Market briefing --- Lori (slow)
welcome, from world headquarters in new york city. i’m lori rothman. this is bloomberg “after the bell.” jobs are more abundant. the unemployment rate matched a four-year low in march. we’ll take a closer look at the labor picture and get views on the economy from ucla anderson deral reserve bank president william poole. she will also get reaction from pimco’s bill gross, manager of the world’s largest bond fund to talk about the selloff today in treasuries. yields on the 10-year note at the highest level since 2002, the 10-year hitting 4.96%. make sure you stick around for that. the settling numbers as the market closes on wall street -- for the week, the dow and the s&p do manage to hold on to marginal gains and the nasdaq just slightly lower on a percentage basis. before we get to mr. poole and bill gross, let’s bring you up to speed on that march employment report from the labor department. payrolls grew by 2110000, more than most economists forecast. this followed a february gain that was revised downward today and brings the addition this year to 540,000. unemployment unexpectedly fell .1 a point, matching a four-year low. average hourly earnings rose .2%. economists say the data suggests the labor market is solid.
>> we were looking for 207, it came out 211. we were looking for unemployment to down tick and we got a .2 gain in hours worked and .2 in wages. year on year, that’s 5.3% income growth, nominal income growth. that’s very respectable. so overall i think this is outstanding.
>> manufacturing lost another 5,000 jobs in march, the second straight drop. economists we surveyed were looking for a gain. the treasury market did not like these numbers. traders say given the drop in the unemployment rate, wage growth may start to pick up, raising concerns about inflation. the 10-year today was down 15/32 with that yield pushing up to 4.96%. that is a four-year high on the 10-year. the five-year also significantly lower, off 7/32, yielding 4.89% and the two-year today also down, yielding 4.88%. we do see a continuing of steepening in the yield curve. in currencies, big day for the dollar. the yen and euro, dollar stronger versus those three currencies. what is the fed thinking what it comes to jobs, inflation and economic growth? kathleen hays is in washington with st. louis federal reserve bank president william poole.
点击播报
Listen Interview: St. Louis Fed Bank President
>> it’s such an interesting time and interesting day to have someone like bill poole here with me. he has been president of the st. louis fed for eight years, has sat through many cycles on the federal reserve and i’m happy to have him as my guest. we want to make it clear at the outset, you’re speaking for bill poole, not the entire fomc.
>> exactly.
>> the employment report, such a big deal. the payrolls up a bit more than expected, the unemployment rate falling unexpectedly. has the latest report changed your view of the economy and interest rates?
>> i think the report was so close to what the market anticipated. yeah, this number was a tad bigger but 13 the revision -- the revision of the previous month, it’s close to being on target so weed we’d be splitting hairs to say this is anything other than what the market anticipated.
>> it seems clear from the guests on bloomberg from people i’ve talked to and even going into this report, wage growth, sure, about pulled back a little bit today but running at a 3.4% annual rate. the unemployment rate seems to be on the downtrend. the fed has talked about tight resource utilization and the possibility that will cause inflation. is that a worry for you when you see wages this high and unemployment this low?
>> central bankers are paid to worry about inflation so i always try to watch that pretty carefully. my view is that the economy is on a very solid track. as long as the inflation rate stays where it is, there’s no reason not to have the economy continue to grow. i think that there are pockets of tightness in both the physical capacity and the labor market . but there are a lot of other places where there’s a lot of excess capacity so i think the economy is on a good, solid course and i don’t see any reason, in my own view, to say that we’re in any sort of difficult situation.
>> you did say a few weeks ago, though, that the economy looked like it had solid growth momentum and if it surprised on upside, the fed may have to step on the brakes a little harder. what do you see, now? are we at a point where you might have to step on the brakes harder and does that mean raise interest rates further?
>> let me make a very general point, here. what you’re doing, and i understand, is searching for clues within the current numbers. i think that the market is reading the current numbers in a very sensible way and what i think we are―need to pay attention to, are not little nuances around the current numbers, but, rather, the bigger things that may come along and surprise us. when everything is coming in on track, no surprises, there really shouldn’t be very much to talk about. we need to be thinking ahead to surprises. you have a graphic you’re going to put up that we could talk about.
>> yes.
>> if i can use that as a prop here.
>> let’s put this up. the euro-dollar futures chart.
