WEBVTT - Surveillance: Fed's Framework With Kaplan 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Daily 0:00:13.960 --> 0:00:17.560 we bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.600 Bloomberg dot Com, and of course, on the Bloomberg. This 0:00:27.640 --> 0:00:31.280 is an important conversation, as he spoke to James Bullard yesterday, 0:00:31.320 --> 0:00:34.320 as we spoke to William Dudley moments ago. Michael McKee 0:00:34.360 --> 0:00:39.920 advances the discussion with Mr Kaplan of Dallas. Michael, Thank you, Tom, 0:00:39.920 --> 0:00:42.519 Good morning, Rob. Thank you very much for joining us 0:00:42.560 --> 0:00:46.320 today on Bloomberg Radio and television worldwide. Um, and thank 0:00:46.360 --> 0:00:48.240 you for not wearing a tie and not making Tom 0:00:48.280 --> 0:00:52.400 look bad here. UM. I hate to do this, but 0:00:52.479 --> 0:00:55.279 let me start by playing the cynics advocate. There are 0:00:55.280 --> 0:00:58.400 those who are saying this morning, the Framework Review change 0:00:58.440 --> 0:01:01.080 is all well and good. What makes you think you 0:01:01.120 --> 0:01:04.040 can even get to two inflation, let alone over it 0:01:04.120 --> 0:01:09.160 since you've gone a decade without getting there. Uh yeah, 0:01:09.400 --> 0:01:11.800 it's possible that it will take a while to get 0:01:11.840 --> 0:01:18.440 to two. Technology technology enabled disruption UH in particular, are 0:01:18.520 --> 0:01:22.560 limiting the pricing power of businesses and uh AN inflation 0:01:22.600 --> 0:01:25.880 has been muted for close to ten years, and so 0:01:26.480 --> 0:01:32.200 part of this policy articulation is really a reaffirmation of 0:01:32.280 --> 0:01:35.440 the of the situation we've been operating in our decision 0:01:35.480 --> 0:01:38.800 function for the last few years. It's not a radical shift. 0:01:38.880 --> 0:01:41.840 It's an affirmation that we're we've been in a more 0:01:41.920 --> 0:01:45.080 muted inflation period. We need to be alert that that 0:01:45.120 --> 0:01:48.640 could change. But uh, but I don't. I don't view 0:01:48.840 --> 0:01:53.160 this policy articulation is as a is a radical change. 0:01:53.200 --> 0:01:56.720 It's a reaffirmation of the way we've been operating. So 0:01:56.920 --> 0:02:01.240 the new policy is that quote, appropriate monetary policy will 0:02:01.280 --> 0:02:07.160 likely aim to achieve inflation moderately above two for some time. 0:02:07.480 --> 0:02:09.960 How do you define moderately above and how do you 0:02:10.000 --> 0:02:14.800 define some time? Yeah, and we've left it deliberately undefined. 0:02:15.160 --> 0:02:19.760 To me, price stability is still our dual mandate. It's 0:02:19.800 --> 0:02:23.799 full employment and price stability. Two percent is our our 0:02:23.840 --> 0:02:26.880 best indicator of that. And so for for me, what 0:02:26.919 --> 0:02:30.240 it means is if we're running, if we get into 0:02:30.320 --> 0:02:32.240 situation I hope we do in the next couple of years, 0:02:32.280 --> 0:02:35.200 we're running closer to full employment. I'm willing to take 0:02:35.240 --> 0:02:39.560 a little bit more risk and have a greater tolerance. Uh, 0:02:39.600 --> 0:02:43.280 in my monetary policy judgments that inflation could run a 0:02:43.320 --> 0:02:46.400 little bit above two percent, And for me, a little 0:02:46.440 --> 0:02:49.760 bit means a little bit. Uh in that I've I've 0:02:49.800 --> 0:02:53.120 said publicly, you know, to and a quarter maybe a 0:02:53.200 --> 0:02:56.160 little bit more than that. I still think price stability 0:02:56.680 --> 0:03:01.560 is the overriding goal. And and this framework doesn't change that. Well, 0:03:01.600 --> 0:03:04.679 why isn't this a return to nineteen sixties style FED 0:03:04.760 --> 0:03:08.119 policy trading off inflation for lower unemployment, Because of course 0:03:08.200 --> 0:03:12.600 that didn't end well. Yeah, and that's a danger. That 0:03:12.600 --> 0:03:16.320 that's a danger. And so it's not that I'm gonna 0:03:16.480 --> 0:03:22.320 lose a concern that we could have a spike in inflation. 