WEBVTT - JP Morgan's Kasman: Problem With Lack of New Investments(Audio)

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<v Speaker 1>So a lot of individual movers and let's face the

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<v Speaker 1>Beige Book, we have to we have to note it

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<v Speaker 1>gets released a couple of weeks ahead of the FEDS medium,

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<v Speaker 1>of course, that's on September one. I want to bring

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<v Speaker 1>in Bruce Kasman, now chief economist and managing director for

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<v Speaker 1>Global Research at JP Morgan Securities. So, Bruce, Uh, you've

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<v Speaker 1>scanned the headlines. I'm sure you have not yet read

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<v Speaker 1>word for word what's in the Beige Book. It seems

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<v Speaker 1>to me that it's a pretty, what I want to say,

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<v Speaker 1>kind of plain vanilla some you know, things are growing,

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<v Speaker 1>inflations contained and let's just get some news that will

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<v Speaker 1>tell us one way or the other where there's economy

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<v Speaker 1>is heading. Well, they don't call it beg for nothing.

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<v Speaker 1>The I think the assessment you made is broadly right.

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<v Speaker 1>It's it's continued with a lot of descriptions of modest

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<v Speaker 1>and moderate throughout the UH the report. And I think

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<v Speaker 1>what that's telling you is that the way that the

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<v Speaker 1>the UM surveys is basically looking at the economy is

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<v Speaker 1>that things are kind of, you know, going along at

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<v Speaker 1>an okay pace. Uh. There's a little bit of wage pressure,

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<v Speaker 1>not much inflation is still low, but there's no signs

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<v Speaker 1>it's getting worse. Uh, And that you know, things are

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<v Speaker 1>kind of, you know, just continuing to kind of move

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<v Speaker 1>along at a at a social pace. Here. One thing

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<v Speaker 1>that I noted that I had not seen previously was

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<v Speaker 1>the San Francisco FED reporting that financial institutions in a

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<v Speaker 1>few states with a legal marijuana industry reported increased operational

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<v Speaker 1>costs related to regulatory constraints on activities linked with that industry.

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<v Speaker 1>Have you ever heard anything from the Federal Reserve comment

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<v Speaker 1>on the legal marijuana business? No, I'm not sure. I'd

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<v Speaker 1>i'd say that tells you anything about monetary policy. But

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<v Speaker 1>one of the things you get in the Beige Book

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<v Speaker 1>is always some interesting in some quirky anecdotes, and that

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<v Speaker 1>certainly is under that category. Jeff, excuse me, I'm thinking

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<v Speaker 1>Jeff Lacker. Bruce Kasman. Jeff Lacker, president of Richmond FED,

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<v Speaker 1>was testifying on FED structure in Washington, d C. He

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<v Speaker 1>and Esther George, who's president in Kansas City FED, both

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<v Speaker 1>arguing to keep it as it is twelve districts, twelve presidents,

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<v Speaker 1>and the board of governors, But afterwards reporters asked him

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<v Speaker 1>about the economy, Jeff Lacker said there's still a strong

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<v Speaker 1>case for a September rate hike up nothing in the

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<v Speaker 1>Beige Book that seems to go one way or the

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<v Speaker 1>other on this. What do you think, UM, I think

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<v Speaker 1>there's a case for a rate high in September. I

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<v Speaker 1>don't think the Fed is going to decide to raise

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<v Speaker 1>rates in September. I think they're more likely to use

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<v Speaker 1>the meeting to basically set us up that if can

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<v Speaker 1>things continue, uh that as they expect that they're going

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<v Speaker 1>to move at the end of the year. UM. As

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<v Speaker 1>you can see, the economy is feeling less downside risks

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<v Speaker 1>as well as the global economy, and I think if

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<v Speaker 1>the Fed feels the economy is on solid footing and

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<v Speaker 1>feels a comfortable that inflation is moving up, they do

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<v Speaker 1>a signal here that they want to raise rates. But

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<v Speaker 1>I don't think the news we've gotten has been strong

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<v Speaker 1>enough or decisive enough to get them to move in September.

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<v Speaker 1>I think they'll wait, hope to see more information confirming it,

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<v Speaker 1>and then move in December. Joining us now is Bruce Kasman.

