Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Lee.
Speaker 1: We bring you insight from the best in economics, finance, investment,
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Speaker 1: very pleased to say that right now we can cross
Speaker 1: of Bloomberg's Michael McKay to catch up with the Dallas
Speaker 1: Fed President. Well, thank you very much, and we are
Speaker 1: talking with Robert Kaplan. He is the president of the
Speaker 1: Dallas Federal Reserve, the eleventh District and the FEDS set
Speaker 1: up and thank you for getting up early joining us
Speaker 1: this morning on Bloomberg TV and radio worldwide. I gotta
Speaker 1: start with j. Powell. Wall Street took his comments yesterday
Speaker 1: as opening the door to a rake cut. Do you
Speaker 1: think that that door is open? Uh? I think it's
Speaker 1: need to make a judgment on that. We're going to
Speaker 1: be very vigilant about understanding these heightened trade tensions, see
Speaker 1: if they feed through to the economy. More most importantly,
Speaker 1: see if they persist. Uh and uh. And so I
Speaker 1: think it's too soon, though to make a judgment as
Speaker 1: to whether we might or might not take an action.
Speaker 1: I'd rather be patient here and let events unfold a
Speaker 1: little bit more well. Investors have priced in three rate cuts,
Speaker 1: and the Wall Street economists over the weekend basically joined
Speaker 1: the consensus that you're going to cut rates. You've been
Speaker 1: in the watching Wade camp Um. What would tip the
Speaker 1: balance for you? When? When would you think that you
Speaker 1: need to make a decision. I would need to see
Speaker 1: some evidence that there's a deceleration or further deceleration of economy.
Speaker 1: We've expected that growth would slow from eighteen and nineteen,
Speaker 1: but we're still growing above trend. We're still seeing a
Speaker 1: tightening in the labor market, and our Dallas trim mean,
Speaker 1: which is our measure of core inflation, is now at
Speaker 1: two percent. We think we'll end the year around two percent.
Speaker 1: So I would need to see some evidence that there's
Speaker 1: a worsening in those trends. We may well see it.
Speaker 1: I'm very I'm on I'm on watch as to whether
Speaker 1: we see a further deceleration. But that's what I'm watching for.
Speaker 1: The data are lagged cost benefit. What's worse cutting too
Speaker 1: early or waiting too long? So it depends on where
Speaker 1: you are uh in the in the in the cycle
Speaker 1: and UH, and what our stances and my own assessment
Speaker 1: of our stance is, we're in the neighborhood of neutral
Speaker 1: right now. So if if we were to cut, that
Speaker 1: would that would be me making a judgment that we
Speaker 1: need to add stimulus to the economy. That might ultimately
Speaker 1: be a judgment I need to make. But if on
Speaker 1: the other hand, you're you've got a restrictive stance and
Speaker 1: you decided to cut, that's something different. Or if you're
Speaker 1: highly accommodative, it also is a different judgment. But right
Speaker 1: now we're pretty much of a neutral setting. UH. And
Speaker 1: the question is should we be stimulus to this economy?
Speaker 1: That's a question I'm asking. I'm open minded about it.
Speaker 1: I think the risk to the downside in the last
Speaker 1: five or six weeks have increased because of these heightened
Speaker 1: trade tensions. So I'm watching it very carefully. But that's
Speaker 1: the judgment I'm gonna I'm gonna and that's the question
Speaker 1: I'm gonna be asking. Well, they say that the Federal
Speaker 1: Reserve decides when the raise rates, but markets decide when
Speaker 1: you're going to cut them. How much pressure do you
Speaker 1: feel from markets right now? I've spent my entire career
Speaker 1: in the markets, as you know, and I've learned that
Speaker 1: markets can change on a dime. For example, there's been
Speaker 1: a dramatic change in the markets since May first, or
Speaker 1: approximately May first, last five or six weeks, and UH,
Speaker 1: as we've seen, you could see a dramatic change UH
Speaker 1: in a different direction over the next five or six weeks.
Speaker 1: For example, what's happening to the treasury curve I think
Speaker 1: is very much in response to heightened trade tensions, and
Speaker 1: some of those decisions or some of those tensions could
Speaker 1: be reversed in the next several weeks. So I've learned
Speaker 1: to watch markets, but but I don't want to overread
Speaker 1: or overreact to what they're saying and UH, because they
Speaker 1: can change on a dime. Well, what are CEOs in
Speaker 1: your district telling you about what they they see in
Speaker 1: the business climate and what are they asking you to do? So?
Speaker 1: UH the biggest issue for businesses today, and I think
Speaker 1: this is the vulnerability for the US economy. It's not
Speaker 1: the consumers in good shape, it's for businesses. There's a
Speaker 1: high level of uncertainty, and businesses are using UH logistics
Speaker 1: and supply chain arrangements heavily to remain competitive. They have
Speaker 1: they don't have uh much pricing power. Technology and globalization
Speaker 1: have limited their pricing parts. They're using some of these
Speaker 1: other techniques uh to manage their costs, and what they're
Speaker 1: seeing is a lot of uncertainty as to how they're
Speaker 1: going to be able to do that. And I think
Speaker 1: these recent uh, these recent threats against Mexico have further
Speaker 1: put more uncertainty into their minds. So what do businesses do?
