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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Unfortunately, he's been dreading

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Speaker 1: this all week. Richard claariit with us now. His work

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Speaker 1: at Columbia University definitive on fancy economics called dynamic stochastic

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Speaker 1: general equilibrium theory. Holding court at the FED, his vice chairman,

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Speaker 1: I'm not going to mince words in frankly a professor Claret,

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Speaker 1: are you still at Columbia?

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Speaker 2: I am?

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Speaker 1: You get a piece of chalk out every See. The

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Speaker 1: problem is, Xavier Sally Martin wouldn't allow Ai in the class.

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Speaker 1: You would allow Ai in a freshman class to make

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Speaker 1: the kids smarter.

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Speaker 2: Right, don't. I don't teach a freshman anymore.

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Speaker 1: But would you let Ai in the class?

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Speaker 3: Now?

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Speaker 2: Not in the class room, but when I teach, I

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Speaker 2: assume the students are making reference to it, which is

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Speaker 2: why I've actually put a focus on having in class presentations.

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Speaker 2: There you go, there you go, lul swash and Socratic dialog.

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Speaker 1: I'm going to cut through the chase Socratic dialogue. You

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Speaker 1: saved Jerome Powell, Folks, I'm not going to mince words

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Speaker 1: about it. It's called a dual engine leadership mode model,

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Speaker 1: and it was Clarida's vice chairman and a guy from

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Speaker 1: Wall Street's chairman. And when he came in you allowed

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Speaker 1: him to relax and grow with your prodigious academic abilities.

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Speaker 1: Does Chairman worsh need a Clarita.

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Speaker 2: Well, that that'll be his decision. I enjoyed my four years,

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Speaker 2: That's that's for sure. But there are a lot of

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Speaker 2: good people at the FED, and I think that's a

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Speaker 2: decision he'll he'll make. He's got a very good advice

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Speaker 2: chair right now and Phil at Phil Jefferson. But at

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Speaker 2: some point there will be a vice chair vacancy.

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Speaker 1: Is that something that the committee when he goes in

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Speaker 1: front of these tough guys in the Hill, they can

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Speaker 1: demand you have a vice chair of the academic skills?

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Speaker 2: Well, it's not clear that that's what would be on

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Speaker 2: their wish list, but possibility, I suppose. I mean they

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Speaker 2: could qush that.

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Speaker 1: Certainly.

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Speaker 3: Kevin Warrish has called for a new accord with the

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Speaker 3: Treasury Department. Yeah, what do you mean by that?

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Speaker 2: Well, you know, this is one of those things where

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Speaker 2: this is very what they call in DC, very big

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Speaker 2: tent language. It means different things to different people. The

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Speaker 2: one accord that we do know about, which is the

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Speaker 2: one that was struck in nineteen fifty one between the

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Speaker 2: Treasury and the FED was a signal moment and FED

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Speaker 2: independence because it got the FED out of the business

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Speaker 2: of essentially camping treasure yels. In fact is I'd like

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Speaker 2: to teach my students. We all know that World War

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Speaker 2: Two ended in nineteen forty five, but the FED didn't

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Speaker 2: get the memory until nineteen fifty one because the Truman

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Speaker 2: administration pressured the FED to keep a camp on rates.

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Speaker 2: The FED declare independence in the accord. I think now

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Speaker 2: if there is a Treasury Fed accord, it would not

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Speaker 2: be so much focused on that. It would be focused

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Speaker 2: on for example, should the FED a whole two trillion

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Speaker 2: dollars in mortgage backed securities? Should the FED the composition

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Speaker 2: of the Fed's portfolio really be tilted toward T bills

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Speaker 2: unless from holding ten and thirty year treasury So I

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Speaker 2: think there are a lot of conversations to have, and

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Speaker 2: even during my time on the FED, there were discussions

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Speaker 2: before the pandemic about rethinking the fed s portfolio composition.

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Speaker 2: So I think that's entirely appropriate. But I think we're

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Speaker 2: a long way away from any formal accord.

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Speaker 3: So what do you expect this Federal Reserve to do

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Speaker 3: in County or twenty six.

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Speaker 2: Well, first we have to get the chair confirmed.

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Speaker 3: He's a foregone conclusion, right.

