Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Good afternoon. My colleagues and I remain squarely focused on
Speaker 2: achieving our dual mandate goals of maximum employment and stable
Speaker 2: prices for the benefit of the American people.
Speaker 3: The FED Reserve announced this afternoon it would keep interest
Speaker 3: rates steady.
Speaker 2: Today, the FMC decided to leave our policy rate unchanged.
Speaker 3: That's in spite of spiking oil prices and new market
Speaker 3: uncertainty driven by the Iran war. FED chair Jerome Powell
Speaker 3: took the podium to explain the rationale behind today's decision.
Speaker 2: The implications of events in the Middle East for the
Speaker 2: US economy are uncertain. In the near term, higher energy
Speaker 2: prices will push up overall inflation, but it is too
Speaker 2: soon to know the scope and duration of the potential
Speaker 2: effects on the economy.
Speaker 3: Bloomberg Fed reporter Amera Amokway says that the FED is
Speaker 3: essentially in weight and see mode when it comes to
Speaker 3: the conflict and the impacts that could have on the economy.
Speaker 4: Obviously, energy, oil, those are all inputs that matter for
Speaker 4: production for service producing businesses, and so if you start
Speaker 4: to see inflationary pressures sort of broadened beyond the energy sector,
Speaker 4: itself into other parts of the economy that I think
Speaker 4: would be of concern to FED policy makers, But they
Speaker 4: will also then be watching the real side of the economy.
Speaker 4: Does the spike and oil prices then have negative implications
Speaker 4: for growth, which then trickles over to the labor market?
Speaker 4: Do we start to see job losses? Do we start
Speaker 4: to see consumers pull back? Do we start to see
Speaker 4: businesses pull back?
Speaker 3: If we start to answer yes to those questions, the
Speaker 3: Fed's dual mandate of keeping prices stable and promoting maximum
Speaker 3: employment gets a lot trickier the tools it has to
Speaker 3: address inflation, like raising interest rates could make the labor
Speaker 3: market worse, and lowering rates to address unemployment could lead
Speaker 3: to higher inflation. Warton Associate Professor Peter Conti Brown puts
Speaker 3: it more simply.
Speaker 1: In so many respects, this is the Fed's worst nightmare.
Speaker 3: I'm David Gera, and this is the big take from
Speaker 3: Bloomberg News today on the show, how the FED is
Speaker 3: thinking about the Iran War, why it held rate steady,
Speaker 3: and what could shift its calculus in the months ahead.
Speaker 3: The part of the Federal Reserve that sets interest rates
Speaker 3: is called the Federal Open Market Committee. Those policymakers have
Speaker 3: a tough job. Under normal economic conditions, they have to
Speaker 3: predict where they think the economy is going by looking
Speaker 3: largely at data the show where it's been. And in
Speaker 3: the last few weeks, with the start of the Iran War,
Speaker 3: predicting where the economy is heading has gotten much much harder.
Speaker 3: To understand how the FED is approaching this challenging time,
Speaker 3: I talked to Bloomberg Fed reporter Emera Amoquay and Wharton
Speaker 3: professor Peter Conti Brown, who's a FED historian. For starters,
Speaker 3: I asked Emera what factors the policymakers considered as they
Speaker 3: decided where interest rates should be right.
Speaker 4: Now, there was a pre Iran war perspective, and the
Speaker 4: situation has obviously shifted dramatically now that we have the
Speaker 4: conflict in Iran. So after the last meeting in January,
Speaker 4: you got the sense that FED officials broadly agreed that
Speaker 4: they had policy in a good place. They cut three
Speaker 4: times towards the end of twenty twenty five. The labor
Speaker 4: market appeared to be steadying after jitters earlier in twenty
Speaker 4: twenty five, and they didn't cut in January, and you
Speaker 4: heard Chair Jerome Poue and several other policymakers saying they
Speaker 4: thought policy wasn't a good place, and some of them
Speaker 4: were really expressing concerns about the fact that inflation remains
Speaker 4: above the fed's target, and that it has been above
Speaker 4: target for five years now. Then the US and Israel
Speaker 4: launched this war on Iran, and that has really kind
Speaker 4: of scrambled the outlook and raises a lot of questions
Speaker 4: about how the FED will proceed in months ahead if
Speaker 4: we start to see their policy goals promoting maximum employment
Speaker 4: and bringing inflation back down start to come into conflict
Speaker 4: because we have seen oil prices shoot sharply higher. That
Speaker 4: has potential implications for inflation. It also has potential implications
Speaker 4: for economic growth and the labor market. And so the
Speaker 4: question now for the FED is if this energy shock
Speaker 4: that we're seeing now persist, how might they approach that.