Speaker 1: What they're telling me they're doing is be more careful,
Speaker 1: hold off on capex, be more cautious. So I think
Speaker 1: this is having some chilling effect. I think the businesses
Speaker 1: will also remark cost the capital is historically low, access
Speaker 1: to capital is historically high, and so uh, they're not
Speaker 1: that sensitive for many of the businesses I talked to,
Speaker 1: other than say the home builders, they're not as sensitive
Speaker 1: to the policy setting as they are all these other
Speaker 1: uncertainties and managing their business. You mentioned the Mexico tariffs.
Speaker 1: No district would be more vulnerable than the eleventh district yours?
Speaker 1: What would be? Have you modeled what the impact would
Speaker 1: be on your district and then on the national economy. Yeah,
Speaker 1: so we're By our estimate, we're probably a third of
Speaker 1: US trade with Mexico. Texas is the largest ex boarding
Speaker 1: state in the United States. Uh, We've taken a number
Speaker 1: of looks at it. I don't even want to throw
Speaker 1: out statistics because I'm still hopeful that that uh there
Speaker 1: actually won't there won't actually be a follow through on
Speaker 1: these tariffs. And the reason I'm hopeful is this is
Speaker 1: a very different trade relationship than the one with China.
Speaker 1: This is substantially an intermediate goods relationships which allow US
Speaker 1: companies to manage their logistics and supply chains, be competitive
Speaker 1: domicile in the United States, and it's allowed North America
Speaker 1: in the US to take share from Asia, so as
Speaker 1: opposed to the trade relationship with China, which is primarily
Speaker 1: a final goods deficit. And so it is so overwhelmingly
Speaker 1: in the interests of the US to have a strong
Speaker 1: trading relationship in North America with with Mexico and to
Speaker 1: some extent Canada, that I don't want to go too
Speaker 1: far expecting that we're going to do something that was
Speaker 1: going to further jeopardize that relationship. It's so clearly in
Speaker 1: our interest to have a strong trading relationship with Mexico. Well,
Speaker 1: we have seen the impact, just as you say, in uncertainty,
Speaker 1: how do you think the Mexicans would react? You speak
Speaker 1: to their positive maker, did you know we're very close
Speaker 1: to senior officials, they're ahead of the central bank. So
Speaker 1: it's not been as reported as much in the press.
Speaker 1: But over the last two years, Mexico has actually is
Speaker 1: the one country in the world that's fighting an inflation problem. Uh.
Speaker 1: They've had a very volatile currency. They've raised their domestic
Speaker 1: interest rate substantially over the last couple of years. I
Speaker 1: think there was hope that there would be some stability
Speaker 1: uh with U S m c A. This just further
Speaker 1: puts volatility in their currency, makes it harder to manage
Speaker 1: their economy, and we see slowing and economic growth in Mexico. Uh,
Speaker 1: they're actually slipping. Uh. They've got a new president. There's
Speaker 1: uncertainty with that. So it's a very challenging time in Mexico.
Speaker 1: You put it all together, what's what the impact has
Speaker 1: there been on your economic outlook for the rest of
Speaker 1: this year. So our forecast for the year still is
Speaker 1: in the neighborhood of two to and a quarter percent
Speaker 1: GDP growth, who could be a little higher, could be
Speaker 1: a little lower. Still think the labor market's kind of tight,
Speaker 1: and we still think we're gonna end the year in
Speaker 1: the neighborhood of two percent on core inflation. Dallas Trim mean,
Speaker 1: I think this These recent events have have raised the
Speaker 1: risk to the downside, and so I'm much more vigilant.
Speaker 1: I'm much more cautious about how events are going to unfold.
Speaker 1: And the question is are these tensions going to persist?
Speaker 1: And if they do, they're likely going to have some
Speaker 1: negative effect on our outlook. But I think it's a
Speaker 1: little too soon for me to make a judgment about that.
Speaker 1: But we're on heightened alert as a result of these tensions.
Speaker 1: You're here in Chicago for a FED Listens conference on
Speaker 1: the monetary policy framework. Is the framework broken? Do you
Speaker 1: need to fix it? No? I think our framework is
Speaker 1: working reasonably well. Uh. There There are a couple of
Speaker 1: big issues though that that we're that we've been talking about.
Speaker 1: One is inflation has been running for the last eight
Speaker 1: or nine years, not completely, but for a lot of
Speaker 1: that time below our two percent target. I think a
Speaker 1: lot of that has to do with technology, technology enabled disruption, globalization,
Speaker 1: I eat structural trends. Should we be revisiting elements of
Speaker 1: our framework, uh so that we can be more confident
Speaker 1: that we're meeting our two percent target and that we're
Speaker 1: anchoring expectations around two percent. And then the other big issue,
Speaker 1: which is somewhat related to that as well as the
Speaker 1: economy is performed over the last number of years, there's
Speaker 1: a number of underrepresentative groups that have not fully participated
Speaker 1: in this recovery. That may be due to educational attainment,
Speaker 1: other impediments uh in their lives that make it harder
Speaker 1: for them to join the workforce and stay in the workforce.
