WEBVTT - Surveillance: Gross Says Job Report Won't Bar Fed Rate Increase 0:00:00.320 --> 0:00:04.160 Who you put your trust in matters. Investors have put 0:00:04.200 --> 0:00:07.640 their trust in independent registered investment advisors to the tune 0:00:07.640 --> 0:00:12.240 of four trillion dollars. Why learn more and find your 0:00:12.240 --> 0:00:27.600 independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 0:00:27.680 --> 0:00:31.680 I'm Tom Keane. Always with Michael McKee. Daily we bring 0:00:31.720 --> 0:00:35.640 you insight from the best in economics, finance, investment, and 0:00:35.720 --> 0:00:41.880 international relations. Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, 0:00:41.920 --> 0:00:48.800 and of course, on the Bloomberg Michael. I know it's 0:00:48.880 --> 0:00:51.640 job today. I believe we have a few guests qualified 0:00:52.200 --> 0:00:56.680 to talk about the unemployment rate, labor participation, maybe even 0:00:56.800 --> 0:01:00.320 someone qualified to talk about wage growth. That would be 0:01:00.360 --> 0:01:04.160 Alan Cruer from Princeton University, who is the former Chief 0:01:04.200 --> 0:01:06.560 Economists at the Labor Department of the Treasury Department and 0:01:06.600 --> 0:01:09.360 the Chairman of the Council of Economic Advisors. I just 0:01:09.400 --> 0:01:12.520 can't hold a job. I don't know what his problem is, 0:01:12.600 --> 0:01:15.360 but all is with this as always on Job's Day. 0:01:15.440 --> 0:01:18.480 Let me just mention Tom before we get started with Alan, 0:01:18.520 --> 0:01:21.800 that the consensus forecasts are for one and seventy two 0:01:21.800 --> 0:01:24.280 thousand jobs to have been created in the month of September, 0:01:24.560 --> 0:01:27.679 and interestingly enough, that is bang on the six month 0:01:27.760 --> 0:01:33.520 average three thousand, So a number today that meets consensus 0:01:33.880 --> 0:01:37.800 would probably uh not lead to a whole lot of 0:01:37.840 --> 0:01:42.679 additional trading. Four nine is the forecast for unemployment. But Alan, 0:01:42.760 --> 0:01:46.160 as Tom touched on, the one change that you do 0:01:46.240 --> 0:01:50.040 see in the forecast is a significant increase in average 0:01:50.080 --> 0:01:53.640 hourly earnings. Uh. The question is is this going to 0:01:53.680 --> 0:01:57.440 be a statistical fluke or are we really seeing wages 0:01:57.560 --> 0:02:00.240 rise because we're running out of workers the old Phillips curve. 0:02:01.120 --> 0:02:03.320 I think we are seeing the Phillips curve. I think 0:02:03.320 --> 0:02:08.000 it's a gradually sloped Philip's curve. But over the past year, 0:02:08.040 --> 0:02:11.000 we have seen wages pick up both nominal and after 0:02:11.040 --> 0:02:14.960 adjusting for inflation UM, which is encouraging. I chose that 0:02:15.040 --> 0:02:16.960 we're continuing to dig our way out of the deep 0:02:17.000 --> 0:02:21.640 problems from the recession. The deep problems of the recession 0:02:21.880 --> 0:02:25.040 UM left us sort of flat and left us with 0:02:25.120 --> 0:02:29.359 this populist anger. We see rage wages rising fast enough 0:02:29.720 --> 0:02:34.320 that it will affect people's view of the world. That's 0:02:34.320 --> 0:02:36.600 a very good question, Mike, and you look at the 0:02:36.680 --> 0:02:40.240 data that came out on we had the fastest growth 0:02:40.280 --> 0:02:44.440 in real median household income since the sense of Spiro 0:02:44.520 --> 0:02:47.760 started collecting the data. So I think it's clear that 0:02:47.800 --> 0:02:50.320 households are doing better, but they went through such a 0:02:50.360 --> 0:02:53.360 traumatic experience that I think it's going to take a 0:02:53.360 --> 0:02:56.880 while before people are feeling good about their economic situation. 0:02:58.160 --> 0:03:01.239 And when I look at the unimp ployment rate, people 0:03:01.320 --> 0:03:04.600 drive low. Is it a constructive lower unemployment rate or 0:03:04.639 --> 0:03:09.120 is it a bad thing If the unemployment rate drops, well, 0:03:09.160 --> 0:03:11.600 I think it's a good thing. On on that, I 0:03:11.639 --> 0:03:15.160 think a tighter labor market will help to support wages. 