Fed's Kaplan on Rate Hike: We Can Afford To Be Patient (Audio)

Annual Symposium. The theme this year designing Resilient Monetary policy Frameworks for the future at a time uncertainty over the course of rate hikes and policy. This is so important, Rob, Welcome, Thank you, good to be here. Well, let's get right into some things you have said about where you see

UH the FED going. Just recently UH Bloomberg Reporting, you spoke UH and said that you thought, watching the data, depending how it goes, especially the labor market, you could see an interest rate increase next month September twenty one odds of a hike as measured by the FED funds features up to about now and and so let me correct that a little bit. What I was asked, is is September off the table? And I said, it's not off the table, but we need to wait and see.

So I've been one of the FED presidents who has been reluctant to speculate on individual meetings because I don't think it's productive. But I do think the case for removing accommodation is strengthening um and for a lot number of reasons, which we can go into, but that's all in the context of I think any removal of accommodation should be patient, slow, gradual, because we've got a number

of persistent headwinds that we have to adjust to. But yes, I think the strength the case for removing some amount of accommodation it has strengthened. So when you say you see the reasons, what's the number one? Is it the fact that labor market is strengthened the number one pro reason? Yeah, as we're making good progress on our on our employment objective, we're making frustratingly slow but still some progress on UM

on our inflation target. And even though first half and specifically second quarter GDP was disappointing, a lot of the reason for it was a big inventory adjustment. Consumer is strong. Final demand in the second quarter was strong, and we think the consumer will be strong for this year, So we think you're gonna see GDP growth rebound in the

second half. All right, Well, there's certainly from the fom C minutes of the last meeting, we saw people said a divided fed, some people more worried about low inflation, some people saying, hey, no, things are picking up, but there's a lot of uncertainty about the outlook, and many people have spoken about that. So with uncertain outlook, a labor market average job growth flowing about a hundred fifty thousand a month from over two hundred thousand previously. Uh,

what's the rush? Why why do we even need to have September on the table? In my own view, and I've said this publicly, I don't think there is a rush. We can afford to be patient. The reason we can afford to be patient is to be a little wonky than neutral rate. The neutral rate that we're neither accommodative or restricted is lower, and it's certainly lower than is widely understood. So while the fet is right now we're accommodative,

we're not as accommodative as people think. And because the neutral rate is lower, and the primary reason for that is slower growth and particularly because of aging demographics, I think we can afford to be patient. But even within that rates this low are not free. There's a cost to savers. It creates distortions for investment, it can create other distortions. And that's the reason why, uh, I think we should be moving towards removing some amount of accommodation.

But we can do it in a patient manner, and we've got the ability to do that, I think because the reasons I just said. And we're speaking with Robert Kaplan, he's president Federals sort of Bank of Dallas here at the FED symposium in Jackson Hole, Wyoming. Pim Fox my co host in New York. Mr Kaplan, you talked about the distortion and the effect of savers because of the

low interest straits. Is there a point at which the Federal Reserve will bluntly recognize and acknowledge the harm that they have caused savers over this elongated period of time. How do you respond to people that say they cannot plan for their future and as a result, they will not spend their money until interest rates increase. So you asked if there's a point at which will acknowledge that we're past that point. We've already if you've heard me

speak publicly, acknowledge it. In most times I speak, and I and I I'm very well aware of it. And in an aging population, uh where people rely more savings and will increasingly rely on savings. If they can't earn a reasonable return on savings, they will either take more risk or they'll spend less. So I think there's a cost to this, and I think we have to take it into account. Well. A lot of talk now about

a rethink of FED policy. You just mentioned the fact that the neutral rate is lower, probably than the FED thought that's the rate that doesn't boost the economy or slow it down. If it's lower, if it's not at four percent or three percent, the FED doesn't have too much room to raise interest rates. Now, what is your view? Where do you come down on this big rethink? Where is it impelling the Fed? Well as it relates to the neutral we do a model in which I've talked

about publicly in Dallas. There's also the law back Williams models. There's other model, but the long and short of it for most people listening. The longer run neutral rate, according to law back William is zero, and our own model in Dallas, we think it's somewhat. It's actually even less than that. It's negative, so it's not that and then you add the inflation rate to that. Okay, so it's not that we're not accommodative, but we are less accommodative

