WEBVTT - Fed Can Start Shrinking Its Balance Sheet, Esther George Says 0:00:09.720 --> 0:00:12.880 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with 0:00:13.560 --> 0:00:16.520 David Gura. Daily we bring you insight from the best 0:00:16.560 --> 0:00:22.279 of economics, finance, investment, and international relations. Find Bloomberg Surveillance 0:00:22.320 --> 0:00:27.000 on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course, 0:00:27.320 --> 0:00:34.560 on the Bloomberg At the morning on a Thursday, August. 0:00:34.560 --> 0:00:36.920 This is Bloomberg Surveillance on Bloomberg Radio. David Gurray in 0:00:36.960 --> 0:00:39.640 New York. Francy Laca with me in London. Tom King's 0:00:39.680 --> 0:00:43.640 summer vacation continues whereabouts unknown. Mr Keane, We'll see him 0:00:43.680 --> 0:00:46.040 back here on Tuesday of next week. Central bank policy 0:00:46.040 --> 0:00:49.000 makers have made their pilgrimage to northwestern Wyoming for the 0:00:49.040 --> 0:00:51.879 Kansas City feds Annual Economic Policies and Post. He will 0:00:51.880 --> 0:00:53.840 hear from the host of that event. Just a little 0:00:53.920 --> 0:00:55.880 later this hour, our colleague Michael McKee sits down with 0:00:56.000 --> 0:00:59.480 Esther George for a wide ranging conversation on monetary policy. 0:00:59.800 --> 0:01:02.360 So Francing Lack which joins me in London, and Ron 0:01:02.400 --> 0:01:03.920 Temple with me here in on our Bloomberg eleven three 0:01:03.920 --> 0:01:06.640 oh studios in New York. We just got off television 0:01:06.640 --> 0:01:09.039 with him. Had some great conversations, and let's circle back 0:01:09.080 --> 0:01:12.360 to monetary policy if we could. I started off on 0:01:12.400 --> 0:01:14.280 TV asking you what you're gonna be listening for from 0:01:14.760 --> 0:01:18.120 from Jackson Hole. Uh. Do you expect the conversation here 0:01:18.200 --> 0:01:20.640 largely to center on inflation? This is something that each 0:01:20.680 --> 0:01:22.920 of these banks is worrying about in its own specific way. 0:01:23.800 --> 0:01:25.000 I do think there will be quite a bit of 0:01:25.000 --> 0:01:27.600 conversation around inflation. I do think obviously, Janet yell and 0:01:27.600 --> 0:01:29.600 speech I believe is going to be about financial stability. 0:01:30.080 --> 0:01:33.480 Um so, the ultimate crux of the discussion should be 0:01:33.520 --> 0:01:36.479 around inflation and should be understanding what is structurally changed 0:01:36.560 --> 0:01:39.560 versus cyclical um so. As a you know, I think 0:01:39.600 --> 0:01:40.880 one of the things we've done a lot of work 0:01:40.920 --> 0:01:44.360 here on is understanding the Phillips curve e either relationship 0:01:44.400 --> 0:01:48.480 between unemployment wage growth, Understanding why even though unemployment has 0:01:48.520 --> 0:01:51.040 declined so far that wage growth is not accelerated more. 0:01:51.360 --> 0:01:53.640 It's a phenomenon across the U S, Germany and Japan. 0:01:53.800 --> 0:01:55.240 So I think there'll be a lot of conversation around 0:01:55.240 --> 0:01:59.800 topics like that and transitory factors affecting inflation. Hi, Ron, 0:01:59.800 --> 0:02:01.920 it's ranting from London. Do you believe that we still 0:02:01.920 --> 0:02:03.760 need to look at the Phillips curve or is it broken? 0:02:03.800 --> 0:02:07.200 Will it come back? It's hard to answer that with 0:02:07.240 --> 0:02:09.880 a high degree of confidence. In my view right now 0:02:09.960 --> 0:02:12.040 is that we should rely on the Phillips curve, and 0:02:12.240 --> 0:02:14.799 my base case assumption in the next one to two 0:02:14.880 --> 0:02:17.200 years is that it will reassert itself. Now we've done 0:02:17.240 --> 0:02:19.720 some interesting analysis here, by the way, Typically the Phillips 0:02:19.760 --> 0:02:21.639 curves looked at at the U three i e. The 0:02:22.160 --> 0:02:24.880 headline unemployment rate relative to wage growth. But if you 0:02:24.960 --> 0:02:27.160 use the U six, which is what people describe as 0:02:27.160 --> 0:02:29.639 the underemployment rate i e. People who are working part 0:02:29.680 --> 0:02:31.399 time but wish