WEBVTT - Bill Dudley on Monetary Policies 0:00:02.040 --> 0:00:06.000 This is Master's in Business with very Rid Holds on 0:00:06.240 --> 0:00:12.280 Bloomberg Radio this week on the podcast what Can I Say? 0:00:12.520 --> 0:00:19.160 Bill Dudley, former New York Fed President, multiple positions at 0:00:19.239 --> 0:00:23.000 Goldman Sachs on Federal Reserve, at the New York Fed, 0:00:23.560 --> 0:00:28.280 really a master class in how monetary policy is not 0:00:28.480 --> 0:00:34.840 only made, but executed and put into actual operations. There 0:00:34.880 --> 0:00:38.560 are few people in the world who understand the inter 0:00:38.640 --> 0:00:43.520 relationships between central banks, the economy, and markets like Bill 0:00:43.600 --> 0:00:50.120 Dudley does. This is just a master class in understanding 0:00:50.120 --> 0:00:55.120 all the factors that affect everything from the economy to inflation, 0:00:55.320 --> 0:00:59.120 to the labor market, the housing market, and of course 0:00:59.200 --> 0:01:02.320 Federal Reserve. I could go on and on, but instead 0:01:03.080 --> 0:01:07.160 I'll just say, with no further ado, my conversation with 0:01:07.360 --> 0:01:11.600 former New York Fed President Bill Dudley. Great to be here, Barry, 0:01:11.640 --> 0:01:13.679 It's great to have you. So I feel like I 0:01:13.800 --> 0:01:16.680 have to call you Bill Bill, because that's what I 0:01:16.720 --> 0:01:19.760 always hear you described as not a William Yep. Let's 0:01:19.840 --> 0:01:21.720 talk a little bit about your background. You get an 0:01:21.760 --> 0:01:27.039 economics PhD from California Berkeley in eighty two, and around 0:01:27.080 --> 0:01:30.000 the same time you become an economist at the Federal 0:01:30.040 --> 0:01:32.720 Reserve Board from eighty one to eighty three. Tell us 0:01:32.760 --> 0:01:33.840 a little bit about that role. 0:01:34.920 --> 0:01:38.000 I was there in the what's called the Financial Studies Section, 0:01:38.080 --> 0:01:40.600 which is one of the very small places in the 0:01:40.640 --> 0:01:43.720 FED that it is not macroeconomics driven, it's microeconomics. So 0:01:43.760 --> 0:01:48.480 we worked on things like payments policy, you know, regulatory policy, 0:01:48.640 --> 0:01:51.680 so all sorts of micro issues, not macro issues. It 0:01:51.720 --> 0:01:54.240 was a pretty interesting period because the Congress had just 0:01:54.280 --> 0:01:57.360 passed what's called the Monetary Control Act, where they're forcing 0:01:57.360 --> 0:02:00.280 the FED to charge for all its services to so 0:02:00.640 --> 0:02:02.080 to sort of level the playing field with. 0:02:02.040 --> 0:02:02.800 The private sector. 0:02:03.040 --> 0:02:04.400 So we had to figure out how we're going to 0:02:04.400 --> 0:02:07.120 price all these services in a way that we can 0:02:07.200 --> 0:02:10.040 still sort of stay in business and be a viable 0:02:10.040 --> 0:02:11.360 competitor to the private sector. 0:02:11.440 --> 0:02:14.760 Huh, that's kind of bizarre. I would imagine in nineteen 0:02:14.800 --> 0:02:17.400 eighty two, the FED was a much smaller entity than 0:02:17.440 --> 0:02:20.800 it is today. What was a day in the life 0:02:20.880 --> 0:02:22.560 of a FED economist like back then? 0:02:23.200 --> 0:02:26.239 So I was working on issues, you know, on payments, 0:02:26.760 --> 0:02:30.079 I worked on issues on you know, some of them 0:02:30.080 --> 0:02:33.240 were quite esoteric. So, for example, the treasure was thinking 0:02:33.240 --> 0:02:35.560 about moving to direct deposit, but they wanted to know 0:02:35.600 --> 0:02:37.400 how much it was going to cost them. Because direct 0:02:37.400 --> 0:02:41.880 deposit the money clears, you know, sorry almost instantly. 0:02:41.960 --> 0:02:42.960 Right when you. 0:02:42.880 --> 0:02:45.560 Write a check, you get check float. It takes time 0:02:45.600 --> 0:02:48.280 for the checks to come back to hit the treasury counts. 0:02:48.320 --> 0:02:49.880 So they want to know how many days does it 0:02:49.919 --> 0:02:52.560 take a Treasury check to get back to us. So 0:02:52.600 --> 0:02:54.919 we actually set this project where we went out to 0:02:54.960 --> 0:02:57.919 the reserve banks and sample checks to find out how 0:02:57.919 --> 0:03:01.080 long did it actually take someone to get their treasury 0:03:01.160 --> 0:03:03.400 check and deposit it somewhere and have a get back 0:03:03.400 --> 0:03:05.200 to the Fed and debit the treasury of the count 0:03:05.240 --> 0:03:06.600 It turned out to be like eight or nine days 0:03:06.600 --> 0:03:07.480 on average. 0:03:07.360 --> 0:03:09.880 And on a couple of billion dollars that flowed as 0:03:09.960 --> 0:03:11.120 real money. It's real money. 0:03:11.160 --> 0:03:13.600 So we wanted to make sure that people understood what 0:03:13.680 --> 0:03:17.120 the cost was. Now, obviously it's a good thing to do. 0:03:17.200 --> 0:03:19.679 I mean, it does cost the Treasury money, but it's 0:03:19.680 --> 0:03:23.320 a much more efficient and more reliable payments medium. 0:03:23.680 --> 0:03:26.840 Did you overlap with the Chairman Paul Vulkar when you were. 0:03:26.720 --> 0:03:29.040 There, Yes, I did. I didn't have a lot of 0:03:29.080 --> 0:03:31.359 interactions with him. I remember one time though I did 0:03:31.480 --> 0:03:34.040 do a briefing of the of the Board of Governors. 0:03:34.120 --> 0:03:36.680 And at the time they had they had this very 0:03:36.760 --> 0:03:39.120 long table in the board in the main board of 0:03:39.160 --> 0:03:42.360 Governor's meeting room, and Volker sat at one end and 0:03:42.440 --> 0:03:44.800 the briefer set all the way at the other end, 0:03:45.400 --> 0:03:48.200 which was made it sort of complicated because Volker had 0:03:48.400 --> 0:03:50.800 usually had a cigar stuck in his mouth, and you 0:03:50.840 --> 0:03:54.839 would have acquire and you could like straining to hear them. 0:03:55.600 --> 0:03:58.520 The senior staff was ready to rescue you if you 0:03:58.560 --> 0:04:02.440 said something inappropriate. I mean they set the bar, the 0:04:02.560 --> 0:04:05.800 tension bar so high because you actually couldn't actually do 0:04:05.840 --> 0:04:08.840 a briefing until you've actually taken a course, no kidding. 0:04:08.920 --> 0:04:11.080 So that means like you're not exactly relaxed when you're 0:04:11.080 --> 0:04:13.920 going to brief the governors. It's not a lot of 0:04:13.920 --> 0:04:16.479 give and take. It's a very formal process. 0:04:16.640 --> 0:04:18.760 And even without a cigar in his mouth. I only 0:04:18.800 --> 0:04:21.320 got to meet Toll Paul once, but he's kind of 0:04:21.400 --> 0:04:25.920 gruff and mumbles like not a clear projecting voice, kind 0:04:25.920 --> 0:04:28.839 of a hoarse, mumbling voice. I can imagine with a 0:04:28.880 --> 0:04:31.640 cigar in his mouth, who could even tell what he's saying. 0:04:31.680 --> 0:04:34.039 Well, I seem to have gotten it good enough. And 0:04:34.080 --> 0:04:36.839 you know what's interesting about that. I didn't really have 0:04:36.920 --> 0:04:38.800 that much interaction with Paul over the next you know, 0:04:38.880 --> 0:04:41.600 fifteen to twenty years, But once I got to the FED, 0:04:42.040 --> 0:04:43.880 we started to actually see each other on a much 0:04:43.880 --> 0:04:46.680 more regular basis. I got involved with a group of thirty, 0:04:46.720 --> 0:04:48.320 Paul was a member of the group of thirty, and 0:04:48.360 --> 0:04:52.320 we gradually became pretty good friends. So it started like 0:04:52.480 --> 0:04:55.279 very slow and sort of matured. 0:04:54.960 --> 0:04:58.800 Like, fine, mind, he's a fascinating guy, and what an 0:04:58.839 --> 0:05:03.400 amazing career. So before you come back to the FED, 0:05:03.600 --> 0:05:07.159 there's a private sector interval. Tell us a little bit 0:05:07.200 --> 0:05:09.880 about the twenty years you spent at Goldman Sachs, where 0:05:10.320 --> 0:05:13.480 you not only became a managing director and a partner, 0:05:13.520 --> 0:05:16.720 but you know, really very much rose through the ranks. Well, 0:05:16.760 --> 0:05:18.200 first I went to JV. Morgan. 0:05:18.240 --> 0:05:20.800 I was there the regulatory commis. JP Morgan at the 0:05:20.839 --> 0:05:23.440 time had one regulatory commis And so when the job 0:05:23.480 --> 0:05:26.240 came open and they approached me at the FED, I thought, boy, 0:05:26.240 --> 0:05:28.440 if I don't take this job, it's not gonna be available, 0:05:29.200 --> 0:05:31.680 you know a few years later, So I went to JV. 0:05:31.760 --> 0:05:32.039 Morgan. 0:05:32.120 --> 0:05:34.760 I worked on a lot of bank regulatory matters, and 0:05:34.760 --> 0:05:37.760 that's why I'm still very interested in bank regulatory issues. 0:05:38.880 --> 0:05:40.320 But that seemed to me like not. 0:05:40.320 --> 0:05:43.200 A really great long term career because, as you know, 0:05:43.360 --> 0:05:47.560 bank regulation changes very slowly, and I start wanted a 0:05:47.600 --> 0:05:51.840 faster tempo. So Goldman Sachs had me into interview for 0:05:51.880 --> 0:05:54.440 a macro economics job, and I thought, well, I don't 0:05:54.480 --> 0:05:57.280 really know a lot of macroeconomics, but I do know 0:05:57.360 --> 0:06:00.960 about how the Federal Reserve operates, how the pay system operates, 0:06:00.960 --> 0:06:03.760 how the plumbing works, how reserves, you know, moved through 0:06:03.760 --> 0:06:06.560 the system. And I think they liked the fact that 0:06:06.600 --> 0:06:09.000 I knew about how things worked at sort of a 0:06:09.040 --> 0:06:11.839 micro level, so they hired me to do macroeconomics. 0:06:12.040 --> 0:06:16.640 So you were chief US economist for a decade over 0:06:17.160 --> 0:06:22.719 a really fascinating period, really the heart of the bull market. 0:06:22.839 --> 0:06:25.480 Tell us a little bit what you remember from that 0:06:25.680 --> 0:06:26.799 role in that era. 0:06:27.880 --> 0:06:30.839 Well, I remember how how it was a period of 0:06:30.880 --> 0:06:35.560 sort of stars for for equity analysts, much more than 0:06:35.600 --> 0:06:38.760 it is today. And one of the biggest stars was 0:06:38.760 --> 0:06:41.679 Abby Joseph's Colin Sure It was the equity analyst for 0:06:42.160 --> 0:06:46.240 Goldman Sachs. So trying to find some space between Abby 0:06:46.320 --> 0:06:50.400 and your audience. Was a little bit challenging, but you know, 0:06:50.640 --> 0:06:53.640 I focused mostly on fixed income and foreign exchange, so 0:06:53.640 --> 0:06:56.479 there was sort of room for me to do my business. 0:06:57.080 --> 0:06:59.320 Probably the highlight of my career at Goldman Sachs was 0:06:59.320 --> 0:07:01.200 that I can't or exactly the year, but it was 0:07:01.200 --> 0:07:04.119 in the early two thousands when people in the markets 0:07:04.279 --> 0:07:06.360 couldn't figure out if the FED was going to move 0:07:06.440 --> 0:07:09.080 by twenty five basis points or by fifty basis points, 0:07:09.560 --> 0:07:12.000 and unlike today, going into the meeting, it really was 0:07:12.200 --> 0:07:15.840 fifty to fifty. And Lloyd Blankfin called me up the 0:07:15.920 --> 0:07:17.360 night before and so I said, you know, we have 0:07:17.360 --> 0:07:19.560 a lot of risk on this notion that they're going 0:07:19.640 --> 0:07:22.720 to do fifty. How do you feel about that? And 0:07:22.760 --> 0:07:25.240 that was my call, I said. I told Loyd said, 0:07:25.240 --> 0:07:27.480 I don't know what's going to happen, but the probability 0:07:27.520 --> 0:07:29.520 of fifty is a lot more than fifty to fifty 0:07:29.720 --> 0:07:31.880 at this point. Next day I had to go to 0:07:31.920 --> 0:07:33.720 Boston for a client meeting. It was really sort of 0:07:33.720 --> 0:07:36.160 sad because I wasn't on the floor at the time 0:07:36.200 --> 0:07:38.520 that the announcement came, but apparently people stood up and. 0:07:38.560 --> 0:07:41.760 Cheered for me and it was a fifty point yeah. 0:07:41.640 --> 0:07:43.280 Yeah, yeah, So I got that was so that was 0:07:43.280 --> 0:07:45.320 probably the highlight and I start I got to miss 0:07:45.400 --> 0:07:46.720 the best part of it, rightly. 0:07:47.560 --> 0:07:51.840 So after you know, more than twenty years Agoman, you 0:07:51.960 --> 0:07:54.600 joined the New York FED in two thousand and seven 0:07:55.080 --> 0:07:59.920 overseeing domestic and foreign exchange trading operations. Two thousand and seven. 0:08:00.120 --> 0:08:05.240 That's some timing. It's really it's after real estate rolled over, 0:08:05.800 --> 0:08:08.840 but it's kind of before the market peaked and the 0:08:08.880 --> 0:08:10.800 real trouble began in O eight or nine. 0:08:11.320 --> 0:08:14.360 Yeah, well, I had about seven months of calm and 0:08:14.400 --> 0:08:18.400 then this chaos started in August of two thousand and seven. 0:08:18.680 --> 0:08:21.800 I remember it really well because I just finished building 0:08:21.800 --> 0:08:24.880 this house in West Virginia and we were taking occupancy 0:08:25.640 --> 0:08:28.640 in early August, and it was literally the same day 0:08:28.680 --> 0:08:32.000 that BNP Paraba shut off redemptions from some of their 0:08:32.080 --> 0:08:35.040 mutual funds, caused all sorts of chaos in Europe, and 0:08:35.040 --> 0:08:36.360 then the question is, well, what are we going to 0:08:36.440 --> 0:08:39.679 do about adding liquidity in the US. So didn't get 0:08:39.679 --> 0:08:41.360 out of the house, my new house for the next 0:08:41.360 --> 0:08:43.320 two days as we tried to figure out how to 0:08:44.120 --> 0:08:48.800 calm markets after the BNP Paraba event. 0:08:49.000 --> 0:08:51.120 And the US market kept going higher. I don't think 0:08:51.120 --> 0:08:53.720 we peaked till like October oh seven, something like that. 0:08:54.080 --> 0:08:59.360 Yeah, people didn't really understand the consequences of subprime. You know, 0:08:59.400 --> 0:09:00.360 I thought for. 0:09:00.440 --> 0:09:03.439 Years, I mean literally for years, if you mentioned it, 0:09:03.760 --> 0:09:06.040 you would be mocked on TV. Yeah, I mean. 0:09:06.240 --> 0:09:08.440 You know, one thing I am proud about when I 0:09:08.520 --> 0:09:11.920 joined the FED is in January two thousand and seven, 0:09:11.960 --> 0:09:14.839 that was my first briefing of the FOMC, and actually 0:09:14.880 --> 0:09:18.240 talked about how this could turn out poorly. You know 0:09:18.280 --> 0:09:21.680 that subprime was being supported by you know, subprime was 0:09:21.679 --> 0:09:24.800 being you know, the credit was flowing to subprime. Subprime 0:09:25.000 --> 0:09:28.040 was enable looking people to buy houses. Home prices were 0:09:28.080 --> 0:09:31.480 going up. Because home prices were going up, subprime wasn't 0:09:31.520 --> 0:09:34.360 a problem, right, But at some point supply was going 0:09:34.400 --> 0:09:37.160 to increase in response to the higher home prices, and 0:09:37.200 --> 0:09:40.160 once prices stopped going up, subprime was going to start 0:09:40.240 --> 0:09:43.319 to go the wrong direction. I said, this is a possibility. 0:09:43.360 --> 0:09:44.640 I didn't say it was going to happen, but by 0:09:44.640 --> 0:09:46.000 I staid it was the possibility. So I was sort 0:09:46.000 --> 0:09:48.640 of pleased that I got off on the right track. 0:09:48.960 --> 0:09:52.360 And then in January two thousand and nine, we were 0:09:52.800 --> 0:09:56.240 deep into the financial crisis where post Lehman and post 0:09:56.320 --> 0:09:59.760 Aig you get named tenth president CEO of the New 0:09:59.880 --> 0:10:04.400 York FED. Again, fantastic timing. What was taking up your 0:10:04.440 --> 0:10:08.520 attention right in the midst of the financial crisis. 0:10:09.040 --> 0:10:12.560 Well, you know, that was a tremendously fortunate event for me. 0:10:12.600 --> 0:10:15.680 I always tell people like brock Obama had to become president, 0:10:16.200 --> 0:10:19.280 Tim Geitner had to become Treasury Secretary, and then the 0:10:19.280 --> 0:10:21.320 board of directors in near FED had to pick me. 0:10:21.400 --> 0:10:23.240 So it's sort of like a low probability times of 0:10:23.280 --> 0:10:26.760 low probably times low probability, so sometimes it works out. Yeah, 0:10:26.920 --> 0:10:28.840 sort of a bank a bank, a trible bank shot. 0:10:29.520 --> 0:10:31.160 You know a lot of things that were focused on 0:10:31.160 --> 0:10:34.199 at the time was trying to provide support to financial markets. 