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Speaker 1: Broadcasting live to New York, Cloomberg eleventh wo to Washington,

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Speaker 1: d C, Bloomberg to Boston, Bloomberg twelve hundreds to San Francisco,

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Speaker 1: Bloomberg nine to the Country, Joe's Exam Channel one nine

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Speaker 1: and around the globe the Bloomberg Radio Plus Save and

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Speaker 1: Bloomberg dot Com. This is Bloomberg Surveillance. Good morning, It

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Speaker 1: is thirty on Wall Street and Michael McKee along with

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Speaker 1: Tom keene Or Economic indicators are brought to you by

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Speaker 1: Commonwealth Financial Network. When it's time to change the conversation,

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Speaker 1: talk with a broker dealer r I A that's ready

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Speaker 1: to listen, Call six two. Visit Commonwealth dot com to

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Speaker 1: learn more. Here's Vinnie Dell Juday's at the First Word

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Speaker 1: desk with the jobless claims numbers. Good morning, Michael. Jobless

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Speaker 1: claims down by six thousand last week, the two hundred

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Speaker 1: seventy eight thousand, roughly in line with Wall Street estimates.

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Speaker 1: Jobless claims below the critical three hundred thousand mark for

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Speaker 1: more than a year now. We also have data from

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Speaker 1: the Philadelphia Fed their regional business and that's a negative

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Speaker 1: reading minus one point eight. And May Economist Survey by

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Speaker 1: Bloomberg had anticipated a positive reading a gang jobless claims

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Speaker 1: the main report at this hour down the two hundred

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Speaker 1: seventy eight thousand at the Bloomberg first work desk Companytel Judice.

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Speaker 1: Let's go back to Washington and New York. Thank you

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Speaker 1: any well? Jobless claims, uh, Philly FED, the Chicago FED

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Speaker 1: Activity Index all what you might consider tertiary information right now,

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Speaker 1: tertiary data jobs claim is important, but they're not moving

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Speaker 1: out of a range that they have been in. But

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Speaker 1: every bit of data is going to be important to

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Speaker 1: a federal reserve that says it is data dependent, and

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Speaker 1: if the data come in as they expected, they would

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Speaker 1: be inclined to raise rates in June. Will they do that?

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Speaker 1: Jeffrey Lacker is the president of the Federal Reserve Bank

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Speaker 1: of Richmond, and he's been nice enough to drive up

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Speaker 1: here to Washington join us in the Bloomberg newsroom to

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Speaker 1: talk about the minutes yesterday in the direction of the Fed. So, uh, surprise,

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Speaker 1: you guys caught the markets unaware. Somebody said you hit

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Speaker 1: them upside the hay as they say, rather rapid adjustment

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Speaker 1: of the markets after yesterday's FED minutes. Why do you

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Speaker 1: think investors have ignored the FED for so long after

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Speaker 1: the April meeting, they basically priced out the FED doing

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Speaker 1: anything until two thousand seventeen. So my sense of things

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Speaker 1: is that markets took the wrong signal from us pausing

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Speaker 1: in in March and April. Uh. The sense I got

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Speaker 1: is that they their interpretation was that we that that

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Speaker 1: the threshold we have for what it takes to get

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Speaker 1: us to pause in the rate increases that in December

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Speaker 1: we outlined we sort of expected to see this year

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Speaker 1: was fairly low, and I think they said it too low,

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Speaker 1: and so I think they just overestimated how likely we

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Speaker 1: were to pause for the rest of the year. Uh.

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Speaker 1: Your old friend and predecessor at the Richmond Fed in

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Speaker 1: the research job, Marvin Goodfriend, was just done with us

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Speaker 1: suggesting that the FED has a credibility problem because it

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Speaker 1: has set the markets up for a rate increase a

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Speaker 1: number of times and then not followed through the broader

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Speaker 1: context here is that all of our benchmarks he talked

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Speaker 1: about a rule, but you know, these are really um

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Speaker 1: measures of where interest rates would otherwise be would have

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Speaker 1: been in the past, if we're behaving the way we

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Speaker 1: usually behave when growth employment and inflation are where they

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Speaker 1: are now. They're all well above where we are now.

