WEBVTT - I'm Worried About GDP Growth, Fed's Kaplan Says 0:00:00.080 --> 0:00:13.040 Yeah, welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 0:00:13.480 --> 0:00:16.960 Jai Ley. We bring you insight from the best in economics, finance, 0:00:17.040 --> 0:00:23.480 investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:28.160 Bloomberg dot Com, and of course on the Bloomberg. Yeah, 0:00:33.680 --> 0:00:36.199 let's bring in Christian Schultz, City Group Global Director of 0:00:36.240 --> 0:00:39.960 European Research. He joins us from London. Christian, thanks very 0:00:40.000 --> 0:00:41.760 much for being with us. All right, let's honor Mr 0:00:41.800 --> 0:00:44.560 Farrell here and begin with what's going on in Spain? 0:00:45.320 --> 0:00:48.760 Is this, first of all unexpected and what do you 0:00:48.800 --> 0:00:52.879 believe this no confidence vote will lead to? Well, we 0:00:52.960 --> 0:00:54.680 had some good news out of Spain in the middle 0:00:54.720 --> 0:00:57.480 of the week because the long delayed budget what was 0:00:57.520 --> 0:01:01.200 passed because of the Catalonia issue is last year that 0:01:01.240 --> 0:01:03.760 had been postponed and I had passed, so that was 0:01:03.760 --> 0:01:07.920 actually good news. And now we get this corruption scandal 0:01:08.000 --> 0:01:10.679 coming to head, not just the treasure apparently, but also 0:01:10.720 --> 0:01:13.760 the party that the Conservative Party as a whole, being 0:01:14.040 --> 0:01:17.319 in the dock and now what looks like a non 0:01:17.360 --> 0:01:20.880 confidence vote um and perhaps new elections. Now this is 0:01:20.920 --> 0:01:24.240 all sort of unfolding as we as we speak, I guess, 0:01:24.240 --> 0:01:26.760 so we can't draw any firm conclusions yet, but I 0:01:26.800 --> 0:01:30.040 think the general story about Spain is here's an economy 0:01:30.040 --> 0:01:33.680 which has bounced back very nicely from to crises um 0:01:33.680 --> 0:01:35.840 and the problems come down a lot. The economy is 0:01:35.880 --> 0:01:38.840 growing fast. The economy the government so far has been 0:01:38.880 --> 0:01:40.760 doing the right things, which is why people would be 0:01:40.800 --> 0:01:43.679 worried if it's elected out of office. The good news 0:01:43.800 --> 0:01:47.440 is that Spain, unlike other countries, especially Italy, doesn't really 0:01:47.440 --> 0:01:52.480 have any Euroskeptic parties. So whatever combination of coalition we 0:01:52.560 --> 0:01:55.320 get next in Spain, I think they're worried that it 0:01:55.360 --> 0:01:58.600 would dramatically change the direction of the economy. UM. I 0:01:58.600 --> 0:02:00.920 think is is quite low. We have to say that 0:02:00.960 --> 0:02:02.840 with caution, but I think it's quite low. As someone 0:02:02.880 --> 0:02:04.960 messaged me this morning, there's a big difference between pro 0:02:05.040 --> 0:02:10.639 European populism and anti European populism within Spain and within Italy. UM. 0:02:10.760 --> 0:02:12.880 Then we've got the price. What's in the price? There 0:02:12.960 --> 0:02:15.520 is a one hundred basis points spread. It's coming in 0:02:15.560 --> 0:02:18.000 a little bit now, about ninety seven basis points between 0:02:18.000 --> 0:02:21.640 the Italian and Spanish ten year there's a one percent 0:02:21.760 --> 0:02:25.560 difference a hundred basis point difference to be more precise, 0:02:25.560 --> 0:02:28.640 between Italian and Spanish tenure debt makes sense to you 0:02:29.080 --> 0:02:33.720 based on politics and economics, Christian, Well, I think you know, 0:02:33.800 --> 0:02:38.800 Spanish debt ratios are much lower than than Italy's, potential 0:02:38.880 --> 0:02:42.720 growth is much higher than in than in Italy, so 0:02:42.840 --> 0:02:45.200 I think there's plenty of reasons. And politics are more 0:02:45.240 --> 0:02:47.280 stable than in Italy, so I think there's plenty of 0:02:47.280 --> 0:02:50.200 reasons to believe that Spain has become something like a 0:02:50.280 --> 0:02:53.800 semi core euros own country. Yeah, much closer to say 0:02:53.840 --> 0:02:57.320 Germany than than to the real periphery like