WEBVTT - Bloomberg Opinion Columnist William Dudley Talks Fed's Patience

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<v Speaker 1>Andersavanns this morning, the Fed remaining patient.

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<v Speaker 2>We're headed back down toward normal. The question is, of course,

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<v Speaker 2>are we normalizing or are we weakening? Those are two

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<v Speaker 2>very different things.

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<v Speaker 3>Underneath the hood of the labor market report.

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<v Speaker 1>There's a little more room for confidence, confidence that we're

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<v Speaker 1>slowing but not falling off a clear You know.

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<v Speaker 2>That I believe that we are restrictive. The longer we

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<v Speaker 2>were restrictive, we're going to have to start thinking about

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<v Speaker 2>the employment side of the manding.

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<v Speaker 1>So here's the latest FED officials refusing to overreact to

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<v Speaker 1>last week's payroll data, Former New York Fed President Bill

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<v Speaker 1>Dudley suggesting that patience might be misplaced right in this

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<v Speaker 1>the Fed's wild ride has only just begun. A deteriorating

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<v Speaker 1>labor market tends to be self reinforcing. The longer the

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<v Speaker 1>FED weights, the greater the potential for damage. An immediate

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<v Speaker 1>rate cut is in order, but that's very unlikely. Prepare

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<v Speaker 1>for more volatility in stock and bond markets. Bill joined us.

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<v Speaker 1>Now for more. Bill, let's stop the market. Then we

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<v Speaker 1>can get to the fed lack of response to it.

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<v Speaker 1>What suggests to you that this is self reinforcing? This

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<v Speaker 1>is the beginning of something much worse.

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<v Speaker 2>Well, a couple of things. Number one, we've seen a

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<v Speaker 2>rise in unemployment claims. We've seen a drop in the

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<v Speaker 2>hire's rate. We've seen a drop in the quits rate.

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<v Speaker 2>It looks to me like the labor market is cooling

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<v Speaker 2>off quite significantly. We've also triggered a so called samrle

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<v Speaker 2>where if the unemploying rate rises by more than a

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<v Speaker 2>half a percent of ver a twelve month period. Every

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<v Speaker 2>time that's happened, we've ended up in recession. So there's

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<v Speaker 2>a lot of risk out there to the downside in

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<v Speaker 2>terms of the labor market. On the other side of

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<v Speaker 2>the mandate, the inflation news has been very, very good recently.

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<v Speaker 2>So it seems to me that the Fed needs to

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<v Speaker 2>hold both sides of the mandate with equal weight right now.

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<v Speaker 2>And that implies that monetary policy should be neutral, not restrictive.

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<v Speaker 2>And we're a long way from neutral. I mean, people

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<v Speaker 2>don't know exactly what a neutral monetary policy is precisely,

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<v Speaker 2>but nobody thinks that five and a quarter five and

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<v Speaker 2>a half percent federful fund trate's consistent with neutral. Probably

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<v Speaker 2>somewhere in the three four percent range is where the

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<v Speaker 2>Fed should be.

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<v Speaker 4>Bill, You've had an enormous influence on how people are

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<v Speaker 4>thinking on Wall Street about what's ahead. So I want

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<v Speaker 4>to ask you, if you think an immediate weight cut

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<v Speaker 4>is not on the table, that they won't move into meeting,

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<v Speaker 4>what would you recommend they should do in the next

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<v Speaker 4>few weeks.

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<v Speaker 2>I think what they should do is change the messaging

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<v Speaker 2>a little bit and make it very clear that they're

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<v Speaker 2>now focused more on the liver side of the mandate.

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<v Speaker 2>Get the market to a tune to the notion that

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<v Speaker 2>if we get weak data over the next six weeks

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<v Speaker 2>that fifty basis points is highly likely. At the September meeting,

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<v Speaker 2>you can put fifty basis points firmly on the table

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<v Speaker 2>if the data can flow continue in the same direction.

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<v Speaker 4>And do you think that'd be willing to do that?

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<v Speaker 4>This has been a very backward looking FED and now

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<v Speaker 4>they need to regain control of the narrative. Do you

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<v Speaker 4>think that that by itself at Jackson Hole for example,

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<v Speaker 4>would be enough to regain control of the narrative.

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<v Speaker 2>Well help a lot, because if the FED, if people

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<v Speaker 2>feel that the Fed's got it finance, so conditions will

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<v Speaker 2>become more accounted. Stock market recover and he'll provide support.

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<v Speaker 2>You know, the problem here is when the labor market

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<v Speaker 2>starts to deteriorate, confidence starts to decline. We saw that

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<v Speaker 2>over the last couple of days, you know, the big,

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<v Speaker 2>big change in market sentiment. And when market sentiment TOTERI rates,

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<v Speaker 2>that can be self reinforcing. People start to pull back

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<v Speaker 2>on hiring, people pull back on spending. Next thing, you know,

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<v Speaker 2>the unemployer rate hasn't gone up a half a percent,

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<v Speaker 2>has gone up a full percentage point or two percentage

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<v Speaker 2>You're in recession now. The good news here is that,

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<v Speaker 2>you know, we if we have economic weakness, the FED

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<v Speaker 2>has plenty of firepower. They have their long way from

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<v Speaker 2>zero percent short term rates, so the fifth can respond

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<v Speaker 2>pretty aggressively if needed. And I think you know, my

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<v Speaker 2>view is that the risk that they're going to need

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<v Speaker 2>to respond aggressively has increased significantly in recent weeks.

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<v Speaker 3>Well, I just want to put a fine point on that,

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<v Speaker 3>because you did write about two weeks ago, before the

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<v Speaker 3>FED decision, before we got the jobs data, that not

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<v Speaker 3>going in July would increase the risk of recession, and

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<v Speaker 3>all of that happened. So just how acute is the

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<v Speaker 3>risk at this moment.

