Speaker 1: This is Bloomberg Surveillance. And some of the European market
Speaker 1: brexited a huge deal, and when that sort of U
Speaker 1: sud Peter moved, you would see a rally. And you're
Speaker 1: a lot of the fluid dynamic things that has made
Speaker 1: the American economy so successful aren't working quite as well anymore.
Speaker 1: Growth is not great, but it's certainly running above potential
Speaker 1: right now. So I think the last thing it's economy
Speaker 1: needs is for the Fed cut rates. Bloomberg Surveillance your
Speaker 1: link to the world of economics, finance, and investment on
Speaker 1: Bloomberg Radio. Good morning, It is seven am on Wall Street.
Speaker 1: It is six am in St. Louis, where St. Louis
Speaker 1: Fed President Jim Bullard has solved the mystery of the
Speaker 1: FEDS missing dots. Breaking news now from the St. Louis Fed. St.
Speaker 1: Louis Fed President Jim Bullard did not submit dots long
Speaker 1: range dots to the FED dot plot because the Fed
Speaker 1: Bank is changing the way it forecasts the economy. A
Speaker 1: very interesting change in Fed orthodoxy. Uh. He is switching
Speaker 1: to a regime based outlook, and we'll talk about that
Speaker 1: in just a moment. A quick check of the markets
Speaker 1: US features are lower, SMP features down by four, down
Speaker 1: features by seventeen, NAZZAC features by four. European markets higher,
Speaker 1: the tragic murder of British MP Joe Cox has suspended
Speaker 1: campaigning on the Brexit and at the moment that has
Speaker 1: the footsy higher by seventy three points, the pound trading
Speaker 1: higher one forty two forty six. The stock six is
Speaker 1: up by four. Here in the US, the tenure note
Speaker 1: yield one point six one point one for the five year,
Speaker 1: the two year sixty nine basis points. The German tenure
Speaker 1: note yield has turned just barely positive this morning. So
Speaker 1: here's where we are with the St. Louis Fed and
Speaker 1: the mystery of the dot plot and an interesting challenge
Speaker 1: to the way the Fed does business. The dot pod,
Speaker 1: of course, compiles Fed officials views of where the funds
Speaker 1: rate will be given their individual economic forecasts. On Wednesday,
Speaker 1: the dot pod that came out showed one policymaker suggesting
Speaker 1: one rate move this year, then nothing in two thousand,
Speaker 1: seventeen or eighteen, give no value at all for the
Speaker 1: long run rate. Where the FED funds will be when
Speaker 1: they stop raising turned out to be St. Louis Fed
Speaker 1: President Jim Bullard, generally seen as a centrist on policy,
Speaker 1: somewhat of a rebel ud orthodoxy. In a statement just out,
Speaker 1: Bullard announcing the St. Louis FED is changing the way
Speaker 1: it forecasts the economy and therefore rates. Instead of a
Speaker 1: converging outlook, where the forecast changes based on expected movements
Speaker 1: in growth, unemployment, and inflation, the bank is now using
Speaker 1: what they call a regime based method. This assumes that
Speaker 1: current conditions will persist in a regime with components changing little,
Speaker 1: and that implies a certain FED policy rate. If the
Speaker 1: regime changes, the outlook for rates would change, but a
Speaker 1: change in the regime isn't forecastable, so Bullet is no
Speaker 1: longer providing a rates forecast beyond the one basis point move.
Speaker 1: He says, the current regime calls for here's a quote.
Speaker 1: Of course, the situation can and will change in the future,
Speaker 1: but exactly how it is difficult to predict. Therefore, the
Speaker 1: best we can do today is forecast the current regime
Speaker 1: will persist and set policy appropriately for this regime. We're
Speaker 1: backing off the idea. He says that we have a
Speaker 1: dogmatic certainty about where the US economy is well Mike,
Speaker 1: this is a huge deal to me, and you go
Speaker 1: right to the right idea, which is regime. I don't
Speaker 1: want to conflate this, Mike, with the raging debate over
Speaker 1: to America's This is about timing and about moving along
Speaker 1: the X axis and moving from a certain regime to
Speaker 1: the jump condition either way of a new regime. It's
Speaker 1: not the same as discussing whether the macroeconomics is Steve
Speaker 1: roach er James Boyard should be a one analysis of
Speaker 1: a one modal America or whether it should be bimodal
Speaker 1: or trimodal, etcetera. So I don't want to conflate this.
