1 00:00:02,400 --> 00:00:06,760 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:07,000 --> 00:00:09,280 Speaker 2: All right, it's time now for our daily Wall Street 3 00:00:09,280 --> 00:00:12,160 Speaker 2: Week Conversation, and today we're taking a look at political 4 00:00:12,200 --> 00:00:15,520 Speaker 2: pressures facing central banks. Joining us now, I'm pleased to 5 00:00:15,520 --> 00:00:18,320 Speaker 2: say we have Ken Rogoff. He is Harvard University Professor 6 00:00:18,360 --> 00:00:22,160 Speaker 2: of Economics and Chair of International Economics, along of course, 7 00:00:22,200 --> 00:00:25,920 Speaker 2: with Wall Street Weeks David Wesson. David, a timely conversation 8 00:00:26,400 --> 00:00:28,520 Speaker 2: as the FED kicks off. It's two day meeting exactly. 9 00:00:28,520 --> 00:00:29,800 Speaker 3: We're about to hear from the Fed what they're going 10 00:00:29,840 --> 00:00:30,880 Speaker 3: to do in the short term, but we want to 11 00:00:30,880 --> 00:00:32,800 Speaker 3: take a longer term look as well. What's going on 12 00:00:32,800 --> 00:00:34,880 Speaker 3: interest rates? And Ken, thanks so much for being with 13 00:00:35,000 --> 00:00:37,560 Speaker 3: You have a paper ad co author with other people 14 00:00:37,600 --> 00:00:40,480 Speaker 3: from Brookings talking about those long term interest rates. First 15 00:00:40,520 --> 00:00:42,000 Speaker 3: of all, given the fact we're going to have the 16 00:00:42,000 --> 00:00:45,520 Speaker 3: Fed make a more short term decision, presumably this week, 17 00:00:45,640 --> 00:00:48,000 Speaker 3: how does that fit with the long term interest rates? 18 00:00:48,080 --> 00:00:50,519 Speaker 3: How should the Fed be taking into account? So what 19 00:00:50,680 --> 00:00:52,159 Speaker 3: you say about long term interest. 20 00:00:51,960 --> 00:00:57,880 Speaker 1: Rates, Well, long term interest rates you're probably higher for 21 00:00:57,960 --> 00:01:01,600 Speaker 1: as far as the I can see, and means there 22 00:01:01,920 --> 00:01:05,600 Speaker 1: are star what they think of what's their target is 23 00:01:06,160 --> 00:01:09,039 Speaker 1: higher than they've been thinking, and some of them still 24 00:01:09,080 --> 00:01:13,800 Speaker 1: seem to be thinking. It collapsed after the financial crisis, 25 00:01:13,880 --> 00:01:16,399 Speaker 1: and there's been some reversion to me, and we've seen 26 00:01:16,400 --> 00:01:18,120 Speaker 1: it in the long rates, and I'm not sure the 27 00:01:18,160 --> 00:01:21,800 Speaker 1: Fed's entirely figured out that some of that will happen 28 00:01:21,840 --> 00:01:24,320 Speaker 1: with the short rates as well. So I think one 29 00:01:24,360 --> 00:01:27,560 Speaker 1: FED governor said, we thought we had two feet on 30 00:01:27,600 --> 00:01:31,440 Speaker 1: the brakes, but maybe we only have one because interest 31 00:01:31,520 --> 00:01:33,280 Speaker 1: rates aret as high as they seen. 32 00:01:34,240 --> 00:01:37,640 Speaker 3: How much influence does the Federal Reserve have over long 33 00:01:37,680 --> 00:01:39,800 Speaker 3: term interest rates? One of the things I took from 34 00:01:39,800 --> 00:01:41,800 Speaker 3: your paper at least is that we had a period 35 00:01:41,840 --> 00:01:44,400 Speaker 3: of low inflation, but it may have been for forces 36 00:01:44,560 --> 00:01:47,039 Speaker 3: much larger than any central bank. It had to do 37 00:01:47,080 --> 00:01:49,760 Speaker 3: with things like globalization and so what was going on, 38 00:01:49,960 --> 00:01:52,760 Speaker 3: unions and some of the lack of conflicts. How much 39 00:01:52,760 --> 00:01:55,160 Speaker 3: influence does the FED have over long term registrates? 40 00:01:57,480 --> 00:02:00,960 Speaker 1: Well, there are two parts to long term interest rates. 