WEBVTT - Former Fed Vice Chair Richard Clarida Talks Balancing Risk

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio News. Pimco Global Economic advisor

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<v Speaker 1>and former FED Vice Chair Rich Clarita joining us Now

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<v Speaker 1>and Rich, what's your take on what we just heard

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<v Speaker 1>from FED Chair J Powell?

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<v Speaker 2>Well, I think the Chair certainly intended to open the

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<v Speaker 2>door pretty wide to cutting in September. Importantly, Lisa, he

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<v Speaker 2>spent a lot of time on balance of risk, which

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<v Speaker 2>is what policymakers do, but at the two key junctures

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<v Speaker 2>he highlighted the balance of risk to the labor market

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<v Speaker 2>is to a weaker labor market, and he basically indicated

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<v Speaker 2>that the balance of risk to higher inflation doesn't appear

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<v Speaker 2>to be a first order concern in terms of persistent inflation.

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<v Speaker 2>So I think the message was they think they're going

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<v Speaker 2>to cut in September, we get some more data, and

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<v Speaker 2>the markets have reacted to that.

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<v Speaker 1>How much do you think that this is partly to

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<v Speaker 1>maintain the Fed's credibility, not as is they'rely with respect

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<v Speaker 1>to the president, but that right now, if they get

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<v Speaker 1>it wrong on the labor market front, that it is

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<v Speaker 1>that much more pernicious based on some of the job owning.

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<v Speaker 3>By what we hear from the president.

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<v Speaker 2>Well, yeah, I mean, as the share said in the remarks,

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<v Speaker 2>it's a curious kind of balance in the labor market.

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<v Speaker 2>The payroll employment growth has been very, very weak in

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<v Speaker 2>the private sector, but the unemployment rate has not gone up,

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<v Speaker 2>and so they are really focused on the balance of risk. Look,

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<v Speaker 2>the FAT has a dual mandate. It's costly to let

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<v Speaker 2>inflation move higher and stay there, but it's also costly

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<v Speaker 2>to have a recession with the rise of the unemployment.

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<v Speaker 2>And I think, Lisa, you're correct they are tilting in

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<v Speaker 2>that direction now.

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<v Speaker 1>It feels like a very different Jackson Hole. And this

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<v Speaker 1>is something that we've been talking about with all of

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<v Speaker 1>our guests today. Rich that people have come on and

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<v Speaker 1>said there is a different tone about central banking independence

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<v Speaker 1>and a question of how to communicate at a time

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<v Speaker 1>of political interference.

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<v Speaker 3>What's your sense of where that was.

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<v Speaker 1>In the speech that we just heard from FED Chair

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<v Speaker 1>J Powell.

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<v Speaker 2>I think the approach the Chair took was to really

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<v Speaker 2>focus front and center, Lisa, on the dual mandate that's

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<v Speaker 2>assigned by Congress, maximum employment and price stability. And the

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<v Speaker 2>Chair gave a very reasoned and thoughtful analysis and discussion

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<v Speaker 2>of how they're balancing the dual mandate risks, and I

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<v Speaker 2>think that's the Jay Powell message to the issue of

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<v Speaker 2>FED independence. We have an assignment from Congress, and this

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<v Speaker 2>is what we're doing to achieve it.

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<v Speaker 1>At this point, we also are dealing with the headlines

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<v Speaker 1>that are coming out about FED Governor Lisa Cook, where

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<v Speaker 1>at the same time that Jerome Powell was giving his speech,

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<v Speaker 1>President Trump came out with this truth post saying that

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<v Speaker 1>he will fire Lisa.

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<v Speaker 3>Cook if she doesn't resign.

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<v Speaker 1>We did hear reports that in the Jackson Lake Lodge

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<v Speaker 1>and the lobby that James Fishback was screaming at Lisa

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<v Speaker 1>Cook that why did she commit mortgage fraud? What's your

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<v Speaker 1>take on what this does in terms of both the

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<v Speaker 1>FED composition but also just the ability to be clear

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<v Speaker 1>minded about making FED policy.

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<v Speaker 2>Well, obviously understand just looking at the headlines that you

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<v Speaker 2>mentioned myself and don't know the details or the facts

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<v Speaker 2>in this particular situation, but clearly we're in an environment

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<v Speaker 2>where FED independence is under scrutiny. And my conviction is that,

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<v Speaker 2>notwithstanding all of the very relevant factors that you mentioned,

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<v Speaker 2>that the Fed's is going to keep doing keep doing

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<v Speaker 2>its job.

