Speaker 1: Bloomberg Audio Studios, podcasts, radio News.
Speaker 2: Turning now to the FED. Former New York Fed President
Speaker 2: Bill Dudley, writing in his latest Bloomberg opinion piece, US
Speaker 2: Federal Reserve and it's chair Jerome Powell are rightly choosing
Speaker 2: not to act on any assumptions about what Donald Trump
Speaker 2: might do as president. That said, if he follows through
Speaker 2: on his more extreme campaign promises, they'll struggle to contain
Speaker 2: the economic consequences, a problem that equity investors ignore at
Speaker 2: their peril. Bill joins us. Now, Bill, you've been.
Speaker 1: In the room.
Speaker 2: You understand what this is like. Give us a sense
Speaker 2: potentially of this attention that might brew between the FED
Speaker 2: chair and President elect Trump.
Speaker 3: Well, the shart run there's that come to much attention
Speaker 3: because I think the Federal Reserve is still going to
Speaker 3: cut interest rates a bit further, but longer term, if
Speaker 3: you look at what the President elect Trump is proposing,
Speaker 3: higher terrorists, deportations, and fiscal steamulus, that's going to tend
Speaker 3: to boost inflation, disrupt economic growth because terrorists will corrupt,
Speaker 3: force people to reorient their supply chains, and it's going
Speaker 3: to make the economic environment more difficult. And so the
Speaker 3: Fed Reserve ultimately is going to react to that. But
Speaker 3: as pol said in his press conference last week, we
Speaker 3: don't assume, we don't guess, we don't speculate, So they're
Speaker 3: not going to act until they actually see the Trump
Speaker 3: agenda actually take form. So don't expect any near term
Speaker 3: response from the Fed. But in the longer term, I
Speaker 3: think if Trump does what he said he's going to do,
Speaker 3: it's going to be difficult to economic ride.
Speaker 4: Well. Bill, as you point out, though, if Trump does
Speaker 4: anything big or abrupt, in your words, the central banks
Speaker 4: response will occur too late to mitigate fully the economic impact.
Speaker 4: So what is the needle to thread to not respond
Speaker 4: too soon when we don't know the extent of things,
Speaker 4: but also not waiting too late that you just can't
Speaker 4: do anything at that moment.
Speaker 3: Well, I do think there's a risk that if Trump
Speaker 3: is very aggressive in terms of his policy choices, that
Speaker 3: the Federal Reserve will be late. I'll be waiting to
Speaker 3: see what happens, and then when it does happen, it
Speaker 3: will be bigger than expected, have bigger consequences for growth
Speaker 3: and inflation. At that point, I think the Federal Reserve
Speaker 3: would be a little bit behind the curve.
Speaker 1: And they might have to actually catch up. That's not
Speaker 1: a near term story.
Speaker 3: That's probably, you know, late twenty twenty five, first half
Speaker 3: of twenty twenty six, just at the time that Paul's
Speaker 3: wrapping up his term is Chuir.
Speaker 5: Good morning to your Bill. In your opinion piece this morning,
Speaker 5: you talk about an oddly divergent reaction from the bond
Speaker 5: market and the equity market. I want to focus on
Speaker 5: the bond market because it has been a wild ride.
Speaker 5: This morning we waken up again. The birds have been reawakened.
Speaker 5: The question I put to you is this, we don't
Speaker 5: know the tariff, we don't know the tax, we don't
Speaker 5: know anything about the fiscal policy exactly. With some broad parameters.
Speaker 5: When you look at the term premium in the bond market,
Speaker 5: the debate is how much more term premium there needs
Speaker 5: to be if there's going to be such a large
Speaker 5: deficit run. Some of the numbers thrown out there are
Speaker 5: pretty obscure. But if we on the brink of where
Speaker 5: there needs to be a lot more term premium to
Speaker 5: hold US treasuries.
Speaker 3: There needs to be some more term premium to reflect
Speaker 3: the uncertainty about the economic outlook and the unsustainable fiscal
Speaker 3: paths of the United States. That's one area where Powell
Speaker 3: actually did to speak out last week. He did say
Speaker 3: that the fiscal path the United States is unsustainable, and
Speaker 3: if President Electrump does all the things he wants to
Speaker 3: do in terms of corporate tax reduction, extending the twenty
Speaker 3: seventeen tax cuts, the fiscal situation is going to worsen, not.
Speaker 1: Improve going forward.
Speaker 3: So I think the path to higher bodilds is the
Speaker 3: most likely path. The other thing that's happened, of course,
Speaker 3: is people have changed their expectations of where the Fed's
Speaker 3: going in terms of short term interest rates. A couple
Speaker 3: of months ago, people were respecting the federal fund rate
Speaker 3: to bottom below three percent. Now the markets are expecting
Speaker 3: the federal fund rate to bottom at around three and
Speaker 3: three quarters percent. So if you have a higher federal
Speaker 3: fund rate, then you're going to have a higher bondiold
Speaker 3: just by construction.
Speaker 5: So the direction of travel, you say, is higher in yields.
Speaker 5: When you look at the response from Power at that
Speaker 5: news conference touched on this with various people, are we
Speaker 5: going to hear much more? I don't know what the
Speaker 5: right word is. Aggressive, demonstrative, exacting language, from the FED.
