WEBVTT - Former NY Fed President Bill Dudley Talks Central Bank, New Essay

0:00:00.280 --> 0:00:07.000
<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

0:00:08.000 --> 0:00:09.920
<v Speaker 2>I'm going to go a little bit nerdy here right

0:00:09.960 --> 0:00:12.480
<v Speaker 2>now is a precursor to get into Bill Dudley with

0:00:12.560 --> 0:00:15.880
<v Speaker 2>his exceptionally important essay of the morning. And I'll be

0:00:15.960 --> 0:00:19.520
<v Speaker 2>quick about this, folks. When we have Richard Clareda on

0:00:19.760 --> 0:00:23.200
<v Speaker 2>the former vice chairman of the Fed, there's a whole

0:00:23.400 --> 0:00:27.120
<v Speaker 2>academics behind him that has a big fancy name that's

0:00:27.160 --> 0:00:32.400
<v Speaker 2>called DSGE Dynamic stochastic general equilibrium theory. This is PhD work.

0:00:33.120 --> 0:00:35.560
<v Speaker 2>A guy named Carl Walsher came out of the same

0:00:35.640 --> 0:00:40.680
<v Speaker 2>Berkeley combine is. Bill Dudley years ago wrote on the contracts,

0:00:40.680 --> 0:00:44.480
<v Speaker 2>the agreements, the beliefs that a central bank has. Ben

0:00:44.479 --> 0:00:46.880
<v Speaker 2>Bernanke said it was one of the three most important

0:00:47.159 --> 0:00:51.360
<v Speaker 2>papers on how central banks think. Joining us now on

0:00:51.400 --> 0:00:55.080
<v Speaker 2>how this central bank thinks. William Dudley, the former president

0:00:55.440 --> 0:00:59.280
<v Speaker 2>of the New York Fed, Bill, we've shattered ex post

0:00:59.600 --> 0:01:04.399
<v Speaker 2>x am take beliefs. How far behind is this central bank?

0:01:06.200 --> 0:01:08.680
<v Speaker 3>Well hard to say with any precision, but I think

0:01:08.720 --> 0:01:12.240
<v Speaker 3>it's pretty simple to say that the dual mandate objectives

0:01:12.280 --> 0:01:16.520
<v Speaker 3>of clation employment now are pretty close imbalanced. Yet Materrey

0:01:16.560 --> 0:01:21.160
<v Speaker 3>policy's still quite restrictive. Most people think that neutral is

0:01:21.200 --> 0:01:24.160
<v Speaker 3>somewhere between three and four percent on the federal fund rate.

0:01:24.280 --> 0:01:27.520
<v Speaker 3>So call us one hundred and fifty bases points away

0:01:27.520 --> 0:01:28.399
<v Speaker 3>from where we should be.

0:01:29.240 --> 0:01:33.120
<v Speaker 2>If we have a vector of whatever it is, economic growth, disinflation,

0:01:33.280 --> 0:01:38.280
<v Speaker 2>whatever we drop in our minds. Peter orzag would call

0:01:38.280 --> 0:01:41.640
<v Speaker 2>it a glide path, which is a glide path right now.

0:01:41.680 --> 0:01:45.600
<v Speaker 2>That matters to Bill. Dudley says, this Fed's got to

0:01:45.640 --> 0:01:46.440
<v Speaker 2>get up and go.

0:01:48.200 --> 0:01:51.160
<v Speaker 3>I think the main issue is the fact that when

0:01:51.160 --> 0:01:54.440
<v Speaker 3>the labor market tends to deteriorate, either tends to deteriate

0:01:54.480 --> 0:01:56.080
<v Speaker 3>a little or a lot. So you don't want to

0:01:56.120 --> 0:01:59.160
<v Speaker 3>go past that threshold where the labor market starts to

0:01:59.240 --> 0:02:02.480
<v Speaker 3>feed on itself and continue to worsen. That's why you

0:02:02.520 --> 0:02:05.680
<v Speaker 3>want to take on insurance now by going more rapidly

0:02:05.760 --> 0:02:07.360
<v Speaker 3>rather than going gradually.

