WEBVTT - Apollo's Torsten Slok Talks Bonds, Monetary Policy

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. And that does bring

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<v Speaker 1>us to our top story for the hour, the direct

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<v Speaker 1>intervention by the Treasury to control the costs of the

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<v Speaker 1>forty trillion dollar US debt pile. The historical track record

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<v Speaker 1>of such interventions are spotty. The two most recent successes, first,

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<v Speaker 1>the treasuries were purchased in the early two thousands of

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<v Speaker 1>about sixty seven billion dollars of primarily longer dated bonds.

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<v Speaker 1>It was a pro tracted operation that did actually push

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<v Speaker 1>the thirty year yield down by about two percentage points

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<v Speaker 1>from six seven to four to six over about a

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<v Speaker 1>two year stretch. And then second, there was Operation Twists

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<v Speaker 1>in twenty eleven that was a duration management scheme where

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<v Speaker 1>the Fed, not the Treasury, bought four hundred billion dollars

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<v Speaker 1>of longer term treasuries while selling an equal amount of

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<v Speaker 1>short term debt. Now, Besson's action so far seemed to

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<v Speaker 1>be standalone, independent, which is curious given that two years

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<v Speaker 1>ago he blasted his predecessor at the Treasury, Janet Yellen,

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<v Speaker 1>for what he character wrzd AND as an attempt to

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<v Speaker 1>re engineer the world's largest bond market. But it's also

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<v Speaker 1>curious timing for all of this, as FED Chair Kevin

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<v Speaker 1>Walsh preps for his own communications moment, a speech Friday

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<v Speaker 1>at Jackson Hole, Wyoming that ostensibly is supposed to be

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<v Speaker 1>about some of the wonkier, more procedural matters out there,

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<v Speaker 1>but no doubt there will be high attention as to

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<v Speaker 1>whether worsh is willing to formally aid Investon's intervention and

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<v Speaker 1>whether he'll actually offer a more detailed explanation of the

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<v Speaker 1>path for FED rates. Torsten Slock. He joins us right now.

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<v Speaker 1>He's a chief economist over at Apollo, and he joins

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<v Speaker 1>us right now. And Torsten, I want to start first

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<v Speaker 1>with Scott best sent what the Treasury is exactly trying

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<v Speaker 1>to do and whether history might actually be at his

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<v Speaker 1>side with regards to the potential effectiveness of some of

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<v Speaker 1>this bond buying.

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<v Speaker 2>Well, the first thing is that it really is three things.

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<v Speaker 2>She started with a un intervention that was pushing long

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<v Speaker 2>race down. Then he had the female intervention, the two

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<v Speaker 2>billion went to four billion, which also has been pushing

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<v Speaker 2>race down. And today we heard some talk about well

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<v Speaker 2>maybe the Treasury General account will also be used to

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<v Speaker 2>low on long term insist rates. So there's almost almost

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<v Speaker 2>campaign from the Treasurer here in an attempt to try

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<v Speaker 2>to put a cloud over rates margets, that is, attempting

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<v Speaker 2>to try to limit how much rates can be going up.

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<v Speaker 2>So on their own, these initiatives have had so far

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<v Speaker 2>a more limited effect, but the fact that this cloud

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<v Speaker 2>is hanging over the market, that certainly something could happen,

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<v Speaker 2>especially if the TGA the Treasury General Account for the Treasury,

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<v Speaker 2>the fits the account of the Treasure's account that fit

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<v Speaker 2>is being used, that could potentially have a bigger impact.

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<v Speaker 1>Well, when we talk about the bigger impact, though, I

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<v Speaker 1>would assume the number, the dollar figure has to get

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<v Speaker 1>a little bit bigger than just two to four billion

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<v Speaker 1>or whatever he said he might go up to here.

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<v Speaker 1>I mean, is there a number that you look at

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<v Speaker 1>where you think that a would have an impact, but

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<v Speaker 1>more importantly a lasting impact.

