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Speaker 1: This is Bloomberg surveillance. We expect FED to heightened comtemba.

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Speaker 1: Even with the recent comments made by the beneficial bringing

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Speaker 1: the possibility earlier, we still think September is more likely.

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Speaker 1: The FED has long considered June an open possibility, not

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Speaker 1: for cloture. I'm not saying that defense should raise it,

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Speaker 1: but why don't you raise it? Get ready for the

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Speaker 1: big pocket correction, and then go your way and keep

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Speaker 1: normalizing great Bloomberg surveillance, your link to the world of economics, finance,

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Speaker 1: and investment on Bloomberg Radio. He is the outlier, or

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Speaker 1: at least he was the outlier in this Our boy

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Speaker 1: of Mike and I have been waiting for this discussion.

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Speaker 1: Nary A Nakasho Dakota, the University of Rochester, the former

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Speaker 1: president of the Minneapolis Fed UH to join us here

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Speaker 1: in a moment and we could talk literally for three hours,

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Speaker 1: NonStop with a mathematician from Baltimore, No question um about that.

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Speaker 1: We said good morning to all of you, my cool

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Speaker 1: McKee and Tom Keane worldwide as we go to this

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Speaker 1: important interview brought you by Cone Residuck Accounting Tax Advisory.

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Speaker 1: Find out more at Cone resideck dot com. C O

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Speaker 1: h N R e z n I c K. He

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Speaker 1: uh is out of Baltimore and out of Chicago in

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Speaker 1: math in Princeton at a very early age in math.

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Speaker 1: And I would love to bring him in, but it's

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Speaker 1: always more appropriate if Michael McKee introduces our FED presidents,

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Speaker 1: governors and in the chair. Mike, you spoke recently with

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Speaker 1: Lacquer of Richmond. How is Couche Lacoda different from Lacquer

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Speaker 1: of Richmond. Uh, well, he's shorter. Uh. Uh. You know,

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Speaker 1: you don't want to uh pigeonhole people because views change.

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Speaker 1: But over the course of his time, the fed Arianna

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Speaker 1: Couch of Dakota was considered more devish, more willing to

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Speaker 1: cut rate. Certainly, Uh, Jeffrey Lacker, who is on the

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Speaker 1: hawk ish end of the scale. But at this point

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Speaker 1: it's almost somewhat beside the point of where you are

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Speaker 1: in the scale, because we're looking at a FED that

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Speaker 1: seems to be somewhat united in the idea that they

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Speaker 1: need to raise interest rates fairly soon. And it is

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Speaker 1: all that is important to folks in the markets, and

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Speaker 1: this morning on Bloomberg View, Marianna, you're writing that there's

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Speaker 1: a question about about that and you call it an

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Speaker 1: unhealthy obsession with the Fed for the markets. Yeah. No,

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Speaker 1: thankful for having me on. It's really real pleasure to

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Speaker 1: join you today. And uh yeah, no. I I think

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Speaker 1: that this focus on the calendar day, on the exact

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Speaker 1: date of the next move by the Fed really reveals

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Speaker 1: that markets and the public more broadly are really graphic

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Speaker 1: for national what is driving Fed decision making? Um, it

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Speaker 1: doesn't seem to be inflation. Inflation is very remains low,

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Speaker 1: has been low for years, UM. Expectations of inflation forecast

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Speaker 1: inflation are that it is going to remain low for

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Speaker 1: the next three years. UM. And you look at longer

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Speaker 1: term inflation expectations measures as measured by UH UM, the

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Speaker 1: tips bonds and and uh you just don't see even

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Speaker 1: those longer term inflation stations have really drifted downwards. So

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Speaker 1: the FEDS decisions to raise rates are not being driven

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Speaker 1: by inflation. So what is driving in And I think

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Speaker 1: that is why there's so much fixation on these on

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Speaker 1: the on these issues of are we gonna go in

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Speaker 1: June September, which economically should be keep totally meaningless, but

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Speaker 1: matter because matter for markets, matter for prices, and matter

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Speaker 1: ultimately for the economy because people see them as informative

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Speaker 1: of what the What's driving FED decision making? Well, the

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Speaker 1: FED has been very I mean, just about everybody I

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Speaker 1: know on the Open Market Committee and every speech they've

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Speaker 1: made has said we're going to raise rates gradually. But

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Speaker 1: in the context of what you're saying, the markets don't

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Speaker 1: seem to believe that, or at least they haven't taken

