Speaker 1: Want to welcome our Bloomberg Television audience to our exclusive
Speaker 1: Bloomberg Radio interview with John Williams. He's President of the
Speaker 1: Federal Reserve Bank of St. Louis, joining us today at
Speaker 1: our San Francisco Bloomberg News Bureau. John, Welcome, San Francisco.
Speaker 1: I am President of San Francisco FED. You are which
Speaker 1: one I was just making St. Louis. Well, you know
Speaker 1: I've been my good friend. Here impersonating another FED official
Speaker 1: back could get you in real trouble. John Williams, President
Speaker 1: of San Francisco FED, And here we are in the
Speaker 1: beautiful Bay Area. It's great to be back with you, John.
Speaker 1: I want to drive right in though. Uh. You know
Speaker 1: you've been recently upbeat on the US economy and your
Speaker 1: most recent speech in March, you painted a picture of
Speaker 1: a growing economy. You're looking for two percent GDP growth
Speaker 1: at least this year, confident inflation is going to his
Speaker 1: target by the end of next year, and you've emphasize
Speaker 1: the weakness overseas isn't decisive for the US economy. So,
Speaker 1: with all that in mind, were you on board last
Speaker 1: week with the Fed's decision to not move on interest rates. Yeah,
Speaker 1: say was, I mean, I think we are in a
Speaker 1: very data dependent mode. We want to make sure that
Speaker 1: we have a very good reading and understanding of what's
Speaker 1: happening both in the US economy in terms of growth, jobs,
Speaker 1: and inflation, but also also make sure we have a
Speaker 1: good read and what's happening globally because that does affect
Speaker 1: the US economy. So I I am a supporter of
Speaker 1: the decisions we've made this year. Uh. That said, I
Speaker 1: do also support the statement we put out there, which
Speaker 1: is that I do expect us to be raising rates
Speaker 1: gradually over the next couple of years due to the
Speaker 1: strength and the labor marketing where I see inflation going. So,
Speaker 1: how are you looking at the US economy in light
Speaker 1: of that first quarter GDP figure? John, zero point five percent?
Speaker 1: And I know your team has has discounted it, not
Speaker 1: just discounted it, but analyzed it. And you've looked at
Speaker 1: the seasonality in those first quarter numbers, how they tend
Speaker 1: that first quarter GDP for many years now has tended
Speaker 1: to be slower than forecast by a wide margin. In fact,
Speaker 1: your your economist, Glen Ruda Bush, has argued that if
Speaker 1: you account for that, it was probably closer one point
Speaker 1: six percent in the first quarter. Hasn't that statistical anomaly
Speaker 1: been fixed? Though? Well, you know the Bureau of Economic
Speaker 1: Analysis that they have a lot of people working on
Speaker 1: this issue of what we call residual seasonality um, and
Speaker 1: I think they have made good improvements. They do a
Speaker 1: great job with the data. But this is an anomaly that,
Speaker 1: as you mentioned, we've seen for many years now. So
Speaker 1: my own view is that the data in the first quarter,
Speaker 1: we do have to discount it a bit, and my
Speaker 1: view would be be closer to something like two percent
Speaker 1: growth or more consistent with what I see as underline trend.
Speaker 1: So overall, I haven't changed my view about what growth
Speaker 1: over the whole year will be around two percent real
Speaker 1: GDP growth, which is what we saw last year. Quite
Speaker 1: apart from GDP though retail sales PC, you know, the
Speaker 1: personal consumption expenditutors, they came in on the week's side
Speaker 1: in the first quarter. Are you are is there a
Speaker 1: risk you overlook that signs other signs that the U.
Speaker 1: S economy actually lost momentum in the first quarter, and
Speaker 1: that's zero point five percent. Isn't such an anomally you know?
Speaker 1: Then you you average growth in the first the fourth quarter.
Speaker 1: In the first quarter, this is a pretty week's are steen,
Speaker 1: which maybe makes that two percent plus a little bit
Speaker 1: harder to achieve. Well, you know, when I when I
Speaker 1: think about this again, we want to be data depending.
Speaker 1: I think this is another reason to be a little
Speaker 1: bit cautious in terms of jumping to conclusions either positive
Speaker 1: or negative based on the first quarter growth. I do
Speaker 1: want to see good consumer spending data in the next
Speaker 1: couple of months. Do you want to see more signs
Speaker 1: that that anomalous reading the first quarter really was anomalous?