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<v Speaker 2>Well, I think that what's happened is there's quite a

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<v Speaker 2>bit of stress in a couple areas of the ecomomy.

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<v Speaker 2>Number one, low income households are really feeling it, both

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<v Speaker 2>because they're tapped out the savings that was generated by

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<v Speaker 2>the fiscal transfers during the pandemic. And two, they're the

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<v Speaker 2>ones who pay the higher short term interest rates in

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<v Speaker 2>terms of credit card debt and not alone debt. And

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<v Speaker 2>number two, we're seeing softness in the housing sector, especially

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<v Speaker 2>in multi family construction. So you're seeing areas of weakness

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<v Speaker 2>that are leading to softer labor market. And that's a

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<v Speaker 2>softer labor market, though, is the key thing. If it

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<v Speaker 2>frightens consumers, then you have weakness and consumption and the

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<v Speaker 2>thing becomes self reinforcing.

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<v Speaker 3>I think the confusing thing for a lot of people

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<v Speaker 3>bill is for every week point, there seems to be

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<v Speaker 3>a strong point for every issue. At Airbnb, there is

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<v Speaker 3>a disney that can raise prices. There is an uber

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<v Speaker 3>that people are willing to buy. How do you distinguish

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<v Speaker 3>between a lower end consumer that's dropping off a cliff

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<v Speaker 3>and one that has just gotten more picky with where

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<v Speaker 3>it spends its money.

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<v Speaker 2>Well, it is difficult to sort out. And you know,

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<v Speaker 2>high income consumers are doing pretty well. I mean, they've

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<v Speaker 2>locked in low mortgage rates. They have been the beneficiaries

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<v Speaker 2>of a very strong stock market. Even after the recent

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<v Speaker 2>decline in the stock market's still up quite over ten

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<v Speaker 2>percent this year. So the high end consumer is feeling

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<v Speaker 2>pretty good about things, but the low end is not.

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<v Speaker 2>The other thing, of course, is also what's happening on

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<v Speaker 2>the investment side. The Biden administration had a number of

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<v Speaker 2>initiatives that boosted investments, spending, infrastructure, chipsacked climate, and the

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<v Speaker 2>question is what's the impetus from investment from those programs.

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<v Speaker 2>Has that peaked or not? And if that has peaked,

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<v Speaker 2>that's another source of potential restraint in coming months.

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<v Speaker 1>It's great to can't shot with this, sir As always

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<v Speaker 1>appreciate the comments this morning, Bill don't be there. The

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<v Speaker 1>former New York Fed president Mohamma, I just want to

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<v Speaker 1>get some fun of thoughts from you. How off site

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<v Speaker 1>do you think we are on rates when we've spent

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<v Speaker 1>the last two years to banking, whether we're sufficiently restrictive.

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<v Speaker 4>Well, if you just listened to what Bill said, and

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<v Speaker 4>I listened very carefully to what he said about the

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<v Speaker 4>labor market. If he's right, we're quite offside.

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<v Speaker 1>Are way too restrictive, like one hundred basis points off side?

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<v Speaker 4>Yeah? I think the more interesting debate is where where's

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<v Speaker 4>the destination? And I think there's major major differences of

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<v Speaker 4>us here as to what is ultimately to destination. Is

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<v Speaker 4>it in the fours or is it below three?

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<v Speaker 1>Well, the market in the moment certainly focused on the path.

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<v Speaker 1>You're focused on this. I've just in the peace that's

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<v Speaker 1>just dropped Maham's just published in Bloomberg Opinion. How do

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<v Speaker 1>you do that at the same time as this waiting

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<v Speaker 1>in vain for a vocal moment? You say the system

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<v Speaker 1>needs a vocal moment. What is that volcan moment?

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<v Speaker 4>Well, every time central banks blink, the Bank of Japan

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<v Speaker 4>blink this morning, the markets take it further, so it

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<v Speaker 4>makes the next episode even more difficult. I think a

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<v Speaker 4>vocal moment is having the courage, as Paul Volker had

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<v Speaker 4>in the nineteen eighties, to say, I'm going to break

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<v Speaker 4>a certain mindset once and for all. And he broke

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<v Speaker 4>the inflating mindset once and for all. But no one

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<v Speaker 4>right now wants wants to be the source of that

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<v Speaker 4>vocal moment.

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<v Speaker 3>Do we need to see something a lot worse, something

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<v Speaker 3>like mine, but even more to shake the fad from

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<v Speaker 3>that to get them to do what you're talking about.

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<v Speaker 4>Yeah, I think I do. But you also need someone

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<v Speaker 4>who is confident enough to be able to say I'll

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<v Speaker 4>see it through. And that's what we haven't had.

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<v Speaker 3>So so you don't sound you don't sound like you

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<v Speaker 3>think that they will change to get where they should be.

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<v Speaker 4>No, I don't. I think we're going to continue playing

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<v Speaker 4>this repeated game until something bad happens, but this repeated

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<v Speaker 4>big game can be played for a while.

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<v Speaker 1>Does need to communicate the destiny Stin Jackson Holle, He

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<v Speaker 1>absolutely needs to do that. How does he do that?

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<v Speaker 1>What does that look like? What does it sound like?

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<v Speaker 4>He'll say, we've looked at this. This is what our

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<v Speaker 4>instincts are right now for where we're going. We're going

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<v Speaker 4>to be going down that path, but we will course

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<v Speaker 4>correct as we get more information. But you need desperately

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<v Speaker 4>to anchor this market. John Muhammed appreciate it. Just fantastic.

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<v Speaker 4>You've nailed the turn in this economy