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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: You usually would dive in with Richard Claret of Pimcoe.

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Speaker 2: He say, what's the market going to do? What's the

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Speaker 2: Fed gonna do? We're gonna stop, and this is why

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Speaker 2: we're talking to Richard Clareda. And today Kachola Coda of Rochester,

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Speaker 2: when he was Federal Reserve Bank of Minnesota said, of

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Speaker 2: the theories wrapped around Professor Clareda, modern macro models do

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Speaker 2: not capture an intermediate, messy reality that's out there right now.

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Speaker 2: There's a messy, messy reality that we're all facing there.

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Speaker 2: And to me, looking at the magnificent architecture of DSGE folks,

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Speaker 2: I'll say, at once dynamics, dotecastic, general equilibrium theory and

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Speaker 2: the beauty of it, and not the physics envy, but

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Speaker 2: just the wonderful thinking of it. You come here and

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Speaker 2: as Ned Phelps would say, go to the X short term,

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Speaker 2: medium term, long term. You're in the Oval office right now,

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Speaker 2: and you've got to explain to Trump and the gentleman

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Speaker 2: from Pennsylvania Hasset the short term, the medium term, the

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Speaker 2: long term of what they are doing right now. How

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Speaker 2: do you explain that?

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Speaker 3: Well, what you say is the goal is to onshore,

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Speaker 3: bring production back to the US, reduce the trade deficit.

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Speaker 3: What we know is they can put on tariffs.

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Speaker 1: They have.

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Speaker 3: The liberation day is tomorrow, but it will take several

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Speaker 3: years for that production if it eventually does ramp up.

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Speaker 3: To boost the supply side of the economy, we have

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Speaker 3: supply chains. Tariffs are essentially attacks on inputs to production,

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Speaker 3: so that slows it down. Also the uncertainty about what

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Speaker 3: the policy will look like in the future as well.

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Speaker 3: So right now what you're getting is a lot of uncertainty.

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Speaker 3: It's slowing the demand in the economy. Eventually you may

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Speaker 3: get more jobs and more production, but that's several years

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Speaker 3: down the road. So I think I want the folks

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Speaker 3: in the Oval Office to understand the time dimensions at

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Speaker 3: work here.

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Speaker 1: For sure.

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Speaker 2: Stephanie Kelton has a theory which is very much against

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Speaker 2: people like you on what modern monetary theory should look like.

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Speaker 2: And part of that theory is the intrusion of politics

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Speaker 2: into monetary economics. Right now, we're doing almost Vorescian tariff law,

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Speaker 2: mckindling tariff law, certainly from a nineteenth century. Can the

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Speaker 2: political system be patient enough to get declared as medium

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Speaker 2: term success.

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Speaker 1: Well, I'm not sure.

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Speaker 3: And in particular, it gets it another fundamental idea in economics,

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Speaker 3: which is the idea of time consistency, that eventually people

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Speaker 3: figure out that your promise now may not be delivered

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Speaker 3: in the future. And so that's why, in particular, if

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Speaker 3: the twenty percent tariffs that we're hearing about are really

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Speaker 3: the beginning of a negotiation, that also adds an additional

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Speaker 3: layer of uncertainty on top of just knowing what the

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Speaker 3: CARAFF number is is now. You know, Tom, we saw

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Speaker 3: him when I was at the Fed in twenty nineteen that,

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Speaker 3: in fact, just the uncertainty about the trade policy itself

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Speaker 3: was a damper to the economy. And that's a very

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Speaker 3: tangible factor fact of life in macro, and I think

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Speaker 3: we're seeing an elevated version of it now.

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Speaker 4: And Richard, I think we're seeing some the folks on

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Speaker 4: wall streets start to take down their GDP numbers being

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Speaker 4: ratchet up their inflation expectations. Are they too early here

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Speaker 4: or is that a reasonable I guess near to intermediate

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Speaker 4: term outlook.

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Speaker 3: Well, you know, Paul, everything in macro is a probability,

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Speaker 3: and so I think it is appropriate to move up

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Speaker 3: the probability of a recession. Certainly it would not be

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Speaker 3: my base case now, but it's certainly somewhat more elevated

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Speaker 3: than it was. In particular, I think the other piece

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Speaker 3: of this, Tom, getting back to your point about the

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Speaker 3: but the ax axis, is there's a lot of talk

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Speaker 3: about fiscal you know, no tax on tips, social Security,

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Speaker 3: you know, tax deductions to buy a car.