0:10:34.600 --> 0:10:37.079 So if you remember, we were still rolling out various 0:10:37.080 --> 0:10:41.000 facilities like the term asset back, the lending facility for example, 0:10:42.320 --> 0:10:45.360 we were running the commercial paper funding facility. We were 0:10:45.400 --> 0:10:47.720 trying to figure out how to do stress test, the 0:10:47.760 --> 0:10:50.559 first stress test of banks. So that was a big 0:10:50.640 --> 0:10:53.960 job in the spring of two thousand and nine, and 0:10:54.000 --> 0:10:56.960 those stress tests were probably the critical turning point in 0:10:57.040 --> 0:11:00.560 the financial crisis. I remember the day after we published 0:11:00.559 --> 0:11:02.679 the stress test, and for the FAT we were actually 0:11:02.720 --> 0:11:05.200 pretty transparent about like what we did and what our 0:11:05.200 --> 0:11:10.000 assumptions were, and here's the results. Bridgewater published a piece 0:11:10.440 --> 0:11:12.760 and I think the headline said something like we agree, 0:11:13.320 --> 0:11:17.000 and I said, okay, we've Now that's that's really important 0:11:17.000 --> 0:11:20.920 because if our analysis is viewed as credible and we 0:11:21.040 --> 0:11:24.000 have the tart money being able to supply the capital 0:11:24.040 --> 0:11:26.920 that's needed, then people can start to rest assured that 0:11:27.000 --> 0:11:30.000 the banking system is going to stabilize and and it's 0:11:30.000 --> 0:11:32.319 going to stop deteriorating now. It also helped that the 0:11:32.360 --> 0:11:35.040 e Commedis was showing signs of bottoming out, so it 0:11:35.040 --> 0:11:37.360 didn't look like we're just heading down into a deep hole. 0:11:37.400 --> 0:11:39.920 But you know, it was very touching, touch a touch 0:11:39.960 --> 0:11:42.200 and go there in the first part of two thousand 0:11:42.200 --> 0:11:43.840 and nine, and there were you know, there were still 0:11:43.840 --> 0:11:47.199 some major financial firms that were pretty darn shaky. I mean, 0:11:47.240 --> 0:11:50.520 City was pretty shaky, Morgan Stanley was pretty shaky. Some 0:11:50.600 --> 0:11:54.200 of the banks were still pretty shaky. So you know, 0:11:54.840 --> 0:11:57.280 until you actually hit bottom and start to pull up, 0:11:57.720 --> 0:11:59.480 you're really wondering are you going to get through this 0:11:59.559 --> 0:12:00.480 and one piece? 0:12:00.880 --> 0:12:05.320 So the Bridgewater piece raises a really interesting question. The 0:12:05.440 --> 0:12:09.040 New York FED is kind of I don't know how 0:12:09.080 --> 0:12:12.960 to say this first amongst the regional feds, because you're 0:12:13.000 --> 0:12:17.240 located right in the heart of the financial community. What 0:12:17.440 --> 0:12:20.920 is the communication like back and forth between the New 0:12:20.960 --> 0:12:27.240 York FED and major players in finance, especially in the 0:12:27.240 --> 0:12:28.720 midst of a crisis like that. 0:12:29.720 --> 0:12:32.120 So the New York FED is sort of unique among 0:12:32.320 --> 0:12:36.240 central banking entities because most central banks they do the 0:12:36.280 --> 0:12:40.000 policy and strategy and the operations all in the same place, 0:12:40.520 --> 0:12:43.000 but in the FED is split. You have policy done 0:12:43.000 --> 0:12:47.439 in Washington, the operational implementation of that policy almost all 0:12:47.440 --> 0:12:50.120 of that takes place at the New York FED. So 0:12:50.240 --> 0:12:52.000 the New York FED is sort of the eyes and 0:12:52.080 --> 0:12:56.120 ears of the FED reserve for markets. I think that 0:12:56.679 --> 0:12:58.680 you know, one thing that helped me a lot during 0:12:58.679 --> 0:13:00.679 the financial crisis is I knew a lot of people 0:13:00.679 --> 0:13:03.400 on Wall Street, and so when something was happening, I 0:13:03.440 --> 0:13:06.400 could call up people I knew and just ask their opinion, 0:13:07.040 --> 0:13:09.840 recognizing that oftentimes their opinion does have a touch of 0:13:09.880 --> 0:13:12.319 self interest. So you need to talk to three or 0:13:12.320 --> 0:13:14.600 four people to sort of triangulate and figure out what 0:13:14.640 --> 0:13:15.960 you think is really going on. I mean, I'll give 0:13:15.960 --> 0:13:18.360 you an example of one thing that really struck me 0:13:18.440 --> 0:13:21.440 during that period. I called up someone and I said, 0:13:22.559 --> 0:13:26.760 here's a complex you know, cdo obligation. You know, you know, 0:13:26.800 --> 0:13:29.200 with all these different mortgages and all these different tranches. 0:13:29.640 --> 0:13:31.920 How long would it take you to actually go through 0:13:31.960 --> 0:13:34.200 that and value it appropriately, to come up with an 0:13:34.240 --> 0:13:37.040 appropriate valuation? He said, oh, take at least two or 0:13:37.040 --> 0:13:39.840 three weeks. Really, And I thought, oh boy, we're in 0:13:39.880 --> 0:13:40.560 big trouble. 0:13:40.760 --> 0:13:41.000 Wow. 0:13:41.160 --> 0:13:43.720 If you don't really know what things are worth when 0:13:43.760 --> 0:13:46.520 you're going through a period of financial stress, that's going 0:13:46.600 --> 0:13:48.880 to be makes things much much more difficult. 0:13:49.000 --> 0:13:50.880 I would have guessed they would break that up into 0:13:50.920 --> 0:13:53.440 five parts, give it to a bunch of juniors, and 0:13:53.480 --> 0:13:56.199 they'd have an answer in three hours. So it scared me. 0:13:56.640 --> 0:14:00.880 Scared I can imagine. So from the New York FED 0:14:01.000 --> 0:14:03.920 you ultimately end up as vice chairman of the f OMC, 0:14:04.520 --> 0:14:09.360 helping to formulate US monetary policy. What was that like 0:14:09.559 --> 0:14:12.640 going from New York to DC. 0:14:14.400 --> 0:14:17.040 Well, it wasn't such a big change because I'd already 0:14:17.080 --> 0:14:19.480 been going to the f MC meetings and briefing the 0:14:20.840 --> 0:14:21.320 f MC. 0:14:21.320 --> 0:14:23.440 Members as president of the New York Fed you have 0:14:23.480 --> 0:14:26.920 a seat. What happened though, as I start switched side. 0:14:26.960 --> 0:14:29.160 So there, So the. 0:14:29.160 --> 0:14:32.840 Day that Tim Geidner was named Treasury Secretary was basically 0:14:33.040 --> 0:14:36.000 the day before an f MC meeting. And I literally 0:14:36.040 --> 0:14:38.440 didn't know when I went down to Washington that Monday 0:14:38.480 --> 0:14:41.240 evening whether I was going to be briefing the FMC 0:14:41.400 --> 0:14:44.000 participants or whether I was going to be an f 0:14:44.160 --> 0:14:48.200 MC participant myself. So I actually prepared two sets of notes. 0:14:48.480 --> 0:14:50.720 Here's my briefing notes if I'm I'm the soul the 0:14:50.760 --> 0:14:53.760 sella manager, and here's my remarks if I'm the president 0:14:53.760 --> 0:14:56.560 of the FED. So I was ready for both. And 0:14:56.600 --> 0:14:58.920 what happened that day he was He was named on 0:14:58.960 --> 0:15:01.960 that Monday, and so on Tuesday, I was I was 0:15:02.000 --> 0:15:03.760 the President of New York Fed. 0:15:03.840 --> 0:15:05.760 Wow. And you know I didn't you know? 0:15:05.800 --> 0:15:08.120 So, And when I got back to New York on 0:15:08.600 --> 0:15:11.880 you know, I think Thursday morning, we had a town 0:15:11.920 --> 0:15:15.320 hall and I gave my first remarks to the New 0:15:15.400 --> 0:15:18.600 York Fed people and had a very simple message for them. 0:15:19.160 --> 0:15:23.720 Best idea wins, because I was really struck by how 0:15:23.800 --> 0:15:27.720 hierarchical central banks tend to be. And I wanted to 0:15:27.760 --> 0:15:30.400 sort of push agat against that idea and basically say, 0:15:30.440 --> 0:15:32.360 it doesn't matter where the idea comes. If it's the 0:15:32.360 --> 0:15:34.400 best idea, that's the idea that should win out. 0:15:34.720 --> 0:15:37.640 Huh. It makes a lot of sense. And since then 0:15:37.720 --> 0:15:41.880 you've gone on to do some work reforming libor as 0:15:42.000 --> 0:15:46.080 the benchmark for rates. Tell us, I always get the name, 0:15:46.600 --> 0:15:49.760 SOFRA the new one that replaced for Yeah, so, so 0:15:49.800 --> 0:15:51.560 tell us a little bit about the work you did, 0:15:51.840 --> 0:15:58.400 because libor was probably the most important number, certainly in credit, 0:15:58.560 --> 0:15:59.960 maybe in all of finance. 0:16:01.240 --> 0:16:04.080 So library for a while was there was a real 0:16:04.200 --> 0:16:06.160 question whether central banks were going to take this on 0:16:06.280 --> 0:16:08.960 or not. And I remember I was in Basel for 0:16:09.040 --> 0:16:12.600 the BIS meetings and I wrote a one page memo 0:16:12.360 --> 0:16:16.320 to Ben Bernanke to hand to Mervin King. Mervin King 0:16:16.440 --> 0:16:18.120 was the head of the sort of the policy making 0:16:18.120 --> 0:16:20.800 group at the BIS at the time, and the memo 0:16:20.880 --> 0:16:24.440 was basically arguing why central banks needed to own the 0:16:24.520 --> 0:16:27.480 librar problem, because if they didn't own it, it wouldn't 0:16:27.520 --> 0:16:30.080 get fixed, it'd be a problem again, and then the 0:16:30.120 --> 0:16:32.000 central banks would be blamed for well, why didn't you 0:16:32.000 --> 0:16:35.120 fix that problem? So I don't know how much important 0:16:35.400 --> 0:16:37.880 that memo had, but I was very pleased to see 0:16:37.920 --> 0:16:39.880 the central banks take eyed up. And as you know, 0:16:39.920 --> 0:16:42.440 it was a huge undertaking which took you know, many 0:16:42.480 --> 0:16:43.720 many years to complete. 0:16:44.720 --> 0:16:47.320 And for those people who may not be familiar with 0:16:48.440 --> 0:16:54.360 the London Interbank offered rate, offered rate literally was a 0:16:54.400 --> 0:16:57.200 survey where they'd call up various bond desks and say, so, 0:16:57.720 --> 0:17:01.320 what are you charging for an overnight loan? And eventually 0:17:01.480 --> 0:17:05.520 traders figured out they could game that by let's just 0:17:05.680 --> 0:17:08.520 call it talking their books, so to speak, in a 0:17:08.560 --> 0:17:12.560 way that would move the librar in their direction. You could, 0:17:12.560 --> 0:17:14.919 you could do a bunch of things with derivatives, and 0:17:14.960 --> 0:17:19.639 eventually libor kind of spiraled out of control, the new 0:17:20.160 --> 0:17:23.960 improved version. How do we prevent that from taking place? 0:17:24.000 --> 0:17:25.640 What were the structural changes? 0:17:26.200 --> 0:17:29.199 Well, the problem, I mean the problem of LIBRA was 0:17:29.200 --> 0:17:32.600 that you had a small cash library market that was 0:17:32.800 --> 0:17:36.520 referencing a very large futures market year all futures market, 0:17:36.600 --> 0:17:39.120 and so you had a situation where you could take 0:17:39.160 --> 0:17:41.520 big positions in the euro dollar market, affect the price 0:17:41.560 --> 0:17:44.080 in the cash market and actually make a profit. So 0:17:44.400 --> 0:17:47.399 the sort of the tail was wagging the dog for sofa, 0:17:47.480 --> 0:17:51.040 the secured overnight funding rate for repo. You have a 0:17:51.040 --> 0:17:53.320 big repo market. I mean it's you know, hundreds and 0:17:53.359 --> 0:17:55.800 hundreds of billions of dollars, so the idea, and it's 0:17:55.840 --> 0:17:58.320 a real market. I mean there's real transactions that are traded, 0:17:58.359 --> 0:18:00.400 and you can sort of track with the price are 0:18:00.680 --> 0:18:03.679 and where trades are. It's so it's almost impossible to 0:18:03.720 --> 0:18:07.399 imagine someone manipulating this sofa market. 0:18:07.960 --> 0:18:11.679 Really really interesting. So so first before we start talking 0:18:11.920 --> 0:18:15.919 about policy, I have to ask. You're at Goldman Sachs 0:18:15.960 --> 0:18:18.480 for twenty years and you get the phone call to 0:18:18.560 --> 0:18:21.520 join the New York FED. What was that like? Was 0:18:21.520 --> 0:18:23.560 that a tough call or was that an easy decision 0:18:23.600 --> 0:18:23.920 to make? 0:18:24.560 --> 0:18:27.440 Well? What happened actually is Tim Geitner called me several 0:18:27.480 --> 0:18:29.760 months earlier and said, you like to come over to 0:18:29.800 --> 0:18:32.240 be a senior advisor. And I said, I'd love to 0:18:32.280 --> 0:18:34.239 be a senior advisor to you, Tim, but what do 0:18:34.280 --> 0:18:36.160 I do with the rest of my you know, forty 0:18:36.160 --> 0:18:38.359 to fifty hour work week. And he didn't have a 0:18:38.359 --> 0:18:39.400 really good answer for that. 0:18:39.560 --> 0:18:44.440 Was this a full time gig? I means, well, I didn't. 0:18:44.520 --> 0:18:46.480 When I left Goldman, I didn't really know what my 0:18:46.520 --> 0:18:49.080 next thing was, so I did not have the next job. 0:18:49.119 --> 0:18:51.239 I was just assuming that I would something would come 0:18:51.240 --> 0:18:55.680 along that right, interesting, So he offered that and I thought, well, 0:18:55.800 --> 0:18:57.639 you know, you know, Tim and I had a very 0:18:57.640 --> 0:18:59.679 good relationship, and you know, I sort of like the 0:18:59.720 --> 0:19:01.560 idea of working from but I thought senior advisor was 0:19:01.600 --> 0:19:04.640 a little bit too unformed. And a couple months later 0:19:04.720 --> 0:19:06.680 he came back and said, can you run the Markets 0:19:06.680 --> 0:19:09.440 group at the New York Fed? That's completely different. You're 0:19:09.480 --> 0:19:13.480 running the group that actually implements monetary policy overseas market 0:19:13.520 --> 0:19:17.760 analysis Dale deals with the primary dealer community. That was 0:19:17.800 --> 0:19:20.000 a real opportunity, so that one I didn't have to 0:19:20.000 --> 0:19:20.920 think very hard about. 0:19:21.600 --> 0:19:25.480 And what's what Not long after Tim gets elevated, you 0:19:26.160 --> 0:19:29.560 take the role of New York Fed President. What's a 0:19:29.640 --> 0:19:32.600 day in the life of New York Fed pres. 0:19:32.359 --> 0:19:35.760 Like, there's a lot to do because New York Fed 0:19:35.840 --> 0:19:39.320 does lots of different things. So you know, we have supervision. 0:19:39.600 --> 0:19:42.040 We oversee some of the largest financial institutions in the 0:19:42.040 --> 0:19:46.040 world from a supervisory perspective, where the international armor of 0:19:46.040 --> 0:19:48.800 the FED, so pretty much every two months. I would 0:19:48.800 --> 0:19:52.119 go to the BIS in Basel, be part of the 0:19:52.160 --> 0:19:56.360 Bank for International Settlement meetings. New York FED President as 0:19:56.400 --> 0:19:58.960 well as the chairman of the of the Board of 0:19:58.960 --> 0:20:01.600 Governors as the Board of Directors of the b S. 0:20:02.000 --> 0:20:04.159 As Alan Blinder once joked to me, he says, New 0:20:04.240 --> 0:20:08.679 York FED is the only only institution that's treated it 0:20:08.760 --> 0:20:11.600 like their their own country because they have this board 0:20:11.640 --> 0:20:15.439 director's position. You know, there's lots of things and you know, 0:20:15.520 --> 0:20:18.960 payments they fed. New York Fed runs FED Wire, The 0:20:19.560 --> 0:20:22.800 New York FED runs Central Bank International Services for a 0:20:22.840 --> 0:20:26.080 bunch of foreign central banks. They have I don't know, 0:20:26.160 --> 0:20:29.199 three four trillion dollars of custody assets from foreign so 0:20:29.240 --> 0:20:31.639 there's a lot. There's lots of pieces to the FED. 0:20:32.680 --> 0:20:33.199 And then there's a. 0:20:33.200 --> 0:20:36.520 Research department, uh and there's a lot of outreach to 0:20:36.560 --> 0:20:38.880 try to get information about what's really happening in the world. 