WEBVTT - Bullard: There Is A Bit Of A Rethink Situation Going On (Audio)

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<v Speaker 1>Earlier today, my co host Kathleen Hayes sat down with

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<v Speaker 1>the Jim Bullard. He is the President of the and

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<v Speaker 1>Chief executive of the Federal Reserve Bank of St. Louis.

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<v Speaker 1>She spoke with him at the Jackson Hole Economics Imposium

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<v Speaker 1>in Wyoming, and Mr Bullard discussed the current economy, also

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<v Speaker 1>a potential rethink in the way that the Federal Reserve

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<v Speaker 1>is approaching monetary policy. Also, we talked about negative interest rates.

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<v Speaker 1>We asked him about negative interest rates. I'm not a

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

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<v Speaker 1>the US because we have other things that we have,

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<v Speaker 1>other firepower that we can use if if necessary. So

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<v Speaker 1>I'm not I'm not thinking in terms of negative rates.

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

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<v Speaker 1>so we're gonna hear a lot about the experience overseas,

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<v Speaker 1>and I am anxious to hear what they have to say.

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

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<v Speaker 1>really attacks on the banking system because the rate of

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<v Speaker 1>return that they get on their UH, on their deposits

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<v Speaker 1>at the FED UH, if you push that into into

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<v Speaker 1>negative territory, then you're really you're really taxing them. This

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<v Speaker 1>was the whole idea of paying interest on reserves. Over

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<v Speaker 1>the last the debate over the last thirty years, the

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<v Speaker 1>banks always argued that they couldn't get interest on reserves

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<v Speaker 1>and that this created a dead asset. And then they

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<v Speaker 1>were this is costing them, and they said they should

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<v Speaker 1>at least be able to get the market rate to

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<v Speaker 1>return on that holding those reserves. And so finally they

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<v Speaker 1>got interest on reserves in two thousand eight in the

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<v Speaker 1>United States. In other countries they had it before, but

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<v Speaker 1>in the United States we've never had it until two

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<v Speaker 1>thousand and now people start to say, well, instead of

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<v Speaker 1>paying you the market right, we're gonna we're gonna put

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<v Speaker 1>it down in the negative territory, so that that is

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<v Speaker 1>could be interpreted as attacks on the banking system. And

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<v Speaker 1>then the banking system that has to pass that on

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<v Speaker 1>to somebody who are they going to pass that on

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<v Speaker 1>to either the shareholders in terms of profits, uh the

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<v Speaker 1>borrowers in terms of rates that the borrowers from the

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<v Speaker 1>bank can get or u to the depositors of the

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<v Speaker 1>bank and start paying them negative rates. And uh so,

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<v Speaker 1>anyway you look at it, that you know, if you

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<v Speaker 1>think about negative rates as attacks on the banking system.

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

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<v Speaker 1>and maybe that's why we've had very mixed results in

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<v Speaker 1>Europe and Japan. A lot of critics out there of

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

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<v Speaker 1>But I think really at the heart of it, one

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<v Speaker 1>of the most fundamental criticisms is this, look, you've you've

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<v Speaker 1>tried all these keeping rates low indefinitely, You've tried bond purchases,

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<v Speaker 1>and the economy is still mired in slow growth and

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

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<v Speaker 1>it's the FED policy, it's uncertainty about it. It's the

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<v Speaker 1>fact that rates are so low they're gonna have to

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<v Speaker 1>move up more at some point. Why go into any

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<v Speaker 1>long term investment? That is one of the big factors

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<v Speaker 1>whole dam back investment, which has been such a weak

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<v Speaker 1>engine of growth right now. How do you answer those

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<v Speaker 1>critics and how do you analyze that well? On the

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

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<v Speaker 1>one thing, one idea I've always had is that the

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<v Speaker 1>private sector has probably a thousand people that talk about

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<v Speaker 1>the FED all day every day around the world. It's

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<v Speaker 1>a twenty four hour a day talk about the FED

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<v Speaker 1>policy world, and the FED only has a handful of

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<v Speaker 1>people that that can respond. So I felt like it's

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<v Speaker 1>important for the policy makers themselves to talk about all

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<v Speaker 1>kinds of issues that come up about uh FED policy,

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

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<v Speaker 1>which is a big complicated object. So they're gonna be

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<v Speaker 1>all kinds of issues all the time, and that's the

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<v Speaker 1>way it's going to be. So I felt it was

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<v Speaker 1>very important for the FED to be involved in this debate.

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<v Speaker 1>Otherwise you're letting the private sector entities drive the debate,

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<v Speaker 1>and they have are taking positions there. You know, they

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<v Speaker 1>have positions in the markets and and they're making bets

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

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<v Speaker 1>you know, I don't think you want them driving policy.