they could work full time, where they're 0:02:32.160 --> 0:02:35.720 discouraged workers, Um, there's actually a much higher correlation between 0:02:35.760 --> 0:02:38.160 that U six and the wage growth. And I do 0:02:38.240 --> 0:02:40.720 think as the U six or the underemployment rate continues 0:02:40.760 --> 0:02:43.520 to decline, we should see the Phillips curve reassert itself 0:02:43.520 --> 0:02:45.880 in the US over the next couple of years. Yeah. 0:02:45.880 --> 0:02:47.480 I like that U three U six. I think it 0:02:47.520 --> 0:02:49.120 was a Thomas chart of the year a couple of 0:02:49.400 --> 0:02:53.639 weeks ago. You look, if you look at Jackson Hall 0:02:53.840 --> 0:02:56.560 and we had you on TV and you basically believe 0:02:56.600 --> 0:02:59.520 that the policy mistake would come from the FED or 0:02:59.520 --> 0:03:02.280 anyone else was hiking too soon because they need to wait, 0:03:02.360 --> 0:03:04.720 in your eyes, for inflation to really come through. But 0:03:04.760 --> 0:03:06.960 where will the biggest policy mistake come from? Is it 0:03:07.000 --> 0:03:09.120 b O J? Is it Fed? Is it B O 0:03:09.200 --> 0:03:12.200 E or E C D? I mean that stuff it 0:03:12.280 --> 0:03:15.760 does seem Let's let's talk about probability versus severity. So 0:03:15.800 --> 0:03:18.640 in terms of the probability the highest probability of mistake, 0:03:18.680 --> 0:03:20.320 I would have to say it still seems to be 0:03:20.360 --> 0:03:22.560 the FED, because the FED is taking a very hawkish 0:03:22.560 --> 0:03:24.639 line in terms of their commentary that they make in 0:03:24.680 --> 0:03:28.399 the speeches. UM, it does seem that there's been an 0:03:28.440 --> 0:03:33.680 extreme level of discomfort with the UM the unprecedented monetary 0:03:33.680 --> 0:03:35.600 policy measures they had to take during the crisis, and 0:03:35.640 --> 0:03:38.480 there's an eagerness to get out of those now. I 0:03:38.520 --> 0:03:40.960 think that would be the FED would be well advised 0:03:40.960 --> 0:03:43.480 to pull back a bit and allow their policies to 0:03:43.520 --> 0:03:45.640 have a chance to succeed. I would argue, frankly, they 0:03:45.640 --> 0:03:47.560 could have been more aggressive than they were. UM. In 0:03:47.640 --> 0:03:49.640 terms of the severity of mistake, I think if the 0:03:49.640 --> 0:03:52.200 B O J were to surprise markets by starting normalized early. 0:03:52.240 --> 0:03:55.360 That would be an incredibly damaging UH factor. I also note, 0:03:55.400 --> 0:03:58.720 obviously the news you've reported this morning about business encouraging 0:03:58.720 --> 0:04:00.520 a BEY to raise taxes, I think would be a 0:04:00.560 --> 0:04:03.360 major mistake. In Japan, we we finally got six quarters 0:04:03.400 --> 0:04:05.600 of GDP growth. Let's not nip this recovery in the 0:04:05.640 --> 0:04:07.440 bud front temple with us SEES the co had of 0:04:07.480 --> 0:04:10.840 multi asset investment Lizard Asset Management. Just on the broader 0:04:10.880 --> 0:04:13.600 subject of monetary policy and how that dovetails with with 0:04:13.680 --> 0:04:16.600 the markets, to what degree is that the biggest influencer 0:04:16.640 --> 0:04:18.960 of where markets are right now? You know that that's 0:04:19.200 --> 0:04:20.800 that's one of the good news items in the last 0:04:20.839 --> 0:04:23.200 stage six to nine months, actually nine to twelve months, 0:04:23.560 --> 0:04:26.080 is that monetary policy has receded a bit in terms 0:04:26.120 --> 0:04:27.840 of the background. If I look back over the last 0:04:27.839 --> 0:04:30.120 several years, there are periods of time where it felt 0:04:30.160 --> 0:04:32.960 like monetary policy was the singular focus of markets, and 0:04:33.000 --> 0:04:34.880 I do think, you know, one one piece of evidence 0:04:34.880 --> 0:04:37.239 of that is correlations within the market and cross markets 0:04:37.279 --> 0:04:39.600 have actually declined quite a bit. Um so I think 0:04:39.640 --> 0:04:42.080 that's been quite positive, especially for firms like ourselves that 0:04:42.120 --> 0:04:45.080 are really focused on security. Selection is an opportunity to 0:04:45.120 --> 