WEBVTT - Richard Clarida on This Tricky Moment for the Federal Reserve 0:00:03.080 --> 0:00:16.079 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:20.040 --> 0:00:23.280 Hello and welcome to another episode of the All Thoughts Podcast. 0:00:23.360 --> 0:00:27.000 I'm Tracy Alloway and I'm Joe Wisenthal. Joe, I feel 0:00:27.080 --> 0:00:28.440 like it's fair to say there are a lot of 0:00:28.440 --> 0:00:31.280 weird things that have been going on lately. You know 0:00:31.280 --> 0:00:34.560 what the weirdest was for me recently? Go on having 0:00:34.600 --> 0:00:37.960 the FED meeting on a Thursday. Yeah, that threw me 0:00:38.080 --> 0:00:39.640 off for that entire week. 0:00:39.760 --> 0:00:41.640 I thought you were going to say the weird thing 0:00:41.760 --> 0:00:43.760 was having a FED meeting two days after the election, 0:00:44.040 --> 0:00:47.680 But no, you're right. I was really confused just the 0:00:47.720 --> 0:00:50.320 fact that it was on the Thursday at all, Setting 0:00:50.400 --> 0:00:53.360 aside the fact that it was an extraordinarily busy week, 0:00:53.440 --> 0:00:54.560 which was just last week. 0:00:54.680 --> 0:00:57.040 I didn't realize how much of my sense of normality 0:00:57.200 --> 0:01:00.720 was in fact influenced by having the FED do something 0:01:00.760 --> 0:01:01.400 on a Wednesday. 0:01:01.520 --> 0:01:02.959 But anyway, that through me too. 0:01:03.360 --> 0:01:06.600 So we just had a FED meeting. We are recording 0:01:06.600 --> 0:01:11.280 this on November twelfth, and clearly this is an interesting 0:01:11.640 --> 0:01:13.920 moment for the Central Bank totally. 0:01:13.959 --> 0:01:16.520 I saw a tweet today. I don't remember who is from, 0:01:16.520 --> 0:01:18.680 so I can't give proper credit. Or maybe it was 0:01:18.720 --> 0:01:20.920 a sell side. I don't know just words that I 0:01:20.920 --> 0:01:23.120 saw on my screen at some point, but I think 0:01:23.360 --> 0:01:27.200 what made this interesting is this moment, or maybe it 0:01:27.240 --> 0:01:30.000 was a toom doing note, whatever it was, this moment 0:01:30.120 --> 0:01:34.080 where the FED is still clearly in the sort of 0:01:34.240 --> 0:01:37.240 short term data dependency. Are we going to see further 0:01:37.319 --> 0:01:41.280 progress on realized inflation and so forth? Watching the data? 0:01:41.319 --> 0:01:44.800 Plenty of miss signals there. Meanwhile, the market is very 0:01:45.040 --> 0:01:47.520 seemingly focused on the medium term and thinking a lot 0:01:47.560 --> 0:01:50.800 about Trump and the new fiscal and macro policies that 0:01:50.840 --> 0:01:53.760 will emerge under this administration. And I thought that was 0:01:53.800 --> 0:01:55.320 a really good way to frame it, which is that 0:01:55.480 --> 0:01:59.920 right now there's two different time frames that people are in, 0:02:00.040 --> 0:02:02.640 and people are trying to resolve the two, and it 0:02:02.720 --> 0:02:05.240 makes for some very interesting times in macro, to say 0:02:05.280 --> 0:02:05.720 the least. 0:02:05.800 --> 0:02:07.720 Yeah, And I have to say, like I do not 0:02:08.360 --> 0:02:11.919 envy policy makers on the FMC at the moment because 0:02:12.000 --> 0:02:15.200 they have been emphasizing the data dependency, as you said, 0:02:15.400 --> 0:02:18.840 But there is all that uncertainty about how the Trump 0:02:18.880 --> 0:02:22.800 administration is going to unfold and what its economic policies 0:02:22.800 --> 0:02:25.760 will actually look like. It seems really difficult to me 0:02:26.040 --> 0:02:29.760 to have to react to that from a monetary policy perspective. 