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All right, it's time now for our daily Wall Street Week Conversation, and today we're taking a look at political pressures facing central banks. Joining us now, I'm pleased to say we have Ken Rogoff. He is Harvard University Professor of Economics and Chair of International Economics, along of course, with Wall Street Weeks David Wesson. David, a timely conversation as the FED kicks off. It's two day meeting exactly.

All right, it's time now for our daily Wall Street Week Conversation, and today we're taking a look at political pressures facing central banks. Joining us now, I'm pleased to say we have Ken Rogoff. He is Harvard University Professor of Economics and Chair of International Economics, along of course, with Wall Street Weeks David Wesson. David, a timely conversation as the FED kicks off. It's two day meeting exactly.

We're about to hear from the Fed what they're going to do in the short term, but we want to take a longer term look as well. What's going on interest rates? And Ken, thanks so much for being with You have a paper ad co author with other people from Brookings talking about those long term interest rates. First of all, given the fact we're going to have the Fed make a more short term decision, presumably this week, how does that fit with the long term interest rates? How should the Fed be taking into account? So what you say about long term interest.

We're about to hear from the Fed what they're going to do in the short term, but we want to take a longer term look as well. What's going on interest rates? And Ken, thanks so much for being with You have a paper ad co author with other people from Brookings talking about those long term interest rates. First of all, given the fact we're going to have the Fed make a more short term decision, presumably this week, how does that fit with the long term interest rates? How should the Fed be taking into account? So what you say about long term interest.

Rates, Well, long term interest rates you're probably higher for as far as the I can see, and means there are star what they think of what's their target is higher than they've been thinking, and some of them still seem to be thinking. It collapsed after the financial crisis, and there's been some reversion to me, and we've seen it in the long rates, and I'm not sure the Fed's entirely figured out that some of that will happen with the short rates as well. So I think one FED governor said, we thought we had two feet on the brakes, but maybe we only have one because interest rates aret as high as they seen.

Rates, Well, long term interest rates you're probably higher for as far as the I can see, and means there are star what they think of what's their target is higher than they've been thinking, and some of them still seem to be thinking. It collapsed after the financial crisis, and there's been some reversion to me, and we've seen it in the long rates, and I'm not sure the Fed's entirely figured out that some of that will happen with the short rates as well. So I think one FED governor said, we thought we had two feet on the brakes, but maybe we only have one because interest rates aret as high as they seen.

How much influence does the Federal Reserve have over long term interest rates? One of the things I took from your paper at least is that we had a period of low inflation, but it may have been for forces much larger than any central bank. It had to do with things like globalization and so what was going on, unions and some of the lack of conflicts. How much influence does the FED have over long term registrates?

How much influence does the Federal Reserve have over long term interest rates? One of the things I took from your paper at least is that we had a period of low inflation, but it may have been for forces much larger than any central bank. It had to do with things like globalization and so what was going on, unions and some of the lack of conflicts. How much influence does the FED have over long term registrates?

Well, there are two parts to long term interest rates. There's the real interest rate, and I think the Fed's long term influence is actually very limited. It follows the flows of international markets. Quantitative easing matters because of the treasury issues lots of short term debt and very little long term debt or the FED helps it do that. That lowers long term interest rates, but it's risky because as we've seen, when interest rates go up, that can cost the US a lot of money. On inflation, I mean, I think, of course, the Fed's heart is in the right place, but it's hard to be a island of technocratic tranquility in the middle of a sea of political turmoil. The FED is independent, but you know, the governors get appointed, the FED share gets appointed. Over the long run, they can control the Fed's budget, a lot of perimeters around its regulation, and political pressures matter. I mean, they don't have to be so food as I'm sure you're going to ask me about Donald Trump and some of the proposals, but I think in more subtle ways they matter. And as you say, there was this long period of globalization, fiscal prudence, Washington Consensus, deunionization. I'm not praising that, but it made it easier for the FED to bring down inflation and maintain decent growth. Everything's going into reverse, certainly, fiscal policies long gone into reverse. Globalization is at least slowed down, might be going into reverse. A number of other factors, and it's going to be harder. I think for those reasons, and my co authors Hassan, Marina and Pierre all think that we're going to have an average harder inflation.

