WEBVTT - Surveillance: Fed Day with Citi's Mann 0:00:00.080 --> 0:00:12.960 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Lee. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:28.720 Bloomberg dot Com, and of course on the Bloomberg. Should 0:00:28.720 --> 0:00:30.400 we bring it Katherine Matt we should pre sure. I 0:00:30.440 --> 0:00:33.280 mean we can start strong with Catherine, City's global chief 0:00:33.280 --> 0:00:36.360 Economists formally heading up the O E c D for 0:00:36.479 --> 0:00:39.120 the Economy Division. Great to have Katherine with us on 0:00:39.159 --> 0:00:41.800 the program. Catherine, just looking ahead to the FETE decision later, 0:00:42.120 --> 0:00:44.239 Let's jump straight to the Q and A and the 0:00:44.240 --> 0:00:46.600 summary of economic projections. What if you got your RYE 0:00:46.600 --> 0:00:49.560 on this morning? Well, I think the real question is 0:00:49.560 --> 0:00:52.320 whether or not there's going to be more dispersion in 0:00:52.360 --> 0:00:55.720 the summary of economic projections because we're already hearing talk 0:00:56.000 --> 0:00:58.840 what we have for some time now, especially since the 0:00:58.920 --> 0:01:03.520 last meeting. UM more more vocalization by some of the 0:01:03.560 --> 0:01:07.240 federalis or of bank presidents, um that, Uh, this march 0:01:07.400 --> 0:01:11.280 towards seventy or a hundred basis point cuts, which is 0:01:11.360 --> 0:01:14.120 what the market is, this marches is really not a 0:01:14.160 --> 0:01:16.920 done deal. And uh you know, they've been saying that, 0:01:17.000 --> 0:01:19.959 I think because of their concerns about the consequences for 0:01:20.120 --> 0:01:23.720 leverage and for spreads UM, and and they're not they're 0:01:23.760 --> 0:01:27.360 not in the majority for sure, but they can voice 0:01:27.400 --> 0:01:32.360 their concerns about the strategy UH through the SMP, and 0:01:32.400 --> 0:01:37.639 that UM will generate greater dispersion in the U SMP. 0:01:37.880 --> 0:01:40.920 How difficult does it make the job of Chairman Pound 0:01:40.959 --> 0:01:44.360 to communicate how much of that is compromised by this 0:01:44.440 --> 0:01:47.520 dispersion in the summary of economic projections that you forecast 0:01:47.960 --> 0:01:52.280 and the descents that we've seen over the last few months. Well, 0:01:52.320 --> 0:01:56.200 I think that that he he could UM use this 0:01:57.040 --> 0:02:02.280 greater dispersion and the descents as evidence of the complexity 0:02:02.360 --> 0:02:05.600 of the situation that the fedoraries are faces in making 0:02:05.640 --> 0:02:08.640 its decisions UM. Because the fact of the matter is, 0:02:08.800 --> 0:02:10.919 if it this was obvious as to what to do, 0:02:11.240 --> 0:02:13.640 there would not be dissents, there would not be dispersion, 0:02:13.919 --> 0:02:16.560 and there wouldn't be vocalization by other bank presidents about 0:02:16.560 --> 0:02:19.120 the range of concerns UH that and data that they 0:02:19.120 --> 0:02:23.480 are looking at. So you can turn this towards a 0:02:23.800 --> 0:02:28.280 the complexity the challenges here is what we're thinking about 0:02:28.360 --> 0:02:31.240 here is what we are weighing. Different of our bank 0:02:31.280 --> 0:02:34.320 presidents weigh it differently because that's exactly what they're supposed 0:02:34.320 --> 0:02:36.959 to do. They're supposed to be representing their district. UM. 0:02:37.080 --> 0:02:41.640 So you can turn this away from the uh single 0:02:41.760 --> 0:02:46.160 voice of the FED too. Why there is this dispersion, 0:02:46.639 --> 0:02:49.400 doctor Man? Is this a meeting? And as I said, folks, 0:02:49.400 --> 0:02:51.880 this will be an historic meeting given all the economics 0:02:51.880 --> 0:02:54.960 that Katherin Man follows every day, along with the finance 0:02:55.040 --> 0:02:57.959 and banking of the repo debate. Is this a meeting 0:02:57.960 --> 0:03:00.320 where this FED will be more focused on the clear 0:03:00.360 --> 0:03:06.880 and present danger than trying to game out the future. Well, 0:03:07.320 --> 0:03:12.840 