Earlier today, my co host Kathleen Hayes sat down with the Jim Bullard. He is the President of the and Chief executive of the Federal Reserve Bank of St. Louis. She spoke with him at the Jackson Hole Economics Imposium in Wyoming, and Mr Bullard discussed the current economy, also a potential rethink in the way that the Federal Reserve is approaching monetary policy. Also, we talked about negative interest rates. We asked him about negative interest rates. I'm not a
fan of negative rates. I don't think they're likely in the US because we have other things that we have, other firepower that we can use if if necessary. So I'm not I'm not thinking in terms of negative rates. I'm anxious to hear what This is an international conference here, so we're gonna hear a lot about the experience overseas, and I am anxious to hear what they have to say.
You know what I've been thinking about negative rates, it's really attacks on the banking system because the rate of return that they get on their UH, on their deposits at the FED UH, if you push that into into negative territory, then you're really you're really taxing them. This was the whole idea of paying interest on reserves. Over the last the debate over the last thirty years, the banks always argued that they couldn't get interest on reserves
and that this created a dead asset. And then they were this is costing them, and they said they should at least be able to get the market rate to return on that holding those reserves. And so finally they got interest on reserves in two thousand eight in the
United States. In other countries they had it before, but in the United States we've never had it until two thousand and now people start to say, well, instead of paying you the market right, we're gonna we're gonna put it down in the negative territory, so that that is
could be interpreted as attacks on the banking system. And then the banking system that has to pass that on to somebody who are they going to pass that on to either the shareholders in terms of profits, uh the borrowers in terms of rates that the borrowers from the bank can get or u to the depositors of the bank and start paying them negative rates. And uh so, anyway you look at it, that you know, if you think about negative rates as attacks on the banking system.
That doesn't sound very stimulative when you describe it that way, and maybe that's why we've had very mixed results in Europe and Japan. A lot of critics out there of the FED, too many FED speakers at once, what's being communicated. But I think really at the heart of it, one of the most fundamental criticisms is this, look, you've you've tried all these keeping rates low indefinitely, You've tried bond purchases, and the economy is still mired in slow growth and
businesses don't want to invest. Some people argue that in fact, it's the FED policy, it's uncertainty about it. It's the fact that rates are so low they're gonna have to move up more at some point. Why go into any long term investment? That is one of the big factors whole dam back investment, which has been such a weak engine of growth right now. How do you answer those
critics and how do you analyze that well? On the idea that there's too much talk about the FED, I mean, one thing, one idea I've always had is that the private sector has probably a thousand people that talk about the FED all day every day around the world. It's a twenty four hour a day talk about the FED policy world, and the FED only has a handful of
people that that can respond. So I felt like it's important for the policy makers themselves to talk about all kinds of issues that come up about uh FED policy, all legitimate issues. And we're talking about a macro economy, which is a big complicated object. So they're gonna be all kinds of issues all the time, and that's the way it's going to be. So I felt it was very important for the FED to be involved in this debate. Otherwise you're letting the private sector entities drive the debate,
and they have are taking positions there. You know, they have positions in the markets and and they're making bets and stuff like that. I don't mind them commenting, but you know, I don't think you want them driving policy. So anyway, so that's one thought on it. That's one of the best defenses i've heard of that, right, the voice of the thousands versus the voice of the few.
But again on this question then of uncertainty, weak spending, businesses that don't want to step up, and the FEDS saying being at the at the heart of the matter, they have distorted and disrupted through the natural workings of the financial system and what drives investments, and that that
is one of the problems right now. I think the threat to increase the policy rate, say two basis points over the next two years or or a little bit longer, UH, that has been looming out there as a threat has not been a good description of what we're actually doing, and so I have felt like that's distorting investment decisions and distorting market pricing in various ways. We're in the middle of the second year after Keewee ended, so we had all often we moved once at the very end
of the year. We've had all of sixteen and we haven't moved so far this year, and markets have us only moving once probably by the end of the year. So we're just not moving at a pace. You know, moving once a year is not really normalization. That's really not a normalization program. That's kind of nothing. So I think you should have you should have a better description of what's actually going on than what we've got. And that's why I came with this other, uh, this other
conception of what's going on. But I do think it's Uh, you can make a case that's distroying investment decisions. Earlier today, Federal Reserve Chair Janet Yellen in her remarks, she left open the door for Federal Reserve rate increase at its September one policy meeting, but she also hedged her comments in ways that give the bank well an economic data dependent out if indeed the economic data is less than sanguine.
Earlier today, also my co host kathen Hey spoke with Jim Bullard, President and Chief Executive of the Federal Reserve Bank of St. Louis, and she asked whether there was a need for a Federal Reserve rethink on monetary policy uh, and wondered if that is what is actually happening. I think there is something of a rethink going on. Uh. And I think it is because inflation has surprise to
the low side. Uh. You would have thought I would have thought five years ago if you told me where we are today with a balance sheet over four trillion and a policy rate still uh, you know, under fifty basis points, I would have said, oh, you must be you know, you must have five percent inflation or something
like that. And that hasn't turned out to be the case. So, uh so, I think there is a rethink about about models Phillips curve in particular, which has long been at the heart of a lot of thinking about the economy. Those relationships don't say to be very good. Um, over the last several years, the economy seems to behave differently at extremely low interest rates. You've got the Japanese example sending out there. You've got the double dip recession in Europe.
