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Fed Should Get Out of the Business of Setting Rates, Forbes Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Steve Forbes,
• 0:32
  Speaker 1: Chairman and editor in chief of Forbes Media, will be
• 0:35
  Speaker 1: speaking at the upcoming Synergy Global Forum, which has taken
• 0:37
  Speaker 1: place at Madison Square Garden in October, and he'll be
• 0:40
  Speaker 1: discussing the parallels between ancient leaders and today's business leaders.
• 0:44
  Speaker 1: I had the opportunity to speak with him to get
• 0:46
  Speaker 1: his thoughts on tax reform, whether markets were pricing in
• 0:48
  Speaker 1: the risks that were evolving in North Korea, as well
• 0:51
  Speaker 1: as whether the Fed would raise rates. He recently wrote
• 0:53
  Speaker 1: a column to President Trump basically saying, please don't let
• 0:56
  Speaker 1: the Congressional Republicans wreck your plan. I started by asking
• 1:00
  Speaker 1: him if he thought that the border tax was dead
• 1:01
  Speaker 1: in the water and whether the Trump administration had a
• 1:04
  Speaker 1: solid vision for tax reform. Take a listen well, Thankfully,
• 1:08
  Speaker 1: the border tax national sales tax. Border tax is dead
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  Speaker 1: for the moment, which would have hurt the working families,
• 1:16
  Speaker 1: people struggling from paycheck to paycheck. That this idea came
• 1:20
  Speaker 1: out from the Republicans that I just find astonishing. I
• 1:24
  Speaker 1: just shake my head. And in terms of going forward,
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  Speaker 1: I think you will. We will get a tax bill
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  Speaker 1: this year because of a thing that biologists taught us
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  Speaker 1: a long time ago, the instinct of self preservation. Uh.
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  Speaker 1: I think the Republicans recognize that if they don't get
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  Speaker 1: a big tax cut through, they're going to be in
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  Speaker 1: deep trouble next year. You know, the man who invented
• 1:49
  Speaker 1: wrote one of the great dictionaries in the English language
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  Speaker 1: called named Samuel Johnson wrote said over two hundred years ago,
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  Speaker 1: he said, the prospect of a hanging focuses a man's
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  Speaker 1: mind wonderfully. I think the prospect of a political hanging
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  Speaker 1: for the Republicans will focus their minds and you will
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  Speaker 1: get a major tax bill. It won't be a huge reform,
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  Speaker 1: they just don't have time for it, but it will
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  Speaker 1: involve major reductions and taxes across the board. Mr Forbes,
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  Speaker 1: you have run for president as a Republican several times.
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  Speaker 1: Do you recognize the Republican Party right now. The party
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  Speaker 1: is always a change. But what I do like today
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  Speaker 1: is that the party still believes in tax cuts, still
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  Speaker 1: believes in UH, having a government that's not burdens among
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  Speaker 1: the people, that doesn't crush people with unnecessary rules and regulations.
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  Speaker 1: And so there are always differences within parties. Parties are
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  Speaker 1: not homogeneous or harmonious. That traditionally in America, you always
• 3:06
  Speaker 1: find elements that don't very much like each other. People
• 3:10
  Speaker 1: don't realize that as normal in American politics and true
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  Speaker 1: for a hundred and sixty years. I'm wondering as the
• 3:17
  Speaker 1: UN gathers right now, there's a real question as to
• 3:22
  Speaker 1: why there's been such a muted response in financial markets
• 3:26
  Speaker 1: to threats of a possible nuclear conflict on the Korean peninsula.
• 3:31
  Speaker 1: Do you think that markets are two sanguine about the
• 3:34
  Speaker 1: risks here. I think the markets believe that one way
• 3:40
  Speaker 1: or the other, the issue is not going to come
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  Speaker 1: to We're not going to go to war, not going
• 3:46
  Speaker 1: to come to a war. I'm not going to come
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  Speaker 1: to serious hostilities. UH. If the markets perceived that this
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  Speaker 1: was a real possibility and not just rhetoric, you would
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  Speaker 1: see the markets are reactive, meetings le and violently. Uh,
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  Speaker 1: you know, we're now a hundred years ago. World War
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  Speaker 1: One began a little over a hundred years ago, and
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  Speaker 1: nineteen fourteen, and amazingly in London, which was then the
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  Speaker 1: financial center of the world, right up to a couple
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  Speaker 1: of days before the war actually broke out, even though
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  Speaker 1: the crisis have been simmering for weeks. Only when they
• 4:24
  Speaker 1: were were about to march off to battle did the
• 4:28
  Speaker 1: markets realize, oh my god, they're not they're they're actually
• 4:32
  Speaker 1: going to go over the cliff this time, and the
• 4:34
  Speaker 1: market collapsed. We closed the stock exchange in the US,
• 4:38
  Speaker 1: so the markets now believe it won't happen, But by golly,
• 4:43
  Speaker 1: if it believed that it actually might go ahead for
• 4:47
  Speaker 1: the sellers, you know. And lastly, I just wanted to
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  Speaker 1: get your opinion on the Federal Reserve their meeting this week,
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  Speaker 1: and many people have been pricing in an increasing chance
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  Speaker 1: that the Fed does raise interest rates again later this year.
