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Bill Dudley on Monetary Policies · Masters in Business

0:02
Speaker 1: This is Master's in Business with very Rid Holds on
0:06
Speaker 1: Bloomberg Radio this week on the podcast what Can I Say?
0:12
Speaker 1: Bill Dudley, former New York Fed President, multiple positions at
0:19
Speaker 1: Goldman Sachs on Federal Reserve, at the New York Fed,
0:23
Speaker 1: really a master class in how monetary policy is not
0:28
Speaker 1: only made, but executed and put into actual operations. There
0:34
Speaker 1: are few people in the world who understand the inter
0:38
Speaker 1: relationships between central banks, the economy, and markets like Bill
0:43
Speaker 1: Dudley does. This is just a master class in understanding
0:50
Speaker 1: all the factors that affect everything from the economy to inflation,
0:55
Speaker 1: to the labor market, the housing market, and of course
0:59
Speaker 1: Federal Reserve. I could go on and on, but instead
1:03
Speaker 1: I'll just say, with no further ado, my conversation with
1:07
Speaker 1: former New York Fed President Bill Dudley. Great to be here, Barry,
1:11
Speaker 1: It's great to have you. So I feel like I
1:13
Speaker 1: have to call you Bill Bill, because that's what I
1:16
Speaker 1: always hear you described as not a William Yep. Let's
1:19
Speaker 1: talk a little bit about your background. You get an
1:21
Speaker 1: economics PhD from California Berkeley in eighty two, and around
1:27
Speaker 1: the same time you become an economist at the Federal
1:30
Speaker 1: Reserve Board from eighty one to eighty three. Tell us
1:32
Speaker 1: a little bit about that role.
1:34
Speaker 2: I was there in the what's called the Financial Studies Section,
1:38
Speaker 2: which is one of the very small places in the
1:40
Speaker 2: FED that it is not macroeconomics driven, it's microeconomics. So
1:43
Speaker 2: we worked on things like payments policy, you know, regulatory policy,
1:48
Speaker 2: so all sorts of micro issues, not macro issues. It
1:51
Speaker 2: was a pretty interesting period because the Congress had just
1:54
Speaker 2: passed what's called the Monetary Control Act, where they're forcing
1:57
Speaker 2: the FED to charge for all its services to so
2:00
Speaker 2: to sort of level the playing field with.
2:02
Speaker 1: The private sector.
2:03
Speaker 2: So we had to figure out how we're going to
2:04
Speaker 2: price all these services in a way that we can
2:07
Speaker 2: still sort of stay in business and be a viable
2:10
Speaker 2: competitor to the private sector.
2:11
Speaker 1: Huh, that's kind of bizarre. I would imagine in nineteen
2:14
Speaker 1: eighty two, the FED was a much smaller entity than
2:17
Speaker 1: it is today. What was a day in the life
2:20
Speaker 1: of a FED economist like back then?
2:23
Speaker 2: So I was working on issues, you know, on payments,
2:26
Speaker 2: I worked on issues on you know, some of them
2:30
Speaker 2: were quite esoteric. So, for example, the treasure was thinking
2:33
Speaker 2: about moving to direct deposit, but they wanted to know
2:35
Speaker 2: how much it was going to cost them. Because direct
2:37
Speaker 2: deposit the money clears, you know, sorry almost instantly.
2:41
Speaker 1: Right when you.
2:42
Speaker 2: Write a check, you get check float. It takes time
2:45
Speaker 2: for the checks to come back to hit the treasury counts.
2:48
Speaker 2: So they want to know how many days does it
2:49
Speaker 2: take a Treasury check to get back to us. So
2:52
Speaker 2: we actually set this project where we went out to
2:54
Speaker 2: the reserve banks and sample checks to find out how
2:57
Speaker 2: long did it actually take someone to get their treasury
3:01
Speaker 2: check and deposit it somewhere and have a get back
3:03
Speaker 2: to the Fed and debit the treasury of the count
3:05
Speaker 2: It turned out to be like eight or nine days
3:06
Speaker 2: on average.
3:07
Speaker 1: And on a couple of billion dollars that flowed as
3:09
Speaker 1: real money. It's real money.
3:11
Speaker 2: So we wanted to make sure that people understood what
3:13
Speaker 2: the cost was. Now, obviously it's a good thing to do.
3:17
Speaker 2: I mean, it does cost the Treasury money, but it's
3:19
Speaker 2: a much more efficient and more reliable payments medium.
3:23
Speaker 1: Did you overlap with the Chairman Paul Vulkar when you were.
3:26
Speaker 2: There, Yes, I did. I didn't have a lot of
3:29
Speaker 2: interactions with him. I remember one time though I did
3:31
Speaker 2: do a briefing of the of the Board of Governors.
3:34
Speaker 2: And at the time they had they had this very
3:36
Speaker 2: long table in the board in the main board of
3:39
Speaker 2: Governor's meeting room, and Volker sat at one end and
3:42
Speaker 2: the briefer set all the way at the other end,
3:45
Speaker 2: which was made it sort of complicated because Volker had
3:48
Speaker 2: usually had a cigar stuck in his mouth, and you
3:50
Speaker 2: would have acquire and you could like straining to hear them.
3:55
Speaker 2: The senior staff was ready to rescue you if you
3:58
Speaker 2: said something inappropriate. I mean they set the bar, the
4:02
Speaker 2: tension bar so high because you actually couldn't actually do
4:05
Speaker 2: a briefing until you've actually taken a course, no kidding.
4:08
Speaker 2: So that means like you're not exactly relaxed when you're
4:11
Speaker 2: going to brief the governors. It's not a lot of
4:13
Speaker 2: give and take. It's a very formal process.
4:16
Speaker 1: And even without a cigar in his mouth. I only
4:18
Speaker 1: got to meet Toll Paul once, but he's kind of
4:21
Speaker 1: gruff and mumbles like not a clear projecting voice, kind
4:25
Speaker 1: of a hoarse, mumbling voice. I can imagine with a
4:28
Speaker 1: cigar in his mouth, who could even tell what he's saying.
4:31
Speaker 2: Well, I seem to have gotten it good enough. And
4:34
Speaker 2: you know what's interesting about that. I didn't really have
4:36
Speaker 2: that much interaction with Paul over the next you know,
4:38
Speaker 2: fifteen to twenty years, But once I got to the FED,
4:42
Speaker 2: we started to actually see each other on a much
4:43
Speaker 2: more regular basis. I got involved with a group of thirty,
4:46
Speaker 2: Paul was a member of the group of thirty, and
4:48
Speaker 2: we gradually became pretty good friends. So it started like
4:52
Speaker 2: very slow and sort of matured.
4:54
Speaker 1: Like, fine, mind, he's a fascinating guy, and what an
4:58
Speaker 1: amazing career. So before you come back to the FED,
5:03
Speaker 1: there's a private sector interval. Tell us a little bit
5:07
Speaker 1: about the twenty years you spent at Goldman Sachs, where
5:10
Speaker 1: you not only became a managing director and a partner,
5:13
Speaker 1: but you know, really very much rose through the ranks. Well,
5:16
Speaker 1: first I went to JV. Morgan.
5:18
Speaker 2: I was there the regulatory commis. JP Morgan at the
5:20
Speaker 2: time had one regulatory commis And so when the job
5:23
Speaker 2: came open and they approached me at the FED, I thought, boy,
5:26
Speaker 2: if I don't take this job, it's not gonna be available,
5:29
Speaker 2: you know a few years later, So I went to JV.
5:31
Speaker 1: Morgan.
5:32
Speaker 2: I worked on a lot of bank regulatory matters, and
5:34
Speaker 2: that's why I'm still very interested in bank regulatory issues.
5:38
Speaker 1: But that seemed to me like not.
5:40
Speaker 2: A really great long term career because, as you know,
5:43
Speaker 2: bank regulation changes very slowly, and I start wanted a
5:47
Speaker 2: faster tempo. So Goldman Sachs had me into interview for
5:51
Speaker 2: a macro economics job, and I thought, well, I don't
5:54
Speaker 2: really know a lot of macroeconomics, but I do know
5:57
Speaker 2: about how the Federal Reserve operates, how the pay system operates,
6:00
Speaker 2: how the plumbing works, how reserves, you know, moved through
6:03
Speaker 2: the system. And I think they liked the fact that
6:06
Speaker 2: I knew about how things worked at sort of a
6:09
Speaker 2: micro level, so they hired me to do macroeconomics.
6:12
Speaker 1: So you were chief US economist for a decade over
6:17
Speaker 1: a really fascinating period, really the heart of the bull market.
6:22
Speaker 1: Tell us a little bit what you remember from that
6:25
Speaker 1: role in that era.
6:27
Speaker 2: Well, I remember how how it was a period of
6:30
Speaker 2: sort of stars for for equity analysts, much more than
6:35
Speaker 2: it is today. And one of the biggest stars was
6:38
Speaker 2: Abby Joseph's Colin Sure It was the equity analyst for
6:42
Speaker 2: Goldman Sachs. So trying to find some space between Abby
6:46
Speaker 2: and your audience. Was a little bit challenging, but you know,
6:50
Speaker 2: I focused mostly on fixed income and foreign exchange, so
6:53
Speaker 2: there was sort of room for me to do my business.
6:57
Speaker 2: Probably the highlight of my career at Goldman Sachs was
6:59
Speaker 2: that I can't or exactly the year, but it was
7:01
Speaker 2: in the early two thousands when people in the markets
7:04
Speaker 2: couldn't figure out if the FED was going to move
7:06
Speaker 2: by twenty five basis points or by fifty basis points,
7:09
Speaker 2: and unlike today, going into the meeting, it really was
7:12
Speaker 2: fifty to fifty. And Lloyd Blankfin called me up the
7:15
Speaker 2: night before and so I said, you know, we have
7:17
Speaker 2: a lot of risk on this notion that they're going
7:19
Speaker 2: to do fifty. How do you feel about that? And
7:22
Speaker 2: that was my call, I said. I told Loyd said,
7:25
Speaker 2: I don't know what's going to happen, but the probability
7:27
Speaker 2: of fifty is a lot more than fifty to fifty
7:29
Speaker 2: at this point. Next day I had to go to
7:31
Speaker 2: Boston for a client meeting. It was really sort of
7:33
Speaker 2: sad because I wasn't on the floor at the time
7:36
Speaker 2: that the announcement came, but apparently people stood up and.
7:38
Speaker 1: Cheered for me and it was a fifty point yeah.
7:41
Speaker 2: Yeah, yeah, So I got that was so that was
7:43
Speaker 2: probably the highlight and I start I got to miss
7:45
Speaker 2: the best part of it, rightly.
7:47
Speaker 1: So after you know, more than twenty years Agoman, you
7:51
Speaker 1: joined the New York FED in two thousand and seven
7:55
Speaker 1: overseeing domestic and foreign exchange trading operations. Two thousand and seven.
8:00
Speaker 1: That's some timing. It's really it's after real estate rolled over,
8:05
Speaker 1: but it's kind of before the market peaked and the
8:08
Speaker 1: real trouble began in O eight or nine.
8:11
Speaker 2: Yeah, well, I had about seven months of calm and
8:14
Speaker 2: then this chaos started in August of two thousand and seven.
8:18
Speaker 2: I remember it really well because I just finished building
8:21
Speaker 2: this house in West Virginia and we were taking occupancy
8:25
Speaker 2: in early August, and it was literally the same day
8:28
Speaker 2: that BNP Paraba shut off redemptions from some of their
8:32
Speaker 2: mutual funds, caused all sorts of chaos in Europe, and
8:35
Speaker 2: then the question is, well, what are we going to
8:36
Speaker 2: do about adding liquidity in the US. So didn't get
8:39
Speaker 2: out of the house, my new house for the next
8:41
Speaker 2: two days as we tried to figure out how to
8:44
Speaker 2: calm markets after the BNP Paraba event.
8:49
Speaker 1: And the US market kept going higher. I don't think
8:51
Speaker 1: we peaked till like October oh seven, something like that.
8:54
Speaker 2: Yeah, people didn't really understand the consequences of subprime. You know,
8:59
Speaker 2: I thought for.
9:00
Speaker 1: Years, I mean literally for years, if you mentioned it,
9:03
Speaker 1: you would be mocked on TV. Yeah, I mean.
9:06
Speaker 2: You know, one thing I am proud about when I
9:08
Speaker 2: joined the FED is in January two thousand and seven,
9:11
Speaker 2: that was my first briefing of the FOMC, and actually
9:14
Speaker 2: talked about how this could turn out poorly. You know
9:18
Speaker 2: that subprime was being supported by you know, subprime was
9:21
Speaker 2: being you know, the credit was flowing to subprime. Subprime
9:25
Speaker 2: was enable looking people to buy houses. Home prices were
9:28
Speaker 2: going up. Because home prices were going up, subprime wasn't
9:31
Speaker 2: a problem, right, But at some point supply was going
9:34
Speaker 2: to increase in response to the higher home prices, and
9:37
Speaker 2: once prices stopped going up, subprime was going to start
9:40
Speaker 2: to go the wrong direction. I said, this is a possibility.
9:43
Speaker 2: I didn't say it was going to happen, but by
9:44
Speaker 2: I staid it was the possibility. So I was sort
9:46
Speaker 2: of pleased that I got off on the right track.
9:48
Speaker 1: And then in January two thousand and nine, we were
9:52
Speaker 1: deep into the financial crisis where post Lehman and post
9:56
Speaker 1: Aig you get named tenth president CEO of the New
9:59
Speaker 1: York FED. Again, fantastic timing. What was taking up your
10:04
Speaker 1: attention right in the midst of the financial crisis.
10:09
Speaker 2: Well, you know, that was a tremendously fortunate event for me.
10:12
Speaker 2: I always tell people like brock Obama had to become president,
10:16
Speaker 2: Tim Geitner had to become Treasury Secretary, and then the
10:19
Speaker 2: board of directors in near FED had to pick me.
10:21
Speaker 2: So it's sort of like a low probability times of
10:23
Speaker 2: low probably times low probability, so sometimes it works out. Yeah,
10:26
Speaker 2: sort of a bank a bank, a trible bank shot.
