WEBVTT - Former New York Fed President Bill Dudley Talks Rate Cuts

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

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<v Speaker 2>Now with his thoughts on this. Bill Dudley Bloomberg, opinion

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<v Speaker 2>columnist and former New York Fed President, here's my unfair question.

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<v Speaker 2>You looked at the data twenty five or fifty in September.

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<v Speaker 3>Well, I think the logic for fifty is pretty compelling.

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<v Speaker 3>The officials have basically said policies should be neutral. The

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<v Speaker 3>risks of the labor market side are equal to the

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<v Speaker 3>risks on the inflation side, and they're long away from neutral.

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<v Speaker 4>But I don't think they're going to do fifty.

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<v Speaker 3>I think that a gradual approach is what they're going

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<v Speaker 3>to pursue.

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<v Speaker 4>Today.

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<v Speaker 3>You had two fit speaker at John Williams and Chris Waller,

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<v Speaker 3>and neither of them hinted that they might go more

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<v Speaker 3>aggressively just meeting. So I think the logic for fifty

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<v Speaker 3>is pretty strong. But I think they're just going to

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<v Speaker 3>do a twenty five basis point rate cut in September.

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<v Speaker 2>If they don't do fifty, does that significantly damage the

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<v Speaker 2>economy until the next meeting.

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<v Speaker 3>I don't think so, because the market's priced in a

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<v Speaker 3>lot of raycuts between now and the end of next year,

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<v Speaker 3>and so you know, we know where headed to much

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<v Speaker 3>lower short term interest rates. All we don't know is

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<v Speaker 3>the speed in which how we're going to get there.

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<v Speaker 3>And I don't think the speed matters that much because

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<v Speaker 3>you know, if you know the FED is going to

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<v Speaker 3>cut rates a lot in the next twelve to eighteen months,

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<v Speaker 3>that gets priced into the bond market, that gets priced

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<v Speaker 3>into mortgage rates, and so the economy gets a benefit

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<v Speaker 3>of those rate cuts before those rate cuts actually materialize.

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<v Speaker 1>How much about bill do you think the FIT is

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<v Speaker 1>actually concerned about the market reaction to this? The last

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<v Speaker 1>time we had a major shift in monetary policy cycles,

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<v Speaker 1>there was a lot of talk by J. Powell about

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<v Speaker 1>financial conditions about the reaction function in the markets. Is

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<v Speaker 1>that concerned as present now as it was then?

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<v Speaker 3>Well, I think they view financial conditions as their friend

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<v Speaker 3>right now because financial conditions are easing even before they've

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<v Speaker 3>actually been forced to act, and so that reduces the

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<v Speaker 3>legs of monitary policy. In terms of how mandary policy

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<v Speaker 3>affects the economy. We've already seen long term mortgage rates,

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<v Speaker 3>for example, come down quite a bit. We haven't seen

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<v Speaker 3>the consequence of that drop up long term mortgage rates

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<v Speaker 3>for housing activity. But at least that first stage has occurred,

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<v Speaker 3>or housing is more affordable now than it was a

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<v Speaker 3>few months ago.

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<v Speaker 1>When we talk about this potential for the start of

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<v Speaker 1>a major easing cycle bill, we'd be remiss and not

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<v Speaker 1>pointing out that there are a lot of fiscal conditions

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<v Speaker 1>government fiscal government conditions that the Fed is at least

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<v Speaker 1>going to have to pay attention to, probably much more

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<v Speaker 1>than they would have had if they had started this

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<v Speaker 1>I don't know a couple of years ago here, what's

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<v Speaker 1>going that discussion like behind closed doors when they have

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<v Speaker 1>to talk about something that effectively they have zero control over.

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<v Speaker 3>Well, the FED always takes the world as it is,

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<v Speaker 3>not the world that it hopes it might be. And

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<v Speaker 3>I think you know, if you look at the candidate's proposals,

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<v Speaker 3>the Trump site in particular, would really blow up the

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<v Speaker 3>budget dose it over the next ten years. The Harris

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<v Speaker 3>is a little bit more ambiguous, and so the FED

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<v Speaker 3>knows that the fiscal stress is going to be probably

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<v Speaker 3>sustained for quite some time, but it's probably not necessarily

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<v Speaker 3>going to get worse than what.

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<v Speaker 4>It is today.

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<v Speaker 3>I mean, if you look at the Congressional budget Office,

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<v Speaker 3>which makes projections over the next decade, They have them

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<v Speaker 3>staying about the same level as a percentage of GDP,

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<v Speaker 3>about six percent of GDP over the next decade. That's

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<v Speaker 3>not good by any stretch of imagination, but it's not

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<v Speaker 3>dramatically worse than.

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<v Speaker 4>What we have today.

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<v Speaker 3>So I don't think the fiscal outlook in the near

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<v Speaker 3>term is going to be a big driver what the

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<v Speaker 3>FED does. I think the FED is basically going to

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<v Speaker 3>react to what they see in terms of the.

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<v Speaker 4>Risk on the labor market side.

