WEBVTT - Surveillance: Central Bank Roundup with Posen 0:00:00.120 --> 0:00:03.800 If you enjoy the Bloomberg Surveillance podcast, check out our 0:00:03.880 --> 0:00:08.959 new daily news program, the Bloomberg Daybreak Podcast. It gives 0:00:09.039 --> 0:00:12.840 you the day's top stories with context in just fifteen minutes. 0:00:13.240 --> 0:00:16.000 Look for it in your podcast feed by six am 0:00:16.160 --> 0:00:20.280 Eastern every morning. Subscribe on Apple, Spotify and anywhere else 0:00:20.400 --> 0:00:23.799 you get your podcasts, and stay tuned for a sample 0:00:23.880 --> 0:00:27.400 of today's edition of Bloomberg Daybreak at the very end 0:00:27.600 --> 0:00:36.000 of this podcast. This is the Bloomberg Surveillance Podcast. I'm 0:00:36.040 --> 0:00:40.080 Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join 0:00:40.200 --> 0:00:44.360 us each day for insight from the best and economics, geopolitics, 0:00:44.360 --> 0:00:49.320 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:49.560 --> 0:00:54.040 Spotify and anywhere you get your podcasts, and always on 0:00:54.120 --> 0:00:58.480 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. 0:00:58.800 --> 0:01:01.040 Right now, what we're gonna do is do what Bloomberg 0:01:01.080 --> 0:01:05.240 Surveillance does best, which give you an informed debate on 0:01:05.319 --> 0:01:08.440 the issues at hand. Lisa Bramwinson, Tom King, John Pharaoh 0:01:08.440 --> 0:01:11.560 and Assignment and joining us now is Adam Posen. He's 0:01:11.600 --> 0:01:15.479 president of the Peterson Institute for International economics. He's one 0:01:15.520 --> 0:01:19.400 of our great American scholars on Germany, and far more 0:01:19.440 --> 0:01:21.960 than that, had a tour of duty as Megan Green 0:01:22.520 --> 0:01:25.240 trots over across the Atlantic here in the coming weeks. 0:01:25.640 --> 0:01:28.640 Adam Posen at the Bank of England years ago, two 0:01:28.680 --> 0:01:32.400 days ago, Adam Posen, you made clear that we would 0:01:32.480 --> 0:01:36.880 see six percent plus interest rates by central banks, and 0:01:36.920 --> 0:01:41.559 particularly by the Bank of England. Will that level? Will 0:01:41.560 --> 0:01:44.000 that crush the United Kingdom economy? 0:01:45.080 --> 0:01:48.320 It's gonna hurt, There's no question, Tom, Thank you and 0:01:48.360 --> 0:01:53.440 Lisa for having me back. The issue is that from 0:01:53.480 --> 0:01:57.040 the start of this inflationary period in the UK, along 0:01:57.040 --> 0:02:00.720 with the Euro Area, the Bank of England MPCI majority 0:02:00.840 --> 0:02:03.320 the governor have kept talking as though they weren't going 0:02:03.400 --> 0:02:05.600 to have to raise rates that much, even though they 0:02:05.600 --> 0:02:08.200 had kept raising them. They kept talking as though they 0:02:08.200 --> 0:02:10.520 didn't need to go much further. They probably wouldn't need 0:02:10.520 --> 0:02:13.399 to go much further. Whereas from the start you had 0:02:13.440 --> 0:02:16.240 a UK from twenty twenty one onwards that had the 0:02:16.280 --> 0:02:19.840 worst aspects of US labor markets made words by Brexit 0:02:20.520 --> 0:02:24.840 and EU Euro Area exposure to energy shots from Russia 0:02:25.360 --> 0:02:29.079 had them both and have less credibility post Brexit and 0:02:29.120 --> 0:02:32.200 post all the political shenanigans, some five prime ministers in 0:02:32.280 --> 0:02:36.400 seven years, so ultimately it never made any sense that 0:02:36.480 --> 0:02:38.760 the UK was going to add up with a lower 0:02:38.880 --> 0:02:42.360 terminal rate for its central bank tightening than the Fed 0:02:42.440 --> 0:02:43.160 or the ECV. 0:02:43.919 --> 0:02:46.040 This is important, folks. I'm gonna get the theory out 0:02:46.080 --> 0:02:49.079 of the way here. There's a blistering essay this morning 0:02:49.080 --> 0:02:53.360 in the Telegraph from Ambrose Evans Pritchard, hugely controversial, but 0:02:53.480 --> 0:02:58.679 within it doctor Posen he alludes to Emery Lactose's idea 0:02:59.560 --> 0:03:03.920 half a country a go of a research program of 0:03:03.960 --> 0:03:06.960 where you get a set of beliefs going, and boy, 0:03:07.000 --> 0:03:10.239 you're gonna stick with your research program. Right or wrong? 