Bloomberg Markets (06/29/2022) Powell, Lagarde and Bailey Panel
Potentially do you see that process. President Garden working in reverse. So actually you know it's different because you know running at the moment is more this this swing ISE substitution that was described earlier in the day where you know because of Covid everybody suddenly decided to stop using any kind of services particularly there were social distancing about it and move to two goods hence the car industry in the US and you know stationary bicycle rather than the fitness club. And now we are seeing this sort of substitution back to services where people who have been deprived of restaurants hotels transportation theaters and all the rest of it that that side of it is currently booming and is sustaining the recovery that is otherwise under the various series of shock that Andrew was alluding to. So how how these things are going to evolve in view of the uncertainty that we have in front of us here in Europe is something that really remains to be to be seen. That's how difficult present Legarde is it to for example model a gas embargo from from Russia. And what it does it has proven look it has proven extremely difficult. And as we have seen from the sort of mis understanding of wrong assessment that
we have seen in the last couple of years that is difficult for sure. And you know the rest is for the moment more in the scenario planning world than than in the remodelling of what's going to happen on the on gas prices. Mr. Carson talking about emerging markets a little bit. So first you know it's I don't know whether they're coming to their strategy because they're used to the volatility. But there are huge implications of course on what the dollar is doing.
Yes of course. I mean I think at the end of the day a very strong dollar in price for many of them very tight global financial conditions. And so far again as I mentioned the exchange rate the impact of pressure has been contained both at the cost of very high rates. What what is a little bit concerning. Not that the E it couldn't
be managed but the four for some emerging markets this is arriving at a time where there is high a corporate debt in case sovereign debt and therefore some fiscal prudence is important at the time were emerging markets are facing a still very severe key challenges. Many of them have made much progress with for example vaccination than in other countries a also forum for many of them. The impact of the increasing commodity prices in fact particularly in food and teen energy is very important. I mean usually commodity price commodities for safe food foodstuffs and energy all face a much larger proportion in the sea in the Congo in the in their basket than in advanced economies. So that obviously reflects itself in more social need. And we're of course many governments according to their capacities they are doing programs to assist people. A. So at
the end of the day they are their only paid situation. They have to manage things very prudently. I think there are as if we compare these with other periods emerging markets whether prepared A. But I think that the that that the challenges are there. I think I think a big challenge for many emerging markets including I would say China is is how to get growth back at a much healthier base. You know I think the growth in emerging markets has slowed down. Not not not now
but even before the pandemic a it to some extent the reaches of globalization have sort of run out of steam. And the and therefore the the the relevance of structural reforms are very important. We need to look much further into how to get growth going independently of the U.S from fiscal and monetary policy. And to a large extent that also applies to advanced economies.
Thank you Governor. We do think inflation in the UK will be longer. It will be more elevated for longer than other parts of the world. Well I mean this as Christina said we are going to be affected by the shock that Christine described in terms of energy prices in Europe because essentially it's a common it's a common shock in geographical Europe. I use that term carefully because it's a single particularly for gas. It's it's a single supply system. So although we don't actually import a large amount of gas from Russia does. In a sense the price is formed outside that uptick.
So and so in that sense it was similar I think where I was. As things stand expects us some more persistence. And the headline rates is because we do have as I mentioned earlier this price capping system and domestic energy prices. At the moment it's a six month cap. But there is a proposal to take it down to three months. But other things equal. You would
imagine that that would put a bit more persistence. And we will of course have to explain that because if we can observe a downward path of underlying inflation we will we have to be very careful to explain that if that's how it emerges does Brexit actually make bringing down inflation harder. Well Brexit I should say. It's very hard at the moment if not impossible to separate out the immediate effects of Brexit and the immediate effects of Covid. So when I look at trade and when I look at labour market particularly you can see effects taking place. But you can see that Covid embrace it are having some effect. The reason I say that is because Bank of England for some time now has had a you know sort of a path of a Brexit effect in its in in its projections which said there would be a fall in trade intensity initially and over a much longer period of time there would be an adjustment to that. And we haven't yet seen anything to to vary
that assumption. There's a fall in sterling actually help with the economy. Well I mean we've got to target the exchange rate. Let's be clear. The exchange rate is one of many inputs to many many influences on inflation. And that's the way I treated. So it hasn't been a positive. I mean we used to say that it was a positive. It was lower. Now I don't sort of attribute sort of you know positives and negatives. I'm not surprised by the way the policies of sterling from the force. The reason that as I said earlier I think U.K. economy is probably weakening rather earlier and somewhat more than others. I think that's been somewhat evident now for a few months. And of course it is over
the last few months it's happened. But I think you know I do. In our system today we do not attribute good and bad to movements in the exchange rate. It's one of the many things that goes into the into the analysis process in terms of how we think about the evolution of inflation. I was going to ask you about the dollar and whether that helps us. Fresh stability
strength. Like Andrew we don't we don't. We don't have responsibility for the level of the dollar. That's the elected government's job. That's the Treasury Department's job. And so it's just another financial condition to us. And since our economy know the external sector and our economy is so much smaller than it is for the others here it's it's not that important. But the dollar has been strong which would tend to be disinflationary but only
at the very at the very margin. I mean I think I think what we what we're seeing these days is it's all right. Jill Spence in a exchange rates but they think that way of thinking of those adjustments in most economies including in emerging market economies are part of the adjustment process. I mean they're indulging in endogenous variables. If for example the lottery is stronger because the U.S. economy stronger because interest rates are higher. And also how the shocks that are around are affecting the different economies.
