Media Call: Global Implications of the Federal Reserve's Decision to Hike Rates

Media Call: Global Implications of the Federal Reserve's Decision to Hike Rates

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Monetary Policy


Experts discuss the Federal Reserve's decision to raise interest rates and what it means for markets and the global economy. 


Kenneth S. Rogoff

Senior Fellow for Economics

Benn Steil

Senior Fellow and Director of International Economics


Michael Levi

David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Maurice R. Greenberg Center for Geoeconomic Studies

LEVI: Good afternoon and welcome to this Council on Foreign Relations conference call on the international consequences of the Federal Reserve’s interest rate decision yesterday. I’m Michael Levi. I direct the Center for Geoeconomic Studies here at the Council on Foreign Relations. And I am lucky to have two fine colleagues with me here today to help us all think through what is happening.

Benn Steil is a senior fellow here. He is director of international economics here at the Council on Foreign Relations. And he is the author of the best-selling and award-wining “Battle of Bretton Woods.” If you haven’t read it, I highly recommend it. Ken Rogoff is a professor of public policy and a professor of economics at Harvard University. He is a senior fellow at the Council on Foreign Relations. He was previously chief economist at the International Monetary Fund. And he is the author of “This Time Is Different,” also award-wining and best-selling.

Let’s start with the basics. Benn, walk us briefly through what the decision was yesterday and what’s happened or not happened in the markets over the last 24 hours.

STEIL: Well, there were two important elements to the Fed’s announcement yesterday. The first was an immediate hike in the Fed’s short-term policy rate, that is its target rate for the Fed funds rate, of a quarter basis points. That had been very well-foreshadowed for many, many months. So the markets were not in any way taken aback by that. This second element was the Fed’s view on the evolution of the economy and interest rates going forward. There, as well, there were absolutely no shockers. The announcement was interpreted as being slightly more dovish than the markets anticipated, and that accounts for the positive reaction domestically, particularly in the stock market here.

In emerging markets, where there was a considerable amount of concern coming from the IMF, World Bank, and many in the private sector, the reaction was very muted. Broadly on emerging market currency and bond markets we saw a mild movement upward. Brazil and Argentina were exceptions, but those movements can be more explained by local factors. So broadly speaking, from the Fed’s perspective, the market reaction yesterday will be interpreted as being evidence for the success of their policies of communication over the past several months in particular.

LEVI: Thanks, Benn. And I want to just remind everyone on this call that this call is on the record.

Ken, last time there was significant announcement from the Fed—not necessarily the last time, but a previous time, we had a lot of turmoil around the world—the so-called taper tantrum. Why is this playing out differently this time?

ROGOFF: Well, the taper tantrum was Bernanke—Ben Bernanke spoke, I think it was in May 2013, and sort of unveiled to the markets that they were going to slow down quantitative easing maybe a little sooner than people expected. And the markets got very nervous. This one, as Benn said, was very, very well-telegraphed. They would have shocked people if they did anything else. And you know, it came in pretty neutral.

So on the one hand, the communication was maybe a little more dovish than the markets were expecting, although on the other hand if you look at the Fed governors’ projections of how fast they’re going to raise interest rates in the near term, it’s probably a little faster than the market, you know, has priced in at the moment. Although, it seems that the market discounts whatever the Fed says because it’s been wrong so many times in a row, and sort of more focused on—not so much on their forecasting, as the spirit of what they’re going to say.

So you know, this is a case where it was very, very built into markets. And the Fed did well. Of course, you know, until this point there had really been quite a bit of turmoil from Fed communications, where the chair and the vice chair were saying we’re going to hike this year, and yet a number of important governors were saying we shouldn’t hike this year. And I think that actually was causing a lot of problems. And in the last few weeks, really, the chair, Janet Yellen, has really taken over the reins, gotten control of the communications, and gotten this out smoothly. It is a very important moment in her tenure. It’s really, you know, the first big action. And she has to be pleased with the very early returns on it.

STEIL: I would just add to that, that although there was no rate ruckus yesterday, nothing to compare with the taper tantrum in 2013, there’s been a slow motion rate ruckus, as it were, over the course of the past year. Investors have already withdrawn about $500 billion from emerging markets this year. So there has—there has been very significant capital outflow in expectation of this rate rise.

