WEBVTT - PIMCO Managing Director Richard Clarida Talks Inflation

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

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<v Speaker 2>Okay, we're gonna go walk on you now as you

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<v Speaker 2>go to Richard Clareda, who changed Columbia economics forever now

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<v Speaker 2>at pimcoh and we're thrilled the Vice Sherman could join

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<v Speaker 2>us this morning. What an honorative Michael Spence and the

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<v Speaker 2>laureate and Richard Porters of London Business School talking about

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<v Speaker 2>John Hicks and long ago there was a thing that

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<v Speaker 2>was invented called the Hicks Hanson model, which now we

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<v Speaker 2>call the ISLM model. And the bottom line is the

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<v Speaker 2>financial media completely focuses on financial LM dynamics money this

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<v Speaker 2>you know, the interest rate? What's inflation can do? Oh yeah,

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<v Speaker 2>there's an is curve which has to ask some zab

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<v Speaker 2>the real economy on it. Rich Clareda, is this fed

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<v Speaker 2>completely riveted to inflation or can they perchance look at

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<v Speaker 2>the American leader of me. If you'd asked me.

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<v Speaker 3>That question, which I think you did two years ago,

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<v Speaker 3>I'd say they're focused on inflation because it was too

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<v Speaker 3>damn high for to today they're saying, and I believe

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<v Speaker 3>that they do see the risk as two sided. I

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<v Speaker 3>think if we did see a sharp slowing in the

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<v Speaker 3>labor market, they would respond because inflation is now close

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<v Speaker 3>enough to target, they can afford to be flexible two

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<v Speaker 3>years ago when inflation was six seven percent.

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<v Speaker 2>Now with the fancy PhD is often Columbia at the

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<v Speaker 2>Eckles Building when you quote unquote focus on labor by

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<v Speaker 2>definition your ex post you have to wait for the

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<v Speaker 2>labor economy to break. You can't anticipate it in a

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<v Speaker 2>given central bank.

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<v Speaker 3>That's a very fundamental question because ideally central bankers, and

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<v Speaker 3>based on including on my own research with Gertler and Galley,

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<v Speaker 3>in a perfect world, you would anticipate if you saw

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<v Speaker 3>the labor market slowing, you try to get ahead. That's

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<v Speaker 3>forwardlooking monetary policy, as I learned in practice. However, the

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<v Speaker 3>economy is always changing, and what was a good model

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<v Speaker 3>five years ago it may not be a good model now.

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<v Speaker 3>So there's a real element of risk management as well.

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<v Speaker 3>But I well a good example of that Tom when

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<v Speaker 3>during my time there, the models were saying, you guys

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<v Speaker 3>are got to keep hiking rates because the unemployment rates

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<v Speaker 3>at four point two percent. In our models say inflation's coming.

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<v Speaker 3>And Jay Pall and I the committee didn't see inflation

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<v Speaker 3>so we didn't hike rates in twenty nineteen. In fact,

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<v Speaker 3>we cut a little bit so the economy could keep going.

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<v Speaker 3>So there's risk on both sides, and I think good

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<v Speaker 3>monetary policy needs to be nimble and assess that.

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<v Speaker 1>You know, central bank inflation targeting I mean, Richard, I

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<v Speaker 1>mean this is something that you know. I mean, we felt,

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<v Speaker 1>at least in emerging markets that central banks had found religion.

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<v Speaker 1>And here we are, and we're seeing central banks cutting

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<v Speaker 1>in the face of a FED on hold. And my

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<v Speaker 1>question for you is how long can that last?

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<v Speaker 3>This divergence? Certainly, I think there was some talk at

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<v Speaker 3>the beginning of the year other countries would not even

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<v Speaker 3>begin to cut until the FED diad. I never believe that,

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<v Speaker 3>And I see, we've already seen Sweden, We've seen Switzerland.

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<v Speaker 3>We're almost certainly going to see Madame Leguarde and the

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<v Speaker 3>ECB tomorrow. So I think certainly central banks can get

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<v Speaker 3>those rate cuts, and I think they could proceed much

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<v Speaker 3>further than the FED if their inflation data supports that decision.

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<v Speaker 3>I think the challenge right now in Europe and the

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<v Speaker 3>UK is the inflation data at best is moving sideways,

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<v Speaker 3>and some measures is moving up, so that may limit

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<v Speaker 3>the number of cuts they get in this year, not

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<v Speaker 3>because they're focused on the FED, but because inflation is

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<v Speaker 3>not cooperating.

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<v Speaker 1>I mean, you just hit the nail on the head.

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<v Speaker 1>I mean, look, this inflation is not cooperating right now

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<v Speaker 1>with the ECB and Madam lecguard is this is an

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<v Speaker 1>interesting experiment, Tom, I mean, can the ECB, I mean

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<v Speaker 1>it's twenty five BIPs? What are they going to cut

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<v Speaker 1>the deeper way to four seventy five? Is that really

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<v Speaker 1>going to juice growth in the Eurozone? I mean, do

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<v Speaker 1>you think that's enough? Do you think they're going to

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<v Speaker 1>have to continue to go more or can they cut

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<v Speaker 1>pause and wait and see what the FED does.

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<v Speaker 3>My guess now is that that that they will pause

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<v Speaker 3>in the sense I don't see them moving at the

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<v Speaker 3>meeting after the June meeting based upon on the data. Now.

