WEBVTT - Bill Poole on Fed Meetings (Audio)

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<v Speaker 1>Room were taking stock the Fed in Focus. There's certainly

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<v Speaker 1>a lot of discussion about whether or not the FED

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<v Speaker 1>is going to try to hike rate again this year.

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<v Speaker 1>We think the Fed by December will be ready to

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<v Speaker 1>do another hike. That sounds like a big difference from

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<v Speaker 1>the markets, but it's not that big a difference. I

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<v Speaker 1>think at this point the Fed is going to remain

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<v Speaker 1>on the sideline through and most likely the better part

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<v Speaker 1>of because they have a huge communication problem with the

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<v Speaker 1>public about what's driving their policy decisions. They basically have

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<v Speaker 1>no strategy. The Fed in Focus on Bloomberg Radio. The

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<v Speaker 1>Fed in Focus on Taking Stock is brought to you

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<v Speaker 1>by a Commonwealth financial network. When it's time to change

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<v Speaker 1>the conversation, talk with a broker dealer. Are I a

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<v Speaker 1>that's ready to listen? Call A six six or six

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<v Speaker 1>two three six three eight or visit Commonwealth dot com

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<v Speaker 1>to learn more. And when we want to learn more

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<v Speaker 1>about the Fed, where they are and where they are heading,

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<v Speaker 1>we often call on William Pool. Bill Pool is former

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<v Speaker 1>feder Reserve, a Bank of St. Louis president and senior

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<v Speaker 1>fellow at the Cato Institute and very busy traveling around

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<v Speaker 1>the world to talk to people about so many things

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<v Speaker 1>that have to do with the FED and the economy. Bill,

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<v Speaker 1>welcome back to the show. Hey, Kathleen, how are you

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<v Speaker 1>just great? You know um coincidentally to you coming on

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<v Speaker 1>the show today. Our our team of FED reporters from

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<v Speaker 1>around the world, led by Craig Torres in Washington, did

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<v Speaker 1>it a story with a triffic headline and a great

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<v Speaker 1>of content. FED deluge of dots and discord leaves global

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<v Speaker 1>markets baffled. Is this a fair charge? Uh? Probably? I

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<v Speaker 1>think he also leaves the FED itself baffled. Why and

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<v Speaker 1>in what way? Well, I think the f O m

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<v Speaker 1>c IS is really sort of uh screwed up in

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<v Speaker 1>its communications approach. Uh. You may remember last year, at

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<v Speaker 1>this time we got past the September meeting, there was

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<v Speaker 1>all this speculation about liftoff, and the FED had promised

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<v Speaker 1>lift off, seemed to promise lift off with the dot

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<v Speaker 1>diagram in and eventually in December meeting last year they

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<v Speaker 1>did it. Uh. It didn't make very much difference, and

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<v Speaker 1>as one could reasonably expect basis points, there's not much

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<v Speaker 1>of a move. And I think it's true that the

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<v Speaker 1>UH long bond long long bonds in the US are

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<v Speaker 1>actually lower than they were a year ago, so it

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<v Speaker 1>didn't lift off long treasuries. So now they're doing exactly

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<v Speaker 1>the same thing. It appears. If assuming that at the meeting,

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<v Speaker 1>our September meeting next week, when I say our, there's

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<v Speaker 1>UH that they passed again, which is the market betting,

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<v Speaker 1>then they're going to come up to December, and depending

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<v Speaker 1>on what they say in September, UH, if they leave

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<v Speaker 1>some guidance in effect, that they're going to have another

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<v Speaker 1>rate increase in six and then we'll play the game

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<v Speaker 1>all over again. Uh. So the problem is that this

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<v Speaker 1>this whole communications strategy of the forward guidance is deeply,

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<v Speaker 1>deeply flawed. It's not as if we haven't been here.

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<v Speaker 1>When I was on the f O m C, we

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<v Speaker 1>went around and about over exactly the same issue back

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<v Speaker 1>in the early part I guess we would say the

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<v Speaker 1>early part of the century. At that time, it had

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<v Speaker 1>to do with the so called tilt language, or the

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<v Speaker 1>bias of the bias language, or the balance of risks language.