Speaker 1: And I think running a somewhat hotter labor market may
Speaker 1: help those groups get in and stay in and help
Speaker 1: create somewhat more inclusive growth in this country. And I
Speaker 1: think that's another issue that we're actively talking about. Can
Speaker 1: you generate inflation if you cut rates? Say, would that
Speaker 1: raise inflation? So you've heard me say before, the the
Speaker 1: monetary policy has a pretty potent effect on the cyclical
Speaker 1: aspects of inflation, tightness of the labor market, other elements
Speaker 1: of the cyclical elements, the part that might be a
Speaker 1: little less susceptible to monetary policy or the structural drivers
Speaker 1: of again technology, technology enabled disruption, globalization, which are limiting
Speaker 1: the pricing power of business, improving the negotiating leverage of consumers,
Speaker 1: making it harder for businesses to raise prices even if
Speaker 1: they have wage increases. And so I think it's muting
Speaker 1: the inflation effect. And so uh, I think these are
Speaker 1: this dynamic is one we just need to take into
Speaker 1: account as we think about monetary policy. Is there any suggestion,
Speaker 1: and there have been many of them made for policies
Speaker 1: you can adopt that you find intriguing or interesting. Well,
Speaker 1: I'm I'm open minded on all these proposals, nominal GDP targeting,
Speaker 1: elements of price level targeting, inflation averaging. I think the
Speaker 1: key for me is do we want to come out
Speaker 1: of this framework review saying there are two or three
Speaker 1: new factors we want to take into account, or we
Speaker 1: want to update our framework, for example, to take into
Speaker 1: account average inflation over a period of time. It's one
Speaker 1: thing to take those factors into account. It's another thing
Speaker 1: to make a commitment or create a rule that would
Speaker 1: bind future actions. I'm reluctant, uh to uh to bind
Speaker 1: ourselves to future scenarios that we you know, we can't predict,
Speaker 1: but I am in favor of alternating, probably updating our
Speaker 1: framework to take a few additional factors into account, which
Speaker 1: I think may serve us well in meeting our dual mandate.
Speaker 1: Are you're worried at all that the FENS raised expectations
Speaker 1: for what's going to come out of this process and
Speaker 1: you may disappoint the market. I think we have to
Speaker 1: be careful. The commune AKA clearly that, uh that I
Speaker 1: think it's a healthy thing to do a framework review.
Speaker 1: I don't think it should be a one time thing.
Speaker 1: I think it's something a good organization does regularly. Uh.
Speaker 1: But because we haven't done it in a long time,
Speaker 1: it may raise some expectations. But I think we're gonna
Speaker 1: have to just communicate what we're thinking and how we're
Speaker 1: doing it, so we we we sort of balance how
Speaker 1: we're going about this. All right, Robert Caplan, thank you
Speaker 1: very much, President of the Dallas Federal Reserve. We'll send
Speaker 1: it back to you. Michael McKay, thank you very much, sir.
Speaker 1: A fantastic interview with the Dallas Fed President. An ugly
Speaker 1: a DP report, a massive downside surprise ahead of payrolls
Speaker 1: Friday in the United States, the number coming in at
Speaker 1: twenty seven k, the median estimate one D eight. He five.
Speaker 1: It sparks a big bond market rally, and now we
Speaker 1: can get reaction from the Federal Reserve. The Chicago Fed
Speaker 1: president Charles Evans sitting down with Bloomberg's Michael McKay. Well,
Speaker 1: thank you very much, and welcome back to Chicago where
Speaker 1: we're speaking with the president of the Chicago Fed and
Speaker 1: our host for this conference, Charlie Evans. Thanks for joining
Speaker 1: us of Morning on Blueberg Television and radio worldwide. Got
Speaker 1: to start with the news. J Powell yesterday his comments
Speaker 1: taken by Wall Street as suggesting the Fed is putting
Speaker 1: a rate cut on the table for consideration. Did you
Speaker 1: take it that way? Is a cut as the door
Speaker 1: open to a cut? Uh? Well, I think we've been
Speaker 1: looking at the data and you know, talking to businesses
Speaker 1: and thinking about how the forecast is evolving. I still
Speaker 1: think that the fundamentals are solid for the economy. There
Speaker 1: is uncertainty and you you know, might be wondering if
Speaker 1: businesses are you know, delayne a little bit more taking
Speaker 1: stock of you know, what the international situation looks like
Speaker 1: I think it would be prudent to take a look
Speaker 1: at you know, our you know setting for monetary policy,
Speaker 1: as we do each and every time, and as I've said, um,
Speaker 1: you know earlier, I'm a little nervous about the low
Speaker 1: inflation rate and so um, even though we expect it's
Speaker 1: kind of temporary. I think that that by itself could
Speaker 1: be a reason for a little bit more accommodation. But
Speaker 1: I think we're just gonna have to look at how
Speaker 1: things are evolving. Cut rates basis points. Will that generate
Speaker 1: inflation hasn't so far? Well, I think that's a good
Speaker 1: question because I think it depends on just supporting and
Speaker 1: an accommodative fashion. We've been under running inflation. We're about
Speaker 1: one point six percent year over year. We ought to
Speaker 1: be at two too and a quarter by now this
Speaker 1: late in the cycle, sort of averaging higher inflation at
Speaker 1: least defending our symmetric objective. And so I think more
Speaker 1: accommodative stance would be supportive of that. Um, you know,
Speaker 1: it depends on the evolution of the economy to whether
Speaker 1: or not that supportive of that or not. I think
Speaker 1: additional nervousness would you know, also um, you know, call
Speaker 1: some of that into question. Something changed with inflation dynamics
Speaker 1: that maybe they Fed an economists in general don't understand.
