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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is exactly where

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Speaker 1: we like to see central bank independence, because central bank

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Speaker 1: independence is thinking about manitre palsy. Not for the next

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Speaker 1: eighteen months, but for the next few years.

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Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,

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Speaker 2: and this is a bonus episode of Trumponomics, the podcast

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Speaker 2: that looks at the economic world of Donald Trump. While

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Speaker 2: I was in New York this week, I hosted a

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Speaker 2: fireside chat with Bill Dudley about the future of the

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Speaker 2: Federal Reserve and its monetary policy. Bill was once President

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Speaker 2: of the Federal Reserve Bank of New York. Before that,

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Speaker 2: he was a chief economist at Goldman Sachs, among other things,

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Speaker 2: and he's now a columnist for Bloomberg Opinion and a

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Speaker 2: senior advisor to Bloomberg Economics. In our conversation, we discussed

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Speaker 2: not only the political threats to fail independence growing by

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Speaker 2: the day under President Trump's administration, but also the US

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Speaker 2: Central Bank's monetary policy right now and the implications of

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Speaker 2: tariffs and the AI investment boom. I started the conversation

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Speaker 2: by asking Bill why he thinks it would be a

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Speaker 2: bad idea for the FED to keep cutting interest rates

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Speaker 2: over the next year or so, which is what the

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Speaker 2: future markets are currently predicting.

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Speaker 1: Well, I think there's a debate going on between what's

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Speaker 1: the biggest risk inflation staying sticky above the two percent

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Speaker 1: target for if we go through next year the fifth

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Speaker 1: year in a row, or the layer market to continue

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Speaker 1: to deteriorate and potentially giving away and having a recession,

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Speaker 1: and Pouls trying to navigate between those two risks, and

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Speaker 1: as he said, it's very difficult to figure out what

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Speaker 1: to do in the current environment. Where he lands is

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Speaker 1: that he thinks that the greater risk, or the increasing

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Speaker 1: risk at least, is the downs side risk to the

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Speaker 1: labor market, and as a consequence of that, he wants

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Speaker 1: to make manentre policy less restrictive to sort of reduce

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Speaker 1: that downside risk to the labor market. Now, I think

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Speaker 1: you could make the argument that the upside risk to

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Speaker 1: inflation still is very much germane because the pass through

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Speaker 1: of teriff of terrorists into prices is probably quite incomplete,

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Speaker 1: and we have a number of other exogenous factors that

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Speaker 1: are going to also put upward pressure on inflation. For example,

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Speaker 1: what's happening with the AI investment boom and the consequence

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Speaker 1: of that for electric prices. Now, I know we like

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Speaker 1: to historically exclude food and energy from our calculation of inflation,

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Speaker 1: and that's fine when the prices go up and the

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Speaker 1: prices come right back down, but that's not going to

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Speaker 1: happen for electricity. The prices are going to keep going

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Speaker 1: up for the next few years, and so I think

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Speaker 1: that have to be considered a part of the inflation outlook.

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Speaker 3: I think where I come out is a little differently

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Speaker 3: than Paul.

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Speaker 1: I think that the inflation risks are just as substantives

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Speaker 1: as the downside risk labor market number one and number two.

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Speaker 1: I don't think policy is as restrictive as he thinks

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Speaker 1: it is. He thinks that policy is restrictive, so they're

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Speaker 1: say before he wants to make it less restrictive. I

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Speaker 1: think if you look at the economy writ large, it

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Speaker 1: doesn't look like Madre policies holding back the economy hardly

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Speaker 1: at all at this point. You know, if you look

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Speaker 1: at the Atlanta Fed GDP now forecast for the third quarter,

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Speaker 1: it's tracking three point eight percent. If you think about

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Speaker 1: the exogenous AI investment spending boom that's going to continue

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Speaker 1: to support economic growth as we go through the rest

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Speaker 1: of twenty twenty five into twenty twenty six. So that's

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Speaker 1: the first point of sort of mild disagreement. The second

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Speaker 1: point is, I just feel like the risk of inflation

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Speaker 1: expectations rising is just as substantive as the labor market

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Speaker 1: continue to DETERIAD.

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Speaker 3: What Paul's worried.

