This is Master's in Business with very Rid Holds on Bloomberg Radio this week on the podcast what Can I Say? Bill Dudley, former New York Fed President, multiple positions at Goldman Sachs on Federal Reserve, at the New York Fed, really a master class in how monetary policy is not only made, but executed and put into actual operations. There are few people in the world who understand the inter relationships between central banks, the economy, and markets like Bill
Dudley does. This is just a master class in understanding all the factors that affect everything from the economy to inflation, to the labor market, the housing market, and of course Federal Reserve. I could go on and on, but instead I'll just say, with no further ado, my conversation with former New York Fed President Bill Dudley. Great to be here, Barry, It's great to have you. So I feel like I have to call you Bill Bill, because that's what I
always hear you described as not a William Yep. Let's talk a little bit about your background. You get an economics PhD from California Berkeley in eighty two, and around the same time you become an economist at the Federal Reserve Board from eighty one to eighty three. Tell us a little bit about that role.
I was there in the what's called the Financial Studies Section, which is one of the very small places in the FED that it is not macroeconomics driven, it's microeconomics. So we worked on things like payments policy, you know, regulatory policy,
so all sorts of micro issues, not macro issues. It was a pretty interesting period because the Congress had just passed what's called the Monetary Control Act, where they're forcing the FED to charge for all its services to so to sort of level the playing field with.
The private sector.
So we had to figure out how we're going to price all these services in a way that we can still sort of stay in business and be a viable competitor to the private sector.
Huh, that's kind of bizarre. I would imagine in nineteen eighty two, the FED was a much smaller entity than it is today. What was a day in the life of a FED economist like back then?
So I was working on issues, you know, on payments, I worked on issues on you know, some of them were quite esoteric. So, for example, the treasure was thinking about moving to direct deposit, but they wanted to know how much it was going to cost them. Because direct deposit the money clears, you know, sorry almost instantly.
Right when you.
Write a check, you get check float. It takes time for the checks to come back to hit the treasury counts. So they want to know how many days does it
take a Treasury check to get back to us. So we actually set this project where we went out to the reserve banks and sample checks to find out how long did it actually take someone to get their treasury check and deposit it somewhere and have a get back to the Fed and debit the treasury of the count It turned out to be like eight or nine days on average.
And on a couple of billion dollars that flowed as real money. It's real money.
So we wanted to make sure that people understood what the cost was. Now, obviously it's a good thing to do. I mean, it does cost the Treasury money, but it's a much more efficient and more reliable payments medium.
Did you overlap with the Chairman Paul Vulkar when you were.
There, Yes, I did. I didn't have a lot of interactions with him. I remember one time though I did do a briefing of the of the Board of Governors.
And at the time they had they had this very long table in the board in the main board of Governor's meeting room, and Volker sat at one end and the briefer set all the way at the other end, which was made it sort of complicated because Volker had usually had a cigar stuck in his mouth, and you would have acquire and you could like straining to hear them. The senior staff was ready to rescue you if you
said something inappropriate. I mean they set the bar, the tension bar so high because you actually couldn't actually do a briefing until you've actually taken a course, no kidding. So that means like you're not exactly relaxed when you're going to brief the governors. It's not a lot of give and take. It's a very formal process.
And even without a cigar in his mouth. I only got to meet Toll Paul once, but he's kind of gruff and mumbles like not a clear projecting voice, kind of a hoarse, mumbling voice. I can imagine with a cigar in his mouth, who could even tell what he's saying.
Well, I seem to have gotten it good enough. And you know what's interesting about that. I didn't really have that much interaction with Paul over the next you know, fifteen to twenty years, But once I got to the FED, we started to actually see each other on a much more regular basis. I got involved with a group of thirty, Paul was a member of the group of thirty, and we gradually became pretty good friends. So it started like very slow and sort of matured.
Like, fine, mind, he's a fascinating guy, and what an amazing career. So before you come back to the FED, there's a private sector interval. Tell us a little bit about the twenty years you spent at Goldman Sachs, where you not only became a managing director and a partner, but you know, really very much rose through the ranks. Well, first I went to JV. Morgan.
I was there the regulatory commis. JP Morgan at the time had one regulatory commis And so when the job came open and they approached me at the FED, I thought, boy, if I don't take this job, it's not gonna be available, you know a few years later, So I went to JV.
