Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Ferreroll and Lisa Abramowitz. Join us each day
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Speaker 2: Perfect guest for reaction to this speech as Mohammad ol
Speaker 2: Aeron of Bloomberg Opinion and Queen's College, Cambridge. Mohammad, thanks
Speaker 2: for being with us and being with us through that
Speaker 2: speech as well. What were your thoughts when you heard
Speaker 2: some of those words from Chairman Powell just moments ago.
Speaker 3: I had three takeaways John. First, it's a speech that
Speaker 3: said very little that is new. He repeated what he
Speaker 3: has said in the past, and he has retained maximum
Speaker 3: policy optionality. Second, he reminded us that with the exception
Speaker 3: of the inflation target he said is two percent and
Speaker 3: will remain two percent, everything else is uncertain and that end.
Speaker 3: His reference to our star in particular was very interesting.
Speaker 3: And Third, what I thought was also curious is how
Speaker 3: he ended this speech. He ended the speech talking about
Speaker 3: we will follow the stars in a cloudy sky. Everybody
Speaker 3: sees the cloudy sky, but what's interesting is that the
Speaker 3: west of Jackson Hall will be about moving stars. All
Speaker 3: the structural changes that are going on domestically and internationally,
Speaker 3: and that just adds to the topic that the three
Speaker 3: of you have been talking. That is a very complex
Speaker 3: world out there, and the FED has to navigate a
Speaker 3: lot of moving pieces, Mohammed.
Speaker 2: One conversation you and I have had over the last
Speaker 2: several weeks, the last several months for that matter, people
Speaker 2: having this discussion here as well, are we, from your standpoint,
Speaker 2: in your opinion, sufficiently restrictive?
Speaker 3: John, This goes immediately to what is the right inflation target?
Speaker 3: If the riding inflation target is two percent, and they
Speaker 3: want to get there in a credible period of time,
Speaker 3: then we are not sufficiently restrictive. If the right inflation target,
Speaker 3: as you've heard many people say, including Adam Posen today,
Speaker 3: is above two percent giving all the structural changes, and
Speaker 3: the way we're going to get there is not by
Speaker 3: announcing the new target by but by following a shadow
Speaker 3: target and then once we see it stable at adopting it.
Speaker 3: I think that's the most likely outcome. By the way,
Speaker 3: then we are sufficiently restrictive.
Speaker 4: Wellhamed, does it concern you that we've heard a lot
Speaker 4: of people who sound pretty happy. Actually, other than Ja Powell,
Speaker 4: who is taking sort of the adult tone of we're
Speaker 4: not there yet, Stop declaring victory. There's a lot more
Speaker 4: down the pike, everybody else sounds like things are going
Speaker 4: really well, and the FED policy is achieving exactly what
Speaker 4: it saw to.
Speaker 3: So I don't think it's everybody else, but most people are,
Speaker 3: especially in the marketplace. So the economists. You have Larry Summers,
Speaker 3: for example, reminding us this morning that if you look
Speaker 3: at the seventies inflation cycle, this one looks very similar.
Speaker 3: He has to do graphs up and he's sort of
Speaker 3: warning implicitly that we may see a pickup in inflation.
Speaker 3: So I think the marketplace is much more complacent than
Speaker 3: the economists saw. The economists recognize that the many moving pieces,
Speaker 3: whereas the marketplace things that we've gotten to a new
Speaker 3: equilibrium and from here is going to be cut next year.
Speaker 3: That remains to be seen.
Speaker 4: Do you think, Muhammed, that it's important for the FED
Speaker 4: to get ahead of a potential resurgence in inflation. Or
Speaker 4: do you think that Jay Powell's approach of watching the
Speaker 4: stars and seeing what they are will be sufficient to
Speaker 4: curtail some sort of more embedded inflation.
Speaker 3: It's hard, Lisa, because as you know, they have not,
Speaker 3: like past Feds, opted for strategic view of the of inflation,
Speaker 3: nor do they have a functional monetary policy framework. So
Speaker 3: they've become highly data dependent, which means that they are
Speaker 3: using instruments with lags on backward looking data. So they
Speaker 3: aren't a bit of a tough situation. They're going to
Speaker 3: remain data dependent. So I don't think he knows what
Speaker 3: they will do in September. He's going to wait to
Speaker 3: see what the job report is. He's going to wait
Speaker 3: for the CPI numbers, and then they're going to decide
Speaker 3: what to do. But this is the irony is it's
Speaker 3: a highly dependent, data dependent FED using instruments that act
Speaker 3: with a lag.
Speaker 2: Plenty of feedback. Tom this coming from no data of Renmak.
Speaker 2: Just Truition sent the following. I thought Power delivered a
Speaker 2: neutral speech. The FED sees its monetary policy stances restrictive,
Speaker 2: and we'll make a more tempered approach to future meetings,
Speaker 2: proceed carefully, risk management. These are all cash phrases for
Speaker 2: do nothing right now. The view from no data, just
Speaker 2: manas a guy.
Speaker 1: A lot more response coming in here, mixed mark red
Speaker 1: and green on the screen, Doctor Orion. I want to
Speaker 1: touch upon your iconic working game theory and that the
Speaker 1: word that I'm hearing this morning is complexity. I heard
Speaker 1: it from you, I heard it from John Lipsky and others.
Speaker 1: The simplicity we're all begging for is tee decisions. You
Speaker 1: are known for this, This is a Jackson Hall devoid
Speaker 1: of tee decisions. How do our viewers and listeners handle
Speaker 1: the complexity now? And to come tom?
