Odd Lots - BONUS EPISODE: Bloomberg Surveillance in Jackson Hole

Episode Date: August 25, 2023

Bloomberg Surveillance comes to the Odd Lots podcast!  Listen for a special edition of Bloomberg Surveillance from the Federal Reserve's annual symposium in Jackson Hole, Wyoming. Hear more from Bloomberg Surveillance on Apple or Spotify.Guests in this episode:Mohamed El-Erian, President of Queens' CollegeTracy Alloway, Co-Host of Odd LotsPatrick Harker, President of the Federal Reserve Bank of PhiladelphiaKristalina Georgieva, Managing Director of the International Monetary FundSee omnystudio.com/listener for privacy information.

This is a special edition of Bloomberg Surveillance in your Oddlots podcast feed. We're in Jackson Hole, Wyoming, along with Joe and Tracy, covering the Fed's annual symposium. Keep listening for conversations with Peterson Institute President Adam Posen and Philadelphia Fed President Patrick Harker. That's coming up on this special edition of Bloomberg Surveillance. This is the Bloomberg Surveillance podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz, join us each day for insight from the best in economics, geopolitics, finance, and investment. Subscribe to Bloomberg Surveillance on Demand, on Apple, Spotify, and anywhere you get your podcast.

And always, on Bloomberg.com, the Bloomberg Terminal and the Bloomberg Business app. Perfect guest for reaction to this speech is Mohamed Al-Aren of Bloomberg Opinion and Queens College, Cambridge. Mohamed, thanks for being with us and being with us through that speech as well. What were your thoughts when you heard some of those words from Chairman Powell just moments ago? I had three takeaways, John. First, it's a speech that said very little that is new. He repeated what he has said in the past and he has retained maximum policy optionality.

Second, he reminded us that with the exception of the inflation target, which he said is 2%, and remain 2%, everything else is uncertain. And his reference to our star in particular was very interesting. And third, what I thought was also curious is how he ended the speech. He ended his speech talking about

we will follow the stars in a cloudy sky. Everybody sees the cloudy sky, but what's interesting is that the west of Jackson Hall will be about moving stars, all the structural changes that are going on domestically and internationally. And that just adds

to the topic that the three of you have been talking, that it's a very complex world out there, and the Fed has to navigate a lot of moving pieces. Mohammed, one conversation you and I have had over the last several weeks, the last several months for that matter, people are having this discussion here as well. Are we, from your standpoint, in your opinion, sufficiently restrictive? John, this goes immediately to what is the right inflation target.

If the right inflation target is 2%, and they want to get there, in a credible period of time, then we are not sufficiently restrictive. If the right inflation target, as you've heard many people say, including Adam Pozen today, is above 2% giving all the structural changes. And the way we're going to get there is not by announcing the new target, but by following a shadow target, and then once we see it stable adopting it, I think that's the most likely outcome, by the way. then we are sufficiently restrictive.

Mohamed, does it concern you that we've heard a lot of people who sound pretty happy, actually, other than Jay Powell, who is taking sort of the adult tone of, we're not there yet, stop declaring victory, there's a lot more down the pike. Everybody else sounds like things are going really well, and the Fed policy is achieving exactly what it sought to. So I don't think it's everybody else, but most people are, especially in the marketplace, not so the economist. You have Larry Summers, for example,

reminding us this morning that if you look at the 70s inflation cycle, this one looks very similar. He has two graphs up, and he's sort of warning implicitly that we may see a pickup in inflation. So I think the marketplace is much more complacent than the economists are. The economists recognize that there are many moving pieces, whereas the marketplace thinks that we've gotten to a new equilibrium. and from here is going to be cut next year. That remains to be seen. Do you think, Mohammed, that it's important for the Fed to get ahead of a potential resurgence

and inflation? Or do you think that Jay Powell's approach of watching the stars and seeing what they are will be sufficient to curtail some sort of more embedded inflation? It's hard, Lisa, because as you know, they have not, like past feds opted for strategic view of inflation, nor... do they have a functional monetary policy framework? So they've become highly data dependent, which means that they are using instruments with lags

on backward-looking data. So they are in a bit of a tough situation. They're going to remain data-dependent. So I don't think he knows what they will do in September. He's going to wait to see what the drop report is. He's going to wait for the CPI numbers, and then they're going to decide what to do. But this is the irony.