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Speaker 1: it on board. And I'm wondering why that is. Well,

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Speaker 1: they say, the FED says two things. The FED says

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Speaker 1: are gonna raise rates gradually, and they say they're going

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Speaker 1: to be um um data dependent, and so both both

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Speaker 1: things have to be true. Are going to be The

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Speaker 1: latter has to be true in some sense, I should

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Speaker 1: say that that they're going to be data dependent. And

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Speaker 1: the question is what does that going to? What data

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Speaker 1: is influencing decision making? When the FED decided to go

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Speaker 1: in December, what was this the data they saw that

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Speaker 1: made them do that. When they decided not to go

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Speaker 1: in January March, what was the data that made them

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Speaker 1: decide to do that. I think that's it's very murky.

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Speaker 1: I think two markets in the public. It doesn't really matter.

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Speaker 1: Each each decision point, each meeting in itself doesn't matter

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Speaker 1: all that much. But every decision you may provides a

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Speaker 1: clue about what's shaping your decisions down the road. It

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Speaker 1: is an honor to speak to you today, UH, to

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Speaker 1: the Mackenzie professor at Rochester, UH, given the moment of

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Speaker 1: Stanley Fisher traveling to Columbia in honor of Michael Woodford.

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Speaker 1: There is a body of theory, UH, Professor Cutchel Lakota

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Speaker 1: that it has a mathiness to it called d SGE

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Speaker 1: dynamic stochastic general equilibrium theory. And all our audience needs

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Speaker 1: to know, is it the theoretical structure of math? Has

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Speaker 1: that been destroyed? Is the outcome of twenty and thirty

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Speaker 1: years of good thinking by you and others? Has it

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Speaker 1: been shaken to its foundations by what we've seen in

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Speaker 1: the recent months and years? Uh? You know, I think

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Speaker 1: that's a great question, and it's a question that uh,

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Speaker 1: We're gonna only learn more about it as we move

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Speaker 1: forward time. I'd say, right at this moment um, I

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Speaker 1: think it's led to a rethinking of what the ingredients

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Speaker 1: of those models should be. But it has not led

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Speaker 1: to really a profound uh UM paradigm shift that the

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Speaker 1: kind we saw sing the Night seven when we moved

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Speaker 1: from the Kynesian of games and model structure to more

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Speaker 1: rational I strongly support that idea. But if we are

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Speaker 1: moving to a new mix within our models, what is

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Speaker 1: that mix? Is it just assume that affect is always

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Speaker 1: behind the data curve, always ex post Yeah. No, I

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Speaker 1: think at this stage, at uh UM, I think academics

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Speaker 1: thinking at least remains still very wedded to the dynamics,

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Speaker 1: to Catholic general equilibrium uh paradigm. What what had happened

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Speaker 1: is that those models have been riched by adding financial sectors.

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Speaker 1: The financial sector was really very primitive in those made

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Speaker 1: holes in two thousand seven, two before two thousand and

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Speaker 1: seven and two thousand and eight. That's that's been muscled up.

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Speaker 1: But the basic structure, the basic way that those structures

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Speaker 1: are being used to approached economy remains the same. For example,

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Speaker 1: yesterday we saw the New York Fed come out with

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Speaker 1: their four D s g E based forecast for reinflation

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Speaker 1: UM showing that their staff, which is you know, one

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Speaker 1: of the key ones in the system is still still

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Speaker 1: very much using these models. Well, let's put Tom's question

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Speaker 1: of my question together, and it basically means that we're

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Speaker 1: trying to figure out the markets. You're trying to figure

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Speaker 1: out the fence reaction function, and it sounds like the

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Speaker 1: fence trying to figure it out as well at this point. Yeah,

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Speaker 1: I think it's it's a the The issue is that

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Speaker 1: the big puzzle for economists is how is it the

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Speaker 1: rates are so low and inflation remains so low? And

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Speaker 1: I many people you listen to speak from the from

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Speaker 1: the from the FOMC and U are conveying a sense

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Speaker 1: of unease with boy, how can rates be so low

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Speaker 1: and it's got to be lead to inflation so soon?

