WEBVTT - Dallas Fed's Kaplan Says Fed Should Tighten Policy Patiently 0:00:00.240 --> 0:00:04.040 Runt You by Bank of America Mary Lynch. With virtual reality, 0:00:04.320 --> 0:00:09.719 virtually everything will change. Discover opportunities in a transforming world. 0:00:10.119 --> 0:00:14.440 Be of a, mL dot Com, slash VR, Mary Lynch, 0:00:14.520 --> 0:00:29.240 Pierced Fenner, and Smith Incorporated. Welcome to the Bloomberg Surveillance Podcast. 0:00:29.280 --> 0:00:32.760 I'm Tom Keene with David Gura. Daily we bring you 0:00:32.840 --> 0:00:37.640 insight from the best of economics, finance, investment, and international relations. 0:00:38.080 --> 0:00:43.640 Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, 0:00:43.640 --> 0:00:47.480 and of course, on the Bloomberg The Morning David Garrel 0:00:47.520 --> 0:00:49.760 with Michael McKee. This morning, Tom Keene at the Council 0:00:49.840 --> 0:00:51.840 on Foreign Relations. In just a few moments, he's gonna 0:00:51.880 --> 0:00:54.800 sit down with Robert Kaplan, the President and CEO of 0:00:54.840 --> 0:00:59.400 the Federal Bank. See the man himself in his If 0:00:59.440 --> 0:01:02.120 you have it, you can listen here, or if you're 0:01:02.200 --> 0:01:04.320 on the Internet, you can pull up the web feed 0:01:04.319 --> 0:01:07.560 from the CFR even aview. Robert Caplan before situated him 0:01:07.560 --> 0:01:10.480 and the pantheon of Fed presidents. Right now he's becoming 0:01:10.480 --> 0:01:12.800 a little more influential. Of course, he's fairly new, and 0:01:12.840 --> 0:01:15.039 it takes a little while to get your sea legs. 0:01:15.080 --> 0:01:19.160 But Uh, he's a guy who was executive at Goldman 0:01:19.200 --> 0:01:21.920 Sachs and Harvard University professor for a long time. So 0:01:22.000 --> 0:01:25.480 a very smart man. Uh, different than previous Dallas FED 0:01:25.520 --> 0:01:27.840 presidents and much more of a centrist and much more 0:01:27.880 --> 0:01:32.800 of a practical thinker rather than coming from a particular 0:01:32.880 --> 0:01:35.520 political point of view. And uh, he is a voter 0:01:35.640 --> 0:01:37.720 this year. Uh. And tell us a bit about the 0:01:37.800 --> 0:01:40.640 Dallas FED itself. You look at all of these various districts. 0:01:40.640 --> 0:01:43.600 What's what's the historical reputation of the Dallas Fed. Well, 0:01:43.680 --> 0:01:48.280 historical reputation has been very very free market, anti regulation, 0:01:48.840 --> 0:01:53.240 and very tough on inflation. And we have no inflation 0:01:53.240 --> 0:01:56.080 to speak up at this point. That's less of an issue, 0:01:56.520 --> 0:01:59.440 but Kaplan is less It's not that he's against free markets, 0:01:59.640 --> 0:02:03.160 but he is not pushing that as much. They're also 0:02:03.400 --> 0:02:06.480 very concerned with trade issues and they do a lot 0:02:06.480 --> 0:02:08.840 of work on the US and Mexico and have for 0:02:08.960 --> 0:02:11.040 years and now of course that's come front and center 0:02:11.080 --> 0:02:12.959 as an issue absolutely as we look ahead to the 0:02:13.200 --> 0:02:15.760 next f O MC meeting taking place on the thirteenth, 0:02:15.800 --> 0:02:18.640 I believe thirteenth and fourteenth in Washington, d C. As 0:02:18.639 --> 0:02:21.040 he mentioned Robert Capital of voting member of the f 0:02:21.160 --> 0:02:23.320 O m C this year. He the thirteenth president and 0:02:23.360 --> 0:02:26.040 CEO of the Federals at Bank of Dallas, former professor 0:02:26.280 --> 0:02:28.359 at the Harvard Business School, author of a number of 0:02:28.440 --> 0:02:31.080 books on on leadership as well, and still fairly new 0:02:31.080 --> 0:02:33.839 to the job, right, Mike, Yes, this is I think 0:02:33.919 --> 0:02:36.560 his second year, uh and his his first year as 0:02:36.600 --> 0:02:38.880 a voter, and so far he has voted with the 0:02:38.880 --> 0:02:42.440 majority in every case to raise rates or hold an 0:02:42.520 --> 0:02:45.680 alternating meetings. We'll see what he does that. I would 0:02:45.680 --> 0:02:48.280 bet you, given what he has said, that he has 0:02:48.480 --> 0:02:50.440 going to vote for a rate in Greece in June. 0:02:50.520 --> 0:02:54.600 Since yesterday we saw Lele Brainer, the dove, the Dove's 0:02:54.639 --> 0:02:58.040 dove on the FED say a radio increase is likely 0:02:58.919 --> 0:03:01.480 very soon. And everybody he takes that to me. In June, 0:03:01.760 --> 0:03:05.040 a number of FED policymakers speaking here before the quiet 0:03:05.040 --> 0:03:07.840 period that precedes at the f O m C meeting 0:03:08.880 --> 0:03:11.440 go ahead. Yeah, you know, they expanded the quiet period. 