Morgan.
I worked on a lot of bank regulatory matters, and that's why I'm still very interested in bank regulatory issues.
But that seemed to me like not.
A really great long term career because, as you know, bank regulation changes very slowly, and I start wanted a faster tempo. So Goldman Sachs had me into interview for a macro economics job, and I thought, well, I don't really know a lot of macroeconomics, but I do know about how the Federal Reserve operates, how the pay system operates, how the plumbing works, how reserves, you know, moved through
the system. And I think they liked the fact that I knew about how things worked at sort of a micro level, so they hired me to do macroeconomics.
So you were chief US economist for a decade over a really fascinating period, really the heart of the bull market. Tell us a little bit what you remember from that role in that era.
Well, I remember how how it was a period of sort of stars for for equity analysts, much more than it is today. And one of the biggest stars was Abby Joseph's Colin Sure It was the equity analyst for Goldman Sachs. So trying to find some space between Abby and your audience. Was a little bit challenging, but you know, I focused mostly on fixed income and foreign exchange, so there was sort of room for me to do my business.
Probably the highlight of my career at Goldman Sachs was that I can't or exactly the year, but it was in the early two thousands when people in the markets couldn't figure out if the FED was going to move by twenty five basis points or by fifty basis points, and unlike today, going into the meeting, it really was fifty to fifty. And Lloyd Blankfin called me up the night before and so I said, you know, we have a lot of risk on this notion that they're going
to do fifty. How do you feel about that? And that was my call, I said. I told Loyd said, I don't know what's going to happen, but the probability of fifty is a lot more than fifty to fifty at this point. Next day I had to go to Boston for a client meeting. It was really sort of sad because I wasn't on the floor at the time that the announcement came, but apparently people stood up and.
Cheered for me and it was a fifty point yeah.
Yeah, yeah, So I got that was so that was probably the highlight and I start I got to miss the best part of it, rightly.
So after you know, more than twenty years Agoman, you joined the New York FED in two thousand and seven overseeing domestic and foreign exchange trading operations. Two thousand and seven. That's some timing. It's really it's after real estate rolled over, but it's kind of before the market peaked and the real trouble began in O eight or nine.
Yeah, well, I had about seven months of calm and then this chaos started in August of two thousand and seven. I remember it really well because I just finished building this house in West Virginia and we were taking occupancy in early August, and it was literally the same day that BNP Paraba shut off redemptions from some of their mutual funds, caused all sorts of chaos in Europe, and then the question is, well, what are we going to
do about adding liquidity in the US. So didn't get out of the house, my new house for the next two days as we tried to figure out how to calm markets after the BNP Paraba event.
And the US market kept going higher. I don't think we peaked till like October oh seven, something like that.
Yeah, people didn't really understand the consequences of subprime. You know, I thought for.
Years, I mean literally for years, if you mentioned it, you would be mocked on TV. Yeah, I mean.
You know, one thing I am proud about when I joined the FED is in January two thousand and seven, that was my first briefing of the FOMC, and actually talked about how this could turn out poorly. You know that subprime was being supported by you know, subprime was being you know, the credit was flowing to subprime. Subprime was enable looking people to buy houses. Home prices were
going up. Because home prices were going up, subprime wasn't a problem, right, But at some point supply was going to increase in response to the higher home prices, and once prices stopped going up, subprime was going to start to go the wrong direction. I said, this is a possibility. I didn't say it was going to happen, but by I staid it was the possibility. So I was sort of pleased that I got off on the right track.
And then in January two thousand and nine, we were deep into the financial crisis where post Lehman and post Aig you get named tenth president CEO of the New York FED. Again, fantastic timing. What was taking up your attention right in the midst of the financial crisis.
Well, you know, that was a tremendously fortunate event for me. I always tell people like brock Obama had to become president, Tim Geitner had to become Treasury Secretary, and then the board of directors in near FED had to pick me. So it's sort of like a low probability times of low probably times low probability, so sometimes it works out. Yeah, sort of a bank a bank, a trible bank shot.