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<v Speaker 4>Richard Claire to Tom Keene here, thank you so much

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<v Speaker 4>for joining. U's very valuable. I've got two texts I

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<v Speaker 4>want to take here that I think are important. You

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<v Speaker 4>recently said that what matters is the institution, that this

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<v Speaker 4>chairman and any future chairman has to protect the institution.

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<v Speaker 4>What's the day one first mandate to protect the institution

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<v Speaker 4>for the next chairman.

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<v Speaker 2>Well, I think first and foremost it's to have in

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<v Speaker 2>place a plan and communication that will deliver expectations of

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<v Speaker 2>price stability. I think the chair was right today to

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<v Speaker 2>emphasize that the FED has to focus on getting price

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<v Speaker 2>stability because that's going to deliver the ability to deliver

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<v Speaker 2>maximum employment. I've also written Tom that the FED is

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<v Speaker 2>sort of a complex, encumbersome institution with nineteen folks around

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<v Speaker 2>the table and the Reserve Bank presidents. But I do

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<v Speaker 2>think that is a strength right now of the institution.

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<v Speaker 4>Right Well, this is really important because it's as fractious

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<v Speaker 4>as a meeting of the bond team at PIMCO. In

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<v Speaker 4>the middle of the speech, Powell channeled a few years

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<v Speaker 4>ago at PIMCO the New Normal. For a moment, I

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<v Speaker 4>thought Mohammed Hlarian had personated in to write the speech.

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<v Speaker 4>There's your optimal new normal for the Fed, which Powell

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<v Speaker 4>mentioned today. What's the best new normal for the next Fed?

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<v Speaker 2>Well, I think a new normal would be inflation moving

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<v Speaker 2>down towards the two percent target, which would let the

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<v Speaker 2>next FED chair cut rates down towards a neutral level.

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<v Speaker 2>You know, PIMCO in twenty fourteen we rolled out the

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<v Speaker 2>idea of a new neutral and we've been operating in

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<v Speaker 2>that new neutral world now for more than a decade,

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<v Speaker 2>and so I think well anchored inflation expectations, getting tariffs

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<v Speaker 2>in the rear view mir would allow the FED to

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<v Speaker 2>cut rates by probably one hundred and fifty basis points

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<v Speaker 2>from here in achieving that ultimate soft landing. So I

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<v Speaker 2>think that would be a good new normal destination for

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<v Speaker 2>the next FED chair.

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<v Speaker 1>What risks are there to that given what we're seeing

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<v Speaker 1>with the dollar, given the fact that we really have

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<v Speaker 1>a very high level of uncertainty around which tariffs are

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<v Speaker 1>going to stick and how much is going to get

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<v Speaker 1>past along to consumers.

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<v Speaker 2>Sure, and I think the Chair was right to point

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<v Speaker 2>out that we are seeing evidence of tariffs showing up

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<v Speaker 2>in the price indexes for imported goods, but that's been

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<v Speaker 2>offset to some extent with a decline in services inflation. Again,

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<v Speaker 2>I think where they are focused is to make sure

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<v Speaker 2>that what is an inevitable increase in the price level

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<v Speaker 2>from tariffs does not over time result in persistent inflation.

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<v Speaker 2>And I think the speech today addressed their thinking right now,

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<v Speaker 2>which is that their baseline is that that will not happen,

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<v Speaker 2>which will give them the room possibly in September, to

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<v Speaker 2>cut rates.

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<v Speaker 4>Yeah, at least I think it's important to mention within

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<v Speaker 4>the market, check that the market is putting on steam.

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<v Speaker 4>Here an hour after the beginning of the speech and

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<v Speaker 4>Mike McKee's bombshell headlines a Dow lifting up, I'm not

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<v Speaker 4>told I can't leave Jackson Hall unless Dow goes up

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<v Speaker 4>a thousand points.

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<v Speaker 3>Well, I'm getting pretty close to it.

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<v Speaker 1>It sounds like you're going to be hiking for maybe

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<v Speaker 1>another six hours and then all of a sudden not

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<v Speaker 1>so much.

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<v Speaker 3>Rich.

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<v Speaker 1>I do want to know, though, about what this does

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<v Speaker 1>in terms of the currency ramifications and where your preference

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<v Speaker 1>lies in terms of the good investment backdrop, because what

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<v Speaker 1>we heard from Fetcher J.

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<v Speaker 3>Powell is so vastly different from what we.

