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What Is Fed Chair Kevin Warsh Trying to Say? · Trumponomics

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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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Speaker 2: I'm Stephanie Flanders, the head of Government and Economics at Bloomberg,
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Speaker 2: and this is Trumpnomics, the podcast that looks at pretty
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Speaker 2: much everything in the economic world of Donald Trump. And
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Speaker 2: in that world, the US Central Bank looms pretty large.
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Speaker 2: And now Donald Trump's handpicked FED Chair, Kevin Walsh, has
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Speaker 2: been in the job nearly three months. I thought it
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Speaker 2: was worth taking stock of his tenure so far. We're
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Speaker 2: recording this on Wednesday morning, US time, so we also
0:44
Speaker 2: have just had a new US inflation number that could
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Speaker 2: make his job slightly easier. One big headline about Kevin
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Speaker 2: Walsh's time at the HELM so far, He's been his
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Speaker 2: own man, despite all the politics around his selection. He's
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Speaker 2: not actively been trying to persuade his fellow governors to
1:01
Speaker 2: cut interest rates, as Donald Trump had urged so often,
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Speaker 2: and although the President says they've spoken, wsh doesn't appear
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Speaker 2: to be taking regular cues from the White House, which
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Speaker 2: probably also note that he's not made any clear gaffes.
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Speaker 2: Most incoming FED chairs have had a misstep or two
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Speaker 2: in their first few weeks. They've been caught thinking aloud
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Speaker 2: in an interview or said a bit too much at
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Speaker 2: a press conference. Well that's not chairwash. In fact, he's
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Speaker 2: not been saying very much at all about anything, and
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Speaker 2: that is a big change for the financial markets. After
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Speaker 2: years in which policymakers have become used to offering a
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Speaker 2: lot of guidance and transparency around their decision making, it's
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Speaker 2: left a lot of people inside and outside the financial
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Speaker 2: market unhappy and confused. Now, you could say investors could
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Speaker 2: just grow up and learn to live with less spoon feeding,
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Speaker 2: but for some, including Bloomberg opinion columnist and former New
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Speaker 2: York Federal Reserve President Bill Dudley, the issue runs deeper
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Speaker 2: than a change of comms. And I'm glad to say
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Speaker 2: he's with us on Trump andnomics to explain, Bill, thank
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Speaker 2: you very much.
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Speaker 3: Yes, I'm delighted to be here now.
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Speaker 2: It's quite difficult these days to find wholehearted supporters of
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Speaker 2: the approach Kevin Walsh has taken. But Robin Brooks is
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Speaker 2: one who thinks the world has maybe been a bit
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Speaker 2: too tough on him. And you'll remember he was on
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Speaker 2: the show a while back. Is now a blogger, senior
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Speaker 2: fellow at the Brookings Institution, former chief economist for the
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Speaker 2: Institute for International Finance and chief FX strategist at Goldman Sachs. Robin,
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Speaker 2: thanks for coming.
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Speaker 4: Back, Thanks for having me.
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Speaker 3: Thank god.
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Speaker 2: We are speaking just an hour or so after the
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Speaker 2: CPI Consumer Price Index numbers come out for the US,
2:49
Speaker 2: and so I guess we should spend a couple of
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Speaker 2: minutes on that, given that it looms quite large in
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Speaker 2: a lot of this decision making. We saw the core
2:58
Speaker 2: inflation number at two point five percent annual rate. That's
3:03
Speaker 2: the lowest in more than five years. The headline rate
3:06
Speaker 2: three point four percent, fair bit higher as it has
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Speaker 2: been for a while. Bill, just briefly on this, How
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Speaker 2: do you think it changes the outlook, if at all,
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Speaker 2: for the next few months. To have this number, It
3:16
Speaker 2: wasn't a big surprise, it has to be said.
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Speaker 3: I think it doesn't change it very much.
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Speaker 1: I think the Fed was on hold at the last
3:22
Speaker 1: meeting because they thought the inflation data is going to
3:25
Speaker 1: be more benign.
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Speaker 3: It has been more benign.
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Speaker 1: So all the arguments for staying on hold that you
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Speaker 1: had at the last meeting are still in place, and
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Speaker 1: that's why the market reduced its probability of tightening in
3:37
Speaker 1: September from about sixty percent to about forty five percent.
