Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane
Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg fraug
Speaker 1: Us in economics. It's a fun, fun day out in
Speaker 1: Jackson Hall with all of these interviews coming up from
Speaker 1: Mr Kaplan from Bostic of Atlanta, and here now is
Speaker 1: our Michael McKee with the Feller Reserve Bank of St.
Speaker 1: Louis FED. President. Good morning, Thank you very much. We'd
Speaker 1: like to welcome everybody listening to us on Bloomberg Radio
Speaker 1: and watching us on Bloomberg Television around the world. We'd
Speaker 1: like to welcome Jim Bullard and thank you for getting
Speaker 1: up so early to join us. Sarah, thanks are having me.
Speaker 1: You're for Minnesota, so you have to pretend you like
Speaker 1: it and it's an inforrible thing. Look a lot of
Speaker 1: Wall Street focus today on the chairman's speech. The minute
Speaker 1: suggested that the FED is locked in for September. So
Speaker 1: even if you disagree with that rate path, is there
Speaker 1: any reason to think that he's gonna see anything market
Speaker 1: moving today. I'm sure the chair will be very careful.
Speaker 1: I've not seen the speech, but he'll do a good job.
Speaker 1: He always does. He's always very very serious. You don't
Speaker 1: get the impression there's any kind of change a foot
Speaker 1: for the Open Market Committee and the rate path that
Speaker 1: there are. Well, the markets are putting a high probability
Speaker 1: on September, and I mean you can pull the other
Speaker 1: members of the Committee as well as I can, and Uh,
Speaker 1: there's certainly seems to be sentiment to go in that direction.
Speaker 1: Would you expect the forward guidance to drop out of
Speaker 1: the statement in September, the idea that the rates are
Speaker 1: accommodative and we'll stay that way. Uh, that's an interesting issue,
Speaker 1: and I think we'll have to wrestle with that one.
Speaker 1: I'm so from from my point of view, i'd, you know,
Speaker 1: rather not be calling rates accommodative right now. I think
Speaker 1: the whole structure of rates is lower, and therefore I
Speaker 1: think we're at neutral, are very close to neutral right now.
Speaker 1: Very interesting story out today on Bloomberg News. Twenty years ago. Unemployment,
Speaker 1: very low, inflation sticky and relatively low. James Stock, you
Speaker 1: normally famous economists did a paper that suggested that in
Speaker 1: those situations where you don't really know why something is happening,
Speaker 1: it is better for the FED to be aggressive than
Speaker 1: to take a step back because you don't know when
Speaker 1: inflation might show up. Now you're in the step back camp.
Speaker 1: Why is James Stock wrong and Jim Board right? Yeah,
Speaker 1: that's an older paper and there was a literature about
Speaker 1: that kind of went around the circles on this, about
Speaker 1: whether you should be more aggressive or less aggressive when
Speaker 1: you're uncertain about about key, key things like the slope
Speaker 1: of the Philip curve. Um, there are arguments on the
Speaker 1: other side. So that was just one paper in a
Speaker 1: in a kind of sea of papers on that. UM.
Speaker 1: I would say it's makes more sense probably to be
Speaker 1: a gradualist on that in the current environment. You know what, uh,
Speaker 1: what you'd like to do is just take on board
Speaker 1: the idea that inflation has been very low, it's been
Speaker 1: very stable, It really has been quite sluggish, and it
Speaker 1: just doesn't seem like you have to do too much.
Speaker 1: But if you had to, you could move pretty fast
Speaker 1: if you needed to. So so I just don't see
Speaker 1: the argument for being pre emptive in this situation in
Speaker 1: a world where the Phillips curve really hasn't been a
Speaker 1: factor in the last twenty years. Well, the Fed essentially
Speaker 1: did not take jamets. Just to show you how flat
Speaker 1: we're talking about now, this is a ratio of ten
Speaker 1: to one, So you need a hundred basis points of
Speaker 1: gap between unemployment and some natural rate of unemployment to
Speaker 1: get just ten basis points on the inflation rate. And man,
Speaker 1: that's that''s really really, that's almost nothing. The next two years.
Speaker 1: We don't see inflation. I don't see it, and more importantly,
Speaker 1: I don't think markets see it. If you look at
Speaker 1: tips space measures of inflation expectations, they're taking all of
Speaker 1: us into account. They've taken into account, uh, fiscal policy,
Speaker 1: rapid growth in the economy, low unemployment rate. They still
Speaker 1: don't see that much inflation, especially if you translate from
Speaker 1: a CPI basis to a PC basis. So they're really
Speaker 1: saying we probably won't hit our inflation target over the
Speaker 1: next five years, next ten years, or the five I'm sorry,
Speaker 1: the next ten years. Well, if they did not take
Speaker 1: James Stock's advice, it kept very slow for long and everybody,
Speaker 1: not everybody, but a lot of people suggest that maybe
Speaker 1: that was one of the proximate causes of the two
Speaker 1: thousand and eight financial crisis, that rates were too low
Speaker 1: for too long and excess is built. You know, okay,
Speaker 1: so financial stability is a is an issue. In the
Speaker 1: nine eight though, would have been the currency crisis and
Speaker 1: started in Thailand and unspread UH in Asia, ultimately not
Speaker 1: affecting the U S economy. Was a lesson from that
Speaker 1: because it drove US rates lower and that actually helped
Speaker 1: the boom in the U S. So um later you got,
Speaker 1: of course, the dot com bubble did come to an
Speaker 1: end later. Yield curve was inverted in two thousand and
Speaker 1: FED went ahead and and race rates in the face
Speaker 1: of inverted yield curve, and you could argue that that
Speaker 1: was a mistake at the time, Well, you and other
Speaker 1: members of the Open Market Committee, I said, we would
Speaker 1: not intentionally UH invert the yield curve. But are you
Speaker 1: smart enough? Do you have enough insight into the markets
Speaker 1: to know whether you would do that? Here's what I
Speaker 1: think in this issue. I was around in two thousand,
Speaker 1: we met, we did it, played it wrong. I was
Speaker 1: around in two thousand and six. Again, the old curve
Speaker 1: was inverted. We played it wrong this time. I want
Speaker 1: to take this signal seriously, even though when you look
Speaker 1: at mac economic models it doesn't really fit into the
Speaker 1: models the way we'd like. But I think you have
Speaker 1: to take it seriously as a signal. And what I
Speaker 1: think about this is there is no reason to challenge
Speaker 1: the yield curve at this time. There's no reason in
Speaker 1: other circumstances. If inflation was higher and heading higher, then
Speaker 1: I might say, well, we're taking some recession risk, but
Speaker 1: I'm willing to trade that off because it looks like
Speaker 1: inflation is getting out of control. We're not in that
Speaker 1: situation today. Inflation is low, it's stable, it's barely up
Speaker 1: to target, just barely getting to target today. So we
Speaker 1: don't need to challenge, we don't need to be preemptive
Speaker 1: on the yield curve. One of the other arguments against moving,
Speaker 1: people say is the impact that you have on emerging
Speaker 1: markets and the spillover effect that could have on the
Speaker 1: US economy. I know your mandate is the US economy,
Speaker 1: but how much of a risk do you think that is? Well,
Speaker 1: I mean, we've been going very slow at the rate
Speaker 1: increases well telegraphed I think these foreign economies have had
Speaker 1: ample opportunity and apple understanding of what was going on
Speaker 1: in the US. You do have some countries that have
Speaker 1: special situations, usually special political situations in one kind or another.