You know a lot of things that were focused on at the time was trying to provide support to financial markets. So if you remember, we were still rolling out various facilities like the term asset back, the lending facility for example, we were running the commercial paper funding facility. We were trying to figure out how to do stress test, the
first stress test of banks. So that was a big job in the spring of two thousand and nine, and those stress tests were probably the critical turning point in the financial crisis. I remember the day after we published the stress test, and for the FAT we were actually pretty transparent about like what we did and what our
assumptions were, and here's the results. Bridgewater published a piece and I think the headline said something like we agree, and I said, okay, we've Now that's that's really important because if our analysis is viewed as credible and we have the tart money being able to supply the capital that's needed, then people can start to rest assured that the banking system is going to stabilize and and it's
going to stop deteriorating now. It also helped that the e Commedis was showing signs of bottoming out, so it didn't look like we're just heading down into a deep hole. But you know, it was very touching, touch a touch and go there in the first part of two thousand and nine, and there were you know, there were still some major financial firms that were pretty darn shaky. I mean, City was pretty shaky, Morgan Stanley was pretty shaky. Some
of the banks were still pretty shaky. So you know, until you actually hit bottom and start to pull up, you're really wondering are you going to get through this and one piece?
So the Bridgewater piece raises a really interesting question. The New York FED is kind of I don't know how to say this first amongst the regional feds, because you're located right in the heart of the financial community. What is the communication like back and forth between the New York FED and major players in finance, especially in the midst of a crisis like that.
So the New York FED is sort of unique among central banking entities because most central banks they do the policy and strategy and the operations all in the same place, but in the FED is split. You have policy done in Washington, the operational implementation of that policy almost all of that takes place at the New York FED. So the New York FED is sort of the eyes and
ears of the FED reserve for markets. I think that you know, one thing that helped me a lot during the financial crisis is I knew a lot of people on Wall Street, and so when something was happening, I could call up people I knew and just ask their opinion, recognizing that oftentimes their opinion does have a touch of self interest. So you need to talk to three or four people to sort of triangulate and figure out what
you think is really going on. I mean, I'll give you an example of one thing that really struck me during that period. I called up someone and I said, here's a complex you know, cdo obligation. You know, you know, with all these different mortgages and all these different tranches. How long would it take you to actually go through that and value it appropriately, to come up with an appropriate valuation? He said, oh, take at least two or
three weeks. Really, And I thought, oh boy, we're in big trouble.
Wow.
If you don't really know what things are worth when you're going through a period of financial stress, that's going to be makes things much much more difficult.
I would have guessed they would break that up into five parts, give it to a bunch of juniors, and they'd have an answer in three hours. So it scared me. Scared I can imagine. So from the New York FED you ultimately end up as vice chairman of the f OMC, helping to formulate US monetary policy. What was that like going from New York to DC.
Well, it wasn't such a big change because I'd already been going to the f MC meetings and briefing the f MC.
Members as president of the New York Fed you have a seat. What happened though, as I start switched side. So there, So the.
Day that Tim Geidner was named Treasury Secretary was basically the day before an f MC meeting. And I literally didn't know when I went down to Washington that Monday evening whether I was going to be briefing the FMC participants or whether I was going to be an f MC participant myself. So I actually prepared two sets of notes. Here's my briefing notes if I'm I'm the soul the sella manager, and here's my remarks if I'm the president
of the FED. So I was ready for both. And what happened that day he was He was named on that Monday, and so on Tuesday, I was I was the President of New York Fed.
Wow. And you know I didn't you know?
So, And when I got back to New York on you know, I think Thursday morning, we had a town hall and I gave my first remarks to the New York Fed people and had a very simple message for them. Best idea wins, because I was really struck by how hierarchical central banks tend to be. And I wanted to sort of push agat against that idea and basically say, it doesn't matter where the idea comes. If it's the best idea, that's the idea that should win out.
Huh. It makes a lot of sense. And since then you've gone on to do some work reforming libor as the benchmark for rates. Tell us, I always get the name, SOFRA the new one that replaced for Yeah, so, so tell us a little bit about the work you did, because libor was probably the most important number, certainly in credit, maybe in all of finance.
