Davos 2024: The High Rate Reality

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Steve Sedgwick, Anchor, CNBC: Good. Okay. Ladies and gentlemen, thank you very much indeed for joining us early on in the Davos agenda. I've already been here about three days, but that's another story as well.

Look, the high-rate reality, an enormous conversation which will take many, many hours, but actually what we've put together here today is the most extraordinary panel, which I guarantee by the end of this panel, we will learn something about the high-rate reality.

My first question, of course, is are we in a high rate reality or is this just compared to recent years? Because many of us in this room, myself especially, are of a certain age where we remember this as a rate normality, rather than a higher rate reality as well. The story is very familiar here, the Fed has gone from close to zero to 5.25 to 5.5%. The ECB, down to this man and others as well, ten straight hikes to a record deposit rate of 4%. Bank of England, up to 5.25% from 0.1% in 2020.

The Bank of Japan... Well, we will leave the Bank of Japan because they haven't actually moved yet. But that's another story as well. So again, we're not calling victory yet. In fact, I've already heard that comment, in the green room as well. We're not calling victory on the fight against inflation as well, too many people of a certain age have looked at Arthur Burns as well. So we know there are concerns and a job still to be done.

But what are the big questions, of course, ramifications on growth, on corporations, on individuals, on governments as well. Some of the deficits look pretty scary. If we have a downturn, if we have a recession, where's the fiscal leeway as well? That will be a big question.

Risk to debtors across the board as well. Meaning for investments, has it changed a lot of the broader parameters? I'm not going to talk for too much longer. I've already said to this amazing panel, please, if you hear something and you want to jump in, we're going to do this after the first round as well.

And, for all you ladies and gentlemen as well, I will bring you in if you want to ask a question as well, towards the end, just give me a nod and we'll get you in. And I've been asked by my host, just for directorial purposes, if you could stand up and state who you are and then state your question as well to this amazing panel, which is Gita Gopinath, who is the first Deputy Managing Director at the IMF; François Villeroy de Galhau, Governor, of the Central Bank of France, who I have already been told will add liveliness to this panel, no pressure there whatsoever; Adena Friedman, well, she was the one who told us that François will do that, she's the Chair and CEO of Nasdaq, just deflecting there from Adena; and Chuck Robbins, the Chair and CEO of Cisco as well.

So, we've got an amazing array of policymakers, of corporate leaders as well, and, one of the most influential economists in the world. So, why don't we start off with you if we can, Gita as well. I've already said it's a higher, rather than a high-rate environment. That's my view as well. But just go through what the ramifications are at the moment, as you see it, from this current environment and maybe a little clue as to where we go next.

Gita Gopinath, First Deputy Managing Director, International Monetary Fund: First of all, it's a pleasure to be here. To start off with, I think we have to focus on what is likely to happen this year. As we know the markets are expecting central banks to cut rates pretty aggressively. I think that's a bit premature to make that conclusion. We are in a phase where inflation is coming down. It's come down quite a bit, its surprised how fast has come down, but yet the job is not done.

We still have labour markets that are relatively tight in the U.S. and including in the euro area. So, we should expect rates to come down sometime this year, but based on the data that we are seeing right now, we expect this to be more likely in the second half of this year.

Now to your question about where we expect rates to head, maybe, you know, three or four years down the line. I think it's fair to say that compared to the period after the great financial crisis, so post 2008, 2019, we are looking at policy rates that I would say are, on average, higher than what we saw during that period. And the reason I say that is because that regime, the post-GFC regime, was a time when central bankers were hyper-focused on having too low inflation and so they were keen on running the economy hot, not moving preemptively.

Now we are in a world where we have far more supply shocks that are much more severe and we've seen that inflation can come back pretty strongly. So, we are moving to a regime where central bankers are going to be a little more cautious about running the economy hot and also moving preemptively and not waiting until they see inflation go above target. So because of those reasons, we're moving to a higher rate environment. And, of course, that has implications. This is normalization, as you said going back to pre-GFC times, but that has implications for the cost of funding around the world compared to that decade of abundant liquidity.

Steve Sedgwick, CNBC: Gita, the Fed, in an old world, about six months ago, used to talk about cumulative and lagged effects as well, which can last something in the region of up to 18 months as well. I don't hear much about that anymore. I don't hear about those effects. Has the penny or the shoe still to drop on the effects of these higher rates? Because across the board, and I know it's something we've already discussed in the green room, but for our audience here, it seems to me that a lot of people haven't had to refinance yet. They've still got to refinance globally, whether you're a government, a corporation, or an individual over the next few years as well, this could be really tough for many people's own personal balance sheet, for government balance sheets and, indeed, for corporates.