0:04:47.560 see differentiation between companies that win and lose based on 0:04:47.600 --> 0:04:49.600 the economy, not just what the FED or the C B, R, 0:04:49.640 --> 0:04:51.880 B O J do. So I think it has received somewhat, 0:04:51.920 --> 0:04:55.120 but it's still very important in that it could undermine 0:04:55.279 --> 0:04:58.400 the economic recovery or that synchronized global growth we see 0:04:58.480 --> 0:04:59.920 right now. A friend and I talked to Chris sim 0:05:00.080 --> 0:05:03.800 Is from Princeton yesterday, the Nobel Laureate, about the handoff 0:05:03.880 --> 0:05:07.120 between monetary policy to fiscal policy and how that's been 0:05:07.160 --> 0:05:09.280 fumbled a little bit here in the US. I think 0:05:09.320 --> 0:05:11.599 you could say, how long do you do you give 0:05:11.640 --> 0:05:13.600 that to work? In other words, we've heard the clarion 0:05:13.640 --> 0:05:15.159 call for so long that there needs to be that 0:05:15.160 --> 0:05:18.039 shift take place here in the US, and it seemed 0:05:18.080 --> 0:05:19.680 like there was the opportunity for it to happen, at 0:05:19.720 --> 0:05:22.720 least in the immediate aftermath of the presidential election. Uh 0:05:22.839 --> 0:05:24.200 do you have you if you have you given up 0:05:24.200 --> 0:05:26.599 on that happening yet? Well? I mean to be fair, 0:05:26.640 --> 0:05:29.159 I think that the real disappointment is that fiscal policy 0:05:29.160 --> 0:05:31.520 should should have been much more aggressive back in two 0:05:31.560 --> 0:05:33.360 thousand and eight and two thousand nine. I mean, that's 0:05:33.640 --> 0:05:36.520 that's when we were basically falling into the abyss. We 0:05:36.600 --> 0:05:38.880 did actually have a seven eighty seven billion dollar fiscal 0:05:38.920 --> 0:05:41.560 stimulus package in the US, but it's easy to forget 0:05:41.560 --> 0:05:43.480 that only a small part of that. I believe something 0:05:43.480 --> 0:05:46.320 on the order of eighty billion dollars was infrastructure. UM 0:05:46.520 --> 0:05:48.320 I could argue you should have had five hundred billion 0:05:48.320 --> 0:05:50.800 to eight hundred billions of infrastructure alone. UM So I 0:05:51.120 --> 0:05:52.760 do think, you know that was the time for a 0:05:52.800 --> 0:05:56.240 major fiscal stimulus. At this point in the cycle, I 0:05:56.240 --> 0:05:59.400 think fiscal stimulus is less necessary. But what we do 0:05:59.480 --> 0:06:02.600 still need is investment to increase the long term productivity 0:06:02.600 --> 0:06:06.440 of this economy through infrastructure, through job training for people 0:06:06.480 --> 0:06:09.640 who have been displaced by trade. Um and basically we 0:06:09.680 --> 0:06:12.360 also need tax reform to basically give businesses confidence and 0:06:12.400 --> 0:06:14.839 how they should invest. What's pricing at the moment run, 0:06:14.960 --> 0:06:19.280 if anything, what's pressing a price priced in? Price priced in? 0:06:19.440 --> 0:06:21.240 I think very little is priced in In In terms of 0:06:21.279 --> 0:06:23.479 policy change. I think the markets have basically reached the 0:06:23.480 --> 0:06:28.000 conclusion that you know that we discussed some good ideas, 0:06:28.080 --> 0:06:30.880 some frankly bad ideas, but very few of those ideas 0:06:30.920 --> 0:06:33.400 will be implemented because there's not the organization in the 0:06:33.400 --> 0:06:36.120 White House um and collaboration between the White House and 0:06:36.160 --> 0:06:38.560 the Congress to get things done right. So if you 0:06:38.640 --> 0:06:41.160 do see, for example, some tax reform because the Trump 0:06:41.160 --> 0:06:43.520 administration says they need to do it a sp to 0:06:43.560 --> 0:06:46.479 kind of get away from all the controversies, that would 0:06:46.480 --> 0:06:48.960 play it on equities, but also affect treasuries or not, 0:06:49.240 --> 0:06:52.000 it should affect both. I mean, let this be very 0:06:52.000 --> 0:06:54.000 clear to in terms of semantics. I mean early on 0:06:54.040 --> 0:06:56.919 we talked in I actually just use the term tax reform. Typically, 0:06:57.000 --> 0:06:59.839 tax reform is intended to mean