Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Jill Wisenthal Joe.
Speaker 2: We are here in Jackson Hole for the Economic Symposium
Speaker 2: held by the Kansas Fed Kansas City Fed every year,
Speaker 2: and every year they choose a theme for the conference.
Speaker 2: So last year I think it was structural shifts in
Speaker 2: the global economy, something fairly generic. Actually, this year it
Speaker 2: is all about the transmission of monetary policy.
Speaker 3: That's right, and there are some pretty big questions. So
Speaker 3: it's like, we all have this idea that you slow
Speaker 3: the economy or you fight inflation by hiking interest rates
Speaker 3: and then your lower interest rates for yourustom but how
Speaker 3: does that like actually work? And this cycle has raised
Speaker 3: a lot of questions, in particular because things that you
Speaker 3: might have expected to see, such as a sharp rise
Speaker 3: in the unemployment rate amid the fall in the rate
Speaker 3: of inflation, hasn't really happened. So I think there's a
Speaker 3: lot of ambiguity still about like what is the process
Speaker 3: via which monetary policy, which is both interest rate policy
Speaker 3: and it gets balance sheet policy. What is the process
Speaker 3: through which these decisions actually transmit to the real economy.
Speaker 2: Right, And we're going back to the debate that was
Speaker 2: popular maybe a year or two ago, which was, if
Speaker 2: you have major disruptions in the economy, like with shipping
Speaker 2: or whatever, and prices increase because of that, is increasing
Speaker 2: interest rates actually going to do anything about those particular constraints.
Speaker 2: But then, just beyond those discussions, which we've been having
Speaker 2: for a long time and we now seem to be
Speaker 2: having in reverse, there are also a lot of things
Speaker 2: that central banks have done over the past couple of
Speaker 2: years that are unusual in one way or another. I
Speaker 2: think today we probably you know, twenty twenty was four
Speaker 2: years ago now, and so we've learned to live with them.
Speaker 2: But if you think back, for instance, to the Fed's
Speaker 2: treasury program in March of twenty twenty, right, like that
Speaker 2: was a big deal and they rolled it out really quickly.
Speaker 3: And they also bought a bunch of types of assets
Speaker 3: or entered into a number of markets. I mean, you
Speaker 3: know they're bond, yeah, corrabond, so other markets through which
Speaker 3: the FED is most never touched in the past. The
Speaker 3: other thing that's worth noting here in the preface to
Speaker 3: this conversation is that for the vast majority of people
Speaker 3: that are even vaguely aware of this thing called Jackson Hole.
Speaker 3: It's to the extent that Chairman Jerome Powell give a speech,
Speaker 3: But it is an academic economic conference and they're over
Speaker 3: papers and presented. There is more here than just one
Speaker 3: speech from one guy.
Speaker 2: No, absolutely, there is a series of presentations and papers
Speaker 2: that are presented. And I am very happy to say
Speaker 2: that today we are going to be digging into this
Speaker 2: question of transmission of monetary policy, and we are going
Speaker 2: to be speaking with one of the panelists from the event,
Speaker 2: and he's going to give us a sort of inside
Speaker 2: look at how all of this works. And also, yeah,
Speaker 2: so I am very excited. We have the perfect guest.
Speaker 2: We are speaking with a Neil cashyapp. He is a
Speaker 2: professor of economics and finance at the Chicago Booth School.
Speaker 2: That's a very.
Speaker 3: Ominous yeah, thunder.
Speaker 2: Sound effect. There's a mountain storm rolling in right now.
Speaker 2: And Neil, thank you so much for coming on all thoughts.
Speaker 4: Thank you. Mother Nature is going to supply liquidity.
Speaker 2: It seems like it. Okay, so how does this work?
Speaker 2: How is it that you come to be at Jackson
Speaker 2: Hole and you are asked to give a presentation on
Speaker 2: You were on the Transmission of Monetary policy panel, but
Speaker 2: the particular angle that you were taking or the paper
Speaker 2: you were presenting was monetary policy implications of market maker
Speaker 2: of last resort operations. So how does that come to
Speaker 2: be as a sort of subject to topic for discussion.
