1 00:00:00,160 --> 00:00:03,480 Speaker 1: Want to welcome our Bloomberg Television audience to our exclusive 2 00:00:03,520 --> 00:00:07,040 Speaker 1: Bloomberg Radio interview with John Williams. He's President of the 3 00:00:07,040 --> 00:00:09,480 Speaker 1: Federal Reserve Bank of St. Louis, joining us today at 4 00:00:09,520 --> 00:00:13,120 Speaker 1: our San Francisco Bloomberg News Bureau. John, Welcome, San Francisco. 5 00:00:13,240 --> 00:00:16,840 Speaker 1: I am President of San Francisco FED. You are which 6 00:00:16,880 --> 00:00:19,000 Speaker 1: one I was just making St. Louis. Well, you know 7 00:00:19,040 --> 00:00:24,759 Speaker 1: I've been my good friend. Here impersonating another FED official 8 00:00:24,800 --> 00:00:27,680 Speaker 1: back could get you in real trouble. John Williams, President 9 00:00:27,680 --> 00:00:29,159 Speaker 1: of San Francisco FED, And here we are in the 10 00:00:29,160 --> 00:00:31,840 Speaker 1: beautiful Bay Area. It's great to be back with you, John. 11 00:00:31,840 --> 00:00:35,120 Speaker 1: I want to drive right in though. Uh. You know 12 00:00:35,240 --> 00:00:37,680 Speaker 1: you've been recently upbeat on the US economy and your 13 00:00:37,720 --> 00:00:39,680 Speaker 1: most recent speech in March, you painted a picture of 14 00:00:39,680 --> 00:00:43,240 Speaker 1: a growing economy. You're looking for two percent GDP growth 15 00:00:43,280 --> 00:00:46,280 Speaker 1: at least this year, confident inflation is going to his 16 00:00:46,320 --> 00:00:49,479 Speaker 1: target by the end of next year, and you've emphasize 17 00:00:49,520 --> 00:00:52,479 Speaker 1: the weakness overseas isn't decisive for the US economy. So, 18 00:00:52,520 --> 00:00:55,240 Speaker 1: with all that in mind, were you on board last 19 00:00:55,280 --> 00:00:59,960 Speaker 1: week with the Fed's decision to not move on interest rates. Yeah, 20 00:01:00,040 --> 00:01:02,480 Speaker 1: say was, I mean, I think we are in a 21 00:01:02,560 --> 00:01:04,920 Speaker 1: very data dependent mode. We want to make sure that 22 00:01:04,959 --> 00:01:07,440 Speaker 1: we have a very good reading and understanding of what's 23 00:01:07,480 --> 00:01:10,480 Speaker 1: happening both in the US economy in terms of growth, jobs, 24 00:01:10,480 --> 00:01:13,280 Speaker 1: and inflation, but also also make sure we have a 25 00:01:13,280 --> 00:01:16,280 Speaker 1: good read and what's happening globally because that does affect 26 00:01:16,280 --> 00:01:19,440 Speaker 1: the US economy. So I I am a supporter of 27 00:01:19,480 --> 00:01:22,680 Speaker 1: the decisions we've made this year. Uh. That said, I 28 00:01:22,720 --> 00:01:25,679 Speaker 1: do also support the statement we put out there, which 29 00:01:25,720 --> 00:01:28,320 Speaker 1: is that I do expect us to be raising rates 30 00:01:28,360 --> 00:01:30,920 Speaker 1: gradually over the next couple of years due to the 31 00:01:30,959 --> 00:01:33,760 Speaker 1: strength and the labor marketing where I see inflation going. So, 32 00:01:33,800 --> 00:01:35,640 Speaker 1: how are you looking at the US economy in light 33 00:01:35,680 --> 00:01:38,840 Speaker 1: of that first quarter GDP figure? John, zero point five percent? 34 00:01:38,920 --> 00:01:42,240 Speaker 1: And I know your team has has discounted it, not 35 00:01:42,319 --> 00:01:44,680 Speaker 1: just discounted it, but analyzed it. And you've looked at 36 00:01:44,680 --> 00:01:47,200 Speaker 1: the seasonality in those first quarter numbers, how they tend 37 00:01:47,200 --> 00:01:50,040 Speaker 1: that first quarter GDP for many years now has tended 38 00:01:50,080 --> 00:01:54,520 Speaker 1: to be slower than forecast by a wide margin. In fact, 39 00:01:55,720 --> 00:01:58,960 Speaker 1: your your economist, Glen Ruda Bush, has argued that if 40 00:01:59,000 --> 00:02:01,520 Speaker 1: you account for that, it was probably closer one point 41 00:02:01,600 --> 00:02:05,560 Speaker 1: six percent in the first quarter. Hasn't that statistical anomaly 42 00:02:05,640 --> 00:02:08,160 Speaker 1: been fixed? Though? Well, you know the Bureau of Economic 43 00:02:08,200 --> 00:02:10,400 Speaker 1: Analysis that they have a lot of people working on 44 00:02:10,440 --> 00:02:13,520 Speaker 1: this issue of what we call residual seasonality um, and 45 00:02:13,560 --> 00:02:15,400 Speaker 1: I think they have made good improvements. They do a 46 00:02:15,400 --> 00:02:17,960 Speaker 1: great job with the data. But this is an anomaly that, 47 00:02:18,240 --> 00:02:20,760 Speaker 1: as you mentioned, we've seen for many years now. So 48 00:02:20,880 --> 00:02:22,960 Speaker 1: my own view is that the data in the first quarter, 49 00:02:23,000 --> 00:02:24,800 Speaker 1: we do have to discount it a bit, and my 50 00:02:24,960 --> 00:02:27,120 Speaker 1: view would be be closer to something like two percent 51 00:02:27,160 --> 00:02:29,880 Speaker 1: growth or more consistent with what I see as underline trend. 52 00:02:30,160 --> 00:02:32,560 Speaker 1: So overall, I haven't changed my view about what growth 53 00:02:32,600 --> 00:02:35,160 Speaker 1: over the whole year will be around two percent real 54 00:02:35,200 --> 00:02:37,720 Speaker 1: GDP growth, which is what we saw last year. Quite 55 00:02:37,720 --> 00:02:40,880 Speaker 1: apart from GDP though retail sales PC, you know, the 56 00:02:40,919 --> 00:02:43,600 Speaker 1: personal consumption expenditutors, they came in on the week's side 57 00:02:43,600 --> 00:02:45,799 Speaker 1: in the first quarter. Are you are is there a 58 00:02:45,919 --> 00:02:49,920 Speaker 1: risk you overlook that signs other signs that the U. 59 00:02:49,960 --> 00:02:53,040 Speaker 1: S economy actually lost momentum in the first quarter, and 60 00:02:53,080 --> 00:02:56,080 Speaker 1: that's zero point five percent. Isn't such an anomally you know? 61 00:02:56,120 --> 00:02:58,440 Speaker 1: Then you you average growth in the first the fourth quarter. 62 00:02:58,440 --> 00:03:00,919 Speaker 1: In the first quarter, this is a pretty week's are steen, 63 00:03:00,919 --> 00:03:02,680 Speaker 1: which maybe makes that two percent plus a little bit 64 00:03:02,680 --> 00:03:04,760 Speaker 1: harder to achieve. Well, you know, when I when I 65 00:03:04,800 --> 00:03:06,960 Speaker 1: think about this again, we want to be data depending. 66 00:03:07,040 --> 00:03:09,080 Speaker 1: I think this is another reason to be a little 67 00:03:09,120 --> 00:03:12,320 Speaker 1: bit cautious in terms of jumping to conclusions either positive 68 00:03:12,360 --> 00:03:14,040 Speaker 1: or negative based on the first quarter growth. I do 69 00:03:14,120 --> 00:03:17,120 Speaker 1: want to see good consumer spending data in the next 70 00:03:17,160 --> 00:03:18,800 Speaker 1: couple of months. Do you want to see more signs 71 00:03:18,800 --> 00:03:22,000 Speaker 1: that that anomalous reading the first quarter really was anomalous? 