Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Let's attempt to get a clear of you on things
Speaker 2: not just my stocks. Let's talk about the future. This
Speaker 2: fed a reserve, the White House casting a wide net
Speaker 2: to replace fed Share. Jaypow, the US Treasury Secretary, scale
Speaker 2: best and praising a quote very good meeting with the
Speaker 2: former Saint Lewis FED President Jim Bullard during his search.
Speaker 2: Jim joined us in the studio for more. Jim, good morning,
Speaker 2: good morning, Thanks for being here. Not many people get
Speaker 2: to experience what you've just experienced, sitting down for a
Speaker 2: conversation to potentially become the fed share. Can you walk
Speaker 2: us through what that was like? What's the process like?
Speaker 3: Well, as you say, they have a lot of a
Speaker 3: lot of people on the list and they're following through.
Speaker 3: It's a transparent process. I think that's good. I think
Speaker 3: all the I know virtually all the people on the list,
Speaker 3: I think they're all good. So I think this was
Speaker 3: a meaning just to talk in broad terms, but I
Speaker 3: can't really report out, you know, details, a word said.
Speaker 2: The Treasury Secretary incredibly talent into the economy and financial markets.
Speaker 2: I'm sure you experienced that in your conversation with him.
Speaker 2: I think you can share with us the kind of
Speaker 2: questions I ammationed that he's asking you when I ask
Speaker 2: them to you, which essentially is, how do you view
Speaker 2: things right now? How do you think about the labor market.
Speaker 3: I thought the Fed's decision was a good one. This
Speaker 3: is looks like a sequence of three moves in a
Speaker 3: row through the end of the year. Of course, you
Speaker 3: want to be data dependent, and the chair stress that
Speaker 3: in the press conference. But I think the committee was
Speaker 3: worried about the non farm payrolls report that you know,
Speaker 3: revised the previous months down considerably. You know, non farm
Speaker 3: payrolls is kind of the key number for the for
Speaker 3: the FED, so I think that made them a little
Speaker 3: bit nervous. There are stories that you can tell about
Speaker 3: why that's happening, But on the other hand, you know
Speaker 3: it could be weakness and market so I think that
Speaker 3: tilted things toward a little bit more dubbish policy. So
Speaker 3: they brought October into the picture, and now you've got
Speaker 3: markets pricing probably seventy five by the end of the year.
Speaker 3: That would be a significant move by the end of
Speaker 3: the year, and they have a little bit of optionality
Speaker 3: if the data goes the other way. So it's a
Speaker 3: pretty good decision from the point of view of how
Speaker 3: this works.
Speaker 1: You said they have optionality if the data goes the
Speaker 1: other way. How high is the bar for strength and
Speaker 1: the economy to really prevent the FED at this point,
Speaker 1: given everything from going three times this year?
Speaker 3: Yeah, I think the committee is also spooked a little
Speaker 3: bit by last year because last year the data looked
Speaker 3: weak but then turned around abruptly, and so they'll be
Speaker 3: nervous about that. It's hard to say exactly how high
Speaker 3: the bar is. Acid judgment callill have to be made
Speaker 3: by members of the committee.
Speaker 1: There's this other disagreement on the FED. Clearly there are
Speaker 1: a lot of them, and understandably because in Wall Street
Speaker 1: there are a lot of disagreements as well as to
Speaker 1: what the economic backdrop is. But you could see a
Speaker 1: spread in terms of where the neutral rate was from
Speaker 1: say three percent in terms of the long term dot
Speaker 1: for some of the FED numbers or four percent for
Speaker 1: some of the others. Where do you sit.
Speaker 3: I think it's still fairly low, So you know, you
Speaker 3: could argue maybe three in a quarter or something like that.
Speaker 3: So if you're still above four percent with the policy rate,
Speaker 3: you're still one hundred basis points above if that's your
Speaker 3: if that's your number. So that's why I've been saying
Speaker 3: they have room to maneuver. They have room to come
Speaker 3: down some on the policy rate and still put downward
Speaker 3: pressure on inflation. Inflation is still above target. And you
Speaker 3: know it has been debated at length over the last
Speaker 3: six months or so, but I think they're in pretty
Speaker 3: good position right now.
