Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: You usually would dive in with Richard Claret of Pimcoe.
Speaker 2: He say, what's the market going to do? What's the
Speaker 2: Fed gonna do? We're gonna stop, and this is why
Speaker 2: we're talking to Richard Clareda. And today Kachola Coda of Rochester,
Speaker 2: when he was Federal Reserve Bank of Minnesota said, of
Speaker 2: the theories wrapped around Professor Clareda, modern macro models do
Speaker 2: not capture an intermediate, messy reality that's out there right now.
Speaker 2: There's a messy, messy reality that we're all facing there.
Speaker 2: And to me, looking at the magnificent architecture of DSGE folks,
Speaker 2: I'll say, at once dynamics, dotecastic, general equilibrium theory and
Speaker 2: the beauty of it, and not the physics envy, but
Speaker 2: just the wonderful thinking of it. You come here and
Speaker 2: as Ned Phelps would say, go to the X short term,
Speaker 2: medium term, long term. You're in the Oval office right now,
Speaker 2: and you've got to explain to Trump and the gentleman
Speaker 2: from Pennsylvania Hasset the short term, the medium term, the
Speaker 2: long term of what they are doing right now. How
Speaker 2: do you explain that?
Speaker 3: Well, what you say is the goal is to onshore,
Speaker 3: bring production back to the US, reduce the trade deficit.
Speaker 3: What we know is they can put on tariffs.
Speaker 1: They have.
Speaker 3: The liberation day is tomorrow, but it will take several
Speaker 3: years for that production if it eventually does ramp up.
Speaker 3: To boost the supply side of the economy, we have
Speaker 3: supply chains. Tariffs are essentially attacks on inputs to production,
Speaker 3: so that slows it down. Also the uncertainty about what
Speaker 3: the policy will look like in the future as well.
Speaker 3: So right now what you're getting is a lot of uncertainty.
Speaker 3: It's slowing the demand in the economy. Eventually you may
Speaker 3: get more jobs and more production, but that's several years
Speaker 3: down the road. So I think I want the folks
Speaker 3: in the Oval Office to understand the time dimensions at
Speaker 3: work here.
Speaker 1: For sure.
Speaker 2: Stephanie Kelton has a theory which is very much against
Speaker 2: people like you on what modern monetary theory should look like.
Speaker 2: And part of that theory is the intrusion of politics
Speaker 2: into monetary economics. Right now, we're doing almost Vorescian tariff law,
Speaker 2: mckindling tariff law, certainly from a nineteenth century. Can the
Speaker 2: political system be patient enough to get declared as medium
Speaker 2: term success.
Speaker 1: Well, I'm not sure.
Speaker 3: And in particular, it gets it another fundamental idea in economics,
Speaker 3: which is the idea of time consistency, that eventually people
Speaker 3: figure out that your promise now may not be delivered
Speaker 3: in the future. And so that's why, in particular, if
Speaker 3: the twenty percent tariffs that we're hearing about are really
Speaker 3: the beginning of a negotiation, that also adds an additional
Speaker 3: layer of uncertainty on top of just knowing what the
Speaker 3: CARAFF number is is now. You know, Tom, we saw
Speaker 3: him when I was at the Fed in twenty nineteen that,
Speaker 3: in fact, just the uncertainty about the trade policy itself
Speaker 3: was a damper to the economy. And that's a very
Speaker 3: tangible factor fact of life in macro, and I think
Speaker 3: we're seeing an elevated version of it now.
Speaker 4: And Richard, I think we're seeing some the folks on
Speaker 4: wall streets start to take down their GDP numbers being
Speaker 4: ratchet up their inflation expectations. Are they too early here
Speaker 4: or is that a reasonable I guess near to intermediate
Speaker 4: term outlook.
Speaker 3: Well, you know, Paul, everything in macro is a probability,
Speaker 3: and so I think it is appropriate to move up
Speaker 3: the probability of a recession. Certainly it would not be
Speaker 3: my base case now, but it's certainly somewhat more elevated
Speaker 3: than it was. In particular, I think the other piece
Speaker 3: of this, Tom, getting back to your point about the
Speaker 3: but the ax axis, is there's a lot of talk
Speaker 3: about fiscal you know, no tax on tips, social Security,
Speaker 3: you know, tax deductions to buy a car.