Speaker 5: What word would you choose that the Fed's retoric needs
Speaker 5: to become more involved in twenty twenty five, I.
Speaker 3: Think the FED is actually going to be very, you know,
Speaker 3: mild in terms of their language. They're going to set
Speaker 3: monetary policy based on what they think is appropriate given
Speaker 3: the growth and inflation out look. And as you noticed,
Speaker 3: it's going to take time for that to manifest this
Speaker 3: stuff because we don't really know exactly what the President
Speaker 3: Electrump is going to do, So I think the language
Speaker 3: will be actually not combative at all. You saw last week,
Speaker 3: you know, reporters asked Trump Powell about you know, what's
Speaker 3: what's how you can react to the Trump policy mix
Speaker 3: and pile basis.
Speaker 1: That no common.
Speaker 3: So I think then in the very short term, the
Speaker 3: FED is going to keep its head down and conduct
Speaker 3: policy based on how the economy is doing right now.
Speaker 4: Those we can take a step back to the reaction
Speaker 4: that we've seen here in the now. As you write
Speaker 4: in your column, you find the stock market response baffling.
Speaker 4: Equity bowls have been really excited about the prospects of
Speaker 4: tax cuts and deregulation.
Speaker 1: What are they missing?
Speaker 3: Well, I think that the stock market has this notion
Speaker 3: that we're going to have deregulation, we're going to have
Speaker 3: corporate tax cuts, and that's going to boost corporate profit margins.
Speaker 1: And I think that's probably parking fair part of the argument.
Speaker 3: But I think what they're missing is all the consequences
Speaker 3: of the other parts of the Trump agenda.
Speaker 1: Higher tariffs I mean higher inflation, they mean.
Speaker 3: Disruption, lower productivity, growth, deportations affect the supply of labor,
Speaker 3: and unsustainable fiscal path means higher interest rates. When I
Speaker 3: look at the bond market versus the stock market, I
Speaker 3: think the bond market, at bond mules rise, that's been
Speaker 3: put increasing pressure on the stock market. We're starting from
Speaker 3: points that the stock market valuations are already extremely high.
Speaker 3: So if bondyles go up, I think that will weigh
Speaker 3: on the stock market. I would not be a big
Speaker 3: stock market bowl at this point. Bill.
Speaker 2: Given that backdrop, how difficult is this December meeting going
Speaker 2: to be for the Fed?
Speaker 3: I don't think it's gonna be that difficult, because I
Speaker 3: think Paul laid it out pretty clearly last week. They
Speaker 3: think that the economy is the risk of inflation, and
Speaker 3: the leader market are roughly in balanced. They think monetary
Speaker 3: policy is still restrictive so that they're heading back towards
Speaker 3: neutrals slowly. So I think at twenty five basis point
Speaker 3: rate of cut in December is still the most likely
Speaker 3: case now. If the economy continues to stay stronger than
Speaker 3: expected and inflation stays stickier than expected, then that December
Speaker 3: rate cut might be the last rate cut for a while.
Speaker 1: But that really depends on the data.
Speaker 3: The FED right now is really data dependent in terms
Speaker 3: of where they're going.
Speaker 1: The direction of rates is downward, but slowly.
Speaker 3: Because the economy has continued to perform pretty well on
Speaker 3: the growth side.
Speaker 2: Last week, Powell was asked a number of time by
Speaker 2: journalists about what would happen if President look Donald Trump
Speaker 2: tried to remove him, and this morning in the Wall
Speaker 2: Street Journal they talked about twenty eighteen and Powell then
Speaker 2: went what they're right reporting to Treasury Secretor Stephen Minuchin
Speaker 2: and said that he would fight his removal sought by
Speaker 2: the president. Are you concerned about the independence of this Fed?
Speaker 3: Well, I think you have to always be concerned about
Speaker 3: the independence of the FED when you have a president
Speaker 3: that seems to be a president elected seems to be
Speaker 3: hostile to the Fed's independence.
Speaker 1: And you know, the reason why we.
Speaker 3: Want an independent central bank is because historically independent central
Speaker 3: banks actually do a better job in terms of managing
Speaker 3: monitoring policy to achieve the outcomes that.
Speaker 1: We want in terms of growth of inflation. So independence
Speaker 1: is really driven.
Speaker 3: By the fact that you actually get better outcomes. That
Speaker 3: people think that the Federal serve is going to change
Speaker 3: course based on pressure from the President, that increases uncertainty
Speaker 3: and risk, and it also makes the FED very short
Speaker 3: sighted in terms of its policy agenda.
Speaker 1: So I think the FED, you know, basically, the FED
Speaker 1: is going to.
Speaker 3: Try to maintain its independent pouwll I think it was
Speaker 3: very very clear last week when asked about whether he's
Speaker 3: playing to resign early no, Whether PROMP has the right
Speaker 3: to fire him legally, no. So PAB basically said pretty clearly,
Speaker 3: I'm going to finish out my term which ends in
Speaker 3: May twenty twenty six, and so tried to close off
Speaker 3: the debate on that whole issue.
Speaker 2: Not permitted under the law. He kept saying that no, no, no,
Speaker 2: And the Wall Street Journal gives some insight into he
Speaker 2: knows this because he went through it in twenty eighteen.
Speaker 2: Former New York Fed President Bill Dudley, Thank you so
Speaker 2: much for your time and insight this morning.