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Speaker 2: Joining us now is someone who is very familiar with
Speaker 2: these types of speeches. Saint Louis FED President James Bullard,
Speaker 2: who recently was in the media talking about his preference
Speaker 2: for one hundred basis points of rate cuts this year
Speaker 2: heading into twenty twenty six. Also a potential contender, I
Speaker 2: should say to be the next FED chair James Jim,
Speaker 2: how much are you seeing what we heard from Fedchair
Speaker 2: j Powell and seeing anything different that you would really
Speaker 2: say say if you were at that podium.
Speaker 3: He used the speech to solidify expectations for twenty five
Speaker 3: basis points in September. I was expecting that anyway markets
Speaker 3: were expecting that. He leaned into the most recent labor
Speaker 3: market report, which was very soft, and so I think
Speaker 3: that's a done deal. He didn't say too much about
Speaker 3: beyond that, what you want to do with the October
Speaker 3: meeting or the December meeting. I have set one hundred
Speaker 3: basis points, you know, going into twenty twenty six. I
Speaker 3: think you could adjust as you go forward and eventually
Speaker 3: get a full hundred basis points, but I would go
Speaker 3: slowly in order to watch the data and then on
Speaker 3: the framework review. I'm sure much earlier in the year
Speaker 3: they had targeted that they would have the framework discussion
Speaker 3: and that they would use the Jackson Hole speech to.
Speaker 4: Talk about changes to the framework.
Speaker 3: I thought those were thoughtful, and they were well presented
Speaker 3: in this speed each and they're about what many.
Speaker 4: Have speculated on.
Speaker 3: So I think they did about as much as they
Speaker 3: can on the framework side.
Speaker 5: Jim Bowler, Tom keenan good morning to you. I definitely
Speaker 5: consider this my conversation of the day. You served a
Speaker 5: lengthy term at the Saint Louis FED. You have lived
Speaker 5: the decline of a greater economy decades and decades ago
Speaker 5: in the effort to provide for a resurgence Saint Louis
Speaker 5: is a next chairman of the FED, whoever that may be.
Speaker 5: Do they have to manage for two American economies, a
Speaker 5: technology driven exceptional economy and another, to use a cliche,
Speaker 5: America flat on their back? How would a chairman execute
Speaker 5: those two Americas.
Speaker 3: Yeah, I think in commonwealth distributsha have become more salient
Speaker 3: topics for the FED.
Speaker 4: Is not that clear how much the FED can really do.
Speaker 3: Providing interest rate Paul, for the whole economy of if
Speaker 3: you change the rate structure, that affects everyone, not just one.
Speaker 4: Particular group that you might be targeting.
Speaker 3: So I think that's been something we've had to wrestle with,
Speaker 3: and I've actually done research on it myself to try
Speaker 3: to understand it better from my point of view.
Speaker 4: So I think there's been been a theme.
Speaker 3: For a while, and that'll be an important theme in
Speaker 3: Macreconowics going forward.
Speaker 5: Mike McKee's got a lot of smarter questions than me
Speaker 5: on the immediacy of this speech. I'm going to ask
Speaker 5: one more distant question, Jim Bollard. You're at Purdue executing
Speaker 5: online technology education every single day. How do you define
Speaker 5: the new technology productivity that America faces?
Speaker 6: Is it enough to save us?
Speaker 5: Is it enough to really add on to our present
Speaker 5: gdp Oh.
Speaker 4: Yeah, I think that the AI boom is.
Speaker 3: You know, it's a general purpose technology that will diffuse
Speaker 3: through the economy. I think the key question is how
Speaker 3: fast does that actually diffuse? And sometimes marcus can get
Speaker 3: ahead of themselves and think it's going to happen sooner.
Speaker 3: Sometimes they're too late and it happens faster than markets think.
Speaker 3: But nevertheless, anyway you look at it, it's an important technology.
Speaker 4: It can drive productivity and.
Speaker 3: I think in higher education is one of the places
Speaker 3: where you can really have the biggest impact. We put
Speaker 3: a AI requirement in at the Danniel School here for
Speaker 3: every single student, and we're trying to expand that to
Speaker 3: all produce. So I think that just shows you how
Speaker 3: important this technology is.
Speaker 6: Jim, it's Mike McKee.
Speaker 7: I have a question about sort of the process involved
Speaker 7: in this speech. The chairman is giving his own speech,
Speaker 7: but basically when he says it's time to maybe adjust policy,
Speaker 7: he's speaking for the entire open market. Can going into
Speaker 7: a speech like this, would he have polled everybody? Does
Speaker 7: he think he has the votes for that? Because we've
Speaker 7: been speaking with FED officials here in Jackson Hall and
Speaker 7: there's still some who were saying, well, we're not sure
Speaker 7: that we need to do that yet.