So the fact that you have a very strong commodity pricing in Europe. With gas and so on and so forth is very logical to think that the real exchange rate will depreciate. And that's part of the adjustment you know. So I think I think where in the world where in most of the cases is exchange rates are part of the adjustment. In some cases in particularly in emerging markets it costs it costs more often in putting the monetary policy
management is because it passed through full moon of the exchange rate into prices is much higher than in advanced economies. So in advanced economies you know it doesn't in in your own Lazarus huge swings. In fact on the on the trajectory of inflation this is it's not that long term power as your customers talk about a gray box. What's your gray box. Is there something that you wish you knew that would help in setting policy on this one. Yeah I'd go back to the same thing really
which is what did we what did we get wrong. And that really was looking at these supply side issues and believing that they would be resolved relatively quickly and that by that I mean there was going to be going to be vaccinations. Everyone would get vaccinated. So the millions of people who dropped out of the labor force would come right back in. So wages wouldn't be under such pressure. That didn't happen for a range of reasons. That didn't happen. In addition to the bottlenecks and the shortages haven't been alleviated yet. And then on the back of that comes the new shock
in the form of the war. But so we. But it was it was wasn't something wrong with our models. The it wasn't the models at all. It was it was a question of how to assess the persistence of these supply side shocks. And I do think that there'll be Jackson's point there'll be a will. And there is a lot of work going on to get smarter about the supply side. It's in the nature of it though. It was a deep in the tail kind of a risk. And those are those are very hard to predict and assess it when they come. Because monetary policy is not an exact science. How often do you actually speak
on the phone to exchange ideas. Do you call each other and say well I've done it this way. I can tell about them I name because part of my job and part of my job is to be able to direct them to Boston to see it every two months to have very very deep and open exchange of views. We do that. And you also we speak well we speak quite often quite a lot. You're not going to present LEGARDE. The ECB decided to apply flexibility to reinvestments from Friday July the 1st. What will be the guideposts.
We decided look I think if you allow. I'd like to just come back to why that is. Because I think that. This risk of fragmentation that is much talked about is something that is very inherent to the European construction and to the fact that we have 19 and 20. But let's say 19 for the moment member states that each have their respective fiscal policy that each have their respective financial markets. And as a result of that our unique monetary policy has to be transmitted throughout this imperfect market of ours which has no fiscal union no monetary union no capital markets union. And as a result of that we just have to make sure that our monetary policy stance is actually transmitted throughout the entire euro area. And the two of them I think I use that word. I don't
know if it exists in English but they are concept central. For our stance to be effective it has to be transmitted throughout. OK. So to do that if we see that there are unwarranted disruption to that transmission and if our stance is impaired as a result we need to take action. And that is the reason we
decided that we would use as of. You're right. Friday. That's what I said yesterday. We could use we would use the flexibility in the reinvestment off of pandemic emergency purchase program redemptions in order to address the potential risk of fragmentation. Second we also decided and and it's work in progress. I'm not going to comment upon it. I know that some some would like to have details and understand before everybody else and particularly before the Governing Council what the details of that instrument will be. But we decided to reinforce our capacity to properly transmit our monetary policy by dividing devising a new tool that will be considered by the Governing Council of the ECB on July the 21st. So don't waste your time asking me for details. Criteria is condition safeguards. All I
said is that it has to be effective. It has to be proportional. It has to include the right level of safeguards. And that's all I will say at this point. How do you direct it would be effective and it will be proportional and it will have safeguards and it will be there. Believe me. How do you direct staff from the time I lost one more time. How do you direct staff when they design this new tool.
Returning is. Is this the famous way. How do you look at China sir. How should we look at China at the moment. Well I mean it dissolves the essence that the things start improving more quickly in China. I mean certainly we need the growth that has come from China. They play a very important role in in the supply chains.
