WEBVTT -  Former New York Fed President and Bloomberg Opinion Columnist Bill Dudley Talks Tariffs & Inflation Affect Federal Reserve 

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

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<v Speaker 2>Let's turn back to the tride story tariffs. They form

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<v Speaker 2>a New York Fed. President Bill Duty saying Trump's tariffs

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<v Speaker 2>will be worse than market's thing right, saying, markets seem

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<v Speaker 2>to think that if the President once stopped the damage,

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<v Speaker 2>the Fed will. I think they're too complacent. Bill joined

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<v Speaker 2>us now for more. Bill, welcome to the program, sir,

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<v Speaker 2>great Pace, let's talk about it. Why do you think

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<v Speaker 2>that's too complacent.

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<v Speaker 1>I think the problem is that the players are bad

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<v Speaker 1>for growth and bad for inflation, which puts a FED

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<v Speaker 1>in a buying Basically, they're missing by more on both

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<v Speaker 1>sides of their mandate. So I think in the near

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<v Speaker 1>term and the Fed's going to basically be on hold

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<v Speaker 1>waiting for more information. Trump administration is making the matter

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<v Speaker 1>worse because not only are they putting tariffs in place,

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<v Speaker 1>they are much larger than they do during the first term.

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<v Speaker 1>They're doing it in a very haphazard, irregular way, which

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<v Speaker 1>is creating a lot of uncertainty. You know, the decline

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<v Speaker 1>in merger activity in the four months of this year

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<v Speaker 1>is pretty strike. People expected merger activity to pick up

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<v Speaker 1>with the Trump administration it's actually gone down because nobody

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<v Speaker 1>knows what the rules of the game are going to

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<v Speaker 1>be in terms of relative prices for inputs, relative prices

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<v Speaker 1>for exports. So people are very confused and people are

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<v Speaker 1>just sitting on their hands.

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<v Speaker 3>Bill, as John was just saying, you wrote this line.

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<v Speaker 3>Market seem to think that if the President won't stop

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<v Speaker 3>the damage, the Federal Reserve will with rate cuts. Where

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<v Speaker 3>do you think they have the political leverage to not

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<v Speaker 3>cut rates at a time when they are seeing quite

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<v Speaker 3>a bit of potential destruction to the US economic outlook.

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<v Speaker 1>Well, it all depends on what happens to inflation, how

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<v Speaker 1>high does it go, and too does it get into

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<v Speaker 1>inflation expectations. The inflation expectations are the key key issue

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<v Speaker 1>for the Fed. The second thing they're going to be

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<v Speaker 1>focusing on how much does the unemployment rate rise. It's

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<v Speaker 1>not about job creation, it's about the unemploying rate. One

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<v Speaker 1>thing that people don't really understand, I think well is

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<v Speaker 1>the fact that we don't need a lot of job

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<v Speaker 1>creation to keep the unemployment rate here, because the growth

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<v Speaker 1>rate of the labor force has collapsed with the Trump administration,

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<v Speaker 1>where DeepArt tape where deporting workers, the number of people

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<v Speaker 1>coming over the borders has collapsed. The growth rate of

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<v Speaker 1>the native border population is really slow. So top speed

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<v Speaker 1>for the US of commune in terms of keeping unemployment

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<v Speaker 1>rate where it is probably fifty thousand in the payroll

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<v Speaker 1>employment a month, and I think people think that one

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<v Speaker 1>hundred and fifty two hundred thousand, if it slows to

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<v Speaker 1>fifty thousand, the Fed's going to cut I think that's wrong.

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<v Speaker 3>Well, I understand the argument that the FED put isn't

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<v Speaker 3>exactly there, that the FED is going to come in

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<v Speaker 3>and cut rates in response to market turmoil. At the

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<v Speaker 3>same time, there is an argument that some of the

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<v Speaker 3>terriff related inflationary forces are one time price adjustments that

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<v Speaker 3>will eventually come down, especially with a weakening economic outlook,

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<v Speaker 3>and that they can look through that a bit more

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<v Speaker 3>in place a bigger emphasis on the unemployment rate and

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<v Speaker 3>other economic indicators. Do you push back against that.

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<v Speaker 1>Well, again, it depends on whether it gets into inflation expectations.

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<v Speaker 1>The first term Trump, the tariff increases were relatively modest.