than is widely recognized. And that's the other reason that I've said it's very critical that monetary policy shouldn't be the only economic tools on the table. We need structure reforms fiscal policy because a lot of the reason for the slower growth is structural aging. Demographics is a good example of a structural issue where the the workforce participation is declining and we think will continue to decline over the next ten years because the population is aging out

of the workforce. Rob I've been covering the federal reserve since the days of Paul Bulker mid eighties, and that's when that's going to keep became so ingrained. Commy picks up too much and read about inflation, your raised rates, it starts blowing down. You cut them. The neutral rate is at zero now or even lower. What does this mean, have we come to the end of this decades long mode of monetary policy as we know it is? Are

rnning a new age? And for your listeners, that's the real neutral rate, so means the nominal neutral rate would be say according to lawback Williams two and so, Yeah, I think we have to face a new reality. I do believe that. I think for those that are hoping or pining for days of your where UH we had fiscal policy, we had other policy in the FED out a lot more maneuvering room. I think it's important to call out this is a new reality. It's a different world.

And in particular, what's so different than any time during my lifetime is the aging workforce. And it's going on in every advanced economy in the world, and it affects potential growth, and it affects UH interest rates and the neutral rate, and we've got to adjust to that. Rather than hope it changes, we have to adjust the reality. Well, you know, there is a lot more discussion now about

what happens in the next recession. I was UH at at an event and recently where a money manager who's worked around the world said, what about the next recession? I know how to price in a recession up until now, because the FED had room to cut rates maybe by about you know, five hundred basis points to get things going. That room no longer exists. What does this mean for

the next recession. So the trade off at the FED is we'd like to have we already we have tools, even where we are now, we'd like to have more more tools. If interest rates were higher, we would have more tools. On the other hand, you don't want to force interest rate increases because you might actually create the recession that you're fearing. And so for me, monetary policy will have a role to play if there's another downturn

or where we are now. But we for most of my lifetime, except for the last seven years, we also had structural policy. We had fiscal policy, and it gave the FED much more operating room. We haven't had it in seven years, and the period of so called paralysis in fiscal policy probably needs to come to an end. We need a broader range of policies in the United States to face our challenges, and I've been saying that regularly.

And the reason I'm saying it it's not that monetary policy doesn't have a role, but we need broader policies and we've had them in our history, just not for the last seven years. Mr Kaplin, do you does the Federal Reserve need greater consistency when it comes to its public message and its public debate? Uh? I think that, UH,

improving FED communication is critical. UH. And what I'll just I've been on I've now been on the FED, UH involved with the FED for a year obviously, and I read all the President's speeches, I read all the Governor's speeches. I'm in all the FOMC meetings. I think if you read the speeches in their entirety and read the minutes in their entirety, you get a fairly coherent message. But that's not the way these things get filtered out almost a quarter century, right, I mean, no one's going to

button and trade, right. Well, it also used to be that the FED was much more muted and much less transparent. So in the interest of transparency, the FED communicates more than negative with that is, it can create confusion, and I think this is an issue that FED needs to continue to wrestle with. I want to ask you about zero zero interest rate policy. We know to the consumer, UH is really about the only big engine of growth right now, because business investment has been has been pretty

weak for the past few quarters. I think a lot of people are wondering, could the zero interest rate policy and quantitative easy be part of the problem. Um, we know borrowing costs are low, that could stimulate growth, but the expect of returns are low now too. Would higher rates would have switched from that policy? Maybe it's out there, but would it incentifies companies to make bigger, longer term investments.

So I'll speak to this as a as a former business person than somebody who who is my entire career including now talks extensively to c e O S. I think the reason capital spending is low is not because interest rates are low. In fact, I think that that lower interest rates makes it easier to make capital spending decisions. Reason capex is has been sluggish is expected sluggish demand,

particularly globally. Number two, high rates of disruption in every single industry, and we don't talk enough about that that you go industry by industry, there are new threats, new competitors. You've got the Internet, which reduces pricing power and reduces margins. And so I think CEO uncertainty is driven more by those issues, and their hesitancy is driven more by those issues than monetary policy. I would argue these low rates have made it easier UH to do cap capital spending.