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<v Speaker 1>So anyway, so that's one thought on it. That's one

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<v Speaker 1>of the best defenses i've heard of that, right, the

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<v Speaker 1>voice of the thousands versus the voice of the few.

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<v Speaker 1>But again on this question then of uncertainty, weak spending,

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<v Speaker 1>businesses that don't want to step up, and the FEDS

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<v Speaker 1>saying being at the at the heart of the matter,

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<v Speaker 1>they have distorted and disrupted through the natural workings of

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<v Speaker 1>the financial system and what drives investments, and that that

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<v Speaker 1>is one of the problems right now. I think the

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<v Speaker 1>threat to increase the policy rate, say two basis points

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<v Speaker 1>over the next two years or or a little bit longer, UH,

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<v Speaker 1>that has been looming out there as a threat has

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<v Speaker 1>not been a good description of what we're actually doing,

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<v Speaker 1>and so I have felt like that's distorting investment decisions

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<v Speaker 1>and distorting market pricing in various ways. We're in the

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<v Speaker 1>middle of the second year after Keewee ended, so we

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<v Speaker 1>had all often we moved once at the very end

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<v Speaker 1>of the year. We've had all of sixteen and we

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<v Speaker 1>haven't moved so far this year, and markets have us

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<v Speaker 1>only moving once probably by the end of the year.

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

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<v Speaker 1>moving once a year is not really normalization. That's really

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<v Speaker 1>not a normalization program. That's kind of nothing. So I

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<v Speaker 1>think you should have you should have a better description

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<v Speaker 1>of what's actually going on than what we've got. And

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<v Speaker 1>that's why I came with this other, uh, this other

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

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

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<v Speaker 1>Federal Reserve Chair Janet Yellen in her remarks, she left

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<v Speaker 1>open the door for Federal Reserve rate increase at its

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<v Speaker 1>September one policy meeting, but she also hedged her comments

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<v Speaker 1>in ways that give the bank well an economic data

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<v Speaker 1>dependent out if indeed the economic data is less than sanguine.

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<v Speaker 1>Earlier today, also my co host kathen Hey spoke with

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<v Speaker 1>Jim Bullard, President and Chief Executive of the Federal Reserve

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<v Speaker 1>Bank of St. Louis, and she asked whether there was

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<v Speaker 1>a need for a Federal Reserve rethink on monetary policy uh,

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<v Speaker 1>and wondered if that is what is actually happening. I

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<v Speaker 1>think there is something of a rethink going on. Uh.

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<v Speaker 1>And I think it is because inflation has surprise to

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<v Speaker 1>the low side. Uh. You would have thought I would

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<v Speaker 1>have thought five years ago if you told me where

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<v Speaker 1>we are today with a balance sheet over four trillion

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<v Speaker 1>and a policy rate still uh, you know, under fifty

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<v Speaker 1>basis points, I would have said, oh, you must be

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<v Speaker 1>you know, you must have five percent inflation or something

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

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<v Speaker 1>uh so, I think there is a rethink about about

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<v Speaker 1>models Phillips curve in particular, which has long been at

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<v Speaker 1>the heart of a lot of thinking about the economy.

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

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<v Speaker 1>the last several years, the economy seems to behave differently

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<v Speaker 1>at extremely low interest rates. You've got the Japanese example

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

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<v Speaker 1>So there's over the last five years. So you've got

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<v Speaker 1>a lot a lot going on to think about and

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<v Speaker 1>to adjust to in the world of monetary policy, which

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<v Speaker 1>I find to me, I find it fascinating because it's

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

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<v Speaker 1>what do you think about inflation that's persistently low inflation

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<v Speaker 1>even though central branks around the world have thrown so

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<v Speaker 1>much at it, low to negative rates, endless bond purchases,

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<v Speaker 1>buying corporate bonds, you know, buying e t f s.

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<v Speaker 1>You know, is you getting a feeling that low inflation

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<v Speaker 1>is somewhat incurable? Well, I doubt that I've thought about

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<v Speaker 1>giving a speech about inflation around the world. Let's check

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<v Speaker 1>out Venezuela. Let's check out, Argentina, Let's check out you know,

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<v Speaker 1>other countries that have had very high inflation, right, so

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<v Speaker 1>they seem to have been able to break out of

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<v Speaker 1>the mold of the low inflation environment globally. Uh. Now,

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<v Speaker 1>usually when that happens, there are other problems in the country,

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<v Speaker 1>and both of those countries have a political upheaval of

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<v Speaker 1>various kinds and um usually governments that uh that you

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<v Speaker 1>know want or need revenue from other sources other than

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<v Speaker 1>their tax base, and and so uh, it's definitely they're

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

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<v Speaker 1>I'm not sure we really want to go down that

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<v Speaker 1>kind of a route. So the inflation that, you know,

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<v Speaker 1>when we say we want to hit two percent inflation,

