WEBVTT - The Next Recession Could Come Courtesy of the Fed 0:00:06.720 --> 0:00:09.119 Hello, and welcome to Stephanomics, the podcast that brings the 0:00:09.119 --> 0:00:12.200 global economy to you, and I'm Stephanie Flanders. This week 0:00:12.240 --> 0:00:15.120 we're talking about money, how to make it and how 0:00:15.120 --> 0:00:18.280 to make sure it keeps its value. It's something we 0:00:18.320 --> 0:00:20.400 all have to think about, but if you're a central bank, 0:00:20.560 --> 0:00:23.079 it's your only job, and the stakes are a lot 0:00:23.160 --> 0:00:26.280 higher because the decisions of central bank takes can affect 0:00:26.280 --> 0:00:29.280 the cost of living the life of an entire country, 0:00:30.040 --> 0:00:32.479 maybe the whole world. The central bank you're sitting in 0:00:32.680 --> 0:00:35.400 happens to be the US Federal Reserve. For the past 0:00:35.479 --> 0:00:38.519 fifteen twenty years, the story of central banks and their 0:00:38.640 --> 0:00:42.479 job has been dramatic but pretty easy to grasp. The rules. 0:00:42.880 --> 0:00:45.840 Whenever economy has got into trouble, the central bank would 0:00:45.840 --> 0:00:48.639 slash interest rates to new lows and flood the economy 0:00:48.640 --> 0:00:52.600 with cheap cash. The economy got better, but never quite 0:00:53.000 --> 0:00:55.440 enough to bring rates back to where they were before 0:00:55.440 --> 0:01:00.400 the crisis, so money stayed cheap. This recovery, those feeling 0:01:00.440 --> 0:01:04.360 a bit different. At least an advanced economies like the US, 0:01:04.560 --> 0:01:08.560 demand is coming back faster than supply, and inflations hitting 0:01:08.600 --> 0:01:12.200 rates we haven't seen in years it's all driving fears 0:01:12.240 --> 0:01:15.479 that one of these central banks is about to monumentally 0:01:15.520 --> 0:01:19.280 screw up, either keep the money flowing too long lose 0:01:19.319 --> 0:01:22.840 control of prices, or raise interest rates too soon and 0:01:22.920 --> 0:01:26.480 choke the recovery. Now the risks look rather different in 0:01:26.520 --> 0:01:28.800 the US and the UK right now. So I've asked 0:01:28.840 --> 0:01:31.440 Bloomberg economists on both sides of the Atlantic to come 0:01:31.440 --> 0:01:33.760 on the show to explain it, or our chief a 0:01:33.840 --> 0:01:37.200 mere economist, Jamie Rush, formerly at the UK Treasury, and 0:01:37.319 --> 0:01:40.880 David Wilcox, now our Director of US Economic Research, but 0:01:40.959 --> 0:01:43.760 for many years in charge of all the forecasts and 0:01:43.800 --> 0:01:47.319 all the economic research produced by the Federal Reserve. You're 0:01:47.319 --> 0:01:50.400 gonna hear them in a few minutes. But first, the 0:01:50.440 --> 0:01:53.480 story of a central bank that tried something new just 0:01:53.640 --> 0:01:56.680 under a year ago and changed the way money works 0:01:56.680 --> 0:02:01.280 in the economy almost overnight. It's called Picks and his 0:02:01.360 --> 0:02:06.240 brazil economy reporter Maria and Louisa Kapoora to explain how 0:02:06.280 --> 0:02:16.680 it's taken the country by a store Feaston Peaks or 0:02:16.880 --> 0:02:19.680 Mega Picks. Wasn't something in Brazilian's used to say a 0:02:19.760 --> 0:02:25.280 year ago. But now you hate everywhere, I mean really everywhere, 0:02:26.040 --> 0:02:28.639 I beat my ren Thry big size split the restaurant 0:02:28.639 --> 0:02:31.680 built with friends Bia Biggs. I even paid my activities 0:02:31.680 --> 0:02:36.959 with Biggs and it's just millions like me. I don't know. 0:02:38.040 --> 0:02:41.880 I have picked since it came out in November. I 0:02:42.000 --> 0:02:45.000 cho speaks because it was easy to make men transfers. 