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Speaker 1: This episode of Bloomberg Benchmark is sponsored by HSBC, winner

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Speaker 1: of Trade Finance America's Company Award for Best Supply Chain

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Speaker 1: Finance Bank in North America HSBC. Where ambition connects with opportunity.

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Speaker 1: The central banks are not the answer. After all these

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Speaker 1: years and all of they've done, they still can't fix

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Speaker 1: the global economy. Now we're in impotence territory. Hi, and

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Speaker 1: welcome back to Bloomberg Benchmark, a podcast about the global economy.

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Speaker 1: It's Thursday, April fourteen. I'm Daniel Moss, Executive editor for

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Speaker 1: Global Economics at Bloomberg News. My co hosts Archieto and

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Speaker 1: Tory still will are out this week, so it's just me.

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Speaker 1: We Most of us familiar with the concept of outsourcing,

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Speaker 1: the idea that companies and governments find it cheaper or

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Speaker 1: more efficient to have outside groups hand all things like

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Speaker 1: customers support, legal services, programming, bill collection, data entry, and

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Speaker 1: so on. And yes, sometimes this takes place overseas a

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Speaker 1: common example of the ubiquitous call centers. Whatever you want

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Speaker 1: to check your bank, balanced, book a hotel, or inquire

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Speaker 1: about something on your cell phone bill. But outsourcing monetary

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Speaker 1: policy that seems to take it to a whole other level.

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Speaker 1: Get in a way, that's what the Federal Reserve has done.

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Speaker 1: Chair Janet Yellen effectively said as much last week when

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Speaker 1: she told an audience in New York that the FED

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Speaker 1: dialed back its projections for how many times it will

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Speaker 1: increase interest rates in response to investors dialing back. First,

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Speaker 1: our colleague Rich Miller listened to her speech, picked up

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Speaker 1: on the theme, and wrote about it for Bloomberg News.

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Speaker 1: Rich has been following the US economy and the FED

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Speaker 1: for more than three decades. He joins us from Washington, Rich,

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Speaker 1: great to have you. Thanks for having me, Dan. Well,

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Speaker 1: the textbooks tell us that markets are, in theory supposed

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Speaker 1: to respond to what you make is saying. Do this

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Speaker 1: seems like the world has been turned upside down. What's

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Speaker 1: going on? Well, first of all, I just want to say,

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Speaker 1: of course, Janet Yellen didn't say in her speech that

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Speaker 1: the Fed is outsourcing monetary policy, and Feed officials would

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Speaker 1: undoubtedly object to that. But but what she laid out

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Speaker 1: in the speech, sure as heck, sounded like that. What

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Speaker 1: happened was the markets got a little bit scared about

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Speaker 1: global growth in China, so they adjusted down the amount

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Speaker 1: of interest rate increases they expected from the Fed. In response,

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Speaker 1: long term interest rates went down. Those long term interest

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Speaker 1: rates lower long term interest rates provided the economy with

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Speaker 1: some stimulus and helped keep the economy on track in

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Speaker 1: the face of this jitters about global growth. So Janet

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Speaker 1: Yellen said, this is great. This is like an automatic stabilizer.

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Speaker 1: I mean, it's sort of sort of like an ideal

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Speaker 1: marriage where your partner sort of knows you so well

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Speaker 1: that you don't even have to ask for the present

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Speaker 1: for your birthday. She or he gets it before you

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Speaker 1: even ask. Well, we know the FED keeps a close

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Speaker 1: eye on markets. They said that that's no secret. But

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Speaker 1: this does seem to elevate it to a new level. Yes,

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Speaker 1: yes it does. I think there was a little bit

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Speaker 1: of an ulterior motive here. The FED has gotten slammed

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Speaker 1: on Capitol Hill by a Republican law may because and

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Speaker 1: by some Republican leaning leaning economists for following a policy

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Speaker 1: that's too discretionary two seat of the pants, and these people,

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Speaker 1: these lawmakers claim that investors don't understand what the Fed's

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Speaker 1: gonna do and that hurts the economy. Yelling was basically said,

