Speaker 1: Bloomberg Audio Studios, podcasts, radio news, while joining US.
Speaker 2: Now with his thoughts on this. Bill Dudley Bloomberg, opinion
Speaker 2: columnist and former New York Fed President, here's my unfair question.
Speaker 2: You looked at the data twenty five or fifty in September.
Speaker 3: Well, I think the logic for fifty is pretty compelling.
Speaker 3: The officials have basically said policies should be neutral. The
Speaker 3: risks of the labor market side are equal to the
Speaker 3: risks on the inflation side, and they're long away from neutral.
Speaker 4: But I don't think they're going to do fifty.
Speaker 3: I think that a gradual approach is what they're going
Speaker 3: to pursue.
Speaker 4: Today.
Speaker 3: You had two fit speaker at John Williams and Chris Waller,
Speaker 3: and neither of them hinted that they might go more
Speaker 3: aggressively just meeting. So I think the logic for fifty
Speaker 3: is pretty strong. But I think they're just going to
Speaker 3: do a twenty five basis point rate cut in September.
Speaker 2: If they don't do fifty, does that significantly damage the
Speaker 2: economy until the next meeting.
Speaker 3: I don't think so, because the market's priced in a
Speaker 3: lot of raycuts between now and the end of next year,
Speaker 3: and so you know, we know where headed to much
Speaker 3: lower short term interest rates. All we don't know is
Speaker 3: the speed in which how we're going to get there.
Speaker 3: And I don't think the speed matters that much because
Speaker 3: you know, if you know the FED is going to
Speaker 3: cut rates a lot in the next twelve to eighteen months,
Speaker 3: that gets priced into the bond market, that gets priced
Speaker 3: into mortgage rates, and so the economy gets a benefit
Speaker 3: of those rate cuts before those rate cuts actually materialize.
Speaker 1: How much about bill do you think the FIT is
Speaker 1: actually concerned about the market reaction to this? The last
Speaker 1: time we had a major shift in monetary policy cycles,
Speaker 1: there was a lot of talk by J. Powell about
Speaker 1: financial conditions about the reaction function in the markets. Is
Speaker 1: that concerned as present now as it was then?
Speaker 3: Well, I think they view financial conditions as their friend
Speaker 3: right now because financial conditions are easing even before they've
Speaker 3: actually been forced to act, and so that reduces the
Speaker 3: legs of monitary policy. In terms of how mandary policy
Speaker 3: affects the economy. We've already seen long term mortgage rates,
Speaker 3: for example, come down quite a bit. We haven't seen
Speaker 3: the consequence of that drop up long term mortgage rates
Speaker 3: for housing activity. But at least that first stage has occurred,
Speaker 3: or housing is more affordable now than it was a
Speaker 3: few months ago.
Speaker 1: When we talk about this potential for the start of
Speaker 1: a major easing cycle bill, we'd be remiss and not
Speaker 1: pointing out that there are a lot of fiscal conditions
Speaker 1: government fiscal government conditions that the Fed is at least
Speaker 1: going to have to pay attention to, probably much more
Speaker 1: than they would have had if they had started this
Speaker 1: I don't know a couple of years ago here, what's
Speaker 1: going that discussion like behind closed doors when they have
Speaker 1: to talk about something that effectively they have zero control over.
Speaker 3: Well, the FED always takes the world as it is,
Speaker 3: not the world that it hopes it might be. And
Speaker 3: I think you know, if you look at the candidate's proposals,
Speaker 3: the Trump site in particular, would really blow up the
Speaker 3: budget dose it over the next ten years. The Harris
Speaker 3: is a little bit more ambiguous, and so the FED
Speaker 3: knows that the fiscal stress is going to be probably
Speaker 3: sustained for quite some time, but it's probably not necessarily
Speaker 3: going to get worse than what.
Speaker 4: It is today.
Speaker 3: I mean, if you look at the Congressional budget Office,
Speaker 3: which makes projections over the next decade, They have them
Speaker 3: staying about the same level as a percentage of GDP,
Speaker 3: about six percent of GDP over the next decade. That's
Speaker 3: not good by any stretch of imagination, but it's not
Speaker 3: dramatically worse than.
Speaker 4: What we have today.
Speaker 3: So I don't think the fiscal outlook in the near
Speaker 3: term is going to be a big driver what the
Speaker 3: FED does. I think the FED is basically going to
Speaker 3: react to what they see in terms of the.
Speaker 4: Risk on the labor market side.
