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Speaker 1: This is Bloomberg Surveillance with Tom Keane, Jonathan Farrow, and

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Speaker 1: Lisa Abramowitz on Bloomberg Radio.

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Speaker 2: We are advantaged by the former Vice Chair of the

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Speaker 2: Federal Reserve System, Richard Clarett of Columbian of course, global

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Speaker 2: economic advisor at pim Coe, Doctor Clarida, I just want

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Speaker 2: to cut to the chase. You wrote an Economist essay

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Speaker 2: on about the IMF meeting that I hope everybody at

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Speaker 2: the FED read, which is it's really going to be

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Speaker 2: hard to get back to a two percent level. Where

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Speaker 2: are we heading across the meetings of twenty twenty three

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Speaker 2: with the inflation dynamic you describe in your Economist article

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Speaker 2: and with what we see from the Fed, where are

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Speaker 2: we going to be in June and onto the December meeting.

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Speaker 3: Well, thank you for having me on the show, Tom.

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Speaker 3: I guess a couple of points. I do think in

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Speaker 3: the statement today, as I and I think others expected,

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Speaker 3: they did adjust the language, and so they definitely want

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Speaker 3: to have the option not to hike at the June

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Speaker 3: meeting by including that language on the extent. But I

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Speaker 3: do think this is a committee that and we'll see

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Speaker 3: this from the chair today. I imagine pretty soon. It's

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Speaker 3: don't get emphasized. They're not declaring mission accomplished. Inflation is

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Speaker 3: way too high, and certainly this will be I think

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Speaker 3: sold and they believe that it's a pause and they're

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Speaker 3: going to do what it takes now. Looking ahead, I

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Speaker 3: have written and do believe that you under a plausible

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Speaker 3: scenario that the FED is laid out in the projections,

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Speaker 3: which I broadly agree with, Inflation a year from now

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Speaker 3: could be running in the twos, but probably not near

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Speaker 3: two point zero, probably north of two and a half,

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Speaker 3: maybe closer to three. And I think at that point

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Speaker 3: the committee will have to make a judgment. But if

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Speaker 3: it sees progress on inflation, then it's shown in the

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Speaker 3: SEP projections. They think they can be adjusting rates downward,

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Speaker 3: but I don't think they have to get all the

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Speaker 3: way to two before you see those adjustments.

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Speaker 2: If we look at where we are with our start

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Speaker 2: and the calculations that people like you make up to

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Speaker 2: see what the path is forward, there are other ways

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Speaker 2: within the system to be more restrictive, and of course

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Speaker 2: one of them is banking trauma. Are we more super

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Speaker 2: restrictive now or more tight than the chairman realizes.

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Speaker 3: Well, I well, I'm not sure what the chairman realizes,

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Speaker 3: but I do think and I certainly believe that what

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Speaker 3: we've seen with SVB, First Republic Credit, Swiss, the kulative

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Speaker 3: effect of that, even if there are no more disruptions,

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Speaker 3: will be to tighten bank lending. I think that's equivalent

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Speaker 3: to some additional rate hikes. So whatever rate hikes you

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Speaker 3: might have thought the economy needed, say in late February,

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Speaker 3: probably fewer now because this is going to slow the economy.

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Speaker 1: You know.

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Speaker 3: Toursten, who I really respect, talked about the other markets

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Speaker 3: for supplying credit, but a lot of small firms and

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Speaker 3: businesses don't have access to those markets. So when bank

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Speaker 3: lending slows, it will impact a small business hiring an

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Speaker 3: employment I think pretty sally.

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Speaker 4: Given that credit interruption. Do you agree with Diane Swank

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Speaker 4: and Matt Lazetti earlier who said that they think that

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Speaker 4: the bar is higher to cut rates than to raise

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Speaker 4: rates again after a pause, Well, let.

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Speaker 1: Me think through that.

