Surveillance: Fed’s Response with Rajan (Podcast)

It's a wonderful, wonderful book on international relations. And the other one is The Third Pillar. It was a book last year that was extraordinary on community and is absolutely the book of the moment right now with what this nation is going through. Rob and Roger joins us from Boost School Chicago. He's the author of The Third Pillar, and yes, the former central bankhead for his India. We'll get to that here in a wide ranging discussion Rago,

we have to talk about federals or policy today. I understand you have a little bit of reticence about that, but the identifiable fault line of our central bank policy is somewhere out there, somehow the debt has to diminish. How will they do that? Well, they can't really do anything about it for now. What they have to do, and what they've been doing very effectively, is support all markets. The problem is when you support all markets, you are

not letting the markets do their work. And the question is when do you allow that to happen. So take, for example, the highly indebted companies like Earths, which are experiencing a revival without any debt restructuring as we go on, the question is when do we allow them to restructure their debt so they can emerge elder from this crisis. And that's the question the FED will have to grapple with.

With all the market supports, when does it allow the market to start operating on its own rago does the FED risk its independence? We had a conversation earlier today about how the FED came out of the nineteen forties in World War Two and basically had to nationalize the debt economy to allow the nation to recover. Is the great unseen out there is we have a FED that loses its independence at some point? Well, I hope not, but the forces that pushed for FED independence are no

longer operating right. Remember, the big issue in the eighties was very high inflation, which is what Paul Wolker tackled by bringing by raising interest rate sky high. The reason for FED independence then was that inflation was the problem, and making the FED independent of the government would allow it to operate and bring it down. Today, we no longer have an inflation problem. If anything, it's a disinflation

problem in the short term. And therefore, when the need for the FED is really to support the economy, for the FED to cooperate with the Treasury and it's doing very well, the rationals for FED independence become a little less cure my senses. It will re establish itself again over the medium term, but in the short run that rationality is no longer on the people. Well, this is the issue, isn't it, Professor, The perception of independence and

central bank independence. If these two both the treasury or the fiscal policy side of things, it's going to work closer with monetary policy in the year and years to come as they actively support issuance from governments. How do they maintain the perception of independence in an environment where both sides are working together to make sure that we can have the kind of Treasury issuance that we've had over the last few months. Well, this is a really

big question. It has to work through institutional independent and so for example, protecting the position of the PET chairman UH, for government to stay away from criticizing the FED for whatever it does and pushing for more overt activity. It has to be a discussion which is on equal terms between the Treasury and the FED. It cannot be one side pushing the other. That will all too perceptions of bet independence. I think the FED is doing a fantastic

job in cooperating. It's done everything is possibly could. But there has to be a reciprocal arrangement from the government side to respect the independence and not make over statements about what it should do. Professor right, I want to cause any dramatic headlines for you, but if we can lean on your experience of the r PI and just reflect them, what's happening and developed central banks right now? To some degree, do you think they are taking on

emerging market characteristics? How these central banks are operating together with fiscal authorities for sure. I mean this was always an emerging the problem. The central bank was under the thumb of the fiscal authorities and essentially had to monetize the debt. In many industrial countries, we are in a similar situation with enormous amounts of debt having to be put out into the markets and the central banks taking

it on on their balance sheet. If you look at the Fed's balance she takes it's expanded from four trillion to seven trillion in space a few a few weeks. This looks a lot like monetization, and it's very helpful in the enabling the government to issue, but it has to be seen as temporary and not a permanent facet of the landscape. That's what they have to work very

hard on doing on ensuring there is separation. The Fed is willingly doing it in honor in order to meet its mandate, not something that's being forced on it by the trade professor. A lot of people don't really see a path for the Federal Reserve to shrink its balance sheet at this point, and doesn't seem like there's any fiscal hawks left in Washington, d C. Is they try to support this government. What's the potential consequence, I mean

building what you were talking about, its developing markets. Their currency is the escape hatch. There right, it deflates it it depreciates versus other currencies when this fiscal balance gets super out of whack. We're not seeing that though right now, at the weakening of the dollar being attributed to risk on rather than a lack of credibility. At what point

