It wouldn't be Jackson Hole if
I wasn't doing an interview without you. Well it's a delight.
It is. Well I don't know how much of a delight it
is for the Fed though. Jay Powell is giving his the traditional
Fed chair chairman kicks it off Friday morning.
People are putting a lot of weight on this speech.
They want him to be clear about where they're going and where they are now.
What is the challenge for shape how well they want him to be clear.
And clarity is the name of the game today.
Because we have had so many changes during the past year during the past
decade and now is the time to project clarity to the financial markets.
And I believe that Jay Powell is perfectly capable to do that.
And I expect him to do that. What we have is we have inflation that
is much above what anyone expected. And what we need to do is to break the
back of it before it gets engraved into contracts into wages before it is deeper
in the economy. The immediate problem always sees you
have a relative price rise because of the shock of this one or another.
And the challenges to ensure that it is not spreading itself like a fire in a
broad area. And this is where the faith comes in
because the Federal Reserve like all central banks the main mission is price
stability. And the main strategy is RTS Partovi.
You need to be ahead of the curve and they'll fall.
The Fed has been a little bit behind the curve.
This is the time to both project that you are committed to to deal with the
inflation but also demonstrated not in words but in actions.
And they have done it up to now. Well in terms of how they got from and
Tessa battery to looking at transitory inflation what happened there.
Is that something else that that Jay Powell has to address in this speech.
Well I think that they did focus on transitory versus permanent has been
misplaced because the issue is not we are not observers or fair
flow of information and say this is temporary or this is permanent and only
if it is permanent we act. I think that the role of the Federal
Reserve and of central banks is to ensure that shocks that can become
permanent are actually becoming temporary.
And the action of the Fed can ensure that this will happen.
One of the issues for J. Palin's colleagues is that Marcus just
don't seem to quite believe the Fed is ready to do this.
Maybe bond yields rise for a while but then they rally again.
Is it a lack of credibility. Is it bad communication.
Is it just me harder now. They let inflation get out of control to
get to this people that they can get the job done now.
Well we are now in a very unique situation.
Well many of the shocks are new all coming at the same time.
We have energy. We have pandemic.
We have supply chain. We have a wall.
We have food. Some things that the Fed can do very
little about. What the Fed is to ensure is that it
does not create a spiral that is healthy credibility and healthy stability.
And I think that this is why the Fed needs to be now much more front loading
than before so as to ensure that you are coming ahead of the curve.
And I would not worry about all the shooting with interest rates for a while
to build up credibility to reduce the lagging behind the flock.
You have been because you have been a little bit lagging behind.
This is the time to accelerate you like in a convoy when you are put behind.
On the gears go to where you want to be and start cruising at the pace that you
want. So I will not be a avails to a more
dramatic actions in order to ensure that next yield.
And we when we talk we would speak about the inflation that was OK.
Inflation that the Fed prevented from spreading.
How aggressive is too aggressive though Jacob.
Because we spoke with Joseph Stiglitz this week and he said the rescue run is
that you actually exacerbate inflationary pressures if you move with
too steep and too long and too aggressive.
This is rate cutting cycle run rate hiking cycle I should say because that
this incentivizes the investment needed to solve the supply chain snarls.
Do you think that there's a good reason to that argument.
Well I think that A given the risk reward situation of the present.
I think that the greater risk is losing the fight against inflation.
And this is the time to build the credibility and move forward.
In fact markets will welcome a signal that says I'm going to ensure price
stability. Look we are now at interest rates that
are clearly below what they should be in the medium term when inflation is so
high. Real interest rates is so negative today
that I would not worry about the debate of quarter percent half percent three
quarters of a percent. The reality is that even if you go three
quarters of a present you will have still a distance to go before you bring
the stance of monetary policy to neutral.
Remember it's not only interest rates. We have had a very massive expansion of
the balance sheets of the Federal Reserve and of other central banks.
And we have had also huge stimulus that has been injected into the economies.
When you put all of it together I think that the balance of risk today is more
inflation rather than less inflation. How closely are you watching China when
it's been such an engine of global growth over the past decades.
Do we need to be more concerned that the new normal of slower growth is going to
be a global drag as well. Well China is the most serious issue.
The world can grow without Russia. The world cannot grow without China.
China is the biggest trading partner of every part of the world.
We have seen DAX to ordinary havoc of supply chain of what happens when China
is stepping out of the situation. And therefore I think that normalization
of relations with China and ensuring their ongoing economic and financial
relationships is key. The fact is that China's growth as you
have indicated is going to be much lower than what it has been in the previous
decades and not marginally so much lower.
And therefore it is important that the world is not adding to this stress but
rather a accommodating growth and making sure that China stays an integral part
of the world economic system. Final question can the Fed reserve avoid
recession. Is it going to have to push so hard that
that does become likely now. And that's and that's what they have to
do and that's what markets need to hear. Well that's why the challenge is so big
because the shocks to the economy that create downside risks whether it is the
energy whether it is the supply change whether it is the food whether it is any
of those things that we were talking about out to the downside.
And therefore yes there is there are now built in slowdown or recessionary
tendencies. Let me only say that inflation will not
add to will not solve the problem. Inflation would only add to the
challenge. And therefore I would not even start
thinking about tradeoffs. Why don't you give up a little bit on
inflation. Because we need growth.
It has never worked. And you know well there was a central
bank from the Bundesbank president ultimately.
Amy Gail once said if you flirt with inflation you end up Mary.
So we really don't want to get married to the inflation we need now to ensure
that the world's stability is maintained.
This is the key for growth.