Andersavanns this morning, the Fed remaining patient.
We're headed back down toward normal. The question is, of course, are we normalizing or are we weakening? Those are two very different things.
Underneath the hood of the labor market report.
There's a little more room for confidence, confidence that we're slowing but not falling off a clear You know.
That I believe that we are restrictive. The longer we were restrictive, we're going to have to start thinking about the employment side of the manding.
So here's the latest FED officials refusing to overreact to last week's payroll data, Former New York Fed President Bill Dudley suggesting that patience might be misplaced right in this the Fed's wild ride has only just begun. A deteriorating labor market tends to be self reinforcing. The longer the FED weights, the greater the potential for damage. An immediate rate cut is in order, but that's very unlikely. Prepare for more volatility in stock and bond markets. Bill joined us.
Now for more. Bill, let's stop the market. Then we can get to the fed lack of response to it. What suggests to you that this is self reinforcing? This is the beginning of something much worse.
Well, a couple of things. Number one, we've seen a rise in unemployment claims. We've seen a drop in the hire's rate. We've seen a drop in the quits rate. It looks to me like the labor market is cooling off quite significantly. We've also triggered a so called samrle where if the unemploying rate rises by more than a half a percent of ver a twelve month period. Every time that's happened, we've ended up in recession. So there's a lot of risk out there to the downside in
terms of the labor market. On the other side of the mandate, the inflation news has been very, very good recently. So it seems to me that the Fed needs to hold both sides of the mandate with equal weight right now. And that implies that monetary policy should be neutral, not restrictive. And we're a long way from neutral. I mean, people don't know exactly what a neutral monetary policy is precisely, but nobody thinks that five and a quarter five and
a half percent federful fund trate's consistent with neutral. Probably somewhere in the three four percent range is where the Fed should be.
Bill, You've had an enormous influence on how people are thinking on Wall Street about what's ahead. So I want to ask you, if you think an immediate weight cut is not on the table, that they won't move into meeting, what would you recommend they should do in the next few weeks.
I think what they should do is change the messaging a little bit and make it very clear that they're now focused more on the liver side of the mandate. Get the market to a tune to the notion that if we get weak data over the next six weeks that fifty basis points is highly likely. At the September meeting, you can put fifty basis points firmly on the table if the data can flow continue in the same direction.
And do you think that'd be willing to do that? This has been a very backward looking FED and now they need to regain control of the narrative. Do you think that that by itself at Jackson Hole for example, would be enough to regain control of the narrative.
Well help a lot, because if the FED, if people feel that the Fed's got it finance, so conditions will become more accounted. Stock market recover and he'll provide support. You know, the problem here is when the labor market starts to deteriorate, confidence starts to decline. We saw that over the last couple of days, you know, the big, big change in market sentiment. And when market sentiment TOTERI rates, that can be self reinforcing. People start to pull back
on hiring, people pull back on spending. Next thing, you know, the unemployer rate hasn't gone up a half a percent, has gone up a full percentage point or two percentage You're in recession now. The good news here is that, you know, we if we have economic weakness, the FED has plenty of firepower. They have their long way from zero percent short term rates, so the fifth can respond
pretty aggressively if needed. And I think you know, my view is that the risk that they're going to need to respond aggressively has increased significantly in recent weeks.
Well, I just want to put a fine point on that, because you did write about two weeks ago, before the FED decision, before we got the jobs data, that not going in July would increase the risk of recession, and all of that happened. So just how acute is the risk at this moment.
Well, I think that what's happened is there's quite a bit of stress in a couple areas of the ecomomy. Number one, low income households are really feeling it, both because they're tapped out the savings that was generated by the fiscal transfers during the pandemic. And two, they're the ones who pay the higher short term interest rates in terms of credit card debt and not alone debt. And number two, we're seeing softness in the housing sector, especially
in multi family construction. So you're seeing areas of weakness that are leading to softer labor market. And that's a softer labor market, though, is the key thing. If it frightens consumers, then you have weakness and consumption and the thing becomes self reinforcing.
I think the confusing thing for a lot of people bill is for every week point, there seems to be a strong point for every issue. At Airbnb, there is a disney that can raise prices. There is an uber that people are willing to buy. How do you distinguish between a lower end consumer that's dropping off a cliff and one that has just gotten more picky with where it spends its money.
Well, it is difficult to sort out. And you know, high income consumers are doing pretty well. I mean, they've locked in low mortgage rates. They have been the beneficiaries of a very strong stock market. Even after the recent decline in the stock market's still up quite over ten percent this year. So the high end consumer is feeling pretty good about things, but the low end is not. The other thing, of course, is also what's happening on
the investment side. The Biden administration had a number of initiatives that boosted investments, spending, infrastructure, chipsacked climate, and the question is what's the impetus from investment from those programs. Has that peaked or not? And if that has peaked, that's another source of potential restraint in coming months.
It's great to can't shot with this, sir As always appreciate the comments this morning, Bill don't be there. The former New York Fed president Mohamma, I just want to get some fun of thoughts from you. How off site do you think we are on rates when we've spent the last two years to banking, whether we're sufficiently restrictive.
Well, if you just listened to what Bill said, and I listened very carefully to what he said about the labor market. If he's right, we're quite offside.
Are way too restrictive, like one hundred basis points off side?
Yeah? I think the more interesting debate is where where's the destination? And I think there's major major differences of us here as to what is ultimately to destination. Is it in the fours or is it below three?
Well, the market in the moment certainly focused on the path. You're focused on this. I've just in the peace that's just dropped Maham's just published in Bloomberg Opinion. How do you do that at the same time as this waiting in vain for a vocal moment? You say the system needs a vocal moment. What is that volcan moment?
Well, every time central banks blink, the Bank of Japan blink this morning, the markets take it further, so it makes the next episode even more difficult. I think a vocal moment is having the courage, as Paul Volker had in the nineteen eighties, to say, I'm going to break a certain mindset once and for all. And he broke the inflating mindset once and for all. But no one right now wants wants to be the source of that vocal moment.
Do we need to see something a lot worse, something like mine, but even more to shake the fad from that to get them to do what you're talking about.
Yeah, I think I do. But you also need someone who is confident enough to be able to say I'll see it through. And that's what we haven't had.
So so you don't sound you don't sound like you think that they will change to get where they should be.
No, I don't. I think we're going to continue playing this repeated game until something bad happens, but this repeated big game can be played for a while.
Does need to communicate the destiny Stin Jackson Holle, He absolutely needs to do that. How does he do that? What does that look like? What does it sound like?
He'll say, we've looked at this. This is what our instincts are right now for where we're going. We're going to be going down that path, but we will course correct as we get more information. But you need desperately to anchor this market. John Muhammed appreciate it. Just fantastic. You've nailed the turn in this economy