0:03:15.320 --> 0:03:19.880 We saw inequality decline in mainly because of more job 0:03:19.919 --> 0:03:24.600 growth that year and higher wage growth, particularly for lower 0:03:24.600 --> 0:03:28.680 income families. UM. I think this recovery is not going 0:03:28.720 --> 0:03:30.400 to be the strongest one we've had, but it could 0:03:30.440 --> 0:03:33.919 well be the longest. Alan Krueger is with this Princeton 0:03:34.080 --> 0:03:38.600 University economics professor, former chief economist at various government agencies, 0:03:38.600 --> 0:03:40.840 including the Labor Department. So here's a man who knows 0:03:41.480 --> 0:03:46.040 the labor economy. One of the issues in the presidential 0:03:46.120 --> 0:03:50.680 race has been the declining rate of labor force participation 0:03:51.360 --> 0:03:54.720 and why people are not in the labor force You've 0:03:54.760 --> 0:03:58.520 just done some new work on it, UM and oddly 0:03:58.560 --> 0:04:01.360 titled it, We'll have all the workers God? What have 0:04:01.400 --> 0:04:05.640 you found? First of all, labor force participation has been 0:04:05.680 --> 0:04:09.760 declining since two thousands, so I find it somewhat curious 0:04:09.840 --> 0:04:11.480 that a lot of the people who are complaining about 0:04:11.480 --> 0:04:15.880 it now didn't start complaining about it until after President 0:04:15.880 --> 0:04:19.560 Obama was elected. UM. The main driver over the last 0:04:19.600 --> 0:04:23.160 decade of the decline in labor force participation has been 0:04:24.240 --> 0:04:28.120 the baby boom reaching retirement age, and the increase in 0:04:28.200 --> 0:04:33.240 retirements just about equals decline in the participation rate. That said, 0:04:33.240 --> 0:04:35.919 there are some other trends that have been taking place 0:04:35.920 --> 0:04:39.600 for a long period of time. Prime age men have 0:04:40.760 --> 0:04:44.080 been reducing their labor force participation for the last fifty years, 0:04:44.560 --> 0:04:47.240 and one of the things I found is that if 0:04:47.279 --> 0:04:50.400 you look at that twelve percent of men fifty four 0:04:50.440 --> 0:04:52.760 who are not working, about half of them have a 0:04:52.800 --> 0:04:56.080 serious health condition. And I think if we are too 0:04:56.839 --> 0:04:59.920 uh look for ways to increase the participation right, we 0:05:00.160 --> 0:05:02.200 need to deal with the health issues that are barrier 0:05:02.279 --> 0:05:06.359 to work for many many workers. I look at on 0:05:06.520 --> 0:05:09.359 Krueger on a job's day that I guess is a 0:05:09.440 --> 0:05:12.200 dead Job's Day because I'm told the November meeting is 0:05:12.240 --> 0:05:15.800 a dead meeting of the f O. M C is 0:05:15.839 --> 0:05:20.080 a media animal. I refuse to succumb to that. Does 0:05:20.120 --> 0:05:22.080 a grizzled pro like you look at this as a 0:05:22.120 --> 0:05:27.400 dead report, you know, I think people tend to uh 0:05:27.600 --> 0:05:31.160 amplify the reports and other months, and in this month 0:05:31.160 --> 0:05:33.520 they're probably underplaying it. You know. The Job's report gives 0:05:33.600 --> 0:05:35.600 us the best picture of how the economy is doing 0:05:35.680 --> 0:05:38.279 in the short run, and at the same time, it's 0:05:38.279 --> 0:05:41.800 a volatile statistic. Like all of the statistics we get. 0:05:42.160 --> 0:05:46.240 What does it say about small business percolating? Is a yeah? 0:05:46.320 --> 0:05:50.400 But which is everything's great? Yeah, but small business isn't there? 