I don't think those I don't think that's the reason. Thinking globally, are you worried about and interest rate increase potentially boosting the dollar? You know, and and and just there's two sides of this. One. Pert's manufacturing the US too makes a end stronger, and Japan's trying mighty hard to get that y end weaker right now. Well, so we have to be cognizant of it. And I've said regularly one we need to watch the impact of our actions on the dollar one you set it for exports.

The other thing I would say is I'd look more significantly to China, where they've got massive overcapacity, high levels of debt, the g d P, fear of capital flight, and a lot of that comes out in a weaker currency, which can be destabilizing, as we saw in January and February. So we're the central banker to the United States. So the way I would describe it, we have to be aware of these external forces that could spill back over

in the United States and create a tightening. I wouldn't overreact to those issues, but we need to be cognizant of them. It wouldn't stop you. I mean, that's not a big consideration strong at all. I think the next step and if, if, and when we decide to remove accommodation, that next step in and of itself, as long as we communicate clearly it's in the context of slow, gradual

removal of accommodation. UM. I think it's manageable. I think earlier in the year where the market thought we were going to raise four to potentially four times in two thousand and sixteen, I think, uh, we saw that did not look like slow and gradual. It looked like two accelerated. And I think there's a lesson to be learned from that. Mr Caplin. To get your thoughts on negative interest rates in Europe, Yeah, so, Uh. The issue on negative rates in Europe as well as in Japan is UM my concern.

They do some negative They have some negative impact on the financial system, on banking system, which is vital to the health of a country or countries. Uh. And while they might create incentives to take more risk and buy time. They're not going to address fundamental structural issues, and those include aging demographics, high levels of debt to GDP UH in particular, and so I think there's not going to

be any getting around. Ultimately, governments in Europe Japan are going to have to find ways to address aging demographics by increasing the workforce UH and addition, deal with issues of high levels of debt to GDP and bring to bear fiscal policy to supplement monetary policy, because if you go too far with monetary policy, I might argue that negative rates might have side effects that may ultimately create

new challenges for these economies. Well, you know, we've already seen in Japan, and you lived in Japan, rob Kaplan President Dallas fed UH for five years. One of the one of the many stories on Bloomberg was about people buying safes to put cash in the safe because they don't want to go to a bank and have to pay ad bank to hold their money. Can you you know? So Japan is a great example two big difficult problems. Not only aging demographics, aging to the extent of the

population is shrinking. Okay, so the country will literally be smaller twenty years from now. Than today if nothing is done. And then the second issue is very high levels of debt to GDP. So how do you solve that? Not easy, especially in a country that's not culturally open to immigration. So they've tried to get more women into the workforce and other things, but there's no getting around Monetary policy

won't address these issues. They'll ultimately need to deal with and you saw this recently by their recent actions, a recognition they need fiscal policy and other structural reforms. Monetary policy by itself won't address these and I think that's a lesson that we should probably learn here and throughout the world, and it's important lesson China. The FOMC minutes again, they singled out the high debt GDP ratio and a certain exchange rate policy. Again, you were just there, you

were in Shanghai. Why is China such a concern to the Federal reservant? To you, Rob Kaplan, Well, the reason I went there and the reason I'll continue to go there. Number one, I've been going there for thirty years. It is it is actually a very significant portion of the world economy today. So what goes on there will affect the rest of the world. But Number two, they're going through an adjustment process where they're trying to wean off

high levels of government spending on state owned enterprises. Is infrastructure real estate that basically they where they use leverage, and so they target a GDP number of six and a half percent and then they create debt to meet it. They can't keep doing that, and so the pressure valve for all this is the exchange rate. So we're just sensitive at the FED. But I think again we shouldn't go too far with this that if there's a stronger

the stronger the dollar is. If there's a suddening strengthening the dollar, as we saw again in January and February, where there's a sudden weakening of the end of the Chinese currency, it's going to create global instability, potentially tightening financial conditions. I again, I think this is an issue that's not going to get resolved in the next few quarters. Is going to be with us for the next ten

