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Speaker 1: This is a conversation that to me caps off one

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Speaker 1: of the most fascinating periods of FED history and economic

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Speaker 1: history that I've ever seen. Rich Claried, a former FED

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Speaker 1: Vice chair, as well as Columbia University professor and PIMCO

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Speaker 1: Global Ecomonomic Advisor, as well as renowned singer Rich Clarida.

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Speaker 1: Thank you so much for being here, Lisa in person.

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Speaker 2: I just want to.

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Speaker 1: Start with what you make of the past week. FED

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Speaker 1: Chair Powell's comments and the market's reaction.

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Speaker 3: Well, the chairs comments took me by surprise, and he

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Speaker 3: had a difficult mission because it's the last meeting of

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Speaker 3: the year, natural to look ahead. But yes, I thought

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Speaker 3: both the press conference and the FMC statement were more

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Speaker 3: dubvish than I expected. You know, there is a soft

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Speaker 3: landing base case. We're all hoping for it, and I

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Speaker 3: think the markets are really focused on that. He didn't

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Speaker 3: say mission accomplished. I'm not sure if he thinks mission accomplished,

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Speaker 3: but that's being interpreted that way. And of course, as

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Speaker 3: you've mentioned on air, we've had a little bit of

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Speaker 3: pushback recently, so we're all now trying to assess what

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Speaker 3: message they would like to deliver.

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Speaker 1: Well, That's exactly what I wanted to ask you.

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Speaker 2: What do you make of the pushback?

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Speaker 3: Well, I think the delicate challenge, and we've discussed this

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Speaker 3: on the show in the past, is a tug of

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Speaker 3: war between their guidance and market pricing. You know, part

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Speaker 3: of the reason Lisa inflation is expected to come down

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Speaker 3: next year to two points something is because financial conditions

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Speaker 3: have tightened well as the markets think mission accomplished in

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Speaker 3: rate cuts. Six cuts are coming in next year, devil

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Speaker 3: ease conditions. That makes it less likely that inflation comes down.

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Speaker 3: So it's a tricky point right now for the Fed.

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Speaker 1: Do you think that Fed share Powell made a mistake.

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Speaker 2: I don't think so.

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Speaker 3: I think he was reflecting his committee, and I think

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Speaker 3: in the press conference sometimes chairs concert of distance themselves,

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Speaker 3: and I think he was embracing the baseline view. But

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Speaker 3: there is a risk case as well, and I think

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Speaker 3: perhaps some of the pushback is to remind folks about

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Speaker 3: those other scenarios.

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Speaker 1: Mary Daily Journal discussion yesterday came out and said, even

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Speaker 1: if the FED cuts rates by three times next year,

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Speaker 1: the FEDS benchmark rate will still be quite restrictive. Even

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Speaker 1: if in that scenario, and that you want to say,

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Speaker 1: we have to be forward looking and make sure that

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Speaker 1: we don't give people price stability but take away jobs.

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Speaker 1: Is this a new emphasis for the Fed?

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Speaker 3: Well, Lisa, I think at the margin it is because

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Speaker 3: I think inflation was so high for so long. I

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Speaker 3: think the Fed effectively had a single mandate for a

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Speaker 3: couple of years. We got to get inflation lower. The

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Speaker 3: federal course has a dual mandate. But I do think,

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Speaker 3: and I of course work closely with Mary. I'm a

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Speaker 3: big fan of hers. I do think the issue is

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Speaker 3: here is that the committee itself emphasizes financial conditions. Indeed,

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Speaker 3: financial conditions made an appearance in the November statement and

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Speaker 3: reappeared in December. It is true that one element is

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Speaker 3: the real funds rate, but other financial conditions are easy, which,

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Speaker 3: as we said, makes it less likely that inflation does come.

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Speaker 1: Down, Which raises this question about whether you are right

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Speaker 1: the two points something kind of view of inflation is

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Speaker 1: kind of what the FED is embracing right now in

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Speaker 1: order not to jeopardize the labor market.

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Speaker 3: Is that what your sense is, Well, I've always thought

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Speaker 3: that two points something would be the point at which

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Speaker 3: they start to think about cutting so that is playing out.

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Speaker 2: In their projection.

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Speaker 3: I do believe down to the individual, they're nineteen of them,

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Speaker 3: they all want inflation to get to two. And I

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Speaker 3: do agree with them that if they hold off cutting

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Speaker 3: rates at all until inflation gets to two, they're probably

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Speaker 3: going to overshoot. But the timing is delicate, and I

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Speaker 3: think there is a you know, there's a risk case

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Speaker 3: on both sides. But I do think they are emphasizing

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Speaker 3: now the dual mandate more than they have then.

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Speaker 1: Do you think it's because they're seeing something that other

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Speaker 1: people aren't, or they're at least emphasizing in their own

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Speaker 1: data some of the weakness that maybe is overlooked by

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Speaker 1: people who are piling into the market.

