WEBVTT - Surveillance: Fed Rate Cut Divergence In Jackson Hole 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jai Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.560 Bloomberg dot Com, and of course, on the Bloomberger St. 0:00:27.600 --> 0:00:30.639 Louis five. President James Bullard is in Jackson Hall, Wyoming 0:00:30.640 --> 0:00:33.320 for the Kansas City Feeds Annual Symposium. He's sitting down 0:00:33.320 --> 0:00:38.000 with Bloomberg's Michael McKee, and he's facing a really complicated 0:00:38.000 --> 0:00:41.640 situation at a time when China is now going to 0:00:41.760 --> 0:00:44.920 issue retaliatory tariffs. Let's head over to Mike McKee. We 0:00:44.960 --> 0:00:47.160 would like to welcome all of our viewers and listeners 0:00:47.159 --> 0:00:50.599 on Bloomberg Television and at radio worldwide to Jackson Hall, 0:00:50.680 --> 0:00:54.080 where the Kansas City fat is holding its annual symposium. Yesterday, 0:00:54.320 --> 0:00:57.040 the Hawks were in control random selection of who got interviewed. 0:00:57.080 --> 0:00:59.680 But we're bringing in a dove now, Jim Bullard. He 0:00:59.800 --> 0:01:03.000 was one of the first to call for rate cuts, 0:01:03.160 --> 0:01:06.399 and you're still calling for rate cuts. Although you want 0:01:07.200 --> 0:01:10.160 basis points, you're not ready to do fifty This next time, 0:01:11.959 --> 0:01:15.520 I think there will be a robust debate about fifties. 0:01:15.560 --> 0:01:19.720 So I think it's uh, it's creeping onto the table here. 0:01:19.800 --> 0:01:24.000 But um, obviously the markets have it as a base 0:01:24.040 --> 0:01:27.720 case of twenty five basis points. J Pole characterized the 0:01:27.800 --> 0:01:30.679 rate cut on July thirty one is a mid course correction, 0:01:30.760 --> 0:01:33.440 but the markets are basically pricing it as the start 0:01:33.440 --> 0:01:35.840 of a rate cut cycle. How do you see it? 0:01:36.120 --> 0:01:40.760 How much accommodation does the economy need? I like to 0:01:40.800 --> 0:01:45.839 think about the mid nineties examples, the example and the example, 0:01:46.120 --> 0:01:49.000 And I know some of your viewers weren't around paying 0:01:49.000 --> 0:01:51.320 attention to financial markets at that time, but if you 0:01:51.480 --> 0:01:54.720 look at that, the feed adjust it was worried about 0:01:54.840 --> 0:01:58.360 let's say the Asian currency crisis, very similar to today, 0:01:58.720 --> 0:02:02.120 lowered the policy rate by about seventy five basis points. 0:02:03.320 --> 0:02:06.640 The US economy actually powered through that whole episode, and 0:02:06.680 --> 0:02:09.880 then the committee took took those insurance cuts away later. 0:02:10.440 --> 0:02:14.200 I think that's a great baseline idea about what we're 0:02:14.200 --> 0:02:18.040 looking at now, with a global trade war, global manufacturing 0:02:18.040 --> 0:02:22.680 and contraction and possible spillovers to the US. You want 0:02:22.720 --> 0:02:26.400 to ensure the economy against that and stay out of trouble. 0:02:26.680 --> 0:02:29.440 So you think maybe seventy basis points where you would 0:02:29.800 --> 0:02:32.880 see us stopping at this point, I'm saying that's what 0:02:32.880 --> 0:02:35.960 they did in the nineties. I don't know where we'll 0:02:36.080 --> 0:02:39.520 end up, but uh uh, you know, I do think 0:02:39.639 --> 0:02:43.520 that you've got this yield curve that's massively inverted here, 0:02:43.760 --> 0:02:47.160 and you got the funds rate as the very highest 0:02:47.200 --> 0:02:49.840 point on the whole yield curve. That doesn't make a 0:02:49.880 --> 0:02:51.920 lot of sense. So we have to react to the 0:02:51.960 --> 0:02:54.440 fact that there's been a down draft in global yield. 