Speaker 1: But again that's going.
Speaker 3: To take most of the rest of this year to
Speaker 3: work its way through Congress, and so again there'll be
Speaker 3: uncertainty over that piece of it as well.
Speaker 4: And given that backdrop of uncertainty, Richard, is there anything
Speaker 4: Fed and policy can do to it to really, I
Speaker 4: don't counteractor to impact the economy because it doesn't feel
Speaker 4: like there's much the FED can do in the face
Speaker 4: of what could be a slowing economy in high inflation.
Speaker 3: Well, I think here we want to distinguish between what
Speaker 3: the FED can do and what they will do. You know,
Speaker 3: what the FED could do is cut rates preemptively. That's
Speaker 3: more or less what the power FED did during my
Speaker 3: team there in twenty nineteen, the economy began to slow
Speaker 3: because of trade policy uncertainty, inflation began to fall, and
Speaker 3: so we cut rates, essentially an insurance cut. I don't
Speaker 3: think the FED really now has the runway to do
Speaker 3: an insurance cut.
Speaker 1: In other words, we.
Speaker 3: May need to see a very tangible slowing in the economy,
Speaker 3: in the labor market, rising the unemployment rate to get
Speaker 3: the Fed off of Hold right here.
Speaker 2: If you just joining it, because across the nation, we're
Speaker 2: with Richard clair To, the former vice chairman of the FED.
Speaker 2: We have a spectacular set of conversations for you today.
Speaker 2: Nancy Lazar will be with us later. Among us Michael Nathanson.
Speaker 2: Paul had a tantrum yesterday and said, get Nathanson. We
Speaker 2: have Michael Nathanson here with an interesting essay on YouTube.
Speaker 2: We welcome all of you on YouTube. Subscribe to Bloomberg Podcast.
Speaker 2: It's our wonderful new distribution. Thank you for a successful march, Paul, Richard.
Speaker 4: So, you know, it's interesting some of the hit You know,
Speaker 4: the data that the FED looks at, historical data still
Speaker 4: shows the economies in pretty solid shape. But boy, I
Speaker 4: get kind of spooked. I think the market gets a
Speaker 4: little spooked when they see survey data like the University
Speaker 4: of Michigan data showing that BOYD consumers really are concerned,
Speaker 4: their sentiment is following their inflation expectations are arising. How
Speaker 4: does the FED look at that type of data?
Speaker 3: It's an input into the projection. I think Cherry Palell
Speaker 3: mentioned at the press conference last week that they look
Speaker 3: at the survey data, but the survey data doesn't necessarily
Speaker 3: translate into hard data eventually.
Speaker 1: I think what we have.
Speaker 3: Seen, even Paul in the hard data is a pretty
Speaker 3: noteworthy slowing in consumption side of the economy relative to
Speaker 3: a really strong fourth quarter. I think a lot of
Speaker 3: reason why cell site houses are marking down their forecast
Speaker 3: is not so much the survey data, it's the tangible
Speaker 3: data on consumption being very very soft in Q.
Speaker 2: One, You, more than anyone, have got to go from
Speaker 2: the academics of DSGE and your work at literally building
Speaker 2: the modern Columbia program. Did you bring Woodford over? Were you?
Speaker 2: You're the one that said, Michael, come on over.
Speaker 1: I wish I could take credit for that.
Speaker 3: That was my success of Don Davis who brought Woodford over,
Speaker 3: but I was leading the cheerleading effort to do it.
Speaker 2: There was a cheerleading effort and they used torpedo bets
Speaker 2: at the Columbia right now.
Speaker 1: So Richard to bring in Stigletz.
Speaker 2: Okay, credit for that, Okay, that's good. But their thing,
Speaker 2: in Richard Clariday, is to bring this over to the
Speaker 2: application of what we're doing now that the theories to
Speaker 2: me are literally out the window. What is the theory
Speaker 2: of the dual mandate right now?
Speaker 1: Well, right now, the labor markets where the Fed wants
Speaker 1: it to be.
Speaker 3: We have about a four percent unemployment rate and all
Speaker 3: broad measures of the labor market. So the Fed wants
Speaker 3: to keep the market, labor market where it is right now.
