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Speaker 1: Now, Christopher Waller, the Fed Reserve governor, is currently speaking to our Saleha Moshin here at Bloomberg's New Economy Forum about monetary policy in the age of AI.
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Speaker 2: So let's just listen in.
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Speaker 1: It's so exciting to be here with Governor Waller. We both flew in from Washington, D.C. to have a chat with you all in the present. One thing I've noticed is that just like in Washington, if you walk around in Delhi, the big conversation is AI, which we're going to continue talking about. Governor Waller, you have made a lot of comments in the last couple of years about the benefits of AI, including productivity boom, contributing to GDP growth, seeing living standards rise. And that's all talking about the United States. I'd love to hear from you how you see the impact of AI in our economy go into the rest of the world, especially emerging markets like India.
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Speaker 3: Yeah, I mean, the way I think about AI is... First, there are those who build the AI tools and models. Then there are those who supply all the inputs to build that. That would be data centers, chips, all that. And then third, that's the people who actually use the models. Now, clearly, when it comes to building the models, the US is the dominant country.
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Speaker 2: China's there as well.
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Speaker 3: In terms of providing the inputs, a lot of that's Taiwan, South Korea, producing the inputs. Data centers, they're all over the world. They're not just located in the U.S. And then, of course, the users are anybody that wants to use.
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Speaker 2: It for work.
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Speaker 3: Now, there's a very high correlation between GDP per capita and AI use in people's work. So that's kind of one of the things that people, I think, I'm a little concerned about is It's not even across the world in terms of how AI is used. And that means it's going to have productivity differences if it's not actually used. So you'll see potentially widening gaps in GDP per capita because of this. But I think it's an amazing technology. I really do think. I'm not a pessimist. I don't believe AI is going to be the end of the human race in the next two years or anything like that.
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Speaker 2: But it is a tool.
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Speaker 3: And even within the Federal Reserve, that's what I tell all of our employees, We're going to train you to do this because we want you to be more productive. If I was going to replace you with AI, I wouldn't waste one cent training you. That would be a waste of money. So it really is a tool that I expect all.
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Speaker 2: Of our employees to use. So that's kind of.
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Speaker 3: The basic global picture of how I think the whole AI world works. Europe, for example, doesn't produce much AI or inputs, but they're big users of it. And it's already kind of widely spread throughout the business sector and community.
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Speaker 1: Let's talk about the payoffs. You say you're an optimist. You're not worried about the human race. When are we going to see some of these benefits, the productivity boom, the increase in our wages, inflation being reined in? Those things haven't really turned up for the everyday person.
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Speaker 2: Right.
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Speaker 3: It's often the case that when you have big technological changes, this is what economists know, is you don't typically see the productivity gains for years. A big part is firms have to figure out, what am I using this for? How am I going to actually increase productivity? They're not really sure, and so there's a lot of trial and error and a.
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Speaker 2: Lot of experimentation.
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Speaker 3: But then you start realizing where it really does have its impact. I mean, I'm telling you, if anybody does any coding... This stuff is amazing. I mean, it's just shocking how good it is. So in terms of coding, yeah, I mean, if you were a coder, your job's going to be fundamentally changed. It doesn't mean you're going to lose your job. It's just you're going to do a different job than what you were doing before. Things that you couldn't do because you were too busy doing basic coding, you're going to be able to now expand what you're doing in terms of the production of your output.
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Speaker 2: So....
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Speaker 3: I think it's just going to be a while before firms start figuring out how to actually do this. And you may, look, you may not see it in terms of, this is one of the measurement things I've thought about. Suppose I can do the same amount of work faster. So instead of five days, I get it done in three days. Maybe I take all that time and just go have more leisure. My output's not any higher.
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Speaker 2: Per a given year. It's just.
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Speaker 3: I've got more time to consume my leisure and enjoy my life. That still means it's still good for welfare, even if you don't see a big increase in.
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Speaker 2: GDP per capita.
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Speaker 3: So you either have to rethink, do we measure productivity per unit of time as opposed to quarterly, it's now down to like days.
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Speaker 2: So you have to kind of think about that.
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Speaker 3: And then just in terms of productivity, There's a lot of things this technology is just going to make your life better, even if it doesn't show up in your work productivity. I always like to point out Google Maps is an amazing.
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Speaker 2: Invention. I don't use it to increase my productivity.
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Speaker 3: It helps me get around in cities where I'm visiting and I don't get lost. That doesn't show up in the GDP numbers, but that makes my life a lot better. So I always try to tell people technology can just make your life better or can actually increase productivity and how much output you produce.