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Speaker 1: was trying to say yes, the markets do understand what

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Speaker 1: we're gonna do, and in fact they had just before

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Speaker 1: we adjust. So I think there was a little bit

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Speaker 1: of a political backstory here that's going on the way

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Speaker 1: she described the relationship between the two of them. What

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Speaker 1: are the risks of this approach? Uh, Well, the risk

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Speaker 1: are uh what mis misunderstandings and upsets like in a marriage, right,

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Speaker 1: we're you know, hearken back to what was at the

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Speaker 1: middle of two thousand and fourteen. Investors work evinced that

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Speaker 1: the FED was going to have what was called quantitative

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Speaker 1: easing forever. It was going to keep on buying bonds

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Speaker 1: in the market and keep on supporting the economy. Then

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Speaker 1: Chairman Ben Bernanky said, well, maybe we're gonna end it,

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Speaker 1: maybe we're gonna taper it, and then the markets through

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Speaker 1: a hissy fit. They had a tantrum, Right, So that's

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Speaker 1: that's the risks that there's misunderstandings that could then lead

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Speaker 1: to blow ups later that could hurt the economy. It

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Speaker 1: really makes me wonder again to use the marriage analogy,

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Speaker 1: who's in charge here? Who right right now? Yeah? Well,

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Speaker 1: I guess in some marriages, uh, someone is clearly in

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Speaker 1: charge and and someone isn't. But I think in most

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Speaker 1: it's kind of a constant, kind of at least in mind,

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Speaker 1: constant kind of jockeying back and forth, trying hopefully to

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Speaker 1: get to a common goal, which in this case is

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Speaker 1: you know, a well functioning economy. I mean, one of

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Speaker 1: the problems is is that the goals don't always fully align. Usually,

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Speaker 1: you know, investors want are well functioning, growing economy, but

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Speaker 1: sometimes they were more interested in, you know, the fact

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Speaker 1: that their investments are doing well a bad But I

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Speaker 1: think it's never clear. I think there's a constant learning

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Speaker 1: process back and forth between the markets and the economy,

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Speaker 1: just like in a marriage. Just to use another analogy,

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Speaker 1: isn't this a little bit like giving a drug addict

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Speaker 1: more heroin? I mean, if you empower the markets to

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Speaker 1: that extent and publicly say you did it after markets

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Speaker 1: did it, doesn't this just risk emboldening investors and they're

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Speaker 1: going to want more and more and more and more

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Speaker 1: and more, and the FED finds itself trapped. I think

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Speaker 1: there is a risk for that, and then eventually the

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Speaker 1: FED will have to disappoint the markets, and then you

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Speaker 1: get this kind of upset like we had with the

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Speaker 1: taper tantrum. So I think there is a definite risk,

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Speaker 1: and I guess it's up to the FED to try

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Speaker 1: to communicate clearly with the markets what when it thinks

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Speaker 1: they're they're going too far. It also, I mean, we've

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Speaker 1: gotten used to seeing the markets want more and more stimulus.

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Speaker 1: But it is kind of interesting when you think about

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Speaker 1: the initial years after the Great Recession. If you look

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Speaker 1: at the markets back then, they were always expecting the

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Speaker 1: FED to raise interest rates like a year out, but

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Speaker 1: the FED didn't have any intention to do that. So

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Speaker 1: the FED eventually had to go out and explicitly say, look,

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Speaker 1: we aren't going to raise interest rates until like the

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Speaker 1: middle of two thousand fifteen. Don't worry boys and girls.

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Speaker 1: So you know, there is risks, but that's just the

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Speaker 1: way things work. And what is the risk that Fed

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Speaker 1: officials misread the message that markets are conveying. I mean,

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Speaker 1: I think it's great obviously, Um I guess, I guess

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Speaker 1: trying to stick with this marriage analogy, you know, one

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Speaker 1: of the partners is kind of someone who's whose moods

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Speaker 1: flips from elation to dejection, and that's the markets right

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Speaker 1: as as it flips. As investors flipped from greed to fear.

