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Speaker 1: Former FED Vice chair and now pimco's Global economic advisor,

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Speaker 1: Rich Clara joining us right now to give us his

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Speaker 1: thoughts on I guess I don't know if it's a conundrum, Rich,

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Speaker 1: maybe that's not the best way to put it, but

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Speaker 1: this is a fad that has made clear that that

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Speaker 1: last mile down to two percent, to a two percent

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Speaker 1: inflation target was going to be a little bit bumping.

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Speaker 1: I think we saw that certainly in the inflation reports

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Speaker 1: last week, and we certainly saw that to a certain

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Speaker 1: extent in the minutes and the discussions that were had

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Speaker 1: behind closed doors at the end of January.

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Speaker 2: I think that's right.

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Speaker 3: I think, in particular, the phrase that jumped out at

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Speaker 3: me Romaine.

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Speaker 2: Was the most they said.

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Speaker 3: Most of the members noted the risk of moving too

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Speaker 3: quickly to cut rates. There was also a reference to

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Speaker 3: some of the progress on disinflation may have been due

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Speaker 3: to idiosyncratic factors, so that skewed a little bit in

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Speaker 3: a bit of a hawk ish a direction.

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Speaker 2: Of course, since.

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Speaker 3: That meeting, you know, we and the FED have gotten

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Speaker 3: the CPI inflation data which came in very hot, and

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Speaker 3: a gangbuster's employment report. So, as is often is the case,

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Speaker 3: these are a little bit stale. But my bottom line

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Speaker 3: is maybe a bit more, a bit a touch more

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Speaker 3: hawkish than perhaps we got out.

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Speaker 2: Of the chair's press conference in January.

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Speaker 1: Are you convinced that where rates right now, where rates

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Speaker 1: are right now, meaning the FED funds rate, that that

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Speaker 1: is indeed the peak?

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Speaker 3: Well, you start with what they think, and they think

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Speaker 3: it's the peak, and the minutes confirmed that, and share

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Speaker 3: Pal more or less said that as his press conference.

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Speaker 3: So I think that has to be the baseline. You know,

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Speaker 3: in life and in FED policy, there are risks on

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Speaker 3: both sides, and so you wouldn't want to attach a

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Speaker 3: zero probability to the fact that they may need to

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Speaker 3: hike if inflation moves up, which they don't expect and

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Speaker 3: we don't expect. But yeah, they think they're done then

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Speaker 3: and they probably are done.

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Speaker 4: Which talk to us a little bit about the role

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Speaker 4: of the jobs market is playing in the FED decision process.

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Speaker 4: So when they're thinking about growth and they're thinking about

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Speaker 4: jobs and sort of stickiness of the jobs market, is

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Speaker 4: that the key factor here? Well, we're all focus on

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Speaker 4: the inflation numbers and getting back to two percent, isn't

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Speaker 4: it really about are we seeing enough jobs weakness to

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Speaker 4: really justify a cut.

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Speaker 2: You know, I think the FEDS thinking has evolved.

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Speaker 3: The traditional macro model would say, if you want to

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Speaker 3: slow inflation, you got to see at least summarizing the

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Speaker 3: unemployment rate. We have had a slow down of wage inflation. Indeed,

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Speaker 3: the employment cost index, which I think is the one

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Speaker 3: they follow the most closely, has pass shifted down into

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Speaker 3: the high threes. And so I think this is a

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Speaker 3: FED in particular, a lot of new folks around the

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Speaker 3: table relative to when I was on the committee.

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Speaker 2: This is a fad that is.

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Speaker 3: Perfectly happy to have the labor market adjust through wages

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Speaker 3: and vacancy, so long as it doesn't necessarily require rising

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Speaker 3: in unemployment.

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Speaker 2: So I think so far that view has been borne out.

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Speaker 4: And then how do you think they incorporate the signals

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Speaker 4: from the market itself. Obviously, the bond market has been

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Speaker 4: pretty frin edic around the last couple of months, pricing

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Speaker 4: in for several cuts and now really contemplating maybe a hike.