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Speaker 1: But there's a long way to go to the next meeting.
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Speaker 1: I think fundamentally the arguments for tightening are still pretty strong.
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Speaker 1: But the arguments I would make is Number one, it
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Speaker 1: doesn't look like montary policy is actually restrictive. We've been
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Speaker 1: at this interest rate or higher for two years and
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Speaker 1: we're still operating at full employment. Number two, we're missing
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Speaker 1: more on the inflation mandate than we are on the employer.
4:00
Speaker 1: I'm a mandate, so in terms of which side you
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Speaker 1: want to care about, you'd care more about the inflation side,
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Speaker 1: and especially in the fact that we've missed the inflation
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Speaker 1: objective for.
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Speaker 3: Five years in row.
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Speaker 1: And then lastly, the risk of an error here I
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Speaker 1: think is asymmetric as well. If you tighten it turns
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Speaker 1: out to be unnecessary, you can obviously easily reverse it.
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Speaker 1: If you don't tighten it, and then you should have tightened,
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Speaker 1: then you have a risk of inflation expectations becoming unanchored,
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Speaker 1: and you have to believe that the real risk, given
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Speaker 1: that the FED is missed for five years in a row.
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Speaker 2: We have that argument a lot, although not so much
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Speaker 2: from Kevin Wath Robin just on this July inflation number.
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Speaker 4: So I would say that I came into this number
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Speaker 4: with a fairly strong view that we don't even though
4:42
Speaker 4: we've had many years of various supply shocks, and of
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Speaker 4: course they just keep coming, we don't really have a
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Speaker 4: picture where inflation is broadening. How I regularly put out
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Speaker 4: in my substack data on inflation generalization, so things that
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Speaker 4: measure or the combined weight of items, and the CPI
5:03
Speaker 4: and the PCE that are above two percent, and those
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Speaker 4: things have been trending down for a couple of years.
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Speaker 4: So I came into this print constructively. If you look
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Speaker 4: at the guts of this print, then I totally agree
5:17
Speaker 4: with Bill. The guts are quite benign, in particular if
5:22
Speaker 4: you look at what I sort of think of as
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Speaker 4: core core. So when you strip out the noisy elements
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Speaker 4: of core inflation, because core does contain non market stuff
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Speaker 4: like Oeer administered prices, when you strip that stuff out,
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Speaker 4: basically we have an inflation reading that was flat after
5:42
Speaker 4: a slightly negative reading a month ago. So my views
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Speaker 4: on monetary policy here have been heavily predicated on what's
5:51
Speaker 4: going on with inflation. And I just don't think from
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Speaker 4: my perspective, this is a print that screams for tightening.
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Speaker 2: I think that's where it leaves us, and both of
6:01
Speaker 2: you are in a slightly different place. But I think
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Speaker 2: we're at least saying there's more question marks around an
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Speaker 2: interest rate rise in September, and I think that's kind
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Speaker 2: of broadly reflected in the market Pricing book. Obviously, we're
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Speaker 2: in a quite different place than we might have been
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Speaker 2: six months ago, when there was much more of a
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Speaker 2: live discussion around cutting interest rates. Even in the discussion
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Speaker 2: we've just had, you've said a great deal more than
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Speaker 2: Kevin Walsh has been willing to say about the underlying
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Speaker 2: dynamics for inflation or what might drive policy going forward.
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Speaker 2: So Bill, explain why you think that lack of lack
6:35
Speaker 2: of communications is a problem.
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Speaker 1: So I have no problem with getting rid of Ford guidance.
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Speaker 1: I think Ford guidance, but talking about what you're going to.
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Speaker 5: Do next is a bad idea because basically it can
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Speaker 5: constrain you from changing policy when new information comes along
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Speaker 5: to suggests that a change is worn, and it can
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Speaker 5: sort of lock you in.
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Speaker 2: We kind of got in the habit of doing that
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Speaker 2: after the global financial crisis, it was sort of somewhat controversial,
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Speaker 2: but then a lot of central banks ended up having
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Speaker 2: Once you start doing it, it has been quite hard
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Speaker 2: for central bits to step back from it.
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Speaker 1: And you could argue that the fed's policy are going
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Speaker 1: through the COVID pandemic was the fact that they were
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Speaker 1: sort of locked in with all these conditions about what
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Speaker 1: would have to happen before they would actually raise rates.
