1 00:00:00,080 --> 00:00:13,800 Speaker 1: Yeah. Welcome to the Bloomberg Surveillance Podcast. I'm Tom keene Jailey. 2 00:00:13,960 --> 00:00:17,560 Speaker 1: We bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,520 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:28,000 Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Ye 5 00:00:33,960 --> 00:00:35,680 Speaker 1: with me. I'm ready please to say. Joining us in 6 00:00:35,720 --> 00:00:37,879 Speaker 1: New York to drain some of the drama from the 7 00:00:37,920 --> 00:00:42,239 Speaker 1: market analysis is Brian Levitt, Oppenheimer Fund Senior investment strategist. 8 00:00:42,280 --> 00:00:44,440 Speaker 1: Brian always great to catch up with you. I'll give 9 00:00:44,479 --> 00:00:47,720 Speaker 1: you a scary headline. First, the doll finishes the day 10 00:00:47,760 --> 00:00:50,760 Speaker 1: down two seven, and then I'll give you the headline 11 00:00:50,800 --> 00:00:53,040 Speaker 1: that I think money pros looked out the SMP five 12 00:00:53,120 --> 00:00:57,640 Speaker 1: hundred softer by four tenths of one percent. One souths fear. 13 00:00:57,720 --> 00:01:01,240 Speaker 1: The other is what well. I think only small minds 14 00:01:01,280 --> 00:01:04,720 Speaker 1: are impressed by large numbers. So um yeah, the numbers 15 00:01:04,720 --> 00:01:08,120 Speaker 1: on the Dow do sound scary. It was a market 16 00:01:08,160 --> 00:01:11,320 Speaker 1: that was concerned about trade rhetoric. We see these types 17 00:01:11,360 --> 00:01:13,600 Speaker 1: of things in the short term. I don't think investors 18 00:01:13,640 --> 00:01:16,440 Speaker 1: should be trying to make long term investment decisions based 19 00:01:16,440 --> 00:01:19,399 Speaker 1: on concerns on what trade policy is gonna look like 20 00:01:19,400 --> 00:01:22,399 Speaker 1: between the United States and China. I understand that we 21 00:01:22,560 --> 00:01:26,400 Speaker 1: could potentially have a bad outcome here, but I think 22 00:01:26,400 --> 00:01:30,200 Speaker 1: cooler heads will prevail, given how intertwined the two countries are, 23 00:01:30,319 --> 00:01:34,360 Speaker 1: and um how important reasonable trade deals between the two 24 00:01:34,440 --> 00:01:36,640 Speaker 1: is for both. Do you just assume that the real 25 00:01:36,760 --> 00:01:39,800 Speaker 1: town winds are stronger here in the American economy than 26 00:01:39,840 --> 00:01:44,479 Speaker 1: the potential headwinds I do. I mean the US economy 27 00:01:44,520 --> 00:01:46,760 Speaker 1: should actually be pretty strong in the second half of 28 00:01:46,760 --> 00:01:49,280 Speaker 1: the year. There's a lot of stimulus, so there's a 29 00:01:49,280 --> 00:01:51,840 Speaker 1: lot of spending coming in. We have the tax cuts, 30 00:01:51,880 --> 00:01:54,680 Speaker 1: so US growth should be strong. I think the thing 31 00:01:54,720 --> 00:01:57,000 Speaker 1: that I would focus on is I don't believe that 32 00:01:57,160 --> 00:02:00,640 Speaker 1: US growth is going to be sustainably stronger. I suspect 33 00:02:00,680 --> 00:02:04,160 Speaker 1: we're in a longer term period of modest growth in 34 00:02:04,200 --> 00:02:07,080 Speaker 1: the United States and that could be disrupted, in my opinion, 35 00:02:07,520 --> 00:02:11,959 Speaker 1: more by tighter FED policy and or a stronger dollar. 36 00:02:12,360 --> 00:02:14,840 Speaker 1: UM and of course a trade war could lead us 37 00:02:14,880 --> 00:02:17,520 Speaker 1: to a stronger dollar. But UM, I would be more 38 00:02:17,520 --> 00:02:21,040 Speaker 1: focused as investors on what that stimulus means to FED 39 00:02:21,120 --> 00:02:24,000 Speaker 1: policy and will the FED see through it that it's 40 00:02:24,080 --> 00:02:27,400 Speaker 1: more of a sugar rush rather than higher sustained growth 41 00:02:27,400 --> 00:02:29,799 Speaker 1: for the United States. There was a tweet yesterday by 42 00:02:29,840 --> 00:02:32,920 Speaker 1: the economist Paul Krugman who said the following, I've been 43 00:02:32,960 --> 00:02:36,800 Speaker 1: amazed at the complacency of markets as the president marches 44 00:02:36,840 --> 00:02:40,359 Speaker 1: off to a trade war. Something that continues to amaze 45 00:02:40,400 --> 00:02:44,120 Speaker 1: me is just how many talented economists off of views 46 00:02:44,160 --> 00:02:47,000 Speaker 1: on markets that are clearly tainted by that political preferences. 47 00:02:48,360 --> 00:02:52,800 Speaker 1: How difficult is it to operate in aen with so 48 00:02:52,880 --> 00:02:56,400 Speaker 1: much noise and so much analysis things that are dressed 49 00:02:56,480 --> 00:02:59,960 Speaker 1: up as analysis, which which are clearly just not impart 50 00:03:00,120 --> 00:03:03,480 Speaker 1: show views on market action. Well, I mean, quite frankly, 51 00:03:03,480 --> 00:03:06,160 Speaker 1: we're always dealing with that. So if you think in 52 00:03:06,200 --> 00:03:09,400 Speaker 1: this elongated bull market, we've been dealing with concerns about 53 00:03:09,440 --> 00:03:12,799 Speaker 1: the breakup of the euro fiscal cliffs, government shutdowns, so 54 00:03:13,160 --> 00:03:15,960 Speaker 1: this has been ongoing. I mean, look, make no mistake, 55 00:03:16,160 --> 00:03:19,720 Speaker 1: if if we get into a massive trade battle with 56 00:03:19,760 --> 00:03:22,960 Speaker 1: the two in the two worlds, the two largest economies 57 00:03:22,960 --> 00:03:26,240 Speaker 1: of the world, that's gonna be disruptive. But but the 58 00:03:26,320 --> 00:03:28,720 Speaker 1: reality is the United States has a lot to lose 59 00:03:28,760 --> 00:03:31,560 Speaker 1: in China has a lot to lose. So I don't 60 00:03:31,600 --> 00:03:34,520 Speaker 1: think that um. You know, economists looking at it from 61 00:03:34,520 --> 00:03:37,200 Speaker 1: the perspective of if we go down this road, then 62 00:03:37,280 --> 00:03:39,920 Speaker 1: this means that for the markets, what I would be 63 00:03:39,960 --> 00:03:43,240 Speaker 1: focusing on as investors are where's earnings growth? What does 64 00:03:43,280 --> 00:03:47,760 Speaker 1: monetary policy look like? Um? And how can we benefit 65 00:03:47,840 --> 00:03:50,560 Speaker 1: from that type of from an environment where we're still 66 00:03:50,600 --> 00:03:54,400 Speaker 1: going to be raising rates. I believe gradually corporate earnings 67 00:03:54,440 --> 00:03:58,440 Speaker 1: look good um, and cooler heads are going to prevail 68 00:03:58,640 --> 00:04:00,680 Speaker 1: on all of this. With with regards to trade wars, 69 00:04:00,800 --> 00:04:05,520 Speaker 1: we forget the twelve months trailing for example spot three. 