I mean many of the tensions we're seeing around the world. They could be mitigated by having higher growth rates around the world. I mean the the I mean the way we have started these conversation was a trying to say yes or you want to hear our thoughts about how can we bring down inflation without affecting growth. You have other sources of growth that would make the whole therefore adjustment process simpler. Now what these one major engine of growth that has not been a contributor
to contributing as much as you could. I have to say China. No. They have problems that are well known. A wonder they hope that can be resolved soon. Is there one in the in the housing market. I mean the housing market has been really sick that sector. It's a very important contribution to growth. A lot of it certainly very much impacting the risk of free of the global economy in the U.S. It's a sector where the Chinese hold three to solving working a lot trying to bring it back its full and. Hopefully they're close. But the I mean I would say at this stage a a for their own sake they're not growing as much as us as they certainly would like. And certainly they're not growing at the
pace. I would like them to see growth because think it would help a lot in trying to solve almost intentions for leaving too. Do you think we'll see more power more globalization and how that will impact our economies going forward. There's certainly certainly a threat of that. And this is not the work of the central banks. But I do think it would be it would be a plus if we were to find a way to you know to for China to take part diplomatically and economically according to a common set of rules. And that would be a big plus for global growth if we could get back on a path
to that. But it's obviously if that's the worth the work of elected governments. Not for us in terms of globalization. Yes. I mean you can imagine the world is not hard to imagine a world where we break into these blocs again. And that would that would be a world of lower productivity and lower incomes over time. Doesn't necessary doesn't have to have to happen that way. People are looking at it shorter and more durable supply chains. It's not clear how much of that will happen. And if so what would be the effects. Those that could also be that could be
more secure but perhaps you know not as not as efficient as the long but but fragile supply chains that we've had. So I think it's it's a very important question. And there's certainly a risk that the benefits of globalization would be lost. But obviously there were there were benefits and there were costs too to the advanced economies. Certainly a question for all of you and your power. I'll start with you. What have we learned about the last 10 years of monetary policy some of the tools that were used by QE or in other parts of the world even negative rates. So we the last 10 years were were so far the height of the disinflationary forces that we faced. And really
it goes back before the global financial crisis. But really since the global financial crisis we had very low inflation. We in the United States we had three and a half percent unemployment for a couple of years or right in that range for a couple of years. And inflation didn't didn't react at all. So we had a very weak. And that gave us the ability to really lean into the maximum employment mandate. And we did that. And I think that was the right thing to do in that world. That world seems to be gone now at least for the time being. And you know we're living with as I mentioned the beginning where we're living with different forces now and have to have to think about monetary policy in a very different way. So I think I think if you wanted to know the lessons to be learned of the last 10 years look at our framework. Those were all based on a low
inflation environment that we had. And now we're in this new world where it's quite different with with higher inflation and many supply shocks and strong inflationary forces around the world is quite a different environment. Present guard. How do you think we'll look at that. Some negative rates. First of all I look at it in a similar way to today. And I think the last 10 years have been 10 years of hero. CAC fight against
disinflationary forces with central banks demonstrating great agility to innovate and find sometimes alternative accommodative ways of dealing with forces that have nothing to do with what we are experiencing now. So we're certainly learning from that period but we are in a new in a new environment which also I think will force us to to show agility and capacity to respond fast to data that we are we are receiving at an accelerated pace and and with a scene that is changing geopolitically as well as economically. Mr. Questions do you think I don't want to sound too dark because I think that they are also good things happening. You know I was reflecting on your comments today and you know think
back December when was in December 20 when we thought that this this pandemic was going to hit us for the next two years at least until such time when vaccination would come to market. And vaccination came about as a matter of you know nine months as opposed to the three years that it normally takes in the same way everybody expected a couple of weeks ago that the Geneva agreement of WTO would be a complete illusion would never happen. Well sudden things happen when when there is goodwill agility creativity. So I have great faith in human infectivity and talent particularly when it includes women point. A lot of these problems are happening because the the recovery
and the expansion have been so much stronger than and faster than expected. If you look in the U.S. labor market as an example now it's a very good time to be in the labor market. You can you know there are two job openings effectively four for every unemployed person. So people are switching jobs. They're getting pay increases. It's you know it's a terrific labor market. The problem is that wages are moving up in some areas that are at levels that are not consistent over time with 2
percent inflation. So it's kind of overheated. Nonetheless it's it's it's a byproduct of of of a very strong recovery giving back on pay increases. The UK is going through a bit of a bumpy ride with a lot of pay increases. How do you see that developing. Well of course it's a it's a reflection of the inflation world we're in at the moment. I mean I'm on record as having said a few months ago that I'll
be careful because I'm probably get it right and precise in terms of where I said that. I think a very high pay increase is trying. And particularly like this applies to both pay increases and price setting by companies. If everybody tries to beat the beat the inflation and particularly the Russian warehousing which is this imported inflation shock which we just can't avoid then it will set the second round effects off. And of course yes we are seeing some
of that tension unfold. I would have to note that I would note that rather more people seem to be agreeing with me today than we're doing several months ago. But that's not the point. I mean the point is yes I think it was likely that we would see this. But I think I have to say the point about second round effects holds as much today as it did then. I mean that's the risk. And that's why we will set monetary policy obviously to offset those if they emerge to get back to Target. We will have to do that.
