WEBVTT - How a Former Fed Vice-Chair Is thinking About the Next Fed Chair 0:00:02.720 --> 0:00:08.760 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.320 --> 0:00:21.360 Hello and welcome to another episode of the Authoughts podcast. 0:00:21.440 --> 0:00:22.800 I'm Tracy Alloway. 0:00:22.480 --> 0:00:25.000 And I'm Joe. Why isn't thal so Joe. 0:00:25.280 --> 0:00:28.560 Trump nominated Kevin Worsh to be FED chair last week. 0:00:28.640 --> 0:00:31.520 We've been talking about it on the show. Obviously, this 0:00:31.560 --> 0:00:35.720 has big market implications, but I'm starting to think that 0:00:35.800 --> 0:00:39.760 the sociological, yeah, questions and aspects of this are kind 0:00:39.760 --> 0:00:40.559 of more interesting. 0:00:41.080 --> 0:00:45.400 I'm so intrigued by the constellation of people who have 0:00:45.479 --> 0:00:48.600 come out either in support or opposition of this name. 0:00:49.200 --> 0:00:52.600 It is not like any other nominee that I can recall, 0:00:52.640 --> 0:00:55.520 where you have fairly sort of mainstream, even sort of 0:00:55.520 --> 0:00:59.720 liberal names like Jason Furman or Geita Gopinath say there's 0:00:59.720 --> 0:01:02.280 a great pick, et cetera. And then you have Paul 0:01:02.360 --> 0:01:05.399 Krugman and Neil Dudda say is a terrible pick and 0:01:05.440 --> 0:01:08.160 so forth. It is. It cuts in ways that I 0:01:08.160 --> 0:01:11.080 would not have necessarily anticipated, not like any other Trump 0:01:11.160 --> 0:01:11.840 pick that I recall. 0:01:12.080 --> 0:01:14.960 Yeah, it is very split, and it feels like there's 0:01:14.959 --> 0:01:19.040 a split within Worsh's own thinking as well. Right, because 0:01:19.080 --> 0:01:22.080 here we have a guy who has talked about wanting 0:01:22.120 --> 0:01:26.600 to overhaul the FED right and even break some heads. 0:01:26.720 --> 0:01:29.120 I think it was a direct quote that we've mentioned before. 0:01:29.440 --> 0:01:32.800 He has given a speech that is literally titled an 0:01:32.800 --> 0:01:37.760 ode to independence the Central Bank. But at the same time, 0:01:37.800 --> 0:01:41.160 there's a big question mark about how and why he 0:01:41.240 --> 0:01:45.480 has suddenly seemingly gone from an inflation hawk to someone 0:01:45.480 --> 0:01:47.800 who's advocating for low rates totally. 0:01:47.880 --> 0:01:50.080 And of course I think I mean, for you know, 0:01:50.200 --> 0:01:52.200 just to be blunt, this would have been something that 0:01:52.320 --> 0:01:55.680 any nominee from this administration, to some extent, there would 0:01:55.680 --> 0:01:58.880 have been question marks around because you know, obviously Trump 0:01:58.880 --> 0:02:01.840 has been very critical of Jerome Powell, despite the fact 0:02:01.880 --> 0:02:05.000 that he nominated him himself, and it's clear that he 0:02:05.120 --> 0:02:08.640 wants a low rates now kind of guy in there. 0:02:08.960 --> 0:02:11.880 He said after the nomination, he's like, you know, he 0:02:11.919 --> 0:02:14.480 didn't make many promises, but he's gonna I think he's 0:02:14.520 --> 0:02:16.000 gonna be a low rates guy. And then he joked 0:02:16.000 --> 0:02:17.760 a couple of days later that he was going to 0:02:17.840 --> 0:02:20.560 sue but that wasn't you know, he was joking. He 0:02:20.600 --> 0:02:26.560 said he was going to sue if worship. Yeah, joke, Aircus, 0:02:26.560 --> 0:02:28.480 you don't know. But this has been the big thing. 0:02:28.880 --> 0:02:32.000 And so the question is the degree to which an 0:02:32.080 --> 0:02:35.200 incoming FED chair presume if he passes the Senate, which 0:02:35.240 --> 0:02:38.360 isn't guaranteed, but if he passes the Senate, can establish 0:02:38.400 --> 0:02:41.880 his commitment to what he's long talked about. It just 0:02:41.919 --> 0:02:47.400 FED independence, while also you know, not immediately angering the 0:02:47.440 --> 0:02:51.080 guy who nominated him, exactly the extent that matters. 