Speaker 1: At this point. We've certainly been under running two percent
Speaker 1: now for quite some time. We've had moments where we've
Speaker 1: gotten up to two percent, and certainly a year and
Speaker 1: a half ago, as we were tightening raising rates, I
Speaker 1: was more confident that we were going to be able
Speaker 1: to get to two percent on a sustainable basis. I
Speaker 1: think that's really important, that would be sustainable. It turns
Speaker 1: out that we weren't. We haven't been able to do that,
Speaker 1: and it seems to be one cycle of temporary uh
Speaker 1: downside risk to inflation after another one after a while.
Speaker 1: I think you really do have to wonder about the
Speaker 1: inflation process and whether or not we just need more accommodation.
Speaker 1: But you're hosting a conference that's part of the fed's
Speaker 1: review of its monetary policy framework designed to sort of
Speaker 1: solve that problem. Have you heard any uh suggestions, and
Speaker 1: there's been a lot of them for different policies you
Speaker 1: could adopt that you think actually would produce the result
Speaker 1: that you want. Well, I think the conference papers have
Speaker 1: been very good. We had a panel yesterday where we
Speaker 1: had people, um, you know, labor, business people in the
Speaker 1: community talking about what maximum employment means for their constituents.
Speaker 1: And I think that, uh, we had a very nice
Speaker 1: paper looking at evaluating different approaches that the FED has
Speaker 1: taken over the last ten in fifteen years. I took
Speaker 1: away from that that it's very important that we continue
Speaker 1: to demonstrate credibility that with all of our actions, we
Speaker 1: want to indicate that we're here to generate symmetric two
Speaker 1: percent inflation and maximum employment. Some of that could be, um,
Speaker 1: another reason for sort of pushing a little harder further
Speaker 1: into the cycle in order to average higher inflation to
Speaker 1: ratify symmetry. I think we're today's papers are going to
Speaker 1: be on that point even more so, and I think
Speaker 1: it will be very interesting to listen to those. Your
Speaker 1: district is sort of at the center of manufacturing in
Speaker 1: the United States. We've seen the I s M reports,
Speaker 1: We've seen the the manufacturing vase suggests ongoing weakness. They
Speaker 1: keep grinding lower, but some say is reminiscent of two
Speaker 1: thousand fifteen. What do you see in manufacturing, Well, we've
Speaker 1: definitely seen the I S M moved down it's still
Speaker 1: expansionary for manufacturing, but there's definitely more uncertainty about you know,
Speaker 1: you know CAPEX orders business fixed investment and you know
Speaker 1: how that's likely to proceed, So that obviously hits the
Speaker 1: manufacturing sector in a pretty big way. UM. I also
Speaker 1: think that the tariffs on agricultural products are really big
Speaker 1: in that effects of farm equipment manufacturers as well, and
Speaker 1: so um, you know, that's just another headwind that the
Speaker 1: economy has got to work its way through in order
Speaker 1: to achieve growth at potential or above potential. I'm looking
Speaker 1: for two percent growth this year. That's actually a pretty
Speaker 1: good growth rate in terms of trend growth. But uh,
Speaker 1: you know, we're gonna have to navigate, um, all of
Speaker 1: the headwinds that we're facing right now. What are your
Speaker 1: district CEO telling you about what they think is going
Speaker 1: to happen to the economy and how they're reacting to it. Um,
Speaker 1: you know, my information from CEOs is a little bit stale.
Speaker 1: It's you know, six weeks since we almost six weeks
Speaker 1: since we had our cycle. I've got my directors meeting today.
Speaker 1: I look forward to their comments. I believe I'm expecting
Speaker 1: sort of a little bit of a continuation of their
Speaker 1: balls up in the air. There's uncertainty. The fundamentals for
Speaker 1: their operations are pretty good, but of course if you
Speaker 1: start making adjustments to the effect supply chains and how
Speaker 1: you move product over and back across the border with Mexico,
Speaker 1: that would have, you know, a negative effect. And so
Speaker 1: I think we have to be aware of all of
Speaker 1: that and make sure that the FED is not getting
Speaker 1: in the way of continued good growth. The FED may
Speaker 1: not be getting in the way, but trade policy maybe
Speaker 1: getting in the way. Have you seen measurable impacts? We
Speaker 1: all talk about the possibility of faster inflation when we
Speaker 1: talk about slower growth. Can you quantify an effect so
Speaker 1: far in the data? So I think that's a challenge.
