Speaker 1: Room were taking stock the Fed in Focus. There's certainly
Speaker 1: a lot of discussion about whether or not the FED
Speaker 1: is going to try to hike rate again this year.
Speaker 1: We think the Fed by December will be ready to
Speaker 1: do another hike. That sounds like a big difference from
Speaker 1: the markets, but it's not that big a difference. I
Speaker 1: think at this point the Fed is going to remain
Speaker 1: on the sideline through and most likely the better part
Speaker 1: of because they have a huge communication problem with the
Speaker 1: public about what's driving their policy decisions. They basically have
Speaker 1: no strategy. The Fed in Focus on Bloomberg Radio. The
Speaker 1: Fed in Focus on Taking Stock is brought to you
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Speaker 1: to learn more. And when we want to learn more
Speaker 1: about the Fed, where they are and where they are heading,
Speaker 1: we often call on William Pool. Bill Pool is former
Speaker 1: feder Reserve, a Bank of St. Louis president and senior
Speaker 1: fellow at the Cato Institute and very busy traveling around
Speaker 1: the world to talk to people about so many things
Speaker 1: that have to do with the FED and the economy. Bill,
Speaker 1: welcome back to the show. Hey, Kathleen, how are you
Speaker 1: just great? You know um coincidentally to you coming on
Speaker 1: the show today. Our our team of FED reporters from
Speaker 1: around the world, led by Craig Torres in Washington, did
Speaker 1: it a story with a triffic headline and a great
Speaker 1: of content. FED deluge of dots and discord leaves global
Speaker 1: markets baffled. Is this a fair charge? Uh? Probably? I
Speaker 1: think he also leaves the FED itself baffled. Why and
Speaker 1: in what way? Well, I think the f O m
Speaker 1: c IS is really sort of uh screwed up in
Speaker 1: its communications approach. Uh. You may remember last year, at
Speaker 1: this time we got past the September meeting, there was
Speaker 1: all this speculation about liftoff, and the FED had promised
Speaker 1: lift off, seemed to promise lift off with the dot
Speaker 1: diagram in and eventually in December meeting last year they
Speaker 1: did it. Uh. It didn't make very much difference, and
Speaker 1: as one could reasonably expect basis points, there's not much
Speaker 1: of a move. And I think it's true that the
Speaker 1: UH long bond long long bonds in the US are
Speaker 1: actually lower than they were a year ago, so it
Speaker 1: didn't lift off long treasuries. So now they're doing exactly
Speaker 1: the same thing. It appears. If assuming that at the meeting,
Speaker 1: our September meeting next week, when I say our, there's
Speaker 1: UH that they passed again, which is the market betting,
Speaker 1: then they're going to come up to December, and depending
Speaker 1: on what they say in September, UH, if they leave
Speaker 1: some guidance in effect, that they're going to have another
Speaker 1: rate increase in six and then we'll play the game
Speaker 1: all over again. Uh. So the problem is that this
Speaker 1: this whole communications strategy of the forward guidance is deeply,
Speaker 1: deeply flawed. It's not as if we haven't been here.
Speaker 1: When I was on the f O m C, we
Speaker 1: went around and about over exactly the same issue back
Speaker 1: in the early part I guess we would say the
Speaker 1: early part of the century. At that time, it had
Speaker 1: to do with the so called tilt language, or the
Speaker 1: bias of the bias language, or the balance of risks language.
Speaker 1: And I eventually came to the view that this whole
Speaker 1: approach of trying to provide market guidance was ill advised
Speaker 1: and the reason is very simple that at the time
Speaker 1: that we've tried to provide any such advice, things change,
Speaker 1: and in that case, we will have been in a
Speaker 1: place where we've provided this advice. But then the world
Speaker 1: has changed, it didn't come out exactly the way we
Speaker 1: thought it was going to come out, and then the
Speaker 1: forward guidance doesn't look so sensible anymore. Never does work
Speaker 1: out the way you think it's going to. There are
Speaker 1: always things that you don't understand, and one of the
Speaker 1: things I don't understand, Billpool, is that asset prices are
Speaker 1: high while consumer price the CPI, the Consumer Price index
Speaker 1: is not accelerating. What's up with that? Well, what's up
Speaker 1: with that is that the obviously the economies growth is low.
Speaker 1: G d P growth has been low. It's the weakest
Speaker 1: recovery um since World War Two. And I believe that
Speaker 1: the reason for that is that there have been uh
Speaker 1: two major depressants, if you will. One is the budgetary
Speaker 1: uncertainty and the possibility of tax increases in the future,
Speaker 1: and that's really staring us in the face now with
Speaker 1: the demographics changes that we have known about for a
Speaker 1: long time UH coming. And then the other the the
Speaker 1: regulatory constraints on economic activity. We're going through this again
Speaker 1: in the news. We've got this Dakota pipeline situation, and
Speaker 1: to me, it's just crazy because pipelines are clearly both
Speaker 1: more efficient, that is, lower costs and safer than transporting
Speaker 1: oil by rail or by truck, and it takes the
Speaker 1: pressure off the rail and the highway infrastructure. Uh, it's
Speaker 1: just nutty. It just doesn't make any sense. And yet
Speaker 1: that there's there's where we are. This Dakota pipeline is
Speaker 1: now tied up in the courts. Uh. We had another
Speaker 1: situation that I've looked at rather closely. He's taking stock
Speaker 1: the FED in Focus on bloom Word Radio, The FED
Speaker 1: in Focus with William Pool. Bill Pool is senior fellow
Speaker 1: at the Cato Institute, former president of the St. Louis
Speaker 1: Federal Reserve. He joins us, Now, Bill Pool, I beg
Speaker 1: your pardon. You were concluding your thoughts and adding some
Speaker 1: more and just wanted to focus on asset prices, high
Speaker 1: inflation constrained. Go ahead, tell us more. Okay, the the
Speaker 1: feed is always made clear, and it's especially clear when
Speaker 1: they started this to the statements of policy intentions, uh, strategy,
Speaker 1: where they had the inflation target. That there is UH
Speaker 1: no way that the FED can control real conditions, real
Speaker 1: economic conditions, such as the long run rate of unemployment.
