Three Rate Hikes Is Still a Good Baseline, Kaplan Says

Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course, on the Bloomberg for Just days away from the first round of elections in France and tomorrow the World Bank and the International Monetary Fund begin their Spring meetings in Washington. Tumillby there with Francine Laqua and an incredible lineup of guests, and our coverage begins this morning with John Lipsky, former first Deputy Managing Director of

the IMF. He was acting Managing director for time as well. He's now that Peter G. Peterson Distinguished Scholar at the Henry Kissinger Center for Global Affairs in the School of Advanced International Studies at the Johns Hopkins University in Washington, and John Lipsky joins US now from our Bloomberg nine one one studios in Washington. Great to have you with us again, John, Thanks very much for being here this morning. Thanks happy to Let's start with the world economic outlook

we got this week. I imagine you've poured over it, and I wonder sort of what you've what you've what you've seen there, what you've drawn from it, what that's going to sort of what the bedrock is going to be there for the meetings that that start tomorrow. Well, indeed, the UH much has been made of the fact that the i m F actually upgraded their growth forecast for

two thousand seventeen two thousand and eighteen. It's been a long time since they've adjusted their forecast upwards, but the adjustment is tiny point one percent, and in fact the trend remains very sluggish growth, especially in the advanced economies. Their forecasting growth of under two percent when the long term average for those for the advanced economies has been nearly three percent. So from that longer term perspective, UH

this is not such a happy picture. And for the emerging economies they see growth still only at about the at about the long term average about four and a half percent. But before the crisis hit in two thousand seven, those countries were growing by seven to eight percent. So it is remains a rather modest picture for growth, and the Fund continues to say risks are tilted to the downside and points out some specific things that need to

be done. So even though the mood music is is a little more upbeat than previously, uh, this is not as good as it should be or could be. Yeah, your former colleague Christine Leguard telling our friends in lack With just a couple of days ago that spring is in the air for for the global economy. So we can use either metaphor the mood music or or or

the the spring being in the air. Let me ask you about the degree to which the French election is going to distract from the goings on in Washington this weekend, that being a major risk event. Well, indeed, it's a mainly because of what it might suggest the atmosphere around the European Union is going to be for the coming months.

After all, we also have a German election coming in the in the fall, we're going to start the negotiations over so called Brexit, the UK's departure from the European Union. So this French election could have a fair amount to do with the the atmosphere surrounding that. And when we look at the European growth figures, they remain better than they have been, still subdued. The I m F says,

the European banking system still needs attention. So Europe will continue to be the focus and the French election will provide a kind of weather vane for the where the wind is blowing. I want to ask you about multi ladderalism and how it relates to to this current administration. You have the IMF meeting this weekend with with the World Banking Concert with the World Bank. Who's going to make the case for multi ladderalism and from multi ladd institutions?

Is this the venue to do it? I know that Christine Legard will be on stage with Steven manuch In the Treasury Secretary. They'll do an interview over the course of of the meetings. Is this the forum to make that case to the US presidential administration? Oh? Absolutely, and I'm sure this will be a message that we're repeated many many times. Uh. The I m F is, of

course trying to lead the way in representing UM. Let's call it a neutral technical voice saying that in fact, international collaboration has a real substance to it and produces better as the holds out the the promise of better economic results. But remember the Group of twenty UH Foreign Finance ministers are meeting tonight and tomorrow and later this UH.

This year, the the G twenty leaders are going to meet in Germany, and that will be a really critical moment to see how the US intends to to participate in the G twenty. Will it take a leadership role or an adversarial role or essentially ignore the whole organization which has been the key venue for the large economies to collaborate on economic programs. Good morning everyone, David Gerr and Tom keenan New York in our Washington Studios FM

Washington Studios with the Johns Hopkins University. John Lipsky, of course, his service to Solomon Brothers and JP Morgan in recent years, that's a joke. And then his work at the International Monetary Fund. John, you had two tours of duty at the i m F. I believe as a young lad minted out of Stanford, you darken the door. How is the i m F different today for when you first walked in the door with Nut Wixel and John Madred