Speaker 3: Peter, the policymakers are looking at this famous dashboard. Look
Speaker 3: at all of these economic data points, and so many
Speaker 3: of them came before Israel in the US launched that war.
Speaker 3: How does that complicate what a marriage is talking about
Speaker 3: their ability to kind of figure out where the economy
Speaker 3: is and where it's.
Speaker 5: Going Should the Iran war be temporary, should the strait
Speaker 5: of horm Us and the rapid deterioration of vessel flow
Speaker 5: through that straight and be relatively short lived, then this
Speaker 5: presents a very challenging dynamic for the FED to navigate,
Speaker 5: but it knows how to do this. Should that be prolonged,
Speaker 5: it's not just very challenging. This becomes the impossibility theorem.
Speaker 1: This is stagflation.
Speaker 5: This is you don't know which lever to pull because
Speaker 5: you exacerbate either one of your two new endates. When
Speaker 5: you have all of the dashboard lights flashing rainbow colors
Speaker 5: because you don't know exactly where we will be four
Speaker 5: weeks from now, let alone four months from now, then
Speaker 5: this creates an unbelievably difficult trajectory. Add to that, what
Speaker 5: America's saying is that we have not reached disinflation to
Speaker 5: target right. So this level of uncertainty makes policy making
Speaker 5: in any given FMC meeting playing darts with a blindfold,
Speaker 5: the FED is going to be exceedingly unlikely to sprint.
Speaker 1: Into the breach to wave off a recession.
Speaker 5: If inflation is moving up even incrementally, if it's moving
Speaker 5: up quickly, then I think it's inconceivable for the FED
Speaker 5: to prioritize unemployment over an inflationary spiral.
Speaker 3: Peter, you're a FED historian, and I'm curious what analogs
Speaker 3: you're looking to at this moment. So there is all
Speaker 3: of this uncertainty over what the FED is doing right now,
Speaker 3: what it's going to be doing at subsequent meetings. Is
Speaker 3: there a parallel that you reach for to this.
Speaker 1: Moment, Yeah, there are too. There was the oil shock
Speaker 1: of nineteen seventy three.
Speaker 5: It's important to remember that the context there, So we
Speaker 5: had an oil embargo announced by OPEK led.
Speaker 1: By Saudi Arabia.
Speaker 5: Inflation was already about nine percent of the time, so
Speaker 5: it was a different inflationary environment than we have today.
Speaker 1: But that oil.
Speaker 5: Embargo had unbelievable effects, and so it exacerbated the inflationary context. Well,
Speaker 5: recessionary consequences were also ticking up. This leads into just
Speaker 5: an unbelievably bruising decade of FED policy wherein to finally
Speaker 5: slay the dragon of inflation, Paul Volker's FMC had to
Speaker 5: trigger a recession so profound it was getting close to
Speaker 5: Great Depression territory, and indeed, until the Great recession. It
Speaker 5: was the most acute recession that we had experienced since
Speaker 5: the nineteen thirties. So that's the bad historical analog. The
Speaker 5: better one would be the late forties and early fifties.
Speaker 5: This is the time when the FED separated itself from
Speaker 5: under the Treasury's domain to a shirt for itself, more
Speaker 5: independence and setting industrate trajectories at a time when inflation
Speaker 5: looked like it was going to have a post war
Speaker 5: pop that would be very hard to eradicate.
