Speaker 1: This is a difficult decision for this FED today, the
Speaker 1: hardest in the last twelve months by far. Joining us
Speaker 1: now to discuss it is Richard Clarity, of the Global
Speaker 1: Economic Advisor at PIMCO and former Vice chair of the
Speaker 1: Federal Reserve. Rich let's start here, How on earth do
Speaker 1: you expect them to approach this decision today? Well, I
Speaker 1: think that they're juggling a lot of competing data and
Speaker 1: competing motives, but ultimately inflations too high, and I think
Speaker 1: they will come down. We'll know in a couple of
Speaker 1: minutes that they'll come down on the side of doing
Speaker 1: a twenty five basis point high. I think if they
Speaker 1: do that, I think it'll be a dovish twenty five.
Speaker 1: I think they're going to want to preserve optionality, and
Speaker 1: almost certainly, either in the statement or the press conference discussion,
Speaker 1: will acknowledge the uncertainty and probably the increased tightening of
Speaker 1: financial condition. So I think that's where they'll land. Let's
Speaker 1: talk through it piece by piece. You've got the decision,
Speaker 1: but that's only a small part of it. As you've indicated,
Speaker 1: You've got the statement, the forecast, a news conference. Rich
Speaker 1: In the statement, there is this line here about ongoing increases.
Speaker 1: Do you expect that to disappear in about twenty five minutes?
Speaker 1: I think yeah, I lean in that direction. I think
Speaker 1: it will. I think it will. Certainly, if they want
Speaker 1: to go in the dovish twenty five direction, I think
Speaker 1: it'll disappear or be modified in some way. Rich. Do
Speaker 1: you think that that's the likely outcome? We were speaking
Speaker 1: earlier today with Betsy Duke, a former Fed governor, who
Speaker 1: said that she thinks the big surprise is going to
Speaker 1: come with a statement of economic projections where they increase
Speaker 1: them in tandem with what they said they were going
Speaker 1: to do, what seems like an eternity ago. Yeah, you know,
Speaker 1: so much has happened in three months. So much has
Speaker 1: happened in three or four days. All eyes on the SEP.
Speaker 1: That being said, Lisa, you know, sometimes Fed chairs, whether
Speaker 1: or not they be Bernanke, Yellen or Pal, can distance
Speaker 1: themselves from an SEP that they're not aligned with, depending
Speaker 1: on where the SEP lands today and the message the
Speaker 1: chair wants to send. We could see that as well.
Speaker 1: It's very finally balanced. I think only two of the eighteen.
Speaker 1: Remember lel Brand is now off the White House only
Speaker 1: two of the eighteen dots would need to shift up
Speaker 1: in order to get those the overall median dot to
Speaker 1: shift up. So I think it is very finally balanced
Speaker 1: on the projections. What would you do, Rich, if you
Speaker 1: were on the FED, what would you vote for? I
Speaker 1: would go for the twenty five. I think that inflation
Speaker 1: is too high. I think that if I think that
Speaker 1: it would be, it will be challenging to pull off
Speaker 1: a pause right here in particular. You know, the whole
Speaker 1: issue that can come up we confronted three years ago.
Speaker 1: You know, what do they know that we don't know?
Speaker 1: So I do think they'll go for the twenty five again.
Speaker 1: I enjoy doing your show thirty minutes before because we'll
Speaker 1: find out where we land. Maybe I'll do a postgame someday, Rich,
Speaker 1: we should do a post game stick around. We can
Speaker 1: do that today. I want to follow up just on
Speaker 1: the psychology of this. We talked about this in the
Speaker 1: last couple of weeks at the FED. Did they really
Speaker 1: know things we don't know about the financial system? When
Speaker 1: chem And pass sits there in that news conference, it's
Speaker 1: just under an affrom Now, Rich, does he know things
Speaker 1: that we don't know about what's happening in the banking
Speaker 1: system right now? Well level, sure, the FED directly regulates
Speaker 1: and supervises thousands of banks, that has supervisors and examiners,
Speaker 1: you know, on the grounds as it were. Not all
Speaker 1: of that goes up, you know, on a daily basis
Speaker 1: to the chair, to the governors or the vice chair.
Speaker 1: But sure, part of what part of what the Jet
Speaker 1: Fed does is that it supervises bank holding companies, So
Speaker 1: it knows a lot about the banking system for sure,
Speaker 1: an individual bank. You might need a PhD in psychology
Speaker 1: to understand some of this rich but I do wonder
Speaker 1: what the psychology if the decision is today. Do you
Speaker 1: think they look at this and have an understanding that
Speaker 1: for some people out there, the more duvish they are,
Speaker 1: the more worried. Some other people might be, well, well,
Speaker 1: that's right. And I do think Lisa and John that
Speaker 1: the reality is is that, you know, initial conditions matter.