Speaker 1: I would say some of the debates we've heard from
Speaker 1: Alan Krueger. No, this doesn't have anything to do with
Speaker 1: current conditions beyond adapting those conditions into a forecast. But
Speaker 1: Steve roach is with us, and you have been looking
Speaker 1: through uh, this is ten page paper from Jim Bode.
Speaker 1: You've been looking through this, Steve as a long time forecaster.
Speaker 1: What do you think, well, Mike, and I mean, I'm
Speaker 1: a fast reader, but you know it takes me more
Speaker 1: that UM absorb this. Um. You know, the idea though
Speaker 1: of discreet regime changes where you sort of cruise along
Speaker 1: for a you know, seemingly indefinite period of time and
Speaker 1: then paw, you pull the switch and you jump to
Speaker 1: another trajectory. Um, you know it's possible, but I think
Speaker 1: the likelihood of that is is low. Um. You know,
Speaker 1: I'm I'm clearly sensitive to the notion that we've been
Speaker 1: locked in a a really difficult economic scenario now for
Speaker 1: the last uh seven years, and the inertia of that
Speaker 1: scenario is hard to crack in terms of growth uh
Speaker 1: and inflation so on, you know, on on that point,
Speaker 1: you know, sort of extrapolation and auto aggressive world uh
Speaker 1: makes makes some sense, But in terms of framing the
Speaker 1: longer term outlook, I'm a little less confident that this
Speaker 1: regime switching model it provides the you know, the magic
Speaker 1: uh breakthrough to forecasting that we've all been looking for. Well,
Speaker 1: it almost seems and I know that you're at the
Speaker 1: disadvantage because you haven't had just to absorb it. And
Speaker 1: I've been struggling to get through all this with everything
Speaker 1: else I'm doing. Uh. He seems to be saying, there
Speaker 1: isn't a magic bullet, There isn't a magic way to
Speaker 1: make a forecast that what we have seen is a
Speaker 1: very persistent steady state. And under that steady state, you
Speaker 1: can make a forecast for a rate, but you don't
Speaker 1: know when that's going to change. So why would you
Speaker 1: do a dot plot that assumes a change out there? Well,
Speaker 1: you know because I'll tell you why. Uh, And that
Speaker 1: is because we know that UM monetary policy operates with
Speaker 1: a lag. So when policymakers make a change, they're making
Speaker 1: a change that will affect the economy of the future,
Speaker 1: not the economy of the past. And under this particular model, uh,
Speaker 1: the assumption that has made is that the policy the
Speaker 1: economy of the past uh persists and that what what
Speaker 1: it does, I think is it sets the FED up
Speaker 1: to be reactive as opposed to proactive. Uh. And uh.
Speaker 1: You know, if if things UH do for unexpected reasons
Speaker 1: change quickly, the FED will then find itself uncomfortably behind
Speaker 1: the curve. But haven't we at this point, to this
Speaker 1: point seen a FED that is totally reactive. They haven't
Speaker 1: been proactive at all. Yeah, this would make I think
Speaker 1: this would make them even um actually more more reactive,
Speaker 1: because again they would they would only move on the
Speaker 1: basis of concrete evidence of a regime change, and that
Speaker 1: is usually based on backward looking dat as opposed to
Speaker 1: forward looking data. But Bullard argues that's what they have
Speaker 1: been telling people they're doing, that they are dated dependent. Well,
Speaker 1: you know again, what is not clear to me, and
Speaker 1: I haven't read this um carefully enough to really render
Speaker 1: a judgment, is what is the evidence they're going to
Speaker 1: use to determine if the regime is actually shifting? And
Speaker 1: the other idea here and I go to Rick Michigan
Speaker 1: of Colombia and his wonderful textbook which is heavily weighted
Speaker 1: towards Okay, what are you gonna do with this when
Speaker 1: you apply to policy. Is there any central bank out
Speaker 1: there that you can think of who is doing anything
Speaker 1: but working on a timeline of making linear forecasts out
Speaker 1: in terms of time and looking at the short and
Speaker 1: maybe the medium or a gu estimate of a long term.
