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CNBC
"BILL DUDLEY INTERVIEW"
INTERVIEW WITH BILL DUDLEY
CORRESPONDENT: STEVE LIESMAN
PRODUCER: GRALNICK
STEVE LIESMAN: WERE YOU SURPRISED BY ALL CRITICISM OF THE FED FROM THE G20
MEETING
BILL DUDLEY:
14:02:37:00 Not surprised that they're unhappy because--
their currencies are appreciating-- rapidly.
There's large capital inflows coming to the
emerging markets. And obviously, that-- that
makes their job harder, so it's-- it's not
surprising that they'd be unhappy about it. I
think that-- what we have to, as a central bank,
is explain very clearly why we're doing what
we're doing. And that-- that-- and in fact, that
what we're doing is actually in their long-term
interests. The sooner the U.S. gets out of this
period of malaise that it's been in, the sooner
that we have more rapid employment growth--
stronger economy-- the quicker we can exit from
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these-- extraordinary-- monetary policy steps.
And that'll be good for everybody.
STEVE LIESMAN:
14:03:16:00 The-- head of the international department at the
People's Bank of China said that fed policy will
undermine and increase the downside risk in the
global recovery. What-- is that accurate?
BILL DUDLEY:
14:03:26:00 I don't think so. I think that the U.S. economy
growing faster-- with stronger employment growth-
- less risk of deflation is very much in the g--
interest of the global economy.
STEVE LIESMAN:
14:03:39:00 And just to-- one more criticism from abroad, the
German finance minister says it's hypocritical of
the United States to accuse China of currency
manipulation, and then use its printing presses
to, quote, artificially lower the value of the
dollar.
BILL DUDLEY:
14:03:50:00 I think that's very off base because I think that
the goal of our policy is a very simple one, to
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ease financial conditions. We're not trying to
push the dollar to any particular level. What
we're trying to do through our large scale asset
purchase programs is to remove treasuries from
the market, and force private investors into
other assets.
14:04:11:00 But we saw it from August to-- November-- is the-
- is the expectations of ano-- another program--
went from very low to very high. Stock market
up-- long term buying yields down, financial
conditions much more accommodative. And that's
supportive to the U.S. economic growth. So the
go-- the goal of the policy is not to push the
dollar up or down.
STEVE LIESMAN:
14:04:31:00 But you have to have some sympathy for the view
that you-- looking at the United States from
abroad, that there is a concerted effort on the
part of the Federal Reserve to go for a weaker
dollar. The Federal Reserve had to know that the
result of its policy would be a weaker dollar.
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BILL DUDLEY:
14:04:44:00 I don't think we knew that the dollar was
necessarily going to weaken. I mean, if people
look at our policy as making it more likely that
the U.S. economy is going to recover, the dollar
could appreciate rather than depreciate. Now
it's true that usually when one country uses
monetary policy relative to other countries, and
reduces their level of interest rates for the
other countries, the currency can weaken, but
that's true for any monetary policy using--
nothing special about a large scale asset
purchase program.
STEVE LIESMAN:
14:05:09:00 Well, except for the fact that it's only the
second time you've ever done it. It's pretty
special.
BILL DUDLEY:
14:05:13:00 Well, it's special because we're at the zero
bound in terms of short term interest rates. The
reason why we're moving to this policy is because
we can't lower short term interest rates any
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further. But-- if you think about this
conceptually, it really does the same thing as
lowering short term interest rates.
14:05:29:00 When U.S. lowers short term interest rates, it
affects long term bond yields-- which makes
financial conditions more accommodative. When we
purchase large-- when we do a large scale asset
purchase by removing duration from the private
market, we reduce long term bond yields so we
have the same-- consequence.
STEVE LIESMAN:
14:05:45:00 You've talked publicly about an equivalent
between-- purchase of assets and-- a federal
reserve basis point interest rate cut. The rest
of the world doesn't see it that way. Are they
not listening, or can you understand why they
would see it as a slightly different sort of aim-
- or goal here?
BILL DUDLEY:
14:06:00:00 Well, I think the-- the problem we have is really
the fact that we don't have an international
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financial system that allows currencies to adjust
smoothly around the world in sort of equivalent--
amounts in different countries. In some
countries, their currencies are very flexible.
14:06:16:00 In other countries, the currencies are not
flexible at all. And so the pressure builds up
on those countries with the very flexible
currencies. And so that increases their problem.
So the problem isn't the Fed's monetary policy,
the problem is the fact that we don't have--
international currency system that allows
equivalent flexibility-- of currencies across the
different countries.
