Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio. This is a Bloomberg Wall Street Week roundtable
Speaker 1: discussion of what happened to our banks. I'm David Weston,
Speaker 1: and I'm delighted to say I am joined our special
Speaker 1: Wall Street Week contributor and former treasure Secretary Larry Summers,
Speaker 1: also of former Fed Governor Dan Trulo, and Stephanie Flanders,
Speaker 1: our very own senior executive editor for Economics and Government.
Speaker 1: So thank you all for joining us. Really appreciate it.
Speaker 1: There's a lot that's gone on in the banks in
Speaker 1: the last two weeks. We heard it from j Powe,
Speaker 1: the Sheriff FED yesterday, So let's talk about exactly what happened.
Speaker 1: I want to start with you, Dan. You were a
Speaker 1: colleague for several years of J. Powell. During the time
Speaker 1: you were on the Fed, you had responsibility for banks supervision.
Speaker 1: We've been told the banks were so strong we didn't
Speaker 1: have to worry about it. Were we misled what happened here?
Speaker 1: We didn't think we still had banking problems. Well, I
Speaker 1: trust that the largest banks truly are in the much
Speaker 1: better capital and liquidity position that Jay Powell referred or
Speaker 1: two yesterday during the press conference. We don't, David obviously
Speaker 1: know yet the whole story, but I think there are
Speaker 1: some things that we do know. We know first that
Speaker 1: there was a significant supervisory failure somewhere along the way.
Speaker 1: Was that failure in the San Francisco Fed's inability to
Speaker 1: identify problems of growth and maturity mismatches and the like
Speaker 1: early on. Was it the failure of the second San
Speaker 1: Francisco FED team, to which did identify some problems to
Speaker 1: follow up in a sufficiently robust way. Was it a
Speaker 1: supervisory failure because of the light touch approach to supervision
Speaker 1: that the Federal Reserve Board had put in place over
Speaker 1: the last four or five years. Or was it a
Speaker 1: supervisory failure because the supervisors generally had not adjusted their
Speaker 1: method of assessing liquidity to take account of very high
Speaker 1: uninsured concentrations coexisting with the capacity of big depositors to
Speaker 1: run at warp speed rather than the way they used
Speaker 1: to run. Those are not mutually exclusive explanations, and I
Speaker 1: also would not rule out a contributing factor being the
Speaker 1: twenty eighteen legislation in twenty nineteen FED regulation, both of
Speaker 1: which deregulated banks of under seven hundred or the regulation
Speaker 1: banks of under seven hundred billion dollars in assets, the
Speaker 1: legislation banks of under two hundred and fifty. But I
Speaker 1: think in the most immediate sense this is clearly a
Speaker 1: supervisory failure. Other factors may be uncovered as the FED
Speaker 1: Zone investigation proceeds. Dan, do we have a sense of
Speaker 1: how big the breadbox is? If I can put it
Speaker 1: that way? What is the likelihood disc could spread to
Speaker 1: other parts of the financial system. We heard a chair
Speaker 1: Pile yesterday saying that silicon value back was an outlier. Dan,
Speaker 1: how do we know it's an outlier? I owed, that's
Speaker 1: a good question, David, And you know your correspond and
Speaker 1: Bloomberg correspond and Katarina Sareva asked a really good question.