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<v Speaker 2>Yeah. That's why today's news about the Treasury General Account,

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<v Speaker 2>which really is the Treasury is like checking account at

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<v Speaker 2>the Federal Reserve that has more than nine hundred billion

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<v Speaker 2>dollars in it at the moment, and that could potentially

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<v Speaker 2>be a much bigger impact on the market because the

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<v Speaker 2>threat of using as much as hundreds of billions of

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<v Speaker 2>dollars on buying long rates could potentially have some implications,

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<v Speaker 2>But that being said, a checking account always needs to

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<v Speaker 2>be refilled with new issuance, so in that sense, it's

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<v Speaker 2>really more the threat of this happening at some point

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<v Speaker 2>that is having the biggest impact.

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<v Speaker 1>Well, that's what I'm curious about too, is what do

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<v Speaker 1>you even need to tap that, because I mean, I

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<v Speaker 1>think back to when the ECV did something similar and

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<v Speaker 1>they never actually made good on it because they didn't

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<v Speaker 1>have to. It was just the idea that they said

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<v Speaker 1>they would do it if necessary. It was enough to

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<v Speaker 1>scare the market into sort of towing the line.

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<v Speaker 2>That's exactly right. So that's why it really Ultimately it's

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<v Speaker 2>very similar to currency intervention from a central bank. If

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<v Speaker 2>you say, as a central bank that we may step

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<v Speaker 2>in and do something, we may stay and buy or

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<v Speaker 2>sell our own currency, then that on its own could

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<v Speaker 2>also be a very important factor when you think about

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<v Speaker 2>the risk that this has a headline could potentially begin

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<v Speaker 2>to weigh in this case on rates and potentially certainly

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<v Speaker 2>create a drop in yields because of the Treasury decide

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<v Speaker 2>to do something. So that is probably shaking out some

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<v Speaker 2>of the people who are now beating on rates moving higher.

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<v Speaker 1>But it gets to this idea though, I mean, if

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<v Speaker 1>we do get to a general account situation where they're

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<v Speaker 1>either threatening to use it or actually use it, this

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<v Speaker 1>goes far beyond debt management. I mean, and now we're

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<v Speaker 1>you know, I don't know what we call it. I mean,

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<v Speaker 1>I don't want to call it. I don't want to

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<v Speaker 1>use the Q word or the Maybe it's just yield

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<v Speaker 1>curve control. I mean, how would you characterize that if

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<v Speaker 1>we do get to that stage.

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<v Speaker 2>Yeah, So the underlying dynamics, of course that rates are

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<v Speaker 2>going higher because inflation has been higher and the fiscal

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<v Speaker 2>situation unfortunately has also putting mopward pressure on rates. So

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<v Speaker 2>therefore those fundamental forces are still in place at the moment.

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<v Speaker 2>So for that reason, these are certainly more you could

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<v Speaker 2>call spoty interventions that are trying at certain points to

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<v Speaker 2>limit how much rates are going up. But that being said,

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<v Speaker 2>it's still a cloud hanging over the rates market that

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<v Speaker 2>this could now the third item coming along with a

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<v Speaker 2>general account also now suddenly being in play. That also

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<v Speaker 2>means that certainly these things could certainly rate much lower,

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<v Speaker 2>and because of that that still is something that likely

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<v Speaker 2>will begin to put some limit on how much rate

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<v Speaker 2>can go up, because you can certainly be jolted down

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<v Speaker 2>to a lower level.

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<v Speaker 1>It doesn't matter that, at least as of right now,

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<v Speaker 1>this is the Treasury Apartment going alone, and the FED,

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<v Speaker 1>at least based on what we know, is not actually

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<v Speaker 1>involved in any of this.

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<v Speaker 2>Do you think that would change, Yeah, that doesn't matter

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<v Speaker 2>because at the moment, the Treasury, of course is living

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<v Speaker 2>under the condition that there is a budget deficit, which

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<v Speaker 2>in round numbers is like five six percent of GDP.