0:03:22.480 --> 0:03:24.919 And I'm not going to lose a concern. And in fact, 0:03:24.960 --> 0:03:29.040 this this framework articulates a concern about financial stability. I 0:03:29.080 --> 0:03:32.600 think those concerns haven't gone away. Uh, it just says 0:03:32.760 --> 0:03:36.040 on the margin, this is my interpretation and the way 0:03:36.040 --> 0:03:38.640 I'll be operating. On the margin. I'm willing to take 0:03:38.680 --> 0:03:43.080 a little bit more risk in service of getting underrepresented 0:03:43.120 --> 0:03:46.000 groups into the labor force, a little bit more risk 0:03:46.040 --> 0:03:48.600 on inflation. But I am, not, for one, going to 0:03:48.680 --> 0:03:52.360 be willing to take risk that we'll lose price stability 0:03:52.480 --> 0:03:55.640 allah the sixties and seventies. I'm gonna be on guard 0:03:55.640 --> 0:03:58.800 against that. Well, there's also a concern out there that 0:03:58.880 --> 0:04:01.480 an overrepresent a group people on Wall Street are going 0:04:01.520 --> 0:04:03.760 to be the real beneficiaries here. That you may not 0:04:03.800 --> 0:04:06.560 be able to stimulate a lot of economic activity or inflation, 0:04:06.600 --> 0:04:10.600 but you sure can pump up the stock market. I 0:04:10.640 --> 0:04:12.960 think that's also something we have to be cognizant of, 0:04:13.120 --> 0:04:16.240 and in particular, not just on the FED funds rate, 0:04:16.440 --> 0:04:19.880 but also on our purchases of treasuries and mortgage backed 0:04:19.920 --> 0:04:24.880 securities and the thirteen three programs that we've implemented this year. 0:04:25.320 --> 0:04:27.640 I think it's very important that we articulate that those 0:04:27.640 --> 0:04:32.680 programs will lapse. Uh. And I do think, uh, we 0:04:32.680 --> 0:04:36.720 we need to be conscious of financial stability and excesses 0:04:37.200 --> 0:04:40.039 that could build as a result of our policies. And 0:04:40.040 --> 0:04:44.000 and I will view that as an important consideration as 0:04:44.000 --> 0:04:46.719 I make judgments going forward. Well, if you were still 0:04:46.720 --> 0:04:49.120 at Goldben Sacks looking at your Bloomberg terminal, would you 0:04:49.160 --> 0:04:54.320 think that maybe we see some bubbles forming now? I would. 0:04:55.800 --> 0:05:01.080 I would be concerned that, uh, when the Fed takes 0:05:01.120 --> 0:05:04.480 the type of actions we've needed to take this year. Uh, 0:05:04.680 --> 0:05:09.920 you have, you have excesses and risk assets, not just prices. 0:05:09.960 --> 0:05:12.880 But what I'm particularly concerned about is debt build up. 0:05:13.360 --> 0:05:16.040 And there hasn't been as much discussion. Maybe there is, 0:05:16.080 --> 0:05:18.599 there should have been. But part of the issue we 0:05:18.720 --> 0:05:23.200 faced in March with the with the pandemic and the 0:05:23.600 --> 0:05:26.240 and the closures that we had to do to fight 0:05:26.320 --> 0:05:28.880 it is we had a lot of excesses in financial 0:05:28.920 --> 0:05:31.720 markets and it required the FED to step in and 0:05:31.800 --> 0:05:34.920 do quite a bit to stabilize financial markets. So those 0:05:34.960 --> 0:05:38.680 excesses can build up. They're hard to see, and yeah, 0:05:38.720 --> 0:05:41.120 i'd be I am worried about those in the seat 0:05:41.160 --> 0:05:43.520 I'm sitting in, and I'd be conscious of those. Uh 0:05:43.600 --> 0:05:46.159 if I were in the private sector. Well, you do 0:05:46.240 --> 0:05:48.760 know Wall Street given your background, and you know as 0:05:48.800 --> 0:05:50.400 well as I do that all the traders are sitting 0:05:50.440 --> 0:05:53.360 there this morning going yeah, great about this framework review. 