WEBVTT - William Dudley Talks Labor Market

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

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<v Speaker 2>Here's the big call of the last twenty four hours,

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<v Speaker 2>Former New York Fed President Bill Dudley saying this, officials

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<v Speaker 2>must cut, and they must do it now. Dudley writing

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<v Speaker 2>and Bloomberg Opinion the following. The facts have changed, so

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<v Speaker 2>I've changed my mind. The Fed should cut, preferably at

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<v Speaker 2>next week's policymaking meeting. Although it might already be too

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<v Speaker 2>late to fend off a recession by cunning interest rates,

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<v Speaker 2>dawdling now unnecessarily increases the risk. Bill joins us for more. Bill,

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<v Speaker 2>wonderful to go on this kind of journey with interest

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<v Speaker 2>rates with you, because I remember at the very start

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<v Speaker 2>of the conversation, coming out of the pandemic, you were

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<v Speaker 2>one together with the likes of Muhammad Aaleri and Larry Summers,

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<v Speaker 2>warning that there were going to be inflation pressures and

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<v Speaker 2>this Federal Reserve needs to hike. You've changed your mind, Bill,

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<v Speaker 2>And in the piece there are several points you've made

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<v Speaker 2>as to why you've changed your mind. I want to

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<v Speaker 2>pick up on what I think was the third one,

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<v Speaker 2>the labor market Bill. What's happening there that's guiding this Coal.

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<v Speaker 3>I think you can see labor market is slowing, especially

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<v Speaker 3>evident in the household employment survey, which is much weaker

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<v Speaker 3>than what we've seen in terms of payroll employment. Over

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<v Speaker 3>the last year, household employments increased by less than two

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<v Speaker 3>hundred thousand. I think the labor market, and the second

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<v Speaker 3>part of the labor market story is, of course, the

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<v Speaker 3>rise in the unemploying rate. We were at three point

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<v Speaker 3>six percent a year ago, now we're at four point

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<v Speaker 3>one percent. And these kind of rises in the unemploying

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<v Speaker 3>rate are essentially warning signs. Every time the unemploying rate

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<v Speaker 3>has gone up by more than a half a percent

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<v Speaker 3>on a three month moving average basis, the US has

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<v Speaker 3>had a recession. This is a so called SAM roll

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<v Speaker 3>right now on the sum rule basis, smoothing it three

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<v Speaker 3>months moving average zero point four to three percent increase.

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<v Speaker 3>So we're getting very very close to training the SAM rule.

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<v Speaker 3>You know, Cherry Pollo himself has pointed out the risks

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<v Speaker 3>now are very much two sided, not one sided. Inflation

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<v Speaker 3>is much more benign two point six percent for the

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<v Speaker 3>core PC to flater a year over year, and we'll

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<v Speaker 3>probably get another good reading on Friday. So I think

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<v Speaker 3>it's time to start to focus on the risk of

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<v Speaker 3>the economy, the risk of the labor market, to minimize

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<v Speaker 3>the risk of recession, which always occurs when the unemployer

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<v Speaker 3>rate goes up by more than zero point five percent

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<v Speaker 3>of three month week average basis.

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<v Speaker 2>Well, let's talk about timing. Then. This was Chairman Poal

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<v Speaker 2>in Centro Portugal, so not even a month ago. He said,

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<v Speaker 2>we have the ability to take our time and get

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<v Speaker 2>this right because the US economy is strong and the

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<v Speaker 2>labor market is strong. Based on your piece, just on

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<v Speaker 2>the timing, they might already be too late to fend

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<v Speaker 2>off a recession. Why are they miscalculating how much time

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<v Speaker 2>they have, in your opinion, even though they have acknowledged

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<v Speaker 2>what's developing in the labor market.

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<v Speaker 3>Well, I think they put not very much weight on

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<v Speaker 3>the some rule, some rules, perfect perfect track records since

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<v Speaker 3>World War two thirteen and zero. But the interview is

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<v Speaker 3>that the reason why the unemployer rate's going up is

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<v Speaker 3>because labor force is growing rapidly, So that's not as

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<v Speaker 3>disturbing as if the unemployer rate was going up because

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<v Speaker 3>people are being laid off. The problem with that story

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<v Speaker 3>is that in the nineteen seventies, we had labor force

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<v Speaker 3>growth is also extremely rapid som roll held. So I

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<v Speaker 3>think you said you want to stick with the Sam

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<v Speaker 3>rule until it's disproved that.

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<v Speaker 1>Said Klaudiassam of the Sum role has actually come on

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<v Speaker 1>and said people put too much emphasis on my son

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<v Speaker 1>role and actually backed away from using that as one

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<v Speaker 1>indicator to really end all be all. Is there anything

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<v Speaker 1>other than that that creates new urgency for.

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<v Speaker 2>This sudden pivot?

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<v Speaker 1>Really a week before the Fed's meeting.

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<v Speaker 3>Well, you know, if the FED doesn't cut in July

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<v Speaker 3>and waste of September, it's not going to have a

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<v Speaker 3>huge effect on the communist ditrectory, except the fact that

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<v Speaker 3>when the unemployment rates starts to deteriorate, the team seem

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<v Speaker 3>to be a reinforcing negative feedback loop. Job jobs are lost,

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<v Speaker 3>people pull back on spending. That leads to cuts in

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<v Speaker 3>further cuts in the employment and investment. So the striking

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<v Speaker 3>thing about the Sum rule is not just a zero

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<v Speaker 3>point five percent threshold, is the fact that every time

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<v Speaker 3>you've gone through that threshold, the unmployer rate's gone up

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<v Speaker 3>a lot. The smallest increase beyond when you go beyond

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<v Speaker 3>zero point five percent is almost two percentage points. So

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<v Speaker 3>that just tells you that once things get start to

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<v Speaker 3>unwind in a negative direction, it tends to keep going.