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Speaker 1: Or are other problems? Uh soon? And we don't see

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Speaker 1: those other problems. Rates are low, inflation remains low, and um,

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Speaker 1: there's I really don't think there's real strong signs of

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Speaker 1: financial stability of any con So it's I think what

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Speaker 1: you're hearing from the Fed is we've got to normalize

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Speaker 1: rates because they cannot stay this way forever. But what

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Speaker 1: drives them to make those decisions over time, I think

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Speaker 1: remains quite quite murky. One of the things that that

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Speaker 1: does seem to at least have a possibility of being

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Speaker 1: true is that by keeping rates so low for so long,

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Speaker 1: it's pushed down the expected return for companies UH to

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Speaker 1: for to invest, and that's one reason that productivity has collapsed.

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Speaker 1: I don't get like to get your on that. Yeah, no,

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Speaker 1: I I guess I've heard this story, and but it

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Speaker 1: doesn't really ring true to me. By keeping market rates low,

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Speaker 1: you should be making investments more attractive UM. The fact

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Speaker 1: that investments investment returns remain low UM is due to

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Speaker 1: other factors. UH my own uh favorite factor in that

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Speaker 1: is that the course of future demand for goods and

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Speaker 1: services UM remains I think quite low for most companies.

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Speaker 1: They don't see that demand being out there, and so

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Speaker 1: they're not as willing to invest. But by keeping market

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Speaker 1: rates low, you're making the return of say building a

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Speaker 1: new factory, to use the classic account example of economics,

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Speaker 1: you're making that return to seem much more attractive because

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Speaker 1: that's driven by other factors like the demand of services

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Speaker 1: and the cost of building that factory. Well, let's come

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Speaker 1: back now, you're going to cut your coda. Where us

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Speaker 1: from the University of Rochester, of course, the former president

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Speaker 1: of the Minneapolis Fed. We have too much to talk about, Mike.

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Speaker 1: When you need to get to get friend Jenny, we

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Speaker 1: need to get all you wonder is a good professor?

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Speaker 1: Try to Jenny Creemal, since he's calling to Rochester, will

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Speaker 1: have to find that out here. There's other joys of

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Speaker 1: the Genesee River, on the shores of the Genesee River

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Speaker 1: that he can abide in while he's in right, he

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Speaker 1: could he could enjoy the two seasons of Rochester winter

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Speaker 1: and the fourth of July. No One probably told him

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Speaker 1: that when he traveled to Rochester's man who grew up?

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Speaker 1: And there's still that's true, that Yester is like the beach.

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Speaker 1: There's still a late late winter in Rochester. All right,

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Speaker 1: now we'll come back with Professor Kocho Lakota. I want

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Speaker 1: to talk to about negative interest rates and the distoration

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Speaker 1: seen by Deutsche Bank today, crying really pushing back against

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Speaker 1: the Moody's downgrade. Of course, UniCredit News and uh Francie

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Speaker 1: la Quasi interview with Barclay's Jes Staley as well. Let's

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Speaker 1: check him with Michael Byrn now and get the latest

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Speaker 1: world of national headlines Mike Tom, thank you very much.

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Speaker 1: A state run Middle East news agency now contradicts reports

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Speaker 1: that Hman marines found at the crash site of Egypt

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Speaker 1: airflight eight oh force suggest that there was an explosion

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Speaker 1: on board that may have brought down the plane. The

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Speaker 1: official told the Associated Press. The logical explanation is that

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Speaker 1: an explosion brought it down. The A three twenty was

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Speaker 1: traveling from Paris to Cairo with sixty six people on

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Speaker 1: board when it went down in the Mediterranean. President Obama

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Speaker 1: says upholding human rights is not a threat to government.

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Speaker 1: In the speech and Hannoy today, he pressed Vietnam to

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Speaker 1: allow greater freedoms for its citizens, calling it the foundation

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Speaker 1: of progress. South Korea says more restaurant workers from North

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Speaker 1: Korea have escaped from their state run workplaces overseas and

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Speaker 1: are headed to Seoul. Global News twenty four hours a day,

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Speaker 1: powered by our twenty four hundred journalists more than a

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Speaker 1: hundred fifty news bureaus around the world. Not Michael bar Michael,

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Speaker 1: thanks so much. We are connecting the dots and they're

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Speaker 1: on a culchual Dakota. An important interview with the professor

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Speaker 1: from Rochester coming up Coachual Dakota on the distortions. The

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Speaker 1: joy of negative interest rates is Bloomberg surveillance. This news

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Speaker 1: update was brought to you by Bentley University. What do

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Speaker 1: rebooting America's oldest ski shop and crunching numbers at mr

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Speaker 1: print have in common? An NBA from Bentley University that

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Speaker 1: prepares graduates to innovate and lead because business is everywhere.