Speaker 3: I think the most important thing to understand is that
Speaker 3: we have left the world of insufficient demand and we
Speaker 3: are now in a world of insufficient supply. And there's
Speaker 3: many reasons for that. It's a world that's not going
Speaker 3: to go away anytime soon. It's not pandemic issues that
Speaker 3: are fully reversible quickly. There are longer term issues going
Speaker 3: on change, globalization, supply change management, the functioning of the
Speaker 3: labor market, and the list goes on. So we are
Speaker 3: now in a different world of supply side constraints, and
Speaker 3: that world will mean that countries will become more inwardly looking,
Speaker 3: which we've seen already, and it also means that policy
Speaker 3: has to adjust to that. Now put on top of
Speaker 3: that the layer of industrial policy as we embark more
Speaker 3: meaningfully on a green transition, and it's all about the
Speaker 3: supply side, Tom, and that's where monetary policy is really challenged,
Speaker 3: because it acts on the demand side.
Speaker 1: We're thrilled, Mohammad to have doctor Greghava with us, and
Speaker 1: then you and Christine Leguard with us later. And the
Speaker 1: heart of the matter is are we beyond the supply
Speaker 1: shocks of this pandemic? Where are we on that continuum? Muhammad?
Speaker 1: Have we escaped COVID?
Speaker 3: I mean, we've escaped the worst of COVID, but we're
Speaker 3: dealing with the legacy of COVID, But we're also dealing
Speaker 3: with the legacy of the war. We're also dealing with
Speaker 3: many other legacies. You know, Tom, is fascinating that you
Speaker 3: will have President Laggard on because if you think the
Speaker 3: US is complicated, then in terms of degrees of complexity,
Speaker 3: Europe is even higher. The UK is even higher than that.
Speaker 3: So it's going to be really interesting to talk as
Speaker 3: you will do to President Laguard, because even though she
Speaker 3: has a single mandate, her environment is significantly more complicated
Speaker 3: than the FEDS, which is already complicated.
Speaker 2: So, Mohammad, she is so much more exposed. Europe is
Speaker 2: much more exposed to what's developing in China at the moment, Muhammad,
Speaker 2: If you took the US out of the equation right now,
Speaker 2: and we've been talking just about Europe and China, wouldn't
Speaker 2: we be talking about things like rate cuts and easing
Speaker 2: and stimulating the economy.
Speaker 3: If you take the US out of the equation, you'ld
Speaker 3: be talking about stagflation, and that's what everybody is afraid of.
Speaker 3: The US is exceptional, and it's exceptional in this economic performance.
Speaker 3: And if you take the US away, then you're taking
Speaker 3: away the only engine of growth for this global economy.
Speaker 3: But you're not taking away to supply side issues that
Speaker 3: are causing the inflationary pressure. So if you take the
Speaker 3: US away, we would be talking about not just the
Speaker 3: risk of stackflation in Europe, but you would be talking
Speaker 3: about the risk of stackflation in the global economy.
Speaker 2: Muhammed, is that the risk of the reality in Europe
Speaker 2: right now?
Speaker 3: John, is still the risk. You know, Yes, Germany is
Speaker 3: struggling the most, and that is if you like the
Speaker 3: engine for Europe, but there's also good things happening in Europe.
Speaker 3: Away from Germany. It's a high risk. It's flashing WED,
Speaker 3: not even yellow, it's flashing WED, but it's not yet
Speaker 3: a done deal. The US is much better off. China,
Speaker 3: ironically is the one that's suffering the most. If you've
Speaker 3: been discussing all morning, there is no obvious policy response,
Speaker 3: and now these piecemeal responses are being rejected by the
Speaker 3: marketplace really quickly. The marketplace is no longer embracing the
Speaker 3: notion that China can get itself out of the mess
Speaker 3: is finds itself in.
Speaker 4: And that's perhaps the cause of the manufacturing recession that
Speaker 4: we see in Germany and parts of Europe.
Speaker 5: But the service.
Speaker 4: Aside, we've been talking about how that's maybe more directly
Speaker 4: affected by the ECB's policies and where rates are and
Speaker 4: the more direct transmission mechanism than in the US. J.
Speaker 4: Powell just said that there is evidence that the long
Speaker 4: and variable lags are coming to the foe and will
Speaker 4: actually reduce growth materially in the US. Is Europe a
Speaker 4: model for the US is headed with respect to services
Speaker 4: in the next couple of months or in the next year.
Speaker 3: I hope not, Lisa. Our service sector has been stronger,
Speaker 3: and even though the PMI numbers this week were disappointing,
Speaker 3: at least there were over fifty for the service sector.
Speaker 3: We don't want pmis south of sixty of fifty. And also,
Speaker 3: ironically the service sectors where Europe just to stackflation as well.
Speaker 3: It's not the goods sector, it's a service sector that's
Speaker 3: the inflation problem, source of an inflation problem. So I
Speaker 3: hope we don't follow Europe because if we do, then
Speaker 3: we will be talking about a very different outlook for
Speaker 3: the US.
Speaker 4: We're also talking about the potential for some sort of
Speaker 4: weakness down the pike. One thing that j Powell speech did.
Speaker 4: We seem to remove rate cuts in the near future,
Speaker 4: at least for the foreseeable future, and you can see
Speaker 4: that shifting upward in the rate expectations. Do you think
Speaker 4: that this economy can handle a five percent FED funds
Speaker 4: rate for the remainder of next year even with all
Speaker 4: the strength that you're hearing about.
Speaker 3: Lisa, we don't know. And he did use the word agile,
Speaker 3: and that's absolutely correct. He's got to be agile. Look,
Speaker 3: there are all sorts of sectors that adjust with a lag.
Speaker 3: We haven't seen the full impact yet of the higher weights.
Speaker 3: You're starting to see it play out in various segments,
Speaker 3: but in a very small way. Remember, not everything gets
Speaker 3: refinanced immediately. This is very unlike the UK economy, where
Speaker 3: the effective duration is much shorter, so you get refinancing quickly,
Speaker 3: and the weights have the great effects happen much quicker.
Speaker 3: So we don't know how well we can navigate under
Speaker 3: five percent. It seems that the big issues in the
Speaker 3: banking sector are behind us. But so far, and it's
Speaker 3: really important to stress this, we've dealt only with interest
Speaker 3: rate risk. We have not dealt with credit risk. We
Speaker 3: have not dealt with liquidity risk. And that's what people
Speaker 3: in the marketplace have to keep an eye on.