And that's a I'm afraid you know the thin code for saying the more they emerge the higher rates will have to be. But what sort of pay rises could be alarming for the Bank of England. Is anything about 2 percent inflation. Well I don't I don't think that's the right way to look at it. Because obviously there's always a productivity angle to it in terms of how pay is set. And it's very important that you know I made a general comment about second round effects. But of course pay is set in the
markets and that's important. And it must continue to be set in a market. So it's wrong to say across the economy this is the right number because he listens different cases and different situations. But I would just emphasize this points about second round effects which is that the crucial point for monetary policy. Mr. Carsons. Has there been an over reliance actually on
monetary policy in the last 10 years. Well I mean I think I think they're even going a little further. We've dealt 2007 2000 and need monetary policy needed to respond. To put it in a different way. Lack of resiliency and growth and just to some extent policies that traditionally are meant to support a sudden fluctuations in the business cycle have broadly been used to lead to more. More would probably in in in in a more lasting way in May. My sense is the role of fiscal and monetary policy to study. Lay said the business cycle into the future are getting are hitting
limits. If fiscal policy survives because there are issues of debt sustainability or can be issues of sustainability and well now if we we cut the long period that where monetary policy would have an impact on growth because as Christine said there's a deep hole in undercover said we. We faced a very I would say specific period of time or very low very low inflation. And where monetary policy could make if you cut the instrument why not use it. Know what they think. I think what we should learn and this is not only I mean at the end of the day the economies do not depend on monetary policy. At the end of the day the central fiscal monetary but also many of the real policies that are out there. And what we have seen is in the last 10 20 years. It's a very old reliable process of economic growth in the world. Some of course have been distorted
by issues like wars or pandemics. What do you own before. I mean we don't have we don't have the resiliency in growth that we would that we would like to see. And that puts a different point in time. A lot of stress on these kind of monetary policy. And at some point that has some impact. So I think yes monetary policy will have to adjust and we'll have to do it all. We are learning and we are learning lessons. What they think where we need to work more is to understand growth and how can we promote it in a more reliable fashion. He doesn't he doesn't agree with that on the panel. Does everybody. It depends what kind of growth. And I really think that the you know the determination of the Europeans to focus and encourage investment in the green
growth is critically important. If we want to develop the economic potential of any economy you have to go in that direction. That's the part of Juliette Saly. Really. Yeah. Yeah. Resilience. Yeah. If you don't give him a burial. Well I was going to observe. I mean the point I was becoming so on
following what and Christine was saying earlier about what we've learned from the last 10 years and make your points on growth. We one things we learnt over that period was that the sort of the underlying interest rate the sort of structural lifestyle seems to have gone down for a long period of time much as in the UK when we look at it. The question is what do we learn from these structural issues that we're facing today. What is what do they imply for it. I'm probably not in the same place as Charles Goodhart because I think these trends are so long run. It's actually on the sort of population side on longevity side that they have quite a long way to play out even on the basis of what we know today. So I think the underlying story will will obviously move. But there's a lot sort of built into it's already.
