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

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Speaker 2: It's the Latest. This Morning, Fedshair Japow saying that recent

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Speaker 2: inflation data hasn't materially changed the overall picture when it

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Speaker 2: comes to raycounts this year. Former New York FED President

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Speaker 2: Bill Dudley saying he thinks the FED is wrong about

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Speaker 2: how low rates will go. Right in this betting against

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Speaker 2: the Fed is a fraught endeavor. Nevertheless, in this case,

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Speaker 2: I think the market is right well. The Fed's projections

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Speaker 2: for twenty twenty four look likely to be more accurate

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Speaker 2: than the markets at the start of the year. This

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Speaker 2: time around, it's the central Bank, not the market that

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Speaker 2: we'll probably have to adjust, Bill and police to say,

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Speaker 2: now for more Bill, this came up in our last

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Speaker 2: conversation together, the spread between the market and the federalserve.

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Speaker 2: What do you think explains that? Is that just a refusal,

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Speaker 2: a reluctance to this FED to really engage in that

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Speaker 2: debate before we get past this inflation, this inflation hurdle.

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Speaker 3: The FED is focused more on what they're going to

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Speaker 3: do in twenty twenty four and don't have a lot

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Speaker 3: of confidence about what's going to happen beyond that well.

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Speaker 3: I think it's interesting is that earlier in the ear

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Speaker 3: we had a gap between thinking that that was going

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Speaker 3: to ease quite a bit six rate cuts that only

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Speaker 3: had three.

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Speaker 4: That's closed, But now the gap has gone the other way.

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Speaker 3: The market thinks that the federal fund rate's going to

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Speaker 3: bottom out around three and three quarters percent. The FED

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Speaker 3: in their summary of economic projections has it going down

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Speaker 3: to two point six percent.

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Speaker 4: So there's a or one hundred basic point different. I

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Speaker 4: think the market's right that the Fed is not going.

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Speaker 3: To go as far as as projecting, and they're sorry

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Speaker 3: of economic projections for two reasons. One, inflation is probably

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Speaker 3: not going to average two percent, is probably go to

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Speaker 3: average a bit higher than two percent. And number two

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Speaker 3: are start the so called neutral rate you know that

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Speaker 3: sets the neutral manitary policy probably has risen given the

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Speaker 3: large fiscal deficits, the AI investment spending boom, and a

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Speaker 3: host to other factors that are basically putting more pressure

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Speaker 3: on the pool savings bill.

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Speaker 2: I often reflect on a conversation you and I had

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Speaker 2: together a number of years ago. I'll sing your praises

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Speaker 2: because you're a modest man and won't do it for yourself.

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Speaker 2: You said in June of I think twenty one that

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Speaker 2: rates are going to go much higher than people think.

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Speaker 2: I remember when you talked about five and five sound

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Speaker 2: it's so foreign five that time now would be like

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Speaker 2: me saying that ten year years to go into eight percent.

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Speaker 2: People just turned around and were like, Bill, your nuts,

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Speaker 2: We're not going to five percent. What did you see

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Speaker 2: that early that led you to believe that rates would

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Speaker 2: need to be that high to get inflation down? And

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Speaker 2: how does that inform your view of where things will

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Speaker 2: be longer term?

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Speaker 3: Well, the federies are set themselves up deliberately to be

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Speaker 3: late in terms of tightening this last last cycle. They

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Speaker 3: basically said, we can't raise rates until inflation is two percent.

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Speaker 3: We're at full employment, and we expect inflation to be

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Speaker 3: two percent in the above two percent in the future.

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Speaker 3: So by the definition, they were going to be very late.

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Speaker 3: If you're late, that means you have to do more.

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Speaker 4: So that's the.

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Speaker 3: Reason why I thought that the rates would have to

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Speaker 3: go quite a bit higher than they expected this time.

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Speaker 3: I think my disagreement with the Fed is the fact

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Speaker 3: that they still think neutral federal fund rates very very

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Speaker 3: low two point six percent. In the reading an estimate

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Speaker 3: of the long run neutral federal fundrate at two percent.

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Speaker 4: Inflation, and I think that's probably not the case.

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Speaker 3: I mean, it's true after the Great Financial Crisis when

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Speaker 3: we had a lot of financial damage to the econmy

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Speaker 3: but if you look back, the tailor rule prior to

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Speaker 3: the Great Financial Crisis, tailor rule had two percent real

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Speaker 3: rates as neutral.

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Speaker 4: So the zero point six percent.

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Speaker 3: Reading that the Fed has that's the immediate estimate, seems

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Speaker 3: awfully love to me.

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Speaker 1: Given that, how much do you think that there needs

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Speaker 1: to be a full repricing of just how much of

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Speaker 1: a cutting cycle there needs to be in the very

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Speaker 1: dear term. In other words, if three rate cuts this

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Speaker 1: year seems a little bit lofty given how strong the

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Speaker 1: data has been, and you see a more likely chance

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Speaker 1: of two or one, well, I think this.

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Speaker 4: Year is really good and been, as Paul says repeatedly,

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Speaker 4: on the data.

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Speaker 3: You know, small differences in the growth rate and the

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Speaker 3: inflation outlooker and change whether the Fed does a little

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Speaker 3: or or more. I don't think, you know, three rate

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Speaker 3: cuts are out of the realm of possibility.

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Speaker 4: I think where I disagree is more longer term, and

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Speaker 4: you've see what's happened.

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Speaker 3: The market's free priced that longer term upwards three and

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Speaker 3: three quarters percent. It's the bottom for the federal funds rate,

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Speaker 3: and that's what's pushing up ten year bondials. So the

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Speaker 3: bond market is adjusting to the fact that they're changing

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Speaker 3: their expectations of where the Fed's going over the longer term.

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Speaker 1: The reason why I ask this is because every time

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Speaker 1: we hear from Power, he talks about bumps in the road,

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Speaker 1: and he talks about how recent data, even though it's

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Speaker 1: come in hotter than expected for the most part, doesn't

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Speaker 1: alter his view that it would be appropriate to start

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Speaker 1: cutting rates at some point in the near future. At

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Speaker 1: what point should that shift should some of these data

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Speaker 1: points be viewed to something other than bumps.

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Speaker 3: Well, his view is that monetary policy is tight and

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Speaker 3: so just a question of time before it slows the economy.

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Speaker 3: The other thing he thinks that pretty strongly, and he's

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Speaker 3: talked about this yesterday again, is that the reason why

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Speaker 3: growth is strong because of the supply chains of normalizing.

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Speaker 3: So you're supplied to supply constraints for holding back the economy.

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Speaker 3: Supply chain is normalizing.

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Speaker 4: You know, one time increasing the growth rate.

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Speaker 3: I think that what he's underestimating is the fact that

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Speaker 3: financial conditions that ease a lot since late October, and

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Speaker 3: that's also supplying considerable support to the economy.

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Speaker 1: And it also raises this question. I know you addressed

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Speaker 1: this last time you were on about whether policy is

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Speaker 1: truly restrictive or not, and you didn't think it was

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Speaker 1: nearly as restrictive as many people had expected. Do you

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Speaker 1: think that there are more people on the Fed who

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Speaker 1: are coming around to this view, who are thinking, wait

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Speaker 1: a second, if we're seeing such easy and financial conditions

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Speaker 1: at rates where they are, maybe that suggests we're not

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Speaker 1: nearly as restrictive as we keep saying.

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Speaker 3: I think very slowly we're starting to see that happen

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Speaker 3: the media and estimate from the FED officials about where

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Speaker 3: neutral fedal fund rate is at two percent inflation move

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Speaker 3: from two point five to two point six percent, so

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Speaker 3: it moved to tenth of a percent, so it's starting

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Speaker 3: to move. The other thing that's important here to notice

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Speaker 3: is there's a big skew to feteries or official testaments.

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Speaker 3: Bottom is at two point four, the top is at

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Speaker 3: three point eight, so there's plenty of room for the

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Speaker 3: medium to move quit considerably higher than the two point

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Speaker 3: six percent that they have today, So I think it's

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Speaker 3: going to continue to drift up.

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Speaker 2: Bill love this place, fantastic. Just down this morning, Bill

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Speaker 2: down play at Bloomberg Opinion. Bill, thank you the Times

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Speaker 2: of this Place. The headline, the Fed is wrong about

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Speaker 2: how low rates will go. Betting against the Fed is

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Speaker 2: a fraw endeavor, But Bill says, in this case, I

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Speaker 2: think the market is right