Speaker 3: Now he's going to report on the center of gravity
Speaker 3: of the committee, even though there might be people that
Speaker 3: have misgivings. At the June meeting, the committee had a
Speaker 3: median dot dot plot of two rate reductions by the
Speaker 3: end of the year, and I think the minutes, you know,
Speaker 3: suggested something that was more like fifty to fifty.
Speaker 4: But then the labor market report came in.
Speaker 3: I think that tilted the balance, so he could have
Speaker 3: he could have pushed back a little bit. I think
Speaker 3: financial markets were expecting him to come be a little
Speaker 3: bit more hawkish here and try to set up a
Speaker 3: fifty to fifty meeting where you would wait and see
Speaker 3: for the rest of the data to come in. But
Speaker 3: I don't think that's where the center of gravity is
Speaker 3: on the committee, so so.
Speaker 4: He went ahead and leaned in.
Speaker 3: I thought there was quite a bit of talk about
Speaker 3: the labor market at the at the beginning. You know,
Speaker 3: you could have could have been a little more, uh,
Speaker 3: you know, a little more emphasis on the low unemployment rate,
Speaker 3: for instance. And you know, he did come out at
Speaker 3: the end of that discussion saying, well, it's in balance,
Speaker 3: but we're a little bit nervous. So I think, you know,
Speaker 3: I think he's accurately uh describing where the bulk of
Speaker 3: the committee is.
Speaker 7: Well where would you be on this question, because we've
Speaker 7: heard FED officials for some time now saying, yes, we
Speaker 7: had poor job creation in recent months, but the unemployment rate,
Speaker 7: as you just mentioned, has been low, and they've described
Speaker 7: the labor market as solid. Now, this seems to be
Speaker 7: sort of a major shift in the way they view
Speaker 7: the outlook and the sort of balance between the two mandates.
Speaker 3: Yeah, what he did at the end of that discussion,
Speaker 3: he said, well, it's in balance.
Speaker 4: But I think the committee's nervous.
Speaker 3: I think it has been slowing, and I think the
Speaker 3: policy rate is moderately restrictive. Is maybe you know, one
Speaker 3: hundred and twenty five basis points above the neutral rate.
Speaker 3: Is that really where you want to be in this circumstance.
Speaker 3: I think the answers no, So you can come down
Speaker 3: some and still have moderately restrictive monetary policy that puts
Speaker 3: gentle downward pressure on inflation. And then the other thing
Speaker 3: I think has happened is that this argument from Chris
Speaker 3: Waller and others on the committee that the you know,
Speaker 3: you should look through the one time increase in goods
Speaker 3: prices coming from tariffs.
Speaker 4: I think that's carrying the day.
Speaker 3: And you know, then he emphasized that inflation expectations remain
Speaker 3: anchored and so on, and so I think that sets
Speaker 3: up a modest move downward in September.
Speaker 2: Jim, We've been talking with you for years and you
Speaker 2: are very focused on the discipline of economics. Right now,
Speaker 2: I'm looking at the headlines that are crossing from the
Speaker 2: past hour. The top one, of course, is a Jerome
Speaker 2: Powell fedchair saying that shifting risks may warrant adjusting rates.
Speaker 2: The second one is that Trump says that hell fire
Speaker 2: the Fed's Lisa's cook if she doesn't resign as someone
Speaker 2: who is thought to be a contender to become the
Speaker 2: next FED chair. Jim, how much does it concern you
Speaker 2: that there's this increasing political noise around the seat and
Speaker 2: exactly what the path of policy forward looks like.
Speaker 3: Yeah, I want to see due process around something like this.
Speaker 3: I want to see you know, you can make charges
Speaker 3: against anybody about anything, I guess, and you know the
Speaker 3: person can answer the charges and the dojke and decide
Speaker 3: what they want to do and so on.
Speaker 4: So I think this has, you know, should.
Speaker 3: Have longer to play out before you took that step.
Speaker 3: Otherwise it's just is kind of the wild West, and
Speaker 3: she can get reinstate later, I guess, or something if
Speaker 3: there wasn't a conviction.
Speaker 4: So seems messy to me.
Speaker 3: I think these kinds of these kinds of charges are
Speaker 3: made from time to time against various officials around Washington,
Speaker 3: but I'd.
Speaker 4: Like to see due process there.
Speaker 2: Jim, there's another question here, and aside from Governor Cook
Speaker 2: and what happens there, about how the perception of political
Speaker 2: interference handles the market reaction to Fed policy. There is
Speaker 2: this perception that that could cause the dollar a week
Speaker 2: in more because there is more of an emphasis on
Speaker 2: supporting growth and supporting the label market than containing inflation.
Speaker 2: And some people are worried that if the Fed does
Speaker 2: cut by fifty seventy five one hundred basis points, as
Speaker 2: you were talking about this past week, that you could
Speaker 2: see a move up in long end yields akin to
Speaker 2: what we saw last year. If you are on the
Speaker 2: FED currently and you did see yields along the long
Speaker 2: end moving up in response to near term FED rate cuts,
Speaker 2: what would you do?