10:29
Speaker 2: You know a lot of things that were focused on
10:31
Speaker 2: at the time was trying to provide support to financial markets.
10:34
Speaker 2: So if you remember, we were still rolling out various
10:37
Speaker 2: facilities like the term asset back, the lending facility for example,
10:42
Speaker 2: we were running the commercial paper funding facility. We were
10:45
Speaker 2: trying to figure out how to do stress test, the
10:47
Speaker 2: first stress test of banks. So that was a big
10:50
Speaker 2: job in the spring of two thousand and nine, and
10:54
Speaker 2: those stress tests were probably the critical turning point in
10:57
Speaker 2: the financial crisis. I remember the day after we published
11:00
Speaker 2: the stress test, and for the FAT we were actually
11:02
Speaker 2: pretty transparent about like what we did and what our
11:05
Speaker 2: assumptions were, and here's the results. Bridgewater published a piece
11:10
Speaker 2: and I think the headline said something like we agree,
11:13
Speaker 2: and I said, okay, we've Now that's that's really important
11:17
Speaker 2: because if our analysis is viewed as credible and we
11:21
Speaker 2: have the tart money being able to supply the capital
11:24
Speaker 2: that's needed, then people can start to rest assured that
11:27
Speaker 2: the banking system is going to stabilize and and it's
11:30
Speaker 2: going to stop deteriorating now. It also helped that the
11:32
Speaker 2: e Commedis was showing signs of bottoming out, so it
11:35
Speaker 2: didn't look like we're just heading down into a deep hole.
11:37
Speaker 2: But you know, it was very touching, touch a touch
11:39
Speaker 2: and go there in the first part of two thousand
11:42
Speaker 2: and nine, and there were you know, there were still
11:43
Speaker 2: some major financial firms that were pretty darn shaky. I mean,
11:47
Speaker 2: City was pretty shaky, Morgan Stanley was pretty shaky. Some
11:50
Speaker 2: of the banks were still pretty shaky. So you know,
11:54
Speaker 2: until you actually hit bottom and start to pull up,
11:57
Speaker 2: you're really wondering are you going to get through this
11:59
Speaker 2: and one piece?
12:00
Speaker 1: So the Bridgewater piece raises a really interesting question. The
12:05
Speaker 1: New York FED is kind of I don't know how
12:09
Speaker 1: to say this first amongst the regional feds, because you're
12:13
Speaker 1: located right in the heart of the financial community. What
12:17
Speaker 1: is the communication like back and forth between the New
12:20
Speaker 1: York FED and major players in finance, especially in the
12:27
Speaker 1: midst of a crisis like that.
12:29
Speaker 2: So the New York FED is sort of unique among
12:32
Speaker 2: central banking entities because most central banks they do the
12:36
Speaker 2: policy and strategy and the operations all in the same place,
12:40
Speaker 2: but in the FED is split. You have policy done
12:43
Speaker 2: in Washington, the operational implementation of that policy almost all
12:47
Speaker 2: of that takes place at the New York FED. So
12:50
Speaker 2: the New York FED is sort of the eyes and
12:52
Speaker 2: ears of the FED reserve for markets. I think that
12:56
Speaker 2: you know, one thing that helped me a lot during
12:58
Speaker 2: the financial crisis is I knew a lot of people
13:00
Speaker 2: on Wall Street, and so when something was happening, I
13:03
Speaker 2: could call up people I knew and just ask their opinion,
13:07
Speaker 2: recognizing that oftentimes their opinion does have a touch of
13:09
Speaker 2: self interest. So you need to talk to three or
13:12
Speaker 2: four people to sort of triangulate and figure out what
13:14
Speaker 2: you think is really going on. I mean, I'll give
13:15
Speaker 2: you an example of one thing that really struck me
13:18
Speaker 2: during that period. I called up someone and I said,
13:22
Speaker 2: here's a complex you know, cdo obligation. You know, you know,
13:26
Speaker 2: with all these different mortgages and all these different tranches.
13:29
Speaker 2: How long would it take you to actually go through
13:31
Speaker 2: that and value it appropriately, to come up with an
13:34
Speaker 2: appropriate valuation? He said, oh, take at least two or
13:37
Speaker 2: three weeks. Really, And I thought, oh boy, we're in
13:39
Speaker 2: big trouble.
13:40
Speaker 1: Wow.
13:41
Speaker 2: If you don't really know what things are worth when
13:43
Speaker 2: you're going through a period of financial stress, that's going
13:46
Speaker 2: to be makes things much much more difficult.
13:49
Speaker 1: I would have guessed they would break that up into
13:50
Speaker 1: five parts, give it to a bunch of juniors, and
13:53
Speaker 1: they'd have an answer in three hours. So it scared me.
13:56
Speaker 1: Scared I can imagine. So from the New York FED
14:01
Speaker 1: you ultimately end up as vice chairman of the f OMC,
14:04
Speaker 1: helping to formulate US monetary policy. What was that like
14:09
Speaker 1: going from New York to DC.
14:14
Speaker 2: Well, it wasn't such a big change because I'd already
14:17
Speaker 2: been going to the f MC meetings and briefing the
14:20
Speaker 2: f MC.
14:21
Speaker 1: Members as president of the New York Fed you have
14:23
Speaker 1: a seat. What happened though, as I start switched side.
14:26
Speaker 1: So there, So the.
14:29
Speaker 2: Day that Tim Geidner was named Treasury Secretary was basically
14:33
Speaker 2: the day before an f MC meeting. And I literally
14:36
Speaker 2: didn't know when I went down to Washington that Monday
14:38
Speaker 2: evening whether I was going to be briefing the FMC
14:41
Speaker 2: participants or whether I was going to be an f
14:44
Speaker 2: MC participant myself. So I actually prepared two sets of notes.
14:48
Speaker 2: Here's my briefing notes if I'm I'm the soul the
14:50
Speaker 2: sella manager, and here's my remarks if I'm the president
14:53
Speaker 2: of the FED. So I was ready for both. And
14:56
Speaker 2: what happened that day he was He was named on
14:58
Speaker 2: that Monday, and so on Tuesday, I was I was
15:02
Speaker 2: the President of New York Fed.
15:03
Speaker 1: Wow. And you know I didn't you know?
15:05
Speaker 2: So, And when I got back to New York on
15:08
Speaker 2: you know, I think Thursday morning, we had a town
15:11
Speaker 2: hall and I gave my first remarks to the New
15:15
Speaker 2: York Fed people and had a very simple message for them.
15:19
Speaker 2: Best idea wins, because I was really struck by how
15:23
Speaker 2: hierarchical central banks tend to be. And I wanted to
15:27
Speaker 2: sort of push agat against that idea and basically say,
15:30
Speaker 2: it doesn't matter where the idea comes. If it's the
15:32
Speaker 2: best idea, that's the idea that should win out.
15:34
Speaker 1: Huh. It makes a lot of sense. And since then
15:37
Speaker 1: you've gone on to do some work reforming libor as
15:42
Speaker 1: the benchmark for rates. Tell us, I always get the name,
15:46
Speaker 1: SOFRA the new one that replaced for Yeah, so, so
15:49
Speaker 1: tell us a little bit about the work you did,
15:51
Speaker 1: because libor was probably the most important number, certainly in credit,
15:58
Speaker 1: maybe in all of finance.
16:01
Speaker 2: So library for a while was there was a real
16:04
Speaker 2: question whether central banks were going to take this on
16:06
Speaker 2: or not. And I remember I was in Basel for
16:09
Speaker 2: the BIS meetings and I wrote a one page memo
16:12
Speaker 2: to Ben Bernanke to hand to Mervin King. Mervin King
16:16
Speaker 2: was the head of the sort of the policy making
16:18
Speaker 2: group at the BIS at the time, and the memo
16:20
Speaker 2: was basically arguing why central banks needed to own the
16:24
Speaker 2: librar problem, because if they didn't own it, it wouldn't
16:27
Speaker 2: get fixed, it'd be a problem again, and then the
16:30
Speaker 2: central banks would be blamed for well, why didn't you
16:32
Speaker 2: fix that problem? So I don't know how much important
16:35
Speaker 2: that memo had, but I was very pleased to see
16:37
Speaker 2: the central banks take eyed up. And as you know,
16:39
Speaker 2: it was a huge undertaking which took you know, many
16:42
Speaker 2: many years to complete.
16:44
Speaker 1: And for those people who may not be familiar with
16:48
Speaker 1: the London Interbank offered rate, offered rate literally was a
16:54
Speaker 1: survey where they'd call up various bond desks and say, so,
16:57
Speaker 1: what are you charging for an overnight loan? And eventually
17:01
Speaker 1: traders figured out they could game that by let's just
17:05
Speaker 1: call it talking their books, so to speak, in a
17:08
Speaker 1: way that would move the librar in their direction. You could,
17:12
Speaker 1: you could do a bunch of things with derivatives, and
17:14
Speaker 1: eventually libor kind of spiraled out of control, the new
17:20
Speaker 1: improved version. How do we prevent that from taking place?
17:24
Speaker 1: What were the structural changes?
17:26
Speaker 2: Well, the problem, I mean the problem of LIBRA was
17:29
Speaker 2: that you had a small cash library market that was
17:32
Speaker 2: referencing a very large futures market year all futures market,
17:36
Speaker 2: and so you had a situation where you could take
17:39
Speaker 2: big positions in the euro dollar market, affect the price
17:41
Speaker 2: in the cash market and actually make a profit. So
17:44
Speaker 2: the sort of the tail was wagging the dog for sofa,
17:47
Speaker 2: the secured overnight funding rate for repo. You have a
17:51
Speaker 2: big repo market. I mean it's you know, hundreds and
17:53
Speaker 2: hundreds of billions of dollars, so the idea, and it's
17:55
Speaker 2: a real market. I mean there's real transactions that are traded,
17:58
Speaker 2: and you can sort of track with the price are
18:00
Speaker 2: and where trades are. It's so it's almost impossible to
18:03
Speaker 2: imagine someone manipulating this sofa market.
18:07
Speaker 1: Really really interesting. So so first before we start talking
18:11
Speaker 1: about policy, I have to ask. You're at Goldman Sachs
18:15
Speaker 1: for twenty years and you get the phone call to
18:18
Speaker 1: join the New York FED. What was that like? Was
18:21
Speaker 1: that a tough call or was that an easy decision
18:23
Speaker 1: to make?
18:24
Speaker 2: Well? What happened actually is Tim Geitner called me several
18:27
Speaker 2: months earlier and said, you like to come over to
18:29
Speaker 2: be a senior advisor. And I said, I'd love to
18:32
Speaker 2: be a senior advisor to you, Tim, but what do
18:34
Speaker 2: I do with the rest of my you know, forty
18:36
Speaker 2: to fifty hour work week. And he didn't have a
18:38
Speaker 2: really good answer for that.
18:39
Speaker 1: Was this a full time gig? I means, well, I didn't.
18:44
Speaker 2: When I left Goldman, I didn't really know what my
18:46
Speaker 2: next thing was, so I did not have the next job.
18:49
Speaker 2: I was just assuming that I would something would come
18:51
Speaker 2: along that right, interesting, So he offered that and I thought, well,
18:55
Speaker 2: you know, you know, Tim and I had a very
18:57
Speaker 2: good relationship, and you know, I sort of like the
18:59
Speaker 2: idea of working from but I thought senior advisor was
19:01
Speaker 2: a little bit too unformed. And a couple months later
19:04
Speaker 2: he came back and said, can you run the Markets
19:06
Speaker 2: group at the New York Fed? That's completely different. You're
19:09
Speaker 2: running the group that actually implements monetary policy overseas market
19:13
Speaker 2: analysis Dale deals with the primary dealer community. That was
19:17
Speaker 2: a real opportunity, so that one I didn't have to
19:20
Speaker 2: think very hard about.
19:21
Speaker 1: And what's what Not long after Tim gets elevated, you
19:26
Speaker 1: take the role of New York Fed President. What's a
19:29
Speaker 1: day in the life of New York Fed pres.
19:32
Speaker 2: Like, there's a lot to do because New York Fed
19:35
Speaker 2: does lots of different things. So you know, we have supervision.
19:39
Speaker 2: We oversee some of the largest financial institutions in the
19:42
Speaker 2: world from a supervisory perspective, where the international armor of
19:46
Speaker 2: the FED, so pretty much every two months. I would
19:48
Speaker 2: go to the BIS in Basel, be part of the
19:52
Speaker 2: Bank for International Settlement meetings. New York FED President as
19:56
Speaker 2: well as the chairman of the of the Board of
19:58
Speaker 2: Governors as the Board of Directors of the b S.
20:02
Speaker 2: As Alan Blinder once joked to me, he says, New
20:04
Speaker 2: York FED is the only only institution that's treated it
20:08
Speaker 2: like their their own country because they have this board
20:11
Speaker 2: director's position. You know, there's lots of things and you know,
20:15
Speaker 2: payments they fed. New York Fed runs FED Wire, The
20:19
Speaker 2: New York FED runs Central Bank International Services for a
20:22
Speaker 2: bunch of foreign central banks. They have I don't know,
20:26
Speaker 2: three four trillion dollars of custody assets from foreign so
20:29
Speaker 2: there's a lot. There's lots of pieces to the FED.
20:32
Speaker 1: And then there's a.
20:33
Speaker 2: Research department, uh and there's a lot of outreach to
20:36
Speaker 2: try to get information about what's really happening in the world.
20:38
Speaker 2: I mean, the one thing that I did that was
20:40
Speaker 2: probably a little new from the FED perspective is I
20:43
Speaker 2: tried to broaden out the people that the New York
20:45
Speaker 2: Fed was talking to. Historically, the New York FEDA typically
20:49
Speaker 2: talked mainly to the primary dealer community, so that's where
20:52
Speaker 2: they obtained their information from. And I thought that that
20:54
Speaker 2: was too narrow. We need, we need, we need a
20:56
Speaker 2: broader set of perspectives. And so I hired a woman
21:00
Speaker 2: named Haley Bowski who came in and literally built out
21:04
Speaker 2: a whole operation so we could actually interact not just
21:07
Speaker 2: with the cell side, but also with the buy side.
