Speaker 1: Bloomberg Audio Studios, podcasts, radio news joining.
Speaker 2: Us now to extend the conversation, they form a New
Speaker 2: York Fed President Bill Dudley, Bill, Welcome to the program.
Speaker 2: Extensive experience at the Federal Reserve inside that institution. How
Speaker 2: do you think they'll be responding to this this morning?
Speaker 1: They're going to be very unhappy because this is a
Speaker 1: real assault on the Federal reserves independence. And as we know,
Speaker 1: central banks independence is really important for good economic outcomes.
Speaker 1: There's been a reason why we've been moving in the
Speaker 1: direction of greater central bank independence over the less four
Speaker 1: decades across the world because central banks that have independence
Speaker 1: in terms of how they conduct monetary policy to achieve
Speaker 1: the objectives set for them by Congress and the administration,
Speaker 1: to a better job in controlling inflation and keeping the
Speaker 1: economy on a stable path. So this is an assault
Speaker 1: on that. And I'm sort of surprised that the markets
Speaker 1: are so relaxed about this now. Maybe that's because we
Speaker 1: don't know where this is going to go. We don't
Speaker 1: know whether Lisa Cook is going to be able to
Speaker 1: stay in office. It certainly looks like the barf to
Speaker 1: getting her out is quite high because it doesn't seem
Speaker 1: that the for cause it would extend to the allegations
Speaker 1: against her, but she certainly a very minimum deserves her
Speaker 1: day in court.
Speaker 3: Well, Bill, it seems like that is the system that
Speaker 3: is emerging, that we're understanding the contours of FED independence
Speaker 3: from the courts. Be it the most recent ruling that
Speaker 3: said other independent agencies could have their heads fired by Trump,
Speaker 3: but not necessarily the FED without cause. This maybe defining
Speaker 3: having the courts define what cause is. If you off
Speaker 3: a system where it's not encoded in law but instead
Speaker 3: is being interpreted by the courts, what does that say
Speaker 3: about the fragility or the stability of FED independence.
Speaker 1: Well, it sort of has to be interpreted by the
Speaker 1: courts because this is there's no precedence for this, So
Speaker 1: we don't really know what the law is until the
Speaker 1: courts actually rule on it. So the courts have to decide,
Speaker 1: you know what, what what what's the law intend to do?
Speaker 1: I think most people think that what Lisa Cook did
Speaker 1: does not represent four cause dismissal from her governorship, but
Speaker 1: it's up for the courts to adjudicate that.
Speaker 3: So, Bill, if we're in a scenario where it seems
Speaker 3: like we might be that this is a FED that
Speaker 3: wants to start to ease policy, that it wants to cut,
Speaker 3: but because of all these proceedings in the background, you
Speaker 3: get some real tension on the long end of the curve.
Speaker 3: What would the FED do in that case that it
Speaker 3: wants to cut, it wants to ease, but the markets
Speaker 3: do something different.
Speaker 1: Well, I think the Federal do what it thinks is
Speaker 1: appropriate to achieve its subjectives on employment and inflation, and
Speaker 1: policy certainly signals that his Jackson Hall remarks that he's
Speaker 1: worried about the downside risk to the labor market more
Speaker 1: than he's worried about the upside risk to inflation, and
Speaker 1: so his view that Manterrey policy is currently restrictive. He
Speaker 1: basically set a signal that is highly likely the FED
Speaker 1: is going to cut rates in September. And I don't
Speaker 1: think this changes any of that. What it does change
Speaker 1: is down the road when the FED Reserve acts. When
Speaker 1: the Fed Reserve if they cut rates at subsequent times,
Speaker 1: is that because they think that's the appropriate thing to
Speaker 1: do for the economy, or because it's because they're under
Speaker 1: pressure from the Trump administration putting a lot of pressure
Speaker 1: on a central bank is in my mind, somewhat counterproductive
Speaker 1: because it basically causes people to start to wonder is
Speaker 1: the Central Bank doing what is appropriate to achieve its
Speaker 1: objectives or is it caving into pressure from the administration.
Speaker 2: Well, you've got great contacts. Do you sense that shift
Speaker 2: is already underway?
Speaker 1: No, I don't think so. I think there is a
Speaker 1: case to cut rates in September. I'm not sure I
Speaker 1: would be in that camp. I'm not as convinced that
Speaker 1: monetary policy actually is restrictive today, and I am more
Speaker 1: worried that the rise in inflation caused by the path
Speaker 1: through of the tariffs will you could be end up
Speaker 1: being more persistent than Paul does. But that's a reasonable
Speaker 1: point of disagreement. I think that if the Fed cuts
Speaker 1: rates in September is not a big event. The market
Speaker 1: certainly anticipates rate cuts over the next year. They expect
Speaker 1: the Fed eventually to cut rates back down to what
Speaker 1: they view as sort of a neutral federal fund rate
Speaker 1: of around three to three and a half percent.
Speaker 2: Go out of interest. Why are you more concerned about inflation?
Speaker 2: In very simple terms, the FED chair has basically come
Speaker 2: out and said he's not worried about upside risk to
Speaker 2: inflation because of the downside risk to employment. What makes
Speaker 2: you more concerned
Speaker 1: Well, four years of being above your inflation to objective,
Speaker 1: and every year you're above your inflation objective, that increases
Speaker 1: the risk that people start to view this is the
Speaker 1: steady state, and then that starts to flow into wage settlements,
Speaker 1: and then it becomes very difficult to get rid of
Speaker 1: the inflation that's been embedded in the system at that point,