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You usually would dive in with Richard Claret of Pimcoe. He say, what's the market going to do? What's the Fed gonna do? We're gonna stop, and this is why we're talking to Richard Clareda. And today Kachola Coda of Rochester, when he was Federal Reserve Bank of Minnesota said, of the theories wrapped around Professor Clareda, modern macro models do not capture an intermediate, messy reality that's out there right now. There's a messy, messy reality that we're all facing there.
And to me, looking at the magnificent architecture of DSGE folks, I'll say, at once dynamics, dotecastic, general equilibrium theory and the beauty of it, and not the physics envy, but just the wonderful thinking of it. You come here and as Ned Phelps would say, go to the X short term, medium term, long term. You're in the Oval office right now, and you've got to explain to Trump and the gentleman from Pennsylvania Hasset the short term, the medium term, the
long term of what they are doing right now. How do you explain that?
Well, what you say is the goal is to onshore, bring production back to the US, reduce the trade deficit. What we know is they can put on tariffs.
They have.
The liberation day is tomorrow, but it will take several years for that production if it eventually does ramp up. To boost the supply side of the economy, we have supply chains. Tariffs are essentially attacks on inputs to production, so that slows it down. Also the uncertainty about what the policy will look like in the future as well. So right now what you're getting is a lot of uncertainty.
It's slowing the demand in the economy. Eventually you may get more jobs and more production, but that's several years down the road. So I think I want the folks in the Oval Office to understand the time dimensions at work here.
For sure.
Stephanie Kelton has a theory which is very much against people like you on what modern monetary theory should look like. And part of that theory is the intrusion of politics into monetary economics. Right now, we're doing almost Vorescian tariff law, mckindling tariff law, certainly from a nineteenth century. Can the political system be patient enough to get declared as medium term success.
Well, I'm not sure.
And in particular, it gets it another fundamental idea in economics, which is the idea of time consistency, that eventually people figure out that your promise now may not be delivered in the future. And so that's why, in particular, if the twenty percent tariffs that we're hearing about are really the beginning of a negotiation, that also adds an additional layer of uncertainty on top of just knowing what the
CARAFF number is is now. You know, Tom, we saw him when I was at the Fed in twenty nineteen that, in fact, just the uncertainty about the trade policy itself was a damper to the economy. And that's a very tangible factor fact of life in macro, and I think we're seeing an elevated version of it now.
And Richard, I think we're seeing some the folks on wall streets start to take down their GDP numbers being ratchet up their inflation expectations. Are they too early here or is that a reasonable I guess near to intermediate term outlook.
Well, you know, Paul, everything in macro is a probability, and so I think it is appropriate to move up the probability of a recession. Certainly it would not be my base case now, but it's certainly somewhat more elevated than it was. In particular, I think the other piece of this, Tom, getting back to your point about the but the ax axis, is there's a lot of talk about fiscal you know, no tax on tips, social Security, you know, tax deductions to buy a car.
But again that's going.
To take most of the rest of this year to work its way through Congress, and so again there'll be uncertainty over that piece of it as well.
And given that backdrop of uncertainty, Richard, is there anything Fed and policy can do to it to really, I don't counteractor to impact the economy because it doesn't feel like there's much the FED can do in the face of what could be a slowing economy in high inflation.
Well, I think here we want to distinguish between what the FED can do and what they will do. You know, what the FED could do is cut rates preemptively. That's more or less what the power FED did during my team there in twenty nineteen, the economy began to slow because of trade policy uncertainty, inflation began to fall, and so we cut rates, essentially an insurance cut. I don't think the FED really now has the runway to do an insurance cut.
In other words, we.
May need to see a very tangible slowing in the economy, in the labor market, rising the unemployment rate to get the Fed off of Hold right here.
If you just joining it, because across the nation, we're with Richard clair To, the former vice chairman of the FED. We have a spectacular set of conversations for you today. Nancy Lazar will be with us later. Among us Michael Nathanson. Paul had a tantrum yesterday and said, get Nathanson. We have Michael Nathanson here with an interesting essay on YouTube. We welcome all of you on YouTube. Subscribe to Bloomberg Podcast.
It's our wonderful new distribution. Thank you for a successful march, Paul, Richard.
So, you know, it's interesting some of the hit You know, the data that the FED looks at, historical data still shows the economies in pretty solid shape. But boy, I get kind of spooked. I think the market gets a little spooked when they see survey data like the University of Michigan data showing that BOYD consumers really are concerned, their sentiment is following their inflation expectations are arising. How does the FED look at that type of data?
It's an input into the projection. I think Cherry Palell mentioned at the press conference last week that they look at the survey data, but the survey data doesn't necessarily translate into hard data eventually.
I think what we have.
Seen, even Paul in the hard data is a pretty noteworthy slowing in consumption side of the economy relative to a really strong fourth quarter. I think a lot of reason why cell site houses are marking down their forecast is not so much the survey data, it's the tangible data on consumption being very very soft in Q.
One, You, more than anyone, have got to go from the academics of DSGE and your work at literally building the modern Columbia program. Did you bring Woodford over? Were you? You're the one that said, Michael, come on over.
I wish I could take credit for that.
That was my success of Don Davis who brought Woodford over, but I was leading the cheerleading effort to do it.
There was a cheerleading effort and they used torpedo bets at the Columbia right now.
So Richard to bring in Stigletz.
Okay, credit for that, Okay, that's good. But their thing, in Richard Clariday, is to bring this over to the application of what we're doing now that the theories to me are literally out the window. What is the theory of the dual mandate right now?
Well, right now, the labor markets where the Fed wants it to be.
