Surveillance Special: Fed Speak in Jackson Hole

Louis FED. President. Good morning, Thank you very much. We'd like to welcome everybody listening to us on Bloomberg Radio and watching us on Bloomberg Television around the world. We'd like to welcome Jim Bullard and thank you for getting up so early to join us. Sarah, thanks are having me. You're for Minnesota, so you have to pretend you like it and it's an inforrible thing. Look a lot of Wall Street focus today on the chairman's speech. The minute

suggested that the FED is locked in for September. So even if you disagree with that rate path, is there any reason to think that he's gonna see anything market moving today. I'm sure the chair will be very careful. I've not seen the speech, but he'll do a good job. He always does. He's always very very serious. You don't get the impression there's any kind of change a foot for the Open Market Committee and the rate path that

there are. Well, the markets are putting a high probability on September, and I mean you can pull the other members of the Committee as well as I can, and Uh, there's certainly seems to be sentiment to go in that direction. Would you expect the forward guidance to drop out of the statement in September, the idea that the rates are accommodative and we'll stay that way. Uh, that's an interesting issue, and I think we'll have to wrestle with that one.

I'm so from from my point of view, i'd, you know, rather not be calling rates accommodative right now. I think the whole structure of rates is lower, and therefore I think we're at neutral, are very close to neutral right now. Very interesting story out today on Bloomberg News. Twenty years ago. Unemployment,

very low, inflation sticky and relatively low. James Stock, you normally famous economists did a paper that suggested that in those situations where you don't really know why something is happening, it is better for the FED to be aggressive than to take a step back because you don't know when inflation might show up. Now you're in the step back camp.

Why is James Stock wrong and Jim Board right? Yeah, that's an older paper and there was a literature about that kind of went around the circles on this, about whether you should be more aggressive or less aggressive when you're uncertain about about key, key things like the slope of the Philip curve. Um, there are arguments on the other side. So that was just one paper in a in a kind of sea of papers on that. UM. I would say it's makes more sense probably to be

a gradualist on that in the current environment. You know what, uh, what you'd like to do is just take on board the idea that inflation has been very low, it's been very stable, It really has been quite sluggish, and it just doesn't seem like you have to do too much. But if you had to, you could move pretty fast if you needed to. So so I just don't see the argument for being pre emptive in this situation in a world where the Phillips curve really hasn't been a

factor in the last twenty years. Well, the Fed essentially did not take jamets. Just to show you how flat we're talking about now, this is a ratio of ten to one, So you need a hundred basis points of gap between unemployment and some natural rate of unemployment to get just ten basis points on the inflation rate. And man, that's that''s really really, that's almost nothing. The next two years. We don't see inflation. I don't see it, and more importantly,

I don't think markets see it. If you look at tips space measures of inflation expectations, they're taking all of us into account. They've taken into account, uh, fiscal policy, rapid growth in the economy, low unemployment rate. They still don't see that much inflation, especially if you translate from a CPI basis to a PC basis. So they're really saying we probably won't hit our inflation target over the next five years, next ten years, or the five I'm sorry,

the next ten years. Well, if they did not take James Stock's advice, it kept very slow for long and everybody, not everybody, but a lot of people suggest that maybe that was one of the proximate causes of the two thousand and eight financial crisis, that rates were too low for too long and excess is built. You know, okay, so financial stability is a is an issue. In the nine eight though, would have been the currency crisis and started in Thailand and unspread UH in Asia, ultimately not

affecting the U S economy. Was a lesson from that because it drove US rates lower and that actually helped the boom in the U S. So um later you got, of course, the dot com bubble did come to an end later. Yield curve was inverted in two thousand and FED went ahead and and race rates in the face of inverted yield curve, and you could argue that that was a mistake at the time, Well, you and other members of the Open Market Committee, I said, we would

not intentionally UH invert the yield curve. But are you smart enough? Do you have enough insight into the markets to know whether you would do that? Here's what I think in this issue. I was around in two thousand, we met, we did it, played it wrong. I was around in two thousand and six. Again, the old curve was inverted. We played it wrong this time. I want to take this signal seriously, even though when you look at mac economic models it doesn't really fit into the