0:02:50.560 --> 0:02:52.959 Exactly right, So we need to talk about all of this, 0:02:53.560 --> 0:02:58.119 get a little bit more color on I guess fedboard culture, yeah, 0:02:58.320 --> 0:03:03.280 and politicals as well, and market implications of course, And 0:03:03.280 --> 0:03:05.800 we really do have the perfect guest. We're going to 0:03:05.800 --> 0:03:08.840 be speaking with, Richard Clarida. He is, of course global 0:03:08.919 --> 0:03:13.120 economic advisor at PIMCO, a professor of economics at Columbia, 0:03:13.160 --> 0:03:17.000 and most importantly for the purpose of this particular conversation, 0:03:17.200 --> 0:03:21.000 he's a former vice chair of the Federal Reserve Board. 0:03:21.240 --> 0:03:24.600 So honestly the perfect guest. Rich Thanks for coming back 0:03:24.639 --> 0:03:25.080 on the show. 0:03:25.560 --> 0:03:27.760 Thank you, looking forward to our discussion. 0:03:28.400 --> 0:03:31.320 So why don't I just start with the very obvious 0:03:31.400 --> 0:03:34.280 question and we can dig in from there. But last 0:03:34.320 --> 0:03:37.920 week when the news broke about worsh being selected by Trump, 0:03:38.760 --> 0:03:41.240 what was the first thought that went through your head. 0:03:41.680 --> 0:03:45.360 I think it's a very sensible chance. It makes sense 0:03:45.400 --> 0:03:50.160 along important dimensions. In particular, it's important because I think, 0:03:50.200 --> 0:03:54.120 based upon background and what he's been writing recently, that 0:03:54.280 --> 0:03:58.480 Warsh will work very well with Scott Bessett at the Treasury. 0:03:58.520 --> 0:04:01.360 There is Fed independence that get into, but it's important. 0:04:01.360 --> 0:04:05.040 It's a practical matter that the FED work well with 0:04:05.640 --> 0:04:08.560 the Treasury, and so it makes sense along a lot 0:04:08.600 --> 0:04:10.280 of dimensions. 0:04:11.000 --> 0:04:13.160 Actually, let's just get into that, because I do find 0:04:13.200 --> 0:04:17.400 that to be very interesting. Say more about working with 0:04:17.520 --> 0:04:20.159 the Treasury. You know, some people would say that is 0:04:20.240 --> 0:04:23.800 not the Fed's job. In fact, I would say, you know, 0:04:24.040 --> 0:04:28.000 Kevin Worrish, going back to the immediate post Great Financial 0:04:28.000 --> 0:04:31.120 Crisis era, had talked about how, for example, it's not 0:04:31.200 --> 0:04:34.680 the Fed's job to backstop fiscal policy. It's not the 0:04:34.680 --> 0:04:38.719 Fed's job to enable larger deficits, which I believe saw 0:04:38.839 --> 0:04:42.240 QI is enabling. But from your perspective, talk to us 0:04:42.279 --> 0:04:46.039 about what a positive relationship between the FED share and 0:04:46.040 --> 0:04:47.280 the Treasury Secretary looks like. 0:04:47.360 --> 0:04:52.080 Yeah, thank you for letting me add some color to that, 0:04:52.120 --> 0:04:56.680 because their dimensions and domains where it would actually be 0:04:56.720 --> 0:05:00.000 a very bad idea for the FED to be domin 0:05:00.120 --> 0:05:03.839 NATed by the Treasury, but along several dimensions. A collaborative 0:05:03.839 --> 0:05:07.200 working relationship is important, and i'll name names several. First, 0:05:07.720 --> 0:05:10.600 is the FED, going back to its founding, is the 0:05:10.600 --> 0:05:15.360 fiscal agent of the government. It has a responsibility to 0:05:15.440 --> 0:05:19.400 make sure that the treasury market has adequate liquidity, that 0:05:19.480 --> 0:05:23.680 it functions properly, and so that that's an important element 0:05:23.760 --> 0:05:27.000 of the job and always has been. It's also important 0:05:27.160 --> 0:05:30.320 because the FED has an important role in bank regulation, 0:05:30.480 --> 0:05:33.760 but not a not a monopoly role. The control of 0:05:33.800 --> 0:05:37.359 the currency, which is within Treasury, also has a regulation 0:05:37.520 --> 0:05:40.599 responsibility as to fdi C. So as a matter of 0:05:40.640 --> 0:05:44.600 necessity on bank regulation there needs to be a degree 0:05:44.640 --> 0:05:49.720 of coordination, and so I would really highlight those two areas. 