0:02:08.639 --> 0:02:11.320
<v Speaker 1>So Bill, in your Bloomberg opinion piece today, you note

0:02:11.320 --> 0:02:13.840
<v Speaker 1>that the two objectives of the feds dual mandate, that is,

0:02:13.840 --> 0:02:17.519
<v Speaker 1>price stability and maximum sustainable employment, that they've come into

0:02:17.680 --> 0:02:21.040
<v Speaker 1>much closer balance, agjecting the monetary policies should be neutral,

0:02:21.639 --> 0:02:23.880
<v Speaker 1>but we're pretty far from neutral. So how do we

0:02:23.919 --> 0:02:25.680
<v Speaker 1>get to neutral? And how quickly do we do that?

0:02:25.720 --> 0:02:29.320
<v Speaker 3>Bill, Well, I think the reason why the Federal Reserve

0:02:29.400 --> 0:02:31.240
<v Speaker 3>is going to do fifty basis points this week is

0:02:31.240 --> 0:02:33.839
<v Speaker 3>to get there more quickly. Now, the good news there's

0:02:33.840 --> 0:02:36.320
<v Speaker 3>a lot of easing's already priced in over the next

0:02:36.400 --> 0:02:38.600
<v Speaker 3>year and a half. So the market's priced in two

0:02:38.680 --> 0:02:41.400
<v Speaker 3>hundred and fifty basis points by the end of twenty

0:02:41.440 --> 0:02:45.440
<v Speaker 3>twenty five, so it's not absolutely critical that they do

0:02:45.520 --> 0:02:48.400
<v Speaker 3>fifty versus twenty five a day. But doing twenty five

0:02:48.400 --> 0:02:52.359
<v Speaker 3>would have been awkward because it would have disappointed market expectations.

0:02:52.360 --> 0:02:55.160
<v Speaker 3>They probably would have shown only another fifty basis points

0:02:55.160 --> 0:02:57.679
<v Speaker 3>in their summary wreck and out projections, so the Fed

0:02:57.720 --> 0:02:59.839
<v Speaker 3>would be essentially saying we're going going to do seventy

0:02:59.880 --> 0:03:02.080
<v Speaker 3>five basis points this year when the market was priced

0:03:02.120 --> 0:03:05.000
<v Speaker 3>for about one hundred and twenty. So I think doing

0:03:05.040 --> 0:03:07.960
<v Speaker 3>fifty brings the Fed more in alignment with the market,

0:03:08.320 --> 0:03:10.400
<v Speaker 3>and it also fits the logic of the moment.

0:03:11.440 --> 0:03:14.000
<v Speaker 1>Bill, are you, do you have a concern or a

0:03:14.040 --> 0:03:17.400
<v Speaker 1>reasonable concern that by maybe going slower than they should,

0:03:17.440 --> 0:03:21.760
<v Speaker 1>that inflation gets back, recession gets pulled back onto the table.

0:03:23.080 --> 0:03:24.480
<v Speaker 3>Well, I think there's a risk of that. I mean,

0:03:24.520 --> 0:03:26.640
<v Speaker 3>every time the unplaying rate has risen by more than

0:03:26.639 --> 0:03:29.040
<v Speaker 3>a half a percent on a three month moving average

0:03:29.040 --> 0:03:32.000
<v Speaker 3>basis over a twelve month period in the United States,

0:03:32.000 --> 0:03:35.040
<v Speaker 3>you've always had a recession. We've actually hit that trigger. Now.

0:03:35.080 --> 0:03:36.800
<v Speaker 3>I don't think that trigger is a hard and fast

0:03:36.880 --> 0:03:39.160
<v Speaker 3>rule that has to hold every time, but it does

0:03:39.240 --> 0:03:41.320
<v Speaker 3>tell you that when the layer market deterioration goes down

0:03:41.400 --> 0:03:44.720
<v Speaker 3>beyond a certain point, it tends to become self reinforcing.

0:03:45.320 --> 0:03:48.640
<v Speaker 3>The next stop after a half a percent increase is

0:03:48.680 --> 0:03:51.080
<v Speaker 3>one point nine percentage points at a full blown recession.

0:03:51.120 --> 0:03:53.800
<v Speaker 3>So that's the risk the FED is taking by waiting.

