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Speaker 1: This is Bloomberg Surveillance Brexit. If they vote to excit

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Speaker 1: would definitely be a vote against free trade, a vote

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Speaker 1: against globalization. The fact could be operating in a hope

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Speaker 1: and prayer, which they've been doing for the better part

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Speaker 1: of the path that years there were always done one

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Speaker 1: quarter away from its capulosity, but the market of sending

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Speaker 1: a different signal. The relationship interest rates and goals can

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Speaker 1: be quite ambiguous, and in the past the times at

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Speaker 1: that interest rate hip schools have done quite well. Bloomberg

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Speaker 1: Surveillance your link to the world of economics, finance, and

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Speaker 1: investment on Bloomberg Radio. Good morning everyone, Michael McKee and

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Speaker 1: Tom Keane. Michael McKee an hour away from an interview

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Speaker 1: with Dennis Lockhart of the Atlanta Fed. They will look

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Speaker 1: at Atlanta GDP, now Atlanta wage Tractor, maybe they'll even

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Speaker 1: look at the Atlanta braves. Michael McKee with Dennis Lockhart,

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Speaker 1: and then on the twelve Dune and what was an

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Speaker 1: important speech by Cherry Yelling has become critically important. And

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Speaker 1: I will say the tape this morning is nice, calmer

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Speaker 1: than what we saw on Friday. Just a couple of

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Speaker 1: data check items one oh seven ten on yen. It

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Speaker 1: is a weaker yen off of the massive strength Friday,

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Speaker 1: and I know sterling off of a number of Brexit

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Speaker 1: polls in favor of Brexit was much weaker earlier, and

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Speaker 1: it's got a little bit of a bid right now.

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Speaker 1: Bloomberg Surveillance brought to you by Cone Resident Accounting, Tax Advisory.

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Speaker 1: Is your business ready to break through? See other professionals.

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Speaker 1: A CONE resident can help guide your business forward. Find

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Speaker 1: out more at Cone residing dot com. Michael a perfect

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Speaker 1: guest to speak to after the dynamics stochastic movements of

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Speaker 1: Friday man who likes to model the economy. He brought

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Speaker 1: in his tester's glue here and try to put the

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Speaker 1: whole fed rate increasing back together again. It kind of

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Speaker 1: felt the rich. Clarida, who is Global Strategic Advisor at

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Speaker 1: Pacific Income Management Company here based on the Atlantic side

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Speaker 1: and also professor at Columbia University. How how do you

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Speaker 1: put humpty dumpty together again? If you're Janet yelling today,

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Speaker 1: how do you avoid the impression that the markets are

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Speaker 1: going to dictate what you do? Well? She's trying to

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Speaker 1: throw a needle there, Mike. She says, she's data dependent

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Speaker 1: and so market reaction to data like the soft payrolls

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Speaker 1: we got Friday, UH is a factor in the FED.

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Speaker 1: They talk about financial conditions so in the language of mathematics,

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Speaker 1: and there is the FED that's looking for a fixed point.

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Speaker 1: They're looking for some balance between what they want to

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Speaker 1: do with the data supports and what the markets expect.

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Speaker 1: I think her timing is good to schedule this speech

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Speaker 1: after after payrolls. We've had a lot of FED speak

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Speaker 1: for the last six weeks or so. So yeah, all

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Speaker 1: eyes on the chairs remarks this afternoon, before we say

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Speaker 1: how does she do it? I guess we should ask

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Speaker 1: you what you think she should do? Yeah, well, no,

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Speaker 1: I think I think the FEDRUC begun a rate hype

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Speaker 1: cycle in this number. Obviously, it's it's a tricky communications

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Speaker 1: challenges the first rate hike cycle, I think, at least

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Speaker 1: in my lifetime, whether hiking rates even though they want

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Speaker 1: inflation to be going up. Typically the FED hikes to

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Speaker 1: reduce inflation. Their argument is that after inflation, the real

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Speaker 1: cost of borrowing is still negative, policies still accommodative. But yes,

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Speaker 1: I think the Feds you continue a very gradual rate