0:05:53.400 --> 0:05:55.880 But what have you done for me lately? Are you 0:05:56.080 --> 0:06:02.320 anticipating any kind of change in the statement, something more 0:06:02.880 --> 0:06:09.400 to adjust forward guidance? Ah. I would prefer and I'm 0:06:09.440 --> 0:06:12.720 one one view around the table. I would prefer to wait. 0:06:13.240 --> 0:06:17.120 I would prefer to get more clarity on the path 0:06:17.200 --> 0:06:20.040 of the virus. I think we've already given quite a 0:06:20.040 --> 0:06:23.040 bit off forward guidance in that through our summary of 0:06:23.080 --> 0:06:26.320 economic projections, which will do another one in September. I've 0:06:26.360 --> 0:06:28.760 already said that rates are going to stay low for 0:06:28.800 --> 0:06:32.520 the rest of this year and all of next year. UH, 0:06:32.560 --> 0:06:36.840 and I would prefer to show some restraint here. We 0:06:37.960 --> 0:06:40.560 I think we've done quite a bit. We last spoke 0:06:40.560 --> 0:06:42.360 with you at the beginning of the month when COVID 0:06:42.400 --> 0:06:46.320 cases were spiking in Texas and the six hundred dollars 0:06:46.560 --> 0:06:50.440 in extra unemployment benefits was just running out. What's the 0:06:50.440 --> 0:06:55.479 economy like now? A month on from there, so we 0:06:55.560 --> 0:06:58.200 had a we had a pretty robust rebound through mid June. 0:06:58.720 --> 0:07:02.160 We saw some stalling after June, and I would say 0:07:02.160 --> 0:07:03.960 in the last two or three weeks, all our high 0:07:04.040 --> 0:07:09.880 frequency indicators mobility engagement indusseries are improved, are are firming, 0:07:10.360 --> 0:07:14.840 and so we're rebounding. Uh. We were not rebounding as 0:07:14.920 --> 0:07:17.280 much as we would have if we had the virus 0:07:17.360 --> 0:07:20.400 under better control, but we're still rebounding. We think third 0:07:20.480 --> 0:07:23.080 quarter I think third quarter GDP is going to be 0:07:24.280 --> 0:07:28.680 plus annualized, and so we are. We are growing we're rebounding. 0:07:28.680 --> 0:07:32.040 The issue is, as long as we've got relatively high 0:07:32.160 --> 0:07:38.120 levels of virus present, it limits consumers willingness to engage 0:07:38.120 --> 0:07:42.160 in a number of industries and activities, and that is 0:07:42.240 --> 0:07:45.680 having a muting effect on the rebound. But we're still 0:07:46.000 --> 0:07:49.080 but we're still rebounding. Well. A week from today we 0:07:49.160 --> 0:07:52.600 get the August payrolls report, what is the labor market like? 0:07:52.800 --> 0:07:57.239 What should we expect when we get those numbers? Uh, 0:07:57.400 --> 0:08:00.320 we think that between now and the end of the year, 0:08:00.800 --> 0:08:04.160 we're at ten point two percent unemployment right now. Uh. 0:08:04.360 --> 0:08:07.360 The bigger indicator I look at you six, which is 0:08:07.480 --> 0:08:11.720 unemployed plus discouraged workers plus people working part time who 0:08:11.720 --> 0:08:14.560 would like to work full time. Is those are both 0:08:14.560 --> 0:08:16.800 going to improve to where the unemployment rate is going 0:08:16.840 --> 0:08:22.080 to end the year. We think closer today at this point, 0:08:22.120 --> 0:08:25.760 and the U six figure will come down also proportionately. 0:08:25.840 --> 0:08:28.440 So I can't tell you the exact timing month to month, 0:08:28.720 --> 0:08:31.120 but you're you're going to see gradual improvement till the 0:08:31.200 --> 0:08:34.040 end of the year unless we have a greater resurgence 0:08:34.040 --> 0:08:37.080 than the virus. The virus is still the key. Going 0:08:37.120 --> 0:08:39.960 back to the framework bringing that into this, you decline 0:08:40.000 --> 0:08:44.120 to put a numerical target on unemployment because the inflation 0:08:44.240 --> 0:08:48.600 inflection point changes over time. According to the Fed, Uh, 0:08:48.640 --> 0:08:51.040 we got down to three and a half percent unemployment 0:08:51.080 --> 0:08:54.400 in February with no inflation. Can we get back there 0:08:54.480 --> 0:09:00.840 again under your framework? Uh, We're to give it every 0:09:01.000 --> 0:09:04.000 We're going to give the economy every opportunity to do that. 0:09:04.520 --> 0:09:08.400 The dynamics of inflation may well change, uh, and I'm 0:09:08.400 --> 0:09:11.840 a tuned to that because of supply shortages, They're going 0:09:11.880 --> 0:09:15.679 to be further changes in technology and technology enabled disruption. 