0:03:54.720 --> 0:03:58.760
<v Speaker 1>Hey, if the FED only goes twenty five basis points,

0:04:00.000 --> 0:04:01.640
<v Speaker 1>do you think we'll get a dissenting vote there?

0:04:03.600 --> 0:04:05.160
<v Speaker 3>I would think so at this point. I mean, I

0:04:05.160 --> 0:04:09.160
<v Speaker 3>think what's essentially happened is the change expectations last week

0:04:09.360 --> 0:04:11.120
<v Speaker 3>with those two articles that came out on the Wall

0:04:11.160 --> 0:04:14.080
<v Speaker 3>Street Journal and the Financial Times, sort of suspicious articles

0:04:14.120 --> 0:04:17.440
<v Speaker 3>because they basically reopened the possibility of fifty when that

0:04:17.560 --> 0:04:20.640
<v Speaker 3>was sort of getting closed off. Since that time, we

0:04:20.680 --> 0:04:23.640
<v Speaker 3>haven't had any you know, FED intervention in any way

0:04:23.680 --> 0:04:26.479
<v Speaker 3>that's visible, So it seems at least that the FED

0:04:26.560 --> 0:04:30.560
<v Speaker 3>is comfortable with the shifting expectations away from twenty five

0:04:30.600 --> 0:04:34.240
<v Speaker 3>to fifty. So I don't think, you know, as time passes,

0:04:34.560 --> 0:04:35.880
<v Speaker 3>I think what's going to happen is we're going to

0:04:35.920 --> 0:04:38.520
<v Speaker 3>continue to price more in the direction of fifty.

0:04:38.520 --> 0:04:40.839
<v Speaker 2>I'm going to go nuts here. And you know, thanks

0:04:40.880 --> 0:04:43.400
<v Speaker 2>Marty emailed it. Marty, thank you so much for listening

0:04:43.880 --> 0:04:46.839
<v Speaker 2>this morning. For Bill, I'm sorry, we've got a shattered

0:04:47.400 --> 0:04:52.479
<v Speaker 2>way of communicating. We have basically back x number of

0:04:52.480 --> 0:04:55.800
<v Speaker 2>meetings of dissent free FED. I mean every love, love, peace, love,

0:04:55.800 --> 0:04:58.400
<v Speaker 2>and dope. I get it. We are the world. We

0:04:58.480 --> 0:05:04.680
<v Speaker 2>are committing FED policy and discussion through a reporter at

0:05:04.680 --> 0:05:05.119
<v Speaker 2>the journal.

0:05:05.120 --> 0:05:08.559
<v Speaker 4>Who's the reporter at the ft Smith? Oh, Colby's Cobby Smith,

0:05:09.000 --> 0:05:12.960
<v Speaker 4>Colby Smith. Okay, come on, Bill, this is blowney. How

0:05:13.000 --> 0:05:15.800
<v Speaker 4>did we get here? Do you blame Alan Greenspan?

0:05:16.120 --> 0:05:19.640
<v Speaker 2>Lawrence Meyer Washington University Saint Louis would say it was

0:05:19.640 --> 0:05:22.599
<v Speaker 2>a term at the FED where Alan read everything. Is

0:05:22.640 --> 0:05:24.760
<v Speaker 2>that where this started? Bill Dugley this.

0:05:26.160 --> 0:05:28.960
<v Speaker 3>I'm not really sure why we're why we're we've landed

0:05:28.960 --> 0:05:31.120
<v Speaker 3>where we've landed. I agree with you this is sort

0:05:31.160 --> 0:05:33.680
<v Speaker 3>of awkward. You really shouldn't be communicating through these sort

0:05:33.680 --> 0:05:37.400
<v Speaker 3>of articles in such a subtle way that some people

0:05:37.440 --> 0:05:39.120
<v Speaker 3>get it and some people don't. That doesn't seem to

0:05:39.200 --> 0:05:42.120
<v Speaker 3>be very fair for people to get the right signal

0:05:42.160 --> 0:05:45.360
<v Speaker 3>from the FED. I think what basically happened was the

0:05:45.680 --> 0:05:48.520
<v Speaker 3>issue of twenty five versus fifty was getting sort of

