1 00:00:03,080 --> 00:00:16,079 Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. 2 00:00:20,040 --> 00:00:23,280 Speaker 2: Hello and welcome to another episode of the All Thoughts Podcast. 3 00:00:23,360 --> 00:00:27,000 Speaker 2: I'm Tracy Alloway and I'm Joe Wisenthal. Joe, I feel 4 00:00:27,080 --> 00:00:28,440 Speaker 2: like it's fair to say there are a lot of 5 00:00:28,440 --> 00:00:31,280 Speaker 2: weird things that have been going on lately. You know 6 00:00:31,280 --> 00:00:34,560 Speaker 2: what the weirdest was for me recently? Go on having 7 00:00:34,600 --> 00:00:37,960 Speaker 2: the FED meeting on a Thursday. Yeah, that threw me 8 00:00:38,080 --> 00:00:39,640 Speaker 2: off for that entire week. 9 00:00:39,760 --> 00:00:41,640 Speaker 3: I thought you were going to say the weird thing 10 00:00:41,760 --> 00:00:43,760 Speaker 3: was having a FED meeting two days after the election, 11 00:00:44,040 --> 00:00:47,680 Speaker 3: But no, you're right. I was really confused just the 12 00:00:47,720 --> 00:00:50,320 Speaker 3: fact that it was on the Thursday at all, Setting 13 00:00:50,400 --> 00:00:53,360 Speaker 3: aside the fact that it was an extraordinarily busy week, 14 00:00:53,440 --> 00:00:54,560 Speaker 3: which was just last week. 15 00:00:54,680 --> 00:00:57,040 Speaker 2: I didn't realize how much of my sense of normality 16 00:00:57,200 --> 00:01:00,720 Speaker 2: was in fact influenced by having the FED do something 17 00:01:00,760 --> 00:01:01,400 Speaker 2: on a Wednesday. 18 00:01:01,520 --> 00:01:02,959 Speaker 4: But anyway, that through me too. 19 00:01:03,360 --> 00:01:06,600 Speaker 2: So we just had a FED meeting. We are recording 20 00:01:06,600 --> 00:01:11,280 Speaker 2: this on November twelfth, and clearly this is an interesting 21 00:01:11,640 --> 00:01:13,920 Speaker 2: moment for the Central Bank totally. 22 00:01:13,959 --> 00:01:16,520 Speaker 3: I saw a tweet today. I don't remember who is from, 23 00:01:16,520 --> 00:01:18,680 Speaker 3: so I can't give proper credit. Or maybe it was 24 00:01:18,720 --> 00:01:20,920 Speaker 3: a sell side. I don't know just words that I 25 00:01:20,920 --> 00:01:23,120 Speaker 3: saw on my screen at some point, but I think 26 00:01:23,360 --> 00:01:27,200 Speaker 3: what made this interesting is this moment, or maybe it 27 00:01:27,240 --> 00:01:30,000 Speaker 3: was a toom doing note, whatever it was, this moment 28 00:01:30,120 --> 00:01:34,080 Speaker 3: where the FED is still clearly in the sort of 29 00:01:34,240 --> 00:01:37,240 Speaker 3: short term data dependency. Are we going to see further 30 00:01:37,319 --> 00:01:41,280 Speaker 3: progress on realized inflation and so forth? Watching the data? 31 00:01:41,319 --> 00:01:44,800 Speaker 3: Plenty of miss signals there. Meanwhile, the market is very 32 00:01:45,040 --> 00:01:47,520 Speaker 3: seemingly focused on the medium term and thinking a lot 33 00:01:47,560 --> 00:01:50,800 Speaker 3: about Trump and the new fiscal and macro policies that 34 00:01:50,840 --> 00:01:53,760 Speaker 3: will emerge under this administration. And I thought that was 35 00:01:53,800 --> 00:01:55,320 Speaker 3: a really good way to frame it, which is that 36 00:01:55,480 --> 00:01:59,920 Speaker 3: right now there's two different time frames that people are in, 37 00:02:00,040 --> 00:02:02,640 Speaker 3: and people are trying to resolve the two, and it 38 00:02:02,720 --> 00:02:05,240 Speaker 3: makes for some very interesting times in macro, to say 39 00:02:05,280 --> 00:02:05,720 Speaker 3: the least. 40 00:02:05,800 --> 00:02:07,720 Speaker 2: Yeah, And I have to say, like I do not 41 00:02:08,360 --> 00:02:11,919 Speaker 2: envy policy makers on the FMC at the moment because 42 00:02:12,000 --> 00:02:15,200 Speaker 2: they have been emphasizing the data dependency, as you said, 43 00:02:15,400 --> 00:02:18,840 Speaker 2: But there is all that uncertainty about how the Trump 44 00:02:18,880 --> 00:02:22,800 Speaker 2: administration is going to unfold and what its economic policies 45 00:02:22,800 --> 00:02:25,760 Speaker 2: will actually look like. It seems really difficult to me 46 00:02:26,040 --> 00:02:29,760 Speaker 2: to have to react to that from a monetary policy perspective. 47 00:02:30,240 --> 00:02:33,160 Speaker 2: So basically, there are a lot of questions. Yeah, lots 48 00:02:33,200 --> 00:02:36,720 Speaker 2: to talk about, and who better to ask these questions 49 00:02:36,760 --> 00:02:39,799 Speaker 2: of than a former FED person. So we are going 50 00:02:39,840 --> 00:02:43,600 Speaker 2: to be speaking with Richard Clarita, the former FED Vice chair, 51 00:02:43,880 --> 00:02:48,000 Speaker 2: now economic advisor at PIMCO and a professor of economics 52 00:02:48,040 --> 00:02:50,520 Speaker 2: at Columbia. Richard, thank you so much for coming on. 53 00:02:50,560 --> 00:02:53,000 Speaker 5: All thoughts, I'm glad to be on the show, big fan. 54 00:02:53,240 --> 00:02:53,880 Speaker 2: Oh, thank you. 55 00:02:54,400 --> 00:02:54,520 Speaker 4: So. 56 00:02:54,800 --> 00:02:57,720 Speaker 2: First of all, you know last week the FMC meeting 57 00:02:57,800 --> 00:03:00,720 Speaker 2: on a Thursday. I got to ask, when you watch those, 58 00:03:01,360 --> 00:03:04,440 Speaker 2: are you sort of watching them like wistfully wishing you 59 00:03:04,520 --> 00:03:07,080 Speaker 2: are there, or are you thinking like, oh gosh, this 60 00:03:07,160 --> 00:03:07,800 Speaker 2: is really tough. 61 00:03:07,840 --> 00:03:11,920 Speaker 5: Now, well, it can be tough. Yeah, I've certainly involved 62 00:03:11,960 --> 00:03:14,760 Speaker 5: during my four years there in thinking about and prepping 63 00:03:14,800 --> 00:03:17,680 Speaker 5: for the press conferences. But yeah, I watched them as 64 00:03:17,680 --> 00:03:20,520 Speaker 5: a FED watcher now and the chair has become quite 65 00:03:20,600 --> 00:03:23,960 Speaker 5: polished and experienced and navigating what can be some sometimes 66 00:03:23,960 --> 00:03:25,040 Speaker 5: some choppy waters. 67 00:03:25,840 --> 00:03:27,840 Speaker 3: By the way, Tracy, you didn't say it, but I 68 00:03:27,919 --> 00:03:30,440 Speaker 3: believe rich is the perfect guest. Oh, I'm sorry, No, 69 00:03:30,560 --> 00:03:32,560 Speaker 3: I just want to establish that I believe in this 70 00:03:32,680 --> 00:03:35,680 Speaker 3: moment we are talking to the perfect guest. And then listeners, 71 00:03:35,680 --> 00:03:37,560 Speaker 3: why didn't you call Rich the perfect guest? So I 72 00:03:37,600 --> 00:03:38,360 Speaker 3: just want to make sure that. 73 00:03:38,400 --> 00:03:40,120 Speaker 2: It was truly an oversight. 74 00:03:40,640 --> 00:03:43,600 Speaker 3: Both Tracy and I consider you to be the perfect guest. 75 00:03:43,800 --> 00:03:46,600 Speaker 3: So we had that fifty basis point cut in September, 76 00:03:47,040 --> 00:03:49,320 Speaker 3: then we had the quarter point the week of the election. 77 00:03:49,640 --> 00:03:53,000 Speaker 3: As I'm looking at the warp function on the terminal 78 00:03:53,120 --> 00:03:56,480 Speaker 3: expectation is for there's sixty five percent chance of a 79 00:03:56,560 --> 00:03:58,480 Speaker 3: cut in December. So not a slam dunk, but that 80 00:03:58,600 --> 00:04:01,920 Speaker 3: still seems to be the expectation. What do you give us, 81 00:04:02,160 --> 00:04:06,200 Speaker 3: as a FED watcher your current read on the crosswinds 82 00:04:06,240 --> 00:04:08,080 Speaker 3: that the Fed is going. Let's start with the short 83 00:04:08,160 --> 00:04:10,200 Speaker 3: term still, because then we can get into the term 84 00:04:10,480 --> 00:04:12,920 Speaker 3: the crosswinds that are happening right now as the FED 85 00:04:12,960 --> 00:04:15,080 Speaker 3: looks for the near term path of policy. 86 00:04:15,080 --> 00:04:18,040 Speaker 5: Well, they've made some judgments. One they judge that policy 87 00:04:18,200 --> 00:04:21,960 Speaker 5: is restrictive, that they've done enough, and so they cut rates. 88 00:04:22,000 --> 00:04:24,480 Speaker 5: They recalibrated. I think that was the term the chair 89 00:04:24,880 --> 00:04:28,000 Speaker 5: used in September. Important to note they've begun to cut 90 00:04:28,080 --> 00:04:31,280 Speaker 5: rates even though inflation is still somewhat above target. Some 91 00:04:31,520 --> 00:04:33,839 Speaker 5: of your listeners may wonder why, and the answer is, 92 00:04:34,400 --> 00:04:37,400 Speaker 5: monetary policy operates with lags, and so if they had 93 00:04:37,400 --> 00:04:39,800 Speaker 5: waited to cut rates until inflation fall all the way 94 00:04:39,800 --> 00:04:41,960 Speaker 5: to two, then they might have overdone it. So I 95 00:04:42,000 --> 00:04:45,120 Speaker 5: do think it made sense to get the process started. 96 00:04:45,240 --> 00:04:47,159 Speaker 5: I do take them at their word. They're not on 97 00:04:47,240 --> 00:04:52,600 Speaker 5: a preset path. The committee is united a unanimous decision 98 00:04:52,760 --> 00:04:55,880 Speaker 5: to cut rates, and I think importantly, and I'm sure 99 00:04:55,880 --> 00:04:58,560 Speaker 5: we'll get to this later. You know, the chairs made 100 00:04:58,720 --> 00:05:01,600 Speaker 5: very clear that he and the Committee are not going 101 00:05:01,680 --> 00:05:05,200 Speaker 5: to be making policy decisions in twenty twenty four based 102 00:05:05,279 --> 00:05:08,080 Speaker 5: upon what might happen in twenty twenty five, and so 103 00:05:08,400 --> 00:05:10,880 Speaker 5: I think it's important to clarify that. I think they 104 00:05:10,920 --> 00:05:14,080 Speaker 5: are data dependent. But my sense is that the probabilities 105 00:05:14,120 --> 00:05:17,359 Speaker 5: that you quoted seem pretty sensible to me. Not a 106 00:05:17,400 --> 00:05:20,039 Speaker 5: slam dunk, but I think more likely than not that 107 00:05:20,080 --> 00:05:22,160 Speaker 5: we get a rate cut in December. 