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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Lee.

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Charles

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Speaker 1: Evans sitting down with bloom Bluck's Tom Kane to the

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Speaker 1: Council on Foreign Relations. We can bring the beginning of

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Speaker 1: that conversation to you now right here on bloom Buck Radio.

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Speaker 1: A moment to Chicago Economics and to Mr Moscow the

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Speaker 1: Researcher Department. There are now and it was important duty.

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Speaker 1: So let us dive in right now. And I within

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Speaker 1: the many speeches you've given, have to go to the

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Speaker 1: speech in Frankfurt, Germany where you speak about mid cycle

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Speaker 1: and about the dynamics at hand. Let's first define this

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Speaker 1: new phrase. I don't believe I read it in Ring

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Speaker 1: Bush Fisher Stars. What is mid cycle? Well, um, you

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Speaker 1: know what what the Federal Open Market Committee sort of

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Speaker 1: identified in uh early you know, twenty nineteen is that

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Speaker 1: the you know, state of the economy and financial markets

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Speaker 1: and inflation were behaving somewhat differently than we thought, um,

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Speaker 1: you know, going into the end of eighteen and so

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Speaker 1: we had been raising the short term policy rate, the

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Speaker 1: federal funds rate target for you know, some time. We

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Speaker 1: were never on a preset course for anything, but we

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Speaker 1: were basically increasing the federal funds right by twenty five

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Speaker 1: basis points every um, every quarter. And then we got

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Speaker 1: to the point where it's like, there seems to be

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Speaker 1: more uncertainty. Um, there were a lot of things in

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Speaker 1: in play the Chinese economy, and it looked like the

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Speaker 1: path that we had expected, which in my own estimation

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Speaker 1: would have called for probably three more rate increases in

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Speaker 1: twenty nineteen, all of a sudden that didn't look like

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Speaker 1: that was appropriate. So in the middle of this you know,

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Speaker 1: economic cycle, as we had been taking the funds right,

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Speaker 1: we thought to a more neutral setting, and then just

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Speaker 1: a little bit beyond that, we decided, I'm not even

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Speaker 1: sure what neutral is anymore. I think it may have

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Speaker 1: mowed down on a short term basis, and we need

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Speaker 1: to make an adjustment so that policy would be and

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Speaker 1: I would say moving from leaning towards a restrictive stance

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Speaker 1: as a path to leaning towards an accommodative stance and

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Speaker 1: that's pretty much what I think we've engineered with our

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Speaker 1: third rate cut. At our last meeting. First the distinctions

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Speaker 1: of this Vice Chairman Fisher would speak of ultra accommodative.

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Speaker 1: Where where we are now within accommodated. I love the

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Speaker 1: phrase Hawker's rate cut. Please explain that to me when

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Speaker 1: we get a chance, Hawkers rate. Don't use this language

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Speaker 1: like that. It's explaining somebody else, not appropriate for long relations.

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Speaker 1: But within this is this path of accommodation that we're

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Speaker 1: on right now. We're at the stasis point now waiting

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Speaker 1: from were But how accommodative is accommodative right now? That's

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Speaker 1: a great question. Um, so you know, so so, um.

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Speaker 1: You know, at some level, monetary policy can be very detailed,

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Speaker 1: very technocratic. You can look at a lot of data,

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Speaker 1: you can try out different models, you can look for

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Speaker 1: a robust response. But at some point you're always basically

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Speaker 1: searching for do I want to be neutral? Do I

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Speaker 1: want to sit in the background and just let the

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Speaker 1: economy go? Let businesses do what they do very well,

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Speaker 1: you know, capitalism and uh they employ people and they

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Speaker 1: deploy capital and they put it in play. When the

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Speaker 1: government is behaving in a nice, responsible value added manner

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Speaker 1: than the economy does very well, and you sit in

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Speaker 1: the background, and then sometimes, uh, there's a shortfall of

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Speaker 1: aggregate demand, a weakness, and you know, providing more incentives

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Speaker 1: for credit intermediation is helpful or the other way around.

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Speaker 1: So you know, you're you're sort of trying to find

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Speaker 1: out are we neutral? Are we accommodative? And I would

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Speaker 1: call the mid cycle adjustment as one where we were

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Speaker 1: clearly on a path headed towards slightly restrictive historically not

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Speaker 1: that restrictive at that point in an economic cycle, but

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Speaker 1: slightly restrictive. And now, in my own mind, I was

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Speaker 1: searching for something that was definitely accommodative, not hugely accommodative,

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Speaker 1: but definitely on the accommodative side of neutral. And I

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Speaker 1: think that neutral rate probably moved down. I mean, on

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Speaker 1: a long run basis, my assessment of neutral is two

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Speaker 1: and three quarters per cent, and so we were still

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Speaker 1: below that when we paused, and now we're at one

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Speaker 1: and a half to one and three quarters. I think

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Speaker 1: we are definitely accommodative, but I'm not entirely sure that

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Speaker 1: the short run UH neutral funds rate isn't a lot

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Speaker 1: closer to two. I want to get to them this moment.

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Speaker 1: But you mentioned the foreground right now, and there's times

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Speaker 1: where a central bank and for the luxury of being

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Speaker 1: not in the foreground is the central Bank of the

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Speaker 1: United States of America right now? Too much in the foreground?

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Speaker 1: Are we asking too much of the eCos building? No,

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Speaker 1: I think at this point in the cycle, as we

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Speaker 1: made that judgment to move towards something more neutral and

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Speaker 1: and and the short run neutral was moving up during

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Speaker 1: that time, we still had a lot of work uh

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Speaker 1: to do, even though um we started thinking about raising rates.

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Speaker 1: But you know, I would say that UH policy is

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Speaker 1: uh not that far off neutral. I'd say it's accommodative.

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Speaker 1: That's a point where Um, there are other factors you

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Speaker 1: know working. There's there's businesses or you know, working very

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Speaker 1: hard to take advantage of the tax reform UH that

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Speaker 1: they enjoy now to focus their business investment. Of course,

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Speaker 1: business investment right now has been following a little bit,

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Speaker 1: so that's that's been a weakness. And now the other

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Speaker 1: factors the weak foreign growth, trade policy, uncertainty and things

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Speaker 1: like that. So there's a variety of external factors that

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Speaker 1: have acted to be restrictive, and so it makes sense

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Speaker 1: for us to I don't set that a little bit

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Speaker 1: in a risk management setting, but basically we're not in

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Speaker 1: the foreground, I would say, And and I believe the

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Speaker 1: Frankfort speech you mentioned is one measurement here two with

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Speaker 1: added to the two percent inflation added to the real

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Speaker 1: our starret and it migrates within your text from five

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Speaker 1: down to four down to two and a half percent.

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Speaker 1: How our story are we are we slaves to this

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Speaker 1: calculation right now? I said, this is just a technocratic

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Speaker 1: way of describing what I was just discussing about. Are

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Speaker 1: you accommodative or are you restrictive? And so you know,

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Speaker 1: if if you're completely comfortable and talking about you know,

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Speaker 1: I think we want to be a little more leaning

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Speaker 1: towards uh UM, incentivizing, helping, credit intermediation so people can

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Speaker 1: take on some investments and consumer spending a little bit.

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Speaker 1: Then that would be you know, below this neutral right,

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Speaker 1: So you can go as technocratic as you want and say,

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Speaker 1: our stars moved down. The short run version of our

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Speaker 1: stars moved down, and I'm just trying to catch up

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Speaker 1: to it and be a little below that. But in

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Speaker 1: my mind, we're just trying to be a little bit accommodative,

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Speaker 1: and it's very artful. I mean I could pull out

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Speaker 1: all kinds of you know, technical assessments, slowback williams uh

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Speaker 1: other measures of that, but there's a lot of uncertainty

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Speaker 1: around that. So we have to make what's so interesting

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Speaker 1: here and I will speak of Michael Ferro at JP,

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Speaker 1: Morgan Mr Powers where this from a city Bank Ellen

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Speaker 1: Center with Morgan Stanley and others have a glide path

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Speaker 1: down a terminal rate and potential GDP it's under two percent.

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Speaker 1: Let us begin with the idea that's not politically acceptable

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Speaker 1: as well, GDP growth, GDP growth. There's politics got to

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Speaker 1: do with that. What has nothing to do with politics,

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Speaker 1: we understand. But but but the the the distinction here

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Speaker 1: is you people are dealing with demographics, nominal GDP what

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Speaker 1: you've been handid and that's unacceptable to so many. And

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Speaker 1: I would suggest the impatience of the president as well.

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Speaker 1: How do you deal with that politics buttressing off you

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Speaker 1: every day. I don't feel alone in this. I think

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Speaker 1: business has have been dealt this environment, demographics, households have

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Speaker 1: been dealt this, you know, environment, the ability of the

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Speaker 1: economy to grow at some at some level, it's it's

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Speaker 1: you know, very simple, it's a matter of arithmetic. Growth

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Speaker 1: in output is going to be equal to the growth

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Speaker 1: and labor input hours plus what those hours are able

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Speaker 1: to accomplish with the capital that businesses give them. That's

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Speaker 1: labor productivity. That's just identity. And then you sort of

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Speaker 1: look at what determines that labor hours. Demographics are a

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Speaker 1: big part of that. Well, the aging of the population,

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Speaker 1: mail attachment to the labor force diminishes as they get older.

