WEBVTT - Former NY Fed President Bill Dudley Talks Fed, Inflation

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Stocks are bouncing up by zero point seven percent on

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<v Speaker 2>the S and P five hundred on the nasdack up

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<v Speaker 2>by one full percentage point catch up trade at the

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<v Speaker 2>bond market, yields lower after a three day weekend. Here Stateside,

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<v Speaker 2>we're down by seven basis points on twoes, We're down

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<v Speaker 2>by close to eight on tens, full forty eight on tens,

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<v Speaker 2>and just about holding on to five percent on a

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<v Speaker 2>thirty year under savannahs this morning, reforming the Federal Reserve.

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<v Speaker 3>I will lead a reform oriented Federal Reserve, learning from

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<v Speaker 3>past successes and mistakes, both escaping static frameworks and models

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<v Speaker 3>and upholding clear standards of integrity and performance.

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<v Speaker 2>So here's the lisis. This morning, Fenchha Kevin Walsh, preparing

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<v Speaker 2>for his first week leading the Central Bank, has investors

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<v Speaker 2>price in higher for longer rates. The former New York

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<v Speaker 2>Fed President Bill Don't be writing. The providing wisdom is

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<v Speaker 2>that the Fed will tighten monetary policy later this year.

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<v Speaker 2>Bill joined us now for more, but welcome to the program.

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<v Speaker 2>I enjoyed the pace. I just want to get one

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<v Speaker 2>important line in there, whether it's credible for this feder

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<v Speaker 2>reserve to say that monegy policy is indeed still restrictive. Bill,

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<v Speaker 2>what's should time film that?

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<v Speaker 1>I think you have to look at the commune's performances

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<v Speaker 1>over the last few years. We've been at this level

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<v Speaker 1>of interest rates are higher since November of I think

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<v Speaker 1>twenty twenty two, and yet the e commute is continue

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<v Speaker 1>to grow. We're still at full employment. So where's the

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<v Speaker 1>evidence that mantre policy has actually been restrictive. If it'd

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<v Speaker 1>been restricted, the emmote should have slowed down, the unemployment

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<v Speaker 1>rates should risen. So I think the case for cutting

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<v Speaker 1>rates now is actually very very weak.

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<v Speaker 4>Given that bill. There's a real question here about the

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<v Speaker 4>housing disinflation that people point to as well. As we

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<v Speaker 4>haven't seen wage inflation accelerate. In fact, you've seen it decelerate.

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<v Speaker 4>We've seen the worker not participate as much as companies

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<v Speaker 4>in terms of just their profit margins. At what point

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<v Speaker 4>does the FED have a right to keep looking at

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<v Speaker 4>that rather than the overlying GDP growth.

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<v Speaker 1>I think they do have a right to look at that.

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<v Speaker 1>I mean, I think the big question is is if

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<v Speaker 1>is the tax refunds that have boosted people's disposable income

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<v Speaker 1>over the last few months the key driver, and as

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<v Speaker 1>we get to July, August, September, we'll consumer spending turnover

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<v Speaker 1>or is the fact that financial conditions are so easy?

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<v Speaker 1>Is that going to be the dominant influence in terms

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<v Speaker 1>of supporting consumption and economic activity. I think the wage

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<v Speaker 1>trend is something that is positive in terms of those

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<v Speaker 1>who think that inflation can come back down to two percent,

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<v Speaker 1>but that could turn I think the problem here is

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<v Speaker 1>that we've been above the Fed's inflation target for more

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<v Speaker 1>than five years, and there is a risk that inflation

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<v Speaker 1>expectations do finally become unanchored. And the University of Michigan

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<v Speaker 1>primary result last week showed that five to ten year

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<v Speaker 1>inflation expectations did tick up quite marketly. Chris Wallers focused

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<v Speaker 1>on the two year inflation outlook two years two years

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<v Speaker 1>forward that's also moved up. So I think the FED

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<v Speaker 1>is concerned that they're starting to lose credibility because they

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<v Speaker 1>haven't been able to get inflation back down to two percent.

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<v Speaker 4>How much is this Fed sort of conditioned by the

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<v Speaker 4>pre pandemic reality of low rates in a way that

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<v Speaker 4>has made them overly dubbish to meet the moment and

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<v Speaker 4>frankly having to reconcile their overly dubbish stance with fundamentally

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<v Speaker 4>stick your inflation as a reality.

