Speaker 1: This is a special edition of Bloomberg Surveillance. In your
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Speaker 2: Perfect guest for reaction to this speech as Mohammad al
Speaker 2: Aaron of Bloomberg Opinion and Queen's College, cambridgemammed. Thanks for
Speaker 2: being with us and being through with us through that
Speaker 2: speech as well. What were your thoughts when you heard
Speaker 2: some of those words from Chairman Power just moments ago.
Speaker 3: I had three takeaways. John, First, it's a speech that
Speaker 3: said very little that is new.
Speaker 2: He repeated what he.
Speaker 3: Has said in the past, and he has retained maximum
Speaker 3: policy optionality. Second, he reminded us that with the exception
Speaker 3: of the inflation target, which he said is two percent
Speaker 3: and will remain two percent, everything else is uncertain. And
Speaker 3: his reference to our star in particular was very interesting.
Speaker 3: And third, what I thought was also curious is how
Speaker 3: he ended the speech. He ended the speech talking about
Speaker 3: we will follow the stars in a cloudy sky. Everybody
Speaker 3: sees the cloudy sky, But what's interesting is that the
Speaker 3: west of Jackson Hall will be about moving stars. All
Speaker 3: the structural changes that are going on domestically and internationally,
Speaker 3: and that just adds to the topic that the three
Speaker 3: of you have been talking. That is a very complex
Speaker 3: world out there, and the FED has to navigate a
Speaker 3: lot of moving pieces.
Speaker 2: Mohammed. One conversation you and I have had over the
Speaker 2: last several weeks, the last several months for that matter,
Speaker 2: people having this discussion here as well, are we, from
Speaker 2: your standpoint, in your opinion, sufficiently restrictive?
Speaker 3: John. This goes immediately to what is the right inflation target?
Speaker 3: If the right inflation target is two percent and they
Speaker 3: want to get there in a credible period of time,
Speaker 3: then we are not sufficiently restrictive. If the right inflation target,
Speaker 3: as you've heard many people say, including Adam Posen today,
Speaker 3: is above two percent, giving all the structural changes, and
Speaker 3: the way we're going to get there is not by
Speaker 3: announcing the new target, but by following a shadow target,
Speaker 3: and then once we see it stable at adopting it.
Speaker 3: I think that's the most likely outcome, by the way,
Speaker 3: then we are sufficiently restrictive.
Speaker 4: Mohammed, Does it concern you that we've heard a lot
Speaker 4: of people who sound pretty happy, actually, other than Jay Powell,
Speaker 4: who is taking sort of the adult tone of we're
Speaker 4: not there yet, Stop declaring victory. There's a lot more
Speaker 4: down the pike, everybody else sounds like things are going
Speaker 4: really well and the FED policy is achieving exactly what.
Speaker 2: It saw to.
Speaker 3: So I don't think it's everybody else, but most people are,
Speaker 3: especially in the marketplace, not so the economists. You have
Speaker 3: Larry Summers, for example, reminding us this morning that if
Speaker 3: you look at the seventies inflation cycle, this one looks
Speaker 3: very similar. He has to do graphs up and he's
Speaker 3: sort of warning implicitly that we may see a pickup
Speaker 3: in inflation. So I think the marketplace is much more
Speaker 3: complacent than the economists saw. The economists recognize that the
Speaker 3: many moving pieces, whereas the marketplace things that we've gotten
Speaker 3: to a new equilibrium and from here is going to
Speaker 3: be cut next year remains to be seen.
Speaker 4: Do you think, Muhammad, that it's important for the Fed
Speaker 4: to get ahead of a potential resurgence in inflation, or
Speaker 4: do you think that Jay Powell's approach of watching the
Speaker 4: stars and seeing what they are will be sufficient to
Speaker 4: curtail some sort of more embedded inflation.
Speaker 3: It's hard, Lisa, because as you know, they have not,
Speaker 3: like past Feds, opted for a strategic view of inflation,
Speaker 3: nor do they have a functional monetary policy framework. So
Speaker 3: they've become highly data dependent, which means that they are
Speaker 3: using instruments with lags on backward looking data. So they
Speaker 3: are in a bit of a tough situation. They're going
Speaker 3: to remain data dependent. So I don't think he knows
Speaker 3: what they will do in September. He's going to wait
Speaker 3: to see what the drop report is. He's going to
Speaker 3: wait for the CPI numbers, and then they're going to
Speaker 3: decide what to do. But this is the irony is
Speaker 3: it's a highly dependent data and then fed using instruments
Speaker 3: that act with a lag.
Speaker 2: Plenty of feedback, Tom, This coming from No Data of
Speaker 2: renmactis church and please send the following. I thought Pow
Speaker 2: delivered a neutral speech. The Fed seas its monetary policy
Speaker 2: stance is restrictive, and we'll make a more tempered approach
Speaker 2: to future meetings. Proceed carefully, risk management. These are all
Speaker 2: catchphrases for do nothing right now. The view from No
Speaker 2: Data just Manasa guy.
Speaker 1: A lot more response coming in here. Mixed market, red
Speaker 1: and green on the screen, Doctor Orion. I want to
Speaker 1: touch upon your iconic work and game theory, and that
Speaker 1: with the word that I'm hearing this morning is complexity.
Speaker 1: I heard it from you, I heard it from John
Speaker 1: Lipsky and others. The simplicity we're all begging for is
Speaker 1: teed decisions.
Speaker 5: You are known for.
Speaker 1: This This is a Jackson Hall devoid of teed decisions.
Speaker 1: How do our viewers and listeners handle the complexity? Now?
Speaker 3: And to come, Tom, I think the most important thing
Speaker 3: to understand is that we have left the world of
Speaker 3: insufficient demand and we are now in a world of
Speaker 3: insufficient supply, and there's many reasons for that. It's a
Speaker 3: world that's not going to go away anytime soon. It's
Speaker 3: not pandemic issues that are fully reversible quickly. There are
Speaker 3: longer term issues going on change, globalization, supply change management,
Speaker 3: the functioning of the labor market, and the list goes on.