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Speaker 1: About in the labor market is that when the labor

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Speaker 1: market det rate's beyond a certain point, it tends to

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Speaker 1: be self reinforcing. And this is really summarized in the

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Speaker 1: sum rule. Every time the unemploying rate's gone up by

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Speaker 1: half a percent, the US is all into reception, with

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Speaker 1: one important exception twenty twenty four. Twenty twenty four, we

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Speaker 1: had a mild trigger of this somrale. Nothing bad happened.

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Speaker 1: But I think that notion that labor marketed touring beyond

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Speaker 1: a certain point is still valid because what happened in

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Speaker 1: twenty twenty four was the unemploying rate went up not

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Speaker 1: because of labor market weakness, but because of a big

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Speaker 1: surge and labor supply. This year, if the unemploying rate

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Speaker 1: goes up by half a percentage point, it's going to

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Speaker 1: because of weakness and labor demand. What concerns me on

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Speaker 1: the inflation side is, you know, we were sort of

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Speaker 1: pushing the envelope here of how long inflation can be

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Speaker 1: above the Fed's target and inflation expectations state will anchored.

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Speaker 1: At some point people are going to start to believe

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Speaker 1: that the FED doesn't really care about getting inflation back

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Speaker 1: to two percent to three percent is good enough. And

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Speaker 1: if that happens, then inflation expectations will become a bit

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Speaker 1: less firmly anchored, and that'll be harder to get inflation

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Speaker 1: down in the future. So my own personal view is

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Speaker 1: I'd be a little bit more patient. Also, I think,

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Speaker 1: you know, they's just a tremands amount unsurty in terms

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Speaker 1: of that can We've never had a you know, a

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Speaker 1: TERRFF shock like this. We've never had an AI investment

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Speaker 1: spending boom like this before. We've never had such a

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Speaker 1: dramatic change in labor supply before. So there's a whole

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Speaker 1: bunch of you know, wild cards that I think, in

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Speaker 1: my mind make me less confident in my forecast. And

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Speaker 1: if I'm less confident in my forecasts, going to be

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Speaker 1: sort of like you don't want to take the Democratic

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Speaker 1: oath of do no harm.

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Speaker 2: That's fantastically useful to run through all those Let's just

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Speaker 2: pick up there. There's a couple of things from there

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Speaker 2: about what constitutes restricted but also about the pass through

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Speaker 2: the of the tariffs. You know, there is just a

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Speaker 2: lot of uncertainty, and so far things have not necessarily

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Speaker 2: played out certainly the way we might have expected from

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Speaker 2: the models. It's a puzzle, frankly on all sides of

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Speaker 2: the newsroom in Bloomberg as well, because we're talking to

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Speaker 2: people in senior business figures who appear to be kind

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Speaker 2: of nervous of mentioning tariffs in their earnings calls. If

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Speaker 2: it's not being shown in prices, these tariffs, which are

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Speaker 2: definitely being paid at the board, you'd expect it to

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Speaker 2: be shown in earnings, but we're not seeing an obvious

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Speaker 2: effect there. Our own Anna Wong has suggested that even

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Speaker 2: just the sheer uncertainty attached to the tariffs this time around,

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Speaker 2: the fact that they're jumping around so much, has actually

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Speaker 2: stayed manufacturers, how retailers hand in changing prices because they think, oh, well,

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Speaker 2: he may there may be a tweet next week and

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Speaker 2: he may suspend it for another few months. So just

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Speaker 2: on that, what's your sort of solution to the puzzle

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Speaker 2: of how tariffs are or are not actually being shown

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Speaker 2: in the economy and prices particularly, Well.

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Speaker 1: First of all, I think the path through process just

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Speaker 1: takes a little bit longer than we expect because the

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Speaker 1: goods have to move from abroad to the US, they

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Speaker 1: have to be unloaded, shift to the retailer, and the

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Speaker 1: retailer actually has to sell the goods at the higher price,

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Speaker 1: and that takes a number of months. Number two, to

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Speaker 1: your point, the encertainty level is really high. And I

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Speaker 1: think when a certainty is really high and there's a

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Speaker 1: cost of raising prices in terms of your customer relations,

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Speaker 1: you want to get more certainty before you decide how

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Speaker 1: big a price rise that you want to put into place.

