WEBVTT - Global Economic Advisor at PIMCO & Former Fed Vice Chair Richard Clarida Talks Geopolitical Risk and the Fed

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Okay, folks, what we're going to talk about you, We're

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<v Speaker 2>not going to talk DSGE. We're not going to talk

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<v Speaker 2>integals within intergals or derivatives. The matthewness that Richard Claret

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<v Speaker 2>has acclaimed for the former vice chairman of the FED.

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<v Speaker 2>I don't want to know when the Fed's going to

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<v Speaker 2>cut rates or all that. We're going to talk about

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<v Speaker 2>what you did at Columbia. Okay, Richard Claret, of folks

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<v Speaker 2>went into Columbia with some massive hires in retention of

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<v Speaker 2>one of the best faculties in the planet. It goes

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<v Speaker 2>back to Leuven in Belgium, it goes back to some

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<v Speaker 2>of the way back work in Germany, and of course

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<v Speaker 2>the combine out of England is well, you retained a

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<v Speaker 2>laureate Stiglitz, You dealt with Jeff Sachs with all of

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<v Speaker 2>his ability. In that you have ned Phelps with this

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<v Speaker 2>massive eclectic view over time. Column Umbia owns the social analysis.

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<v Speaker 2>Good morning Chicago, and mister Becker, you own the social

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<v Speaker 2>analysis of this case shaped economy. Jeff Sachs wrote a

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<v Speaker 2>book twenty years ago. I'm going to say that was

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<v Speaker 2>way out front on this How case shaped are we

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<v Speaker 2>when you talk to your friends and Romans and countrymen

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<v Speaker 2>in Colombia, how K shaped are we now? Doctor Claardon.

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<v Speaker 1>Well, and also you left out Bob Mandel truly a

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<v Speaker 1>giant and international monetary economics. So it certainly has been

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<v Speaker 1>a treat to be at Columbia all these years. We're

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<v Speaker 1>definitely in a K shape economy. I think we've been

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<v Speaker 1>moving in that direction for thirty years, not in a

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<v Speaker 1>straight line, but the trend has definitely been in that direction.

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<v Speaker 1>I think the events with the pandemic, the policy response,

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<v Speaker 1>and the like amplified some of those trends. You know,

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<v Speaker 1>in America, if you own your home, as sixty percent

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<v Speaker 1>of people do, and if you own stock, you've had

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<v Speaker 1>a very good run. But that means there's a substantial

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<v Speaker 1>fraction of the country that has not been participating. Maybe

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<v Speaker 1>if I can just parachute a bit in on this.

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<v Speaker 1>You know, at the FED, when the economy slows, you

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<v Speaker 1>cut rates, and I certainly did that at my time

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<v Speaker 1>at the FED, and the FED understands it. When it

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<v Speaker 1>lowers rates, it's going to support the labor market, which

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<v Speaker 1>is good and for a lot of people. That is

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<v Speaker 1>their stake in the economy, is their job. But low

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<v Speaker 1>rates also lead to higher acid valuations and also leads

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<v Speaker 1>to some of the trends that you've mentioned in the

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<v Speaker 1>case shape economy. And so I think central bankers understand that,

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<v Speaker 1>but their toolkit is really pretty limited. So I think

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<v Speaker 1>that's how we end up with this dynamic.

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<v Speaker 3>How does it FED, a reserve or any central bank

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<v Speaker 3>deal with a black swan like, oh, I don't know,

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<v Speaker 3>a war andrant that came out of nowhere. I mean,

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<v Speaker 3>how does a FED typically look at those types of events.

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<v Speaker 1>It's difficult to predict back swamp black swans almost by definition.

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<v Speaker 1>So what you try to do is you try to

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<v Speaker 1>do analysis. You try to look back at history. You know,

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<v Speaker 1>history doesn't repeat, but it rhymes as the saying goes.

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<v Speaker 1>And so I'm sure at the FED they're looking at

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<v Speaker 1>past oil shocks, past Middle East conflicts. But they'll also

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<v Speaker 1>have to fix factor in, Paul, that it's a different

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<v Speaker 1>US economy than you know back in my college years

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<v Speaker 1>in the nineteen seventies, in particular of the US is

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<v Speaker 1>a net energy export. Important however, is in the FEDCE

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<v Speaker 1>models it's still the case that when energy prices go up,

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<v Speaker 1>the economy slows, and I think the main reason for

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<v Speaker 1>that is that erods real incomes for a lot of workers.

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<v Speaker 1>Also the fact that the US imports a lot of

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<v Speaker 1>goods that have a high energy content, and so yes,

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<v Speaker 1>you'd better be an exporter than an importer. But the

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<v Speaker 1>US is not insulated from this shock.

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<v Speaker 2>Might Karl Marx comes from the giant Thomas soul Out

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<v Speaker 2>at Hoover. Yeah, and also from my great mentor in London,

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<v Speaker 2>Megnum Desaia, who we lost last year, Karl Marx said

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<v Speaker 2>in the British Museum reading room and wrote a treatise

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<v Speaker 2>on the end of capitalism, and the bottom line is,

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<v Speaker 2>by definition we become ever more k shaped, evermore divided,

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<v Speaker 2>and there's corrective solutions. Do you worry that within all

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<v Speaker 2>of the institutions of you've as you've represented, that we're

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<v Speaker 2>getting to stress points where it falls apart.