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<v Speaker 1>we want to hit it through you know, very conventional methods,

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<v Speaker 1>and and that seems to not be working quite as

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<v Speaker 1>well as it did in the past globally. In the

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<v Speaker 1>last FOMC minutes, the FED was concerned about a number

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<v Speaker 1>of different areas or from China debt, did you DP

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

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<v Speaker 1>in a nutshell, are you worried what it was. What

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<v Speaker 1>are you and your your team seeing and how much

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<v Speaker 1>is that influence the fed's next decision on an interest

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<v Speaker 1>rate increase. I don't put as much weight on these

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<v Speaker 1>global factors as other people. So let me give you

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<v Speaker 1>my argument. Um. People say that because the world is

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<v Speaker 1>more globalized now, we're going to start paying attention to

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<v Speaker 1>the shock in a remote province of China or something

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<v Speaker 1>happens in Latin America or something like that. That is

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<v Speaker 1>not what economic theory says. Economic theory says, if you've

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<v Speaker 1>got the flexible exchange rates between countries as we do

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<v Speaker 1>between Japan, Europe, and the US, which are the main

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<v Speaker 1>blocks and most of the other main blocks, then then

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<v Speaker 1>when there's a shock in one part of the world,

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<v Speaker 1>the exchange is supposed to move, and that's supposed to

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<v Speaker 1>adjust uh most of you know, offset most of the shock,

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<v Speaker 1>and that then you can conduct independent monetary policies in

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<v Speaker 1>the various countries. And this is the way that you

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<v Speaker 1>stabilize all the economies of the various countries. And I

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<v Speaker 1>think on the whole, that's still the right model to

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<v Speaker 1>have in mind. If you look at some of the

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

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<v Speaker 1>say we're at Jackson Hole. Last year you had the

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<v Speaker 1>Chinese devaluation and big you know, scare about that. I

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<v Speaker 1>said that I didn't not think it was that big

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<v Speaker 1>of a deal. I turned out to be right about that. Um.

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<v Speaker 1>Then we came into January and again people brought up China.

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

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<v Speaker 1>big of a deal. It was right about that. Again,

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<v Speaker 1>we have Brexit. People say, oh my god, if they

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

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<v Speaker 1>They did vote no. I don't see it. So your

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<v Speaker 1>people are over emphasizing how much this can really come

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<v Speaker 1>back to a big economy like the US. It certainly

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<v Speaker 1>causes these things have caused global financial market volatility, but

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<v Speaker 1>that volatility tends to settle down after a while because

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

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<v Speaker 1>How is a trade agreement between the UK and the

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<v Speaker 1>continent going to going to come back to affect actual

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<v Speaker 1>real things in the US through trade relationships or something

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<v Speaker 1>like that. All the estimates are that those effects are

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<v Speaker 1>extremely small. So it's very important for the UK and

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<v Speaker 1>it's kind of important for the continent, it's important for

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<v Speaker 1>the European project, but it's not. No, it's not important

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<v Speaker 1>for the US. In terms of risks of keeping rates

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<v Speaker 1>too low for too long. People are concerned, say, look,

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<v Speaker 1>by the time you can see the excesses or some

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<v Speaker 1>sort of bubble where people have got and we know

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

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

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<v Speaker 1>Because you've got your regime, you said, oh, probably not

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<v Speaker 1>gonna have to raise rates much at all. Meantime, the

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<v Speaker 1>skeptics would say, yeah, Jim, you and your team with

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<v Speaker 1>your view are going to let some problems fester and

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<v Speaker 1>we're gonna have to deal them deal with them later,

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

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<v Speaker 1>I'll be right up front about this. Our framework does

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<v Speaker 1>not address the issue of asset price bubbles. So that's

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<v Speaker 1>just something that is not included. However, if you look

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<v Speaker 1>at most forecasting, typical forecasting models f R b U

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<v Speaker 1>S or Myron Associates or back of Economic Advisors or

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<v Speaker 1>GDP NOW or whatever you want to look at those

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<v Speaker 1>kinds of things, they're not talking about asset price bubbles,

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<v Speaker 1>they just have sort of mechanical relationships and the economy.

0:13:00.640 --> 0:13:03.360
<v Speaker 1>They try to track the business cycle and then they go.

0:13:04.280 --> 0:13:06.920
<v Speaker 1>So I think you want to think about these things

0:13:06.920 --> 0:13:12.240
<v Speaker 1>in judgmental terms, where you're making a judgment, uh, separate

0:13:12.280 --> 0:13:16.400
<v Speaker 1>from the model about how big a problem is asset

0:13:16.480 --> 0:13:20.440
<v Speaker 1>valuation and uh do we would we or would we

0:13:20.520 --> 0:13:23.240
<v Speaker 1>not want to use monetary policy to try to control that.