Speaker 1: They borrowed in foreign currency, that's often an issue. Not
Speaker 1: enough reserves, that's often an issue. So UM, I would
Speaker 1: take those as special cases the countries that are having trouble. Um,
Speaker 1: but I'll keep an eye on it. Also on the
Speaker 1: list of things that FEDE officials have been concerned about
Speaker 1: the decline in home sales, and not just the decline
Speaker 1: in home sales, but median prices have been falling, is
Speaker 1: the is the FED killing the housing market by raising rates? Uh? Well,
Speaker 1: housing is one of the most interest sensitive sectors, so
Speaker 1: you would think it would have some impact there. Um.
Speaker 1: If you talk to real estate people, then they say, wow,
Speaker 1: it's limited in it's because of the limited inventories and prices. Uh.
Speaker 1: You're saying medium prices went down, but uh, some of
Speaker 1: the year over year figures are still positive. So um,
Speaker 1: and they have risen quite a bit. They've been rising.
Speaker 1: The housing prices up until now, until recently have been
Speaker 1: rising at a fairly good clip. Finally, on the list tariffs.
Speaker 1: Most economists say there will be some effect, but it
Speaker 1: doesn't show up in the data. So I'm wondering what
Speaker 1: companies in your district CEOs are telling you about the
Speaker 1: impact of tariffs so far and what impact that might
Speaker 1: be having on their investments. Certainly get an airfull about
Speaker 1: tariffs from many different angles. There's a lot of concern
Speaker 1: on main street about how these tariff wars will affect
Speaker 1: them and their products. Soybeans, for instance, is a major
Speaker 1: product out of the eighth district that's UH, that's exported. Um.
Speaker 1: I hope we can get to some resolution. I hope
Speaker 1: that the strategy works, that this is UH negotiating tactic,
Speaker 1: but that ultimatelyly it leads to freer trade and better
Speaker 1: trade arrangements with our trading partner. Well, there's been uncertainty
Speaker 1: about tariffs. There was uncertainty about the impact of the
Speaker 1: tax reform law, and la time we talked to you
Speaker 1: suggested that that was leading companies to hold off on
Speaker 1: investment decisions because they weren't sure what the climate was
Speaker 1: going to be. Has that changed or company is still
Speaker 1: on hold. They are concerned about the tariff issue because
Speaker 1: they feel like well, if I if I put a
Speaker 1: plant in country acts and then there are a bunch
Speaker 1: of you know, the tariffs go way up that are
Speaker 1: going to have to move the plant to some other country.
Speaker 1: And so they want to know what the rules are
Speaker 1: before they invest, as a classic element of investing on
Speaker 1: a grand scale, And they do want certainty before they
Speaker 1: do that one of the tet but they wanted the
Speaker 1: more certain One of the topics here as we talk
Speaker 1: about changing market structure is the decline in business dynamism
Speaker 1: in the United States. Do you have a good handle
Speaker 1: on why that is and how is it in the
Speaker 1: eighth district? You know, I have I have an idea
Speaker 1: about this, and I'm going to test it out and
Speaker 1: pitch it out here to these two people here at
Speaker 1: this conference. But I think the core ideas that in
Speaker 1: the nineteen eight if you look at the data since
Speaker 1: the nineteen eighties, there are more people working for big
Speaker 1: companies today than there were. It used to be like
Speaker 1: kind of like six. Now it's like eight of all
Speaker 1: employees are working for so called big companies, depending on
Speaker 1: how you define that. So if you think about what
Speaker 1: happens since the eighties, it was all about rolling up industries.
Speaker 1: Hardware industry used to be very uh dispersed. Now you've
Speaker 1: got Lows and home depot. Uh. Coffee used to have
Speaker 1: a coffee shop on every street corner. They're independently owned.
Speaker 1: Now you've got Starbucks. That theme has rolled through the
Speaker 1: US corporate sector since the nineteen eighties, and I think
Speaker 1: that that is what has driven this idea that you know,
Speaker 1: more people are working for bigger companies. The worry about
Speaker 1: that is bigger companies that are thought to not innovate
Speaker 1: as much, and so that might hurt our economy long term.
Speaker 1: Not enough small firms and uh, you know, they tend
Speaker 1: to be you know, more sluggish and not not react
Speaker 1: enough to market events compared to smaller firms, So that
Speaker 1: would be the concern. Jim Bullard, president of the St.
Speaker 1: Louis Fan Thanks for joining us on this cold morning.
Speaker 1: We'll let you get warm and justice. Second, okay, we'll
Speaker 1: send it back to you. Michael McKee, Thank you so much.
