Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: All right, it's time now for our daily Wall Street
Speaker 2: Week Conversation, and today we're taking a look at political
Speaker 2: pressures facing central banks. Joining us now, I'm pleased to
Speaker 2: say we have Ken Rogoff. He is Harvard University Professor
Speaker 2: of Economics and Chair of International Economics, along of course,
Speaker 2: with Wall Street Weeks David Wesson. David, a timely conversation
Speaker 2: as the FED kicks off. It's two day meeting exactly.
Speaker 3: We're about to hear from the Fed what they're going
Speaker 3: to do in the short term, but we want to
Speaker 3: take a longer term look as well. What's going on
Speaker 3: interest rates? And Ken, thanks so much for being with
Speaker 3: You have a paper ad co author with other people
Speaker 3: from Brookings talking about those long term interest rates. First
Speaker 3: of all, given the fact we're going to have the
Speaker 3: Fed make a more short term decision, presumably this week,
Speaker 3: how does that fit with the long term interest rates?
Speaker 3: How should the Fed be taking into account? So what
Speaker 3: you say about long term interest.
Speaker 1: Rates, Well, long term interest rates you're probably higher for
Speaker 1: as far as the I can see, and means there
Speaker 1: are star what they think of what's their target is
Speaker 1: higher than they've been thinking, and some of them still
Speaker 1: seem to be thinking. It collapsed after the financial crisis,
Speaker 1: and there's been some reversion to me, and we've seen
Speaker 1: it in the long rates, and I'm not sure the
Speaker 1: Fed's entirely figured out that some of that will happen
Speaker 1: with the short rates as well. So I think one
Speaker 1: FED governor said, we thought we had two feet on
Speaker 1: the brakes, but maybe we only have one because interest
Speaker 1: rates aret as high as they seen.
Speaker 3: How much influence does the Federal Reserve have over long
Speaker 3: term interest rates? One of the things I took from
Speaker 3: your paper at least is that we had a period
Speaker 3: of low inflation, but it may have been for forces
Speaker 3: much larger than any central bank. It had to do
Speaker 3: with things like globalization and so what was going on,
Speaker 3: unions and some of the lack of conflicts. How much
Speaker 3: influence does the FED have over long term registrates?
Speaker 1: Well, there are two parts to long term interest rates.
Speaker 1: There's the real interest rate, and I think the Fed's
Speaker 1: long term influence is actually very limited. It follows the
Speaker 1: flows of international markets. Quantitative easing matters because of the
Speaker 1: treasury issues lots of short term debt and very little
Speaker 1: long term debt or the FED helps it do that.
Speaker 1: That lowers long term interest rates, but it's risky because
Speaker 1: as we've seen, when interest rates go up, that can
Speaker 1: cost the US a lot of money. On inflation, I mean,
Speaker 1: I think, of course, the Fed's heart is in the
Speaker 1: right place, but it's hard to be a island of
Speaker 1: technocratic tranquility in the middle of a sea of political turmoil.
Speaker 1: The FED is independent, but you know, the governors get appointed,
Speaker 1: the FED share gets appointed. Over the long run, they
Speaker 1: can control the Fed's budget, a lot of perimeters around
Speaker 1: its regulation, and political pressures matter. I mean, they don't
Speaker 1: have to be so food as I'm sure you're going
Speaker 1: to ask me about Donald Trump and some of the proposals,
Speaker 1: but I think in more subtle ways they matter. And
Speaker 1: as you say, there was this long period of globalization,
Speaker 1: fiscal prudence, Washington Consensus, deunionization. I'm not praising that, but
Speaker 1: it made it easier for the FED to bring down
Speaker 1: inflation and maintain decent growth. Everything's going into reverse, certainly,
Speaker 1: fiscal policies long gone into reverse. Globalization is at least
Speaker 1: slowed down, might be going into reverse. A number of
Speaker 1: other factors, and it's going to be harder. I think
Speaker 1: for those reasons, and my co authors Hassan, Marina and
Speaker 1: Pierre all think that we're going to have an average
Speaker 1: harder inflation.
Speaker 3: Now.
Speaker 1: To be clear, I'm not saying that Fed's not going
Speaker 1: to bring inflation down to two percent this time. I
Speaker 1: think it might, but we're going to see more upwards
Speaker 1: by like we had over the pandemic on occasion, and
Speaker 1: not so much these long periods of deflation.
Speaker 2: Well, you're right, we are definitely going to get to
Speaker 2: that Wall Street Journal reporting about, of course, Donald Trump
Speaker 2: and what influence he might seek to have over the FED.
Speaker 2: But let's just complete the thought on maybe and when
Speaker 2: it comes to inflation, and of course that decades long
Speaker 2: shift to lower inflation that central banks and the FED
Speaker 2: had less to do with it than maybe commonly thought.
Speaker 2: If that's the case, when you think about the inflation
Speaker 2: that we're dealing with now, should that realization, if true,
Speaker 2: impacts how they're approaching the current inflation that is in
Speaker 2: the economy.