0:02:30.240 --> 0:02:33.160 So basically, there are a lot of questions. Yeah, lots 0:02:33.200 --> 0:02:36.720 to talk about, and who better to ask these questions 0:02:36.760 --> 0:02:39.799 of than a former FED person. So we are going 0:02:39.840 --> 0:02:43.600 to be speaking with Richard Clarita, the former FED Vice chair, 0:02:43.880 --> 0:02:48.000 now economic advisor at PIMCO and a professor of economics 0:02:48.040 --> 0:02:50.520 at Columbia. Richard, thank you so much for coming on. 0:02:50.560 --> 0:02:53.000 All thoughts, I'm glad to be on the show, big fan. 0:02:53.240 --> 0:02:53.880 Oh, thank you. 0:02:54.400 --> 0:02:54.520 So. 0:02:54.800 --> 0:02:57.720 First of all, you know last week the FMC meeting 0:02:57.800 --> 0:03:00.720 on a Thursday. I got to ask, when you watch those, 0:03:01.360 --> 0:03:04.440 are you sort of watching them like wistfully wishing you 0:03:04.520 --> 0:03:07.080 are there, or are you thinking like, oh gosh, this 0:03:07.160 --> 0:03:07.800 is really tough. 0:03:07.840 --> 0:03:11.920 Now, well, it can be tough. Yeah, I've certainly involved 0:03:11.960 --> 0:03:14.760 during my four years there in thinking about and prepping 0:03:14.800 --> 0:03:17.680 for the press conferences. But yeah, I watched them as 0:03:17.680 --> 0:03:20.520 a FED watcher now and the chair has become quite 0:03:20.600 --> 0:03:23.960 polished and experienced and navigating what can be some sometimes 0:03:23.960 --> 0:03:25.040 some choppy waters. 0:03:25.840 --> 0:03:27.840 By the way, Tracy, you didn't say it, but I 0:03:27.919 --> 0:03:30.440 believe rich is the perfect guest. Oh, I'm sorry, No, 0:03:30.560 --> 0:03:32.560 I just want to establish that I believe in this 0:03:32.680 --> 0:03:35.680 moment we are talking to the perfect guest. And then listeners, 0:03:35.680 --> 0:03:37.560 why didn't you call Rich the perfect guest? So I 0:03:37.600 --> 0:03:38.360 just want to make sure that. 0:03:38.400 --> 0:03:40.120 It was truly an oversight. 0:03:40.640 --> 0:03:43.600 Both Tracy and I consider you to be the perfect guest. 0:03:43.800 --> 0:03:46.600 So we had that fifty basis point cut in September, 0:03:47.040 --> 0:03:49.320 then we had the quarter point the week of the election. 0:03:49.640 --> 0:03:53.000 As I'm looking at the warp function on the terminal 0:03:53.120 --> 0:03:56.480 expectation is for there's sixty five percent chance of a 0:03:56.560 --> 0:03:58.480 cut in December. So not a slam dunk, but that 0:03:58.600 --> 0:04:01.920 still seems to be the expectation. What do you give us, 0:04:02.160 --> 0:04:06.200 as a FED watcher your current read on the crosswinds 0:04:06.240 --> 0:04:08.080 that the Fed is going. Let's start with the short 0:04:08.160 --> 0:04:10.200 term still, because then we can get into the term 0:04:10.480 --> 0:04:12.920 the crosswinds that are happening right now as the FED 0:04:12.960 --> 0:04:15.080 looks for the near term path of policy. 0:04:15.080 --> 0:04:18.040 Well, they've made some judgments. One they judge that policy 0:04:18.200 --> 0:04:21.960 is restrictive, that they've done enough, and so they cut rates. 0:04:22.000 --> 0:04:24.480 They recalibrated. I think that was the term the chair 0:04:24.880 --> 0:04:28.000 used in September. Important to note they've begun to cut 0:04:28.080 --> 0:04:31.280 rates even though inflation is still somewhat above target. Some 0:04:31.520 --> 0:04:33.839 of your listeners may wonder why, and the answer is, 0:04:34.400 --> 0:04:37.400 monetary policy operates with lags, and so if they had 0:04:37.400 --> 0:04:39.800 waited to cut rates until inflation fall all the way 0:04:39.800 --> 0:04:41.960 to two, then they might have overdone it. So I 0:04:42.000 --> 0:04:45.120 do think it made sense to get the process started. 0:04:45.240 --> 0:04:47.159 I do take them at their word. They're not on 0:04:47.240 --> 0:04:52.600 a preset path. The committee is united a unanimous decision 0:04:52.760 --> 0:04:55.880 to cut rates, and I think importantly, and I'm sure 0:04:55.880 --> 0:04:58.560 we'll get to this later. You know, the chairs made 0:04:58.720 --> 0:05:01.600 very clear that he and the Committee are not going 0:05:01.680 --> 0:05:05.200 to be making policy decisions in twenty twenty four based 0:05:05.279 --> 0:05:08.080 upon what might happen in twenty twenty five, and so 0:05:08.400 --> 0:05:10.880 I think it's important to clarify that. I think they 0:05:10.920 --> 0:05:14.080 are data dependent. But my sense is that the probabilities 0:05:14.120 --> 0:05:17.359 that you quoted seem pretty sensible to me. Not a 0:05:17.400 --> 0:05:20.039 slam dunk, but I think more likely than not that 0:05:20.080 --> 0:05:22.160 we get a rate cut in December. 