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Speaker 1: on your radio. This is a Bloomberg Business Flash. With

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Speaker 1: the Bloomberg Business Flash. Good morning, I'm John Tucker. Let's

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Speaker 1: say head over to the Bloomberg first word breaking news

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Speaker 1: task for today's morning call. And here's Bill Maloney. Morning Bill,

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Speaker 1: Good morning John US. She just are trading around their

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Speaker 1: best levels right now. Gaff you is currently hired by

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Speaker 1: ninety points, sesamees Game eleven and NAZAC futures rise by

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Speaker 1: six the US ten yeld at one point eight five percent,

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Speaker 1: and UPM markets rebounded from a week open. Italy gains

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Speaker 1: one point nine percent. On the US economic front ten

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Speaker 1: o'clock Richmond fed and new home sales and regarding earnings

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Speaker 1: this morning, Auto Zone Q three p S, comps, sales

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Speaker 1: and revenue all missed estimates, Best Buy Q two adjusted

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Speaker 1: EPs view trailed estimates, and DSW cut its forecast and

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Speaker 1: other news. Moody's cut Deutsche Banks writing to two levels

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Speaker 1: above junk and very in medical to spin off its

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Speaker 1: medical imaging unit. Foind me some of your key Wallsted

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Speaker 1: upgrades and downgrades. See if industry is cut under perform

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Speaker 1: at Bank of America, Archer, Daniels and d are raised

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Speaker 1: out before at BMO, Best Buy cuting neutral orat City Group,

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Speaker 1: General Mills cut the cell of Goldman Sacks and finally

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Speaker 1: Anthem cut the neutral over at stern A g live

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Speaker 1: in the first breaking news desk on Bill Maloney, John

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Speaker 1: and we checked the markets for you every fifteen minutes

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Speaker 1: during the trading day right here. All Bloomberg Radio and

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Speaker 1: Bloomberg Surveillance continues now with the Tom Keenom, Mike m

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Speaker 1: John talker. Thank you so much Bloomberg Surveillance. This this this

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Speaker 1: morning brought you by Investco. Do the day's headlines have

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Speaker 1: you searching for more investment views? Investco's experts gonna help

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Speaker 1: find out the latest thought leadership at the Investco blog.

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Speaker 1: Visit investco dot com slash us to subscribe. Michael McKee

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Speaker 1: and I with Narianna Caucha Dakota of Rochester, the former

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Speaker 1: president of the Minneapolis Fed. He has been very much

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Speaker 1: in the news recently. Professor Tom Sergeant owns the word robust.

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Speaker 1: He's done a cottage industry of thinking about game theory,

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Speaker 1: about how we think about what we think about in economics,

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Speaker 1: wrapped around this strange word of robust. He's done that

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Speaker 1: with Lars Peter Hansen. Do we have a robust understanding

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Speaker 1: and a robust knowledge of the robust nous of negative

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Speaker 1: interest rates? Do we have a clue what we're doing

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Speaker 1: and what the ramifications are? Yeah? No, I think, Uh

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Speaker 1: that's a great to talk about negative indust rates. Uh.

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Speaker 1: I'll quickly mention that the Lars handsome with my adviser,

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Speaker 1: So I I've work that's that's I can um No,

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Speaker 1: I think that. Uh, there's there's When you're ever thinking

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Speaker 1: about problems, are policy decisions from a robustness perspective? You're

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Speaker 1: thinking about the worst case scenarios. That's essentially what robust

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Speaker 1: de drives you to do. Uh, it's really a worst

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Speaker 1: case scenario kind of analysis that that's that you're being

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Speaker 1: forced to do. Um. I think they're you know, we're

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Speaker 1: we're there's worst case scenarios associated with going negative, there's

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Speaker 1: worst case scenarios associated with not going negative. And I

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Speaker 1: think there's when you to hear the discussion on negative

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Speaker 1: interest rates, there's a bias to words, well, maybe we

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Speaker 1: should just stay at zero, maybe we shouldn't, shouldn't try

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Speaker 1: to push any further on this that kind of an action. Though,

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Speaker 1: if you the countries that are gone negative are facing

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Speaker 1: big costs, big worst cases associated with with within in action,

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Speaker 1: and that's why drives them to take the step of

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Speaker 1: of of of going negative. I think we're learning absolutely

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Speaker 1: learning about negative instrates myself. My own takeaway from what

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Speaker 1: we've seen so far is banks don't like low interest rates.