Kine's well, dramatically different time. Because remember, even though the i m F and the Breton Wood system were designed to be international, when I first walked in the door in four UH, the world was still divided by the Cold War, and membership in the I m F was restricted to Western countries. After the global system became truly global for the first time, and that was reflected in the I m F and other international institutions. So today the membership has brought er. It's truly a venue for

global considerers. You've lived the joy of being the chief pinata people taking shots at you about the forecasting ability of Ken Rogoff and Olivier Blanchard, and now the good professor from Berkeley, Mariye Hobbs felt enjoys being beaten to death pushed back against the harsh critics of I m F guestimates in the acclaimed Blue, Green, and Red books helped me out here with what they get wrong. Oh but let's let me start by saying what they get right.

They I think that the clearly the world economic outlook forecast of the m F remains the principal benchmark forecast for the global economy. Uh. You can like it, disagree with it, but it tends to point to the key issues and discusses them in depth and in a serious way. So it provides a tremendously useful benchmark for discussions. Uh, it would be I think too narrow to say, well, let's do a scorecard and see if they get it

right to the decimal points it is. It tries to focus on the critical near term issues, so that's what they get right. Let's put it this way. Let's put it this way. There is a market test. H it is the benchmark global forecast that you'll find everyone taking into account and either agreeing with their disagreement. But if it didn't have that basic quality, it wouldn't be the benchmark. John Let's I was talking with Tom yesterday we were doing a book live and I said to him, is

there a theme for this this year's spring meetings? And he says, there's always a theme, but it gets scrapped just a few hours. And I'm at you mean, thinking like Mike Tyson, everyone has a plan until they get punched in the mouth. Is America first going to be

the de facto theme of of of the conference this weekend. Well, for sure, there's going to be an awful lot of interest in the in the new Trump administration's participation in the meetings, and especially not just in the I m F meeting itself, but in the G twenty ministerial and to see, uh whether the what, what kind of participation

and attitude is projected by the U S authorities. But not just not just after all we just talked about there, they're the live issue of Greece and the current uh let's call them friendly negotiation between the i m F and the European Union over resolving that there's the uncertainty

about Europe. All of these will be important, but overriding will be the question of is there the commitment to international cooperation collaboration to sustain the international trade and financial system that has produced such good results for such time but seems to be under under attack or where do we stand in that regard? John Lipsky, thank you so much. With the JOHNS. Hopkins University h Dr Lipsky of course

for years at JP morgan Um Economics. He wrote the first chapter to my book years ago David Gurrow with one James Glassman who darkens our door on Jobs Day, and it was smart and they were way out front on the job economy. And this mystery, one of the mysteries here which is alluded to by Madame Legarde, but permeates all of our work. Where's the wage growth? Where's the wage growth? In every country? Where's where's the wage growth? And you wonder if that could be the surprise here

wrapped her on of course the French election. It is an appropriate day to speak of fair and balanced David. Foreign Affairs magazine actually is fair and balanced. Not that I would editorialize, uh there, but but they're fair and they're balanced, and in their new issue, which is hard hitting, there are articles in support of where this administration would like to go. That's a good setup, isn't it. Absolutely Rose, the editor of Foreign Afairs, joining us here in our

eleven three oh studios in New York. Let me go straight to your note at the beginning of the issue here you talk about the three ways by which you have to disentangle what this administration is doing when it comes to foreign policy. Say you're looking for the normal, the incompetent UH, and the dangerous and you warn't here

the damage is already being done. What do you What did you set out to do with this issue in particular, Well, you know, it's very hard to cover the Trump administration in real time because we are still trying to figure out what's going on, and they're so nontransparent and they're so unusual. It's also difficult for magazine like Foreign Affairs for as print edition because we have a long lead time,

and so you have to it. What we wanted to do was evaluate with this issue what they're actually been doing and what the consequences are. And what are most of our authors are saying is that they really don't know what they're doing on foreign policy, and the instincts that they brought to the administration to power UH actually are all wrong because they're out to essentially dismantle a global system that actually has been working pretty well. And

so UH. Their process of what you're seeing this spring and presumably what you'll continue to see over the next few months as well, is the education of the Trump administration. They've realized it seems already that their initial approach, the bannoned view of the world just isn't gonna fly and doesn't work. Now they're floundering to try to do something else. They've brought in a more moderate people, They've empowered people like Kushner and Cone and Dina Powell and and so forth.

