caroline: from bloomberg world headquarters, i am caroline hyde. romaine: i am romaine bostick. taylor: i am taylor riggs. caroline: s&p 500 closing at a record high, even as fed chair jay powell gives a stronger signal that the central bank will begin tapering this year. the dovish delivery getting it just right while leaving rates alone. >> the pace of the recovery has

exceeded expectations at the fomc's recent july meeting. i was of the view, as were most, that if the economy involved broadly as anticipated, could be appropriate to reduce the pace of asset purchases this year. this intervening month has brought more progress in the form of a strong report for july, but also the further spread of the delta variant. we will carefully assess incoming data and the risks. the timing of case of the coming reduction and asset purchases will not be intended to carry direct signal regarding interest-rate lift off. we have much ground to cover to reach maximum employment, and time will tell if we have reached 2% inflation on a sustainable basis. taylor: it has been all jay powell today. what caught my attention is the terminal chart. they showed this again at the 2:00 hour. the wide dispersion of where we thought 10 year yields would go. i bring you this chart, down to

1%. you could go up higher to almost 2% if you are thinking about yields on the bullish case. it was interesting, some of the other conversations we are having about it counterintuitive -- having it be counterintuitive why don't we ask our chief u.s. interest rates strategist about those moves. it was jim caron at morgan stanley saying that if you taper, you are reducing the availability to reach the 2.5% terminal rate, and, therefore, you will fall on slower growth. is that the way we should think about these moves? ida: i am not sure that is necessarily how we should inc. about this at the moment. i think two things happened, and the market is pricing this. one is you saw significant buying of tips today in a liquid market. that has meant inflation expectations have gone up when you look at tips break even, up

four or five basis points today. part of that is this lower forever fed we are likely to have. we thought we would that the hint of a dovish taper and jay powell gave us that. keep in mind, we have not yet tapered. the way i look at the way yields have developed the last year is that we basically got the first half of the taper tantrum in january and february this year when yields went from 70 basis points to 150 basis points, and now we are consolidating a little bit below that. once the federal reserve starts to taper, that means there is going to be less demand for treasury securities and dealers and other potential investors are going to have to take up that slack. that is when you get kind of the second half of the taper move. i don't think it is going to be a tantrum, but it means you are going to see slightly higher yields, lower bond rates. romaine: i am curious, ira,

obviously, powell went through great pains to divorce the taper from any potential rate hikes. it is no secret the market is basically looking at the pace of the tapering once it starts and basically going to try to extrapolate when they think rates might rise. there was also concerned about the economic cycle. if you divorce these two, maybe the economic cycle gets ahead of the fed. what are people positioning for right now? around the taper or the rate hike? ira: so, mostly around the rate hikes really. when you look at what it is being priced for hikes, you are looking at early 2023 that the market is pricing. i think that is too optimistic because a lot can go wrong. we also have to divorce -- jay powell said what i thought he would say and i thought it was the right thing to say, and that is that they need to taper. the money being created behind

their bond purchases is not needed in the economy. interest rates are still low, even if they go up 30 or 50 basis points, our expectations after tapering, you will still have a yield that is not high or contractionary for the economy. i think it was right for chair powell to say that. the fed is going to be looking at the rest of the economy, it is going to be looking at future projections of the economy after the end of taper. therefore, you are going to see for a long time, at least six months or year-and-a-half, before they start to taper. after they finish bond purchases after the last economic crisis, not quite a decade ago, it was 15 months between the end of the bond purchases and when they first cycled. and then it was another year before their second hike. we can expect them to go cautiously when they begin to reduce a significant amount of stimulus. caroline: talk about the reverse

repo operations happening and why you think that program matters. ira: well, the program matters because if we do not have it, interest rates in the money market space, so t-bills and purchase agreements and other short-term rates would probably be negative right now, and the federal reserve wants to keep most rates above zero. we are ok with some at zero, but they do not want them to fall below zero. it is basically a way for them to drain cash when people do not want it and get paid something above zero, so five basis points is not much but it is about zero. that facility keeps interest rates from falling into negative territory and embarrassing the fed and away where people will say they lost control of monetary policy. it also shows you this is not a cash problem. all of the woes in the economic environment and globally is not

