WEBVTT - Professor Raghuram Rajan Talks Fed Day Preview

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio News.

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<v Speaker 2>We're on Central Bank Watch Markets fully pricing in a

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<v Speaker 2>September rate cut for the FO ANDC after some encouraging

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<v Speaker 2>signs from recent inflation data. Here to talk about maybe

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<v Speaker 2>what we might learn out of the FED tomorrow as

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<v Speaker 2>it makes that big decision is rober Ram Rajan, Professor

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<v Speaker 2>of Finance at the University of Chicago Booth School of

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<v Speaker 2>Business and of course former governor of the Reserve Bank

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<v Speaker 2>of India as well as a former a chief economist

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<v Speaker 2>over at the International Monetary Fund. All Right, rajer There's

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<v Speaker 2>been a lot of talk right now about the idea

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<v Speaker 2>that the FED and all the data points that we've

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<v Speaker 2>gotten leading up to this meeting basically leaves it with

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<v Speaker 2>no choice other than to at least telegraph some type

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<v Speaker 2>of cut sometime in twenty twenty four. When you look

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<v Speaker 2>at the data that we've gotten so far, do you

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<v Speaker 2>think that would be justified?

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<v Speaker 3>Yeah, I mean, as far as the FED goes, I

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<v Speaker 3>think all the data, recent data point towards, you know,

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<v Speaker 3>things moving in the direction at once. It's not there yet,

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<v Speaker 3>but it's moving in the right direction. Certainly, chem and

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<v Speaker 3>Paul doesn't want to commit himself in his post decision

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<v Speaker 3>talk to a cut in September, but he wants to

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<v Speaker 3>hint as much as he can.

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<v Speaker 4>I think the FED is seeing well.

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<v Speaker 3>Inflation is nearabouts where it wants to be, two and

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<v Speaker 3>a half percent on the core PC is getting there,

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<v Speaker 3>and labor markets are certainly cooling at least when you

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<v Speaker 3>look at unemployment claims, openings are down to one point

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<v Speaker 3>two per unemployed person and quits a low and stable

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<v Speaker 3>at below pre pandemic levels. So other than the jobs numbers,

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<v Speaker 3>which are still in the one hundred to two hundred range,

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<v Speaker 3>it is a labor.

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<v Speaker 4>Market that seems to be cooling off.

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<v Speaker 3>And of course there are other parts of the economy

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<v Speaker 3>we're just showing signs of some stress. I mean, housing

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<v Speaker 3>isn't great, and of course you look at credit card

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<v Speaker 3>defaults and all that. It's starting to pick up. So

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<v Speaker 3>the FED is saying we're nearly there. If wait too long,

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<v Speaker 3>we see a slowdown, which we don't want.

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<v Speaker 2>Well, well, that's what I'm curious about, particularly when it

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<v Speaker 2>comes to the consumer side of the equation, household spending

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<v Speaker 2>and the idea that we have started to see softness

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<v Speaker 2>there at least softness that showed up in the official data,

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<v Speaker 2>and of course there's a ton of a acdotal evidence

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<v Speaker 2>out there that households have at least started to rethink

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<v Speaker 2>just how much they spend on discretionary items. How much

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<v Speaker 2>does that that particular data point have the factor into

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<v Speaker 2>this decision.

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<v Speaker 4>It does weigh into the Fed's decision.

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<v Speaker 3>But remember that at the aggregate level or the overall level,

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<v Speaker 3>the economy is still chugging on pretty strongly. The second

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<v Speaker 3>quarter growth numbers were really quite quite strong at two

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<v Speaker 3>point eight. And what you're seeing is, you know, for

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<v Speaker 3>every sort of bit of weakness that you hear about,

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<v Speaker 3>there is potentially an offsetting strength. What the FED doesn't

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<v Speaker 3>want to do is maybe, you know, cut in July

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<v Speaker 3>and then see things pick up. There's also the sort

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<v Speaker 3>of uncertainty surrounding the election. How much do they want

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<v Speaker 3>to ease before the election only to see an administration

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<v Speaker 3>come in which may change things.