Just on the shorter on points on growth. I mean I think one of the puzzles which we're certainly looking at on though if if you take that sort of underlying story of the last decade certainly the UK economy is why hasn't investment been greater. Because there's a there's a gap opened up between the sort of the risk free rate and the return and the risk taking environment. That investment has been very subdued. Now I think the other question after also. But are we capturing investment there. I mean it's something we're looking at certainly which is is there just more investment or a non-traditional source which is probably not wholly but in part helps to explain that. But I think I see that as an important issue to understand in terms of what we want to
know going forwards because there's no question that investments as Christine was saying in terms of climate change is a big part of the picture going forward and how we solve some of these these issues that we've been living with in terms of investments on low productivity and RTX as well. Jihye Lee do you think we have an overreliance on monetary policy especially as a Fed. Yes I do. I would just say I think that in economic discussion generally there is much too much focus on demand management and not enough on things that will. Make us grow at the maximum sustainable level sustainable growth in the longer run. There's
not enough focus on and that isn't the Fed's job. That's more the job of again elected governments. But I'd like to see more of that. So how should governments be thinking about their economic policy going forward. If if if monetary policy is not the only game in town. You're asking me. So I'm kind of out of the business of giving advice to the fiscal authorities these days. So I would just say I think
when I get asked that by an elected representative what I say is focus on investing in people and investing in things that will increase the productive capacity economy over time. That's what I say in terms of I think what a central bank should do is stick to its knitting and do its job and and leave leave the major issues of the day to the elected representatives present Legarde. We have to stick to our knitting. That's for sure. But if we are asked for advice we should give it. And I think that you know to the extent that fiscal and monetary is I've worked hand in hand
during the pandemic and to good effect. I think we should also reflect on how fiscal can leverage what we do and how we can facilitate it. But we're not. This is this is no longer the same corporation hand in hand that we used to do during the pandemic. And then I would give the same advice invest in people invest in green be targeted and focused and in the medium term in the fiscal space has to be has to be made sustainable for all countries certainly in the euro area. Mr. Parsons what's the correct way of fiscal policy to help. Monetary. Well I would I would definitely in my voice to invest in people but they will see more Maureen in different tasks fix that thing once the human capabilities. Very specific location is one. I think what we call what we have learned with the pandemic is that health systems are extremely important. And I think to a large extent we have from the investor invests that there is.
The other thing is that all digitization will be in play in technology and technological advance. We will really impose very very dramatic a pressures in in many countries. And I think I think to how help load up our cells. That is very important. Climate change just as Christine said is useful. It says in many parts of the world incorporating a lady's two females into the labor force is very important and investing more in them. I think it's also of the essence in many parts of the world. Law and order is very important. And so. So I mean there is the good thing about things is that there is a lot to be done.
But there is a wide variety of areas where we come back. And I think it's kind of tough if you make a difference relatively soon. Governor very well it's timing. I mean Jay's right independence goes both ways. Now Weldon and we must respect. That's what we do. I think there's a common interests. That's what I was saying a few minutes ago. And understanding why the trend rates of growth is has fallen because it has in our case it has fallen. Now I don't then for a central bank. I'm not going to stop prescribing what should be done about it because in the good money in most cases that would be outside our remit. But obviously we have a strong interest in the trend rates of
growth. So understanding the trend rates of growth as you know is an important thing. And it's it's something where we can we can collaborate in that sense I think perfectly happily 327. So we only have three minutes. And I mean I'd like to ask you just to close off your power if you're speaking now to the American people to try and help them understand how long it will take for monetary policy to go back to something that resembles normalcy. What would you tell them. I would say that we fully understand and appreciate how the pain people are going through dealing with higher inflation that we have the tools to address that and the resolve to use them. And we are committed to and will succeed in getting inflation down to 2 percent. The process is likely highly likely to involve some pain. But the worst pain would be from from failing to address this high inflation and allowing it to become persistent. PRESIDENT GHANI DITO GOVERNOR very absolutely. I
would just add one thing that is to Jay's point in Christine's points about understanding the pain. This form of inflation is even more painful for those on low incomes because it is concentrated in the essentials and in energy and food. And when you look at the consumption baskets of different groups of income groups of the population suddenly. It's the lowest lows and the lowest income or most concentrated of those things. But is that you know that is very difficult and something that obviously is very sad. We have to do everything we can because as Jay said if we don't if we don't get it but talk it the