the clear and present danger UM affects your trajectory in 0:03:12.880 --> 0:03:16.640 the longer term, so you can't really separate the two 0:03:16.680 --> 0:03:20.320 of them. UM. And so they have to be both 0:03:20.360 --> 0:03:25.240 responsive to the current environment. UM. Particularly, they have to 0:03:25.320 --> 0:03:29.440 recognize that if they don't do what the market expects 0:03:29.480 --> 0:03:34.160 them to do, there will be financial turbulence consequences, and 0:03:34.360 --> 0:03:38.880 that that that financial turbulence does feed through to the 0:03:38.880 --> 0:03:41.920 real economy. And the question is how much does it 0:03:42.040 --> 0:03:44.680 feed through? And I think the different ones of the 0:03:44.720 --> 0:03:48.320 bank presidents think differently about how much passed through of 0:03:48.360 --> 0:03:50.760 turbulence to the real economy that we need to worry 0:03:50.800 --> 0:03:53.040 about it, that they need to worry about um. And 0:03:53.080 --> 0:03:56.640 that's why you're ending up with these different views of 0:03:56.640 --> 0:03:59.480 of the situation and also the extent to which financial 0:03:59.480 --> 0:04:05.600 turbulent is a necessary part of the adjustment towards a 0:04:05.760 --> 0:04:10.080 more normal rate in for the policy rate. I'm gonna 0:04:10.080 --> 0:04:11.800 put out a chart on Twitter. This is one of 0:04:11.840 --> 0:04:13.920 the repot charts we look at with the yield up 0:04:13.920 --> 0:04:17.640 at three. We don't I know the charts work on 0:04:17.760 --> 0:04:20.599 Radio Beautiful. You'll see him first on Twitter. I'm Bloomberg 0:04:20.640 --> 0:04:23.240 Radio John. To be clear, we don't have a quote 0:04:23.320 --> 0:04:26.120 yet for this morning up or down from the three 0:04:26.160 --> 0:04:29.040 point nine three statistic of yesterday. We'll get that a 0:04:29.080 --> 0:04:32.280 little bit later this morning. A little bit later this afternoon, 0:04:32.400 --> 0:04:34.680 there will be a news conference and a smart journalist 0:04:34.720 --> 0:04:36.919 perhaps his name will be Michael McKee, will put his 0:04:36.960 --> 0:04:38.880 hand up and he will ask the chairman a question 0:04:38.920 --> 0:04:42.760 about what has been happening with overnight rates. And Catherine, 0:04:42.760 --> 0:04:45.440 I just wonder how the chairman puts this in plain English, 0:04:45.839 --> 0:04:48.200 and how he puts the response to the Federal Reserve 0:04:48.240 --> 0:04:51.400 in plain English as well. Well. Again, I think he 0:04:51.440 --> 0:04:54.600 has to go back to the to the word complexity. Um. 0:04:54.640 --> 0:04:59.360 It's a very complex system. Um. And the market can 0:04:59.400 --> 0:05:05.080 be very reactive, and the Federal Reserve responded um. And 0:05:05.200 --> 0:05:08.240 so you know, it's a it's a situation that that 0:05:08.320 --> 0:05:10.000 he's not going to be able to put it into 0:05:10.080 --> 0:05:11.960 plain English. I mean, I think he may use the 0:05:11.960 --> 0:05:14.320 plumbing word because it is kind of a matter of plumbing. 0:05:14.560 --> 0:05:18.799 Plumbing sometimes gets stopped up. And when when that happens, uh, 0:05:18.839 --> 0:05:20.680 you know, the water comes out in places that you 0:05:20.720 --> 0:05:22.839 didn't expect. And I think that's what we're seeing here, 0:05:23.160 --> 0:05:26.880 and the plumbers came in and fixed it. Okay, Catherine Man, 0:05:26.920 --> 0:05:30.520 thank you so much, greatly appreciate you stopping by through 0:05:30.560 --> 0:05:33.400 this important FED day. Doctor Man, head of economics at 0:05:34.320 --> 0:05:52.200 City Group. As well, we have the right guest, John Farrell, 0:05:52.279 --> 0:05:55.080 long ago and far away. Um. He would throw pieces 0:05:55.080 --> 0:05:58.040 of chalk at students that didn't get at Boston University 0:05:58.480 --> 0:06:00.640 as professor of finance for the as you that don't know, 0:06:00.760 --> 0:06:05.360 Bu's finance program is truly world class, sounds people, So 0:06:05.720 --> 0:06:08.520 he will it is gruesome and he will now explain 0:06:09.160 --> 0:06:12.040 the