Sterling in just a few minutes. And of course, the u. K. As well, where weve seen quite a volatile quite a lot of volatility. A little more than we expect it for labor turnover, 7. 2 6 7. 26on billiard million. Now for the extrusive interview. Kathleen i want to welcome our bloomberg audience for this interview with Robert Kaplan, president of the Federal Reserve bank of dallas. It is a windy, rainy day. Clyde you could make it over here. Interesting because you made it clear you are a voter next year. Lets put that on the table. Youve made it clear you are one of the 13 fomc members. You must be one of the dots that sees no rate cuts, no rate hikes unless something happens in 2020. What has to happen . Robert there has to be a Material Change in the outlook, either for better or worse. Ive already got baked into my outlook, we are going to have weak manufacturing next year, sluggish growth, pretty sluggish Business Investment, but with a strong consumer. There would have to be some Material Change from that outlook. I think it is fairly balanced at the moment. Will get some stabilization in trade. I think the moves the fed has made have also been helpful. I would say the risks are balanced. Kathleen if you see the risks tilting toward the upside and the possible need for a rate hike, would that be hard to do in an Election Year . Would you consider that illadvised, something the fed will try to avoid . Robert it will not be a factor as usual. King, im going to divorce political considerations. I think we will try to make the best decision we can in light of the circumstances. Kathleen you repeated this morning, as you said for a while, you expect to percent growth next year. That hasnt changed. 3. 5 unemployment. It sounds like you dont expect the passage of the phase i trade deal to have much impact on the economy, certainly not out of the gate. Robert thats probably correct. Ive been hoping there would be some trade stabilization generally. This is part of that. That is not to say, and you heard me say this before, i think the trade issues with china are going to go on for years, not months. I think most businesses are adjusted to that. These issues of intellectual property, technology transfer, and the much deeper issues with china are going to be going on for a long time. So phase one is better than not having phase one, but it doesnt mean there wont still be trade uncertainty. Kathleen another thing you have pounded the table on for the past however long, yearandahalf, this has been going on, it is not necessarily the impact of the trade war on the economy. It is more about the hit on businesses. Business uncertainty, and what that means for investment. So may i also conclude that you think that is, uncertainty is not going away with a trade deal . Phase two negotiations are starting immediately, according to the president. Robert what i said and i still say, if it was just about the trade dispute with china, i think business is could manage that. I think getting the usmca ratified also helps. But for most businesses i talk to, it is the broader trade uncertainty. Two months ago or so, we threatened mexico with tariffs even though we had a trade agreement, and that would have had a substantial effect on logistics and supply chain arrangements. Wound up not happening, but the threat was enough to cause businesses to realize, even with trade agreements, if we have a National Strategy that uses policy andforeign economic tool, you just have to be prepared as a business youre are going to have more uncertainty. So most people i am talking to are saying lets put them on hold and slow down. We are seeing that in business fixed investment. Kathleen a passage of the new the dallas feda, region certainly does a lot of trade with mexico. How much does it mean for your district . How much does it mean for the country . Robert logistics and supply chain arrangements in mexico are critical not just to texas, but the entire country. Having the agreement done where you have more certainty is a positive. Will it have a Material Change . Im not sure about that. Ironically, it may actually help mexico on balance more, in that their gdp growth has been very weak, and they need more Business Investment, and getting this past will help them especially. But it is a positive for the United States, and it is essential to u. S. Competitiveness and logistics of supply chains. Kathleen moving to the Global Economy, you are concerned about how weak exports, etc. Could spread. The fed did three rate cuts. The economy is in a good place. The main reason was global development. Global tensions, a weaker Global Economy. China is expected to keep we getting next year. Germany is still very weak. In the fed has paused in its rate cuts. Not sothe real result much the Global Economy changed because of the feds three rate cuts, but the yield curve recovered and reassured domestic Financial Markets . Is that the key to what the fed did, and your support for it . Robert for me, it was one of the keys. My own judgment, if we roll back the clock to june, wasnt just weaker Global Growth. It was weaker manufacturing in the United States and week business fixed investment. I said at the time we should do modest, limited, restrained adjustment to the fed funds rate to address those issues. The other thing i was worried about was the curve was inverted, and i felt it would be much better if we had an upwardly sloping curve. To me, the curve is a symptom that may our adjustments were about right. It wasnt intended to solve these issues, but it was intended to adjust policy in light of these issues. I think the curve being upwardly sloping tells me we are probably at about the right place. Kathleen so that curve is a strong signal, but where it to move in the other direction again robert it would concern me. Kathleen i want to move on to the consumer. Cometment has been weak about retail sales have been decelerating. The november number was half what the Consensus Forecast was. Our Bloomberg Economics team is exposing all of these sales to come in at only 3. 