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Speaker 1: hike cycle. This year. I think that that is their

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Speaker 1: baseline case. A couple more hikes this year. Yeah. There

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Speaker 1: is a beautiful forty page monograph out of the New

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Speaker 1: York Fed on the alchemy at hand. And as I knew, folks,

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Speaker 1: I knew this before I went to page forty two

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Speaker 1: of it. Clarena Galli Girtler The Science of Monetary Policy,

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Speaker 1: a new Keynesian perspective, not so much after what we

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Speaker 1: saw Friday, but where we are now, the great distortions

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Speaker 1: that we're all living in, whether we can do the

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Speaker 1: math or not. Is claire to Galli Girtler at work

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Speaker 1: or do you have to amend it so much where

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Speaker 1: you question the underlying precepts of D. S. G. I

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Speaker 1: think that's a great question. I've thought about it. I've

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Speaker 1: spoken to a lot of policymakers about it. I've gotten

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Speaker 1: it from them. Uh, you know, Clara Gallagher or thank

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Speaker 1: you for the citation. Was a simple three equation, a

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Speaker 1: model useful for teaching and getting insight. I think any

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Speaker 1: macro model needs at least three equations, so I'd start

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Speaker 1: with but obviously, but but the global economy, in the

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Speaker 1: U S economy, especially the language between macro and finance

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Speaker 1: is much more complex than that three equation model. So

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Speaker 1: I certainly would begin with C G G. I certainly

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Speaker 1: wouldn't end there. I think it's a starting point, but

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Speaker 1: it's not a complete analysis of the economy. How does

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Speaker 1: Jane Yellen use Claire to Galli Girtler? This is an

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Speaker 1: important question, folks. I say it with great respect. I

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Speaker 1: happened as an amateur to strongly agree with Professor Clara

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Speaker 1: that you need three equations, go back to Lagrangian functions,

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Speaker 1: and we can't, Mike, we can't do lagrange and functions.

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Speaker 1: On Monday, I had lambed it for dinner last night. Now,

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Speaker 1: within that, Professor is the basic idea of a respect

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Speaker 1: for behavioral economics and the shocks of the finance system.

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Speaker 1: How does Yelling use the foundations that you built and

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Speaker 1: others built in the real policy making? Obviously we built

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Speaker 1: on John Taylor and Mike Woodford any others for sure,

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Speaker 1: and it wasn't just us. I think that Yelling and

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Speaker 1: the FAT and most of the world's major central banks

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Speaker 1: recognized and have put a lot of effort into better

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Speaker 1: understanding financial macro languages. They're also much more focused and

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Speaker 1: I think appropriately so on the robustness of their analysis.

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Speaker 1: They want to know, if we get this wrong, what

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Speaker 1: does the left tail look like? And I think that's

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Speaker 1: also an important advance over sort of the view of

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Speaker 1: the Great moderation going into this. So again, the FAT

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Speaker 1: has a very elaborate models. They spend a lot of

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Speaker 1: time trying to understand macro uh and finance, and I

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Speaker 1: think they're focused on robustness, perhaps more than in the past,

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Speaker 1: and that's appropriate. They don't particularly like to say our

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Speaker 1: models are wrong, but a number of FED officials have said, uh,

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Speaker 1: semi publicly or or privately to me that one of

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Speaker 1: the problems they've had with the DSG emails they use

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Speaker 1: is they don't incorporate financial markets very well. And if

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Speaker 1: you're trying to figure out the left tail, how do

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Speaker 1: you do that then, especially when you get different kinds

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Speaker 1: of market reactions to seemingly similar events. Absolutely, and I

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Speaker 1: think that the FED has gone down a couple of

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Speaker 1: different paths which I think are complementary. The first is

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Speaker 1: both the FED and the US government more broadly is

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Speaker 1: trying to make at least the banking part of the

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Speaker 1: financial system much more robust, better capitalized, more streamlined in

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Speaker 1: terms of financing. So part of it is simply to

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Speaker 1: get a better handle on on banks in the financial system.

