Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
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Speaker 1: we welcome all of you worldwide on Bloomberg Television and
Speaker 1: Bloomberg Radio. An important interview with a Vice Chairman of
Speaker 1: the Fellow Reserve, Richard Claida, made more important by the
Speaker 1: events of this week. Yes, we always talk about Richard
Speaker 1: Claida about the broader scope and scale of economics, but
Speaker 1: this time is different. As Reinhardt and Rogoff said classically
Speaker 1: ten years ago, the news flow is extraordinary. Vice Chairman,
Speaker 1: thank you so much for toomerg. It's important to be
Speaker 1: in this room. We're in the Magisterial Echoes building. It's
Speaker 1: a jewel of nineties architecture. And we are in the
Speaker 1: special library with all these books, most of them first
Speaker 1: edition from the private collection of Adolph Miller and others.
Speaker 1: It's the scope of economics just over your right shoulder,
Speaker 1: the three volumes of Alan Meltzer. To any of these
Speaker 1: books in this library matter in the modern economics that
Speaker 1: we have today. I think they do. Tom you know,
Speaker 1: contacts is important. Uh, you know whether they say history
Speaker 1: doesn't repeat, but it rhymes. And I think I'm a
Speaker 1: I'm a student to some extent of monetary history. So so,
Speaker 1: of course, yeah, there's a lot of wisdom in this building,
Speaker 1: in this room. As they brought us in from security,
Speaker 1: we looked down in the lobby where FDR dedicated this building.
Speaker 1: He had some challenges. Chairman Bernanke is of course written
Speaker 1: exclusively wonderfully I should say about those challenges, and they
Speaker 1: had a challenge of disinflation and deflation. This challenge we
Speaker 1: have now is different than then, right, Well, it is different.
Speaker 1: Although we are in a world really globally of lower inflation.
Speaker 1: You see that in the year Zone, you see that
Speaker 1: in Japan and the US were close to our two
Speaker 1: percent objective, and that's very important to us. But you're right,
Speaker 1: there are some important global trends now that are impacting
Speaker 1: the U S and other countries. Let's begin with this
Speaker 1: word solid. I think of yelling slack, there's a number
Speaker 1: of others. Uh, we have a solid economy. What is
Speaker 1: a solid economy? Well, look, I think our outlook is
Speaker 1: really for a sustained economic expansion, Tom, and that's important
Speaker 1: because as of about a week from now, this will
Speaker 1: become the longest expansion in US history. We had very
Speaker 1: strong growth in the first quarter, north of three percent.
Speaker 1: We could see some moderation and growth this year, but
Speaker 1: the economy's baseline outlook is good sustained growth, a strong
Speaker 1: labor market, and inflation near our objective. Then why are
Speaker 1: we speaking of cutting interest rates? Well? Because in this environment, Tom,
Speaker 1: especially in the last six or eight weeks, there have
Speaker 1: been elevated uncertainty about the outlook. The economy is hitting
Speaker 1: some cross currents now, there's been a marking down on
Speaker 1: global growth prospects. There's uncertainty about international trade. There's some
Speaker 1: evidence that's weighing on sentiment a bit. So we're monitoring
Speaker 1: that that closely, and we'll act as appropriate to sustain expansion.
Speaker 1: I can go four or five ways. Let's let's begin
Speaker 1: with this new word uncertainty. Uncertainty are non policy shocks.