Speaker 4: Well, they start trying to put the program together sometime
Speaker 4: around January and they contacted a bunch of people saying,
Speaker 4: this year the theme is going to be X. You've
Speaker 4: written on some issue adjacent to X. Would you be
Speaker 4: interested in preparing a paper? So first thing it has
Speaker 4: to happen is they got to ask you, but you
Speaker 4: also have to have a room in your schedule to
Speaker 4: actually produce something. Now, I was on a panel and
Speaker 4: the panel was about the linkages between the financial system
Speaker 4: and monetary policy transmissions, and that was our little bit
Speaker 4: of it. There were two other papers today about government
Speaker 4: debt markets and also about the Phillips curve. And so
Speaker 4: the conference surrounds the topic of monetary policy transmission through
Speaker 4: a bunch of cumulative papers that are written by different people,
Speaker 4: and then each paper has a discussant discussian's usually also
Speaker 4: written on the topic. So in our case, I got
Speaker 4: a call just saying, you know, you, I've done a
Speaker 4: lot on financial stability and monetary policies are something you
Speaker 4: would be willing to talk about, And I said sure.
Speaker 3: So when we think of monetary policy, we think of
Speaker 3: interest rates, or we think of other tools besides moving
Speaker 3: up and down rates that affect interest rates. So forward
Speaker 3: guidance can be a type of interest rate policy QI
Speaker 3: in a sense can be that as well. During March
Speaker 3: twenty twenty, when the market basically broke, the FED intervened
Speaker 3: massively to stabilize the treasury market in a way that
Speaker 3: maybe mathematically in some sense looks like QWI, but it
Speaker 3: was not QUI in the way that QI was done
Speaker 3: like during the Great Financial Crisis, because it wasn't about
Speaker 3: rate gun and so that came somewhat separate, but it
Speaker 3: still was balance sheet operations in order to stabilize This
Speaker 3: talk a little bit more basically about what your contribution
Speaker 3: the panel was about.
Speaker 4: Well, I pointed out that the Fed's process and explanation
Speaker 4: for what they're doing kind of all pretty quickly. So
Speaker 4: if you go back and look at what they said
Speaker 4: on March fifteenth, they said, you know, we've got to
Speaker 4: stabilize the markets. This is a financial stability intervention. We're
Speaker 4: going to buy this stuff because we think that they're
Speaker 4: kind of plumbing issues in the financial system that are
Speaker 4: messing up the US treasury market, and that market's the
Speaker 4: foundation of everything. By a week later, their next unscheduled meeting,
Speaker 4: they said, and this is also going to support monetary policy.
Speaker 4: By April. You know, now we're six weeks later, they've
Speaker 4: got monetary policy and market functioning side by side completely there,
Speaker 4: and then by the time you get to September, they've
Speaker 4: dropped the financial stability rationale and now they're talking about
Speaker 4: a monetary policy operation by coincidence buying exactly the same
Speaker 4: amount of bonds. So what I said is, you know,
Speaker 4: it worked out and it was certainly appropriate. I think
Speaker 4: there are at least some people in the FED system
Speaker 4: that we'll say, you know, we carried on then for
Speaker 4: another eighteen months buying this stuff, and looking back, do
Speaker 4: we wish we'd stop sooner? Maybe? So that was the
Speaker 4: entry into this discussion.
Speaker 3: Yeah, Tracy, I remember at the time feeling as though
Speaker 3: the FED had sort of backdoored itself into QUEI starting
Speaker 3: with this big asset purchase for pure plumbing reasons, but
Speaker 3: then finding it hard to extricate in the same way
Speaker 3: that like the original QI was in the sense.
Speaker 2: Well also the mission creep from the plumbing of the
Speaker 2: US treasury market, which I think we all agree is
Speaker 2: very important for the overall global markets and also the economy.
Speaker 2: But then they started buying corporate bonds as well, which
Speaker 2: was a huge step change. I remember in the sort
Speaker 2: of like early to mid twenty tens because I was
Speaker 2: covering the corporate bond market at the FT and I
Speaker 2: remember every once in a while I would say, like, oh,
Speaker 2: people say that if this market blows up, the FED
Speaker 2: might have to step in and buy corporate bonds. And
Speaker 2: this was like a big deal. And then fast forward
Speaker 2: to twenty twenty and it happens, and it you know,
Speaker 2: there was so much else going on that it didn't
Speaker 2: get as much attention as it should have in my opinion.
Speaker 2: But anil the corporate bond purchase program, what did you
Speaker 2: think about that and how that fit into.
Speaker 4: Well that Actually, you know, they did buy that stuff,
Speaker 4: but then they got rid of it pretty quickly. So
Speaker 4: there's a little bit of a distinction between what happened
Speaker 4: there and what happened with the treasuries where it kept going.