It's a highly dependent, data-dependent Fed using instruments that act with a lag. Plenty of feedback, Tom. This coming from Neil Dutta of Rememak, just published in. Sure, please. Send the following. I thought Powell delivered a neutral speech. The Fed sees its monetary policy stance as restrictive and will make a more tempered approach to future meetings. Proceed carefully, risk management.

These are all cash phrases for do nothing right now. The view from Neil Data just moments ago. A lot more response coming in here, a mixed market, red and green. on the screen. Dr. O'Aerian, I want to touch upon your iconic work-in-game theory, and that the word that I'm hearing this morning is complexity. I heard it from you. I heard it from John Lipsky and others. The simplicity we're all begging for is T-Decisions. You are known for this. This is a Jackson Hole devoid of T-Decisions. How do our viewers and listeners handle the complexity now and to come? Tom, I think the most important thing to understand is that we have left the world of insufficient demand, and we are now in a world of insufficient supply.

And there's many reasons for that. It's a world that's not going to go away anytime soon. It's not pandemic issues that are fully reversible quickly. There are longer term issues going on, change globalization, supply change management, the functioning of the labor market, and the list goes on. So we are now in a different world of supply side constraints. And that world will mean that countries will become more inwardly looking, which we've seen already. It also means that policy has to adjust to that. Now put on top of that, the layer of industrial policy as we embark more meaningfully on a green transition. And it's all about the supply side, Tom. And that's where monetary policy is really challenged.

because it acts on the demand side. We're thrilled, Mohamed, to have Dr. Gorgieva with us, and then you and Christine Lagarde with us later. In the heart of the matter is, are we beyond the supply shocks of this pandemic? Where are we on that continuum, Muhammad? Have we escaped COVID? I mean, we've escaped the worst of COVID, but we're dealing with the legacy of COVID.

But we're also dealing with the legacy of the war. We're also dealing with many other legacies. You know, Tom, it's fascinating that you will have President Lagarde on, because if you think the U.S. is complicated, then in terms of degrees of complexity, Europe is even higher. The U.K. is even higher than that. So it's going to be really interesting to talk, as you will do, to President Lagarde, because even though she has a single mandate, her environment is significantly more complicated than the feds, which is already complicated. So, Mohammed, she is so much more exposed. Europe is much more exposed to what's developing in China at the moment. Mohammed, if you took the US out of the equation right now, and we'd be talking just about Europe and China, wouldn't we be talking about things like rate cuts and easing

and stimulating the economy? If you take the US out of the equation, you would be talking about stagflation. And that's what everybody is afraid of. The US is exceptional. and it's exceptional in its economic performance. And if you take the US away, then you're taking away the only engine of growth

for this global economy, but you're not taking away the supply side issues that are causing the inflationary pressures. So if you take the US away, we would be talking about not just the risk of stackflation in Europe, but you would be talking about the risk of stackflation in the global economy. Mohammed, is that the risk or the reality in Europe right now?

John is still the risk, You know, yes, Germany is struggling the most, and that is, if you like, the engine for Europe. But there's also good things happening in Europe away from Germany. It's a high risk. It's flashing red, not even yellow. It's flashing red. But it's not yet a done deal. The U.S. is much better off. China, ironically, is the one that's suffering the most. Have you been discussing all morning, there is no obvious policy. your response, and now these piecemeal responses are being rejected by the marketplace really

quickly. The marketplace is no longer embracing the notion that China can get itself out of the mess, finds itself in. And that's perhaps the cause of the manufacturing recession that we see in Germany and parts of Europe. But the services side, we've been talking about how that's maybe more directly affected by the ECB's policies and where rates are, and the more direct transmission mechanism than in the U.S. Jay Powell just said that there is evidence that the long and variable lags are coming to the fore and will actually reduce growth materially in the U.S. Is Europe a model where the U.S. is headed with respect to services in the next couple of months

or in the next year? I hope not, Lisa. Our service sector has been stronger. And even though the PMI numbers this week were disappointing, at least there were over 50 for the service sector. We don't want PMI's south of 50, or 50. And also, ironically, the service sector is where Europe gets a tax inflation as well. It's not the good sector.