Speaker 3: So we are now in a different world of supply
Speaker 3: side constraints, and that world will mean that countries will
Speaker 3: become more inwardly looking, which we've seen already, and it
Speaker 3: also means that policy has to adjust to that. Now
Speaker 3: put on top of that the layer of industrial policy
Speaker 3: as we embark more meaningfully on a green transition, And
Speaker 3: it's all about the supply side, tom and that's where
Speaker 3: monetary policy is really challenged, because it acts on the
Speaker 3: demand side.
Speaker 1: We're thrilled, Mohaman to have doctor Gerghavin with us, and
Speaker 1: then you and Christian Laguard with us later. And the
Speaker 1: heart of the matter is, are we beyond the supply
Speaker 1: shocks of this pandemic? Where are we on that Continueum Muhammad?
Speaker 1: Have we escaped COVID?
Speaker 3: I mean, we've escaped the worst of COVID, but we're
Speaker 3: dealing with the legacy of COVID, but we're also dealing
Speaker 3: with the legacy of the war. We're also dealing with
Speaker 3: many other legacies. You know, Tom is fascinating that you
Speaker 3: will have President Lagard on because if you think the
Speaker 3: US is complicated, then in terms of degrees of complexity,
Speaker 3: Europe is even higher. The UK is even higher than that.
Speaker 3: So it's going to be really interesting to talk as
Speaker 3: you will do to President Laguard because even though she
Speaker 3: has a single mandate, her environment is significantly more complicated
Speaker 3: than the FEDS, which is already complicated.
Speaker 2: So Mohammed, she is so much more exposed. Europe is
Speaker 2: much more exposed to what's developing in China at the moment, Muhammed,
Speaker 2: if you took the US out of the equation right now,
Speaker 2: and we've been talking just about Europe and China, wouldn't
Speaker 2: we be talking about things like rate cuts and easing
Speaker 2: and stimulating the economy.
Speaker 3: If you take the US out of the equation, you
Speaker 3: would be talking about stagflation, and that's what everybody is
Speaker 3: afraid of. The US is exceptional, and it's exceptional in
Speaker 3: its economic performance, and if you take the US away,
Speaker 3: then you're taking away the only engine of growth for
Speaker 3: this global economy. But you're not taking away to supply
Speaker 3: side issues that are causing the inflationary pressure. So if
Speaker 3: you take the US away, we would be talking about
Speaker 3: not just the risk of stackflation in Europe, but you
Speaker 3: would be talking about the risk of stackflation in the
Speaker 3: global economy.
Speaker 2: Muhammed, is that the risk or the reality in Europe
Speaker 2: right now?
Speaker 3: John, is still the risk?
Speaker 2: You know?
Speaker 3: Yes, Germany is struggling the most, and that is if
Speaker 3: you like the engine for Europe, but there's also good
Speaker 3: things happening in Europe. Away from Germany. It's a high risk.
Speaker 3: It's flashing WED, not even yellow, it's flashing WED. But
Speaker 3: it's not yet a done deal. The US is much
Speaker 3: better off. China, ironically, is the one that's suffering the most.
Speaker 3: If you've been discussing all morning, there is no obvious
Speaker 3: policy response. And now these piecemeala responses are being rejected
Speaker 3: by the marketplace really quickly. The marketplace is no longer
Speaker 3: embracing the notion that China can get itself out of
Speaker 3: the mess is finds itself in.
Speaker 4: And that's perhaps the cause of the manufacturing recession that
Speaker 4: we see in Germany and parts of Europe, but the
Speaker 4: service aside, we've been talking about how that's maybe more
Speaker 4: directly affected by the ECB's policies and where rates are
Speaker 4: and the more direct transmission mechanism than in the US. J.
Speaker 4: Powell just said that there is evidence that the long
Speaker 4: and variable lags are coming to the fore and will
Speaker 4: actually reduce growth materially in the US. Is Europe a
Speaker 4: model for the US is headed with respect to services
Speaker 4: in the next couple of months or in the next year.
Speaker 2: I hope not, Lisa.
Speaker 3: Our service sector has been stronger, and even though the
Speaker 3: PMI numbers this week were disappointing, at least there were
Speaker 3: over fifty for the service sector. We don't want pmis
Speaker 3: south of sixty or fifty. And also, ironically, the service
Speaker 3: sector is where Europe just to staflation as well. It's
Speaker 3: not the goods sector, it's a service sector that's the
Speaker 3: inflation problem, source of an inflation problem. So I hope
Speaker 3: we don't follow Europe, because if we do, then we
Speaker 3: will be talking about a very different outlook for the US.
Speaker 4: We're silso talking about the potential for some sort of
Speaker 4: weakness down the pike.
Speaker 5: One thing that J.
Speaker 4: Powell speech did we seem to remove rate cuts in
Speaker 4: the near future, at least for the foreseeable future, and
Speaker 4: you can see that shifting upward in the rate expectations.
Speaker 4: Do you think that this economy can hand a five
Speaker 4: percent fed funds rate for the remainder of next year,
Speaker 4: even with all the strength that you're hearing about.
Speaker 3: Lisa, We don't know. And he did use the word agile,
Speaker 3: and that's absolutely correct. He's got to be agile. Look,
Speaker 3: there are all sorts of sectors that adjust.
Speaker 2: With a lag.
Speaker 3: We haven't seen the full impact yet of the higher rates.
Speaker 3: You're starting to see it play out in various segments,
Speaker 3: but in a very small way. Remember, not everything that's
Speaker 3: refinanced immediately. This is very unlike the UK economy, where
Speaker 3: the effective duration is much shorter, so you get refinancing
Speaker 3: quickly and the weights happen, the great effects happen much quicker.