Speaker 1: In the press conference yesterday. She looked back at the
Speaker 1: notes from the January thirty, first February first FOMC meeting
Speaker 1: and noted that there had been a discussion of the
Speaker 1: potential financial stability implications of the rapid rise and interest
Speaker 1: rates which the FED is engineered over the last year,
Speaker 1: and she pointed to some specific areas of concern which
Speaker 1: the FOEMC had identified, one being runs on non bank
Speaker 1: institutions a little bit ironic in retrospect, but also the
Speaker 1: position of banks with large portfolios of treasuries that had
Speaker 1: not been marked to market but had lost value obviously
Speaker 1: because of the interest rate increases. And she asked the
Speaker 1: chair for a little bit of an explanation of what
Speaker 1: that discussion had been, and he was unable to give
Speaker 1: it to her. For me, it raises the question of
Speaker 1: whether they were monitoring just those kinds of issues throughout
Speaker 1: last year as they were increasing rates. I mean, you
Speaker 1: would think that interest rate risk would have jumped to
Speaker 1: the top of the supervisory heap, and that the FOMC
Speaker 1: would have been getting reports on the impact of the
Speaker 1: interest rate increases on deposits, deposit flows, holdings of securities,
Speaker 1: especially those that are not marked to market. So I
Speaker 1: think as a backward looking matter, it will be interesting
Speaker 1: to find that out. As a forward looking matter, has
Speaker 1: the FED in since a week ago Friday, done the
Speaker 1: kind of assessment to be able to tell Jay Powell
Speaker 1: you can go out and say that it's an outlier
Speaker 1: in the banking system is safe. He didn't indicate that
Speaker 1: any such assessment had been done. Perhaps it has, Perhaps
Speaker 1: it hasn't. Maybe Vice Chair bar we'll talk about it
Speaker 1: next week for Congress, But right now our basis for
Speaker 1: evaluating his statement is kind of limited. So Larry, let's
Speaker 1: put you back at the Treasury, or for that matter,
Speaker 1: at the White House. If you were looking at this situation,
Speaker 1: what questions would you be asking to make sure you
Speaker 1: understood the possible ramifications of what we've seen so far
Speaker 1: in a broader financial context. Before I answered, Before I
Speaker 1: answer that hypothetical, let me put a question to my
Speaker 1: friend Dan, who I'll just say I think did an
Speaker 1: enormous amount to strengthen our financial system during his time
Speaker 1: at the FED. Dan, I've heard it said, and I
Speaker 1: don't know that. Even in twenty twenty two, the FED
Speaker 1: stress tests that were applied to the largest banks did
Speaker 1: not include an analysis of the stress from a major
Speaker 1: interst rate height. If that's true, that seems kind of
Speaker 1: bizarre from the point of view of the world of
Speaker 1: early twenty twenty two, when it certainly many people, certainly
Speaker 1: me on David's show, were emphasizing that there was likely
Speaker 1: to need to be very substantial increases in interest rates.
Speaker 1: Can you say something and if the stress tests weren't
Speaker 1: considering increases in interest rates, then perhaps the exempting of
Speaker 1: Silicon Valley Bank from the stress tests was not central
Speaker 1: to understanding the problem. Can you say something about interest
Speaker 1: rate hikes and FED stress tests? Sure? So? First off,
Speaker 1: I think Larry, I agree with the statement you made
Speaker 1: toward the end of your question, which is, actually, if
Speaker 1: Silicon Valley had been in last year's stress test for
Speaker 1: real rather than its stress rehearsal, I don't think it
Speaker 1: would have made much difference sisily the reason you say
Speaker 1: that they weren't stressing the things that were the SVB
Speaker 1: vulnerabilities with respect to stress testing generally, over again, over
Speaker 1: the last five or six years, the stress test has
Speaker 1: become eminently predictable. The scenario that's used is now a
Speaker 1: single scenario, which is essentially a variant on the very
Speaker 1: first one we put in some years ago. That is
Speaker 1: a severe, quite severe recession, but it follows the basic
Speaker 1: pattern of the scenario that was developed when we began
Speaker 1: doing the annual stress test. The scenario, of course includes
Speaker 1: a reduction in interest rates because of the hypothesis of
Speaker 1: a recession and the Fed's reaction. When I was at
Speaker 1: the FED, we were using also an alternative scenario. It's
Speaker 1: called the adverse rather than severely adverse scenario, and we
Speaker 1: use that scenario to test things than the prototype of
Speaker 1: the severe recession. And indeed we used it at least
Speaker 1: one year, and I think a couple of years, to
Speaker 1: test what would happen with unusual changes and interest rates
Speaker 1: which were not then anticipated. So to some degree, the
Speaker 1: answer to your question is like supervision. Generally, the stress
Speaker 1: test has become less rigorous over time, and I think
Speaker 1: more importantly, it's become too predictable. And the whole purpose
Speaker 1: of a stress test is that you're trying to stress
Speaker 1: against the unanticipated, not the anticipated. At the risk of
Speaker 1: preps being too tough on your former colleagues at the FED,
Speaker 1: you talk about predictable versus unpredictable. I would argue that
Speaker 1: at a very minimum, the stress tests ought to consider
Speaker 1: what is the major risk of their moment. When you
Speaker 1: were at the FED DAN in that period, I think
Speaker 1: it was reasonable to think that the major risk was
Speaker 1: a tilt towards recession and deflation. But I don't see
Speaker 1: how anybody last spring could have thought that the major
Speaker 1: risk was anything other than a spike in interest rates.
