James Brian Bullard: Trade War Has A Lot More Impact Outside The U.S.

James Brian Bullard: Trade War Has A Lot More Impact Outside The U.S.
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First On CNBC: CNBC Transcript: St. Louis Fed President James Brian Bullard Speaks with CNBC’s Steve Liesman from Fed Summit in Jackson Hole, WY Today

WHEN: Today, Friday, August 23, 2019

WHERE: CNBC’s “Squawk Box” – Live from the Fed Summit in Jackson Hole, Wyoming

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The following is the unofficial transcript of excerpts from a FIRST ON CNBC interview with St. Louis Fed President James Brian Bullard and CNBC’s Steve Liesman on CNBC’s “Squawk Box” (M-F 6AM –9AM) today, Friday, August 23rd, live from the Fed Summit in Jackson Hole, Wyoming. The following is a link to the interview on CNBC.com:

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JOE KERNEN: We’re getting ready for Jay Powell’s speech later today in Jackson Hole. But, before we hear from the Fed Chair, Steve Liesman is joined by a very special guest. Good morning, Steve. Is he big and hairy?

STEVE LIESMAN: Yeah. Yes. No. No, he’s not.

JOE KERNEN: Kind of. We don’t really know.

STEVE LIESMAN: Yes, as of in good morning, is I meant to say. No, he’s not big and hairy. And just so people were not watching in the last half hour or yesterday understand, we are on Big Foot watch here at Jackson Hole, among the wildlife. We have seen elk and moose, no Big Foot yet but we do have a crew of people who are out there looking. Let’s not waste any more time. We are joined by St. Louis Federal Reserve President James Brian Bullard, now, a tradition for you to get up early. Now you sort of ask for it -- we say ‘5:30?’ You say, ‘Yes.’


STEVE LIESMAN: You -- I know you do it’s great. So, let’s turn up the heat on this cold morning here. We had two Federal Reserve Presidents yesterday, your colleagues, suggest they were not so inclined to cut interest rates because, they say the economy is running about where they thought it was going to be. They are concerned about excess leverage in the economy. Where do you stand relative to those arguments and what is yours about where rates ought to go?

JAMES BRIAN BULLARD: Yeah, if you look at these tips, yields, break evens, tips breaks even.

STEVE LIESMAN: Tips are inflation adjusted bonds –

JAMES BRIAN BULLARD: What the market thinks inflation is going to be over the next five years, let’s say. And you adjust it, because it’s CPI, you adjust it to PCE. Market’s only expecting about 1% or 1.1% inflation. So, we’re supposed to hit our inflation target. That’s one reason why I’ve argued that, you know, we should get lower here.

STEVE LIESMAN: But to hit your inflation target, I mean, you would think you’d have to be aggressive on the interest rate front?

JAMES BRIAN BULLARD: Well, you know. Yield curve’s inverted here. We have one of the higher rates on the whole yield curve. That’s not a good place to be, I think.

STEVE LIESMAN: So, I want to underscore that. Robert Kaplan said this yesterday. And I have not checked if this is true. I assume he’s right. The Fed funds rate is the highest rate on the yield curve.

JAMES BRIAN BULLARD: Yes. Well, I see the curve’s trading up a little today. But yeah, basically.

STEVE LIESMAN: So, that means – let’s just be clear about what that means. Overnight money -- if you lend me money overnight, I pay you more than if you lend me money for ten years.


STEVE LIESMAN: That’s weird. Right?

JAMES BRIAN BULLARD: Yeah. So, I mean, obviously, a down draft in global yields and we’re going to talk about that and trade war, all that. I think the Fed needs to stay consistent with where yields are trading.

STEVE LIESMAN: So, let’s put that aside. We’ll come back to that argument. What’s your economic outlook? How much concern do you have for the economy? How much recession concern do you have?

JAMES BRIAN BULLARD: I think consumption looks pretty good. Obviously labor markets continue to do well in the U.S. and we’ll keep an eye on that. Some of the retail sales that came out, last week, very good. I guess some this week, too. So, you know, all of that looks good. I think the question is, looking forward, you know, how much risk are we facing from the fact that you’ve got a global manufacturing contraction going on? And possibly more to come. So, there’s down side risk and I think you’d like to take out insurance against that downside risk. And I’d like to take out more insurance against a down side risk. But the good side is, okay, nothing happens, the U.S. economy continues to grow, we can take the insurance back next year if it turns out that this is all going to blow over.

