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Let's attempt to get a clear of you on things not just my stocks. Let's talk about the future. This fed a reserve, the White House casting a wide net to replace fed Share. Jaypow, the US Treasury Secretary, scale best and praising a quote very good meeting with the former Saint Lewis FED President Jim Bullard during his search. Jim joined us in the studio for more. Jim, good morning,
good morning, Thanks for being here. Not many people get to experience what you've just experienced, sitting down for a conversation to potentially become the fed share. Can you walk us through what that was like? What's the process like?
Well, as you say, they have a lot of a lot of people on the list and they're following through. It's a transparent process. I think that's good. I think all the I know virtually all the people on the list, I think they're all good. So I think this was a meaning just to talk in broad terms, but I can't really report out, you know, details, a word said.
The Treasury Secretary incredibly talent into the economy and financial markets. I'm sure you experienced that in your conversation with him. I think you can share with us the kind of questions I ammationed that he's asking you when I ask them to you, which essentially is, how do you view things right now? How do you think about the labor market.
I thought the Fed's decision was a good one. This is looks like a sequence of three moves in a row through the end of the year. Of course, you want to be data dependent, and the chair stress that in the press conference. But I think the committee was worried about the non farm payrolls report that you know, revised the previous months down considerably. You know, non farm payrolls is kind of the key number for the for the FED, so I think that made them a little
bit nervous. There are stories that you can tell about why that's happening, But on the other hand, you know it could be weakness and market so I think that tilted things toward a little bit more dubbish policy. So they brought October into the picture, and now you've got markets pricing probably seventy five by the end of the year. That would be a significant move by the end of the year, and they have a little bit of optionality
if the data goes the other way. So it's a pretty good decision from the point of view of how this works.
You said they have optionality if the data goes the other way. How high is the bar for strength and the economy to really prevent the FED at this point, given everything from going three times this year?
Yeah, I think the committee is also spooked a little bit by last year because last year the data looked weak but then turned around abruptly, and so they'll be nervous about that. It's hard to say exactly how high the bar is. Acid judgment callill have to be made by members of the committee.
There's this other disagreement on the FED. Clearly there are a lot of them, and understandably because in Wall Street there are a lot of disagreements as well as to what the economic backdrop is. But you could see a spread in terms of where the neutral rate was from say three percent in terms of the long term dot for some of the FED numbers or four percent for some of the others. Where do you sit.
I think it's still fairly low, So you know, you could argue maybe three in a quarter or something like that. So if you're still above four percent with the policy rate, you're still one hundred basis points above if that's your if that's your number. So that's why I've been saying they have room to maneuver. They have room to come down some on the policy rate and still put downward
pressure on inflation. Inflation is still above target. And you know it has been debated at length over the last six months or so, but I think they're in pretty good position right now.
How credible do you think two percent actually is.
I think the Committee is very dedicated to the two percent target. I think it would be foolish to abandon that target. It has set an international standard across all the countries of the world. And if the lead economy says, oh, you know, we're going to back off that, then all the other countries would back off. You'd be back into the seventies and you'd have a lot of care. So that is not a good idea, and the Committee will
try to get back to two percent. However, I think you want to get back on a nice, smooth, asymptotic path to two percent, and the forecasts always show that, and that's always the way the Fed thinks about it.
The two year rolling view. Now some people might say that's aspirational magical forecasting. It's just we're always forecasting this two years out but never actually hits it based on history, which raises the credibility question. The federal reserves cunning interest rates with inflation closer to three than it is to two, with unemployment closer to four than it is to five,
and but that could ease it all time highs. Is this the right time to back away from that restrictive monetary policy that's going to lead to that glidepoth back towards two percent.
It's restrictive, but even when they come down, it'll still be somewhat restrictive. I think one of the pieces of risk management you have to think about here is suppose the economy is tipping into a marked slowdown. Then the committee would want to be accommodative in that circumstance, and you'd want to be below your neutral rate, so you'd have a long way to go. You'd have to really
scramble if that happened. I'm not saying that's the base case, but that's a possibility, and so you probably want to be a little bit closer to neutral so you didn't have to work so hard if you got into that scenario.
