World Economic Update

The World Economic Update highlights the quarter’s most important and emerging trends. Discussions cover changes in the global marketplace with special emphasis on current economic events and their implications for U.S. policy.

This series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies and is dedicated to the life and work of the distinguished economist Martin Feldstein.

MALLABY: So welcome to CFR’s World Economic Update. This series is dedicated to the distinguished economist Martin Feldstein. I think I’m one of many who remember him as a very generous mentor. This morning on our panel we have Ellen Zentner, holding her microphone—(laughter)—chief economic strategist at Morgan Stanley. Doug Rediker, managing partner International Capital Strategies and also a scholar at Brookings. Karen Karniol-Tambour, co-chief investment officer at Bridgewater. 

We have to start on the somber note. Today is October 7. It’s a painful anniversary. The war unleashed by the massacre a year ago is already the longest and most deadly between Israelis and Arabs since 1949. My CFR colleague Steven Cook returned from Israel recently and reported that the fighting in Gaza is winding down, but whilst it may be winding down in one zone, it’s clearly also widening. So in security terms, humanitarian terms, geopolitical terms, it’s obviously a historic moment.  

But this is the World Economic Update. And for markets and the world economy, the big question is whether Iran eventually retaliates by closing the Strait of Hormuz, whether Israel hits Iranian oil facilities, or whether Iran attacks other oil facilities in the Gulf. So, Karen, I note that oil prices are up again this morning in London, but just by a little bit. Talk a bit about how you see these risks for markets and how sort of the wide distribution is processed by investors. 

KARNIOL-TAMBOUR: Thanks for having me on such a somber day, as you say. Yeah, I think the oil market has learned that a lot of very important geopolitical events can happen and not affect oil supply and demand, that there’s just a lot of elements here that can happen without affecting oil supply and demand. And when you look at where we are today, the important backdrop is you have an oil market where supply is just greater than demand. And so demand has been stalling, flat, falling, depends where you look, where supply has been rising, especially from U.S. and shale. And when you have more supply than demand, prices should be falling. The reasons prices aren’t falling even more than they are is that the Saudis, especially, but all of OPEC are keeping oil off the markets.  

What that means is that there’s oil that’s sort of, like, waiting. And they’d be more than happy to put it back into the market if such an opportunity arose. So that means that the market can actually weather a pretty moderate disruption relatively easily. And it would take a large disruption to actually have real impact. Then, if you start thinking about numbers, just round numbers, oil market’s about 100 million barrels a day. Iran is about four of that. Saudi alone has spare capacity. It’s like five and a half, of which maybe two and a half is them proactively saying, I’ve just taken this off. I’d love to get it back on.  

So even if Israel goes after oil capacity in Iran very hard, to have a very hard impact—and then it’s also not Israel’s main interest, right? That’s not like what they’re really going after is stopping the flow of export money into Iran. They’d much rather go after either military targets or harm Iran disproportionately, so something like refineries within Iran, not stop the international side. And to the extent that the Israelis and Americans agree, disagree, however, they’re working through what to do, I’m sure the Americans are telling them, please don’t go after the world oil market. That’s not in our interest, ahead of an election.  

So then you get to the Iranian retaliation. As you said, that’s the big deal. If they retaliate by closing the Strait of Hormuz, that’s more, like, seventeen million barrels of oil they go through that. If they go after their neighbors’ capacities—now, again, I’d remember the backdrop. Which is, today Iran has every interest to seem that a retaliation would be very severe because they’re trying to discourage Israel. Once Israel’s done something, their interests have opposed. They don’t really want to see escalation and they’re going to try to downplay whatever Israel did as not a big deal. So they won’t necessarily retaliate as much as they say today.  

And then if they go on a path of, say, retaliating against Saudi Arabia, that has all the spare capacity, they can actually not do that much damage. And the last time they went after Saudi facilities, they didn’t do a lot. So I think that’s why the oil market’s calm. There’s obviously tail risks, but a lot of paths that are relatively benign for oil even if they’re a big deal geopolitically. 

MALLABY: Doug, the U.S., has tried hard to mediate in the conflict. I think Secretary Blinken has been there ten times. And the fact that the conflict, you know, far from ending is spreading could be read as a sign of a lack of U.S. influence. It could be seen as a microcosm of the crisis in the rules-based international order, writ large. Talk a bit about that, and the consequences for investors and markets. 

REDIKER: So you and I talked about this yesterday, before this, and trying to reframe this question in a way that made sense in this context. And I’m starting with that backdrop because I’m not sure the premise of Israel and U.S. influence or lack thereof in Israel, in this context, is a starting point from which to start talking about, you know, whether multilateralism works more broadly. Because Israel is a unique actor, in a region that is uniquely fragile, in an election year which is uniquely precarious, at a time when all of these things are happening at once. So extrapolating from the fact that Biden, Blinken, Jake, others, are not successful thus far or potentially moving forward in restraining Israel’s response is not something from which I would derive a broader lesson. 

But on the broader lesson, which is not necessarily directly derived from that set of facts, yeah. I think that we are moving from multilateralism, which was never all that effective but there was a high point in which the U.S., maybe under the Clinton administration, post the decline of the Soviet Union, there was a world order that existed that people sort of thought, oh, multilateralism, globalization works. And so let’s all get behind it. It wasn’t necessarily the U.N., but there was a sense that there was globalization moving forward, and everybody was going to benefit.  