Italy and increase, 0:02:57.360 --> 0:02:59.880 and I think that's that's justified. But in the short term, 0:03:00.000 --> 0:03:02.040 you know, uncertainty can rebound. We've seen it last year 0:03:02.080 --> 0:03:05.440 with the Catalonia referendum. We may now see some uncertainty 0:03:05.480 --> 0:03:08.560 around potential elections, but I think the general story is 0:03:08.560 --> 0:03:11.560 still the same. I'm more confident in the Spanish outlook 0:03:11.600 --> 0:03:13.680 than in Italian. Christian, I just wonder what it means 0:03:13.720 --> 0:03:15.840 for markets, because the lesson of the last several years 0:03:15.840 --> 0:03:19.080 in Europe since the European debt crisis is to fade 0:03:19.360 --> 0:03:23.600 political risk that's how you made money. You faded the 0:03:23.639 --> 0:03:27.400 Catalonia risk last year. You fade the risk in in 0:03:27.520 --> 0:03:32.160 France last year. Why is the situation in Italy any different? Oh, 0:03:32.200 --> 0:03:35.400 it may not be. I think there's plenty of scenarios 0:03:35.560 --> 0:03:37.960 of where we can go from here with Italy. There 0:03:38.040 --> 0:03:40.480 is the scenario that we've seen quite play out quite 0:03:40.480 --> 0:03:43.840 a few times now recently, where um an event looks 0:03:43.880 --> 0:03:46.360 like a big risk, but then people torn down the 0:03:46.360 --> 0:03:49.160 reth rig don't take the most aggressive decision. They could 0:03:49.160 --> 0:03:51.040 be taking some of the Italian context. That would mean 0:03:51.240 --> 0:03:55.840 a relatively smooth summit EU summit at the end of June, perhaps, 0:03:56.440 --> 0:03:59.000 you know, putting all these fiscal easing pledges a bit 0:03:59.040 --> 0:04:01.520 on the back burner, and very quickly you'd be back 0:04:01.520 --> 0:04:04.480 to a scenario where Italy isn't prized as much bigger 0:04:04.520 --> 0:04:07.280 risk there was before this government would befall. But there's also, 0:04:07.280 --> 0:04:10.360 of course, the risk of a very confrontational, judent summit 0:04:10.840 --> 0:04:14.040 of the government very quickly moving to reverse the pension 0:04:14.080 --> 0:04:18.120 reforms and do all these tax cuts, becoming fiscally unsustainable. 0:04:18.480 --> 0:04:20.400 UM the e c B becoming involved in all of 0:04:20.440 --> 0:04:24.559 this UM. The Greece scenario if you like UM, which, 0:04:24.839 --> 0:04:27.360 of course with Italy instead of Greece, would be a 0:04:27.400 --> 0:04:30.360 much bigger risk than it was perhaps, But at the 0:04:30.400 --> 0:04:32.680 same time, the e c B is cutting back on 0:04:32.720 --> 0:04:35.520 its stimulus program. This has got to be count availing 0:04:35.560 --> 0:04:40.040 to what's going on in Italy. Yes, but they're only 0:04:40.080 --> 0:04:43.200 cutting back on the net purchases UM. So the thirty 0:04:43.200 --> 0:04:45.400 billion per month that they're buying, they have of course 0:04:45.400 --> 0:04:48.520 already bought about two point five trillions, So the monthly 0:04:48.680 --> 0:04:52.040 extra purchases are becoming less and less important, and more 0:04:52.040 --> 0:04:55.000 and more important is that the stock of bonds they 0:04:55.000 --> 0:04:57.240 have already bought in which they're continuing to reinvest. So 0:04:57.279 --> 0:05:00.880 I don't think that the ecb ending purchases at the 0:05:01.000 --> 0:05:03.599 end of the year isn't necessarily such a big negative 0:05:03.640 --> 0:05:06.680 for for these peripheral markets. Kristin Schell is always going 0:05:06.680 --> 0:05:09.320 to Canty with the City Group, Global director of European Research, 0:05:09.400 --> 0:05:25.040 joining US out of London. Well. North Korea said that 0:05:25.080 --> 0:05:28.440 it was surprised by President Donald Trump's decision to cancel 0:05:28.560 --> 0:05:32.520 the June twelfth summit with North Korean leader Kim Jong on, 0:05:33.400 --> 0:05:36.560 and now North Korea says it remains willing to meet 0:05:36.600 --> 0:05:38.680 with the United States at any time. Here to tell 0:05:38.760 --> 0:05:41.840 us more about the situation is Thomas Byrne. He is 0:05:41.880 --> 0:05:44.719 