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Speaker 1: But as I said, the FED and other central banks

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Speaker 1: are improving and making their models more are elaborate with

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Speaker 1: regards to financials, and folks, please stay with us. And

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Speaker 1: this this is a really serious conversation invoving too much

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Speaker 1: theory for a Monday. If I go from CLARAA. Golly

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Speaker 1: Girdler and I go to two thousand three, Michael Woodford

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Speaker 1: who you mentioned from Princeton, how did you hire him?

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Speaker 1: Were you responsible for him migrating? No? Well, I was

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Speaker 1: no longer chair at that point. I was a faculty member,

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Speaker 1: but certainly wasn't eager. Eager and congratulations, and Gaudy Eggerson

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Speaker 1: is well the zero bound? Yeah, does your world or

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Speaker 1: Woodford's world, or Yelling or lock Arts world work at

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Speaker 1: the zero bound? That vinced me sure now that and

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Speaker 1: of course not surprisingly that that's the that's the money question, Tom.

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Speaker 1: All of the pre crisis apparatus gave very little attention

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Speaker 1: to the zero bound. Indeed, there's a famous paper by

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Speaker 1: John Williams at the San Francisco FED that essentially said,

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Speaker 1: we don't have to ignore the zero bound. We have

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Speaker 1: to worry about it because we won't hit it very often.

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Speaker 1: While we've hit it now, and then most almost certainly

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Speaker 1: in the next downturn downturn whenever it is, we'll hit

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Speaker 1: it again. In a world where the underlying neutral policy

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Speaker 1: rate is low and where inflation is low, we're not

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Speaker 1: our world of of a normal funds rate of five percent,

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Speaker 1: or in the world of a normal funds rate maybe

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Speaker 1: in the two percent range. So you're gonna hit the

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Speaker 1: zero bound. And that means that once you do, you're

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Speaker 1: doing quantitative eason, you're doing forward guidance. In some countries

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Speaker 1: they're actually going to negative rate. So absolutely it changes

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Speaker 1: the whole yelling and central bank approach to thinking about

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Speaker 1: policy knowing that you're most luckily going to hit the

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Speaker 1: zero bound in the next downturn. Well, one of the

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Speaker 1: issues or questions that comes up about Mr Woodford's advice,

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Speaker 1: and we went out to Jackson Hole for the for

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Speaker 1: It's a couple of years ago, and he did a

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Speaker 1: great paper on you know, how forward guidance would help,

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Speaker 1: And so the finn implemented it and argues that it helped,

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Speaker 1: and now they don't seem to be able to get

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Speaker 1: out of it. There seems to be a page missing

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Speaker 1: from Woodford. And that is what you do when you

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Speaker 1: want to go to the other direction. How what kind

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Speaker 1: of guidance you give, because as the markets seem to

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Speaker 1: be terribly confused, well, I think I think Cherry Yelling

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Speaker 1: and and stam Fish and the others would like four

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Speaker 1: guidance to work in both directions. When they want rates

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Speaker 1: to be at zero or or unchanged, they want to

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Speaker 1: give guidance. They've been trying to give guidance on a

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Speaker 1: FED liftoff. But as you've hit the nail on the head,

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Speaker 1: the challenges as they're giving guidance on liftoff, the markets

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Speaker 1: simply don't believe it. So the FED, for example, in December,

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Speaker 1: said they're gonna hike four times this year. I think

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Speaker 1: I was on your show. I said, that's not a prediction,

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Speaker 1: that's an aspiration. They're not going to HiPE. So the

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Speaker 1: challenge they have is that as they give guidance that's

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Speaker 1: on the more aggressive end, the markets to simply discount it.

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Speaker 1: I can't ignore it. I'm gonna come back on this.

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Speaker 1: This is absolutely critical and we're honored that you're here today.