revenue neutral. I EU 0:07:00.200 --> 0:07:02.280 some tax rates, streamline the tax code, but find ways 0:07:02.320 --> 0:07:04.600 to replace that revenue. I think the probability of that 0:07:04.680 --> 0:07:06.640 is less than five percent at this point. I think 0:07:06.680 --> 0:07:09.000 what we're really talking about right now is tax cuts, 0:07:09.000 --> 0:07:11.720 which will increase the deficit and should have a a 0:07:11.840 --> 0:07:14.280 long term arguable depending on the structure of the tax cuts, 0:07:14.520 --> 0:07:18.040 a negative implication for bond prices and e higher yields 0:07:18.080 --> 0:07:20.480 because of the credit quality of the sovereign um. So 0:07:20.520 --> 0:07:23.560 we'll see how that plays out. But even if President 0:07:23.560 --> 0:07:25.400 Trump does come out and say I want tax cuts 0:07:25.480 --> 0:07:28.720 right now, leadership is not a tweet. Leadership is actually 0:07:28.800 --> 0:07:32.080 delineating what kind of tax cuts, what form, and then 0:07:32.200 --> 0:07:35.200 actually engaging with Congress effectively on a sustained basis to 0:07:35.240 --> 0:07:37.440 make sure it happens. And so far that's really been 0:07:37.480 --> 0:07:39.840 missing in the policy action. I'm struck around reading your 0:07:39.840 --> 0:07:43.360 your research, how optimistic you are about the global economy generally, 0:07:43.480 --> 0:07:45.920 Given that, where do you see the most opportunity? Now, 0:07:46.720 --> 0:07:50.200 I mean it's it's it's it's I think emerging markets 0:07:50.240 --> 0:07:54.000 again still have the best opportunity, partly because they are 0:07:54.120 --> 0:07:57.040 basically just coming off the bottom in terms of commodity 0:07:57.040 --> 0:08:01.520 price stabilization and worries around FED policy. And the valuations 0:08:01.560 --> 0:08:05.760 importantly are although above historical levels, not as far above 0:08:05.840 --> 0:08:07.280 as say Europe and the US. Just give you a 0:08:07.320 --> 0:08:11.160 sense a magnitude relative for the Ford median, the median 0:08:11.160 --> 0:08:13.800 forward Pe over the last ten years, emerging markets is 0:08:13.800 --> 0:08:15.800 one and a half pe multiples rich. Europe is about 0:08:15.800 --> 0:08:17.360 two points seven rich. In the US is three and 0:08:17.360 --> 0:08:20.040 a half multiples rich. So you are paying a premium 0:08:20.080 --> 0:08:22.720 to history, but not as much, and earnings arguably are 0:08:22.720 --> 0:08:25.040 still depressed in these countries. So I like the U 0:08:25.120 --> 0:08:27.040 S and I like European equities, but I think I'm 0:08:27.120 --> 0:08:30.240 probably offers a better, say, three year view than those 0:08:30.280 --> 0:08:32.520 developed economies. Quick bite, If I could get you to 0:08:32.520 --> 0:08:34.120 talk about China a little bit as well. We've been 0:08:34.120 --> 0:08:37.599 following news about the country trying to reduce its capital outflows. 0:08:37.600 --> 0:08:39.559 How does that how does that change the level of 0:08:39.600 --> 0:08:43.280 opportunity there for you? Ye, China's obviously, I think for 0:08:43.280 --> 0:08:46.120 any foreign or visiting China and investigating China, it is 0:08:46.360 --> 0:08:49.440 more opaque than these, say, European, US Japanese economies. I 0:08:49.440 --> 0:08:51.319 do think China has done a good job of stimulating 0:08:51.320 --> 0:08:53.160 growth in the short term and early two thousand and 0:08:53.160 --> 0:08:56.720 sixteen with credit and fiscal stimulus UM. But I do 0:08:56.800 --> 0:09:00.520 think the biggest challenge facing China is the Everett humulating 0:09:00.520 --> 0:09:03.160 pile of corporate debt um. We've seen corporate debt go 0:09:03.200 --> 0:09:05.120 from a hundred thirty eight percent of GDP in two 0:09:05.120 --> 0:09:09.120 thousand eleven in two thousand and sixteen. That basically implies 0:09:09.120 --> 0:09:11.560 a hundred eighteen percent increase in corporate debt in four years, 0:09:11.840 --> 0:09:14.240 and so China needs to basically wean itself from the 0:09:14.679 --> 0:09:18.559 heroine of debt and basically continue rebalancing economy now. To 0:09:18.559 --> 0:09:19.960 be fair to them, they've done a good job of 0:09:19.960 --> 0:09:22.720 moving more to services. But but it's gonna be a challenge. 