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<v Speaker 1>He is Managing director, Chief Economist JP Morgan. Bruce someone

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<v Speaker 1>if you could tell us a little bit about how

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<v Speaker 1>you believe the US economy will continue to perform given

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<v Speaker 1>its lackluster performance so far this year. Um, we're kind

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<v Speaker 1>of looking for more of the same. We think the

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<v Speaker 1>economy will get back to about a two pace of growth. UM.

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<v Speaker 1>I think that's a pace which unfortunately is uh, you know,

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<v Speaker 1>pretty decent given where our supply side conditions uh stand

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<v Speaker 1>right now. Um, but it's not one I think that's

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<v Speaker 1>going to excite anybody. I think it's going to calm

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<v Speaker 1>some of the fears we've had as we went through

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<v Speaker 1>the first half of this year, and people will worry

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<v Speaker 1>the things we're gonna get a lot worse. But I

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<v Speaker 1>think there's still enough drag here in terms of the

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<v Speaker 1>business sector profitability is suspending. I think there's still enough

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<v Speaker 1>of a sluggish global environment out there that the economy

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<v Speaker 1>is not really going to take off here in any

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<v Speaker 1>in any meaningful way. Bruce uh Jeff Lacker, president of

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<v Speaker 1>Richmond FED, saying there's still a strong keys for September

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<v Speaker 1>interest rate increased to an extent. Is it your sense

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<v Speaker 1>that those who are arguing more vehemently, who are more

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<v Speaker 1>saying no, let's raise interest rates now, certainly by the

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<v Speaker 1>end of the year. To what extent is that argument

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<v Speaker 1>do you think based more on worries about financial excesses

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<v Speaker 1>developed develop developing financial instability if you keep rates so

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<v Speaker 1>low for so long, versus an argument that there's really

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<v Speaker 1>such a pickup in the economy that you have to

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<v Speaker 1>worry about inflation getting out of control. Well, I think

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<v Speaker 1>there's two pieces to the argument. One is what you're saying.

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<v Speaker 1>I think there's a concern on some members minds that

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<v Speaker 1>the low interest rate environment is starting to create some uh,

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<v Speaker 1>financial risks, and I think you can see some signs

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<v Speaker 1>in commercial real estate, you can see some signs in

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<v Speaker 1>corporate leverage that can can certainly get people a little

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<v Speaker 1>bit concerned on that front. I think the other side

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<v Speaker 1>of this is, even though the economy is not growing

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<v Speaker 1>it at particularly robust pace, labor markets are continuing to tighten,

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<v Speaker 1>Wage numbers are starting to move up. Core inflation to

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<v Speaker 1>us looks like it's starting to drift up, and the

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<v Speaker 1>Fed is just not that far from its objectives here

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<v Speaker 1>in terms of where the the full employment and price

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<v Speaker 1>stability objectives are, and you know, given where policy rates are,

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<v Speaker 1>that's an argument for UM moving on the normalization paths.

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<v Speaker 1>I think that both of these things are in the

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<v Speaker 1>minds of those that are are interested in raising rates

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<v Speaker 1>right now. Bruce Kasman, did you foresee this sluggish growth?

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<v Speaker 1>I mean, is there a call that you wish you

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<v Speaker 1>had made that you didn't or something that has confounded

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<v Speaker 1>you about the economy's performance in the last twelve months. Um. Uh,

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<v Speaker 1>there are a lot of things that I wish I

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<v Speaker 1>had done differently in the last twelve months. Uh, We'll

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<v Speaker 1>take just one. I think we've been a little bit

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<v Speaker 1>surprised by the degree to which the drags coming on

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<v Speaker 1>on the corporate sector of hit um. And I think

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<v Speaker 1>we have, uh, you know, overestimated growth somewhat, but in

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<v Speaker 1>terms of the the forecast on the labor market, in

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<v Speaker 1>terms of the forecast on inflation, things have been evolving

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<v Speaker 1>pretty well the way we expected. And I think that does,

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<v Speaker 1>you know, speak to one of our core views, which

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<v Speaker 1>is that this is an economy which has a weak

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<v Speaker 1>underlying potential rate of growth, so it doesn't take that

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<v Speaker 1>much growth to continue to tighten. And I think that's

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<v Speaker 1>important because it points to the constraints that are on

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<v Speaker 1>the U S economy as we think about the outlook

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<v Speaker 1>going forward. The e c B is meaning tomorrow European

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<v Speaker 1>Central Bank, and there's uh, I think a view out

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<v Speaker 1>there that they could uh at this meeting are very

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<v Speaker 1>soon announce more bond purchases or open up the kind

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<v Speaker 1>of bond purchases they're making. Meanwhile, of course, a big

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<v Speaker 1>story yesterday that two big European corporates are issuingsuing bonds

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<v Speaker 1>with a negative rate of point oh five per cent.

