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Bullard: There Is A Bit Of A Rethink Situation Going On (Audio) · Bloomberg Intelligence

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  Speaker 1: Earlier today, my co host Kathleen Hayes sat down with
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  Speaker 1: the Jim Bullard. He is the President of the and
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  Speaker 1: Chief executive of the Federal Reserve Bank of St. Louis.
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  Speaker 1: She spoke with him at the Jackson Hole Economics Imposium
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  Speaker 1: in Wyoming, and Mr Bullard discussed the current economy, also
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  Speaker 1: a potential rethink in the way that the Federal Reserve
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  Speaker 1: is approaching monetary policy. Also, we talked about negative interest rates.
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  Speaker 1: We asked him about negative interest rates. I'm not a
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  Speaker 1: fan of negative rates. I don't think they're likely in
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  Speaker 1: the US because we have other things that we have,
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  Speaker 1: other firepower that we can use if if necessary. So
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  Speaker 1: I'm not I'm not thinking in terms of negative rates.
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  Speaker 1: I'm anxious to hear what This is an international conference here,
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  Speaker 1: so we're gonna hear a lot about the experience overseas,
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  Speaker 1: and I am anxious to hear what they have to say.
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  Speaker 1: You know what I've been thinking about negative rates, it's
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  Speaker 1: really attacks on the banking system because the rate of
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  Speaker 1: return that they get on their UH, on their deposits
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  Speaker 1: at the FED UH, if you push that into into
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  Speaker 1: negative territory, then you're really you're really taxing them. This
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  Speaker 1: was the whole idea of paying interest on reserves. Over
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  Speaker 1: the last the debate over the last thirty years, the
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  Speaker 1: banks always argued that they couldn't get interest on reserves
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  Speaker 1: and that this created a dead asset. And then they
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  Speaker 1: were this is costing them, and they said they should
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  Speaker 1: at least be able to get the market rate to
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  Speaker 1: return on that holding those reserves. And so finally they
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  Speaker 1: got interest on reserves in two thousand eight in the
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  Speaker 1: United States. In other countries they had it before, but
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  Speaker 1: in the United States we've never had it until two
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  Speaker 1: thousand and now people start to say, well, instead of
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  Speaker 1: paying you the market right, we're gonna we're gonna put
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  Speaker 1: it down in the negative territory, so that that is
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  Speaker 1: could be interpreted as attacks on the banking system. And
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  Speaker 1: then the banking system that has to pass that on
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  Speaker 1: to somebody who are they going to pass that on
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  Speaker 1: to either the shareholders in terms of profits, uh the
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  Speaker 1: borrowers in terms of rates that the borrowers from the
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  Speaker 1: bank can get or u to the depositors of the
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  Speaker 1: bank and start paying them negative rates. And uh so,
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  Speaker 1: anyway you look at it, that you know, if you
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  Speaker 1: think about negative rates as attacks on the banking system.
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  Speaker 1: That doesn't sound very stimulative when you describe it that way,
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  Speaker 1: and maybe that's why we've had very mixed results in
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  Speaker 1: Europe and Japan. A lot of critics out there of
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  Speaker 1: the FED, too many FED speakers at once, what's being communicated.
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  Speaker 1: But I think really at the heart of it, one
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  Speaker 1: of the most fundamental criticisms is this, look, you've you've
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  Speaker 1: tried all these keeping rates low indefinitely, You've tried bond purchases,
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  Speaker 1: and the economy is still mired in slow growth and
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  Speaker 1: businesses don't want to invest. Some people argue that in fact,
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  Speaker 1: it's the FED policy, it's uncertainty about it. It's the
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  Speaker 1: fact that rates are so low they're gonna have to
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  Speaker 1: move up more at some point. Why go into any
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  Speaker 1: long term investment? That is one of the big factors
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  Speaker 1: whole dam back investment, which has been such a weak
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  Speaker 1: engine of growth right now. How do you answer those
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  Speaker 1: critics and how do you analyze that well? On the
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  Speaker 1: idea that there's too much talk about the FED, I mean,
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  Speaker 1: one thing, one idea I've always had is that the
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  Speaker 1: private sector has probably a thousand people that talk about
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  Speaker 1: the FED all day every day around the world. It's
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  Speaker 1: a twenty four hour a day talk about the FED
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  Speaker 1: policy world, and the FED only has a handful of
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  Speaker 1: people that that can respond. So I felt like it's
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  Speaker 1: important for the policy makers themselves to talk about all
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  Speaker 1: kinds of issues that come up about uh FED policy,
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  Speaker 1: all legitimate issues. And we're talking about a macro economy,
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  Speaker 1: which is a big complicated object. So they're gonna be
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  Speaker 1: all kinds of issues all the time, and that's the
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  Speaker 1: way it's going to be. So I felt it was
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  Speaker 1: very important for the FED to be involved in this debate.