0:20:38.880 --> 0:20:40.399 I mean, the one thing that I did that was 0:20:40.440 --> 0:20:43.000 probably a little new from the FED perspective is I 0:20:43.000 --> 0:20:45.280 tried to broaden out the people that the New York 0:20:45.280 --> 0:20:48.720 Fed was talking to. Historically, the New York FEDA typically 0:20:49.240 --> 0:20:52.240 talked mainly to the primary dealer community, so that's where 0:20:52.240 --> 0:20:54.320 they obtained their information from. And I thought that that 0:20:54.440 --> 0:20:56.320 was too narrow. We need, we need, we need a 0:20:56.359 --> 0:21:00.560 broader set of perspectives. And so I hired a woman 0:21:00.680 --> 0:21:04.800 named Haley Bowski who came in and literally built out 0:21:04.840 --> 0:21:07.439 a whole operation so we could actually interact not just 0:21:07.520 --> 0:21:09.920 with the cell side, but also with the buy side. 0:21:10.480 --> 0:21:13.960 And so we started an advisory group of people for 0:21:14.000 --> 0:21:19.240 you know, hedge funds, pension funds, insurance companies, buyside investors, 0:21:19.320 --> 0:21:21.520 and so we have them in periodically to talk to 0:21:21.640 --> 0:21:24.879 and so we got a much broader network of information 0:21:25.040 --> 0:21:26.680 that we could sort of take on board. And I 0:21:26.760 --> 0:21:30.440 think that's valuable because you know, where you sit really 0:21:30.480 --> 0:21:32.680 does influence your perspective, and you sort of want to 0:21:32.760 --> 0:21:37.680 understand what biases and you know, self promotion sometimes that 0:21:37.720 --> 0:21:39.440 people are talking their book that you want to be 0:21:39.480 --> 0:21:41.960 able to make sure you don't get fooled by that. 0:21:42.280 --> 0:21:44.960 Now you could go back not all that far in 0:21:45.040 --> 0:21:48.760 the FED history, and there was none of this communication. 0:21:49.480 --> 0:21:55.159 It wasn't a transcripts release, there wasn't a reporter scrum 0:21:55.280 --> 0:21:58.199 and a Q and A. There wasn't even an announcement 0:21:58.280 --> 0:22:00.399 of change and interest rates. You had to follow bond 0:22:00.480 --> 0:22:03.879 market to see when rates changed. What are the pros 0:22:03.920 --> 0:22:08.159 and cons of being so clear and so transparent with 0:22:08.359 --> 0:22:12.480 market participants? Is the risk that maybe we're too clear? 0:22:13.720 --> 0:22:17.240 Well, I think there's a strong argument in favor of 0:22:17.320 --> 0:22:21.479 transparency as opposed to opacity. And you know this has 0:22:21.480 --> 0:22:23.800 been debated within the Fed for many years. I mean 0:22:23.840 --> 0:22:26.919 Alan Greenspan, Paul Volker definitely preferred to be opaque. I 0:22:26.920 --> 0:22:29.919 mean Alan greenspand famously said if you understand, if you 0:22:29.920 --> 0:22:32.639 think you understand what I said, then I wasn't unclear 0:22:32.760 --> 0:22:34.080 enough for something. 0:22:33.800 --> 0:22:34.320 To that effect. 0:22:35.560 --> 0:22:40.399 So the value of transparency is that if markets understand 0:22:40.600 --> 0:22:43.520 how the Federal Reserve is going to react to incoming information, 0:22:44.200 --> 0:22:47.879 the market can essentially price in with the Fed hasn't 0:22:47.920 --> 0:22:51.160 even yet done, and so that can make monetary policy 0:22:51.240 --> 0:22:52.400 work much more rapidly. 0:22:52.400 --> 0:22:53.560 So let's think about it today. 0:22:53.880 --> 0:22:57.000 So the market is pricing in roughly five to six 0:22:57.119 --> 0:22:59.840 twenty five basis point rate cuts between now and the 0:23:00.119 --> 0:23:03.240 end of the year, so that means monitary policy is easier, 0:23:03.280 --> 0:23:06.679 even though the Federal Reserve hasn't cut rates yet, So. 0:23:06.920 --> 0:23:08.880 They do some of the work for the Fed. Yeah, 0:23:09.080 --> 0:23:09.719 and it makes it. 0:23:09.760 --> 0:23:12.760 And it also means that as newcoming information is coming in, 0:23:13.240 --> 0:23:16.520 the market can reprice, and so that can cause the 0:23:16.560 --> 0:23:19.679 impulse of the economic news to be filtered into financial 0:23:19.720 --> 0:23:23.120 conditions much more more quickly. I'm a big believer in 0:23:23.160 --> 0:23:26.240 financial conditions as a framework for thinking about monetary policy. 0:23:26.720 --> 0:23:29.399 You know, twenty something years ago Jan Hattys and I 0:23:29.440 --> 0:23:32.720 introduced the gold SAX Financial Conditions Index, and it took 0:23:32.760 --> 0:23:36.200 about twenty plus years for the Federal Reserve too sort 0:23:36.200 --> 0:23:38.240 of endorse it. I mean, Jay Powell talks about financial 0:23:38.240 --> 0:23:40.760 conditions a lot more than any other chair of the 0:23:40.800 --> 0:23:43.639 Fed ever has. The reason why financial conditions are so 0:23:43.680 --> 0:23:46.400 important is in the United States, the commy doesn't really 0:23:46.440 --> 0:23:49.199 run on short term interest rates. It really runs on 0:23:49.240 --> 0:23:52.639 how short term interest rates affect long term rates, mortgage rates, 0:23:53.359 --> 0:23:56.879 stock market, the dollar credit spreads. You know, we have 0:23:56.920 --> 0:23:59.320 a big capital market compared to other countries, and so 0:23:59.720 --> 0:24:02.720 shorts are not really the driver. Now, if short term 0:24:02.760 --> 0:24:06.560 rates and financial conditions were rigidly connected, so if I 0:24:06.600 --> 0:24:08.960 moved the short term rate by X, I know exactly 0:24:09.040 --> 0:24:11.880 how much financial conditions are moved by. Why we don't 0:24:11.920 --> 0:24:14.280 have to worry about financial conditions, but there's actually a 0:24:14.320 --> 0:24:17.320 lot of gift between the two, and so financial conditions 0:24:17.359 --> 0:24:19.920 can move a lot even as short term interest rates 0:24:19.920 --> 0:24:21.760 haven't changed very much. I mean, good example is just 0:24:21.800 --> 0:24:24.240 the last three months, last three months, since the end 0:24:24.280 --> 0:24:28.280 of October till now, financial conditions have eased dramatically. I mean, 0:24:28.320 --> 0:24:30.960 the Golden Sacks Financial conditions indexes moved by about a 0:24:31.119 --> 0:24:34.200 one and a half points, which is a big move 0:24:34.240 --> 0:24:37.560 for that index, even as the FED hasn't done anything 0:24:37.560 --> 0:24:38.800 in terms of short term rates. 0:24:39.280 --> 0:24:43.480 So part of the problem with everybody anticipating FED actions 0:24:43.600 --> 0:24:48.880 is there is a tendency for many people, sometimes most people, 0:24:48.960 --> 0:24:54.040 to get it wrong. Wall Street has been anticipating a 0:24:54.080 --> 0:24:56.679 FED cut for what is it now? We're in the 0:24:56.720 --> 0:24:59.480 seventh month, eighth month of Hey, if the FED is 0:24:59.480 --> 0:25:03.680 going to start any day, now, what does it mean? 0:25:03.760 --> 0:25:09.080 When anticipating FED actions almost becomes a Wall Street parlor game, 0:25:09.160 --> 0:25:13.639 and there's less focus on what's happening in the broad 0:25:13.680 --> 0:25:16.480 economy and more focus on, well, what is the second 0:25:16.480 --> 0:25:20.000 and third derivative of this mean to this economist advising 0:25:20.119 --> 0:25:22.840 this FED governor and the impact on the FOMSA. 0:25:23.119 --> 0:25:25.159 I mean, sometimes I think you're right that there's almost 0:25:25.200 --> 0:25:26.800 too much focus on what's going to happen at the 0:25:26.840 --> 0:25:28.439 next meeting. I mean, you know, when you go to 0:25:28.440 --> 0:25:31.800 the press conference now, Powell has just asked multiple different 0:25:31.880 --> 0:25:34.080 varieties of the question. Okay, so what would cause you 0:25:34.119 --> 0:25:37.600 to move at the March meeting or at the May meeting? 0:25:38.080 --> 0:25:39.960 And of course Paul's not going to answer that question, 0:25:40.280 --> 0:25:42.840 you know, because it depends it depends on how the 0:25:42.880 --> 0:25:48.240 economy evolves between now and then. So I think, you know, 0:25:48.280 --> 0:25:50.240 one of the problems I think you have is that 0:25:50.280 --> 0:25:53.399 the Fed Reserve does publish a forecast, the Summary of 0:25:53.400 --> 0:25:56.199 Economic Projections, which is the forecast of all the nineteen 0:25:56.440 --> 0:25:59.440 FMC participants, So that gives you an idea what they 0:25:59.480 --> 0:26:01.120 sort of think is going to happen at any given 0:26:01.160 --> 0:26:04.240 point in time. But those forecasts are, you know, not 0:26:04.320 --> 0:26:08.080 particularly reliable and says all forecasts, Yeah, it's all four 0:26:08.160 --> 0:26:10.360 cut stars. So you don't want to you don't want 0:26:10.359 --> 0:26:13.399 to take it sort of literally. But you know, like 0:26:13.480 --> 0:26:15.960 right now, there's a bit of a gap, right the 0:26:16.040 --> 0:26:20.000 FEDS is talking about three rate cuts in twenty twenty four, 0:26:20.040 --> 0:26:22.800 and the market's got five to six priced in, so 0:26:23.359 --> 0:26:25.600 you know what will happen is the economic news will 0:26:25.600 --> 0:26:27.920 come out and that will drive make the FETI either 0:26:27.960 --> 0:26:30.800 go more quickly or more slowly, and that will will 0:26:31.000 --> 0:26:34.040 Well what actually is important? So I always tell people 0:26:34.119 --> 0:26:37.080 focus on the data more than what the feder Reserve 0:26:37.240 --> 0:26:39.200 says beyond the next meeting. 0:26:39.520 --> 0:26:42.480 Well, although, to be fair, and I find this perplexing, 0:26:43.160 --> 0:26:46.720 say what people will say about Jerome Powell. He has 0:26:46.800 --> 0:26:50.480 said what his position is, he has said what he's 0:26:50.520 --> 0:26:53.800 going to do, and then he has done exactly that 0:26:53.960 --> 0:26:56.520 for the past three years. And it's almost as if 0:26:56.560 --> 0:26:59.400 Wall Street just doesn't believe him. Like, no, no, we're 0:26:59.440 --> 0:27:01.120 not going to cut this year. You got you got 0:27:01.160 --> 0:27:04.360 three or four quarters settled down. No, no cut next month, 0:27:04.359 --> 0:27:07.480 says wall Street. He has said what he meant and 0:27:07.520 --> 0:27:10.080 then stuck to it, and yet the Street seems to 0:27:10.160 --> 0:27:10.680 doubt him. 0:27:11.119 --> 0:27:13.800 Well, there's two reasons why the market could disagree with 0:27:13.840 --> 0:27:17.399 the FED. One is they could misunderstand the Fed's reaction function. 0:27:17.560 --> 0:27:20.000 So you give them the FED set of economic data, 0:27:20.000 --> 0:27:21.800 how are they going to react to it? But it 0:27:21.840 --> 0:27:24.159 also could be a disagreement about how the economy itself 0:27:24.240 --> 0:27:26.760 is going to evolve. The FED might be more optimistic 0:27:26.840 --> 0:27:30.360 or more pessimistic on the economy than market participants. Right now, 0:27:30.359 --> 0:27:34.200 it's really hard to say what's what's the disagreement about. 0:27:34.680 --> 0:27:36.880 Does Wall Street think the comedy is gonna be weaker 0:27:36.960 --> 0:27:39.439 than the Fed does, or does the or does the 0:27:39.480 --> 0:27:42.359 market just think that the Fed is going to be 0:27:42.440 --> 0:27:44.639 more aggressive than the Fed things at this point? 0:27:44.840 --> 0:27:47.639 Right Sometimes it just looks like pure wishful thinking. 0:27:48.280 --> 0:27:50.879 I think sometimes the market just gets ahead of itself. 0:27:50.920 --> 0:27:54.000 It's almost like there's we're now talking about easing, so 0:27:54.080 --> 0:27:55.840 the bell is about to go off, and I don't 0:27:55.840 --> 0:27:57.480 want to miss out, and so I'm going to be 0:27:57.480 --> 0:28:00.119 pretty aggressive about positioning for that. And I think I 0:28:00.119 --> 0:28:02.600 think there's a little bit of you know, and sometimes 0:28:02.640 --> 0:28:05.320 things tend to go too far because people get caught 0:28:05.359 --> 0:28:07.679 off size and then people have to close out the 0:28:07.720 --> 0:28:09.960 trades that went wrong, and so everyone sort of moving 0:28:10.040 --> 0:28:12.400 all at once to the other side of the boat, 0:28:12.440 --> 0:28:14.800 and so things can get overdone at the end of 0:28:14.840 --> 0:28:16.719 the day, though, I mean, the FED reserve, you know, 0:28:17.000 --> 0:28:19.640 writes the story. You know, the market has to converge 0:28:19.680 --> 0:28:21.960 to what the FED ultimately does. And so this is 0:28:22.000 --> 0:28:25.280 why the Fed's not particularly worried about when the market 0:28:25.320 --> 0:28:27.159 prices in more or less because at the end of 0:28:27.200 --> 0:28:29.320 the day's view, as you know, we'll do what we 0:28:29.359 --> 0:28:30.920 need to do and the market will have to come 0:28:31.040 --> 0:28:32.760 along with us. 0:28:32.800 --> 0:28:37.200 It's inevitable. So we mentioned Jerome pal He's been as 0:28:37.240 --> 0:28:41.000 clear as any FED chief in history. What are your 0:28:41.040 --> 0:28:45.840 thoughts on how the modern Federal Reserve communicates with markets 0:28:45.880 --> 0:28:48.680 in the public today versus how they used to do it. 0:28:49.400 --> 0:28:50.960 You don't even have to go that far back twenty 0:28:51.040 --> 0:28:51.480 years ago. 0:28:51.840 --> 0:28:53.840 I think it's as I said earlier, I think it's 0:28:53.920 --> 0:28:56.440 a lot better way of communicating because then markets can 0:28:56.560 --> 0:28:58.840 understand what the Fed is up to. They can interpret 0:28:58.960 --> 0:29:01.600 economic information and real time and figure out what that 0:29:01.640 --> 0:29:04.240 means for the likely path of short term rates, so 0:29:04.360 --> 0:29:09.880 financial conditions can move long before the Federals are actually acts. Now, obviously, 0:29:09.960 --> 0:29:12.520 you know there's there's a risk in all this because 0:29:12.560 --> 0:29:15.600 what the Fed says may not be borne out by 0:29:15.720 --> 0:29:19.080 the economic information. And so I think the important thing 0:29:19.080 --> 0:29:21.200 in all this is not to take what the federalser 0:29:21.360 --> 0:29:24.479 says as gospel. When they have a forecast, that's their 0:29:24.520 --> 0:29:27.720 forecast today, and that forecast will change as the incoming 0:29:27.760 --> 0:29:30.600 information warrants it. I think where Paulo has done a 0:29:30.640 --> 0:29:34.200 really good job is being very clear about his commitment 0:29:34.240 --> 0:29:37.160 to getting inflation back down to two percent, because the 0:29:37.200 --> 0:29:39.720 biggest risk over the last couple of years was that 0:29:40.240 --> 0:29:43.440 people would start to doubt the Fed's willingness to be 0:29:43.520 --> 0:29:46.800 tough and and and finish the job. And if that 0:29:46.840 --> 0:29:50.640 were to happen, inflation expectations would have become unanchored, and 0:29:50.640 --> 0:29:52.720 that would have made the fedes job a lot more difficult. 0:29:52.960 --> 0:29:55.560 One of the great developments of the last couple of 0:29:55.600 --> 0:29:57.520 years is even though we did have a period of 0:29:57.600 --> 0:30:02.560 very high inflation, long term expectations really stayed unanchored through 0:30:02.560 --> 0:30:04.840 that entire period, and so paul deserves it quite a 0:30:04.840 --> 0:30:05.560 bit of credit for that. 0:30:05.920 --> 0:30:08.800 So we're recording this a few days after his sixty 0:30:08.880 --> 0:30:14.600 minutes interview broadcast. Some things that I took away from that. First, 0:30:15.000 --> 0:30:18.840 it's a complicated job with a lot of moving parts. 0:30:18.880 --> 0:30:23.520 And second, the FED as an institution is a political 0:30:24.080 --> 0:30:28.080 They serve the public, not anyone branch or anyone party 0:30:29.000 --> 0:30:32.520 of the electorate. I thought he was very intelligent and reassuring. 0:30:32.680 --> 0:30:34.520 What was your reaction to that interview? 0:30:35.000 --> 0:30:36.560 I thought it was a very good interview, and I 0:30:36.560 --> 0:30:39.680 thought he actually broke a little bit of new ground 0:30:39.680 --> 0:30:43.000 when he talked about the fiscal sustainability issue, and he 0:30:43.040 --> 0:30:46.560 also talked about the importance of the US role in 0:30:46.600 --> 0:30:47.000 the world. 0:30:48.080 --> 0:30:51.160 I picked that up also. I thought that was the 0:30:51.160 --> 0:30:54.160 first time I've heard of FED chief talk about liberal 0:30:54.240 --> 0:30:57.520 democracy is an important aspect of global leadership. 