the president of the Korea Society, and he is an 0:05:44.720 --> 0:05:48.880 adjunct professor of International and Public Affairs at Columbia University's 0:05:48.880 --> 0:05:52.440 School of International and Public Affairs. And I should say 0:05:52.440 --> 0:05:55.799 that the Mr. Burns education into the world of Korea 0:05:55.839 --> 0:05:57.800 and the Korean Peninsula goes all the way back to 0:05:57.880 --> 0:06:00.920 his time in the Peace Corps, in which he served 0:06:01.000 --> 0:06:04.680 in South Korea. And I'm wondering, Professor Byrne, if you 0:06:04.720 --> 0:06:07.320 can just give us a little bit of perspective as 0:06:07.320 --> 0:06:11.320 to what do you believe is actually going on in 0:06:11.600 --> 0:06:17.800 North Korea. Yeah, well, my my thinking about North Korea 0:06:18.040 --> 0:06:21.600 is um. You know, Kim Jong l and the leader 0:06:21.600 --> 0:06:27.320 of North Korea surprised everybody on January one, h saying 0:06:27.360 --> 0:06:33.360 he's willing to engage South Korea, willing to UH prioritize 0:06:33.400 --> 0:06:38.040 economic development over military prowess and UH and that's set 0:06:38.080 --> 0:06:42.560 into motion. What we've seen play out with the summit 0:06:43.000 --> 0:06:46.480 UH with Kim Jong Lun in China toward China is 0:06:46.560 --> 0:06:50.039 historic one with South Korea, Poma and German at the 0:06:50.160 --> 0:06:54.880 end of April and almost one with President Trump would 0:06:54.880 --> 0:06:58.159 have been the first time UH sitting president has met 0:06:58.360 --> 0:07:00.720 a North Korean leader. I think what's going on in 0:07:00.839 --> 0:07:05.440 that North Korea this is a very dramatic shift strategically. 0:07:05.480 --> 0:07:10.240 It really hasn't baked in very well that to to 0:07:10.320 --> 0:07:13.960 give up its military first policy and go to something 0:07:14.000 --> 0:07:18.720 like economic development, and really of North Korea series about 0:07:18.760 --> 0:07:22.160 economic development, it really does have to abandon its nuclear 0:07:22.200 --> 0:07:26.000 weapons program and has to develop resources, um and not 0:07:26.200 --> 0:07:31.000 just money but also institutional resources to developing an economy, 0:07:31.080 --> 0:07:33.720 and it won't be able to do that under the 0:07:33.800 --> 0:07:38.040 sanctions that exist. Do you believe that Kim Chong is 0:07:38.320 --> 0:07:43.520 UH secure in his position in North Korea? Well, I get, 0:07:44.120 --> 0:07:47.080 I mean who knows, right, I mean he has been 0:07:47.200 --> 0:07:51.880 very uh very firm, if not ruthless and rooting out 0:07:51.880 --> 0:07:56.440 opposition reports star there's been you know, more executions in 0:07:56.560 --> 0:07:59.960 his short UH time and wet this about six years now, 0:08:00.040 --> 0:08:03.920 I think, uh than under his father's And I think 0:08:03.920 --> 0:08:06.080 if he was willing to go to Singapore, assuming that 0:08:06.160 --> 0:08:09.480 was serious, I think he feels pretty pretty secure. He 0:08:09.480 --> 0:08:11.680 didn't make two trips to China for the first time, 0:08:11.960 --> 0:08:15.800 first time he left North Korea since coming to power 0:08:15.960 --> 0:08:19.720 in the end of it's almost that the South Koreans 0:08:19.760 --> 0:08:24.040 happening that the president has canceled the summit. What I 0:08:24.080 --> 0:08:27.760 read is that they're they're they're disappointed. South Korean hopes 0:08:27.800 --> 0:08:31.679 were very high, and I you know, uh, the country 0:08:31.720 --> 0:08:36.560 has been divided since since n UM, it's been in 0:08:36.600 --> 0:08:39.920 a state of armistice and for sixty five years, three 0:08:40.000 --> 0:08:45.319 years of a very very devastating war, and they were 0:08:45.320 --> 0:08:48.240 hoping they could turn the corner and and see, you know, 0:08:48.320 --> 0:08:51.560 peace and prosperity for the whole peninsula. I think those 0:08:51.600 --> 0:08:55.079 hopes and aspirations were still in play. I don't think UM, 0:08:55.120 --> 0:08:56.839 they've got out the window. I think we're in much 0:08:56.840 --> 0:09:02.920 better position now we're