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<v Speaker 1>And I eventually came to the view that this whole

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<v Speaker 1>approach of trying to provide market guidance was ill advised

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<v Speaker 1>and the reason is very simple that at the time

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<v Speaker 1>that we've tried to provide any such advice, things change,

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<v Speaker 1>and in that case, we will have been in a

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<v Speaker 1>place where we've provided this advice. But then the world

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<v Speaker 1>has changed, it didn't come out exactly the way we

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<v Speaker 1>thought it was going to come out, and then the

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<v Speaker 1>forward guidance doesn't look so sensible anymore. Never does work

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<v Speaker 1>out the way you think it's going to. There are

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<v Speaker 1>always things that you don't understand, and one of the

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<v Speaker 1>things I don't understand, Billpool, is that asset prices are

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<v Speaker 1>high while consumer price the CPI, the Consumer Price index

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<v Speaker 1>is not accelerating. What's up with that? Well, what's up

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<v Speaker 1>with that is that the obviously the economies growth is low.

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<v Speaker 1>G d P growth has been low. It's the weakest

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<v Speaker 1>recovery um since World War Two. And I believe that

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<v Speaker 1>the reason for that is that there have been uh

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<v Speaker 1>two major depressants, if you will. One is the budgetary

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<v Speaker 1>uncertainty and the possibility of tax increases in the future,

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<v Speaker 1>and that's really staring us in the face now with

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<v Speaker 1>the demographics changes that we have known about for a

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<v Speaker 1>long time UH coming. And then the other the the

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<v Speaker 1>regulatory constraints on economic activity. We're going through this again

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<v Speaker 1>in the news. We've got this Dakota pipeline situation, and

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<v Speaker 1>to me, it's just crazy because pipelines are clearly both

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<v Speaker 1>more efficient, that is, lower costs and safer than transporting

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<v Speaker 1>oil by rail or by truck, and it takes the

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<v Speaker 1>pressure off the rail and the highway infrastructure. Uh, it's

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<v Speaker 1>just nutty. It just doesn't make any sense. And yet

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<v Speaker 1>that there's there's where we are. This Dakota pipeline is

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<v Speaker 1>now tied up in the courts. Uh. We had another

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<v Speaker 1>situation that I've looked at rather closely. He's taking stock

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<v Speaker 1>the FED in Focus on bloom Word Radio, The FED

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<v Speaker 1>in Focus with William Pool. Bill Pool is senior fellow

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<v Speaker 1>at the Cato Institute, former president of the St. Louis

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<v Speaker 1>Federal Reserve. He joins us, Now, Bill Pool, I beg

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<v Speaker 1>your pardon. You were concluding your thoughts and adding some

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<v Speaker 1>more and just wanted to focus on asset prices, high

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<v Speaker 1>inflation constrained. Go ahead, tell us more. Okay, the the

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<v Speaker 1>feed is always made clear, and it's especially clear when

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<v Speaker 1>they started this to the statements of policy intentions, uh, strategy,

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<v Speaker 1>where they had the inflation target. That there is UH

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<v Speaker 1>no way that the FED can control real conditions, real

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<v Speaker 1>economic conditions, such as the long run rate of unemployment.

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<v Speaker 1>So the same thing is true of the rate of

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<v Speaker 1>productivity growth. Federal reserve has nothing to do with that,

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<v Speaker 1>And the same thing is true of the real rate

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<v Speaker 1>of interest. So it looks as though the FED has

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<v Speaker 1>influenced over the rate of interest because it sets the

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<v Speaker 1>federal funds rate, but that's only the short rate in

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<v Speaker 1>the short run, and it is fundamentally constrained by the

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<v Speaker 1>productivity of the economy. The demand, the underlying demand for

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<v Speaker 1>funds to finance investment. Investment has been slow to recover

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<v Speaker 1>in this recovery period, and that's an essential feature of

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<v Speaker 1>this recovery. So I think that the UH that the

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<v Speaker 1>market analysts have generally underplayed the importance of various environmental

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<v Speaker 1>especially constraints on expansion of infrastructure such as pipelines. And

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<v Speaker 1>the reason that companies aren't building this stuff is that

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<v Speaker 1>they're not allowed to. It's just very simple. And so

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<v Speaker 1>if you go to great lengths, as the Jordan's cove

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<v Speaker 1>case for the Federal Regulator, the UH that case that

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<v Speaker 1>came to ahead last March, the Energy Regulatory Commission denied

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<v Speaker 1>permission to go ahead to build an export terminal and

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<v Speaker 1>that was the end of it. So why should companies

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<v Speaker 1>go to the expense of preparing an environmental impact statement

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<v Speaker 1>when they're going to get chopped off by this vague

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<v Speaker 1>standard of public bill. Here's one thing, though, I don't understand.

