Richard Clarida on the Fed Decision

they will come down. We'll know in a couple of minutes that they'll come down on the side of doing a twenty five basis point high. I think if they do that, I think it'll be a dovish twenty five. I think they're going to want to preserve optionality, and almost certainly, either in the statement or the press conference discussion, will acknowledge the uncertainty and probably the increased tightening of financial condition. So I think that's where they'll land. Let's

talk through it piece by piece. You've got the decision, but that's only a small part of it. As you've indicated, You've got the statement, the forecast, a news conference. Rich In the statement, there is this line here about ongoing increases. Do you expect that to disappear in about twenty five minutes? I think yeah, I lean in that direction. I think it will. I think it will. Certainly, if they want to go in the dovish twenty five direction, I think

it'll disappear or be modified in some way. Rich. Do you think that that's the likely outcome? We were speaking earlier today with Betsy Duke, a former Fed governor, who said that she thinks the big surprise is going to come with a statement of economic projections where they increase them in tandem with what they said they were going to do, what seems like an eternity ago. Yeah, you know, so much has happened in three months. So much has happened in three or four days. All eyes on the SEP.

That being said, Lisa, you know, sometimes Fed chairs, whether or not they be Bernanke, Yellen or Pal, can distance themselves from an SEP that they're not aligned with, depending on where the SEP lands today and the message the chair wants to send. We could see that as well. It's very finally balanced. I think only two of the eighteen. Remember lel Brand is now off the White House only two of the eighteen dots would need to shift up in order to get those the overall median dot to

shift up. So I think it is very finally balanced on the projections. What would you do, Rich, if you were on the FED, what would you vote for? I would go for the twenty five. I think that inflation is too high. I think that if I think that it would be, it will be challenging to pull off a pause right here in particular. You know, the whole issue that can come up we confronted three years ago. You know, what do they know that we don't know? So I do think they'll go for the twenty five again.

I enjoy doing your show thirty minutes before because we'll find out where we land. Maybe I'll do a postgame someday, Rich, we should do a post game stick around. We can do that today. I want to follow up just on the psychology of this. We talked about this in the last couple of weeks at the FED. Did they really

know things we don't know about the financial system? When chem And pass sits there in that news conference, it's just under an affrom Now, Rich, does he know things that we don't know about what's happening in the banking system right now? Well level, sure, the FED directly regulates and supervises thousands of banks, that has supervisors and examiners, you know, on the grounds as it were. Not all of that goes up, you know, on a daily basis to the chair, to the governors or the vice chair.

But sure, part of what part of what the Jet Fed does is that it supervises bank holding companies, So it knows a lot about the banking system for sure, an individual bank. You might need a PhD in psychology to understand some of this rich but I do wonder what the psychology if the decision is today. Do you think they look at this and have an understanding that for some people out there, the more duvish they are, the more worried. Some other people might be, well, well,

that's right. And I do think Lisa and John that the reality is is that, you know, initial conditions matter. If we were several years ago and we not had this overshoot in inflation, I think the power or the the yelling or the Bernankee Fed could well could well pause at a meeting like this. But the history is what it is, which is inflation is too high. The data since the beginning of the year has been too high.

And remember the Fed acted very boldly just days ago to put in place a very appropriate, but bold liquidity program, and I think they believe that that can address the immediate issues in the banking system, the so called separation principle. They'd like to use rates to address inflation and use their other tools to address financial stability concerns. How do they finesse the byproduct of this, which is a three

hundred billion dollar expansion of their balance sheet? Well, I don't know if you can, Lisa finance a three hundred billion The balance sheet is actually now moving in There are different forces on the balance sheet. You have the facilities which inject liquidity. The Treasury is running down its TGA account that's adding liquidity. On the other hand, you have this reverse repurchase facility that's draining liquility, and then you have QT. So there are a lot of moving

parts here. I think today will be status quo. I would be surprised if we see an adjustment in those parameters. But over time, if this liquidity provision with these new programs, then at some point they will probably have to address it. Tiffany Wilding of PIMCO came out and said that regardless of whether they go twenty five basis points or nothing, this is probably going to be the end of the rate hiking cycle. Do you agree with that? And what

is going to be the justification of that? If basically we heard from if A chair J. Powell just weeks ago that they're still pretty far away from their goal, well, they are far away from their goals. I think it will be data dependent. It sounds tripe, but I think

in this case it's true. One thing I would say is that whatever you thought about the tightening of financial conditions before SVB and Credit Swiss and the like, clearly we're going to have tighter financial conditions going further and historically when bank lending is impacted, as it will be, I think going forward that's going to slow the economy, and I think the Committee will take that into account. The real question is when does that start to show

up in the data and on their radar screen. So what do you think he'll say if he's asked today whether the recent instability is disinflation rate? Do you think he'll address that straight on head on Jay's J J. Pale's a straight shooter. I think he will. I think I think what he would likely say to a question like that is the FED monitors broad range of indicators on financial conditions, and I think he would put it in the context or broader financial conditions, probably not wanting