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Speaker 1: If you remember, they couldn't raise rates until we were
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Speaker 1: at full employment, until inflation was at two percent, and
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Speaker 1: we thought inflation was going to be above two percent
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Speaker 1: in the future. So in March of twenty two, inflation
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Speaker 1: was really high and the Federal fund rate was zero.
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Speaker 1: So that was example of four guiance of really boxing
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Speaker 1: you in. So I think most to comments, I think
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Speaker 1: I agree with the predicate that for guidance is too constraining,
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Speaker 1: But we can't conflate for guidance with providing information about
7:43
Speaker 1: the Fed's monetary policy reaction function. In other words, how
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Speaker 1: does the FED think about monetary policy? How does the
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Speaker 1: FED think how monitary policy it affects aggregate demand and inflation?
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Speaker 1: And Kevin Watsh has been very reluctant to provide any
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Speaker 1: information about how he's thinking about the economy and what
7:59
Speaker 1: the implication of that are for monetary policy.
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Speaker 3: And I think that's a mistake.
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Speaker 1: You know, he basically wants to outsource it to financial
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Speaker 1: markets to sort of decide what the FED should do.
8:08
Speaker 1: But the markets don't price to what the FED should do.
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Speaker 1: They priced to what the FED will do, and so
8:12
Speaker 1: in this situation, you just have the markets looking at
8:14
Speaker 1: the FED, the FED looking at the markets, and policy
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Speaker 1: becomes sort of indeterminate. So I think this is a
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Speaker 1: mistake not to provide more information about how you're thinking
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Speaker 1: about monetary policy. And it's partly about credibility and accountability.
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Speaker 1: FED is a complete bat black box. Then the FED
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Speaker 1: is actually not being very accountable in terms of its
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Speaker 1: responsibilities to the public.
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Speaker 3: Robin.
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Speaker 2: I think lots of people agree that it's constraining to
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Speaker 2: have the forward guidance, especially the kind of super detailed
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Speaker 2: conditionality around future policy. But we've got used to having
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Speaker 2: a pretty clear idea of what central bank's reaction function is,
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Speaker 2: you know, how it will respond to a given set
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Speaker 2: of circumstances. It seems like Kevin Walsh doesn't even want
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Speaker 2: to provide much clarity on that.
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Speaker 4: First of all, I should say I've only ever worked
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Speaker 4: as a central bank as an intern, so I definitely
9:04
Speaker 4: am way more junior in.
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Speaker 3: That respect to Bill.
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Speaker 4: I can't hold the cantle to president of the New
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Speaker 4: York Fed, so I thought I would give a little
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Speaker 4: bit of a market perspective on everything. And I think
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Speaker 4: the number one question is there is clearly mounting political
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Speaker 4: pressure on the FED, and that predates Wosh, and it
9:27
Speaker 4: predates some of the I think communication lapses in the
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Speaker 4: recent press conferences that he's done. And to be fair
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Speaker 4: to worsh, I don't think his performance was great. I
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Speaker 4: think he's being too glib about batting off questions about
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Speaker 4: the outlook. I don't love it, but let's give the
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Speaker 4: guy a little bit of a break. The initial press
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Speaker 4: conferences of his predecessors weren't exactly a marsh up glory either,
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Speaker 4: so there's a learning curve. It's a massive job, there's nerves.
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Speaker 4: So I would say that I think the bigger issue
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Speaker 4: is this growing pressure on the FED and other central banks.
10:07
Speaker 4: And roll the clock back exactly one year, Stephanie to
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Speaker 4: Jackson Hole twenty twenty five. Powell gave a speech on
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Speaker 4: the twenty second of August, where he basically said, you
10:20
Speaker 4: know what, the balances of inflation versus employment are tilting
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Speaker 4: in favor of worrying about employment, and we're going to
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Speaker 4: start easing. This came after months of criticism by the President.