0:03:11.000 --> 0:03:14.519 Does the Bank of England have a flawed research program? 0:03:14.800 --> 0:03:16.880 And do they need to amend it pronto? 0:03:18.680 --> 0:03:23.160 I fear that they have taken too seriously some of 0:03:23.200 --> 0:03:26.880 the some of their models. All central banks have investment 0:03:26.960 --> 0:03:28.640 in their models. But one of the good things that 0:03:28.720 --> 0:03:30.760 happened at the Bank of England when I was there 0:03:30.880 --> 0:03:33.720 during the global financial crisis, and then most of the 0:03:33.760 --> 0:03:37.560 other central banks, was you realized, under those circumstances you 0:03:37.600 --> 0:03:40.440 put the model aside, you don't use it if it's 0:03:40.440 --> 0:03:45.280 not realistic. Unfortunately, to me, the Bank has been relying 0:03:45.480 --> 0:03:50.600 on a couple mistaken assumptions or worldview. First that there 0:03:50.720 --> 0:03:54.600 was no erosion and credibility of the overall UK macro 0:03:54.680 --> 0:03:59.280 policy regime post brings in post politics, which clearly is 0:03:59.280 --> 0:04:03.080 not true. And second that if there was going to 0:04:03.080 --> 0:04:07.240 be a major real income shock, which they did rightly 0:04:07.360 --> 0:04:12.600 call that that would lead to a decline in nominal 0:04:12.640 --> 0:04:16.120 wage growth, and that was clearly mistaken. And I and 0:04:16.160 --> 0:04:19.840 others than other former NPC members like sister Widwani, we're 0:04:19.880 --> 0:04:21.960 pointing this out as an error at the end of 0:04:22.040 --> 0:04:25.240 twenty twenty one in their forecast, and they didn't come 0:04:25.279 --> 0:04:29.400 off that until very recently. I'm not conceptual like Ambrose. 0:04:29.440 --> 0:04:30.680 I'm not going to say is this a lot Ca 0:04:30.839 --> 0:04:35.880 toast moment or you change of para all that, But 0:04:36.440 --> 0:04:38.920 I think over the last year and a half two 0:04:39.000 --> 0:04:41.920 years they have stuck with some model assumptions that were 0:04:42.000 --> 0:04:45.159 publicly questioned and some of the members, the external members 0:04:45.160 --> 0:04:47.640 of the committee also questioned, Adam. 0:04:47.520 --> 0:04:50.440 Are there parallels with the UK and the US and 0:04:50.480 --> 0:04:53.240 the Federal Reserve which is currently at a precipice of 0:04:53.279 --> 0:04:54.480 a pretty key moment. 0:04:55.800 --> 0:04:57.840 At least, I think it's fair to draw the parallel. 0:04:58.640 --> 0:05:02.039 I think, just as with our markets with energy shocks, 0:05:02.360 --> 0:05:06.000 it's worse than the UK. Unfortunately in this instance, because 0:05:06.560 --> 0:05:09.120 it took the FED a while to change their view 0:05:09.360 --> 0:05:12.839 on inflation. A bunch of us were beating the drum 0:05:12.880 --> 0:05:15.239 for them to do that starting at the first quarter 0:05:15.320 --> 0:05:20.839 of twenty twenty one. But the bottom line is they 0:05:20.839 --> 0:05:23.839 did significantly change it by summer of twenty twenty two, 0:05:24.160 --> 0:05:26.960 and they clearly from the testimony, they don't have a 0:05:27.000 --> 0:05:29.920 full strategy, but they are aware inflation is job one. 0:05:30.240 --> 0:05:33.200 They are aware it's trend inflation. They are aware that 0:05:33.240 --> 0:05:36.960 it wasn't the transitory stuff. So I think the FED 0:05:37.120 --> 0:05:39.240 got out of its own way to some degree. 