going to be a huge deal.

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Speaker 1: They did vote no. I don't see it. So your

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Speaker 1: people are over emphasizing how much this can really come

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Speaker 1: back to a big economy like the US. It certainly

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Speaker 1: causes these things have caused global financial market volatility, but

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Speaker 1: that volatility tends to settle down after a while because

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Speaker 1: the fundamentals don't really change. And you know, something like brexit,

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Speaker 1: How is a trade agreement between the UK and the

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Speaker 1: continent going to going to come back to affect actual

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Speaker 1: real things in the US through trade relationships or something

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Speaker 1: like that. All the estimates are that those effects are

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Speaker 1: extremely small. So it's very important for the UK and

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Speaker 1: it's kind of important for the continent, it's important for

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Speaker 1: the European project, but it's not. No, it's not important

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Speaker 1: for the US. In terms of risks of keeping rates

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Speaker 1: too low for too long. People are concerned, say, look,

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Speaker 1: by the time you can see the excesses or some

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Speaker 1: sort of bubble where people have got and we know

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Speaker 1: there's been a lot of reaching for yield. Right, Uh,

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Speaker 1: it's too late. What how do you approach that aspect?

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Speaker 1: Because you've got your regime, you said, oh, probably not

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Speaker 1: gonna have to raise rates much at all. Meantime, the

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Speaker 1: skeptics would say, yeah, Jim, you and your team with

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Speaker 1: your view are going to let some problems fester and

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Speaker 1: we're gonna have to deal them deal with them later,

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Speaker 1: and it's not going to be fun. Yeah. Um, so

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Speaker 1: I'll be right up front about this. Our framework does

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Speaker 1: not address the issue of asset price bubbles. So that's

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Speaker 1: just something that is not included. However, if you look

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Speaker 1: at most forecasting, typical forecasting models f R b U

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Speaker 1: S or Myron Associates or back of Economic Advisors or

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Speaker 1: GDP NOW or whatever you want to look at those

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Speaker 1: kinds of things, they're not talking about asset price bubbles,

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Speaker 1: they just have sort of mechanical relationships and the economy.

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Speaker 1: They try to track the business cycle and then they go.

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Speaker 1: So I think you want to think about these things

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Speaker 1: in judgmental terms, where you're making a judgment, uh, separate

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Speaker 1: from the model about how big a problem is asset

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Speaker 1: valuation and uh do we would we or would we

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Speaker 1: not want to use monetary policy to try to control that.

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Speaker 1: This is a very important issue for monetary policy. It

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Speaker 1: has been the most important issue over the last twenty years.

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Speaker 1: We had the tech bubble, and we had the housing bubble,

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Speaker 1: and there was you know, and if we have another bubble,

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Speaker 1: there again be a debate about what to do about it.

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Speaker 1: So this is none of this is in my framework,

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Speaker 1: So that just has to be handled separately. But right

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Speaker 1: now I think I think you can make a case that, um,

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Speaker 1: you know, we're certainly not in any kind of bubble

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Speaker 1: territory the way we were with the housing bubble or

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Speaker 1: the way we were with the tech bubble. Uh, maybe

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Speaker 1: maybe somebody can make a case. But also I think

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Speaker 1: the FED has beefed up its tracking of this kind

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Speaker 1: of stuff a lot. We do get a financial stability

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Speaker 1: report quarterly, we look at all kinds of nooks and

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Speaker 1: crannies in financial markets and try to see if there's

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Speaker 1: anything that's catching, uh, that you know, that looks troublesome.

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Speaker 1: So I think our radar is much better than it

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Speaker 1: than it used to be. But uh, if we do

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Speaker 1: get into a bubble situation, the committee is gonna have

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Speaker 1: to make a judgment about what to do about it,

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Speaker 1: and we'll have to face that. That was Jim Bullard.

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Speaker 1: He is the President and CEO of the Federal Reserve

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Speaker 1: Bank of St. Louis, speaking with, of course, my co

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Speaker 1: host Kathleen Hayes the Jackson Whole Economic Symposium in Jackson Hole, Wyoming,

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Speaker 1: and he was speaking in the context of remarks from

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Speaker 1: Federal Reserve share Janet Yellen signaling growing conviction that the

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Speaker 1: Central Bank will raise short term interest rates in the

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Speaker 1: weeks or the month ahead. Of course, their policy meeting

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Speaker 1: is set for September and the twenty one, But perhaps

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Speaker 1: even as important is the Federal Reserve's decision hinging on

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Speaker 1: whether the labor market is showing steady gains. The Labor

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Speaker 1: Department will report on September the second about the labor

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Speaker 1: conditions in the United States in August. Job gains have

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Speaker 1: been averaging about a hundred and ninety thousand a month

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Speaker 1: over the past three months. The bond market a little

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Speaker 1: bit of a sell off today, the ten year down

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Speaker 1: sixteen thirty seconds with the yield of one point six

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Speaker 1: two percent, and the thirty year bond down nineteen thirty

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Speaker 1: seconds with a yield of two point two nine percent.

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Speaker 1: This is taking stock. I'm PIM Fox my co host

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Speaker 1: Kathleen Hayes. This is Bloomberg.