0:05:50.480 --> 0:05:54.279 What do you see there after a financial crisis. I 0:05:54.279 --> 0:05:57.200 think it's typically the case that small business struggles. That's 0:05:57.240 --> 0:06:01.600 who's dependent on bank financing. They have difficulty getting credit 0:06:01.680 --> 0:06:04.479 there homes are often under water, which is a source 0:06:04.480 --> 0:06:07.280 of credit. So the longer that this recovery goes on, 0:06:08.040 --> 0:06:11.120 the likelier I think it is that small businesses will 0:06:11.120 --> 0:06:14.279 start to be able to get credit, that their credit 0:06:14.320 --> 0:06:17.840 records will improve, and that will be one reason why 0:06:17.880 --> 0:06:20.800 I think we can see this recovery go on for 0:06:20.880 --> 0:06:26.120 some time if we don't make policy mistakes. How how 0:06:26.160 --> 0:06:28.720 would you define a policy mistake? UM? When you have 0:06:28.960 --> 0:06:31.240 interest rates as low as they are, and when you 0:06:31.279 --> 0:06:35.560 have the FED promising to be as slow and cautious 0:06:35.600 --> 0:06:38.400 as they have UM. The traditionally we think of a 0:06:38.400 --> 0:06:42.240 policy make mistake is the FED raising interest rates too quickly. Well, 0:06:42.279 --> 0:06:46.480 that has been a cause of most of our recessions. UM. 0:06:46.560 --> 0:06:48.200 On the other hand, you also have to worry about 0:06:48.200 --> 0:06:51.440 bubbles building up, which is a risk to the recovery. 0:06:52.120 --> 0:06:55.520 And you have to worry about the potential election of 0:06:55.520 --> 0:06:58.080 a candidate who says he'll slap a forty five pers 0:06:58.120 --> 0:07:03.120 and tariff on China, potentially reneg on the full faith 0:07:03.120 --> 0:07:06.440 and credit of the US dollar, h deport millions of 0:07:07.120 --> 0:07:10.760 UH immigrants, all of those things I think would devastate 0:07:10.800 --> 0:07:14.720 the economy. I look at all and it's a terrific 0:07:14.760 --> 0:07:17.040 set of guests that we've got lined up. And there's 0:07:17.080 --> 0:07:21.600 an international feel to this report. I mean, fold in 0:07:21.720 --> 0:07:25.360 here the better American economy? How much better is it 0:07:25.720 --> 0:07:28.560 than some of the other challenges around the world. The 0:07:28.560 --> 0:07:31.160 answers it gets wider and wider, doesn't it. Well, we 0:07:31.200 --> 0:07:33.240 certainly have a lot of problems, but I wouldn't trade 0:07:33.240 --> 0:07:36.520 all our problems for any other country's problems. I was 0:07:36.640 --> 0:07:41.160 just in Korea, actually flew back late last night, and Uh, 0:07:41.200 --> 0:07:44.120 they have a demographics tsunami that's about to hit them. 0:07:44.120 --> 0:07:46.720 They're going to go from the fourth youngest country in 0:07:46.760 --> 0:07:48.400 the O e c D to the oldest in the 0:07:48.440 --> 0:07:51.280 matter of twenty five years. You look at the problems 0:07:51.280 --> 0:07:54.440 in Japan, which has never recovered from the recession in 0:07:54.480 --> 0:08:00.320 the early nineties. China has enormous challenge at ahead of it. Uh. Europe, Uh, 0:08:00.480 --> 0:08:03.000 the UK just go on and on, and our problems 0:08:03.040 --> 0:08:06.520 are solvable. If we have the political will to address them. 0:08:06.560 --> 0:08:09.400 Well that will be uh the question. Come January, when 0:08:09.440 --> 0:08:12.400 we have a new Congress and a new president. We 0:08:12.440 --> 0:08:17.080 shall see Alan Krueger, thanks for Hobsdalen Krueger sitting in 0:08:17.080 --> 0:08:18.960 my chair in New York without a bow tie on. 0:08:20.080 --> 0:08:22.840 Actually he actually was not wearing a tie point and 0:08:23.000 --> 0:08:28.120 we moved him. He couldn't sit there. I knew I 0:08:28.160 --> 0:08:45.320 shouldn't have tweeted that picture. Tom Alan Krueger and Tom Kane. Um, 0:08:45.360 --> 0:08:47.920 this is a real pleasure and honor, folks. Peter Fisher 0:08:48.080 --> 0:08:51.920 is uh, someone who has served the nation at treasury. 0:08:52.240 --> 0:08:55.000 He has served a nation in academics, and he actually 0:08:55.080 --> 0:08:59.600 served a nation doing finance in a small shop called Blackstone. Uh. 0:08:59.800 --> 0:09:02.960 He is right now, I would say, associated more with 0:09:03.040 --> 0:09:07.720 Tuck and Dartmouth uh than the other eight places he works. Peter, 0:09:07.840 --> 0:09:10.640 good morning. Um. I guess I could start up by 0:09:10.640 --> 0:09:13.400 saying have you ever seen anything like this? But let 0:09:13.400 --> 0:09:16.880 me get to the what Jack lewis looking at this morning, 0:09:16.920 --> 0:09:19.679 the Secretary of the Treasury. I just did a fancy 0:09:19.720 --> 0:09:24.320 pants log extrapolation of sterling to one point to zero, 0:09:24.840 --> 0:09:27.440 and somewhere in the vicinity of the middle of November, 0:09:28.000 --> 0:09:31.360 we're going to enjoy a good old G seven currency depreciation. 