John williams is speaking, saying the fed is monitoring money market developments. Be sure this will be part of the conversation all week this week, and bill dudley and a couple of moments. Markets, the dax down. Pmi data in france and germany disappointed, driving the stoxx 600 lower. Poundro weaker, as is the , 0. 5 percent versus the dollar. A bloomberg surveillance special event, former new york president bill dudley. We welcome all of you worldwide. Special moment a conversation with william dudley. , not ayou back 14 years , bill dudleye shockingly pressing a. Press against that was when tim got her said come over to the fed desk and help us with the shortterm markets. Bsnot were killing to get in school. The only b is the one in microeconomics, so im not sure hes qualified. I dont know if we want to go there about grades. We might want to figure out his grade from the new york fed. This was bill dudley on bloomberg opinion. The fed can handle the reaper market, saying the following, one of the most important Interest Rates has had a tumultuous week, and the aberration has critic concern. My advice, dont worry, the fed can handle it. Lets start with what happened last week. Things,nday, two Corporate Tax payments september 15 and settlement of treasury auctions move money from the private sector, banks to the treasurys account at the fed, draining Bank Reserves from the system. Started to seee upward personal repo rates. That spilled into tuesday. The pressure was significant enough to push the federal funds to 2. 30 , so the federal funds rate was trading out of its range. Things happening at the same idiosyncratic, or more structural . The bank has to find the appropriate level of reserves. Is that what we are working through . The fed has shrunk its Balance Sheet. Growing nowance is that the debt limit issue is being resolved, so the number of has beenbeens shrinking. The Federal Reserve does not know how much Bank Reserves thanks need to satisfy the new liquidity requirements and how generated. Will be plenty of their wares reserves, but now, reserves demand, reserves supply, so there is a shock to the system. The trust market a shortterm paper. You worked in the trenches with your Goldman Sachs market experience, new york fed with geithner or, and you said the fed does not know. If the fed does not know, does that potentially affect trust . I dont think so. We always knew there was demand for reserves, but could not reserve how much because there was more than sufficient reserves in the system, so there was always a point where we saw upward pressure on shortterm rates. When we reach that point, the fed knew they needed to add more reserves, and thats what we saw the past week. One complaint is they werent quick enough. What is your response . Would beone day it nice if they responded more eventy, but this is an for markets, not the economy. Emerging theive , and12 months, you left this new york fed is different under williams. It is not as sensitive as markets. I dont except that. Defendant John Williams and the fed, please. We knew demand for reserves would equal supply, and when that happened, we would see upward pressure on rates. That is what happened last week. That is the other thing people dont appreciate. It is not one person at the top of the Federal Reserve. There are hundreds and hundreds of qualified people that execute Monetary Policy on behalf of the Federal Reserve. Where are we today . We are in a good place. Repo rates are where they should be. Mission accomplished. We talked to someone from citigroup, he said the same thing, everything is fine. It is a kerfuffle. A sizable part of our audience are flatout worried, or even dont agree with the idea the Balance Sheet of the ecb of the has moved tohe fed 14 trillion. They want a reassurance that that is a good place to be, rather than the nostalgia of moving back to a previous Balance Sheet regime. If you move back to the previous regime, the Federal Reserve would have to intervene massively in markets on a daily basis. I dont think that is a good regime. In the current regime, if you have enough reserves, you dont have to do anything daytoday. The Interest Rate you pay on excess reserves thats money market rates. The federal funds rate traits within its range. We need 400 billion is the plugin number now . People dont know how Much Research you need, but i think the fed will build a bigger buffer. In time, there is the prospect of two things. Number one, they will increase the size of their Balance Sheet. Chairman Jerome Powell talked about that. The Balance Sheet will grow again. The second thing they will consider is introducing a standing repo facility. Whenever there is upward pressure on rates from the facility can do repo and that would take away risk of a big upswing in shortterm rates. Many people picking up on the expansion of the Balance Sheet. A lot of people are saying this is not qe. This is totally different. I want you to run us through by the expansion of the bow she is definitely not that. Secondly, how you can adjust the operation of that Balance Sheet expansion to ensure people dont believe it is that. If you are adding reserves to keep shortterm rates from exhibiting upward pressure, that is different than adding reserves to push down longterm rates. , taking longer maturity assets to person longterm Interest Rates, trying to have enough reserves in the system to prevent upward pressure on shortterm rates without adding reserves to the system, so the goals are different. One thing the fed could do is make it clear this is not qe is to expand the Balance Sheet, not by buying treasuries and securitys across the yield curve. Is the central bank constrained by a trillion dollar deficit . Germany, a desire for fiscal expansion. Limited by a you tree deficit . There are lots of reasons why you might want to worry about the longterm fiscal capacity of the u. S. Interest rates will probably not stay as low as they are today, and the retirement of the baby boomer generation, some medicare and Social Security costs, but it does not put constraints on the fed. Have you spoken to the fed and the last week . No. Hes going to tell us. Have you spoken to the fed and the last week . Its important to let the president do the job. Mei have had people come to and said the morale is not good in the new york fed and there is a lack of leadership. I cant comment on that. This interview has come to a screeching halt. A lot of Market Participants were concerned the new york fed did not come in on monday and waited until Tuesday Morning. I think this is a nonstory, i really do. If the narrative is being shaped is new york fed under williams is not on top of the markets the way it is wasnt a you, there is a problem. Im not concerned about it in the slightest. We have had this testing within the hyper complex market. You went from Goldman Sachs over there, even bill dudley had a learning curve and certain elements of the planning. Everybody has a learning curve. I want you to speak to our audience about confidence and linkage of his plumbing into Global Banking system trust. How do we get from point a to point b . Point b. E gotten to the market is behaving well. The federal funds rate is trading within its range. It is all about outcomes. The outcomes we see today are fine. I think you look at this month from now and you will have a different view. Over the weekend, questions about major banks reticent to or funds orre money securities as well. Is that a behavioral aspect . When there is a shortage of reserves in the system relative to demand, people are surprised. When they were surprised they said maybe i should be more worried about reserves in my account. When you have a surprise like this, the demand for reserves extend thease and stress in repo markets. The interview could get more tense because we have to reflect on an oped you wrote a month ago. I want to take a quote and ask you to clarify it. It was the conclusion of the original oped that cut a lot of peoples backs up. Difficult of Monetary Policy is to achieve the best longterm economic outcome from then fed officials to consider how it will affect the political outcome in 2020. How much pushback could you get when that cut published . There was some misunderstanding about what i was trying to say. What were you trying to say . The main point was to point out the fact that President Trump was trying to have it both ways on trade. He was pursuing a trade policy with china that posed a risk for the economy, and sang at the same time if the economy is performing badly, it is the feds fault. I wanted to make it clear that major risk to the economy is trade policy, because trade uncertainty about investment and supply lines and things of that sort come in the fed needs to make it clear that Monetary Policy can only do so much about that. I think the fed has made it clear over the last weeks. If you look at chairman pelz press conference come he talked about trade uncertainty, about how it is not something the fed can easily address, and that was desirable. I thought people would be sympathetic about that view. I think that is the part of the oped that people were sympathetic with. Trying to be provocative. You were certainly that. Notion thatcept the the feds goals are maximum price to build that over the long term, and the premise that this trade war might not be good for the economic outlook, then logic would say there is a question should be fed take this into consideration. At the end of the day, i made it clear in the second piece i wrote that i dont think the fed should take this into consideration when setting policy. If the fed were to do that, they would become politicized and people would react by taking away the independence of the fed. You think the fed has become politicized . It has because of the president s attack on the fed. There was an academic piece that just came out, and they did a of the effect of the president s tweets on the federal funds market. They found the tweets were causing people to reduce expectations about the federal funds market, so the fed is already politicized in the sense that people are not sure now if the fed is easing because that is the appropriate policy path or because of pressure from the president. That politicization is coming from the president. But also that politicization and at peace came from you. The i ask you to talk about new york fed, you are keen to say that former new york fed president should not comment on the current new york fed president , but by mentioning 2020, do you appreciate how you have compromised your corner former colleagues . I think they would do what is appropriate for the economy. If i was in their shoes, i would do the same thing. I want to talk about the chairman including powell had a good press conference. There is still this thing about William Miller in a nonphd chairman. How is chairman powell doing . Are there elements that he is not a phd so there is a different cadence to what this chairman says . I said repeatedly you dont have to have a phd in economics to be a successful policymaker the fed. I think chairman powell is proving that. Whatnk he