Speaker 3: So we don't know how well we can navigate the
Speaker 3: five percent. It seems that the big issues in the
Speaker 3: banking sector are behind us, but so far, and it's
Speaker 3: really important to stress this, we've dealt only with interest
Speaker 3: rate risk. We have not dealt with credit risk. We
Speaker 3: have not dealt with liquidity risk, and that's what people
Speaker 3: in the marketplace have to keep an eye on.
Speaker 2: Stuart Kaiser, a city publishing just moments ago, give you
Speaker 2: a flavor of what's happening on the south side. Not
Speaker 2: a game changer for markets from Chair Power, but remind
Speaker 2: us on upside risk to inflation, that demand downside risks
Speaker 2: to growth. Mohammedel Airan still with us, Mohammed, I just
Speaker 2: want to finish on that with you. The downside risk
Speaker 2: to growth to counter the upside risk to inflation. Is
Speaker 2: that something we all need to be cautious of, gone
Speaker 2: into year round and beyond.
Speaker 3: Yes, and that's why Chair Pal had a speech full
Speaker 3: of optionality. You know, I go back to what Mike
Speaker 3: McKee correctly said. It's not that the content was new.
Speaker 3: It wasn't. There was nothing in that speech that we
Speaker 3: didn't know before. Whether it was explaining what has been
Speaker 3: behind inflation, or whether it was explaining the range of
Speaker 3: policy possibilities and the risks and the need for risk management.
Speaker 2: All that has been said before.
Speaker 3: What was notable this time is that it was packaged
Speaker 3: slightly more hawkish than than dubvish, and that's what people
Speaker 3: are picking up on. But ultimately, John, if we step back,
Speaker 3: the only thing he said is that what we know
Speaker 3: for sure is his belief is that two percent is
Speaker 3: the right inflation target and will remain the right inflation target.
Speaker 3: That issue is going to be hotly discussed in the
Speaker 3: next quarters as we get more and more data.
Speaker 2: Yeah, Muhammed, and I think that device is gon and
Speaker 2: go away anytime soon, even if you havevin power tries
Speaker 2: to put it to bad. Mhammed, thanks for being with
Speaker 2: us today. I appreciate it as always Mohammed al Arion.
Speaker 1: It will be analysis and interpretation owning the high ground
Speaker 1: on that is Joseph Wisenthal and Tracy Alloway. They host
Speaker 1: a podcast odd Lot's. Alloway had to redo her fireplace
Speaker 1: mantle because.
Speaker 2: The awards have come in outright so large.
Speaker 1: Yeah, they're piling up. I mean Wisenthal already had a
Speaker 1: mantle that it holds three Interpax City joining us. Tracy
Speaker 1: Alloway from Weisenthal would not get out of bed this
Speaker 1: early this morning. What I love about your work back
Speaker 1: at the f ten years ago is you own a
Speaker 1: perspective of London and New York and synthesizing the Western
Speaker 1: world China and an exceptional Japan with you waita in
Speaker 1: attendance here in this YCC disaster. Just had to listen
Speaker 1: to his hawkish one. How does Asia interpret what we
Speaker 1: heard this morning?
Speaker 6: Well, I'm kind of confused at some of the bond
Speaker 6: market action that we've seen, so two year yields going
Speaker 6: above five percent hawkish interpretation.
Speaker 5: But I'm on the Neil.
Speaker 6: Dudda side here, which is this was a very dubvish speech. Actually,
Speaker 6: Powell sort of gave a nod to the r star debate,
Speaker 6: the idea about whether or not the neutral rate of
Speaker 6: interest is structurally higher in current world. But then in
Speaker 6: the next sentence he basically goes, but we have no
Speaker 6: idea what our star is anyway, so it's completely irrelevant.
Speaker 5: And they're talking about being at restricted.
Speaker 1: It's not a small matter, John, Yeah, that's not a
Speaker 1: small matter. This has come up a couple times today.
Speaker 1: The guy from New York City, you know, the private
Speaker 1: equity guy, whatever Paul is, he's not too big on
Speaker 1: the plugins of our stir.
Speaker 2: The tracy something you've discussed. This probably shouldn't come as
Speaker 2: a surprise, should it.
Speaker 5: I don't think so.
Speaker 6: To me, it very much resembles what we saw last
Speaker 6: month from Powell. It's very much a data dependent speech,
Speaker 6: which makes sense because you have two major data points
Speaker 6: coming up before the next FED decision. Why would Powell
Speaker 6: stick his neck out at this particular moment in time?
Speaker 6: And of course there is a lot of uncertainty about
Speaker 6: those long and variable lags, as.
Speaker 5: You were talking about, Lisa, Well, this is a problem
Speaker 5: right now for j.
Speaker 4: Powell because he wants to bring things down, but he
Speaker 4: doesn't want to curtail tynamism too much. Do you think
Speaker 4: that it seems fair to view his speech as saying
Speaker 4: that rate cuts are not in the cards for a
Speaker 4: longer period of time time next year, because that's maybe
Speaker 4: what he wanted to say in the implicit sort of tone,
Speaker 4: but not what he actually said.
Speaker 6: I think he'd have to see a real deterioration in
Speaker 6: the underlying data to justify a rate cut, and that's
Speaker 6: just not happening. We have a lot of sort of
Speaker 6: anecdotal data points about maybe consumer spending is starting to weaken,
Speaker 6: but we haven't seen any of that in the unemployment
Speaker 6: rate right now. That said, I know the tone of
Speaker 6: this particular Jackson hole is very different to last year
Speaker 6: where Palell was talking about how we'd have to assume
Speaker 6: more pain in order to bring down inflation. But that said,
Speaker 6: it's still a really uncomfortable moment for central bankers because
Speaker 6: inflation is coming down in a way that they didn't
Speaker 6: necessarily expect.
Speaker 2: Right.
Speaker 6: The Phillips curve says that if inflation's coming down, the
Speaker 6: unemployment rate should be going up, but that hasn't been
Speaker 6: what's happening.
Speaker 5: So there's still a ton of uncertainty here.