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  Speaker 1: Otherwise you're letting the private sector entities drive the debate,
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  Speaker 1: and they have are taking positions there. You know, they
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  Speaker 1: have positions in the markets and and they're making bets
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  Speaker 1: and stuff like that. I don't mind them commenting, but
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  Speaker 1: you know, I don't think you want them driving policy.
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  Speaker 1: So anyway, so that's one thought on it. That's one
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  Speaker 1: of the best defenses i've heard of that, right, the
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  Speaker 1: voice of the thousands versus the voice of the few.
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  Speaker 1: But again on this question then of uncertainty, weak spending,
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  Speaker 1: businesses that don't want to step up, and the FEDS
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  Speaker 1: saying being at the at the heart of the matter,
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  Speaker 1: they have distorted and disrupted through the natural workings of
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  Speaker 1: the financial system and what drives investments, and that that
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  Speaker 1: is one of the problems right now. I think the
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  Speaker 1: threat to increase the policy rate, say two basis points
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  Speaker 1: over the next two years or or a little bit longer, UH,
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  Speaker 1: that has been looming out there as a threat has
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  Speaker 1: not been a good description of what we're actually doing,
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  Speaker 1: and so I have felt like that's distorting investment decisions
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  Speaker 1: and distorting market pricing in various ways. We're in the
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  Speaker 1: middle of the second year after Keewee ended, so we
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  Speaker 1: had all often we moved once at the very end
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  Speaker 1: of the year. We've had all of sixteen and we
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  Speaker 1: haven't moved so far this year, and markets have us
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  Speaker 1: only moving once probably by the end of the year.
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  Speaker 1: So we're just not moving at a pace. You know,
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  Speaker 1: moving once a year is not really normalization. That's really
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  Speaker 1: not a normalization program. That's kind of nothing. So I
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  Speaker 1: think you should have you should have a better description
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  Speaker 1: of what's actually going on than what we've got. And
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  Speaker 1: that's why I came with this other, uh, this other
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  Speaker 1: conception of what's going on. But I do think it's Uh,
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  Speaker 1: you can make a case that's distroying investment decisions. Earlier today,
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  Speaker 1: Federal Reserve Chair Janet Yellen in her remarks, she left
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  Speaker 1: open the door for Federal Reserve rate increase at its
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  Speaker 1: September one policy meeting, but she also hedged her comments
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  Speaker 1: in ways that give the bank well an economic data
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  Speaker 1: dependent out if indeed the economic data is less than sanguine.
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  Speaker 1: Earlier today, also my co host kathen Hey spoke with
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  Speaker 1: Jim Bullard, President and Chief Executive of the Federal Reserve
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  Speaker 1: Bank of St. Louis, and she asked whether there was
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  Speaker 1: a need for a Federal Reserve rethink on monetary policy uh,
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  Speaker 1: and wondered if that is what is actually happening. I
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  Speaker 1: think there is something of a rethink going on. Uh.
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  Speaker 1: And I think it is because inflation has surprise to
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  Speaker 1: the low side. Uh. You would have thought I would
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  Speaker 1: have thought five years ago if you told me where
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  Speaker 1: we are today with a balance sheet over four trillion
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  Speaker 1: and a policy rate still uh, you know, under fifty
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  Speaker 1: basis points, I would have said, oh, you must be
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  Speaker 1: you know, you must have five percent inflation or something
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  Speaker 1: like that. And that hasn't turned out to be the case. So,
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  Speaker 1: uh so, I think there is a rethink about about
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  Speaker 1: models Phillips curve in particular, which has long been at
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  Speaker 1: the heart of a lot of thinking about the economy.
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  Speaker 1: Those relationships don't say to be very good. Um, over
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  Speaker 1: the last several years, the economy seems to behave differently
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  Speaker 1: at extremely low interest rates. You've got the Japanese example
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  Speaker 1: sending out there. You've got the double dip recession in Europe.
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  Speaker 1: So there's over the last five years. So you've got
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  Speaker 1: a lot a lot going on to think about and
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  Speaker 1: to adjust to in the world of monetary policy, which
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  Speaker 1: I find to me, I find it fascinating because it's
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  Speaker 1: an endlessly fascinating subject. But it's you know, it's not easy. Jim,
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  Speaker 1: what do you think about inflation that's persistently low inflation
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  Speaker 1: even though central branks around the world have thrown so
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  Speaker 1: much at it, low to negative rates, endless bond purchases,
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  Speaker 1: buying corporate bonds, you know, buying e t f s.