Speaker 1: But that never happened.
Speaker 5: It never took root, and as a result, we had
Speaker 5: just extraordinary economic growth with relatively mild inflation. So we
Speaker 5: want things to look like the fifties, We fear the
Speaker 5: things are looking like the seventies.
Speaker 3: Amara, As you listened to FED policymakers in the run
Speaker 3: up to this meeting, how much was that history coloring
Speaker 3: their sense of this moment. How evident was it that
Speaker 3: they were thinking back about those two instances that Peter
Speaker 3: just mentioned.
Speaker 4: So we didn't hear from many FED policy makers after
Speaker 4: the launch of the war. We heard from a few,
Speaker 4: like a handful, talking about sort of this textbook approach
Speaker 4: to oil shocks, to energy shocks, which would say that
Speaker 4: if the shock is a short term thing, the FED
Speaker 4: should look through it. In other words, the FED doesn't
Speaker 4: necessarily need to raise rates because the FED is thinking
Speaker 4: about policy on a medium to long term outlook, and
Speaker 4: so if something is going to be short lived, you
Speaker 4: don't want to overreact to that and set policy according
Speaker 4: to that.
Speaker 3: What does it mean for the FED to look through something?
Speaker 5: When we use the metaphor of looking through, and it
Speaker 5: is a metaphor you're saying because you're saying there's some
Speaker 5: sort of tumult in front of you that you can
Speaker 5: see the end of, you can see the other side of,
Speaker 5: and the other side looks more like where we were
Speaker 5: before the tunnel than it does in the tunnel. Because
Speaker 5: if the tumult is the new normal, then there's no
Speaker 5: looking through. You have to adjust to the new normal.
Speaker 5: And that's what the FED doesn't have the luxury of doing.
Speaker 5: Are we going to see as a result of whatever
Speaker 5: is happening in the Middle East today, a fundamental reordering
Speaker 5: of the way that we do geopolitics, energy policy, macroconomic
Speaker 5: growth alliances? And if the answer to that is yes,
Speaker 5: there's no looking through, the tumult is us and that's
Speaker 5: what the FED has to adapt to.
Speaker 3: Peter, I'm curious how the FED is trying to encourage
Speaker 3: stability in the bond market at this moment. Mean, there's
Speaker 3: been so much volatility as the result of this war
Speaker 3: getting underway. What are policymakers trying to do to kind
Speaker 3: of calm things down so much as they can.
Speaker 5: I think this is one of the reasons why this
Speaker 5: is kind of a Nimer scenario. The Fed's primary tools
Speaker 5: for calmon bond markets is to assure the markets of
Speaker 5: its medium and long term credibility that no matter what
Speaker 5: happens in the world, whether we have to look through
Speaker 5: these episodic supply shocks or whether we incorporate them into
Speaker 5: our diagnosis and prognosis, the FED will be grown ups
Speaker 5: in the room to do the right thing for the
Speaker 5: long term stability of the US dollar. And those are
Speaker 5: assurances that are very difficult to make when what we're
Speaker 5: trying to predict is whether this is going to be
Speaker 5: an inflationary environment, not just because of the Iron War,
Speaker 5: but because the deterioration of norms of FED independence, or
Speaker 5: this is going to be a recessionary environment. We haven't
Speaker 5: talked about the other elephant in the room, which is
Speaker 5: whether AI will be writing us the economy on a
Speaker 5: rocket toward greater productivity and rate compression, or the white
Speaker 5: collar recession that will send unemployment rates into double digits.
Speaker 5: And given that amount of uncertainty, the only thing that
Speaker 5: the FED can do reassure bond markets is to continue
Speaker 5: to say we don't know what the right policy is,
Speaker 5: except we do know that we will find it.
