WEBVTT - Fed’s Christopher Waller Talks Higher Yields, Inflation 0:00:00.120 --> 0:00:03.880 Now, Christopher Waller, the Fed Reserve governor, is currently speaking 0:00:03.920 --> 0:00:06.960 to our Saleha Moshin here at Bloomberg's New Economy Forum 0:00:07.020 --> 0:00:09.459 about monetary policy in the age of AI. 0:00:09.480 --> 0:00:10.400 So let's just listen in. 0:00:10.780 --> 0:00:13.000 It's so exciting to be here with Governor Waller. We 0:00:13.020 --> 0:00:15.720 both flew in from Washington, D.C. to have a chat 0:00:15.760 --> 0:00:19.060 with you all in the present. One thing I've noticed 0:00:19.300 --> 0:00:21.780 is that just like in Washington, if you walk around 0:00:21.800 --> 0:00:25.570 in Delhi, the big conversation is AI, which we're going 0:00:25.590 --> 0:00:28.880 to continue talking about. Governor Waller, you have made a 0:00:29.040 --> 0:00:31.380 lot of comments in the last couple of years about 0:00:31.400 --> 0:00:37.250 the benefits of AI, including productivity boom, contributing to GDP growth, 0:00:37.310 --> 0:00:42.290 seeing living standards rise. And that's all talking about the 0:00:42.330 --> 0:00:44.909 United States. I'd love to hear from you how you 0:00:45.010 --> 0:00:48.760 see the impact of AI in our economy go into 0:00:48.800 --> 0:00:51.540 the rest of the world, especially emerging markets like India. 0:00:52.360 --> 0:00:55.450 Yeah, I mean, the way I think about AI is... First, 0:00:55.550 --> 0:00:59.050 there are those who build the AI tools and models. 0:01:00.270 --> 0:01:03.980 Then there are those who supply all the inputs to 0:01:04.030 --> 0:01:07.039 build that. That would be data centers, chips, all that. 0:01:07.600 --> 0:01:12.500 And then third, that's the people who actually use the models. Now, clearly, 0:01:12.520 --> 0:01:16.120 when it comes to building the models, the US is 0:01:16.140 --> 0:01:17.500 the dominant country. 0:01:17.660 --> 0:01:18.800 China's there as well. 0:01:19.640 --> 0:01:23.200 In terms of providing the inputs, a lot of that's Taiwan, 0:01:23.250 --> 0:01:28.240 South Korea, producing the inputs. Data centers, they're all over 0:01:28.280 --> 0:01:31.440 the world. They're not just located in the U.S. And then, 0:01:31.480 --> 0:01:33.979 of course, the users are anybody that wants to use. 0:01:33.920 --> 0:01:35.340 It for work. 0:01:36.050 --> 0:01:40.429 Now, there's a very high correlation between GDP per capita 0:01:40.630 --> 0:01:44.750 and AI use in people's work. So that's kind of 0:01:44.850 --> 0:01:46.650 one of the things that people, I think, I'm a 0:01:46.670 --> 0:01:51.000 little concerned about is It's not even across the world 0:01:51.040 --> 0:01:53.280 in terms of how AI is used. And that means 0:01:53.360 --> 0:01:56.160 it's going to have productivity differences if it's not actually used. 0:01:56.200 --> 0:02:01.500 So you'll see potentially widening gaps in GDP per capita 0:02:01.600 --> 0:02:04.700 because of this. But I think it's an amazing technology. 0:02:04.770 --> 0:02:07.470 I really do think. I'm not a pessimist. I don't 0:02:07.510 --> 0:02:09.110 believe AI is going to be the end of the 0:02:09.150 --> 0:02:11.790 human race in the next two years or anything like that. 0:02:12.630 --> 0:02:13.970 But it is a tool. 0:02:14.250 --> 0:02:16.470 And even within the Federal Reserve, that's what I tell 0:02:16.690 --> 0:02:19.620 all of our employees, We're going to train you to 0:02:19.680 --> 0:02:21.720 do this because we want you to be more productive. 