Stanford's Taylor Sees Advantage in Normalizing Rates (Audio)

lows is faltering. Reports today showed service companies expanded last month at the fastest pace in four months, while fewer jobs were added than projected, which have the markets every fifteen minutes throughout the trading day down, Bloomberg Radio down. Industrial average is down one hundred thirty points three quarters of a percent, trading at seventeen thousand, six hundred twenty. SMP f ive foundered down sixteen point three quarters of

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Bloomberg Radio. What's it take to get for Federal Reserve Bank presidents in one place on one day to debate a very contentious, very hot topic and monetary policy. Well, if your name is John Taylor, and you have a rule named after the Taylor Rule, and if you are holding a monetary policy conference for the third year in a row, that's what you can get. John Taylor is with us here at the Hoover Institution at Stanford University. John, of course the George P. Schult's Senior Fellow in Economics

at Hoover. He's the Mary and Robert Raymond Professor of ECON at Stanford University, and so much more. In this year the conference is entitled International Monetary Stability, Past, Present and Future. So John, thank you for inviting me back to the conference. It's great to be here. Glad you could could become Glad you could be here and I

wanted to have you on the show today. The conference officially kicks off tomorrow, but I wanted to get you on the show today so we could really take our time to put the issues on the table, so our listeners will be already for tomorrow. So the monetary policy rule that you have, the Taylor rule, in essence, takes a look at unemployment and inflation, a couple of coefficients and then says, what what what a central bank should do.

You say, we're not even we're not exactly applying to the United States, but you say, it's really important now to apply that rule overseas for starters. What's the rule? Why is it so important? Well, when when they fed another central banks came close to using this type of rule or procedure, things work really well. They moved the interest rate around in a pretty predictable way, and the economy was good. Is it's a good time, And when

other center banks do the same thing. So there's a lot of evidence both in economics and experience that this kind of thing works and read sutly central banks have gone different directions, and in some sense that's the purpose. Our conferences say, why is there so much difference in exchange rates are moving and capital flows are moving, and

that's the instability that we're concerned about. And the thought is of central banks and the sense got back to a more normal approach, which is a policy rule approach that they could eliminate a lot of this instability. John Taylor, I don't know whether you're familiar with Bill Maher, the television interviewer, but he has a segment where he says new rules, and I'm wondering if you could talk about new rules based systems or a new rules based world economy.

Tell us about how a rules based system would work. Well, what we've seen with experiences when central banks have more predictable policies, so people know what they're doing when they're moving the interest rate around, which is what they usually do,

then it provides more stability. And so a rules base means you kind of know what's up, what the government's up to, what the center banks are up to, and they around the world know what each other is up to, so it provides a real sort of sense of guidance and stability. It's kind of natural you know what your counterparts are doing. Other parts of the world. We've sent We've seen it work in other areas of international policy,

trade policy. Rules based strategies have been out there a long time and experienced people people like poll Vocal used to run the FED, people like George SCHULTZU many cabinet posts recognize this importance of a strategy and advocating we moved back to this kind of thing. It's really not so new. The world is different, but it's it's something that's worked in the past and it will work again. Well, is there really a rules for all season though? John?

It doesn't discretion have a role because there a certain center. Feds always sid inflation rises, raise rates, you know, job the job market gets too tight, going to start headquarter recession, you cut rates and there's a certain then there's something discretion based around your evaluation of those numbers and what

they're with the trends are where they're going. Well, the advantage of a rule of procedures, you know when they're going to do it and by how much, And it's not just winging it and saying we're going to move by this amount when we think we will and and get off of it. So there's quite a bit of difference and and of course in any situation, you need

to have some discretion. All the proposals that I've certainly worked on that are being proposed now allow for some discretion in a case of emergency, In case of a panic, of course you have to have that, but that doesn't mean you do it all the time. That doesn't mean you don't have a system or a strategy in place. Again, so people know what you're up to. Interest rates. Are interest rates too low? Yes? I think they are at

this point. There has been a real effort to try to raise them in the US last year they took a stab at into somebody seem to be backing off. At this point, they've been near zero for a law a long time. Other central banks have followed the FED down quite frankly, and it's become more of a global things. So a good fraction of the center banks in the world have rates which are nears are or even slightly

less than zero. Very unusual situation, and I think that's part of the sense in which it's it's unusual and therefore not rule like. So the idea that that's what will be you're discussing at this conference with real practitioners and people have been working at this for many, many years to see why are we in this unusual situation.