Speaker 4: So they kept buying the MBS and treasuries for much
Speaker 4: much longer. And what my paper was about was to
Speaker 4: contrast what happened there with what happened in the fall
Speaker 4: of twenty twenty two in the UK disclosure. I was
Speaker 4: on the Financial Policy Committee of the Bank of England
Speaker 4: at that time, so for the beginning of that at
Speaker 4: least I had some first hand experience there, but I'm
Speaker 4: not speaking for the Bank of England here, And that
Speaker 4: program was conducted very quickly. There was thirteen days over
Speaker 4: which they bought and they actually the thing people dind
Speaker 4: not to know is that they sold it all in
Speaker 4: twelve days. So they really got in and got out.
Speaker 3: Oh yeah.
Speaker 4: And they managed to pull that off when they were
Speaker 4: buying for the Financial Stability Rationale at the same time
Speaker 4: they were starting their QT. So here you've got these
Speaker 4: two things. Wait, you're buying, you're selling, Which way do
Speaker 4: you want and habit But they managed to pull it
Speaker 4: off pretty gracefully. And so what I was trying to
Speaker 4: suggest for the FED is maybe they should look at
Speaker 4: their institutional structure and see if they want to do
Speaker 4: a little bit of tinkering so that they would have
Speaker 4: some sort of advisory group that would make the financial
Speaker 4: stability call. That isn't exactly the same people as doing
Speaker 4: monetary policy.
Speaker 3: That's super interesting. I had forgotten that point, how quickly,
Speaker 3: because I remember when the Bank of England stepped into
Speaker 3: the market and people were like, oh, they've backtracked, they've
Speaker 3: lost their heart, they're not going to do it. But
Speaker 3: actually they really had continued the fight against inflation, and
Speaker 3: that ended fairly quickly. See more about like from the
Speaker 3: FED institutional perspective, why the FED has found it challenging
Speaker 3: or did find it challenging in twenty twenty to sort
Speaker 3: of delink asset purchases for the purpose of smoothing a
Speaker 3: market versus asset purchases for the purpose of conducting monetary policy.
Speaker 4: Well, so to be fair to them, I got this
Speaker 4: question in the discussion. Somebody said, well, you know, what
Speaker 4: difference does it make. They bought the stuff. It was
Speaker 4: clear they were going to need to buy much more,
Speaker 4: so you labeled it financial stability. Imagine that they had
Speaker 4: stopped in April, and then the FEC a month later said,
Speaker 4: now we're going to start buying and we're going to
Speaker 4: buy the same amount, You really think it would be
Speaker 4: that different. Maybe in that particular outcome it wouldn't have
Speaker 4: been so different. But my point is more like, you
Speaker 4: never know when the next plumbing problem is going to
Speaker 4: show up and what the circumstances are. And I think
Speaker 4: you would like the market to believe that if you
Speaker 4: do face a Bank of England situation, that you've got,
Speaker 4: you know, a recipe for dealing with it, and that
Speaker 4: you thought it through and people can kind of understand
Speaker 4: the way it's going to work. And to me, if
Speaker 4: it's the exact same group of people who make all
Speaker 4: the same decisions and you want to call this is
Speaker 4: a financial stability, that's a monetary policy decision, I think
Speaker 4: it just muddles the communications. And it also I think
Speaker 4: for the financial stability decisions, there are experts in the
Speaker 4: Federal Reserve system that you might want to consult and
Speaker 4: actually give them a voice. Now, the way the FED works,
Speaker 4: the FOMC owns every decision about the Fed's balance sheet.
Speaker 4: So I recommended this Purchase Facility Committee a PFC, And
Speaker 4: I don't think the PFC could legally order the FED
Speaker 4: to do anything. They could make a recommendation in the
Speaker 4: FMC could then ratify. But I still think there would
Speaker 4: be some benefits to saying, well, our Technical Plumbing Committee,
Speaker 4: you know, is looked at this, decided that there's a
Speaker 4: problem and said why don't you go ahead and act
Speaker 4: on this recommendation. And then presumably then the PFC would
Speaker 4: a few months later say we think this is done.
Speaker 4: You could end it and you can go ahead and
Speaker 4: start selling. And ideally you would have announced the rules
Speaker 4: under which you would sell, you know, or how are
Speaker 4: you going to determine how much you're going to sell?
Speaker 4: Who are you going to sell to? All these kinds
Speaker 4: of things. But there's a bunch of technical issues that
Speaker 4: need to get worked out. And again, if you want
Speaker 4: to convince everybody this is separate, then having a whole
Speaker 4: separate playbook that you point to I think would be valuable.
Speaker 2: I have a Jackson Hole related question on this, but
Speaker 2: you mentioned that someone asked you a similar question at
Speaker 2: the event. What's reception like at these things? How do
Speaker 2: you know if your presentation has been successful? Because something
Speaker 2: like your paper, you're making constructive criticisms of a program,
Speaker 2: but they are to some extent criticisms. Nonetheless, so what
Speaker 2: do people say after you present?