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Speaker 1: One thing that's clear to measure is inflation. And right now, the narrative in the United States and in other parts of the world is an affordability crisis. There is definitely an impulse that's coming from AI-related impacts on the economy. In the short term, when do you see the AI hit to inflation dissipating in the U.S.
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Speaker 3: Yeah, I mean, the whole build-out, obviously, if you're building out several trillion dollars of investment in AI, and you have to buy all that stuff, and your demand is perfectly inelastic, you'll pay whatever price if you're one of the hyperscalers. You're going to bid up the price of all semiconductors of all type, and that's going to spill over to anybody else who uses those products. And that's what we're starting to see in the US. We're starting to see AI having a spreading out of inflation because it's just increasing demand for everything else. Now, down the road, when this stuff is done and they've kind of built it out, that kind of demand pressure goes away. And then you hopefully will start seeing all the supply effects, which means we can produce more output faster and at a lower price. So it's one of these two-stage things. Demand is going to be, especially the size of the investment. I mean, this is shocking how much is being spent on this compared to any other point in history. And so you're going to see these price pressures early on. How long are they going to last? It could last anywhere from two to three years, given how much they've committed already to spend out in the future. Now, if all that falls off, if suddenly there's a pullback or you can't meet this build-out, you can't do it, that'll put a check on prices. But the benefits on inflation down the road are, they're down the road as far as I'm concerned.
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Speaker 2: They're still a few years out. A few years off.
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Speaker 1: Is there any chance that the inflation that's stemming from the AI build-out could be embedded in the economy for a longer time?
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Speaker 3: Yeah, I mean, like I said, it's very specific what it is. It's not like a broad-based effect. It spills over into a smaller set of goods than other things. And we know that at some point this huge build-out and huge demand is going to, I won't say completely come to an end, but it's going to taper off a lot. And when that happens, we'll see the demand pressure come down. But from all the plans that I'm hearing from the hyperscalers, they're still planning on spending trillions of dollars over the next three years. So this demand pressure may still be there. And we have to just decide how we want to respond to that.
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Speaker 1: Well, let's talk about the AI build-out. There is still a lot of investment that's coming through. A lot of that is being issued in corporate debt. We're seeing a lot of financing to help with the AI build-out. And of course, that debt is sensitive to U.S. treasuries. and we've seen yields skyrocket. Global yields are high. Can you talk through a little bit about what you see in U.S. yields, whether that could be longer term, and how much of the global higher yield picture has to do with the narrative in the U.S., and what's separate?
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Speaker 3: Yeah, I mean, everybody's suddenly paying attention to high yields, and when you look at it, it's not yields have gone up because there's expected higher future inflation.
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Speaker 2: That doesn't show up.
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Speaker 3: Inflation expectations are well anchored So all of the buildup is not coming from an inflation premium.
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Speaker 2: That's not where it's coming from. So it is a factor of real growth.
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Speaker 3: If you have real growth and real productivity and these investments are going to pay off, you're willing to pay more in terms of your interest cost. And people know that and they'll ask for it. So real growth has an effect on these real yields. Now, on top of that, you have general fiscal concerns around the world. All governments are kind of sitting here in a, at least in the advanced countries, not such a great state. And we're seeing that in France right now. So some of this is just driving up yields in some countries that aren't necessarily related to the U.S. or maybe some other countries. And then the competition from AI is a serious, serious concern. Because even if the money flows into the U.S., so demand goes up, but there's inflows from abroad, and that kind of cancels out the price effect. that money's leaving some other country. Their yields are going to go up. So even if you have competition and no inflows in the U.S., yields are going to go up. If you have higher demand and yet there's inflows from other countries, you're going to see higher yields in those countries because the funds are no longer available for those countries.
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Speaker 2: To invest in.
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Speaker 3: But the AI build, I think, is definitely having an impact. I mean, if you look at Google issued, I think, a 40-year bond and it was paying 100 basis points over U.S.
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Speaker 2: Treasuries. Where do you want to hold?
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Speaker 3: 100 basis point premium for a Google bond that's probably going to pay off? It's not like they're going to probably default. So that is affecting the way people are looking at things. So anyway, that's it.
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Speaker 1: There's economists who say that the U.S., at least, and maybe the rest of the world, is entering a phase of just higher yields and needs to adjust to it.
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Speaker 2: Do you agree with that?