Speaker 2: Stuart Kaiser, a city publishing just moments ago, give you
Speaker 2: a flavor of what's happening on the south side. Not
Speaker 2: a game changer for markets from share power, but remind
Speaker 2: us on upside risk to inflation, that demand, downside risks
Speaker 2: to growth. Mohammed al Airin still with us Mohammed, I
Speaker 2: just want to finish on that with you. The downside
Speaker 2: risk to growth to counter the upside risk to inflation.
Speaker 2: Is that something we all need to be cautious of
Speaker 2: going to see year round beyond.
Speaker 3: Yes, And that's why Chair Pal had a speech full
Speaker 3: of optionality.
Speaker 6: You know.
Speaker 3: I go back to what Mike McKee correctly said. It's
Speaker 3: not that the content was new. It wasn't. There was
Speaker 3: nothing in that speech that we didn't know before. Whether
Speaker 3: it was explaining what has been behind inflation, or whether
Speaker 3: it was explaining the range of policy possibilities and the
Speaker 3: risks and the need for risk management. All that has
Speaker 3: been said before. What was notable this time is that
Speaker 3: it was packaged slightly more hawkish than dubvish, and that's
Speaker 3: what people are picking up on. But ultimately, John, if
Speaker 3: we step back, the only thing he said is that
Speaker 3: what we know for sure is his belief is that
Speaker 3: two percent is the right inflation target and will remain
Speaker 3: the right inflation target. That issue is going to be
Speaker 3: hotly discussed in the next quarters as we get more
Speaker 3: and more data.
Speaker 2: Yeah, Mohammed, and I think that device going gaway any
Speaker 2: tom soon, even if you haven Powell tries to put
Speaker 2: it to bad Mohammed. Thanks for famin us today. I
Speaker 2: appreciate it as O whys Mohammed al arion.
Speaker 1: It will be analysis and interpretation owning the high ground
Speaker 1: on that is Joseph Weisenthal and Tracy Alloway. They host
Speaker 1: a podcast od Loots. Alloway had to redo her fireplace
Speaker 1: mantle because the awards have come in so large. Yeah,
Speaker 1: they're piling up. I mean my Wisenthal already had a
Speaker 1: mantle that could hold three hundred pounds. Next joining us,
Speaker 1: Tracy Alloway from Wisenthal would not get out of bed
Speaker 1: this early this morning. What I love about your work
Speaker 1: back at the FTEN years ago is you own a
Speaker 1: perspective of London and New York and synthesizing the Western
Speaker 1: world and an exceptional Japan with Uwaita in attendance here
Speaker 1: in this YCC disaster. Just had to listen to his
Speaker 1: hawkish one. How does Asia interpret what we heard this morning?
Speaker 7: Well, I'm kind of confused at some of the bond
Speaker 7: market action that we've seen so two year yields going
Speaker 7: above five percent hawkish interpretation. But I'm on the Neil
Speaker 7: Dudda's side here, which is This was a very dubvish speech. Actually,
Speaker 7: Powell sort of gave a nod to the R star debate,
Speaker 7: the idea about whether or not the neutral rate of
Speaker 7: interest is structurally higher in the current world. But then
Speaker 7: in the next sentence he basically goes, but we have
Speaker 7: no idea what our star is anyway, so it's completely irrelevant.
Speaker 5: And they're talking about being at restriction.
Speaker 1: That's not a small matter, John, Yeah, that's not a
Speaker 1: small matter. This has come up a couple times today.
Speaker 1: The guy from New York City, you know, the private
Speaker 1: equity guy, whatever Paul is. He's not too big on
Speaker 1: the plugins of our.
Speaker 2: Start's tricy something you've discussed. This probably shouldn't come as
Speaker 2: a surprise, should it.
Speaker 5: I don't think so.
Speaker 7: To me, it very much resembles what we saw last
Speaker 7: month from Powell.
Speaker 5: It's very much a data dependent.
Speaker 7: Speech, which makes sense because you have two major data
Speaker 7: points coming up before the next FED decision. Why would
Speaker 7: Powell stick his neck out at this particular moment in time.
Speaker 7: And of course there is a lot of uncertainty about
Speaker 7: those long and variable lags as you were talking about, Lisa.
Speaker 4: And this is a problem right now for j Powell
Speaker 4: because he wants to bring things down, but he doesn't
Speaker 4: want to curtail tonymism too much. Do you think that
Speaker 4: it seems fair to view his speech as saying that
Speaker 4: rate cuts are not in the cards for a longer
Speaker 4: period of time next year, because that's maybe what he
Speaker 4: wanted to say in the implicit sort of tone, but
Speaker 4: not what he actually said.
Speaker 7: I think he'd have to see a real deterioration in
Speaker 7: the underlying data to justify a rate cut, and that's
Speaker 7: just not happening. We have a lot of sort of
Speaker 7: anecdotal data points about maybe consumer spending is starting to weaken,
Speaker 7: but we haven't seen any of that in the unemployment
Speaker 7: rate right now, said, I know, the tone of this
Speaker 7: particular Jackson hole is very different to last year, where
Speaker 7: Powell was talking about how we'd have to assume more
Speaker 7: pain in order to bring down inflation. But that said,
Speaker 7: it's still a really uncomfortable moment for central bankers because
Speaker 7: inflation is coming down in a way that they didn't
Speaker 7: necessarily expect.
Speaker 5: Right The Phillips curve says.
Speaker 7: That if inflation's coming down, the unemployment rate should be
Speaker 7: going up, but that hasn't been.
Speaker 5: What's happening, So there's still a ton of uncertainty here.
Speaker 4: This is essentially, while it is a global central banker
Speaker 4: is coming together, it's also essentially an academic conference, and
Speaker 4: you're here with odd laws to speak to some of
Speaker 4: the academic research. What are you hoping to illuminate in
Speaker 4: this whole shifting global structure?
