WEBVTT - Former St. Louis Fed President Jim Bullard Talks Interest Rates, Fed Chair

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Let's attempt to get a clear of you on things

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<v Speaker 2>not just my stocks. Let's talk about the future. This

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<v Speaker 2>fed a reserve, the White House casting a wide net

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<v Speaker 2>to replace fed Share. Jaypow, the US Treasury Secretary, scale

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<v Speaker 2>best and praising a quote very good meeting with the

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<v Speaker 2>former Saint Lewis FED President Jim Bullard during his search.

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<v Speaker 2>Jim joined us in the studio for more. Jim, good morning,

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<v Speaker 2>good morning, Thanks for being here. Not many people get

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<v Speaker 2>to experience what you've just experienced, sitting down for a

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<v Speaker 2>conversation to potentially become the fed share. Can you walk

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<v Speaker 2>us through what that was like? What's the process like?

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<v Speaker 3>Well, as you say, they have a lot of a

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<v Speaker 3>lot of people on the list and they're following through.

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<v Speaker 3>It's a transparent process. I think that's good. I think

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<v Speaker 3>all the I know virtually all the people on the list,

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<v Speaker 3>I think they're all good. So I think this was

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<v Speaker 3>a meaning just to talk in broad terms, but I

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<v Speaker 3>can't really report out, you know, details, a word said.

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<v Speaker 2>The Treasury Secretary incredibly talent into the economy and financial markets.

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<v Speaker 2>I'm sure you experienced that in your conversation with him.

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<v Speaker 2>I think you can share with us the kind of

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<v Speaker 2>questions I ammationed that he's asking you when I ask

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<v Speaker 2>them to you, which essentially is, how do you view

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<v Speaker 2>things right now? How do you think about the labor market.

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<v Speaker 3>I thought the Fed's decision was a good one. This

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<v Speaker 3>is looks like a sequence of three moves in a

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<v Speaker 3>row through the end of the year. Of course, you

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<v Speaker 3>want to be data dependent, and the chair stress that

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<v Speaker 3>in the press conference. But I think the committee was

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<v Speaker 3>worried about the non farm payrolls report that you know,

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<v Speaker 3>revised the previous months down considerably. You know, non farm

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<v Speaker 3>payrolls is kind of the key number for the for

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<v Speaker 3>the FED, so I think that made them a little

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<v Speaker 3>bit nervous. There are stories that you can tell about

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<v Speaker 3>why that's happening, But on the other hand, you know

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<v Speaker 3>it could be weakness and market so I think that

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<v Speaker 3>tilted things toward a little bit more dubbish policy. So

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<v Speaker 3>they brought October into the picture, and now you've got

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<v Speaker 3>markets pricing probably seventy five by the end of the year.

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<v Speaker 3>That would be a significant move by the end of

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<v Speaker 3>the year, and they have a little bit of optionality

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<v Speaker 3>if the data goes the other way. So it's a

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<v Speaker 3>pretty good decision from the point of view of how

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<v Speaker 3>this works.

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<v Speaker 1>You said they have optionality if the data goes the

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<v Speaker 1>other way. How high is the bar for strength and

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<v Speaker 1>the economy to really prevent the FED at this point,

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<v Speaker 1>given everything from going three times this year?

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<v Speaker 3>Yeah, I think the committee is also spooked a little

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<v Speaker 3>bit by last year because last year the data looked

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<v Speaker 3>weak but then turned around abruptly, and so they'll be

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<v Speaker 3>nervous about that. It's hard to say exactly how high

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<v Speaker 3>the bar is. Acid judgment callill have to be made

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<v Speaker 3>by members of the committee.

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<v Speaker 1>There's this other disagreement on the FED. Clearly there are

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<v Speaker 1>a lot of them, and understandably because in Wall Street

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<v Speaker 1>there are a lot of disagreements as well as to

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<v Speaker 1>what the economic backdrop is. But you could see a

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<v Speaker 1>spread in terms of where the neutral rate was from

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<v Speaker 1>say three percent in terms of the long term dot

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<v Speaker 1>for some of the FED numbers or four percent for

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<v Speaker 1>some of the others. Where do you sit.

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<v Speaker 3>I think it's still fairly low, So you know, you

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<v Speaker 3>could argue maybe three in a quarter or something like that.

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<v Speaker 3>So if you're still above four percent with the policy rate,

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<v Speaker 3>you're still one hundred basis points above if that's your

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<v Speaker 3>if that's your number. So that's why I've been saying

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<v Speaker 3>they have room to maneuver. They have room to come

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<v Speaker 3>down some on the policy rate and still put downward

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<v Speaker 3>pressure on inflation. Inflation is still above target. And you

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<v Speaker 3>know it has been debated at length over the last

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<v Speaker 3>six months or so, but I think they're in pretty

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<v Speaker 3>good position right now.