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Speaker 4: It came immediately after criticism a few days before where
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Speaker 4: Trump said Powell is terrible for the housing market. And
10:44
Speaker 4: if you look at financial markets, there's a lot of
10:48
Speaker 4: talk how the curve has steepened now right, long term
10:51
Speaker 4: yields have risen because markets are worried about inflation and
10:55
Speaker 4: risk premium and volatility. Well, guess what, the curve steepened
10:59
Speaker 4: just as much much after that August twenty second, twenty
11:03
Speaker 4: twenty five dollish speech from Powell. And if you look
11:07
Speaker 4: at precious metals prices back then, you know that was
11:10
Speaker 4: the debasement trade, gold, silver, All these crazy things when
11:13
Speaker 4: completely bonkers. So the first point that I want to
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Speaker 4: make is I think it's a bit of a red
11:20
Speaker 4: herring to personalize this too much. I think obviously Worsh
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Speaker 4: is Worsh and he's new, and there are a lot
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Speaker 4: of questions given how little he's saying. But I think
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Speaker 4: the bigger issue is that we have a FED that's
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Speaker 4: under massive pressure from politicians, and the underlying problem is
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Speaker 4: that fiscal policy is completely out of control and we
11:41
Speaker 4: have real worries about how we're going to pay for
11:43
Speaker 4: all this debt. So I think that's my number one
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Speaker 4: point on the specifics of forward guidance that Bill mentioned.
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Speaker 4: So I totally agree there is no right formula for
11:54
Speaker 4: the right amount of forward guidance. The only thing that
11:57
Speaker 4: I would say, you can look at how data sensitive
12:02
Speaker 4: treasury yields are, and ideally you want the market to
12:07
Speaker 4: incorporate information actively and to have a high beta to
12:11
Speaker 4: what's going on. This is basically what worsh is saying. Right,
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Speaker 4: He's saying, I want the market to form its own view,
12:17
Speaker 4: and we are if you look at history, about on
12:22
Speaker 4: a two out of ten on that scale. So the
12:25
Speaker 4: data sensitivity of treasury yields, whether you look if two
12:29
Speaker 4: year or ten year, is very low. So that means
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Speaker 4: that markets here are still very complacent about the role
12:38
Speaker 4: that they are supposed to play in this regime change.
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Speaker 4: And so I take some of the rhetoric about loss
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Speaker 4: of credibility with a big grain of salt.
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Speaker 3: Because of that, I just pushed back a little bit
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Speaker 3: on that.
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Speaker 1: I think that where I would disagree a little bit
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Speaker 1: is it's not like worsh came in and said everything
12:54
Speaker 1: is fine.
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Speaker 3: No, he talked about regime change.
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Speaker 1: So, you know, I think he's getting more criticism because
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Speaker 1: he's actually that he's going to do things totally differently,
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Speaker 1: and yet hasn't really explained why this totally different way
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Speaker 1: of doing thing is necessarily going to lead to better outcomes.
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Speaker 1: So I think the problem at for Kevin so far
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Speaker 1: has been a little bit of all had no cattle.
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Speaker 1: I mean, he's promised a lot, but he hasn't really
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Speaker 1: delivered anything. I mean, we're waiting for the task forces,
13:17
Speaker 1: and the task forces aren't going to arrive for another
13:20
Speaker 1: four or five months. And even then, I mean, who
13:23
Speaker 1: knows what the task forces are going to come up
13:25
Speaker 1: with this? As Chris Waller pointed out, you know, it's
13:27
Speaker 1: not like these issues haven't already been studied pretty intensively
13:30
Speaker 1: within the FED. So I think the Kevin has basically
13:33
Speaker 1: raised the stakes. And when you underperform after raising the stakes,
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Speaker 1: and then I think you're going to be more subject
13:39
Speaker 1: to criticism.
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Speaker 2: The task forces, I guess they're on the frame up
13:42
Speaker 2: a policy, the balance sheet, financial market functioning, communications, I'm
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Speaker 2: trying to remember inflation, inflation, yeah, which, as you say,
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Speaker 2: all of those things have been discussed at length. Sticking
14:07
Speaker 2: with you Bill for a bit. There's an element of
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Speaker 2: this which is about giving a new chair time to
14:14
Speaker 2: bed in. But I think there's also a specific thing,
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Speaker 2: which I guess is your point, which is if you
14:20
Speaker 2: don't give any clarity on your underlying model for the economy,
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Speaker 2: or you seem to suggest that you're putting it all
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Speaker 2: onto the market itself, then that is what, over time
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Speaker 2: causes a credibility problem, not necessarily today or tomorrow, but
14:35
Speaker 2: over time. And is also there's sort of a there
14:38
Speaker 2: is a coherency problem there because it comes to seem
14:41
Speaker 2: very circular. You know, everything is based on either what
14:45
Speaker 2: the markets are saying or what expectations are saying, and
14:48
Speaker 2: somehow the central bank becomes almost like on you know,
14:52
Speaker 2: left out of the picture.