0:09:16.120 --> 0:09:18.800 There may be changes in the dollar. We'll have to 0:09:18.840 --> 0:09:22.240 see if there's severe dollar weakness that could have an 0:09:22.240 --> 0:09:26.400 impact on inflation. And so UM, I think I think 0:09:26.440 --> 0:09:28.240 my own approach is going to be I want to 0:09:28.280 --> 0:09:31.960 give the labor market every opportunity to get back to 0:09:32.040 --> 0:09:37.000 that point and not pre empt improvement because I anticipate inflation. 0:09:37.040 --> 0:09:39.960 I'm willing to take a little bit more risk in 0:09:40.080 --> 0:09:43.480 having inflation run moderately above two percent in order to 0:09:43.520 --> 0:09:47.320 get to fuller employment and bring in a number of 0:09:47.360 --> 0:09:52.080 these underrepresented groups that I think will really help the 0:09:52.120 --> 0:09:55.640 country and help the labor market be stronger. Speaking of 0:09:55.920 --> 0:09:58.640 inflation expectations, as a Wall Street guy who really gets 0:09:58.679 --> 0:10:01.679 this stuff. What are ake Even's telling us? Now, there's 0:10:01.679 --> 0:10:04.760 a theory out there that while they have been rising, 0:10:04.920 --> 0:10:07.440 it's really because there's a lack of liquidity in the 0:10:07.480 --> 0:10:11.280 tips market, and if you take that liquidity premium out, 0:10:11.760 --> 0:10:19.679 you don't see any inflation embedded in the expectations markets. Uh. 0:10:19.720 --> 0:10:22.520 There's a lot of factors that affect trading markets. As 0:10:22.520 --> 0:10:25.280 you said, liquidity is one of them. I would say 0:10:25.559 --> 0:10:30.199 the concern about dollar weakness is reflected in a number 0:10:30.320 --> 0:10:34.120 of commodities, and I think is having some effect on 0:10:34.160 --> 0:10:37.760 the tips market. So there there are certain groups, I 0:10:37.760 --> 0:10:41.160 would guess in the private sector that are positioning themselves 0:10:41.200 --> 0:10:44.079 to be prepared for higher inflation than we've had the 0:10:44.160 --> 0:10:47.120 last ten years. That may or may not happen, but 0:10:47.240 --> 0:10:48.960 I think you're seeing a little bit of that concern 0:10:49.000 --> 0:10:52.280 in the tips market. Well, last quick question, I'm turning 0:10:52.280 --> 0:10:54.280 you over to Tom. Tom wants to know will the 0:10:54.360 --> 0:11:00.920 US economy collapse if there's no football in Texas this ball? Uh? 0:11:00.960 --> 0:11:04.520 I think the the the the Texas economy, and the 0:11:04.520 --> 0:11:07.280 the US has shown to be very resilient even if 0:11:07.280 --> 0:11:10.800 you take away things that that we hold sacred. We'll 0:11:10.840 --> 0:11:14.439 adapt to it and well will continue to will continue 0:11:14.480 --> 0:11:17.560 to power ahead. Robert Kaplan, the president of the Dallas, 0:11:17.840 --> 0:11:21.520 thank you very much for joining us. Did you see Oh, yes, 0:11:21.600 --> 0:11:23.679 her dad he hasn't that like a press conference is 0:11:23.720 --> 0:11:28.800 like he was practicing to be polist press conference. Michael McKee, 0:11:28.840 --> 0:11:32.400 congratulations on a bullard and cup and conversation wrapped around 0:11:32.679 --> 0:11:39.280 Chairman Paul speech as well. In days of old of 0:11:39.360 --> 0:11:42.720 Bloomberg on the economy, this would be a one hour conversation. 0:11:42.920 --> 0:11:46.600 We'll compress that in now with William Dudley. For years 0:11:46.800 --> 0:11:50.400 at Golden Sacks and given great credit for inventing modern 0:11:50.440 --> 0:11:53.960 Goldben Sacks economics, and then at the New York Fed. 0:11:54.040 --> 0:11:56.319 Bill Dudley out of Berkeley has been one of our 0:11:56.320 --> 0:12:01.400 greatest students of our theory of monetary policy. Bill Dudley, 0:12:01.440 --> 0:12:05.360 what did the chairman wrought yesterday? We knew this was coming, 0:12:05.960 --> 0:12:10.600 but the scathing notes I have read from selected economists 0:12:10.760 --> 0:12:15.520 have startled me. What did he do yesterday? But what 0:12:15.559 --> 0:12:19.280 he did yesterday was he basically changed the inflation objective 0:12:19.360 --> 0:12:22.439 of the FED reserve. Before the Fed failed what's called 0:12:22.520 --> 0:12:24.720 bygones police. Every year they tried to hit two percent, 0:12:25.240 --> 0:12:27.600 they missed for five years, ten years, a hundred years, 0:12:27.600 --> 0:12:29.559 a thousand years, next year. It was always to try 0:12:29.559 --> 0:12:32.000 to hit two percent. Problem with doing that is if 0:12:32.040 --> 0:12:36.080 you keep missing on one side, inflation expectations become an anchored, 0:12:36.520 --> 0:12:38.520 and that was troubling the FED. The FED hasn't had 0:12:38.559 --> 0:12:42.400 troubled hitting two percent objective on inflation for many years. 