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<v Speaker 2>How credible do you think two percent actually is.

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<v Speaker 3>I think the Committee is very dedicated to the two

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<v Speaker 3>percent target. I think it would be foolish to abandon

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<v Speaker 3>that target. It has set an international standard across all

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<v Speaker 3>the countries of the world. And if the lead economy says, oh,

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<v Speaker 3>you know, we're going to back off that, then all

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<v Speaker 3>the other countries would back off. You'd be back into

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<v Speaker 3>the seventies and you'd have a lot of care. So

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<v Speaker 3>that is not a good idea, and the Committee will

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<v Speaker 3>try to get back to two percent. However, I think

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<v Speaker 3>you want to get back on a nice, smooth, asymptotic

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<v Speaker 3>path to two percent, and the forecasts always show that,

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<v Speaker 3>and that's always the way the Fed thinks about it.

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<v Speaker 2>The two year rolling view. Now some people might say

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<v Speaker 2>that's aspirational magical forecasting. It's just we're always forecasting this

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<v Speaker 2>two years out but never actually hits it based on history,

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<v Speaker 2>which raises the credibility question. The federal reserves cunning interest

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<v Speaker 2>rates with inflation closer to three than it is to two,

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<v Speaker 2>with unemployment closer to four than it is to five,

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<v Speaker 2>and but that could ease it all time highs. Is

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<v Speaker 2>this the right time to back away from that restrictive

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<v Speaker 2>monetary policy that's going to lead to that glidepoth back

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<v Speaker 2>towards two percent.

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<v Speaker 3>It's restrictive, but even when they come down, it'll still

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<v Speaker 3>be somewhat restrictive. I think one of the pieces of

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<v Speaker 3>risk management you have to think about here is suppose

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<v Speaker 3>the economy is tipping into a marked slowdown. Then the

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<v Speaker 3>committee would want to be accommodative in that circumstance, and

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<v Speaker 3>you'd want to be below your neutral rate, so you'd

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<v Speaker 3>have a long way to go. You'd have to really

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<v Speaker 3>scramble if that happened. I'm not saying that's the base case,

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<v Speaker 3>but that's a possibility, and so you probably want to

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<v Speaker 3>be a little bit closer to neutral so you didn't

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<v Speaker 3>have to work so hard if you got into that scenario.

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<v Speaker 1>One of the tests for a lot of people is

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<v Speaker 1>if inflation does go up, maybe say at the end

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<v Speaker 1>of this year early next year, which a lot of

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<v Speaker 1>people are expecting that it will, what's the Fed's response.

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<v Speaker 1>Do they keep cutting or do they look past it

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<v Speaker 1>is simply a one time price adjustment.

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<v Speaker 3>I think they've made pretty clear that they're going to

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<v Speaker 3>look through temporary tariff effects and they expect inflation to

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<v Speaker 3>resume its downward trend and the effects have been muted.

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<v Speaker 3>US Trade Representative does not have an inflation target, so

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<v Speaker 3>I think that you know, it's up to the FED

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<v Speaker 3>to determine what the inflation rate is going to be,

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<v Speaker 3>not trade policy, but so lots of things affect inflation,

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<v Speaker 3>and then you know you have to get on your

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<v Speaker 3>sort of medium term path, and I think that's what

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<v Speaker 3>they're doing.

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<v Speaker 1>You mentioned earlier that there is a degree of fear

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<v Speaker 1>of repeating what we saw last year, where the FED

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<v Speaker 1>cut by one hundred basis points and we saw the

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<v Speaker 1>long end of the yield curve rise by one hundred

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<v Speaker 1>basis points and economic data pick back up. And I

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<v Speaker 1>just wonder how much you think the FED is open,

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<v Speaker 1>or you would be open if you are on the

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<v Speaker 1>Fed now to adjust some of the balance sheet composition

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<v Speaker 1>in response to any move in the long end of

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<v Speaker 1>the yield curve.

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<v Speaker 3>I think the balance sheet policy has been in the background.

