Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Showing us now the former vice chairman of the Federal
Speaker 2: Reserve System with pimcoh and.
Speaker 3: Of course Forever herder of cats.
Speaker 2: At Columbia University within their Department of Economics.
Speaker 3: I've got it's going to be a four hour.
Speaker 2: Conversation and we're only doing it a short block this
Speaker 2: time with the Vice Chairman, Clarita, but we'll make it
Speaker 2: a much longer conversation next time. I want you to reaffirm,
Speaker 2: recapitulate your Economist article of seven eight, nine months ago
Speaker 2: where you shook the industry by saying, forget about two
Speaker 2: point zero zero percent, it's going to be some number higher.
Speaker 3: Revisit that right now.
Speaker 4: Well, thank you, Tom, and always great to be on
Speaker 4: the show, especially in studio.
Speaker 3: Yeah.
Speaker 4: In that essay, I highlighted that that I thought the
Speaker 4: pal FED and really global central banks we're really aiming
Speaker 4: to get inflation down to what I called two points something,
Speaker 4: and the idea was inflation was up to five, six
Speaker 4: or seven at the peak, and the goal would be
Speaker 4: to get it in the zip code of the inflation target.
Speaker 4: But in terms of dealing with the last mile to
Speaker 4: let the economy sort of get to the last mile
Speaker 4: on its own without another leg up.
Speaker 5: In rate hikes.
Speaker 4: And that's what I think we're seeing in the US
Speaker 4: and really around the world.
Speaker 3: Is the FED restrictive? Now?
Speaker 2: The polarity of market economists we speak to is there's
Speaker 2: a select group saying, you know what, they could go
Speaker 2: up further and then come down, and those others saying,
Speaker 2: stop it. They're way above the real rate, bring it
Speaker 2: down now.
Speaker 3: Which is it?
Speaker 4: They think they're restrictive. I think they're restrictive. I think
Speaker 4: there can be a debate on how restrictive. The Fed's thinking,
Speaker 4: which I think makes sense Tom, is that the longer
Speaker 4: they keep rates here, and importantly, the longer they signal
Speaker 4: they're going to keep rates here, they will become more restrictive.
Speaker 4: And so yes, I'm certainly in the camp that they've
Speaker 4: done enough and the real question is how long do
Speaker 4: they have to keep rates at this level?
Speaker 1: Richuel, Tom and I will speak to people both in
Speaker 1: academia and in practice that says the FED should.
Speaker 5: Be cutting now.
Speaker 1: If you look at the real time data, inflation is
Speaker 1: maybe not whipped, but we're pretty darn close, and we
Speaker 1: should be cutting rates now.
Speaker 5: How do you think about that.
Speaker 4: If I were still in the building, I would not
Speaker 4: be in the camp to be cutting now. It certainly
Speaker 4: looked like that was feasible coming into the year, but
Speaker 4: you know, since the beginning of the year, the inflation
Speaker 4: numbers have been going in the wrong direction. And also
Speaker 4: I think that especially, I think what's relevant here is
Speaker 4: an element of risk management. So I think there is
Speaker 4: path dependence. The fact that the last three years inflation
Speaker 4: has been well above target. I think it makes it
Speaker 4: a harder call to cut preemptively. So I do think,
Speaker 4: you know, sometimes central banks say they're data dependent, and
Speaker 4: they're not. I do think the pal FED now is
Speaker 4: data dependent, and I think they're ready to cut if
Speaker 4: the inflation data starts to proceed as they expect.
Speaker 5: How do you think this FED is looking at the
Speaker 5: labor market?
Speaker 1: Tom and I we kind of throughout this term it
Speaker 1: feels like we're at full employment. Everybody who wants a
Speaker 1: job kind of has a job.
Speaker 5: Wages are going on at pretty reasonable pace. How do
Speaker 5: you think the FED looks at the labor market today.
Speaker 4: I think they see a labor market that is robust
Speaker 4: by a variety of measures, not just the unemployment rate,
Speaker 4: but other indications, and that's a good thing. Indeed, I
Speaker 4: think one of the first speeches I gave is Vice
Speaker 4: chairs I made the point, you know, the FED is
Speaker 4: not targeting wage inflation. It actually likes it when folks
Speaker 4: get a nice raise, but raises have to be consistent
Speaker 4: with the inflation target. And you know, we've gotten some
Speaker 4: good news on productivity in the last year. Productivity growth
Speaker 4: is now around two percent, and two percent productivity growth
Speaker 4: with four percent wage increases, if sustained, gets some pretty
Speaker 4: close to where they want to be. So I don't
Speaker 4: think there's a lot of adjustment required in the labor market.
Speaker 3: From here.