Speaker 1: So a process that didn't consider as a risk seems
Speaker 1: to me to be a profoundly problematic process. Even if
Speaker 1: you were to accept that you were only going to
Speaker 1: look at one scenario and all of that, it seems
Speaker 1: almost like the supervisors were mailing it in if they
Speaker 1: weren't thinking about at a moment when monetary policy was
Speaker 1: turning in a dramatic way towards tightening, and at a
Speaker 1: moment where the FED had just retired the word transitory,
Speaker 1: we're not looking at interest rate. Is there a reasonable
Speaker 1: is there a defense? Well, I would say first, this
Speaker 1: is not by way of defense or certainly not an apologia,
Speaker 1: but just a bit of explanation. It's quite likely that
Speaker 1: the scenario development was taking place in the latter part
Speaker 1: of twenty twenty one if it was going to be
Speaker 1: the twenty twenty two stress test, And of course this
Speaker 1: is the period in which the FOMC was still figuring
Speaker 1: out that the inflation problem was not transitory. But I
Speaker 1: don't want to use that as a kind of exculpation
Speaker 1: of the supervisors. Second thing to say is it's not
Speaker 1: the supervisors, meaning the staff who are making the policy
Speaker 1: decisions as to what kind of stress tests to have
Speaker 1: whether to have multiple scenarios, that's a decision of the
Speaker 1: Board of Governors, and so it rests with them. But
Speaker 1: I agree with the graviment of your remarks, which is
Speaker 1: not to have tried to think about something other than
Speaker 1: the same scenario is a failure of supervision in and
Speaker 1: of itself. Stephane, you've worked at the Treasury in the
Speaker 1: United States. You also have covered financial markets and other
Speaker 1: business issues over in Europe for a good long time.
Speaker 1: One thing we're hearing from both Larry and Dan is
Speaker 1: rates were going up, and there weren't just going up here,
Speaker 1: They're going up over in Europe as well. Was what
Speaker 1: we're seeing aroun now in the banking system. Maybe not
Speaker 1: the specifics of Silicon Valley Bank, but was something like
Speaker 1: that almost inevitable. After we've pumped so much money in
Speaker 1: the system, we start taking it out, there's going to
Speaker 1: be stress, real stress, and there's going to be some failure. Yeah,
Speaker 1: And I wish I was I was closer to you guys,
Speaker 1: because I knew I was going to struggle to get
Speaker 1: a word in with you too. But I think in
Speaker 1: this conversation, I think it is important when we're thinking
Speaker 1: about what the implications are. You know, you have to
Speaker 1: distinguish what is an outlier about not the Silicon Valley Bank,
Speaker 1: but others that have got into trouble in this episode.
Speaker 1: What is fundamentally a regulatory stupidity, you know, a very
Speaker 1: traditional problem the interest rate risk that was just hiding
Speaker 1: in plain sight, and what is a genuinely new issue
Speaker 1: which was not being fully taken into account by anyone
Speaker 1: looking at the risks. And I think when you look
Speaker 1: at something like Silicon Valley Bank, you know clearly it
Speaker 1: was an outlier in the speed with which deposits had
Speaker 1: been built up, in its massive exposure to uninsured deposits
Speaker 1: and reliance on that for funding. I hope it was
Speaker 1: an outlier in not having a chief risk officer for
Speaker 1: nine months, which was an extraordinary state of affairs. Was
Speaker 1: but what was very traditional about this, and as the
Speaker 1: discussion with Larry and Dan is suggesting, was that you know,
Speaker 1: right here was a massive interest rate risk that was
Speaker 1: whether or not it was in the stress test was
Speaker 1: something that central banks should have been thinking very hard about.
Speaker 1: And I think it was sort of striking that we
Speaker 1: had a lot of the debate around this, What are
Speaker 1: the hidden risk. You know, all the conversations that you
Speaker 1: will have had, David, when you ask regulators what's keeping
Speaker 1: you up at night, they would always talk about private equity.