Speaker 1: If we were several years ago and we not had
Speaker 1: this overshoot in inflation, I think the power or the
Speaker 1: the yelling or the Bernankee Fed could well could well
Speaker 1: pause at a meeting like this. But the history is
Speaker 1: what it is, which is inflation is too high. The
Speaker 1: data since the beginning of the year has been too high.
Speaker 1: And remember the Fed acted very boldly just days ago
Speaker 1: to put in place a very appropriate, but bold liquidity program,
Speaker 1: and I think they believe that that can address the
Speaker 1: immediate issues in the banking system, the so called separation principle.
Speaker 1: They'd like to use rates to address inflation and use
Speaker 1: their other tools to address financial stability concerns. How do
Speaker 1: they finesse the byproduct of this, which is a three
Speaker 1: hundred billion dollar expansion of their balance sheet? Well, I
Speaker 1: don't know if you can, Lisa finance a three hundred
Speaker 1: billion The balance sheet is actually now moving in There
Speaker 1: are different forces on the balance sheet. You have the
Speaker 1: facilities which inject liquidity. The Treasury is running down its
Speaker 1: TGA account that's adding liquidity. On the other hand, you
Speaker 1: have this reverse repurchase facility that's draining liquility, and then
Speaker 1: you have QT. So there are a lot of moving
Speaker 1: parts here. I think today will be status quo. I
Speaker 1: would be surprised if we see an adjustment in those parameters.
Speaker 1: But over time, if this liquidity provision with these new programs,
Speaker 1: then at some point they will probably have to address it.
Speaker 1: Tiffany Wilding of PIMCO came out and said that regardless
Speaker 1: of whether they go twenty five basis points or nothing,
Speaker 1: this is probably going to be the end of the
Speaker 1: rate hiking cycle. Do you agree with that? And what
Speaker 1: is going to be the justification of that? If basically
Speaker 1: we heard from if A chair J. Powell just weeks
Speaker 1: ago that they're still pretty far away from their goal, well,
Speaker 1: they are far away from their goals. I think it
Speaker 1: will be data dependent. It sounds tripe, but I think
Speaker 1: in this case it's true. One thing I would say
Speaker 1: is that whatever you thought about the tightening of financial
Speaker 1: conditions before SVB and Credit Swiss and the like, clearly
Speaker 1: we're going to have tighter financial conditions going further and
Speaker 1: historically when bank lending is impacted, as it will be,
Speaker 1: I think going forward that's going to slow the economy,
Speaker 1: and I think the Committee will take that into account.
Speaker 1: The real question is when does that start to show
Speaker 1: up in the data and on their radar screen. So
Speaker 1: what do you think he'll say if he's asked today
Speaker 1: whether the recent instability is disinflation rate? Do you think
Speaker 1: he'll address that straight on head on Jay's J J.
Speaker 1: Pale's a straight shooter. I think he will. I think
Speaker 1: I think what he would likely say to a question
Speaker 1: like that is the FED monitors broad range of indicators
Speaker 1: on financial conditions, and I think he would put it
Speaker 1: in the context or broader financial conditions, probably not wanting
Speaker 1: to single this out in particular. Rich. One thing I've
Speaker 1: said over the last couple of weeks, in fact, the
Speaker 1: last week particularly, and I'll ask this question of you
Speaker 1: as well, when they discussed the totality of the data,
Speaker 1: does that include bank stocks? Now? Bank stocks? Do you
Speaker 1: mean bank bankityan equities? Yeah, well, obviously I'm not in
Speaker 1: the meeting. I don't know. I think financial conditions come
Speaker 1: up quite regularly. Whether or not they would hone in
Speaker 1: on bank stocks, I'm not sure. Let's get to our
Speaker 1: next guest, Pre Miser, the head of Right Strategy over
Speaker 1: at TD Securities. Pre I wonder for to catch up
Speaker 1: you decision thirteen minutes away, twenty five or pause when
Speaker 1: two weeks ago it was fifty or twenty five? What
Speaker 1: a change it has? Indeed, and I think you've seen
Speaker 1: the tightening in financial conditions and expected tightening in bank
Speaker 1: lending standards, you know, but we think the market's eighty
Speaker 1: percent price for twenty five, that the FED goes twenty five.
