Speaker 1: You're listening to taking stock line from the Jackson Hole
Speaker 1: Economic Symposium on Bloomberg Radio. Robert Kaplan as President and
Speaker 1: CEO of the Fed to Reserve Bank of Dallas. He
Speaker 1: was an investment banker at Goldman Sachs, Professor of Management
Speaker 1: at Harvard and UH. In his new role just over
Speaker 1: a year now, Rob Kaplan has definitely made his mark
Speaker 1: at the Federal Reserve UH, covering the district of Dallas
Speaker 1: here at Jackson Hall, Wyoming for the Kansas City FEDS
Speaker 1: Annual Symposium. The theme this year designing Resilient Monetary policy
Speaker 1: Frameworks for the future at a time uncertainty over the
Speaker 1: course of rate hikes and policy. This is so important, Rob, Welcome,
Speaker 1: Thank you, good to be here. Well, let's get right
Speaker 1: into some things you have said about where you see
Speaker 1: UH the FED going. Just recently UH Bloomberg Reporting, you
Speaker 1: spoke UH and said that you thought, watching the data,
Speaker 1: depending how it goes, especially the labor market, you could
Speaker 1: see an interest rate increase next month September twenty one
Speaker 1: odds of a hike as measured by the FED funds
Speaker 1: features up to about now and and so let me
Speaker 1: correct that a little bit. What I was asked, is
Speaker 1: is September off the table? And I said, it's not
Speaker 1: off the table, but we need to wait and see.
Speaker 1: So I've been one of the FED presidents who has
Speaker 1: been reluctant to speculate on individual meetings because I don't
Speaker 1: think it's productive. But I do think the case for
Speaker 1: removing accommodation is strengthening um and for a lot number
Speaker 1: of reasons, which we can go into, but that's all
Speaker 1: in the context of I think any removal of accommodation
Speaker 1: should be patient, slow, gradual, because we've got a number
Speaker 1: of persistent headwinds that we have to adjust to. But yes,
Speaker 1: I think the strength the case for removing some amount
Speaker 1: of accommodation it has strengthened. So when you say you
Speaker 1: see the reasons, what's the number one? Is it the
Speaker 1: fact that labor market is strengthened the number one pro reason? Yeah,
Speaker 1: as we're making good progress on our on our employment objective,
Speaker 1: we're making frustratingly slow but still some progress on UM
Speaker 1: on our inflation target. And even though first half and
Speaker 1: specifically second quarter GDP was disappointing, a lot of the
Speaker 1: reason for it was a big inventory adjustment. Consumer is strong.
Speaker 1: Final demand in the second quarter was strong, and we
Speaker 1: think the consumer will be strong for this year, So
Speaker 1: we think you're gonna see GDP growth rebound in the
Speaker 1: second half. All right, Well, there's certainly from the fom
Speaker 1: C minutes of the last meeting, we saw people said
Speaker 1: a divided fed, some people more worried about low inflation,
Speaker 1: some people saying, hey, no, things are picking up, but
Speaker 1: there's a lot of uncertainty about the outlook, and many
Speaker 1: people have spoken about that. So with uncertain outlook, a
Speaker 1: labor market average job growth flowing about a hundred fifty
Speaker 1: thousand a month from over two hundred thousand previously. Uh,
Speaker 1: what's the rush? Why why do we even need to
Speaker 1: have September on the table? In my own view, and
Speaker 1: I've said this publicly, I don't think there is a rush.
Speaker 1: We can afford to be patient. The reason we can
Speaker 1: afford to be patient is to be a little wonky
Speaker 1: than neutral rate. The neutral rate that we're neither accommodative
Speaker 1: or restricted is lower, and it's certainly lower than is
Speaker 1: widely understood. So while the fet is right now we're accommodative,
Speaker 1: we're not as accommodative as people think. And because the
Speaker 1: neutral rate is lower, and the primary reason for that
Speaker 1: is slower growth and particularly because of aging demographics, I
Speaker 1: think we can afford to be patient. But even within
Speaker 1: that rates this low are not free. There's a cost
Speaker 1: to savers. It creates distortions for investment, it can create
Speaker 1: other distortions. And that's the reason why, uh, I think
Speaker 1: we should be moving towards removing some amount of accommodation.