Speaker 3: Coming up the challenges facing the Federal Reserve as it
Speaker 3: tries to find the right policy in the face of
Speaker 3: attacks on its independence and dissent among policymakers, and the
Speaker 3: latest developments as Jerome Powell reaches the end of his
Speaker 3: term as chair in the midst of a DOJ investigation
Speaker 3: into him and the FED, Peter looking at the crucible
Speaker 3: of the FOMC and thinking about history, do moments like
Speaker 3: this tend to lead to more unanimity among policymakers or
Speaker 3: more division. We went through this period where it seemed
Speaker 3: like FED Chair Jerome Powell had a lot of success
Speaker 3: in getting members of that committee to come on board
Speaker 3: with what he hoped the committee would do. We've seen
Speaker 3: that eroad a bit in recent meetings. Is this historically
Speaker 3: a time when the FED is more unified, when there
Speaker 3: is a large geopolitical risk like this one.
Speaker 5: You know, in the cycles of history of division and
Speaker 5: union and consensus. On the political side, we have enough
Speaker 5: data points to really see cycles, but at the FED
Speaker 5: we don't, and the reason is because we simply don't
Speaker 5: have the tradition of a lot of dissensus at the FOMC,
Speaker 5: at least formally as tallied by votes. And in that sense,
Speaker 5: this is another factor that makes the current FOMC extraordinarily
Speaker 5: difficult to predict. And that's not because we have ten
Speaker 5: central bankers who see it one way and two who
Speaker 5: see it another. That's pretty consistent over time. It's that
Speaker 5: we have the famous double descents that we have not
Speaker 5: seen for many years. That means, for those who are
Speaker 5: kind of outside that FED speak universes, that we have
Speaker 5: the consensus view, that's the policy view that commands the
Speaker 5: majority of the FMC, and then we have dissents going
Speaker 5: in both other directions. So saying you're being too restrictive,
Speaker 5: say one group, and you're being too accommodative says another.
Speaker 5: And that's what we have right now, although not in
Speaker 5: the January meeting, But in the meetings prior we had
Speaker 5: double descents, and that makes it really hard to predict
Speaker 5: what the Iran policy will mean for the FMC. Unlike
Speaker 5: in a political context, for sometimes we have these external
Speaker 5: wars creating a rally around the flag moment, there's not
Speaker 5: that same ethos because the questions are fundamentally different.
Speaker 3: Amara. We started off with you talking about how much
Speaker 3: has changed here over these last few weeks, and I
Speaker 3: look at this note, a recent note from Deutsche Bank,
Speaker 3: and that economics team rights a question that was almost
Speaker 3: unthinkable two weeks ago is now being more heavily debated.
Speaker 3: Could the FED raise rates in twenty twenty six? You
Speaker 3: talked about how the economy has shifted, the forecast for
Speaker 3: the economy have changed. How about just in terms of
Speaker 3: what market participants are expecting the Fed to do in
Speaker 3: the week's end, the weeks and months ahead.
Speaker 4: I think people are not really expecting another cut under
Speaker 4: chair Pale, whose term ends in May. But I think
Speaker 4: it's interesting because even if you look at the minutes
Speaker 4: from the January meeting, there were some officials who were
Speaker 4: already talking about hikes then, who were saying, look, inflation
Speaker 4: has been too high for too long, and we actually
Speaker 4: need to adjust what we're saying about the situation to
Speaker 4: acknowledge the facts that moves in the future may need
Speaker 4: to be higher. And so for those as Peter was
Speaker 4: talking about, those policymakers who are more concerned about inflation,
Speaker 4: you could see a world where this Iran situation, if
Speaker 4: it continues, could only heighten their concerns and maybe make
Speaker 4: them have less of an appetite to respond to any
Speaker 4: downside that we see on the real side of the economy,
Speaker 4: you know, for economic growth, for the labor market, because
Speaker 4: there are new inflationary pressures. And so I think what
Speaker 4: markets and investors are going to be listening closely for
Speaker 4: in this meeting and in subsequent meetings if this situation continues,
Speaker 4: is how Chair Poal is sort of characterizing the vibe
Speaker 4: on the committee and how he's really thinking about balancing
Speaker 4: these two risks in the months ahead. And that matters
Speaker 4: also because as it stands now, Chairpow could perhaps still
Speaker 4: be on the board even past his chair term in May,
Speaker 4: and he could still be chairing the FOMC past his
Speaker 4: chair term in May, and so I think people are
Speaker 4: still going to be looking for some signal from Chair
Speaker 4: pow in these final meetings under his chair term.