Speaker 1: They'd talk about non bank shadow banking. Has been the
Speaker 1: thing that people were you know, was this worry for
Speaker 1: all these years, and in fact it was the most
Speaker 1: obvious problem sitting on bank balance sheets as a direct
Speaker 1: result of monetary policy actions by central banks that has
Speaker 1: actually caused this issue. I would just say, though one
Speaker 1: of the reasons maybe they weren't looking at that so closely,
Speaker 1: or that I'd be interested to know what Dan and
Speaker 1: Larry think about this. You know, there is an element
Speaker 1: of this which is new, and we see in the
Speaker 1: speed with which deposits left these institutions, and that's the
Speaker 1: non stickiness of those deposits. And I think, you know,
Speaker 1: one of the things that regulators were thinking when they
Speaker 1: looked considered interest rate risk potentially was that there was
Speaker 1: a sort of self hedging mechanism in a bank of
Speaker 1: the fact that deposits would be slow to move if
Speaker 1: they weren't being paid the higher interest rates. That is
Speaker 1: no longer the case, and I think that probably does
Speaker 1: have longer term implications for regulation and potentially longer term
Speaker 1: implications for how much we insure deposits. Yeah, I think
Speaker 1: that's a question for either Larry or Dan. Does our
Speaker 1: entire approach to deposits change given what we've seen in
Speaker 1: the fact is they're not as stick as we thought
Speaker 1: they were. That's what I was alluding to earlier. I'd
Speaker 1: like to have a sense of exactly what the deposit
Speaker 1: profiles of this group of banks is as a whole,
Speaker 1: because in theory, at least, the supervisor should already have
Speaker 1: been distinguishing among different kinds of uninsured deposits, some of
Speaker 1: which I've always been understood to be eminently runnable, others
Speaker 1: of which have thought to were thought to be at
Speaker 1: least somewhat stickier than insured retail deposits. If it turns
Speaker 1: out that those and this is what Stephanie I think
Speaker 1: was suggesting that those middle categories have changed, then you're
Speaker 1: going to need a change in regular lesion, and not
Speaker 1: just in supervision. Larry, let me let mean sort of
Speaker 1: widen the frame a little bit without I agree with
Speaker 1: what Dan said, but I would put it this way.
Speaker 1: We know that the FED staff has a problem with
Speaker 1: discontinuous change. They basically entirely missed the discontinuous change in
Speaker 1: inflation because they stuck with their model and its traditions.
Speaker 1: And I think the broad concern that someone has to
Speaker 1: put is that for the first time ever, we are
Speaker 1: now in a world of highly digital banking, with the
Speaker 1: ability to withdraw funds extremely quickly and with the ability
Speaker 1: to put them somewhere else extremely quickly and easily because
Speaker 1: of digital account opening. So we're in this super digital world,
Speaker 1: and we're in a super digital world with five percent
Speaker 1: interest rates, and we've never been in a high interest rate,
Speaker 1: super digital world before, and large amounts of the economics
Speaker 1: of the banking industry rest on earning substantial interest premiums
Speaker 1: on deposits and whatever the traditional models are of what's
Speaker 1: sticky and what's not. The fact that we've had the
Speaker 1: world's fastest run and the world's biggest run at one
Speaker 1: of at the sixteenth largest bank in the country managed
Speaker 1: to have the biggest bank run in history has to
Speaker 1: teach us that there's a lot of reason to be
Speaker 1: open to a much wider range of possibilities about the
Speaker 1: risks associated with deposits. Then we thought previously, and so
Speaker 1: it seems to me that you asked me earlier what
Speaker 1: I would be thinking about if I was in the
Speaker 1: Treasury Department, and I guess I would be feeling my
Speaker 1: responsibility as the Chair of the Financial Stability Oversight Council
Speaker 1: very strongly at a moment like this, and I'd be
Speaker 1: thinking about making sure that whatever I was saying and doing,
Speaker 1: I was adding to confidence rather than subtracting from confidence
Speaker 1: in the very short run, that if you're in an
Speaker 1: institution and that institution fails, it's gonna be okay for
Speaker 1: you if that happens right now, because if you're not
Speaker 1: sending that signal in a reasonably clear way, you'd ever
Speaker 1: know where the runs are going to start next. I'd
Speaker 1: be thinking about this issue that I just raised of
Speaker 1: the new high interest rate digital world, and I'd be
Speaker 1: thinking about making sure that there was some broader discussion
Speaker 1: of the whole official financial community about these questions of
Speaker 1: stress testing, because I must say, doing stress testing four
Speaker 1: twenty twenty two, even if it was started in twenty
Speaker 1: twenty one, without considering unusual increases in interest rates as
Speaker 1: a stressor, is really very problematic. So I want to
Speaker 1: pick about this speed of digital just for a moment.
