WEBVTT - Surveillance: Fed Patience With Dudley 0:00:05.120 --> 0:00:09.320 Welcome to the Bloomberg Surveillance Podcast Hometown Keene. Along with 0:00:09.440 --> 0:00:13.200 Jonathan Ferroll and Lisa A. Brownwitz Jaylie, we bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance and Apple Podcast SoundCloud, Bloomberg dot Com 0:00:23.920 --> 0:00:30.760 and of course I'm the Bloomberg terminal. Joining us now, 0:00:30.840 --> 0:00:33.600 Bill Dudley. I'm pleased to say, the Bloomberg Opinion columist 0:00:33.640 --> 0:00:37.320 Princeton University, senior research scholar at former New York Fed 0:00:37.360 --> 0:00:40.440 President joins us too. Bill. It's going to catch up 0:00:40.440 --> 0:00:42.840 with you and I enjoy your pieces and your piece 0:00:42.880 --> 0:00:45.000 out this morning. It's a little bit technical, but I 0:00:45.000 --> 0:00:47.159 want you to run through things. When the Bank of 0:00:47.200 --> 0:00:49.440 England comes out with the rate decision, bank rate means 0:00:49.479 --> 0:00:50.960 a lot for a lot of people in the UK 0:00:51.120 --> 0:00:54.360 for business loans, for mortgages. The Fed funds rate is 0:00:54.400 --> 0:00:56.680 a different beast, and you push him back against the 0:00:56.680 --> 0:00:59.520 continued use of targeting the Fed funds rate and using 0:00:59.560 --> 0:01:02.720 it almost can you just want me through the thinking head? Well? 0:01:02.760 --> 0:01:05.360 The Federal funds rate used to be important because reserves 0:01:05.400 --> 0:01:07.600 in the banking system were quite scarce and so banks 0:01:07.600 --> 0:01:10.199 had to trade the federal funds rate FED federal funds 0:01:10.240 --> 0:01:13.240 between themselves to satisfy the reserve requirements. That's not the 0:01:13.280 --> 0:01:16.840 situation today. The banking systems awash and reserves as a 0:01:16.880 --> 0:01:20.360 federal reserve continues to buy D twenty billion of treasuries 0:01:20.360 --> 0:01:23.839 and agency mortgage back securioes. So the federal fund market 0:01:23.840 --> 0:01:26.759 has become very different, very much much smaller, and much 0:01:26.800 --> 0:01:28.920 more idiot thing credit than it has been in the past. 0:01:29.400 --> 0:01:31.640 Motivation for this piece was the fact that the Fed 0:01:31.720 --> 0:01:35.160 last week had to make a technical adjustment to too 0:01:35.280 --> 0:01:37.960 short term interest rates the rate they pay on overnight 0:01:37.959 --> 0:01:40.920 reverse repurchase agreements and interest rate they pay on reserves 0:01:40.959 --> 0:01:44.160 five basis points each. Why supposedly keep the federal fund 0:01:44.280 --> 0:01:47.360 rate closer to the middle of his target range? Why 0:01:47.400 --> 0:01:49.480 are we tiring the federal fund rate in the first place. 0:01:49.520 --> 0:01:52.400 At this point, it's no longer an important market. The 0:01:52.440 --> 0:01:54.720 Fed has the ability to just to paid interest on reserves. 0:01:55.000 --> 0:01:57.559 Why not Why not ditch the federal funds rate target 0:01:57.560 --> 0:01:59.400 and just set the interest rate on reserves at the 0:01:59.440 --> 0:02:02.520 level that's a apropriate with the monetary conditions that the 0:02:02.520 --> 0:02:06.040 FED seeks to accomplish. Well, that's your simple solution in 0:02:06.120 --> 0:02:09.040 your words three words, drop the target. But could you 0:02:09.080 --> 0:02:12.040 anticipate a communication issue around doing that. If they were 0:02:12.120 --> 0:02:15.600 to do that this year, I think they could explain 0:02:15.639 --> 0:02:17.760 it very easily. They would no longer have to make 0:02:17.800 --> 0:02:21.960 these technical adjustments that I think are more confusing than illuminating. Also, 0:02:22.000 --> 0:02:23.960 another thing that they need to do is is exempt 0:02:24.000 --> 0:02:27.040 reserves from the leverage ratio. As they add more reserves 0:02:27.040 --> 0:02:29.799 to the banking system, that's putting downward pressure on race. 0:02:30.080 --> 0:02:31.960 The whole reason why they had to make this technical 0:02:31.960 --> 0:02:34.400 adjustment to the federal fund