108 00:05:23,080 --> 00:05:25,480 Speaker 2: So, just on this point, how do you square the 109 00:05:25,839 --> 00:05:30,640 Speaker 2: proverbial lags in monetary policy with the desire to not 110 00:05:30,880 --> 00:05:35,719 Speaker 2: be reacting to an incoming administration where policies are not 111 00:05:35,920 --> 00:05:37,600 Speaker 2: necessarily clear at the moment. 112 00:05:38,839 --> 00:05:40,760 Speaker 5: It's a great point. Luckily, we have a lot of 113 00:05:40,920 --> 00:05:44,160 Speaker 5: historical examples because as you know, we have presidential elections 114 00:05:44,200 --> 00:05:47,120 Speaker 5: every four years, and the FED as an institution in 115 00:05:47,160 --> 00:05:49,560 Speaker 5: the staff have a lot of experience. And one of 116 00:05:49,640 --> 00:05:53,359 Speaker 5: the things I learned is especially in the US system, 117 00:05:53,440 --> 00:05:56,520 Speaker 5: unlike say the UK system, where you present a budget, 118 00:05:56,560 --> 00:05:59,520 Speaker 5: and here there's a whole set of negotiations. And so 119 00:05:59,800 --> 00:06:02,200 Speaker 5: I do think that the chair gave a good insight 120 00:06:02,279 --> 00:06:05,640 Speaker 5: into the process that they'll follow, which is, over time 121 00:06:05,680 --> 00:06:08,800 Speaker 5: they'll learn about the contours of the plans for policy, 122 00:06:08,839 --> 00:06:11,839 Speaker 5: then what gets enacted. I do think, you know, it 123 00:06:11,960 --> 00:06:14,440 Speaker 5: is a good point. I think initial conditions here are 124 00:06:14,520 --> 00:06:18,599 Speaker 5: quite relevant, and so in particular with inflation running close 125 00:06:18,640 --> 00:06:21,280 Speaker 5: to target if a bit above, I think the general 126 00:06:21,320 --> 00:06:24,440 Speaker 5: playbook they usually follow makes sense. You know, there is 127 00:06:24,480 --> 00:06:27,400 Speaker 5: a risk that if they don't start moving now, then 128 00:06:27,440 --> 00:06:30,440 Speaker 5: for certain scenarios it's too late. But I think given 129 00:06:30,440 --> 00:06:32,760 Speaker 5: where inflation as, they're making the correct call. 130 00:06:33,440 --> 00:06:36,440 Speaker 3: So I don't know if economics is really a science 131 00:06:36,600 --> 00:06:38,680 Speaker 3: or not, but if it is a science, I feel 132 00:06:38,720 --> 00:06:43,400 Speaker 3: like economists are cursed to never have the pure experiments 133 00:06:43,880 --> 00:06:45,839 Speaker 3: in the real world that they would like to see 134 00:06:45,880 --> 00:06:50,200 Speaker 3: and I'm thinking about that specifically since September. Since mid 135 00:06:50,240 --> 00:06:53,720 Speaker 3: September early October we got that fifty basis point cut. 136 00:06:54,080 --> 00:06:57,000 Speaker 3: Since then, rates at the long end in particular have 137 00:06:57,080 --> 00:07:02,080 Speaker 3: been rising. Unfortunately, from a pure scientific experiment, that is 138 00:07:02,160 --> 00:07:05,160 Speaker 3: around the same time that Donald Trump's odds in the 139 00:07:05,200 --> 00:07:09,320 Speaker 3: polls also started rising. Therefore, it's a little tough to 140 00:07:09,360 --> 00:07:12,560 Speaker 3: tease out how much of this is. Okay, We're going 141 00:07:12,640 --> 00:07:16,240 Speaker 3: to have more reflationary policies in the next administration, which 142 00:07:16,280 --> 00:07:20,280 Speaker 3: we can get to versus you know what, the economy 143 00:07:20,320 --> 00:07:23,320 Speaker 3: is stronger than we thought, neutral is stronger than we thought, 144 00:07:23,360 --> 00:07:25,400 Speaker 3: and the terminal rate is not going to be as 145 00:07:25,440 --> 00:07:28,680 Speaker 3: low as we thought, simply due to existing economic conditions. 146 00:07:29,080 --> 00:07:31,040 Speaker 3: When you look at that rise in the long end, 147 00:07:31,080 --> 00:07:33,480 Speaker 3: the higher terminal rate, and so forth, how do you 148 00:07:33,520 --> 00:07:36,720 Speaker 3: try to disambiguate the two and what signal, if any, 149 00:07:36,760 --> 00:07:39,560 Speaker 3: do you read in post September market activity. 150 00:07:40,040 --> 00:07:42,520 Speaker 5: Great question, and I think you know the simple answer 151 00:07:42,600 --> 00:07:44,240 Speaker 5: would be you look at all the above. But I 152 00:07:44,240 --> 00:07:48,080 Speaker 5: think we can make a couple of informed observations. The 153 00:07:48,160 --> 00:07:50,120 Speaker 5: first and if I were back on my old FED job, 154 00:07:50,160 --> 00:07:53,320 Speaker 5: I'd be looking at this is longer term measures of 155 00:07:53,360 --> 00:07:58,000 Speaker 5: longer term inflation expectations, either in the tips market or surveys, 156 00:07:58,160 --> 00:08:01,920 Speaker 5: and those are very well behave. Secondly, we also have 157 00:08:01,960 --> 00:08:05,600 Speaker 5: had some pretty strong macro data, big revisions to GDP, 158 00:08:05,840 --> 00:08:09,000 Speaker 5: which in some ways really change in important ways the 159 00:08:09,040 --> 00:08:12,720 Speaker 5: assessment of where the economy is right now. We got 160 00:08:12,720 --> 00:08:15,120 Speaker 5: a very soft labor market report, but I think the 161 00:08:15,160 --> 00:08:17,720 Speaker 5: markets in the FED are inclined to look through that 162 00:08:17,960 --> 00:08:22,200 Speaker 5: given the storm and other related consequences of that. A 163 00:08:22,320 --> 00:08:25,600 Speaker 5: term perhaps you've used on your show before is also 164 00:08:25,640 --> 00:08:27,960 Speaker 5: look at the term premium. How much of this move 165 00:08:28,000 --> 00:08:31,320 Speaker 5: and yields is essentially bond investors saying I want to 166 00:08:31,360 --> 00:08:34,120 Speaker 5: get paid more in terms of a higher yield given 167 00:08:34,160 --> 00:08:37,360 Speaker 5: what may happen to fiscal policy or growth. And I 168 00:08:37,360 --> 00:08:39,480 Speaker 5: think all of the above has been going on. It 169 00:08:39,520 --> 00:08:43,600 Speaker 5: has been some moving term premium, some stronger data, backward 170 00:08:43,640 --> 00:08:47,120 Speaker 5: looking data, and probably some repricing of the path for 171 00:08:47,200 --> 00:08:50,160 Speaker 5: the economy given the election. I would point out that 172 00:08:50,240 --> 00:08:53,880 Speaker 5: at this stage, I think you want to distinguish between 173 00:08:54,440 --> 00:08:57,760 Speaker 5: a phenomenon where by knowing the election victor, I think 174 00:08:57,760 --> 00:09:01,240 Speaker 5: we know something about the contours, for example, tax policy, 175 00:09:01,240 --> 00:09:05,000 Speaker 5: It's more likely that the twenty seventeen. Trump tax cuts 176 00:09:05,000 --> 00:09:07,880 Speaker 5: are going to get extended more or less intact, and 177 00:09:07,880 --> 00:09:10,480 Speaker 5: that probably would not have been the outcome if we'd 178 00:09:10,480 --> 00:09:13,520 Speaker 5: had an opposite election outcome. So I think in this 179 00:09:13,600 --> 00:09:16,160 Speaker 5: early stage, it's hard to determine how much of this 180 00:09:16,240 --> 00:09:19,080 Speaker 5: is a repricing of the level of markets versus a 181 00:09:19,120 --> 00:09:21,920 Speaker 5: new trend, because I think both could be going on. 182 00:09:22,920 --> 00:09:25,439 Speaker 2: I feel like I should just mention again, we're recording 183 00:09:25,480 --> 00:09:30,319 Speaker 2: this on November twelfth, and there is something happening tomorrow 184 00:09:30,360 --> 00:09:32,720 Speaker 2: that might have a bearing on this conversation, which is 185 00:09:32,760 --> 00:09:36,000 Speaker 2: we're going to get the latest CPI reading when it 186 00:09:36,040 --> 00:09:41,040 Speaker 2: comes to inflation. Obviously there has been improvement on this front, 187 00:09:41,120 --> 00:09:45,720 Speaker 2: but in the most recent FMC meaning Powell was emphasizing, 188 00:09:45,920 --> 00:09:48,400 Speaker 2: you know, really making the point that he expects this 189 00:09:48,559 --> 00:09:52,400 Speaker 2: to be a sort of bumpy path going forward. When 190 00:09:52,440 --> 00:09:55,440 Speaker 2: a FED chair is saying something like that, should we 191 00:09:55,480 --> 00:09:58,160 Speaker 2: assume that the risk is to the upside on prices? 192 00:09:59,360 --> 00:10:01,760 Speaker 5: I don't think so. I don't think that's the message 193 00:10:01,760 --> 00:10:03,640 Speaker 5: he was trying to convey. I take him at his 194 00:10:03,760 --> 00:10:07,000 Speaker 5: word that it is a bumpy path. Maybe I'll put 195 00:10:07,040 --> 00:10:10,079 Speaker 5: something back into that conversation that sort of fell out 196 00:10:10,080 --> 00:10:12,040 Speaker 5: of favor. There's a lot of talk a year ago 197 00:10:12,040 --> 00:10:15,079 Speaker 5: about the last mile being tough to navigate, and I 198 00:10:15,120 --> 00:10:17,560 Speaker 5: would point out that, you know, if you look at 199 00:10:17,559 --> 00:10:21,200 Speaker 5: inflation on a twelve month basis, in December of last year, 200 00:10:21,240 --> 00:10:24,160 Speaker 5: inflation fell to two point nine the Fed's preferred measure 201 00:10:24,280 --> 00:10:27,040 Speaker 5: on the core PCEE and that was a big moment. 