Speaker 1: But we can do it in a patient manner, and
Speaker 1: we've got the ability to do that, I think because
Speaker 1: the reasons I just said. And we're speaking with Robert Kaplan,
Speaker 1: he's president Federals sort of Bank of Dallas here at
Speaker 1: the FED symposium in Jackson Hole, Wyoming. Pim Fox my
Speaker 1: co host in New York. Mr Kaplan, you talked about
Speaker 1: the distortion and the effect of savers because of the
Speaker 1: low interest straits. Is there a point at which the
Speaker 1: Federal Reserve will bluntly recognize and acknowledge the harm that
Speaker 1: they have caused savers over this elongated period of time.
Speaker 1: How do you respond to people that say they cannot
Speaker 1: plan for their future and as a result, they will
Speaker 1: not spend their money until interest rates increase. So you
Speaker 1: asked if there's a point at which will acknowledge that
Speaker 1: we're past that point. We've already if you've heard me
Speaker 1: speak publicly, acknowledge it. In most times I speak, and
Speaker 1: I and I I'm very well aware of it. And
Speaker 1: in an aging population, uh where people rely more savings
Speaker 1: and will increasingly rely on savings. If they can't earn
Speaker 1: a reasonable return on savings, they will either take more
Speaker 1: risk or they'll spend less. So I think there's a
Speaker 1: cost to this, and I think we have to take
Speaker 1: it into account. Well. A lot of talk now about
Speaker 1: a rethink of FED policy. You just mentioned the fact
Speaker 1: that the neutral rate is lower, probably than the FED
Speaker 1: thought that's the rate that doesn't boost the economy or
Speaker 1: slow it down. If it's lower, if it's not at
Speaker 1: four percent or three percent, the FED doesn't have too
Speaker 1: much room to raise interest rates. Now, what is your view?
Speaker 1: Where do you come down on this big rethink? Where
Speaker 1: is it impelling the Fed? Well as it relates to
Speaker 1: the neutral we do a model in which I've talked
Speaker 1: about publicly in Dallas. There's also the law back Williams models.
Speaker 1: There's other model, but the long and short of it
Speaker 1: for most people listening. The longer run neutral rate, according
Speaker 1: to law back William is zero, and our own model
Speaker 1: in Dallas, we think it's somewhat. It's actually even less
Speaker 1: than that. It's negative, so it's not that and then
Speaker 1: you add the inflation rate to that. Okay, so it's
Speaker 1: not that we're not accommodative, but we are less accommodative
Speaker 1: than is widely recognized. And that's the other reason that
Speaker 1: I've said it's very critical that monetary policy shouldn't be
Speaker 1: the only economic tools on the table. We need structure
Speaker 1: reforms fiscal policy because a lot of the reason for
Speaker 1: the slower growth is structural aging. Demographics is a good
Speaker 1: example of a structural issue where the the workforce participation
Speaker 1: is declining and we think will continue to decline over
Speaker 1: the next ten years because the population is aging out
Speaker 1: of the workforce. Rob I've been covering the federal reserve
Speaker 1: since the days of Paul Bulker mid eighties, and that's
Speaker 1: when that's going to keep became so ingrained. Commy picks
Speaker 1: up too much and read about inflation, your raised rates,
Speaker 1: it starts blowing down. You cut them. The neutral rate
Speaker 1: is at zero now or even lower. What does this mean,
Speaker 1: have we come to the end of this decades long
Speaker 1: mode of monetary policy as we know it is? Are
Speaker 1: rnning a new age? And for your listeners, that's the
Speaker 1: real neutral rate, so means the nominal neutral rate would
Speaker 1: be say according to lawback Williams two and so, Yeah,
Speaker 1: I think we have to face a new reality. I
Speaker 1: do believe that. I think for those that are hoping
Speaker 1: or pining for days of your where UH we had
Speaker 1: fiscal policy, we had other policy in the FED out
Speaker 1: a lot more maneuvering room. I think it's important to
Speaker 1: call out this is a new reality. It's a different world.