to these two interest rates 0:02:34.520 --> 0:02:36.640 push the federal fund rate up was the fact that 0:02:36.639 --> 0:02:39.959 they're flooding the banking system with reserves. Banks don't want 0:02:39.960 --> 0:02:43.079 the reserves because of the leverage ratio, which is starting 0:02:43.080 --> 0:02:45.480 to bind as a capital requirement for banks, and the 0:02:45.720 --> 0:02:49.040 example from the leverage ratio, then that problem goes away 0:02:49.040 --> 0:02:51.760 as well. And Bill, you're talking about the glut of 0:02:52.080 --> 0:02:54.760 deposits that you're seeing on some of the bank books, 0:02:54.760 --> 0:02:56.639 with some banks even saying to their corporate clients, we 0:02:56.680 --> 0:02:59.240 don't even want your money because it is getting to 0:02:59.240 --> 0:03:02.480 be excess of just taking a step back. How much 0:03:02.720 --> 0:03:05.519 is the change that you're proposing evidence that we're going 0:03:05.560 --> 0:03:08.639 to remain in this environment with a system awatch and 0:03:08.720 --> 0:03:12.720 cash and the Federal Reserve pumping money continually into it, 0:03:13.080 --> 0:03:14.840 even though there is so much cash. How much is 0:03:14.880 --> 0:03:17.600 it just sort of an acknowledgement of that reality over 0:03:17.639 --> 0:03:21.040 the near and frankly not even that near term. Well, 0:03:21.040 --> 0:03:22.800 I think we're gonna be in a system where there's 0:03:22.840 --> 0:03:25.000 lots of reserves in the banking system for some time 0:03:25.040 --> 0:03:26.360 to come. First of all, the Fed is not going 0:03:26.400 --> 0:03:29.320 to stop their asset purchases quickly. It's probably going to 0:03:29.360 --> 0:03:31.920 continue well into the fall. So the balancy is going 0:03:31.960 --> 0:03:33.919 to continue to grow. The munt of reserves in the 0:03:33.919 --> 0:03:36.200 bankasys we're going to continue to grow. And then when 0:03:36.240 --> 0:03:39.480 it finally decides to start to normalize, it's balancy. Balancy 0:03:39.640 --> 0:03:41.119 is so big now it's going to take a long 0:03:41.200 --> 0:03:43.240 time to get it back to, you know, the one 0:03:43.280 --> 0:03:45.600 a half trillion of excess reserves that we had prior 0:03:45.640 --> 0:03:48.440 to the pandemic. So I think we have a system 0:03:48.480 --> 0:03:51.080 where the interest rate the FED pays on reserves. It's 0:03:51.080 --> 0:03:54.440 a primary tool of Montrey policy. Let's acknowledge them. I 0:03:54.520 --> 0:03:57.920 understand Bill, the argument that the FED wants to continue 0:03:57.920 --> 0:04:00.400 with their very easy money policy is just comply to 0:04:00.440 --> 0:04:04.080 allow inflation to pick up and allow employment to get 0:04:04.120 --> 0:04:07.200 to a better place. However, people have pointed to certain 0:04:07.240 --> 0:04:09.720 fraud the areas and the mortgage market in particular. Do 0:04:09.720 --> 0:04:11.840 you think it's advisable. Do you think that it would 0:04:11.840 --> 0:04:14.720 harm the progress that the Fed is allowing to happen 0:04:14.720 --> 0:04:16.800 in the economy for them to pair back on some 0:04:16.839 --> 0:04:19.200 of the mortgage debt purchases that they make every month. 0:04:20.600 --> 0:04:23.360 I think it would have an effect more on expectations 0:04:23.440 --> 0:04:26.680 about future mandrec polls we tell the market the FED 0:04:27.000 --> 0:04:30.840 has now acknowledged that they made substantial further progress towards 0:04:30.839 --> 0:04:34.039 their goals, and so people would change their expectations of 0:04:34.080 --> 0:04:35.520 the timing of tightening. So I don't think it would 0:04:35.520 --> 0:04:38.360 be that important in the neurrowness of the housing market. 