0:05:39.720 --> 0:05:43.000 We are discussing this concern about whether the FED can 0:05:43.080 --> 0:05:46.479 get down to a two percent inflation rate without causing pain, 0:05:46.560 --> 0:05:48.920 that perhaps people are unprepared for something that you raised 0:05:48.920 --> 0:05:50.960 a while ago, that perhaps it's just better to get 0:05:51.000 --> 0:05:53.520 to a three percent rate and be more comfortable with 0:05:53.600 --> 0:05:56.680 that higher rate. Where are you now in terms of 0:05:56.760 --> 0:05:59.880 what the FED has done and where it is heading 0:06:00.040 --> 0:06:03.040 in terms of inflation rate based on how much it's 0:06:03.080 --> 0:06:03.920 raised rates so far. 0:06:05.800 --> 0:06:09.720 I would love for Chris Waller and others to write, 0:06:10.120 --> 0:06:14.760 love to see vacancies continue to come down without unemployment 0:06:14.880 --> 0:06:20.920 rising and the pass through from all the previous shocks 0:06:20.960 --> 0:06:24.280 to be weeded out and therefore not have to have 0:06:24.320 --> 0:06:27.520 a much higher rate. I think that is a very 0:06:27.560 --> 0:06:31.359 bad gamble. I'm in fact more hawkish than even some 0:06:31.480 --> 0:06:34.479 of my colleagues on this, even though I'm known p 0:06:34.520 --> 0:06:39.120 obviously as an inflation dom because I see US as 0:06:39.200 --> 0:06:43.880 having such tight labor markets in the US and such 0:06:44.040 --> 0:06:48.480 trend inflation persisting even though it's coming off some that 0:06:49.080 --> 0:06:53.240 you're going to need real contraction in the credit markets 0:06:53.279 --> 0:06:54.680 to get where you need to go. 0:06:54.880 --> 0:06:57.680 This is really important, Adam. What's required in terms of 0:06:57.680 --> 0:07:00.040 how high rates to have to go in order to 0:07:00.080 --> 0:07:02.760 get real contraction in credit markets that are resilient. 0:07:05.600 --> 0:07:06.560 Well, I mean, one. 0:07:06.400 --> 0:07:08.920 Way to look at it is that we finally, over 0:07:08.960 --> 0:07:12.400 the last few months, have spreads on quality spreads between 0:07:12.520 --> 0:07:16.480 you know, different classes of bonds or government borrowers versus 0:07:16.480 --> 0:07:20.120 private sector borrowers that are consistent with the tightening cycle. 0:07:20.160 --> 0:07:24.880 We haven't seen spreads be that wide, very wide at all, 0:07:24.960 --> 0:07:29.080 until very recently. So similarly, if you, however, you want 0:07:29.120 --> 0:07:31.640 to compute what you think the real interest rate is. 0:07:31.960 --> 0:07:36.520 We are just now getting to positive really, and so 0:07:36.640 --> 0:07:40.560 to me it's we are only now getting to type policy. 0:07:41.440 --> 0:07:47.400 And especially since the residential construction and employment proved very 0:07:47.480 --> 0:07:50.440 resilient to interest rate rises in a way that we 0:07:50.520 --> 0:07:52.800 have not seen before. That to me is the biggest 0:07:52.800 --> 0:07:57.920 surprise in the US. It tells us that the amount 0:07:57.920 --> 0:08:00.840 of monetary tightening has been done so far as sufficient. Now, 0:08:00.880 --> 0:08:03.320 maybe what we're just now gotten over the last couple 0:08:03.280 --> 0:08:06.680 of months will prove sufficient, But I'd rather air on 0:08:06.760 --> 0:08:09.480 the side of tightening more and that the US economy 0:08:10.440 --> 0:08:11.840 he won't fall into recession. 0:08:11.840 --> 0:08:13.680 We've got some time for one more question here, Adam. 0:08:13.680 --> 0:08:15.679 We're going to bring you over to the next half hour, Folks, 0:08:15.760 --> 0:08:19.680 this conversation is so important without imposing the Peterson Institute. 0:08:19.720 --> 0:08:22.520 It's real simple, Adam. There's a whole school of thought 0:08:22.560 --> 0:08:26.840 out there with disinflationary vectors in place, and we're being successful. 