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  Speaker 1: Do you think that that's the right move? And do
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  Speaker 1: you think that next year the Fed should take a
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  Speaker 1: more aggressive hiking stance with the FETs? You do really
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  Speaker 1: is ultimately get out of the business of trying to
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  Speaker 1: set interest rates and let that be done by borrower
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  Speaker 1: and lender. Uh interest is a price, and the FED
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  Speaker 1: is engaged in price controls, and those usually don't work
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  Speaker 1: very well, and their actions in recent years have done
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  Speaker 1: more harm to the financial markets, to the credit markets,
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  Speaker 1: to their functioning, rather than helping. It's one thing to
• 5:38
  Speaker 1: respond to a panic, which is what we had in
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  Speaker 1: two thousand eight early two thousand nine, Will you take
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  Speaker 1: extraordinary measures quite another when the panic passes and you're
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  Speaker 1: in the business of trying to manipulate the economy. It
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  Speaker 1: does not work. So the sooner they get out of
• 5:57
  Speaker 1: the way, the better. The sooner they reduced the size
• 6:00
  Speaker 1: of their bloated portfolio bonds that they bought, the better.
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  Speaker 1: They've indicated they're going to start to do that. But
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  Speaker 1: this is the case of where the FED would have
• 6:11
  Speaker 1: been better off having done less. We would have ended
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  Speaker 1: up with a more healthy economy. That was Steve Forbes,
• 6:19
  Speaker 1: Chairman and editor in chief of Forbes and Media, and
• 6:22
  Speaker 1: he'll be speaking at the upcoming Synergy Global Form that
• 6:25
  Speaker 1: takes place at Medicine Square Garden October, and and that
• 6:30
  Speaker 1: will be a conversation that features the distinctions or the
• 6:35
  Speaker 1: comparisons between leaders of old and ancient times and the
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  Speaker 1: leaders today. He had a very controversial take on the
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  Speaker 1: Federal Reserve because the idea that they should get out
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  Speaker 1: of the business of setting interest rates at all, that
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  Speaker 1: they did more harm to the financial system and more harm. Uh.
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  Speaker 1: You know this is this is a very controversial point
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  Speaker 1: that has been brought up by some people that perhaps
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  Speaker 1: the economy could have cleared itself out and recovered, we
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  Speaker 1: would have seen greater in relation. Uh, if the Fed
• 7:01
  Speaker 1: would have just let the market collapse after Lehman brothers
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  Speaker 1: uh their demise in September two. You know, one of
• 7:09
  Speaker 1: the things I love about life is that hindsight is well,
• 7:13
  Speaker 1: it's not even clear that that is because right now
• 7:16
  Speaker 1: people still disagree and say that perhaps the FED saved
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  Speaker 1: the US from another great depression like we saw in Yeah, exactly,
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  Speaker 1: and uh, I don't think you know, a hypothesis and
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  Speaker 1: theories necessarily outlay reality. We are broadcasting from the Bloomberg
• 7:43
  Speaker 1: Global Business Form taking place at the Plaza Hotel in
• 7:46
  Speaker 1: Midtown Manhattan. Joining us now is Carlickadonna. He is, of course,
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  Speaker 1: our chief US economist for Bloomberg intelligence and h Carl,
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  Speaker 1: I want to begin by just getting your thoughts on
• 7:57
  Speaker 1: the home the previously owned UH home report today looking
• 8:02
  Speaker 1: like a one year low. But is this really just
• 8:05
  Speaker 1: because of Hurricane Harvey. Well, it definitely looked like there
• 8:09
  Speaker 1: was some hurricane impact, especially with the south showing we
• 8:14
  Speaker 1: do get some geographic breakdown, uh, and it showed a
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  Speaker 1: sharp contraction in the south. So UH. The existing home
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  Speaker 1: sales data is clocked or tabulated at the time of closing. UH.
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  Speaker 1: But even so, a lot of people probably had to
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  Speaker 1: cancel UH closing due to inclement weather, right sure, and
• 8:34
  Speaker 1: they can't they can't get the bank to transfer money
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  Speaker 1: and so on. But does this how you wanted to
• 8:40
  Speaker 1: and do you does this matter to you right now?
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  Speaker 1: Or is it really just a question of do we
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  Speaker 1: get some kind of economic data that allows the Federal
• 8:48
  Speaker 1: Reserve to raise interest rates one more time this year?
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  Speaker 1: Or I think this just shows one more data point
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  Speaker 1: that is starting to have a hurricane impact. And probably
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  Speaker 1: we can't trust the next month's data either. We're seeing
• 9:01
  Speaker 1: it in home sales, vehicle sales, retail sales, and Danta effect,
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  Speaker 1: isn't it. It's always something, It's always something that's right.