0:02:54.960 --> 0:02:57.560 What is it that you're ensuring against. There doesn't seem 0:02:57.560 --> 0:02:59.800 to be a demand problem in the US, it doesn't 0:02:59.800 --> 0:03:02.200 see to be a cost of credit problem. Now this 0:03:02.280 --> 0:03:06.320 is a This is a global slowdown, and and there's 0:03:06.320 --> 0:03:08.799 a trade war going on. I don't think there's resolution 0:03:08.880 --> 0:03:13.320 likely anytime soon, um. And this trade war is triggering 0:03:13.520 --> 0:03:18.359 other actions around the world, other countries thinking about reevaluating 0:03:18.400 --> 0:03:23.079 their own trade relationships. So this could um easily get 0:03:23.080 --> 0:03:25.840 out of control and easily feed back to the US. 0:03:26.480 --> 0:03:28.639 That's not my base case, but it is something that 0:03:28.680 --> 0:03:31.160 could happen. I think we should protect against. But how 0:03:31.200 --> 0:03:35.440 does monetary policy to do that? Well, lower rates will 0:03:36.080 --> 0:03:40.840 will stimulate our economy somewhat compared to what they would 0:03:40.840 --> 0:03:45.320 be otherwise, and that would help us power through the waters, 0:03:45.560 --> 0:03:47.880 the churning waters here of the trade war. A lot 0:03:47.920 --> 0:03:52.360 of people say lower rates won't help because the problem 0:03:52.400 --> 0:03:54.960 that we're having is companies cutting back because of trade 0:03:54.960 --> 0:03:58.720 war uncertainty. Not because they think that the economy, but 0:03:58.800 --> 0:04:01.840 it's the big economy. There are lots of other aspects 0:04:01.880 --> 0:04:06.920 to the economy. Uh, you know, intersensitive sectors that are 0:04:06.920 --> 0:04:10.600 gonna it's gonna matter for them. How much additional growth 0:04:10.600 --> 0:04:14.200 do you think you can provide to the economy. Well, 0:04:14.240 --> 0:04:17.240 that's a great question, and there's a long literature, much 0:04:17.279 --> 0:04:19.280 of it's been presented here at Jackson Hole over the 0:04:19.360 --> 0:04:21.920 years about you know, what the real effects of monetary 0:04:21.960 --> 0:04:25.640 policy are and how much the economy reacts. But if 0:04:25.640 --> 0:04:31.120 you think about the nineties Asian currency crisis, example, we 0:04:31.160 --> 0:04:35.480 actually argued in St. Louis during that period that because 0:04:35.600 --> 0:04:38.640 rates were lower because of the flight to safety, that 0:04:38.640 --> 0:04:41.800 that helped the economy get through that episode with kind 0:04:41.839 --> 0:04:45.320 of unscathed and so, uh, you know, maybe we can 0:04:45.360 --> 0:04:47.560 get an outcome like that this time around. Well, how 0:04:47.640 --> 0:04:50.480 much of it is the fact the idea that somebody 0:04:50.520 --> 0:04:52.599 will see lower interest rates and go buy a car. 0:04:52.640 --> 0:04:55.159 And how much of it is just reassuring people that 0:04:55.400 --> 0:04:58.080 somebody's watching out in the economy. Well, we do want 0:04:58.120 --> 0:05:01.800 to continue the expand, shin, and we're certainly willing to 0:05:01.880 --> 0:05:06.320 take all actions that we need to to continue the 0:05:06.360 --> 0:05:08.760 expansion as best we can. How much do you worry 0:05:08.800 --> 0:05:11.720 about the way Wall Street sees it, the idea that 0:05:11.800 --> 0:05:14.520 they think there's a recession imminent and they're looking at 0:05:14.680 --> 0:05:18.640 four additional rate cuts. Do you think they're reading the 0:05:18.680 --> 0:05:21.440 economy the outlook wrong? Well, if you look at the 0:05:21.680 --> 0:05:23.880 look at the yield curve, it's been a good predictor 0:05:24.120 --> 0:05:27.680 of slowdowns and recessions. And so if you have a 0:05:27.720 --> 0:05:30.800 recession prediction model, it's going to use the yield curve 0:05:30.839 --> 0:05:33.240 to try to predict that. So our job is to 0:05:33.240 --> 0:05:36.000 get the yield curve to be uninverted so that those 0:05:36.040 --> 0:05:39.080 recession probability models don't work anymore. That would be a 0:05:39.080 --> 0:05:41.000 great uh, that would be a great thing to do. 0:05:41.120 --> 0:05:44.440 I'm not interested in testing somebody's theory about this time 0:05:44.520 --> 0:05:46.760 is different about the yelk curve. Well, do you think 0:05:46.800 --> 0:05:50.000 that with the haven trade these days you might not 0:05:50.120 --> 0:05:52.800 be able to get long rates up because so much 0:05:53.040 --> 0:05:56.360 money is coming into the US because rates are negative elsewhere. Right. 