Speaker 1: We focus on the trade or we focus on the president,
Speaker 1: but there's many other shocks out there. Mr Droggy dealing
Speaker 1: with his shots. Mr Crown and others dealing with actually
Speaker 1: the Norwegian Bank just yesterday or the day before, raising
Speaker 1: rates because of the shocks they have. What's the non
Speaker 1: policy shock? It matters for the vice chairman. Well, I
Speaker 1: think that that we really have uncertainty in the sense
Speaker 1: that there's always some geopolitical uncertainty, but there's also uncertainty
Speaker 1: about how the global economy navigates at a point, you know,
Speaker 1: you have negative interest rates in the Eurozone, UH and
Speaker 1: in Japan. Those countries are are well away from where
Speaker 1: they want to be UH and I think that is
Speaker 1: a factor as as well. When you ran Colombia economic
Speaker 1: and some would say reinvigorated Columbia economics with your acquisition
Speaker 1: of talent, there was a demanded Columbia about a study
Speaker 1: of economic history within our economic history. Have we ever
Speaker 1: had an American central bank that is central banker to
Speaker 1: the world because of negative interest rates because of the challenge?
Speaker 1: Is that's an interesting question Toomas. I'm not surprised from you.
Speaker 1: I think the FAT has played the dominant role in
Speaker 1: central banking throughout most of my professional career. I think
Speaker 1: perhaps what's a little bit unusual this time is the
Speaker 1: U the U S is much closer to where it
Speaker 1: wants to be in terms of both employment and inflation
Speaker 1: than our other major economies. And because we have a
Speaker 1: much more globalized capital market than we did forty years
Speaker 1: ago when I began my studies, that also has an
Speaker 1: impact as well. That's probably a little bit different than
Speaker 1: in the past. You know, when I do these interviews,
Speaker 1: always bring in the resources of Bloomberg. Let me start
Speaker 1: with a silence in the press conference, Michael McKee has
Speaker 1: an important and Chairman Powell gave a graceful answer, but
Speaker 1: maybe dodge the glide path of what you hope to accomplish.
Speaker 1: If we have one rate cut, two or even three
Speaker 1: rate cuts, what does that accomplish for the American economy
Speaker 1: given your two percent statistic for growth. Well, first of all,
Speaker 1: of course, let me remind your viewers that at our
Speaker 1: most recent meeting we made no adjustment to policy, but
Speaker 1: we did say that we are monitoring closely the cross
Speaker 1: currents that are facing the economy and some of these uncertainties.
Speaker 1: And also, as chair Pal indicated, UH, there was I
Speaker 1: think broad agreement around the table that the case for
Speaker 1: providing more accommodation has increased since our May meeting. Uh,
Speaker 1: and clearly We're going to be looking and and be
Speaker 1: very attuned to the incoming data flow. But again, I
Speaker 1: think the important point Tom about our policy is we
Speaker 1: have the tools necessary to sustain expansion, a strong labor
Speaker 1: market and stable prices, and as appropriate, we will deploy
Speaker 1: those tools to achieve those goals. We welcome all of
Speaker 1: you again on Bloomberg Radio and Bloomberg Television worldwide conversation
Speaker 1: with the Vice Chairman of the FED, Richard Clarata. Our
Speaker 1: Creig Tourist is not only writing of economics, but he
Speaker 1: is truly a student of the history of it. As
Speaker 1: I mentioned before, yelling with the words slack, Clarada with
Speaker 1: the words solid, Craig Tourist says, how stuck is this
Speaker 1: Federal Reserve? What are the degrees of freedom you feel
Speaker 1: you have? Given the global events and given the realities
Speaker 1: of a boy in a solid American economy, and yet
Speaker 1: a need for ray cuts? How stuck in a position
Speaker 1: is this FED? Well? I admire, Craig. I don't think
Speaker 1: we're stuck at all. I think, in fact, we have
Speaker 1: the flexibility that we need that I think some other
Speaker 1: countries would wish that they would wish that they had
Speaker 1: uh you know, our primary tool is the federal funds. Right,
Speaker 1: you know, we're far away from the zero bounds and
Speaker 1: we certainly have some some room along those lines if
Speaker 1: we need to, And again we'll act as appropriate. So
Speaker 1: I don't think we're stuck at all. And I think again,
Speaker 1: we have a tool kit, and we have an objective
Speaker 1: assigned to us by the Congress, and and we're going
Speaker 1: to do our best to achieve that objective. It was
Speaker 1: an incredibly important idea of being near the zero bound.