0:03:11.480 --> 0:03:13.480 They moved it back so it's longer. And I was 0:03:13.520 --> 0:03:16.800 sitting with a FED stafford yesterday who was listening in 0:03:16.960 --> 0:03:21.760 on Little Brainer's speech, and she said, thank god, unless 0:03:21.840 --> 0:03:24.960 we have to worry about more days in which they 0:03:25.000 --> 0:03:28.680 can't test. Weeks was before the last meeting. It seems 0:03:28.720 --> 0:03:30.600 like that there were a tremendous amount of speeches. Seems 0:03:30.600 --> 0:03:32.760 like the quantity of speeches has increased. Let's head over 0:03:32.800 --> 0:03:34.639 to the council in formulations up Park Avenue from O 0:03:34.639 --> 0:03:37.480 Bloomberg eleven through with Studios. Tom Keene interviewing Robert Kaplan 0:03:37.640 --> 0:03:40.040 of the Dallas Fan I'm not going to go through 0:03:40.080 --> 0:03:42.800 your bio because it will just take too long, other 0:03:42.840 --> 0:03:45.320 than to say he was Marshall Professor at Harvard Business 0:03:45.320 --> 0:03:48.000 School by way of the University of Kansas, which is 0:03:48.040 --> 0:03:51.520 always a good thing. What have you learned about the 0:03:51.560 --> 0:03:55.680 heritage of the Dallas Fed parachuting in Well, Uh, there's 0:03:55.680 --> 0:03:57.520 a great history in the Dallas Fed. But with the 0:03:57.800 --> 0:04:00.880 most significant thing to me about the Than district is 0:04:01.280 --> 0:04:06.320 uh the business dynamics. It's uh. We're largest energy producer 0:04:06.360 --> 0:04:10.120 in the United States, largest exporting state Texas is in 0:04:10.160 --> 0:04:13.680 the United States. Growing. President will go after you, after 0:04:13.720 --> 0:04:16.479 he's going after the Germans. Well, I won't even go 0:04:16.640 --> 0:04:22.520 near that. But uh, but and we're growing very very rapidly. 0:04:22.600 --> 0:04:26.520 We're uh migration of people in firms to the state 0:04:26.520 --> 0:04:29.680 of Texas in particular has been a significant trend is 0:04:29.680 --> 0:04:32.000 accelerating over the last fifteen years. We have a national 0:04:32.040 --> 0:04:34.640 growth rate to three whatever it is, what's the Texas 0:04:34.720 --> 0:04:37.279 growth rate? If we're we're going about a full percentage 0:04:37.279 --> 0:04:41.640 point faster over the last fifteen years on average every year. Uh, 0:04:41.680 --> 0:04:44.040 And so what it's going to be this year, I'm 0:04:44.080 --> 0:04:47.880 not sure but that but for lots of reasons, people 0:04:48.440 --> 0:04:51.320 and firms are moving to the eleventh districts, So we're 0:04:51.320 --> 0:04:53.960 growing very rapidly. And that'll be one of our themes here, 0:04:54.000 --> 0:04:57.360 particularly to dive into the concept of John Edwards to 0:04:57.520 --> 0:05:00.279 America's and maybe we can talk not you're just stricks 0:05:00.279 --> 0:05:04.240 outside Texas, but the two Texas is a more general statement. 0:05:05.080 --> 0:05:07.200 I want to go to an idea that I was 0:05:07.240 --> 0:05:10.080 talking with our Matt Bestler about and and and this 0:05:10.200 --> 0:05:12.600 is this wonderful thing. This is a mouthful, folks. For 0:05:12.640 --> 0:05:15.080 those of you not in economics, this is why you're 0:05:15.080 --> 0:05:21.200 not in economics. The Dallas Fed trimmed mean PC. That's 0:05:21.360 --> 0:05:25.440 your proprietary view of inflation. What I know in my 0:05:25.520 --> 0:05:29.040 work at Bloomberg is inflation and the vector of it 0:05:29.080 --> 0:05:31.960 now is front and center. Is the vector up or 0:05:32.040 --> 0:05:35.680 is a vector to disinflation again. So it's been weak 0:05:35.880 --> 0:05:38.320 the last couple of months. If you go step a 