70 00:04:06,960 --> 00:04:09,160 Speaker 1: I mean it's been a double digit market and then 71 00:04:09,360 --> 00:04:11,600 Speaker 1: recently it's been a churn as we saw the emotion 72 00:04:11,640 --> 00:04:15,400 Speaker 1: of flat two thousand and eighteen results. Just as a 73 00:04:15,400 --> 00:04:17,919 Speaker 1: as an investment one O one. Do I want to 74 00:04:17,920 --> 00:04:20,120 Speaker 1: be foreign or do I want to be domestic? Well, 75 00:04:20,160 --> 00:04:22,120 Speaker 1: let me take the first part first. When you talk 76 00:04:22,200 --> 00:04:24,440 Speaker 1: about how markets have been up over the last year, 77 00:04:24,560 --> 00:04:27,880 Speaker 1: I can't tell you, Tom how many times investors asked 78 00:04:27,920 --> 00:04:29,920 Speaker 1: me when are we going to get a correction? We 79 00:04:29,920 --> 00:04:32,919 Speaker 1: we need a correction. Seventeen has been too sanguins so 80 00:04:33,200 --> 00:04:35,760 Speaker 1: we took care of some of that in February, and 81 00:04:35,760 --> 00:04:39,479 Speaker 1: we've had some churn lately in markets, but with regards 82 00:04:39,520 --> 00:04:43,760 Speaker 1: to international investing, we had actually had a pretty bad 83 00:04:43,839 --> 00:04:46,320 Speaker 1: bout in twenty fifteen, I would say in some parts 84 00:04:46,320 --> 00:04:49,679 Speaker 1: of the world recessionary light conditions. We had a nice 85 00:04:49,760 --> 00:04:54,720 Speaker 1: recovery um in twenty sixteen into twenty seventeen, and you've 86 00:04:54,760 --> 00:04:58,520 Speaker 1: had some moderation here, and the reality is that moderation 87 00:04:58,600 --> 00:05:02,240 Speaker 1: is movement to our more able level of growth. Concerns 88 00:05:02,279 --> 00:05:05,080 Speaker 1: recently about a strengthening dollar that's really come in over 89 00:05:05,120 --> 00:05:09,719 Speaker 1: the last handful of weeks um. But if you want if, if, if, 90 00:05:09,760 --> 00:05:13,000 Speaker 1: the if, the central cases, which is my view, is 91 00:05:13,040 --> 00:05:14,760 Speaker 1: that there's gonna be a lot of stimulus in the 92 00:05:14,839 --> 00:05:17,800 Speaker 1: United States. Where does all of that money go? Do 93 00:05:17,800 --> 00:05:22,200 Speaker 1: do American consumers increase our savings rates to fund our deficits? 94 00:05:22,400 --> 00:05:26,080 Speaker 1: Or do we consume and foreign investors invest in US 95 00:05:26,160 --> 00:05:29,400 Speaker 1: treasuries to fund our deficits? I believe it's the latter. 96 00:05:29,760 --> 00:05:32,160 Speaker 1: Last time that happened two thousand three, two thousand four, 97 00:05:32,279 --> 00:05:36,200 Speaker 1: two thousand five, that was a great time for international investing, 98 00:05:36,480 --> 00:05:39,320 Speaker 1: particularly the emerging markets. Well, what's the analysis so far? 99 00:05:39,480 --> 00:05:42,760 Speaker 1: Where is the dividend going? Where's the dividend going? I 100 00:05:42,760 --> 00:05:45,400 Speaker 1: mean you've seen UM, you've seen share by backs, you've 101 00:05:45,400 --> 00:05:50,680 Speaker 1: seen dividends, UM, you've seen some investment in the United States, 102 00:05:51,080 --> 00:05:56,720 Speaker 1: UH through through infrastructure investment or targeted investment. But ultimately 103 00:05:57,480 --> 00:06:01,280 Speaker 1: that money UM is gonna find its way around the world, 104 00:06:01,600 --> 00:06:05,479 Speaker 1: and that's gonna be a nice backdrop, in my opinion, 105 00:06:05,560 --> 00:06:08,320 Speaker 1: for for international investing. For one of them laser folks 106 00:06:08,400 --> 00:06:10,640 Speaker 1: on what is happening in credit? And I think if 107 00:06:10,640 --> 00:06:12,560 Speaker 1: you're in equity, that's why you're going to spot the 108 00:06:12,600 --> 00:06:15,960 Speaker 1: turn first. What happens in credit. Marty Fridson very closely 109 00:06:16,000 --> 00:06:18,960 Speaker 1: watched in the high yield space, pointing out that the 110 00:06:19,000 --> 00:06:22,080 Speaker 1: covenant quality of high yield bonds was the worst level 111 00:06:22,320 --> 00:06:26,039 Speaker 1: since he started analyzing them back in What does that 112 00:06:26,040 --> 00:06:28,560 Speaker 1: actually tell you about where we are in the credit 113 00:06:28,600 --> 00:06:31,200 Speaker 1: cycle when covenant quality is this bad, Well, it tells 114 00:06:31,200 --> 00:06:33,640 Speaker 1: you that we're getting later in the cycle. Although income 115 00:06:33,680 --> 00:06:36,719 Speaker 1: coverage ratios for most of these companies look quite good, 116 00:06:36,920 --> 00:06:39,039 Speaker 1: and you know, you don't see a huge wall of 117 00:06:39,120 --> 00:06:42,680 Speaker 1: maturity given that most of these businesses took advantage of 118 00:06:42,760 --> 00:06:45,760 Speaker 1: low rates and pushed out maturities well into the future. 119 00:06:46,200 --> 00:06:50,039 Speaker 1: So just because um, you know, spreads are tight and 120 00:06:50,120 --> 00:06:53,680 Speaker 1: covenant quality has deteriorated. Doesn't mean that there's going to 121 00:06:53,760 --> 00:06:56,440 Speaker 1: be disruption. You would need a catalyst for that. That 122 00:06:56,520 --> 00:06:59,800 Speaker 1: catalyst would have to be severe economic disruption in one 123 00:06:59,800 --> 00:07:03,360 Speaker 1: of the major economic blocks UH. I don't believe that's 124 00:07:03,360 --> 00:07:06,480 Speaker 1: where we're heading. I actually think the the global economy, 125 00:07:06,600 --> 00:07:11,640 Speaker 1: short of a major trade UH battle, actually looks quite good. 126 00:07:11,760 --> 00:07:14,360 Speaker 1: If we get a stronger dollar, what does that signal 127 00:07:14,400 --> 00:07:16,720 Speaker 1: is that like no big deal to Oppenheimer Funds, No, 128 00:07:17,000 --> 00:07:18,920 Speaker 1: a stronger dollar would be a big deal. I think 129 00:07:18,960 --> 00:07:21,600 Speaker 1: that's what investors need to be focusing on in all 130 00:07:21,680 --> 00:07:25,040 Speaker 1: this noise. We're still in a weaker dollar environment over 131 00:07:25,080 --> 00:07:27,480 Speaker 1: the last year, but we've had a cyclical move higher 132 00:07:27,480 --> 00:07:30,960 Speaker 1: over the last number of weeks. A stronger dollar to 133 00:07:31,200 --> 00:07:34,680 Speaker 1: US would signal a return of deflationary forces in the 134 00:07:34,760 --> 00:07:39,800 Speaker 1: United States UH and the potential for a recession UM 135 00:07:39,800 --> 00:07:42,320 Speaker 1: within the next number within the next handful of years. 