Speaker 1: Michael McKee in front of the split rail fence at
Speaker 1: Jackson Hole. A beautiful, beautiful morning. Is the fog is
Speaker 1: burned off. Here he is with a president of the
Speaker 1: Cleveland Fed. Here he is and thank you very much,
Speaker 1: and we welcome President Mster to Bloomberg Television and Radio worldwide.
Speaker 1: Thank you for coming out in the cold here. You're
Speaker 1: not nervous, you're shivering because it is really cold out here.
Speaker 1: To the fundamental question that they just asked, was j
Speaker 1: Powell today? The minutes sort of suggest were locked in
Speaker 1: for September for a rate move. So does Chairman Poule
Speaker 1: need to say anything today or can the bond traders
Speaker 1: who are not in the Hampton's uh you know, leave
Speaker 1: by noon. Well, look, the case for raising interest rates,
Speaker 1: I think it's pretty compelling. We have an economy that's
Speaker 1: growing above trend, we have low unemployment, and we have
Speaker 1: inflation at basically our goal of two percent. So we've
Speaker 1: been trying to engineer UM calibrate our policy path to
Speaker 1: the economy, and so this gradual increase in rate seems
Speaker 1: to be a very compelling case right now, given that
Speaker 1: we are accommodative still on monetary plans. We think the
Speaker 1: market gets that the Chairman doesn't need to steer us
Speaker 1: in any direction. Well, you know, the Chairman will give
Speaker 1: his speech today and I think he's going to be
Speaker 1: talking about UM some longer own issues as well as
Speaker 1: perhaps short run issues. And I'm looking forward to hearing
Speaker 1: his speech as well. Uh, you think in September you
Speaker 1: go ahead and drop the accommodative statement from from from
Speaker 1: your statement the accommodative sentence end for guidance. So you know, UM,
Speaker 1: in the minutes mentioned that you know, we're thinking about
Speaker 1: how we want to you know, change the statement. UM.
Speaker 1: We we look at the statement every time to make
Speaker 1: sure that we're being UM transparent about our views on
Speaker 1: policy and and sort of give an indication where policy
Speaker 1: is going. Now, we're in a in a situation now
Speaker 1: where you know, we are data dependent as we've been UM,
Speaker 1: and we want to be UM as transparent so we
Speaker 1: can where we think policy is going. But we also
Speaker 1: want people to understand that we don't lock ourselves into something.
Speaker 1: We want to react to how the data comes in
Speaker 1: and where the economy is going. So again, we want
Speaker 1: our our our statements to be transparent in that sense
Speaker 1: so that people aren't misled. Well, I wonder if if
Speaker 1: the markets completely get the message. And the reason I
Speaker 1: asked that is the is the yield curve being so
Speaker 1: flat and a lot of people predicting it's going to invert.
Speaker 1: You're about a hundred basis points below where the median
Speaker 1: terminal rate would be based on your latest forecast. So
Speaker 1: if you're going to raising rates to that point and
Speaker 1: the Eel curve is this flat, does that suggest that
Speaker 1: markets aren't getting your message or that they fundamentally disagree
Speaker 1: with your assessment of the economy. Well, I think the
Speaker 1: yeld curve is certainly something we look at the slope
Speaker 1: of the young curve. I think there's reasons to think
Speaker 1: that it may not be signaling the same as it
Speaker 1: has in the past. As you know, um an inverted
Speaker 1: your curve is usually correlated with um an economy going
Speaker 1: into recession. But there's a reason too that the long
Speaker 1: end is depressed now for other reasons. In particular, there's
Speaker 1: demand for safe assets, so you know, quality flight to
Speaker 1: quality into the U S. Treasury market and also um
Speaker 1: QI around the world. You know, we've a lot of
Speaker 1: central banks have used the long end in the US.
Speaker 1: We did, we bought long term masses, and that put
Speaker 1: downward pressure on the long ended. So the signal that
Speaker 1: you take from the old curve now is different than
Speaker 1: it has been in the past. You mentioned Qui. At
Speaker 1: the less FED meating, you had a staff presentation monetary
Speaker 1: policy tools, and the conclusion of the staff was, we're
Speaker 1: going to get to the zero lower bound again sometime
Speaker 1: in the next decade, and they aren't really sure how
Speaker 1: much que or forward guidance is going to help get
Speaker 1: off zero. Does that worry Well, I think QUI was
Speaker 1: successful in terms of putting lower UM accommodation into the economy.
Speaker 1: It is one of the tools that we have. Forward
Speaker 1: guidance is another tool that we have, and I think
Speaker 1: this discussion was an important one to have so that
Speaker 1: we are prepared. There's reason to believe that longer term
Speaker 1: interest rates are going to be lower UM in the
Speaker 1: future for demographic reasons, because of demand for safe assets,
Speaker 1: and so it's very very good for the FED to
Speaker 1: have these discussions to be prepared. But we do have
Speaker 1: tools that we can use at the lower bound. Do
Speaker 1: you have enough confidence in them that they work or
Speaker 1: do you need to find another arrow for the quiverment? Well,
Speaker 1: I think we're always you know, looking at our monetary
Speaker 1: policy framework. UM that's something else that we're going to
Speaker 1: have a discussion of bound in the future, and that's
Speaker 1: part of this, you know, prudent planning for the future. Uh.
Speaker 1: The FED had maybe three main concerns, and not concerns
Speaker 1: in the sense that they were imminent problems for the economy,
Speaker 1: but things that you're watching. Emerging markets a big one,
Speaker 1: and I wonder how you approach this, what your feel
Speaker 1: is feeling is about the Fed's responsibility for what happens
Speaker 1: in emerging markets, given the dollars role as the reserve currency,
Speaker 1: and the outside effect that you have on other people. Right,
Speaker 1: So Congress has given us our mandate, and of course
Speaker 1: it's it's centered on the domestic economy, but we are
Speaker 1: in a global economy, so the feedback effects of other markets,
Speaker 1: other countries onto the US economy is something that we
Speaker 1: must take into account when we're doing US monetary policy.