0:05:38.320 --> 0:05:43.480 little further back, it's been gradually increasing from fourteen fifteen 0:05:43.480 --> 0:05:47.000 to sixteen to seventeen. That the thing that's giving people 0:05:47.040 --> 0:05:51.240 pause is over the last two months, particularly March, for 0:05:51.279 --> 0:05:57.440 a number of I think idiosyncratic reasons. Inflation dipped, telecommunications, pricing, 0:05:57.600 --> 0:06:00.839 other factors. But you notice the e C came out, 0:06:02.200 --> 0:06:05.160 Personal consumption expenditures came out yesterday, and I think it 0:06:05.240 --> 0:06:08.719 showed me that the April number is sort of back 0:06:08.760 --> 0:06:12.920 on trend. The number for most people quote the trailing 0:06:13.000 --> 0:06:15.839 twelve months, and you'll notice the trailing twelve months after 0:06:15.920 --> 0:06:18.760 yesterday declined. But the reason for that is not that 0:06:18.839 --> 0:06:21.000 April was week. It was that a year ago April 0:06:21.080 --> 0:06:24.520 was so strong. So I actually think while inflation has 0:06:24.560 --> 0:06:27.279 been slow and uneven, I don't think we have a 0:06:27.320 --> 0:06:30.720 deteriorating trend. I don't believe that's what's going on. To 0:06:30.880 --> 0:06:33.040 text off this one is the Dala's heritage. I get 0:06:33.040 --> 0:06:35.120 to it in a moment, but let's talk about them more. 0:06:35.160 --> 0:06:40.480 Washington centric analysis we heard that from Governor Brainerd earlier 0:06:40.520 --> 0:06:42.840 today and all the other feed speakers all diving into 0:06:42.880 --> 0:06:46.599 this mix. Is your take that the prism around around 0:06:46.640 --> 0:06:49.240 that table of the ECHOS building. Is your take that 0:06:49.279 --> 0:06:52.560 it's a traditional study of inflation or is there a 0:06:52.640 --> 0:06:56.000 new new to how the feed itself has to deal 0:06:56.360 --> 0:06:59.320 with this odd thing? There's definitely, in my judgment, a 0:06:59.400 --> 0:07:01.800 new new. Now I'm not an economist, I'm a business person, 0:07:01.839 --> 0:07:04.080 but I have I work with lots of economists, so 0:07:04.120 --> 0:07:06.280 I think that gives me a little different perspective. But 0:07:06.360 --> 0:07:09.440 the things that are new, I'll mention two, in particular, 0:07:10.320 --> 0:07:14.960 global over capacity, particularly because of China. China has been 0:07:15.320 --> 0:07:18.040 growing GDP on average about six and a percent a year, 0:07:18.040 --> 0:07:21.920 but the problem is it's they're increasing debt to GDP 0:07:22.040 --> 0:07:25.440 in order to achieve that growth, and they're creating over capacity, 0:07:25.480 --> 0:07:28.200 not just an infrastructure, but an industry is like steel. 0:07:28.280 --> 0:07:32.160 So that's increasing global over capacity that's creating a headwind 0:07:32.200 --> 0:07:36.240 for inflation. And then the second thing that's significant is 0:07:36.320 --> 0:07:41.840 technology enabled disruption, which is another way of saying machines 0:07:41.840 --> 0:07:46.920 are increasingly replacing people, but consumers can use technology now 0:07:47.000 --> 0:07:50.160 to shop for pricing more than ever in our lifetime, 0:07:50.240 --> 0:07:54.600 and therefore the pricing power of businesses is less than 0:07:54.720 --> 0:07:56.760 has it been at any time in our to the 0:07:56.760 --> 0:07:59.160 PhD economists, and wants you to know that, I mean, 0:07:59.160 --> 0:08:02.600 a guy like you come from a different world. Uh, 0:08:02.640 --> 0:08:05.280 the guy up in Minneapolis comes from Cary, comes from 0:08:05.280 --> 0:08:07.160 a different world, et cetera. Do you guys have an 0:08:07.200 --> 0:08:10.200 advantage because you didn't read the textbooks? Well, I think 0:08:10.520 --> 0:08:13.240 many of the many FED presidents, or I would say 0:08:13.280 --> 0:08:15.760 even most do what I do. I look, I talked 0:08:15.800 --> 0:08:18.120 to all the economists, I go through all the economic theory, 0:08:18.120 --> 0:08:21.760 all the economic data, and then I talked to probably 0:08:21.800 --> 0:08:24.560 thirty c e o s. Every month, we do surveys 0:08:24.600 --> 0:08:27.600 among businesses, small businesses, big business as. We do not 0:08:27.680 --> 0:08:31.080 only industrial surveys, but energy surveys, service sector surveys, and 0:08:31.120 --> 0:08:33.640 I put them both together. So a lot of my 0:08:33.800 --> 0:08:36.880 understand about what's going on out there I look at data, 0:08:37.160 --> 0:08:39.000 but a lot of it also comes from talking to 0:08:39.040 --> 0:08:42.440 business leaders. Talking to business leaders is in the present. 