Speaker 4: Definitely be a concern.
Speaker 3: And that's the tricky part of this business, is that
Speaker 3: you know, you think you're pursuing a dubbish policy at
Speaker 3: the short end, but the long end goes up because
Speaker 3: in place and expectations start to rise, markets start to
Speaker 3: lose confidence in the FED and the credibility of the FED,
Speaker 3: and that can go very very badly and unfortunately fairly quickly.
Speaker 3: So I think you do have to be come You
Speaker 3: do have to be careful here. But I'm saying that
Speaker 3: I think that committee has room to maneuver if they
Speaker 3: proceed carefully over the remainder of twenty five and the
Speaker 3: first half of twenty twenty six.
Speaker 5: I don't want to get out front of the debate
Speaker 5: here the moment, Jim Bullard, But what I would say
Speaker 5: to Chairman Bullard and Mike.
Speaker 6: McKee, I got to turn to you.
Speaker 5: You and I used to sit and look at the
Speaker 5: dots and go which one is Bullard?
Speaker 6: I mean, you and I do.
Speaker 7: It's fairly easy after a while to figure out.
Speaker 5: I've Chairman Bullard, is your first act if you take
Speaker 5: over the FED as your act to get rid.
Speaker 6: Of the dots?
Speaker 4: Yeah.
Speaker 3: I've threatened to well, ex President, I threatened to withdraw
Speaker 3: from the dot plot. I think this could be done better.
Speaker 3: This was discussed at the Framework conference and former chair
Speaker 3: of Bernanke gave a very nice presentation and talk about
Speaker 3: a quarterly monetary policy report, get more organized about it,
Speaker 3: put out a forecast.
Speaker 4: I think all of that could be done.
Speaker 3: I've advocated that for a long time, and so I
Speaker 3: think that would sort of clear up some of the
Speaker 3: misconceptions around the dot plot.
Speaker 6: Okay, this is really really important, Folcus.
Speaker 5: Jim Bullard made he can history i'd say, a decade ago,
Speaker 5: with a small, short paper forceful on regime change. How
Speaker 5: do we get a new FED away from the guessing
Speaker 5: and the certitude and the silly parlor game of it,
Speaker 5: Jim Bullard, with great respect, how do we get to
Speaker 5: that more disciplined study around the game of the FED
Speaker 5: and regime change?
Speaker 3: Yeah, I think regime switching is a great way to
Speaker 3: think about the global economy and the US economy and
Speaker 3: how it operates. There are relatively long periods of time
Speaker 3: where you might have let's say, slow growth and very
Speaker 3: low interest rates, and you might switch to another time
Speaker 3: with faster growth and higher interest rates. I think understanding
Speaker 3: that and understanding how that affects policy choices is a
Speaker 3: great thing to study further and talk about further in
Speaker 3: the years ahead, So you know, I think it's very
Speaker 3: salient for what the committee does.
Speaker 2: Jim Bullard, former FED President of the Saint Louis Bank,
Speaker 2: will be sticking with us.
Speaker 6: Right now.
Speaker 2: In markets, you can see a cheering across Wall Street
Speaker 2: to the opening the door to a potential rate cut
Speaker 2: next month. Potentially more. You could see equities surging higher
Speaker 2: across the different of the different indexes, led by some
Speaker 2: of the more interest rate sensitive sectors. The Russell two thousand.
Speaker 2: You can see ten year yields down now about six
Speaker 2: basis points, even more at the front end, down ten
Speaker 2: basis points. As people look to the prospect of the
Speaker 2: Fed looking through some of the inflation from tariffs. You
Speaker 2: could see the dollar markedly weaker one seventeen on the
Speaker 2: euro dollar cross up on nine tenths of a percent
Speaker 2: in terms of just the percentage rise up about a
Speaker 2: basis point. And there's a real question here about what
Speaker 2: this means going forward. City Wealth Chief Investment Officer Kate
Speaker 2: Moore is still with us, freezing a little bit because
Speaker 2: it is a little bit chilly.
Speaker 4: Here, nippy in the morning.
Speaker 2: I am curious though about what you're hearing in terms
Speaker 2: of prospective FED chairs and the politicization of the Federal Reserve.
Speaker 2: If this is a FED willing to err on the
Speaker 2: Dubvish side, does that mean something that materially is higher
Speaker 2: with respect to returns and with respect to risk appetite.