0:30:57.600 --> 0:31:01.120 Yeah, exactly, And so I thought that was a noteworthy, 0:31:01.600 --> 0:31:04.320 a new new piece. I thought the rest of it was, 0:31:04.360 --> 0:31:06.520 you know, pretty much tracked, you know, his remarks at 0:31:06.520 --> 0:31:09.440 the press conference. You know, I think that, you know, 0:31:09.480 --> 0:31:11.840 it's good for him to get out there and sort 0:31:11.840 --> 0:31:14.920 of demystify the FED. I mean, the FED is you know, 0:31:15.040 --> 0:31:19.520 not so you know, easy for the average person to understand. 0:31:19.520 --> 0:31:21.600 And so going on sixty minutes is is is a 0:31:21.600 --> 0:31:24.120 good idea from from from time to time. I thought 0:31:24.120 --> 0:31:25.400 he did a you know, I thought he did a 0:31:25.440 --> 0:31:28.320 good job. I thought it was very very clear. You know, 0:31:28.760 --> 0:31:30.920 this is not the first FED chair that's been on 0:31:30.960 --> 0:31:31.640 sixty minutes. 0:31:31.720 --> 0:31:33.320 Uh, BERNANKI has done it. 0:31:33.400 --> 0:31:35.280 Yeah, BERNANKI has done it. I'm not I can't remember 0:31:35.280 --> 0:31:36.760 if Janet Yellen did it or not, but. 0:31:37.400 --> 0:31:40.719 Uh, she definitely did it as Treasury secretary, remember if 0:31:40.720 --> 0:31:41.120 she did it. 0:31:41.160 --> 0:31:44.480 As we've been very lucky in terms of the leadership 0:31:44.520 --> 0:31:47.280 of the FED. I mean to have I mean Greenspan obviously, 0:31:47.600 --> 0:31:49.720 you know, was on sort of without parallel, and then 0:31:49.840 --> 0:31:53.880 and then they have Bernanky yelling and Paul in a row. 0:31:54.000 --> 0:31:57.040 Those are three exceptionally good FED chair. I mean my 0:31:57.120 --> 0:31:58.560 only you know, critique of the FED. 0:31:58.600 --> 0:32:00.880 And you know I write for Bloomberg, you know sometimes 0:32:01.080 --> 0:32:02.680 you know, I say what I what I think and 0:32:02.760 --> 0:32:03.920 let the chips follow. They may. 0:32:04.440 --> 0:32:06.840 The one I think mistake the FED made, you know 0:32:06.880 --> 0:32:08.880 over the last few years was they were really really 0:32:08.960 --> 0:32:10.560 late to get off the dime in terms of it's 0:32:10.560 --> 0:32:12.600 starting to tighten monetary policy now. 0:32:12.680 --> 0:32:15.520 Isn't that historically true? Is it so? The Fed throughout 0:32:15.560 --> 0:32:19.240 the twenty tens, we're late to recognize, hey, we don't 0:32:19.240 --> 0:32:22.120 have to be on emergency footing anymore. Not only were 0:32:22.160 --> 0:32:25.160 they late to start tightening in two thousand and one, 0:32:25.640 --> 0:32:29.640 the twenty twenty one, they were late to recognize inflation 0:32:29.760 --> 0:32:32.760 peaked in twenty two. I mean, it's you could easily 0:32:32.760 --> 0:32:35.840 make the argument that they could have begun cutting any 0:32:35.960 --> 0:32:39.840 this meeting, last meeting two meetings ago. Take the past 0:32:39.880 --> 0:32:42.640 six months of inflation, we're at two percent. Yeah. 0:32:42.680 --> 0:32:44.960 I think the reason why they're not cutting at is 0:32:44.640 --> 0:32:47.080 is there's really two reasons for that. Number One, the 0:32:47.080 --> 0:32:49.160 economy is a lot stronger than they thought it was 0:32:49.200 --> 0:32:51.800 going to be, and so that means the risk of 0:32:51.840 --> 0:32:53.720 waiting is a lot lower than they thought it was 0:32:53.760 --> 0:32:56.960 going to be. Because the economy, you know, grew over 0:32:57.040 --> 0:33:00.479 three percent in the fourth quarter. The Atlanta Fed GDP 0:33:00.560 --> 0:33:03.080 now forecast for the first quarters over four percent. I mean, 0:33:03.080 --> 0:33:05.000 obviously it probably won't be that strong when all the 0:33:05.080 --> 0:33:07.400 data comes in, but the Kammy has a lot of momentum, 0:33:07.480 --> 0:33:11.000 and so the pressure on the Fed to cut rates 0:33:11.280 --> 0:33:14.040 because of weakness and growth weakness and the labor market 0:33:14.160 --> 0:33:16.360 just isn't there, and that allows them to be more patient. 0:33:16.720 --> 0:33:18.760 The second thing is important is a little bit of 0:33:18.760 --> 0:33:21.840 delay is not going to have a huge consequence because 0:33:21.880 --> 0:33:24.280 look what's happened to financial conditions over the last few months. 0:33:24.320 --> 0:33:27.000 They be dramatically So the Fed is already getting a 0:33:27.040 --> 0:33:30.080 lot of additional support to the economy without actually having 0:33:30.080 --> 0:33:32.200 hand to cut cut rates. In some ways, the Fed 0:33:32.200 --> 0:33:33.440 can sort of have its cake. 0:33:33.760 --> 0:33:35.800 Keep, you know, show that they're tough minded, and they're 0:33:35.800 --> 0:33:38.840 gonna get inflation all the way down, and and and 0:33:38.840 --> 0:33:40.840 and and and you know, they can have their cake 0:33:40.880 --> 0:33:43.000 and eat it too and have the market basically use 0:33:43.080 --> 0:33:45.760 financial conditions and provide support to the economy. So I 0:33:45.840 --> 0:33:47.480 think it's you know, it's worked out very well from 0:33:47.480 --> 0:33:51.080 the Fed's perspective. So so you mentioned you you contribute 0:33:51.120 --> 0:33:56.520 to Bloomberg Opinion. One of the criticisms that took place 0:33:57.000 --> 0:34:03.520 in the prior administration was the President Trump kind of haranguing. 0:34:04.480 --> 0:34:04.520 J. 0:34:04.720 --> 0:34:07.600 Powell to cut rates, and you wrote an op ed 0:34:08.160 --> 0:34:11.120 tell after you had left the FED saying the Fed 0:34:11.160 --> 0:34:15.000 shouldn't enable Donald Trump. In other words, the independence of 0:34:15.040 --> 0:34:20.239 the institution is much more important than anyone rate cut 0:34:20.320 --> 0:34:23.640 or rate hike it at any time tell us about that. 0:34:23.640 --> 0:34:25.920 That generated a lot of controversy. 0:34:26.200 --> 0:34:28.480 Yeah, I think people you know, I probably didn't say 0:34:28.480 --> 0:34:30.680 it the way I needed to say it. It was 0:34:30.719 --> 0:34:32.840 really more of a thought experiment about how, you know, 0:34:32.840 --> 0:34:35.279 if the Fed Reserve really cares about the country, they 0:34:35.320 --> 0:34:37.279 just need to you know, in the economy, which is 0:34:37.320 --> 0:34:39.640 their mandate. They just need to do the right thing 0:34:41.120 --> 0:34:45.359 and let the chips fall, or they may I think that, 0:34:45.600 --> 0:34:48.759 you know, the Trump administration's attacks on the FED, I 0:34:48.760 --> 0:34:52.040 think are really you know, counterproductive for the Trump administration, 0:34:52.239 --> 0:34:55.200 and they're also damaging to the FED because if the 0:34:55.239 --> 0:34:59.600 FED is viewed as politicized, that basically reduces people's trust 0:34:59.760 --> 0:35:02.799 in in the central Bank. And I think if the 0:35:03.040 --> 0:35:04.960 trust in the central Bank is reduced, that makes the 0:35:04.960 --> 0:35:08.799 Federal Reserve less effective as an institution. One reason why 0:35:08.840 --> 0:35:12.279 I think the FED, you know, doesn't take politics into consideration. 0:35:12.560 --> 0:35:14.640 And in my experience, I was at the FMC table 0:35:14.680 --> 0:35:17.400 for eleven and a half years, never talked about politics, 0:35:17.440 --> 0:35:20.719 never consideration in terms of montre policy decisions. For very 0:35:20.760 --> 0:35:24.239 simple reason. If you start to take politics into consideration, 0:35:24.800 --> 0:35:28.000 you've politicized the FED. And if you politicize the FED, 0:35:28.360 --> 0:35:31.279 you've basically compromised the independence of the FED and its 0:35:31.320 --> 0:35:34.000 ability to be effective. So you just don't want to 0:35:34.040 --> 0:35:36.400 go down that path at all. And I think, you know, 0:35:36.680 --> 0:35:40.200 I think J. Powell completely understands that, and you know, 0:35:40.480 --> 0:35:42.080 I give him a lot of credit. I mean, when 0:35:42.320 --> 0:35:46.480 when Trump was attacking him pretty vocifiorously, Paul did not 0:35:46.640 --> 0:35:49.600 rise to debate. He was completely silent, and he just 0:35:49.640 --> 0:35:52.359 did his job it's got to be tough to be, 0:35:52.440 --> 0:35:53.560 you know, being beaten up. 0:35:53.560 --> 0:35:57.400 Publicly by the president. But he showed a tremendous amount 0:35:57.440 --> 0:36:00.720 of discipline, and I think that basically, you know, enhance 0:36:00.880 --> 0:36:04.920 the credibility and independence of the FED. So that comment 0:36:05.000 --> 0:36:08.600 we were discussing earlier that he made on sixty minutes, 0:36:09.280 --> 0:36:12.960 here's the quote, there's a real desire for American leadership. 0:36:13.000 --> 0:36:16.319 Since World War Two, the US has been the indispensable nation, 0:36:16.480 --> 0:36:22.040 supporting and defending democracy, security arrangements, and economic arrangements, with 0:36:22.160 --> 0:36:25.120 a leading voice on that. It's clear the world wants that. 0:36:25.320 --> 0:36:27.640 I would want the people in the US, in the 0:36:27.719 --> 0:36:32.000 United States to know this has benefited our country enormously. 0:36:32.480 --> 0:36:35.959 It benefits our economy so much to have this role, 0:36:36.239 --> 0:36:39.759 and I just hope that continues. Am I reading too 0:36:39.840 --> 0:36:42.880 much into that to say, hey, this is an argument 0:36:43.080 --> 0:36:47.320 against President Trump, who is trying to realign the world 0:36:47.800 --> 0:36:52.040 and pull back from US leadership. I think it's I 0:36:52.040 --> 0:36:54.719 think it's a something hit. 0:36:55.480 --> 0:36:58.360 Jere Paul very much believes in that US engagement in 0:36:58.360 --> 0:37:01.520 the world leads to better comes, both in a security 0:37:01.520 --> 0:37:07.359 perspective economic perspective. Absolutely essential for addressing issues like climate change, 0:37:07.400 --> 0:37:11.400 and I think you're just expressing his opinion. Obviously, if 0:37:11.640 --> 0:37:15.040 if there is a next Trump administration and they decide 0:37:15.080 --> 0:37:20.439 to file follow a very isolationist policy, I imagine that, 0:37:20.600 --> 0:37:23.680 you know, Paul will not agree with that, but I 0:37:23.719 --> 0:37:26.360 think he'll be very silent about the fact that he 0:37:26.400 --> 0:37:28.680 doesn't agree with it because he won't want to, you know, 0:37:28.840 --> 0:37:31.880 engage in that political process because that will compromise the 0:37:31.920 --> 0:37:34.799 independs of the FED. So so to your point, this 0:37:34.960 --> 0:37:37.600 was pretty you know, this is a step out for 0:37:37.719 --> 0:37:40.120 power relative to what he said, but there was nothing 0:37:40.160 --> 0:37:42.520 in there about who was in favor of what. 0:37:43.360 --> 0:37:45.600 It's not a political statement, it's not a pin the 0:37:45.640 --> 0:37:50.760 fact that hey, this US leadership in global economics has 0:37:50.800 --> 0:37:52.080 nothing but benefit the country. 0:37:52.160 --> 0:37:56.160 Yeah, it's his opinion that this is in the US's interest. 0:37:56.239 --> 0:37:58.399 It has been in the US interests, in the US 0:37:58.440 --> 0:38:00.000 interest today, and it will be in the US interest 0:38:00.120 --> 0:38:02.680 in the future. That's his view, and I have to 0:38:02.680 --> 0:38:04.160 say I very much agree with it. 0:38:04.280 --> 0:38:06.839 I don't disagree. And if there are some candidates that 0:38:07.280 --> 0:38:10.320 don't have that belief system, well, is that being political 0:38:10.440 --> 0:38:13.400 or is that just here's a historical fact, this is 0:38:13.520 --> 0:38:14.399 what's helped the US. 0:38:14.560 --> 0:38:18.120 Well, I think he's allowed to have his beliefs, and 0:38:18.160 --> 0:38:20.680 I don't think that you know his his this belief 0:38:20.719 --> 0:38:23.879 that he's expressed is should be viewed as a controversial one. 0:38:24.680 --> 0:38:28.680 I think that's that's that's something that you know, a 0:38:28.760 --> 0:38:32.560 high number of people in the country. I think would 0:38:32.560 --> 0:38:33.640 would would would support. 0:38:34.520 --> 0:38:37.239 I don't disagree at all. So, so let's talk a 0:38:37.239 --> 0:38:41.760 little bit about the history of the Federal Reserve, starting 0:38:41.800 --> 0:38:47.200 with the dual mandate price stability, namely inflation and unemployment. 0:38:47.719 --> 0:38:50.759 How does the FED balance those two and what are 0:38:50.840 --> 0:38:54.200 the data points that they follow most closely? 0:38:55.160 --> 0:38:58.680 So the FEDS do mandate was actually established by Congress, 0:38:58.719 --> 0:39:01.120 not by the FED. Congress and the Humphrey Hawkson's Act 0:39:01.120 --> 0:39:03.160 basically said, here's what we want the FED to do. 0:39:04.040 --> 0:39:08.120 We want to have the maximum sustainable employment in the 0:39:08.160 --> 0:39:12.200 country consistent with price stability, which the FED then subsequently 0:39:12.239 --> 0:39:16.040 defined to be two percent inflation. And so the FED 0:39:16.440 --> 0:39:18.920 basically is trying to manage the economy with both these 0:39:19.040 --> 0:39:23.240 goals in mind. And sometimes one of the goals turns 0:39:23.239 --> 0:39:26.120 out to be more significant because the FED is doing 0:39:26.239 --> 0:39:30.040 more poorly on that side. So for the last couple 0:39:30.080 --> 0:39:32.680 of years. The problem was not that the economy was 0:39:32.680 --> 0:39:35.080 far away from full employment. The comoty was either at 0:39:35.120 --> 0:39:37.800 full employment or maybe even a little beyond full employment 0:39:37.800 --> 0:39:40.440 when we saw how tight the liver market was, especially 0:39:40.480 --> 0:39:44.200 in twenty twenty two. So the Fed's focus was on 0:39:44.239 --> 0:39:46.560 inflation because the inflation was well above the FEDS two 0:39:46.600 --> 0:39:51.759 percent objective. What's happened recently is inflation's come down, and 0:39:51.840 --> 0:39:55.760 so the FED can start to talk about both sides 0:39:55.760 --> 0:39:57.880 of the mandate, not just the inflation side, but also 0:39:57.960 --> 0:40:01.600 the labor market side. And so now you're going to 0:40:01.640 --> 0:40:04.239 see a lot more balanced messaging from the FED. Now, 0:40:04.239 --> 0:40:06.200 the good news from the Fed is that things are 0:40:06.280 --> 0:40:09.719 going really, really well. You know, you know, the inflation 0:40:09.960 --> 0:40:13.200 on a six months change basis for the core PC deflator, 0:40:13.200 --> 0:40:16.840 which is the FEDS you know, preferred measure of inflation, 0:40:16.960 --> 0:40:19.840 is tracking two percent. So all we need is another 0:40:19.960 --> 0:40:22.120 six months of the same as as cheer Paul said 0:40:22.160 --> 0:40:24.640 in his Breast conference, and we're basically at the FEDS 0:40:24.920 --> 0:40:29.360 two percent objective and the labor markets doing gangbusters. Frankly, 0:40:29.440 --> 0:40:32.600 I mean, payroll employment growth over three hundred thousand last month, 0:40:33.520 --> 0:40:35.480 So we have sort of the best of both worlds, 0:40:35.520 --> 0:40:38.000 inflation has come down and the labor market is still very, 0:40:38.200 --> 0:40:41.120 very robust, So you know, it's it's interesting when you 0:40:41.120 --> 0:40:44.480 look at polling results of Americans. They're they're very unhappy 0:40:44.480 --> 0:40:47.799 about the economy, and what they're unhappy about is how 0:40:47.840 --> 0:40:49.640 much prices went up over the last four. 0:40:49.719 --> 0:40:52.360 Not current rate of inflation, exact absolute prices. 0:40:52.480 --> 0:40:55.520 It's a price level problem, not an inflation rate problem, 0:40:55.640 --> 0:40:57.600 because if you look at the so called misery index, 0:40:57.640 --> 0:41:00.080 which comds like to do, which is the sum of 0:41:00.280 --> 0:41:03.640 inflation plus the unemployed rate, it's really at a historically 0:41:03.680 --> 0:41:06.080 low level. So you know, I think what's going to 0:41:06.120 --> 0:41:09.279 happen over time is if we keep inflation, you know, 0:41:09.440 --> 0:41:14.200 around two percent, some of the unhappiness about the price 0:41:14.280 --> 0:41:16.759 level will gradually fade away. People just sort of start 0:41:16.760 --> 0:41:19.560 to accept it, and then people will start to assess 0:41:19.600 --> 0:41:23.120 the ecmomune in a more favorable way for the Biden administration. 