Speaker 1: And in particular, what's so different than any time during
Speaker 1: my lifetime is the aging workforce. And it's going on
Speaker 1: in every advanced economy in the world, and it affects
Speaker 1: potential growth, and it affects UH interest rates and the
Speaker 1: neutral rate, and we've got to adjust to that. Rather
Speaker 1: than hope it changes, we have to adjust the reality. Well,
Speaker 1: you know, there is a lot more discussion now about
Speaker 1: what happens in the next recession. I was UH at
Speaker 1: at an event and recently where a money manager who's
Speaker 1: worked around the world said, what about the next recession?
Speaker 1: I know how to price in a recession up until now,
Speaker 1: because the FED had room to cut rates maybe by
Speaker 1: about you know, five hundred basis points to get things going.
Speaker 1: That room no longer exists. What does this mean for
Speaker 1: the next recession. So the trade off at the FED
Speaker 1: is we'd like to have we already we have tools,
Speaker 1: even where we are now, we'd like to have more
Speaker 1: more tools. If interest rates were higher, we would have
Speaker 1: more tools. On the other hand, you don't want to
Speaker 1: force interest rate increases because you might actually create the
Speaker 1: recession that you're fearing. And so for me, monetary policy
Speaker 1: will have a role to play if there's another downturn
Speaker 1: or where we are now. But we for most of
Speaker 1: my lifetime, except for the last seven years, we also
Speaker 1: had structural policy. We had fiscal policy, and it gave
Speaker 1: the FED much more operating room. We haven't had it
Speaker 1: in seven years, and the period of so called paralysis
Speaker 1: in fiscal policy probably needs to come to an end.
Speaker 1: We need a broader range of policies in the United
Speaker 1: States to face our challenges, and I've been saying that regularly.
Speaker 1: And the reason I'm saying it it's not that monetary
Speaker 1: policy doesn't have a role, but we need broader policies
Speaker 1: and we've had them in our history, just not for
Speaker 1: the last seven years. Mr Kaplin, do you does the
Speaker 1: Federal Reserve need greater consistency when it comes to its
Speaker 1: public message and its public debate? Uh? I think that, UH,
Speaker 1: improving FED communication is critical. UH. And what I'll just
Speaker 1: I've been on I've now been on the FED, UH
Speaker 1: involved with the FED for a year obviously, and I
Speaker 1: read all the President's speeches, I read all the Governor's speeches.
Speaker 1: I'm in all the FOMC meetings. I think if you
Speaker 1: read the speeches in their entirety and read the minutes
Speaker 1: in their entirety, you get a fairly coherent message. But
Speaker 1: that's not the way these things get filtered out almost
Speaker 1: a quarter century, right, I mean, no one's going to
Speaker 1: button and trade, right. Well, it also used to be
Speaker 1: that the FED was much more muted and much less transparent.
Speaker 1: So in the interest of transparency, the FED communicates more
Speaker 1: than negative with that is, it can create confusion, and
Speaker 1: I think this is an issue that FED needs to
Speaker 1: continue to wrestle with. I want to ask you about
Speaker 1: zero zero interest rate policy. We know to the consumer,
Speaker 1: UH is really about the only big engine of growth
Speaker 1: right now, because business investment has been has been pretty
Speaker 1: weak for the past few quarters. I think a lot
Speaker 1: of people are wondering, could the zero interest rate policy
Speaker 1: and quantitative easy be part of the problem. Um, we
Speaker 1: know borrowing costs are low, that could stimulate growth, but
Speaker 1: the expect of returns are low now too. Would higher
Speaker 1: rates would have switched from that policy? Maybe it's out there,
Speaker 1: but would it incentifies companies to make bigger, longer term investments.
Speaker 1: So I'll speak to this as a as a former
Speaker 1: business person than somebody who who is my entire career
Speaker 1: including now talks extensively to c e O S. I
Speaker 1: think the reason capital spending is low is not because
Speaker 1: interest rates are low. In fact, I think that that
Speaker 1: lower interest rates makes it easier to make capital spending decisions.
Speaker 1: Reason capex is has been sluggish is expected sluggish demand,
Speaker 1: particularly globally. Number two, high rates of disruption in every
Speaker 1: single industry, and we don't talk enough about that that
Speaker 1: you go industry by industry, there are new threats, new competitors.