is the currency back in play here? Well, Typically, the central banks intermediation starts becoming more difficult when, for example, the banks separately are unwilling to hold the enormous quantity of reserves that are pushed onto the banand sheet. That typically means a strong economic recovery where they want to expand credit. That's one reason the central bank might find it hard to maintain a large balance sheet. The second reason, of course, is inflation. Now, neither of these is currently

a big issue. When this start becoming issues, it is very important that the Fed be able to shrink its balance sheet by selling assets back on the market, and presumably under these two conditions it will be reasonably easy to sell assets back onto the market. The the greater danger amongst these two stronger credit and stronger inflation is probably stronger inflation. And that's why that's just a risk

over the medium term. It's not a risk today, Professor, I was reading a recent column that you wrote, or you're arguing for federal governments as well as monetary policymakers to withdraw some support. Now, is that an accurate reflection of your stance? Now, I'm not saying a withdrawal support. Now. What I am saying is, as we go forward, we have to change the narrative from this is about a couple of months of support to the economy as we

deal with the pandemic and then things come back. Now, that was the narrative which we started the fight within March, but now it's becoming much clear this much creer. This is going to be a long drawn out battle, and some sectors of the economy are going to take years to come back. Some sectors will have to transform themselves.

So what I'm saying is, as we go forward, we have to ask how much support do we need and where do we still have to continue supporting Hearts and Carnival or should we allow them to restructure their debt and maybe change their business models so that they can deal with the emerging new economy. That's really the question.

When do we start moving support to enabling transformation rather than preserve, preserving the economy as is, and as we go forward, we have to move from preservation to transformation, both in terms of Treasury policies as well as in FED policies. Professor Roger, one final question, and I must turn back to the third pillar and your primal scream for community in America. This past weekend in Chicago with the gang warfare was a war zone with that protest

from sea to shining sea in America. Your book is a book of optimism, but you talk about the intractable inability for America to find community. How do we find the third pillar? The great question if you look at what the pandemic has done, it has exacerbated every division we had, whether it's rural, upon whether it's on the basis of race, whether it's on the basis of education. We're sitting working at home, others are on the front line dealing with the pandemic or or serving people in stores.

So really the issue is how do we bring the country together in a stronger way. And I really believe we have to look at disadvantaged communities. We'll have to look at communities that have fallen behind, and we have to ensure that they provide the people is stronger sense of belonging, the strongest sense of empowerment, but also greater

capabilities for the new economy we are creating. That requires work bottom up, and that also requires pushing more part to them so that they can seize the seeds that are and use it effectively. This is a lot of work. It requires transformations of our transformation of our economy. It requires a lot more decentralization. But I think in the long run this will be the way we get sustainable growth, not through more and more debt, but through stronger growth

from every part of economy. So that's that's what the book is about. Professor. Already, powerful conversation, and we appreciate your time and look forward to getting your back soon. That is Professor ram Ranch and the former RBI Caverna and the University of Chicago Booths score Professor. Earlier this morning in Paris, the O e c D issued what I am more than certain was the grimmest report they've ever done, and with it was some terrific nuance that

was led by Lawrence Boone. She is their chief economist and has just done a phenomenal job of explaining the distinctions of this pandemic, Lawrence, what is the single distinction when you overlay this pandemic on the global economy. What's the one message you have but the one high Um, the one message we have is that we are confronted by massive uncertainty. Um. It's a global pandemic, as you say, but also a global economic crisis. And it's the it's

the biggest and perfect clients we are saying. And because we have this massive uncertainty, we we had to issue two scenarios, two fits of broadcast for the first time in a each history, so that we could we could flame you know, the extent of what the possible outlook, and both of them, as you said, are very dream Lawrence. What is so important here is the shift literally in the less number of days, but certainly in the last

two weeks, towards a less prosperous world economy. We had a developed nation COVID virus, and now we have the COVID virus of an impoverished Mumbai and all of India. The horrific statistics out of Chile and the rest of South America. What do you people presume will be the developing economy effect of this terrible virus. So this is one of our major concerns. I do you know developing