Gita Gopinath, International Monetary Fund: I think first, we have to recognize that there has been a lot of resilience in the economy, despite the rate hikes that we have seen. So we've looked at the estimate of how much of transmission has already happened and our estimate is that for the U.S., about three-fourths, so 75%, of the transmission has already gone through and we have the rest that's going to happen this year. For the euro area, it's been less because you started later, so there's more of the transmission left. But what is uniformly true is that we have households and corporations with stronger balance sheets and we've seen effects, but we've also seen resilience. Labour markets are slowing, but at a much more gradual pace, which is why, you know, I think that at the IMF we feel like a soft landing scenario. The probabilities have gone up quite a bit, because we've had inflation come down without needing that much of a loss in terms of economic activity.

Steve Sedgwick, CNBC: I find that extraordinary you talk about three-quarters of the transmission. I will move on. I know the point you made on resilience is something that Adena is going to bring up as well. But I want to get to a policymaker. I'm so tempted to ask François Villeroy de Galhau when we're gonna get the first rate cut, because we all want to know, but he's not going to tell us. So, I have already asked Robert Holzmann from the Austrian Central Bank, that wasn't good for the doves out there. I've already asked Mario Centeno this morning from the Portuguese Central Bank that was more dovish as well, so within his first answer, he's going to tell us about the challenges about making that decision about the first rate cut, which, according to Goldman Sachs told me yesterday, it's in April. Yeah!

François Villeroy de Galhau, Governor, Central Bank of France: So, I thought you would resist your own temptation, but you didn't. But let me say some words about the present situation. It's too early to declare victory. I completely agree with Gita, the job is not yet done. That said, interest rate tightening has been quite successful so far. And more successful, than what we expected in Davos, say, one year ago. What we can see on both sides of the Atlantic is something like a soft landing so far, which raises, by the way, a new question. If you listen, what was the rule or what is the rule of monetary policy in this soft landing? Were we only lucky due to energy disinflation? Or were we also talented?

Can I stress two facts, at least on the European side in favour of monetary policy: first, core inflation, excluding energy and food, decreased significantly in our case from 5.7 to 3.4 already and second, probably on both sides of the Atlantic, the main achievement of monetary policy has been to anchor inflation expectations and then to prevent spillovers from energy shocks to goods and services inflation. And this is a huge difference with the 1970s. That said, I won't answer about this year's interest rate, but let me give a historical perspective in, let's say three to four years, what do high-interest rates mean? How high could they be? If I think I will focus on our policy rates, in the euro area. If I think in nominal terms, obviously they shouldn't be higher than today. And, barring major surprises, we look at the Middle East, our next move will be a cut probably this year. I will not comment on the season.

So, not higher than today, but higher than in the past during 2015 to 2022. And to say this way, the new normal in the future will not be the subnormal we lived through during 2015-22. I think this is an important message. And probably the level of this new normal will depend on two economic variables. First is medium-term inflation and we could expect inflation to be higher in the future than during the low inflation episode we live through due to the famous three Ds: deglobalization, demographics and decarbonization.

So, it will be probably very volatile, but we will have a better chance to achieve the 2% objective. And, the second economic variable is the level of 'R' star, the so-called neutral interest rate. The good thing with R star, and Gita will probably agree on that, is that we don't know exactly where it is, but I know for sure is that it stopped decreasing, which was a 20-year downward trend, whether it increased in the recent past, we don't know exactly, but let me say that for the Euro area, we estimate R star to be around zero. It means if you take these two variables, around 2% inflation and around zero for R star, we could expect through the cycle, as an average. real rates for our monetary policy to be around zero, which means through the cycle neutral. And, if I look at nominal rates, we could expect them to be around 2% against R as an average through the cycle. And I focus on our policy rate. I will stop there.

Steve Sedgwick, CNBC: I would just already tone up something that Gita said with something that you said, you're optimistic about a soft landing, you won't give us the season. Is it going to be a warm season? No? Okay. Just trying it out. But Gita has already said the transmission effect, and correct me if I'm wrong, in the US has already had about three-quarters of the effects on borrowers and what have you, whereas less so in Europe as well. Are we still to see the ramifications of the 4% interest rate across broader Europe?

François Villeroy de Galhau, Central Bank of France: Perhaps two quick comments about the season. Why don't I say anything? I said it should be this year, bearing major surprises. But, if you allow me, I don't think it's a relevant question, because we are not calendar-driven, we are data-driven and let me stress that strongly.

