00:00Before we get to the decision tomorrow, I do want to go back to kind of the the bad old
00:05days, if you will, of that sort of remain is this is this where you want me to make my
00:10apology because we did write those papers, but we did not include sections on risks to the policy and how
00:18to exit.
00:19OK. And I think in retrospect, there are risks and in particular, it's hard to get out once you're in.
00:25Well, let's talk about the exit. I mean, they finally came out of it, what, in early 2024.
00:30I mean, they're still only, you know, in the one percent range, but that's a huge turnaround.
00:34As you sort of grade the progress that they've made, particularly on the monetary policy side, do you think that
00:41what has happened so far in this two, two and a half years since they came out of the negative
00:47rates has been, if not a success, certainly constructive?
00:50It's enormous progress because you have to put the central bank within society at large.
00:57And Japan is leading the pack with an eight for most macroeconomic distinctions.
01:04So that is an eight very aging population.
01:07And for an aging population, low inflation or deflation isn't such a bad thing because it's transferring income from the
01:16young to the old.
01:18Well, it's not an accident that they live so long without it, with it.
01:24And it's to the credit of the Bank of Japan that they were able to manage an exit or at
01:31least a renormalization of the stance of policy.
01:34Well, let me just bring this home for a second.
01:36I mean, because you were at the Fed's monetary affairs division when we were sort of experimenting with our own,
01:42you know, zero, near zero interest rate thing.
01:45And, I mean, we seem to have avoided, I would think, I mean, you can correct me if you're wrong,
01:50that deflation trap that Japan was in.
01:51I know we didn't hold that line as long as they did.
01:54But what was the difference between what the U.S. did and what Japan had done in all those years
01:58prior?
01:59So there's a couple of things.
02:01One is don't undercount the size of the shock.
02:04Yes, the great financial crisis has great in its name for a reason.
02:10But the overinvestment in property and the bust in Japan and the banking crisis was enormous.
02:19And just as Japanese banks were getting somewhat better, they got hit by the Asian financial crisis.
02:25And so it was a string of crises hitting an open economy.
02:32But it's also the case that Japan, as distinct to the U.S., is under-diversified.
02:40They hold—the Japanese household owns way more yen-denominated securities relative to the appropriate risk-taking.
02:52In the U.S., that means—not the case, and it means we've got an external discipline.
02:58The dollar moves, capital investors shift from place to place.
03:05Being under-diversified means it's harder to put that pressure on Japan.
03:10So sort of the interesting question you're asking about Japan is, gee, all the hallmarks of crises coming, why didn't
03:20they happen?
03:21Because they're under-diversified.
03:24So, Vincent, you have a hawkish BOJ on one side and a hawkish Fed on the other.
03:28It almost makes you think which central bank will be winning when it comes to the dollar-yen trade.
03:31It also makes you wonder how Secretary Besant is going to keep a lid on 10-year Treasury yields.
03:38An important reason 10-year rates are rising is a worldwide phenomenon, including the renormalization of rates in Japan.
03:50And if it's all central banks raising the tide to short rates, it's going to put pressure on 10-year
04:01yields.
04:01To your point, at today or as of 2 o'clock yesterday, it's much harder to see an opening of
04:12spreads at the short end because it's going to be the Fed and the BOJ that are raising rates.
04:19Let's talk about the rate path moving forward.
04:21The SEP implies that the Fed may be content with just two hikes.
04:24Do you think that Fed officials are underestimating the potential for the unemployment rate to decline?
04:29I think there's lots of risks to what the Fed did.
04:33And with regard to the summary of economic projections, I would note that one participant didn't include himself in the
04:40survey.
04:41And I would think he's the most important one, Chair Warsh.
04:45What I heard yesterday was a chairman in charge.
04:49It was a unanimous decision.
04:51It wasn't front-run by leaks to newspapers.
04:57He got his board on board, even though he's probably the most hawkish member of the board.
05:02And the reasons he articulated for policy tightening weren't closed, i.e., it was about getting the return of inflation
05:14and gold timelier.
05:16Well, you can always do better on that.
05:18He said financial conditions were still accommodative.
05:21He seemed pretty sanguine about the prospects of spending staying above trend.
05:26And he kept regretting all the misses, the 66 months in which inflation has run above Fed gold.
05:35That sounded like somebody was going to tighten a few times, not just what's in the path for the summary
05:42of economic projections.
05:43And that seemed to be what the market wanted to a certain degree or another, some confidence that there would
05:50be sort of a real effort to sort of tamp down inflation.
05:53I guess the question is, is it going to be measured enough where whatever damage to the labor market and
05:59the broader economy will be minor relative to the gains that we might make fought through a disinflation cycle?
06:07Well, I think the issue about incidences you're raising is really important, both in terms of spending and in terms
06:15of prices.
06:16On the spending side, it's not clear to me that the major impetus to aggregate demand in the U.S.
06:25is that rate sensitive, i.e., spending on capital goods to support new technologies.
06:33And so if you want to slow spending and can't slow that part of it, you've got to put a
06:38bigger crimp on the rest, i.e., housing.
06:42The second part is, if you're just impatient, if you just think that some parts of the consumer prices aren't
06:52– inflation aren't slowing enough, you've got to put more force to the rest of them, i.e., 60%, 70
07:00% of the consumer price basket is sticky.
07:0370% is in the Atlanta Fed's measure.
07:07They're slow to adjust.
07:09They're inertial.
07:10Lots of services.
07:11Lots of habit and rules of thumbs in pricing.
07:19So inflation is slow to adjust lower.
07:23If you're impatient with that, then you've got to make the fast-moving prices go down even.
07:30You have to reduce that inflation even faster, and that could therefore make the impact of monetary policy quite uneven.
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