0:04:38.600 --> 0:04:40.560 I think it would be quite important as a signal 0:04:40.640 --> 0:04:44.080 of the Monterrey policy and the timing of tightening. Montre 0:04:45.320 --> 0:04:48.440 is that the preferred method versus first. I don't think 0:04:48.440 --> 0:04:49.880 they're gonna do it. I don't think they're gonna do it. 0:04:49.920 --> 0:04:52.239 I think they're gonna be pretty patient here. What about 0:04:52.240 --> 0:04:54.840 perhaps maybe more of an equal waiting taper. I think 0:04:54.920 --> 0:04:59.400 all December a discussion of five billion and treasuries five 0:04:59.400 --> 0:05:01.280 billion in b asked. Is that just more of an 0:05:01.279 --> 0:05:04.880 easy path to go? Well, I think that you have 0:05:04.920 --> 0:05:08.000 a template from the last cycle, and so to deviate 0:05:08.040 --> 0:05:10.040 from that template you have to have a really good reason. 0:05:10.400 --> 0:05:11.920 I don't think they have a really good reason. I 0:05:11.960 --> 0:05:14.000 think if they deviate from what they did last time 0:05:14.360 --> 0:05:16.640 just raises a bunch of questions. What are you concerned about? 0:05:16.640 --> 0:05:18.679 Why aren't you following the game plan that you followed West? 0:05:19.279 --> 0:05:21.440 What do we learn from last time around bill? The 0:05:21.520 --> 0:05:24.400 lessons of the last time we reduced asset purchases and 0:05:24.520 --> 0:05:29.280 eventually actually had some balance sheet reductions several years later. Well, 0:05:29.279 --> 0:05:32.800 I think it went in all fairness, quite smoothly, once 0:05:32.839 --> 0:05:35.840 the Fed communicated clearly about what's the what's the what's 0:05:35.839 --> 0:05:39.120 the sequence was going to be, First we stop the 0:05:39.160 --> 0:05:42.200 asset purchases, we can taper the asset purchases down, then 0:05:42.240 --> 0:05:44.240 we raise short term rates, and then we finally start 0:05:44.279 --> 0:05:47.000 to normalize the size of the bounty. So this time 0:05:47.000 --> 0:05:49.479 the market has a template to look at. Last time 0:05:49.480 --> 0:05:51.400 they didn't, and so there's a lot more uncertainty about 0:05:51.400 --> 0:05:53.680 what the favors are going to do in the last 0:05:53.680 --> 0:05:55.440 cycle compared to this secle. I think it's one reason 0:05:55.480 --> 0:05:58.039 why the markets are pretty comfortable with what's the Fed's 0:05:58.120 --> 0:06:00.400 up to. Do you think that there's two much FED 0:06:00.440 --> 0:06:02.160 speak at this point We've been talking about how there's 0:06:02.240 --> 0:06:04.760 very little dissent and there basically is a FED official 0:06:04.839 --> 0:06:09.280 every hour speaking. Well, there's always probably too much FED sean. 0:06:09.920 --> 0:06:12.520 The thing to pay attention to is really the chairman, 0:06:12.880 --> 0:06:14.960 the vice chairman of the of the Board of Governors, 0:06:14.960 --> 0:06:17.360 and the vice chairman of the over Market Committee. So 0:06:17.600 --> 0:06:22.240 how Clarida and Williams, what are you saying, ignore the 0:06:22.240 --> 0:06:25.360 FED presidents when they go around doing speeches. Yes, I 0:06:25.680 --> 0:06:28.040 wouldn't say ignore the FED presidents, but put a lot 0:06:28.160 --> 0:06:30.280 less weight on them because they're just one member of 0:06:30.320 --> 0:06:33.159 the committee. I mean, the big three set the agenda 0:06:33.240 --> 0:06:36.159 for the Federal Market Committee. He's not gonna do something 0:06:36.160 --> 0:06:39.800 if those three people aren't on board. So it's about weight. 0:06:40.000 --> 0:06:43.039 Don't ignore the presidents, but don't put too much weight 0:06:43.080 --> 0:06:45.840 on what one individual president might say, but just how 0:06:45.920 --> 0:06:49.360 much they influence the conversation inside the Federal Reserve, when 0:06:49.400 --> 0:06:51.440 you have those f ONMC meetings, when you have the 0:06:51.480 --> 0:06:55.000 likes of plus official really pushing back at the turn 0:06:55.040 --> 0:06:56.960 of the last crisis, going through the recovery, Just how 0:06:57.000 --> 0:07:00.080 much do they influence the conversation. I think they have 0:07:00.120 --> 0:07:03.520 any They influenced the conversation because they offer a different perspective, 0:07:03.560 --> 0:07:06.279 and I think diversity of views is actually important. Diversity 0:07:06.279 --> 0:07:08.880 of backgrounds is actually important in terms of getting good 0:07:09.000 --> 0:07:12.760 monetary policymaking. By the end of the day, the committee 0:07:12.800 --> 0:07:15.800 is gonna go where the consensus is, so someone's always dissenting. 