WEBVTT - Bill Dudley Talks 2017 Tax Cut Extension

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<v Speaker 1>Bloomberg, Audio studios, podcasts, radio news. Former New York FED

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<v Speaker 1>President Bill Dudley, writing in his new column that just

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<v Speaker 1>dropped across Bloomberg, the FED can and must at times

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<v Speaker 1>make assumptions about what politicians will do. When the Trump

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<v Speaker 1>administration's tariff and deportation policies come in to focus, that

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<v Speaker 1>outlook may become less rosy. Bill Dudley, I'm so pleased

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<v Speaker 1>to say joins us now, Bill, thank you so much

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<v Speaker 1>for being with us. Let's just talk about how a

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<v Speaker 1>FED comes up with a dot plot looking into twenty

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<v Speaker 1>twenty five without making some assumptions about what the policy

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<v Speaker 1>backdrop is going to look like.

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<v Speaker 2>I think they are going to make assumptions.

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<v Speaker 3>I think they're going to assume that the twenty seventeen

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<v Speaker 3>text cuts do get extended. So I think what Paul

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<v Speaker 3>said at the last press conference, you don't guess speculator

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<v Speaker 3>to assume, is actually contradicted by what they actually did

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<v Speaker 3>in December twenty sixteen when they did include the fiscal

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<v Speaker 3>policy students that they thought was going to be enacted

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<v Speaker 3>by the first Trump administration that was in the forecasts.

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<v Speaker 3>So I think, you know, they have to assume it

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<v Speaker 3>when it's big, when it's likely, when it's sort of

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<v Speaker 3>clear what it's going to be, and when it's priced

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<v Speaker 3>into financial markets. And I think that's true for the

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<v Speaker 3>for the extension of the tax cuts. It's not true

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<v Speaker 3>for terrorists or immigration policy, because it's very uncertain about

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<v Speaker 3>what those policies actually will be at this point.

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<v Speaker 1>Bill, do you think that that's why it's more important

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<v Speaker 1>to look at, say tax cuts than some of the

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<v Speaker 1>other policies. They could potentially have contradictory effects on inflation

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<v Speaker 1>and growth.

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<v Speaker 3>I think the real problem on terrorist is you don't

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<v Speaker 3>know how big they are, how long they're going to last,

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<v Speaker 3>what the whether it's going to be retaliation, and on deportations,

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<v Speaker 3>you just don't know the magnitude or speed of what

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<v Speaker 3>the program is going to be. And so if you

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<v Speaker 3>don't know what it's going to be, it's really hard

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<v Speaker 3>to put it into the forecast as in terms of

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<v Speaker 3>its likely effects. Well, I think the text so I

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<v Speaker 3>think the tax cut assumption is going to be in there,

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<v Speaker 3>but nothing else.

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<v Speaker 4>Well, when it comes to terrorists is September twenty eighteen,

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<v Speaker 4>Tealbook talked about the fact that in the first iteration

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<v Speaker 4>of Trump they just saw the terroriffs as a one

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<v Speaker 4>hit threat. You agree with that assessment, and do you

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<v Speaker 4>think that would still hold today for this FOMC.

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<v Speaker 3>I don't think you're gonna make any assumptions on terror

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<v Speaker 3>shick because we just don't really know what the administration

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<v Speaker 3>is going to do. I think the big difference, though,

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<v Speaker 3>the terrorists that we're done in the first Trump administration

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<v Speaker 3>were actually relatively small. The total tariff on an importse

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<v Speaker 3>one from one and a half percent of imports to

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<v Speaker 3>three percent of imports during the first Trump administration.

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<v Speaker 2>We're talking about much bigger numbers.

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<v Speaker 3>Now, we're talking about ten, twenty percent, sixty percent against China.

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<v Speaker 2>So Magatue may be much greater.

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<v Speaker 3>But we're not really sure is this just a threat

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<v Speaker 3>or is it actually going to turn out in terms

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<v Speaker 3>of substance.

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<v Speaker 5>So, Bill, what we essentially have is just then corporation

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<v Speaker 5>of tax cuts and missing out on two key pillars

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<v Speaker 5>of Trump's policy going forward, immigration and at the same time, tariffs.

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<v Speaker 5>I know that this is a sacrilegious question, so you'll

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<v Speaker 5>have to forgive me, but are the dots even useful

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<v Speaker 5>this time around?

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<v Speaker 2>Then?

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<v Speaker 3>Well, I think what's the problem with the dots is

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<v Speaker 3>you're going to have an unusually rosy FOURK because it

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<v Speaker 3>doesn't include some of the more controversial economic policies that

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<v Speaker 3>could really change the outlook with respect to growth, inflation,

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<v Speaker 3>and proctuvity. You know, higher tariffs, deportation is going to

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<v Speaker 3>be disruptive to the economy. It's going to tend to

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<v Speaker 3>push inflation up, it's going to push growth down, and

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<v Speaker 3>that's just not going to be in the forecast.

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<v Speaker 1>At this point. Bill, what's your base case for how

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<v Speaker 1>they're going to sort of telegraph some sort of pause

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<v Speaker 1>or some sort of adjustment to the process of rate

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<v Speaker 1>cuts in twenty twenty five.

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<v Speaker 2>Well, I think I'll be done in a couple of

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<v Speaker 2>different ways.

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<v Speaker 3>Number One, the number of rate cuts that they show

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<v Speaker 3>in twenty twenty five will go down from last time.

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<v Speaker 3>Last time in September, they had four ratecuts, four to

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<v Speaker 3>twenty five base point ratecuts in twenty twenty five, so

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<v Speaker 3>this time will be two or three.

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<v Speaker 2>And Second, I.

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<v Speaker 3>Think I'll talk about how inflation is a little bit sticky,

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<v Speaker 3>the economy is doing really well. You'll probably see some

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<v Speaker 3>upper revisions of the FED estimates of so called our star,

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<v Speaker 3>the neutral rate, so I think all those things together

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<v Speaker 3>will make it pretty clear that you know, January is

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<v Speaker 3>probably going to be a pause, and that's really what's

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<v Speaker 3>in the markets. Markets are very certain about December being

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<v Speaker 3>a cut, and they're pretty certain about January being a boss.

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<v Speaker 1>Bill, what's your take if you were on the FMC,

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<v Speaker 1>where would your dot be, what would you be looking

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<v Speaker 1>for for next year? And what the bigger concern is

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<v Speaker 1>inflation or weakness?

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<v Speaker 3>Well, I think the big place where I would probably

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<v Speaker 3>diverge from the consensus of.

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<v Speaker 2>The committee is on our star.

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<v Speaker 3>Right now, the media estimate or our star is two

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<v Speaker 3>point nine percent, So the Feds basically show the federal

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<v Speaker 3>funderrate going to two point nine percent in the SEP

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<v Speaker 3>not in twenty twenty five, but in twenty twenty six

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<v Speaker 3>and twenty SEP twenty seven. I'd have a higher ur star,

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<v Speaker 3>probably something in the order of three and a half percent,

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<v Speaker 3>maybe maybe a little bit of higher. So I would

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<v Speaker 3>not have as much cumulative easing of manitary policies what

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<v Speaker 3>the Fed will have, and.

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<v Speaker 1>That seems to be where the market's at right now.

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<v Speaker 1>Certainly as well. Absolutely, Former New York Fed President Bill Dudley,

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<v Speaker 1>thank you so much. For being with us,