So library for a while was there was a real question whether central banks were going to take this on or not. And I remember I was in Basel for the BIS meetings and I wrote a one page memo
to Ben Bernanke to hand to Mervin King. Mervin King was the head of the sort of the policy making group at the BIS at the time, and the memo was basically arguing why central banks needed to own the librar problem, because if they didn't own it, it wouldn't get fixed, it'd be a problem again, and then the central banks would be blamed for well, why didn't you fix that problem? So I don't know how much important that memo had, but I was very pleased to see
the central banks take eyed up. And as you know, it was a huge undertaking which took you know, many many years to complete.
And for those people who may not be familiar with the London Interbank offered rate, offered rate literally was a survey where they'd call up various bond desks and say, so, what are you charging for an overnight loan? And eventually traders figured out they could game that by let's just call it talking their books, so to speak, in a
way that would move the librar in their direction. You could, you could do a bunch of things with derivatives, and eventually libor kind of spiraled out of control, the new improved version. How do we prevent that from taking place? What were the structural changes?
Well, the problem, I mean the problem of LIBRA was that you had a small cash library market that was referencing a very large futures market year all futures market, and so you had a situation where you could take big positions in the euro dollar market, affect the price in the cash market and actually make a profit. So the sort of the tail was wagging the dog for sofa, the secured overnight funding rate for repo. You have a
big repo market. I mean it's you know, hundreds and hundreds of billions of dollars, so the idea, and it's a real market. I mean there's real transactions that are traded, and you can sort of track with the price are and where trades are. It's so it's almost impossible to imagine someone manipulating this sofa market.
Really really interesting. So so first before we start talking about policy, I have to ask. You're at Goldman Sachs for twenty years and you get the phone call to join the New York FED. What was that like? Was that a tough call or was that an easy decision to make?
Well? What happened actually is Tim Geitner called me several months earlier and said, you like to come over to be a senior advisor. And I said, I'd love to be a senior advisor to you, Tim, but what do I do with the rest of my you know, forty to fifty hour work week. And he didn't have a really good answer for that.
Was this a full time gig? I means, well, I didn't.
When I left Goldman, I didn't really know what my next thing was, so I did not have the next job. I was just assuming that I would something would come along that right, interesting, So he offered that and I thought, well, you know, you know, Tim and I had a very good relationship, and you know, I sort of like the idea of working from but I thought senior advisor was a little bit too unformed. And a couple months later he came back and said, can you run the Markets
group at the New York Fed? That's completely different. You're running the group that actually implements monetary policy overseas market analysis Dale deals with the primary dealer community. That was a real opportunity, so that one I didn't have to think very hard about.
And what's what Not long after Tim gets elevated, you take the role of New York Fed President. What's a day in the life of New York Fed pres.
Like, there's a lot to do because New York Fed does lots of different things. So you know, we have supervision. We oversee some of the largest financial institutions in the world from a supervisory perspective, where the international armor of the FED, so pretty much every two months. I would go to the BIS in Basel, be part of the
Bank for International Settlement meetings. New York FED President as well as the chairman of the of the Board of Governors as the Board of Directors of the b S. As Alan Blinder once joked to me, he says, New York FED is the only only institution that's treated it like their their own country because they have this board director's position. You know, there's lots of things and you know,
payments they fed. New York Fed runs FED Wire, The New York FED runs Central Bank International Services for a bunch of foreign central banks. They have I don't know, three four trillion dollars of custody assets from foreign so there's a lot. There's lots of pieces to the FED.
And then there's a.
Research department, uh and there's a lot of outreach to try to get information about what's really happening in the world. I mean, the one thing that I did that was probably a little new from the FED perspective is I tried to broaden out the people that the New York Fed was talking to. Historically, the New York FEDA typically talked mainly to the primary dealer community, so that's where they obtained their information from. And I thought that that was too narrow. We need, we need, we need a
broader set of perspectives. And so I hired a woman named Haley Bowski who came in and literally built out a whole operation so we could actually interact not just with the cell side, but also with the buy side. And so we started an advisory group of people for you know, hedge funds, pension funds, insurance companies, buyside investors, and so we have them in periodically to talk to and so we got a much broader network of information
that we could sort of take on board. And I think that's valuable because you know, where you sit really does influence your perspective, and you sort of want to understand what biases and you know, self promotion sometimes that people are talking their book that you want to be able to make sure you don't get fooled by that.
