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Showing us now the former vice chairman of the Federal Reserve System with pimcoh and.
Of course Forever herder of cats.
At Columbia University within their Department of Economics.
I've got it's going to be a four hour.
Conversation and we're only doing it a short block this time with the Vice Chairman, Clarita, but we'll make it a much longer conversation next time. I want you to reaffirm, recapitulate your Economist article of seven eight, nine months ago where you shook the industry by saying, forget about two point zero zero percent, it's going to be some number higher.
Revisit that right now.
Well, thank you, Tom, and always great to be on the show, especially in studio.
Yeah.
In that essay, I highlighted that that I thought the pal FED and really global central banks we're really aiming to get inflation down to what I called two points something, and the idea was inflation was up to five, six or seven at the peak, and the goal would be to get it in the zip code of the inflation target. But in terms of dealing with the last mile to let the economy sort of get to the last mile on its own without another leg up.
In rate hikes.
And that's what I think we're seeing in the US and really around the world.
Is the FED restrictive? Now?
The polarity of market economists we speak to is there's a select group saying, you know what, they could go up further and then come down, and those others saying, stop it. They're way above the real rate, bring it down now.
Which is it?
They think they're restrictive. I think they're restrictive. I think there can be a debate on how restrictive. The Fed's thinking, which I think makes sense Tom, is that the longer they keep rates here, and importantly, the longer they signal they're going to keep rates here, they will become more restrictive. And so yes, I'm certainly in the camp that they've done enough and the real question is how long do they have to keep rates at this level?
Richuel, Tom and I will speak to people both in academia and in practice that says the FED should.
Be cutting now.
If you look at the real time data, inflation is maybe not whipped, but we're pretty darn close, and we should be cutting rates now.
How do you think about that.
If I were still in the building, I would not be in the camp to be cutting now. It certainly looked like that was feasible coming into the year, but you know, since the beginning of the year, the inflation numbers have been going in the wrong direction. And also I think that especially, I think what's relevant here is an element of risk management. So I think there is path dependence. The fact that the last three years inflation has been well above target. I think it makes it
a harder call to cut preemptively. So I do think, you know, sometimes central banks say they're data dependent, and they're not. I do think the pal FED now is data dependent, and I think they're ready to cut if the inflation data starts to proceed as they expect.
How do you think this FED is looking at the labor market?
Tom and I we kind of throughout this term it feels like we're at full employment. Everybody who wants a job kind of has a job.
Wages are going on at pretty reasonable pace. How do you think the FED looks at the labor market today.
I think they see a labor market that is robust by a variety of measures, not just the unemployment rate, but other indications, and that's a good thing. Indeed, I think one of the first speeches I gave is Vice chairs I made the point, you know, the FED is not targeting wage inflation. It actually likes it when folks get a nice raise, but raises have to be consistent with the inflation target. And you know, we've gotten some
good news on productivity in the last year. Productivity growth is now around two percent, and two percent productivity growth with four percent wage increases, if sustained, gets some pretty close to where they want to be. So I don't think there's a lot of adjustment required in the labor market.
From here.
You're joining us right now, Richard Clarida from a vice chairman of the FED, and of course with Columbia University, you're a certain kind of monetary economist. Of course with DSG, with DSGE, with Jordi Gally, and I think of megdund decaih Over at the London School of Economics, coming from a totally different world. Megnan got Lord Desai got so upset about our fiction of equilibrium that he wrote a book about it two.
Thousand and eight, two thousand and nine.
In d SGE, there's a respect for vulrus in some form of normal equilibrium. How can we measure equilibrium now if we don't have a clue what productivity is doing.
I just don't buy it.
Well, I think we measure it with pretty big error, Tom, And you're absolutely right that not just productivity, but a lot of inputs into theoretical DSGE models are star term premium, equity premium are all unobserved and measured with air. So I always thought, and I've said this on your show, and I've said this in the halls of the FED. You know, models are a place to start, but not to end the conversation. And in particular, you know folks
would criticize s DSG that they're three equation models. Well, I think every economy needs to have at least three equations, but there are a lot more so, Tom, it's a starting point, but it's not a destination to get to the end.
The two hundred and fifty PhDs whatever it is. Fat least they've all studied.
Clarida, Gally, Girtler, the rest of it.
I get it. They've studied this stuff. Yeah, isn't germane right now? Our listeners say You've got to be kidding me. After the shock of a pandemic, Yeah, a triple stimulus, throw the equations out. Does Chairman Paul have equations now that are effective, that are that have some form of use.
My sense, obviously from public comments of not only the chair but the committee, is that they've understood Tom for some time that the shock was sufficiently unusual and substantial that they need they can, and they are relying less on models and more on the way the data evolves. You know, Tom, on one hand, you know, the models were telling them that to get inflation down from five and a half to two points something, they need to
have a big increase in the unemployment rate. And both Governor Waller, Charipell and others said, look, the economy may be different this time. We don't have to assume a big cratering in the labor market, and that was actually a positive device.
