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Stocks are bouncing up by zero point seven percent on the S and P five hundred on the nasdack up by one full percentage point catch up trade at the bond market, yields lower after a three day weekend. Here Stateside, we're down by seven basis points on twoes, We're down by close to eight on tens, full forty eight on tens, and just about holding on to five percent on a thirty year under savannahs this morning, reforming the Federal Reserve.
I will lead a reform oriented Federal Reserve, learning from past successes and mistakes, both escaping static frameworks and models and upholding clear standards of integrity and performance.
So here's the lisis. This morning, Fenchha Kevin Walsh, preparing for his first week leading the Central Bank, has investors price in higher for longer rates. The former New York Fed President Bill Don't be writing. The providing wisdom is that the Fed will tighten monetary policy later this year. Bill joined us now for more, but welcome to the program. I enjoyed the pace. I just want to get one important line in there, whether it's credible for this feder
reserve to say that monegy policy is indeed still restrictive. Bill, what's should time film that?
I think you have to look at the commune's performances over the last few years. We've been at this level of interest rates are higher since November of I think twenty twenty two, and yet the e commute is continue to grow. We're still at full employment. So where's the evidence that mantre policy has actually been restrictive. If it'd been restricted, the emmote should have slowed down, the unemployment rates should risen. So I think the case for cutting rates now is actually very very weak.
Given that bill. There's a real question here about the housing disinflation that people point to as well. As we haven't seen wage inflation accelerate. In fact, you've seen it decelerate. We've seen the worker not participate as much as companies in terms of just their profit margins. At what point does the FED have a right to keep looking at that rather than the overlying GDP growth.
I think they do have a right to look at that. I mean, I think the big question is is if is the tax refunds that have boosted people's disposable income over the last few months the key driver, and as we get to July, August, September, we'll consumer spending turnover or is the fact that financial conditions are so easy? Is that going to be the dominant influence in terms
of supporting consumption and economic activity. I think the wage trend is something that is positive in terms of those who think that inflation can come back down to two percent, but that could turn I think the problem here is that we've been above the Fed's inflation target for more than five years, and there is a risk that inflation expectations do finally become unanchored. And the University of Michigan primary result last week showed that five to ten year
inflation expectations did tick up quite marketly. Chris Wallers focused on the two year inflation outlook two years two years forward that's also moved up. So I think the FED is concerned that they're starting to lose credibility because they haven't been able to get inflation back down to two percent.
How much is this Fed sort of conditioned by the pre pandemic reality of low rates in a way that has made them overly dubbish to meet the moment and frankly having to reconcile their overly dubbish stance with fundamentally stick your inflation as a reality.
I agree with that. I mean, I think that if you look at the level of real rates prior to two thousand and seven, the real rate embodied in the tailor roll, for example, it's two percent. The FEDS assuming today that the level of real rates justed for two percent inflation is one percent. So it's very possible that you know, matre policy today is not restrictive at all because real rates are higher, and there was a reason
to think that real rates are higher. Look at the investment spending boom caused by the AI that's raising real interest rates because of increasing the investment demand in the economy. The fiscal path of the US is also raising real rates because it's diminishing the supply of savings available for investments. So I think there are reasons, there are good reasons of things that real rates are higher than they have been in the recent past.
When you have Christopher Waller saying that his current policy position is to hold rate study for the near term because policy risks have change, do you find it interesting that he was able to look through the potential tariff impact on inflation, but he's not when it comes to the oil shock, well, I.
Think they're really the same in terms of both being likely to be transitory. The real question though, is how does it get bodied in inflation expectations, And I just think the FED is sort of pushing the limits of their credibility to claim that trust us that we're going to get inflation back down in two percent when we haven't been able to do it for the last five years. So I think he's getting nervous that they can't sustain this. There's also a big risk here. I mean, Kevin wartsh
is coming in. The President wants lower interest rates, so you can see all the elements in place where the FED should tighten rates sometime later this year, and they don't because of the pressure from the President. So the questions about the FEDS into pa how willing Kevin works would be willing to buck the desires of the president
also way into this situation. So I think that if the Fed's independence was on what wasn't under question, then they'd be more likely that inflation expectations would stay well anchored.
So Bill, there's an at tension in inflation expectations right now. Consumers don't trust them, haven't for a while. You see that in the recent survey. They're expecting inflation to be way above their particular target for a significant period of time. But market based inflation expectations, does the market trust them?
Well?
I think if you look at the very longer term expectations, for example, like if you look at the treasury inflation protected securities market versus nominal treasuries five years out, that looks fine. I think the issue is that an accurate measure of what households and businesses think today. And I think that's why Waller brought up what's inflation going to be two years from now for the next two years, and that is started to tick up, So that's not
so far over the horizon. Five years is pretty long time. Yeah, I can trust the Fed's going to get inflation down to two percent in five years? Are they going to get it down to two percent by the end of twenty twenty seven?
Is this a recent problem or a problem is persistive for some time under Chairman Powell.
I think it's a more recent problem in the sense that the credibility that monetary policy is restrictive has really started to finish as ecommoy has continued to perform well. So that's really the You know, if the policy thesis was correct, the policy was restrictive, then the ecmomoya should have slowed more in the uneployment rate should have risen more.
Certainly, the data is testing that thesis. Bill, appreciate your time, great column today, Thank you, sir. The former New York Fed President Bill Dudley on Bloomberg Opinion this line