0:02:22.460 --> 0:02:24.580 If I was going to replace you with AI, I 0:02:24.620 --> 0:02:28.780 wouldn't waste one cent training you. That would be a 0:02:28.800 --> 0:02:30.910 waste of money. So it really is a tool that 0:02:31.060 --> 0:02:31.930 I expect all. 0:02:31.840 --> 0:02:35.430 Of our employees to use. So that's kind of. 0:02:35.410 --> 0:02:37.890 The basic global picture of how I think the whole 0:02:37.930 --> 0:02:42.450 AI world works. Europe, for example, doesn't produce much AI 0:02:42.990 --> 0:02:47.410 or inputs, but they're big users of it. And it's 0:02:47.490 --> 0:02:51.470 already kind of widely spread throughout the business sector and community. 0:02:53.010 --> 0:02:56.190 Let's talk about the payoffs. You say you're an optimist. 0:02:56.430 --> 0:03:00.740 You're not worried about the human race. When are we 0:03:00.760 --> 0:03:03.420 going to see some of these benefits, the productivity boom, 0:03:03.660 --> 0:03:07.780 the increase in our wages, inflation being reined in? Those 0:03:07.820 --> 0:03:10.860 things haven't really turned up for the everyday person. 0:03:11.310 --> 0:03:12.030 Right. 0:03:12.660 --> 0:03:15.630 It's often the case that when you have big technological changes, 0:03:15.650 --> 0:03:19.350 this is what economists know, is you don't typically see 0:03:19.370 --> 0:03:22.870 the productivity gains for years. A big part is firms 0:03:22.910 --> 0:03:24.930 have to figure out, what am I using this for? 0:03:25.050 --> 0:03:27.950 How am I going to actually increase productivity? They're not 0:03:27.990 --> 0:03:30.190 really sure, and so there's a lot of trial and 0:03:30.350 --> 0:03:30.810 error and a. 0:03:30.810 --> 0:03:31.889 Lot of experimentation. 0:03:32.490 --> 0:03:35.970 But then you start realizing where it really does have 0:03:36.030 --> 0:03:38.550 its impact. I mean, I'm telling you, if anybody does 0:03:38.610 --> 0:03:42.540 any coding... This stuff is amazing. I mean, it's just 0:03:42.700 --> 0:03:46.680 shocking how good it is. So in terms of coding, yeah, 0:03:46.700 --> 0:03:48.780 I mean, if you were a coder, your job's going 0:03:48.800 --> 0:03:51.140 to be fundamentally changed. It doesn't mean you're going to 0:03:51.160 --> 0:03:52.760 lose your job. It's just you're going to do a 0:03:52.820 --> 0:03:55.910 different job than what you were doing before. Things that 0:03:55.970 --> 0:03:58.370 you couldn't do because you were too busy doing basic coding, 0:03:59.010 --> 0:04:01.170 you're going to be able to now expand what you're 0:04:01.210 --> 0:04:04.030 doing in terms of the production of your output. 0:04:04.890 --> 0:04:05.240 So.... 0:04:07.820 --> 0:04:10.520 I think it's just going to be a while before 0:04:10.860 --> 0:04:13.700 firms start figuring out how to actually do this. And 0:04:13.780 --> 0:04:16.880 you may, look, you may not see it in terms of, 0:04:17.620 --> 0:04:19.700 this is one of the measurement things I've thought about. 0:04:21.080 --> 0:04:24.000 Suppose I can do the same amount of work faster. 0:04:26.190 --> 0:04:28.750 So instead of five days, I get it done in 0:04:28.810 --> 0:04:31.710 three days. Maybe I take all that time and just 0:04:31.750 --> 0:04:35.430 go have more leisure. My output's not any higher. 0:04:35.550 --> 0:04:36.890 Per a given year. It's just. 0:04:37.310 --> 0:04:40.890 I've got more time to consume my leisure and enjoy 0:04:40.940 --> 0:04:44.060 my life. That still means it's still good for welfare, 0:04:44.160 --> 0:04:46.000 even if you don't see a big increase in. 0:04:47.839 --> 0:04:48.940 GDP per capita. 0:04:49.380 --> 0:04:53.000 So you either have to rethink, do we measure productivity 0:04:53.060 --> 0:04:57.220 per unit of time as opposed to quarterly, it's now 0:04:57.279 --> 0:04:58.300 down to like days. 0:04:59.040 --> 0:05:00.380 So you have to kind of think about that. 0:05:00.400 --> 0:05:04.200 And then just in terms of productivity, There's a lot 0:05:04.240 --> 0:05:06.020 of things this technology is just going to make your 0:05:06.040 --> 0:05:08.000 life better, even if it doesn't show up in your 0:05:08.040 --> 0:05:13.219 work productivity. I always like to point out Google Maps 0:05:13.339 --> 0:05:14.680 is an amazing. 