0:41:23.200 --> 0:41:25.719 There's a little bit of race going on, right, will 0:41:25.800 --> 0:41:31.680 this change in sentiment occur fast enough relative to the 0:41:31.760 --> 0:41:33.160 November election? 0:41:33.480 --> 0:41:36.440 They got seven months to hope that the polling data, 0:41:36.960 --> 0:41:40.200 the economic data is going to consumer confidence. So it 0:41:40.680 --> 0:41:41.719 does seem to be improving. 0:41:41.800 --> 0:41:43.640 I mean, if you look at the most recent consumer 0:41:43.680 --> 0:41:46.280 confidence serves, it does look like consumer confidence is improving. 0:41:46.320 --> 0:41:50.520 So people are starting to, you know, understand that the 0:41:50.560 --> 0:41:53.239 inflation rate does seem to be much lower, but they're 0:41:53.239 --> 0:41:54.520 still very unhappy because you know, when you go at 0:41:54.520 --> 0:41:56.400 the grocery store, you just remember that this thing that 0:41:56.480 --> 0:41:59.680 I bought for you know, three dollars, you know, four 0:41:59.760 --> 0:42:02.680 years ago, and that costs four to fifty. And you 0:42:02.719 --> 0:42:05.960 know that just every time you go to the grocery store, 0:42:06.000 --> 0:42:08.279 you go to the gas station, see you're reminded by 0:42:08.520 --> 0:42:10.160 about the higher price level. 0:42:10.600 --> 0:42:15.400 I see it more in the grocery store than gas stations. 0:42:15.680 --> 0:42:18.080 Our gas is three and change and twenty years ago 0:42:18.200 --> 0:42:21.240 gas was three and change. That's been flat for two decades, 0:42:21.520 --> 0:42:24.759 but food prices definitely have and shelter prices have moved up. 0:42:24.960 --> 0:42:27.120 So before I get to two percent, because I have 0:42:27.160 --> 0:42:29.680 a lot of questions about that, let's talk a little 0:42:29.719 --> 0:42:34.200 bit about the labor market. So first we're again we're 0:42:34.239 --> 0:42:36.759 recording this February twenty twenty three. We just had a 0:42:36.960 --> 0:42:42.480 giant number, a giant upside surprise in payrolls. When the 0:42:42.480 --> 0:42:45.480 FED looks at that number, are they thinking, well, you 0:42:45.520 --> 0:42:48.120 know it's January, there are a lot of one time 0:42:48.160 --> 0:42:52.200 adjustments and seasonal ax or are they saying, hey, this 0:42:52.360 --> 0:42:55.840 labor market is really booming. We can sit back a 0:42:55.880 --> 0:42:57.480 little bit, a little bit of both. 0:42:57.719 --> 0:42:59.759 I mean, in other words, you get you understand that 0:42:59.760 --> 0:43:04.120 the is noisy and so reality is not exactly what 0:43:04.160 --> 0:43:06.279 the data is telling you. The data is you know, 0:43:06.440 --> 0:43:08.840 it's sampled. You know, they've go out and poll people, 0:43:08.880 --> 0:43:12.359 and so there's sampling bias. Also, in the winter, things 0:43:12.360 --> 0:43:15.480 get very affected by the weather as you go from 0:43:15.560 --> 0:43:19.319 you know, warm weather, warm winter weather months to cold 0:43:19.400 --> 0:43:22.080 winter weather months when you go from rain to snowfall. 0:43:22.600 --> 0:43:26.480 So the Fed basically doesn't take one month as sort 0:43:26.480 --> 0:43:29.719 of gospel truth. They look at the pattern and the 0:43:29.800 --> 0:43:33.200 underlying trend, and you know, on that underlying trend, labor 0:43:33.239 --> 0:43:36.600 market looks quite strong. So the Fed is taking a 0:43:36.600 --> 0:43:38.920 signal from that, and that's one reason why they're more 0:43:38.960 --> 0:43:42.520 patient about cutting interest rates because they sort of feel like, 0:43:43.040 --> 0:43:45.080 you know, we can wait a little bit longer, and 0:43:45.360 --> 0:43:48.640 the risk that we're taking is very slow because look 0:43:48.680 --> 0:43:50.960 at how strong the US labor market is. 0:43:51.160 --> 0:43:53.840 So let's talk about not one month, but the past 0:43:53.920 --> 0:43:56.359 couple of years of the labor market. You have an 0:43:56.440 --> 0:44:00.640 enormous number of people who are out on disability, reduced 0:44:00.760 --> 0:44:07.760 legal immigration for jobs dramatically. Early retirements have been taking place, 0:44:08.520 --> 0:44:13.719 a giant uptick in new business formation, so that's a 0:44:13.719 --> 0:44:16.840 big group of people who aren't in the hiring pool. 0:44:16.880 --> 0:44:19.880 They were actually running their own firms. It seems like 0:44:20.640 --> 0:44:23.000 all the issues that have been taking place in the 0:44:23.080 --> 0:44:27.160 labor market, including the wage size side, is that we 0:44:27.400 --> 0:44:30.080 just don't have enough bodies to put to work in 0:44:30.080 --> 0:44:33.719 the United States. I think that was true a year ago. 0:44:33.800 --> 0:44:35.680 I think it's less true today. 0:44:36.080 --> 0:44:38.719 If you look at the ratio of unfilled jobs to 0:44:38.800 --> 0:44:41.319 unemployed workers, that peaked at around two to one. 0:44:41.400 --> 0:44:44.120 Yeah, it was almost record. 0:44:43.920 --> 0:44:45.839 High, and now it's about one and a half to one. 0:44:46.000 --> 0:44:48.160 So the labor market is still really tight, but it's 0:44:48.200 --> 0:44:51.000 not quite as tight. You also think we got a 0:44:51.040 --> 0:44:53.640 big positive surprise last year in terms of the labor 0:44:53.680 --> 0:44:54.719 force growth. 0:44:55.040 --> 0:44:57.280 I mean people coming back, people coming. 0:44:57.239 --> 0:45:00.439 Back into the layor force. And also immigration and legal 0:45:00.440 --> 0:45:03.279 immigration into the US picked up dramatically last year. I mean, 0:45:03.520 --> 0:45:06.239 essentially we didn't have much legal immigration at all during 0:45:06.320 --> 0:45:09.120 the COVID period and then all of a sudden, we 0:45:09.120 --> 0:45:12.000 get a big bubble of that in twenty twenty three, 0:45:12.440 --> 0:45:16.360 and so what you've had is big, strong growth in 0:45:16.400 --> 0:45:20.760 payroll employment, but it hasn't translated through into a decline 0:45:20.840 --> 0:45:24.080 in the unemployment rate. So looking at the unemployer rate, 0:45:24.080 --> 0:45:25.800 the labor mark is no tighter than it was a 0:45:25.880 --> 0:45:29.640 year ago, which is, you know, was a huge positive 0:45:29.680 --> 0:45:33.560 benefit to the US economy and to the Fed, because 0:45:33.920 --> 0:45:36.200 if we'd had that growth in payroll employment without the 0:45:36.239 --> 0:45:38.719 increase in the labor force, the labor mark would be 0:45:38.760 --> 0:45:41.200 too tight, wages too high, and the Federal Reserve wild 0:45:41.200 --> 0:45:43.320 still be worried about it too high inflation. 0:45:43.560 --> 0:45:45.520 And we've seen wages go up. I think for the 0:45:45.600 --> 0:45:50.520 past six months real wages are actually growing faster than inflation. 0:45:50.600 --> 0:45:52.520 Well that's one reason why the e commy is staying 0:45:53.080 --> 0:45:58.360 relatively strong. I mean, as inflation comes down and novel wages, 0:45:58.600 --> 0:46:01.680 you know, inflation comes down maybe a little bit less 0:46:02.040 --> 0:46:06.680 slow more slowly, real incomes increase and that supports the 0:46:06.719 --> 0:46:11.200 consumer spending. So I think the unwinding of goods price pressures, 0:46:11.239 --> 0:46:13.879 which is really the big driver of why inflations come down, 0:46:14.480 --> 0:46:17.680 that's sort of a windfall for consumers right now, and 0:46:17.719 --> 0:46:20.160 so that's actually sustaining real consumer spending. 0:46:20.640 --> 0:46:24.120 And that shift from goods back to services, which is 0:46:24.520 --> 0:46:27.520 more or less where we were pre pandemic, is certainly 0:46:27.560 --> 0:46:30.920 easing prices in that sector. 0:46:31.120 --> 0:46:33.959 Yeah. I mean, all the supply chain disruptions that we had, 0:46:34.080 --> 0:46:36.280 you know, a few years ago, caused by that shift 0:46:36.320 --> 0:46:38.759 in demand from services to goods that just sort of 0:46:38.840 --> 0:46:41.479 overwhelmed the capacity of the world to bring those goods 0:46:41.520 --> 0:46:44.480 to the US in a timely way. That's that's that's 0:46:44.840 --> 0:46:46.000 all unwound at this point. 0:46:46.239 --> 0:46:50.640 So let's talk about the two percent inflation target. Your 0:46:50.800 --> 0:46:54.879 colleague Roger Ferguson in the Council on Foreign Relations last 0:46:54.920 --> 0:47:00.359 year criticized the two percent inflation target as some that 0:47:00.600 --> 0:47:04.880 randomly originated from New Zealand, and surprisingly it came not 0:47:05.040 --> 0:47:08.920 from an academic study but from an offhand comment during 0:47:08.960 --> 0:47:13.839 the television interview in the nineteen eighties. Is Ferguson right, 0:47:14.000 --> 0:47:16.560 Is this really just a big, silly round number. 0:47:17.000 --> 0:47:19.440 Well, it's true that the Reserve Bank of New Zealand 0:47:19.560 --> 0:47:22.200 started by, you know, picking the two percent number, and 0:47:22.239 --> 0:47:25.040 then other central banks followed. But I think there are 0:47:25.080 --> 0:47:29.719 some logical reasons why they followed two percent was low 0:47:29.800 --> 0:47:33.400 enough that inflation wasn't going to be sort of important 0:47:33.400 --> 0:47:37.239 component of people's thinking in terms of their consumption investment decisions. 0:47:38.239 --> 0:47:40.239 Two percent inflation in the US, I think the thing 0:47:40.360 --> 0:47:44.200 could argue that that was mostly consistent with price stability. 0:47:44.480 --> 0:47:47.000 You know, prices are only the double at two percent 0:47:47.080 --> 0:47:52.560 inflation compounded every thirty five years. So so but you're right, 0:47:52.600 --> 0:47:54.359 it was arbitrary. They could have picked a different number. 0:47:54.400 --> 0:47:56.680 They could have picked, you know, three percent or one percent. 0:47:57.520 --> 0:47:59.359 The reason why you want to have a little bit 0:47:59.360 --> 0:48:02.520 of inflation is it really allows you to do two things. 0:48:02.600 --> 0:48:05.120 Number one, it provides a little bit of grease in 0:48:05.200 --> 0:48:07.880 the labor market because people don't like their normal wages 0:48:07.960 --> 0:48:11.760 to be cut, but relative wage rates have to change, 0:48:11.960 --> 0:48:13.520 and so if you have a little bit of inflation, 0:48:13.600 --> 0:48:16.520 it makes the labor market work more efficiently in terms 0:48:16.520 --> 0:48:20.960 of allowing wage adjustments that allow workers to be distributed appropriately. 0:48:21.000 --> 0:48:21.839 So that's the first thing. 0:48:22.200 --> 0:48:23.719 The second reason why you want a little bit of 0:48:23.800 --> 0:48:26.359 inflation is that if you have a little bit of inflation, 0:48:26.960 --> 0:48:30.080 the nominal federal funds rate can be a little bit higher, 0:48:30.400 --> 0:48:32.880 and so when you go into an economic downturn, the 0:48:32.920 --> 0:48:35.560 Federal Reserve has more room to cut interest rates before 0:48:35.560 --> 0:48:38.120 they hit the zero or bound for interest rates of zero. 0:48:38.600 --> 0:48:42.120 So people who are arguing for a higher inflation target 0:48:42.120 --> 0:48:44.160 today are basically arguing like it would be better to 0:48:44.200 --> 0:48:46.920 have even more room for the Fed to cut rates, 0:48:46.920 --> 0:48:49.480 because if the inflation target was three rather than two, 0:48:49.920 --> 0:48:51.840 the peak federal funds rate in the cycle would be 0:48:51.880 --> 0:48:54.200 a one percentage point higher, so the Fed would have 0:48:54.280 --> 0:48:57.680 more room to cut rates. I think there's virtually no 0:48:57.920 --> 0:48:59.759 chance that the Fed is going to change their two 0:48:59.760 --> 0:49:02.759 percent inflation virtually no chance. And there's a couple of 0:49:02.760 --> 0:49:07.600 reasons for that. Number One, Congress sets the mandate for 0:49:07.680 --> 0:49:10.680 the FED, and they define it at Brice stability. The 0:49:10.719 --> 0:49:12.799 Fed has stretched that a bit to call that two 0:49:12.880 --> 0:49:15.960 percent inflation. I think stretching a little bit farther to 0:49:16.000 --> 0:49:19.120 call it three percent inflation. That's a bit of a stretch. 0:49:19.719 --> 0:49:21.640 The second reason I think that they're not going to 0:49:21.680 --> 0:49:23.919 move from two percent inflation is it's taken the FED 0:49:23.960 --> 0:49:27.240 a long time to get inflation expectations anchored around two percent. 0:49:27.760 --> 0:49:29.960 If you move from two percent to three percent, all 0:49:30.040 --> 0:49:33.480 sun inflation expectations become unanchored, and it's not obviously you 0:49:33.520 --> 0:49:35.439 can get them re anchored back at three percent, because 0:49:35.440 --> 0:49:39.440 if you're willing to change the target once, why couldn't 0:49:39.440 --> 0:49:42.719 you change the target again, especially in a situation where 0:49:42.760 --> 0:49:46.480 the Fed US is running a massive fiscal deficit, huge 0:49:46.520 --> 0:49:50.040 fiscal problems, and people always wonder, well, one way out 0:49:50.040 --> 0:49:54.280 of a fiscal mess is is inflation and to monetize 0:49:54.320 --> 0:49:54.640 the dead. 0:49:54.920 --> 0:49:56.080 So I don't think you're going to do it for 0:49:56.120 --> 0:49:58.480 that reason. The last reason why don't think they're going 0:49:58.480 --> 0:49:59.719 to do it is there's plenty of room to cut 0:49:59.719 --> 0:50:03.320 interest rates. Federal funds rates over five and a quarter percent, 0:50:03.800 --> 0:50:06.799 So if the Commie gets in trouble over the next year, 0:50:06.840 --> 0:50:09.040 the Fed has plenty of room to cut rates before 0:50:09.080 --> 0:50:11.080 they get to the zero loorbow for it. They could 0:50:11.160 --> 0:50:14.600 do three fifty bases point cuts and you're still way above. 0:50:14.400 --> 0:50:17.520 Aach So it's just not going to happen. This is 0:50:17.560 --> 0:50:19.839 sort of an academic debate. I don't think it's a 0:50:19.880 --> 0:50:21.000 true FED reserved debate. 0:50:21.160 --> 0:50:24.000 Really really interesting, So let's talk a little bit about 0:50:24.600 --> 0:50:28.840 different FED policies over the past decades and how those 0:50:28.880 --> 0:50:34.240 decisions have aged. Let's start with last decade the twenty tens, 0:50:34.840 --> 0:50:38.440 FED rates were essentially zero the whole time, and yet 0:50:38.440 --> 0:50:42.120 we couldn't get CPI to budget above two percent the 0:50:42.160 --> 0:50:47.120 whole decade following the financial crisis. What made that so 0:50:47.320 --> 0:50:49.600 challenging for monetary policy makers? 0:50:50.360 --> 0:50:52.000 Well, I think the problem coming out of the Great 0:50:52.000 --> 0:50:54.839 Financial Crisis was how much damage was done to. 0:50:54.760 --> 0:50:58.239 People's balance sheets and to their credit scores. And when 0:50:58.280 --> 0:51:01.560 you say people, you mean households, you mean operations for everybody. 0:51:01.760 --> 0:51:05.239 Households mostly, but also businesses. Just a tremendous amount of 0:51:05.320 --> 0:51:08.920 damage caused by that very deep recession. I think of 0:51:08.960 --> 0:51:11.120 all the households who came out of that period where 0:51:11.160 --> 0:51:13.800 the value of their mortgage was higher than the value 0:51:13.800 --> 0:51:16.000 of their home. Think of all the people that were 0:51:16.000 --> 0:51:20.200 delinquent on their obligations and so then got bad credit scores, 0:51:20.200 --> 0:51:23.799 and then that reduced their access to credit. So there 0:51:23.800 --> 0:51:26.360 were a lot of headwinds. The other thing that happened 0:51:26.400 --> 0:51:29.440 was fiscal policy that was eased pretty dramatically when Barack 0:51:29.440 --> 0:51:33.480 Obama became president. That got clawed back very very quickly 0:51:33.520 --> 0:51:37.080 in twenty eleven and twelve. So there were fiscal headwinds 0:51:37.239 --> 0:51:39.879 that we haven't faced this time around that also held 0:51:39.920 --> 0:51:42.440 the economy back. So you're absolutely right. The Fed's challenge 0:51:42.480 --> 0:51:46.520 during that period was to make monitor policy accommodative enough 0:51:46.840 --> 0:51:51.279 to support the economy sufficiently to keep inflation at two percent. Now, 0:51:51.320 --> 0:51:54.360 the FED fell a little bit short of their inflation objective, 0:51:54.840 --> 0:51:58.200 but you know, if you really look at where we were, 0:51:58.320 --> 0:52:01.279 you know, on the eve of the pandemic, and it 0:52:01.320 --> 0:52:02.200 was a pretty good place. 