0:05:56.360 --> 0:05:58.640 But there's a silver lining to that because that's driving 0:05:58.800 --> 0:06:01.719 longer term yields low, and that should be helpful to 0:06:01.800 --> 0:06:03.919 the U s economy. That's what happened during the Asian 0:06:03.920 --> 0:06:07.440 currency crisis. What are CEOs in your district telling you 0:06:07.480 --> 0:06:12.760 about what's happening What they see happening, um depends who 0:06:12.800 --> 0:06:16.400 you talk to. Uh. I would say in manufacturing, they're 0:06:16.480 --> 0:06:21.560 very much scrambling to reorient supply chains, think about new 0:06:21.600 --> 0:06:27.599 strategies that will work even in a more uncertain world. Uh. There. 0:06:28.160 --> 0:06:33.520 If you look at agriculture, that's very much a UM 0:06:33.720 --> 0:06:37.320 down industry, I would say for now, they've and they're 0:06:37.400 --> 0:06:40.279 very much affected by the trade war. So but on 0:06:40.320 --> 0:06:44.479 the other hand, consumer goods or something more closely tied 0:06:44.520 --> 0:06:48.040 to US consumer they're doing pretty well. Walmart reported out 0:06:48.080 --> 0:06:52.719 of our district last week that, you know, very strong sales. 0:06:52.760 --> 0:06:56.280 So I think there are um good things going on 0:06:56.279 --> 0:06:58.360 on the consumer side and the household side, which makes 0:06:58.400 --> 0:07:01.119 perfect sense. You've got, you know, a great labor market, 0:07:01.240 --> 0:07:04.400 unemployment near fifty year lows a lot of good things 0:07:04.440 --> 0:07:07.159 going on in that dimension, well, business has been helding, 0:07:07.320 --> 0:07:09.800 holding back on spending. Do C e O s tell 0:07:09.800 --> 0:07:12.040 you that they think there will be demand out there, 0:07:12.080 --> 0:07:14.160 there will be a reason to invest if they get 0:07:14.200 --> 0:07:17.080 past the uncertainty of trade wars go away. I think 0:07:17.120 --> 0:07:19.920 they'd be willing to invest, but they're kind of wondering, 0:07:19.960 --> 0:07:21.720 Oh wait a minute, now, how should I do this 0:07:21.880 --> 0:07:25.480 given the uncertainty that's out there? Uh? Do you worry 0:07:25.480 --> 0:07:27.720 that the fit is the only game in town and 0:07:27.760 --> 0:07:31.240 that people are putting too much responsibility for keeping the 0:07:31.280 --> 0:07:35.720 economy afloat on you? I do think uh, all eyes 0:07:35.760 --> 0:07:38.120 have turned to central banking, but that's that's over the 0:07:38.160 --> 0:07:41.640 last decade. And uh, I think a whole people are 0:07:41.680 --> 0:07:43.840 coming to the realization that you need other types of 0:07:43.880 --> 0:07:48.160 policies to help you. There are many, many policies pursued 0:07:48.200 --> 0:07:50.760 by federal and state governments, and it's the sum total 0:07:50.840 --> 0:07:53.040 of all those that help your economy. Would you think 0:07:53.080 --> 0:07:56.240 that the economic situation in the US now calls for 0:07:56.280 --> 0:07:59.520 a significant fiscal response. You know, we just got a 0:07:59.560 --> 0:08:03.520 budget deal through and it you know, it is more spending. 0:08:03.680 --> 0:08:06.400 So I'd like to see an analysis of that on 0:08:06.480 --> 0:08:10.080 the economy before I go to another spending bill on 0:08:10.120 --> 0:08:15.360 top of that. Inflation it was BIPARTISANSI you know, I think, 0:08:15.400 --> 0:08:17.840 you know, people say, well, there's never bipartisanship, but actually 0:08:17.880 --> 0:08:20.120 you got that through, So I thought that was pretty good. 0:08:21.160 --> 0:08:24.160 The minute showed that there was division on the committee 0:08:24.280 --> 0:08:27.560 in terms of inflation and some people thinking that cutting 0:08:27.600 --> 0:08:29.880 rates is. One of the reasons for cutting rates is 0:08:29.880 --> 0:08:33.160 that inflation expectations have slipped in that too low. I 0:08:33.200 --> 0:08:36.280 presume you're in that camp. Now. I'm very I'm very concerned. 