Some people think it's just right. I don't, but I think we're gonna explore that, and I believe see that there's an advantage of normalizing rates at this point in time if you're a country like Japan which has had deflation. Europe's with with the deflation, are negative interest rates consistent with the Taylor rule? Well, at this point in Japan's situation, they've tried everything they could. They have had a new central bank with a gigantic amount of quantitative easy and

that means purchases of security. So it's it's much more in the zero or negative rates, and and it really hasn't worked. I think that's the concern. These policies don't seem to be working, and they're basically exchanged the exchange rates. They make a big difference on that, and that's that's what really the attention is at this point is exchange rates moving around and capital flows moving around, and they're really not helping the Japanese economy. If anything, they're going

the wrong way. We're going to continue the conversation with John Taylor. He is the Professor of Economics at Stanford University, Senior Fellow in Economics at the Hoover Institution. You're listening to taking Stock. I'm Kim Fox, my co host, Kathleen Hayes, and this is Bloomberg Radio. Coming up on taking Stock. Roger mcmeee, founding partner of the venture capital firm Elevation

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at Bloomberg le headquarters in New York City. But a lot of global market instability, a lot of economist, a lot economies having trouble. Could it have something to do with a monetary policy situation that could use some more rule based procedures. We're gonna look at the international aspect of John Taylor's rule. Pim with John Taylor of the Hoover Institution, and will also be talking about Donald Trump, who seems to be taking over the Republican nomination for president.

Bill Bes come up with the Mark Halpern John Hilman of with all due respect or right now, with all due respect, let's go to Katherine Cowndery in the Bloomberg news room. Thank you, pam Well. Stocks are declining. Mixed economic reports are weighing on the market. One report showed service companies expanded in April at the fastest pace in four months. Another from the Payrolls Processor a DP showed

companies hired fewer workers in April than estimated. Peter Dickson, Global Equities Economy as at Commerce Bank, told Bloomberg Radio that investors are not getting much direction from economic data. They're not really getting an awful lot of steer from central banks either. There was a sense of there at central banks is from the kitchen sink up to the problem. We're not seeing any real signs of significant recovery, and I think as a consequence, investors just feel a little

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years ago. The trade deficit narrative forty point four billion dollars in March. That's a drop of thirteen point nine percent from February. It was the smallest trade gap since November. And now let's get an update of some of the other stories. We're following today. Thank you, Katherine from the Bloomberg News room. I'm Ramie in essentio. John Kazik, last man standing in Donald Trump's path to the Republican nomination, will end his campaign later today, making Trump the party's

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Bloomberg newsroom, I'm Ramy and a cent Cio gatherin. Thank you, and now let's get a quick update of the equity benchmarks. Del Industrial Average is down one one point at seventeen thousand, six hundred fifty s and p f F foundered down twelve points to two thousand fifty one. Then Naztac is down thirty six points at forty seven. And that's a Bloomberg Business flash. He is taking Stock The FED in

focus on Bloombird Radio. The FED in focuses Rachi Bay Willoughby since eight, New York City's boutique camera store for precision crafted, Hazzle, blood and Like a cameras, plus a full selection of go pro action adventure cameras. Willoughby's corner of Fifth Avenue and thirty first Street. You're listening to taking Stock, I'm pim Fox. My co host Kathleen Hayes. Joining us now is John Taylor for a continuing conversation

about economics. He's a professor of economics at Stanford University has also Senior Fellow in Economics at the Hoover Institution. Professor Taylor. And denying that something is true just because it suits your fancy doesn't make it any less true. And what I mean by that is if you ask a child if something happens in another part of the country, and will it affect them, many of them understand yes,

it will global warming, various types of things. Why our economists seemingly immune to this connection, Well, I don't or that or FED officials, I guess I should say more specifically, Well, I think you know quite candidly, a lot of FED officials think too much about what's happening all over the place, and maybe just the opposite of what you're saying that there's a sense in which if they react to every little wiggle and every little movement all around the world,