Speaker 4: This is essentially, while it is a global central banker
Speaker 4: is coming together, it's also essentially an academic conference and
Speaker 4: you're here with Odds to speak to some of the
Speaker 4: academic research. What are you hoping to illuminate in this
Speaker 4: whole shifting global structure?
Speaker 5: That was sort of the theme. Yeah, that's exactly right.
Speaker 6: So I know that the focus is always going to
Speaker 6: be on the sort of short term outlook for interest rates,
Speaker 6: but really Jackson Hole is about the long term framework
Speaker 6: of monetary policy.
Speaker 5: And one of the big themes that is starting to.
Speaker 6: Emerge is this idea of higher public debt and we've
Speaker 6: seen that born out in the Fitch rating cut. Recently,
Speaker 6: bond yields higher because of some concerns over the outlook
Speaker 6: for US fiscal health. And again, the unusual thing about
Speaker 6: this moment in time is that we are seeing massive
Speaker 6: fiscal spending.
Speaker 5: At a time of low unemployment. That hasn't really happened before.
Speaker 6: And so I think there are a lot of people
Speaker 6: at this conference who are wrestling with that idea.
Speaker 5: In that dynamic, you and.
Speaker 1: Joe wis loove Rockstar hours. You're just sort of windering,
Speaker 1: and you do your podcast, and you do it by
Speaker 1: piecing together conversations where Bloomberg surveillance is complete and total
Speaker 1: chaos twenty four. What's the conversation here you're most looking
Speaker 1: for into your next podcast?
Speaker 6: Thank you for assuming that all thoughts isn't constant chaos
Speaker 6: as well. Tom, Well, we're having you on later today.
Speaker 2: Count please all.
Speaker 1: Right, it's a conversation you want right now at Jackson Hole.
Speaker 6: Okay, the big picture goes back to that bond outlook.
Speaker 6: What does a world of structurally higher debt look like?
Speaker 6: Does it necessitate higher interest rates? And what new financial
Speaker 6: risks does it introduce into the system. So we basically
Speaker 6: moved from a system that was very much reliant on
Speaker 6: bank lending to one that is far more bond based.
Speaker 6: And how do you square a world where bonds really
Speaker 6: really matter with central bank mandates to bring down inflation.
Speaker 5: There's a tension there.
Speaker 6: You can't build the financial system on bonds and assume
Speaker 6: that they're going to be very low volatility and then
Speaker 6: try to bring down inflation and have higher rates.
Speaker 2: Tricy, this was great. Good to have you here. Thank you,
Speaker 2: thank you having Thank you very much, Tricy Anaway the
Speaker 2: host the co host of the Odlots podcast. Joining us
Speaker 2: is Patrick Kaker, the Philadelphia FED President, Patrick good Mornick,
Speaker 2: Let's start right here, not what Chairman Pal said, but
Speaker 2: what your colleague over at the Boston Fed said in
Speaker 2: the last twenty four hours, that this resilience of this
Speaker 2: economy suggests maybe we might have to do more. You
Speaker 2: take a different view.
Speaker 7: Why so, Look, we have to get inflation down to
Speaker 7: two percent. We all agree on that, I mean everybody is.
Speaker 7: We're all committed to that. The question is how to
Speaker 7: get there. We are at a restrictive stance in my view,
Speaker 7: and we're putting pressure on the economy to slow inflation.
Speaker 7: The question is whether we need to increase the pressure,
Speaker 7: just keep pushing pushing, pushing, and I'm in the camp
Speaker 7: right now. Just keep the pressure going, let this work
Speaker 7: through again. The data may dictate that we change course
Speaker 7: or I change course, But for right now, what I'm
Speaker 7: seeing and what I'm hearing, particularly soft data. What I'm
Speaker 7: hearing I've been around my district all summer talking to people,
Speaker 7: is the clea I hear is you've done a lot
Speaker 7: very quickly. Right, You've taken a lot of pressure quickly.
Speaker 7: Now let us work through that, Let the banking system
Speaker 7: work through it, let the corporations work through that. So
Speaker 7: that I agree with that, I think we just keep
Speaker 7: the pressure on and see how things turn out. J.
Speaker 8: Paul didn't really say anything new, but he did sort
Speaker 8: of cast it in a hawkish light, and he talked
Speaker 8: about how the economy is perhaps growing faster than anticipated
Speaker 8: and that could increase inflationary pressures. So what would it
Speaker 8: take to get you to change your view and think
Speaker 8: we need to raise rates more.
Speaker 7: If we saw that the decreases in inflation, we're stalling right,
Speaker 7: that we weren't making that progress that we need to make.
Speaker 8: But what would that How would that manifest itself? Because
Speaker 8: people who calculate CPI the analysts suggest we're going to
Speaker 8: see it go back up, just essentially for mechanical.
Speaker 7: Reasons on the headline side, Yeah, for sure, But we
Speaker 7: also were going to see shelter inflation come down, right
Speaker 7: that it's coming down now. You see this with real
Speaker 7: time rents. So if service inflation in particular, or core
Speaker 7: service inflation, whatever you want to call it, supercore, if
Speaker 7: that continues to stall, then I'd say we have to
Speaker 7: do more. But again, I really want to emphasize we
Speaker 7: are doing something right now. It's not as though keeping
Speaker 7: rates where they are is doing nothing. We're actually continuing
Speaker 7: to put pressure on the economy.
Speaker 4: You said, and Jay Powell just said that it was
Speaker 4: important to get inflation back down to two percent.
Speaker 5: That was unequivocal.
Speaker 4: Does it matter when I mean right now you can
Speaker 4: see in the dots that it's not until after twenty
Speaker 4: twenty five. If it takes till twenty thirty, does it matter?
Speaker 7: Oh yeah, twenty thirty is a long way off twenty six.
Speaker 7: They set under four this year, under three next year,
Speaker 7: and then get to two in twenty twenty five. So yeah,
Speaker 7: it's going to take some time. But what really matters
Speaker 7: what I hear all the time. Is not just the headline,
Speaker 7: not just supercore, but think about the essentials of life,
Speaker 7: the things that people really need, shelter, food, transportation, energy.