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Speaker 1: Then you have the other partner who's maybe stolid and

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Speaker 1: looks at models and rarely changes his or her mind.

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Speaker 1: And sometimes the one who's, you know, saying you know

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Speaker 1: the end is near is right. Oftentimes the one who's

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Speaker 1: saying the end is in he is not right. But

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Speaker 1: sometimes the one who says don't worry, be happy or

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Speaker 1: don't worry things are copasetic is wrong. So you know

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Speaker 1: why they have, you know, a huge they fed have

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Speaker 1: a huge bunch of people in New York sort of

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Speaker 1: in constant contact with the markets, trying to figure out

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Speaker 1: what the message of the markets are trying then to say, well,

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Speaker 1: do we agree with what the markets are worried about

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Speaker 1: or what the markets think of doing, or do we not? Well,

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Speaker 1: I hope this marriage doesn't end in an expensive custody trial. Definitely, Definitely,

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Speaker 1: it's been great to have your perspective. Keep up the

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Speaker 1: good work. Thanks, thanks, thanks a lot for inviting me.

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Speaker 1: Enjoyed it, and now a would from our sponsor. This

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Speaker 1: episode of Bloomberg Benchmark is sponsored by HSBC, with over

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Speaker 1: eight thousand global relationship managers on the ground in over

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Speaker 1: sixty countries. HSBC makes your global ambition their local business HSBC. Well,

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Speaker 1: the issues that Rich outlined touch on things you know,

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Speaker 1: we wrestle with daily here at Bloomberg News and helping

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Speaker 1: us flesh it out and maybe even have it out.

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Speaker 1: Two of my colleagues, Bob Burgess and Madeline Limp. Bob

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Speaker 1: is executive editor for Markets and Madeline is executive editor

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Speaker 1: for Bloomberg First World, tell us a little bit about

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Speaker 1: what that actually is. Hi, Dan, thank you for the introduction,

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Speaker 1: and Bloomberg First Wood is a very short bullet point

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Speaker 1: service about markets, issues and news that's of interest to

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Speaker 1: markets in a very quick and condensed form. Well, Bob,

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Speaker 1: you've got to feel vindicated by this Markets of one, right.

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Speaker 1: I'll never be able to mix it up with you

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Speaker 1: in quite the same way in our morning and afternoon

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Speaker 1: news meetings. Rich. I think I brought up some very

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Speaker 1: interesting topics. But the one thing Rich didn't talk about

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Speaker 1: was markets are always forward looking. Okay, markets are not

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Speaker 1: necessarily reactive to central banks, but they're more pricing in

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Speaker 1: what is going to happen in the future. We're it's

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Speaker 1: going to be the cost of money six months out,

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Speaker 1: a year out, and so what we've seen over the

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Speaker 1: past three years is that the markets have been continually

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Speaker 1: more right on the outlook for for the economy and

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Speaker 1: um the market has generally been more pessimistic on the

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Speaker 1: pace of growth, the FED has been more optimistic. And

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Speaker 1: what we've seen over the past twelve to eighteen months,

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Speaker 1: maybe even two years, is that the Fed's outlook in

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Speaker 1: the economy has continually come down to the markets view

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Speaker 1: of the economy. And yet markets will move in response

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Speaker 1: to specific central bank events on any given day, often

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Speaker 1: the way they should. You're drawing a distinction between the

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Speaker 1: longer term and the short term. Markets will always have

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Speaker 1: immediate reaction to whoever central bank does on a certain day,

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Speaker 1: but the markets are going to be pricing in what

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Speaker 1: is going to be, what they think is going to be,

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Speaker 1: or what the market things is going to be happening

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Speaker 1: four months out to a year out. And one of

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Speaker 1: the big debates that's going on in markets these days,

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Speaker 1: and you and I and Madeline have have talked a

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Speaker 1: lot about this is just how effective is central bank

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Speaker 1: you know, policy these days? As you and I have

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Speaker 1: debated in Madeline has Uh, We've all talked about a

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Speaker 1: lot in recent weeks is is sort of the effectiveness

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Speaker 1: of of global central banks and policies. We talked a

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Speaker 1: lot about the diminishing returns as central banks are getting

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Speaker 1: from uh, this era of lower no interest rates. Uh.