Speaker 1: It's all about the communication beyond. But you know, beyond
Speaker 1: just looking at a sort of the dot plot, we're
Speaker 1: actually going to be looking at, how does see SEP
Speaker 1: lineup with the dot plot? You know, the economic outlook
Speaker 1: is extremely uncertain. If we get a sense of the
Speaker 1: FED reaction function, you know, how would they respond if
Speaker 1: inflation is a little high but the unemployment rate starts
Speaker 1: to rise. I think that's what I'll be watching. I
Speaker 1: think we have to be extremely number, but we do
Speaker 1: think that they're going to hike. They're going to try
Speaker 1: and separate liquidity facilities from essentially monetary policy. I do
Speaker 1: hope chap Howe sells that BTFP program. It's a very
Speaker 1: generous program, you know, I think talking about sort of
Speaker 1: removing that stigma, if any stigma exists. I hope Chapow
Speaker 1: is able to say banks access this, it's against treasuries,
Speaker 1: it's against mortgages. And here, you know, let us focus
Speaker 1: on inflation. Pray lace or I just then we're talking
Speaker 1: about Christine the Card, the ECB president earlier on today.
Speaker 1: No trade offs between price and financial stability, we will
Speaker 1: not entertain trade offs. The ECP has plenty of toes
Speaker 1: to address financial stability risks. Can you imagine chairman powers
Speaker 1: and the same thing in around about forty two minutes. Yeah.
Speaker 1: I struggle with that a little bit because how does
Speaker 1: monetary policy flow through the economy. It does throw through
Speaker 1: the banking system, and it does through essentially financial markets.
Speaker 1: When the banking system is constrained, when financial markets are
Speaker 1: sort of seizing, freezing you can use your favorite term,
Speaker 1: you know. I think then it's very hard to sort
Speaker 1: of disentangle the two. I mean, I think we have
Speaker 1: a clear inflation problem. It's not clear how sustain the
Speaker 1: banking crisis will be. So I think chappower to separate
Speaker 1: the two entirely, I think would be very risk negative,
Speaker 1: would make people get nervous that the effects going to
Speaker 1: overdo it. I'm hoping he can use the data dependence,
Speaker 1: the idea that we've got these tools but we remain watchful.
Speaker 1: I'm hoping he can sort of not sound too blase
Speaker 1: about about financial stability here. How do you translate financial
Speaker 1: instability with some sort of equivalency in rate hike. It's
Speaker 1: very hard, It's the same thing I struggled with with
Speaker 1: QT as well. These are nonlinear effects, you know, small
Speaker 1: tightening and financial conditions, I would argue, is what the
Speaker 1: FED wants through heights when it's disorderly, when it is
Speaker 1: too much, I think that's when it starts to impact
Speaker 1: the economy in fairly nonlinear fashion. QT is similar. So
Speaker 1: I actually don't like the comparison because you know it
Speaker 1: would be it's assuming some sort of linear relationship between
Speaker 1: tighter financial conditions and rate hikes. It's really when it
Speaker 1: becomes too much, so very hard to model. I think
Speaker 1: it's something we're just going to have to track. We're
Speaker 1: going to have to track things like deposit flows, lending,
Speaker 1: you know, bank lending, things like that to get a
Speaker 1: sense of how is this financial crisis sort of feeding
Speaker 1: through into the real economy. If FED share j Howard
Speaker 1: comes out indicates twenty five basis point, they're going to
Speaker 1: hike by that and there could still be additional right
Speaker 1: hikes down the pike, how much is that reprice the market?
Speaker 1: That is pretty much counting on rate cuts before the
Speaker 1: end of the year. So I think the one year,
Speaker 1: two year part can absolutely reprice because I think we
Speaker 1: have to understand there's a different threshold for the FED
Speaker 1: to stop hiking as if there is to start to ease.
Speaker 1: So I think that zero, you know, the very front
Speaker 1: end can move in my mind, the five year, the
Speaker 1: ten year, that's much more a view of where's the economy.