It's a service sector that's the source of an inflation problem. So I hope we don't follow Europe, because if we do, then we will be talking about a very different outlook for the U.S. We're still still talking about the potential for some sort of weakness down the pike. One thing that Jay Powell's speech did was seem to remove rate cuts in the near future. at least for the foreseeable future, and you can see that shifting upward in the rate expectations. Do you think that this economy

can handle a 5% Fed Funds rate for the remainder of next year, even with all the strength that you're hearing about? Lisa, we don't know, and he did use the word agile, and that's absolutely correct. He's got to be agile.

Look, there are all sorts of sectors that are just with a lag. We haven't seen the full impact yet of the higher rates. you're starting to see it play out in various segments, but in a very small way. Remember, not everything gets refinanced immediately. This is very unlike the UK economy where the effective duration is much shorter. So you get refinancing quickly, and the rate effects happen much quicker.

So we don't know how well we can navigate the 5%. It seems that the big issues in the banking sector are behind us, But so far, and it's really important to stress this, we've dealt only with interest rate risk. We have not dealt with credit risk. We have not dealt with liquidity risk. And that's what people in the marketplace have to keep an eye on. Stuart Kaiser, a city publishing just a moment ago, give you a flavor of what's happening on the south side. Not a gain changer for markets from Chair Powell, but remind us on upside risk to inflation that demand downside risk to growth. Mohamed Al-Aerian is still with us. Mohamed, I just want to finish on that with you. the downside risk to growth to counter the upside risk to inflation.

Is that something we all need to be cautious of going into year-end and beyond? Yes, and that's why Chair Powell had a speech full of optionality. You know, I go back to what Mike McKee correctly said. It's not that the content was new. It wasn't. There was nothing in that speech that we didn't know before, whether it was explaining what has been behind inflation or whether it was explaining the range of,

policy possibilities and the risks and the need for risk management. All that has been said before. What was notable this time is that it was packaged, slightly more hawkish than Dovish. And that's what people are picking up on. But ultimately, John, if we step back, the only thing he said is that what we know for sure is his belief is that 2% is the right inflation target and will remain the right inflation target. That issue. is going to be hotly discussed in the next quarters as we get more and more data. Yeah, Mohammed, I don't think that debate's going away anytime soon, even if Chairman Powell tries to put it to bed. Mohammed, thanks for being with us today.

Appreciate it, as always. Mohammed al-Aryan. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini. We'll bring you the latest headlines, in-depth analysis, and big interviews.

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It will be analysis and interpretation. Owning the high ground on that is Joseph Wisenthaw in terms. Tracy Allaway. They host a podcast, Oddlutz. Allaway had to redo her fireplace mantle because the awards have come in. Oh, right. They're piling up. Yeah, they're piling up. You mean, my Wysenthal already had a mantle that could hold 300 pounds. In New York City. Joining us, Tracy Alloay from Alitz. Wysenthal would not get out of bed this early this morning. What I love about your work back at the FTA and years ago is you own a perspective of London. New York and synthesizing the Western world. China and an exceptional Japan with Uweda in attendance here in this YCC disaster just had to listen to his hawkish one. How does Asia interpret what we heard

this morning? Well, I'm kind of confused at some of the bond market action that we've seen. So two-year yields going above five percent hawkish interpretation, but I'm on the Neil Duda's side here, which is this was a very doveish speech, actually. Powell sort of gave a nod to the R-Star debate, the idea about whether or not the neutral rate of interest is structurally higher in the current world. But then in the next sentence, he basically goes, but we have no idea what R-Star is anyway. So it's completely irrelevant. And they're talking about being at restrictive already. That's not a small matter, John.

Yeah, that's not a small matter. This has come up a couple times today. The guy from New York City, you know, the private equity guy, whatever Paul is, he's not too big on the plight. and the plug-ins of our start. Tracy, something you've discussed, this probably shouldn't come as a surprise, should it? I don't think so. To me, it very much resembles what we saw last month from Powell. It's very much a data-dependent speech, which makes sense,

because you have two major data points coming up before the next Fed decision. Why would Powell stick his neck out at this particular moment in time? And, of course, there is a lot of uncertainty about those long and variable lags, as you were talking about, Lisa. Well, and this is a problem right now for Jay Powell, because he wants to bring things down, but he doesn't want to curtail dynamism too much. Do you think that it seems fair to view his speech as saying that rate cuts are not in the cards for a longer period of time next year? Because that's maybe what he wanted to say in the implicit sort of tone, but not what he actually said.