0:07:15.840 --> 0:07:18.680 They started marginalize themselves because they're not relevant in terms 0:07:18.680 --> 0:07:20.760 of figuring out where the where's the committee gonna go 0:07:21.160 --> 0:07:23.120 U in the future. Right now, there's a lot of 0:07:23.160 --> 0:07:25.720 disagreement about, you know, when should we start to uh 0:07:25.920 --> 0:07:30.840 paper asset purchases because people are uncertain about the state 0:07:30.880 --> 0:07:33.200 of the recovery and how fast will it cut into 0:07:33.720 --> 0:07:36.840 unused labor resources. There's quite a bit of disagree agreement 0:07:36.920 --> 0:07:40.040 right now about timing. But the people that matter are WILLIAMS. 0:07:40.440 --> 0:07:43.200 Laria and of course Howell, because they're the ones who 0:07:43.240 --> 0:07:46.560 are going to determine the ultimate timing it's gonna catch up. 0:07:46.560 --> 0:07:48.000 I so always got to see a great pace to 0:07:48.320 --> 0:07:50.000 a had a blow Bloomberg dot com and all the 0:07:50.000 --> 0:07:53.480 Bloomberg terminal built dountly that Bloomberg opinion columnists at former 0:07:53.720 --> 0:08:02.200 New York Fed President Danny Fledge Flower Target, professor of 0:08:02.280 --> 0:08:06.200 Economics and former Bank of England Monetary Policy Committee remember 0:08:06.560 --> 0:08:08.440 joining us. Now. We were just talking about how there 0:08:08.560 --> 0:08:11.480 is not much being said that is new. However we 0:08:11.600 --> 0:08:13.600 make here something in a half hour time from the 0:08:13.640 --> 0:08:16.560 Bank of England when they release their rate decision. You're 0:08:16.600 --> 0:08:21.200 looking for a potential policy error. Can you explain, Well, 0:08:22.400 --> 0:08:26.240 both the Fed and the Bank of England are struggling 0:08:26.320 --> 0:08:30.280 in the dark. We've never seen anything like this and 0:08:30.400 --> 0:08:33.400 the best thing is to simply wait and see. Um. So, 0:08:33.559 --> 0:08:36.240 any any suggestion that they have a clue. I mean 0:08:36.280 --> 0:08:38.040 people say things that I think we're going to tighten 0:08:38.080 --> 0:08:42.199 in three Well, they're just kind of winging. It's I 0:08:42.280 --> 0:08:44.640 think that the potential area here at the Bank is 0:08:44.720 --> 0:08:47.840 to say that they're going to start to perhaps um 0:08:48.400 --> 0:08:52.200 do less quey start sort of stop it by August 0:08:52.280 --> 0:08:56.360 rather than December, as the economy goes into lockdown. Um, 0:08:57.000 --> 0:09:00.959 the data really are very confusing. So I think the 0:09:01.160 --> 0:09:03.800 sensible thing for them to do is to say we're continuing, 0:09:03.880 --> 0:09:06.959 we're waiting, and we're watching. Two people are going to 0:09:07.080 --> 0:09:09.280 leave the committee how day, this is his last meeting. 0:09:09.880 --> 0:09:12.480 Um Liese leaves in August and we get Catherine Man. 0:09:12.960 --> 0:09:14.719 So I think the right thing to do is to 0:09:14.840 --> 0:09:18.840 just say waiting, watching, and and and signaling that they 0:09:18.880 --> 0:09:20.679 have a clue what they're going to do in the future. 0:09:20.760 --> 0:09:23.280 I think it would be a major era. Well, Danny, 0:09:23.520 --> 0:09:25.600 I got to think that all of people are all 0:09:25.640 --> 0:09:27.560 of the discussion that we hear at of FED officials 0:09:27.600 --> 0:09:30.240 at a Bank of England officials basically gets shrugged off 0:09:30.280 --> 0:09:33.400 by markets because until fair FED chair J. Powell speaks, 0:09:33.679 --> 0:09:35.760 no one's gonna listen. Basically, he's going to lead the 0:09:35.840 --> 0:09:38.480 charge globally when it comes to tightening and until he 0:09:38.600 --> 0:09:41.079 does so, you know, these members on different central banks 0:09:41.160 --> 0:09:43.400 can say whatever they want, no one will believe them. 0:09:43.520 --> 0:09:46.480 Isn't that the case? I think that's right, and I 0:09:46.559 --> 0:09:50.200 think in many senses J