1 00:00:02,360 --> 00:00:06,720 Speaker 1: Bloomberg Audio Studios, podcasts, radio News. 2 00:00:06,880 --> 00:00:09,240 Speaker 2: Turning now to the FED. Former New York Fed President 3 00:00:09,280 --> 00:00:12,560 Speaker 2: Bill Dudley, writing in his latest Bloomberg opinion piece, US 4 00:00:12,600 --> 00:00:16,239 Speaker 2: Federal Reserve and it's chair Jerome Powell are rightly choosing 5 00:00:16,440 --> 00:00:19,600 Speaker 2: not to act on any assumptions about what Donald Trump 6 00:00:19,680 --> 00:00:22,520 Speaker 2: might do as president. That said, if he follows through 7 00:00:22,560 --> 00:00:26,040 Speaker 2: on his more extreme campaign promises, they'll struggle to contain 8 00:00:26,079 --> 00:00:30,040 Speaker 2: the economic consequences, a problem that equity investors ignore at 9 00:00:30,040 --> 00:00:32,600 Speaker 2: their peril. Bill joins us. Now, Bill, you've been. 10 00:00:32,479 --> 00:00:32,960 Speaker 1: In the room. 11 00:00:33,320 --> 00:00:36,120 Speaker 2: You understand what this is like. Give us a sense 12 00:00:36,159 --> 00:00:39,320 Speaker 2: potentially of this attention that might brew between the FED 13 00:00:39,479 --> 00:00:41,360 Speaker 2: chair and President elect Trump. 14 00:00:42,640 --> 00:00:44,280 Speaker 3: Well, the shart run there's that come to much attention 15 00:00:44,400 --> 00:00:46,000 Speaker 3: because I think the Federal Reserve is still going to 16 00:00:46,040 --> 00:00:48,960 Speaker 3: cut interest rates a bit further, but longer term, if 17 00:00:48,960 --> 00:00:51,480 Speaker 3: you look at what the President elect Trump is proposing, 18 00:00:51,680 --> 00:00:56,680 Speaker 3: higher terrorists, deportations, and fiscal steamulus, that's going to tend 19 00:00:56,680 --> 00:01:01,560 Speaker 3: to boost inflation, disrupt economic growth because terrorists will corrupt, 20 00:01:01,840 --> 00:01:06,080 Speaker 3: force people to reorient their supply chains, and it's going 21 00:01:06,120 --> 00:01:08,320 Speaker 3: to make the economic environment more difficult. And so the 22 00:01:08,400 --> 00:01:10,360 Speaker 3: Fed Reserve ultimately is going to react to that. But 23 00:01:10,400 --> 00:01:12,560 Speaker 3: as pol said in his press conference last week, we 24 00:01:12,560 --> 00:01:16,320 Speaker 3: don't assume, we don't guess, we don't speculate, So they're 25 00:01:16,319 --> 00:01:18,400 Speaker 3: not going to act until they actually see the Trump 26 00:01:18,520 --> 00:01:22,240 Speaker 3: agenda actually take form. So don't expect any near term 27 00:01:22,280 --> 00:01:24,679 Speaker 3: response from the Fed. But in the longer term, I 28 00:01:24,680 --> 00:01:27,040 Speaker 3: think if Trump does what he said he's going to do, 29 00:01:27,440 --> 00:01:29,800 Speaker 3: it's going to be difficult to economic ride. 30 00:01:29,840 --> 00:01:32,080 Speaker 4: Well. Bill, as you point out, though, if Trump does 31 00:01:32,080 --> 00:01:35,160 Speaker 4: anything big or abrupt, in your words, the central banks 32 00:01:35,200 --> 00:01:38,800 Speaker 4: response will occur too late to mitigate fully the economic impact. 33 00:01:39,160 --> 00:01:41,480 Speaker 4: So what is the needle to thread to not respond 34 00:01:41,520 --> 00:01:43,600 Speaker 4: too soon when we don't know the extent of things, 35 00:01:43,800 --> 00:01:46,280 Speaker 4: but also not waiting too late that you just can't 36 00:01:46,319 --> 00:01:47,480 Speaker 4: do anything at that moment. 