0:05:15.760 --> 0:05:19.250 Invention. I don't use it to increase my productivity. 0:05:19.260 --> 0:05:22.750 It helps me get around in cities where I'm visiting 0:05:23.050 --> 0:05:25.430 and I don't get lost. That doesn't show up in 0:05:25.470 --> 0:05:28.510 the GDP numbers, but that makes my life a lot better. 0:05:28.529 --> 0:05:31.100 So I always try to tell people technology can just 0:05:31.140 --> 0:05:34.000 make your life better or can actually increase productivity and 0:05:34.020 --> 0:05:35.160 how much output you produce. 0:05:36.740 --> 0:05:40.120 One thing that's clear to measure is inflation. And right now, 0:05:40.200 --> 0:05:42.160 the narrative in the United States and in other parts 0:05:42.200 --> 0:05:46.440 of the world is an affordability crisis. There is definitely 0:05:47.279 --> 0:05:51.020 an impulse that's coming from AI-related impacts on the economy. 0:05:52.180 --> 0:05:55.480 In the short term, when do you see the AI 0:05:55.680 --> 0:05:57.840 hit to inflation dissipating in the U.S. 0:05:59.500 --> 0:06:02.279 Yeah, I mean, the whole build-out, obviously, if you're building 0:06:02.380 --> 0:06:06.540 out several trillion dollars of investment in AI, and you 0:06:06.560 --> 0:06:08.860 have to buy all that stuff, and your demand is 0:06:08.920 --> 0:06:12.390 perfectly inelastic, you'll pay whatever price if you're one of 0:06:12.410 --> 0:06:15.589 the hyperscalers. You're going to bid up the price of 0:06:15.630 --> 0:06:18.430 all semiconductors of all type, and that's going to spill 0:06:18.490 --> 0:06:22.010 over to anybody else who uses those products. And that's 0:06:22.029 --> 0:06:23.950 what we're starting to see in the US. We're starting 0:06:23.970 --> 0:06:27.460 to see AI having a spreading out of inflation because 0:06:27.540 --> 0:06:31.099 it's just increasing demand for everything else. Now, down the road, 0:06:31.140 --> 0:06:33.000 when this stuff is done and they've kind of built 0:06:33.040 --> 0:06:36.539 it out, that kind of demand pressure goes away. And 0:06:36.580 --> 0:06:40.060 then you hopefully will start seeing all the supply effects, 0:06:40.120 --> 0:06:42.890 which means we can produce more output faster and at 0:06:42.910 --> 0:06:45.930 a lower price. So it's one of these two-stage things. 0:06:46.029 --> 0:06:49.490 Demand is going to be, especially the size of the investment. 0:06:49.510 --> 0:06:52.530 I mean, this is shocking how much is being spent 0:06:52.589 --> 0:06:55.729 on this compared to any other point in history. And 0:06:55.770 --> 0:06:58.089 so you're going to see these price pressures early on. 0:06:58.210 --> 0:07:01.000 How long are they going to last? It could last 0:07:01.060 --> 0:07:03.580 anywhere from two to three years, given how much they've 0:07:03.640 --> 0:07:07.240 committed already to spend out in the future. Now, if 0:07:07.320 --> 0:07:10.360 all that falls off, if suddenly there's a pullback or 0:07:10.400 --> 0:07:12.740 you can't meet this build-out, you can't do it, that'll 0:07:12.980 --> 0:07:16.700 put a check on prices. But the benefits on inflation 0:07:16.740 --> 0:07:18.740 down the road are, they're down the road as far 0:07:18.780 --> 0:07:19.260 as I'm concerned. 0:07:19.290 --> 0:07:21.770 They're still a few years out. A few years off. 0:07:21.830 --> 0:07:25.590 Is there any chance that the inflation that's stemming from 0:07:25.610 --> 0:07:28.770 the AI build-out could be embedded in the economy for 0:07:28.790 --> 0:07:29.370 a longer time? 0:07:30.470 --> 0:07:33.030 Yeah, I mean, like I said, it's very specific what 0:07:33.070 --> 0:07:36.130 it is. It's not like a broad-based effect. It spills 0:07:36.210 --> 0:07:41.370 over into a smaller set of goods than other things. 