Speaker 4: Well, most of the people that are in that room
Speaker 4: know each other. I've known a lot of these people
Speaker 4: for a long time. Some of them will tell you
Speaker 4: if they think you're full of it, they'll just say,
Speaker 4: I don't you convince me at all. Had somebody tell
Speaker 4: me that just fifteen minutes ago. But there are others
Speaker 4: that said, hey, that's pretty good. I'd like to think
Speaker 4: about that more. Let's stay in touch, you know kind
Speaker 4: of thing. So you're never going to get unanimity in
Speaker 4: a group that diverse, and I think you figure out
Speaker 4: if what you were arguing in favor of actually changes
Speaker 4: what they do. So if they bother to set up
Speaker 4: a PFC or some other central bank, does I think
Speaker 4: that would be fantastic and I think it could happen.
Speaker 3: You know, you mentioned the Bank of England episode in
Speaker 3: twenty twenty two. Similar questions arose in March twenty twenty
Speaker 3: three when SVB blew up and there was once again
Speaker 3: these questions, will the FED have to do something that,
Speaker 3: at least on surface, is in contravention of the ongoing
Speaker 3: fight then against inflation. I'm actually curious this distinction between
Speaker 3: asset purchases for the conduct of monetary policy versus asset
Speaker 3: purchases for the conduct of market stabilization. I would actually
Speaker 3: be curious your story of what does asset purchases for
Speaker 3: monetary policy to do? How does that transmit? How does
Speaker 3: Q transmit?
Speaker 4: Okay, so can I do it in two steps? So
Speaker 4: let me first say, asset purchases for financial stability should
Speaker 4: only be deployed when a lending facility won't work. Going
Speaker 4: back to Badget, everybody understands central banks lend, you know,
Speaker 4: and all of that. So the thing that's weird about
Speaker 4: asset purchases is you're finally admitting, Okay, the lending facility
Speaker 4: isn't enough. In March of twenty twenty three, the lending
Speaker 4: facility work. They didn't actually have to buy anything. So
Speaker 4: it's a little different, and I think making that distinction,
Speaker 4: it's true your balance sheet grows for a little bit
Speaker 4: when you do the lending, but I still think it's
Speaker 4: worth for analytic clarity to separate those two. How does
Speaker 4: QI work? Well, you could have five conferences on that.
Speaker 4: So the fed's theory of this has always been that
Speaker 4: you take duration, you're buying longer term securities. You're taking
Speaker 4: that out of the market. There's people that crave duration,
Speaker 4: that want to have that in their portfolio, and so
Speaker 4: the first thing you do is you reduce the supply
Speaker 4: that's available to market. That lowers interest rates to some extent,
Speaker 4: but it also probably changes term premium because people have
Speaker 4: to now pay a premium. If they want to get
Speaker 4: the treasuries that you've taken away, they're going to bid
Speaker 4: that up, and then if they wanted duration, they're going
Speaker 4: to go find it somewhere else, so that they think
Speaker 4: that that's going to spill over into adjacent markets. It's
Speaker 4: incredibly contentious as to how wide the spillovers are. We
Speaker 4: know the best evidence for QE comes when markets were
Speaker 4: very dysfunctional, and whether this was just a signaling thing
Speaker 4: that's the Fed's got your back, or whether it was
Speaker 4: really this complicated theory I just gave you is very
Speaker 4: hard to know, but I guess that's the state of play.
Speaker 5: Joe.
Speaker 2: Do you remember that Ben Bernanki quote where it was
Speaker 2: like the problem with QE is that it works like
Speaker 2: in practice but not in theory. Yeah, yeah, Okay, Well,
Speaker 2: on that note, maybe we can broaden this out a
Speaker 2: little bit and talk about the transmission of monetary policy
Speaker 2: in general. But it feels like a lot of the
Speaker 2: debates that we had post twenty twenty are now potentially
Speaker 2: happening in reverse, where we're asking, like, Okay, the Fed's
Speaker 2: going to ease what does that actually mean for the
Speaker 2: economy and for markets? How are you thinking about that?
Speaker 4: Okay? I think that question is related to the thing
Speaker 4: that the two of you talked about at the beginning,
Speaker 4: which is, Okay, the Fed's going to hammer the economy.
Speaker 4: They've raised rates, you know, five hundred basis points. The
Speaker 4: economy has not fallen into recession and crashed. So part
Speaker 4: of the motivation for the conference is how did that happen?
