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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Joining us now is the form of FED Vice Chair

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Speaker 2: Randy Kross Randy Craig to catch up with you, so fantastic,

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Speaker 2: get your thoughts on a major issue. A conversation we've

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Speaker 2: been having now over the last week or so is

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Speaker 2: whether this Federal Reserve is beginning to drift towards accepting

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Speaker 2: a higher inflation rate. Is that your sense of things

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Speaker 2: or would you push back?

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Speaker 1: So? No, I don't think that's either likely or consistent

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Speaker 1: with the Fed's communication. Just before this inflationary surge began,

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Speaker 1: there was a comprehensive review of the monetary policy framework,

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Speaker 1: and as part of that, the FED reaffirmed the two

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Speaker 1: percent inflation target. It would be very surprising and it

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Speaker 1: would not be good for the Fed's future credibility for

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Speaker 1: them in the first inflationary surge after reasserting that monetary

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Speaker 1: policy framework and that inflation target, to say well, three

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Speaker 1: percent is close enough for government work and so we're

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Speaker 1: done would mean that the next time there was an

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Speaker 1: inflationary surge with a new three percent target, and inflation

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Speaker 1: goes up to nine percent and the FED says we're

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Speaker 1: headed back down to three folks would say, last time

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Speaker 1: you said you're headed back down to two why should

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Speaker 1: we believe you now. So it's important for the FED,

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Speaker 1: and the FED has been quite consistent in communicating that

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Speaker 1: two percent is the inflation target. I don't think that

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Speaker 1: inflation has to come all the way down to two

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Speaker 1: percent before the FED starts easing, but it has to

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Speaker 1: be their preferred inflationary target measure, which is core PCEE

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Speaker 1: has to have come down much closer to two percent

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Speaker 1: and have stayed there for a while. And the other

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Speaker 1: factors in the economy that could be inflationary, particularly tightness

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Speaker 1: in the labor market, have to have adjusted themselves enough

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Speaker 1: for the FED to feel comfortable cutting.

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Speaker 3: I guess one question I have is in the markets.

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Speaker 3: He took the time back in the fall to mention

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Speaker 3: financial The market had done a lot of was work

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Speaker 3: for him. You know, treasure yields were at five percent,

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Speaker 3: equities were weak, credit spreads were a little bit wobbly.

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Speaker 3: Now all of a sudden, you have yields back to

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Speaker 3: four and a quarter percent roughly, you have equity markets

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Speaker 3: doing very well, credit spreads are very tight, and he

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Speaker 3: chooses not to mention financial conditions is that a signal

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Speaker 3: or just how he's thinking about it that I think

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Speaker 3: is confusing me and seems to be pointing to a

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Speaker 3: person who really wants to be dubvish.

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Speaker 1: So I think you've got We're at an inflection point

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Speaker 1: in the fed's policy path and fed's communications. At the

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Speaker 1: outset of this process, there were two hypotheses that interest

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Speaker 1: rates wouldn't have to go as high as they traditionally

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Speaker 1: have in the past in order to contain this inflation,

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Speaker 1: variety of reasons for that. And that interest rates wouldn't

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Speaker 1: have to stay as high for as long in order

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Speaker 1: to contain this inflation, a variety of reasons for that.

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Speaker 1: I think the first of those hypotheses has been born out.

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Speaker 1: Interest rates. The tailor rule, for example, a guideline that

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Speaker 1: central banks around the world have used to guide interstrate policy,

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Speaker 1: would have suggested at the outset of this you needed

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Speaker 1: short term registrates of nine or ten percent. We didn't

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Speaker 1: get there. Inflation says significantly subsided. But the second hypothesis

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Speaker 1: was wrong. It's going to take a longer period of

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Speaker 1: time than many of us, myself included, believed at the

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Speaker 1: outset of this for policy to do its work now.

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Speaker 1: At the outset of the process, it was clear that

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Speaker 1: interest rates had to go higher, not clear how high.

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Speaker 1: Interust rates had to stay high for a while, not

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Speaker 1: clear how long, and so everybody was agreed we at

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Speaker 1: least have to do something. We're now at the inflection

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Speaker 1: point where there will be differences of view among the

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Speaker 1: committee and therefore different communications from the various members of

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Speaker 1: the committee, and the job of the chair is to

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Speaker 1: try to maintain a consensus and direct that committee to

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Speaker 1: an outcome, which complicates his communication task as well. So

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Speaker 1: it's going to be confusing and people will, I think,

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Speaker 1: take wrong signals by hearing what they want to hear

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Speaker 1: as the tone of the messages from the various FED communicators.

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Speaker 2: Be understood, Randy, this was great. One thing we have

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Speaker 2: to do is we've got to do this again because

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Speaker 2: we've got to go My apologies about the technical connections

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Speaker 2: to Randy Qualls, the form of FED Vice chev