Speaker 3: Char Pal has said a number of times that the
Speaker 3: Committee doesn't think that the labor market now is a
Speaker 3: source of inflation. So they're very happy where the labor
Speaker 3: market is. What they were thinking six months ago is
Speaker 3: that they were on a glide path to this soft landing,
Speaker 3: although they didn't use that term. And I think the
Speaker 3: glide path has been delayed somewhat.
Speaker 2: My ten year real yield here, Jerome Schneider called me
Speaker 2: up from PIMCO yet up early. He says, Tom, the
Speaker 2: ten year really yield one point seventy eight percent. It's
Speaker 2: coming down, down, down, If you're talking to PIMCO troops
Speaker 2: right now, are you modeling out a higher unemployment rate?
Speaker 2: I got Atlanta GDP GRIMM, I got feder Reserve Bank
Speaker 2: of New York disagreeing with that. Where is Richard Clarida
Speaker 2: on the I guess the vector of the unemployment rate?
Speaker 1: I think the risk is to the upside.
Speaker 3: And indeed, if you look at the FEDS projections two
Speaker 3: weeks ago, where they show a chart that what is
Speaker 3: the risk to the unemployment outlook, it's to the upside.
Speaker 3: So I think there's some upside risk right here. You know,
Speaker 3: at minimum, given what's going on with DOGE right now,
Speaker 3: we're going to see some increase in unemployment through those efforts.
Speaker 3: Also important to note that even coming into the year Tom,
Speaker 3: if you look at private employment in particular, excluding healthcare
Speaker 3: and education, which have a pretty big government backstop, private
Speaker 3: employment had been really slowing throughout much of last year.
Speaker 3: So I think that's also irrelevant.
Speaker 4: How do you view the consumer here today, Richard? It
Speaker 4: just seems like anytime over the last twelve fifteen years
Speaker 4: to get concerned about the economy, the consumer hangs in
Speaker 4: there and generally keep spending pretty well. How do you
Speaker 4: think about the US consumer.
Speaker 3: Well, in the aggregate, you know, there are three hundred
Speaker 3: million consumers, and in the aggregate they're in great shape.
Speaker 3: You know, in particular high levels of net worth. If
Speaker 3: you own a house, if you have money in the
Speaker 3: stock market, you've had a really good run for the
Speaker 3: last several years.
Speaker 1: But about a third of Americans don't.
Speaker 3: Own their own home or don't hold any stock, and
Speaker 3: for them it's a very different outcome. So what you're
Speaker 3: starting to see in the data now is a pretty strong,
Speaker 3: if I may use the term bifurcation between upper ear
Speaker 3: consumers and consumers who don't own their own homes or
Speaker 3: have a lot of stock market wealth, and then they're
Speaker 3: getting pinched.
Speaker 2: Okay, this is the heart of the matter. I mean,
Speaker 2: Alan Meltzer almost took it, almost took a swing at me,
Speaker 2: Jackson Whole ones over this because Alan Meltzer want to
Speaker 2: go back to forty seven and aggregate data. You've been
Speaker 2: teaching that for twenty five years back when you were
Speaker 2: at Illinois. We're aggregating data. You just described a Barbell
Speaker 2: John Edwards to Americas. Yeah, around the table at the
Speaker 2: Eccles building. Besides arguing over who's got redskinsts. Forget about that.
Speaker 2: But around the table at the Eckles Building, are you
Speaker 2: looking at two Americas or some economic aggregated fiction.
Speaker 3: Well, I'll put and say you look at both. But
Speaker 3: certainly during my time there, the staff did very very
Speaker 3: good work on looking a very disaggregated data. Forget you
Speaker 3: know two Americas that were looked at like thirty eight
Speaker 3: different parts of the economy.
Speaker 1: So you do both?
Speaker 2: Oh, come on, I mean Jason Furman in his wonderful
Speaker 2: New York got bed. We'll get Professor Furman in up
Speaker 2: at some at a school in New England somewhere. Jason says,
Speaker 2: flat out, tariffs kill the poor and the tax cut
Speaker 2: goes to the rich. It's a single sense INTI surveillance correction. Lisa,
Speaker 2: thank you for noting it. It's not the Washington Redskins.