Speaker 4: And now inflation is starting to come down? How did
Speaker 4: that happen without slack opening up nearly still happen? I
Speaker 4: think we don't know. Part of it is the stuff
Speaker 4: that we didn't understand or see coming on the way
Speaker 4: up has certainly reversed itself. So some of it they
Speaker 4: got maybe for free. Some of it is people are
Speaker 4: not still asking for aggressive wage increases, so we haven't
Speaker 4: seen these second round effects where because you discover your
Speaker 4: grocery bills higher. You go to your boss and say
Speaker 4: I need a raise, and then he gives you a raise,
Speaker 4: and he has to raise his prices and so on.
Speaker 4: So we haven't had a huge wage price spiral, so
Speaker 4: that's been helpful. Chairman Powell today talked about inflation expectations
Speaker 4: being anchored, and because people kind of trust the Fed,
Speaker 4: they're content to go back for asking for normal raises
Speaker 4: because they think prices are going to grow at the
Speaker 4: normal rate. So I think it's a complicated story. On
Speaker 4: the question of why didn't the economy tip over, I
Speaker 4: think that's a very other contentious debate. Some of it
Speaker 4: looks like the fiscal stimulus was bigger and more targeted
Speaker 4: in ways that impacted monetary policies. So what do I
Speaker 4: mean by that? Well, Number one, auto industry normally gets
Speaker 4: crushed when the Fed hikes interest rates five hundred basis points.
Speaker 4: People still can't get cars from the shortages from four
Speaker 4: years ago, so the auto market hasn't tipped over quite
Speaker 4: so much. Construction normally gets crushed. Well, the Inflation Reduction Act,
Speaker 4: aptly named, has generated all kinds of construction spending, so
Speaker 4: that hasn't tipped over. So those are two of the
Speaker 4: engines that normally tightening would work through that haven't been crushed.
Speaker 4: Now the housing market has been hurt some. But I
Speaker 4: think it is very much an open question as to
Speaker 4: how they've pulled this off.
Speaker 3: What does it say that there are so many open questions,
Speaker 3: like we're like, okay, good time.
Speaker 4: We could have five.
Speaker 3: Conferences on how QUI works alone. We don't really know
Speaker 3: the degree to which interest rate hikes have depressed inflation
Speaker 3: versus some of the reversal of these distinct factors like
Speaker 3: big picture, the fact that like so much and so
Speaker 3: much energy it spends in markets and everyone else thinking
Speaker 3: about monetary policy, and yet these core fundamental questions are
Speaker 3: like massively open for debate, Like what's your take on that.
Speaker 4: I think we got lulled into a sense of false
Speaker 4: security by twenty five years of pretty good luck where
Speaker 4: we didn't have big shocks and where central banks built
Speaker 4: a theory of the case of this is how the
Speaker 4: economy works. We know we can fine tune and land
Speaker 4: things just right. You know, we need to worry about
Speaker 4: these one or two variables. We've got this kind of
Speaker 4: conventional consensus, and you know that kind of got blown
Speaker 4: up in the global financial crisis, where the simple models,
Speaker 4: the Phillip's curve and all that didn't work out so
Speaker 4: much because if you saw the size of that recession,
Speaker 4: you should have had massive disinflation. It didn't happen there.
Speaker 4: Then we didn't see this inflation spike coming. It came.
Speaker 4: Now it's dissipated again, no recession. So I think part
Speaker 4: of it is the period between about nineteen eighty four
Speaker 4: and now has been an anomalous period. We didn't have
Speaker 4: deep recessions, we didn't have these wild external shocks to
Speaker 4: deal with, And I think that also means that it's
Speaker 4: really hard to do empirical work because there's not a
Speaker 4: lot of variants, and so there's lots of theories that
Speaker 4: work just about as well. Like I think inflation is
Speaker 4: going to be what it was last year, that model's
Speaker 4: incredibly hard to beat.
Speaker 2: Speaking of empirical research, I wanted to ask you about
Speaker 2: one of your I think probably one of your most
Speaker 2: well known research projects or papers, and this was on
Speaker 2: price setting. During your PhD, Joe asked you how QY works.
Speaker 2: So I'm going to ask a very simple question and
Speaker 2: then hopefully you can talk about your paper. But what
Speaker 2: changes prices or why do prices change.