repot market Why did you begin, John with the 0:06:12.120 --> 0:06:14.719 grilling of Jack Ablin. You know, I love about this 0:06:14.760 --> 0:06:17.839 program sometimes when Tom tells me what to lead with 0:06:18.200 --> 0:06:20.200 and then allows me it's this is about as far 0:06:20.279 --> 0:06:22.560 as you go when you just you know, it's on 0:06:22.600 --> 0:06:26.360 a shortly ship. Want to black Hawks hockey, but we're 0:06:26.400 --> 0:06:28.359 not going to do that. Why don't you Jack Camplin, 0:06:28.600 --> 0:06:32.600 Let's introduce the guest properly, Jack Camplin, Crescent Wealth Advises, 0:06:32.640 --> 0:06:35.440 founding partner and see Io. Good morning to Jack, Good morning. 0:06:35.760 --> 0:06:38.320 Let's begin with this issue. Just walk us through it. 0:06:38.480 --> 0:06:41.640 What is happening? Well, I mean it's a simple matter 0:06:41.760 --> 0:06:45.839 of shortage of overnight cash. The question is there is 0:06:45.880 --> 0:06:48.600 no single source that that we can look at to 0:06:48.680 --> 0:06:52.280 say where did this cash go? Um. Some of it 0:06:52.800 --> 0:06:56.359 perhaps related to the fact that the world expected the 0:06:56.400 --> 0:07:00.760 Federal Reserve to lower interest rates this afternoon, so they 0:07:01.160 --> 0:07:05.160 possibly put rates they put their cash out longer dated. 0:07:05.800 --> 0:07:10.320 Some of it may relate to the corporate tax payments 0:07:10.840 --> 0:07:14.400 that are due UM. But the fact is that there 0:07:14.520 --> 0:07:17.440 was a shortage of overnight cash and as a result, 0:07:17.560 --> 0:07:20.119 I think we saw the overnight rate spiked to nearly 0:07:20.200 --> 0:07:25.160 seven percent yesterday. UM FED has come back and injected 0:07:25.720 --> 0:07:28.880 cash into the system. UM. And for right now, I'm 0:07:28.920 --> 0:07:32.680 not really putting anything more into it. I think it's 0:07:32.720 --> 0:07:35.680 just a supplied demand issue. If it were to persist, 0:07:36.360 --> 0:07:39.480 then perhaps there's a trust issue that we have to concern. 0:07:39.520 --> 0:07:41.120 A lot of fact is going into this company is 0:07:41.120 --> 0:07:43.680 pulling cash from money market funds to pay tax one 0:07:43.720 --> 0:07:46.560 of them, the government selling treasuries at Gloody treasuries, a 0:07:46.600 --> 0:07:49.600 scarcity at dollars, all of that stuff coming together. Some 0:07:49.640 --> 0:07:54.800 people are looking at bank cash reserves declining and ultimately 0:07:54.840 --> 0:07:58.120 contributing structurally to what has been happening not once, but 0:07:58.240 --> 0:08:01.880 three times over the last wealth months. Jack, just wocus 0:08:01.920 --> 0:08:06.400 through that. Why it's so significant? Yeah, I think that um, 0:08:06.560 --> 0:08:11.040 you know, having the cash reserves available UM is part 0:08:11.120 --> 0:08:13.840 and parcel of the bankings, you know, keeping the banking 0:08:13.880 --> 0:08:19.040 system operating. UM. And I think having clients that are 0:08:19.680 --> 0:08:23.080 you know, drawing on that cash, um, you know, is 0:08:23.280 --> 0:08:25.600 is putting us strand on the system. I know it's 0:08:25.600 --> 0:08:28.160 not Boston University, but we gotta assume it. Come Loudy 0:08:28.280 --> 0:08:32.079 Holding Court here from Villanova and Finance Angela Mantalotis, who wrote, 0:08:32.080 --> 0:08:34.800 with our jury is the brilliant explainer on all this, 0:08:35.360 --> 0:08:39.760 and the single sentence from mantalotis is the idea that 0:08:39.880 --> 0:08:44.480 the repo market is twenty three percent the size of 0:08:44.520 --> 0:08:47.760 the treasury market, and in the last crisis they were 0:08:47.800 --> 0:08:53.440 the same size. We have regulated ourselves to a smaller 0:08:54.080 --> 0:08:58.640 plumbing liquidity market, haven't we. Jamie Diamond says, we're constraint. 