0:09:22.760 --> 0:09:24.960 And as it relates to capital flows, I think the 0:09:24.960 --> 0:09:27.560 biggest issue in capital flows is controlling the boom bus 0:09:27.559 --> 0:09:29.920 cycle in real estate. Um, every time we have a 0:09:29.920 --> 0:09:32.440 boom in real estate and proceeding follows to a bust, 0:09:32.640 --> 0:09:34.760 we see capital flows increase. And I think the Chinese 0:09:34.760 --> 0:09:37.600 authorities have recognized that. Ron, Thank you so much, Fron 0:09:37.640 --> 0:09:40.360 Temple there what a way with words? He is Lazar 0:09:40.440 --> 0:09:43.440 Asset Management Managing Director. In the meantime, the focus of 0:09:43.440 --> 0:09:46.280 course a turn inning turning on Jackson Hole and the 0:09:46.320 --> 0:09:49.840 central bankers meeting there, the dollar strengthening, stocks in Europe 0:09:49.920 --> 0:10:04.880 advancing David Garry here in York, Francy in London, A 0:10:05.000 --> 0:10:07.839 frenzy local in London. Aside, now four weeks into the shift, 0:10:07.920 --> 0:10:11.840 begin to watch things like that. I think it's greatly 0:10:11.880 --> 0:10:14.480 in London. Will to make the change. David Washington, there 0:10:14.480 --> 0:10:16.840 you go, perfect, Uh want to flag some news here 0:10:16.880 --> 0:10:19.840 out of Venezuela. Washington in Venezuela, Washington levied some sanctions 0:10:19.840 --> 0:10:24.280 on individuals related to Venezuela they're now reportedly considering blocking 0:10:24.320 --> 0:10:26.960 trades of Venezuela and held dollar denominated notes sold by 0:10:26.960 --> 0:10:28.839 the government and the state run oil company. Here to 0:10:28.880 --> 0:10:30.599 talk about this with us as Shannon O'Neill, she's a 0:10:30.640 --> 0:10:33.880 senior fellow at the Council on Foreign Relations, And as 0:10:33.920 --> 0:10:35.640 we get into this, I'm curious, this is a country 0:10:35.679 --> 0:10:38.360 that has not defaulted on its debt despite the worsening 0:10:38.400 --> 0:10:41.720 political and economic situation there. There seems to be a 0:10:41.720 --> 0:10:44.280 a real sense of of strength or dedication here to 0:10:44.360 --> 0:10:47.680 not defaulting. How likely is that to continue? Do you think? Well, 0:10:47.720 --> 0:10:50.920 we have seen that they have chosen to pay their 0:10:51.000 --> 0:10:55.000 interest and some principle over paying for basic food, in 0:10:55.000 --> 0:10:57.960 medicine and the like, especially as oil prices will come 0:10:58.000 --> 0:11:00.560 down there's less cash flowing around Venezuela. They've chosen to 0:11:00.559 --> 0:11:03.520 pay creditors and not feed their people, and they will 0:11:03.520 --> 0:11:05.920 continue to do that, I think, as long as they can. 0:11:06.440 --> 0:11:09.400 The question is, they've been running down their reserves, they've 0:11:09.400 --> 0:11:11.480 been selling off assets, they've been trying to get money 0:11:11.480 --> 0:11:13.920 from Russia and China other places, and they're coming to 0:11:13.960 --> 0:11:16.360 the point where there's really nowhere else to go for money, 0:11:16.360 --> 0:11:19.280 and particularly if the United States would put sanctions on 0:11:19.280 --> 0:11:21.800 and make it harder for them in financial markets, are 0:11:21.840 --> 0:11:23.760 harder for them to sell their oil around the world. 0:11:24.160 --> 0:11:26.720 It would be very difficult to continue servicing this debt. 0:11:26.480 --> 0:11:28.480 I ask you about rhetoric. I spent some time in 0:11:28.480 --> 0:11:31.160 Bolivia in the early two thousands, and strong rhetoric from 0:11:31.160 --> 0:11:33.200 the US had a very positive effect, as I heard it, 0:11:33.640 --> 0:11:35.959 among the rhetoric that you would hear domestically, that that 0:11:36.040 --> 0:11:39.200 could be spun kind of countintuitively in a positive way 0:11:39.200 --> 0:11:42.360 in that country. Here we see strengthened, harsher rhetoric from 0:11:42.360 --> 0:11:45.680 the US with regard to Venezuela. We're hearing the word 0:11:45.720 --> 0:11:49.720 dictatorship and dictator used now regularly by senior administration officials. 