Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Charles Evans, former Chicago
Speaker 1: FED president. I'm so pleased to say joining us now, Charles,
Speaker 1: thank you so much for being here. I want to
Speaker 1: start with really the debate that we've been having on
Speaker 1: the show this morning, which is is the FED behind
Speaker 1: the heart curve or ahead of the curve if they
Speaker 1: cut rates in September.
Speaker 2: Well, good morning.
Speaker 3: That that is a great question, and you know, I
Speaker 3: think the Fed is in a is in an okay
Speaker 3: place right now. I think that they have spent a
Speaker 3: lot of their time indicating that they need confidence that
Speaker 3: the inflation is going to be on a sustainable path
Speaker 3: to get to two percent inflation, and I think that's
Speaker 3: a stiff performance. Bar I think back in January they
Speaker 3: were nervous that so many people thought that many rape
Speaker 3: cuts were ahead, and then the inflation path that the
Speaker 3: first quarter was bumpy. But things are they appear to
Speaker 3: be much better. The last press conference, J. Powell indicated
Speaker 3: that inflation probably gross was welcome, and you know, everybody's
Speaker 3: expecting a.
Speaker 2: Better number this morning.
Speaker 3: So I think they're in a position where they can
Speaker 3: respond to the improving inflation data. And you know, the
Speaker 3: normalization in the labor market and a bit of nervousness
Speaker 3: with the fact that unemployment has gone up. But I
Speaker 3: think it's time for them to, you know, really start
Speaker 3: talking more about how they're going to act and than
Speaker 3: actually act.
Speaker 1: You know, Charles, you have the luxury right now of
Speaker 1: not actually having to represent the Fetcher reserve, and you
Speaker 1: could talk about what your impression is of market positioning.
Speaker 1: So let's go there. The fact that the market has
Speaker 1: pretty much full confidence that the FED is going to
Speaker 1: cut at least three times, probably four times this year,
Speaker 1: one hundred basis points of rate. Because we were speaking
Speaker 1: earlier with Justin dear Cole, who basically was saying, why
Speaker 1: there is no sign that they should be cutting rates
Speaker 1: given the fact that the economy still is strong and
Speaker 1: the labor market hasn't turned over, what's the argument to
Speaker 1: go now, given that we're not seeing a negative print
Speaker 1: on a job list, on jobs creations.
Speaker 3: Well, the funds rates at a restrictive rate of five
Speaker 3: point three percent. They set that in July of last year,
Speaker 3: and inflation has come down, so by its real measure,
Speaker 3: it's only gotten tighter since they took those actions. Inflation
Speaker 3: has come down If you look at a bunch of
Speaker 3: benchmark policy rules that the FED looks at, they don't
Speaker 3: follow them necessarily. I mean, they certainly don't follow them
Speaker 3: in lockstep, but they're a guide as to where a
Speaker 3: policy likely would.
Speaker 2: Be headed, and they are far south of where we
Speaker 2: are right now. I think I saw something where John.
Speaker 3: Taylor said that his rule says that the FED should
Speaker 3: be about four percent. That's quite a long ways. J.
Speaker 3: Powell has said that the labor market is normalizing, and
Speaker 3: they seem to have more confidence that the labor market
Speaker 3: is only normalizing and not doing worse than that. Even
Speaker 3: though the unemployment rate has gone up, it's four point
Speaker 3: three percent now. Maybe the most recent increase was for
Speaker 3: some positive factors like increases in labor force, but it
Speaker 3: is increased by substantially deployment rate. Usually it does. It
Speaker 3: either goes up or it goes down, and when it's
Speaker 3: going up, it usually keeps going up. And so it
Speaker 3: would be quite sensible from a risk management standpoint to
Speaker 3: sort of take an initial action and step down somewhat
Speaker 3: from the restrictive level of five point three percent.
Speaker 4: Along with what they should be doing, there's also a
Speaker 4: matter of what they should be saying, and at least
Speaker 4: from the more hawkish members. Bowman Boston kind of pushing
Speaker 4: back saying, we need more evidence. Charles, you take this
Speaker 4: view that your fellow peers that they aren't guiding well
Speaker 4: at this moment. What would it look to be guiding better?
Speaker 4: What would you want to hear from the FOMC at
Speaker 4: this moment?