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Speaker 2: I'm really sure of that. I think it's important for them.

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Speaker 3: You know, the FED was criticized a lot in twenty

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Speaker 3: twenty one and twenty twenty two for being behind the curve.

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Speaker 3: I think it's appropriate to step back and acknowledge the

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Speaker 3: progress and disinflation, and I think they're seeing that. But

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Speaker 3: I think there's still still a ways to go, and

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Speaker 3: I think in particular, the labor market may require more

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Speaker 3: adjustment than their factoring in.

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Speaker 2: Sorry, no, it's all right. I'll let you get you bad.

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Speaker 1: It's a confusing moment for all of us, and I'm

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Speaker 1: wondering if you think it helps or hurts the cause

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Speaker 1: to see the FED come out FED show j Powell

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Speaker 1: with one message and then Austin Goolsby saying, you, guys,

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Speaker 1: I'm surprised by your reaction and hearing from John william

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Speaker 1: saying we're not really talking about rate cuts.

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Speaker 3: You know, that's not That's not something you'd like to

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Speaker 3: see coming out of a meeting. I think the market

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Speaker 3: reaction easing financial conditions is something that they are trying

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Speaker 3: to push back again, I don't know how successful they

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Speaker 3: can be.

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Speaker 2: However, do you.

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Speaker 1: Think that easing and financial conditions does have ultimately an

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Speaker 1: inflationary impact right now?

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Speaker 2: Well, to the.

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Speaker 3: Same extent that if you titan financial conditions, it lowers inflation.

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Speaker 3: If they're eased on a sustainable basis, credit spreads are typed,

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Speaker 3: borrowing cost or lower valuations are up at the margin,

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Speaker 3: it supports demand. And if you think there's a demand

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Speaker 3: piece to inflation, then yes, So.

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Speaker 1: Right now, do you think that it is potentially concerning

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Speaker 1: encounter to what the FED is looking for given the

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Speaker 1: all in feeling, and frankly, I mean, we just heard

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Speaker 1: this morning the FED shot the bears. The FED wants

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Speaker 1: to make people happy. I was bearish, but now I'm

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Speaker 1: really bullish. I mean, is this a positive thing?

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Speaker 3: Well, look, I'm very convinced that the power Fed will

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Speaker 3: do what it takes. I think that the communications challenges,

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Speaker 3: which were substantial in twenty twenty three, maybe even more

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Speaker 3: substantial in twenty.

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Speaker 1: There's been speculation from a number of guests that there

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Speaker 1: is a political element to this, that the calendar is tricky. Yeah,

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Speaker 1: for the Federal Reserve, considering that heading into November, everything

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Speaker 1: is going to be really politicized. Do you buy any

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Speaker 1: of that argument that would encourage them to make a

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Speaker 1: move earlier in the year.

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Speaker 3: Look, the history shows, in fact I checked before I

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Speaker 3: came on ear the FED has actually adjusted rates in

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Speaker 3: most presidential election years. In fact, they cut rates in

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Speaker 3: ninety two and cut rates in eight although for other reasons,

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Speaker 3: and they've.

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Speaker 2: Hiked rates as well in election years.

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Speaker 3: So historically, the FED doesn't let the political calendar dictate

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Speaker 3: the outcome at the margin. Could it influence timing, say

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Speaker 3: between a June move and a September move?

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Speaker 2: You know.

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Speaker 3: I'm not sure, but I think that the number of

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Speaker 3: rate adjustments we get next year will be the adjustments

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Speaker 3: that the Committee thinks is appropriate given the economy.

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Speaker 1: Given that we are talking about the politicization. Do you

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Speaker 1: think that this jeopardizes some of the credibility of the FED,

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Speaker 1: given that so many people have come on here and

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Speaker 1: speculated and we don't have any ability to basically know

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Speaker 1: or not know. But is there some other consequence of

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Speaker 1: just that speculation.

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Speaker 2: I really don't think so, Lisa.

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Speaker 3: In the end, the FED will be judged by returning

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Speaker 3: to price stability and ideally doing so at minimal cost

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Speaker 3: to the labor market. And so I think the fedes

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Speaker 3: credibility and the annibal rise and fall with delivering price stability.

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Speaker 1: When you talk about the potential for a reacceleration of

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Speaker 1: inflation and a stickiness, do you see that coming through

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Speaker 1: the services sector in a material way? Which areas of

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Speaker 1: the economy. Could we see a more material reignition?

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Speaker 2: Yeah? So, I think, I think exactly so.

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Speaker 3: I think goods goods prices are now falling, so we've

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Speaker 3: had goods disinflation deflation. The service sector typically lags behind.

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Speaker 3: I would also say I think the real where the

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Speaker 3: rubber will hit the road, Lisa is in the labor market.