Now you could go back not all that far in the FED history, and there was none of this communication. It wasn't a transcripts release, there wasn't a reporter scrum and a Q and A. There wasn't even an announcement of change and interest rates. You had to follow bond market to see when rates changed. What are the pros and cons of being so clear and so transparent with market participants? Is the risk that maybe we're too clear?
Well, I think there's a strong argument in favor of transparency as opposed to opacity. And you know this has been debated within the Fed for many years. I mean Alan Greenspan, Paul Volker definitely preferred to be opaque. I mean Alan greenspand famously said if you understand, if you think you understand what I said, then I wasn't unclear enough for something.
To that effect.
So the value of transparency is that if markets understand how the Federal Reserve is going to react to incoming information, the market can essentially price in with the Fed hasn't even yet done, and so that can make monetary policy work much more rapidly.
So let's think about it today.
So the market is pricing in roughly five to six twenty five basis point rate cuts between now and the end of the year, so that means monitary policy is easier, even though the Federal Reserve hasn't cut rates yet, So.
They do some of the work for the Fed. Yeah, and it makes it.
And it also means that as newcoming information is coming in, the market can reprice, and so that can cause the impulse of the economic news to be filtered into financial conditions much more more quickly. I'm a big believer in financial conditions as a framework for thinking about monetary policy. You know, twenty something years ago Jan Hattys and I introduced the gold SAX Financial Conditions Index, and it took about twenty plus years for the Federal Reserve too sort
of endorse it. I mean, Jay Powell talks about financial conditions a lot more than any other chair of the Fed ever has. The reason why financial conditions are so important is in the United States, the commy doesn't really run on short term interest rates. It really runs on how short term interest rates affect long term rates, mortgage rates, stock market, the dollar credit spreads. You know, we have a big capital market compared to other countries, and so
shorts are not really the driver. Now, if short term rates and financial conditions were rigidly connected, so if I moved the short term rate by X, I know exactly how much financial conditions are moved by. Why we don't have to worry about financial conditions, but there's actually a lot of gift between the two, and so financial conditions can move a lot even as short term interest rates
haven't changed very much. I mean, good example is just the last three months, last three months, since the end of October till now, financial conditions have eased dramatically. I mean, the Golden Sacks Financial conditions indexes moved by about a one and a half points, which is a big move for that index, even as the FED hasn't done anything in terms of short term rates.
So part of the problem with everybody anticipating FED actions is there is a tendency for many people, sometimes most people, to get it wrong. Wall Street has been anticipating a FED cut for what is it now? We're in the seventh month, eighth month of Hey, if the FED is going to start any day, now, what does it mean?
When anticipating FED actions almost becomes a Wall Street parlor game, and there's less focus on what's happening in the broad economy and more focus on, well, what is the second and third derivative of this mean to this economist advising this FED governor and the impact on the FOMSA.
I mean, sometimes I think you're right that there's almost too much focus on what's going to happen at the next meeting. I mean, you know, when you go to the press conference now, Powell has just asked multiple different varieties of the question. Okay, so what would cause you to move at the March meeting or at the May meeting? And of course Paul's not going to answer that question, you know, because it depends it depends on how the
economy evolves between now and then. So I think, you know, one of the problems I think you have is that the Fed Reserve does publish a forecast, the Summary of Economic Projections, which is the forecast of all the nineteen FMC participants, So that gives you an idea what they sort of think is going to happen at any given point in time. But those forecasts are, you know, not particularly reliable and says all forecasts, Yeah, it's all four cut stars. So you don't want to you don't want
to take it sort of literally. But you know, like right now, there's a bit of a gap, right the FEDS is talking about three rate cuts in twenty twenty four, and the market's got five to six priced in, so you know what will happen is the economic news will come out and that will drive make the FETI either go more quickly or more slowly, and that will will Well what actually is important? So I always tell people focus on the data more than what the feder Reserve says beyond the next meeting.
Well, although, to be fair, and I find this perplexing, say what people will say about Jerome Powell. He has said what his position is, he has said what he's going to do, and then he has done exactly that for the past three years. And it's almost as if Wall Street just doesn't believe him. Like, no, no, we're not going to cut this year. You got you got three or four quarters settled down. No, no cut next month,
says wall Street. He has said what he meant and then stuck to it, and yet the Street seems to doubt him.
