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Speaker 1: PIMCO went in on the fed's road ahead riding in

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Speaker 1: their secondar outlook quote, we don't expect developed market central

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Speaker 1: banks to formally change their targets, but do expect those

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Speaker 1: targeting two percent to be willing to tolerate two point

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Speaker 1: something inflation as part of what PIMCOM is calling an

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Speaker 1: opportunistic disinflation strategy. And please to say that joining us

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Speaker 1: now is the PIMCO Global Economic Advisor, former FED Vice chair,

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Speaker 1: good friend of us, Richard Clarenda.

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Speaker 2: Good morning, rich great to be here, and thanks for

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Speaker 2: coming out.

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Speaker 1: Good to see you, thanks for having us. Let's start

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Speaker 1: with that, what on earth is opportunistic disinflation strategy? What

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Speaker 1: is that?

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Speaker 2: Well, in some ways, John's back to the future.

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Speaker 3: A lot of folks think of the early Greenspan years

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Speaker 3: in the US as opportunistic disinflation, raise rates to get

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Speaker 3: inflation close to target and then basically wait for the

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Speaker 3: next downturn to get it all the way to target.

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Speaker 2: And we actually think it's implicit.

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Speaker 3: If you look at the Fed's SEP projections, they don't

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Speaker 3: have inflation getting down to two percent for several more years.

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Speaker 2: And you have they have them.

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Speaker 3: So I was even cutting rates next year, we think

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Speaker 3: implicitly not only the FED but other central banks will

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Speaker 3: go down that road.

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Speaker 1: So when chem and Power last year talked about pain, rich, Yeah,

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Speaker 1: do we not need that much pain? Then? Do we

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Speaker 1: just push out a timeline?

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Speaker 3: Well, I think there will have to be an adjustment

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Speaker 3: in the labor market even to get to two points something.

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Speaker 3: You see the challenge and how John's inflation is running

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Speaker 3: at four point something. So I think that pain in

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Speaker 3: the labor market that Chair Power referred to as Jackson

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Speaker 3: Hall is going to be part of it to get

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Speaker 3: inflation down to two points something. But the next leg

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Speaker 3: may have to wait till the next downturn.

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Speaker 1: Well, let's talk about the next downturn? Yeah, where on

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Speaker 1: earth is it? We've been talking about this for ages now.

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Speaker 1: When chem and Power delivered that speech last year, even

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Speaker 1: when you were at the FED, I was thinking unemployment here,

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Speaker 1: how's it going to handle this time in cycle? We

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Speaker 1: going from zero to five and unemployment still around three

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Speaker 1: and a half. We had Dan sit in your seat

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Speaker 1: a little bit earlier and talk about the longer vailable lacks.

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Speaker 1: He said, potentially they're longer. Is that how you and

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Speaker 1: the team of thinking about it now.

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Speaker 3: Well, yes, remember we actually had a sharp slow down

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Speaker 3: in growth last year. GDP growth downshifted from six to

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Speaker 3: one and will probably be in the ones or even

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Speaker 3: lower this year.

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Speaker 2: So we've had the down shift in growth.

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Speaker 3: Yes, John, The surprise is the US labor market is

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Speaker 3: very resilient. Typically that slowed down in growth, you would

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Speaker 3: see much more of a rise in unemployment. Our view

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Speaker 3: continues to be that the lags will kick in. Labor

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Speaker 3: market is typically a lagging indicator. But yes, it has

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Speaker 3: been a surprise how resilient the labor market's been.

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Speaker 1: The federal serve is talking about a skip, not a pause.

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Speaker 1: How much effort goes into a shifting language like that

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Speaker 1: to not use the word pause and for everyone to

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Speaker 1: cover less around skip.

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Speaker 3: Well, a lot of effort, a lot of discussion among

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Speaker 3: members of the so called troika, the chair John Williams

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Speaker 3: and now Phil Jefferson, and then of course it's socialized

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Speaker 3: in the broader committee. But suffice to say, there's a

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Speaker 3: lot of wordsmithing that goes on behind the scenes.

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Speaker 1: The potential future almost called him the future vice chair,

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Speaker 1: but he has potentially going to be that Governor Jefferson,

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Speaker 1: talk to me about how pivotal that addressed from him

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Speaker 1: was last week, how important was that.

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Speaker 2: It was important?