Speaker 1: So I agree with that point. I do tend to
Speaker 1: focus more on the employment data. Employment job gains have
Speaker 1: been really strong all the way through the latest data.
Speaker 1: Well we've seen you know, we'll get some more data
Speaker 1: soon as well. But when you look at job growth,
Speaker 1: you look at unemployment, you look at labor force participation,
Speaker 1: in a lot of other indicators, labor market continues to improve.
Speaker 1: I think we're full employment or close to it on
Speaker 1: all these indicators. So I do take a pretty strong
Speaker 1: signal from the from the employment side, not just a
Speaker 1: g d P, which tends to be you know, volatile
Speaker 1: and subject to some of these revisions and other issues.
Speaker 1: So as we look ahead to the next meeting, and
Speaker 1: obviously everyone's looking ahead to that meeting. So my yeah,
Speaker 1: and you're gonna go to Octionton, not St. Louis, but
Speaker 1: from San Francisco. What what do you need to see?
Speaker 1: You know, we've had strong jobs growth, but we haven't
Speaker 1: had inflation picking up very much. So what what does
Speaker 1: John Williams have to see when he sits down at
Speaker 1: the table in June to say yes, I'm arguing for
Speaker 1: I'm on board for the great hike. So I think
Speaker 1: we need to see a continuation of the progress we
Speaker 1: have been seeing over the last year, seeing core or
Speaker 1: underlying measures of inflation continue to move generally up towards
Speaker 1: two percent. I'm not expecting to jump towards supercent, but
Speaker 1: be on a on the right trajectory consistent with my
Speaker 1: forecast that over the next couple of years inflation will
Speaker 1: two years inflation will get back to two percent. I
Speaker 1: also want to see continue good job gains and continued
Speaker 1: signs of the economy as it has still good momentum.
Speaker 1: So I'm looking for a continuation of what we've been seeing,
Speaker 1: not for a big upside surprise. But obviously I don't
Speaker 1: need to see really strong just a continuation of what
Speaker 1: we have been seeing. So the status quo will be enough. Yeah,
Speaker 1: because again I think it would for me. It would
Speaker 1: resolve some of these little worries about Q one data.
Speaker 1: What was that telling us. I don't take a strong
Speaker 1: signal from it, but I want to make sure that
Speaker 1: that's the right conclusion. And also this issue about uncertainty
Speaker 1: abroad and and in financial market turm Hall early in
Speaker 1: the year, we want to make sure that that didn't
Speaker 1: have a bigger impact on the US economy. So if
Speaker 1: I c S continue to add good number of jobs
Speaker 1: he you know, againing improvements in the economy, and good
Speaker 1: signs on inflation, that would be enough. Good signs on inflation,
Speaker 1: but nothing because it's a forecast so far, right, John,
Speaker 1: and inflation has been undershooting for a long time. So
Speaker 1: in other words, you're willing to say, let's go ahead
Speaker 1: and raise interest rates again June, even if inflation is
Speaker 1: still a forecast and it has moved higher, that's right.
Speaker 1: As long as the inflation they are consistent with the
Speaker 1: forecast I have of moving towards two percent, that would
Speaker 1: be enough. Now, you know, as you you mentioned, we've
Speaker 1: been missing undershooting inflation for quite some time. But you know,
Speaker 1: in terms of the and I take that seriously in
Speaker 1: terms of thinking about what's happening. But in terms of
Speaker 1: Monterey policy, Let's remember, interest rates are still very low.
Speaker 1: I'm not talking about having one interest rate increase, you know,
Speaker 1: in the next few months or whenever. Isn't making tight
Speaker 1: Monterey policy. It's just stepping back a little bit from
Speaker 1: the very a comedy of Monterey policy. So it's not
Speaker 1: about tightening policy so much, it's just pulling back a
Speaker 1: little bit on the accommodation we've had in place. Well,
Speaker 1: because as you know, market expectations are once again a
Speaker 1: little bit out of sync with the FED. Because right now,
Speaker 1: basically you could say the markets are pricing in just
Speaker 1: one interest rate increase. You've had people like Larry Fink
Speaker 1: from Black Rock and Jeff good Luck from a Double
Speaker 1: double line talking about just one interest rate increase this year.