Well, there are two parts to long term interest rates. There's the real interest rate, and I think the Fed's long term influence is actually very limited. It follows the flows of international markets. Quantitative easing matters because of the treasury issues lots of short term debt and very little long term debt or the FED helps it do that. That lowers long term interest rates, but it's risky because as we've seen, when interest rates go up, that can cost the US a lot of money. On inflation, I mean, I think, of course, the Fed's heart is in the right place, but it's hard to be a island of technocratic tranquility in the middle of a sea of political turmoil. The FED is independent, but you know, the governors get appointed, the FED share gets appointed. Over the long run, they can control the Fed's budget, a lot of perimeters around its regulation, and political pressures matter. I mean, they don't have to be so food as I'm sure you're going to ask me about Donald Trump and some of the proposals, but I think in more subtle ways they matter. And as you say, there was this long period of globalization, fiscal prudence, Washington Consensus, deunionization. I'm not praising that, but it made it easier for the FED to bring down inflation and maintain decent growth. Everything's going into reverse, certainly, fiscal policies long gone into reverse. Globalization is at least slowed down, might be going into reverse. A number of other factors, and it's going to be harder. I think for those reasons, and my co authors Hassan, Marina and Pierre all think that we're going to have an average harder inflation.

Now.

Now.

To be clear, I'm not saying that Fed's not going to bring inflation down to two percent this time. I think it might, but we're going to see more upwards by like we had over the pandemic on occasion, and not so much these long periods of deflation.

To be clear, I'm not saying that Fed's not going to bring inflation down to two percent this time. I think it might, but we're going to see more upwards by like we had over the pandemic on occasion, and not so much these long periods of deflation.

Well, you're right, we are definitely going to get to that Wall Street Journal reporting about, of course, Donald Trump and what influence he might seek to have over the FED. But let's just complete the thought on maybe and when it comes to inflation, and of course that decades long shift to lower inflation that central banks and the FED had less to do with it than maybe commonly thought. If that's the case, when you think about the inflation that we're dealing with now, should that realization, if true, impacts how they're approaching the current inflation that is in the economy.

Well, you're right, we are definitely going to get to that Wall Street Journal reporting about, of course, Donald Trump and what influence he might seek to have over the FED. But let's just complete the thought on maybe and when it comes to inflation, and of course that decades long shift to lower inflation that central banks and the FED had less to do with it than maybe commonly thought. If that's the case, when you think about the inflation that we're dealing with now, should that realization, if true, impacts how they're approaching the current inflation that is in the economy.

Well, they did a great job, but they had the wind at their backs. Now they're running into the wind and it's harder, you know. I think here the big issue is not simply the embedded inflation. But where is the long term real interest rate going to go? In other words, how high a Fed funds rate? Do we need to get the right real interest rate? They've been thinking I think for a long time half a percent real interest rate, and maybe that's right, But there's little question the long rates have gone up, and even after the Fed unwinds its interest rate hikes, I think they're going to stay high for a very long time. And so maybe interest rates aren't as tight as they think. And I'm sure that kind of conversation's going through the halls of the Federal Reserve now. They just have to be rethinking things.

Well, they did a great job, but they had the wind at their backs. Now they're running into the wind and it's harder, you know. I think here the big issue is not simply the embedded inflation. But where is the long term real interest rate going to go? In other words, how high a Fed funds rate? Do we need to get the right real interest rate? They've been thinking I think for a long time half a percent real interest rate, and maybe that's right, But there's little question the long rates have gone up, and even after the Fed unwinds its interest rate hikes, I think they're going to stay high for a very long time. And so maybe interest rates aren't as tight as they think. And I'm sure that kind of conversation's going through the halls of the Federal Reserve now. They just have to be rethinking things.

So Ken, let's go to that question about the reporting about what perhaps a president Trump might do if we were reelected. It is reporting, and the Trump camp specifically has not said that's where they're headed. But if in fact there was a move by a new Trump administration to really really take away from the independence of thirds, or how much difference would make, because it sounds like you think there's going to be pressure on not just the FIT but other central blanks no matter whatapons.

So Ken, let's go to that question about the reporting about what perhaps a president Trump might do if we were reelected. It is reporting, and the Trump camp specifically has not said that's where they're headed. But if in fact there was a move by a new Trump administration to really really take away from the independence of thirds, or how much difference would make, because it sounds like you think there's going to be pressure on not just the FIT but other central blanks no matter whatapons.

