Surveillance: Fed Will Emphasize Patience, Kroszner Says

where to begin. And we must go to the true expert for Bloomberg News, and that is Anna Edwards on the Green in Westminster. Anna, the eight amendments. I tried to memorize them. I only got to two amendments. I'm sorry, that's okay, you've forgiven. Tom. Well, all you needed to know was most of them went the government's way, I suppose, so most things did go the government's way, at least in the very short term. She won a victory of sorts, didn't she. She goes to back to Brussels to try

and to renegotiate the backstop. Brussels and said no, they keep saying no. The UK that says, that's just a negotiating position. So we wait to see what can possibly be achieved. In two weeks. That has not been achieved over the last two years. And could we be all back here on Valentine's Day looking at amendments once again. Tom, You know, I'm reading the newspapers and it's real simple. The Irish Prime ministers asked the European Union to hold

their nerve. I believe somebody over in Brussels at some point said nothing's open for renegotiation. What is prime minister made trying to accomplish in Brussels given that immediate response. Yeah, the immediate response has been very negative. I suppose the linguists have been passing the language and trying to work out if there is a room between the two to find some sort of compromise. So the EU has said

no change to the withdrawal agreement. Absolutely not the words used by Thereason May yesterday whether she was looking for legally binding changes, She didn't say she wanted to actually replace the backstop. So is that code for can we write on a different piece of paper some legally binding words, a code of sill as it's called to satisfy both sides? Would that satisfy the European Research Group, though the far

Brexit here side of the Conservative Party. They've come together over the last twenty four hours in an act of unity, and they're sending her back to Brussels to try and seek something. But whatever she comes back from Brussels with, would it be satisfactory to them? As I say, in two weeks, we could be back here again doing this all again, looking at amendments, just like we did last night around Article fifty extensions and and blocking no deal.

So we could still be talking about those things. Um so I know where's labor and all of this well in incident into one of the interesting things happened last night in the in the Commons when Theresa May stood up to speak after the results of all of these amendments were voted on, and Labor in the shape of Jeremy Corbyn did say, okay, I'll come and meet you. And remember he had refused to do that for some time, so it seems as if he is willing to at least go and speak to Thereason May. He will be

a bit of a bystander though for the next two weeks. Also, I want to assumes, because she is the one who's going to go back to Brussels and see what she can come back with in terms of rewriting that backstop. But but he is at least going to meet her, which is progress compared to the last few weeks. Stephen Stanley dropping by the studio Amherst Pierpont Economists. Good morning to Stephen. What is the FED decision day guide over

at your shop? Good morning? Well, I think you know, the FED has declared themselves on pause, so um, and it actually is kind of a good time for that, given that we haven't really had much data over the last month. So I think really the FED wants to

emphasize that they're being flexible, that they're listening. I think the markets viewed, uh for for better for worse in December that the Fed was somehow not listening to what the markets were trying to tell them, and so the Fed wants to uh lend a sympathetic ear even though ultimately, you know, they may end up having to raise rates further later in the year. So Stephen, we could talk

about they're going to reclaim optionality. I'm just wondering whether that come to formalize patients on rates and flexibility on the balance sheet. In the statement in the news conference, do you expect that to happen. Well, I think, you know, in terms of the statement, you've got the forward guidance about continued gradual rate hikes, and the question is, really are they going to continue to soften that? Are they

going to take it out altogether in January? Worry? Um, they starting at the November f MC minutes, they started UH with the idea that they do want to get away from forward guidance, So that does lend itself toward a more flexible UH stance. I don't know that they're gonna want to talk too much about the balance sheet. Um. My guess is that you're gonna have to ask UH Chairman pala question to get much out of him. On

the balance sheet. What's the effect right now the economy on the fiction of real yields that we still have? What's the effect right now? I've just diminished real yields from any of our experience. Well, I mean, I think you know, the the UH we have peaked just above zero in terms of where yields are um relative to inflation. Yeah,

but we're still very low historically. And you know, for my money, I I still think the economy as a result, I think policies relatively easy in the economy, UH still should have a lot of momentum, and certainly we've seen that in the UH jobs numbers that we've gotten and I think everything we haven't gotten a lot data, but the consumer seems to be still well. The hard data, let's be clear and jord distinction, if we count the hard data has still being absolutely fantastic in many aspects