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Speaker 1: Female increases in labor force participation have run their course.

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Speaker 1: That led to very strong growth in labor hours in

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Speaker 1: the eighties, but now are much weaker and younger people

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Speaker 1: don't have the same attachment to the workforce that they

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Speaker 1: used to, so they don't work as much now. If

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Speaker 1: you add on top of that the fact that you

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Speaker 1: have a particular attitude towards uh immigration, which would add

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Speaker 1: to labor employment and hours, then you've got a big

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Speaker 1: hold that you're looking at. So that labor hours component

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Speaker 1: is not going to be very large. We estimated to

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Speaker 1: be half a percent each year going forward, half a percent. Now,

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Speaker 1: labor productivity, what are you expecting from that? I'd love

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Speaker 1: to think that technology is going to improve us labor

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Speaker 1: productivity a lot with technology. You didn't mention technology technology

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Speaker 1: in any of that discussion, which is fine, But now

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Speaker 1: we're all living with technology. Does that lead to an inequality?

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Speaker 1: Does that lead to a Barbell outcome where technology a vanage?

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Speaker 1: Just let me finish, let me let me finish the

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Speaker 1: low growth, just to complete the thought right, because because

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Speaker 1: the labor productivity might kind of go. We got a

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Speaker 1: tax reform, we've got disruptive technologies, we've got new digital technologies.

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Speaker 1: We oughtously really strong growth. When did we see really

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Speaker 1: strong growth the eighties? In the eighties, we saw really

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Speaker 1: strong growth when we were growing, not not in a decline.

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Speaker 1: We grew three and a quarter percent. Why was that

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Speaker 1: labor input? Labor input was really st long during that

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Speaker 1: time period. How about labor productivity? They call that the

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Speaker 1: labor slow the productivity slowdown period. We had great growth,

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Speaker 1: low productivity growth. There was a whole bunch of things

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Speaker 1: going and it wasn't until nine to two thousand five

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Speaker 1: that we really saw an acceleration of productivity. Is very

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Speaker 1: difficult to predict when labor productivity is going to accelerate.

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Speaker 1: It takes a very long time. Computers hit the factory floor,

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Speaker 1: uh in a digital fashion in manufacturing durable goods in

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Speaker 1: the late nineties, and so you get this, but it's

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Speaker 1: very difficult to predict. You could hope for it to

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Speaker 1: be really strong. You can hope a long time. I

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Speaker 1: just don't know how to predict. We're predicting one and

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Speaker 1: a quarter percent. I think that's a pretty good great

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Speaker 1: rate of growth. And that's how I get the one

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Speaker 1: and three. And that's what the economy has dealt that hand.

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Speaker 1: We're looking at it. The politicians are dealt that hand too.

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Speaker 1: If they want three percent, if they want four or

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Speaker 1: five percent, then you've got to think about public policies

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Speaker 1: are gonna have an effect on that. Call it fiscal

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Speaker 1: space this year with new name for labor employment practices.

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Speaker 1: All kinds of things tell me about nominal GDP. With

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Speaker 1: the lower demographics, with the new lower potential GDP, do

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Speaker 1: we need to have a reset in our belief of

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Speaker 1: the animal spirit we need to get Are we going

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Speaker 1: to be sustained under four percent? Or could we do

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Speaker 1: okay the current GDP? Yeah? I don't spend as much

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Speaker 1: of my time thinking about nominal GDP, you know, as

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Speaker 1: as he's thinking more about how you cut out a car,

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Speaker 1: about the real GDP growth in the inflation, and I

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Speaker 1: would say inflation has been on the light side. It's

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Speaker 1: been under our two percent objective, and we've said that

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Speaker 1: we should be pursuing a symmetric two percent objective. So

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Speaker 1: that means, you know, it would be good if the

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Speaker 1: FM clarified that a little bit more, and some of

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Speaker 1: our discussions about our long run strategy, I think clarifying

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Speaker 1: what we mean by symmetry would be important to me.

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Speaker 1: It means we should average two percent over some reasonable

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Speaker 1: period of time. We should probably spend half our time

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Speaker 1: above two percent, But we've spent our entire time below

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Speaker 1: two percents since we uh called this out. So being

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Speaker 1: willing to go above two percent is something that I

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Speaker 1: think conservative central bankers have a lot of trouble with.

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Speaker 1: I think the ECB historically has had trouble with that.

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Speaker 1: Bank of Japan has really had problem with that. And

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Speaker 1: so if you limit yourself, if you say our objective

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Speaker 1: is two percent, but you really act as if it's

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Speaker 1: a ceiling, that reduces the monetary policy space that you

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Speaker 1: have when you need to provide more accommodation of during

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Speaker 1: the downturn. So that's why I think it's important to

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Speaker 1: achieve our two percent symmetric objective. In Evan's speech is

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Speaker 1: responsible until it's not and the words come out here,

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Speaker 1: I have mild comfort with two and a half percent inflation.

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Speaker 1: Perseverance is crucial, a powerful, full throated commitment to this

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Speaker 1: a symmetry you speak of because it all centers on

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Speaker 1: outcome based monetary policy. Let's dive into this. Olivier Blanchard

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Speaker 1: and others many years ago said, look, we need to

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Speaker 1: really pop inflation. We need an aggressive approach. Here you

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Speaker 1: follow on as a public official with really a strong

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Speaker 1: statement that we have to jump start this search for

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Speaker 1: a higher level of inflation. Explain what a powerful, full

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Speaker 1: throated Evans commitment is. Ah, so you've you've, you've you've

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Speaker 1: interwoven two different policies. I would never do that. So so, um,

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Speaker 1: I believe you were probably referring to Olivier blanche Shard.

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Speaker 1: I think he was research director at the I m

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Speaker 1: F and he sort of said, you know, there's really

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Speaker 1: because what we have said is on average, the federal

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Speaker 1: reserve when we go into recession we cut the short

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Speaker 1: run policy rate by at least five hundred basis points

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Speaker 1: five percentage points and more. If we start at two

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Speaker 1: and three quarters per cent, we can't do five percentage points,

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Speaker 1: and so we don't have a lot of ammunition and

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Speaker 1: capacity that's premised on a real rate of three quarters

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Speaker 1: of a percentage point and two percent being at two

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Speaker 1: percent inflation. If you don't get to two percent, you

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Speaker 1: start lower than that if you had a higher inflation objective.

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Speaker 1: And this is where Olivier Blanchechard was musing, if we

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Speaker 1: had four percent for plus a one percent real rate,

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Speaker 1: you know that gives you five percentage points, and then

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Speaker 1: you've got more capacity. Central banks have sort of settled

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Speaker 1: on two percent um. People get very nervous when you

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Speaker 1: talk about two point one percent or more than that,

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Speaker 1: but any rate, So I think most people have backed

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Speaker 1: off in our own long run framework. Cher J. Powell

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Speaker 1: took off the table resetting the inflation objective before we

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Speaker 1: even got started that type of things. So so when

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Speaker 1: you are trying to hit two percent symmetrically, I think

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Speaker 1: you need to hit it. And so if you say symmetric,

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Speaker 1: we need to say what we mean. That is, if

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Speaker 1: it's averaging. That just means it some of the time

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Speaker 1: you're going to be above it. And since we've been

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Speaker 1: down at one percent and one and a half percent

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Speaker 1: one a corner for a very long period of time,

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Speaker 1: two and a half just does and seem that outrageous,

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Speaker 1: except that they're an awful lot of people who kind

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Speaker 1: of say, as soon as you go above two, you're

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Speaker 1: probably headed to eighteen on a big number um, and

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Speaker 1: it just sort of presumes that it's not possible to

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Speaker 1: operate in a parallel environment around that two per set.

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Speaker 1: We need to discuss that, we need to communicate what

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Speaker 1: we mean. I'm comfortable with two and a half percent

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Speaker 1: inflation um, and in fact, trying to get to two

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Speaker 1: percent with momentum full throated harder than many would try

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Speaker 1: to make sure that we actually get there head for

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Speaker 1: two and a half. Half the time we don't get

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Speaker 1: to two. So maybe that would get us to two,

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Speaker 1: and then maybe the other half we go over a

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Speaker 1: little bit. You know, when I get to two and

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Speaker 1: a half, I'm definitely gonna be Look, what's my forecast?

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Speaker 1: Am I expecting to go to three? Or their special

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Speaker 1: circumstances that are gonna make us go further. It is

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Speaker 1: very difficult to generate inflation in the current environment. And

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Speaker 1: in fact, we just agreed to tax reform and a

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Speaker 1: fiscal policy and government spending that increase the national debt

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Speaker 1: um by a trillion a half dollars over tenure. That's

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Speaker 1: not enough to get inflation going either. So I think, um,

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Speaker 1: you know, we need to we need to work harder.

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Speaker 1: I was talking to her, Michael McKie this morning about

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Speaker 1: the outcome of your Frankfurt speech. How do we affect

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Speaker 1: the as you say, momentum the physics to get above

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Speaker 1: two even two point five, three months of two point seven,

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Speaker 1: how do you affect that process? You know, I'm trained

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Speaker 1: as a monetary economists, and most of the time your

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Speaker 1: training is you know, inflation is the monetary authorities concern.