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Speaker 3: Well, I mean, like I said, if this is all because of higher growth, that's a good thing. I'd rather have higher growth and higher yields and low growth and low yields. That seems like an obvious one to me. What you get concerned about is it's driven by inflation expectations, fiscal concerns, which I think is really a problem in France right now.
00:11:06
Speaker 2: Could be in the U.S.
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Speaker 3: People are starting to wake up to our fiscal situation is not that good. And then naturally, bondholders are going to demand a higher yield to get them to buy that debt. So if you're living with higher yields because of higher growth, to me, that's a good thing. If you were living with higher yields because of greater fear of inflation.
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Speaker 2: That is not a good outcome.
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Speaker 1: I want to ask you about the fiscal policy situation and how that affects your role and your work at the Fed. But first, when yields go up, they do tend to do the job a little bit of a rate hike. In the picture that we have now, do you think that that's enough, or is there more room for the Federal Reserve to raise interest rates?
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Speaker 3: Yeah, so I've long argued that the 10-year rate is determined.
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Speaker 2: By global supply and demand.
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Speaker 3: What I do, changing the overnight interest rate on deposits, that's not driving the 10-year yield much. And even if I do it, it's for some short period of time, not 10 years out.
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Speaker 2: So I've always viewed.
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Speaker 3: The 10-year as being driven by global factors, global demand, also supply from the US Treasury.
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Speaker 2: And it's not so much what I do.
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Speaker 3: So when yields go up, is that going to impact interest-sensitive sectors like housing and autos and other things?
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Speaker 2: Yeah, of course it is.
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Speaker 3: Does that tighten off demand for those products and put downward pressure on prices?
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Speaker 2: It should.
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Speaker 3: It's not our intent to do it, but that's going to be one of the natural spillovers from this kind of surge in yields at the 10-year and higher.
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Speaker 1: So it's doing a little bit of the work.
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Speaker 2: It is doing some of the work.
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Speaker 1: Let's get back to the debt problem, which is global, highest levels since World War II. In France, we're seeing that investors are now realizing that maybe there's a ceiling for how much debt France can issue.
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Speaker 3: U.S.
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Speaker 1: Debt, U.S. treasuries are quite different. They are seen as a safe haven in times of terminal line risk.
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Speaker 2: The U.S.
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Speaker 1: Has an exorbitant privilege. Do you see that privilege running out?
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Speaker 3: Yeah, I'd say there's a lot of academic research coming out in the U.S. that that safety liquidity premium on U.S. treasuries is gone.
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Speaker 2: It's gone. It's gone.
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Speaker 3: So that was always the following. People would pay more for a U.S. treasury because it's safe, liquid, easy to trade compared to other government debt potentially. So that higher price they're willing to pay means a lower yield on that debt. But if you no longer feel like it's a safe asset or it's not really the best thing to hold, then that premium goes away.
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Speaker 2: People won't pay that higher price.
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Speaker 3: And that academic research is saying that in the last couple of years that has disappeared. That's another reason your rates are going to go up if you lose that convenience yield. And it's not a trivial sum. It could be like 50 to 70 basis points.
00:14:01
Speaker 1: You know, we've seen emerging markets have managed their deficits a little bit better than a lot of Western countries' advanced economies. And again, just remarking on France, investors, bond vigilantes showing that there is a line. How do you think that would be demonstrated in the U.S., that there is finally a ceiling that's been reached?
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Speaker 3: Well, you'll see that sign, like I said, from the bond markets. If the bond markets are now worried that this debt is not as safe as they think it is, or I've always thought it was, they'll pay a lower price to hold it and therefore a higher yield. So you'll start seeing it when yields start creeping up. It doesn't have to be a crisis. I mean, sometimes it's a crisis, but otherwise it's just the yields go up. It's kind of what you're seeing in France. The yields have just gone up. but they're still able to issue it. They're just having to pay a much higher yield to get people to take it. So that would be it. I think you would see, if you started seeing problems with auctions, where demand is not showing up to buy it, and that's a problem. If you are afraid that one way to get rid of your debt is just inflated away in real inflation, then you get this inflation premium that suddenly now gets built up. That would be the most common way that fiscal policy would spill over into rates if they just think it's going to be inflationary and that's going.
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Speaker 2: To push up yields. And so I got to have a higher yield to accept that debt.
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Speaker 3: So, you know, auctions, bond yields creeping up, chatter about the fiscal deficits now taking course.
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Speaker 2: We're not seeing a lot of that in the U.S. per se. But like I said, France, man, things just kind of suddenly exploded on them. Yeah, the U.S.