Speaker 7: As long as they're moving in the right direction, Americans
Speaker 7: are better off, and we need to be committed to that.
Speaker 2: You clearly think we're sufficiently restrictive. Other people think we don't.
Speaker 2: So let's go through that point. Unemployment is still three
Speaker 2: point five percent. Growth this quarter could come in at
Speaker 2: about three percent. What is the evidence that we're sufficiently restrictive?
Speaker 2: What can you actually point to beyond the soft day?
Speaker 2: So let's talk about the real hard data.
Speaker 7: Starting to stoppen. We are hearing story after story I'm hearing.
Speaker 2: And you think that's connected to where interest rates are
Speaker 2: right now?
Speaker 7: Yeah, markets, labor markets are definitely easing up. We're hearing
Speaker 7: this over and over again. It's easier to get employees.
Speaker 7: And the retail numbers I'm a little suspicious of because
Speaker 7: what we're hearing, for example, from a major supplier to
Speaker 7: the back of the school market is sales are not
Speaker 7: what they expected. So we are starting to see these
Speaker 7: early signs, but they're early, right, and so I don't
Speaker 7: think we need to react either way right now, just
Speaker 7: let us ride a little bit. Let it let's just
Speaker 7: keep putting the pressure on it.
Speaker 8: Well, if you keep the pressure on, but even don't
Speaker 8: raise rates, how long do you need to keep the
Speaker 8: pressure on. When would you see moving away from the peak?
Speaker 7: Clearly not until next year at the earliest. And when
Speaker 7: next year again, the data will have to dictate that.
Speaker 8: Well. There is a question about if inflation keeps coming down,
Speaker 8: real rates continue to rise and put additional pressure on
Speaker 8: the economy, would you see the FED recalibrate its peak
Speaker 8: rate to keep the pressure steady as opposed to letting
Speaker 8: it grow. I realized this is a fine point for
Speaker 8: the market area. And if you get the wrong if
Speaker 8: you say this the wrong way, they're all going to
Speaker 8: start pricing your rate cuts.
Speaker 7: It's possible, right but at this point, we really need
Speaker 7: to see inflation moving down, and they're saying the early
Speaker 7: signs of that again, and I'm getting story after story
Speaker 7: from all our contacts that it is starting to happen.
Speaker 7: But I want to keep rates where they are right now,
Speaker 7: and then we'll decide later what we do.
Speaker 8: What do you think is happening with labor market wages
Speaker 8: at this point, because that was the concern, especially with
Speaker 8: Jpal's non housing services. These guys were talking about the
Speaker 8: United Autoworkers negotiations going on. Have we broken the back
Speaker 8: of rising wages rising at a too fast a pace?
Speaker 7: Too early to tell right now, but it does seem
Speaker 7: like what I'm hearing from all our contacts is that
Speaker 7: it is starting to ease, right I mean, we're not
Speaker 7: where we were where midyear increases, they're there. Nobody's considering that.
Speaker 7: So we are starting to see some easy particularly in
Speaker 7: the service area, hotels, restaurants, and so forth. We are
Speaker 7: starting to see it getting a little easier to get
Speaker 7: the table at the restaurant. And you know, and one
Speaker 7: of the things that I think about, one of the
Speaker 7: potential risks is that when student loan payments come back in.
Speaker 7: I don't think it's a big economic issue. I mean
Speaker 7: when you run the numbers, but it's a psychological issue here.
Speaker 7: I've not gotten that three four, five hundred dollars bill.
Speaker 7: Now I get it. And so I've been talked to
Speaker 7: a lot of people of that generation wher saying, yeah,
Speaker 7: you know, I may have to back off some of
Speaker 7: my spending.
Speaker 5: Well, but this goes to this question.
Speaker 4: Of Okay, well, the savings are going to get borne
Speaker 4: down and then we're going to start to see the
Speaker 4: real economy expose itself.
Speaker 5: Right, A lot of people have questioned that.
Speaker 4: But I am wondering, what kind of neutral rate, what
Speaker 4: kind of you know, sort of longer term expectation for
Speaker 4: the FED do you expect in the new normal?
Speaker 5: What does it look like?
Speaker 7: Yeah, so we don't know for sure, right, let's start there.
Speaker 7: We don't know exactly what that new normal looks like.
Speaker 7: But one of the things I think about is what's
Speaker 7: fundamentally shifted in the economy between before the pandemic and now,
Speaker 7: remember before the pandemic hard to remember for all of this, right,
Speaker 7: given what we've been through, but we had low interest rates,
Speaker 7: low unemployment, and low inflation. What's fundamentally shifted? There have
Speaker 7: been a lot of things. Supply We're going to talk
Speaker 7: about this in this meeting. There's supply chain issues that
Speaker 7: are shifting and being re engineered. But fundamentally, I think
Speaker 7: it's plausible that we can get back to that. No,
Speaker 7: I'm not predicting that right now, but it is plausible.
Speaker 7: So I think we have to realize that we lived
Speaker 7: in that world. We've proven that that can happen, and
Speaker 7: so could it happen again?
Speaker 2: Yes, it sounds like a base case when I listened
Speaker 2: to you, is that case?
Speaker 1: I don't know.
Speaker 7: I mean, at this point, I'm not quite sure. But
Speaker 7: clearly we're going to get we think, and we'll get
Speaker 7: back to trend growth in a couple of years. We'll
Speaker 7: get inflation under control in a couple of years, and
Speaker 7: inflation and unemployment will tick up. But really in the
Speaker 7: fouri ish range, back to the neutral rate.
Speaker 2: You've offered example after example in the last eight minutes.
Speaker 2: It's highly anecdotal. Is the basebook now more important to
Speaker 2: us than us retailselves?