fifteen years. It will take that long or longer for China to work through this transition, and so I just think it's something we need to watch over the next number of years. Did China's Chinese officials you spoke to

expressionate concern about the US. Did you anything you share with us that they when they look at US and the FED what they're saying, Uh, they are very conscious there of the transition that they're going through in the fragility of it and the big and you notice they've they've apply very substantial capital controls in the last six months because the thing they are concerned about, they're concerned about domestic instability, and they're concerned about capital flight and

they're trying to staunch it. And so the one thing they keep their eye on is the currency. And they understand that domestic players would like to take more money out than they currently can because they worry that Chinese GDP growth is going to need to decline and the government cannot continue to leverage up or increase their leverage in order to support GDP, and that means a weaker currency.

So that's what they're cognizant enough. Mr Kaplan, Note, what do you ask yourself when you look in the mirror? And the reason I put it that way is because of course you're book what to ask the person in the mirror, And I wonder if you could just answer that in the context of many critics of the Federal Reserve who say the FED missed the housing crisis and they've managed to keep interest rates too low for too long,

and now we're addicted to low rates. Yeah. So I have a little bit of an intellectual benefit that I've only been involved with the FED for years, so I can, probably as much as anyone who's at the FED look at this with an objective point of view. And I would say the biggest thing I try to ask when I look in the mirror is whether I like it or not? What I see? Am I facing? Are we

facing reality? Let's do the analysis on economic conditions. Let's understand what the neutral rate is, even though it's a it's a judgment. You're not going to see it on a Bloomberg screen. Uh. And what should we be doing on monetary policy? And and That's what I'm asking every day. And I actually think the reason that rates are lower today, a part of it is the FED. But honestly, I think the bigger part is slowing global growth, aging demographics,

demand for safe assets around the world. The neutral rate would be is in decline. Uh and uh. And I think a part of it's the FED. That people may over attribute that decline to the FED. I think a lot of it is market determined. Uh well, len's let's continue on that vein and circle back to something we're

just talking to the beginning this conversation. If we have a recession in the next several years and rates are still low in the US, what is the strategy more quantity, dative easing, forward guidance, negative rates, so that we have all those tools at our disposal. On the one hand, On the other hand, I feel strongly that we need soon and I've said this again, I'll keep saying, it's truck shure reform. That means, uh, policies that grow the workforce,

vocational training, the skills mismatch we have in this country. Uh. We need to review our regulatory policy at this state, local, and national level. We need infrastructure. We need to look at our infrastructure which is aging and decaying and is a source of negative productivity, and we need to look at ways to bolster that. I think we need to do those things, and we need to do them soon

because we need a broader rate of policy tools. And so that's that's my answer that if we don't get any of those actions, then I think the FED will be in a position will have to use its own tools, and I think it will be suboptimal for what, uh for for addressing the challenges the US faces, and I think that would be unfortunate, and that's why I'm calling this out now. Mr Kavin. You may be calling it out, but as you've also described, that's out of the remit

really of the Federal Reserve. Um, what do you foresee in terms of interest rates? Is it possibly United States could have negative interest rates? It is now I'd make one point back. I actually think calling out publicly without regard to the implications what I see in economic conditions and what I think needs to happen is part of my job, and I think I'm not doing my job if I don't do it. So I think that's a big part of our remit, and maybe we haven't done

it enough. We need to do it more. Actually, But back to your point, uh, Well, if you've got to face reality, if we get in a future situation, my concern is negative rates, for example in the United States, will hurt the financial system obviously further penalized savers, and my bigger fear a lot of companies in this country use the commercial paper market. The money is healthy. Money market industry is very critical, and negative rates will uh

will be negative for all those sources. So we're getting to the point where I wouldn't say we're pushing on a string, but I think there's real trade offs to negative rates that we have to face. Robert Caplin, thank you so very much kicking off our special coverage here in Jackson Hole, Wyoming the fit of Reserve Can't City's Symposium. He's president of the Federal Reserve Bank of Dallas, and we thank him so much for taking time for us on taking stop and Kathleen Hayes along with Pim Fox

and this is Bloomberg. Yeah,