0:05:51.120 --> 0:05:53.080 So I mentioned at the beginning that I'm kind of 0:05:53.120 --> 0:05:56.200 interested in the inner functioning of the FED board. From 0:05:56.400 --> 0:06:00.880 your perspective, how does communication between the and the Treasury 0:06:01.240 --> 0:06:04.640 actually happened. I'm sort of envisioning, like, I don't know, 0:06:04.800 --> 0:06:07.800 a WhatsApp or signal group group chat. 0:06:08.600 --> 0:06:11.840 There is a tradition, it's not in statute, There is 0:06:11.880 --> 0:06:15.800 a tradition that the Treasury Secretary and the FED chair 0:06:16.480 --> 0:06:19.960 meet on a regular basis, oftentimes over breakfast. 0:06:20.520 --> 0:06:22.880 And so during my time that. 0:06:22.839 --> 0:06:27.400 Was the primary point of contact was bilateral between when 0:06:27.440 --> 0:06:30.279 I was there, a Jay Poll and Stephen Mnuchen and 0:06:30.320 --> 0:06:34.320 then when Janet Yellen became a Treasury secretary. So that's informal. 0:06:34.640 --> 0:06:38.279 They're typically not staff in the room for that. There's 0:06:38.320 --> 0:06:41.760 also the Financial Stability Oversight Council, which was a creation 0:06:42.120 --> 0:06:45.640 in Dodd Frank which by statute is chaired by the 0:06:45.680 --> 0:06:50.400 Treasury Secretary, and then they're the FED among other agencies, 0:06:50.440 --> 0:06:54.040 also participates in that process. And then thirdly, as I mentioned, 0:06:54.360 --> 0:06:58.040 anything involving a bank regulation is typically going to involve 0:06:58.560 --> 0:07:01.719 if the senior or even device to share for supervision 0:07:01.800 --> 0:07:04.800 level interaction on bank regulation. 0:07:05.800 --> 0:07:07.880 You know, let's get into some of the I guess 0:07:07.960 --> 0:07:11.880 criticisms or perhaps questions about Kevin Worshon. There's a few 0:07:11.960 --> 0:07:16.160 different dimensions. One is, of course, there's perception that he's 0:07:16.200 --> 0:07:19.320 long been an inflation hawk and suddenly he sounded more 0:07:19.640 --> 0:07:23.480 dubvish over the last twelve eighteen months or whatever. Setting 0:07:23.560 --> 0:07:25.920 that aside, though, you know, some of the criticisms start 0:07:26.040 --> 0:07:29.920 early on, including his judgment around the Great Financial crisis 0:07:30.440 --> 0:07:34.080 concerned more about inflation, you know, even up into fall 0:07:34.160 --> 0:07:36.520 two thousand and eight than employment right on the eve 0:07:36.720 --> 0:07:40.200 of collapse, also seemed to get very anxious about inflation 0:07:40.800 --> 0:07:43.640 soon coming out of the worst of it, etc. Like 0:07:43.680 --> 0:07:47.520 when you think about, okay, like his qualifications and what 0:07:47.560 --> 0:07:49.880 we can expect from him, how much like when you 0:07:49.920 --> 0:07:53.280 go back to that era, how much should we hold 0:07:53.320 --> 0:07:56.480 that against him, perhaps either that he was off the 0:07:56.520 --> 0:07:58.680 mark or that he was at least very far out 0:07:58.680 --> 0:08:00.000 of consensus at the time. 0:08:00.560 --> 0:08:02.760 Well, I think you have to look at the entire picture. 0:08:02.920 --> 0:08:07.600 And Kevin was also very involved with Ben and Tim 0:08:07.680 --> 0:08:12.160 Geidner and Dudley and the crisis response to the global 0:08:12.200 --> 0:08:15.280 financial crisis, which really played out over a period of 0:08:15.320 --> 0:08:19.000 twelve to eighteen months. And I think by most accounts, 0:08:19.000 --> 0:08:22.360 in my judgment, that he actually added a lot of 0:08:22.480 --> 0:08:27.320 value in the fog of war inflation. As I myself learned, 0:08:27.440 --> 0:08:31.960 especially in periods of crisis and unusual large shocks, inflation 0:08:32.120 --> 0:08:35.400 forecasting can be challenging. So I don't think I would 0:08:35.400 --> 0:08:38.240 hold that particular episode against them. I think it does 0:08:38.360 --> 0:08:41.640 fairly characterize the way that most of us think about 0:08:41.760 --> 0:08:45.280 Kevin throughout during that period and really the last fifteen 0:08:45.520 --> 0:08:49.440 years is he has been a pretty consistent critic of 0:08:49.480 --> 0:08:52.560 the FED under the second half of Bernanky and then 0:08:52.640 --> 0:08:55.559 Yelling and Powell, and typically the criticism has come from 0:08:55.600 --> 0:09:00.839 the hawkish direction, and certainly in that episode his criticism 0:09:00.960 --> 0:09:05.400 of the FED was that some certain quotes would indicate that. 0:09:05.320 --> 0:09:07.280 Hawkish inclination as well. 0:09:07.400 --> 0:09:09.840 Maybe just I can follow up because in your earlier 0:09:10.160 --> 0:09:14.400 comment you also mentioned his recent advocacy. 0:09:13.840 --> 0:09:15.679 For lower rates. 0:09:15.720 --> 0:09:17.840 Now it's important this is in the context of a 0:09:17.880 --> 0:09:21.880 committee that under Pale's leadership, beginning in September of twenty 0:09:21.920 --> 0:09:25.000 twenty four, already began to cut rates. In fact, when 0:09:25.000 --> 0:09:28.440 I did your show earlier and we were talking about 0:09:28.480 --> 0:09:31.600 that right after I think the initial rate cuts under Powell, 0:09:31.640 --> 0:09:34.040 I made reference to what I've been calling for some 0:09:34.200 --> 0:09:36.000 time now, a FED. 0:09:36.120 --> 0:09:38.440 Is running what I call the quote two points. 0:09:38.080 --> 0:09:41.400 Something inflation target, which was they don't like it to 0:09:41.440 --> 0:09:43.440 start with the three, four, five, six or seven, but 0:09:43.480 --> 0:09:45.959 if inflation gets down to two points something, they can 0:09:46.000 --> 0:09:48.559 start to talk and think about rate cuts, as they 0:09:48.559 --> 0:09:53.840 did under Pale. And importantly at the December FED meeting, 0:09:54.000 --> 0:09:57.440 so just about six weeks ago, the FED indicated through 0:09:57.480 --> 0:10:01.920 those very imperfect dot plots that a majority of the committee, 0:10:02.240 --> 0:10:05.880 of that existing committee, which Kevin will inherit, felt that 0:10:06.000 --> 0:10:09.719 at least one more ray cut this year, given the circumstances, 0:10:09.760 --> 0:10:12.560 would be appropriate. So, yes, Kevin has come out in 0:10:12.600 --> 0:10:16.080 favor of ray cuts in his public comments. Don't know 0:10:16.120 --> 0:10:18.880 what he said privately to the President, but I doubt 0:10:18.920 --> 0:10:21.360 that they differed what he said publicly. But that's in 0:10:21.400 --> 0:10:24.640 the context of a committee that at least a majority 0:10:25.080 --> 0:10:28.600 of whom think that in this year it'll be appropriate 0:10:28.640 --> 0:10:30.200 to cut at least once. 0:10:46.200 --> 0:10:48.959 I'm just going to keep pretending to be an anthropologist 0:10:49.000 --> 0:10:52.360 and ask a bunch of cultural questions. But what actually 0:10:52.480 --> 0:10:56.960 is the role of FED chair when you're in a 0:10:57.000 --> 0:11:01.000 monetary policy meeting? So, you know, let's say that Warsh 0:11:01.040 --> 0:11:04.120 has some sort of outlier opinion. I don't know, he's 0:11:04.160 --> 0:11:11.400 prioritizing employment versus prices or whatever. Can he convince everyone 0:11:11.480 --> 0:11:14.960 at the table, all the voting members to actually change 0:11:14.960 --> 0:11:15.839 their minds? 0:11:16.600 --> 0:11:16.960 Crazy. 0:11:17.000 --> 0:11:19.599 It's a great question because a point that I like 0:11:19.679 --> 0:11:23.120 to make, at least in my professional time, which goes 0:11:23.120 --> 0:11:25.360 back to Paul Vulker. We tend to talk about the 0:11:25.400 --> 0:11:28.960 FED as the Vulgar FED, the Greenspan FED, pal Yellen, 0:11:29.320 --> 0:11:33.679 Bernank FED. And that's appropriate because in this era FED 0:11:33.760 --> 0:11:38.960 shares have been persuasive and they've usually got their way. 0:11:39.000 --> 0:11:40.559 But importantly, the. 0:11:40.559 --> 0:11:44.160 FED as an institution was specifically designed by the Congress 0:11:44.280 --> 0:11:47.760 in the nineteen thirties in such a way that any 0:11:47.800 --> 0:11:51.440 material monetary policy decision do they raise or lower interest rates, 0:11:51.480 --> 0:11:55.000 or do they buy or sell treasuries requires an affirmative 0:11:55.080 --> 0:11:58.120 vote of a committee comprised of twelve members. 