WEBVTT - Harvard University Professor Kenneth Rogoff Talks Markets

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>All right, it's time now for our daily Wall Street

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<v Speaker 2>Week Conversation, and today we're taking a look at political

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<v Speaker 2>pressures facing central banks. Joining us now, I'm pleased to

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<v Speaker 2>say we have Ken Rogoff. He is Harvard University Professor

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<v Speaker 2>of Economics and Chair of International Economics, along of course,

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<v Speaker 2>with Wall Street Weeks David Wesson. David, a timely conversation

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<v Speaker 2>as the FED kicks off. It's two day meeting exactly.

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<v Speaker 3>We're about to hear from the Fed what they're going

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<v Speaker 3>to do in the short term, but we want to

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<v Speaker 3>take a longer term look as well. What's going on

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<v Speaker 3>interest rates? And Ken, thanks so much for being with

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<v Speaker 3>You have a paper ad co author with other people

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<v Speaker 3>from Brookings talking about those long term interest rates. First

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<v Speaker 3>of all, given the fact we're going to have the

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<v Speaker 3>Fed make a more short term decision, presumably this week,

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<v Speaker 3>how does that fit with the long term interest rates?

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<v Speaker 3>How should the Fed be taking into account? So what

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<v Speaker 3>you say about long term interest.

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<v Speaker 1>Rates, Well, long term interest rates you're probably higher for

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<v Speaker 1>as far as the I can see, and means there

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<v Speaker 1>are star what they think of what's their target is

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<v Speaker 1>higher than they've been thinking, and some of them still

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<v Speaker 1>seem to be thinking. It collapsed after the financial crisis,

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<v Speaker 1>and there's been some reversion to me, and we've seen

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<v Speaker 1>it in the long rates, and I'm not sure the

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<v Speaker 1>Fed's entirely figured out that some of that will happen

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<v Speaker 1>with the short rates as well. So I think one

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<v Speaker 1>FED governor said, we thought we had two feet on

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<v Speaker 1>the brakes, but maybe we only have one because interest

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<v Speaker 1>rates aret as high as they seen.

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<v Speaker 3>How much influence does the Federal Reserve have over long

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<v Speaker 3>term interest rates? One of the things I took from

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<v Speaker 3>your paper at least is that we had a period

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<v Speaker 3>of low inflation, but it may have been for forces

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<v Speaker 3>much larger than any central bank. It had to do

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<v Speaker 3>with things like globalization and so what was going on,

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<v Speaker 3>unions and some of the lack of conflicts. How much

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<v Speaker 3>influence does the FED have over long term registrates?

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<v Speaker 1>Well, there are two parts to long term interest rates.

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<v Speaker 1>There's the real interest rate, and I think the Fed's

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<v Speaker 1>long term influence is actually very limited. It follows the

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<v Speaker 1>flows of international markets. Quantitative easing matters because of the

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<v Speaker 1>treasury issues lots of short term debt and very little

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<v Speaker 1>long term debt or the FED helps it do that.

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<v Speaker 1>That lowers long term interest rates, but it's risky because

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<v Speaker 1>as we've seen, when interest rates go up, that can

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<v Speaker 1>cost the US a lot of money. On inflation, I mean,

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<v Speaker 1>I think, of course, the Fed's heart is in the

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<v Speaker 1>right place, but it's hard to be a island of

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<v Speaker 1>technocratic tranquility in the middle of a sea of political turmoil.

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<v Speaker 1>The FED is independent, but you know, the governors get appointed,

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<v Speaker 1>the FED share gets appointed. Over the long run, they

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<v Speaker 1>can control the Fed's budget, a lot of perimeters around

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<v Speaker 1>its regulation, and political pressures matter. I mean, they don't

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<v Speaker 1>have to be so food as I'm sure you're going

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<v Speaker 1>to ask me about Donald Trump and some of the proposals,

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<v Speaker 1>but I think in more subtle ways they matter. And

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<v Speaker 1>as you say, there was this long period of globalization,

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<v Speaker 1>fiscal prudence, Washington Consensus, deunionization. I'm not praising that, but

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<v Speaker 1>it made it easier for the FED to bring down

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<v Speaker 1>inflation and maintain decent growth. Everything's going into reverse, certainly,

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<v Speaker 1>fiscal policies long gone into reverse. Globalization is at least

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<v Speaker 1>slowed down, might be going into reverse. A number of

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<v Speaker 1>other factors, and it's going to be harder. I think

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<v Speaker 1>for those reasons, and my co authors Hassan, Marina and

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<v Speaker 1>Pierre all think that we're going to have an average

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<v Speaker 1>harder inflation.

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<v Speaker 3>Now.

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<v Speaker 1>To be clear, I'm not saying that Fed's not going

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<v Speaker 1>to bring inflation down to two percent this time. I

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<v Speaker 1>think it might, but we're going to see more upwards

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<v Speaker 1>by like we had over the pandemic on occasion, and

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<v Speaker 1>not so much these long periods of deflation.

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<v Speaker 2>Well, you're right, we are definitely going to get to

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<v Speaker 2>that Wall Street Journal reporting about, of course, Donald Trump

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<v Speaker 2>and what influence he might seek to have over the FED.

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<v Speaker 2>But let's just complete the thought on maybe and when

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<v Speaker 2>it comes to inflation, and of course that decades long

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<v Speaker 2>shift to lower inflation that central banks and the FED

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<v Speaker 2>had less to do with it than maybe commonly thought.

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<v Speaker 2>If that's the case, when you think about the inflation

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<v Speaker 2>that we're dealing with now, should that realization, if true,

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<v Speaker 2>impacts how they're approaching the current inflation that is in

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<v Speaker 2>the economy.