Speaker 1: I think most of what I've been hearing what I
Speaker 1: just indicated is that this is on the soft data
Speaker 1: kind of side. It's uncertainty. It does get at business
Speaker 1: attitudes towards putting precious capital at risk over a longer
Speaker 1: period of time, when the actions might be undone by
Speaker 1: a change in trade policy or other actions. And so
Speaker 1: I think it's a more difficult time to take a
Speaker 1: longer perspective. And so people are waiting and just sort
Speaker 1: of seeing how things play out. Could come out fine. Um,
Speaker 1: you know that's what everybody helps with the trade policies,
Speaker 1: your cost benefit analysis. Is it better to be slow
Speaker 1: to cut if needed, or better to be cutting through
Speaker 1: seeing Yeah, that's that's a good question too. And and
Speaker 1: I'm gonna I'm gonna pause a little bit and just
Speaker 1: sort of say it gets at the strategy. And my
Speaker 1: own take on things is that inflation is just a
Speaker 1: little light relative to our symmetric two percent inflation. So
Speaker 1: before we even talk about, you know, more trade uncertainty,
Speaker 1: I'm a little more inclined to kind of think, you know,
Speaker 1: we might you I wonder if we've got the appropriately
Speaker 1: accommodative setting in order to generate inflation at two to
Speaker 1: two one a quarter per cent and two and a
Speaker 1: half percent inflation would not be um against our symmetric
Speaker 1: inflation objective as long as it was relatively contained. So
Speaker 1: I think that there's scope for that. Now if you
Speaker 1: layer on top of this additional uncertainties as to the
Speaker 1: real economy and just you know, there are insurance reasons
Speaker 1: to talk about adjustments, I think, um, you know, there's
Speaker 1: more to talk about these days when it comes to
Speaker 1: monetary policy, and we'll be doing that in Washington before
Speaker 1: too long. One of the things you've gotta be talking
Speaker 1: about is what's happening overseas and the impact that comes
Speaker 1: back into the US. And one thing we have seen
Speaker 1: is much stronger dollar companies feeling that impact in your district. Um.
Speaker 1: You know, I think that there are you know, a
Speaker 1: number of headwinds that they're facing, and obviously relative prices
Speaker 1: would have one effect on that. I think commodity prices
Speaker 1: have been another. But they've sort of come off those
Speaker 1: kinds of pressures mentioned agriculture. I wanted to ask you
Speaker 1: about that because of course this is a huge agricultural district.
Speaker 1: You've got tariffs and you've got floods. Uh, you've got
Speaker 1: reports that farmers aren't gonna be able to plant. How
Speaker 1: how bad is it? Um? Yeah, the weather effects have
Speaker 1: been really uh you know, um, not good obviously. UM.
Speaker 1: You know, a lot of flooding, a lot of just
Speaker 1: navigating going around the area. You know, bridges are out
Speaker 1: and things like that in the fields are more difficult.
Speaker 1: So um yeah, everybody struggling with that, and the uh,
Speaker 1: crop prices aren't supportive of you know, that profitability either well,
Speaker 1: what's that going to do to inflation or to growth? Um,
Speaker 1: you know, crop prices have been low, so obviously if
Speaker 1: supply was curtailed by some effect, you might predict that
Speaker 1: prices would go up a little bit, you know, somewhat,
Speaker 1: But it's going to depend on the entire um, you know,
Speaker 1: the market where planting takes place, elsewhere in world conditions.
Speaker 1: So it's hard to say. I'm not really concerned about
Speaker 1: the inflationary consequences of that, nor the tariff effects. Um,
Speaker 1: even larger tariffs I think would sort of be a
Speaker 1: one off effect on overall prices, and so I don't
Speaker 1: think that would risk our inflation objective at the moment. Well,
Speaker 1: then where do you get the symmetric two percent that
Speaker 1: you want from? Well, I think we're trying to find
Speaker 1: the appropriate setting for monetary policy, and uh, you know,
Speaker 1: so far, we sort of decided that settling on the
Speaker 1: low end of the range of neutral uh interest rate
Speaker 1: seems to be a good place to sit because it
Speaker 1: supports the economy and helps support inflation a little bit.
Speaker 1: If all of a sudden, we you know, realize that
Speaker 1: that's a little bit more contractionary than we thought. If
Speaker 1: we're getting in the way of the economy, I think
Speaker 1: we would have to rethink that and make adjustments. But
Speaker 1: that's a determination that we need to look at the
Speaker 1: day to talk to people about and UH come together
Speaker 1: as a committee on We had a viewer a question
Speaker 1: come in that kind of gets at one of the
Speaker 1: panels that was here yesterday about FED communication. UM, and
Speaker 1: I think back to when you and I were down
Speaker 1: in Florida recently and Kevin Walsh, the former FED governor,
Speaker 1: said we could have chosen a one point five percent
Speaker 1: inflation target, and then everybody thinked we great because we
Speaker 1: keep hitting that. Um, what's magical about two percent? And
Speaker 1: why is it off the table that you would want
Speaker 1: to change that number? Yeah, I didn't agree with that assessment.
Speaker 1: I worry that, UM, you know, if you if you
Speaker 1: choose a lower inflation objective, that conservative central bankers are
Speaker 1: always going to be a little bit nervous about going
Speaker 1: above their inflation objective. I think the real issue and
Speaker 1: that we have is UH UM stating very clearly what
Speaker 1: we mean by symmetric and stating that you're comfortable with
Speaker 1: inflation half a point above your objective. If we had
Speaker 1: lowered the objective to one and a half, for all
Speaker 1: I know, we'd be down at one and a quarter,
Speaker 1: and so I don't really think that's a great idea.
Speaker 1: It also wouldn't give us enough capacity to cut rates.
Speaker 1: One and a half was reasonable discussion back in the
Speaker 1: mid two thousands when productivity was so much stronger, real
Speaker 1: interest rates were higher, and the threat of the zero
Speaker 1: lower bound was not really what it is now. But currently,
Speaker 1: with lower trend growth rates, lower labor force growth expected UH,
Speaker 1: and productivity growth, I think that would you know, we
Speaker 1: need to defend our two percent symmetric inflation objective very strongly.