>> you have the euro-dollar futures and the futures is for the december euro dollar futures and it’s a direct read on the market ‘s expectation on the federal funds rate for december. the chart starts in the middle part of last year and you can see the wiggles up and down. let me put to a couple of things on the chart. one, you can see katrina, the effects of katrina pretty clearly there at the end of august, beginning of september. people didn’t know what that disruption was going to do, how it might change fed policy and the rate dropped. this is the estimate of what the rate would be, now, at the end of this year. then, over the course of february, particularly, maybe starting the last week of january, you see a pretty steady uptrend and that’s because we had a series of economic reports that were a tad on the high side of expectation. and the sum total of those led the market to believe the economy was stronger than it had previously anticipated and that’s why the expectation, the federal funds rate at the end of this year, got bid up. it’s those continuing surprises which should be our focus and the market does a really good job of analyzing the data. and we’ve seen an example of that today. we had an employment report that was a good, strong report, maybe a tad stronger than expectation and the market bid rates up a little bit and you can see the uptick at the end of the chart representing today’s trading.
>> that uptick predicts the fed funds rate is going to 5.25%. does the market have it right?
>> we don’t know whether that’s right. it’s a perfectly reasonable understanding given the information that is now available but what i want to emphasize is that the information changes all the time and that we need to understand the surprises that are coming down the pike and the sensible way to react to those surprises. now, i can’t forecast the surprises any better than anyone else can.
>> let’s look at something like gold at $600 an ounce and other commodity prices surging -- silver, copper. many people say this is a sign of a strong and growing global economy that has not been slowed down by energy prices and a precursor of accelerating inflation. how do you read that?
>> i think that gold has a poor record on the whole in predicting inflation, changes in the rate of inflation. it may well reflect a strong global economy, particularly in asia where incomes are growing handsomely. there’s a long history of demand for gold and gold jewelry as a way of safeguarding assets. that’s where it may come you but i’m not an expert on the gold market . i don’t think it has that much bearing on what i do.
>> you’re an expert on something like the unemployment rate. what level―is there a level where bill poole says, yeah, that’s a level i’m worried about, that will be more inflationary?
>> i like to look at the inflation directly rather than the unemployment rate. if you look at atchart that plots unemployment rate or changes in unemployment rate against inflation, there is only the very, very weakest of relationships there. it’s just not an adequate indicator for monetary policy purposes in the short run.
>> people who think that the fed has done enough and is in danger of overshooting, one of the things they bring up―you’ve talked about what a great economy it is. it’s growing but inflation is contained and they talk about core inflation down around 2% or lower. do you look at core inflation at that level and say, i don’t need to worry about inflation?
>> i think we always have to worry about inflation because there’s always the possibility that inflation will be coming along to bite us. so we try to look as best we can at the deeper determinants of inflation. when i said in response to your question about the unemployment, i don’t ignore the unemployment rate. i don’t ignore the pressures that i see in markets . but there is no close relationship that allows for that to be by any means the only thing i look at.
>> bill, i think what must be hard for the federal reserve, when you’ve been in a certain mode, cutting rates or raising rates, and you have to shift gears, that’s what gets tricky. we have the transcripts from the federal reserve meetings back in 2000, the view seemed to be, oh, we’re going to have to push the funds rate up to 7.5% to contain inflation. the funds rate went to 6.5% and recession followed. how does the fed know in this cycle when it’s time to stop raising rates?
>> there’s no iron-clad answer to that. i’ll tell you at this point, unlike the situation a year ago, at this point i very much go meeting by meeting by meeting. we accumulate the evidence over the course of the weeks between meetings, try to put it all together, look out ahead as best as we and make the decision at that meeting. but i, myself, am not looking beyond one meeting because i think that we are close enough to the region that is in equilibrium. that doesn’t say we’re going to stop here, that i think we’re going to stop here, it doesn’t say that i know where my own vote is going to be. but i’m looking at the data one meeting at a time because the information accumulates over time.
>> as a man who has been at the fed for eight years now and you’ve gone through recession and strong times, does it get harder at this point? do you worry you’ll go too far?
>> there are always risks on both sides. there are risks that we would stop too soon and there are risks that we’d stop too late and we have to define the best balance we can between those two risks. my own view is that inflation is the key here because, i think we have a lot of evidence that if the inflation rate starts to get away from us, that is a much harder process to reverse than if we see the economy softening, because i believe that the economy would react pretty quickly and constructively to the end of the tightening, or even to an easing if it turned out that we saw that in the data. whereas inflation is a much harder thing to stop once it gets going.
