Bloomberg Audio Studios, podcasts, radio news. Unfortunately, he's been dreading this all week. Richard claariit with us now. His work at Columbia University definitive on fancy economics called dynamic stochastic general equilibrium theory. Holding court at the FED, his vice chairman, I'm not going to mince words in frankly a professor Claret, are you still at Columbia?
I am?
You get a piece of chalk out every See. The problem is, Xavier Sally Martin wouldn't allow Ai in the class. You would allow Ai in a freshman class to make the kids smarter.
Right, don't. I don't teach a freshman anymore.
But would you let Ai in the class?
Now?
Not in the class room, but when I teach, I assume the students are making reference to it, which is why I've actually put a focus on having in class presentations. There you go, there you go, lul swash and Socratic dialog.
I'm going to cut through the chase Socratic dialogue. You saved Jerome Powell, Folks, I'm not going to mince words about it. It's called a dual engine leadership mode model, and it was Clarida's vice chairman and a guy from Wall Street's chairman. And when he came in you allowed him to relax and grow with your prodigious academic abilities. Does Chairman worsh need a Clarita.
Well, that that'll be his decision. I enjoyed my four years, That's that's for sure. But there are a lot of good people at the FED, and I think that's a decision he'll he'll make. He's got a very good advice chair right now and Phil at Phil Jefferson. But at some point there will be a vice chair vacancy.
Is that something that the committee when he goes in front of these tough guys in the Hill, they can demand you have a vice chair of the academic skills?
Well, it's not clear that that's what would be on their wish list, but possibility, I suppose. I mean they could qush that.
Certainly.
Kevin Warrish has called for a new accord with the Treasury Department. Yeah, what do you mean by that?
Well, you know, this is one of those things where this is very what they call in DC, very big tent language. It means different things to different people. The one accord that we do know about, which is the one that was struck in nineteen fifty one between the Treasury and the FED was a signal moment and FED independence because it got the FED out of the business of essentially camping treasure yels. In fact is I'd like
to teach my students. We all know that World War Two ended in nineteen forty five, but the FED didn't get the memory until nineteen fifty one because the Truman administration pressured the FED to keep a camp on rates. The FED declare independence in the accord. I think now if there is a Treasury Fed accord, it would not be so much focused on that. It would be focused on for example, should the FED a whole two trillion
dollars in mortgage backed securities? Should the FED the composition of the Fed's portfolio really be tilted toward T bills unless from holding ten and thirty year treasury So I think there are a lot of conversations to have, and even during my time on the FED, there were discussions before the pandemic about rethinking the fed s portfolio composition. So I think that's entirely appropriate. But I think we're a long way away from any formal accord.
So what do you expect this Federal Reserve to do in County or twenty six.
Well, first we have to get the chair confirmed.
He's a foregone conclusion, right.
I think once he has a hearing, he will get confirmed because he's very well qualified. But it may be maybe a while before he has a hearing. I think it's important to note that the pal FED in December when they release those dots, those famous or infamous dots, the pal FED, or at least a majority of the FED in December, thought at least one rate cut this year would be appropriate, and I think eight folks thought
maybe two raycus would be appropriate. So I do think that when Warsh gets in, if the economic data play out the way that I and others expect, I think he'll be able to persuade the committee to continue to cut rights down describe around three percent.
Okay, Richard Claarder with his folks, the former vice chairman of the FED, hugely visible, does a great job helping us on the FED day the FED decides thrilledy could be in studio with us for you across the nation and around the world. Thank you for your attendance on YouTube subscribe to Bloomberg A podcast. I look at all this, I look at the parlor game, and just what it comes down to is staggering from meeting from meeting. When mister Wharsh joins, do we have a theory of monetary policy?
Or is it every president and governor for themselves?
Tom fantastic question, because I do think that based upon what Kevin has said with his very voluminous paper trail over the last fifteen years, I think that will I think that will be a discussion. I think Kevin has expressed some skepticism for reliance on what he believes are flawed models, too much of a backward looking approach. What I would point out, at least during my four years
is the palwfed and certainly declared device chair. It was not handcuffed to the models, even though I developed many of them.