Speaker 8: Look, markets love certainty and our investors love certainty, and
Speaker 8: we want a certainty in terms of the process around
Speaker 8: making monetary policy decisions. So I don't have any insight
Speaker 8: into who might be named next FED chair, But what
Speaker 8: I will say is if there is a sense that
Speaker 8: the process is changing, I think that will lead to
Speaker 8: some pause and perhaps some volatility in the market. You know,
Speaker 8: our expectation is that regardless of who takes the next
Speaker 8: chair and what seats are filled, we'll have a continuous
Speaker 8: continuation of the process of being data dependent, of being thoughtful,
Speaker 8: of having great debate and discussion amongst the FED governors
Speaker 8: and their staff. But if that were to change, I
Speaker 8: think that would introduce volatility. I think the most important
Speaker 8: thing for us right now is to recognize that so
Speaker 8: much of the data is going to be mixed through
Speaker 8: the back half of the year, and that's going to
Speaker 8: have a huge impact I think in terms of investor sentiment,
Speaker 8: and I would suggest even more crowding in some of
Speaker 8: the favored trades.
Speaker 7: We tend to get reactions like we're seeing in the
Speaker 7: market now on a day when news breaks. But I
Speaker 7: think we're probably going to see extended rally here because
Speaker 7: people are anticipating great conscience. Does that worry you in
Speaker 7: terms of a bubble forming or some sort of excess
Speaker 7: spending that would push up inflation because of inflated asset prices.
Speaker 8: Yeah, so I have been a little bit worried actually
Speaker 8: about positioning. I feel like I've been a little bit
Speaker 8: more cautious frankly than some of my peers on the
Speaker 8: street and saying, you know, people own the highest quality
Speaker 8: parts of the market. It's quite crowded. Some of the
Speaker 8: shorts when we're looking at some of the fast money
Speaker 8: a community are very similar across the board, and we've
Speaker 8: seen people kind of shrug off concerns around economic growth
Speaker 8: or even the technological disruption across a lot of industries.
Speaker 8: We've seen significant improvements in terms of the earnings or
Speaker 8: vision ratios, City Economic surprise index has moved up, you know,
Speaker 8: and all of this together I think sets us up
Speaker 8: for you know, a little bit of weakness if there
Speaker 8: was a bad data point, or if there was a
Speaker 8: bit of a shock where there's a lot of consensus positioning.
Speaker 2: Well, Jim, Jim Bullard, I'd love to bring you back
Speaker 2: in here. How much does that concern you that sort
Speaker 2: of a bias to cut rates could cause asset price
Speaker 2: inflation to get ahead maybe of where the economy is.
Speaker 3: Yeah, equities, except for just recently, equities have been doing
Speaker 3: very well as they've digested the new trade policy of
Speaker 3: the US and how that's going to play out globally.
Speaker 4: You've got the AI boom going on, really a driver
Speaker 4: for the big tech companies, and you know.
Speaker 3: I do get concerned that things we get ahead of ourselves.
Speaker 3: Sure it's a great technology and everything, but how fast
Speaker 3: is it really going to in diffuse into actual productivity
Speaker 3: in the economy. But overall, I would say, you know,
Speaker 3: it's possible that we'll get higher productivity growth ahead and
Speaker 3: really a good outcome for the second half of the
Speaker 3: twenty twenties here, much as we had in the for
Speaker 3: the nineteen nineties.
Speaker 5: Let me talk to the chief investment strategist Purdue University
Speaker 5: right now. I'm going to do a double barrel question
Speaker 5: first to doctor Bullard and then to doctor Moore. Jim
Speaker 5: Bullard as simple as I can all of my conversations
Speaker 5: rather Jakamnagel, Bundesbank, Kate Moore, City Group and on and on,
Speaker 5: is about an elevated or persistent nominal GDP.
Speaker 6: Do you frame out that.
Speaker 5: We're going to have an animal spirit in the country,
Speaker 5: whether it's better real growth okay, inflation too much inflation, okay,
Speaker 5: real growth, But what we're talking about forward is an
Speaker 5: elevated nominal GDP.
Speaker 3: If you think real growth is going to be faster
Speaker 3: than yes, nominal gp growth would be faster even if
Speaker 3: the Fed hits it's two percent inflation target over that period.
Speaker 3: So yeah, you would see higher, faster nominal GDP growth.
Speaker 6: I mean, I look at this, Kate Moore, and it's
Speaker 6: a higher manner.
Speaker 5: And I'm really surprised by your comments. I think they're
Speaker 5: extremely important our back to the US quality, etc.
Speaker 6: But it sounds like.
Speaker 5: City Group is modeling out through all the emotion, the fear,
Speaker 5: the turmoil, the political debate.
Speaker 6: As we just sign next to the eight foot there
Speaker 6: in the lobby.
Speaker 5: The answer here is you're modeling out that will be
Speaker 5: okay and there'll be a better nominal GDP, it leads
Speaker 5: into revenue, etc.
Speaker 8: Look, I think we're going to have an okay growth environment.
Speaker 8: But one thing we keep on talking about is sort
Speaker 8: of the ke shape. Right there are the haves and
Speaker 8: have nots across all the different industries and different consumer groups.