202 00:10:27,120 --> 00:10:29,520 Speaker 5: That was the first time in almost three years inflation 203 00:10:29,640 --> 00:10:33,160 Speaker 5: had was two points something. It's very likely that this 204 00:10:33,320 --> 00:10:35,960 Speaker 5: year will end in inflation will end on a twelve 205 00:10:35,960 --> 00:10:38,480 Speaker 5: month basis anyway at around two eight or two nine. 206 00:10:38,559 --> 00:10:41,040 Speaker 5: So at least by that metric, you know, this is 207 00:10:41,040 --> 00:10:43,800 Speaker 5: a year when we've not moved backwards. But you could 208 00:10:43,880 --> 00:10:46,719 Speaker 5: argue that, you know, progress on inflation at minimum has 209 00:10:46,760 --> 00:10:50,320 Speaker 5: been slow. And so the way I take the conversation 210 00:10:50,440 --> 00:10:52,920 Speaker 5: from the Chair and other members of the FED is 211 00:10:53,160 --> 00:10:56,560 Speaker 5: they have a view that disinflation will continue, but they're 212 00:10:56,600 --> 00:10:58,880 Speaker 5: also open to the risk that it may stall. I 213 00:10:58,960 --> 00:11:01,600 Speaker 5: don't think necessarily it means inflation is going to go 214 00:11:01,760 --> 00:11:05,600 Speaker 5: up to frightening levels, but progress could stall, and I 215 00:11:05,640 --> 00:11:08,360 Speaker 5: think that they're very attuned and attentive to evidence in 216 00:11:08,400 --> 00:11:09,200 Speaker 5: the data on that. 217 00:11:25,480 --> 00:11:28,520 Speaker 3: So, as you mentioned, you know, there's a confluence of factors. 218 00:11:28,800 --> 00:11:32,600 Speaker 3: One of the things that may explain why the market 219 00:11:32,640 --> 00:11:35,440 Speaker 3: has repriced its terminal rate or the depth of the 220 00:11:35,520 --> 00:11:38,400 Speaker 3: rate cut cycle this time. And you mentioned that we 221 00:11:38,480 --> 00:11:40,720 Speaker 3: had some pot we got that strong job support, there 222 00:11:40,800 --> 00:11:43,400 Speaker 3: was some positive GDP revisions that make it look like 223 00:11:43,400 --> 00:11:46,720 Speaker 3: the economy is in a higher state. The one thing 224 00:11:46,800 --> 00:11:49,160 Speaker 3: that's been bandied about for years now is this idea 225 00:11:49,200 --> 00:11:53,120 Speaker 3: that post pandemic, like so called our star is higher. 226 00:11:53,480 --> 00:11:55,280 Speaker 3: I don't know what it is, whether it is higher 227 00:11:55,360 --> 00:11:58,360 Speaker 3: or not, but if it is higher, what's different. Suppose 228 00:11:58,440 --> 00:12:02,920 Speaker 3: it is higher changed in your view? That would explain 229 00:12:03,320 --> 00:12:05,480 Speaker 3: a higher neutral rate of interest? 230 00:12:06,080 --> 00:12:09,400 Speaker 5: Good point. I think a couple of factors. First of all, 231 00:12:09,440 --> 00:12:12,200 Speaker 5: why was our star believed to be pretty low in 232 00:12:12,240 --> 00:12:14,560 Speaker 5: the decade before the pandemic Maybe you know a bit 233 00:12:14,600 --> 00:12:17,439 Speaker 5: of an anecdote. There was also uncertainty about our star 234 00:12:18,080 --> 00:12:21,720 Speaker 5: in twenty eighteen when I arrived at the FED range 235 00:12:21,720 --> 00:12:24,240 Speaker 5: of views, I think from the fund rate maybe two 236 00:12:24,320 --> 00:12:26,280 Speaker 5: and a half up to three and a half in 237 00:12:26,280 --> 00:12:29,079 Speaker 5: that cycle, the Palfed sort of found out where neutral 238 00:12:29,320 --> 00:12:30,960 Speaker 5: was because when we got the fund rate to two 239 00:12:31,000 --> 00:12:33,080 Speaker 5: and a half, the economy was in a pretty good place. 240 00:12:33,120 --> 00:12:36,040 Speaker 5: In fact, if anything, inflation began to slow. So it 241 00:12:36,160 --> 00:12:38,680 Speaker 5: is true that you don't know it precisely, but you 242 00:12:38,720 --> 00:12:40,120 Speaker 5: can sort of have a sense if you're in the 243 00:12:40,160 --> 00:12:43,040 Speaker 5: right ballpark. So why might it have gone up? Well, 244 00:12:43,080 --> 00:12:46,360 Speaker 5: there are some positive reasons and maybe some more negative reasons. 245 00:12:46,360 --> 00:12:48,920 Speaker 5: The positive reason is our star is thought to be 246 00:12:48,960 --> 00:12:51,960 Speaker 5: related to growth. So if potential growth is higher, either 247 00:12:52,080 --> 00:12:56,319 Speaker 5: because of innovation or AI or list your favorite contributor, 248 00:12:56,640 --> 00:12:59,840 Speaker 5: that could push up our star. It could also reflect, 249 00:13:00,040 --> 00:13:03,160 Speaker 5: you know, demand for capital. We have had some evidence 250 00:13:03,200 --> 00:13:07,400 Speaker 5: at least in certain sectors of expanded capital spending. We 251 00:13:07,440 --> 00:13:10,800 Speaker 5: went through a decade when capital spending was was was weak. 252 00:13:11,080 --> 00:13:12,600 Speaker 5: On the other side of the ledger, A lot of 253 00:13:12,600 --> 00:13:15,120 Speaker 5: the factors that we're keeping our star pretty low have 254 00:13:15,240 --> 00:13:19,160 Speaker 5: not really changed, you know, Demographic factors have not really moved, 255 00:13:19,559 --> 00:13:22,920 Speaker 5: and if anything, saving has been moving up. So I 256 00:13:22,960 --> 00:13:24,800 Speaker 5: think they will find it in this cycle as we 257 00:13:24,800 --> 00:13:27,360 Speaker 5: did in the last cycle by looking at the data 258 00:13:27,559 --> 00:13:30,760 Speaker 5: and as they get close, you know, rethinking. 259 00:13:30,240 --> 00:13:33,840 Speaker 3: That could government spending be a contributor, given that deficits 260 00:13:33,880 --> 00:13:36,800 Speaker 3: to the share of GDP are very high, given where 261 00:13:36,840 --> 00:13:40,280 Speaker 3: the unemployment rate in resource utilization generally. 262 00:13:40,600 --> 00:13:42,600 Speaker 5: Certainly, and here maybe if I could be a little 263 00:13:42,640 --> 00:13:46,439 Speaker 5: wonkish for your listeners, never never worry about that. And 264 00:13:46,840 --> 00:13:49,480 Speaker 5: I wrote a recent essay in the in the FT 265 00:13:49,920 --> 00:13:52,520 Speaker 5: on this on this topic. Here, I do think you 266 00:13:52,600 --> 00:13:55,960 Speaker 5: want to distinguish between the neutral rate that the FED 267 00:13:56,040 --> 00:13:58,120 Speaker 5: focuses on, which is really the front end of the 268 00:13:58,160 --> 00:14:00,319 Speaker 5: yield curve. So where's the funds rate going to end 269 00:14:00,400 --> 00:14:03,560 Speaker 5: up when inflation gets to target? Right now? That FED 270 00:14:03,600 --> 00:14:06,760 Speaker 5: thinks that numbers around three percent. If you ask me 271 00:14:06,800 --> 00:14:09,040 Speaker 5: the question, where are bond yields going to end up? 272 00:14:09,480 --> 00:14:11,160 Speaker 5: My own view, and I think the Pimco view is 273 00:14:11,240 --> 00:14:14,439 Speaker 5: higher than we saw in the decade before the pandemic. 274 00:14:14,480 --> 00:14:16,400 Speaker 5: So in other words, we think the front end of 275 00:14:16,400 --> 00:14:19,040 Speaker 5: the curve may not be all that higher, but long 276 00:14:19,120 --> 00:14:21,160 Speaker 5: rates could be higher because the curve will be steeper. 277 00:14:21,200 --> 00:14:24,680 Speaker 5: In other words, markets will adjust not so much because 278 00:14:24,720 --> 00:14:27,320 Speaker 5: the FED has to do something different, but because the 279 00:14:27,400 --> 00:14:29,800 Speaker 5: yuel curve will be steeper. It was very flat in 280 00:14:29,840 --> 00:14:33,760 Speaker 5: the decade before the pandemic. For example, in twenty eighteen, 281 00:14:33,840 --> 00:14:35,520 Speaker 5: when we got the funds rate up to two and 282 00:14:35,520 --> 00:14:38,840 Speaker 5: a half, tenure treasure eels were three and so for 283 00:14:38,920 --> 00:14:41,880 Speaker 5: the reasons you mentioned deficits and debt probably in a 284 00:14:41,920 --> 00:14:45,080 Speaker 5: world with higher longer yields than we saw in the 285 00:14:45,080 --> 00:14:46,760 Speaker 5: decade before the pandemic. 286 00:14:47,560 --> 00:14:51,240 Speaker 2: Since we're on the topic of higher long term yields, 287 00:14:51,560 --> 00:14:53,680 Speaker 2: one of the things we've been speaking about on the 288 00:14:53,720 --> 00:14:57,320 Speaker 2: show recently is mortgage rates, and even though the FED 289 00:14:57,400 --> 00:15:02,160 Speaker 2: has been cutting, those haven't really gone down, partly because 290 00:15:02,160 --> 00:15:05,440 Speaker 2: they are influenced by longer term treasury yields and those 291 00:15:05,480 --> 00:15:09,560 Speaker 2: are going up. Given that, you know, affecting the cost 292 00:15:09,680 --> 00:15:12,160 Speaker 2: of housing or the mortgage rate is supposed to be 293 00:15:12,280 --> 00:15:16,239 Speaker 2: a primary tool in which a central bank actually influences 294 00:15:16,280 --> 00:15:19,640 Speaker 2: the real economy. Does that pose a problem at all 295 00:15:19,720 --> 00:15:20,760 Speaker 2: for the central bank? 296 00:15:22,080 --> 00:15:25,280 Speaker 5: I think it's a reality for the central bank because 297 00:15:25,520 --> 00:15:27,960 Speaker 5: for the most part, although the FED has been very 298 00:15:28,000 --> 00:15:31,680 Speaker 5: active in supporting the mortgage market through the QE programs, 299 00:15:31,720 --> 00:15:35,240 Speaker 5: it's mortgage portfolio is running off, and if anything, tracy, 300 00:15:35,280 --> 00:15:38,360 Speaker 5: they've indicated that may well continue even when they stop 301 00:15:38,680 --> 00:15:42,240 Speaker 5: qt In general, and you are correct, mortgages will tend 302 00:15:42,320 --> 00:15:44,600 Speaker 5: yields will tend to move closely, not so much with 303 00:15:45,000 --> 00:15:48,240 Speaker 5: the funds rate, but the longer end of the yield curve. 304 00:15:48,920 --> 00:15:50,960 Speaker 5: I would say it's more of a reality. As they 305 00:15:51,000 --> 00:15:54,560 Speaker 5: think about the appropriate stance of policy, they will need 306 00:15:54,600 --> 00:15:58,240 Speaker 5: to factor that in to what they project they need 307 00:15:58,280 --> 00:16:02,080 Speaker 5: to do to achieve their inflation employment target. So I 308 00:16:02,080 --> 00:16:04,720 Speaker 5: think the in the FEDS thinking it's just a reality 309 00:16:05,040 --> 00:16:07,680 Speaker 5: of the way the financial markets work, and that may 310 00:16:07,720 --> 00:16:10,720 Speaker 5: call them to adjust policy in one way or another 311 00:16:10,760 --> 00:16:11,400 Speaker 5: in the future. 