Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: I'm going to go a little bit nerdy here right
Speaker 2: now is a precursor to get into Bill Dudley with
Speaker 2: his exceptionally important essay of the morning. And I'll be
Speaker 2: quick about this, folks. When we have Richard Clareda on
Speaker 2: the former vice chairman of the Fed, there's a whole
Speaker 2: academics behind him that has a big fancy name that's
Speaker 2: called DSGE Dynamic stochastic general equilibrium theory. This is PhD work.
Speaker 2: A guy named Carl Walsher came out of the same
Speaker 2: Berkeley combine is. Bill Dudley years ago wrote on the contracts,
Speaker 2: the agreements, the beliefs that a central bank has. Ben
Speaker 2: Bernanke said it was one of the three most important
Speaker 2: papers on how central banks think. Joining us now on
Speaker 2: how this central bank thinks. William Dudley, the former president
Speaker 2: of the New York Fed, Bill, we've shattered ex post
Speaker 2: x am take beliefs. How far behind is this central bank?
Speaker 3: Well hard to say with any precision, but I think
Speaker 3: it's pretty simple to say that the dual mandate objectives
Speaker 3: of clation employment now are pretty close imbalanced. Yet Materrey
Speaker 3: policy's still quite restrictive. Most people think that neutral is
Speaker 3: somewhere between three and four percent on the federal fund rate.
Speaker 3: So call us one hundred and fifty bases points away
Speaker 3: from where we should be.
Speaker 2: If we have a vector of whatever it is, economic growth, disinflation,
Speaker 2: whatever we drop in our minds. Peter orzag would call
Speaker 2: it a glide path, which is a glide path right now.
Speaker 2: That matters to Bill. Dudley says, this Fed's got to
Speaker 2: get up and go.
Speaker 3: I think the main issue is the fact that when
Speaker 3: the labor market tends to deteriorate, either tends to deteriate
Speaker 3: a little or a lot. So you don't want to
Speaker 3: go past that threshold where the labor market starts to
Speaker 3: feed on itself and continue to worsen. That's why you
Speaker 3: want to take on insurance now by going more rapidly
Speaker 3: rather than going gradually.
Speaker 1: So Bill, in your Bloomberg opinion piece today, you note
Speaker 1: that the two objectives of the feds dual mandate, that is,
Speaker 1: price stability and maximum sustainable employment, that they've come into
Speaker 1: much closer balance, agjecting the monetary policies should be neutral,
Speaker 1: but we're pretty far from neutral. So how do we
Speaker 1: get to neutral? And how quickly do we do that?
Speaker 3: Bill, Well, I think the reason why the Federal Reserve
Speaker 3: is going to do fifty basis points this week is
Speaker 3: to get there more quickly. Now, the good news there's
Speaker 3: a lot of easing's already priced in over the next
Speaker 3: year and a half. So the market's priced in two
Speaker 3: hundred and fifty basis points by the end of twenty
Speaker 3: twenty five, so it's not absolutely critical that they do
Speaker 3: fifty versus twenty five a day. But doing twenty five
Speaker 3: would have been awkward because it would have disappointed market expectations.
Speaker 3: They probably would have shown only another fifty basis points
Speaker 3: in their summary wreck and out projections, so the Fed
Speaker 3: would be essentially saying we're going going to do seventy
Speaker 3: five basis points this year when the market was priced
Speaker 3: for about one hundred and twenty. So I think doing
Speaker 3: fifty brings the Fed more in alignment with the market,
Speaker 3: and it also fits the logic of the moment.
Speaker 1: Bill, are you, do you have a concern or a
Speaker 1: reasonable concern that by maybe going slower than they should,
Speaker 1: that inflation gets back, recession gets pulled back onto the table.
Speaker 3: Well, I think there's a risk of that. I mean,
Speaker 3: every time the unplaying rate has risen by more than
Speaker 3: a half a percent on a three month moving average
Speaker 3: basis over a twelve month period in the United States,
Speaker 3: you've always had a recession. We've actually hit that trigger. Now.
Speaker 3: I don't think that trigger is a hard and fast
Speaker 3: rule that has to hold every time, but it does
Speaker 3: tell you that when the layer market deterioration goes down
Speaker 3: beyond a certain point, it tends to become self reinforcing.
Speaker 3: The next stop after a half a percent increase is
Speaker 3: one point nine percentage points at a full blown recession.
Speaker 3: So that's the risk the FED is taking by waiting.