Speaker 4: Well, businesses will try to pass through cost shocks when
Speaker 4: they come, but for lots of goods, the cost just
Speaker 4: keep following because automation and just supply chain efficiencies keep
Speaker 4: getting ever greater. If you just look at the way
Speaker 4: that prices for so many goods have evolved, the cost
Speaker 4: just falling, and so we haven't had a great amount
Speaker 4: of cost pressure, at least for goods. Now for services
Speaker 4: it's rather different. And you certainly saw after the pandemic
Speaker 4: if you tried to go on vacation or come to
Speaker 4: any place where it was you could go hiking and
Speaker 4: be away from people, it got really expensive and the
Speaker 4: market cleared by price, just like you got taught in
Speaker 4: your econ one on one class. So I think it
Speaker 4: depends on what you're looking at. I think for the
Speaker 4: service sector the usual story is kind of right. It's
Speaker 4: its demand versus supply, and if the demands urges, price
Speaker 4: is going to go up. In many cases, what you
Speaker 4: actually see, like in supermarkets, is you just see fewer discounts,
Speaker 4: so there's a lot of loss leaders to draw people
Speaker 4: into the stores. When the economy's running really hot. They
Speaker 4: just they do less of that, so that's a hidden
Speaker 4: price increase, but the effective price paid is going to
Speaker 4: go up.
Speaker 3: You know, it occurs to me, you know, you talk
Speaker 3: about this like long stretch of stability, or people talk
Speaker 3: about it the Great moderation and this confidence that like
Speaker 3: central banks or maybe just the FED in particular, has
Speaker 3: this power to sort of solve any problem or smooth
Speaker 3: over any problem. And then there was a lot of
Speaker 3: questions about whether that was true during the Great Financial Crisis.
Speaker 3: But then the economy maybe not as fast as we'd like,
Speaker 3: but it slowly resumed it's ascent. Then COVID comes and
Speaker 3: we get a very different kind of shock and inflationary shock.
Speaker 3: But here we are in August twenty twenty four. Unemployment
Speaker 3: is below four and a half percent, inflation seems to
Speaker 3: be back to target basically, Like, I feel like you
Speaker 3: could tell a story in which all of the belief
Speaker 3: about the omnipotence of the FED actually kind of keeps
Speaker 3: getting vindicated.
Speaker 4: Ah, yes, and no. I mean I think that they
Speaker 4: showed tremendous courage hiking interest rates as fast as they did.
Speaker 4: One of the other panels on my panel was talking
Speaker 4: about communications policy and pointing out how much more predictable
Speaker 4: FED policy has been, which I thought was quite interesting
Speaker 4: to show just how systematic is and it's not just
Speaker 4: the FED, all the central banks have gotten away from this.
Speaker 4: We got to surprise them, you know.
Speaker 2: They thought about that.
Speaker 4: Yeah, think about green Span. I used to give a
Speaker 4: handout to my class of a nineteen ninety one FMC
Speaker 4: meeting where he talked about the journalists are going to
Speaker 4: be watching you at Jackson Hole, the tilt of your head,
Speaker 4: which way you look, and how you answer a question.
Speaker 4: We can't let them know what we're thinking. You know
Speaker 4: now how it used to be like that.
Speaker 3: Yeah, so you surprise their ability to surprise.
Speaker 4: So they've done a lot of good stuff. And if
Speaker 4: you looked in December, somebody raised this at the meeting
Speaker 4: in December of twenty twenty one, if you asked how
Speaker 4: much higher interest rates for forecast to be, I think
Speaker 4: at the end of twenty twenty two it was something
Speaker 4: like seventy five basis points. Well, they blew through that,
Speaker 4: so even they didn't know what they were going to do,
Speaker 4: but once they got going giddy up.
Speaker 2: So the panel where you were speaking it was about
Speaker 2: you know, the financial stability and the transmission of monetary policy,
Speaker 2: and we are coming off of quite a dramatic market event.
Speaker 2: So we're speaking on August twenty third, and then, you know,
Speaker 2: a couple of weeks ago, we have this huge sell
Speaker 2: off in markets, lots of talk about the unwind of
Speaker 2: the carry trade, and at that particular moment in time,
Speaker 2: there were some calls or maybe at least one call
Speaker 2: for the FED to do some sort of emergency intervention.
Speaker 2: Given your knowledge of financial stability and your work on
Speaker 2: this topic, how did you view that episode and what's
Speaker 2: your sense of the response that the central bank should
Speaker 2: have taken if any.