Speaker 8: And so I don't think that we want to assume
Speaker 8: that everyone is going to experience strong growth in the
Speaker 8: second half the year. And we're seeing this, of course
Speaker 8: in the consumer companies. We're seeing this across you know,
Speaker 8: segments of different households. We're seeing this even in technology companies,
Speaker 8: those that have made the investments and are reaping dividends
Speaker 8: from it. So yes, we may have these good headline numbers,
Speaker 8: but I think as investors we have to really pay
Speaker 8: attention to what's going on beneath the surface, and I
Speaker 8: think there's an opportunity for differentiation over the next couple quarters.
Speaker 2: We are looking at a market that is moving, We
Speaker 2: are looking at headlines that are coming. And I want
Speaker 2: to bring this to you that Canada is planning to
Speaker 2: remove retaliatory tariffs on many US products in an olive
Speaker 2: branch to President Trump. And there is this feeling that
Speaker 2: maybe some of the tariffs are fungible, that we are
Speaker 2: going to see some of them removed, or US as
Speaker 2: a negotiating state.
Speaker 5: I strongly agree with what you're saying. This was sort
Speaker 5: of out there in the ether last night, but to
Speaker 5: see these headlines is another example we adjust well.
Speaker 2: And that's one of the reasons why there has been
Speaker 2: a focus on the labor market fed chair to ome
Speaker 2: Powell speaking just moments ago, really focusing on the complications
Speaker 2: for the labor market overall.
Speaker 9: While the labor market appears to be in balance, it
Speaker 9: is a curious kind of balance that results from a
Speaker 9: marked slowing in both the supply of and demand for workers.
Speaker 9: This unusual situation suggests that downside risks to employment are rising,
Speaker 9: and if those risks materialize, they can do so quickly
Speaker 9: in the form of sharply higher layoffs and rising unemployment.
Speaker 2: Some people might say that a fetcher J. Powell is
Speaker 2: coming around to the Chris Waller view of things, that
Speaker 2: there is this feeling of potentially the weakening and the
Speaker 2: labor market taking priority over inflation at a time where
Speaker 2: some of these tariffs are put on taken off, and
Speaker 2: that's what we're seeing a little bit in terms of
Speaker 2: negotiation this morning.
Speaker 5: Well, the given the take and it goes back to
Speaker 5: Kate Moore's optimism on investment in America and you see
Speaker 5: it a dollar thank you, and you putting up that
Speaker 5: wonderful dollar Looney chart and you see things adjusts and
Speaker 5: you wonder, Okay, what do we do with China, what
Speaker 5: do we do with Mexico with the produce debate? And
Speaker 5: pharmaceuticals with Europe? Guess what there may be constructive surprises
Speaker 5: is the certitude of the tariff debate gives way, It
Speaker 5: makes it easier for the next chairman, and maybe maybe
Speaker 5: I'll get out of triple levers all cash. It's fifty fifty.
Speaker 2: Oh, now is the time to definitely do it? Yeah,
Speaker 2: for sure, Jim. Before we let you get on with
Speaker 2: your day, I do want to finish there that have
Speaker 2: we seen from tariffs that there is this fungibility there
Speaker 2: that they get put on, they get taken off, and
Speaker 2: that right now the path of travel is lower from
Speaker 2: where we were maybe on April second, not higher again,
Speaker 2: And so you can look through in another kind of
Speaker 2: way some of the inflationary impact.
Speaker 3: Yeah, I mean, I think it was great to reach
Speaker 3: a pluminary deal with the EU. That's one of the
Speaker 3: bigger blocks in the world.
Speaker 4: China put on the back burner.
Speaker 3: Markets like that for now, and then you've got Canada
Speaker 3: and Mexico. Looks like we're headed toward renegotiation of the USMCA,
Speaker 3: which I think would be a fine thing to revisit.
Speaker 3: Was scheduled for twenty twenty six anyway, so it's maybe
Speaker 3: a little bit more settled than it was earlier this year,
Speaker 3: and I think markets are liking that.
Speaker 4: That's making it easier to plan. So far, so good
Speaker 4: on that.
Speaker 2: Jim Bullard, former Saint Louis FED President, joining us. Thank
Speaker 2: you so much for being with us. Maybe a future
Speaker 2: FED chair. We shall see. The process is ongoing. And
Speaker 2: City Wealth Chief Investments Officer Kate Moore, before we let
Speaker 2: you go, I just would like your take on this,
Speaker 2: the idea that we are at a moment where suddenly
Speaker 2: people are looking through the inflationary ramifications of tariffs. Are
Speaker 2: you seeing the same kind of thing? And that's appropriate
Speaker 2: that this isn't nineteen seventies. This is a different shock
Speaker 2: that usually is a demand shock in the end.
Speaker 8: Look, I will say people have been looking through the
Speaker 8: inflationary impact of terriffs for the entirety of the summer.