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Speaker 1: So it's better to raise the prices once and rather

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Speaker 1: than raise the prices multiple times. So I fully expect

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Speaker 1: that you know, most of the tariff burden is ultimately

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Speaker 1: going to be passed through, you know, probably on the

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Speaker 1: order of eighty percent, and I think that's probably going

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Speaker 1: to be worth you know, one to one percent to

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Speaker 1: one and a half percent on the level of prices.

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Speaker 1: So I'm pretty confident that inflation is going to be

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Speaker 1: three percent or more, you know, well in well through

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Speaker 1: the first half of twenty twenty six. So I think

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Speaker 1: it's I think it's more delayed than not coming, because

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Speaker 1: to your point, if it's not showing up in earnings,

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Speaker 1: then we're going to be seeing it at some point.

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Speaker 2: And on the question of whether it's restricted, obviously, one

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Speaker 2: of the arguments that's been used by Stephen Myron and

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Speaker 2: others for why it is actually more restrictive than we

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Speaker 2: think the policy currently is that the natural rate has

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Speaker 2: fallen for reasons that he described in his testimony. I

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Speaker 2: think that the house view is certainly that that's not

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Speaker 2: the case. But is that one of the things that

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Speaker 2: you're thinking about in looking at considering where the policy

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Speaker 2: is restrictive enough?

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Speaker 1: As cher Paaloa says, we know our star by its works,

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Speaker 1: and what he means by that is we look outside

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Speaker 1: see how the commedy is performing. If the comedy is

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Speaker 1: stronger than we thought, then we tend to revise up

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Speaker 1: our estimate of our star. And if the e commedy

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Speaker 1: is weaker than we thought, we tend to revise down

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Speaker 1: our estimate of our store. I'd say, right now, given

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Speaker 1: all the uncertainty in policy, the tariff shock, you know,

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Speaker 1: it is a tightening of physical policy. Given all that,

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Speaker 1: you'd have to say, the commedy is performing better than expected.

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Speaker 1: In fact, you know, it's the last FED meeting, the

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Speaker 1: FED revised up their growth forecast for twenty twenty six

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Speaker 1: by a couple tenths of a percent. So that to

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Speaker 1: me tells me that our star is probably a little

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Speaker 1: bit higher than we think now. You know, Stephen Moran

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Speaker 1: made a number of arguments why our star is lowered,

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Speaker 1: and I think some of the arguments are actually sensible,

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Speaker 1: but some of them are not. And of course he conveniently,

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Speaker 1: I think, ignored some of the factors that are also

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Speaker 1: resulting in a higher our star. The investment spending boom,

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Speaker 1: for it was just totally not even mentioned by Marian

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Speaker 1: in his remarks. And it's hard to believe that the

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Speaker 1: investment spending boom in the short term doesn't increase the

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Speaker 1: demand for capital and result in a higher interest rate

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Speaker 1: to consistent with a neutral manetary policy.

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Speaker 3: You know what.

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Speaker 1: The argument where I agree with him is on the

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Speaker 1: slower growth of the population, slower growth of liver force,

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Speaker 1: that one, I think is you know, a good argument

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Speaker 1: because I think if you have less people, you need

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Speaker 1: less capital to equip them to work. So I think

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Speaker 1: that one was something I agree with. But the some

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Speaker 1: of the other arguments I think are btr cherry picking

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Speaker 1: the arguments to support his point of view.

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Speaker 3: But the biggest problem is how does he explain if.

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Speaker 1: The policy is as restrictive as he says it is,

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Speaker 1: then why is the economy performing so well?

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Speaker 2: There is this kind of mystic meg aspect to the

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Speaker 2: our Star debate. You have this feeling of you never

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Speaker 2: can see it, never can put it down, But we

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Speaker 2: talk about it a lot. We're going to talk about

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Speaker 2: it more later. Finally, just on the short term situation,

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Speaker 2: given that you have been, unlike most of the people

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Speaker 2: in the room round the table for these discussions, how

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Speaker 2: will the FMC be thinking about the shutdown? And how

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Speaker 2: important is it the timing If the government goes back

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Speaker 2: to work, say this week or that it's seeming pretty unlikely,

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Speaker 2: what kind of difference does that make relative to it

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Speaker 2: being what seems likely to be a pretty prolonged shutdown.

