FED, ECB, Joe Matthew discussed on Balance of Power

Automatic TRANSCRIPT

Take as well, powered by more than 2700 journalists and analysts and more than a 120 countries. I'm Joe Matthew. This is Bloomberg. Thank you so much, Joe. Well, we're hearing a fair amount from members of the Federal Reserve this week about what they think about interest rates and they seem to be pointing maybe towards 75 basis point rate hike later this month. The same time we actually heard from the European Central Bank this week, they did the 75 basis point. The first time they had ever done that. To take us through the economies and the central banks on both sides of the Atlantic, welcome now, Stephanie kelton. She's Professor of economics and public policy at stony brook university. So professor Kellen, thank you so much for being back with us. Let's start with Europe if we would. I think maybe a toss up between 50 and 75. They went with 75, they indicated more is to come. What are they facing over there? What are they trying to deal with? Well, they're trying to deal with inflation, the way countries all over the world are. And what they're facing though really is just a very acute crisis. And they know it. And it's largely an energy crisis. And so while on the one hand, you have the ECB and Christine Lagarde explaining, you know, we're going to be very aggressive. We've done this unprecedented 75 basis point hike. At the same time, she's pretty candid about saying that this is not likely to do much in terms of getting at the core driver of our inflation problem, which is energy costs. So they're using the blunt instrument, which is the only real tool that they think they have. And they're doing it while recognizing that it is likely not going to provide the kind of relief that everybody wants to see. Well, that's my curiosity, actually, because it's not clear to me how raising rates will take down the energy rates as long as president Putin is doing what he's doing. At the same time, they started copying a rock and a hard place. They have to do something. They feel they have to do something. So, you know, it's this tendency to just really rely so heavily on central banks. I mean, after all, central banks have the mandate. It is the Central Bank, both here in the U.S. with the fed and in Europe with the ECB that is supposed to be in a sense in charge of fighting inflation. So if inflation is a problem, we look first to the Central Bank to deal with the problem. And the reality is that everyone from Jerome Powell, the Christine Lagarde and other central bankers have told us pretty candidly from the beginning that when you are facing inflationary pressures that arise from the supply side of the economy due to the pandemic, oil price shocks and the light, that their toolkit is not well designed to deal with those sorts of problems. And I think if you read between the lines, what they're basically saying is we could use some help on other fronts, right? There's another policy lever. There are other things that we could be doing to try to tamp down inflationary pressures. One of the big stories right now, obviously, is currency. And what has happened in the U.S. dollar hitting new records actor record against just about every other currency. In part, perhaps you go to the energy situation, maybe also because of some divergence on monetary policy. What do you make of the U.S. dollar and what it is doing right now? Is it going to keep going? It looks like it will. I mean, I don't see reasons to believe that the dollar is on the verge of softening against other major currencies. In fact, I think the strength will probably continue afoot. I think the Euro will continue to weaken the bank of Japan seems not terribly bothered with the strengthening of the dollar Vis-à-vis the yen. So I think the dollar can rip higher. I think the obvious problem, really, is for the rest of the world, especially emerging markets, many poor countries heavily indebted in U.S. dollars. This has the potential to lead to debt crises in other parts of the world, sub Saharan Africa, we've already seen what's happened in Sri Lanka, but countries like Argentina and even Ukraine are vulnerable to these to the increased strength of the U.S. dollar. Stephanie, what do you think the fed thinks about where the dollar is? We had Bill Dudley, the former president of the New York fed on earlier on Bloomberg, and this is what he had to say. He thinks maybe the fed wants this. The fed actually wants the dollar to be relatively firm because a stronger dollar restrains economic activity. And it reduces inflation because it reduces the cost of import imports into the United States. So the fed is not unhappy with the dollar strength. This is just part and parcel. One aspect of how you tighten financial conditions. Professor, do you agree with the bill Dudley? Do you think the fed wants that strong a dollar? I do. I do. I don't think it does a lot of heavy lifting in terms of reducing inflationary pressure, but no question that it helps. I mean, the reality, David is that when I look at the way things have unfolded, let's say for the first half of the year. And what I think lies ahead, what I see is inflation stepping down and signs that to me suggest that we're going to continue to see inflation coming down in the second half of the year. You can say that a strong dollar helps with that. It surely does. You could also argue that a recession helps with that. I prefer not to see that happen. I think if you look at delivery times, they're normalizing. You look at the number of unfilled orders normalizing. You look at transportation costs and rail and frayed containers and air all coming down nicely. Those costs are coming down sharply. The New York fed supply chain pressures index is normalizing. You got companies with few exceptions, but you've got a lot of companies announcing either hiring freezes or layoffs. Many people describe the housing market as already in recession and the strong dollar adds to that. You've got a lot of fiscal drag. You've got Janet Yellen telling us we have substantial fiscal drag in place. So you combine all of those things. And I actually think that we have had enough tightening. It's enough. But the fed doesn't agree. The fed wants to see credible evidence of inflation continuing to come down month after month for some period of time. And until they see that, they're going to continue hiking. And we'll have to deal with the fallout. That's certainly seems to be where they're headed. Thank you so much, professor, always really helpful to have you on that Stephanie kelton. She's stony brook university Professor of economics and public policy. Coming up, we're going to be joined by Jane harman, president emerita of

Coming up next