0:11:58.160 --> 0:12:00.880 And so, as I'd like to say, and I'll say it. 0:12:00.840 --> 0:12:03.760 Again, really, the power of the FED chair is the 0:12:03.840 --> 0:12:06.560 power of persuasion, because at the end of the day, 0:12:06.640 --> 0:12:09.560 he or she only has one vote. Now, it's often 0:12:09.880 --> 0:12:14.720 argued that, well, rich, that's silly, because rarely do FED 0:12:14.760 --> 0:12:18.160 shares get out voted, And that's true. It happened once 0:12:18.760 --> 0:12:21.520 or twice under Vulgar, it happened way back in the 0:12:21.640 --> 0:12:23.079 nineteen forties. 0:12:23.120 --> 0:12:24.640 And so yes, empirically it. 0:12:24.559 --> 0:12:26.880 May appear as though chairs always get their way, but 0:12:27.280 --> 0:12:31.920 remember FED chairs know where the committee is leaning, and oftentimes, 0:12:32.120 --> 0:12:36.920 or certain circumstances, they may themselves decide not to be 0:12:37.000 --> 0:12:39.360 on the losing end of a particular vote, but to 0:12:39.400 --> 0:12:42.520 try to persuade the committee over time to move in. 0:12:42.480 --> 0:12:44.320 Their a direction. 0:12:44.800 --> 0:12:48.680 Now one thing I can't really speak to the Greenspan FED, 0:12:48.720 --> 0:12:52.360 but beginning under Bernanki and continuing under Yellen, and certainly 0:12:52.440 --> 0:12:56.200 with Jay Powell, there is a lot of pre meeting 0:12:56.640 --> 0:13:01.640 FMC meeting communication and indeed Powell during my time there 0:13:01.760 --> 0:13:06.280 would have individual bilateral discussions with the other eighteen people, 0:13:06.559 --> 0:13:08.679 not just the voters, but you know there are twelve 0:13:08.760 --> 0:13:12.240 voters and another seven Reserve Bank presidents who don't vote 0:13:12.280 --> 0:13:15.559 in a particular year. So Powell would have eighteen individual 0:13:15.600 --> 0:13:19.920 phone calls or face to face meetings before every meeting. 0:13:20.360 --> 0:13:22.440 I don't think that was the practice under green Span, 0:13:22.559 --> 0:13:25.440 for example. And so part of really what a FED 0:13:25.720 --> 0:13:28.960 chair does is to get a sense of where individuals 0:13:28.960 --> 0:13:32.559 on the committee are. But really an important power that 0:13:32.800 --> 0:13:36.520 the chair does have is the chair sets the agenda 0:13:36.559 --> 0:13:41.160 for the meeting, and the staff briefings, for the most part, 0:13:41.240 --> 0:13:45.079 are prepared by the board staff, sometimes with input from 0:13:45.120 --> 0:13:48.480 the Reserve Bank presidents, and the board staff reports to 0:13:48.559 --> 0:13:51.960 the chair, and so the agenda for the meeting and 0:13:52.280 --> 0:13:55.960 oftentimes details about the sort of analysis that would be 0:13:56.080 --> 0:13:59.160 useful for the discussion will be something that the chair 0:13:59.240 --> 0:14:02.199 will have a view. No during you asked for anecdotes, 0:14:02.240 --> 0:14:05.360 you know, during during my time because of my background 0:14:05.440 --> 0:14:08.760 in monetary economics, Chair Palel J. Palell did ask me 0:14:08.880 --> 0:14:13.000 to take a pretty hands on role in interfacing between 0:14:13.080 --> 0:14:16.080 himself and the staff, in particular the forecasting in the 0:14:16.120 --> 0:14:20.680 monetary affairs groups. But ultimately my role was really you know, 0:14:20.760 --> 0:14:23.400 in service to what he wanted to do to produce 0:14:23.440 --> 0:14:24.800 a successful meeting. 0:14:24.880 --> 0:14:27.440 The final thing, I'll say, you got me sort of 0:14:27.480 --> 0:14:27.880 wound up. 0:14:28.320 --> 0:14:28.920 It was all great. 