I'd give you great credit. I'm gonna Paul can I, editor, I give you great credit for this. You are the one person who could have said we'd go for the models well.
And in fact, my first speech in October of twenty eighteen, I basically made the case that the economy appeared to have stronger growth potential and a potential for lower unemployment than the FED models thought, and that the POWERFED should be willing if the labor market was continuing to blossom and inflation didn't appear to allow that to happen. In fact, I think I said, you know, monetary policy is not
a problem if too many people are working right. And indeed the PALWFED cut rates in twenty nineteen the noun a Plummer rate out of fifty year low. So I think the FED has probably been less handcuffed to models than Kevin's remarks might suggest. But I certainly think based upon that there will be a discussion of the best way to incorporate modeling into FED analysis.
What happens to j. Powell when he does step down from fit? Does he stay on the at the FED? Does he leave? Typically they ride off into the sunset?
Right they do.
In fact, there's only one example in FED history of a chair that did not ride off into the sunset, and a very important FED chair gentleman named Marin Eckles, so important he is a building names there you go. And Eccles was an FDR appointee. And when Harry Truman came in, Harry Truman wanted a different FED chair, but Eckles stayed on for four years as governor and actually turned out to be a real thorn and Harry Truman's side.
But fast forward to Pale. You know, j Pal's been asked many times and including at the most recent press conference, what his intentions are when his term is chair is up, and he's really not commented. So there's the possibility he could stay on. I myself think that it's unlikely that he stays on for the remainder of his term, which goes through twenty twenty eight.
Richard Clarida with us, so we did a Bloomberg function. It was great. Michael mcke organized it. It was all these worthies in the audience. Catherine Man comes up and gives me a hug. The Queen of descent over at the Bank of England. What's wrong with us being like the Bank of England? And they come out like a Supreme Court decision. Oh no, it's a FED meeting five to four and the chairman voted against the majority. Is that a bad thing?
I don't think it's a bad thing. I think the Bank of England, really beginning under Mervyn King's tens actually viewed it as a feature, not a bug, to have close votes encourage thoughtful descent. And as I recall, the governor has been on losing sight on some votes. There unusual in FED history. In fact, I did prepare for
your show. I went back and looked. Saint Louis FED has a great database on this, and you'd have to go back to nineteen thirty nineteen thirty nine the last time a chair actually lost an FMC vote, and that was Mariner Eccles. But Jane William Miller and Paul Volker lost votes on discount rate adjustments. But again we're going back forty to fifty years.
Did do you prepare for this show? Are you kidding me?
You'd be the only one, Richard?
What's the FED focusing on now? Is it the labor market? Is it inflation? Where's the balance these days?
They've been pretty consistent for a while that inflation's too high. It's been above target for five years, it'll probably be above target this year for six years. But the FED has a dual mandate and the unemployment rate is basically right now at a point that they think is consistent with a healthy labor market. But they are noticing the
payroll employment gains have been very much. Indeed, when we get the revisions later this week, it actually may show negative payroll gains in the second half of the year. And so I do think that I take them at their word when they say they would not welcome any additional rise in the unemployment rate, and I think they would react to that. But so long as the economy sort of turns along as people expect, I think they are trying to balance that against their concerns about elevated inflation.
Paul Sweeney with Richard Clarita, right now, can I ask, can we go NERD right now out of Monday freezing money? Okay? Did you recruit Woodford to Columbia? Was that your trying?
I was not shre when Mike was recruited that, but I certainly was enthusiastic and worked hard on getting him to Columbia, which was a huge appointment for Colombia now twenty two years ago.