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Speaker 1: Kid Jokes, who's the chief market strategist at Society Generally,

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Speaker 1: actually had a very good no doubt talking about how

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Speaker 1: after the trillions of dollars of money that has been

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Speaker 1: pumped into the global economy by central banks, here we

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Speaker 1: are in two thousand sixteen, able two thousand sixteen, and

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Speaker 1: all we're seeing is very low growth. This is your

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Speaker 1: impotent point exactly. We're going to get to that in

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Speaker 1: just a second, because I've got something for you all that.

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Speaker 1: But Madeline, and your experience other markets always right, and

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Speaker 1: how do you determine what they're actually saying? You can

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Speaker 1: see what a phenomenal logical market level is, but how

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Speaker 1: do you know that the interpretation is right? Well? I

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Speaker 1: think it all depends on your perspective, right, And always

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Speaker 1: remember my short position is your long position. If you

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Speaker 1: believe something is going up, you've got to sell it

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Speaker 1: to somebody. So it's it's a given take situation. But

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Speaker 1: I do think that more broadly in a market based

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Speaker 1: capitalist system, as we have for aessential bank, not to

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Speaker 1: pay attention to the markets and what the markets are saying.

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Speaker 1: These are ultimately smart people who are doing their analysis

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Speaker 1: and putting their money on the line, or their investors

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Speaker 1: money on the line. That you can't really ignore that.

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Speaker 1: And I would sort of warn that you know, where

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Speaker 1: not talking about the stock market here and it's various

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Speaker 1: ups and downs. Nor are we talking about the FX

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Speaker 1: markets another completely different story. We are talking about the

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Speaker 1: bond market here, which can be volatile admittedly, but if

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Speaker 1: you look at the ten year yield since December, it

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Speaker 1: has been more or less on a downtrend and two

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Speaker 1: percent is the level that is really hard for the

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Speaker 1: I think that tells you something about what investors feel

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Speaker 1: is the outlook for growth. But for both of you

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Speaker 1: in your jobs, one of the things I find frustrating

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Speaker 1: out what actually is the central point? Because it does

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Speaker 1: feel like one day market participants are saying that there

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Speaker 1: needs to do this and they're hopeless at that. Then

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Speaker 1: the next day they're saying precisely the opposite how do

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Speaker 1: you sort out, to quote Nate Silver, the signal from

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Speaker 1: the noise. As Medal has said, there's always going to

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Speaker 1: be a buyer and a seller, and you're always going

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Speaker 1: to have the ups and downs of the markets. But

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Speaker 1: what we need to do every day is is take

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Speaker 1: a step back, take a look at the big picture

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Speaker 1: and try to get a sense of what does the

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Speaker 1: bigger picture or message that the markets are are are sending.

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Speaker 1: And I think that in these days it's clear that

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Speaker 1: the markets are signaling that the outlook for the global

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Speaker 1: economy is is pretty anemic. I mean, as Madeline said,

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Speaker 1: he's talking about the tenure yield. Globally, bon yields on

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Speaker 1: average are down one to one point three percent, a

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Speaker 1: record low. Does anemic often get conflated, mistakenly with disastrous

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Speaker 1: If we go back to January, in the first half

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Speaker 1: of February, the narrative coming not just from the markets,

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Speaker 1: but from some family serious economists as well, you could

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Speaker 1: be forgiven for thinking the apocalypse was with us, and

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Speaker 1: now here we are. The macro economic data hasn't changed dramatically,

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Speaker 1: certainly within the US, China hasn't fallen apart, and the

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Speaker 1: Eurozone is like, you know, hanging in there. Well, what

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Speaker 1: I would say is you're right. I mean, at the

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Speaker 1: beginning of the year, there was a number of different

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Speaker 1: events that happened that caused a lot of terminal markets.