0:02:45.520 --> 0:02:48.560 That was in Carlo Garti Silva native from what are 0:02:48.639 --> 0:02:51.080 and who I run into. He was having coffee in 0:02:51.080 --> 0:02:54.400 a restaurant in the southeast region of Brasilia. Most of 0:02:54.440 --> 0:02:57.560 the payments he makes nowadays on most of the transfers 0:02:57.600 --> 0:03:01.160 he makes to his family. You speaks a new payment 0:03:01.240 --> 0:03:07.920 platform that's sweeping across Brazil. I made the picks of 0:03:08.160 --> 0:03:10.800 three thousand three eyes as a low one. That was 0:03:10.880 --> 0:03:18.680 my last PIX transaction. The mobile payment platform, created by 0:03:18.720 --> 0:03:22.240 Brazil's Central Bank less than a year ago, has changed 0:03:22.240 --> 0:03:25.959 the financial landscape of Brazil. Now, more than a hundred 0:03:26.040 --> 0:03:30.240 and ten million users have transferred money through Pigs, which 0:03:30.400 --> 0:03:33.520 lives within a bank's mobile phone app in just the 0:03:33.639 --> 0:03:37.280 same way sell do us for US base banks. As 0:03:37.320 --> 0:03:40.440 if to underline the bad streach of a new payment system. 0:03:40.520 --> 0:03:43.440 While waiting at a stoplight in Brasilia, I noticed a 0:03:43.480 --> 0:03:47.280 woman going car to car packing for money. Her cardboard 0:03:47.320 --> 0:03:54.080 sign said she accepted pigs. Pigs was creating an attempt 0:03:54.120 --> 0:03:57.920 to simplify banking transfers and make them cheaper, while also 0:03:57.920 --> 0:04:02.760 boosting competition. But the success of Picks has highlighted another 0:04:02.800 --> 0:04:07.360 potential benefits of the system, an increasing financial inclusion by 0:04:07.400 --> 0:04:10.080 bringing people like the woman I saw at the spotlight 0:04:10.480 --> 0:04:14.800 into the country's banking system. And that's just huge for Brazil, 0:04:15.160 --> 0:04:18.120 where three percent of people don't have a bank account. 0:04:18.920 --> 0:04:21.440 You need to have a bank account to access Peaks, 0:04:21.440 --> 0:04:23.960 but once you do, you can enter the platform just 0:04:24.160 --> 0:04:28.560 by registering your phone number, your textually or just your email. 0:04:29.240 --> 0:04:32.560 Here's bank chief Roberto campus net To speaking in an 0:04:32.560 --> 0:04:36.120 interview with the Council of the America's in August. I 0:04:36.120 --> 0:04:38.880 think Picks became a very popular, you know, gain a 0:04:38.880 --> 0:04:41.440 lot of space, a very popular project that the Central 0:04:41.440 --> 0:04:44.440 Bank did. The message from the very beginning was it's 0:04:44.520 --> 0:04:48.280 not only a substitution effect, but also you increase the 0:04:48.360 --> 0:04:53.000 number of payments if you're gonna enable new business models, 0:04:53.040 --> 0:04:57.640 which should increase the volume overall, should increase the ability 0:04:57.680 --> 0:04:59.840 of small companies or companies that sell things that have 0:05:00.000 --> 0:05:04.000 a small chicken to get into the market people the 0:05:04.320 --> 0:05:07.240 self employed. We actually see people sending things on the 0:05:07.279 --> 0:05:10.080 street and accepting picks this day, so it's becoming again 0:05:10.120 --> 0:05:12.919 a very popular thing. We never expected the reach. You know, 0:05:12.960 --> 0:05:16.159 we have two eighty two million keys, we have seven 0:05:16.200 --> 0:05:20.400 point four million entities companies using Picks is catching on 0:05:20.480 --> 0:05:23.640 so quickly, in part because it's just so easy to use, 0:05:23.880 --> 0:05:27.760 said Brenda Lovo, senior advisory at Bussis Central Bank and 0:05:27.880 --> 0:05:31.240 part of the team managing Picks. It's always available for 0:05:31.480 --> 0:05:34.080 four hours a day, seven days a week. The funds 0:05:34.120 --> 0:05:38.800 are instantly available at the peas accounts. So uh, it's 0:05:38.839 --> 0:05:43.159 a very easy and people intuitive way of transferring money 0:05:43.360 --> 0:05:47.479 using the themartphone. The pandemic turn not to be fertile 0:05:47.520 --> 0:05:50.800 ground for the growth of Picks. People were cooked at home, 0:05:51.040 --> 0:05:56.280 avoiding contact, and businesses were closed and suddenly here comes Peaks, 0:05:56.320 --> 0:06:00.320 making digital transfers as easy and fast as using cash. 0:06:00.880 --> 0:06:05.000 By September, about eighty nine billion dollars have moved through 0:06:05.040 --> 0:06:07.440 the system, And just to give you an idea of 0:06:07.480 --> 0:06:11.600 what that means, PIX moves fifty times the amount of 0:06:11.640 --> 0:06:16.560 money ordinary text