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Speaker 1: If you're Paul Wolker, you know, if you're g. William

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Speaker 1: Miller back in the seventies and you kind of go

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Speaker 1: or Arthur Burns, well, you know inflations double I can't

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Speaker 1: do anything about that. No, do some way down you

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Speaker 1: can do something about that, and Paul Bolker did that.

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Speaker 1: It's the responsibility to deal with that. If inflation is

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Speaker 1: under your objective. It's your responsibility if you don't understand

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Speaker 1: all the other factors that at work to make you

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Speaker 1: think you think low rates are accommodative, when in fact

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Speaker 1: they're actually still restrictive if you're not hitting there on

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Speaker 1: the interst rate lower Young mois with that summer piece

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Speaker 1: out of JP Morgan, not a forecast, but a model

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Speaker 1: of how you bring the tenure yel down. Is that

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Speaker 1: where we could be heading as we affect and evans

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Speaker 1: like two and a half percent inflation jump. So I

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Speaker 1: think they're kindling to I think there are a lot

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Speaker 1: of details. At any point in the process, we could

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Speaker 1: have a discussion like that, and I'm willing to have

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Speaker 1: it as guy. But at the moment, I'm thinking more

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Speaker 1: about strategy and how you go about operationalizing to get

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Speaker 1: to your strategic goals, and I think an enormous part

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Speaker 1: of it is communicating we are we are headed for symmetry,

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Speaker 1: we are willing to go over. We must go over

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Speaker 1: two percent. If we are going to average two percent,

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Speaker 1: you've got to be above two percent when you've been

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Speaker 1: below it. When you think about the effects of the

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Speaker 1: U zero lower bound, we now call it the effective

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Speaker 1: lower bound. I guess because some people think we might

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Speaker 1: go to negative interest rates. I think zero lower bound

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Speaker 1: is probably more accurate. But you know, when when when

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Speaker 1: interest rates fall a lot and we're at the zero

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Speaker 1: lower bound, our expectation is inflation is going to be

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Speaker 1: pretty low. Then we get out of this in the

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Speaker 1: second half of the cycle, we get back to a

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Speaker 1: more we should be there now, and then if you're

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Speaker 1: gonna average two, you've got to be above two for

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Speaker 1: that second half. Well, maybe you need to, you know,

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Speaker 1: be be targeting something more like two and a quarter

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Speaker 1: or two and a half on the second half of

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Speaker 1: an economic cycle just to get to an average two percent.

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Speaker 1: Talking about that strategy, making sure that everybody is totally

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Speaker 1: comfortable with it or not, and admitting what your operational approaches,

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Speaker 1: but communicating what you're going to do after being very

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Speaker 1: clear about that, and not kind of getting nervous and

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Speaker 1: twitching when you get to two point one or one

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Speaker 1: point nine, Because I confess I'm about as outspoken as

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Speaker 1: anybody in terms of I'm okay with inflation above two.

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Speaker 1: But then I start talking about inflation at two point two,

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Speaker 1: and maybe my maybe my voice breaks a little bit.

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Speaker 1: I think it's part of the DNA of central bankers,

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Speaker 1: and we really need to break out of that if

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Speaker 1: we're going to be able to achieve two percent symmetric inflation.

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Speaker 1: I mentioned Gerald Ford today on television. I realized nobody

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Speaker 1: on my staff kneho. He was what about whips United

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Speaker 1: States whip disinflation? Now, I mean, that's that's really the

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Speaker 1: strategy we're talking about. How big a constraint is trillion

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Speaker 1: dollar deficits. You mentioned the fiscal response to the vogue

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Speaker 1: this moment is fiscal space. Whatever that means. Are you

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Speaker 1: constrained by the fiscal challenges of the nation. I mean,

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Speaker 1: as we look at conducting monetary policy, you do it

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Speaker 1: over a particular horizon and that you know you can

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Speaker 1: have some effect on three to five years. You look

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Speaker 1: at that forecast, there seems to be uh no constraints

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Speaker 1: from um accumulation of fiscal debt. I would expect that

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Speaker 1: to emerge from very high treasury rates, long term bond yields.

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Speaker 1: That is not what we're seeing. Even though we've seen

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Speaker 1: a little bit of a turnaround, they're very low right now,

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Speaker 1: so there doesn't seem to be any pressure there. This

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Speaker 1: is a different world than the seventies. There's an intense

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Speaker 1: desire for safe assets. Um, you know, people used to

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Speaker 1: kind of go tee. Have you noticed that the German

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Speaker 1: Bund is negative? Who in the heck would want to

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Speaker 1: own the German Bund? And I say a lot of people,

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Speaker 1: because most people who see the negative yield don't see

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Speaker 1: the point that the price is very high because people

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Speaker 1: want that. So are are low long term interest rates

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Speaker 1: indicate that people like holding that there's a demand for that.

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Speaker 1: You could argue that there's, you know, a need for

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Speaker 1: more supply and this would be one way for it,

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Speaker 1: but it doesn't in any as I can tell. Constraining

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Speaker 1: our forecast carnigu melon with the heritage of Allen Meltzer

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Speaker 1: Marvin good friend there as well. He wrote a Jackson

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Speaker 1: whole about negative interest rates. There was a modest uproar

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Speaker 1: about that paper. Your thoughts on the experiment of negative

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Speaker 1: interest rates and with that the idea of Japan to

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Speaker 1: Europe to a US slowdown? Do we have should we

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Speaker 1: have a fear of a trajectory towards negative interest rates

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Speaker 1: in America? I think the central banks that have used

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Speaker 1: negative interest rates have found them to be helpful for them.

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Speaker 1: I think that, um, if you let me just take

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Speaker 1: the e c B d c B and in the

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Speaker 1: Bank of Japan. They came later to the um broad

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Speaker 1: asset purchasing programs that the Fed head embarked upon with

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Speaker 1: our open ended QUE three in September two thousand twelve.

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Speaker 1: We did quantitative easy before that, but we did the

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Speaker 1: open ended in twelve, and that sort of changed things.

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Speaker 1: I think for guidance was helpful, but the combination was useful. Um,

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Speaker 1: the Bank wage Fan did that. ECB did that, but

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Speaker 1: they also added negative interest rates, so I think that

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Speaker 1: helped them a little bit. If you look at the

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Speaker 1: level of negative interest rates, they sort of pale in

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Speaker 1: comparison to the actual need for accommodation. Back in two

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Speaker 1: thousand nine, according to many interest rate rules, the Federal

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Speaker 1: reserves should have been seeking to set the nominal Federal

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Speaker 1: funds rate at about minus four percentage points. That's what

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Speaker 1: the tailor rules straight reading would have indicated. We can't

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Speaker 1: do that, because you know, got zero minus seventy basis

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Speaker 1: points is probably a very low down payment on something

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Speaker 1: like that. Other policies would have been you know, at

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Speaker 1: some point also fiscal policy and other policies. You know, I,

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Speaker 1: you know, I think that the central Bank has to

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Speaker 1: address inflation and has to help the economy as much

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Speaker 1: as we can. But as you know, long term treasury

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Speaker 1: rates go very low. If you're concerned about that, that

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Speaker 1: seems to indicate that it's not very expensive to run

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Speaker 1: expansionary fiscal policies, and maybe the trade off there is

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Speaker 1: better so negative interest rates. I don't think that we

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Speaker 1: can achieve enough with that tool. I worry that financial

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Speaker 1: institutions and UH savvy investors who would find themselves at

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Speaker 1: risk would organize their resources in a way to make

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Speaker 1: their exposure more limited. That would be a natural thing

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Speaker 1: for them to do, and so I would expect it

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Speaker 1: would be even less effective in the future. I would

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Speaker 1: much prefer to get our communications strategy more in line

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Speaker 1: with achieving our objectives. Financial institutions and savvy investors have

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Speaker 1: gone after you, guys over You mentioned the balance sheet,

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Speaker 1: and the critics would say quantitative using, and there the

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Speaker 1: new quantitative using that's under process now. Bill Dudley, of course,

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Speaker 1: with a firestorm, wrote about this with Bloomberg Vice chairman

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Speaker 1: Clarative spoke to me the other day and made clear

431
00:23:51,800 --> 00:23:55,520
Speaker 1: this is not a new que about just lightly touched.

432
00:23:55,560 --> 00:24:01,160
Speaker 1: Given the time on the repo uproar and the efficacy

433
00:24:01,359 --> 00:24:07,800
Speaker 1: of your solution away from being quantity of easing forever. Sure,

434
00:24:07,920 --> 00:24:11,159
Speaker 1: so we spent a long time at the zero lower bound.

435
00:24:11,240 --> 00:24:14,359
Speaker 1: We've got a very large balance sheet. We went up

436
00:24:14,400 --> 00:24:17,680
Speaker 1: to foreign half trillion dollars at some point, and so

437
00:24:17,760 --> 00:24:19,879
Speaker 1: it was clear that we needed to bring the size

438
00:24:19,920 --> 00:24:21,280
Speaker 1: of the balance sheet down. There were a lot of

439
00:24:21,280 --> 00:24:23,240
Speaker 1: people who kept telling us, yelling at us that we

440
00:24:23,280 --> 00:24:25,440
Speaker 1: should have a lower balance sheet. At the end of

441
00:24:25,440 --> 00:24:27,480
Speaker 1: the day, we're going to do what we think is best.