STEVE LIESMAN: Before we go macro again to the global story, I want to go micro in the sense that St. Louis is a great microcosm of the country. You have pretty strong manufacturing business but also AG. Can you talk about what – because one of the things Fed Presidents do is you talk to these businesses all the time. Tell us what they’re telling you about their outlook and their current conditions in both manufacturing and in agriculture?

JAMES BRIAN BULLARD: Yeah, the agri-business sector has not been good for the last couple of years. This year you had a combination of very wet weather all across our district -- really delayed planting and made people change plans, even not plan at all. And then in addition, you’ve got the trade war going on, which is very much hitting the AG sector very directly.

STEVE LIESMAN: Okay. Now let’s take a step back. The President argues, among other things, that our rates are high relative to Germany and other countries around the world. And he also further argues they’re keeping rates low in order to keep their currency low and gain advantage on exports. How do you respond? Is that an argument you agree with?

JAMES BRIAN BULLARD: Yeah, European rates low, ours higher. But our economy is better. So, I think the growth in the U.S. and the innovation in the U.S., the big tech in the U.S., a lot of things are, you know, generally speaking, are going well in the U.S. compared to Europe. So that’s part of the differential there.

STEVE LIESMAN: Talk about your approach to interest rates. I hear you saying clearly you think the next move ought to be a cut. But when you talk about the tips rate being down very low, 1% depending upon how you adjust it, and needing to get to 2%, that strikes me you could favor a fairly aggressive rate cutting regime.

JAMES BRIAN BULLARD: You know, I’d like to see how the, that market would react to what we’re doing. But it doesn’t give me a lot of confidence. We’ve missed our inflation target to the low side since 2012 basically --

STEVE LIESMAN: Only seven years?

JAMES BRIAN BULLARD: Yeah. Continuously. And now you’re looking out five years and you’re telling me again, you know --

STEVE LIESMAN: Another five.

JAMES BRIAN BULLARD: Yeah. So, I -- you’d like inflation, the U.S. economy a surprise to the upside the last 2.5 years. And you would expect inflation to be probably above target in this environment.


JAMES BRIAN BULLARD: And that’s not the situation we’re in. So, I’d like to focus on that and get that to happen.

STEVE LIESMAN: Joe Kernen has a question back in Times Square.



JOE KERNEN: Good to see you and thanks for playing along with the -- the big and hairy and all that kind of stuff. But let me -- is there a big hairy mal-investment problem globally right now you can see? Or is it really just secular disinflation globally that is the primary thing that we’re talking about here? I mean, there must be something somewhere where all of this money is sloshing around where it’s going to come back to haunt us. But it’s not – I mean, the biggest bond rally in history, right? I mean, 30-year treasuries have never been this valuable, have they?

JAMES BRIAN BULLARD: You know, I think the trade war has a lot more impact outside the U.S. than it does inside the U.S. So, we’re all stressing about it here, but if you’re a small country outside the U.S., you’re very concerned about what the future holds. So, they’re not going to make the billion-dollar investment. They’re not going to build the new factory while all of this uncertainty is in the air. So, you see the global economy somewhat slower than it was, and possibly getting slower still. That’s feeding back to U.S. equities and to U.S. bond markets.

JOE KERNEN: What I’m saying is, is there something unintended happening that we don’t have our eye on right now that’s going to come back to roost because of all of this money, all of this cheap money sloshing around? Is there overbuilding going on? Is there -- are things being done that wouldn’t be done if there was, you know, some come-uppance in the near future?

JAMES BRIAN BULLARD: Well, I don’t think that we have a financial bubble on the order of magnitude of the internet bubble or the housing bubble. But I am sympathetic to the idea that we could face problems going forward. I’m not sure interest rate policy is necessarily the way to handle that. I think you’d like to handle that sort of thing through other channels.

STEVE LIESMAN: Jim, let me follow-up on that, I really like that question on the excess leverage issue. Are you concerned that – will lower interest rates solve the problems that are out there? When you talk to businesses, is the cost of capital the issue? And if the trade war and global economic weakness of the problems, how are the lower cost of funds in the U.S., how does that solve that problem?

JAMES BRIAN BULLARD: Yeah, I mean, we’re always operating on the margin. And so, yeah, sure, there are marginal effects and it would stimulate interest sensitive sectors. And I think that’s as powerful as ever. And so that you would have some effect from that. Is it going to solve every problem in the economy? Absolutely not. There are many other things and other types of policies that have to be used to address other issues.


ANDREW ROSS SORKIN: Hey Jim, I have a different question. It relates to all of this, which is to say, as you know, the CBO reported this week that the U.S. deficit is going to exceed a trillion dollars next year. I wonder whether you think low interest rates are actually helping keep this what I describe as irresponsible party going?