Speaker 2: How credible do you think two percent actually is.
Speaker 3: I think the Committee is very dedicated to the two
Speaker 3: percent target. I think it would be foolish to abandon
Speaker 3: that target. It has set an international standard across all
Speaker 3: the countries of the world. And if the lead economy says, oh,
Speaker 3: you know, we're going to back off that, then all
Speaker 3: the other countries would back off. You'd be back into
Speaker 3: the seventies and you'd have a lot of care. So
Speaker 3: that is not a good idea, and the Committee will
Speaker 3: try to get back to two percent. However, I think
Speaker 3: you want to get back on a nice, smooth, asymptotic
Speaker 3: path to two percent, and the forecasts always show that,
Speaker 3: and that's always the way the Fed thinks about it.
Speaker 2: The two year rolling view. Now some people might say
Speaker 2: that's aspirational magical forecasting. It's just we're always forecasting this
Speaker 2: two years out but never actually hits it based on history,
Speaker 2: which raises the credibility question. The federal reserves cunning interest
Speaker 2: rates with inflation closer to three than it is to two,
Speaker 2: with unemployment closer to four than it is to five,
Speaker 2: and but that could ease it all time highs. Is
Speaker 2: this the right time to back away from that restrictive
Speaker 2: monetary policy that's going to lead to that glidepoth back
Speaker 2: towards two percent.
Speaker 3: It's restrictive, but even when they come down, it'll still
Speaker 3: be somewhat restrictive. I think one of the pieces of
Speaker 3: risk management you have to think about here is suppose
Speaker 3: the economy is tipping into a marked slowdown. Then the
Speaker 3: committee would want to be accommodative in that circumstance, and
Speaker 3: you'd want to be below your neutral rate, so you'd
Speaker 3: have a long way to go. You'd have to really
Speaker 3: scramble if that happened. I'm not saying that's the base case,
Speaker 3: but that's a possibility, and so you probably want to
Speaker 3: be a little bit closer to neutral so you didn't
Speaker 3: have to work so hard if you got into that scenario.
Speaker 1: One of the tests for a lot of people is
Speaker 1: if inflation does go up, maybe say at the end
Speaker 1: of this year early next year, which a lot of
Speaker 1: people are expecting that it will, what's the Fed's response.
Speaker 1: Do they keep cutting or do they look past it
Speaker 1: is simply a one time price adjustment.
Speaker 3: I think they've made pretty clear that they're going to
Speaker 3: look through temporary tariff effects and they expect inflation to
Speaker 3: resume its downward trend and the effects have been muted.
Speaker 3: US Trade Representative does not have an inflation target, so
Speaker 3: I think that you know, it's up to the FED
Speaker 3: to determine what the inflation rate is going to be,
Speaker 3: not trade policy, but so lots of things affect inflation,
Speaker 3: and then you know you have to get on your
Speaker 3: sort of medium term path, and I think that's what
Speaker 3: they're doing.
Speaker 1: You mentioned earlier that there is a degree of fear
Speaker 1: of repeating what we saw last year, where the FED
Speaker 1: cut by one hundred basis points and we saw the
Speaker 1: long end of the yield curve rise by one hundred
Speaker 1: basis points and economic data pick back up. And I
Speaker 1: just wonder how much you think the FED is open,
Speaker 1: or you would be open if you are on the
Speaker 1: Fed now to adjust some of the balance sheet composition
Speaker 1: in response to any move in the long end of
Speaker 1: the yield curve.
Speaker 3: I think the balance sheet policy has been in the background.
Speaker 3: I think that's a appropriate. The Committee has been shrinking
Speaker 3: the size of the balance sheet a little bit slower
Speaker 3: pace recently, but I think they're pretty happy with that
Speaker 3: policy for now. They want to get to this ample
Speaker 3: reserves level. There's a good speech by my former colleague
Speaker 3: Chris Waller in Dallas, so if you want some bedtime reading,
Speaker 3: you can read that. But that was actually a very
Speaker 3: good sort of back of the envelope calculation about the
Speaker 3: balance sheet and all the pieces of the balance sheet.
