WEBVTT - Surveillance Special: Fed Vice Chairman Richard Clarida 0:00:09.840 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.560 Bloomberg dot Com, and of course on the Bloomberg And 0:00:27.640 --> 0:00:30.200 we welcome all of you worldwide on Bloomberg Television and 0:00:30.240 --> 0:00:33.479 Bloomberg Radio. An important interview with a Vice Chairman of 0:00:33.520 --> 0:00:37.120 the Fellow Reserve, Richard Claida, made more important by the 0:00:37.159 --> 0:00:39.880 events of this week. Yes, we always talk about Richard 0:00:39.920 --> 0:00:43.280 Claida about the broader scope and scale of economics, but 0:00:43.440 --> 0:00:47.000 this time is different. As Reinhardt and Rogoff said classically 0:00:47.120 --> 0:00:50.960 ten years ago, the news flow is extraordinary. Vice Chairman, 0:00:50.960 --> 0:00:53.559 thank you so much for toomerg. It's important to be 0:00:53.600 --> 0:00:56.800 in this room. We're in the Magisterial Echoes building. It's 0:00:56.840 --> 0:01:00.200 a jewel of nineties architecture. And we are in the 0:01:00.320 --> 0:01:04.440 special library with all these books, most of them first 0:01:04.600 --> 0:01:08.240 edition from the private collection of Adolph Miller and others. 0:01:08.280 --> 0:01:11.240 It's the scope of economics just over your right shoulder, 0:01:11.280 --> 0:01:14.760 the three volumes of Alan Meltzer. To any of these 0:01:14.800 --> 0:01:18.720 books in this library matter in the modern economics that 0:01:18.840 --> 0:01:20.920 we have today. I think they do. Tom you know, 0:01:21.040 --> 0:01:24.040 contacts is important. Uh, you know whether they say history 0:01:24.040 --> 0:01:26.319 doesn't repeat, but it rhymes. And I think I'm a 0:01:26.520 --> 0:01:29.520 I'm a student to some extent of monetary history. So so, 0:01:29.600 --> 0:01:31.760 of course, yeah, there's a lot of wisdom in this building, 0:01:31.840 --> 0:01:34.440 in this room. As they brought us in from security, 0:01:34.520 --> 0:01:37.600 we looked down in the lobby where FDR dedicated this building. 0:01:37.760 --> 0:01:40.840 He had some challenges. Chairman Bernanke is of course written 0:01:40.920 --> 0:01:44.840 exclusively wonderfully I should say about those challenges, and they 0:01:44.880 --> 0:01:48.880 had a challenge of disinflation and deflation. This challenge we 0:01:48.920 --> 0:01:51.840 have now is different than then, right, Well, it is different. 0:01:51.840 --> 0:01:55.120 Although we are in a world really globally of lower inflation. 0:01:55.200 --> 0:01:57.000 You see that in the year Zone, you see that 0:01:57.040 --> 0:01:59.480 in Japan and the US were close to our two 0:01:59.480 --> 0:02:03.320 percent objective, and that's very important to us. But you're right, 0:02:03.560 --> 0:02:06.600 there are some important global trends now that are impacting 0:02:06.600 --> 0:02:08.720 the U S and other countries. Let's begin with this 0:02:08.760 --> 0:02:11.760 word solid. I think of yelling slack, there's a number 0:02:11.760 --> 0:02:15.680 of others. Uh, we have a solid economy. What is 0:02:15.680 --> 0:02:18.160 a solid economy? Well, look, I think our outlook is 0:02:18.200 --> 0:02:21.720 really for a sustained economic expansion, Tom, and that's important 0:02:21.760 --> 0:02:24.480 because as of about a week from now, this will 0:02:24.520 --> 0:02:28.320 become the longest expansion in US history. We had very 0:02:28.360 --> 0:02:30.880 strong growth in the first quarter, north of three percent. 