Second about the transmission, Gita, you will probably agree that there are two legs in this transmission from monetary decisions to financial conditions and then from financial conditions to the real economy. About the first leg, I think the transmission is more or less over. And in Europe, what is key is the transmission through banks, because as you know, the bank credit channel is about two-thirds or three-quarters in the euro, much more than in the US. What is more difficult is the second leg, the transmission of financial conditions to the real economy and to the borrowers. Here, it's much more difficult to assess and strongly depends on various sectors. If I take real estate, for instance, I think most of the transmission has happened already because it's very sensitive to interest rates. For other sectors, we will see, but we have the feeling that the transmission of this monetary cycle is at least as strong and quick as in the past.

Steve Sedgwick, CNBC: Okay. Thank you very much indeed for that. You are data-driven, but markets are very often calendar-driven as well, as we've seen with this stunning reversal in the level of the yield of the US ten year, from when it was doing the job for the Fed, working with the Fed and then when it came down to a high three-handle, low four-handle, all of a sudden I didn't hear the Fed talking about how easy money had got, compared to when it was at 5%. But we'll come back to this in a little bit because Adena, the markets are, I think, on a hair trigger for when the first cuts are going to be. Again, I saw the note from Mr. Hatzius from Goldmans yesterday talking about March, talking about April for the ECB, talking about the Bank of England to follow soon thereafter. Do you think the markets are on a hair trigger for that first-rate cut?

Adena Friedman, Chair and Chief Executive Officer, Nasdaq Inc.: I think that the markets tend to anticipate. So, you know, the markets try to predict the future. And, what they're basically predicting is that there will be rate cuts.

Steve Sedgwick, CNBC: Are they better than the economists who have predicted 30 of the last recessions, when they only happen six times?

Adena Friedman, Nasdaq Inc.: No. I mean, economists they always joke about the fact that they're, you know, they're as good as the weatherman. But, at the same time, you know, they sound great. But I actually think that this time there are a lot of signals that would say that there should be rate cuts as we go through the year. The question is when they would start, and if I were the Fed, I would be a little concerned about starting too early, because, you know, yes, we're seeing the right direction of travel with inflation; I think the Fed is also expecting the direction of travel to moderate, meaning it's going to get harder and harder to kind of continue to bring the rate down. So, they're going to, they're going to expect that, which is also good. But they also want to make sure that they feel like they've really gotten to a state of stability around the rate before they start making significant moves on the interest rates.

So that would mean, you know, I would say that I don't know when that's going to be. I'm not going to try to predict that. But the markets do try to predict it. And, what happens in the markets as a result of this notion that there could be a lower cost of capital as you go through the year, is that investors can start to think about how they model company earnings over the future more successfully. They can say, well, I know that the cost of capital is not likely to go up, so then I can at least put in a stable cost of capital as a foundational element of their model.

They also know that inflation is coming down. So they also know that the cost of doing business is also moderating. So that also gives them more confidence. And, if you are a borrower, if you're trying to do M&A or you're trying to expand your business, you also know your cost of capital as a company is not going to be higher, like so, if you borrow now, you're not selling out tomorrow at a higher rate later.

So I think all of that builds more confidence in the market, which of course does show up in the market values. While last year, was a very what I would say, top-heavy market performance that kind of brought all the indexes up, I think you're starting to see in December and into January a broader-based improvement in valuations because I think that the broader market, small caps are now starting to show some improvement in valuations and others because they know that the cost of capital is likely to be stable to lower going forward.

And, I think that will also drive an interest in investors wanting to put risk capital to work, which means IPOs. We could actually have the IPO market opening back up again. And we are seeing a lot of interest we have about, you know, 85 companies who filed to go public on Nasdaq who are wanting to go out into the market. And so I think that they're starting to gain more and more confidence that that could happen in the first quarter or the second quarter, most likely more in the second quarter, but there'll be some bellwethers in the first quarter.

Steve Sedgwick, CNBC: Your great teams put together a lot of notes to me about resilience as well, but I really want to talk about the changing business model or certainly how investors evaluate business models, because we all know in 1997, 98, 99, the Nasdaq went to the races on the back of pretty shaky business models. It was more about the thematic. And this time around, there is a fear that it's excitement about the thematic again, whether it's crypto, whether it's AI, what have you. And again, there's a brilliant chart I saw comparing Cisco in the '90s to NVIDIA now and, okay, it was a very specific time frame, but it was very interesting looking at the exuberance about the business model and the multiple to sales as well. So I think it's great that investors are having a reality check again now, but has that process still a long way to go?

Adena Friedman, Nasdaq Inc.: Well, I think first of all, there's always going to be an opportunity for speculation in the markets. And that's a factor of the market's meaning, again the market's trying to predict the future right. So the future of technology and they're going to get excited about that. And they think that if you know the next generation of AI is really going to have a sea change effect on the economy, on companies, on industry, they're going to invest, they're going to lean in there. And that's kind of part of the benefits of having the markets be open and available. I think that at the end of the day though, the earnings have to follow, right?