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  Speaker 1: So in that context, what happens if Federal Reserve punts
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  Speaker 1: or do you think that they're going to raise interest rates? Well,
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  Speaker 1: the Federal Reserve has to base policy on the last
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  Speaker 1: clean data points. So I think that they are so
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  Speaker 1: well telegraphed with respect to us inaugurating the balance sheet
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  Speaker 1: unwind at this meeting that it would take something much
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  Speaker 1: more severe to cause them to deviate from this path. Uh.
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  Speaker 1: The question mark or the moving part is really their
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  Speaker 1: active policy, which is going to be interest rate hikes,
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  Speaker 1: and they have from now until December to try to
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  Speaker 1: get a cleaner read of what's happening, and that that's
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  Speaker 1: a long time in terms of economic data. So what's
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  Speaker 1: your call, Well, we have adjusted our call, so the
• 9:56
  Speaker 1: December rate increases, no, sure bet Uh, without a doubt. However,
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  Speaker 1: I think that they will ultimately, assuming that the economy
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  Speaker 1: bounces back swiftly from the hurricane, and it appears that
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  Speaker 1: way in the economic data, we think that December rate
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  Speaker 1: hike happens, and then we think that the Fed proceeds
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  Speaker 1: at a slower pace over the next couple of years.
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  Speaker 1: So the Fed, at least as of its last forecast
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  Speaker 1: update was signaling three hikes per year both next year
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  Speaker 1: and the year after. We think that they will be
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  Speaker 1: going at a slower pace of two hikes per year,
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  Speaker 1: So we can think June December, June December, uh, and
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  Speaker 1: in fact one more year of June December. So two
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  Speaker 1: hikes per year over the next three years from the Fed.
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  Speaker 1: So we've revised our FED call as a result. Okay,
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  Speaker 1: but I mean, we don't even know who really is
• 10:44
  Speaker 1: going to be on the Federal Reserve next year. We
• 10:46
  Speaker 1: don't know who will be on the FED, but there's
• 10:48
  Speaker 1: a good chance that it's Janet Yellen. Uh. And if
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  Speaker 1: it's not her, it's going to be someone probably of
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  Speaker 1: her ILK that's going to be cautious with respect to
• 10:58
  Speaker 1: UH interest rate policy. Mean, they don't want to raise
• 11:00
  Speaker 1: interest rates. And also we know that the President is
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  Speaker 1: in favor of low interest rates. I mean, he's got
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  Speaker 1: a background in the real estate industry, and they don't
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  Speaker 1: necessarily like expensive money. They do not like expensive money.
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  Speaker 1: And if your goal is to hit three percent GDP growth,
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  Speaker 1: putting a hawk at the Fed is not going to
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  Speaker 1: be the way to get there. Hey, Carl, you know,
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  Speaker 1: I don't know whether you've noticed, But I've noticed that
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  Speaker 1: there is almost no debate or conversation about the debt.
• 11:27
  Speaker 1: And we've got the debt ceiling deal that was done,
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  Speaker 1: but there's no conversation about it except maybe when we
• 11:33
  Speaker 1: talk about tax reform and whether it's going to be
• 11:35
  Speaker 1: revenue neutral, but over such a long period of time
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  Speaker 1: that it's almost immaterial. Well, debt is going to come
• 11:42
  Speaker 1: back into the picture. But as as you hinted, I
• 11:45
  Speaker 1: suspect we need to have greater clarity on what tax reform,
• 11:49
  Speaker 1: if we get any, is going to look like, whether
• 11:52
  Speaker 1: we get tax reform or simply just a tax cuts
• 11:56
  Speaker 1: to stimulate growth. Uh and Uh. It may have been
• 11:59
  Speaker 1: in the background, but I suspect it's going to come
• 12:01
  Speaker 1: into the foreground, especially once we get to actually considering
• 12:06
  Speaker 1: passage of a of a more concrete deal in Congress.
• 12:10
  Speaker 1: I was gonna say that Randall Stevenson of UH A,
• 12:13
  Speaker 1: T and T was speaking earlier today. I think he
• 12:16
  Speaker 1: said that, you know, if there is some kind of
• 12:17
  Speaker 1: tax deal that is put together, maybe to allow the
• 12:20
  Speaker 1: repatriation of US profits that are held overseas, that we
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  Speaker 1: could see three percent g d P if we do
• 12:27
  Speaker 1: get sustainable three percent GDP. What does that do? What
• 12:30
  Speaker 1: would interest rates look like to you? Well, there's a
• 12:32
  Speaker 1: big difference between three percent and sustainable three percent. Uh.
• 12:36
  Speaker 1: If we let's say sustainable three percent, what happens where
• 12:41
  Speaker 1: would interest rates be? Uh? If we're having sustainable three
• 12:45
  Speaker 1: percent growth, that probably means a speed limit for the
• 12:49
  Speaker 1: economy has moved up, so it might not be that inflationary. Uh.
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  Speaker 1: And there would be a significant offset from stronger tax revenue.