Speaker 1: So again, you know, at this point, um, we don't
Speaker 1: anticipate that there will be big feedbacks, but we've seen
Speaker 1: in the past that financial markets can propagate shocks from
Speaker 1: one economy to another, and so it's certainly something that
Speaker 1: we're going to be monitoring. A nothing obviously on everybody's list, tariffs,
Speaker 1: Alan Blinder said the other day of economists agree that
Speaker 1: tariffs will have an impact on the economy, yet we
Speaker 1: don't see it in the data. So how worried are
Speaker 1: you about that? Well, it's certainly a risk. UM. If
Speaker 1: you look at just the terrorists have been announced. In
Speaker 1: terms of the macro economic effect, it's not that large,
Speaker 1: but there's uncertainty around how that will play out, and
Speaker 1: that it's in and of itself, can affect firms in
Speaker 1: our district. We've been monitoring because of course the fourth
Speaker 1: district is UM you know, has a trade with Canada
Speaker 1: as being an important part of the economy and also
Speaker 1: the auto industry, and so we're we are very much
Speaker 1: looking at firms and talking to firms, and firms have
Speaker 1: said that they are taking too account terrorists, but so
Speaker 1: far they haven't reacted strongly to them. They haven't taken
Speaker 1: off investment that they had planned, but they are considering it,
Speaker 1: and so that's something that we want to monitor very carefully. Well,
Speaker 1: you are so the center of the tariffs for the
Speaker 1: United States economy according to the President. So do you
Speaker 1: see any positive effects UM. I think that most economists
Speaker 1: and myself including think that free trade actually benefits UM countries.
Speaker 1: If you actually look at the history that you want
Speaker 1: to have free and open and fair trade, and so
Speaker 1: I would be in that camp. Well, if you if
Speaker 1: you go forward with additional tariffs, does it have a
Speaker 1: major effect on the economy or or your district or
Speaker 1: is it small enough given the size of the U. S.
Speaker 1: Economy that it doesn't really matter all that Munch. I
Speaker 1: think it depends on how it plays out. If we
Speaker 1: get into a trade war where we have one country
Speaker 1: retaliating against another, that in and of itself can affect
Speaker 1: the U. S. Economy through the direct root of the
Speaker 1: tariffs themselves, but also through the uncertainty that it causes.
Speaker 1: Do you anticipate that the tarrifts will add to any
Speaker 1: of the inflation pressures that you lore at amester Warriable?
Speaker 1: So you know that's is a consideration. If it's a
Speaker 1: one time tariff and it's a one time increase in prices,
Speaker 1: then we'll look through that. I think that's not an
Speaker 1: inflationary But if you have these retaliatory tars that come
Speaker 1: on over time and continue, then it's something that we
Speaker 1: have to take into account in terms of our inflation readings.
Speaker 1: Speaking of inflation, do you think you understand inflation dynamics
Speaker 1: these days? I mean you're worried that the lack of
Speaker 1: slack in the economy is going to push up prices,
Speaker 1: but it's not really happen. So I think it's something
Speaker 1: we watch. Um. You know, we know for a number
Speaker 1: of years that the so called Phillips curve um has
Speaker 1: not been very steep, and so it's something that we
Speaker 1: have to understand. I mean, my own view of inflation
Speaker 1: is that inflation expectations are very important determinant of dynamics.
Speaker 1: We have seen inflation move up to our two percent goal.
Speaker 1: I expect by the end of the year that I'll
Speaker 1: be able to conclude that it's sustainably a two percent
Speaker 1: I mean, we're gonna seem monthly variations in the in
Speaker 1: the data as we always do, but I think it's
Speaker 1: been moving up and think that's something that as we
Speaker 1: go forward into the next year, we're gonna have to
Speaker 1: be monitoring very carefully where we are relative to our goals.
Speaker 1: But that's typical monetary policy making. Well, the shift the
Speaker 1: argument has shifted basically for whether inflation is rising and
Speaker 1: will it hit your goal to how far above your
Speaker 1: goal do you let it go? What would you be
Speaker 1: comfortable with? So we didn't overreact when inflation was below
Speaker 1: our goal. I don't think it's right for us to
Speaker 1: overreact when inflation goes a bit above our goal. We're
Speaker 1: always aiming to keep inflation ball at our two percent
Speaker 1: goal um, and so I'm comfortable with inflation moving a
Speaker 1: little bit above two percent. But again it's got to
Speaker 1: be in the medium run forecast coming back down to
Speaker 1: two percent. Well, I mean, these guys out there on
Speaker 1: the trading guests are all wondering, what does she mean
Speaker 1: a little bit? I mean two point five percent for
Speaker 1: how long? It really depends on the forecast, right, I mean,
Speaker 1: I wouldn't be comfortable if I saw forecasts that had,
Speaker 1: you know, inflation moving up and continue to move up
Speaker 1: above two percent. If I saw it move up temporarily,
Speaker 1: but my forecast and most economists forecasts were to come
Speaker 1: back down to two percent over that media un forecast
Speaker 1: time horizon, over which policy monetary policy and effect the economy,
Speaker 1: then I'd be comfortable. And the other question everybody wants
Speaker 1: to know is if inflation is moving up, when do
Speaker 1: I get a raise? Because right now, consumer price inflation
Speaker 1: is running above average hourly earnings. Right, So if you
Speaker 1: look at the e c I data, which is one
Speaker 1: of the indicators of wage inflation. You have seen an
Speaker 1: accelerate um from where it was earlier in the expansion,
Speaker 1: which is a good thing um. And if you look
Speaker 1: at the DISAGGREGATEDDC it's the lower end um of wages
Speaker 1: that are moving up. So I think that's a very
Speaker 1: good thing. I think a lot of what's going on
Speaker 1: in the wage um picture has to do with low
Speaker 1: productivity growth, So investment being up can increase productivity growth.