Speaker 5: That was sort of the theme. Yeah, that's exactly right.
Speaker 7: So I know that the focus is always going to
Speaker 7: be on the sort of short term outlook for interest rates,
Speaker 7: but really Jackson Hole is about the long term framework
Speaker 7: of monetary policy. And one of the big themes that
Speaker 7: is starting to emerge is this idea of higher public
Speaker 7: debt and we've seen that born out in the Fitch
Speaker 7: rating cut. Recently, bond yields higher because of some concerns
Speaker 7: over the outlook for US fiscal health.
Speaker 5: And again, the unusual.
Speaker 7: Thing about this moment in time is that we are
Speaker 7: seeing massive fiscal spending at a time of low unemployment.
Speaker 7: That hasn't really happened before. And so I think there
Speaker 7: are a lot of people at this conference who are
Speaker 7: wrestling with that idea.
Speaker 5: In that dynamic, you and.
Speaker 1: Joe Wisvove Rockstar hours you're just sort of wandering, and
Speaker 1: you do your podcast, and you do it by piecing
Speaker 1: together conversations where Bloomberg surveillance is complete and total chaos
Speaker 1: twenty four seven. What's the conversation here you're most looking
Speaker 1: for into your next podcast?
Speaker 7: Thank you for assuming that all thoughts isn't constant chaos
Speaker 7: as well. Tom, Well, we're having you on later today.
Speaker 1: It count Please, it's a conversation you want right now
Speaker 1: at Jackson Hall.
Speaker 7: Okay, the big picture goes back to that bond Outlook.
Speaker 7: What does a world of structurally higher debt look like?
Speaker 7: Does it miss citate higher interest rates? And what new
Speaker 7: financial risks does it introduce into the system. So we
Speaker 7: basically moved from a system that was very much reliant
Speaker 7: on bank.
Speaker 5: Lending to one that is far more bond based.
Speaker 7: And how do you square a world where bonds really
Speaker 7: really matter with central bank mandates to bring down inflation?
Speaker 5: There's a tension there.
Speaker 7: You can't build the financial system on bonds and assume
Speaker 7: that they're going to be very low volatility and then
Speaker 7: try to bring down inflation and have higher rates.
Speaker 2: Tracy, this was great, good to have you here. Thank you,
Speaker 2: Thank you having thank you very much, Tracy Allaway, the
Speaker 2: host the co host of the Oddlots podcast. Joining us
Speaker 2: is Patrick Khaka, the Philadelphia FED President, Patrick good Monk.
Speaker 2: Let's start right here, not what Shaman Power said, but
Speaker 2: what your colleague over at the Boston FED said in
Speaker 2: the last twenty four hours that this resilience of this
Speaker 2: economy suggests maybe we might have to do more. You
Speaker 2: take a different view.
Speaker 8: Why so, Look, we have to get inflation down to
Speaker 8: two percent. We all agree on that, I mean everybody is.
Speaker 8: We're all committed to that. The question is how to
Speaker 8: get there. We are at a restrictive stance in my view,
Speaker 8: and we're putting pressure on the economy to slow inflation.
Speaker 8: The question is whether we need to increase the pressure.
Speaker 8: Just keep pushing, pushing, pushing, And I'm in the camp
Speaker 8: right now. Just keep the pressure going. Let this work through.
Speaker 8: And again the data may dictate that we change course
Speaker 8: or I change course. But for right now, what I'm
Speaker 8: seeing and what I'm hearing, particularly soft data, what I'm
Speaker 8: hearing I've been around my district all summer talking to people,
Speaker 8: is that the plea I hear is you've done a
Speaker 8: lot very quickly, right you've taken a lot of pressure quickly.
Speaker 8: Now let us work through that, Let the banking system
Speaker 8: work through it, let the corporations work through that. So
Speaker 8: that I agree with that. I think we just keep
Speaker 8: the pressure on and see how things turn out.
Speaker 6: JPL didn't really say anything new, but he did sort
Speaker 6: of cast it in a hawkish light, and he talked
Speaker 6: about how the economy is perhaps growing faster than anticipated
Speaker 6: and that could increase inflationary pressures. So what would it
Speaker 6: take to get you to change your view and think
Speaker 6: we need to raise rates more?
Speaker 8: If we saw that the decreases in inflation we're installing
Speaker 8: right that we weren't making that progress that we need
Speaker 8: to make.
Speaker 6: But what would that How would that manifest itself? Because
Speaker 6: people who calculate CPI the analyst suggest we're going to
Speaker 6: see it go back up, just essentially for mechanical.
Speaker 8: Reasons on the headline side, Ye, for sure, but we
Speaker 8: also were going to see shelter inflation come down, right
Speaker 8: that it's coming down now you see this with real
Speaker 8: time rents. So if service inflation in particular, or core
Speaker 8: service inflation, whatever you want to call it, supercore, if
Speaker 8: that continues to stall, then I'd say we have to
Speaker 8: do more, But again I really want emphasized we are
Speaker 8: doing something right now. It's not as though keeping rates
Speaker 8: where they are is doing nothing. We're actually continuing to
Speaker 8: put pressure on the economy.
Speaker 4: You said, Jay Powell just said that it was important
Speaker 4: to get inflation back down to two percent.
Speaker 5: That was unequivocal.
Speaker 4: Does it matter when I mean right now you can
Speaker 4: see in the dots that it's not until after twenty
Speaker 4: twenty five. If it takes till twenty thirty, does it matter.
Speaker 8: Yeah, twenty thirty is a long way off twenty six.
Speaker 5: We're going to get under four.
Speaker 8: This year, under three next year, and then get to
Speaker 8: two in twenty twenty five. So yeah, it's going to
Speaker 8: take some time. But what really matters, what I hear
Speaker 8: all the time is not just a headline, not just supercore,
Speaker 8: but think about the essentials of life, the things that
Speaker 8: people really need, shelter, food, transportation, energy. As long as
Speaker 8: they're moving in the right direction, Americans are better off,
Speaker 8: and we need to be committed to that.