37 00:01:48,720 --> 00:01:50,400 Speaker 3: Well, I do think there's a risk that if Trump 38 00:01:50,680 --> 00:01:53,240 Speaker 3: is very aggressive in terms of his policy choices, that 39 00:01:53,280 --> 00:01:56,120 Speaker 3: the Federal Reserve will be late. I'll be waiting to 40 00:01:56,160 --> 00:01:58,080 Speaker 3: see what happens, and then when it does happen, it 41 00:01:58,080 --> 00:02:01,480 Speaker 3: will be bigger than expected, have bigger consequences for growth 42 00:02:01,480 --> 00:02:03,800 Speaker 3: and inflation. At that point, I think the Federal Reserve 43 00:02:03,840 --> 00:02:05,280 Speaker 3: would be a little bit behind the curve. 44 00:02:05,920 --> 00:02:07,920 Speaker 1: And they might have to actually catch up. That's not 45 00:02:08,000 --> 00:02:08,840 Speaker 1: a near term story. 46 00:02:08,880 --> 00:02:12,119 Speaker 3: That's probably, you know, late twenty twenty five, first half 47 00:02:12,160 --> 00:02:14,880 Speaker 3: of twenty twenty six, just at the time that Paul's 48 00:02:15,120 --> 00:02:17,160 Speaker 3: wrapping up his term is Chuir. 49 00:02:18,280 --> 00:02:22,240 Speaker 5: Good morning to your Bill. In your opinion piece this morning, 50 00:02:22,240 --> 00:02:24,960 Speaker 5: you talk about an oddly divergent reaction from the bond 51 00:02:25,000 --> 00:02:26,840 Speaker 5: market and the equity market. I want to focus on 52 00:02:26,840 --> 00:02:29,760 Speaker 5: the bond market because it has been a wild ride. 53 00:02:30,240 --> 00:02:33,120 Speaker 5: This morning we waken up again. The birds have been reawakened. 54 00:02:33,440 --> 00:02:35,720 Speaker 5: The question I put to you is this, we don't 55 00:02:35,760 --> 00:02:37,639 Speaker 5: know the tariff, we don't know the tax, we don't 56 00:02:37,639 --> 00:02:40,840 Speaker 5: know anything about the fiscal policy exactly. With some broad parameters. 57 00:02:41,440 --> 00:02:43,480 Speaker 5: When you look at the term premium in the bond market, 58 00:02:43,639 --> 00:02:46,600 Speaker 5: the debate is how much more term premium there needs 59 00:02:46,600 --> 00:02:48,120 Speaker 5: to be if there's going to be such a large 60 00:02:48,160 --> 00:02:51,200 Speaker 5: deficit run. Some of the numbers thrown out there are 61 00:02:51,240 --> 00:02:54,200 Speaker 5: pretty obscure. But if we on the brink of where 62 00:02:54,200 --> 00:02:56,560 Speaker 5: there needs to be a lot more term premium to 63 00:02:56,639 --> 00:02:58,280 Speaker 5: hold US treasuries. 64 00:03:00,080 --> 00:03:03,000 Speaker 3: There needs to be some more term premium to reflect 65 00:03:03,000 --> 00:03:07,200 Speaker 3: the uncertainty about the economic outlook and the unsustainable fiscal 66 00:03:07,200 --> 00:03:09,360 Speaker 3: paths of the United States. That's one area where Powell 67 00:03:09,400 --> 00:03:12,560 Speaker 3: actually did to speak out last week. He did say 68 00:03:12,560 --> 00:03:15,440 Speaker 3: that the fiscal path the United States is unsustainable, and 69 00:03:15,480 --> 00:03:17,720 Speaker 3: if President Electrump does all the things he wants to 70 00:03:17,760 --> 00:03:21,040 Speaker 3: do in terms of corporate tax reduction, extending the twenty 71 00:03:21,120 --> 00:03:24,440 Speaker 3: seventeen tax cuts, the fiscal situation is going to worsen, not. 72 00:03:24,800 --> 00:03:25,720 Speaker 1: Improve going forward. 