Speaker 2: You're joining us right now, Richard Clarida from a vice
Speaker 2: chairman of the FED, and of course with Columbia University,
Speaker 2: you're a certain kind of monetary economist. Of course with DSG,
Speaker 2: with DSGE, with Jordi Gally, and I think of megdund
Speaker 2: decaih Over at the London School of Economics, coming from
Speaker 2: a totally different world. Megnan got Lord Desai got so
Speaker 2: upset about our fiction of equilibrium that he wrote a
Speaker 2: book about it two.
Speaker 3: Thousand and eight, two thousand and nine.
Speaker 2: In d SGE, there's a respect for vulrus in some
Speaker 2: form of normal equilibrium. How can we measure equilibrium now
Speaker 2: if we don't have a clue what productivity is doing.
Speaker 3: I just don't buy it.
Speaker 4: Well, I think we measure it with pretty big error, Tom,
Speaker 4: And you're absolutely right that not just productivity, but a
Speaker 4: lot of inputs into theoretical DSGE models are star term premium,
Speaker 4: equity premium are all unobserved and measured with air. So
Speaker 4: I always thought, and I've said this on your show,
Speaker 4: and I've said this in the halls of the FED.
Speaker 4: You know, models are a place to start, but not
Speaker 4: to end the conversation. And in particular, you know folks
Speaker 4: would criticize s DSG that they're three equation models. Well,
Speaker 4: I think every economy needs to have at least three equations,
Speaker 4: but there are a lot more so, Tom, it's a
Speaker 4: starting point, but it's not a destination to get to
Speaker 4: the end.
Speaker 2: The two hundred and fifty PhDs whatever it is. Fat
Speaker 2: least they've all studied.
Speaker 3: Clarida, Gally, Girtler, the rest of it.
Speaker 2: I get it. They've studied this stuff. Yeah, isn't germane
Speaker 2: right now? Our listeners say You've got to be kidding me.
Speaker 2: After the shock of a pandemic, Yeah, a triple stimulus,
Speaker 2: throw the equations out. Does Chairman Paul have equations now
Speaker 2: that are effective, that are that have some form of use.
Speaker 4: My sense, obviously from public comments of not only the
Speaker 4: chair but the committee, is that they've understood Tom for
Speaker 4: some time that the shock was sufficiently unusual and substantial
Speaker 4: that they need they can, and they are relying less
Speaker 4: on models and more on the way the data evolves.
Speaker 4: You know, Tom, on one hand, you know, the models
Speaker 4: were telling them that to get inflation down from five
Speaker 4: and a half to two points something, they need to
Speaker 4: have a big increase in the unemployment rate. And both
Speaker 4: Governor Waller, Charipell and others said, look, the economy may
Speaker 4: be different this time. We don't have to assume a
Speaker 4: big cratering in the labor market, and that was actually
Speaker 4: a positive device.
Speaker 2: I can't say enough, Paul, how I agree with this?
Speaker 2: And then this is Paul Powell's been hit like a pinata.
Speaker 2: Powell led saying, do we really trust these equations?
Speaker 3: And Clarida who.
Speaker 2: Invented the equations in Colombia, you know Sti Stiglitz.
Speaker 3: They got their equations.
Speaker 2: Some of them are real simple like Stiglitz engrossmen and
Speaker 2: others like Clarina Ed's Greek to me, But the answer
Speaker 2: is do they matter right now?
Speaker 3: And Powell's let on this.
Speaker 1: I know, and Tom, one of the key issues for
Speaker 1: a lot of folks is the consumer here. I mean,
Speaker 1: you know, there's a tale of two cities, if not
Speaker 1: more out there with the US consumer.
Speaker 5: A lot of folks are really struggling.
Speaker 1: Particularly they don't own assets, whether it's real estate or
Speaker 1: you know, stocks or.
Speaker 5: And things like that.
Speaker 1: And how does the FED think about the consumer here?
Speaker 1: How did they gauge how the consumer's do they look
Speaker 1: at the earnings from Walmart?
Speaker 5: I mean, what do they do? Well?
Speaker 4: The FED staff has devotes a lot of resources to
Speaker 4: the consumer, not only at the aggregate level what is
Speaker 4: total consumption, but also increasingly during the time I was there,
Speaker 4: focusing on the on the distribution in both income and
Speaker 4: consumption distribution across the population. And there are a lot
Speaker 4: of things that can you can monitor, in particular how
Speaker 4: many households are laid in their car payments or credit
Speaker 4: card payments, and so certainly, certainly the FED spends a
Speaker 4: lot of time on the bottom up analysis of the consumer.
Speaker 1: So again we came into the year, Richard, I mean
Speaker 1: the market was discounting six rate cuts, an now we're
Speaker 1: down to lesson to I mean, the market has no
Speaker 1: idea what's going on out there? Is the fed From
Speaker 1: your perspective, are they happy to say, Hey, we've done
Speaker 1: a lot of work here, We've raised rates, we had
Speaker 1: a major impact on this economy. Let's just wait and
Speaker 1: see how our work plays out. Is that kind of
Speaker 1: where we are?