0:09:31.880 --> 0:09:36.079 Can the United Kingdom work in a vacuum or there 0:09:36.080 --> 0:09:40.440 are there present in near future knock on effects of 0:09:40.520 --> 0:09:44.200 weaker sterling? Um, well, that they're they're bound to be. 0:09:44.640 --> 0:09:47.920 I think we can see the Brexit is hard to 0:09:48.000 --> 0:09:50.560 price other than in the exchange rate that we think 0:09:50.559 --> 0:09:52.760 it slows the UK economy down. We think it makes 0:09:52.800 --> 0:09:56.200 the Bank of England tend towards the easier side of 0:09:56.240 --> 0:09:59.079 whatever they can pull off. And that's everything else is 0:09:59.120 --> 0:10:01.920 so uncertain about Brexit. We see the sort of anomaly 0:10:02.040 --> 0:10:06.200 driving Sterling lower and lower. Um Uh. Clearly they're gonna 0:10:06.200 --> 0:10:08.840 be knock on effects. Given the size of the UK economy, 0:10:08.880 --> 0:10:11.600 it still matters to us all and and it may 0:10:11.640 --> 0:10:13.840 pick up the terms of trade. This may be what's 0:10:13.840 --> 0:10:17.120 annoying European leaders, even if they're not saying it that 0:10:17.240 --> 0:10:20.440 Sterling is benefiting from the depreciation they hoped the euro 0:10:20.520 --> 0:10:24.840 would get over the exactly years um. So it's about 0:10:24.880 --> 0:10:26.920 to have those consequences. A little hard to see how 0:10:26.920 --> 0:10:30.000 it all shakes out, but yeah, and yakulm Fell's moments ago, 0:10:30.080 --> 0:10:34.840 folks on surveillance talking about eurostability or even strength flows 0:10:34.920 --> 0:10:38.960 Peter Fisher, Uh, this redounds back onto a United States 0:10:39.000 --> 0:10:41.640 and clearly day two here, folks of the I m 0:10:41.720 --> 0:10:45.760 F meetings, the idea is the US, evermore, is stronger 0:10:45.800 --> 0:10:49.000 and better and in good shape compared to so many 0:10:49.000 --> 0:10:53.440 other nations and regional systems. Do you agree, Peter, Yes, 0:10:53.600 --> 0:10:55.800 I mean it's we wish we'd had more of an 0:10:55.840 --> 0:10:58.800 acceleration in this recovery. We wish we were doing better 0:10:58.880 --> 0:11:02.160 in some terms, but we're going pretty well, especially compared 0:11:02.200 --> 0:11:04.480 with the rest of the world. Just looking at UM 0:11:05.440 --> 0:11:09.079 the level of our unemployment, level of GDP both it's disappointing, 0:11:09.160 --> 0:11:13.400 but it's better than the neighborhood. Absolutely, Peter, when we 0:11:13.440 --> 0:11:16.480 look at job's day coming up, and I guess we'll 0:11:16.520 --> 0:11:19.440 focus on that within the hour. And this is something 0:11:19.480 --> 0:11:22.920 you're quite good at. There's a macro economic system of 0:11:23.000 --> 0:11:27.840 one view of a nation. John Edwards among others started 0:11:27.840 --> 0:11:31.959 talking about two America's do you is I'm going to 0:11:32.120 --> 0:11:35.720 call you a non macro expert, but yet with great 0:11:35.880 --> 0:11:40.040 micro realities. Do you look at America is a two 0:11:40.040 --> 0:11:43.360 system job economy or can you really blend it all 0:11:43.440 --> 0:11:46.760 in as we did for decades and decades? No, I 0:11:47.240 --> 0:11:51.080 I think we know UM our labor market is fractured, 0:11:51.200 --> 0:11:53.880 or we have a decline in the participation rate. We've 0:11:53.920 --> 0:11:59.559 got the discouraged UH, middle age and working age. I 0:11:59.559 --> 0:12:03.160 should a men who aren't participating in the labor force, 0:12:03.559 --> 0:12:05.640 UM that we should all scratch our heads about that 0:12:05.720 --> 0:12:09.200 and think that that's that's a big challenge for us. UM. 0:12:09.240 --> 0:12:12.680 I think it's such a disappointment that this campaign has 0:12:12.760 --> 0:12:17.720 not focused on what we should be doing to really 0:12:17.760 --> 0:12:22.880 invigorate our our labor market structural reforms we should be undertaking. 