0:08:36.760 --> 0:08:40.959 Excuse me about the five year tips break even, which 0:08:41.040 --> 0:08:43.319 is I'm not sure where it's trading today, but it's 0:08:43.400 --> 0:08:47.319 been trading very low. And if you subtract our thirty 0:08:47.360 --> 0:08:51.520 basis points to translate between CPI inflation and pc inflation, 0:08:52.040 --> 0:08:55.880 it says that markets are only expecting about one percent 0:08:56.080 --> 0:08:58.720 or maybe one point one percent inflation over the next 0:08:58.800 --> 0:09:01.960 five years, and we're supposed to hit two percent inflation. 0:09:02.080 --> 0:09:04.600 So I think we can afford to be kind of 0:09:04.679 --> 0:09:08.480 duvish here and get those inflation expectations up and hopefully 0:09:08.559 --> 0:09:10.760 hit our inflation target over the next five years. Well, 0:09:10.800 --> 0:09:13.480 again a question about what you can accomplish. Do you 0:09:13.520 --> 0:09:17.600 think you actually can move inflation expectations. Given that you 0:09:17.679 --> 0:09:21.160 had rates at zero for seven years and inflation couldn't 0:09:21.200 --> 0:09:25.000 hit two percent, Well, uh, we have to try while 0:09:25.000 --> 0:09:27.840 we can, and while we've got the what we're in 0:09:27.840 --> 0:09:31.560 the position to do so. I definitely think inflation expectations 0:09:31.800 --> 0:09:35.480 will move up if we if we uh, player cards 0:09:35.559 --> 0:09:37.480 right here. How long do you think we need to 0:09:37.520 --> 0:09:40.360 be in a rate cutting cycle as long as the 0:09:40.400 --> 0:09:44.640 trade wars are on? You know, I think the trade 0:09:44.679 --> 0:09:49.120 wars have been priced into markets, uh, in a way 0:09:49.120 --> 0:09:52.080 that they weren't earlier. I think as of May or 0:09:52.200 --> 0:09:56.080 April May time frame this year, markets were kind of putting, 0:09:56.360 --> 0:09:59.960 you know, making up numbers, but like probability on the 0:10:00.040 --> 0:10:02.160 idea that there would be a deal with China was 0:10:02.240 --> 0:10:05.160 just around the corner, just two weeks away, something like that. 0:10:05.880 --> 0:10:08.880 Now I think that it's shifted the other way, where 0:10:09.200 --> 0:10:12.840 Wall Street is putting probably a no deal anytime soon, 0:10:13.520 --> 0:10:16.079 the kind of the notion that that maybe the Chinese 0:10:16.080 --> 0:10:18.760 will just wait for the election and see if they 0:10:18.760 --> 0:10:22.760 can get a new president to negotiate with. So I 0:10:22.800 --> 0:10:26.560 think the all of that's now been priced in and 0:10:26.679 --> 0:10:30.160 so there's probably no more kind of downside to that 0:10:30.480 --> 0:10:33.040 at least. All right, Jim Bullard, St. Louis Fed President, 0:10:33.080 --> 0:10:35.319 thank you for joining us on Bloomberg Television and radio work. 0:10:35.320 --> 0:10:37.280 All right, Thanks a lot, Mike, we'll send it back 0:10:37.280 --> 0:10:40.240 to you in New York. That was Bloomberg's Michael McKee 0:10:40.240 --> 0:10:58.520 speaking with St. Louis Fed President James Bullard. We're gonna 0:10:58.520 --> 0:11:02.160 be hearing right now from Dallas Fed President Robert Kaplan. 0:11:02.200 --> 0:11:04.839 He is in Jackson Hole at the Kansas City FEDS 0:11:04.880 --> 0:11:08.800 Annual Symposey. I'm sitting down with Bloomberg's very own Michael McKee. Mike, 0:11:08.920 --> 0:11:10.680 thank you very much, and welcome to all of our 0:11:10.760 --> 0:11:13.800 viewers and listeners on Bloomberg Television and radio worldwide. We 0:11:13.840 --> 0:11:16.600 are with Robert Kaplan, the Dallas Fed President. Thanks for 0:11:16.760 --> 0:11:21.120 joining us again here on Bloomberg. A lot of people 0:11:21.240 --> 0:11:24.120 yesterday you took the comments of the Fed presidents who 0:11:24.160 --> 0:11:27.199 were interviewed as a sort of hawkish rebellion. But there 0:11:27.200 --> 0:11:30.280 are doves out there as well. And since you got here, 0:11:30.440 --> 0:11:33.240 we've been basically telling people you're sympathetic to the rate 0:11:33.320 --> 0:11:37.800 cut cause yeah, and you know, the disagreement within within 0:11:37.840 --> 0:11:40.720 the Fed, I think is much more about how to 0:11:40.800 --> 0:11:43.120 manage the risks. And the way I see the US 0:11:43.200 --> 0:11:46.800 