442
00:24:27,600 --> 00:24:30,159
Speaker 1: But reducing the size of the balance sheet was always

443
00:24:30,200 --> 00:24:33,880
Speaker 1: part of our plan. And so as we embarked upon

444
00:24:33,880 --> 00:24:35,720
Speaker 1: a plan to reduce the size of the balance sheet

445
00:24:35,760 --> 00:24:38,200
Speaker 1: at some point, and you know, you realize this very

446
00:24:38,200 --> 00:24:41,199
Speaker 1: early on. How big is the balance sheet going to

447
00:24:41,240 --> 00:24:44,280
Speaker 1: be when you settle down and then start growing it again.

448
00:24:44,320 --> 00:24:47,320
Speaker 1: Because cash starts to grow in the size of the economy,

449
00:24:47,400 --> 00:24:49,880
Speaker 1: the balance sheets going to grow. And so we had

450
00:24:49,920 --> 00:24:52,480
Speaker 1: discussions about that. And this is gonna have an implication

451
00:24:52,560 --> 00:24:54,919
Speaker 1: for when short term policy rates all of a sudden

452
00:24:55,240 --> 00:24:59,240
Speaker 1: might start to um uh tighten and all of that,

453
00:24:59,400 --> 00:25:01,679
Speaker 1: and so you know, we made a judgment that we

454
00:25:01,760 --> 00:25:04,800
Speaker 1: could reduce the balance sheet to a certain point, and

455
00:25:04,840 --> 00:25:08,040
Speaker 1: then then early September we kind of learned that looks

456
00:25:08,040 --> 00:25:11,680
Speaker 1: like the markets need on a short term basis because

457
00:25:11,720 --> 00:25:15,680
Speaker 1: of tax policies where checks are written, funds are put

458
00:25:15,720 --> 00:25:18,159
Speaker 1: off to the side and aren't used for repo and

459
00:25:18,240 --> 00:25:21,560
Speaker 1: things like that other things, there wasn't as much liquidity there.

460
00:25:21,880 --> 00:25:24,399
Speaker 1: You've also got a change in regulatory policies so that

461
00:25:24,520 --> 00:25:28,000
Speaker 1: some of the banks and dealer brokers that previously were

462
00:25:28,000 --> 00:25:32,840
Speaker 1: in the business of arbitraging these rates between um uh

463
00:25:32,880 --> 00:25:36,359
Speaker 1: you know, repo rates and you know other depository rates,

464
00:25:36,400 --> 00:25:38,840
Speaker 1: they might uh provide that, and then it's kind of like,

465
00:25:39,000 --> 00:25:42,000
Speaker 1: you know, the regulatory incentives now aren't as attractive for that.

466
00:25:42,119 --> 00:25:45,640
Speaker 1: So we kind of decided ultimately that the balance sheet

467
00:25:45,680 --> 00:25:48,880
Speaker 1: probably needed to be larger than where we were at

468
00:25:48,880 --> 00:25:52,399
Speaker 1: that time, and so we embarked on, um, you know,

469
00:25:52,880 --> 00:25:56,120
Speaker 1: buying sixty billion dollars a month at the moment short

470
00:25:56,240 --> 00:25:59,600
Speaker 1: term t bills. So this doesn't add duration to speak

471
00:25:59,640 --> 00:26:01,960
Speaker 1: of to our balance she It's not like the QUI

472
00:26:02,119 --> 00:26:05,040
Speaker 1: where we're buying long term assets, and so it's in

473
00:26:05,080 --> 00:26:07,200
Speaker 1: that sense. This is not QWI. This is just trying

474
00:26:07,240 --> 00:26:10,080
Speaker 1: to provide liquidity, and we're gonna be searching for the

475
00:26:10,160 --> 00:26:13,880
Speaker 1: right level of liquidity so that we can hit our

476
00:26:13,880 --> 00:26:17,160
Speaker 1: funds rate target, keep the funds right within the target range,

477
00:26:17,200 --> 00:26:20,439
Speaker 1: and not have it um, you know, go of that

478
00:26:20,520 --> 00:26:23,200
Speaker 1: because of a lack of arbitrage with other treasury rates.

479
00:26:23,320 --> 00:26:25,080
Speaker 1: One more question and then I'm going to go to

480
00:26:25,200 --> 00:26:27,720
Speaker 1: questions from the floor of a wonderful audience here today.

481
00:26:27,960 --> 00:26:30,000
Speaker 1: Just as a warning, the first question we'll go to

482
00:26:30,040 --> 00:26:32,560
Speaker 1: the gentleman from Cedar Rapids, which I haven't talked to

483
00:26:32,720 --> 00:26:35,320
Speaker 1: before this, but we'll figure out who the gentleman from

484
00:26:35,359 --> 00:26:39,200
Speaker 1: Cedar Rapids is here in a moment. One final question.

485
00:26:39,400 --> 00:26:42,360
Speaker 1: This is all great, and it's great for the elites,

486
00:26:42,600 --> 00:26:44,919
Speaker 1: and it's great for the suits and ties, but the

487
00:26:44,960 --> 00:26:49,159
Speaker 1: bottom line is America's savers have been crushed by this

488
00:26:49,320 --> 00:26:52,880
Speaker 1: collapse of the real interest rate and for even that matter,

489
00:26:52,960 --> 00:26:56,240
Speaker 1: the nominal interest rate. Speak to the savers out there,

490
00:26:56,359 --> 00:27:01,040
Speaker 1: Speak to the have nots of investment who haven't articipated

491
00:27:01,200 --> 00:27:06,360
Speaker 1: through all of this economics. Um. Yeah, I talked to somebody,

492
00:27:06,480 --> 00:27:08,800
Speaker 1: you know, you know, every morning before I go to

493
00:27:08,840 --> 00:27:11,320
Speaker 1: an f o MC meeting about this exact problem. My

494
00:27:11,359 --> 00:27:14,000
Speaker 1: wife is always telling me, make sure that you don't

495
00:27:14,040 --> 00:27:17,560
Speaker 1: cut that interest rate. I need a higher There we go, right,

496
00:27:17,640 --> 00:27:20,480
Speaker 1: you can see what effect that's haden. Riley, could you Riley?

497
00:27:20,520 --> 00:27:24,040
Speaker 1: Could you get her on radio? Will want her Mrs

498
00:27:24,040 --> 00:27:27,400
Speaker 1: evans Um. You know, so that's definitely the case. One

499
00:27:27,400 --> 00:27:31,320
Speaker 1: thing about monetary policy. When you're raising interest rates, there

500
00:27:31,320 --> 00:27:34,360
Speaker 1: are some people who benefit from getting higher interest rates.

501
00:27:34,359 --> 00:27:36,520
Speaker 1: There are some people who don't benefit because they've got

502
00:27:36,600 --> 00:27:39,200
Speaker 1: higher borrowing costs and things like that. So it's extremely

503
00:27:39,280 --> 00:27:42,000
Speaker 1: natural for us to you know, be paying attention to that.

504
00:27:42,080 --> 00:27:43,520
Speaker 1: But at the end of the day, it comes down

505
00:27:43,520 --> 00:27:45,639
Speaker 1: to how the economy is gonna do. I think that

506
00:27:45,680 --> 00:27:47,879
Speaker 1: everybody is going to be better off when we pursue

507
00:27:47,920 --> 00:27:51,440
Speaker 1: monetary policies, even when that means low interest rates. So

508
00:27:51,520 --> 00:27:54,160
Speaker 1: our market determined, I mean, we set this uh short

509
00:27:54,240 --> 00:27:56,600
Speaker 1: term policy rates, and then the market determines all the

510
00:27:56,640 --> 00:27:58,719
Speaker 1: other rates. And if it's not in line with that,

511
00:27:58,840 --> 00:28:01,639
Speaker 1: like if there's fiscal policy see problems the yod kerbel

512
00:28:01,680 --> 00:28:04,560
Speaker 1: Steepen and things like that. So we we can't do

513
00:28:04,640 --> 00:28:06,439
Speaker 1: everything that's golden. But you know, in this case, I

514
00:28:06,440 --> 00:28:09,080
Speaker 1: think getting the economy going so that the job market

515
00:28:09,200 --> 00:28:11,600
Speaker 1: is very strong, labor markets are very strong. I think

516
00:28:11,600 --> 00:28:14,919
Speaker 1: the consumer right now uh is supporting the economy in

517
00:28:14,960 --> 00:28:18,080
Speaker 1: an enormous way, in a way that the business side

518
00:28:18,160 --> 00:28:20,879
Speaker 1: at the moment is not, even though the architects of

519
00:28:20,960 --> 00:28:25,080
Speaker 1: tax corporate reform indicated it should be stronger than that.

520
00:28:25,160 --> 00:28:28,280
Speaker 1: And I think that are we're still waiting to say, well,

521
00:28:28,320 --> 00:28:34,920
Speaker 1: there's so many other things going on with reform. Ah,

522
00:28:34,920 --> 00:28:39,320
Speaker 1: well yeah, but anyway that much trouble right now, you know.

523
00:28:39,360 --> 00:28:41,640
Speaker 1: But but I think that getting the economy going is

524
00:28:41,640 --> 00:28:56,720
Speaker 1: going to help everybody, including savers in this room. A

525
00:28:56,800 --> 00:28:58,640
Speaker 1: number of years ago, he was with the i m

526
00:28:58,720 --> 00:29:02,320
Speaker 1: F at the time, John Let's he talked about macroprudential risk.