136 00:07:42,360 --> 00:07:47,320 Speaker 1: So I would be very concerned about a stronger dollar UM. 137 00:07:47,400 --> 00:07:49,840 Speaker 1: But I suspect if the dollar gets too strong, the 138 00:07:49,840 --> 00:07:53,480 Speaker 1: Federal Reserve like they did in early and well back off. 139 00:07:54,440 --> 00:07:57,040 Speaker 1: Thank you so much, Thank you well, Brian, stay around 140 00:07:57,040 --> 00:08:00,000 Speaker 1: for this. It's too important. I mean the World Cup, John, 141 00:08:00,000 --> 00:08:03,200 Speaker 1: it is so boring right now? Did the ESPN as 142 00:08:03,240 --> 00:08:09,200 Speaker 1: a story? Argentina's Lionel Messi quote suffers in cries in 143 00:08:09,320 --> 00:08:12,880 Speaker 1: pursuit of World Cup. This according to his mother. Are 144 00:08:12,920 --> 00:08:16,720 Speaker 1: you not excited about Portugal Morocco in fifty two minutes time? 145 00:08:17,400 --> 00:08:20,320 Speaker 1: I thought you'd be getting excited about that? No, what about? 146 00:08:20,800 --> 00:08:24,360 Speaker 1: What about Uruguay Saudi Arabia? Does that do it for? You? Know? 147 00:08:25,400 --> 00:08:28,040 Speaker 1: What do guys like you do on days like this? 148 00:08:28,520 --> 00:08:30,280 Speaker 1: On days like this, you watch some of the best 149 00:08:30,280 --> 00:08:33,680 Speaker 1: players in the world just just play openly and freely. 150 00:08:33,880 --> 00:08:35,920 Speaker 1: I was I did my feil best, Brian? I have 151 00:08:36,000 --> 00:08:39,240 Speaker 1: to keep Joan Ferrell happy. Of course. Of course, so 152 00:08:39,280 --> 00:08:44,160 Speaker 1: I watched the highlights of Senegal yesterday. You picked one 153 00:08:44,160 --> 00:08:46,360 Speaker 1: of the worst games to watch the highlights of Did 154 00:08:46,360 --> 00:08:50,199 Speaker 1: you have fun? I just did you get through two minutes? 155 00:08:50,240 --> 00:08:53,680 Speaker 1: If I can sit through baseball for hours, two minutes 156 00:08:54,200 --> 00:08:57,400 Speaker 1: of the highlights of Senegal? Hey, I'm watching training camp 157 00:08:57,440 --> 00:09:01,680 Speaker 1: New York Giants getting ready for training camp, watching watching 158 00:09:01,679 --> 00:09:08,079 Speaker 1: the voluntary workouts Sa Kwon Barkley Beckham, Seriously, are you 159 00:09:08,120 --> 00:09:11,800 Speaker 1: watching camp? No? Well, we haven't started in voluntary workouts 160 00:09:11,840 --> 00:09:15,200 Speaker 1: should have started that heat that he is oppressive right now, Okay, 161 00:09:28,480 --> 00:09:30,400 Speaker 1: I've read it cover to cover, so I can tell 162 00:09:30,440 --> 00:09:34,560 Speaker 1: you the Third Revolution on Sjing Ping and his New 163 00:09:34,880 --> 00:09:38,360 Speaker 1: China is a must read. It's without question shortlisted for 164 00:09:38,440 --> 00:09:41,240 Speaker 1: Book of the Year in all of Economics and International 165 00:09:41,320 --> 00:09:45,720 Speaker 1: Relations from the Council on Foreign Relations. Elizabeth Economy joins us. 166 00:09:45,840 --> 00:09:48,720 Speaker 1: Right now, Liz, you had a wonderful chapter on pollution, 167 00:09:48,800 --> 00:09:51,520 Speaker 1: which is your wheelhouse. We all know that, But what 168 00:09:51,600 --> 00:09:56,000 Speaker 1: I found amazing is how you identify, as you say 169 00:09:56,000 --> 00:09:58,640 Speaker 1: in the early part of your book, um G and 170 00:09:58,679 --> 00:10:01,480 Speaker 1: his team have set out to run the race differently 171 00:10:02,200 --> 00:10:05,560 Speaker 1: from their predecessors. What do we miss judge in our 172 00:10:05,600 --> 00:10:09,079 Speaker 1: trade battle with Mr she given that he's going to 173 00:10:09,200 --> 00:10:12,960 Speaker 1: do things differently. Well, I think you know, what we've 174 00:10:12,960 --> 00:10:16,200 Speaker 1: seen with C. Jinping is just his enormous concentration of 175 00:10:16,280 --> 00:10:20,439 Speaker 1: power and the deepening of the Party into the Chinese society. 176 00:10:20,559 --> 00:10:23,480 Speaker 1: And you know this suggests that, uh, you know, he's 177 00:10:23,520 --> 00:10:26,920 Speaker 1: willing I think to Obviously we've seen he's willing to retaliate. 178 00:10:27,480 --> 00:10:31,760 Speaker 1: He's willing to absorb the pain that the President Trump's 179 00:10:31,960 --> 00:10:35,880 Speaker 1: tariffs are likely to inflict. On the Chinese economy, um, 180 00:10:36,000 --> 00:10:38,760 Speaker 1: and to stir up nationalism. He's, you know, a highly 181 00:10:38,840 --> 00:10:43,160 Speaker 1: nationalistic leader, and I think we can expect that, you know, 182 00:10:43,280 --> 00:10:45,640 Speaker 1: he's going to stand firm in this with the work 183 00:10:45,679 --> 00:10:48,960 Speaker 1: of you and Jonathan Spence and others uh. Great within 184 00:10:49,080 --> 00:10:52,679 Speaker 1: China literature, the idea absorbed the pain seems to be 185 00:10:52,720 --> 00:10:56,000 Speaker 1: part of the Chinese experience on this What's Happened to 186 00:10:56,120 --> 00:10:59,319 Speaker 1: Us twenty four hours, Liz is the idea that after 187 00:10:59,360 --> 00:11:01,600 Speaker 1: they go after tip for tat trade and they run 188 00:11:01,640 --> 00:11:06,200 Speaker 1: out of that optionality, they will go after individual corporations. 189 00:11:06,240 --> 00:11:09,839 Speaker 1: The absolute no brainers to go after Apple Computer, right, 190 00:11:11,000 --> 00:11:13,880 Speaker 1: I think Apple Computer, but also you know companies like 191 00:11:13,960 --> 00:11:18,560 Speaker 1: Starbucks and KFC and Nike. Uh. There are lots of 192 00:11:18,960 --> 00:11:22,240 Speaker 1: sort of premier US brands very popular in China, but 193 00:11:22,559 --> 00:11:25,040 Speaker 1: you know, they can find substitutes, uh. And we've seen 194 00:11:25,040 --> 00:11:29,280 Speaker 1: the Chinese are very capable of boycott's of u S 195 00:11:29,320 --> 00:11:32,840 Speaker 1: products of other countries products, and I fully expect that's 196 00:11:32,920 --> 00:11:36,920 Speaker 1: one of the tools that the Chinese government will utilize. 197 00:11:37,440 --> 00:11:39,800 Speaker 1: They also can cause a lot of problems for companies 198 00:11:40,000 --> 00:11:43,400 Speaker 1: doing business in China that manufacture and China surprise inspections 199 00:11:43,440 --> 00:11:48,960 Speaker 1: on factories make it more difficult for companies to repatriate profits. Um, 200 00:11:49,000 --> 00:11:52,280 Speaker 1: you know, basically, uh, just making things much more difficult. 