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00:00DAVID: WE WILL STAY ON THE SUBJECT OF CENTRAL BANKS IN WITNESS IS STILL KEVIN WARSH. WE SPOKE WITH MARTY FELDSTEIN EARLIER AND HE TALKED ABOUT HOW WE MEASURE THE HEALTH OF THE ECONOMY. >> I AM CONVINCED THAT WE ARE JUST SUBSTANTIALLY UNDERESTIMATING HOW WELL WE ARE DOING. THAT ALSO MEANS WE ARE OVERESTIMATING INFLATION. THE IDEA THAT THE FED SHOULD TRY TO GO FROM 1.6 -1.8 WHEN WE PROBABLY CANNOT MEASURE IT IS NUTTY. DAVID: WHAT DOES THE WEST COAST AND STANFORD HAVE TO SAY? >> DESPITE MARTY'S PEDIGREE, HE'S GOT THIS RIGHT. THE IDEA WE HAVE REDUCED ECONOMIC POLICY THROUGH A SCIENCE THAT THIS IS LIKE PHYSICS IS FOOLISH AND DANGEROUS. MARTY HAS THIS RIGHT. THE MODEL THE FED IS USING IS USEFUL BUT TO TAKE THE OUTPUT AS GOSPEL AND BELIEVE IN THESE FORECASTS THAT HAVE ONLY BEEN WRONG CONSISTENTLY FOR SEVEN YEARS IS A BAD WAY TO MAKE ECONOMIC POLICY AND DANGEROUS FOR MARKETS TO FOLLOW. JONATHAN: WHAT IS THE OUTCOME OF ALL OF THIS? THERE IS 20% OF THE DOLLAR FROM APPRECIATION -- THERE IS A 20% OF PATIENT DATA THERE IS A 20% APPRECIATION OF THE DOLLAR FROM JUNE. WHAT DO YOU MAKE OF THAT? >> THE FED HAS A JUDGMENT AND THEY WANT THE DOLLAR TO BE WEAKER. THAT'S NOT A HAWK VERSUS DOUG, THAT'S A U.S. POLICY. ; U.S. INDUSTRIAL POLICY BUT NOT A POLICY I WOULD FAVOR. THE FED IS IN THE BUSINESS OF ESTABLISHING SHORT-TERM INTEREST RATES. WE SHOULD GET OUT OF TO OTHER BUSINESSES-ESTABLISHING LONG-TERM INTEREST RATE AND TRYING TO MANIPULATE OR MEASURE THE CURRENCY. THERE IS A FREE FLOW OF CAPITAL AND NEEDS TO MOVE TO THE HIGHEST AND BEST PROJECTS. IN THE DEPTHS OF THE FINANCIAL CRISIS, MAYBE WE HAVE TO EXERT MORE INFLUENCE. JONATHAN: THE OTHER STORY IS JANET YELLEN. WHAT DO YOU MAKE THAT THE FED HAS SHIFTED AWAY FROM LOOKING AT DOMESTIC FACTORS AND THERE IS A CONCERN ABOUT GLOBAL RISKS? >> THIS CAN SOUND LIKE A PAROCHIAL AMERICAN BUT THE FED HAS HUGE SECOND AND THIRD ORDER IMPACTS TO EVERY OTHER ECONOMY IN THE WORLD. IT IS A MOST IMPOSSIBLE FOR OTHER MAJOR CENTRAL BANKS TO MAKE THE RIGHT DECISION FOR THEIR POLICY GOOD THEY HAVE NO IDEA WHAT THE FEDERAL RESERVE WILL DO IT IF PLANS CHANGE WITH THE SEASONS, ONCE THE FED ESTABLISHES A PLAN AND STRATEGY, IF IT STICKS WITH IT, THEN OTHERS CAN MAKE THE RIGHT POLICY MOVES FOR THEIR COUNTRY. WE WANT AN INTERCONNECTED GLOBAL ECONOMY AND WHETHER WE LIKE IT OR NOT, THE U.S. CENTRAL BANK IS THE MOST IN INSIDE OF THAT. ALIX: WE SAW JAMES BULLARD THROW HIS HANDS UP AT THE DOT PLOT. JANET YELLEN ACTUALLY SHOWED A CHART IN JACKSON HOLE. WILL THAT BE MORE HELPFUL? >> I THINK IT WOULD BE USEFUL IF THEY DEMONSTRATED THE KIND OF MODESTY THAT A CHART DEMONSTRATES. IT'S A FANCY WAY OF SAYING WE DON'T KNOW AND WE WILL NO LONGER PRETEND TO BE SOWED SIZE. THAT'S THE DIRECTION THE BANK OF ENGLAND HAS GONE. MARK CARNEY SUGGESTS TO MARKETS TO INFORM OUR JUDGMENTS. WE ARE TELLING MARKETS YOU SHOULD FOLLOW US. JONATHAN: THE OTHER SIDE OF THE CHART IS WE USED TO GO INTO THE INFLATION REPORT AND GO THROUGH THE INFLATION REPORT AND TRY TO WORK OUT WHAT IS GOING ON. YOU WOULD BE WAITING FOR THE BANK OF ENGLAND TO TELL YOU. WE ARE WAITING FOR THE FED TO TELL US BUT WITH A BIG ASTERISK. THE MARKET IS NOT BROUGHT ONE OF THESE FORECASTS FOR A LONG TIME. >> THEY NEED TO USE MARKET PRICES TO INFORM THEIR DECISIONS . INSTEAD, IN THE DEPTHS OF THE CRISIS, THEY FOUND THEY CAN PUSH

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Former Fed Governor Warsh: Danger of Fed as a Science

Kevin Warsh, distinguished visiting fellow at Hoover Institution and former Federal Reserve Board Governor, talks about the danger of breaking down Federal Reserve policy into a science and the global need for an established plan from the Fed. He speaks on "Bloomberg ‹GO›." (Source: Bloomberg)

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