21:10
Speaker 2: And so we started an advisory group of people for
21:14
Speaker 2: you know, hedge funds, pension funds, insurance companies, buyside investors,
21:19
Speaker 2: and so we have them in periodically to talk to
21:21
Speaker 2: and so we got a much broader network of information
21:25
Speaker 2: that we could sort of take on board. And I
21:26
Speaker 2: think that's valuable because you know, where you sit really
21:30
Speaker 2: does influence your perspective, and you sort of want to
21:32
Speaker 2: understand what biases and you know, self promotion sometimes that
21:37
Speaker 2: people are talking their book that you want to be
21:39
Speaker 2: able to make sure you don't get fooled by that.
21:42
Speaker 1: Now you could go back not all that far in
21:45
Speaker 1: the FED history, and there was none of this communication.
21:49
Speaker 1: It wasn't a transcripts release, there wasn't a reporter scrum
21:55
Speaker 1: and a Q and A. There wasn't even an announcement
21:58
Speaker 1: of change and interest rates. You had to follow bond
22:00
Speaker 1: market to see when rates changed. What are the pros
22:03
Speaker 1: and cons of being so clear and so transparent with
22:08
Speaker 1: market participants? Is the risk that maybe we're too clear?
22:13
Speaker 2: Well, I think there's a strong argument in favor of
22:17
Speaker 2: transparency as opposed to opacity. And you know this has
22:21
Speaker 2: been debated within the Fed for many years. I mean
22:23
Speaker 2: Alan Greenspan, Paul Volker definitely preferred to be opaque. I
22:26
Speaker 2: mean Alan greenspand famously said if you understand, if you
22:29
Speaker 2: think you understand what I said, then I wasn't unclear
22:32
Speaker 2: enough for something.
22:33
Speaker 1: To that effect.
22:35
Speaker 2: So the value of transparency is that if markets understand
22:40
Speaker 2: how the Federal Reserve is going to react to incoming information,
22:44
Speaker 2: the market can essentially price in with the Fed hasn't
22:47
Speaker 2: even yet done, and so that can make monetary policy
22:51
Speaker 2: work much more rapidly.
22:52
Speaker 1: So let's think about it today.
22:53
Speaker 2: So the market is pricing in roughly five to six
22:57
Speaker 2: twenty five basis point rate cuts between now and the
23:00
Speaker 2: end of the year, so that means monitary policy is easier,
23:03
Speaker 2: even though the Federal Reserve hasn't cut rates yet, So.
23:06
Speaker 1: They do some of the work for the Fed. Yeah,
23:09
Speaker 1: and it makes it.
23:09
Speaker 2: And it also means that as newcoming information is coming in,
23:13
Speaker 2: the market can reprice, and so that can cause the
23:16
Speaker 2: impulse of the economic news to be filtered into financial
23:19
Speaker 2: conditions much more more quickly. I'm a big believer in
23:23
Speaker 2: financial conditions as a framework for thinking about monetary policy.
23:26
Speaker 2: You know, twenty something years ago Jan Hattys and I
23:29
Speaker 2: introduced the gold SAX Financial Conditions Index, and it took
23:32
Speaker 2: about twenty plus years for the Federal Reserve too sort
23:36
Speaker 2: of endorse it. I mean, Jay Powell talks about financial
23:38
Speaker 2: conditions a lot more than any other chair of the
23:40
Speaker 2: Fed ever has. The reason why financial conditions are so
23:43
Speaker 2: important is in the United States, the commy doesn't really
23:46
Speaker 2: run on short term interest rates. It really runs on
23:49
Speaker 2: how short term interest rates affect long term rates, mortgage rates,
23:53
Speaker 2: stock market, the dollar credit spreads. You know, we have
23:56
Speaker 2: a big capital market compared to other countries, and so
23:59
Speaker 2: shorts are not really the driver. Now, if short term
24:02
Speaker 2: rates and financial conditions were rigidly connected, so if I
24:06
Speaker 2: moved the short term rate by X, I know exactly
24:09
Speaker 2: how much financial conditions are moved by. Why we don't
24:11
Speaker 2: have to worry about financial conditions, but there's actually a
24:14
Speaker 2: lot of gift between the two, and so financial conditions
24:17
Speaker 2: can move a lot even as short term interest rates
24:19
Speaker 2: haven't changed very much. I mean, good example is just
24:21
Speaker 2: the last three months, last three months, since the end
24:24
Speaker 2: of October till now, financial conditions have eased dramatically. I mean,
24:28
Speaker 2: the Golden Sacks Financial conditions indexes moved by about a
24:31
Speaker 2: one and a half points, which is a big move
24:34
Speaker 2: for that index, even as the FED hasn't done anything
24:37
Speaker 2: in terms of short term rates.
24:39
Speaker 1: So part of the problem with everybody anticipating FED actions
24:43
Speaker 1: is there is a tendency for many people, sometimes most people,
24:48
Speaker 1: to get it wrong. Wall Street has been anticipating a
24:54
Speaker 1: FED cut for what is it now? We're in the
24:56
Speaker 1: seventh month, eighth month of Hey, if the FED is
24:59
Speaker 1: going to start any day, now, what does it mean?
25:03
Speaker 1: When anticipating FED actions almost becomes a Wall Street parlor game,
25:09
Speaker 1: and there's less focus on what's happening in the broad
25:13
Speaker 1: economy and more focus on, well, what is the second
25:16
Speaker 1: and third derivative of this mean to this economist advising
25:20
Speaker 1: this FED governor and the impact on the FOMSA.
25:23
Speaker 2: I mean, sometimes I think you're right that there's almost
25:25
Speaker 2: too much focus on what's going to happen at the
25:26
Speaker 2: next meeting. I mean, you know, when you go to
25:28
Speaker 2: the press conference now, Powell has just asked multiple different
25:31
Speaker 2: varieties of the question. Okay, so what would cause you
25:34
Speaker 2: to move at the March meeting or at the May meeting?
25:38
Speaker 2: And of course Paul's not going to answer that question,
25:40
Speaker 2: you know, because it depends it depends on how the
25:42
Speaker 2: economy evolves between now and then. So I think, you know,
25:48
Speaker 2: one of the problems I think you have is that
25:50
Speaker 2: the Fed Reserve does publish a forecast, the Summary of
25:53
Speaker 2: Economic Projections, which is the forecast of all the nineteen
25:56
Speaker 2: FMC participants, So that gives you an idea what they
25:59
Speaker 2: sort of think is going to happen at any given
26:01
Speaker 2: point in time. But those forecasts are, you know, not
26:04
Speaker 2: particularly reliable and says all forecasts, Yeah, it's all four
26:08
Speaker 2: cut stars. So you don't want to you don't want
26:10
Speaker 2: to take it sort of literally. But you know, like
26:13
Speaker 2: right now, there's a bit of a gap, right the
26:16
Speaker 2: FEDS is talking about three rate cuts in twenty twenty four,
26:20
Speaker 2: and the market's got five to six priced in, so
26:23
Speaker 2: you know what will happen is the economic news will
26:25
Speaker 2: come out and that will drive make the FETI either
26:27
Speaker 2: go more quickly or more slowly, and that will will
26:31
Speaker 2: Well what actually is important? So I always tell people
26:34
Speaker 2: focus on the data more than what the feder Reserve
26:37
Speaker 2: says beyond the next meeting.
26:39
Speaker 1: Well, although, to be fair, and I find this perplexing,
26:43
Speaker 1: say what people will say about Jerome Powell. He has
26:46
Speaker 1: said what his position is, he has said what he's
26:50
Speaker 1: going to do, and then he has done exactly that
26:53
Speaker 1: for the past three years. And it's almost as if
26:56
Speaker 1: Wall Street just doesn't believe him. Like, no, no, we're
26:59
Speaker 1: not going to cut this year. You got you got
27:01
Speaker 1: three or four quarters settled down. No, no cut next month,
27:04
Speaker 1: says wall Street. He has said what he meant and
27:07
Speaker 1: then stuck to it, and yet the Street seems to
27:10
Speaker 1: doubt him.
27:11
Speaker 2: Well, there's two reasons why the market could disagree with
27:13
Speaker 2: the FED. One is they could misunderstand the Fed's reaction function.
27:17
Speaker 2: So you give them the FED set of economic data,
27:20
Speaker 2: how are they going to react to it? But it
27:21
Speaker 2: also could be a disagreement about how the economy itself
27:24
Speaker 2: is going to evolve. The FED might be more optimistic
27:26
Speaker 2: or more pessimistic on the economy than market participants. Right now,
27:30
Speaker 2: it's really hard to say what's what's the disagreement about.
27:34
Speaker 2: Does Wall Street think the comedy is gonna be weaker
27:36
Speaker 2: than the Fed does, or does the or does the
27:39
Speaker 2: market just think that the Fed is going to be
27:42
Speaker 2: more aggressive than the Fed things at this point?
27:44
Speaker 1: Right Sometimes it just looks like pure wishful thinking.
27:48
Speaker 2: I think sometimes the market just gets ahead of itself.
27:50
Speaker 2: It's almost like there's we're now talking about easing, so
27:54
Speaker 2: the bell is about to go off, and I don't
27:55
Speaker 2: want to miss out, and so I'm going to be
27:57
Speaker 2: pretty aggressive about positioning for that. And I think I
28:00
Speaker 2: think there's a little bit of you know, and sometimes
28:02
Speaker 2: things tend to go too far because people get caught
28:05
Speaker 2: off size and then people have to close out the
28:07
Speaker 2: trades that went wrong, and so everyone sort of moving
28:10
Speaker 2: all at once to the other side of the boat,
28:12
Speaker 2: and so things can get overdone at the end of
28:14
Speaker 2: the day, though, I mean, the FED reserve, you know,
28:17
Speaker 2: writes the story. You know, the market has to converge
28:19
Speaker 2: to what the FED ultimately does. And so this is
28:22
Speaker 2: why the Fed's not particularly worried about when the market
28:25
Speaker 2: prices in more or less because at the end of
28:27
Speaker 2: the day's view, as you know, we'll do what we
28:29
Speaker 2: need to do and the market will have to come
28:31
Speaker 2: along with us.
28:32
Speaker 1: It's inevitable. So we mentioned Jerome pal He's been as
28:37
Speaker 1: clear as any FED chief in history. What are your
28:41
Speaker 1: thoughts on how the modern Federal Reserve communicates with markets
28:45
Speaker 1: in the public today versus how they used to do it.
28:49
Speaker 1: You don't even have to go that far back twenty
28:51
Speaker 1: years ago.
28:51
Speaker 2: I think it's as I said earlier, I think it's
28:53
Speaker 2: a lot better way of communicating because then markets can
28:56
Speaker 2: understand what the Fed is up to. They can interpret
28:58
Speaker 2: economic information and real time and figure out what that
29:01
Speaker 2: means for the likely path of short term rates, so
29:04
Speaker 2: financial conditions can move long before the Federals are actually acts. Now, obviously,
29:09
Speaker 2: you know there's there's a risk in all this because
29:12
Speaker 2: what the Fed says may not be borne out by
29:15
Speaker 2: the economic information. And so I think the important thing
29:19
Speaker 2: in all this is not to take what the federalser
29:21
Speaker 2: says as gospel. When they have a forecast, that's their
29:24
Speaker 2: forecast today, and that forecast will change as the incoming
29:27
Speaker 2: information warrants it. I think where Paulo has done a
29:30
Speaker 2: really good job is being very clear about his commitment
29:34
Speaker 2: to getting inflation back down to two percent, because the
29:37
Speaker 2: biggest risk over the last couple of years was that
29:40
Speaker 2: people would start to doubt the Fed's willingness to be
29:43
Speaker 2: tough and and and finish the job. And if that
29:46
Speaker 2: were to happen, inflation expectations would have become unanchored, and
29:50
Speaker 2: that would have made the fedes job a lot more difficult.
29:52
Speaker 2: One of the great developments of the last couple of
29:55
Speaker 2: years is even though we did have a period of
29:57
Speaker 2: very high inflation, long term expectations really stayed unanchored through
30:02
Speaker 2: that entire period, and so paul deserves it quite a
30:04
Speaker 2: bit of credit for that.
30:05
Speaker 1: So we're recording this a few days after his sixty
30:08
Speaker 1: minutes interview broadcast. Some things that I took away from that. First,
30:15
Speaker 1: it's a complicated job with a lot of moving parts.
30:18
Speaker 1: And second, the FED as an institution is a political
30:24
Speaker 1: They serve the public, not anyone branch or anyone party
30:29
Speaker 1: of the electorate. I thought he was very intelligent and reassuring.
30:32
Speaker 1: What was your reaction to that interview?
30:35
Speaker 2: I thought it was a very good interview, and I
30:36
Speaker 2: thought he actually broke a little bit of new ground
30:39
Speaker 2: when he talked about the fiscal sustainability issue, and he
30:43
Speaker 2: also talked about the importance of the US role in
30:46
Speaker 2: the world.
30:48
Speaker 1: I picked that up also. I thought that was the
30:51
Speaker 1: first time I've heard of FED chief talk about liberal
30:54
Speaker 1: democracy is an important aspect of global leadership.
30:57
Speaker 2: Yeah, exactly, And so I thought that was a noteworthy,
31:01
Speaker 2: a new new piece. I thought the rest of it was,
31:04
Speaker 2: you know, pretty much tracked, you know, his remarks at
31:06
Speaker 2: the press conference. You know, I think that, you know,
31:09
Speaker 2: it's good for him to get out there and sort
31:11
Speaker 2: of demystify the FED. I mean, the FED is you know,
31:15
Speaker 2: not so you know, easy for the average person to understand.
31:19
Speaker 2: And so going on sixty minutes is is is a
31:21
Speaker 2: good idea from from from time to time. I thought
31:24
Speaker 2: he did a you know, I thought he did a
31:25
Speaker 2: good job. I thought it was very very clear. You know,
31:28
Speaker 2: this is not the first FED chair that's been on
31:30
Speaker 2: sixty minutes.
31:31
Speaker 1: Uh, BERNANKI has done it.
31:33
Speaker 2: Yeah, BERNANKI has done it. I'm not I can't remember
31:35
Speaker 2: if Janet Yellen did it or not, but.