0:07:41.890 --> 0:07:44.110 And we know that at some point this huge build-out 0:07:44.130 --> 0:07:47.790 and huge demand is going to, I won't say completely 0:07:47.830 --> 0:07:49.970 come to an end, but it's going to taper off 0:07:50.010 --> 0:07:52.540 a lot. And when that happens, we'll see the demand 0:07:52.570 --> 0:07:55.350 pressure come down. But from all the plans that I'm 0:07:55.410 --> 0:07:58.440 hearing from the hyperscalers, they're still planning on spending trillions 0:07:58.480 --> 0:08:01.520 of dollars over the next three years. So this demand 0:08:01.580 --> 0:08:03.760 pressure may still be there. And we have to just 0:08:03.780 --> 0:08:05.280 decide how we want to respond to that. 0:08:05.960 --> 0:08:08.640 Well, let's talk about the AI build-out. There is still 0:08:08.720 --> 0:08:11.500 a lot of investment that's coming through. A lot of 0:08:11.540 --> 0:08:16.370 that is being issued in corporate debt. We're seeing a 0:08:16.390 --> 0:08:19.670 lot of financing to help with the AI build-out. And 0:08:19.710 --> 0:08:24.040 of course, that debt is sensitive to U.S. treasuries. and 0:08:24.060 --> 0:08:28.060 we've seen yields skyrocket. Global yields are high. Can you 0:08:28.120 --> 0:08:32.439 talk through a little bit about what you see in U.S. yields, 0:08:32.460 --> 0:08:35.099 whether that could be longer term, and how much of 0:08:35.160 --> 0:08:37.860 the global higher yield picture has to do with the 0:08:37.900 --> 0:08:39.679 narrative in the U.S., and what's separate? 0:08:40.640 --> 0:08:43.229 Yeah, I mean, everybody's suddenly paying attention to high yields, 0:08:43.280 --> 0:08:46.150 and when you look at it, it's not yields have 0:08:46.170 --> 0:08:48.809 gone up because there's expected higher future inflation. 0:08:49.570 --> 0:08:50.470 That doesn't show up. 0:08:50.750 --> 0:08:54.620 Inflation expectations are well anchored So all of the buildup 0:08:54.920 --> 0:08:57.060 is not coming from an inflation premium. 0:08:57.140 --> 0:09:00.000 That's not where it's coming from. So it is a 0:09:00.040 --> 0:09:01.160 factor of real growth. 0:09:01.280 --> 0:09:03.440 If you have real growth and real productivity and these 0:09:03.580 --> 0:09:06.330 investments are going to pay off, you're willing to pay 0:09:06.390 --> 0:09:10.030 more in terms of your interest cost. And people know 0:09:10.090 --> 0:09:12.890 that and they'll ask for it. So real growth has 0:09:12.929 --> 0:09:15.929 an effect on these real yields. Now, on top of that, 0:09:15.990 --> 0:09:20.699 you have general fiscal concerns around the world. All governments 0:09:20.740 --> 0:09:23.460 are kind of sitting here in a, at least in 0:09:23.500 --> 0:09:26.440 the advanced countries, not such a great state. And we're 0:09:26.460 --> 0:09:29.679 seeing that in France right now. So some of this 0:09:29.760 --> 0:09:33.400 is just driving up yields in some countries that aren't 0:09:33.420 --> 0:09:36.559 necessarily related to the U.S. or maybe some other countries. 0:09:37.300 --> 0:09:41.430 And then the competition from AI is a serious, serious concern. 0:09:42.429 --> 0:09:45.870 Because even if the money flows into the U.S., so 0:09:45.950 --> 0:09:48.989 demand goes up, but there's inflows from abroad, and that 0:09:49.070 --> 0:09:52.440 kind of cancels out the price effect. that money's leaving 0:09:52.460 --> 0:09:54.720 some other country. Their yields are going to go up. 0:09:55.460 --> 0:09:58.989 So even if you have competition and no inflows in 0:09:59.030 --> 0:10:01.740 the U.S., yields are going to go up. If you 0:10:01.780 --> 0:10:04.600 have higher demand and yet there's inflows from other countries, 0:10:05.240 --> 0:10:07.059 you're going to see higher yields in those countries because 0:10:07.100 --> 0:10:09.439 the funds are no longer available for those countries. 