Speaker 1: If that so? Uh, you said even two or three recently,
Speaker 1: not two, but even three rate increases are reasonable this year.
Speaker 1: What is it that you see the markets don't? What
Speaker 1: are the markets missing? Well, first of all, the markets
Speaker 1: aren't one person. There are you know, millions of people
Speaker 1: involved in investing and making you know, uh forecasts and
Speaker 1: decisions around that. So there are different views. When I
Speaker 1: look at the markets, the data from the markets, what
Speaker 1: you see as a kind of a bimodal distribution. A
Speaker 1: lot of people think that the modal or the baseline cases,
Speaker 1: the one that I've laid out of, you know, unemployment
Speaker 1: continue to come down, good job growth to present GDP,
Speaker 1: and inflation moving back. You see this in the survey
Speaker 1: of professional forecasts, the blue chip surveys. You see it
Speaker 1: from my own colleagues, in our own dot plots, in
Speaker 1: our own SEP forecast. There is this other part of
Speaker 1: the distribution which I under you know, I think of
Speaker 1: as related to concerns about Asia, concerns about Europe and Japan,
Speaker 1: the rest of the world. That there's this downside scenario
Speaker 1: where global growth really slows, other things happen, and that
Speaker 1: that's a negative shock to the US. So obviously that's
Speaker 1: priced into the market, the possibility of a negative scenario
Speaker 1: that seems to get a lot of weight and investors minds.
Speaker 1: So my view that we should be gradually raising interest
Speaker 1: rates this year is based on the notion that we
Speaker 1: follow this baseline scenario, that the data continue to come
Speaker 1: in show the U s eCOM and continues to be
Speaker 1: on the good track, and under those conditions we should
Speaker 1: raise rates. Clearly, if the downside, you know, risk really
Speaker 1: do happen, uh, the we see really negative effects in
Speaker 1: the US economy, then we should uh pause and and
Speaker 1: wait until it's appropriate to raise right. So I see
Speaker 1: the markets have trained kind of balance these two different
Speaker 1: scenarios and come to their best estimates of what we
Speaker 1: should do. Uh. But you know again, I'm my My
Speaker 1: answer to your question really is, is the my baseline
Speaker 1: scenario where which is pretty optimistic and there was downtrack
Speaker 1: dependent raw on track, then the June rate hike is
Speaker 1: of a likelihood in your view, and certainly something you
Speaker 1: would support at the very least. Well, So I don't
Speaker 1: want to see likelihood because you know, we're never supposed
Speaker 1: to talk about what's going to happen at f HOMC
Speaker 1: means where my colleagues are going to say, and then
Speaker 1: of course we're gonna get a lot of data between
Speaker 1: now and then, and we love good discussions. But in
Speaker 1: my view, yes, it would be appropriate given all of
Speaker 1: the things we've talked about to to go on that
Speaker 1: that next step, But you know, a lot can happen
Speaker 1: between now in the middle of June, that's for sure.
Speaker 1: What do you make of some of the data we've
Speaker 1: seen today, certainly the markets reacting to the slow down
Speaker 1: and manufacturing in China and slow down U Cake, We've
Speaker 1: got some mixed numbers earlier in the week, and of
Speaker 1: course our own one of our key manufacturing engages from
Speaker 1: the supply management heading back towards fifty again, does that
Speaker 1: give you any positure? Well, you know, I think again
Speaker 1: you have to look at all the data and analyze
Speaker 1: it very carefully. And in terms of China, I think
Speaker 1: the story we're seeing, we've been seeing for the last
Speaker 1: couple of years, is that this pivot in China from
Speaker 1: a manufacturing export driven economy has been moving more to
Speaker 1: consumer goods, more to services, and so we've seen a
Speaker 1: kind of sequence of disappointments around Chinese manufacturing data, which
Speaker 1: I don't think really reflects the overall economy so much.
Speaker 1: Is the fact that they are really are moving their
Speaker 1: economy from one um you know, kind of one focused
Speaker 1: to another, and I expect to see a continuation of
Speaker 1: kind of weaker manufacturing readings from China, but that but
Speaker 1: seeing stronger spending on consumer consumer spending and other indicators.
