JP Morgan's Kasman: Problem With Lack of New Investments(Audio)

word for word what's in the Beige Book. It seems to me that it's a pretty, what I want to say, kind of plain vanilla some you know, things are growing, inflations contained and let's just get some news that will tell us one way or the other where there's economy is heading. Well, they don't call it beg for nothing. The I think the assessment you made is broadly right. It's it's continued with a lot of descriptions of modest

and moderate throughout the UH the report. And I think what that's telling you is that the way that the the UM surveys is basically looking at the economy is that things are kind of, you know, going along at an okay pace. Uh. There's a little bit of wage pressure, not much inflation is still low, but there's no signs it's getting worse. Uh, And that you know, things are kind of, you know, just continuing to kind of move

along at a at a social pace. Here. One thing that I noted that I had not seen previously was the San Francisco FED reporting that financial institutions in a few states with a legal marijuana industry reported increased operational costs related to regulatory constraints on activities linked with that industry. Have you ever heard anything from the Federal Reserve comment on the legal marijuana business? No, I'm not sure. I'd

i'd say that tells you anything about monetary policy. But one of the things you get in the Beige Book is always some interesting in some quirky anecdotes, and that certainly is under that category. Jeff, excuse me, I'm thinking

Jeff Lacker. Bruce Kasman. Jeff Lacker, president of Richmond FED, was testifying on FED structure in Washington, d C. He and Esther George, who's president in Kansas City FED, both arguing to keep it as it is twelve districts, twelve presidents, and the board of governors, But afterwards reporters asked him about the economy, Jeff Lacker said there's still a strong case for a September rate hike up nothing in the Beige Book that seems to go one way or the

other on this. What do you think, UM, I think there's a case for a rate high in September. I don't think the Fed is going to decide to raise rates in September. I think they're more likely to use the meeting to basically set us up that if can things continue, uh that as they expect that they're going

to move at the end of the year. UM. As you can see, the economy is feeling less downside risks as well as the global economy, and I think if the Fed feels the economy is on solid footing and feels a comfortable that inflation is moving up, they do a signal here that they want to raise rates. But I don't think the news we've gotten has been strong enough or decisive enough to get them to move in September. I think they'll wait, hope to see more information confirming it,

and then move in December. Joining us now is Bruce Kasman. He is Managing director, Chief Economist JP Morgan. Bruce someone if you could tell us a little bit about how you believe the US economy will continue to perform given its lackluster performance so far this year. Um, we're kind of looking for more of the same. We think the

economy will get back to about a two pace of growth. UM. I think that's a pace which unfortunately is uh, you know, pretty decent given where our supply side conditions uh stand right now. Um, but it's not one I think that's going to excite anybody. I think it's going to calm some of the fears we've had as we went through the first half of this year, and people will worry the things we're gonna get a lot worse. But I think there's still enough drag here in terms of the

business sector profitability is suspending. I think there's still enough of a sluggish global environment out there that the economy is not really going to take off here in any in any meaningful way. Bruce uh Jeff Lacker, president of Richmond FED, saying there's still a strong keys for September interest rate increased to an extent. Is it your sense that those who are arguing more vehemently, who are more saying no, let's raise interest rates now, certainly by the

end of the year. To what extent is that argument do you think based more on worries about financial excesses developed develop developing financial instability if you keep rates so low for so long, versus an argument that there's really such a pickup in the economy that you have to worry about inflation getting out of control. Well, I think there's two pieces to the argument. One is what you're saying.

I think there's a concern on some members minds that the low interest rate environment is starting to create some uh, financial risks, and I think you can see some signs in commercial real estate, you can see some signs in corporate leverage that can can certainly get people a little bit concerned on that front. I think the other side of this is, even though the economy is not growing it at particularly robust pace, labor markets are continuing to tighten,

Wage numbers are starting to move up. Core inflation to us looks like it's starting to drift up, and the Fed is just not that far from its objectives here in terms of where the the full employment and price stability objectives are, and you know, given where policy rates are, that's an argument for UM moving on the normalization paths. I think that both of these things are in the minds of those that are are interested in raising rates

right now. Bruce Kasman, did you foresee this sluggish growth? I mean, is there a call that you wish you had made that you didn't or something that has confounded you about the economy's performance in the last twelve months. Um. Uh, there are a lot of things that I wish I had done differently in the last twelve months. Uh, We'll take just one. I think we've been a little bit surprised by the degree to which the drags coming on

on the corporate sector of hit um. And I think we have, uh, you know, overestimated growth somewhat, but in terms of the the forecast on the labor market, in terms of the forecast on inflation, things have been evolving pretty well the way we expected. And I think that does, you know, speak to one of our core views, which is that this is an economy which has a weak underlying potential rate of growth, so it doesn't take that

much growth to continue to tighten. And I think that's important because it points to the constraints that are on the U S economy as we think about the outlook going forward. The e c B is meaning tomorrow European Central Bank, and there's uh, I think a view out there that they could uh at this meeting are very soon announce more bond purchases or open up the kind

of bond purchases they're making. Meanwhile, of course, a big story yesterday that two big European corporates are issuingsuing bonds with a negative rate of point oh five per cent. When you see that, Bruce, though, when when a person looks at that, how are we supposed to think that this this policy is working when they're going deeper and deeper into negative territory. Well, I just say, don't shoot

the messenger here. I think the reason why Europe needs rates in negative territory is because you've had two recessions in the space of eight years. You have enormous amount of slack in the economy, You've got inflation which is sitting very low, and you've got a financial sector which is still only gradually healing. I think DCB has done a lot in the last couple of years to help

promote getting some growth going in the UR area. But I think, you know, compared to where the US is the UR area is still very early in its expansion. It's still growing at at a modest pace UH, and it needs needs more support. It doesn't have a fiscal tool to use UM, and unfortunately, I think negative interest rates are actually what's needed there and what has actually been a positive in terms of helping keep UH their

expansion going. Bruce Kasman. As part of the Beije Books Anecdotal survey, they noted in New York that a trucking industry analysts says that there remains a shortage of trucking drivers of truck drivers and that the firms don't have enough pricing power for them to afford raising salaries. Is

that something that you see extending beyond just the trucking industry. Well, leaving aside the specifics there, I think there is a very important message that does resonate with me for the broader economy, which is that corporates are in an environment in which they're starting to face tight labor markets, not high wage gains, but starting to see some bargaining power return to labor, but they don't have the pricing power in a global environment where the dollar has gone up

and where global demand has been weak, um, and I think what we see is corporate margins coming under pressure, what we've seen as business confidence being depressed, and what we've also been seeing is very weak capital spending. That to me is the is the piece of the economy that's not there that we would really like to see to get growth up to a to a strong pace.

I've heard at least one economists say that keeping the key rate for so so low for so long is one of the things that creates uncertainty for large corporations are unwilling to commit to long term investments because they say, this can't last forever, let's just everything short term. Is this one of the problems with defense current policy. No, I don't think so at all. Um. I think the low rates is creating incentives for corporates to do a lot in terms of taking out debt and in terms

of using it. What I think is going on is they're just not seeing the opportunities in terms of top line growth, in terms of both pricing and volume gains to be willing to put that money to work in terms of new investments. I don't think the FED is the problem there, but I think we do have a problem there, and that's you know, that's that's really at the core of what constraints is facing this economy right now. Bruce Casmin, thanks so much for joining US. Bruce's chief

economists at JP Morgan Securities. Tearing apart the Beijing Book for US, Yes, modest growth, modest inflation, but still enough momentum perhaps for interest rate increase by the end of the year. This is Boomberg