0:12:23.520 --> 0:12:26.560 We've been too much focused on the negative, if you will, 0:12:27.040 --> 0:12:33.360 of Secretary Clinton coined years ago, Years ago, folks, Senator 0:12:33.360 --> 0:12:37.800 Clinton coined an idea of fair trade. What is fair trade? 0:12:37.840 --> 0:12:45.000 To Peter Fisher, um well, I think fair trade says 0:12:45.040 --> 0:12:48.520 we think we should get our fair access to other 0:12:48.600 --> 0:12:51.480 markets and only give people fair access to our markets. 0:12:51.760 --> 0:12:53.800 I think that's putting the shoe on the wrong foot, 0:12:53.880 --> 0:12:56.040 if you will, I think we should be doing more 0:12:56.559 --> 0:12:59.679 for people who are displaced by free trade. I think 0:12:59.679 --> 0:13:04.040 we should doing much much more to retrain those who 0:13:04.080 --> 0:13:07.640 lose their jobs, to provide adjustment assistance to those counties 0:13:08.200 --> 0:13:10.760 where we see the job lost from the benefits of trade. 0:13:10.800 --> 0:13:13.679 We know the benefits to trade flow to all of 0:13:13.760 --> 0:13:16.040 us but are hard to measure, and the costs of 0:13:16.120 --> 0:13:19.040 free trade are easy to identify. People who have lost 0:13:19.080 --> 0:13:21.600 their jobs feel it we should do much more for that. 0:13:21.679 --> 0:13:23.840 I don't think we should hold back on trade because 0:13:24.200 --> 0:13:26.800 someone else isn't being fair to us. I think we 0:13:26.800 --> 0:13:29.520 should be fair to our own people. We should be 0:13:29.559 --> 0:13:31.600 fair to our workers and do much much more on 0:13:31.640 --> 0:13:34.520 the trade adjustment assistant side. Peter Fisher with his time 0:13:34.559 --> 0:13:37.600 for surveillance correction. I'm good at those. There will be 0:13:37.640 --> 0:13:41.240 many today. I believe I identified Mr Fisher with Blackstone, 0:13:41.240 --> 0:13:43.360 and I should have migrated over to black Rock. Is 0:13:44.679 --> 0:13:47.320 thank the place of former employment. Let's go to what 0:13:47.400 --> 0:13:49.240 you used to do at black Rock. You'd wander in 0:13:49.280 --> 0:13:52.920 the door your leisurely day starting at nine am you'd 0:13:52.960 --> 0:13:56.760 wander over to the liquidity desk and say are we liquid? 0:13:56.840 --> 0:14:00.679 You rarely said are we solving? Peter? For sure, I've 0:14:00.720 --> 0:14:04.200 been linking the word trust into liquidity and there's some 0:14:04.280 --> 0:14:08.079 real questions about that within the banking system. How liquid 0:14:08.600 --> 0:14:13.520 are the European banks right now? Uh? Well, I I'm 0:14:13.720 --> 0:14:16.319 not close to the European banks or the trading market 0:14:16.360 --> 0:14:18.080 system as I used to be when I did it 0:14:18.120 --> 0:14:21.360 full time. Um, I think they are liquid. I think 0:14:21.400 --> 0:14:23.920 they're running out of income. The constraint I think has 0:14:23.960 --> 0:14:27.200 coming on the other side. UM So, I don't think 0:14:27.200 --> 0:14:29.840 people are worried about You know that they can't pay 0:14:29.880 --> 0:14:32.680 their bills when they're due. But where they're worried about 0:14:32.760 --> 0:14:36.320 is the margin compression UM and and earnings power. And 0:14:36.360 --> 0:14:37.920 I think you see the rumblings out of the e 0:14:38.040 --> 0:14:41.320 c B about Uh, the system being over banks, Well, 0:14:41.320 --> 0:14:43.920 that's been true in Europe for thirty years. They're overbanked. 