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Speaker 1: So it's pretty clear that we're departing relatively substantially from

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Speaker 1: patterns of past behavior that have been successful for US. UM.

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Speaker 1: I think he's right that in times we've gotten in

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Speaker 1: trouble in the past, have have usually been episodes where

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Speaker 1: we're about to increase rates or we're in the midst

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Speaker 1: of increasing rates, and other things distract us, other things

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Speaker 1: dissuade us UM, and uh, we get a little bit

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Speaker 1: behind the curve. I think that happened, has happened a

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Speaker 1: couple of times the last couple of decades. Well, there's

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Speaker 1: two issues there. One is where you are relative to inflation.

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Speaker 1: The other is FED credibility. Have you failed in communications? Well, UM,

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Speaker 1: so to the extent that markets, um, you know, misunderstood

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Speaker 1: the meaning of of our US pausing in March and April.

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Speaker 1: I think that might have been the case. I think

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Speaker 1: you can, in hindsight, you can argue that the FEDS

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Speaker 1: decisions to pause in January, March in April. Would you

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Speaker 1: say they were a mistake. You're not a voter this year,

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Speaker 1: so we don't have your official vote, but suggestions from

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Speaker 1: you in your public remarks are that you would have

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Speaker 1: approved of raising rates already. I certainly supported the rate

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Speaker 1: increase at the April meeting, um And I think a

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Speaker 1: rate increase at the March meeting would have been um

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Speaker 1: perfectly reasonable as well. UM So, I think that would

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Speaker 1: have kept us on course. I think markets, you know,

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Speaker 1: wouldn't been as confused about our intentions for the rest

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Speaker 1: of the year. If uh, if we are to believe

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Speaker 1: the minutes, more than two people suggested a rate increase

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Speaker 1: at the April meeting would have been acceptable. I know

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Speaker 1: you're not gonna speak for others on the thoat, but

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Speaker 1: it does raise the question of whether Janet Yellen has

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Speaker 1: some sort of rebellion on her hands, whether the board

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Speaker 1: is not very united over this question. Well, as you know,

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Speaker 1: the committee has always had um comes to range of views.

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Speaker 1: It's real strength of the committee. Uh, diverse us are

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Speaker 1: brought to bear. We all expect each other to bring

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Speaker 1: our our best game, bring our best independent analysis of

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Speaker 1: what we should do. People didn't bring different perspectives, different orientations.

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Speaker 1: UM So, I wouldn't characterize things as a rebellion by

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Speaker 1: any means. I think we have the usual um diversity

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Speaker 1: of views in the committee right now? Well, Uh, usual

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Speaker 1: diversity is a fairly broad phrase for it's a binary decision.

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Speaker 1: And H is the raise rates camp growing? Is it?

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Speaker 1: Is it that the f O m C is now

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Speaker 1: broadly in favor if the data come through with a

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Speaker 1: rate increase. I think the minutes did a good job

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Speaker 1: of of uh conveying the breadth of expectation within the

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Speaker 1: committee about UM what they'd likely to what would they

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Speaker 1: would be likely to favor doing in June given the

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Speaker 1: data coming in is expected. I thought that passage was clear.

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Speaker 1: I thought it was accurate. I thought it was a

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Speaker 1: good reflection of the extent to which Yeah, I think

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Speaker 1: if we did come in with data that along lines

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Speaker 1: were expecting the pick up growth in the second quarter,

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Speaker 1: inflation kind of remaining where it is now or maybe

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Speaker 1: advancing further towards two percent UNI measured by the PC index, UM,

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Speaker 1: I think that UM, I think the case would be

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Speaker 1: very strong for raising rates in June as well. Well,

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Speaker 1: that's an interesting point you just made about inflation. Uh,

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Speaker 1: it doesn't have to go up, you think it just

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Speaker 1: has to remain approximately where it is now. We get

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Speaker 1: the PC number one it doesn't have to even higher

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Speaker 1: for so we get we had this UM a couple

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Speaker 1: of strong inflation months on January and February UM, and

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Speaker 1: then a little bit weaker in March. UM. April CPI

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Speaker 1: looks stronger than than eight UH than March UH, suggesting

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Speaker 1: UM pc UH could be stronger on a year over

