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A Decade Since the Financial Crisis: Perspectives on Monetary Policy

Featuring Ben Bernanke, PIMCO Global Advisory Board Member - Jean-Claude Trichet, PIMCO Global Advisory Board Member - Marc Seidner, Chief Investment Officer, Non-traditional Strategies Putting Policy into Practice.

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Marc P. Seidner, CIO Non-traditional Strategies: Good morning to all of you. Let me add my word of – words of thanks to Candice and to others that have come before me and said the same but thanks to all of you, one, for being here and more importantly for the honor and privilege of working with you all and your clients. It’s humbling to sit – to sit before you so – so thank you, thank you all very much.

I’m also mindful that today is the first day of spring and so let me say happy spring to all of you, although for many of you that are traveling back to the East Coast and other parts of the States, I know you’ll probably be engaged with your devices during this session and trying to re-route plan – travel plans and re-book flights and so I hope you have safe onward travels from here.

Also mindful of the fact that it is a year –ten years and a week ago, I believe, roughly, signaled the collapse of Bear Stearns, so here we are a decade since the financial crisis. And while that’s a long period of time and while so much seems so different than back then, there are lingering scars and lingering issues which is, to some degree, the topic of our discussion here this morning with two incredibly important guests.

I’m mindful of the notion that we ended yesterday on a high note with two former presidents and here I am joined this morning with two esteemed policy makers and central bankers. So the topics this morning will range from economic outlook, policy outlook, people, personnel, personalities, the interplay between monetary and fiscal policy, inflation outlook, how we might think about the economic cycle progressing, and how policy may respond in the next economic downturn, those will all be topics that we will touch on today.

In order to cover them, I’m joined with, as I said, two important contributors this morning.

To my far left, your right, is Dr. Ben Bernanke. These two gentlemen need very little introduction but I will be brief in doing so, just so we all have – we’re all on the same page.

Dr. Bernanke is currently a distinguished fellow at the Brookings Institution. As you know, Ben served two terms as chairman of the Board of Governors of the Federal Reserve from 2006 to 2014. He also served as chairman of the Federal Open Market Committee.

Dr. Bernanke has published numerous articles on a variety of economic issues and is the author of several scholarly books and two textbooks including his most recent book, the Courage to Act. He holds a PhD in Economics from MIT and a bachelor's degree from Harvard University.

 

Jean-Claude Trichet to my immediate – to my immediate left. Mr. Trichet was president of the European Central Bank from 2003 to 2011. He was also president of the European Systemic Risk Board since its inception until 2011. Prior to that, Jean-Claude led the French Treasury for six years. He also chaired the Paris Club for Sovereign Debt Rescheduling, the European Monetary Committee, and was governor of Banc du France for ten years. He graduated from the Institut D'etudes Politiques de Paris, University du Paris in economics, and the Ecole Nationale D'administration. My apologies to our French colleagues for butchering their language with a high school education in French.

So with that, why don't we get – ah, we should also note that these two gentlemen serve as members of our global advisory board Ben has chaired it since its inception, so thank you both for being here and good morning to both of you.

2017 marked the first year of synchronized global growth since the financial crisis. So why don’t we start with a recap of 2017 growth, a brief one, and then more importantly, the outlook for 2018. Ben, do you want to start? Lead us off with a review of the US economic conditions?

Ben Bernanke, PIMCO Global Advisory Board Member: Sure. And I think we should take a moment to talk about the little engine that could, which is the US economic recovery.

It hasn’t been a blowout recovery because productivity growth is limited – is paced in GDP gains, but it’s been steady. We are now 105 months into the expansion. The all-time record since 1854 is 120 months that was in the 1990s, and it’s looking like we have a very good chance to break that record.

The recovery has been driven mostly on the demand side by households who are currently in the best condition they’ve been in, financially, collectively at least, for a very long time.

Household wealth is well above – in real terms – the pre-crisis levels. Income is growing with the jobs and wage gains. Confidence is high, leverage is low, all of these things mean that the household sectors continue to be a source of support for the US recovery.

What’s a little bit different in the last year or so, is in the nautical terminology used by some current fed – policy makers, the headwinds that have been affecting the recovery are have been turning to tailwinds. That’s a good thing I found out. There are three of them, in particular, three major changes that have – look like they are going to be supporting growth going forward as well.

The first is financial conditions. Despite the fact that the Feds raised rates five times, the overall broad financial conditions are quite supportive of growth. The stock market, obviously, is raising a lot. Long term bond yields are remaining quite low, historically. Credit spreads have tightened, been tight. The dollar has weakened, which is supportive of growth, so all of those financial conditions have spiked again, instead of tightening, are suggestive of a powerful impulse to continued growth.