economies usually have less equipped healthcare system. It's much more difficult to confine people and provide a shelter because of the sheer size of informal workers. UM. They've been hurt by a locomoy scientists as well, and what we've seen is that capital outflows have been more abrupt and matching

than in any other crisis. UM. And I think that's where the oecy message becomes really really right on points, because without cooperating globally, it's going to be very difficult both for this country, but for the rest of the world as well, including the advanced economy, to renew with

the type of growth that we had before. Because what this is telling us, beyond the financial risk that that can be coming from emerging market economies, beyond the human tragedy, is that the virus you know, for which we have no vaccine or no treatment. As your where you speak A said, we'll stay whether if we don't eradicate it every where every single country and a fire cooperation is

still necessary. So dr give us a sense of kind of how you think the response has in across uh, you know, some of the developed economies here it seems like a lot of economies are trying to reopen here. Uh, what is your sense of how this might play out? What are your forecasting right now? So it's it's very diverse. Of course developing economies. You are seeing countries like India where there's still some state science confinement. Others are more open.

The governments trying to reach out to informal people, you know, informal workers through digital means and and also by giving put tickets. We also have countryline pressing on where the type of decision related confinements are being made at the state level. Um are others like Columbia who are actually putting in place more confinement and reaching out to informal workers fo digital. South Africa has been very at the forefront of this because they had some of the other

and of it various clisses before. So it's extremely diverse depending on the experience they had and how how is you they think about using how compatible they deal with digital and also you know how large is the country and and dispersed the economic activity. Lawrence, do you have of an opinion and a view and you're just so experienced at this of the effort of Mirco mccron to provide fiscal union in Europe. Have you folded that into

the o e c D analysis. So I think that's super important because one of the main concern that we had in the building up of these projections is the way that the pandemic, you know, has affected countries within the euro Zone in a very different way, and that depends not only on the confinement and the way they tackle um the pandemic, but it also difference on the economic specialization and the type of physical support that country

is we're able to put in Joyce. So we were seeing these divergence across viewers in the country, which I do you know, having followed that for a long time, is not very helpful. UM. But this, this European recovery plan put out by American and Macon is right addressing

these diregens, and I think this is to be very welcome. Rasford, thank you so much in congratulations on a just a superb and needed view forward by the O E c D. Let's start a program this morning with pre a measure of TV securities on this Federal reserve decision several hours away. Let's just begin with what you're focused on and what you want to hear from that news conference, which M and PAL. So you know, I think we're not looking for any specific policy. Actually, we're not looking for them

to strengthen forward guidance. We're not looking for a specific dollar amount of they going to be buying per month. I think what I'll be focused on is the language. How does chap Our frame the outlook frame the reopening. You know, we had a pretty positive payroll number, but in our on Friday, but in our view that was expected. When the economy reopens, you will you are likely to

see much better data. But I think for Chepower to stress on the medium term risks, I think one of the things we're really focused on is, yes, we're reopening slowly, but are we reopening to a new normal? And we just don't know this. So I think for chap Ower to say, and for the fact to say there's considerable risks in the medium term, we're going to remain highly accommodative and sort of suggest that there might be more

steps in the months ahead. So I think we do expect them to undertake geek of control we expect them to be buying a lot more longer data treasures. But I don't think now is the time to commit to that because of all the uncertainty. So I think just suggesting that there's still that uncertainty, I think we'll see it in then in the dot plot. If the long run dot ns down, it will be the lowest ever long run not so, I think that will be the fact saying, well, maybe there is some impact on our

star based on the pandemic. Unfortunately we don't have too many pandemics to go to. But I think some reflection of our star maybe lower inflation. You know, even though there's talk around high inflation for some necessities. I think to suggest that, unlike a war, capacity is still out there. You look outside, there's still all that capacity. It's tremendous

amount of slack in the system. I think for him to stress on that will actually tell the market that the fat is likely to be accommodative for a long long time. Speaks the love inflation, speaks the love of rights for a long long time. Prayer. I just wonder if they can make it even more simpler. Just a few months ago, if you asked the fellow reserve. What their objective was, it would be extending the cycle. Can they say something like, we need to get this economy

