Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Unfortunately, he's been dreading
Speaker 1: this all week. Richard claariit with us now. His work
Speaker 1: at Columbia University definitive on fancy economics called dynamic stochastic
Speaker 1: general equilibrium theory. Holding court at the FED, his vice chairman,
Speaker 1: I'm not going to mince words in frankly a professor Claret,
Speaker 1: are you still at Columbia?
Speaker 2: I am?
Speaker 1: You get a piece of chalk out every See. The
Speaker 1: problem is, Xavier Sally Martin wouldn't allow Ai in the class.
Speaker 1: You would allow Ai in a freshman class to make
Speaker 1: the kids smarter.
Speaker 2: Right, don't. I don't teach a freshman anymore.
Speaker 1: But would you let Ai in the class?
Speaker 3: Now?
Speaker 2: Not in the class room, but when I teach, I
Speaker 2: assume the students are making reference to it, which is
Speaker 2: why I've actually put a focus on having in class presentations.
Speaker 2: There you go, there you go, lul swash and Socratic dialog.
Speaker 1: I'm going to cut through the chase Socratic dialogue. You
Speaker 1: saved Jerome Powell, Folks, I'm not going to mince words
Speaker 1: about it. It's called a dual engine leadership mode model,
Speaker 1: and it was Clarida's vice chairman and a guy from
Speaker 1: Wall Street's chairman. And when he came in you allowed
Speaker 1: him to relax and grow with your prodigious academic abilities.
Speaker 1: Does Chairman worsh need a Clarita.
Speaker 2: Well, that that'll be his decision. I enjoyed my four years,
Speaker 2: That's that's for sure. But there are a lot of
Speaker 2: good people at the FED, and I think that's a
Speaker 2: decision he'll he'll make. He's got a very good advice
Speaker 2: chair right now and Phil at Phil Jefferson. But at
Speaker 2: some point there will be a vice chair vacancy.
Speaker 1: Is that something that the committee when he goes in
Speaker 1: front of these tough guys in the Hill, they can
Speaker 1: demand you have a vice chair of the academic skills?
Speaker 2: Well, it's not clear that that's what would be on
Speaker 2: their wish list, but possibility, I suppose. I mean they
Speaker 2: could qush that.
Speaker 1: Certainly.
Speaker 3: Kevin Warrish has called for a new accord with the
Speaker 3: Treasury Department. Yeah, what do you mean by that?
Speaker 2: Well, you know, this is one of those things where
Speaker 2: this is very what they call in DC, very big
Speaker 2: tent language. It means different things to different people. The
Speaker 2: one accord that we do know about, which is the
Speaker 2: one that was struck in nineteen fifty one between the
Speaker 2: Treasury and the FED was a signal moment and FED
Speaker 2: independence because it got the FED out of the business
Speaker 2: of essentially camping treasure yels. In fact is I'd like
Speaker 2: to teach my students. We all know that World War
Speaker 2: Two ended in nineteen forty five, but the FED didn't
Speaker 2: get the memory until nineteen fifty one because the Truman
Speaker 2: administration pressured the FED to keep a camp on rates.
Speaker 2: The FED declare independence in the accord. I think now
Speaker 2: if there is a Treasury Fed accord, it would not
Speaker 2: be so much focused on that. It would be focused
Speaker 2: on for example, should the FED a whole two trillion
Speaker 2: dollars in mortgage backed securities? Should the FED the composition
Speaker 2: of the Fed's portfolio really be tilted toward T bills
Speaker 2: unless from holding ten and thirty year treasury So I
Speaker 2: think there are a lot of conversations to have, and
Speaker 2: even during my time on the FED, there were discussions
Speaker 2: before the pandemic about rethinking the fed s portfolio composition.
Speaker 2: So I think that's entirely appropriate. But I think we're
Speaker 2: a long way away from any formal accord.
Speaker 3: So what do you expect this Federal Reserve to do
Speaker 3: in County or twenty six.
Speaker 2: Well, first we have to get the chair confirmed.
Speaker 3: He's a foregone conclusion, right.