0:14:44.120 --> 0:14:46.960 They've got too many banks. They should have once they've 0:14:47.040 --> 0:14:49.560 invented the euro they should have worked much harder on 0:14:49.560 --> 0:14:53.840 a rationalization consolidation of the banking system. So this is overdue, 0:14:53.880 --> 0:14:57.120 and that would be one way to try to deal 0:14:57.240 --> 0:15:00.720 with the earnings compression of the European banking system. I 0:15:00.720 --> 0:15:02.680 think that's where the constraint is. And this has been 0:15:02.720 --> 0:15:05.280 a theme folks of the meetings. Pure Moscovici was just 0:15:05.360 --> 0:15:09.120 wonderful yesterday on this profitability conundrum. Let me bring in 0:15:09.160 --> 0:15:12.000 Michael McKee in New York with Peter Fisher. Michael, Peter, 0:15:12.040 --> 0:15:14.640 I guess a lot of the question that revolves around 0:15:14.720 --> 0:15:18.280 all of this is, uh, confidence, do we have confidence 0:15:18.320 --> 0:15:22.160 in the European banking system? But here as we see 0:15:22.160 --> 0:15:24.200 people come in and out of the labor forces, we 0:15:24.280 --> 0:15:28.400 see wages start to rise, do we have enough confidence 0:15:28.440 --> 0:15:32.840 to whether any kind of FED rate move, small FED 0:15:32.920 --> 0:15:36.080 rate move? Will people keep borrowing? Will people keep spending? 0:15:36.480 --> 0:15:38.320 If the FED does something that that would seem to 0:15:38.320 --> 0:15:43.480 be the key question that surrounds all this. I don't 0:15:43.520 --> 0:15:46.520 think the Fed funds rate twenty five basic points higher. 0:15:46.640 --> 0:15:49.480 Is it really going to constrain anyone? UM, That's not 0:15:49.640 --> 0:15:51.960 what I think is is uh. I think the Fed 0:15:52.160 --> 0:15:55.520 is likely to confront pick up an inflation. I'm not 0:15:55.600 --> 0:15:58.360 very fussed about inflation, but most of the measures of 0:15:58.400 --> 0:16:02.040 inflation have already accelerated to two and higher. The Fed's 0:16:02.080 --> 0:16:06.080 preferred PCE measure is lacking. I think there's gonna be 0:16:06.080 --> 0:16:08.040 a catch up here, and I think that's gonna give 0:16:08.040 --> 0:16:10.920 a little pressure to the long end of the yield curve. UM. 0:16:10.920 --> 0:16:14.240 I think today's employment report fits on the stronger side, 0:16:14.560 --> 0:16:16.840 will add to that pressure that well, yeah, if that's 0:16:16.840 --> 0:16:18.400 going to have to do something. But it's not about 0:16:18.400 --> 0:16:21.000 the next twenty five basis points. It's about whether the 0:16:21.080 --> 0:16:23.640 Fed will do one next year or three or four 0:16:23.680 --> 0:16:26.360 moves next year. That's what is going to hang in 0:16:26.360 --> 0:16:28.720 the balance over the next few months of economic data. 0:16:28.960 --> 0:16:32.360 Peter Fisher is with us right now lecture at the 0:16:32.360 --> 0:16:35.920 Toch School of Business at Dartmouth College. Formerly the man 0:16:35.960 --> 0:16:39.000 who ran the open market operations for the Federal Reserve, 0:16:39.040 --> 0:16:42.440 worked at the Treasury Department, is under Secretary for Domestic Finance. 0:16:42.840 --> 0:16:45.680 And then I had a career at black Rock in 0:16:45.760 --> 0:16:47.520 the markets, and I want to go to the markets 0:16:47.720 --> 0:16:51.880 and their relationship to the FED. There's been, Peter a 0:16:51.960 --> 0:16:55.160 big question raised recently about whether or not the FED 0:16:55.280 --> 0:16:59.760 is and its policies are distorting anything in the markets. 0:17:00.400 --> 0:17:02.200 How do you see it? If you were going to 0:17:02.280 --> 0:17:05.920 be producing for the next FED meeting, the market report 0:17:06.560 --> 0:17:11.760 that goes into the meeting, what would you be telling them? Uh, Well, 0:17:12.680 --> 0:17:14.840 they might be shocked to hear what I'll tell them. Um, 0:17:15.520 --> 0:17:17.800 we know the yield curve has been dragged down by 0:17:18.400 --> 0:17:21.119 the qui le policies in Japan and Europe. That is 0:17:21.160 --> 0:17:23.520 our long end. You can see it. It was coming 0:17:23.560 --> 0:17:25.800 down when the FED really wasn't doing anything over the 0:17:25.880 --> 0:17:28.840 last year. As the two attend spread tightened, that was 0:17:28.880 --> 0:17:32.800 more of a tightening than the FED expected. That's one anomaly. 0:17:33.840 --> 0:17:36.159 But I think what I'd be telling the committee they 0:17:36.200 --> 0:17:39.160 might not want to hear is they've been targeting low 0:17:39.240 --> 0:17:44.280 level of volatility as if it is a third policy goal. Um. 0:17:44.480 --> 0:17:48.119 And so they've been that they are uncomfortable when asset 0:17:48.160 --> 0:17:51.159 prices jump around too much. Uh, it's it's like a 0:17:51.240 --> 0:17:55.200 third in addition to inflation and employment. UM. They get 0:17:55.240 --> 0:17:59.000 squeamish about volatility. UM. I think that's a big mistake. 