Bloomberg, Audio studios, podcasts, radio news. Former New York FED President Bill Dudley, writing in his new column that just dropped across Bloomberg, the FED can and must at times make assumptions about what politicians will do. When the Trump administration's tariff and deportation policies come in to focus, that outlook may become less rosy. Bill Dudley, I'm so pleased to say joins us now, Bill, thank you so much
for being with us. Let's just talk about how a FED comes up with a dot plot looking into twenty twenty five without making some assumptions about what the policy backdrop is going to look like.
I think they are going to make assumptions.
I think they're going to assume that the twenty seventeen text cuts do get extended. So I think what Paul said at the last press conference, you don't guess speculator to assume, is actually contradicted by what they actually did in December twenty sixteen when they did include the fiscal policy students that they thought was going to be enacted by the first Trump administration that was in the forecasts.
So I think, you know, they have to assume it when it's big, when it's likely, when it's sort of clear what it's going to be, and when it's priced into financial markets. And I think that's true for the for the extension of the tax cuts. It's not true for terrorists or immigration policy, because it's very uncertain about what those policies actually will be at this point.
Bill, do you think that that's why it's more important to look at, say tax cuts than some of the other policies. They could potentially have contradictory effects on inflation and growth.
I think the real problem on terrorist is you don't know how big they are, how long they're going to last, what the whether it's going to be retaliation, and on deportations, you just don't know the magnitude or speed of what the program is going to be. And so if you don't know what it's going to be, it's really hard to put it into the forecast as in terms of its likely effects. Well, I think the text so I think the tax cut assumption is going to be in there, but nothing else.
Well, when it comes to terrorists is September twenty eighteen, Tealbook talked about the fact that in the first iteration of Trump they just saw the terroriffs as a one hit threat. You agree with that assessment, and do you think that would still hold today for this FOMC.
I don't think you're gonna make any assumptions on terror shick because we just don't really know what the administration is going to do. I think the big difference, though, the terrorists that we're done in the first Trump administration were actually relatively small. The total tariff on an importse one from one and a half percent of imports to three percent of imports during the first Trump administration.
We're talking about much bigger numbers.
Now, we're talking about ten, twenty percent, sixty percent against China.
So Magatue may be much greater.
But we're not really sure is this just a threat or is it actually going to turn out in terms of substance.
So, Bill, what we essentially have is just then corporation of tax cuts and missing out on two key pillars of Trump's policy going forward, immigration and at the same time, tariffs. I know that this is a sacrilegious question, so you'll have to forgive me, but are the dots even useful this time around?
Then?
Well, I think what's the problem with the dots is you're going to have an unusually rosy FOURK because it doesn't include some of the more controversial economic policies that could really change the outlook with respect to growth, inflation, and proctuvity. You know, higher tariffs, deportation is going to be disruptive to the economy. It's going to tend to push inflation up, it's going to push growth down, and that's just not going to be in the forecast.
At this point. Bill, what's your base case for how they're going to sort of telegraph some sort of pause or some sort of adjustment to the process of rate cuts in twenty twenty five.
Well, I think I'll be done in a couple of different ways.
Number One, the number of rate cuts that they show in twenty twenty five will go down from last time. Last time in September, they had four ratecuts, four to twenty five base point ratecuts in twenty twenty five, so this time will be two or three.
And Second, I.
Think I'll talk about how inflation is a little bit sticky, the economy is doing really well. You'll probably see some upper revisions of the FED estimates of so called our star, the neutral rate, so I think all those things together will make it pretty clear that you know, January is probably going to be a pause, and that's really what's in the markets. Markets are very certain about December being a cut, and they're pretty certain about January being a boss.
Bill, what's your take if you were on the FMC, where would your dot be, what would you be looking for for next year? And what the bigger concern is inflation or weakness?
Well, I think the big place where I would probably diverge from the consensus of.
The committee is on our star.
Right now, the media estimate or our star is two point nine percent, So the Feds basically show the federal funderrate going to two point nine percent in the SEP not in twenty twenty five, but in twenty twenty six and twenty SEP twenty seven. I'd have a higher ur star, probably something in the order of three and a half percent, maybe maybe a little bit of higher. So I would not have as much cumulative easing of manitary policies what the Fed will have, and.
That seems to be where the market's at right now. Certainly as well. Absolutely, Former New York Fed President Bill Dudley, thank you so much. For being with us,