Speaker 7: When I step back and I think about myself, and
Speaker 7: I can only speak for myself. Right when we were
Speaker 7: going through the early part of the pandemic and we
Speaker 7: were saying that inflation was transitory, it was just used
Speaker 7: vehicles and so forth, what we're hearing, what I was
Speaker 7: hearing from my contacts was now it's more persistent. And
Speaker 7: I didn't factor that in. The mistake I made. If
Speaker 7: I made a mistake, was I didn't factor that. It's
Speaker 7: really soft data, that anecdotal data. But it's more than
Speaker 7: anecdotal data. It's what people are really feeling real time
Speaker 7: in the economy. Now we've done a lot of things
Speaker 7: like done real time pulse surveys and so forth to
Speaker 7: get ahead of that. Now, I don't want to make
Speaker 7: that same mistake twice. And so what I'm hearing right
Speaker 7: now from those same contacts is things seem to be
Speaker 7: slowing more than the data is showing. That could be wrong,
Speaker 7: and that's why we have to As chair Pal said,
Speaker 7: risk management is an important issue here. But if they're right,
Speaker 7: if that soft data is right, then I think it
Speaker 7: really then just solidifies my view that we stay putting
Speaker 7: pressure on not necessarily increasing right now to see how
Speaker 7: that all resolves itself.
Speaker 8: NERD question for our friends on the trading guests out there,
Speaker 8: especially the bond guys. The balance sheet has been coming down,
Speaker 8: but very slowly because of.
Speaker 2: The caps and the way that works.
Speaker 8: You haven't hit maximum reduction yet on a month by
Speaker 8: month basis, and at the same time we have seen
Speaker 8: financial conditions remain easier than you would expect. So the
Speaker 8: question is do you do more with the balance sheet
Speaker 8: because it has an effect on how tight the policy is.
Speaker 7: At this point, I don't see us changing course on
Speaker 7: how we're reducing the balance sheet. Again, circumstances could dictate
Speaker 7: something else, but for right now, I think we just
Speaker 7: stay the course, keep that on, as I've said or
Speaker 7: many times before, on autopilot, just let it run, and
Speaker 7: if we need to adjust policy, we adjust that. With
Speaker 7: the bed country.
Speaker 8: Well, there has been a question on the other side
Speaker 8: of how close you are to stopping balance sheet reduction
Speaker 8: when you reach the level of demand.
Speaker 7: Yeah, I don't think we're there yet, but we do
Speaker 7: clearly have to monitor that. If you go back to
Speaker 7: the last time we did this, we knew we were
Speaker 7: at that point where we needed to stop, and we
Speaker 7: saw the market indicators, the volatility in the markets. We've
Speaker 7: not seen that yet, but we could.
Speaker 4: We have seen real yields climb significantly. Today five year
Speaker 4: real yields, inflation for adjusted yields rose the highest levels
Speaker 4: going back to two thousand and eight. Are you watching
Speaker 4: that closely as an indication of the transmission mechanism at
Speaker 4: the balance sheet run off?
Speaker 5: Sure?
Speaker 7: Yeah, I mean that's one of many, and it's also
Speaker 7: just a simple trading and things like the phatas market
Speaker 7: and so forth. Not at this point. I mean, but
Speaker 7: it is clearly something we need to keep watching.
Speaker 2: Can I finish on this itty provocative? Have you destroyed
Speaker 2: the mortgage market in America for generation?
Speaker 7: I don't think so. I mean, well, it is clearly
Speaker 7: tough when you talk to bankers.
Speaker 2: Beyond tough people, Yeah, it's first.
Speaker 7: First time home buyer really really hard because there's no inventory.
Speaker 7: Even if they could they could afford mortgage, they can't
Speaker 7: find a home because people are locked into that low
Speaker 7: mortgage rate, you know, in their existing home. That's why
Speaker 7: I think we don't keep going with rigs right, so
Speaker 7: that we can stay steady and at some point as
Speaker 7: we reduce rates, we can bring those mortgage rates back down.
Speaker 7: There's no question that's an initiation.
Speaker 2: But we're not going back to two percent mortgages over
Speaker 2: thirty years, are we. So that inventory is offline maybe
Speaker 2: for a generation.
Speaker 8: Less.
Speaker 7: You're not there yet, yeah, because what we're hearing from
Speaker 7: some of the home builders is they keep selling, how
Speaker 7: they're having a.
Speaker 2: Great sign, having a great high. I've done that a
Speaker 2: huge favor. Yeah, we're talking about whether this housing market
Speaker 2: can really recover in the next several years given that
Speaker 2: this feels quite generational. This feels like a but there's a.
Speaker 7: Lot of inventory coming online I can tell you in
Speaker 7: Philadelphia and across many cities I know, but Philadelphia, for example,
Speaker 7: a lot of multifamilies coming online in the next few years.
Speaker 7: So we are increasing inventory.
Speaker 2: Patrick, it's good to see you as always. Thank you,
Speaker 2: sir Patrick Harker, the Philadelphia Fed President. Reaction there from
Speaker 2: inside the Federals following that space from Chairman Powell.
Speaker 1: What I'm going to do at Jackson Hall right now
Speaker 1: as we begin in the sunrise at this important Friday
Speaker 1: is taken a more international perspective. She is not here
Speaker 1: at Jackson Hall, but in heart and soul her institution,
Speaker 1: the International Monetary Fund, decisively is Kristallina Gorgiheva joins us,
Speaker 1: the Managing director of the IMF, offer a recent essay
Speaker 1: on what everyone's talking about, the fragmentation, the fracture of
Speaker 1: the global economy. Doctor Gorgihaeva, congratulations on the essay that
Speaker 1: you and your team put together for foreign affairs. You
Speaker 1: speak of fragmentation, How urgent is the need for solution
Speaker 1: right now?
Speaker 2: What needs to be done now to.
Speaker 1: Begin to a more stable global economy.
Speaker 9: It is urgent, and that sense of urgency is lacking.
Speaker 5: Tom. Why is it urgent?
Speaker 9: Because we have moved in a more shock front world,
Speaker 9: in a world of more uncertainty, and in this world
Speaker 9: we need each other even more than before, and yet
Speaker 9: cooperation is in a retreat.