consequences are worse. All right. It's three thirty p.m.. So thank you so much for joining us. Thank you so much for a great panel. Get off the gentlemen. Follow me and I got you Soundstage. That was Bloomberg's Francine Lacqua moderating a panel with Fed Chair Jay Powell. ECB President Legarde Christine Lagarde Bowie Governor Andrew Bailey and the Bank for International Settlements a general manager US Augusten Carstens from Central Portugal. It was a really wide ranging hour and a half interview. The markets moving during the hour and a half. It really felt like central bankers were sticking to their knitting. And you can see that evolving within the equity market. Flat on the day we were a bit lower but relatively flat. We are
seeing some money come into the bond market and some money come into the dollar as well as two commodities. You have yields moving lower particularly on the back. And the overwhelming message really from all of them is that we will feel pain here as we bring down inflation. But it's gonna be worth it because if we do anchor inflation expectations that's going to be a lot worse. How do we get there. There is a lot of vague conversation about that and how the models are working also was really up for debate within this wide ranging panel. Guy. Yeah and the relationship between the markets and central banks remains a confused one was my take away from this. Certainly the markets feel like in some ways they are leading. But Fed Chair
Jay Powell talking about the fact that they didn't feel like it from where he was sitting in terms of the the the process of bringing demand down so that supply can catch up. That is basically what power was talking about. He believes that that doesn't necessarily imply a recession. Nevertheless you look at market pricing and that certainly is pointing us in that direction and you look at some of the recent data which would seem to take us there. The question is how deep will that recession be. Is it a shallow one. And if it is a shallow one is that enough to push inflation out of the system. So a lot to
think about a lot coming out of that. The markets obviously hanging on every word from those central bankers. Let us pivot back to a little earlier on in the conversation that Francine had with them and hear a little bit more about what the Fed chair Jay Powell said a moment ago. If what we see for example is that Reid's vision of the world into competing geopolitical and economic camps in a reversal of globalization that certainly sounds like lower productivity and lower growth. And in many parts of this side of that you see you see aging demographics. So a shrinking workforce. And you see economies that are growing more slowly and whose workforces are not expanding. So that's some that's certainly a possible outcome I think probably to some extent a likely outcome. And in the shorter term can the economy. Can the U.S. economy actually deal with a possible onslaught of interest rate hikes. So the U.S. economy is actually in pretty strong shape. So if
you look back a year the U.S. economy grew more than five and a half percent. It was really the big reopening here. And so we had expected this year to be that that growth would moderate to a more sustainable path. We also of course are raising interest rates. And the aim of that is to slow growth down so that supply will have a chance to
catch up. We hope that that growth can still remain positive. But if you look at the strength of the economy households are in very strong financial shape. They've still got a lot of excess savings from from you know forced savings from not being able to travel and things like that and also from fiscal transfers. So households are overall not not every household and not not the ones at the lower end of the income spectrum but overall in strong say the same thing is true of businesses. Very very low
rates of default and things like that. Lots of cash on the balance sheet. The labor market is tremendously strong you know still averaging very very high job growth per month. So overall the U.S. economy is in is is well positioned to withstand tighter monetary policy. We think it is automatically a tradeoff between fighting inflation or taking care of the economy. And how far are you willing to go with interest rate hikes. So I guess I'd say it this way. Our
aim is to is to have growth moderate. It's a sort of a necessary adjustment that needs to happen. So that again supply can catch up. It could be supply of workers. It could be it could be time for the supply chains to you know to improve. So the sense of that is that if we can get right now supply and demand are really out of balance in many parts of the U.S. economy. Labor
market being a big example of that. We need to get them better in balance so that inflation can come down. And that's the aim of what we're doing now. We don't have precision tools. Obviously monetary policy famously a blunt tool. That is our aim. That is our intention. We think that there are pathways for us to achieve that to achieve the path back to 2 percent inflation while still retaining sustaining a strong labor market. We believe we can do that. That is our aim. There's no guarantee that we can do that. It's obviously something that's going to be quite challenging. And I would also say that the
events of the last few months have made it significantly more challenging thinking there particularly of the war in Ukraine which has added tremendously to inflate inflationary pressures around food and energy commodities and agricultural chemicals and industrial chemicals and things like that. So it's gotten harder. The pathways have gotten narrower. Nonetheless that is our aim. And we believe that there are pathways to to achieve that. And I veterans a power from the ECB forum on central banking in central Portugal let's get more reaction now and bring in Michael McKee Bloomberg International Economics and policy correspondent. Hey Mike it really seemed like all the central bankers they were doubling down like we are going to inflict some kind of harm on the economy. But it's worth it because in place An is getting deep. Anger will be eased the even bigger risk. Did you learn anything new. Nothing really new in terms of
anything that would affect the markets or any kind of change to what you think the monetary policy path will be. Perhaps the only new thing we heard was Christine Lagarde saying the new anti fragmentation tool would be discussed at their next meeting on July 20th and 21st. First time she's put it a time in a second. But in terms of where they are what they're all saying is uncertainty is key. We do not know what is going to happen to the overall economy because we've had a series of shocks. We did not anticipate.