312 00:16:11,840 --> 00:16:15,280 Speaker 3: There was a famous paper that came out staying on 313 00:16:15,360 --> 00:16:18,720 Speaker 3: the subject of housing called Housing is the Business Cycle. 314 00:16:18,920 --> 00:16:21,000 Speaker 3: And one of the things that was interesting was that 315 00:16:21,120 --> 00:16:24,720 Speaker 3: during twenty twenty two, when the you know, when mortgage 316 00:16:24,760 --> 00:16:26,720 Speaker 3: rates really started to rocket higher, we did get this 317 00:16:26,800 --> 00:16:28,560 Speaker 3: freeze in the housing market that we didn't see a 318 00:16:28,560 --> 00:16:32,000 Speaker 3: plungin home prices, but we really saw, Yeah, the market 319 00:16:32,080 --> 00:16:33,760 Speaker 3: sort of came to a freeze. And there still is 320 00:16:33,800 --> 00:16:36,320 Speaker 3: a lot of diminished activity, and we still see fewer 321 00:16:36,440 --> 00:16:38,880 Speaker 3: housing starts, and we still don't see a lot of 322 00:16:38,920 --> 00:16:41,720 Speaker 3: sales and all this stuff. Do you think the relationship 323 00:16:41,800 --> 00:16:45,120 Speaker 3: has changed in some way between the housing market and 324 00:16:45,240 --> 00:16:46,440 Speaker 3: the broader macroeconomy. 325 00:16:46,760 --> 00:16:49,160 Speaker 5: Great question, because you know, you look at I've been 326 00:16:49,160 --> 00:16:51,200 Speaker 5: doing this now for four decades, so you look at 327 00:16:51,200 --> 00:16:54,640 Speaker 5: business cycle history and there are some common features and 328 00:16:54,680 --> 00:16:58,280 Speaker 5: then there are always some surprises, and in particular in 329 00:16:58,600 --> 00:17:02,320 Speaker 5: this cycle, one thing that has been different is the 330 00:17:02,400 --> 00:17:05,439 Speaker 5: fact that so many folks in the years before the 331 00:17:05,480 --> 00:17:07,880 Speaker 5: FED raised rates were able to lock in low rate 332 00:17:08,119 --> 00:17:11,640 Speaker 5: mortgages that you've had less mobility. People are less likely 333 00:17:11,680 --> 00:17:14,000 Speaker 5: to move and if they want to, simply because if 334 00:17:14,040 --> 00:17:16,119 Speaker 5: they sell their house, they then got to get a 335 00:17:16,160 --> 00:17:19,199 Speaker 5: mortgage at a much higher rate. Now, this phenomenon is 336 00:17:19,280 --> 00:17:22,479 Speaker 5: always evident in the data, because people can lock in 337 00:17:22,480 --> 00:17:25,159 Speaker 5: low rates and then rates move up. But what's different 338 00:17:25,160 --> 00:17:27,960 Speaker 5: in this cycle is the magnitude of the gap between 339 00:17:28,000 --> 00:17:30,560 Speaker 5: the spot mortgage rate and the rate that millions and 340 00:17:30,600 --> 00:17:33,240 Speaker 5: tens of millions of people locked in. So I think 341 00:17:33,240 --> 00:17:36,320 Speaker 5: in that respect, this is a different cycle, and it's 342 00:17:36,359 --> 00:17:39,680 Speaker 5: been a factor that's been supporting house prices even though 343 00:17:39,680 --> 00:17:43,119 Speaker 5: the Fed's been raising rates dramatically. Typically you would not 344 00:17:43,200 --> 00:17:44,679 Speaker 5: have seen that in past. 345 00:17:45,080 --> 00:17:48,040 Speaker 2: Just related to this topic, the FED has been talking 346 00:17:48,080 --> 00:17:51,320 Speaker 2: a lot about how it's necessary to I guess, ease 347 00:17:51,400 --> 00:17:55,679 Speaker 2: up on the restrictiveness of monetary policy and therefore cut rates. 348 00:17:55,880 --> 00:17:58,639 Speaker 2: And I'm always a little bit confused because when I 349 00:17:58,760 --> 00:18:03,600 Speaker 2: look at financial conditions on the Bloomberg, they look pretty 350 00:18:03,840 --> 00:18:07,520 Speaker 2: easy to me. And you know, obviously this has happened 351 00:18:07,760 --> 00:18:10,920 Speaker 2: post the FMC meeting, but we have, for instance, junk 352 00:18:10,960 --> 00:18:14,800 Speaker 2: bond spreads getting pretty close to historical lows, Equity markets 353 00:18:14,840 --> 00:18:19,880 Speaker 2: obviously at a record. Where's the restrictiveness actually showing up? 354 00:18:21,080 --> 00:18:23,320 Speaker 5: Great point, and I look at the same screens that 355 00:18:23,400 --> 00:18:26,200 Speaker 5: you both do as well. The FED, the Board of 356 00:18:26,240 --> 00:18:28,960 Speaker 5: Governors actually about a year ago or so, developed its 357 00:18:28,960 --> 00:18:34,080 Speaker 5: own index of financial conditions, and that also shows conditions, 358 00:18:34,480 --> 00:18:37,960 Speaker 5: you know, trending in an easier direction. The chair got 359 00:18:38,000 --> 00:18:40,640 Speaker 5: a question or two on this and the press conference 360 00:18:40,760 --> 00:18:43,200 Speaker 5: last week, and I'm paraphrasing, but his answer was more 361 00:18:43,200 --> 00:18:45,600 Speaker 5: along the lines of they try not to get up 362 00:18:45,640 --> 00:18:48,040 Speaker 5: in high frequency, you know, day to day, week to 363 00:18:48,080 --> 00:18:50,080 Speaker 5: week moves, but they do want to look at longer 364 00:18:50,160 --> 00:18:52,560 Speaker 5: run trends, I would argue, And if you look at 365 00:18:52,560 --> 00:18:56,200 Speaker 5: longer run trends, now you know conditions are certainly moving 366 00:18:56,280 --> 00:19:00,240 Speaker 5: in an easier direction. Now you know that's okay, But 367 00:19:00,359 --> 00:19:03,880 Speaker 5: it's also important. I think as the FED communicates through 368 00:19:04,320 --> 00:19:07,720 Speaker 5: press conferences and speeches, you know that they clarify what 369 00:19:07,840 --> 00:19:10,440 Speaker 5: they are looking at, because sometimes FED officials will talk 370 00:19:10,440 --> 00:19:14,640 Speaker 5: about the funds rate being restrictive relative to inflation and history, 371 00:19:14,640 --> 00:19:17,600 Speaker 5: and that's that's true, But the conversation I think also 372 00:19:17,760 --> 00:19:20,960 Speaker 5: needs to acknowledge what we're looking at in different parts 373 00:19:21,000 --> 00:19:23,359 Speaker 5: of the of the markets. Now, again, inflation is on 374 00:19:23,400 --> 00:19:26,240 Speaker 5: the path down to two percent, so and easing a 375 00:19:26,320 --> 00:19:29,600 Speaker 5: conditions relative to say twenty twenty two, and they're very restrictive, 376 00:19:29,680 --> 00:19:32,720 Speaker 5: is not necessarily a problem, but it certainly I think 377 00:19:32,840 --> 00:19:35,560 Speaker 5: needs to be a factor in the outlook. 378 00:19:36,080 --> 00:19:36,720 Speaker 4: I'm going to ask you. 379 00:19:36,680 --> 00:19:38,440 Speaker 3: A sort of I think it would be a variation 380 00:19:38,760 --> 00:19:41,320 Speaker 3: on Tracy's question, and it came up in also a 381 00:19:41,359 --> 00:19:45,120 Speaker 3: recent episode we did with Chicago Fed President Austin goulds, Now, 382 00:19:45,160 --> 00:19:48,600 Speaker 3: when you look at the progress that we've made on 383 00:19:48,880 --> 00:19:54,560 Speaker 3: inflation since it peaked, given that many financial indices have surged, 384 00:19:54,960 --> 00:19:58,040 Speaker 3: given that the unemployment rate is still only four point 385 00:19:58,160 --> 00:20:01,240 Speaker 3: one percent, what's your store for it and what's your 386 00:20:01,280 --> 00:20:05,600 Speaker 3: story for the connection between the move up in short 387 00:20:05,680 --> 00:20:08,320 Speaker 3: term interest rates by the Fed and how that fed 388 00:20:08,359 --> 00:20:09,960 Speaker 3: through to lower realized inflation. 389 00:20:11,440 --> 00:20:13,760 Speaker 5: Well, you know, the in my youth used to call 390 00:20:13,800 --> 00:20:16,119 Speaker 5: it the sixty four thousand dollars question. Maybe this is 391 00:20:16,119 --> 00:20:17,840 Speaker 5: sixty four billion dollar. 392 00:20:18,080 --> 00:20:21,400 Speaker 2: Inflation hypothetical questions, Mobully. 393 00:20:21,080 --> 00:20:24,639 Speaker 5: The sixty four trillion dollar question. The good news is 394 00:20:24,720 --> 00:20:26,840 Speaker 5: relative to real time, and I can tell you as 395 00:20:26,880 --> 00:20:29,560 Speaker 5: a FED official in twenty twenty one, we had so 396 00:20:29,680 --> 00:20:34,960 Speaker 5: many conflicting signals, but with the benefit of hindsight and 397 00:20:35,040 --> 00:20:38,760 Speaker 5: also looking across the globe, I think some pretty clear 398 00:20:39,320 --> 00:20:42,160 Speaker 5: patterns helped to account for this. You know, I should 399 00:20:42,200 --> 00:20:46,360 Speaker 5: also confess that I was a charter member of Team Transitory. 