of this U S economy. The soft data has just started to roll over a little bit. A lot of people latched onto the consumer confidence numbers we had yesterday, and just to paint the picture for us here on radio, there was a bigger spread between the confidence in the here and now and the confidence about the future, and the confidence in the here and now substantially higher than the way people feel about the future. And a lot

of people are concerned about that spread. Should they be well, you know, I would say, let's wait a month and see what happens, because the survey was taken right in the middle of the government shutdown, and that clearly had an effect on the way people were thinking about the future. Um, so you know, factors, we could be in another government

shutdown in a month's time. So I'm not sure we we have full resolution on that, but I would say, um, that the fact that people are still feeling good about their actual situations is a good sign. We've talked about the tension between the market and the data. Chairman Pal talked about that very tension, and I'm wondering whether the chairman can sit there today inside that tension has resolved itself. Do you think it's too eady to tell? It's way

too early? UM? I think the markets again, the markets are still talking about a recession either this year or next. Um. And I just you know the Fed obviously we've seen their projections. They don't believe that. They don't believe. Let's go to the y that because I would see just a lot of our listeners worldwide and coast to coast, coast of frozen coast, I should say, actually believe in maybe not an n b our recession, but some form of lesser growth off of make America great again growth.

That's the the zeitgeist right now. You don't agree, right? Yeah? I think what the market is seeing is they say, okay, we think that growth topped out last year, so the pace of growth is going to slow down. In two thousand and nineteen versus two thousand and eighteen, and and I don't think that there's a I think most people feel that it's a straight line. Once it starts on a downward path, it's inevitable that it's gonna make its

way into negative territory. So Stephen, global uncertainty has increased, inflation is low enough that it gives them some space to be patient. I understand all of that. What I don't understand really is to what degree the trade debate down in Washington could open the door for the Federal Reserve later this year. Is it a big factor, a small factor. How much weight do you assign to the importance of that. I think it's a pretty big factor.

I think what the markets are focused on is really the tariff situation, right because we've got the big issues that I think are going to be that certainly the U. S Side wants to deal with this week around intellectual property protection and some of these broad structural issues that are going to take years to hash out. But what the markets are really worried about is the possibility that

tears are going to ratchet up in them. Okay, that's n X. I believe on white calls C plus I plus G plus n X, how much of growth is terroiffs or trade or n X? What percentages it? Well, I mean exports are about twelve percentage DP, imports about fifteen UM. But from one year to the next, in terms of looking at the growth um that exports tends to be very volatile, so it can have a big positive or negative contribution to GDP. It was pretty negative last year, and I think part of that was because

firms were trying to front load imports. But does it does it threaten the sea which is well, I think that's a great question. In one Yeah, I think that the that the consumer is in pretty good shape. I mean, the labor market is strong, wages around. Can I digress here? You want to claims we were in Davos. No, we were in Davos, Steve Pharrells too young to understand this. You and I have never thought about that statists, right, Yeah,

we're never John, that's the outlier of outliers. We've been near multi decade lows for a long long time on initial jobless claims. What I do think is interesting, Stephen, we're not even factoring in population change from decades ago. Excuse me, I had that it's even for really more stunning now relative to the size of the population. Sure, sure, I mean up until this cycle, anything below three hundred

was considered extraordinary. Now we're talking about two hundred amazing statements. Stanny, great to catch up with you please, consumer shopping, Uh, probably not so great in the short run. On a FED day, it is always our joy, indeed our academic honor to speak with Randall Crossing in the booth schools Chicago joins us. Now the former FED governor is well Randy within all your experience, And it comes down to a choice set, an opportunity set, did any chairman face?

Is how constrained is Chairman Powell into this meeting, or for that matter, is a set into the next two or three meetings? Does he have a wide set of choices or is he limited? Well? I think, um, well, he has choices open to him. But I don't think he's going to exercise those. I think he's going to stay in a in a pretty limited lane. I think

they're gonna emphasize that they're going to be patient. I think they're going to emphasize that they see some some clouds on the horizon, and as they had mentioned in their December statement, that they're downside risks, although they probably will still say that the balance of risks is is relatively or the risks are relatively balanced. But I think they're going to leave themselves a little bit more wiggle room for maybe not moving quite as much as they

were suggesting back in December. Grandy, A lot of people are drawing parallels with the O five, O six period m of a decade or so ago. You were on the f MC around that time, Randy, Does it feel like that to you? Are there any kind of parallels that you would draw and what lesson would you have learned from that period that the Federal Reserve can apply today? So I think that, uh, the FIT feels that they've raised rates to roughly the area where they are neither