Speaker 1: I think that's a good thing. I think the other aspect,
Speaker 1: of course, is an inflation has been low over most
Speaker 1: of the of the expansion, and that also explains the
Speaker 1: low levels of wage the Right Semester, thank you very
Speaker 1: much for joining us. Thank you. We'll let you go
Speaker 1: get warm and we'll send it back to you. Careful,
Speaker 1: careful interview with the president of the Cleveland Federal Right Semester.
Speaker 1: We're there, Michael mckew. This will be an important interview,
Speaker 1: always interesting with a member of the Dallas FED. And
Speaker 1: for Robert Kaplan, it is about confidence in the American economy.
Speaker 1: It is about the business process. It is about business
Speaker 1: and from that confidence the leadership that leads to investment
Speaker 1: and then on two jobs. We do this with green
Speaker 1: on the screen, the dow up the vis under twelve
Speaker 1: eleven point nine nine. I'm watching yields here higher a
Speaker 1: little bit this morning, but really all attention paid to
Speaker 1: this series of FED interviews leading to the power speech.
Speaker 1: Right now are Michael McKee and Jackson Hall with Robert
Speaker 1: Kaplan of the Dallas Fed. Thank you very much. We
Speaker 1: welcome Dallas FED President Robert Kaplan to Bloomberg Television and
Speaker 1: Radio worldwide. Thank you for joining us. You're you're probably addressed.
Speaker 1: You're not as old as we're about twenty minutes away
Speaker 1: from the main event of the day for Wall Street
Speaker 1: and the chairman's speech the minutes suggests we're locked in
Speaker 1: for a rate increase in September, probably in December as well.
Speaker 1: Do you expect the chairman to give us any guidance
Speaker 1: to the contrary. I'm not going to comment on what
Speaker 1: the Chairman is gonna say. I'll let his speech stand
Speaker 1: on its own. I've said I think we ought to
Speaker 1: be moving toward neutral, which means three or four increases
Speaker 1: over the next nine to twelve months, and I think
Speaker 1: at this point moving in September and December is consistent
Speaker 1: with that path, so that that would be my own view,
Speaker 1: but I think everyone around the table you should express
Speaker 1: their views independently, including the chair, and I know he
Speaker 1: will well. One of the arguments around the table is
Speaker 1: that inflation is roughly at your target, but it's not
Speaker 1: moving up very fast. And you've been advocating continuing with
Speaker 1: the path that you're on. But why do you need
Speaker 1: to do that if inflation is not breaking up? So UH.
Speaker 1: Our measure at the Dallas FED is the trim mean,
Speaker 1: which is a core inflation measure. X is out extreme
Speaker 1: moves to the upside and downside. And we see that
Speaker 1: getting to two by the end of this year and
Speaker 1: even strengthening beyond there. And here's here's what's going on.
Speaker 1: There's two conflicting factors. One is the cyclical factors. Got
Speaker 1: a very tight labor market, we have higher input costs.
Speaker 1: Some of it's due to tariffs, maybe transitory factors, but
Speaker 1: there's no question that cyclical factors are pushing prices UH
Speaker 1: upward UH and and having inflation. Their structural factors going
Speaker 1: the other way. Globalization, automation, you know, people being replaced
Speaker 1: by technology, and so my own view is inflation is
Speaker 1: going to keep moving up because the cyclical factors are
Speaker 1: very strong. I don't think it's going to run away
Speaker 1: from us. But I think what the balance we're trying
Speaker 1: to tread at the at the FED, and what I'm
Speaker 1: trying to tread is you want to move gradually. You
Speaker 1: don't want to move so slowly that inflation uh, and
Speaker 1: the cyclical forces get ahead of themselves and get ahead
Speaker 1: of us, and we have to play catch up, in
Speaker 1: which case would have to raise rates more quickly. And
Speaker 1: I think that typically leads to bad outcomes in particular recession.
Speaker 1: So what we're trying to do is raise gradually. And
Speaker 1: and that's the reason why I've been advocating let's keep moving.
Speaker 1: The other reason I'm advocating let's keep moving, we're meeting
Speaker 1: our dual mandate objectives. We're reading our full employment objective.
Speaker 1: As you said, inflations around two percent. In that context,
Speaker 1: we should we shouldn't be a we don't need to
Speaker 1: be accommodative. We should be moving to a neutral stance.
Speaker 1: And neutral would mean for me, three or four increases
Speaker 1: to get to somewhere in the neighborhood. UH. US or
Speaker 1: minus of two and a half to two and three
Speaker 1: quarters percent, maybe a little bit more. And that's the
Speaker 1: primary reason why I've been advocating we should keep gradually
Speaker 1: raising the FED funds rate. Well, you're the FEDS man
Speaker 1: in the oil patch, and you just wrote this week
Speaker 1: that oil prices are going to go up. Well, here's
Speaker 1: what here's what I'm saying. I'm saying they're vulnerable to
Speaker 1: an upside price spike. Here's why we were in a
Speaker 1: global oversupply situation over the last few years, where now
Speaker 1: we think in in global equilibrium, supply basically equal to demand,
Speaker 1: but because global demand keeps growing um and uh, they're
Speaker 1: also there's the risk of supply outages from Iran Venezuela. Uh.
Speaker 1: We think US production is going to need to keep growing,
Speaker 1: and shale in particular, but there are limits to how
Speaker 1: fast shale can grow. So what we've cautioned is in
Speaker 1: the next three years three to five, we're likely to
Speaker 1: move into global undersupply situation. So while we're in this period,
Speaker 1: we're a little more vulnerable than we have been to uh,
Speaker 1: you know, less oil on the market from Iran because
Speaker 1: of sanctions, or less oil on the market from Venezuela,
Speaker 1: and we're just cautioning. I think we're a little more
Speaker 1: vulnerable to an upside price shock and oil uh in
Speaker 1: this period, and we just have to be sensitive to that.
Speaker 1: Does that translate into inflation concerns that would change the
Speaker 1: rake bath? I think oil and energy is obviously one
Speaker 1: part of inflation, but I think it leads, it leads
Speaker 1: into a broad narrative. Most CEOs I talked to, and
Speaker 1: I talked about thirty a month, and we do broad surveys.