I think he'd have to see a real deterioration in the underlying data to justify a rate cut. And that's just not happening. We have a lot of sort of anecdotal data points about maybe consumers. spending is starting to weaken, but we haven't seen any of that in the unemployment rate, right? Now, that said, I know the tone of this particular Jackson Hole is very different to last year where Powell was talking about how we'd have to assume more pain in order to bring down inflation, but that said, it's still a really uncomfortable moment for central bankers because inflation is coming down in a way that they didn't necessarily expect, right?

The Phillips curve says that if inflation's coming down, the unemployment rate should be going up, but that hasn't been what's happening. So there's still a ton of uncertainty here. This is essentially, while it is global central bankers coming together, it's also essentially an academic conference. You're here with odd laws to speak to some of the academic research. What are you hoping to illuminate in this whole shifting global structure that was sort of a theme? Yeah, that's exactly right. So I know that the focus is always going to be on the sort of short-term outlook for interest rates. But really, Jackson Hole is about the long-term framework of monetary policy. And one of the big themes that is starting to emerge is this idea of higher public

debt. And we've seen that borne out in the Fitch rating cut recently, bond yields higher because of some concerns over the outlook for U.S. fiscal health. And again, the unusual thing about this moment in time is that we are seeing massive fiscal spending at a time of low unemployment. That hasn't really happened before. And so I think there are a lot of people at this conference who are wrestling with that idea and that dynamic. You and Joe Weis have rock star hours. You just sort of wandering and you do your podcast and you do it by piecing together conversations where Bloomberg surveillance is complete and total chaos 24-7. What's the conversation here you're most looking for into your next podcast? Well, thank you for assuming that all thoughts isn't constant chaos as well, Tom.

Well, we're having you on later today. That doesn't count. No, it counts. Please. You are. What's a conversation you want right now at Jackson Hall? Okay, the big picture goes back to that bond outlook. What does a world of structurally higher debt look like? Does it necessitate higher interest rates? And what new financial risks does it introduce into the system? So we basically moved from a system that was very much reliant on bank lending to one that is far more bond-based. And how do you square a world where bonds really, really matter with central bank mandates to

bring down inflation. There's a tension there. You can't build the financial system on bonds and assume that they're going to be very low volatility and then try to bring down inflation and have higher rates. Tracy, this was great. It's good to have you here. Thank you. Thank you for having me. Thank you very much. Tracy Allaway, the host, the co-host of the Oddlots podcast. Joining us is Patrick Parker, the Philadelphia Fed president. Patrick, good morning. Let's start right here, not what Chairman Powell said, but what your colleague over at the Boston Fed said in the last 24 hours. So this resilience of this economy suggests maybe we might have to do more. You take a different view. Why?

So look, we have to get inflation down to 2%. We all agree on that. I mean, everybody is, we're all committed to that. The question is, is how to get there. We are at a restrictive stance in my view, and we're putting pressure on the economy to slow inflation. The question is whether we need to increase the pressure or just keep pushing, pushing, pushing. And I'm in the camp right now, just keep the pressure going, let this work through. Again, the data may dictate that we change course, or I change course, but for right now, what I'm seeing, and what I'm hearing, particularly soft data, what I'm hearing, I've been

around my district all summer talking to people, is that the plea I hear is you've done a lot very quickly, right? You've taken a lot of pressure quickly. Now let us work through that. Let the banking system work through it. Let the corporations work through that. So I agree with that. I think we just keep the pressure on and see how things turn out.

Jay Powell didn't really say anything new, but he did sort of cast it in a hawkish light. And he talked about how the economy is perhaps growing faster than anticipated, and that could increase inflationary pressures. So what would it take to get you to change your view and think we need to raise rates more? If we saw that the decreases in inflation were stalling, right, that we weren't making that progress that we need to make. But how would that manifest itself? Because people who calculate CPI, the analysts, suggest we're going to see it go back up just essentially for mechanical reasons. On the headline side, yeah, for sure.