41 00:02:01,000 --> 00:02:04,160 Speaker 1: There's the real interest rate, and I think the Fed's 42 00:02:04,840 --> 00:02:08,560 Speaker 1: long term influence is actually very limited. It follows the 43 00:02:08,639 --> 00:02:14,400 Speaker 1: flows of international markets. Quantitative easing matters because of the 44 00:02:14,440 --> 00:02:17,800 Speaker 1: treasury issues lots of short term debt and very little 45 00:02:17,840 --> 00:02:21,040 Speaker 1: long term debt or the FED helps it do that. 46 00:02:21,040 --> 00:02:24,240 Speaker 1: That lowers long term interest rates, but it's risky because 47 00:02:24,560 --> 00:02:27,320 Speaker 1: as we've seen, when interest rates go up, that can 48 00:02:27,360 --> 00:02:30,919 Speaker 1: cost the US a lot of money. On inflation, I mean, 49 00:02:30,960 --> 00:02:33,000 Speaker 1: I think, of course, the Fed's heart is in the 50 00:02:33,080 --> 00:02:37,639 Speaker 1: right place, but it's hard to be a island of 51 00:02:38,120 --> 00:02:42,680 Speaker 1: technocratic tranquility in the middle of a sea of political turmoil. 52 00:02:43,080 --> 00:02:48,440 Speaker 1: The FED is independent, but you know, the governors get appointed, 53 00:02:48,480 --> 00:02:51,960 Speaker 1: the FED share gets appointed. Over the long run, they 54 00:02:51,960 --> 00:02:55,080 Speaker 1: can control the Fed's budget, a lot of perimeters around 55 00:02:55,120 --> 00:02:59,040 Speaker 1: its regulation, and political pressures matter. I mean, they don't 56 00:02:59,040 --> 00:03:01,240 Speaker 1: have to be so food as I'm sure you're going 57 00:03:01,280 --> 00:03:04,600 Speaker 1: to ask me about Donald Trump and some of the proposals, 58 00:03:04,840 --> 00:03:07,320 Speaker 1: but I think in more subtle ways they matter. And 59 00:03:07,360 --> 00:03:10,959 Speaker 1: as you say, there was this long period of globalization, 60 00:03:12,360 --> 00:03:18,560 Speaker 1: fiscal prudence, Washington Consensus, deunionization. I'm not praising that, but 61 00:03:19,040 --> 00:03:21,359 Speaker 1: it made it easier for the FED to bring down 62 00:03:21,400 --> 00:03:26,880 Speaker 1: inflation and maintain decent growth. Everything's going into reverse, certainly, 63 00:03:27,000 --> 00:03:31,720 Speaker 1: fiscal policies long gone into reverse. Globalization is at least 64 00:03:31,760 --> 00:03:34,640 Speaker 1: slowed down, might be going into reverse. A number of 65 00:03:34,680 --> 00:03:38,280 Speaker 1: other factors, and it's going to be harder. I think 66 00:03:38,520 --> 00:03:44,160 Speaker 1: for those reasons, and my co authors Hassan, Marina and 67 00:03:44,240 --> 00:03:47,880 Speaker 1: Pierre all think that we're going to have an average 68 00:03:47,920 --> 00:03:48,600 Speaker 1: harder inflation. 69 00:03:48,680 --> 00:03:48,760 Speaker 3: Now. 70 00:03:48,920 --> 00:03:52,280 Speaker 1: To be clear, I'm not saying that Fed's not going 71 00:03:52,320 --> 00:03:55,960 Speaker 1: to bring inflation down to two percent this time. I 72 00:03:56,000 --> 00:03:59,640 Speaker 1: think it might, but we're going to see more upwards 73 00:03:59,760 --> 00:04:03,440 Speaker 1: by like we had over the pandemic on occasion, and 74 00:04:03,520 --> 00:04:06,080 Speaker 1: not so much these long periods of deflation. 75 00:04:06,960 --> 00:04:08,880 Speaker 2: Well, you're right, we are definitely going to get to 76 00:04:08,960 --> 00:04:11,880 Speaker 2: that Wall Street Journal reporting about, of course, Donald Trump 77 00:04:11,920 --> 00:04:14,880 Speaker 2: and what influence he might seek to have over the FED. 78 00:04:14,920 --> 00:04:17,960 Speaker 2: But let's just complete the thought on maybe and when 79 00:04:17,960 --> 00:04:21,120 Speaker 2: it comes to inflation, and of course that decades long 80 00:04:21,160 --> 00:04:24,000 Speaker 2: shift to lower inflation that central banks and the FED 81 00:04:24,080 --> 00:04:26,880 Speaker 2: had less to do with it than maybe commonly thought. 82 00:04:27,240 --> 00:04:29,400 Speaker 2: If that's the case, when you think about the inflation 83 00:04:29,480 --> 00:04:33,680 Speaker 2: that we're dealing with now, should that realization, if true, 84 00:04:33,960 --> 00:04:38,200 Speaker 2: impacts how they're approaching the current inflation that is in 85 00:04:38,240 --> 00:04:38,919 Speaker 2: the economy. 