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Speaker 1: The way I think about it is that mitropolitan in
14:56
Speaker 1: the US works very powerfully through financial conditions. So what
14:59
Speaker 1: the FED affects the bond market, the stock market, the
15:02
Speaker 1: dollar credits, breads et cetera. The impulse from short term
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Speaker 1: rates to the real economy directly is pretty mild, and
15:08
Speaker 1: so you really want financial conditions to sort of get
15:11
Speaker 1: it right about what the FED is actually going to do,
15:13
Speaker 1: because if financial conditions get it right, financial markets can
15:16
Speaker 1: price the data in real time to what the Feder
15:19
Speaker 1: will actually likely do in the future. That makes manitary
15:22
Speaker 1: policy more efficient, and it also makes it more timely.
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Speaker 1: But if you're basically throwing a lot of dust into
15:28
Speaker 1: the air and confusing markets about what the FED is
15:31
Speaker 1: actually going to do, that transmission between the data determining
15:36
Speaker 1: market expectations versus what the Federal actually do becomes a
15:39
Speaker 1: lot more loose, and that basically makes monetary policy less
15:43
Speaker 1: less effective. So I've been an advocate of transparency for
15:47
Speaker 1: a very long time, but transparency doesn't mean for guidance,
15:50
Speaker 1: and I think we have to distinguish between those two
15:51
Speaker 1: different things.
15:52
Speaker 2: Robin As you say, you were a market participant in
15:55
Speaker 2: his press conference when Kevin Walsh was emphasizing that you know,
15:59
Speaker 2: you can't refering to the market, kept referring to bond yields.
16:03
Speaker 2: It wasn't clear to a lot of people whether he
16:06
Speaker 2: was suggesting that that higher level of bond market of
16:11
Speaker 2: yields of long term yields was suggesting that rates needed
16:14
Speaker 2: to be higher over time, or that the bond market
16:16
Speaker 2: was doing the tightening for the FED. I just wondered,
16:20
Speaker 2: how did you read that, because that was one of
16:21
Speaker 2: the bits that sort of was confusing to people and
16:23
Speaker 2: sounded very circular.
16:25
Speaker 4: Yeah, I don't think that was a strong point of
16:27
Speaker 4: the press conference. But go back to twenty thirteen and
16:33
Speaker 4: the taper tantrum. You know, the situation to me as
16:36
Speaker 4: an outsider at the time, I was sitting on the
16:39
Speaker 4: trading floor Goldman. You know, the tenure yield was around
16:44
Speaker 4: one and a half percent, it was very stable, financial
16:48
Speaker 4: conditions were very easy, and we then had congressional testimony
16:53
Speaker 4: from Bernanki in May twenty thirteen that said, you know,
16:57
Speaker 4: we may taper. Q QUI three was running at the time,
17:02
Speaker 4: and this was a big shock because it pulled the
17:07
Speaker 4: rug out from what markets thought was a certain environment.
17:11
Speaker 4: And of course, the dividing line there between transparency and
17:18
Speaker 4: forward guidance is a hard one to draw because you know,
17:23
Speaker 4: when are they going to taper how much? It's actually
17:26
Speaker 4: really hard to say.
17:27
Speaker 2: But if you're clear about your reaction function, I don't
17:30
Speaker 2: think that is the same as forward guidance.
17:33
Speaker 4: Yeah, I guess, but things start to get specific real fast,
17:38
Speaker 4: and I think it's hard to be specific, and so
17:42
Speaker 4: in a way you can't be. So if you are
17:46
Speaker 4: a central bank that is gonna provide less information and
17:52
Speaker 4: let the market do more heavy lifting than it means,
17:56
Speaker 4: there will be more surprises to markets. They won't like that,
18:00
Speaker 4: and it will lead to more volatility and curve steepening.
18:05
Speaker 4: That's exactly what happened in twenty thirteen, and that's what
18:07
Speaker 4: we're seeing now. Is that a negative indictment on warsh
18:11
Speaker 4: I'm not sure.
18:12
Speaker 2: Bill in a deeper sense. Is it too soon to say?