0:08:58.880 --> 0:09:02.680 We we are. Although I think the FED has expanded 0:09:02.720 --> 0:09:08.320 the number of dealers which then that can borrow directly 0:09:08.400 --> 0:09:10.400 from the FED. So I think what they've done is 0:09:10.440 --> 0:09:14.600 while the size of the market has diminished, the number 0:09:14.600 --> 0:09:17.360 of players that can go directly to the FED has 0:09:17.840 --> 0:09:20.400 We're going to see more of these interventions by the FED, 0:09:20.480 --> 0:09:23.320 like yesterday and presume today as well. Yeah, so I 0:09:23.360 --> 0:09:25.839 think that there there are some offsets, But you're right. 0:09:25.880 --> 0:09:29.160 I think the market has has shrunk, and I think 0:09:29.200 --> 0:09:33.679 it you know, too many investors. This hearkens back to 0:09:33.720 --> 0:09:35.840 the find you know, the beginnings of the financial crisis, 0:09:35.880 --> 0:09:40.440 when we were having liquidity upsets, um the auction rate 0:09:40.520 --> 0:09:43.520 securities and all that that we're part of, you know, 0:09:43.559 --> 0:09:47.520 the funding crisis. Uh, this isn't a trust issue. I 0:09:47.559 --> 0:09:49.800 don't think it's a trust issue. I think I think 0:09:49.800 --> 0:09:53.120 it's right now, it's a supply demanding equity issue. Pretty 0:09:53.160 --> 0:09:56.240 much everyone says this isn't a trust issue. Yeah, I 0:09:56.240 --> 0:09:58.200 don't think it is. I think, you know, like I said, 0:09:58.320 --> 0:10:01.040 I think we'll let it play out and if if, 0:10:01.080 --> 0:10:04.240 if we see that, uh, the overnight rate is in 0:10:04.280 --> 0:10:06.560 the threes a week from now, then you know, we'll 0:10:06.600 --> 0:10:09.120 re reassess. What are the chances that the FED needs 0:10:09.160 --> 0:10:12.160 to stop building up the bounty sheet again. Well you 0:10:12.200 --> 0:10:14.560 know that's you know, that's a slippery slope. But it 0:10:14.600 --> 0:10:17.480 looks like they may have to do that. Um. I 0:10:17.720 --> 0:10:20.920 I suspect, you know, and I've been saying that they've 0:10:20.960 --> 0:10:27.040 created this nanny state for corporate America, UM with the 0:10:27.080 --> 0:10:29.920 low rates and low overnight rates and low you know, 0:10:30.080 --> 0:10:34.040 tenure rate. UM. You know, nearly ten percent of US 0:10:34.120 --> 0:10:38.760 companies listed our zombie companies right now. And the question 0:10:38.840 --> 0:10:41.000 is which way does the FED want to go continue 0:10:41.000 --> 0:10:45.600 to ease and just pander to this issue, or get 0:10:45.679 --> 0:10:49.120 tough and try to reconcile Jack. Nobody cares the Cubs 0:10:49.160 --> 0:10:51.280 lost to the Reds last night for two What is 0:10:51.320 --> 0:10:53.760 this about? The Cubs have to be in the playoffs, 0:10:53.840 --> 0:10:57.480 the Cubs are holding on by their fingernails. Um, I'm 0:10:57.520 --> 0:11:00.400 hopeful they'll be in a wild card game against the 0:11:00.480 --> 0:11:04.600 Nationals and perhaps they can the Fed can use Wrigley 0:11:04.640 --> 0:11:08.360 Field as a collateral. John, That's what we'll do, Jack Evelyn, 0:11:08.480 --> 0:11:14.240 great to see you. Advisors love it. It'd be very cool. 0:11:14.400 --> 0:11:16.480 I love it. I could see him there. I love 0:11:16.520 --> 0:11:21.480 American football. That's a joke. So it's so easy to 0:11:21.559 --> 0:11:38.120 get you guys. So what is a mid cycle adjustment? 0:11:38.120 --> 0:11:42.400 Stephen King joining us now HSBC Senior Economic Advisor. Stephen, 0:11:42.440 --> 0:11:45.400 just help us answer that. What is a mid cycle adjustment? 0:11:45.440 --> 0:11:48.559 And is that what you expect? Well, we had them 0:11:48.559 --> 0:11:51.280 in the past. We had one in the mid nineties, 0:11:52.160 --> 0:11:54.680 one that came after the Asian crisis as well, which 0:11:54.679 --> 0:11:57.960 is sort of time. It's whether they're kind of a 0:11:58.080 --> 0:12:01.760 poolse to refresh as more reduction interest rates that doesn't 0:12:01.840 --> 0:12:05.120 lead very far, keeps the economy going. You have a 0:12:05.160 --> 0:12:07.440 kind of soft landing, and then everything sort of motors 0:12:07.440 --> 0:12:10.600 back up to too normally if you like. The The 0:12:10.640 --> 0:12:12.960 evidence though, is that most times when the said tries 0:12:12.960 --> 0:12:15.760 to achieve one of these mid cycle adjustments, it discovers 0:12:15.760 --> 0:12:19.559 that actually it's got a a late cycle problem because 0:12:19.600 --> 0:12:21.400 it ends up cutting interest rates much more than it 0:12:21.440 --> 0:12:24.439 had originally expected. And that's partly because you end up 0:12:24.480 --> 0:12:28.599 with a significantly weaker economy than they had originally anticipated. 