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<v Speaker 1>Well, I'm not sure of that, but certainly the trends,

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<v Speaker 1>as I mentioned, since twenty twenty have definitely moved more

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<v Speaker 1>in that direction. I would point out though, that we

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<v Speaker 1>have had periods not all that long ago, you know,

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<v Speaker 1>certainly in the last part of Obama and during the

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<v Speaker 1>first Trump term, before the before the pandemic, you actually

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<v Speaker 1>had some of those K shaped trends.

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<v Speaker 2>Reverses the lower desk post.

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<v Speaker 1>And I can certainly tell you that during my time

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<v Speaker 1>at the FED, it was one of my focuses. That's

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<v Speaker 1>one reason why the FED got a lot of criticism

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<v Speaker 1>for cutting rates in twenty nineteen, because the unemployment rate

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<v Speaker 1>was below four percent and some models were saying, oh,

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<v Speaker 1>you can't operate the economy below four percent unemployment, and

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<v Speaker 1>our attitude, well, let's see how the economy operates. And

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<v Speaker 1>I think that was a positive development. And so I

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<v Speaker 1>think policymakers do need when they are in a healthy

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<v Speaker 1>economy to allow the economy to reach its potential.

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<v Speaker 3>One could argue, I mean the war. Notwithstanding the economy

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<v Speaker 3>is generally performing well in terms of growth, the unemployment

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<v Speaker 3>still looks like at our near full employment. Sure, I

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<v Speaker 3>guess that's a recipe for the FED to say, all right,

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<v Speaker 3>we're doing our job and maybe we can just sit down,

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<v Speaker 3>stand down a little bit. Is that what you expect

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<v Speaker 3>the FED to do over the next several meetings.

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<v Speaker 2>I do.

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<v Speaker 1>I think that they've pretty much signaled that the existing

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<v Speaker 1>FED before Kevin Warsh arrives. It is happy right now

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<v Speaker 1>to step back see how the economy evolves with its

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<v Speaker 1>energy shock. It is interesting that they did indicate that

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<v Speaker 1>most of the members of the committee still see at

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<v Speaker 1>least one cut this year and next year as appropriate,

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<v Speaker 1>and so I would think that over time Kevin Warsh

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<v Speaker 1>will be able to get the Committee to cut rates

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<v Speaker 1>at least a couple more times, but it may not

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<v Speaker 1>happen for for a while.

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<v Speaker 2>Richard Clarita with his folks of Columbia of course of

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<v Speaker 2>Pimco as well global economic advisor and the former chair

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<v Speaker 2>of the Federal former vice chair, I was gonna give

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<v Speaker 2>you a promotion there, sorry forbervice chair the Federal system

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<v Speaker 2>as well. Okay, I gotta get you in trouble Myron

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<v Speaker 2>was and Governor Myron was in with John Farrell, John

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<v Speaker 2>I thought was great. Gildham, there's a FED reacting after

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<v Speaker 2>the fact, folks, John Tucker told me the Latin his

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<v Speaker 2>ex post and then there's this whole dream of getting

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<v Speaker 2>out front and fixing it before it screws up, called

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<v Speaker 2>ex ante. I would suggest Governor Myron is not nearly

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<v Speaker 2>ex post. Is his brethren at the FED. He genuinely

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<v Speaker 2>wants to get anti Is there any evidence of a

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<v Speaker 2>successful central bank trying to get out front of the model.

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<v Speaker 1>Well, you have to look pretty long and hard to

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<v Speaker 1>find that.

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<v Speaker 2>Testament.

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<v Speaker 1>Yeah, you know, models are tools, but they're backward looking,

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<v Speaker 1>and in particular, I think oftentimes the argument that Governor

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<v Speaker 1>Myron has made is he he has a personal individual

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<v Speaker 1>belief that the neutral interest rate in the US is

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<v Speaker 1>well below the current level and well below where the

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<v Speaker 1>committee believes. You know, he could be right, but I

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<v Speaker 1>don't think that is the view on the committee, so

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<v Speaker 1>I think he'll continue to be a minority view on that.

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<v Speaker 3>You mentioned mister Warsh taking the FED chair seat later

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<v Speaker 3>this year, in several months time. I'm not sure we've

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<v Speaker 3>got a path for that to happen. How concerned are

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<v Speaker 3>you about some of the noise surrounding that whole.

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<v Speaker 1>Well, I think it's it's pretty clear now that in

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<v Speaker 1>order to become a FED chair you've got to be

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<v Speaker 1>confirmed by the Senate, and to be confirmed by the Senate,

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<v Speaker 1>you have to have an affirmative vote in the Banking Committee,

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<v Speaker 1>and right now Senator Tillis has indicated he will not

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<v Speaker 1>support any FED nominee, including Warsh, who he thinks would

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<v Speaker 1>be a good choice until the current situation with the

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<v Speaker 1>Justice Department subpoenas and the FED is resolved. And Power

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<v Speaker 1>more or less said that himself that he's not going

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<v Speaker 1>anywhere until it's resolved. We do think it will be resolved.