palanas that both sound the same. 0:09:50.400 --> 0:09:53.160 He's been very sensible. Um, what did I just say, 0:09:53.280 --> 0:09:57.079 waiting and watching understanding they made a mistake in two 0:09:57.120 --> 0:10:00.839 thousand fifteen and accepted that and saying, you know, we'll 0:10:00.960 --> 0:10:03.920 we'll see how the economy moves. I mean, we've still 0:10:04.000 --> 0:10:06.400 got to understand what happens in the with the vaccine, 0:10:06.760 --> 0:10:08.880 and what happens in the in the Southern States in 0:10:08.920 --> 0:10:11.559 the United States, of course, but then there's all these 0:10:11.640 --> 0:10:14.520 issues about which firms are going to survive and are 0:10:14.600 --> 0:10:17.920 people going to change their long run behavior, and that's 0:10:17.920 --> 0:10:20.199 a risk of the downside. People are going to keep 0:10:20.240 --> 0:10:23.120 those savings that they have and not not spend them. 0:10:23.320 --> 0:10:26.760 We don't know, but the risk I think to the downside. 0:10:26.920 --> 0:10:29.120 So if you go back to making the potential error 0:10:29.480 --> 0:10:32.319 people saying, oh, we need to worry about inflation, well 0:10:32.400 --> 0:10:35.160 what inflation? So the fact that the talk today is 0:10:35.240 --> 0:10:38.240 the bank deblion worries about inflation, Well it's two point 0:10:38.360 --> 0:10:41.679 one and we've had two very weird months where the 0:10:41.800 --> 0:10:45.280 base effects dominated and the slight changes in the last 0:10:45.320 --> 0:10:48.240 couple of months go away in twelve months time. So 0:10:48.440 --> 0:10:51.839 everything looks to be transitory and temporary. And the answer 0:10:51.920 --> 0:10:53.839 is we just don't know. And j Palace, but I 0:10:53.960 --> 0:10:58.040 think fantastic and he's just been saying essentially that wait, 0:10:58.559 --> 0:11:01.719 look and we'll risk bond if we need to. But 0:11:01.800 --> 0:11:04.720 there ain't no inflation problem despite the fact two point 0:11:04.840 --> 0:11:08.000 one and that's supposedly an inflation problem with a weird 0:11:08.080 --> 0:11:11.280 couple of months. Come on, folks, get real, Danny. Do 0:11:11.320 --> 0:11:15.640 you think we're suffering from a better group think? Yeah? Absolutely, 0:11:15.720 --> 0:11:19.720 I mean the group think in a way that if 0:11:19.760 --> 0:11:22.520 you follow Padal, is to be right. But I hear 0:11:22.559 --> 0:11:25.240 these these fit governors he held in at the Bank 0:11:25.360 --> 0:11:28.280 being making ludicrous claim saying inflation is going to take 0:11:28.320 --> 0:11:32.680 off based upon what wild wishful thinking and guessing that's 0:11:32.720 --> 0:11:35.520 not credible for a central plan. Danny, That dissents healthy, 0:11:35.600 --> 0:11:38.400 isn't it even if they disagree, it's healthy to happen. 0:11:38.559 --> 0:11:40.640 And I think what I've missed over the last ten years, 0:11:40.840 --> 0:11:43.719 particularly the Bank of England, since Governor Carney came out 0:11:43.760 --> 0:11:46.680 with some forward guidance. So let's face it didn't work. 0:11:46.960 --> 0:11:48.439 But one thing he said off the back of that 0:11:48.520 --> 0:11:50.600 forward guidance is that it helped to tie the hands 0:11:50.640 --> 0:11:52.839 at a committee because you've got everyone to agree with 0:11:52.960 --> 0:11:55.839 one thing and no one could dissent anymore. John, that 0:11:56.520 --> 0:11:58.160 you and I were just chaffing on this. If you look, 0:11:58.240 --> 0:12:00.959 if you look at the fit, not a single governor 0:12:01.400 --> 0:12:05.679 since Greenspan has ever dissented. Governors at the Bank of 0:12:05.760 --> 0:12:09.160 England have actually not dissent, although whole Dana's cheek economists 0:12:09.280 --> 0:12:13.640 has um. I think a real debate is credible and sensible. 