ROGOFF Absolutely.

LEVI: And I know you’ve trademarked the term “rate ruckus,” so we can wait for future opportunities to use it.

Benn, we talked about this all in the wake of the non-decision a couple months ago, and a big part of that story was that global markets were so uncertain. There was turmoil and uncertainty surrounding China and beyond. A big part of the story was uncertainty in the international environment that helped lead to the Fed not moving and signaling that they would be much more cautious. Should we attribute part of what’s happened this time around to a calmer international environment than prevailed a couple months ago?

STEIL: I think that’s a significant part of it. But what I would throw into the mix is the fact that the Fed has taken its own forward guidance policy quite seriously. Forward guidance was instituted after the financial crisis spread globally and we hit the zero-interest-rate bound because conventional policy tools were no longer available. So it became sort of part of the policy tool basket to communicate to the markets what the Fed would do down the road. And the Fed had really been saying quite persistently over a long period of time that we should expect the first rate rise sometime in 2015. The debate was largely over whether it would be around June or whether it would be closer to the end of the year.

So I do think that there was a real feeling within the FOMC that they needed to take some measure within calendar 2015 in order to lead—lend credence to that policy. But I think Janet Yellen has tried to balance that out by persistently telling the markets that future rate increases would almost certainly be done at a very, very gradual pace.

And that, I think, is where the real test for Fed policy comes in. Is the Fed going to be able to rely on gradualism? Might it have to be more aggressive? Or might the Fed even have to acknowledge that it made a mistake, that the global economy was in weaker shape than they had imagined, and have to step back and go back to zero rates? So it’s real—that’s the real challenge going forward. They’ve sort of cut themselves a very, very narrow corridor in which to maneuver without shocking the markets.

LEVI: And I want to circle back to several of the things you raised there. Ken, anything different, in your view?

ROGOFF: Well, I mean, I think they waited a long time. There were—you know, there was certainly a case to wait longer because inflation hadn’t yet picked up. And there was certainly a case to have done it in March, because employment was picking up very strongly and has continued to. And I think the Fed, you know, both from an economic point of view and a political point of view, has been very patient in waiting for this moment.

Their big fear is that something completely out of the box, having nothing to do with monetary policy, happens—I just say facetiously a flu epidemic and it, you know, hurts productivity, and the Fed owns it. Anything that goes wrong they get blamed for, despite the fact this is a very modest interest-rate increase. You know, the real action is down the road.

And the interest rate is still very, very low. You know, I think if you waved a magic wand over everyone and made them forget that the interest rate had been zero and made it 1 percent, nobody would be clamoring for cuts right now. They’d still be talking about how fast a hike.

And so I think the Fed’s been aware of that for a long time, but kind of nervous about shaking up the market, nervous about the political ramifications. And I think it, you know, finally became to the point where, you know, there was getting to be a risk, as Chair Yellen said, that, since they kept waiting, they might have to start hiking more precipitously. And that would cause problems. And so that’s why they decided to get rolling now.

Now, you know, will it be gradual? I think the Fed needs to leave itself room. Their forecasting has really not been very good for the last seven years. It’s been difficult to do, but you know, I think the one certainty is that they haven’t been predicting very well. And they need to know that, and I think they do. And they realize things could be worse than they thought, they could be better. And, you know, if they’re worse, I think they’ll just slow it down. I think it would take an awful lot to get them to backpedal, because the interest rate’s still really low. But if it’s better, then they could move faster.

LEVI: Ken, you raised the possibility of surprises forcing them to react. When you look at the possibilities or surprises essentially coming from the evolution of the U.S. economy, or coming from external shocks, what do you think is more likely to potentially disrupt the plans that the Fed has?

ROGOFF: Well, I think external shocks are way more likely at this point. The U.S. economy has very solid domestic demand. The thing that has not really kicked in yet is business investment. It hasn’t really kicked in anywhere, and they expect that it will. But oil, you know, has had a rough patch, but on the other hand that’s definitely been countered by the fact that oil prices are very low for consumers.