0:08:26.840 --> 0:08:28.680 And I want to talk about the naval gazing of 0:08:28.760 --> 0:08:31.040 do we get back to two percent or whatever in 0:08:31.080 --> 0:08:34.440 the next section. But right now, are you suggesting that 0:08:34.480 --> 0:08:39.400 we completely misjudge how we will extend the X axis 0:08:39.440 --> 0:08:43.160 of these high interest rates, and we will see a 0:08:43.280 --> 0:08:46.520 five percent or dare I say six percent millu well 0:08:46.559 --> 0:08:48.640 out into twenty twenty four. 0:08:50.040 --> 0:08:52.960 My central call is that they're going to get above 0:08:53.040 --> 0:08:55.600 five point five before the end of the year, and 0:08:55.679 --> 0:08:58.440 it's going to remain there into at least second quarter 0:08:58.480 --> 0:09:03.120 of twenty twenty four. And unlike some other people, I 0:09:03.160 --> 0:09:05.520 think that the risk is more that they may have 0:09:05.600 --> 0:09:08.520 to do more than that, and not so much that 0:09:08.559 --> 0:09:10.120 they're going to have to do less than that. 0:09:10.200 --> 0:09:12.640 What we're doing, we're talking to a cross section of people, 0:09:12.679 --> 0:09:16.520 and we've certainly seen that in views on the equity markets, 0:09:16.600 --> 0:09:22.400 some huge caution, some optimism, blinding neutrality from US Wealth Bank, 0:09:22.559 --> 0:09:26.400 and we're also driving forward the conversation wrapped around theory 0:09:26.640 --> 0:09:29.559 under question for Global Wall Street. This has been a 0:09:29.679 --> 0:09:32.600 joy for the last fifteen minutes without im posing and 0:09:32.640 --> 0:09:36.840 we continue now and with me as well, is Michael McKee, 0:09:36.880 --> 0:09:41.760 our Bloomberg International Economics and Policy and Theory correspondent. When 0:09:41.800 --> 0:09:44.440 the theory's thrown out the window? Mike mckaty, you first 0:09:44.520 --> 0:09:47.400 question for you, and that is how bad has the 0:09:47.400 --> 0:09:50.120 theory been blown out the window? I mean, I mean 0:09:50.760 --> 0:09:53.760 a posin has to act posing like and you know, 0:09:54.240 --> 0:09:56.880 future central banker like you don't. 0:09:57.240 --> 0:09:59.600 Well, I was listening to Adam earlier and I think 0:09:59.640 --> 0:10:03.200 he's that it's not just the Bank of England, it's 0:10:03.240 --> 0:10:08.720 all economists basically work off of models that have worked 0:10:08.760 --> 0:10:12.319 for twenty twenty five thirty years that aren't working anymore now. 0:10:12.400 --> 0:10:18.400 Some discarded those faster than others, and certainly you could 0:10:18.400 --> 0:10:21.120 say the Fed did not, the Bank of England did not. 0:10:22.280 --> 0:10:26.040 But now they are to varying degrees adjusting. And that's 0:10:26.120 --> 0:10:30.040 the question, though, what do you do? Where do you go? 0:10:30.400 --> 0:10:31.640 If the model doesn't work? 0:10:31.679 --> 0:10:35.080 You can try to figure out why and readjust a model, 0:10:35.520 --> 0:10:40.160 but they become more guidance than any kind of a 0:10:40.200 --> 0:10:41.840 real path forward. 0:10:42.120 --> 0:10:44.840 We continue with that, imposing the president of the Peterson 0:10:44.880 --> 0:10:48.240 Institute for International Economics, Adam, I'm going to get right 0:10:48.280 --> 0:10:50.200 to it and frame here the path down to three 0:10:50.240 --> 0:10:53.400 percent in a raging debate led by your work with 0:10:53.480 --> 0:10:57.240 your colleague Olivier Blanchard John Williams as an ur starts 0:10:57.320 --> 0:11:02.400 subdued and we will get back near twoish percent. You disagree, 0:11:02.440 --> 0:11:06.080 But what's the nuance? Now? What's changed in where we 0:11:06.280 --> 0:11:10.880 are heading within this new level for FED rate policy. 0:11:11.200 --> 0:11:13.800 I don't think much has changed in the spirit of 0:11:13.800 --> 0:11:16.640 the conversation you and Michael we're just having. I think 0:11:16.720 --> 0:11:19.600 more needs to change. So what we had was a 0:11:19.679 --> 0:11:23.400 series of central bankers repeatedly saying throughout the last couple 0:11:23.400 --> 0:11:27.240 of years, do means to and then saying sato voce 0:11:27.440 --> 0:11:30.640 but audibly, Look, it might be better to get that 0:11:30.800 --> 0:11:33.280 to stop at three or to be slow getting to two, 0:11:33.640 --> 0:11:36.880 but we can't admit it now. And my belief, which 0:11:36.920 --> 0:11:39.280 was part of my belief when we were advocating and 0:11:39.360 --> 0:11:42.560 designing inflation targets in the first place, was