0:02:31.320 --> 0:02:33.800 We could see some moderation and growth this year, but 0:02:33.880 --> 0:02:37.519 the economy's baseline outlook is good sustained growth, a strong 0:02:37.600 --> 0:02:41.639 labor market, and inflation near our objective. Then why are 0:02:41.680 --> 0:02:46.160 we speaking of cutting interest rates? Well? Because in this environment, Tom, 0:02:46.240 --> 0:02:48.480 especially in the last six or eight weeks, there have 0:02:48.560 --> 0:02:52.480 been elevated uncertainty about the outlook. The economy is hitting 0:02:52.520 --> 0:02:55.400 some cross currents now, there's been a marking down on 0:02:55.440 --> 0:02:59.880 global growth prospects. There's uncertainty about international trade. There's some 0:03:00.040 --> 0:03:03.520 evidence that's weighing on sentiment a bit. So we're monitoring 0:03:03.560 --> 0:03:07.400 that that closely, and we'll act as appropriate to sustain expansion. 0:03:07.560 --> 0:03:09.880 I can go four or five ways. Let's let's begin 0:03:10.000 --> 0:03:15.240 with this new word uncertainty. Uncertainty are non policy shocks. 0:03:15.680 --> 0:03:19.320 We focus on the trade or we focus on the president, 0:03:19.360 --> 0:03:22.600 but there's many other shocks out there. Mr Droggy dealing 0:03:22.600 --> 0:03:25.600 with his shots. Mr Crown and others dealing with actually 0:03:25.600 --> 0:03:29.120 the Norwegian Bank just yesterday or the day before, raising 0:03:29.240 --> 0:03:32.359 rates because of the shocks they have. What's the non 0:03:32.480 --> 0:03:36.040 policy shock? It matters for the vice chairman. Well, I 0:03:36.080 --> 0:03:39.200 think that that we really have uncertainty in the sense 0:03:39.240 --> 0:03:43.080 that there's always some geopolitical uncertainty, but there's also uncertainty 0:03:43.120 --> 0:03:46.360 about how the global economy navigates at a point, you know, 0:03:46.400 --> 0:03:49.400 you have negative interest rates in the Eurozone, UH and 0:03:49.600 --> 0:03:52.720 in Japan. Those countries are are well away from where 0:03:52.760 --> 0:03:54.800 they want to be UH and I think that is 0:03:54.840 --> 0:03:59.960 a factor as as well. When you ran Colombia economic 0:04:00.120 --> 0:04:03.960 and some would say reinvigorated Columbia economics with your acquisition 0:04:03.960 --> 0:04:07.640 of talent, there was a demanded Columbia about a study 0:04:07.760 --> 0:04:11.800 of economic history within our economic history. Have we ever 0:04:11.920 --> 0:04:15.400 had an American central bank that is central banker to 0:04:15.480 --> 0:04:19.440 the world because of negative interest rates because of the challenge? 0:04:19.480 --> 0:04:23.040 Is that's an interesting question Toomas. I'm not surprised from you. 0:04:23.320 --> 0:04:25.880 I think the FAT has played the dominant role in 0:04:25.920 --> 0:04:30.160 central banking throughout most of my professional career. I think 0:04:30.200 --> 0:04:33.160 perhaps what's a little bit unusual this time is the 0:04:33.240 --> 0:04:35.839 U the U S is much closer to where it 0:04:35.839 --> 0:04:39.720 wants to be in terms of both employment and inflation 0:04:40.000 --> 0:04:43.120 than our other major economies. And because we have a 0:04:43.200 --> 0:04:46.400 much more globalized capital market than we did forty years 0:04:46.440 --> 0:04:49.000 ago when I began my studies, that also has an 0:04:49.040 --> 0:04:51.600 impact as well. That's probably a little bit different than 0:04:51.640 --> 0:04:53.400 in the past. You know, when I do these interviews, 0:04:53.440 --> 0:04:55.880 always bring in the resources of Bloomberg. Let me start 0:04:55.880 --> 0:04:58.960 with a silence in the press conference, Michael McKee has 0:04:59.080 --> 0:05:03.839 an important and Chairman Powell gave a graceful answer, but 0:05:04.440 --> 0:05:08.440 maybe dodge the glide path of what you hope to accomplish. 