Speaker 1: Bloomberg Audio Studios, podcasts, radio News. Pimco Global Economic advisor
Speaker 1: and former FED Vice Chair Rich Clarita joining us Now
Speaker 1: and Rich, what's your take on what we just heard
Speaker 1: from FED Chair J Powell?
Speaker 2: Well, I think the Chair certainly intended to open the
Speaker 2: door pretty wide to cutting in September. Importantly, Lisa, he
Speaker 2: spent a lot of time on balance of risk, which
Speaker 2: is what policymakers do, but at the two key junctures
Speaker 2: he highlighted the balance of risk to the labor market
Speaker 2: is to a weaker labor market, and he basically indicated
Speaker 2: that the balance of risk to higher inflation doesn't appear
Speaker 2: to be a first order concern in terms of persistent inflation.
Speaker 2: So I think the message was they think they're going
Speaker 2: to cut in September, we get some more data, and
Speaker 2: the markets have reacted to that.
Speaker 1: How much do you think that this is partly to
Speaker 1: maintain the Fed's credibility, not as is they'rely with respect
Speaker 1: to the president, but that right now, if they get
Speaker 1: it wrong on the labor market front, that it is
Speaker 1: that much more pernicious based on some of the job owning.
Speaker 3: By what we hear from the president.
Speaker 2: Well, yeah, I mean, as the share said in the remarks,
Speaker 2: it's a curious kind of balance in the labor market.
Speaker 2: The payroll employment growth has been very, very weak in
Speaker 2: the private sector, but the unemployment rate has not gone up,
Speaker 2: and so they are really focused on the balance of risk. Look,
Speaker 2: the FAT has a dual mandate. It's costly to let
Speaker 2: inflation move higher and stay there, but it's also costly
Speaker 2: to have a recession with the rise of the unemployment.
Speaker 2: And I think, Lisa, you're correct they are tilting in
Speaker 2: that direction now.
Speaker 1: It feels like a very different Jackson Hole. And this
Speaker 1: is something that we've been talking about with all of
Speaker 1: our guests today. Rich that people have come on and
Speaker 1: said there is a different tone about central banking independence
Speaker 1: and a question of how to communicate at a time
Speaker 1: of political interference.
Speaker 3: What's your sense of where that was.
Speaker 1: In the speech that we just heard from FED Chair
Speaker 1: J Powell.
Speaker 2: I think the approach the Chair took was to really
Speaker 2: focus front and center, Lisa, on the dual mandate that's
Speaker 2: assigned by Congress, maximum employment and price stability. And the
Speaker 2: Chair gave a very reasoned and thoughtful analysis and discussion
Speaker 2: of how they're balancing the dual mandate risks, and I
Speaker 2: think that's the Jay Powell message to the issue of
Speaker 2: FED independence. We have an assignment from Congress, and this
Speaker 2: is what we're doing to achieve it.
Speaker 1: At this point, we also are dealing with the headlines
Speaker 1: that are coming out about FED Governor Lisa Cook, where
Speaker 1: at the same time that Jerome Powell was giving his speech,
Speaker 1: President Trump came out with this truth post saying that
Speaker 1: he will fire Lisa.
Speaker 3: Cook if she doesn't resign.
Speaker 1: We did hear reports that in the Jackson Lake Lodge
Speaker 1: and the lobby that James Fishback was screaming at Lisa
Speaker 1: Cook that why did she commit mortgage fraud? What's your
Speaker 1: take on what this does in terms of both the
Speaker 1: FED composition but also just the ability to be clear
Speaker 1: minded about making FED policy.
Speaker 2: Well, obviously understand just looking at the headlines that you
Speaker 2: mentioned myself and don't know the details or the facts
Speaker 2: in this particular situation, but clearly we're in an environment
Speaker 2: where FED independence is under scrutiny. And my conviction is that,
Speaker 2: notwithstanding all of the very relevant factors that you mentioned,
Speaker 2: that the Fed's is going to keep doing keep doing
Speaker 2: its job.