400 00:20:46,359 --> 00:20:49,080 Speaker 3: This is where people come up odd lots. Is confession 401 00:20:49,720 --> 00:20:50,600 Speaker 3: confession time. 402 00:20:50,680 --> 00:20:54,440 Speaker 5: I was a charter member of Team Transitory. And obviously 403 00:20:54,840 --> 00:20:57,480 Speaker 5: it took a while for inflation to get back to 404 00:20:57,520 --> 00:21:00,760 Speaker 5: two points something. A couple of things. For first of all, 405 00:21:01,040 --> 00:21:04,439 Speaker 5: in retrospect, a lot of the surgeon inflation in the 406 00:21:04,560 --> 00:21:08,919 Speaker 5: US and globally was driven by supply disruptions. You know, 407 00:21:08,960 --> 00:21:12,399 Speaker 5: it turned out to be more timely and costly to 408 00:21:12,520 --> 00:21:15,399 Speaker 5: reopen the global economy than it was to shut it down. 409 00:21:15,880 --> 00:21:16,040 Speaker 4: You know. 410 00:21:16,160 --> 00:21:18,800 Speaker 5: Secondly, in the US, there was a lot of demand 411 00:21:18,840 --> 00:21:21,560 Speaker 5: support that was flooding the system. The FED went all 412 00:21:21,600 --> 00:21:24,879 Speaker 5: in without apology in twenty twenty. We had six trillion 413 00:21:24,960 --> 00:21:29,040 Speaker 5: dollars of physical support in twelve months. And so you know, 414 00:21:29,160 --> 00:21:31,480 Speaker 5: from econ one oh one, if the demand curve shift's 415 00:21:31,600 --> 00:21:34,120 Speaker 5: right and the supply curslift's left, you're going to get 416 00:21:34,240 --> 00:21:36,479 Speaker 5: a move up in prices, and that's what we got. 417 00:21:36,880 --> 00:21:39,240 Speaker 5: There was a lot of uncertainty when the palt Fed 418 00:21:39,280 --> 00:21:42,200 Speaker 5: started hiking in twenty twenty two about would they succeed, 419 00:21:42,320 --> 00:21:46,280 Speaker 5: what would it take to get inflation down? And I think, 420 00:21:46,480 --> 00:21:49,000 Speaker 5: you know, we're all pleased that, in fact, inflation has 421 00:21:49,040 --> 00:21:52,240 Speaker 5: come down pretty close to target without a real disruption 422 00:21:52,320 --> 00:21:54,959 Speaker 5: in the economy. And I think that's due to some 423 00:21:55,000 --> 00:21:59,320 Speaker 5: of the supply shocks reversing here and abroad, and it's 424 00:21:59,359 --> 00:22:01,960 Speaker 5: also due to the fact that the pal Fed did 425 00:22:02,080 --> 00:22:06,040 Speaker 5: raise rates aggressively they reactored inflation expectations. I think, if 426 00:22:06,040 --> 00:22:08,439 Speaker 5: I can editorialize a bit here, I think we're in 427 00:22:08,480 --> 00:22:10,680 Speaker 5: a world where, unlike on your show, we're going to 428 00:22:10,760 --> 00:22:14,280 Speaker 5: have thirty or forty minutes. A lot of economics contary 429 00:22:14,440 --> 00:22:17,480 Speaker 5: takes place on Twitter and one hundred and forty characters, 430 00:22:17,520 --> 00:22:20,040 Speaker 5: and there are a lot of topics and economics and 431 00:22:20,119 --> 00:22:22,920 Speaker 5: finance that are really you can't do justice too and 432 00:22:23,240 --> 00:22:25,280 Speaker 5: in a tweet, and I think this is one of them. 433 00:22:25,320 --> 00:22:27,120 Speaker 5: So some folks look at this and they say, well, 434 00:22:27,119 --> 00:22:29,720 Speaker 5: it has to be supply, or it has to be demand, 435 00:22:29,840 --> 00:22:31,879 Speaker 5: or it has to be monetary policy. And in fact, 436 00:22:32,200 --> 00:22:34,600 Speaker 5: it was really an all of the above in response 437 00:22:34,640 --> 00:22:37,240 Speaker 5: to a once in a century shock, and it was 438 00:22:37,280 --> 00:22:41,320 Speaker 5: also a global phenomenon as well, And so I think 439 00:22:41,440 --> 00:22:44,040 Speaker 5: that's the received wisdom now. It was not obvious two 440 00:22:44,080 --> 00:22:45,480 Speaker 5: or three years ago. 441 00:22:46,040 --> 00:22:48,040 Speaker 2: I feel like this is my chance to ask you 442 00:22:48,080 --> 00:22:53,000 Speaker 2: what Powell's burner account on Twitter actually is, but it's 443 00:22:53,040 --> 00:22:54,080 Speaker 2: probably a long shot. 444 00:22:54,320 --> 00:22:54,639 Speaker 4: Okay. 445 00:22:54,880 --> 00:22:59,399 Speaker 2: So, speaking of like the overall macro picture and the 446 00:22:59,480 --> 00:23:02,840 Speaker 2: story that we tell ourselves, Richmond FED President Tom Barkin 447 00:23:03,280 --> 00:23:06,280 Speaker 2: was just speaking and he sort of laid out two 448 00:23:07,119 --> 00:23:11,080 Speaker 2: opposing paths for the economy going forward. And one is 449 00:23:11,320 --> 00:23:15,960 Speaker 2: a pretty optimistic path where election uncertainty is behind us, 450 00:23:16,000 --> 00:23:19,560 Speaker 2: and so companies feel more confident in terms of hiring 451 00:23:19,680 --> 00:23:24,280 Speaker 2: an investment, and so everything stays very pleasant and the 452 00:23:24,280 --> 00:23:29,320 Speaker 2: economy keeps going strong. And then the downside scenario is 453 00:23:29,400 --> 00:23:33,800 Speaker 2: that as price is cool, companies feel more pressure to 454 00:23:34,200 --> 00:23:38,040 Speaker 2: cut costs in order to either maintain or boost their margins. 455 00:23:38,080 --> 00:23:40,919 Speaker 2: And that's when you start getting a labor market that 456 00:23:41,240 --> 00:23:43,840 Speaker 2: is weakening, you know, even further than some of the 457 00:23:43,840 --> 00:23:48,080 Speaker 2: softness that we've seen in recent months. What's your sort 458 00:23:48,119 --> 00:23:52,240 Speaker 2: of scenario analysis for let's say twenty twenty five. 459 00:23:53,560 --> 00:23:57,600 Speaker 5: Well, thank you for introducing scenarios, because that's also quite important. 460 00:23:57,880 --> 00:24:01,280 Speaker 5: So I do think the baseline I called the baseline scenario, 461 00:24:01,280 --> 00:24:04,679 Speaker 5: which is the most likely outcome, is the one the 462 00:24:04,720 --> 00:24:07,440 Speaker 5: FED has more or less, and really, you know, most 463 00:24:07,440 --> 00:24:11,199 Speaker 5: Wall Street economists and forecasters have sketched out Now my 464 00:24:11,480 --> 00:24:14,080 Speaker 5: former colleagues at the FED won't call it the soft landing, 465 00:24:14,119 --> 00:24:16,679 Speaker 5: but it looks like I'll call it the soft landing. 466 00:24:16,760 --> 00:24:21,040 Speaker 5: So inflation continues to return gradually to two percent in 467 00:24:21,080 --> 00:24:24,960 Speaker 5: the context of a fully employed economy, perhaps a modest 468 00:24:25,000 --> 00:24:29,280 Speaker 5: downshift in growth from maybe three percent down to somewhere 469 00:24:29,280 --> 00:24:33,600 Speaker 5: in the twos But an alternative scenario is what I 470 00:24:33,640 --> 00:24:36,240 Speaker 5: and I think this is where Tom bark and land 471 00:24:36,560 --> 00:24:40,280 Speaker 5: as well, is what I've called the sticky inflation scenario. Basically, 472 00:24:40,800 --> 00:24:43,480 Speaker 5: inflation doesn't get worse, it just doesn't get better. It 473 00:24:43,480 --> 00:24:46,600 Speaker 5: gets stuck it between two and a half and three percent. 474 00:24:46,960 --> 00:24:48,760 Speaker 5: I think that, you know, that's not the end of 475 00:24:48,800 --> 00:24:51,160 Speaker 5: the world, but that's a scenario where probably the FED 476 00:24:51,280 --> 00:24:54,720 Speaker 5: is not delivering on the rate cuts that the markets expect, 477 00:24:55,080 --> 00:24:57,199 Speaker 5: and then I think third and the least likely of 478 00:24:57,240 --> 00:24:59,639 Speaker 5: the three is one that maybe you also mentioned in 479 00:24:59,680 --> 00:25:03,040 Speaker 5: the text of Tom's speech, where we've had tightening in 480 00:25:03,119 --> 00:25:05,639 Speaker 5: financial conditions and policy. It's just taken a while to 481 00:25:05,680 --> 00:25:07,760 Speaker 5: show up, and when it does, you will have a 482 00:25:07,800 --> 00:25:11,840 Speaker 5: slowing economy, rising unemployment, perhaps in the context of maybe 483 00:25:11,880 --> 00:25:15,879 Speaker 5: even some sticky inflation. And that's probably of the three scenarios, 484 00:25:15,920 --> 00:25:18,320 Speaker 5: the one that that is the you know, the least friendly, 485 00:25:18,680 --> 00:25:20,600 Speaker 5: and the one that would be the toughest call for 486 00:25:20,680 --> 00:25:23,080 Speaker 5: the FED. And so I would think it's of the three, 487 00:25:23,160 --> 00:25:35,600 Speaker 5: the least likely, but certainly not a zero. 488 00:25:41,440 --> 00:25:43,520 Speaker 3: Some could say that in the twenty tens we sort 489 00:25:43,560 --> 00:25:46,400 Speaker 3: of had the reverse of that sticky inflation and that 490 00:25:46,720 --> 00:25:50,160 Speaker 3: for much of the time during that decade inflation did 491 00:25:50,200 --> 00:25:52,600 Speaker 3: not It was missing from the bottom. Yeah, it's a 492 00:25:52,640 --> 00:25:54,439 Speaker 3: nice problem to have, I kind of think, but it 493 00:25:54,480 --> 00:25:56,880 Speaker 3: was missing from the bottom. But arguably you could say 494 00:25:56,880 --> 00:25:59,760 Speaker 3: the FED tolerated it, and the FED was okay with it, 495 00:25:59,800 --> 00:26:02,400 Speaker 3: even I know technically it wasn't hitting the goal. Talk 496 00:26:02,440 --> 00:26:06,200 Speaker 3: a little bit more about that scenario in which inflation 497 00:26:06,359 --> 00:26:08,679 Speaker 3: is running at two and a half percent, as you 498 00:26:08,720 --> 00:26:11,199 Speaker 3: put it, that's not the end of the world, especially 499 00:26:11,359 --> 00:26:15,439 Speaker 3: if employment remains robust, but it is technically you know, 500 00:26:15,480 --> 00:26:17,960 Speaker 3: it is missing the goal. It is missing the mandate. 501 00:26:18,320 --> 00:26:20,439 Speaker 3: Talk a little bit more about that sort of not 502 00:26:20,560 --> 00:26:23,000 Speaker 3: the end of the world, slightly sticky scenario and how 503 00:26:23,040 --> 00:26:24,000 Speaker 3: the FED things are well. 504 00:26:24,080 --> 00:26:28,240 Speaker 5: And again I can clarify, not the end of the world, 505 00:26:28,520 --> 00:26:32,560 Speaker 5: you know, COMMA, so long as inflation expectations remain anchored. 