Speaker 2: What does that mean?
Speaker 9: It means that unless we wake up and we act
Speaker 9: pragmatically in the areas where we can find common ground,
Speaker 9: and in the areas where we must find common ground,
Speaker 9: like the fight against climate change, we will drift into
Speaker 9: a world that is poorer and less secure. We have
Speaker 9: random numbers. Unless we wake up and we pursue this
Speaker 9: pragmatic collaboration, we are going to be losing about seven
Speaker 9: percent of global GDP in the long run. I mean
Speaker 9: that is like White transend and Germany from the economic
Speaker 9: map of the world.
Speaker 1: Because of time, doctor gargave. It's so important I get
Speaker 1: this in this morning. I want you to speak right
Speaker 1: now to the four major central bankers assembled here and
Speaker 1: Jackson Hall. The singular call this year is the five
Speaker 1: year caution of economic growth of your institution. You call
Speaker 1: it slobalization. How do those four central bankers assemble here
Speaker 1: get us out of slobalization.
Speaker 9: It is not going to be only the job of
Speaker 9: central bankers, but yes they play a role, and their
Speaker 9: role is to be very careful in assessing how data
Speaker 9: informs their actions. We're going to see tom after a
Speaker 9: period of convergence in monetary part see action tightening creates
Speaker 9: fighting inflation, some divergence because where the US economy is
Speaker 9: very resilient I was listening to the discussion just before me,
Speaker 9: the European economy is not. There is less strength in
Speaker 9: the performance over there. So central bankers will have to
Speaker 9: recognize that some specificity in how they approach the fight
Speaker 9: against inflation and how they link this to their role
Speaker 9: in supporting growth and employment. How they approach that is
Speaker 9: going to be a matter of thorough assessment of national data.
Speaker 9: Let me just make one point about the United States.
Speaker 9: What we see in the US is very strong demand
Speaker 9: for services, very good, but not good enough for the
Speaker 9: world economy because it doesn't trans into.
Speaker 5: Spillover for global growth.
Speaker 9: And this is why my main point is there would
Speaker 9: be some divergence in policy approaches across central banks.
Speaker 4: Crystallina is fragmentation inflationary, of course.
Speaker 9: It is why because so much, how much did you
Speaker 9: take you if you take the main impact of fragmentation
Speaker 9: through trade, what it translates into is pushing cost of
Speaker 9: production up on a global scale. How inflationary it could
Speaker 9: be depends, of course on how that specifically reflects into
Speaker 9: cost structures across national economies in the world economy. But
Speaker 9: the pressure on costs and then through that on standard
Speaker 9: of living ordinary people serve only comes when we fragment
Speaker 9: the world economy.
Speaker 2: Christin and I just want to squeeze this in. I've
Speaker 2: got about sixty seconds ninety seconds left on the clock.
Speaker 2: You've said the IMF needs more resources. Can you be
Speaker 2: a lot more specific about what that means, what do
Speaker 2: you need and where do you expect those resources to
Speaker 2: come from.
Speaker 9: Well, let's face reality, more shot from world means countries
Speaker 9: need to have more capacity to face these shocks. Today,
Speaker 9: global reserves are concentrated in a small number of strong,
Speaker 9: advanced and emerging market economists. Ten countries hold two thirds
Speaker 9: of global reserves and all the small medium sized countries
Speaker 9: hope less than one percent of global reserves. This is
Speaker 9: where the IMF comes in. We are the insurer for
Speaker 9: the uninsured. Today, our size one trillion dollars lending capacity
Speaker 9: is just not enough to be the against future shocks
Speaker 9: that we all anticipate are going to be happening. And
Speaker 9: also what we want to see is reliance on own resources.
Speaker 9: We are discussing with our membership to bring the quarter
Speaker 9: resources of the fund again above fifty percent of our
Speaker 9: funding level. Today they are at forty percent, So we
Speaker 9: are talking about a not a minor increase. But I
Speaker 9: think everybody understands that this is a provision of a
Speaker 9: global public good. If the IMF cannot hold financial stability
Speaker 9: in vulnerable countries, that is hurting not only those countries,
Speaker 9: it has negative skill over for the world economy.
Speaker 2: The IMF managing. All right, Christina, thank you. It's going
Speaker 2: to hear from you. Thank you.
Speaker 1: This is a wonderful moment now as we go to
Speaker 1: that speech because of central bankers gathered here and yes,
Speaker 1: US economics, but of course international economics, and they will
Speaker 1: listen more to Barry eichen Green of Berkeley than anyone here.
Speaker 1: He owns the high ground from Golden Fetters, his classic
Speaker 1: book on gold until what we see with globalizing capital,
Speaker 1: and now his intense focus on debt and the debt
Speaker 1: mess we're in. Doctor kan Green, Thank you so much
Speaker 1: for joining us. How bad is the debt mess we're in?
Speaker 10: Well, I think it's a big change from the pre
Speaker 10: COVID days. Governments are going to be constrained if and
Speaker 10: when we have a global recession, if and when a
Speaker 10: bad thing happens, they have a lot less room to
Speaker 10: run fiscally because of the increase in public debts worldwide.
Speaker 1: As usual, You've been out front on this, and the
Speaker 1: phrase that I hear from you is and you say
Speaker 1: it with respect to the institutional pressures and our political leaders.
Speaker 1: The modern medicine that we have, what is the more
Speaker 1: stronger medicine we need to take to get control of
Speaker 1: our debt in our ratios.
Speaker 10: I think we're going to have to learn to live
Speaker 10: with these high levels of public debt that the advice
Speaker 10: policy makers are getting from the Bank for International Settlements
Speaker 10: in the IMF about bringing down debt ratios. That's unrealistic.