0:05:48.520 --> 0:05:52.560
<v Speaker 3>closed off as you approached the blackout period. Call didn't

0:05:52.600 --> 0:05:54.960
<v Speaker 3>want it to be closed off because he was actually

0:05:54.960 --> 0:05:58.120
<v Speaker 3>thinking pretty strobably about fifty basis points, and this was

0:05:58.160 --> 0:06:00.680
<v Speaker 3>the way to keep it open. I think what's happened

0:06:00.720 --> 0:06:02.880
<v Speaker 3>is people have reflected on it a bit more. The

0:06:03.000 --> 0:06:06.280
<v Speaker 3>logic for fifty has become very compelling to people, and

0:06:06.320 --> 0:06:07.960
<v Speaker 3>that's why I think that's what the Fit's going to

0:06:08.040 --> 0:06:09.440
<v Speaker 3>do at this meeting this week.

0:06:09.560 --> 0:06:11.480
<v Speaker 2>I want to make a distinction here. This is not

0:06:11.600 --> 0:06:14.360
<v Speaker 2>an Allen Meltzer fifty. I mean, we're not showing up

0:06:14.360 --> 0:06:17.880
<v Speaker 2>at the discount window because the world's falling apart. Is

0:06:17.960 --> 0:06:21.120
<v Speaker 2>just like an original fifty beep cut that we're getting

0:06:21.640 --> 0:06:27.520
<v Speaker 2>because of pandemic mysteries, because of unknowns, or frankly, doctor Dudley,

0:06:27.560 --> 0:06:29.120
<v Speaker 2>because of too much information.

0:06:30.240 --> 0:06:32.040
<v Speaker 3>Well, I think they're just started a little late. I mean,

0:06:32.080 --> 0:06:34.840
<v Speaker 3>I you know, a month ago or so, I said

0:06:34.839 --> 0:06:37.880
<v Speaker 3>this rates in July. So if they've done twenty five

0:06:37.920 --> 0:06:40.039
<v Speaker 3>in July and twenty five in September, they'd be in

0:06:40.080 --> 0:06:42.000
<v Speaker 3>the same place. So I think it's a little bit

0:06:42.040 --> 0:06:46.320
<v Speaker 3>because the labor market has weakened more quickly than they

0:06:46.360 --> 0:06:49.120
<v Speaker 3>were anticipating. Remember, we had those very large downward revisions

0:06:49.120 --> 0:06:51.839
<v Speaker 3>to payroll employment, and then the last three months in

0:06:51.920 --> 0:06:54.039
<v Speaker 3>terms of the payroll gains is the lowest three month

0:06:54.120 --> 0:06:58.200
<v Speaker 3>period since twenty twenty. So there's been a distinct chilling

0:06:58.240 --> 0:07:01.360
<v Speaker 3>of the labor market and that's happened for really rapidly. Now.

0:07:01.360 --> 0:07:05.039
<v Speaker 3>The FED is reasonably comfortable that that's mostly due to

0:07:05.080 --> 0:07:07.760
<v Speaker 3>the fact that the labor force is increasing and that's

0:07:07.760 --> 0:07:11.239
<v Speaker 3>what's pushing up the unemployer rate. But you know, there

0:07:11.280 --> 0:07:13.040
<v Speaker 3>are quite a few signs that the layer market's a

0:07:13.080 --> 0:07:15.240
<v Speaker 3>little softer than it was, and I think that's what's

0:07:15.320 --> 0:07:17.440
<v Speaker 3>maybe surprised that Fed how quickly that's come on.

0:07:18.200 --> 0:07:20.640
<v Speaker 1>Is there just following up on that labor point bill.

0:07:20.720 --> 0:07:23.320
<v Speaker 1>Is there a level of the unemployment rate? I don't

0:07:23.360 --> 0:07:26.640
<v Speaker 1>know a headline number that would really get their attention

0:07:26.920 --> 0:07:30.000
<v Speaker 1>or is this trend higher that you mentioned before, is

0:07:30.000 --> 0:07:31.600
<v Speaker 1>that what's going to push this FED forward?