Speaker 1: Most companies I talked to are saying input costs are
Speaker 1: going up. Energy is part of it, uh steal aluminum um.
Speaker 1: Some of that's due to these to due to tariffs.
Speaker 1: I think input cause generally are going up so uh UM.
Speaker 1: I think we just have to be aware of that. Now.
Speaker 1: This is why there's one impact of the tariffs that
Speaker 1: affects oil that people are concerned about. One of the
Speaker 1: reasons production isn't growing faster and say the Permian Basin
Speaker 1: and Texans Texas is lack of infrastructure, particularly pipelines that
Speaker 1: takes steal uh and these tariffs. A lot of people
Speaker 1: in the industry are concerned they're going to slow building
Speaker 1: of those pipelines or at least make it more expensive.
Speaker 1: And so all these factors that fit in with one another,
Speaker 1: and it's part of the broad dashboard that I'm watching.
Speaker 1: Let's talk about tariffs in those CEOs. Uh, we don't
Speaker 1: see tariff impacts in the data yet, So are the
Speaker 1: CEOs changing behavior at all because of what they think
Speaker 1: might happen? If you'll if you look economy wide, we
Speaker 1: don't see much impact. Digree. If you look at individual industries,
Speaker 1: you're seeing you're seeing impact. And what I hear from
Speaker 1: CEOs i'm talking to is, at a minimum, the tariffs
Speaker 1: are having somewhat of a chilling impact on their capital
Speaker 1: spending plants, meaning they're just saying, let's just wait a
Speaker 1: little bit and see how this unfolds. And in certain
Speaker 1: industries it's raising input costs and for the first time
Speaker 1: in a long time, they're trying to pass on price increases.
Speaker 1: I don't see it yet, as you said, in overall GDP,
Speaker 1: and I think if it's contained here, I'm optimistic that
Speaker 1: it won't have a material effect on GDP. But what
Speaker 1: we're watching for and what companies are watching for, is
Speaker 1: this spread further. Is it more prolonged as it get wider.
Speaker 1: I'm hopeful that that won't happen, and if it does,
Speaker 1: we'll have to reassess the impact on the overall economy.
Speaker 1: Based on what you said about three or four more
Speaker 1: rate increases, you're about a hundred basis points below what
Speaker 1: you think neutral might be. Yet the yield curve is
Speaker 1: extraordinarily flat right now. Market spreading about inversion, does that
Speaker 1: suggest maybe a failure to communicate on the FEDS part,
Speaker 1: in the sense that investors don't understand your view of
Speaker 1: the economy or they don't believe your forecasts. No, I
Speaker 1: actually think the the treasury markets reading what we're saying
Speaker 1: pretty accurately. Here's the way I read the treasury market.
Speaker 1: The short end, the one in two year treasuries are
Speaker 1: are fully reflective. I think of the of the rhetoric
Speaker 1: from the Fed, how many times we planned to raise rates? Uh,
Speaker 1: and I think that's uh. That's substantially reflected in the
Speaker 1: short end of the curve. The long end of the
Speaker 1: curve isn't controlled by the FED. The long end of
Speaker 1: the curve is dictated by economic conditions and GDP growth.
Speaker 1: With the long end of the curve is saying is yes,
Speaker 1: there's a lot of global liquidity which may be putting
Speaker 1: some downward pressure. In other words, there's lots of pension
Speaker 1: funds and central banks that are buying the tenure in
Speaker 1: the third year. But I think with the long end
Speaker 1: of the curve is also saying is that medium term
Speaker 1: growth is going to be weaker than what it looks today.
Speaker 1: It's gonna be more sluggish. So I actually think that
Speaker 1: the Treasury curve is very consistent with what we've been
Speaker 1: saying and our economic outlook, and pretty consistent with what
Speaker 1: the Feds have been saying about the path of rates. Well,
Speaker 1: if growth is going too slow and inflation UH isn't
Speaker 1: going to get out of control, what do you worry
Speaker 1: about in terms of the economy, What in your mind
Speaker 1: could derail December or two thousand nineteen rate pikes. Well,
Speaker 1: in the short run, the things I'm looking at we'll
Speaker 1: have to see if terroriffs become more widespread. But related
Speaker 1: to that, I'm looking for UH risk outside the United States.
Speaker 1: So obviously there are countries like Turkey and Argentina that
Speaker 1: are very dependent on dollar denominated debt and they're having
Speaker 1: a turmoil so far that hasn't led to contagion. I
Speaker 1: think it's so far contained, but I'm watching that. I
Speaker 1: think the reason watch it so closely is if you
Speaker 1: had global financial instability that could spill over back in
Speaker 1: the United States and affect financial conditions here. So I'm
Speaker 1: watching for that. Setting that aside, I'm more worried about
Speaker 1: about the medium term outlook than what happens in the
Speaker 1: next six twelve months. I think the short term outlook
Speaker 1: for the U s economy is very strong, as you
Speaker 1: and I have discussed, but I'm more worried about what
Speaker 1: happens in twenty one, which is being driven more in
Speaker 1: my opinion, by the fact that fiscal stimulus will have faded,
Speaker 1: but we'll be left with an aging population, slowing workforce
Speaker 1: growth UH, and sluggish productivity I think mainly due to
Speaker 1: lagging education and skill levels in the United States. We
Speaker 1: can do something about those things, but that's still my
Speaker 1: biggest concern. And then the third concern, which I've mentioned before,
Speaker 1: is we're getting a tail wind from fiscal stimulus right
Speaker 1: now and a lot of government debt. That tailwind can
Speaker 1: turn into a headwind if we decide in the next
Speaker 1: few years. We've got to moderate debt growth in the
Speaker 1: United States. So those are the three things I'm most
Speaker 1: worried about. But that isn't necessarily a six month worry,
Speaker 1: that's a medium term worry. Well, let me quickly ask
Speaker 1: you this. The FED most recent meeting staff presented UH
Speaker 1: an analysis of policy going forward and suggested you're gonna
Speaker 1: be at zero, You're gonna have to cut rates to
Speaker 1: zero again sometime within the next decade, and that maybe
Speaker 1: q E and forward guidance don't work as well as
Speaker 1: they did the last time to get us out of that.