Well, there's two reasons why the market could disagree with the FED. One is they could misunderstand the Fed's reaction function. So you give them the FED set of economic data, how are they going to react to it? But it also could be a disagreement about how the economy itself is going to evolve. The FED might be more optimistic or more pessimistic on the economy than market participants. Right now, it's really hard to say what's what's the disagreement about.
Does Wall Street think the comedy is gonna be weaker than the Fed does, or does the or does the market just think that the Fed is going to be more aggressive than the Fed things at this point?
Right Sometimes it just looks like pure wishful thinking.
I think sometimes the market just gets ahead of itself. It's almost like there's we're now talking about easing, so the bell is about to go off, and I don't want to miss out, and so I'm going to be
pretty aggressive about positioning for that. And I think I think there's a little bit of you know, and sometimes things tend to go too far because people get caught off size and then people have to close out the trades that went wrong, and so everyone sort of moving all at once to the other side of the boat, and so things can get overdone at the end of the day, though, I mean, the FED reserve, you know, writes the story. You know, the market has to converge
to what the FED ultimately does. And so this is why the Fed's not particularly worried about when the market prices in more or less because at the end of the day's view, as you know, we'll do what we need to do and the market will have to come along with us.
It's inevitable. So we mentioned Jerome pal He's been as clear as any FED chief in history. What are your thoughts on how the modern Federal Reserve communicates with markets in the public today versus how they used to do it. You don't even have to go that far back twenty years ago.
I think it's as I said earlier, I think it's a lot better way of communicating because then markets can understand what the Fed is up to. They can interpret economic information and real time and figure out what that means for the likely path of short term rates, so financial conditions can move long before the Federals are actually acts. Now, obviously, you know there's there's a risk in all this because what the Fed says may not be borne out by
the economic information. And so I think the important thing in all this is not to take what the federalser says as gospel. When they have a forecast, that's their forecast today, and that forecast will change as the incoming
information warrants it. I think where Paulo has done a really good job is being very clear about his commitment to getting inflation back down to two percent, because the biggest risk over the last couple of years was that people would start to doubt the Fed's willingness to be tough and and and finish the job. And if that were to happen, inflation expectations would have become unanchored, and that would have made the fedes job a lot more difficult.
One of the great developments of the last couple of years is even though we did have a period of very high inflation, long term expectations really stayed unanchored through that entire period, and so paul deserves it quite a bit of credit for that.
So we're recording this a few days after his sixty minutes interview broadcast. Some things that I took away from that. First, it's a complicated job with a lot of moving parts. And second, the FED as an institution is a political They serve the public, not anyone branch or anyone party of the electorate. I thought he was very intelligent and reassuring. What was your reaction to that interview?
I thought it was a very good interview, and I thought he actually broke a little bit of new ground when he talked about the fiscal sustainability issue, and he also talked about the importance of the US role in the world.
I picked that up also. I thought that was the first time I've heard of FED chief talk about liberal democracy is an important aspect of global leadership.
Yeah, exactly, And so I thought that was a noteworthy, a new new piece. I thought the rest of it was, you know, pretty much tracked, you know, his remarks at the press conference. You know, I think that, you know, it's good for him to get out there and sort of demystify the FED. I mean, the FED is you know, not so you know, easy for the average person to understand. And so going on sixty minutes is is is a good idea from from from time to time. I thought he did a you know, I thought he did a
good job. I thought it was very very clear. You know, this is not the first FED chair that's been on sixty minutes.
Uh, BERNANKI has done it.
Yeah, BERNANKI has done it. I'm not I can't remember if Janet Yellen did it or not, but.
Uh, she definitely did it as Treasury secretary, remember if she did it.
As we've been very lucky in terms of the leadership of the FED. I mean to have I mean Greenspan obviously, you know, was on sort of without parallel, and then and then they have Bernanky yelling and Paul in a row. Those are three exceptionally good FED chair. I mean my only you know, critique of the FED.
And you know I write for Bloomberg, you know sometimes you know, I say what I what I think and let the chips follow. They may.
The one I think mistake the FED made, you know over the last few years was they were really really late to get off the dime in terms of it's starting to tighten monetary policy now.