0:08:42.960 --> 0:08:46.439 What are your thoughts on forward guidance? This concept is 0:08:46.559 --> 0:08:49.920 silliness of data dependency. Do you find the dots to 0:08:49.960 --> 0:08:54.079 be a constructive tool? Well, so there's a few questions 0:08:54.080 --> 0:08:56.320 in there. So let's talk about data. Let's take data 0:08:56.360 --> 0:09:00.200 dependency for starters. So I'm not I'm not crazy out 0:09:00.200 --> 0:09:04.280 the term data dependency. I prefer to look at data. 0:09:04.600 --> 0:09:06.520 But as a business person, again, I like to look 0:09:06.559 --> 0:09:10.240 at secular drivers, and then data as the economy unfolds, 0:09:10.280 --> 0:09:15.079 either confirms or makes me question the effect these drivers 0:09:15.080 --> 0:09:19.280 are having. So, uh, for example, GDP growth is sluggish. 0:09:19.679 --> 0:09:21.960 I think the big driver behind that. One of the 0:09:21.960 --> 0:09:26.840 big drivers is aging demographics, slowing population growth, slowing workforce growth, 0:09:27.040 --> 0:09:29.920 and so that makes that makes sense to me. Uh 0:09:30.760 --> 0:09:32.760 So I think you got to look at both. But 0:09:32.800 --> 0:09:35.600 I prefer to look at drivers, and then the data 0:09:35.720 --> 0:09:37.920 sort of confirms, like it would as a business person, 0:09:38.600 --> 0:09:41.080 what track we're on or whether whether the drivers are 0:09:41.080 --> 0:09:43.920 having the effect. I think, Carrie, let's go two hours. 0:09:43.960 --> 0:09:45.920 This is going too well, all right, So that you 0:09:46.120 --> 0:09:48.800 talked about the dot plot, so that makes plain of people. 0:09:48.840 --> 0:09:50.360 I think most people here probably come on, we all 0:09:50.440 --> 0:09:53.240 know what the plot. Well, it's shockingly some people may 0:09:53.240 --> 0:09:55.440 not know what the dot plot is. But every quarter, 0:09:56.520 --> 0:10:00.320 all the FED presidents and the governor's submit we all 0:10:00.360 --> 0:10:05.040 submit our forecast for seventeen, eighteen nineteen in the medium 0:10:05.120 --> 0:10:10.520 term GDP inflation not only headline, but core unemployment rate 0:10:11.080 --> 0:10:13.320 and what we think the neutral rate is likely to be, 0:10:13.320 --> 0:10:16.520 which will come back to settle out. So that's referred 0:10:16.520 --> 0:10:19.280 to affectionately or not so affectionately as the dot plot 0:10:19.760 --> 0:10:22.199 or the summary of economic projections. But that gives you 0:10:22.240 --> 0:10:25.040 a pretty good feel every quarter of what each of 0:10:25.120 --> 0:10:28.760 us is thinking about and the views there. There's a 0:10:28.800 --> 0:10:32.120 scatter chart, but they tend to congeal around. Uh, certainly, 0:10:32.160 --> 0:10:34.080 where's the vector of that chart? Right now? What are 0:10:34.080 --> 0:10:35.920 we going to see in future? Dot? I mean you, 0:10:36.160 --> 0:10:38.320 I know you're filling your form out on the way 0:10:38.320 --> 0:10:41.360 from Reagan into the Ecles Building, right, But actually, I mean, 0:10:41.360 --> 0:10:43.600 come on, there's a lot of analysis going into this thing. 