Speaker 1: It's been talked about by others as well. Digital's not
Speaker 1: going away, at least not that I can see. It's
Speaker 1: not gonna We can't. We can't regulate digital out of existence.
Speaker 1: Are there other possible rautary responses that I mean, we
Speaker 1: have circuit breakers when it comes to the stock market, right,
Speaker 1: there's too much move too quickly, Stephan, I'll ask you
Speaker 1: the question, is there a prospect of having something that's
Speaker 1: an equivalent of a circuit breaker for deposits? I think,
Speaker 1: I mean, I think there's a whole range of things
Speaker 1: we could get into. I think one could also think about,
Speaker 1: you know, the degree of you know, how we look
Speaker 1: at liquidity ratios and liquidity buffers might have to change
Speaker 1: if you know, there is that lack of there's lack
Speaker 1: of stickiness. If we think that those deposits could go
Speaker 1: much faster, you may even get I mean, a number
Speaker 1: of people have drawn the conclusion, that's quite a leak
Speaker 1: from here, that this is one of the biggest arguments
Speaker 1: for having a central bank digital currency, because then you
Speaker 1: can automatically have a claim on the central bank for
Speaker 1: your deposits and your your you don't face any of
Speaker 1: these issues. It's a big leak from where we are now,
Speaker 1: and it means a fundamental change to to the model
Speaker 1: of banking that we've had. But I think you know
Speaker 1: Larry is right, and that was one of the things
Speaker 1: I was alluding to that it is it's a threat
Speaker 1: to the basic business model of model of banking and
Speaker 1: also to the way we have thought about safety nets
Speaker 1: in this area and how one provides comm David, I
Speaker 1: would just add two things. One, I think we need
Speaker 1: to be careful about the time scale of things. It
Speaker 1: may be that it will be appropriate to fundamentally rethink
Speaker 1: the structure of our financial system, but the worst time
Speaker 1: to do that would be in a six week period
Speaker 1: while the fires were burning, And so we need to
Speaker 1: separate the what are we going to do now tactically
Speaker 1: from the longer run strategic questions. The other thing I'd
Speaker 1: say is that I agree with Stephanie about strengthening liquidity.
Speaker 1: Dan will be very knowledgeable about exactly how you would
Speaker 1: do that, But I would dissent massively from the idea
Speaker 1: of circuit breakers on deposits. If you start saying that
Speaker 1: when certain things happen, then you're no longer going to
Speaker 1: be able to get your money out of the bank.
Speaker 1: What that's going to do is accelerate the run because
Speaker 1: people are gonna want to make sure that they get
Speaker 1: their money out before the circuit breaker comes down. So
Speaker 1: I don't think there's likely to be a circuit breaker
Speaker 1: mechanism that works. And I think there's a lot of
Speaker 1: debate about the merits of the circuit breakers we have
Speaker 1: in equity markets, So that would not be the direction
Speaker 1: I would build. So Dan, let me accept Larry's very
Speaker 1: strong descent from circuit breakers and turn it all the
Speaker 1: way around the other way, and that's guaranteeing deposits across
Speaker 1: the board. We had the Secretary of Treasury, Janet Yell
Speaker 1: And go up to Congress this week and say, you
Speaker 1: know what, we're not really considering seriously just taking all
Speaker 1: the limits off the guarantees. And then she came back
Speaker 1: the next day and say, I have to demand my
Speaker 1: remarks a little bit here, because we're going to do
Speaker 1: what we need to do to back deposits. Are we
Speaker 1: getting a clear message about exactly the security of deposits
Speaker 1: its secured by the federal government. Well, I mean, I
Speaker 1: let people judge for themselves whether the message is clear.
Speaker 1: Here's what I drew from what both Janet Yellen and
Speaker 1: Jay Powell have said over the last forty eight hours.