too. Here's again Brazil's Central Bank. We 0:06:16.640 --> 0:06:21.159 expected that PICKS would be very used here in Brazil, 0:06:21.920 --> 0:06:25.520 but we thought that it would take a certain amount 0:06:25.600 --> 0:06:30.400 of time because people have their own abits of using 0:06:31.040 --> 0:06:34.000 means of payments. For here in Brazil, we use a 0:06:34.040 --> 0:06:37.159 lot of cash, and we use a lot of cred 0:06:37.279 --> 0:06:42.440 cards and that cards, so Brazilians were not familiar to use. 0:06:42.520 --> 0:06:45.800 There's much funds to start a payment, and PIX was 0:06:46.600 --> 0:06:50.159 a really new thing that came in Brazil, but it 0:06:50.320 --> 0:06:56.359 ocplied this space really really really fast. Uh. Picks UH 0:06:56.600 --> 0:06:59.720 is the instant payments seems that that that have the 0:06:59.720 --> 0:07:05.360 fast adoption in its first year. Picks has been especially 0:07:05.400 --> 0:07:09.960 game changing for small business owners like Hanada's Leveda Pets, 0:07:10.040 --> 0:07:12.760 who runs a small cat sitting business in the central 0:07:12.880 --> 0:07:19.640 Brazilian city of Ours Class. Picks lower the costs for 0:07:19.760 --> 0:07:23.120 my customers because the transfer feed that each bank charged 0:07:23.160 --> 0:07:25.960 me could be as high as thirty percent of my take. 0:07:26.640 --> 0:07:37.680 So PIGS brought me more financial control element cannot with 0:07:37.720 --> 0:07:41.440 a sales vaccination great growing every day. The economy now 0:07:41.680 --> 0:07:46.000 is almost fully reopened and people are entering out stopping 0:07:46.000 --> 0:07:49.360 by the bank now it's much easier, and yet PIGS 0:07:49.560 --> 0:07:53.640 is still growing. In July, it broke its own record 0:07:53.720 --> 0:07:59.800 of fourty million payments in just one day. Julian Afraida 0:08:00.080 --> 0:08:03.080 works at a pastor shop which began using pigs just 0:08:03.320 --> 0:08:08.240 five months ago. The work with all credit and debit cards. 0:08:08.560 --> 0:08:11.920 The pigs was very practical and many clients wanted it, 0:08:12.360 --> 0:08:16.280 and it makes payments for deliveris easier. In three seconds, 0:08:16.320 --> 0:08:20.120 she sees the payments in her account see pick. Sometimes 0:08:20.240 --> 0:08:23.360 it takes less than that. It's super fast and we 0:08:23.400 --> 0:08:27.120 don't pay fees to banks. Credit cards can take as 0:08:27.120 --> 0:08:29.760 long as thirty days for us to see the money, 0:08:30.280 --> 0:08:32.800 and with debit cards, if the purchase is made on 0:08:32.800 --> 0:08:35.800 a weekend, we'll always see it the next Monday. But 0:08:35.920 --> 0:08:42.200 Pigs is automatic. There's just one hitch. Brazil is a 0:08:42.280 --> 0:08:46.480 high crime country and criminals have also begun to capitalize 0:08:46.480 --> 0:08:50.680 on the success of pigs. Express Kidnappings are also back, 0:08:50.960 --> 0:08:54.280 and people are being snatched off the street at gunpoint 0:08:54.679 --> 0:08:57.440 and forced to pull out all their stabings from the 0:08:57.520 --> 0:09:02.240 closest ATM machine. To now the bad guys only need 0:09:02.320 --> 0:09:06.280 to force them to make up pigs. Accounts are traceable 0:09:06.440 --> 0:09:10.600 in picks, but criminals use fake ones or false names. 0:09:11.440 --> 0:09:15.320 The Central Bank responded rather quickly with new limits on 0:09:15.440 --> 0:09:19.480 transfers at night, and other safety measures have also been 0:09:19.480 --> 0:09:23.320 taken to address the possibility of hackers entering PICKS database. 