We have about a four percent unemployment rate and all broad measures of the labor market. So the Fed wants to keep the market, labor market where it is right now. Char Pal has said a number of times that the Committee doesn't think that the labor market now is a source of inflation. So they're very happy where the labor market is. What they were thinking six months ago is that they were on a glide path to this soft landing,
although they didn't use that term. And I think the glide path has been delayed somewhat.
My ten year real yield here, Jerome Schneider called me up from PIMCO yet up early. He says, Tom, the ten year really yield one point seventy eight percent. It's coming down, down, down, If you're talking to PIMCO troops right now, are you modeling out a higher unemployment rate? I got Atlanta GDP GRIMM, I got feder Reserve Bank of New York disagreeing with that. Where is Richard Clarida on the I guess the vector of the unemployment rate?
I think the risk is to the upside.
And indeed, if you look at the FEDS projections two weeks ago, where they show a chart that what is the risk to the unemployment outlook, it's to the upside. So I think there's some upside risk right here. You know, at minimum, given what's going on with DOGE right now, we're going to see some increase in unemployment through those efforts.
Also important to note that even coming into the year Tom, if you look at private employment in particular, excluding healthcare and education, which have a pretty big government backstop, private employment had been really slowing throughout much of last year. So I think that's also irrelevant.
How do you view the consumer here today, Richard? It just seems like anytime over the last twelve fifteen years to get concerned about the economy, the consumer hangs in there and generally keep spending pretty well. How do you think about the US consumer.
Well, in the aggregate, you know, there are three hundred million consumers, and in the aggregate they're in great shape. You know, in particular high levels of net worth. If you own a house, if you have money in the stock market, you've had a really good run for the last several years.
But about a third of Americans don't.
Own their own home or don't hold any stock, and for them it's a very different outcome. So what you're starting to see in the data now is a pretty strong, if I may use the term bifurcation between upper ear consumers and consumers who don't own their own homes or have a lot of stock market wealth, and then they're getting pinched.
Okay, this is the heart of the matter. I mean, Alan Meltzer almost took it, almost took a swing at me, Jackson Whole ones over this because Alan Meltzer want to go back to forty seven and aggregate data. You've been teaching that for twenty five years back when you were at Illinois. We're aggregating data. You just described a Barbell John Edwards to Americas. Yeah, around the table at the Eccles building. Besides arguing over who's got redskinsts. Forget about that.
But around the table at the Eckles Building, are you looking at two Americas or some economic aggregated fiction.
Well, I'll put and say you look at both. But certainly during my time there, the staff did very very good work on looking a very disaggregated data. Forget you know two Americas that were looked at like thirty eight different parts of the economy.
So you do both?
Oh, come on, I mean Jason Furman in his wonderful New York got bed. We'll get Professor Furman in up at some at a school in New England somewhere. Jason says, flat out, tariffs kill the poor and the tax cut goes to the rich. It's a single sense INTI surveillance correction. Lisa, thank you for noting it. It's not the Washington Redskins. It's the commander's my foots it's my foot. Excuse me.
Maybe we'll go back, who knows, maybe I'll still have a job.
The world's changed.
So Richard, where do we go from here?
What's the key thing that you're looking at here for this economy? Is it the tariffs? Is it the consumer? Is it the labor market. What's the key thing you're focusing on.
Look, I think I think the issue is we're in a period now where measured inflation is going to go up because of the pass through of the tariffs, and activity is.
Going to slow.
So the real question for me, Paul, is are we going through what I call a whiff of stagflation or are we really entering what would be a pretty very pretty persistent stagflationary crunch. You know, I'm still relatively optimistic. I think it's more of a whiff than a new normal, but it's certainly something that that is would be would be quite relevant.
Yeah, it seems like a tough political call there to slow this economy and the rise inflation. Is the longer term gain that this administration sees from perhaps restoring more manufacturing.
Is that a realistic expectation?
Do you think?
Well, that it is a realistic expect but it will not happen overnight. It will take several years. And in particular, in fairness, we saw a version of this in the Reagan administration. People think of Reagan as being a free trader, and he may have been philosophically, but the Reagan administration, which I actually worked with back in my youth, was
actually quite interventionist. In particular, they had a policy known as voluntary export restraints on Japanese cars, and what the big Japanese automaker's Toylet and Honda realized is the only way for them to have a presence in the US was to build a lot of factories in the US, And so I worked an ambitious enough trade policy can lead over time to some onshoring, but it won't happen overnight.
I got eight ways to go. For a final question, I want to go to zero s, but it's too early in the morning for a zero sum a discussion. Here, the heart of the matter is a president is looking at this as a bilateral discussion. The giant William Klein Peterson Institute aggressively disagrees with that. What's our multilateral outcome of this bilateral naivete?
I think we'll learn a little bit more tomorrow about how much of this is intended to be permanent and how much it is an opening, you know, art of the deal negotiation. If it is. If it is, as I suspect, it will be the opening rounds of multiple negotiations across different countries.
Then it's certainly not going to be.
It's certainly not going to really be a multilateral plan will be a series of bilateral deals.
Is get gone to put you know, partner phrases get gone.
And I think the evidence in favor of that is that the Biden administration really didn't try to resuscitate the w TO.
So why didn't they? Why did Why did they resuscitate the Atlantic Charter off of Newfoundland in nineteen forty two when we were flat on our back.
Well you would have to ask them, but they're the political center of gravity in the last four years before Trump two point zero was really not to engage in the WTO. We never staffed up the dispute settlement process.
It's completely fair. I mean, it goes back to transpecific failure.
Yeah, and very good reminder the transpecific partnership exactly.
Yeah, you can come into off for liberation data.
I'll do it by phone. How about that?
Richard clear to thank you so much, generous of you to be with us,