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  Speaker 1: You know, is you getting a feeling that low inflation
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  Speaker 1: is somewhat incurable? Well, I doubt that I've thought about
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  Speaker 1: giving a speech about inflation around the world. Let's check
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  Speaker 1: out Venezuela. Let's check out, Argentina, Let's check out you know,
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  Speaker 1: other countries that have had very high inflation, right, so
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  Speaker 1: they seem to have been able to break out of
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  Speaker 1: the mold of the low inflation environment globally. Uh. Now,
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  Speaker 1: usually when that happens, there are other problems in the country,
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  Speaker 1: and both of those countries have a political upheaval of
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  Speaker 1: various kinds and um usually governments that uh that you
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  Speaker 1: know want or need revenue from other sources other than
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  Speaker 1: their tax base, and and so uh, it's definitely they're
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  Speaker 1: showing the way. Though it's definitely still possible to have inflation.
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  Speaker 1: I'm not sure we really want to go down that
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  Speaker 1: kind of a route. So the inflation that, you know,
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  Speaker 1: when we say we want to hit two percent inflation,
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  Speaker 1: we want to hit it through you know, very conventional methods,
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  Speaker 1: and and that seems to not be working quite as
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  Speaker 1: well as it did in the past globally. In the
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  Speaker 1: last FOMC minutes, the FED was concerned about a number
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  Speaker 1: of different areas or from China debt, did you DP
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  Speaker 1: exchange rate instability, European banks. Let's start with China in
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  Speaker 1: in a nutshell, are you worried what it was. What
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  Speaker 1: are you and your your team seeing and how much
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  Speaker 1: is that influence the fed's next decision on an interest
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  Speaker 1: rate increase. I don't put as much weight on these
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  Speaker 1: global factors as other people. So let me give you
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  Speaker 1: my argument. Um. People say that because the world is
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  Speaker 1: more globalized now, we're going to start paying attention to
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  Speaker 1: the shock in a remote province of China or something
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  Speaker 1: happens in Latin America or something like that. That is
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  Speaker 1: not what economic theory says. Economic theory says, if you've
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  Speaker 1: got the flexible exchange rates between countries as we do
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  Speaker 1: between Japan, Europe, and the US, which are the main
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  Speaker 1: blocks and most of the other main blocks, then then
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  Speaker 1: when there's a shock in one part of the world,
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  Speaker 1: the exchange is supposed to move, and that's supposed to
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  Speaker 1: adjust uh most of you know, offset most of the shock,
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  Speaker 1: and that then you can conduct independent monetary policies in
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  Speaker 1: the various countries. And this is the way that you
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  Speaker 1: stabilize all the economies of the various countries. And I
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  Speaker 1: think on the whole, that's still the right model to
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  Speaker 1: have in mind. If you look at some of the
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  Speaker 1: things I've been talked about over the last year. Let's
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  Speaker 1: say we're at Jackson Hole. Last year you had the
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  Speaker 1: Chinese devaluation and big you know, scare about that. I
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  Speaker 1: said that I didn't not think it was that big
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  Speaker 1: of a deal. I turned out to be right about that. Um.
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  Speaker 1: Then we came into January and again people brought up China.
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  Speaker 1: Something's going on in China. I said, it wasn't that
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  Speaker 1: big of a deal. It was right about that. Again,
• 10:54
  Speaker 1: we have Brexit. People say, oh my god, if they
• 10:56
  Speaker 1: vote no on Brexit, that's going to be a huge deal.
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  Speaker 1: They did vote no. I don't see it. So your
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  Speaker 1: people are over emphasizing how much this can really come
• 11:07
  Speaker 1: back to a big economy like the US. It certainly
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  Speaker 1: causes these things have caused global financial market volatility, but
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  Speaker 1: that volatility tends to settle down after a while because
• 11:20
  Speaker 1: the fundamentals don't really change. And you know, something like brexit,
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  Speaker 1: How is a trade agreement between the UK and the
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  Speaker 1: continent going to going to come back to affect actual
• 11:33
  Speaker 1: real things in the US through trade relationships or something
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  Speaker 1: like that. All the estimates are that those effects are
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  Speaker 1: extremely small. So it's very important for the UK and
• 11:43
  Speaker 1: it's kind of important for the continent, it's important for
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  Speaker 1: the European project, but it's not. No, it's not important
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  Speaker 1: for the US. In terms of risks of keeping rates
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  Speaker 1: too low for too long. People are concerned, say, look,
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  Speaker 1: by the time you can see the excesses or some
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  Speaker 1: sort of bubble where people have got and we know
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  Speaker 1: there's been a lot of reaching for yield. Right, Uh,
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  Speaker 1: it's too late. What how do you approach that aspect?
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  Speaker 1: Because you've got your regime, you said, oh, probably not
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  Speaker 1: gonna have to raise rates much at all. Meantime, the
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  Speaker 1: skeptics would say, yeah, Jim, you and your team with
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  Speaker 1: your view are going to let some problems fester and
• 12:22
  Speaker 1: we're gonna have to deal them deal with them later,
• 12:25
  Speaker 1: and it's not going to be fun. Yeah. Um, so
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  Speaker 1: I'll be right up front about this. Our framework does
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  Speaker 1: not address the issue of asset price bubbles. So that's
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  Speaker 1: just something that is not included. However, if you look
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  Speaker 1: at most forecasting, typical forecasting models f R b U
• 12:45
  Speaker 1: S or Myron Associates or back of Economic Advisors or
• 12:50
  Speaker 1: GDP NOW or whatever you want to look at those
• 12:54
  Speaker 1: kinds of things, they're not talking about asset price bubbles,
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  Speaker 1: they just have sort of mechanical relationships and the economy.
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  Speaker 1: They try to track the business cycle and then they go.
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  Speaker 1: So I think you want to think about these things
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  Speaker 1: in judgmental terms, where you're making a judgment, uh, separate
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  Speaker 1: from the model about how big a problem is asset
• 13:16
  Speaker 1: valuation and uh do we would we or would we
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  Speaker 1: not want to use monetary policy to try to control that.
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  Speaker 1: This is a very important issue for monetary policy. It
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  Speaker 1: has been the most important issue over the last twenty years.
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  Speaker 1: We had the tech bubble, and we had the housing bubble,
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  Speaker 1: and there was you know, and if we have another bubble,
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  Speaker 1: there again be a debate about what to do about it.
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  Speaker 1: So this is none of this is in my framework,
• 13:43
  Speaker 1: So that just has to be handled separately. But right
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  Speaker 1: now I think I think you can make a case that, um,
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  Speaker 1: you know, we're certainly not in any kind of bubble
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  Speaker 1: territory the way we were with the housing bubble or
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  Speaker 1: the way we were with the tech bubble. Uh, maybe
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  Speaker 1: maybe somebody can make a case. But also I think
• 14:04
  Speaker 1: the FED has beefed up its tracking of this kind
• 14:08
  Speaker 1: of stuff a lot. We do get a financial stability
• 14:11
  Speaker 1: report quarterly, we look at all kinds of nooks and
• 14:15
  Speaker 1: crannies in financial markets and try to see if there's
• 14:18
  Speaker 1: anything that's catching, uh, that you know, that looks troublesome.
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  Speaker 1: So I think our radar is much better than it
• 14:27
  Speaker 1: than it used to be. But uh, if we do
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  Speaker 1: get into a bubble situation, the committee is gonna have
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  Speaker 1: to make a judgment about what to do about it,
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  Speaker 1: and we'll have to face that. That was Jim Bullard.
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  Speaker 1: He is the President and CEO of the Federal Reserve
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  Speaker 1: Bank of St. Louis, speaking with, of course, my co
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  Speaker 1: host Kathleen Hayes the Jackson Whole Economic Symposium in Jackson Hole, Wyoming,
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  Speaker 1: and he was speaking in the context of remarks from
• 14:52
  Speaker 1: Federal Reserve share Janet Yellen signaling growing conviction that the
• 14:55
  Speaker 1: Central Bank will raise short term interest rates in the
• 14:58
  Speaker 1: weeks or the month ahead. Of course, their policy meeting
• 15:02
  Speaker 1: is set for September and the twenty one, But perhaps
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  Speaker 1: even as important is the Federal Reserve's decision hinging on
• 15:10
  Speaker 1: whether the labor market is showing steady gains. The Labor
• 15:14
  Speaker 1: Department will report on September the second about the labor
• 15:19
  Speaker 1: conditions in the United States in August. Job gains have
• 15:22
  Speaker 1: been averaging about a hundred and ninety thousand a month
• 15:26
  Speaker 1: over the past three months. The bond market a little
• 15:29
  Speaker 1: bit of a sell off today, the ten year down
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  Speaker 1: sixteen thirty seconds with the yield of one point six
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  Speaker 1: two percent, and the thirty year bond down nineteen thirty
• 15:40
  Speaker 1: seconds with a yield of two point two nine percent.
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  Speaker 1: This is taking stock. I'm PIM Fox my co host
• 15:48
  Speaker 1: Kathleen Hayes. This is Bloomberg.