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<v Speaker 1>We do think eventually Warsh becomes chair. The timing of

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<v Speaker 1>that is uncertain. Whether or not it happens in time

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<v Speaker 1>for the June meeting is too soon to tell, but

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<v Speaker 1>we do think eventually that it will get resolved.

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<v Speaker 2>The first thing I did with AI, Yeah, Tom Secunda,

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<v Speaker 2>wee our founders grabbed me by the cheese its rack

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<v Speaker 2>and the food court, so that we need a briefing

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<v Speaker 2>and mister Secunda's leadership, folks on AI is noted across

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<v Speaker 2>a ten state area. Richard Clarity. He said, here's AI.

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<v Speaker 2>Get up to speed on it, Richard Clair, It is

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<v Speaker 2>up to speed on AI right now. Is it a

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<v Speaker 2>job creator or is it a job loser?

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<v Speaker 1>Well, right now doesn't appear to be either in the data.

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<v Speaker 1>And I think there are as many opinions on this

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<v Speaker 1>as there are people that you talk to. Myself, I

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<v Speaker 1>am I'm skeptical that in the next year or so

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<v Speaker 1>we're going to see a dramatic change in the labor

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<v Speaker 1>market because of AI. The models are impressive, but the

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<v Speaker 1>analogy I like to use is even their developers admit

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<v Speaker 1>that they hallucinate. Hallucination is a feature, not a bug.

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<v Speaker 1>And I don't know about you at Bloomber, but I

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<v Speaker 1>can tell you at PIMCO, we don't hire a lot

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<v Speaker 1>of employees who say part of my job description is

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<v Speaker 1>I'm going to hallucinate, and so I think until they

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<v Speaker 1>figure that out, it may not have as much an

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<v Speaker 1>effect on the labor market as people think.

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<v Speaker 2>You and I used a kufulinser slide roll. Okay, the

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<v Speaker 2>only way you can learn logs is a slide role.

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<v Speaker 2>Remember when the Hewlett packard, the rich kids had the

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<v Speaker 2>Hewlett Packard. What was it called reverse polish? Reverse Polish.

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<v Speaker 2>I got one on my phone here. But to me,

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<v Speaker 2>it's the same shift where the professors are going mental

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<v Speaker 2>in clash and use your calculator and all that, and

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<v Speaker 2>we're just going to get We're gonna deal with it.

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<v Speaker 2>I think we're gonna.

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<v Speaker 1>Deal with it and remember that near term in order

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<v Speaker 1>to get the nirvana of AI benefits. There has to

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<v Speaker 1>be a lot of capital spending, data centers, power generation,

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<v Speaker 1>and so the the interesting thing about AI right now

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<v Speaker 1>is that it's really a driver of a lot of

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<v Speaker 1>the old traditional bricks and mortar economy.

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<v Speaker 2>One final question, Yes, sir Jerome Powell, you've been a

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<v Speaker 2>staunch defender of him. He's had a pretty good ten

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<v Speaker 2>days week here. Yeah, and and so uh the governor

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<v Speaker 2>as well, under duress. What's his value add to the

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<v Speaker 2>American people to serve out all of his different tenures.

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<v Speaker 1>Well, I think it's important. I think I think J.

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<v Speaker 1>Powell recognizes that, you know, the first sentence, and eventually,

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<v Speaker 1>whenever his New York Times obituary is written, is he

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<v Speaker 1>wants to make sure that it says something along the

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<v Speaker 1>lines as chair Powell Report restored price stability and maintained

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<v Speaker 1>the Fed's independence. And I think that he is going

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<v Speaker 1>to achieve that.

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<v Speaker 2>Thank you so much, Richard Claire to coming was this

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<v Speaker 2>okay that we didn't do monetary part of the game.

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<v Speaker 1>And I also say it must be opening day because

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<v Speaker 1>mister Kean's wearing a tomorrow probably mister Sweeney, of course,

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<v Speaker 1>my god, where's the Duke? I know are you going

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<v Speaker 1>to the game?

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<v Speaker 3>Not going to the game, but it'll be a great

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<v Speaker 3>game against.

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<v Speaker 2>I'm afraid to ask. How's your bracket?

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<v Speaker 1>Yes, well, I'm a loyal alum of the University of

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<v Speaker 1>Illinois and I picked them. At least on that part

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<v Speaker 1>of the bracket. I'm doing pretty well. Although I got

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<v Speaker 1>to tell you, what is this playing a tournament game

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<v Speaker 1>on a home court for the number two?

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<v Speaker 2>Do they have a bracket pool at the FED? Oh? Ye, PhDs,

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<v Speaker 2>all the stuff and all that. I think so there's

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<v Speaker 2>a some ringer there that you know, like Vince Ryan

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<v Speaker 2>Hard years ago was winning three years in a row.

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<v Speaker 1>Anyway, go line on, okay, Richard Claire, thank you so much, greatly,

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<v Speaker 1>greatly appreciate it.