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<v Speaker 1>It wasn't an inflation issue because inflation was running below

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<v Speaker 1>the fedes two percent objective. This time, the teriff increases,

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<v Speaker 1>our orders of magnitude larger, and it's happening at the

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<v Speaker 1>time that inflation has been running well above the fedes

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<v Speaker 1>two percent objective for four years. So inflation expectations are

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<v Speaker 1>the key. And one troubling indicator in that regard is

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<v Speaker 1>what the University of Michigan Household Expectations Survey showed last

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<v Speaker 1>month for five to ten year forward inflation expectations, it

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<v Speaker 1>rose to three and a half percent, the highest level

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<v Speaker 1>since the nineteen nineties. So if that is corroborated by

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<v Speaker 1>other inflation expectations indicators, that's going to make it much

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<v Speaker 1>more difficult for the FED.

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<v Speaker 3>Bill You're talking about the upcoming economic projections we're going

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<v Speaker 3>to get from the Fed, and you say inflation will

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<v Speaker 3>be increased, but the path for the unemployment rate won't

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<v Speaker 3>change much as labor force growth slows along with hiring.

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<v Speaker 1>Are you basically saying the Fed and their projections are

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<v Speaker 1>going to almost pinpoint stagflation. Well, I think they have

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<v Speaker 1>to lower their growth estimates given the uncertainty that the

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<v Speaker 1>terrts are causing and the fact that it makes the

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<v Speaker 1>real income for lower income households very much squeeze. So

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<v Speaker 1>they're not going to be able to spend very much.

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<v Speaker 1>They have to raise inflation because the price level of

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<v Speaker 1>a lot of these important goods is going to go

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<v Speaker 1>up pretty significantly. So I think that's sort of in

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<v Speaker 1>the cards. I think what's going to surprise people is

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<v Speaker 1>that they're not going to raise their unemployment rate projectory

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<v Speaker 1>very much. And I think that people maybe be surprised

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<v Speaker 1>that they're not going to increase the number of rate

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<v Speaker 1>cuts they have in their forecasts. Last time, they had

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<v Speaker 1>two rate cuts for twenty twenty five, and I think

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<v Speaker 1>they'll keep it right there.

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<v Speaker 2>Bill, let's just talk about those forecasts. What is the

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<v Speaker 2>approach to putting forecasts together in a moment like this.

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<v Speaker 2>How much of a conversation happens between individual policymakers actually with.

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<v Speaker 1>Regard to the summary of economic projections, everyone sort of

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<v Speaker 1>does their own, so this is not coordinated. You are allowed,

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<v Speaker 1>towards the end of the Federal Open Market Committed Meeting

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<v Speaker 1>to change your forecast based on what you've heard from others,

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<v Speaker 1>but people rarely do that, So these things are really

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<v Speaker 1>put into place before the meeting starts and hardly ever changed.

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<v Speaker 3>A lot of people expect the statement of economic projection

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<v Speaker 3>not to really move that signific ken Lee, and if

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<v Speaker 3>they do, for it to essentially be irrelevant because they

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<v Speaker 3>don't know anything, do you disagree? Do you think that

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<v Speaker 3>it will be indicative of what kinds of scenario analysis

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<v Speaker 3>individual members are doing and how much they're incorporating policy

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<v Speaker 3>for their outlook.

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<v Speaker 1>I think the reason that matters is the fact that

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<v Speaker 1>I think people are looking for the FED to sort

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<v Speaker 1>of come to the rescue of the economy by cutting rays.

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<v Speaker 1>And you've seen it then in the decline and ten

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<v Speaker 1>your treasure note heels over the last few months, and

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<v Speaker 1>I think the Fed's doing a signal through the Summary

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<v Speaker 1>of Economic Projections and in Chairman Paul's press conference, is

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<v Speaker 1>that No, we're sitting on our hands for the time being.

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<v Speaker 2>Bill Duntley with the license great pay on Bloomberg Opinion.

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<v Speaker 2>That Bloomberg column available on Bloomberg Dot comment on the

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<v Speaker 2>Bloomberg terminal Bill, Thank you, sir. As always, they form

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<v Speaker 2>a New York Fed President, Bill Duntle that on the

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<v Speaker 2>Federal reserve and whether that FED put is alive and

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<v Speaker 2>well