Speaker 1: We mentioned capex slowing down. Do you see any evidence
Speaker 1: that productivity is picking up other than cyclically? And will
Speaker 1: or will? I mean, we've certainly seen stronger productivity growth
Speaker 1: in the first quarter and last year it was stronger
Speaker 1: than it has been UM. I think you're right to
Speaker 1: point out that it's been cyclical, and I think that
Speaker 1: if you look at us sufficiently medium term and longer
Speaker 1: term perspective, it's far more likely. UM. I'd love to
Speaker 1: see stronger productivity growth, there's no doubt about it, and
Speaker 1: more innovation would be helpful for that, but it's got
Speaker 1: to hit business practices, it's got to hit the factory floor,
Speaker 1: it's got to be integrated into all of the offices
Speaker 1: in a way that leads to higher productivity. And there
Speaker 1: are a lot of disruptive technologies coming about that get
Speaker 1: in the way of that adoption for for everything, and so, UM,
Speaker 1: I'm kind of with John Fernal and others where I
Speaker 1: think that productivity going forward it's gonna be stronger than
Speaker 1: seventy three to nine five, but it's not going to
Speaker 1: be it's unlikely to be as strong as ninety five
Speaker 1: to two thousand five. And so I'm looking for about
Speaker 1: one and a quarter percent productivity combined with half a
Speaker 1: percent labor growth over the medium term structural sustainable. That's
Speaker 1: one of three quarters percent trend growth. We need to
Speaker 1: make sure that we've got the accommodated, the appropriate policy
Speaker 1: in place so that we can achieve that you have now, Um,
Speaker 1: you know, I've been optimistic that we did on the
Speaker 1: basis of the most recent data and the fact that
Speaker 1: we think that we're on the low end of the
Speaker 1: neutral rate. But with all the uncertainties coming about, and
Speaker 1: you know, new data We're gonna have to take a
Speaker 1: look at that, all right, Charlie Evans will watch for
Speaker 1: what you do at the next time. Thanks for joining
Speaker 1: us today. I'm Bloomberg Radio and Television worldwide. We'll send
Speaker 1: it back to you. Mcal McKee, thank you so much.
Speaker 1: What a tour to force. Michael McKee with two very
Speaker 1: different interviews with two very different presidents, Camplain of Dallas
Speaker 1: and then Charles Evans, truly one of a great monetary theorist,
Speaker 1: Evans of Chicago, with a more PhD like I guess
Speaker 1: I think Mr Kepel would say, yeah, fancier economic analysis.
Speaker 1: It is a perfect time to speak to a guy
Speaker 1: with a big fancy title executive editor Economics Holding Court
Speaker 1: out of London. Uh. Simon Kennedy, who of course led
Speaker 1: our our nascent Brexit coverage and put together all that
Speaker 1: team as well, but far more important Simon Kennedy of
Speaker 1: a few years back, a younger Simon Kennedy working in
Speaker 1: Washington saw during the financial crisis where institutions have to
Speaker 1: catch up and institutions adjust. Simon, I want to go
Speaker 1: back to a moment you and I shared at the St.
Speaker 1: Regis Hotel a million years ago, with John snow Treasury Secretary,
Speaker 1: where he adjusted with a card soil or appendix to
Speaker 1: whatever the blah blah blah statement was. Are we near
Speaker 1: a point within all of our economic reporting where elites
Speaker 1: and institutions are going to have to radically adjust? And
Speaker 1: will we see that from the Fed? Um? Well, we
Speaker 1: we saw some scientists that they're open to it. They
Speaker 1: in some ways of talking with Carna earlier economists and
Speaker 1: cast money. This is just what Jerne Pals from the
Speaker 1: FED suggested was a statement of what the said, does
Speaker 1: you know it monsitors things and it ad just as
Speaker 1: as as needed. But I think in the past you've
Speaker 1: had some criticism of your own powers fect chairman for
Speaker 1: his communications with the market, maybe appearing a little tone
Speaker 1: deaf from time to time. Uh, And so I think
Speaker 1: from the boxic point of view, it was a welcome
Speaker 1: thing that he at least acknowledged the debate that's going
Speaker 1: on on Wall Street, and and even if he didn't
Speaker 1: say that the rate comes coming here, at least said
Speaker 1: you were aware of the we're aware of the debate.
Speaker 1: And perhaps the risk had been if he'd just stood
Speaker 1: up and talked about out the monetary policy framework for
Speaker 1: the long term, which obviously the theme of that conference. Um,
Speaker 1: the markets would have fallen out of bed. So I
Speaker 1: think he's the center of gravity. As as as we
Speaker 1: report today, central garrity has moved towards the cut. Is
Speaker 1: it there? Yeah, it doesn't look like it. Um. Is
Speaker 1: the feed aware that the debates going on? Absolutely? The
Speaker 1: Jazz report is tomorrow, excuse me, two days. But in
Speaker 1: between there is an ECB meeting and certainly we've heard
Speaker 1: Simon this morning from all that all of a sudden
Speaker 1: it's a very important ECB meeting. State from our team
Speaker 1: in Frankfort. Why Mr drag sire tomorrow is so important.
Speaker 1: So I think you've got a few few moving parts.