Speaker 1: And we have one rate cut. I'll get the fifty
Speaker 1: basis point rate cut in July in a moment I'm sure,
Speaker 1: I know you don't want to talk about, but is
Speaker 1: it linear if you cut twenty five basis points fifty
Speaker 1: then seventy five? Is it a linear effect on the
Speaker 1: American economy? Or does it compound? Is there a inertial force?
Speaker 1: Is there an increasing force? Is you make multiple rate cuts? Well,
Speaker 1: I think there are a couple of points here. First
Speaker 1: of all, a lot of our models are are linear,
Speaker 1: and as someone who wrote down models, I know that.
Speaker 1: But the real world is nonlinear, and I think as
Speaker 1: policymakers we factor that in at you know, as we can.
Speaker 1: So the linear response is the starting point, but in
Speaker 1: that room and in that meeting, we're certainly alert to nonlinearities. Yeah.
Speaker 1: Market economists right now judging Draggy of a few days ago,
Speaker 1: judging the Polpe press conference, and now judging Richard Claire
Speaker 1: to Alan Ruskin and Deutsche Meka many others, go, July
Speaker 1: five really matters a moldy unemployment report. You're gonna tell
Speaker 1: me it's just one data point. What is the challenge
Speaker 1: on July five? If you get a soft a week
Speaker 1: attempted labor economy report, well, I think here today, then
Speaker 1: the labor market has been has been strong obviously if
Speaker 1: you look at payroll games and you look at the
Speaker 1: unemployment rate on average, we did have a soft print recently.
Speaker 1: But it's important for your reviewers to no time. We're
Speaker 1: not looking at any one data point. We get a
Speaker 1: lot of data. We're getting data on GDP towards the
Speaker 1: end of July. We'll get data on PC inflation pretty soon. Obviously,
Speaker 1: we get a lot of global data. We're looking at
Speaker 1: the global manufacturing cycle. We're looking at the down down,
Speaker 1: you know, downward estimates to global growth as well. So
Speaker 1: a lot of a lot of factors. It's we're not
Speaker 1: a one note to central bank here, that's for sure.
Speaker 1: Sometimes we read one re ugget it out research note
Speaker 1: Vice Chairman, You maybe Mrs rees Orsch note from Barclays
Speaker 1: where they stun Global Wall Street with the idea of
Speaker 1: a fifty basis point rate cut in July. I don't
Speaker 1: want you to comment on that. I know you want to.
Speaker 1: I know you're not going to answer the question. But
Speaker 1: what's important there is the underlying theme, which is these challenges,
Speaker 1: these uncertainties, these non policy shocks will move from goods
Speaker 1: producing and manufacturing producing America in Europe and the rest
Speaker 1: over into the buoyant service sector. Is that a risk? Well,
Speaker 1: I think there's an evolution and economies evolved, and for
Speaker 1: the last fifty years we've seen the economy become more
Speaker 1: of a service economy. That's true around the world. That's
Speaker 1: just a trend of global um development. Uh. You know,
Speaker 1: But again, the U S economy is a complex organism
Speaker 1: and and overall growth rate is obviously important. But markets
Speaker 1: are going to work to allocate resources, and we really
Speaker 1: focus on the overall aggregate picture. You know, it's not
Speaker 1: the FEDGS job to look at the service sector versus
Speaker 1: any other a sector. But we're again trying to support
Speaker 1: maximum employment of price stability. One of the things that's
Speaker 1: wonderful about you is you've left a paper trail of
Speaker 1: academic You must left a paper trail, don't. You've left
Speaker 1: the paper trill. And there's all sorts of things out there.
Speaker 1: I like to pick one paper and study it before
Speaker 1: you when I speak, vice chairman or not vice chairman.
Speaker 1: Clara Waldman two thousand seven is a brilliant walkthrough of
Speaker 1: inflation shock. Did you ever think we'd be here where
Speaker 1: we're looking the other way? It disinflation ship? Well you
Speaker 1: know that that you bring that up, Tommy, you're right.