18:15
Speaker 2: At a time he may end up saying a bit
18:16
Speaker 2: more in press conferences, and at some level he was
18:18
Speaker 2: kind of making a point in his first press conference,
18:22
Speaker 2: but for example, in the Jackson Hole speech coming up,
18:25
Speaker 2: he's kind of said he thinks of it as a
18:26
Speaker 2: blank sheet. It won't go down very well if it
18:29
Speaker 2: is a blank sheet. But if he gives a kind
18:31
Speaker 2: of pretty standard speech where he does flesh a bit
18:35
Speaker 2: more out, like he's kind of broader thinking about the economy,
18:38
Speaker 2: I mean, this is all recoverable presumably.
18:41
Speaker 3: Yeah.
18:42
Speaker 1: I mean what I expect is not Keevin Worse to
18:43
Speaker 1: come up and say, oh, I did it wrong, and
18:45
Speaker 1: I'm going to change and I'm going to give you
18:47
Speaker 1: a lot more information going forward. I think what's going
18:49
Speaker 1: to happen is he's just going to gradually give more
18:51
Speaker 1: information because more information is appropriate way to respond. The
18:54
Speaker 1: fact is, if he doesn't give information to the market,
18:56
Speaker 1: people are just going to turn to other FED speakers
18:58
Speaker 1: for that information. It's not as if other officials aren't
19:01
Speaker 1: telling you about what their monitor policy reaction function is.
19:05
Speaker 1: And so I think from Kevin Wirsch's perspective, he needs
19:08
Speaker 1: to talk more also so that he's the one that
19:10
Speaker 1: people actually listen to about what the FED is likely
19:13
Speaker 1: to do in the future.
19:15
Speaker 2: Who gets this right? I mean, I'm sort of thinking
19:18
Speaker 2: about at the Bank of England, we've had the sort
19:20
Speaker 2: of opposite extreme now where everybody is now they get
19:24
Speaker 2: their own separate paragraph in the minutes or even in
19:28
Speaker 2: the statement about the interest rate decision, in massive influx
19:33
Speaker 2: of speaking from and views from all the individual members,
19:37
Speaker 2: which some think of as just being a cacophony and
19:39
Speaker 2: not being very helpful. The European Central Bank you've always
19:42
Speaker 2: had a cacophony in terms of all the governors from
19:44
Speaker 2: all these countries that you can't really control. But the
19:46
Speaker 2: messaging of the leadership has been reasonably clear about we
19:50
Speaker 2: look at these three things when we're thinking about how
19:53
Speaker 2: to change policy. Do you think either the Bank of
19:56
Speaker 2: England or the ECB is getting more right?
20:02
Speaker 1: I like the ECB's approach because I think what they're
20:04
Speaker 1: doing is they're saying, here's our baseline forecast, the staff forecasts,
20:08
Speaker 1: and then their scenarios around that. So there's alternative scenarios,
20:12
Speaker 1: and I think providing alternative scenarios gives you a notion
20:15
Speaker 1: of things evolved differently than our baseline forecasts, Here's how
20:18
Speaker 1: we're likely to respond, and having the alternative scenarios gives
20:22
Speaker 1: market information about how the central banker is like the
20:24
Speaker 1: reactive things turn out differently than the central bank has forecast.
20:28
Speaker 1: I was part of the group of thirty paper that
20:30
Speaker 1: we published in April this year which made series of
20:33
Speaker 1: recommendations for the FED. One was to eliminate for guidance,
20:36
Speaker 1: for example, but the other was to actually provide more
20:39
Speaker 1: information about the staff forecast and scenarios to get people
20:43
Speaker 1: a little bit away from the Summary of Economic Projections,
20:46
Speaker 1: which is so focused on the modal forecast, as if
20:49
Speaker 1: this is the forecast, it's actually likely to be realized
20:51
Speaker 1: in the future.
20:52
Speaker 3: If you go back and look.
20:53
Speaker 1: At the track record of the SEP, it's pretty terrible
20:56
Speaker 1: in terms of what's actually happened rather to the SEP forecast.
21:00
Speaker 1: So I think having scenario analysis, which gives people a
21:03
Speaker 1: broader set of information about how the fedieser would respond
21:07
Speaker 1: different things turn out to be more important or less
21:09
Speaker 1: important than they expect, would be helpful.
21:12
Speaker 2: Robin, do you see any better models out there?
21:15
Speaker 4: So I have one story that perhaps is relevant, which
21:19
Speaker 4: is many years ago at Goldman I was also put
21:23
Speaker 4: in charge. In addition to running the FX team, I
21:26
Speaker 4: was put in charge for covering Canada. And this was
21:30
Speaker 4: not a promotion because no one ever wanted to cover
21:34
Speaker 4: poor Canada.
21:35
Speaker 3: I did that too, Rob, I had the same.
21:36
Speaker 2: Experience and you didn't do so badly, so you.
21:40
Speaker 4: Know, well, Bill, then I am in good footsteps. But anyway,
21:45
Speaker 4: so Canada did a rollback of forward guidance. After Kearney
21:52
Speaker 4: was the Bank of Canada governor and his successor was
21:55
Speaker 4: po Laws and a lot of what is playing out
22:00
Speaker 4: now at the FED played out exactly back then for Canada.
22:07
Speaker 4: There were a lot of criticisms that we don't know
22:11
Speaker 4: what's going on, what is the reaction function, who do
22:14
Speaker 4: we listen to? Market volatility went up. He also cast
22:19
Speaker 4: doubt on the inflation metrics that the Bank of Canada
22:22
Speaker 4: was following and introduced a bunch of new ones. So
22:24
Speaker 4: there's lots of parallels there too, And in the end,
22:28
Speaker 4: I think that episode was navigated with markets pivoting to
22:34
Speaker 4: new inflation metrics, data sensitivity what I refer to just now.
22:38
Speaker 4: For treasury yields went up, so markets learned, but it
22:42
Speaker 4: was an adjustment. And of course we have another such
22:45
Speaker 4: episode which also involves Mark Carney because he's been in
22:49
Speaker 4: so many central banks, which is the Bank of England,
22:52
Speaker 4: and the shift to Governor Bailey also has involved plus
22:56
Speaker 4: four guidance and this cacophony Stephanie that you mentioned. I
23:00
Speaker 4: am a fan of that because I think it is transparent. Now,
23:05
Speaker 4: of course, it means you've got more voices, but the
23:10
Speaker 4: market is a very smart animal and it'll figure out
23:13
Speaker 4: who are the voices that we should listen to and
23:15
Speaker 4: who are the voices that we can safely ignore.
23:18
Speaker 2: Well, and Mark Carney of course won't like to be
23:20
Speaker 2: reminded of any of this because when he went to
23:22
Speaker 2: the Bank of England he then had a not very
23:25
Speaker 2: good experience with forward guidance, became known as the unreliable
23:28
Speaker 2: boyfriend for not sticking with his promises. But that's all
23:32
Speaker 2: forgotten now now he's holding up the global liberal order. Okay,
23:36
Speaker 2: we've basically run out of time. I guess it's worthwhile
23:39
Speaker 2: sort of stepping back a bit, especially for those who
23:42
Speaker 2: last tuned into this topic, worried about this Trump pick
23:48
Speaker 2: putting the entire institution of the FED at risk, potentially
23:53
Speaker 2: getting rid of all of the giving into demands to
23:56
Speaker 2: sack lots of the regional governors. Some were seeing in
24:00
Speaker 2: a big reduction and interest rates beyond what the economy
24:03
Speaker 2: would could justify when this new at that point unnamed
24:08
Speaker 2: chair came in. I mean, I guess you could say, Bill,
24:11
Speaker 2: the fact that we're sort of talking about lack of
24:13
Speaker 2: clarity around his thinking on the economy and teething problems
24:18
Speaker 2: potentially and this sort of new regime that he wants
24:21
Speaker 2: to see, I mean, that's kind of a win relative
24:23
Speaker 2: to the sort of much kind of bigger political risks
24:26
Speaker 2: that we were talking about a year or six months ago.
24:30
Speaker 1: Yeah, but those risks aren't having completely gone away. The
24:33
Speaker 1: Lisa Cook case is still live and well there has
24:35
Speaker 1: been a hold up in the naming the Atlanta Fed president,
24:39
Speaker 1: which is interesting and be interesting to see who actually
24:42
Speaker 1: gets that slot. And so, you know, I hope that
24:46
Speaker 1: the FED isn't politicized, and I think it's Kevin Warsh's
24:49
Speaker 1: interest to act in a way to show that it's
24:51
Speaker 1: not politicized. And I think he said all the right
24:53
Speaker 1: things about central bank independence and his commitment to.
24:55
Speaker 3: Keep inflation at two percent.
24:57
Speaker 1: But you know, at the end of the day, people
24:58
Speaker 1: will be judged by action rather than words, and so
25:01
Speaker 1: we'll have to wait and see how this plays out.
25:03
Speaker 1: I mean, my advice to him is to do your
25:05
Speaker 1: job as best you can and to out the president
25:08
Speaker 1: because you have the job today. That's the only way
25:11
Speaker 1: to success. If you start to listen to the President,
25:14
Speaker 1: then start to try to lean in his direction, and
25:17
Speaker 1: if people you sort of get wind of that, thery
25:21
Speaker 1: b and some difficult I mean, just though the whole
25:23
Speaker 1: story about President Trump's phone calls with Warsh just raises
25:28
Speaker 1: a question that I think if I was the FED chairman,
25:31
Speaker 1: I wouldn't want to have that question raised.
25:34
Speaker 2: Just as a last point, how much of that is
25:35
Speaker 2: kind of also embedded in some of the pricing in
25:39
Speaker 2: markets or do you think it's just much more focus on,
25:43
Speaker 2: for example, the fiscal the debt situation.
25:46
Speaker 4: Definitely. We did one of these podcasts two months ago
25:48
Speaker 4: with John Authors on the global debt situation, right, and
25:51
Speaker 4: I think since then, the situation around Japan has gotten worse.
25:57
Speaker 4: We are seeing long term meals and the United State dates.
26:00
Speaker 4: So if you look at, for example, the ten year
26:03
Speaker 4: ten year forward treasury yield, it's the highest in twenty years,
26:07
Speaker 4: with the labor market data that are not red hot
26:11
Speaker 4: and inflation data that are reasonably okay on a month
26:15
Speaker 4: over month basis. So I would say we are in
26:20
Speaker 4: an era of major fiscal dominance, and I think what's
26:24
Speaker 4: happening is a symptom of that.
26:26
Speaker 2: But if the market was expecting, on balance, a Trump
26:31
Speaker 2: selected another, a new Trump selected head of the FED
26:36
Speaker 2: to be a bit more kind of inflation biased or
26:40
Speaker 2: willing to tolerate more inflation, do you think that's still
26:43
Speaker 2: there the expectation.
26:44
Speaker 4: I think the market thinks it. The best illustration is
26:48
Speaker 4: that we went into the July m C meeting on
26:51
Speaker 4: the twenty ninth of July pricing ten basis points in
26:55
Speaker 4: hikes after a CPI report that was flat for a month,
27:00
Speaker 4: and so the odds of a hike at that meeting
27:05
Speaker 4: I think were very low. And the fact that the
27:09
Speaker 4: market went into that meeting pricing a forty percent probability
27:13
Speaker 4: of a hike, the market here basically is daring worsh
27:19
Speaker 4: You know, okay, you do Trump's bidding, but we are
27:22
Speaker 4: going to push you into hiking. And so that is,
27:24
Speaker 4: in my opinion, the standoff that we have, and it's
27:27
Speaker 4: it's an interesting decoupling and politicization in my opinion of
27:32
Speaker 4: market pricing at the moment, because people are reading something
27:36
Speaker 4: into wash that may or may not be true. I'm
27:39
Speaker 4: going to be a glasshoupful guy on that.
27:42
Speaker 2: Let's stick with the glass helpful. I'm sure Kevin wesh
27:44
Speaker 2: will be listening to the advice from one form of
27:46
Speaker 2: New York Fed president to the current chair, Bill Dudley,
27:49
Speaker 2: Robin Brooks, thank you so much, thank you, thank you,
27:58
Speaker 2: thanks for listening to Trump and from Bloomberg. It was
28:01
Speaker 2: hosted by me Stephanie Flanders I was joined by Bill
28:03
Speaker 2: Dudley and Robin Brooks. Trumponomics was produced by Moses Adam
28:08
Speaker 2: and Samosadi, with help from Ammy Keane and sound design
28:11
Speaker 2: by Blake Maples. Cheryl Brumley is Bloomberg's head of podcasts
28:16
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Speaker 2: us very highly wherever you listen