0:05:08.760 --> 0:05:11.640 If we have one rate cut, two or even three 0:05:11.720 --> 0:05:15.840 rate cuts, what does that accomplish for the American economy 0:05:16.000 --> 0:05:19.480 given your two percent statistic for growth. Well, first of all, 0:05:19.520 --> 0:05:21.640 of course, let me remind your viewers that at our 0:05:21.680 --> 0:05:24.640 most recent meeting we made no adjustment to policy, but 0:05:24.760 --> 0:05:28.000 we did say that we are monitoring closely the cross 0:05:28.080 --> 0:05:31.880 currents that are facing the economy and some of these uncertainties. 0:05:31.920 --> 0:05:34.960 And also, as chair Pal indicated, UH, there was I 0:05:34.960 --> 0:05:37.800 think broad agreement around the table that the case for 0:05:37.880 --> 0:05:42.960 providing more accommodation has increased since our May meeting. Uh, 0:05:43.000 --> 0:05:45.880 and clearly We're going to be looking and and be 0:05:46.080 --> 0:05:48.560 very attuned to the incoming data flow. But again, I 0:05:48.600 --> 0:05:52.080 think the important point Tom about our policy is we 0:05:52.160 --> 0:05:56.119 have the tools necessary to sustain expansion, a strong labor 0:05:56.200 --> 0:05:59.920 market and stable prices, and as appropriate, we will deploy 0:06:00.040 --> 0:06:03.159 those tools to achieve those goals. We welcome all of 0:06:03.160 --> 0:06:06.599 you again on Bloomberg Radio and Bloomberg Television worldwide conversation 0:06:06.720 --> 0:06:10.120 with the Vice Chairman of the FED, Richard Clarata. Our 0:06:10.160 --> 0:06:13.640 Creig Tourist is not only writing of economics, but he 0:06:13.800 --> 0:06:16.320 is truly a student of the history of it. As 0:06:16.360 --> 0:06:19.840 I mentioned before, yelling with the words slack, Clarada with 0:06:19.960 --> 0:06:24.039 the words solid, Craig Tourist says, how stuck is this 0:06:24.160 --> 0:06:27.400 Federal Reserve? What are the degrees of freedom you feel 0:06:27.400 --> 0:06:31.080 you have? Given the global events and given the realities 0:06:31.200 --> 0:06:34.440 of a boy in a solid American economy, and yet 0:06:34.480 --> 0:06:37.040 a need for ray cuts? How stuck in a position 0:06:37.440 --> 0:06:39.640 is this FED? Well? I admire, Craig. I don't think 0:06:39.680 --> 0:06:41.560 we're stuck at all. I think, in fact, we have 0:06:41.920 --> 0:06:44.240 the flexibility that we need that I think some other 0:06:44.279 --> 0:06:46.920 countries would wish that they would wish that they had 0:06:47.360 --> 0:06:50.000 uh you know, our primary tool is the federal funds. Right, 0:06:50.080 --> 0:06:53.080 you know, we're far away from the zero bounds and 0:06:53.200 --> 0:06:55.960 we certainly have some some room along those lines if 0:06:56.000 --> 0:06:58.760 we need to, And again we'll act as appropriate. So 0:06:58.800 --> 0:07:01.200 I don't think we're stuck at all. And I think again, 0:07:01.560 --> 0:07:03.760 we have a tool kit, and we have an objective 0:07:03.800 --> 0:07:06.200 assigned to us by the Congress, and and we're going 0:07:06.240 --> 0:07:08.560 to do our best to achieve that objective. It was 0:07:08.600 --> 0:07:12.040 an incredibly important idea of being near the zero bound. 