0:52:03.000 --> 0:52:05.760 And the fact that it took a decade is says 0:52:05.840 --> 0:52:10.000 more about the lack of fiscal spending Congress than what 0:52:10.040 --> 0:52:10.520 the FED did. 0:52:10.600 --> 0:52:12.560 And you had a very long expansion. I mean, the 0:52:12.600 --> 0:52:15.040 reality of the expansion would have kept going except for 0:52:15.080 --> 0:52:16.000 the COVID pandemic. 0:52:16.880 --> 0:52:20.000 Really interesting, So let's talk about the prior decade to 0:52:20.120 --> 0:52:24.600 two thousands. You had a speech around twenty fourteen where 0:52:24.640 --> 0:52:29.120 you said the FED was late in recognizing how long 0:52:29.520 --> 0:52:33.319 they kept rates low for and that the liftoff from 0:52:33.560 --> 0:52:37.680 four to six should have happened faster and sooner. Tell 0:52:37.760 --> 0:52:40.839 us a little bit about what the lessons were from 0:52:40.880 --> 0:52:45.799 that episode and what the FED should have done in 0:52:45.840 --> 0:52:47.160 the early two thousands. 0:52:47.840 --> 0:52:50.239 So there's been a big debate going on for many, 0:52:50.280 --> 0:52:53.759 many years about how should the FED respond to financial 0:52:53.800 --> 0:52:57.120 imbalances in the economy, how should they respond to sort 0:52:57.120 --> 0:53:01.680 of incipient bubbles. The green Span view was it's very 0:53:01.680 --> 0:53:06.040 hard to recognize bubbles. It's not clear how you rain 0:53:06.120 --> 0:53:08.279 them in. So the best thing to do is just 0:53:08.320 --> 0:53:10.320 sort of let the bubbles take to run their course, 0:53:10.360 --> 0:53:14.719 and then clean up after the bubble collapses. Here in 0:53:14.800 --> 0:53:17.759 the bus period, my view has been very much that, no, 0:53:17.920 --> 0:53:21.400 that's not a great strategy because the bursting of the 0:53:21.400 --> 0:53:24.600 bubble can cause a lot of financial knock on effects, 0:53:24.960 --> 0:53:28.640 and so better to identify the bubble in real time 0:53:29.040 --> 0:53:31.880 and try to sort of rain that bubble in. And 0:53:31.920 --> 0:53:33.239 I think, you know, if you look at the two 0:53:33.320 --> 0:53:36.320 thousand and four two thousand and seven to eight period, 0:53:36.800 --> 0:53:39.120 boy would have been really good if we'd done something 0:53:39.160 --> 0:53:44.319 about subprime mortgage lending, about mortgage underwriting standards. If we'd 0:53:44.320 --> 0:53:47.400 done that, we would have had a much smaller housing bubble, 0:53:47.800 --> 0:53:50.160 and we would have had much less damage when that 0:53:50.200 --> 0:53:53.680 bubble collapsed in two thousand and eight. So my view 0:53:53.680 --> 0:53:56.560 has always been let's try to be a little bit 0:53:56.560 --> 0:54:00.480 more proactive. Now, the problem with being proactive is, you know, 0:54:00.600 --> 0:54:02.640 how do you know it's a bubble, and the rally 0:54:02.719 --> 0:54:05.560 is you don't, and so it's very hard to convince 0:54:05.600 --> 0:54:07.880 people to take proactive steps to deal with sort of 0:54:07.880 --> 0:54:11.680 incipient problems because you can't really be sure with one 0:54:11.760 --> 0:54:14.160 hundred percent confidence of what's actually going on. 0:54:15.040 --> 0:54:19.279 So you're really pointing out two issues. First, I want 0:54:19.280 --> 0:54:22.960 to say, the FED had taken rates under two percent 0:54:23.040 --> 0:54:26.480 for about three years and under one percent for a year, 0:54:26.560 --> 0:54:30.360 so that was pretty unprecedented until you know the post 0:54:30.360 --> 0:54:33.200 financial crisis here. But you're also pointing out to the 0:54:33.239 --> 0:54:38.759 FED as regulator, and you know, to cast blame. Greenspan 0:54:39.080 --> 0:54:43.520 was very much anti regulator, a little bit more lovely 0:54:43.760 --> 0:54:50.080 care and he allowed a lot of non GSE, non 0:54:50.200 --> 0:54:53.640 traditional banks to make all sorts of loans. It's not 0:54:53.680 --> 0:54:57.800 like he gave them permission, he just didn't really regulate them. 0:54:58.200 --> 0:55:03.080 And that's where a lot of the really sketchy prime 0:55:03.160 --> 0:55:05.400 can and the FED actually did have some authority in 0:55:05.480 --> 0:55:08.240 terms of regulating the mortgage market, authority that they didn't 0:55:08.239 --> 0:55:10.759 really use. Need Gramlik was a governor at the FED, 0:55:10.800 --> 0:55:13.319 and he sort of brought his concerns, Oh boy did 0:55:13.320 --> 0:55:17.520 he to Alan Greenspan, and nothing really really happened. I mean, 0:55:17.520 --> 0:55:20.239 I mean, even when I was at Goldman Sachs, you know, 0:55:20.360 --> 0:55:23.919 and working with my successor, Yan Hostis, we were very 0:55:24.000 --> 0:55:27.560 focused on how this mortgage, this housing bubble was fueling 0:55:27.600 --> 0:55:31.040 consumption through what was called mortgage equity withdrawal. People were 0:55:31.040 --> 0:55:34.000 basically taking their appreciated gains in their houses and they 0:55:34.000 --> 0:55:36.440 were pulling it out in terms of you know, Helock's 0:55:36.560 --> 0:55:40.000 home equity loans, and we felt that that was also 0:55:40.080 --> 0:55:43.000 contributing to stronger consumption and this was going to potentially 0:55:43.120 --> 0:55:47.120 end quite badly. Ed Gramlik was an unsung hero of 0:55:47.160 --> 0:55:50.560 that era because he really identified what was going on 0:55:50.680 --> 0:55:54.120 in real time and not in a you know, hair 0:55:54.160 --> 0:55:57.760 on fire historyonic way. He was very sober and thoughtful 0:55:57.760 --> 0:56:03.040 and academic, and you know, had had Green spent paid 0:56:03.040 --> 0:56:06.759 more attention to Gromlik, could have been a very different outcome. Well, 0:56:06.760 --> 0:56:07.560 I think you would. 0:56:07.320 --> 0:56:12.400 Have had a smaller bubble, maybe you'd have less you know, 0:56:12.880 --> 0:56:15.880 financial innovation. You could wait against some of the triple 0:56:15.960 --> 0:56:19.000 A cdo stuff. I mean, you know, that's a that 0:56:19.080 --> 0:56:21.640 was I mean, some of the innovations in the financial 0:56:21.680 --> 0:56:24.200 industry in terms of products also contributed to the to 0:56:24.520 --> 0:56:27.120 the bubble, sure, right, because you managed to sell all 0:56:27.160 --> 0:56:32.080 these you know, you took a bunch of bad subprime mortgages, 0:56:32.520 --> 0:56:36.360 then you trunched the cash flows and turned these subprime 0:56:36.400 --> 0:56:40.239 mortgages into seventy percent triple A rated securities, and so 0:56:40.320 --> 0:56:42.160 that sort of kept the whole thing going. So the 0:56:42.200 --> 0:56:44.880 financial engineering was also an aspect of the problem that 0:56:44.960 --> 0:56:46.600 contributed to the to the bubble. 0:56:46.960 --> 0:56:49.680 The rating agencies changed their model. They were being paid 0:56:49.680 --> 0:56:53.080 by the underwriters instead of being paid by the mode purchasers. 0:56:53.120 --> 0:56:55.160 That's a big factor that. Yeah, I think a lot 0:56:55.200 --> 0:56:57.920 of people overlook all right, So we could spend forever 0:56:57.960 --> 0:57:01.160 talking about the financial crisis, but I want to get 0:57:01.360 --> 0:57:06.880 to the nineteen nineties, and we've referenced the Maestro. I 0:57:07.000 --> 0:57:09.000 was on a trading desk back then, and I always 0:57:09.000 --> 0:57:13.600 thought green Span was way too solicitous. I'm not sure 0:57:13.640 --> 0:57:16.800 if that's the right word. He was way too concerned 0:57:16.800 --> 0:57:20.520 about how Wall Street perceived him. Is that a fair 0:57:20.600 --> 0:57:24.560 criticism of green Span? Because it felt like he was 0:57:24.800 --> 0:57:32.080 much more accommodative of short term market reactions anytime there 0:57:32.080 --> 0:57:36.880 was a problem for a lais a fair randy and 0:57:37.000 --> 0:57:40.280 he went right to you know, the interventionist policy so 0:57:40.920 --> 0:57:43.680 we had the long term capital management issue, we had 0:57:43.760 --> 0:57:48.919 the Thai crisis and the Russian ruble crisis, and every 0:57:48.920 --> 0:57:52.080 time there was a hiccup in the markets, green Span 0:57:52.200 --> 0:57:56.760 didn't hesitate to cut rates. I think that's you know, fair. 0:57:56.840 --> 0:57:58.720 But at the same time, I think green Span you 0:57:58.840 --> 0:58:02.160 did a reasonable job being inflation control. So the consequences 0:58:02.200 --> 0:58:05.720 of coming to the market's aid to sort of sort 0:58:05.760 --> 0:58:09.720 of smooth out market dysfunction, you know, didn't have a 0:58:09.880 --> 0:58:13.400 really negative consequence for inflation. So I think he sort 0:58:13.440 --> 0:58:16.400 of got mostly got away with it. But I agree 0:58:16.400 --> 0:58:20.000 with you he was probably a little bit more willing 0:58:20.080 --> 0:58:27.760 to address relatively you know, small, not large, not persistent 0:58:28.200 --> 0:58:31.320 movements in markets that maybe the FED could have looked 0:58:31.360 --> 0:58:33.520 looked past, you know that said, I mean, you know, 0:58:33.640 --> 0:58:36.080 his track record was really good. I mean, I think 0:58:36.160 --> 0:58:40.480 the blind spot was really just more about not having 0:58:40.520 --> 0:58:42.840 this view that we can identify bubbles and we should 0:58:42.840 --> 0:58:45.400 deal with bubbles in real time rather than waiting for 0:58:45.440 --> 0:58:47.320 the bubble to burst. And that was that was his 0:58:47.360 --> 0:58:49.959 big mistake. If you know, if you think about when 0:58:50.040 --> 0:58:52.360 when Ben Bernaki came in in two thousand and six, 0:58:52.960 --> 0:58:55.000 you know, the die was already cast right in terms 0:58:55.080 --> 0:58:57.360 of what was going to happen at that point. It's 0:58:57.360 --> 0:59:00.120 just what no one had yet recognized it. 0:59:00.200 --> 0:59:02.400 No, there's no doubt about that. And in fact, by 0:59:02.760 --> 0:59:06.480 six real estate had peaked. You saw it in the 0:59:06.520 --> 0:59:09.640 homebuilders and the banks and the brokers like there were 0:59:09.680 --> 0:59:13.600 market signals that there was problems, but the overall stock 0:59:13.640 --> 0:59:18.080 market kept going until you know, late seven. So let's 0:59:18.120 --> 0:59:22.200 talk you mentioned earlier about surveys. I always look at 0:59:22.320 --> 0:59:28.680 surveys askance because A people don't know, and B even 0:59:28.720 --> 0:59:32.680 when they know about what's happening today, it tends to 0:59:32.720 --> 0:59:36.120 be on a lag. And then lastly, they have no idea. 0:59:36.160 --> 0:59:38.560 When you ask, hey, where's inflation going to be five 0:59:38.640 --> 0:59:42.360 years from now? That seems to be like about as silly. A. 0:59:43.000 --> 0:59:47.200 Nobody has any idea, much less a layperson. Why do 0:59:47.320 --> 0:59:53.720 we put so much emphasis on inflation expectations? Well, I 0:59:53.760 --> 0:59:54.280 don't think that. 0:59:54.400 --> 0:59:56.080 I mean, I think you're right that people don't have 0:59:56.120 --> 0:59:58.480 a really good sense of and we talked about earlier 0:59:58.480 --> 1:00:02.680 at price level versus rate of inflation. But it's interesting 1:00:02.720 --> 1:00:05.560 to see how their views change over time. So it's 1:00:05.600 --> 1:00:08.120 probably not the level of what they perceive inflation is 1:00:08.120 --> 1:00:09.200 going to be over the next ten years. 1:00:09.200 --> 1:00:09.800 That's interesting. 1:00:09.880 --> 1:00:12.360 It's whether they think it's higher or lower than it was, 1:00:12.720 --> 1:00:15.480 you know, a month ago, six months ago, a year ago. 1:00:16.400 --> 1:00:19.000 The reason why inflation expectations are so important is that 1:00:19.120 --> 1:00:22.120 people think inflation expectations are truly going to be higher, 1:00:22.480 --> 1:00:24.600 then that's going to set the wage setting process, and 1:00:24.640 --> 1:00:26.320 wages are going to be higher. And if wages are 1:00:26.400 --> 1:00:28.840 going to be higher, that's going to feed into prices 1:00:29.120 --> 1:00:31.640 and that's going to cause actual inflation to be higher. 1:00:31.800 --> 1:00:35.160 That was a very nineteen seventies problem that seemed to 1:00:35.200 --> 1:00:38.720 be what why inflation was so sticky? Yeah, and we 1:00:38.760 --> 1:00:42.120 had such a hard time until Vulf came along getting 1:00:42.240 --> 1:00:43.000 out of that cycle. 1:00:43.160 --> 1:00:44.880 And one good thing is too we have other ways 1:00:44.880 --> 1:00:47.560 of measuring inflation expectations now that we didn't have thirty 1:00:47.600 --> 1:00:49.800 years ago. We have the treasure you tips market, so 1:00:49.800 --> 1:00:52.680 we can look at tips shields versus nonal treasure yields 1:00:52.720 --> 1:00:54.960 and we can sort of calculate what are people willing 1:00:54.960 --> 1:00:58.000 to pay for inflation protection and that gives us a 1:00:58.040 --> 1:01:01.800 sense of how much inflation is into the into in 1:01:01.880 --> 1:01:02.880 people's expectations. 1:01:02.880 --> 1:01:06.960 Marketing expectations do the inflation expectation surveys and the spread 1:01:07.000 --> 1:01:10.360 between the tip shield and treasuries. Do they correlate well 1:01:10.480 --> 1:01:12.040 or are their occasional big divergence. 1:01:12.080 --> 1:01:15.240 I think they I think they correlate well in the large, 1:01:15.640 --> 1:01:17.400 but I don't think they correlate well at all in 1:01:17.440 --> 1:01:19.600 the small. I mean, one example is, people look at 1:01:19.760 --> 1:01:21.600 tip shields and they look at what's called the five 1:01:21.680 --> 1:01:24.000 x five forward rates of what's inflation going to be 1:01:24.040 --> 1:01:26.600 five years from now for the next five years, and 1:01:26.640 --> 1:01:30.840 that five year forward inflation rate moves along around with 1:01:30.920 --> 1:01:33.800 current oil prices. So when the rest go over town, 1:01:34.040 --> 1:01:38.200 it seems to affect the people's inflation expectations through the 1:01:38.240 --> 1:01:40.560 tips market five years from now, which makes no you know, 1:01:40.880 --> 1:01:41.440 no sense. 1:01:42.040 --> 1:01:42.400 Part of the. 1:01:42.400 --> 1:01:44.960 Problem is it is also the liquidity of the tips 1:01:44.960 --> 1:01:47.800 market is different than the liquidity of the nominal treasury market, 1:01:47.800 --> 1:01:50.200 and so that also can cause some noise in terms 1:01:50.200 --> 1:01:52.800 of your measurement. But you know, two separate sets of 1:01:53.600 --> 1:01:56.280 of of numbers. And then you also have you know, 1:01:56.440 --> 1:01:59.240 professional forecasters, you know what do they think? So that's 1:01:59.240 --> 1:02:00.880 a third set, and so you look at these three 1:02:01.600 --> 1:02:04.800 pretty disparate sources of information on inflation expectations, you can 1:02:04.800 --> 1:02:06.560 get a pretty good sense of, you know, is it 1:02:06.600 --> 1:02:09.880 broadly stable or is it moving in a bad way. 1:02:10.160 --> 1:02:14.320 So let's talk about the biggest part of CPI, which 1:02:14.440 --> 1:02:17.520 is shelter. When we're looking at inflation, we really want 1:02:17.560 --> 1:02:22.800 to know what shelter costs are. The way bls, the 1:02:22.840 --> 1:02:25.720 way the Bureau of Labor Statistics measures shelter is owner's 1:02:25.800 --> 1:02:30.360 equivalent rent and full caveat everybody's aware there's issues with 1:02:30.400 --> 1:02:34.240 this and there are some changes coming. But let's talk 1:02:34.240 --> 1:02:36.120 a little bit. As it's been for the past couple 1:02:36.160 --> 1:02:40.480 of years. It's survey based. Hey what could you rent 1:02:40.800 --> 1:02:44.400 your property for? Seems to be a funny question. So 1:02:45.040 --> 1:02:48.600 it's laggy versus real time measures. And yet this is 1:02:48.640 --> 1:02:54.480 the single biggest part of CPI. George Box famously said 1:02:54.520 --> 1:02:57.480 all models are wrong, but some are useful. Is this 1:02:58.240 --> 1:03:00.480 a model that is both wrong and useful. 