Speaker 1: I mean, we were in the hard landing camp even
Speaker 1: before this. Now I guess we're in a harder landing
Speaker 1: camp because now you've had that tightening in bank lending
Speaker 1: standards or you will have that. So I think the
Speaker 1: actually the long end might rally, meaning you know, long
Speaker 1: end rates might actually fall because if the FED is
Speaker 1: not going to have the flexibility to be responsive to
Speaker 1: the tightening and financial conditions, that's actually going to make
Speaker 1: things worse for the economy. So I think only the
Speaker 1: very front end is going to be extremely responsive responsive
Speaker 1: to a hawk ish FED. The long end is going
Speaker 1: to I think it a harder line. Then if you
Speaker 1: watch this tune again in Life on TV and radio,
Speaker 1: we kind of get down to a FED decision about
Speaker 1: nine minutes away. Alongside us, Premisra of TD also waits
Speaker 1: in patient lead the form of FED vice chat Richard
Speaker 1: rich Just to bring you back into the conversation, we'll
Speaker 1: be talking about how high the hurdle rate might be,
Speaker 1: the bar to kind of interest rates Rich How high
Speaker 1: do you think the bar is to cut rates at
Speaker 1: of FED. Well, I think it's higher than it has
Speaker 1: been in the last thirty years, when the FED was
Speaker 1: quite responsive when there was any rise in unemployment, and
Speaker 1: so I do think obviously I agree with Prea. I
Speaker 1: think it's not only something they will do, it's something
Speaker 1: they should do. Is to acknowledge that there will be
Speaker 1: additional tiny and financial conditions as banks add liquidity. And
Speaker 1: I think banks, either of their own choice or with
Speaker 1: the encouragement of supervisors, will be adding more liquidity, which
Speaker 1: means slower loan growth. But I also think that the
Speaker 1: FED message from ten days ago still relevant. I think
Speaker 1: they will I think they will be patient. That said,
Speaker 1: once we do start to see the labor markets often
Speaker 1: unemployment to go up as the FED projects, then we
Speaker 1: could see a pretty rapid decline and underlying inflation, and
Speaker 1: I think they would be data dependent and respond to
Speaker 1: that too. But I do think the bar has higher,
Speaker 1: Jonathan than it has been in the past thirty years.
Speaker 1: How much damage do you think has been done in
Speaker 1: the last couple of weeks, and Rich the reason I
Speaker 1: asked that, I'm very aware of how quickly things have
Speaker 1: moved in just two weeks. Two weeks ago, Chairman Poals
Speaker 1: comes off his second day of testimony on Capitol Hill,
Speaker 1: opening the door to fifty basis points and bank here
Speaker 1: we are talking about rate cuts and whether they hike
Speaker 1: or not at all today, and Rich, I'm trying to
Speaker 1: stay open minded about the prospect that maybe regulators authorities
Speaker 1: come out with a solution for the banking system and
Speaker 1: then all of a sudden we're talking about the things
Speaker 1: we've been talking about two weeks ago. Is that on
Speaker 1: the mind of these policymakers, and if it is, what's
Speaker 1: the prudent course of action for them today? Well? I
Speaker 1: do think it's on their mind. I think it should
Speaker 1: be on their mind. I think the way they'd like
Speaker 1: to see this go is by providing very out as said,
Speaker 1: very ample and generous liquidity. They think that banks can
Speaker 1: and should take advantage of that. But I think at
Speaker 1: the margin, many of the banks that we're talking about
Speaker 1: are probably going to have to slow their loan growth
Speaker 1: in order to have a more liquid balance sheet, and
Speaker 1: that will have to factor into the projections. Perhaps not
Speaker 1: at this meeting, but certainly as we go through the year.
Speaker 1: We were talking about how potentially we could see a
Speaker 1: much higher inflationary regime for a bit longer and the
Speaker 1: FED would have to go further in terms of a
Speaker 1: terminal rate. Perhaps the further in terms of eternal rate
Speaker 1: isn't as much on the table now as it was
Speaker 1: two weeks ago. But do you think that overall growth
Speaker 1: expectations need to come down because of some greater degree
Speaker 1: of structural tightening by some of these regional banks. Absolutely,
Speaker 1: you know. I think if you look at market pricing,
Speaker 1: we're not pricing in a hard landing by the end
Speaker 1: of next year, after all the cuts of the markets
Speaker 1: pricing and we're pricing and fit funds at three percent.