0:17:59.200 --> 0:18:02.040 I think it's a natural consequence of monetary policy doing 0:18:02.040 --> 0:18:05.360 its thing. UM. But you can see this very low 0:18:05.440 --> 0:18:08.760 level of all that that we've had UM that I 0:18:08.800 --> 0:18:12.160 think is creating the distortions. That's the most important one 0:18:12.680 --> 0:18:18.760 to improve, Mr Fisher a negative rates strategy. Do we 0:18:18.840 --> 0:18:22.320 need to disperse the effect of negative rates to a 0:18:22.359 --> 0:18:26.600 broader public nation to nation? Do we need to stop 0:18:26.760 --> 0:18:30.520 using negative rates and migrate back to the zero bound? 0:18:30.960 --> 0:18:35.320 What's the Peter Fisher calculus there? Well, I think negative 0:18:35.400 --> 0:18:38.320 rates were a mistake. I think it UM. I think 0:18:38.520 --> 0:18:40.919 the Bank of Japan has not quite admitted it, but 0:18:41.000 --> 0:18:43.560 they're working their way out of them so that they've 0:18:43.600 --> 0:18:46.280 come up with an exit strategy from negative rates, and 0:18:46.320 --> 0:18:50.199 that's to manage their yield curve um negative rates. There 0:18:50.200 --> 0:18:52.720 are lots of fallacies that go into thinking that negative 0:18:52.800 --> 0:18:56.120 rates would work. One is that the human reaction function 0:18:56.200 --> 0:18:58.840 is linear, that if we lower rates from four to 0:18:58.920 --> 0:19:02.000 three percent, that all courage consumption. So if we lower 0:19:02.040 --> 0:19:04.840 them from zero to minus one, that will encourage consumption. No, 0:19:05.040 --> 0:19:08.280 it looks like it encourages savings. Uh, we can see 0:19:08.280 --> 0:19:11.359 why negative rate might help you weaken your currency if 0:19:11.400 --> 0:19:14.800 you're trying to steal demand from your trading partners, um. 0:19:14.840 --> 0:19:17.400 But it doesn't look like it's going to encourage consumption, 0:19:18.560 --> 0:19:20.480 in part because banks aren't willing to pass it on. 0:19:21.160 --> 0:19:24.000 And so banks really face in Japan and Europe and 0:19:24.080 --> 0:19:27.199 in very deal curve already they have trouble passing on 0:19:27.240 --> 0:19:29.480 the negative rates. So it's zero at the short end 0:19:29.760 --> 0:19:32.320 and then it's negative at the long end. That's terrible 0:19:32.359 --> 0:19:35.520 for the credit channel. So pretty much the Bank of 0:19:35.600 --> 0:19:39.080 Japan and ECB have acknowledged that it didn't help the 0:19:39.119 --> 0:19:43.200 credit channel. UM, so it really doesn't. It hasn't helped. 0:19:43.440 --> 0:19:46.800 So this is I think the most embarrassing thing for 0:19:46.840 --> 0:19:49.720 the central bankers is for the last eight years they've 0:19:49.760 --> 0:19:52.640 said they had to experiment, the economy was in difficult 0:19:52.640 --> 0:19:54.800 circumstances and it was up to them to be bold 0:19:54.840 --> 0:19:57.920 and experiment. But they never can admit when their experiments 0:19:57.960 --> 0:20:01.560 don't work, the experimental method or choires that people acknowledge 0:20:01.920 --> 0:20:04.400 what the results were, and they've had a hard time 0:20:04.440 --> 0:20:07.919 doing that. Well, I can't I can't say enough Michael, 0:20:07.960 --> 0:20:12.280 the importance of this non linearity. This is a huge deal. 0:20:13.280 --> 0:20:16.720 We Uh, we do see evidence of what you're talking about, 0:20:16.720 --> 0:20:20.320 Peter here in the headlines. Just crossing now. Mario Draggy 0:20:20.440 --> 0:20:22.720 in Washington for the I m F meetings, giving a 0:20:22.760 --> 0:20:25.959 speech behind closed doors, but the text released. Uh. Droggy 0:20:26.520 --> 0:20:29.600 saying that they will let que continue to run and 0:20:29.680 --> 0:20:34.000 he sees rates at current or lower levels for an 0:20:34.000 --> 0:20:37.520 extended period, repeats that they will use all instruments within 0:20:37.560 --> 0:20:41.800 their mandate