Fast forward to today, none of that is still true. So multilateralism, under whatever context it was before, has kind of been succeeded by what I call minilateralism, which is a series of different fora. So the G-20 is now—it’s still there, but does it do anything? Does it—is it productive? No. I don’t think the G-20, other than when CFR President Mike Froman was in the White House at a time when the G-20 really stepped up and played a leading role in crisis response, I think it’s been on a steady decline ever since. Now you have the BRICS and the G-7. You have the Quad. You have, you know, the African Union. You have all these different entities that are battling for influence.  

That doesn’t mean you’re in what Ian Bremmer called the GZERO world. I’m going to push back on that. Minilateralism simply means you have different fora that are playing roles that are sometimes coordinated, often not, sometimes inconsistent. And people are trying to get their leg into what the rules of the road mean. From a market and an economic perspective, that’s troubling because if you look at one basic overriding hallmark of globalization, the WTO set the rules of the road for global trade.  

And now the U.S. has taken the lead in saying we no longer subscribe to the rules of the WTO. That doesn’t mean the U.S. is wrong. It just means the U.S. has been the leading proponent in saying we’re not going to support the WTO as it has existed for the past 20 or 30 years. So we aren’t in chaos, but we are certainly not in a world in which U.S.-led world order can be taken as a foundation to start your day, have your coffee, and move on. You’ve got to question the basic premises. 

MALLABY: OK. So we’re going to switch to perhaps the biggest economic news shock over the last couple of weeks, which has been the policy U-turn in China. For eighteen months the government basically refused to act in the face of sort of deflationary weakness, not least because the traditional form of Chinese stimulus, which is lots more infrastructure spending, would have been even more deflationary. So that was not so attractive. But they finally acted now, with a barrage of different kinds of stimulus. And, lo and behold, the stock market has soared. I think Hong Kong’s up, like, 30 percent.  

So, Ellen, this does seem to indicate a big U-turn in the government’s overall stance. But in your judgment, is the stimulus large enough and well-designed enough to get China out of its macro trap?  

ZENTNER: I think one of the important things about China is that they tend to do stimulus by trial and error. And so it’s how dedicated are they to reflation? I think as early as tomorrow, with the NDRC press conference, we’ll probably get an announcement of another stimulus package. We’re expecting around a two trillion renminbi package. And I think investors will react to that positively. Local government financing, some consumption boost, and/or bank refinancing—recapitalization, and some more infrastructure capex. And that may not be the end of it, but it shows—would show that Beijing is very dedicated to reflation.  

And because they do it by trial and error, it doesn’t necessarily mean that’s the end of it. But I think with the first blitz of stimulus, it was not directed in a way that you would hope that would stimulate consumption. It was sort of going to the old playbook again. You’ve already got a lot of production overcapacity there. And it would—it was going to create even more production overcapacity. And so it would just mean that China would continue to export deflation to the rest of the world. 

MALLABY: Karen, one of the curiosities about China’s policy barrage has been that—so, up to now there’s been this reluctance to deliver a consumer stimulus. You’d have thought that a communist government might be happy to help ordinary people by giving them money, but even now I think they are disguising the consumer stimulus as sort of a pro-natalist thing. You know, they want to give money to families with kids or newborns, because, you know, that’s good for the demographic challenge that they face. So they’re dressing it up as a sort of nationalistic supply side thing, as opposed to helping ordinary people, which Xi seems to think will make all soft. So it’s kind of quite Hayekian, or Thatcherite, or something.  

And then in addition, the recent stimulus seems to be quite strongly focused on the stock market. Again, a bit weird for—(laughs)—a communist government. So I’m asking this because in order to predict what’s going to happen in the future, one needs to have a model of their—of their ideology, of how they see the world. I mean, so how do you think about their ideological lens when you’re trying to look in the future?  

KARNIOL-TAMBOUR: Well, I love how you asked that question, because it is quite curious, right? And I think that they have shifted from a world where they thought the most important thing is deliver the growth, because that’s what people have us in power for, and we’re not going to stay in power unless we can deliver it. To thinking that’s not what’s keeping us in power. The population has to understand that we’re kind of in a war, and is going to be a war footing, and we’re not necessarily going to deliver the growth. And feeling like there’s more of a mix of things they’re trying to accomplish, but that national security and, you know, issues that basically relate to what they see as conflict with the United States and others is more important.  

And that went as far as, until recently, really deprioritizing growth in a pretty extreme way, because they looked at all the giant sucking sound in the economy from some of these deleveragings and kind of said, you know, dealing with this would create moral hazard, would create giving money to people who don’t need money. We don’t really want to. Now, what’s happened, I think, is a meaningful turn, where they’ve basically said, look, the economy’s getting too weak. This is getting too extreme. And we’re committed to kind of stopping this slide. I still think it’s not in the old world, where now the only important thing is create growth no matter what. Still a mix of issues. But I basically agree with Ellen that they’re going to dole it out to make sure growth doesn’t get so weak. They don’t want to so extremely, you know, lie about statistics and so on, to be well below the growth that they kind of want to be at.  

That said there are some weird ideological peculiarities here, I’d say. One is, they do seem very opposed to this idea of, like, bazooka stimulus that goes to everybody. I think they feel that what the U.S. did sending checks to people is completely unacceptable. So you are going to see any kind of stimulation being directed at something that they could think has a higher good of where they want the economy to go. They don’t want the economy to have the shape it used to. So whether that is what kind of spending—like, they have kind of a Cash for Clunkers type of activity there, where they’re encouraging people to have a certain kind of capital spending. Whether it’s who is spending. Like, you made the point of, you know, kind of very poor people, what they did in this round was tiny, but they’re going to keep thinking, who am I directing this to? Let’s make sure it’s the right part of the economy. Or, literally thinking that they’re influencing people’s behavior in ways they want, like, having more children. Having, you know, kind of a child credit. So they’re going to keep trying to do that.  