Speaker 1: Hey, if the FED only goes twenty five basis points,
Speaker 1: do you think we'll get a dissenting vote there?
Speaker 3: I would think so at this point. I mean, I
Speaker 3: think what's essentially happened is the change expectations last week
Speaker 3: with those two articles that came out on the Wall
Speaker 3: Street Journal and the Financial Times, sort of suspicious articles
Speaker 3: because they basically reopened the possibility of fifty when that
Speaker 3: was sort of getting closed off. Since that time, we
Speaker 3: haven't had any you know, FED intervention in any way
Speaker 3: that's visible, So it seems at least that the FED
Speaker 3: is comfortable with the shifting expectations away from twenty five
Speaker 3: to fifty. So I don't think, you know, as time passes,
Speaker 3: I think what's going to happen is we're going to
Speaker 3: continue to price more in the direction of fifty.
Speaker 2: I'm going to go nuts here. And you know, thanks
Speaker 2: Marty emailed it. Marty, thank you so much for listening
Speaker 2: this morning. For Bill, I'm sorry, we've got a shattered
Speaker 2: way of communicating. We have basically back x number of
Speaker 2: meetings of dissent free FED. I mean every love, love, peace, love,
Speaker 2: and dope. I get it. We are the world. We
Speaker 2: are committing FED policy and discussion through a reporter at
Speaker 2: the journal.
Speaker 4: Who's the reporter at the ft Smith? Oh, Colby's Cobby Smith,
Speaker 4: Colby Smith. Okay, come on, Bill, this is blowney. How
Speaker 4: did we get here? Do you blame Alan Greenspan?
Speaker 2: Lawrence Meyer Washington University Saint Louis would say it was
Speaker 2: a term at the FED where Alan read everything. Is
Speaker 2: that where this started? Bill Dugley this.
Speaker 3: I'm not really sure why we're why we're we've landed
Speaker 3: where we've landed. I agree with you this is sort
Speaker 3: of awkward. You really shouldn't be communicating through these sort
Speaker 3: of articles in such a subtle way that some people
Speaker 3: get it and some people don't. That doesn't seem to
Speaker 3: be very fair for people to get the right signal
Speaker 3: from the FED. I think what basically happened was the
Speaker 3: issue of twenty five versus fifty was getting sort of
Speaker 3: closed off as you approached the blackout period. Call didn't
Speaker 3: want it to be closed off because he was actually
Speaker 3: thinking pretty strobably about fifty basis points, and this was
Speaker 3: the way to keep it open. I think what's happened
Speaker 3: is people have reflected on it a bit more. The
Speaker 3: logic for fifty has become very compelling to people, and
Speaker 3: that's why I think that's what the Fit's going to
Speaker 3: do at this meeting this week.
Speaker 2: I want to make a distinction here. This is not
Speaker 2: an Allen Meltzer fifty. I mean, we're not showing up
Speaker 2: at the discount window because the world's falling apart. Is
Speaker 2: just like an original fifty beep cut that we're getting
Speaker 2: because of pandemic mysteries, because of unknowns, or frankly, doctor Dudley,
Speaker 2: because of too much information.
Speaker 3: Well, I think they're just started a little late. I mean,
Speaker 3: I you know, a month ago or so, I said
Speaker 3: this rates in July. So if they've done twenty five
Speaker 3: in July and twenty five in September, they'd be in
Speaker 3: the same place. So I think it's a little bit
Speaker 3: because the labor market has weakened more quickly than they
Speaker 3: were anticipating. Remember, we had those very large downward revisions
Speaker 3: to payroll employment, and then the last three months in
Speaker 3: terms of the payroll gains is the lowest three month
Speaker 3: period since twenty twenty. So there's been a distinct chilling
Speaker 3: of the labor market and that's happened for really rapidly. Now.
Speaker 3: The FED is reasonably comfortable that that's mostly due to
Speaker 3: the fact that the labor force is increasing and that's
Speaker 3: what's pushing up the unemployer rate. But you know, there
Speaker 3: are quite a few signs that the layer market's a
Speaker 3: little softer than it was, and I think that's what's
Speaker 3: maybe surprised that Fed how quickly that's come on.
Speaker 1: Is there just following up on that labor point bill.
Speaker 1: Is there a level of the unemployment rate? I don't
Speaker 1: know a headline number that would really get their attention
Speaker 1: or is this trend higher that you mentioned before, is
Speaker 1: that what's going to push this FED forward?