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Speaker 1: Why can't they do one and done? Why I I

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Speaker 1: don't understand why a vector must be established. Well that

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Speaker 1: I think in the narrow answer to that is they

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Speaker 1: could do one and done. I think the broader answers

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Speaker 1: they don't want to do one and done because it

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Speaker 1: sets up an asymmetric risk to the down said it's

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Speaker 1: that's up an asymmetric rist of the downside. And again

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Speaker 1: their view of the world. We can question it. Their

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Speaker 1: view of the world. As Stan Fisher has said many times,

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Speaker 1: including on Bloomberg, we have a very accommodative policy. After December,

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Speaker 1: we still have a very accommodative policy under our liftoff

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Speaker 1: path policy is going to be accommodated until the year

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Speaker 1: eighteen at least because they have the real interest rate

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Speaker 1: as negative until fatis Richard Clarida with us with PIMCO,

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Speaker 1: of course associated with Columbia University economics views. We are

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Speaker 1: absolutely thrilled. Did he's here to give Michael McKey a

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Speaker 1: briefing before he speaks with them as luck of Atlanta,

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Speaker 1: and then of course on to the important Janet Yellow speech.

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Speaker 1: You'll see chair Yellow speech twelve noon today on Bloomberg

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Speaker 1: Radio worldwide Futures up five. Clarida singlehandedly lifted the equity

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Speaker 1: markets this morning. Futures up five this morning. To check

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Speaker 1: our world and national headlines, and to that we bring

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Speaker 1: in John Tucker. All right, Michael and Tom. Tropical storm

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Speaker 1: column gaining speed and strength as it gets ready to

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Speaker 1: strike Florida later today. The winds right now about fifty

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Speaker 1: miles the center of Colin expected to approach the coast

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Speaker 1: of the Florida Big Bend area this afternoon or this evening.

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Speaker 1: Yellery Clinton goes into Tuesday's California primary, meaning just twenty

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Speaker 1: six more delegates to clinch the Democratic presidential nomination. At

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Speaker 1: a rally last night in the States, she warned of

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Speaker 1: a contentious campaign ahead and Goldman Sachs may not have

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Speaker 1: had the best luck when it came to trade recommendations

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Speaker 1: this year. Maybe It's economists will have more success with soccer.

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Speaker 1: With the Euro Tournament set to kick off in the

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Speaker 1: Paris suburbs June tenth, Goldman Economists, led by Jan Hatzi,

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Speaker 1: is predicting victory for host nation France. Global News twenty

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Speaker 1: four hours a day, two d journalists more than one

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Speaker 1: hundred fifty news bureaus around the world. I'm John Tucker,

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Speaker 1: Mike and Tom John. Thanks so much. Abraham tweets in

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Speaker 1: he says, do the math okay, pie equals the expectation

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Speaker 1: of the summation of beta sigma asked plus it's I

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Speaker 1: think it's an oiler. It's an oily equation. Bloomberg Surveillance.

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Speaker 1: The news update brought to you by land Over Precipitate.

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Speaker 1: Radio Plus mobile app, and on your radio. This is

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Speaker 1: a Bloomberg Business Flash and I'm Karen Moscow U s

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Speaker 1: Dock Index futures are extending their gains this morning, and

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Speaker 1: so is NIMEX. Screwed oil. Let's go to the First

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Speaker 1: Word Breaking news desk for today's morning call. Here's Bill Maloney.

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Speaker 1: Good morning, Bill, Good morning Karen. That's right. US futures

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Speaker 1: have improved since the last time we spoke with doubt.

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Speaker 1: Futures currently higher by fifty four points. SP futures gained

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Speaker 1: five and a half and as the futures rise by twelve,

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Speaker 1: the US ten Niel at one point seven to per cent,

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Speaker 1: and in Europe the UK gains one percent. Germany is

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Speaker 1: a little changed on the US economic front at ten o'clock.