Speaker 8: At this point, there's been an enormous roller coaster ride
Speaker 8: in terms of expectations for end tariffs. But what I
Speaker 8: will say is this, you know, even if we're at
Speaker 8: a lower rate, I'm just going to say fifteen percent
Speaker 8: effective tariffs relative to where expectations were in the beginning
Speaker 8: of April. I think we have to keep our eye
Speaker 8: on the sectoral teriffs and this has potentially some of
Speaker 8: the biggest impact for overall earnings. And those are sticky,
Speaker 8: we know, and are likely to endure through multiple different administrations.
Speaker 8: So you know, this a give and take between some
Speaker 8: of our trading partners around the reciprocal tariffs we're watching
Speaker 8: that it's very hard to trade around it. But I
Speaker 8: will say the sectoral tariffs are going to be very
Speaker 8: important for our outlook.
Speaker 6: Stay with us.
Speaker 5: More from Bloomberg Surveillance coming up after this.
Speaker 1: This is the Bloomberg Surveillance podcast. Listen live each weekday
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Speaker 2: Well, let's take a listen to what Fedchara Jerome Powell
Speaker 2: had to say about tariffs and what the impact is
Speaker 2: on the economy.
Speaker 4: Take listen.
Speaker 9: The effects of tariffs on consumer prices are now clearly visible.
Speaker 9: We expect those effects to accumulate overcoming months, with high
Speaker 9: uncertainty about both timing and amounts. The question that matters
Speaker 9: for monetary policy is whether these price increases are likely
Speaker 9: to materially raise the risk of an ongoing inflation problem.
Speaker 2: What you could see is the response is rip roaring
Speaker 2: in markets, with equities surging, yields plunging on the front end,
Speaker 2: yield curve steepening at a dollar a weeker Pimpko global
Speaker 2: economic advisor and former FED Vice chair Rich Clarita joining us.
Speaker 2: Now and Rich, what's your take on what we just
Speaker 2: heard from FED share j Powell?
Speaker 10: Well, I think the share certainly intended to open the
Speaker 10: door pretty wide to cutting in September. Importantly, Lisa, he
Speaker 10: spent a lot of time on balance of risk, which
Speaker 10: is what policy makers do, but at the two key
Speaker 10: junctures he highlighted the balance of risk to the labor
Speaker 10: market is to a weaker labor market, and he basically
Speaker 10: indicated that the balance of risk to higher inflation doesn't
Speaker 10: appear to be a first order concern in terms of
Speaker 10: persistent inflation. So I think the message was they think
Speaker 10: they're going to cut in September, we get some more data,
Speaker 10: and the markets every acted to that.
Speaker 2: How much do you think that this is partly to
Speaker 2: maintain the Fed's credibility, not necessarily with respect to the president,
Speaker 2: but that right now, if they get it wrong on
Speaker 2: the labor market front, that it is that much more
Speaker 2: pernicious based on some of the job owning by what
Speaker 2: we hear from the President.
Speaker 10: Well, yeah, I mean, as the chair said in the remarks,
Speaker 10: it's a curious kind of balance in the labor market.
Speaker 10: The payroll employment growth has been very, very weak in
Speaker 10: the private sector, but the unemployment rate has not gone up,
Speaker 10: and so they are really focused on the balance of risk.
Speaker 4: Look, the FED has a dual mandate.
Speaker 10: It's costly to let inflation move higher and stay there,
Speaker 10: but it's also costly to have a recession with the
Speaker 10: rise of the unemployment. And I think, Lisa, you're correct
Speaker 10: they are tilting in that direction.
Speaker 4: Now.
Speaker 2: It feels like a very different Jackson Hole. And this
Speaker 2: is something that we've been talking about with all of
Speaker 2: our guests today, Rich that people have come on and
Speaker 2: said there is a different tone about central banking independence
Speaker 2: and a question of how to communicate at a time
Speaker 2: of such political interference. What's your sense of where that
Speaker 2: was in the speech that we just heard from Fedchair
Speaker 2: J Powell.
Speaker 10: I think the approach the Chair took was to really
Speaker 10: focus front and center Lisa on the dual mandate that's
Speaker 10: assigned by Congress maximum employment and price stability, and the
Speaker 10: Chair gave a very reasoned and thoughtful analysis and discussion
Speaker 10: of how they're balancing the dual mandate risks.
Speaker 4: And I think that's the j. Powell message to the
Speaker 4: issue of FED independence.
Speaker 10: We have an assignment from Congress, and this is what
Speaker 10: we're doing to achieve it.