STEVE LIESMAN:
14:06:35:00 You said that-- a weaker dollar was not the aim
of policy. Are-- do you think a weaker dollar
would be something that would be good for the
U.S. economy?
BILL DUDLEY:
14:06:46:00 I don't think-- we don't have a view about where
the-- where the dollar should go. We-- what we
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have a view about is what's the appropriate
monetary policy for the U.S. so that we can
achieve-- best achieve our dual mandate of-- full
employment and price stability.
14:07:00:00 So the dollar's really not part of that equation.
Now obviously, if the dollar goes up or the
dollar goes down, we factor that in, in terms of
our outlook, in terms of what that's going to do
to growth and then-- and employment and
inflation. But the dollar's not really the
objective of policy.
STEVE LIESMAN:
14:07:14:00 But as an economist of some renown before you
joined the Federal Reserve, and now as a-- the
new Fed president, you have to look at the 700 or
so billion dollar U.S. trade deficit and say, you
know what, this argues for weaker currency, that
a market based system would say that the currency
should be weaker, also given the-- com--
competitive-- advantages or disadvantages when it
comes to where-- where we are right now with the
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currency.
BILL DUDLEY:
14:07:38:00 I don't think you can draw that-- analogy from
the trade deficit to how that translates for the
currency 'cause we've actually had pretty
sizeable trade deficits for many years. And the
dollar's esse-- essentially, already reflects
that. In fact, the trade deficit now is quite a
bit-- smaller than it was a few years ago.
STEVE LIESMAN:
14:07:54:00 Has the Fed effectively communicated its policy?
Why, except for a single op ed in the Washington
Post, didn't the Federal Reserve come out and
talk about what it was trying to do, and what
impact it would have?
BILL DUDLEY:
14:08:05:00 Well, I think that we certainly explained-- in
the run-up to the policy decision why we were
contemplating the-- the-- the possibility of
doing large scale asset purchases. I think
probably we haven't communicated it as
effectively as we'd like to in terms of why we're
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doing this, and why we can do this safely.
14:08:23:00 You know, I think there's sorta two sort of
critiques of the large scale asset purchase
program. One, it won't be effective. It doesn't
do that much. And-- and we agree with that, that
we don't think that this large scale asset
purchase program's going to have a huge, powerful
effect on-- on the U.S. economy.
14:08:37:00 And two, I think there's a lotta concern about
exit. Once-- when the time comes and the U.S.
economy finally does pick up speed and inflation
starts to rise, will we-- will we be-- will--
will-- will we be able to exit from this program
smoothly without a long term inflation problem?
And I think the answer to that second question is
really critical. And our answer to that question
is very much yes. We have the ability to exit
smoothly because we have the ability to pay
interest on excess reserves. We have the ability
to drain excess banking res-- reserves from the
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system. So we are very confident of our ability
to exit when the time comes, in terms of the
tools.
14:09:07:00 We also are very confident of our will to exit.
So the second thing I think that's-- that worries
people is will the Fed do the right thing when
the time comes. And I think everybody on the
FOMC-- I think everybody on the Federal open
market committee is completely committed to
keeping inflation-- low over the long term.
STEVE LIESMAN:
14:09:26:00 Just today-- 600 economists published a-- letter,
open letter saying that the-- Fed's plan to-- to
do large triage-- purchase (?), quote, risk
currency debasement and inflation. Does it make
you think twice that maybe you have the economics
wrong here if 600 economists, many of them fairly
renowned in their own right are on the other side
here?
BILL DUDLEY:
14:09:45:00 I think the issue is-- I think people do not
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understand clearly-- and that-- and this is
partly on us to communicate clearly our ability
to manage-- this when we actually acess-- we can
have an enlarged balance sheet and not have an--
a long term inflation problem.
14:10:00:00 And the reason for that is we have the ability to
pay interest on excess reserves, which allows us
to raise the cost of credit in a way to moderate
credit demand when the time comes. That tool we
did not have prior to the fall of 2008. So if
you're reading the old money and banking
textbooks, yes, you would be very concerned that
the increase in the size of the Fed's balance
sheet is going to ultimately lead to a long term
inflation problem.
14:10:23:00 Except the world today is different than the
world prior to 2008 because we have new tools in
place. If we didn't have that tool, we wouldn't-
- we'd be doing what we're doing. That tool
gives us the ability to exit smoothly when the
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time comes.
STEVE LIESMAN:
14:10:34:00 What's happening to this-- these-- this money you
put out there. Does it create money? I mean,
people say the Fed is just printing money. Is
that an accurate description of what you guys are
doing?
BILL DUDLEY:
14:10:42:00 Well, I wouldn't say we're quite printing money.
What we're doing is b-- when we buy treasury
securities, we are increasing the amount of
reserves in the banking system. For those
reserves to actually create money, the banks
actually have to lend those reserves out.
14:10:55:00 The problem we have in the U.S. economy today is
not that there's too much lending. No, the f--
the problem we have in the economy today is
there's insufficient lending. Up until very,
very recently, total loans, outstanding were
declined, they'd been declining for the last
several years.
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14:11:07:00 So there's plenty of reserves in the banking
system right now. If we increase the amount of
reserves in the banking system, it's not going to
have any big consequence for lending. How the
large scale asset purchase program works is not
through its effects on bank reserves, but its
effects on financial asset prices.
14:11:23:00 By easing financial market conditions, it makes
households-- by lowering long term rates, it
makes housing more affordable. It re-- reduces
the costs for businesses to invest. This higher
stock market increases household wealth. And so
all these things have-- they're not-- they're not
powerful in terms of their effects.
14:11:39:00 But even a little bit of nudge to the economy
today I think is very, very important because if
the economy can grow a little bit faster, that
gives you a much better prospect about being in a
virtuous (?) circle, little bit stronger growth
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leads to a little bit more demand. Little bit
more demand leads to more employment growth,
higher income, rising confidence, a virtuous
circle. And what the Federal Reserve wants to do
is make sure that we're in that side of-- of
things, rather than on the other side of things
where we've seen Japan over the last 15 or 20
years.
STEVE LIESMAN:
14:12:09:00 I just want to come back to thing. So-- so
you're saying effectively that people who say the
Fed is printing money are essentially wrong.
It's not that you disagree with Milton Friedman's
(PH) idea, it's just that you don't think we're
at a place where Milton Friedman's ideas apply
directly right now?
BILL DUDLEY:
14:12:26:00 For the-- for money-- for-- for the money supply
to go up, the banks have to take those reserves
and lend them out. What's actually happening
right now is they're not lending them out. If
they were lending them out, then we'd have more
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demand. We'd have faster employment growth.
14:12:39:00 That would be actually a good thing. So the
reserve creation at this point is not causing any
problems. Now eventually, if the economy picks
up speed and people become more confident about
the outlook, the banks will presumably be more
willing to lend those reserves out. At that
point, we're going to have to be able to manage
that exit problem.
14:12:57:00 The-- the way we do that is we can raise the rate
that we pay-- pay banks on the excess reserves
that they hold with us. By raising that rate, we
can induce the banks to hold the reserves with us
rather than lend them out. But that's not the
problem we have today, that's the problem in the
future.
STEVE LIESMAN:
14:13:11:00 But it is an issue of how quickly you can apply
the brakes, right? I mean-- in the first
instance, you guys do a series of quarterly
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surveys on lending. How well do you think your--
how good is your ability to gauge-- lending and
the use of these excess reserves such that you
can get in front of a process whereby the banks
are really creating money?
BILL DUDLEY:
14:13:28:00 I don't think, Steve, this is really any
different than the problem that we face-- during
any-- transition from recession to expansion. At
some point in this business cycle, the Fed has to
go from an easing mode to a tightening mode.
This is really no different. The only difference
this time is we'll be doing it within-- with a
much bigger balance sheet.
STEVE LIESMAN:
14:13:45:00 Can-- can you explain the amount of QE (PH), or
quantitative easing that you arrived at and the
duration? Why 600 billion for eight months? Why
not 500 billion for seven, or 700 billion for
nine?
BILL DUDLEY:
14:13:59:00 I mean, I wouldn't get too precise about this.
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You know-- you know, it's-- it's not like if we
do 50 billion more or 50 billion less it's going
to have effects. You know, what we did is we--
we-- we did an amount that we thought was
significant enough to have an impact.
14:14:15:00 We-- we think that the 600 billion of large scale
asset purchase programs is roughly equivalent to
a 75 basis points reduction in the federal funds
rate. Now, we stretched it over eight months
because we don't want to buy so much treasuries
at any given time that we just start to distort
the markets. So-- the time period was more tied
to how much could we-- how fast could we do that
600 billion without distorted market prices
unduly.
STEVE LIESMAN:
14:14:38:00 The Fed chairman how-- said in his speech in
Jackson Hole that the Federal Reserve cannot do
it alone, and practically asked Congress to do
something. How much of-- of-- of the amount that
you've done is the result of what you could call
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congressional action? In your opinion, is fiscal
policy too tight?
BILL DUDLEY:
14:14:58:00 I wouldn't make a judgment about what Congress
should or shouldn't do on fiscal policy. But I
think the chairman was absolutely right. It-- it
can't all be about the Fed on monetary policy.
What we can do is pull the levers that we think
will generate better outcomes in terms of
employment and inflation over the medium to long
term, and that's what we're doing.
14:15:17:00 What Congress can do, I think, is provide more
clarity on the fiscal outlook. I mean, one of
the problems today is not just that we-- not just
what the fiscal trajectory is, but its
uncertainty about that fiscal traject-- tra--
trajectory that's probably causing people to
hold-- hold back.
STEVE LIESMAN:
14:15:31:00 One of the concerns that people have is that the-
- the recent run in with deflation we had in
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2003, they-- they argue the Fed had it wrong,
that while the Fed was busy fighting deflation at
an output gap, in fact, there was inflation
brewing, and the Fed was forced to revort--
reverse course fairly rapidly. What assurances
do you have, can you give us now that this is not
a repeat of '03, given also that the economy
looks like they'd been at a little better footing
in the last month or two.
BILL DUDLEY:
14:15:59:00 Well, if you-- if you remember back to 2003-- we
didn't have-- an inflation problem in 2004, or
2005, or 2006. In fact, you know, the problem
in-- in the 2003-- expansion was not what was
happening to price inflation, but what was
happening to housing prices. So I think what--
what that cycle tells us is that we have to watch
other things than just prices of goods and
services, but financial asset prices. So--
STEVE LIESMAN:
14:16:25:00 But inflation did rise into the sort of four
percent level.
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BILL DUDLEY:
14:16:27:00 It was-- it was-- it was pretty moderate. I
mean, at the-- at the end of the day, I-- I-- I
think it's not fair to say that we had an
inflation problem during the last cycle. Look,
obviously, we're going to have to look at all the
panoply of economic indicators very carefully to
know when the time is right to exit.
14:16:43:00 Now, you know, I think-- you know, it's-- I think
it's remarkable though that we're spending so
much time talking about exit when you think about
the fact that we have a 9.6 percent unemployment
rate, and an economy that's growing only about
two and two-- two to two and a half percent at an
annual rate. We're not even generating
sufficient jobs yet to-- actually bring the
unemployment rate down. So you know, this exit
could be several years away.
STEVE LIESMAN:
14:17:06:00 Do-- do you think the people who-- (COUGHING)
pardon me-- who argue for the Fed not to be doing
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anything now-- are those people promoting the
idea of a recession right now?
BILL DUDLEY:
14:17:21:00 I don't think they're promoting. I think the-- I
think they're making-- I think it's reasonable
people can differ about the benefits versus the
costs of another large scale asset purchase
program. I mean, reasonable people can differ.
So I-- I certainly understand why some people
think that this is not a good idea because
they're-- they're-- in their assessment
(COUGHING) the benefits aren't that great, and
the costs are-- are-- are ho-- are relative high
because they're worried about the exit problem.
14:17:44:00 I think where we-- where-- where the majority of
people on the federal market committee (?) come
out-- is very much on the side that the benefits
do outweigh the costs. The benefits outweigh the
costs because we saw the effect on financial
conditions as we went from no expectation of a
large scale asset purchase program to a much
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great expectation of a large scale asset purchase
program. Stock market went up, bond yields fell.
14:18:05:00 And the second thing-- and I think this is the
thing that's really important, is I think that--
that most members of the federal-- market
committee are-- are very confident that we have
the tools to exit smoothly when the time comes,
and all members of the FMOC have the will to exit
smoothly when the time comes.
STEVE LIESMAN:
14:18:22:00 Some of those people who disagree with the policy
are the guys you are rubbin' shoulders with, or
rubbing elbows with the FMOC meeting. How bitter
is the debate right now? How strong is the
divide among members of the FMOC when it comes to
this issue?
BILL DUDLEY:
14:18:41:00 I think reasonable people can differ about costs
and benefits. And I think it's not surprising as
the Fed gets to unusual, unconventional policy
tools that there can be disagreement about
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whether the benefits-- outweigh the costs. But
you know, if you look at the last Federal open
market committee meeting, you know, the vote was
ten to one in favor of this policy. So I think
that tells you that there's a pretty strong
consensus on the committee that the benefits do
outweigh the costs.
STEVE LIESMAN:
14:19:05:00 I'm going to come back to the question I asked,
and-- and I'm asking this personal way (?). In
the absence of this policy that you have, do you
feel as if the economy risked recession?
BILL DUDLEY:
14:19:15:00 I don't think that-- yeah, well, I mean, I think
there was certainly a risk. I think what
happened as we went from spring to summer is we
saw the economy losing its forward momentum. The
benefits of the economy of the inventory
restocking were starting to fade, and we really
hadn't caught yet in terms of consumption,
spending, business, fixed investment picking up
in a way that was generating sizable gains in
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terms of employment.
14:19:37:00 So the economy was actually slowing down as we
were going through the year. The second half of
the year looks like it's going to distinctly
slower than the first half of the year. That's--
creates some anxiety. Second, we're seeing
inflation come down. So inflation, you know, is
just modestly below the level that most federal
officials would say is consistent with price
stability. But the trajectory is downward.
14:19:58:00 So slowing economy-- traje-- trajectory of
inflation declining, you know, get-- it's-- it's
starting to get you a little bit uncomfortably
close to the-- the-- the economy's tipping point,
not that-- so much that we thought we were going
to fall into recession, but you know, as you-- as
the economy's slowing, you're getting closer to
that tipping point, the risk are rising that
there could be some shock to the economy that
could push you over that edge. And the next
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thing you could know, you could actually be
spinning down into recession. So one way to
think about the policy that we put in place is
that we basically, by providing a little bit of
extra support to the economy, we're pushing the
economy away from that tipping point, and
therefore, s-- having a meaningful effect on the
risk of a double dip.
STEVE LIESMAN:
14:20:40:00 Are-- are you an advocate of this idea-- I don't
mean advocate, but do you-- support the idea
that-- there's a stall speed for the economy,
that-- we can't just grow below potential and
potentially have unemployment rising beneath
that, that that itself could tip the economy over
into recession?
BILL DUDLEY:
14:20:58:00 Well, I think there is-- a fair amount of--
empirical evidence that suggests that there is a
stall speed for the economy. One interesting
fact from the post war-- World War II period in
the United States is we've never had a three-
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tenths of a percent rise-- in the unemployment
rate-- without actually-- once it goes up three-
tenths of a percent, we end up having a full
blown recession.
14:21:20:00 And the next-- increase after three-tenths of a
percent, the smallest is 1.9 percentage points.
So that we've never had an increase in the
unemployment rate of just a half a percent, or
just one percent, or just one and a half percent.
So that does suggest that that-- that once you
get to a certain point, and an unemployment rate
goes up enough, that starts to weigh on
confidence, that starts to weigh on spending. If
spending is cut back, that leads to more
unemployment, and the economy cycles down into
recession.
14:21:46:00 (OFF-MIC CONVERSATION)
STEVE LIESMAN:
14:22:29:00 How much of a concern are higher commodity
prices?
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BILL DUDLEY:
14:22:34:00 I mean, I think that higher commodity prices, you
know, are not a big concern, but certainly,
they're a small concern. Obviously, to the
extent that commodity prices go up a lot-- that
would be a hit to-- real incomes in the U.S., and
therefore, would be a negative in terms of-- the
economic outlook.
14:22:51:00 I think the-- the important thing though is you
know, we don't-- you know, to the extent that
commodity prices are going up, it's hard to know
what's really driving it. Is it the large scale
asset purchase program, or is it the fact that
emerging-- growth in the emerging world is very,
very strong? Or is it the fact that in certain
parts of the world, the-- the growing season
hasn't been very good, and so-- there's been
increase in-- in-- in agricultural commodity
prices?
14:23:10:00 (OVERTALK)
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STEVE LIESMAN:
14:23:11:00 --but does it also mean that people don't believe
in the dollar anymore, and they're looking for
safe have assets like-- assets like gold or oil?
BILL DUDLEY:
14:23:19:00 Well, I think the important thing here-- you
know, when you're talking about commodity prices
is that the share of commodity prices in the U.S.
consumer basket is pretty low. So commodity
prices have to go up a lot to have a really--
significant effect on-- on real income growth in
the United States.
STEVE LIESMAN:
14:23:36:00 When you look at gold, and you see it over $1,400
an ounce, does it give you again, concern over
the credibility of Fed policy?
BILL DUDLEY:
14:23:43:00 Well, we certainly do assess over a whole variety
of indicators to get a sense of-- of what the
credibility of-- of-- of federal reserve policy
is. Gold prices, you know, would be one of
those. But the thing that we really focus on
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more are-- what's happening to inflation
expectations-- and what's happening to the
dispersion of inflation of expectations.
14:24:02:00 Are there people that are becoming more and more
nervous that inflation's going to get away from
us on the upside? And when-- when we look at
inflation expectations, what we see over the last
six months is that as the economy's slowing, as
we went into the summer-- inflation expectations
were coming down. And they were coming down to a
point where it started to suggest that people
were actually starting to worry about a deflation
kind of outcome.
14:24:24:00 And over the last three months, as we've gone
from no-- very low probability of a large scale
asset purchase program to a much higher
probability, inflation expectations have come
back-- to where they were earlier in the year.
So-- so-- we certainly monitor that. Now, gold
prices is a tricky one because you know, when
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real rates are really low like they are today,
like five year tip yields-- were-- you know, were
negative-- the-- the carrying cost of holding
gold is really, really low. And so gold prices
are going to go up in part because-- the-- the--
the carry cost is extraordinarily low in an
environment where monetary policy is easy like it
is today.
STEVE LIESMAN:
14:24:58:00 You talked-- if I'm right about the idea of being
able to put the genie back in the bottle when it
comes to exit strategy. What about the idea of--
of Fed credibility on inflation fighting? Do you
feel like you can promote inflation for a while,
or higher levels of inflation, and then turn it
on a dime, and say, no, no, no, we-- we-- now we
don't want to do it that way, we want to promote
stable prices or-- or-- or low-- lower inflation?
BILL DUDLEY:
14:25:21:00 Look, I don't think there is any support at all
within the federal open market committee to allow
higher inflation than what's consistent with
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price stability. If you look at the federal open
market committee-- almost all the members think
that-- price stability is somewhere in the range
of one in three-quarters to two percent.
14:25:37:00 That's what we're committed to, as the chairman
had said, two percent or a bit less. There's no
desire to fool around with going above that.
It's too dangerous. We-- we saw what happened in
the '60s and '70s when-- once the central bank
tolerates a little bit more inflation. At the
end, it gets you nothing because at the end, you-
- that-- you're going to have to put that genie
back in the bottle.
14:25:58:00 And that means you're going to have to end up
having-- a tough-- difficult recession, which is
what the Federal Reserved engineered in the late
'70s and early '80s under Chairman Volcker. Very
painful to get inflation back down. So you know,
I think everybody on the federal open market
committee understands that higher inflation is a
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bad thing. It's not consistent with achieving
our-- our-- our other part of our dual mandate,
which is maximum employment. The best way to
achieve maximum employment over the long run is
to keep inflation low, around one and a half, two
percent.
STEVE LIESMAN:
14:26:26:00 So you're kinda implicitly rejecting the idea of
IMF economist (Olivier) Blanchard to aim for a
higher inflation rate.
BILL DUDLEY:
14:26:31:00 Absolutely. I'm not-- I'm not sort of rejecting
it, I am rejecting it. (LAUGHTER)
STEVE LIESMAN:
14:26:37:00 The economy of late looks like it's on a little
bit better footing. Are you at all more
optimistic than you had been, given s-- say, from
the-- from the summer, at all? You s-- what--
what kind of acceleration are you looking for in
2011, from what you talked about earlier, the
slower second half?
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BILL DUDLEY:
14:26:50:00 Well, I think the most recent set of economic
numbers have been a little bit better. We saw--
a somewhat better private-- sector employment
report. We saw a pretty good jump in hours
worked-- in-- in October-- retail sales a little
bit firmer.
14:27:06:00 But you know, the-- the-- the-- economies have a
lot of volatility in them. So I would be a
little bit hesitant to throw out too big a signal
from one month's worth of-- of data. Also it's
important to recognize that we have lots of slack
in this economy. So we need many, many months of
200,000, 300,000 pings in payroll employment. We
haven't even got to that level once yet.
14:27:28:00 So I think that, you know, it's-- it's-- it's--
it's a-- it's heartening to see a little bit of
signs of improvement. And I think-- the easing
of financial conditions that we engineered from
August to November was probably a helpful part of
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that story.
STEVE LIESMAN:
14:27:41:00 One of the criticisms of Fed policy is that there
could be potentially large losses on the Fed's
balance sheet if interest rates go the other way.
How much concern is-- essentially, the steward of
the Fed's balance sheet do you have about that?
BILL DUDLEY:
14:27:50:00 Well, I think the ad-- the-- you know, I think
it's very, very important to recognize that the
large scale asset purchase program does expose
the Federal Reserve's balance sheet to risk in
the sense that if interest rates go up a lot,
long term interest rates go up a lot-- the
Federal Reserve could have losses on some of its
securities.
14:28:06:00 But m-- my own personal view is that-- if that
were to occur, it'd be occurring in an
environment where we're actually getting a strong
economic recovery. So the costs there, I think,
would be very modest, relative to the benefits of
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actually having much stronger employment, and
much lower unemployment rate, a much healthier
economy.
STEVE LIESMAN:
14:28:24:00 Interest rates, since you started QE, seem to be
going the other way, and the dollar seems to have
done the opposite of what critics contended was
the point of the policy. What do you make of
the-- of-- of the tenure now sort of up in that
280 range when you-- back in Jackson Hole, you're
in the 260 range?
BILL DUDLEY:
14:28:40:00 Well, I think that a couple things are happening.
One, the economic news is looking somewhat
better. And of course, the bond market's going
to react to that more favorable economic news.
So yeah, the problem always is-- the question is
well, what would the bond yield be without the
second large scale asset purchase program. And
we just don't know what that counter factual (?)
would be.
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14:28:56:00 I think the second thing, of course, that's
happening is-- you know, there-- there has been
some-- renewed concerns about some of the
peripheral countries in Europe. And so the Euro
has-- has-- has weakened against the dollar after
strengthening versus the dollar. And I think the
issue, of course, is that, you know, large scale
asset purchase program, people were expecting it.
And so, you know, it's probably a little bit of
the, you know, buy on the rumor, sell on the
news-- when the large scale asset purchase
actually-- program actually arrives.
STEVE LIESMAN:
14:29:22:00 So I just got back from Seoul where members of
the G20 approved Basel Three, something you
worked on, but also-- I want your comment on what
they did relative to the big systemically
important banks. Did they kick it down the road
to a place where nothing will get done, or do you
feel confident having-- knowing what's inside
that communicate, that this is beginning of a
process that in say, a year's time, will result
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in real regulation, and-- and a real addressing
of the too big to fail issue?
BILL DUDLEY:
14:29:48:00 I think the too big to fail issue is being
addressed-- both in the U.S. and elsewhere.
What's happening on the international track is
identifying-- globally-- important-- systemically
important financial institutions. So-- and
basically-- for those institutions-- it's
thinking about-- having-- rules and regulations
in place that required them to have more loss
absorbing cap-- capacity relative to smaller,
less systemically important institutions.
14:30:17:00 And of course, here in the United States-- you
know, the-- the-- the Dodd Frank Act (PH) has
established-- a new resolution regime for large
systemically important non-bank financial
institutions, so we're making progress on this.
You know, but this is not easy-- for globally
active firms that are participating and active in
many different jurisdictions-- it's going to take
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some time to develop a resolution regime that
works-- you know, in a coordinative fashion
around the world.
STEVE LIESMAN:
14:30:41:00 Do you feel like a year, you'll come back, and--
I know you're goin' to Basel a lot. Do you feel
like that-- that process is going to lead, in a
year's time, through a real global regime?
BILL DUDLEY:
14:30:50:00 Well, I think it's going to-- it may-- may take
longer than a year. I mean, I think, in fact, it
will probably take longer than a year. But I
think if-- you know, if the U.S. can make
progress on-- in implementing its resolution
regime, and other countries can make similar
progress-- then I think, you know, down the road,
we will get to a point where we actually can
resolve-- a large complex global firm.
STEVE LIESMAN:
14:31:07:00 And-- does it mean higher capital requirements
for big banks?
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BILL DUDLEY:
14:31:12:00 Well-- what-- what the-- what the G20 and the f--
financial stability board have endorsed is-- is--
is greater loss absorbing capacity-- for these
firms. Doesn't necessarily have to be a higher
common equity, but it just has to have a greater
loss absorbing capacity. So that could be a debt
that converts into equity-- or contingent
capital, or s-- something that, you know, other--
other-- other measures.
14:31:33:00 (OFF-MIC CONVERSATION)
STEVE LIESMAN:
14:31:38:00 China now seems to be battling a-- an inflation
problem, or at least taking action as if it has
one. How much of the inflation problem that
China seems to be having right now, in your
opinion, stems from its currency policy?
BILL DUDLEY:
14:31:53:00 I think the-- you know, China has-- a bit of an
inflation problem because they've been growing
very, very rapidly. You know, you look at their
growth rate, it's been very, very, very strong.
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You know, their currency has been appreciating,
but at a very modest rate.
14:32:07:00 You know, I think if they-- you know, if they--
if they want to-- restrain inflation, they have a
number of tools to-- to do so. One tool is
raising interest rates, another tool is raising
reserve requirements, and then a third tool would
be letting their currency appreciate at a-- at a
faster pace.
STEVE LIESMAN:
14:32:23:00 One outcome from what seems to have happened in
the United States with the-- with policy has been
capital controls on some emerging market
countries. Does that give you concern?
BILL DUDLEY:
14:32:32:00 Well, I-- I certainly want-- want to-- you know,
tell emerging market countries how to cope with--
large capital in flows that they're experiencing.
I think it does create-- you know-- difficult
situations. So I think it-- I certainly
understand when they-- when-- when-- you know,
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why they're putting those capital controls in
place.
14:32:50:00 You know, they basically have three options;
capital controls-- reserve accumulation, or
letting their currencies of-- appreciate very,
very sharply. And so I-- I-- certainly-- it
certainly makes sense that you might want to use-
- more than just allowing the currency to
appreciate very, very sharply, 'cause that could
start to distort the composition of growth within
the economy.
STEVE LIESMAN:
14:33:11:00 IS THERE something that you want to add to the
discussion.
BILL DUDLEY:
14:33:23:00 Well, I think the-- the big thing that I-- I
really want to stress is-- is the fact that--
there has been a debate on the FOMC about the
large scale asset purchase program and-- you
know, that-- in my mind, that's completely
appropriate.
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14:33:34:00 Reasonable people can-- can differ about where
the benefits and costs fall. But I think the
important thing to stress is that the FOMC
membership is really, actually-- has a consensus
on a couple important issues. One, the
importance of the dual mandate-- try to achieve
maximum employment and price stability. Price
stability not just in the present, but over the
long run. Two, to use all available tool to try
to achieve that dual mandate. And three, most
importantly-- not let inflation get away for a
little while.
STEVE LIESMAN:
14:35:21:00 Bill, did you suggest earlier that you think
quantitative easing will have little effect on
the economy. Is that what you're saying?
BILL DUDLEY:
14:35:26:00 Little effect, I wouldn't agree with. Modest
effect. It's not a fantasy. It's not a magic
wand. It's going to make the economy grow a
little bit faster. It's going to generate a
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little bit more employment growth. But you know,
we have a long bumpy road to travel.
14:35:37:00 Now, that said, a little bit faster employment
growth-- is a good thing-- because it pushes the
economy farther away from-- from the tipping
point. You know, if we can get even a little bit
faster growth, there's more chance of a virtuous
circle taking hold where faster employment growth
leads to rising income, leads to more spending,
leads to rising confidence, and then the circle
continues in a p-- very positive direction.
14:36:03:00 So I think that people understate the importance
of a little bit faster growth. A little bit
faster growth can make the difference between a
very good outcome down the road and a very bad
outcome. And I don't know-- so I think that, you
know, people who focus on, well, it's only worth,
you know, X-tenths of a percent on GDP, or X-
tenths of a percent on the unemployment rate are
missing the point that the difference between
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moving a little bit faster-- and moving a little
bit slower can-- can make all the world of
difference because the economy does have a
tipping point.
STEVE LIESMAN:
14:37:04:00 So what are the ways that-- these large scale
asset purchases can affect the real economy?
BILL DUDLEY:
14:37:10:00 Well, I think that it-- works on the real economy
through the effect on financial market
conditions. So for example, as we went from
August to November, what we saw was the stock
market went up. Stock market going up boosts
households' wealth, makes people maybe a little
bit more comfortable, spending a little bit more,
saving a little bit less.
14:37:26:00 We also saw a drop in long term interest rates.
We saw-- a compaction, a compression of credit
spreads. So the cost of businesses to--
undertake new investment-- fell during that
period. And obviously, very low mortgage rates
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make housing more affordable, so that create--
increases the demand for housing, which is
particularly important in environment where--
where the housing market is very, very-- soft.
STEVE LIESMAN:
14:37:47:00 But people say the Fed is playing a dangerous
game by targeting the stock market.
BILL DUDLEY:
14:37:52:00 I don't think we're targeting the stock market,
what we're doing is we're removing treasury
securities from the private sector's hand, and
letting the private sector choose what assets
they want to replace those treasury securities
with.
14:38:04:00 So it's really the private sector making the
choice, okay, so I'm-- no longer can hold these
treasuries, 'cause I have now sold them to the
Fed. So the private sector's deciding, you know,
do they want to bid up the stock market, do they
want to buy c-- corporate bonds. So it's really
the private sector that's making the decision
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what asset to own at that point.