Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Stocks are bouncing up by zero point seven percent on
Speaker 2: the S and P five hundred on the nasdack up
Speaker 2: by one full percentage point catch up trade at the
Speaker 2: bond market, yields lower after a three day weekend. Here Stateside,
Speaker 2: we're down by seven basis points on twoes, We're down
Speaker 2: by close to eight on tens, full forty eight on tens,
Speaker 2: and just about holding on to five percent on a
Speaker 2: thirty year under savannahs this morning, reforming the Federal Reserve.
Speaker 3: I will lead a reform oriented Federal Reserve, learning from
Speaker 3: past successes and mistakes, both escaping static frameworks and models
Speaker 3: and upholding clear standards of integrity and performance.
Speaker 2: So here's the lisis. This morning, Fenchha Kevin Walsh, preparing
Speaker 2: for his first week leading the Central Bank, has investors
Speaker 2: price in higher for longer rates. The former New York
Speaker 2: Fed President Bill Don't be writing. The providing wisdom is
Speaker 2: that the Fed will tighten monetary policy later this year.
Speaker 2: Bill joined us now for more, but welcome to the program.
Speaker 2: I enjoyed the pace. I just want to get one
Speaker 2: important line in there, whether it's credible for this feder
Speaker 2: reserve to say that monegy policy is indeed still restrictive. Bill,
Speaker 2: what's should time film that?
Speaker 1: I think you have to look at the commune's performances
Speaker 1: over the last few years. We've been at this level
Speaker 1: of interest rates are higher since November of I think
Speaker 1: twenty twenty two, and yet the e commute is continue
Speaker 1: to grow. We're still at full employment. So where's the
Speaker 1: evidence that mantre policy has actually been restrictive. If it'd
Speaker 1: been restricted, the emmote should have slowed down, the unemployment
Speaker 1: rates should risen. So I think the case for cutting
Speaker 1: rates now is actually very very weak.
Speaker 4: Given that bill. There's a real question here about the
Speaker 4: housing disinflation that people point to as well. As we
Speaker 4: haven't seen wage inflation accelerate. In fact, you've seen it decelerate.
Speaker 4: We've seen the worker not participate as much as companies
Speaker 4: in terms of just their profit margins. At what point
Speaker 4: does the FED have a right to keep looking at
Speaker 4: that rather than the overlying GDP growth.
Speaker 1: I think they do have a right to look at that.
Speaker 1: I mean, I think the big question is is if
Speaker 1: is the tax refunds that have boosted people's disposable income
Speaker 1: over the last few months the key driver, and as
Speaker 1: we get to July, August, September, we'll consumer spending turnover
Speaker 1: or is the fact that financial conditions are so easy?
Speaker 1: Is that going to be the dominant influence in terms
Speaker 1: of supporting consumption and economic activity. I think the wage
Speaker 1: trend is something that is positive in terms of those
Speaker 1: who think that inflation can come back down to two percent,
Speaker 1: but that could turn I think the problem here is
Speaker 1: that we've been above the Fed's inflation target for more
Speaker 1: than five years, and there is a risk that inflation
Speaker 1: expectations do finally become unanchored. And the University of Michigan
Speaker 1: primary result last week showed that five to ten year
Speaker 1: inflation expectations did tick up quite marketly. Chris Wallers focused
Speaker 1: on the two year inflation outlook two years two years
Speaker 1: forward that's also moved up. So I think the FED
Speaker 1: is concerned that they're starting to lose credibility because they
Speaker 1: haven't been able to get inflation back down to two percent.
Speaker 4: How much is this Fed sort of conditioned by the
Speaker 4: pre pandemic reality of low rates in a way that
Speaker 4: has made them overly dubbish to meet the moment and
Speaker 4: frankly having to reconcile their overly dubbish stance with fundamentally
Speaker 4: stick your inflation as a reality.