So, as you know, you can have moments in the markets that can get dislocated from reality and sometimes the reality catches up and sometimes it doesn't. I think now though, you know, today if you look at the tech industry, you look at what's really driving valuations in the markets, there are some great companies doing, you know with very strong earnings, very strong revenue growth driving the markets up and they also have a lot of promise of what I can generate for their business in the future.

And then you also, I think have companies that have spent 2022 and 2023 becoming more resilient, focusing on getting to positive cash flow, focusing on actually building up. They don't want to be in the situation where they're at the mercy of the markets either, so they've spent their time, you know, kind of calling their investments, making it so they're making certain conviction debts and driving a positive cash flow if they're not already profitable. And I think that'll also make them stronger if the markets come back, cost of capital goes down, investors are more confident and they're more resilient. That actually I think is good for markets, good for the company, good for the economy. And that's what we talked about last year. Last year we were talking about exactly that, you know, this notion of getting to a point of financial resilience is actually much better for the sustainability of the economy.

Steve Sedgwick, CNBC: Sure, but I guess the question I'll raise in a moment is, have central banks aided that longer-term resilience or actually hid a lot of the demons in the cupboard, which will only come out during a prolonged period of high rate?

I'll come back to that because I want to get to Chuck. Chuck, you've already surprised me in the greenroom, because one thing that Cisco has done is made one very large acquisition in the last six months and one smaller one that I've seen. And I was going to come to you and say, actually, the high rate environment isn't affecting your dealmaking. If it's the right company, with the right fundamentals and the right cash flow, and you've got enough cash in the bank, then you're just going to do deals regardless. But actually, you've already said to me, actually, no, it really is affecting how we're making our decisions.

Chuck Robbins, Chair and Chief Executive Officer, Cisco Systems, Inc.: Yeah, it's great to be here. I think look, you reference the big deal that we are still waiting on regulatory review and approval for, which was Splunk, which we are paying $28 billion for, largely financed through debt. And in that case, their financials were strong enough to support the interest payments and everything else from cash flow perspective. So it made a lot of sense for us.

As you know, in tech to your point, a lot of these companies are not profitable. A lot of them, a lot of the startups are burning cash. We had this free-money mentality for this very long time, so money was being thrown at everything. And so when we would go look at companies, you had to be willing to take on the OpEx that would come with them at a time where they generally would not be accretive by any stretch. And now it's just become a bigger issue, because now you have to think about the interest costs that come along with it.

So now that we have done Splunk, we had another deal that one of my team members wanted us to look at recently. And we said, well, that comes with about $50 million of interest expense, can you absorb that into the business model when you pull this thing in? And the answer was no, I can't cover their OpEx and another $50 million in interest expense. So we walked. Right. So, I think that it has had an effect on M&A for sure, because for all the years we've been doing it, you never had to really consider interest expense. You just have. It is like it's zero. And so it's certainly coming into play there and I think to Adena's point, you know, when you get into GenAI and some of these other things we are seeing, some of the private valuations are going nuts again and it's ironic to me that we're so quickly doing this after what we experienced you know, 48 months ago, right? I mean, it's just incredible.

Steve Sedgwick, CNBC: But I can value, Steve Sedgwick Inc, at $20 billion, when actually everyone else really knows it's worth about a billion or thereabouts. So, when I've got a valuation, it means nothing until the deal's done as well. So are a lot of the private sector valuations, which are owned by our dear friends in VC or PE or what have you, is it just pie in the sky and they're just kind of floating kites, so to speak, or actually are deals getting done at these high valuations?

Adena Friedman, Nasdaq Inc. I think in the VC world, you have to realize in the VC community, they don't just take one bet, right? They're going to be spreading their bets.

Steve Sedgwick, CNBC: And they've never been known to inflate the valuations of all of those bets.

Adena Friedman, Nasdaq Inc.: And the challenge to them is, now they have a real cost of capital. And the companies that they're investing in have a real cost of capital. That's a very different investment thesis to begin with. And so, I mean, the amount of VC money that went to work over the last year and a half is much, much, much lower than it has been in the prior years. I think at the same time, they are going to get wrapped up in what's the next wave, what's the next potential? They don't want to be left behind, they want to be early. They want to place their bets across several different opportunities because at the end of the day, they're making a lot of small bets and then they become bigger over time, right?

Some fail, some don't, but that is the nature of VC and when it comes to AI, you know, they're just going to be afraid to be left behind again. So it is a cycle. And, at the same time, if they win three out of eight, you know, three out of nine, and they have really big winners, that's going to...