the point 0:11:42.600 --> 0:11:45.920 of inflation targets was to communicate an a credible way 0:11:45.920 --> 0:11:49.400 with the public. And so I think between a choice 0:11:49.440 --> 0:11:53.160 of saying you're going to tow but then taking your 0:11:53.200 --> 0:11:56.400 time about it, and then maybe in a FED review 0:11:56.480 --> 0:11:58.680 in two years time you sort of admit that you 0:11:58.679 --> 0:12:02.120 were not going to do is not preferable to saying 0:12:02.320 --> 0:12:04.760 we're only going to three and since and this is 0:12:04.800 --> 0:12:08.199 actually a virtue of how bad things are. If you 0:12:08.360 --> 0:12:10.800 get if you take us down from eight to three, 0:12:11.000 --> 0:12:13.520 you're still pretty credible disinflation and stuff. 0:12:14.400 --> 0:12:18.199 What's the Venn diagram look like of Adam Posen in 0:12:18.320 --> 0:12:22.760 a rules based John Taylor, can we be rules based 0:12:23.240 --> 0:12:26.560 if we get back to a Posin blenchard three percent? 0:12:28.320 --> 0:12:31.320 Well inflation targeting. The part of it I'd like to 0:12:31.400 --> 0:12:36.760 keep is always been what I called this discipline discretion 0:12:37.120 --> 0:12:40.000 co authorate to late Thomas Laubach, or what Bernanki and 0:12:40.040 --> 0:12:44.800 Michigan called constrained discretion, the idea that it's intermediate between 0:12:44.920 --> 0:12:49.600 rules and pure discretion. And I think Professor Taylor has 0:12:49.640 --> 0:12:51.920 been right about a lot over the last couple of years, 0:12:51.920 --> 0:12:53.880 But I still am not sold on the idea of 0:12:53.960 --> 0:12:56.720 the rule. What I am sold on is the idea 0:12:56.800 --> 0:13:00.240 that you can't deviate from the target without explaining yourself 0:13:00.240 --> 0:13:03.680 and adapting the target. And so I don't know about 0:13:03.679 --> 0:13:06.880 a ven diagram. I think we both agree, would agree 0:13:06.920 --> 0:13:09.720 you need a lot more inflation disinflation than we've had. 0:13:10.400 --> 0:13:12.400 That the FED was behind the curve and had a 0:13:12.440 --> 0:13:15.440 wrong idea, But ultimately it's not because they didn't never 0:13:15.559 --> 0:13:17.240 rules because they had a wrong idea. 0:13:18.200 --> 0:13:20.160 Well, Adam, if I can follow up on the idea 0:13:20.280 --> 0:13:23.840 of whether or not you want to raise the inflation target. 0:13:24.400 --> 0:13:26.840 Do you have a lot of confidence one way or 0:13:26.840 --> 0:13:29.960 another that two percent is wrong or three percent is 0:13:30.000 --> 0:13:32.480 going to fit the economy that comes out of this 0:13:32.600 --> 0:13:35.440 whole thing, because at this point it seems like we 0:13:35.480 --> 0:13:38.120 don't really know, We don't have a good grasp on 0:13:38.280 --> 0:13:40.680 where inflation is going and how fast. 0:13:41.080 --> 0:13:44.160 It's fair, it's a fair question. I want to go 0:13:44.240 --> 0:13:48.000 back to one one basic point, which was when we 0:13:48.320 --> 0:13:51.160 an Ancunisian lawback and I wrote the inflation targeting book. 0:13:52.200 --> 0:13:56.079 We wrote in it and assumed that inflation targets would 0:13:56.080 --> 0:13:59.760 be reset over time. As I started saying, and I'm 0:13:59.800 --> 0:14:02.720 only speaking for myself now, not my distinguished co authors, 0:14:03.360 --> 0:14:05.439 as I started saying around two thousand and four, two 0:14:05.480 --> 0:14:09.560 thousand and five, we made a mistake because people treated 0:14:09.600 --> 0:14:12.760 these inflation targets like exchange rate targets. They were scared 0:14:12.760 --> 0:14:15.000 to move them because they were worried it gave a 0:14:15.040 --> 0:14:18.000 bad message. And so and there was too much convergence 0:14:18.040 --> 0:14:20.600 among different central banks and different economies all on this 0:14:20.640 --> 0:14:24.600 two percent, and that just reinforced it. Whereas you should 0:14:24.600 --> 0:14:29.280 be adapting the inflation to target to the realities, not 0:14:29.440 --> 