0:12:14.080 --> 0:12:15.959 But I think if you if you realize that we 0:12:16.120 --> 0:12:19.400 just don't know. Remember, we saw the biggest dropping output 0:12:19.520 --> 0:12:23.120 ever seen, biggest and fastest dropping output ever seen. And 0:12:23.240 --> 0:12:26.199 the question is what's the past data where we have 0:12:26.320 --> 0:12:30.920 past data from the great influenza UM, and we've had 0:12:31.000 --> 0:12:33.240 you know, so there's there's really not much to go 0:12:33.520 --> 0:12:36.959 buy um. So, yeah, you're right, descent quite good. But 0:12:37.280 --> 0:12:39.880 but in a sense, much of the descent we've actually 0:12:39.960 --> 0:12:43.400 seen over the last decade has been dissent in error. 0:12:44.200 --> 0:12:48.200 The reality is that people have argued that you should 0:12:48.240 --> 0:12:50.959 have raised rates and you've dissented on that side, and 0:12:51.040 --> 0:12:53.079 it's clear over the last decade every one of those 0:12:53.160 --> 0:12:57.160 votes was in error. You shouldn't have done that. Big picture, Danny, 0:12:57.200 --> 0:12:58.960 A lot of the notes that I've read the push 0:12:59.040 --> 0:13:03.400 for wage pressures focus on human capital, a shift to 0:13:03.559 --> 0:13:07.959 e s g. Those are structurally inflationary. Are we in 0:13:08.040 --> 0:13:12.520 a new inflationary regime. Well, the answer, the answer is 0:13:12.559 --> 0:13:15.080 go and read the blog written by C. C Rouse, 0:13:16.360 --> 0:13:19.679 the chair of the c A, talks about Actually the 0:13:19.760 --> 0:13:22.360 likehood is that the wage data really a messed up 0:13:22.720 --> 0:13:25.120 and reality is very soon we're going to see negative 0:13:25.160 --> 0:13:28.000 wage growth. I've got two nice indicators for the UK 0:13:28.520 --> 0:13:31.440 how hard it is to understand wage growth. The official 0:13:31.559 --> 0:13:35.080 data came out this week on wage growth eight point 0:13:35.160 --> 0:13:38.400 four percent, but we've just had data this morning on 0:13:38.480 --> 0:13:42.319 the size of wage settlements too, um and so what 0:13:42.480 --> 0:13:45.760 you have are these base effects and composition effects. It's 0:13:45.840 --> 0:13:49.520 very hard to understand what's going on. But in wage terms, 0:13:49.600 --> 0:13:52.959 we've seen the bottom of the wage distribution dropout, and 0:13:53.120 --> 0:13:56.679 so we're comparing to a weird thing from a year ago. Um. 0:13:56.800 --> 0:14:00.439 And so I think the evidence is actually that, um, yeah, 0:14:00.480 --> 0:14:02.520 there are going to be some bottlenecks, but that's not 0:14:02.720 --> 0:14:05.920 something you want to respond to instantly. That's sorry. I 0:14:06.360 --> 0:14:09.599 think that the wage pressure we will see, but I 0:14:09.720 --> 0:14:11.720 think a lot of it is you know the world 0:14:11.840 --> 0:14:15.440 is changing a bit. How many more Jata points would 0:14:15.480 --> 0:14:20.800 it take for you to see three four? Um? I 0:14:20.880 --> 0:14:26.240 don't know. I want to see evidence that significant bottlenecks 0:14:26.280 --> 0:14:29.320 are occurring, and I don't see that in the data. 0:14:29.560 --> 0:14:31.280 I'm not gonna I'm not gonna say three or four. 0:14:31.320 --> 0:14:33.440 I would want to see sustained evidence. But I think 0:14:33.480 --> 0:14:36.520 the wage settlement evidence is pretty good two percent, saying 0:14:36.520 --> 0:14:38.720 as it's been for the last decade, it's been two 0:14:38.840 --> 0:14:42.600 to to two. Yes, there are temporary bottlenecks, but what 0:14:42.680 --> 0:14:45.920 should the central bank do to respond to a temporary bottle? 0:14:45.960 --> 0:14:48.600 I think of price changes. We saw a big rise 0:14:48.640 --> 0:14:51.720 in timber prices. Okay, people don't have to buy timber, 0:14:51.880 --> 0:14:54.120 and so the price of timber now is halved. So 0:14:54.720 --> 0:14:57.200 I think we'll we just have to watch an economy 0:14:57.560 --> 0:15:00.720 recovering from a shot we've never seen before. Danny, just 0:15:00.760 --> 0:15:03.080 to conclude things someone wrote into me just moments ago, 0:15:03.120 --> 0:15:05.040 and I think you'd agree with them. The only mistake 0:15:05.080 --> 0:15:08.120 has been to be too hawkish, never too davish. That's 0:15:08.160 --> 0:15:09.600 been true over the last ten years. Is that what 0:15:09.680 --> 0:15:12.720 you worry about now? I think that's right. I mean, 0:15:12.920 --> 0:15:16.480 I don't understand how is it an error to sit 0:15:16.600 --> 0:15:20.360 and wait and watch, just wait, don't, don't, don't do 0:15:20.480 --> 0:15:23.600 anything more than you're doing now and watches the economy 0:15:24.240 --> 0:15:27.480 resolves itself. Look look, look at the hawk ish folk 0:15:27.800 --> 0:15:30.760 who I've been on your programs with many times over 0:15:30.800 --> 0:15:33.360 the last decade, telling us inflation was going to take off, 0:15:33.440 --> 0:15:35.200 that's what it was gonna do. You had to raise breack. 