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Speaker 3: First of all, it was an excellent speech, and really

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Speaker 3: in Phil's voice. I've known Phil for thirty years, we

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Speaker 3: were colleagues at Columbia.

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Speaker 2: But it did something very important, which is that the.

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Speaker 3: Chair had tried to put his stamp on communication at

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Speaker 3: an event at the FED two or three weeks ago,

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Speaker 3: and then, as is often the case, there's a lot

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Speaker 3: of chatter from different Reserve Bank presidents and governors, and

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Speaker 3: so market pricing was really.

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Speaker 2: All over the map.

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Speaker 3: Do they cut to the high type three times? Cut

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Speaker 3: three times? And so Governor Jefferson came out and gave

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Speaker 3: a very focused speech illustrating that a skip, if the

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Speaker 3: committee chooses to skip, will not indicate that they're done,

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Speaker 3: but they do need to respect the lags and the

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Speaker 3: additional titaning were likely to get from banking this location. So,

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Speaker 3: in essence, reinforced the message that the Chair had delivered

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Speaker 3: weeks before, and I think that served a very useful

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Speaker 3: purpose because it shows that that's what the Chair is

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Speaker 3: thinking going into the next meeting.

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Speaker 1: Do you think this is it? The peak of interest

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Speaker 1: rights to the FED? Is view few in the team,

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Speaker 1: Well is it the peak?

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Speaker 3: I think that the data has been coming in a

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Speaker 3: bit stronger and if anything, even some of the more

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Speaker 3: dubbish members of the committee have sounded a bit howkeyer,

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Speaker 3: So we could get an additional hiker to in this cycle.

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Speaker 3: I think it's a closer call than it would have

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Speaker 3: thought several months ago. I will say I still think

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Speaker 3: that the reasoning that the Chair put forward, which is

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Speaker 3: that we've had this dislocation in banking, two of the

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Speaker 3: biggest bank failures in US history.

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Speaker 2: You know, right now Marcus have sort.

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Speaker 3: Of moved on to the next thing, but some of

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Speaker 3: those challenges remain, and so I think that's going to

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Speaker 3: come back into the discussion at some point as well.

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Speaker 1: There was some thoughts about raycuts. We priced them in, Yeah,

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Speaker 1: we priced them out. Just how high is the bar

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Speaker 1: for right cuts?

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Speaker 2: John?

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Speaker 3: I think the bar for raycuts the rest of this

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Speaker 3: calendar year is very high, not only on economic grounds,

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Speaker 3: but the communication has been very consistent. From the most

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Speaker 3: dubbish to the most hawkish member. Every member of that

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Speaker 3: committee has said, look, we're not going to do the

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Speaker 3: heavy lifting to get rates and restrictive territory and then

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Speaker 3: start to cut them.

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Speaker 2: So I think the bar to cutting.

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Speaker 3: This year is very high, because remember the FED has

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Speaker 3: penciled into its projections a pretty sharp slow down to

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Speaker 3: the labor working. They have the unemployment rate going up

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Speaker 3: to four and a half percent by the end of

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Speaker 3: the year without any cuts. So I do think if

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Speaker 3: there are cuts, it's really a twenty twenty four story.

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Speaker 2: But yeah, I think the bar's high.

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Speaker 1: Let's pay this conversation with a second Rountlook, yeah, what

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Speaker 1: are they going back to if they do begin to cut.

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Speaker 1: There's been a big conversation about that, We're not going

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Speaker 1: back to zero. I think we've both hurt that conversation

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Speaker 1: a million times. What would we go back to?

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Speaker 3: Well, we did a lot of discussion and thinking on this,

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Speaker 3: and of course in twenty fourteen we rolled out at

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Speaker 3: our form the new neutral idea, which was that the

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Speaker 3: FED funds range would end up neutral somewhere in two

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Speaker 3: to three percent, and this year we reaffirmed that view.

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Speaker 3: So we do think most of the factors that kept

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Speaker 3: policy rates. Again, these are the policy rates when you're

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Speaker 3: at full employment and low inflation. We think there's more

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Speaker 3: upside to the inflation outlooked and then the real rate outlook.

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Speaker 3: And so our baseline view is that J. Powell and

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Speaker 3: Christine Legard and Andrew Bailey and the central bankers will

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Speaker 3: do more or less what it takes to keep inflation

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Speaker 3: expectations anchored. But there is there is a risk to

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Speaker 3: the inflation outlook at somewhat to the upside. So we

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Speaker 3: do think that once the inflation rate has come down

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Speaker 3: close to where the Fed wants that, once the economis adjusted,

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Speaker 3: we think, and apparently they still think through the dots

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Speaker 3: rates are getting down into the twos.