Speaker 3: Right, So, Peter Jerome Powell's tenure as FED share is
Speaker 3: supposed to end this spring, but he told reporters today
Speaker 3: that if his successor is not confirmed by the end
Speaker 3: of his term, he would serve as Chair pro tem
Speaker 3: until then. Howell also told reporters he wouldn't leave the
Speaker 3: FED Board while a Department of Justice investigation into him
Speaker 3: and the Federal Reserve is ongoing, and all of this
Speaker 3: relates to a renovation project of the Federserve's headquarters and
Speaker 3: testimony that j. Powell gave about that renovation. A few
Speaker 3: days ago, a judge blocked subpoenas that were a part
Speaker 3: of that investigation, and the DOJ has vowed to appeal that.
Speaker 3: How could all of this that legal fight influence the
Speaker 3: way the FED is handling decisions going forward and how
Speaker 3: the confirmation process for Powells successor plays out.
Speaker 5: I think the announcement that the Department of Justice is
Speaker 5: going to appeal the legal decision from the district court
Speaker 5: increased my priors from I think that there was a
Speaker 5: substantial minority probability that Share Powell would continue on as
Speaker 5: governor to now think that is likelier than not that
Speaker 5: Chair Palell is not going anywhere. And because Tom Tillis
Speaker 5: Senator from North Carolina has stayed resolute in his determination
Speaker 5: that so long as criminal proceedings are open against j Pal,
Speaker 5: there will be no confirmation hearing for his successor. But
Speaker 5: we also heard something that was from the lawyers representing
Speaker 5: in ja Palell which they told the Department of Justice
Speaker 5: that so long as this investigation is pending, jay Pal's
Speaker 5: not going anywhere, he will be staying at the FED.
Speaker 5: And as now, putting on my legal hat, I would
Speaker 5: say that is if I were asked for legal advice
Speaker 5: from the Palateam, that's exactly what I would tell them.
Speaker 1: You go nowhere, you say exactly where you are.
Speaker 5: You put yourself in an expanded legal and criminal peril
Speaker 5: should you leave. And so you stay where you are,
Speaker 5: You continue to be represented by the fed's lawyers, you
Speaker 5: continue to exercise that political coalition that's going to be
Speaker 5: plugged into the FED. And if that's true, that scrambles
Speaker 5: the governance story by a lot, and that means not
Speaker 5: only are we likely to have ja Pal's stag in place,
Speaker 5: we are also likely for the first time in the
Speaker 5: Fed's history to have you know, an Avignon pope, Two
Speaker 5: popes at the FED, two chairs, meaning that as soon
Speaker 5: as his term is up as FED Chair, it is
Speaker 5: likely to be the case that Vice Chair Jefferson will
Speaker 5: take over.
Speaker 1: For those board duties.
Speaker 5: But the FOMC, which elects its chair on an annual basis,
Speaker 5: will keep Powell in place until his successor is named. Indeed,
Speaker 5: that is what they announced in January when they held
Speaker 5: that election. And so we will have a FED Chair
Speaker 5: j Powell have the FOC, and we will have a
Speaker 5: FED Chair Philip Jefferson at the board, and we will
Speaker 5: have a raging president who doesn't like either of them
Speaker 5: and wants to do something.
Speaker 1: A third thing, and.
Speaker 5: My only advice to FED watchers everywhere is grab your
Speaker 5: tissues and grab your bucket of popcorn, because this tragic
Speaker 5: comedy is just you know, beginning.
Speaker 3: This is the Big Take from Bloomberg News. I'm David
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