Speaker 1: So I would argue that the markets pricing in, you know,
Speaker 1: an early start to rate cuts, but then some soft
Speaker 1: landing by the end of next year. If you have
Speaker 1: to incorporate the lagged effects of monetary tightening, the fact
Speaker 1: that now we're going to have bank lending tightening, I
Speaker 1: think you're supposed to price in a decent chance of
Speaker 1: a recession, which means that the fat funds rate may
Speaker 1: have to go well below three percent. You know, I
Speaker 1: don't know about zero, but perhaps the fat is to
Speaker 1: go one percent two percent, and that's not priced in,
Speaker 1: Which is why I still like the long end of
Speaker 1: the treasury curve, because I think, as you know, the
Speaker 1: savings buffer of the household sector starts to come down
Speaker 1: the household sector, the business sector is going to need loans,
Speaker 1: and if the banking sector is pushing back, that's not
Speaker 1: going to happen. Rich I'd love you to weigh in
Speaker 1: on that. Do you agree with prayer there that you
Speaker 1: could see a fat funds rate that goes back to
Speaker 1: one or even maybe two percent, but even one percent
Speaker 1: after all of the discussion around a higher inflationary time, Well, well,
Speaker 1: of course you could. I think you know there are
Speaker 1: always there are probabilities involved, and and certainly you know
Speaker 1: there are scenarios where you end up. I guess I'd
Speaker 1: like to put on the table a scenario which probably
Speaker 1: would be a recession scenario according to the NBER. But
Speaker 1: we could have a rise in the unemployment rate of
Speaker 1: a point and a point in a quarter, a slowdown
Speaker 1: on GDP growth, with unemployment ending up in the floors.
Speaker 1: You know to me, that would be a pretty softish landing,
Speaker 1: even though it could technically be a recession. So I
Speaker 1: think there's a wide range of scenarios now, probably wider
Speaker 1: than we've seen in decades, and I think that's just
Speaker 1: going to be a fact of why for the foreseeable future.
Speaker 1: Rich One question Tom asks quite often every time we
Speaker 1: do this, and we miss him today. Of course he's
Speaker 1: decided to take this week off of all weeks. Tk's
Speaker 1: going to be back with this next week. We do
Speaker 1: miss him. Of course, the more I say, the more
Speaker 1: people will believe me. Right, keep just keep going, Get
Speaker 1: it again, all right, let's Rich, I'll get to the question.
Speaker 1: The question that Tom would often ask is why there
Speaker 1: isn't any descent on the committee? Is today the kind
Speaker 1: of day we would expect someone to put their hand up,
Speaker 1: Rich and just say, I don't see it this way,
Speaker 1: We need to pause? Great question, I well know, and
Speaker 1: five minutes I don't think so, because I think if
Speaker 1: there's going to be a dissent, people would telegraph it
Speaker 1: in their speeches and commentary. And Jay Pale has done
Speaker 1: a remarkable job of keeping a very diverse committee together.
Speaker 1: We could well see a dissent, but I don't think
Speaker 1: it will be today. What is the reluctance to dissent
Speaker 1: on the committee? What's behind that? Do you think? Well?
Speaker 1: Descents are people are not reluctant to dissent, especially reserve
Speaker 1: bank presidents. If you go back, really you'd have to
Speaker 1: go back to vulgar years when you actually had governors
Speaker 1: and indeed, in some cases vice chairs descending. So for
Speaker 1: variety of reasons, maybe we can discuss on a future show.
Speaker 1: Governors are are more hesitant to dissent on a monetary
Speaker 1: policy decision, but reserve bank presidents can and do dissent,
Speaker 1: and during my time there, we had dissents from from
Speaker 1: three reserve bank presidents on some rate decisions. Rich, You're
Speaker 1: absolutely welcome back anytime. I just want to throw that
Speaker 1: out there and we can discuss all about governors and
Speaker 1: the difference prea before we get to the decision, which
Speaker 1: isn't about two and a half minutes away. Any final
Speaker 1: thoughts on what we should be looking for in terms
Speaker 1: of the ruttoric, in terms of the statement, in terms
Speaker 1: of the projections, So obviously what they're going to do
Speaker 1: with with rate hikes, we're going to be watching that
Speaker 1: medium dot. I would also look at the distribution of
Speaker 1: those dots. How many are five, seventy five or six?
Speaker 1: You know, is there a hawkish bias to the distribution,
Speaker 1: and then link that the dot plot to the economic focust.
Speaker 1: If they lower the unemployment rate and they increase the
Speaker 1: inflation number, but they keep the median dot unchanged, that's
Speaker 1: a dublish reaction function. So it's really about communication going forward,
Speaker 1: you know, trying to understand the reaction function as we
Speaker 1: know that the economy is going to look very different,
Speaker 1: you know, three to six months from now. Rich just
Speaker 1: one quick one to a journalist the fivor what would
Speaker 1: you ask in that news conference in thirty two minutes?
Speaker 1: What keeps you up at night a lot at the moment,
Speaker 1: it could be literally everything you're sleeping exactly, Richard, thank you,
Speaker 1: Grey to catch up with the Richard Clouder preemisra