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Speaker 1: Let's turn to the FED speak continuing today, with Governor

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Speaker 1: Waller set to deliver remarks at the Economic Club of

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Speaker 1: New York on Friday. You're hear from the San Francisco

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Speaker 1: FED President Mary Daily, speaking ahead of Chair Pale himself.

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Speaker 1: Their remarks coming after the FED Preferred Inflation Gauge PCEE

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Speaker 1: is due out eight thirty Eastern time on Friday. Bloomberg

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Speaker 1: Economics expecting core PCE to rise the most in September.

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Speaker 1: Backing the Fed's patients on rake cuts, I'm pleased to

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Speaker 1: say that we're blessed with the presence of the former

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Speaker 1: FED Vice Chair Richard Claridon. Rich It's good to.

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Speaker 2: See it, and I'm blessed to be here. Thank you

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Speaker 2: very much.

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Speaker 1: I've been singing your praises for the last week because

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Speaker 1: I was thinking back to the secular outlook from PIMCO

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Speaker 1: in the middle of last year, where you and the

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Speaker 1: team wrote down this FED will accept two points something.

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Speaker 1: Can you describe what you were looking for back then,

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Speaker 1: what you saw and whether it's starting to come your way.

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Speaker 2: Well, John, I think it has played out. Look.

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Speaker 3: I think Cheripal and the committee deserves enormous credit. Inflation

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Speaker 3: got up to five and a half or six percent,

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Speaker 3: maybe ten on headline.

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Speaker 2: It's now running in the twos.

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Speaker 3: Our review then was two points something would be the

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Speaker 3: point at which the power Fed would start to pivot

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Speaker 3: towards easing.

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Speaker 2: I think they think they're done.

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Speaker 3: I think they're signaling that they're going to be cutting

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Speaker 3: starting this year. I think it's important to remember the

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Speaker 3: goal is to get to two percent, but they're going

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Speaker 3: to start cutting before they get to two based upon

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Speaker 3: their view that financial conditions are tight. So we'll see

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Speaker 3: how it plays out. But I think so far that's

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Speaker 3: played out like we thought.

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Speaker 1: A phrase you've used is opportunistic disinflation. Can you help

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Speaker 1: me explain the difference between what you see and maybe

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Speaker 1: what others see when they start to say things like,

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Speaker 1: and I was talking about it on this program, a

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Speaker 1: higher tolerance for inflation.

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Speaker 2: What's the difference. I don't think they're done. I don't

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Speaker 2: think there's the tolerance.

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Speaker 3: Opportunistic inflation actually is something that folks thought the Greenspan

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Speaker 3: Fed did thirty plus years ago.

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Speaker 2: That is your titan policy.

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Speaker 3: You get inflation close to where you want it, but

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Speaker 3: for that last mile, you just wait till the next

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Speaker 3: recession to get it done, and that could well be

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Speaker 3: what we end up in this cycle. That is, the

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Speaker 3: rate cuts will start before you get to the long

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Speaker 3: run goal of two percent, and at some point be

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Speaker 3: a downturn inflation can fall further than The tricky thing is,

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Speaker 3: of course the FED wants to avoid the downturn in

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Speaker 3: the first place, which means that minimum chair power will

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Speaker 3: have some communication challenges I had.

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Speaker 2: I think, well, there's a lot to umpact there.

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Speaker 4: Just let's start on the first issue, which is something

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Speaker 4: that Andrew Hollenhorst is talking about earlier this week, that

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Speaker 4: essentially you cannot get down to two percent without a recession.

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Speaker 3: Do you agree, Well, I think historically that's what you

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Speaker 3: would say, but look, the progress has been remarkable. You

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Speaker 3: mentioned Governor Waller, big fan of Chris's worked with him.

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Speaker 3: You know, Chris has been making the point you can

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Speaker 3: get back to two percent without a lot of unemployment

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Speaker 3: of vacancies are cut. So I don't want to say

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Speaker 3: that you can't get there, but it could be a

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Speaker 3: heavy lift.

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Speaker 2: Yeah.

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Speaker 4: Well, and the other part of what you said is

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Speaker 4: really important that FIT doesn't seem to want that weakness,

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Speaker 4: and they even said that they would cut rates in

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Speaker 4: response to a.