being expansionary nor contractionary, the so called neutral range. And you know, now there's debating, well, should they go a little bit further or not? Are they seeing inflation pressure or not? And so far they really haven't seen a lot of inflation pressure. But there's a lot of uncertainty about whether the hot labor market will lead to more inflation or not and um, and that's why they continue

to debate. And that's why I think that the markets were unsure of where they would be because people were a supposing different different points of view. Randy, there is this belief that the Federal Reserve is now done that, so why be how belief on Wall Street that perhaps there is nothing left for this cycle? Do you think Federal Reserve has a duty to reclaim some optionality at today's mating? That's well said. Yeah, So I don't think

they need to reclaim the optionality. I think they still have it and sometimes the markets just need to sort of u catch up to it. Is Uh. Certainly the you know, expectations of interesting increases and uh uh have have changed quite a bit over time. Uh, and so make an increase or decrease depending on underlying inflation and underlying economic activity. So I don't think he's going to try to push that. I think he feels that he has the option if he needed, if the underlying data

would want to push them to do more. But I don't think he's going to push that today. Professor Krasner, we really enjoy you and Davos, we thought you were great there when you got yourself out of the snow bank to talk to us, that you missed it, Randy. The theme in Davos was about the effect of low real rates on the banking system. Okay, Europe, we all get with negative interest rates is hugely distorted. How distorted is our world right now with these low real rates

that we enjoy in the United States? Are is the FED looking at it in the meeting that we're significantly distorted or is it a non event? Well, that's it's a very interesting question because if you look over a longer horizon, like from back thirty years, real interest rates that is the inflation adjustor rates have been falling globally for for for decades, really since the nineteen eighties, so

thirty forty years. And so a lot of people say, well, it's just a recent thing that central banks have pushed rates down so low, but it's really been part of a longer, longer term trend. And and I think that has to do with the supply and demand of savings and really introducing an enormous amounts of UH savings from China into the world world economy. The US has now raised rates um and so we're at least having a real rate of slightly positive, unlike most countries of the world.

So I don't think the FIT is worried that we're sort of out of step with the rest of the world. And I think they would like to see rates to be a little bit more more positive, real rates to be a bit more positive. But um, I think they're comfortable with where we are at the moment. Brandy, Can we talk about the weather just briefly. You're amand that

know Chicago. Well, I understand you're not in Chicago, and imagine you're happy you're not right now, but just your experience with the weather and what it means for the economy. We are going into a real cold snap over the next week and potentially a whole lot longer. Uh. Certainly, Uh, it is not so warm a Chicago. But I am in Hong Kong where we have a new campus and complex here and we just had an opening and through

the really spectacular and strictly spectacular because it's not freezing. Um. These cold snaps can have negative impacts on economic actor. It will depend on how long it's sustained. If it's just a day or two, it really won't leave much of the more. Randa Crosser, thank you so much. The former governor of the fellow Reserve Wisconsin, Degree Hong Kong he is John may I stayed editorially, Professor Krasner is smarter than we are. Yes, So let us migrate forward

to trade, which is the most important right now. Let us do that with Debra Lett Paulson Institute Vice Chairman. Debora, great to have you with us on the program. High level trade talks commencing in Washington, d C. What is your base case this week? Well, it's a very positive sign that Vice Premier Leoja is here and the chances I think are good that they'll get some kind of framework deal, not not the final deal, but at least

enough to have it go to the two presidents to finalize. So, Debor, is that something a little bit more than talks about talks. What do you think the framework will actually look like? Well, there are several components that need to be included in

any kind of final deal. One, the President has made clear that he wants to see additional exports from the United States to China, so expect the Chinese to announce purchases of US products they've already announced some in the agricultural area, including commitments on soybeans, and then there needs to be market access for companies. You know, it's it is um It doesn't make sense at all when you've got the largest banks in the world in China and

you can't have a hundercent owned securities firm. Where are we on the legal history of joint ventures? If we're going to do more with trade, there has to be combinations, mergers, joint ventures. Can US companies still go in and do jvs to get things done in China? Legally they're allowed, of course to go in and do joint ventures, but I think what the government US government is pushing for is that the voice of a joint venture should be up to the company and based on commercial terms, not