0:05:23.080 --> 0:05:25.480 So, just on this point, how do you square the 0:05:25.839 --> 0:05:30.640 proverbial lags in monetary policy with the desire to not 0:05:30.880 --> 0:05:35.719 be reacting to an incoming administration where policies are not 0:05:35.920 --> 0:05:37.600 necessarily clear at the moment. 0:05:38.839 --> 0:05:40.760 It's a great point. Luckily, we have a lot of 0:05:40.920 --> 0:05:44.160 historical examples because as you know, we have presidential elections 0:05:44.200 --> 0:05:47.120 every four years, and the FED as an institution in 0:05:47.160 --> 0:05:49.560 the staff have a lot of experience. And one of 0:05:49.640 --> 0:05:53.359 the things I learned is especially in the US system, 0:05:53.440 --> 0:05:56.520 unlike say the UK system, where you present a budget, 0:05:56.560 --> 0:05:59.520 and here there's a whole set of negotiations. And so 0:05:59.800 --> 0:06:02.200 I do think that the chair gave a good insight 0:06:02.279 --> 0:06:05.640 into the process that they'll follow, which is, over time 0:06:05.680 --> 0:06:08.800 they'll learn about the contours of the plans for policy, 0:06:08.839 --> 0:06:11.839 then what gets enacted. I do think, you know, it 0:06:11.960 --> 0:06:14.440 is a good point. I think initial conditions here are 0:06:14.520 --> 0:06:18.599 quite relevant, and so in particular with inflation running close 0:06:18.640 --> 0:06:21.280 to target if a bit above, I think the general 0:06:21.320 --> 0:06:24.440 playbook they usually follow makes sense. You know, there is 0:06:24.480 --> 0:06:27.400 a risk that if they don't start moving now, then 0:06:27.440 --> 0:06:30.440 for certain scenarios it's too late. But I think given 0:06:30.440 --> 0:06:32.760 where inflation as, they're making the correct call. 0:06:33.440 --> 0:06:36.440 So I don't know if economics is really a science 0:06:36.600 --> 0:06:38.680 or not, but if it is a science, I feel 0:06:38.720 --> 0:06:43.400 like economists are cursed to never have the pure experiments 0:06:43.880 --> 0:06:45.839 in the real world that they would like to see 0:06:45.880 --> 0:06:50.200 and I'm thinking about that specifically since September. Since mid 0:06:50.240 --> 0:06:53.720 September early October we got that fifty basis point cut. 0:06:54.080 --> 0:06:57.000 Since then, rates at the long end in particular have 0:06:57.080 --> 0:07:02.080 been rising. Unfortunately, from a pure scientific experiment, that is 0:07:02.160 --> 0:07:05.160 around the same time that Donald Trump's odds in the 0:07:05.200 --> 0:07:09.320 polls also started rising. Therefore, it's a little tough to 0:07:09.360 --> 0:07:12.560 tease out how much of this is. Okay, We're going 0:07:12.640 --> 0:07:16.240 to have more reflationary policies in the next administration, which 0:07:16.280 --> 0:07:20.280 we can get to versus you know what, the economy 0:07:20.320 --> 0:07:23.320 is stronger than we thought, neutral is stronger than we thought, 0:07:23.360 --> 0:07:25.400 and the terminal rate is not going to be as 0:07:25.440 --> 0:07:28.680 low as we thought, simply due to existing economic conditions. 0:07:29.080 --> 0:07:31.040 When you look at that rise in the long end, 0:07:31.080 --> 0:07:33.480 the higher terminal rate, and so forth, how do you 0:07:33.520 --> 0:07:36.720 try to disambiguate the two and what signal, if any, 0:07:36.760 --> 0:07:39.560 do you read in post September market activity. 