in December last year. So putting 0:09:02.920 --> 0:09:06.559 things into perspective, I think maybe events moved a bit 0:09:06.600 --> 0:09:10.560 too quickly. UM. North Korea was not quite sure on 0:09:10.559 --> 0:09:14.959 on how much it could, on what the how much 0:09:15.000 --> 0:09:17.480 would have to give up to to have this meeting 0:09:17.480 --> 0:09:22.320 with the President Trump and to really embark upon a 0:09:22.360 --> 0:09:25.440 program of the new ecularization Thomas for Wall Street, there's 0:09:25.440 --> 0:09:27.800 a big question in the last twenty four hours. UM. 0:09:27.880 --> 0:09:29.840 For a while, over the last year the President has 0:09:29.880 --> 0:09:33.200 been leaning on China to put the pressure on North Korea, 0:09:33.520 --> 0:09:35.559 and in many ways he's tied that effort into the 0:09:35.640 --> 0:09:38.920 trade policy story as well, willing to back away on 0:09:39.000 --> 0:09:40.920 trade if the Chinese can put the pressure on the 0:09:40.920 --> 0:09:43.439 North Koreans to come to the table. What has China's 0:09:43.520 --> 0:09:46.440 role in all of this now? But China has a 0:09:46.440 --> 0:09:48.320 big role, and it's really hard to figure it out. 0:09:48.400 --> 0:09:51.040 I mean, first of all, I think it's I think 0:09:51.080 --> 0:09:54.400 it's safe to say that China is in with the 0:09:54.480 --> 0:09:57.440 ultimate objective that the US has an also staff koreative 0:09:57.480 --> 0:10:01.240 Republic of Korea, that is a we dismantling of North 0:10:01.320 --> 0:10:05.040 Korea's nuclear weapons program, and that's the so called Libyan model. 0:10:05.600 --> 0:10:09.560 Um Oliba model happened to be on very rapidly. So 0:10:09.880 --> 0:10:12.560 they're all in favor of that. China may have a 0:10:12.600 --> 0:10:16.200 different timetable and want to see more concessions from the 0:10:16.280 --> 0:10:18.720 US up front than the US is probably willing to give, 0:10:19.200 --> 0:10:23.560 given the disappointing record of twenty years of that type 0:10:23.559 --> 0:10:25.920 of diplomacy with North Korea and where North Korea is 0:10:25.960 --> 0:10:30.920 today with nuclear bombs, with with the intercontinental ballistic missiles. 0:10:30.960 --> 0:10:35.200 But I think they both agree on the fundamental strategic objective, 0:10:35.240 --> 0:10:39.160 it's really on how to get there. Um so I 0:10:39.960 --> 0:10:43.640 it's how they work that out. Now. One of the 0:10:43.760 --> 0:10:46.720 one of the dynamics of this whole complicated process is 0:10:46.760 --> 0:10:50.400 that if North Korea word who embark on a genuine 0:10:51.240 --> 0:10:54.600 program of the nuclearization or path the nuclearization, who would 0:10:54.640 --> 0:10:57.400 probably imply that they would move close to the South 0:10:57.480 --> 0:11:01.120 Korea and would be some distance between more distance between 0:11:01.160 --> 0:11:04.880 North Korea and China, And maybe it is uncomfortable about that. 0:11:05.840 --> 0:11:09.800 Thomas Byrne. Previous to your role at the Korea Society, 0:11:10.200 --> 0:11:13.800 you were with Moody's Investors Services, you were the director 0:11:13.800 --> 0:11:16.880 of Analysis for the Sovereign Risk Group for Asia Pacific. 0:11:17.720 --> 0:11:20.160 What can you tell us about the reaction perhaps in 0:11:20.280 --> 0:11:25.840 Japan and other nations in the region. Well, everyone, I 0:11:25.880 --> 0:11:29.559 think was very hopeful that this, uh, this this great 0:11:29.840 --> 0:11:33.960 geopolitical risk would be contained and eliminated through a process 0:11:33.960 --> 0:11:37.760 of the nuclearization. However, I don't think anyone has given 0:11:37.800 --> 0:11:42.319 up hope that that outcome could still be achieved. Um 0:11:42.440 --> 0:11:44.560 One of the one of the things to understand, the 0:11:44.600 --> 0:11:49.000 biggest deterrent to geopolitical risks in Northeast Asia has been 0:11:49.040 --> 0:11:53.520 the r O k US Alliance for UH since since 0:11:53.640 --> 0:11:58.080 nineteen fifty three, for sixty five years. UM this has 0:11:58.200 --> 0:12:03.160 prevented UH an outbreak of the Second Korean