understands Monetary Policy needs to do. I think he is thoughtful. It is all about judgment. Right. Confidence in someones judgment is what is critical. I have confidence in chairman powell. If we assume the assumption of any given chairman, i can a president tweeting in early 2008. This chairman is being buffeted from all sides. Fromdoes he need to hear vicechairman clara and the other phd economists at the fed right now to drive forward to a better policy . The core group of leaders that the fed, clara, williams, and powell are all on the same page. Are they . I think so. What about the dots . I think a lot of people hate these dots, and the fed is starting to go that way as well. Why do we still have them . Once you move to greater transparency, it is hard to pull it back. The fact that how people interpret the dots, it is a modal forecast of what you think will happen, but does not capture the uncertainty about the economic outlook. The reality is are you going to do what you think is the most. Ikely outcome they would change in a way that pushes you to different policy. It does capture dissent in a fractured reserve. We see that in europe at the ecb as well. Pushback signal, the from the policymakers at the top getting in response to the slow down . I dont think there is a big split in the Federal Reserve. The big question is the economy is doing fine, but there are ookks to the economic outl caused by trade uncertainty. In that environment, you take out insurance or not. Some people think you should take insurance, and others not. There is something a lot of people still struggle with. Why do lower Interest Rates help to address the tensions on the back of the trade dispute . Numberink they help in a of ways. They make financial conditions more accommodative, stock markets, bond markets. It probably takes upward pressure of the dollar. At the margin, it is not wellsuited for trade uncertainty. Its not like the fed cuts 25 basis points in trade uncertainty gets resolved, but it supports the economy in other ways. Road are 12 years down the from 2007, 2 thousand 8, 2009. End . Does this when does the financial repression end . Big,are going to say this dudleys experience, geigers experience, bernankes experience, it has not worked out for the common good. When do we escape from this . I think that is at really negative interpretation where we are. We are at a low Unemployment Rate. The fed is close to their inflation goal. Fair. I think the reality is if you could stay here in terms of employment. Until we clear the trade war, is that the key issue . That creates the biggest Downside Risk to the economy, for sure. It is the biggest growth scare of the last 10 years, 12 years. The previous two at the fed have been had fakes, manufacturing, anything you see here that is different from the expansive 2011 through 2016 . Ofthe president has a lot control over what ultimately happens. The second thing to stresses the household sector is in really good shape. Jobs are being created, wages are rising more quickly, household confidence is high, and households have not taken on that much debt. The Household Debt through the cycle is totally different than the last cycle. The reason why people are nervous is because of the great recession. Is that risk is pretty much off the table for two reasons. The sector is not over extended and the Financial System is in better shape. The thing i wonder is all this discussion that we speak of every day on bloomberg surveillance is the rationalization of a new terminal rate. Jp morgan and others have been good about this. Goldman sachs had a house call of lower gdp way out front of many others as well. It is all of this rationalization we will have a Financial System to get to a new nominal rate, new terminal rate, a new real rate, and a new Unemployment Rate . It is just a different statistic from our childhood. Case,t seems to be the real Interest Rates consistent with the neutral Monetary Policy is distinctly lower today and in the past. If you look at the old tailorable formulation from a real Interest Rates consider neutral was 2 . Now people think the real Interest Rate consider neutral 0. 5 . Ser to 0 to fedprojections the publishes, the long terms nominal medium rate is 2. 5 , centerpoint five inflation, much lower than in the past. What is your rate on gdp and how much is the president affecting that with his trade war . Much is hard to know how the trade and certainty is cutting growth, but it is having negative consequences for investment spending. As tariffs get ratcheted up, it will bleed into consumers as well. I am pleased to say you think the neutral rate is still positive. Were getting a lot of questions about the prospect of negative Interest Rates. We have been in denmark, switzerland, japan. Is that something you could see working, just operationally working in the United States . I think you could operationally do it come up at you saw the fed did not go down 2013, andn 2011 two the experience with negative Interest Rates around the world has been mixed, set the bar for the Federal Reserve a negative Interest Rates in the u. S. Is really high, especially given there are other tools available to stimulate the economy, qe, for guidance, and policy as well. Guidance . S forward is it in the economic graveyard . Do we go back to true data dependency . You need for guidance when you are at the zero lower bound for Interest Rates. You dont need for guidance for other rates. It is meeting to meeting. He cant tell you what hes going to do next because it depends on the Economic Data. The Economic