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<v Speaker 1>When you see that, Bruce, though, when when a person

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<v Speaker 1>looks at that, how are we supposed to think that

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<v Speaker 1>this this policy is working when they're going deeper and

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<v Speaker 1>deeper into negative territory. Well, I just say, don't shoot

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<v Speaker 1>the messenger here. I think the reason why Europe needs

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<v Speaker 1>rates in negative territory is because you've had two recessions

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<v Speaker 1>in the space of eight years. You have enormous amount

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<v Speaker 1>of slack in the economy, You've got inflation which is

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<v Speaker 1>sitting very low, and you've got a financial sector which

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<v Speaker 1>is still only gradually healing. I think DCB has done

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<v Speaker 1>a lot in the last couple of years to help

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<v Speaker 1>promote getting some growth going in the UR area. But

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<v Speaker 1>I think, you know, compared to where the US is

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<v Speaker 1>the UR area is still very early in its expansion.

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<v Speaker 1>It's still growing at at a modest pace UH, and

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<v Speaker 1>it needs needs more support. It doesn't have a fiscal

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<v Speaker 1>tool to use UM, and unfortunately, I think negative interest

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<v Speaker 1>rates are actually what's needed there and what has actually

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<v Speaker 1>been a positive in terms of helping keep UH their

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<v Speaker 1>expansion going. Bruce Kasman. As part of the Beije Books

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<v Speaker 1>Anecdotal survey, they noted in New York that a trucking

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<v Speaker 1>industry analysts says that there remains a shortage of trucking

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<v Speaker 1>drivers of truck drivers and that the firms don't have

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<v Speaker 1>enough pricing power for them to afford raising salaries. Is

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<v Speaker 1>that something that you see extending beyond just the trucking industry. Well,

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<v Speaker 1>leaving aside the specifics there, I think there is a

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<v Speaker 1>very important message that does resonate with me for the

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<v Speaker 1>broader economy, which is that corporates are in an environment

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<v Speaker 1>in which they're starting to face tight labor markets, not

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<v Speaker 1>high wage gains, but starting to see some bargaining power

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<v Speaker 1>return to labor, but they don't have the pricing power

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<v Speaker 1>in a global environment where the dollar has gone up

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<v Speaker 1>and where global demand has been weak, um, and I

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<v Speaker 1>think what we see is corporate margins coming under pressure,

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<v Speaker 1>what we've seen as business confidence being depressed, and what

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<v Speaker 1>we've also been seeing is very weak capital spending. That

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<v Speaker 1>to me is the is the piece of the economy

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<v Speaker 1>that's not there that we would really like to see

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<v Speaker 1>to get growth up to a to a strong pace.

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<v Speaker 1>I've heard at least one economists say that keeping the

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<v Speaker 1>key rate for so so low for so long is

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<v Speaker 1>one of the things that creates uncertainty for large corporations

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<v Speaker 1>are unwilling to commit to long term investments because they say,

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<v Speaker 1>this can't last forever, let's just everything short term. Is

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<v Speaker 1>this one of the problems with defense current policy. No,

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<v Speaker 1>I don't think so at all. Um. I think the

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<v Speaker 1>low rates is creating incentives for corporates to do a

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<v Speaker 1>lot in terms of taking out debt and in terms

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<v Speaker 1>of using it. What I think is going on is

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<v Speaker 1>they're just not seeing the opportunities in terms of top

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<v Speaker 1>line growth, in terms of both pricing and volume gains

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<v Speaker 1>to be willing to put that money to work in

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<v Speaker 1>terms of new investments. I don't think the FED is

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<v Speaker 1>the problem there, but I think we do have a

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<v Speaker 1>problem there, and that's you know, that's that's really at

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<v Speaker 1>the core of what constraints is facing this economy right now.

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<v Speaker 1>Bruce Casmin, thanks so much for joining US. Bruce's chief

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<v Speaker 1>economists at JP Morgan Securities. Tearing apart the Beijing Book

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<v Speaker 1>for US, Yes, modest growth, modest inflation, but still enough

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<v Speaker 1>momentum perhaps for interest rate increase by the end of

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<v Speaker 1>the year. This is Boomberg