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Speaker 3: I think that inflation's just too damn high. It's not

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Speaker 3: three points something, it's in the fours. Whatever progress appeared

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Speaker 3: to be evident in the data in the winter has

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Speaker 3: now best stalled, and so yes, I think there's a

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Speaker 3: committee that is going to be very reluctant to ease

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Speaker 3: until it really does start to see inflation moving down sustainably,

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Speaker 3: and so I would agree with that.

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Speaker 4: So right now, as we look at this statement and

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Speaker 4: we understand what you're saying, what more do they have

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Speaker 4: to see in the banking sector in order to say, Okay,

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Speaker 4: hold up, this is something really serious. It needs a

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Speaker 4: little bit more scrutiny.

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Speaker 3: Well, I guess, I guess it's an evolving situation. We've

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Speaker 3: resolved to significant banks resolved in the sense that they

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Speaker 3: they collapsed and they had to be acquired with facilitator

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Speaker 3: by the FDIIC.

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Speaker 1: Look, let me say what I do.

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Speaker 3: Believe the banking system as a whole in the US

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Speaker 3: has enough capital, has enough liquidity, and it is profitable.

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Speaker 3: So this is not an issue about the banking system

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Speaker 3: per se. But clearly there are fragilities amongst certain banks,

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Speaker 3: in particular in that category between one hundred to two

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Speaker 3: hundred and fifty billion, and we may not have seen

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Speaker 3: the last of that.

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Speaker 5: If you want to chain again Life on TV and radio.

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Speaker 5: This is a special edition of Bloomberg Surveillance covering the

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Speaker 5: Federal Reserve decision from about twenty minutes ago, they hiked

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Speaker 5: interest rates twenty five basis points. If you're interested in

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Speaker 5: the language shift in the statement that we got from

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Speaker 5: last time. Last time they said the Committee anticipates that

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Speaker 5: some additional policy firming may be appropriate. A couple of

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Speaker 5: lines have changed around that. The line now reads in

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Speaker 5: determining the extent to which additional policy firming may be

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Speaker 5: appropriate to return inflation to two percent over the time,

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Speaker 5: the Committee will take into account the cumulative tightening of

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Speaker 5: monetary policy. Off the back of this directity market positive

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Speaker 5: on the SMP by zero point four percent. That's only

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Speaker 5: a P five hundred in the bond market, yields a

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Speaker 5: bit lower the front end. Not a big move. That

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Speaker 5: move faced just a little bit. We're down about three

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Speaker 5: four basis points on a two year three ninety two.

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Speaker 5: Just to look at foreign exchange briefly, the euro strongest

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Speaker 5: dollar week or off the back of all of this

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Speaker 5: one ten sixty five the news conference you're laughing atn't

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Speaker 5: you're all ten? He wrote dollar? You love that? Eleven

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Speaker 5: minutes away from that news conference. It doesn't seem to change. Rich.

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Speaker 5: I keep saying the same thing. Rich, I just want

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Speaker 5: to jump in on the banking stress. Your former colleague

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Speaker 5: John Williams of the New York Fed has really played

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Speaker 5: down the role the FED has played in this by

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Speaker 5: hiking interest rates from zero to five so quickly in

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Speaker 5: a little more than a year. I'm just wondering what

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Speaker 5: your assessment of that is. The contribution of FED policy

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Speaker 5: over the last twelve months to what we've seen play

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Speaker 5: out at the regional banking level.

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Speaker 1: Good question.

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Speaker 3: I have anormous regard and work closely with John for

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Speaker 3: nearly four years. I think as a FED official, he

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Speaker 3: is careful in how he chooses his word.

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Speaker 1: I'll just tell you what I think.

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Speaker 3: I think in every rate hike cycle, banks that have

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Speaker 3: exposure to interest sensative assets are are going to face challenges.

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Speaker 3: You know, in the case of First Republic, they held

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Speaker 3: a lot of mortgages.

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Speaker 1: Mortgages get hurt when the rates go up.