0:07:40.040 --> 0:07:42.520 Great question, and I think you know the simple answer 0:07:42.600 --> 0:07:44.240 would be you look at all the above. But I 0:07:44.240 --> 0:07:48.080 think we can make a couple of informed observations. The 0:07:48.160 --> 0:07:50.120 first and if I were back on my old FED job, 0:07:50.160 --> 0:07:53.320 I'd be looking at this is longer term measures of 0:07:53.360 --> 0:07:58.000 longer term inflation expectations, either in the tips market or surveys, 0:07:58.160 --> 0:08:01.920 and those are very well behave. Secondly, we also have 0:08:01.960 --> 0:08:05.600 had some pretty strong macro data, big revisions to GDP, 0:08:05.840 --> 0:08:09.000 which in some ways really change in important ways the 0:08:09.040 --> 0:08:12.720 assessment of where the economy is right now. We got 0:08:12.720 --> 0:08:15.120 a very soft labor market report, but I think the 0:08:15.160 --> 0:08:17.720 markets in the FED are inclined to look through that 0:08:17.960 --> 0:08:22.200 given the storm and other related consequences of that. A 0:08:22.320 --> 0:08:25.600 term perhaps you've used on your show before is also 0:08:25.640 --> 0:08:27.960 look at the term premium. How much of this move 0:08:28.000 --> 0:08:31.320 and yields is essentially bond investors saying I want to 0:08:31.360 --> 0:08:34.120 get paid more in terms of a higher yield given 0:08:34.160 --> 0:08:37.360 what may happen to fiscal policy or growth. And I 0:08:37.360 --> 0:08:39.480 think all of the above has been going on. It 0:08:39.520 --> 0:08:43.600 has been some moving term premium, some stronger data, backward 0:08:43.640 --> 0:08:47.120 looking data, and probably some repricing of the path for 0:08:47.200 --> 0:08:50.160 the economy given the election. I would point out that 0:08:50.240 --> 0:08:53.880 at this stage, I think you want to distinguish between 0:08:54.440 --> 0:08:57.760 a phenomenon where by knowing the election victor, I think 0:08:57.760 --> 0:09:01.240 we know something about the contours, for example, tax policy, 0:09:01.240 --> 0:09:05.000 It's more likely that the twenty seventeen. Trump tax cuts 0:09:05.000 --> 0:09:07.880 are going to get extended more or less intact, and 0:09:07.880 --> 0:09:10.480 that probably would not have been the outcome if we'd 0:09:10.480 --> 0:09:13.520 had an opposite election outcome. So I think in this 0:09:13.600 --> 0:09:16.160 early stage, it's hard to determine how much of this 0:09:16.240 --> 0:09:19.080 is a repricing of the level of markets versus a 0:09:19.120 --> 0:09:21.920 new trend, because I think both could be going on. 0:09:22.920 --> 0:09:25.439 I feel like I should just mention again, we're recording 0:09:25.480 --> 0:09:30.319 this on November twelfth, and there is something happening tomorrow 0:09:30.360 --> 0:09:32.720 that might have a bearing on this conversation, which is 0:09:32.760 --> 0:09:36.000 we're going to get the latest CPI reading when it 0:09:36.040 --> 0:09:41.040 comes to inflation. Obviously there has been improvement on this front, 0:09:41.120 --> 0:09:45.720 but in the most recent FMC meaning Powell was emphasizing, 0:09:45.920 --> 0:09:48.400 you know, really making the point that he expects this 0:09:48.559 --> 0:09:52.400 to be a sort of bumpy path going forward. When 0:09:52.440 --> 0:09:55.440 a FED chair is saying something like that, should we 0:09:55.480 --> 0:09:58.160 assume that the risk is to the upside on prices? 0:09:59.360 --> 0:10:01.760 I don't think so. I don't think that's the message 0:10:01.760 --> 0:10:03.640 he was trying to convey. I take him at his 0:10:03.760 --> 0:10:07.000 word that it is a bumpy path. Maybe I'll put 0:10:07.040 --> 0:10:10.079 something back into that conversation that sort of fell out 0:10:10.080 --> 0:10:12.040 of favor. There's a lot of talk a year ago 0:10:12.040 --> 0:10:15.079 about the last mile being tough to navigate, and I 0:10:15.120 --> 0:10:17.560 would point out that, you know, if you look at 0:10:17.559 --> 0:10:21.200 inflation on a twelve month basis, in December of last year, 0:10:21.240 --> 0:10:24.160 inflation fell to two point nine the Fed's preferred measure 0:10:24.280 --> 0:10:27.040 on the core PCEE and that was a big moment. 