But I still don't think they have a new actual governing strategy. And since they don't actually have an ideology or a sense of what they want to achieve, Uh, no one really knows what they're going to do when they haven't staffed up the administration. So we're all essentially watching and waiting for their process of self education to get to the point where we can actually get back to the business of running the country in the world. You've got a guy like Bob Cohen Princeton via Duke

and Harvard thinking about the liberal international order. Do you get the sense of that kind of contemplation is happening within the White House? This education is taking place. But does the White House see what it's doing in those

sort of broader terms. I think, uh, not really. Uh, there's no evidence that this White House actually understands, at least the White House, the new people who have come in understands what the liberal order is, what the system in the global UH trading networks are and and security networks, what alliances we have, and how to make that operate.

There are a lot of professionals in maybe parts of the U. S. Government, but there's this disconnect between the professional staff of the government, all the technocrats, and the White House. UH. And while the removal of Flynn and the replacement with McMaster was an excellent sign that brings those professionals closer to the center of power, UH, it's

still not clear that they are actually running things. And at this point, I think everybody is over interpreting UH really random decisions and actions and words by the administration as if they actually are reflective of some larger strategy. But it's clear they don't. They have no idea what to do on Syria, they don't know what they want to do on trade, they don't know what they want to do on Russia China, and so we're all waiting until they kind of figure that out. We got a

minute and a half left. State the case for the president's policy. You do that in your new issue. But the state of the case of the president's policy is there was a great deal of complacency about how things were going and that was unjustified, and that in effect, sort of like the electoral surprise of the Brexit and

then Trump. UH, there was a was a recognition by large sectors of the population in America around the world that the liberal order that had been keeping sort of things basically stable and moving forward was disproportionately benefiting some groups in society and screwing the middle classes the lower classes and UH not paying enough attention, and that those

things needed to be remedied. And the best argument so far is that by UH challenging our assumptions, by moving to address some of the problems with globalization, by sending the signal that the unitis can't be pushed around, we are bringing back a certain degree of UH sober American leadership and confronting real problems that have been brushed under

the rug. The problem is you need to have a professional competence UH developing that into an actual strategy and putting it in place, and we don't haven't seen that yet, partly because there are no people in the top echelon the administration who actually have good jobs yet. Can I do my usual sales picture. Here's here's the issue, folks. The heritage of Foreign Affairs Magazine is spectacular. Gideon Rose and his team have kicked a new life into it.

It is fabulous article to article, in short essay to short essay. Their bonus round have it in large friendly funds and my eyes. Thank you, Gideon, Foreign Affairs Magazine. It's the price of a Martini. Get it brought you by Bank of America. Mary Lynch Dedicated to bringing our clients insights and solutions to meet the challenges of a transforming world. That's the power of global Connections. Mary Lynch, Pierce Federan Smith Incorporated, Member s I p C. There's

something new from Bloomberg. It's called Lens. Starting right now, you can use the Bloomberg Io s app off your iPhone or iPad, or our new Google Chrome extension to read any news story on any website, scan it, and then instantly see the news stories relevant market data from Bloomberg. In addition, see all the bios of the key people mentioned in the story. It's called Lens, and it is just that, a lens into the people and the data

of any story you may be reading. Again, Lens brings you the power of Bloomberg's news and data download or io s app or search for the Bloomberg extension at the Chrome Store to try lens out. Learn more at Bloomberg dot com slash lens. Yeah, this is fascinating. Robert Kaplan is not your normal FED president, and critically he's not the normal FED resident of the heritage of the Dallas Fed. It goes back to the Georgia School and

the good work of Robert McTeer, among the others. And then they brought in Kaplan of a small school in Boston called Harvard University. Michael McKee picked himself up the floor. Here is our Michael McKee were the president of the Dallas FED. Thank you very much, and we would like to welcome Robert Caplan, the president of the Dallas Federal Reserve Bank, to Bloomberg Radio and TV worldwide. Thanks for joining us this morning and having us down here and

in the Big d Welcome to Texas. The consensus forecast for first quarter in GDP one and a half percent, so called hard data, has been soft. The soft data has been strong, the yield curve flattening, tenure coming down a lot, but the financial condition indexes are loosening. So what is really going on? Other is there something happening that we're not picking up. Well, Uh, let me talk. Let me start with the last part on the tenure.

My own my own sense is the tenure is is reflecting the fact that expected GDP growth is going to be uh, maybe sluggish as it has been the last several years. And also there's some geopolitical events, particularly what's going on in Europe, potentially other geopolitical events military and otherwise that might be causing people on balance to be

in the US dollar be in the tenure. I think in terms of GDP growth for the first quarter, I think the key underpinning to this economy still though for me, is the U S. Consumer household balance sheets in the United States are in relatively good shape, household debt services in very good shape. So the consumers got the ability to spend, and they're almost seventy of the economy. The question is will they spend uh, And I think there's

also some uncertainties for them. The healthcare reform discussion may have some chilling effect on some consumers because they're not sure how much their healthcare is going to cost. Maybe some other uncertainties. So my own view is, uh, the the household sector ultimately is going to spend this year because they've got the capacity to, and so I think we'll have a little better GDP growth than first quarter suggests.

But I do think because of aging demographics and a number of other headwinds, perspective, GDP growth still is challenging, and I still think that's the big issue for this country to deal with. Well. The markets have started to price out more aggressive FED action. The FED this year sort of pivoted towards a faster pace of moves. Is there anything that tells you that that pivot may have

stopped or slowed now? I still I still think uh, uh the uh, the three um, the median of three rate increases for this year we've already done one is still a good baseline. Uh. If the economy develops a little more slowly and we can we can do less than that. If the economy is a little stronger, we can do more than that. But I still think we're making good progress toward full employment. There's still some labor slack, but I think we're approaching full employment. The trickier issue

is inflation. The work we're doing here in Dallas and our work on the Dallas trim means suggests the core inflation continues to slowly gradually move up. But I think UH excess capacity globally, particularly in China, UH and and possibly growing because they keep investing in excess capacity in China. And second, technology and technology enabled disruption which is impacting businesses pricing power and also increasingly replacing people with technology.

Those are having downward pressure impacts on inflation. So I think the inflation mandate will have to watch a little more closely. But I still think, having said all that, the three is probably a good baseline. But patients means to me when I say we should be grad frual inpatient, it means we we have the ability and the flexibility

UH to wait and see how the economy unfolds. Turn over a few more cards, and I would counsel that that's quite appropriate that we exercise that patience basis points to to one the proper setting for rates at this moment or should they be higher, And it's just a process of getting there. Here's how I think about that. UH. For me, I always think about what's the neutral rate. I've talked to you before about what's the rate at

which we're neither accommodative or restrictive. If you ask me today, I would say that neutral rate, and it's a theoretical rate and it can change, is closer to two than to three. So for its seventy basis points. Now, that tells me in that framework, we're still accommodative. But uh, we don't have that much room to get to neutral. So we're accommodative, but probably not as a comidative as people think. Uh. And so that's how I look at it.

So I still think basis points is appropriate place to be. And I think if we continue to make progress unemployment and inflation, and the economy unfolds around two percent GDP growth, I still think it'll be appropriate to get a little closer to neutral and continue to remove accommodation for years. I would come down here and ask you when is the Fed going to raise interest rates? But the question Wall Street is asking now is when is the Fed going to tell us what their plans for the balance

sheet are? How soon do you think we get the program that you want? Uh. My own view has been that we need to get a little further along in so called normalization of rates before we begin to let the balance sheet run off. For me, I think that could be as soon as later this year or maybe early next year, we should begin the process of letting the balance sheet roll off. That means not selling securities. It means letting our treasury securities and mortgage backed securities

run off as they mature. And I still believe we should do that gradually, patiently. But I think that process again could begin as early as at the end of this year, and I think that's appropriate. Yes, I think it should be phased in. I think it should be gradual, and the objective to me ought to be to do it in a way that's gradual enough that we don't have a material impact on either the treasury market or the mortgage backed securities markets. A lot of decisions have

to be made on the operational aspects of this. When do When can we expect an announcement on that? Uh? I think similar to that time frame, I think I think it's appropriate at least a couple of three months before we begin that we make some type of announcement as to the plan. And so I don't want to prejudge what the exact tim into that will be. But again, if I think we're going to start as soon as

later this year early next year. I think we should make some announcement at least a couple of months in advance of that. Now, the balance sheet question is how big should it be at the end if you're going to determine how you're going to taper, Do you have an idea of what you'd like to see? Well, I don't think we have an exact fix on that, because that we've got much more global liquidity, we have a

different financial regime, capital regime. UH, it's gonna be bigger than the eight billion we used to run, but I think still the balance sheet could be substantially below the four and a half trillion we are today, and so I think we'll we'll it'll be lower meaningfully than where it is, but it's going to be higher than it was eight years ago. Do you want to keep substantial access reserves in the system to be able to continue the repo and ioe er system of managing five I

think for the time being, I think we should. But I also think that's something that would be healthy for us to visit and revisit as this process unfolds. UH. Fiscal policy, did you include any stimulus in your forecast for this year that you're having to back off on. Now, I've said consistently since this since the election, I'm not explicitly factoring in any fiscal or structure reforms into my forecast. And the reason why is some of the things being

discussed I think are positive. UH. Regulatory review if it's done thoughtfully, infrastructure spending, if it's done appropriately. UH. Tax reform underlining the word reform, I think could be helpful, But I also think some of the policies being discussed could be negative, UH, depending on healthcare, how it's actually dealt with, how we deal with immigration. UH. I've said consistently the biggest challenge we face in this country is

slowing workforce growth. We need policies that either help workers get retrained and discourage workers back into the workforce, But at some point we're gonna need policies that probably take a more constructive look at immigration if going to grow

GDP adequately. And so I think I don't know which of the positive or may challenging policies are going to get implemented, and so my I think the best approach is to do what we've done, which is make a forecast based on things as they are, but will continue to monitor and adapt as policies are enacted. Speaking of immigration, you're on the border, you have the greatest interaction with Mexico.

Have you seen a change in the economic relationship since Donald Trump came to off Yeah, yes, I've've seen a lot of concern. I spent a lot of time, as you know, in Mexico and with the head of the Central Bank and mster Finance, and my biggest concern would be I believe NAFTA will get renegotiated, and I'll stay away from the details, but I think I'm confident about that because a lot of those concessions were already made

as part of t p p UM. I think, uh, there are other parts of the rhetoric that are having inflammatory effect on the mood, the public mood in Mexico. There's gonna be a presidential election in July of eighteen, and I think the United States benefits enormously economically and geopolitically from a good relationship and a constructive relationship with Mexico.

And so I want to I want to be vigilant that the rhetoric here does not create a situation where uh it makes it much more likely that the person gets elected president of Mexico is going to be more negative to the United States that that may turn out to be the way to get elected in Mexico, and I don't think that's uh likely to be in the interests either economically or geopolitically of the United States. Thanks

for listening to the Bloomberg Surveillas podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio, brought you by Bank of America Mary Lynch. Dedicated to bringing our clients insights and solutions to meet the challenges of a transforming world.

That's the power of global connections. Mary Lynch, Pierce Feeder and Smith Incorporated Member s I p C.