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Speaker 1: This is Bloomberg surveillance. I think most experts would agree

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Speaker 1: that the world needs more pansionary fiscal policy. But I

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Speaker 1: think the MC is trying to tell us, hey, guys,

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Speaker 1: there is actually a good case to be made for

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Speaker 1: the economy recent full capacity and defol for US hitting

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Speaker 1: all doom mandating bakers don't like changing policy without preparing markets.

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Speaker 1: The fact that they had in the preparing markets for

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Speaker 1: a rate high to suggest that there will not be

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Speaker 1: one in June. Bloomberg Surveillance your link to the world

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Speaker 1: of economics, finance, and investment on Bloomberg Rady, Good morning everyone.

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Speaker 1: In the interview of the day, are Michael McKee with

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Speaker 1: Jeff Lacker. Look for that in thirty minutes Before that,

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Speaker 1: a primer on American monetary theory. Marvin good Friend joins us,

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Speaker 1: associated for years with the Richmond Fed and now Meltzer

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Speaker 1: professor at Carnegie Mellon University. Will speak with Professor good

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Speaker 1: Friend here just in a few moments. I'll let Michael

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Speaker 1: McKee lead off that important interview before his interview with

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Speaker 1: Jeff Lacker first, So with lots going on, let me

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Speaker 1: get this out of the way. The good friends at

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Speaker 1: Cone Resinnick helping us UH this morning. Bloomberg Surveillance has

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Speaker 1: always brought you by Kona Resnik. Accounting, tax advisory. Regulatory

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Speaker 1: changes can impact your business. See how the experts at

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Speaker 1: kone Resnick can help you navigate these complexities. Find out

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Speaker 1: more at cone Resnik uh dot com. Delicate headlines out

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Speaker 1: of the leadership of Egypt right now. They are speaking

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Speaker 1: in Cairo, and there is a confusion over the comments

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Speaker 1: of President holand earlier the president of France suggesting that

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Speaker 1: the egypt air plane crashed in the Mediterranean. Mediterranean Egypt

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Speaker 1: officials pulled back from that and they make clear that

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Speaker 1: this is not a crash yet because there's no evidence

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Speaker 1: of it. That is a nuance within this tragedy. But

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Speaker 1: that's being addressed right now to the Egyptian people by

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Speaker 1: Mr Fathi. Is the nation uh recoils from the Egypt

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Speaker 1: air crashing. This is north of Egypt and south of

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Speaker 1: Athens in uh the Mediterranean. There are speculations and rumors

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Speaker 1: about terrorism. I want to make clear there is no

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Speaker 1: official word in any way whatsoever about terrorism with this

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Speaker 1: playing out, this is clearly a developing story. With that said, Michael,

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Speaker 1: I think we need to frame our wonderful guests. Marvin

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Speaker 1: good friend UM working years ago after Richmond Fed and

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Speaker 1: has been really Michael vigilant about the new FED, the

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Speaker 1: modern FED and its ability to tuh to translate message. Well, Uh, indeed,

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Speaker 1: and uh Marvin comes from a tradition of the Richmond Fed,

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Speaker 1: more hawkish than some of the other regional Fed banks.

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Speaker 1: And you're part of the shadow open market committee that

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Speaker 1: wants to raise rates sooner rather than later, as Richmond

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Speaker 1: FED president Uh Jeffrey Lacker, whom we'll talk to in

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Speaker 1: a little bit. Marvin, what would be the justification for

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Speaker 1: higher rates right now? People say, Um, we've got unemployment down,

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Speaker 1: but we still can't get inflation higher. The FED has

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Speaker 1: been doing a lot, but there's just not a lot

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Speaker 1: of demand in the country yet, and we should keep

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Speaker 1: rates where they are. Well. Come and h Mike, thanks

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Speaker 1: for inviting me. I have to start out with my

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Speaker 1: with a little bit of a preamble before I give

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Speaker 1: you my justification because it's it's a little different and

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Speaker 1: um than straight raising rates scenario. It's based on a

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Speaker 1: long history of studying inflation scares and bond markets. I

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Speaker 1: noticed today a big story on bond markets. The main

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Speaker 1: problem I think the FED has, frankly, is not that

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Speaker 1: inflation is going to be a problem. It's a problem

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Speaker 1: with how to get the bond markets to be sensitive

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Speaker 1: to the FEDS certain raising of interest rates over the

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Speaker 1: next few years. In other words, the problem, in my view,

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Speaker 1: is not that inflation is a problem per se, but

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Speaker 1: there's a problem in exiting and making the bond markets

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Speaker 1: do in a smooth way. So I can go on

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Speaker 1: without in another minute and get to your point. If

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Speaker 1: you want otherwise, you can, you can, you can intervene.

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Speaker 1: We'll go ahead and explain what you mean by trying

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Speaker 1: to get the market to do what you want. Clearly

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Speaker 1: they haven't been able to right exactly exactly. So what

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Speaker 1: I think part of the problem stems from the fact

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Speaker 1: I think that the SET does not use the language

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Speaker 1: of the inflation target as strong as I think it should.

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Speaker 1: It should say, you know, we're worried about inflation, that's

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Speaker 1: our primary objective. Um the inflation is getting close to

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Speaker 1: the two percent target, we have a case for raising

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Speaker 1: rates at that point. I think they should lead with

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Speaker 1: that argument, and they haven't been so. Last year. What

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Speaker 1: happened is they waited until December to move rates up.

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Speaker 1: It looked like they were reluctant to do so. Then

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Speaker 1: they moved rates up in December and the market said, okay,

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Speaker 1: you guys are ready to do it. Then they stopped.

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Speaker 1: So what they have is a problem of the markets

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Speaker 1: being unable to decide how the set is thinking visavi

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Speaker 1: the proximity of the inflation rate to the inflation They've

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Speaker 1: got themselves in a box and that's where they are.

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Speaker 1: They stopped and start. Um. So here's the problem. If

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Speaker 1: inflation expectations begin to rise and then they raise rates,

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Speaker 1: they have a double whammy that knocks bond prices down.

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Speaker 1: They don't want to do that. Um. But so there's

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Speaker 1: a delicate business. And here's where I come out. UM.

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Speaker 1: I think you have to look back at past inflation

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Speaker 1: expectation situations. And I've done. I've been looking at inflation

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Speaker 1: scares my whole life. Uh, And I think you need

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Speaker 1: to ask yourself the question what has precipitated significant or

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Speaker 1: even large inflations moves in the past. It's always been

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Speaker 1: associated with the way I would put it, an inclination

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Speaker 1: on the part of the Fed to let inflation rise

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Speaker 1: either in the sixties because they thought it would lower unemployment,

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Speaker 1: or later in the eighties, in the seventies because in

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Speaker 1: the ghost stop period they were reluctant to raise rates

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Speaker 1: against because of the recession. But by the time we

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Speaker 1: got through the eighties and the vocal disinflation and the

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Speaker 1: Greenspan uh, you know, steady low inflation scenario, the last

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Speaker 1: inflation scaran bond market, we get into the two thousands.

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Speaker 1: In my view, the world already understands that the said

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Speaker 1: is not going to let inflation go up much. And

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Speaker 1: that's the world we're in. Full disclosure, folks, I've been

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Speaker 1: in a Professor good Friend's office and offspring had the

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Speaker 1: privilege of studying with Professor good Friend at Carnegie Mellon Marvin.

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Speaker 1: When you go into your office, straight ahead is your

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Speaker 1: Sydney Crosby poster of the Pittsburgh Penguins, And just to

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Speaker 1: the right of it is a magnificent bookshelf of of

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Speaker 1: of the history of of economics. Are we just confusing

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Speaker 1: our economic theory of a move from Keynesian nominal interest

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Speaker 1: rate reviewed a real interest rate review to this absolute

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Speaker 1: insanity we have now of negative interest rates? Is that

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Speaker 1: all that's really going on here. I think there's a

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Speaker 1: lot of confusion about how to interpret the transition from

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Speaker 1: the high inflation period of the old days to where

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Speaker 1: we are now. I think that there's a lot of

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Speaker 1: confusion because the so called rational expectation school, which emphasizes expectations,

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Speaker 1: has been proven right over the Keynesians in the sense

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Speaker 1: that we did we were able to to to prevent

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Speaker 1: inflation from going higher. But now I think people people

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Speaker 1: don't really the Keynsie especially, they don't really think in

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Speaker 1: terms of expect of credibility having been established for inflation.

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Speaker 1: So I think that the comparison for me is the

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Speaker 1: late nineteen nineties UM for where we are today. In

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Speaker 1: the early es, you know, inflation with six Greenspan worked

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Speaker 1: hard to get it down to three. We had the

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Speaker 1: last bond market inflation scare in n where bond markets

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Speaker 1: the long thirty year rate rose two percentage points. Since then,

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Speaker 1: the bond markets have been quiet, if anything, worried about deflation. UH.

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Speaker 1: And so I say said needs to have a sense

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Speaker 1: of what the public believes about its intentions, and the

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Speaker 1: set has not been clear about that, and that's what's

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Speaker 1: the confusion. UH. In some sense, I think the set

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Speaker 1: is untrustworthy of its own credibility. Honestly, I do think

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Speaker 1: rates have to rise, But I think what's causing the

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Speaker 1: choppiness is an inability that said, to talk about what

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Speaker 1: it's doing more closely in terms of its inflation target.

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Speaker 1: And that's an old Keynesian problem Kenzie and economic economists

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Speaker 1: do not like to talk in terms of Monterrey policy

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Speaker 1: directly in terms of managing inflation. And so that's how

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Speaker 1: I would square what you just what you just prompted

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Speaker 1: me to say. Well, it raises the question then if

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Speaker 1: the unless we get some sort of big economic data

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Speaker 1: surprise between now and the June fifteen meeting, do they

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Speaker 1: have to raise or are they going to severely hurt

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Speaker 1: their credibility because now they put the markets on notice.

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Speaker 1: So the problem is there's no question that as as

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Speaker 1: the headlines would say that the June increase should be

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Speaker 1: on the table. Absolutely if there's evidence that comes in strongly,

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Speaker 1: should do it and move. But the problem is, as

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Speaker 1: I've mentioned before, the FAT has has demonstrated a reluctance

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Speaker 1: in the last six months. It's unclear whether there really

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Speaker 1: worries that inflation or they're worried about the bond market collapse.

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Speaker 1: In November two thousand, wrote overcoming the zero bound on

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Speaker 1: the interest rate policy. You've been thinking about this for

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Speaker 1: a while. What would exactly happen to the American economy

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Speaker 1: and markets if they raised in July and they raised

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Speaker 1: some time else this year? What would be the outcome?

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Speaker 1: I think very little. I think there is headroom. I

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Speaker 1: think the markets are forgiving at this point. If the

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Speaker 1: said were to say we'd like to raise rates another

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Speaker 1: fifty basis points, because that's what you're saying, I think

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Speaker 1: in the sad way to say that, and to say

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Speaker 1: that in terms of we're concerned about inflation and the

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Speaker 1: negative at real rate, Yeah, they could get aware of that,

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Speaker 1: but that would be moving in more in terms of

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Speaker 1: a rule, more in terms of steadiness. Are you others? What?

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Speaker 1: Let me say this, either the market has to get

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Speaker 1: steady or the Fed has to get steady. You have

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Speaker 1: a dance between two partners. If you know, my metaphor

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Speaker 1: would be there on the floor. Nobody knows what hand

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Speaker 1: to put out to the art quickly. Here are you

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Speaker 1: dancing with Laurence Summers? Right now? Are you? And are

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Speaker 1: you and Larry Summers on the same page. Absolutely not.

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Speaker 1: I realized my message is a little bit, you know,

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Speaker 1: a little more nuanced, but absolutely okay. You give me

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Speaker 1: a minute or two. I can explain that later. Okay.

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Speaker 1: Marvin good Friend wound up this morning, Michael McKie, Am

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Speaker 1: I doing okay? I got the Pittsburgh Penguins in there

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Speaker 1: last night after they whooped Tampa Bay four to two. Yeah,

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Speaker 1: the folks in Tampa are not going to be talking

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Speaker 1: to you this morning. You're you're too gleeful. We say

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Speaker 1: good morning to Raymond James down in Tampa, who give

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Speaker 1: us a good perspective from time to time. Marvin good

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Speaker 1: Friend with us some Carnie Melon University. What a perfect

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Speaker 1: preparation for Mike's discussion with Jeffrey Lacker. This is the

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Speaker 1: hour of economics worldwide today. I can really say that

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Speaker 1: I'm really looking forward to Mike's questions with the president

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Speaker 1: of the Richmond Friend. We will return with Marvin good

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Speaker 1: Friend of Carnegie Mellon futures negative three the yield one

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Speaker 1: point eight six percent. This morning, let's check in with

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Speaker 1: Michael barn now and get the latest on that missing

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Speaker 1: egypt airplane. Mike, Tom thank you very much. Greece's Defense

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Speaker 1: minister says the egypt Air flight that crashed this morning

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Speaker 1: made abrupt turns and suddenly lost altitude just before vanishing

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Speaker 1: from radar shortly after entering Cairo's air traffic control area.

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Speaker 1: He says, the plane turned ninety degrees left and then

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Speaker 1: a three hundred sixty degree turned toward the right, dropping

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Speaker 1: from an altitude of thirty eight thousand feet to fifteen

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Speaker 1: thousand feet, and then was lost at about ten thousand feet.

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Speaker 1: Flight eight oh four, with sixty six people on board,

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Speaker 1: was flying from Paris to Cairo. Meanwhile, France's lower House

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Speaker 1: of Parliament has approved the two month extension of the

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Speaker 1: state of emergency that was declared after the deadly November

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Speaker 1: attacks in Paris. Global News twenty four hours a day,

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Speaker 1: powered by our twenty four hundred journalists and more than

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Speaker 1: a hundred fifty news bureaus around the world. Michael Barr

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Speaker 1: might well e stad that conversation. Michael McKee and Tom

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Speaker 1: keep speaking with Marvin Goodfriend, and we'll talk about secular stagnation,

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Speaker 1: some the other themes that we hear from the good

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Speaker 1: from a president of Harvard, Lawrence Summers from Washington from

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Speaker 1: New York. Bloomberg Surveillance the news update brought to you

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Speaker 1: a Bloomberg Business Flash and I'm Karen Moscow. Future is

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Speaker 1: moving lower this morning. Let's go to the First Word

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Speaker 1: Breaking news desk for today's morning call, and here's Bill Maloney.

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Speaker 1: Good morning Bill, Good morning Karen. Futures are down but

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Speaker 1: have paired their losses since the Walmart results down. Future

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Speaker 1: is currently lowered by sixteen points, has to be dropped

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Speaker 1: two and a half and as the futures fall by

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Speaker 1: six the US ten yel at one point eight seven

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Speaker 1: per cent on the US Economic Frinday eight thirty, Chicago

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Speaker 1: FED initial jobs claims and Philly FED at a tenth.

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Speaker 1: They're the natural gas storage change and FEDS. Dudley speaks

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Speaker 1: in New York after the Bellas Night Cisco Beat shares

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Speaker 1: her up five percent pre market. Salesforce boosted your views,

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Speaker 1: and Tesla reported a two billion dollar public offering. Brianna

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Speaker 1: aarings this morning. Advance Autoparts EPs missed shares a down

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Speaker 1: ten percent pre market, Dick Sporting Goods cut ERPs views,

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Speaker 1: and Walmart Q one beat shares her up eight percent

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Speaker 1: pre market. In del news, Montsanto got an unsolicited proposal

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Speaker 1: from Bear Technique to merge with FMC in an all

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Speaker 1: stock deal, and Church and Dwhite is up eight percent

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Speaker 1: pre market on reports of a possible bid. Find me

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Speaker 1: some of your wellsheet upgrades and downgrades. Hilton and Hyad

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Speaker 1: cut the neutral over at Bank of America, Bank United

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Speaker 1: cut the cell. Goldman Sachs and mackeed Martin Northrook Roman

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Speaker 1: both cut the sector per form at RBC Live from

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Speaker 1: the first breaking news task on bo Maloney Care. Thanks

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Speaker 1: Bill to hear live breaking news over her Bloomberg type

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Speaker 1: squawk A go on your terminal, Let's sq you a

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Speaker 1: w K go. That's a Bloomberg business flash. Tom and

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Speaker 1: Mike Aaron, thanks so much. I'm Bloomberg Surveillance this morning

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Speaker 1: from Washington from New York, brought you by investco. If

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Speaker 1: you considered all of your investment alternatives, nontraditional asset classes

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Speaker 1: and strategies may help you achieve your goals. Find out

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Speaker 1: more at investco dot com slash Alternatives. Michael McKee and

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Speaker 1: Washington with him Jeffrey Lacker will get to their important

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Speaker 1: interview here in about eleven minutes. Before that, we are

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Speaker 1: honored to bring you the Meltzer Professor and Carnegie Mellon Marvin.

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Speaker 1: Good friend, Marvin, I we were talking about Mr. Summers

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Speaker 1: in secular Stagnation. I take your point that rational expectations

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Speaker 1: forced the Kanesiean movement of decades to consider interest rates,

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Speaker 1: to consider inflation, to consider a modern word open economy.

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Speaker 1: And yet rational expectations has a prescription that the market

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Speaker 1: will fix all that didn't work out? Did it well? Right?

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Speaker 1: I mean no one would have No one would have

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Speaker 1: really expected that to be true. Although what you're right, Tom,

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Speaker 1: the rational expectations point of view tended to be associated

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Speaker 1: with a free market point of view, that that the

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Speaker 1: markets do everything correctly without any assist from good good,

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Speaker 1: good government, good rules, law, other other real economy factors.

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Speaker 1: But but that's that those views have been separated over

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Speaker 1: the last few years, but initially that was absolutely the

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Speaker 1: case Jeff Laquer years ago in folks, the part of

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Speaker 1: economics that Jeffrey Laugher is acclaimed for is I mean,

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Speaker 1: I would need a bloody Mary in my hand, Professor

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Speaker 1: Goodman to get through this, good friend, to get through this.

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Speaker 1: But incentive compatible financial contracts, asset prices, and the value

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Speaker 1: of control. Come on, professor, you don't even teach this

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Speaker 1: at carneie melon. But what Lacquer gets to is contracts

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Speaker 1: and trust. Has this fed lost the trust of the

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Speaker 1: American people with their confusion of communication? I think I

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Speaker 1: think it's fair to say that to pick up of

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Speaker 1: the analogy that I that I left with the last segment.

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Speaker 1: You know, the set is dancing with markets, and there's

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Speaker 1: no neither side knows where to put their hands on

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Speaker 1: the shoulders of the waist of the others, and so

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Speaker 1: there's no trust. There's no sense of what we what

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Speaker 1: do we do? How do we behave together? In other words,

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Speaker 1: in the fancy language of economics, the set has not

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Speaker 1: provided a stable policy rule or behavior that the market

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Speaker 1: can latch onto and and and then and then therefore

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Speaker 1: the market is just flailing around trying to figure out

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Speaker 1: what the Fed's up to, and therefore the FED can't

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Speaker 1: forecast what the market is doing. And that's my technical

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Speaker 1: way of describing what you what you do. We need

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Speaker 1: to establish trust in order for this thing to move

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Speaker 1: smoothly forward. Well does that suggest, then, Marvin, that you

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Speaker 1: would want a rule based system? Well, I do favor

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Speaker 1: rule based system. I think there's no alternative but for

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Speaker 1: the SAID to be more clear about the terms upon

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Speaker 1: which it's raising interest rates. And I said, as I

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Speaker 1: say before, the only thing that the SAID can really

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Speaker 1: control over the long run is the long run rate

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Speaker 1: of inflation. And so I think it should speak more,

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Speaker 1: much more strongly in terms of justify what it's doing

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Speaker 1: in terms of its inflation target then it is willing

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Speaker 1: to do at this point, and to justify what it's

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Speaker 1: doing in terms of anything else is kind of a

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Speaker 1: wobbly way of doing business. Because we're near full employment

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Speaker 1: by most UH measures, and you're you're splitting hairs, UH,

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Speaker 1: and it's very difficult to communicate on that basis. Let

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Speaker 1: me ask you a question that I'm going to put

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Speaker 1: to Jeff. I'll preview it forum here, UH, and you

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Speaker 1: referenced this a little bit, I think earlier a story

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Speaker 1: on the Bloomberg Today where they talk with large Road

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Speaker 1: of the Danish Central Bank governor who suggests that maybe

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Speaker 1: it's a zero bound and in some cases in his country,

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Speaker 1: even negative rates. The relationship between monetary policy and inflation

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Speaker 1: breaks down that monetary policy has aimed at basically stimulating

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Speaker 1: demand and there's just no demand out there. I think

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Speaker 1: there's no question that well, I don't know if there's

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Speaker 1: there's certainly a demand problem in certain countries in certain

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Speaker 1: parts of the world, the US, I don't think how

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Speaker 1: the huge demand problem so we don't have the negative

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Speaker 1: real rates that you're talking about in Europe that the

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Speaker 1: Danish governor is talking about UM. And I think that

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Speaker 1: to me that echoes my my my sense that what

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Speaker 1: the said should be doing is turkey and talking in

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Speaker 1: terms of inflation. If inflation stays below target, UM, maybe

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Speaker 1: it shouldn't be so eager to raise rates because basically

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Speaker 1: because it's that inflation conversation is really the only stable

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Speaker 1: conversation that they But Professor at the time we got

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Speaker 1: left you as a genetic hawk. Can you withstand a

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Speaker 1: yell and overshoot on inflation. I would like to see that. Actually,

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Speaker 1: I'm you know, we haven't had that kind of thing

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Speaker 1: happened since two thousand eight. A little bit um. I

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Speaker 1: could withstand it, but I want her to start talking

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Speaker 1: about inflation target right now, so that she she she

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Speaker 1: can use being under target, she can use that as

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Speaker 1: a reason maybe delay rates if she wants, and then

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Speaker 1: she hitches her wagons at that, and then if inflation

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Speaker 1: goes above, you get the credibility on the upside. I

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Speaker 1: don't know what's gonna happen. You're Marvin good Friends. You

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Speaker 1: usedly gonna run Richmond Feder, the San Francisco feeder, maybe

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Speaker 1: the feeders of Bank of New Zealand, one of the

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Speaker 1: three at some point. Marvin good Friend is a Carnegie

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Speaker 1: Mellon University and yes, Horse I got an email. He

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Speaker 1: does have a Sydney Crosby poster in his office. He

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Speaker 1: is the Meltzer Professor of Economics at Carnegie. Melon, Mike,

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Speaker 1: that was just fabulous. What a great way to set

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Speaker 1: up your conversation with Mr Lacker. Obviously, it leads to

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Speaker 1: several questions that we will put to the president of

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Speaker 1: the Richmond Fed. In just a few moments. I don't

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Speaker 1: know if he's got any hockey posters in his office,

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Speaker 1: but you Tom have single handedly lost every listener we

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Speaker 1: have in Tampa today. Well I I've done that, but

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Speaker 1: it's been for those of you worldwide. It's just wonderful hockey.

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Speaker 1: This is prime time for wonderful ice hockey. Mike and

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Speaker 1: I have really enjoyed the coverage and uh we we

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Speaker 1: uh enjoy what we see across Canada, North America through

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Speaker 1: the Stanley Cup. Coming up, Michael mckey's important conversation with

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Speaker 1: Jeffrey Lacker of Richmond from Washington. From New York, Bloomberg's

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Speaker 1: surveillance coming up, with all due respect. Highlight brought to

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