because of a lack of cash. it is not because monetary policy is to type. it is because of reasons beyond the scope of monetary policy. because of that, why continue to buy bonds? the time for qe has passed. it was right to do it last march, april and may, and even beyond that, but at this point, it is not making a big difference to the economy. i think romaine: ira jersey -- i think. romaine: ira jersey helping us break down the market reactions. we will get back to that conversation. we have breaking news, affirm shares up 80% after hours. this is the by now, pay later. you see this button a lot. you want to buy something, you click on it, and you don't have to pay at once. amazon is partnering with affirm to deliver pay overtime options. that is a big deal. taylor: what is interesting is

earlier, shares were down 4% or 5% because of peloton news and the readthrough of the slow down. total reversal. interesting news from amazon. caroline: it was your stock of the hour. taylor: you pay attention. caroline: they just keep coming out with more and more partnerships, like goldman and apple trying to build their own version. romaine: we will get back to our conversation on jackson hole and what the fed does next. we will speak to the former chief of the treasury department, janice eberly, and more on her takeaways from that event, next. ♪ next. ♪

>> the criteria that we put in the statement about what it would take for us to begin tapering, i think we are pretty much there. >> we still have a fair amount of energy momentum. i think that we can do our tapering faster. >> let's phase out the purchases and give ourselves a breathing room in 22. >> keep it simple. let's start the process and get it over with. >> it may give us more flexibility down the road on our decisions on the right. >> the timing and pace of the coming reduction in asset purchases will not be carrying a direct signal and timing of interest rate lift off, for which we have established a different and more stringent task. caroline: a few of the fed presidents and jay powell speaking about the timeline for tapering. of course, the ending of what we

are seeing. for more, we would like to welcome janice eberly, professor of finance and former chief economist at the department of treasury. the jackson hole event this morning, talk to us about what you think is coming out. the narrative and the efficacy of monetary policy right now. how efficient is it? janice: i think there was good news and bad news for policymakers this morning. there was discussion both on the monetary side and fiscal side, so they were looking at the whole portfolio of policies during covid in particular and compared to past recessions. the good news was that policies had been pretty effective in reaching the business sector and not creating that kind of spillover, negative spillovers that one might have feared. in particular, there was concern

and discussion about creating zombies, so the kind of firms that can only survive and live with policy reports. some of the results suggested that policy was not later -- laser targeted on firms that were needed but avoided providing a lot of support to firms that could only live with that kind of government support, so it was news on the zombie side that they had been pretty effective on that. taylor: let me jump in, if i may, because some of the criticism -- maybe you can help me understand -- and the phrase i hear is you do not keep a person on an emergency medical life support for a year. it seems like we have continued to keep his emergency support systems for almost 18 months. eventually, the medicine stops working. are we doing a good enough job

of taking back some of that medicine? janice: the argument bears about the unevenness, right, so the discussion was that in some parts of the economy, probably when you think about withdrawing the medicine, but other parts of the economy and in particular labor market, are still pretty weak and require support. when you have blunt instruments, which was the theme of the day, like monetary policy and fiscal policy that cannot individually target parts of the economy should you pull back and risk harming the sectors that are weak or keep the risk going? one of the first papers this morning said, you know, it probably is not as bad as you think because having extra support for the stronger parts of the economy attracts labor

into that part of the economy, and those are areas that need to grow, so it may help overcome those tight constraints we are seeing. we are seeing it pretty favorable to keeping the doctor in the house. romaine: keeping the doctor in the house, that is monetary policy. you have another doctor walking into the room, fiscal policy. people are wondering at this stage in the economic cycle, if there could be potentially trillions of dollars more in fiscal spending, additional school spending, pumped into the economy. that was focused today, and there has been a lot of talk about new thinking of economics and the revenge of them if you will, and i am curious of what was talked about behind closed doors, is this generally deemed to be effective in achieving the ultimate mandate? janice: i think the overall theme was pretty positive for policy interventions, but let me give you an example where there was concern that maybe we did

not get it quite right. i mentioned that there were not so worried about zombies, and that is on the firm side. the argument was that by keeping a firm alive because it is connected to its employees and vendors, still connected to its landlord, has stopped the stage for strong recovery in other sectors. on the other hand, we do not do that in the labor market. a lot of employees went into unemployment and are now seeking new jobs in that process has been slower. that has been a slower part of the economy. so it questions on whether we should look at policies implemented in other policies like furloughs they had in the u.k. to try to maintain those lengths between firms and employees, and that would really

be a different approach for the u.s., especially for something that we hope will be a short run like covid. caroline: a different way of getting unemployment benefits into the system. i'm interested to go into your research and what it focuses on right here and right now. when you look at firm spending on budgeting decisions, but also household consumption. it was interesting that perhaps there was talk of no labor wage spirals getting into inflation, and fed chair powell talked about inflation pressures and what that does to the consumer at the moment. what do you make of the strength of the consumer and their own purchasing habits right now? janice: this is part of the unevenness. there has been a switch in composition of consumption toward durable goods, toward manufactured goods and away from

services because of the nature of the shock we have had, and on top of that, because of supply constraints and the support for the economy, savings has really jumped up. there is a lot of capacity for spending, but some of the things that might normally recover during an upturn i really constrained, either because of the nature of stock, because it is covid and fewer people are taking user services or because there are restraints on the goods people went to immediately as soon as they had spending power. taylor: janice eberly, professor at northwestern university, i really appreciate your time and for joining us this friday afternoon. meanwhile, caroline hyde is going to do her best impression of telling me what the heck is a digital dollar. we will get into it. chair powell did not really speak about the central bank's

digital currencies today but made it clear he wants the fed to play a leading role in the development of international standards. we will discuss it all and the possibility of that digital dollar with eswar prasad of cornell university. this is bloomberg. ♪

romaine: today we are focused on all things fed, all things jackson hole. we heard from fed chair powell. he did not speak on the thing caroline cares most about, cryptocurrency. the central bank is exploring digital dollar and at some point will release some research. here to talk more about what the future may hold, we want to bring in eswar prasad, new fed chair of trade policy economics at cornell and his new book is

aptly titled "the future of money: how the digital revolution is transforming currency and finance." thanks for being here on the program. i do want to start off with the elephant in the room, which a lot of people were not necessarily expecting jay powell to talk about cryptocurrency, but they are awaiting to hear from the fed in this research report, i guess, about what the role, if any, the fed may actually have in the general crypto space. eswar: my understanding is that the fed is going to explore the design options. what they are talking about is retail central bank digital currency that could replace the physical dollar bills you may still have in your wallet, or at least some of us still do. it has many advantages. it can reduce the size of the shadow economy and bring more activity into the open. it can make certain monetary policy operations easier and put money into people's central bank accounts more directly.

but it also has broader societal implications. it could mean less privacy in financial transactions, and that is the sort of thing the fed wants to be wary about, any risks to privacy in commercial banks are thought through clearly, and that this has to be as much political as an economic decision. i think the fed is going to show us what the technical possibilities might be, and then really leave it to congress to decide whether we should really be moving towards a digital dollar. caroline: you have written plenty in articles and the like of the failings with crypto, mainly bitcoin, number one crypto by market cap at least, and the energy and efficiency of transacting in it at times and the nature it still has. of course, that privacy issue. do you think the federal reserve will find a way to get around that? are they worried about the pace of other central banks, the fact that china already seems to be

aching movements, and the ecb looking into it? eswar: certainly there are central banks looking into digital currency and it has become a wave. any of the major central banks, including those of china and japan, have already started trials. the european central bank and bank of london are contemplating trials. at this instance, i do not think there is a huge first mover advantage. i think the notion that they may present the digital version of the yuan related to the physical dollar for me is still a bit of a hard sell. certainly, the u.s. can learn a lot of the other countries experimenting and how to minimize the risks in terms of security and enhance privacy considerations, make sure there is not a commercial banking system. no central bank wants to be doing what commercial banks are doing right now. the u.s. could learn a lot and is going to learn a lot from what other countries are doing. it is going to be -- it is not a big threat that other countries

are moving forward. caroline: we only have a minute left, unfortunately, and it may not crowd out the yuan but what about some of the stable coins that already exist, if the central bank makes its own, will they fade away? eswar: these table coins are essentially providing a necessary service, which is a low cost, efficient digital payment, which is why they are gaining some traction, there is a big regulatory risk arriving -- arising from these coins that could lead to unregulated money market funds. the fed would introduce a digital dollar and it could make those in an efficient and safer way, so i think there is an opportunity for the fed to make progress in terms of providing digital payments available to broad swath of the population. caroline: thank you, eswar prasad. we wish we had more time, but i will go away and read the books and articles. professor at cornell university. romaine: i have got to love that

graphic on his book. it says it all. what is the future of money, taylor riggs? taylor: who? romaine: you, taylor riggs. taylor: so exciting. caroline: she needs to sleep. taylor: thanks for watching. what'd you miss? is done. this is bloomberg. ♪

>> from the heart of where innovation, money, and power collide. from silicon valley and beyond, this is bloomberg technology with emily chang. ♪ emily: i am emily chang in san francisco and this is bloomberg technology. coming up, pellets has investors sweating. pellets on --