The bigger risks lurk outside—China certainly being, you know, the biggest area of uncertainty. They’re going through a very rough transition that may turn out smooth but, you know, might not. And, you know, the emerging markets I think has been underscored—are under duress. It’s kind of amazing that Brazil and Russia, you know, have not had bigger problems than they have yet. And I think in 2016, if oil prices stay this low and if commodity prices stay this low, we are likely to see a few accidents along the way in emerging markets.

I think the Fed probably anticipates that and thinks it won’t throw them off course. But of course, these things can always end up, you know, having effects you can’t imagine. When Russia defaulted at the end of the ’90s, you know, it caused problems for farmers in Kansas. So, you know, the international economy interlinkages are very complex, and it’s very difficult to predict.

LEVI: Benn, I want to pick up on one of those interlinkages. You wrote late last week about the interplay between what the Fed is doing and what the Bank of Japan and ECB are doing. You wrote about it on your Geo-Graphics blog. Can you—can you talk us a bit through that? What is that broader central bank context? And how should that shape how we think about the Fed action?

STEIL: Yeah, this is another significant difference between the situation today and what we saw in mid-2013 with the taper tantrum. And that is we’re entering an era of what I might call the great divergence in monetary policy among the major developed markets—the United States, on the one hand, moving into a tightening phase; the eurozone and Japan, in stark contrast, still in expansion mode. And even if the Fed presses forward with tightening at the pace that it’s painted for us, we can expect that over the course of 2015-2016 alone the European Central Bank and the Bank of Japan will flood the market with $2 trillion of additional central bank liquidity. And that is very, very significant.

Now, although the dollar plays a very special role in the international marketplace, there is—and I think this is worth emphasizing—no less reason to expect positive spillovers from asset purchases by the ECB and the BOJ than we would have anticipated and did see under QE by the Fed. In other words, that liquidity that’s being pumped into the market has to go somewhere. Investors are going to be looking for opportunities, and emerging markets are likely to be—to be one of them. So that’s a—that’s a positive factor for emerging markets going forward, as compared to 2013.

LEVI: Ken, do you agree that the liquidity being added to the market by the BOJ and ECB is likely to have similar impacts on emerging markets as QE has had?

ROGOFF: Right. I certainly think the broad-brush picture Benn paints is correct. And I agree with that, that the overall stance of the developed countries is balanced. On the other hand, the role of the dollar really is outsized. Interest rate hikes probably matter more than QE, quantitative easing. And so, you know, it’s still possible that on balance it will hurt. And of course there are, you know, some countries which are more dollar linked and more dollar dependent than others, particularly in Asia. But absolutely what Benn said, is you have to look at the overall situation in the advanced countries. And the Bank of Japan and the European Central Bank certainly look set to do more on the expansion side, just as the Fed is tightening.

I think the Fed—monetary policy, I’d still underscore, is pretty loose. I mean, suppose they do get to a percent at the end of 2016, which the market doesn’t even believe that that’s what the Fed is, you know, telling. There’ll be another percent. They’d get to, you know, over one and a quarter. That’s still a very low interest rate. It’s still probably going to be a negative real interest rate. The inflation rate probably going to be greater than the interest rate. So it’s still overall pretty expansionary. And I think an emerging market that’s really hurting in this situation, like Russia and Brazil, have deeper problems.

STEIL: I think I’d throw into the mix that there may be an element of risk thrown into the equation in emerging markets by this divergence between Europe and the United States. In recent months, the BIS has documented that there’s been a material shift in international borrowing out of emerging markets away from the dollar and towards euros, obviously because interest rates are lower and appear to be declining in the eurozone.

Now, although there are plenty of risks involved in emerging markets sovereign and corporate borrowing in dollars, since these countries tended to do most of their international transactions in dollars, there was a sort of logic to this borrowing. But if they’re merely borrowing in euros in order to save on interest rate costs, and they continue to conduct business in U.S. dollars, they’re exposed to a new source of risk, currency risk, that they weren’t exposing themselves to before. And I think that’s something we’re going to have to look out for.