0:10:27.120 --> 0:10:29.520 That was the first time in almost three years inflation 0:10:29.640 --> 0:10:33.160 had was two points something. It's very likely that this 0:10:33.320 --> 0:10:35.960 year will end in inflation will end on a twelve 0:10:35.960 --> 0:10:38.480 month basis anyway at around two eight or two nine. 0:10:38.559 --> 0:10:41.040 So at least by that metric, you know, this is 0:10:41.040 --> 0:10:43.800 a year when we've not moved backwards. But you could 0:10:43.880 --> 0:10:46.719 argue that, you know, progress on inflation at minimum has 0:10:46.760 --> 0:10:50.320 been slow. And so the way I take the conversation 0:10:50.440 --> 0:10:52.920 from the Chair and other members of the FED is 0:10:53.160 --> 0:10:56.560 they have a view that disinflation will continue, but they're 0:10:56.600 --> 0:10:58.880 also open to the risk that it may stall. I 0:10:58.960 --> 0:11:01.600 don't think necessarily it means inflation is going to go 0:11:01.760 --> 0:11:05.600 up to frightening levels, but progress could stall, and I 0:11:05.640 --> 0:11:08.360 think that they're very attuned and attentive to evidence in 0:11:08.400 --> 0:11:09.200 the data on that. 0:11:25.480 --> 0:11:28.520 So, as you mentioned, you know, there's a confluence of factors. 0:11:28.800 --> 0:11:32.600 One of the things that may explain why the market 0:11:32.640 --> 0:11:35.440 has repriced its terminal rate or the depth of the 0:11:35.520 --> 0:11:38.400 rate cut cycle this time. And you mentioned that we 0:11:38.480 --> 0:11:40.720 had some pot we got that strong job support, there 0:11:40.800 --> 0:11:43.400 was some positive GDP revisions that make it look like 0:11:43.400 --> 0:11:46.720 the economy is in a higher state. The one thing 0:11:46.800 --> 0:11:49.160 that's been bandied about for years now is this idea 0:11:49.200 --> 0:11:53.120 that post pandemic, like so called our star is higher. 0:11:53.480 --> 0:11:55.280 I don't know what it is, whether it is higher 0:11:55.360 --> 0:11:58.360 or not, but if it is higher, what's different. Suppose 0:11:58.440 --> 0:12:02.920 it is higher changed in your view? That would explain 0:12:03.320 --> 0:12:05.480 a higher neutral rate of interest? 0:12:06.080 --> 0:12:09.400 Good point. I think a couple of factors. First of all, 0:12:09.440 --> 0:12:12.200 why was our star believed to be pretty low in 0:12:12.240 --> 0:12:14.560 the decade before the pandemic Maybe you know a bit 0:12:14.600 --> 0:12:17.439 of an anecdote. There was also uncertainty about our star 0:12:18.080 --> 0:12:21.720 in twenty eighteen when I arrived at the FED range 0:12:21.720 --> 0:12:24.240 of views, I think from the fund rate maybe two 0:12:24.320 --> 0:12:26.280 and a half up to three and a half in 0:12:26.280 --> 0:12:29.079 that cycle, the Palfed sort of found out where neutral 0:12:29.320 --> 0:12:30.960 was because when we got the fund rate to two 0:12:31.000 --> 0:12:33.080 and a half, the economy was in a pretty good place. 0:12:33.120 --> 0:12:36.040 In fact, if anything, inflation began to slow. So it 0:12:36.160 --> 0:12:38.680 is true that you don't know it precisely, but you 0:12:38.720 --> 0:12:40.120 can sort of have a sense if you're in the 0:12:40.160 --> 0:12:43.040 right ballpark. So why might it have gone up? Well, 0:12:43.080 --> 0:12:46.360 there are some positive reasons and maybe some more negative reasons. 0:12:46.360 --> 0:12:48.920 The positive reason is our star is thought to be 0:12:48.960 --> 0:12:51.960 related to growth. So if potential growth is higher, either 0:12:52.080 --> 0:12:56.319 because of innovation or AI or list your favorite contributor, 0:12:56.640 --> 0:12:59.840 that could push up our star. It could also reflect, 0:13:00.040 --> 0:13:03.160 you know, demand for capital. We have had some evidence 0:13:03.200 --> 0:13:07.400 at least in certain sectors of expanded capital spending. We 0:13:07.440 --> 0:13:10.800 went through a decade when capital spending was was was weak. 0:13:11.080 --> 0:13:12.600 On the other side of the ledger, A lot of 0:13:12.600 --> 0:13:15.120 the factors that we're keeping our star pretty low have 0:13:15.240 --> 0:13:19.160 not really changed, you know, Demographic factors have not really moved, 0:13:19.559 --> 0:13:22.920 and if anything, saving has been moving up. So I 0:13:22.960 --> 0:13:24.800 think they will find it in this cycle as we 0:13:24.800 --> 0:13:27.360 did in the last cycle by looking at the data 0:13:27.559 --> 0:13:30.760 and as they get close, you know, rethinking. 