Isn't that historically true? Is it so? The Fed throughout the twenty tens, we're late to recognize, hey, we don't have to be on emergency footing anymore. Not only were they late to start tightening in two thousand and one, the twenty twenty one, they were late to recognize inflation peaked in twenty two. I mean, it's you could easily make the argument that they could have begun cutting any this meeting, last meeting two meetings ago. Take the past
six months of inflation, we're at two percent. Yeah.
I think the reason why they're not cutting at is is there's really two reasons for that. Number One, the economy is a lot stronger than they thought it was going to be, and so that means the risk of waiting is a lot lower than they thought it was going to be. Because the economy, you know, grew over three percent in the fourth quarter. The Atlanta Fed GDP
now forecast for the first quarters over four percent. I mean, obviously it probably won't be that strong when all the data comes in, but the Kammy has a lot of momentum, and so the pressure on the Fed to cut rates because of weakness and growth weakness and the labor market just isn't there, and that allows them to be more patient.
The second thing is important is a little bit of delay is not going to have a huge consequence because look what's happened to financial conditions over the last few months. They be dramatically So the Fed is already getting a lot of additional support to the economy without actually having hand to cut cut rates. In some ways, the Fed can sort of have its cake.
Keep, you know, show that they're tough minded, and they're gonna get inflation all the way down, and and and and and and you know, they can have their cake and eat it too and have the market basically use financial conditions and provide support to the economy. So I think it's you know, it's worked out very well from the Fed's perspective. So so you mentioned you you contribute
to Bloomberg Opinion. One of the criticisms that took place in the prior administration was the President Trump kind of haranguing.
J.
Powell to cut rates, and you wrote an op ed tell after you had left the FED saying the Fed shouldn't enable Donald Trump. In other words, the independence of the institution is much more important than anyone rate cut or rate hike it at any time tell us about that. That generated a lot of controversy.
Yeah, I think people you know, I probably didn't say it the way I needed to say it. It was really more of a thought experiment about how, you know, if the Fed Reserve really cares about the country, they just need to you know, in the economy, which is
their mandate. They just need to do the right thing and let the chips fall, or they may I think that, you know, the Trump administration's attacks on the FED, I think are really you know, counterproductive for the Trump administration, and they're also damaging to the FED because if the FED is viewed as politicized, that basically reduces people's trust in in the central Bank. And I think if the trust in the central Bank is reduced, that makes the
Federal Reserve less effective as an institution. One reason why I think the FED, you know, doesn't take politics into consideration. And in my experience, I was at the FMC table for eleven and a half years, never talked about politics, never consideration in terms of montre policy decisions. For very simple reason. If you start to take politics into consideration, you've politicized the FED. And if you politicize the FED, you've basically compromised the independence of the FED and its
ability to be effective. So you just don't want to go down that path at all. And I think, you know, I think J. Powell completely understands that, and you know, I give him a lot of credit. I mean, when when Trump was attacking him pretty vocifiorously, Paul did not rise to debate. He was completely silent, and he just did his job it's got to be tough to be, you know, being beaten up.
Publicly by the president. But he showed a tremendous amount of discipline, and I think that basically, you know, enhance the credibility and independence of the FED. So that comment we were discussing earlier that he made on sixty minutes, here's the quote, there's a real desire for American leadership. Since World War Two, the US has been the indispensable nation, supporting and defending democracy, security arrangements, and economic arrangements, with
a leading voice on that. It's clear the world wants that. I would want the people in the US, in the United States to know this has benefited our country enormously. It benefits our economy so much to have this role, and I just hope that continues. Am I reading too much into that to say, hey, this is an argument against President Trump, who is trying to realign the world and pull back from US leadership. I think it's I think it's a something hit.
Jere Paul very much believes in that US engagement in the world leads to better comes, both in a security perspective economic perspective. Absolutely essential for addressing issues like climate change,
and I think you're just expressing his opinion. Obviously, if if there is a next Trump administration and they decide to file follow a very isolationist policy, I imagine that, you know, Paul will not agree with that, but I think he'll be very silent about the fact that he doesn't agree with it because he won't want to, you know, engage in that political process because that will compromise the
independs of the FED. So so to your point, this was pretty you know, this is a step out for power relative to what he said, but there was nothing in there about who was in favor of what.