Then the other—it is a little peculiar that they’ve kind of started looking at the market as this sentiment signal, that they feel they should be able to have enough influence over. I think it started with the bond market, where I found all of the discussion about how maybe it’s antipatriotic to have the bond yield go lower very weird. Like if you said to me six months ago, do you think the Chinese government would want you to buy their bonds or sell their bonds, I’d probably say selling their bonds would be bad, but now they decide buying them is bad. And now feeling that the stock market also is too negative and there needs to be kind of more positive sentiment.  

I kind of think there’s a limit, though, to these kinds of activities. You know, that’s one of many considerations. Only so much they can do to actually move these markets. But you are getting more of a stock market response from the fact they were saying so clearly, we don’t like the stock market level. There’s probably some degree of a short squeeze that happened. And we’re going to help people buy the stock market. That’s being priced into markets more than a big economic response, which I think people are still somewhat skeptical of. And it’s going to take some rolling stimulus to really prove it.  

MALLABY: Ellen, you were talking a bit—I want to get to the spillover effects. So for emerging markets, for commodity prices, for the world economy writ large, if we get this—if this is the equivalent of, you know, the Fed cuts fifty basis points but that’s just the beginning—(laughs)—we’re going to have a sort of stream of stimulus coming out, what’s that do to the global economic outlook?  

ZENTNER: Well, I think, you know, something that Karen said is important, right? It’s they’re trying to stabilize growth and keep it at a certain level. This is not stimulus that’s going to send China back to 6, 7, 8 percent growth. I mean, our China economists are expecting nominal growth to be around 3.9 percent, and now they’ve probably moved the needle on that. It’s probably going to be somewhat faster than that, but it’s not going to be, you know, China growth of old. So I don’t know that—China can probably stabilize its deflation and the deflationary spillover effects to the rest of the world, but I don’t know that this is going to be enough stimulus for a new day for China where we’re going back to the old growth.  

I mean, we’re—in the U.S., we’re importing a good deal of deflation from China. We have actually reverted back to the normal deflationary goods environment that we were in pre-COVID. And maybe you can lift that to flat price growth for goods if China is stimulative enough, but I don’t—I don’t think that it’s going to be inflationary for goods in the U.S., that it will be enough. So I just don’t know that it’s going to move the needle that much. But I think what you do is get the sigh of relief from investors that China is not going to drag down the rest of the global economy into sort of that recession level, that 3 ½ percent growth that we consider a sort of recessionary level for the global economy, because they’re willing to do what it takes. 

MALLABY: So, Doug, I need to ask you a question about Europe, although I have to confess that the subject depresses me at the moment. So growth is barely positive. The political center has lost its grip in France, or is weakened anyway, Germany, Italy. There are these obvious structural problems. If you look at the Mario Draghi report from about a month ago, it points out that in 1995 European productivity was 95 percent of America’s. Now it’s down to less than 80 percent of America’s. So all these structural problems.  

But because of this political fragmentation, very unlikely that much will be done. I mean, I would—I feel—I mean, I’d love to be told I’m wrong, but I feel as if there was going to be some sort of shock that got us out of this very slow growth equilibrium in Europe, it might be a negative shock, not a positive shock. It could be the French fiscal outlook deteriorates and you get, you know, a proper French debt crisis, as opposed to some good thing, like, oh, they’re going to integrate the European energy market, or something. But, Doug, can you cheer me up?  

REDIKER: No. (Laughter.) And I say that with the same level of sadness that you started your question with. I moved back from Europe. I lived there almost twenty years, and found, especially in Washington, the degree of frustration and skepticism about Europe was really off putting, because Europe, at that point—this is almost twenty years ago—was, I thought, a much more optimistic story than the narrative in Washington would suggest. Fast forward, I’ve been back here in almost twenty years, and maybe I’ve become more cynical or maybe Europe has simply failed to perform, at least in recent years.  

But, no, I think your distress about the future of Europe is well placed. And part of it is—you referred to the Draghi report. The Draghi report is—I didn’t agree with everything in it. I agree with almost everything in it. But the problem with the Draghi report was it had that number of 600 to 800 billion of annual spending and investment that was required. And that’s all the skeptics needed to see. So for all of the other structural reforms that it was proposing, the one thing that the Friedrich Merzs of Europe saw was a big number tied with some reference somewhere in the report to a common European borrowing facility. And that meant they could throw it out and say it’s that usual, you know, common euro bond thing. That all you Europeans want to dig into the to the German coffers. And we’re not going to stand for it.  

Well, first of all, that’s not what the report said. And, second of all, they do need a lot of that and they’re not going to do any of it. So in fact, what worries me now is Germany—let’s not call it the sick man of Europe or the economic anchor or driver of Europe—but it is the most important economy of Europe. And its political system is totally dysfunctional at this point. They’ve got a traffic light coalition, which doesn’t talk to each other. And when they do, it’s hostile. So you’ve got an election next year. In the meantime, Germany has started to reimpose border controls in spite of the fact that Schengen basically says you can’t do that except in extreme circumstances. They started to do that.  

Germany voted against the China EV tariffs, right? Other countries that were more skeptical, including Spain, at least abstained. Germany voted against it. And Germany is now standing in the way of the UniCredit-Commerzbank transaction, which, again, if you go back to the crisis, the euro crisis, one of the outcomes of that was banking union. And one of the report—one of the Draghi report’s recommendations is, we need scale. We need large—not national champions, just large, scalable entities in Europe that can compete on a global scale. Here’s one, UniCredit, Italian bank, Commerzbank, German bank, cross border. And yet, the German political response has been no, no, no.  