Speaker 10: We're not going to be able to grow out of
Speaker 10: these higher debt ratios. We're not going to have a
Speaker 10: more favorable real interest rate going forward than we've had
Speaker 10: in the past. We're not going to be able to
Speaker 10: run primary budget surpluses for long periods of time. So
Speaker 10: I think we're going to have to tiptoe lightly through
Speaker 10: this problem and manage these heavy.
Speaker 2: Debts tipso your words, manage. Other people might say this
Speaker 2: ends in disaster, Barry, what's the argument against that?
Speaker 10: For countries like the United States? There is a big
Speaker 10: remains demand out there from foreign central banks and the
Speaker 10: international private sector for US treasury bonds. So I think
Speaker 10: the the US government is an exception to the general
Speaker 10: rule in that it has room to run. Other governments
Speaker 10: are going to have to reform fiscal institutions, worry about
Speaker 10: fiscal transparency, do all the things that the IMF and
Speaker 10: others have been recommending for years.
Speaker 4: Does it basically suggest that longer term yields in the
Speaker 4: US are where they need to be, That basically the
Speaker 4: term premium is going to be significantly higher, That essentially
Speaker 4: what you.
Speaker 5: See is what you get.
Speaker 10: Well, I think the term premium can come down a bit,
Speaker 10: but not back down to pre COVID levels. I think
Speaker 10: where everybody understands that we're in a new world with
Speaker 10: higher interest rates, the question is how much higher? And
Speaker 10: I wouldn't be a pessimist about that.
Speaker 4: How much has the debt that the US is a
Speaker 4: curd in particular driven a lot of the inflation that
Speaker 4: we see. How much you can really basically write the
Speaker 4: book and say helicopter money actually does cause inflation.
Speaker 10: Well, I think the fiscal stimulus that we the United
Speaker 10: States did in twenty twenty one was a contributing factor
Speaker 10: to the inflation, and there will be debate about that
Speaker 10: today because there were other contributing factories as well, the
Speaker 10: supply shocks, a variety of other things.
Speaker 1: Take your study of debt, your view on the inflation
Speaker 1: adjusted yield, which is maybe what the adults of pros
Speaker 1: look at, and bring it over to the Eichinggreen application
Speaker 1: of monetary policy. And there's a whole our starred debate
Speaker 1: in that. Are we going to move away from a
Speaker 1: two percent regime? And how do we search out an
Speaker 1: anchored level that is higher?
Speaker 10: Well, I think the FED has to bring inflation down
Speaker 10: to two percent before it really opens that conversation we
Speaker 10: saw in this recent episode. The importance of credibility, and
Speaker 10: credibility and two percent are synonymous. For the time being.
Speaker 10: The only time you talk about changing the regime is
Speaker 10: when you have everything.
Speaker 1: Let's go to alohol at Berkeley to Brad the LNG
Speaker 1: the office. You and I are going to walk in
Speaker 1: with a professor DeLong, and I'm going to say to
Speaker 1: both of you, with your academics and his politic more
Speaker 1: political view, what's the price of bringing inflation down to
Speaker 1: two percent? What's the cost of that to Americans?
Speaker 10: Well, so far the cost has been minimal compared to
Speaker 10: the doom and gloom scenarios. We heard about unemployment going
Speaker 10: up to five or six percent.
Speaker 1: So so far, Somark, you have been the arch optimist
Speaker 1: against doom and glue. And how do you respond to
Speaker 1: the doom and gloom that we hear daily from Lisa
Speaker 1: Bramwooz or that we hear out in all of economics.
Speaker 1: How do you respond to that American gloom that you
Speaker 1: fought against for fifty years?
Speaker 10: Well, look at what the Atlanta Fed now Crackers is saying.
Speaker 10: The US economy is on track. There there's no sign
Speaker 10: of inflation on the horizon. Yet in this kind of
Speaker 10: assembly of economists there has to be one optimist.
Speaker 2: At least your name is referenced.
Speaker 4: I just want to wonder, you know, at one point,
Speaker 4: is it unsustainable this kind of enthusiasm, this kind of growth, right,
Speaker 4: I mean, at some point you're not going to get
Speaker 4: down to two percent. I'm already changing to three percent
Speaker 4: two percent for quite a while, even by the fed's
Speaker 4: own admission twenty twenty five, exactly after.
Speaker 5: Twenty twenty five. Doesn't that reduce their credibility to some degree?
Speaker 10: They have to have a credible strategy for getting to
Speaker 10: two percent? So this is the classic. Give them a
Speaker 10: target two percent or give them a date and never
Speaker 10: give them both two percent?
Speaker 2: Can we think about where it came from? Is this
Speaker 2: really about some people in New Zealand in the nineteen
Speaker 2: eighties just coming up with a number. Is that what
Speaker 2: we're all doing here?
Speaker 5: Percent?
Speaker 2: About two percent?
Speaker 10: That's exactly what we're all all doing here.
Speaker 1: But history has consequences, should I see anyway I said
Speaker 1: geta I mean absolutely absolutely dead. On the first time
Speaker 1: I think I met you, or it was like within
Speaker 1: the year I met you, some guy almost took a
Speaker 1: swing at you on a stage in Singapore at at
Speaker 1: G seven meeting. He was so angry with you. How
Speaker 1: do you respond to, OMG, the dollar's dead? Ren mindy ascended?
Speaker 1: You throw chalk at people at Berkeley when it comes
Speaker 1: up how do you respond.
Speaker 10: No, at Berkeley, I don't hear it, but that that
Speaker 10: kind of interchange, you get more invitations, do you.
Speaker 1: Get okay, you get more speaking fees off that. Do
Speaker 1: you suggest a dollar is at risk given all these stresses?
Speaker 10: I think the dollar is not at risk yet. So
Speaker 10: we in the United States can do things to damage
Speaker 10: its credibility, but nothing that happens at the Brick Summit
Speaker 10: this weekend will much as you reader, I would have
Speaker 10: chosen to come here anyway.
Speaker 2: Yet word yet it's so loaded. Thank you. This is
Speaker 2: wonderful trading. Thank you very much, sir.
Speaker 1: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and
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