Speaker 1: Does that concern you? What else do you do? So
Speaker 1: what that emphasizes for me is our tools are in
Speaker 1: the lingo asymmetrical. It's a lot easier to tighten than
Speaker 1: to ease. So that affects my thinking now, Meaning I
Speaker 1: mentioned growth are strong now, but I think it's going
Speaker 1: to wane somewhat in nineteen maybe two and a half
Speaker 1: percent and then trending down to two percent or one
Speaker 1: or three quarters to two percent. UH makes me conscious
Speaker 1: that it's very important that we move gradually and patiently
Speaker 1: because if we overdo it UH, and we have to
Speaker 1: play catch up and the economy is in a downturn,
Speaker 1: we don't have much capacity for fiscal stimulus, and as
Speaker 1: you just said, our tools, uh, we don't have a
Speaker 1: lot of tools in then as many as we've had
Speaker 1: in the past in the next recession. So it tells
Speaker 1: me that we ought to be moving gradually and patiently now.
Speaker 1: And also remind myself monetary policy acts with a lag
Speaker 1: so we may not see the effect of the great
Speaker 1: increases now for another six to twelve months, and it's
Speaker 1: a little bit masked by all this fiscal stimulus. I
Speaker 1: think it's very important for us to keep that in mind.
Speaker 1: And so again, all that leads me to let's gradually
Speaker 1: move to neutral and then when we get there, let's
Speaker 1: assess where we are and figure out what, if any,
Speaker 1: action should be taken. But I think it's very important
Speaker 1: that we we move in a gradual, patient way. All right,
Speaker 1: Robert Kaplan, thank you very much for joining us, President
Speaker 1: of the Dallas FED. We'll send it back to you.
Speaker 1: Michael McKee in Jackson Hole for a former governor of
Speaker 1: the Federal Reserve System, Frederick Michigan, Rick Michigan of Columbia University,
Speaker 1: Do we need dear a statement? Rick? Today? Unfed Independence
Speaker 1: is this is a good point for Chairman Paul to
Speaker 1: slip been one or two sentences to stake out FED territory.
Speaker 1: I don't know if it's if it's necessary right now. Certainly, uh.
Speaker 1: Bet A reserved independence extremely important. Uh. And we have
Speaker 1: a lot of both history and also research that indicates
Speaker 1: that when central banks are independent of politicians, we get
Speaker 1: much better monetary policy. And the problem here is the
Speaker 1: politicians things short term. We see this right now with
Speaker 1: President Trump. He you know that we have the economy
Speaker 1: roaring along and inflation is potentially a serious problem. But
Speaker 1: he's a low interest rate guy and he wants to
Speaker 1: keep the economy strong because that gets some votes. And
Speaker 1: this is very typical. Uh. What has been very interesting
Speaker 1: in the last twenty or so years is that that
Speaker 1: basically during the clin administration, there was a basically a
Speaker 1: rule that the president would not criticize the FED for
Speaker 1: raising rates, and that actually has served us very well
Speaker 1: and actually existed until this recent press sency. Uh. And
Speaker 1: it's been violated. But on the other hand, it's not
Speaker 1: clear how big a deal this is. You know, Trump
Speaker 1: is Trump. He liked the tweets about everything, says things
Speaker 1: that are pretty wild on a lot of different issues,
Speaker 1: and so I don't know how seriously to take his
Speaker 1: comments on lower illustrates. Tell me about and this goes
Speaker 1: to your service at the Bank of New York ages Ago.
Speaker 1: Tell me about the dollar dynamics in the FED. I
Speaker 1: mean it a given FED mating at the Echoes building
Speaker 1: or within the this color book or that color book.
Speaker 1: Is there a lot of attention paid to dollar movements?
Speaker 1: Not really? Uh that there's several issues here, uh that
Speaker 1: the dollar movements. Uh, First of all, the impact on
Speaker 1: the US economy is not that large because we're so
Speaker 1: we're so big that were our trade sector is actually
Speaker 1: smaller relatant most countries. So for a point of view
Speaker 1: how important it is to actually the forecast, it's not huge. Uh.
Speaker 1: That Also very important is that the Seat of Reserve
Speaker 1: should focus on domestic issues, should focus on what's happened
Speaker 1: to inflation, and also what's happened to the overall economy,
Speaker 1: and the dollars should feed into that in terms of
Speaker 1: actually having an impact on on what goes on in
Speaker 1: you as economy. But that end is not huge. So
Speaker 1: in that sense, the dollar really is not a big issue.
Speaker 1: The only time it could be really relevant is doing
Speaker 1: a financial crisis with potential for financial disruption. But that's
Speaker 1: not the situation we're in right now. So I would
Speaker 1: expect that there's very little discussion of the dollar right
Speaker 1: now inside inside the Echo building when the FMC meets
Speaker 1: let's back up to first principles. I love the cover
Speaker 1: of your second edition Macroeconomics, Policy and Practice. You've got
Speaker 1: the yachts of the elite on the cover. That's the
Speaker 1: that's that's It's got these gorgeous sailboats sailing off into
Speaker 1: the distance. You should know. I'm a very avid sailor,
Speaker 1: but my boat is a tiny little boat, only two
Speaker 1: and your your publisher, no doubt, said no, we need
Speaker 1: something more more fancy then that, so that students could
Speaker 1: dream someday of the big yachtchet with that set Rick Michigan.