0:07:12.360 --> 0:07:14.320 And we have one rate cut. I'll get the fifty 0:07:14.320 --> 0:07:16.760 basis point rate cut in July in a moment I'm sure, 0:07:17.080 --> 0:07:19.200 I know you don't want to talk about, but is 0:07:19.200 --> 0:07:23.000 it linear if you cut twenty five basis points fifty 0:07:23.120 --> 0:07:26.360 then seventy five? Is it a linear effect on the 0:07:26.360 --> 0:07:30.520 American economy? Or does it compound? Is there a inertial force? 0:07:31.040 --> 0:07:34.520 Is there an increasing force? Is you make multiple rate cuts? Well, 0:07:34.560 --> 0:07:36.120 I think there are a couple of points here. First 0:07:36.120 --> 0:07:38.920 of all, a lot of our models are are linear, 0:07:39.360 --> 0:07:41.480 and as someone who wrote down models, I know that. 0:07:41.520 --> 0:07:43.680 But the real world is nonlinear, and I think as 0:07:43.720 --> 0:07:47.520 policymakers we factor that in at you know, as we can. 0:07:47.600 --> 0:07:50.120 So the linear response is the starting point, but in 0:07:50.160 --> 0:07:54.440 that room and in that meeting, we're certainly alert to nonlinearities. Yeah. 0:07:54.640 --> 0:07:59.000 Market economists right now judging Draggy of a few days ago, 0:07:59.160 --> 0:08:02.440 judging the Polpe press conference, and now judging Richard Claire 0:08:02.480 --> 0:08:06.040 to Alan Ruskin and Deutsche Meka many others, go, July 0:08:06.200 --> 0:08:10.480 five really matters a moldy unemployment report. You're gonna tell 0:08:10.520 --> 0:08:13.400 me it's just one data point. What is the challenge 0:08:13.400 --> 0:08:16.679 on July five? If you get a soft a week 0:08:16.800 --> 0:08:20.520 attempted labor economy report, well, I think here today, then 0:08:20.600 --> 0:08:23.360 the labor market has been has been strong obviously if 0:08:23.360 --> 0:08:25.040 you look at payroll games and you look at the 0:08:25.080 --> 0:08:28.480 unemployment rate on average, we did have a soft print recently. 0:08:28.480 --> 0:08:30.520 But it's important for your reviewers to no time. We're 0:08:30.520 --> 0:08:32.680 not looking at any one data point. We get a 0:08:32.679 --> 0:08:35.480 lot of data. We're getting data on GDP towards the 0:08:35.600 --> 0:08:40.199 end of July. We'll get data on PC inflation pretty soon. Obviously, 0:08:40.240 --> 0:08:42.120 we get a lot of global data. We're looking at 0:08:42.120 --> 0:08:46.920 the global manufacturing cycle. We're looking at the down down, 0:08:47.120 --> 0:08:49.360 you know, downward estimates to global growth as well. So 0:08:49.520 --> 0:08:51.280 a lot of a lot of factors. It's we're not 0:08:51.320 --> 0:08:53.880 a one note to central bank here, that's for sure. 0:08:53.960 --> 0:08:57.760 Sometimes we read one re ugget it out research note 0:08:58.400 --> 0:09:01.160 Vice Chairman, You maybe Mrs rees Orsch note from Barclays 0:09:01.160 --> 0:09:04.720 where they stun Global Wall Street with the idea of 0:09:04.720 --> 0:09:08.120 a fifty basis point rate cut in July. I don't 0:09:08.160 --> 0:09:10.040 want you to comment on that. I know you want to. 0:09:10.520 --> 0:09:12.480 I know you're not going to answer the question. But 0:09:12.559 --> 0:09:16.720 what's important there is the underlying theme, which is these challenges, 0:09:16.800 --> 0:09:21.000 these uncertainties, these non policy shocks will move from goods 0:09:21.040 --> 0:09:25.880 producing and manufacturing producing America in Europe and the rest 0:09:26.400 --> 0:09:30.920 over into the buoyant service sector. Is that a risk? Well, 0:09:30.960 --> 0:09:33.960 I think there's an evolution and economies