Speaker 2: You clearly think with sufficiently restrictive. Other people think we don't.
Speaker 2: So let's go through that points. Unemployment is still three
Speaker 2: point five percent growth this quarter could come in at
Speaker 2: about three percent. What is the evidence that we're sufficiently restrictive?
Speaker 2: What can you actually point to beyond the soft date?
Speaker 2: So let's talk about the real hard data.
Speaker 8: Is starting to talk it. We are hearing story after
Speaker 8: story here.
Speaker 2: And you think that's connected to where interest rights are
Speaker 2: right now?
Speaker 8: Yeah, labor markets. Labor markets are definitely easing up. We're
Speaker 8: hearing this over and over again. It's easier to get employees.
Speaker 8: And the retail numbers I'm a little suspicious of because
Speaker 8: what we're hearing, for example, from a major supplier to
Speaker 8: the back of the school market is sales are not
Speaker 8: what they expected. So we are starting to see these
Speaker 8: early signs, but they're early, right, and so I don't
Speaker 8: think we need to react either way right now. Just
Speaker 8: let us ride a little bit. Let it, let's just
Speaker 8: keep putting the pressure on.
Speaker 6: Well, if you keep the pressure on, but even don't
Speaker 6: raise rates, how long do you need to keep the
Speaker 6: pressure on. When would you see moving away from the peak?
Speaker 8: Clearly not until next year at the earliest. And when
Speaker 8: next year again, the data will have to dictate that.
Speaker 6: Well. There is a question about if inflation keeps coming down.
Speaker 6: Real rates continue to rise and put additional pressure on
Speaker 6: the economy. Would you see the FED recalibrate its peak
Speaker 6: rate to keep the pressure steady as opposed to letting
Speaker 6: it grow. I realized this is a fine point.
Speaker 8: For the market area.
Speaker 6: And if you get the wrong if you say this
Speaker 6: the wrong way, they're all going to start pricing in
Speaker 6: rate cuts.
Speaker 8: Look, it's possible, right, but at this point, we really
Speaker 8: need to see inflation moving down, and they're saying early
Speaker 8: signs of that again, and I'm getting story after story
Speaker 8: from all our contacts, and it is starting to happen.
Speaker 8: But I want to keep rates where they are right now,
Speaker 8: and then we'll decide later what we do.
Speaker 6: What do you think is happening with labor market wages
Speaker 6: at this point, because that was the big concern, especially
Speaker 6: with Jpel's non housing services. These guys were talking about
Speaker 6: the United Autoworkers negotiations going on. Have we broken the
Speaker 6: back of rising wages rising at at too fast a pace?
Speaker 8: Too early to tell right now, but it does seem
Speaker 8: like what I'm hearing from all our contacts is that
Speaker 8: it is starting to ease, right. I mean, we're not
Speaker 8: where we were where midyear increases, they're there. Nobody's considering that.
Speaker 8: So we are starting to see some easy particularly in
Speaker 8: the service area hotels, restaurants, and so forth. We are
Speaker 8: starting to see it getting a little easier to get
Speaker 8: the table at the restaurant or you know. And one
Speaker 8: of the things that I think about, one of the
Speaker 8: potential risks is that when student loan payments come back in.
Speaker 8: I don't think it's a big economic issue. I mean,
Speaker 8: when you run the numbers, it not. But it's a
Speaker 8: psychological issue here. I've not gotten that three, four or
Speaker 8: five hundred dollars bill. Now I get it. And so
Speaker 8: I've been talked to a lot of people of that
Speaker 8: generation where saying, yeah, you know, I may have to
Speaker 8: back off some of my spending.
Speaker 4: Well, but this goes to this question of okay, well
Speaker 4: the savings are going to get borne down and then
Speaker 4: we're going to start to see the real economy expose itself.
Speaker 2: Right.
Speaker 4: A lot of people have questioned that, But I am
Speaker 4: wondering what kind of neutral rate, what kind of you know,
Speaker 4: sort of longer term expectation for the FED do you
Speaker 4: expect in the new norm them all?
Speaker 5: What does it look like?
Speaker 8: Yeah, so We don't know for sure, right let's start there.
Speaker 8: We don't know exactly what that new normal looks like.
Speaker 8: But one of the things I think about is what's
Speaker 8: fundamentally shifted in the economy between before the pandemic and now?
Speaker 8: Remember before the pandemic hard to remember for all of this, right,
Speaker 8: given what we've been through, but we had low interest rates,
Speaker 8: low unemployment, and low inflation. What's fundamentally shifted? There have
Speaker 8: been a lot of things supply We're going to talk
Speaker 8: about this in this meeting. There's supply chain issues that
Speaker 8: are shifting and being re engineered. But fundamentally, I think
Speaker 8: it's plausible we can get back to that.
Speaker 1: Now.
Speaker 8: I'm not predicting that right now, but it is plausible.
Speaker 8: So I think we have to realize that we lived
Speaker 8: in that world. We've proven that that can happen, and
Speaker 8: so could it happen again?
Speaker 2: Yes, sounds like a base case. When I listened to you,
Speaker 2: I don't know.
Speaker 8: I mean point, I'm not quite sure. But clearly we're
Speaker 8: going to get we think, and we'll get back to
Speaker 8: trend growth in a couple of years. We'll get inflation
Speaker 8: under control in a couple of years, and inflation and
Speaker 8: unemployment will tick up, but really in the flourish range
Speaker 8: back to the neutral rate.
Speaker 2: You've offered example after example in the last eight minutes.
Speaker 2: It's highly anecdotal. Is the Facebook now more important to
Speaker 2: us than US retail sales?