0:09:24.600 --> 0:09:27.959 And if the numbers tell us anything is that for 0:09:28.200 --> 0:09:32.800 hundreds of thousands of resilience, the risk of using Peaks 0:09:32.960 --> 0:09:37.680 is outweighed by the reward in costs and convenience. But 0:09:37.840 --> 0:09:42.319 Picks needs to grow to achieve financial inclusion. Here's Leonard 0:09:42.400 --> 0:09:46.560 Roja Suarez, director of the Latin American Initiative at the 0:09:46.640 --> 0:09:51.360 Center for Global Development in Washington, d C. And so 0:09:52.200 --> 0:09:56.880 Peaks is great for at lower in financial cost, increase 0:09:56.960 --> 0:10:01.679 the security, and improve the consumer spirit. But that is 0:10:01.720 --> 0:10:06.280 true only for those that have a bank account, because 0:10:06.320 --> 0:10:09.640 that's a requirement of PIGS. For those that do not 0:10:09.760 --> 0:10:12.560 have a bank account, bank account, or do not have 0:10:12.920 --> 0:10:16.800 a smartphone, they will not be able to access the 0:10:18.320 --> 0:10:22.360 up and so that would leave about thirty of the 0:10:22.440 --> 0:10:26.720 Brazilian population out of being able to use the app. 0:10:28.720 --> 0:10:33.160 Some of those changes seem to be already happening. Offline 0:10:33.200 --> 0:10:36.160 payments are in the words, along with programs that will 0:10:36.200 --> 0:10:40.520 allow people to withdraw money from stores using PICKS and 0:10:40.679 --> 0:10:43.680 bank chief Campus Nettle says we haven't seen the full 0:10:43.760 --> 0:10:47.920 scope of PICKS yet. In fact, he estimates we've only 0:10:47.920 --> 0:10:52.760 seen five of its posessial and if that is true, 0:10:53.480 --> 0:10:57.079 Brazil could be on the brink of a digital revolution. 0:10:58.160 --> 0:11:08.040 For Blue Venus, I'm Maria least couple well, no good 0:11:08.080 --> 0:11:12.520 deed goes unpunished. Our brazil economist Adriana Dupeter just informed 0:11:12.520 --> 0:11:15.720 me that PICKS has been so successful the government's thinking 0:11:15.760 --> 0:11:18.440 of slapping a financial transactions tax on it to help 0:11:18.480 --> 0:11:21.440 fill the whole in the government's public finances. So I 0:11:21.440 --> 0:11:24.680 guess there are some things about Brazil that technology can't change. 0:11:25.240 --> 0:11:28.760 But now we move from a digital revolution for central 0:11:28.760 --> 0:11:32.600 banks to just a very difficult decision. As I mentioned 0:11:32.600 --> 0:11:35.240 at the start of the show, the rapid recovery we've 0:11:35.240 --> 0:11:38.120 seen in a lot of advanced economies this year has 0:11:38.160 --> 0:11:41.720 produced something we haven't seen in a long time inflation 0:11:42.200 --> 0:11:45.520 rising prices. The annual rate of inflation last month in 0:11:45.559 --> 0:11:49.360 the US hit five point four percent. That's the highest 0:11:49.400 --> 0:11:51.880 in more than a decade, and only the second highest 0:11:51.880 --> 0:11:55.320 reading this century. Now, this was supposed to be a 0:11:55.400 --> 0:11:59.280 short term blip, a temporary side effect of the extraordinary 0:11:59.320 --> 0:12:03.040 impact of COVID nineteen. But it's dragging on a bit, 0:12:03.320 --> 0:12:06.360 and some pretty influential economists, including my old boss, the 0:12:06.440 --> 0:12:10.320 former Treasury Secretary Larry Summers, say the Federal Reserve and 0:12:10.360 --> 0:12:13.360 maybe other central banks are in danger of falling asleep 0:12:13.400 --> 0:12:16.320 at the wheel. Well. As mentioned at the start, I 0:12:16.360 --> 0:12:19.880 have our Director of US Economic Research, David Wilcox, and 0:12:20.120 --> 0:12:24.040 chief a Mere economist, Jamie Rush here to discuss all this. 0:12:24.600 --> 0:12:28.199 I mean, David, you spent a long time at the FED. 0:12:28.679 --> 0:12:31.560 They say, institutions always at risk of fighting the last war? 0:12:31.880 --> 0:12:34.800 Is it? Is it too focused on lack of demand, 0:12:35.120 --> 0:12:37.680 which has been such a problem off and on for 0:12:37.720 --> 0:12:40.800 the past ten or twenty years, and now not focused 0:12:40.920 --> 0:12:44.640 enough on too much demand and actually too much inflation. 