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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: They form a New York Fed President Bill Dudley with

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Speaker 2: this to say, the Fed should prepare markets for the

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Speaker 2: unexpected to an unusual extent, the world's most powerful central

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Speaker 2: bank leaves the public in the dark. It can and

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Speaker 2: should do better. Build joined Just now for more, Bill,

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Speaker 2: Let's take it to the top from the top, and

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Speaker 2: welcome to the program sir. What is the importance of

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Speaker 2: a central bank articulating conveying its reaction function and where

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Speaker 2: do you think the SEP falls short at the moment?

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Speaker 1: The advantage of conveying your reaction functions the markets can

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Speaker 1: anticipate in real time as the economic outlook changes, what

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Speaker 1: the FED is going to do in the future, and

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Speaker 1: that actually actually speeds up the transmission of Madre policy

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Speaker 1: to the real economy. So the markets know how the

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Speaker 1: FIT is going to adjust, market prices adjust immediately, and

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Speaker 1: so that makes the FEDS response communicated to the market

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Speaker 1: to the comming more quickly.

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Speaker 3: So that's a really good thing. Right now.

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Speaker 1: The summary of economic projection is very much focused on

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Speaker 1: the modal forecast of the nineteen five see participants, and

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Speaker 1: so it doesn't really tell you much at all about

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Speaker 1: what the FED would do if the tariff impact turns

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Speaker 1: out to be larger on inflation or it turns out

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Speaker 1: to be larger on growth.

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Speaker 3: How will the FED pivot? How much will they cut rates?

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Speaker 1: And this is why a lot of central banks around

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Speaker 1: the world publish staff forecasts with scenarios or publish committee

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Speaker 1: forecasts with scenarios, which basically the scenarios give you some

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Speaker 1: sense of what the central bank will do if things

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Speaker 1: turn out differently than expected. Last week, Bernanki gave a

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Speaker 1: presentation at the Federal Reserve of the second annual Thomas

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Speaker 1: Lawback Research Conference. He basically outlined why the FED needs

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Speaker 1: to do this. The FED is basically an outlier. Every

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Speaker 1: other central bank does this in one form or another

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Speaker 1: that are peers of the FED, and this would actually

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Speaker 1: help the FED to both communicate and also pivot when

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Speaker 1: things turn out to be different than they expected. If

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Speaker 1: you had that scenario in say twenty twenty one twenty two,

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Speaker 1: that inflation might stay.

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Speaker 3: Higher for longer, that probably made it easier.

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Speaker 1: For the FED to terminate its large scale asset purchase

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Speaker 1: program earlier.

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Speaker 2: Bill, Isn't this something that effective communication? In the news

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Speaker 2: conference could address well.

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Speaker 1: I think the problem with the news conference is the

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Speaker 1: questions are very much focused on the central forecast and

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Speaker 1: the Summary of Economic Projections and the DOC lot.

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Speaker 3: So we don't we don't we don't.

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Speaker 1: Get into a lot of detailed analysis of what if

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Speaker 1: you know.

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Speaker 3: When Paul is asked questions.

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Speaker 4: About what would you do if this happens, he usually

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Speaker 4: says it's data dependent, and we'll see if you have

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Speaker 4: if you actually sketched out alternative scenarios, that gives you

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Speaker 4: a little bit more meat on the bone to sort

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Speaker 4: of see how the federalis would react if things are

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Speaker 4: turned out.

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Speaker 3: Differently and expected.

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Speaker 1: Federaries have already does this as part of the staff

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Speaker 1: forecasts that are given to the Federal over Market Committee presumers.

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Speaker 1: They do what are called all sims, which basically our

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Speaker 1: simulations of if.

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Speaker 3: The world turns out to be different.

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Speaker 1: So this is not like it's not being done in

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Speaker 1: truly already at the FED. Just I think sharing a

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Speaker 1: little bit more of this information with the public would

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Speaker 1: be very helpful.