Speaker 3: So I think that's a good place to start for
Speaker 3: those that want to understand current balance sheet policy. The
Speaker 3: mortgage backed securities are going to take a long time
Speaker 3: to go off. I do think the FED made a
Speaker 3: mistake in March April of twenty twenty. We went all
Speaker 3: in on mortgage backed securities, thinking that the pandemic was
Speaker 3: going to harm the housing market, and we got ninety two,
Speaker 3: one hundred and twenty days in and boy, it went
Speaker 3: the other way. Demand for housing was way up, so
Speaker 3: unfortunately we added a lot of mortgage backed securities over
Speaker 3: that two year period. But we're going to have to
Speaker 3: let that gradually go off.
Speaker 2: Would you avote it for fifty this week?
Speaker 3: No, I don't think so. So I thought it was
Speaker 3: a good decision because the Hawks could say that, Okay,
Speaker 3: we only went twenty five, and we got optionality on
Speaker 3: the future moves. But the Doves got the twenty five
Speaker 3: and probably twenty five at October, and that's almost as
Speaker 3: good as getting fifty today. And you do get the
Speaker 3: optionality in there.
Speaker 2: Says when people talk about the institution, you know so well,
Speaker 2: just based on what you've just said, do you think
Speaker 2: people underestimate just how persuases if you need to be
Speaker 2: on the committee, the degree of negotiations that do take
Speaker 2: place about the kind of things you just described.
Speaker 3: It's a you know, it's a big formal meeting, and
Speaker 3: people are very good at making their arguments, and they
Speaker 3: have the presidents have their own staffs. So I mean,
Speaker 3: I love it. I think it's a great uh, it's
Speaker 3: it's a great place to make decisions. I think also
Speaker 3: people have to understand that you're not talking so much
Speaker 3: about what you're going to do on the day, you're
Speaker 3: talking about what should our future path be over the
Speaker 3: next six months and over the next two years, but
Speaker 3: especially over the next six months, because you know you
Speaker 3: have to it's a big committee and you have to
Speaker 3: be basically on board with you know what you're going
Speaker 3: to do.
Speaker 1: On that particular day, you were very vocal about how
Speaker 1: you felt about the dot plot back in the day.
Speaker 1: Didn't like it.
Speaker 3: Bring this up.
Speaker 1: So significant to see your dot always just there at zero?
Speaker 3: Are you going to get rid of it? Would you
Speaker 3: get rid of it? I mean, what use? I think
Speaker 3: we can do better than we have on the dot plot.
Speaker 3: And at one point I talked about you dropping out completely.
Speaker 3: I did drop out of the long long run part.
Speaker 3: But I think we could do something like former chair
Speaker 3: Ben Bernanke outlined in the recent conference that the FED
Speaker 3: had about the framework review, and he mocked up a
Speaker 3: quarterly report that could be put out, and that would
Speaker 3: put out a forecast. That's what other central banks do,
Speaker 3: and then members can talk relative to that forecast. They
Speaker 3: could say, well, no, I'm more optimistic about the economy
Speaker 3: or more pessimistic about inflation, whatever. I think that would
Speaker 3: be closer to an international standard, and that's probably the
Speaker 3: direction this should go, because the dot plot has its problems.
Speaker 2: I remember when you make that move at the time,
Speaker 2: and I can't believe it was about ten years ago,
Speaker 2: which just amazing how quickly time is flying. Jim is
Speaker 2: going to see you. Appreciate you, transparency and good luck
Speaker 2: with the process. Thank you, sir, appreciate it.
Speaker 3: Great to be here. Thank you, Thank you very much.
Speaker 2: The former Sen Lewis FED President Jimpull out there, and
Speaker 2: of course I can d A to B the next
Speaker 2: FED chair