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Speaker 1: But again that's going.

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Speaker 3: To take most of the rest of this year to

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Speaker 3: work its way through Congress, and so again there'll be

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Speaker 3: uncertainty over that piece of it as well.

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Speaker 4: And given that backdrop of uncertainty, Richard, is there anything

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Speaker 4: Fed and policy can do to it to really, I

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Speaker 4: don't counteractor to impact the economy because it doesn't feel

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Speaker 4: like there's much the FED can do in the face

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Speaker 4: of what could be a slowing economy in high inflation.

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Speaker 3: Well, I think here we want to distinguish between what

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Speaker 3: the FED can do and what they will do. You know,

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Speaker 3: what the FED could do is cut rates preemptively. That's

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Speaker 3: more or less what the power FED did during my

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Speaker 3: team there in twenty nineteen, the economy began to slow

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Speaker 3: because of trade policy uncertainty, inflation began to fall, and

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Speaker 3: so we cut rates, essentially an insurance cut. I don't

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Speaker 3: think the FED really now has the runway to do

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Speaker 3: an insurance cut.

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Speaker 1: In other words, we.

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Speaker 3: May need to see a very tangible slowing in the economy,

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Speaker 3: in the labor market, rising the unemployment rate to get

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Speaker 3: the Fed off of Hold right here.

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Speaker 2: If you just joining it, because across the nation, we're

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Speaker 2: with Richard clair To, the former vice chairman of the FED.

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Speaker 2: We have a spectacular set of conversations for you today.

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Speaker 2: Nancy Lazar will be with us later. Among us Michael Nathanson.

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Speaker 2: Paul had a tantrum yesterday and said, get Nathanson. We

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Speaker 2: have Michael Nathanson here with an interesting essay on YouTube.

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Speaker 2: We welcome all of you on YouTube. Subscribe to Bloomberg Podcast.

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Speaker 2: It's our wonderful new distribution. Thank you for a successful march, Paul, Richard.

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Speaker 4: So, you know, it's interesting some of the hit You know,

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Speaker 4: the data that the FED looks at, historical data still

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Speaker 4: shows the economies in pretty solid shape. But boy, I

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Speaker 4: get kind of spooked. I think the market gets a

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Speaker 4: little spooked when they see survey data like the University

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Speaker 4: of Michigan data showing that BOYD consumers really are concerned,

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Speaker 4: their sentiment is following their inflation expectations are arising. How

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Speaker 4: does the FED look at that type of data?

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Speaker 3: It's an input into the projection. I think Cherry Palell

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Speaker 3: mentioned at the press conference last week that they look

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Speaker 3: at the survey data, but the survey data doesn't necessarily

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Speaker 3: translate into hard data eventually.

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Speaker 1: I think what we have.

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Speaker 3: Seen, even Paul in the hard data is a pretty

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Speaker 3: noteworthy slowing in consumption side of the economy relative to

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Speaker 3: a really strong fourth quarter. I think a lot of

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Speaker 3: reason why cell site houses are marking down their forecast

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Speaker 3: is not so much the survey data, it's the tangible

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Speaker 3: data on consumption being very very soft in Q.

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Speaker 2: One, You, more than anyone, have got to go from

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Speaker 2: the academics of DSGE and your work at literally building

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Speaker 2: the modern Columbia program. Did you bring Woodford over? Were you?

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Speaker 2: You're the one that said, Michael, come on over.

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Speaker 1: I wish I could take credit for that.

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Speaker 3: That was my success of Don Davis who brought Woodford over,

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Speaker 3: but I was leading the cheerleading effort to do it.

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Speaker 2: There was a cheerleading effort and they used torpedo bets

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Speaker 2: at the Columbia right now.

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Speaker 1: So Richard to bring in Stigletz.

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Speaker 2: Okay, credit for that, Okay, that's good. But their thing,

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Speaker 2: in Richard Clariday, is to bring this over to the

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Speaker 2: application of what we're doing now that the theories to

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Speaker 2: me are literally out the window. What is the theory

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Speaker 2: of the dual mandate right now?

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Speaker 1: Well, right now, the labor markets where the Fed wants

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Speaker 1: it to be.

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Speaker 3: We have about a four percent unemployment rate and all

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Speaker 3: broad measures of the labor market. So the Fed wants

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Speaker 3: to keep the market, labor market where it is right now.