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<v Speaker 3>I think that's a appropriate. The Committee has been shrinking

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<v Speaker 3>the size of the balance sheet a little bit slower

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<v Speaker 3>pace recently, but I think they're pretty happy with that

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<v Speaker 3>policy for now. They want to get to this ample

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<v Speaker 3>reserves level. There's a good speech by my former colleague

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<v Speaker 3>Chris Waller in Dallas, so if you want some bedtime reading,

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<v Speaker 3>you can read that. But that was actually a very

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<v Speaker 3>good sort of back of the envelope calculation about the

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<v Speaker 3>balance sheet and all the pieces of the balance sheet.

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<v Speaker 3>So I think that's a good place to start for

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<v Speaker 3>those that want to understand current balance sheet policy. The

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<v Speaker 3>mortgage backed securities are going to take a long time

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<v Speaker 3>to go off. I do think the FED made a

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<v Speaker 3>mistake in March April of twenty twenty. We went all

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<v Speaker 3>in on mortgage backed securities, thinking that the pandemic was

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<v Speaker 3>going to harm the housing market, and we got ninety two,

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<v Speaker 3>one hundred and twenty days in and boy, it went

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<v Speaker 3>the other way. Demand for housing was way up, so

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<v Speaker 3>unfortunately we added a lot of mortgage backed securities over

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<v Speaker 3>that two year period. But we're going to have to

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<v Speaker 3>let that gradually go off.

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<v Speaker 2>Would you avote it for fifty this week?

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<v Speaker 3>No, I don't think so. So I thought it was

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<v Speaker 3>a good decision because the Hawks could say that, Okay,

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<v Speaker 3>we only went twenty five, and we got optionality on

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<v Speaker 3>the future moves. But the Doves got the twenty five

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<v Speaker 3>and probably twenty five at October, and that's almost as

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<v Speaker 3>good as getting fifty today. And you do get the

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<v Speaker 3>optionality in there.

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<v Speaker 2>Says when people talk about the institution, you know so well,

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<v Speaker 2>just based on what you've just said, do you think

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<v Speaker 2>people underestimate just how persuases if you need to be

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<v Speaker 2>on the committee, the degree of negotiations that do take

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<v Speaker 2>place about the kind of things you just described.

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<v Speaker 3>It's a you know, it's a big formal meeting, and

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<v Speaker 3>people are very good at making their arguments, and they

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<v Speaker 3>have the presidents have their own staffs. So I mean,

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<v Speaker 3>I love it. I think it's a great uh, it's

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<v Speaker 3>it's a great place to make decisions. I think also

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<v Speaker 3>people have to understand that you're not talking so much

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<v Speaker 3>about what you're going to do on the day, you're

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<v Speaker 3>talking about what should our future path be over the

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<v Speaker 3>next six months and over the next two years, but

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<v Speaker 3>especially over the next six months, because you know you

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<v Speaker 3>have to it's a big committee and you have to

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<v Speaker 3>be basically on board with you know what you're going

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<v Speaker 3>to do.

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<v Speaker 1>On that particular day, you were very vocal about how

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<v Speaker 1>you felt about the dot plot back in the day.

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<v Speaker 1>Didn't like it.

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<v Speaker 3>Bring this up.

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<v Speaker 1>So significant to see your dot always just there at zero?

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<v Speaker 3>Are you going to get rid of it? Would you

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<v Speaker 3>get rid of it? I mean, what use? I think

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<v Speaker 3>we can do better than we have on the dot plot.

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<v Speaker 3>And at one point I talked about you dropping out completely.

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<v Speaker 3>I did drop out of the long long run part.

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<v Speaker 3>But I think we could do something like former chair

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<v Speaker 3>Ben Bernanke outlined in the recent conference that the FED

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<v Speaker 3>had about the framework review, and he mocked up a

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<v Speaker 3>quarterly report that could be put out, and that would

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<v Speaker 3>put out a forecast. That's what other central banks do,

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<v Speaker 3>and then members can talk relative to that forecast. They

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<v Speaker 3>could say, well, no, I'm more optimistic about the economy

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<v Speaker 3>or more pessimistic about inflation, whatever. I think that would

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<v Speaker 3>be closer to an international standard, and that's probably the

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<v Speaker 3>direction this should go, because the dot plot has its problems.

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<v Speaker 2>I remember when you make that move at the time,

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<v Speaker 2>and I can't believe it was about ten years ago,

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<v Speaker 2>which just amazing how quickly time is flying. Jim is

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<v Speaker 2>going to see you. Appreciate you, transparency and good luck

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<v Speaker 2>with the process. Thank you, sir, appreciate it.

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<v Speaker 3>Great to be here. Thank you, Thank you very much.

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<v Speaker 2>The former Sen Lewis FED President Jimpull out there, and

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<v Speaker 2>of course I can d A to B the next

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<v Speaker 2>FED chair