Speaker 4: Well, look, the markets always want to get bailed out,
Speaker 4: so the fact that people were saying that this should
Speaker 4: happen is no surprise. But I use that as an
Speaker 4: example in my talk. I said, you know, it turned
Speaker 4: out in the event that there was not so much
Speaker 4: instability at the beginning of the month as to have
Speaker 4: any central bank have to go intervene. But if they
Speaker 4: had intervened, I think they would have wanted to use
Speaker 4: the Bank of England playbook and they would have wanted
Speaker 4: to say this just like what the Bank of England did,
Speaker 4: and so the spirit of my comments were, Okay, not
Speaker 4: everybody has the legal infrastructure that the BOE does. So
Speaker 4: there is a financial policy Committee, it's by statue, there's
Speaker 4: all these rules around it. If you don't have that,
Speaker 4: why don't you go ahead and set up something that
Speaker 4: would approximate it. So let's suppose the thing in August
Speaker 4: had gotten much worse and had gone on for a
Speaker 4: few more days into a week or two, and then
Speaker 4: somebody was going to buy What would they have said
Speaker 4: about it? You know? And I think they're having the
Speaker 4: playbook worked out and agreed amongst yourselves in advance and
Speaker 4: communicated to markets probably would make that easier next time around.
Speaker 2: Yeah, I remember this was potentially one of the differentiating
Speaker 2: factors of March twenty twenty was that the FED kind
Speaker 2: of had a playbook of what it could potentially do,
Speaker 2: and so it could kind of pull it off the shelf.
Speaker 2: I have just one more question, which is looking over
Speaker 2: your career history and research, it is incredibly varied, probably
Speaker 2: like one of the most varied academic careers that I've seen.
Speaker 2: So you've done work on Japan's economy. I think maybe
Speaker 2: you came up with the term zombie firms, or at
Speaker 2: least you did some of the early work on that topic.
Speaker 2: You did early work on contingent capital Coco's living wills,
Speaker 2: Like how do you decide what you want to look
Speaker 2: at and examine and what do you think you're going
Speaker 2: to be looking at next?
Speaker 4: Well, I mean, one thing kind of leads to another.
Speaker 4: So I started out. I was I was on the
Speaker 4: staff at the board actually, and Greenspan was talking about
Speaker 4: stuff in nineteen ninety that I couldn't understand. And my colleague,
Speaker 4: my longtime co author, Jeremy Stein maybe you've had him
Speaker 4: on here. Jeremy and I were talking and we started
Speaker 4: trying to figure out, like, how do we understand what
Speaker 4: he's talking about? So we started studying banks, how monetary
Speaker 4: policy transmission worked through the banking system. Then we started
Speaker 4: learning about banks and started to think about financial regulation
Speaker 4: because it's kind of tied up. And Japan had this
Speaker 4: really terrible productivity ten year long crisis where the banks
Speaker 4: were in the middle of that. So a lot of
Speaker 4: this is all tied together by banks. Actually, the next
Speaker 4: thing I'm working on is actually money laundering. So imagine
Speaker 4: you think about where the global economy is going to
Speaker 4: be in five or ten years. My guess is there's
Speaker 4: going to be more fragmentation. There'll be a lot of
Speaker 4: stuff on sanctions, there's going to be friendshoring, there's going
Speaker 4: to be all these forces. And that kind of economic
Speaker 4: policy involves the state compelling the private sector to do
Speaker 4: stuff that it wouldn't otherwise do. Okay, when you think
Speaker 4: about most regulation that the government engages, and it's to
Speaker 4: correct an externality, it's some adverse bill over. You know,
Speaker 4: private incentives don't align. This isn't that. This is like, okay,
Speaker 4: we think there's a risk of another nine to eleven.
Speaker 4: We're going to compel you to do a bunch of stuff.
Speaker 4: It might cost you half a billion dollars, but you
Speaker 4: got to do it. Where do you draw the boundaries
Speaker 4: on that, and how do you think about it? Well,
Speaker 4: economists don't have a great way of thinking about problems
Speaker 4: of that sort, because you can't do cost benefit. If
Speaker 4: you know, you think about the value of a human life.
Speaker 4: You could try to start adding this stuff up, but
Speaker 4: it's not very satisfying. It turns out there is one
Speaker 4: part of the US economy where we've run an experiment.
Speaker 4: It's a fifty year old experiment, and it's where we
Speaker 4: compel the private sector to deal with money laundry. And
Speaker 4: so if you look at the history of how money
Speaker 4: laundering laws have evolved, there's a lot of lessons in
Speaker 4: there for once the state starts compelling the private sector
Speaker 4: to do stuff. So, Kate, Judge and I are working
Speaker 4: on a book on this.
Speaker 3: Can you tell us some of the lessons? You know,
Speaker 3: we'll read the book still vite lessons come back?
Speaker 4: Yeah, I mean there's so many. I mean it's gonna
Speaker 4: be a book, but many many analogies about you know,
Speaker 4: you you start out, you don't have an overall set
Speaker 4: of principles and objective, So what do you do? You're reactive,
Speaker 4: So think about the way we did Russian sanctions. It's
Speaker 4: kind of pulled out of the air, made up. You
Speaker 4: look at often their competing aims with respect to money laundering.