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Speaker 3: In the case of SVB, they held a lot of

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Speaker 3: you know, securities and so and so. I think banks

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Speaker 3: do maturity transformation. They borrow short and lend long, and

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Speaker 3: when bond yields go up a lot some banks are

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Speaker 3: going to be are going to be challenged, and so

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Speaker 3: I just think it's an inevitable part of of monetary policles.

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Speaker 3: As I said, the banking system as a whole is sound,

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Speaker 3: but banks that have big exposure to rising rates that

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Speaker 3: they didn't hedge are not surprisingly going to get hurt.

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Speaker 2: And I can ask you this because you're the monetary guy.

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Speaker 2: If you're the regulation guy, couldn't ask you this, Doctor Clarida.

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Speaker 2: But you know for you it works, and with your

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Speaker 2: experience and your public service to the country, it's real simple.

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Speaker 2: Everybody's scared stiff. Libors back to where it is. This

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Speaker 2: new sofas back to where it is. Kathy Jones over

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Speaker 2: at Squab is just out with where the FDTR rate is.

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Speaker 2: It's back to where it was, which is six two

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Speaker 2: thousand and six. Michael Spence was eloquent in twenty ten

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Speaker 2: about the regulatory failures leading into seven eight nine.

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Speaker 6: Are we there again? Tom?

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Speaker 1: I don't think we're there. I don't believe we're there.

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Speaker 3: What I will say is that, and I think the

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Speaker 3: report that we got out of the FED and the GAO,

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Speaker 3: I certainly read both of them carefully, and clearly there

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Speaker 3: were things that were missed. Not so much in regulation,

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Speaker 3: but perhaps in supervision. And I do think that we

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Speaker 3: will see that changed pretty quickly, and certainly I think

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Speaker 3: that would be a good idea.

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Speaker 6: Rich.

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Speaker 5: You know the Federal Reserve in your time, there has

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Speaker 5: been heavily criticized over the last few months regarding this issue.

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Speaker 5: Can you share some of your experience in your time?

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Speaker 5: Did these issues ever come up at board meetings that

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Speaker 5: you attended around the names that have failed over the

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Speaker 5: last two months. Were these flanked in any way, shape

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Speaker 5: or form at the board level in day c Well.

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Speaker 1: Let me just let me just say this.

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Speaker 3: I was surprised by both of these based upon my

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Speaker 3: entire experience, and in particular, what I would say.

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Speaker 1: Is there was a focus.

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Speaker 3: It was in statute in twenty eighteen that the FED

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Speaker 3: should tailor to the individual banks regulation and supervision. I

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Speaker 3: think that that certainly is important, but I think these

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Speaker 3: reports do indicate that that needs to be improved, and

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Speaker 3: I think it will be improved and it should be improved.

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Speaker 4: I guess another way to ask this, Rich is just

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Speaker 4: whether this goes all the way up to Jerome Powell

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Speaker 4: in terms of his oversight of individual regional bank regulatory exercises.

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Speaker 4: In other words, is he somebody who would have known

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Speaker 4: some of the granularities here? Just to give us a

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Speaker 4: window into what that process is.

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Speaker 1: Yeah, I think I'll just leave my answer at that.

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Speaker 3: Obviously I've not been in the building for fifteen months,

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Speaker 3: and I'll just leave my answer at that.

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Speaker 4: All right, Well, just to give you a well, Rich,

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Speaker 4: you know, the reason why this is important is because

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Speaker 4: people often think of these as independent items. Right, You've

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Speaker 4: got on one hand, policy and you definitely have an

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Speaker 4: inflation problem. But John, you have to wonder if at

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Speaker 4: a certain point you're kind of challenge if you have

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Speaker 4: a regulatory.

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Speaker 5: Miss mistaken, Rich, I don't think we're going to let

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Speaker 5: this go. You were there. You guys knew they were

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Speaker 5: hiking aggressively. SVB has gone under signature bank First Republic

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Speaker 5: silver Gate when you were hiking interest rates this aggressively

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Speaker 5: at the Federal Reserve? Was this on your radar? And Rich?

