Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: The Center, The Federal Reserve Trader is looking ahead to
Speaker 2: the FED minutes this week and a great decision at
Speaker 2: the end of the month. The former New York Fed
Speaker 2: president built out le calling for the Central Bank to
Speaker 2: improve its communication, writing the better the quality of the
Speaker 2: Fed's communication, the more accurately market participants can assess how
Speaker 2: policy is likely to change. This tightens the linkage between
Speaker 2: monetary policy actions and financial conditions, which increases the speed
Speaker 2: and precision of monetary policy transmission. Bill Johndice now for more. Bill,
Speaker 2: Welcome to the show, sir, and a very happy new
Speaker 2: year to you. Where do you think the Fed is
Speaker 2: struggling to communicate right now? On what issue? Specifically?
Speaker 3: I think the sorary econotic projections last month was confusing
Speaker 3: the people because there was a pretty big up up
Speaker 3: through revision to the inflation estimates for twenty twenty five,
Speaker 3: yet it was hard for Paul to explain the sources
Speaker 3: of that. He noted that the participants and operate from
Speaker 3: a common set of assumptions. Some are assuming effects of
Speaker 3: Trump tariff and deportation policies, some weren't, and some didn't
Speaker 3: say whether they were or weren't, So each of the
Speaker 3: projections has a different set of assumptions embedded in it,
Speaker 3: which makes it very hard to anticipate what the Fed
Speaker 3: thinks is going to happen and how they're going to
Speaker 3: react to it.
Speaker 1: Bill is the issue for the FED right now communication
Speaker 1: or just not necessarily understanding which direction of this economy
Speaker 1: is going to go.
Speaker 3: In both, I think the problem is they're having trouble
Speaker 3: communicating how they're likely to react to the Trump policies.
Speaker 4: Obviously, if terroists are broad based, that is one effect.
Speaker 3: If they're much more targeted, as the Watching Post report suggest,
Speaker 3: that has a different implication.
Speaker 4: So it's a lot of the I'm certainly about what
Speaker 4: Trump policies are going to be, and of.
Speaker 3: Course the Fed is uncertain about how the economy itself
Speaker 3: is going to perform. A key issue for the Fed
Speaker 3: in terms of the economy is the labor market going
Speaker 3: to continue to weaken or not.
Speaker 4: Had been very.
Speaker 3: Clear that he thinks the labor market is still weakening
Speaker 3: and he doesn't want it to waken any further.
Speaker 4: So that's why Friday's paydroll and ployer report is so important.
Speaker 1: When you talk about a reaction function. This has been
Speaker 1: one of the big quag buyers for people. What is
Speaker 1: sort of the scenario analysis that the FED is doing
Speaker 1: and how they're going to respond to it. Do you
Speaker 1: think that they have that scenario analysis or do you
Speaker 1: think that increasingly, by default, it is becoming an increasingly
Speaker 1: data point dependent federal reserve.
Speaker 3: Well, there's definitely a scenario analysis that takes place before
Speaker 3: each meeting.
Speaker 4: The staff prepares.
Speaker 3: What's so called tealbook, and in the Tealbook there's a
Speaker 3: baseline forecast, but there's also these alternative simulations which suggests
Speaker 3: how the economy might evolve if things happen differently.
Speaker 4: I think that's another problem with the Summary of Economic Projections.
Speaker 3: It's a modal forecast and it doesn't talk about at
Speaker 3: all about what's going to happen if things turn out
Speaker 3: differently than what FED officials expect. So I think one
Speaker 3: thing the FED could do is actually do what a
Speaker 3: lot of foreign central banks do is actually have a
Speaker 3: consensus forecast, difficult to do with a committee of nineteen
Speaker 3: people spread all over the country. You could actually start
Speaker 3: to publish the staff forecast. There is a staff forecast
Speaker 3: available before every meeting, and if you put that out there,
Speaker 3: you have a better sense of what the baseline assumptions
Speaker 3: of the FED are.
Speaker 5: But Bill isn't one of the issues that Comm's problems
Speaker 5: is because they don't want to or can't be seen
Speaker 5: talking about policy. Do you just think the FED should
Speaker 5: be more open about policy all of the members?
Speaker 3: Well, clearly what happens on tiarists and deportation is going
Speaker 3: to have a big, big effect on the Commy in
Speaker 3: twenty twenty twenty five, So I don't think you can
Speaker 3: avoid thinking about that in terms of making your economic forecast.
Speaker 3: I think the FED is reluctant to talk about it
Speaker 3: because he doesn't want to get self engaged into this
Speaker 3: political discussion, and I think they're worried that will politicize
Speaker 3: the FED, So they're trying to think about it with
Speaker 3: how talking about it at the same time.
Speaker 5: Is your main concern right now with the FED communications
Speaker 5: or would you do anything differently on policy?
Speaker 3: I think they are in a pretty good place right now.
Speaker 3: I think that they understand that the Commy is doing okay.
Speaker 3: Inflation is a little bit sticky, so it makes sense
Speaker 3: to wait. They also understand that there's a lot of
Speaker 3: uncertainty about what policy is going to be forthcoming, and
Speaker 3: Paul said when things are usurned, you should slow down.
Speaker 4: So I think that all makes a lot of sense.
Speaker 4: I think the big disconnect I think between.
Speaker 3: Markets and the FED is where is the FED heading
Speaker 3: over the medium the longer term. The FED says we're
Speaker 3: heading to three percent federal funds rate. The market says
Speaker 3: we're heading to something more like a four percent federal
Speaker 3: fund rates.
Speaker 4: So there's a.
Speaker 3: Pretty big gap about what is a neutral monitary policy.
Speaker 3: FED thinks the neutral monitary policy is quite a bit
Speaker 3: easier than we are today. The market thinks that the
Speaker 3: neutral monitary policy is slightly easier than where we are today.
Speaker 2: But what did you do with your own forecast when
Speaker 2: you had Trump coming in in Volume one? How did
Speaker 2: you change things? So do you anticipate the changes to
Speaker 2: policy beforehand or react once it was introduced.
Speaker 4: I think I thought.
Speaker 3: That there was more risk in the forecast, So I
Speaker 3: think the biggest change for me was to talk about
Speaker 3: risk and uncertainty going up. And I think that's what's
Speaker 3: happened to I mean, I think we the big transition
Speaker 3: from Biden to Trump is under Biden, we sort of
Speaker 3: knew exactly what the policies were, and in fact, over
Speaker 3: the last two years there hasn't really been much in
Speaker 3: terms of new policy initiatives. Now we're going into the
Speaker 3: Trump era, when you know there's gonna be a lot
Speaker 3: of changes in policy and yet and.
Speaker 4: We don't know yet they're what they're going to be.
Speaker 3: So I think we're going from a period of low
Speaker 3: uncertainty to much higher uncertainty.
Speaker 4: That's what's got to get priced into markets.
Speaker 3: That's one reason why I think the bond market has
Speaker 3: done poorly over the last few months.
Speaker 2: Oh, I appreciate your time, as always bought down to
Speaker 2: the former New York Fed president. Looking at to twenty
Speaker 2: twenty five and beyond,