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Speaker 2: Weakening labor mark. I noticed that, Yeah, what does this.

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Speaker 4: Mean for the longer term inflation rate? Does it mean

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Speaker 4: that two points something is the floor? And kind of

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Speaker 4: we could see sort of bouts of volatility in inflation

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Speaker 4: in the upcoming years.

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Speaker 2: I think that is a risk case.

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Speaker 3: I think the progress on disinflation is remarkable, but it's

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Speaker 3: inflation still above where they want it to be, and

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Speaker 3: there's some evidence that are maybe more sticky and stubborn.

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Speaker 3: Then folks were thinking again, I'll let the data speak

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Speaker 3: for itself.

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Speaker 2: I hope the power THAD really is data dependent.

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Speaker 3: I think they need to be open to the possibility

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Speaker 3: that inflation is sticky, and I think that changes their

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Speaker 3: communication and the ratepath.

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Speaker 1: Can you help us understand the inconsistency that we struggled

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Speaker 1: with last week and again on the program this morning

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Speaker 1: we call it with Bruce Caspman a JP Morgan. It's brilliant,

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Speaker 1: and I acknowledge the difficulty in explaining the following. When

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Speaker 1: the FED is asked if we're sufficiently restrictive, chem and

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Speaker 1: Pan will often speak and point to the labor market,

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Speaker 1: then simultaneously embrace and confirm that a lot of the

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Speaker 1: improvement came from the supply side. Now, I'm trying to

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Speaker 1: understand whether you can really point the labor market as

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Speaker 1: assign you're sufficiently restrictive and also acknowledge that a lot

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Speaker 1: of the improvements come from the supply side. Can you

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Speaker 1: do those two things at once?

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Speaker 2: You can?

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Speaker 3: I think, Look, there has been improvement in the labor market.

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Speaker 3: Wage inflation has stepped down from five and a half

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Speaker 3: down to around four percent, but that's still a little

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Speaker 3: bit hot compared to where they want to get. But

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Speaker 3: the chair is right, there's been important supply side benefits.

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Speaker 3: In particular, labor supply productivity is also picked up.

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Speaker 2: I actually think, John, if I.

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Speaker 3: Could, I think maybe a little bit more of a

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Speaker 3: disconnect is on the financial conditions predicate itself. You know,

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Speaker 3: if you just look narrowly at the federal funds rate,

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Speaker 3: it's well above inflation. That looks very tight historically, but

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Speaker 3: of course very few people, including bankspar at the federal

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Speaker 3: funds rate. If you look at mortgage rates and you

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Speaker 3: look at other things, they've come down, and credit spreads

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Speaker 3: are tight.

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Speaker 2: You know, Bloomberg financial.

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Speaker 3: Conditions indexes, including bloombergs are easing, and so he got

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Speaker 3: that question last week about financial conditions and he says,

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Speaker 3: we think they're tight. Well, they could be, but they're

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Speaker 3: certainly easier than they were in November.

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Speaker 1: Which you think pointing to when he says we think

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Speaker 1: that's height What is he pointing.

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Speaker 3: To, Well, absolute borrowing costs if you want to get

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Speaker 3: a car, lint, if you want to get a mortgage rate.

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Speaker 3: So traditional indicators of the cost of borrowing are elevated,

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Speaker 3: but obviously other indicators are moving in the other direction.

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Speaker 3: So as usual with the data, it's probably a mixed picture.

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Speaker 4: Do you think that it's clear that it is truly

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Speaker 4: a sufficiently restrictive rate currently at the Federal Reserve?

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Speaker 3: That would be my base case, but there is a

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Speaker 3: risk that that it's not. And I think importantly the

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Speaker 3: focus on the baseline, of course is reinsuring we want

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Speaker 3: to know what's going to happen. But I think there

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Speaker 3: is a risk management case here where it may not

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Speaker 3: be restrictive enough. I think the FEDS view, I don't

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Speaker 3: think people care. What I think I think the FEDS

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Speaker 3: view is if the if inflations stickier and more stubborn

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Speaker 3: than they want, they'll just keep rates at the current

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Speaker 3: level longer, or they'll reduce the pace of rate cuts.