economy is the U S consumers strong, and as long 0:11:46.840 --> 0:11:49.439 as the US consumers stay strong, we're not going to 0:11:49.559 --> 0:11:51.760 have a downturn or severe downturn. We're going to have 0:11:51.800 --> 0:11:56.400 solid growth. The issue is manufacturing. This week, global growth 0:11:56.440 --> 0:12:00.720 is decelerating, and if those intensify, that's going to seep 0:12:00.760 --> 0:12:03.360 into the rest of the economy. The consumer will be 0:12:03.440 --> 0:12:06.559 the last thing to go. H. And what what I'm 0:12:06.559 --> 0:12:10.280 concerned about is if those negatives intensify, you could have 0:12:10.320 --> 0:12:14.200 a negative jobs report UH in the next X number 0:12:14.200 --> 0:12:17.000 of months, and then you're gonna see weakness in the consumer. 0:12:17.120 --> 0:12:19.640 And if we wait to see that, I think we've 0:12:19.640 --> 0:12:23.720 waited too long. So I'm very open minded and constructive 0:12:24.040 --> 0:12:26.240 that we may need to make a policy adjustment here 0:12:26.240 --> 0:12:29.559 in the next X number of months. UH. And but 0:12:29.679 --> 0:12:31.440 I'm keeping an open mind, and I haven't made a 0:12:31.440 --> 0:12:34.120 decision yet, and I'll decide before the September meeting. How 0:12:34.120 --> 0:12:36.640 big a policy adjustment in the long run do you 0:12:36.679 --> 0:12:40.400 think we need? There was J Polla his July thirty 0:12:40.440 --> 0:12:43.520 first Press convert saying mid course correction and yet Wall 0:12:43.520 --> 0:12:48.319 Street pricing in right now, beginning of a red cut cycle. Yeah, 0:12:48.360 --> 0:12:51.160 so I've been I've been very open about saying unless 0:12:51.200 --> 0:12:55.520 I see meaningful further weakness, I view the the adjustments 0:12:55.559 --> 0:13:02.080 needed as tactical. They should be limited, restrain, modest. Uh. 0:13:02.120 --> 0:13:04.199 And I don't see this is the beginning of a 0:13:04.280 --> 0:13:07.839 rate cunning cycle. But we may need to make some adjustment. 0:13:07.920 --> 0:13:10.559 And for me, the reality check on that is when 0:13:10.559 --> 0:13:12.439 I look at the Fed Funds rate, I don't I 0:13:12.480 --> 0:13:15.080 don't worry as much about the debate between once and 0:13:15.160 --> 0:13:18.120 tens twos intends and how that's moving. I look at 0:13:18.160 --> 0:13:21.959 the Fed Funds rate versus the entire treasury curve, and 0:13:22.200 --> 0:13:24.920 the whole treasury curve has moved down in the last 0:13:24.960 --> 0:13:27.360 three or four months. The Fed Funds rate is now 0:13:27.400 --> 0:13:30.679 above every rate along the treasury curve, including the thirty year. 0:13:31.240 --> 0:13:34.320 That for me is a reality check that says, maybe 0:13:34.400 --> 0:13:37.160 policy is tighter than I might have thought three or 0:13:37.160 --> 0:13:39.959 four months ago, and we may need to make an adjustment. 0:13:40.120 --> 0:13:43.800 And I think that's a good, uh, good second check 0:13:43.880 --> 0:13:47.240 for me, which I am cognizant enough so they December 0:13:47.240 --> 0:13:50.080 a rate increase might have been a mistake, you know. 0:13:50.400 --> 0:13:54.120 Um uh, my own view is if you ask me 0:13:54.160 --> 0:13:58.000 on a what my forecast was for the economy, I 0:13:58.000 --> 0:14:00.160 would have said two and a half percent growth, and 0:14:00.280 --> 0:14:02.880 if I was wrong, the risks were to the upside. 0:14:03.120 --> 0:14:06.359 So in April I would have said I had my concerns, 0:14:06.440 --> 0:14:09.560 but no, I think policy setting is about right. We 0:14:09.640 --> 0:14:13.000 then had the China issue. We then had the threat 0:14:13.040 --> 0:14:16.240 against Mexico, which might have been more significant to number 0:14:16.240 --> 0:14:19.920 of businesses I talked to. We've had recent intensification, and 0:14:20.040 --> 0:14:23.200 now in light of these events since May one, now 0:14:23.280 --> 0:14:28.160 I think, uh, there's a there's an argument in improving argument, 0:14:28.200 --> 0:14:31.680 increasing argument that maybe the policy setting needs to be adjusted, 0:14:31.880 --> 0:14:35.240 but it's as