0:12:45.640 --> 0:12:49.679 I don't think so, Stephanie. For sure, the Federal Reserve 0:12:49.840 --> 0:12:56.240 is facing challenging circumstances with pandemic induced economic collapse the 0:12:56.320 --> 0:12:58.679 likes of which we haven't seen in at least a 0:12:58.800 --> 0:13:03.360 century in the United States. But let's remind ourselves the 0:13:03.480 --> 0:13:07.360 dominant narrative in the US for the past two decades 0:13:07.400 --> 0:13:11.439 has been inflation that ran too low, not too high. 0:13:11.640 --> 0:13:16.240 It was frustrating for the Federal Reserve that they persistently 0:13:16.400 --> 0:13:21.600 undershot their two percent objective. Another key ingredient in the 0:13:21.720 --> 0:13:24.720 environment right now in the US has been the astonishing 0:13:24.800 --> 0:13:28.200 downward move in interest rates around the globe, and that's 0:13:28.320 --> 0:13:32.760 left central banks, including the Federal Reserve, with too little 0:13:32.880 --> 0:13:36.600 room to cut rates in order to fight recessions. To 0:13:36.679 --> 0:13:39.640 try to push back against those two developments, the FED 0:13:39.679 --> 0:13:43.520 put in place a new framework one year ago under 0:13:43.559 --> 0:13:46.720 which they pledged to be more tolerant of inflation running 0:13:46.720 --> 0:13:50.120 a little above the two percent objective. So, while the 0:13:50.160 --> 0:13:55.160 situation remains very fluid and very uncertain, the bigger risk 0:13:55.320 --> 0:13:58.880 from the Fed's point of view, in my assessment, is 0:13:58.920 --> 0:14:02.600 that inflation set eggs below the two percent objective once 0:14:02.640 --> 0:14:05.680 again after the current set of snarl ups in the 0:14:05.720 --> 0:14:10.160 supply chains are resolved. I think they're right to stack 0:14:10.280 --> 0:14:14.360 the odds on inflation in favor of inflation running a 0:14:14.360 --> 0:14:17.400 little above two I guess there's two things here. There's 0:14:17.440 --> 0:14:20.400 that the forecasts that the Federal Reserve might have or 0:14:20.520 --> 0:14:23.960 policy makers might have a different that they just don't 0:14:24.000 --> 0:14:26.080 think inflation is going to stick around as long as 0:14:26.320 --> 0:14:29.120 as other forecasters do. And then there's something else which 0:14:29.120 --> 0:14:31.080 just to say we we do think inflation maybe we'll 0:14:31.120 --> 0:14:34.600 stick around for a bit, but we think that's we're 0:14:34.640 --> 0:14:37.680 more tolerant of that than we might have been in 0:14:37.720 --> 0:14:43.160 previous eras. Yes, I think that's just right. Monetary policy 0:14:43.240 --> 0:14:49.120 is risky business. It's not for the timid of heart. Um. Certainly, 0:14:49.200 --> 0:14:52.320 there are some prominent voices, and you mentioned Larry Summers 0:14:52.360 --> 0:14:56.520 being perhaps the loudest of all, that are warning the 0:14:56.520 --> 0:14:58.960 FED that they are on the brink of losing control 0:14:59.000 --> 0:15:03.640 of inflation. But the consensus view remains much more benign 0:15:03.760 --> 0:15:07.800 than that. My own views tend towards the more benign 0:15:08.080 --> 0:15:12.880 end of the range. I think we're likely to have inflation, 0:15:12.960 --> 0:15:16.880 that's a little about two a year or two from now, 0:15:17.360 --> 0:15:22.400 but I don't anticipate that. The most likely outcome is 0:15:22.480 --> 0:15:26.640 that I will see inflation as a persistent problem for 0:15:26.680 --> 0:15:29.600 the FED to deal with by them. And I guess 0:15:29.680 --> 0:15:31.920 when you talk about FED stuff until not very long ago, 0:15:32.440 --> 0:15:34.240 a lot of those people used to used to work 0:15:34.280 --> 0:15:36.480 for you. It's all very well saying, well, we want 0:15:36.480 --> 0:15:38.320 to build ourselves a bit of room for maneuver for 0:15:38.360 --> 0:15:41.160 the future, so if inflation goes higher, that's not such 0:15:41.200 --> 0:15:45.960 a big issue. But if you've lost credibility, if you 0:15:46.040 --> 0:15:50.360 seem to be acting too late, then I guess the 0:15:50.440 --> 0:15:52.960 risk is that you then have to do too much. 0:15:53.080 --> 0:15:58.520 I mean, how concerned will they be about that? To think, Well, 0:15:58.600 --> 0:16:03.720 let's distinguish two instituencies here. The job of the staff 0:16:04.160 --> 0:16:07.800 is to try to give their best professional judgment. They're 0:16:07.880 --> 0:16:13.240 acting like physicists, admittedly in an improve in an imperfect world. 