Speaker 1: They do not have the authority without congressional action to
Speaker 1: ensure the deposits and open banks. What I think they
Speaker 1: have done is effectively to say the following, We do
Speaker 1: have the authority, along with the FDIC to ensure previously
Speaker 1: uninsured deposits in failed banks. And so what we are
Speaker 1: basically telling you is, if a bank fails, we will
Speaker 1: ensure the uninsured deposits. And I take it that that's
Speaker 1: what Jay Powell was really saying yesterday when he said
Speaker 1: all deposits are safe, and when he was asked to
Speaker 1: elaborate on that, he just repeated the talking point. And
Speaker 1: that's when I inferred that this was the message that
Speaker 1: he was trying to give. And if you think about it,
Speaker 1: if that is indeed their position. If you think about it,
Speaker 1: it's essentially the same as ensuring uninsured deposits, because even
Speaker 1: if you said x anti, all these big deposits are insured,
Speaker 1: no one will actually drawn that insurance until the bank
Speaker 1: had failed. So in that sense, it may be the
Speaker 1: equivalent of the ensuring of all deposits in the system,
Speaker 1: except for the fact, of course that it's presumably a
Speaker 1: policy that will not last forever, and when are they
Speaker 1: going to kind of back off of it? Is obviously
Speaker 1: a pretty important point. The second thing one might say,
Speaker 1: and I can already I can feel Larry maybe having
Speaker 1: this reaction, is if that's what you mean, why don't
Speaker 1: you say it more clearly so that you will maximize
Speaker 1: the calming effect of whatever tool it is that you're
Speaker 1: prepared to use. And I don't know why they didn't
Speaker 1: say it more explicitly, except perhaps that they didn't want
Speaker 1: to intimate that somehow they were using the authority they
Speaker 1: do have to achieve an end that supposedly they can't
Speaker 1: achieve without congressional approval. Dan, I think there's one other
Speaker 1: I think there's one other point, certainly, and you may
Speaker 1: have parsed the statements more closely than I did. But
Speaker 1: some of the statements, particularly I think from the Treasury side,
Speaker 1: have talked about contagion as well, So I'm not sure
Speaker 1: the authorities have been quite as clear as you suggest
Speaker 1: in saying that if you've got money in a bank
Speaker 1: and that bank fails and it's not a source of contagion,
Speaker 1: you will nonetheless have your deposit ensured, and as I
Speaker 1: understand it, in order to payoff uninsured deposits, there need
Speaker 1: to be some set of claims made by the government
Speaker 1: about the systemic seriousness of the moment. So I think
Speaker 1: that is also a place where there's some play. But
Speaker 1: I think I would share what I think as your
Speaker 1: instinct to be erring on the side of projecting confidence
Speaker 1: as ones choosing the way in which one talks about this.
Speaker 1: I mean the contagion of reference. Contagion sends the message
Speaker 1: that is exactly what a lot of depositors are quite
Speaker 1: reasonably doing, which is why, okay, I need to get
Speaker 1: into a bigger bank. So just to spell out why
Speaker 1: that matters. If you make it all part of a
Speaker 1: contagion argument, you're not giving that confidence to people who
Speaker 1: are in the relatively smaller banks, although it still pretty
Speaker 1: big banks by European standards. Well, I think I think
Speaker 1: if I were at the FED now and we were
Speaker 1: trying to formulate a rationale for what I suggested a
Speaker 1: moment ago was the likely policy, even though it's not
Speaker 1: stated explicitly, I think I would probably say something like
Speaker 1: the following. Look six weeks ago, if there had been
Speaker 1: a failure of a two billion dollar bank somewhere, ensuring
Speaker 1: uninsured depositors would be a very hard case to make
Speaker 1: on systemic risk grounds. But at this juncture, even if
Speaker 1: a two billion dollar bank fails and an uninsured depositor
Speaker 1: is not made whole, in the current circumstances, the anxiety,
Speaker 1: the nervousness, the uncertainty that itself will add fuel to
Speaker 1: the potential systemic fire. And thus in these circumstances one
Speaker 1: could take the action there as well. You do, as
Speaker 1: a statutory matter, need to make the systemic risk argument,
Speaker 1: though that is the authority that they have, and I
Speaker 1: think Janet Yellen did make reference to small banks yesterday
Speaker 1: as well. Dan, I want to pick up on your
Speaker 1: comment if you were still to Fed. We had a
Speaker 1: decision from the Fed this week to raise another twenty
Speaker 1: five basis points. Some people had been urging that actually
Speaker 1: they just hold given the difficulis with banking. At the
Speaker 1: same time, he Jaypole admitted that there's more uncertainty about
Speaker 1: the extent of which what's already happened with financial conditions
Speaker 1: may have essentially imposed a further rate hike already. Did
Speaker 1: they get it right? Dan? From your point of view,
Speaker 1: did Jay Pal get it right? Well? I mean it's
Speaker 1: very obviously, our ly the most difficult decisions since he's
Speaker 1: been there, although I actually think market expectations helped him.