527
00:29:02,360 --> 00:29:07,320
Speaker 1: Will let him have the first question today, Dr Lipsky, Thanks,

528
00:29:07,320 --> 00:29:14,520
Speaker 1: good morning, good question. Obviously, the FED in recent uh

529
00:29:14,840 --> 00:29:17,760
Speaker 1: FO MC and its recent pronouncements has paid a lot

530
00:29:17,760 --> 00:29:24,040
Speaker 1: of attention to international economic development financial developments. Does that

531
00:29:24,120 --> 00:29:28,800
Speaker 1: represent a heightened awareness of the influence of international forces

532
00:29:28,880 --> 00:29:32,400
Speaker 1: on domestic and the domestic economy and hence on domestic

533
00:29:32,920 --> 00:29:38,520
Speaker 1: UNFED policy or is this in line with the previous practice.

534
00:29:39,040 --> 00:29:43,920
Speaker 1: And secondly, it was many had suggested that with central banks,

535
00:29:44,000 --> 00:29:47,920
Speaker 1: all key central banks focusing on the same inflation target

536
00:29:48,480 --> 00:29:52,880
Speaker 1: of two, that that would bring about an implicit coordination

537
00:29:53,480 --> 00:29:58,920
Speaker 1: of international monetary policy among key central banks. Yet today

538
00:29:59,000 --> 00:30:04,400
Speaker 1: we see as substantial differences in UH in actual short

539
00:30:04,520 --> 00:30:10,720
Speaker 1: term rates, substantial and uncertainty about its influence on UH

540
00:30:10,760 --> 00:30:14,400
Speaker 1: the value of the global value of the dollar. Has

541
00:30:14,480 --> 00:30:20,160
Speaker 1: that agreement on a common inflation target actually brought about

542
00:30:20,280 --> 00:30:25,400
Speaker 1: coordination or of international monitory policy? Those Yeah, now, that's

543
00:30:25,400 --> 00:30:29,000
Speaker 1: that's that's that's really interesting and and quite quite complicated

544
00:30:29,000 --> 00:30:31,200
Speaker 1: because as you point out, that sort of gets at

545
00:30:31,320 --> 00:30:34,520
Speaker 1: the foreign exchange values. You know, we could all agree

546
00:30:34,560 --> 00:30:37,320
Speaker 1: on different inflation objectives, and that in principle would have

547
00:30:37,360 --> 00:30:40,760
Speaker 1: a path for how foreign exchange rates would evolve smoothly

548
00:30:40,840 --> 00:30:43,520
Speaker 1: over time if everything went on a steady state fashion.

549
00:30:43,600 --> 00:30:46,160
Speaker 1: So it gets complicated pretty quickly. But I believe that

550
00:30:46,920 --> 00:30:52,200
Speaker 1: UM on that basis more clarity for all the central

551
00:30:52,240 --> 00:30:56,240
Speaker 1: banks as to what their objectives are, the weights that

552
00:30:56,320 --> 00:31:00,640
Speaker 1: they give to inflation versus other objective of which in

553
00:31:00,720 --> 00:31:04,160
Speaker 1: most of those cases are secondary to the inflation, right,

554
00:31:04,160 --> 00:31:06,560
Speaker 1: But they also care about the economy and also probably

555
00:31:06,600 --> 00:31:10,440
Speaker 1: financial stability to some extent, and so the more we

556
00:31:10,520 --> 00:31:14,480
Speaker 1: all understand UM and our in line in the sense

557
00:31:14,560 --> 00:31:17,320
Speaker 1: that it's normal we do this too, so it's more

558
00:31:17,400 --> 00:31:21,240
Speaker 1: likely we'll understand that. You know, I think there's better

559
00:31:21,320 --> 00:31:26,600
Speaker 1: understanding of the policies that everyone would pursue UM to

560
00:31:26,720 --> 00:31:29,920
Speaker 1: achieve that. I wouldn't call it coordination. There is, you

561
00:31:29,960 --> 00:31:32,840
Speaker 1: know better than I do. There's lots of conversations. Uh.

562
00:31:32,920 --> 00:31:35,840
Speaker 1: People get together in Bosle uh six times a year

563
00:31:35,840 --> 00:31:39,360
Speaker 1: at least, and other places around the world, and so

564
00:31:39,440 --> 00:31:43,240
Speaker 1: there's a sharing of information about what's going on that

565
00:31:43,280 --> 00:31:47,680
Speaker 1: I think is helpful for everybody to achieve their objectives

566
00:31:47,720 --> 00:31:52,239
Speaker 1: in um UM. You know, if it's not cooperative, at

567
00:31:52,280 --> 00:31:56,600
Speaker 1: least it's non um rivalrous UM as best it can be.

568
00:31:56,880 --> 00:32:00,960
Speaker 1: I think in terms of the international situation san UM,

569
00:32:01,040 --> 00:32:03,479
Speaker 1: I don't think things are different in terms of a

570
00:32:03,520 --> 00:32:06,520
Speaker 1: different policy reaction. I think it's a different moment in

571
00:32:06,640 --> 00:32:11,120
Speaker 1: time than UM many other times where uh. You know,

572
00:32:11,200 --> 00:32:16,200
Speaker 1: Europe is definitely slowing. Brexit is a huge uncertainty, even

573
00:32:16,280 --> 00:32:19,880
Speaker 1: though it looks like now things could play out in

574
00:32:19,960 --> 00:32:24,120
Speaker 1: a more careful fashion. But it's really hard to guess

575
00:32:24,160 --> 00:32:27,280
Speaker 1: that I and and and China is a big uncertainty,

576
00:32:27,280 --> 00:32:33,240
Speaker 1: and then international tariff trade discussions uncertainty around that certainly

577
00:32:33,320 --> 00:32:34,840
Speaker 1: changes things. So I mean, in terms of the mid

578
00:32:34,880 --> 00:32:37,200
Speaker 1: cycle adjustment, I would say this is very much a

579
00:32:37,320 --> 00:32:42,800
Speaker 1: risk management approach to ensuring that the US economy is

580
00:32:43,240 --> 00:32:46,920
Speaker 1: positioned as well as it can be for a little

581
00:32:46,920 --> 00:32:50,960
Speaker 1: more noise from wherever it could come from to the

582
00:32:51,000 --> 00:32:57,720
Speaker 1: economy to help support it. Our adjustments have not been anywhere, um,

583
00:32:57,760 --> 00:33:03,479
Speaker 1: you know, large enough to change the dynamics substantially. If

584
00:33:03,520 --> 00:33:05,680
Speaker 1: there was a big negative shock, we'd have to respond,

585
00:33:05,760 --> 00:33:08,000
Speaker 1: and I would expect other countries would have to. So

586
00:33:08,160 --> 00:33:10,680
Speaker 1: I think this is sort of the normal response. But

587
00:33:10,800 --> 00:33:13,440
Speaker 1: the moment in time is really, you know, quite different

588
00:33:13,560 --> 00:33:17,640
Speaker 1: than large events you're channeling there, Frank Night, Chicago. I'm

589
00:33:17,680 --> 00:33:22,200
Speaker 1: in the same maybe, but parts right now. Chair Paul's

590
00:33:22,280 --> 00:33:24,840
Speaker 1: out there at the press conference and he has to

591
00:33:24,880 --> 00:33:29,960
Speaker 1: parse the risks you measure versus the tangible uncertainties that

592
00:33:30,000 --> 00:33:33,200
Speaker 1: are out there right now. Expand a little bit here

593
00:33:33,880 --> 00:33:39,080
Speaker 1: on on how uncertain those uncertainties are something Muhammadalarian, I'm sorry,

594
00:33:39,280 --> 00:33:45,480
Speaker 1: how uncertain are those uncertainties right now? Those unknowns, Uh,

595
00:33:45,800 --> 00:33:50,680
Speaker 1: they're uncertain they're big. Um uh. You know, before before

596
00:33:50,720 --> 00:33:53,360
Speaker 1: before breakfast, we were talking about a few things and

597
00:33:53,680 --> 00:33:56,680
Speaker 1: we mentioned Rudy dorn Bush and um, you know, while

598
00:33:56,720 --> 00:34:01,120
Speaker 1: I never met him myself, I have seen a number

599
00:34:01,160 --> 00:34:05,840
Speaker 1: of scholars who studied with him. He's much beloved and

600
00:34:05,840 --> 00:34:09,840
Speaker 1: and Paul Krugman attributed but others to to Rudy Dornbush

601
00:34:09,920 --> 00:34:13,800
Speaker 1: this idea from international crisis that you can see something

602
00:34:13,840 --> 00:34:18,120
Speaker 1: really bad happening and it unfolds in a very slow fashion,

603
00:34:18,280 --> 00:34:21,360
Speaker 1: and you just think that it has to change the world,

604
00:34:21,400 --> 00:34:24,160
Speaker 1: and it doesn't, and it takes longer than you can imagine.