Speaker 1: In terms of the US, I think the manufacturing sector
Speaker 1: clearly has been hit by the fallen oil prices, which
Speaker 1: cuts back on drilling and oil uh you know, uh,
Speaker 1: drilling in those activities, which is buys off steel and
Speaker 1: things like that. And obviously the strong dollar has affected
Speaker 1: a manufacturing sector. But I read the ice M. Actually
Speaker 1: data is is being pretty neutral. It's not that manufacturing
Speaker 1: is contracting or something, but just is growing modestly. Okay.
Speaker 1: You know, one of the things a lot of FED officials,
Speaker 1: including you, have downplayed is the weakness and oil prices.
Speaker 1: Is a strong dollar there transitory? How do you know
Speaker 1: those forces are transitory? And what if they're not, because
Speaker 1: they've certainly been holding inflation down for a while. And again,
Speaker 1: the FED has this dual objective and one of them
Speaker 1: is hitting that inflation target. Yeah, And just to clarify
Speaker 1: is I don't view the oil prices as transitory. By
Speaker 1: their effect on inflation, as you suggested, is more transitory.
Speaker 1: We're seeing that, you know what, all the prices move
Speaker 1: up and down overall inflation moves up and down, but
Speaker 1: we're not seeing any obvious signs from movements and oil
Speaker 1: prices onto major moves. UH can't pass through the core
Speaker 1: inflation rounderlying inflation, and that's kind of the second round
Speaker 1: effects that you worry about when you think about movements
Speaker 1: in commodity prices. Right now, I actually see, you know,
Speaker 1: oil prices have been factor pushing down inflation will add
Speaker 1: just with time, and the underlying inflation in services especially
Speaker 1: has been moving up. So again I'm kind of I'm
Speaker 1: pretty confident that we're on the right track and inflation. Okay, Well,
Speaker 1: we're going to continue our conversation with San Francisco FED
Speaker 1: President John Williams on Bloomberg taking Stock for our radio program,
Speaker 1: and we certainly thank our Bloomberg TV listeners for joining
Speaker 1: us today. So John, we want to continue now with
Speaker 1: this look at all the various factors that the markets
Speaker 1: are going over so or so Closely, I want to
Speaker 1: get back to this question inflation because I've been talking
Speaker 1: to a lot of Federal Reserve officials in St. Louis,
Speaker 1: Chicago here in San Francisco now, and one of the
Speaker 1: things I've heard is that inflation has undershot its target
Speaker 1: for so long that it's not only possibly not a
Speaker 1: bad idea, but actually a good idea to have inflation
Speaker 1: at or above target for a while. But I don't
Speaker 1: think you're on board with that now. I don't think
Speaker 1: we want to aim for inflation above our two percent
Speaker 1: longer run goal on on purpose. What I would love
Speaker 1: to see is inflation be on reach two percent, sometimes
Speaker 1: half the time above, half the time a little below,
Speaker 1: but really just fluctuating around that two percent. So being
Speaker 1: a little bit above two percent is not something I
Speaker 1: worry about being uh you know, that doesn't worry me.
Speaker 1: But again, I don't see us it's trying to target
Speaker 1: a high inflation rate, uh in the future. Now, you know,
Speaker 1: one of the things that we've made clear earlier with
Speaker 1: our one of our statements was that the goal was
Speaker 1: some metric, so two percents, not our ceiling. Really is
Speaker 1: the midpoint of where we want to see inflation, uh be. Now,
Speaker 1: my own forecast over the last year, I sometimes, based
Speaker 1: on my own views, you have inflation just moving right
Speaker 1: to two percent sometimes that we're shooting a little bit
Speaker 1: due to the dynamics and inflation. Again, that that to
Speaker 1: me is not an important issue. A little bit of
Speaker 1: overshooting isn't a problem, but we don't want to purposefully
Speaker 1: try to create higher inflation. UH. In my view. UH,
Speaker 1: there's an interesting statistic I wonder if you've had a
Speaker 1: chance to look at, and that is, if you look
Speaker 1: at UH the year to date inflation rate for about
Speaker 1: two decades now, it is consistently run below two percent.
Speaker 1: If you look at it that way, it's considered consistently undershot. UH.