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<v Speaker 2>That's not going to change. And if that's not changing,

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<v Speaker 2>the needs that there's still a need to finance the

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<v Speaker 2>government deficit, and as a result of that, government debt

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<v Speaker 2>levels are still going up. So in that sense, these

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<v Speaker 2>things are all smaller things that are happening on the

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<v Speaker 2>fringes because on their own, they're not changing the fundamental

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<v Speaker 2>forces that are driving rates higher, and namely that the

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<v Speaker 2>moment high inflation and also the fiscal situation.

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<v Speaker 1>Well, let's talk about some of those fundamental forces. I mean,

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<v Speaker 1>obviously we've talked a lot in this program, the for

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<v Speaker 1>near forty trillion dollars debt load. Obviously, the servicing load.

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<v Speaker 1>Again is just looking at just the interest payment projected

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<v Speaker 1>for Q four and I think it was close to

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<v Speaker 1>two hundred billion dollars, I mean, which is insane. So

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<v Speaker 1>that's not something the Treasury can solve on its own.

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<v Speaker 1>Certainly not even the FED can solve on its own.

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<v Speaker 1>That's something in theory that Congress would have to address,

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<v Speaker 1>and as far as I know, it doesn't look like

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<v Speaker 1>they're ready to do that.

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<v Speaker 2>Yeah, And the risk with interventions in any shape and

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<v Speaker 2>form in lowering long rates is that if you issue

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<v Speaker 2>more in the front end, that has two risks. First

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<v Speaker 2>of all, it lowers the weighted average maturity if that outstanding,

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<v Speaker 2>that means that the weighted average maturity of what is

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<v Speaker 2>the debt level in terms of duration, that will become lower.

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<v Speaker 2>In other words, we will simply get that much more

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<v Speaker 2>debt is now in the front end. And the second

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<v Speaker 2>risk with that is that if much more debt, it

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<v Speaker 2>particularly is in t pls, that means that it becomes

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<v Speaker 2>much more sensitive to what the Fed is doing, because

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<v Speaker 2>now a bigger share of deat outstanding is in the

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<v Speaker 2>very very front of YU curve. So if Kevin Wohs

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<v Speaker 2>decides to race rates at one of the upcoming meetings.

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<v Speaker 2>That means that debt interest payments will go up because

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<v Speaker 2>there now is more sensitivity now that more debt is

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<v Speaker 2>in t pls.

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<v Speaker 1>Well on that point, though, I mean, if the weight

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<v Speaker 1>that average maturity go down, I think right now it's

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<v Speaker 1>around like five and a half five seven or something

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<v Speaker 1>like that exactly, and that's because of the shorter end stuff.

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<v Speaker 1>Does that I want to say, by default? But does

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<v Speaker 1>that mean that does that put upward pressure on the

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<v Speaker 1>average interest rate that we have on that debt overall?

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<v Speaker 2>Yeah, so it means that you certainly become more dependent

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<v Speaker 2>in the front end because now you have more deat

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<v Speaker 2>in the front end. That then depends on what the

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<v Speaker 2>FED is doing. What happens in the long end becomes

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<v Speaker 2>certainly a very important question around how does the long

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<v Speaker 2>end interpret what's going on. If the long end says

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<v Speaker 2>everything is great, No, we don't need to have high rates,

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<v Speaker 2>we can now begin to go down, then you would

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<v Speaker 2>have that the debt servicing costs would go lower. But

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<v Speaker 2>if the long end begins to say, hey, we have

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<v Speaker 2>some fundamental forces that are still at play and these

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<v Speaker 2>have not changed, then of course the long end could

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<v Speaker 2>go higher, and as a result, the net effect would

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<v Speaker 2>be you are both more sensitive to higher rates from

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<v Speaker 2>the Fed in the front end, but you now also

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<v Speaker 2>would see the term premium. We see long rates go

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<v Speaker 2>up because now the markets begin to question either the

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<v Speaker 2>Fed's commitments to two percent inflation or also the overall

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<v Speaker 2>the fiscal situation where now dead levels still again continue

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<v Speaker 2>to go over Do you have.