0:13:23.840 --> 0:13:27.240
<v Speaker 1>This is a very important issue for monetary policy. It

0:13:27.280 --> 0:13:32.040
<v Speaker 1>has been the most important issue over the last twenty years.

0:13:32.120 --> 0:13:35.200
<v Speaker 1>We had the tech bubble, and we had the housing bubble,

0:13:35.320 --> 0:13:37.600
<v Speaker 1>and there was you know, and if we have another bubble,

0:13:37.600 --> 0:13:41.440
<v Speaker 1>there again be a debate about what to do about it.

0:13:41.520 --> 0:13:43.719
<v Speaker 1>So this is none of this is in my framework,

0:13:43.880 --> 0:13:48.240
<v Speaker 1>So that just has to be handled separately. But right

0:13:48.280 --> 0:13:52.600
<v Speaker 1>now I think I think you can make a case that, um,

0:13:52.640 --> 0:13:54.960
<v Speaker 1>you know, we're certainly not in any kind of bubble

0:13:55.120 --> 0:13:57.840
<v Speaker 1>territory the way we were with the housing bubble or

0:13:57.880 --> 0:14:01.160
<v Speaker 1>the way we were with the tech bubble. Uh, maybe

0:14:01.480 --> 0:14:04.760
<v Speaker 1>maybe somebody can make a case. But also I think

0:14:04.800 --> 0:14:08.360
<v Speaker 1>the FED has beefed up its tracking of this kind

0:14:08.360 --> 0:14:11.400
<v Speaker 1>of stuff a lot. We do get a financial stability

0:14:11.480 --> 0:14:15.000
<v Speaker 1>report quarterly, we look at all kinds of nooks and

0:14:15.080 --> 0:14:18.199
<v Speaker 1>crannies in financial markets and try to see if there's

0:14:18.800 --> 0:14:23.840
<v Speaker 1>anything that's catching, uh, that you know, that looks troublesome.

0:14:24.200 --> 0:14:27.080
<v Speaker 1>So I think our radar is much better than it

0:14:27.200 --> 0:14:30.560
<v Speaker 1>than it used to be. But uh, if we do

0:14:30.640 --> 0:14:32.960
<v Speaker 1>get into a bubble situation, the committee is gonna have

0:14:33.000 --> 0:14:34.800
<v Speaker 1>to make a judgment about what to do about it,

0:14:34.880 --> 0:14:38.320
<v Speaker 1>and we'll have to face that. That was Jim Bullard.

0:14:38.360 --> 0:14:41.000
<v Speaker 1>He is the President and CEO of the Federal Reserve

0:14:41.040 --> 0:14:43.760
<v Speaker 1>Bank of St. Louis, speaking with, of course, my co

0:14:43.880 --> 0:14:49.320
<v Speaker 1>host Kathleen Hayes the Jackson Whole Economic Symposium in Jackson Hole, Wyoming,

0:14:49.600 --> 0:14:51.920
<v Speaker 1>and he was speaking in the context of remarks from

0:14:52.000 --> 0:14:55.480
<v Speaker 1>Federal Reserve share Janet Yellen signaling growing conviction that the

0:14:55.480 --> 0:14:58.800
<v Speaker 1>Central Bank will raise short term interest rates in the

0:14:58.800 --> 0:15:02.760
<v Speaker 1>weeks or the month ahead. Of course, their policy meeting

0:15:02.880 --> 0:15:07.320
<v Speaker 1>is set for September and the twenty one, But perhaps

0:15:07.320 --> 0:15:10.520
<v Speaker 1>even as important is the Federal Reserve's decision hinging on

0:15:10.560 --> 0:15:14.680
<v Speaker 1>whether the labor market is showing steady gains. The Labor

0:15:14.720 --> 0:15:19.200
<v Speaker 1>Department will report on September the second about the labor

0:15:19.360 --> 0:15:22.760
<v Speaker 1>conditions in the United States in August. Job gains have

0:15:22.920 --> 0:15:25.640
<v Speaker 1>been averaging about a hundred and ninety thousand a month

0:15:26.200 --> 0:15:29.720
<v Speaker 1>over the past three months. The bond market a little

0:15:29.760 --> 0:15:31.880
<v Speaker 1>bit of a sell off today, the ten year down

0:15:31.960 --> 0:15:35.040
<v Speaker 1>sixteen thirty seconds with the yield of one point six

0:15:35.120 --> 0:15:40.200
<v Speaker 1>two percent, and the thirty year bond down nineteen thirty

0:15:40.280 --> 0:15:44.560
<v Speaker 1>seconds with a yield of two point two nine percent.

0:15:45.400 --> 0:15:48.120
<v Speaker 1>This is taking stock. I'm PIM Fox my co host

0:15:48.240 --> 0:15:50.520
<v Speaker 1>Kathleen Hayes. This is Bloomberg.