0:10:43.640 --> 0:10:45.839 But is it a valuable tool? Sure? And what's it 0:10:45.880 --> 0:10:48.080 gonna show us in the number of If somebody who's 0:10:48.080 --> 0:10:50.640 been observing the FED now for thirty years, that's me 0:10:50.720 --> 0:10:55.079 and my business career, I think I think it's very useful, um, 0:10:55.400 --> 0:10:57.640 because it gives me a pretty good idea about what 0:10:57.800 --> 0:11:01.160 every participant around that table is thinking. Uh, and when 0:11:01.160 --> 0:11:03.319 there are differences, it gives us a basis to debate, 0:11:03.320 --> 0:11:05.920 so I think it's very useful. My own view, just 0:11:06.080 --> 0:11:10.080 my dot has been GDP growth, for example this year 0:11:10.960 --> 0:11:13.560 would be between two two and a quarter percent. I 0:11:13.559 --> 0:11:15.959 think the unemployment rates four point four percent now I 0:11:15.960 --> 0:11:18.240 think it's going to decline further as we get at 0:11:18.280 --> 0:11:20.800 the end of this year. It's not the only employment 0:11:20.840 --> 0:11:23.199 measure I look at. I look at something called you six, 0:11:23.480 --> 0:11:26.000 which doesn't go on the dot plot, which I'll come 0:11:26.040 --> 0:11:29.280 back to. And my own view is inflation will slowly 0:11:29.400 --> 0:11:32.559 but gradually over the next two or three years, not immediately, 0:11:32.559 --> 0:11:34.319 but the next two or three years. Get the two percent. 0:11:34.480 --> 0:11:38.320 Within your wonderful books on leadership, there is implied through 0:11:38.400 --> 0:11:42.560 all these books confidence. One of the great mysteries in 0:11:42.559 --> 0:11:44.680 this room at the Council on Foreign Relations, one of 0:11:44.679 --> 0:11:48.360 the great mysteries in your Dallas district is where is 0:11:48.480 --> 0:11:52.240 business investment? Where is the confidence to move forward? Let 0:11:52.280 --> 0:11:54.600 me just start with the Mathness is it because the 0:11:54.679 --> 0:11:57.720 people that you used to talk to an HBS, they 0:11:57.760 --> 0:12:00.199 can't figure out where the risk free rate is? Are 0:12:00.200 --> 0:12:02.640 the distortions so great? So let's take let's take the 0:12:02.679 --> 0:12:06.840 first part. Business confidence right now is high? Okay, there's 0:12:06.840 --> 0:12:09.880 a lot of business optimism, and you see business investment 0:12:09.920 --> 0:12:11.600 is stronger this year than it's been in the last 0:12:11.640 --> 0:12:15.960 few years. The issue is, UH, that's great and it 0:12:16.000 --> 0:12:22.200 can help GDP growth, but se approximately the economy is 0:12:22.200 --> 0:12:25.920 the consumer. So at the end of the day, businesses 0:12:25.920 --> 0:12:30.880 are more optimistic for several reasons, but ultimately everyone is 0:12:30.920 --> 0:12:34.079 watching the consumer. The consumer is the primary driver of 0:12:34.160 --> 0:12:38.400 GDP growth. Increased business investment though helps and businesses right now, 0:12:38.440 --> 0:12:42.400 we're optimistic, do they see it? The disconnect right now 0:12:42.480 --> 0:12:45.040 is while they're more optimistic, then when you ask a 0:12:45.080 --> 0:12:48.640 business leader, do you see improvement in your business? Oftentimes 0:12:48.679 --> 0:12:52.000 the answer is not yet, but we're expecting it. We're 0:12:52.040 --> 0:12:54.680 expecting We're still there. Does it have to do with 0:12:54.800 --> 0:12:58.360 rain art rokeof length or duration coming out of the 0:12:58.400 --> 0:13:01.480 financial crisis? It just takes kind to heal or there 0:13:01.559 --> 0:13:06.240 a new format of globalization where American business is waiting 0:13:06.640 --> 0:13:10.760 to pull the trigger on the nostalgic investment. Remember, so 0:13:10.920 --> 0:13:14.760 for me, UH, I think some business leaders are hopeful, 0:13:15.480 --> 0:13:19.319 UH that fiscal and other policies might help improve GDP growth. 0:13:19.320 --> 0:13:25.240 That's part of it, UM and UH. In addition, though 0:13:25.720 --> 0:13:27.600 some of the things that have been headwinds which I 0:13:27.600 --> 0:13:32.360 don't think are going away, sluggish population growth which has 0:13:32.360 --> 0:13:36.840 a big effect on consumer spending, and sluggish GDP growth, 0:13:37.160 --> 0:13:41.960 but also increasing disruption and new business models increasingly are 0:13:41.960 --> 0:13:45.080 displacing old ones, which are giving many business leaders pause. 