War. It's 0:12:03.160 --> 0:12:05.559 been defensive in nature, it hasn't been aggressive and that 0:12:05.720 --> 0:12:10.280 Korea at all and UH and this has enabled South 0:12:10.360 --> 0:12:13.920 Korea to developed into such a prosperous country that it 0:12:14.000 --> 0:12:17.520 is today and also a democratic country. Can North Korea 0:12:17.679 --> 0:12:22.079 achieve some kind of advance economically without striking a deal 0:12:22.120 --> 0:12:25.040 with the United States? I don't think so. I think 0:12:25.040 --> 0:12:28.600 it could well. First of all, the question is UH, 0:12:29.160 --> 0:12:33.440 you know, UH, it's deprived of resources right now. A 0:12:33.520 --> 0:12:36.480 deal with the US would really mean that North Korea 0:12:36.559 --> 0:12:38.640 has the opportunity to open to the rest of the world. 0:12:38.800 --> 0:12:41.319 They joined the i m F. Now, if North Korea 0:12:41.360 --> 0:12:44.280 one is expecting to get help from the World Bank 0:12:44.360 --> 0:12:47.720 or the Asian Development Bank or even the the Asian 0:12:47.760 --> 0:12:50.480 Infrastructure Investment Bank in Beijing, they have to join the 0:12:50.480 --> 0:12:56.360 I m F. However, North Korea perhaps can get China 0:12:56.400 --> 0:12:58.880 could ease or relax some of the sanctions that it 0:12:59.000 --> 0:13:01.880 has been enforcing. How But China, because it will not 0:13:02.200 --> 0:13:07.200 do that until North Korea and barracks on the nuclearization 0:13:07.400 --> 0:13:09.800 Thomas justly, I just want to come through if I 0:13:09.840 --> 0:13:13.880 possibly can, just to jump in up. Possibly can Thomas um. 0:13:13.960 --> 0:13:15.920 The question I think, just to wrap things up, is 0:13:15.920 --> 0:13:19.199 whether the North Korean regime is collapsing. A lot of 0:13:19.240 --> 0:13:21.520 people have made a big deal about the destruction of 0:13:21.520 --> 0:13:24.320 the nuclear test site. There are some reports that actually 0:13:24.320 --> 0:13:26.320 it collapsed a long while ago, and that's why the 0:13:26.360 --> 0:13:28.280 North Korean leader has come to the table. Just how 0:13:28.360 --> 0:13:31.760 bad are things in North Korea right now? Well, North 0:13:31.840 --> 0:13:35.400 Korea is a black box. I mean it probably no 0:13:35.440 --> 0:13:38.160 one would have advanced noticed if the if the regime 0:13:38.280 --> 0:13:41.480 is collapsing. But I think the economy is in trouble. 0:13:41.559 --> 0:13:43.800 I think it's been in trouble for for some years. 0:13:43.800 --> 0:13:46.280 If you look at the import figures, it's not importing. 0:13:46.280 --> 0:13:49.400 The imports for going down even before the sanctions were introduced. 0:13:49.480 --> 0:13:54.599 The new comprehensive sanctions that if they're continued, would be 0:13:54.720 --> 0:13:57.400 much have a much greater impact on North koreezy economy 0:13:57.400 --> 0:14:00.960 than the Orian sanctions had on the ring An economy. 0:14:01.440 --> 0:14:03.679 So it's hard to say, but you know, it's a 0:14:03.840 --> 0:14:09.559 very repressive government. It has keptain power since Niking forty 0:14:09.880 --> 0:14:14.160 through war and through famine, so it's it has more 0:14:14.200 --> 0:14:17.560 staying power than any probably any other government any anywhere 0:14:17.559 --> 0:14:19.800 else in the world. Thomas Burn gret to catch up 0:14:19.800 --> 0:14:21.560 with you, say thank you very much for giving your time, 0:14:21.560 --> 0:14:26.880 the Korean Society president and Columbia University professor on North Korea, 0:14:27.000 --> 0:14:43.480 the South and the relationship with the United States. I'm 0:14:43.520 --> 0:14:45.080 really pleased to say that we can now cross over 0:14:45.120 --> 0:14:47.880 to Bloomberg's Michael McKay, who's standing by with the Dallas 0:14:47.880 --> 0:14:52.160 Federal Reserve. President. Well, thank you very much, and good 0:14:52.160 --> 0:14:55.440 morning to everybody on Bloomberg television and radio worldwide. And 0:14:55.480 --> 0:14:58.280 thank you, miss President for joint don't you like to 0:14:58.320 --> 0:15:02.080 be able to call Mr President? Welcome to