WEBVTT - Bloomberg Opinion Columnist Bill Dudley Talks Fed Under Trump 0:00:02.360 --> 0:00:06.720 Bloomberg Audio Studios, podcasts, radio News. 0:00:06.880 --> 0:00:09.240 Turning now to the FED. Former New York Fed President 0:00:09.280 --> 0:00:12.560 Bill Dudley, writing in his latest Bloomberg opinion piece, US 0:00:12.600 --> 0:00:16.239 Federal Reserve and it's chair Jerome Powell are rightly choosing 0:00:16.440 --> 0:00:19.600 not to act on any assumptions about what Donald Trump 0:00:19.680 --> 0:00:22.520 might do as president. That said, if he follows through 0:00:22.560 --> 0:00:26.040 on his more extreme campaign promises, they'll struggle to contain 0:00:26.079 --> 0:00:30.040 the economic consequences, a problem that equity investors ignore at 0:00:30.040 --> 0:00:32.600 their peril. Bill joins us. Now, Bill, you've been. 0:00:32.479 --> 0:00:32.960 In the room. 0:00:33.320 --> 0:00:36.120 You understand what this is like. Give us a sense 0:00:36.159 --> 0:00:39.320 potentially of this attention that might brew between the FED 0:00:39.479 --> 0:00:41.360 chair and President elect Trump. 0:00:42.640 --> 0:00:44.280 Well, the shart run there's that come to much attention 0:00:44.400 --> 0:00:46.000 because I think the Federal Reserve is still going to 0:00:46.040 --> 0:00:48.960 cut interest rates a bit further, but longer term, if 0:00:48.960 --> 0:00:51.480 you look at what the President elect Trump is proposing, 0:00:51.680 --> 0:00:56.680 higher terrorists, deportations, and fiscal steamulus, that's going to tend 0:00:56.680 --> 0:01:01.560 to boost inflation, disrupt economic growth because terrorists will corrupt, 0:01:01.840 --> 0:01:06.080 force people to reorient their supply chains, and it's going 0:01:06.120 --> 0:01:08.320 to make the economic environment more difficult. And so the 0:01:08.400 --> 0:01:10.360 Fed Reserve ultimately is going to react to that. But 0:01:10.400 --> 0:01:12.560 as pol said in his press conference last week, we 0:01:12.560 --> 0:01:16.320 don't assume, we don't guess, we don't speculate, So they're 0:01:16.319 --> 0:01:18.400 not going to act until they actually see the Trump 0:01:18.520 --> 0:01:22.240 agenda actually take form. So don't expect any near term 0:01:22.280 --> 0:01:24.679 response from the Fed. But in the longer term, I 0:01:24.680 --> 0:01:27.040 think if Trump does what he said he's going to do, 0:01:27.440 --> 0:01:29.800 it's going to be difficult to economic ride. 0:01:29.840 --> 0:01:32.080 Well. Bill, as you point out, though, if Trump does 0:01:32.080 --> 0:01:35.160 anything big or abrupt, in your words, the central banks 0:01:35.200 --> 0:01:38.800 response will occur too late to mitigate fully the economic impact. 0:01:39.160 --> 0:01:41.480 So what is the needle to thread to not respond 0:01:41.520 --> 0:01:43.600 too soon when we don't know the extent of things, 0:01:43.800 --> 0:01:46.280 but also not waiting too late that you just can't 0:01:46.319 --> 0:01:47.480 do anything at that moment. 0:01:48.720 --> 0:01:50.400 Well, I do think there's a risk that if Trump 0:01:50.680 --> 0:01:53.240 is very aggressive in terms of his policy choices, that 0:01:53.280 --> 0:01:56.120 the Federal Reserve will be late. I'll be waiting to 0:01:56.160 --> 0:01:58.080 see what happens, and then when it does happen, it 0:01:58.080 --> 0:02:01.480 will be bigger than expected, have bigger consequences for growth 0:02:01.480 --> 0:02:03.800 and inflation. At that point, I think the Federal Reserve 0:02:03.840 --> 0:02:05.280 would be a little bit behind the curve. 