72 00:03:22,000 --> 00:03:24,200 Speaker 1: So I agree with that point. I do tend to 73 00:03:24,240 --> 00:03:27,040 Speaker 1: focus more on the employment data. Employment job gains have 74 00:03:27,120 --> 00:03:29,480 Speaker 1: been really strong all the way through the latest data. 75 00:03:29,480 --> 00:03:31,600 Speaker 1: Well we've seen you know, we'll get some more data 76 00:03:32,160 --> 00:03:35,320 Speaker 1: soon as well. But when you look at job growth, 77 00:03:35,320 --> 00:03:37,720 Speaker 1: you look at unemployment, you look at labor force participation, 78 00:03:37,760 --> 00:03:40,840 Speaker 1: in a lot of other indicators, labor market continues to improve. 79 00:03:40,960 --> 00:03:43,000 Speaker 1: I think we're full employment or close to it on 80 00:03:43,000 --> 00:03:45,400 Speaker 1: all these indicators. So I do take a pretty strong 81 00:03:45,480 --> 00:03:47,840 Speaker 1: signal from the from the employment side, not just a 82 00:03:47,920 --> 00:03:50,119 Speaker 1: g d P, which tends to be you know, volatile 83 00:03:50,160 --> 00:03:52,320 Speaker 1: and subject to some of these revisions and other issues. 84 00:03:52,480 --> 00:03:54,440 Speaker 1: So as we look ahead to the next meeting, and 85 00:03:54,480 --> 00:03:58,080 Speaker 1: obviously everyone's looking ahead to that meeting. So my yeah, 86 00:03:58,120 --> 00:04:00,720 Speaker 1: and you're gonna go to Octionton, not St. Louis, but 87 00:04:00,760 --> 00:04:04,200 Speaker 1: from San Francisco. What what do you need to see? 88 00:04:04,680 --> 00:04:06,760 Speaker 1: You know, we've had strong jobs growth, but we haven't 89 00:04:06,760 --> 00:04:09,200 Speaker 1: had inflation picking up very much. So what what does 90 00:04:09,280 --> 00:04:11,640 Speaker 1: John Williams have to see when he sits down at 91 00:04:11,680 --> 00:04:14,720 Speaker 1: the table in June to say yes, I'm arguing for 92 00:04:14,920 --> 00:04:18,440 Speaker 1: I'm on board for the great hike. So I think 93 00:04:18,440 --> 00:04:20,719 Speaker 1: we need to see a continuation of the progress we 94 00:04:20,800 --> 00:04:23,040 Speaker 1: have been seeing over the last year, seeing core or 95 00:04:23,120 --> 00:04:27,960 Speaker 1: underlying measures of inflation continue to move generally up towards 96 00:04:28,000 --> 00:04:30,680 Speaker 1: two percent. I'm not expecting to jump towards supercent, but 97 00:04:30,760 --> 00:04:33,279 Speaker 1: be on a on the right trajectory consistent with my 98 00:04:33,440 --> 00:04:35,800 Speaker 1: forecast that over the next couple of years inflation will 99 00:04:35,880 --> 00:04:37,960 Speaker 1: two years inflation will get back to two percent. I 100 00:04:38,000 --> 00:04:40,640 Speaker 1: also want to see continue good job gains and continued 101 00:04:40,680 --> 00:04:43,320 Speaker 1: signs of the economy as it has still good momentum. 102 00:04:43,360 --> 00:04:46,920 Speaker 1: So I'm looking for a continuation of what we've been seeing, 103 00:04:47,040 --> 00:04:50,479 Speaker 1: not for a big upside surprise. But obviously I don't 104 00:04:50,480 --> 00:04:53,680 Speaker 1: need to see really strong just a continuation of what 105 00:04:53,760 --> 00:04:56,560 Speaker 1: we have been seeing. So the status quo will be enough. Yeah, 106 00:04:56,600 --> 00:04:58,880 Speaker 1: because again I think it would for me. It would 107 00:04:58,880 --> 00:05:01,600 Speaker 1: resolve some of these little worries about Q one data. 108 00:05:01,680 --> 00:05:04,080 Speaker 1: What was that telling us. I don't take a strong 109 00:05:04,080 --> 00:05:05,800 Speaker 1: signal from it, but I want to make sure that 110 00:05:05,800 --> 00:05:09,520 Speaker 1: that's the right conclusion. And also this issue about uncertainty 111 00:05:09,560 --> 00:05:12,039 Speaker 1: abroad and and in financial market turm Hall early in 112 00:05:12,040 --> 00:05:13,800 Speaker 1: the year, we want to make sure that that didn't 113 00:05:14,000 --> 00:05:16,160 Speaker 1: have a bigger impact on the US economy. So if 114 00:05:16,160 --> 00:05:18,680 Speaker 1: I c S continue to add good number of jobs 115 00:05:18,680 --> 00:05:21,760 Speaker 1: he you know, againing improvements in the economy, and good 116 00:05:21,760 --> 00:05:25,320 Speaker 1: signs on inflation, that would be enough. Good signs on inflation, 117 00:05:25,400 --> 00:05:28,680 Speaker 1: but nothing because it's a forecast so far, right, John, 118 00:05:28,720 --> 00:05:31,719 Speaker 1: and inflation has been undershooting for a long time. So 119 00:05:31,760 --> 00:05:34,119 Speaker 1: in other words, you're willing to say, let's go ahead 120 00:05:34,160 --> 00:05:38,760 Speaker 1: and raise interest rates again June, even if inflation is 121 00:05:38,760 --> 00:05:41,359 Speaker 1: still a forecast and it has moved higher, that's right. 122 00:05:41,400 --> 00:05:43,760 Speaker 1: As long as the inflation they are consistent with the 123 00:05:43,800 --> 00:05:46,880 Speaker 1: forecast I have of moving towards two percent, that would 124 00:05:46,920 --> 00:05:49,520 Speaker 1: be enough. Now, you know, as you you mentioned, we've 125 00:05:49,560 --> 00:05:52,839 Speaker 1: been missing undershooting inflation for quite some time. But you know, 126 00:05:52,880 --> 00:05:55,240 Speaker 1: in terms of the and I take that seriously in 127 00:05:55,320 --> 00:05:57,400 Speaker 1: terms of thinking about what's happening. But in terms of 128 00:05:57,400 --> 00:06:00,640 Speaker 1: Monterey policy, Let's remember, interest rates are still very low. 129 00:06:01,200 --> 00:06:04,560 Speaker 1: I'm not talking about having one interest rate increase, you know, 130 00:06:04,600 --> 00:06:07,400 Speaker 1: in the next few months or whenever. Isn't making tight 131 00:06:07,480 --> 00:06:10,200 Speaker 1: Monterey policy. It's just stepping back a little bit from 132 00:06:10,200 --> 00:06:12,839 Speaker 1: the very a comedy of Monterey policy. So it's not 133 00:06:12,880 --> 00:06:15,360 Speaker 1: about tightening policy so much, it's just pulling back a 134 00:06:15,360 --> 00:06:18,120 Speaker 1: little bit on the accommodation we've had in place. Well, 135 00:06:18,120 --> 00:06:20,680 Speaker 1: because as you know, market expectations are once again a 136 00:06:20,680 --> 00:06:22,920 Speaker 1: little bit out of sync with the FED. Because right now, 137 00:06:23,120 --> 00:06:25,360 Speaker 1: basically you could say the markets are pricing in just 138 00:06:25,480 --> 00:06:28,160 Speaker 1: one interest rate increase. You've had people like Larry Fink 139 00:06:28,240 --> 00:06:32,679 Speaker 1: from Black Rock and Jeff good Luck from a Double 140 00:06:33,279 --> 00:06:36,960 Speaker 1: double line talking about just one interest rate increase this year. 141 00:06:37,320 --> 00:06:41,000 Speaker 1: If that so? Uh, you said even two