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IMF’s Tobias Adrian on financial stability risks facing the global economy

Tobias Adrian, IMF's Monetary and Capital Markets Department Financial Counsellor and Director, joined Yahoo Finance Live to discuss the risks facing the global economic recovery.

Video Transcript

- We want to bring in Tobias Adrian. He's IMF's Monetary and Capital Markets Department Financial Counselor and Director. Tobias, it's great to see you.

The Fed still saying that we do have a ways to go but that we are on the right track. What's your assessment of the US economic recovery and the policy measures that are necessary at this point in the recovery? And I think we also might need you to a mute there for us.

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TOBIAS ADRIAN: Yeah, I did just mute. Thanks for having me. Yeah, the fiscal package is definitely going to boost growth in the US. And inflation expectations are coming up as well. That is an intended consequence of the stance of monetary policy.

So we expect inflation to overshoot slightly. But we don't see any de-anchoring or infiltration expectations in the medium term. So all is good in other words.

Growth is coming back, unemployment is coming down, inflation will come up to target, overshoot slightly. And that's exactly what the Fed's new inflation targeting framework is aiming to do. So I think we're in a pretty good place.

BRIAN CHEUNG: Hi, Tobias. It's Brian Cheung, it's great to see you again. I want to ask about the financial stability implications. That's, kind of, your bread and butter over at the International Monetary Fund.

The Fed minutes noted that there's been some concern within the central bank about pressures in the commercial real estate sector. They said that there could be some sort of unwinding of mortgage forbearance if things were to get worse again. That's not their baseline expectation but it's a possibility. What is the IMF's assessment globally of the broad financial vulnerability? Is it a similar picture around the world with a lot of other office spaces, kind of, wondering how they're going to recoup those losses they sustained during the pandemic?

TOBIAS ADRIAN: Yeah, absolutely. You know, the good thing is that the US is accelerating growth and that is helping everybody. But of course, coming out of the pandemic there are going to be structural changes in terms of how people work, to what extent this work from home arrangements-- virtual work is going to continue going forward-- and that could have an adverse impact on the commercial real estate market.

You know, that would probably have an adverse impact on the vendors in the that market. Banks have some exposure to commercial real estate. But of course on the other hand, those firms that will take advantage of the virtual work environment, at least to some extent, even after the pandemic is over, would benefit from leasing less office space. So for the economy as a whole it's probably a good thing. But for the specific commercial real estate lending segment it might be a hit.

BRIAN CHEUNG: And Tobias, I never thought I would see the day where the word GameStop would appear in an IMF report of any sort. I'm just wondering how the IMF has viewed the short squeeze situation and kind of, the market structural questions that were raised in GameStop. They might be separately different from what we saw from ArcadeGo's. But I think people who are looking on the outside in are wondering, what the heck has been going on in financial markets the last two or three months? What does the IMF have to say about the risks of structural issues maybe presenting a problem?

TOBIAS ADRIAN: Yeah, excellent question. Easy financial conditions. So low interest rates, tight credit spreads, and easy funding is an intended consequence of easy monetary policy.

But of course, you don't want risk-taking to be excessive. And so this is where the right balance has to come in. And this is where monetary policy has to be balanced by prudential policy. We have seen an outsized impact of retail investors, as well as family officers, on trading activity and possibly on valuations in some segments.

So GameStop is an obvious example, but there are certainly some other segments where retail investors and family offices might have quite a bit of impact on pricing. So what is interesting is that you know, in general, investing has moved to a lot of passive investing, right? So passive investing, which is not doing much other than, you know, perhaps your annual reallocation across portfolios. You know, that is really the dominant investing vehicle at the moment.

But that also means that active retail investors or active family offices actually can have quite a bit of price impact because there's not as many other active investors out there. And we are certainly seeing those dynamics play out.

- Tobias, what about the proposal to raise taxes? And not just here in the US. We also heard Secretary Janet Yellen pushing for a global minimum corporate tax rate. Can the global economy at this point in the recovery, can it handle higher taxes?

TOBIAS ADRIAN: Of course, the higher taxes are used in order to raise infrastructure spending, which is going to raise total output. It's going to raise productivity by building human capital, by building physical capital, by making the economy overall work better. And you know, the conquerations that I've seen, the net effect on the economy is actually a positive.

So even though taxes are higher, in the medium term growth is going to be higher. And because growth is going to be higher that is offsetting the higher tax rates on the corporations on net. So on net, shareholders as well as workers and the economy as a whole, are still going to be better off.

BRIAN CHEUNG: And Tobias, the action today in bond markets has been in the other way. But the broad story over the last three months or so has been rising a longer term bond yields, especially in the US Treasury markets, which are indexed as the risk-free rate around the world. So are there any sort of financial stability implications to the pretty remarkable increase that we've seen in bond yields?

A lot of that is accompanied by rising asset prices across the board as well. Does the IMF see any concern with those rising bond yields?

TOBIAS ADRIAN: Yes, absolutely. You know, some readjustment of longer term yields is to be expected and it's totally normal. So you know, in the middle of last year the 10-year US Treasury was about half a percent. It has come back up to about 1.65 at the moment. It was up [INAUDIBLE] two, three weeks ago.

But this is still below prepandemic levels, which was about 2%, right? In the bigger picture, yes, there was an increase in yields. But relative to the longer history these are still low yields. So financial conditions remain easy.

The concern really was about the speed of adjustment in those yields. They did rise very rapidly. And that can trigger sell of the margin calls. And indeed, we did see that some risky assets, some segments in the equity markets were selling off. There was some reversal of capital flows in the merging markets. But all of that has stabilized at this point.

And on that, you know, we might well see further growth at the same time as having slightly higher yields in the Treasury market.

- Tobias Adrian, IMF's Monetary and Capital Markets Department Financial Counselor and Director. Thanks so much for taking the time to join us this after.