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Speaker 1: You had China weakening its its currency, raising concerns about

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Speaker 1: a currency war. Oil and commodities continued to collapse um

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Speaker 1: raising concern about deflation, global recession, defaults by energy companies

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Speaker 1: that have raised a hundreds of billions of dollars in

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Speaker 1: recent years. You had all these events coming together at

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Speaker 1: the same time. You had the Bank of Japan going

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Speaker 1: into negative interest rates and the European Central Bank going

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Speaker 1: further into a negative interest rates, and the message that

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Speaker 1: was sending the markets was the central banks are not

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Speaker 1: the answer. After all these years and all of they've done,

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Speaker 1: they still can't fix the global economy. Now we're in

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Speaker 1: impotence territory for one of a better time. Right. But

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Speaker 1: you know, so I think that you know, taking a

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Speaker 1: look at all that the first couple of months of

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Speaker 1: the year, it was very turbulent markets and markets were, um,

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Speaker 1: we're reacting to that. They weren't just reacting to to

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Speaker 1: what central banks were doing. March was a tremendous comeback.

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Speaker 1: I think in the SMP we were down ten percent

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Speaker 1: through mid February and then the SMP five recouped all

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Speaker 1: that through the end of March. It was the biggest

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Speaker 1: turnaround in history for the markets. So that makes me

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Speaker 1: wonder who was right in January February or were they

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Speaker 1: both right? They were both right. The markets are not

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Speaker 1: signaling now that it's all clear, while back in February

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Speaker 1: and January. In February, there's a lot of concern about

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Speaker 1: as I said, deflation, global recession that's come out of

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Speaker 1: the market, but the market is not signaling that it's

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Speaker 1: all clear, right. And I would just add to that

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Speaker 1: with Bob says, is that you have to just be

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Speaker 1: mindful of when when you talk about the market, what

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Speaker 1: your how you look at things. I really do think

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Speaker 1: the perspective rely matters if you take what the market

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Speaker 1: is pricing in now for it, like Bob says, in

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Speaker 1: the next years ahead, you know, rather than looking at

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Speaker 1: the noise, you have to kind of look at the

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Speaker 1: long term and then sort of from there. And it

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Speaker 1: wouldn't be tenable to have the market pricing in you know,

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Speaker 1: very low likelihood of maybe even two rate tags this

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Speaker 1: year and the Fed still maintaining no, we're going to

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Speaker 1: raise rates for You can't have that dicotomy go on

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Speaker 1: for too long. At some point, something has to converge.

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Speaker 1: And I think for the FED to look at the model,

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Speaker 1: and you know, the FED looks at it's economic models,

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Speaker 1: the market looks at their economic models, and I think

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Speaker 1: taking it together, it's just using all the data that

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Speaker 1: you can to formulate the best policy that you can

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Speaker 1: come up with. I think right or wrong is a

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Speaker 1: hard question to answer, because ultimately, if the policy is

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Speaker 1: set right, then yes, you should see growth pick up.

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Speaker 1: Right come the middle of the year, the picture looks different.

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Speaker 1: You're trying to create the conditions now that foster growth

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Speaker 1: in the future, and I think that's a really hard

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Speaker 1: balance to achieve and we shouldn't be trying to parse

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Speaker 1: too much out of the day to day moves, and

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Speaker 1: I would really warn against looking too close listens at

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Speaker 1: that point. But but the other thing, you know is

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Speaker 1: I think what happened at the beginning of the year

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Speaker 1: is people were setting up for the FED. You know,

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Speaker 1: the FED was tightening policy. They started in December, and

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Speaker 1: people were trying to set up for that, and there

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Speaker 1: was a lot of volatility around and I think that

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Speaker 1: added to the whole concern of what was going on,

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Speaker 1: and some big names thought that they would have to

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Speaker 1: revert to queue and that they would take interest rates

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Speaker 1: off the table together. Now they've scaled back their projections,

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Speaker 1: as Rich was just saying, but they haven't taken them

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Speaker 1: off the table, and they certainly haven't eased Let's get

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Speaker 1: back to the eye word body. I can buy the

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Speaker 1: argument that the central bank efforts now suffering diminishing returns,

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Speaker 1: but there still is a return there. Are you sure

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Speaker 1: it's impotence. I think it depends on how you look

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Speaker 1: at it from the market perspective. If you're looking about

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Speaker 1: at strictly what central banks are doing to asset prices,

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Speaker 1: it's probably not evident because there's still the e c B,

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Speaker 1: the b o J, they're still buying bonds, um and

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Speaker 1: other financial assets. The federals are even though it's not

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Speaker 1: creating money to buy bonds, it's reinvesting the proceeds from

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Speaker 1: maturing bonds into new security, so that money is is

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Speaker 1: cycling back in. That's actually that's supporting the bond market.