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Speaker 1: year basis. We have some strong numbers falling off of

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Speaker 1: the twelve months average moving average, and so UM that

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Speaker 1: suggests that we might get inflation readings that are twelve

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Speaker 1: month basis don't move up much, even though the monthly

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Speaker 1: numbers are are firmer than they had been in the

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Speaker 1: middle of last year. And so just by the algebra

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Speaker 1: of it, UM I think UH twelve month numbers that

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Speaker 1: don't decline from here, UM, I think you're gonna reflect

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Speaker 1: good progress towards two percent. We are Bloomberg surveillance and

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Speaker 1: we're talking which every Lacquer, the president of the Richmond

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Speaker 1: Fed live from the Bloomberg newsroom in Washington. UH. The

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Speaker 1: Federal Reserve noted in UH the earlier part of this

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Speaker 1: year that global risks were the reason for them holding

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Speaker 1: off on rate increases. In the April meeting, the minutes

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Speaker 1: show that they felt global risk had diminished, but a

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Speaker 1: lot of people thought they were still there. So what's

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Speaker 1: changed enough to suggest that you can go ahead in

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Speaker 1: June if the global risks are still out there? So

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Speaker 1: I I see the risks from global economic and financial

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Speaker 1: developments as having substantially and virtually entirely um dissipated. I

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Speaker 1: think I think there there always are some risks out there,

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Speaker 1: but I think that relative to times in the past

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Speaker 1: when we've we've been able to hold our thoughts about them,

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Speaker 1: uh and recognize them but move ahead anyway. I think

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Speaker 1: they're they're about where they you know, at a certain

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Speaker 1: nominal level. UM. So I don't think there at a

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Speaker 1: level that we should dissuade us. You know, as I said,

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Speaker 1: I thought we should raise rates and April I didn't

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Speaker 1: think global risks at that point post enough threat to

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Speaker 1: the U S economy that we needed insurance in the

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Speaker 1: form of longer delay and rate increases. Moody's out Living

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Speaker 1: report last night, they cut their US growth forecast for

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Speaker 1: the year, arguing that investors and policymakers are underestimating the

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Speaker 1: slowdown in China and its potential to have a significant

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Speaker 1: impact on markets and global demand. It's uh interesting point

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Speaker 1: of view. UM you know, certainly there's um you know,

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Speaker 1: uncertainty about the extent to which they can maintain the

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Speaker 1: growth process they've been um you know showing for the

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Speaker 1: last a couple of decades, it's been breathtaking the pace

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Speaker 1: of their GDP growth. UM. They seem to have managed

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Speaker 1: to keep growth going so far this year, um you

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Speaker 1: know by hooker by kruk might be a good phrase

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Speaker 1: for it, um and um. But they seem to have

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Speaker 1: the capacity to do so going forward as well. UM

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Speaker 1: and uh. So it's it's not clear it's going to

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Speaker 1: falter substantially from here, and I think the risks to

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Speaker 1: Chinese growth look certainly less than they were several months ago.

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Speaker 1: The other big question for people is the dollar. The

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Speaker 1: dollar rallied after the minutes came out. How concerned are

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Speaker 1: you that it does have the impact that the head

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Speaker 1: sighted at the January meeting and on that it will

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Speaker 1: slow growth in the United States. So last year we

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Speaker 1: saw a sustained trend in the dollar um and uh.

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Speaker 1: This year we there's been some retrenchment and moved back

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Speaker 1: um you know at uh five or ten percent move

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Speaker 1: would be pretty notable. From here, I would be pretty

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Speaker 1: unusual and pretty unexpected. UM. So at this point, I'm

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Speaker 1: not expecting the path of the dollar of the remainder

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Speaker 1: of the year to pose a big threat to US growth.

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Speaker 1: It's notable. I think that we have been able to

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Speaker 1: absorb um uh the impact of the dollar changed last

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Speaker 1: year in manufacturing and still turn in reasonable growth numbers.