That troubles me, because then what you ultimately have is a fight between the European Commission, the ECB, and the strongest national government, which happens to be very weak. And that is not going to end well, because I don’t think the Germans are going to say, oh gee, we’re wrong. Let’s become more European in our approach. I think the opposite is more likely to be true, in a year before they have a national election. And that doesn’t portend any great structural reforms in the foreseeable future. 

MALLABY: One factoid on this question of scale is that, you know, in the 1980s the Italian economy was bigger than China plus India. So you need to worry about scale, right? Italy was scale. It’s a different story now, obviously. And they need to wake up.  

Ellen, I want to ask you about the Fed. So the last meeting, three weeks ago, there was this fifty basis point cut. A sort of naive outside view would be how good does that look now, right? You’ve got a very strong jobs number last week, inflation core PCE remains above target, growth is running at an annualized rate of 3 (percent). Energy prices are heading up a bit because of the Middle East, even if not massively. So do you think Chairman Powell feels comfortable that the fifty basis point cut was the right thing? And how do you see it going forward? 

ZENTNER: Yeah, I definitely think that he views as being the right thing. I think that when he told us that they had a serious discussion about cutting twenty-five basis points in July, that that was a missed opportunity. He was not able to gain consensus for that cut. And it’s oftentimes difficult to gain consensus when things aren’t falling apart. When things are falling apart, it’s very easy to bring policymakers together to make a decision. So you weren’t able to get consensus for the twenty-five in July and September. You know, you can argue till the cows come home, but it was sort of a makeup cut. And it was a strong start.  

The issue then is how do you control markets from thinking that fifty is the new twenty-five? Well, it’s easy now, in hindsight, to control the market—(laughs)—when you’ve got great data that continues to come in. You talk about inflation still being above target, but if you look at the three month annualized pace, it’s right on target. And so inflation really isn’t a concern. The unemployment rate, even though it ticked down in this latest report, is still up a good deal from the bottom. And I think it makes for a strong baseline for Chair Powell to continue modest cuts, twenty-five basis points. And if you go that slowly, then you can sort of feel your way toward neutral.  

And so I think that’s why you’re not going to see the center of the committee, and certainly not a Powell or a Waller come back and push back against the idea that they continue with twenty-fives. And I think the market is now finally well priced for that—for that path. 

MALLABY: So I want to get to the U.S. election before we open it up for members to ask questions. We’re going to do a lightning round. I know there’s sort of a populist trend in the world. This is a bit of a populist maneuver. But so super briefly, the question is, for each of you: If Donald Trump wins the election in four weeks and one day, does the S&P 500 have a better week or a worse week than if Kamala Harris were to win? Better or worse, Karen. 

KARNIOL-TAMBOUR: I want to go same. 

MALLABY: Same? (Laughter.) OK, done. 

REDIKER: I’m not going to answer it with a one-word answer. I’m going to say the question presumes that we have an outcome that is already known within that week. (Laughter.) And that’s a very benign outcome. So what I’m worried about is that there is no definitive outcome within that week. And, second of all, I think it’s going to depend a lot on what happens with the House and the Senate, because I think that there is going to be—if there is a split government, then the markets will be up regardless of whether it’s Harris or Trump at the top. And if there is a wave one way or the other, then I think the markets will be down. 

MALLABY: Ellen. 

ZENTNER: What Doug said. But let’s take the—(laughter)—let’s take—the spirit of the question is, we assume that it is known on election night that Donald Trump is the—is the winner. And so I think a week—a lot can happen to the market in a week. Twenty-four hours? I think up, more so, in a Trump presidency win than Kamala. But Congress makeup is ultimately what the market will react to. 

MALLABY: OK. So staying on the U.S. election, Karen, there—I guess there are two big questions for markets, taxes and tariffs. On the taxes, you’ve got the expiration of the 2017 tax cuts. That would be kind of the first order of business in the first year of the new administration. So talk a bit about the contrasting visions on taxes that the two candidates have, and the consequences. 

KARNIOL-TAMBOUR: Well, in some sense we’re lucky that we have that expiration, because it’s going to force action. Nobody in either party wants on them letting this thing expire and raising taxes on a majority of Americans, without doing something. Then if you look at the difference in visions, the Harris vision, to the extent that we understand it, is one where you still extend a lot of these tax cuts. But for people making under $400,000 a year you add a bunch of tax credits—child tax credit, earned income tax credit. But you pay for a lot of it with rising taxes on both wealthy individuals and corporations, including some things that I think are definitely a reach like, you know, unrealized income—unrealized capital gains. Definitely a big change in kind of philosophy of what’s happened before.  

All that adds up to a slightly shrinking deficit. That said it’s very unlikely that Harris both wins and has a sweep. So if you look at betting markets, it’s about fifty/fifty Trump/Harris, who wins. But if Harris wins, it’s more like two-thirds that, you know, she doesn’t have that much control. And so in that world, and you start saying what’s actually going to happen, what’s actually likely, I think you get something that looks like she gets some of the tax credits that she wants, and she doesn’t get nearly the tax increases that she wants. That’s just not going to have the type of majority. So you’re going to end up with more like a flat deficit, something of that nature, maybe even a slightly rising deficit. Whereas Trump wants to extend everything, he’s also said things as extreme as maybe he’ll continue lowering corporate tax cuts more. Very clearly, that’s flat to rising deficits, because it’s very hard to imagine that tariffs would be possibly enough to pay for all of these pieces.  