Speaker 5: So watching the unemployer rates the payer, all employment growth, wages, layoffs,
Speaker 5: in particular, any signs of growing weakness in the labor
Speaker 5: market are going to accelerate the rate of FED rate cuts.
Speaker 2: So let's get more than into some of the candidate's
Speaker 2: proposals on the economic side. You had a peace out
Speaker 2: in Bloomberg Opinion yesterday talking about the high tariffs proposed
Speaker 2: by former President Donald Trump. You say, high tariffs week
Speaker 2: dollar a recipe for disaster. You write, as long as
Speaker 2: the US keeps borrowing at the same pace, the policies
Speaker 2: of higher tariffs and weaker dollar are fundamentally at odds
Speaker 2: and a bigger deficit means less savings, which means the
Speaker 2: dollar would have to appreciate even more. So can you
Speaker 2: just sum this up for me in terms of why
Speaker 2: this economic posle is so off.
Speaker 4: Well, it basically wouldn't work.
Speaker 3: You know. Trump's basically proposing that I'm going to raise
Speaker 3: terris a lot and I'm going to intervene and push
Speaker 3: the dollar down in value, and that's somehow going to
Speaker 3: solve the trade deficit. But that this is what actually
Speaker 3: causes trade deficits in the first place. The reason why
Speaker 3: we have a big trade deficit is we have a
Speaker 3: shortage of domestic savings relative to domestic investment.
Speaker 4: The personal savings rate right now is running around three percent.
Speaker 3: We have a large fiscal deficit, and so you know,
Speaker 3: we're essentially spending beyond our means, and so we have
Speaker 3: to import that capital from abroad to fill that savings shortfall.
Speaker 3: And that caple from broad is in the form of
Speaker 3: a big trade deficit. So if you're president, if you're
Speaker 3: a candid Trump and become a President Trump and all
Speaker 3: of a sudden you enact all these things that are going
Speaker 3: to blow out the budget deficit even further. That's going
Speaker 3: to exacerbate the saving shortfall, and you're going to need
Speaker 3: a bigger trade deficit, not a smaller trade deficit.
Speaker 4: So the notion that the dollar would go you.
Speaker 3: Know, would would be would depreciate and the environment is
Speaker 3: probably pretty unlikely. The dollar would probably have to strengthen
Speaker 3: to generate that bigger trade deficit.
Speaker 2: There is so much debate though as to whether those
Speaker 2: higher tariffs are going to be good or bad for
Speaker 2: the economy and who actually winds up paying for it
Speaker 2: at the end, walk me through your thinking.
Speaker 3: Well, most economists are pretty uh, you know, they don't
Speaker 3: agree on we don't agree on everything, but we are
Speaker 3: one thing. The terrorists are are are bad idea generally
Speaker 3: unless you're doing it for sort of you know, for
Speaker 3: for national security kind of reasons.
Speaker 4: Because they basically distort trade.
Speaker 3: They push you away from doing the things that you
Speaker 3: have a competitive advantage from for to doing things where
Speaker 3: you're you're probably less less, less less effective. They're also
Speaker 3: bad because the end the burden of terrorists are not
Speaker 3: felt by foreign producers. At the end of the day,
Speaker 3: they're felt by domestic households. And you know what's interesting
Speaker 3: about the Trump proposals is they would be bad for
Speaker 3: the core constituency that Trump, uh, you know, has has
Speaker 3: attached him. Low and modern income houshales and support Trump
Speaker 3: would be the ones that would pay the biggest burden
Speaker 3: on these on these on these terraffs.
Speaker 1: Is there a way to blunt that impact through monetary policy?
Speaker 1: I mean, given how blunt that policy is.
Speaker 3: Not really I mean, obviously, you know, if you had
Speaker 3: higher terrorists, you'd have more inflation, and the Fed Reserve
Speaker 3: would have to take that into consideration in terms of
Speaker 3: the manitary policy paths that they chose. But you know,
Speaker 3: the FED is not going to make any decisions about
Speaker 3: this for many many months. The Fed doesn't set policy
Speaker 3: based on what might be it might happen in the future.
Speaker 3: They set policy on what's happening today, So anything, you know,
Speaker 3: first we have to sell the election. Then we have
Speaker 3: to see what the incoming administration does, and then only
Speaker 3: then would the FED start to react to that in
Speaker 3: terms of how they set the manentre policy.
Speaker 4: So that's still many months down the road.
Speaker 1: All right, well said Bill, Always great conversation. Bill Dudley
Speaker 1: is the Bloomberg Opinion, a columnist, senior advisor to Bloomberg Economics,
Speaker 1: and of course, former fed