WEBVTT - Bill Dudley Talks Fed Independence

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news joining.

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<v Speaker 2>Us now to extend the conversation, they form a New

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<v Speaker 2>York Fed President Bill Dudley, Bill, Welcome to the program.

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<v Speaker 2>Extensive experience at the Federal Reserve inside that institution. How

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<v Speaker 2>do you think they'll be responding to this this morning?

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<v Speaker 1>They're going to be very unhappy because this is a

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<v Speaker 1>real assault on the Federal reserves independence. And as we know,

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<v Speaker 1>central banks independence is really important for good economic outcomes.

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<v Speaker 1>There's been a reason why we've been moving in the

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<v Speaker 1>direction of greater central bank independence over the less four

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<v Speaker 1>decades across the world because central banks that have independence

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<v Speaker 1>in terms of how they conduct monetary policy to achieve

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<v Speaker 1>the objectives set for them by Congress and the administration,

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<v Speaker 1>to a better job in controlling inflation and keeping the

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<v Speaker 1>economy on a stable path. So this is an assault

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<v Speaker 1>on that. And I'm sort of surprised that the markets

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<v Speaker 1>are so relaxed about this now. Maybe that's because we

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<v Speaker 1>don't know where this is going to go. We don't

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<v Speaker 1>know whether Lisa Cook is going to be able to

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<v Speaker 1>stay in office. It certainly looks like the barf to

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<v Speaker 1>getting her out is quite high because it doesn't seem

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<v Speaker 1>that the for cause it would extend to the allegations

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<v Speaker 1>against her, but she certainly a very minimum deserves her

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<v Speaker 1>day in court.

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<v Speaker 3>Well, Bill, it seems like that is the system that

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<v Speaker 3>is emerging, that we're understanding the contours of FED independence

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<v Speaker 3>from the courts. Be it the most recent ruling that

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<v Speaker 3>said other independent agencies could have their heads fired by Trump,

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<v Speaker 3>but not necessarily the FED without cause. This maybe defining

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<v Speaker 3>having the courts define what cause is. If you off

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<v Speaker 3>a system where it's not encoded in law but instead

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<v Speaker 3>is being interpreted by the courts, what does that say

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<v Speaker 3>about the fragility or the stability of FED independence.

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<v Speaker 1>Well, it sort of has to be interpreted by the

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<v Speaker 1>courts because this is there's no precedence for this, So

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<v Speaker 1>we don't really know what the law is until the

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<v Speaker 1>courts actually rule on it. So the courts have to decide,

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<v Speaker 1>you know what, what what what's the law intend to do?

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<v Speaker 1>I think most people think that what Lisa Cook did

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<v Speaker 1>does not represent four cause dismissal from her governorship, but

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<v Speaker 1>it's up for the courts to adjudicate that.

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<v Speaker 3>So, Bill, if we're in a scenario where it seems

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<v Speaker 3>like we might be that this is a FED that

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<v Speaker 3>wants to start to ease policy, that it wants to cut,

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<v Speaker 3>but because of all these proceedings in the background, you

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<v Speaker 3>get some real tension on the long end of the curve.

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<v Speaker 3>What would the FED do in that case that it

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<v Speaker 3>wants to cut, it wants to ease, but the markets

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<v Speaker 3>do something different.

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<v Speaker 1>Well, I think the Federal do what it thinks is

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<v Speaker 1>appropriate to achieve its subjectives on employment and inflation, and

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<v Speaker 1>policy certainly signals that his Jackson Hall remarks that he's

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<v Speaker 1>worried about the downside risk to the labor market more

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<v Speaker 1>than he's worried about the upside risk to inflation, and

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<v Speaker 1>so his view that Manterrey policy is currently restrictive. He

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<v Speaker 1>basically set a signal that is highly likely the FED

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<v Speaker 1>is going to cut rates in September. And I don't

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<v Speaker 1>think this changes any of that. What it does change

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<v Speaker 1>is down the road when the FED Reserve acts. When

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<v Speaker 1>the Fed Reserve if they cut rates at subsequent times,

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<v Speaker 1>is that because they think that's the appropriate thing to

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<v Speaker 1>do for the economy, or because it's because they're under

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<v Speaker 1>pressure from the Trump administration putting a lot of pressure

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<v Speaker 1>on a central bank is in my mind, somewhat counterproductive

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<v Speaker 1>because it basically causes people to start to wonder is

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<v Speaker 1>the Central Bank doing what is appropriate to achieve its

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<v Speaker 1>objectives or is it caving into pressure from the administration.

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<v Speaker 2>Well, you've got great contacts. Do you sense that shift

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<v Speaker 2>is already underway?

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<v Speaker 1>No, I don't think so. I think there is a

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<v Speaker 1>case to cut rates in September. I'm not sure I

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<v Speaker 1>would be in that camp. I'm not as convinced that

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<v Speaker 1>monetary policy actually is restrictive today, and I am more

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<v Speaker 1>worried that the rise in inflation caused by the path

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<v Speaker 1>through of the tariffs will you could be end up

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<v Speaker 1>being more persistent than Paul does. But that's a reasonable

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<v Speaker 1>point of disagreement. I think that if the Fed cuts

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<v Speaker 1>rates in September is not a big event. The market

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<v Speaker 1>certainly anticipates rate cuts over the next year. They expect

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<v Speaker 1>the Fed eventually to cut rates back down to what

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<v Speaker 1>they view as sort of a neutral federal fund rate

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<v Speaker 1>of around three to three and a half percent.

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<v Speaker 2>Go out of interest. Why are you more concerned about inflation?

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<v Speaker 2>In very simple terms, the FED chair has basically come

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<v Speaker 2>out and said he's not worried about upside risk to

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<v Speaker 2>inflation because of the downside risk to employment. What makes

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<v Speaker 2>you more concerned

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<v Speaker 1>Well, four years of being above your inflation to objective,

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<v Speaker 1>and every year you're above your inflation objective, that increases

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<v Speaker 1>the risk that people start to view this is the

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<v Speaker 1>steady state, and then that starts to flow into wage settlements,

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<v Speaker 1>and then it becomes very difficult to get rid of

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<v Speaker 1>the inflation that's been embedded in the system at that point,