Speaker 1: Or are we going to have a central bank which
Speaker 1: says here is where we are, this is our regime,
Speaker 1: and then out the X axis we'll find a new
Speaker 1: regime at some point. I mean, that's to me essentially
Speaker 1: what Mr Bullets saying has changing the X axis if
Speaker 1: he if he can make a convincing case that's a
Speaker 1: twelve months out from now, we're moving from regime one
Speaker 1: to regime too, and here are five reasons why, and
Speaker 1: we're going to frame policy with that in mind. Then
Speaker 1: I give them all the credit in the world. But
Speaker 1: it's not clear to me in in a casual read
Speaker 1: of this paper that that's pretty much what they're laying out.
Speaker 1: It seems to me to be um, you know, a
Speaker 1: framework that says the regime remains in place until we're
Speaker 1: convinced otherwise, and that transition from one regime to another
Speaker 1: is tricking. And critically mike both of these analyzes on
Speaker 1: the X axis the timeline, folks, work from an ex
Speaker 1: post analysis, and institution has to observe the present. Am
Speaker 1: I don't am I speaking at a turner dr roach.
Speaker 1: I don't want to throw a piece of chalk at me.
Speaker 1: But it's an ex post analysis. Under both a conventional
Speaker 1: dot plot timeline or a regime jump condition condition X
Speaker 1: axis look low inflation, which is, you know, the dominant
Speaker 1: feature of the current regime. Give central banks, you know,
Speaker 1: the luxury to fiddle around with uh contemplating one regime
Speaker 1: or another once inflation or if inflation begins to bump
Speaker 1: up against this um you know, a threshold that that
Speaker 1: makes them more then they don't have the luxury anymore,
Speaker 1: and they have to be much more nimble, uh in
Speaker 1: deciding what the operative scenario is. So I'd like to
Speaker 1: know more and and maybe it's in this paper or
Speaker 1: maybe there's you know, UMU further follow up work that
Speaker 1: needs to be done about how they analyze the shift
Speaker 1: from one scenario to another. I mean, we've all been
Speaker 1: doing scenario. Now let's come back. Stephen Roach with as
Speaker 1: Yale University and Mike McKee with Jim Bullard's new paper
Speaker 1: on regime change. This morning. This our Surveillance brought to
Speaker 1: you by Monkisco Volvo is at Montcisco Volvo dot com.
Speaker 1: Here's Michael Barr with the latest world at National Headlines. Mike, Tom,
Speaker 1: thank you very much of you. It's continued to come
Speaker 1: in for a British lawmaker who was shot and stabbed
Speaker 1: to death yesterday ahead of next week's Brexit referendum. Labor
Speaker 1: lawmaker Joe Cox, who was forty one, was a strong
Speaker 1: advocate of Britain remaining in the EU, campaigning on both
Speaker 1: sides of the Brexit issue have been suspended for a
Speaker 1: second day today. Bernie Sanders says he will work with
Speaker 1: Hillary Clinton to defeat Donald Trump at the fall presidential election.
Speaker 1: Sanders spoke during a live stream address from his home
Speaker 1: in Vermont last night. Analysis has begun of the only
Speaker 1: so called black box recovered thus far from an egypt
Speaker 1: airplane that crashed in the Mediterranean Sea last month, killing
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Speaker 1: And back to UH Michael and Tom. Good morning, Good morning,
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Speaker 1: Stephen wrote with me in a great fortune if Steve
Speaker 1: Roach here as Jim Bullard releases a very important thought
Speaker 1: provoking paper and Steve, you and I touched on this
Speaker 1: an hour and a half ago. Here's the key sentence.
Speaker 1: They've got a benchmark out of a number of years
Speaker 1: out that they're trying to get to. This is Bullard quote.
Speaker 1: If the committee moved at a pace of basis points
Speaker 1: per year, it would take fourteen years to reach their
Speaker 1: terminal value. And the idea here is a protest against measured.
Speaker 1: Let's back up, did measured work? It hasn't yet, Tom
Speaker 1: and Um, you know, I think to me, you know
Speaker 1: that's the lesson of the pre crisis period where the fan,
Speaker 1: if you might remember, member started um with a one
Speaker 1: percent federal funds rate after the equity bubble burst, and
Speaker 1: in these measured um moves of basis points a shot,
Speaker 1: I think there were seventeen or eighteen of them. Uh,
Speaker 1: they finally got the funds rate up to five and
Speaker 1: a half percent. But then during that period of measured normalization,
Speaker 1: the biggest bubbles and distortions in US economic history built up.