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<v Speaker 3>In fact, maybe I just a venture there could be

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<v Speaker 3>a little bit of seller's remorse because they really signals

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<v Speaker 3>this rate cut beginning in March, and I think they're

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<v Speaker 3>going to get it in, and I think it makes

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<v Speaker 3>sense to get it in, But I would not extrapolate

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<v Speaker 3>from this that it's going to be every meeting, I

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<v Speaker 3>really do think. And I saw a wonderful speech that

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<v Speaker 3>Madame Leguard gave at the ECB Watchers, where I also

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<v Speaker 3>spoke in March. It was one of her best speeches,

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<v Speaker 3>and the message I got from that is she is

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<v Speaker 3>very data dependent and if the data doesn't cooperate, right,

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<v Speaker 3>that's going to be a factor.

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<v Speaker 2>Inner jackson whole speech, which recovered was the same ideas, Okay,

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<v Speaker 2>we're data dependent, but let's have a longer vision as well.

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<v Speaker 2>Richard Clarita, I have to have a nerd book of

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<v Speaker 2>the summer. And it's Adam Posen's fault. We'll blame him

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<v Speaker 2>out of Peterson Institute, Marie Sobsfeld and Douger when talking

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<v Speaker 2>about trade, talking about what's out there and all of this,

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<v Speaker 2>and we're going to get Brad Setzer in here. But

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<v Speaker 2>I deglobalization. Defen's got to worry about the rest of

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<v Speaker 2>the world as well. Do they work within regional trading

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<v Speaker 2>blocks now or do we still have a hybrid trade

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<v Speaker 2>economy that can be part of our growth.

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<v Speaker 3>Well, obviously globalization, I think it's clear has peaked, and

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<v Speaker 3>so the real question for the next five, ten, fifteen,

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<v Speaker 3>twenty years is what does on sharing, friends, sharing, supply

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<v Speaker 3>chain rethink. How does that translate? But I will say

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<v Speaker 3>it's very relevant tom to monetary policy because in the

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<v Speaker 3>thirty years before the pandemic, globalization made the FED job

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<v Speaker 3>easier because it put dowur rice pressure on goods and

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<v Speaker 3>in labor markets. And if it reverses, that means that

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<v Speaker 3>the margin that does jobs harder.

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<v Speaker 2>Right now, and this goes to the meeting next week,

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<v Speaker 2>You've got a partition of domestic final sales which are

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<v Speaker 2>actually pretty good. But I'm sorry you bolt on a

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<v Speaker 2>few other statistics, including trade, and it's a sub two

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<v Speaker 2>percent economy. Yeah, which is it?

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<v Speaker 3>My own sense is that we're heading down to around

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<v Speaker 3>a two percent economy, with a risk that we could

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<v Speaker 3>overshoot in the other direction. I think it's too soon

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<v Speaker 3>to tell, but some of the data, including the Bloomber

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<v Speaker 3>Surprise indest it has moved into negative territory. We saw

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<v Speaker 3>Atlanta FED marked down from four to one eight in

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<v Speaker 3>the last couple of weeks, so Bear's watching rich.

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<v Speaker 1>We talk about data dependence here in the US, and

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<v Speaker 1>we have two big data points coming out. We have

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<v Speaker 1>the ISM services coming up tomorrow and then followed by payrolls.

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<v Speaker 1>But I think it's those sub components. So I'm asking you,

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<v Speaker 1>what are you really looking at? Within the data, You're

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<v Speaker 1>looking at prices, paid, new orders. In the ising data

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<v Speaker 1>you looking at you know, libor force size, average hourly earnings.

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<v Speaker 1>I mean, what are you most focused on over the

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<v Speaker 1>next couple of years.

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<v Speaker 3>At some level, the flip answer would be all the

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<v Speaker 3>all the above. You know, certainly when you're at the FED,

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<v Speaker 3>you are looking at everything. But I would say that,

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<v Speaker 3>if I had to prioritize, I'm focused more on the

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<v Speaker 3>cost side of the economy right now, in the sense

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<v Speaker 3>that everyone agrees that the labor market needs to adjust

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<v Speaker 3>to be consistent with the inflation mandate, and I would

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<v Speaker 3>say that the numbers there are are encouraging. We've seen

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<v Speaker 3>a big disceleration and wage inflation that may create some

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<v Speaker 3>political problems for the incumbent, but from the Fed's point

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<v Speaker 3>of view, it's moving wage inflation in the direction of

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<v Speaker 3>consistent with price to ability, unlike, for example, what we're

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<v Speaker 3>seeing in the year Zone in the UK. So I

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<v Speaker 3>think labor market and the cost side of the economy

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<v Speaker 3>is what I be focused on. I think the demand

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<v Speaker 3>side will take care of itself.

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<v Speaker 2>I'm out of time. Can you come back, of course

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<v Speaker 2>if we can get you in for fed DA great,

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<v Speaker 2>Thank you so much so, former vice chairman of the fed.

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<v Speaker 2>I can't say enough about what he did to rebuild

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<v Speaker 2>Columbia economics a number of years ago. He's at a

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<v Speaker 2>small shop or they play golf. Pimo Small West Coast,

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<v Speaker 2>Coast