if needed. Uh. And he at the same 0:20:41.840 --> 0:20:45.119 time says that low rates are hurting banks relying on 0:20:45.200 --> 0:20:49.320 maturity transformation. Um, so, yes, we're causing harm, but no, 0:20:49.400 --> 0:20:52.560 we're not going to stop. Yeah. Well he I mean, 0:20:52.800 --> 0:20:55.880 at least in Japan, the Bank of Japan by by 0:20:55.960 --> 0:20:58.840 committing to try to manage their yield curve, they're going 0:20:58.880 --> 0:21:00.800 to try to have a great will exit. I think 0:21:00.800 --> 0:21:03.480 it's a very wise thing to do if you've made 0:21:03.480 --> 0:21:05.680 the mistake of negative rates, now you're trying to undo 0:21:05.720 --> 0:21:09.280 the damage. They want to control how fast the curve steepens. 0:21:09.840 --> 0:21:12.560 And that's one way of passing the football over to 0:21:12.840 --> 0:21:16.439 the Abbe government and fiscal policy. But Droggy doesn't have 0:21:16.480 --> 0:21:19.000 that option. He doesn't have anyone to pass the football 0:21:19.040 --> 0:21:23.040 to Um on the fiscal side, and so he he's 0:21:23.160 --> 0:21:26.400 left Um, you know, spinning his wheels. I'm afraid it's 0:21:26.440 --> 0:21:30.320 it's very awkward for him. Peter Fisher. Let's leave it there. 0:21:30.359 --> 0:21:32.119 Thank you so much, very generous for you to be 0:21:32.200 --> 0:21:35.040 with us today with Tuck at Dartmouth College. Uh and 0:21:35.080 --> 0:21:38.040 of course with the service to the Treasury, the Treasury 0:21:38.080 --> 0:21:44.040 Department number of years ago. The who you put your 0:21:44.080 --> 0:21:48.399 trust in matters. Investors have put their trust in independent 0:21:48.440 --> 0:21:52.080 registered investment advisors to the tune of four trillion dollars. 0:21:52.800 --> 0:21:56.600 Why they see their role is to serve, not sell. 0:21:57.480 --> 0:21:59.760 That's why Charles Schwab is committed to the success of 0:21:59.840 --> 0:22:05.040 a seven thousand independent financial advisors who passionately dedicate themselves 0:22:05.359 --> 0:22:09.200 to helping people achieve their financial goals. Learn more and 0:22:09.400 --> 0:22:19.720 find your independent advisor dot com. The question now is 0:22:19.720 --> 0:22:22.320 how the treasury market trades all of this. We'd like 0:22:22.359 --> 0:22:26.320 to welcome to Bloomberg Radio and Television, Bill Gross of 0:22:26.440 --> 0:22:30.080 Janice Capital and Bill, you've seen the numbers at one 0:22:30.119 --> 0:22:34.640 commentator already out with the phrase, mech but does it matter? 0:22:35.040 --> 0:22:38.000 The question I put to Peter Fisher a minute ago 0:22:38.080 --> 0:22:42.160 does it matter to anybody except short term treasury traders 0:22:42.240 --> 0:22:45.520 at this point? Yeah, I know. Thanks, So I don't 0:22:45.680 --> 0:22:49.800 know how you spell or but in any case, you know, 0:22:49.880 --> 0:22:52.879 pretty milk toast, you can you can spell that, and 0:22:53.080 --> 0:22:56.320 and pretty on the number in terms of what we're 0:22:56.320 --> 0:23:01.240 expecting the work week was, I guess, And as you mentioned, 0:23:01.280 --> 0:23:03.640 wage is a point two percent. So there's nothing much 0:23:03.680 --> 0:23:07.119 there to keep the FED from raising interest rates. And 0:23:07.160 --> 0:23:09.959 whether it's November or December, I'm not sure, but I 0:23:09.960 --> 0:23:12.399 think at some point they have to. I mean, the 0:23:12.480 --> 0:23:15.080 central banks tend to be a little weak need at 0:23:15.119 --> 0:23:18.480 the moment, including the FED. They've talked tough and stressed 0:23:18.840 --> 0:23:22.119 data dependence and here we are. But you know, they've 0:23:22.280 --> 0:23:24.600 only been three Hawks willing to back up their words 0:23:24.600 --> 0:23:27.440 with the dissension at the last month's vote. And so 0:23:27.560 --> 0:23:30.480 I I think that there's the important thing. I think, like, 0:23:30.560 --> 0:23:34.280 I think the growing outcry from financial institutions about negative 0:23:34.320 --> 0:23:40.399 interest rates are starting to have some effect. Boston's Rosen 0:23:40.480 --> 0:23:43.880