00:00The sense, if I look at dollar-yen, is that the BOJ has not been hawkish enough today.
00:05Is that the right read?
00:08I wouldn't say that exactly.
00:10I think the Bank of Japan has been behaving as largely was expected,
00:17that it is cautiously, slowly looking to tighten policy.
00:21The problem is, it doesn't matter how often Treasury Secretary Besant
00:27shouts house like some demented grandmother at a bingo parlour.
00:31It's not going to change the fundamentals.
00:34And the fundamentals are that the fair value for the yen is probably around 160, 165.
00:40And absent intervention, you're drifting back in that direction.
00:44You know, fundamentals will out.
00:46They'll win in the end.
00:47And that's where we are, I think.
00:49The Bank of Japan's move, it seemed to me, was fairly rational, in line with expectations.
00:54They want to gradually move back to a neutral monetary policy.
00:57That's what they're doing.
01:00So we have to accept a kind of 160 dollar yen.
01:03Is that the interpretation?
01:06Well, unless you're going to fundamentally change the direction of either the US economy
01:11or the Japanese economy, yes.
01:14I mean, the fundamentals were putting the yen over 160 before the intervention.
01:19It wasn't a speculative attack.
01:22There wasn't people placing bets against the yen that led it to over 160.
01:27That was where the fundamental position of the relative economies,
01:30the interpretation of where capital flows were going, was dictating the yen should be.
01:35And Besant then intervenes.
01:38You get the yen coming down against the dollar-yen rate coming down, a strengthening of the yen.
01:44But that's defying fundamentals.
01:47Intervention works under one of two circumstances.
01:49If you're taking on a speculative attack, which wasn't the case,
01:53or if you use the period of intervention to change the fundamentals,
01:58we've not really seen any change in fundamental on either side.
02:02I thought the House always wins.
02:04That was certainly the line coming from Besant.
02:07Is it going to lose?
02:11Well, I think the market has already judged on that,
02:14that on this particular instance, the House has lost.
02:18Not that I think Besant was the House,
02:20because the whole idea of a House is that you're in a speculative casino,
02:25and that's not what was happening with the yen.
02:27What has happened is economists have won,
02:29which, of course, is only right and proper.
02:33On the one hand, yes.
02:34On the one hand, maybe not.
02:36Paul, let's just talk about, actually, what was the big surprise for me this week,
02:40which was how candid and terse, I think Bank of America are calling it this morning,
02:46Chair Walsh was.
02:47That was a 29-minute press conference that laid out where we're going,
02:54despite the fact that we don't want to do forward guidance,
02:56and gave the market a pretty clear idea that rates are going to go higher in the United States.
03:00Is that the real takeaway from this week?
03:04I think the real takeaway is that central banks are reacting to oil prices,
03:10which is a little bit concerning, because this is a one-off shock.
03:14Central banks are supposed to move beyond one-off shocks.
03:18They're supposed to ignore the one-off shock.
03:19But essentially, we've been worrying for some time about political interference in central banking.
03:27Well, the fact is, the government of Iran is interfering quite aggressively in central banking around the world,
03:33because it's the oil price that is very much dictating the direction here.
03:37I think with regards to Walsh and the market reaction,
03:42I mean, my interpretation was there was a certain reaction to what Walsh was saying,
03:46but actually, you know, the fabled dot plots were the big guide as far as the financial markets were concerned.
03:52They were clearly signalling an overwhelming majority of Fed members looking for a second rate hike this year.
04:00And so that's where markets have priced.
04:03Where do you think we go?
04:06Well, I think we get a second rate hike.
04:08The Fed has to do a second rate hike to prove that this week's rate hike wasn't a mistake, even
04:13if it was.
04:14So they need to demonstrate that, no, no, no, everything's perfectly fine.
04:17We know what we're doing.
04:19I think that the risk that we have, and I would stress it's a risk,
04:24is that if central banks are going to continue to obsess about oil prices and its impact on inflation,
04:31they have no choice but to suppress the non-oil economy and create a slowdown in the non-oil economy.
04:40That's the only way you can counter a supply shock in the oil market.
04:44Now, the hope has to be that the oil price comes down and we don't get to that stage.
04:49Charitably, you can argue that most central banks are operating at a more or less neutral policy at the moment.
04:55We really don't want to see a restrictive policy.
04:58I don't think central banks want to see it.
04:59But that's the risk that has started to build with this obsessional law.
05:05That's not what he said.
05:06He said policy is accommodative.
05:07He said, I've removed a dollop of accommodation.
05:10The implication being that actually we're not at neutral.
05:13We are below neutral.
05:15And he wants to at least get back to neutral.
05:18That would seem to be the implication coming from him.
05:20And he also says, just look out the window effectively.
05:23Inflation is everywhere.
05:24It's not just an oil shock.
05:25It is coming from a number of notable parts of the economy.
05:28The U.S. is dealing with, obviously, the AI build-out.
05:31It's not just an oil shock.
05:35So I would agree, in the case of the United States, it's not just an oil shock.
05:39You also have the lingering after effect of tariffs.
05:42But we know that that's fading fairly rapidly from the picture.
05:46The truth of the matter is, if you look at underlying inflation,
05:51so, you know, airfares are up because of oil prices.
05:54That's a first-round oil price effect.
05:57So a second-round effect.
05:58Second-round effects would be wage price spirals or profit-led inflation.
06:02We're not seeing those in the United States.
06:05When you look at what is happening,
06:07you can attribute nearly all of the inflation pressures, such as they are,
06:12to oil prices being pushed down the supply chain.
06:17Now, I will grant you, they're being pushed down more quickly than normal
06:20because people are more receptive to the idea of oil prices coming through.
06:27But, Paul, we're probably – the other argument is that we are to the right of potential,
06:32that we're to the right of LRAS, that actually this is an economy that is producing inflation
06:37because it's growing too fast and needs to be slowed down.
06:42Well, I think you're struggling to see that because if the economy was growing too fast,
06:46if the economy was seriously imbalanced, you'd be seeing a lot more wage growth than you're seeing.
06:51You wouldn't be having zero, zero real income growth.
06:56That's not an economy that's growing too fast.
06:58That's an economy that's struggling to meet its weekly bills.
07:01That's the issue.
07:02What you have got is a very, very narrow driver of growth coming through,
07:07your very selected pockets of growth,
07:10and inflation that is actually quite concentrated.
07:13This isn't a broad increase in prices.
07:15This is a very concentrated nature of inflation.
07:18That isn't indicative of an economy that is unbalanced.
07:22It's not indicative of an accommodative policy.
07:24I don't think any economist would really argue that the Fed is accommodative at the moment.
07:28That's the issue that we're facing.
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