Speaker 1: I agree with that. I mean, I think that if
Speaker 1: you look at the level of real rates prior to
Speaker 1: two thousand and seven, the real rate embodied in the
Speaker 1: tailor roll, for example, it's two percent. The FEDS assuming
Speaker 1: today that the level of real rates justed for two
Speaker 1: percent inflation is one percent. So it's very possible that
Speaker 1: you know, matre policy today is not restrictive at all
Speaker 1: because real rates are higher, and there was a reason
Speaker 1: to think that real rates are higher. Look at the
Speaker 1: investment spending boom caused by the AI that's raising real
Speaker 1: interest rates because of increasing the investment demand in the economy.
Speaker 1: The fiscal path of the US is also raising real
Speaker 1: rates because it's diminishing the supply of savings available for investments.
Speaker 1: So I think there are reasons, there are good reasons
Speaker 1: of things that real rates are higher than they have
Speaker 1: been in the recent past.
Speaker 5: When you have Christopher Waller saying that his current policy
Speaker 5: position is to hold rate study for the near term
Speaker 5: because policy risks have change, do you find it interesting
Speaker 5: that he was able to look through the potential tariff
Speaker 5: impact on inflation, but he's not when it comes to
Speaker 5: the oil shock, well, I.
Speaker 1: Think they're really the same in terms of both being
Speaker 1: likely to be transitory. The real question though, is how
Speaker 1: does it get bodied in inflation expectations, And I just
Speaker 1: think the FED is sort of pushing the limits of
Speaker 1: their credibility to claim that trust us that we're going
Speaker 1: to get inflation back down in two percent when we
Speaker 1: haven't been able to do it for the last five years.
Speaker 1: So I think he's getting nervous that they can't sustain this.
Speaker 1: There's also a big risk here. I mean, Kevin wartsh
Speaker 1: is coming in. The President wants lower interest rates, so
Speaker 1: you can see all the elements in place where the
Speaker 1: FED should tighten rates sometime later this year, and they
Speaker 1: don't because of the pressure from the President. So the
Speaker 1: questions about the FEDS into pa how willing Kevin works
Speaker 1: would be willing to buck the desires of the president
Speaker 1: also way into this situation. So I think that if
Speaker 1: the Fed's independence was on what wasn't under question, then
Speaker 1: they'd be more likely that inflation expectations would stay well anchored.
Speaker 2: So Bill, there's an at tension in inflation expectations right now.
Speaker 2: Consumers don't trust them, haven't for a while. You see
Speaker 2: that in the recent survey. They're expecting inflation to be
Speaker 2: way above their particular target for a significant period of time.
Speaker 2: But market based inflation expectations, does the market trust them?
Speaker 3: Well?
Speaker 1: I think if you look at the very longer term expectations,
Speaker 1: for example, like if you look at the treasury inflation
Speaker 1: protected securities market versus nominal treasuries five years out, that
Speaker 1: looks fine. I think the issue is that an accurate
Speaker 1: measure of what households and businesses think today. And I
Speaker 1: think that's why Waller brought up what's inflation going to
Speaker 1: be two years from now for the next two years,
Speaker 1: and that is started to tick up, So that's not
Speaker 1: so far over the horizon. Five years is pretty long time. Yeah,
Speaker 1: I can trust the Fed's going to get inflation down
Speaker 1: to two percent in five years? Are they going to
Speaker 1: get it down to two percent by the end of
Speaker 1: twenty twenty seven?
Speaker 2: Is this a recent problem or a problem is persistive
Speaker 2: for some time under Chairman Powell.
Speaker 1: I think it's a more recent problem in the sense
Speaker 1: that the credibility that monetary policy is restrictive has really
Speaker 1: started to finish as ecommoy has continued to perform well.
Speaker 1: So that's really the You know, if the policy thesis
Speaker 1: was correct, the policy was restrictive, then the ecmomoya should
Speaker 1: have slowed more in the uneployment rate should have risen more.
Speaker 2: Certainly, the data is testing that thesis. Bill, appreciate your time,
Speaker 2: great column today, Thank you, sir. The former New York
Speaker 2: Fed President Bill Dudley on Bloomberg Opinion this line