Speaker 3: Well, I think so the FED is really relied on
Speaker 3: this rhetoric that they're not about to cut rates until
Speaker 3: they have confidence, confidence that inflation is going to come down,
Speaker 3: come down sustainably, come down sustainably to two percent.
Speaker 2: The FED doesn't have a lot of.
Speaker 3: Experience with maintaining sustainable two percent inflation. We kept inflation
Speaker 3: under two percent at one of three quarters for a
Speaker 3: number of years. If that's the definition of sustainable, then
Speaker 3: I can understand why they need the restrictive stance of policy.
Speaker 2: In order to be confident.
Speaker 3: But I don't think that's what they really mean, or
Speaker 3: they should mean. And I think that the you know,
Speaker 3: the increase in the unemployment rate has got to make
Speaker 3: you a little bit nervous at five point three percent.
Speaker 3: The FED doesn't have a lot of history of being
Speaker 3: able to they don't have any history of being able
Speaker 3: to cut the funds rate at a measured pace in
Speaker 3: these twenty five basis point increments on a quarterly.
Speaker 2: Pace that the SEPs have.
Speaker 3: What you have more likely to peak funds rate like
Speaker 3: this is January two thousand and one, where all of
Speaker 3: a sudden they realized they needed to be nimble and
Speaker 3: cut by one hundred basis points within two weeks. In
Speaker 3: January two thousand and eight, where we cut by one
Speaker 3: hundred and twenty five basis points in the course of
Speaker 3: two weeks as well. And so I think it's just
Speaker 3: risk management that you would want to step off of
Speaker 3: this really quite restrictive five point three percent stance and
Speaker 3: as nimbly as possible communicate that this is just sort
Speaker 3: of a readjustment and you've still got your eyes on
Speaker 3: getting inflation down. It's just you don't need as much
Speaker 3: restrictiveness as they have in place now.
Speaker 4: Well, one of the kind of criticisms that's lobbed at
Speaker 4: the current FOMC is this idea of recency bias that
Speaker 4: they were behind when it came to try and combat
Speaker 4: inflation on the way up. So that sort of scars
Speaker 4: from that moment means that they don't cut as soon. Charles,
Speaker 4: you've been in the room where these decisions have being made.
Speaker 4: Do you think there's any credence to that argument.
Speaker 3: I think that, you know, one part people uphold and saying,
Speaker 3: you know, you need to be humble. If it needs
Speaker 3: to be humble, there's a lot of uncertainty out there.
Speaker 3: I think part of humility is being embarrassed when things
Speaker 3: didn't go the way that you thought they did. And
Speaker 3: so when inflation went up to seven percent on the PCE,
Speaker 3: and I was part of this and the committee, and
Speaker 3: I was saying, this looks like it's transitory. It's you know,
Speaker 3: it's not going to last. It's not you know, it
Speaker 3: was persistent, it was very persistent, but it has come down.
Speaker 3: It's kind of come down without unemployment going up. The
Speaker 3: playbook normally would have been, you you really need a
Speaker 3: downturn in order to get inflation down from seven percent.
Speaker 3: We'ren't two and a half percent on the PCE core PCE.
Speaker 3: That's that's remarkable, and it's because of an unwinding of
Speaker 3: the supply factors. And so I think that it is
Speaker 3: difficult to look.
Speaker 2: Past the fact that they I think they had their
Speaker 2: eyes on the ball. I think J.
Speaker 3: Powell and increasing the punts right very quickly in twenty
Speaker 3: twenty two got ahead of the curve. Certainly got on
Speaker 3: top of the curve better than the other for in
Speaker 3: central banks. But it's hard to give up on this
Speaker 3: idea that you let inflation get away from you in
Speaker 3: twenty twenty two.
Speaker 2: Gosh, start it.
Speaker 3: It just got to get it down to two point zero,
Speaker 3: and it's got to be sustainable. I think that's very aggressive,
Speaker 3: but that seems to be what they're thinking about. I'm
Speaker 3: not in the room with them, and I'm trying to
Speaker 3: understand from their communications what they really mean by the
Speaker 3: sustainable two percent, and I think they could use some
Speaker 3: clarifying on that.
Speaker 1: Charles Evans, former Chicago FED president, Thank you