0:13:30.240 --> 0:13:33.840 That could government spending be a contributor, given that deficits 0:13:33.880 --> 0:13:36.800 to the share of GDP are very high, given where 0:13:36.840 --> 0:13:40.280 the unemployment rate in resource utilization generally. 0:13:40.600 --> 0:13:42.600 Certainly, and here maybe if I could be a little 0:13:42.640 --> 0:13:46.439 wonkish for your listeners, never never worry about that. And 0:13:46.840 --> 0:13:49.480 I wrote a recent essay in the in the FT 0:13:49.920 --> 0:13:52.520 on this on this topic. Here, I do think you 0:13:52.600 --> 0:13:55.960 want to distinguish between the neutral rate that the FED 0:13:56.040 --> 0:13:58.120 focuses on, which is really the front end of the 0:13:58.160 --> 0:14:00.319 yield curve. So where's the funds rate going to end 0:14:00.400 --> 0:14:03.560 up when inflation gets to target? Right now? That FED 0:14:03.600 --> 0:14:06.760 thinks that numbers around three percent. If you ask me 0:14:06.800 --> 0:14:09.040 the question, where are bond yields going to end up? 0:14:09.480 --> 0:14:11.160 My own view, and I think the Pimco view is 0:14:11.240 --> 0:14:14.439 higher than we saw in the decade before the pandemic. 0:14:14.480 --> 0:14:16.400 So in other words, we think the front end of 0:14:16.400 --> 0:14:19.040 the curve may not be all that higher, but long 0:14:19.120 --> 0:14:21.160 rates could be higher because the curve will be steeper. 0:14:21.200 --> 0:14:24.680 In other words, markets will adjust not so much because 0:14:24.720 --> 0:14:27.320 the FED has to do something different, but because the 0:14:27.400 --> 0:14:29.800 yuel curve will be steeper. It was very flat in 0:14:29.840 --> 0:14:33.760 the decade before the pandemic. For example, in twenty eighteen, 0:14:33.840 --> 0:14:35.520 when we got the funds rate up to two and 0:14:35.520 --> 0:14:38.840 a half, tenure treasure eels were three and so for 0:14:38.920 --> 0:14:41.880 the reasons you mentioned deficits and debt probably in a 0:14:41.920 --> 0:14:45.080 world with higher longer yields than we saw in the 0:14:45.080 --> 0:14:46.760 decade before the pandemic. 0:14:47.560 --> 0:14:51.240 Since we're on the topic of higher long term yields, 0:14:51.560 --> 0:14:53.680 one of the things we've been speaking about on the 0:14:53.720 --> 0:14:57.320 show recently is mortgage rates, and even though the FED 0:14:57.400 --> 0:15:02.160 has been cutting, those haven't really gone down, partly because 0:15:02.160 --> 0:15:05.440 they are influenced by longer term treasury yields and those 0:15:05.480 --> 0:15:09.560 are going up. Given that, you know, affecting the cost 0:15:09.680 --> 0:15:12.160 of housing or the mortgage rate is supposed to be 0:15:12.280 --> 0:15:16.239 a primary tool in which a central bank actually influences 0:15:16.280 --> 0:15:19.640 the real economy. Does that pose a problem at all 0:15:19.720 --> 0:15:20.760 for the central bank? 0:15:22.080 --> 0:15:25.280 I think it's a reality for the central bank because 0:15:25.520 --> 0:15:27.960 for the most part, although the FED has been very 0:15:28.000 --> 0:15:31.680 active in supporting the mortgage market through the QE programs, 0:15:31.720 --> 0:15:35.240 it's mortgage portfolio is running off, and if anything, tracy, 0:15:35.280 --> 0:15:38.360 they've indicated that may well continue even when they stop 0:15:38.680 --> 0:15:42.240 qt In general, and you are correct, mortgages will tend 0:15:42.320 --> 0:15:44.600 yields will tend to move closely, not so much with 0:15:45.000 --> 0:15:48.240 the funds rate, but the longer end of the yield curve. 