Speaker 4: Richard Claire to Tom Keene here, thank you so much
Speaker 4: for joining. U's very valuable. I've got two texts I
Speaker 4: want to take here that I think are important. You
Speaker 4: recently said that what matters is the institution, that this
Speaker 4: chairman and any future chairman has to protect the institution.
Speaker 4: What's the day one first mandate to protect the institution
Speaker 4: for the next chairman.
Speaker 2: Well, I think first and foremost it's to have in
Speaker 2: place a plan and communication that will deliver expectations of
Speaker 2: price stability. I think the chair was right today to
Speaker 2: emphasize that the FED has to focus on getting price
Speaker 2: stability because that's going to deliver the ability to deliver
Speaker 2: maximum employment. I've also written Tom that the FED is
Speaker 2: sort of a complex, encumbersome institution with nineteen folks around
Speaker 2: the table and the Reserve Bank presidents. But I do
Speaker 2: think that is a strength right now of the institution.
Speaker 4: Right Well, this is really important because it's as fractious
Speaker 4: as a meeting of the bond team at PIMCO. In
Speaker 4: the middle of the speech, Powell channeled a few years
Speaker 4: ago at PIMCO the New Normal. For a moment, I
Speaker 4: thought Mohammed Hlarian had personated in to write the speech.
Speaker 4: There's your optimal new normal for the Fed, which Powell
Speaker 4: mentioned today. What's the best new normal for the next Fed?
Speaker 2: Well, I think a new normal would be inflation moving
Speaker 2: down towards the two percent target, which would let the
Speaker 2: next FED chair cut rates down towards a neutral level.
Speaker 2: You know, PIMCO in twenty fourteen we rolled out the
Speaker 2: idea of a new neutral and we've been operating in
Speaker 2: that new neutral world now for more than a decade,
Speaker 2: and so I think well anchored inflation expectations, getting tariffs
Speaker 2: in the rear view mir would allow the FED to
Speaker 2: cut rates by probably one hundred and fifty basis points
Speaker 2: from here in achieving that ultimate soft landing. So I
Speaker 2: think that would be a good new normal destination for
Speaker 2: the next FED chair.
Speaker 1: What risks are there to that given what we're seeing
Speaker 1: with the dollar, given the fact that we really have
Speaker 1: a very high level of uncertainty around which tariffs are
Speaker 1: going to stick and how much is going to get
Speaker 1: past along to consumers.
Speaker 2: Sure, and I think the Chair was right to point
Speaker 2: out that we are seeing evidence of tariffs showing up
Speaker 2: in the price indexes for imported goods, but that's been
Speaker 2: offset to some extent with a decline in services inflation. Again,
Speaker 2: I think where they are focused is to make sure
Speaker 2: that what is an inevitable increase in the price level
Speaker 2: from tariffs does not over time result in persistent inflation.
Speaker 2: And I think the speech today addressed their thinking right now,
Speaker 2: which is that their baseline is that that will not happen,
Speaker 2: which will give them the room possibly in September, to
Speaker 2: cut rates.
Speaker 4: Yeah, at least I think it's important to mention within
Speaker 4: the market, check that the market is putting on steam.
Speaker 4: Here an hour after the beginning of the speech and
Speaker 4: Mike McKee's bombshell headlines a Dow lifting up, I'm not
Speaker 4: told I can't leave Jackson Hall unless Dow goes up
Speaker 4: a thousand points.
Speaker 3: Well, I'm getting pretty close to it.
Speaker 1: It sounds like you're going to be hiking for maybe
Speaker 1: another six hours and then all of a sudden not
Speaker 1: so much.
Speaker 3: Rich.
Speaker 1: I do want to know, though, about what this does
Speaker 1: in terms of the currency ramifications and where your preference
Speaker 1: lies in terms of the good investment backdrop, because what
Speaker 1: we heard from Fetcher J.