or three recently, 142 00:06:41,040 --> 00:06:44,880 Speaker 1: not two, but even three rate increases are reasonable this year. 143 00:06:45,240 --> 00:06:47,200 Speaker 1: What is it that you see the markets don't? What 144 00:06:47,279 --> 00:06:49,320 Speaker 1: are the markets missing? Well, first of all, the markets 145 00:06:49,320 --> 00:06:52,000 Speaker 1: aren't one person. There are you know, millions of people 146 00:06:52,040 --> 00:06:55,080 Speaker 1: involved in investing and making you know, uh forecasts and 147 00:06:55,120 --> 00:06:57,839 Speaker 1: decisions around that. So there are different views. When I 148 00:06:57,839 --> 00:06:59,919 Speaker 1: look at the markets, the data from the markets, what 149 00:07:00,040 --> 00:07:03,520 Speaker 1: you see as a kind of a bimodal distribution. A 150 00:07:03,560 --> 00:07:07,400 Speaker 1: lot of people think that the modal or the baseline cases, 151 00:07:07,560 --> 00:07:09,279 Speaker 1: the one that I've laid out of, you know, unemployment 152 00:07:09,320 --> 00:07:12,240 Speaker 1: continue to come down, good job growth to present GDP, 153 00:07:12,320 --> 00:07:14,480 Speaker 1: and inflation moving back. You see this in the survey 154 00:07:14,560 --> 00:07:17,040 Speaker 1: of professional forecasts, the blue chip surveys. You see it 155 00:07:17,080 --> 00:07:19,560 Speaker 1: from my own colleagues, in our own dot plots, in 156 00:07:19,600 --> 00:07:22,480 Speaker 1: our own SEP forecast. There is this other part of 157 00:07:22,480 --> 00:07:24,440 Speaker 1: the distribution which I under you know, I think of 158 00:07:24,520 --> 00:07:27,880 Speaker 1: as related to concerns about Asia, concerns about Europe and Japan, 159 00:07:27,920 --> 00:07:30,640 Speaker 1: the rest of the world. That there's this downside scenario 160 00:07:30,680 --> 00:07:33,520 Speaker 1: where global growth really slows, other things happen, and that 161 00:07:33,720 --> 00:07:36,160 Speaker 1: that's a negative shock to the US. So obviously that's 162 00:07:36,280 --> 00:07:39,480 Speaker 1: priced into the market, the possibility of a negative scenario 163 00:07:39,800 --> 00:07:42,160 Speaker 1: that seems to get a lot of weight and investors minds. 164 00:07:42,200 --> 00:07:45,600 Speaker 1: So my view that we should be gradually raising interest 165 00:07:45,720 --> 00:07:47,840 Speaker 1: rates this year is based on the notion that we 166 00:07:47,920 --> 00:07:50,840 Speaker 1: follow this baseline scenario, that the data continue to come 167 00:07:50,880 --> 00:07:52,600 Speaker 1: in show the U s eCOM and continues to be 168 00:07:52,640 --> 00:07:55,360 Speaker 1: on the good track, and under those conditions we should 169 00:07:55,440 --> 00:07:58,360 Speaker 1: raise rates. Clearly, if the downside, you know, risk really 170 00:07:58,400 --> 00:08:01,480 Speaker 1: do happen, uh, the we see really negative effects in 171 00:08:01,480 --> 00:08:04,000 Speaker 1: the US economy, then we should uh pause and and 172 00:08:04,120 --> 00:08:06,640 Speaker 1: wait until it's appropriate to raise right. So I see 173 00:08:06,680 --> 00:08:09,160 Speaker 1: the markets have trained kind of balance these two different 174 00:08:09,160 --> 00:08:11,680 Speaker 1: scenarios and come to their best estimates of what we 175 00:08:11,680 --> 00:08:14,320 Speaker 1: should do. Uh. But you know again, I'm my My 176 00:08:14,400 --> 00:08:17,040 Speaker 1: answer to your question really is, is the my baseline 177 00:08:17,080 --> 00:08:19,720 Speaker 1: scenario where which is pretty optimistic and there was downtrack 178 00:08:20,520 --> 00:08:23,000 Speaker 1: dependent raw on track, then the June rate hike is 179 00:08:23,200 --> 00:08:25,760 Speaker 1: of a likelihood in your view, and certainly something you 180 00:08:25,800 --> 00:08:27,880 Speaker 1: would support at the very least. Well, So I don't 181 00:08:27,880 --> 00:08:29,800 Speaker 1: want to see likelihood because you know, we're never supposed 182 00:08:29,840 --> 00:08:31,520 Speaker 1: to talk about what's going to happen at f HOMC 183 00:08:31,680 --> 00:08:33,440 Speaker 1: means where my colleagues are going to say, and then 184 00:08:33,480 --> 00:08:35,079 Speaker 1: of course we're gonna get a lot of data between 185 00:08:35,080 --> 00:08:37,200 Speaker 1: now and then, and we love good discussions. But in 186 00:08:37,200 --> 00:08:40,520 Speaker 1: my view, yes, it would be appropriate given all of 187 00:08:40,520 --> 00:08:43,040 Speaker 1: the things we've talked about to to go on that 188 00:08:43,040 --> 00:08:45,040 Speaker 1: that next step, But you know, a lot can happen 189 00:08:45,120 --> 00:08:47,160 Speaker 1: between now in the middle of June, that's for sure. 190 00:08:47,240 --> 00:08:48,640 Speaker 1: What do you make of some of the data we've 191 00:08:48,640 --> 00:08:51,280 Speaker 1: seen today, certainly the markets reacting to the slow down 192 00:08:51,280 --> 00:08:54,640 Speaker 1: and manufacturing in China and slow down U Cake, We've 193 00:08:54,679 --> 00:08:56,520 Speaker 1: got some mixed numbers earlier in the week, and of 194 00:08:56,520 --> 00:08:59,520 Speaker 1: course our own one of our key manufacturing engages from 195 00:08:59,520 --> 00:09:03,240 Speaker 1: the supply management heading back towards fifty again, does that 196 00:09:03,280 --> 00:09:05,680 Speaker 1: give you any positure? Well, you know, I think again 197 00:09:05,720 --> 00:09:07,640 Speaker 1: you have to look at all the data and analyze 198 00:09:07,679 --> 00:09:09,880 Speaker 1: it very carefully. And in terms of China, I think 199 00:09:09,880 --> 00:09:11,760 Speaker 1: the story we're seeing, we've been seeing for the last 200 00:09:11,760 --> 00:09:14,120 Speaker 1: couple of years, is that this pivot in China from 201 00:09:14,120 --> 00:09:17,439 Speaker 1: a manufacturing export driven economy has been moving more to 202 00:09:17,640 --> 00:09:20,480 Speaker 1: consumer goods, more to services, and so we've seen a 203 00:09:20,559 --> 00:09:24,760 Speaker 1: kind of sequence of disappointments around Chinese manufacturing data, which 204 00:09:24,760 --> 00:09:27,360 Speaker 1: I don't think really reflects the overall economy so much. 205 00:09:27,480 --> 00:09:29,880 Speaker 1: Is the fact that they are really are moving their 206 00:09:29,920 --> 00:09:32,880 Speaker 1: economy from one um you know, kind of one focused 207 00:09:33,080 --> 00:09:35,600 Speaker 1: to another, and I expect to see a continuation of 208 00:09:35,679 --> 00:09:39,080 Speaker 1: kind of weaker manufacturing readings from China, but that but 209 00:09:39,160 --> 00:09:43,200 Speaker 1: seeing stronger spending on consumer consumer spending and other indicators. 