WEBVTT - Bloomberg Opinion Columnist & Former President NY Fed Bank, Bill Dudley, Talks Kevin Warsh

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

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<v Speaker 2>So here's the laces this morning. The Republican Senator Tom

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<v Speaker 2>Tillis Tanning CNN is still planning to block Kevin Walsh's nomination.

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<v Speaker 2>The ongoing DOJ probe into FED Chad J. Powell, clouding

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<v Speaker 2>the confirmation process. The former New York Fed President Bill

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<v Speaker 2>Dudley Jodge us now for more, Bill, welcome, And this

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<v Speaker 2>is a difficult question to answer, so forgive me. We

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<v Speaker 2>go straight to the ram of speculation. But if you

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<v Speaker 2>had to guess what the FMC looks like in the

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<v Speaker 2>month of June, what would you guess it's going to

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<v Speaker 2>look like.

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<v Speaker 1>I assume that somebody's going to blank. Either the Trump

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<v Speaker 1>administration is going to withdraw their investigation of the renovation

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<v Speaker 1>of the headquarters building, or Tom Tillis is going to

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<v Speaker 1>decide that he will align himself with the Republican majority

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<v Speaker 1>in the Centme Banking Committee and vote to firm power.

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<v Speaker 1>But we're not sure. We're not sure. And if they don't,

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<v Speaker 1>you know, if Tillis doesn't withdraw his objection, if the

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<v Speaker 1>Trump administration doesn't stop the probe, then it's very likely

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<v Speaker 1>that Powell will stay on as the acting chair. At

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<v Speaker 1>that point, Trump is threatened to fire Paul as the

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<v Speaker 1>acting chair, and it's not clear legally whether he has

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<v Speaker 1>the authority to do so. So it's a bit of

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<v Speaker 1>a mess. It obviously makes it the job for Kevin

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<v Speaker 1>Wortsch also more difficult, not just because of delaying potentially

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<v Speaker 1>his taking over from Powell, but also he's going to

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<v Speaker 1>be viewed with quite a bit of skepticism, I think

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<v Speaker 1>by the rest of the committee. Is he there to

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<v Speaker 1>do what's appropriate for the Fed in terms of the

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<v Speaker 1>conduct of monetary policy or is he there to do

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<v Speaker 1>the president's bidding.

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<v Speaker 2>So Bill, these are important questions, and we all take

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<v Speaker 2>seriously the threat to central bank independence. But I think

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<v Speaker 2>we also take comfort from how while anchor inflation expectations

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<v Speaker 2>have been throughout all of this, do you see anything

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<v Speaker 2>on the horizon that might upset some of that.

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<v Speaker 1>Well, Inflations expectations are anchored in part because people think

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<v Speaker 1>the federal do the right thing, so it's not independent

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<v Speaker 1>of the behavior. So I think that people would be

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<v Speaker 1>very upset. I think if Powell is somehow fired and

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<v Speaker 1>it goes into the courts and it has to be adjudicated,

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<v Speaker 1>Kevin Worsh, I think is going to have to win

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<v Speaker 1>the hearts and minds of the rest of the Federal

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<v Speaker 1>Open Market Committee. I think it's very unlikely that the

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<v Speaker 1>Fed's going to cut rates in June. I think the

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<v Speaker 1>headline inflation going to be close to four percent on

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<v Speaker 1>a year over year basis. Then I think the sentiment

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<v Speaker 1>is going to be to watch and wait, and in

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<v Speaker 1>part to ensure that inflation expectations do stay well anchored.

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<v Speaker 3>We saw yesterday Treasury Secretary Scott Peasant came out and

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<v Speaker 3>took the heat off of Kevin Orsh should he become

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<v Speaker 3>a FED chair by May fifteenth, as is expected or

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<v Speaker 3>at least scheduled, saying that he would understand if the

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<v Speaker 3>FED needs to wait on rate cuts, even if he

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<v Speaker 3>ultimately saw large cuts. Beyond that, how do you see

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<v Speaker 3>a Treasury Fed accord working together to shrink the balance

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<v Speaker 3>sheet and reshape the way that the FED controls rates

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<v Speaker 3>at the front end and the shape of the curve.

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<v Speaker 1>I don't think they're going to change how they execute

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<v Speaker 1>monetary policy. I think they're going to remain in a

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<v Speaker 1>regime where reserves are above the supply, reserves above the demand, reserves. Well,

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<v Speaker 1>I think they're going to do is make some changes

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<v Speaker 1>structurally that reduce the demand for reserves. And if the

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<v Speaker 1>demand for reserves can come down, then the supply of

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<v Speaker 1>reserves can come down and the balance sheet can shrink.

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<v Speaker 1>But I think what's probably being exaggerated a little bit

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<v Speaker 1>is how much restraint that will cause. If you shrink

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<v Speaker 1>the balance sheet, I say, at trillion dollars, which is

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<v Speaker 1>probably an order of magnitude that we're talking about, it's

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<v Speaker 1>going to exert very little real restraint on the economy.

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<v Speaker 1>So the idea that balance sheet reduction can lead to

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<v Speaker 1>dramatic declines and short term rates, I just don't think

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<v Speaker 1>that's credible.

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<v Speaker 3>I remember back in twenty twenty one, you came on

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<v Speaker 3>the show and you said that ten year yields could

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<v Speaker 3>be at five percent. You could see FED funds rates

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<v Speaker 3>at five percent. Given the inflation building and the system

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<v Speaker 3>right now, do you think that people are overly sanguine

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<v Speaker 3>with just how much inflation is building in the system

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<v Speaker 3>as a result of the commodity shock stemming from the

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<v Speaker 3>Middle East.

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<v Speaker 1>Well, I think that it's correct for the FED to

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<v Speaker 1>think of this as a temporary shock that energy prices

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<v Speaker 1>are probably going to go back down in the fullness

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<v Speaker 1>of time, but I think they're constrained for two reasons.

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<v Speaker 1>Number one, we've been missing the inflation target to the

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<v Speaker 1>upside for five years in a row, so every month

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<v Speaker 1>and year you stretch that out, there's more risk to

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<v Speaker 1>inflation expectations. And number two, the Fed's independence is under attack.

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<v Speaker 1>The feds independence was not under attack, the risk to

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<v Speaker 1>inflation expectations would be significantly lower.

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<v Speaker 2>Bill, It's going to see you. Thanks for your stern conversation.

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<v Speaker 2>There built out be there, the former New York Fed

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<v Speaker 2>president some pretty pointed, pointed opinions on the future of

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<v Speaker 2>this central bank and the threast to independence that we've

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<v Speaker 2>seen building from the administration this year.