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Speaker 2: I think once he has a hearing, he will get

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Speaker 2: confirmed because he's very well qualified. But it may be

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Speaker 2: maybe a while before he has a hearing. I think

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Speaker 2: it's important to note that the pal FED in December

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Speaker 2: when they release those dots, those famous or infamous dots,

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Speaker 2: the pal FED, or at least a majority of the

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Speaker 2: FED in December, thought at least one rate cut this

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Speaker 2: year would be appropriate, and I think eight folks thought

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Speaker 2: maybe two raycus would be appropriate. So I do think

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Speaker 2: that when Warsh gets in, if the economic data play

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Speaker 2: out the way that I and others expect, I think

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Speaker 2: he'll be able to persuade the committee to continue to

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Speaker 2: cut rights down describe around three percent.

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Speaker 1: Okay, Richard Claarder with his folks, the former vice chairman

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Speaker 1: of the FED, hugely visible, does a great job helping

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Speaker 1: us on the FED day the FED decides thrilledy could

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Speaker 1: be in studio with us for you across the nation

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Speaker 1: and around the world. Thank you for your attendance on

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Speaker 1: YouTube subscribe to Bloomberg A podcast. I look at all this,

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Speaker 1: I look at the parlor game, and just what it

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Speaker 1: comes down to is staggering from meeting from meeting. When

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Speaker 1: mister Wharsh joins, do we have a theory of monetary policy?

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Speaker 1: Or is it every president and governor for themselves?

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Speaker 2: Tom fantastic question, because I do think that based upon

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Speaker 2: what Kevin has said with his very voluminous paper trail

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Speaker 2: over the last fifteen years, I think that will I

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Speaker 2: think that will be a discussion. I think Kevin has

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Speaker 2: expressed some skepticism for reliance on what he believes are

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Speaker 2: flawed models, too much of a backward looking approach. What

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Speaker 2: I would point out, at least during my four years

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Speaker 2: is the palwfed and certainly declared device chair. It was

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Speaker 2: not handcuffed to the models, even though I developed many

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Speaker 2: of them.

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Speaker 1: I'd give you great credit. I'm gonna Paul can I, editor,

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Speaker 1: I give you great credit for this. You are the

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Speaker 1: one person who could have said we'd go for the

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Speaker 1: models well.

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Speaker 2: And in fact, my first speech in October of twenty eighteen,

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Speaker 2: I basically made the case that the economy appeared to

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Speaker 2: have stronger growth potential and a potential for lower unemployment

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Speaker 2: than the FED models thought, and that the POWERFED should

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Speaker 2: be willing if the labor market was continuing to blossom

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Speaker 2: and inflation didn't appear to allow that to happen. In fact,

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Speaker 2: I think I said, you know, monetary policy is not

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Speaker 2: a problem if too many people are working right. And

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Speaker 2: indeed the PALWFED cut rates in twenty nineteen the noun

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Speaker 2: a Plummer rate out of fifty year low. So I

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Speaker 2: think the FED has probably been less handcuffed to models

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Speaker 2: than Kevin's remarks might suggest. But I certainly think based

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Speaker 2: upon that there will be a discussion of the best

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Speaker 2: way to incorporate modeling into FED analysis.

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Speaker 3: What happens to j. Powell when he does step down

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Speaker 3: from fit? Does he stay on the at the FED?

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Speaker 3: Does he leave? Typically they ride off into the sunset?

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Speaker 1: Right they do.

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Speaker 2: In fact, there's only one example in FED history of

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Speaker 2: a chair that did not ride off into the sunset,

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Speaker 2: and a very important FED chair gentleman named Marin Eckles,

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Speaker 2: so important he is a building names there you go.

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Speaker 2: And Eccles was an FDR appointee. And when Harry Truman

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Speaker 2: came in, Harry Truman wanted a different FED chair, but

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Speaker 2: Eckles stayed on for four years as governor and actually

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Speaker 2: turned out to be a real thorn and Harry Truman's side.

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Speaker 2: But fast forward to Pale. You know, j Pal's been

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Speaker 2: asked many times and including at the most recent press conference,

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Speaker 2: what his intentions are when his term is chair is up,

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Speaker 2: and he's really not commented. So there's the possibility he

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Speaker 2: could stay on. I myself think that it's unlikely that

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Speaker 2: he stays on for the remainder of his term, which

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Speaker 2: goes through twenty twenty eight.

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Speaker 1: Richard Clarida with us, so we did a Bloomberg function.

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Speaker 1: It was great. Michael mcke organized it. It was all these

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Speaker 1: worthies in the audience. Catherine Man comes up and gives

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Speaker 1: me a hug. The Queen of descent over at the

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Speaker 1: Bank of England. What's wrong with us being like the

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Speaker 1: Bank of England? And they come out like a Supreme

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Speaker 1: Court decision. Oh no, it's a FED meeting five to

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Speaker 1: four and the chairman voted against the majority. Is that

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Speaker 1: a bad thing?