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<v Speaker 4>On the ground substantially.

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<v Speaker 3>So I think a gentle cut, if the data cooperate

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<v Speaker 3>by September, is what they want to sort of signal,

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<v Speaker 3>and I think it'll be hint Hay and down Sinach

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<v Speaker 3>without any kind of commitment tomorrow that they will cut

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<v Speaker 3>in September.

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<v Speaker 1>To give themselves maximum optionality, as they've been careful to

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<v Speaker 1>do each step along the way. So Rabram, you had

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<v Speaker 1>mentioned that the labor market seems to be cooling, But

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<v Speaker 1>I look at the estimates for job growth for the

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<v Speaker 1>jobs of what we're going to get on Friday, and

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<v Speaker 1>an estimated one hundred and seventy five thousand jobs added

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<v Speaker 1>after two hundred and six thousand jobs are added in

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<v Speaker 1>the month of June. You don't really see signs of

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<v Speaker 1>cooling as much in new jobs growth as you do

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<v Speaker 1>in say jobless claims or job openings and quits. Does

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<v Speaker 1>that matter that mix?

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<v Speaker 3>That's right, I mean it's not telling the same story.

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<v Speaker 3>But then you know household surveys, for example, are telling

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<v Speaker 3>a different story from the payrolls. So I think, again,

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<v Speaker 3>there are lots of data out there. Depending on your persuasion,

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<v Speaker 3>you can find something to satisfy you that cuts up

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<v Speaker 3>way over you, or you know, we should wait a

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<v Speaker 3>little longer. I think the fad is going to be

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<v Speaker 3>fairly pragmatic and say, well, we don't have any economy

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<v Speaker 3>that's tanking yet, and if it does show signs of weakness.

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<v Speaker 3>We can always cut a little faster. So for now,

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<v Speaker 3>let's hold and see what happens, and we can cut September.

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<v Speaker 1>Do you believe ra rum that we're going to get

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<v Speaker 1>a unanimous decision? And I asked that because Bill Dudley,

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<v Speaker 1>of course, a former New York FED president, wrote an

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<v Speaker 1>opinion piece for US where he said he has changed

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<v Speaker 1>his mind and now sees the need to cut this

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<v Speaker 1>month as opposed to waiting until September because that increases

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<v Speaker 1>the risk of a recession. Will anyone stick their head

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<v Speaker 1>out on that idea when it comes down to a

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<v Speaker 1>bout tomorrow.

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<v Speaker 3>It's not an entirely bad outcome. If one or two

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<v Speaker 3>depart from the overall decision, especially towards a cut. It

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<v Speaker 3>shows that the FED is debating things, and in this

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<v Speaker 3>environment where the political pressure on the FED will start

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<v Speaker 3>amping up before the election, it's good to show that

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<v Speaker 3>the FED is mildly split.

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<v Speaker 4>But you know, let's see.

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<v Speaker 3>I don't know if they will engineer that or it

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<v Speaker 3>will come because of natural differences in opinion. But I

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<v Speaker 3>don't think it's the end of the world if there

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<v Speaker 3>is a little bit of a split.

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<v Speaker 2>Right, I have to ask you a little bit about

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<v Speaker 2>what's going on overseas, because there's been a lot of

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<v Speaker 2>talk about the idea that we might start to see

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<v Speaker 2>significant divergence in central banks. We know the ECB has

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<v Speaker 2>already cut. There's a big question as to whether they'll

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<v Speaker 2>do anything else again and whether they went to early.

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<v Speaker 2>But I'm wondering if it actually matters this time. I

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<v Speaker 2>know we used to in the past focus so much

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<v Speaker 2>on the correlations between these central banks raising and cutting

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<v Speaker 2>at least somewhat in sync here, but is that sort

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<v Speaker 2>of the wrong thing to look at this cycle?