605
00:34:24,200 --> 00:34:27,200
Speaker 1: Then when things really hit the fan, it happens much

606
00:34:27,239 --> 00:34:30,239
Speaker 1: more quickly than you ever you know, expect, And so

607
00:34:30,320 --> 00:34:34,440
Speaker 1: there's this non linearity, you can call it nighty and

608
00:34:34,640 --> 00:34:37,439
Speaker 1: ninety and uncertainty in the sense that it may never

609
00:34:37,480 --> 00:34:40,879
Speaker 1: have happened. You can't predict the timing of it. But

610
00:34:41,440 --> 00:34:44,799
Speaker 1: they're these factors out there and unless something offsets them

611
00:34:44,840 --> 00:34:47,359
Speaker 1: or somebody else gets their act together, it you know,

612
00:34:47,640 --> 00:34:50,279
Speaker 1: doesn't look like it would be helpful, but it might

613
00:34:50,320 --> 00:34:53,360
Speaker 1: not occur. That's really hard to address. Allan Santner plays

614
00:34:53,360 --> 00:34:58,400
Speaker 1: the chief economist to Morgan Stanley. I thought the Evans

615
00:34:58,480 --> 00:35:02,799
Speaker 1: rule original was brilliant because unemployment our rates remain low,

616
00:35:03,000 --> 00:35:06,839
Speaker 1: at least until unemployment was below six and a half

617
00:35:06,880 --> 00:35:10,239
Speaker 1: percent um. But you had to guard against financial stability,

618
00:35:10,440 --> 00:35:13,840
Speaker 1: and that was important, right, so as long as inflation

619
00:35:14,280 --> 00:35:16,440
Speaker 1: doesn't move but isn't projected to move above two and

620
00:35:16,440 --> 00:35:20,160
Speaker 1: a half percent. So if you think about, um, you know,

621
00:35:20,239 --> 00:35:24,480
Speaker 1: you all have been discussing inflation framework. What would an

622
00:35:24,480 --> 00:35:28,480
Speaker 1: Evans role look like today that would aim at getting

623
00:35:28,480 --> 00:35:31,520
Speaker 1: inflation higher but have some sort of knockout clause for

624
00:35:31,600 --> 00:35:36,319
Speaker 1: financial stability. Yeah, so, um, you know. So when I

625
00:35:36,360 --> 00:35:39,759
Speaker 1: was arguing for Ford guidance, it was a little bit

626
00:35:39,800 --> 00:35:42,160
Speaker 1: simpler in the following since we were stuck at zero

627
00:35:42,920 --> 00:35:46,000
Speaker 1: on the funds rate, we had a lot of discussions

628
00:35:46,040 --> 00:35:48,960
Speaker 1: about you know, the committee was divided. Some people wanted

629
00:35:48,960 --> 00:35:52,800
Speaker 1: to raise rates, um, you know, sooner than certainly I thought.

630
00:35:52,840 --> 00:35:54,840
Speaker 1: And the unemployment rate was high, and you had a

631
00:35:54,840 --> 00:35:57,200
Speaker 1: discussion about, well, what's a natural rate of unemployment? What

632
00:35:57,239 --> 00:35:59,640
Speaker 1: if it's seven percent. If it's seven percent, maybe we

633
00:35:59,680 --> 00:36:01,600
Speaker 1: need to start raising the funds right now we think

634
00:36:01,640 --> 00:36:03,520
Speaker 1: it's more like four point three percent. So you talk

635
00:36:03,560 --> 00:36:06,319
Speaker 1: about uncertainty a whole lot of that, and it was

636
00:36:06,480 --> 00:36:08,719
Speaker 1: a little easier. I thought we were trying to stifle

637
00:36:08,920 --> 00:36:13,959
Speaker 1: premature expectations of a FED tightening. Now, if you're gonna

638
00:36:14,000 --> 00:36:15,960
Speaker 1: do it, I mean, we've got the funds rate target

639
00:36:16,000 --> 00:36:18,160
Speaker 1: at one and a half to one on a quarter percent,

640
00:36:18,239 --> 00:36:22,080
Speaker 1: and so now you would be trying to craft something

641
00:36:22,160 --> 00:36:26,440
Speaker 1: where you'd indicate we're going to continue to maintain an

642
00:36:26,480 --> 00:36:29,440
Speaker 1: accommodative stance of policy. Maybe that would be keeping the

643
00:36:29,440 --> 00:36:32,440
Speaker 1: funds rate where target where it is now until and

644
00:36:32,480 --> 00:36:35,399
Speaker 1: then some objective has stated. So my colleague Neil cash Cary,

645
00:36:35,480 --> 00:36:38,520
Speaker 1: I believe, is not being shy about sort of saying,

646
00:36:38,640 --> 00:36:40,960
Speaker 1: you know, we should have inflation at two percent, and

647
00:36:41,000 --> 00:36:44,479
Speaker 1: maybe one thing to do would keep accommodative policy until

648
00:36:44,520 --> 00:36:48,400
Speaker 1: inflation gets to two percent. That could be one example

649
00:36:49,200 --> 00:36:52,800
Speaker 1: of that it gets to be well, it was challenge.

650
00:36:53,000 --> 00:36:55,120
Speaker 1: It was kind of easy then because unemployment was so

651
00:36:55,200 --> 00:36:57,279
Speaker 1: high and six and a half percent was such an

652
00:36:57,280 --> 00:37:01,520
Speaker 1: achievable objective just kind of knew we should blow through that.

653
00:37:02,160 --> 00:37:03,839
Speaker 1: You know, you get to two percent and you kind

654
00:37:03,840 --> 00:37:06,799
Speaker 1: of go, is it sustainable at two did we just

655
00:37:06,880 --> 00:37:09,600
Speaker 1: kind of touched too? You know? Should we have six

656
00:37:09,680 --> 00:37:13,560
Speaker 1: months at two, you'd have to craft something like that. Um.

657
00:37:13,600 --> 00:37:15,640
Speaker 1: And then I suppose I know, I have a number

658
00:37:15,640 --> 00:37:19,360
Speaker 1: of colleagues the committee. By judging by my colleague speeches

659
00:37:19,440 --> 00:37:25,520
Speaker 1: and our summary of economic projections, the committee's fairly well divided. UM.

660
00:37:25,560 --> 00:37:28,239
Speaker 1: You know a number of people have mentioned financial instability

661
00:37:28,680 --> 00:37:31,799
Speaker 1: risks that if there was more leverage taken, more frothiness

662
00:37:31,840 --> 00:37:35,120
Speaker 1: and markets than maybe the low funds right target would

663
00:37:35,160 --> 00:37:40,440
Speaker 1: be inconsistent with that. I don't subscribe to that argument myself,

664
00:37:40,520 --> 00:37:42,920
Speaker 1: because I think that that's trying to do too much

665
00:37:42,960 --> 00:37:46,200
Speaker 1: with a single tool. I think our supervisory and regulatory

666
00:37:46,280 --> 00:37:51,120
Speaker 1: policies ought to be UM ensuring that any damage that

667
00:37:51,200 --> 00:37:54,360
Speaker 1: comes from leverage. First off, it's we don't get to

668
00:37:54,440 --> 00:37:57,160
Speaker 1: an over leverage position, and also that we're ready with

669
00:37:57,200 --> 00:38:04,879
Speaker 1: the capital without re leveraging. Can you reflate without re leveraging? Well,

670
00:38:04,920 --> 00:38:07,080
Speaker 1: I mean we have to talk about the circumstances that

671
00:38:07,200 --> 00:38:09,080
Speaker 1: I you know, we're talking about a two thousand nine

672
00:38:09,280 --> 00:38:12,200
Speaker 1: uh period and so I mean, I think a lot

673
00:38:12,200 --> 00:38:14,840
Speaker 1: of it comes down to capital in the banking system,

674
00:38:14,920 --> 00:38:18,040
Speaker 1: and UM, at the moment, it looks like we have, um,

675
00:38:18,080 --> 00:38:20,239
Speaker 1: you know, quite a lot of capital. We've added more

676
00:38:20,280 --> 00:38:23,440
Speaker 1: and better capital, and the regulatory environment has shifted just

677
00:38:23,480 --> 00:38:29,400
Speaker 1: a little bit to allow uh, you know, more UH

678
00:38:29,440 --> 00:38:33,080
Speaker 1: dividends and and things like that a little bit um.

679
00:38:33,120 --> 00:38:38,839
Speaker 1: You know, it comes down ultimately during a financial downturn,

680
00:38:39,360 --> 00:38:41,839
Speaker 1: when banks are rebuilding their capital, when did they think

681
00:38:41,840 --> 00:38:44,160
Speaker 1: they've got as much as they need to lend freely

682
00:38:44,320 --> 00:38:47,879
Speaker 1: and intermediate credit in all the right places. And that's

683
00:38:47,880 --> 00:38:50,400
Speaker 1: one of those things that I think always takes longer

684
00:38:50,800 --> 00:38:53,880
Speaker 1: than most people appreciate. And I think that was a

685
00:38:53,920 --> 00:38:57,520
Speaker 1: big part of UH coming out of the financial crisis

686
00:38:57,560 --> 00:39:01,560
Speaker 1: this time. Uh. And also, you know, financial institutions thinking

687
00:39:01,600 --> 00:39:03,680
Speaker 1: about how their business model might change over the next

688
00:39:03,719 --> 00:39:06,280
Speaker 1: five and ten years. So it gets complicated pretty quickly.