506 00:26:33,400 --> 00:26:36,879 Speaker 5: And that's why you'll hear FED officials almost ad nauseum, 507 00:26:37,200 --> 00:26:39,800 Speaker 5: always put in that qualifier, so you know, once a 508 00:26:39,840 --> 00:26:41,840 Speaker 5: FED official, always a FED official, so long as an 509 00:26:41,880 --> 00:26:45,720 Speaker 5: inflation expectation, because the FED really does want people to 510 00:26:45,800 --> 00:26:49,000 Speaker 5: expect inflation to be two percent. And I think I'm 511 00:26:49,000 --> 00:26:51,399 Speaker 5: glad you brought up the prior decade because in the 512 00:26:51,400 --> 00:26:55,919 Speaker 5: prior decade inflation was operating below target. That was oftentimes 513 00:26:55,920 --> 00:26:58,360 Speaker 5: in the context of a soft labor market as well. 514 00:26:58,359 --> 00:27:01,000 Speaker 5: Remember it took like six or seven years for the 515 00:27:01,080 --> 00:27:03,080 Speaker 5: labor market to get back to where it had been 516 00:27:03,160 --> 00:27:06,440 Speaker 5: before the financial crisis, and so one of the big 517 00:27:06,440 --> 00:27:10,840 Speaker 5: differences is we got back very quickly to maximum employment here. 518 00:27:11,119 --> 00:27:13,600 Speaker 5: So I think, so long as people are expecting that 519 00:27:13,720 --> 00:27:16,960 Speaker 5: inflation will continue to fall if it gets stuck. I 520 00:27:17,000 --> 00:27:20,160 Speaker 5: don't think that's anything that triggers, you know, a dramatic 521 00:27:20,200 --> 00:27:24,399 Speaker 5: FED reaction. What it could do, however, is it could 522 00:27:24,560 --> 00:27:28,080 Speaker 5: mean that the FED just pauses rate cuts or slows 523 00:27:28,160 --> 00:27:30,679 Speaker 5: down the pace of rate cuts and you know, doesn't 524 00:27:30,680 --> 00:27:33,520 Speaker 5: deliver getting the funds rate all the way down to neutral, 525 00:27:33,880 --> 00:27:36,840 Speaker 5: as many folks thought in September when they cut rates 526 00:27:36,840 --> 00:27:40,560 Speaker 5: by fifty bases points. Maybe elaborate a bit. You know, 527 00:27:40,600 --> 00:27:43,720 Speaker 5: the Fed is undergoing on a five year schedule right 528 00:27:43,760 --> 00:27:47,919 Speaker 5: now or commencing a review of its monetary policy framework. 529 00:27:47,960 --> 00:27:51,200 Speaker 5: I was there during the last framework review in which 530 00:27:51,240 --> 00:27:55,200 Speaker 5: we all agreed upon unanimously to reaffirm the two percent 531 00:27:55,240 --> 00:27:58,000 Speaker 5: inflation target. I get a lot of questions, you know, 532 00:27:58,040 --> 00:28:00,960 Speaker 5: will the Poal Fed, you know, raised the It's an 533 00:28:01,000 --> 00:28:03,560 Speaker 5: easy question to answer because Pal's been asked that a 534 00:28:03,640 --> 00:28:06,040 Speaker 5: number of times and he always gives the same answer. No, 535 00:28:06,200 --> 00:28:08,879 Speaker 5: we will not raise the inflation target. So the Pala 536 00:28:08,880 --> 00:28:12,280 Speaker 5: FED is targeting two percent inflation. But just as in 537 00:28:12,320 --> 00:28:15,399 Speaker 5: the decade before inflation was a little bit below to 538 00:28:15,840 --> 00:28:18,520 Speaker 5: we operated there, we may operate for some time a 539 00:28:18,560 --> 00:28:20,399 Speaker 5: bit above two as well. 540 00:28:20,960 --> 00:28:24,639 Speaker 2: So we've been very focused on the macro but I 541 00:28:24,720 --> 00:28:27,760 Speaker 2: feel like we do have to ask some political questions 542 00:28:27,800 --> 00:28:31,720 Speaker 2: sure as well, And I think you were actually nominated 543 00:28:31,760 --> 00:28:36,080 Speaker 2: by President Trump, was that right? So I guess, first question, 544 00:28:36,240 --> 00:28:41,080 Speaker 2: how would you characterize Trump's relationship with the Central Bank 545 00:28:41,200 --> 00:28:43,840 Speaker 2: or the way that he views the role of an 546 00:28:43,880 --> 00:28:45,680 Speaker 2: institution like the Federal Reserve. 547 00:28:46,960 --> 00:28:50,080 Speaker 5: Well, I think he's made that clear through his public 548 00:28:50,160 --> 00:28:54,120 Speaker 5: comments over the years. He certainly opined on interest rates 549 00:28:54,200 --> 00:28:58,640 Speaker 5: during his time as as president. That was not unprecedented. Indeed, 550 00:28:58,640 --> 00:29:01,480 Speaker 5: if you go back and FED history in the olden days, 551 00:29:01,520 --> 00:29:04,200 Speaker 5: before all of us were active in markets, you had 552 00:29:04,240 --> 00:29:08,720 Speaker 5: presidents like Truman and Johnson and Nixon opining on the FED. 553 00:29:08,920 --> 00:29:13,400 Speaker 5: More recently, really, since the eighties and nineties, publicly, presidents 554 00:29:13,440 --> 00:29:16,600 Speaker 5: have not weighed in to FED discussions, although sometimes their 555 00:29:16,760 --> 00:29:20,160 Speaker 5: Treasury secretaries and their staffs, do you know. More recently, 556 00:29:20,200 --> 00:29:22,520 Speaker 5: during the campaign, he was asked about it, and as 557 00:29:22,520 --> 00:29:24,920 Speaker 5: I recall, his answer with something along the lines of 558 00:29:25,400 --> 00:29:28,960 Speaker 5: I should be able to offer my opinion on policy. 559 00:29:29,080 --> 00:29:32,200 Speaker 5: So I think it's pretty clear how he thinks about that. 560 00:29:32,920 --> 00:29:35,840 Speaker 2: But I guess the wild card this time around is 561 00:29:36,160 --> 00:29:39,600 Speaker 2: it certainly feels like a second Trump administration might be 562 00:29:40,080 --> 00:29:43,960 Speaker 2: or at least feel more empowered yea in certain things. 563 00:29:44,160 --> 00:29:48,040 Speaker 2: And there's also the involvement of guys like Elon Musk 564 00:29:48,080 --> 00:29:52,400 Speaker 2: who is tweeting about ending the FED. How does that 565 00:29:52,600 --> 00:29:55,760 Speaker 2: bear on the central bank and policy makers there? 566 00:29:56,200 --> 00:29:59,920 Speaker 5: Well, I think the simple answer is the FED has 567 00:30:00,480 --> 00:30:03,240 Speaker 5: The FED has a mandate from Congress. So the FED. 568 00:30:03,280 --> 00:30:05,600 Speaker 5: First of all, the FED is a creation of Congress. 569 00:30:05,640 --> 00:30:07,920 Speaker 5: You know, in many countries the central banks are actually 570 00:30:08,000 --> 00:30:11,200 Speaker 5: part of the finance ministry. The FED is a creation 571 00:30:11,320 --> 00:30:14,640 Speaker 5: of Congress. Congress says the Fed's job is price stability 572 00:30:14,640 --> 00:30:17,640 Speaker 5: and maximum employment. And I can tell you the culture 573 00:30:17,640 --> 00:30:19,720 Speaker 5: of the FED, not only the board, but the twelve 574 00:30:19,760 --> 00:30:22,960 Speaker 5: reserve bank presidents you know, takes that mandate and that 575 00:30:23,040 --> 00:30:27,800 Speaker 5: responsibility seriously. So I fully expect my former colleagues just 576 00:30:27,880 --> 00:30:31,360 Speaker 5: to do their job and to set policy based upon 577 00:30:31,400 --> 00:30:35,440 Speaker 5: achieving that mandate and to filter out, you know, distractions 578 00:30:35,560 --> 00:30:37,160 Speaker 5: or other such things. 579 00:30:37,720 --> 00:30:39,560 Speaker 3: Tracy, I'm just going to say, you know, there was 580 00:30:39,640 --> 00:30:43,440 Speaker 3: that recent mid October interview Trump with Bloomberg editor in 581 00:30:43,520 --> 00:30:46,000 Speaker 3: chief John mclis waite where he said, you show up 582 00:30:46,040 --> 00:30:47,880 Speaker 3: to the office once a month and you say, let's 583 00:30:47,880 --> 00:30:50,720 Speaker 3: see flip a coin and everybody talks about you like 584 00:30:50,720 --> 00:30:53,280 Speaker 3: you're a god. Just to be clear, there's no actual 585 00:30:53,320 --> 00:30:54,440 Speaker 3: coin flip, right, there. 586 00:30:54,320 --> 00:30:56,480 Speaker 5: Is no coin flip. At least in my four years. 587 00:30:56,160 --> 00:30:58,320 Speaker 3: At least of the four years, you never saw a 588 00:30:58,320 --> 00:31:01,640 Speaker 3: coin flip. At Paul's most recent press conference, he was 589 00:31:01,680 --> 00:31:04,240 Speaker 3: asked about, you know, some of policy changes that could 590 00:31:04,280 --> 00:31:07,880 Speaker 3: come under the next administration, and how they're always studying 591 00:31:07,920 --> 00:31:09,480 Speaker 3: and if it looks like something could pass, you know, 592 00:31:09,480 --> 00:31:13,800 Speaker 3: they run the models, et cetera. You mentioned taxes, and 593 00:31:13,840 --> 00:31:17,280 Speaker 3: I think there probably is a general consensus that at 594 00:31:17,360 --> 00:31:18,920 Speaker 3: least on the big things, we're probably not going to 595 00:31:19,000 --> 00:31:22,040 Speaker 3: see tons of movement because you know, the most likely 596 00:31:22,080 --> 00:31:24,480 Speaker 3: outcome is some sort of extension of the Tax Cut 597 00:31:24,520 --> 00:31:28,920 Speaker 3: and Jobs Act. But the two big wild cards potentially 598 00:31:28,960 --> 00:31:33,920 Speaker 3: from a macro standpoint, outside of taxes are tariff policy, 599 00:31:34,040 --> 00:31:36,560 Speaker 3: which we don't know we know that Trump lakes tariffs, 600 00:31:36,760 --> 00:31:40,200 Speaker 3: and immigration policy, which could be everything from a harder 601 00:31:40,200 --> 00:31:45,840 Speaker 3: border to deportations, potentially mass deportations. Undocumented workers are very 602 00:31:45,840 --> 00:31:49,400 Speaker 3: heavy in both agriculture, residential constructions, speaking of housing and 603 00:31:49,440 --> 00:31:52,320 Speaker 3: so forth. Say, these things are coming down the line, 604 00:31:52,320 --> 00:31:54,720 Speaker 3: and the FED is going to think about modeling changes 605 00:31:54,840 --> 00:31:58,800 Speaker 3: under the economy under these various scenarios. As an economist, 606 00:31:59,480 --> 00:32:02,400 Speaker 3: what do the things theoretically mean? And again I'm aware 607 00:32:02,400 --> 00:32:05,000 Speaker 3: we don't know the size scale, but we understand some 608 00:32:05,120 --> 00:32:06,160 Speaker 3: of the major priorities. 