201 00:11:52,320 --> 00:11:55,000 Speaker 1: You know, Starbucks wants to expand in China, It's one 202 00:11:55,040 --> 00:11:57,480 Speaker 1: of their fastest growing markets. They can just stop the 203 00:11:57,520 --> 00:12:00,880 Speaker 1: approval process for new Starbucks. So I think there are 204 00:12:00,880 --> 00:12:03,719 Speaker 1: a lot of different tools in the Chinese toolbox. I'm 205 00:12:03,760 --> 00:12:07,080 Speaker 1: not sure that our administration is is aware that simply 206 00:12:07,120 --> 00:12:10,800 Speaker 1: because they don't export enough to us to make it painful. 207 00:12:10,800 --> 00:12:13,040 Speaker 1: I mean, they don't important enough to make it painful 208 00:12:13,679 --> 00:12:16,240 Speaker 1: for us that somehow they don't have other tools they 209 00:12:16,280 --> 00:12:18,200 Speaker 1: can use less. Jonathan here, great to have you with 210 00:12:18,240 --> 00:12:19,959 Speaker 1: us on the program. Um, they're the buttons that the 211 00:12:20,040 --> 00:12:22,040 Speaker 1: Chinese can push. Walk me through the buttons that the 212 00:12:22,200 --> 00:12:25,600 Speaker 1: American administration can push to force the Chinese to welden 213 00:12:25,679 --> 00:12:29,160 Speaker 1: the open up. Oh look, I think the tariffs are 214 00:12:29,200 --> 00:12:30,920 Speaker 1: not the way to go. I mean this is you know, 215 00:12:30,960 --> 00:12:34,720 Speaker 1: President Trump's sort of maximum pressure campaign on the trade front, 216 00:12:34,800 --> 00:12:37,960 Speaker 1: like we saw with Ki Jongan, North Korea, and I think, 217 00:12:37,960 --> 00:12:40,240 Speaker 1: frankly like we're seeing on the border right now, you know, 218 00:12:40,600 --> 00:12:43,840 Speaker 1: push and push until something gives. Really what we ought 219 00:12:43,840 --> 00:12:47,240 Speaker 1: to be doing and it sounds so tired, but it's true. 220 00:12:47,400 --> 00:12:49,480 Speaker 1: Is you know, working through the w t O, working 221 00:12:49,480 --> 00:12:53,000 Speaker 1: with our allies, you take made in China, which is 222 00:12:53,240 --> 00:12:57,160 Speaker 1: you know, the Chinese Industrial plan to basically control not 223 00:12:57,240 --> 00:13:00,720 Speaker 1: only China's market and tent cutting edge areas technology, but 224 00:13:00,800 --> 00:13:04,360 Speaker 1: also globally to develop Chinese champions. We can go through 225 00:13:04,360 --> 00:13:06,920 Speaker 1: the w t O, we can build a case against 226 00:13:07,040 --> 00:13:10,079 Speaker 1: China's quota system. There are ways to do this legally, 227 00:13:10,520 --> 00:13:12,840 Speaker 1: and we should be doing it. Pushing on tariffs is 228 00:13:12,880 --> 00:13:15,040 Speaker 1: not going to get the Chinese to back down on 229 00:13:15,080 --> 00:13:17,960 Speaker 1: made in China, not going to get them to back 230 00:13:17,960 --> 00:13:21,079 Speaker 1: down on forced technology transfer, not going to get them 231 00:13:21,080 --> 00:13:23,880 Speaker 1: to back down on subsidies and intellectual property tests. So 232 00:13:24,120 --> 00:13:27,559 Speaker 1: you know, those are structural changes that the Chinese that 233 00:13:27,640 --> 00:13:30,040 Speaker 1: we have to work within the system to push for 234 00:13:30,480 --> 00:13:33,080 Speaker 1: tariffs are good as a shock value. Yet the Chinese 235 00:13:33,080 --> 00:13:35,720 Speaker 1: to the tables and negotiate past that they don't do much. 236 00:13:36,360 --> 00:13:40,320 Speaker 1: Why haven't previous administration has been successful doing what essentially 237 00:13:40,360 --> 00:13:43,760 Speaker 1: you're saying they should do well? I think there's been 238 00:13:43,800 --> 00:13:46,320 Speaker 1: a sense um, you know, prior to see Jin paying 239 00:13:46,520 --> 00:13:49,040 Speaker 1: that if the United States and others sort of model 240 00:13:49,120 --> 00:13:52,400 Speaker 1: best behavior right that China is going eventually to follow 241 00:13:52,480 --> 00:13:54,960 Speaker 1: suit the Chinese promise and promise, and there was a 242 00:13:55,000 --> 00:13:57,440 Speaker 1: sense that Chinese economy was opening up, that it was 243 00:13:57,559 --> 00:14:00,280 Speaker 1: moving in the direction of other economies. You know, Jin 244 00:14:00,360 --> 00:14:04,320 Speaker 1: Ping has upended that understanding, right, He's you know, pushed 245 00:14:04,360 --> 00:14:07,120 Speaker 1: to enhance the role of state and enterprises, pushed to 246 00:14:07,200 --> 00:14:10,040 Speaker 1: enhance the role of the party in the economy. Uh. 247 00:14:10,120 --> 00:14:13,160 Speaker 1: And so now it's time to to you know, react 248 00:14:13,200 --> 00:14:15,800 Speaker 1: in different and new ways. And so I'm not opposed 249 00:14:15,800 --> 00:14:19,200 Speaker 1: to some elements of reciprocity and things like that. This 250 00:14:19,240 --> 00:14:21,720 Speaker 1: is a different China, Um, But I think you know, 251 00:14:21,960 --> 00:14:25,040 Speaker 1: it's come about because of a new understanding. We need 252 00:14:25,080 --> 00:14:28,080 Speaker 1: a new policy. If you're just joining us, Elizabeth, economy 253 00:14:28,120 --> 00:14:30,880 Speaker 1: where this with the consul and foreign relations are important. 254 00:14:30,880 --> 00:14:35,520 Speaker 1: Book The Third Revolution. It's brilliantly footnoted, Elizabeth, and you've 255 00:14:35,520 --> 00:14:40,120 Speaker 1: got end occurrent Bloomberg News in your footnotes. Bloomberg Business 256 00:14:40,120 --> 00:14:43,720 Speaker 1: Week article from three years ago. State companies back on 257 00:14:43,920 --> 00:14:47,160 Speaker 1: China's to do list? What is the state of the 258 00:14:47,240 --> 00:14:51,880 Speaker 1: state companies in China? And can how will they affect 259 00:14:51,880 --> 00:14:56,040 Speaker 1: this trade debate? So again, I think c Jin king 260 00:14:56,440 --> 00:15:00,920 Speaker 1: Um has made it clear despite some of the optimism 261 00:15:01,000 --> 00:15:04,240 Speaker 1: that many people in the international community felt back in 262 00:15:04,280 --> 00:15:08,200 Speaker 1: two thousand and thirteen when the government unveiled this economic 263 00:15:08,200 --> 00:15:11,280 Speaker 1: reform agenda that included the idea that they were going 264 00:15:11,280 --> 00:15:15,000 Speaker 1: to address state on enterprises zombie failing enterprises, she didn't. 265 00:15:15,000 --> 00:15:17,120 Speaker 1: Pink is made clear. I think over the past five 266 00:15:17,240 --> 00:15:20,200 Speaker 1: years that he is all about strengthening the hand of 267 00:15:20,240 --> 00:15:23,400 Speaker 1: the state, and