to single this out in particular. Rich. One thing I've said over the last couple of weeks, in fact, the last week particularly, and I'll ask this question of you as well, when they discussed the totality of the data, does that include bank stocks? Now? Bank stocks? Do you mean bank bankityan equities? Yeah, well, obviously I'm not in the meeting. I don't know. I think financial conditions come up quite regularly. Whether or not they would hone in

on bank stocks, I'm not sure. Let's get to our next guest, Pre Miser, the head of Right Strategy over at TD Securities. Pre I wonder for to catch up you decision thirteen minutes away, twenty five or pause when two weeks ago it was fifty or twenty five? What

a change it has? Indeed, and I think you've seen the tightening in financial conditions and expected tightening in bank lending standards, you know, but we think the market's eighty percent price for twenty five, that the FED goes twenty five. It's all about the communication beyond. But you know, beyond just looking at a sort of the dot plot, we're actually going to be looking at, how does see SEP lineup with the dot plot? You know, the economic outlook

is extremely uncertain. If we get a sense of the FED reaction function, you know, how would they respond if inflation is a little high but the unemployment rate starts to rise. I think that's what I'll be watching. I think we have to be extremely number, but we do think that they're going to hike. They're going to try and separate liquidity facilities from essentially monetary policy. I do

hope chap Howe sells that BTFP program. It's a very generous program, you know, I think talking about sort of removing that stigma, if any stigma exists. I hope Chapow is able to say banks access this, it's against treasuries, it's against mortgages. And here, you know, let us focus on inflation. Pray lace or I just then we're talking about Christine the Card, the ECB president earlier on today. No trade offs between price and financial stability, we will

not entertain trade offs. The ECP has plenty of toes to address financial stability risks. Can you imagine chairman powers and the same thing in around about forty two minutes. Yeah. I struggle with that a little bit because how does monetary policy flow through the economy. It does throw through the banking system, and it does through essentially financial markets. When the banking system is constrained, when financial markets are sort of seizing, freezing you can use your favorite term,

you know. I think then it's very hard to sort of disentangle the two. I mean, I think we have a clear inflation problem. It's not clear how sustain the banking crisis will be. So I think chappower to separate the two entirely, I think would be very risk negative, would make people get nervous that the effects going to overdo it. I'm hoping he can use the data dependence, the idea that we've got these tools but we remain watchful. I'm hoping he can sort of not sound too blase

about about financial stability here. How do you translate financial instability with some sort of equivalency in rate hike. It's very hard, It's the same thing I struggled with with QT as well. These are nonlinear effects, you know, small tightening and financial conditions, I would argue, is what the FED wants through heights when it's disorderly, when it is too much, I think that's when it starts to impact

the economy in fairly nonlinear fashion. QT is similar. So I actually don't like the comparison because you know it would be it's assuming some sort of linear relationship between tighter financial conditions and rate hikes. It's really when it becomes too much, so very hard to model. I think

it's something we're just going to have to track. We're going to have to track things like deposit flows, lending, you know, bank lending, things like that to get a sense of how is this financial crisis sort of feeding through into the real economy. If FED share j Howard comes out indicates twenty five basis point, they're going to hike by that and there could still be additional right hikes down the pike, how much is that reprice the market? That is pretty much counting on rate cuts before the

end of the year. So I think the one year, two year part can absolutely reprice because I think we have to understand there's a different threshold for the FED to stop hiking as if there is to start to ease. So I think that zero, you know, the very front end can move in my mind, the five year, the ten year, that's much more a view of where's the economy. I mean, we were in the hard landing camp even

before this. Now I guess we're in a harder landing camp because now you've had that tightening in bank lending standards or you will have that. So I think the actually the long end might rally, meaning you know, long end rates might actually fall because if the FED is not going to have the flexibility to be responsive to the tightening and financial conditions, that's actually going to make

things worse for the economy. So I think only the very front end is going to be extremely responsive responsive to a hawk ish FED. The long end is going to I think it a harder line. Then if you watch this tune again in Life on TV and radio, we kind of get down to a FED decision about

nine minutes away. Alongside us, Premisra of TD also waits in patient lead the form of FED vice chat Richard rich Just to bring you back into the conversation, we'll be talking about how high the hurdle rate might be, the bar to kind of interest rates Rich How high do you think the bar is to cut rates at of FED. Well, I think it's higher than it has been in the last thirty years, when the FED was quite responsive when there was any rise in unemployment, and

so I do think obviously I agree with Prea. I think it's not only something they will do, it's something they should do. Is to acknowledge that there will be additional tiny and financial conditions as banks add liquidity. And I think banks, either of their own choice or with the encouragement of supervisors, will be adding more liquidity, which means slower loan growth. But I also think that the FED message from ten days ago still relevant. I think

they will I think they will be patient. That said, once we do start to see the labor markets often unemployment to go up as the FED projects, then we could see a pretty rapid decline and underlying inflation, and I think they would be data dependent and respond to that too. But I do think the bar has higher, Jonathan than it has been in the past thirty years.