0:11:50.000 --> 0:11:53.199 What's the effect of that been here on the situation 0:11:53.240 --> 0:11:56.280 in Venezuela domestically, Well, it looks like it may be 0:11:56.320 --> 0:11:59.559 providing Maduro, the president of Venezuela, a bit of a lifeline. 0:12:00.080 --> 0:12:03.040 Um he has and those before him, have created, all 0:12:03.040 --> 0:12:07.200 by themselves, a huge humanitarian and financial and economic crisis 0:12:07.200 --> 0:12:11.080 that's happening, real catastrophe that is all of their own making. 0:12:11.120 --> 0:12:13.560 But when the United States steps in and with this 0:12:13.640 --> 0:12:16.640 kind of rhetoric or perhaps even moving further into sanctions 0:12:16.640 --> 0:12:19.720 and the like. It gives them an excuse, it gives 0:12:19.760 --> 0:12:22.200 them an outside enemy. And while we in the United 0:12:22.200 --> 0:12:24.040 States tend to look to the president in the future, 0:12:24.200 --> 0:12:27.480 Latin American countries really focus often on the past, on 0:12:27.600 --> 0:12:30.840 history and the what they see is sort of imperials 0:12:30.840 --> 0:12:33.120 in the United States intervening in the region. So there 0:12:33.200 --> 0:12:37.320 is this reflex action against this tough talk. All right, 0:12:37.400 --> 0:12:39.439 what's the best thing to do here? Shouton I mean, 0:12:39.520 --> 0:12:41.439 you see that there's a possible but and also in 0:12:41.480 --> 0:12:44.439 certain trades, but then that would also heard off or 0:12:44.520 --> 0:12:46.920 cut off a lifeline to, you know, a country which 0:12:46.960 --> 0:12:50.959 is heavily indebted. There is a real challenge for the 0:12:51.040 --> 0:12:53.320 United States. As much as they want to do something 0:12:53.400 --> 0:12:56.640 tough on Venezuela, as democracy ends there, as there's a 0:12:56.640 --> 0:12:59.600 crackdown on the opposition, it's hard to know what to do. 0:12:59.760 --> 0:13:03.040 And really the most successful policies, I would say, would 0:13:03.040 --> 0:13:06.400 be ones that bring other Latin American nations in to 0:13:06.800 --> 0:13:09.240 condemn this regime. And there are many options out there. 0:13:09.240 --> 0:13:11.760 There are a lot of presidents who have stepped up, 0:13:11.960 --> 0:13:17.080 whether Medicio Macri and Argentina, Paninieto in Mexico, the President 0:13:17.120 --> 0:13:19.480 Peru of Chile. Many of these see the end of 0:13:19.480 --> 0:13:21.880 democracy there as a huge problem for the region, so 0:13:21.920 --> 0:13:25.320 their allies there, but tough funeralateral actions in the United 0:13:25.360 --> 0:13:27.720 States will drive them away rather than bring them together. 0:13:28.200 --> 0:13:29.880 I mean, it seems that the President has not really 0:13:29.920 --> 0:13:33.080 ruled out a military option in Venezuela. What does that 0:13:33.160 --> 0:13:37.480 mean for for the country. He did mention that that 0:13:37.640 --> 0:13:40.760 this Department of Defense walked back pretty quickly from what 0:13:40.960 --> 0:13:44.520 that might mean, um, And it's hard to imagine even 0:13:44.600 --> 0:13:47.439 what that would look like, um, some sort of military 0:13:47.480 --> 0:13:51.080 intervention there. I think one thing you might see is, 0:13:51.200 --> 0:13:55.160 particularly the humanitarian crisis deepens, you could imagine the United 0:13:55.160 --> 0:13:58.400 States government, in part the Department of Defense helping with 0:13:58.480 --> 0:14:01.120 some of that movement of people that are flooding today 0:14:01.240 --> 0:14:05.640 already into Columbia, Brazil and other countries nearby. Just lastly, 0:14:05.640 --> 0:14:07.240 here in the minute we have left with you, let 0:14:07.240 --> 0:14:10.240 me ask you about the status of the NAFTA renegotiation efforts. 0:14:10.280 --> 0:14:12.000 We have the first round of those meetings here over 0:14:12.000 --> 0:14:14.360 the last week or so. What are you watching, what 0:14:14.360 --> 0:14:16.640 are you listening for? As they get underway? I gather 0:14:16.840 --> 0:14:18.960 they meet again on September the first for the next round. 