Speaker 1: You've got one that global backdrop that that they we're
Speaker 1: talking about, that Pal's talking about the trade war and
Speaker 1: the light and there's a chance that Europe actually ends
Speaker 1: up the loser both ways. You know, the expert powerhouse
Speaker 1: that Germany suffers with a trade war. If there's the
Speaker 1: US China deal, um to create a kind of a
Speaker 1: trading block within those two powerhouses, than the neural gets
Speaker 1: squeezed out either way. So there's a global picture. Um.
Speaker 1: There's also stents that like the FED, the ECB thought
Speaker 1: it was was on the way out, had had obviously
Speaker 1: stopped que um and was looking to raise rates even
Speaker 1: even at some point a year now pushed that into
Speaker 1: the future. UM. And so you've got to what they're
Speaker 1: gonna do tomorrow is some bad new bank loans that
Speaker 1: they previously had hoped not to do. So they're going
Speaker 1: to release these bank loans to two banks, or at
Speaker 1: least detail the framework or how they'll do it. Um.
Speaker 1: There's obviously pressure on them to be very generous on
Speaker 1: the terms their attack. But now yet again the ECB
Speaker 1: is now back into a debate about there whether it
Speaker 1: can do more stimulus. UM. Story on the Bloombow terminal
Speaker 1: to day about what those options could possibly be a
Speaker 1: couple of things. On that one, there's not much room
Speaker 1: for the ECB two cart Remember when we're talking about
Speaker 1: FED lacking ammunition. The FED height the FED created a
Speaker 1: little bit of a buffer between itself and zero. The
Speaker 1: e CP doesn't have that buffer in ever got to
Speaker 1: hike UM even last year when the economy was doing okay.
Speaker 1: So it's got less room to um uh to uh
Speaker 1: well come to the rescue. It need be and thirdly,
Speaker 1: you've got the sense that Mario Druggi leaves UM the
Speaker 1: ECB in October. He's he's done, he's term limited, he's out. Um.
Speaker 1: You know, it could be that he tries to hum
Speaker 1: as a city group just today, it could it could
Speaker 1: be that he tries to overcome that lame duck status
Speaker 1: um that he risked having by actually going going harder
Speaker 1: doing it now, maybe doing a favor for to whoever exactly.
Speaker 1: And and also what's changing. We saw this this morning
Speaker 1: in a blur of headlines, folks. I really can't convey
Speaker 1: from our London studios the global sense of news flows extraordinary. Mean, really,
Speaker 1: all we haven't seen, maybe in the last twelve hours
Speaker 1: is a Chinese say something. But Simon Kennedy, there was
Speaker 1: Italy finally chastised by the European Commission. How does the
Speaker 1: ECB fold into the arch debate between mean, the Germanic
Speaker 1: austerity crew in an Italy desperately trying to deal with
Speaker 1: one currency and no combined fiscal policy. Well they should
Speaker 1: be has done quite a bit for Italy in the past,
Speaker 1: obviously with its contrib easing. But the messages are staying
Speaker 1: that countries have to get there are the debts in
Speaker 1: order the death. It's not it's interesting in that the
Speaker 1: European Commission is that is trustising Italy. It's probial trustis
Speaker 1: in France exactly. Debt metrics are not not opticity great either.
Speaker 1: And then it comes back to the plane facts and
Speaker 1: this will obviously inform the CP appointment. The euro is
Speaker 1: a is a political construct and um and and and
Speaker 1: making the economy kind of work within that place construct
Speaker 1: is that is the challenge of the times for for
Speaker 1: European policymakers. The same in Kennedy and Shortners, thank you
Speaker 1: so much, executive or running all of our economic coverage worldwide,
Speaker 1: I'm gonna turn to the experts time when it comes
Speaker 1: to economic theory. And she didn't. Unfortunately, you know, an
Speaker 1: expert just darkened the door here of our Bloomberg and actor,
Speaker 1: Elena Shulietteva Bloomberg Economic senior US economist. So, Elena, let's
Speaker 1: just go back to yesterday. What did you take away
Speaker 1: from Chairman Pal's comments? Not as much as the market
Speaker 1: seem to have taken from it. So I think J.
Speaker 1: Powell just used a simple boilerplate language when he talked
Speaker 1: about how AFMC will react to slowing in economic growth.
Speaker 1: So obviously they're watching and monitoring what is happening in
Speaker 1: the economy with respect to tariffs and otherwise, he did not,
Speaker 1: in our of you, signal any um biased towards uh
Speaker 1: the rate move. I don't think not yet. At least
Speaker 1: it's interesting because the market clearly is ahead of where
Speaker 1: the Fed is. The market is you know, pricing in
Speaker 1: you know, a couple of discounts, maybe even you know,
Speaker 1: a rate cut, maybe even this summer. Um is the
Speaker 1: market too far ahead of itself, do you think? I
Speaker 1: think so, although the data seemed to be starting to
Speaker 1: signal that things are actually filtering into the real economic activities.
Speaker 1: So the Ladies da DP print this morning actually was
Speaker 1: quite shocking, not that much the extent of the drop
Speaker 1: in the hiring pace because it comes on the back
Speaker 1: of a very strong reading, but rather than the breadths
Speaker 1: of of trouble in in in terms of hiring. So
Speaker 1: you saw manufacturing payrolls continue to be weak. You see
Speaker 1: some tangential services industries starting to get a hit from
Speaker 1: trade tensions. If you look at trade and transportation industries,
Speaker 1: that is slowing as well, so that that is telling
Speaker 1: us that all this trade judice are starting to filter
Speaker 1: into the mystic real economy. So, Lena, do you think
Speaker 1: any of them it's interially when you think about that.