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Speaker 3: Char Pal has said a number of times that the

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Speaker 3: Committee doesn't think that the labor market now is a

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Speaker 3: source of inflation. So they're very happy where the labor

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Speaker 3: market is. What they were thinking six months ago is

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Speaker 3: that they were on a glide path to this soft landing,

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Speaker 3: although they didn't use that term. And I think the

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Speaker 3: glide path has been delayed somewhat.

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Speaker 2: My ten year real yield here, Jerome Schneider called me

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Speaker 2: up from PIMCO yet up early. He says, Tom, the

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Speaker 2: ten year really yield one point seventy eight percent. It's

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Speaker 2: coming down, down, down, If you're talking to PIMCO troops

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Speaker 2: right now, are you modeling out a higher unemployment rate?

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Speaker 2: I got Atlanta GDP GRIMM, I got feder Reserve Bank

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Speaker 2: of New York disagreeing with that. Where is Richard Clarida

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Speaker 2: on the I guess the vector of the unemployment rate?

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Speaker 1: I think the risk is to the upside.

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Speaker 3: And indeed, if you look at the FEDS projections two

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Speaker 3: weeks ago, where they show a chart that what is

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Speaker 3: the risk to the unemployment outlook, it's to the upside.

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Speaker 3: So I think there's some upside risk right here. You know,

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Speaker 3: at minimum, given what's going on with DOGE right now,

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Speaker 3: we're going to see some increase in unemployment through those efforts.

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Speaker 3: Also important to note that even coming into the year Tom,

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Speaker 3: if you look at private employment in particular, excluding healthcare

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Speaker 3: and education, which have a pretty big government backstop, private

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Speaker 3: employment had been really slowing throughout much of last year.

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Speaker 3: So I think that's also irrelevant.

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Speaker 4: How do you view the consumer here today, Richard? It

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Speaker 4: just seems like anytime over the last twelve fifteen years

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Speaker 4: to get concerned about the economy, the consumer hangs in

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Speaker 4: there and generally keep spending pretty well. How do you

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Speaker 4: think about the US consumer.

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Speaker 3: Well, in the aggregate, you know, there are three hundred

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Speaker 3: million consumers, and in the aggregate they're in great shape.

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Speaker 3: You know, in particular high levels of net worth. If

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Speaker 3: you own a house, if you have money in the

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Speaker 3: stock market, you've had a really good run for the

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Speaker 3: last several years.

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Speaker 1: But about a third of Americans don't.

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Speaker 3: Own their own home or don't hold any stock, and

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Speaker 3: for them it's a very different outcome. So what you're

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Speaker 3: starting to see in the data now is a pretty strong,

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Speaker 3: if I may use the term bifurcation between upper ear

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Speaker 3: consumers and consumers who don't own their own homes or

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Speaker 3: have a lot of stock market wealth, and then they're

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Speaker 3: getting pinched.

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Speaker 2: Okay, this is the heart of the matter. I mean,

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Speaker 2: Alan Meltzer almost took it, almost took a swing at me,

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Speaker 2: Jackson Whole ones over this because Alan Meltzer want to

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Speaker 2: go back to forty seven and aggregate data. You've been

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Speaker 2: teaching that for twenty five years back when you were

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Speaker 2: at Illinois. We're aggregating data. You just described a Barbell

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Speaker 2: John Edwards to Americas. Yeah, around the table at the

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Speaker 2: Eccles building. Besides arguing over who's got redskinsts. Forget about that.

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Speaker 2: But around the table at the Eckles Building, are you

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Speaker 2: looking at two Americas or some economic aggregated fiction.

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Speaker 3: Well, I'll put and say you look at both. But

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Speaker 3: certainly during my time there, the staff did very very

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Speaker 3: good work on looking a very disaggregated data. Forget you

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Speaker 3: know two Americas that were looked at like thirty eight

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Speaker 3: different parts of the economy.

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Speaker 1: So you do both?

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Speaker 2: Oh, come on, I mean Jason Furman in his wonderful

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Speaker 2: New York got bed. We'll get Professor Furman in up

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Speaker 2: at some at a school in New England somewhere. Jason says,

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Speaker 2: flat out, tariffs kill the poor and the tax cut

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Speaker 2: goes to the rich. It's a single sense INTI surveillance correction. Lisa,

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Speaker 2: thank you for noting it. It's not the Washington Redskins.