back to pre COVID nineteen levels, that's the objective. Amnatory policy will be loosen until we get there. I think they could. In fact, one form of strengthening forward guidance is to make it outcome based um. But I think if we realize that there could be a lot of structural damage done to the economy, I think it gets a little harder for them to commit to pre COVID levels. Just remember, the economy is growing at a trend. So are we getting back to pre COVID output level or

are we getting back to pre COVID trend level. I think they'd like to get to trend. But if there is a lot of structural damage done, if if you four start to pick up, I think the FED will struggle to say we want to get back to that level, but to suggest that we're not about to take the foot off the pedal. In fact, we might accelerate more in terms of easing if we find that these risks

that they're talking about. So I think today they really stress on the risk if they do materialize as we reopen and we're not reopening to the old normal, then they actually come in with more. I think that's what we really need to see, particularly after the rate rise. I mean last week we had a pretty significant rate rice. I think the market is trying to test the FED to see how accommodative will they be? All are they

okay with rates being higher? I think chap I will be really forcefully in that they don't want much higher rates here Priam Israel. When we talk about getting back to pre COVID levels, we've already gotten there. When it comes to markets in terms of reversing some of the losses with the respect of the SMP and NASDAC, there's a feeling in markets heads I win tails I win because the FED is going to come in and backstop asset prices. So far, the Feed has given no indication

that they would like to push against that. Do you think that this impression that the market have has is correct that basically this is the one tool the FED has and they're going to double down on it, and that is keeping asset prices high. Right, great point. I mean if you look at the stock market, you'd almost say what pandemic. You know that where is is this

medium term risk being reflected? I think the stock market is partly reflecting the fact that the FET has just told us that rates are going to be low for a very long period of time. So when you just count cash flows, that interest rate component is important. That's why being multiples rise. I think what we are all struggling with rank and I don't have an answer. Nobody really knows, is what is the medium term outlook? Has

there being structural damage done? I think, um, you know, the market is right in that interest rates are going to go for a long time. I struggled with the e component of that. You know, the pe, the pe could be higher, but if companies are you know, going bankrupt or particularly small businesses getting impacted, and we don't do enough on the fiscal front, and this still worries me. I expect you're about to make another push for more

physical stimulus here. I don't think he'll bring up financial stability as a reason for them to cut back on accommodation because if they do cut back on accommodation and you get a pretty big impact on the economy or you you know, worsen the recovery process, and that's really the worst case outcomes. So I don't think they stressed on financial stability, but I do think the stock market is pricing in this getting back to normal, and that's what really I we we struggled with as to what

new normal is. We've got to have sophisticates here on the bond market. That would be you, Lisa Bramo. It's in the host of the real yield. John Farrell from Mere Mortals like me. Can you explain to me is the FED action that is talk or is the FED action that's actual tangible action? What part of where they are right now are they Are they all talk in promise or they actually doing right now? Um, so they've done a lot. I think we shouldn't forget how much

they did in March. In fact, some of the facilities are still getting ruled out, so I would not discount the action part. They did take grades down to zero they've been suggesting through talk and forward guidance is a very powerful tool. I think the innovation of the two eight crisis was forward guidance. The FED discovered that if you tell the market that you're not hiking for a long time, that can keep rates law that can help asset prices um you know, so I think they continue

to use that as a tool. That talk is powerful. They do have various ways they can talk, Fed speeches, press conference. The dot plot is one form of that communication as well. The action will be needed though at some point, particularly when you talk about the tenure, because talk can only really anchor the front end. So I'll be certainly watching for how to see frame, how to

share out frame. The QUE program isn't just about market functioning, because if that's the case, treasury markets functioning just fine, they can stop q ME here. I don't think that's the right policy. I think that's going to result in a big rising rates. So the action will be needed. Now, the Fed every week does buy treasuries. I think they retain that flexibility to buy as much as they want, as much as is needed as where on the curve.