Speaker 2: I think once he has a hearing, he will get
Speaker 2: confirmed because he's very well qualified. But it may be
Speaker 2: maybe a while before he has a hearing. I think
Speaker 2: it's important to note that the pal FED in December
Speaker 2: when they release those dots, those famous or infamous dots,
Speaker 2: the pal FED, or at least a majority of the
Speaker 2: FED in December, thought at least one rate cut this
Speaker 2: year would be appropriate, and I think eight folks thought
Speaker 2: maybe two raycus would be appropriate. So I do think
Speaker 2: that when Warsh gets in, if the economic data play
Speaker 2: out the way that I and others expect, I think
Speaker 2: he'll be able to persuade the committee to continue to
Speaker 2: cut rights down describe around three percent.
Speaker 1: Okay, Richard Claarder with his folks, the former vice chairman
Speaker 1: of the FED, hugely visible, does a great job helping
Speaker 1: us on the FED day the FED decides thrilledy could
Speaker 1: be in studio with us for you across the nation
Speaker 1: and around the world. Thank you for your attendance on
Speaker 1: YouTube subscribe to Bloomberg A podcast. I look at all this,
Speaker 1: I look at the parlor game, and just what it
Speaker 1: comes down to is staggering from meeting from meeting. When
Speaker 1: mister Wharsh joins, do we have a theory of monetary policy?
Speaker 1: Or is it every president and governor for themselves?
Speaker 2: Tom fantastic question, because I do think that based upon
Speaker 2: what Kevin has said with his very voluminous paper trail
Speaker 2: over the last fifteen years, I think that will I
Speaker 2: think that will be a discussion. I think Kevin has
Speaker 2: expressed some skepticism for reliance on what he believes are
Speaker 2: flawed models, too much of a backward looking approach. What
Speaker 2: I would point out, at least during my four years
Speaker 2: is the palwfed and certainly declared device chair. It was
Speaker 2: not handcuffed to the models, even though I developed many
Speaker 2: of them.
Speaker 1: I'd give you great credit. I'm gonna Paul can I, editor,
Speaker 1: I give you great credit for this. You are the
Speaker 1: one person who could have said we'd go for the
Speaker 1: models well.
Speaker 2: And in fact, my first speech in October of twenty eighteen,
Speaker 2: I basically made the case that the economy appeared to
Speaker 2: have stronger growth potential and a potential for lower unemployment
Speaker 2: than the FED models thought, and that the POWERFED should
Speaker 2: be willing if the labor market was continuing to blossom
Speaker 2: and inflation didn't appear to allow that to happen. In fact,
Speaker 2: I think I said, you know, monetary policy is not
Speaker 2: a problem if too many people are working right. And
Speaker 2: indeed the PALWFED cut rates in twenty nineteen the noun
Speaker 2: a Plummer rate out of fifty year low. So I
Speaker 2: think the FED has probably been less handcuffed to models
Speaker 2: than Kevin's remarks might suggest. But I certainly think based
Speaker 2: upon that there will be a discussion of the best
Speaker 2: way to incorporate modeling into FED analysis.
Speaker 3: What happens to j. Powell when he does step down
Speaker 3: from fit? Does he stay on the at the FED?
Speaker 3: Does he leave? Typically they ride off into the sunset?
Speaker 1: Right they do.
Speaker 2: In fact, there's only one example in FED history of
Speaker 2: a chair that did not ride off into the sunset,
Speaker 2: and a very important FED chair gentleman named Marin Eckles,
Speaker 2: so important he is a building names there you go.
Speaker 2: And Eccles was an FDR appointee. And when Harry Truman
Speaker 2: came in, Harry Truman wanted a different FED chair, but
Speaker 2: Eckles stayed on for four years as governor and actually
Speaker 2: turned out to be a real thorn and Harry Truman's side.
Speaker 2: But fast forward to Pale. You know, j Pal's been
Speaker 2: asked many times and including at the most recent press conference,
Speaker 2: what his intentions are when his term is chair is up,
Speaker 2: and he's really not commented. So there's the possibility he
Speaker 2: could stay on. I myself think that it's unlikely that
Speaker 2: he stays on for the remainder of his term, which
Speaker 2: goes through twenty twenty eight.
Speaker 1: Richard Clarida with us, so we did a Bloomberg function.
Speaker 1: It was great. Michael mcke organized it. It was all these
Speaker 1: worthies in the audience. Catherine Man comes up and gives
Speaker 1: me a hug. The Queen of descent over at the
Speaker 1: Bank of England. What's wrong with us being like the
Speaker 1: Bank of England? And they come out like a Supreme
Speaker 1: Court decision. Oh no, it's a FED meeting five to
Speaker 1: four and the chairman voted against the majority. Is that
Speaker 1: a bad thing?