So there's over the last five years. So you've got a lot a lot going on to think about and to adjust to in the world of monetary policy, which I find to me, I find it fascinating because it's
an endlessly fascinating subject. But it's you know, it's not easy. Jim, what do you think about inflation that's persistently low inflation even though central branks around the world have thrown so much at it, low to negative rates, endless bond purchases, buying corporate bonds, you know, buying e t f s. You know, is you getting a feeling that low inflation is somewhat incurable? Well, I doubt that I've thought about giving a speech about inflation around the world. Let's check
out Venezuela. Let's check out, Argentina, Let's check out you know, other countries that have had very high inflation, right, so they seem to have been able to break out of
the mold of the low inflation environment globally. Uh. Now, usually when that happens, there are other problems in the country, and both of those countries have a political upheaval of various kinds and um usually governments that uh that you know want or need revenue from other sources other than their tax base, and and so uh, it's definitely they're showing the way. Though it's definitely still possible to have inflation. I'm not sure we really want to go down that
kind of a route. So the inflation that, you know, when we say we want to hit two percent inflation, we want to hit it through you know, very conventional methods, and and that seems to not be working quite as well as it did in the past globally. In the last FOMC minutes, the FED was concerned about a number of different areas or from China debt, did you DP exchange rate instability, European banks. Let's start with China in
in a nutshell, are you worried what it was. What are you and your your team seeing and how much is that influence the fed's next decision on an interest rate increase. I don't put as much weight on these global factors as other people. So let me give you my argument. Um. People say that because the world is more globalized now, we're going to start paying attention to the shock in a remote province of China or something happens in Latin America or something like that. That is
not what economic theory says. Economic theory says, if you've got the flexible exchange rates between countries as we do between Japan, Europe, and the US, which are the main blocks and most of the other main blocks, then then when there's a shock in one part of the world, the exchange is supposed to move, and that's supposed to adjust uh most of you know, offset most of the shock, and that then you can conduct independent monetary policies in the various countries. And this is the way that you
stabilize all the economies of the various countries. And I think on the whole, that's still the right model to have in mind. If you look at some of the things I've been talked about over the last year. Let's say we're at Jackson Hole. Last year you had the Chinese devaluation and big you know, scare about that. I said that I didn't not think it was that big of a deal. I turned out to be right about that. Um. Then we came into January and again people brought up China.
Something's going on in China. I said, it wasn't that big of a deal. It was right about that. Again, we have Brexit. People say, oh my god, if they vote no on Brexit, that's going to be a huge deal. They did vote no. I don't see it. So your people are over emphasizing how much this can really come back to a big economy like the US. It certainly causes these things have caused global financial market volatility, but that volatility tends to settle down after a while because
the fundamentals don't really change. And you know, something like brexit, How is a trade agreement between the UK and the continent going to going to come back to affect actual real things in the US through trade relationships or something like that. All the estimates are that those effects are extremely small. So it's very important for the UK and it's kind of important for the continent, it's important for the European project, but it's not. No, it's not important
for the US. In terms of risks of keeping rates too low for too long. People are concerned, say, look, by the time you can see the excesses or some sort of bubble where people have got and we know there's been a lot of reaching for yield. Right, Uh, it's too late. What how do you approach that aspect? Because you've got your regime, you said, oh, probably not
gonna have to raise rates much at all. Meantime, the skeptics would say, yeah, Jim, you and your team with your view are going to let some problems fester and we're gonna have to deal them deal with them later, and it's not going to be fun. Yeah. Um, so I'll be right up front about this. Our framework does not address the issue of asset price bubbles. So that's
just something that is not included. However, if you look at most forecasting, typical forecasting models f R b U S or Myron Associates or back of Economic Advisors or GDP NOW or whatever you want to look at those kinds of things, they're not talking about asset price bubbles, they just have sort of mechanical relationships and the economy. They try to track the business cycle and then they go.
So I think you want to think about these things in judgmental terms, where you're making a judgment, uh, separate from the model about how big a problem is asset valuation and uh do we would we or would we not want to use monetary policy to try to control that. This is a very important issue for monetary policy. It has been the most important issue over the last twenty years.
We had the tech bubble, and we had the housing bubble, and there was you know, and if we have another bubble, there again be a debate about what to do about it. So this is none of this is in my framework, So that just has to be handled separately. But right now I think I think you can make a case that, um, you know, we're certainly not in any kind of bubble territory the way we were with the housing bubble or the way we were with the tech bubble. Uh, maybe
maybe somebody can make a case. But also I think the FED has beefed up its tracking of this kind of stuff a lot. We do get a financial stability report quarterly, we look at all kinds of nooks and crannies in financial markets and try to see if there's anything that's catching, uh, that you know, that looks troublesome. So I think our radar is much better than it
than it used to be. But uh, if we do get into a bubble situation, the committee is gonna have to make a judgment about what to do about it, and we'll have to face that. That was Jim Bullard.
He is the President and CEO of the Federal Reserve Bank of St. Louis, speaking with, of course, my co host Kathleen Hayes the Jackson Whole Economic Symposium in Jackson Hole, Wyoming, and he was speaking in the context of remarks from Federal Reserve share Janet Yellen signaling growing conviction that the Central Bank will raise short term interest rates in the
weeks or the month ahead. Of course, their policy meeting is set for September and the twenty one, But perhaps even as important is the Federal Reserve's decision hinging on whether the labor market is showing steady gains. The Labor Department will report on September the second about the labor conditions in the United States in August. Job gains have been averaging about a hundred and ninety thousand a month
over the past three months. The bond market a little bit of a sell off today, the ten year down sixteen thirty seconds with the yield of one point six two percent, and the thirty year bond down nineteen thirty seconds with a yield of two point two nine percent. This is taking stock. I'm PIM Fox my co host Kathleen Hayes. This is Bloomberg.