0:16:13.960 --> 0:16:17.840 But their job is to lay out their expectation the 0:16:17.960 --> 0:16:24.360 range of uncertainties around that expectation. Policymakers, you're absolutely right, 0:16:24.960 --> 0:16:29.080 have to take into consideration a larger constellation of issues, 0:16:29.600 --> 0:16:37.000 including things like credibility and reinforcing the meaning of the 0:16:37.080 --> 0:16:41.760 new framework that the FED adopted just a year ago. Um, 0:16:41.840 --> 0:16:46.200 the FED staff is as good as they get, uh, 0:16:46.240 --> 0:16:50.240 and I think they are really free of any kind 0:16:50.480 --> 0:16:55.120 of larger sort of pressures that that might be on 0:16:56.200 --> 0:17:00.320 other elements. Their job is to just simply if their 0:17:00.360 --> 0:17:03.960 best professional judgment, they don't need to take into account 0:17:04.640 --> 0:17:09.920 issues of credibility or other matters like that. What would 0:17:09.960 --> 0:17:12.000 it take to change the fat's mind? Do you think 0:17:12.359 --> 0:17:15.199 that how much inflation would you have to see? For 0:17:15.280 --> 0:17:17.359 how long? I mean, when we see these numbers. You 0:17:17.400 --> 0:17:21.760 see very high house price inflation, you see rents taking off, 0:17:21.880 --> 0:17:24.640 you know some things which are not one would think, 0:17:24.640 --> 0:17:28.080 not entirely just related to these supply chain issues that 0:17:28.200 --> 0:17:32.040 we've had coming out of COVID. Yeah, what will be 0:17:32.080 --> 0:17:35.920 required to change the FATS mind is really, I think 0:17:35.960 --> 0:17:40.399 a break and inflationary psychology that we haven't seen really 0:17:40.480 --> 0:17:46.360 since the early nineteen eighties. Um, if it becomes the 0:17:46.440 --> 0:17:52.600 dominant narrative that businesses are putting in place price increases 0:17:52.680 --> 0:17:57.399 because they know their competitors are, if they're granting wage 0:17:57.440 --> 0:18:01.240 increases because they know that they're workers are being bid 0:18:01.280 --> 0:18:05.960 away by others who were offering higher salaries. If workers 0:18:05.960 --> 0:18:10.840 are demanding larger pay increases because their cost of living 0:18:10.960 --> 0:18:13.520 is going up not only over the past year, but 0:18:13.600 --> 0:18:17.400 they expected over the coming year. Those are the basic 0:18:17.600 --> 0:18:21.480 ingredients of a classic wage price spiral, and that's what 0:18:21.640 --> 0:18:25.159 will prompt the FIT to conclude that inflation expectations are 0:18:25.200 --> 0:18:28.520 no longer anchored as they have been for the past 0:18:28.560 --> 0:18:32.280 two decades, and that in turn will prompt the FIT 0:18:33.000 --> 0:18:36.359 to slow the economy in order to contain inflation pressures. 0:18:44.080 --> 0:18:46.600 I'm going to bring Jamie Russian now are a mere 0:18:47.320 --> 0:18:51.000 chief chief economists because if you we tend to think 0:18:51.000 --> 0:18:53.840 of terms of hawks and doves at central banks, and 0:18:53.880 --> 0:18:56.600 it greatly annoys the policymakers that sitting there because they 0:18:56.600 --> 0:18:59.240 think they have very interesting, nuanced views. But the hulks, 0:18:59.280 --> 0:19:01.320 broadly speaking, are the ones who want to raise interest 0:19:01.400 --> 0:19:03.840 rates with money more expensive, and the doves are the 0:19:03.880 --> 0:19:07.720 ones who want to keep money very flowing, very loosely 0:19:07.800 --> 0:19:11.960 and freely. If we have a flock of doves still 0:19:12.119 --> 0:19:17.400 encamped at the Federal Reserve building in the US, there 0:19:17.400 --> 0:19:20.720 are certainly a few hawks, and one very prominent hawk 0:19:21.240 --> 0:19:25.200 we've been hearing from from the Bank of England recently. 