0:15:48.920 --> 0:15:50.960 I would say it's more of a reality. As they 0:15:51.000 --> 0:15:54.560 think about the appropriate stance of policy, they will need 0:15:54.600 --> 0:15:58.240 to factor that in to what they project they need 0:15:58.280 --> 0:16:02.080 to do to achieve their inflation employment target. So I 0:16:02.080 --> 0:16:04.720 think the in the FEDS thinking it's just a reality 0:16:05.040 --> 0:16:07.680 of the way the financial markets work, and that may 0:16:07.720 --> 0:16:10.720 call them to adjust policy in one way or another 0:16:10.760 --> 0:16:11.400 in the future. 0:16:11.840 --> 0:16:15.280 There was a famous paper that came out staying on 0:16:15.360 --> 0:16:18.720 the subject of housing called Housing is the Business Cycle. 0:16:18.920 --> 0:16:21.000 And one of the things that was interesting was that 0:16:21.120 --> 0:16:24.720 during twenty twenty two, when the you know, when mortgage 0:16:24.760 --> 0:16:26.720 rates really started to rocket higher, we did get this 0:16:26.800 --> 0:16:28.560 freeze in the housing market that we didn't see a 0:16:28.560 --> 0:16:32.000 plungin home prices, but we really saw, Yeah, the market 0:16:32.080 --> 0:16:33.760 sort of came to a freeze. And there still is 0:16:33.800 --> 0:16:36.320 a lot of diminished activity, and we still see fewer 0:16:36.440 --> 0:16:38.880 housing starts, and we still don't see a lot of 0:16:38.920 --> 0:16:41.720 sales and all this stuff. Do you think the relationship 0:16:41.800 --> 0:16:45.120 has changed in some way between the housing market and 0:16:45.240 --> 0:16:46.440 the broader macroeconomy. 0:16:46.760 --> 0:16:49.160 Great question, because you know, you look at I've been 0:16:49.160 --> 0:16:51.200 doing this now for four decades, so you look at 0:16:51.200 --> 0:16:54.640 business cycle history and there are some common features and 0:16:54.680 --> 0:16:58.280 then there are always some surprises, and in particular in 0:16:58.600 --> 0:17:02.320 this cycle, one thing that has been different is the 0:17:02.400 --> 0:17:05.439 fact that so many folks in the years before the 0:17:05.480 --> 0:17:07.880 FED raised rates were able to lock in low rate 0:17:08.119 --> 0:17:11.640 mortgages that you've had less mobility. People are less likely 0:17:11.680 --> 0:17:14.000 to move and if they want to, simply because if 0:17:14.040 --> 0:17:16.119 they sell their house, they then got to get a 0:17:16.160 --> 0:17:19.199 mortgage at a much higher rate. Now, this phenomenon is 0:17:19.280 --> 0:17:22.479 always evident in the data, because people can lock in 0:17:22.480 --> 0:17:25.159 low rates and then rates move up. But what's different 0:17:25.160 --> 0:17:27.960 in this cycle is the magnitude of the gap between 0:17:28.000 --> 0:17:30.560 the spot mortgage rate and the rate that millions and 0:17:30.600 --> 0:17:33.240 tens of millions of people locked in. So I think 0:17:33.240 --> 0:17:36.320 in that respect, this is a different cycle, and it's 0:17:36.359 --> 0:17:39.680 been a factor that's been supporting house prices even though 0:17:39.680 --> 0:17:43.119 the Fed's been raising rates dramatically. Typically you would not 0:17:43.200 --> 0:17:44.679 have seen that in past. 0:17:45.080 --> 0:17:48.040 Just related to this topic, the FED has been talking 0:17:48.080 --> 0:17:51.320 a lot about how it's necessary to I guess, ease 0:17:51.400 --> 0:17:55.679 up on the restrictiveness of monetary policy and therefore cut rates. 