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Speaker 2: You share them view.

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Speaker 3: I do share that view. I think what could be

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Speaker 3: different this time? You know this is saying this time

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Speaker 3: is different? I think what could be different this time

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Speaker 3: is we may have policy rates in the twos, but

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Speaker 3: we may have higher bond yields. The Treasury issued a

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Speaker 3: lot of debt to support the fiscal policy during the pandemic.

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Speaker 3: We now have a debt to GDP ratio back to

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Speaker 3: where it was in World War Two one hundred percent

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Speaker 3: of GDP.

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Speaker 2: It wasn't that long ago that folks like.

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Speaker 3: Ken Rogoff and others were saying, once you get above

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Speaker 3: one hundred it fundamentally changes your economy. So we do

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Speaker 3: think that the Fed will probably be doing less q

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Speaker 3: in the future, what we called QE fatigue, And we

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Speaker 3: think there's a limit to how much treasury debt investors

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Speaker 3: will hold without getting compensated. So we could see a

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Speaker 3: world of steeper yield curves. Right now, they're inverted, but

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Speaker 3: they could resteepmen.

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Speaker 1: Okay, So basically the Federal reserve is at two, and

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Speaker 1: you're thinking about what further out, further out of the

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Speaker 1: yield curve.

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Speaker 3: Ten, your treasuries ultimately somewhere in the threes, depending upon

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Speaker 3: how we get how we get to two, and also

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Speaker 3: how credible the feed is on inflation.

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Speaker 1: They're coming out with a ton of tea ill issuance

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Speaker 1: of the treasury yea, hundreds of billions. Now, if you're

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Speaker 1: a bar you're bearish about it, and if you're a bull,

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Speaker 1: you don't really care. Give us the reality check. What

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Speaker 1: do you think that ultimately means hundreds of billions of

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Speaker 1: dollars of tea bills coming into the market all at once.

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Speaker 1: How does that spill over?

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Speaker 3: Well, it's interesting, John, because a lot of the discussion

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Speaker 3: until recently has been there's been a shortage of tea bills.

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Speaker 3: The Treasury is doing this, of course, because we got

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Speaker 3: the debt ceiling bill finally pan and they want to replenish.

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Speaker 3: You know, they're checking account at the FED, what's called

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Speaker 3: the Treasury General Account. So they'll do that by issuing

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Speaker 3: tea bills. That will put some upper pressure on front

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Speaker 3: end rates. Not really an issue for the FED in

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Speaker 3: terms of maintaining its policy rate, but a potential issue

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Speaker 3: for the liquidity of the banking system, because when the

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Speaker 3: Treasury issues tea bills to private investors, if private investors

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Speaker 3: are not money market funds those reserves during the system,

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Speaker 3: it could tighten liquidity in the banking system. If they

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Speaker 3: come from money market funds, which are investing now with

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Speaker 3: the FED, it may not. So I think there's more

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Speaker 3: than the usual amount of uncertainty about how bank liquidity

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Speaker 3: evolves over the next six months with these tea bills.

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Speaker 1: You think that's another reason to skip June to white.

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Speaker 3: I do not think that's another reason to skip June.

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Speaker 3: I think that I think if they skip June, which

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Speaker 3: it looks like they will, it will be basically based

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Speaker 3: on the you know, the macro and inflation discussion now.

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Speaker 1: Want to finish on in flights. Just a final question

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Speaker 1: in this piece two points something that's your world. I

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Speaker 1: can hear your language in there. If we set a

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Speaker 1: new inflation target today, not that they're going to you

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Speaker 1: push back against that, but if we did, would it

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Speaker 1: still be two percent?

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Speaker 3: Well, the way I like to play it is that

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Speaker 3: if you rewind the tape to thirty years ago in

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Speaker 3: central banks had sort of agreed on three I think

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Speaker 3: I don't think anything would be different now, but there

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Speaker 3: is what people call path dependence in policy, and having

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Speaker 3: committed to doing too, I think it would be very costly,

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Speaker 3: and I think they'll shy away from formally changing the target.

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Speaker 1: Interesting, rich Go to see it right to catch up,

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Speaker 1: that's fantastic, Richard Cloud to that the form of FED

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Speaker 1: vice chair