so, uh, you know, state on enterprises 268 00:15:23,400 --> 00:15:26,280 Speaker 1: are important not only for China at home, right because 269 00:15:26,280 --> 00:15:29,000 Speaker 1: they employ a lot of people and they take care 270 00:15:29,040 --> 00:15:31,600 Speaker 1: of infrastructure things at home, but also they are an 271 00:15:31,680 --> 00:15:35,520 Speaker 1: essential component of china strategy abroad. She didn't Pink can 272 00:15:35,560 --> 00:15:38,000 Speaker 1: direct them to go into Africa and Southeast Asia and 273 00:15:38,080 --> 00:15:41,360 Speaker 1: Latin America, undertake a lot of projects that are basically 274 00:15:41,520 --> 00:15:46,400 Speaker 1: money money losing, but also serve broader strategic objectives. So 275 00:15:46,480 --> 00:15:48,800 Speaker 1: I think, you know, get the Chinese to build the 276 00:15:48,920 --> 00:15:52,040 Speaker 1: port in uh, you know, Sri Lanka, take control of 277 00:15:52,080 --> 00:15:54,680 Speaker 1: the port and have Chinese c l A Navy ships 278 00:15:54,680 --> 00:15:59,040 Speaker 1: to visit. So I think state n't enterprises aren't going anywhere. Um, 279 00:15:59,080 --> 00:16:01,240 Speaker 1: you know, He's try to make a little bit of 280 00:16:01,280 --> 00:16:04,480 Speaker 1: this sort of mixed enterprises, forcing some private enterprises like 281 00:16:04,520 --> 00:16:08,200 Speaker 1: Ali Baba to takes stakes in stato and enterprises, but 282 00:16:08,400 --> 00:16:10,040 Speaker 1: that's not really going to make much of a difference. 283 00:16:10,200 --> 00:16:12,360 Speaker 1: Liz Economy, thank you so much. Thank you for the 284 00:16:12,440 --> 00:16:15,600 Speaker 1: royalty off the Third Revolution. I've been really screaming about 285 00:16:15,600 --> 00:16:17,920 Speaker 1: this book, folks. She sent me a bucket of Kentucky 286 00:16:17,960 --> 00:16:21,480 Speaker 1: fried chicken, just you know, smooth things over Liz Economy 287 00:16:21,560 --> 00:16:24,880 Speaker 1: and a really important book on China. My mustard. Right now, 288 00:16:25,560 --> 00:16:42,760 Speaker 1: the Third Revolution. Right now in CenTra Portugal, here is 289 00:16:42,880 --> 00:16:49,359 Speaker 1: Mario drag The trade unions have disappeared, uh, structural reforms, 290 00:16:50,120 --> 00:16:54,120 Speaker 1: labor supplies going up, it's increased a lot. And then 291 00:16:54,160 --> 00:16:58,720 Speaker 1: known wage related aspects like people wanting more stability rather 292 00:16:58,800 --> 00:17:03,120 Speaker 1: than higher wages, especially because their employment is of low quality. 293 00:17:03,640 --> 00:17:07,919 Speaker 1: And then the importance of past inflation. Now to disentangle 294 00:17:08,040 --> 00:17:13,560 Speaker 1: all these reasons, it's very difficult, but one conclusion is 295 00:17:13,600 --> 00:17:16,080 Speaker 1: that we see that all these we combined effect of 296 00:17:16,119 --> 00:17:20,520 Speaker 1: all these reasons is gradually washing out, is gradually waning. 297 00:17:21,760 --> 00:17:25,800 Speaker 1: The good example is one given by the importance of 298 00:17:25,920 --> 00:17:31,440 Speaker 1: past law inflation. For a long time, the e CB 299 00:17:31,560 --> 00:17:37,040 Speaker 1: staffs calculated that low inflation, past low inflation has dragged 300 00:17:37,040 --> 00:17:41,199 Speaker 1: about point two percent out of wage growth in the 301 00:17:41,280 --> 00:17:47,000 Speaker 1: last three years period point two percent period. And now 302 00:17:47,240 --> 00:17:50,040 Speaker 1: we see that this effect is waning out, and as 303 00:17:50,080 --> 00:17:53,679 Speaker 1: it has, headline inflation is picking up headlining current headline 304 00:17:53,680 --> 00:17:57,080 Speaker 1: inflation because more and more important and past low inflation 305 00:17:57,160 --> 00:18:00,520 Speaker 1: is losing importance. And so that's that's in a sense 306 00:18:00,640 --> 00:18:07,280 Speaker 1: also says that anchoring inflation expectations was crucial and remains crucial. Unfortunately, 307 00:18:07,320 --> 00:18:13,320 Speaker 1: there will anchor. So once this is said, we see 308 00:18:13,320 --> 00:18:18,560 Speaker 1: the nominal wages are indeed increasing. No matter which measure 309 00:18:18,600 --> 00:18:23,320 Speaker 1: we take. We take compensation per employee, we take compensation 310 00:18:23,359 --> 00:18:27,280 Speaker 1: per hour, we take negotiated wages, all of them are 311 00:18:27,359 --> 00:18:30,400 Speaker 1: going up, and they're going up around now. It's one 312 00:18:30,800 --> 00:18:35,840 Speaker 1: the last data point for for the for the compensation 313 00:18:35,920 --> 00:18:38,800 Speaker 1: per employee and compensation para is the same, but the 314 00:18:38,840 --> 00:18:43,880 Speaker 1: same thing. Well, having said that, um is this going 315 00:18:43,960 --> 00:18:48,640 Speaker 1: to be translated into higher inflation? Well, here I think 316 00:18:48,680 --> 00:18:51,120 Speaker 1: the record is a little more mixed. For example, we 317 00:18:51,240 --> 00:18:55,760 Speaker 1: had we had an increasing wage growth by point eight 318 00:18:55,760 --> 00:19:00,480 Speaker 1: percent between two thousand sixteen and two thousands eighteen and 319 00:19:00,560 --> 00:19:04,359 Speaker 1: this year, but the increase in inflation was only point 320 00:19:04,359 --> 00:19:09,879 Speaker 1: one percent. And because productivity gone up by point seven. Um. Now, 321 00:19:10,040 --> 00:19:12,879 Speaker 1: what we expect for our productivity, we do expect it 322 00:19:12,920 --> 00:19:15,720 Speaker 1: will grow less than it has done in the late 323 00:19:15,840 --> 00:19:19,400 Speaker 1: stage of the cycles, and wages nominal wages will grow 324 00:19:19,520 --> 00:19:22,119 Speaker 1: more than they have done in the in the in 325 00:19:22,400 --> 00:19:25,800 Speaker 1: up to now. So all in all, we see the 326 00:19:25,880 --> 00:19:30,560 Speaker 1: UNI labor costs on on an upward path. And uh. 327 00:19:30,600 --> 00:19:33,040 Speaker 1: And by the way, the other consideration which was touched 328 00:19:33,080 --> 00:19:37,359 Speaker 1: in the previous discussion was related to pricing power, the 329 00:19:37,520 --> 00:19:42,800 Speaker 1: coming back of pricing power. Uh. And there again we 330 00:19:42,880 --> 00:19:47,040 Speaker 1: see encouraging signs because if we look at an index 331 00:19:47,080 --> 00:19:52,639 Speaker 1: which more closely reflects input prices, namely the domestic price 332 00:19:52,960 --> 00:19:56,760 Speaker 1: domestic no food price inflation in April, let's going up 333 00:19:56,760 --> 00:20:00,160 Speaker 1: by point five, which is the highest rate scenes think 334 00:20:00,160 --> 00:20:03,960 Speaker 1: in the last six seven years. So all in all, 335 00:20:04,520 --> 00:20:10,320 Speaker 1: this is um is encouraging. Now, what about e commerce? 