1:03:01.120 --> 1:03:04.640 Well, I think you've underscored some of the shortcomings of 1:03:04.640 --> 1:03:07.480 owner's equivalent rent, as you know, both in terms of 1:03:07.640 --> 1:03:09.960 timeliness and also in terms of you know, it's not 1:03:10.000 --> 1:03:12.400 even a cash outlay that people are making. So when 1:03:12.440 --> 1:03:14.840 you started thinking about what's having to people's real incomes, 1:03:14.840 --> 1:03:17.320 you're sort of imputing a cost that they don't actually 1:03:17.480 --> 1:03:20.400 really incur. So when you're started thinking about how much 1:03:20.400 --> 1:03:23.240 can people actually afford to buy, well, I'm not really 1:03:23.240 --> 1:03:24.640 renting my house from myself. 1:03:24.680 --> 1:03:28.520 So you're absolutely right. You have a budget line for shelter, 1:03:28.720 --> 1:03:31.480 but it doesn't include you've already sort of right, it's 1:03:31.480 --> 1:03:32.280 already in your budget. 1:03:32.280 --> 1:03:34.760 It's already in your budget exactly. So I think this 1:03:34.880 --> 1:03:37.320 is one reason why the Fed puts more emphasis on 1:03:37.400 --> 1:03:41.400 the personal consumption expenditure deflator because it has a much 1:03:41.640 --> 1:03:44.880 lower weight for shelter. But you're right, the legs here 1:03:44.920 --> 1:03:47.080 are sort of crazy. So one reason why we're going 1:03:47.160 --> 1:03:50.640 to see lower core PC deflator and lower core CPI 1:03:50.720 --> 1:03:54.200 over the next twelve months is because rents did come 1:03:54.240 --> 1:03:56.800 down and then with a lag of about a year 1:03:56.920 --> 1:03:57.120 or so. 1:03:57.600 --> 1:03:59.120 Is it that much? I always thought it was a 1:03:59.120 --> 1:04:00.960 couple of six months months, quarter or two. 1:04:01.120 --> 1:04:03.880 It's six months at least six months, like, because the 1:04:03.920 --> 1:04:08.040 rent's only repriced periodically, right every year or two, every 1:04:08.080 --> 1:04:10.160 year or two, and so they have to reprice before 1:04:10.200 --> 1:04:13.560 they get into the So it's that lag because you 1:04:13.560 --> 1:04:17.680 know rents repriced instantaneously, then everything would be sort of 1:04:17.760 --> 1:04:20.680 up to date. But rents price slowly when you know, 1:04:20.720 --> 1:04:24.800 the least comes due, and so it's lagging behind reality. 1:04:25.120 --> 1:04:26.960 So this is something that's going to probably feed into 1:04:26.960 --> 1:04:29.640 the core PC deflator and keep inflation a little bit 1:04:29.680 --> 1:04:31.280 lower over the next six to twelve months. 1:04:31.720 --> 1:04:34.360 But is it really you know, real. 1:04:34.160 --> 1:04:36.520 In terms of what's actually actually happening to inflation on 1:04:36.560 --> 1:04:38.640 the ground, it's probably you know, going to be a 1:04:38.640 --> 1:04:39.560 little bit misleading. 1:04:39.720 --> 1:04:42.160 So there are a couple of real estate entities, the 1:04:42.200 --> 1:04:45.160 Apartment List Index or Zillow does the real time in 1:04:45.640 --> 1:04:48.280 K Shiller, right, So even k Shiller is a little 1:04:48.320 --> 1:04:51.479 bit of a lag, not as much as owner's equivalent rent. 1:04:51.800 --> 1:04:55.320 But the interesting thing is the real time indicies have 1:04:55.440 --> 1:04:58.680 showed falling real estate prices the past, i don't know, 1:04:58.760 --> 1:05:01.720 three months, four months hasn't gotten into the CPI yet, right, 1:05:01.800 --> 1:05:05.320 And so it's interesting it's coming, it's coming. That's that's 1:05:05.360 --> 1:05:10.040 got to be very optimistic to think, Hey, even all 1:05:10.080 --> 1:05:14.880 these people are concerned about reacceleration of inflation, we know 1:05:14.960 --> 1:05:18.360 the biggest part of CPI is going to keep drifting lower. 1:05:18.760 --> 1:05:21.800 That's got to be positive for future Fed policy. 1:05:21.840 --> 1:05:24.280 Right, But the question is is it temporary or is 1:05:24.280 --> 1:05:27.120 it more persistent? So to figure that out. To figure 1:05:27.120 --> 1:05:28.600 that out, we have to look at the housing market. 1:05:28.680 --> 1:05:30.840 So how is the housing market performing? Well, the housing 1:05:30.840 --> 1:05:33.200 market actually looks like it's starting to come back. Why 1:05:33.240 --> 1:05:35.280 is it coming back? Because mortgage rates have fallen by 1:05:35.760 --> 1:05:38.320 you know, one percentage point, and so that's actually stimming 1:05:38.320 --> 1:05:40.840 in the housing sector. So I think the interesting question is. 1:05:40.800 --> 1:05:43.320 Not like just what's the next chapter as this stuff 1:05:43.360 --> 1:05:46.560 feeds through the CPI, it's what's the chapter after that? 1:05:47.200 --> 1:05:50.160 Based on how quickly does the housing market recover in 1:05:50.200 --> 1:05:51.800 response to lower interest rates. 1:05:52.120 --> 1:05:55.320 So so Powell was asked, I think it was on 1:05:55.400 --> 1:05:59.680 sixty minutes about the commercial real estate. So as opposed 1:05:59.680 --> 1:06:02.520 to up every year or two, you have leases that 1:06:02.600 --> 1:06:05.480 go five, ten, twenty years. So this seems to be 1:06:05.520 --> 1:06:09.960 taking place in slow motion. But it seems like commercial 1:06:09.960 --> 1:06:14.120 real estate is a genuine risk factor, certainly for some 1:06:14.200 --> 1:06:17.720 of the regional and community banks. How should we be 1:06:17.880 --> 1:06:22.240 contextualizing what's been taking place with remote work and work 1:06:22.280 --> 1:06:27.240 from home and the return to office process that still 1:06:27.280 --> 1:06:30.440 has lots of vacancies in urban centers. 1:06:30.960 --> 1:06:33.080 Yeah, I mean I would define it more nearly than 1:06:33.080 --> 1:06:35.480 commercial real estate. I would just find it as office 1:06:35.520 --> 1:06:39.600 building space because that's really where you have very high vacancies, rates, 1:06:39.680 --> 1:06:44.360 very underutilized resource, and prices are coming down, especially for 1:06:44.640 --> 1:06:47.600 you know, class B and Class C buildings, not the 1:06:47.600 --> 1:06:51.200 best stuff coming down quite significantly. You know, you're absolutely right. 1:06:51.280 --> 1:06:53.000 This is sort of a slow burn rather than a 1:06:53.000 --> 1:06:55.960 fast burn, because the problem typically arises, not you know, 1:06:56.000 --> 1:07:00.880 immediately arises when the mortgage has to be the commercial 1:07:00.960 --> 1:07:05.040 real estate loan has to be refinanced. As long as 1:07:05.120 --> 1:07:07.720 the income on the property covers the interest on the loan, 1:07:08.680 --> 1:07:11.840 the borrower isn't going to default when the loan comes due, 1:07:11.840 --> 1:07:14.640 though the lender typically says, hey, your building is worth 1:07:14.920 --> 1:07:18.240 forty percent less than it was before. I'm sorry, we're 1:07:18.240 --> 1:07:19.760 not going to lend you as much money. You need 1:07:19.760 --> 1:07:22.400 to come up with more collateral. And at that point 1:07:22.480 --> 1:07:26.280 the borrow might say, I don't have the collateral. The 1:07:26.320 --> 1:07:30.880 building's yours, and so then that crystallizes in the loss 1:07:30.920 --> 1:07:34.680 for the commercial bank. I think there are definitely commercial 1:07:34.680 --> 1:07:37.680 banks that are going to have trouble due to their 1:07:37.840 --> 1:07:43.000 concentrated commercial office building portfolio, But I don't view this 1:07:43.120 --> 1:07:47.920 as big enough or fast enough to really be you know, 1:07:48.000 --> 1:07:50.320 systemic from a financial stability perspective. 1:07:50.560 --> 1:07:53.560 Huh really interesting. All right. We've talked about the housing market, 1:07:53.880 --> 1:07:57.440 the office spased market. One question we really haven't gotten 1:07:57.480 --> 1:08:01.000 to has been the stock and bond market. They've been 1:08:01.160 --> 1:08:04.680 very chaotic the past couple of years. How does the 1:08:04.680 --> 1:08:08.680 FED think about stock or bond market volatility? How does 1:08:08.720 --> 1:08:10.400 that impact decision making? 1:08:11.080 --> 1:08:13.720 Well, I think, as Paul has said many times, you know, 1:08:13.880 --> 1:08:17.400 monitary policy in the US works through financial conditions, and 1:08:17.520 --> 1:08:20.680 two key components of financial conditions are the bond and 1:08:20.720 --> 1:08:24.280 stock market. So if the bond market eels are low, 1:08:24.520 --> 1:08:27.799 the stock prices are high and rising, that's making financial 1:08:27.800 --> 1:08:31.479 conditions more accommodative and that's actually supporting the economy. So 1:08:31.520 --> 1:08:34.240 the FED is going to take that into consideration. So, 1:08:34.760 --> 1:08:36.679 you know, we talked earlier about why the FED isn't 1:08:36.720 --> 1:08:39.080 moving yet because they want to be confident they're going 1:08:39.120 --> 1:08:42.040 to actually achieve their two percent objective. They're not moving 1:08:42.160 --> 1:08:44.840 yet because the labor market is strong. But they're also 1:08:44.920 --> 1:08:48.719 not moving yet because financial conditions have eased a lot, 1:08:48.960 --> 1:08:50.640 and so the market is doing quite a bit of 1:08:50.680 --> 1:08:53.040 work for the FED. Even before the Fed actually has 1:08:52.800 --> 1:08:56.040 cut interest rates, So the FED, you know, I don't 1:08:56.040 --> 1:08:58.000 think I think it's important to understand that the FED 1:08:58.080 --> 1:09:02.800 doesn't really target financial market prices. So people sometimes say, well, 1:09:02.800 --> 1:09:04.600 if the stock market goes down, the Federal Reserve is 1:09:04.600 --> 1:09:07.080 going to react to that. No, the Fed's going to 1:09:07.080 --> 1:09:09.200 react to the stock market if the FED thinks the 1:09:09.200 --> 1:09:12.960 stock market has gone down far enough, persistently enough to 1:09:12.960 --> 1:09:15.760 affect the real economy to impede the ability of the 1:09:15.800 --> 1:09:19.280 FED to achieve its its inflation and employment objectives. Fed 1:09:19.280 --> 1:09:22.040 doesn't care about the stock market itself. It cares about 1:09:22.040 --> 1:09:24.080 how the stock market affects the real economy. 1:09:24.400 --> 1:09:27.439 So sometimes you get a market crash and the economy 1:09:27.479 --> 1:09:31.799 shrugs it off. Nineteen eighty seven, one day, twenty three percent, 1:09:31.920 --> 1:09:35.000 the economy couldn't care less. And then even the dot 1:09:35.040 --> 1:09:39.840 com implosion, which was modest on the Dow and the 1:09:40.000 --> 1:09:44.120 SMP if you consider thirty percent modest, it was brutal 1:09:44.160 --> 1:09:47.120 on the Nasdaq, which was something like eighty one percent. 1:09:47.560 --> 1:09:51.719 But we had a very mild recession in two thousand 1:09:51.720 --> 1:09:58.560 and one. So does that basically argue for less intervention 1:09:58.760 --> 1:10:02.479 by the FED, or does the subsequent FED intervention. Is 1:10:02.479 --> 1:10:06.000 that what prevented this like A one, from becoming much worse. 1:10:06.520 --> 1:10:09.240 Well, I think one was really you know, also nine 1:10:09.320 --> 1:10:12.280 eleven was really a significant event, and that I think 1:10:12.320 --> 1:10:16.280 provoked a more and more much more aggressive FED. I 1:10:16.280 --> 1:10:19.519 think the Fed, you know, is aware what the bond 1:10:19.600 --> 1:10:21.680 market is doing and where what the stock market is doing, 1:10:21.680 --> 1:10:24.360 because that affects the transmission of monetary policy. The real 1:10:24.360 --> 1:10:26.439 e commy, but they don't have a view that we 1:10:26.520 --> 1:10:28.760 need to target a particular level of the stock market 1:10:28.840 --> 1:10:31.040 or the bond market. That never comes up as an issue, 1:10:32.000 --> 1:10:33.680 you know. It's not like the Fed. You know, if 1:10:33.720 --> 1:10:35.800 the stock market went down ten percent tomorrow, it's not 1:10:35.840 --> 1:10:37.320 like this the Fed would go, oh, we need to 1:10:37.400 --> 1:10:40.360 change monetary policy. If it went down twenty five to 1:10:40.479 --> 1:10:43.840 thirty percent and stayed persistently lower, that would probably have 1:10:44.000 --> 1:10:47.160 implications for the economic growth, and that would then affect 1:10:47.360 --> 1:10:50.519 monetary policy. But it's all through the effects on economic growth. 1:10:50.720 --> 1:10:53.600 Paul has talked about this. It's it's the persistence of 1:10:53.640 --> 1:10:56.760 the change in financial conditions that matters. It's not what 1:10:56.800 --> 1:10:58.679 the stock market does over a day or a week. 1:10:58.720 --> 1:11:00.800 It's what the stock market does over six months or 1:11:00.840 --> 1:11:02.400 a year that really matters. 1:11:03.120 --> 1:11:06.680 So before I get to my favorite questions, I just 1:11:06.720 --> 1:11:10.960 have to ask, really, what you're focusing on today. You 1:11:11.120 --> 1:11:16.280 join the Princeton Griswold Center as a senior advisor, You 1:11:16.479 --> 1:11:19.120 chair the Bretton Woods Committee, you serm on the Group 1:11:19.160 --> 1:11:22.360 of thirty and Council form relations. Are you still doing 1:11:22.360 --> 1:11:26.200 all those actively today? Tell us what's keeping you busy 1:11:26.240 --> 1:11:26.759 these days? 1:11:27.840 --> 1:11:30.559 Those things the Brenton Woods Committee, I'm the chair and 1:11:30.840 --> 1:11:32.960 we've been broadening out the work that we do at 1:11:32.960 --> 1:11:34.760 the Brendon Woods Committee. I mean to just give to 1:11:34.800 --> 1:11:37.240 tell you what the Brenton Wicks Committee is about. It's 1:11:37.280 --> 1:11:40.720 basically dedicated to the notion that international cooperation and coordination 1:11:41.160 --> 1:11:43.559 lead to better outcomes. So along the lines of what 1:11:43.600 --> 1:11:47.639 Paul said in a sixty minutes interview and basically trying 1:11:47.640 --> 1:11:53.320 to build strong international institutions that can facilitate cooperation on 1:11:53.680 --> 1:12:00.000 important issues like you know, financial stability, climate change, digital finance, 1:12:00.080 --> 1:12:05.519 it's health trade where countries working together can lead to 1:12:05.560 --> 1:12:08.880 better outcomes. So the Bretonwitz Committee, uh, you know, we 1:12:09.200 --> 1:12:12.679 it's been growing, the work has been expanding or doing 1:12:12.720 --> 1:12:17.040 work on digital finance, climate finance, sovereign debt future of 1:12:17.080 --> 1:12:20.759 the multilateral of financial institutions like the World Bank and IMF, 1:12:20.760 --> 1:12:23.400 what should their role be going forward. So it's pretty 1:12:23.439 --> 1:12:26.360 exciting and I spend you know, quite a bit of 1:12:26.360 --> 1:12:26.880 time on it. 1:12:27.280 --> 1:12:28.400 What's the Group of thirty? 1:12:28.720 --> 1:12:30.760 Group of thirty is a is a group of people. 1:12:31.000 --> 1:12:32.800 It's a it's a It's an organization that was set 1:12:32.880 --> 1:12:34.480 up several decades. 1:12:34.160 --> 1:12:35.439 Ago of. 1:12:36.920 --> 1:12:41.360 People that are either currently very senior in academia policy 1:12:42.120 --> 1:12:45.200 or we're involved in academy and policy at a very 1:12:45.240 --> 1:12:47.680 senior level. You know, people like Paul Volker was a 1:12:47.680 --> 1:12:50.800 member of the of the Group of thirty. Jean Clautchochet 1:12:50.960 --> 1:12:52.600 is a is a current member of the of the 1:12:52.640 --> 1:12:57.000 Group of thirty. People of you know, Mark Karney is 1:12:57.520 --> 1:13:01.000 is the is the person who's in charge of running 1:13:01.040 --> 1:13:04.120 the Group of thirty from from a member of perspective, 1:13:04.160 --> 1:13:07.719 so a lot of senior people that focus on important 1:13:07.760 --> 1:13:10.800 issues of the day. So, for example, a number of 1:13:10.840 --> 1:13:12.639 months ago, the Group of thirty asked me to lead 1:13:12.680 --> 1:13:17.880 a project on you know, financial supervision reform. You know, 1:13:17.880 --> 1:13:20.320 what we do in terms of the regulatory policy with 1:13:20.400 --> 1:13:22.719 respect to the banking system in light of what happened 1:13:23.000 --> 1:13:27.160 in March of twenty twenty three with respect to Silicon 1:13:27.240 --> 1:13:29.800 Valley Bank and a number of other banks. And in 1:13:29.880 --> 1:13:33.519 January we published a report and we basically argued for 1:13:33.720 --> 1:13:36.479 a number of reforms that need to be made. And 1:13:36.640 --> 1:13:38.400 you know, I've been talking to the people at the 1:13:38.400 --> 1:13:40.920 FED nails. We're trying to get some traction for some 1:13:41.000 --> 1:13:42.519 of the proposals that we've made. 1:13:43.040 --> 1:13:45.479 Really interesting, all right, I know I only have you 1:13:45.560 --> 1:13:47.760 for so much time, so let me jump to my 1:13:47.840 --> 1:13:51.000 favorite questions that we ask all of our guests, starting 1:13:51.040 --> 1:13:53.840 with what's keeping you entertained these days? What are you 1:13:53.960 --> 1:13:55.120 watching or listening to? 1:13:56.760 --> 1:13:58.559 I usually want, you know, stream things to you know, 1:13:58.600 --> 1:14:02.479 television series that strike my fancy, you know right now, 1:14:02.479 --> 1:14:03.720 you know, right now, it's a little bit of a 1:14:03.760 --> 1:14:05.439 you know, sometimes it's a little bit of science fiction 1:14:05.720 --> 1:14:07.280 like Foundation. 