0:14:19.880 --> 0:14:23.480 They have decided a lightning round of renegotiations here and 0:14:23.800 --> 0:14:26.280 meetings to try to change nap TO to to update NAFTA. 0:14:26.280 --> 0:14:29.200 And so what I'm watching is do that continue? Do 0:14:29.240 --> 0:14:31.360 they really think they can end this by the end 0:14:31.400 --> 0:14:33.560 of the year or beginning of two thousand eighteen. If 0:14:33.560 --> 0:14:36.000 they stick to that schedule, then I wouldn't expect big 0:14:36.120 --> 0:14:38.600 changes to NAFTA, or the changes I would expect would 0:14:38.600 --> 0:14:41.080 be the ones that I have already been negotiated in TPP, 0:14:41.240 --> 0:14:44.040 the Trans Pacific Partnership. Great to speak here, Thanks for 0:14:44.160 --> 0:14:45.880 thanks for coming in. Shannon O'Neil from the Council on 0:14:45.920 --> 0:14:48.000 Formulations who joined us here on Bloomberg Surveillance on Bloomberg 0:14:48.040 --> 0:14:49.720 Radio Bloomberg Television as well. You can check out her 0:14:49.760 --> 0:14:53.160 interview there on Bloomberg dot com or on the Bloomberg terminal. 0:15:04.680 --> 0:15:08.280 This is the forty one Economic Symposium for the Kansas 0:15:08.320 --> 0:15:11.040 City Fed here in Jackson Hall, and Ester George, the 0:15:11.040 --> 0:15:13.680 President of the Kansas City Fed, is the host. And 0:15:13.720 --> 0:15:16.040 you've been here for all No, not really, neither of IY. 0:15:17.360 --> 0:15:20.240 This has changed significantly over the years the TV presence, 0:15:20.280 --> 0:15:23.080 the focus on it. Janet Yellen is speaking on Friday, 0:15:23.240 --> 0:15:26.200 Mario dragging speaking on Friday, Global Wall Street on the 0:15:26.280 --> 0:15:28.840 edge of their chairs, expecting them to make news. But 0:15:29.000 --> 0:15:32.200 that's not what this was designed to do. Know, the 0:15:32.280 --> 0:15:36.160 purpose of the conference is really to dig into issues 0:15:36.960 --> 0:15:40.360 that we think matter to central banking, matter to monetary policy, 0:15:40.400 --> 0:15:43.320 and ultimately matter to the real economy. And so you 0:15:43.360 --> 0:15:46.640 want people on the program that are thoughtful about those issues, 0:15:46.920 --> 0:15:49.880 that can debate those issues, bring different perspectives to them. 0:15:49.880 --> 0:15:52.600 And that's really our goal every year is to try 0:15:52.600 --> 0:15:54.680 to have a relevant topic that will add to our 0:15:54.800 --> 0:15:58.560 understanding of these issues. Well, the relevant topic for people 0:15:58.560 --> 0:16:01.400 on Wall Street lately has been inflation. So let's talk 0:16:01.440 --> 0:16:04.120 about that a little bit. You've long argued in favor 0:16:04.120 --> 0:16:07.000 of higher rates to head off inflation, and people have 0:16:07.040 --> 0:16:10.480 said Estra George is wrong because there's no inflation. What 0:16:10.600 --> 0:16:13.400 if we flip that argument on its head and say 0:16:13.520 --> 0:16:16.840 you've raised rates and there's no inflation, have you accomplished 0:16:16.840 --> 0:16:18.840 what you set out to do? So? And I think 0:16:18.880 --> 0:16:21.720 about inflation, Mike, I think about our mandate, which is 0:16:21.720 --> 0:16:25.280 price stability and relative to an economy that's growing at 0:16:25.320 --> 0:16:28.800 two and is adding jobs. I think we're in a 0:16:28.840 --> 0:16:33.160 pretty good place, and we still have very accommodative monetary policy, 0:16:33.280 --> 0:16:36.440 So that tells me we should begin to, as we've indicated, 0:16:36.520 --> 0:16:41.840 gradually removing that accommodation as long as the outlook supports 0:16:42.040 --> 0:16:44.920 that we are moving in the right direction, and I 0:16:44.920 --> 0:16:47.800 think we are. So that suggests you are in favor 0:16:47.840 --> 0:16:50.160 of yet another rate move this year, as the dot 0:16:50.160 --> 0:16:53.760 plot would indicate. So that was my last forecast, and 0:16:54.040 --> 0:16:57.080 each time we put those together is a new opportunity 0:16:57.160 --> 0:16:58.840 to look at the data. So I'll be looking at 0:16:58.880 --> 0:17:00.760 the data in the next few weeks as we get 0:17:00.760 --> 0:17:04.320 