But we're going to see shelter inflation come down, right? It's coming down now. You see this with real-time rents. So if service inflation in particular, or core service inflation, whatever you want to call, super core, if that continues to stall, then I'd say, we have to do more. But again, I really want to emphasize, we are doing something right now. It's not as though keeping rates where they are is doing nothing. We're actually continuing to put pressure on the economy. You said, and Jay Powell just said that it was important to get inflation back down to 2% that was unequivocal. Does it matter when? I mean, right now, you can see in the dots that it's not

until after 2025. If it takes until 2030, does it matter? Oh, yeah. 2030 is a long way off. Yeah, it definitely matters. So our view is like, we're going to get under four this year, under three next year, and then get to two in 2025. So, yeah, it's going to take some time. But what really matters, what I hear all the time is not just a headline, not just super core, but think about the essentials of life, the things that people really need, shelter, food, transportation, energy.

As long as they're moving in the right direction, Americans are better off. And we need to be committed to that. You clearly think we're sufficiently restrictive. Other people think we don't. So let's go through that points. Unemployment is still 3.5%. Growth this quarter could come in at about 3%. Yep.

What is the evidence that we're sufficiently restrictive? What can you actually point to beyond the soft data? Let's talk about the real hard data. So inflation is starting to soften. We are hearing story after story I'm hearing of... And you think that's connected to where interest rates are right now? Yeah. Labor markets are definitely easing up.

We're hearing this over and over again. It's easier to get employees. And the retail numbers are a little... suspicious of because what we're hearing, for example, from a major supplier to the back to school market is sales are not what they expected. So we are starting to see these early signs, but they're early, right? And so I don't think we need to react either way right now. Just let this ride a little bit. Let let it let's just keep putting the pressure on. Well, if you keep the pressure on, but even don't raise rates, how long do you need to keep the pressure on? When would you see

moving away from the peak? Clearly not until next year at the earliest. And when next year, again, the data will have to dictate that. Well, there is a question about if inflation keeps coming down, real rates continue to rise and put additional pressure on the economy. Would you see the Fed recalibrate its peak rate to keep the pressure steady as opposed to letting it grow? I realize this is a fine point for the markets. And if you say this the wrong, if you say this the wrong way they're all going to start pricing in rate cuts. Look, it's possible, right? But at this point, we really need to see inflation moving down. And we're seeing early signs of that, again, and I'm getting story after story from all our contacts that it is starting to happen. But I want to

keep rates where they are right now. And then we'll decide later what we do. What do you think is happening with labor market wages at this point? Because that was the big concern, especially with J-PAL's non-housing services. These guys were talking about the United auto workers negotiations going on. Have we broken the back of rising wage wages rising at too fast a pace? Too early to tell right now, but it does seem like what I'm hearing from all our contacts is that it is starting to ease. Right. I mean, we're not where we were where mid-year increases

they're there. Nobody's considering that. So we are starting to see some easing. Particularly in the service area, you know, hotels, restaurants, and so forth, we are starting to see it getting a little easier to get the table at the restaurant. And, you know, and one of the things that I think about, one of the potential risks, is that when student loan payments come back in, I don't think it's a big economic issue. I mean, when you run the numbers, but it's a psychological issue. Here, I've not gotten that $3, $400, $500 bill. Now I get it.

And so I've been talked to a lot of people of that generation who are saying, yeah, I may have to back off some of my spending. Well, but this goes to this question of, okay, well, the savings are going to get borne down, and then we're going to start to see the real economy expose itself, right? A lot of people have questioned that. But I am wondering what kind of neutral rate, what kind of, you know, sort of longer-term expectation for the Fed do you expect in the new normal? What does it look like?

Yeah, so we don't know for sure, right? Let's start there. We don't know exactly what that new normal looks like. But one of the things I think about is what, fundamentally shifted in the economy between before the pandemic and now. Remember before the pandemic? Hard to remember for all of us, right, given what we've been through. But we had low interest rates, low unemployment, and low inflation. What's fundamentally shifted? There have been a lot of things. Supply, we're going to talk about this in this meeting. There's supply chain issues that are

shifting and being re-engineered. But fundamentally, I don't think. I think it's plausible. We can get back to that? No, I'm not predicting that right now, but it is plausible. So I think we have to realize that we lived in that world. We've proven that that can happen. And so could it happen again? Yes.

Sounds like a base case when I listen to you. Is that your base case? I don't know. I mean, at this point, I'm not quite sure. But clearly, we're going to get, we think, and we'll get back to trend growth in a couple of years. We'll get inflation under control in a couple of years. And inflation and unemployment will tick up, but really in the four-ish range, back to the neutral rate. You've offered example after example in the last eight minutes.