210 00:09:43,320 --> 00:09:46,160 Speaker 1: In terms of the US, I think the manufacturing sector 211 00:09:46,240 --> 00:09:49,800 Speaker 1: clearly has been hit by the fallen oil prices, which 212 00:09:49,840 --> 00:09:53,000 Speaker 1: cuts back on drilling and oil uh you know, uh, 213 00:09:53,080 --> 00:09:56,240 Speaker 1: drilling in those activities, which is buys off steel and 214 00:09:56,280 --> 00:09:58,880 Speaker 1: things like that. And obviously the strong dollar has affected 215 00:09:58,880 --> 00:10:01,840 Speaker 1: a manufacturing sector. But I read the ice M. Actually 216 00:10:01,880 --> 00:10:04,679 Speaker 1: data is is being pretty neutral. It's not that manufacturing 217 00:10:04,760 --> 00:10:07,880 Speaker 1: is contracting or something, but just is growing modestly. Okay. 218 00:10:08,040 --> 00:10:09,960 Speaker 1: You know, one of the things a lot of FED officials, 219 00:10:09,960 --> 00:10:12,600 Speaker 1: including you, have downplayed is the weakness and oil prices. 220 00:10:12,679 --> 00:10:15,760 Speaker 1: Is a strong dollar there transitory? How do you know 221 00:10:15,800 --> 00:10:18,520 Speaker 1: those forces are transitory? And what if they're not, because 222 00:10:18,520 --> 00:10:20,800 Speaker 1: they've certainly been holding inflation down for a while. And again, 223 00:10:21,200 --> 00:10:23,360 Speaker 1: the FED has this dual objective and one of them 224 00:10:23,400 --> 00:10:26,920 Speaker 1: is hitting that inflation target. Yeah, And just to clarify 225 00:10:27,440 --> 00:10:29,600 Speaker 1: is I don't view the oil prices as transitory. By 226 00:10:29,679 --> 00:10:32,920 Speaker 1: their effect on inflation, as you suggested, is more transitory. 227 00:10:33,000 --> 00:10:34,840 Speaker 1: We're seeing that, you know what, all the prices move 228 00:10:34,920 --> 00:10:37,760 Speaker 1: up and down overall inflation moves up and down, but 229 00:10:37,800 --> 00:10:40,520 Speaker 1: we're not seeing any obvious signs from movements and oil 230 00:10:40,559 --> 00:10:44,680 Speaker 1: prices onto major moves. UH can't pass through the core 231 00:10:44,880 --> 00:10:48,000 Speaker 1: inflation rounderlying inflation, and that's kind of the second round 232 00:10:48,000 --> 00:10:50,160 Speaker 1: effects that you worry about when you think about movements 233 00:10:50,160 --> 00:10:53,000 Speaker 1: in commodity prices. Right now, I actually see, you know, 234 00:10:53,080 --> 00:10:56,400 Speaker 1: oil prices have been factor pushing down inflation will add 235 00:10:56,880 --> 00:11:00,600 Speaker 1: just with time, and the underlying inflation in services especially 236 00:11:01,040 --> 00:11:03,360 Speaker 1: has been moving up. So again I'm kind of I'm 237 00:11:03,360 --> 00:11:06,040 Speaker 1: pretty confident that we're on the right track and inflation. Okay, Well, 238 00:11:06,040 --> 00:11:09,360 Speaker 1: we're going to continue our conversation with San Francisco FED 239 00:11:09,440 --> 00:11:13,640 Speaker 1: President John Williams on Bloomberg taking Stock for our radio program, 240 00:11:13,640 --> 00:11:17,320 Speaker 1: and we certainly thank our Bloomberg TV listeners for joining 241 00:11:17,400 --> 00:11:21,920 Speaker 1: us today. So John, we want to continue now with 242 00:11:22,000 --> 00:11:25,200 Speaker 1: this look at all the various factors that the markets 243 00:11:25,280 --> 00:11:27,679 Speaker 1: are going over so or so Closely, I want to 244 00:11:27,679 --> 00:11:29,959 Speaker 1: get back to this question inflation because I've been talking 245 00:11:29,960 --> 00:11:32,400 Speaker 1: to a lot of Federal Reserve officials in St. Louis, 246 00:11:32,880 --> 00:11:35,679 Speaker 1: Chicago here in San Francisco now, and one of the 247 00:11:35,679 --> 00:11:39,080 Speaker 1: things I've heard is that inflation has undershot its target 248 00:11:39,120 --> 00:11:42,920 Speaker 1: for so long that it's not only possibly not a 249 00:11:43,080 --> 00:11:47,640 Speaker 1: bad idea, but actually a good idea to have inflation 250 00:11:47,840 --> 00:11:50,480 Speaker 1: at or above target for a while. But I don't 251 00:11:50,520 --> 00:11:52,559 Speaker 1: think you're on board with that now. I don't think 252 00:11:52,559 --> 00:11:55,880 Speaker 1: we want to aim for inflation above our two percent 253 00:11:55,960 --> 00:11:58,440 Speaker 1: longer run goal on on purpose. What I would love 254 00:11:58,440 --> 00:12:01,560 Speaker 1: to see is inflation be on reach two percent, sometimes 255 00:12:01,640 --> 00:12:03,760 Speaker 1: half the time above, half the time a little below, 256 00:12:03,960 --> 00:12:07,160 Speaker 1: but really just fluctuating around that two percent. So being 257 00:12:07,200 --> 00:12:09,000 Speaker 1: a little bit above two percent is not something I 258 00:12:09,040 --> 00:12:12,040 Speaker 1: worry about being uh you know, that doesn't worry me. 259 00:12:12,120 --> 00:12:14,040 Speaker 1: But again, I don't see us it's trying to target 260 00:12:14,080 --> 00:12:17,840 Speaker 1: a high inflation rate, uh in the future. Now, you know, 261 00:12:17,880 --> 00:12:20,520 Speaker 1: one of the things that we've made clear earlier with 262 00:12:20,559 --> 00:12:22,800 Speaker 1: our one of our statements was that the goal was 263 00:12:22,880 --> 00:12:26,000 Speaker 1: some metric, so two percents, not our ceiling. Really is 264 00:12:26,040 --> 00:12:29,200 Speaker 1: the midpoint of where we want to see inflation, uh be. Now, 265 00:12:29,280 --> 00:12:31,839 Speaker 1: my own forecast over the last year, I sometimes, based 266 00:12:31,880 --> 00:12:34,520 Speaker 1: on my own views, you have inflation just moving right 267 00:12:34,559 --> 00:12:36,640 Speaker 1: to two percent sometimes that we're shooting a little bit 268 00:12:36,679 --> 00:12:39,120 Speaker 1: due to the dynamics and inflation. Again, that that to 269 00:12:39,120 --> 00:12:40,679 Speaker 1: me is not an important issue. A little bit of 270 00:12:40,679 --> 00:12:43,240 Speaker 1: overshooting isn't a problem, but we don't want to purposefully 271 00:12:43,280 --> 00:12:47,520 Speaker 1: try to create higher inflation. UH. In my view. UH, 272 00:12:47,760 --> 00:12:49,800 Speaker 1: there's an interesting statistic I wonder if you've had a 273 00:12:49,880 --> 00:12:51,720 Speaker 1: chance to look at, and that is, if you look 274 00:12:51,720 --> 00:12:54,720 Speaker 1: at UH the year to date inflation rate for about 275 00:12:54,760 --> 00:12:59,319 Speaker 1: two decades now, it is consistently run below two percent. 