Speaker 2: I don't think it's a bad thing. I think the
Speaker 2: Bank of England, really beginning under Mervyn King's tens actually
Speaker 2: viewed it as a feature, not a bug, to have
Speaker 2: close votes encourage thoughtful descent. And as I recall, the
Speaker 2: governor has been on losing sight on some votes. There
Speaker 2: unusual in FED history. In fact, I did prepare for
Speaker 2: your show. I went back and looked. Saint Louis FED
Speaker 2: has a great database on this, and you'd have to
Speaker 2: go back to nineteen thirty nineteen thirty nine the last
Speaker 2: time a chair actually lost an FMC vote, and that
Speaker 2: was Mariner Eccles. But Jane William Miller and Paul Volker
Speaker 2: lost votes on discount rate adjustments. But again we're going
Speaker 2: back forty to fifty years.
Speaker 1: Did do you prepare for this show? Are you kidding me?
Speaker 2: You'd be the only one, Richard?
Speaker 3: What's the FED focusing on now? Is it the labor market?
Speaker 3: Is it inflation? Where's the balance these days?
Speaker 2: They've been pretty consistent for a while that inflation's too high.
Speaker 2: It's been above target for five years, it'll probably be
Speaker 2: above target this year for six years. But the FED
Speaker 2: has a dual mandate and the unemployment rate is basically
Speaker 2: right now at a point that they think is consistent
Speaker 2: with a healthy labor market. But they are noticing the
Speaker 2: payroll employment gains have been very much. Indeed, when we
Speaker 2: get the revisions later this week, it actually may show
Speaker 2: negative payroll gains in the second half of the year.
Speaker 2: And so I do think that I take them at
Speaker 2: their word when they say they would not welcome any
Speaker 2: additional rise in the unemployment rate, and I think they
Speaker 2: would react to that. But so long as the economy
Speaker 2: sort of turns along as people expect, I think they
Speaker 2: are trying to balance that against their concerns about elevated inflation.
Speaker 1: Paul Sweeney with Richard Clarita, right now, can I ask,
Speaker 1: can we go NERD right now out of Monday freezing money? Okay?
Speaker 1: Did you recruit Woodford to Columbia? Was that your trying?
Speaker 2: I was not shre when Mike was recruited that, but
Speaker 2: I certainly was enthusiastic and worked hard on getting him
Speaker 2: to Columbia, which was a huge appointment for Colombia now
Speaker 2: twenty two years ago.
Speaker 1: Yeah, I told you, Michael Woodford. Folks, it's a thousand
Speaker 1: page book. Everybody owns it. Martin Feldtsen once said, Tom,
Speaker 1: no one's ever read it cover to cover. Clar I have,
Speaker 1: but the bottom line and I'm bringing this up, folks,
Speaker 1: because we had an Ezrab prosade the other day from
Speaker 1: Cornell with his wonderful important books Doomload the Doom Look
Speaker 1: really important book, And the bottom line is we assume
Speaker 1: Woodford like Eiler equations, they come down to a point
Speaker 1: of stability, and within the system there's stability. The end
Speaker 1: result is stability, and Professor Presada is saying, no, it's
Speaker 1: not They're going to go out on the X axis
Speaker 1: and be unstable.
Speaker 2: Discuss well, okay, I think at a thirty thousand foot
Speaker 2: level in thirty seconds, all macro models, or almost all
Speaker 2: macro models really our best thought of as approximations typically
Speaker 2: linear in a neighborhood of where you want to be,
Speaker 2: and the real world can be a lot messier and
Speaker 2: very nonlinear. Term that I know pops up on this
Speaker 2: show and I think, what I'm just beginning to read
Speaker 2: his book, but he's been highlighting is we could be
Speaker 2: in a prolonged period of very nonlinear market and economic development.
Speaker 1: Geopolitical development. So if you're halfway through the book, he
Speaker 1: sold the movie, right, Yeah, DiCaprio's playing. I mean, it's
Speaker 1: a gloomy book. It's shockingly gloomy.
Speaker 2: Yeah, yeah, again, I have not I've not worked through it,
Speaker 2: but I certainly must read for me, So I'll wait
Speaker 2: till I finish it before our wait.