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<v Speaker 1>Heard from Joakim Novel of the German Central Bank where

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<v Speaker 1>he said we have to focus on inflation and right

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<v Speaker 1>now that is more concerning to them than trying to

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<v Speaker 1>support growth by cutting rates or being stimulative. The fact

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<v Speaker 1>that that is the framework there and it is such

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<v Speaker 1>a different framework here, does that make you want to

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<v Speaker 1>invest in Europe a little bit more?

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<v Speaker 2>Well? You know, I think one of our themes at

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<v Speaker 2>PIMCO is that we're in a world where taking advantage

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<v Speaker 2>of a global opportunity set makes sense. Also, we're in

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<v Speaker 2>a world where makes us to focus on valuations and

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<v Speaker 2>without getting into particular markets or securities. There have been

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<v Speaker 2>some pretty big divergencies between valuation and the US and Europe,

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<v Speaker 2>especially in inequity markets. Also, you know, the Europeans are

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<v Speaker 2>much closer to their two percent target than is the

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<v Speaker 2>FED because from your point of view, the tariffs are

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<v Speaker 2>really a disinflationary for so we're at different points in

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<v Speaker 2>the rate cycle and that does open up some good opportunities.

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<v Speaker 4>Richard Clarita, you are definitive in the mathematics, the modern

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<v Speaker 4>mathematics of our economics.

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<v Speaker 3>Then, you know, we.

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<v Speaker 4>Talk about a new framework and it's a lot of

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<v Speaker 4>job boning about process. Maybe it's what are we going

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<v Speaker 4>to do with the dots? What are we going to

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<v Speaker 4>do with the mathematics of modern economics forward? Is it

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<v Speaker 4>diminished after all this turmoil?

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<v Speaker 2>You know, you know, Tom, you and I over the years,

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<v Speaker 2>decades now, I've talked about that a number of times,

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<v Speaker 2>and my thinking continues to be the mathematics, the models,

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<v Speaker 2>including my own, our tools. They're a starting point for

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<v Speaker 2>analysis and discussion. But they're not They're not handcuffs, nor

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<v Speaker 2>are they the destination. And certainly, you know, the the

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<v Speaker 2>last five years have been unusual with a pandemic and

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<v Speaker 2>all the rest. But I continue to believe that models

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<v Speaker 2>in math are our tools, not handcuffs.

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<v Speaker 4>My goal right now, Rich is to get you on

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<v Speaker 4>the short list, is to be the next chairman. So

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<v Speaker 4>let's talk tariffs here. What is the clarita mathematics of

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<v Speaker 4>Trump tariffs?

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<v Speaker 2>Well, as Mike mckeeth said, they are raising a heck

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<v Speaker 2>of a lot of revenue, and I would agree with

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<v Speaker 2>my Washington there you go. I think I think Washington

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<v Speaker 2>may very quickly get hooked on the two or three

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<v Speaker 2>hundred billion dollars a year in tariff revenue, especially if

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<v Speaker 2>you know the initial cost of raising that revenue is

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<v Speaker 2>in the rearview mirror, which which I think I expect

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<v Speaker 2>to be the case down the road. Look, we're in

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<v Speaker 2>a different regime, you know. We talked at PIMCO in

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<v Speaker 2>June about uh an era of fragmentation, and these trends

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<v Speaker 2>have been accelerating and the destination global trading system and

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<v Speaker 2>global economy is going to be very different in five

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<v Speaker 2>years than it was in the thirty years of globalization.

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<v Speaker 2>So I think to be continued is the way I

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<v Speaker 2>would answer your question.

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<v Speaker 3>He's running, Is that what you think?

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<v Speaker 1>I know?

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<v Speaker 4>Bullets running?

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<v Speaker 3>Yeah.

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<v Speaker 4>I think by the time we get done on the

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<v Speaker 4>show today, we're gonna have Tracy Alloway running.

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<v Speaker 1>I think that maybe we'll doubt but I am we will.

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<v Speaker 1>She's sitting here with us. I'm sure, she says, I

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<v Speaker 1>bag Rich. I am curious though, going forward this idea

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<v Speaker 1>of how inflationary tariffs could or couldn't be given the

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<v Speaker 1>fact that this is a new world order. And we

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<v Speaker 1>were talking with Adam Posen of the Peters Constitute earlier

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<v Speaker 1>and he was talking about how he sees inflation as

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<v Speaker 1>having nodes of the nineteen seventies and potentially being really

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<v Speaker 1>pernicious Why do you not necessarily see that?

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<v Speaker 3>Why are markets more sanguine on that risk?