0:14:29.880 --> 0:14:31.000 The final thing I'll. 0:14:30.800 --> 0:14:34.680 Say is, and I think this has been publicly reported, 0:14:34.720 --> 0:14:38.200 but it's at a typical FED meeting, there is a 0:14:38.200 --> 0:14:41.360 policy announcement that comes out a two PM that's a decision, 0:14:42.080 --> 0:14:45.120 and the committee of course is discussing that decision, but 0:14:45.160 --> 0:14:48.840 it's discussing other options. And at a typical meeting, in 0:14:48.880 --> 0:14:53.480 addition to the the FED statement and the policy action 0:14:54.240 --> 0:14:56.880 that was the outcome of the meeting, the committee is 0:14:56.880 --> 0:15:01.760 also discussing alternatives, actually tangible altern is, alternative A, alternative B, 0:15:01.880 --> 0:15:05.920 alternative C. And there can be quite extensive back and 0:15:05.960 --> 0:15:10.600 forth in the meetings about those alternatives. And so even 0:15:10.600 --> 0:15:12.560 at the end of the day with the public sees, 0:15:12.800 --> 0:15:15.520 the FED decided to keep rates on hold, and there 0:15:15.520 --> 0:15:19.960 were two descents, was for Governors Myron and Waller. A 0:15:19.960 --> 0:15:22.680 lot more is being discussed at the meeting as potential 0:15:22.720 --> 0:15:25.800 alternatives to that statement and that decision, and a lot 0:15:25.800 --> 0:15:29.120 of discussion in meetings can be about what the committee 0:15:29.120 --> 0:15:31.480 thinks might be appropriate for the next meeting or the 0:15:31.520 --> 0:15:34.880 meeting down the road. Indeed, one of the many things 0:15:34.920 --> 0:15:37.680 I learned, I made a promise to myself when I 0:15:37.760 --> 0:15:40.800 was in the job to try to learn something new 0:15:40.880 --> 0:15:43.920 every day, and I usually did. And one of the 0:15:43.960 --> 0:15:47.440 things I didn't appreciate before I got in to the 0:15:47.480 --> 0:15:52.640 FED is, especially the chair and the powerfit, you really 0:15:52.680 --> 0:15:57.440 need to have a sense of the arc of both 0:15:57.560 --> 0:15:59.720 the year in terms of the data flow you're likely 0:15:59.760 --> 0:16:02.200 to get it, and the arc of where decisions need 0:16:02.320 --> 0:16:06.040 to be made and how they're made. And so there's 0:16:06.080 --> 0:16:09.119 a lot sort of like an imperfect but not completely 0:16:09.120 --> 0:16:12.960 a bad analogy is we've heard of legendary football coaches 0:16:13.200 --> 0:16:15.680 who like script the first fifty plays of the game, 0:16:15.760 --> 0:16:17.680 so sometimes they move away, but they want to have 0:16:17.720 --> 0:16:20.680 a plan about how they'll react if the defense does 0:16:20.680 --> 0:16:21.440 a certain thing. 0:16:21.360 --> 0:16:21.720 Or the other. 0:16:22.040 --> 0:16:24.560 And it's not dissimilar to the way, at least when 0:16:24.600 --> 0:16:27.280 I was at the palfed that we would be thinking 0:16:27.560 --> 0:16:30.120 not only about the January meeting and then start thinking 0:16:30.120 --> 0:16:33.480 about March, but really the arc of the of the year, 0:16:33.720 --> 0:16:35.800 you know, based upon your view of the data and 0:16:36.160 --> 0:16:39.560 a number of other considerations. So those are some tangible 0:16:39.600 --> 0:16:42.840 examples of the way chairs I think put their imprint 0:16:43.000 --> 0:16:44.800 on the process. 0:16:45.560 --> 0:16:49.400 So thinking of calling several plays in a row, we've 0:16:49.440 --> 0:16:54.320 seen Kevin Warsh very skeptical of forward guidance and some 0:16:54.400 --> 0:16:58.200 of the monetary policy innovations that occurred in two thousand 0:16:58.200 --> 0:17:00.720 and eight, two thousand and nine and so forth. I 0:17:00.760 --> 0:17:03.640 think it's easy maybe for people to forget that things 0:17:03.720 --> 0:17:07.040 like the dots, the press conference and so forth, these 0:17:07.080 --> 0:17:10.119 are all very modern. For most of the fed's history, 0:17:10.240 --> 0:17:11.280 there was none of this stuff. 0:17:11.520 --> 0:17:13.960 Do you think I remember the invention of the dot plant? 