Texas, Mike. 0:15:02.120 --> 0:15:04.680 We're glad to have you here. Thank you. Fundamentals, I 0:15:04.720 --> 0:15:07.200 don't think anybody doesn't know your position, but just for 0:15:07.240 --> 0:15:10.240 the record, you see growth picking up, unemployment going down, 0:15:10.280 --> 0:15:12.720 and two more rate moves this year is and that 0:15:12.880 --> 0:15:16.360 my base cases three for the year. Uh, we should 0:15:16.360 --> 0:15:20.560 be gradually moving toward neutral. And the other caution that 0:15:20.680 --> 0:15:24.040 I've repeated various times as while this year's growth will 0:15:24.040 --> 0:15:29.040 be strong, next year will be somewhat weaker, and by 0:15:29.160 --> 0:15:32.120 we're gonna head back down to potential, which is closer 0:15:32.160 --> 0:15:34.320 to one and three quarters to two percent. The reason 0:15:34.360 --> 0:15:36.680 I mentioned it, that's on my mind when I think 0:15:36.720 --> 0:15:39.800 about the shape of the Fed funds curve. What would 0:15:39.840 --> 0:15:42.040 it take to get you to support a fourth move 0:15:42.120 --> 0:15:47.880 this year? UH, continued strengthen the economy, But more than that, 0:15:47.960 --> 0:15:51.520 I'd want to see some actions that suggested to me 0:15:51.640 --> 0:15:56.280 at least that sustainable GDP growth was improved, and so 0:15:56.360 --> 0:16:00.000 that would be things that improve growth in the workforce. UH, 0:16:00.040 --> 0:16:03.120 it would it would show some policy moves that might 0:16:03.160 --> 0:16:06.160 suggest we're going to improve skill levels of our workforce, 0:16:06.360 --> 0:16:11.400 education levels, some of the fundamental drivers UH would need 0:16:11.480 --> 0:16:15.640 to change for me to be more aggressive. The Open 0:16:15.680 --> 0:16:19.120 Market Committee in its last statement put symmetrical higher up there. 0:16:19.360 --> 0:16:20.840 With the choice of that word, What are you trying 0:16:20.880 --> 0:16:23.160 to tell the markets that inflation may run a little 0:16:23.160 --> 0:16:25.280 bit above two percent or that you are going to 0:16:25.280 --> 0:16:27.720 tolerate it for a while running above two percent? I 0:16:27.760 --> 0:16:29.800 think it's the probably the former. It's that inflation may 0:16:29.880 --> 0:16:32.880 run a little bit above two percent, and our job 0:16:33.360 --> 0:16:38.000 is is to try to keep inflation so that it 0:16:38.080 --> 0:16:41.720 doesn't persistently run above two or persistently below and now 0:16:41.760 --> 0:16:44.960 we've been running seven or eight years below two. But 0:16:45.560 --> 0:16:49.120 in the future would I would tolerate some moves above too, 0:16:49.120 --> 0:16:52.280 But if I thought it would be persistently staying above two, 0:16:52.720 --> 0:16:55.800 I'd want to take more policy action. The forecast you 0:16:55.840 --> 0:16:57.320 mentioned in June you have to make a new one 0:16:57.400 --> 0:17:01.000 for the Open Market Committee, meaning tax cuts, trade, tariffs, 0:17:01.040 --> 0:17:03.400 budget deficits, all the things that are going on in 0:17:03.440 --> 0:17:05.840 the world right now. How confident are you in what 0:17:05.920 --> 0:17:07.560 you think is gonna happen. Well, this is part of 0:17:07.560 --> 0:17:10.280 the job. You've always got all these variables changing, which 0:17:10.359 --> 0:17:14.480 makes this job interesting and also why it's not a 0:17:14.520 --> 0:17:18.120 static thing. It's a dynamic thing. But the tax legislation, 0:17:18.480 --> 0:17:20.400 as I mentioned it for this year is a positive, 0:17:20.880 --> 0:17:24.760 but you mentioned debt on the flip side. While it's 0:17:24.760 --> 0:17:26.960 a stimulus now, I think it may create a head 0:17:27.000 --> 0:17:29.480 wind in the out years because we're gonna need to 0:17:29.520 --> 0:17:32.560 moderate deck growth. We're already it's unsustainably high levels of 0:17:32.560 --> 0:17:36.640 deck growth. On the trade tearor front, I've said consistently, 0:17:37.359 --> 0:17:41.680 UH trade is an opportunity for the United States, particularly 0:17:41.680 --> 0:17:45.040 in North America, and I would be concerned if we 0:17:45.080 --> 0:17:48.320 don't ultimately get this trade agreement updated and agreed to 0:17:49.160 --> 0:17:52.800 with Mexico and Canada because it's an intermediate good relationship. 