>> would an inflation target help? ben bernanke, before he became fed chairman, seemed to be pushing for that. many of your colleagues -- you’ve been in favor of it at some point. are you still in favor of it? is it politically feasible?
>> i remain in favor of it. it’s something that the fomc will be taking up. it’s not on the agenda as far as i know right now. in the sense of, i don’t have a meeting agenda that says it is there. in fact, i don’t have the agenda for the next meeting. i think we will be taking it up. i don’t believe that an inflation target has any particular bearing on the current monetary policy. i think it has a much longer-run bearing on the fed and its communication with the market and an example i would give is that if you look at the early 1960’s, we had no inflation target, we had no inflation problem. but when we ended up in one in the late 1960’s and the 1970’s. would an inflation target that was announced to the public have helped in that circumstance? i think the answer is yes, it would have. so i’m in favor of it for longer-run purposes but i don’t think it has an important bearing on the immediate policy outlook.
>> the fed sets its forecast for the core inflation number twice a year, right now at 1.5% to 2%. isn’t that kind of the de facto inflation target for the fed right now?
>> i think there are some differences in the fomc as to what the desirable target ought to be. i don’t think those differences are large but i think they are there. i think we ought to come to an agreement on a common approach because there can only be one target at the end of the day for the central bank. the differences we have across the fomc, i think, are pretty minor, but we ought to dispose of that issue.
>> what about the language the fed uses. recently you’ve said, if i could paraphrase and overstate a bit, you’re fed up with the statement that gets parsed, is it measured, is it moderate? what do you think the fed should do with the language that it uses to communicate to the market and do you expect to see changes in the weeks and months ahead?
>> we’ll have to see where chairman bernanke wants to lead us there. there are two things we need do with the language and fed communication more generally. first, we need to help the market understand how we are likely to respond to various changes that occur in the world, surprises, if you will. and part of that comes about as a consequence of explaining our policy actions in response to something that has happened. secondly, the fed ought not itself be a disturbance to the market . and one of the things that has concerned me is that the language we have used has, i believe, from time to time, had multiple interpretations in the market . not everybody has had the same view of what it is weed. in fact, i’m willing to bet that not everybody in the fomc had the same view as to what it is we just said and that, to me, is a problem. i don’t think we’re communicating clearly, if we ourselves don’t have the same view and particularly if the market reads different things into what arere saying and that can be a source of random disturbance to the market which is not constructive.
>> i think one of the reasons people are uncertain now is they figure the fed’s probably closer―certainly than when the funds rate at 1%, you got to be closer to a pause or something and people don’t know what pause language will look like. do you have any idea what pause language would sound like from the fed?
>> we need to draw a distinction between language that says we intend or expect at this time not to change the rate next time―that’s a very different thing from saying that we have no commitment at all in our own minds as to what we’re going to do next time. the first says, we’re not going to change next time unless something really dramatic happens. the second says we’re open to either holding it the same or increasing or decreasing. those are somewhat different things and i think it ought to be easy to explain they’re different things. but we do have to do it in a way that doesn’t confuse people.
>> recently i was talking to a couple of economists who have been doing this for a long time, as well. and they are concerned. they’re looking at the flatness of the yield curve in combination with slow growth in the real m.2 money supply, an important indicator. they’re looking at the growth of bank reserves, they think it’s not strong enough and they are saying the policy is already restrictive and if the fed continues, it’s risking slowdown or recession. the st. louis fed has been a monitorous fed, do you pay attention to these signals?
>> i certainly watch both m-2 and the narrower aggregate, m.z.m. they are not close guides month by month so i look at the longer-run trends. i don’t think it’s true that on a longer-run basis that either of them is flashing a warning signal. i think they’re both in a reasonable range at this point. i think the economy is in solid shape. i just think people can’t seem to get used to how good it is.
>> the same thing happened in the late 1990’s when the fed got a lot of credit for letting the economy run because things were growing and stocks were rallying and you sat back and didn’t choke it off so i think the same kind of question is being raised now, the economy is faring nicely, inflation seems low and steady and expectations low and steady but the fed keeps raising rates. no wonder people are confused. what signal makes the fed change?
>> the answer to that is simple. the inflation process is a very influential process―inertial process with long lags involved. looking back is not telling us the story we need on inflation. so far everything is fine but we want to make sure it stays that way so we have to look ahead in a process that is very inertial. i think the economy is in solid shape. i would be more than delighted if we can bring the unemployment rate down some more provided it doesn’t raise a risk. what happened in―year 2000, 2001, is a really good example of what i’m talking about. a whole bunch of things turned in pretty rapid order that we had not anticipated. the market had not anticipated them, either. so those are things we have to respond to as we see them happening.
>> sounds like you’re saying, as long as the inflation numbers month by month are tame, unemployment can fall, wages can rise, and the fed or bill poole, anyway, will not necessarily take that as a worrisome sign of more inflation that merits more and more rate increases?
>> i would amend your statement, because that’s right, you said as long as the inflation numbers month by month are ok, but we need to find forward-looking measures.
>> what are they?
>> what we rely a lot on for that is anecdotal reports, for example―contracts being signed in advance. we get directors from our business contacts that give us some indication of what’s going on ahead. that’s part of it. another part of the story is productivity. wage growth is fine if it’s covered by productivity growth and you don’t get it into prices so we try to look at what’s going on with productivity. there’s a lot of pieces to this puzzle but we don’t just blindly look at the recent monthly data.
>> i know you’re sanguine on housing and the fact that the bubble can deflate and soften and not be a problem for the economy. home sales still expected strong this year but the sense that maybe the investor element played a pretty big role last year, recently, in pushing this process up and prices up and that that’s perhaps starting to soften, are you the least bit concerned that we might see more of a thud that you’ve been expecting?
>> i would emphasize a couple of things about housing. first of all, it is very likely that housing starts and permits will be basically flat, maybe down some. sales, prices surely can’t continue to rise at recent rates, they will flatten out, as well. housing is highly visible. there are a lot of reports over the course of the month -- starts, permits, new home sales, existing home sales. it’s very visible. there’s another aspect of investment, though, that is much less visible but the nonresidential structures is an important sector and in fact if you look at total business investment, the residential part is maybe 1/3 of the total. so there’s another 2/3 that’s actually larger and i believe there’s a lot of evidence of strengthening in the nonresidential part of investment. we see that with our own building project in our st. louis federal reserve bank, we see upward pressure on costs and availability of supplies. there’s a booming construction market in st. louis, the st. louis metropolitan area. we have to be looking there and we don’t have the monthly flow of data in the same way so we’re depending a lot on our business contacts to give us a good insight into what’s going on there.
>> we’ll have to follow your same business contacts, too, and get this intelligence. i want to ask you about the global setting for the federal reserve. you do have a bit of a reputation as a hawk, somebody who is vigilant on inflation. we have the european central bank, looks like people sooner or later, more interest rate increases. bank of japan even talking about ending the quantitative easing, moving slowly to small interest rate increases. but what about inflation expectations? what about the global situation? does that complicate things for the fed? does it make you feel that you, too, then, have to be more inclined towards raising rates because the rest of the world is?
>> the rates abroad are rising primarily because economic activity is improving, that’s particularly obvious in japan. those countries are sources of demand for u.s. exports. so we have a world economy that is expanding, which is a very healthy thing. so, sure, we pay attention to the things that are going on in the world economy. we have to.
>> and how about the role of globalization and the global economy keeping down inflation. is it kind of misplaced to worry so much about inflation when you have cheap labor overseas, tons of excess capacity that u.s. companies can draw on. isn’t that the ultimate inflation fighter?
>> the world economy is very important for certain types of goods. it does nothing, for example, for energy supplies domestically. think about electricity, the electricity we produce here is not imported from anywhere -- maybe a little bit from canada and mexico. so there are certain areas of industrial output that are heavily dependent only on local supplies. other areas, like automobiles, an obvious example, where you can import a lot of goods from abroad. so it varies. globalization has an important impact for parts of the economy and not for others.
>> you’ve spoken openly about your retirement and you’ve earned it to think about that. how much longer do you think you’ll stay at the st. louis fed and do you have any thoughts about what kind of person you would like to replace you?
>> that will be up to our board of directors when the time comes. i will be retiring eventually am it’s not right around the corner but it will be coming in a few years. i’ve had a ball. i will be sorry to see that day come.
>> it’s one of the best jobs in the world as far as i’m concerned and i appreciate so much you taking all this time to come, talk to our viewers. bill poole, president of the st. louis federal reserve bank. thank you very, very much.
>> thank you, kathleen.
>> now we are going to continue to talk about the bond market , interest rates, from another point of view. and i certainly hope our next guest has had a chance to listen in on this very interesting conversation i’ve just had