336 00:20:10,960 --> 00:20:14,560 Speaker 1: Is this going to dampen this process of recovering inflation? 337 00:20:15,760 --> 00:20:21,040 Speaker 1: And again, the previous discussion about whether an increasing concentration 338 00:20:21,200 --> 00:20:25,200 Speaker 1: does affect the rate of inflation to some extent give 339 00:20:25,280 --> 00:20:29,480 Speaker 1: some light some light on on this issue. Now the 340 00:20:29,560 --> 00:20:33,320 Speaker 1: answer that we have is that we find very little 341 00:20:33,359 --> 00:20:39,480 Speaker 1: evidence that in e commerce has any effect on inflation, 342 00:20:40,520 --> 00:20:44,720 Speaker 1: It's clearly has increased price transparency, clear may have some 343 00:20:44,800 --> 00:20:49,720 Speaker 1: compression of margins, some cost saving, but all in only 344 00:20:49,800 --> 00:20:56,600 Speaker 1: the aggregate this doesn't show into a permanent lower inflation. 345 00:20:57,320 --> 00:21:00,800 Speaker 1: So probably the effects of the eco commers and other 346 00:21:00,960 --> 00:21:04,560 Speaker 1: aspects of globalization have to do more with the composition 347 00:21:05,480 --> 00:21:10,000 Speaker 1: of industries rather than with an aggregate effect that we 348 00:21:10,000 --> 00:21:12,119 Speaker 1: we don't we cannot find in the data an agree 349 00:21:12,200 --> 00:21:19,639 Speaker 1: permanent effect. So all this makes us confident that inflation 350 00:21:19,760 --> 00:21:23,240 Speaker 1: is converging towards our objective. And we draw this confidence 351 00:21:23,400 --> 00:21:28,160 Speaker 1: by the title the advertised labor market, by the high 352 00:21:28,200 --> 00:21:32,800 Speaker 1: capacity utilization rates, by and frankly by and as I 353 00:21:32,800 --> 00:21:37,280 Speaker 1: will say in a moment, by the continuing ample monetary accommodation. 354 00:21:38,680 --> 00:21:44,679 Speaker 1: Also by the disappearance of what we called the tail 355 00:21:44,840 --> 00:21:50,400 Speaker 1: risks of deflation. So all this leads us has led 356 00:21:50,480 --> 00:21:55,679 Speaker 1: the god In Council last week to give guidance on 357 00:21:55,800 --> 00:21:59,440 Speaker 1: monetary policy. And the first thing is we made I 358 00:21:59,520 --> 00:22:02,040 Speaker 1: said last to get the press conference. We need to 359 00:22:02,040 --> 00:22:05,399 Speaker 1: make sure that the ample degree of accommodation that is 360 00:22:05,440 --> 00:22:11,840 Speaker 1: currently incorporated into the financing conditions on which the staff 361 00:22:11,880 --> 00:22:17,480 Speaker 1: projections are predicated is maintained for as long as necessary 362 00:22:17,600 --> 00:22:20,720 Speaker 1: in order to bring about the convergence of inflation towards 363 00:22:20,840 --> 00:22:25,560 Speaker 1: our objective. And then we went through the various measures. 364 00:22:25,560 --> 00:22:28,800 Speaker 1: We said that we intend to maintain our portfolio accumulating 365 00:22:28,880 --> 00:22:31,920 Speaker 1: securities for an extended period of time after the end 366 00:22:31,920 --> 00:22:35,920 Speaker 1: of net purchases, and in any event, as long as necessary. 367 00:22:36,280 --> 00:22:39,760 Speaker 1: So and then we enhanced our guidance on future rate 368 00:22:39,800 --> 00:22:43,560 Speaker 1: path for our key interest rates. We said that we 369 00:22:43,640 --> 00:22:46,840 Speaker 1: expect to help them at the present level, at least 370 00:22:46,920 --> 00:22:49,480 Speaker 1: through the summer of two thousand nineteen, in any case, 371 00:22:49,520 --> 00:22:52,640 Speaker 1: for as long as necessary to ensure that inflation evolves 372 00:22:52,680 --> 00:22:56,919 Speaker 1: along the trajectory that is aligned with the sustained adjustment 373 00:22:56,960 --> 00:23:00,880 Speaker 1: path that we expect to see in the medium term. Thanks, 374 00:23:01,359 --> 00:23:06,320 Speaker 1: thank you, Chembo, Thank you Stephanitely, thank you Mario. So. 375 00:23:06,840 --> 00:23:10,119 Speaker 1: Nine years into an expansion that has sometimes proceeded slowly, 376 00:23:10,160 --> 00:23:13,240 Speaker 1: the U S economy is now performing very well. Growth 377 00:23:13,320 --> 00:23:16,600 Speaker 1: is meaningfully above most estimates of its long term trend, 378 00:23:16,720 --> 00:23:19,680 Speaker 1: although admittedly that trend is not what we would have 379 00:23:19,720 --> 00:23:22,560 Speaker 1: hoped it to be. The labor market is particularly robust, 380 00:23:22,640 --> 00:23:25,840 Speaker 1: with unemployment at at its lowest level since April two 381 00:23:25,840 --> 00:23:28,520 Speaker 1: thousand and inflation has moved up close to our two 382 00:23:28,520 --> 00:23:32,000 Speaker 1: percent objective, although we haven't yet seen it remain there 383 00:23:32,000 --> 00:23:34,320 Speaker 1: on a sustained basis, as our goal would suggest we 384 00:23:34,320 --> 00:23:38,440 Speaker 1: should do. Today, most Americans who want jobs can find them, 385 00:23:38,480 --> 00:23:41,119 Speaker 1: and high demand for workers should support wage growth and 386 00:23:41,200 --> 00:23:44,399 Speaker 1: labor force participation, the latter a measure on which the 387 00:23:44,440 --> 00:23:48,400 Speaker 1: United States now lags most other advanced economies. A tight 388 00:23:48,480 --> 00:23:51,280 Speaker 1: labor market may also lead businesses to invest more in 389 00:23:51,320 --> 00:23:55,800 Speaker 1: technology and training, which should support productivity growth, and some groups, 390 00:23:55,920 --> 00:23:58,760 Speaker 1: such as some racial and ethnic minorities, that still have 391 00:23:58,920 --> 00:24:03,600 Speaker 1: higher unemployment lower participation rates, could also see increasing benefits 392 00:24:03,640 --> 00:24:07,080 Speaker 1: from a tight labor market. In short, there's a lot 393 00:24:07,119 --> 00:24:11,240 Speaker 1: to like about low unemployment. Achieving our statutory goal, though 394 00:24:11,280 --> 00:24:13,959 Speaker 1: of maximum employment in a context of price stability and 395 00:24:14,000 --> 00:24:18,880 Speaker 1: financial stability is both our responsibility and our challenge. Earlier 396 00:24:18,880 --> 00:24:21,360 Speaker 1: in the expansion, as the economy recovered, the the need 397 