One of the tests for a lot of people is if inflation does go up, maybe say at the end of this year early next year, which a lot of people are expecting that it will, what's the Fed's response. Do they keep cutting or do they look past it is simply a one time price adjustment.
I think they've made pretty clear that they're going to look through temporary tariff effects and they expect inflation to resume its downward trend and the effects have been muted.
US Trade Representative does not have an inflation target, so I think that you know, it's up to the FED to determine what the inflation rate is going to be, not trade policy, but so lots of things affect inflation, and then you know you have to get on your sort of medium term path, and I think that's what they're doing.
You mentioned earlier that there is a degree of fear of repeating what we saw last year, where the FED cut by one hundred basis points and we saw the long end of the yield curve rise by one hundred basis points and economic data pick back up. And I just wonder how much you think the FED is open, or you would be open if you are on the Fed now to adjust some of the balance sheet composition in response to any move in the long end of the yield curve.
I think the balance sheet policy has been in the background. I think that's a appropriate. The Committee has been shrinking the size of the balance sheet a little bit slower pace recently, but I think they're pretty happy with that policy for now. They want to get to this ample reserves level. There's a good speech by my former colleague Chris Waller in Dallas, so if you want some bedtime reading,
you can read that. But that was actually a very good sort of back of the envelope calculation about the balance sheet and all the pieces of the balance sheet. So I think that's a good place to start for those that want to understand current balance sheet policy. The mortgage backed securities are going to take a long time to go off. I do think the FED made a
mistake in March April of twenty twenty. We went all in on mortgage backed securities, thinking that the pandemic was going to harm the housing market, and we got ninety two, one hundred and twenty days in and boy, it went the other way. Demand for housing was way up, so unfortunately we added a lot of mortgage backed securities over that two year period. But we're going to have to let that gradually go off.
Would you avote it for fifty this week?
No, I don't think so. So I thought it was a good decision because the Hawks could say that, Okay, we only went twenty five, and we got optionality on the future moves. But the Doves got the twenty five and probably twenty five at October, and that's almost as good as getting fifty today. And you do get the optionality in there.
Says when people talk about the institution, you know so well, just based on what you've just said, do you think people underestimate just how persuases if you need to be on the committee, the degree of negotiations that do take place about the kind of things you just described.
It's a you know, it's a big formal meeting, and people are very good at making their arguments, and they have the presidents have their own staffs. So I mean, I love it. I think it's a great uh, it's
it's a great place to make decisions. I think also people have to understand that you're not talking so much about what you're going to do on the day, you're talking about what should our future path be over the next six months and over the next two years, but especially over the next six months, because you know you have to it's a big committee and you have to be basically on board with you know what you're going to do.
On that particular day, you were very vocal about how you felt about the dot plot back in the day. Didn't like it.
Bring this up.
So significant to see your dot always just there at zero?
Are you going to get rid of it? Would you get rid of it? I mean, what use? I think we can do better than we have on the dot plot. And at one point I talked about you dropping out completely. I did drop out of the long long run part. But I think we could do something like former chair Ben Bernanke outlined in the recent conference that the FED had about the framework review, and he mocked up a quarterly report that could be put out, and that would
put out a forecast. That's what other central banks do, and then members can talk relative to that forecast. They could say, well, no, I'm more optimistic about the economy or more pessimistic about inflation, whatever. I think that would be closer to an international standard, and that's probably the direction this should go, because the dot plot has its problems.
I remember when you make that move at the time, and I can't believe it was about ten years ago, which just amazing how quickly time is flying. Jim is going to see you. Appreciate you, transparency and good luck with the process. Thank you, sir, appreciate it.
Great to be here. Thank you, Thank you very much.
The former Sen Lewis FED President Jimpull out there, and of course I can d A to B the next FED chair