4 over last year, the second weakest of the cycle. What is your main engine what if your main engine of growth is starting to run out of gas . Robert i dont think that is going to happen, and heres what i will be watching for. Im worried that week Business Investment and weak manufacturing would seep into other parts of the economy. We havent seen that yet. Month, theresen no doubt the consumer Balance Sheets are in much better shape, and weve got a very tight jobs market. Theres no evidence i see that the job market is doing anything but getting tighter. That is a pretty good tailwind for the consumer, so unless something changes that causes employment picture to change, the consumer is going to be solid for next year. That doesnt mean in any month or quarter they are going to spend, but they have the capacity to spend, and i think that is a pretty good underpinning for the economy. Kathleen the other side of the policy coin in 2020 is inflation. At the press conference after the meeting last week, jay powell said he would have to see persistently rising inflation to get on board with a rate hike. What is your position . We have been in a situation where we have been able to run a very tight labor takingithout inflation off. Weve had muted inflation. This is whats great about the fomc. We all have a bit of a different take on this. I will be looking at what potential growth does. I will be looking at what the trends are in the labor market, and in addition, i will be looking at where we versus our target. I will also be looking at Financial Stability issues in weighing whether some actions are appropriate. , universelongerterm of michigan inflation expectations, the recent survey matched the record low of the survey, which has been going along for a decade. So, 2. 3 . Does this concern you . Robert in my view, and ive been talking about this the last few years, weve had a substantial structural change in the u. S. Economy, from disruption, the fact that everyone has in the palm of his or her hand or Computing Power then business is 10 years ago. Power has shifted. Businesses dont have Pricing Power. It is not surprising that Consumer Expectations are going to stay low, so does it concern me . No, i think it is reality. We just have to acknowledge that the reality of technology and the lack of Pricing Power is here to stay. Kathleen here is something kind of puzzling to me. The dots, if you look to 2021 and 2022, suggest they will start tilting toward rate hikes. But the consensus inflation forecast is in a range of Something Like 1. 8 to 1. 92 . The fed has been talking about inflation overshoot because it shot under for so long, for so many years has not hit its target. So it looks like that is not the feds position, that as soon as you see the 2 and higher, we better stop hiking rates we better start hiking rates. Robert all it gives you is a snapshot in middecember on , on what myr date best guess is on what rates are going to do. I, reason some people, or may have put in a rate increase is we may get a point where growth is trending above potential. Maybe inflation is starting to meet or exceed our target. But i dont know if that is going to happen. I still think i would be willing to tolerate some overshoot of the 2 target, as long as it is not persistent. If i thought it were persistent and was going to last, i would want to do something to adjust rates. That is a little different tolerance then we had historically, where we, as we were approaching 2 and had a tight labor force, we thought we had to move. I think theres a greater tolerance to take more risk on a little bit of an overshoot, and thats probably where i am. Kathleen it doesnt some like much, though, to tell you the truth. This is not about making it up. Robert on the makeup strategy, and that whole concept for your viewers of averaging, i think it is important to look at whether weve been running behind. I think it is important to look at averaging, but theres no subsidy to using your judgment when you get in a situation, and i dont want to forgo using my judgment based on the circumstances at the time. Kathleen why dont we move on to the repo injection. Weve been involved with this for so long. We remember when the to do reverse repose day in and day out. That was ancient history before the crisis. Now these reserve injections prevent market instability and have gotten so big that people say they rival what was done with quantitative easing, three rounds of quantitative easing. Will you tell us that these injections wont have the same impact as qe . Qe, for people watching, is when we buy treasury securities along the curve. Right now we are buying bills at a limited amount, 60 billion a month for some five or six months. Because money is fungible, if we are buying bills, some would argue it must be having some depressing effect on the rest of the curve, and as a markets person most of my life, that makes sense to me. So it is having probably some effect. We are trying to limit it. I cant make a categorical statement, but we did make a judgment, and i made a judgment along with the fomc, that we would let the Balance Sheet may be run down a little bit, and we needed to increase reserves in the system because of tax payments, debt issuance. But i do want to see, after we get past year end, i would like to continue the debate about what our strategy out to be, have the smallest possible Balance Sheet consistent with an ample reserve regime. We probably have more debate to have on that subject after we get through year end. Kathleen and even jay powell set at the press conference, theres a lot of my plate beside the standing repo facility. I want to bring in my partner vonnie quinn in something weve done for years. I know youve got some questions as well. Vonnie absolutely, and thanks very much for visiting us. You mentioned weaknesses, and i am curious because corporate debt trading and distress levels reached a high in november, and ccc spreads have blown out in the last few weeks. How concerned are you about that area . Robert when i see ccc spreads , im actually more encouraged. What gets me worried is that b and bb spreads are so tight. If the market is distinguishing between lower quality credits and better credits, i think that is an encouraging sign. Youve gotorry is increasing pes, historically low cap rates, very tight credit spreads, and i am keeping a close eye on excesses and balances, particularly when corporate debt is historically high. Bbb debt is tripled. I am cognizant of that, and watching it carefully to make sure we are not creating excess, undo excesses that are not hard to do with later. Vonnie your new colleague in central banking Christine Lagarde specifically called out the words talk and of as being unhelpful, and the words of hawk and dove as being unhelpful, and used the word apple. Should this the word owl. Should those terms go away . Robert ive been called a hawk and a dove. For me, i think most important thing a central banker does is it face the facts and assess reality, and avoid being ideological. In that regard, i think you want to avoid them, and more importantly, i want to avoid acting like one of those labels because when circumstances change, i need to be open to adapting to that. Vonnie we have had some changes in the last couple of weeks. If the ecb first tries to bring rates backup from negative next year, how does that change the calculus at the Federal Reserve . Said publicly i am not a fan of negative rates. My concern about negative rates may be an example of the central bank trying to do too much, and the need for broader economic policy. I am fearful about negative impacts on the financial system. So i could understand why the ecb might want to do that, and i would like to avoid negative rates here in the United States. We have comenative a but im not sure it is a constructive alternative. Isnie my point, i suppose, if the ecb tries to raise rates, does that mean u. S. Rates automatically get a boost . Does that change the calculus . Robert i dont think so. The set of issues they are dealing with in europe is different enough from hours that i could understand them taking action, and it might have no implication, and my judgment, for what we do. Vonnie one question on england. We obviously had a big change underway. Deutsche bank is looking for the bank of england to cut rates in january, and obviously theres a lot of concern that the capital buffer on banks will double. Yesterday it was 2 . Curious to your thoughts as to how the british economy has changed. Worse, myr better or own judgment has been, and i have been vocal about this, i think globalization is an opportunity for countries like the u. S. , u. K. , and others to grow faster. Obviously the trend right now is towards deglobalization, and it just means slower growth. What you seen in the u. K. Is they have depreciated their currency because the economy has been weaker. It has helped stabilize things, but i think there challenges going to be how to grow faster and engage with the rest of the world in light of brexit. I think globalization is still, all things equal, is an opportunity, not a threat. It is an opportunity to grow faster. Vonnie on that, i will send it right back to you, kathleen. Kathleen i want to follow up on questions about the Global Economy because you said earlier today that you were concerned. I just want you to explain that a little bit better. You are concerned that we are a very export dependent country, the most export dependent in the world. Robert over 40 . Vonnie exactly. Where that doesnt get better, where maybe that deepens, whatever happens with the trade deal is not going, and that affects the United States. What do you mean by that, and how much does that affect the outlook . Robert my base case for next years Global Growth next year wont be spectacular, but my hope is it will stabilize. If it doesnt, it will affect the United States, and by the way, the best example is the Energy Business, where the price of oil is lower. Capex for the Energy Business we think this year has been down 5 to 10 . With think it will be down 15 next year because of the lower price of oil and profitability challenges and capital discipline. So lower Global Growth, more sluggish growth, we are not immune to it. Almost half of our companies, s p 500 revenues and profits come from outside the u. S. I am hopeful we will stabilize and even see some improvement in Global Growth, but the point is it matters, and trade is central to whether or not we get better Global Growth. Kathleen this is still a big risk hanging over the economy that i think raises a big question about the solidity and i know the dots are a point in time. Nevertheless, whatever anybody was looking at at the fomc meeting, the law must be saying lets assume that things dont get worse from the trade war, and may be they start getting better. That maybe we dont need to cut rates more. Robert and by the way, that is my most likely case. Weve had a rough year in terms of global trade, and youve seen that reflected in Global Growth. To get case is not going worse next year. It might stabilize. If that is not true, i am going to have to take a hard look at that. Ibert i want to kathleen want to ask you about the dots. ,oure doing monetary review youre going to change things. Many officials love the dots, even though they can change. They give people an idea of where thi