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00:00SCARLET: LET'S START WITH YOU, ED. I WANT TO GET YOUR THOUGHTS ON WHETHER THE FED SHOULD BE RAISING RATES COME JUNE. IS THAT THE RIGHT DIRECTION GIVEN THE STATE OF THE ECONOMY? EDWARD: THERE ARE TWO THINGS YOU WANT TO THINK ABOUT WHEN IT COMES TO THE FED POLICY. FIRST, IS THE ECONOMY STRONG ENOUGH TO WITHSTAND RAISING RATES? AND THE SECOND IS, WILL IT STIMULATE A LAGGING ECONOMY EVEN IF IT IS NOT STRONG ENOUGH? THE FIRST QUESTION IS WHAT WE WANT TO FOCUS ON INITIALLY, AND THAT IS, WHERE IS THE ECONOMY RIGHT NOW? THERE IS NO QUESTION WE ARE IN MUCH BETTER SHAPE THAN WE WERE LOVE YEARS AGO AND I WOULD JUDGE THAT PRIMARILY BY LOOKING AT THE LABOR MARKET, AND I THINK THAT'S WHAT THE FED LOOK THAT. IF YOU LOOK AT THE UNEMPLOYMENT RATE, WHICH IS DOWN, BUT MORE IMPORTANTLY, THE JOB CREATION RATE, BUT -- WHICH HAS BEEN STRONG IN THE PAST FEW MONTHS AND THE LAST YEAR, THAT SIGNALS WE ARE ON TRACK AND IT'S TIME TO BE MOVING BACK TOWARD MORE REGULAR POLICY. THE NEGATIVE ON THAT, IF THE FED WANTS TO KEEP RATES DOWN, EXCEPT PLENTY OF AMMUNITION WILL STOP -- AMMUNITION. THE UNEMPLOYMENT RATE IS THE RIGHT NUMBER TO BE FOCUSING ON, BECAUSE IT TAKES INTO ACCOUNT THINGS LIKE LABOR FORCE REGISTRATION -- PARTICIPATION AND POPULATION GROWTH. THAT NUMBER IS LOW AND WAGE GROWTH IS LOW. AND GDP GROWTH IS NOT GREAT. AND THE RECENT QUARTER SALES HAVE NOT BEEN FANTASTIC ALSO BEEN A WANT TO KEEP IN -- HAS NOT BEEN FANTASTIC. IF THEY WANT TO KEEP THINGS LOW, THEY COULD HAVE AMMUNITION TO SAY THAT THE ECONOMY IS NOT REALLY A SICKLY WHERE THEY WANTED TO BE. BUT THEY SHOULD BE LOOKING AT UNEMPLOYMENT GROWTH AND MOVING TOWARD A MORE NORMAL TRAJECTORY. JOE: HOW DO YOU RECONCILE THE CRITICISM WITH SOME OF YOUR SKEPTICISM ABOUT WHETHER THE ECONOMY IS REALLY THEY ARE? EDWARD: I WAS NOT A CRITIC OF THE EARLY POLICIES. IN FACT, I THOUGHT THE FED BEHAVED ADMIRABLY IN TWO THOUSAND EIGHT. THEY DID A GREAT JOB. AND QE1 WAS PROBABLY A GOOD MOVE. QE2, LESS SO. AND QE3, EVEN LESS EFFECTIVE. WE ARE NOW IN A SITUATION WHERE MONETARY POLICY IS NOT DOING MUCH TO STIMULATE THE ECONOMY. I WOULD DISAGREE WITH YOUR LEAD-IN BY RAY D ALIO SAYING THAT IF THE MONETARY AUTHORITIES TIGHTEN WE WILL BE IN THE TROUBLE. AS LONG AS WE DO IT IN A GRADUAL FASHION, AND I DON'T SEEN A CHANCE THEY WILL DO SO RADICALLY, I DON'T SEE THE ECONOMY STRUGGLING. I THINK WE WILL BE ABLE TO SHAKE OFF AND DO SO APPROPRIATELY. AND IF WE DON'T GET TO NORMAL RATES, WE WON'T HAVE THE DISCRETION TO USE MONETARY POLICY EFFECTIVELY