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  Speaker 1: So I I don't know that that means a higher
• 12:59
  Speaker 1: interest rate. If it's a not sustainable increase in three
• 13:02
  Speaker 1: percent growth, then that's going to have some inflationary ramifications
• 13:07
  Speaker 1: which would push longer term yields higher. Well, okay, so
• 13:11
  Speaker 1: so the real question here is a are we getting
• 13:14
  Speaker 1: three growth on a sustained basis or just as a
• 13:17
  Speaker 1: cheap sugar high from a one time tax cut. Uh?
• 13:20
  Speaker 1: And two, if we are looking at faster growth, has
• 13:24
  Speaker 1: the speed limit of the economy moved higher or Uh?
• 13:28
  Speaker 1: If it hasn't, then there's going to be some some
• 13:31
  Speaker 1: fallout from inflation pressures. Well, I mean this idea of
• 13:35
  Speaker 1: sustainable or not sustainable, I mean, just as we're seeing
• 13:37
  Speaker 1: what the results of today's existing home sales report. There's
• 13:42
  Speaker 1: always something to make whatever the news is extraordinary, right,
• 13:47
  Speaker 1: I mean, it seems to happen on a regular basis,
• 13:49
  Speaker 1: whether it is a natural disaster or man made disaster,
• 13:53
  Speaker 1: whether it's something like Brexit. In that context, is there
• 13:56
  Speaker 1: any way that the Federal Reserve will change It's kind
• 13:59
  Speaker 1: of under standing of the pace of economic performance because
• 14:04
  Speaker 1: we seem to be having so many one off events
• 14:07
  Speaker 1: that affect the economy. Well, for the Fed to reassess
• 14:11
  Speaker 1: the speed limit for the economy, we need to see
• 14:14
  Speaker 1: a couple of things happen. So one, UH, demographics are
• 14:19
  Speaker 1: our destiny. I know that's the hack hackneyed expression. But
• 14:23
  Speaker 1: if we're not getting faster population growth, either through a
• 14:27
  Speaker 1: rebound in the birth rate or UH more UH inclusive
• 14:33
  Speaker 1: or relaxed immigration policies, UH, it's hard to hit that
• 14:37
  Speaker 1: faster growth rate without a change to the demographic trend,
• 14:41
  Speaker 1: and population growth has been decelerating. The other factor is
• 14:45
  Speaker 1: the productive capacity of the economy. UH. And there's two
• 14:49
  Speaker 1: components to that. One UH is a rebound in productivity
• 14:52
  Speaker 1: in and of itself, UH and two would be a
• 14:55
  Speaker 1: significant investment into the capital stock of the econom me
• 15:00
  Speaker 1: whether that's infrastructure spending on rail lines and utilities and
• 15:04
  Speaker 1: airports or whatnot, things like rebuilding when it comes to
• 15:07
  Speaker 1: the Commonwealth of Puerto Rico. Well, well, certainly there will
• 15:11
  Speaker 1: be big rebuilding, but that's not going to necessarily improve
• 15:14
  Speaker 1: the productive capacity of the of the economy. We got
• 15:18
  Speaker 1: to leave it there, Thanks very much. Carl Rick Donald,
• 15:20
  Speaker 1: thus economist for Bloomberg Intelligence as a PIM, was saying,
• 15:35
  Speaker 1: Hurricane Maria made landfall in Puerto Rico as a category
• 15:39
  Speaker 1: for storm just within the past few hours, and this
• 15:43
  Speaker 1: would be the worst storm to hit the island since.
• 15:47
  Speaker 1: Give us more of a perspective on just how potentially
• 15:51
  Speaker 1: catastrophic this hurricane is, as well as what some of
• 15:54
  Speaker 1: the financial damage could look like. I want to bring
• 15:56
  Speaker 1: in Michelle Kaski. She's our Puerto Rico reporter for Bloomberg
• 15:59
  Speaker 1: News andjoins us from O Bloomberg eleven three oh studio
• 16:01
  Speaker 1: in New York. Michelle, can you just give us a
• 16:04
  Speaker 1: sort of a state of play right now? What is
• 16:06
  Speaker 1: where is the hurricane? How long is it going to last?
• 16:09
  Speaker 1: And does it look like it's going to be as
• 16:11
  Speaker 1: bad as some more predicting Hey, good morning, um Yeah,
• 16:15
  Speaker 1: the hurricane as we speak is going over the island.
• 16:17
  Speaker 1: They're experiencing experiencing it, the heavy, heavy winds and the
• 16:21
  Speaker 1: rainfall and of course the the potential for some some
• 16:25
  Speaker 1: serious storm surges. And um, they have this very weak
• 16:30
  Speaker 1: infrastructure to begin with, even before the hurricane came. So um,
• 16:34
  Speaker 1: they're electric grid is at risk, even water, UM supply
• 16:40
  Speaker 1: of water. So we just have to wait and see
• 16:42
  Speaker 1: and and see how bad the damage is going to be.