evolved, and for 0:09:34.000 --> 0:09:36.720 the last fifty years we've seen the economy become more 0:09:36.760 --> 0:09:39.600 of a service economy. That's true around the world. That's 0:09:39.640 --> 0:09:43.079 just a trend of global um development. Uh. You know, 0:09:43.160 --> 0:09:45.840 But again, the U S economy is a complex organism 0:09:45.920 --> 0:09:50.120 and and overall growth rate is obviously important. But markets 0:09:50.120 --> 0:09:53.000 are going to work to allocate resources, and we really 0:09:53.040 --> 0:09:55.960 focus on the overall aggregate picture. You know, it's not 0:09:56.000 --> 0:09:59.000 the FEDGS job to look at the service sector versus 0:09:59.040 --> 0:10:02.360 any other a sector. But we're again trying to support 0:10:02.440 --> 0:10:04.959 maximum employment of price stability. One of the things that's 0:10:04.960 --> 0:10:07.800 wonderful about you is you've left a paper trail of 0:10:07.880 --> 0:10:12.920 academic You must left a paper trail, don't. You've left 0:10:12.920 --> 0:10:15.680 the paper trill. And there's all sorts of things out there. 0:10:15.800 --> 0:10:18.520 I like to pick one paper and study it before 0:10:18.559 --> 0:10:21.520 you when I speak, vice chairman or not vice chairman. 0:10:22.120 --> 0:10:27.280 Clara Waldman two thousand seven is a brilliant walkthrough of 0:10:27.360 --> 0:10:31.160 inflation shock. Did you ever think we'd be here where 0:10:31.160 --> 0:10:34.360 we're looking the other way? It disinflation ship? Well you 0:10:34.400 --> 0:10:37.320 know that that you bring that up, Tommy, you're right. 0:10:37.400 --> 0:10:39.720 That paper was written in two thousand and six and 0:10:39.760 --> 0:10:43.000 published in two thousand and seven. Uh, And certainly my 0:10:43.080 --> 0:10:46.480 crystal ball didn't indicate almost anything that has happened in 0:10:46.480 --> 0:10:49.959 the last dozen years. The interesting thing about that paper, though, 0:10:50.040 --> 0:10:53.240 is it basically argued that in the old world, the 0:10:53.240 --> 0:10:56.560 way exchange rates would respond to inflation was to weaken. 0:10:56.600 --> 0:10:59.600 And we argued that if you have inflation targeting central banks, 0:10:59.600 --> 0:11:03.400 incredible central banks, that that correlation can go the other way. 0:11:03.440 --> 0:11:05.680 And in that paper and other paper since then that 0:11:05.760 --> 0:11:08.200 is held up in the data. Is credibility at risk? 0:11:08.280 --> 0:11:10.760 With all the challenges this is historic week from the 0:11:10.760 --> 0:11:14.840 economics of the of the draggy uh discussion of the 0:11:14.880 --> 0:11:18.559 delicacy of the Chairman Powell faced in the press conference. 0:11:19.080 --> 0:11:22.760 Is credibility of our banking at risk? I don't think so, Tom, 0:11:22.840 --> 0:11:25.679 you know, and let me explain to your viewers because 0:11:25.679 --> 0:11:27.520 you have a lot of global viewers on your show. 0:11:28.440 --> 0:11:31.640 Our mandate is assigned to us by the Congress Instatute 0:11:31.640 --> 0:11:33.960 in black and wine. The loss as we have a 0:11:34.080 --> 0:11:37.320 goal and maximum employment, price stability, and we have the 0:11:37.400 --> 0:11:40.120 independence to set our policy rates in order to achieve 0:11:40.160 --> 0:11:43.280 those goals. But we are accountable. We're accountable for our results, 0:11:43.600 --> 0:11:46.840 were accountable for explaining and trying to explain what we're 0:11:46.840 --> 0:11:49.440 doing and why we did it. Um, and I don't 0:11:49.440 --> 0:11:51.880 think our independence is is under threat, and I think 0:11:51.920 --> 0:11:54.360 we're doing our job, will continue to do our change. 