Speaker 1: Well, they did a great job, but they had the
Speaker 1: wind at their backs. Now they're running into the wind
Speaker 1: and it's harder, you know. I think here the big
Speaker 1: issue is not simply the embedded inflation. But where is
Speaker 1: the long term real interest rate going to go? In
Speaker 1: other words, how high a Fed funds rate? Do we
Speaker 1: need to get the right real interest rate? They've been
Speaker 1: thinking I think for a long time half a percent
Speaker 1: real interest rate, and maybe that's right, But there's little
Speaker 1: question the long rates have gone up, and even after
Speaker 1: the Fed unwinds its interest rate hikes, I think they're
Speaker 1: going to stay high for a very long time. And
Speaker 1: so maybe interest rates aren't as tight as they think.
Speaker 1: And I'm sure that kind of conversation's going through the
Speaker 1: halls of the Federal Reserve now. They just have to
Speaker 1: be rethinking things.
Speaker 3: So Ken, let's go to that question about the reporting
Speaker 3: about what perhaps a president Trump might do if we
Speaker 3: were reelected. It is reporting, and the Trump camp specifically
Speaker 3: has not said that's where they're headed. But if in
Speaker 3: fact there was a move by a new Trump administration
Speaker 3: to really really take away from the independence of thirds,
Speaker 3: or how much difference would make, because it sounds like
Speaker 3: you think there's going to be pressure on not just
Speaker 3: the FIT but other central blanks no matter whatapons.
Speaker 1: Yes, I do so it won't be as crude as
Speaker 1: the rumors that we're hearing about from President Trump. I
Speaker 1: don't think we're going to go to the extremes of
Speaker 1: Turkey where President Ergowan kept firing his central bank, or
Speaker 1: every other year when they tried to raise the interest rate.
Speaker 1: I don't think we're going to get there. But almost
Speaker 1: no matter who's in power, they're looking for ways to
Speaker 1: try to loosen monetary policy. But I think progressives have
Speaker 1: ideas for taking away FED independence too. They're not at
Speaker 1: the tip of the tongue of President Biden or Jared
Speaker 1: Bernstein and his advisors, but they are ideas floating out there.
Speaker 1: And the thing is is it's not going to work
Speaker 1: very well. I mean, it's going to be obvious that
Speaker 1: it's not working. If you take away FED independence, investors
Speaker 1: are going to get jittery inflation expectations. They're going to
Speaker 1: go up the dollars in a tank, appily for better
Speaker 1: for worse. Maybe I think markets will throw a pretty
Speaker 1: cold bucket of water on the president if he tries
Speaker 1: to do that. I don't think he would go to
Speaker 1: that extreme, but it's clear, you know, he wants to
Speaker 1: be disruptor and chief, and it probably irritates him that
Speaker 1: I'll get so much attention at his press conferences.
Speaker 2: So markets there would apply the brakes in that scenario,
Speaker 2: which of course still being reported out. Details unclear, so
Speaker 2: we won't go too far into the hypotheticals. But let's
Speaker 2: talk a little bit more about real interest rates. If
Speaker 2: we do enter into this environment where you have these
Speaker 2: episodic spikes of inflation, what would sustainably higher real interest
Speaker 2: rates mean for this economy when you think about the
Speaker 2: potential ripple effects, Well.
Speaker 1: I think it really comes in the costs of borrowing
Speaker 1: for the government for individuals. So remember, you know inflations
Speaker 1: also driving up tax revenues. It's also driving up wages
Speaker 1: and salaries. But the real interest rates, you know, they're
Speaker 1: there to stay there the wedge between the two and
Speaker 1: this world. You know, there was this period where you
Speaker 1: were just a sucker not to borrow as much as possible,
Speaker 1: whether it was to buy a larger house, whether it
Speaker 1: was to fund new government programs, et cetera. And I think,
Speaker 1: you know, we live in a more normal world. Now.
Speaker 1: I'm not saying I'm telling you what interest rates are
Speaker 1: going to be for the next twenty years. But what
Speaker 1: I am saying is I think on average, they're going
Speaker 1: to be a lot higher than they were after the
Speaker 1: global financial crisis.
Speaker 3: Ken, last quick one, if I could, what does it
Speaker 3: do to growth if we have longer long term interest rates.
Speaker 1: Well, we've had long term interest rates a lot higher
Speaker 1: for a long time and had better growth than we
Speaker 1: have now. It sort of depends on what's going on.
Speaker 1: I think. To the extent it's driven by huge government borrowing,
Speaker 1: private borrowing, it's clearly negative. You're just paying a risk
Speaker 1: premium tomorrow. To the extent it's driven by AI and
Speaker 1: productivity and wondrous new technologies and obviously high rates just
Speaker 1: go hat in hand, and maybe there's some of both.
Speaker 2: All right, got to leave it there, but really enjoyed
Speaker 2: this conversation. Are big thanks, of course to Ken Rogoff
Speaker 2: of Harvard University. A great setup, big questions heading into
Speaker 2: tomorrow's Central Bank meeting.