0:12:42.840 --> 0:12:44.880 So basically the FED has shifted and said, now, no, 0:12:45.000 --> 0:12:46.520 we don't want to hit two percent every year. We 0:12:46.559 --> 0:12:48.680 want to hit two percent on average. So if we 0:12:48.760 --> 0:12:51.360 underperform inflation for a bunch of years, then we need 0:12:51.400 --> 0:12:54.000 to have inflation above two percent for a while in 0:12:54.080 --> 0:12:57.200 order to keep inflation expectations around two percent. That's really 0:12:57.200 --> 0:13:00.679 what that's this whole shifted designed to keep inflation expectations 0:13:00.920 --> 0:13:04.520 well anchored at two percent well explained. If we combine 0:13:04.640 --> 0:13:08.959 Angus medicine on demographics and population with Alan Meltzer on 0:13:09.040 --> 0:13:13.280 the history of your institution, A simple question has to 0:13:13.320 --> 0:13:17.840 be asked, if we assume a lesser nominal GDP, if 0:13:17.840 --> 0:13:21.679 we assume a more dampened economy, why don't we just 0:13:21.800 --> 0:13:25.560 lower the two percent target to one point nine or 0:13:25.640 --> 0:13:29.800 one point eight percent. Why not do that. The reason 0:13:29.800 --> 0:13:32.320 why the Fed wants to have a inflation target of 0:13:32.360 --> 0:13:35.200 two percent, not lower, is they want to have enough 0:13:35.280 --> 0:13:39.080 room when you end uh an economic expansion to have 0:13:39.160 --> 0:13:41.360 the nominal interest rate high enough so there's enough room 0:13:41.400 --> 0:13:43.959 to cut rates to stimulate the economy and get the 0:13:43.960 --> 0:13:47.120 econmy out of recession. Let's say the inflation target was zero, 0:13:47.600 --> 0:13:50.040 then the you know, the peak short term funds rate 0:13:50.080 --> 0:13:51.560 would at the end of the cycle might be two 0:13:51.640 --> 0:13:54.320 or three percent. There wouldn't be much room to cut rates, 0:13:54.600 --> 0:13:56.840 and therefore there wouldn't be much way way to actually 0:13:56.840 --> 0:14:01.720 stimulate economic activity. J Powell essentially way writing the obituary 0:14:01.840 --> 0:14:05.880 for the Phillips curve this relationship that previously was believed 0:14:05.880 --> 0:14:08.640 that if you get unemployment lower, that will lead to 0:14:08.679 --> 0:14:12.719 a rise in inflation. I wouldn't say it's quite the obituary, 0:14:12.760 --> 0:14:15.080 but he's basically saying that we are now going to 0:14:15.160 --> 0:14:19.240 focus on inflation to god when we tighten entrey policy, 0:14:19.520 --> 0:14:22.200 not the level of the unemployer rate. So they change 0:14:22.240 --> 0:14:26.120 the language with respect to their employment goals rather than 0:14:26.160 --> 0:14:29.520 deviations around their employment goals, it's now shortfalls. So they're 0:14:29.560 --> 0:14:32.360 basically saying that we'll push the unemployer rate to whatever 0:14:32.440 --> 0:14:35.720 level we can. As long as inflation is low, we're 0:14:35.720 --> 0:14:39.400 gonna keep going. Before in this last cycle, we actually 0:14:39.440 --> 0:14:41.600 saw the Feds start to rage rates even before we 0:14:41.640 --> 0:14:45.200 got to a full employment. So we are getting inflation 0:14:45.280 --> 0:14:47.800 in certain areas, and we were talking about this earlier 0:14:47.840 --> 0:14:51.280 in the show. Certainly asset prices have gotten incredibly inflated 0:14:51.280 --> 0:14:53.760 and continued to do so on the promise that the 0:14:53.800 --> 0:14:56.560 Federal keep rates low. How concerning is this? At what 0:14:56.600 --> 0:14:59.440 point does this have to take to make the take 0:14:59.480 --> 0:15:02.960 stock and