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Speaker 1: Labor market conditions in next and Yellin speaks in Philadelphia

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Speaker 1: at twelve thirty. In other news, Devin Energy to sell

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Speaker 1: must one billion and non core upstream assets, Ocular Therapeutics

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Speaker 1: second phase to re study missed primary endpoint, and AMG

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Speaker 1: is buying asset company Steaks from Goldman's peters Hill for

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Speaker 1: eight hundred million. Finding some of your wallsheet upgrades and downgrades,

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Speaker 1: Pilgrim's Pride and Tyson Cutching market perform at BMO. Advy

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Speaker 1: Cutching market perform at Cowen Harley, Davidson Cuting Neutral versus

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Speaker 1: by over at Goldman Sachs and Walmart raced Di Vibe

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Speaker 1: over at Jeffreies Live from the first breaking Newsscomb Bill Maloney, Karen,

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Speaker 1: all right, thanks spill to hear live breaking news over

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Speaker 1: your Bloomberg type squawk go and your terminal that's squ

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Speaker 1: you a w K go and that's a Bloomberg business flash.

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Speaker 1: Tom and Mike Karen, I thanks so much, gretly appreciate

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Speaker 1: the features advance of five Right now Bloomer's surveillance bunched

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Speaker 1: and follow at investo us on Twitter. Michael, why don't

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Speaker 1: you bring in her steam guest this after we survived

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Speaker 1: Scott Mather on Friday? Well, you can never you can

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Speaker 1: never have too many people from Pimcoke who are here

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Speaker 1: to enlighten us. And we're pleased that Rich Clarenda is

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Speaker 1: here because he brings the economic on this Monday after

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Speaker 1: the c f A test, he brings the D S

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Speaker 1: G E model way of thinking to our program. Uh.

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Speaker 1: And yet I want to ask you about communications strategy.

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Speaker 1: We were talking about the whole Woodford thing, uh, and

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Speaker 1: forward guidance one of the problems that FED has had,

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Speaker 1: as as you mentioned, getting markets to believe forward guidance.

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Speaker 1: And there's seems to be a feeling out there that

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Speaker 1: the FED cannot move if the markets do not permit it,

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Speaker 1: and I would think she would want to push back

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Speaker 1: against that. Yeah, I think she will. And as indeed,

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Speaker 1: as we were discussing off air Bill Dudley recently when

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Speaker 1: someone said, a few raise rates, that will tighten financial conditions,

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Speaker 1: and he correctly said, that's what raising rates does. It

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Speaker 1: does tighten financial conditions modestly certainly. So, yes, I think

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Speaker 1: I think Cherry Yellen and the other members of the

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Speaker 1: committee uh Well will certainly want to and I hope

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Speaker 1: they do indicate that data dependence is not in itself

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Speaker 1: a policy and their expectation is that they do need

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Speaker 1: to raise rates, and they certainly don't want to be

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Speaker 1: perceived as giving the markets. Who are the People's Bank

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Speaker 1: of China, you know, a veto over the rate high path.

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Speaker 1: But it is a delicate issue because they do depend

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Speaker 1: on market expectations to implement policy. Well do they continue

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Speaker 1: to sell forward the idea that rates are going to

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Speaker 1: have to raise, How do they convince people that they

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Speaker 1: mean it? Well, I think in part through repetition. So

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Speaker 1: I lost count of the number of FETE officials in

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Speaker 1: the last six weeks who were on the tape concluding

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Speaker 1: Evans who's Charlie Evans, my good friend, who's considered on

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Speaker 1: the more dover side. I think talking about a couple

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Speaker 1: of rates, Williams two or three uh high. So I

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Speaker 1: think part of this repetition Arthur Burns had a pipe

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Speaker 1: in his hand. You know, maybe we do better if

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Speaker 1: Janet Yelling had a pipe her hand February of nineteen

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Speaker 1: seventy to March of nineteen before him, a guy named

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Speaker 1: William McChesney Martin, who did pretty well, I would suggest

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Speaker 1: in history, and William Miller afterwards, who sort of was

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Speaker 1: there as the gap prevolcre There was a measured window

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Speaker 1: from seventies six to seventy eight. The charts, the Bloomberg chart.

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Speaker 1: I'll put the chart out on Bloomberg Radio. Plus, I

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Speaker 1: want to go back the measured Greenspan didn't invent measured.

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Speaker 1: Measured is what we do to maintain control as an institution.