LEVI: Let me ask—let me ask both of you. Benn, you’ve just laid out one possible risk out looking forward. Are there—are there other specific risks that you see that could throw the Fed off course?

ROGOFF: Well, I think maybe almost the biggest existential risk is that the overall level of global inflation adjusted interest rates is stunningly low. And outside periods when there’s been heavy, heavy regulation holding all the interest rates down, it’s really an extraordinary period. And no one quite understands it. And I think—

LEVI: Do we have any historical precedents for it?

ROGOFF: Well, I mean, after—there were very low, negative—there were very negative real interest rates after World War II, and really through the early ’60s, but there was a lot of financial repression during that period. We had low real interest rates during the 1970s because there was unexpected inflation. But the nature of this, where, you know, it’s coming—a significant part of it’s coming from other factors—there are many. We don’t quite know how much of it is excess saving by emerging markets, how much of it is people are afraid there might be another financial crisis and want to keep, you know, more of their money in bonds, how much of it is people, you know, think inflation’s going to, you know, continue being—coming down? We don’t really know the answer to that.

But I think one of the things—you know, people—one of the—people have often said, look, there are other central banks that have tried hiking their interest rates during this period—Sweden, Israel, the eurozone—and they’ve all had to backtrack. Most of the reason they’ve had to backtrack is not because their economic forecasts were necessarily wildly off. It was because they, you know, got wrong this tide of global interest rates coming down. The U.S. is bigger than certainly Sweden or Israel. And it moves the real interest rates when it moves, but it’s only a quarter of the global economy. And if the Fed’s reading on, you know, overall real interest rates is wrong—they clearly expect them to begin to rise again which is kind of reasonable—but if they’re wrong about that, they could get sucked in. That’s been the thing people have been getting wrong again and again.

STEIL: Ken, can I ask you where you come down on Larry Summers’ secular stagnation pieces, and his—the grounding of his criticism of the Fed rate hike on the basis of that theory?

ROGOFF: Well, I don’t see how we could know that we’re in secular stagnation now in the aftermath of a financial crisis, with huge debt buildups, very heavy regulation that will probably fade after a while, and tremendous amount of fear. I think we’re actually better—we would better think of ourselves as being in a debt cycle—actually, a debt super-cycle, that first started in the U.S., then went to Europe, then went to China. And sort of projecting that growth is going to be long forever out of that I think is dubious. It might be, but we don’t know.

And I would just, if you don’t mind, point out that when Karl Marx wrote it was between the first and second industrial revolutions, things were about to get much better again. When Alvin Hansen at Harvard coined the term secular stagnation at the end of the ’30s, it was just as the cusp of the biggest productivity boom ever in the United States, from 1940 to 1970. And at the end of the 1970s, when we had stagflation, there were people writing we would never have growth again. I think it’s very hard to extrapolate.

But I think a trenchant part of Larry’s criticism is that we might have the real interest rate tide wrong. It might still be low for whatever reason. And when we don’t understand—we really don’t understand why it’s been so low, certainly not just because of low future growth. There’s a lot of, you know, fear out there also that’s been a factor, and the rising influence of emerging markets. But there’s also a fair chance that could go the other way. And if it—already, since he wrote his secular stagnation piece in 2013, real interest rates have bumped up quite a bit. And they could go further.

LEVI: I am tempted to take us to the questions on—to allow Karl Marx to take us to the questions. But I’m going to ask Benn one more. But do get your questions ready. And I believe you press star-one to get in the queue. If I’m incorrect, after I’ve asked this question someone will correct me.

Benn, part of the rationale behind yesterday’s decision was that the Fed didn’t want to wreck its credibility. But if you look out beyond the immediate decision, what does—what do the week’s events tell you about the credibility of forward guidance from the Fed?

STEIL: Well, I’ve been a skeptic of forward guidance for some time now. And it’s not just on the basis of—the experience of the United States, it’s based on the experience internationally. The bank of England has had a number of embarrassing episodes with forward guidance gone awry. I think the worst single episode was a year ago where the Swiss Central Bank completely shocked the markets by abandoning its peg to the euro. That was literally a shock to the markets because just several days before one of the bank’s top officials had made a public speech in which he said plainly that the policy was going to continue. And I think those sorts of actions really do drive home to the markets that we can only trust in action. We can’t trust in words.