0:12:29.080 --> 0:12:30.839 Is that what you expect to happen here, Steve, is 0:12:30.880 --> 0:12:33.760 that your base case on how this plays out? Well? 0:12:33.840 --> 0:12:37.079 I think at the moment it's difficult to look too 0:12:37.080 --> 0:12:39.839 far into the future of HSBC had a couple of 0:12:39.920 --> 0:12:43.240 rate cuts coming through today and then in October. There's 0:12:43.240 --> 0:12:45.280 a possibility of stuff happening next year that we're not 0:12:45.280 --> 0:12:47.560 forecasting it currently. But I think one of the big 0:12:47.559 --> 0:12:51.080 debates about the U S economy is is how late 0:12:51.160 --> 0:12:53.240 cycle is it. And there are a couple of things 0:12:53.240 --> 0:12:54.839 that I think the said would be worried about. One 0:12:54.840 --> 0:12:58.200 of course, slope of the yield curve and inverted yield 0:12:58.200 --> 0:13:00.600 curve or flattening yield curve is often in would signal 0:13:00.720 --> 0:13:03.720 of a downswing to come UM. And the other thing 0:13:04.040 --> 0:13:05.880 they might worry about is the fact that the unemployment 0:13:05.960 --> 0:13:08.040 rate is so incredibly low UM. And when you've had 0:13:08.040 --> 0:13:11.640 a low unemployment rate, it sounds like great news, but 0:13:11.760 --> 0:13:14.240 often it can be a sign of wage pressures beginning 0:13:14.240 --> 0:13:16.720 to build. Maybe a squeeze in margins may have an 0:13:16.760 --> 0:13:19.440 impact on capital spending, and all those things might be 0:13:19.520 --> 0:13:22.280 issues to the final issue, of course, is the fair 0:13:22.360 --> 0:13:25.760 worrying about the sort of geopetical situation, and in particular 0:13:25.800 --> 0:13:28.040 that the trade war between the U S and China. 0:13:28.280 --> 0:13:30.160 To your book of eight years ago, is it a 0:13:30.160 --> 0:13:33.920 grave new world? I mean, shouldn't we be optimistic about 0:13:34.040 --> 0:13:39.079 stunning unemployment rate resilient US economy relative to everything else? 0:13:39.360 --> 0:13:41.720 Are we going into this press conference? Is a grave 0:13:41.720 --> 0:13:45.080 new world? Well, the good news is that the US 0:13:45.120 --> 0:13:49.439 has done better than other countries on unemployment UM and 0:13:49.520 --> 0:13:51.840 so on and so forth. That they're not such good 0:13:51.840 --> 0:13:53.640 news as the US has a problem which has been 0:13:53.640 --> 0:13:57.280 shared in other countries too, which is a productivity growth 0:13:57.280 --> 0:13:59.880 has been incredibly low UM, and that's given you a 0:14:00.040 --> 0:14:02.640 kind of a situation where unemployment is low but wage 0:14:02.640 --> 0:14:05.680 growth is very, very weak in general, and people have 0:14:05.760 --> 0:14:07.880 felt that they've been left behind. That's particularly true of 0:14:08.440 --> 0:14:11.800 the number of different American regions. So although you have 0:14:12.120 --> 0:14:15.080 on the surface evidence of an economy that's doing better 0:14:15.120 --> 0:14:17.760 than others, there are a lot of I think weak 0:14:17.840 --> 0:14:21.120 links within that economy is one reason why I think 0:14:21.160 --> 0:14:23.920 the US has become more protectionists, trying to explain why 0:14:23.960 --> 0:14:26.520 it has these weak links. And of course one narrative 0:14:26.560 --> 0:14:29.400 of SUMILARI is to blame somebody else, whether it be China, 0:14:29.520 --> 0:14:32.000 Mexico or elsewhere. Stephen King, I just put out a 0:14:32.080 --> 0:14:35.400 charter on Twitter Radio you'll see it first, Bloomberg Radio worldwide. 