to be required by the Chinese government. Obviously, we understand if there are some sectors that are sensitive, but the fact, as I was saying, if you have you know, the Goldman Sacks or JP Working can't have in a hundred percent owned securities firm is just outrageous. Debora. We honor at a point where maybe China is beyond having the standard excuse of an emerging market, where by they need to do these kind of things. But do you think

we are passed that point with China? Is China developed enough that they can no longer lean on that emerging market status as an excuse. I think in in some sectors it might be an excuse, but in those we need to see some kind of timetable for opening. But certainly in some sectors, particularly in the financial and technology area, there's no excuse at all. Debora Laerwether, she's vice chairman Pulson Institute, and we get we're we have a run for an hour to talk about some of the questions

of antiquity. She's expert in the world's antiquities. Let's dovetail trade into that. All him at trade Deborah Lair, Which is tourism And I can go back to the seventy four and the magic of finding the terra cotta army in China. Everyone goes there, everybody makes a track. It's one of the few reasons to go inland from the Pacific rim for American tourists. Is tourism part of the trade debate? And where is that right now? That's an

excellent question. It hasn't really been part of the debate, although It's one of the us is great exports and certainly one of China's great exports. The numbers of Chinese tourists continue to grow significantly, and it's become a huge potential market for you know, countries like France, which is the number one destination, and even now growing for countries in the Middle East. Well, I mean John Farrell sees that when he's in Gucci on Fifth Avenue. I get that,

But what about us over there? When Americans go over to China? Has that diminished? With all the uproar of the last couple of years it has there is not the same numbers of American tourists traveling, even though there's a significant number. It's it has been um dropped because there have been concerns, including travel warnings, coming out of the State Department. Recently. Let's talk about something that came out the Department of Justice in the last couple of days.

This following paragraph. The alleged conduct described in the indictment occurred from and includes an internal Huawei announcement that the company was offering bonuses to employees who succeeded in stealing confidential information from other companies, ratcheting up the pressure on Huawei ahead of these trade talks. Debora, how does this feature as these individuals sit down in Washington, d C. To try and come up with what you describe as

a trade framework. It's Huawei the elephant in the room. I'm not driven to the elephant in the room, but it's certainly like the Chinese government going after Microsoft, IBM, and Apple all at the same time. I mean, it's a it's a national champion in terms of it's a

company that people are very proud of. And while Huawei has been under its scrutiny for almost too years, this is the first time they've gone after it in a significant way, and the Justice Department has decided to go after an individual, which is what has really gotten people's attention in China versus just the company like they did with z T. But from where you sit to John's good question, the Chinese at these tables of trade can't

ignore that, can they? Given the history and heritage of mss Meng with the Communist Party, No, they can't ignore it. I mean it's a very significant issue, and as I said, it's it's gotten a lot of attention in China because

they have gone after an individual versus the company. And while they understand, maybe not completely, but at least a little bit, that our justice system works separately from the political system, the fact that the President did come out and say it could potentially be part of a trade deal led many to believe that this was political. This has been very helpful Debra Laying because so much. She's

vice chairman the Pulsit Institute and greatly appreciated John. I thought you phrased that question just perfectly about you know, thinks there's as she said, if it was a T and tier Microsoft or Apple, we'd be in an uproar. Yeah. Best. Let's be clear about something though. The Chinese have blocked many American companies from operating within China, so I know this is a very different It's not it's not apples for apples, but certainly let's not pretend that we have

sort of unfettered access into Chinese. That is why they're sitting around the table down in Washington today, because the United States does not. I would say, on and off the record, the thunderous consensus of every CEO of ever talked to is j VS always disappointed China. If you are lucky folks to fed date you can well, you can run the shop at the Richmond Fed for years

with Marvin Goodfriend. That's what Mr broad Us did. Or if you're lucky, you can go to one of the coolest schools in the country, Washington Lee, which is basically in the middle of nowhere, where everybody's smart and well attended. But if you're really lucky, you can go to one of the most beautiful high schools in this nation. It is Thomas Jefferson High School. It is on the National Register of Historic Whatever Al brought us, What was it like to be in that building as a kid, to