Speaker 1: What does that tell us about perhaps some kind of
Speaker 1: secular change in this economy globally there's so much global disinflation,
Speaker 1: there's with some global deflation. As you studied this for
Speaker 1: so long over the years, John, not only UH as
Speaker 1: San Francisco FED president, but director of research and in
Speaker 1: all your academic studies, are you raising questions about this
Speaker 1: now yourself? Well, you know, I I'm I may not
Speaker 1: be I may not be totally alone in this, but
Speaker 1: I'm one of the few people says I think the
Speaker 1: Phillips curve is alive. And well, I think that our
Speaker 1: understanding inflation has is UH, the models we've used over
Speaker 1: the last few decades. I think our good indicators you
Speaker 1: look at underlying inflation. So core inflation is run about
Speaker 1: one point six percent of the last year UH. Some
Speaker 1: of that is due to lagged effects of a weaker economy,
Speaker 1: a lot of it's due to the strong dollar and
Speaker 1: some pass through energy prices into the core UH. If
Speaker 1: you look at the trim mean from the Dallas FED again,
Speaker 1: it's telling you the same kind of thing, about one
Speaker 1: or three chorus per cent or something like that. I
Speaker 1: don't think the inflation behavior right now is inconsistent with
Speaker 1: standard models of inflation. It reflects the fact that we've
Speaker 1: been hit by a whole bunch of big shocks, the
Speaker 1: dollar strengthening by over for a while. Now it's come
Speaker 1: back a bit um, you know, the decline in oil
Speaker 1: prices and weak global growth more generally, so, I think
Speaker 1: these are factors have held us down on inflation the
Speaker 1: last few years. Obviously, the recession had a huge effect
Speaker 1: inflation in the US UH for many years. But again
Speaker 1: I don't see this as some kind of break in
Speaker 1: the trend or behavior of inflation. I do think the
Speaker 1: good news here that we don't want to forget is
Speaker 1: we do have reasonably well anchored inflation expectations of the US.
Speaker 1: So you know that meant that we avoided deflation during
Speaker 1: the Great Recession, which was very important and today I think,
Speaker 1: you know, having well anchored inflation expectations is an important
Speaker 1: part of helping us get back to our our two
Speaker 1: percent goal um, and that's just something we want to preserve.
Speaker 1: When ask you also, can you mentioned uh that uh
Speaker 1: the markets and market reaction and of course the first
Speaker 1: three months of the year, Uh, they're was a big
Speaker 1: market sell off watching China. Uh. One of the things
Speaker 1: that seemed to slow the Fed in its tracks because
Speaker 1: after looking at four interest rate increases in December at
Speaker 1: the f MC meeting by marsh the Fed said, you
Speaker 1: know what it looks like, two are more prudent. Genet. Yellen,
Speaker 1: in her testimonies to Congress has has talked about the
Speaker 1: how the market impact really provide a certain amount of
Speaker 1: offset to some potential downward pressure on the US economy
Speaker 1: from the market turmoil, certainly bond yields being lower. You've
Speaker 1: you downplayed the only recent speech John the what the
Speaker 1: market was reacting to. You said, it wasn't so much
Speaker 1: just some rate move on the FEDS part. It was
Speaker 1: all these other factors. But so many people in the
Speaker 1: markets have interpreted No. Number One, that the market saw
Speaker 1: the FED starting embarking on a series of rate hikes
Speaker 1: Number one, and then the FEDS seeing that and in
Speaker 1: a sense acknowledging in fact that this had unstabilized the
Speaker 1: market to degree that it less than the need for
Speaker 1: rate hikes this year. Or did you how did you
Speaker 1: look at that change then in the rate hike forecast
Speaker 1: for did you not think it was necessary? Or did
Speaker 1: I sort of misunderstand you in that speech where you
Speaker 1: downplay the market when what we're reacting to, Well, I
Speaker 1: do think that the markets reacting a lot of different things,
Speaker 1: and obviously, talking to people in the markets, I hear
Speaker 1: this story about the Fed's role and concerns around that.