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Speaker 1: Treasuries have seen good auctions. In August, there was one that was the best auction in 20 years, I think. What this does bring to light is the conversation around fiscal dominance and the independence of central banks. We're seeing some comments, again, back to France, that the central bank there is under pressure. How do you think that the world's central bankers who are facing these kinds of fiscal policy issues and spilling into their monetary policy work, how do you think that that Chinese wall is holding up?
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Speaker 3: Well, we always have to take fiscal policy into account and how it's impacting the economy, not the government financing, but just how it spills over and affects the economy. So we always have to say, you know, if you do this bill, a tax bill or a spending bill, what's it going to do to consumption, investment? And then, you know, then we have to adjust based on what's going on in the real economy. Fiscal dominance is when you start having to do monetary policy to help the government finance. That's where you have to really come worry about it. And so far, at least for the U.S., we're not in that situation. Maybe France is getting closer. Like, how are you going to get out of this mess except by printing money? The only problem with the French is they don't print.
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Speaker 2: Their own money. The ECB does. But in the U.S., I'll give you an example.
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Speaker 3: After the Second World War, the debt-to-GDP ratio in the U.S.
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Speaker 2: During the Second World War went up over 100%.
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Speaker 3: The two years after the war ended, inflation was so high, it eroded away 40% of that debt in real terms. It was the massive, it was the biggest form of erosion in the real value of government debt we've ever seen in the US. Now, no, it didn't collapse the US. It didn't create a lot of issues. It did create, led to a Fed-Treasury accord. kind of keep the Fed out of this kind of financing world.
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Speaker 2: But yeah, I'll just stop there.
00:17:51
Speaker 1: Well, I'm sure all of the senior executives in the room hear questions and concerns from people in the companies and in the economy about job security when AI is coming into force. You are a pessimist about how AI is going to affect daily lives. But speaking of jobs, I do have to ask if you feel that your job is safe because you are not facing a threat from AI taking over your role as a member of the Fed's rate-setting committee, but there is someone in the White House who is unhappy with how the FOMC board is operating, saying that it's being difficult in lowering interest rates, giving the new chair, Kevin Morse, a hard time. Do you feel your job is safe?
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Speaker 2: I'm As far as I know, I.
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Speaker 3: Mean, as far as AI, yeah, you could create a whole AI FOMC. I know some academic researchers at Stanford have done this. They've mimicked each one of us through our speeches and all of our statements and created their own AI agents.
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Speaker 2: So there's a Chris.
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Speaker 3: Waller AI agent in this model where they set interest rates. I don't know how well it works, but I found it just fascinating that you could do that. In terms of other things, yeah, I mean, I think there is a threat to Fed independence by the administration.
00:19:14
Speaker 2: So far, it hasn't really succeeded.
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Speaker 3: I think our institutions have made it clear that they don't necessarily want this to happen. I'm hoping that that continues. And then the ultimate protector is just the bond market. I mean, if bond markets are worried you're going to create a high inflation environment, those interest rates are not gonna go down. They're gonna go way up. And so there's good reasons that you don't, you wanna have an independent central bank. And it has worked very well for 40 years in almost all the countries that have done it. I just think it's a mistake to even think about going.
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Speaker 2: Away from it.
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Speaker 1: So it's the bond market that's helping protect the members of the Board of Governors, like you. And who else?
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Speaker 2: Congress?
00:20:04
Speaker 3: Well, Congress and the courts. I mean, our institutions are designed to their protections in terms of how they do this. We've seen that several times in the courts in the last year. The bond market's so obsessed with AI, I don't know, they don't even pay attention, it seems like, half the time. But I have faith in the U.S. institutions between Congress and the courts that they will make sure that we don't lose our independence and that the President of the United States sets monetary policy.
00:20:37
Speaker 1: Well, that is optimistic. Let's end on that note because you see AI keeping the rest of our jobs safe and your job is also safe. Guests, please join me in thanking Governor Waller.
00:20:47
Speaker 3: Thank you.
Speaker 1: Now, Christopher Waller, the Fed Reserve governor, is currently speaking to our Saleha Moshin here at Bloomberg's New Economy Forum about monetary policy in the age of AI.
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Speaker 2: So let's just listen in.
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Speaker 1: It's so exciting to be here with Governor Waller. We both flew in from Washington, D.C. to have a chat with you all in the present. One thing I've noticed is that just like in Washington, if you walk around in Delhi, the big conversation is AI, which we're going to continue talking about. Governor Waller, you have made a lot of comments in the last couple of years about the benefits of AI, including productivity boom, contributing to GDP growth, seeing living standards rise. And that's all talking about the United States. I'd love to hear from you how you see the impact of AI in our economy go into the rest of the world, especially emerging markets like India.
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Speaker 3: Yeah, I mean, the way I think about AI is... First, there are those who build the AI tools and models. Then there are those who supply all the inputs to build that. That would be data centers, chips, all that. And then third, that's the people who actually use the models. Now, clearly, when it comes to building the models, the US is the dominant country.
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Speaker 2: China's there as well.
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Speaker 3: In terms of providing the inputs, a lot of that's Taiwan, South Korea, producing the inputs. Data centers, they're all over the world. They're not just located in the U.S. And then, of course, the users are anybody that wants to use.
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Speaker 2: It for work.
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Speaker 3: Now, there's a very high correlation between GDP per capita and AI use in people's work. So that's kind of one of the things that people, I think, I'm a little concerned about is It's not even across the world in terms of how AI is used. And that means it's going to have productivity differences if it's not actually used. So you'll see potentially widening gaps in GDP per capita because of this. But I think it's an amazing technology. I really do think. I'm not a pessimist. I don't believe AI is going to be the end of the human race in the next two years or anything like that.
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Speaker 2: But it is a tool.
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Speaker 3: And even within the Federal Reserve, that's what I tell all of our employees, We're going to train you to do this because we want you to be more productive. If I was going to replace you with AI, I wouldn't waste one cent training you. That would be a waste of money. So it really is a tool that I expect all.
00:02:31
Speaker 2: Of our employees to use. So that's kind of.
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Speaker 3: The basic global picture of how I think the whole AI world works. Europe, for example, doesn't produce much AI or inputs, but they're big users of it. And it's already kind of widely spread throughout the business sector and community.
00:02:53
Speaker 1: Let's talk about the payoffs. You say you're an optimist. You're not worried about the human race. When are we going to see some of these benefits, the productivity boom, the increase in our wages, inflation being reined in? Those things haven't really turned up for the everyday person.
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Speaker 2: Right.
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Speaker 3: It's often the case that when you have big technological changes, this is what economists know, is you don't typically see the productivity gains for years. A big part is firms have to figure out, what am I using this for? How am I going to actually increase productivity? They're not really sure, and so there's a lot of trial and error and a.
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Speaker 2: Lot of experimentation.
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Speaker 3: But then you start realizing where it really does have its impact. I mean, I'm telling you, if anybody does any coding... This stuff is amazing. I mean, it's just shocking how good it is. So in terms of coding, yeah, I mean, if you were a coder, your job's going to be fundamentally changed. It doesn't mean you're going to lose your job. It's just you're going to do a different job than what you were doing before. Things that you couldn't do because you were too busy doing basic coding, you're going to be able to now expand what you're doing in terms of the production of your output.
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Speaker 2: So....
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Speaker 3: I think it's just going to be a while before firms start figuring out how to actually do this. And you may, look, you may not see it in terms of, this is one of the measurement things I've thought about. Suppose I can do the same amount of work faster. So instead of five days, I get it done in three days. Maybe I take all that time and just go have more leisure. My output's not any higher.
00:04:35
Speaker 2: Per a given year. It's just.
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Speaker 3: I've got more time to consume my leisure and enjoy my life. That still means it's still good for welfare, even if you don't see a big increase in.
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Speaker 2: GDP per capita.
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Speaker 3: So you either have to rethink, do we measure productivity per unit of time as opposed to quarterly, it's now down to like days.
00:04:59
Speaker 2: So you have to kind of think about that.
00:05:00
Speaker 3: And then just in terms of productivity, There's a lot of things this technology is just going to make your life better, even if it doesn't show up in your work productivity. I always like to point out Google Maps is an amazing.
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Speaker 2: Invention. I don't use it to increase my productivity.
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Speaker 3: It helps me get around in cities where I'm visiting and I don't get lost. That doesn't show up in the GDP numbers, but that makes my life a lot better. So I always try to tell people technology can just make your life better or can actually increase productivity and how much output you produce.
00:05:36
Speaker 1: One thing that's clear to measure is inflation. And right now, the narrative in the United States and in other parts of the world is an affordability crisis. There is definitely an impulse that's coming from AI-related impacts on the economy. In the short term, when do you see the AI hit to inflation dissipating in the U.S.
00:05:59
Speaker 3: Yeah, I mean, the whole build-out, obviously, if you're building out several trillion dollars of investment in AI, and you have to buy all that stuff, and your demand is perfectly inelastic, you'll pay whatever price if you're one of the hyperscalers. You're going to bid up the price of all semiconductors of all type, and that's going to spill over to anybody else who uses those products. And that's what we're starting to see in the US. We're starting to see AI having a spreading out of inflation because it's just increasing demand for everything else. Now, down the road, when this stuff is done and they've kind of built it out, that kind of demand pressure goes away. And then you hopefully will start seeing all the supply effects, which means we can produce more output faster and at a lower price. So it's one of these two-stage things. Demand is going to be, especially the size of the investment. I mean, this is shocking how much is being spent on this compared to any other point in history. And so you're going to see these price pressures early on. How long are they going to last? It could last anywhere from two to three years, given how much they've committed already to spend out in the future. Now, if all that falls off, if suddenly there's a pullback or you can't meet this build-out, you can't do it, that'll put a check on prices. But the benefits on inflation down the road are, they're down the road as far as I'm concerned.
00:07:19
Speaker 2: They're still a few years out. A few years off.
00:07:21
Speaker 1: Is there any chance that the inflation that's stemming from the AI build-out could be embedded in the economy for a longer time?
00:07:30
Speaker 3: Yeah, I mean, like I said, it's very specific what it is. It's not like a broad-based effect. It spills over into a smaller set of goods than other things. And we know that at some point this huge build-out and huge demand is going to, I won't say completely come to an end, but it's going to taper off a lot. And when that happens, we'll see the demand pressure come down. But from all the plans that I'm hearing from the hyperscalers, they're still planning on spending trillions of dollars over the next three years. So this demand pressure may still be there. And we have to just decide how we want to respond to that.
00:08:05
Speaker 1: Well, let's talk about the AI build-out. There is still a lot of investment that's coming through. A lot of that is being issued in corporate debt. We're seeing a lot of financing to help with the AI build-out. And of course, that debt is sensitive to U.S. treasuries. and we've seen yields skyrocket. Global yields are high. Can you talk through a little bit about what you see in U.S. yields, whether that could be longer term, and how much of the global higher yield picture has to do with the narrative in the U.S., and what's separate?
00:08:40
Speaker 3: Yeah, I mean, everybody's suddenly paying attention to high yields, and when you look at it, it's not yields have gone up because there's expected higher future inflation.
00:08:49
Speaker 2: That doesn't show up.
00:08:50
Speaker 3: Inflation expectations are well anchored So all of the buildup is not coming from an inflation premium.
00:08:57
Speaker 2: That's not where it's coming from. So it is a factor of real growth.
00:09:01
Speaker 3: If you have real growth and real productivity and these investments are going to pay off, you're willing to pay more in terms of your interest cost. And people know that and they'll ask for it. So real growth has an effect on these real yields. Now, on top of that, you have general fiscal concerns around the world. All governments are kind of sitting here in a, at least in the advanced countries, not such a great state. And we're seeing that in France right now. So some of this is just driving up yields in some countries that aren't necessarily related to the U.S. or maybe some other countries. And then the competition from AI is a serious, serious concern. Because even if the money flows into the U.S., so demand goes up, but there's inflows from abroad, and that kind of cancels out the price effect. that money's leaving some other country. Their yields are going to go up. So even if you have competition and no inflows in the U.S., yields are going to go up. If you have higher demand and yet there's inflows from other countries, you're going to see higher yields in those countries because the funds are no longer available for those countries.
00:10:09
Speaker 2: To invest in.
00:10:10
Speaker 3: But the AI build, I think, is definitely having an impact. I mean, if you look at Google issued, I think, a 40-year bond and it was paying 100 basis points over U.S.
00:10:19
Speaker 2: Treasuries. Where do you want to hold?
00:10:21
Speaker 3: 100 basis point premium for a Google bond that's probably going to pay off? It's not like they're going to probably default. So that is affecting the way people are looking at things. So anyway, that's it.
00:10:36
Speaker 1: There's economists who say that the U.S., at least, and maybe the rest of the world, is entering a phase of just higher yields and needs to adjust to it.
00:10:43
Speaker 2: Do you agree with that?
00:10:45
Speaker 3: Well, I mean, like I said, if this is all because of higher growth, that's a good thing. I'd rather have higher growth and higher yields and low growth and low yields. That seems like an obvious one to me. What you get concerned about is it's driven by inflation expectations, fiscal concerns, which I think is really a problem in France right now.
00:11:06
Speaker 2: Could be in the U.S.
00:11:07
Speaker 3: People are starting to wake up to our fiscal situation is not that good. And then naturally, bondholders are going to demand a higher yield to get them to buy that debt. So if you're living with higher yields because of higher growth, to me, that's a good thing. If you were living with higher yields because of greater fear of inflation.
00:11:31
Speaker 2: That is not a good outcome.
00:11:33
Speaker 1: I want to ask you about the fiscal policy situation and how that affects your role and your work at the Fed. But first, when yields go up, they do tend to do the job a little bit of a rate hike. In the picture that we have now, do you think that that's enough, or is there more room for the Federal Reserve to raise interest rates?
00:11:53
Speaker 3: Yeah, so I've long argued that the 10-year rate is determined.
00:11:57
Speaker 2: By global supply and demand.
00:11:59
Speaker 3: What I do, changing the overnight interest rate on deposits, that's not driving the 10-year yield much. And even if I do it, it's for some short period of time, not 10 years out.
00:12:10
Speaker 2: So I've always viewed.
00:12:11
Speaker 3: The 10-year as being driven by global factors, global demand, also supply from the US Treasury.
00:12:18
Speaker 2: And it's not so much what I do.
00:12:19
Speaker 3: So when yields go up, is that going to impact interest-sensitive sectors like housing and autos and other things?
00:12:27
Speaker 2: Yeah, of course it is.
00:12:28
Speaker 3: Does that tighten off demand for those products and put downward pressure on prices?
00:12:33
Speaker 2: It should.
00:12:35
Speaker 3: It's not our intent to do it, but that's going to be one of the natural spillovers from this kind of surge in yields at the 10-year and higher.
00:12:43
Speaker 1: So it's doing a little bit of the work.
00:12:45
Speaker 2: It is doing some of the work.
00:12:47
Speaker 1: Let's get back to the debt problem, which is global, highest levels since World War II. In France, we're seeing that investors are now realizing that maybe there's a ceiling for how much debt France can issue.
00:13:02
Speaker 3: U.S.
00:13:03
Speaker 1: Debt, U.S. treasuries are quite different. They are seen as a safe haven in times of terminal line risk.
00:13:10
Speaker 2: The U.S.
00:13:10
Speaker 1: Has an exorbitant privilege. Do you see that privilege running out?
00:13:15
Speaker 3: Yeah, I'd say there's a lot of academic research coming out in the U.S. that that safety liquidity premium on U.S. treasuries is gone.
00:13:24
Speaker 2: It's gone. It's gone.
00:13:27
Speaker 3: So that was always the following. People would pay more for a U.S. treasury because it's safe, liquid, easy to trade compared to other government debt potentially. So that higher price they're willing to pay means a lower yield on that debt. But if you no longer feel like it's a safe asset or it's not really the best thing to hold, then that premium goes away.
00:13:48
Speaker 2: People won't pay that higher price.
00:13:50
Speaker 3: And that academic research is saying that in the last couple of years that has disappeared. That's another reason your rates are going to go up if you lose that convenience yield. And it's not a trivial sum. It could be like 50 to 70 basis points.
00:14:01
Speaker 1: You know, we've seen emerging markets have managed their deficits a little bit better than a lot of Western countries' advanced economies. And again, just remarking on France, investors, bond vigilantes showing that there is a line. How do you think that would be demonstrated in the U.S., that there is finally a ceiling that's been reached?
00:14:21
Speaker 3: Well, you'll see that sign, like I said, from the bond markets. If the bond markets are now worried that this debt is not as safe as they think it is, or I've always thought it was, they'll pay a lower price to hold it and therefore a higher yield. So you'll start seeing it when yields start creeping up. It doesn't have to be a crisis. I mean, sometimes it's a crisis, but otherwise it's just the yields go up. It's kind of what you're seeing in France. The yields have just gone up. but they're still able to issue it. They're just having to pay a much higher yield to get people to take it. So that would be it. I think you would see, if you started seeing problems with auctions, where demand is not showing up to buy it, and that's a problem. If you are afraid that one way to get rid of your debt is just inflated away in real inflation, then you get this inflation premium that suddenly now gets built up. That would be the most common way that fiscal policy would spill over into rates if they just think it's going to be inflationary and that's going.
00:15:28
Speaker 2: To push up yields. And so I got to have a higher yield to accept that debt.
00:15:33
Speaker 3: So, you know, auctions, bond yields creeping up, chatter about the fiscal deficits now taking course.
00:15:40
Speaker 2: We're not seeing a lot of that in the U.S. per se. But like I said, France, man, things just kind of suddenly exploded on them. Yeah, the U.S.
00:15:47
Speaker 1: Treasuries have seen good auctions. In August, there was one that was the best auction in 20 years, I think. What this does bring to light is the conversation around fiscal dominance and the independence of central banks. We're seeing some comments, again, back to France, that the central bank there is under pressure. How do you think that the world's central bankers who are facing these kinds of fiscal policy issues and spilling into their monetary policy work, how do you think that that Chinese wall is holding up?
00:16:16
Speaker 3: Well, we always have to take fiscal policy into account and how it's impacting the economy, not the government financing, but just how it spills over and affects the economy. So we always have to say, you know, if you do this bill, a tax bill or a spending bill, what's it going to do to consumption, investment? And then, you know, then we have to adjust based on what's going on in the real economy. Fiscal dominance is when you start having to do monetary policy to help the government finance. That's where you have to really come worry about it. And so far, at least for the U.S., we're not in that situation. Maybe France is getting closer. Like, how are you going to get out of this mess except by printing money? The only problem with the French is they don't print.
00:17:02
Speaker 2: Their own money. The ECB does. But in the U.S., I'll give you an example.
00:17:06
Speaker 3: After the Second World War, the debt-to-GDP ratio in the U.S.
00:17:12
Speaker 2: During the Second World War went up over 100%.
00:17:15
Speaker 3: The two years after the war ended, inflation was so high, it eroded away 40% of that debt in real terms. It was the massive, it was the biggest form of erosion in the real value of government debt we've ever seen in the US. Now, no, it didn't collapse the US. It didn't create a lot of issues. It did create, led to a Fed-Treasury accord. kind of keep the Fed out of this kind of financing world.
00:17:50
Speaker 2: But yeah, I'll just stop there.
00:17:51
Speaker 1: Well, I'm sure all of the senior executives in the room hear questions and concerns from people in the companies and in the economy about job security when AI is coming into force. You are a pessimist about how AI is going to affect daily lives. But speaking of jobs, I do have to ask if you feel that your job is safe because you are not facing a threat from AI taking over your role as a member of the Fed's rate-setting committee, but there is someone in the White House who is unhappy with how the FOMC board is operating, saying that it's being difficult in lowering interest rates, giving the new chair, Kevin Morse, a hard time. Do you feel your job is safe?
00:18:35
Speaker 2: I'm As far as I know, I.
00:18:40
Speaker 3: Mean, as far as AI, yeah, you could create a whole AI FOMC. I know some academic researchers at Stanford have done this. They've mimicked each one of us through our speeches and all of our statements and created their own AI agents.
00:18:55
Speaker 2: So there's a Chris.
00:18:56
Speaker 3: Waller AI agent in this model where they set interest rates. I don't know how well it works, but I found it just fascinating that you could do that. In terms of other things, yeah, I mean, I think there is a threat to Fed independence by the administration.
00:19:14
Speaker 2: So far, it hasn't really succeeded.
00:19:18
Speaker 3: I think our institutions have made it clear that they don't necessarily want this to happen. I'm hoping that that continues. And then the ultimate protector is just the bond market. I mean, if bond markets are worried you're going to create a high inflation environment, those interest rates are not gonna go down. They're gonna go way up. And so there's good reasons that you don't, you wanna have an independent central bank. And it has worked very well for 40 years in almost all the countries that have done it. I just think it's a mistake to even think about going.
00:19:53
Speaker 2: Away from it.
00:19:55
Speaker 1: So it's the bond market that's helping protect the members of the Board of Governors, like you. And who else?
00:20:02
Speaker 2: Congress?
00:20:04
Speaker 3: Well, Congress and the courts. I mean, our institutions are designed to their protections in terms of how they do this. We've seen that several times in the courts in the last year. The bond market's so obsessed with AI, I don't know, they don't even pay attention, it seems like, half the time. But I have faith in the U.S. institutions between Congress and the courts that they will make sure that we don't lose our independence and that the President of the United States sets monetary policy.
00:20:37
Speaker 1: Well, that is optimistic. Let's end on that note because you see AI keeping the rest of our jobs safe and your job is also safe. Guests, please join me in thanking Governor Waller.
00:20:47
Speaker 3: Thank you.