609 00:32:06,880 --> 00:32:10,240 Speaker 5: So let's take these in turn. So tariff's the sort 610 00:32:10,280 --> 00:32:13,280 Speaker 5: of the textbook way to think about if you're a policymaker, 611 00:32:13,400 --> 00:32:15,800 Speaker 5: how you think about a one time tariff is going 612 00:32:15,880 --> 00:32:18,160 Speaker 5: to be an increase in the price of those goods 613 00:32:18,160 --> 00:32:20,640 Speaker 5: to the extent it's passed through. I think Governor Waller 614 00:32:20,880 --> 00:32:23,920 Speaker 5: was recently quoted as saying, you know, a tariff in 615 00:32:23,960 --> 00:32:26,520 Speaker 5: it of itself is not really inflationary. It pushes up 616 00:32:26,560 --> 00:32:29,200 Speaker 5: the price of goods affected by the tariff. I think 617 00:32:29,240 --> 00:32:32,480 Speaker 5: the temptation at the FED would be to look through that, 618 00:32:33,040 --> 00:32:36,000 Speaker 5: and I think in many circumstances that would be the 619 00:32:36,040 --> 00:32:38,840 Speaker 5: way to go. It could be a bit challenging this time, 620 00:32:38,960 --> 00:32:41,680 Speaker 5: you know, because to look through an increase in the 621 00:32:41,720 --> 00:32:44,920 Speaker 5: price level from tariffs we mean in invoking some form 622 00:32:44,960 --> 00:32:47,880 Speaker 5: of the version of we think it's transitory, and so 623 00:32:48,080 --> 00:32:51,120 Speaker 5: that guidance might need to be refined a bit. But 624 00:32:51,160 --> 00:32:53,440 Speaker 5: I do think that that's largely the way that they 625 00:32:53,480 --> 00:32:58,120 Speaker 5: would look at it initially again monitoring inflation expectations. And 626 00:32:58,240 --> 00:33:00,640 Speaker 5: in terms of immigration, there's obviously, you know, there's both 627 00:33:00,720 --> 00:33:05,280 Speaker 5: legal and undocumented immigration that does influence the labor supply. 628 00:33:05,360 --> 00:33:08,479 Speaker 5: As you all know, we had a big revision in 629 00:33:08,680 --> 00:33:12,920 Speaker 5: Washington's official count of undocumented immigration recently, about a year 630 00:33:13,000 --> 00:33:16,720 Speaker 5: or so ago, showing much more of that. I do 631 00:33:16,760 --> 00:33:19,720 Speaker 5: think importantly that I think, regardless of who had won 632 00:33:19,760 --> 00:33:22,040 Speaker 5: the election, we were probably going to have a flow 633 00:33:22,040 --> 00:33:24,600 Speaker 5: of immigration a lot less than we have been seeing 634 00:33:24,920 --> 00:33:28,320 Speaker 5: and maybe comparable to prior period. So the FED staff 635 00:33:28,360 --> 00:33:31,200 Speaker 5: could begin to factor that in. I think in terms 636 00:33:31,240 --> 00:33:33,840 Speaker 5: of the details of what the Trump administration will do 637 00:33:33,960 --> 00:33:36,400 Speaker 5: beyond that, I think it's too soon. It's too soon 638 00:33:36,440 --> 00:33:39,760 Speaker 5: to tell. I do think the sector the sectoral impact 639 00:33:39,840 --> 00:33:41,959 Speaker 5: that you raised, Joe, is a good one. You know, 640 00:33:42,080 --> 00:33:46,600 Speaker 5: not all immigrants, document or undocumented, flow evenly across all sectors. 641 00:33:46,960 --> 00:33:49,760 Speaker 5: They're more concentrated in certain sectors than others, and so 642 00:33:49,840 --> 00:33:52,560 Speaker 5: I would imagine that when the Fed's doing staff work, 643 00:33:52,600 --> 00:33:55,920 Speaker 5: it would be looking at at that bottom up sectoral level. 644 00:33:56,720 --> 00:33:59,000 Speaker 2: There's one other question that I wanted to ask you, 645 00:33:59,040 --> 00:34:01,080 Speaker 2: and I'm trying to think how to phrase it. Or 646 00:34:01,080 --> 00:34:03,800 Speaker 2: how to word it. But the past couple of years, 647 00:34:04,080 --> 00:34:06,840 Speaker 2: one of the big debates when it comes to the 648 00:34:06,840 --> 00:34:10,319 Speaker 2: economy has been, I guess, the discrepancy between the heart 649 00:34:10,360 --> 00:34:13,720 Speaker 2: and the soft data the vibes. So, you know, lots 650 00:34:13,760 --> 00:34:17,279 Speaker 2: of the surveys showing that people aren't very happy with 651 00:34:17,320 --> 00:34:19,560 Speaker 2: the way things are going. We see that in you know, 652 00:34:19,840 --> 00:34:25,400 Speaker 2: declining confidence numbers. Now the vibes potentially are shifting. But 653 00:34:25,640 --> 00:34:29,280 Speaker 2: I guess I'm just curious how the FED thinks about 654 00:34:29,640 --> 00:34:32,960 Speaker 2: sentiment when it comes to judging the real strength or 655 00:34:33,040 --> 00:34:34,440 Speaker 2: weakness of the economy. 656 00:34:35,200 --> 00:34:37,799 Speaker 5: Well, it's certainly something that the FED looks at. And 657 00:34:37,800 --> 00:34:40,200 Speaker 5: of course there are a lot of different sentiment surveys, 658 00:34:40,560 --> 00:34:43,480 Speaker 5: and in particular also you can compare, for example, the 659 00:34:43,520 --> 00:34:48,960 Speaker 5: sentiment of Fortune five hundred CEOs versus independent business. Myself, 660 00:34:49,040 --> 00:34:53,080 Speaker 5: I used to look a lot at the NFIB survey 661 00:34:53,719 --> 00:34:57,400 Speaker 5: data for small businesses. They're often a leading indicator, at 662 00:34:57,480 --> 00:35:01,480 Speaker 5: least in certain circumstances. Maybe one thing I can weigh 663 00:35:01,480 --> 00:35:03,439 Speaker 5: in a little bit, because I think it has been 664 00:35:04,680 --> 00:35:07,640 Speaker 5: it's been an important part of the last several years, 665 00:35:07,640 --> 00:35:11,160 Speaker 5: and it's actually an area where macroeconomists don't do a 666 00:35:11,200 --> 00:35:14,839 Speaker 5: great job. You know, macro oftentimes is about adding up 667 00:35:14,880 --> 00:35:18,239 Speaker 5: the economy. You've got GDP, you've got employment. But we 668 00:35:18,360 --> 00:35:22,000 Speaker 5: have had a period where I do think that the 669 00:35:22,040 --> 00:35:25,440 Speaker 5: distributional ripples of the way the economy has evolved in 670 00:35:25,480 --> 00:35:27,480 Speaker 5: the last several years has been relevant. Let me get 671 00:35:27,560 --> 00:35:30,680 Speaker 5: to give it a very concrete example. So you know, 672 00:35:31,040 --> 00:35:34,000 Speaker 5: if you're in the sixty percent of Americans who live 673 00:35:34,040 --> 00:35:37,840 Speaker 5: in owner occupied housing and you own stock, last four years, 674 00:35:37,840 --> 00:35:40,719 Speaker 5: looks pretty good. Your portfolio is up, the value of 675 00:35:40,719 --> 00:35:43,720 Speaker 5: your house is up. But that means they're forty percent 676 00:35:43,760 --> 00:35:45,719 Speaker 5: of folks who actually don't own their own home or 677 00:35:45,760 --> 00:35:48,200 Speaker 5: don't have a lot of stock, and for them, you know, 678 00:35:48,320 --> 00:35:50,760 Speaker 5: the big increase in the price level and the erosion 679 00:35:50,800 --> 00:35:53,879 Speaker 5: and real income was quite relevant. So I do think 680 00:35:53,920 --> 00:35:58,040 Speaker 5: that macro oftentimes does focus on adding up across and 681 00:35:58,160 --> 00:36:01,239 Speaker 5: talking about the representative individual. Well, but I think we 682 00:36:01,320 --> 00:36:03,640 Speaker 5: have been through a period in a pretty compressed period 683 00:36:03,680 --> 00:36:06,920 Speaker 5: of time when there have been some pretty big divergences 684 00:36:06,960 --> 00:36:10,040 Speaker 5: across different parts of the economy, and I think, you know, 685 00:36:10,200 --> 00:36:12,800 Speaker 5: I think that will be relevant going forward. And again 686 00:36:12,880 --> 00:36:15,200 Speaker 5: that's certainly something that when I was the FED, you know, 687 00:36:15,280 --> 00:36:18,040 Speaker 5: the staff was doing a lot of work on as well. 688 00:36:18,400 --> 00:36:20,960 Speaker 2: Yeah, the divergences I think are really important, and you 689 00:36:20,960 --> 00:36:24,480 Speaker 2: see it also in corporate borrowing. So if you're a 690 00:36:24,480 --> 00:36:26,880 Speaker 2: smaller business and you're getting a bank loan, that interest 691 00:36:26,960 --> 00:36:29,720 Speaker 2: rate is probably pretty high. But if you're a huge 692 00:36:29,719 --> 00:36:33,040 Speaker 2: company tapping the bond market, you know it's not that bad. 693 00:36:33,120 --> 00:36:35,560 Speaker 2: Right now. I lied earlier when I said I only 694 00:36:35,560 --> 00:36:36,560 Speaker 2: had one more question. 695 00:36:36,400 --> 00:36:38,759 Speaker 5: Okay, because I do. In fact, you're forgiven, thank you. 696 00:36:39,280 --> 00:36:42,319 Speaker 2: But you know you are a FED person who went 697 00:36:42,400 --> 00:36:46,359 Speaker 2: to being a FED watcher. What's your one piece of 698 00:36:46,440 --> 00:36:50,280 Speaker 2: advice for people who are watching the FED at this juncture? 