0:17:53.040 --> 0:17:56.760 It helps logistics supply chains, it adds jobs here, and 0:17:56.800 --> 0:17:59.800 it makes us more potent in negotiating the chan which 0:18:00.040 --> 0:18:02.040 it well in your mind, what's the biggest threat or 0:18:02.080 --> 0:18:04.840 threats to the U s economy right now? Still the 0:18:04.560 --> 0:18:06.720 big The biggest threat are the things that are staring 0:18:06.800 --> 0:18:09.760 us in the face. UH. Our workforce growth is slowing 0:18:09.920 --> 0:18:13.760 because we're aging, and we're not yet making policy decisions 0:18:13.800 --> 0:18:16.960 to address that. Our skill levels in the United States 0:18:17.000 --> 0:18:19.200 are lagging the rest of the world. We rank twenty 0:18:19.240 --> 0:18:22.800 five out of OC countries, and our skill levels aren't 0:18:22.880 --> 0:18:26.119 keeping up with disruption. And the last thing is we're 0:18:26.400 --> 0:18:29.480 very highly leveraged, and we just leveraged up late in 0:18:29.520 --> 0:18:32.840 the economic cycle, and I'm worried that that's going to 0:18:32.960 --> 0:18:35.320 create a headwind for economic growth. It also means in 0:18:35.359 --> 0:18:38.160 the next downturn we don't we may not have capacity 0:18:38.240 --> 0:18:41.320 for fiscal policy. Those things are the things that ultimately 0:18:41.440 --> 0:18:43.840 matter the most and worrying me the most. Well, non 0:18:43.920 --> 0:18:47.000 financial corporate debt, is it a record Speaking of leverage. 0:18:47.280 --> 0:18:48.920 There's a view that could be the trigger for the 0:18:48.960 --> 0:18:51.320 next real financial crisis. How do you see it. I 0:18:51.400 --> 0:18:55.080 probably don't see that. Uh So, Yes, corporate debt to 0:18:55.160 --> 0:18:58.440 GDP is higher, but the financial sector is part of 0:18:58.520 --> 0:19:01.640 that is as D level urged. And what I'm looking 0:19:01.680 --> 0:19:06.360 for is systemic risk. If a company fails or defaults, 0:19:06.400 --> 0:19:08.600 that's not a good thing, but it's not going to 0:19:08.680 --> 0:19:11.000 pull down or shouldn't pull down the rest of the economy. 0:19:11.480 --> 0:19:14.639 So corporate debt to GDP is something to watch, but 0:19:14.800 --> 0:19:17.320 I don't think. I don't I don't see a red 0:19:17.400 --> 0:19:20.040 flag on that at this point. Another thing you didn't 0:19:20.160 --> 0:19:22.600 mention is oil. You're the guy in the oil patch 0:19:22.680 --> 0:19:24.520 here for the fat. What do you see happening with 0:19:24.600 --> 0:19:26.680 oil prices? And how much of a danger is it 0:19:26.720 --> 0:19:29.480 to the economy. It's not a danger. You know. We're 0:19:29.520 --> 0:19:32.200 in a We're in a fragile equilibrium right now. You've 0:19:32.240 --> 0:19:33.879 heard me say before, And what do I mean by that? 0:19:34.240 --> 0:19:37.399 We're in relative supply demand balance globally, but part of 0:19:37.440 --> 0:19:41.760 that balance is based on OPEC. Another oil producing countries 0:19:41.760 --> 0:19:44.399 are green. They're gonna cut one point eight million barrels 0:19:44.440 --> 0:19:46.919 a day and there's some talk that maybe they're going 0:19:46.960 --> 0:19:49.879 to revisit that. Having said that, we think for the 0:19:49.960 --> 0:19:51.920 next three to five years you're gonna see sort of 0:19:51.960 --> 0:19:55.159 a volatile up and down in oil prices, with shale 0:19:55.640 --> 0:19:59.000 being the incremental supplier to global demand. My concern is 0:19:59.040 --> 0:20:01.639 not the next few years, it's in the out years. 0:20:02.560 --> 0:20:04.840 We think, well, we may well likely get into a 0:20:04.920 --> 0:20:08.879 global undersupply situation because we as prolific as shale is, 0:20:09.280 --> 0:20:11.240 it's not going to be enough to keep up with 0:20:11.320 --> 0:20:14.200 global demand, and we're not spending on long life projects, 0:20:14.800 --> 0:20:17.400 so we we think there's spike risk to the upside. 