raise rates. Well, I think that they are 0:15:03.080 --> 0:15:06.000 a little bit uncomfortable with the fact that asset prices 0:15:06.040 --> 0:15:08.720 are are so buoyant. But remember that was it's also 0:15:08.800 --> 0:15:11.000 partly by design. I mean, the Fed basically did what 0:15:11.040 --> 0:15:13.840 they did in March April May to try to make 0:15:13.880 --> 0:15:16.880 the Monterrey policy easy and financial conditions a conditive, and 0:15:16.920 --> 0:15:19.440 they succeeded. Now, as the stock market keeps going up 0:15:19.440 --> 0:15:21.280 and up and up and up, that will cause some 0:15:21.640 --> 0:15:25.040 anxiety about the Fed. But remember the stock markets go up, 0:15:25.040 --> 0:15:28.280 stock markets go down. The consequences for financial stability historically 0:15:28.320 --> 0:15:30.880 have been actually been pretty modest. We had the stock 0:15:30.880 --> 0:15:34.920 market crash in lots of economists anticipated there be a recession. 0:15:35.040 --> 0:15:38.880 There was no recession. I think that, you know, buoyancy 0:15:38.920 --> 0:15:41.440 in the stock market is probably less risky to the 0:15:41.480 --> 0:15:44.280 economy because it's not all people that hold, you know, 0:15:44.720 --> 0:15:48.240 use a lot of leverage to own own stocks. Bill 0:15:48.320 --> 0:15:51.360 Dudley Robert Samuelson in The Washington Post wrote a fabulous 0:15:51.360 --> 0:15:55.120 book a decade ago on the sixties inflation, really centering 0:15:55.560 --> 0:15:58.480 on the theology of Walter Heller and well meaning people 0:15:58.480 --> 0:16:01.800 who were trying to tame budgets in the Vietnam we're 0:16:01.800 --> 0:16:05.800 budgets and and such. Stephen Stanley of Amir's Pier Punt 0:16:05.960 --> 0:16:09.320 wrote a wonderful essay over the weekend, and he hearkens 0:16:09.360 --> 0:16:13.520 back to the volatility that could be assumed here through 0:16:13.560 --> 0:16:17.520 what are called stop go policies. The idea of a 0:16:17.520 --> 0:16:20.840 FED that has to adapt suddenly we move away from 0:16:20.880 --> 0:16:27.480 the green span uh careful set a sequential policy back 0:16:27.520 --> 0:16:31.360 towards the Walter Heller stop go policies of the sixties 0:16:31.360 --> 0:16:35.000 and seventies. Is that a risk. I wouldn't put it 0:16:35.120 --> 0:16:37.240 quite letting that way in terms of stop go. But 0:16:37.320 --> 0:16:39.320 what what the FED is basically saying is we're gonna 0:16:39.360 --> 0:16:43.240 wait until inflation actually gets before we tighten. What that 0:16:43.280 --> 0:16:45.400 means is when they start to tighten, they'll probably try 0:16:45.480 --> 0:16:47.920 have to tighten quite a lot. And so you know, 0:16:48.000 --> 0:16:49.720 the markets right now are saying, oh, this is great. 0:16:49.720 --> 0:16:51.440 The Fed's gonna be on hold for a very long time. 0:16:51.880 --> 0:16:55.200 But it also raises the risk that when inflation actually 0:16:55.240 --> 0:16:58.080 gets above to two percent of the Fed's objective, the 0:16:58.080 --> 0:16:59.760 FED will actually have to slam on the brakes a 0:16:59.800 --> 0:17:02.360 little bit harder, and so it does increase the risk 0:17:02.480 --> 0:17:05.720 of an economic downturn. On the other side, is the 0:17:06.000 --> 0:17:09.240 is the Greenspan era ending? I mean, if if Alan 0:17:09.320 --> 0:17:13.280 Greenspan was of a gradual approach of sixteenths and eighths 0:17:13.280 --> 0:17:16.000 of a percentage point, are we going back with the 0:17:16.040 --> 0:17:19.439 stop going as you just mentioned larger increases did the 0:17:19.440 --> 0:17:24.680 Greenspan era and yesterday? You know, I'm not sure that 0:17:25.040 --> 0:17:27.879 Alan greens would necessarily disagree with what the FED is 0:17:27.920 --> 0:17:30.600 proposing here, but it certainly we're now in a new 0:17:30.640 --> 0:17:34.120 regime where you don't tighten preemptively just because you think 0:17:34.160 --> 0:17:37.679 the commun is getting to the full employment. You actually 0:17:37.680 --> 0:17:41.720 wait to see whether the low unemployer rate actually translates 0:17:41.720 --> 0:17:44.760 into rising inflation before you actually play mont So it 0:17:44.840 --> 0:17:47.600 is a it is a meaningful ship. Now that said, 0:17:47.640 --> 0:17:50.879 I think the FED is actually already acting that way today. 