It's highly anecdotal. Is the beige book now more important to us than U.S. retail sales? When I step back and I think about myself, and I can only speak for myself, right? When we were going through the early part of the pandemic, and we were saying that inflation was transitory, it was just used vehicles and so forth. What we're hearing, what I was hearing from my contacts, was now really it's more persistent. And I didn't factor that in. The mistake I made, if I made a mistake, was I didn't factor that really soft data, that anecdotal data. But it's more than anecdotal data.

It's what people are really feeling real-time in the economy. Now, we've done a lot of things, like done real-time pulse surveys and so forth to get ahead of that now. I don't want to make that same mistake twice. And so what I'm hearing right now from those same contacts is things seem to be slow. more than the data is showing. That could be wrong. That's why we have to, as Chair Powell said, risk management is an important issue here.

But if they're right, if that soft data is right, then I think it really then just solidifies my view that we stay putting pressure on, not necessarily increasing right now, to see how that all resolves itself. Nerd question for our friends on the trading desk out there, especially the bond guys. the balance sheet has been coming down, but very slowly because of the caps and the way that works.

You haven't hit maximum reduction yet on a month-by-month basis. And at the same time, we have seen financial conditions remain easier than you would expect. So the question is, do you do more with the balance sheet because it has an effect on how tight the policy is? At this point, I don't see us changing course on how we're reducing the balance sheet. Again, circumstances could dictate something else. But for right now, I think we just stay the course, keep that on, as I've said many times before, on autopilot, just let it run. And if we need to adjust policy, we adjust that with the Fed Funds rate. Well, there has been a question on the other side of how close you are to stopping balance sheet reduction when you reach the level of demand.

Yeah, I don't think we're there yet, but we do clearly have to monitor that. If you go back to the last time we did this, we knew we were at that point where we needed to stop and we saw the market indicators, the volatility in the market. We've not seen that yet, but we could. We have seen real yields climb significantly. Today, five-year real yields, inflation for adjusted yields, rose the highest levels going back to 2008. Are you watching that closely as an indication of the transmission mechanism of the balance sheet runoff? Sure. Yeah, I mean, that's one of many.

And it's also just simple trading and things like the Fed funds market and so forth. Not at this point. I mean, but it is clearly something we need to keep watching. Can I finish on this? It's slightly provocative. Have you destroyed the mortgage market in America for a generation? I don't think so. Why not?

Well, it is clearly tough. When you talk to bankers. Beyond tough. People are locked into mortgages at two handles for the rest of their lives. First-time homebuyer, really, really hard because there's no inventory. Right? Even if they could afford the mortgage, they can't find a home because people are locked into that low mortgage rate, you know, in their existing home. That's why I think we don't keep going with rates, right? It's that we can stay steady. And at some point, as we reduce rates, we can bring those mortgage rates back down. There's no question that's initially. But we're not going back to 2% mortgages over 30 years, have we? Yeah. So that inventory is offline, maybe for a generation.

I'm less... You're not there yet? Yeah, because what we're hearing from some of the home builders is they keep selling. Oh, they're having a great time. They've done that a huge favor. I'm talking about whether this housing market can really recover in the next several years, given that this feels quite generational. This feels like a really tough time.

There's a lot of inventory coming online. I can tell you, in Philadelphia and across many cities I know, but Philadelphia, for example, a lot of multifamilies coming online in the next few years. So we are increasing inventory. Patrick, it's good to see you, as always. Thank you, sir. Patrick Harker, the Philadelphia Fed President. The first reaction there from inside the Federal Reserve following that speech from Chairman Powell. This is Tom Keene, inviting you to join us for the Bloomberg Surveillance Podcast. It's about making you smarter every business day.

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And on the West Coast, listen as soon as you wake up. That's the Bloomberg Surveillance Podcast with Tom Key, Paul Sweeney and me, Alexis Christophores. Subscribe today, wherever you get your podcasts. Bloomberg Surveillance, essential listening each and every business day. What we're going to do at Jackson Hole right now as we begin in the sunrise at this important Friday is take a more international perspective. She is not here at Jackson Hole, but in heart and soul, her institution, the International Monetary Fund decisively is.

Kristina Gorgieva joins us, the managing director of the IMF. offer a recent essay on what everyone's talking about, the fragmentation, the fracture of the global economy. Dr. Gorgiava, congratulations on the essay that you and your team put together for foreign affairs. You speak of fragmentation. How urgent is the need for solution right now? What needs to be done now to begin to a more stable global economy?