0:17:14.080 --> 0:17:15.040 Remember that we. 0:17:14.880 --> 0:17:17.080 Were trying to I still don't get it, but yeah, 0:17:17.200 --> 0:17:17.720 well we were. 0:17:17.640 --> 0:17:20.080 Trying to figure out internally at Bloomberg, like the best 0:17:20.119 --> 0:17:23.000 way to tlate that information. 0:17:23.640 --> 0:17:26.000 Do you think I mean setting, I said Worsh's view. 0:17:26.440 --> 0:17:29.120 Do you think there's an argument to be made that 0:17:29.200 --> 0:17:33.000 some of these communication innovations that maybe made a lot 0:17:33.040 --> 0:17:35.720 of sense during a period of ZERP where the FED 0:17:35.800 --> 0:17:37.840 was trying to convince the market that would be on 0:17:37.880 --> 0:17:41.040 hold for a very long time, that maybe they can 0:17:41.160 --> 0:17:44.080 be revisited and we don't need so much of this 0:17:44.119 --> 0:17:45.240 stuff in normal times. 0:17:46.280 --> 0:17:49.800 Yeah, so I think let's focus now on communication stuff 0:17:49.880 --> 0:17:53.160 that was your specific question, but perhaps later also talk 0:17:53.240 --> 0:17:57.040 about Kevin's other critiques, which are broadly the balance sheet 0:17:57.080 --> 0:17:59.280 and sort of mission create in the size and the 0:17:59.320 --> 0:18:03.280 composition of balance sheet. And then third critique is is 0:18:03.560 --> 0:18:08.359 grounding FED policy both actions and communication more towards a 0:18:08.400 --> 0:18:11.639 policy rules framework and a less moving away from what 0:18:11.720 --> 0:18:14.040 he calls meeting by meeting discretion. But let's talk about 0:18:14.040 --> 0:18:19.160 communication and having observed and taught this and actually done 0:18:19.160 --> 0:18:21.000 it for four years, I want to begin with a 0:18:21.080 --> 0:18:26.119 historically factual statement that's important to provide some contexts. It 0:18:26.200 --> 0:18:32.560 is perfectly possible to conduct a very successful monetary policy 0:18:32.960 --> 0:18:36.880 without any forward guidance. Paul Vulker did it for eight years, 0:18:36.880 --> 0:18:40.000 and Alan Greenspan did it for seventeen. Now there would 0:18:40.040 --> 0:18:43.440 be little handsome winks and nods. But forward guidance as 0:18:43.480 --> 0:18:47.359 we know it today is really something that was not 0:18:47.560 --> 0:18:51.480 really in the toolkit of Paul Volker or for the 0:18:51.520 --> 0:18:55.400 first seventeen years Alan Greenspan. No green spans endlesslie fascinating. 0:18:55.440 --> 0:18:57.800 And one of the fascinating things about green Span is 0:18:57.800 --> 0:19:01.520 that in his last two years, say not coincidentally at 0:19:01.520 --> 0:19:04.840 the time that Ben Bernanke was a FAG governor, right 0:19:04.880 --> 0:19:07.320 at the very end in two thousand and four to six, 0:19:07.440 --> 0:19:11.159 Greenspan began to dip his toe into forward guidance. But 0:19:11.200 --> 0:19:14.640 for the most part that was not really part of 0:19:14.680 --> 0:19:15.359 the toolkit. 0:19:15.480 --> 0:19:17.119 So why did forward guide? First of all? 0:19:17.160 --> 0:19:19.600 Then what is forward guidance and why to become part 0:19:19.640 --> 0:19:23.280 of the toolkit? Well, at its most basic level, forward 0:19:23.280 --> 0:19:27.639 guidance is providing information to observers and importantly to financial 0:19:27.680 --> 0:19:35.080 markets about the committee's expectation of the path for interest rates. Now, 0:19:35.200 --> 0:19:38.760 there's a huge academic literature. I've contributed to it myself, 0:19:38.800 --> 0:19:40.879 and one of the interesting things that you might find 0:19:40.880 --> 0:19:44.000 that might be surprising about that literature is it's spent 0:19:44.040 --> 0:19:47.000 a lot of time twenty years ago arguing that forward 0:19:47.000 --> 0:19:51.200 guidance was irrelevant because the Feds looking at inflation data, 0:19:51.200 --> 0:19:54.120 the market's looking at inflation data. Inflation's too damn high, 0:19:54.160 --> 0:19:56.119 the Federal raise rates if it's low, don't cut rate, 0:19:56.240 --> 0:19:58.520 So you don't really get any You don't really get 0:19:58.520 --> 0:20:01.600 any incremental benefit by t telling people what you're going 0:20:01.680 --> 0:20:03.159 to do if they. 0:20:02.880 --> 0:20:04.000 Were going to do it anyway. 