models the way we'd like. But I think you have to take it seriously as a signal. And what I think about this is there is no reason to challenge the yield curve at this time. There's no reason in other circumstances. If inflation was higher and heading higher, then I might say, well, we're taking some recession risk, but I'm willing to trade that off because it looks like inflation is getting out of control. We're not in that situation today. Inflation is low, it's stable, it's barely up

to target, just barely getting to target today. So we don't need to challenge, we don't need to be preemptive on the yield curve. One of the other arguments against moving, people say is the impact that you have on emerging markets and the spillover effect that could have on the US economy. I know your mandate is the US economy,

but how much of a risk do you think that is? Well, I mean, we've been going very slow at the rate increases well telegraphed I think these foreign economies have had ample opportunity and apple understanding of what was going on in the US. You do have some countries that have special situations, usually special political situations in one kind or another. They borrowed in foreign currency, that's often an issue. Not enough reserves, that's often an issue. So UM, I would

take those as special cases the countries that are having trouble. Um, but I'll keep an eye on it. Also on the list of things that FEDE officials have been concerned about the decline in home sales, and not just the decline in home sales, but median prices have been falling, is the is the FED killing the housing market by raising rates? Uh? Well, housing is one of the most interest sensitive sectors, so

you would think it would have some impact there. Um. If you talk to real estate people, then they say, wow, it's limited in it's because of the limited inventories and prices. Uh. You're saying medium prices went down, but uh, some of the year over year figures are still positive. So um, and they have risen quite a bit. They've been rising. The housing prices up until now, until recently have been rising at a fairly good clip. Finally, on the list tariffs.

Most economists say there will be some effect, but it doesn't show up in the data. So I'm wondering what companies in your district CEOs are telling you about the impact of tariffs so far and what impact that might be having on their investments. Certainly get an airfull about tariffs from many different angles. There's a lot of concern on main street about how these tariff wars will affect them and their products. Soybeans, for instance, is a major

product out of the eighth district that's UH, that's exported. Um. I hope we can get to some resolution. I hope that the strategy works, that this is UH negotiating tactic, but that ultimatelyly it leads to freer trade and better trade arrangements with our trading partner. Well, there's been uncertainty

about tariffs. There was uncertainty about the impact of the tax reform law, and la time we talked to you suggested that that was leading companies to hold off on investment decisions because they weren't sure what the climate was going to be. Has that changed or company is still

on hold. They are concerned about the tariff issue because they feel like well, if I if I put a plant in country acts and then there are a bunch of you know, the tariffs go way up that are going to have to move the plant to some other country.

And so they want to know what the rules are before they invest, as a classic element of investing on a grand scale, And they do want certainty before they do that one of the tet but they wanted the more certain One of the topics here as we talk about changing market structure is the decline in business dynamism in the United States. Do you have a good handle on why that is and how is it in the

eighth district? You know, I have I have an idea about this, and I'm going to test it out and pitch it out here to these two people here at this conference. But I think the core ideas that in the nineteen eight if you look at the data since the nineteen eighties, there are more people working for big companies today than there were. It used to be like kind of like six. Now it's like eight of all employees are working for so called big companies, depending on

how you define that. So if you think about what happens since the eighties, it was all about rolling up industries. Hardware industry used to be very uh dispersed. Now you've got Lows and home depot. Uh. Coffee used to have a coffee shop on every street corner. They're independently owned. Now you've got Starbucks. That theme has rolled through the US corporate sector since the nineteen eighties, and I think that that is what has driven this idea that you know,

more people are working for bigger companies. The worry about that is bigger companies that are thought to not innovate as much, and so that might hurt our economy long term. Not enough small firms and uh, you know, they tend to be you know, more sluggish and not not react enough to market events compared to smaller firms, So that would be the concern. Jim Bullard, president of the St. Louis Fan Thanks for joining us on this cold morning. We'll let you get warm and justice. Second, okay, we'll

send it back to you. Michael McKee, Thank you so much. Michael McKee in front of the split rail fence at Jackson Hole. A beautiful, beautiful morning. Is the fog is burned off. Here he is with a president of the Cleveland Fed. Here he is and thank you very much, and we welcome President Mster to Bloomberg Television and Radio worldwide. Thank you for coming out in the cold here. You're not nervous, you're shivering because it is really cold out here.