Speaker 2: It's the commander's my foots it's my foot. Excuse me.
Speaker 1: Maybe we'll go back, who knows, maybe I'll still have
Speaker 1: a job.
Speaker 4: The world's changed.
Speaker 1: So Richard, where do we go from here?
Speaker 4: What's the key thing that you're looking at here for
Speaker 4: this economy? Is it the tariffs? Is it the consumer?
Speaker 4: Is it the labor market. What's the key thing you're
Speaker 4: focusing on.
Speaker 3: Look, I think I think the issue is we're in
Speaker 3: a period now where measured inflation is going to go
Speaker 3: up because of the pass through of the tariffs, and
Speaker 3: activity is.
Speaker 1: Going to slow.
Speaker 3: So the real question for me, Paul, is are we
Speaker 3: going through what I call a whiff of stagflation or
Speaker 3: are we really entering what would be a pretty very
Speaker 3: pretty persistent stagflationary crunch. You know, I'm still relatively optimistic.
Speaker 3: I think it's more of a whiff than a new normal,
Speaker 3: but it's certainly something that that is would be would
Speaker 3: be quite relevant.
Speaker 4: Yeah, it seems like a tough political call there to
Speaker 4: slow this economy and the rise inflation. Is the longer
Speaker 4: term gain that this administration sees from perhaps restoring more manufacturing.
Speaker 1: Is that a realistic expectation?
Speaker 4: Do you think?
Speaker 3: Well, that it is a realistic expect but it will
Speaker 3: not happen overnight. It will take several years. And in particular,
Speaker 3: in fairness, we saw a version of this in the
Speaker 3: Reagan administration. People think of Reagan as being a free trader,
Speaker 3: and he may have been philosophically, but the Reagan administration,
Speaker 3: which I actually worked with back in my youth, was
Speaker 3: actually quite interventionist. In particular, they had a policy known
Speaker 3: as voluntary export restraints on Japanese cars, and what the
Speaker 3: big Japanese automaker's Toylet and Honda realized is the only
Speaker 3: way for them to have a presence in the US
Speaker 3: was to build a lot of factories in the US,
Speaker 3: And so I worked an ambitious enough trade policy can
Speaker 3: lead over time to some onshoring, but it won't happen overnight.
Speaker 2: I got eight ways to go. For a final question,
Speaker 2: I want to go to zero s, but it's too
Speaker 2: early in the morning for a zero sum a discussion. Here,
Speaker 2: the heart of the matter is a president is looking
Speaker 2: at this as a bilateral discussion. The giant William Klein
Speaker 2: Peterson Institute aggressively disagrees with that. What's our multilateral outcome
Speaker 2: of this bilateral naivete?
Speaker 3: I think we'll learn a little bit more tomorrow about
Speaker 3: how much of this is intended to be permanent and
Speaker 3: how much it is an opening, you know, art of
Speaker 3: the deal negotiation. If it is. If it is, as
Speaker 3: I suspect, it will be the opening rounds of multiple
Speaker 3: negotiations across different countries.
Speaker 1: Then it's certainly not going to be.
Speaker 3: It's certainly not going to really be a multilateral plan
Speaker 3: will be a series of bilateral deals.
Speaker 2: Is get gone to put you know, partner phrases get gone.
Speaker 3: And I think the evidence in favor of that is
Speaker 3: that the Biden administration really didn't try to resuscitate the
Speaker 3: w TO.
Speaker 2: So why didn't they? Why did Why did they resuscitate
Speaker 2: the Atlantic Charter off of Newfoundland in nineteen forty two
Speaker 2: when we were flat on our back.
Speaker 3: Well you would have to ask them, but they're the
Speaker 3: political center of gravity in the last four years before
Speaker 3: Trump two point zero was really not to engage in
Speaker 3: the WTO. We never staffed up the dispute settlement process.
Speaker 2: It's completely fair. I mean, it goes back to transpecific failure.
Speaker 3: Yeah, and very good reminder the transpecific partnership exactly.
Speaker 2: Yeah, you can come into off for liberation data.
Speaker 1: I'll do it by phone. How about that?
Speaker 2: Richard clear to thank you so much, generous of you
Speaker 2: to be with us,