0:17:55.880 --> 0:17:58.639 And I'm always a little bit confused because when I 0:17:58.760 --> 0:18:03.600 look at financial conditions on the Bloomberg, they look pretty 0:18:03.840 --> 0:18:07.520 easy to me. And you know, obviously this has happened 0:18:07.760 --> 0:18:10.920 post the FMC meeting, but we have, for instance, junk 0:18:10.960 --> 0:18:14.800 bond spreads getting pretty close to historical lows, Equity markets 0:18:14.840 --> 0:18:19.880 obviously at a record. Where's the restrictiveness actually showing up? 0:18:21.080 --> 0:18:23.320 Great point, and I look at the same screens that 0:18:23.400 --> 0:18:26.200 you both do as well. The FED, the Board of 0:18:26.240 --> 0:18:28.960 Governors actually about a year ago or so, developed its 0:18:28.960 --> 0:18:34.080 own index of financial conditions, and that also shows conditions, 0:18:34.480 --> 0:18:37.960 you know, trending in an easier direction. The chair got 0:18:38.000 --> 0:18:40.640 a question or two on this and the press conference 0:18:40.760 --> 0:18:43.200 last week, and I'm paraphrasing, but his answer was more 0:18:43.200 --> 0:18:45.600 along the lines of they try not to get up 0:18:45.640 --> 0:18:48.040 in high frequency, you know, day to day, week to 0:18:48.080 --> 0:18:50.080 week moves, but they do want to look at longer 0:18:50.160 --> 0:18:52.560 run trends, I would argue, And if you look at 0:18:52.560 --> 0:18:56.200 longer run trends, now you know conditions are certainly moving 0:18:56.280 --> 0:19:00.240 in an easier direction. Now you know that's okay, But 0:19:00.359 --> 0:19:03.880 it's also important. I think as the FED communicates through 0:19:04.320 --> 0:19:07.720 press conferences and speeches, you know that they clarify what 0:19:07.840 --> 0:19:10.440 they are looking at, because sometimes FED officials will talk 0:19:10.440 --> 0:19:14.640 about the funds rate being restrictive relative to inflation and history, 0:19:14.640 --> 0:19:17.600 and that's that's true, But the conversation I think also 0:19:17.760 --> 0:19:20.960 needs to acknowledge what we're looking at in different parts 0:19:21.000 --> 0:19:23.359 of the of the markets. Now, again, inflation is on 0:19:23.400 --> 0:19:26.240 the path down to two percent, so and easing a 0:19:26.320 --> 0:19:29.600 conditions relative to say twenty twenty two, and they're very restrictive, 0:19:29.680 --> 0:19:32.720 is not necessarily a problem, but it certainly I think 0:19:32.840 --> 0:19:35.560 needs to be a factor in the outlook. 0:19:36.080 --> 0:19:36.720 I'm going to ask you. 0:19:36.680 --> 0:19:38.440 A sort of I think it would be a variation 0:19:38.760 --> 0:19:41.320 on Tracy's question, and it came up in also a 0:19:41.359 --> 0:19:45.120 recent episode we did with Chicago Fed President Austin goulds, Now, 0:19:45.160 --> 0:19:48.600 when you look at the progress that we've made on 0:19:48.880 --> 0:19:54.560 inflation since it peaked, given that many financial indices have surged, 0:19:54.960 --> 0:19:58.040 given that the unemployment rate is still only four point 0:19:58.160 --> 0:20:01.240 one percent, what's your store for it and what's your 0:20:01.280 --> 0:20:05.600 story for the connection between the move up in short 0:20:05.680 --> 0:20:08.320 term interest rates by the Fed and how that fed 0:20:08.359 --> 0:20:09.960 through to lower realized inflation. 0:20:11.440 --> 0:20:13.760 Well, you know, the in my youth used to call 0:20:13.800 --> 0:20:16.119 it the sixty four thousand dollars question. Maybe this is 0:20:16.119 --> 0:20:17.840 sixty four billion dollar. 0:20:18.080 --> 0:20:21.400 Inflation hypothetical questions, Mobully. 0:20:21.080 --> 0:20:24.639 The sixty four trillion dollar question. The good news is 0:20:24.720 --> 0:20:26.840 relative to real time, and I can tell you as 0:20:26.880 --> 0:20:29.560 a FED official in twenty twenty one, we had so 0:20:29.680 --> 0:20:34.960 many conflicting signals, but with the benefit of hindsight and 0:20:35.040 --> 0:20:38.760 also looking across the globe, I think some pretty clear 0:20:39.320 --> 0:20:42.160 patterns helped to account for this. You know, I should 0:20:42.200 --> 0:20:46.360 also confess that I was a charter member of Team Transitory. 0:20:46.359 --> 0:20:49.080 This is where people come up odd lots. Is confession 0:20:49.720 --> 0:20:50.600