Speaker 1: You've got the Internet, which reduces pricing power and reduces margins.
Speaker 1: And so I think CEO uncertainty is driven more by
Speaker 1: those issues, and their hesitancy is driven more by those
Speaker 1: issues than monetary policy. I would argue these low rates
Speaker 1: have made it easier UH to do cap capital spending.
Speaker 1: I don't think those I don't think that's the reason.
Speaker 1: Thinking globally, are you worried about and interest rate increase
Speaker 1: potentially boosting the dollar? You know, and and and just
Speaker 1: there's two sides of this. One. Pert's manufacturing the US
Speaker 1: too makes a end stronger, and Japan's trying mighty hard
Speaker 1: to get that y end weaker right now. Well, so
Speaker 1: we have to be cognizant of it. And I've said
Speaker 1: regularly one we need to watch the impact of our
Speaker 1: actions on the dollar one you set it for exports.
Speaker 1: The other thing I would say is I'd look more
Speaker 1: significantly to China, where they've got massive overcapacity, high levels
Speaker 1: of debt, the g d P, fear of capital flight,
Speaker 1: and a lot of that comes out in a weaker currency,
Speaker 1: which can be destabilizing, as we saw in January and February.
Speaker 1: So we're the central banker to the United States. So
Speaker 1: the way I would describe it, we have to be
Speaker 1: aware of these external forces that could spill back over
Speaker 1: in the United States and create a tightening. I wouldn't
Speaker 1: overreact to those issues, but we need to be cognizant
Speaker 1: of them. It wouldn't stop you. I mean, that's not
Speaker 1: a big consideration strong at all. I think the next
Speaker 1: step and if, if, and when we decide to remove accommodation,
Speaker 1: that next step in and of itself, as long as
Speaker 1: we communicate clearly it's in the context of slow, gradual
Speaker 1: removal of accommodation. UM. I think it's manageable. I think
Speaker 1: earlier in the year where the market thought we were
Speaker 1: going to raise four to potentially four times in two
Speaker 1: thousand and sixteen, I think, uh, we saw that did
Speaker 1: not look like slow and gradual. It looked like two accelerated.
Speaker 1: And I think there's a lesson to be learned from that.
Speaker 1: Mr Caplin. To get your thoughts on negative interest rates
Speaker 1: in Europe, Yeah, so, Uh. The issue on negative rates
Speaker 1: in Europe as well as in Japan is UM my concern.
Speaker 1: They do some negative They have some negative impact on
Speaker 1: the financial system, on banking system, which is vital to
Speaker 1: the health of a country or countries. Uh. And while
Speaker 1: they might create incentives to take more risk and buy time.
Speaker 1: They're not going to address fundamental structural issues, and those
Speaker 1: include aging demographics, high levels of debt to GDP UH
Speaker 1: in particular, and so I think there's not going to
Speaker 1: be any getting around. Ultimately, governments in Europe Japan are
Speaker 1: going to have to find ways to address aging demographics
Speaker 1: by increasing the workforce UH and addition, deal with issues
Speaker 1: of high levels of debt to GDP and bring to
Speaker 1: bear fiscal policy to supplement monetary policy, because if you
Speaker 1: go too far with monetary policy, I might argue that
Speaker 1: negative rates might have side effects that may ultimately create
Speaker 1: new challenges for these economies. Well, you know, we've already
Speaker 1: seen in Japan, and you lived in Japan, rob Kaplan
Speaker 1: President Dallas fed UH for five years. One of the
Speaker 1: one of the many stories on Bloomberg was about people
Speaker 1: buying safes to put cash in the safe because they
Speaker 1: don't want to go to a bank and have to
Speaker 1: pay ad bank to hold their money. Can you you know?
Speaker 1: So Japan is a great example two big difficult problems.
Speaker 1: Not only aging demographics, aging to the extent of the
Speaker 1: population is shrinking. Okay, so the country will literally be
Speaker 1: smaller twenty years from now. Than today if nothing is done.