0:14:35.400 --> 0:14:38.360 You see it first, charts on radio. Well, there's a 0:14:38.400 --> 0:14:41.280 lot going earlier, and Stephen King, it's something I've never seen. 0:14:41.320 --> 0:14:44.200 This is a custom chart from our Ira Jersey of 0:14:44.240 --> 0:14:47.200 the repo market is the size of the treasury market, 0:14:47.560 --> 0:14:50.480 and as you well know, Dr King, basically we fell 0:14:50.520 --> 0:14:53.520 off a cliff in two thousand nine where we said 0:14:53.520 --> 0:14:56.360 we're never going to repeat two thousand and seven again, 0:14:56.880 --> 0:14:59.680 and the size of that repot market is back to 0:15:00.000 --> 0:15:04.880 eighteen eighty one nine eight zero. Have we gotten ourselves 0:15:04.880 --> 0:15:09.320 into trouble because we have shrunken our markets hoping never 0:15:09.400 --> 0:15:15.120 to never to repeat two thousand seven two. I think 0:15:15.120 --> 0:15:17.840 there are some difficulties out there. The repose situation currently 0:15:17.840 --> 0:15:20.840 I'm not so sure about. But I think that one 0:15:20.840 --> 0:15:24.080 thing that has happened is that the combination of zero 0:15:24.200 --> 0:15:26.600 rates q E and so and so forth has definitely 0:15:26.720 --> 0:15:31.280 lifted financial asset prices a long long way, even though 0:15:31.720 --> 0:15:35.240 underlying excellent performance has actually not been that great. That 0:15:35.320 --> 0:15:37.640 a little gap has opened up between financial hope and 0:15:37.680 --> 0:15:41.840 economic reality. And that gap, I think is something which yeah, 0:15:41.840 --> 0:15:44.640 it's sort of it's created an obvious problem for central bankers. 0:15:44.680 --> 0:15:47.640 You think, well, have we just created another bubble in 0:15:47.680 --> 0:15:50.200 the attempt to dig ourselves out of the hole that 0:15:50.240 --> 0:15:53.880 was created by the global financial crisis. When we get QT, 0:15:54.200 --> 0:16:00.200 where does the financial hope go? Um? Well, QT doing 0:16:00.240 --> 0:16:03.440 because you're trying to sort of unwind the addiction that 0:16:03.480 --> 0:16:07.320 has been created on on the continuous easy money. But 0:16:07.440 --> 0:16:09.120 as we've seen from the fair, it's proved to be 0:16:09.160 --> 0:16:12.600 perhaps her a more tortuous process than they themselves had 0:16:12.640 --> 0:16:15.600 originally expected. And they think one lesson, it's like a 0:16:15.680 --> 0:16:17.840 Japanese lesson in one sense from the experience of the 0:16:17.880 --> 0:16:20.840 last two or three years, is that even when central banks, 0:16:20.880 --> 0:16:23.280 including the fad of trying to return to some kind 0:16:23.280 --> 0:16:27.600 of monetary normality, they've really struggled to do it because 0:16:27.720 --> 0:16:29.880 each time they've done it, they've had to reverse much 0:16:29.920 --> 0:16:32.440 more quickly than people had originally expected. You go back 0:16:32.480 --> 0:16:34.600 a year or two, everyone was saying this is going 0:16:34.640 --> 0:16:36.360 to carry on raising rates for a long period of time. 0:16:36.440 --> 0:16:39.000 Suddenly with a handful of months, they're going into the 0:16:39.040 --> 0:16:41.360 can tire. You the reverse direction and the one sense 0:16:41.400 --> 0:16:43.960 they're being dragged down by events elsewhere in the world, where, 0:16:43.960 --> 0:16:46.360 of course interest rates Europe, Japan and some that's still 0:16:46.400 --> 0:16:48.560 absolutely at rock bottom. Stephen, I want to pick up 0:16:48.600 --> 0:16:50.560 on the issue with Europe right now. There is a 0:16:50.560 --> 0:16:53.920 big focus on monetary policy impotence. So many people come 0:16:53.920 --> 0:16:55.480 on this program and say this is what I think 0:16:55.520 --> 0:16:57.640 the central Bank will do. Now, let me tell you 0:16:57.640 --> 0:17:00.520 why it won't work. Olivia blind Shut of the Pitterson 0:17:00.560 --> 0:17:02.160 Institute for me of the I m F. I'm sure 0:17:02.160 --> 0:17:03.920 you know him. While Stephen was out on Twitter over 0:17:03.920 --> 0:17:06.359 the weekend and he had a really nice little sweet 0:17:06.359 --> 0:17:07.680 storm and I just want to bring you one line 0:17:07.680 --> 0:17:09.919 from it. I suspect we may be close to the 0:17:09.920 --> 0:17:13.160 reversal rate, Stephen. How important is that concept right now 0:17:13.240 --> 0:17:15.440 and how close are we to it in some big 0:17:15.480 --> 0:17:19.840 economic blocks. So in Europe this is a particularly important issue. 