73 00:03:25,919 --> 00:03:28,560 Speaker 3: So I think the path to higher bodilds is the 74 00:03:28,600 --> 00:03:31,079 Speaker 3: most likely path. The other thing that's happened, of course, 75 00:03:31,160 --> 00:03:33,280 Speaker 3: is people have changed their expectations of where the Fed's 76 00:03:33,320 --> 00:03:36,160 Speaker 3: going in terms of short term interest rates. A couple 77 00:03:36,160 --> 00:03:38,320 Speaker 3: of months ago, people were respecting the federal fund rate 78 00:03:38,400 --> 00:03:41,440 Speaker 3: to bottom below three percent. Now the markets are expecting 79 00:03:41,440 --> 00:03:43,280 Speaker 3: the federal fund rate to bottom at around three and 80 00:03:43,320 --> 00:03:45,400 Speaker 3: three quarters percent. So if you have a higher federal 81 00:03:45,440 --> 00:03:47,400 Speaker 3: fund rate, then you're going to have a higher bondiold 82 00:03:47,880 --> 00:03:48,640 Speaker 3: just by construction. 83 00:03:50,320 --> 00:03:55,640 Speaker 5: So the direction of travel, you say, is higher in yields. 84 00:03:55,920 --> 00:03:59,040 Speaker 5: When you look at the response from Power at that 85 00:03:59,120 --> 00:04:01,920 Speaker 5: news conference touched on this with various people, are we 86 00:04:01,960 --> 00:04:05,040 Speaker 5: going to hear much more? I don't know what the 87 00:04:05,080 --> 00:04:09,760 Speaker 5: right word is. Aggressive, demonstrative, exacting language, from the FED. 88 00:04:09,840 --> 00:04:12,760 Speaker 5: What word would you choose that the Fed's retoric needs 89 00:04:12,760 --> 00:04:16,720 Speaker 5: to become more involved in twenty twenty five, I. 90 00:04:16,640 --> 00:04:18,760 Speaker 3: Think the FED is actually going to be very, you know, 91 00:04:18,839 --> 00:04:21,240 Speaker 3: mild in terms of their language. They're going to set 92 00:04:21,279 --> 00:04:23,479 Speaker 3: monetary policy based on what they think is appropriate given 93 00:04:23,520 --> 00:04:26,560 Speaker 3: the growth and inflation out look. And as you noticed, 94 00:04:26,560 --> 00:04:28,560 Speaker 3: it's going to take time for that to manifest this 95 00:04:28,560 --> 00:04:30,480 Speaker 3: stuff because we don't really know exactly what the President 96 00:04:30,480 --> 00:04:32,960 Speaker 3: Electrump is going to do, So I think the language 97 00:04:33,000 --> 00:04:36,720 Speaker 3: will be actually not combative at all. You saw last week, 98 00:04:37,000 --> 00:04:40,599 Speaker 3: you know, reporters asked Trump Powell about you know, what's 99 00:04:40,720 --> 00:04:43,279 Speaker 3: what's how you can react to the Trump policy mix 100 00:04:43,360 --> 00:04:44,719 Speaker 3: and pile basis. 101 00:04:44,480 --> 00:04:45,320 Speaker 1: That no common. 102 00:04:45,960 --> 00:04:47,880 Speaker 3: So I think then in the very short term, the 103 00:04:47,880 --> 00:04:50,320 Speaker 3: FED is going to keep its head down and conduct 104 00:04:50,440 --> 00:04:53,200 Speaker 3: policy based on how the economy is doing right now. 105 00:04:53,800 --> 00:04:55,760 Speaker 4: Those we can take a step back to the reaction 106 00:04:55,880 --> 00:04:58,119 Speaker 4: that we've seen here in the now. As you write 107 00:04:58,120 --> 00:05:01,040 Speaker 4: in your column, you find the stock market response baffling. 108 00:05:01,480 --> 00:05:04,080 Speaker 4: Equity bowls have been really excited about the prospects of 109 00:05:04,200 --> 00:05:05,760 Speaker 4: tax cuts and deregulation. 