Speaker 3: Powell is so vastly different from what we.
Speaker 1: Heard from Joakim Novel of the German Central Bank where
Speaker 1: he said we have to focus on inflation and right
Speaker 1: now that is more concerning to them than trying to
Speaker 1: support growth by cutting rates or being stimulative. The fact
Speaker 1: that that is the framework there and it is such
Speaker 1: a different framework here, does that make you want to
Speaker 1: invest in Europe a little bit more?
Speaker 2: Well? You know, I think one of our themes at
Speaker 2: PIMCO is that we're in a world where taking advantage
Speaker 2: of a global opportunity set makes sense. Also, we're in
Speaker 2: a world where makes us to focus on valuations and
Speaker 2: without getting into particular markets or securities. There have been
Speaker 2: some pretty big divergencies between valuation and the US and Europe,
Speaker 2: especially in inequity markets. Also, you know, the Europeans are
Speaker 2: much closer to their two percent target than is the
Speaker 2: FED because from your point of view, the tariffs are
Speaker 2: really a disinflationary for so we're at different points in
Speaker 2: the rate cycle and that does open up some good opportunities.
Speaker 4: Richard Clarita, you are definitive in the mathematics, the modern
Speaker 4: mathematics of our economics.
Speaker 3: Then, you know, we.
Speaker 4: Talk about a new framework and it's a lot of
Speaker 4: job boning about process. Maybe it's what are we going
Speaker 4: to do with the dots? What are we going to
Speaker 4: do with the mathematics of modern economics forward? Is it
Speaker 4: diminished after all this turmoil?
Speaker 2: You know, you know, Tom, you and I over the years,
Speaker 2: decades now, I've talked about that a number of times,
Speaker 2: and my thinking continues to be the mathematics, the models,
Speaker 2: including my own, our tools. They're a starting point for
Speaker 2: analysis and discussion. But they're not They're not handcuffs, nor
Speaker 2: are they the destination. And certainly, you know, the the
Speaker 2: last five years have been unusual with a pandemic and
Speaker 2: all the rest. But I continue to believe that models
Speaker 2: in math are our tools, not handcuffs.
Speaker 4: My goal right now, Rich is to get you on
Speaker 4: the short list, is to be the next chairman. So
Speaker 4: let's talk tariffs here. What is the clarita mathematics of
Speaker 4: Trump tariffs?
Speaker 2: Well, as Mike mckeeth said, they are raising a heck
Speaker 2: of a lot of revenue, and I would agree with
Speaker 2: my Washington there you go. I think I think Washington
Speaker 2: may very quickly get hooked on the two or three
Speaker 2: hundred billion dollars a year in tariff revenue, especially if
Speaker 2: you know the initial cost of raising that revenue is
Speaker 2: in the rearview mirror, which which I think I expect
Speaker 2: to be the case down the road. Look, we're in
Speaker 2: a different regime, you know. We talked at PIMCO in
Speaker 2: June about uh an era of fragmentation, and these trends
Speaker 2: have been accelerating and the destination global trading system and
Speaker 2: global economy is going to be very different in five
Speaker 2: years than it was in the thirty years of globalization.
Speaker 2: So I think to be continued is the way I
Speaker 2: would answer your question.
Speaker 3: He's running, Is that what you think?
Speaker 1: I know?
Speaker 4: Bullets running?
Speaker 3: Yeah.
Speaker 4: I think by the time we get done on the
Speaker 4: show today, we're gonna have Tracy Alloway running.
Speaker 1: I think that maybe we'll doubt but I am we will.
Speaker 1: She's sitting here with us. I'm sure, she says, I
Speaker 1: bag Rich. I am curious though, going forward this idea
Speaker 1: of how inflationary tariffs could or couldn't be given the
Speaker 1: fact that this is a new world order. And we
Speaker 1: were talking with Adam Posen of the Peters Constitute earlier
Speaker 1: and he was talking about how he sees inflation as
Speaker 1: having nodes of the nineteen seventies and potentially being really
Speaker 1: pernicious Why do you not necessarily see that?