0:14:32.760 every minute to make excuses, but every several years to 0:14:32.800 --> 0:14:35.760 make it realistic, and so to me, there's no question 0:14:35.840 --> 0:14:39.080 that the higher inflation target would be better. We well, 0:14:39.160 --> 0:14:41.600 Blanchard used to talk with co authors about a four 0:14:41.600 --> 0:14:44.440 percent target. He's now publicly said he's in favor of 0:14:44.440 --> 0:14:47.680 a three rather two. I've always believed it should be 0:14:47.760 --> 0:14:51.000 higher than two. Not always sorry. When I wrote the book, 0:14:51.000 --> 0:14:53.040 I didn't, but I believed it should be moved as needed, 0:14:53.120 --> 0:14:56.120 and since fifteen years i've believed it should be moved up. 0:14:56.920 --> 0:15:00.000 So I think there's no harm in saying three, because 0:15:00.080 --> 0:15:02.440 you're still going to be credible disinflating from where we 0:15:02.480 --> 0:15:04.280 are now the three, and then you're not going to 0:15:04.360 --> 0:15:07.680 have to go through the major pain of squeezing out 0:15:07.720 --> 0:15:09.000 that last bit of inflation. 0:15:09.520 --> 0:15:11.880 Well, let me ask you about another communications issue, and 0:15:11.920 --> 0:15:15.640 that is forward guidance. The FED and other central banks 0:15:16.000 --> 0:15:19.360 really like the idea at various times, but now it 0:15:19.360 --> 0:15:22.320 seems like they're having trouble communicating with the markets since 0:15:22.320 --> 0:15:25.480 they're unable to say what they're going to do next. 0:15:26.040 --> 0:15:28.840 Is that a FED problem, a market problem? Or does 0:15:28.920 --> 0:15:31.200 forward guidance not work as well as they thought? 0:15:32.120 --> 0:15:35.440 Borer guits never worked as well as all? I mean 0:15:35.560 --> 0:15:38.360 back when my first speech after leaving the Bank of 0:15:38.360 --> 0:15:41.880 England at Jackson Hole in twenty twelve, I made a 0:15:41.880 --> 0:15:45.080 whole point arguing that forward guidance was never going to 0:15:45.120 --> 0:15:49.640 work well, and everything since then bears that out. But 0:15:50.000 --> 0:15:53.120 that doesn't mean you just wander around and randomly say, oh, 0:15:53.160 --> 0:15:56.400 here's today's data. So like I look at Bank of England. 0:15:56.840 --> 0:15:58.640 The issue for me, I know we can talk about 0:15:58.640 --> 0:16:00.480 the FED, but I mean the banking and the issue 0:16:00.520 --> 0:16:02.960 for me is not that they made the wrong interest 0:16:03.040 --> 0:16:05.400 rate hikes, because they did a lot of them pretty fast, 0:16:05.640 --> 0:16:07.240 but that they kept saying, well, this will be the 0:16:07.280 --> 0:16:09.160 last one and we probably don't need to do more. 0:16:09.280 --> 0:16:11.040 We're going to be able to stop at four percent. 0:16:11.880 --> 0:16:15.480 And so again it's not so much about for guidance, 0:16:15.520 --> 0:16:19.960 it's about they communicated the wrong forecast. And I think 0:16:20.360 --> 0:16:22.840 the FED or the Bank of England has to or 0:16:22.880 --> 0:16:26.920 other central banks have to say, our forecast was wrong, 0:16:27.240 --> 0:16:29.960 we are shifting to this forecast. This forecast may be 0:16:30.040 --> 0:16:33.120 wrong too, but this is the best guess and therefore 0:16:33.160 --> 0:16:36.280 you should expect ax. You're not going to be able 0:16:36.320 --> 0:16:40.280 to do forward guidance the way you did in the crisis, 0:16:40.400 --> 0:16:43.120 because that was meant as a substitute for policy anyways. 0:16:43.160 --> 0:16:46.000 It was never meant to be a standalone, useful tool 0:16:46.040 --> 0:16:47.200 in a normal situation. 0:16:48.080 --> 0:16:49.840 I want to get back to FED policy. Got two 0:16:49.880 --> 0:16:52.920 more questions Adam before you go. You've been very generous 0:16:53.000 --> 0:16:55.920 with your time, and the basic one is what Mike 0:16:56.000 --> 0:16:58.920 McKee's going to see in the press conference looking out 0:16:58.960 --> 0:17:04.280 for five, six seven meetings as well for our audience, 0:17:04.960 --> 0:17:07.639 what would you suggest will be the market the real 0:17:07.800 --> 0:17:11.560 estate reaction if we get to pose in rate levels. 