Speaker 1: And then the second issue is very high levels of
Speaker 1: debt to GDP. So how do you solve that? Not easy,
Speaker 1: especially in a country that's not culturally open to immigration.
Speaker 1: So they've tried to get more women into the workforce
Speaker 1: and other things, but there's no getting around Monetary policy
Speaker 1: won't address these issues. They'll ultimately need to deal with
Speaker 1: and you saw this recently by their recent actions, a
Speaker 1: recognition they need fiscal policy and other structural reforms. Monetary
Speaker 1: policy by itself won't address these and I think that's
Speaker 1: a lesson that we should probably learn here and throughout
Speaker 1: the world, and it's important lesson China. The FOMC minutes again,
Speaker 1: they singled out the high debt GDP ratio and a
Speaker 1: certain exchange rate policy. Again, you were just there, you
Speaker 1: were in Shanghai. Why is China such a concern to
Speaker 1: the Federal reservant? To you, Rob Kaplan, Well, the reason
Speaker 1: I went there and the reason I'll continue to go there.
Speaker 1: Number one, I've been going there for thirty years. It
Speaker 1: is it is actually a very significant portion of the
Speaker 1: world economy today. So what goes on there will affect
Speaker 1: the rest of the world. But Number two, they're going
Speaker 1: through an adjustment process where they're trying to wean off
Speaker 1: high levels of government spending on state owned enterprises. Is
Speaker 1: infrastructure real estate that basically they where they use leverage,
Speaker 1: and so they target a GDP number of six and
Speaker 1: a half percent and then they create debt to meet it.
Speaker 1: They can't keep doing that, and so the pressure valve
Speaker 1: for all this is the exchange rate. So we're just
Speaker 1: sensitive at the FED. But I think again we shouldn't
Speaker 1: go too far with this that if there's a stronger
Speaker 1: the stronger the dollar is. If there's a suddening strengthening
Speaker 1: the dollar, as we saw again in January and February,
Speaker 1: where there's a sudden weakening of the end of the
Speaker 1: Chinese currency, it's going to create global instability, potentially tightening
Speaker 1: financial conditions. I again, I think this is an issue
Speaker 1: that's not going to get resolved in the next few quarters.
Speaker 1: Is going to be with us for the next ten
Speaker 1: fifteen years. It will take that long or longer for
Speaker 1: China to work through this transition, and so I just
Speaker 1: think it's something we need to watch over the next
Speaker 1: number of years. Did China's Chinese officials you spoke to
Speaker 1: expressionate concern about the US. Did you anything you share
Speaker 1: with us that they when they look at US and
Speaker 1: the FED what they're saying, Uh, they are very conscious
Speaker 1: there of the transition that they're going through in the
Speaker 1: fragility of it and the big and you notice they've
Speaker 1: they've apply very substantial capital controls in the last six
Speaker 1: months because the thing they are concerned about, they're concerned
Speaker 1: about domestic instability, and they're concerned about capital flight and
Speaker 1: they're trying to staunch it. And so the one thing
Speaker 1: they keep their eye on is the currency. And they
Speaker 1: understand that domestic players would like to take more money
Speaker 1: out than they currently can because they worry that Chinese
Speaker 1: GDP growth is going to need to decline and the
Speaker 1: government cannot continue to leverage up or increase their leverage
Speaker 1: in order to support GDP, and that means a weaker currency.
Speaker 1: So that's what they're cognizant enough. Mr Kaplan, Note, what
Speaker 1: do you ask yourself when you look in the mirror?
Speaker 1: And the reason I put it that way is because
Speaker 1: of course you're book what to ask the person in
Speaker 1: the mirror, And I wonder if you could just answer
Speaker 1: that in the context of many critics of the Federal
Speaker 1: Reserve who say the FED missed the housing crisis and
Speaker 1: they've managed to keep interest rates too low for too long,
Speaker 1: and now we're addicted to low rates. Yeah. So I
Speaker 1: have a little bit of an intellectual benefit that I've
Speaker 1: only been involved with the FED for years, so I can,
Speaker 1: probably as much as anyone who's at the FED look
Speaker 1: at this with an objective point of view. And I
Speaker 1: would say the biggest thing I try to ask when
Speaker 1: I look in the mirror is whether I like it
Speaker 1: or not? What I see? Am I facing? Are we
Speaker 1: facing reality? Let's do the analysis on economic conditions. Let's
Speaker 1: understand what the neutral rate is, even though it's a
Speaker 1: it's a judgment. You're not going to see it on
Speaker 1: a Bloomberg screen. Uh. And what should we be doing
Speaker 1: on monetary policy? And and That's what I'm asking every day.