31:37
Speaker 1: Uh, she definitely did it as Treasury secretary, remember if
31:40
Speaker 1: she did it.
31:41
Speaker 2: As we've been very lucky in terms of the leadership
31:44
Speaker 2: of the FED. I mean to have I mean Greenspan obviously,
31:47
Speaker 2: you know, was on sort of without parallel, and then
31:49
Speaker 2: and then they have Bernanky yelling and Paul in a row.
31:54
Speaker 2: Those are three exceptionally good FED chair. I mean my
31:57
Speaker 2: only you know, critique of the FED.
31:58
Speaker 1: And you know I write for Bloomberg, you know sometimes
32:01
Speaker 1: you know, I say what I what I think and
32:02
Speaker 1: let the chips follow. They may.
32:04
Speaker 2: The one I think mistake the FED made, you know
32:06
Speaker 2: over the last few years was they were really really
32:08
Speaker 2: late to get off the dime in terms of it's
32:10
Speaker 2: starting to tighten monetary policy now.
32:12
Speaker 1: Isn't that historically true? Is it so? The Fed throughout
32:15
Speaker 1: the twenty tens, we're late to recognize, hey, we don't
32:19
Speaker 1: have to be on emergency footing anymore. Not only were
32:22
Speaker 1: they late to start tightening in two thousand and one,
32:25
Speaker 1: the twenty twenty one, they were late to recognize inflation
32:29
Speaker 1: peaked in twenty two. I mean, it's you could easily
32:32
Speaker 1: make the argument that they could have begun cutting any
32:35
Speaker 1: this meeting, last meeting two meetings ago. Take the past
32:39
Speaker 1: six months of inflation, we're at two percent. Yeah.
32:42
Speaker 2: I think the reason why they're not cutting at is
32:44
Speaker 2: is there's really two reasons for that. Number One, the
32:47
Speaker 2: economy is a lot stronger than they thought it was
32:49
Speaker 2: going to be, and so that means the risk of
32:51
Speaker 2: waiting is a lot lower than they thought it was
32:53
Speaker 2: going to be. Because the economy, you know, grew over
32:57
Speaker 2: three percent in the fourth quarter. The Atlanta Fed GDP
33:00
Speaker 2: now forecast for the first quarters over four percent. I mean,
33:03
Speaker 2: obviously it probably won't be that strong when all the
33:05
Speaker 2: data comes in, but the Kammy has a lot of momentum,
33:07
Speaker 2: and so the pressure on the Fed to cut rates
33:11
Speaker 2: because of weakness and growth weakness and the labor market
33:14
Speaker 2: just isn't there, and that allows them to be more patient.
33:16
Speaker 2: The second thing is important is a little bit of
33:18
Speaker 2: delay is not going to have a huge consequence because
33:21
Speaker 2: look what's happened to financial conditions over the last few months.
33:24
Speaker 2: They be dramatically So the Fed is already getting a
33:27
Speaker 2: lot of additional support to the economy without actually having
33:30
Speaker 2: hand to cut cut rates. In some ways, the Fed
33:32
Speaker 2: can sort of have its cake.
33:33
Speaker 1: Keep, you know, show that they're tough minded, and they're
33:35
Speaker 1: gonna get inflation all the way down, and and and
33:38
Speaker 1: and and and you know, they can have their cake
33:40
Speaker 1: and eat it too and have the market basically use
33:43
Speaker 1: financial conditions and provide support to the economy. So I
33:45
Speaker 1: think it's you know, it's worked out very well from
33:47
Speaker 1: the Fed's perspective. So so you mentioned you you contribute
33:51
Speaker 1: to Bloomberg Opinion. One of the criticisms that took place
33:57
Speaker 1: in the prior administration was the President Trump kind of haranguing.
34:04
Speaker 2: J.
34:04
Speaker 1: Powell to cut rates, and you wrote an op ed
34:08
Speaker 1: tell after you had left the FED saying the Fed
34:11
Speaker 1: shouldn't enable Donald Trump. In other words, the independence of
34:15
Speaker 1: the institution is much more important than anyone rate cut
34:20
Speaker 1: or rate hike it at any time tell us about that.
34:23
Speaker 1: That generated a lot of controversy.
34:26
Speaker 2: Yeah, I think people you know, I probably didn't say
34:28
Speaker 2: it the way I needed to say it. It was
34:30
Speaker 2: really more of a thought experiment about how, you know,
34:32
Speaker 2: if the Fed Reserve really cares about the country, they
34:35
Speaker 2: just need to you know, in the economy, which is
34:37
Speaker 2: their mandate. They just need to do the right thing
34:41
Speaker 2: and let the chips fall, or they may I think that,
34:45
Speaker 2: you know, the Trump administration's attacks on the FED, I
34:48
Speaker 2: think are really you know, counterproductive for the Trump administration,
34:52
Speaker 2: and they're also damaging to the FED because if the
34:55
Speaker 2: FED is viewed as politicized, that basically reduces people's trust
34:59
Speaker 2: in in the central Bank. And I think if the
35:03
Speaker 2: trust in the central Bank is reduced, that makes the
35:04
Speaker 2: Federal Reserve less effective as an institution. One reason why
35:08
Speaker 2: I think the FED, you know, doesn't take politics into consideration.
35:12
Speaker 2: And in my experience, I was at the FMC table
35:14
Speaker 2: for eleven and a half years, never talked about politics,
35:17
Speaker 2: never consideration in terms of montre policy decisions. For very
35:20
Speaker 2: simple reason. If you start to take politics into consideration,
35:24
Speaker 2: you've politicized the FED. And if you politicize the FED,
35:28
Speaker 2: you've basically compromised the independence of the FED and its
35:31
Speaker 2: ability to be effective. So you just don't want to
35:34
Speaker 2: go down that path at all. And I think, you know,
35:36
Speaker 2: I think J. Powell completely understands that, and you know,
35:40
Speaker 2: I give him a lot of credit. I mean, when
35:42
Speaker 2: when Trump was attacking him pretty vocifiorously, Paul did not
35:46
Speaker 2: rise to debate. He was completely silent, and he just
35:49
Speaker 2: did his job it's got to be tough to be,
35:52
Speaker 2: you know, being beaten up.
35:53
Speaker 1: Publicly by the president. But he showed a tremendous amount
35:57
Speaker 1: of discipline, and I think that basically, you know, enhance
36:00
Speaker 1: the credibility and independence of the FED. So that comment
36:05
Speaker 1: we were discussing earlier that he made on sixty minutes,
36:09
Speaker 1: here's the quote, there's a real desire for American leadership.
36:13
Speaker 1: Since World War Two, the US has been the indispensable nation,
36:16
Speaker 1: supporting and defending democracy, security arrangements, and economic arrangements, with
36:22
Speaker 1: a leading voice on that. It's clear the world wants that.
36:25
Speaker 1: I would want the people in the US, in the
36:27
Speaker 1: United States to know this has benefited our country enormously.
36:32
Speaker 1: It benefits our economy so much to have this role,
36:36
Speaker 1: and I just hope that continues. Am I reading too
36:39
Speaker 1: much into that to say, hey, this is an argument
36:43
Speaker 1: against President Trump, who is trying to realign the world
36:47
Speaker 1: and pull back from US leadership. I think it's I
36:52
Speaker 1: think it's a something hit.
36:55
Speaker 2: Jere Paul very much believes in that US engagement in
36:58
Speaker 2: the world leads to better comes, both in a security
37:01
Speaker 2: perspective economic perspective. Absolutely essential for addressing issues like climate change,
37:07
Speaker 2: and I think you're just expressing his opinion. Obviously, if
37:11
Speaker 2: if there is a next Trump administration and they decide
37:15
Speaker 2: to file follow a very isolationist policy, I imagine that,
37:20
Speaker 2: you know, Paul will not agree with that, but I
37:23
Speaker 2: think he'll be very silent about the fact that he
37:26
Speaker 2: doesn't agree with it because he won't want to, you know,
37:28
Speaker 2: engage in that political process because that will compromise the
37:31
Speaker 2: independs of the FED. So so to your point, this
37:34
Speaker 2: was pretty you know, this is a step out for
37:37
Speaker 2: power relative to what he said, but there was nothing
37:40
Speaker 2: in there about who was in favor of what.
37:43
Speaker 1: It's not a political statement, it's not a pin the
37:45
Speaker 1: fact that hey, this US leadership in global economics has
37:50
Speaker 1: nothing but benefit the country.
37:52
Speaker 2: Yeah, it's his opinion that this is in the US's interest.
37:56
Speaker 2: It has been in the US interests, in the US
37:58
Speaker 2: interest today, and it will be in the US interest
38:00
Speaker 2: in the future. That's his view, and I have to
38:02
Speaker 2: say I very much agree with it.
38:04
Speaker 1: I don't disagree. And if there are some candidates that
38:07
Speaker 1: don't have that belief system, well, is that being political
38:10
Speaker 1: or is that just here's a historical fact, this is
38:13
Speaker 1: what's helped the US.
38:14
Speaker 2: Well, I think he's allowed to have his beliefs, and
38:18
Speaker 2: I don't think that you know his his this belief
38:20
Speaker 2: that he's expressed is should be viewed as a controversial one.
38:24
Speaker 2: I think that's that's that's something that you know, a
38:28
Speaker 2: high number of people in the country. I think would
38:32
Speaker 2: would would would support.
38:34
Speaker 1: I don't disagree at all. So, so let's talk a
38:37
Speaker 1: little bit about the history of the Federal Reserve, starting
38:41
Speaker 1: with the dual mandate price stability, namely inflation and unemployment.
38:47
Speaker 1: How does the FED balance those two and what are
38:50
Speaker 1: the data points that they follow most closely?
38:55
Speaker 2: So the FEDS do mandate was actually established by Congress,
38:58
Speaker 2: not by the FED. Congress and the Humphrey Hawkson's Act
39:01
Speaker 2: basically said, here's what we want the FED to do.
39:04
Speaker 2: We want to have the maximum sustainable employment in the
39:08
Speaker 2: country consistent with price stability, which the FED then subsequently
39:12
Speaker 2: defined to be two percent inflation. And so the FED
39:16
Speaker 2: basically is trying to manage the economy with both these
39:19
Speaker 2: goals in mind. And sometimes one of the goals turns
39:23
Speaker 2: out to be more significant because the FED is doing
39:26
Speaker 2: more poorly on that side. So for the last couple
39:30
Speaker 2: of years. The problem was not that the economy was
39:32
Speaker 2: far away from full employment. The comoty was either at
39:35
Speaker 2: full employment or maybe even a little beyond full employment
39:37
Speaker 2: when we saw how tight the liver market was, especially
39:40
Speaker 2: in twenty twenty two. So the Fed's focus was on
39:44
Speaker 2: inflation because the inflation was well above the FEDS two
39:46
Speaker 2: percent objective. What's happened recently is inflation's come down, and
39:51
Speaker 2: so the FED can start to talk about both sides
39:55
Speaker 2: of the mandate, not just the inflation side, but also
39:57
Speaker 2: the labor market side. And so now you're going to
40:01
Speaker 2: see a lot more balanced messaging from the FED. Now,
40:04
Speaker 2: the good news from the Fed is that things are
40:06
Speaker 2: going really, really well. You know, you know, the inflation
40:09
Speaker 2: on a six months change basis for the core PC deflator,
40:13
Speaker 2: which is the FEDS you know, preferred measure of inflation,
40:16
Speaker 2: is tracking two percent. So all we need is another
40:19
Speaker 2: six months of the same as as cheer Paul said
40:22
Speaker 2: in his Breast conference, and we're basically at the FEDS
40:24
Speaker 2: two percent objective and the labor markets doing gangbusters. Frankly,
40:29
Speaker 2: I mean, payroll employment growth over three hundred thousand last month,
40:33
Speaker 2: So we have sort of the best of both worlds,
40:35
Speaker 2: inflation has come down and the labor market is still very,
40:38
Speaker 2: very robust, So you know, it's it's interesting when you
40:41
Speaker 2: look at polling results of Americans. They're they're very unhappy
40:44
Speaker 2: about the economy, and what they're unhappy about is how
40:47
Speaker 2: much prices went up over the last four.
40:49
Speaker 1: Not current rate of inflation, exact absolute prices.
40:52
Speaker 2: It's a price level problem, not an inflation rate problem,
40:55
Speaker 2: because if you look at the so called misery index,
40:57
Speaker 2: which comds like to do, which is the sum of
41:00
Speaker 2: inflation plus the unemployed rate, it's really at a historically
41:03
Speaker 2: low level. So you know, I think what's going to
41:06
Speaker 2: happen over time is if we keep inflation, you know,
41:09
Speaker 2: around two percent, some of the unhappiness about the price
41:14
Speaker 2: level will gradually fade away. People just sort of start
41:16
Speaker 2: to accept it, and then people will start to assess
41:19
Speaker 2: the ecmomune in a more favorable way for the Biden administration.
41:23
Speaker 2: There's a little bit of race going on, right, will
41:25
Speaker 2: this change in sentiment occur fast enough relative to the
41:31
Speaker 2: November election?
41:33
Speaker 1: They got seven months to hope that the polling data,
41:36
Speaker 1: the economic data is going to consumer confidence. So it
41:40
Speaker 1: does seem to be improving.
41:41
Speaker 2: I mean, if you look at the most recent consumer
41:43
Speaker 2: confidence serves, it does look like consumer confidence is improving.
41:46
Speaker 2: So people are starting to, you know, understand that the
41:50
Speaker 2: inflation rate does seem to be much lower, but they're
41:53
Speaker 2: still very unhappy because you know, when you go at
41:54
Speaker 2: the grocery store, you just remember that this thing that
41:56
Speaker 2: I bought for you know, three dollars, you know, four
41:59
Speaker 2: years ago, and that costs four to fifty. And you
42:02
Speaker 2: know that just every time you go to the grocery store,
42:06
Speaker 2: you go to the gas station, see you're reminded by
42:08
Speaker 2: about the higher price level.
42:10
Speaker 1: I see it more in the grocery store than gas stations.