Speaker 1: That paper was written in two thousand and six and
Speaker 1: published in two thousand and seven. Uh, And certainly my
Speaker 1: crystal ball didn't indicate almost anything that has happened in
Speaker 1: the last dozen years. The interesting thing about that paper, though,
Speaker 1: is it basically argued that in the old world, the
Speaker 1: way exchange rates would respond to inflation was to weaken.
Speaker 1: And we argued that if you have inflation targeting central banks,
Speaker 1: incredible central banks, that that correlation can go the other way.
Speaker 1: And in that paper and other paper since then that
Speaker 1: is held up in the data. Is credibility at risk?
Speaker 1: With all the challenges this is historic week from the
Speaker 1: economics of the of the draggy uh discussion of the
Speaker 1: delicacy of the Chairman Powell faced in the press conference.
Speaker 1: Is credibility of our banking at risk? I don't think so, Tom,
Speaker 1: you know, and let me explain to your viewers because
Speaker 1: you have a lot of global viewers on your show.
Speaker 1: Our mandate is assigned to us by the Congress Instatute
Speaker 1: in black and wine. The loss as we have a
Speaker 1: goal and maximum employment, price stability, and we have the
Speaker 1: independence to set our policy rates in order to achieve
Speaker 1: those goals. But we are accountable. We're accountable for our results,
Speaker 1: were accountable for explaining and trying to explain what we're
Speaker 1: doing and why we did it. Um, and I don't
Speaker 1: think our independence is is under threat, and I think
Speaker 1: we're doing our job, will continue to do our change.
Speaker 1: And we say this, folks, in honor of Martin Feldstein
Speaker 1: just this week, a huge loss for this current of
Speaker 1: my and one of my teachers and manator teachers and
Speaker 1: and and truly a mentor. Talking to Rick Michigan, the
Speaker 1: former governor the other day, a profound linkage of policy
Speaker 1: with this academics that we have. We are at a
Speaker 1: moment where we're asking for other people to finally help
Speaker 1: central bankers. Are we so fiscally constrained right now that
Speaker 1: you guys feel alone given the growth of the debt
Speaker 1: and the deficit. Well, let me say this. Let let
Speaker 1: me say this again. Our mandate is is monetary policy.
Speaker 1: So we don't weigh into two fiscal policy. Obviously, we
Speaker 1: take fiscal policy into account in our outlook and calibrating
Speaker 1: our appropriate policy response. I do think that we are
Speaker 1: in a world where we're not just in the US,
Speaker 1: but around the world. We do need to recognize that
Speaker 1: there are a lot of important public policy issues that
Speaker 1: are really fiscal policy issues that are not the purview
Speaker 1: of central banks. And I think to the extent that
Speaker 1: the public feels that the central banks are the solution
Speaker 1: to every concern about the economy, is is not the
Speaker 1: correct one. We actually have a pretty narrow mandate, uh,
Speaker 1: and we tend to focus on that. I have no
Speaker 1: idea the law or process of demotion at this great institution.
Speaker 1: I know you don't want to talk about this, but
Speaker 1: it is in the air in Washingshion. We have a
Speaker 1: president who speaks his mind by this modern communication method.
Speaker 1: How has this building responded to the gossip, the innuendo
Speaker 1: of a demotion of any given faure time. I can
Speaker 1: tie and we've known each other for twenty years. We're
Speaker 1: just doing our job. It helps that we have a
Speaker 1: very crisp and clear mandate. We have a tool kit,
Speaker 1: we have an excellent staff. We have twelve Reserve Bank
Speaker 1: presidents from around the country. We sit around that big
Speaker 1: table just across the hall. We have an objective, we
Speaker 1: have the tools um and we have a very very
Speaker 1: very very collegial committee and we reach we think good
Speaker 1: good decision. Mclaria, thank you so much. Thanks for listening
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