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Speaker 1: I think still see labor markets tight and substantially still

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Speaker 1: see consumer spending expand substantially. So I think that's an

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Speaker 1: indicator extent to which export oriented manufacturing, Although it's important

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Speaker 1: to a lot of people. UM, is this a small

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Speaker 1: enough fraction of the economy that we can we can

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Speaker 1: have some weakness there and still see looks like real

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Speaker 1: rates ought to be around one percent or so, and

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Speaker 1: we ought to be moving towards UH that that level

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Speaker 1: UM positive one percent UM and that's a measure of

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Speaker 1: sort of how far behind me are in nominal terms.

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Speaker 1: I think you know, if you factor in a UM,

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Speaker 1: you know, let's say inflation is one and a half

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Speaker 1: percent right now, UM, you know, our benchmarks are the

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Speaker 1: inflation that the interest rate, nominal interest rate should be

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Speaker 1: between two and three and Um, we're significantly behind that.

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Speaker 1: Right now, Jeffrey Lacker is with us from the Richmond FED.

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Speaker 1: We're gonna go straight through there. Enjoying this interview so

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Speaker 1: much here on the Bloomberg Radio. Assuming there's no black swan,

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Speaker 1: the data are okay, but you want to pause because

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Speaker 1: of Brexit or some reason in June. Would you, ever, then,

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Speaker 1: in terms of UH communication with the market in October,

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Speaker 1: like promise that you will go in July. What do

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Speaker 1: you mean by October like promise well in October in

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Speaker 1: the FED statement in October you basically right right, sort

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Speaker 1: of laid down a strong marker. Um. Yeah, that's one

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Speaker 1: way we could do it. I mean we can, you know,

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Speaker 1: we should say what we think, say what we know, UM,

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Speaker 1: don't say what we've done now. So, UM, you know,

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Speaker 1: certainly if in a Brexit type pause scenario in June,

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Speaker 1: in June, that's the kind of thing that would materialize.

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Speaker 1: But I have to emphasize that I don't think it's likely.

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Speaker 1: It doesn't at this point look at all likely that Um,

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Speaker 1: you know, Breggs, it's going to be enough of a

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Speaker 1: risk in June to be at least Um, it's a

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Speaker 1: stair hand Uh. We talked a little bit earlier about

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Speaker 1: the minute suggestion that there were members who felt that

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Speaker 1: based on standard benchmarks like policy rules, the FEDS behind

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Speaker 1: the curve. And I think you told us that you would.

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Speaker 1: You were one of the Uh how far behind are we? Well,

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Speaker 1: you know, as I said, significantly, I know it's UM.

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Speaker 1: About a year or two ago, these benchmarks UM rose

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Speaker 1: above zero. Uh and uh, you know, I think that's

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Speaker 1: why last year was the beginning of the sense that yes,

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Speaker 1: it's time to raise rates. Uh. You know, that was

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Speaker 1: the analytics behind it. People often ask, well, you know,

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Speaker 1: how do you know when to raise rates? That was it.

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Speaker 1: We paused last year. We sort of delayed getting started

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Speaker 1: for various reasons UM. And then some other reasons came

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Speaker 1: along and we paused to more. We got started in

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Speaker 1: December than January February, and the turmoil and markets and

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Speaker 1: the risk of people saw from the on the global front,

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Speaker 1: UM let us to pause again. Meanwhile, those benchmarks have

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Speaker 1: kept rising because they're based on real things inflation, UM employment.

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Speaker 1: Uh and uh, so we're we're behind. And you know,

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Speaker 1: as I said, there been times in the past when

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Speaker 1: purely financial mark a phenomenon Uh, that you know are

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Speaker 1: forward looking, but still they're just financial market jitters have

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Speaker 1: stayed our hand. Is a great example, Uh, that you

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Speaker 1: had the Russian debt default, you had some turmoil and

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Speaker 1: financial markets, you had the LTCM episode, and we cut

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Speaker 1: interest rates three times in the fall. We took our

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Speaker 1: time turning around and recovering those in ninety nine. And

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Speaker 1: I think in hindsight, that's a clear case of US. Um,

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Speaker 1: you know, cutting too much, easing too much in response

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Speaker 1: to purely financial market phenomena. Uh. And um, we got

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Speaker 1: behind the curve in ninety nine, and and arguably that

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Speaker 1: contributed to the sequence over the course of two thousand,

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Speaker 1: two thousand one, two two that led to to what

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Speaker 1: we saw them. We don't know what your dot is

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Speaker 1: on the on the dot plot, but if we are

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Speaker 1: to say, I think they'd let you. Uh, if we

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Speaker 1: are behind on inflation, does that change your view of

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Speaker 1: how many times and how quickly they f used to

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Speaker 1: raise rates? Uh? Yeah, So I've been, um, you guys

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Speaker 1: comfortable with the December projection. Um of the sort of

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Speaker 1: the media and SEP projection of four rate increases this year. Um,

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Speaker 1: And uh, you know, I I don't think the data suggests,

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Speaker 1: you know, the US economy suggests much of a change

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Speaker 1: in views about about the appropriateness event. Um. I'd like

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Speaker 1: to get um, you know, as close to that as

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Speaker 1: we can by the end of the year. You can,

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Speaker 1: you can get back what we've lost. Yeah, So we're

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Speaker 1: in this this process of of of pausing and delaying,

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Speaker 1: UM has runs the risk of becoming a one way street. Uh,

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Speaker 1: sort of a ratchet effect where when when when some

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Speaker 1: risks arise, we delay, but when the risks subside, we

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Speaker 1: shouldn't just start raising again. We need to get back

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Speaker 1: on the path we thought we were going to be on.

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Speaker 1: So um, you know, instead we seem to be in

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Speaker 1: this this process of delaying and then we people expect

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Speaker 1: us to start increasing again, but we'll never get back

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Speaker 1: to the path we thought we we thought was appropriate

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Speaker 1: in December if we do that. And I think that

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Speaker 1: kind of one way ratchet effect has some some real

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Speaker 1: risks to it. We talked about a one way effect.

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Speaker 1: Jenny Yellen has argued asymmetry is a real problem for

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Speaker 1: the FED. It's much easier to deal with inflation than deflation.

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Speaker 1: How does that fit into this scenario? Now I'm I'm

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Speaker 1: not in the camp of being really confident about UM

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Speaker 1: how to handle an erosion of UM inflation expectations on

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Speaker 1: the high side, we haven't seen it um and in

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Speaker 1: a long time. And when we did see it that

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Speaker 1: the environment was so different the late nineties sixties, when

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Speaker 1: inflation got away from us. We had some little inflation

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Speaker 1: scares back in the nineteen eighties and nineteen nineties. Marvin

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Speaker 1: documented those very well, and some some work he did

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Speaker 1: in the nineteen nineties um And emphasize the importance of

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Speaker 1: getting on top of those. But each one of them

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Speaker 1: was very different and and it came into different contexts,

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Speaker 1: had a different genesis. If it happened again, it would

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Speaker 1: it would be very different. And so I'm you know,

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Speaker 1: I'm not UM. I'm not sanguine about being able to

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Speaker 1: handle it. Very easily mentioned Uh in our conversation with

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Speaker 1: Marvin good friend UH the story on the Bloomberg Today,

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Speaker 1: where Uh in a fascinating interview with Lars Roady, the

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Speaker 1: Danish Central Bank governor. He suggested that maybe there is

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Speaker 1: something different about the link between monetary policy and inflation

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Speaker 1: these days because there's no demand out there. UM. So

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Speaker 1: I I agree with Marvin. I was listening in on

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Speaker 1: his um some of his interview. UM, I agree, I

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Speaker 1: don't think there's a demand problem in the United States.

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Speaker 1: I think the fundamentals are strong for US growth. Prodecuty

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Speaker 1: growth is low. But um, you know, nonetheless, it's there

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Speaker 1: and there there are innovations taking place in there are

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Speaker 1: advances being made that are pushing real incomes up. Uh.

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Speaker 1: And so I mean you've seen American consumers act with

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Speaker 1: a fair amount of confidence in the last couple of years. Uh.

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Speaker 1: And so I don't think it's a demand issue in

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Speaker 1: the United States. I have to shift gears a little

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Speaker 1: bit and bring in some politics. Uh. I know. FED

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Speaker 1: officials never admit that political pressure will affect policy decisions.

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Speaker 1: But are you at least worried about the FED bashing

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Speaker 1: on the campaign trail? Now? That always makes me nervous.

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Speaker 1: There was an issue in two thousand twelve as well. Um.

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Speaker 1: We are scrupulously nonpartisan institution, and I think if you

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Speaker 1: read the transcripts, it's very easy to see what plays

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Speaker 1: no role in what we do. Um. You know, I

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Speaker 1: I like it when I hear on the campaign trails

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Speaker 1: respect for the fed's independence, importance of the independence of

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Speaker 1: monetary policy. I think we've seen historically in the United

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Speaker 1: States the danger of UM a federal reserve of that's

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Speaker 1: UM excessively sensitive to UM politicians and UH their interests,

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Speaker 1: because that can tilt monetary policy and direction. That's UM

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Speaker 1: focused on the short run to the detriment of long

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Speaker 1: run UH missions like price stability. Well, they're even leaving

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Speaker 1: the presidential candidates out of it. A lot of people

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Speaker 1: up on Capitol Hill suggesting we should change the governance

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Speaker 1: structure of the FED. You're pushing back strongly against that.

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Speaker 1: It's our governance structure strikes people peculiar. But UM, there's

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Speaker 1: a logic to it. It came out of the fact

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Speaker 1: that we were founded as a network of twelve clearing

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Speaker 1: houses universal membership instead of just restricted to a club

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Speaker 1: in a city like New York and Chicago. UM and UM.

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Speaker 1: The natural governance model for a clearing house is it's

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Speaker 1: a joint venture of the banking industry, and so bankers

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Speaker 1: own your capital and they sit on your board and

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Speaker 1: elect your members. Wilson, the great progressive UM insisted it

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Speaker 1: on a board of governors, a technocratic federal agency to

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Speaker 1: oversee this, and UM so the Board of Governors has

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Speaker 1: responsibility for three of our directors out of nine. UM.

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Speaker 1: Our governance structure serves a very valuable purpose. It's a

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Speaker 1: hybrid public private governance structure UM, and that's played an

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Speaker 1: important role in the independence of monetary policy in the US.

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Speaker 1: I'm open to considering other ideas, UM, but UM, for me,

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Speaker 1: it's going to be important that they preserve monetary policy independence.

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Speaker 1: And I haven't heard of a governance reform proposal that

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Speaker 1: I think does that. Very very quickly. Let me ask

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Speaker 1: you last question. Donald Trump says he get rid of

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Speaker 1: Janet yelling and appoints someone who shares his views on

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Speaker 1: interest rates and policy. Uh. What would that mean for

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Speaker 1: FED credibility? UM? So I think it would be problematic

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Speaker 1: and and uh for UM, a presidential candidate to dismiss

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Speaker 1: a FED chair on the basis will leave the perceived

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Speaker 1: party affiliation. Jeffrey Lecker, thank you very much for joining

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Speaker 1: us today. He's the president of the Federal Reserve Bank

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Speaker 1: of Richmond, and of course, the FED suggesting that we

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Speaker 1: are going to be looking to be June meeting June,

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Speaker 1: and we'll see how the FED votes. Jeff doesn't have

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Speaker 1: a vote this time, so he gets to avoid a

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Speaker 1: mere participant participant as opposed to a member. Tom Keane

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Speaker 1: is always a participant and a member of Blueberg Surveillance. Tom,

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Speaker 1: how are the markets doing as Uh, well, I'm not

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Speaker 1: sure if you move the market or Jeff Lacher move

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Speaker 1: the market, but one of you move the market. The

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Speaker 1: two year ye old point nine zero eight three a

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Speaker 1: spike up off economic data, but then um like a

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Speaker 1: real advance on what we heard from Dr Lacker, No

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Speaker 1: question about that is yields move higher off the tone

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Speaker 1: that we heard is well, futures were negative seven doing

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Speaker 1: better off buoyant Walmart earnings, which I guess somewhat links

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Speaker 1: into Mr Lacker's optimism on the American demand economy, on

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Speaker 1: our innovation, on our ability to move forward. So maybe

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Speaker 1: that's a weak linkage into the equity markets as well.

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Speaker 1: We will give you more in economics, finance, investment, and

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Speaker 1: of Egypt. Are Michael McKee in Washington. I'm Tim keenan

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Speaker 1: New York. Bloomberg Surveillance