42:15
Speaker 1: Our gas is three and change and twenty years ago
42:18
Speaker 1: gas was three and change. That's been flat for two decades,
42:21
Speaker 1: but food prices definitely have and shelter prices have moved up.
42:24
Speaker 1: So before I get to two percent, because I have
42:27
Speaker 1: a lot of questions about that, let's talk a little
42:29
Speaker 1: bit about the labor market. So first we're again we're
42:34
Speaker 1: recording this February twenty twenty three. We just had a
42:36
Speaker 1: giant number, a giant upside surprise in payrolls. When the
42:42
Speaker 1: FED looks at that number, are they thinking, well, you
42:45
Speaker 1: know it's January, there are a lot of one time
42:48
Speaker 1: adjustments and seasonal ax or are they saying, hey, this
42:52
Speaker 1: labor market is really booming. We can sit back a
42:55
Speaker 1: little bit, a little bit of both.
42:57
Speaker 2: I mean, in other words, you get you understand that
42:59
Speaker 2: the is noisy and so reality is not exactly what
43:04
Speaker 2: the data is telling you. The data is you know,
43:06
Speaker 2: it's sampled. You know, they've go out and poll people,
43:08
Speaker 2: and so there's sampling bias. Also, in the winter, things
43:12
Speaker 2: get very affected by the weather as you go from
43:15
Speaker 2: you know, warm weather, warm winter weather months to cold
43:19
Speaker 2: winter weather months when you go from rain to snowfall.
43:22
Speaker 2: So the Fed basically doesn't take one month as sort
43:26
Speaker 2: of gospel truth. They look at the pattern and the
43:29
Speaker 2: underlying trend, and you know, on that underlying trend, labor
43:33
Speaker 2: market looks quite strong. So the Fed is taking a
43:36
Speaker 2: signal from that, and that's one reason why they're more
43:38
Speaker 2: patient about cutting interest rates because they sort of feel like,
43:43
Speaker 2: you know, we can wait a little bit longer, and
43:45
Speaker 2: the risk that we're taking is very slow because look
43:48
Speaker 2: at how strong the US labor market is.
43:51
Speaker 1: So let's talk about not one month, but the past
43:53
Speaker 1: couple of years of the labor market. You have an
43:56
Speaker 1: enormous number of people who are out on disability, reduced
44:00
Speaker 1: legal immigration for jobs dramatically. Early retirements have been taking place,
44:08
Speaker 1: a giant uptick in new business formation, so that's a
44:13
Speaker 1: big group of people who aren't in the hiring pool.
44:16
Speaker 1: They were actually running their own firms. It seems like
44:20
Speaker 1: all the issues that have been taking place in the
44:23
Speaker 1: labor market, including the wage size side, is that we
44:27
Speaker 1: just don't have enough bodies to put to work in
44:30
Speaker 1: the United States. I think that was true a year ago.
44:33
Speaker 1: I think it's less true today.
44:36
Speaker 2: If you look at the ratio of unfilled jobs to
44:38
Speaker 2: unemployed workers, that peaked at around two to one.
44:41
Speaker 1: Yeah, it was almost record.
44:43
Speaker 2: High, and now it's about one and a half to one.
44:46
Speaker 2: So the labor market is still really tight, but it's
44:48
Speaker 2: not quite as tight. You also think we got a
44:51
Speaker 2: big positive surprise last year in terms of the labor
44:53
Speaker 2: force growth.
44:55
Speaker 1: I mean people coming back, people coming.
44:57
Speaker 2: Back into the layor force. And also immigration and legal
45:00
Speaker 2: immigration into the US picked up dramatically last year. I mean,
45:03
Speaker 2: essentially we didn't have much legal immigration at all during
45:06
Speaker 2: the COVID period and then all of a sudden, we
45:09
Speaker 2: get a big bubble of that in twenty twenty three,
45:12
Speaker 2: and so what you've had is big, strong growth in
45:16
Speaker 2: payroll employment, but it hasn't translated through into a decline
45:20
Speaker 2: in the unemployment rate. So looking at the unemployer rate,
45:24
Speaker 2: the labor mark is no tighter than it was a
45:25
Speaker 2: year ago, which is, you know, was a huge positive
45:29
Speaker 2: benefit to the US economy and to the Fed, because
45:33
Speaker 2: if we'd had that growth in payroll employment without the
45:36
Speaker 2: increase in the labor force, the labor mark would be
45:38
Speaker 2: too tight, wages too high, and the Federal Reserve wild
45:41
Speaker 2: still be worried about it too high inflation.
45:43
Speaker 1: And we've seen wages go up. I think for the
45:45
Speaker 1: past six months real wages are actually growing faster than inflation.
45:50
Speaker 2: Well that's one reason why the e commy is staying
45:53
Speaker 2: relatively strong. I mean, as inflation comes down and novel wages,
45:58
Speaker 2: you know, inflation comes down maybe a little bit less
46:02
Speaker 2: slow more slowly, real incomes increase and that supports the
46:06
Speaker 2: consumer spending. So I think the unwinding of goods price pressures,
46:11
Speaker 2: which is really the big driver of why inflations come down,
46:14
Speaker 2: that's sort of a windfall for consumers right now, and
46:17
Speaker 2: so that's actually sustaining real consumer spending.
46:20
Speaker 1: And that shift from goods back to services, which is
46:24
Speaker 1: more or less where we were pre pandemic, is certainly
46:27
Speaker 1: easing prices in that sector.
46:31
Speaker 2: Yeah. I mean, all the supply chain disruptions that we had,
46:34
Speaker 2: you know, a few years ago, caused by that shift
46:36
Speaker 2: in demand from services to goods that just sort of
46:38
Speaker 2: overwhelmed the capacity of the world to bring those goods
46:41
Speaker 2: to the US in a timely way. That's that's that's
46:44
Speaker 2: all unwound at this point.
46:46
Speaker 1: So let's talk about the two percent inflation target. Your
46:50
Speaker 1: colleague Roger Ferguson in the Council on Foreign Relations last
46:54
Speaker 1: year criticized the two percent inflation target as some that
47:00
Speaker 1: randomly originated from New Zealand, and surprisingly it came not
47:05
Speaker 1: from an academic study but from an offhand comment during
47:08
Speaker 1: the television interview in the nineteen eighties. Is Ferguson right,
47:14
Speaker 1: Is this really just a big, silly round number.
47:17
Speaker 2: Well, it's true that the Reserve Bank of New Zealand
47:19
Speaker 2: started by, you know, picking the two percent number, and
47:22
Speaker 2: then other central banks followed. But I think there are
47:25
Speaker 2: some logical reasons why they followed two percent was low
47:29
Speaker 2: enough that inflation wasn't going to be sort of important
47:33
Speaker 2: component of people's thinking in terms of their consumption investment decisions.
47:38
Speaker 2: Two percent inflation in the US, I think the thing
47:40
Speaker 2: could argue that that was mostly consistent with price stability.
47:44
Speaker 2: You know, prices are only the double at two percent
47:47
Speaker 2: inflation compounded every thirty five years. So so but you're right,
47:52
Speaker 2: it was arbitrary. They could have picked a different number.
47:54
Speaker 2: They could have picked, you know, three percent or one percent.
47:57
Speaker 2: The reason why you want to have a little bit
47:59
Speaker 2: of inflation is it really allows you to do two things.
48:02
Speaker 2: Number one, it provides a little bit of grease in
48:05
Speaker 2: the labor market because people don't like their normal wages
48:07
Speaker 2: to be cut, but relative wage rates have to change,
48:11
Speaker 2: and so if you have a little bit of inflation,
48:13
Speaker 2: it makes the labor market work more efficiently in terms
48:16
Speaker 2: of allowing wage adjustments that allow workers to be distributed appropriately.
48:21
Speaker 1: So that's the first thing.
48:22
Speaker 2: The second reason why you want a little bit of
48:23
Speaker 2: inflation is that if you have a little bit of inflation,
48:26
Speaker 2: the nominal federal funds rate can be a little bit higher,
48:30
Speaker 2: and so when you go into an economic downturn, the
48:32
Speaker 2: Federal Reserve has more room to cut interest rates before
48:35
Speaker 2: they hit the zero or bound for interest rates of zero.
48:38
Speaker 2: So people who are arguing for a higher inflation target
48:42
Speaker 2: today are basically arguing like it would be better to
48:44
Speaker 2: have even more room for the Fed to cut rates,
48:46
Speaker 2: because if the inflation target was three rather than two,
48:49
Speaker 2: the peak federal funds rate in the cycle would be
48:51
Speaker 2: a one percentage point higher, so the Fed would have
48:54
Speaker 2: more room to cut rates. I think there's virtually no
48:57
Speaker 2: chance that the Fed is going to change their two
48:59
Speaker 2: percent inflation virtually no chance. And there's a couple of
49:02
Speaker 2: reasons for that. Number One, Congress sets the mandate for
49:07
Speaker 2: the FED, and they define it at Brice stability. The
49:10
Speaker 2: Fed has stretched that a bit to call that two
49:12
Speaker 2: percent inflation. I think stretching a little bit farther to
49:16
Speaker 2: call it three percent inflation. That's a bit of a stretch.
49:19
Speaker 2: The second reason I think that they're not going to
49:21
Speaker 2: move from two percent inflation is it's taken the FED
49:23
Speaker 2: a long time to get inflation expectations anchored around two percent.
49:27
Speaker 2: If you move from two percent to three percent, all
49:30
Speaker 2: sun inflation expectations become unanchored, and it's not obviously you
49:33
Speaker 2: can get them re anchored back at three percent, because
49:35
Speaker 2: if you're willing to change the target once, why couldn't
49:39
Speaker 2: you change the target again, especially in a situation where
49:42
Speaker 2: the Fed US is running a massive fiscal deficit, huge
49:46
Speaker 2: fiscal problems, and people always wonder, well, one way out
49:50
Speaker 2: of a fiscal mess is is inflation and to monetize
49:54
Speaker 2: the dead.
49:54
Speaker 1: So I don't think you're going to do it for
49:56
Speaker 1: that reason. The last reason why don't think they're going
49:58
Speaker 1: to do it is there's plenty of room to cut
49:59
Speaker 1: interest rates. Federal funds rates over five and a quarter percent,
50:03
Speaker 1: So if the Commie gets in trouble over the next year,
50:06
Speaker 1: the Fed has plenty of room to cut rates before
50:09
Speaker 1: they get to the zero loorbow for it. They could
50:11
Speaker 1: do three fifty bases point cuts and you're still way above.
50:14
Speaker 2: Aach So it's just not going to happen. This is
50:17
Speaker 2: sort of an academic debate. I don't think it's a
50:19
Speaker 2: true FED reserved debate.
50:21
Speaker 1: Really really interesting, So let's talk a little bit about
50:24
Speaker 1: different FED policies over the past decades and how those
50:28
Speaker 1: decisions have aged. Let's start with last decade the twenty tens,
50:34
Speaker 1: FED rates were essentially zero the whole time, and yet
50:38
Speaker 1: we couldn't get CPI to budget above two percent the
50:42
Speaker 1: whole decade following the financial crisis. What made that so
50:47
Speaker 1: challenging for monetary policy makers?
50:50
Speaker 2: Well, I think the problem coming out of the Great
50:52
Speaker 2: Financial Crisis was how much damage was done to.
50:54
Speaker 1: People's balance sheets and to their credit scores. And when
50:58
Speaker 1: you say people, you mean households, you mean operations for everybody.
51:01
Speaker 2: Households mostly, but also businesses. Just a tremendous amount of
51:05
Speaker 2: damage caused by that very deep recession. I think of
51:08
Speaker 2: all the households who came out of that period where
51:11
Speaker 2: the value of their mortgage was higher than the value
51:13
Speaker 2: of their home. Think of all the people that were
51:16
Speaker 2: delinquent on their obligations and so then got bad credit scores,
51:20
Speaker 2: and then that reduced their access to credit. So there
51:23
Speaker 2: were a lot of headwinds. The other thing that happened
51:26
Speaker 2: was fiscal policy that was eased pretty dramatically when Barack
51:29
Speaker 2: Obama became president. That got clawed back very very quickly
51:33
Speaker 2: in twenty eleven and twelve. So there were fiscal headwinds
51:37
Speaker 2: that we haven't faced this time around that also held
51:39
Speaker 2: the economy back. So you're absolutely right. The Fed's challenge
51:42
Speaker 2: during that period was to make monitor policy accommodative enough
51:46
Speaker 2: to support the economy sufficiently to keep inflation at two percent. Now,
51:51
Speaker 2: the FED fell a little bit short of their inflation objective,
51:54
Speaker 2: but you know, if you really look at where we were,
51:58
Speaker 2: you know, on the eve of the pandemic, and it
52:01
Speaker 2: was a pretty good place.
52:03
Speaker 1: And the fact that it took a decade is says
52:05
Speaker 1: more about the lack of fiscal spending Congress than what
52:10
Speaker 1: the FED did.
52:10
Speaker 2: And you had a very long expansion. I mean, the
52:12
Speaker 2: reality of the expansion would have kept going except for
52:15
Speaker 2: the COVID pandemic.
52:16
Speaker 1: Really interesting, So let's talk about the prior decade to
52:20
Speaker 1: two thousands. You had a speech around twenty fourteen where
52:24
Speaker 1: you said the FED was late in recognizing how long
52:29
Speaker 1: they kept rates low for and that the liftoff from
52:33
Speaker 1: four to six should have happened faster and sooner. Tell
52:37
Speaker 1: us a little bit about what the lessons were from
52:40
Speaker 1: that episode and what the FED should have done in
52:45
Speaker 1: the early two thousands.