a result of other policies away from 0:14:35.240 --> 0:14:38.680 monetary policy. Why was the Mexico threat worse than the 0:14:38.760 --> 0:14:42.960 China threat? So it's interesting the China threat clearly affected 0:14:43.200 --> 0:14:46.520 businesses here if you had a market you sold to China, 0:14:46.680 --> 0:14:51.280 like agricultural, or if you had logistics and supply chains 0:14:51.320 --> 0:14:55.000 that Mexico is central the so many companies in this 0:14:55.160 --> 0:14:58.600 country in terms of logistics and supply chains. When that 0:14:58.680 --> 0:15:02.280 threat occurred, even though we had a trade agreement not ratified, 0:15:02.320 --> 0:15:07.040 but a trade agreement that really for the businesses I 0:15:07.160 --> 0:15:11.000 talked to, Even though it didn't actually happen, it was 0:15:11.040 --> 0:15:14.840 so significant to their business that after that, most of 0:15:14.880 --> 0:15:17.760 them I talked to tell me they've now internalized that 0:15:18.640 --> 0:15:21.760 trade uncertainty is sort of a fact of life now. 0:15:22.800 --> 0:15:25.240 I think before that threat, they had thought, if we 0:15:25.280 --> 0:15:28.480 can resolve some of these agreements, maybe we'll settle down. 0:15:28.520 --> 0:15:33.080 I think the Mexico threat help business internalize. I think 0:15:33.080 --> 0:15:35.200 trade uncertainty is gonna be with us. And what I 0:15:35.240 --> 0:15:39.240 saw businesses do is become more cautious in terms of 0:15:38.880 --> 0:15:42.600 capex expansion plans. And I think that caution is still 0:15:42.640 --> 0:15:45.240 here today. Well that's not a cost of credit issue, 0:15:45.360 --> 0:15:47.640 nor is it a demand issue. So tell me how 0:15:47.680 --> 0:15:50.760 monetary policy, you guys making a rate cut is going 0:15:50.800 --> 0:15:53.360 to help any of this. Yeah, So to your to 0:15:53.440 --> 0:15:56.640 that point, if I talk to businesses today, every one 0:15:56.680 --> 0:16:00.560 of them says to me, probably without exception, listen, availability 0:16:00.720 --> 0:16:03.880 and cost the capital is not my problem. You know. 0:16:03.960 --> 0:16:06.720 Monetary policy, you guys, are not my problem. My problem 0:16:06.840 --> 0:16:10.200 is trade uncertainty and other issues related to that that 0:16:10.360 --> 0:16:15.200 are having challenging impacts on my business. Uh, here's the issue. 0:16:15.720 --> 0:16:18.080 If you look out over the horizon, and the job 0:16:18.120 --> 0:16:20.280 of a central banker is not to look at what 0:16:20.360 --> 0:16:22.880 the situation is today, is to look at what it's 0:16:22.880 --> 0:16:24.720 going to be over the next X number of months. 0:16:25.080 --> 0:16:30.120 If the policy setting is too tight, um then eventually 0:16:30.520 --> 0:16:35.400 you're going to see credit tighten. You'll see that, ultimately, 0:16:35.440 --> 0:16:39.280 I believe, tighten financial conditions, which will impact the economy. 0:16:39.560 --> 0:16:42.640 I think my job is to look ahead and balance 0:16:42.840 --> 0:16:46.760 these risks and to try to make risk management decisions 0:16:46.800 --> 0:16:49.640 so that the policy setting is more appropriate, because I 0:16:49.680 --> 0:16:52.480 know if it's too tight, it may seem innocuous for 0:16:52.520 --> 0:16:55.040 a number of months, but eventually I think that will 0:16:55.120 --> 0:16:57.760 lead my own years that will lead to a tightening 0:16:57.760 --> 0:17:00.000 and financial conditions down the road, even though we don't 0:17:00.040 --> 0:17:03.000 see attorny. But are you a hammer in search of 0:17:03.000 --> 0:17:05.800 a nail here? In this instant people expect the FED 0:17:05.880 --> 0:17:09.520 rate cut to solve the economy's problems, and it's not 0:17:09.520 --> 0:17:11.760 going to do that. So quite the contrary, And you've 0:17:11.760 --> 0:17:14.320 probably heard me say, I've been very vocal in saying 0:17:14.640 --> 0:17:18.560 the full crimer the center of gravity and US economic policy. 