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Speaker 1: So historically these government shutdowns have not had a big

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Speaker 1: effect on the economic trajectory.

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Speaker 3: And the reason for that is people.

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Speaker 1: Ultimately get paid even for their or even for the

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Speaker 1: time that they were furloughed, so that they don't actually

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Speaker 1: adjust their spending habits in any significant way. But this

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Speaker 1: shutdown could be a little bit different because there are

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Speaker 1: people that apparently are going to be furloughed, there are

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Speaker 1: people who are not getting paid, so it might have

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Speaker 1: a more damaging consequence to the economy. Now, I think

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Speaker 1: everybody's of the view that this is not going to

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Speaker 1: last sort of indefinitely. You know, maybe it goes a month,

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Speaker 1: maybe it goes five weeks, but I don't think anyone

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Speaker 1: is expecting it to last through the end of the year.

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Speaker 1: And so at the end of the day, the size

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Speaker 1: of the shock that this is going to generate to

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Speaker 1: the economy is pretty small, and I would think that

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Speaker 1: it's unlikely that it's going to have a real big

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Speaker 1: consequence for MONTARC policy. Now the October meeting, I think

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Speaker 1: the FED is definitely going to ease at this point.

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Speaker 1: Once you started to ease, you're almost going to certainly

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Speaker 1: go in the same direction unless you get a new

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Speaker 1: set of information that contradicts your motivation for easing in

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Speaker 1: the first place. Since the FED is getting virtually no information,

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Speaker 1: of course they're going to keep going in the same direction.

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Speaker 2: There's a yeah, of course, that's a good point in

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Speaker 2: terms of the BLS numbers and other things. Okay, So,

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Speaker 2: I mean, one thing that I like about your columns

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Speaker 2: that you do for Bloomberg Bill, and certainly why they

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Speaker 2: get read, is that you have these admirably direct headlines

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Speaker 2: that say basically what you're going to say. And if

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Speaker 2: you'll forgive me fourth of August column, the FED is

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Speaker 2: under siege and it'll be just fine. That was one column.

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Speaker 3: Yeah, I changed my mind on that one three weeks later.

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Speaker 2: Three weeks later, just about the time that Lisa Cook

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Speaker 2: was attempted to be fired. I wasn't very worried about

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Speaker 2: the FED now I am. So if you are, why

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Speaker 2: isn't Wall Street.

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Speaker 3: That's a good question. I don't have a good answer

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Speaker 3: for that.

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Speaker 1: I guess Wall Street is just very uncertain how this

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Speaker 1: all is going to play out. Obviously, the Lisa Cook

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Speaker 1: case is going up to the Supreme Court, and how

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Speaker 1: they rule is going to be really important. If they

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Speaker 1: rule that President Trump can dismiss Lisa Cook for cause

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Speaker 1: then in principle, President Trump can dismiss other members of

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Speaker 1: the Board of Governors for cause, and it's not even

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Speaker 1: clearer whether what his authority would be over the Federals

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Speaker 1: or bank prisons. The fear in markets is that the

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Speaker 1: Trump administration will soon get could soon get control of

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Speaker 1: the Board of Governors, and then those that majority on

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Speaker 1: the Board of Governors could then start to decide not

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Speaker 1: to reappoint Federals or bank presidence when they're five year

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Speaker 1: two terms come due in February of next year. So

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Speaker 1: you can see that how you can bootstrap control of

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Speaker 1: the Board of Governors to having control full of the

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Speaker 1: broad Federal Open Market Committee, even if the Lisa Cook

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Speaker 1: case has decided in favor of the president. I don't

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Speaker 1: think this is preordained. We don't really know what, you know,

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Speaker 1: Chris Waller and Michelle Bowman would do. I thought it

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Speaker 1: was interesting at the last meeting that they went along

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Speaker 1: with the majority for a twenty five base point raycut,

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Speaker 1: not the fifty bass point raycut that Stephen Moran supported.