Speaker 4: So we don't want to push people out of the
Speaker 4: financial system. But if we make the know your customer
Speaker 4: stuff too onerous, we drive them out. So there's a
Speaker 4: trade off. It's kind of hidden. We don't have a
Speaker 4: good formula for dealing with think about all the things
Speaker 4: we're going to do with which Chinese companies do we
Speaker 4: cut off? Where are we going to draw the boundaries?
Speaker 4: So there's many, many, many analogies.
Speaker 2: All Right, you're going to have to come back on
Speaker 2: All Blots or Kate will to when the book is out,
Speaker 2: to give us all the lessons and all the detail
Speaker 2: and nuance. But in the meantime, and Neil, thank you
Speaker 2: so much for coming on All Blots. Really appreciate it.
Speaker 3: That's fantastic.
Speaker 5: Thank you, Joe.
Speaker 2: That was interesting, and part of me thinks it's kind
Speaker 2: of crazy that that was the first time we had
Speaker 2: Aneil on.
Speaker 3: Yeah, he was great, and I know all these different topics.
Speaker 3: We didn't even really talk about Japan at all.
Speaker 5: Yeah, we could.
Speaker 2: Have done a whole separate episode just on Japan totally.
Speaker 3: I really enjoyed that. And I do remember thinking in
Speaker 3: March twenty twenty that this massive balance sheet expansion that
Speaker 3: the FED engaged in was not the same thing as
Speaker 3: the QWI, even though in the monetary aggregates it looks
Speaker 3: like it's all the same thing on the chart, that
Speaker 3: there was clearly something different, And I remember thinking like, oh,
Speaker 3: it's sort of got a tricky situation here, because then
Speaker 3: they had to figure out the sequence of the unwined Yeah,
Speaker 3: then to the first rate hike, and so it's interesting,
Speaker 3: you know, and then we sort of forgot about that.
Speaker 3: It's ancient history. But the idea that there are costs
Speaker 3: if a market intervention for financial stability purposes ends up
Speaker 3: in intersecting with whatever you're trying to fight on the
Speaker 3: macro front.
Speaker 2: Right with monetary policy, and then you get those sort
Speaker 2: of cross currents. The other thing we'll have to watch
Speaker 2: out for going forward is if there is a PFC created. Yeah,
Speaker 2: we'll know where it came from.
Speaker 3: Well, because everyone listened to odd Lots or either that,
Speaker 3: or maybe it came from all present the room at
Speaker 3: Jackson Hole. It's got to be one of the other though.
Speaker 3: But the intuition there makes a lot of sense. And
Speaker 3: I had forgotten. I didn't forget the whole Bank of
Speaker 3: England liz Trust Pound mini crisis in late twenty twenty two,
Speaker 3: but I had forgotten how quickly the Bank of England
Speaker 3: was able to extricate itself. Yeah, and because there were
Speaker 3: a bunch of you know, people like ah, you like
Speaker 3: lost your will and the fight against inflatia is there.
Speaker 3: They do it again and of course, you know, there
Speaker 3: was the opening of the discount window or discount window
Speaker 3: activity in March twenty twenty three in the US.
Speaker 5: It kind of.
Speaker 2: Got lost in the political drama. Totally happened afterwards, but
Speaker 2: it wasn't.
Speaker 3: Both of those are examples of how there are certain
Speaker 3: aspects of the balance sheet that don't evitably have to
Speaker 3: interact with like the macro fights you're trying to have, right.
Speaker 2: Like, you can design these sort of last resort programs
Speaker 2: to fine tune certain aspects with financial markets totally.
Speaker 3: And this is where, like, if you accept the premise
Speaker 3: that there is a fundamental difference between asset purchases for
Speaker 3: financial stability versus asset purchases to drive interest rates lower
Speaker 3: take duration out of the market, then this is where
Speaker 3: the problem of a sort of pure money supply approach
Speaker 3: comes from, because again, on paper, it's all the same
Speaker 3: M like M one on or M two whatever it is,
Speaker 3: but they do have different functions. And I do think
Speaker 3: this is where sometimes people get led astray simply by
Speaker 3: looking at that aggregate chart and not realizing that at
Speaker 3: different times those purchases, even though it's still just you know,
Speaker 3: reserves for securities can do different things.
Speaker 2: Yeah, I think that's right. All right, shall we leave
Speaker 2: it there.
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy. You can follow me at Tracy Alloway.
Speaker 3: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 3: Follow our producers Kerman Rodriguez at Kerman Arman, Dashel Bennett
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