Speaker 3: Well, I think you're you're exactly right. The labor market
Speaker 3: holds the key here. So if the unemployer rate keeps
Speaker 3: drifting up, that will continue to motivate the FED to
Speaker 3: go more quickly, because at that point the risk won't
Speaker 3: be balanced. The risk will be tilted to the downside
Speaker 3: on the labor market. So right now, think of the
Speaker 3: risk as balance. We want to go to neutral. Labor
Speaker 3: market continues to deteriorate unemployer rate keeps going up, the
Speaker 3: FED will then start to think, oh, we don't want
Speaker 3: to push policy to natural. We might want we might
Speaker 3: want to push policy to easy.
Speaker 2: Bill Dudley, you've got a key paragraph where you touch
Speaker 2: upon with you know, Vice Chairman Claren has talked about
Speaker 2: in many others three old folks. The FED decides on Wednesday.
Speaker 2: I can't believe it'll be better than the last time
Speaker 2: we did it six weeks ago, but we'll try. And
Speaker 2: the answer is, doctor Dudley, is the vectors in place
Speaker 2: of let's say disinflation for conversation, But are we getting
Speaker 2: back to two point?
Speaker 3: Oh?
Speaker 2: Do you simply discard what I'm going to call a
Speaker 2: John Taylor two point oh banded end point for a
Speaker 2: new end point that jumbles up all of our thinking.
Speaker 3: I think the FED thinks that they're going to get
Speaker 3: back to something close to two percent. I mean, if
Speaker 3: you look at the labor marker right now, for example,
Speaker 3: labor job openings are at a level consistent with where
Speaker 3: we were in twenty nineteen, where inflation was actually below
Speaker 3: two percent. The other thing that started making making you
Speaker 3: more confident that is what's been having a wage inflation
Speaker 3: that's come down below four percent. So I think the
Speaker 3: FED is not like giving up and saying, oh, two
Speaker 3: and a half percent inflation is good enough. I think
Speaker 3: they do think that we'll see further disinflation in the
Speaker 3: once ahead.
Speaker 1: So Bill, we look at the two year treasury. I mean,
Speaker 1: you know, just a couple of coffee goes, Tom would say,
Speaker 1: was it five percent? We're down down to three point
Speaker 1: five to five percent on the two year treasury. I mean,
Speaker 1: the market's already doing the hard work here, aren't they.
Speaker 3: No, you're absolutely right. I mean financial conditions have eased
Speaker 3: a lot, even though the federally surviving yet cut rates
Speaker 3: and that obviously makes Madre policy work more quickly than
Speaker 3: it has in the passed. But that said, you know
Speaker 3: how you know, low, low and modern income households, you
Speaker 3: know are affected by the current level of short term
Speaker 3: rates in terms of credit very dead auto yet so
Speaker 3: it's so the level the current level of short term
Speaker 3: rates still matters a bit.
Speaker 2: One of the great moments of my career, folks, and
Speaker 2: I'm sure doctor Dudley doesn't remember this weird at some whatever.
Speaker 2: You know, the coffee was expensive and Bill Dudley was
Speaker 2: chowing down the quest once as I remember, and we're
Speaker 2: talking about an America in the age of retirement. And
Speaker 2: Bill went mental and full gold and sex mental. Then
Speaker 2: he said, Tom, some people have to retire at sixty
Speaker 2: because their bodies are broken. Bill. That was an indication
Speaker 2: of your work, mechanical work, which is, there's two Americas
Speaker 2: out there. Are we committing monetary policy for the halves,
Speaker 2: the elite, the major financial system, people that benefit from financialization,
Speaker 2: and this whole debate ignores and America essentially flat on
Speaker 2: their back.
Speaker 3: Well, I actually think the priory motivation for the interest
Speaker 3: rates is the deterioration out for low and modern income workers.
Speaker 3: We start to think about the consumer spending reports have
Speaker 3: gott recently. It's all about stress at the low end,
Speaker 3: and I think that's what's motivating the Fit to cut
Speaker 3: rates more quickly. I think they're definitely taking that into consideration.
Speaker 2: Doctor Dudley, Thank you so much, Bill Dudley, without question,
Speaker 2: the essay of the day at moved markets worldwide. Look
Speaker 2: to Bloomberg opinion. I'll get that out on Twitter and
Speaker 2: LinkedIn here any moment, but it'll be widely distributed today.
Speaker 2: Bill Dudley of Berkeley, and of course of Goldman Saxoph,
Speaker 2: former President of the New York Federal Reserve System, for
Speaker 2: Bloomberg at Pinyon