Thomas Jefferson High School? Gosh, just been a long time. Tom graduated in fifty seven. But uh, that building is a magnificent building. Not many people recognize that it's you know, obviously not doesn't look away at that fifty years ago. But it was a huge school at the time. We had about two thousands. Of course, a whole different era, but that was back in another time there. It's back when we built schools like jewels, folks, and that's something

maybe we could learn from in the past. Al brought us. I want to go right to inflation, right now you've always been uh, not rigid, but you know, watchful of inflation in the hindsight of a decade. What did the inflation he's just get wrong about this time of disinflation. Uh, yes, well, you know, of course I have. Most of my career, Tom was one of fighting to bring inflation down and establish FED credibility for the ability to do that and

the commitment to do that for the long run. We got there, I think about the end of the of the last century and have been dealing with a different situation now. Uh. And it's been tough, and it's created this this problem of low interest rates. Uh. The zero bound is an issue that we've had to deal with them. And you know what's come out of that, quantitative easing and and all of that, and that's you know, that's

still a work in progress. And I think, uh, I think God I had left the FED by the time we got to the crisis in in eight and oh nine. My personal belief is that while that was rough and ragged in many ways, I believe that bernanke and and Janet Yellen and others that the FIT at the time did a great job of getting us through that without even worse consequences. So now we're settling down and trying to still trying to deal with some of the problems

that that creator dr brought us. We're going to hear from the FED later this afternoon. UM, I think most people are probably focusing a little bit more on the balance sheet management from the Fed. What do you expect to hear today? Uh, you know that's I'm not sure we're going to hear anything, but we may. Sorry for the ambiblit answer, but let let me try to put

it this way. I think there are a number of people out there, uh, some in the political arena of some market professionals and traders who would like to see some indication from the FED that it will back off from its current program of trying to reduce the balance sheet, not necessarily in the program, but slow it down maybe

posit uh those on. From a political perspective, there there's some who feel that this is an additional element of tightening by the FED that's unwarranted in the current economic situation. From the standpoint of the market professional financial market professionals, I think there is a view, uh on the part of many of these folks that, uh, this is creating a liquidity problem, a scarcity of reserves, which is which is part of the reason of some of the volatility

in markets. Okay, against that background, uh, this this would

be my take. There's something at the FED itself. Within the FED, there is a discussion going on that is not really about current economic conditions, current monetary policy prospects, but about really down the weeds issue, which is how the FIT operates its operating procedure for controlling its target federal fundery And without trying to go into any of the long detail about this recent development, is a growing view within the FIT that the that they can, over

the long run adopt a control procedure which would allow the balance sheet to beat larger. In other words, it would still be smaller than than uh it is now, but would allow the FED not to reduce it so much. Uh. If that, I don't think they've made that decision. I

think it's likely to be discussed at this meeting. If they were to reach some sort of consensus that this is a good thing, then Chairman Powell more in his press conference hint at that and maybe give some sense that that the feds terminal balance sheet level will be higher than had been thought before, and that might create the possibility of some slowing in this process, or even some pause on that some sense of a long answer.

But I hope that answers the question now. Absolutely. I'm just kind of I think most people are trying to get a sense of where that level might be. It's certainly not as low as two and a half trillion, is it? Do you have a best guess or where

you think that might come out? Or they think that might be hard to say, but I would I would say that it would if they at an earlier stage of this, when they when they first began this process, and I think the number you just cited two and a half maybe a little bit more, was sort of thought that would be the endgame under this new development that I just described. It could be I guess its highest three and a half or maybe somewhat below the

four trillion, But that's you know, that's a guess. Are we gonna see albrought us a history of forward guidance

anytime soon? Are we are we able to say that Ford guidance is done, We're back to data dependency, and it's time to write a Richmond fed history like Thomas Humphrey would write, well, Uh, you know, I think the Ford guidance has has played That's to go back to your earlier question, Tom, in this new world, uh more deflation is a greater risk than it was in All that's from that Ford guidance has has been an important tool that the FED has been able to use, uh

to deal with the challenge face that it faces with with the with low interest ration in the zero bound. So it's an important, uh tool, and it's one that needs to be understood better and analyzed. We really haven't gotten that yet, but at some point, I think economic historians like Tom Humphrey a wonderful colleague of mine, but

other people as well. Uh, we'll look at that dish. Yeah, evaluate how well it was implemented over the last let's say, fifteen years ago, and maybe learn something about how to do it better going forward. That's still still all all the work in progress. Yeah, thank you so much. I'll brought us who really brought history to the FED with his term at the Richmond and Fred Tom Humphrey I've had the ability to interview. I love what the Giant Mark blog said about Thomas Humphrey of the Richmond Fed,

the undisputed master of the history of monetary economics. I'll try to get out on Twitter the wonderful Richmond uh compendium of what Tom Humphrey did over his wonderful career on economic history. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to reviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio