Does The Feds Framework Still Work? w/ Dennis Lockhart

um so Dennis what do you think the conversation is right now around the FED table around the fomc table what are the governors and presidents most focus on I mean very few people get the opportunity to sit there you know what it's like it seems incredibly difficult right now every time we have this conversation we kind of think we come back to the federally being between a rock and a hard place just such a diff so difficult navigating this what do you think the conversation is like right now well there are several conversations that go on there's a conversations among the governors in Washington who are co-located and and mostly in the office I would say so they they have a chance to to compare notes on their assessment of the of the circumstances and then the presidents of the reserve banks who are out in their individual Reserve Banks may or may not be having many conversations among them among that group but uh are talking to their economic staff almost every day to evaluate the situation what I think is the focus at the moment would be first sort of what is the core inflationary picture what what is the Econo how is the economy trending and then second what are the risk factors associated with the debt ceiling and the sort of on-again off-again small and Regional Bank crisis or crisis may be too strong a word small and medium Bank liquidity issues that is it seems to be feeding a credit contraction or or at least a backing off of uh credit availability those are the things that seem to me uh to be on the table at the moment um you know I just occurs to me I'm not sure that everyone really understands the way it uh you know the way it works um and the the FED presidents play a really important role in that dialogue don't they it's my understanding that you're really I don't want to say boots on the ground but have that um view into the real economy in the region that you're operating in to get a sense of what's happening because the US is it's an enormous economy it has a lot of different some areas are experiencing you know certain Dynamics and others or not I would assume that that information coming from the FED presidents is extremely important in the decision making yes I I'd like to believe it's very valuable and I think the governors and I'm quite certain chair Powell values the input that they uh that they all get from from the various uh fed districts the the process between meetings is a very important process and the staff and the presidents of the reserve banks are engaging with uh business people and Community leaders throughout their regions and asking the question how are you experiencing the economy what are you worried about and what how does it feel to you you're going to get different answers depending upon the sector represented by the the person being interviewed but all of that is accumulated and and synthesized into something called the beige book which is really is really a book of uh or a uh a report of anecdotal inputs and those anecdotal inputs are often repeated at the table at the Federal Open Market Committee meeting and and I think are are a valuable input even though it's anecdote it's not data it's not hard numbers it is still used as part of the inputs to the decision yeah absolutely I mean what you're hearing from people um I I think sometimes gives you especially when you're starting to hear it from different regions um it gives you a fantastic Insight I would think into what's going on and maybe a little bit more in the moment than you know some of the data which we know just by Nature the way it was collected or at least it used to be lags so so right now you mentioned the problem that the the concern that's probably um going to be expressed after seeing that expectation number because expectations matter so much fed Governor prior to that fed Governor Michelle Bauman already came out warning that more rate hikes might be needed do you think that now having seen that expectation data do you think that the fed's going to have to raise rates again in June what are the options that they're likely weighing here I think it's a complicated picture because you you I think you first start with um the evolution of of the inflation problem and the economy absent the banking situation banking system situation and absent the debt ceiling so if you're just to isolate that and look at the probability of a pause versus the probability of of another rate increase it will depend largely on the inflation data the data we received this week struck me as confirming a view of gradual disinflation but not rapid disinflation so you know the FED is not getting the climb down the ladder that it's looking for and that would argue that they would at least consider another rate increase at the at the upcoming June meeting having said that in the real world they have these other two factors and we don't know today how they're going to play out the trend of of of credit availability is to some degree evaluatable or accessible and this week we saw we had the senior loan officer survey which seemed to say that banks for a variety of reasons we're raising their credit standards and at the same time credit demand was declining so it's a shrinking credit picture for more than one reason the debt ceiling is is a real wild card it strikes me and and we will know I hope in the next few days how that's going to be resolved and I hope it has resolved with the debt ceiling being raised but uh if it goes to the to the just the 11th uh hour or more it's it's uh it's risky and and in a default situation I'm sure the committee would have to factor that into their decision so as I said there are there there's more than one factor at work here some of them are very contingent some of them are more predictable but uh you know that at the end of the day they were only probably two major decisions either to pause or to to continue with a rate increase my own handicapping of it is that the the the the committee is now in a position to pause if there are compelling reasons to do that yeah and I've got to think the two you mentioned are are huge concerns uh the when it comes to the The Strain in the regional Banks I mean won't another rate