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<v Speaker 3>And that's why the risk here is significant.

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<v Speaker 1>Bill, your colin got a lot of attention, and in

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<v Speaker 1>large part because you were on the forefront as John

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<v Speaker 1>was mentioning of this idea that the FED would have

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<v Speaker 1>to raise rates much beyond what people currently thought at

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<v Speaker 1>the time, and that maybe even the neutral rate was

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<v Speaker 1>going to be higher than what it was in the

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<v Speaker 1>past based on the weakening that you've seen. Are you

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<v Speaker 1>rethinking that concept that inflation is going to be structurally

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<v Speaker 1>higher and that the FED is going to have a

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<v Speaker 1>harder time combating it in the future.

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<v Speaker 3>Well, if the economy slows and the unemployed right rises,

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<v Speaker 3>then the downward pressures on inflation are going to persist.

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<v Speaker 3>You know, two point six percent is really not that

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<v Speaker 3>far away from the Fed's two percent inflation objection objective,

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<v Speaker 3>and in my mind that difference is not a sufficient

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<v Speaker 3>to take a big risk of reces. So I think

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<v Speaker 3>it's time to the FED to focus on the other

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<v Speaker 3>side of its dual mandate, which is the employment side.

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<v Speaker 3>Paul has talked about the fact that the FED has

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<v Speaker 3>two objectives, inflation and employment, and I just feel like

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<v Speaker 3>the risks on the employment side are increasing to the

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<v Speaker 3>points that you want to put more weight on that.

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<v Speaker 2>But a lot of the things you can say as

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<v Speaker 2>a form of FED official that you can't say as

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<v Speaker 2>a current FED official. I'm just interested in the communication

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<v Speaker 2>of this. You can speak your mind now freely with us.

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<v Speaker 2>You can write the piece on Bloomberg Opinion. Can you

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<v Speaker 2>imagine what the fallout would be if we had the

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<v Speaker 2>current New York FED President or the chairman of the

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<v Speaker 2>Federal Reserve saying the things that you're saying right now

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<v Speaker 2>at the July FED meeting. Do you think they can

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<v Speaker 2>even do that even if they thought it well.

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<v Speaker 3>I think if chir Paul was of the view that

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<v Speaker 3>shared the same view as many, I think he would

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<v Speaker 3>probably talk to the officials and develop a consensus to

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<v Speaker 3>move in in July. I mean, I think one of

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<v Speaker 3>the interesting sort of quandaries of the fetis and right

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<v Speaker 3>now they've telegraphed it pretty clearly that they're going to

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<v Speaker 3>move in September, and it's sort of basic question. It

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<v Speaker 3>was so obvious that you need to move in September,

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<v Speaker 3>then what are you waiting for? Why not just moving July?

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<v Speaker 1>At this point, there are a lot of people who

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<v Speaker 1>are associating political reasons for why someone might want to

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<v Speaker 1>come out and say that now is the right time

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<v Speaker 1>to cut since the data hasn't weakened that dramatically in

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<v Speaker 1>the past couple of weeks, we have seen an ongoing

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<v Speaker 1>deterioration that seems consistent with a normalization bill.

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<v Speaker 2>How do you counter.

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<v Speaker 1>Those accusations that this is being done ahead of an

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<v Speaker 1>election highly contested where if the economy can keep doing okay,

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<v Speaker 1>typically the incumbent or the incumbent party does better.

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<v Speaker 3>Well. I think my experience, and I think this is

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<v Speaker 3>borne out by the Federal over Market Committee transcripts over

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<v Speaker 3>many many years, is the FED doesn't take politics and

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<v Speaker 3>consideration at all, and in terms of this timing of monetary policy,

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<v Speaker 3>ratiing cases or rate cuts, and I think that's appropriate

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<v Speaker 3>behavior by the Fed. They need to be independent, they

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<v Speaker 3>don't want it. They shouldn't be taking the election cycle

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<v Speaker 3>into consideration, and I don't think the Fed is doing

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<v Speaker 3>that here. I think the reason why the Fed is

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<v Speaker 3>delaying is I think they were surprise last year when

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<v Speaker 3>they thought inflation was coming down and it turned out

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<v Speaker 3>we got a number of disappointing reasonings readings on inflation.

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<v Speaker 3>I think they're also probably waiting because Paul probably wants

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<v Speaker 3>to achieve a full consensus, you know. I think he'd

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<v Speaker 3>like to see a unanimous boat in favor of easing.

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<v Speaker 3>And the hawks maybe, you know, there may be some

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<v Speaker 3>people were hawkish on the nefom seed. They are still

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<v Speaker 3>a bit reluctant. I think ray cuts are definitely coming.

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<v Speaker 3>I just think that at this point there's not a

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<v Speaker 3>really strong case for waiting.

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<v Speaker 2>Hi, Bill, it's quite to catch up with this. Appreciate

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<v Speaker 2>the insight. This piece yesterday and Bloomberg Opinion got a

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<v Speaker 2>ton of attention. They form a New York Fed President

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<v Speaker 2>and Bloomberg Opinion columnist Bill Dumpley that on his cove

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<v Speaker 2>to start counting interest rights