Yeah, I told you, Michael Woodford. Folks, it's a thousand page book. Everybody owns it. Martin Feldtsen once said, Tom, no one's ever read it cover to cover. Clar I have, but the bottom line and I'm bringing this up, folks, because we had an Ezrab prosade the other day from Cornell with his wonderful important books Doomload the Doom Look really important book, And the bottom line is we assume Woodford like Eiler equations, they come down to a point
of stability, and within the system there's stability. The end result is stability, and Professor Presada is saying, no, it's not They're going to go out on the X axis and be unstable.
Discuss well, okay, I think at a thirty thousand foot level in thirty seconds, all macro models, or almost all macro models really our best thought of as approximations typically linear in a neighborhood of where you want to be, and the real world can be a lot messier and very nonlinear. Term that I know pops up on this show and I think, what I'm just beginning to read his book, but he's been highlighting is we could be in a prolonged period of very nonlinear market and economic development.
Geopolitical development. So if you're halfway through the book, he sold the movie, right, Yeah, DiCaprio's playing. I mean, it's a gloomy book. It's shockingly gloomy.
Yeah, yeah, again, I have not I've not worked through it, but I certainly must read for me, So I'll wait till I finish it before our wait.
Okay, sure, hey, Richard worked.
We're thirteen months into this whole tariff thing. I'm going to look back on and say, boy, this was nothing. It didn't seem to be that big of an issue. And that's not when I heard it. Early on. I heard a lot of folks saying, boy, this is going to be inflationary and so on and so forth. We just haven't seen it. So with a little bit of hindsight.
Yeah, yeah, what's happened. So let me reinforce what you said when we eventually, when we get the data for twenty twenty five, it may show GDP growth this as it was in twenty twenty four, maybe down to tenth. It will likely show inflation unchanged from twenty twenty four, And so a future historian may well say what you just said, which is what was the big deal? GDP growth didn't move, inflation didn't move. I think a couple
of things. One is that the ultimate tariffs put in place were a lot lower than the Liberation Day levels, and his best in his emphasized that was part of the negotiating strategy. Secondly, you know, there's a saying in
baseball sometimes you'd rather be lucky than good. I think the other thing that happened is whatever headwind there might have been from tariff's counterfactually was offset by the buoyant capax spending, especially by the tech companies, and the fact that the stock market is very optimistic on this story, so that generates a wealth effect and an investment effect.
And then thirdly, US companies absorbed more of the tariff hit in somewhat reduced margins, and you know in the Act they did have that room profit margins have been very healthy, and they didn't pass it through to the consumer. And again, of course, we have the IAPA decision the Supreme Court is about to release, and that may further
lead to lower Just put it this way. I think if you calculate the actually the tariff revenue we're collecting divided by imports, it's coming in at about ten percent, and liberation day was like thirty five percent. So that's sort of the order of magnitude.
I got eight other questions. I gotta squeeze us in to be responsible or zegg and pose and creating a firestorm with an idea of resilient higher rates, or even driving higher rates somewhat due to the surprise of higher wages riding this up. At the Peterson Institute, do you and PIMCO worry about price down yield up?
Well, you know, we get paid to worry about it. What we do observe, at least in the treasure rate market is the fact act, which is really since the last FED rate hike, which was two and a half years ago ten, your treasury yields have been in a pretty tight range four and three quarters at the high end,
three and three quarters at the low end. Now that also you also need to note that underlying real rates, which we can see from the inflation index bond market, are much higher than they were in twenty nineteen, and so we're going to have a steeper yield curve than
we did pre pandemic, which is a good thing. I think we're going to probably have elevated, somewhat elevated volatility relative to the decade before the pandemic, in which rate volatility was suppressed through zero or negative number at one point.
I think in Europe, there was like eighteen trillion dollars of negative yielding sovereign debts, so we do pay attention to it, but we think a lot of the repricing that needed to happen because of the fiscal outlook has basically already happened and is in the price.
I am begging when you get through the doom loop. When I get through the doomom, I would be honored to have you and Prisada in the same studio together. Would be a service to a lot of people thinking about this. His public service to the nation at the Federal Reserve System. Richard Claritay he is Global Economic Advisor at PIMCO