0:15:35.440 --> 0:15:38.320 Oh that was nonsense. So I think that the error 0:15:38.400 --> 0:15:42.560 has always been in a recovery, you're tightened too quickly. 0:15:43.000 --> 0:15:46.280 There's enough really no error to be had in waiting 0:15:46.400 --> 0:15:48.760 and looking and seeing it. And I think that's what's 0:15:48.800 --> 0:15:50.000 going on. And we got to see in the UK. 0:15:50.400 --> 0:15:53.040 The potential is the government is going to withdraw the stimulus, 0:15:53.080 --> 0:15:56.080 perhaps in September in the in the US, these unemployment 0:15:56.120 --> 0:15:58.680 benefits are going to go, and then we'll see, we'll 0:15:58.680 --> 0:16:01.840 see what how the economy anounces back. But you know, 0:16:02.120 --> 0:16:06.080 we look, watch and don't make another big mistakes like 0:16:06.280 --> 0:16:08.600 George olds One did in the UK in two thousand ten. 0:16:09.160 --> 0:16:10.840 Need we need a round table, don't we with you? 0:16:10.920 --> 0:16:13.120 Andrew says we need to do that again? Oh no, 0:16:13.480 --> 0:16:18.880 we get days and friends now we are good friends. 0:16:18.920 --> 0:16:21.920 We both think brexit as a disaster. Let me go. 0:16:22.080 --> 0:16:24.480 You agree on He still wants to raise rates, of course, 0:16:24.560 --> 0:16:26.680 does he? Well, that's what I thought maybe that would 0:16:26.720 --> 0:16:29.600 be the optimal man table for a program. What's the 0:16:29.680 --> 0:16:36.160 discussion that you wanted forever and he wants higher rates. 0:16:36.240 --> 0:16:38.040 Danny's going to see it. It's going to hear from you, 0:16:38.200 --> 0:16:43.040 Danny Blanche for dam professor Again, I'm trying former bankingron 0:16:43.080 --> 0:16:51.760 a Monetary Policy Committee member. Let's turn to Luke UBSS 0:16:51.840 --> 0:16:55.200 and Management Asset Allocation strategist Mr Kawa, going to see 0:16:55.200 --> 0:16:59.240 you a good old friend, Luke. Central banks when they 0:16:59.360 --> 0:17:02.240 change type baby steps and the baby step that I 0:17:02.240 --> 0:17:04.560 think we're witnessing over the past week, both with the 0:17:04.680 --> 0:17:06.680 Fedom Reserve and now the Bank of England seems to 0:17:06.760 --> 0:17:09.840 be just reassessing the balance of risks around the outlook 0:17:09.880 --> 0:17:12.880 and also around the outlook for inflation. What's your take 0:17:12.960 --> 0:17:16.800 on that? Look? John, imagine if your your baby's first 0:17:16.880 --> 0:17:18.720 step wasn't a first step, if it was you know, 0:17:18.960 --> 0:17:21.920 a whole vaulter, a high jump. That's that's the shock 0:17:22.040 --> 0:17:23.879 kind of the market had to deal with, even though 0:17:23.920 --> 0:17:25.960 we're talking about things that were only out you know, 0:17:26.040 --> 0:17:29.359 ine and do require a lot of of progress to 0:17:29.400 --> 0:17:32.240 be sustained and to be actually realized. So kind of 0:17:32.320 --> 0:17:35.040 looking at the FED and digesting how that might hit 0:17:35.119 --> 0:17:37.800 cross asset action. What we're thinking about is kind of 0:17:38.119 --> 0:17:41.520 the two reasons why German Powell said that the dots 0:17:41.640 --> 0:17:44.600 did move up. One reason is that you know economic 0:17:44.680 --> 0:17:48.200 activity is coming in, so there's more confidence within the 0:17:48.280 --> 0:17:51.160 FED that the baseline outlook that they achieved and marked 0:17:51.200 --> 0:17:53.440 that they outline of March is going to be achieved. 