Steve Sedgwick, CNBC: If they win three out of nine, that is going crazy because it's exponential.

Adena Friedman, Nasdaq Inc.: Exactly and some of the first have done that.

Chuck Robbins, Cisco Systems, Inc.: So these companies will never come public on Nasdaq at the valuations that they have right now, $6.5 billion valuations, for a company that has 14 million in revenue.

Steve Sedgwick, CNBC: Did you get your numbers the wrong way there, with $6.5 billion valuation for a company that has got 14 million in revenue. Yeah. And I just want to think about that for a moment. That makes Steve Sedgwick Inc. look really cheap!

Chuck Robbins, Cisco Systems, Inc.: In a time where everybody believes these foundational large language models are going to be commoditized, but that's a different forum.

Adena Friedman, Nasdaq Inc.: That's the big question.

Steve Sedgwick, CNBC:: So, Francois.

François Villeroy de Galhau, Central Bank of France: May I state the obvious for us as central banks about our compass, because I think it's important in this discussion. Our compass is inflation, obviously, price stability. It's not corporate valuation or the level of the stock exchange market. And when we had low interest rates, it was not to foster equity valuation.

I think the symmetric is true also on the investor side. Obviously, the interest rates play a role, but I guess that for, I hope, your investment decision, it's not the most important factor. It's about the state of technology, the business perspective, etc. If you take the big techs, Apple and others, they were all founded and funded 20 years ago when the level of interest rate was much higher. So interest rate level is one factor. It shouldn't be the key factor.

Adena Friedman, Nasdaq Inc.: I think for investors it's about the change in interest rates, like if they can, if we're dealing with an interest rate environment, that's let's say 3 to 4.5% in the United States for some extended period of time, I think that the world can get very comfortable with that. It's really the change factor, You know, markets just don't like surprises. And so to go from 0 to 5.5% in a very short period of time, that's a surprise, right? That's something that makes it difficult for investors to adjust.

Steve Sedgwick, CNBC: But it's the surprise that has led to record levels on the market.

Adena Friedman, Nasdaq Inc. It's very concentrated though. I think you have to look at that.

Gita Gopinath, International Monetary Fund: I think we should keep in mind that a challenge for central bankers, François, even though you've mentioned that you're focusing on inflation and the financial conditions, you know, is an intermediate target for you, but in the last few months, we have seen financial conditions ease everywhere in the U.S. and in the euro area it's been tighter on average, but it's still eased. So I think the challenge for central banks in trying to make sure that you have the soft landing and that you stick the landing, is certainly more of a challenge now because of these last few months of exuberance.

Steve Sedgwick, CNBC: But that's the point isn't it. And I'll bring Chuck in on this and then everyone can just jump in. But okay, we're waiting, François won't tell us what the season is, what we'll be wearing when the rate cut happens, But the fact is, we have had an amazing cut in the cost of money. Whether it's bunds, whether it's OATs, whether it's gilts, whether it's the Fed curve as well. Across the curve, the treasuries have gone from 5% to 4%. We've seen a 20% cut in the cost of finance. Look at high yield. We never got anywhere near to the level that high-yield debt got to in the peak of the 0811, which, you know, had a double-digit handle where now I didn't know what at 8% on high-yield debt. Now it's a fraction of what it could have been. And what perhaps arguably the right price is. Chuck, do you want to come back on this?

Chuck Robbins, Cisco Systems, Inc.: Well, I just think the other thing, I think the policymakers also are considering, I think, some longer-term trends and I hope that we're cautious about how rapidly we do bring rates down. And that's probably counter to what most people would want to see. Because if you think about what's happening right now, there are these long-term major efforts that are underway on a global basis that are going to fundamentally be inflationary for a very long time.

So all the work that every company in the world is doing around supply chain redundancy and diversification and geographic diversification, on-shoring. All of that's more expensive. If you bring supply chains back it is more expensive, it just is. So as the U.S. tries to push for that as an example, it's more expensive for companies and those costs are going to get passed through. You've got nationalism that's happening all around the world, where everybody's asking companies to invest locally. In India, you hear you manufacture here, or you don't sell your products here. In Europe, every country is saying you need to build a cloud instance here, you can't you can't run a global instance anymore. That's going to cost tech companies more, those costs are going to flow through. We talked about it before the sustainability. This move towards sustainability is going to have an inflationary aspect for some period of time. And there's more of these things that are happening out there. So I think we just have to be careful.

Gita Gopinath, International Monetary Fund: I think this is this is right. The pressure is in terms of what's coming through because of fragmentation, protectionism, climate shocks, conflicts. I think they're all moving in the direction of having more upside risks to inflation.

Now, we've been focused quite a bit on the policy rate, obviously for funding cost purposes what matters is the overall long-term rate, which includes term premium and so on. So I think we should focus a little bit on that, because if you look at the long-term rates that we have and you said there was a time which shot up, you know, U.S. ten-year yields went up to 5%, which is something we hadn't seen in a in a long time. It has come back down. You see that compression happened. But I think we have to recognize we're living in a world where governments are running, on average, much higher fiscal deficits than they did before the pandemic. So 6 to 8%, for the U.S. for example, at the moment.

And it's not just 8% where they are now. But if we look at our forecast for the next several years, that's where the number stays. So the U.S. puts a lot of its debt on the market. That obviously raises the cost of borrowing, not just for the U.S. government, but also, importantly, for the rest of the world. So, in fact, you know, when we look at the aim of of course, we look a lot at emerging and developing markets as a whole and looking ahead, given what we are seeing in terms of the cost of borrowing going up and the fact that you're getting high rates on U.S. produced assets, you know, kind of squeezes them out. I mean, there's crowding out that you're seeing in other emerging markets.

Steve Sedgwick, CNBC: So the higher interest rate costs that governments are having to pay and at the same time as running greater fiscal deficits as well, that has to have a ramification on growth and also the ability of governments to react to the next crisis, because they're already fiscally maxed out.

Gita Gopinath, International Monetary Fund: That is certainly true. Of course, it varies by the country. The U.S. has is the biggest safe asset issuer in the world, there is a huge appetite for U.S. treasuries. But it is the case that we've gone through three years where the government is viewed as the insurer of first resort, which is that in every shock, be the pandemic, be the energy crisis that, you know, the government comes in and quite liberally sends money to households and to firms. And that expectation is set in and you can see that it's much harder to actually roll off the subsidies that were provided during the pandemic.

Now, on top of that, if you add all the structural spending needs that are there in terms of climate, in terms of defence, in terms of how the new industrial policy push, and of course, for emerging and developing countries, the whole Sustainable Development Goals. That number, that additional spending is about 7% of GDP, more relative to what we're doing now. And there's been a huge temptation to finance everything to debt issuance as opposed to raising taxes and raising revenues. So I think there is this big question of how do you pay for it all, and to do it without issuing large amounts of debt.

And, frankly, if you look at the political economy around the world and with this election period that we're in right now, it's hard to think that, you know, anybody sitting down and thinking about this question hard enough.

Steve Sedgwick, CNBC: Francois, why don't you come in and I'll ask you a question?

François Villeroy de Galhau, Central Bank of France: You know, two quick comments on financial conditions. Two caveats, perhaps, about these decrees you mentioned. First, and Gita just stressed it, it's partly a reversal of a strong increase we lived through between September and October. And, second, on the European side, never forget that the bank channel is predominant. So market long-term interest rates have less of a role. That said, on fiscal policy I couldn't agree more with Gita. We have at present a policy mix between monetary and fiscal, which is not fully consistent. Let me say it this way. And I think it's important for our governments on both sides of the Atlantic to be fiscally more conservative and to use this soft landing in order to really tighten a bit fiscal policy. The good news on the European side, is that we have now a fiscal policy framework since December 20. So the question mark is will it be implemented? I strongly hope so, including for my own country.

Steve Sedgwick, CNBC: Your own country was the first to break the rules of the original.

François Villeroy de Galhau, Central Bank of France: No no not the first one.

Steve Sedgwick, CNBC: Germany and France were the first to break the Growth and Stability Pact, if I recall from my early part of this century. I think it was George Osborne who said, 'we need to fix the roof, while the sun shines as well.'

But this amazing period of low rates that we had and this softish landing that we hope we're going to have as well, do you really believe and adding to the fact that Gita has just saying about this stunning amount people going to the polls this year,, do we really think in an election year we're going to see fiscal responsibility from governments?

François Villeroy de Galhau, Central Bank of France: I don't say it's easy, and I can not answer on behalf of governments, but the only thing is that a change of interest rate makes this problem more pressing. When the cost of debt was about zero in nominal terms and negative in real terms, fiscal policy was not an issue, in the short run. But now, if you look at the cost of that in the yearly budget of each of our governments, it's increased significantly. So it means it's not only a long term issue, which is obvious, it's a question of solidarity with the next generation, which we missed for decades, let us be honest. It's also a short-term issue. If you are a government and you have to close your yearly budget for next year, you now feel the pressure of your level of debt on your interest rate expenditures.

Steve Sedgwick, CNBC: I should remind everyone that this panel is going out live on CNBC, by the way, my own programme this morning. So in the next couple of minutes, does anyone have any questions already, there is this gentleman here, anyone else? Okay. There's plenty as well.

So I'll give you a chance in a few moment's time all four of you, and if anyone else wants to as well. Great piece. I was reading, Howard Marks did an editorial in the Financial Times recently, and he's quoting, but I'll give you the line, because I want to get everyone's view of this one as well. 'The late, great Charlie Munger wrote to me in 2001, maybe we have a new version of the 19th-century British historian adage from Lord Acton.' You'll all understand this one, 'easy money corrupts, but really easy money corrupts absolutely as well.'

Chuck, I'm gonna start off with you on this one. Are you worried that if we get an easier money period as well already, I mean, we've already talked with Adena about the levels of markets, and there's some good reasons for those levels and there's some questionable reasons as well. Do you fear that we're actually going to forget about fiscal financial responsibility if we go back down on rates too quickly?

Chuck Robbins, Cisco Systems, Inc.: Yeah. Quick, funny Charlie story. He and I are on a panel talking about strategic M&A a few years ago and they were talking about multiples of EBITDA that you'd be willing to pay. And they got to me and I said, well, most companies we buy don't have any EBITDA. And Charlie said, you Silicon Valley guys are crazy.

But anyway, yeah, I do worry about it, that's my whole point, I'm not in the camp that we should just start immediately lower rates. I think we have to be much smarter about it. And I do think the point earlier, people call us the new normal, whatever. This is the normal. We just got away from it for a very long time. And so I think we joke backstage about it, if you're 40 years old or younger, you thought that 0% was just how it worked, and that's not the case. And so I do worry a little bit and I think it's making companies think more responsibly.

Adena Friedman, Nasdaq Inc.: Yeah. I mean, personally, I think that if we are getting back down to a very low-interest rate environment, it means that we're not growing and that's not good for anyone. So let's just hope that we can get to a rate environment in the 3 to 4.5% range. I always like use that kind of range, because I think that means that we're having hopefully, you know modest inflation and real growth within the economy, which then allows us to to grow, but also have a cost of capital that we have to then make we have to make priority decisions.

So one of the good things about having a cost of capital is it forces prioritization. I think during this period of free money, we had kind of let every flower bloom. Well, I think that it's really important to figure out which of those is actually going to grow into a tree and really become meaningful to the company, to the government, whatever you're trying to achieve.

So I actually think that that is a good discipline. I think that we should be looking forward to having a rate environment that might be a little bit moderated from where we are, but also recognizing that that's a good discipline. And frankly, as you've pointed out, we've done extremely well in the economy with real rates. And so I think it's just a matter of getting the everyone kind of more used to that environment over time.

Steve Sedgwick, CNBC: I will just add that World Economic Forum has just put up a great economist report in advance of this meeting, in the last 24 hours as well. Um, there is a QR code. I don't know if it's going to show on the screens, but it's worth having a look at the economist report and again, they, like the rest of us, are all in the dark a little bit about a whole host of these issues now. But I do want to go back to Gita on this one. I can't see any scenario and no one has talked about it on this panel and I haven't read anything recently that says we are going back down to the easy money of that period, 2015, to 2022. You don't paint in a scenario at the moment where we all going back down to those unbelievably low levels are you?

Gita Gopinath, International Monetary Fund: No, we don't expect that to be the case. Like I said, there was also a period when the fight was one-sided. It was about not having enough inflation. And for all the reasons we've already discussed about the deinflationary pressures that are in the system and the fact that I think if you are a central bank, in which you experience over the last two, three years, you know, you understand that inflation can come back pretty quickly. So you have to be a little careful about it.

So we are going to move to an environment where, you know, I expect again, the R star may not be very different from what it was before. But central bankers, as in terms of their policy framework, are going to be much more wary about hitting the pedal to the floor. Also, I do hope, and François you can come in on this, which is the whole of quantitative easing that happened during that period post-GFC is something that will be treated much more warily at this time. I think it was used probably a little too liberally and the worry is in terms of the financial risks that can build up because of that kind of quantitative easing. I think we have to be more wary about it. And really it's an instrument to be used if you are in a deep recession or you have market dysfunction. So, it kind of has to be used less frequently than it was done before.

François Villeroy de Galhau, Central Bank of France: So I could be more positive about the past, but bygones have bygones. Let me say for the future, stress it again. The new normal will not be the subnormal of 2015 to 2022. Or to put it in a nutshell, it will be an era of fair money, probably, rather than easy money or free money.

But again, our compass will be inflation. It will not be the idea to help governments or corporates or to penalize them. You have one compass and it's very important.

Steve Sedgwick, CNBC: Let's get a few quick questions. If we can start off with this gentleman here. I have been asked by our hosts if you could stand up and they'll give you a microphone and a quick question and then we'll get a quick answer from one or two of our panelists.

Audience member: Thank you. I am Brad Olson, one of the Global Shapers and a New Zealand economist. Should policymakers be worried about the timing mismatch, if policymakers are already of the view that interest rates are going to come down, but they're sort of lighter than what the markets are seeing, is that a worry and probably if so, what do you do about that? Do you try and jawbone the market or are you comfortable sort of sitting there and going, interest rates are going to come down. You're a little bit wrong on the timing market, but it's not going to affect inflation too much.

Steve Sedgwick, CNBC: Did you want to pick up on Francois you're the resident policymaker.

François Villeroy de Galhau, Central Bank of France: Again, it's the temptation of the short-term question, but can I add, as I said, we are not calendar-driven, we are not market-driven either. We look at financial conditions, but as I said, they're quite volatile, we will be data-driven. Let us be slightly more precise, we look at actual data. We look also at future data, including our own forecasts and inflation expectations.

Adena Friedman, Nasdaq Inc.: Can I also say, I think that while the market might try to predict timing, it's really up to the policymakers to make the right long-term decision for the economy. And I think a worse outcome would be that they lower rates too early, inflation spikes back up and they have to bring them back up. The markets would react very poorly to that. So it's much better if they are more patient on the front end and then try to bring it down I think in a way that's very sustainable.

Gita Gopinath, International Monetary Fund: I do think it does pose somewhat of a challenge for bringing inflation down durably if you're going to get a lot of easing in financial conditions. But, that said, last year was a year when the market started out by expecting rate cuts for different reasons because it thought the economy would be in a recession. That didn't happen. There was a worry that the big adjustments back up in expectations would create a lot of turbulence. That didn't really happen. So I think we're, you know, I worry a little less about it now than I did a year ago.

Steve Sedgwick, CNBC: Okay, right. Let's get this latest question in here. I may get to sneak in a third one if this lady's very quick.

Audience member: Hi, I'm from the Bank of England and also a Young Global Leader of the Forum. A question to you, Governor on your third D on decarbonization. There are worries that high rates are also hurting investment at a time when we really need to deliver on the green transition. But, of course, as central bankers, our compass is inflation and an unstable inflation environment also hurts investment. But your President Macron, hinted that there may be a best of both worlds with his comments at COP, suggesting potentially dual rates. So what is your thoughts on that? Thank you.

François Villeroy de Galhau, Central Bank of France: I guess my president will come tomorrow to Davos. So you should put the question to him. But no, that said, as I said, we have one primary objective, which is price stability, but we should incorporate the economic effect of climate change to achieve price stability. And this is, for me, the right answer. I don't oppose price stability in, let's say, climate change. If we ignore including the short-term effects of climate change on output and yes, on prices, we make a significant mistake. This is why we have a green agenda on the ECB side. And we are lead pioneers in this field.

Steve Sedgwick, CNBC: If you're very quick, I can just get it in. Yeah. Officially, we've got 50 seconds. I might squeeze an extra minute from our lovely hosts.

Audience member: I am also part of the Global Shapers team here, but I'm also an economist at the World Bank. And my question would be to you Gita that you know, IMF has recently launched their multi-fund for Public Finance Partnership, though GBV fund and climate change being one of the cross-cutting priorities in that capacity development initiative. So how do you think IMF can equip countries to make their supply chains more green and push towards a green trade agenda?

Gita Gopinath, International Monetary Fund: I think the first thing that we're helping countries with is, in terms of what we call domestic resource mobilization, which is the countries we have in mind, are emerging and developing economies, who seem to, in terms of the amount of tax revenues that they raise, are quite low. So in the interest of time, I'm going to stop with that point, because that's where we're focused on quite a bit, which is how to be able to raise more resources internally. And that's also going to be relevant given all the discussion we've had in terms of the external high interest rate environment.

Steve Sedgwick, CNBC: We have covered a lot of ground. I'm going to wrap it up then. And be very well-behaved at the start of my Davos experience this year. I don't want to get in trouble with WEF this early on. I normally save it until at least the Wednesday. But I just want to wrap up a couple of points. From Chuck, the private sector is already off to the races, which is just extraordinary and so private sector. But from Adena as well with the VCs, she's rewritten the power laws. They must be so pleased, three out of nine, they would take three out of nine. They really would as well. Of course, the economist last year stunningly pessimistic, we're more optimistic this year. I hope we're not wrong as well. And from François absolutley zero clues on that first-rate cut as well. He won't even tell us what we're supposed to be wearing then. Thank you all very much indeed.