0:20:17.480 --> 0:20:20.359 That would worry me because if we're growing slowly in 0:20:20.440 --> 0:20:23.040 these out years and then you get an oil increase 0:20:23.280 --> 0:20:26.280 or a gasoline increase, it's like a tax on consumers. 0:20:26.600 --> 0:20:30.280 But I think we're in a we're in a fragile equilibrium, 0:20:30.320 --> 0:20:33.480 in pretty good shape for the next few years. There 0:20:33.600 --> 0:20:36.439 is always the question of when people think recession might 0:20:36.520 --> 0:20:39.280 be coming. Um. I assume you're of the view that recession, 0:20:39.400 --> 0:20:43.200 as FED officials are, processions don't die of old age. 0:20:43.600 --> 0:20:46.040 But there's a feeling in the mass right that that 0:20:46.480 --> 0:20:50.280 maybe we uh, we're seeing the yield curves start to 0:20:50.359 --> 0:20:56.719 tell us something. Well, uh, there's always some not material, 0:20:56.880 --> 0:21:01.000 not immaterial probability of recession. As you know. Uh, what 0:21:01.119 --> 0:21:05.000 I'm worried about is sustainable economic growth. We're gonna have recessions. 0:21:05.080 --> 0:21:07.399 My job is to make sure that an ups and 0:21:07.520 --> 0:21:11.920 down cycles. You know, we've got maximum sustainable employment and 0:21:12.119 --> 0:21:15.760 price stability. And what I'm worried about right now is 0:21:16.160 --> 0:21:20.000 not the short term cyclical questions. But I'm worried we're not. 0:21:20.119 --> 0:21:24.200 Are we doing the right things to grow to grow GDP? 0:21:24.440 --> 0:21:26.680 GDP is made up of growth in the workforce and 0:21:26.800 --> 0:21:29.600 growth in productivity, and I don't see us making policy 0:21:29.680 --> 0:21:33.040 steps to address either. And I think both it look 0:21:33.119 --> 0:21:35.800 like they're gonna be sluggish in the outyears. We just 0:21:35.920 --> 0:21:37.800 don't notice it as much right now because we've got 0:21:37.880 --> 0:21:40.240 a very large fiscal stimulus and up to now, the 0:21:40.280 --> 0:21:43.439 FED has been accommodative. Are you getting less? So how 0:21:43.480 --> 0:21:46.080 do we know when you get to the point that 0:21:46.680 --> 0:21:50.320 we're starting to tighten policy. Well, we're obviously raising the 0:21:50.400 --> 0:21:55.119 FED funds rate and moving toward neutral neutrals, the theoretical 0:21:55.240 --> 0:21:58.600 FED funds rate where we're no longer accommodative. Uh, I 0:21:58.760 --> 0:22:01.200 think that level is probably in the neighborhood of two 0:22:01.200 --> 0:22:03.800 and a half two and three quarters, which basically a 0:22:03.880 --> 0:22:06.119 half a percent to three quarters per cent of a 0:22:06.200 --> 0:22:10.000 point real. Uh, we're at one fifty to one now, 0:22:10.200 --> 0:22:13.560 so three or four moves we will be at neutral. 0:22:14.000 --> 0:22:16.560 So you said you would not intentionally vote for a 0:22:16.680 --> 0:22:19.480 policy that would invert the yield curve. But that's almost 0:22:19.480 --> 0:22:21.359 a tautology. I mean, why would you do that? The 0:22:21.440 --> 0:22:25.520 real question is can you avoid a policy accident by 0:22:26.119 --> 0:22:29.880 raising the federal funds rate too far but not realizing it? Uh? Yeah, 0:22:30.080 --> 0:22:32.240 that that could happen because we don't control the curve. 0:22:32.320 --> 0:22:34.520 As you know, we controlled just the Fed funds rate, 0:22:35.040 --> 0:22:38.399 and right now two's to tens is roughly you know, 0:22:38.560 --> 0:22:42.320 fifty basis points. So this is why I've said, and 0:22:42.400 --> 0:22:46.040 others have said, every day I'm gonna be watching very 0:22:46.119 --> 0:22:49.480 carefully the shape of the yield curve. And what the 0:22:49.560 --> 0:22:52.520 shape of the yield curve tells me is prospects for 0:22:52.640 --> 0:22:56.200 future growth out your growth are sluggish, and so I 0:22:56.359 --> 0:22:58.760 think it's worth paying attention to that. But that will 0:22:59.280 --> 0:23:01.399 That's the reason why I'm saying, let's just keep the 0:23:01.440 --> 0:23:04.600 base case for this year at three I'm not looking 0:23:04.680 --> 0:23:08.359