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<v Speaker 2>Well, I think simply because the the nineteen seventies we're

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<v Speaker 2>a very serient experience for the current group of policy

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<v Speaker 2>makers who lived through it, and I think there were

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<v Speaker 2>some important lessons learned. And one lesson learned is high

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<v Speaker 2>and persistent inflation is very costly to the economy. And

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<v Speaker 2>I think politicians learned that as well, and so I

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<v Speaker 2>think that central banks have earned a lot of credibility

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<v Speaker 2>the under Vulcar, under green Span, under pass FED chairs

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<v Speaker 2>in the US and abroad, and I think that expectations

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<v Speaker 2>of inflation, we're sort of in a world in which

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<v Speaker 2>the bomb markets at least think that over a five

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<v Speaker 2>year period, the FED is going to do whatever it

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<v Speaker 2>takes to get inflation down what I call two points something.

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<v Speaker 2>And I think that's an important victory that central banks

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<v Speaker 2>are still benefiting from. And I would expect that and

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<v Speaker 2>certainly hope that will continue.

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<v Speaker 4>Richter Clarita with us follow you on radio and TV.

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<v Speaker 4>We've extended this wonderful show with a huge market movie

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<v Speaker 4>c today. Off of the Powell speech, I want to

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<v Speaker 4>turn to Michael McKee because my head's spinning. I've got

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<v Speaker 4>Chairman Bullard, Chairman Clarita, Chairman Alloway, and the rest. So

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<v Speaker 4>when they're in the Oval Office and they're sitting on

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<v Speaker 4>the couches and President Trump is going to turn to

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<v Speaker 4>the people he trusts. Here, let's start with the Secretary

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<v Speaker 4>of Treasury. What is Beson can say to him about

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<v Speaker 4>the qualifications needed for a Trump chairman.

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<v Speaker 5>Well, probably from Scott Besson's you would hear the importance

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<v Speaker 5>of being able to relate on Wall Street. It was

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<v Speaker 5>put once to me that the Treasury Secretary's job in

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<v Speaker 5>terms of the markets is to be able to calm

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<v Speaker 5>them down when something is going wrong. And so that

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<v Speaker 5>I would argue for a certain number of the candidates,

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<v Speaker 5>maybe miss Alloway, it fits in that category that have

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<v Speaker 5>that gravitas to be able to do that. The idea

0:12:57.200 --> 0:13:01.240
<v Speaker 5>that you want to cut rates is that's not really

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<v Speaker 5>part of it, because you wouldn't be on the list

0:13:02.880 --> 0:13:05.160
<v Speaker 5>if you didn't want to cut rates at this point.

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<v Speaker 5>So it's going to be somebody who is the president

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<v Speaker 5>will feel comfortable with maybe this move if the Fed

0:13:12.040 --> 0:13:14.679
<v Speaker 5>cuts rates. He's more comfortable with a wider group of

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<v Speaker 5>people because he started to get what he.

0:13:16.679 --> 0:13:18.520
<v Speaker 4>Wants and Joe Wisenthal.

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<v Speaker 5>We could add job Weisenthal because well, we don't know

0:13:22.240 --> 0:13:24.360
<v Speaker 5>if the president is a country music fan. We'd have

0:13:24.400 --> 0:13:28.160
<v Speaker 5>to find that out first. But I think going forward,

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<v Speaker 5>the one thing you could say maybe out of this

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<v Speaker 5>speech is if an ordinary administration which wasn't going to

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<v Speaker 5>be subject kind of the whims the way Donald Trump

0:13:36.440 --> 0:13:39.280
<v Speaker 5>does things, this would have really given a boost to

0:13:39.360 --> 0:13:42.480
<v Speaker 5>Chris Waller because essentially what they're saying is Chris Waller

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<v Speaker 5>was right that inflation looked through inflation from tariffs because

0:13:47.760 --> 0:13:50.160
<v Speaker 5>it will be a one time price boost.

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<v Speaker 1>Yeah, Now the question is going to be and ultimately

0:13:52.800 --> 0:13:53.520
<v Speaker 1>is this going to be.

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<v Speaker 3>A hawkish cut or a dubbish cut.

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<v Speaker 1>In September, Pimpko goes at Rich Clarita, you've been incredibly

0:13:58.800 --> 0:14:01.520
<v Speaker 1>generous with your time. Thank you so much for being

0:14:01.720 --> 0:14:04.520
<v Speaker 1>with us as we dissect that speech. It was a

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<v Speaker 1>lot longer than as prior speeches, and it was one

0:14:07.679 --> 0:14:10.960
<v Speaker 1>that signaled at the beginning of a new rate cutting cycle.

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<v Speaker 1>They have not cut rates since December in twenty and

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<v Speaker 1>twenty four