And that touches on the fact that our models were wrong because we didn't anticipate the supply shocks that we got. So we have laid out a path now that we think will get us to a place where inflation comes down and eventually gets to 2 percent. But there's a lot that can happen between now and then. And so we might have to tighten more. We might have to go too far. There will be pain but it's much worse if we let it go and like inflation get embedded in all of our economies. Mike the real question I think the market's now trying to grapple with is yes you want to get inflation to target but that's not something that's going to happen overnight. As you say it's going to take quite quite some time to get that. Do we understand how long it's going to take to get there and when the central bank is going to know whichever central bank it is they are on the right track and have the right policy settings and and stepping off of that settings to get to that target. Well
unfortunately the answer to both questions Guy is really no. We don't know how long it's going to take. And the central bankers on that stage made the point because there have been a lot of unanticipated supply shocks. We could have something else happen. We've Covid we could see the war drag on or some expansion of it. Those kind of things will delay bringing back the bring down inflation. But the problem for the central banks is they're all dealing with backward looking numbers. And we saw
during this panel market's level off a little bit and a bond yields fall largely because first quarter GDP in the United States was revised down because of a big downward revision in consumer spending. Now that was January February and March. And so if you're making policy today based on what you thought had happened then you're way behind the curve. Maybe the economy's slowing more quickly. How does the Fed know that they don't. And so that is part of that. The tricky aspect here for all these central banks going forward which I think also then raises the question of their models. And they got the question of can you
adapt policy quickly of inflation like Paul Krugman was talking about comes down faster than we think that they have the right models. Some of them up on the stage like Andrew Bailey or Carstens where a lot more introspective it seemed in front of their models work what they got wrong versus A.J. Power. Did you pick up on anything there. Well their positions have been pretty much that for a while. The Fed's position Jay Paul's position is that the models work given the inputs that they were given at
the time because the models had been based on what had happened for the last 20 30 40 years. Unfortunately everything changed in inflation dynamics as you got these additional supply shocks and the supply shocks weren't accounted for because they were so locked up and so fast. And that's the problem for the central banks is adapting to the possibility of something like that happening again. Now can you adopt your models. That's a question because these are. This was such an out of the blue
oxides. Yunus shock to the global economy. OK. So let's get him the models and let's focus here on the fat model dot plot which is what gives us the clues as to where the individual members of the FOMC thinks things are going to the financial markets. Powell talked about the fact that the markets and the dot plot fairly well aligned right now and the markets are doing some of the heavy lifting for the central bank. But if the models are all over the place that means in theory the dot plots are going to be all over the place which they have been which means that the market can expect significant volatility going forward from here. Well if we're just talking about the Fed you basically have agreement in the dot plot for what's going to happen in 2022. Then as you go farther out into 20 23 24 the dots get farther apart and uncertainty gets greater. And I think what the Fed has been happy about is that the markets have anticipated what the Fed was going to do. And the pricing
now from the markets is about where the dot plot says it's going to be for the rest of this year. The Fed doesn't want to go farther because they aren't sure. They're just guessing this far out where the market is adjusting on a day to day basis. But right now that raises the question of is the monetary policy change getting into the economy faster. Which gets back to that question of when does the Fed know what's going on or does the Fed have to adjust more quickly. I was a little puzzled by Paul saying he didn't think that markets were leading them. They're not forcing the Fed to do what they want them to do but they are
anticipating where the Fed is going to be. And he admitted they've done a pretty good job of that. Which maybe comes back to this whole idea that the policy works with a lag. But maybe that lag in this kind of supercharged superfast environment we're working in is a little less than maybe we all thought it was might be key. Thank you very much indeed. Let us carry on with that element of this conversation. IRA Jersey chief U.S. Rate Strategies the Bloomberg Intelligence
joining us now. All right. What do you make of that whole point about the fact that actually the markets are anticipating and are already kind of where the dots ultimately ended up being. They got there much faster. And what do you think that means in terms of the impact that anticipated policy is going to have on the economy and the role that the market is playing within that. But he has a lot to unpack there in that question but I think no one is there's been a significant shift over the last 20 years certainly since the global financial crisis in the feds and indeed the ECB ISE and the Bank of England's communication policy. So the idea is that they want to basically have the market front run what they're going to do. They want to be as transparent as they can with still owning a little bit of optionality like Lagarde had mentioned as well during that panel that we just we just heard. So I do think that that they're happy that you see higher interest rates being priced for the future. Now what's interesting though is that you know you have seen today during the during the speech that you did have seen
the yield curve start to flatten just a little bit more. And part of that is in anticipation that central banks are going to continue to be hawkish but the economy will slow in the future. And that's why you have very flat yield curves. Now why the yield curve in Europe has flattened quite significantly over the last couple of weeks. And the U.S. yield curve is likely to invert just because at some point even if we don't go into a technical recession we will have to have a substantial growth slowdown in order to get inflation down to reasonable levels. So IRA it really feels like the central bankers reaction function to that is to ignore it. I mean you basically had better day powers like the yield curve as part of our input. So is the dollar. But we don't really pay that much attention to it. What's going to happen when the market's kind of front run that
they start to start pricing in say rate cuts in 2024 because of the risk of recession. Well we're actually already pricing for that now. And in fact if you look at the DOT blog the dot plot shows that to write the Federal Reserve thinks that that in general you'll have a peak interest rates next year. They'll start to cut a little bit in 2024. And then and then the neutral
rate is somewhere around two and a half percent. So they go up to three and a half and then they come back down to two and a half over time. You know I think that that the foot for the Fed the market has to be a little bit of a signaling tool. But right now and I think Jay Powell you know it was very clear a couple of weeks ago he reiterated this today the economy in the U.S.