Speaker 1: And I actually think the reason that rates are lower today,
Speaker 1: a part of it is the FED. But honestly, I
Speaker 1: think the bigger part is slowing global growth, aging demographics,
Speaker 1: demand for safe assets around the world. The neutral rate
Speaker 1: would be is in decline. Uh and uh. And I
Speaker 1: think a part of it's the FED. That people may
Speaker 1: over attribute that decline to the FED. I think a
Speaker 1: lot of it is market determined. Uh well, len's let's
Speaker 1: continue on that vein and circle back to something we're
Speaker 1: just talking to the beginning this conversation. If we have
Speaker 1: a recession in the next several years and rates are
Speaker 1: still low in the US, what is the strategy more quantity,
Speaker 1: dative easing, forward guidance, negative rates, so that we have
Speaker 1: all those tools at our disposal. On the one hand,
Speaker 1: On the other hand, I feel strongly that we need
Speaker 1: soon and I've said this again, I'll keep saying, it's
Speaker 1: truck shure reform. That means, uh, policies that grow the workforce,
Speaker 1: vocational training, the skills mismatch we have in this country. Uh.
Speaker 1: We need to review our regulatory policy at this state, local,
Speaker 1: and national level. We need infrastructure. We need to look
Speaker 1: at our infrastructure which is aging and decaying and is
Speaker 1: a source of negative productivity, and we need to look
Speaker 1: at ways to bolster that. I think we need to
Speaker 1: do those things, and we need to do them soon
Speaker 1: because we need a broader rate of policy tools. And
Speaker 1: so that's that's my answer that if we don't get
Speaker 1: any of those actions, then I think the FED will
Speaker 1: be in a position will have to use its own tools,
Speaker 1: and I think it will be suboptimal for what, uh
Speaker 1: for for addressing the challenges the US faces, and I
Speaker 1: think that would be unfortunate, and that's why I'm calling
Speaker 1: this out now. Mr Kavin. You may be calling it out,
Speaker 1: but as you've also described, that's out of the remit
Speaker 1: really of the Federal Reserve. Um, what do you foresee
Speaker 1: in terms of interest rates? Is it possibly United States
Speaker 1: could have negative interest rates? It is now I'd make
Speaker 1: one point back. I actually think calling out publicly without
Speaker 1: regard to the implications what I see in economic conditions
Speaker 1: and what I think needs to happen is part of
Speaker 1: my job, and I think I'm not doing my job
Speaker 1: if I don't do it. So I think that's a
Speaker 1: big part of our remit, and maybe we haven't done
Speaker 1: it enough. We need to do it more. Actually, But
Speaker 1: back to your point, uh, Well, if you've got to
Speaker 1: face reality, if we get in a future situation, my
Speaker 1: concern is negative rates, for example in the United States,
Speaker 1: will hurt the financial system obviously further penalized savers, and
Speaker 1: my bigger fear a lot of companies in this country
Speaker 1: use the commercial paper market. The money is healthy. Money
Speaker 1: market industry is very critical, and negative rates will uh
Speaker 1: will be negative for all those sources. So we're getting
Speaker 1: to the point where I wouldn't say we're pushing on
Speaker 1: a string, but I think there's real trade offs to
Speaker 1: negative rates that we have to face. Robert Caplin, thank
Speaker 1: you so very much kicking off our special coverage here
Speaker 1: in Jackson Hole, Wyoming the fit of Reserve Can't City's Symposium.
Speaker 1: He's president of the Federal Reserve Bank of Dallas, and
Speaker 1: we thank him so much for taking time for us
Speaker 1: on taking stop and Kathleen Hayes along with Pim Fox
Speaker 1: and this is Bloomberg. Yeah,