0:17:53.760 --> 0:17:56.800 So on the one hand, this suggests that continued inline 0:17:56.920 --> 0:17:59.040 data is going to be a force of pressure that 0:17:59.119 --> 0:18:02.040 continues to pull orward dots. And if you're trading short 0:18:02.119 --> 0:18:04.119 term interest rates, all you have to do is be 0:18:04.200 --> 0:18:07.040 more confident than the FED that that economic outlook is 0:18:07.080 --> 0:18:08.960 going to be achieved. You can kind of continue to 0:18:09.000 --> 0:18:12.200 push the timeline on that front. On the other hand, 0:18:12.400 --> 0:18:14.600 it's clear that the the inflation risk, the balance of 0:18:14.640 --> 0:18:18.320 inflation risk that jumping too and that thirteen beneficials thinking 0:18:18.400 --> 0:18:20.960 that the either risk to UH to a core PC 0:18:21.119 --> 0:18:24.400 are tilted to the upside. That also influences the forecast, 0:18:24.480 --> 0:18:27.159 the balance of risks, and when they think tightening might 0:18:27.280 --> 0:18:29.680 be warranted. So on the other hand, you have what 0:18:29.840 --> 0:18:32.359 we would expect to see over time, is that the 0:18:32.440 --> 0:18:35.960 ebbing of these inflationary pressures and upside risk just as 0:18:36.040 --> 0:18:39.440 these these do turn to be less persistent, to avoid 0:18:39.560 --> 0:18:42.760 using the T word, inflationary forces. So kind of putting 0:18:42.840 --> 0:18:45.159 this together, I think what you would expect coming out 0:18:45.200 --> 0:18:47.040 of the f l NCY, and this is something we've 0:18:47.119 --> 0:18:50.119 adjusted to take account of, is that that real yields 0:18:50.200 --> 0:18:53.480 break even trade off has moved more into the real 0:18:53.600 --> 0:18:56.879 yield side of it, driving moves in the tenure that 0:18:57.040 --> 0:18:59.000 of course is going to also have an effect on 0:18:59.080 --> 0:19:03.320 the dollar. So it's about seeing less widespread dollar weakness 0:19:03.600 --> 0:19:07.080 and the scope for that deteriorating on the margin. What 0:19:07.240 --> 0:19:09.480 I will say is encouraging to say from a risk 0:19:09.600 --> 0:19:12.480 perspective is that even as we've had you know, a 0:19:12.720 --> 0:19:15.160 broad dollar rebound in the wake of the f o MC, 0:19:15.600 --> 0:19:18.800 it's rallying more against the d X Y components than 0:19:18.880 --> 0:19:20.840 it is against the m f X components. So this 0:19:20.920 --> 0:19:23.399 suggests this isn't about a kind of a dumping of 0:19:23.600 --> 0:19:26.359 risk currencies so to speak, or a less positive view 0:19:26.440 --> 0:19:29.200 on risk. It's just a reevaluation suation of the FED 0:19:29.440 --> 0:19:31.280 real yields and what that means at the front end. 0:19:31.400 --> 0:19:33.480 So Luke, the more we hear the two are in transitory. 0:19:33.760 --> 0:19:36.320 The more people buy risk assets, exactly as you said, 0:19:36.359 --> 0:19:39.720 they're going further into a risk in order to get returns. 0:19:39.720 --> 0:19:42.000 There is a question at what point the Federal Reserve, 0:19:42.040 --> 0:19:43.919 the Bank of England, other central banks starts to take 0:19:43.960 --> 0:19:47.520 action just to curtail some of the moves that we've seen. 0:19:47.600 --> 0:19:50.119 And I'm thinking of the mortgage market in particular to 0:19:50.320 --> 0:19:53.600 Tailor's point earlier, this question of the composition of which 0:19:53.960 --> 0:19:57.160 assets the FED may pair back on its purchases. How 0:19:57.320 --> 0:19:59.600 much are you looking to the mortgage market to feel 0:19:59.680 --> 0:20:02.720 some from that as people start to question the elevated 0:20:02.760 --> 0:20:06.879 housing prices. Well, I think the main reason why the 0:20:07.240 --> 0:20:09.280 FED at this point is still purchasing in both asset 0:20:09.359 --> 0:20:12.280 classes because it knows, as we know, that by purchasing mbs, 0:20:12.359 --> 0:20:14.760 it's it's sucking treasury fall out of the market. And 0:20:15.160 --> 0:20:16.960 you know what one of the Fed's goals is to, 0:20:17.200 --> 0:20:20.520 you know, use asset purchases to a certain extent, to 0:20:20.720 --> 0:20:24.639