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Speaker 2: It's the commander's my foots it's my foot. Excuse me.

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Speaker 1: Maybe we'll go back, who knows, maybe I'll still have

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Speaker 1: a job.

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Speaker 4: The world's changed.

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Speaker 1: So Richard, where do we go from here?

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Speaker 4: What's the key thing that you're looking at here for

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Speaker 4: this economy? Is it the tariffs? Is it the consumer?

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Speaker 4: Is it the labor market. What's the key thing you're

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Speaker 4: focusing on.

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Speaker 3: Look, I think I think the issue is we're in

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Speaker 3: a period now where measured inflation is going to go

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Speaker 3: up because of the pass through of the tariffs, and

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Speaker 3: activity is.

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Speaker 1: Going to slow.

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Speaker 3: So the real question for me, Paul, is are we

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Speaker 3: going through what I call a whiff of stagflation or

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Speaker 3: are we really entering what would be a pretty very

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Speaker 3: pretty persistent stagflationary crunch. You know, I'm still relatively optimistic.

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Speaker 3: I think it's more of a whiff than a new normal,

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Speaker 3: but it's certainly something that that is would be would

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Speaker 3: be quite relevant.

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Speaker 4: Yeah, it seems like a tough political call there to

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Speaker 4: slow this economy and the rise inflation. Is the longer

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Speaker 4: term gain that this administration sees from perhaps restoring more manufacturing.

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Speaker 1: Is that a realistic expectation?

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Speaker 4: Do you think?

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Speaker 3: Well, that it is a realistic expect but it will

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Speaker 3: not happen overnight. It will take several years. And in particular,

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Speaker 3: in fairness, we saw a version of this in the

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Speaker 3: Reagan administration. People think of Reagan as being a free trader,

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Speaker 3: and he may have been philosophically, but the Reagan administration,

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Speaker 3: which I actually worked with back in my youth, was

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Speaker 3: actually quite interventionist. In particular, they had a policy known

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Speaker 3: as voluntary export restraints on Japanese cars, and what the

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Speaker 3: big Japanese automaker's Toylet and Honda realized is the only

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Speaker 3: way for them to have a presence in the US

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Speaker 3: was to build a lot of factories in the US,

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Speaker 3: And so I worked an ambitious enough trade policy can

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Speaker 3: lead over time to some onshoring, but it won't happen overnight.

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Speaker 2: I got eight ways to go. For a final question,

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Speaker 2: I want to go to zero s, but it's too

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Speaker 2: early in the morning for a zero sum a discussion. Here,

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Speaker 2: the heart of the matter is a president is looking

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Speaker 2: at this as a bilateral discussion. The giant William Klein

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Speaker 2: Peterson Institute aggressively disagrees with that. What's our multilateral outcome

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Speaker 2: of this bilateral naivete?

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Speaker 3: I think we'll learn a little bit more tomorrow about

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Speaker 3: how much of this is intended to be permanent and

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Speaker 3: how much it is an opening, you know, art of

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Speaker 3: the deal negotiation. If it is. If it is, as

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Speaker 3: I suspect, it will be the opening rounds of multiple

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Speaker 3: negotiations across different countries.

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Speaker 1: Then it's certainly not going to be.

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Speaker 3: It's certainly not going to really be a multilateral plan

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Speaker 3: will be a series of bilateral deals.

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Speaker 2: Is get gone to put you know, partner phrases get gone.

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Speaker 3: And I think the evidence in favor of that is

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Speaker 3: that the Biden administration really didn't try to resuscitate the

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Speaker 3: w TO.

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Speaker 2: So why didn't they? Why did Why did they resuscitate

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Speaker 2: the Atlantic Charter off of Newfoundland in nineteen forty two

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Speaker 2: when we were flat on our back.

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Speaker 3: Well you would have to ask them, but they're the

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Speaker 3: political center of gravity in the last four years before

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Speaker 3: Trump two point zero was really not to engage in

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Speaker 3: the WTO. We never staffed up the dispute settlement process.

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Speaker 2: It's completely fair. I mean, it goes back to transpecific failure.

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Speaker 3: Yeah, and very good reminder the transpecific partnership exactly.

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Speaker 2: Yeah, you can come into off for liberation data.

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Speaker 1: I'll do it by phone. How about that?

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Speaker 2: Richard clear to thank you so much, generous of you

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Speaker 2: to be with us,