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Speaker 1: Are we gonna get a measured speech today? Okay? Well,

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Speaker 1: Tom using the word measure has a couple of meetings.

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Speaker 1: Are we gonna Oh? Yes, I think I think we

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Speaker 1: will get a measured speech because I think one thing

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Speaker 1: we've discussed here a lot about cherry y'alling is she

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Speaker 1: very jealously wants to have maximum optionality, so he will

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Speaker 1: certainly not want to She will certainly and I think,

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Speaker 1: not want to flag a June hike, but she will

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Speaker 1: not want to close the door to doing several hips

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Speaker 1: this year. So I think she's trying to navigate. She

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Speaker 1: will have a measured pace. But I want to get

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Speaker 1: back to your earlier point. What what Chair Greenspan did

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Speaker 1: was essentially for the first time to communicate and the

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Speaker 1: markets thought, essentially commit to a measured pace of of liftoff.

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Speaker 1: So that was the innovation to Greenspan. He the further

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Speaker 1: forward guidance, not Ben Bernando, I'll go with it please. Well,

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Speaker 1: bringing another one, Paul Vulker. He stood up to the markets.

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Speaker 1: He said, I don't care what you think. I'm gonna

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Speaker 1: raise rates until the cows come home. And uh and

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Speaker 1: they you know, they they almost a big protests outside

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Speaker 1: the heart of this. In Folus, this goes back to

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Speaker 1: Magna Decide Ellessee, who's coming a totally different than Professor Clarada,

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Speaker 1: much more holistically with the whole Marxist background and all that.

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Speaker 1: Richard Clarata, if we establish measurement, does that by definition

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Speaker 1: imply a build up of credit is everybody gets into

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Speaker 1: the enthusiasm of the yelling put or the clarata put,

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Speaker 1: and all of a sudden you've got a redux of

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Speaker 1: a build up in crepin and And I think I

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Speaker 1: think that's always a risk, and in particular in the

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Speaker 1: U S it's a more challenging problem than, for example,

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Speaker 1: saying continental Europe and Japan. In Europe and Japan, essentially

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Speaker 1: all credit in the economies intermediated through banks and banking

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Speaker 1: is very concentrated. So if you're can essentially either explicitly

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Speaker 1: or implicitly nudge the banks, especially in the US, most

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Speaker 1: of our credits intermediate outside of banks. So there always

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Speaker 1: is a risk in the U S system of having

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Speaker 1: low rates as triggering accesses and credit markets. Now, I

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Speaker 1: don't believe that we're in that situation broadly. The FED,

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Speaker 1: I think doesn't believe it, but that certainly is a risk,

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Speaker 1: and I think many FED officials said one reason they

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Speaker 1: want to get off zero I think I think Mr

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Speaker 1: Kaplan said that the other day from Dallas, one reason

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Speaker 1: to get off zero is the risk of those accesses

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Speaker 1: at at zero rates. Do you think do you think

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Speaker 1: they're serious. Well, they're already off zero. I think they're

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Speaker 1: serious and intending to Oh well, certainly in the extreme

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Speaker 1: case where you would have a replay of OHA, that

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Speaker 1: would it would be very very very serious. As again,

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Speaker 1: I think there are a lot of differences with OA,

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Speaker 1: in particular with regards to the banking system and also

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Speaker 1: with parts of the plumbing of of the credit markets

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Speaker 1: through repo and central clearing UH and the like. But

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Speaker 1: of course we always need to remember that generals are

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Speaker 1: quite good at fighting the last war. So I'm very

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Speaker 1: confident in the next down turn, whenever it is, will

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Speaker 1: not look like oh eight, but it would look like

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Speaker 1: something else. And that's the danger. Mike. I'm gonna turn

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Speaker 1: after Lockhart after yelling to page three fifty two of

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Speaker 1: Woodford's Interesting Pipe Prices and read about optimal price setting

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Speaker 1: within Dodgen's capital. I think that'll get it done. Somebody's

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Speaker 1: thank you, wonderful, wonderful, wonderful. This is Bloomberg's surveillance coming

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