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Speaker 1: They don't like them, Uh, they don't like twenty five bases.

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Speaker 1: They like fifty basic points better than twenty five, and

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Speaker 1: they like zero better than twenty five. So I don't

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Speaker 1: know if I've learned much more than that so far

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Speaker 1: about the dialogue on negative interest rates, but it always

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Speaker 1: has to kept in mind that inaction also has its

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Speaker 1: own worst cases associated with it. Well, I guess that's

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Speaker 1: the discretionary part of monetary policy for the policymakers to

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Speaker 1: decide where that risk line is. Because when you look

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Speaker 1: at the most recent iterations of quantity of easing and

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Speaker 1: now UH negative interest rates, we're not seeing inflation uh.

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Speaker 1: And it appears to a lot of people that the

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Speaker 1: central banks are running up against the liquidity constraint that

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Speaker 1: it renders them powerless to do much more. I think

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Speaker 1: there's a lot of tools left than the in the

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Speaker 1: tool kit. Um. I you know a four boss. Mr

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Speaker 1: Brynanki has written a very nice blog post I think,

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Speaker 1: explaining how the Fed and other central banks continue to

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Speaker 1: have I think a lot of tools left. Um. I

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Speaker 1: think the central banks are conveying unfortunately, are communicating a

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Speaker 1: sense of powerlessness, and that feeds back on itself, um

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Speaker 1: to to generate uh, lower inflation expectations, lower inflation outcomes. UH.

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Speaker 1: But I think one of the challenges has been that

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Speaker 1: the FED and other central banks want inflation, but they

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Speaker 1: don't want too much inflation. And in a post I

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Speaker 1: wrote recently, I compared this idea that you want to

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Speaker 1: throw your keys onto a table or a chair in

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Speaker 1: front of you, but you never want the keys to

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Speaker 1: go above the chair. Well, it's very hard then to

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Speaker 1: get the keys on the chair if you never want

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Speaker 1: to have it go above UM. And that's what the

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Speaker 1: game of central banks are trying to play. Somehow get

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Speaker 1: inflation back to target without it ever going about target.

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Speaker 1: I think that that's proven very challenging. But to Stanley

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Speaker 1: Fisher's speech the other day to Michael Woodford's legacy, he

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Speaker 1: ended the speech by understanding that even with all we've got,

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Speaker 1: we're in the search for economic growth. Does this monetary

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Speaker 1: discussion have anything to do with getting the real economy

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Speaker 1: back on track? You know that it has a little

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Speaker 1: bit to do with it, But you know, monetary policy

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Speaker 1: cannot be um. If we have persistently low growth, persistently

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Speaker 1: little productivity growth, for example, monetary policy can't be the

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Speaker 1: cure for that. With that said, um, you know, we're

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Speaker 1: about below or maybe a little more than that, below

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Speaker 1: what we would expect it to be uh ten years ago.

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Speaker 1: So if you formed an expectation in two thousands of

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Speaker 1: six of where we're gonna be in twenty sixteen, we

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Speaker 1: would be about twelve percent higher. I think at least

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Speaker 1: some of that maybe maybe not certainly not the full

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Speaker 1: twelve percent, but maybe it's much a half of it

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Speaker 1: we could make up with through better monetary and physical policy.

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Speaker 1: That's you know, we shouldn't sneeze at that by saying, oh,

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Speaker 1: that's not long term, bro, that's something that's worth worth

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Speaker 1: of pursuing. Arianna Cudt Dakota. Um, you and Tom got

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Speaker 1: to get together for a Jenny cream at some point. Uh.

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Speaker 1: Tom can give you all the tourist highlights of Rochester

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Speaker 1: and Nick ta Hoss National Landmark. That's the professor Cutchi Lakota.

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Speaker 1: Thank you so much. Congratulations on your appointment at the

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Speaker 1: University of Rochester. Mike. That was fascinating and not definitely

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Speaker 1: not enough time. Yeah, we'll have to get him back

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Speaker 1: on again. And and he writes now for Bloomberg View,

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Speaker 1: and we should mention a view go or Bloomberg View

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Speaker 1: on the on the on the internet, uh, and check

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Speaker 1: out his writings. And we did not ask him about

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Speaker 1: the outlier that would have been rude and figures up

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Speaker 1: eleven Bloomberg's surveillance coming up with all due respect highlight

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