To the fundamental question that they just asked, was j Powell today? The minutes sort of suggest were locked in for September for a rate move. So does Chairman Poule need to say anything today or can the bond traders who are not in the Hampton's uh you know, leave by noon. Well, look, the case for raising interest rates, I think it's pretty compelling. We have an economy that's growing above trend, we have low unemployment, and we have

inflation at basically our goal of two percent. So we've been trying to engineer UM calibrate our policy path to the economy, and so this gradual increase in rate seems to be a very compelling case right now, given that we are accommodative still on monetary plans. We think the market gets that the Chairman doesn't need to steer us in any direction. Well, you know, the Chairman will give his speech today and I think he's going to be talking about UM some longer own issues as well as

perhaps short run issues. And I'm looking forward to hearing his speech as well. Uh, you think in September you go ahead and drop the accommodative statement from from from your statement the accommodative sentence end for guidance. So you know, UM, in the minutes mentioned that you know, we're thinking about

how we want to you know, change the statement. UM. We we look at the statement every time to make sure that we're being UM transparent about our views on policy and and sort of give an indication where policy is going. Now, we're in a in a situation now where you know, we are data dependent as we've been UM, and we want to be UM as transparent so we can where we think policy is going. But we also want people to understand that we don't lock ourselves into something.

We want to react to how the data comes in and where the economy is going. So again, we want our our our statements to be transparent in that sense so that people aren't misled. Well, I wonder if if the markets completely get the message. And the reason I asked that is the is the yield curve being so flat and a lot of people predicting it's going to invert. You're about a hundred basis points below where the median

terminal rate would be based on your latest forecast. So if you're going to raising rates to that point and the Eel curve is this flat, does that suggest that markets aren't getting your message or that they fundamentally disagree with your assessment of the economy. Well, I think the yeld curve is certainly something we look at the slope of the young curve. I think there's reasons to think that it may not be signaling the same as it

has in the past. As you know, um an inverted your curve is usually correlated with um an economy going into recession. But there's a reason too that the long end is depressed now for other reasons. In particular, there's demand for safe assets, so you know, quality flight to quality into the U S. Treasury market and also um QI around the world. You know, we've a lot of central banks have used the long end in the US. We did, we bought long term masses, and that put

downward pressure on the long ended. So the signal that you take from the old curve now is different than it has been in the past. You mentioned Qui. At the less FED meating, you had a staff presentation monetary policy tools, and the conclusion of the staff was, we're going to get to the zero lower bound again sometime in the next decade, and they aren't really sure how much que or forward guidance is going to help get

off zero. Does that worry Well, I think QUI was successful in terms of putting lower UM accommodation into the economy. It is one of the tools that we have. Forward guidance is another tool that we have, and I think this discussion was an important one to have so that we are prepared. There's reason to believe that longer term interest rates are going to be lower UM in the future for demographic reasons, because of demand for safe assets, and so it's very very good for the FED to

have these discussions to be prepared. But we do have tools that we can use at the lower bound. Do you have enough confidence in them that they work or do you need to find another arrow for the quiverment? Well, I think we're always you know, looking at our monetary policy framework. UM that's something else that we're going to have a discussion of bound in the future, and that's

part of this, you know, prudent planning for the future. Uh. The FED had maybe three main concerns, and not concerns in the sense that they were imminent problems for the economy, but things that you're watching. Emerging markets a big one, and I wonder how you approach this, what your feel is feeling is about the Fed's responsibility for what happens in emerging markets, given the dollars role as the reserve currency,

and the outside effect that you have on other people. Right, So Congress has given us our mandate, and of course it's it's centered on the domestic economy, but we are in a global economy, so the feedback effects of other markets, other countries onto the US economy is something that we must take into account when we're doing US monetary policy.