0:02:05.920 --> 0:02:07.920 And they might have to actually catch up. That's not 0:02:08.000 --> 0:02:08.840 a near term story. 0:02:08.880 --> 0:02:12.119 That's probably, you know, late twenty twenty five, first half 0:02:12.160 --> 0:02:14.880 of twenty twenty six, just at the time that Paul's 0:02:15.120 --> 0:02:17.160 wrapping up his term is Chuir. 0:02:18.280 --> 0:02:22.240 Good morning to your Bill. In your opinion piece this morning, 0:02:22.240 --> 0:02:24.960 you talk about an oddly divergent reaction from the bond 0:02:25.000 --> 0:02:26.840 market and the equity market. I want to focus on 0:02:26.840 --> 0:02:29.760 the bond market because it has been a wild ride. 0:02:30.240 --> 0:02:33.120 This morning we waken up again. The birds have been reawakened. 0:02:33.440 --> 0:02:35.720 The question I put to you is this, we don't 0:02:35.760 --> 0:02:37.639 know the tariff, we don't know the tax, we don't 0:02:37.639 --> 0:02:40.840 know anything about the fiscal policy exactly. With some broad parameters. 0:02:41.440 --> 0:02:43.480 When you look at the term premium in the bond market, 0:02:43.639 --> 0:02:46.600 the debate is how much more term premium there needs 0:02:46.600 --> 0:02:48.120 to be if there's going to be such a large 0:02:48.160 --> 0:02:51.200 deficit run. Some of the numbers thrown out there are 0:02:51.240 --> 0:02:54.200 pretty obscure. But if we on the brink of where 0:02:54.200 --> 0:02:56.560 there needs to be a lot more term premium to 0:02:56.639 --> 0:02:58.280 hold US treasuries. 0:03:00.080 --> 0:03:03.000 There needs to be some more term premium to reflect 0:03:03.000 --> 0:03:07.200 the uncertainty about the economic outlook and the unsustainable fiscal 0:03:07.200 --> 0:03:09.360 paths of the United States. That's one area where Powell 0:03:09.400 --> 0:03:12.560 actually did to speak out last week. He did say 0:03:12.560 --> 0:03:15.440 that the fiscal path the United States is unsustainable, and 0:03:15.480 --> 0:03:17.720 if President Electrump does all the things he wants to 0:03:17.760 --> 0:03:21.040 do in terms of corporate tax reduction, extending the twenty 0:03:21.120 --> 0:03:24.440 seventeen tax cuts, the fiscal situation is going to worsen, not. 0:03:24.800 --> 0:03:25.720 Improve going forward. 0:03:25.919 --> 0:03:28.560 So I think the path to higher bodilds is the 0:03:28.600 --> 0:03:31.079 most likely path. The other thing that's happened, of course, 0:03:31.160 --> 0:03:33.280 is people have changed their expectations of where the Fed's 0:03:33.320 --> 0:03:36.160 going in terms of short term interest rates. A couple 0:03:36.160 --> 0:03:38.320 of months ago, people were respecting the federal fund rate 0:03:38.400 --> 0:03:41.440 to bottom below three percent. Now the markets are expecting 0:03:41.440 --> 0:03:43.280 the federal fund rate to bottom at around three and 0:03:43.320 --> 0:03:45.400 three quarters percent. So if you have a higher federal 0:03:45.440 --> 0:03:47.400 fund rate, then you're going to have a higher bondiold 0:03:47.880 --> 0:03:48.640 just by construction. 0:03:50.320 --> 0:03:55.640 So the direction of travel, you say, is higher in yields. 