Speaker 2: At this point, we also are dealing with the headlines
Speaker 2: that are coming out about FED Governor Lisa Cook, where
Speaker 2: at the same time that Jerome Powell was giving his speech,
Speaker 2: President Trump came out with this truth post saying that
Speaker 2: he will fire Lisa Cook if she doesn't resign. We
Speaker 2: did hear reports that in the Jackson Lake Lodge and
Speaker 2: the lobby that James Fishback was screaming at so Cook
Speaker 2: that why did she commit mortgage fraud? What's your take
Speaker 2: on what this does in terms of both the FED
Speaker 2: composition but also just the ability to be clear minded
Speaker 2: about making FED policy.
Speaker 10: Well, obviously understand just looking at the headlines that you
Speaker 10: mentioned myself and don't know the details or the facts
Speaker 10: in this particular situation, but clearly we're in an environment
Speaker 10: where FED independence is under scrutiny. And my conviction is that,
Speaker 10: notwithstanding all of the very relevant factors that you mentioned,
Speaker 10: that the Fed's is going to keep doing keep doing
Speaker 10: his job.
Speaker 5: Richard Claire to Tom Keene here, thank you so much
Speaker 5: for joining.
Speaker 6: U's very valuable.
Speaker 5: I've got two tasks I want to take here that
Speaker 5: I think are important. You recently said that what matters
Speaker 5: is the institution that this chairman and any future chairman
Speaker 5: has to protect the institution. What's the day one first
Speaker 5: mandate to protect the institution for the next chairman?
Speaker 10: Well, I think first and foremost it's to have in
Speaker 10: place a plan and communication that will deliver expectations of
Speaker 10: price stability. I think the chair was right today to
Speaker 10: emphasize that the FED has to focus on getting price stability,
Speaker 10: because that's going to deliver the ability to deliver maximum employment.
Speaker 10: I've also written Tom that the FED is sort of
Speaker 10: a complex and cumbersome institution with nineteen folks around the
Speaker 10: table and the Reserve Bank presidents. But I do think
Speaker 10: that is a strength right now of the institution.
Speaker 5: Right Well, this is really important because it's as fractiiced
Speaker 5: as a meeting of the bond team at Pimco. In
Speaker 5: the middle of the speech, Powell channeled a few years
Speaker 5: ago at PIMCO the new normal for a moment, I thought.
Speaker 5: Mohammed Ilarian persued it in to write the speech, What
Speaker 5: is your optimal new normal for the FED? Which Powell
Speaker 5: mentioned today? What's the best new normal for the next FED?
Speaker 10: Well, I think a new normal would be inflation moving
Speaker 10: down towards the two percent target, which would let the
Speaker 10: next BEED chair cut rates down towards a neutral level.
Speaker 10: You know, Pimco in twenty fourteen we rolled out the
Speaker 10: idea of a new neutral and we've been operating in
Speaker 10: that new neutral world now for more than a decade,
Speaker 10: and so I think well anchored inflation expectations, getting tariffs
Speaker 10: in the rear view, Mirr would allow the FED to
Speaker 10: cut rates by probably one hundred and fifty basis points
Speaker 10: from here and achieving that ultimate soft landing. So I
Speaker 10: think that would be a good new normal destination for
Speaker 10: the next FED chair.
Speaker 2: What risks are there to that given what we're seeing
Speaker 2: with the dollar, given the fact that we really have
Speaker 2: a very high level of uncertainty around which tariffs are
Speaker 2: going to stick and how much is going to get
Speaker 2: past along to consumers.
Speaker 10: Sure, and I think the Chair was right to point
Speaker 10: out that we are seeing evidence of tariffs showing up
Speaker 10: in the price indexes for imported goods, but that's been
Speaker 10: offset to extent with the decline in services inflation. Again,
Speaker 10: I think where they are focused is to make sure
Speaker 10: that what is an inevitable increase in the price level
Speaker 10: from tariffs does not over time result in persistent inflation.
Speaker 10: And I think the speech today addressed their thinking right now,
Speaker 10: which is that their baseline is that that will not happen,
Speaker 10: which will give them the room possibly in September, to
Speaker 10: cut rates.
Speaker 5: Yeah, Lisa, I think it's important to mention within the
Speaker 5: market check that the market is putting on steam. Here
Speaker 5: an hour after the beginning of the speech and Mike
Speaker 5: McKee's bombshell headlines a Dow lifting up. I'm not told
Speaker 5: I can't leave Jackson Hall unless Dow goes up a
Speaker 5: thousand points.
Speaker 6: Well, I'm getting pretty close to you.
Speaker 2: It sounds like you're going to be hiking for maybe
Speaker 2: another six hours and then all of a sudden not
Speaker 2: so much rich. I do want to know, though, about
Speaker 2: what this does in terms of the currency ramifications and
Speaker 2: where your preference lies in terms of the good investment backdrop,
Speaker 2: because what we heard from fetcherg is so vastly different
Speaker 2: from what we heard from Joakim Novel of the German
Speaker 2: Central Bank, where he said we have to focus on
Speaker 2: inflation and right now that is more concerning to them
Speaker 2: than trying to support growth by cutting rates or being stimulative.