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<v Speaker 1>Well, they did a great job, but they had the

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<v Speaker 1>wind at their backs. Now they're running into the wind

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<v Speaker 1>and it's harder, you know. I think here the big

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<v Speaker 1>issue is not simply the embedded inflation. But where is

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<v Speaker 1>the long term real interest rate going to go? In

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<v Speaker 1>other words, how high a Fed funds rate? Do we

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<v Speaker 1>need to get the right real interest rate? They've been

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<v Speaker 1>thinking I think for a long time half a percent

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<v Speaker 1>real interest rate, and maybe that's right, But there's little

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<v Speaker 1>question the long rates have gone up, and even after

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<v Speaker 1>the Fed unwinds its interest rate hikes, I think they're

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<v Speaker 1>going to stay high for a very long time. And

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<v Speaker 1>so maybe interest rates aren't as tight as they think.

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<v Speaker 1>And I'm sure that kind of conversation's going through the

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<v Speaker 1>halls of the Federal Reserve now. They just have to

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<v Speaker 1>be rethinking things.

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<v Speaker 3>So Ken, let's go to that question about the reporting

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<v Speaker 3>about what perhaps a president Trump might do if we

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<v Speaker 3>were reelected. It is reporting, and the Trump camp specifically

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<v Speaker 3>has not said that's where they're headed. But if in

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<v Speaker 3>fact there was a move by a new Trump administration

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<v Speaker 3>to really really take away from the independence of thirds,

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<v Speaker 3>or how much difference would make, because it sounds like

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<v Speaker 3>you think there's going to be pressure on not just

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<v Speaker 3>the FIT but other central blanks no matter whatapons.

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<v Speaker 1>Yes, I do so it won't be as crude as

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<v Speaker 1>the rumors that we're hearing about from President Trump. I

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<v Speaker 1>don't think we're going to go to the extremes of

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<v Speaker 1>Turkey where President Ergowan kept firing his central bank, or

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<v Speaker 1>every other year when they tried to raise the interest rate.

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<v Speaker 1>I don't think we're going to get there. But almost

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<v Speaker 1>no matter who's in power, they're looking for ways to

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<v Speaker 1>try to loosen monetary policy. But I think progressives have

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<v Speaker 1>ideas for taking away FED independence too. They're not at

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<v Speaker 1>the tip of the tongue of President Biden or Jared

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<v Speaker 1>Bernstein and his advisors, but they are ideas floating out there.

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<v Speaker 1>And the thing is is it's not going to work

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<v Speaker 1>very well. I mean, it's going to be obvious that

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<v Speaker 1>it's not working. If you take away FED independence, investors

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<v Speaker 1>are going to get jittery inflation expectations. They're going to

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<v Speaker 1>go up the dollars in a tank, appily for better

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<v Speaker 1>for worse. Maybe I think markets will throw a pretty

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<v Speaker 1>cold bucket of water on the president if he tries

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<v Speaker 1>to do that. I don't think he would go to

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<v Speaker 1>that extreme, but it's clear, you know, he wants to

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<v Speaker 1>be disruptor and chief, and it probably irritates him that

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<v Speaker 1>I'll get so much attention at his press conferences.

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<v Speaker 2>So markets there would apply the brakes in that scenario,

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<v Speaker 2>which of course still being reported out. Details unclear, so

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<v Speaker 2>we won't go too far into the hypotheticals. But let's

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<v Speaker 2>talk a little bit more about real interest rates. If

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<v Speaker 2>we do enter into this environment where you have these

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<v Speaker 2>episodic spikes of inflation, what would sustainably higher real interest

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<v Speaker 2>rates mean for this economy when you think about the

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<v Speaker 2>potential ripple effects, Well.

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<v Speaker 1>I think it really comes in the costs of borrowing

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<v Speaker 1>for the government for individuals. So remember, you know inflations

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<v Speaker 1>also driving up tax revenues. It's also driving up wages

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<v Speaker 1>and salaries. But the real interest rates, you know, they're

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<v Speaker 1>there to stay there the wedge between the two and

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<v Speaker 1>this world. You know, there was this period where you

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<v Speaker 1>were just a sucker not to borrow as much as possible,

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<v Speaker 1>whether it was to buy a larger house, whether it

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<v Speaker 1>was to fund new government programs, et cetera. And I think,

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<v Speaker 1>you know, we live in a more normal world. Now.

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<v Speaker 1>I'm not saying I'm telling you what interest rates are

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<v Speaker 1>going to be for the next twenty years. But what

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<v Speaker 1>I am saying is I think on average, they're going

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<v Speaker 1>to be a lot higher than they were after the

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<v Speaker 1>global financial crisis.

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<v Speaker 3>Ken, last quick one, if I could, what does it

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<v Speaker 3>do to growth if we have longer long term interest rates.

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<v Speaker 1>Well, we've had long term interest rates a lot higher

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<v Speaker 1>for a long time and had better growth than we

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<v Speaker 1>have now. It sort of depends on what's going on.

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<v Speaker 1>I think. To the extent it's driven by huge government borrowing,

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<v Speaker 1>private borrowing, it's clearly negative. You're just paying a risk

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<v Speaker 1>premium tomorrow. To the extent it's driven by AI and

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<v Speaker 1>productivity and wondrous new technologies and obviously high rates just

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<v Speaker 1>go hat in hand, and maybe there's some of both.

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<v Speaker 2>All right, got to leave it there, but really enjoyed

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<v Speaker 2>this conversation. Are big thanks, of course to Ken Rogoff

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<v Speaker 2>of Harvard University. A great setup, big questions heading into

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<v Speaker 2>tomorrow's Central Bank meeting.