and particularly the labor market is very strong. So the point that we've been trying to make is the Fed right now only has a single mandate normally does to full employment and stable prices. Now it can just focus on that price mandate because the labor market is so strong. Mary Daly yesterday and on an online stream mentioned to like look at unemployment going up a couple of tents is something that we expect to happen. B And we kind of need to happen because we need to get demand a little bit lower and we need to get inflation down. And that has to be our priority right now because it's the bigger problem than the
labor market at the moment. IRA when will we know if the market believes that a recession will be enough to get inflation out of the system. Huh. Yeah. We might not know that till next year. In fact that was just the way your team was just looking at what the market is pricing for inflation at year end. And we are still expecting that the market is still expecting year on year inflation to be over 7 percent in December of this year. So not coming down as
quickly as a lot of forecasts suggest in the economics lands landscape. So really we might not know until you know next year sometime how effective a lot of this monetary policy is in. Any central banker will tell you there's long and variable lags. Mike McKee was just mentioning that maybe those legs are a little bit shorter. I'm not sure that they are. I still think that it will take a substantial period of time for some of these policies to filter through the economy in part because of some other things that were mentioned on the panel. You still have household and business balance sheets that are very strong. You have excess savings built up that can be used to make purchases for some period of time but eventually that ends. And it's really unclear how quickly all of that excess savings is going to be going to be spent. And as long as it's still in the system
you can still have inflation. It's a little bit higher than the Fed's comfort level. IRA what's the level of confidence in central bankers and their models. There was a lot of conversation about that. Yes markets as well. But also it just in their models and kind of where they went wrong. And I ask that because if they don't really know where they went wrong then nothing really know then how to get it right and how to adjust policy in the same way and as flexible if inflation does wind up coming down quickly. If we do hit some kind of recession what's your level and the market's level of competence. Well you know I I I have a lot of models for a lot of different things. And you know we all take them all with a little bit of a grain of salt because it's all garbage in garbage out. So you can't predict everything. Right. So every single model that we have we
know that there are things that that shift in paradigms. We know that there are things that that you just can't forecast. Right. We can't forecast a war. We can't forecast you know supply chain issues at the port of Los Angeles. Right. Those are all things that that are to these models and you have to be aware of. But ex ante you can't forecast them right. You can't forecast and
exaggerate shock. And that's always the challenge exposed because you you need to react to those exaggerated shocks in some way that maybe you're not sure what the what the sensitivity of your policy is going to be to the resolution of those shots. And I think that's one of the points that that that central banks are trying to make is that they thought that all these supply shocks were going to go away. They didn't. Now they led to demand shocks and now that means inflation at least priced by the market is going to be more persistent than they hoped. Hey IRA such great analysis as always. Thank you so very much. IRA Jersey. Bloomberg Intelligence. Thank you for joining us dissecting that and made a panel that we've had there. This is Bloomberg.
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Cryptic broker Voyager Digital issued a notice of default to three arrows after failing to get repayment on a six hundred seventy five million dollar loan. A consulting firm plans asset sales including three arrows holdings encrypted stock items. And that is your latest business. Thanks Alex. Thanks so much Riddick. And I think that guy this goes to sort of the heart of the issue when it comes to crypto is the contagion effect. Like we all know that there's not enough space for all these guys to exist in the crypto world but it's who lend to whom who's going to get repaid and how that affects their business models and the systemic risk if there is any that we need to be paying attention to. This is the thing that we don't know around. They slow down what is systemic and what is not. Now clearly coming out of the GFC
we tidied up a lot of the issues around what is systemic around the banking sector the traditional financial sector but it's moved elsewhere. Clearly crypto is going to be one area that I think central banks regulators are going to have to pay a great deal of attention to what is going to be the systemic effect here. We've already seen obviously huge moves lower already in terms of asset prices. But do we fully understand yet the implications of that. The lines that are connecting some of these financial elements of the system still unclear to my mind at this point. Yeah. And also I think the question then becomes how correlated are these assets going to be to the rest of the market. So as rates rise we'll do more than get shaken out. We don't know that correlation yet necessarily either. I think we have some idea of
it. Clearly they are more correlated than we first thought. I think that probably is maybe true. We'll talk more about this obviously as we work our way through the rest of today's session and continue to see maybe some of those effects showing up. Up next we're going to be talking to tech Christie's Spirit Airlines president CEO. Big day coming up for that airline closes next display but.