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Speaker 3: I don't really think the POWERFED is thinking about hiking

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Speaker 3: anymore right now. I think they think they're done.

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Speaker 4: You said if the FED really is data dependent, and

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Speaker 4: I don't think you're necessarily casting doubt and whether they

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Speaker 4: look at data, But what data matters most If what

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Speaker 4: we're looking at right now is inflation data that is

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Speaker 4: coming in hotter and frankly goods disinflation that seems to

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Speaker 4: have ended.

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Speaker 3: Certainly that the January and February data. If the PCE

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Speaker 3: comes in, that would be the reson There are some evidence.

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Speaker 3: I think the chair is correct of seasonality. You know,

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Speaker 3: that's always tricky. In recent years, most of the bad

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Speaker 3: news and inflation has been in the first four or

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Speaker 3: five months. So I don't think we want to remove

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Speaker 3: that possibility. I just think that a sticky inflation scenario

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Speaker 3: is maybe not a baseline, but it's a very realistic case,

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Speaker 3: and I think investors and people looking at the economy

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Speaker 3: need to start thinking about it.

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Speaker 1: How do you perceive the balance of risks holding too

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Speaker 1: long ago cutting too soon? What is the bigger risk

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Speaker 1: for you?

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Speaker 3: Well, I'm no longer there, so it probably doesn't matter,

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Speaker 3: I think, given that the last three years inflation has

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Speaker 3: substantially overshot the target. Look, I was a charter member

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Speaker 3: of Team Transitory. It's looking better now than it did

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Speaker 3: a year ago. But I think there is path dependence

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Speaker 3: and history dependence and monetary policy, and so I think

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Speaker 3: the risk management I would be doing if I were there,

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Speaker 3: would say there is a real we want to avoid.

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Speaker 2: I don't think it's we want to avoid.

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Speaker 3: Having inflation shoot up again and having the credibility challenge.

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Speaker 3: So I would be leaving more in a hawkish balance

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Speaker 3: of risk mode than just hugging the baseline right now.

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Speaker 4: To put sort of a bow on that point, if

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Speaker 4: you think about how much more investors have to consider

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Speaker 4: the idea of sticky inflation and fedificials themselves, can you

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Speaker 4: give us a sense of how much that possibility has

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Speaker 4: increased in your view and the past month or two,

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Speaker 4: based on the loosening of financial conditions and frankly the

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Speaker 4: Fed's response.

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Speaker 3: To it, it has increased certainly.

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Speaker 2: Look, we got really sick.

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Speaker 3: We got five out of six months of really really good,

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Speaker 3: surprisingly good inflation data, and for good reasons, both supply

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Speaker 3: and demand, where in some ways I think there's actually now,

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Speaker 3: compared to where we were maybe in January, a better

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Speaker 3: alignment between markets in the FED in the sense that

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Speaker 3: you know, after the December meeting, the markets are priced

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Speaker 3: in six or seven cuts, which which was a disconnect

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Speaker 3: with what I thought the power FED would deliver. So

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Speaker 3: on that end, I don't think there's too much of

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Speaker 3: a disconnect now. I think markets understand, they think they're done.

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Speaker 3: The margin that they're going to play with is when

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Speaker 3: to cut and how much to cut, but not to hike.

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Speaker 3: So I don't think there's that much of a of

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Speaker 3: a disconnect right now.

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Speaker 1: One final question, can we do the show again in

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Speaker 1: Newport Beach, California? Can we do that in June?

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Speaker 2: Excuse me?

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Speaker 3: Well, you know it's above my pay grade, but h

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Speaker 3: and I'll treat you to a burger like I did.

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Speaker 3: Actually you treated me or no one.

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Speaker 2: Treated each other.

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Speaker 1: No, I think we treated each other.

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Speaker 2: We treated each other.

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Speaker 1: Yeah, I think sort of money and Mike exchange cards

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Speaker 1: or something like that. Rich is good to see it.

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Speaker 1: Thank you, Thank you very much. Your former FED Vice

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Speaker 1: chair Richard Clarender