Speaker 1: A lot of people are looking at the inequalities of
Speaker 1: America in this mystery of wage growth. Rick Michigan on
Speaker 1: wage growth, When does it happen? Okay, So I think
Speaker 1: that there's a there's a huge problem for the US
Speaker 1: in terms of income equality. Uh And in fact, this
Speaker 1: is also leading to some of our very unusual politics
Speaker 1: which I don't think as healthy, healthy as it has
Speaker 1: been in the past. Uh. The problem here is that
Speaker 1: if you don't get a good education, if you don't
Speaker 1: get highly educated, then you're screwed. And uh and unfortunately,
Speaker 1: there are a lot of people in the US who
Speaker 1: are not getting well enough educated and they're not having
Speaker 1: wage increases, and people who are highly educated, people like me,
Speaker 1: have done very well. That creates problems because many of
Speaker 1: the policies that then get put into place are ones
Speaker 1: which very focusing. They're very much on distribution, redistribution or
Speaker 1: in ways that may not be the best way to
Speaker 1: do it, or us we have u some of the
Speaker 1: kind of things that we've seen during the during this
Speaker 1: most recent presidential election. So this is actually not healthy.
Speaker 1: It's a problem that's very serious. Unfortunately, not that much
Speaker 1: the government can do about in the short term. Because
Speaker 1: this is a book about the fundamentals of education, and
Speaker 1: fixing a l high education, which is a huge problem
Speaker 1: in the theory, is very hard to do. I'll take
Speaker 1: your point that the Federal Reserve Bank cannot solve this problem.
Speaker 1: They've got only so many tools in so much institutional force.
Speaker 1: But there's a primal scream, Rick Michigan, whether it's in
Speaker 1: Australia or Hungary or in the United States, a populous
Speaker 1: revolt against the disparity of what g d P gains
Speaker 1: were getting. What can be the policy prescription? And folks,
Speaker 1: I say this with Michigan's landmark textbook which said, wait
Speaker 1: a minute, I'm actually going to talk about policy, Rick,
Speaker 1: what is the policy prescription to meet the people that
Speaker 1: support President Trump and their primal scream. So I think
Speaker 1: that a key shoe here is how do we improve
Speaker 1: elementary high school education so that the people who basically
Speaker 1: may not afford to go to college or actually may
Speaker 1: be people who can be very productive in the society
Speaker 1: but doing the trades. How can we make that a
Speaker 1: lot better? And this is a huge, huge issue in
Speaker 1: the context of not just the US, but many other countries.
Speaker 1: Chile has worked very hard, has been very successful to
Speaker 1: Latin American country in terms of getting growth, but they've
Speaker 1: never fixed their education. Do we need to go back
Speaker 1: to a guilt Do do we need to go back
Speaker 1: to a guild system or reinvigorate unions after the atomization
Speaker 1: of labor. Yeah, I don't think it's so much the
Speaker 1: UH making union struggle will be a solution. But I
Speaker 1: think giving people a leg up. What's always been wonderful
Speaker 1: about the United States has been your view is but
Speaker 1: if you work really hard, you can actually do better
Speaker 1: than your parents. And this has been something that has
Speaker 1: actually allowed us to have actually hire income inequality within generations,
Speaker 1: but across generations. Uh, that that there's that there is
Speaker 1: a quality. My grandfather was a pedlary, starved to death,
Speaker 1: basically never made a living. My father was an accountant,
Speaker 1: was a successful businessman. And then I'm the third generation.
Speaker 1: Of course I'm the scholar. So this is the American dream,
Speaker 1: and the American dream is not there anymore. That we
Speaker 1: actually have less upward mobility across generations now in the
Speaker 1: US then in Europe. That's a disastrous thing for this country.
Speaker 1: On the other hand, fixing it in sort of uh
Speaker 1: by quick fixes, that's not going to be the solution. Uh.
Speaker 1: Many of the issues of talking about trying to boost manufacturing,
Speaker 1: which a Trump administration is pushed and thinking that will
Speaker 1: help these people is just not not right. That that
Speaker 1: it's not going to work. It's really something that we
Speaker 1: have to dig in deeper to say, how do we
Speaker 1: give people who want to work the ability to make it,
Speaker 1: and we're not doing that in this country and that's terrible.
Speaker 1: Within this Rick is to bring it back the Chairman
Speaker 1: Palatin speech that we're going to hear an institution that
Speaker 1: a lot of people turn to. It used to be
Speaker 1: just about monetary policy. We've broken the rule on discussion
Speaker 1: of fiscal policy. We've broken the rule you know, often
Speaker 1: on discussion of a dollar and such. Where's this fed one,
Speaker 1: two or three Jackson holes from now? Well, I think
Speaker 1: that the problem is that many of these other issues
Speaker 1: are ones that the FED can control. I think the
Speaker 1: FED can, of course, will be making a clear cut
Speaker 1: case for why independence of the FED is so important. Uh.
Speaker 1: And I actually think that that uh, even though that
Speaker 1: Trump has has criticized the FED for for raising interest rates,
Speaker 1: that this will actually not be a very serious challenge
Speaker 1: to the FED. I think this is again just one
Speaker 1: of many Trump's comments which are sometimes frequently very wild
Speaker 1: and uh and people take them with the grain and
Speaker 1: salt as they should. Uh. The other issues in fiscal policy,
Speaker 1: we we also have a fiscal policy without now which
Speaker 1: is extremely peculiar, again, very focused on the short term.
Speaker 1: You're an economy that's basically close to overheating, and then
Speaker 1: you put in a big will stimulus. This is not
Speaker 1: the right timing for this, uh and UH. And particularly
Speaker 1: there's some of the fiscal stimulus, which is focused on
Speaker 1: tax cuts for very high income people really are not
Speaker 1: something that will produce long term growth, but will the
Speaker 1: issue of the corporate tax cut is something that could
Speaker 1: be couldn't be justified in terms of promoting growth. But
Speaker 1: a lot of the tax decreases that we just saw,
Speaker 1: we actually would not focused on what really needs to
Speaker 1: be focused on, but instead and goos just goosing up
Speaker 1: the economy, and that's not the right way to go. Governor. Professor,
Speaker 1: thank you so much, Rick Michigan of Columbia University. We
Speaker 1: greatly appreciate that this morning and extensive conversation with professors.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg Radio.