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Speaker 2: I don't think it's a bad thing. I think the

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Speaker 2: Bank of England, really beginning under Mervyn King's tens actually

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Speaker 2: viewed it as a feature, not a bug, to have

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Speaker 2: close votes encourage thoughtful descent. And as I recall, the

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Speaker 2: governor has been on losing sight on some votes. There

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Speaker 2: unusual in FED history. In fact, I did prepare for

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Speaker 2: your show. I went back and looked. Saint Louis FED

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Speaker 2: has a great database on this, and you'd have to

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Speaker 2: go back to nineteen thirty nineteen thirty nine the last

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Speaker 2: time a chair actually lost an FMC vote, and that

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Speaker 2: was Mariner Eccles. But Jane William Miller and Paul Volker

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Speaker 2: lost votes on discount rate adjustments. But again we're going

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Speaker 2: back forty to fifty years.

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Speaker 1: Did do you prepare for this show? Are you kidding me?

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Speaker 2: You'd be the only one, Richard?

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Speaker 3: What's the FED focusing on now? Is it the labor market?

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Speaker 3: Is it inflation? Where's the balance these days?

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Speaker 2: They've been pretty consistent for a while that inflation's too high.

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Speaker 2: It's been above target for five years, it'll probably be

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Speaker 2: above target this year for six years. But the FED

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Speaker 2: has a dual mandate and the unemployment rate is basically

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Speaker 2: right now at a point that they think is consistent

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Speaker 2: with a healthy labor market. But they are noticing the

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Speaker 2: payroll employment gains have been very much. Indeed, when we

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Speaker 2: get the revisions later this week, it actually may show

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Speaker 2: negative payroll gains in the second half of the year.

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Speaker 2: And so I do think that I take them at

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Speaker 2: their word when they say they would not welcome any

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Speaker 2: additional rise in the unemployment rate, and I think they

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Speaker 2: would react to that. But so long as the economy

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Speaker 2: sort of turns along as people expect, I think they

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Speaker 2: are trying to balance that against their concerns about elevated inflation.

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Speaker 1: Paul Sweeney with Richard Clarita, right now, can I ask,

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Speaker 1: can we go NERD right now out of Monday freezing money? Okay?

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Speaker 1: Did you recruit Woodford to Columbia? Was that your trying?

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Speaker 2: I was not shre when Mike was recruited that, but

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Speaker 2: I certainly was enthusiastic and worked hard on getting him

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Speaker 2: to Columbia, which was a huge appointment for Colombia now

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Speaker 2: twenty two years ago.

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Speaker 1: Yeah, I told you, Michael Woodford. Folks, it's a thousand

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Speaker 1: page book. Everybody owns it. Martin Feldtsen once said, Tom,

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Speaker 1: no one's ever read it cover to cover. Clar I have,

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Speaker 1: but the bottom line and I'm bringing this up, folks,

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Speaker 1: because we had an Ezrab prosade the other day from

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Speaker 1: Cornell with his wonderful important books Doomload the Doom Look

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Speaker 1: really important book, And the bottom line is we assume

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Speaker 1: Woodford like Eiler equations, they come down to a point

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Speaker 1: of stability, and within the system there's stability. The end

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Speaker 1: result is stability, and Professor Presada is saying, no, it's

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Speaker 1: not They're going to go out on the X axis

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Speaker 1: and be unstable.

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Speaker 2: Discuss well, okay, I think at a thirty thousand foot

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Speaker 2: level in thirty seconds, all macro models, or almost all

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Speaker 2: macro models really our best thought of as approximations typically

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Speaker 2: linear in a neighborhood of where you want to be,

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Speaker 2: and the real world can be a lot messier and

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Speaker 2: very nonlinear. Term that I know pops up on this

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Speaker 2: show and I think, what I'm just beginning to read

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Speaker 2: his book, but he's been highlighting is we could be

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Speaker 2: in a prolonged period of very nonlinear market and economic development.

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Speaker 1: Geopolitical development. So if you're halfway through the book, he

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Speaker 1: sold the movie, right, Yeah, DiCaprio's playing. I mean, it's

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Speaker 1: a gloomy book. It's shockingly gloomy.

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Speaker 2: Yeah, yeah, again, I have not I've not worked through it,

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Speaker 2: but I certainly must read for me, So I'll wait

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Speaker 2: till I finish it before our wait.