1:14:07.960 --> 1:14:10.200 Or are you do you watching the second or third 1:14:10.200 --> 1:14:11.439 season of fa I'm. 1:14:11.320 --> 1:14:15.320 In the second season right Sometimes it's things like poker Face, 1:14:15.360 --> 1:14:19.960 which is on Peacock. Another one I'm watching my wife 1:14:20.000 --> 1:14:22.560 and I now mister and Missus Smith. 1:14:22.600 --> 1:14:24.400 Just started on Amazon, just started, so. 1:14:24.479 --> 1:14:27.400 You know, it's you know, we usually watch one show 1:14:27.439 --> 1:14:31.960 at night and that's us also tolerance. I never It's 1:14:31.960 --> 1:14:33.200 a great way to just errow and wind. 1:14:33.240 --> 1:14:34.840 At the end of the day, I would not have 1:14:35.080 --> 1:14:38.120 pegged you as a sci fi fan. And I'm going 1:14:38.160 --> 1:14:41.240 to give you the two recommendations I give everybody. Okay, 1:14:41.840 --> 1:14:45.559 one is on Amazon Prime, the expanse, which is, Yeah, 1:14:45.560 --> 1:14:47.960 I did I did read. I did watch about five 1:14:48.280 --> 1:14:49.880 five of did you like it? It got a little 1:14:49.880 --> 1:14:50.559 wacky at the end. 1:14:50.760 --> 1:14:53.439 I sartainly ran out of gas after about yeah, fifth season. 1:14:53.479 --> 1:14:55.720 I did watch a lot of a lot of. 1:14:55.680 --> 1:15:00.240 That fascinating political US. And then the other one was 1:15:00.280 --> 1:15:04.240 it's only two seasons altered Carbon It's really good. I 1:15:04.320 --> 1:15:08.920 haven't seen that one. Fascinating story and filled with all 1:15:08.960 --> 1:15:12.559 sorts of really interesting as a sci fi geek, those 1:15:12.560 --> 1:15:14.599 are my two favs. Do you liked? For all Mankind? 1:15:16.000 --> 1:15:17.040 I haven't seen it? 1:15:17.320 --> 1:15:17.439 So? 1:15:17.479 --> 1:15:18.040 That one is. 1:15:18.040 --> 1:15:21.000 About the sort of alternate space race between Russia and 1:15:21.120 --> 1:15:23.479 the US where Russia actually gets a man on the 1:15:23.479 --> 1:15:26.080 moon first, and then it follows sort of the develop 1:15:26.160 --> 1:15:29.360 of the NASA program over the subsequent. 1:15:29.760 --> 1:15:32.080 How is the series? It's quite good? Oh really, I'm 1:15:32.080 --> 1:15:34.920 gonna I'm going to add that to my list. I 1:15:34.960 --> 1:15:39.040 am a soccer for a great space venture. Let's talk 1:15:39.080 --> 1:15:42.799 about some of your mentors who helped shape your career. 1:15:43.800 --> 1:15:46.639 So the most important one, by far, I think, was 1:15:47.320 --> 1:15:51.160 my professor at Berkeley, James PEARSK. He worked at Yale, 1:15:51.160 --> 1:15:53.080 then he went to work at the Federal Reserve Board 1:15:53.160 --> 1:15:56.280 in Washington. He was the social director of research, and 1:15:56.280 --> 1:15:58.120 then he went to Berkeley. And I was his research 1:15:58.120 --> 1:16:01.280 assistant at Berkeley for five years, wow, which is a 1:16:01.360 --> 1:16:04.760 very long stretch as being someone's research assistant. And he 1:16:04.880 --> 1:16:07.800 sort of got me interested in policy and got me 1:16:07.920 --> 1:16:09.080 sort of knowledgeable about what the. 1:16:09.040 --> 1:16:10.280 Federal Reserve was all about. 1:16:10.280 --> 1:16:12.680 And so I think the reason why I went to 1:16:12.720 --> 1:16:15.839 the feder Reserve rather than went into academy is because 1:16:15.880 --> 1:16:21.120 of his counseling. And he became a really good friend. 1:16:21.280 --> 1:16:22.479 But there are a lot of you know, there's a lot 1:16:22.520 --> 1:16:24.519 of other people along the way, but he's the one 1:16:24.560 --> 1:16:27.160 that sort of, you know, stands out. 1:16:27.520 --> 1:16:30.080 Huh. Let's talk about books. What are some of your 1:16:30.080 --> 1:16:32.160 favorites and what are you reading right now? 1:16:33.240 --> 1:16:36.160 Right now, I haven't really gotten into anything particularly that's 1:16:36.200 --> 1:16:41.240 like grabbed me. I just finished Andy Wear's a book, 1:16:41.439 --> 1:16:44.120 Hail Mary I don't know if you've had science fiction one. 1:16:44.439 --> 1:16:46.559 I don't read a lot of science fiction, but every 1:16:46.600 --> 1:16:48.800 once in a while I get a hankering for it. 1:16:49.600 --> 1:16:53.120 I typically read more things that are like thriller detective 1:16:53.200 --> 1:16:55.840 kind of things. But you know, I'm not a I 1:16:55.840 --> 1:16:58.320 took a lot of literaually in college, but I don't 1:16:58.320 --> 1:17:00.679 read a lot of heavy literature now because I usually 1:17:00.680 --> 1:17:02.880 by the end of the day i'm I'm I'm a 1:17:02.920 --> 1:17:05.879 little wiped out and and and to read really good literature, 1:17:05.960 --> 1:17:08.479 it takes it takes focus, takes a lot of attention. 1:17:08.600 --> 1:17:11.759 So I like things like Dennis Lane. I think he's 1:17:11.560 --> 1:17:15.800 he does really good stuff. Uh don Winslow, I know 1:17:15.840 --> 1:17:17.479 the name for sure, it does some. 1:17:17.400 --> 1:17:18.160 Really good stuff. 1:17:18.760 --> 1:17:22.000 Uh So I like the stuff that's like a little 1:17:22.000 --> 1:17:26.200 bit you know better than you know, sort of Lee 1:17:26.320 --> 1:17:27.519 Child's you know a little bit deeper. 1:17:27.840 --> 1:17:30.639 Sure, Lee Child's. My wife is a giant. Lee Child 1:17:31.040 --> 1:17:31.880 read everything. 1:17:31.840 --> 1:17:34.600 Lee Child is entertaining, but every story is sort of 1:17:34.640 --> 1:17:39.960 along the same same lines. So so that's the sort 1:17:40.000 --> 1:17:41.760 of stuff that I like to read, and I read. 1:17:42.080 --> 1:17:44.840 I read a fair amount the sci fi book I 1:17:44.880 --> 1:17:49.320 have sitting on my nightstand that I'm almost afraid to start. 1:17:49.439 --> 1:17:52.760 Is the three body problem, and it's each book is 1:17:52.840 --> 1:17:57.120 nine hundred pages. Three books is it's actually by a 1:17:57.280 --> 1:18:03.400 Chinese author and references. Is the inability to forecast the 1:18:03.479 --> 1:18:08.840 location of heavenly bodies of planets moon stars. We can 1:18:08.920 --> 1:18:11.639 calculate too once you bring a third one in. It's 1:18:11.760 --> 1:18:15.280 just the outcomes. I'll take a look at that. It's fascinating. 1:18:15.360 --> 1:18:19.320 Have you read Tediang. He's a short story writer. He 1:18:19.360 --> 1:18:23.840 writes short story of fiction. He's got two books science fiction. 1:18:24.479 --> 1:18:25.400 It's fabulous. 1:18:25.520 --> 1:18:29.599 What's it's very intellectual stuff. It's he writes. He writes 1:18:29.640 --> 1:18:32.920 sometimes in the New Yorker magazine. So there's a book 1:18:33.000 --> 1:18:36.880 of his. I'm trying to remember. I think he's had 1:18:36.920 --> 1:18:42.640 two volumes of all stories. Yeah, all short stories. The 1:18:42.680 --> 1:18:45.559 movie The Arrival was based on was based on his 1:18:45.600 --> 1:18:48.000 short So the one I just got is Stories of 1:18:48.040 --> 1:18:51.120 your Life and other tells. But the one before that 1:18:51.280 --> 1:18:54.720 is Revelation Ascendancy. Yeah, it's so funny you mentioned that 1:18:54.840 --> 1:18:57.200 literally just and I gave that to a few friends 1:18:57.439 --> 1:19:00.000 for holidays and stuff. Is great because really I'm excited. 1:19:00.000 --> 1:19:04.200 That is like the book I Bring on Planes where 1:19:04.280 --> 1:19:06.160 all I go Now to read. Let me let me 1:19:06.200 --> 1:19:10.320 go through a chapter. Really, and there's this really fascinating 1:19:10.360 --> 1:19:13.439 collection of short stories. I'll never remember it, but i'll 1:19:13.479 --> 1:19:17.720 but I'll email it to you. Diary of an interstellar 1:19:17.880 --> 1:19:23.160 refrigerator repairman, something along those lines. And it's it's brilliant 1:19:23.200 --> 1:19:27.920 science fiction, but it's also surprisingly amusing and funny. It's 1:19:28.000 --> 1:19:30.639 it's out. If you like those, I think you'll you'll 1:19:31.040 --> 1:19:35.040 appreciate that they're not it's not all the same story. 1:19:35.240 --> 1:19:38.160 They're kind of like just very loose set in the 1:19:38.200 --> 1:19:41.880 same universe, but unrelated type of uh stuff, but really 1:19:41.920 --> 1:19:45.680 really fascinating. And our final two questions, what sort of 1:19:45.720 --> 1:19:49.080 advice would you give a college grad who is interested 1:19:49.160 --> 1:19:53.720 in a career in either economics or central banking or 1:19:54.080 --> 1:19:55.680 monetary policy. 1:19:56.400 --> 1:20:00.400 Find an interesting job, build your human capital. You find 1:20:00.400 --> 1:20:03.519 that your human capital is no longer going up at 1:20:03.560 --> 1:20:07.240 a particularly rapid rate, find a new job. I mean, 1:20:07.280 --> 1:20:09.400 I was very lucky because I jumped around in my career, 1:20:09.439 --> 1:20:12.280 and I feel like every place I moved, I learned 1:20:12.280 --> 1:20:15.600 a new set of skills and information which sort of 1:20:15.600 --> 1:20:19.160 helped me do better at the next endeavor. So I 1:20:19.160 --> 1:20:23.240 think it's really important not to get stale and you know, 1:20:23.680 --> 1:20:26.280 and the second really most important thing is find something 1:20:26.280 --> 1:20:28.080 that you that you can be you know, that really 1:20:28.080 --> 1:20:30.240 interests you, that you can be enthusiastic about it. Because 1:20:30.240 --> 1:20:33.160 if you can't go to work and be enthusiastic about it, 1:20:33.400 --> 1:20:35.479 you're not going to do very well and you're not gonna. 1:20:35.240 --> 1:20:35.880 Be very happy. 1:20:36.360 --> 1:20:38.759 I mean, ideally, you know, you like your work, and 1:20:39.360 --> 1:20:42.120 the difference between work and pleasure so starts to blur 1:20:42.680 --> 1:20:45.920 and you don't really aren't resentful when there's more, you know, 1:20:46.320 --> 1:20:48.759 demands for your work. I mean, during the financial crisis, 1:20:48.800 --> 1:20:52.200 you can imagine I worked pretty long hours, but I 1:20:52.200 --> 1:20:53.680 wouldn't have had it any other way. I mean, it 1:20:53.680 --> 1:20:56.000 was absolutely a fascinating period of time, and yeah it 1:20:56.040 --> 1:20:59.080 was work, but but I got a lot out of it. 1:20:59.520 --> 1:21:03.840 My wife describes me as being gainfully unemployed, which is 1:21:04.160 --> 1:21:06.439 exactly along those things. I would do it if I 1:21:06.439 --> 1:21:09.360 was getting paid or not. So it works out really well. 1:21:09.400 --> 1:21:12.280 And our final question, what do you know about the 1:21:12.320 --> 1:21:17.000 world of investing today, markets, investing, monetary policy that you 1:21:17.040 --> 1:21:19.800 wish you knew thirty or forty years ago when you 1:21:19.840 --> 1:21:21.040 were first getting started. 1:21:22.200 --> 1:21:24.599 Well, I mean when I first started investing. I started 1:21:24.640 --> 1:21:28.040 investing in nineteen seventy four, seventy five, and I have 1:21:28.160 --> 1:21:31.080 to say I was so naive about investing at that time. 1:21:31.640 --> 1:21:35.880 I didn't really understand you know, you know what really 1:21:35.960 --> 1:21:41.759 drove stock market evaluation, you know, what determined the success 1:21:41.800 --> 1:21:45.600 of companies. You know, you'll learn a lot by doing it. 1:21:46.160 --> 1:21:48.680 And I personally think a lot of people over overinvest 1:21:48.960 --> 1:21:51.559 in the sense of making transaction. I found over time 1:21:51.600 --> 1:21:54.160 that you know, I have good ideas once every like 1:21:54.560 --> 1:21:58.519 five ten years, and you know you have to wait 1:21:58.520 --> 1:22:01.200 for that good idea to to and then implement that 1:22:01.320 --> 1:22:04.200 investment thesis. You know, well, one thing I'm good at 1:22:04.200 --> 1:22:07.160 it coming out with ideas, but I'm terrible at trading 1:22:07.200 --> 1:22:07.719 on them. 1:22:08.080 --> 1:22:09.200 You know, like Bob Rubin a. 1:22:09.200 --> 1:22:10.960 Number of years ago at Goldman's you know, you know, 1:22:11.200 --> 1:22:13.400 you know, suggested that, well maybe you should, you know, 1:22:13.520 --> 1:22:17.479 should actually start trading things trying try that. I said, no, Bob, 1:22:17.520 --> 1:22:20.120 I don't think my my risk tolerance is right for that. 1:22:20.200 --> 1:22:22.040 And the second reason not to do it is that 1:22:22.080 --> 1:22:24.040 if you start trading things, then it sort of leaks 1:22:24.040 --> 1:22:29.040 into your interpretation of information and events, because then you 1:22:29.080 --> 1:22:32.040 start to talk your book and try to contribute. You know, 1:22:32.400 --> 1:22:35.200 this is the reason why the ten year bond yield. 1:22:34.920 --> 1:22:37.320 Should fall, because well, I have a position. 1:22:37.439 --> 1:22:40.160 I have a position, you know, And I said to me, now, 1:22:40.200 --> 1:22:42.040 you don't really want me to do that, because when 1:22:42.040 --> 1:22:43.600 I wouldn't be very good at it, and then I 1:22:43.680 --> 1:22:46.679 might lose some of my you know, objectivity with quotes 1:22:46.720 --> 1:22:47.120 around it. 1:22:47.439 --> 1:22:50.479 I do like the idea of low frequency trading as a. 1:22:50.800 --> 1:22:53.519 Yeah, I mean, I think for most people, buying an 1:22:53.600 --> 1:22:56.240 ETF on a broad based stock market and then putting 1:22:56.240 --> 1:22:59.000 it away for twenty years is the right approach. 1:22:59.160 --> 1:23:02.479 Can't really just agree, Bill, Thank you for being so 1:23:02.720 --> 1:23:05.960 generous with your time. This has just been absolutely delightful. 1:23:06.720 --> 1:23:09.360 We have been speaking with Bill Dudley. He is the 1:23:09.400 --> 1:23:13.640 former US economist for Goldman Sachs and head of the 1:23:13.680 --> 1:23:16.240 New York Fed, as well as his many policy roles 1:23:16.840 --> 1:23:20.760 at the Federal Reserve. If you enjoy this conversation, well, 1:23:20.880 --> 1:23:22.960 be sure and check out any of the five hundred 1:23:23.160 --> 1:23:26.200 or so we've done over the past. Hey, it's almost 1:23:26.280 --> 1:23:30.320 ten years. You can find those at iTunes, Spotify, YouTube, 1:23:30.400 --> 1:23:34.800 wherever you find your favorite podcasts. Sign up for my 1:23:34.920 --> 1:23:37.720 daily reading list at Ridhelts dot com. Follow me on 1:23:37.760 --> 1:23:41.960 Twitter at Ridolts. Check out my new podcast At the Money, 1:23:42.320 --> 1:23:47.160 short ten minute conversations with experts about the most important 1:23:47.200 --> 1:23:51.920 elements of your earning money, spending money, and most importantly, 1:23:52.080 --> 1:23:55.040 investing money. I would be remiss if I did not 1:23:55.160 --> 1:23:58.479 thank the crack team of people who help us put 1:23:58.520 --> 1:24:02.960 these conversations together each week. Kayla Lapara is my audio engineer. 1:24:03.040 --> 1:24:06.640 Attika val Bron is my project manager. Anna Luke is 1:24:06.680 --> 1:24:11.759 my producer. Sean Russo is my researcher. I'm Rid Holts. 1:24:12.000 --> 1:24:15.559 You've been listening to Masters in Business on key birth 1:24:15.640 --> 1:24:16.760 ratio