hike just exacerbate the situation well um I mean we've talked people talking about Bank walks they're not talking about Bank runs but they are talking about Bank walks and and there's a concern that that's just going to continue you know I think I I don't think you can deny that that raising interest rates has to some degree causes this problem and therefore continuing to raise interest rates certainly doesn't make it better even if banks are hedged even if banks are are relatively liquid um raising interest rates doesn't make it better so far the committee has tried to separate the two issues Financial stability on one side and inflation and monetary policy on the other and that was their position coming out of the the most recent fomc meeting that these are separable issues and I think the committee will try to continue to do that but the severity of the of the conditions that that we're facing you know could very well force a greater weight on the Regional Bank and small Bank liquidity issues even in making a decision on monetary policy yeah I mean they they would like them to be separate but that's that doesn't seem very tethered in reality um you know to say they're separate uh I well I think you know how do they continue to hold on to that line if you roll the film back a bit and you remember we had three bank failures actually Silicon Valley Bank signature bank and then with a bit of a lag Republic National Bank and I think Jay Powell was probably working from the best information he had but in in so many words in the press conference he said the problem has been ring fenced and and the deposit outflow of of other Banks uh as uh essentially ceased that that is what I heard him say in the press conference and that could have been their assessment at that time that this was a matter related to three Banks and that the problem was largely contained in that state of the world separating monetary policy from Financial stability policy would make sense you don't have to allow one to pollute the other but we have seen this week mostly in stock prices we've seen a continuing pressure on some of these Banks and and to some degree that the the declines in stock prices reflects a continuing questioning of their survivability or their uh solvency and it's just a matter of how severe this problem continues to be and whether it Cascades do you have any concerns about it being systemic the banks the individual Banks themselves are not systemic and the way we thought about systemic risk back in 2008 and 2009 and what I mean by that is the failure of any individual bank is not going to bring down the system but what we seem to be experiencing here is collectively this size of Bank call it a medium-sized Bank a Regional Bank collectively if you had a succession of runs on these Banks that's a systemic event it's going to really rattle the um the economy and could lead to something far worse that internationalizes or moves Upstream to some of the larger too big to fail Banks so I you know I do think you can argue that what we have seen and what we may be seeing cannot be dismissed as not not systemic that's a double negative there but but I'm I'm trying to stand I'm trying to be a little bit more subtle in the in the choice of words than just say it's a systemic event yeah yeah no I understand what you're saying I mean in the you know given the interconnectedness of the global economy it's really hard for me to get my head around how anything's ring fence but this this brings up a really good question that Colin has how does the FED check for accuracy of information and I'm thinking of it in terms of the speed in which things happen so we know when we've seen some of these issues especially with Silicon Valley Bank it was sort of a virtual bank run right I mean it would it happened in a way that we've never really seen before given the fact that people now have Bank apps on their phone is the Fed equipped to deal with that information and that kind of speed or is this something they're likely talking about well one day I'm sure they're talking about it let me piggyback on something you said and then you refer to the the nature of the bank run that we saw with Silicon Valley Bank um I think you can make the argument that we are in a new era of Bank runs is not your grandfather's Bank Run uh you know it's it's it's not uh It's a Wonderful Life with people standing in line outside a bank it's Chief Financial officers with unguaranteed deposits who are on their cell phones moving literally billions of dollars around to find a safe haven and it can happen extremely rapidly so I think everyone learned in the Silicon Valley Bank episode that that there is simply a new modern Bank Run and it's different than maybe the way it had been conceptualized as a risk even with recent years and no one realized how rapidly this can develop the impact of social media for example was not on anyone's radar screen that I'm aware of or if it was it was a very you know academic uh you know in the background kind of recognition that maybe runs could develop with the help of social media well we've experienced one now and I think everyone is upgrading their real-time information gathering for accuracy and for Speed speed in some respects maybe is as important as a hundred percent accuracy you can be eighty percent right and still make a decision that can forestall a problem yeah absolutely I I when we're talking about I just want to go back to the the uh you know the strains in the banking system and the credit crunch that's sort of happening as a result of that um we had a guest on earlier this week who was saying they're kind of estimating that it could be the equivalent of maybe three rate hikes some people have said as many as six I mean clearly this is going to be a drag on the economy how are you thinking about this how how much of an impact do you think it will have in terms of slowing the US economy I think it's very hard to quantify in terms of 25 basis point rate hikes one two or three I think that's a you know that's a a useful way of trying to make your assessment as scientific as it can be but I I just I think it's it's difficult but what appears to be developing is a the banks are pulling in their the how