0:10:09.179 --> 0:10:09.900 To invest in. 0:10:10.380 --> 0:10:13.309 But the AI build, I think, is definitely having an impact. 0:10:13.330 --> 0:10:15.070 I mean, if you look at Google issued, I think, 0:10:15.090 --> 0:10:18.800 a 40-year bond and it was paying 100 basis points 0:10:18.960 --> 0:10:19.500 over U.S. 0:10:19.559 --> 0:10:21.760 Treasuries. Where do you want to hold? 0:10:21.760 --> 0:10:26.630 100 basis point premium for a Google bond that's probably 0:10:26.670 --> 0:10:28.790 going to pay off? It's not like they're going to 0:10:28.809 --> 0:10:32.490 probably default. So that is affecting the way people are 0:10:32.530 --> 0:10:36.410 looking at things. So anyway, that's it. 0:10:36.830 --> 0:10:39.119 There's economists who say that the U.S., at least, and 0:10:39.160 --> 0:10:41.200 maybe the rest of the world, is entering a phase 0:10:41.380 --> 0:10:43.820 of just higher yields and needs to adjust to it. 0:10:43.840 --> 0:10:44.440 Do you agree with that? 0:10:45.400 --> 0:10:47.069 Well, I mean, like I said, if this is all 0:10:47.110 --> 0:10:50.250 because of higher growth, that's a good thing. I'd rather 0:10:50.309 --> 0:10:52.950 have higher growth and higher yields and low growth and 0:10:52.990 --> 0:10:56.569 low yields. That seems like an obvious one to me. 0:10:57.390 --> 0:11:00.640 What you get concerned about is it's driven by inflation expectations, 0:11:01.340 --> 0:11:04.360 fiscal concerns, which I think is really a problem in 0:11:04.400 --> 0:11:05.180 France right now. 0:11:06.380 --> 0:11:07.400 Could be in the U.S. 0:11:07.420 --> 0:11:09.860 People are starting to wake up to our fiscal situation 0:11:09.920 --> 0:11:14.220 is not that good. And then naturally, bondholders are going 0:11:14.240 --> 0:11:17.959 to demand a higher yield to get them to buy 0:11:17.980 --> 0:11:25.080 that debt. So if you're living with higher yields because 0:11:25.100 --> 0:11:27.090 of higher growth, to me, that's a good thing. If 0:11:27.120 --> 0:11:30.069 you were living with higher yields because of greater fear 0:11:30.110 --> 0:11:30.830 of inflation. 0:11:31.010 --> 0:11:32.170 That is not a good outcome. 0:11:33.210 --> 0:11:35.970 I want to ask you about the fiscal policy situation 0:11:35.990 --> 0:11:38.089 and how that affects your role and your work at 0:11:38.110 --> 0:11:42.840 the Fed. But first, when yields go up, they do 0:11:42.920 --> 0:11:44.579 tend to do the job a little bit of a 0:11:44.640 --> 0:11:47.880 rate hike. In the picture that we have now, do 0:11:48.059 --> 0:11:50.420 you think that that's enough, or is there more room 0:11:50.470 --> 0:11:53.150 for the Federal Reserve to raise interest rates? 0:11:53.490 --> 0:11:57.450 Yeah, so I've long argued that the 10-year rate is determined. 0:11:57.030 --> 0:11:58.589 By global supply and demand. 0:11:59.370 --> 0:12:02.809 What I do, changing the overnight interest rate on deposits, 0:12:03.450 --> 0:12:07.050 that's not driving the 10-year yield much. And even if 0:12:07.120 --> 0:12:09.020 I do it, it's for some short period of time, 0:12:09.080 --> 0:12:10.000 not 10 years out. 0:12:10.650 --> 0:12:11.530 So I've always viewed. 0:12:11.370 --> 0:12:14.620 The 10-year as being driven by global factors, global demand, 0:12:14.840 --> 0:12:17.320 also supply from the US Treasury. 0:12:18.000 --> 0:12:19.280 And it's not so much what I do. 0:12:19.420 --> 0:12:23.360 So when yields go up, is that going to impact 0:12:24.100 --> 0:12:27.179 interest-sensitive sectors like housing and autos and other things? 0:12:27.220 --> 0:12:28.179 Yeah, of course it is. 0:12:28.800 --> 0:12:31.569 Does that tighten off demand for those products and put 0:12:31.610 --> 0:12:32.770 downward pressure on prices? 0:12:33.010 --> 0:12:33.370 It should. 0:12:35.130 --> 0:12:37.480 It's not our intent to do it, but that's going 0:12:37.500 --> 0:12:40.020 to be one of the natural spillovers from this kind 0:12:40.080 --> 0:12:43.260 of surge in yields at the 10-year and higher. 0:12:43.700 --> 0:12:44.980 So it's doing a little bit of the work. 0:12:45.080 --> 0:12:46.020 It is doing some of the work. 0:12:47.640 --> 0:12:50.179 Let's get back to the debt problem, which is global, 0:12:50.520 --> 0:12:54.960 highest levels since World War II. In France, we're seeing 0:12:55.400 --> 0:12:58.750 that investors are now realizing that maybe there's a ceiling 0:12:58.970 --> 0:13:00.949 for how much debt France can issue. 0:13:02.740 --> 0:13:03.020 U.S. 0:13:03.040 --> 0:13:06.540 Debt, U.S. treasuries are quite different. They are seen as 0:13:06.700 --> 0:13:09.240 a safe haven in times of terminal line risk. 0:13:10.120 --> 0:13:10.480 The U.S. 0:13:10.520 --> 0:13:14.770 Has an exorbitant privilege. Do you see that privilege running out? 0:13:15.750 --> 0:13:19.010 Yeah, I'd say there's a lot of academic research coming 0:13:19.070 --> 0:13:24.230 out in the U.S. that that safety liquidity premium on U.S. 0:13:24.270 --> 0:13:24.910 treasuries is gone. 0:13:24.929 --> 0:13:27.210 It's gone. It's gone. 0:13:27.700 --> 0:13:30.330 So that was always the following. People would pay more 0:13:30.410 --> 0:13:33.610 for a U.S. treasury because it's safe, liquid, easy to 0:13:33.670 --> 0:13:38.429 trade compared to other government debt potentially. So that higher 0:13:38.490 --> 0:13:40.500 price they're willing to pay means a lower yield on 0:13:40.530 --> 0:13:43.380 that debt. But if you no longer feel like it's 0:13:43.440 --> 0:13:45.860 a safe asset or it's not really the best thing 0:13:45.920 --> 0:13:48.380 to hold, then that premium goes away. 0:13:48.420 --> 0:13:49.920 People won't pay that higher price. 0:13:50.080 --> 0:13:52.469 And that academic research is saying that in the last 0:13:52.490 --> 0:13:55.270 couple of years that has disappeared. That's another reason your 0:13:55.309 --> 0:13:57.010 rates are going to go up if you lose that 0:13:57.050 --> 0:13:59.929 convenience yield. And it's not a trivial sum. It could 0:13:59.950 --> 0:14:01.650 be like 50 to 70 basis points. 0:14:01.670 --> 0:14:05.580 You know, we've seen emerging markets have managed their deficits 0:14:05.620 --> 0:14:07.860 a little bit better than a lot of Western countries' 0:14:07.880 --> 0:14:13.240 advanced economies. And again, just remarking on France, investors, bond 0:14:13.260 --> 0:14:16.600 vigilantes showing that there is a line. How do you 0:14:16.640 --> 0:14:18.760 think that would be demonstrated in the U.S., that there 0:14:18.820 --> 0:14:20.780 is finally a ceiling that's been reached? 0:14:21.380 --> 0:14:24.240 Well, you'll see that sign, like I said, from the 0:14:24.280 --> 0:14:27.210 bond markets. If the bond markets are now worried that 0:14:29.810 --> 0:14:32.410 this debt is not as safe as they think it is, 0:14:33.310 --> 0:14:37.610 or I've always thought it was, they'll pay a lower 0:14:37.650 --> 0:14:40.820 price to hold it and therefore a higher yield. So 0:14:40.940 --> 0:14:43.760 you'll start seeing it when yields start creeping up. It 0:14:43.800 --> 0:14:46.240 doesn't have to be a crisis. I mean, sometimes it's 0:14:46.300 --> 0:14:48.280 a crisis, but otherwise it's just the yields go up. 0:14:48.500 --> 0:14:50.120 It's kind of what you're seeing in France. The yields 0:14:50.160 --> 0:14:53.180 have just gone up. but they're still able to issue it. 0:14:53.490 --> 0:14:56.670 They're just having to pay a much higher yield to 0:14:56.710 --> 0:15:00.130 get people to take it. So that would be it. 0:15:00.250 --> 0:15:02.370 I think you would see, if you started seeing problems 0:15:02.390 --> 0:15:06.450 with auctions, where demand is not showing up to buy it, 0:15:07.530 --> 0:15:12.370 and that's a problem. If you are afraid that one 0:15:12.430 --> 0:15:14.510 way to get rid of your debt is just inflated 0:15:14.570 --> 0:15:19.230 away in real inflation, then you get this inflation premium 0:15:19.250 --> 0:15:21.840 that suddenly now gets built up. That would be the 0:15:21.890 --> 0:15:24.460 most common way that fiscal policy would spill over into 0:15:24.620 --> 0:15:26.960 rates if they just think it's going to be inflationary 0:15:28.020 --> 0:15:28.580 and that's going. 0:15:28.480 --> 0:15:29.960 To push up yields. And so I got to have 0:15:30.000 --> 0:15:32.820 a higher yield to accept that debt. 0:15:33.560 --> 0:15:37.540 So, you know, auctions, bond yields creeping up, chatter about 0:15:37.800 --> 0:15:39.979 the fiscal deficits now taking course. 0:15:40.360 --> 0:15:42.240 We're not seeing a lot of that in the U.S. 0:15:42.280 --> 0:15:45.020 per se. But like I said, France, man, things just 0:15:45.060 --> 0:15:47.650 kind of suddenly exploded on them. Yeah, the U.S. 0:15:47.700 --> 0:15:50.560 Treasuries have seen good auctions. In August, there was one 0:15:50.600 --> 0:15:53.160 that was the best auction in 20 years, I think. 0:15:54.460 --> 0:15:56.820 What this does bring to light is the conversation around 0:15:56.880 --> 0:16:00.320 fiscal dominance and the independence of central banks. We're seeing 0:16:00.360 --> 0:16:04.000 some comments, again, back to France, that the central bank 0:16:04.060 --> 0:16:07.180 there is under pressure. How do you think that the 0:16:07.220 --> 0:16:10.440 world's central bankers who are facing these kinds of fiscal 0:16:10.480 --> 0:16:13.680 policy issues and spilling into their monetary policy work, how 0:16:13.700 --> 0:16:15.470 do you think that that Chinese wall is holding up? 0:16:16.130 --> 0:16:19.370 Well, we always have to take fiscal policy into account 0:16:19.410 --> 0:16:23.480 and how it's impacting the economy, not the government financing, 0:16:23.500 --> 0:16:25.760 but just how it spills over and affects the economy. 0:16:27.140 --> 0:16:28.780 So we always have to say, you know, if you 0:16:28.800 --> 0:16:30.980 do this bill, a tax bill or a spending bill, 0:16:31.000 --> 0:16:35.900 what's it going to do to consumption, investment? And then, 0:16:35.920 --> 0:16:38.180 you know, then we have to adjust based on what's 0:16:38.200 --> 0:16:43.000 going on in the real economy. Fiscal dominance is when 0:16:43.040 --> 0:16:45.090 you start having to do monetary policy to help the 0:16:45.130 --> 0:16:49.060 government finance. That's where you have to really come worry 0:16:49.100 --> 0:16:52.410 about it. And so far, at least for the U.S., 0:16:52.430 --> 0:16:56.210 we're not in that situation. Maybe France is getting closer. Like, 0:16:56.630 --> 0:16:58.030 how are you going to get out of this mess 0:16:58.070 --> 0:17:00.990 except by printing money? The only problem with the French 0:17:01.050 --> 0:17:02.340 is they don't print. 0:17:02.240 --> 0:17:05.679 Their own money. The ECB does. But in the U.S., 0:17:05.780 --> 0:17:06.660 I'll give you an example. 0:17:06.960 --> 0:17:12.780 After the Second World War, the debt-to-GDP ratio in the U.S. 0:17:12.800 --> 0:17:15.920 During the Second World War went up over 100%. 0:17:15.920 --> 0:17:19.340 The two years after the war ended, inflation was so high, 0:17:20.619 --> 0:17:23.430 it eroded away 40% of that debt in real terms. 0:17:24.270 --> 0:17:27.629 It was the massive, it was the biggest form of 0:17:29.970 --> 0:17:32.729 erosion in the real value of government debt we've ever 0:17:32.770 --> 0:17:38.200 seen in the US. Now, no, it didn't collapse the US. 0:17:38.240 --> 0:17:40.500 It didn't create a lot of issues. It did create, 0:17:40.700 --> 0:17:44.730 led to a Fed-Treasury accord. kind of keep the Fed 0:17:44.869 --> 0:17:47.450 out of this kind of financing world. 0:17:50.050 --> 0:17:51.110 But yeah, I'll just stop there. 0:17:51.990 --> 0:17:54.560 Well, I'm sure all of the senior executives in the 0:17:54.619 --> 0:17:58.500 room hear questions and concerns from people in the companies 0:17:58.800 --> 0:18:01.679 and in the economy about job security when AI is 0:18:01.740 --> 0:18:05.680 coming into force. You are a pessimist about how AI 0:18:05.740 --> 0:18:09.850 is going to affect daily lives. But speaking of jobs, 0:18:10.090 --> 0:18:11.950 I do have to ask if you feel that your 0:18:11.990 --> 0:18:14.670 job is safe because you are not facing a threat 0:18:14.730 --> 0:18:17.950 from AI taking over your role as a member of 0:18:18.030 --> 0:18:21.080 the Fed's rate-setting committee, but there is someone in the 0:18:21.100 --> 0:18:24.900 White House who is unhappy with how the FOMC board 0:18:24.960 --> 0:18:29.679 is operating, saying that it's being difficult in lowering interest rates, 0:18:29.760 --> 0:18:33.320 giving the new chair, Kevin Morse, a hard time. Do 0:18:33.359 --> 0:18:34.540 you feel your job is safe? 0:18:35.500 --> 0:18:38.399 I'm As far as I know, I. 0:18:40.280 --> 0:18:42.859 Mean, as far as AI, yeah, you could create a 0:18:42.940 --> 0:18:46.820 whole AI FOMC. I know some academic researchers at Stanford 0:18:46.840 --> 0:18:51.060 have done this. They've mimicked each one of us through 0:18:51.140 --> 0:18:53.900 our speeches and all of our statements and created their 0:18:54.000 --> 0:18:55.760 own AI agents. 0:18:55.780 --> 0:18:56.980 So there's a Chris. 0:18:56.800 --> 0:19:01.220 Waller AI agent in this model where they set interest rates. 0:19:01.980 --> 0:19:04.959 I don't know how well it works, but I found 0:19:05.000 --> 0:19:08.390 it just fascinating that you could do that. In terms 0:19:08.450 --> 0:19:11.520 of other things, yeah, I mean, I think there is 0:19:11.560 --> 0:19:14.100 a threat to Fed independence by the administration. 0:19:14.859 --> 0:19:18.840 So far, it hasn't really succeeded. 0:19:18.859 --> 0:19:22.619 I think our institutions have made it clear that they 0:19:22.660 --> 0:19:26.550 don't necessarily want this to happen. I'm hoping that that continues. 0:19:27.550 --> 0:19:30.230 And then the ultimate protector is just the bond market. 0:19:31.070 --> 0:19:32.970 I mean, if bond markets are worried you're going to 0:19:33.030 --> 0:19:37.379 create a high inflation environment, those interest rates are not 0:19:37.400 --> 0:19:40.580 gonna go down. They're gonna go way up. And so 0:19:41.560 --> 0:19:44.310 there's good reasons that you don't, you wanna have an 0:19:44.350 --> 0:19:47.409 independent central bank. And it has worked very well for 0:19:47.410 --> 0:19:49.550 40 years in almost all the countries that have done it. 0:19:51.330 --> 0:19:53.590 I just think it's a mistake to even think about going. 0:19:53.390 --> 0:19:53.889 Away from it. 0:19:55.350 --> 0:19:59.230 So it's the bond market that's helping protect the members 0:19:59.250 --> 0:20:02.880 of the Board of Governors, like you. And who else? 0:20:02.990 --> 0:20:03.450 Congress? 0:20:04.080 --> 0:20:07.020 Well, Congress and the courts. I mean, our institutions are 0:20:07.060 --> 0:20:13.110 designed to their protections in terms of how they do this. 0:20:13.210 --> 0:20:16.429 We've seen that several times in the courts in the 0:20:16.450 --> 0:20:20.970 last year. The bond market's so obsessed with AI, I 0:20:21.010 --> 0:20:23.470 don't know, they don't even pay attention, it seems like, 0:20:23.490 --> 0:20:26.630 half the time. But I have faith in the U.S. 0:20:26.670 --> 0:20:31.460 institutions between Congress and the courts that they will make 0:20:31.500 --> 0:20:34.340 sure that we don't lose our independence and that the 0:20:34.380 --> 0:20:36.359 President of the United States sets monetary policy. 0:20:37.210 --> 0:20:39.810