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Speaker 3: So we've had a substantial adjustment in the labor market

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Speaker 3: without any rise in unemployment.

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Speaker 2: And that is great, I will say.

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Speaker 3: My good friend and former colleague Chris Waller nailed that

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Speaker 3: back in the summer of twenty twenty two, so that's wonderful.

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Speaker 3: I do think, however, that you cannot have two percent

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Speaker 3: price inflation target if wayes are going up four or

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Speaker 3: five percent, which is where we are now. So I

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Speaker 3: think I would be if I were there, I'd be

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Speaker 3: looking at the labor market adjustment as well as the

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Speaker 3: services sector as well. You know, one of the measures,

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Speaker 3: which is core services x housing, has basically not adjusted

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Speaker 3: at all in the last several months, so still elevated.

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Speaker 1: A lot of people are talking about how the economic

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Speaker 1: data has been really positive and how the FED has

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Speaker 1: been doing a good job, and how we have seen

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Speaker 1: unemployment stay low even with inflation coming down. Why do

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Speaker 1: you think people feel so bad?

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Speaker 3: Well, I think there's a distinction, and it's certainly one

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Speaker 3: I've thought about and written about. Economists tend to focus

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Speaker 3: on inflation, that's the change in prices, but individuals in

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Speaker 3: the economy tend to think about the level of prices.

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Speaker 3: Even if inflation returns to two percent, the level of

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Speaker 3: things going to the grocery store, going to the movies,

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Speaker 3: rent on your apartment, those numbers are all, you know,

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Speaker 3: a lot higher than they were four four years ago.

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Speaker 3: So I think when inflation's low and stable, we tend

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Speaker 3: to ignore that. But when we've had a big move

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Speaker 3: in the level of prices, I think it does create

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Speaker 3: more concern among households than you may infer just by

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Speaker 3: looking at the inflation data.

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Speaker 1: I want to ask you, though, also about the housing marketing.

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Speaker 1: You mention rents being higher. We've just got housing starts

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Speaker 1: and building pertmits come in higher than expected. We do

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Speaker 1: see some of the treasury rally pair back, which is

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Speaker 1: what you would expect. Does the high price of homes,

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Speaker 1: in addition to the lack of any volumes, also create

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Speaker 1: some sort of real dampening effect to sentiment?

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Speaker 2: Well.

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Speaker 3: I think the high valuation for homes obviously makes the

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Speaker 3: people who own homes happier, but there's a distributional consequence,

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Speaker 3: especially for younger parts of the population, Folks in their

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Speaker 3: twenties and thirties who have not yet acquired that first home,

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Speaker 3: and whatever they thought about the cost of ownership three

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Speaker 3: or four years ago, it's a lot higher. But there's

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Speaker 3: a huge wealth effect, positive wealth effect for folks who

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Speaker 3: own homes. Presumably they're happy about that.

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Speaker 1: Well, but it raises this question about what this does

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Speaker 1: longer term to the inflation dynamic, but also to sentiment,

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Speaker 1: particularly for younger individuals who haven't gotten.

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Speaker 2: In Yeah, well it does.

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Speaker 3: And I think that this is an unusual period, Lisa,

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Speaker 3: in the sense that because so many folks refinanced into

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Speaker 3: low rate mortgages in the prior decade, the FED, including

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Speaker 3: when I was there, it was doing QE to support

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Speaker 3: the mortgage market, and because these are fifteen and thirty

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Speaker 3: or fixed rate mortgages, it is having this effect on

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Speaker 3: supply that may be with us for a while.

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Speaker 1: We'll we're here with Richard Clarita of PIMCO, formerly FED

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Speaker 1: Vice chair. We are going to be having a conversation

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Speaker 1: with my colleague David Weston with Brian moynihan of Bank

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Speaker 1: of a May America. And I do want to get

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Speaker 1: your take, rich on whether you are seeing the stability

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Speaker 1: in banks as one reason why a soft landing can materialize, right,

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Speaker 1: that's sort of one tailwist tailwind to a lot of

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Speaker 1: this rally that was not there.

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Speaker 3: Say in March, Lisa, absolutely, you know, the global financial

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Speaker 3: crisis triggered a major rethink of the way that we

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Speaker 3: regulate and supervised banks.

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Speaker 2: In the US as a whole.

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Speaker 3: If you look at all the banks, they have lots

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Speaker 3: of capital, lots of liquidity, and indeed, in twenty twenty,

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Speaker 3: when we were going through the dark days of the pandemic,

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Speaker 3: you know, banks were a source of stability and increasing lending.

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Speaker 3: So absolutely, I do think it's an important reason to

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Speaker 3: think of the banking system as supporting the economy and

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Speaker 3: not being a headwind.

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Speaker 1: Rich Clarida, thank you so much for taking the time,

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Speaker 1: as always wonderful to get your insights