But I think we do want to hear some talk that's helpful for the long end as to how they're framing it. I think suggesting that we don't want longer to term rates rising will tell us that the Fed will buy as much as needed to keep that long end anchored until we know that the economy can handle higher, so I wouldn't scoundrel brilliant work as always and always enjoy catching out with its ad security has had a

global right strategy ahead of that fat decision. Prays that my best at the same Well you, It has been an extraordinary day for Bloomberg Surveillance and wonderful conversation including Professor Rajan moments ago you heard from Olivier Blanchard, who we spoke to yesterday. It is now time to turn to the equivalent in New York City real estate. Some people do real estate and they go on with their lives, and others actually become part of the fabric of the community.

William Rewden has done that. He has been hugely upfront on the development of real estate in New York City that has a social good and a social fabric. We are thrilled to bring him to you. Is New York City reopens, Bill one. Thank you so much for being with us today. What is the last few weeks been like for you, your properties and the people within those properties. Well, first of all, Tom, thank you and the rest of

the team for for having me on. And I think you know your your professor Rajan just talked about community and you mentioned it and and what what we what we find and what we work on is creating communities and trying to bring people together. And we obviously have gone through over the last several months a very difficult period of time. And in the last couple of weeks. Uh you know, uh, there there have been I think

dramatic sea changes in the way. Hopefully people look forward and try to bring our communities together, because that's that's really critical. And I think our city is you know, so diverse, and uh that's our strength. And how do we bring people together? And you can't do that working from home? And I think you know some of your other speakers have talked about that too. You you have to be working in your office, working together. Um. You know,

I talked about collaboration, community connectivity. So that's what we have to keep doing to move forward our economy. And the you know, Phase one opened up the other day in New York. You had almost uh people on using

the subway. The governor and the mayor done an incredible job to we were you know peak you know, several thousand people a day getting sick today, uh is I mentioned I don't mean to interrupt Hill, but just because the time, and I know Lise's got a whole bunch of questions here is Well, what I find so important, Bill is hope. We have to develop a hope of the people. Maybe they're not protesting, maybe they're certainly not looting, but they have lost hope over the last X number

of years. Not about the pandemic, they've just lost hope in development. How do we jump start that hope within the Greater New York's any region. Well, I think the first step is opening Phase one and then in a couple of weeks from now, opening Phase two. Getting our city back and in the economy moving again, creating. Uh. You know, the construction cranes are working, the men and women on those sites are back into work, almost four

d people. That is a sign of hope. And and you're right, we need to have we need to have signs that give us guidance that things are going to get better. Uh. You're seeing legislation, you know in New York State yesterday. Uh in terms of of of of changes in policing. Uh. We have to work together with communities and and create better policing policies where people feel confident about their their police and um and we have to create economic opportunities for for all spectrums of of

of our of of our population. And we're gonna do that, and you're gonna see New York City be at the forefront of job creation, dealing with issues from racial and justice to affordable housing to education. That's what we do. And we've come back before from from major tragic events and we've worked together. This is an entrepreneurial spirit. You talked about hope. We've come back before from in the early nineties where we had nineties million feet in Lower Manhattan,

you had thirty vacancy. We came together, We converted office buildings to residential. We we we created tax incentives for companies to move downtown. You create Now you have seventy thousand people living in Lower Manhattan from ten thousand, five years ago. So there there are symbols out there. Nine eleven. Uh. We came back after Sandy. We came back. Well, Bill, let's talk about the hope versus the here and now. As you own seventeen office buildings, I believe throughout the city,

what's the demand like right now for that office space? Obviously, when the city and the country went on pause, things slowed down. But there you know again, you know, going back to the hope, A lease was signed two weeks ago by TikTok in Times Square for over two feet over a thousand people are going to move into UH an office building on Street. That's hope. That's a sign that things are gonna turn around. We're working on different deals.

I know a lot of my colleagues are working on things. Unfortunately, things got you know, put on on pause. But as soon as we start opening up to the economy, I think you'll start seeing activity uh leasing, both commercial and residential, and people starting to come back into the city. Bill

got to leave it there. Bill Ruden, thank you so much for the update on the spirit of New York City and of course with the many many properties that he has that he's built, particularly his historic effort in Battery Park after UH eleven William Reuten on the Spirit of New York. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene.

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