Speaker 1: Okay, sure, hey, Richard worked.
Speaker 3: We're thirteen months into this whole tariff thing. I'm going
Speaker 3: to look back on and say, boy, this was nothing.
Speaker 3: It didn't seem to be that big of an issue.
Speaker 3: And that's not when I heard it. Early on. I
Speaker 3: heard a lot of folks saying, boy, this is going
Speaker 3: to be inflationary and so on and so forth. We
Speaker 3: just haven't seen it. So with a little bit of hindsight.
Speaker 2: Yeah, yeah, what's happened. So let me reinforce what you
Speaker 2: said when we eventually, when we get the data for
Speaker 2: twenty twenty five, it may show GDP growth this as
Speaker 2: it was in twenty twenty four, maybe down to tenth.
Speaker 2: It will likely show inflation unchanged from twenty twenty four,
Speaker 2: And so a future historian may well say what you
Speaker 2: just said, which is what was the big deal? GDP
Speaker 2: growth didn't move, inflation didn't move. I think a couple
Speaker 2: of things. One is that the ultimate tariffs put in
Speaker 2: place were a lot lower than the Liberation Day levels,
Speaker 2: and his best in his emphasized that was part of
Speaker 2: the negotiating strategy. Secondly, you know, there's a saying in
Speaker 2: baseball sometimes you'd rather be lucky than good. I think
Speaker 2: the other thing that happened is whatever headwind there might
Speaker 2: have been from tariff's counterfactually was offset by the buoyant
Speaker 2: capax spending, especially by the tech companies, and the fact
Speaker 2: that the stock market is very optimistic on this story,
Speaker 2: so that generates a wealth effect and an investment effect.
Speaker 2: And then thirdly, US companies absorbed more of the tariff
Speaker 2: hit in somewhat reduced margins, and you know in the
Speaker 2: Act they did have that room profit margins have been
Speaker 2: very healthy, and they didn't pass it through to the consumer.
Speaker 2: And again, of course, we have the IAPA decision the
Speaker 2: Supreme Court is about to release, and that may further
Speaker 2: lead to lower Just put it this way. I think
Speaker 2: if you calculate the actually the tariff revenue we're collecting
Speaker 2: divided by imports, it's coming in at about ten percent,
Speaker 2: and liberation day was like thirty five percent. So that's
Speaker 2: sort of the order of magnitude.
Speaker 1: I got eight other questions. I gotta squeeze us in
Speaker 1: to be responsible or zegg and pose and creating a
Speaker 1: firestorm with an idea of resilient higher rates, or even
Speaker 1: driving higher rates somewhat due to the surprise of higher
Speaker 1: wages riding this up. At the Peterson Institute, do you
Speaker 1: and PIMCO worry about price down yield up?
Speaker 2: Well, you know, we get paid to worry about it.
Speaker 2: What we do observe, at least in the treasure rate
Speaker 2: market is the fact act, which is really since the
Speaker 2: last FED rate hike, which was two and a half
Speaker 2: years ago ten, your treasury yields have been in a
Speaker 2: pretty tight range four and three quarters at the high end,
Speaker 2: three and three quarters at the low end. Now that
Speaker 2: also you also need to note that underlying real rates,
Speaker 2: which we can see from the inflation index bond market,
Speaker 2: are much higher than they were in twenty nineteen, and
Speaker 2: so we're going to have a steeper yield curve than
Speaker 2: we did pre pandemic, which is a good thing. I
Speaker 2: think we're going to probably have elevated, somewhat elevated volatility
Speaker 2: relative to the decade before the pandemic, in which rate
Speaker 2: volatility was suppressed through zero or negative number at one point.
Speaker 2: I think in Europe, there was like eighteen trillion dollars
Speaker 2: of negative yielding sovereign debts, so we do pay attention
Speaker 2: to it, but we think a lot of the repricing
Speaker 2: that needed to happen because of the fiscal outlook has
Speaker 2: basically already happened and is in the price.
Speaker 1: I am begging when you get through the doom loop.
Speaker 1: When I get through the doomom, I would be honored
Speaker 1: to have you and Prisada in the same studio together.
Speaker 1: Would be a service to a lot of people thinking
Speaker 1: about this. His public service to the nation at the
Speaker 1: Federal Reserve System. Richard Claritay he is Global Economic Advisor
Speaker 1: at PIMCO