0:19:25.280 --> 0:19:27.479 Jamie talk us through the situation there, because it feels 0:19:27.480 --> 0:19:30.679 like the forecasters and the central bank are facing the 0:19:30.720 --> 0:19:33.840 same uncertainties in the UK and some of the same inflation, 0:19:34.280 --> 0:19:37.560 but coming up with rather different conclusions. Yeah, I think 0:19:37.600 --> 0:19:39.800 that's right. So if you go back even just a 0:19:39.800 --> 0:19:43.439 few months, there seemed to be a consensus among global 0:19:43.560 --> 0:19:47.080 central banks that they were just tread carefully, if in 0:19:47.119 --> 0:19:48.840 fact there was any treading to be done at all, 0:19:49.800 --> 0:19:53.280 and so the bank wasn't expected to lift interest rates 0:19:53.560 --> 0:19:57.280 until three in the UK, and they were going to 0:19:57.280 --> 0:20:01.040 tolerate any sort of inflation if as long as it 0:20:01.119 --> 0:20:04.919 was going to be temporary. But now wage pressure is 0:20:04.920 --> 0:20:07.120 picked up a bit, and not just in the places 0:20:07.119 --> 0:20:11.800 that have been affected by COVID, the most energy costs 0:20:11.800 --> 0:20:14.320 are up, which is obviously pushing headline inflation up a lot. 0:20:14.760 --> 0:20:17.480 And it seems that the Bank of England's lost its nerve. 0:20:18.400 --> 0:20:23.520 The governor is increasingly vocal about the risks of inflation, 0:20:24.160 --> 0:20:27.040 and that's prompted markets to bring forward the timing of 0:20:27.080 --> 0:20:32.680 expected rate hikes not two but to next month. So um, 0:20:32.720 --> 0:20:35.919 it's been a really really big shift in the Bank's 0:20:35.960 --> 0:20:38.560 rhetoric and how markets are perceiving it, and indeed they're 0:20:38.560 --> 0:20:42.119 expecting another eight basis points or so of of hikes 0:20:42.160 --> 0:20:44.800 next year as well. So it's just worth it's worth 0:20:44.840 --> 0:20:47.359 emphasizing just how big a change that was. So, as 0:20:47.400 --> 0:20:49.760 you said at the start, only a few months ago, 0:20:50.280 --> 0:20:52.720 probably the beginning of the summer, we were expecting interest 0:20:52.800 --> 0:20:56.600 rates to stay basically at zero, just above zero in 0:20:56.640 --> 0:20:59.920 the UK for at least another year or a year 0:21:00.000 --> 0:21:04.440 in a bit, so no change until three and now 0:21:04.640 --> 0:21:09.159 we're not only expecting maybe three quarters of a percentage 0:21:09.160 --> 0:21:12.200 point worth of cuts next year, but even a rise 0:21:12.440 --> 0:21:14.880 this year, so that interest rates in the year's time, 0:21:14.920 --> 0:21:18.480 the official base rate could be one percentage point rather 0:21:18.560 --> 0:21:21.439 than more or less zero. Now, I can't think of 0:21:21.440 --> 0:21:24.159 a time when you've had such a dramatic change. You 0:21:24.200 --> 0:21:27.600 said that the bank, the bad governor had lost its 0:21:27.760 --> 0:21:30.280 lost his nerve. That normally sounds like a bad thing. 0:21:30.359 --> 0:21:33.760 Do you think he's making a mistake? Well, so, I 0:21:33.800 --> 0:21:36.120 think there's two questions here. Are they making mistake about 0:21:36.160 --> 0:21:39.000 the policy that they're taking now? So they have they 0:21:39.040 --> 0:21:43.240 are accommodating market expectations and higher rates, which is tightening. 0:21:43.280 --> 0:21:45.840 It's happen. That's happening right now. Basically it's feeding through 0:21:45.840 --> 0:21:48.959 to borrowing costs in the wider economy as we speak. 0:21:49.600 --> 0:21:52.760 So people expecting rates to go up and pushes the 0:21:52.840 --> 0:21:54.960 market rates. So when I go and get a bortgage 0:21:55.040 --> 0:21:56.800 or where if I'm trying to borrow as a business, 0:21:57.080 --> 0:22:00.680 I'm already paying more because people are expecting interests exactly right. 0:22:00.720 --> 0:22:03.000 So if you think about the five year borrowing cost 0:22:03.080 --> 0:22:05.159 in markets, like the risk free rate that's gone up 0:22:05.160 --> 0:22:08.120 fifty basis points over the past few months, eventually that's 0:22:08.119 --> 0:22:09.959 going to feed through to your five year mortgage if 0:22:09.960 --> 0:22:12.920 that's if that's what you've chosen. Um, so these things 0:22:12.920 --> 0:22:15.600 are going to start affecting people even before interest rates 0:22:15.640 --> 0:22:18.520 have actually gone up. So I think that's an important point. 