0:20:04.160 --> 0:20:06.919 And so the case for forward guidance then has to 0:20:06.960 --> 0:20:10.880 then rest on something other than it's okay to talk about. 0:20:10.640 --> 0:20:11.320 What you're going to do. 0:20:11.400 --> 0:20:15.840 And wherefore guidance really became a focus of the Fed 0:20:15.960 --> 0:20:18.800 was out of desperation at the zero bound, so rates 0:20:18.880 --> 0:20:22.119 got cut to zero after Lehman Brothers. The economy was 0:20:22.160 --> 0:20:25.240 in free fall, the financial system was on the vergic collapse, 0:20:26.000 --> 0:20:30.120 and the Bernanki Fed couldnot use conventional policy to lower 0:20:30.200 --> 0:20:33.359 rates because they had hit you a zero bound, and 0:20:33.440 --> 0:20:37.119 so they began to provide guidance to the markets to 0:20:37.359 --> 0:20:40.360 essentially reassure markets that they were not on a hair 0:20:40.400 --> 0:20:44.440 trigger to high rates, because they kept noticing that even 0:20:44.480 --> 0:20:48.400 though the economy was weak, inflation was low, unemployment was high, 0:20:48.480 --> 0:20:51.240 the bomb market kept pricing in rate heights that they 0:20:51.240 --> 0:20:54.520 had no intention of delivering, and so forward guidance really 0:20:54.600 --> 0:20:57.040 took on an important role when the FED was trapped 0:20:57.560 --> 0:21:01.359 at the zero bound. Now interesting corollary then is what 0:21:01.359 --> 0:21:03.880 do you do when you raise rates above zero? And 0:21:03.920 --> 0:21:07.080 of course the power FED did that beginning well, Yellen 0:21:07.119 --> 0:21:09.360 and then Powell did that, and I was actually there 0:21:09.440 --> 0:21:13.040 for the rate hikes in that cycle, and the FED 0:21:13.119 --> 0:21:17.480 by the time I arrived, importantly because of the dots, 0:21:17.520 --> 0:21:20.640 the FED had begun to had continued to use forward 0:21:20.680 --> 0:21:24.520 guidance even after rates got above zero, and oftentimes the 0:21:24.600 --> 0:21:29.040 dot plot was an input into that, since it provides 0:21:29.640 --> 0:21:34.560 imperfect but potentially useful information about the committee's intention to 0:21:34.840 --> 0:21:38.960 adjust rates. Let me say, however, that I think it's 0:21:39.119 --> 0:21:43.360 entirely appropriate that Kevin Worsh or anyone who becomes a 0:21:43.359 --> 0:21:47.359 FED chair now think about the cost and benefits of 0:21:47.440 --> 0:21:49.960 for guidance. Indeed, I've said for at least a decade, 0:21:49.960 --> 0:21:52.960 including before when I joined the FED, that forward guidance 0:21:53.000 --> 0:21:57.720 and quantitative easing are not exempt from the laws of economics. 0:21:57.760 --> 0:22:03.120 They have benefits but also costs. There are probably diminishing returns, 0:22:03.560 --> 0:22:06.680 and so I don't think it's at all inappropriate for 0:22:06.960 --> 0:22:10.040 the FED under the leadership of the chair to think 0:22:10.040 --> 0:22:13.840 about benefits and cost of forward guidance and circumstances when 0:22:13.840 --> 0:22:16.360 it may be useful, in circumstances when it. 0:22:16.359 --> 0:22:19.320 May not be. Let me just add a little coda here. 0:22:19.760 --> 0:22:23.640 Another dimension of FED communication that's changed has really been 0:22:24.320 --> 0:22:27.199 the result of a change in technology and access. So, 0:22:27.600 --> 0:22:30.480 you know, if you go back to the nineteen eighties, yes, 0:22:30.520 --> 0:22:32.560 when Vulker gave a speech, people would read it in 0:22:32.600 --> 0:22:34.320 the Times, on Wall Street Journal. 0:22:34.400 --> 0:22:38.240 Would report on it. But other than that, FED communication 0:22:38.560 --> 0:22:40.160 was pretty limited. 0:22:40.840 --> 0:22:42.919 And of course now, of course we all have access 0:22:42.920 --> 0:22:46.920