86 00:04:41,040 --> 00:04:43,440 Speaker 1: Well, they did a great job, but they had the 87 00:04:43,480 --> 00:04:46,000 Speaker 1: wind at their backs. Now they're running into the wind 88 00:04:46,040 --> 00:04:50,279 Speaker 1: and it's harder, you know. I think here the big 89 00:04:50,320 --> 00:04:55,640 Speaker 1: issue is not simply the embedded inflation. But where is 90 00:04:55,760 --> 00:04:58,600 Speaker 1: the long term real interest rate going to go? In 91 00:04:58,640 --> 00:05:02,480 Speaker 1: other words, how high a Fed funds rate? Do we 92 00:05:02,560 --> 00:05:05,760 Speaker 1: need to get the right real interest rate? They've been 93 00:05:05,839 --> 00:05:08,600 Speaker 1: thinking I think for a long time half a percent 94 00:05:08,800 --> 00:05:13,559 Speaker 1: real interest rate, and maybe that's right, But there's little 95 00:05:13,600 --> 00:05:16,799 Speaker 1: question the long rates have gone up, and even after 96 00:05:16,880 --> 00:05:20,200 Speaker 1: the Fed unwinds its interest rate hikes, I think they're 97 00:05:20,200 --> 00:05:22,760 Speaker 1: going to stay high for a very long time. And 98 00:05:23,080 --> 00:05:27,000 Speaker 1: so maybe interest rates aren't as tight as they think. 99 00:05:27,040 --> 00:05:30,640 Speaker 1: And I'm sure that kind of conversation's going through the 100 00:05:30,680 --> 00:05:33,880 Speaker 1: halls of the Federal Reserve now. They just have to 101 00:05:33,920 --> 00:05:35,080 Speaker 1: be rethinking things. 102 00:05:35,520 --> 00:05:37,640 Speaker 3: So Ken, let's go to that question about the reporting 103 00:05:37,760 --> 00:05:41,160 Speaker 3: about what perhaps a president Trump might do if we 104 00:05:41,160 --> 00:05:44,560 Speaker 3: were reelected. It is reporting, and the Trump camp specifically 105 00:05:44,560 --> 00:05:47,040 Speaker 3: has not said that's where they're headed. But if in 106 00:05:47,040 --> 00:05:49,839 Speaker 3: fact there was a move by a new Trump administration 107 00:05:50,160 --> 00:05:54,119 Speaker 3: to really really take away from the independence of thirds, 108 00:05:54,200 --> 00:05:56,400 Speaker 3: or how much difference would make, because it sounds like 109 00:05:56,680 --> 00:05:58,240 Speaker 3: you think there's going to be pressure on not just 110 00:05:58,279 --> 00:06:01,160 Speaker 3: the FIT but other central blanks no matter whatapons. 111 00:06:02,000 --> 00:06:05,920 Speaker 1: Yes, I do so it won't be as crude as 112 00:06:06,000 --> 00:06:10,640 Speaker 1: the rumors that we're hearing about from President Trump. I 113 00:06:10,640 --> 00:06:13,200 Speaker 1: don't think we're going to go to the extremes of 114 00:06:13,320 --> 00:06:18,240 Speaker 1: Turkey where President Ergowan kept firing his central bank, or 115 00:06:18,320 --> 00:06:21,520 Speaker 1: every other year when they tried to raise the interest rate. 116 00:06:21,560 --> 00:06:24,040 Speaker 1: I don't think we're going to get there. But almost 117 00:06:24,120 --> 00:06:28,160 Speaker 1: no matter who's in power, they're looking for ways to 118 00:06:28,200 --> 00:06:31,320 Speaker 1: try to loosen monetary policy. But I think progressives have 119 00:06:31,839 --> 00:06:36,720 Speaker 1: ideas for taking away FED independence too. They're not at 120 00:06:36,720 --> 00:06:40,080 Speaker 1: the tip of the tongue of President Biden or Jared 121 00:06:40,080 --> 00:06:43,640 Speaker 1: Bernstein and his advisors, but they are ideas floating out there. 122 00:06:44,200 --> 00:06:46,760 Speaker 1: And the thing is is it's not going to work 123 00:06:46,920 --> 00:06:50,080 Speaker 1: very well. I mean, it's going to be obvious that 124 00:06:50,120 --> 00:06:53,719 Speaker 1: it's not working. If you take away FED independence, investors 125 00:06:53,760 --> 00:06:57,159 Speaker 1: are going to get jittery inflation expectations. They're going to 126 00:06:57,200 --> 00:07:01,240 Speaker 1: go up the dollars in a tank, appily for better 127 00:07:01,360 --> 00:07:04,920 Speaker 1: for worse. Maybe I think markets will throw a pretty 128 00:07:04,960 --> 00:07:08,039 Speaker 1: cold bucket of water on the president if he tries 129 00:07:08,080 --> 00:07:09,920 Speaker 1: to do that. I don't think he would go to 130 00:07:09,960 --> 00:07:12,600 Speaker 1: that extreme, but it's clear, you know, he wants to 131 00:07:12,640 --> 00:07:17,400 Speaker 1: be disruptor and chief, and it probably irritates him that 132 00:07:17,880 --> 00:07:21,320 Speaker 1: I'll get so much attention at his press conferences. 