Speaker 2: The fact that that is the framework there and it
Speaker 2: is such a different framework here, does that make you
Speaker 2: want to invest in Europe a little bit more?
Speaker 10: Well, you know, I think one of our themes at
Speaker 10: PIMCO is that we're in a world where taking advantage
Speaker 10: of a global opportunity set makes sense. Also, we're in
Speaker 10: a world where makes sense to focus on valuations and
Speaker 10: without getting into particular markets or securities. There have been
Speaker 10: some pretty big divergencies between valuation in the US and Europe,
Speaker 10: especially in inequity markets. Also, you know, the Europeans are
Speaker 10: much closer to their two percent target than is the
Speaker 10: FED because from your point of view, the tariffs are
Speaker 10: really a disinflationary force. So we're at different points in
Speaker 10: the rate cycle, and that does open up some good opportunities.
Speaker 5: Richard Clarita, you are definitive in the mathematics, the modern
Speaker 5: mathematics of our economics. Then you know, we talk about
Speaker 5: a new framework and it's a lot of job boning
Speaker 5: about process.
Speaker 6: Maybe it's what are we going to do with the dots?
Speaker 6: What are we going to do with the.
Speaker 5: Mathematics of modern economics?
Speaker 6: Forward? Is it diminished after all this turmoil?
Speaker 10: You know, you know, Tom, you and I over the
Speaker 10: years decades now, I've talked about that a number of times,
Speaker 10: and my thinking continues to be the mathematics, the models,
Speaker 10: including my own, our tools. They're a starting point for
Speaker 10: analysis and discussion, but they're not They're not handcuffs, nor
Speaker 10: are they the destination.
Speaker 4: And certainly, you know.
Speaker 10: The last five years have been unusual with a pandemic
Speaker 10: and all the rest. But I continue to believe that
Speaker 10: models in math are our tools, not handcuffs.
Speaker 5: My goal right now, Rich is to get you on
Speaker 5: the short list, is to be the next chairman.
Speaker 6: So let's talk tariffs here.
Speaker 5: What is the clarita mathematics of Trump tariffs?
Speaker 10: Well, as Mike McKee said, they are raising a heck
Speaker 10: of a lot of revenue, and I would agree with.
Speaker 6: My Washington there you go.
Speaker 10: I think I think Washington may very quickly get hooked
Speaker 10: on the two or three hundred billion dollars a year
Speaker 10: in tariff revenue, especially if you know the initial cost
Speaker 10: of raising that revenue is in the rearview mirror, which
Speaker 10: which I think I expect to be the case down
Speaker 10: the road.
Speaker 6: Look, we're in.
Speaker 4: A different regime, you know.
Speaker 10: We talked at PIMCO in June about an era of fragmentation,
Speaker 10: and these trends have been accelerating and the destination for
Speaker 10: the global trading system and global economy is going to
Speaker 10: be very different in five years than it was in
Speaker 10: the thirty years of globalization. So I think to be
Speaker 10: continued is the way I would answer your question.
Speaker 2: He's running, Is that what you think? I know?
Speaker 6: Bullets running?
Speaker 5: Yeah, I think by the time we get done on
Speaker 5: the show today, we're going to have Tracy Alloway, right.
Speaker 2: I think that maybe we'll find out, But I am
Speaker 2: we will. She's sitting here with us. I'm sure, she says,
Speaker 2: I bag Rich. I am curious though, going forward this
Speaker 2: idea of how inflationary tariffs could or couldn't be given
Speaker 2: the fact that this is a new world order. And
Speaker 2: we were talking with Adam Posen of the Peter S
Speaker 2: Constitute earlier, and he was talking about how he sees
Speaker 2: inflation as having nodes of the nineteen seventies and potentially
Speaker 2: being really pernicious. Why do you not necessarily see that?
Speaker 2: Why are markets more sanguine on that risk?
Speaker 10: Well, I think simply because the nineteen seventies we're a
Speaker 10: very serient experience for the current group of policymakers who
Speaker 10: lived through it, and I think there were some important
Speaker 10: lessons learned. And one lesson learned is high and persistent
Speaker 10: inflation is very costly to the economy. And I think
Speaker 10: politicians learn that as well, and so I think that
Speaker 10: central banks have earned a lot of credibility. The under Vulcar,
Speaker 10: under green Span, under pass fed chairs in the US
Speaker 10: and abroad, and I think that expectations of inflation, we're
Speaker 10: sort of in a world in which the bomb markets
Speaker 10: at least think that over a five year period, the
Speaker 10: FED is going to do whatever it takes to get
Speaker 10: inflation down what I call two points something. And I
Speaker 10: think that's an important victory that central banks are still
Speaker 10: benefiting from, and I would expect that and certainly hope
Speaker 10: that will continue.
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