110 00:05:06,360 --> 00:05:07,160 Speaker 1: What are they missing? 111 00:05:08,400 --> 00:05:11,320 Speaker 3: Well, I think that the stock market has this notion 112 00:05:11,400 --> 00:05:14,760 Speaker 3: that we're going to have deregulation, we're going to have 113 00:05:14,880 --> 00:05:17,839 Speaker 3: corporate tax cuts, and that's going to boost corporate profit margins. 114 00:05:17,839 --> 00:05:20,680 Speaker 1: And I think that's probably parking fair part of the argument. 115 00:05:20,960 --> 00:05:23,640 Speaker 3: But I think what they're missing is all the consequences 116 00:05:23,680 --> 00:05:25,360 Speaker 3: of the other parts of the Trump agenda. 117 00:05:25,920 --> 00:05:28,680 Speaker 1: Higher tariffs I mean higher inflation, they mean. 118 00:05:28,600 --> 00:05:33,760 Speaker 3: Disruption, lower productivity, growth, deportations affect the supply of labor, 119 00:05:34,800 --> 00:05:38,440 Speaker 3: and unsustainable fiscal path means higher interest rates. When I 120 00:05:38,440 --> 00:05:40,360 Speaker 3: look at the bond market versus the stock market, I 121 00:05:40,400 --> 00:05:42,400 Speaker 3: think the bond market, at bond mules rise, that's been 122 00:05:42,440 --> 00:05:45,400 Speaker 3: put increasing pressure on the stock market. We're starting from 123 00:05:45,440 --> 00:05:48,480 Speaker 3: points that the stock market valuations are already extremely high. 124 00:05:48,839 --> 00:05:50,680 Speaker 3: So if bondyles go up, I think that will weigh 125 00:05:50,680 --> 00:05:52,279 Speaker 3: on the stock market. I would not be a big 126 00:05:52,320 --> 00:05:54,240 Speaker 3: stock market bowl at this point. Bill. 127 00:05:54,320 --> 00:05:57,760 Speaker 2: Given that backdrop, how difficult is this December meeting going 128 00:05:57,800 --> 00:05:58,480 Speaker 2: to be for the Fed? 129 00:06:00,040 --> 00:06:01,640 Speaker 3: I don't think it's gonna be that difficult, because I 130 00:06:01,680 --> 00:06:04,640 Speaker 3: think Paul laid it out pretty clearly last week. They 131 00:06:04,680 --> 00:06:07,960 Speaker 3: think that the economy is the risk of inflation, and 132 00:06:08,000 --> 00:06:10,400 Speaker 3: the leader market are roughly in balanced. They think monetary 133 00:06:10,400 --> 00:06:13,480 Speaker 3: policy is still restrictive so that they're heading back towards 134 00:06:13,480 --> 00:06:16,560 Speaker 3: neutrals slowly. So I think at twenty five basis point 135 00:06:16,640 --> 00:06:18,760 Speaker 3: rate of cut in December is still the most likely 136 00:06:18,839 --> 00:06:21,400 Speaker 3: case now. If the economy continues to stay stronger than 137 00:06:21,400 --> 00:06:25,279 Speaker 3: expected and inflation stays stickier than expected, then that December 138 00:06:25,360 --> 00:06:27,080 Speaker 3: rate cut might be the last rate cut for a while. 139 00:06:27,080 --> 00:06:28,400 Speaker 1: But that really depends on the data. 140 00:06:28,880 --> 00:06:31,400 Speaker 3: The FED right now is really data dependent in terms 141 00:06:31,400 --> 00:06:32,159 Speaker 3: of where they're going. 142 00:06:32,680 --> 00:06:35,760 Speaker 1: The direction of rates is downward, but slowly. 