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Speaker 5: If it was on your radar, why was nothing done

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Speaker 5: about it in a sufficient way to prevent this from

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Speaker 5: ultimately materializing?

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Speaker 3: Well, I was there in twenty eighteen when we hiked

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Speaker 3: rates up to two and a half percent and paused

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Speaker 3: at that level. I continue to say, as I did,

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Speaker 3: or when I got a similar question, the banking system

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Speaker 3: as a whole is sound. It has a lot of

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Speaker 3: capital and liquidity, and so at a top down macroeconomic level,

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Speaker 3: it certainly was not then a concern Rich.

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Speaker 2: What's so important here to John's question? And I know

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Speaker 2: there was a pandemic and all of the estimation of

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Speaker 2: the glide path of the great medical miracle of getting

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Speaker 2: out of the pandemic, But a lot of cynics would

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Speaker 2: be saying that well meaning people have been basically practicing

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Speaker 2: modern monetary theory with the Biden stimulus in whatever form

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Speaker 2: it was, and now we're trying to extricate ourselves from it.

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Speaker 2: How do we extricate ourselves from the FED, the deficit,

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Speaker 2: the debt ceiling, the other worries that our listeners and

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Speaker 2: viewers have. What does he do in the press conference

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Speaker 2: to help us extricate ourselves from his dilemma?

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Speaker 1: Well, I think there are a lot of moving parts there.

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Speaker 1: I think J.

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Speaker 3: Powell is going to focus on doing his job, keeping

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Speaker 3: at it till the job is done, but being attuned

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Speaker 3: and attentive and sensitive to what we're seeing in the

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Speaker 3: financial system. And I don't expect him to move beyond that.

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Speaker 3: But Tom, you are right the thrust of your question.

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Speaker 3: These are all related and obviously they all impend on

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Speaker 3: monetary point.

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Speaker 6: This is the heart of the matter.

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Speaker 2: From the head of economics at Columbia University for so

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Speaker 2: many years and what he did with Gertler, John, this

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Speaker 2: is a FED that has to get back to a

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Speaker 2: laser focus on what the original mission was through the pandemic.

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Speaker 6: There were all these other issues.

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Speaker 2: The social the social policy that was you know, it's

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Speaker 2: gone off in the crisis.

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Speaker 5: Let's be clear that was driven by the chairman himself.

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Speaker 6: Yes, I agree, I totally agree.

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Speaker 2: But the point is to what the former vice chairman

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Speaker 2: is saying, they're going to get back to a more

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Speaker 2: focused process.

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Speaker 6: That would be one guest.

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Speaker 5: Let's focus on the next four minutes. In about four

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Speaker 5: minutes time, we will have a news conference with Chairman

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Speaker 5: pow Rich. Let's wrap it up there. What would be

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Speaker 5: your focus going into this news conference just as a

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Speaker 5: spectator now from outside the Federal Reserve looking at this

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Speaker 5: play out.

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Speaker 1: Well, thank you for that question.

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Speaker 3: I do think that the statement today will will will

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Speaker 3: be helpful in that because I do think the goal

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Speaker 3: coming into the meeting. Notwithstanding, what we saw with First

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Speaker 3: Republic was was to give themselves the option to pause

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Speaker 3: and uh. But certainly I think the charitable stress that

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Speaker 3: they're not it's not mission accomplished, and they've got a.

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Speaker 1: Lot of work to do.

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Speaker 3: So I think I think we'll hear a fair amount

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Speaker 3: of references uh to uh to that, because I think

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Speaker 3: he and the committee do want to guard against the

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Speaker 3: pause being heard as done, or pause being heard as

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Speaker 3: rate cuts are eminent.

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Speaker 5: Sounded like a thanks for not asking me about it

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Speaker 5: banks again from th Rich than you so much, Chair,

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Speaker 5: wonderful to gay perspective on this monastry policy decision.