689
00:39:06,880 --> 00:39:09,239
Speaker 1: I've only got one tool. There's an awful lot of

690
00:39:09,239 --> 00:39:12,239
Speaker 1: objectives out there. And if you want to put a

691
00:39:12,280 --> 00:39:14,400
Speaker 1: little political spend on some of the police, I just

692
00:39:14,480 --> 00:39:16,880
Speaker 1: don't know you you I only say that because you

693
00:39:16,960 --> 00:39:19,120
Speaker 1: did um. But if you did about you know, you

694
00:39:19,280 --> 00:39:20,960
Speaker 1: like more growth and things like that, you have to

695
00:39:20,960 --> 00:39:23,439
Speaker 1: think about sustainability and all of that. So it gets

696
00:39:23,480 --> 00:39:26,120
Speaker 1: complicated very quickly. Well, the path, let's go to a

697
00:39:26,360 --> 00:39:28,800
Speaker 1: villain bowder here. The path from Yell and James Tobin

698
00:39:29,200 --> 00:39:33,360
Speaker 1: with City Group. Villain Bowder, thank you very much. You

699
00:39:33,440 --> 00:39:36,960
Speaker 1: mentioned that standard Taylor rule into the nine called for

700
00:39:37,840 --> 00:39:43,200
Speaker 1: roughly minded four percent policy rate. UM. Admittedly, you know,

701
00:39:43,560 --> 00:39:45,880
Speaker 1: but every effective lower bound is it's about to be

702
00:39:45,960 --> 00:39:49,920
Speaker 1: higher than that. But it doesn't explain by the margin

703
00:39:50,000 --> 00:39:54,320
Speaker 1: that is there. Technically it wasn't used by the authority.

704
00:39:54,680 --> 00:39:58,400
Speaker 1: The question is is this political or is there a

705
00:39:58,480 --> 00:40:04,920
Speaker 1: believe that there's a reversal rate, which you mean why

706
00:40:04,960 --> 00:40:08,160
Speaker 1: we didn't take it into Neglece territory and the next

707
00:40:08,200 --> 00:40:11,040
Speaker 1: time of asking the next tichtical slowdown you will be

708
00:40:11,040 --> 00:40:14,960
Speaker 1: back at infective zolo about and by not plot further?

709
00:40:15,400 --> 00:40:21,480
Speaker 1: Is there any particularity for that, Um, that's a good question, certainly. Um.

710
00:40:21,680 --> 00:40:25,279
Speaker 1: The FED was ahead of the other central banks in

711
00:40:25,480 --> 00:40:27,719
Speaker 1: two thousand and eight, two thousand nine. It started in

712
00:40:27,760 --> 00:40:32,520
Speaker 1: the US, and uh, our our our problems were worse initially.

713
00:40:33,239 --> 00:40:37,640
Speaker 1: I think there was you know, I really can't recall

714
00:40:37,760 --> 00:40:42,680
Speaker 1: any substantial discussions of negative interest rates during that time.

715
00:40:42,719 --> 00:40:48,000
Speaker 1: I would give you know, Professor Governor Chairman Ben Bernanke

716
00:40:48,440 --> 00:40:53,239
Speaker 1: huge credit for thinking up new liquidity programs that were

717
00:40:53,280 --> 00:40:56,840
Speaker 1: inspired by things he had studied in the nineteen thirties

718
00:40:56,880 --> 00:40:59,960
Speaker 1: and problems there and all of that. Negative interest rates

719
00:41:00,040 --> 00:41:03,160
Speaker 1: just weren't something that seemed to appeal to many people.

720
00:41:03,200 --> 00:41:06,080
Speaker 1: Now we have experience in these other central banks, and

721
00:41:06,120 --> 00:41:09,879
Speaker 1: so you could imagine trying that, you know, like I said,

722
00:41:09,880 --> 00:41:12,680
Speaker 1: I think maybe you could get seventy bases points and

723
00:41:12,680 --> 00:41:15,280
Speaker 1: whether or not that would help maybe, I I frankly

724
00:41:15,320 --> 00:41:17,600
Speaker 1: think that a lot. I mean, you know, if we

725
00:41:17,680 --> 00:41:20,759
Speaker 1: had a longer discussion about asset purchases and open ended

726
00:41:20,840 --> 00:41:24,319
Speaker 1: QWI three and you can probably every side can find

727
00:41:24,440 --> 00:41:28,359
Speaker 1: studies that indicate powerful and not really so powerful an

728
00:41:28,360 --> 00:41:30,600
Speaker 1: event studies being what they are, that's a very difficult

729
00:41:30,600 --> 00:41:34,239
Speaker 1: thing to measure. I continue to come down on the

730
00:41:34,320 --> 00:41:37,800
Speaker 1: side of it really came down to communicating the signaling channel.

731
00:41:37,840 --> 00:41:39,880
Speaker 1: We were going to do whatever it takes. If you

732
00:41:39,920 --> 00:41:43,800
Speaker 1: look at what Mario Draggy achieved in two thousand and

733
00:41:43,920 --> 00:41:47,560
Speaker 1: twelve by saying, we'll do whatever it takes and it

734
00:41:47,600 --> 00:41:50,560
Speaker 1: will be enough. What did he do He developed the

735
00:41:50,600 --> 00:41:53,160
Speaker 1: o MT How many O m T bonds did they

736
00:41:53,160 --> 00:42:02,719
Speaker 1: ever issue? None? I mean, you showing your willingness to

737
00:42:02,760 --> 00:42:06,640
Speaker 1: do something that previous versions of the head of the

738
00:42:06,680 --> 00:42:10,680
Speaker 1: Central Bank weren't willing to contemplate goes. Always following through

739
00:42:10,680 --> 00:42:13,759
Speaker 1: and delivering though is really important, So constantly working on

740
00:42:13,880 --> 00:42:16,600
Speaker 1: that if negative interest rates were a helpful signal, and

741
00:42:16,760 --> 00:42:18,600
Speaker 1: I think that's part of what it is, because they

742
00:42:18,680 --> 00:42:22,120
Speaker 1: keep backtracking on what reserve levels are actually being hit.

743
00:42:22,440 --> 00:42:24,840
Speaker 1: If anything, you kind of want to hit more of it,

744
00:42:24,920 --> 00:42:26,840
Speaker 1: and in sent if you lend out more than you

745
00:42:26,920 --> 00:42:30,080
Speaker 1: get more credit or whatnot. So the design is challenging.

746
00:42:30,560 --> 00:42:34,280
Speaker 1: This gets to courage. As you mentioned the perseverance needed

747
00:42:34,560 --> 00:42:37,640
Speaker 1: to reflate above two or two and a half percentages.

748
00:42:37,800 --> 00:42:40,360
Speaker 1: I want to circle back to the single idea, what

749
00:42:40,560 --> 00:42:46,040
Speaker 1: is the mechanism of that perseverance, that courage that we need. Well,

750
00:42:46,040 --> 00:42:49,239
Speaker 1: I think it's very important that the Central Bank have

751
00:42:50,280 --> 00:42:53,480
Speaker 1: uh sufficient level of independence and be perceived as independence.

752
00:42:53,520 --> 00:42:56,760
Speaker 1: So I think whenever you start worrying about the actions

753
00:42:56,800 --> 00:42:59,640
Speaker 1: that I take through increasing my balance sheet might not

754
00:42:59,800 --> 00:43:04,120
Speaker 1: be perceived well by a variety authorities, that tends to

755
00:43:04,719 --> 00:43:08,799
Speaker 1: make you wonder about that being able to undertake these

756
00:43:08,880 --> 00:43:13,360
Speaker 1: very strong actions and be accountable. So go and testify

757
00:43:13,440 --> 00:43:17,760
Speaker 1: to Congress and explain it to the public and and everybody.

758
00:43:17,960 --> 00:43:20,560
Speaker 1: I'm not saying it's not without risk because we tried

759
00:43:20,680 --> 00:43:24,600
Speaker 1: things which had not been tried before to my knowledge,

760
00:43:24,800 --> 00:43:27,719
Speaker 1: and um, they were unpopular for a lot of people.

761
00:43:27,760 --> 00:43:29,680
Speaker 1: And then you've got the saber question. I have taken

762
00:43:29,719 --> 00:43:33,479
Speaker 1: the saber question many, many times. Um, it's still there.

763
00:43:33,520 --> 00:43:36,680
Speaker 1: It will always be there. Um. You know, some people

764
00:43:36,719 --> 00:43:40,080
Speaker 1: benefit from some policies and other people are disadvantaged. When

765
00:43:40,160 --> 00:43:42,800
Speaker 1: we we know when Paul Boker had to bring double

766
00:43:42,800 --> 00:43:48,399
Speaker 1: digit inflation down, the unemployment roles increased hugely and that

767
00:43:48,480 --> 00:43:52,600
Speaker 1: was part of the cost. And so monetary policy affects

768
00:43:52,600 --> 00:43:59,400
Speaker 1: people differently at different points in time. Sir h thank you,

769
00:43:59,480 --> 00:44:07,040
Speaker 1: David Fake. You alluded to the conundrum of lack of

770
00:44:07,040 --> 00:44:12,239
Speaker 1: productivity growth in the eighties. How comfortable are you with

771
00:44:12,560 --> 00:44:21,280
Speaker 1: your metrics and your ability to appropriately measure productivity in services,

772
00:44:21,640 --> 00:44:27,000
Speaker 1: which is constitutes the lion's share of our economy. Yeah,

773
00:44:27,320 --> 00:44:30,000
Speaker 1: now there's a good points. Productivity is one of the

774
00:44:30,000 --> 00:44:36,560
Speaker 1: most difficult things to measure. Services in particular, is very difficult. Um, yep.