0:17:18.640 --> 0:17:24.160 They do not monetary policy. Uh, it's trade uncertainty, it's 0:17:24.160 --> 0:17:28.480 probably immigration policy to some extent, it's policies that relate 0:17:28.520 --> 0:17:32.960 to improve skill training, UH, infrastructure spending, but particularly for 0:17:33.000 --> 0:17:36.960 the insuring, trade policy and immigration policy, policies that could 0:17:36.960 --> 0:17:39.680 help us grow the workforce. That's the center of gravity 0:17:39.680 --> 0:17:43.720 and US economic policy. It's not that monetary policy doesn't 0:17:43.720 --> 0:17:46.000 have a key role to play, but it's not the 0:17:46.040 --> 0:17:49.159 full crimb of economic policy. And I regularly call that 0:17:49.240 --> 0:17:53.720 out because no, I don't believe monetary policy is causing 0:17:53.840 --> 0:17:55.879 if we have a slowdown, I don't think it's causing 0:17:55.880 --> 0:17:58.720 the slowdown. And if we have a severe slowdown, I 0:17:58.760 --> 0:18:01.320 don't think monetary policy See isn't going to be enough 0:18:01.359 --> 0:18:04.840 to arrest it either, But it still has a key 0:18:04.960 --> 0:18:07.360 role to play, and so we've got to make good 0:18:07.359 --> 0:18:10.119 decisions about it to play that key role. You probably 0:18:10.160 --> 0:18:12.080 know more about Wall Street than anybody else. I'm a 0:18:12.119 --> 0:18:15.800 fed given your background at Goldban Sacks. UH. Do you 0:18:15.920 --> 0:18:19.720 worry that by cutting rates you're going to just encourage 0:18:20.960 --> 0:18:26.719 financial shall we say, misallocations? So, um, you always worry, 0:18:26.720 --> 0:18:28.440 And this is one of the reasons why I've said, 0:18:28.880 --> 0:18:32.760 even though I'm open to an adjustment, UH, either in 0:18:32.800 --> 0:18:35.679 September over the next few meetings, I'd prefer not to 0:18:35.760 --> 0:18:39.639 have to make any adjustment because if you lower the 0:18:39.640 --> 0:18:42.399 Fed Funds rate, it reduced save, it reduce the rate 0:18:42.480 --> 0:18:47.120 for savers, it encourages risk taking. UM. Now, I will 0:18:47.200 --> 0:18:51.080 also acknowledge if you look ahole along the whole treasury 0:18:51.119 --> 0:18:53.920 curve to some extent, that horse has already left the bar. 0:18:53.960 --> 0:18:59.200 And I mean for investors, Uh, your fixed income alternatives 0:18:59.440 --> 0:19:03.400 have all declines substantially. The only rate that hasn't declined 0:19:03.440 --> 0:19:06.880 with it is the Fed Funds rate. So I think, uh, 0:19:07.040 --> 0:19:11.000 to some extent, the incentive to increase debt or leverage, 0:19:11.000 --> 0:19:14.400 which I've called out, that's already there because the treasury 0:19:14.440 --> 0:19:17.520 curve is where most businesses borrow. A number of them 0:19:17.520 --> 0:19:19.919 borrow on floating rate basis, but but a lot of 0:19:19.920 --> 0:19:22.960 them to fund share repurchase or mergers use the treasury curve. 0:19:23.280 --> 0:19:26.879 So I'm balancing that and I'm concerned about it. But 0:19:27.000 --> 0:19:30.120 I think most importantly, my my foremost in my mind 0:19:30.200 --> 0:19:33.399 right now is can we take steps that will help 0:19:33.880 --> 0:19:39.160 moderate this sloaning we're seeing, or help with the global 0:19:39.200 --> 0:19:42.600 slowing which might transmit to the United States and manufacturing 0:19:42.640 --> 0:19:46.920 weakness that that that appears could seep into the rest 0:19:46.960 --> 0:19:49.280 of the economy. That's those are the issues I'm trying 0:19:49.280 --> 0:19:51.960 to balance. But can't you be seen as if you're 0:19:51.960 --> 0:19:54.119 trying to bring FED funds down to the treasury curve 0:19:54.320 --> 0:19:56.879 being led around by Wall Street. I'm not trying to 0:19:56.880 --> 0:19:58.840 bring it down to the treasury curve, but I think 0:19:58.840 --> 0:20:01.240 the treasury curve being low is a signal that maybe 0:20:01.400 --> 0:20:04.080 a monetary policy is two tight. So no, we're not 0:20:04.080 --> 0:20:07.040 going to be led around by Wall Street. I think 0:20:07.080 --> 0:20:11.440 the curve is far more driven, not by monetary policy. Again, 0:20:11.680 --> 0:20:14.320 but if I watched the curve extremely carefully, been watching 0:20:14.440 --> 0:20:17.800 markets