Now, the Fed’s big challenge going forward is, as Ken said, their track record on forecasting is not good, not just going back to the financial crisis, but going back many decades. Now, I had done a study a few years ago finding that their track record was consistently worse than that of so-called blue chip private forecasters. And even if you assume that they’re not going to be worse forecasters going forward, they don’t have insider information. And forward guidance is really premised on the notion that the central bank does have a good grasp of the economic conditions going forward, and therefore is in a responsible position to guide the markets about policy in the future.

Now, if economic conditions don’t evolve as a central bank had expected, then one of two bad things can happen. First, the central bank sticks with its forward guidance because it doesn’t want to lose its credibility, and it has suggested to the market that a certain policy was going to be pursued, such as gradualism, and it sticks with it in order to validate that previous forward guidance. The other option is the one that the Swiss central bank took, which is to abruptly abandon its forward guidance and shock the market and say that economic conditions have radically changed, they’re very different from those that we had expected, and therefore we’re going to change our policy. And in both cases, I think the central bank loses credibility, and therefore had to be very cautious about over-relying on forward guidance.

LEVI: All right. Thank you, Benn and Ken.

OPERATOR: At this time we will open the floor for questions. Also, a reminder, this call is on the record.

LEVI: Thank you. While we’re waiting for your questions to get into the queue, Benn, you raised the possibility of a move back to zero. Ken, you said that you think the odds on that are very low. Benn, what do you think it would take for the Fed to do that?

STEIL: Oh, I think it would take a cataclysmic event. This is one of the risks that raising rates that Larry Summers has focused on, that the Fed would be very, very reluctant to go back to zero if economic conditions change. And so there is a significant risk that the policy stance will be too tight going forward because of an unanticipated change in economic conditions.

And remember, those changes can come from forces that are extraordinarily difficult, if not impossible, to predict. Ken talked about the possibility of a flu epidemic. Cataclysmic political events are also largely unpredictable. And even in those cases, when the Fed would have some justification for stepping back to zero rates, I think they’d still be very reluctant to do it.

LEVI: I didn’t realize that we needed to have our senior fellow for global health on this call, but I know—I encourage everyone on the call to wash their hands carefully when we’re done.

Benn, just to follow up very briefly on that, if there’s a cataclysmic event and the Fed reduces its interest rate from 25 basis points or 50 basis points to zero, that’s not much ammunition in the first place, right? It’s hard to imagine a cataclysmic event to which that is a commensurate response.

STEIL: No, it isn’t. But, you know, here’s the—here’s the policy options the Fed has if they don’t want to rely on interest rates. They could rely on changes in the size and composition of their balance sheet. In other words, they could leave the policy rate where it is and sell assets—that is, Treasury securities or mortgage-backed securities, which is an extremely unlikely action for the Fed—in order to tighten financial conditions.

The problem with that approach—and it does have some advocates, such as Richard Koo, who recently took up that position in Foreign Affairs—if that thing—if things do worsen, I think the Fed would much prefer to simply lower the policy rate again than to watch another round of QE and build up the balance sheet again. I think they’d find that even more challenging and politically intractable.

I don’t know how Ken feels about that.

LEVI: I think we actually have a couple questions in the queue now so I want to go to those. Operator?

OPERATOR: Our first question comes from Rich Miller from Bloomberg.

Q: Thank you very much for holding this.

Ken, I wonder if, you know, in your study of past crises and whatnot, what has been the behavior of the—you know, the equilibrium rate? I mean, has it been very, very slow to rise and very, very depressed for a while? Or is this, in some sense—(chuckles)—so this time is different? I’m just wondering what—you know, what history tells us about that.

ROGOFF: Well, of course, we saw this in the Great Depression, where policy interest rates actually didn’t literally drop to zero, but market rates did. It was a different—a different policy environment, but basically the same thing. And we had, you know, the moral equivalent of zero rates for much of the 1930s in the U.S., in the United Kingdom. They stayed very low thereafter, in World War II and beyond, although that was because there was a tremendous amount of financial repression that didn’t allow the rates to go up. And we saw it in Japan. You know, there aren’t so many financial crises in modern times in the financial centers, which is what this was. This was really global.

So if you look at the post-World War II crises—the Scandinavian countries, Spain, and/or emerging markets—of course, their interest rates go up, you know, during these periods. They have—they have a big depreciation of the exchange rate, their interest rates go up.

But, no, that’s certainly—this is certainly an extraordinary episode, having the global real interest rates be so low in the center countries.

LEVI: Thanks, Ken.

And the next question?

OPERATOR: Our next question comes from William Healy with Deutsche Bank.

Q: Good afternoon, and thank you very much for the call.

I think my question is a follow up to Ken’s remark, and maybe it was just a one-off versus the role of the dollar being outsized. But I was intrigued by the comment that hikes were more impactful than QE, Ken. And I’m wondering if that was just a second-order comment from the role of the dollar or whether there was some implicit or—(inaudible, background noise)—sort of numbers in terms of the rate hikes versus the value of QE.

ROGOFF: There are no meaningful numbers on QE. I mean, there have been many studies on QE. You can very well measure the immediate bond market effects and the immediate equity effects. But if you look after a year, it’s very hard to find any forensic evidence that it had an effect. That doesn’t mean there wasn’t, but it’s very widely debated in academics, you know, just how important it is.

If you’re a trader and you know the Fed’s about to do QE tomorrow, you’re going to make a lot of money if you have inside information. But if you’re only able to trade for, you know—you know, use the information a year later, it’s not obvious.

I think central banks are loath to be doing QE again. They would much rather be doing interest-rate policy if they have—you know, if they could be in the position to do so.

Q: But just one quick follow up, thank you. But if we’re sort of thinking that the ECB and BOJ next year adding 2 trillion (dollars) of additional liquidity, and you made the remark markets at best are loath to believe in the Fed will raise significantly its rate higher—so if we’re looking at an environment of 2 trillion (dollars) of additional liquidity and perhaps not as a hawkish Fed, does that sort of—I don’t know change your view, but does that—where do you sort of take the next logical thought process on the differentiation of those two metrics?

ROGOFF: Well, I don’t think the Bank of Japan and the ECB are very happy about, you know, having to use QE. No, they are different. And Japan, you know, does things like buy the stock market, and that obviously—that kind of QE—which is, you know, not really pure QE, but a mix of, you know, buying—you know, transforming the duration of government debt and intervening in private markets, or if you do that in mortgaged-backed security markets, that has a bigger effect. In Europe it has a bigger effect because the ECB is implicitly making transfers from the northern European countries to the southern countries. And that’s had an impact.

So, you know, there are many dimensions to QE. And it sort of depends on exactly what the Fed does. They’re not all the same. I think if we’re talking about, you know, just buying government bonds, it’s not that effective. If we’re talking about buying the stock market, I think it’s a road the Fed would not want to travel very far down.

Q: Thank you very much.

LEVI: Benn, do you have any views on this? Benn, do you want to pick up on this? This started with your comments about those different banks.

STEIL: Yeah, well, the—well, here’s the risk I see going forward. The market is actually considerably less sanguine about the evolution of economic conditions going forward. If you look at the—what the FOMC expects to do on interest rates, they’re talking about a Fed funds rate at the end of 2016 of 1.375 percent, whereas the market is actually anticipating a rate of less than half that. That’s a very significant gap. The market has fully priced in a rise to 0.625 percent.

And interestingly enough, that number is below the lowest FOMC-member projection, which is at 0.875 percent. So the market is really anticipating that going forward into 2016 that economic conditions are going to be quite sluggish. And if the market is right about that, you know, the Fed may be forced to reconsider opening up that toolkit. I agree with Ken that we don’t know very well how it works. But once you get to the zero bound, we don’t know how any of these policies that have been used in the last few years, like negative interest rates, really effect the real economy. We’re in uncharted territory.

ROGOFF: The only thing I’d add to that is that—I mean, I think if there—a lot of it centers around inflationary pressures. And if productivity is just low, and there’s secular stagnation of the supply side, that Robert Gordon worries about, but employment’s full getting, you know, overemployment, upward pressures on prices, the Fed’s going to just say, well, we better take measures to improve productivity, think about using fiscal policy because monetary policy’s done all it can when we start seeing these price pressures. I think if there’s an inconsistency in models it would be that the Fed, yeah, cares a lot about the economy and employment in its dual mandate, but if inflation pressures are building up enough, that’s really—they’re really going to look at that first.

LEVI: Operator, I think we have another call on the line.

OPERATOR: Yes. Our next question is from Paul Merolli with Energy Intelligence.

Q: Hi. Yes, thanks for having the call.

One of the most leveraged and distressed industries is the oil and gas sector in the U.S. economy. What impact could the Fed’s rate hike have on this sector? And could you just speak to sort of the impact of the oil and gas sector’s problems to the broader U.S. economy at the moment?

STEIL: I think that’s a great question for the moderator.

ROGOFF: Yeah, that’s what I was going to say. Why don’t you answer that, Michael?

LEVI: No, no, Ken, you’ve written on this just recently.

ROGOFF: Yeah, I mean, obviously the low oil prices are going to put tremendous pressure on oil producers everywhere in the United States, in, you know, all the OPEC countries, even Saudi Arabia. It’s kind of incredible the pressure they’re feeling on their exchange rate right now. So the low oil prices are going to cause duress. And they’re going to cause duress in that sector. But the U.S. is a very diversified economy. And so other sectors will benefit. And I think overall low oil prices are not so much of a problem at all for the U.S., and they’re great for Japan and Europe. So we see, you know, other developed, advanced countries doing pretty well. And that would help the overall environment too.

LEVI: And then let me throw in two brief points. First, if you’re just looking at it as a 25 basis point change in the cost of capital, there isn’t some kind of magnification through the system that gives an outsized effect. That is not a large impact compared to all the other risks and all the other factors that play into costs for the oil and gas industry.

The second thing is if you look at the market, the market thinks—seems to think that big oil price movements are a much more important deal. You saw big oil price decline overnight earlier this week. And—or, sorry—a big oil price increase, and with it a big gain in the high-yield index. Yesterday, hardly any movement in the high-yield index, which is a pretty good sign of distress in the oil and gas sectors.

So I think there’s a lot of other stuff going on in the oil and gas world that is going to dwarf the impact of this. And I’d also just flag that a competition faced by oil and gas, whether that’s efficiency or alternative energy, in many cases is actually more sensitive to interest rates because it involves more up-front capital spend and less fuel-spend later on.

Operator, are there any other people in the queue?

OPERATOR: Yes. We have one last question. Our final question is from Kakumi Kobayashi from Kyoto News.

Q: Good afternoon. Thank you for holding these. I’m just wondering, the—if there is any sign that there is possible or unexpected capital outflow from any Asian—emerging markets in Asia, or any serious impact on the Chinese economy from this recent rate hike? Thank you.

LEVI: The impact on the Chinese economy, or any signs of capital outflow in Asia.

Q: So the emerging markets only in Asia.

LEVI: Yes.

Q: Thank you.

ROGOFF: Well, I mean, the Chinese Central Bank has had to react, you know, to—they have sort of a dollar peg. And as the dollar appreciates, this hurts. And they’ve had to react. There have been a lot of capital outflow from emerging Asia, as Benn said at the outset of the call. And Asia’s very vulnerable. The combination of a slowing China and potentially rising U.S. rates is pretty painful. On the other hand, a lot of that, you know, took place over the summer and it’s sort of a question of where do we go next? This was a microscopic move compared to, you know, some of the uncertainties that unfolded over the summer.

LEVI: Benn, anything else to add on that?

STEIL: Nope. No.

LEVI: All right. We are basically at the end of this call. I want to thank our speakers, my colleagues, for leading us through this. I think we have in addition to great insight, several excellent buzzwords to take with us—rate ruckus, great divergence, moral equivalent of zero. CFR is trademarking all of these as we speak. Thank you, again. And with that, we are finished with this call.

ROGOFF: Thank you.

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