0:13:45.720 --> 0:13:48.520 Even though they want to invest in their business, they're 0:13:48.559 --> 0:13:50.880 not sure that the model that they're investing in is 0:13:50.920 --> 0:13:53.520 going to be sustainable. So I think that's a that's 0:13:53.559 --> 0:13:58.079 a countervailing headwind which is putting a bit of tamping 0:13:58.120 --> 0:13:59.880 down a little bit of options. So you wandered down 0:13:59.880 --> 0:14:01.800 to college station and you have to give a lecture 0:14:01.800 --> 0:14:03.760 at the business school, and some wise guy in an 0:14:03.760 --> 0:14:06.640 A Corps uniform stands up in the back and goes, 0:14:06.760 --> 0:14:09.360 excuse me, sir, do you believe in GDP because that's 0:14:09.360 --> 0:14:12.439 a whole belief right now that these statistics, these traditional 0:14:12.480 --> 0:14:15.240 models that we have don't work anywhere. How do you 0:14:15.280 --> 0:14:19.560 respond to the youngster Texas A? Yeah, So here's here's 0:14:19.560 --> 0:14:21.520 the things that are clear, and here the things that 0:14:21.560 --> 0:14:25.640 are getting debated. GDP growth still it's not perfect, but 0:14:25.800 --> 0:14:30.600 it's still pretty good measure of economic activity. There's an 0:14:30.680 --> 0:14:33.440 issue a lot of people raise about transfer pricing. You 0:14:33.440 --> 0:14:37.240 know Apple, uh innovates a phone here, but they manufactured overseas. 0:14:37.440 --> 0:14:40.280 But I still think GDP growth is is pretty good measure. 0:14:40.440 --> 0:14:44.760 The debate has been about the unemployment rate UH and famously, 0:14:45.200 --> 0:14:47.720 you know many many people have gotten on television said 0:14:47.760 --> 0:14:49.840 the four point four percent. That's a great number, but 0:14:49.920 --> 0:14:52.720 it's not a real number. So I like to go 0:14:52.760 --> 0:14:55.480 to U six, which I mentioned earlier. Here's what U 0:14:55.600 --> 0:14:58.200 six is in the lingo, So you three to use 0:14:58.240 --> 0:15:01.360 the lingo is the headline unemploy himent rate. You six 0:15:01.880 --> 0:15:06.720 is unemployed plus discourage workers plus people who are working 0:15:06.840 --> 0:15:10.080 part time if in a better economy would rather work 0:15:10.120 --> 0:15:12.600 full time. I think that's a better measure of slack. 0:15:12.960 --> 0:15:16.640 That's at eight point six percent right now, here's the problem. 0:15:16.920 --> 0:15:20.440 The pre recession low in that number was eight point 0:15:20.480 --> 0:15:26.560 one percent, So we're gradually moving toward the prerecession low. 0:15:26.840 --> 0:15:30.760 And in a hundred and sixty million person economy, difference 0:15:30.800 --> 0:15:33.320 between eight six and eight one, it's less than a 0:15:33.360 --> 0:15:37.360 million workers. While they're slack. There's not as much slack 0:15:37.520 --> 0:15:40.120 as people might think. And here's the second problem, which 0:15:40.120 --> 0:15:43.560 we'll get to. Where there is slack, it is highly 0:15:43.600 --> 0:15:48.080 correlated to lower levels of educational attainment i e. College 0:15:48.360 --> 0:15:52.120 and less than college. That participation rates and employment rates 0:15:52.280 --> 0:15:54.720 if you finished college are very high in the United States. 0:15:54.840 --> 0:15:56.840 They could get better, but they're pretty high. Even if 0:15:56.880 --> 0:16:00.440 you've finished some college, they're relatively high. If you went 0:16:00.480 --> 0:16:03.000 to high school, though, they're lower, and if you've got 0:16:03.120 --> 0:16:06.960 some high school education, they're much lower. And so the 0:16:07.000 --> 0:16:10.400 problem is where they're slack and discourage workers. There's there's 0:16:10.440 --> 0:16:13.520 a high correlation between high school and less than high school, 0:16:13.560 --> 0:16:16.280 and that's why there's a number of things we're gonna 0:16:16.320 --> 0:16:27.200 need to do to address that runt. You by Bank 0:16:27.200 --> 0:16:31.920 of America Mary Lynch. With virtual reality, virtually everything will change. 0:16:32.400 --> 0:16:36.960 Discover opportunities in a transforming world. VI of a mL 0:16:37.080 --> 0:16:42.640 dot Com slash VR, Mary Lynch, Pierced Fenner and Smith Incorporated. 0:16:48.120 --> 0:16:52.000 There's something new from Bloomberg. It's called Lens. Starting right now, 0:16:52.080 --> 0:16:55.440 you can use the Bloomberg iOS app off your iPhone 0:16:55.560 --> 0:17:00.200 or iPad or our new Google Chrome extension to read 0:17:00.240 --> 0:17:04.160 any news story on any website, scan it, and then 0:17:04.200 --> 0:17:08.359 instantly see the news stories relevant market data from Bloomberg. 