775
00:44:36,719 --> 00:44:40,839
Speaker 1: I I take those points. I think that um, no

776
00:44:40,880 --> 00:44:46,920
Speaker 1: matter how poorly they may be measured at the moment,

777
00:44:46,960 --> 00:44:50,200
Speaker 1: I believe them to be measured on a basis that

778
00:44:50,320 --> 00:44:52,600
Speaker 1: is consistent with the way the national income and product

779
00:44:52,600 --> 00:44:55,759
Speaker 1: accounts are measured. I say that only because if we

780
00:44:55,800 --> 00:44:58,600
Speaker 1: pick a benchmark, we can pick a benchmark GDP growth,

781
00:44:58,640 --> 00:45:02,200
Speaker 1: real GDP growth. UM. I'm trying to explain to people

782
00:45:02,239 --> 00:45:04,680
Speaker 1: why I think one in three quarters per cent is

783
00:45:04,760 --> 00:45:08,120
Speaker 1: the rest growth rate for the economy. I do not

784
00:45:08,160 --> 00:45:15,000
Speaker 1: think it's three um. Now, UM, inflation has not been

785
00:45:15,040 --> 00:45:17,319
Speaker 1: growing very strongly. Part of this is going to come

786
00:45:17,360 --> 00:45:24,320
Speaker 1: down to UM. If inflation we're growing very strongly, um Collie,

787
00:45:24,480 --> 00:45:26,240
Speaker 1: you know, and we're at two and a quarter percent

788
00:45:26,760 --> 00:45:29,520
Speaker 1: growth and inflation is growing very strongly, we'd have to

789
00:45:29,520 --> 00:45:32,240
Speaker 1: have more restrictive policies. I would guess that would reduce

790
00:45:32,280 --> 00:45:34,919
Speaker 1: economic activity, and so that would make you wonder about

791
00:45:34,960 --> 00:45:39,719
Speaker 1: what productivity is. Now. If productivity was really strong, that

792
00:45:39,760 --> 00:45:42,279
Speaker 1: presumably would reduce unit labor costs, and that could be

793
00:45:42,320 --> 00:45:45,520
Speaker 1: consistent with the lower inflation. So, you know, I look

794
00:45:45,520 --> 00:45:47,719
Speaker 1: at inflation and I kind of go, if we can

795
00:45:47,760 --> 00:45:50,480
Speaker 1: hit our inflation objective and get that right. We look

796
00:45:50,520 --> 00:45:53,719
Speaker 1: at real GDP, We look at all the indicators of productivity,

797
00:45:53,840 --> 00:45:56,680
Speaker 1: and if they're aligned and seem like they're doing well,

798
00:45:56,800 --> 00:45:59,719
Speaker 1: then I call it a day and I'm done. The

799
00:46:00,000 --> 00:46:02,680
Speaker 1: search staff looks at productivity and tries to find out

800
00:46:02,760 --> 00:46:05,880
Speaker 1: if there's new insights from the services. It's very important,

801
00:46:05,920 --> 00:46:09,400
Speaker 1: there's no doubt about it. But it's the you know,

802
00:46:09,440 --> 00:46:14,320
Speaker 1: the big inflation and how's the economy doing that capture

803
00:46:14,400 --> 00:46:18,600
Speaker 1: most of my intention. I'm sure that some sectors of

804
00:46:18,600 --> 00:46:22,160
Speaker 1: the economy have very strong and thriving productivity growth, but

805
00:46:22,200 --> 00:46:24,680
Speaker 1: when you put it all together, and we've also got

806
00:46:24,680 --> 00:46:27,720
Speaker 1: the age of disruption too, and so you see spectacular

807
00:46:27,800 --> 00:46:32,279
Speaker 1: productivity gains in other areas that completely decimate, you know,

808
00:46:32,360 --> 00:46:37,160
Speaker 1: the legacy producers, and that gets averaged across that. So

809
00:46:37,400 --> 00:46:40,319
Speaker 1: you kind of want to People usually want to pick

810
00:46:40,320 --> 00:46:43,080
Speaker 1: out the winners and look at the strong productivity growth,

811
00:46:43,080 --> 00:46:45,560
Speaker 1: and we've also got the laggards that need to be

812
00:46:45,640 --> 00:46:48,600
Speaker 1: dealt with. To this wonderful question, it's a hard question.

813
00:46:48,840 --> 00:46:51,120
Speaker 1: I can't do. It's a hard question. There's no answer there.

814
00:46:51,120 --> 00:46:55,120
Speaker 1: I was speaking with Ellen Meltzer lunch with Allan Meltzer

815
00:46:55,160 --> 00:46:57,799
Speaker 1: in Pittsburgh. We got this raging argument about should we

816
00:46:57,920 --> 00:47:00,800
Speaker 1: add you know, Allan Meltzer. You up at Allan Meltzer.

817
00:47:01,040 --> 00:47:03,359
Speaker 1: I upset Allan Meltzer at lunch. It's hard to do.

818
00:47:03,719 --> 00:47:06,680
Speaker 1: But we have this raging debate about John Edwards in

819
00:47:06,760 --> 00:47:11,040
Speaker 1: two America's versus the desire to aggregator. As you say,

820
00:47:11,280 --> 00:47:14,239
Speaker 1: put all the data together. Do we need to be

821
00:47:14,280 --> 00:47:18,279
Speaker 1: more respectful of not putting all the data together and

822
00:47:18,320 --> 00:47:23,279
Speaker 1: worrying about two or three America's. They have benefiting from

823
00:47:23,320 --> 00:47:26,799
Speaker 1: the new productivity and they have nots left behind. I

824
00:47:26,800 --> 00:47:29,560
Speaker 1: have a lot of respect round Melzer. He was steam

825
00:47:29,640 --> 00:47:32,600
Speaker 1: professor Carnegie Mellon when when when I was there, I

826
00:47:32,640 --> 00:47:35,040
Speaker 1: didn't always agree with everything, But you know, that's the

827
00:47:35,120 --> 00:47:41,560
Speaker 1: nature of economics. Um, yeah, I don't know. I think

828
00:47:41,600 --> 00:47:45,719
Speaker 1: it's you know, the state of the economy is really hard. Um.

829
00:47:45,760 --> 00:47:49,600
Speaker 1: You know, I was falling back on my meager economics

830
00:47:49,680 --> 00:47:53,280
Speaker 1: training and macroeconomics. One of the first things you assume

831
00:47:53,440 --> 00:47:57,080
Speaker 1: is that the distribution of activity just isn't that important.

832
00:47:57,320 --> 00:48:03,400
Speaker 1: Income distribution I income, low income. It's just a simplifying assumption.

833
00:48:03,520 --> 00:48:06,920
Speaker 1: But it seems like the level of income inequality is

834
00:48:07,000 --> 00:48:12,840
Speaker 1: really very large at the moment. And um, the nature

835
00:48:12,920 --> 00:48:19,520
Speaker 1: of productivity enhances returns to UM. Education and certain skills

836
00:48:20,160 --> 00:48:25,239
Speaker 1: UM lead to outcomes like that. And I think if

837
00:48:25,280 --> 00:48:31,880
Speaker 1: you're you know, wondering about appropriate levels for economic growth

838
00:48:31,880 --> 00:48:36,360
Speaker 1: that benefit a large uh swath of the population. You

839
00:48:36,400 --> 00:48:39,759
Speaker 1: have to be thinking about how you can address some

840
00:48:39,920 --> 00:48:43,279
Speaker 1: challenges that aren't in my economic models to help more

841
00:48:43,320 --> 00:48:45,759
Speaker 1: people benefit from that. So I mean, is that two

842
00:48:45,800 --> 00:48:48,160
Speaker 1: America's three America the data? I mean, you can kind

843
00:48:48,160 --> 00:48:52,040
Speaker 1: of try to do the uniform macroeconomist viewpoint that it's

844
00:48:52,120 --> 00:48:56,040
Speaker 1: GDP and that's all I care about. But there's way more, um,

845
00:48:56,080 --> 00:48:58,520
Speaker 1: you know, going on, you know, and this comes up

846
00:48:58,520 --> 00:49:02,120
Speaker 1: in in the economics profession now, in the lack of

847
00:49:02,160 --> 00:49:05,360
Speaker 1: diversity and women in the profession. And do we find

848
00:49:05,360 --> 00:49:08,399
Speaker 1: ourselves looking at certain questions more and deciding that it's

849
00:49:08,440 --> 00:49:11,200
Speaker 1: perfectly fine because of that? I really don't know, but

850
00:49:11,280 --> 00:49:13,319
Speaker 1: I know that when I have more people in the

851
00:49:13,360 --> 00:49:16,359
Speaker 1: room giving me new perspectives on how things will be

852
00:49:16,560 --> 00:49:18,640
Speaker 1: playing out, I usually end up in a better place.

853
00:49:19,200 --> 00:49:23,399
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and

854
00:49:23,440 --> 00:49:28,759
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast

855
00:49:28,800 --> 00:49:33,040
Speaker 1: platform you prefer. I'm on Twitter at Tom Keane Before

856
00:49:33,080 --> 00:49:36,920
Speaker 1: the podcast, you can always catch us worldwide. I'm Bloomberg

857
00:49:37,000 --> 00:49:37,280
Speaker 1: Radio