It is urgent, and that sense of urgency is lacking. Tom, why is it urgent? Because we have moved in a more shock-prone world, in a world of more uncertainty. And in this world, we need each other even more than before. And yet, cooperation is in a retreat. What does that mean? It means that unless we wake up and we act pragmatically in the areas where we can, can find common ground. And in the areas where we must find common ground, like the fight against climate change, we will drift into a world that is poorer and less secure.

We have run the numbers unless we wake up and we pursue this pragmatic collaboration, we are going to be losing about 7% of global GDP in the long run. I mean, that is like wiping out France and Germany from the economic map of the world. Because of time, Dr. Gorgave, it's so important I get this in this morning.

I want you to speak right now to the four major central bankers assembled here and Jackson Hole. The singular call this year is the five-year caution of economic growth of your institution. You call it globalization. How do those four central bankers assembled here get us out of globalization? It is not going to be only the job of central bankers, but yes, they play a role.

And their role is to be very careful in assessing how data informs their actions. We are going to see, Tom, after a period of convergence in monetary policy action, tightening rates, fighting inflation, some divergence because where the U.S. economy is very resilient. I was listening to this discussion just before me. The European economy is not. There is less strength in the performance over there. So central bankers will have to recognize that some specificity in how they approach the fight against inflation and how they link this to their role in supporting growth and employment,

how they approach that is going to be a matter of total assessment of national data. Let me just make one point about the United States. What we see in the U.S. is very strong demand for services. Very good, but not good enough for the world economy because it doesn't translate into spill over for global growth. And this is why my main point is there would be some divergence in policy approaches across central banks. Cristina, is fragmentation inflationary? Of course it is. Why? Because how much so? How much do that be considered? If you take the main impact of fragmentation through trade, what is the?

What it translates into is pushing cost of production up on a global scale. How inflationary it could be depends, of course, on how that specifically reflects into cost structures across national economies in the world economy. But the pressure on costs, and then through that on standard of living of ordinary people, comes when we fragment the world economy. Christina, I just want to squeeze this in. I've got about 60 seconds, 90 seconds left on the clock. You've said the IMF needs more resources.

Can you be a lot more specific about what that means? What do you need? And where do you expect those resources to come from? Well, let's face reality. More shock-prone world means countries need to have more capacity to face these shocks. Today, global reserves are concentrated in a small, number of strong advanced and emerging market economies. Ten countries hold two-thirds of global reserves,

and all the small, medium-sized countries hold less than 1% of global reserves. This is where the IMF comes in. We are the insurer for the uninsured. Today, our size, $1 trillion lending capacity, is just not enough to be the bubble against future shocks that we all anticipate are going to be happening. And also what we want to see is reliance on own resources.

We are discussing with our membership to bring the quarter resources of the fund again above 50% of our funding level. Today they are at 40%. So we are talking about a not a minor increase, but I think everybody understands that this is a provision of a global public good. If the IMF cannot hold financial stability in vulnerable countries, that is hurting not only those countries, it has negative spillover for the world economy. The IMF managing director.

Christina, thank you. It's going to hear from you. Thank you. This is a wonderful moment now as we go to that speech with the central bankers gathered here on, yes, U.S. economics, but of course, international economics, and they will listen more to Barry Eichen Green of Berkeley than anyone here. He owns the high ground from Golden Feders, his classic book on gold, until what we see with globalizing capital and now his intense focus on debt and the debt mess we're in.

Dr. Eiken Green, thank you so much for joining us. How bad is the debt mess we're in? Well, I think it's a big change from the pre-COVID days. Governments are going to be constrained if and when we have a global recession, if and when a bad thing happens. They have a lot less room to run fiscally because of the increase in public debts worldwide. As usual, you've been out front on this, and the phrase that I hear from you, and you say it with respect to the institutional pressures and our political leaders, the modern medicine that we have. What is the more stronger medicine we need to take to get control of our debt

in our ratios? I think we're going to have to learn to live with these high levels of public debt that the advice policymakers are getting from the bank for international settlements and the IMF about bringing down debt ratios. That's unrealistic. We're not going to be able to grow out of these higher debt ratios. We're not going to have a more favorable real interest rate going forward than we've had in the past. We're not going to be able to run primary budget surpluses for long periods of time. So I think we're going to have to tiptoe lightly through this problem