ready for the September meeting and see whether that still 0:17:04.400 --> 0:17:06.960 makes sense. Based on what I've seen today, I think 0:17:06.960 --> 0:17:09.320 there's still opportunity to do that, so by the end 0:17:09.359 --> 0:17:11.920 of the year, not necessarily in September. No, No, that's 0:17:12.000 --> 0:17:15.199 I don't pick a meeting, and I don't consider that 0:17:15.320 --> 0:17:18.240 rate path in those projections a commitment. So I think 0:17:18.280 --> 0:17:20.960 it is a general sense of where rates should go 0:17:21.160 --> 0:17:24.320 well to what extent is inflation a lagging indicator. It's 0:17:24.359 --> 0:17:26.359 something FED officials have argued for a long time. In 0:17:26.400 --> 0:17:29.479 other words, is the Phillips curve broken or is nayru 0:17:29.680 --> 0:17:33.080 lower than it has been in the past. What's happened 0:17:33.080 --> 0:17:35.040 to inflation? Well, I don't know that I'm going to 0:17:35.080 --> 0:17:37.200 have a good answer for you there because many people 0:17:37.240 --> 0:17:40.280 are studying that very issue. The things I look at 0:17:40.320 --> 0:17:44.119 when I look at inflation, so goods, the price of 0:17:44.160 --> 0:17:47.879 goods that's been falling. Maybe that's due to technology. There 0:17:47.880 --> 0:17:49.520 are a number of factors that I think may be 0:17:49.640 --> 0:17:52.320 pressing down. When you look at services, which is two 0:17:52.359 --> 0:17:56.360 thirds of the economy, you see that those rates are 0:17:56.400 --> 0:17:59.280 actually staying at two percent and higher. So in the 0:17:59.359 --> 0:18:02.560 context of the economy we have today, that's why I 0:18:02.600 --> 0:18:04.840 think you have to be careful getting to focus on 0:18:04.880 --> 0:18:07.720 a point estimate as opposed to the broader trends that 0:18:07.800 --> 0:18:10.240 you see and the expectations that are out there. Well, 0:18:10.280 --> 0:18:13.520 speaking of expectations, with inflation not rising and you've had 0:18:13.560 --> 0:18:18.240 five months of disappointments and the CPI market expectations are falling, 0:18:18.480 --> 0:18:20.359 is that a problem for a FED that has always 0:18:20.359 --> 0:18:24.479 said expectations are key to keeping prices stable. So I 0:18:24.480 --> 0:18:27.280 think you have to pay very careful attention to that, 0:18:27.400 --> 0:18:30.840 and I would include myself there but again you have 0:18:30.960 --> 0:18:34.760 to know what drives those expectations, and that's the challenge 0:18:34.800 --> 0:18:37.320 is constantly looking at what's going on in the economy, 0:18:37.600 --> 0:18:40.639 what might be reflected in those numbers, as opposed to 0:18:40.680 --> 0:18:45.399 overreacting to UH some specific point estimate that you see. 0:18:45.720 --> 0:18:48.760 You do have new forecasts for growth and inflation and 0:18:48.840 --> 0:18:53.600 unemployment coming out in September. How have yours changed or 0:18:53.640 --> 0:18:57.440 have they changed at all as the economy has evolved? Well, 0:18:57.480 --> 0:19:02.080 in my own case, unemployment has come down faster than 0:19:02.160 --> 0:19:06.320 some of my projections. UM, inflation has stayed lower on 0:19:06.400 --> 0:19:10.280 the whole, I think over this period, and the economy 0:19:10.400 --> 0:19:13.439 did not take off, I think as many of us 0:19:13.520 --> 0:19:15.960 hoped it would, but it's been coming in at a 0:19:16.040 --> 0:19:20.000 two pretty steady rate of growth. So this month marks 0:19:21.040 --> 0:19:25.160 consecutive month of growth in our economy, and I think 0:19:25.200 --> 0:19:27.640 it gives us a better sense as we look forward 0:19:27.920 --> 0:19:30.000 that that might be what we expect. Do you have 0:19:30.040 --> 0:19:32.960 any reason to mark up or mark down your growth forecast? 0:19:33.760 --> 0:19:36.360 So not at this point. I'm encouraged that the global 0:19:36.600 --> 0:19:40.040 economy UM is looking better and you see growth beginning 0:19:40.040 --> 0:19:43.639 to pick up. Um In terms of domestic policies that 0:19:43.760 --> 0:19:48.720 might have posed an upside uh to whether it's infrastructure spending, 0:19:48.760 --> 0:19:51.160