Speaker 1: My view is a lot of the reaction earlier this
Speaker 1: year was concerns about China slowing growth, concerns about very
Speaker 1: low inflation in the in the in the Euro Area, UH,
Speaker 1: struggles in other countries as well. UH. So I think
Speaker 1: that a lot of it's really driven by things are
Speaker 1: happening outside the country. Importantly, though, those things happening outside
Speaker 1: the US come back and affect the US economy too,
Speaker 1: So we have to take that into account. The strengthening
Speaker 1: the dollar obviously was a big factor that pushes down inflation,
Speaker 1: slows our growth, uh you know, weak or growth abroad
Speaker 1: has those uh slows our growth in exports as well,
Speaker 1: so we have to take them into account. So again,
Speaker 1: I think our forecasts have come down on for growth
Speaker 1: for sixteen um, you know. And I think that's consistent
Speaker 1: with the fact that there are changes in financial and
Speaker 1: global conditions that uh, that affect the US economy and
Speaker 1: then that feeds into the appropriate path for policy. So
Speaker 1: to me, it's not as huge as surprise that you know,
Speaker 1: the dots you know have moved out. Again, I'm not
Speaker 1: speaking for why my colleagues had their own views. One
Speaker 1: of the things that I would just raise is based
Speaker 1: on you know, research a lot of people have done,
Speaker 1: is I think that as this recovery and expansion it
Speaker 1: goes on and on with very low interest rates, yet
Speaker 1: we're still only getting at or slightly above trend growth.
Speaker 1: It does make me think that this kind of neutral
Speaker 1: or equilibrium interest rate is lower than we previously thought.
Speaker 1: And you can see this in the kind of long
Speaker 1: run interest rate projections from my colleagues. But a lot
Speaker 1: of economic academic literature is showing that, I think pretty
Speaker 1: persuasively that the new normal for interest rates is just
Speaker 1: much lower than we thought safe ten years ago. So
Speaker 1: today that the Median dot has the FED funds rate
Speaker 1: ending up a three and a quarter percent. If you
Speaker 1: would ask that same question fifteen, you know, years ago
Speaker 1: people were probably said something like, uh, four in a
Speaker 1: quarter or four and a half percent with a two
Speaker 1: percent inflation rate. I actually think there's some downside to this.
Speaker 1: I think that maybe the new normal, the new natural
Speaker 1: interest rate, if you will, maybe even lower than one
Speaker 1: in a quarter. I think that some of these long
Speaker 1: run slowdowns and demographics proactivity growth. I know that you
Speaker 1: can talk to John fernald In my colleague who's a
Speaker 1: leading expert on proctivty trans and studied this very extensively. Uh,
Speaker 1: and he's in his views on peractivity have been formed
Speaker 1: me on this is that you know, with slower growth
Speaker 1: globally and in the U S and many other countries,
Speaker 1: I think it does argue that the natural rate or
Speaker 1: normal interest rates are just gonna be much lower in
Speaker 1: the future. And we're also speaking to Mary Daily in
Speaker 1: this hour. She's ahead of researcher at the San Francisco
Speaker 1: fed UM. One more question, again a criticism I've heard
Speaker 1: of a couple of economists lately that maybe you know
Speaker 1: you're stressing the strength of labor market, that you're stressing
Speaker 1: head count over the demand for labor services. But basically,
Speaker 1: the number of jobs created exaggerates demand for labor services
Speaker 1: because accounts full time and part time workers equally, downplays
Speaker 1: the length of the work week, fails to address the
Speaker 1: fact that some of the jobs created our low wage,
Speaker 1: low skill jobs, and uh not recognizing the failure of
Speaker 1: wages to rise as also a lack of demand for
Speaker 1: labor services. How do you look at that headcount versus
Speaker 1: the other side of the coin, How do you weigh
Speaker 1: that because that would suggest me to the labor market
Speaker 1: isn't sending such a strong signal. And that's a view
Speaker 1: that you know, many people have argued on the side
Speaker 1: that there's still some slack in the labor market and
Speaker 1: that you know, we we can continue easy, easy, continue
Speaker 1: with our comedy and montey policy. So first of all,
Speaker 1: this is the best case you know I can make
Speaker 1: for why you know, at the FAT we need really
Speaker 1: top notch researchers to help us think through all these issues.
Speaker 1: You mentioned labor force participation. We talked about proctivity, we
Speaker 1: talked about uh, you know, in the natural rate of unemployment,
Speaker 1: you think about part time, UH for part time for
Speaker 1: economic reasons. All these issues about the labor market and
Speaker 1: what's happening. How to think about that is what our
Speaker 1: team at the San Francisco BED works UH constantly on.