0:22:18.560 --> 0:22:21.640 So if there is a policy mistake happening, it's being 0:22:21.680 --> 0:22:24.040 made now. It's not something that's about to happen, it's 0:22:24.080 --> 0:22:27.440 it's already happening. So so there's that, and I think, 0:22:28.160 --> 0:22:30.359 you know, is it a mistake? Well, we don't actually know. 0:22:30.800 --> 0:22:32.920 It may prove to be the case that inflation does 0:22:32.960 --> 0:22:36.160 pick up sustainably and actually this is going to look 0:22:36.160 --> 0:22:37.919 like quite a smart move in a year or so 0:22:38.119 --> 0:22:41.439 is time. Equally, you could see that unemployment goes up 0:22:41.480 --> 0:22:45.760 as the end of the furlough scheme in the UK happens, 0:22:45.880 --> 0:22:49.520 and and that pushes down on on on wage pressure 0:22:49.520 --> 0:22:53.919 and therefore inflation tips back downwards, which case would look 0:22:54.000 --> 0:22:57.600 like a mistake because it needlessly delayed the recovery. I 0:22:57.600 --> 0:23:00.040 think the bigger question though, is whether there is a 0:23:00.040 --> 0:23:02.880 TJ error being made here? Is that is it better 0:23:03.000 --> 0:23:05.760 to be if you're going to be wrong? Is it 0:23:05.840 --> 0:23:08.200 is it better to be wrong by going too early 0:23:08.440 --> 0:23:11.119 or by going too late, And in my opinion, it 0:23:11.200 --> 0:23:13.600 is better to be to to raise interest rate it's 0:23:13.640 --> 0:23:16.520 too late, because a little bit of extra inflation isn't 0:23:16.520 --> 0:23:18.840 going to be too damaging into the bank's credibility, is 0:23:18.880 --> 0:23:20.880 not going to hurt people too much, especially if it's 0:23:21.200 --> 0:23:26.040 it's driven by wage increases UM. Compared with what we've seen, 0:23:26.040 --> 0:23:29.600 which is a rapid repricing of interest rates. The possibility 0:23:29.680 --> 0:23:34.520 that this has actually some some some nonlinear effects, meaning 0:23:35.000 --> 0:23:38.159 that the economy could respond worse to a sudden increase 0:23:38.200 --> 0:23:41.360 in interest rates than than than one that's been very 0:23:41.359 --> 0:23:45.159 carefully choreographed over the course of say six months UM. 0:23:45.240 --> 0:23:47.040 And so I think that is actually the bigger danger. 0:23:47.080 --> 0:23:48.920 You could have a position here where the bank is 0:23:49.160 --> 0:23:52.480 as has endorsed a lot of tightening, and that it 0:23:52.520 --> 0:23:55.960 could it could affect demand, it could affect the housing market. 0:23:55.960 --> 0:23:59.600 It could have really quite a few unintended consequences. So 0:24:00.600 --> 0:24:03.280 the strategic decision from from in my view, is probably 0:24:03.320 --> 0:24:06.600 not the right one. It sounds like you're making a 0:24:06.640 --> 0:24:09.119 similar argument to what one would make in the US. 0:24:09.840 --> 0:24:14.000 I guess one argument is that the UK is in 0:24:14.080 --> 0:24:19.399 a worse position than the US and particularly is a 0:24:19.440 --> 0:24:23.840 bit more vulnerable to inflation taking off because it's also 0:24:23.960 --> 0:24:27.040 just had this kind of recently self inflicted wound of Brexit. 0:24:27.200 --> 0:24:29.240 Is there a sense in which the Bank of England 0:24:29.720 --> 0:24:33.480 needs to be a bit more concerned about triggering an 0:24:33.480 --> 0:24:36.520 inflationary spiral than the US. We've also had quite a 0:24:36.520 --> 0:24:39.000 lot more inflation than the US. We haven't really had 0:24:39.400 --> 0:24:42.960 a deflation concern in the UK the way that you 0:24:43.040 --> 0:24:46.120 have in say America or the Eurozone. We've been able 0:24:46.160 --> 0:24:48.240 to deliver quite a lot of inflation even through these 0:24:48.320 --> 0:24:51.560 last few years. I don't think the Bank needs needs 0:24:51.560 --> 0:24:55.280 to be especially concerned just because of the additional disruptions 0:24:55.320 --> 0:24:57.679 caused by Brexit. I mean, we always have this this 0:24:57.680 --> 0:25:01.080 this backdrop of supply chain disruption more broadly due to COVID. 0:25:01.520 --> 0:25:04.159 It's very difficult to unpick the Brexit distructions from the 0:25:04.160 --> 0:25:08.760 COVID disruptions. So I think, in in short, there isn't 0:25:08.760 --> 0:25:11.920 an obvious reason why you should adopt a different policy 0:25:12.200 --> 0:25:15.040 in Britain from the one that is being adopted in 0:25:15.160 --> 0:25:17.800 the Europe and in the US. And in fact, by 0:25:17.840 --> 0:25:21.280