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<v Speaker 5>So watching the unemployer rates the payer, all employment growth, wages, layoffs,

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<v Speaker 5>in particular, any signs of growing weakness in the labor

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<v Speaker 5>market are going to accelerate the rate of FED rate cuts.

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<v Speaker 2>So let's get more than into some of the candidate's

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<v Speaker 2>proposals on the economic side. You had a peace out

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<v Speaker 2>in Bloomberg Opinion yesterday talking about the high tariffs proposed

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<v Speaker 2>by former President Donald Trump. You say, high tariffs week

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<v Speaker 2>dollar a recipe for disaster. You write, as long as

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<v Speaker 2>the US keeps borrowing at the same pace, the policies

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<v Speaker 2>of higher tariffs and weaker dollar are fundamentally at odds

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<v Speaker 2>and a bigger deficit means less savings, which means the

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<v Speaker 2>dollar would have to appreciate even more. So can you

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<v Speaker 2>just sum this up for me in terms of why

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<v Speaker 2>this economic posle is so off.

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<v Speaker 4>Well, it basically wouldn't work.

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<v Speaker 3>You know. Trump's basically proposing that I'm going to raise

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<v Speaker 3>terris a lot and I'm going to intervene and push

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<v Speaker 3>the dollar down in value, and that's somehow going to

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<v Speaker 3>solve the trade deficit. But that this is what actually

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<v Speaker 3>causes trade deficits in the first place. The reason why

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<v Speaker 3>we have a big trade deficit is we have a

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<v Speaker 3>shortage of domestic savings relative to domestic investment.

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<v Speaker 4>The personal savings rate right now is running around three percent.

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<v Speaker 3>We have a large fiscal deficit, and so you know,

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<v Speaker 3>we're essentially spending beyond our means, and so we have

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<v Speaker 3>to import that capital from abroad to fill that savings shortfall.

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<v Speaker 3>And that caple from broad is in the form of

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<v Speaker 3>a big trade deficit. So if you're president, if you're

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<v Speaker 3>a candid Trump and become a President Trump and all

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<v Speaker 3>of a sudden you enact all these things that are going

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<v Speaker 3>to blow out the budget deficit even further. That's going

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<v Speaker 3>to exacerbate the saving shortfall, and you're going to need

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<v Speaker 3>a bigger trade deficit, not a smaller trade deficit.

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<v Speaker 4>So the notion that the dollar would go you.

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<v Speaker 3>Know, would would be would depreciate and the environment is

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<v Speaker 3>probably pretty unlikely. The dollar would probably have to strengthen

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<v Speaker 3>to generate that bigger trade deficit.

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<v Speaker 2>There is so much debate though as to whether those

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<v Speaker 2>higher tariffs are going to be good or bad for

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<v Speaker 2>the economy and who actually winds up paying for it

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<v Speaker 2>at the end, walk me through your thinking.

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<v Speaker 3>Well, most economists are pretty uh, you know, they don't

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<v Speaker 3>agree on we don't agree on everything, but we are

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<v Speaker 3>one thing. The terrorists are are are bad idea generally

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<v Speaker 3>unless you're doing it for sort of you know, for

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<v Speaker 3>for national security kind of reasons.

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<v Speaker 4>Because they basically distort trade.

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<v Speaker 3>They push you away from doing the things that you

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<v Speaker 3>have a competitive advantage from for to doing things where

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<v Speaker 3>you're you're probably less less, less less effective. They're also

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<v Speaker 3>bad because the end the burden of terrorists are not

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<v Speaker 3>felt by foreign producers. At the end of the day,

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<v Speaker 3>they're felt by domestic households. And you know what's interesting

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<v Speaker 3>about the Trump proposals is they would be bad for

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<v Speaker 3>the core constituency that Trump, uh, you know, has has

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<v Speaker 3>attached him. Low and modern income houshales and support Trump

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<v Speaker 3>would be the ones that would pay the biggest burden

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<v Speaker 3>on these on these on these terraffs.

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<v Speaker 1>Is there a way to blunt that impact through monetary policy?

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<v Speaker 1>I mean, given how blunt that policy is.

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<v Speaker 3>Not really I mean, obviously, you know, if you had

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<v Speaker 3>higher terrorists, you'd have more inflation, and the Fed Reserve

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<v Speaker 3>would have to take that into consideration in terms of

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<v Speaker 3>the manitary policy paths that they chose. But you know,

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<v Speaker 3>the FED is not going to make any decisions about

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<v Speaker 3>this for many many months. The Fed doesn't set policy

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<v Speaker 3>based on what might be it might happen in the future.

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<v Speaker 3>They set policy on what's happening today, So anything, you know,

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<v Speaker 3>first we have to sell the election. Then we have

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<v Speaker 3>to see what the incoming administration does, and then only

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<v Speaker 3>then would the FED start to react to that in

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<v Speaker 3>terms of how they set the manentre policy.

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<v Speaker 4>So that's still many months down the road.

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<v Speaker 1>All right, well said Bill, Always great conversation. Bill Dudley

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<v Speaker 1>is the Bloomberg Opinion, a columnist, senior advisor to Bloomberg Economics,

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<v Speaker 1>and of course, former fed