Speaker 1: And when the bubbles burst, Uh, they they brought the
Speaker 1: unbalanced US economy closer to the ABYSS than ever. So
Speaker 1: if if that's what's you know at stake here and
Speaker 1: what um Bullard and his colleagues are offering, that the
Speaker 1: Fed would be inclined, inclined to be more aggressive in
Speaker 1: shifting policy immediately to quote a new regime than I
Speaker 1: would be in favor of that. What's missing for me,
Speaker 1: and again in a very casual to this paper, is
Speaker 1: is an understanding of what they're thinking about and how
Speaker 1: to determine in going from regime to regime. I totally
Speaker 1: agree with that, and and to use the languages of
Speaker 1: rules and discretion even with a regime change where we're
Speaker 1: maybe going back to it. Arthur Burns central banking of
Speaker 1: a little more abruptness, the basic idea here is you
Speaker 1: still have to have rules to affect the end of
Speaker 1: the given regime as you guess out to the new regime,
Speaker 1: you gotta have rules. I think the most important thing, though,
Speaker 1: is you have to have discipline. Uh you could you
Speaker 1: could call that rules um to to really stick with
Speaker 1: a strong view are irrespective of the political blowback that
Speaker 1: comes when you are making um seemingly unpopular adjustments, uh,
Speaker 1: vulgar if we look back on history, is really unique
Speaker 1: in in in his willingness to take on the politically
Speaker 1: correct response to the central banking. Others have just been
Speaker 1: very reluctant to um to buck the tide. But he
Speaker 1: did it within a time of excess is a time
Speaker 1: of excess inflation, the time of excess money illusion and
Speaker 1: Titanic nominal GDP. But there were howls of protests. I'm
Speaker 1: working at the FED. Then the FED was encircled and
Speaker 1: blockaded by farmers who had driven their fancy tractors in
Speaker 1: from the Midwest. Congress wanted his scalp, even though he
Speaker 1: didn't have much hair. Uh. He was hugely unpopular in
Speaker 1: many quarters. But yet he knew there was an interest
Speaker 1: rate that would be required much higher than anybody thought
Speaker 1: himself included his squeeze inflation out of this in today,
Speaker 1: Janet Yelling would be encircled by howls of uh the
Speaker 1: affluent in their Mercedes. Ben's right, Well, it's you know,
Speaker 1: independent central banking is very important. You need leaders at
Speaker 1: a central bank. We're willing to take on the body politics. Mike.
Speaker 1: Further thoughts from you as you break worldwide This story
Speaker 1: of James Bullard with an important new paper, Mike, what
Speaker 1: do you see with us? We mentioned the idea takes
Speaker 1: fourteen years to get a measured path up to wherever
Speaker 1: they're heading. Depends, in Jim Bullard's words, and whether the
Speaker 1: regime changes or not. One of the interesting things he
Speaker 1: raised questions He raises Steve is as a risk to
Speaker 1: his regime forecast inflation. He is betting that the Phillips
Speaker 1: curve relationship has broken down and that if it comes
Speaker 1: back that can obviously change things. Leaving aside whether it
Speaker 1: works for Jim Bullard or not, does the Phillips curve
Speaker 1: still work for Steve Roach? He note the bullet notes
Speaker 1: that we've got four unemployment and no inflation. Yeah, it's
Speaker 1: a question is whether or not the four point seven
Speaker 1: percent really accurately gauges the supply demand balance in the
Speaker 1: labor market. Um You know, I do think that that's
Speaker 1: a important question, Mike, in that um uh. Inflation remains
Speaker 1: quiescent around the world, and yet in central banks around
Speaker 1: the world are absolutely convinced that the single most important
Speaker 1: thing they need to do is inflation targeting. What this
Speaker 1: paper I did pick up, you know, one phrase in
Speaker 1: this paper. It says, this approach presented here has little
Speaker 1: to say about asset price bubble risk. And that's the
Speaker 1: flip side of what happens when you have easy money
Speaker 1: on inflation less world. And so this is a big
Speaker 1: issue that needs to be addressing. Thank you so much.
Speaker 1: We are out of time with Dr Roach. You know,
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