Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: So here's the laces this morning. The Republican Senator Tom
Speaker 2: Tillis Tanning CNN is still planning to block Kevin Walsh's nomination.
Speaker 2: The ongoing DOJ probe into FED Chad J. Powell, clouding
Speaker 2: the confirmation process. The former New York Fed President Bill
Speaker 2: Dudley Jodge us now for more, Bill, welcome, And this
Speaker 2: is a difficult question to answer, so forgive me. We
Speaker 2: go straight to the ram of speculation. But if you
Speaker 2: had to guess what the FMC looks like in the
Speaker 2: month of June, what would you guess it's going to
Speaker 2: look like.
Speaker 1: I assume that somebody's going to blank. Either the Trump
Speaker 1: administration is going to withdraw their investigation of the renovation
Speaker 1: of the headquarters building, or Tom Tillis is going to
Speaker 1: decide that he will align himself with the Republican majority
Speaker 1: in the Centme Banking Committee and vote to firm power.
Speaker 1: But we're not sure. We're not sure. And if they don't,
Speaker 1: you know, if Tillis doesn't withdraw his objection, if the
Speaker 1: Trump administration doesn't stop the probe, then it's very likely
Speaker 1: that Powell will stay on as the acting chair. At
Speaker 1: that point, Trump is threatened to fire Paul as the
Speaker 1: acting chair, and it's not clear legally whether he has
Speaker 1: the authority to do so. So it's a bit of
Speaker 1: a mess. It obviously makes it the job for Kevin
Speaker 1: Wortsch also more difficult, not just because of delaying potentially
Speaker 1: his taking over from Powell, but also he's going to
Speaker 1: be viewed with quite a bit of skepticism, I think
Speaker 1: by the rest of the committee. Is he there to
Speaker 1: do what's appropriate for the Fed in terms of the
Speaker 1: conduct of monetary policy or is he there to do
Speaker 1: the president's bidding.
Speaker 2: So Bill, these are important questions, and we all take
Speaker 2: seriously the threat to central bank independence. But I think
Speaker 2: we also take comfort from how while anchor inflation expectations
Speaker 2: have been throughout all of this, do you see anything
Speaker 2: on the horizon that might upset some of that.
Speaker 1: Well, Inflations expectations are anchored in part because people think
Speaker 1: the federal do the right thing, so it's not independent
Speaker 1: of the behavior. So I think that people would be
Speaker 1: very upset. I think if Powell is somehow fired and
Speaker 1: it goes into the courts and it has to be adjudicated,
Speaker 1: Kevin Worsh, I think is going to have to win
Speaker 1: the hearts and minds of the rest of the Federal
Speaker 1: Open Market Committee. I think it's very unlikely that the
Speaker 1: Fed's going to cut rates in June. I think the
Speaker 1: headline inflation going to be close to four percent on
Speaker 1: a year over year basis. Then I think the sentiment
Speaker 1: is going to be to watch and wait, and in
Speaker 1: part to ensure that inflation expectations do stay well anchored.
Speaker 3: We saw yesterday Treasury Secretary Scott Peasant came out and
Speaker 3: took the heat off of Kevin Orsh should he become
Speaker 3: a FED chair by May fifteenth, as is expected or
Speaker 3: at least scheduled, saying that he would understand if the
Speaker 3: FED needs to wait on rate cuts, even if he
Speaker 3: ultimately saw large cuts. Beyond that, how do you see
Speaker 3: a Treasury Fed accord working together to shrink the balance
Speaker 3: sheet and reshape the way that the FED controls rates
Speaker 3: at the front end and the shape of the curve.
Speaker 1: I don't think they're going to change how they execute
Speaker 1: monetary policy. I think they're going to remain in a
Speaker 1: regime where reserves are above the supply, reserves above the demand, reserves. Well,
Speaker 1: I think they're going to do is make some changes
Speaker 1: structurally that reduce the demand for reserves. And if the
Speaker 1: demand for reserves can come down, then the supply of
Speaker 1: reserves can come down and the balance sheet can shrink.
Speaker 1: But I think what's probably being exaggerated a little bit
Speaker 1: is how much restraint that will cause. If you shrink
Speaker 1: the balance sheet, I say, at trillion dollars, which is
Speaker 1: probably an order of magnitude that we're talking about, it's
Speaker 1: going to exert very little real restraint on the economy.
Speaker 1: So the idea that balance sheet reduction can lead to
Speaker 1: dramatic declines and short term rates, I just don't think
Speaker 1: that's credible.
Speaker 3: I remember back in twenty twenty one, you came on
Speaker 3: the show and you said that ten year yields could
Speaker 3: be at five percent. You could see FED funds rates
Speaker 3: at five percent. Given the inflation building and the system
Speaker 3: right now, do you think that people are overly sanguine
Speaker 3: with just how much inflation is building in the system
Speaker 3: as a result of the commodity shock stemming from the
Speaker 3: Middle East.
Speaker 1: Well, I think that it's correct for the FED to
Speaker 1: think of this as a temporary shock that energy prices
Speaker 1: are probably going to go back down in the fullness
Speaker 1: of time, but I think they're constrained for two reasons.
Speaker 1: Number one, we've been missing the inflation target to the
Speaker 1: upside for five years in a row, so every month
Speaker 1: and year you stretch that out, there's more risk to
Speaker 1: inflation expectations. And number two, the Fed's independence is under attack.
Speaker 1: The feds independence was not under attack, the risk to
Speaker 1: inflation expectations would be significantly lower.
Speaker 2: Bill, It's going to see you. Thanks for your stern conversation.
Speaker 2: There built out be there, the former New York Fed
Speaker 2: president some pretty pointed, pointed opinions on the future of
Speaker 2: this central bank and the threast to independence that we've
Speaker 2: seen building from the administration this year.