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<v Speaker 1>I know you could argue that the amount of regulation

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<v Speaker 1>and the kind of constraints on various kinds of investments

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<v Speaker 1>have increased over the years, but that's been in a

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<v Speaker 1>place for a while. And what hasn't been in place

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<v Speaker 1>for a while is this current zero interest rate policy

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<v Speaker 1>and in fact, in some cases negative rates in other countries.

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<v Speaker 1>And we've seen this and very low bond yields, and

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<v Speaker 1>I do I am curious what you would say in

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<v Speaker 1>response to Jim Low, who's this It's just me Jim Tiss,

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<v Speaker 1>who's the CEO of Lows, speaking to a Bloomberg event today. Uh.

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<v Speaker 1>He says that this policy hasn't worked. Uh. He says

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<v Speaker 1>the Fed has gotten itself into a hole of zero

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<v Speaker 1>interest rates and they don't know how to get out,

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<v Speaker 1>and in fact that the keeping the yield suppression is

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<v Speaker 1>hurting investors, right, it's harder to get yield. How do

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<v Speaker 1>you respond to that? Is the Fed a fault there?

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<v Speaker 1>And should they start raising rates as a result? The

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<v Speaker 1>Federal Reserve cannot raise rates above what the market will support.

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<v Speaker 1>The demand for funds around the world is weak because

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<v Speaker 1>of the demand for investment, physical investment, which is financed

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<v Speaker 1>through the bond markets. So the Federal Reserve can no

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<v Speaker 1>more raise the rate of interest than the Department of

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<v Speaker 1>Agriculture can simply double the price of wheat. It's just

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<v Speaker 1>that simple bill pool. If there is an inflation target

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<v Speaker 1>of let's say this coming from a speech by San

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<v Speaker 1>Francisco FED President John Williams earlier in the month, Uh,

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<v Speaker 1>what would you think that would do to asset prices?

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<v Speaker 1>Do you think that he doesn't care what it does

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<v Speaker 1>two asset prices? And you think that he reflects the

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<v Speaker 1>thinking of Janet Yellen share the feeder reserve? Well, I

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<v Speaker 1>have no idea about Janet Yellen's views on that, although

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<v Speaker 1>I think that she has reinforced the view that the

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<v Speaker 1>two percent target will be retained. What I find strange

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<v Speaker 1>about the argument of changing the target to four percent

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<v Speaker 1>is that the Fed can't even get up to two percent,

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<v Speaker 1>and what instruments does it are available to even get

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<v Speaker 1>the two percent? The Feed has been struggling to get

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<v Speaker 1>even to two percent. So the argument that joined the

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<v Speaker 1>four would be helpful is one that I just don't understand.

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<v Speaker 1>If I'm going to raise the key rate this year,

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<v Speaker 1>is it not gonna happen. I don't know what the

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<v Speaker 1>Fed is going to do. That's part of the problem.

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<v Speaker 1>The Fed itself doesn't know what it's gonna do. Alright, Well,

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<v Speaker 1>we're gonna leave it there. Bill Poll always always, i'd

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<v Speaker 1>like to talk to you. Thank you so very much

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<v Speaker 1>for joining us. Bill is former president of the Federals

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<v Speaker 1>at Bank of St. Louis, so he's been there and

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<v Speaker 1>done that. Though we've got a kind of a a brave

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<v Speaker 1>new world of zero rates since Bill took over that

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<v Speaker 1>office and then left. I'm Kathleen Hayes along with Pim Fox.

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<v Speaker 1>This is taking Stock. Got a lot more coming up

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<v Speaker 1>on the show. Keep it right here. This is Bloomberg