133 00:07:21,320 --> 00:07:24,280 Speaker 2: So markets there would apply the brakes in that scenario, 134 00:07:24,400 --> 00:07:27,760 Speaker 2: which of course still being reported out. Details unclear, so 135 00:07:27,800 --> 00:07:30,800 Speaker 2: we won't go too far into the hypotheticals. But let's 136 00:07:30,840 --> 00:07:33,520 Speaker 2: talk a little bit more about real interest rates. If 137 00:07:33,560 --> 00:07:36,560 Speaker 2: we do enter into this environment where you have these 138 00:07:36,600 --> 00:07:41,480 Speaker 2: episodic spikes of inflation, what would sustainably higher real interest 139 00:07:41,560 --> 00:07:43,800 Speaker 2: rates mean for this economy when you think about the 140 00:07:43,800 --> 00:07:47,400 Speaker 2: potential ripple effects, Well. 141 00:07:47,240 --> 00:07:51,320 Speaker 1: I think it really comes in the costs of borrowing 142 00:07:51,800 --> 00:07:56,440 Speaker 1: for the government for individuals. So remember, you know inflations 143 00:07:56,480 --> 00:08:01,200 Speaker 1: also driving up tax revenues. It's also driving up wages 144 00:08:01,240 --> 00:08:04,760 Speaker 1: and salaries. But the real interest rates, you know, they're 145 00:08:04,800 --> 00:08:08,520 Speaker 1: there to stay there the wedge between the two and 146 00:08:08,840 --> 00:08:11,040 Speaker 1: this world. You know, there was this period where you 147 00:08:11,040 --> 00:08:13,920 Speaker 1: were just a sucker not to borrow as much as possible, 148 00:08:14,280 --> 00:08:17,400 Speaker 1: whether it was to buy a larger house, whether it 149 00:08:17,440 --> 00:08:21,080 Speaker 1: was to fund new government programs, et cetera. And I think, 150 00:08:21,120 --> 00:08:24,040 Speaker 1: you know, we live in a more normal world. Now. 151 00:08:24,120 --> 00:08:27,040 Speaker 1: I'm not saying I'm telling you what interest rates are 152 00:08:27,040 --> 00:08:30,040 Speaker 1: going to be for the next twenty years. But what 153 00:08:30,120 --> 00:08:32,640 Speaker 1: I am saying is I think on average, they're going 154 00:08:32,679 --> 00:08:36,000 Speaker 1: to be a lot higher than they were after the 155 00:08:36,040 --> 00:08:37,360 Speaker 1: global financial crisis. 156 00:08:37,480 --> 00:08:40,200 Speaker 3: Ken, last quick one, if I could, what does it 157 00:08:40,240 --> 00:08:42,880 Speaker 3: do to growth if we have longer long term interest rates. 158 00:08:45,400 --> 00:08:49,319 Speaker 1: Well, we've had long term interest rates a lot higher 159 00:08:49,360 --> 00:08:51,520 Speaker 1: for a long time and had better growth than we 160 00:08:51,600 --> 00:08:54,640 Speaker 1: have now. It sort of depends on what's going on. 161 00:08:54,880 --> 00:08:58,320 Speaker 1: I think. To the extent it's driven by huge government borrowing, 162 00:08:58,679 --> 00:09:03,040 Speaker 1: private borrowing, it's clearly negative. You're just paying a risk 163 00:09:03,080 --> 00:09:07,400 Speaker 1: premium tomorrow. To the extent it's driven by AI and 164 00:09:07,520 --> 00:09:13,040 Speaker 1: productivity and wondrous new technologies and obviously high rates just 165 00:09:13,080 --> 00:09:16,120 Speaker 1: go hat in hand, and maybe there's some of both. 166 00:09:16,960 --> 00:09:19,320 Speaker 2: All right, got to leave it there, but really enjoyed 167 00:09:19,320 --> 00:09:22,079 Speaker 2: this conversation. Are big thanks, of course to Ken Rogoff 168 00:09:22,400 --> 00:09:26,520 Speaker 2: of Harvard University. A great setup, big questions heading into 169 00:09:26,559 --> 00:09:28,360 Speaker 2: tomorrow's Central Bank meeting.