0:17:51.240 --> 0:17:54.159 The fact that when the FED stopped raising rates and 0:17:54.240 --> 0:17:56.960 reverse course, you know, a year and a half ago, uh, 0:17:57.040 --> 0:17:59.879 you know, that was partly due to an idea that 0:18:00.240 --> 0:18:02.879 we want to get inflation above two percent, that was 0:18:02.920 --> 0:18:05.679 already So we already have seen a shift in policy. 0:18:05.760 --> 0:18:08.320 Does the FED have any control at this point given 0:18:08.359 --> 0:18:11.560 where rates are in actually boosting the inflation rate that 0:18:11.600 --> 0:18:16.200 they want to boost. Well, that's where autocomments has some skepticism. 0:18:16.280 --> 0:18:17.960 It's it's nice to say that you want to get 0:18:17.960 --> 0:18:21.159 inflation above two but you haven't been able to accomplish 0:18:21.200 --> 0:18:23.719 that over the last ten years, and so what are 0:18:23.760 --> 0:18:26.520 the tools you're going to use to actually accomplish that outcome. 0:18:26.600 --> 0:18:28.879 So there's quite a bit of skepticism about whether the 0:18:28.880 --> 0:18:32.639 FED will actually be successful in pushing inflation above two percent. 0:18:32.680 --> 0:18:35.960 And the Japanese experience is a cautionary tale in that regard. Well, 0:18:36.000 --> 0:18:37.960 they said, I mean J F R. J. Powell said, 0:18:38.160 --> 0:18:40.240 we are prepared to use all the tools in our 0:18:40.240 --> 0:18:42.520 toolbox and they didn't go on to say what those 0:18:42.560 --> 0:18:44.480 tools were, and we're all sort of left in the dark. 0:18:44.760 --> 0:18:46.879 What do you see as the most plausible tools that 0:18:46.880 --> 0:18:49.639 the FED will engage next should there be another like 0:18:49.720 --> 0:18:52.680 of a downturn. Well, I think that they'll do more 0:18:52.680 --> 0:18:55.640 of the same, They'll do more asset purchases, They'll keep 0:18:55.640 --> 0:18:58.720 their their credit to liquidit programs in place. But I 0:18:58.760 --> 0:19:00.960 think the reality is we have to acknowledge the fact 0:19:01.040 --> 0:19:04.760 that the power of Monterrey policy right now to stimulate 0:19:04.800 --> 0:19:07.359 the economy it's pretty low. I mean, interest rates are 0:19:07.359 --> 0:19:10.280 already very low, the stock market is already very high, 0:19:10.359 --> 0:19:14.119 credit markets are very open and accessible. So the the 0:19:14.200 --> 0:19:16.639 the idea that the FED can do more. Yes, they 0:19:16.640 --> 0:19:18.920 can do more, but how much effect will it actually 0:19:18.920 --> 0:19:20.440 have in the economy. That's why the FED keeps talking 0:19:20.440 --> 0:19:23.639 about fiscal policy right now. The FED understands that that 0:19:23.760 --> 0:19:26.840 the power from Montreal policies to support the economy today 0:19:27.200 --> 0:19:30.360 is pretty darned modest, and what the economy really needs 0:19:30.400 --> 0:19:33.120 at this point is for their fiscal support. Bill Dudley, 0:19:33.200 --> 0:19:35.040 I want to go back to the heritage of Berkeley 0:19:35.040 --> 0:19:37.919 economics and folks, it's just a fabulous heritage. We know, 0:19:38.000 --> 0:19:40.119 I can green and de long of now, but the 0:19:40.200 --> 0:19:43.960 heritage back to the time of Bill Dudley is absolutely extraordinary, 0:19:44.000 --> 0:19:48.119 from Anchor Loft and uh Sayas and and others, Bill Dudley, 0:19:48.160 --> 0:19:51.600 when you look at the heritage of Berkeley economics, can 0:19:51.680 --> 0:19:54.560 you say that the speech yesterday will have a global 0:19:54.680 --> 0:19:59.080 impact that other central bankers, including Andrew Bailey speaking here 0:19:59.440 --> 0:20:02.280 in and hour or so at Jackson Hall, that they 0:20:02.320 --> 0:20:07.360 will have to adjust as well. I think people generally 0:20:07.400 --> 0:20:10.040 are are understanding more and more that the importance of 0:20:10.080 --> 0:20:13.440 keeping inflation expectations well anchored, and so I think that's 0:20:13.520 --> 0:20:15.960 a broadly share view around around the world. So I 0:20:15.960 --> 0:20:18.199 don't really think that the FED is sort of in 0:20:18.240 --> 0:20:21.080 the vanguard here. I think what they're doing is responding 0:20:21.119 --> 0:20:23.280 to a problem that's been very evident for a number 0:20:23.280 --> 0:20:28.320 of years. Bill. What's the statistic above two percent where 0:20:28.359 --> 0:20:31.560 this policy in place, where the sweat goes up among 0:20:31.680 --> 0:20:34.840 fancy guys like you. Is it two point one percent? 