Speaker 1: They had sort of converged around twenty five basis points,
Speaker 1: and so then it became a communication issue. I mean,
Speaker 1: what I was struck by David In on the monetary
Speaker 1: policy side of what he said yesterday was that he said,
Speaker 1: quite explicitly, it's too soon to tell how monetary policy
Speaker 1: should respond to the anticipated credit tightening. But I actually
Speaker 1: think their actions yesterday were a fairly significant response. I mean, everybody,
Speaker 1: three or four weeks ago, people were anticipating a fifty
Speaker 1: basis point increase, We got twenty five. Three or four
Speaker 1: weeks ago, we thought we might see the SEP suggest
Speaker 1: a ceiling of five seventy five or six percent interest,
Speaker 1: And now we're back to exactly where they were in
Speaker 1: December at last December when they did the last SEP,
Speaker 1: and of course they changed the language on the forward
Speaker 1: guidance type language. Instead of ongoing increases, we're back to
Speaker 1: may have some firming, and of course some people were
Speaker 1: reading that as the end or close to the end
Speaker 1: of the tightening cycle. So I actually thought that they
Speaker 1: were conveying more of an assessment of the impact than
Speaker 1: Chair Powa suggested in his remarks yesterday. So, Laurie, what
Speaker 1: about you. In the past you suggested perhaps they might
Speaker 1: have to have a term of rate as high as
Speaker 1: six percent. Do you agree with Dan that what we
Speaker 1: saw from j. Powe in the Federal Reserve this week
Speaker 1: was a monetary policy reaction to what we've seen already,
Speaker 1: and if so, was it appropriate? I think what they
Speaker 1: did was broadly appropriate. It was a time for temporizing,
Speaker 1: because there's a lot of uncertainty and a lot of
Speaker 1: cards are going to be turned over in the next
Speaker 1: several months. And the question then was just temporizing mean
Speaker 1: stopping all rate increases. And I think if they had
Speaker 1: done that, it would have sent actually a signal that
Speaker 1: they were very highly alarmed and would have been a
Speaker 1: mistake whether to continue precisely on the path that they
Speaker 1: were on before these banking concerns arose. I think that
Speaker 1: would have seemed almost oblivious to what was a potentially
Speaker 1: gathering storm and so I think, as Dan suggests, that
Speaker 1: a middle ground path was right, and it was particularly
Speaker 1: right if the policy is going to be signaling in
Speaker 1: a clear way that even if your bank fails, you're
Speaker 1: going to be a depositor as well, And so nobody
Speaker 1: in America needs to have the kind of sweaty Palm's
Speaker 1: weekend that a large number of people had worrying about
Speaker 1: whether they were going to meet their payroll because of
Speaker 1: Silicon Valley Bank. And I think in the context of
Speaker 1: providing those kinds of assurances that the monetary policy path
Speaker 1: they set was appropriate and appropriate doesn't mean that it
Speaker 1: will turn out to be right. Appropriate means that the
Speaker 1: errors are kind of two sided. That there's a chance
Speaker 1: that they'll need to tighten more than they're currently projecting,
Speaker 1: and there's also a chance that not all the tightening
Speaker 1: they're currently projecting will be necessary. I think if authorities
Speaker 1: are sufficiently aggressive about adding confidence to the system, my
Speaker 1: guest best guess is that the Fed's judgment in the
Speaker 1: SEP will turn out to be considerably more accurate than
Speaker 1: the markets assessment that the FED is going to be
Speaker 1: pushed into rate cuts very soon. But that's a a
Speaker 1: judgment that one can't have any great amount of confidence
Speaker 1: in But yes, I think what they did was broadly appropriate,
Speaker 1: particularly if we can be sending reasonably strong signals of
Speaker 1: confidence in the system. So that is going to conclude
Speaker 1: our Bloomberg Wall Street Week Brown Table, the first we've
Speaker 1: ever had. Actually, I want to thank our panelists. She's
Speaker 1: Stephanie Flanders. She's the senior executive editor for Economics and
Speaker 1: Government for Bloomberg, dance roller, former Fed governor, and also,
Speaker 1: of course our special contrior on Wall Street Week. He's
Speaker 1: Larry Summers of Harvard. That's it for this edition of
Speaker 1: Wall Street Week. I'm David Weston. This is Bloomberg