Speaker 1: So the same thing is true of the rate of
Speaker 1: productivity growth. Federal reserve has nothing to do with that,
Speaker 1: And the same thing is true of the real rate
Speaker 1: of interest. So it looks as though the FED has
Speaker 1: influenced over the rate of interest because it sets the
Speaker 1: federal funds rate, but that's only the short rate in
Speaker 1: the short run, and it is fundamentally constrained by the
Speaker 1: productivity of the economy. The demand, the underlying demand for
Speaker 1: funds to finance investment. Investment has been slow to recover
Speaker 1: in this recovery period, and that's an essential feature of
Speaker 1: this recovery. So I think that the UH that the
Speaker 1: market analysts have generally underplayed the importance of various environmental
Speaker 1: especially constraints on expansion of infrastructure such as pipelines. And
Speaker 1: the reason that companies aren't building this stuff is that
Speaker 1: they're not allowed to. It's just very simple. And so
Speaker 1: if you go to great lengths, as the Jordan's cove
Speaker 1: case for the Federal Regulator, the UH that case that
Speaker 1: came to ahead last March, the Energy Regulatory Commission denied
Speaker 1: permission to go ahead to build an export terminal and
Speaker 1: that was the end of it. So why should companies
Speaker 1: go to the expense of preparing an environmental impact statement
Speaker 1: when they're going to get chopped off by this vague
Speaker 1: standard of public bill. Here's one thing, though, I don't understand.
Speaker 1: I know you could argue that the amount of regulation
Speaker 1: and the kind of constraints on various kinds of investments
Speaker 1: have increased over the years, but that's been in a
Speaker 1: place for a while. And what hasn't been in place
Speaker 1: for a while is this current zero interest rate policy
Speaker 1: and in fact, in some cases negative rates in other countries.
Speaker 1: And we've seen this and very low bond yields, and
Speaker 1: I do I am curious what you would say in
Speaker 1: response to Jim Low, who's this It's just me Jim Tiss,
Speaker 1: who's the CEO of Lows, speaking to a Bloomberg event today. Uh.
Speaker 1: He says that this policy hasn't worked. Uh. He says
Speaker 1: the Fed has gotten itself into a hole of zero
Speaker 1: interest rates and they don't know how to get out,
Speaker 1: and in fact that the keeping the yield suppression is
Speaker 1: hurting investors, right, it's harder to get yield. How do
Speaker 1: you respond to that? Is the Fed a fault there?
Speaker 1: And should they start raising rates as a result? The
Speaker 1: Federal Reserve cannot raise rates above what the market will support.
Speaker 1: The demand for funds around the world is weak because
Speaker 1: of the demand for investment, physical investment, which is financed
Speaker 1: through the bond markets. So the Federal Reserve can no
Speaker 1: more raise the rate of interest than the Department of
Speaker 1: Agriculture can simply double the price of wheat. It's just
Speaker 1: that simple bill pool. If there is an inflation target
Speaker 1: of let's say this coming from a speech by San
Speaker 1: Francisco FED President John Williams earlier in the month, Uh,
Speaker 1: what would you think that would do to asset prices?
Speaker 1: Do you think that he doesn't care what it does
Speaker 1: two asset prices? And you think that he reflects the
Speaker 1: thinking of Janet Yellen share the feeder reserve? Well, I
Speaker 1: have no idea about Janet Yellen's views on that, although
Speaker 1: I think that she has reinforced the view that the
Speaker 1: two percent target will be retained. What I find strange
Speaker 1: about the argument of changing the target to four percent
Speaker 1: is that the Fed can't even get up to two percent,
Speaker 1: and what instruments does it are available to even get
Speaker 1: the two percent? The Feed has been struggling to get
Speaker 1: even to two percent. So the argument that joined the
Speaker 1: four would be helpful is one that I just don't understand.
Speaker 1: If I'm going to raise the key rate this year,
Speaker 1: is it not gonna happen. I don't know what the
Speaker 1: Fed is going to do. That's part of the problem.
Speaker 1: The Fed itself doesn't know what it's gonna do. Alright, Well,
Speaker 1: we're gonna leave it there. Bill Poll always always, i'd
Speaker 1: like to talk to you. Thank you so very much
Speaker 1: for joining us. Bill is former president of the Federals
Speaker 1: at Bank of St. Louis, so he's been there and
Speaker 1: done that. Though we've got a kind of a a brave
Speaker 1: new world of zero rates since Bill took over that
Speaker 1: office and then left. I'm Kathleen Hayes along with Pim Fox.
Speaker 1: This is taking Stock. Got a lot more coming up
Speaker 1: on the show. Keep it right here. This is Bloomberg