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Speaker 1: Been looking forward to this conversation all morning.

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Speaker 2: Richard Clarida, the Global Economic Advisor at PIMCO and former

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Speaker 2: Fed Reserve Vice chair and a good friend of this

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Speaker 2: program for many, many years. Rich, wonderful to catch up

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Speaker 2: with you, sir. I was thinking back to our conversation

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Speaker 2: we had on the West Coast when Pimco put out

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Speaker 2: their second outlook and you and I talked about what

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Speaker 2: you called the Fed tolerating two points something. Did you

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Speaker 2: hear that from Chairman Powell in that news conference yesterday,

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Speaker 2: because I did.

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Speaker 3: Well, Yeah, I think that, you know, they've had a

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Speaker 3: lot to do, They've done a lot of happy lifting. Ultimately,

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Speaker 3: they do want to get inflation to two but they

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Speaker 3: understand that if a year from now it's running in

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Speaker 3: the twos, that will have been a big accomplishment and

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Speaker 3: they can adjust rates down. They don't, you know, they

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Speaker 3: obviously don't want to tighten too much. And so yes,

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Speaker 3: I think two points something is kicking and alive for

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Speaker 3: sure right now.

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Speaker 1: Rich.

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Speaker 2: It's worth going over what they're basically telling us explicitly,

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Speaker 2: they're willing to cut interest rates with inflation above two percent.

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Speaker 2: How controversial might that be?

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Speaker 3: I'll do a good job explaining it. What they're going

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Speaker 3: to say is, look, as inflation falls, if the FED

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Speaker 3: doesn't count rates, it's actually tightening policy because policy is

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Speaker 3: the real rate. So if the nomine rates unchanged, inflation's following,

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Speaker 3: they're tightening and they won't think they need to add

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Speaker 3: additional tightening if they think the inflation momentum is going

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Speaker 3: in the right way. So that's the way that they

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Speaker 3: will that they'll explain it.

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Speaker 4: The FED was talking a lot about data dependency and

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Speaker 4: how they really aren't giving forward guidance at this point.

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Speaker 4: Did you get a sense of which data could really

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Speaker 4: shift their views before September? Even though we do get

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Speaker 4: a slew of data, we've heard every time them come

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Speaker 4: out and say one data point a trend does not

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Speaker 4: make sure.

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Speaker 3: And I think so they'll have they'll have two more

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Speaker 3: inflation prints and two more labor market prints. But Lisa

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Speaker 3: I thought for a long time that another important development

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Speaker 3: that they're going to be following is what's going on

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Speaker 3: in the labor market. They like the fact that the

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Speaker 3: labor market is buoyant, but wages are going up faster

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Speaker 3: than consistent with the with the two percent targets, so

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Speaker 3: I do think they'll be looking at the labor market data,

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Speaker 3: wage employment cost index, as well as the price inflation.

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Speaker 4: So what would they have to see? How high is

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Speaker 4: the threshold for them to hike again in September or,

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Speaker 4: if not in September, in November.

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Speaker 3: I think it's I think it's maybe a closer call

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Speaker 3: than some of the market pricing right now. You know,

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Speaker 3: they did write down two more hikes in June. We

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Speaker 3: got one of them yesterday, and an overwhelming majority of

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Speaker 3: the committee thought in June that appropriate policy would call

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Speaker 3: for one more hike. So I think certainly one more

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Speaker 3: hike is in play at some point in the fall.

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Speaker 3: You know, the chair said that explicitly. He also said

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Speaker 3: that when he was in Europe a couple of weeks ago.

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Speaker 3: So I don't think it's an overly high hurdle to

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Speaker 3: get that hike. I don't think they necessarily have to

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Speaker 3: do it in September. I will say this, whatever hiking

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Speaker 3: they think they need to do, I think they want

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Speaker 3: to get in this year.

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Speaker 1: Why this year, Rich? Why is that imported?

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Speaker 3: Well, I think a couple of reasons. I think that

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Speaker 3: I think they think they're close to the end anyway,

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Speaker 3: and inflation's moving, however, slowly in their direction, and I

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Speaker 3: think they would like to stay out of the spotlight

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Speaker 3: in an election year. Now we've had the FED hike

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Speaker 3: in election years, oh four, nineteen eighty four come to mind.

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Speaker 3: And they'll do that if they really think they that

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Speaker 3: inflation really requires a much higher ratepath. But I think

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Speaker 3: this cycle is aiming to finish up sometime in the fall.

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Speaker 2: You know that this FED is always criticized. The Committee

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Speaker 2: always faces criticism for something. Some of the criticism we

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Speaker 2: heard from some guests in the news conference before the

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Speaker 2: news conference and after the news conference too, was just

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Speaker 2: how data dependent this FED actually is. They took a

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Speaker 2: break from hiking rich then they come back and hike again.

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Speaker 2: And in the intimated period we had inflation that actually improved,

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Speaker 2: the inflationing backdrops seem to get better, and yet they

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Speaker 2: hiked anyway. How data dependent are they?