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Speaker 1: There's no question about it. But when people start talking

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Speaker 1: about whether the central banks and the Fed are are

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Speaker 1: impotent or not, they are talking really about the transition

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Speaker 1: mechanism in the sense that is the wealth in the

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Speaker 1: financial markets that the central banks have created, is that

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Speaker 1: leaking into or helping the real economy, And in a

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Speaker 1: lot of ways they're saying that it's not helping the

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Speaker 1: real economy. Take a look at them the the Atlanta

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Speaker 1: Fed in its estimates of GDP for the first quarter,

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Speaker 1: I think it's down to below one percent now the

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Speaker 1: beginning of the year was supposed to be something between

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Speaker 1: two and a half to three so that I think

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Speaker 1: when the markets see that, sees that it tells them something.

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Speaker 1: To be fair to the Atlanta Fair, that is a

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Speaker 1: tracking estimate which does change week by week depending on

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Speaker 1: incoming data. And I just wanted to say that, well,

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Speaker 1: that is the crux of what the ECB is doing

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Speaker 1: to get away from the vetch just a little bit.

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Speaker 1: They're buying program of corporate bonds. What will really matter

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Speaker 1: is whether that trickles truth too small and medium sized companies,

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Speaker 1: and as we know in Europe, those are much less

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Speaker 1: dependent on the markets and do a lot more through

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Speaker 1: bank financings. Are any of the market participants that your

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Speaker 1: teams are talking to saying that the initial stimulus, and

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Speaker 1: by initial I mean say from late two thousand and

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Speaker 1: seven through two for arguments, say, are they saying those

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Speaker 1: were ineffective in staving off depression? There's no question about it.

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Speaker 1: But but that was two thousand, two thousand ten, two

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Speaker 1: thousand seven, two thousand and ten. We're now in two

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Speaker 1: thousand sixteen. It doesn't seem to be working as effectively

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Speaker 1: as it did then. So that's an argument for diminishing returns.

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Speaker 1: It is, but remember when when the FED begins to

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Speaker 1: stop reinvestment, that's going to be another big adjustment, particularly

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Speaker 1: for one market that never gets much mentioned, which is

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Speaker 1: the mortgage backed securities market. That is going to be

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Speaker 1: something to watch. Well, Madeline, you're responsible for first word.

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Speaker 1: That means for the last word. I do have to

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Speaker 1: come back to Bob by all means well he said

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Speaker 1: it as metal as said earlier. I mean, if you're

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Speaker 1: trying to answer the questions about whether markets are right

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Speaker 1: or wrong, there is no answer to that. The markets

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Speaker 1: are going to is going to vacillate from day to

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Speaker 1: day on the incoming data. But if you take a

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Speaker 1: step back, take a look at the markets as a whole,

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Speaker 1: the message that they're signaling is that central banks can't

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Speaker 1: do it alone. And meanwhile, every Fed official says, hey,

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Speaker 1: but the April meeting is still alive. Meeting or Bob

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Speaker 1: and Madeline, thanks for joy and us. We're going to

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Speaker 1: definitely have you back, and thank you to all of

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Speaker 1: you for listening to Bloomberg Benchmark. We will be back

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Speaker 1: next week. Until then, you can find us on the

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Speaker 1: Bloomberg terminal and Bloomberg dot com, as well as iTunes,

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Speaker 1: pocket Cast, Stitcher and a few others. And while you're there,

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Speaker 1: take a minute to rate and review the show so

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Speaker 1: more listeners can find us and do let us know

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