Speaker 1: It's helped to think a lot about and you're gonna
Speaker 1: get talk to Mary daily about that some more. And
Speaker 1: here's the way I see it is that, you know,
Speaker 1: during the Great Recession, there are a lot of big
Speaker 1: questions about what's happened to labor market? Is there a
Speaker 1: new normal? Is is economy fundamentally shifted? And I think
Speaker 1: the good news here overall is that most of the
Speaker 1: research that I've seen is that the new economy is
Speaker 1: gonna be similar to the old economy. The normal unemployment
Speaker 1: rate about five percent. So that's good. It's it's not
Speaker 1: some kind of negative structural change in terms of labor
Speaker 1: force participation. The declines we've seen are mostly driven by
Speaker 1: demographics of retirement, the baby boom and things like that.
Speaker 1: That again doesn't seem read the structural change. So you know,
Speaker 1: my my view, just to summarize on this, is that
Speaker 1: the wage Okay, you're to be able to talk to
Speaker 1: Mary about the wage data more, but I don't think
Speaker 1: that's sending such a negative single on this is taking
Speaker 1: stock the Fed in focus on bloom Word Radio. Two
Speaker 1: year government yields are negative in France, Germany, Italy, Spain, Sweden,
Speaker 1: the Netherlands, Switzerland. So our negative interest rates deflationary or
Speaker 1: is their presence simply an indication that the demand for
Speaker 1: money and increase prices is now upon us. Let's find
Speaker 1: out more from the Federal Reserve President of the San
Speaker 1: Francisco FED, John Williams. He's joining my co host Kathleen
Speaker 1: Hayes in San Francisco. So, John Williams, negative interest rates,
Speaker 1: does that mean that people just don't even want to
Speaker 1: borrow money? Well, what you've see negative interest rates in
Speaker 1: the countries where UH inflation is very low and in
Speaker 1: fact deflation has come up a number of times, and
Speaker 1: so it's too too many, I think people it's just
Speaker 1: a continuation of going from you know, normally positive interest
Speaker 1: rates down to zero and then moving to negative basically
Speaker 1: to try to move people to spend more money and
Speaker 1: to stimulate the economy and create more jobs and create
Speaker 1: some more inflation. So it's definitely a something we haven't
Speaker 1: seen before. Really, Uh, do you believe that it works?
Speaker 1: I think it works in part because it brings down
Speaker 1: interest rates, as you just mentioned with all those two
Speaker 1: year yields, and I think a boost has a kind
Speaker 1: of the normal effects. I do think there's some negative
Speaker 1: effects to in terms of confidence and also I think
Speaker 1: in in terms of functioning a financial market. So we
Speaker 1: had the FED. You know, we've thought about this and
Speaker 1: decided we didn't want to go to negative interest rates. Instead,
Speaker 1: we went to other other policy tools. Uh, And and
Speaker 1: I think that's what we would do in the future.
Speaker 1: But it's definitely something we're watching and trying to understand
Speaker 1: better because it's happening in so many other countries. Well, John,
Speaker 1: this leads me to look at the banking system, and
Speaker 1: broadly there's been a concern about reach for yield that
Speaker 1: if rates are so low and even negative, people will
Speaker 1: go out the respectrum just to make some money and
Speaker 1: that could cause problems. But yesterday at the Milk and
Speaker 1: Institute conference, you said that you see a risk that
Speaker 1: the relentless demand for safe cash like assets could drive
Speaker 1: the creation of a dangerous instrument that repackages risky securities
Speaker 1: and calls them safe like Christ crisis era c dos
Speaker 1: within the next five years. Are you thinking of anything
Speaker 1: specific right now? Obviously the FED banks oversee the banking system,
Speaker 1: and you've got some pretty important players, right so, you know,
Speaker 1: again at the conference, I was highlighting this as a
Speaker 1: as a risk down the road. I don't see this
Speaker 1: as a risk really emerging right now or in danger
Speaker 1: of emerging, but something that we need to be focused on.
Speaker 1: And there were a lot of causes of the financial crisis,
Speaker 1: but clearly one of them was a global demand, extremely
Speaker 1: strong global demand for things that are appeared to be safe.