Speaker 5: Do you think that's exactly where they are?
Speaker 4: In fact, that the chair got that question at the
Speaker 4: press conference, and I'm paraphrasing, but his answer was along
Speaker 4: the lines of, we judge that policy is restrictive, and
Speaker 4: we judge that if we keep it here long enough,
Speaker 4: it will be sufficiently restrictive. So that's definitely their mindset.
Speaker 4: Their data dependent in terms of when the cut and
Speaker 4: how many cuts are going to happen, but they certainly
Speaker 4: judge that policy is restrictive here and they just have
Speaker 4: to keep it here.
Speaker 3: Well.
Speaker 2: One of the great moments now in economics, Professor Clarita
Speaker 2: is your colleague in crime at Columbia, Joseph Stiglitz, Nobel Prizer.
Speaker 3: He's out with a wonderful new book.
Speaker 2: Very thought provoking, should be read by conservatives, The Road
Speaker 2: to Freedom, Economics and the Good Society. You two are
Speaker 2: both victims of the Midwest. One of the great great
Speaker 2: advantages here is Clarita and Stiglitz are like, what, everybody,
Speaker 2: calm down, there's a whole other country out there. Yeah,
Speaker 2: tell me about policing. As dean of Columbia Economics, Joe Stiglitz,
Speaker 2: I can't fathom that is your day job. What was
Speaker 2: it like telling Joe Stiglitz, you will teach this course?
Speaker 4: Well, no, Joe is a treasure and I'm actually proud
Speaker 4: of the fact that when I was department chair back
Speaker 4: in two thousand and one, I recruited Joe to Columbia.
Speaker 4: It was one of my big, big accomplishments. I'm an
Speaker 4: enormous fan of his research. He's an incredible colleague, incredibly creative,
Speaker 4: and you know, I just wish we had fifty more
Speaker 4: Joe Stiglitz. Whether without the Nobel problem.
Speaker 2: Why should conservatives read Stiglitz The Road to Freedom?
Speaker 4: Well, I'm reading it now. I listened to a podcast
Speaker 4: the other day. Looks it gives I think an informed
Speaker 4: and nuanced assessment of the power that economics can have
Speaker 4: about thinking about the world, if you're willing to step
Speaker 4: away from the oversimplifying assumption. So much of Joe's career
Speaker 4: has been driven by a curiosity about the world and
Speaker 4: providing a structure to think about it.
Speaker 1: How do you think about this US economy? A lot
Speaker 1: of we hear recently about the exceptionalism of the US
Speaker 1: economy vis a vis Europe. Let's think Germany or Asia,
Speaker 1: Let's think China. Is this something as unusual, this kind
Speaker 1: of decoupling, if you will, in terms of performance.
Speaker 4: You know that term means different things to different people.
Speaker 4: What is clear, I think is through the rear view
Speaker 4: mirror last year many predictions of a recession. Not only
Speaker 4: did a recession not happen, but growth was a point
Speaker 4: above a trend, a very hot labor market. I think
Speaker 4: part of the exceptionalism theme relates to excitement about AI.
Speaker 4: AI is a big deal. It's not clear if it'll
Speaker 4: be a big deal in the next six months or
Speaker 4: six years, but it is a big deal, and obviously
Speaker 4: US companies in US innovation are poised to benefit from that.
Speaker 4: But there's another dem I would argue in which the
Speaker 4: US is exceptional, exceptional but in a poor direction, which
Speaker 4: is that we have an exceptionally irresponsible fiscal policy. And
Speaker 4: if you look at the CBO numbers, they are frightening,
Speaker 4: essentially deficits of five six seven percent of GDP as
Speaker 4: far as the I can see, so exceptional in multiple directions.
Speaker 2: I would say one final question, Yeah, we have a
Speaker 2: presidential candidate, a former president who basically wants to take
Speaker 2: the independence of the FED away from your reading of
Speaker 2: our political economy. Can an individual can a single president
Speaker 2: remove FED independence?
Speaker 3: Certainly not.
Speaker 4: I think the legal standing of that issue is clear
Speaker 4: and decided, and I would coup points one. Jerome Powell
Speaker 4: will serve out his term which goes through May of
Speaker 4: twenty six. Secondly, there are no vacancies on the federal
Speaker 4: reserve right now, so for the foreseeable future, there's no
Speaker 4: nothing for a future president to do on that account.
Speaker 3: This is this has been fun. Did we do? Okay?
Speaker 2: Yeah?
Speaker 3: You know quality?
Speaker 5: See yeah, yeah, gentlemenly see. I'll take that.
Speaker 2: Richard Clarida, thank you so much of Columbia University and
Speaker 2: of course the FED and with PIMCO, thank you as well.