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Speaker 1: So you know, just because you're a Trump appoint he

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Speaker 1: doesn't mean that you're necessarily willing to do things as

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Speaker 1: radical as not reappointing a federal Reserve banks these five

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Speaker 1: year the five reappointments historically have been absolutely routine. You know,

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Speaker 1: they're they're not they're not ever, They've never been consequential

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Speaker 1: in the past. So to not reappoint a federal resert

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Speaker 1: president because you're afraid that they're not a supporter of

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Speaker 1: much lower interest rates would be without president. So I'm

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Speaker 1: looking at, you know, a couple of things. Number one,

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Speaker 1: the Lisa Cook case, hugely consequential. Number two, where are

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Speaker 1: where are Michelle Bowman and Chris Waller and all this?

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Speaker 1: And how far are they willing to go in terms

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Speaker 1: of transforming the FED? You know, basically, you know, dismissing

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Speaker 1: federis or presence because you don't like how they're going

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Speaker 1: to vote on monetary policy would be the end of

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Speaker 1: FED independence. And I think, you know, to your point,

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Speaker 1: it's remarkable that people are so optimistic about this, because

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Speaker 1: even if it's a twenty percent probability, it's a twenty

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Speaker 1: percent probability of a very bad event. As you talked

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Speaker 1: at the top of the of the of this session.

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Speaker 1: You know, if Donald Trump were to get his way

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Speaker 1: and get one percent interest rates, we would have a

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Speaker 1: much more significant inflation problem. Inflation expectations would become un anchored,

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Speaker 1: and the heel care would steepen. The bond market vigilantis

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Speaker 1: would almost certainly return, the dollar would weaken sharply.

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Speaker 3: You know, we would have a pretty big mess on

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Speaker 3: your hands.

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Speaker 1: And if that's you know, even if that's only a

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Speaker 1: twenty percent probability, that seems like something that you want

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Speaker 1: to price in.

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Speaker 2: We did some scenarios thinking about how you might euphemistically

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Speaker 2: call a different reaction function of the FED under a

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Speaker 2: new chair. I mean, one distinguishing feature of all of them,

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Speaker 2: even the more extreme one, is that things look pretty

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Speaker 2: good for a while and then they're really bad. And

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Speaker 2: just looking at Donald Trump's policies sort of through time,

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Speaker 2: he's been quite good at picking policies that were quite

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Speaker 2: good for a while that he wouldn't necessarily pay the

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Speaker 2: consequences of. Isn't that a reason to be a bit nervous?

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Speaker 1: Well, this is exactly why we like to see central

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Speaker 1: bank independence, because central bank independence is thinking about maitre policy,

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Speaker 1: not for the next eighteen months, but for the next

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Speaker 1: few years. You know, if you have an independence central bank,

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Speaker 1: it can think medium to long term. If you have

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Speaker 1: a central bank that's controlled by the executive branch and

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Speaker 1: is worried about how things are going to look for

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Speaker 1: the next election, yeah, you can basically make Maitre policy

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Speaker 1: very stimuli, make the economy look very strong, and the

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Speaker 1: inflation consequence of that usually shows through later. There's been

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Speaker 1: a lot of academic studies that have looked at economic

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Speaker 1: performance based on how independent the central bank is, and

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Speaker 1: the jury is in the more independent the central bank,

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Speaker 1: the better the economic outcomes. And this is the reason

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Speaker 1: why we've been engaged in a movement to more central

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Speaker 1: bank independence over the last thirty years. This is not

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Speaker 1: a new trend. So if Trump moves this in the

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Speaker 1: opposite direction, this is unwinding a lot of momentum that's

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Speaker 1: been in place for several decades.

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Speaker 2: We're going to run out of time. But I've got

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Speaker 2: a couple of quick ones. I mean one is just

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Speaker 2: as a matter of fact, given all the conversation around this,

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Speaker 2: given the focus on the particular candidates, the FED is

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Speaker 2: traditionally the fmc's a bit different certainly from the Bank

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Speaker 2: of England that you tend to have unanimity. The chairman

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Speaker 2: tends to command a lot of the room, so to speak.

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Speaker 2: You don't have the governor or the head of the

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Speaker 2: bank doesn't tend to be voted down in their decisions.

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Speaker 2: That as many people who have said that depends on

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Speaker 2: the respect that the people around the table have for

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Speaker 2: the chair. Do you think that anybody coming in in

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Speaker 2: these circumstances now is tainted because of the process that's

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Speaker 2: led up to it.