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Speaker 4: Do they care what the bond market is doing around

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Speaker 4: these times? Are they a little bit concerned about the

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Speaker 4: degree of volatility that has emerged in the bond market?

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Speaker 2: You know, I think there and I've pointed out to

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Speaker 2: this before.

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Speaker 3: You know, there was a disconnect that opened up after

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Speaker 3: the December meeting. At the December meeting, they indicated that

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Speaker 3: most participants thought that three cuts this year would would

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Speaker 3: make sense, and the market at one point was pricing

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Speaker 3: in six. Yeah.

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Speaker 2: So since we got that hotter.

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Speaker 3: CPI and employment data, there's now a pretty good alignment

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Speaker 3: between at least where the Fed was until recently and

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Speaker 3: where market is pricing.

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Speaker 2: So, you know, I think that's going to be part

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Speaker 2: of the cycle. It's been part of other cycles.

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Speaker 3: If you look at the record, you know, when the

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Speaker 3: Fed says they think they're done, the markets will will

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Speaker 3: be off to the racist to price.

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Speaker 2: In those cuts.

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Speaker 3: So I think more or less this is part of

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Speaker 3: what they're expecting. But I think there's a better alignment

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Speaker 3: now than there was after the December meeting.

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Speaker 1: Is the labor market right now rich the job market?

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Speaker 1: Is that also aligned with that same narrative.

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Speaker 2: It's moving in that direction.

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Speaker 3: Romain, I think they have pointed out, if not in

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Speaker 3: the minutes, then certainly other times that you know, wage

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Speaker 3: inflation compensations about two thirds of costs for many companies

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Speaker 3: is still you know, a little bit hot relative to

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Speaker 3: the number that would be consistent with price stability. On

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Speaker 3: the other hand, we haven't given some good news on

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Speaker 3: productivity productivity now, even if you average through the pandemic gyrations,

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Speaker 3: which were substantial, productivity growth is probably at the high

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Speaker 3: end of where it was before the pandemic, and that's

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Speaker 3: quite important. Unfortunately, productivity is hard to forecast, but strong

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Speaker 3: productivity numbers definitely moving the direction they want.

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Speaker 1: Well, I'm glad you went there, because there's been a

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Speaker 1: lot of concerns as to why we haven't seen a

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Speaker 1: more meaningful shift in productivity, higher productivity, at least in

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Speaker 1: past economic cycles. We're getting some of that now. But

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Speaker 1: as you know, Rich, there's a lot of talk about

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Speaker 1: artificial intelligence and all the companies involved in that and

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Speaker 1: what it could potentially mean for labor, productivity and just

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Speaker 1: the overall efficiency of this economy. I know it's kind

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Speaker 1: of early, but do you see a promise that AI

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Speaker 1: and some of the technologies associated with it could lead

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Speaker 1: to greater productivity.

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Speaker 2: Sure, there's that promise.

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Speaker 3: You know, technologists thinks it's potentially is at least as

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Speaker 3: big a deal as you know, Internet connectivity, and personal

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Speaker 3: computing was, and of course that led for at least

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Speaker 3: a decade or so to about a percentage point increase

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Speaker 3: in productivity. I think it's too soon to tell, but

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Speaker 3: obviously you know that that's a real possibility, and part

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Speaker 3: of what stock markets do is try to value you

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Speaker 3: know that possibility. I think right now the PALFED is

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Speaker 3: really focused more on the pier and now they've also benefited.

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Speaker 2: The economy's benefited from an.

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Speaker 3: Increase in labor force supply as well, so I think

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Speaker 3: that's their focus, all.

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Speaker 2: Right, rich got to leave it there.

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Speaker 1: Great to talk to you. Richard Clara, a former vice

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Speaker 1: chair now pimco's Global Economic Advisor, helping us count down

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Speaker 1: to the closing bills