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<v Speaker 1>Any expectation that Kevin Warsh will address this in his

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<v Speaker 1>Friday speech.

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<v Speaker 2>I think at Jackson Hall that he will probably be

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<v Speaker 2>focusing more on the economic outlook. You'll probably focusing more,

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<v Speaker 2>if anything, on the framework that the FED is having

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<v Speaker 2>at the moment, just to try to address some of

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<v Speaker 2>these criticisms that he has seen in terms of the

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<v Speaker 2>last press conference, where a lot of people said, yes,

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<v Speaker 2>we understand that for what guidance may be going away,

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<v Speaker 2>but now instead we s you'd be focusing on framework guidance.

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<v Speaker 2>Tell us what is the framework? Are you focusing on

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<v Speaker 2>the balance sheet? Are you focusing on tightening fotangic conditions

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<v Speaker 2>or you focusing on the fitfunct rate? What are the

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<v Speaker 2>tools you're going to use to tighten monetary policy to

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<v Speaker 2>try to get inflation to come down.

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<v Speaker 1>And you think he will do that. He seems like

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<v Speaker 1>he does not want to be that community.

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<v Speaker 2>So that's why I think that most of the discussion

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<v Speaker 2>will probably not be so much around the task forces.

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<v Speaker 2>It probably don't want to preemp what they're going to

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<v Speaker 2>deliver later this year, but it's probably going to focus

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<v Speaker 2>more on what is the economic situation at the moment,

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<v Speaker 2>and therefore less on the overall framework for communication, for

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<v Speaker 2>the balance sheet, for data that he has in the

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<v Speaker 2>task forces, but really more just laying out what is

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<v Speaker 2>our view on the economic outlook at the moment without

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<v Speaker 2>giving any forward guidance.

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<v Speaker 1>It was interesting looking at the last minutes and some

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<v Speaker 1>of the anecdotal evidence that came out prior to that

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<v Speaker 1>about a big focus on artificial intelligence and how it's

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<v Speaker 1>affecting either productivity or inflation or vice versa, depending on

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<v Speaker 1>your perspective. Do you think this will become much more

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<v Speaker 1>of a dominant conversation, not only at the next FED meeting,

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<v Speaker 1>but for the next couple of FED meeting.

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<v Speaker 2>Yes, I do think that this is becoming very important,

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<v Speaker 2>exactly for the reasons you're mentioning, namely that at the moment,

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<v Speaker 2>because the AI built out requires hiring more people, It

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<v Speaker 2>requires buying more memory, more chips, more equipment, buying land.

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<v Speaker 2>It also involves construction. That means that in the near term,

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<v Speaker 2>AI is actually inflationary. But once AI is adopted and

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<v Speaker 2>deployed and implemented, then we should expect to see that

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<v Speaker 2>AI will be disinflationary, and we'll probably also have some

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<v Speaker 2>important impacts when we think about who it is that's impacted. Namely,

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<v Speaker 2>we could almost begin to see a reversal of the

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<v Speaker 2>key in the key shape consumer, whereby the high end

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<v Speaker 2>is going to see lower wagstgrowths, it is going to

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<v Speaker 2>see lower job growth, whereas the lower leg of the

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<v Speaker 2>k blue collar workers are probably going to ultimately still

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<v Speaker 2>see stronger wage growths, ultimately also going to see better

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<v Speaker 2>job growth because AI is mainly hurting those who have

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<v Speaker 2>more skills, who have more education.

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<v Speaker 1>All right, tors, So I gotta leave it there. I

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<v Speaker 1>really appreciate it. Torsten Slock, chief economists over at Apollo