• 16:45
  Speaker 1: But basically all of today they will be experiencing this,
• 16:48
  Speaker 1: this horrible storm, Michelle. Do we know anything about the
• 16:51
  Speaker 1: disposition of the first responders or indeed whether the United
• 16:55
  Speaker 1: States federal government has sent troops or any person a
• 17:00
  Speaker 1: knell into the island commonwealth in order to not only
• 17:03
  Speaker 1: maintain order but the help with the cleanup. Now, before
• 17:06
  Speaker 1: UM the storm hit, the governor did say that because
• 17:10
  Speaker 1: um the island is at risk of being without electricity
• 17:13
  Speaker 1: for some time or parts of the island would be
• 17:15
  Speaker 1: at risk, that they would then uh afterwards get outside
• 17:20
  Speaker 1: help from um from the mainland US. Now, whether those
• 17:27
  Speaker 1: those that help has arrived with boots on the ground, UM,
• 17:31
  Speaker 1: we don't know yet, but that is the anticipation that
• 17:34
  Speaker 1: Puerto Rico will get not just um, some FEMA money
• 17:37
  Speaker 1: at some point, but actual hands on help from the
• 17:40
  Speaker 1: federal government. Right. The reason I ask is because I
• 17:42
  Speaker 1: know that that has been an issue with the US
• 17:44
  Speaker 1: Virgin Islands, for example in St. Thomas and and St. John.
• 17:48
  Speaker 1: Is trying to get the help to the people that
• 17:50
  Speaker 1: actually needed at the moment of the state of the
• 17:54
  Speaker 1: Puerto Rican economy. This couldn't have happened at a worse time, No,
• 17:57
  Speaker 1: it couldn't. They declared bankruptcy in early May, and they're
• 18:02
  Speaker 1: going through the bankruptcy process. They they don't have a
• 18:06
  Speaker 1: tremendous amount of cash on hand to be able to
• 18:10
  Speaker 1: deal with you know, storm clean up and rebuilding. So
• 18:13
  Speaker 1: that's why, um, they're really seeking the the federal help.
• 18:17
  Speaker 1: And um, you know the again, this infrastructure needed to
• 18:21
  Speaker 1: be upgraded even before the storm, so um, this only
• 18:25
  Speaker 1: accelerates that need. Well. Yeah, and just to put a
• 18:28
  Speaker 1: number on that, Puerto Rico's emergency fund stood at about
• 18:30
  Speaker 1: thirty two million dollars before IRMA passed through the island.
• 18:34
  Speaker 1: That compares to an estimated a potential of thirty billion
• 18:37
  Speaker 1: dollars of damage, so quite an order of magnitude higher
• 18:41
  Speaker 1: of money that they will need. Michelle. You know, I
• 18:44
  Speaker 1: was speaking with some Puerto Rico investors. You know, will
• 18:46
  Speaker 1: this create even more of a headache for this island
• 18:50
  Speaker 1: that has seventy four billion dollars of death that it
• 18:52
  Speaker 1: can't pay back and has amid in the midst of
• 18:54
  Speaker 1: a lot of legal negotiations over that. Well, let's actually
• 18:58
  Speaker 1: helped them in in a weird way in the sense
• 19:01
  Speaker 1: that perhaps there will be more money flowing towards the
• 19:04
  Speaker 1: island to rebuild its infrastructure that already was falling into disrepair. Well,
• 19:09
  Speaker 1: that's that's the hope that this actually puts even more
• 19:12
  Speaker 1: attention on, um the needs that Puerto Rico has, and
• 19:17
  Speaker 1: and again that the potential federal dollars could be um
• 19:22
  Speaker 1: helping to upgrade systems that we're so out of date
• 19:25
  Speaker 1: even before the storm hit. Um, that that would be
• 19:29
  Speaker 1: sort of the silver lining here. But again, the damage
• 19:32
  Speaker 1: might be we don't know yet, but the damage could
• 19:34
  Speaker 1: be so extensive that, um, you know that that federal
• 19:39
  Speaker 1: money may not be enough or it Um, it will
• 19:43
  Speaker 1: just take an incredible amount of time for the island
• 19:45
  Speaker 1: to bounce back. Well, I mean here's a quote from
• 19:48
  Speaker 1: the Governor of Puerto Rico, Ricardo Rossello. He was speaking
• 19:51
  Speaker 1: to the Associated Press and he said, we're going to
• 19:53
  Speaker 1: lose a lot of infrastructure in Puerto Rico. We're going
• 19:56
  Speaker 1: to have to rebuild. And then Eric Blake, who's a
• 19:59
  Speaker 1: forecaster the National Hurricane Center, tweeted this morning that the
• 20:05
  Speaker 1: strike on the same place in the same intensity following Harvey,
• 20:10
  Speaker 1: Hurricane Harvey and Hurricane Irma unprecedented in the modern era.
• 20:16
  Speaker 1: So that's kind of draws a line under it, doesn't it. Michelle, Sure, definitely.
• 20:21
  Speaker 1: I mean, it's just two weeks ago. Um, they went
• 20:23
  Speaker 1: through Irma, thank god, Herma. Irma just passed through over
• 20:27
  Speaker 1: the north of the island, so they got mostly a
• 20:30
  Speaker 1: very very heavy, very strong tropical storm. Um, the hurricane
• 20:35
  Speaker 1: didn't actually Irma didn't actually hit the island itself, but
• 20:38
  Speaker 1: they did have to deal with the effects of a
• 20:40
  Speaker 1: hurricane then, and that was just two weeks ago, so
• 20:43
  Speaker 1: they were barely able to pick themselves up. I mean,
• 20:46
  Speaker 1: there were still people without power on the island because
• 20:50
  Speaker 1: of Irma before Maria hit. Well, we're gonna certainly watch
• 20:54
  Speaker 1: this ongoing natural disaster. Thank you very much for joining us.
• 20:59
  Speaker 1: Michelle Kaski is our Puerto Rico reporter for Bloomberg, joining
• 21:02
  Speaker 1: us in our eleven three oh studio And something else
• 21:16
  Speaker 1: is gonna be taking place today, but it'll be in Washington,
• 21:19
  Speaker 1: and it has to do with the Federal Reserve. And
• 21:21
  Speaker 1: here to help us understand what might or might not
• 21:23
  Speaker 1: happen is Ira Jersey, chief US interest rates strategist for Bloomberg.
• 21:27
  Speaker 1: He joins us from our Bloomberg eleven three oh studios. Ira,
• 21:31
  Speaker 1: Great to have you with us as always. So, um,
• 21:34
  Speaker 1: Federal Reserve going to raise rates or not pay fim?
• 21:36
  Speaker 1: Uh no not okay, we're all done. But are they
• 21:42
  Speaker 1: going to tell us anything about unwinding the balance sheet? Yeah? So,
• 21:45
  Speaker 1: so I think it would be a surprise actually if
• 21:46
  Speaker 1: they did not start on winding the balance sheet. They've
• 21:49
  Speaker 1: set up the market for this, now that we have
• 21:51
  Speaker 1: the debt ceiling out of the way and a budget
• 21:53
  Speaker 1: at least until December. Um, this is kind of the
• 21:55
  Speaker 1: optimal time for the Fed to do it. There's not
• 21:57
  Speaker 1: a lot of reason to wait. Um. So, so I
• 22:00
  Speaker 1: do think that they'll do it. Um, we don't need
• 22:02
  Speaker 1: you know. One of the questions I've been asked today
• 22:04
  Speaker 1: is are we going to get any other operational details? Well,
• 22:07
  Speaker 1: for the for the FED, the only real operational detail
• 22:09
  Speaker 1: they need to tell us, perhaps is are they going
• 22:12
  Speaker 1: to change the way that they buy mortgages? Because for
• 22:14
  Speaker 1: treasuries they just mature and they go away, and the
• 22:17
  Speaker 1: Fed will just do its normal course reinvestment like it
• 22:20
  Speaker 1: it's always done, and it's uh, you know, hundred plus
• 22:22
  Speaker 1: year history. So so I do think that that, uh
• 22:26
  Speaker 1: is something that that they'll do. We then get the
• 22:28
  Speaker 1: summary of economic projections and UH and their statement, and
• 22:32
  Speaker 1: that I think might be actually scrutinized a bit more.
• 22:35
  Speaker 1: And right now the FED funds futures market is pricing
• 22:38
  Speaker 1: in a chance of the Fed hiking rates in December.
• 22:43
  Speaker 1: Do you think that that is overly optimistic or do
• 22:46
  Speaker 1: you think that the market, uh, it will be surprised
• 22:49
  Speaker 1: by the feds haggishness. So, yeah, that's a good question. Um.
• 22:54
  Speaker 1: You know, my my view is is that that the
• 22:55
  Speaker 1: FED has always heard on the side of caution when
• 22:57
  Speaker 1: it comes to hiking rates, particularly if they think that
• 23:00
  Speaker 1: they there might be some kind of bumps in the
• 23:02
  Speaker 1: road ahead for the economy. Um. I think the idea
• 23:05
  Speaker 1: that they're going to hike this year is a little
• 23:07
  Speaker 1: bit optimistic, um, and definitely will rely on what's gone
• 23:11
  Speaker 1: on with the data. So you've had some very disappointing
• 23:14
  Speaker 1: inflation numbers. It's been creeping up a little bit. I
• 23:17
  Speaker 1: actually think that over the next six months we could
• 23:19
  Speaker 1: actually uh see inflation start to tick up just a
• 23:22
  Speaker 1: little bit. I'm not saying a lot or that's gonna
• 23:24
  Speaker 1: be worrying, but at the same time, it could be
• 23:26
  Speaker 1: just enough that the Federal Reserve can be a little
• 23:28
  Speaker 1: bit more um more hawkish. Now you know, well that
• 23:31
  Speaker 1: can they do that this year? Yes? I do think
• 23:33
  Speaker 1: it's so data dependent that something like forty sixty or
• 23:37
  Speaker 1: even fifty fifty odds is probably the right level. So, um,
• 23:41
  Speaker 1: you really have to have a view. Do you think
• 23:42
  Speaker 1: that the data is going to improve significantly or do
• 23:45
  Speaker 1: you think it's gonna, um gonna kind of meander on
• 23:47
  Speaker 1: the way it is now? And if Meri Anderson wait
• 23:50
  Speaker 1: is now, they probably stay pat you know, I would
• 23:52
  Speaker 1: love to get your opinion on a story that brought
• 23:55
  Speaker 1: in Chopotta wrote earlier this week of Blimpbroock News, where
• 23:57
  Speaker 1: he was talking about analysts expecting that Treasury yield could
• 24:00
  Speaker 1: actually drop if the Federal Reserve continues with its balancing
• 24:05
  Speaker 1: unwind as it plans to do, just because that type
• 24:09
  Speaker 1: of tightening would end up slowing the US economy, UH
• 24:13
  Speaker 1: and therefore reducing the prospect of inflation going forward. Do
• 24:16
  Speaker 1: you agree with that? Yeah, you know, this is a
• 24:19
  Speaker 1: question I get asked a lot. You know, you look
• 24:21
  Speaker 1: at charts and you say, oh, when the Federal Reserve,
• 24:23
  Speaker 1: and I've shown these sharts too, Right, when the Federal
• 24:25
  Speaker 1: Reserve bought bonds, yields actually rose. UM that that had
• 24:28
  Speaker 1: to do with with inflation expectations moving higher. I'm not
• 24:32
  Speaker 1: convinced that the runoff of the balance sheet necessarily UM
• 24:36
  Speaker 1: has to have that detrimental of an impact on the economy,
• 24:40
  Speaker 1: primarily because, UM, it probably won't lead to yields rising
• 24:44
  Speaker 1: that much, because it's really up to the Treasury Department
• 24:47
  Speaker 1: to manage the issuance of these new bonds to the public.
• 24:51
  Speaker 1: And when you look at things like, uh, you know,
• 24:54
  Speaker 1: who really loses out here, well, it ends up being
• 24:56
  Speaker 1: some liquidity by banks. So over time, UH bank thinks
• 25:00
  Speaker 1: that own that have these reserves on their balance sheet
• 25:03
  Speaker 1: will have less reserves, so maybe they have a little
• 25:05
  Speaker 1: less liquidity. Um. And because of that, I think some
• 25:08
  Speaker 1: people are saying, oh, well, that means that there might
• 25:10
  Speaker 1: not be the lending that we need, and that could
• 25:12
  Speaker 1: slow the economy and actually have yields fall. I'm I'm
• 25:15
  Speaker 1: not quite in that camp. I think it's probably more
• 25:18
  Speaker 1: neutral for the economy than anything, um. But but I
• 25:21
  Speaker 1: do think that it's important to think about these things
• 25:24
  Speaker 1: because this has never been tried. Right. Yeah, we've never
• 25:26
  Speaker 1: had a FED a central bank balance sheet that shrunk
• 25:30
  Speaker 1: by the magnitude that the federal reserves going to be
• 25:32
  Speaker 1: attempting to do over the next couple of years. Hey,
• 25:35
  Speaker 1: you mentioned the mortgage industry, and I want to get
• 25:38
  Speaker 1: a little bit more detail with that because you know,
• 25:41
  Speaker 1: you say, okay, maybe interest rates will other stay where
• 25:43
  Speaker 1: they are on the decline. Right now, we're two eighty
• 25:46
  Speaker 1: for the thirty year and we're two twenty three for
• 25:49
  Speaker 1: the ten year. Existing home sales came out today they
• 25:53
  Speaker 1: were what five point three five million? Everyone was looking
• 25:56
  Speaker 1: for five point four or five, so that was a
• 25:58
  Speaker 1: little bit of a disappointment. Do you think that we'll
• 26:00
  Speaker 1: see increases in the cost of money to consumers and
• 26:03
  Speaker 1: want to buy a house. Yeah. So, so I think
• 26:06
  Speaker 1: the big risk with the Fed Reserve unwinding its balance
• 26:09
  Speaker 1: sheet is going to be in mortgage in mortgage area,
• 26:12
  Speaker 1: But it's so well telegraphed that we've actually already had
• 26:15
  Speaker 1: pretty significant and meaningful widening in spreads between mortgage backed
• 26:19
  Speaker 1: securities and UM and the tenure Treasury. And I think
• 26:22
  Speaker 1: that those spreads being that wide UM is indicative of
• 26:26
  Speaker 1: the idea that there's going to be more supply into
• 26:28
  Speaker 1: the mortgage market over time UM. And I do think
• 26:32
  Speaker 1: so will there be more than this? You know that
• 26:34
  Speaker 1: that's a that's a good question and certainly something that
• 26:37
  Speaker 1: that has to be watched. But I suspect that most,
• 26:40
  Speaker 1: maybe seventy eight percent of the of the higher mortgage
• 26:44
  Speaker 1: costs because of unwind has already been priced in. All right.
• 26:47
  Speaker 1: You know, I'm wondering, are we talking about the FED
• 26:49
  Speaker 1: too much? Does the Fed even matter that much anymore?
• 26:52
  Speaker 1: Or has it basically ceded control to the ECB and
• 26:55
  Speaker 1: b o J and others. I think the Fed matters
• 26:58
  Speaker 1: in when they when they initially announced something, so when
• 27:01
  Speaker 1: they started talking about UM, you know, balance sheet unwind
• 27:05
  Speaker 1: and stuff, the market took notice. Now it just become
• 27:07
  Speaker 1: you know, so what if they don't do it, that's
• 27:09
  Speaker 1: the news. If they do it, so we're expecting it.
• 27:12
  Speaker 1: Who cares? Um. But I do think that the that
• 27:14
  Speaker 1: the risk to markets at this point, and to your point, LEAs,
• 27:17
  Speaker 1: is that, um, if the ECB starts to taper, if
• 27:20
  Speaker 1: the Bank of Japan significantly changes their own QWI program,
• 27:24
  Speaker 1: those are things that can royal the global fixed income
• 27:27
  Speaker 1: markets and the global government bond markets in particular. And
• 27:30
  Speaker 1: I think that's the one place where you could see
• 27:33
  Speaker 1: a substantial sell off in in ten ure yields is
• 27:36
  Speaker 1: if the ECB were to come out over the next
• 27:38
  Speaker 1: several months and say, hey, we're gonna slow down our
• 27:40
  Speaker 1: bond buying, and we're gonna slow down a lot, and
• 27:43
  Speaker 1: quickly you get a taper tantrum like reaction to that,
• 27:45
  Speaker 1: and you can see curve step and you can see
• 27:47
  Speaker 1: ten year yields head up towards two seventy five, maybe
• 27:50
  Speaker 1: toward three percent. I don't think they stay there. I
• 27:52
  Speaker 1: think that that's an interesting buying opportunity if that were
• 27:55
  Speaker 1: to happen. But um, but at the end of the day,
• 27:57
  Speaker 1: that that's the type of volatility that you can get.
• 28:00
  Speaker 1: So so, so I think the Fed has done a
• 28:02
  Speaker 1: good job in its communication where it's it's really limited
• 28:05
  Speaker 1: the amount of volatility that comes from its own actions,
• 28:08
  Speaker 1: whereas other central banks now are potentially the impetus for
• 28:11
  Speaker 1: more volatility. Any chance that we don't get a rate
• 28:14
  Speaker 1: increased this year, well yeah, I think that there's a
• 28:17
  Speaker 1: pretty high chance that we don't get an interest rate.
• 28:20
  Speaker 1: And if I said, okay, so if that's the case,
• 28:22
  Speaker 1: if that happens, if we've got a free pass from
• 28:24
  Speaker 1: now until the end of December, what's that due to
• 28:27
  Speaker 1: the dollar? We're now at one nine team, we were
• 28:29
  Speaker 1: at one twenty against the euro, one eight pounds sterling,
• 28:34
  Speaker 1: and boy it's been losing value against the Canadian dollar
• 28:36
  Speaker 1: wor so. So the dollar tends to go in these
• 28:40
  Speaker 1: very long cycles. So when you look at the the
• 28:42
  Speaker 1: trade weighted dollar, for example, I like looking at the
• 28:45
  Speaker 1: trade weighted dollar because it it has more of a
• 28:47
  Speaker 1: direct economic impact than say looking at dollar euro into euros.
• 28:51
  Speaker 1: Not not a as major of a of a trading
• 28:54
  Speaker 1: partner with the US is say Canada, like you mentioned
• 28:56
  Speaker 1: pim um. So so when you look at the trade
• 28:59
  Speaker 1: weighted dollar ten to go in these five to seven
• 29:01
  Speaker 1: year cycles. And we just had this pretty strong up
• 29:05
  Speaker 1: cycle where the dollar appreciated quite a lot over about
• 29:09
  Speaker 1: five year period, and now we're maybe starting at this, uh,
• 29:12
  Speaker 1: the next down leg of the cycle where the dollar
• 29:15
  Speaker 1: will ultimately depreciate against some other currencies um and over
• 29:19
  Speaker 1: a long period of time. Now that's not necessarily against
• 29:22
  Speaker 1: every currency, but against um, you know, this large basket
• 29:25
  Speaker 1: of currencies every Jersey, thank you so much. Always a
• 29:28
  Speaker 1: pleasure here your insights on the FED and all things
• 29:31
  Speaker 1: related to interest rates. Iver Jersey is our interest rate
• 29:33
  Speaker 1: strategist for Bloomberg Intelligence. He has normally based in New Jersey,
• 29:37
  Speaker 1: but he was coming to us from our Bloomberg eleven
• 29:39
  Speaker 1: three oh studios. Thanks for listening to the Bloomberg P
• 29:45
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 29:48
  Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 29:52
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 29:56
  Speaker 1: on Twitter at Lisa abramoits one before the podcast. You
• 29:59
  Speaker 1: can always catch us worldwide on Bloomberg Radio