The second is the global situation, Jean-Claude will talk about Europe and we’ll talk about this more generally, but in 2015, 2016, US recovery was a bit more questionable because of mixed conditions, globally. Currently we have, as Marc mentioned, a synchronized recovery in Europe, Japan, China, and emerging markets, which is providing support for US exports and manufacturing and for growth.

And finally, the most recent thing which has sort of changed the tone in recent months, is the fiscal actions including not only the tax cut, but also some fairly expansive spending agreements that we're on this week. Congress is racing, as usual, to avoid shutting down the government. I don't know how you run a business where your main goal is to avoid shutting down the lights every couple of weeks, but anyway, that's where that is, but physical expansion is going to be also supportive.

So the near term prospects for growth seem to be ratcheted up. In September, the Fed thought that growth was going to be 2.1 percent in 2018, and in December they raised it up to 2.5. I'm guessing that in the forecast they make this week they'll go to 2.8 or 2.9 which is about a percentage point above potential output so that means that unemployment will continue to fall probably into the mid/upper threes, at a minimum. So we have what looks like the near term of fairly sustained growth.

Recession probabilities are quite low, at least the next year or two. After that, we’ll talk about it, but there – I think are some greater risks, but at least in the near term, we seem to be on a pretty – pretty strong path.

Marc Seidner: Thanks Ben. Jean-Claude, Ben talked about "the little engine that could” being the United States and growth above potential. European growth in 2017 was well ahead of potential. How sustainable is the expansion in Europe?

Jean-Claude Trichet, PIMCO Global Advisory Board Member: Well, first of all, let me say it’s a real pleasure to be here and to have been a witness of the exquisite relationship between Republicans and Democrats, where it’s not absolutely obvious on my own standpoint at the very beginning.

Now, to echo what said Ben, we – the real start of our own recovery after our double dip was Q1, 2013. I would say, approximately, three years and nine month after the trough that we both had in 2009.

So the – there was a – the trough of – the totally synchronized, then the US recovery started, slightly, moderately, but nevertheless, very clearly since then. And we had ourselves, the start of the recovery, in sync with the US, and then the Sovereign Risk Crisis which was double dip, and then we are growing since Q1, 2017.

So there is a quite important delay of three years and nine months between our two recoveries and we have to get that in mind when we reflect on various comparison between the US and Europe.

That being said, I have to say that after start of the recovery, which was quite slow and quite laborious, we have an acceleration – we had an acceleration which surprised quite a lot, I have to say, the global observers, the international financial institutions, and the Central Bank itself.

To give you only one view on that – and we discussed that a lot in the global advisory board here – we had the IMF foreseeing something, like, 1.7 percent of growth in Europe last year. The final figure is 2.5. So you see, there has been a very, very substantial significant acceleration of growth in Europe. So we will see whether it remains at that level, accelerates a little bit, the first quarter seems to be very good but we will see. We do not have yet the figure.

In any case, I note that – because it was not advertised too much, taking into account the fact that your area was considered a laggard for good reasons, obviously, because we had the Sovereign Risk Crisis, but we were growing a little faster than the US.

So there is something which is happening in the Euro area which corresponds, in my own understanding, to the catching up, of course, of the time that we – we are losing with the Sovereign Risk Crisis, to the fact that hard work has been done – at least in the macro policies, not in the structure reforms, but in the macro policies in practically all European countries.

And now they have the capacity to grow, confidence came back in most countries, and that was very important because our problem was really that we – we had five, six, countries that lost confidence, that had lost their credit worthiness and had to regain this credit worthiness. And we have this synchronization that Ben was mentioning. Not only with the rest of the world, which is very good, but also inside Europe. We never had that level of small standard deviation between the growth of the various Euro-area countries. So all this combined makes growth quite, you know, reasonable. Again, nothing to be very proud of. We still have slacks, we still have a level of unemployment, which is much too high, and a lot of hard work remains to be done.

For this year, I would say the projection of 2.4 percent seems to be reasonable. It’s very likely that this catching up – I would say "episode" of '17 and '18, will not last eternally, so all the projections are foreseeing something which would be more moderate and closer to what is, probably, growth potential.

But as I said, the main problem – main issue I see is that we have a macro policy that is still, in my view, a little bit too restrictive. We are posting 3.5 percent curative count surplus which prove that we are reasonably – I would say, competitive, taking into the account that growth is there and growth was substantial, as I said last year, so maintaining 3.5 is something which has a positive side of the coin but also, I mean, we don't need to post 3.5, so I would be more happy if we had more dynamic domestic demand in the Euro area as a whole, and particularly in those countries that have high level of competitiveness and high level of current account surpluses.

But again, main issue, in the long run, is to get back a level of productivity growth that would be much more satisfactory. We share the same problems as all other as advanced economists on that front. And again, we have to achieve our structural reform, achieve the single market, achieve the structural reforms, and that goes for a lot of hard work.

Marc Seidner: Maybe we’ll expand on the globe conditions in a bit – in a moment, but since we are sort of on the – on the brink of the interplay between the economy and policy, perhaps we’ll shift and talk about policy now and Central Bank policy.

The mantra for 2018 has been three, maybe four. I didn’t realize that was snow storms on the East Coast in March. I thought that was supposed to be federal reserve actions, but Ben, talk about – translate the economic outlook from a central banker prospective into the policy outlook for – for the federal reserve. How do you – how do you – how do you.

Ben Bernanke: Sure. So the basic themes are continuity – J Powell is actually Janet Yellen in a disguise we – and he is promised to continue the broad strategy, which is a gradual raising – gradual tightening of interest rates reflecting the recovery.

The question, I think – the immediate question which was raised, particularly in a salient way in his first Humphry Hawkins testimony is: Will the fiscal policy actions we've seen – and the stronger conditions, the tail winds, is that going to pick up the pace a little bit? It's a close call so let me – they're two separate questions, really.

The first is: Will the Fed change its forecast, because the Fed puts out, as you know, quarterly, puts out a summary of economic projects, which include both output inflation but also some rate projections, which are made by the individual members, not by the committee collectively.

But – so they've been projecting three rate hikes in 2018. The economists are generally split, but whether they will go to three or four this week, when they come out of their meeting, my guess is they will stay at three.

I think what we have seen from their communication is that the strength – they've seen recently has strengthened their conviction in the broad path, but not necessarily been enough to push them to four hikes.

I do think they'll probably add some hikes in 2019. And what we're looking at here, and sort of the base case scenario is continued gradual rate hikes, maybe three or so in 2018 – I think that’s sort of where the projections will be.

I also think the actuality will be something like that because, you know, world’s a lot more complicated than these – these simple model projections, and it’s going to be – there’s going to be periods of volatility, there’s going to be periods of uncertainty. We’re already seeing – for example, the first quarter GDP numbers being a little bit disappointing. Is that seasonality? Is that something else?

The Fed has got a lot of time. They don’t have to be in any kind of rush, and so there’s – there’s certainly room to be cautions and to, you know, make sure they have – they are comfortable with the situation for raising rates. So I think, in the end, it will probably be something, like, three rate hikes but the basic – the basic thrust of gradual rate hikes, probably ending up above three percent, is certainly alive.

I should mention it’s actually very telling that no one – there is – you know, almost no one is talking about the balance sheet but that’s going on as well. The balance sheet is being passively wound down. I think that adds about the equivalent of a rate hike each year, so that is some additional tightening as well, but that’s going very well. That will continue. There’s no chance at all that that will be changed so that’s – I think that’s sort of what – what we will see. Again, because the data are noisy, because there is volatility, because marks will go up and down, I think the Fed will be very cautions but will still continue on this path.

One last comment: I’m pretty sure that J Powell, the new chair, will introduce press conferences at every meeting, sometime recently soon. And that will eliminate one sort of artificial constraint on policy, which has been this tendency not to want to move rates except at press conference meeting, and that constraint will go away.

Marc Seidner: And just to stay on that – two follow-up questions on that. Is that a good thing? Is more communication better or more press conferences better?

Ben Bernanke: I think it’s probably – certainly don’t want to have that constraint on the ability to move at different meetings. Secondly, I do think that – you know, people complain about too much communication, a cacophony and so on but one solution to that is to have the chair be more assertive and to express the collective view and so more opportunities for the chair to come out right after meeting and say, "Here is what we've decided," you know, Mario and Jean-Claude did that so well for the ECB. I think that reduces a little bit – in fact, that reduces some of the noise coming from other sources so I think it is a good thing. It's – I have to tell you from personal perspective, it's hard because the meeting is a day and a half, you're working really hard, you're trying to build a consensus, then you gotta go out and meet the press. It's demanding. So that's – one of the reasons not to do eight, but J is very – very big on communication. He said in his very first, you know, video that he wants to – even more transparent, he wants to explain what the Fed is doing, not just to the politicians and the markets, but to the broad public. So I think he will be very focused on that kind of communication.

Marc Seidner: Jean-Claude, you mentioned that Europe, in a very simple framework, is three years and nine months behind the United States. Does that mean the ECB policy is three years and nine months behind the United States? Or is that too simplistic?

Jean-Claude Trichet: At least when you look at the trough, the last trough. But that being said, yes, I think that it is – I mean, certainly not an appropriate projection, but it’s a good grid to understand what’s happening.

The start of the tapering was in the United States after being announced, approximately, three years – at most four years before the start of the tapering in Europe, which was the beginning of this year. Starting from 60 to 30. I don’t consider that the previous 80 to 60 was the start of the tapering it was totally denied by the Central Bank and they said it’s – we are back to the 60 when we introduced the asset purchases. So let’s say that we have the tapering, the tapering in the US lasted something like nine, ten months, something like that.

I expect that it could preview well, last nine month in our case, with the end of this tapering period, end of September this year. It is the present – of course, the Central Bank is not committed to stop the net purchases after September, but it’s pretty possible. And for me, it would look quite likely if we have confirmation of the rate figures, of growth in particular and of the rise of employment in the Euro area.

So if it is the case, then after the interruption of the net purchases of asset in the United States, you had a quite long period before the start of the interest rate increases, and the forward guidance’s more or less the same on both – the previous former – forward guidance in the United States is very clear – we are very close to the forward guidance in the – in the US at the time.

So I expect that if – again, I follow that grid. Again, if things are going the right direction, if there is confirmation that regrowth is there and also, of course, that tensions appear on the side of – of inflation which is, again, the main goal – the main – the primary goal of the Central Bank in Europe, according to the treaty, is to deliver price stability in the medium run.

So again, if you want me to offer you some kind of reference, some kind of benchmark, I would say this is a possible benchmark, of course, I said Ben, data are noisy, the world and the global economy is very difficult to predict.

We don’t know what trade will dawn and the initiative of the United States, in this respect, worrying all of us, obviously, so we don’t know what will be the impact on global growth, what will be the impact on the, you know, your own observation and decisions.

But again, if I make a working assumption that we do not have interruption of this global growth –synchronized global growth in the years to come, I will say what I just said, since it seems to me, reasonable.

Now, let me also say to comment on the – what Ben said on communication. I’ll need to offer you the following: In our case, in the ECB since the very beginning, we thought that press conferences after the meeting of the governing counsel were absolutely necessary. And it was not because we wanted to improve communication, but it was because we were several countries and speaking different languages and if there were not terms of reference given by the chair in an unchallengeable way immediately after the meeting, then you would have had a lot of gossips in various languages all translated in English. They would have been totally contradictory and we would be in a total mess. So, for our own I would say – I would say, for our own continental reasons, a single currency reason, I think we were right from the very beginning to have these kind of communications.

Marc Seidner: Mario Draghi’s term is up towards the end of 2019. Can you speak a little bit about the importance of people and personalities and how impactful Draghi’s successor may be on the path for policy?

Jean-Claude Trichet: Well, first of all, I would say that continuity has been the – I would say the appropriate concept to understand what was happening in – in Central Banks, in general.

All the decisions we are taking collective – collisual decision and you should not neglect that in any Central Bank, in my opinion. Now, of course you have a leadership which is exerted and the leadership counsel, in particularly, in very difficult period.

So I – maybe we will go back to that that, but it’s true that in those periods without the leadership of Ben, we would not be exactly in a position where we are today. And I accept fully that purchasing Greek treasuries, purchasing iration, purchasing treasury ­ ­­– or even Spain – Spanish and Italian treasuries in '10 and the '11 was very dramatic and very, very dramatically criticized and probably at the time was not acceptable, politically, the very moment the decision we are taken.

But with all that being said, I am very confident that the ECB will continue whoever is the next president to have this kind of predictable – I say "policy" which we have observed in the past – I say myself several times, I would have taken the same decisions as Mario took in various circumstances, different circumstances. We were both heavily criticized for the boldness of the decision we took and that's normal. That is part of the responsibility of an independent Central Bank.

Now, to be clear, we have several possibilities. One is that the European heads would agree on, I would say, a person who would not be French, would not be German, and would not necessarily be belonging to a big country. And then, it is possible.

They could agree on a German, and that would create, not in my opinion, dramatic problem for the policy of the – of the Central Bank because, again, the interest of the Central Bank, the treaty primary mandate is there. And whoever is at the head of the Central Bank has to take a decision – an interest of the whole of the Euro area and not necessarily one particular country. And that – what has been done by all of us now, including Wim Duisenberg, the first president, but it is more difficulty that one might have, is if its own public opinion is very, very profoundly opposing. Some of the decision that appear absolutely necessary, but it's a question of which, in my opinion, would not change the overall policy of the bank, and then you could have other nationality, including in a big country.

We will see what happens. I have full confidence that they will take a right decision, also taking in account the fact the other decisions in Europe to be taken up, including the presidency of the commission, including other positions that are important. And of course, when the heads of state and government will discuss all of that, they will probably have in mind some kind of a package.

Marc Seidner: Ben, Jean-Claude talked about the criticism that both of you have faced making difficult – Center Banks, the Fed, the ECB I mean, you faced making really difficult decisions regarding quantitative easing. As you look back over the last few years and given the synchronization of growth, is it – is there any ambiguity in your mind that quantitative easing worked?

Ben Bernanke: I think there’s reasonable uncertainty about how strong it was. Full stop. I think there is uncertainty. And that’s the reason that the Federal Reserve decided to keep short-term rates as their primary instrument and let the unwinding of quantitative easing take place in a very passive and predictable way because they didn’t know exactly – trying to use it in a more, you know, data dependent way would probably not be very effective because we don’t – we don’t know.

So, again, I think there is some uncertainty and there is also some uncertainty about whether it worked primarily through effecting term premia so the price of the securities being purchased, versus its effects via signaling, that is the Feds saying – or the ECB saying that we are not going to raise rates until well after the end of asset purchases as a way of committing to a very long period of low rates so I express these uncertainties.

I think the bulk of the work suggests that it was effective, it did help. Generally speaking, we saw the – simplest experiment is, you know, how did the economies respond? And in the United States and the UK, which adopted these practices most quickly, that saw the quickest recovery. Europe and Japan, for various reasons, adopted asset purchases later, but subsequently after their decisions, they too saw pick ups in economic activity. So, yes, I think it is effective. I think that the Fed thinks it’s effective. I think it will be in the toolkit the next time we have a serious downturn.

But again, it’s also true that we simply don’t have the same kind of confidence and knowledge about its affects that we do for short term interest rate movements.

Marc Seidner: We’ll come back to the next downturn, and perhaps what is left in the policy toolkit in a minute, but, Ben, you mentioned it earlier in your outlook, the – sort of the interplay between fiscal

and monetary policy, how are we supposed to – how do you think about the recent fiscal expansion in the United States, the impact on the economy, and the sustainability and how would it be interpreted by the Federal Reserve?

Ben Bernanke: Well, I was generally – I think I'm net disappointed with the fiscal actions that have been taken. The beneficial part, which was the lower cost of capital that comes out of the lower corporate tax rate, that could have been achieved at much less cost.

For example, by just full expensing. By giving firms stability to deduct their investments expenditures directly from their taxable income, that could have been done and gotten the same benefits without – without having a big deficit impact. The deficit – there’s two problems with a big deficit.

One is that in terms of short run stabilizations, it’s exquisitely mistimed. In 2013, I was sitting before congress saying, unemployment is at eight percent. This is not the time to be raising taxes and cutting spending, which they were doing with great delight at that point. And now we are getting a big deficit at a time when unemployment is four percent.

Likewise, in the longer term, I think these big deficits are going to reduce our – I’m not an alarmist. I’m not a chicken little-type. I don’t think that we’re heading to some kind of catastrophe, but at a minimum, the big deficits are going to reduce our fiscal flexibility a decade or two decades – particularly with the pressure coming from – as President Bush mentioned yesterday – from entitlements and the like.

So next time there’s a big recession or some kind of national crisis or war or whatever might happen, we won’t have the fiscal space that we had, you know, prior to this decision, so I am concerned about the actions themselves.

It makes the Feds job harder because it is putting stimulus at – sort of the wrong time in the cycle and so the Fed is going to have to delicately manage that process. It’s also a political minefield of course, but I have confidence the Fed will be independent in its decisions, but it is going to make this process a little more difficult because, at a minimum, unemployment is going to probably fall even further. Which is a good thing in the short run, but if it’s not a sustainable level, it’s hard to achieve the so-called "soft landing”.

So again, I think that the Fed is going have to judge how much more restriction is needed. A bit more will probably be needed, but it is badly timed from the – certainly from a business cycle perspective.

Marc Seidner: It is extraordinarily unusual. Jean-Claude, on the fiscal-monetary mix and the reform agenda in Europe, how – how confident are you that the right decisions will be made, politically, to sustain the expansion and, maybe put, sort of, you know, frankly and succinctly, will a good period go to waste by creating complacency and not – not requiring difficult decisions and difficult actions?

Jean-Claude Trichet: Well, first of all, let me – let me say that we have a policy mix which, obviously, is not sufficiently expansive. And to the extent that I don't think monetary policy could be more expansive, clearly we have a problem, I would not say necessarily on the fiscal side but certainly on the dynamics of the wages and salaries, the dynamics of the domestic demand, both I would say public and private and I would insist very much on the private.

We have the legacy of the previous crisis which has created – set restrained, including in countries that have a lot of room for maneuvering. And I’m speaking particularly of countries that are posting 8.5 percent current account surplus, 10 percent current account surplus. It’s only one country – it’s a small group of countries that have an enormous amount of current account surplus.

And, normally, if market economy functions, you should have much more dynamism, of course, in the wages and salaries and the negotiation between social partners and so forth. But for many reasons, including the fact that there is a paradox in Europe. We thought, at the very beginning, that the limited mobility would be extremely modest and we realize – only to give you one example, in Germany in '15, 300,000 people came – workers, net. Came in Germany from the rest of the Euro-area. 300,000.

So I'm not speaking of the massive immigration coming from the Middle East. So there is something which might explain why. The dynamism that we were expecting in countries that are very prosperous, very close to – our full – at full employment is not necessarily translating in what we would expect and is probably necessary.

So all that being said, I hope very much that market economy, we start really functioning. That the domestic demand in Europe, starting with those countries that are really, really and at full employment – will function and  that we will have much more dynamism there.

Again, the problem is not necessarily that they have to embark on dramatic new fiscal expanses.

In most country, there is not much room for maneuvering and I would share a view of Ben. But again, the normal functioning of the private sector should activate domestic demand in many countries in Europe, not only in Germany or in the Netherlands.

Marc Seidner: I should take a moment, just to remind everybody that there is – on the app, there is the opportunity to ask questions. We’ll try to save some time at the end for your questions if you’ll feel free to send them in.

Why don’t we turn our attention to the inflation outlook? A lot of talk about inflation yesterday, a lot of talk about inflation dynamics, inner play. The word "Goldilocks" has been used. Candice used it to introduce us. A period of above trend growth while relatively stable price pressures.

Ben, how do you think about the inflationary pressures in the United States, perhaps even globally, as output gaps shrink as capacity diminishes. Could talk a little about your outlook for inflation?

Ben Bernanke: So first, I think this market narrative that inflation is gone forever and that, you know, and that the Phillips curve is completely dead.

I think that’s – market’s typical over-reaction to some short run data surprises. The Phillips curve is actually performing about as well as usual which is not well, but it does – it is, in fact, I think, at least, at minimum, a good frame for thinking about inflation and certainly the one the Fed uses and I think significantly the ECB – Jean-Claude can comment.

I think, in particular, the Phillips curve models actually under predicted inflation in the years after the crisis, interestingly, because inflation didn’t fall as much as the high unemployment rates, suggesting they should.

Now, the market reaction has been about 2017 where the Feds core inflation target, you know, has been below expected. I think there are basically three reasons to numerate these things – one is inflation expectations, saying that we have had a period of low inflation so people have become fairly accustomed to it, that means people are more reluctant to raise prices to raise wages.

Secondly, the fact that the inflation/ unemployment relationship is a very weak one. The best estimates are that 100 basis point decline in the unemployment rate only raises inflation by seven basis points in a quarter, and maybe less than 20 basis points in three quarters so it's a weak relationship, but it seems to be there.

The third thing which I think was important in 2017 is that you get – sometimes, you know, every equation has an epsilon, every equation has errors and there's things that have happened recently – for example, the – much has been made of the big drop in cell phone plan prices last March. That’s going to fall out in the data in a month or two, we are going to see a little bump up just mechanically in the inflation numbers. I think one that’s more important actually is healthcare costs, which have been rising in the US very slowly. Much more slowly than in the past and which are a big share of the basket that inflation measures.

So put it all together, what’s the outlook? I think what we are going to see is some moderate increase in inflation. You know, first some of these factors, these special factors are going to drop out of the data. Healthcare costs are probably going to rise a bit more quickly based on what we are seeing in terms of payments to doctors, et cetera, Number one.

Number two, the inflation expectations have picked up a bit, as shown, for example, the break evens. And then finally, the unemployment as low as it is, is going to – it's beginning to see some pressure in wages and prices and I think it will come. I'm not concerned that this is going to be a big shift. Again, these are very weak relationships, so I expect that inflation will move towards the Feds target, probably later this year or next year.

I do think – and this is something worth mentioning – that because these relationships are noisy and because the data are noisy, month to month there's going to be volatility as we see an extra tenth in the inflation number and markets will say, Oh, my God you know, inflation's out of control, I would just counsel patients because month to month these numbers can be noisy, and there's not really much basis to worry about a real major shift, but I do think that there's a moderate upward trend and we'll probably see over the next year or two.

Marc Seidner: It's a complicated topic and maybe we shouldn't spend too much time on it, but the notion of R star – some discussion yesterday about PIMCO's theory about the New Neutral. Given the growth outlook given the inflation outlook, do you subscribe to a New Neutral thesis? Do you subscribe to a lower R star than – or a lower level of real short-term interest rates in the cycle than in the past?

Ben Bernanke: Well, broadly, yes, in the sense that I don’t think we’re going to go back to 1990s ten-year yields. I think the long run factors of low inflation, very slow workforce growth. And until recently at least, you know, slow productivity growth. All those things – you know, large savings. I’ve talked – myself, I’ve talked about the savings glut. All those things are going to keep rates low on a historical basis going forward, but I think there are some modest upside risks that are worth mentioning.

And it was mentioned yesterday the fact that productivity is so – productivity growth is well below post-war norms and there is certainly some upside risk to that. Inflation is not going to be falling from here.

Term premium, risk premium the – are surprisingly low. And while there are good reasons for that and that will probably be maintained, there is also some chance that they will come up a bit  – particularly if inflation comes back a bit and bonds become a little riskier from that perspective, that’s another reason for the risk premium – the term premium to move up a bit.

So I think that the R star, the longer neutral rate, however you want to describe it, is probably a lit by north of three at this point, so it’s certainly not high and – but there are some risk to it.

Marc Seidner: There’s a question from the audience and I’m reminded that we’ve been rather Europe and US centric and not expanding to the rest of the world, but maybe – can you – either one of you want to share thoughts on the Chinese outlook? Particularly timely this week given the – the appointment of Yi Gang as the PBOC Governor? Any thoughts on the Chinese outlook and the shift in leadership at the PBOC?

Jean-Claude Trichet: I think it is – you said the new chair in the Fed is another incarnation of Yellen and I would say the new chair of the Governor of the PBOC is very very close – very close to our excellent – I would say companion in the crisis, the previous – the former governor. So I would say Yi Gang does not signal any change and it’s at the very moment where the PBOC is given more clout, more responsibility including in the domain of banking surveillance which, by the way, for me is one lesson of the main crisis in all our countries so it's – it's a convergence which is quite impressive but I'm very confident on the continuity in China.

Marc Seidner: Let’s —

Ben Bernanke: Let me just – can I just add to that?

Marc Seidner: Of course.

Ben Bernanke: I interviewed Yi Gang on stage at Brookings a few months ago – if you can get online, if you’re interested and I found he was really good, I enjoyed working with him. He’s a good economist.

So I think the weak continuity cautions liberalization I think on growth that, again, we’re going to see some slow down in – modest slow down in growth because, among other things, one of the goals of the new finance team would be to unwind some of this credit overhang, and that’s going to require some adjustment in growth expectations as well as any reforms, state of enterprises and the like, so some of the growth instruments that were used so actively in recent years are going to become less powerful but that’s okay because as President Yi has talked about quality matters as much as quantity and it’s important that the growth be – of the kind that improves welfare, it leaves people better off.

Jean-Claude Trichet: If I may go back to inflation because it’s –

Marc Seidner: Yes, please.

Jean-Claude Trichet: Of course, a very important issue. On top of all what Ben said, and I entirely share his analysis, I would say we have a weakening of the bargaining power of labor in all advanced economy for reasons that are very complex, certainly linked to the intensity of the competition with the emerging world, linked to a number of, you know, global trends that also, probably, at the roots of the populist move that we see in all our advanced economy.

And that of course creates an additional element of timidity in the demand for – wages and salaries increases – I see that in Europe very, very strongly, particularly in those countries, which I already mentioned. We are normally – the normal functioning of marketing would push up the demand for additional nominal wages and salaries, nominal and real.

And so it's a big, big issue that is, I would say, adding to what Ben has said which is – and which is really profound. For us in Europe to the extent that we both have a single market with a single currency, but also many different countries, we have to say many different structure, many different social partners – culture, historical culture, we have an immense problem because the – I would say, appropriate level of inflation for the Euro area as a whole, at the present moment, is the average, of course, of all nation inflation, and the ceiling is the inflation which exists in the most competitive countries because all the others have to get more – I would say, gaining their competitiveness.

So if inflation in Germany is too low, it constrain all the other national inflation in the medium run, and therefore we are below our two percent that is our – I would say differential price stability. So there is there a real, real issue and I have to say that on the stability of the relationship between slacks and inflation, I hesitate to say that we observe what we should in Europe.

It's very complex, extremely noisy, and the situation of the various countries is not alike. So we have – and it's one of my discovery a few time after I came in this position, delivering price stability was not necessarily so complicated on my time because we are posting two percent over a long period of time, but the treating the problem of sustained persistent divergences between the various country was the main problem and I would say remains the problem of the Euro-area.

Marc Seidner: So why don't we – in the few minutes we have left – turn to a look in the future. We've been sort of talking about the present, let's look to the future.

And Jean-Claude, you've – you touched on sort of the lack of bargaining power by labor being an important topic. Ben, you've talked about fiscal – the unusual nature of this amount of stimulus so late in the economic cycle with questions about how – what could respond to the next downturn.

You often remind – Ben, you often remind us that it is normal in an economic downturn for the Federal Reserve to cut interest rates by 500 basis points. Well, even in your scenario, we get to something around three percent which doesn't leave 500 basis points to cut with the estimates for 2020 with the fiscal deficit somewhere between five and six percent. This group polled thinks the next recession hits in 2020.

What's left – ECB is starting with minus 40 basis point deposit rates. What's left, and it's a critical question for investors if you think about discounting long term cash flows, what's left for policy to respond in the next downturn?

Ben Bernanke: So we're assuming no fiscal policy. That would certainly be the – a front line thing, if it was available. On monetary policy, we have optimists and pessimists about the current toolbox.

Using short term interest rate cuts, no negative rates in the United States, quantitative easing and forward guidance that is giving information to the market about how long rates expect to be low, et cetera, the Fed did manage to get a reasonable amount of stimulus into the economy and helped a reasonable pace of recovery from one of the deepest recessions in history.

And so one might argue – and Janet Yellen’s made this case that – at Jackson Hole a couple years ago, that the current toolbox, which is short term interest rates plus asset purchases and forward guidance, might be enough under moderate, you know, downturn scenarios. That is the – you know, assuming you're start from something close to neutral or above neutral, et cetera.

So I wouldn't be completely, you know, depressed about the alternatives, there are some tools there.

But, of course, there is always the risk of something deeper, there is a risk that you get hit, I mean, you know, I don't have any expectation that Europe or Japan is going to face a new downturn, but they are clearly have much less space, even in the federal reserve at this point, with the further ease policy so what else can be done.

The one other idea, which is being widely discussed at the Fed, is changing the framework from inflation targeting to something that would involve perhaps temporarily higher inflation after a period of very low interest rates.

So I have a proposal called Temporary Price Level Targeting, I won’t try to explain it, but basically the idea is, again, that if you persuade markets that when you hit zero interest rates that you are going to be very, very aggressive about keeping rates low and letting inflation even overshoot, that will add additional stimulus to the system.

This is at early stages of discussion. My own guess is that they won’t formally change, that they’ll keep the inflation targeting framework, but they may communicate that in zero situations where interest rates are zero that there will be a particularly extended period of policy ease and some to toleration of inflation overshoots coming up.

Japan’s is doing that right now. Japan is talking about overshooting it’s inflation targets on the exit as well.

So short answer, we have more than just a rate cuts, we also have forward guidance and quantitative easing, that should give us most of what we need but there’s also going to be some general discussion about changing the framework in ways that will allow for temporary increases in inflation, as a way of getting some extra stimulus.

Marc Seidner: Jean-Claude, any addition perspectives from – from the ECB?

Jean-Claude Trichet: No. I will say do not forget the three years and nine months delay so I hope that we will be in a position, when the recession comes, where we will have some more room for maneuvering. Again, don’t forget, plus 3.5 current accounts surplus in Europe. So it means that they are room for maneuvering. Minor 3.5 percent current account surplus in the US, which suggests that room for maneuvering is not that big, necessarily, when you take all into account.

So, again, we will see, but, of course, there is no doubt that if there is a recession in the US, contagion will operate. So my nine – not my three years and nine months might be very difficult to sustain, even if we are not in sync and even if we have a lot catching exercise to continue and to operate.

So I hope very much that the recession in the US will be as long, long, long period as possible, even if I share the view of Ben, that it was a little bit surprising to accelerate this episode of the cycle – the, I will say, buoyancy of the economy with this new decision on the fiscal side.

Marc Seidner: I’m reminded by our Australian colleagues that Australia is in its 26th year of economic expansion. So hopefully all of us become Australia.

I believe we’re out of time. We didn’t have a chance to get to many of your questions. I’m sure there’ll be time to interact with either Ben or Jean-Claude during lunch or other moments.

Thank you all for your time this morning.

Most importantly, please join me in thanking Jean-Claude and Ben for their time this morning.

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