0:17:08.680 --> 0:17:11.760 In addition, see all the bios of the key people 0:17:12.200 --> 0:17:15.439 mentioned in the story. It's called lens, and it is 0:17:15.480 --> 0:17:18.560 just that, a lens into the people and the data 0:17:18.680 --> 0:17:22.919 of any story you may be reading. Again, Lens brings 0:17:22.960 --> 0:17:26.199 you the power of Bloomberg's news and data. Download or 0:17:26.240 --> 0:17:29.560 io s app or search for the Bloomberg extension at 0:17:29.600 --> 0:17:32.919 the Chrome Store to try lens out. Learn more at 0:17:32.960 --> 0:17:39.280 Bloomberg dot com slash lens. I want to ask one 0:17:39.320 --> 0:17:42.159 more monetary question before we dive into what some of 0:17:42.200 --> 0:17:44.520 the research you and your team have been doing at 0:17:44.680 --> 0:17:48.800 at Dallas. One of my treasured books is out of 0:17:48.800 --> 0:17:52.560 the Dallas fed and it is a beautiful, thick monograph, 0:17:52.920 --> 0:17:57.159 exceptionally smart set of essays in honor of John B. Taylor, 0:17:57.280 --> 0:18:00.400 Stanford University. It was a symposium, it was done. I've 0:18:00.400 --> 0:18:02.520 read the whole thing cover to cover. It is math 0:18:02.640 --> 0:18:06.000 warning for those of you have the CFR, I'm sorry, 0:18:06.400 --> 0:18:12.479 algebra differential equations, but within that is some brilliance. Do 0:18:12.600 --> 0:18:17.480 you buy the traditional economics of the feed when the 0:18:17.560 --> 0:18:20.520 media trots out the Phillips curve and you and I 0:18:20.560 --> 0:18:23.359 can go much deeper than trying to answers, do you 0:18:23.440 --> 0:18:26.760 buy the orthodoxy still works? Or do we have to 0:18:26.800 --> 0:18:30.159 amend it. So let me talk about some things that 0:18:30.200 --> 0:18:32.640 have been used historically that I think need to be adjusted. 0:18:32.640 --> 0:18:36.440 The Philip's curve, for example, which talks about transmission. If 0:18:36.440 --> 0:18:39.560 you're at full employment, you would expects wage pressure. You 0:18:39.600 --> 0:18:43.000 expect that wage pressure to translate into price pressure and inflation. 0:18:43.520 --> 0:18:47.120 I would say because of globalization, i e. This excess 0:18:47.119 --> 0:18:50.679 capacity issue, and also what I talked about disruption, the 0:18:50.720 --> 0:18:53.399 fact that businesses have less pricing power. I think the 0:18:53.440 --> 0:18:56.640 Phillips curve is still is alive and well, but it's 0:18:56.680 --> 0:19:01.200 more muted, meaning to extent there's wage pressure here today, 0:19:01.480 --> 0:19:04.439 it's less likely that gets transmitted to prices because business 0:19:04.440 --> 0:19:10.080 customers won't accept the price increase. And um, because businesses 0:19:10.160 --> 0:19:14.159 can replace workers with technology and there's wage pressure, it 0:19:14.240 --> 0:19:18.200 puts some downward pressure on wage pressure. So that's one example. UM. 0:19:19.080 --> 0:19:23.639 I would say. The second thing is the economy is 0:19:23.720 --> 0:19:26.520 dramatically different than it was ten years ago, twenty years ago, 0:19:26.560 --> 0:19:28.280 and thirty years ago. You know, a lot of people 0:19:28.320 --> 0:19:30.720 like to refer back to the Reagan air and it's 0:19:30.760 --> 0:19:34.600 and here's what's so different, uh, aging demographics. So the 0:19:34.640 --> 0:19:36.640 trend over the last thirty years has been going like this, 0:19:36.840 --> 0:19:40.960 slowing population growth, lower participation rates, and over the next 0:19:41.000 --> 0:19:43.720 ten years, the bad news is it's gonna get worse. 0:19:44.240 --> 0:19:46.520 And it's one of the few things we can forecast 0:19:46.560 --> 0:19:49.120 with a lot of confidence. And we think the participation 0:19:49.200 --> 0:19:53.560 rate today sixty it's likely to diplo. So that's one issue. 