276 00:12:59,360 --> 00:13:04,440 Speaker 1: If you look at it that way, it's considered consistently undershot. UH. 277 00:13:04,800 --> 00:13:07,360 Speaker 1: What does that tell us about perhaps some kind of 278 00:13:07,400 --> 00:13:12,000 Speaker 1: secular change in this economy globally there's so much global disinflation, 279 00:13:12,040 --> 00:13:14,959 Speaker 1: there's with some global deflation. As you studied this for 280 00:13:15,000 --> 00:13:18,000 Speaker 1: so long over the years, John, not only UH as 281 00:13:18,040 --> 00:13:20,680 Speaker 1: San Francisco FED president, but director of research and in 282 00:13:20,800 --> 00:13:23,800 Speaker 1: all your academic studies, are you raising questions about this 283 00:13:23,840 --> 00:13:26,280 Speaker 1: now yourself? Well, you know, I I'm I may not 284 00:13:26,360 --> 00:13:28,040 Speaker 1: be I may not be totally alone in this, but 285 00:13:28,080 --> 00:13:29,400 Speaker 1: I'm one of the few people says I think the 286 00:13:29,400 --> 00:13:31,920 Speaker 1: Phillips curve is alive. And well, I think that our 287 00:13:32,000 --> 00:13:35,320 Speaker 1: understanding inflation has is UH, the models we've used over 288 00:13:35,360 --> 00:13:37,920 Speaker 1: the last few decades. I think our good indicators you 289 00:13:37,960 --> 00:13:40,560 Speaker 1: look at underlying inflation. So core inflation is run about 290 00:13:40,600 --> 00:13:43,000 Speaker 1: one point six percent of the last year UH. Some 291 00:13:43,120 --> 00:13:45,920 Speaker 1: of that is due to lagged effects of a weaker economy, 292 00:13:46,160 --> 00:13:48,360 Speaker 1: a lot of it's due to the strong dollar and 293 00:13:48,480 --> 00:13:51,560 Speaker 1: some pass through energy prices into the core UH. If 294 00:13:51,559 --> 00:13:53,480 Speaker 1: you look at the trim mean from the Dallas FED again, 295 00:13:53,520 --> 00:13:55,080 Speaker 1: it's telling you the same kind of thing, about one 296 00:13:55,120 --> 00:13:56,960 Speaker 1: or three chorus per cent or something like that. I 297 00:13:56,960 --> 00:14:00,280 Speaker 1: don't think the inflation behavior right now is inconsistent with 298 00:14:00,520 --> 00:14:03,040 Speaker 1: standard models of inflation. It reflects the fact that we've 299 00:14:03,040 --> 00:14:05,360 Speaker 1: been hit by a whole bunch of big shocks, the 300 00:14:05,400 --> 00:14:08,160 Speaker 1: dollar strengthening by over for a while. Now it's come 301 00:14:08,240 --> 00:14:10,760 Speaker 1: back a bit um, you know, the decline in oil 302 00:14:10,800 --> 00:14:14,760 Speaker 1: prices and weak global growth more generally, so, I think 303 00:14:14,760 --> 00:14:17,439 Speaker 1: these are factors have held us down on inflation the 304 00:14:17,520 --> 00:14:21,560 Speaker 1: last few years. Obviously, the recession had a huge effect 305 00:14:21,600 --> 00:14:24,320 Speaker 1: inflation in the US UH for many years. But again 306 00:14:24,360 --> 00:14:26,520 Speaker 1: I don't see this as some kind of break in 307 00:14:26,600 --> 00:14:29,320 Speaker 1: the trend or behavior of inflation. I do think the 308 00:14:29,360 --> 00:14:31,120 Speaker 1: good news here that we don't want to forget is 309 00:14:31,160 --> 00:14:34,640 Speaker 1: we do have reasonably well anchored inflation expectations of the US. 310 00:14:34,760 --> 00:14:38,040 Speaker 1: So you know that meant that we avoided deflation during 311 00:14:38,040 --> 00:14:41,000 Speaker 1: the Great Recession, which was very important and today I think, 312 00:14:41,200 --> 00:14:44,120 Speaker 1: you know, having well anchored inflation expectations is an important 313 00:14:44,160 --> 00:14:46,680 Speaker 1: part of helping us get back to our our two 314 00:14:46,720 --> 00:14:49,760 Speaker 1: percent goal um, and that's just something we want to preserve. 315 00:14:50,400 --> 00:14:53,720 Speaker 1: When ask you also, can you mentioned uh that uh 316 00:14:54,560 --> 00:14:57,480 Speaker 1: the markets and market reaction and of course the first 317 00:14:57,680 --> 00:15:01,080 Speaker 1: three months of the year, Uh, they're was a big 318 00:15:01,240 --> 00:15:05,360 Speaker 1: market sell off watching China. Uh. One of the things 319 00:15:05,360 --> 00:15:07,640 Speaker 1: that seemed to slow the Fed in its tracks because 320 00:15:07,920 --> 00:15:11,680 Speaker 1: after looking at four interest rate increases in December at 321 00:15:11,680 --> 00:15:14,040 Speaker 1: the f MC meeting by marsh the Fed said, you 322 00:15:14,080 --> 00:15:17,440 Speaker 1: know what it looks like, two are more prudent. Genet. Yellen, 323 00:15:17,520 --> 00:15:21,120 Speaker 1: in her testimonies to Congress has has talked about the 324 00:15:21,160 --> 00:15:25,720 Speaker 1: how the market impact really provide a certain amount of 325 00:15:25,720 --> 00:15:29,880 Speaker 1: offset to some potential downward pressure on the US economy 326 00:15:29,880 --> 00:15:32,960 Speaker 1: from the market turmoil, certainly bond yields being lower. You've 327 00:15:33,280 --> 00:15:37,000 Speaker 1: you downplayed the only recent speech John the what the 328 00:15:37,000 --> 00:15:39,160 Speaker 1: market was reacting to. You said, it wasn't so much 329 00:15:39,200 --> 00:15:42,240 Speaker 1: just some rate move on the FEDS part. It was 330 00:15:42,280 --> 00:15:44,720 Speaker 1: all these other factors. But so many people in the 331 00:15:44,760 --> 00:15:48,120 Speaker 1: markets have interpreted No. Number One, that the market saw 332 00:15:48,120 --> 00:15:50,240 Speaker 1: the FED starting embarking on a series of rate hikes 333 00:15:50,320 --> 00:15:53,480 Speaker 1: Number one, and then the FEDS seeing that and in 334 00:15:53,480 --> 00:15:57,440 Speaker 1: a sense acknowledging in fact that this had unstabilized the 335 00:15:57,480 --> 00:15:59,400 Speaker 1: market to degree that it less than the need for 336 00:15:59,480 --> 00:16:02,640 Speaker 1: rate hikes this year. Or did you how did you 337 00:16:02,680 --> 00:16:05,840 Speaker 1: look at that change then in the rate hike forecast 338 00:16:06,080 --> 00:16:09,560 Speaker 1: for did you not think it was necessary? Or did 339 00:16:09,600 --> 00:16:12,400 Speaker 1: I sort of misunderstand you in that speech where you 340 00:16:12,440 --> 00:16:14,560 Speaker 1: downplay the market when what we're reacting to, Well, I 341 00:16:14,600 --> 00:16:16,720 Speaker 1: do think that the markets reacting a lot of different things, 342 00:16:16,720 --> 00:16:19,120 Speaker 1: and obviously, talking to people in the markets, I hear 343 00:16:19,200 --> 00:16:22,840 Speaker 1: this story about the Fed's role and concerns around that. 344 00:16:23,400 --> 00:16:25,360 Speaker 1: My view is a lot of the reaction earlier this 345 00:16:25,440 --> 00:16:29,080 Speaker 1: year was concerns about China slowing growth, concerns about very 346 00:16:29,120 --> 00:16:32,480 Speaker 1: low inflation in the in the in the Euro Area, UH, 347 00:16:32,560 --> 00:16:35,680 Speaker 1: struggles in other countries as well. UH. So I think 348 00:16:35,680 --> 00:16:37,360 Speaker 1: that a lot of it's really driven by things are 349 00:16:37,360 --> 00:16:41,080 Speaker 1: happening outside the country. Importantly, though, those things happening outside 350 00:16:41,120 --> 00:16:44,040 Speaker 1: the US come back and affect the US economy too, 351 00:16:44,040 --> 00:16:46,440 Speaker 1: So we have to take that into account. The strengthening 352 00:16:46,520 --> 00:16:49,400 Speaker 1: the dollar obviously was a big factor that pushes down inflation, 353 00:16:49,600 --> 00:16:52,720 Speaker 1: slows our growth, uh you know, weak or growth abroad 354 00:16:53,040 --> 00:16:55,880 Speaker 1: has those uh slows our growth in exports as well, 355 00:16:56,000 --> 00:16:58,400 Speaker 1: so we have to take them into account. So again, 356 00:16:58,440 --> 00:17:00,640 Speaker 1: I think our forecasts have come down on for growth 357 00:17:00,640 --> 00:17:04,040 Speaker 1: for sixteen um, you know. And I think that's consistent 358 00:17:04,080 --> 00:17:05,919 Speaker 1: with the fact that there are changes in financial and 359 00:17:05,920 --> 00:17:09,159 Speaker 1: global conditions that uh, that affect the US economy and 360 00:17:09,160 --> 00:17:11,679 Speaker 1: then that feeds into the appropriate path for policy. So 361 00:17:11,760 --> 00:17:14,320 Speaker 1: to me, it's not as huge as surprise that you know, 362 00:17:14,359 --> 00:17:17,000 Speaker 1: the dots you know have moved out. Again, I'm not 363 00:17:17,000 --> 00:17:20,200 Speaker 1: speaking for why my colleagues had their own views. One 364 00:17:20,200 --> 00:17:22,040 Speaker 1: of the things that I would just raise is based 365 00:17:22,040 --> 00:17:23,760 Speaker 1: on you know, research a lot of people have done, 366 00:17:24,080 --> 00:17:26,840 Speaker 1: is I think that as this recovery and expansion it 367 00:17:26,880 --> 00:17:29,320 Speaker 1: goes on and on with very low interest rates, yet 368 00:17:29,320 --> 00:17:32,399 Speaker 1: we're still only getting at or slightly above trend growth. 369 00:17:32,640 --> 00:17:34,520 Speaker 1: It does make me think that this kind of neutral 370 00:17:34,600 --> 00:17:38,000 Speaker 1: or equilibrium interest rate is lower than we previously thought. 371 00:17:38,000 --> 00:17:39,920 Speaker 1: And you can see this in the kind of long 372 00:17:40,000 --> 00:17:42,560 Speaker 1: run interest rate projections from my colleagues. But a lot 373 00:17:42,600 --> 00:17:46,240 Speaker 1: of economic academic literature is showing that, I think pretty 374 00:17:46,240 --> 00:17:49,119 Speaker 1: persuasively that the new normal for interest rates is just 375 00:17:49,200 --> 00:17:52,760 Speaker 1: much lower than we thought safe ten years ago. So 376 00:17:52,840 --> 00:17:55,600 Speaker 1: today that the Median dot has the FED funds rate 377 00:17:55,720 --> 00:17:57,600 Speaker 1: ending up a three and a quarter percent. If you 378 00:17:57,600 --> 00:18:00,560 Speaker 1: would ask that same question fifteen, you know, years ago 379 00:18:00,600 --> 00:18:03,119 Speaker 1: people were probably said something like, uh, four in a 380 00:18:03,200 --> 00:18:04,880 Speaker 1: quarter or four and a half percent with a two 381 00:18:04,880 --> 00:18:07,800 Speaker 1: percent inflation rate. I actually think there's some downside to this. 382 00:18:07,880 --> 00:18:10,359 Speaker 1: I think that maybe the new normal, the new natural 383 00:18:10,359 --> 00:18:12,879 Speaker 1: interest rate, if you will, maybe even lower than one 384 00:18:12,920 --> 00:18:14,760 Speaker 1: in a quarter. I think that some of these long 385 00:18:14,880 --> 00:18:18,639 Speaker 1: run slowdowns and demographics proactivity growth. I know that you 386 00:18:18,640 --> 00:18:20,880 Speaker 1: can talk to John fernald In my colleague who's a 387 00:18:20,960 --> 00:18:24,720 Speaker 1: leading expert on proctivty trans and studied this very extensively. Uh, 388 00:18:24,720 --> 00:18:26,960 Speaker 1: and he's in his views on peractivity have been formed 389 00:18:27,440 --> 00:18:30,320 Speaker 1: me on this is that you know, with slower growth 390 00:18:30,359 --> 00:18:32,520 Speaker 1: globally and in the U S and many other countries, 391 00:18:33,720 --> 00:18:35,840 Speaker 1: I think it does argue that the natural rate or 392 00:18:35,880 --> 00:18:38,600 Speaker 1: normal interest rates are just gonna be much lower in 393 00:18:38,600 --> 00:18:42,119 Speaker 1: the future. And we're also speaking to Mary Daily in 394 00:18:42,160 --> 00:18:45,600 Speaker 1: this hour. She's ahead of researcher at the San Francisco 395 00:18:45,680 --> 00:18:48,439 Speaker 1: fed UM. One more question, again a criticism I've heard 396 00:18:48,440 --> 00:18:50,399 Speaker 1: of a couple of economists lately that maybe you know 397 00:18:50,400 --> 00:18:53,480 Speaker 1: you're stressing the strength of labor market, that you're stressing 398 00:18:54,040 --> 00:18:57,119 Speaker 1: head count over the demand for labor services. But basically, 399 00:18:57,520 --> 00:19:01,880 Speaker 1: the number of jobs created exaggerates demand for labor services 400 00:19:01,920 --> 00:19:05,480 Speaker 1: because accounts full time and part time workers equally, downplays 401 00:19:05,480 --> 00:19:08,080 Speaker 1: the length of the work week, fails to address the 402 00:19:08,119 --> 00:19:10,959 Speaker 1: fact that some of the jobs created our low wage, 403 00:19:11,359 --> 00:19:15,480 Speaker 1: low skill jobs, and uh not recognizing the failure of 404 00:19:15,520 --> 00:19:18,119 Speaker 1: wages to rise as also a lack of demand for 405 00:19:18,200 --> 00:19:21,280 Speaker 1: labor services. How do you look at that headcount versus 406 00:19:21,320 --> 00:19:22,720 Speaker 1: the other side of the coin, How do you weigh 407 00:19:22,760 --> 00:19:24,480 Speaker 1: that because that would suggest me to the labor market 408 00:19:24,680 --> 00:19:27,560 Speaker 1: isn't sending such a strong signal. And that's a view 409 00:19:27,640 --> 00:19:29,600 Speaker 1: that you know, many people have argued on the side 410 00:19:29,600 --> 00:19:31,600 Speaker 1: that there's still some slack in the labor market and 411 00:19:31,600 --> 00:19:35,520 Speaker 1: that you know, we we can continue easy, easy, continue 412 00:19:35,520 --> 00:19:37,440 Speaker 1: with our comedy and montey policy. So first of all, 413 00:19:37,440 --> 00:19:39,400 Speaker 1: this is the best case you know I can make 414 00:19:39,400 --> 00:19:41,240 Speaker 1: for why you know, at the FAT we need really 415 00:19:41,280 --> 00:19:44,040 Speaker 1: top notch researchers to help us think through all these issues. 