0:11:54.360 --> 0:11:56.720 And we say this, folks, in honor of Martin Feldstein 0:11:57.320 --> 0:12:00.640 just this week, a huge loss for this current of 0:12:00.679 --> 0:12:03.319 my and one of my teachers and manator teachers and 0:12:03.320 --> 0:12:05.560 and and truly a mentor. Talking to Rick Michigan, the 0:12:05.600 --> 0:12:09.439 former governor the other day, a profound linkage of policy 0:12:09.559 --> 0:12:13.120 with this academics that we have. We are at a 0:12:13.320 --> 0:12:17.480 moment where we're asking for other people to finally help 0:12:17.640 --> 0:12:21.959 central bankers. Are we so fiscally constrained right now that 0:12:22.000 --> 0:12:25.240 you guys feel alone given the growth of the debt 0:12:25.280 --> 0:12:28.079 and the deficit. Well, let me say this. Let let 0:12:28.080 --> 0:12:31.120 me say this again. Our mandate is is monetary policy. 0:12:31.240 --> 0:12:34.360 So we don't weigh into two fiscal policy. Obviously, we 0:12:34.440 --> 0:12:38.480 take fiscal policy into account in our outlook and calibrating 0:12:38.480 --> 0:12:43.000 our appropriate policy response. I do think that we are 0:12:43.000 --> 0:12:45.160 in a world where we're not just in the US, 0:12:45.240 --> 0:12:47.760 but around the world. We do need to recognize that 0:12:47.800 --> 0:12:50.360 there are a lot of important public policy issues that 0:12:50.400 --> 0:12:53.520 are really fiscal policy issues that are not the purview 0:12:53.520 --> 0:12:56.320 of central banks. And I think to the extent that 0:12:56.400 --> 0:12:59.200 the public feels that the central banks are the solution 0:12:59.280 --> 0:13:02.800 to every concern about the economy, is is not the 0:13:02.840 --> 0:13:05.679 correct one. We actually have a pretty narrow mandate, uh, 0:13:05.720 --> 0:13:07.960 and we tend to focus on that. I have no 0:13:08.120 --> 0:13:14.280 idea the law or process of demotion at this great institution. 0:13:14.480 --> 0:13:16.840 I know you don't want to talk about this, but 0:13:16.960 --> 0:13:19.719 it is in the air in Washingshion. We have a 0:13:19.760 --> 0:13:24.439 president who speaks his mind by this modern communication method. 0:13:24.880 --> 0:13:29.640 How has this building responded to the gossip, the innuendo 0:13:29.800 --> 0:13:32.559 of a demotion of any given faure time. I can 0:13:32.600 --> 0:13:34.800 tie and we've known each other for twenty years. We're 0:13:34.840 --> 0:13:36.560 just doing our job. It helps that we have a 0:13:36.640 --> 0:13:39.280 very crisp and clear mandate. We have a tool kit, 0:13:39.360 --> 0:13:41.760 we have an excellent staff. We have twelve Reserve Bank 0:13:41.800 --> 0:13:44.800 presidents from around the country. We sit around that big 0:13:44.840 --> 0:13:48.280 table just across the hall. We have an objective, we 0:13:48.360 --> 0:13:51.680 have the tools um and we have a very very 0:13:51.840 --> 0:13:54.320 very very collegial committee and we reach we think good 0:13:54.480 --> 0:13:59.720 good decision. Mclaria, thank you so much. Thanks for listening 0:13:59.760 --> 0:14:04.320 to a Bloomberg Surveillance podcast. Subscribe and listen to interviews 0:14:04.360 --> 0:14:09.600 on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. 0:14:10.120 --> 0:14:13.480 I'm on Twitter at Tom Keene before the podcast. You 0:14:13.520 --> 0:14:16.920 can always catch us worldwide. I'm Bloomberg Radio.