Speaker 8: When I step back and I think about myself, and
Speaker 8: I can only speak for myself. Right when we were
Speaker 8: going through the early part of the pandemic and we
Speaker 8: were saying that inflation was transitory, it was just used
Speaker 8: vehicles and so forth, what we're hearing, what I was
Speaker 8: hearing from my contacts was now, really it's more persistent,
Speaker 8: and I didn't factor that in. The mistake I made.
Speaker 8: If I made a mistake was I didn't factor that
Speaker 8: it's really soft data, that anecdotal data. But it's more
Speaker 8: than anecdotal data. It's what people are really feeling real
Speaker 8: time in the economy. Now, we've done a lot of things.
Speaker 8: I've done real time pulse surveys and so forth to
Speaker 8: get our get ahead of that. Now, I don't want
Speaker 8: to make that same mistake twice. And so what I'm
Speaker 8: hearing right now from those same contacts is things seem
Speaker 8: to be slowing more than the data showing that could
Speaker 8: be wrong, and that's why we have to As chair
Speaker 8: Pal said, risk management is an important issue here. But
Speaker 8: if they're right, if that soft data is right, then
Speaker 8: I think it really then just solidifies my view that
Speaker 8: we stay putting pressure on, not necessarily increasing right now
Speaker 8: to see how that all resolves itself.
Speaker 6: Nerd question for our friends on the trading guests out there,
Speaker 6: especially the bond guys. The balance sheet has been coming down,
Speaker 6: but very slowly because of the caps and the way
Speaker 6: that works. You haven't hit maximum reduction yet on a
Speaker 6: month by month basis, and at the same time we
Speaker 6: have seen financial conditions remain easier than you would expect.
Speaker 6: So the question is do you do more with the
Speaker 6: balance sheet because it has an effect on how tight
Speaker 6: the filese he is.
Speaker 8: At this point, I don't see us changing course on
Speaker 8: how we're reducing the balance Again, circumstances could dictate something else,
Speaker 8: but for right now, I think we just stay the course,
Speaker 8: keep that on as I said or many times before,
Speaker 8: on autopilot, just let it run, and if we need
Speaker 8: to adjust policy, we adjust that.
Speaker 6: With the bed country, well, there has been a question
Speaker 6: on the other side of how close you are to
Speaker 6: stopping balance sheet reduction when you reach the level of demand.
Speaker 8: Yeah. I don't think we're there yet, but we do
Speaker 8: clearly have to monitor that. If you go back to
Speaker 8: the last time we did this, we knew we were
Speaker 8: at that point where we needed to stop when we
Speaker 8: saw the market indicators, the volatility in the markets. We've
Speaker 8: not seen that yet, but we could.
Speaker 4: We have seen real yields climb significantly. Today five year
Speaker 4: real yields. Inflation for adjusted yields rose the highest levels
Speaker 4: going back to two thousand and eight. Are you watching
Speaker 4: that closely as an indication of the transmission mechanism at
Speaker 4: the balance sheet run off?
Speaker 6: Sure?
Speaker 8: Yeah, I mean that's one of many. It's also just
Speaker 8: a simple trading and things.
Speaker 4: Like the market and so forth.
Speaker 8: Not at this point, I mean, but it is clearly
Speaker 8: something we need to keep watching.
Speaker 2: Can I finish on this slightly provocative? Have you destroyed
Speaker 2: the mortgage market in America for a generation?
Speaker 8: I don't think so. I mean, well, it is clearly
Speaker 8: tough when you talk to bankers.
Speaker 2: Beyond tough people.
Speaker 8: First time home buyer really really hard because there's no inventory.
Speaker 8: Even if they could they could afford the mortgage, they
Speaker 8: can't find a home because people are locked into that
Speaker 8: low mortgage rate, you know, in their existing home. That's
Speaker 8: why I think we don't keep going with rates right,
Speaker 8: so that we can stay steady and at some point
Speaker 8: as we reduce rates, we can bring those mortgage rates
Speaker 8: back down. There's no question that's an isitiation.
Speaker 2: But we're not going back to two percent mortgages over
Speaker 2: thirty years, are we. So that inventory is offline maybe
Speaker 2: for a general less you're not there yet.
Speaker 8: Yeah, because what we're hearing from some of the home
Speaker 8: builders is they keep selling.
Speaker 2: How they're having a great time, having a great high's
Speaker 2: out a huge favor. We're talking about whether this housing
Speaker 2: market can really recover in the next several years. Given
Speaker 2: that this feels quite generational, This feels like a.
Speaker 8: There's inventory coming online, I can tell you in Philadelphia
Speaker 8: and across many cities I know, but Philadelphia, for example,
Speaker 8: a lot of multifamilies coming online in the next few years.
Speaker 8: So we are increasing inventory.
Speaker 2: Patrick, it's good to see you as always. Thank you,
Speaker 2: sir Patrick Harker, the Philadelphia Fed President. The first reaction
Speaker 2: there from Insight the Federals following that speech from Chairman Powell.
Speaker 1: What I'm going to do at Jackson Hall right now,
Speaker 1: as we begin in the sunrise of this important Friday,
Speaker 1: it's taking more international perspective. She is not here at
Speaker 1: Jackson Hall, but in Hurt and Saul, her institution, the
Speaker 1: International Monetary Fund, decisively is Crystallina Gorgheva joins us, the
Speaker 1: Managing director of the IMF, of a recent essay on
Speaker 1: what everyone's talking about, the fragmentation, the fracture of the
Speaker 1: global economy. Doctor Gergieva, congratulations on the essay that you
Speaker 1: and your team put together for foreign affairs. You speak
Speaker 1: of fragmentation. How urgent is the need for solution right now?
Speaker 1: What needs to be done now to begin to a
Speaker 1: more stable global economy?
Speaker 9: It is urgent, and that sense of urgency is lacking Tom.
Speaker 9: Why is it urgent? Because we have moved in a
Speaker 9: more shocked front world, in a world of more uncertainty,
Speaker 9: and in this world we need each other even more
Speaker 9: than before, and yet cooperation is in a retreat. What
Speaker 9: does that mean? It means that unless we wake up
Speaker 9: and we act pragmatically in the areas where we can
Speaker 9: find common ground and in the areas where we must
Speaker 9: find common ground, like the fight against climate change, we
Speaker 9: will drift into a world that is poorer and less secure.
Speaker 9: We have rundom numbers. Unless we wake up and we
Speaker 9: pursue this pragmatic collaboration, we are going to be losing
Speaker 9: about seven percent of global GDP in the long run.
Speaker 9: I mean that is like White transcend and Germany from
Speaker 9: the economic map of the world.
Speaker 1: Because of time, doctor Garg gave. It's so important I
Speaker 1: get this in this morning. I want you to speak
Speaker 1: right now to the four major central bankers assembled here
Speaker 1: in Jackson Hall. Ang your call this year is the
Speaker 1: five year caution of economic growth of your institution. You
Speaker 1: call it slobalization. How do those four central bankers assemble
Speaker 1: here get us out of slobalization.
Speaker 9: It is not going to be only the job of
Speaker 9: central bankers, but yes, they play a role, and their
Speaker 9: role is to be very careful in assessing how data
Speaker 9: informs their actions. We're going to see tom after a
Speaker 9: period of convergence in monetary policy action typening creates fighting inflation,
Speaker 9: some divergence. Because where the US economy is very resilient,
Speaker 9: I was listening to the discussion just before me, the
Speaker 9: European economy is not there is less strength in the
Speaker 9: performance over there. So central bankers will have to recognize
Speaker 9: that some specificity in how they approach the fight against
Speaker 9: inflation and how they link this to their role in
Speaker 9: supporting growth and employment. How they approach that is going
Speaker 9: to be a matter of thorough assessment of national data.
Speaker 9: Let me just make one point about the United States.
Speaker 9: What we see in the US is very strong demand
Speaker 9: for services, very good, but not good enough for the
Speaker 9: world economy because it doesn't translate into spillover for global growth.
Speaker 9: And this is why my main point is there would
Speaker 9: be some divergence in policy approaches across central banks.
Speaker 4: Crystallina is fragmentation inflationary?
Speaker 9: Of course it is why because so much how much
Speaker 9: did you take? If you take the main impact of
Speaker 9: fragmentation through trade, what it translates into is pushing costs
Speaker 9: of production up on a global scale. How inflationary it
Speaker 9: could be depends, of course on how that specifically reflects
Speaker 9: into cost structures across national economies in the world economy.
Speaker 9: But the pressure on costs and then through that on
Speaker 9: standard the living of ordinary people certainly comes when we
Speaker 9: fragment the world economy.
Speaker 2: Christin and I just want to squeeze this in. I've
Speaker 2: got about sixty seconds ninety seconds left on the clock.
Speaker 2: You've said the IMF needs more resources. Can you be
Speaker 2: a lot more specific about what that means, what do
Speaker 2: you need and where do you expect those resources to
Speaker 2: come from.
Speaker 9: Well, let's face reality, more short prone world means countries
Speaker 9: need to have more capacity to face these shocks. Today,
Speaker 9: global reserves are concentrated in a small number of strong
Speaker 9: advanced and emerging market economiests ten countries hold two thirds
Speaker 9: of global reserves and all the small medium sized countries
Speaker 9: hold less than one percent of global reserves. This is
Speaker 9: where the IMF comes in. We are the insurer for
Speaker 9: the uninsured. Today, our size one trillion dollars lending capacity
Speaker 9: is just not enough to be the buffer against future
Speaker 9: shocks that we all anticipate are going to be happening.
Speaker 9: And also what we want to see is reliance on
Speaker 9: own resources. We are discussing with our membership to bring
Speaker 9: the quarter resources of the fund again above fifty percent
Speaker 9: of our funding level. Today they are at forty percent.
Speaker 9: So we are talking about a not a minor increase.
Speaker 9: But I think everybody understands that this is a provision
Speaker 9: of a global public good. If the IMAS cannot hold
Speaker 9: financial stability in vulnerable countries, that is hurting not only
Speaker 9: those countries, it has negative skill over for the world economy.
Speaker 2: The IMF managing. All right, Christiana, thank you, it's got
Speaker 2: a hair from you. Thank you.
Speaker 1: This is a wonderful moment now as we go to
Speaker 1: that speech with the central bankers gathered here on yes,
Speaker 1: US economics, but of course international economics, and they will
Speaker 1: listen more to Barry Eichen Green and Berkeley than anyone here.
Speaker 1: He owns the high ground from golden feathers, his classic
Speaker 1: book on gold until what we see with globalizing capital,
Speaker 1: and now his intense focus on debt and the debt
Speaker 1: mess we're in. Doctor Ikon Green, thank you so much
Speaker 1: for joining us. How bad is the debt mess we're in?
Speaker 10: Well, I think it's a big change from the pre
Speaker 10: COVID days. Governments are going to be constrained if and
Speaker 10: when we have a global recession, if and when a
Speaker 10: bad thing happens, they have a lot less room to
Speaker 10: run fiscally because of the increase in public debts worldwide.
Speaker 1: As usual, you've been out front on this and the
Speaker 1: phrase that I hear from you is and you say
Speaker 1: it with respect to the institutional pressures and our political leaders.
Speaker 1: The modern medicine that we have, what is the more
Speaker 1: stronger medicine we need to take to get control of
Speaker 1: our debt in our ratios.
Speaker 10: I think we're going to have to learn to live
Speaker 10: with these high levels of public debt. That the advice
Speaker 10: policy makers are getting from the Bank for International Settlements
Speaker 10: in the IMF about bringing down debt ratios, that's unrealistic.
Speaker 10: We're not going to be able to grow out of
Speaker 10: these higher debt ratios. We're not going to have a
Speaker 10: more favorable real interest rate going forward then we've had
Speaker 10: in the past. We're not going to be able to
Speaker 10: run primary budget surpluses for long periods of time. So
Speaker 10: I think we're going to have to tiptoe likely through
Speaker 10: this problem and manage these heavy debts.
Speaker 2: Tips your words, manage. Other people might say this ends
Speaker 2: in disaster, Barry, what's the argument against that?
Speaker 10: For countries like the United States. There is a big
Speaker 10: remains demand out there from foreign central banks and the
Speaker 10: international private sector for US Treasury bonds. So I think
Speaker 10: the US government is an exception to the general rule
Speaker 10: in that it has room to run. Other governments are
Speaker 10: going to have to reform fiscal institutions, worry about fiscal transparency.
Speaker 10: Do all the things that the IMF and others have
Speaker 10: been recommending for years.
Speaker 4: Does it basically suggest that longer term yields in the
Speaker 4: US are where they need to be, that basically the
Speaker 4: term premium is going to be significantly higher, that essentially
Speaker 4: what you see.
Speaker 5: Is what you get.
Speaker 10: Well, I think the term premium can come down a bit,
Speaker 10: but not back down to pre COVID levels. I think
Speaker 10: where everybody understands that we're in a new world with
Speaker 10: higher interest rates, the question is how much higher? And
Speaker 10: I wouldn't be a pessimist about that.
Speaker 4: How much has the debt that the US is a
Speaker 4: curd in particular driven a lot of the inflation that
Speaker 4: we see. How much you can really basically write the
Speaker 4: book and say helicopter money actually does cause inflation?
Speaker 10: Well, I think the fiscal stimulus that we in the
Speaker 10: United States did in twenty twenty one was a contributing
Speaker 10: factor to the inflation, and there will be debate about
Speaker 10: that today because there were other contributing factors as well.
Speaker 10: The supply shocks, a variety of other things.
Speaker 1: Take your study of debt, your view on the inflation
Speaker 1: adjusted yield, which is maybe what the adults of pros
Speaker 1: look at, and bring it over to the Eichinggreen application
Speaker 1: of monetary policy. And there's a whole our starred debate
Speaker 1: in that. Are we going to move away from a
Speaker 1: two percent regime? And how do we search out an
Speaker 1: anchored level that is higher?
Speaker 10: Well, I think the Fed has to bring inflation down
Speaker 10: to two percent before it really opens that conversation we
Speaker 10: saw in this recent episode the importance of credibility, and
Speaker 10: credibility and two percent are synonymous for the time being.
Speaker 10: The only time you talk about changing the regime is
Speaker 10: when you have everything else.
Speaker 1: Let's go to Alahall at Berkeley to Brad Delong's office.
Speaker 1: You and I are going to walk in with a
Speaker 1: professor DeLong, and I'm going to say to both of you,
Speaker 1: with your academics and his politic more political view, what's
Speaker 1: the price of bringing inflation down to two percent? What's
Speaker 1: the cost of that to Americans?
Speaker 10: Well, so far, the cost has been minimal compared to
Speaker 10: the doom and gloom scenarios we heard about unemployment going
Speaker 10: up to five or six percent. So so far so.
Speaker 1: That imark you have been the arch optimist against doom
Speaker 1: and glue. And how do you respond to the doom
Speaker 1: and gloom that we hear daily from Lisa Bramwootz or
Speaker 1: that we hear out in all of economics. How do
Speaker 1: you respond to that American bloom that you fought against
Speaker 1: for fifty years?
Speaker 10: Well, look at what the Atlanta Fed now cracker is saying.
Speaker 10: The US economy is on track. There there's no sign
Speaker 10: of inflation on the horizon. Yet in this kind of
Speaker 10: assembly of economists, there has to be one optimist at LISTA.
Speaker 2: This is your name is reference to me.
Speaker 4: I just want to wonder, you know it? At one
Speaker 4: point is it unsustainable this kind of enthusiasm, this kind
Speaker 4: of growth?
Speaker 6: Right?
Speaker 4: I mean, at some point you're not going to get
Speaker 4: down to two percent. I'm already changing to three percent
Speaker 4: two percent for quite a while, even by the Fed's
Speaker 4: own admission.
Speaker 2: Twenty twenty five, exactly after.
Speaker 4: Twenty twenty five, doesn't that reduce their credibility to some degree?
Speaker 10: They have to have a credible strategy for getting to
Speaker 10: So this is the classic. Give them a target two
Speaker 10: percent or give them a date, never give them both
Speaker 10: two percent?
Speaker 2: Can you think about where it came from? Is this
Speaker 2: really about some people in New Zealand in the nineteen
Speaker 2: eighties just coming up with a number. Is that what
Speaker 2: we're all doing here?
Speaker 10: That's exactly what we're all all doing here. But history
Speaker 10: has consequences.
Speaker 1: Can I see get?
Speaker 2: I mean absolutely absolutely dead?
Speaker 1: On the first time I think I met you, or
Speaker 1: it was like within the year I met you, some
Speaker 1: guy almost took a swing at you on a stage
Speaker 1: in Singapore at at G seven meeting. He was so
Speaker 1: angry with you. How do you respond to, OMG, the
Speaker 1: dollar's dead, ren mindy ascended? You throw a chalk at
Speaker 1: people at Berkeley when it comes up? How do you respond?
Speaker 10: No, at Berkeley, I don't hear it.
Speaker 6: But uh.
Speaker 10: That that kind of interchange. You get more invitations, do
Speaker 10: you get okay?
Speaker 1: You get some're speaking fees off that. Do you suggest
Speaker 1: a dollar is at risk given all these stresses?
Speaker 10: I think the dollar is not risk yet. So we
Speaker 10: in the United States can do things to damage its credibility,
Speaker 10: But nothing that happens at the Brick Summit this weekend
Speaker 10: will much as your work. I would have chosen to
Speaker 10: come here anyway.
Speaker 2: The word yet, the word yet is so loaded. Thank you.
Speaker 2: This is wonderful, Trady. Thank you very much, sir.
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