0:03:55.920 --> 0:03:59.040 When you look at the response from Power at that 0:03:59.120 --> 0:04:01.920 news conference touched on this with various people, are we 0:04:01.960 --> 0:04:05.040 going to hear much more? I don't know what the 0:04:05.080 --> 0:04:09.760 right word is. Aggressive, demonstrative, exacting language, from the FED. 0:04:09.840 --> 0:04:12.760 What word would you choose that the Fed's retoric needs 0:04:12.760 --> 0:04:16.720 to become more involved in twenty twenty five, I. 0:04:16.640 --> 0:04:18.760 Think the FED is actually going to be very, you know, 0:04:18.839 --> 0:04:21.240 mild in terms of their language. They're going to set 0:04:21.279 --> 0:04:23.479 monetary policy based on what they think is appropriate given 0:04:23.520 --> 0:04:26.560 the growth and inflation out look. And as you noticed, 0:04:26.560 --> 0:04:28.560 it's going to take time for that to manifest this 0:04:28.560 --> 0:04:30.480 stuff because we don't really know exactly what the President 0:04:30.480 --> 0:04:32.960 Electrump is going to do, So I think the language 0:04:33.000 --> 0:04:36.720 will be actually not combative at all. You saw last week, 0:04:37.000 --> 0:04:40.599 you know, reporters asked Trump Powell about you know, what's 0:04:40.720 --> 0:04:43.279 what's how you can react to the Trump policy mix 0:04:43.360 --> 0:04:44.719 and pile basis. 0:04:44.480 --> 0:04:45.320 That no common. 0:04:45.960 --> 0:04:47.880 So I think then in the very short term, the 0:04:47.880 --> 0:04:50.320 FED is going to keep its head down and conduct 0:04:50.440 --> 0:04:53.200 policy based on how the economy is doing right now. 0:04:53.800 --> 0:04:55.760 Those we can take a step back to the reaction 0:04:55.880 --> 0:04:58.119 that we've seen here in the now. As you write 0:04:58.120 --> 0:05:01.040 in your column, you find the stock market response baffling. 0:05:01.480 --> 0:05:04.080 Equity bowls have been really excited about the prospects of 0:05:04.200 --> 0:05:05.760 tax cuts and deregulation. 0:05:06.360 --> 0:05:07.160 What are they missing? 0:05:08.400 --> 0:05:11.320 Well, I think that the stock market has this notion 0:05:11.400 --> 0:05:14.760 that we're going to have deregulation, we're going to have 0:05:14.880 --> 0:05:17.839 corporate tax cuts, and that's going to boost corporate profit margins. 0:05:17.839 --> 0:05:20.680 And I think that's probably parking fair part of the argument. 0:05:20.960 --> 0:05:23.640 But I think what they're missing is all the consequences 0:05:23.680 --> 0:05:25.360 of the other parts of the Trump agenda. 0:05:25.920 --> 0:05:28.680 Higher tariffs I mean higher inflation, they mean. 0:05:28.600 --> 0:05:33.760 Disruption, lower productivity, growth, deportations affect the supply of labor, 0:05:34.800 --> 0:05:38.440 and unsustainable fiscal path means higher interest rates. When I 0:05:38.440 --> 0:05:40.360 look at the bond market versus the stock market, I 0:05:40.400 --> 0:05:42.400 think the bond market, at bond mules rise, that's been 0:05:42.440 --> 0:05:45.400 put increasing pressure on the stock market. We're starting from 0:05:45.440 --> 0:05:48.480 points that the stock market valuations are already extremely high. 0:05:48.839 --> 0:05:50.680 So if bondyles go up, I think that will weigh 0:05:50.680 --> 0:05:52.279 on the stock market. I would not be a big 0:05:52.320 --> 0:05:54.240 stock market bowl at this point. Bill. 0:05:54.320 --> 0:05:57.760 Given that backdrop, how difficult is this December meeting going 0:05:57.800 --> 0:05:58.480 to be for the Fed? 0:06:00.040 --> 0:06:01.640 I don't think it's gonna be that difficult, because I 0:06:01.680 --> 0:06:04.640 think Paul laid it out pretty clearly last week. They 0:06:04.680 --> 0:06:07.960 think that the economy is the risk of inflation, and 0:06:08.000 --> 0:06:10.400 the leader market are roughly in balanced. They think monetary 0:06:10.400 --> 0:06:13.480 policy is still restrictive so that they're heading back towards 0:06:13.480 --> 0:06:16.560 neutrals slowly. So I think at twenty five basis point 0:06:16.640 --> 0:06:18.760 rate of cut in December is still the most likely 0:06:18.839 --> 0:06:21.400 case now. If the economy continues to stay stronger than 0:06:21.400 --> 0:06:25.279 expected and inflation stays stickier than expected, then that December 0:06:25.360 --> 0:06:27.080 rate cut might be the last rate cut for a while. 