Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: The former New York Fed President Bill Dudley with a
Speaker 2: new op ed titled Watch's approach to Fed policy is
Speaker 2: deeply flawed. He writes, outsourcing monaetment policy to financial markets
Speaker 2: is a terrible idea. Watsh missed an opportunity to rebuild
Speaker 2: the Fed's credibility. Bill joined just now for more, Bill,
Speaker 2: welcome to the program. We were all watching that news
Speaker 2: conference and it didn't start terribly and then progressively it
Speaker 2: just got more and more confusing. What was the point
Speaker 2: in that news conference where you sat up and said
Speaker 2: this is weird.
Speaker 3: Well, it's weird when you're not explaining why three people
Speaker 3: are dissenting, yet the committee is deciding and changing policy.
Speaker 3: There really was virtually no information about how the Fed
Speaker 3: Reserve is thinking about mandre policy, how the Fed Reserve
Speaker 3: is likely to react to incoming information in terms of
Speaker 3: how they adjust Manjari policy. The silence of Worsh was
Speaker 3: really quite deafening, and the financial markets, you know, basically
Speaker 3: said thumbs down. I mean, the fact that thirty year
Speaker 3: yield went up to ten year wheel went up and
Speaker 3: two year yields dropped really was a sign that there
Speaker 3: was a loss of credibility in that from that press.
Speaker 2: Conference, Bill, I want to highlight a distinction because I
Speaker 2: think it's important and it's in the body of your OPAD,
Speaker 2: and I want to say it for you. You're not
Speaker 2: against reducing forward guidance. This is important. I think that
Speaker 2: the complaints about the people doing the complaining often or
Speaker 2: around the idea that somehow we still want our hands
Speaker 2: being held, that we want to hold on to the
Speaker 2: post GFC communication architecture. And Bill, I don't think that's
Speaker 2: what your criticism is about.
Speaker 1: No.
Speaker 3: I mean I wrote a group of thirty paper that
Speaker 3: we published in April, and one of the recommendations was
Speaker 3: to get rid of four guides. The only time we
Speaker 3: really need four guides is when you're at the zero
Speaker 3: lore bound for interest rates and you're trying to provide
Speaker 3: additional monetary policy stimulus. But the rest of the time,
Speaker 3: it really just sort of inhibits the FED and probably
Speaker 3: makes the FED a little bit slower to react to
Speaker 3: incoming information. But that doesn't mean you don't want to
Speaker 3: know what the FED monetary policy reaction function is. And
Speaker 3: I think that's the real problem, and it's comments is
Speaker 3: conflating the two and they're very very different. If I
Speaker 3: don't understand how the feder reeser is going to react
Speaker 3: to incoming information, I can't price financial markets correctly. And
Speaker 3: it's also creating a lot of uncertainty about what policy
Speaker 3: is going to be in the future.
Speaker 1: Uh.
Speaker 3: You know, the market response on on Wednesday was really
Speaker 3: FED credibility has lessened, and I think this is a
Speaker 3: really own goal on.
Speaker 1: Kevin Warsh's part.
Speaker 3: You know, I think when one of the problems here,
Speaker 3: I think is these over promised and under delivered.
Speaker 1: You know, you've talked.
Speaker 3: About you know, sea change at the FED, radical regime change,
Speaker 3: but then the markets are actually getting very very little
Speaker 3: in terms of guidance on how to think.
Speaker 1: About the new FED.
Speaker 4: Well, we were discussing about whether maybe some of this
Speaker 4: was by design. There is going to be more volatility.
Speaker 4: There has been more volatility both at the front end
Speaker 4: and the long end, in response to every economic data
Speaker 4: point and comment coming from anyone on the Federal Reserve
Speaker 4: as a result of an absence of some sort of
Speaker 4: reaction function articulated by the FEC chair. Do you think
Speaker 4: that this could be by design to help reduce inflation
Speaker 4: without hiking rates.
Speaker 1: I don't think this is a really great strategy for
Speaker 1: a couple of reasons.
Speaker 3: Number one, it's a very inefficient way of tightening financial conditions. Basically,
Speaker 3: you're driving up risk breming in markets. That's a dead
Speaker 3: weight loss to the economy. Number Two, how well can
Speaker 3: you actually control the market process to degenerate the impulse
Speaker 3: that you want to slow the economy down so sufficiently?
Speaker 1: And lastly, you know it's a credibility issue. I mean,
Speaker 1: if the extent that.
Speaker 3: The market's reacted the way they did on Wednesday, that's
Speaker 3: telling you that people are more worried about the Fed's
Speaker 3: resolved to do the job. That means inflation expectations are
Speaker 3: less well anchored than they were prior to the press conference.
Speaker 1: That in itself makes the Fed's job harder.
Speaker 4: Bill, how high is the bar for there to be
Speaker 4: I don't want to say mutiny, but the bulk of
Speaker 4: the FMC committee voting against the chair potentially with the Governor's.