JAMES BRIAN BULLARD: It does seem like the deficit hawks have -- are on vacation in Washington. So, I don’t know. I would say this: I do think it’s time to re-evaluate our models of government debt and what we think is too much government debt. We’ve the Maastricht treaty – it has been around for 20 years, it enshrined the idea of 60% debt to GDP ratio was a reasonable number -- pretty much every country is over that and has, many of them have not experienced dire consequences from that. So, I think we need to think more carefully about the –

ANDREW ROSS SORKIN: What’s a fair number then? What’s a fair ratio?

JAMES BRIAN BULLARD: Yeah. Well, I wish I knew. But I’m saying that it’s time to have this discussion in the macro community. I don’t think you can just harken back to the Maastricht treaty and say that’s the number we’ve got to hit every day.

STEVE LIESMAN: 300% was the debt to GDP ratio of England during the 19th century. 200% plus is now Japan. Right?


STEVE LIESMAN: Neither of those countries suffered very much.


STEVE LIESMAN: We don’t know especially when it’s the reserve currency. Which kind of gets to a question, Jim, that I think is fascinating here. You’ve got to set interest rates for the United States. At the same time, you just talked about the feedback from the globe--


STEVE LIESMAN: --of global economies. So, to what extent is the U.S. too tight for the world, and to what extent do you take that into account when you figure out where to set U.S. interest rates?

JAMES BRIAN BULLARD: Yeah, I’ve long argued we’re in this low interest rate regime and we just have to respect that. And that sort of talk has come out in other ways in the monetary policy debate. But, you know, it’s just not your grandfather’s economy and you can’t be thinking about the policy rate at 5% as being sort of the normal rate, the way it was in the 1990s. We’re operating at a lower level. But nevertheless, at that lower level, we might take out insurance in some circumstances. We might take it back in other circumstances. I don’t know if you remember this ’98 example. 1998, you had the Asian Currency Crisis going on. A very similar situation. A lot of uncertainty abroad. We were worried about that coming back to the U.S. We lowered the rate, I think, a total 75 basis points –

STEVE LIESMAN: 3 rate cuts for 75 – a midcycle adjustment—

JAMES BRIAN BULLARD: And then, not too much really happened partly because we got the benefit of lower interest rates in the U.S. -- so not very much happened in the U.S. then the Fed took those back gradually over the subsequent period. So, I think that that’s a good model or a good baseline case for what could go on here. You take out the insurance. If you -- if nothing happens, you take it back.

STEVE LIESMAN: So, I mean, that’s important. Right? Because Fed Chair Powell said mid-cycle adjustment and the market freaked out. I will say that many of us in the press corps in the room didn’t understand mid-cycle adjustment as one cut. Because we thought it was hearkening back to both ’95 and ’98 when there were three cuts in each instance, over different periods of time. Is that what this is like here right now? Is that the model in your mind?

JAMES BRIAN BULLARD: I don’t want to -- I’m not speaking for Jay. I’m speaking for me.

STEVE LIESMAN: You don’t want to mid-cycle adjustment.

JAMES BRIAN BULLARD: Yeah. But I do like those examples. And I think those were cases where things were played very, very well. And it’s always the case with insurance, where you can say, well, you know, you made these cuts and it turned out the economy continued to grow. But that’s okay. Then you can just come back and take the cuts back.

STEVE LIESMAN: With apologies to the control room, just one more quick question. If you guys could put up the DXY, the dollar chart. It’s strengthening again this morning. Every time you guys seem like you make a move that could potentially improve the U.S. economy, the dollar strengthens.


STEVE LIESMAN: Could we actually weaken the dollar through our interest rate policy?

JAMES BRIAN BULLARD: So many things affect the dollar, including the quality of the foreign economies and the foreign policymakers and what they’re doing. If you look at the trade weighted dollar over the last two and a half years, yeah, it fluctuates but it’s not that different than it was two and a half years ago. So, I mean, as a macro guy, I kind of say, ‘Well, it looks kind of the same.’ If you’re in the market every day and you’re trying to make your quarterly earnings, you’re going to be pretty concerned about it. But I don’t feel like we’ve gone overboard on the dollar here.

STEVE LIESMAN: Jim, you’re very kind to get up and join us this morning for this tradition we have. Thanks very much.

JAMES BRIAN BULLARD: All right. Thanks very much.

STEVE LIESMAN: Back to you guys. Jim Bullard, St. Louis Federal Reserve President.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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