0:19:53.720 --> 0:19:56.760 Globalization is different today than it was twenty and thirty 0:19:56.840 --> 0:20:01.760 years ago, meaning, uh, we're much more globally intertwined. But 0:20:02.520 --> 0:20:06.840 the trade relationships I think are being misdiagnosed a little 0:20:06.880 --> 0:20:10.920 bit today, meaning uh, it's not a zero sum game. 0:20:11.280 --> 0:20:15.600 Our relationship, for example, with Mexico, in our judgment, increases 0:20:15.920 --> 0:20:19.879 US competitiveness, has caused jobs to stay in the United 0:20:19.880 --> 0:20:23.679 States that we'd otherwise lose, most likely to Asia. And 0:20:23.720 --> 0:20:26.320 so you have to think about globalization different disruption. We've 0:20:26.320 --> 0:20:28.359 already mentioned that I got one last one and I'll stop, 0:20:28.600 --> 0:20:32.080 and that is the debt supercycle. We are much more 0:20:32.240 --> 0:20:35.640 leveraged today than we were ten years ago, certainly twenty 0:20:35.720 --> 0:20:38.680 years ago and thirty years ago. Uh. Government dead held 0:20:38.720 --> 0:20:42.320 by the public is now seventy it's been going up, 0:20:42.880 --> 0:20:46.800 and present value of unfunded entitlements is now forty six trillion. 0:20:46.840 --> 0:20:50.360 Dollars also been going up, and because of aging demographics 0:20:50.520 --> 0:20:54.240 makes it worse. And that's that last part. I think 0:20:54.280 --> 0:20:57.080 that creates a head wind that isn't talked about that much. 0:20:57.359 --> 0:20:59.359 Reason it's not talked about his rates are so low. 0:20:59.440 --> 0:21:02.000 If you had more normal interest rates, I think we'd 0:21:02.040 --> 0:21:05.000 be having a much more intense national discussion on that. 0:21:05.040 --> 0:21:06.600 I want to take to some of those themes, but 0:21:06.640 --> 0:21:09.480 I got so it changes everything. The FETE analysis, you 0:21:09.480 --> 0:21:12.120 have to talk agree, it changes the world is different. 0:21:12.240 --> 0:21:13.880 So we've got to change the way we look at Okay, 0:21:13.880 --> 0:21:15.040 we're gonna do that in a minute, but I got 0:21:15.160 --> 0:21:16.840 to rip up the script on one question. I want 0:21:16.920 --> 0:21:18.960 to speak not so much to the president. Is a 0:21:19.000 --> 0:21:20.800 public official, I'm not. I know you're not going to 0:21:20.880 --> 0:21:23.720 take shots in any other I am not. I know 0:21:23.840 --> 0:21:25.400 you're not. We're gonna get that out of the way. 0:21:25.480 --> 0:21:28.280 But what I would suggest, within the format of the 0:21:28.359 --> 0:21:31.399 counts on foreign relations and the heritage of this shot, 0:21:31.680 --> 0:21:35.520 we can go back to Jacob win or Chicago and 0:21:35.560 --> 0:21:38.760 talk about America is a mercantilis power. You're on the 0:21:38.800 --> 0:21:41.720 border with Mexico. They're gonna build the walls. You can 0:21:41.720 --> 0:21:45.000 see it outside your window on Pearl Street. Are we 0:21:45.119 --> 0:21:48.199 gonna end up being a mercantilist America? Is that a 0:21:48.240 --> 0:21:53.600 real risk? It's it's a direction we we would be 0:21:53.640 --> 0:21:55.680 well served not to go in. And here's the Here's 0:21:55.720 --> 0:22:02.040 the problem is the of the imports it's from Mexico today. 0:22:02.240 --> 0:22:06.720 Is US content okay? Means these goods going back and 0:22:07.280 --> 0:22:10.399 forth across the border. Adding jobs in the US is 0:22:10.440 --> 0:22:14.199 not the only criteria. Are they globally competitive? That that 0:22:14.280 --> 0:22:17.200 will they sustain? Will they be here ten years now? 0:22:17.359 --> 0:22:22.159 The relationship with Mexico allows us to be more globally competitive. 0:22:22.320 --> 0:22:26.040 Here's the second problem is geo politically. I think this country, 0:22:26.040 --> 0:22:28.520 maybe we've taken it for rent, is very well served 0:22:29.200 --> 0:22:34.840 by having stable relationships with stale relationship with our neighbor 0:22:34.920 --> 0:22:38.200 on our southern border. UH. It has been. It's a 0:22:38.359 --> 0:22:40.560 very helpful to the United States. And my only my 0:22:40.600 --> 0:22:42.800 main concern I think NAFTA my own view, and I've 0:22:42.800 --> 0:22:45.480 said this publicly, will get renegotiated in a constructive way 0:22:45.520 --> 0:22:51.080