Speaker 1: Assets are very liquid, you could trade, you can uh
Speaker 1: do a repose on, and things like that. Um So
Speaker 1: with that huge demand that led to people being very
Speaker 1: creative and engineering. What they thought of is uh taking
Speaker 1: mortgage mortgages and turning them into uh, you know, traunching
Speaker 1: them and turning them into different assets that had different
Speaker 1: risk characteristics. The problem was is that people got fooled
Speaker 1: that these risky assets were somehow cleansed of their risk
Speaker 1: through this process as opposed to the risk was still
Speaker 1: was still there. And I do worry that the fundamental
Speaker 1: issue is huge global demand for safe assets has, if anything,
Speaker 1: gotten bigger and stronger today than it was in the past.
Speaker 1: So I think there is a potential down the road
Speaker 1: for financial institutions and financial engineers to come up with
Speaker 1: the next uh you know whatever, you know, whatever it
Speaker 1: will be, and I don't know what it will be,
Speaker 1: but uh kind of a process of repackaging risky assets
Speaker 1: and trying to sell them as say, does if that
Speaker 1: have the tools to prevent that this time? Well, I
Speaker 1: think we we have the tools. In terms of the
Speaker 1: banking sector, I'm I think that we've accomplished a lot
Speaker 1: in terms of making sure our banking sector in the
Speaker 1: US and in our other regulatary agencies and other countries
Speaker 1: have also done the same to make sure they have
Speaker 1: adequate capital, you know, strong risk management, and all of
Speaker 1: those things. So I think the banking sector is a
Speaker 1: much better position. But a lot of this creation of
Speaker 1: these money like or cash like instruments really happens outside
Speaker 1: the banking sector, into what we often call the shadow
Speaker 1: banking sector. So I think It's an area that we
Speaker 1: have to keep monitoring and making sure we understand and
Speaker 1: and and and realizing that the you know, the next
Speaker 1: financial crisis could be a very different thing than we
Speaker 1: saw last time. In trying to understand where those risks are.
Speaker 1: What if you could speak to the issue of people
Speaker 1: who work and people who save what little money they
Speaker 1: have left over after they have spent what they need
Speaker 1: to live. Negative interest rates hurt them. If you want
Speaker 1: to stimulate spending, why don't you just give the money?
Speaker 1: Why take it away from them? Well, you know, giving
Speaker 1: people money is what you know, we were typically called
Speaker 1: fiscal policy, like tax cuts or government spending. So you know,
Speaker 1: central banks like the FED and the e c B
Speaker 1: UH don't have the authority to do that. And in
Speaker 1: the end, the authority they do have is to to
Speaker 1: move interest rates up and down. I agree with the
Speaker 1: basic premise you pointed out, though, is a negative interest
Speaker 1: rates comes with quite a few with costs as as
Speaker 1: well as some benefits. And again, you know, I don't
Speaker 1: want to speak what would I do if I were
Speaker 1: in the in the e c B or another central
Speaker 1: banks as they face really difficult challenges. But again it's
Speaker 1: one of the reasons in the In the u s
Speaker 1: of the FED, we have thought about this carefully numerous
Speaker 1: times and decided the negative interest rates was not the
Speaker 1: most effective tool, partly for the reasons that you laid
Speaker 1: out with it for other ones that I mentioned earlier too. Well.
Speaker 1: We're going to continue our conversation here with John Williams
Speaker 1: at the San Francisco FED. We're going to be talking
Speaker 1: also with Mary Daily, she is the director of research
Speaker 1: at the San Francisco FED. We're gonna look at wage growth,
Speaker 1: won't you with wish your paycheck was getting bigger? Will
Speaker 1: Have FED certainly does because they like to see some
Speaker 1: more inflation and that could be a very important channel um.
Speaker 1: Mary and her team have come up with some very
Speaker 1: interesting research which suggests that maybe the slowdown in wages
Speaker 1: wasn't caused exactly the way you thought, and why maybe
Speaker 1: the pickup isn't going to be either. On Kathleen Hayes
Speaker 1: in San Francisco, PIM Fox in New York, speaking with
Speaker 1: John Williams, he's president of the Federals Serve Bank of
Speaker 1: San Francisco. On Bloomberg Radio