00:24:21,440 --> 00:24:24,800 Speaker 1: for highly accommodative monetary policy it was clear. But with 398 00:24:24,880 --> 00:24:28,960 Speaker 1: unemployment low and expected to decline to decline further, inflation 399 00:24:28,960 --> 00:24:31,800 Speaker 1: close to our objective, and the risks to the outlook balanced, 400 00:24:32,160 --> 00:24:35,000 Speaker 1: the case for continued gradual increases in the federal funds 401 00:24:35,080 --> 00:24:38,680 Speaker 1: rate is strong. I'll turn for a minute to current 402 00:24:38,720 --> 00:24:42,760 Speaker 1: labor market conditions. At three percent, the unemployment rate is 403 00:24:42,800 --> 00:24:45,480 Speaker 1: now below most estimates of its long run level, which 404 00:24:45,480 --> 00:24:48,480 Speaker 1: are clustered in the mid fours. And many other labor 405 00:24:48,520 --> 00:24:51,560 Speaker 1: market indicators also suggest in economy near full employment. And 406 00:24:51,560 --> 00:24:54,840 Speaker 1: I'll name just a couple um uh one would be 407 00:24:54,880 --> 00:24:57,480 Speaker 1: an elevated level of job vacancies. So for the first 408 00:24:57,520 --> 00:25:00,119 Speaker 1: time since the labor market began collecting this data in 409 00:25:00,160 --> 00:25:02,919 Speaker 1: two thousand, there are now more job vacancies than there 410 00:25:02,960 --> 00:25:07,320 Speaker 1: are people counting counta as unemployed. In addition, the quits 411 00:25:07,400 --> 00:25:10,879 Speaker 1: rate is elevated, a sign that workers are able to 412 00:25:10,920 --> 00:25:14,320 Speaker 1: find another job when they seek one, and surveys show 413 00:25:14,400 --> 00:25:16,879 Speaker 1: that businesses are finding it difficult to fill vacancies and 414 00:25:16,880 --> 00:25:20,680 Speaker 1: that households perceived jobs as plentiful. A couple of other 415 00:25:20,720 --> 00:25:24,560 Speaker 1: indicators are are less clear. Labor force participation among primate 416 00:25:24,800 --> 00:25:28,200 Speaker 1: workers has moved up in recent years, but remains below 417 00:25:28,240 --> 00:25:33,040 Speaker 1: its pre crisis levels. In addition, wage growth has been moderate, 418 00:25:33,160 --> 00:25:35,800 Speaker 1: which is consistent with low productivity growth but also an 419 00:25:35,800 --> 00:25:39,560 Speaker 1: indication that the labor market is not excessively tight. Looking 420 00:25:39,560 --> 00:25:42,600 Speaker 1: out ahead, the job market seems likely to strengthen further. 421 00:25:42,720 --> 00:25:45,440 Speaker 1: Real GDP is now reported to have grown two and 422 00:25:45,480 --> 00:25:48,439 Speaker 1: three percent over the past four quarters, well above estimates 423 00:25:48,440 --> 00:25:52,159 Speaker 1: of its long run trend. Expansionary fiscal policy is just 424 00:25:52,320 --> 00:25:54,960 Speaker 1: arriving and expected to add to aggregate demand over the 425 00:25:55,000 --> 00:25:58,520 Speaker 1: next few years, so many forecasters expect the unemployment rate 426 00:25:58,560 --> 00:26:00,880 Speaker 1: to fall into the mid threes and to remain there 427 00:26:00,880 --> 00:26:03,800 Speaker 1: for an extended period. If that does come to pass, 428 00:26:03,920 --> 00:26:06,439 Speaker 1: it will mean the lowest unemployment in the United States 429 00:26:06,440 --> 00:26:10,359 Speaker 1: since the late nineteen sixties fifty years ago. Because we 430 00:26:10,400 --> 00:26:13,320 Speaker 1: have so little experience with very low unemployment, it's interesting 431 00:26:13,359 --> 00:26:17,560 Speaker 1: to compare today's labor market with that earlier period. Unemployment 432 00:26:17,560 --> 00:26:20,560 Speaker 1: was below four percent from February nineteen sixty six through 433 00:26:20,640 --> 00:26:24,720 Speaker 1: January nineteen seventy, and during that time PC inflation increased 434 00:26:25,040 --> 00:26:27,679 Speaker 1: from below two percent in nineteen sixty five to about 435 00:26:27,680 --> 00:26:32,160 Speaker 1: five percent in nineteen seventy. In hindsight, unemployment is now 436 00:26:32,200 --> 00:26:34,800 Speaker 1: widely thought to have been unsustainably low and to have 437 00:26:34,840 --> 00:26:39,600 Speaker 1: contributed to escalating inflation. But the question is how significant 438 00:26:39,640 --> 00:26:42,680 Speaker 1: and relevant is that precedent for today. The U s 439 00:26:42,720 --> 00:26:45,560 Speaker 1: economy has changed in many ways over the last fifty years. 440 00:26:46,600 --> 00:26:50,640 Speaker 1: By some estimates, the natural rate of unemployment is substantially 441 00:26:50,680 --> 00:26:54,080 Speaker 1: lower now. For example, the Aggressional Budget Office now estimates 442 00:26:54,080 --> 00:26:56,520 Speaker 1: that the natural rate was about five and three quarters 443 00:26:56,520 --> 00:27:00,240 Speaker 1: percent then and now a full percentage point lower. And 444 00:27:00,359 --> 00:27:03,240 Speaker 1: rising education levels do point to a decline in natural 445 00:27:03,320 --> 00:27:06,400 Speaker 1: rate since the nineteen sixties, because more highly educated people 446 00:27:06,400 --> 00:27:08,960 Speaker 1: are less likely to be unemployed. The share of the 447 00:27:08,960 --> 00:27:11,480 Speaker 1: population with a college degree has risen from less than 448 00:27:11,520 --> 00:27:15,320 Speaker 1: fifteen percent to nearly now, and they share with less 449 00:27:15,320 --> 00:27:17,560 Speaker 1: than a high school degree has declined from forty five 450 00:27:17,640 --> 00:27:22,800 Speaker 1: percent to about five Another important difference from the nineteen 451 00:27:22,840 --> 00:27:25,560 Speaker 1: sixties is that inflation has been low and stable for 452 00:27:25,600 --> 00:27:29,720 Speaker 1: an extended period, which has better anchored inflation expectations. Today, 453 00:27:29,720 --> 00:27:33,399 Speaker 1: policymakers have a greater appreciation of the role expectations play 454 00:27:33,440 --> 00:27:36,600 Speaker 1: and inflation dynamics, and a clearer commitment to maintaining low 455 00:27:36,640 --> 00:27:40,920 Speaker 1: and stable inflation. So, unfortunately, with the passage of a 456 00:27:40,920 --> 00:27:43,399 Speaker 1: half century and important changes in the structure of our 457 00:27:43,400 --> 00:27:46,680 Speaker 1: economy and in central bank practices, in my view of 458 00:27:46,720 --> 00:27:49,800 Speaker 1: the historical comparison does not shed as much light as 459 00:27:49,800 --> 00:27:54,560 Speaker 1: we might have hoped, and that lack of useful historical 460 00:27:54,600 --> 00:27:57,320 Speaker 1: precedent leaves us with some uncertainty about the answers to 461 00:27:57,440 --> 00:28:01,720 Speaker 1: several important and challenging questions. First, estimates of the natural 462 00:28:01,800 --> 00:28:05,000 Speaker 1: rate of unemployment by FOMC participants and others have drifted 463 00:28:05,040 --> 00:28:08,880 Speaker 1: lower as unemployment has declined without much apparent reaction from inflation. 