Yes, I do so it won't be as crude as the rumors that we're hearing about from President Trump. I don't think we're going to go to the extremes of Turkey where President Ergowan kept firing his central bank, or every other year when they tried to raise the interest rate. I don't think we're going to get there. But almost no matter who's in power, they're looking for ways to try to loosen monetary policy. But I think progressives have ideas for taking away FED independence too. They're not at the tip of the tongue of President Biden or Jared Bernstein and his advisors, but they are ideas floating out there. And the thing is is it's not going to work very well. I mean, it's going to be obvious that it's not working. If you take away FED independence, investors are going to get jittery inflation expectations. They're going to go up the dollars in a tank, appily for better for worse. Maybe I think markets will throw a pretty cold bucket of water on the president if he tries to do that. I don't think he would go to that extreme, but it's clear, you know, he wants to be disruptor and chief, and it probably irritates him that I'll get so much attention at his press conferences.

Yes, I do so it won't be as crude as the rumors that we're hearing about from President Trump. I don't think we're going to go to the extremes of Turkey where President Ergowan kept firing his central bank, or every other year when they tried to raise the interest rate. I don't think we're going to get there. But almost no matter who's in power, they're looking for ways to try to loosen monetary policy. But I think progressives have ideas for taking away FED independence too. They're not at the tip of the tongue of President Biden or Jared Bernstein and his advisors, but they are ideas floating out there. And the thing is is it's not going to work very well. I mean, it's going to be obvious that it's not working. If you take away FED independence, investors are going to get jittery inflation expectations. They're going to go up the dollars in a tank, appily for better for worse. Maybe I think markets will throw a pretty cold bucket of water on the president if he tries to do that. I don't think he would go to that extreme, but it's clear, you know, he wants to be disruptor and chief, and it probably irritates him that I'll get so much attention at his press conferences.

So markets there would apply the brakes in that scenario, which of course still being reported out. Details unclear, so we won't go too far into the hypotheticals. But let's talk a little bit more about real interest rates. If we do enter into this environment where you have these episodic spikes of inflation, what would sustainably higher real interest rates mean for this economy when you think about the potential ripple effects, Well.

So markets there would apply the brakes in that scenario, which of course still being reported out. Details unclear, so we won't go too far into the hypotheticals. But let's talk a little bit more about real interest rates. If we do enter into this environment where you have these episodic spikes of inflation, what would sustainably higher real interest rates mean for this economy when you think about the potential ripple effects, Well.

I think it really comes in the costs of borrowing for the government for individuals. So remember, you know inflations also driving up tax revenues. It's also driving up wages and salaries. But the real interest rates, you know, they're there to stay there the wedge between the two and this world. You know, there was this period where you were just a sucker not to borrow as much as possible, whether it was to buy a larger house, whether it was to fund new government programs, et cetera. And I think, you know, we live in a more normal world. Now. I'm not saying I'm telling you what interest rates are going to be for the next twenty years. But what I am saying is I think on average, they're going to be a lot higher than they were after the global financial crisis.

I think it really comes in the costs of borrowing for the government for individuals. So remember, you know inflations also driving up tax revenues. It's also driving up wages and salaries. But the real interest rates, you know, they're there to stay there the wedge between the two and this world. You know, there was this period where you were just a sucker not to borrow as much as possible, whether it was to buy a larger house, whether it was to fund new government programs, et cetera. And I think, you know, we live in a more normal world. Now. I'm not saying I'm telling you what interest rates are going to be for the next twenty years. But what I am saying is I think on average, they're going to be a lot higher than they were after the global financial crisis.

Ken, last quick one, if I could, what does it do to growth if we have longer long term interest rates.

Ken, last quick one, if I could, what does it do to growth if we have longer long term interest rates.

Well, we've had long term interest rates a lot higher for a long time and had better growth than we have now. It sort of depends on what's going on. I think. To the extent it's driven by huge government borrowing, private borrowing, it's clearly negative. You're just paying a risk premium tomorrow. To the extent it's driven by AI and productivity and wondrous new technologies and obviously high rates just go hat in hand, and maybe there's some of both.

Well, we've had long term interest rates a lot higher for a long time and had better growth than we have now. It sort of depends on what's going on. I think. To the extent it's driven by huge government borrowing, private borrowing, it's clearly negative. You're just paying a risk premium tomorrow. To the extent it's driven by AI and productivity and wondrous new technologies and obviously high rates just go hat in hand, and maybe there's some of both.

All right, got to leave it there, but really enjoyed this conversation. Are big thanks, of course to Ken Rogoff of Harvard University. A great setup, big questions heading into tomorrow's Central Bank meeting.

All right, got to leave it there, but really enjoyed this conversation. Are big thanks, of course to Ken Rogoff of Harvard University. A great setup, big questions heading into tomorrow's Central Bank meeting.