So again, you know, at this point, um, we don't anticipate that there will be big feedbacks, but we've seen in the past that financial markets can propagate shocks from one economy to another, and so it's certainly something that we're going to be monitoring. A nothing obviously on everybody's list, tariffs, Alan Blinder said the other day of economists agree that tariffs will have an impact on the economy, yet we don't see it in the data. So how worried are

you about that? Well, it's certainly a risk. UM. If you look at just the terrorists have been announced. In terms of the macro economic effect, it's not that large, but there's uncertainty around how that will play out, and that it's in and of itself, can affect firms in

our district. We've been monitoring because of course the fourth district is UM you know, has a trade with Canada as being an important part of the economy and also the auto industry, and so we're we are very much looking at firms and talking to firms, and firms have said that they are taking too account terrorists, but so far they haven't reacted strongly to them. They haven't taken off investment that they had planned, but they are considering it,

and so that's something that we want to monitor very carefully. Well, you are so the center of the tariffs for the United States economy according to the President. So do you see any positive effects UM. I think that most economists and myself including think that free trade actually benefits UM countries. If you actually look at the history that you want to have free and open and fair trade, and so

I would be in that camp. Well, if you if you go forward with additional tariffs, does it have a major effect on the economy or or your district or is it small enough given the size of the U. S. Economy that it doesn't really matter all that Munch. I

think it depends on how it plays out. If we get into a trade war where we have one country retaliating against another, that in and of itself can affect the U. S. Economy through the direct root of the tariffs themselves, but also through the uncertainty that it causes. Do you anticipate that the tarrifts will add to any of the inflation pressures that you lore at amester Warriable? So you know that's is a consideration. If it's a one time tariff and it's a one time increase in prices,

then we'll look through that. I think that's not an inflationary But if you have these retaliatory tars that come on over time and continue, then it's something that we have to take into account in terms of our inflation readings. Speaking of inflation, do you think you understand inflation dynamics these days? I mean you're worried that the lack of slack in the economy is going to push up prices, but it's not really happen. So I think it's something

we watch. Um. You know, we know for a number of years that the so called Phillips curve um has not been very steep, and so it's something that we have to understand. I mean, my own view of inflation is that inflation expectations are very important determinant of dynamics. We have seen inflation move up to our two percent goal.

I expect by the end of the year that I'll be able to conclude that it's sustainably a two percent I mean, we're gonna seem monthly variations in the in the data as we always do, but I think it's been moving up and think that's something that as we go forward into the next year, we're gonna have to be monitoring very carefully where we are relative to our goals.

But that's typical monetary policy making. Well, the shift the argument has shifted basically for whether inflation is rising and will it hit your goal to how far above your goal do you let it go? What would you be comfortable with? So we didn't overreact when inflation was below our goal. I don't think it's right for us to overreact when inflation goes a bit above our goal. We're always aiming to keep inflation ball at our two percent goal um, and so I'm comfortable with inflation moving a

little bit above two percent. But again it's got to be in the medium run forecast coming back down to two percent. Well, I mean, these guys out there on the trading guests are all wondering, what does she mean a little bit? I mean two point five percent for how long? It really depends on the forecast, right, I mean, I wouldn't be comfortable if I saw forecasts that had, you know, inflation moving up and continue to move up

above two percent. If I saw it move up temporarily, but my forecast and most economists forecasts were to come back down to two percent over that media un forecast time horizon, over which policy monetary policy and effect the economy, then I'd be comfortable. And the other question everybody wants to know is if inflation is moving up, when do I get a raise? Because right now, consumer price inflation is running above average hourly earnings. Right, So if you look at the e c I data, which is one

of the indicators of wage inflation. You have seen an accelerate um from where it was earlier in the expansion, which is a good thing um. And if you look at the DISAGGREGATEDDC it's the lower end um of wages that are moving up. So I think that's a very good thing. I think a lot of what's going on in the wage um picture has to do with low productivity growth, So investment being up can increase productivity growth.

I think that's a good thing. I think the other aspect, of course, is an inflation has been low over most of the of the expansion, and that also explains the low levels of wage the Right Semester, thank you very much for joining us. Thank you. We'll let you go get warm and we'll send it back to you. Careful, careful interview with the president of the Cleveland Federal Right Semester. We're there, Michael mckew. This will be an important interview,

always interesting with a member of the Dallas FED. And for Robert Kaplan, it is about confidence in the American economy. It is about the business process. It is about business and from that confidence the leadership that leads to investment and then on two jobs. We do this with green on the screen, the dow up the vis under twelve

eleven point nine nine. I'm watching yields here higher a little bit this morning, but really all attention paid to this series of FED interviews leading to the power speech. Right now are Michael McKee and Jackson Hall with Robert Kaplan of the Dallas Fed. Thank you very much. We welcome Dallas FED President Robert Kaplan to Bloomberg Television and Radio worldwide. Thank you for joining us. You're you're probably addressed.

You're not as old as we're about twenty minutes away from the main event of the day for Wall Street and the chairman's speech the minutes suggests we're locked in for a rate increase in September, probably in December as well. Do you expect the chairman to give us any guidance to the contrary. I'm not going to comment on what the Chairman is gonna say. I'll let his speech stand

on its own. I've said I think we ought to be moving toward neutral, which means three or four increases over the next nine to twelve months, and I think at this point moving in September and December is consistent with that path, so that that would be my own view, but I think everyone around the table you should express their views independently, including the chair, and I know he will well. One of the arguments around the table is that inflation is roughly at your target, but it's not

moving up very fast. And you've been advocating continuing with the path that you're on. But why do you need to do that if inflation is not breaking up? So UH. Our measure at the Dallas FED is the trim mean, which is a core inflation measure. X is out extreme moves to the upside and downside. And we see that getting to two by the end of this year and even strengthening beyond there. And here's here's what's going on.

There's two conflicting factors. One is the cyclical factors. Got a very tight labor market, we have higher input costs. Some of it's due to tariffs, maybe transitory factors, but there's no question that cyclical factors are pushing prices UH upward UH and and having inflation. Their structural factors going the other way. Globalization, automation, you know, people being replaced by technology, and so my own view is inflation is going to keep moving up because the cyclical factors are

very strong. I don't think it's going to run away from us. But I think what the balance we're trying to tread at the at the FED, and what I'm trying to tread is you want to move gradually. You don't want to move so slowly that inflation uh, and the cyclical forces get ahead of themselves and get ahead of us, and we have to play catch up, in which case would have to raise rates more quickly. And I think that typically leads to bad outcomes in particular recession.

So what we're trying to do is raise gradually. And and that's the reason why I've been advocating let's keep moving. The other reason I'm advocating let's keep moving, we're meeting our dual mandate objectives. We're reading our full employment objective. As you said, inflations around two percent. In that context, we should we shouldn't be a we don't need to be accommodative. We should be moving to a neutral stance. And neutral would mean for me, three or four increases

to get to somewhere in the neighborhood. UH. US or minus of two and a half to two and three quarters percent, maybe a little bit more. And that's the primary reason why I've been advocating we should keep gradually raising the FED funds rate. Well, you're the FEDS man in the oil patch, and you just wrote this week that oil prices are going to go up. Well, here's what here's what I'm saying. I'm saying they're vulnerable to

an upside price spike. Here's why we were in a global oversupply situation over the last few years, where now we think in in global equilibrium, supply basically equal to demand, but because global demand keeps growing um and uh, they're also there's the risk of supply outages from Iran Venezuela. Uh. We think US production is going to need to keep growing, and shale in particular, but there are limits to how

fast shale can grow. So what we've cautioned is in the next three years three to five, we're likely to move into global undersupply situation. So while we're in this period, we're a little more vulnerable than we have been to uh, you know, less oil on the market from Iran because of sanctions, or less oil on the market from Venezuela, and we're just cautioning. I think we're a little more vulnerable to an upside price shock and oil uh in this period, and we just have to be sensitive to that.

Does that translate into inflation concerns that would change the rake bath? I think oil and energy is obviously one part of inflation, but I think it leads, it leads into a broad narrative. Most CEOs I talked to, and I talked about thirty a month, and we do broad surveys. Most companies I talked to are saying input costs are going up. Energy is part of it, uh steal aluminum um. Some of that's due to these to due to tariffs. I think input cause generally are going up so uh UM.

I think we just have to be aware of that. Now. This is why there's one impact of the tariffs that affects oil that people are concerned about. One of the reasons production isn't growing faster and say the Permian Basin and Texans Texas is lack of infrastructure, particularly pipelines that takes steal uh and these tariffs. A lot of people in the industry are concerned they're going to slow building of those pipelines or at least make it more expensive.

And so all these factors that fit in with one another, and it's part of the broad dashboard that I'm watching. Let's talk about tariffs in those CEOs. Uh, we don't see tariff impacts in the data yet, So are the CEOs changing behavior at all because of what they think might happen? If you'll if you look economy wide, we don't see much impact. Digree. If you look at individual industries,

you're seeing you're seeing impact. And what I hear from CEOs i'm talking to is, at a minimum, the tariffs are having somewhat of a chilling impact on their capital spending plants, meaning they're just saying, let's just wait a little bit and see how this unfolds. And in certain industries it's raising input costs and for the first time in a long time, they're trying to pass on price increases.

I don't see it yet, as you said, in overall GDP, and I think if it's contained here, I'm optimistic that it won't have a material effect on GDP. But what we're watching for and what companies are watching for, is this spread further. Is it more prolonged as it get wider. I'm hopeful that that won't happen, and if it does, we'll have to reassess the impact on the overall economy. Based on what you said about three or four more rate increases, you're about a hundred basis points below what

you think neutral might be. Yet the yield curve is extraordinarily flat right now. Market spreading about inversion, does that suggest maybe a failure to communicate on the FEDS part, in the sense that investors don't understand your view of the economy or they don't believe your forecasts. No, I actually think the the treasury markets reading what we're saying pretty accurately. Here's the way I read the treasury market. The short end, the one in two year treasuries are

are fully reflective. I think of the of the rhetoric from the Fed, how many times we planned to raise rates? Uh, and I think that's uh. That's substantially reflected in the short end of the curve. The long end of the curve isn't controlled by the FED. The long end of the curve is dictated by economic conditions and GDP growth. With the long end of the curve is saying is yes, there's a lot of global liquidity which may be putting

some downward pressure. In other words, there's lots of pension funds and central banks that are buying the tenure in the third year. But I think with the long end of the curve is also saying is that medium term growth is going to be weaker than what it looks today. It's gonna be more sluggish. So I actually think that the Treasury curve is very consistent with what we've been saying and our economic outlook, and pretty consistent with what

the Feds have been saying about the path of rates. Well, if growth is going too slow and inflation UH isn't going to get out of control, what do you worry about in terms of the economy, What in your mind could derail December or two thousand nineteen rate pikes. Well, in the short run, the things I'm looking at we'll have to see if terroriffs become more widespread. But related to that, I'm looking for UH risk outside the United States.

So obviously there are countries like Turkey and Argentina that are very dependent on dollar denominated debt and they're having a turmoil so far that hasn't led to contagion. I think it's so far contained, but I'm watching that. I think the reason watch it so closely is if you had global financial instability that could spill over back in the United States and affect financial conditions here. So I'm

watching for that. Setting that aside, I'm more worried about about the medium term outlook than what happens in the

next six twelve months. I think the short term outlook for the U s economy is very strong, as you and I have discussed, but I'm more worried about what happens in twenty one, which is being driven more in my opinion, by the fact that fiscal stimulus will have faded, but we'll be left with an aging population, slowing workforce growth UH, and sluggish productivity I think mainly due to

lagging education and skill levels in the United States. We can do something about those things, but that's still my biggest concern. And then the third concern, which I've mentioned before, is we're getting a tail wind from fiscal stimulus right now and a lot of government debt. That tailwind can turn into a headwind if we decide in the next few years. We've got to moderate debt growth in the United States. So those are the three things I'm most

worried about. But that isn't necessarily a six month worry, that's a medium term worry. Well, let me quickly ask you this. The FED most recent meeting staff presented UH an analysis of policy going forward and suggested you're gonna be at zero, You're gonna have to cut rates to zero again sometime within the next decade, and that maybe q E and forward guidance don't work as well as they did the last time to get us out of that.

Does that concern you? What else do you do? So what that emphasizes for me is our tools are in the lingo asymmetrical. It's a lot easier to tighten than to ease. So that affects my thinking now, Meaning I mentioned growth are strong now, but I think it's going to wane somewhat in nineteen maybe two and a half percent and then trending down to two percent or one

or three quarters to two percent. UH makes me conscious that it's very important that we move gradually and patiently because if we overdo it UH, and we have to play catch up and the economy is in a downturn, we don't have much capacity for fiscal stimulus, and as you just said, our tools, uh, we don't have a lot of tools in then as many as we've had in the past in the next recession. So it tells me that we ought to be moving gradually and patiently now.

And also remind myself monetary policy acts with a lag so we may not see the effect of the great increases now for another six to twelve months, and it's a little bit masked by all this fiscal stimulus. I think it's very important for us to keep that in mind. And so again, all that leads me to let's gradually move to neutral and then when we get there, let's assess where we are and figure out what, if any, action should be taken. But I think it's very important

that we we move in a gradual, patient way. All right, Robert Kaplan, thank you very much for joining us, President of the Dallas FED. We'll send it back to you. Michael McKee in Jackson Hole for a former governor of the Federal Reserve System, Frederick Michigan, Rick Michigan of Columbia University, Do we need dear a statement? Rick? Today? Unfed Independence is this is a good point for Chairman Paul to slip been one or two sentences to stake out FED territory.

I don't know if it's if it's necessary right now. Certainly, uh. Bet A reserved independence extremely important. Uh. And we have a lot of both history and also research that indicates that when central banks are independent of politicians, we get much better monetary policy. And the problem here is the politicians things short term. We see this right now with President Trump. He you know that we have the economy

roaring along and inflation is potentially a serious problem. But he's a low interest rate guy and he wants to keep the economy strong because that gets some votes. And this is very typical. Uh. What has been very interesting in the last twenty or so years is that that basically during the clin administration, there was a basically a rule that the president would not criticize the FED for raising rates, and that actually has served us very well

and actually existed until this recent press sency. Uh. And it's been violated. But on the other hand, it's not clear how big a deal this is. You know, Trump is Trump. He liked the tweets about everything, says things that are pretty wild on a lot of different issues, and so I don't know how seriously to take his comments on lower illustrates. Tell me about and this goes to your service at the Bank of New York ages Ago.

Tell me about the dollar dynamics in the FED. I mean it a given FED mating at the Echoes building or within the this color book or that color book. Is there a lot of attention paid to dollar movements? Not really? Uh that there's several issues here, uh that the dollar movements. Uh, First of all, the impact on the US economy is not that large because we're so we're so big that were our trade sector is actually smaller relatant most countries. So for a point of view

how important it is to actually the forecast, it's not huge. Uh. That Also very important is that the Seat of Reserve should focus on domestic issues, should focus on what's happened to inflation, and also what's happened to the overall economy, and the dollars should feed into that in terms of actually having an impact on on what goes on in you as economy. But that end is not huge. So in that sense, the dollar really is not a big issue. The only time it could be really relevant is doing

a financial crisis with potential for financial disruption. But that's not the situation we're in right now. So I would expect that there's very little discussion of the dollar right now inside inside the Echo building when the FMC meets let's back up to first principles. I love the cover of your second edition Macroeconomics, Policy and Practice. You've got the yachts of the elite on the cover. That's the that's that's It's got these gorgeous sailboats sailing off into

the distance. You should know. I'm a very avid sailor, but my boat is a tiny little boat, only two and your your publisher, no doubt, said no, we need something more more fancy then that, so that students could dream someday of the big yachtchet with that set Rick Michigan. A lot of people are looking at the inequalities of America in this mystery of wage growth. Rick Michigan on wage growth, When does it happen? Okay, So I think that there's a there's a huge problem for the US

in terms of income equality. Uh And in fact, this is also leading to some of our very unusual politics which I don't think as healthy, healthy as it has been in the past. Uh. The problem here is that if you don't get a good education, if you don't get highly educated, then you're screwed. And uh and unfortunately, there are a lot of people in the US who are not getting well enough educated and they're not having wage increases, and people who are highly educated, people like me,

have done very well. That creates problems because many of the policies that then get put into place are ones which very focusing. They're very much on distribution, redistribution or in ways that may not be the best way to do it, or us we have u some of the kind of things that we've seen during the during this most recent presidential election. So this is actually not healthy. It's a problem that's very serious. Unfortunately, not that much

the government can do about in the short term. Because this is a book about the fundamentals of education, and fixing a l high education, which is a huge problem in the theory, is very hard to do. I'll take your point that the Federal Reserve Bank cannot solve this problem. They've got only so many tools in so much institutional force.

But there's a primal scream, Rick Michigan, whether it's in Australia or Hungary or in the United States, a populous revolt against the disparity of what g d P gains were getting. What can be the policy prescription? And folks, I say this with Michigan's landmark textbook which said, wait a minute, I'm actually going to talk about policy, Rick, what is the policy prescription to meet the people that

support President Trump and their primal scream. So I think that a key shoe here is how do we improve elementary high school education so that the people who basically may not afford to go to college or actually may be people who can be very productive in the society but doing the trades. How can we make that a lot better? And this is a huge, huge issue in the context of not just the US, but many other countries.

Chile has worked very hard, has been very successful to Latin American country in terms of getting growth, but they've never fixed their education. Do we need to go back to a guilt Do do we need to go back to a guild system or reinvigorate unions after the atomization of labor. Yeah, I don't think it's so much the UH making union struggle will be a solution. But I

think giving people a leg up. What's always been wonderful about the United States has been your view is but if you work really hard, you can actually do better than your parents. And this has been something that has actually allowed us to have actually hire income inequality within generations, but across generations. Uh, that that there's that there is a quality. My grandfather was a pedlary, starved to death, basically never made a living. My father was an accountant,

was a successful businessman. And then I'm the third generation. Of course I'm the scholar. So this is the American dream, and the American dream is not there anymore. That we actually have less upward mobility across generations now in the US then in Europe. That's a disastrous thing for this country. On the other hand, fixing it in sort of uh

by quick fixes, that's not going to be the solution. Uh. Many of the issues of talking about trying to boost manufacturing, which a Trump administration is pushed and thinking that will help these people is just not not right. That that it's not going to work. It's really something that we have to dig in deeper to say, how do we give people who want to work the ability to make it, and we're not doing that in this country and that's terrible.

Within this Rick is to bring it back the Chairman Palatin speech that we're going to hear an institution that a lot of people turn to. It used to be just about monetary policy. We've broken the rule on discussion of fiscal policy. We've broken the rule you know, often on discussion of a dollar and such. Where's this fed one, two or three Jackson holes from now? Well, I think that the problem is that many of these other issues

are ones that the FED can control. I think the FED can, of course, will be making a clear cut case for why independence of the FED is so important. Uh. And I actually think that that uh, even though that Trump has has criticized the FED for for raising interest rates, that this will actually not be a very serious challenge to the FED. I think this is again just one of many Trump's comments which are sometimes frequently very wild and uh and people take them with the grain and

salt as they should. Uh. The other issues in fiscal policy, we we also have a fiscal policy without now which is extremely peculiar, again, very focused on the short term. You're an economy that's basically close to overheating, and then you put in a big will stimulus. This is not

the right timing for this, uh and UH. And particularly there's some of the fiscal stimulus, which is focused on tax cuts for very high income people really are not something that will produce long term growth, but will the issue of the corporate tax cut is something that could be couldn't be justified in terms of promoting growth. But a lot of the tax decreases that we just saw, we actually would not focused on what really needs to be focused on, but instead and goos just goosing up

the economy, and that's not the right way to go. Governor. Professor, thank you so much, Rick Michigan of Columbia University. We greatly appreciate that this morning and extensive conversation with professors. 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 Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.