How much damage do you think has been done in the last couple of weeks, and Rich the reason I asked that, I'm very aware of how quickly things have

moved in just two weeks. Two weeks ago, Chairman Poals comes off his second day of testimony on Capitol Hill, opening the door to fifty basis points and bank here we are talking about rate cuts and whether they hike or not at all today, and Rich, I'm trying to stay open minded about the prospect that maybe regulators authorities come out with a solution for the banking system and then all of a sudden we're talking about the things

we've been talking about two weeks ago. Is that on the mind of these policymakers, and if it is, what's the prudent course of action for them today? Well? I do think it's on their mind. I think it should be on their mind. I think the way they'd like to see this go is by providing very out as said, very ample and generous liquidity. They think that banks can

and should take advantage of that. But I think at the margin, many of the banks that we're talking about are probably going to have to slow their loan growth in order to have a more liquid balance sheet, and that will have to factor into the projections. Perhaps not at this meeting, but certainly as we go through the year. We were talking about how potentially we could see a much higher inflationary regime for a bit longer and the FED would have to go further in terms of a

terminal rate. Perhaps the further in terms of eternal rate isn't as much on the table now as it was two weeks ago. But do you think that overall growth expectations need to come down because of some greater degree of structural tightening by some of these regional banks. Absolutely, you know. I think if you look at market pricing, we're not pricing in a hard landing by the end of next year, after all the cuts of the markets pricing and we're pricing and fit funds at three percent.

So I would argue that the markets pricing in, you know, an early start to rate cuts, but then some soft landing by the end of next year. If you have to incorporate the lagged effects of monetary tightening, the fact that now we're going to have bank lending tightening, I think you're supposed to price in a decent chance of a recession, which means that the fat funds rate may

have to go well below three percent. You know, I don't know about zero, but perhaps the fat is to go one percent two percent, and that's not priced in, Which is why I still like the long end of the treasury curve, because I think, as you know, the savings buffer of the household sector starts to come down the household sector, the business sector is going to need loans, and if the banking sector is pushing back, that's not going to happen. Rich I'd love you to weigh in

on that. Do you agree with prayer there that you could see a fat funds rate that goes back to one or even maybe two percent, but even one percent after all of the discussion around a higher inflationary time, Well, well, of course you could. I think you know there are always there are probabilities involved, and and certainly you know there are scenarios where you end up. I guess I'd like to put on the table a scenario which probably

would be a recession scenario according to the NBER. But we could have a rise in the unemployment rate of a point and a point in a quarter, a slowdown on GDP growth, with unemployment ending up in the floors. You know to me, that would be a pretty softish landing, even though it could technically be a recession. So I think there's a wide range of scenarios now, probably wider than we've seen in decades, and I think that's just going to be a fact of why for the foreseeable future.

Rich One question Tom asks quite often every time we do this, and we miss him today. Of course he's decided to take this week off of all weeks. Tk's going to be back with this next week. We do miss him. Of course, the more I say, the more people will believe me. Right, keep just keep going, Get it again, all right, let's Rich, I'll get to the question. The question that Tom would often ask is why there

isn't any descent on the committee? Is today the kind of day we would expect someone to put their hand up, Rich and just say, I don't see it this way, We need to pause? Great question, I well know, and five minutes I don't think so, because I think if there's going to be a dissent, people would telegraph it in their speeches and commentary. And Jay Pale has done a remarkable job of keeping a very diverse committee together. We could well see a dissent, but I don't think

it will be today. What is the reluctance to dissent on the committee? What's behind that? Do you think? Well? Descents are people are not reluctant to dissent, especially reserve bank presidents. If you go back, really you'd have to go back to vulgar years when you actually had governors and indeed, in some cases vice chairs descending. So for variety of reasons, maybe we can discuss on a future show.

Governors are are more hesitant to dissent on a monetary policy decision, but reserve bank presidents can and do dissent, and during my time there, we had dissents from from three reserve bank presidents on some rate decisions. Rich, You're absolutely welcome back anytime. I just want to throw that out there and we can discuss all about governors and the difference prea before we get to the decision, which

isn't about two and a half minutes away. Any final thoughts on what we should be looking for in terms of the ruttoric, in terms of the statement, in terms of the projections, So obviously what they're going to do with with rate hikes, we're going to be watching that medium dot. I would also look at the distribution of those dots. How many are five, seventy five or six? You know, is there a hawkish bias to the distribution, and then link that the dot plot to the economic focust.

If they lower the unemployment rate and they increase the inflation number, but they keep the median dot unchanged, that's a dublish reaction function. So it's really about communication going forward, you know, trying to understand the reaction function as we know that the economy is going to look very different, you know, three to six months from now. Rich just one quick one to a journalist the fivor what would you ask in that news conference in thirty two minutes?

What keeps you up at night a lot at the moment, it could be literally everything you're sleeping exactly, Richard, thank you, Grey to catch up with the Richard Clouder preemisra