699 00:36:50,880 --> 00:36:54,960 Speaker 5: Well, I have two your pro tip okay. The first 700 00:36:55,000 --> 00:36:57,359 Speaker 5: bit of advice is, you know, there are nights when 701 00:36:57,440 --> 00:36:59,439 Speaker 5: the Fed's at full strength, which it is now. They're 702 00:36:59,440 --> 00:37:03,359 Speaker 5: twelve vers bank presidents and their seven governors, including the chair, 703 00:37:03,480 --> 00:37:05,279 Speaker 5: so that means in any given day there could be 704 00:37:05,360 --> 00:37:09,600 Speaker 5: nineteen speeches or interviews. It can get pretty overwhelming. But 705 00:37:09,719 --> 00:37:12,319 Speaker 5: in the modern era, which really I define with the 706 00:37:12,360 --> 00:37:15,919 Speaker 5: Brnanke Fed, you know FED chairs are now very much 707 00:37:16,120 --> 00:37:18,920 Speaker 5: in the public domain. There are now eight press conferences 708 00:37:18,920 --> 00:37:23,120 Speaker 5: a year. There's Jackson Hole chair pal typically doesn't on 709 00:37:23,200 --> 00:37:25,920 Speaker 5: the record sit down three or four other times a year. 710 00:37:25,960 --> 00:37:28,960 Speaker 5: So almost every month, maybe with the exception of there's 711 00:37:29,000 --> 00:37:31,319 Speaker 5: one month in there. Chair Pale is out there, and 712 00:37:31,360 --> 00:37:33,400 Speaker 5: so I think, if you want to be a FEDA washer, 713 00:37:33,440 --> 00:37:36,680 Speaker 5: just listen to Jay pal He's a straight shooter. He 714 00:37:36,719 --> 00:37:39,400 Speaker 5: writes his own speeches, and so you get a pretty 715 00:37:39,400 --> 00:37:42,320 Speaker 5: clear sense of where he is. I think the second 716 00:37:42,320 --> 00:37:44,520 Speaker 5: bit of advice I would get, and it's not a 717 00:37:44,520 --> 00:37:47,480 Speaker 5: deep point, but it's often forgotten because there are only 718 00:37:47,480 --> 00:37:49,640 Speaker 5: eight FED meetings a year. You know, we tend to 719 00:37:49,680 --> 00:37:51,680 Speaker 5: think about sort of like if you're an NFL fan, 720 00:37:51,760 --> 00:37:55,000 Speaker 5: you know there's a game every Sunday. The reality, though, 721 00:37:55,239 --> 00:37:57,719 Speaker 5: is that when you're inside the FED, and certainly if 722 00:37:57,719 --> 00:38:00,640 Speaker 5: you're Jay Powell or my former column because I'm sure 723 00:38:00,680 --> 00:38:04,320 Speaker 5: current FED officials, you're really looking at ahead at least 724 00:38:04,360 --> 00:38:06,960 Speaker 5: twelve months, if not longer. You know, the further you 725 00:38:07,040 --> 00:38:09,319 Speaker 5: go out, the more uncertain you go out. But the 726 00:38:09,440 --> 00:38:12,000 Speaker 5: idea that you know, each FED meeting is a meeting 727 00:38:12,000 --> 00:38:14,719 Speaker 5: by meeting. Yeah, there's data dependence and you're not in 728 00:38:14,719 --> 00:38:17,640 Speaker 5: a preset court, but the FED also has to develop 729 00:38:17,640 --> 00:38:20,000 Speaker 5: a plan for a baseline view and an arc for 730 00:38:20,080 --> 00:38:24,000 Speaker 5: communication and policy, and oftentimes I think commentary on the 731 00:38:24,040 --> 00:38:26,520 Speaker 5: FED it maybe focuses a little bit more on the 732 00:38:26,520 --> 00:38:29,400 Speaker 5: noise and not so much on the arc or the signal. 733 00:38:29,960 --> 00:38:33,040 Speaker 2: All right, Richard Claria truly the perfect guest for this 734 00:38:33,239 --> 00:38:35,719 Speaker 2: particular conversation. Thank you so much for coming on off 735 00:38:35,760 --> 00:38:36,520 Speaker 2: of you. 736 00:38:36,680 --> 00:38:50,120 Speaker 4: Thanks for having me, Joe. 737 00:38:50,520 --> 00:38:53,520 Speaker 2: That was a great conversation, Really good timing to be 738 00:38:53,640 --> 00:38:57,239 Speaker 2: speaking with someone like Clarida. I do think I like 739 00:38:57,320 --> 00:39:00,800 Speaker 2: your framing of like the sort of two track policy 740 00:39:00,880 --> 00:39:03,799 Speaker 2: right now, the short term versus the long term. I 741 00:39:03,840 --> 00:39:07,920 Speaker 2: do think there is a tension embedded in that where 742 00:39:08,200 --> 00:39:11,439 Speaker 2: you know, clearly the people talk about the FED being 743 00:39:12,200 --> 00:39:16,439 Speaker 2: ahead or behind of the curve right, and Richard brought 744 00:39:16,520 --> 00:39:19,520 Speaker 2: up the long and variable legs. I do think there 745 00:39:19,600 --> 00:39:23,759 Speaker 2: is a desire to get ahead of some things. But 746 00:39:23,880 --> 00:39:26,080 Speaker 2: at the same time, you know they've emphasized that data 747 00:39:26,080 --> 00:39:29,800 Speaker 2: dependence for so long, and the future is so uncertain 748 00:39:30,000 --> 00:39:32,920 Speaker 2: at this current moment in time. I don't know how 749 00:39:32,920 --> 00:39:34,400 Speaker 2: they square those two things. 750 00:39:34,480 --> 00:39:34,960 Speaker 4: It's tricky. 751 00:39:35,120 --> 00:39:37,320 Speaker 3: By the way, I do want to give I confirmed 752 00:39:37,360 --> 00:39:40,120 Speaker 3: a specific shout out to Tim Dewey pasted odd Lad's 753 00:39:40,160 --> 00:39:43,200 Speaker 3: guests at sgh Macro. The first line of his note 754 00:39:43,560 --> 00:39:46,800 Speaker 3: this morning was the Fed's in your term focus remains 755 00:39:46,840 --> 00:39:49,920 Speaker 3: on the data while market participants continue to digest the 756 00:39:49,960 --> 00:39:54,520 Speaker 3: economic implications of Trump's victory last week. So that point 757 00:39:54,560 --> 00:39:55,440 Speaker 3: about the dual time. 758 00:39:55,800 --> 00:39:58,480 Speaker 2: I like that you care about attribution absolutely. 759 00:39:58,560 --> 00:40:00,840 Speaker 3: You know, I came up with the age of blo and linking, 760 00:40:00,920 --> 00:40:03,560 Speaker 3: so this is like people before people used to just 761 00:40:03,560 --> 00:40:06,240 Speaker 3: steal stuff. So but I do think that from Tim, 762 00:40:06,800 --> 00:40:11,239 Speaker 3: which I then transmitted, is a very useful way of 763 00:40:11,320 --> 00:40:15,360 Speaker 3: explaining why this moment seems so complicated. And you know, 764 00:40:15,400 --> 00:40:18,520 Speaker 3: as I mentioned and we talked about with Rich, it's 765 00:40:18,600 --> 00:40:23,440 Speaker 3: arguably been very complicated ever since simultaneously Trump's odds started 766 00:40:23,520 --> 00:40:26,240 Speaker 3: rising in the polls and we got that huge September 767 00:40:26,360 --> 00:40:29,440 Speaker 3: jobs report, which is Rich mentioned, sort of caused this 768 00:40:29,560 --> 00:40:32,319 Speaker 3: rethink about how strong or how weak the economy really 769 00:40:32,400 --> 00:40:34,160 Speaker 3: was when they cut fifty bases points. 770 00:40:34,640 --> 00:40:37,120 Speaker 2: And so for books, you and I differ a little 771 00:40:37,120 --> 00:40:39,279 Speaker 2: bit on this point because I think like it is 772 00:40:39,320 --> 00:40:41,920 Speaker 2: becoming clearer that a lot of that reaction in long 773 00:40:42,000 --> 00:40:44,480 Speaker 2: term yields is to Trump. 774 00:40:44,680 --> 00:40:45,600 Speaker 5: Yeh, these policies. 775 00:40:45,680 --> 00:40:49,960 Speaker 2: What I will say is we have CPI on Wednesday. 776 00:40:50,040 --> 00:40:52,360 Speaker 2: By the time this episode comes out, will have gotten 777 00:40:52,400 --> 00:40:54,640 Speaker 2: that number and we will have seen the market reaction 778 00:40:54,760 --> 00:40:57,040 Speaker 2: to it. I think that might be an interesting one 779 00:40:57,080 --> 00:40:59,600 Speaker 2: to watch to try to further settle this question. 780 00:41:00,239 --> 00:41:03,319 Speaker 3: Tracy. Yes, nothing is ever settled. Yeah, how do you 781 00:41:04,280 --> 00:41:07,840 Speaker 3: After how many years will you when will you stop 782 00:41:07,880 --> 00:41:10,480 Speaker 3: believing that any question in economics could. 783 00:41:10,280 --> 00:41:13,240 Speaker 2: Ever believing that there are in fact answers. 784 00:41:12,840 --> 00:41:14,719 Speaker 3: That will never you have to give that up at 785 00:41:14,719 --> 00:41:17,800 Speaker 3: some point. We will never have answers, only new questions. 786 00:41:18,000 --> 00:41:19,000 Speaker 2: The nice thing is. 787 00:41:18,960 --> 00:41:20,920 Speaker 3: I've already given into this idea, even. 788 00:41:20,719 --> 00:41:24,560 Speaker 2: If I'm personally disappointed by a lack of answers. Having 789 00:41:24,800 --> 00:41:27,920 Speaker 2: a continuous stream of questions means we have never ending 790 00:41:28,160 --> 00:41:31,080 Speaker 2: content for this podcast. It is great, always something to 791 00:41:31,120 --> 00:41:31,600 Speaker 2: talk about. 792 00:41:31,640 --> 00:41:33,360 Speaker 5: Absolutely, Okay, shall we leave it there. 793 00:41:33,480 --> 00:41:34,200 Speaker 3: Let's leave it there. 794 00:41:34,320 --> 00:41:37,000 Speaker 2: This has been another episode of the All Thoughts podcast. 795 00:41:37,120 --> 00:41:40,200 Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway. 796 00:41:40,640 --> 00:41:43,280 Speaker 3: I'm Joe Isn't though. You can follow me at the Stalwart. 797 00:41:43,480 --> 00:41:47,920 Speaker 3: Follow our guest Richard Clarday. He's at r HC two too. 798 00:41:48,080 --> 00:41:49,480 Speaker 3: I don't know if you post there very much, but 799 00:41:49,520 --> 00:41:52,879 Speaker 3: he has follow Our producers Carmen Rodriguez at Carmen Ermann 800 00:41:53,000 --> 00:41:56,040 Speaker 3: dash ol Bennett at dashbot and kill Brooks at Kilbrooks. 801 00:41:56,320 --> 00:41:58,960 Speaker 3: Thank you to our producer Moses Onam. From our All 802 00:41:59,040 --> 00:42:02,719 Speaker 3: Thoughts content, go Toloomberg dot com, slash odd lots where transcripts, 803 00:42:02,760 --> 00:42:05,359 Speaker 3: a blog, and a new daily newsletter that you should 804 00:42:05,560 --> 00:42:08,399 Speaker 3: sign up for. And if you want to chat about 805 00:42:08,440 --> 00:42:11,800 Speaker 3: all of these topics, especially macro, check out our discord 806 00:42:11,960 --> 00:42:14,240 Speaker 3: Discord dot gg, slash oup loots. 807 00:42:14,640 --> 00:42:17,400 Speaker 2: And if you enjoy all lolots, if you like it 808 00:42:17,440 --> 00:42:19,839 Speaker 2: when we talk about the FED with a former FED 809 00:42:19,920 --> 00:42:23,000 Speaker 2: vice chair, then please leave us a positive review on 810 00:42:23,080 --> 00:42:26,600 Speaker 2: your favorite podcast platform. And remember, if you are a 811 00:42:26,640 --> 00:42:30,560 Speaker 2: Bloomberg subscriber, in addition to getting that new daily All 812 00:42:30,600 --> 00:42:33,279 Speaker 2: Thoughts newsletter, you can also listen to all of our 813 00:42:33,320 --> 00:42:36,480 Speaker 2: episodes absolutely ad free. 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