Speaker 3: Why are markets more sanguine on that risk?
Speaker 2: Well, I think simply because the the nineteen seventies we're
Speaker 2: a very serient experience for the current group of policy
Speaker 2: makers who lived through it, and I think there were
Speaker 2: some important lessons learned. And one lesson learned is high
Speaker 2: and persistent inflation is very costly to the economy. And
Speaker 2: I think politicians learned that as well, and so I
Speaker 2: think that central banks have earned a lot of credibility
Speaker 2: the under Vulcar, under green Span, under pass FED chairs
Speaker 2: in the US and abroad, and I think that expectations
Speaker 2: of inflation, we're sort of in a world in which
Speaker 2: the bomb markets at least think that over a five
Speaker 2: year period, the FED is going to do whatever it
Speaker 2: takes to get inflation down what I call two points something.
Speaker 2: And I think that's an important victory that central banks
Speaker 2: are still benefiting from. And I would expect that and
Speaker 2: certainly hope that will continue.
Speaker 4: Richter Clarita with us follow you on radio and TV.
Speaker 4: We've extended this wonderful show with a huge market movie
Speaker 4: c today. Off of the Powell speech, I want to
Speaker 4: turn to Michael McKee because my head's spinning. I've got
Speaker 4: Chairman Bullard, Chairman Clarita, Chairman Alloway, and the rest. So
Speaker 4: when they're in the Oval Office and they're sitting on
Speaker 4: the couches and President Trump is going to turn to
Speaker 4: the people he trusts. Here, let's start with the Secretary
Speaker 4: of Treasury. What is Beson can say to him about
Speaker 4: the qualifications needed for a Trump chairman.
Speaker 5: Well, probably from Scott Besson's you would hear the importance
Speaker 5: of being able to relate on Wall Street. It was
Speaker 5: put once to me that the Treasury Secretary's job in
Speaker 5: terms of the markets is to be able to calm
Speaker 5: them down when something is going wrong. And so that
Speaker 5: I would argue for a certain number of the candidates,
Speaker 5: maybe miss Alloway, it fits in that category that have
Speaker 5: that gravitas to be able to do that. The idea
Speaker 5: that you want to cut rates is that's not really
Speaker 5: part of it, because you wouldn't be on the list
Speaker 5: if you didn't want to cut rates at this point.
Speaker 5: So it's going to be somebody who is the president
Speaker 5: will feel comfortable with maybe this move if the Fed
Speaker 5: cuts rates. He's more comfortable with a wider group of
Speaker 5: people because he started to get what he.
Speaker 4: Wants and Joe Wisenthal.
Speaker 5: We could add job Weisenthal because well, we don't know
Speaker 5: if the president is a country music fan. We'd have
Speaker 5: to find that out first. But I think going forward,
Speaker 5: the one thing you could say maybe out of this
Speaker 5: speech is if an ordinary administration which wasn't going to
Speaker 5: be subject kind of the whims the way Donald Trump
Speaker 5: does things, this would have really given a boost to
Speaker 5: Chris Waller because essentially what they're saying is Chris Waller
Speaker 5: was right that inflation looked through inflation from tariffs because
Speaker 5: it will be a one time price boost.
Speaker 1: Yeah, Now the question is going to be and ultimately
Speaker 1: is this going to be.
Speaker 3: A hawkish cut or a dubbish cut.
Speaker 1: In September, Pimpko goes at Rich Clarita, you've been incredibly
Speaker 1: generous with your time. Thank you so much for being
Speaker 1: with us as we dissect that speech. It was a
Speaker 1: lot longer than as prior speeches, and it was one
Speaker 1: that signaled at the beginning of a new rate cutting cycle.
Speaker 1: They have not cut rates since December in twenty and
Speaker 1: twenty four