0:20:35.240 --> 0:20:38.280 Or is it the number substantially higher the tape is 0:20:38.359 --> 0:20:41.440 really I think it depends on two things. One, how 0:20:41.480 --> 0:20:43.960 long have you been below two percent? And by how much? 0:20:44.160 --> 0:20:47.800 And numbers and how that is then affected inslation expectations 0:20:48.040 --> 0:20:49.159 at the end of the day is they made it 0:20:49.320 --> 0:20:51.640 very clear in their policy statement what they care about 0:20:51.680 --> 0:20:54.359 at the end of the day is keeping inflation expectations 0:20:54.440 --> 0:20:58.720 anchored at two percent. So the inflation outcomes necessary to 0:20:58.760 --> 0:21:01.200 do that are what going to drive their decision beating. 0:21:01.359 --> 0:21:03.560 It turned out that inflation rising to two and a 0:21:03.640 --> 0:21:07.280 quarter percent was sufficient to keep inflation expectations anchored at 0:21:07.280 --> 0:21:09.840 two percent, and they stopped there. It turned out that 0:21:09.880 --> 0:21:11.800 they needed inflation to rise to two and a half 0:21:11.920 --> 0:21:15.320 or three percent to get inflation expectations will anchor and 0:21:15.359 --> 0:21:18.560 maybe more patient. This is fascinating, Bill Dudley, thank you 0:21:18.600 --> 0:21:21.040 so much, a very generous interview or the former president 0:21:21.320 --> 0:21:27.359 of the New York Fed. Right now, the gentleman from 0:21:27.400 --> 0:21:29.840 Michigan and Chicago joins us Smart Casel. He is with 0:21:29.960 --> 0:21:33.960 PIMCO or CIO for Global Credit. Mark your world changed 0:21:34.040 --> 0:21:38.080 yesterday and what way did Pimco's world change because of 0:21:38.119 --> 0:21:42.560 the new framework of Chairman Pouel. Well, Tom, I think 0:21:42.600 --> 0:21:46.240 this is a big deal. Powell. I agree, and this 0:21:46.320 --> 0:21:48.359 is it may not be a paradigm ship, but I 0:21:48.359 --> 0:21:51.359 think this is a significant evolution of how the FED thinks. 0:21:51.359 --> 0:21:54.080 And I think Powell is a really good leader. If 0:21:54.119 --> 0:21:58.439 you if you look at the inflation, the core PC inflation, 0:21:59.000 --> 0:22:02.600 we haven't gotten to the FEDS inflation target mandate since 0:22:02.720 --> 0:22:05.040 two thousand five to two thousand and six, so we 0:22:05.080 --> 0:22:10.199 have had fifteen years of undershooting in our country. And 0:22:10.240 --> 0:22:11.960 by the way, the same thing has happened in Europe 0:22:12.000 --> 0:22:15.240 and Japan. So I think, you know, Paul has realized 0:22:15.280 --> 0:22:17.600 this and they are willing to run the economy hot, 0:22:18.040 --> 0:22:20.320 and I think he's going to go all in. Uh 0:22:20.359 --> 0:22:23.160 in Sport. I hate to say, is Lisa, but it's 0:22:23.160 --> 0:22:25.600 a victory lab for Kis. We gotta do it this morning. 0:22:25.600 --> 0:22:29.239 Marquis your shop full disclosure, folks, I visited Newport, I've 0:22:29.240 --> 0:22:32.359 been to Cappy's Cafe with Mohammed, you guys, with the 0:22:32.480 --> 0:22:35.680 leadership of Bill and Mohammed, and then following on after 0:22:35.760 --> 0:22:39.640 that train wreck with your leadership, Marquisel. PIMCO has been 0:22:39.840 --> 0:22:44.200 dead on about a low rate regime. Do you maintain 0:22:44.320 --> 0:22:47.439 that low rate regime or can you see out two years, 0:22:47.520 --> 0:22:50.239 five years, ten years where we get back to the 0:22:50.320 --> 0:22:56.320 normalcy The chairman Paul desires, uh, Tom, you know we 0:22:56.320 --> 0:23:00.040