0:06:27.080 --> 0:06:28.400 But that really depends on the data. 0:06:28.880 --> 0:06:31.400 The FED right now is really data dependent in terms 0:06:31.400 --> 0:06:32.159 of where they're going. 0:06:32.680 --> 0:06:35.760 The direction of rates is downward, but slowly. 0:06:35.520 --> 0:06:37.719 Because the economy has continued to perform pretty well on 0:06:37.760 --> 0:06:38.479 the growth side. 0:06:38.600 --> 0:06:40.680 Last week, Powell was asked a number of time by 0:06:40.760 --> 0:06:44.440 journalists about what would happen if President look Donald Trump 0:06:44.480 --> 0:06:46.520 tried to remove him, and this morning in the Wall 0:06:46.520 --> 0:06:49.760 Street Journal they talked about twenty eighteen and Powell then 0:06:49.800 --> 0:06:53.080 went what they're right reporting to Treasury Secretor Stephen Minuchin 0:06:53.120 --> 0:06:55.160 and said that he would fight his removal sought by 0:06:55.160 --> 0:06:58.679 the president. Are you concerned about the independence of this Fed? 0:07:00.520 --> 0:07:02.360 Well, I think you have to always be concerned about 0:07:02.400 --> 0:07:04.440 the independence of the FED when you have a president 0:07:04.480 --> 0:07:06.640 that seems to be a president elected seems to be 0:07:06.680 --> 0:07:08.240 hostile to the Fed's independence. 0:07:08.640 --> 0:07:09.680 And you know, the reason why we. 0:07:09.640 --> 0:07:13.040 Want an independent central bank is because historically independent central 0:07:13.080 --> 0:07:15.560 banks actually do a better job in terms of managing 0:07:15.560 --> 0:07:17.840 monitoring policy to achieve the outcomes that. 0:07:17.760 --> 0:07:20.480 We want in terms of growth of inflation. So independence 0:07:20.520 --> 0:07:21.480 is really driven. 0:07:21.240 --> 0:07:22.920 By the fact that you actually get better outcomes. That 0:07:22.960 --> 0:07:25.119 people think that the Federal serve is going to change 0:07:25.120 --> 0:07:30.040 course based on pressure from the President, that increases uncertainty 0:07:30.080 --> 0:07:32.000 and risk, and it also makes the FED very short 0:07:32.000 --> 0:07:33.760 sighted in terms of its policy agenda. 0:07:34.160 --> 0:07:35.960 So I think the FED, you know, basically, the FED 0:07:36.040 --> 0:07:36.400 is going to. 0:07:36.360 --> 0:07:38.280 Try to maintain its independent pouwll I think it was 0:07:38.400 --> 0:07:41.360 very very clear last week when asked about whether he's 0:07:41.360 --> 0:07:45.800 playing to resign early no, Whether PROMP has the right 0:07:45.840 --> 0:07:49.600 to fire him legally, no. So PAB basically said pretty clearly, 0:07:49.960 --> 0:07:52.760 I'm going to finish out my term which ends in 0:07:52.840 --> 0:07:56.040 May twenty twenty six, and so tried to close off 0:07:56.040 --> 0:07:57.840 the debate on that whole issue. 0:07:57.560 --> 0:08:00.480 Not permitted under the law. He kept saying that no, no, no, 0:08:00.760 --> 0:08:03.080 And the Wall Street Journal gives some insight into he 0:08:03.160 --> 0:08:06.280 knows this because he went through it in twenty eighteen. 0:08:06.360 --> 0:08:08.440 Former New York Fed President Bill Dudley, Thank you so 0:08:08.520 --> 0:08:10.080 much for your time and insight this morning.