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Speaker 3: Well a good good point. Data dependents are very last

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Speaker 3: stick phrase which is opened to various interpretations. I think,

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Speaker 3: on balance really going forward, especially after this meeting yesterday,

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Speaker 3: they really are data dependent. As you know I've said

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Speaker 3: on your air before most of this rate high cycle,

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Speaker 3: they've not been that data dependent. In March of last year,

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Speaker 3: they knew two things. The fund rate was at zero

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Speaker 3: and inflation was at five going to six. That's all

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Speaker 3: the data they needed to set off this very aggressive

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Speaker 3: rate hike cycle. I do think that we do get

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Speaker 3: close to the terminal rate, that the margin is more

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Speaker 3: a data dependent although I did I agree, and I

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Speaker 3: said on Bloomberg after that meeting, it was an awkward

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Speaker 3: pause in June, that's for sure.

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Speaker 4: It's an awkward moment also right now, given that the

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Speaker 4: Fed is removing recession as the base case and we're

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Speaker 4: looking at a soft landing, and yet there's a real

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Speaker 4: question mark among analysts and a real split among investors

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Speaker 4: about whether inflation could reaccelerate as a result of the strength,

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Speaker 4: the resilience the wages. Where do you fall on this?

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Speaker 4: What do you think the Fed falls on this? Given

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Speaker 4: that they it seemed to be taking perhaps a bit

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Speaker 4: more of a dubbish stance.

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Speaker 3: Yes, quite quite. Frankly, Lisa, I was surprised in the

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Speaker 3: press conference. I wasn't surprised to hear the chair says

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Speaker 3: he has many times that he thinks there's a path

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Speaker 3: to a soft landing. That's okay, sure, there's a path,

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Speaker 3: but I was surprised that he invoked the change in

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Speaker 3: the staff forecast. I don't think that was in the

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Speaker 3: June minutes, and so he's obviously entitled to do that.

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Speaker 3: But yes, not my base case, not our base case.

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Speaker 3: But there is a scenario where we get some good

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Speaker 3: news on inflation this fall because the falling rents, used

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Speaker 3: car prices again falling. But if the FED finds itself

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Speaker 3: in Marsha twenty twenty four with an unemployment rate of

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Speaker 3: four an inflation rate of four, you know, with some

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Speaker 3: of that temporary good news behind them, they're in a

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Speaker 3: very tough spot. So I do think it's a risk.

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Speaker 3: It's not the base case, but it's certainly something if

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Speaker 3: I were still there would be I'd be assessing.

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Speaker 4: What do you think right now is the bigger risk

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Speaker 4: rich the idea of inflation reaccelerating and still being a problem,

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Speaker 4: or the idea of recession and avoiding something more entrenched,

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Speaker 4: which could happen if the FED moves slower.

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Speaker 3: Well, personally, I do think that, you know, again I'm

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Speaker 3: in the private sector now, I do think that the FED.

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Speaker 3: The bigger risk is for the FED is to declare

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Speaker 3: a mission accomplished too early and find themselves next year

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Speaker 3: having to restart the rate hike. So if I were there,

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Speaker 3: it would skew me to getting in, you know, that

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Speaker 3: additional hike this year, and I think some members of

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Speaker 3: the committee we'll see it that way, lookly. So the

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Speaker 3: other thing is the Fed's own projection, which I agree with,

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Speaker 3: has unemployment rate rising by about a point by the

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Speaker 3: end of next year. That would be very modest. That

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Speaker 3: would probably be the most modest downturn we've had. But historically,

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Speaker 3: as we know the so rule, whenever the unemployment rate

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Speaker 3: rises by more than a half a point, it's ultimately

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Speaker 3: declared a recession. So I actually think a truly non

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Speaker 3: recession outcome without any rye in the unemployment rate at

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Speaker 3: all is going to be tough. That's my personal view.

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Speaker 2: Would be phenomenal if that materialized. I want to finish

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Speaker 2: on this if we can rich Yeah, no descents. We

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Speaker 2: talked about this yesterday, I've been talking about it for

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Speaker 2: a while. You've been on the committee. Why do people,

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Speaker 2: even when we know they might disagree with the decision,

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Speaker 2: make the decision not to descend.

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Speaker 1: Why does that happen on the committee.

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Speaker 3: Well, you know, the FED has been an institution that's

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Speaker 3: been around for one hundred plus years, and there are

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Speaker 3: certain cultural norms, and certainly it's been a very long

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Speaker 3: time since you've had a governor dissent on a policy

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Speaker 3: rate decision. If you go back to the Vulgar years,

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Speaker 3: he had governors and his vice chair dissenting. But you

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Speaker 3: know since green Span. But the reserve bank presidents can

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Speaker 3: and dossent. Certainly, during my time at the FED, especially

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Speaker 3: in twenty nineteen, we had three descents and we had

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Speaker 3: several presidents saying they would have descended if they had

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Speaker 3: had a vote. So descents can happen. The other thing

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Speaker 3: I should notice, we've had a lot of turnover, a

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Speaker 3: mon jong the regional bank, District Bank presidential, the announcement

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Speaker 3: of Jim Bullard recently ast George at Charlie Evans Rosengrin.

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Speaker 3: You know, there's accumulated fifty plus years of institutional experience

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Speaker 3: that's no longer in that room. I think that's also relevant.

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Speaker 2: Richard, thank you, sir for wang Let's catch up, So

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Speaker 2: next time in studio please Richard Clardy there, the former

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Speaker 2: FED Vice chair and now with pim Co