I can't say enough, Paul, how I agree with this? And then this is Paul Powell's been hit like a pinata. Powell led saying, do we really trust these equations?
And Clarida who.
Invented the equations in Colombia, you know Sti Stiglitz.
They got their equations.
Some of them are real simple like Stiglitz engrossmen and others like Clarina Ed's Greek to me, But the answer is do they matter right now?
And Powell's let on this.
I know, and Tom, one of the key issues for a lot of folks is the consumer here. I mean, you know, there's a tale of two cities, if not more out there with the US consumer.
A lot of folks are really struggling.
Particularly they don't own assets, whether it's real estate or you know, stocks or.
And things like that.
And how does the FED think about the consumer here? How did they gauge how the consumer's do they look at the earnings from Walmart?
I mean, what do they do? Well?
The FED staff has devotes a lot of resources to the consumer, not only at the aggregate level what is total consumption, but also increasingly during the time I was there, focusing on the on the distribution in both income and
consumption distribution across the population. And there are a lot of things that can you can monitor, in particular how many households are laid in their car payments or credit card payments, and so certainly, certainly the FED spends a lot of time on the bottom up analysis of the consumer.
So again we came into the year, Richard, I mean the market was discounting six rate cuts, an now we're down to lesson to I mean, the market has no idea what's going on out there? Is the fed From your perspective, are they happy to say, Hey, we've done a lot of work here, We've raised rates, we had a major impact on this economy. Let's just wait and see how our work plays out. Is that kind of where we are?
Do you think that's exactly where they are?
In fact, that the chair got that question at the press conference, and I'm paraphrasing, but his answer was along the lines of, we judge that policy is restrictive, and we judge that if we keep it here long enough, it will be sufficiently restrictive. So that's definitely their mindset. Their data dependent in terms of when the cut and how many cuts are going to happen, but they certainly judge that policy is restrictive here and they just have to keep it here.
Well.
One of the great moments now in economics, Professor Clarita is your colleague in crime at Columbia, Joseph Stiglitz, Nobel Prizer.
He's out with a wonderful new book.
Very thought provoking, should be read by conservatives, The Road to Freedom, Economics and the Good Society. You two are both victims of the Midwest. One of the great great advantages here is Clarita and Stiglitz are like, what, everybody, calm down, there's a whole other country out there. Yeah, tell me about policing. As dean of Columbia Economics, Joe Stiglitz, I can't fathom that is your day job. What was it like telling Joe Stiglitz, you will teach this course?
Well, no, Joe is a treasure and I'm actually proud of the fact that when I was department chair back in two thousand and one, I recruited Joe to Columbia. It was one of my big, big accomplishments. I'm an enormous fan of his research. He's an incredible colleague, incredibly creative, and you know, I just wish we had fifty more Joe Stiglitz. Whether without the Nobel problem.
Why should conservatives read Stiglitz The Road to Freedom?
Well, I'm reading it now. I listened to a podcast the other day. Looks it gives I think an informed and nuanced assessment of the power that economics can have about thinking about the world, if you're willing to step away from the oversimplifying assumption. So much of Joe's career has been driven by a curiosity about the world and providing a structure to think about it.
How do you think about this US economy? A lot of we hear recently about the exceptionalism of the US economy vis a vis Europe. Let's think Germany or Asia, Let's think China. Is this something as unusual, this kind of decoupling, if you will, in terms of performance.
You know that term means different things to different people. What is clear, I think is through the rear view mirror last year many predictions of a recession. Not only did a recession not happen, but growth was a point above a trend, a very hot labor market. I think part of the exceptionalism theme relates to excitement about AI.
AI is a big deal. It's not clear if it'll be a big deal in the next six months or six years, but it is a big deal, and obviously US companies in US innovation are poised to benefit from that. But there's another dem I would argue in which the US is exceptional, exceptional but in a poor direction, which
is that we have an exceptionally irresponsible fiscal policy. And if you look at the CBO numbers, they are frightening, essentially deficits of five six seven percent of GDP as far as the I can see, so exceptional in multiple directions.
I would say one final question, Yeah, we have a presidential candidate, a former president who basically wants to take the independence of the FED away from your reading of our political economy. Can an individual can a single president remove FED independence?
Certainly not.
I think the legal standing of that issue is clear and decided, and I would coup points one. Jerome Powell will serve out his term which goes through May of twenty six. Secondly, there are no vacancies on the federal reserve right now, so for the foreseeable future, there's no nothing for a future president to do on that account.
This is this has been fun. Did we do? Okay?
Yeah?
You know quality?
See yeah, yeah, gentlemenly see. I'll take that.
Richard Clarida, thank you so much of Columbia University and of course the FED and with PIMCO, thank you as well.