0:17:19.920 --> 0:17:22.600 So it really works on the basis that the more 0:17:22.680 --> 0:17:27.000 negative interest rates go, these official interest rates go, the 0:17:27.080 --> 0:17:31.119 more difficult it becomes for banks to be significantly profitable. 0:17:31.400 --> 0:17:33.960 And one reason for that is that banks, for all 0:17:34.000 --> 0:17:36.719 sorts of social reasons more thing any house, finding very 0:17:36.720 --> 0:17:42.240 difficult to offer their customers negative nominal interest rates um, 0:17:42.359 --> 0:17:44.919 and so the consequences that they end up paying too 0:17:45.040 --> 0:17:49.159 much to fund their own institutions, and their profit margins 0:17:49.200 --> 0:17:51.320 are in never to be squeezed. As a consequence of that, 0:17:52.080 --> 0:17:55.280 I know that squeeze comes through. It means that effectively 0:17:55.320 --> 0:17:57.800 the kind of the monthly plumbing doesn't work quite so 0:17:57.840 --> 0:17:59.920 well because in the old sort of textbook, ex a 0:18:00.040 --> 0:18:03.200 palls near the central bank cuts interest rates a bit 0:18:03.800 --> 0:18:07.199 um and one being cut, you know, you end up 0:18:07.200 --> 0:18:09.080 with the stimulus coming through in terms of bank lending, 0:18:09.320 --> 0:18:11.120 but the banks aren't making your money out of it. 0:18:11.480 --> 0:18:13.280 And actually the bank lending doesn't pick up in the 0:18:13.280 --> 0:18:15.320 way that perhaps the center bank would normally expect. So 0:18:15.640 --> 0:18:17.919 it's a kind of peculiarity associated with the fact that 0:18:18.080 --> 0:18:21.920 cash ultimately offers you a zero interest rate in nominal terms. 0:18:21.920 --> 0:18:24.600 So the more negative you go, the more attractive cash 0:18:24.680 --> 0:18:28.760 becomes um. And you can quickly move in certain circumstances 0:18:28.760 --> 0:18:31.200 to a sort of weird economy where cash dominates. If 0:18:31.240 --> 0:18:34.400 we reached the constraint of the limit, I should say, 0:18:34.520 --> 0:18:37.200 rather on a calculus basis, if we reach the limit 0:18:37.680 --> 0:18:42.320 of what global q E can do, I think we're 0:18:42.359 --> 0:18:46.320 certainly in a situation of diminishing marginal returns. Okay, But 0:18:46.400 --> 0:18:47.919 if we reach the limit, I mean, is that what 0:18:47.920 --> 0:18:51.720 we've learned at the last fourty eight hours Now, I 0:18:51.760 --> 0:18:53.840 think you can do more QUI if you wanted to. 0:18:53.960 --> 0:18:56.440 There's no sort of specific limits on it. The issue, 0:18:56.440 --> 0:18:59.480 I think is the effectiveness of it UM and your 0:18:59.480 --> 0:19:02.119 montar part. He works a lot on people's expectations. If 0:19:02.160 --> 0:19:03.880 they sort of believe it's going to have an impact, 0:19:03.880 --> 0:19:06.639 then it become more confident, Asset prices rise, all the 0:19:06.680 --> 0:19:08.840 sorts of usual things kick in. But if it turns 0:19:08.840 --> 0:19:11.960 out that people are no longer convinced that KIE works, 0:19:12.040 --> 0:19:14.080 it may be that you do quite a lot of it, 0:19:14.119 --> 0:19:16.600 but not really much really happens. I course, that was 0:19:16.640 --> 0:19:18.840 exactly the Japanese experience over the course of the last 0:19:18.840 --> 0:19:21.159 ten and fifteen years, that KWIE did not deliver the 0:19:21.160 --> 0:19:24.400 economic outcomes that some people have predicted. This has been wonderful. 0:19:24.400 --> 0:19:28.200 Stephen King, thank you so much with h just extraordinary 0:19:28.240 --> 0:19:31.280 time today and it's too very third. Thanks Step as well. 0:19:46.440 --> 0:19:48.920 It is always a joy to speak to Austin Gulsby, 0:19:49.000 --> 0:19:53.399 but it's a particularly joy after Professor Gulsby turns at 0:19:53.440 --> 0:19:58.560 the Booth School to his analytic finance stem eligible brethren, 0:19:58.680 --> 0:20:04.919 including John Cochrane, Douglas Diamond, Luigi's Dallas, Eric Swick, Robin Roging. 