464 00:28:09,600 --> 00:28:13,600 Speaker 1: But how how reliable are these current estimates. They've always 465 00:28:13,600 --> 00:28:16,160 Speaker 1: been uncertain, and they may be even more so now 466 00:28:16,320 --> 00:28:20,800 Speaker 1: as inflation has become less responsive to unemployment. The anchoring 467 00:28:20,840 --> 00:28:23,800 Speaker 1: of expectations as a welcome development has likely played a 468 00:28:23,880 --> 00:28:25,840 Speaker 1: role in the flattening of the Phillips curve. That a 469 00:28:25,920 --> 00:28:28,639 Speaker 1: flatter Phillips curve makes it harder to assess whether movements 470 00:28:28,640 --> 00:28:31,600 Speaker 1: and inflation reflect the cyclical position of the economy or 471 00:28:31,640 --> 00:28:36,080 Speaker 1: other influences. Second question, what would be the consequences for 472 00:28:36,160 --> 00:28:38,760 Speaker 1: inflation if employment were to run well below the natural 473 00:28:38,840 --> 00:28:43,320 Speaker 1: rate for an extended period. The flat Phillips curve suggests 474 00:28:43,320 --> 00:28:46,800 Speaker 1: that the implications for inflation might not be large, although 475 00:28:46,800 --> 00:28:50,240 Speaker 1: a very tight labor market could lead to larger nonlinear effects. 476 00:28:50,560 --> 00:28:53,760 Speaker 1: Research on that question is ambiguous. Again, reflecting the limited 477 00:28:53,840 --> 00:28:58,280 Speaker 1: historical experience, We should also remember that remember that where 478 00:28:58,280 --> 00:29:01,680 Speaker 1: inflation expectations are well anchored, it's likely because central banks 479 00:29:01,680 --> 00:29:05,160 Speaker 1: have kept inflation under control. If central banks were instead 480 00:29:05,240 --> 00:29:08,320 Speaker 1: to try to exploit the nonresponsiveness of inflation to low 481 00:29:08,360 --> 00:29:13,920 Speaker 1: unemployment and push resource utilization significantly and persistently past sustainable levels, 482 00:29:14,400 --> 00:29:16,680 Speaker 1: the public might begin to question whether our commitment to 483 00:29:16,720 --> 00:29:21,320 Speaker 1: low inflation continues and expectations could come under upward pressure. 484 00:29:21,920 --> 00:29:24,560 Speaker 1: Of course, so far, we see no signs of this 485 00:29:24,680 --> 00:29:28,080 Speaker 1: at all. If anything, some measures of longer term inflation 486 00:29:28,120 --> 00:29:31,240 Speaker 1: expectations in the United States have edged lower in recent years. 487 00:29:32,760 --> 00:29:38,000 Speaker 1: Third question, can persistently strowing economic conditions pose financial stability risks? 488 00:29:38,880 --> 00:29:42,280 Speaker 1: Of course, strowing economic conditions are a good thing. Such 489 00:29:42,280 --> 00:29:44,840 Speaker 1: conditions can make the financial system better able to absorb 490 00:29:44,920 --> 00:29:48,440 Speaker 1: shocks through strong balance sheets and investor confidence. But we've 491 00:29:48,480 --> 00:29:51,280 Speaker 1: often seen confidence turn into over confidence and lead to 492 00:29:51,320 --> 00:29:56,280 Speaker 1: excessive borrowing and risk taking, leaving the financial system more vulnerable. Indeed, 493 00:29:56,320 --> 00:29:59,640 Speaker 1: the fact that the two most recent US recessions stemmed 494 00:29:59,680 --> 00:30:02,560 Speaker 1: Prince Believe from financial imbalances and not from high inflation, 495 00:30:02,920 --> 00:30:07,480 Speaker 1: highlights the importance of closely monitoring financial conditions today. I 496 00:30:07,520 --> 00:30:11,440 Speaker 1: see US financial vulnerability financial stability vulnerabilities as in line 497 00:30:11,440 --> 00:30:14,800 Speaker 1: with their long run averages. While some asset prices are 498 00:30:14,880 --> 00:30:18,320 Speaker 1: high by historical standards, I don't see broad signs of 499 00:30:18,320 --> 00:30:22,000 Speaker 1: excessive borrowing or leverage. In addition, banks have far greater 500 00:30:22,080 --> 00:30:25,880 Speaker 1: levels of capital and liquidity than before the crisis. Fourth, 501 00:30:25,920 --> 00:30:29,560 Speaker 1: while persistently strong economic conditions can pose risks to inflation 502 00:30:29,560 --> 00:30:32,960 Speaker 1: and perhaps financial stability, we can also also ask whether 503 00:30:33,000 --> 00:30:36,160 Speaker 1: there may be lasting benefits. As I mentioned at the beginning, 504 00:30:36,440 --> 00:30:38,480 Speaker 1: a tight labor market could draw more people into the 505 00:30:38,600 --> 00:30:41,440 Speaker 1: labor force. In fact, as the labor market has tightened, 506 00:30:41,480 --> 00:30:43,680 Speaker 1: more workers have been moving back to work and off 507 00:30:43,720 --> 00:30:47,360 Speaker 1: disability roles. That could also there could also be benefits 508 00:30:47,440 --> 00:30:51,720 Speaker 1: to productivity and potential growth. Alto told, though the persistence 509 00:30:51,760 --> 00:30:55,720 Speaker 1: of any such positive historesist benefits is uncertain, since again 510 00:30:55,880 --> 00:31:00,000 Speaker 1: the historical evidence is sparse and conclusive, so to wrap. 511 00:30:59,880 --> 00:31:04,000 Speaker 1: As is often the case in the current environment, significant 512 00:31:04,080 --> 00:31:07,959 Speaker 1: uncertainty attends the process of monetary policy. So today, with 513 00:31:08,000 --> 00:31:10,920 Speaker 1: the economy strong and risks to the outlook balanced, the 514 00:31:11,040 --> 00:31:14,120 Speaker 1: case for continued gradual increases in the federal funds rate 515 00:31:14,480 --> 00:31:18,560 Speaker 1: remains strong and is broadly supported among fo MC participants. 516 00:31:19,040 --> 00:31:31,000 Speaker 1: Thanks very much. Thanks for listening to the Bloomberg Surveillance podcast. 517 00:31:31,360 --> 00:31:36,240 Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or 518 00:31:36,440 --> 00:31:40,760 Speaker 1: whichever podcast platform you prefer. I'm on Twitter at Tom 519 00:31:40,880 --> 00:31:44,760 Speaker 1: Keane before the podcast. You can always catch us worldwide. 520 00:31:45,200 --> 00:31:46,280 Speaker 1: I'm Bloomberg Radio