416 00:19:44,080 --> 00:19:47,119 Speaker 1: You mentioned labor force participation. We talked about proctivity, we 417 00:19:47,200 --> 00:19:49,919 Speaker 1: talked about uh, you know, in the natural rate of unemployment, 418 00:19:49,920 --> 00:19:52,600 Speaker 1: you think about part time, UH for part time for 419 00:19:52,640 --> 00:19:55,439 Speaker 1: economic reasons. All these issues about the labor market and 420 00:19:55,440 --> 00:19:58,560 Speaker 1: what's happening. How to think about that is what our 421 00:19:58,600 --> 00:20:02,119 Speaker 1: team at the San Francisco BED works UH constantly on. 422 00:20:02,160 --> 00:20:03,560 Speaker 1: It's helped to think a lot about and you're gonna 423 00:20:03,560 --> 00:20:05,440 Speaker 1: get talk to Mary daily about that some more. And 424 00:20:05,560 --> 00:20:07,280 Speaker 1: here's the way I see it is that, you know, 425 00:20:07,359 --> 00:20:09,040 Speaker 1: during the Great Recession, there are a lot of big 426 00:20:09,119 --> 00:20:11,199 Speaker 1: questions about what's happened to labor market? Is there a 427 00:20:11,200 --> 00:20:14,600 Speaker 1: new normal? Is is economy fundamentally shifted? And I think 428 00:20:14,600 --> 00:20:17,119 Speaker 1: the good news here overall is that most of the 429 00:20:17,160 --> 00:20:19,960 Speaker 1: research that I've seen is that the new economy is 430 00:20:20,000 --> 00:20:22,560 Speaker 1: gonna be similar to the old economy. The normal unemployment 431 00:20:22,640 --> 00:20:24,720 Speaker 1: rate about five percent. So that's good. It's it's not 432 00:20:25,200 --> 00:20:27,840 Speaker 1: some kind of negative structural change in terms of labor 433 00:20:27,880 --> 00:20:31,080 Speaker 1: force participation. The declines we've seen are mostly driven by 434 00:20:31,119 --> 00:20:33,640 Speaker 1: demographics of retirement, the baby boom and things like that. 435 00:20:33,640 --> 00:20:36,560 Speaker 1: That again doesn't seem read the structural change. So you know, 436 00:20:36,600 --> 00:20:38,800 Speaker 1: my my view, just to summarize on this, is that 437 00:20:39,080 --> 00:20:41,879 Speaker 1: the wage Okay, you're to be able to talk to 438 00:20:41,920 --> 00:20:43,600 Speaker 1: Mary about the wage data more, but I don't think 439 00:20:43,600 --> 00:20:47,200 Speaker 1: that's sending such a negative single on this is taking 440 00:20:47,240 --> 00:20:52,040 Speaker 1: stock the Fed in focus on bloom Word Radio. Two 441 00:20:52,119 --> 00:20:58,440 Speaker 1: year government yields are negative in France, Germany, Italy, Spain, Sweden, 442 00:20:58,680 --> 00:21:04,000 Speaker 1: the Netherlands, Switzerland. So our negative interest rates deflationary or 443 00:21:04,119 --> 00:21:07,639 Speaker 1: is their presence simply an indication that the demand for 444 00:21:07,800 --> 00:21:11,560 Speaker 1: money and increase prices is now upon us. Let's find 445 00:21:11,600 --> 00:21:14,080 Speaker 1: out more from the Federal Reserve President of the San 446 00:21:14,119 --> 00:21:18,160 Speaker 1: Francisco FED, John Williams. He's joining my co host Kathleen 447 00:21:18,160 --> 00:21:22,240 Speaker 1: Hayes in San Francisco. So, John Williams, negative interest rates, 448 00:21:22,880 --> 00:21:25,159 Speaker 1: does that mean that people just don't even want to 449 00:21:25,280 --> 00:21:29,919 Speaker 1: borrow money? Well, what you've see negative interest rates in 450 00:21:29,960 --> 00:21:33,639 Speaker 1: the countries where UH inflation is very low and in 451 00:21:33,680 --> 00:21:36,679 Speaker 1: fact deflation has come up a number of times, and 452 00:21:36,720 --> 00:21:39,439 Speaker 1: so it's too too many, I think people it's just 453 00:21:39,560 --> 00:21:43,359 Speaker 1: a continuation of going from you know, normally positive interest 454 00:21:43,440 --> 00:21:46,400 Speaker 1: rates down to zero and then moving to negative basically 455 00:21:46,440 --> 00:21:48,760 Speaker 1: to try to move people to spend more money and 456 00:21:48,800 --> 00:21:51,480 Speaker 1: to stimulate the economy and create more jobs and create 457 00:21:51,520 --> 00:21:54,640 Speaker 1: some more inflation. So it's definitely a something we haven't 458 00:21:54,640 --> 00:21:57,639 Speaker 1: seen before. Really, Uh, do you believe that it works? 459 00:21:58,520 --> 00:22:01,040 Speaker 1: I think it works in part because it brings down 460 00:22:01,040 --> 00:22:02,840 Speaker 1: interest rates, as you just mentioned with all those two 461 00:22:02,920 --> 00:22:05,479 Speaker 1: year yields, and I think a boost has a kind 462 00:22:05,520 --> 00:22:07,600 Speaker 1: of the normal effects. I do think there's some negative 463 00:22:07,600 --> 00:22:11,040 Speaker 1: effects to in terms of confidence and also I think 464 00:22:11,040 --> 00:22:14,159 Speaker 1: in in terms of functioning a financial market. So we 465 00:22:14,200 --> 00:22:16,159 Speaker 1: had the FED. You know, we've thought about this and 466 00:22:16,160 --> 00:22:18,840 Speaker 1: decided we didn't want to go to negative interest rates. Instead, 467 00:22:18,880 --> 00:22:21,760 Speaker 1: we went to other other policy tools. Uh, And and 468 00:22:21,800 --> 00:22:23,399 Speaker 1: I think that's what we would do in the future. 469 00:22:23,440 --> 00:22:26,040 Speaker 1: But it's definitely something we're watching and trying to understand 470 00:22:26,440 --> 00:22:29,120 Speaker 1: better because it's happening in so many other countries. Well, John, 471 00:22:29,119 --> 00:22:34,280 Speaker 1: this leads me to look at the banking system, and 472 00:22:34,680 --> 00:22:38,040 Speaker 1: broadly there's been a concern about reach for yield that 473 00:22:38,080 --> 00:22:40,440 Speaker 1: if rates are so low and even negative, people will 474 00:22:40,440 --> 00:22:42,320 Speaker 1: go out the respectrum just to make some money and 475 00:22:42,359 --> 00:22:45,760 Speaker 1: that could cause problems. But yesterday at the Milk and 476 00:22:45,800 --> 00:22:49,280 Speaker 1: Institute conference, you said that you see a risk that 477 00:22:49,359 --> 00:22:52,240 Speaker 1: the relentless demand for safe cash like assets could drive 478 00:22:52,280 --> 00:22:55,639 Speaker 1: the creation of a dangerous instrument that repackages risky securities 479 00:22:55,680 --> 00:22:59,560 Speaker 1: and calls them safe like Christ crisis era c dos 480 00:22:59,600 --> 00:23:02,159 Speaker 1: within the next five years. Are you thinking of anything 481 00:23:02,200 --> 00:23:06,520 Speaker 1: specific right now? Obviously the FED banks oversee the banking system, 482 00:23:06,600 --> 00:23:09,080 Speaker 1: and you've got some pretty important players, right so, you know, 483 00:23:09,119 --> 00:23:11,960 Speaker 1: again at the conference, I was highlighting this as a 484 00:23:11,960 --> 00:23:13,760 Speaker 1: as a risk down the road. I don't see this 485 00:23:13,800 --> 00:23:16,560 Speaker 1: as a risk really emerging right now or in danger 486 00:23:16,560 --> 00:23:18,720 Speaker 1: of emerging, but something that we need to be focused on. 487 00:23:18,840 --> 00:23:21,360 Speaker 1: And there were a lot of causes of the financial crisis, 488 00:23:21,520 --> 00:23:25,000 Speaker 1: but clearly one of them was a global demand, extremely 489 00:23:25,040 --> 00:23:28,000 Speaker 1: strong global demand for things that are appeared to be safe. 490 00:23:28,040 --> 00:23:31,719 Speaker 