Now I think when you add that up and you say, and back to my same answer across the two of them, you probably have a pretty similar deficit situation. Doesn’t matter that much, because she’s not going to get to literally increase the taxes to the degree she wants. He’s probably not going to lower them to the degree he wants. You’re probably going to end up with something very similar, with slightly different compositions. Trump’s is more directly supportive to stock markets, because you’re talking about probably friendlier corporates. But Kamala’s is probably friendlier to growth, because money going to lower-income households, there’s a very high likelihood to actually be spent in the real economy which, you know, does matter for the stock market, not just the corporate tax rate. So across the two of those, I think more like a wash, but obviously somewhat different in terms of composition. 

MALLABY: So there were this—in the FT and the Wall Street Journal this morning, folks might have seen these scorings of the two plans, which projects that the augmentation of the deficit if Trump were to be elected is 2X the effect of Kamala. And you’re basically saying, yeah, but if you put Congress in, that’s not right.  

ZENTNER: You put Congress in, it’s just not going to happen that way. You take their literal plans, yeah, it’s about right. But the Kamala plan, I just think has such a low probability of fully being enacted. 

MALLABY: Doug, quickly on trade. We’ve already had plenty of trade war. Are we going to get much more? 

REDIKER: Yeah. I think, without being too negative, I’m really afraid of the Trump scenario in which he comes in, and Trump seems to have decided that tariffs are the answer to every single problem in the world today, or at least in this country today. And that they are costless. So 10 percent across-the-board tariffs, he just decided, no, no, let’s make them 20 (percent). And then 100 percent tariffs—well, I saw this morning—he said on Mexican EVs, let’s make it 200 percent. So if—his advisors are going out and trying to calm audiences like this by saying no, no, they’ll be targeted tariffs. Don’t worry. And I’m here to tell you, worry—(laughter)—because I have heard nothing from Donald Trump that suggests anything targeted about them whatsoever.  

So if he is going to go in with a tariffs are simply costless, and if it’s not enough to do 100 percent we’ll just make it 200 percent—that mindset is a catalyst for a global trade war. And a global trade war says that we could be going into a very nasty economic cycle, self-imposed, self-inflicted, but that is—that you can’t discount. So I’m very worried that the markets broadly are discounting the risks of Trump being elected. And independent of what Karen’s talking about, which has a congressional side to it, Trump, under IEEPA, can actually impose tariffs unilaterally. Whether it becomes reversed by the courts two years down the road or not, is of no consequence to him. Fact of the matter is, he can do it, and it immediately sets off a series of domino-like effects that really worry me. That’s what scares me. 

MALLABY: I do wonder whether China’s stimulus might have been slightly influenced by the desire to kind of get out in front of this problem. That if they can soften the second China shock, that might take some of the heat out of this. But last word on politics and the economy from Ellen. Do you think that the Fed’s independence is totally rock solid and assured? Or do you think the election outcome could have an impact on that?  

ZENTNER: No, I think the election—look, we can say that it’s absolutely absurd that a president sit on the FOMC or, you know, influence the FOMC in a way that it becomes sort of an entity that’s in the president’s pocket. But there is always that risk. And even the specter of the Fed losing its independence can have a profound impact on sort of the inflation-fighting credibility of the Fed. You know, again, the makeup of Congress will matter a good deal. Unless you have enough of a majority in the Senate, it’s going to be awfully hard to nominate and confirm sort of the real fringes of FOMC leadership, of who could lead the Fed. But I think that if that—if Donald Trump were to win the election, that rhetoric were to be at the top of his agenda, I think you would definitely see an impact.  

And just to go back to the tariffs question, I mean, you can go back to 2019 and have a playbook for what happens when there is a trade dispute—I won’t say war. We’re not allowed to say war. But a trade dispute that has a global impact that monetary policy does have to react to. It was extremely detrimental. The global economy was headed toward a recession. And also those that are—that believe that the dollar will be weakened under a Trump presidency, because he says I want the dollar to be weaker, will be in for a rude awakening. Because you can go back to 2019 also and see that tariffs do not weaken the dollar. They weaken the global economy, and they strengthen the dollar. 

MALLABY: Hmm. OK. Let’s open it up to members. Reminder that this is on the record. One question over here.  

Q: Good morning. Earl Carr, representing CJPA Global Advisors. And, Sebastian, it’s always great to see you.  

Thank you for a fascinating discussion. On Friday, the European Union agreed to adopt the largest definitive tariffs on Chinese-made electronic battery vehicles. How do you think China is going to respond to the European Union? And what are the broader implications of this for the global economy? Thank you. 

MALLABY: Doug. 

REDIKER: Well, the EU has been very, very precise in how it is imposing those tariffs. So it is all compliant with the WTO, as opposed to the U.S. which ignored the WTO in the way we’ve adopted our tariffs. So I think China has had very strong bilateral, multilateral negotiations. I think the reason that Germany voted against it was because Germany is desperately afraid that China will retaliate against German carmakers. So the Germans figured they can have it both ways. They could not stop it because it was qualified majority voting, but they can say to the Chinese, hey, look, we tried. But the main point, I would say, is this is all WTO compliant. And the Chinese are challenging it through the WTO. So I don’t think you’re going to see a major escalation of a trade conflict, if not a trade war, between the EU and China.  

But it doesn’t make China happy. There was some statistic, some study that showed for tariffs to work in the EU against Chinese EVs, they need to be at least 50 percent. And the way that they’ve layered them on, most of them are at layer—at levels below 50 percent. All of them are. But I think even the highest one is just below 50 percent. So it may impose additional costs, but it’s not going to totally shut off the market to the Chinese.  

MALLABY: Tara. There’s a microphone coming. 

Q: Thank you. Tara Hariharan, NWI. 

A question about the dollar, asked three ways. Ellen, given American economic exceptionalism at this time, what can there be in the near future that could slow down dollar strength? Doug, going back to the comment Ellen made about Trump wanting a softer, a weaker dollar, is it very simplistic, though, right now, given the tariff setup, to assume that if Trump comes in the dollar would mechanically strengthen, and maybe if Kamala comes in that, you know, we have at least dollar stability? And, Karen, I just wanted to ask you about the status of the carry trade, which, of course, you know, roiled us all in markets in the middle of the year. Given the current setup of relative dollar strength, how do you see the yen and the yuan progressing against the dollar in the coming weeks and months? Thanks. 

ZENTNER: I think for, you know, what could get the dollar to weaken, I think on monetary policy, if the Fed decided that they just wanted to close the gap between the policy rate where it is and where they think neutral is more quickly—not because the global economy is headed toward a recession or the U.S. is in trouble, but just, hey, we’ve got ample room to cut, let’s front load all of that and get to sort of neutral quickly.  

MALLABY: OK. 

REDIKER: I’m going to question the premise. I’ve heard Donald Trump and his advisors say three things. They want a strong dollar, they want a weak dollar, they want a stable dollar. (Laughter.) So if you can tell me what Trump’s policy really is, then maybe I can answer your question more intelligently. But I don’t think Trump understands the impact of his policies on the dollar. So the fact that he wants one one day and one the other means, I think, that the—A, it is impossible to know where the dollar will be, because I don’t think we know what Trump wants. And I don’t think he understands what his policies would result in. So I’m just going to shrug my shoulders. (Laughter.) 

KARNIOL-TAMBOUR: And before I get to carry trade, let me add one thing to that. Which is I basically agree with Ellen that his policies are going to be strong dollar policies, for the simple reason that you have the trade and then you have the capital accounts. And we’ve just gotten to the point where almost every dollar invested in the world gets invested in the United States, the U.S. has really high share of, you know, indices, and so on. And whatever you do on trade doesn’t change people’s desire to buy U.S. assets. And so if all you do is shut down the trade route, well then people still constantly want to buy our assets. OK, you’re just going to get a stronger dollar. There’s no way around that. And he’s not doing anything on the other side of it. 

And briefly, on the carry trade, you know, I think that it was—it was a very classic thing that happened, right, where something fundamentally changed to the markets—in this case, the Bank of Japan—but there were so many people positioned in a certain way that the move was a lot more stark than just what happened fundamentally. And the move hit markets that were unrelated. Like, it’s very hard to argue there’s something related—that you should change the price of the Chinese currency because the Bank of Japan tightening, except for the fact that we know that the same traders were doing both of those trades at the same time. When they had losses, they just had to pull back from both.  

My assessment is that most people who are in those trades have been washed out. And this is kind of what happens. You lose money on the trade, you don’t go right back in. So you just don’t have as much activity. And so that those exchange rates are now just being driven more fundamentally. And in the case of the yen, there’s so much stability to Japanese monetary policy and, like, fear to do anything to world markets again, that it is the dollar side that’s going to be the decisive one, and what happens with the Fed. And in case of China, lots of influences but less likely that something totally unrelated to China, again, will end up hitting the Chinese currency.  

MALLABY: Fred. 

Q: Fred Hochberg. 

Inflation has hit Europe probably even more than it’s hit our country. It seems to have a much bigger political dimension here. And could you help me understand why? And then, sorry, I’ll ask it sort of unrelated—when we talk about growth in China, there’s a—I hear so many economists saying, well, they’re not going to get back to 6 to 8 percent. No economy can grow at 8 percent forever. So as the base gets larger, why do we keep asking the question if China can’t grow at 8 percent. Of course it can’t grow at 8 percent. So what am I missing? I must be missing something.  

MALLABY: So, on the China thing, who wants to do this? And maybe wrap in this issue that we almost raised earlier, which is the official data are pretty suspect. They’re just, like, not publishing quite a lot of it. So a lot of people think that the—when you—when you cited those numbers for your colleagues’ projections of Chinese growth, this is like their nominal projection. They’re just having to look through the data— 

ZENTNER: Their projection of what they think China will report. 

MALLABY: Oh, what they—what China will report, not what the actual will be. 

ZENTNER: Yeah. Yeah, because that’s what—you know, when you’re in investment banking that’s what investors key off of is official data, however, terrible official data is on the collection.  

MALLABY: So I think you said 3.9 (percent) was the— 

ZENTNER: Three-point-nine percent nominal. Which is—which will probably, with this much stimulus coming in you would have to assume that that number is probably going to be higher. But, you know, my point is that no one should expect that China would be growing at sort of those prior numbers. And, as you say, as the economy gets larger and larger, that’s more difficult. But what is the appropriate number? China wants it to be faster than it is now. That’s what we know. How much stimulus will that take, for China to be satisfied with the growth numbers they’re getting? There’s no telling. Again, trial and error—trial and error stimulus is you just keep doing it until you get some desirable outcome. 

MALLABY: But—maybe Karen or Doug want to weigh in on this—but if they’re reporting—if the projection is that they will report 3.9 (percent), that’s the official nominal figure, what do we think is the actual nominal figure? Is it the same, or is it different? 

KARNIOL-TAMBOUR: So they definitely carefully control any number where they tell you, we are targeting this number. They really don’t want to report something different than their target. Because that’s their credibility, right? And you can measure what’s actually going on. And sometimes it’s stronger, sometimes it’s weaker. Currently it’s weaker, right? But I liked your question a lot. I think that there’s two issues that people use when they kind of use some of the shorthand of the level of growth. One is the short term issue, which is are they going for strong growth or are they going for let’s stop the disaster? And people are using a lot of this terminology to basically say, they’re not really going for strong growth. They’re going for, let’s not have a disaster.  

But then the more important one is, let’s say big picture, where’s China going? Is this going to be a rich country or not, right? Like, it’s the second biggest economy in the world, but it is significantly poorer per capita than any of the wealthy countries. It also has a shrinking population. And so what does China ultimately look like in ten, twenty, thirty years is the really fundamental question. And they understand—those leaders, they understand the middle-income trap. Like, they understand that getting to actually be a rich country is kind of a different ballgame than not being a dirt-poor country, and they got from one phase to the other. And so there’s a lot of different ways to say, how do you get to that next phase? But you know, you need real growth to continue to be strong, or you just get stuck and you don’t become a richer country over time.  

MALLABY: Doug, do you want to do the other part? The— 

REDIKER: Yeah, but I just want to weigh in on this as well. I think that people have to understand one basic paradigm shift in China. Which is that when Xi Jinping came into power he said: We are going to double the size of the Chinese economy by 2020. That was a target. Whether it was an annual growth rate of seven or eight or ten or twelve, or whatever it was along the way, it was we’re going to double it. And that was Xi Jinping’s mandate from on high. It is now beyond 2020. And the primary goal of the Xi Jinping regime is not growth. It is security. So, yes, the economy is important. Yes, growth is important. No, it is nowhere near as important as the last decade suggests it had been.  

So we all have to get our heads around that it’s no longer the primary driving motivation of the Chinese government. On Fred’s question about inflation, EU-U.S., I don’t know if it’s more important here than it is there, other than in the context of we’ve got a national election where it has become one of the two or three top issues. If you ask a German about anything having to do with the economy, the first words out of their mouth will have something to do with inflation. That’s just the way they’ve been trained for the last hundred years. (Laughter.) So I don’t know if the premise is entirely correct but, again, remember, the ECB has a single mandate, and our Fed has a dual mandate.  

ZENTNER: But you have to—I think you have to know—understand who’s leading the Fed at the time. What do they want their legacy to be? You certainly don’t want your legacy to be that you were the leader that lost control of decades-long buildup of confidence in your inflation-fighting capabilities. Over the past many decades, central banks—globally, it’s become gospel that inflation expectations drive inflation. And inflation expectations had started to lift. And then you have a leader of the Fed that does not want to be named as the guy that lost the inflation-fighting credibility, and Volcker being a personal hero of Chair Powell. And so that’s where you get—that’s when the really aggressive rate cuts set in, when you bumped it up to seventy-five basis points a meeting, because inflation expectations had started to become unanchored. I’m not sure they were becoming unanchored the same way in Europe. 

MALLABY: There was also sort of the clear external villain in Europe, which was the Ukraine War, Russia, the gas embargo, and all that stuff. Whereas in the U.S., it was a bit more home baked. Sorry. OK. Yes, let’s get a question here. Microphone’s just coming. 

Q: Thank you so much. Hi. Antony Ghee from Bank of America.  

First of all, thank you all for enlightening conversation. And, Sebastian, I’ll defer to you on who should answer the question, but it’s likely Ellen is my guess. But given rising geopolitical tensions and, you know, given policy uncertainty, whether it’s China, whether it’s in Europe, given what’s happened in Germany and elsewhere, and even here in the United States, over the next market cycle—we’ve been talking about growth. Where’s that growth going to come from? What are the catalysts? What are the primary themes that’s going to drive growth going forward? 

ZENTNER: Growth in the economy?  

Q: Yes. 

MALLABY: Maybe you should talk about AI. 

ZENTNER: Yeah. Well, I mean, last week—or, I guess it was now week before last, we had really important data that got overshadowed by labor market report and other more near-term concerns. But that data was an upside—significant upside revisions to gross domestic income, where income was revised upward, consumption was revised upward, and the savings rate was revised upward. So we spent more and still had a higher savings cushion. And, at the same time, we know that downward revisions to employment are coming in February. So that is productivity operating on a much higher plane. Now, it’s too early to say whether that is something that’s going to be sustained, or is it just a post-COVID distortion? If it’s something that’s going to be sustained, then that higher productivity is what sets the economy on just a higher operating plane, right? Your potential growth is just higher.  

Otherwise, for the economy to sustain higher growth it has to come from your consumption sector. You have to be firing on all cylinders. And that means the lower income—middle- and lower-income households have to be spending as well. Now maybe this comes out of a Kamala Harris outcome, where her preferred stimulus for the economy is going to be targeted towards social programs. But right now, we’ve only got the wealthy driving spending in the U.S. And so we need for that to broaden out. But otherwise, productivity is sort of the culprit that you always point to of sort of the end-all be-all salvo for the economy, in order to set us on sort of the next decade or two of higher growth. 

KARNIOL-TAMBOUR: Can I just add one thing? Which is, it’s almost shocking to get through a whole session like this and not mention AI. But in addition to households that, Ellen’s right, it’s mostly the higher-income households, because lower income ones are more washed out with the prior rate rises. In addition to households that have a lot of income that they’re generating, and a nice balance sheet, and they’re spending, you have a potential for a big corporate cycle here, because corporates are in good shape. They’re not indebted. They have a lot of cash on their balance sheets. And there is a subset of them today that feel obviously an existential need to spend as much as they need to. And they’re telling you, like, the risk of underinvesting for us is much higher than the risk of overinvesting.  

So that is a recipe for some degree of overbuilding AI capacity, because not everyone’s going to be a winner but everyone’s going to try. And that’s just a subset of corporates. You could easily imagine that expanding with more and more sectors saying, wait a minute, there’s going to be a winner in my space that uses AI better than I do. So you could get what you saw in the ’90s, part of the cycle actually really supported by a big capex cycle by corporates. I think we’re at the start of that. And that’s going to keep heating up.  

MALLABY: Yeah. Let’s go here. 

Q: Thank you. Chris Isham with CT Group.  

Just to follow up on the Draghi report, one of the points in that report, I believe, made the point that one of the things that’s crushing innovation in the EU is overregulation. Do you see any steps, any indications the EU has taken that on board? Do you see any movement towards reform on overregulation? And what do you see on the horizon there? 

MALLABY: I could say a couple of things, and then Doug can correct me. I mean, I think the fact that Draghi was asked to write the report shows you—that’s, in itself, a signal, right? Because then they—you know, the Commission knew exactly what he was going to—the direction he was going to go in. And Draghi, you know, who I talked to in the process of—when he was sort of preparing the rollout, you know, was very strategic about, I’m not just writing a report here. I am going to go brief, you know, all of the important stakeholders in the European Parliament, in the Commission, in the national capitals. And, you know, I think—you know, so he’s much more than just writing a report. He is sort of an unofficial movement—(laughs)—in favor of deregulation and in favor of—importantly, of market scale.  

That’s his big thing. Knocking down boundaries, you want an integrated capital market, you want an integrated energy market, you want an integrated startup market, you want an integrated sort of science funding system. He wants a sort of DARPA equivalent for Europe that should be centrally organized, so you don’t have kind of competing groups which are all giving money not to the best science, but to the science which is in their own jurisdiction. So that’s his vision. And I think just the fact that he’s doing—he’s out there talking about it tells us that there is a constituency for this. People understand your point. But to go from understanding the point to then actually having policy change, when you look at the national capitals—and, for the most part, especially in the big economies, there’s been this total disintegration of the authority of the center and its ability to really get stuff done.  

You know, the weird thing about the last few years is that what used to be thought of as the crazy, dysfunctional European periphery—you know, Portugal, Spain, et cetera—has become more functional than in the 2010s, and the sort of leading countries, the core countries, less functional, right? Britain has left. Germany has this traffic light coalition that Doug referred to, a big rise in voting for the far-right. Italy has a populist leader. You know, France has managed to squeak through and get Barnier, a reasonable centrist, as the prime minister but, you know, there’s just a lot of sort of electoral momentum behind the far-right and the far-left. So I think people get it in Europe. Like, there’s a sort of technocratic—and quite a big technocratic faction that gets it. It’s just that the politics are completely dysfunctional. 

You want to— 

REDIKER: I would agree with that. I mean, I think one of the problems is Draghi’s report was commissioned by Ursula von der Leyen. She buys in, the Commission buys in, but the national governments are not there yet. And I think that the major takeaway of the Draghi report is going to be priorities in the next EU budget, which is a far cry from a deregulatory agenda that’s going to move in the direction you suggest is necessary, and I agree. 

MALLABY: Next question. Yeah, right here. 

Q: Hi. Andrew Watrous with Morgan Stanley.  

Thank you for your comments. I have a question about the U.S. labor market. We got some data last week from the Bureau for Labor Statistics that showed sort of a weird picture of the U.S. labor market. We had the hiring—the private hiring rate very, very low. We had the quits rate very, very low. But the layoffs—but the layoffs rate was also extremely low. So we have this picture of people not wanting to leave their job, not feeling comfortable leaving their job. We had high NFP, but we had a very low hiring rate. And so it seems like the two sides of the U.S. economy, people staying in their jobs, people not wanting to leave their jobs, and not a huge hiring wave, but on the other hand no layoffs. So what’s going on in the labor market? And does it all—is the only factor that really matters for the future of the labor market and the unemployment rate what the Fed does, and do they do they cut quickly enough? Or are there other factors that matter? Thank you. 

MALLABY: Ellen. 

ZENTNER: Yeah. So the labor market, there’s no churn. There’s not a lot of churn in the housing market either. I mean, it’s just not a lot of churn in the economy. That’s not good, because then it makes you more subject to risks. And I would say that, given that layoffs are very low and companies are hiring just what they need, that means that there’s downside risks to the labor market if companies do start to layoff. Now, what would cause them to start laying off? It’s if bottom line growth in the economy were to flag. We’re not seeing that. It would be if business costs suddenly went up, so you have a big widening of credit spreads. You know, commercial and industrial loans fall off, which is how you fund payrolls. And we’re not seeing that either. But it does mean that it’s easier to break to the downside.  

There was a big rebound in service sector hiring. That’s good news. It does mean that spending is probably still stronger than we—or, holding up quite well. But, you know, when you are—when hiring is slowing and layoffs aren’t rising, it only takes a little bit of layoffs rising to start to get to net negative payrolls. And that’s why I say there’s a downside risk. The unemployment rate is still the end-all, be-all indicator, and is the end-all, be-all indicator that the Fed is following. The Fed is not going to tolerate any further weakening the labor market. I think it was a sigh of relief that the unemployment rate ticked down in this report. It can easily revert back a few tenths in the next report. But that’s what they’re going to follow. As long as the unemployment rate is sort of moving up modestly or staying steady, I think they can continue with twenty-fives. And that’s why I say it’s their—it’s their baseline.  

MALLABY: OK. I want to remind everyone that the video and the transcript of this meeting will be posted on the CFR website. This has been on the record. Thank you to Ellen, Doug, and Karen. And thank you to you all for coming. (Applause.) 

(END) 

This is an uncorrected transcript.