0:07:32.920 --> 0:07:35.080
<v Speaker 3>Well, I think you're you're exactly right. The labor market

0:07:35.160 --> 0:07:37.640
<v Speaker 3>holds the key here. So if the unemployer rate keeps

0:07:37.720 --> 0:07:40.160
<v Speaker 3>drifting up, that will continue to motivate the FED to

0:07:40.200 --> 0:07:43.200
<v Speaker 3>go more quickly, because at that point the risk won't

0:07:43.240 --> 0:07:46.000
<v Speaker 3>be balanced. The risk will be tilted to the downside

0:07:46.040 --> 0:07:49.160
<v Speaker 3>on the labor market. So right now, think of the

0:07:49.240 --> 0:07:51.679
<v Speaker 3>risk as balance. We want to go to neutral. Labor

0:07:51.720 --> 0:07:54.800
<v Speaker 3>market continues to deteriorate unemployer rate keeps going up, the

0:07:54.840 --> 0:07:56.760
<v Speaker 3>FED will then start to think, oh, we don't want

0:07:56.800 --> 0:07:59.520
<v Speaker 3>to push policy to natural. We might want we might

0:07:59.560 --> 0:08:00.840
<v Speaker 3>want to push policy to easy.

0:08:01.200 --> 0:08:04.040
<v Speaker 2>Bill Dudley, you've got a key paragraph where you touch

0:08:04.120 --> 0:08:06.880
<v Speaker 2>upon with you know, Vice Chairman Claren has talked about

0:08:06.880 --> 0:08:10.560
<v Speaker 2>in many others three old folks. The FED decides on Wednesday.

0:08:10.760 --> 0:08:12.600
<v Speaker 2>I can't believe it'll be better than the last time

0:08:12.600 --> 0:08:15.240
<v Speaker 2>we did it six weeks ago, but we'll try. And

0:08:15.280 --> 0:08:18.600
<v Speaker 2>the answer is, doctor Dudley, is the vectors in place

0:08:18.640 --> 0:08:22.680
<v Speaker 2>of let's say disinflation for conversation, But are we getting

0:08:22.720 --> 0:08:23.600
<v Speaker 2>back to two point?

0:08:23.720 --> 0:08:23.920
<v Speaker 3>Oh?

0:08:24.000 --> 0:08:28.480
<v Speaker 2>Do you simply discard what I'm going to call a

0:08:28.640 --> 0:08:33.800
<v Speaker 2>John Taylor two point oh banded end point for a

0:08:33.920 --> 0:08:37.160
<v Speaker 2>new end point that jumbles up all of our thinking.

0:08:38.440 --> 0:08:40.400
<v Speaker 3>I think the FED thinks that they're going to get

0:08:40.400 --> 0:08:42.800
<v Speaker 3>back to something close to two percent. I mean, if

0:08:42.800 --> 0:08:45.040
<v Speaker 3>you look at the labor marker right now, for example,

0:08:45.200 --> 0:08:49.120
<v Speaker 3>labor job openings are at a level consistent with where

0:08:49.120 --> 0:08:52.000
<v Speaker 3>we were in twenty nineteen, where inflation was actually below

0:08:52.040 --> 0:08:54.839
<v Speaker 3>two percent. The other thing that started making making you

0:08:54.960 --> 0:08:57.199
<v Speaker 3>more confident that is what's been having a wage inflation

0:08:57.280 --> 0:09:00.040
<v Speaker 3>that's come down below four percent. So I think the

0:09:00.120 --> 0:09:02.440
<v Speaker 3>FED is not like giving up and saying, oh, two

0:09:02.480 --> 0:09:04.400
<v Speaker 3>and a half percent inflation is good enough. I think

0:09:04.400 --> 0:09:06.760
<v Speaker 3>they do think that we'll see further disinflation in the

0:09:06.760 --> 0:09:07.360
<v Speaker 3>once ahead.

0:09:08.280 --> 0:09:11.240
<v Speaker 1>So Bill, we look at the two year treasury. I mean,

0:09:11.440 --> 0:09:13.320
<v Speaker 1>you know, just a couple of coffee goes, Tom would say,

0:09:13.400 --> 0:09:15.440
<v Speaker 1>was it five percent? We're down down to three point

0:09:15.600 --> 0:09:19.040
<v Speaker 1>five to five percent on the two year treasury. I mean,

0:09:19.200 --> 0:09:21.400
<v Speaker 1>the market's already doing the hard work here, aren't they.