1: Assets are very liquid, you could trade, you can uh 491 00:23:31,760 --> 00:23:34,320 Speaker 1: do a repose on, and things like that. Um So 492 00:23:34,480 --> 00:23:37,560 Speaker 1: with that huge demand that led to people being very 493 00:23:37,640 --> 00:23:41,399 Speaker 1: creative and engineering. What they thought of is uh taking 494 00:23:41,400 --> 00:23:44,960 Speaker 1: mortgage mortgages and turning them into uh, you know, traunching 495 00:23:45,000 --> 00:23:47,399 Speaker 1: them and turning them into different assets that had different 496 00:23:47,480 --> 00:23:50,680 Speaker 1: risk characteristics. The problem was is that people got fooled 497 00:23:50,920 --> 00:23:53,680 Speaker 1: that these risky assets were somehow cleansed of their risk 498 00:23:53,720 --> 00:23:56,640 Speaker 1: through this process as opposed to the risk was still 499 00:23:56,960 --> 00:23:59,480 Speaker 1: was still there. And I do worry that the fundamental 500 00:23:59,560 --> 00:24:03,840 Speaker 1: issue is huge global demand for safe assets has, if anything, 501 00:24:03,920 --> 00:24:07,200 Speaker 1: gotten bigger and stronger today than it was in the past. 502 00:24:07,200 --> 00:24:09,320 Speaker 1: So I think there is a potential down the road 503 00:24:09,640 --> 00:24:13,919 Speaker 1: for financial institutions and financial engineers to come up with 504 00:24:13,960 --> 00:24:16,560 Speaker 1: the next uh you know whatever, you know, whatever it 505 00:24:16,600 --> 00:24:18,200 Speaker 1: will be, and I don't know what it will be, 506 00:24:18,720 --> 00:24:23,720 Speaker 1: but uh kind of a process of repackaging risky assets 507 00:24:23,720 --> 00:24:25,320 Speaker 1: and trying to sell them as say, does if that 508 00:24:25,440 --> 00:24:27,480 Speaker 1: have the tools to prevent that this time? Well, I 509 00:24:27,480 --> 00:24:29,159 Speaker 1: think we we have the tools. In terms of the 510 00:24:29,200 --> 00:24:32,200 Speaker 1: banking sector, I'm I think that we've accomplished a lot 511 00:24:32,200 --> 00:24:34,199 Speaker 1: in terms of making sure our banking sector in the 512 00:24:34,280 --> 00:24:37,440 Speaker 1: US and in our other regulatary agencies and other countries 513 00:24:37,480 --> 00:24:39,240 Speaker 1: have also done the same to make sure they have 514 00:24:39,280 --> 00:24:42,199 Speaker 1: adequate capital, you know, strong risk management, and all of 515 00:24:42,240 --> 00:24:44,040 Speaker 1: those things. So I think the banking sector is a 516 00:24:44,080 --> 00:24:46,879 Speaker 1: much better position. But a lot of this creation of 517 00:24:46,920 --> 00:24:50,240 Speaker 1: these money like or cash like instruments really happens outside 518 00:24:50,280 --> 00:24:53,040 Speaker 1: the banking sector, into what we often call the shadow 519 00:24:53,080 --> 00:24:55,119 Speaker 1: banking sector. So I think It's an area that we 520 00:24:55,160 --> 00:24:58,080 Speaker 1: have to keep monitoring and making sure we understand and 521 00:24:58,080 --> 00:25:01,000 Speaker 1: and and and realizing that the you know, the next 522 00:25:01,040 --> 00:25:03,840 Speaker 1: financial crisis could be a very different thing than we 523 00:25:03,880 --> 00:25:06,560 Speaker 1: saw last time. In trying to understand where those risks are. 524 00:25:07,200 --> 00:25:09,720 Speaker 1: What if you could speak to the issue of people 525 00:25:09,840 --> 00:25:13,640 Speaker 1: who work and people who save what little money they 526 00:25:13,680 --> 00:25:16,880 Speaker 1: have left over after they have spent what they need 527 00:25:16,960 --> 00:25:20,680 Speaker 1: to live. Negative interest rates hurt them. If you want 528 00:25:20,680 --> 00:25:23,639 Speaker 1: to stimulate spending, why don't you just give the money? 529 00:25:23,720 --> 00:25:27,240 Speaker 1: Why take it away from them? Well, you know, giving 530 00:25:27,280 --> 00:25:29,840 Speaker 1: people money is what you know, we were typically called 531 00:25:29,880 --> 00:25:33,760 Speaker 1: fiscal policy, like tax cuts or government spending. So you know, 532 00:25:33,840 --> 00:25:35,639 Speaker 1: central banks like the FED and the e c B 533 00:25:36,119 --> 00:25:38,520 Speaker 1: UH don't have the authority to do that. And in 534 00:25:38,560 --> 00:25:40,560 Speaker 1: the end, the authority they do have is to to 535 00:25:40,680 --> 00:25:42,800 Speaker 1: move interest rates up and down. I agree with the 536 00:25:43,080 --> 00:25:45,920 Speaker 1: basic premise you pointed out, though, is a negative interest 537 00:25:46,000 --> 00:25:48,480 Speaker 1: rates comes with quite a few with costs as as 538 00:25:48,520 --> 00:25:51,240 Speaker 1: well as some benefits. And again, you know, I don't 539 00:25:51,240 --> 00:25:53,200 Speaker 1: want to speak what would I do if I were 540 00:25:53,280 --> 00:25:55,240 Speaker 1: in the in the e c B or another central 541 00:25:55,240 --> 00:25:58,200 Speaker 1: banks as they face really difficult challenges. But again it's 542 00:25:58,200 --> 00:25:59,879 Speaker 1: one of the reasons in the In the u s 543 00:26:00,000 --> 00:26:02,840 Speaker 1: of the FED, we have thought about this carefully numerous 544 00:26:02,920 --> 00:26:05,159 Speaker 1: times and decided the negative interest rates was not the 545 00:26:05,160 --> 00:26:08,240 Speaker 1: most effective tool, partly for the reasons that you laid 546 00:26:08,240 --> 00:26:11,639 Speaker 1: out with it for other ones that I mentioned earlier too. Well. 547 00:26:11,640 --> 00:26:15,560 Speaker 1: We're going to continue our conversation here with John Williams 548 00:26:15,560 --> 00:26:19,080 Speaker 1: at the San Francisco FED. We're going to be talking 549 00:26:19,160 --> 00:26:22,679 Speaker 1: also with Mary Daily, she is the director of research 550 00:26:22,680 --> 00:26:25,040 Speaker 1: at the San Francisco FED. We're gonna look at wage growth, 551 00:26:25,119 --> 00:26:28,080 Speaker 1: won't you with wish your paycheck was getting bigger? Will 552 00:26:28,080 --> 00:26:30,080 Speaker 1: Have FED certainly does because they like to see some 553 00:26:30,160 --> 00:26:34,200 Speaker 1: more inflation and that could be a very important channel um. 554 00:26:34,280 --> 00:26:36,520 Speaker 1: Mary and her team have come up with some very 555 00:26:36,560 --> 00:26:42,840 Speaker 1: interesting research which suggests that maybe the slowdown in wages 556 00:26:43,200 --> 00:26:45,920 Speaker 1: wasn't caused exactly the way you thought, and why maybe 557 00:26:46,000 --> 00:26:48,879 Speaker 1: the pickup isn't going to be either. On Kathleen Hayes 558 00:26:49,119 --> 00:26:52,080 Speaker 1: in San Francisco, PIM Fox in New York, speaking with 559 00:26:52,440 --> 00:26:54,639 Speaker 1: John Williams, he's president of the Federals Serve Bank of 560 00:26:54,680 --> 00:26:56,240 Speaker 1: San Francisco. On Bloomberg Radio