Speaker 1: Joining suit, I don't think we would get to that.
Speaker 3: I think at that point worksh throwing the tonnel and
Speaker 3: vote with the majority. I can't imagine a situation where
Speaker 3: the chairman allows themselves to be outvoted by the committee,
Speaker 3: because if you had that result, it basically would be
Speaker 3: saying that the chairman has lost control of the committee,
Speaker 3: and that's just not a very good look for any organization.
Speaker 1: Bill.
Speaker 2: It was also vague about the inflation target. That was confusing.
Speaker 2: Too vague on the inflation target, whether they'd respond to it,
Speaker 2: and what's aol they would use to respond? Can I
Speaker 2: pick up on that last point? Bill, he's flirting with
Speaker 2: the idea of using balance sheet instead of short term
Speaker 2: policy rights. Sure, right, Well, what do you think of it?
Speaker 1: Well?
Speaker 3: I think the problem here is that even if you
Speaker 3: reduce the balance sheet, you're probably going to be reduced
Speaker 3: by about a trillion dollars or so if you want
Speaker 3: to continue to have an ample reserves regime, and I
Speaker 3: think the commandment of the Committee is to maintain the
Speaker 3: ample reserve regime. And then the question is how much
Speaker 3: restraint is shrinking the balance sheet by a trillion dollar
Speaker 3: is going to be.
Speaker 1: It's actually gonna be very very small.
Speaker 3: So the idea that you know, you pull on this
Speaker 3: balance sheet lever and that allows you to not have
Speaker 3: to tighten monitar policy, I think is very much exaggerated.
Speaker 2: It's obvious that for the market, the primary tool is
Speaker 2: still the policy, right because you can see that in
Speaker 2: the reaction this morning to the sense of economic takes
Speaker 2: that we've got moments ago on way they came in
Speaker 2: hotter labor costs. You saw yields rise at the front
Speaker 2: end of the curve. But we talked about this all morning,
Speaker 2: the credibility hit. You say credibility has been hit. Others
Speaker 2: agree with you. Let's talk about how you repair it.
Speaker 2: When you do a job really badly, sometimes you have
Speaker 2: to do more than you otherwise would have had to do.
Speaker 2: How much more do they need to do now at
Speaker 2: this fuller reserve to regain that credibility?
Speaker 1: Well, I think you have to follow up talk with actions.
Speaker 3: So I think that what's happened in financial markets over
Speaker 3: the last you know, seventy two hours or so basically
Speaker 3: increases the pressure on the Fed to act in September.
Speaker 3: If it's a jump ball in September, you almost need
Speaker 3: to tighten now because you've have lost credibility over the
Speaker 3: last couple of months.
Speaker 4: Do you think that it increases the chance of a
Speaker 4: larger than expected great hike?
Speaker 3: It's possible, but I don't think that you're so far
Speaker 3: away from your inflation objective that you know you need
Speaker 3: sort of shock therapy. If the feder Reserve did fifty
Speaker 3: basis points move, that would be, in my mind, a
Speaker 3: little bit of a sign of desperation. Why didn't why
Speaker 3: didn't you hike in July? You do ffty basis points
Speaker 3: at sentebor. I think that's actually it is a confusing
Speaker 3: narrative as well.
Speaker 4: What do you think the overall motivation is here? I mean,
Speaker 4: we've been talking about this and a lot of people
Speaker 4: said Kevin worsh is a one hundred percent respected person
Speaker 4: by the mainstream of the financial markets, by the establishment.
Speaker 4: Do you think this is just rookies error, the classic
Speaker 4: kind of first press conference of a FED chair Or
Speaker 4: do you think that there is some political motivation here
Speaker 4: trying to dodge the ire of the president going into
Speaker 4: the midterm elections.
Speaker 3: I can't judge that, but I generally think no, that
Speaker 3: he's not trying to do it to sort of modify
Speaker 3: the president.
Speaker 1: I think he really does believe.
Speaker 3: That somehow outsourcing this to financial markets will improve the
Speaker 3: conduct of monetary policy. But you can't outsource it to
Speaker 3: financial markets for a very simple reason. Markets don't price
Speaker 3: to what the FED should do. They priced to what
Speaker 3: they think the FED will do. And so if you
Speaker 3: try to assource at the markets, all you have is
Speaker 3: the market's looking the Fed, the Fed looking at markets,
Speaker 3: and the interest rate death is indeterminate.
Speaker 2: So it doesn't work that we were talking about yesterday,
Speaker 2: which is everyone's pointing at each other.
Speaker 4: And I saw a couple versions of that Fed.
Speaker 2: I'm sure you did, but it's good to say it.
Speaker 2: Thank you, buddy, go down be there, the former New
Speaker 2: York FED president. Thank you very much, sir, appreciate your time.