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Speaker 1: Okay, sure, hey, Richard worked.

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Speaker 3: We're thirteen months into this whole tariff thing. I'm going

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Speaker 3: to look back on and say, boy, this was nothing.

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Speaker 3: It didn't seem to be that big of an issue.

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Speaker 3: And that's not when I heard it. Early on. I

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Speaker 3: heard a lot of folks saying, boy, this is going

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Speaker 3: to be inflationary and so on and so forth. We

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Speaker 3: just haven't seen it. So with a little bit of hindsight.

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Speaker 2: Yeah, yeah, what's happened. So let me reinforce what you

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Speaker 2: said when we eventually, when we get the data for

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Speaker 2: twenty twenty five, it may show GDP growth this as

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Speaker 2: it was in twenty twenty four, maybe down to tenth.

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Speaker 2: It will likely show inflation unchanged from twenty twenty four,

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Speaker 2: And so a future historian may well say what you

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Speaker 2: just said, which is what was the big deal? GDP

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Speaker 2: growth didn't move, inflation didn't move. I think a couple

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Speaker 2: of things. One is that the ultimate tariffs put in

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Speaker 2: place were a lot lower than the Liberation Day levels,

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Speaker 2: and his best in his emphasized that was part of

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Speaker 2: the negotiating strategy. Secondly, you know, there's a saying in

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Speaker 2: baseball sometimes you'd rather be lucky than good. I think

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Speaker 2: the other thing that happened is whatever headwind there might

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Speaker 2: have been from tariff's counterfactually was offset by the buoyant

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Speaker 2: capax spending, especially by the tech companies, and the fact

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Speaker 2: that the stock market is very optimistic on this story,

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Speaker 2: so that generates a wealth effect and an investment effect.

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Speaker 2: And then thirdly, US companies absorbed more of the tariff

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Speaker 2: hit in somewhat reduced margins, and you know in the

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Speaker 2: Act they did have that room profit margins have been

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Speaker 2: very healthy, and they didn't pass it through to the consumer.

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Speaker 2: And again, of course, we have the IAPA decision the

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Speaker 2: Supreme Court is about to release, and that may further

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Speaker 2: lead to lower Just put it this way. I think

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Speaker 2: if you calculate the actually the tariff revenue we're collecting

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Speaker 2: divided by imports, it's coming in at about ten percent,

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Speaker 2: and liberation day was like thirty five percent. So that's

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Speaker 2: sort of the order of magnitude.

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Speaker 1: I got eight other questions. I gotta squeeze us in

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Speaker 1: to be responsible or zegg and pose and creating a

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Speaker 1: firestorm with an idea of resilient higher rates, or even

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Speaker 1: driving higher rates somewhat due to the surprise of higher

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Speaker 1: wages riding this up. At the Peterson Institute, do you

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Speaker 1: and PIMCO worry about price down yield up?

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Speaker 2: Well, you know, we get paid to worry about it.

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Speaker 2: What we do observe, at least in the treasure rate

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Speaker 2: market is the fact act, which is really since the

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Speaker 2: last FED rate hike, which was two and a half

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Speaker 2: years ago ten, your treasury yields have been in a

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Speaker 2: pretty tight range four and three quarters at the high end,

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Speaker 2: three and three quarters at the low end. Now that

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Speaker 2: also you also need to note that underlying real rates,

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Speaker 2: which we can see from the inflation index bond market,

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Speaker 2: are much higher than they were in twenty nineteen, and

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Speaker 2: so we're going to have a steeper yield curve than

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Speaker 2: we did pre pandemic, which is a good thing. I

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Speaker 2: think we're going to probably have elevated, somewhat elevated volatility

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Speaker 2: relative to the decade before the pandemic, in which rate

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Speaker 2: volatility was suppressed through zero or negative number at one point.

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Speaker 2: I think in Europe, there was like eighteen trillion dollars

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Speaker 2: of negative yielding sovereign debts, so we do pay attention

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Speaker 2: to it, but we think a lot of the repricing

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Speaker 2: that needed to happen because of the fiscal outlook has

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Speaker 2: basically already happened and is in the price.

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Speaker 1: I am begging when you get through the doom loop.

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Speaker 1: When I get through the doomom, I would be honored

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Speaker 1: to have you and Prisada in the same studio together.

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Speaker 1: Would be a service to a lot of people thinking

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Speaker 1: about this. His public service to the nation at the

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Speaker 1: Federal Reserve System. Richard Claritay he is Global Economic Advisor

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Speaker 1: at PIMCO