143 00:06:35,520 --> 00:06:37,719 Speaker 3: Because the economy has continued to perform pretty well on 144 00:06:37,760 --> 00:06:38,479 Speaker 3: the growth side. 145 00:06:38,600 --> 00:06:40,680 Speaker 2: Last week, Powell was asked a number of time by 146 00:06:40,760 --> 00:06:44,440 Speaker 2: journalists about what would happen if President look Donald Trump 147 00:06:44,480 --> 00:06:46,520 Speaker 2: tried to remove him, and this morning in the Wall 148 00:06:46,520 --> 00:06:49,760 Speaker 2: Street Journal they talked about twenty eighteen and Powell then 149 00:06:49,800 --> 00:06:53,080 Speaker 2: went what they're right reporting to Treasury Secretor Stephen Minuchin 150 00:06:53,120 --> 00:06:55,160 Speaker 2: and said that he would fight his removal sought by 151 00:06:55,160 --> 00:06:58,679 Speaker 2: the president. Are you concerned about the independence of this Fed? 152 00:07:00,520 --> 00:07:02,360 Speaker 3: Well, I think you have to always be concerned about 153 00:07:02,400 --> 00:07:04,440 Speaker 3: the independence of the FED when you have a president 154 00:07:04,480 --> 00:07:06,640 Speaker 3: that seems to be a president elected seems to be 155 00:07:06,680 --> 00:07:08,240 Speaker 3: hostile to the Fed's independence. 156 00:07:08,640 --> 00:07:09,680 Speaker 1: And you know, the reason why we. 157 00:07:09,640 --> 00:07:13,040 Speaker 3: Want an independent central bank is because historically independent central 158 00:07:13,080 --> 00:07:15,560 Speaker 3: banks actually do a better job in terms of managing 159 00:07:15,560 --> 00:07:17,840 Speaker 3: monitoring policy to achieve the outcomes that. 160 00:07:17,760 --> 00:07:20,480 Speaker 1: We want in terms of growth of inflation. So independence 161 00:07:20,520 --> 00:07:21,480 Speaker 1: is really driven. 162 00:07:21,240 --> 00:07:22,920 Speaker 3: By the fact that you actually get better outcomes. That 163 00:07:22,960 --> 00:07:25,119 Speaker 3: people think that the Federal serve is going to change 164 00:07:25,120 --> 00:07:30,040 Speaker 3: course based on pressure from the President, that increases uncertainty 165 00:07:30,080 --> 00:07:32,000 Speaker 3: and risk, and it also makes the FED very short 166 00:07:32,000 --> 00:07:33,760 Speaker 3: sighted in terms of its policy agenda. 167 00:07:34,160 --> 00:07:35,960 Speaker 1: So I think the FED, you know, basically, the FED 168 00:07:36,040 --> 00:07:36,400 Speaker 1: is going to. 169 00:07:36,360 --> 00:07:38,280 Speaker 3: Try to maintain its independent pouwll I think it was 170 00:07:38,400 --> 00:07:41,360 Speaker 3: very very clear last week when asked about whether he's 171 00:07:41,360 --> 00:07:45,800 Speaker 3: playing to resign early no, Whether PROMP has the right 172 00:07:45,840 --> 00:07:49,600 Speaker 3: to fire him legally, no. So PAB basically said pretty clearly, 173 00:07:49,960 --> 00:07:52,760 Speaker 3: I'm going to finish out my term which ends in 174 00:07:52,840 --> 00:07:56,040 Speaker 3: May twenty twenty six, and so tried to close off 175 00:07:56,040 --> 00:07:57,840 Speaker 3: the debate on that whole issue. 176 00:07:57,560 --> 00:08:00,480 Speaker 2: Not permitted under the law. He kept saying that no, no, no, 177 00:08:00,760 --> 00:08:03,080 Speaker 2: And the Wall Street Journal gives some insight into he 178 00:08:03,160 --> 00:08:06,280 Speaker 2: knows this because he went through it in twenty eighteen. 179 00:08:06,360 --> 00:08:08,440 Speaker 2: Former New York Fed President Bill Dudley, Thank you so 180 00:08:08,520 --> 00:08:10,080 Speaker 2: much for your time and insight this morning.