0:20:05.000 --> 0:20:08.680 I mean, all these guys at Chicago are completely analytical, 0:20:09.000 --> 0:20:11.680 and you know that's where googles be turns when he's 0:20:11.680 --> 0:20:15.399 got to explain the repo market. Professor Goolsby joins us 0:20:16.000 --> 0:20:20.159 this morning, Austin, we're all brushing up on one in 0:20:20.320 --> 0:20:24.760 two day paper. What do macro economists how do they 0:20:24.800 --> 0:20:29.119 adapt and adjust to that short term paper market? That 0:20:29.200 --> 0:20:34.800 analytical finance at Booth schools legendary on Well, uh, thanks 0:20:34.800 --> 0:20:37.280 for having me back on first of all, um, and 0:20:37.600 --> 0:20:42.480 I think everybody first we were all starting to have 0:20:42.640 --> 0:20:46.240 flashbacks and nightmares. Oh god, is this how it begins? 0:20:46.760 --> 0:20:51.280 But I think most people that I have been talking 0:20:51.320 --> 0:20:57.720 to their view is in a crisis. Every correlation goes 0:20:57.760 --> 0:20:59.800 to one, as they say, and the fact that this 0:20:59.880 --> 0:21:04.440 is just one little market and it's not spreading thus 0:21:04.440 --> 0:21:08.680 far to others. Um, that means that that it maybe 0:21:09.320 --> 0:21:12.639 hopefully doesn't have a grander meaning. You have been wonderful 0:21:12.920 --> 0:21:18.280 about linking academic theory into the application this afternoon at 0:21:18.280 --> 0:21:20.919 this press conference. How much is the chairman and the 0:21:21.000 --> 0:21:24.040 proxy of Vice Chairman Clara and the others. How much 0:21:24.040 --> 0:21:27.560 are they making it up as they go versus foundational 0:21:27.720 --> 0:21:33.880 economic theory. That's the uh, that's always the magic balance 0:21:34.000 --> 0:21:37.399 that the that the FED here has to strike. I 0:21:37.480 --> 0:21:43.400 kind of think moments like this are always the danger 0:21:43.480 --> 0:21:46.000 for any policy maker, and you could call it on 0:21:46.080 --> 0:21:50.280 monetary policy, or if you were thinking about fiscal policy 0:21:50.320 --> 0:21:55.439 the same thing, that something strange happens, and you could 0:21:56.400 --> 0:22:01.440 incidentally destroy your credibility going forward if you say something 0:22:02.600 --> 0:22:06.400 in passing like, oh, we think there's no problem. This 0:22:06.480 --> 0:22:11.159 is a minor matter. You know circa Ben Burnankee when 0:22:11.240 --> 0:22:13.919 they asked him about sub prime housing and he says not, Now, 0:22:14.040 --> 0:22:16.359 this is a very limited thing and it's not going 0:22:16.400 --> 0:22:22.000 to spread. If the facts end up proving them wrong. Um, 0:22:22.240 --> 0:22:28.280 then people are going to conclude either the chair and 0:22:28.400 --> 0:22:32.040 the system they didn't understand the theory, They didn't know 0:22:32.080 --> 0:22:35.760 what was going on. If facts prove them right and 0:22:35.840 --> 0:22:38.400 they get up and say this is just a technical matter, 0:22:38.440 --> 0:22:41.200 it's just in one market, don't everybody, you know, pay 0:22:41.320 --> 0:22:46.400 no attention, keep walking. If they say that that proves right, 0:22:47.160 --> 0:22:50.000 then essentially nobody will remember it. So I kind of 0:22:50.040 --> 0:22:53.280 think days like today are a no wins scenario for 0:22:53.320 --> 0:22:56.960 the for the FED. So, Professor, you know, as we 0:22:57.000 --> 0:22:59.720 await the FED decision this afternoon, Now, there's a school 0:22:59.760 --> 0:23:01.320 of thought out there that says, as we get to 0:23:01.359 --> 0:23:04.199 the grinding ever lower rates, that incremental rate cuts by 0:23:04.200 --> 0:23:08.320 the FED just are losing their effectiveness um to really 0:23:08.400 --> 0:23:12.960 impact economic Outlook, what is your thoughts? Yeah, look, I 0:23:13.280 --> 0:23:17.359 agree with that. I wrote a little piece summarizing that, 0:23:18.280 --> 0:23:22.520