0:09:22.679 --> 0:09:25.200
<v Speaker 3>No, you're absolutely right. I mean financial conditions have eased

0:09:25.200 --> 0:09:27.439
<v Speaker 3>a lot, even though the federally surviving yet cut rates

0:09:27.440 --> 0:09:30.400
<v Speaker 3>and that obviously makes Madre policy work more quickly than

0:09:30.440 --> 0:09:33.040
<v Speaker 3>it has in the passed. But that said, you know

0:09:33.040 --> 0:09:35.559
<v Speaker 3>how you know, low, low and modern income households, you

0:09:35.600 --> 0:09:38.040
<v Speaker 3>know are affected by the current level of short term

0:09:38.080 --> 0:09:40.480
<v Speaker 3>rates in terms of credit very dead auto yet so

0:09:40.520 --> 0:09:42.800
<v Speaker 3>it's so the level the current level of short term

0:09:42.920 --> 0:09:44.040
<v Speaker 3>rates still matters a bit.

0:09:44.679 --> 0:09:46.760
<v Speaker 2>One of the great moments of my career, folks, and

0:09:46.760 --> 0:09:49.959
<v Speaker 2>I'm sure doctor Dudley doesn't remember this weird at some whatever.

0:09:50.040 --> 0:09:52.959
<v Speaker 2>You know, the coffee was expensive and Bill Dudley was

0:09:53.040 --> 0:09:55.920
<v Speaker 2>chowing down the quest once as I remember, and we're

0:09:55.960 --> 0:09:59.120
<v Speaker 2>talking about an America in the age of retirement. And

0:09:59.120 --> 0:10:02.280
<v Speaker 2>Bill went mental and full gold and sex mental. Then

0:10:02.360 --> 0:10:05.600
<v Speaker 2>he said, Tom, some people have to retire at sixty

0:10:05.640 --> 0:10:08.959
<v Speaker 2>because their bodies are broken. Bill. That was an indication

0:10:09.080 --> 0:10:12.720
<v Speaker 2>of your work, mechanical work, which is, there's two Americas

0:10:12.840 --> 0:10:16.959
<v Speaker 2>out there. Are we committing monetary policy for the halves,

0:10:17.600 --> 0:10:23.559
<v Speaker 2>the elite, the major financial system, people that benefit from financialization,

0:10:24.080 --> 0:10:28.280
<v Speaker 2>and this whole debate ignores and America essentially flat on

0:10:28.320 --> 0:10:28.760
<v Speaker 2>their back.

0:10:30.200 --> 0:10:33.280
<v Speaker 3>Well, I actually think the priory motivation for the interest

0:10:33.360 --> 0:10:37.200
<v Speaker 3>rates is the deterioration out for low and modern income workers.

0:10:37.280 --> 0:10:40.160
<v Speaker 3>We start to think about the consumer spending reports have

0:10:40.240 --> 0:10:43.120
<v Speaker 3>gott recently. It's all about stress at the low end,

0:10:43.160 --> 0:10:45.000
<v Speaker 3>and I think that's what's motivating the Fit to cut

0:10:45.080 --> 0:10:49.000
<v Speaker 3>rates more quickly. I think they're definitely taking that into consideration.

0:10:49.160 --> 0:10:51.920
<v Speaker 2>Doctor Dudley, Thank you so much, Bill Dudley, without question,

0:10:52.040 --> 0:10:55.199
<v Speaker 2>the essay of the day at moved markets worldwide. Look

0:10:55.240 --> 0:10:57.320
<v Speaker 2>to Bloomberg opinion. I'll get that out on Twitter and

0:10:57.360 --> 0:11:01.439
<v Speaker 2>LinkedIn here any moment, but it'll be widely distributed today.

0:11:01.880 --> 0:11:05.120
<v Speaker 2>Bill Dudley of Berkeley, and of course of Goldman Saxoph,

0:11:05.120 --> 0:11:08.600
<v Speaker 2>former President of the New York Federal Reserve System, for

0:11:08.679 --> 0:11:10.400
<v Speaker 2>Bloomberg at Pinyon