Speaker 1: I guess on the jobs number today, my question is,
Speaker 1: is a job's number like that again well below were expectations.
Speaker 1: Where is that consistent with an economy that's slowing to
Speaker 1: a two and two and a half percent kind of rate.
Speaker 1: Today's number clearly over states the trundlining weakness. I think
Speaker 1: you have to look at the three months moving average,
Speaker 1: for example, but that has slowed quite considerably, so in February.
Speaker 1: If you look at the numbers in February and now,
Speaker 1: it has slowed by about a hundred thousand jobs, so
Speaker 1: that is quite significant. And we actually revised that. Or
Speaker 1: reading for payrolls uh this morning? What do you do?
Speaker 1: Where'd you go one sixty down from two or five? Okay,
Speaker 1: we saw Chris wrap you over the MUFG go from
Speaker 1: two hundred down to and twenty. Everybody adjusting numbers and
Speaker 1: they're allowed to do that. Helena, I want to get
Speaker 1: theoretical on you and that. Vice Chairman Clarata, of course
Speaker 1: acclaimed with Clarata Golly Girdler, which is immense mathewness that
Speaker 1: to be honest with the jet leg Helena, I'm too
Speaker 1: tired to go through. But John Cochrane, who's always controversial
Speaker 1: and always smart and interesting in Chicago pushing against everybody
Speaker 1: out there, really emphasizes in a a classroom note that
Speaker 1: the problem with all these theories is they don't assume
Speaker 1: a policy shock, and they don't assume the serial nature
Speaker 1: of many many policy shocks. By definition, right now we're
Speaker 1: going through extraordinary policy shocks. How do people like you
Speaker 1: do their job given policy shock? Well, it's it's absolutely
Speaker 1: it's very difficult because uh, you know, I hate to
Speaker 1: say that that, but this time is different. So you
Speaker 1: made me say that. Um, yes, so, But I think
Speaker 1: you know, what we see right now is really a
Speaker 1: mixture of some unusual circumstances but at the same time
Speaker 1: some really familiar trends. So you do see wage acceleration,
Speaker 1: and we will probably see that in the Friday's jobs report,
Speaker 1: and we do see the unemployment rate is low, and
Speaker 1: that is what's starting to push wages higher. So it's
Speaker 1: probably not as clear given all the policy things that
Speaker 1: are happening around us but the key cyclical momentum, I
Speaker 1: think is still there and we just need to look
Speaker 1: through all these uncertainties and uh, you know, market jitus
Speaker 1: and whatever, give us an update on yquill ce, pussy, pus,
Speaker 1: je pus and X. On the I part, where's investment
Speaker 1: right now? Is a confidence so evaporated that that we're
Speaker 1: going to use the Charles Evans mentioned to Michael McKee
Speaker 1: today that we really don't know what the confidences of
Speaker 1: businesses and their investment may drop. I think that's the
Speaker 1: weakest link in the economy. And unfortunately, all growth will
Speaker 1: be concentrated in the consumer sector again, which makes it
Speaker 1: vulnerable to any major shock. So you keep all your
Speaker 1: eggs in month basket and that's not ideal. You know
Speaker 1: from CFA books, you learn diversification is you know, matters,
Speaker 1: and it's still applying to economic growth as well. Investment
Speaker 1: will continue to be non existent, I think, at least
Speaker 1: in the near to him, actually, in that respect, Thomas
Speaker 1: Barking speaking a couple of weeks ago, he he made
Speaker 1: a really great speech and he basically said, we can
Speaker 1: talk ourselves into a recession if we continue, uh and
Speaker 1: at that pace, and actually business sentiment, business investment really matters. Well,
Speaker 1: that's what exactly where I was going to go next.
Speaker 1: I've been hearing the recession word in much more frequently
Speaker 1: over the last several weeks and a half in the past.
Speaker 1: Is that's something that's in the forecast of Boomer economics. No,
Speaker 1: we're not there yet, and that is exactly for the
Speaker 1: reason I just mentioned that consumers are still in a
Speaker 1: good shape. So you look at consumer sentiment, you look
Speaker 1: at wages, you look at jobs, even like given today's numbers,
Speaker 1: you know, the momentum is still above the trend pace.
Speaker 1: So that means we will continue to see unemployment rate
Speaker 1: falling from where we are right now. In fact, we
Speaker 1: already at the level that the Fed penciled in for
Speaker 1: the end of the year in terms of the unemployment rate,
Speaker 1: so they will have to revise it down again when
Speaker 1: they meet UH this month. So I think the consumers
Speaker 1: are doing still quite well, so that means growth in
Speaker 1: the economy we will continue to be abuff potential, which
Speaker 1: means better labor market, better economy. Still. So, Elena, thank
Speaker 1: you so much at table with us with Bloomberg Economics,
Speaker 1: and I think it's been pretty cool Paul to go
Speaker 1: from Kaplan to Evans to Sherlott Tabor, I think it's
Speaker 1: just to go certain certain walk to it. Thanks for
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to
Speaker 1: interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.
Speaker 1: I'm on Twitter at Tom Keane before the podcast. You
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio