tv National Association for Business Economics Conference Afternoon Session CSPAN March 7, 2017 12:58am-1:57am EST
status full's something want to be respected and want power. the global ceo discusses her book on how the financial elite and their networks rule the world. >> see what is wrong with the systems, but i ask if they hold the prisoner -- the system prisoner or if it is the fault of the system. i concluded it is an interaction of both. >> sunday night. at certainlook monetary policies and whether they have helped or hindered growth. john spoke at the national association. this is about
john. and now at you just cannot quit that fed. now in the third longest economic expansion we ife had and a question is policy will be discussed. in light of the discussions with the mortgage-backed component of the fed and the balance sheet, we have looked at the treasury. this started to rise in july holding of the ecb and the bank of japan saying they would assess the negative rates
>> i am delighted to be back here. i was on this board and i can see the conference has grown stronger and i am delighted to see that. grownnomy, i wish it had stronger, but i think there has been a consistent, if not exciting recovery. of the demographic reasons, it will be hard to get the labor hours and productivity has been slow. that is why we are getting 2% rateh with the inflation being consistently below the theet of 2% with
expenditure index and it started to move gradually. i think the the federal reserve dealone what it can to with growth, they cannot do everything. they should be able to create jobs and create the growth rate they are wrong -- they want. they cannot do that. they are an important piece of the puzzle, but only one. we're making sure we avoid the deflation outcome. tore are things we can do reduce expectations, which the fed has done. we are coming closer to the 2%
the federal reserve made it very clear that, unless something really radical happens , they will raise rates and it will get them on a path to raising rates further this year. it will give us this opportunity for more rate hikes and we will see how the economy he falls and how inflation evolves. most signs point to reasonable, not extraordinary growth and a slight increase with inflation expectations and the federal reserve needs to continue on the path they are going to be on this year stay ahead of the
falling it'srates the 1980's and they have come down gradually before the financial crisis and a concern andwith emerging markets china was integrated into the with elements and , it isngs being equal trying to become more integrated high, in someare cases. that will shift down the supply savings. about china'ss
demographic transition. age withwill start to this policy. it doesn't look like a response with fertility. the response will be 20 years up before the impact on the him ation and we will see rapidly-aging workforce. the savings rate is three or 4%. we will see forces driving rates ,ackup and where they will go no one has been process enough to tell us that.
the fundamental economic forces have been driving rates back up. will they go back to where they were in the 1980's? probably not. china will be saving a lot and pushll probably see rates up from where they have been in many of the rates have been higher than that. you point to the forecast and demonstrate your sense of humor. >> yes. humor with a decimal point. i agree with pretty much
there was he said and a response to the crisis in the short and longer run. i was at the federal reserve more recent the and i would like nitty-gritty of what will happen tomorrow and fill out that picture. that a rate clear increase is likely in march and the thing that surprises me is that people decided that this is a surprise and it is strange that they are doing that. you you are surprise, assume that there has been a andonic shift in thoughts
everything will be different. so, that is always nonsense. let me explain this nonsense. -- by the way, i put on our website as a public service and you can like. that, if you let me say my perspective on and the fed has been doing that is that you can encapsulate with a little of wisdom normalized policy as rapid and as prudent as possible.
didn't get the rate increase. let's compare this to what is happening. and wethe basis points see the stock markets boom and the macro data has been fine and mixed. get the previous year and the expectation of some slipping. the rising expectation moves back. that is true in the u.s. and japan. it looks to me like we could previousod case in the considerd we would sander raising rates. we do not need a shift in beliefs about the economy to
thing that has changed is the avenue and what will happen with taxes, spending, and trade. in order to take strategic that kind of stuff is all completely crazy. whether you like it or not, most of this is kind of active them make and we don't think we know and weng about politics that we enough to know
are not good at that. nobody in their right mind would try to adjust the interest rates. somehow in the avenue. that would be insanity. the mandate says it isn't supposed to do that. we make factors to global and global economic activity. how much of this will be pushed onto rates, if the global economy starts to pick up with
the coordination? forces that have been driving rates down and it sell theant and we may potential for deflation. theybody has learned lessons of friedman and schwartz. and theank stands by rates spike, that translates and thisw you to shock something for the great depression. they did not turn into great thingsions because of
worldwide and there is economic growth that has weighed in on the u.s. ability to export and will have an impact on measures we have had and some wild swings in the energy it has fallen from an astonishing high. and thehese factors , when i was at the fed, the crisis was really heating up and there was a world
and theyimf meeting talked about how to respond to this globally, because it is not a single-country issue. those are probably the peak years of international coordination and these were years with a lot of central banks being actively use and many of these are no longer there were being actively used. obviously, it is going in different directions and japan has gone into negative territory. other andware of each meet local conditions. these drive the domestic policy
in value. whether the dollar is overvalued, if the rates rise, the rest of the world and significant areas of the world that are weak, the dollar will go of and need trade deficit will get worse, almost independent of policy. overwhelmicult to those forces. see how they feel , at theese issues and u.s. economy keeps growing, people say the dollar is going up and the trade deficit is veryng worse and it is difficult to not have that happen. >> i remind you that, if you
have questions, we will field both of youd andioned the policy tools there are a lot more than there were before the crisis. for peopleny guide to think about when the different policy tools should be applied and when they should expect that? how should we put them in context, working as business economists? the fordsiest is speakingwith people unprecedented
things done in unprecedented situations and there was no do this inyou could times like these. now, support and guidance may remain going forward and there is a great commitment to transparency. if we are fortunate enough to get right to a normal time, it will play a less prominent role and it will look more like it you didn't listen they carefully. they are going to do with they usually did.
is a muchce sheet trickier issue in some people having their toes banksse waters, central have gotten good at this and i don't think there is a lot of taste for that and that they would rather get back to something more standard in the operating procedures. shrinking backm notome smaller and this is something they will have to think about for another year or two. how will they adjust the balance sheet?
i think that the preferred approach is to do something notly predictable and disrupt the markets. , have that not be the way policy is adjusted. when they change the balance sheet and how it is used, that and technical choice whatever pace they choose, they want the interest rate to be the main signal of policy and the balance sheet be the sideshow. there could be a new set of those whosoon and
want to reduce the balance sheet , i think that just means the rise at rates would little more slowly. if you are taking away this from the balance sheet, you get the and they wouldy try to do it well. that is my view of how that will go. i think that i agree that the fed does not want the using qualitative easing. it was done boldly and with many central banks reluctant and want to get the balance sheets that to
normal. was a big part of the lien and clean debate and it was a question of whether they should go back to the lien and clean balance sheets. certainly, before the crisis, the central banks had different aproaches and there was german approach to these things. seen as's sheet was optimal. was just cash on the live the liddy side. isthe asset side, it short-term treasury security and it gets you lean and clean. we are pretty far from that and
they are starting to get your print debt and you are seeing things that are less green. lien is. the thing you would associate with this balance sheet. with is a strong desire much of the fed staff to get the balance sheet as clean as possible as could be as's and it is something our moderator could be interested in any you could see that with the fed trying to get out and normalize that. there was concern about that and there were people repaying mortgages and mortgage-backed securities, which were naturally
shrinking. they then change that i think that's the most likely way in which they would do it. my guess is once they do start to normalize the balance sheet, they are going to be focusing on that piece first, because they would like to have something that is both lean and clean and that gives you there, but i think the concern is more about the lack of cleanliness. but it also gives you to something that is more lean. lean. so what is the optimal size of the balance sheet? we don't really have a good theory for that. one can argue that the way the fed had operated precrisis was a good benchmark, but there was no -- it would be very hard to turn to an evidence that said the fed balance sheet should be up at exactly this. there are reasons for having a
lean and clean balance sheet. when you don't have a lean and clean balance sheet, that leads to all sorts of potential political issues for what are you doing, why are you doing this, and if you can't buy this why can't you buy that? i ahvhave debt, you should buy that. the political challenges the ecb has of allocating that purchases europe --ases across the bank of japan consistently buying equities, people thought it was a temper tantrum when ben bernanke said there was a chance that in six to nine months they might increase the rate upon purchases. imagine what will happen to the nikkei when the bank of japan stops buying equities. that's going to create quite a strong reaction. it'll be difficult to get out of fed wants toe be seen. what is the right amount?
shouldlates to how much the financial system be running. and obviously, we went in the u.s. with no excess reserves to , nowold increase at least to $3trillion trillion. most banks in the global financial crisis feel that having more cushion of excess reserves is probably worthwhile. the fed now has the interest on reserves, and my guess is we will continue to do use that and the federal funds rate to set weerest rates, and i think will be doing that probably with a much bigger cushion of excess reserves. $2 trillion, probably not, but tens of billions, probably not either.
that will be that will be the big debate in 2018-2019. the is the optimal level of balance sheet for running the economy? how much cushion should we have of excess reserve? i guess is most everyone in the fomc is saying we need to clean things up, but how lead should we be? as lean as we were before, we don't need to trillion dollars. >> let me come in on a couple things. i don't know if it is clarified, but you can be the judge. in this case it is sincere -- randy would like to get back to normal as quickly as possible, which would sell it off rapidly. it is more likely they will let it run off.
--s going to be >> i was describing the way mortgage backed securities would go, but obviously in a rising rate environment you are less likely to get as many -- it would be a very slow process. thef i can continue -- second point is that, just to make sure everybody knows this, treasuryan only by securities and agency securities , so it's not like the fed could have ever been as messy or not clean as the ecb.
is there a desire to exit the mortgage backed securities, the agency securities, more rapidly than the treasuries? there was at one time but i'm not so sure it is still there. true thataid, it is as the interest rates rise you get less mortgage prepayments and those mortgage backed securities live longer. they are naturally going to be living longer if rates increase as we hope. it will be a question of whether the fed wants to sell some or let them run off in a way that could have a tail. so far the fed has recently said it is unlikely to sell because they don't want to disrupt the
and accept residual weather gets to be so small that it couldn't disrupt market. >> obviously something that is on people's minds, five of the first 10 questions were about the portfolio. is thethe questions was fed's ability to change the duration of its portfolio another monetary policy tool? there has been some shift. >> in the fed's way of thinking, that is a tightening that could affect quantitative easing, a large stock of long-duration andrities out of the market
as the duration of the portfolio moves down -- if it moves down more quickly the fed is likely to believe it is appropriate to raise rates more slowly in order to keep the financial conditions about where they like it. the question might partly have in -- some people including the have arguedvernor that manipulation of the duration of the portfolio might be an active policy every day and that is true, it could be. there is nod i -- case for that, really, practically no case at most central banks but certainly at the fed. it will naturally happened at the end of the portfolio runoff but that is not policy and there is no taste for actively using
that tool. >> the key is how is it affecting the yield curve and i don't think we are quite sure -- one it should be that of the things we want to make sure when we are making asset purchases is to be sure changes in short-term rates were very rapidly translated into lower, long-term rates and then make sure they were then translated into borrowing costs, to make sure they help the transmission mechanism, make it more rapid and make it tighter. happenssee exactly what as this exit occurs but the yield curve has not gotten steep , it has flattened. --will be interesting to see will they get a significant
steepening of the yield curve? that will be one of the key because weg forward have a very different shape of the yield curve that we did. >> one less question related to the mortgage component of the portfolio. my understanding is there was an experiment in the late 1990's surplusfederal budget what kindestion was, of securities would be traded to conduct monetary policy and there was an experiment that was terminated, indicating some preference to some industry. the temper tantrum also affected , it dropsg market sales for the next 10 months by .0% from what was projected
is the fed comfortable now that the housing sector is in good enough shape and that when they make the decision the portfolio will start the structural shift to treasuries, away from mortgage securities? >> i think you put it quite well -- they will only do that when they feel comfortable and that's why this discussion about the portfolio will be a discussion later this year and my hunch is it's probably not going to be 2018 orted until late 2019 because the fed wants to make sure they can move rates into the range it feels comfortable to be. ok, the economy continues to recover, the markets are strong enough, we can pull back from other areas.
the last thing they want is something that's very rapid. if you want to search for the word gradual and its synonyms from fed speakers i don't think there is any word they have used more frequent than that. the last thing they want to do -- they don't quite understand how markets will respond to even mild statements about how the balance sheet is going to change, which could lead to sharp increases in short and long rates. that is a discussion that will occur next year but it will be far off. >> a couple things. i think this said does not now see the pressing need to, once they have made a decision, to act immediately in this regard. they believe they can try to implement a sort of more
technical sideshow approach, and that means not only do they need to make the decision, they are going to communicate it clearly in advance because there isn't a big need to hurry. i think you will know a good deal about this well before it happens. the other thing that we haven't that ifentioned is those happen a year from now as we are talking about, they could get a very different fomc and you should take everything randy and i have said about what they are likely to do more than a year or so in the future with a grain of salt. have going to depend -- we two governor slots to be filled right now, one is leaving in april, chair yellen is up in
february next year, fisher is up in june. that's a whole new ballgame. things are things that in many areas -- monetary policy in normal times, it doesn't matter that much who was running the fed, but these things -- relative to these questions we are talking about now, those questions are more settled. how will someone feel about leaving and how fast can i get there, that could change a lot depending on the particular folks who get chosen to make those decisions. >> you touched on the second who isn that came in, going to be on the board going forward. names, youecting
might reflect on what you think might change in terms of policy inclinations on people that might represent the incoming a ministration. you don't have to if that's uncomfortable. [laughter] i think the administration has not made their intentions very clear with respect to the fed. obviously they have very publicly said it's important for them to pick a vice chair for supervision regulation, and many buts keep getting floated, my guess is they will focus on that first and the other pieces will fall into place. >> i think many of the regulatory questions which haven't been our focus today are likely to be the most important
those will bee -- big issues. fulks as the source of who are likely to be invited, i don't have any special insight. important is really that there has been talk about not so many academics. there are plenty of non-academics who have been i thinkntral bankers -- people will be able to handle the needs of monetary policy and handle it in largely similar ways. the regulatory side is much more contentious and would be a whole different session. i'm not particularly qualified to speak on that.
>> there are a couple questions tying back to the prior panel on regards to how u.s. monetary policy might impact emerging markets. there are structural changes taking place within trade. thoughts on how that might affect monetary policy decision-making? central banks are creatures of their governments, and usually their mandates are to focus primarily on their domestic economic activity. that central market activity affected, that is usually filtered through which the focus is for central banks -- obviously they also try to avoid causing economic ult, is that will affect
financial stability and real activity. but as john had said, the fed is , and itl telegraphed seems to be gaining credibility that it will move more than just once at the end of each year. that is playing out in emerging markets. but unlike a few years ago where it will cause a lot of tu mult, the market is doing ok. it is having impacts on foreign-exchange values, but if we look around the globe, it's not just the u.s. equity markets that are doing reasonably well but it's many countries around the world, including emerging markets. i think the fed will take notice of those issues as they might have feedback on the u.s., but i don't think it will be the prime
just, nor should it be, like other central banks shouldn't be focusing on other countries, but the country they have their mandate for. >> i think i agree. >> ok. maybe this is the rapid round. r sub $50 oil prices good or bad for the economy? sub $50 oil prices, good or bad? how would the fed think about that? say --uld [laughter] say, like with the strong dollar/week dollar and the other discussions, they help some and hurt others. if you said in the long run would you rather have cheaper
sources in any resource are expensive resources, cheaper is that iter if that means can be supplied at low cost as an input. over time, you would just that. >> i love everything to be cheap. you have to look at that in the broader impact. the underlying structure, regulation of the market -- the trumpstion, administration suggested they tended to ee's energy policy to increase production. barriers,ory competition effects operation of tokets and that goes back the first discussion we had
about productivity. >> i agree. there are countervailing issues, and whatever the countervailing issues are, people have very different views on it, but in general if you can make the market work better, setting aside those issues, and the price of energy goes down, that's a winner overall for the economy. question speaking to the stimulative nature of raising -- interest on excess reserves? whether that will be impactful? to raise the interest rates on savings? >> what the impact of that is. certainly there is an impact not only on savers but directly on individual savers, and a big impact on pension fund insurance companies.
a lot of savings is done indirectly through those institutions, and many of them have made novel commitments -- nominal commitments when they thought the 10 year rate was going to be between 4% and 6%. suddenly, for a very extended period of time, they are getting lower rates of return. this is even more extreme in europe and japan, rates have been low for a long time. in europe they are getting very low rates on their investments and i think that is where the real challenge is. you could link to financial disruptions, and many of these organizations can't be made good on. as we gradually exit and interest rates normalize, it should be less of a challenge, -- this novelent
that is in the system, where the real challenge would be. feeling is a common that is widespread in this audience that raising rates would be stimulative contrary to normal times. i think it's a question of guessing like that, and i like the question of oil prices, it certainly would have certain stimulative effects in helping out savers who are on fixed income and the life insurance industry pension funds -- those are important and we would be in better shape if the economy were allowed those companies to be in a healthier position. that will be stimulative. does that mean this was the wrong policy?
there are positive effect on the other side for low rates as well , and historians will sort out buttly where it netted out the conventional thinking is that they were warranted despite the fact that there would be some positive effect. point are at that turning , and hopefully interest rates at more thanconomy the glacial pace we have happened to see. it would be nice to get rates back up. to.ooks like it is going >> when we brought rates down to effectively zero, the big debate at the fomc that is all public was not exactly whether it would eventuallyero -- we
got an agreement to say that but i don't think anyone was sitting around that table in 2008 and thought it was going to be eight or nine years where we were debating whether we are going to start the process. it has been much longer than we expected and part of that has to do with your forces and part of nots just the economy responding as strongly as we had hoped and the fed said at the beginning there are a lot of that make for the strength and weakness of the economy. >> let's wrap this up with a quote from mark twain. "prediction is a difficult art with respect to the future." please join me in thanking our talent. [applause] >> thank you very much.
that was an excellent, excellent panel. thank you to fannie mae. i would like to ask our next panelists to come up to the stage and take their seats, please. >> tuesday, a confirmation hearing for president trump's nominees for the justice department. the senate judiciary committee hears from rod rosen, nominee for deputy of attorney general handling doj programs, and rachel bland for associate attorney general. live coverage here on c-span. >> veterans affairs secretary david shall can and john mccain testified tuesday on efforts to boost access to health care for veterans. we are alive with the house veterans affairs committee at
7:30 p.m. eastern on c-span 2. >> c-span's "washington journal," live every day with news and policy issues that impact you. coming up tuesday morning, sarah chamberlain, president and ceo of republican mainstream partnership, discusses the moderate republicans and the role they will play in the upcoming administration. then, and immigration reporter for the associated press. she will talk about the newly revised travel ban executive order. and william gholston from the brookings institution will discuss the trump presidency so far, and how congress is responding to its legislative agenda. be sure to watch "washington journal" beginning live at 7:00 a.m. eastern tuesday morning. join the discussion. >> next, remarks by neil cache kari, president and ceo of the federal reserve bank of