0:17:13.640 --> 0:17:16.720 Thank you for generously giving me this much of surveillance time. 0:17:18.359 --> 0:17:20.480 I think the market's going to be negative, but I 0:17:20.480 --> 0:17:22.720 don't think in the US it's going to be disastrous, 0:17:22.800 --> 0:17:26.840 as you and Lisa and John have repeatedly talked about. Rightly, 0:17:27.200 --> 0:17:30.840 this has been an incredibly resilient market in equities. Even 0:17:30.880 --> 0:17:33.320 in real estate. The the loss is commercial estate's different, 0:17:33.320 --> 0:17:35.640 but in residential real estate the losses have not been 0:17:35.680 --> 0:17:40.240 that large given the past run up and construction continues. So, 0:17:40.600 --> 0:17:43.159 going back to someone who were saying earlier, Tom, I 0:17:43.200 --> 0:17:46.359 think you're going to need in market terms, some form 0:17:46.400 --> 0:17:50.960 of capitulation, because that's just the side effect of their 0:17:51.040 --> 0:17:54.040 being actual tightening of credit conditions, and I think we're 0:17:54.320 --> 0:17:57.879 just getting there. But it doesn't have to be disastrous 0:17:58.400 --> 0:18:02.199 because we don't have the same fragility I believe in 0:18:02.240 --> 0:18:04.480 our financial markets. We did past cycles. 0:18:04.560 --> 0:18:08.000 At the Peterson Institute, Chad Bona with a great segment 0:18:08.080 --> 0:18:12.120 on the historic collapse of Switzerland's watch industry. That's how 0:18:12.320 --> 0:18:16.920 esoteric Peterson Institute can get. One of the things percolating 0:18:16.920 --> 0:18:20.400 Adam in late June is a new bout of American exceptionalism. 0:18:20.400 --> 0:18:24.560 Were different than they are? Is America exceptional. 0:18:26.000 --> 0:18:28.240 In a lot of social ways, yes, and a lot 0:18:28.240 --> 0:18:33.119 of economic ways now, so our racial divisions, our regional divisions, 0:18:33.119 --> 0:18:38.400 our gun violence, our nativism. These are all things under 0:18:38.440 --> 0:18:41.159 debate and which are not under debate, and a lot 0:18:41.200 --> 0:18:45.359 of other high income economies, So we are exceptional in 0:18:45.400 --> 0:18:49.080 our economy. The Economist, as you know, had a great 0:18:49.080 --> 0:18:52.040 feature a little while back of great survey talking about 0:18:52.240 --> 0:18:54.480 the ways in which the US economy powers ahead. It 0:18:54.600 --> 0:18:57.720 remains to be seen how much of that was sustainable 0:18:57.920 --> 0:19:02.560 versus how much of that was brief fiscal. But ultimately 0:19:02.600 --> 0:19:08.080 there is some special sauce to the urban, innovative parts 0:19:08.359 --> 0:19:12.200 of the US economy. In services in tech that others 0:19:12.200 --> 0:19:14.879 have not been able to replicate, and we have to 0:19:14.920 --> 0:19:16.479 take that. That's a blessing. 0:19:16.560 --> 0:19:18.359 We got to leave it there, Doctor Posen, thank you 0:19:18.400 --> 0:19:21.600 so much for a substantial mid year conversation, Adam posing 0:19:21.680 --> 0:19:24.960 the Peterson Institute formerly is public service to the Bank 0:19:25.000 --> 0:19:38.639 of England. Michael Collins joins now for a brief senior 0:19:38.680 --> 0:19:42.119 portfolio manager of PGUM Fixed Income. Michael, what does this 0:19:42.240 --> 0:19:44.719 record curve and version mean to you? How does your 0:19:44.720 --> 0:19:47.560 world change when you see two tens one hundred and 0:19:47.560 --> 0:19:48.520 two basis points? 0:19:49.280 --> 0:19:50.960 Yeah, Tom and Lisa, good morning. 