52:47
Speaker 2: So there's been a big debate going on for many,
52:50
Speaker 2: many years about how should the FED respond to financial
52:53
Speaker 2: imbalances in the economy, how should they respond to sort
52:57
Speaker 2: of incipient bubbles. The green Span view was it's very
53:01
Speaker 2: hard to recognize bubbles. It's not clear how you rain
53:06
Speaker 2: them in. So the best thing to do is just
53:08
Speaker 2: sort of let the bubbles take to run their course,
53:10
Speaker 2: and then clean up after the bubble collapses. Here in
53:14
Speaker 2: the bus period, my view has been very much that, no,
53:17
Speaker 2: that's not a great strategy because the bursting of the
53:21
Speaker 2: bubble can cause a lot of financial knock on effects,
53:24
Speaker 2: and so better to identify the bubble in real time
53:29
Speaker 2: and try to sort of rain that bubble in. And
53:31
Speaker 2: I think, you know, if you look at the two
53:33
Speaker 2: thousand and four two thousand and seven to eight period,
53:36
Speaker 2: boy would have been really good if we'd done something
53:39
Speaker 2: about subprime mortgage lending, about mortgage underwriting standards. If we'd
53:44
Speaker 2: done that, we would have had a much smaller housing bubble,
53:47
Speaker 2: and we would have had much less damage when that
53:50
Speaker 2: bubble collapsed in two thousand and eight. So my view
53:53
Speaker 2: has always been let's try to be a little bit
53:56
Speaker 2: more proactive. Now, the problem with being proactive is, you know,
54:00
Speaker 2: how do you know it's a bubble, and the rally
54:02
Speaker 2: is you don't, and so it's very hard to convince
54:05
Speaker 2: people to take proactive steps to deal with sort of
54:07
Speaker 2: incipient problems because you can't really be sure with one
54:11
Speaker 2: hundred percent confidence of what's actually going on.
54:15
Speaker 1: So you're really pointing out two issues. First, I want
54:19
Speaker 1: to say, the FED had taken rates under two percent
54:23
Speaker 1: for about three years and under one percent for a year,
54:26
Speaker 1: so that was pretty unprecedented until you know the post
54:30
Speaker 1: financial crisis here. But you're also pointing out to the
54:33
Speaker 1: FED as regulator, and you know, to cast blame. Greenspan
54:39
Speaker 1: was very much anti regulator, a little bit more lovely
54:43
Speaker 1: care and he allowed a lot of non GSE, non
54:50
Speaker 1: traditional banks to make all sorts of loans. It's not
54:53
Speaker 1: like he gave them permission, he just didn't really regulate them.
54:58
Speaker 1: And that's where a lot of the really sketchy prime
55:03
Speaker 1: can and the FED actually did have some authority in
55:05
Speaker 1: terms of regulating the mortgage market, authority that they didn't
55:08
Speaker 1: really use. Need Gramlik was a governor at the FED,
55:10
Speaker 1: and he sort of brought his concerns, Oh boy did
55:13
Speaker 1: he to Alan Greenspan, and nothing really really happened. I mean,
55:17
Speaker 1: I mean, even when I was at Goldman Sachs, you know,
55:20
Speaker 1: and working with my successor, Yan Hostis, we were very
55:24
Speaker 1: focused on how this mortgage, this housing bubble was fueling
55:27
Speaker 1: consumption through what was called mortgage equity withdrawal. People were
55:31
Speaker 1: basically taking their appreciated gains in their houses and they
55:34
Speaker 1: were pulling it out in terms of you know, Helock's
55:36
Speaker 1: home equity loans, and we felt that that was also
55:40
Speaker 1: contributing to stronger consumption and this was going to potentially
55:43
Speaker 1: end quite badly. Ed Gramlik was an unsung hero of
55:47
Speaker 1: that era because he really identified what was going on
55:50
Speaker 1: in real time and not in a you know, hair
55:54
Speaker 1: on fire historyonic way. He was very sober and thoughtful
55:57
Speaker 1: and academic, and you know, had had Green spent paid
56:03
Speaker 1: more attention to Gromlik, could have been a very different outcome. Well,
56:06
Speaker 1: I think you would.
56:07
Speaker 2: Have had a smaller bubble, maybe you'd have less you know,
56:12
Speaker 2: financial innovation. You could wait against some of the triple
56:15
Speaker 2: A cdo stuff. I mean, you know, that's a that
56:19
Speaker 2: was I mean, some of the innovations in the financial
56:21
Speaker 2: industry in terms of products also contributed to the to
56:24
Speaker 2: the bubble, sure, right, because you managed to sell all
56:27
Speaker 2: these you know, you took a bunch of bad subprime mortgages,
56:32
Speaker 2: then you trunched the cash flows and turned these subprime
56:36
Speaker 2: mortgages into seventy percent triple A rated securities, and so
56:40
Speaker 2: that sort of kept the whole thing going. So the
56:42
Speaker 2: financial engineering was also an aspect of the problem that
56:44
Speaker 2: contributed to the to the bubble.
56:46
Speaker 1: The rating agencies changed their model. They were being paid
56:49
Speaker 1: by the underwriters instead of being paid by the mode purchasers.
56:53
Speaker 1: That's a big factor that. Yeah, I think a lot
56:55
Speaker 1: of people overlook all right, So we could spend forever
56:57
Speaker 1: talking about the financial crisis, but I want to get
57:01
Speaker 1: to the nineteen nineties, and we've referenced the Maestro. I
57:07
Speaker 1: was on a trading desk back then, and I always
57:09
Speaker 1: thought green Span was way too solicitous. I'm not sure
57:13
Speaker 1: if that's the right word. He was way too concerned
57:16
Speaker 1: about how Wall Street perceived him. Is that a fair
57:20
Speaker 1: criticism of green Span? Because it felt like he was
57:24
Speaker 1: much more accommodative of short term market reactions anytime there
57:32
Speaker 1: was a problem for a lais a fair randy and
57:37
Speaker 1: he went right to you know, the interventionist policy so
57:40
Speaker 1: we had the long term capital management issue, we had
57:43
Speaker 1: the Thai crisis and the Russian ruble crisis, and every
57:48
Speaker 1: time there was a hiccup in the markets, green Span
57:52
Speaker 1: didn't hesitate to cut rates. I think that's you know, fair.
57:56
Speaker 2: But at the same time, I think green Span you
57:58
Speaker 2: did a reasonable job being inflation control. So the consequences
58:02
Speaker 2: of coming to the market's aid to sort of sort
58:05
Speaker 2: of smooth out market dysfunction, you know, didn't have a
58:09
Speaker 2: really negative consequence for inflation. So I think he sort
58:13
Speaker 2: of got mostly got away with it. But I agree
58:16
Speaker 2: with you he was probably a little bit more willing
58:20
Speaker 2: to address relatively you know, small, not large, not persistent
58:28
Speaker 2: movements in markets that maybe the FED could have looked
58:31
Speaker 2: looked past, you know that said, I mean, you know,
58:33
Speaker 2: his track record was really good. I mean, I think
58:36
Speaker 2: the blind spot was really just more about not having
58:40
Speaker 2: this view that we can identify bubbles and we should
58:42
Speaker 2: deal with bubbles in real time rather than waiting for
58:45
Speaker 2: the bubble to burst. And that was that was his
58:47
Speaker 2: big mistake. If you know, if you think about when
58:50
Speaker 2: when Ben Bernaki came in in two thousand and six,
58:52
Speaker 2: you know, the die was already cast right in terms
58:55
Speaker 2: of what was going to happen at that point. It's
58:57
Speaker 2: just what no one had yet recognized it.
59:00
Speaker 1: No, there's no doubt about that. And in fact, by
59:02
Speaker 1: six real estate had peaked. You saw it in the
59:06
Speaker 1: homebuilders and the banks and the brokers like there were
59:09
Speaker 1: market signals that there was problems, but the overall stock
59:13
Speaker 1: market kept going until you know, late seven. So let's
59:18
Speaker 1: talk you mentioned earlier about surveys. I always look at
59:22
Speaker 1: surveys askance because A people don't know, and B even
59:28
Speaker 1: when they know about what's happening today, it tends to
59:32
Speaker 1: be on a lag. And then lastly, they have no idea.
59:36
Speaker 1: When you ask, hey, where's inflation going to be five
59:38
Speaker 1: years from now? That seems to be like about as silly. A.
59:43
Speaker 1: Nobody has any idea, much less a layperson. Why do
59:47
Speaker 1: we put so much emphasis on inflation expectations? Well, I
59:53
Speaker 1: don't think that.
59:54
Speaker 2: I mean, I think you're right that people don't have
59:56
Speaker 2: a really good sense of and we talked about earlier
59:58
Speaker 2: at price level versus rate of inflation. But it's interesting
1:00:02
Speaker 2: to see how their views change over time. So it's
1:00:05
Speaker 2: probably not the level of what they perceive inflation is
1:00:08
Speaker 2: going to be over the next ten years.
1:00:09
Speaker 1: That's interesting.
1:00:09
Speaker 2: It's whether they think it's higher or lower than it was,
1:00:12
Speaker 2: you know, a month ago, six months ago, a year ago.
1:00:16
Speaker 2: The reason why inflation expectations are so important is that
1:00:19
Speaker 2: people think inflation expectations are truly going to be higher,
1:00:22
Speaker 2: then that's going to set the wage setting process, and
1:00:24
Speaker 2: wages are going to be higher. And if wages are
1:00:26
Speaker 2: going to be higher, that's going to feed into prices
1:00:29
Speaker 2: and that's going to cause actual inflation to be higher.
1:00:31
Speaker 1: That was a very nineteen seventies problem that seemed to
1:00:35
Speaker 1: be what why inflation was so sticky? Yeah, and we
1:00:38
Speaker 1: had such a hard time until Vulf came along getting
1:00:42
Speaker 1: out of that cycle.
1:00:43
Speaker 2: And one good thing is too we have other ways
1:00:44
Speaker 2: of measuring inflation expectations now that we didn't have thirty
1:00:47
Speaker 2: years ago. We have the treasure you tips market, so
1:00:49
Speaker 2: we can look at tips shields versus nonal treasure yields
1:00:52
Speaker 2: and we can sort of calculate what are people willing
1:00:54
Speaker 2: to pay for inflation protection and that gives us a
1:00:58
Speaker 2: sense of how much inflation is into the into in
1:01:01
Speaker 2: people's expectations.
1:01:02
Speaker 1: Marketing expectations do the inflation expectation surveys and the spread
1:01:07
Speaker 1: between the tip shield and treasuries. Do they correlate well
1:01:10
Speaker 1: or are their occasional big divergence.
1:01:12
Speaker 2: I think they I think they correlate well in the large,
1:01:15
Speaker 2: but I don't think they correlate well at all in
1:01:17
Speaker 2: the small. I mean, one example is, people look at
1:01:19
Speaker 2: tip shields and they look at what's called the five
1:01:21
Speaker 2: x five forward rates of what's inflation going to be
1:01:24
Speaker 2: five years from now for the next five years, and
1:01:26
Speaker 2: that five year forward inflation rate moves along around with
1:01:30
Speaker 2: current oil prices. So when the rest go over town,
1:01:34
Speaker 2: it seems to affect the people's inflation expectations through the
1:01:38
Speaker 2: tips market five years from now, which makes no you know,
1:01:40
Speaker 2: no sense.
1:01:42
Speaker 1: Part of the.
1:01:42
Speaker 2: Problem is it is also the liquidity of the tips
1:01:44
Speaker 2: market is different than the liquidity of the nominal treasury market,
1:01:47
Speaker 2: and so that also can cause some noise in terms
1:01:50
Speaker 2: of your measurement. But you know, two separate sets of
1:01:53
Speaker 2: of of numbers. And then you also have you know,
1:01:56
Speaker 2: professional forecasters, you know what do they think? So that's
1:01:59
Speaker 2: a third set, and so you look at these three
1:02:01
Speaker 2: pretty disparate sources of information on inflation expectations, you can
1:02:04
Speaker 2: get a pretty good sense of, you know, is it
1:02:06
Speaker 2: broadly stable or is it moving in a bad way.
1:02:10
Speaker 1: So let's talk about the biggest part of CPI, which
1:02:14
Speaker 1: is shelter. When we're looking at inflation, we really want
1:02:17
Speaker 1: to know what shelter costs are. The way bls, the
1:02:22
Speaker 1: way the Bureau of Labor Statistics measures shelter is owner's
1:02:25
Speaker 1: equivalent rent and full caveat everybody's aware there's issues with
1:02:30
Speaker 1: this and there are some changes coming. But let's talk
1:02:34
Speaker 1: a little bit. As it's been for the past couple
1:02:36
Speaker 1: of years. It's survey based. Hey what could you rent
1:02:40
Speaker 1: your property for? Seems to be a funny question. So
1:02:45
Speaker 1: it's laggy versus real time measures. And yet this is
1:02:48
Speaker 1: the single biggest part of CPI. George Box famously said
1:02:54
Speaker 1: all models are wrong, but some are useful. Is this
1:02:58
Speaker 1: a model that is both wrong and useful.
1:03:01
Speaker 2: Well, I think you've underscored some of the shortcomings of
1:03:04
Speaker 2: owner's equivalent rent, as you know, both in terms of
1:03:07
Speaker 2: timeliness and also in terms of you know, it's not
1:03:10
Speaker 2: even a cash outlay that people are making. So when
1:03:12
Speaker 2: you started thinking about what's having to people's real incomes,
1:03:14
Speaker 2: you're sort of imputing a cost that they don't actually
1:03:17
Speaker 2: really incur. So when you're started thinking about how much
1:03:20
Speaker 2: can people actually afford to buy, well, I'm not really
1:03:23
Speaker 2: renting my house from myself.
1:03:24
Speaker 1: So you're absolutely right. You have a budget line for shelter,
1:03:28
Speaker 1: but it doesn't include you've already sort of right, it's
1:03:31
Speaker 1: already in your budget.
1:03:32
Speaker 2: It's already in your budget exactly. So I think this
1:03:34
Speaker 2: is one reason why the Fed puts more emphasis on
1:03:37
Speaker 2: the personal consumption expenditure deflator because it has a much
1:03:41
Speaker 2: lower weight for shelter. But you're right, the legs here
1:03:44
Speaker 2: are sort of crazy. So one reason why we're going
1:03:47
Speaker 2: to see lower core PC deflator and lower core CPI
1:03:50
Speaker 2: over the next twelve months is because rents did come
1:03:54
Speaker 2: down and then with a lag of about a year
1:03:56
Speaker 2: or so.
1:03:57
Speaker 1: Is it that much? I always thought it was a
1:03:59
Speaker 1: couple of six months months, quarter or two.
1:04:01
Speaker 2: It's six months at least six months, like, because the
1:04:03
Speaker 2: rent's only repriced periodically, right every year or two, every
1:04:08
Speaker 2: year or two, and so they have to reprice before
1:04:10
Speaker 2: they get into the So it's that lag because you
1:04:13
Speaker 2: know rents repriced instantaneously, then everything would be sort of
1:04:17
Speaker 2: up to date. But rents price slowly when you know,
1:04:20
Speaker 2: the least comes due, and so it's lagging behind reality.
1:04:25
Speaker 2: So this is something that's going to probably feed into
1:04:26
Speaker 2: the core PC deflator and keep inflation a little bit
1:04:29
Speaker 2: lower over the next six to twelve months.
1:04:31
Speaker 1: But is it really you know, real.
1:04:34
Speaker 2: In terms of what's actually actually happening to inflation on
1:04:36
Speaker 2: the ground, it's probably you know, going to be a
1:04:38
Speaker 2: little bit misleading.
1:04:39
Speaker 1: So there are a couple of real estate entities, the
1:04:42
Speaker 1: Apartment List Index or Zillow does the real time in
1:04:45
Speaker 1: K Shiller, right, So even k Shiller is a little
1:04:48
Speaker 1: bit of a lag, not as much as owner's equivalent rent.
1:04:51
Speaker 1: But the interesting thing is the real time indicies have
1:04:55
Speaker 1: showed falling real estate prices the past, i don't know,
1:04:58
Speaker 1: three months, four months hasn't gotten into the CPI yet, right,
1:05:01
Speaker 1: And so it's interesting it's coming, it's coming. That's that's
1:05:05
Speaker 1: got to be very optimistic to think, Hey, even all
1:05:10
Speaker 1: these people are concerned about reacceleration of inflation, we know
1:05:14
Speaker 1: the biggest part of CPI is going to keep drifting lower.
1:05:18
Speaker 1: That's got to be positive for future Fed policy.
1:05:21
Speaker 2: Right, But the question is is it temporary or is
1:05:24
Speaker 2: it more persistent? So to figure that out. To figure
1:05:27
Speaker 2: that out, we have to look at the housing market.
1:05:28
Speaker 2: So how is the housing market performing? Well, the housing
1:05:30
Speaker 2: market actually looks like it's starting to come back. Why
1:05:33
Speaker 2: is it coming back? Because mortgage rates have fallen by
1:05:35
Speaker 2: you know, one percentage point, and so that's actually stimming
1:05:38
Speaker 2: in the housing sector. So I think the interesting question is.
1:05:40
Speaker 1: Not like just what's the next chapter as this stuff
1:05:43
Speaker 1: feeds through the CPI, it's what's the chapter after that?
1:05:47
Speaker 2: Based on how quickly does the housing market recover in
1:05:50
Speaker 2: response to lower interest rates.
1:05:52
Speaker 1: So so Powell was asked, I think it was on
1:05:55
Speaker 1: sixty minutes about the commercial real estate. So as opposed
1:05:59
Speaker 1: to up every year or two, you have leases that
1:06:02
Speaker 1: go five, ten, twenty years. So this seems to be
1:06:05
Speaker 1: taking place in slow motion. But it seems like commercial
1:06:09
Speaker 1: real estate is a genuine risk factor, certainly for some
1:06:14
Speaker 1: of the regional and community banks. How should we be
1:06:17
Speaker 1: contextualizing what's been taking place with remote work and work
1:06:22
Speaker 1: from home and the return to office process that still
1:06:27
Speaker 1: has lots of vacancies in urban centers.
1:06:30
Speaker 2: Yeah, I mean I would define it more nearly than
1:06:33
Speaker 2: commercial real estate. I would just find it as office
1:06:35
Speaker 2: building space because that's really where you have very high vacancies, rates,
1:06:39
Speaker 2: very underutilized resource, and prices are coming down, especially for
1:06:44
Speaker 2: you know, class B and Class C buildings, not the
1:06:47
Speaker 2: best stuff coming down quite significantly. You know, you're absolutely right.
1:06:51
Speaker 2: This is sort of a slow burn rather than a
1:06:53
Speaker 2: fast burn, because the problem typically arises, not you know,
1:06:56
Speaker 2: immediately arises when the mortgage has to be the commercial
1:07:00
Speaker 2: real estate loan has to be refinanced. As long as
1:07:05
Speaker 2: the income on the property covers the interest on the loan,
1:07:08
Speaker 2: the borrower isn't going to default when the loan comes due,
1:07:11
Speaker 2: though the lender typically says, hey, your building is worth
1:07:14
Speaker 2: forty percent less than it was before. I'm sorry, we're
1:07:18
Speaker 2: not going to lend you as much money. You need
1:07:19
Speaker 2: to come up with more collateral. And at that point
1:07:22
Speaker 2: the borrow might say, I don't have the collateral. The
1:07:26
Speaker 2: building's yours, and so then that crystallizes in the loss
1:07:30
Speaker 2: for the commercial bank. I think there are definitely commercial
1:07:34
Speaker 2: banks that are going to have trouble due to their
1:07:37
Speaker 2: concentrated commercial office building portfolio, But I don't view this
1:07:43
Speaker 2: as big enough or fast enough to really be you know,
1:07:48
Speaker 2: systemic from a financial stability perspective.
1:07:50
Speaker 1: Huh really interesting. All right. We've talked about the housing market,
1:07:53
Speaker 1: the office spased market. One question we really haven't gotten
1:07:57
Speaker 1: to has been the stock and bond market. They've been
1:08:01
Speaker 1: very chaotic the past couple of years. How does the
1:08:04
Speaker 1: FED think about stock or bond market volatility? How does
1:08:08
Speaker 1: that impact decision making?
1:08:11
Speaker 2: Well, I think, as Paul has said many times, you know,
1:08:13
Speaker 2: monitary policy in the US works through financial conditions, and
1:08:17
Speaker 2: two key components of financial conditions are the bond and
1:08:20
Speaker 2: stock market. So if the bond market eels are low,
1:08:24
Speaker 2: the stock prices are high and rising, that's making financial
1:08:27
Speaker 2: conditions more accommodative and that's actually supporting the economy. So
1:08:31
Speaker 2: the FED is going to take that into consideration. So,
1:08:34
Speaker 2: you know, we talked earlier about why the FED isn't
1:08:36
Speaker 2: moving yet because they want to be confident they're going
1:08:39
Speaker 2: to actually achieve their two percent objective. They're not moving
1:08:42
Speaker 2: yet because the labor market is strong. But they're also
1:08:44
Speaker 2: not moving yet because financial conditions have eased a lot,
1:08:48
Speaker 2: and so the market is doing quite a bit of
1:08:50
Speaker 2: work for the FED. Even before the Fed actually has
1:08:52
Speaker 2: cut interest rates, So the FED, you know, I don't
1:08:56
Speaker 2: think I think it's important to understand that the FED
1:08:58
Speaker 2: doesn't really target financial market prices. So people sometimes say, well,
1:09:02
Speaker 2: if the stock market goes down, the Federal Reserve is
1:09:04
Speaker 2: going to react to that. No, the Fed's going to
1:09:07
Speaker 2: react to the stock market if the FED thinks the
1:09:09
Speaker 2: stock market has gone down far enough, persistently enough to
1:09:12
Speaker 2: affect the real economy to impede the ability of the
1:09:15
Speaker 2: FED to achieve its its inflation and employment objectives. Fed
1:09:19
Speaker 2: doesn't care about the stock market itself. It cares about
1:09:22
Speaker 2: how the stock market affects the real economy.
1:09:24
Speaker 1: So sometimes you get a market crash and the economy
1:09:27
Speaker 1: shrugs it off. Nineteen eighty seven, one day, twenty three percent,
1:09:31
Speaker 1: the economy couldn't care less. And then even the dot
1:09:35
Speaker 1: com implosion, which was modest on the Dow and the
1:09:40
Speaker 1: SMP if you consider thirty percent modest, it was brutal
1:09:44
Speaker 1: on the Nasdaq, which was something like eighty one percent.
1:09:47
Speaker 1: But we had a very mild recession in two thousand
1:09:51
Speaker 1: and one. So does that basically argue for less intervention
1:09:58
Speaker 1: by the FED, or does the subsequent FED intervention. Is
1:10:02
Speaker 1: that what prevented this like A one, from becoming much worse.
1:10:06
Speaker 2: Well, I think one was really you know, also nine
1:10:09
Speaker 2: eleven was really a significant event, and that I think
1:10:12
Speaker 2: provoked a more and more much more aggressive FED. I
1:10:16
Speaker 2: think the Fed, you know, is aware what the bond
1:10:19
Speaker 2: market is doing and where what the stock market is doing,
1:10:21
Speaker 2: because that affects the transmission of monetary policy. The real
1:10:24
Speaker 2: e commy, but they don't have a view that we
1:10:26
Speaker 2: need to target a particular level of the stock market
1:10:28
Speaker 2: or the bond market. That never comes up as an issue,
1:10:32
Speaker 2: you know. It's not like the Fed. You know, if
1:10:33
Speaker 2: the stock market went down ten percent tomorrow, it's not
1:10:35
Speaker 2: like this the Fed would go, oh, we need to
1:10:37
Speaker 2: change monetary policy. If it went down twenty five to
1:10:40
Speaker 2: thirty percent and stayed persistently lower, that would probably have
1:10:44
Speaker 2: implications for the economic growth, and that would then affect
1:10:47
Speaker 2: monetary policy. But it's all through the effects on economic growth.
1:10:50
Speaker 2: Paul has talked about this. It's it's the persistence of
1:10:53
Speaker 2: the change in financial conditions that matters. It's not what
1:10:56
Speaker 2: the stock market does over a day or a week.
1:10:58
Speaker 2: It's what the stock market does over six months or
1:11:00
Speaker 2: a year that really matters.
1:11:03
Speaker 1: So before I get to my favorite questions, I just
1:11:06
Speaker 1: have to ask, really, what you're focusing on today. You
1:11:11
Speaker 1: join the Princeton Griswold Center as a senior advisor, You
1:11:16
Speaker 1: chair the Bretton Woods Committee, you serm on the Group
1:11:19
Speaker 1: of thirty and Council form relations. Are you still doing
1:11:22
Speaker 1: all those actively today? Tell us what's keeping you busy
1:11:26
Speaker 1: these days?
1:11:27
Speaker 2: Those things the Brenton Woods Committee, I'm the chair and
1:11:30
Speaker 2: we've been broadening out the work that we do at
1:11:32
Speaker 2: the Brendon Woods Committee. I mean to just give to
1:11:34
Speaker 2: tell you what the Brenton Wicks Committee is about. It's
1:11:37
Speaker 2: basically dedicated to the notion that international cooperation and coordination
1:11:41
Speaker 2: lead to better outcomes. So along the lines of what
1:11:43
Speaker 2: Paul said in a sixty minutes interview and basically trying
1:11:47
Speaker 2: to build strong international institutions that can facilitate cooperation on
1:11:53
Speaker 2: important issues like you know, financial stability, climate change, digital finance,
1:12:00
Speaker 2: it's health trade where countries working together can lead to
1:12:05
Speaker 2: better outcomes. So the Bretonwitz Committee, uh, you know, we
1:12:09
Speaker 2: it's been growing, the work has been expanding or doing
1:12:12
Speaker 2: work on digital finance, climate finance, sovereign debt future of
1:12:17
Speaker 2: the multilateral of financial institutions like the World Bank and IMF,
1:12:20
Speaker 2: what should their role be going forward. So it's pretty
1:12:23
Speaker 2: exciting and I spend you know, quite a bit of
1:12:26
Speaker 2: time on it.
1:12:27
Speaker 1: What's the Group of thirty?
1:12:28
Speaker 2: Group of thirty is a is a group of people.
1:12:31
Speaker 2: It's a it's a It's an organization that was set
1:12:32
Speaker 2: up several decades.
1:12:34
Speaker 1: Ago of.
1:12:36
Speaker 2: People that are either currently very senior in academia policy
1:12:42
Speaker 2: or we're involved in academy and policy at a very
1:12:45
Speaker 2: senior level. You know, people like Paul Volker was a
1:12:47
Speaker 2: member of the of the Group of thirty. Jean Clautchochet
1:12:50
Speaker 2: is a is a current member of the of the
1:12:52
Speaker 2: Group of thirty. People of you know, Mark Karney is
1:12:57
Speaker 2: is the is the person who's in charge of running
1:13:01
Speaker 2: the Group of thirty from from a member of perspective,
1:13:04
Speaker 2: so a lot of senior people that focus on important
1:13:07
Speaker 2: issues of the day. So, for example, a number of
1:13:10
Speaker 2: months ago, the Group of thirty asked me to lead
1:13:12
Speaker 2: a project on you know, financial supervision reform. You know,
1:13:17
Speaker 2: what we do in terms of the regulatory policy with
1:13:20
Speaker 2: respect to the banking system in light of what happened
1:13:23
Speaker 2: in March of twenty twenty three with respect to Silicon
1:13:27
Speaker 2: Valley Bank and a number of other banks. And in
1:13:29
Speaker 2: January we published a report and we basically argued for
1:13:33
Speaker 2: a number of reforms that need to be made. And
1:13:36
Speaker 2: you know, I've been talking to the people at the
1:13:38
Speaker 2: FED nails. We're trying to get some traction for some
1:13:41
Speaker 2: of the proposals that we've made.
1:13:43
Speaker 1: Really interesting, all right, I know I only have you
1:13:45
Speaker 1: for so much time, so let me jump to my
1:13:47
Speaker 1: favorite questions that we ask all of our guests, starting
1:13:51
Speaker 1: with what's keeping you entertained these days? What are you
1:13:53
Speaker 1: watching or listening to?
1:13:56
Speaker 2: I usually want, you know, stream things to you know,
1:13:58
Speaker 2: television series that strike my fancy, you know right now,
1:14:02
Speaker 2: you know, right now, it's a little bit of a
1:14:03
Speaker 2: you know, sometimes it's a little bit of science fiction
1:14:05
Speaker 2: like Foundation.