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<v Speaker 3>No, I think it does matter. You can see the

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<v Speaker 3>problem with Japan. Right when Japan was holding firm on

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<v Speaker 3>a relatively mild monitory policy while everybody else was tightening,

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<v Speaker 3>you saw a weakening of the end and that has

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<v Speaker 3>had an impact domestically, both in terms of consumer confidence

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<v Speaker 3>as well as inflation. Now it would seem this week

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<v Speaker 3>tomorrow Japan has to make a decision and probably start

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<v Speaker 3>raising rates, even as the rest of the world is

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<v Speaker 3>starting to contemplate cuts. So you know that does have

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<v Speaker 3>to be an equilibrium, and it doesn't sort of emerge.

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<v Speaker 3>You see the effects in exchange rates, which eventually cause

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<v Speaker 3>you know, central banks to have to adjust. I think

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<v Speaker 3>the ECB is seeing weakness in Europe right now, so

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<v Speaker 3>they actually have a greater reason to cut in September

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<v Speaker 3>than potentially the FED has at this point.

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<v Speaker 2>Well, it's interesting you bring up Japan because obviously they're

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<v Speaker 2>going in a different direction than everyone else, and maybe

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<v Speaker 2>that's a good thing. I am curious. I mean you've

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<v Speaker 2>seen a lot, of course, going back to your days

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<v Speaker 2>at dimth and then of course at the Reserve Bank

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<v Speaker 2>of India, when you look at Japan and this multi

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<v Speaker 2>decade doll drums if you will, that it's been in

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<v Speaker 2>do you look at what's happening now as sort of

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<v Speaker 2>a real upcycle, the idea that they're finally breaking free

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<v Speaker 2>from the past and moving on to something better.

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<v Speaker 3>I think they are, and it's not just monetary policy.

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<v Speaker 3>Of course, a lot of work on corporate governance. There

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<v Speaker 3>is now a greater sense, for example, that Japanese cooperations

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<v Speaker 3>have to deliver a value for money to their investors,

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<v Speaker 3>and there's been a lot of pressure on them.

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<v Speaker 4>To up their game.

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<v Speaker 3>So I think Japan has spent a lot of time

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<v Speaker 3>in the doldrums, but is slowly starting to come out

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<v Speaker 3>for a.

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<v Speaker 4>Variety of reasons. You know, this time is different.

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<v Speaker 3>But of course Japan still has the huge aging problem

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<v Speaker 3>that you know other countries are yet to confront but

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<v Speaker 3>will eventually, and how they manage that is going to

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<v Speaker 3>be really important. How much immigration do they allow? How

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<v Speaker 3>much immigration can they sustain? So it still has problems,

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<v Speaker 3>but I think at least the malaise from the Great

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<v Speaker 3>Recession and the slowdown after that is finally coming to

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<v Speaker 3>an end.

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<v Speaker 1>All right, rob Ram, we started with the FED. I

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<v Speaker 1>want to end with the FED. What is the headline

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<v Speaker 1>going to be tomorrow when jape House speaks? Where could

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<v Speaker 1>he surprise everyone?

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<v Speaker 3>I think he's going to try and not to surprise anyone.

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<v Speaker 3>He's going to try and say, look, we're still in

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<v Speaker 3>data contingent more but the data are cooperating right now,

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<v Speaker 3>and you know, if things go the right way, you

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<v Speaker 3>guys should expect some good news in September.

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<v Speaker 4>As far as Reid Country School, that's sort of the message.

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<v Speaker 3>I don't know how clear he's going to be, yeah,

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<v Speaker 3>but that's the message.

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<v Speaker 4>He is probably going to.

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<v Speaker 2>Say, all right, all right, we've got to leave it

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<v Speaker 2>there here and always great to talk to you and

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<v Speaker 2>great to see that view. You know, I'm not sure

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<v Speaker 2>exactly what way your windows facing, but if you turn

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<v Speaker 2>to the left of the right, you actually see the

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<v Speaker 2>home that I grew up in right down.

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<v Speaker 4>The street, the University of Chicago right now.

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<v Speaker 2>Right down by Medici. I don't know if it's sill there.

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<v Speaker 2>Rag Aaram Raja and always a pleasure. Professor of Finance

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<v Speaker 2>at the University of Chicago Booth School, the business former

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<v Speaker 2>Reserve Bank of India Governor