should I put up the banks are raising their standards and becoming much more selective in terms of credit and at the same time the demand for credit is declining probably driven by a gradually slowing economy which is the result of the rate hikes we've had before so in those circumstances I think there is a trade-off between the banks doing the job for the fed and the FED doing it itself by raising interest rates in other words I think the FED can make a judgment and I'm sure there will be different estimates of the impact of of the credit picture voiced at the table in June but make a judgment of the the substitutability of bank credit contraction versus another rate hike and I think they're probably now in a situation of being comfortable making that kind of judgment and therefore putting a pause on the table yeah yeah that'll be on on that side of the Ledger I want to get to um we have a bunch of questions I want to get to a couple of them before we before we flip over um and this is uh this is uh this is an interesting one uh Achilles everyone keeps complaining that the fed's not looking at the right data but isn't the FED aware of this because I'm pretty sure there are smart people in the FED versus what people generally give them credit for well yeah my experiences are a lot of smart people on the fed and uh I would not have survived from the job if I weren't surrounded by people who were a lot smarter than me and and and better educated and and particularly in economics than I was so yes uh on the matter of data the FED does not have um at least much of a stream of proprietary data other than maybe the surveys and the anecdotes that are collected between meetings as I referenced earlier so the FED is looking at the same data that Wall Street is looking at and that money management firms are looking at and the academic economists are looking at it's the same data um and you know no privileged information in the Fed so the question really is how much uh confidence do you have how much do you rely on the public data that come out mostly out of the government but out of uh some private firms and and other organizations that that issue a data series of one kind or another and the difference between the fed and most other consumers of the data is the Fed has literally hundreds of economists who are following the data so it's sort of more people working on it as opposed to something that's uh proprietary and I you know I think those people are extremely well qualified they understand the underlying methodologies which is important to know where the numbers come from and how the numbers are are actually calculated and uh periodically are in touch with the the statisticians who are the source of those of those data Series so that's the way I would characterize the do they have enough smart people questioned yeah yeah um and it's people who are doing it in depth all the time you know so they really I think that really gives you sort of some sense of ownership um just just to give you a little bit more color when I was at the Atlanta fed and important data were issued we would have a meeting any week of the seven six seven weeks between meetings so it's a continuous process we would have a meeting talk about the data that had come out and what its implication would be uh Benjamin asking uh in terms of the banking situation is it possible to solve these Bank Run risks simply by removing the reserve requirement for loans no I don't think that alone uh that that may help in in the sense of just easing up a little bit in terms of uh available funds and so forth for the for the banks but I'll answer that by saying um you know in in a bank run no amount of relief from reserve requirements is going to save you from from the kind of of deposit outflow that for example Silicon Valley Bank saw and and this is me speaking here I I don't want to be distant anybody else has a view a bank is a fairly fragile edifice in the first place leverage of ten to one basically so a small capital-based relative to total assets uh also a tendency to borrow short and lend long which is um obviously is is is an insolvency problem waiting to happen if everything happened at the same time running a bank is uh reliant on the law of large numbers that you have deposits coming in and deposits going out every single minute of every single day but it all adds up to stability providing there is confidence out there among depositors in the General Public so it is terribly reliant on trust and confidence and when that confidence is shaken the in I would call it the intrinsic fragility of the structure of a of a bank gets under pressure I mean it just or begins to express itself and that that's in some respects what we're seeing that's a fantastic description does that concern you massively when we again look at the ability for someone to tweet something and cause everyone to pick up their phone how do you address the issue of confidence and Trust well I do think we may have seen a a major change in in the Dynamics of that confidence and Trust question uh or we've experienced it with the recent bank failures because as you point out it's just just an influential tweet can start a a you know a bunch of Market actions that bring back conceivably bring down an institution that otherwise should be stable that it you know it's is you know more or less fundamentally in pretty decent shape and managing its problems but social media can create um just a a panic that is all psychological but it's real it has its effect so I you know I do think uh we're in a somewhat different world and I'm sure the Regulators are evaluating you know how do they operate within that kind of context yeah I would think so I was going to say I smell a white paper coming I certainly hope someone's very quickly very quickly looking into this uh we have a bunch more really good questions um we have hit the bottom of the half hour so if you'd like to continue with us make sure you scan that QR code for those of you who have to jump have a fantastic weekend hope you get out and enjoy the beautiful weather

Channel: Real Vision

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Id: 8ve_VXNmOBY

Length: 24min 10sec (1450 seconds)

Published: Fri May 12 2023