1:14:07
Speaker 1: Or are you do you watching the second or third
1:14:10
Speaker 1: season of fa I'm.
1:14:11
Speaker 2: In the second season right Sometimes it's things like poker Face,
1:14:15
Speaker 2: which is on Peacock. Another one I'm watching my wife
1:14:20
Speaker 2: and I now mister and Missus Smith.
1:14:22
Speaker 1: Just started on Amazon, just started, so.
1:14:24
Speaker 2: You know, it's you know, we usually watch one show
1:14:27
Speaker 2: at night and that's us also tolerance. I never It's
1:14:31
Speaker 2: a great way to just errow and wind.
1:14:33
Speaker 1: At the end of the day, I would not have
1:14:35
Speaker 1: pegged you as a sci fi fan. And I'm going
1:14:38
Speaker 1: to give you the two recommendations I give everybody. Okay,
1:14:41
Speaker 1: one is on Amazon Prime, the expanse, which is, Yeah,
1:14:45
Speaker 1: I did I did read. I did watch about five
1:14:48
Speaker 1: five of did you like it? It got a little
1:14:49
Speaker 1: wacky at the end.
1:14:50
Speaker 2: I sartainly ran out of gas after about yeah, fifth season.
1:14:53
Speaker 2: I did watch a lot of a lot of.
1:14:55
Speaker 1: That fascinating political US. And then the other one was
1:15:00
Speaker 1: it's only two seasons altered Carbon It's really good. I
1:15:04
Speaker 1: haven't seen that one. Fascinating story and filled with all
1:15:08
Speaker 1: sorts of really interesting as a sci fi geek, those
1:15:12
Speaker 1: are my two favs. Do you liked? For all Mankind?
1:15:16
Speaker 1: I haven't seen it?
1:15:17
Speaker 2: So?
1:15:17
Speaker 1: That one is.
1:15:18
Speaker 2: About the sort of alternate space race between Russia and
1:15:21
Speaker 2: the US where Russia actually gets a man on the
1:15:23
Speaker 2: moon first, and then it follows sort of the develop
1:15:26
Speaker 2: of the NASA program over the subsequent.
1:15:29
Speaker 1: How is the series? It's quite good? Oh really, I'm
1:15:32
Speaker 1: gonna I'm going to add that to my list. I
1:15:34
Speaker 1: am a soccer for a great space venture. Let's talk
1:15:39
Speaker 1: about some of your mentors who helped shape your career.
1:15:43
Speaker 2: So the most important one, by far, I think, was
1:15:47
Speaker 2: my professor at Berkeley, James PEARSK. He worked at Yale,
1:15:51
Speaker 2: then he went to work at the Federal Reserve Board
1:15:53
Speaker 2: in Washington. He was the social director of research, and
1:15:56
Speaker 2: then he went to Berkeley. And I was his research
1:15:58
Speaker 2: assistant at Berkeley for five years, wow, which is a
1:16:01
Speaker 2: very long stretch as being someone's research assistant. And he
1:16:04
Speaker 2: sort of got me interested in policy and got me
1:16:07
Speaker 2: sort of knowledgeable about what the.
1:16:09
Speaker 1: Federal Reserve was all about.
1:16:10
Speaker 2: And so I think the reason why I went to
1:16:12
Speaker 2: the feder Reserve rather than went into academy is because
1:16:15
Speaker 2: of his counseling. And he became a really good friend.
1:16:21
Speaker 2: But there are a lot of you know, there's a lot
1:16:22
Speaker 2: of other people along the way, but he's the one
1:16:24
Speaker 2: that sort of, you know, stands out.
1:16:27
Speaker 1: Huh. Let's talk about books. What are some of your
1:16:30
Speaker 1: favorites and what are you reading right now?
1:16:33
Speaker 2: Right now, I haven't really gotten into anything particularly that's
1:16:36
Speaker 2: like grabbed me. I just finished Andy Wear's a book,
1:16:41
Speaker 2: Hail Mary I don't know if you've had science fiction one.
1:16:44
Speaker 2: I don't read a lot of science fiction, but every
1:16:46
Speaker 2: once in a while I get a hankering for it.
1:16:49
Speaker 2: I typically read more things that are like thriller detective
1:16:53
Speaker 2: kind of things. But you know, I'm not a I
1:16:55
Speaker 2: took a lot of literaually in college, but I don't
1:16:58
Speaker 2: read a lot of heavy literature now because I usually
1:17:00
Speaker 2: by the end of the day i'm I'm I'm a
1:17:02
Speaker 2: little wiped out and and and to read really good literature,
1:17:05
Speaker 2: it takes it takes focus, takes a lot of attention.
1:17:08
Speaker 2: So I like things like Dennis Lane. I think he's
1:17:11
Speaker 2: he does really good stuff. Uh don Winslow, I know
1:17:15
Speaker 2: the name for sure, it does some.
1:17:17
Speaker 1: Really good stuff.
1:17:18
Speaker 2: Uh So I like the stuff that's like a little
1:17:22
Speaker 2: bit you know better than you know, sort of Lee
1:17:26
Speaker 2: Child's you know a little bit deeper.
1:17:27
Speaker 1: Sure, Lee Child's. My wife is a giant. Lee Child
1:17:31
Speaker 1: read everything.
1:17:31
Speaker 2: Lee Child is entertaining, but every story is sort of
1:17:34
Speaker 2: along the same same lines. So so that's the sort
1:17:40
Speaker 2: of stuff that I like to read, and I read.
1:17:42
Speaker 1: I read a fair amount the sci fi book I
1:17:44
Speaker 1: have sitting on my nightstand that I'm almost afraid to start.
1:17:49
Speaker 1: Is the three body problem, and it's each book is
1:17:52
Speaker 1: nine hundred pages. Three books is it's actually by a
1:17:57
Speaker 1: Chinese author and references. Is the inability to forecast the
1:18:03
Speaker 1: location of heavenly bodies of planets moon stars. We can
1:18:08
Speaker 1: calculate too once you bring a third one in. It's
1:18:11
Speaker 1: just the outcomes. I'll take a look at that. It's fascinating.
1:18:15
Speaker 2: Have you read Tediang. He's a short story writer. He
1:18:19
Speaker 2: writes short story of fiction. He's got two books science fiction.
1:18:24
Speaker 2: It's fabulous.
1:18:25
Speaker 1: What's it's very intellectual stuff. It's he writes. He writes
1:18:29
Speaker 1: sometimes in the New Yorker magazine. So there's a book
1:18:33
Speaker 1: of his. I'm trying to remember. I think he's had
1:18:36
Speaker 1: two volumes of all stories. Yeah, all short stories. The
1:18:42
Speaker 1: movie The Arrival was based on was based on his
1:18:45
Speaker 1: short So the one I just got is Stories of
1:18:48
Speaker 1: your Life and other tells. But the one before that
1:18:51
Speaker 1: is Revelation Ascendancy. Yeah, it's so funny you mentioned that
1:18:54
Speaker 1: literally just and I gave that to a few friends
1:18:57
Speaker 1: for holidays and stuff. Is great because really I'm excited.
1:19:00
Speaker 1: That is like the book I Bring on Planes where
1:19:04
Speaker 1: all I go Now to read. Let me let me
1:19:06
Speaker 1: go through a chapter. Really, and there's this really fascinating
1:19:10
Speaker 1: collection of short stories. I'll never remember it, but i'll
1:19:13
Speaker 1: but I'll email it to you. Diary of an interstellar
1:19:17
Speaker 1: refrigerator repairman, something along those lines. And it's it's brilliant
1:19:23
Speaker 1: science fiction, but it's also surprisingly amusing and funny. It's
1:19:28
Speaker 1: it's out. If you like those, I think you'll you'll
1:19:31
Speaker 1: appreciate that they're not it's not all the same story.
1:19:35
Speaker 1: They're kind of like just very loose set in the
1:19:38
Speaker 1: same universe, but unrelated type of uh stuff, but really
1:19:41
Speaker 1: really fascinating. And our final two questions, what sort of
1:19:45
Speaker 1: advice would you give a college grad who is interested
1:19:49
Speaker 1: in a career in either economics or central banking or
1:19:54
Speaker 1: monetary policy.
1:19:56
Speaker 2: Find an interesting job, build your human capital. You find
1:20:00
Speaker 2: that your human capital is no longer going up at
1:20:03
Speaker 2: a particularly rapid rate, find a new job. I mean,
1:20:07
Speaker 2: I was very lucky because I jumped around in my career,
1:20:09
Speaker 2: and I feel like every place I moved, I learned
1:20:12
Speaker 2: a new set of skills and information which sort of
1:20:15
Speaker 2: helped me do better at the next endeavor. So I
1:20:19
Speaker 2: think it's really important not to get stale and you know,
1:20:23
Speaker 2: and the second really most important thing is find something
1:20:26
Speaker 2: that you that you can be you know, that really
1:20:28
Speaker 2: interests you, that you can be enthusiastic about it. Because
1:20:30
Speaker 2: if you can't go to work and be enthusiastic about it,
1:20:33
Speaker 2: you're not going to do very well and you're not gonna.
1:20:35
Speaker 1: Be very happy.
1:20:36
Speaker 2: I mean, ideally, you know, you like your work, and
1:20:39
Speaker 2: the difference between work and pleasure so starts to blur
1:20:42
Speaker 2: and you don't really aren't resentful when there's more, you know,
1:20:46
Speaker 2: demands for your work. I mean, during the financial crisis,
1:20:48
Speaker 2: you can imagine I worked pretty long hours, but I
1:20:52
Speaker 2: wouldn't have had it any other way. I mean, it
1:20:53
Speaker 2: was absolutely a fascinating period of time, and yeah it
1:20:56
Speaker 2: was work, but but I got a lot out of it.
1:20:59
Speaker 1: My wife describes me as being gainfully unemployed, which is
1:21:04
Speaker 1: exactly along those things. I would do it if I
1:21:06
Speaker 1: was getting paid or not. So it works out really well.
1:21:09
Speaker 1: And our final question, what do you know about the
1:21:12
Speaker 1: world of investing today, markets, investing, monetary policy that you
1:21:17
Speaker 1: wish you knew thirty or forty years ago when you
1:21:19
Speaker 1: were first getting started.
1:21:22
Speaker 2: Well, I mean when I first started investing. I started
1:21:24
Speaker 2: investing in nineteen seventy four, seventy five, and I have
1:21:28
Speaker 2: to say I was so naive about investing at that time.
1:21:31
Speaker 2: I didn't really understand you know, you know what really
1:21:35
Speaker 2: drove stock market evaluation, you know, what determined the success
1:21:41
Speaker 2: of companies. You know, you'll learn a lot by doing it.
1:21:46
Speaker 2: And I personally think a lot of people over overinvest
1:21:48
Speaker 2: in the sense of making transaction. I found over time
1:21:51
Speaker 2: that you know, I have good ideas once every like
1:21:54
Speaker 2: five ten years, and you know you have to wait
1:21:58
Speaker 2: for that good idea to to and then implement that
1:22:01
Speaker 2: investment thesis. You know, well, one thing I'm good at
1:22:04
Speaker 2: it coming out with ideas, but I'm terrible at trading
1:22:07
Speaker 2: on them.
1:22:08
Speaker 1: You know, like Bob Rubin a.
1:22:09
Speaker 2: Number of years ago at Goldman's you know, you know,
1:22:11
Speaker 2: you know, suggested that, well maybe you should, you know,
1:22:13
Speaker 2: should actually start trading things trying try that. I said, no, Bob,
1:22:17
Speaker 2: I don't think my my risk tolerance is right for that.
1:22:20
Speaker 2: And the second reason not to do it is that
1:22:22
Speaker 2: if you start trading things, then it sort of leaks
1:22:24
Speaker 2: into your interpretation of information and events, because then you
1:22:29
Speaker 2: start to talk your book and try to contribute. You know,
1:22:32
Speaker 2: this is the reason why the ten year bond yield.
1:22:34
Speaker 1: Should fall, because well, I have a position.
1:22:37
Speaker 2: I have a position, you know, And I said to me, now,
1:22:40
Speaker 2: you don't really want me to do that, because when
1:22:42
Speaker 2: I wouldn't be very good at it, and then I
1:22:43
Speaker 2: might lose some of my you know, objectivity with quotes
1:22:46
Speaker 2: around it.
1:22:47
Speaker 1: I do like the idea of low frequency trading as a.
1:22:50
Speaker 2: Yeah, I mean, I think for most people, buying an
1:22:53
Speaker 2: ETF on a broad based stock market and then putting
1:22:56
Speaker 2: it away for twenty years is the right approach.
1:22:59
Speaker 1: Can't really just agree, Bill, Thank you for being so
1:23:02
Speaker 1: generous with your time. This has just been absolutely delightful.
1:23:06
Speaker 1: We have been speaking with Bill Dudley. He is the
1:23:09
Speaker 1: former US economist for Goldman Sachs and head of the
1:23:13
Speaker 1: New York Fed, as well as his many policy roles
1:23:16
Speaker 1: at the Federal Reserve. If you enjoy this conversation, well,
1:23:20
Speaker 1: be sure and check out any of the five hundred
1:23:23
Speaker 1: or so we've done over the past. Hey, it's almost
1:23:26
Speaker 1: ten years. You can find those at iTunes, Spotify, YouTube,
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Speaker 1: wherever you find your favorite podcasts. Sign up for my
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Speaker 1: daily reading list at Ridhelts dot com. Follow me on
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Speaker 1: Twitter at Ridolts. Check out my new podcast At the Money,
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Speaker 1: short ten minute conversations with experts about the most important
1:23:47
Speaker 1: elements of your earning money, spending money, and most importantly,
1:23:52
Speaker 1: investing money. I would be remiss if I did not
1:23:55
Speaker 1: thank the crack team of people who help us put
1:23:58
Speaker 1: these conversations together each week. Kayla Lapara is my audio engineer.
1:24:03
Speaker 1: Attika val Bron is my project manager. Anna Luke is
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Speaker 1: my producer. Sean Russo is my researcher. I'm Rid Holts.
1:24:12
Speaker 1: You've been listening to Masters in Business on key birth
1:24:15
Speaker 1: ratio