and manage these heavy debts. Tiptoe, your words, manage. Other people might say, this ends in disaster. Barry, what's the argument against that? For countries like the United States, there is a big, remains demand out there from foreign central banks and the international private sector

for U.S. Treasury bonds. So I think the U.S. government is an exception to the general rule in that it has room to run. Other governments are going to have to reform fiscal institutions, worry about fiscal transparency, do all the things that the IMF and others have been recommending for years. Does it basically suggest that longer term yields in the U.S. are where they need to be, that basically the term premium is going to be significantly higher, that essentially what you see is what you get? Well, I think the term premium can come down a bit, but not back down to pre-COVID levels. I think everybody understands that we're in a new world with higher interest rates. The question is, how much higher? And I wouldn't be a pessimist about that.

How much has the debt that the U.S. has incurred in particular driven a lot of the inflation that we see? How much you can really basically write the book and say helicopter money actually does cause inflation? Well, I think the fiscal stimulus that we in the United States did in 2021 was a contributing factor to the inflation. And there will be debate about that today because there were other contributing factors as well, the supply shocks, a variety of other things. Take your study of debt, your view on the inflation-adjusted yield, which is maybe what the adults of pros look at, and bring it over to the Eichen Green application of monetary policy. And there's a whole R-star debate in that. Are we going to move away from a 2% regime?

And how do we search out an anchored level that is higher? Well, I think the Fed has to bring inflation down to 2% before it really opens that conversation. We saw in this recent episode the importance of credibility and credibility and 2% are synonymous for the time being. the only time you talk about changing the regime is when you have everything under control. Let's go down the hall at Berkeley to Brad DeLong's office. You and I are going to walk in with Professor DeLong, and I'm going to say to both of you with your academics and his politic, more political view, what's the price of bringing inflation down to 2%?

What's the cost of that to Americans? Well, so far the cost has been minimal compared to the doom and gloom scenarios we heard about unemployment going up to five or six percent. So far so good. But that's what you're your hallmark. You have been the arch optimist against doom and gloom. And how do you respond to the doom and gloom that we hear daily from Lisa Abramowitz or that we hear out in all of economics? How do you respond to that American gloom that you fought against for 50 years? Well, look at what the Atlanta Fed, now Tracker, is saying the U.S. economy is on track. There's no sign of inflation on the horizon.

Yet in this kind of assembly of economists, there has to be one optimist. Lisa, this is like the GOP today, isn't it? Your name was reference. I just wanted to wonder, you know, at one point, is it unsustainable, this kind of enthusiasm, this kind of growth, right? I mean, at some point, you're not going to get down to 3%, 2%. I'm already changing to 3%. 2% for quite a while, even by the Fed's own admission. 2025.

Exactly. After 2025. Doesn't that reduce their credibility to some degree? They have to have a credible strategy for getting to 2%. So this is the classic, give them a target 2%, or give them a date, never give them both. 2%. Can we think about where it came from? Is this really about some people in New Zealand in the 1980s just coming up with a number?

Is that what we're all doing here? 2%. What is it about 2%? That's exactly what we're all doing here, but history has consequences. Is it amazing? You know, you're dead on. Absolutely dead on. Absolutely dead on.

The first time I think I met you, or it was like within the year I met you, some guy almost took a swing at you on a stage at Singapore. In a G7 meeting, he was so angry with you. How do you respond to, OMG, the dollar's dead, Renminbi ascended? Do you throw chalk at people at Berkeley when it comes up? How do you respond? No, at Berkeley, I don't hear it, but that kind of interchange. You get more intitations.

Do you get, okay, you get some speaking fees off that. Do you suggest the dollar is at risk, given all these stresses? I think the dollar is not at risk yet. So we in the United States can do things to damage its credibility, but nothing that happens at the BRIC summit this weekend will much affect the dollar. You were invited, were you? I would have chosen to come here anyway. The word yet, the word yet is so loaded.

Barry, thank you. This was wonderful. Trudy, thank you very much, Seth. Subscribe to the Bloomberg Surveillance Podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday, starting at 7 a.m. Eastern. On Bloomberg.com, the Iheart radio app, tune in and the Bloomberg business app. You can watch us live on Bloomberg Television and always on the Bloomberg Terminal.

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