0:19:51.119 --> 0:19:53.439 The dilemma out there, and one of the reasons the 0:19:53.480 --> 0:19:56.639 Martins are so confused and everybody was confused about the 0:19:56.680 --> 0:20:01.520 economic trajectory is that the typical models, the traditional leading 0:20:01.560 --> 0:20:05.280 indicators like the slope of the yield curve, all of 0:20:05.320 --> 0:20:10.320 the empirical evidence, the surveys are all pointing to recession 0:20:10.560 --> 0:20:15.480 right pending recession doom. The problem is from the bottom up, 0:20:15.800 --> 0:20:18.320 the fundamental analysts in US and you know, as you 0:20:18.359 --> 0:20:20.359 know Peache and fixed income, we pride ourselves on that 0:20:20.400 --> 0:20:23.320 bottom up analysis. I always say, sometimes the economists tell 0:20:23.359 --> 0:20:24.560 the analysts what's. 0:20:24.359 --> 0:20:24.920 Going to happen. 0:20:25.480 --> 0:20:27.640 But our view is a lot of times the analysts 0:20:27.640 --> 0:20:30.000 tell the economists what's going to happen. And when you 0:20:30.000 --> 0:20:31.960 look at the world from the bottom up and you 0:20:31.960 --> 0:20:34.399 look at all these companies and all these industries, and 0:20:34.440 --> 0:20:37.320 you look at the housing market, the auto market, the 0:20:37.359 --> 0:20:41.840 mortgage market, the banking system, it's hard to find the 0:20:41.920 --> 0:20:45.480 areas where you're going to see a big collapse in activity, 0:20:45.640 --> 0:20:50.120 in demand, in lending in and a big surge in default. 0:20:50.200 --> 0:20:53.360 So we're kind of splitting the difference and just assuming 0:20:53.400 --> 0:20:55.960 that growth is going to slow, you have a moderation 0:20:56.080 --> 0:20:59.680 and growth, moderation and inflation, but there's really low risk 0:20:59.760 --> 0:21:01.240 of a deeper session. 0:21:01.040 --> 0:21:04.960 Here within that analysis, do you go load the boat 0:21:05.119 --> 0:21:08.520 on garbage corporate or dare I say high yield distress? 0:21:09.080 --> 0:21:11.800 Or do you take the middle ground of equality corporate 0:21:11.920 --> 0:21:13.359 versus full faith and credit. 0:21:14.000 --> 0:21:16.320 Yeah, it's the latter for sure. 0:21:16.480 --> 0:21:18.879 I mean, what happens at this point to cycle Tom 0:21:19.160 --> 0:21:21.160 with the Fed and all these other central banks having 0:21:21.160 --> 0:21:22.400 tightened policies. 0:21:21.960 --> 0:21:25.080 So aggressively, it does start to bite. 0:21:25.119 --> 0:21:27.919 And it is starting to bite the weakest credits, the 0:21:27.960 --> 0:21:31.680 weakest people, the weakest governments, and you're seeing the most 0:21:31.760 --> 0:21:35.120 levered credits, the ones that are exposed to floating rates, 0:21:35.160 --> 0:21:39.360 whether they're loan issuers or whether they're commercial real estate borrowers, 0:21:39.640 --> 0:21:42.639 they are starting to get hit, right. So those are 0:21:42.680 --> 0:21:44.520 the areas of the market you really want to be 0:21:44.600 --> 0:21:47.440 careful with and avoid. The good news is, as we've 0:21:47.480 --> 0:21:51.160 talked about with you many times, the higher quality parts 0:21:51.160 --> 0:21:55.560 of the market are still for sale. They're offering tremendous spreads, 0:21:55.600 --> 0:21:59.359 tremendous yields to kind of sit up in quality and 0:21:59.440 --> 0:22:02.680 print you know, six handle coupons while you wait. 0:22:03.320 --> 0:22:05.600 Michael, I have to be honest. A lot of people 0:22:05.640 --> 0:22:07.840 have come on this show and they say, you know, 0:22:08.040 --> 0:22:09.919 you've come up with a theory, and you hold it 0:22:09.960 --> 0:22:11.800 for a longer period of time. You try to ignore 0:22:11.880 --> 0:22:13.479 the noise of all the mood swings, and we come 0:22:13.560 --> 0:22:15.239 up here and we say, yeah, yeah, yeah, But our 0:22:15.320 --> 0:22:17.200 job every day is to gauge the mood swings and 0:22:17.240 --> 0:22:19.919 figure out how the shifts are happening. Today, there is 0:22:19.920 --> 0:22:22.800 a material shift after a week of hawkish speak from 0:22:23.040 --> 0:22:25.600 a lot of central bankers around the world. Does that 0:22:25.720 --> 0:22:28.480 shift your view at all, the sense that suddenly we're 0:22:28.480 --> 0:22:31.919 gaming out six and a quarter percent ECB rates that 0:22:31.960 --> 0:22:34.480