they're going to be doing too many things. So the trick is to find the big things that are really moving the economy or require some response, and and that does take judgment, but it also takes experience. That's why I think these rules or strategies which shay which is the things you're gonna react to and which are not,

isn't so important. So let's take a look a couple of papers that are coming up at the conference tomorrow, John, particularly for our listeners who are FED nerds like us, and I really want to dive into these which will be accessible as well. Um the fan often says when it comes to its moves that sure it could impact emerging markets, but remember a very extensive analysis that FED had a couple of years ago about oh, there are all these other things in markets are reacting to when

they sold off, not FED moves, right. But Sebastian Edwards, actually economist has done a paper which suggests that there's direct links and direct impact of the FEDS moves on

the rest of the world. Yes, he is one of the people giving papers a dis conference which he studied carefully and saw these impacts in Latin American countries, but you can see them in other countries as well, and so it's there, and you know, you you think that there's reasons the exchange rates could move, interest rates couldn't move, and the US is a powerful federal reserve, has a powerful set of reserves, so that's going to have these impacts. So the question is how do we deal with that?

And that's why that's why I think you need to have some sense of cooperation or some sense of global aspects of this. One of the most outspoken central bankers in the world these days as the central banker runs India, ragu Rajan, and he can see some of these impacts on his own country. So I think it's important for the world to take these into account. Does the world pay too much attention to the Federal Reserve? The Federal

Reserve is the most significant central bank. The dollar is the most significant currency, so they have to pay attention to the Federal Reserve. I think what we need to do is find a way for the Bank of the United States, the FED, to integrate its policy and think more about its impact on the world, because the world

does feedback on the United States. Even if you're just concerned about the United States, if you're mandated to be concerned about US inflation and unemployment, you've got to think about the impacts on the rest of the world because it can come back and hurt you. So the FED as a superpower that maybe he has gotten too powerful. That's also being addressed at the conference tomorrow. John. Yeah, one of the interesting papers David Beckworth is giving is

about the FED as a superpower. That reflects the reality that the Federal Reserve is a is a a power full central bank and superpower. Is maybe wanted to underline that, but you need to take that into account and the dollar its role. The dollar is important. It's not disappearing. There's lots of people talking about the Chinese currency can be more important, but it's still the dollar, and we

need to think about how to make that work. How would you debate or how would you push forward the idea of interest rate increases to the Federal Reserve Bank presidents that vote against them, how would you convince them? Well, the main thing is in the past, when we've had policies with higher interest rates, in these circumstances, things that work much better. And there are colleagues of those people at the FED who think exactly the same. They've seen

history and they can see it works. Economics is a confusing science for lots of people, so there's different viewpoints. That's the way it is. So you've got to persuade, you gotta talk, and you know, there are times where policy is not great. You've got to find a way to get back to good policy. It'll be better for

the economy. John, what would you change about the federalssor of Peter Fisher, who was the head of the Market's Desk of the New York Fed, gave a talk just a few days ago saying that the size of the f o MC, the Board of Governors plus the Fed Bank President should be cut back. I think he wants to get rid of the board, have fewer Fedbank presidents, to have more transparency. It's a good idea. Well, you know,

just step back. There's an enormous number of proposals put out there right now, and Peters is one of them. I think it's it's worth thinking about, and that reflects the fact that policy is not working so well and there's some problems, and there's legislation in Congress to actually

make some changes. I think some of that legislation's promising, maybe more promising than what Peter is referring to what we discussed it and that really requires the FED to simply report it strategy, to simply say what they're doing as clearly as they can. I think that would be uge improvement. John Taylor, thank you so very much, joining us here at the Hoover Institution at Stanford University on the eve of his third annual Monetary Policy conference. This

year it's International Monetary Stability, Past, Present and Future. We're speaking a lot more about the conference today and tomorrow. This is taking Stock on Bloomberg Radio. The FED Hour on Taking Stock is brought to you by Commonwealth Financial Network. When it's time to change the conversation, talk with a broker dealer r A A that's ready to listen. Call eight six six four six two three six three eight of VI is a Comwealth dot com To learn more