carefully for my whole adult life, the big moves 0:20:17.800 --> 0:20:20.760 in the treasure curve haven't been, to my eye, haven't 0:20:20.760 --> 0:20:24.439 been response to monetary policy. Action or rhetoric have been 0:20:24.480 --> 0:20:28.800 in response to trade uncertainty and other economic policies away 0:20:28.920 --> 0:20:32.040 from monetary policy. Last question, do you think we can 0:20:32.080 --> 0:20:37.600 talk ourselves into recession? Well? Yes, Psychology is a critical 0:20:37.680 --> 0:20:40.840 part of the economy, and I noticed that the August 0:20:41.160 --> 0:20:44.760 consumer sentiment numbers were a little bit weaker. And I 0:20:44.800 --> 0:20:50.040 think if you have continued uncertainty, um, if you have 0:20:50.119 --> 0:20:54.560 intensification of trade uncertainty or trade and not just with China, 0:20:54.600 --> 0:20:59.240 I mean more broadly with other countries globally uh visa 0:20:59.320 --> 0:21:03.480 the United States. Consumers pay attention to that and and 0:21:03.600 --> 0:21:06.960 this chain of events I mentioned earlier about weakness and 0:21:07.160 --> 0:21:10.720 manufacturing seeping to other parts of the economy eventually affecting 0:21:10.760 --> 0:21:14.280 the jobs market. Consumers are watching that chain of events too, 0:21:14.760 --> 0:21:17.359 and a very cognizant of in their own industry. And 0:21:17.480 --> 0:21:21.960 so sure, yet the psychology con turned negative and affect 0:21:22.000 --> 0:21:24.320 the economy, and we have to be cognizant of that. 0:21:24.800 --> 0:21:27.239 Robert Caplan, Dallas FED, thank you very much for joining us. 0:21:27.280 --> 0:21:29.520 Thank this morning. We'll send it back to you in 0:21:29.560 --> 0:21:32.760 New York. That was Bloomberg's Michael McKee speaking with Dallas 0:21:32.760 --> 0:21:47.960 FED President Robert Kaplan. We're gonna be hearing from Cleveland 0:21:47.960 --> 0:21:51.040 FED President Laretta Muster in just a few moments. She's 0:21:51.040 --> 0:21:54.800 in Jackson Hole, Wyoming for the Kansas City FEDS Annual Symposium. 0:21:54.840 --> 0:21:57.640 She's sitting down with Michael McKee a lot of questions 0:21:57.680 --> 0:22:00.679 about what the FED can do to counter the uncertainty 0:22:00.680 --> 0:22:03.120 and markets, as well as what they are willing to do. 0:22:03.320 --> 0:22:05.920 So let us head over now to Bloomberg's very own 0:22:06.000 --> 0:22:07.919 Michael McKee, Thank you very much, and we'd like to 0:22:07.960 --> 0:22:11.040 welcome Lorettamester, the President of the Federal Reserve Bank of Cleveland, 0:22:11.080 --> 0:22:14.159 to Bloomberg Television and Radio worldwide. Good morning to you, 0:22:14.200 --> 0:22:16.479 and thank you for coming out on a chilly morning 0:22:16.520 --> 0:22:20.000 here in the mountains of Wyoming. Uh. You have said 0:22:20.160 --> 0:22:23.960 that if the economy the data come in about as 0:22:24.000 --> 0:22:27.480 they have been, you don't necessarily see a need for 0:22:27.520 --> 0:22:30.919 another rate cut in September. But monetary policy works with 0:22:31.000 --> 0:22:33.879 long and variable lags, as we know, and now it 0:22:33.920 --> 0:22:37.040 appears with these additional tariffs from China coming on this morning, 0:22:37.040 --> 0:22:39.480 the trade wars aren't going to be going away anytime soon. 0:22:39.960 --> 0:22:43.439 So when you look at the economy six eight months 0:22:43.520 --> 0:22:47.640 from now, are you still confident that you don't need accommodation. Well, 0:22:47.680 --> 0:22:50.560 that's the key question, right is is we know trade 0:22:50.560 --> 0:22:53.439 policy uncertainty has been weighing on the outlook. You know, 0:22:53.480 --> 0:22:57.439 we talked to our business contacts. We've seen already business 0:22:57.480 --> 0:23:02.320 spending the weekend because of that tariff situation and the 0:23:02.400 --> 0:23:05.560 uncertainty around the tariff situation. And as this continues, we 0:23:05.600 --> 0:23:08.320 have to keep monitoring whether firms are going to continue 0:23:08.359 --> 0:23:11.200 to react the way they have and with caution whether 0:23:11.320 --> 0:23:13.679