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Speaker 5: Well, Bill, there is one argument that part of the

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Speaker 5: reason market participants concentrate so much on that median outlook

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Speaker 5: is because it is an anonymous that what we get

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Speaker 5: in the SEP we don't know what each individual member thinks,

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Speaker 5: so it forces us to coalesce around that media. Should

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Speaker 5: there and could there be a scenario where we do

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Speaker 5: know what each individual member thinks, that it is no

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Speaker 5: longer an anonymous survey put out to the public.

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Speaker 1: Well, another shortcoming of the Summary of Economic projections is

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Speaker 1: you can't connect the interest rate dot back to the

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Speaker 1: forecast that that person made for unemployment, inflation, and growth.

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Speaker 1: So if you can't really discern an individual's person's reaction function,

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Speaker 1: there have been proposals been made from time to time

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Speaker 1: that let's actually publish what each person's forecast is so

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Speaker 1: you can actually sort of see that reaction function.

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Speaker 3: I think that would be an improvement over what we

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Speaker 3: have today.

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Speaker 1: But of course then people are going to be trying

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Speaker 1: to figure out which.

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Speaker 3: Dot is the chairman's dot.

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Speaker 1: And I think, you know, communicating broadly to financial markets

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Speaker 1: to people are less FED watchers than me or you.

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Speaker 1: I'm not sure that connecting the dots really allows you

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Speaker 1: to provide that nuance. But what will the FED do

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Speaker 1: if things turn out differently than expected?

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Speaker 5: It does seem like we're an environment though, where Chair

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Speaker 5: Powell has been trying his hardest not to make news,

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Speaker 5: and part of that bill seems akin to what's happening

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Speaker 5: in politics, that President Trump is more likely to say

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Speaker 5: something about where the path they're going and his displeasure

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Speaker 5: for it. What changes if we do get something to

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Speaker 5: what you're proposing, where you get more scenarios, is there

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Speaker 5: increased political pressure? Is that a risk that the FED

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Speaker 5: should think about?

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Speaker 1: Well, I think the political pressure of scenarios is that

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Speaker 1: you're writing down things that might be not so good.

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Speaker 1: So let's imagine that the FED wrote down a scenario

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Speaker 1: where the terrorists are going to turn out to be

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Speaker 1: higher for longer.

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Speaker 3: That's going to feed more into inflation.

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Speaker 1: Now I'm sure President Trump wouldn't like that, but still

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Speaker 1: it's a possibility in terms of the economic outlook, and

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Speaker 1: the FED really does need to think about things beyond

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Speaker 1: the central forecast.

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Speaker 2: Can we just wrap it up with something you've touched

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Speaker 2: on a few times, Bill, If the dual mandate is

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Speaker 2: in conflict at the end of the year, which side

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Speaker 2: of the mandate do you think they should prioritize.

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Speaker 1: I think it's really difficult to say at this point

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Speaker 1: because it depends on what the risks are of making

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Speaker 1: a mistake. So let's imagine that you decided, oh, I'm

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Speaker 1: really more worried about the growth side, and then as

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Speaker 1: a consequence of that, inflation expectations became unanchored. Then you'd

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Speaker 1: have a real mess in your hand. You'll be back

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Speaker 1: in the nineteen seventies. Not a great place to be.

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Speaker 1: So I think it's really not just about which factor

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Speaker 1: is more off target, but also what are the risks

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Speaker 1: of being wrong? And I think why they're fed is

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Speaker 1: paused right now is because they don't want to be wrong.

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Speaker 1: This is a very tricky situation where you don't know

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Speaker 1: where the trade policy is going to end. You don't

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Speaker 1: know the impact of trade policy on growth and inflation,

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Speaker 1: and you don't know how this is going to affect

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Speaker 1: households and businesses in terms of their attitude.

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Speaker 3: It's sort of future inflation. Bill.

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Speaker 2: Appreciate your input, as always, sir, built dounply there the

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Speaker 2: former New York FED president with an you Calum on

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Speaker 2: Bloomberg Opinion