IN THE FUTURE. THAT WILL BE IMPORTANT TO THINK ABOUT AS WELL. SCARLET: MIKE MCKEE, OUR ECONOMICS EDITOR, WHAT IS YOUR TAKE ON THAT? BECAUSE SO MANY PEOPLE SAY THAT THEY COULD HOLD OFF, BUT OTHERS POINT OUT THAT IF THEY DO THEY WILL BE BEHIND THE CURVE. MIKE GUPTA I THINK PEOPLE ARE MISINTERPRETING -- MIKE: I THINK PEOPLE ARE MISINTERPRETING RAYDALIO'S COMMENTS. ALL THEY SEE ARE THE HEADLINES. HE DOES TALK ABOUT HOW THEY WILL NOT BE ABLE TO RESPOND THE FUTURE IF THEY DON'T GET RATES UP. WHAT HE SEEMS TO BE CONCERNED WITH IS THE SPEED WITH WHICH THE FED WOULD RAISE RATES AND HOW HIGH THEY WOULD GO. IN 1937 RATES, BUT BANK REQUIREMENTS UP TO 50% AT A TIME THAT THEY WERE CAPPING THE MONEY SUPPLY GROWTH. THE CONFLUENCE OF EVENTS THEY CAME TOGETHER IS NOT IN PLACE APPLES OF THE FED IS NOT TALKING ABOUT A RATE INCREASE -- IS NOT IN PLACE NOW. THE FED IS NOT TALKING ABOUT A RATING PRIEST, AND EVEN IF THEY DID RAISE RATES, IT WOULD PROBABLY NOT HAVE THE SAME EFFECT ON THE ECONOMY. JOE: WHAT ARE THE OTHER THINGS WILL BE WATCHING TODAY? MIKE: JANET YELLEN , TO GO BACK TO 2000 FOUR, THE FED PLAYBOOK THEN, THEY WANTED TO GET AWAY FROM A STATEMENT OF TIME DEPENDENCY. THEY WENT TO A STATEMENT WHERE THEY SAID WE COULD GO TO A MORE MEASURED PACE OF RAISING RATES. THAT IS PROBABLY THE STATEMENT SHE WANTS TO GET ACROSS TODAY. THEY WENT WITH THE WORD PATIENT EVERY TIME PREVIOUSLY, BUT THAT IS NOT GOING TO HAVE THIS TIME. YOU WANT TO LISTEN TO WHAT JANET YELLEN SAYS ABOUT THE PACE, AND HOW FAST WILL THE RATES GO UP. WE ARE MISSING TO FED MEMBERS -- TWO FED MEMBERS HERE. THE STAFF IS GOING TO CONTRIBUTE THEIR FORECAST TO THE PROJECTIONS, BUT WHEN YOU GET SOMEBODY TO TAKE THOSE PLACES, IT MAY CHANGE AGAIN. WE DON'T KNOW WHICH THE DOTS AR E, BUT YOU HAVE TO TAKE THAT WITH A LITTLE GREAT OF SALT. BUT IF THEY DO IN GENERAL, IT WILL BE A SLOWER PACE AND THAT WILL PLEASE THE MARKET. SCARLET: THERE IS A FACTOR THE FED CANNOT OVERLOOK. WHAT KIND OF ALLOWANCES OR CONCESSIONS DOES THE FEDERAL RESERVE MAKE WITH REGARD TO THE DOLLAR? EDWARD: THE FED CERTAINLY TAKES INTO ACCOUNT EXCHANGE RATES IN SETTING MONETARY POLICY. EXCHANGE RATES ARE NOT SIMPLY SET THE FED, BUT ALSO SET IN INTERACTIONS WITH OTHER BANKS AS WELL AND THE ECB HAS BEEN THE PRIMARY PLAYER IN THAT SCENARIO. IF WE ARE LOOKING AT EXCHANGE RATES, IT HAS NOT SO MUCH TO DO WITH THE FED AND MUCH MORE TO DO WITH THE ECB AND THE BANK OF JAPAN AS WELL. I DO THINK THE DISCUSSION ON EXCHANGE RATES, IT TENDS TO BE OVER EMPHASIZED. WHILE EXCHANGE RATES ARE ORTON AND THEY DO AFFECT THE ECONOMY AND TRADE PATTERNS, -- ARE IMPORTANT AND THEY DO AFFECT THE ECONOMY AND TRADE PATTERNS, THIS IS NOT THE NET IS PARTICULARLY CONTROVERSIAL. MOST PEOPLE LOOK AT IT AND FIND EXCHANGE RATES ARE A FACTOR, BUT RELATIVELY MINOR FACTOR IN AFFECTING THE ECONOMY. EVEN IF THE FED WERE TO AFFECT THE EXCHANGE RATES, AND I DON'T THINK THEY WILL IN A DRAMATIC WAY, IT WOULD LIKELY NOT HAVE A BIG EFFECT ON US. JOE: I WANT TO GET YOUR TAKE ON THE RECENT SLOWDOWN IN ECONOMIC DATA. THERE HAS BEEN SOME INDICATION THAT IT HAS COME UP BELOW EXPECTATIONS. DO YOU CHALK THAT UP TO THE WINTER? EDWARD, I CHECKED THIS UP TO STANDARD -- I CHALK THIS UP TO STANDARD VOLATILITY. YOU CAN SEE A LOT OF VOLATILITY IN THE GDP GROWTH RATES, THINGS LIKE EMPLOYMENT GROWTH. SOME OF THAT IS MEASUREMENT ERROR, BY THE WAY. THE GOVERNMENT COMES BACK TWO YEARS LATER AND RESTATES WHAT GDP WAS DOING, RESTATE SALES AND SO FORTH. PART OF THAT WILL BE CONTEMPORANEOUS MEASUREMENT ERROR, JUST STUFF WE DON'T KNOW WHAT IS GOING ON AT THE TIME. I WOULD NOT PLACE TOO MUCH SINCE THIS ON THAT. I DO THINK YOU WANT TO LOOK OVER THE LONGER RUN, TWO OR THREE ORDERS, AND AS I SAID EARLY -- TWO OR THREE QUARTERS, AND AS I SAID EARLIER, PRIMARILY BECAUSE OF THINGS THAT ARE HAPPENING IN THE LABOR MARKET. WE DO SEE STRENGTH THERE AND THAT IS USUALLY THE BEST INDICATOR OF WHERE THE ECONOMY IS GOING. AND THE OTHER THING I WOULD LOOK AT IS THE MARKET, BY THE WAY. THE MARKET TELLS US WHERE THE ECONOMY IS GOING MORE THAN JUST ABOUT ANYTHING ELSE, AND THE MARKET HAS BEEN REASONABLE OVER THE LAST QUARTERS, I WOULD SAY. -- THE LAST TWO QUARTERS, I WOULD SAY. WE ARE PROBABLY ON PATH FOR A 2% GROWTH RATE IN THE NEXT YEAR, WHICH IS PRETTY MUCH WHAT WE HAD. SCARLET: TO WHAT EXTENT IS THE FED LOOKING AT HOW THE MARKET REACTS TO WHAT IT SAYS? MIKE: THEY DO LOOK AT HOW THE MARKET REACTS, BUT MORE IN TERMS OF EXPECTATIONS THAN ANYTHING ELSE. THEY ARE WATCHING INFLATION EXPECTATIONS PARTICULARLY CAREFULLY, AND INTERESTINGLY, THEY HAVE COME UP A BIT IN RECENT MONTHS. INFLATION HAS NOT. THEY ARE LOOKING FOR IT TO INCREASE IN THE NEXT COUPLE OF QUARTERS. IF THEY ARE LOOKING AT THEIR FORECAST AND THAT IS WHAT THEY ARE DESOLATE THEY EXPECT, THEN THEY ARE GOING TO HAVE TO LOOK AT RAISING RATES TO BE AHEAD OF THAT, BECAUSE INFLATION IS A LAGGING INDICATOR. SCARLET: THERE IS THAT CHART. THAT IS WHAT IS SUPPOSED TO HAPPEN.

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Fed Has the Ammunition to Keep Rates Low: Ed Lazear

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