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Speaker 1: No, I think it depends on how they perform in

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Speaker 1: the job. So it's sort of up to them when

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Speaker 1: they come in. Cet A Reserve is a consensus driven institution.

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Speaker 1: I mean, the chair can lead, but it only leads

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Speaker 1: so far. So the last meeting is a good example.

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Speaker 1: There were some people who didn't want to cut rates

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Speaker 1: at the last meeting, so you look at the outcome

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Speaker 1: of the meeting. All the people except Moran voted for

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Speaker 1: the twenty five basis point raycut.

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Speaker 3: And so that's basically telling.

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Speaker 1: You is when the committee has confidence in the chairman.

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Speaker 1: If the issues are small, the committee is oftentimes willing

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Speaker 1: to defer to the chairman, But if the if the

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Speaker 1: chairman wants to take the interest rates down two hundred

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Speaker 1: basis points and the committee thinks that's inappropriate, then it's

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Speaker 1: not going to happen. So I think, you know, it's

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Speaker 1: so the chair can lead, but it can only lead

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Speaker 1: so far.

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Speaker 2: There's a question that came up at a meeting we

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Speaker 2: had this morning. Do you personally think that Jay Powe

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Speaker 2: will stick around as he suggested?

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Speaker 1: I think I think he's keeping his options open. I mean,

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Speaker 1: I think if he's that his presence was standing between

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Speaker 1: good manitary policy and bad manitary policy, then I think

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Speaker 1: he would stay on board. If he thought that his

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Speaker 1: presence wouldn't make much difference, then I think he'll step down.

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Speaker 1: So I think he's right now. I don't think he

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Speaker 1: knows the answer to that question. So I don't think

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Speaker 1: he knows what he's going to do at this point.

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Speaker 2: And the final question was just taking us full circle

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Speaker 2: to the discussion we had around where the risks lie

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Speaker 2: in the current decision all this debate. You know, another

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Speaker 2: potential consequences I've actually heard investors talk about is that

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Speaker 2: in a year or so's time, if you've had a

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Speaker 2: sort of continued boost to the economy from some of

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Speaker 2: these rate cuts and it's actually inflation is starting to

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Speaker 2: come back or come through it could look like you

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Speaker 2: really need to raise rates again, and the fear would

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Speaker 2: be that a slightly more politically compromised FED, whoever the

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Speaker 2: chair is, will not want to do that in the

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Speaker 2: lead up to a mid term election. Do you think

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Speaker 2: that's another reason for holding now?

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Speaker 1: Well, I think you know what you're getting to is

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Speaker 1: is that as we start this a discussion about the

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Speaker 1: independence of the FED, even if the FED retains its independence,

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Speaker 1: there's always the question of whether the FED is starting

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Speaker 1: to pull its punches because it's worried about the consequence

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Speaker 1: of it if it doesn't do the administration's bidding. I mean, already,

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Speaker 1: I've been asked a number of times. Do you think

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Speaker 1: the FED cut rates in September because of the political

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Speaker 1: pressure of the Trump administration.

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Speaker 3: I don't think so.

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Speaker 1: I think Paul believes that it's appropriate to worry about

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Speaker 1: the downside risk to the labor market. But the very

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Speaker 1: fact that people are asking me that question shows that

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Speaker 1: there's already been some damage to the Fed's credibility.

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Speaker 2: Yeah, that is just the kind of question that anyone

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Speaker 2: on the FED always hated, and certainly you always used

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Speaker 2: to say that, Bill Dudley, Thank you so much.

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Speaker 3: Thank you.

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Speaker 2: Thanks for listening to Trumpnomics from Bloomberg and this special

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Speaker 2: episode was hosted by me, Stephanie Flanders and I was

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00:19:57,040 --> 00:19:59,960
Speaker 2: joined by Bill Dudley. Trumpnomics was produced by some of

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Speaker 2: Saddi and Moses and Dam with help from Amy Keene

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00:20:03,240 --> 00:20:07,399
Speaker 2: and special thanks to Rachel Lewis Chriskey. Sound design is

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00:20:07,400 --> 00:20:11,640
Speaker 2: by Blake Maples and Sage Bowman is Bloomberg's head of podcasts.

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