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<v Speaker 1>I agree with that. I mean, I think that if

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<v Speaker 1>you look at the level of real rates prior to

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<v Speaker 1>two thousand and seven, the real rate embodied in the

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<v Speaker 1>tailor roll, for example, it's two percent. The FEDS assuming

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<v Speaker 1>today that the level of real rates justed for two

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<v Speaker 1>percent inflation is one percent. So it's very possible that

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<v Speaker 1>you know, matre policy today is not restrictive at all

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<v Speaker 1>because real rates are higher, and there was a reason

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<v Speaker 1>to think that real rates are higher. Look at the

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<v Speaker 1>investment spending boom caused by the AI that's raising real

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<v Speaker 1>interest rates because of increasing the investment demand in the economy.

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<v Speaker 1>The fiscal path of the US is also raising real

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<v Speaker 1>rates because it's diminishing the supply of savings available for investments.

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<v Speaker 1>So I think there are reasons, there are good reasons

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<v Speaker 1>of things that real rates are higher than they have

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<v Speaker 1>been in the recent past.

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<v Speaker 5>When you have Christopher Waller saying that his current policy

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<v Speaker 5>position is to hold rate study for the near term

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<v Speaker 5>because policy risks have change, do you find it interesting

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<v Speaker 5>that he was able to look through the potential tariff

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<v Speaker 5>impact on inflation, but he's not when it comes to

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<v Speaker 5>the oil shock, well, I.

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<v Speaker 1>Think they're really the same in terms of both being

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<v Speaker 1>likely to be transitory. The real question though, is how

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<v Speaker 1>does it get bodied in inflation expectations, And I just

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<v Speaker 1>think the FED is sort of pushing the limits of

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<v Speaker 1>their credibility to claim that trust us that we're going

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<v Speaker 1>to get inflation back down in two percent when we

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<v Speaker 1>haven't been able to do it for the last five years.

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<v Speaker 1>So I think he's getting nervous that they can't sustain this.

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<v Speaker 1>There's also a big risk here. I mean, Kevin wartsh

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<v Speaker 1>is coming in. The President wants lower interest rates, so

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<v Speaker 1>you can see all the elements in place where the

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<v Speaker 1>FED should tighten rates sometime later this year, and they

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<v Speaker 1>don't because of the pressure from the President. So the

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<v Speaker 1>questions about the FEDS into pa how willing Kevin works

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<v Speaker 1>would be willing to buck the desires of the president

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<v Speaker 1>also way into this situation. So I think that if

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<v Speaker 1>the Fed's independence was on what wasn't under question, then

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<v Speaker 1>they'd be more likely that inflation expectations would stay well anchored.

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<v Speaker 2>So Bill, there's an at tension in inflation expectations right now.

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<v Speaker 2>Consumers don't trust them, haven't for a while. You see

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<v Speaker 2>that in the recent survey. They're expecting inflation to be

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<v Speaker 2>way above their particular target for a significant period of time.

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<v Speaker 2>But market based inflation expectations, does the market trust them?

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<v Speaker 3>Well?

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<v Speaker 1>I think if you look at the very longer term expectations,

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<v Speaker 1>for example, like if you look at the treasury inflation

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<v Speaker 1>protected securities market versus nominal treasuries five years out, that

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<v Speaker 1>looks fine. I think the issue is that an accurate

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<v Speaker 1>measure of what households and businesses think today. And I

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<v Speaker 1>think that's why Waller brought up what's inflation going to

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<v Speaker 1>be two years from now for the next two years,

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<v Speaker 1>and that is started to tick up, So that's not

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<v Speaker 1>so far over the horizon. Five years is pretty long time. Yeah,

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<v Speaker 1>I can trust the Fed's going to get inflation down

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<v Speaker 1>to two percent in five years? Are they going to

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<v Speaker 1>get it down to two percent by the end of

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<v Speaker 1>twenty twenty seven?

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<v Speaker 2>Is this a recent problem or a problem is persistive

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<v Speaker 2>for some time under Chairman Powell.

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<v Speaker 1>I think it's a more recent problem in the sense

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<v Speaker 1>that the credibility that monetary policy is restrictive has really

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<v Speaker 1>started to finish as ecommoy has continued to perform well.

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<v Speaker 1>So that's really the You know, if the policy thesis

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<v Speaker 1>was correct, the policy was restrictive, then the ecmomoya should

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<v Speaker 1>have slowed more in the uneployment rate should have risen more.

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<v Speaker 2>Certainly, the data is testing that thesis. Bill, appreciate your time,

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<v Speaker 2>great column today, Thank you, sir. The former New York

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<v Speaker 2>Fed President Bill Dudley on Bloomberg Opinion this line