It's not a political statement, it's not a pin the fact that hey, this US leadership in global economics has nothing but benefit the country.
Yeah, it's his opinion that this is in the US's interest. It has been in the US interests, in the US interest today, and it will be in the US interest in the future. That's his view, and I have to say I very much agree with it.
I don't disagree. And if there are some candidates that don't have that belief system, well, is that being political or is that just here's a historical fact, this is what's helped the US.
Well, I think he's allowed to have his beliefs, and I don't think that you know his his this belief that he's expressed is should be viewed as a controversial one. I think that's that's that's something that you know, a high number of people in the country. I think would would would would support.
I don't disagree at all. So, so let's talk a little bit about the history of the Federal Reserve, starting with the dual mandate price stability, namely inflation and unemployment. How does the FED balance those two and what are the data points that they follow most closely?
So the FEDS do mandate was actually established by Congress, not by the FED. Congress and the Humphrey Hawkson's Act basically said, here's what we want the FED to do. We want to have the maximum sustainable employment in the country consistent with price stability, which the FED then subsequently defined to be two percent inflation. And so the FED basically is trying to manage the economy with both these
goals in mind. And sometimes one of the goals turns out to be more significant because the FED is doing more poorly on that side. So for the last couple of years. The problem was not that the economy was far away from full employment. The comoty was either at full employment or maybe even a little beyond full employment when we saw how tight the liver market was, especially in twenty twenty two. So the Fed's focus was on inflation because the inflation was well above the FEDS two
percent objective. What's happened recently is inflation's come down, and so the FED can start to talk about both sides of the mandate, not just the inflation side, but also the labor market side. And so now you're going to see a lot more balanced messaging from the FED. Now, the good news from the Fed is that things are going really, really well. You know, you know, the inflation on a six months change basis for the core PC deflator, which is the FEDS you know, preferred measure of inflation,
is tracking two percent. So all we need is another six months of the same as as cheer Paul said in his Breast conference, and we're basically at the FEDS two percent objective and the labor markets doing gangbusters. Frankly, I mean, payroll employment growth over three hundred thousand last month, So we have sort of the best of both worlds, inflation has come down and the labor market is still very, very robust, So you know, it's it's interesting when you
look at polling results of Americans. They're they're very unhappy about the economy, and what they're unhappy about is how much prices went up over the last four.
Not current rate of inflation, exact absolute prices.
It's a price level problem, not an inflation rate problem, because if you look at the so called misery index, which comds like to do, which is the sum of inflation plus the unemployed rate, it's really at a historically low level. So you know, I think what's going to happen over time is if we keep inflation, you know, around two percent, some of the unhappiness about the price
level will gradually fade away. People just sort of start to accept it, and then people will start to assess the ecmomune in a more favorable way for the Biden administration. There's a little bit of race going on, right, will this change in sentiment occur fast enough relative to the November election?
They got seven months to hope that the polling data, the economic data is going to consumer confidence. So it does seem to be improving.
I mean, if you look at the most recent consumer confidence serves, it does look like consumer confidence is improving. So people are starting to, you know, understand that the inflation rate does seem to be much lower, but they're still very unhappy because you know, when you go at the grocery store, you just remember that this thing that I bought for you know, three dollars, you know, four
years ago, and that costs four to fifty. And you know that just every time you go to the grocery store, you go to the gas station, see you're reminded by about the higher price level.
I see it more in the grocery store than gas stations. Our gas is three and change and twenty years ago gas was three and change. That's been flat for two decades, but food prices definitely have and shelter prices have moved up. So before I get to two percent, because I have a lot of questions about that, let's talk a little bit about the labor market. So first we're again we're recording this February twenty twenty three. We just had a
giant number, a giant upside surprise in payrolls. When the FED looks at that number, are they thinking, well, you know it's January, there are a lot of one time adjustments and seasonal ax or are they saying, hey, this labor market is really booming. We can sit back a little bit, a little bit of both.
I mean, in other words, you get you understand that the is noisy and so reality is not exactly what the data is telling you. The data is you know, it's sampled. You know, they've go out and poll people, and so there's sampling bias. Also, in the winter, things get very affected by the weather as you go from you know, warm weather, warm winter weather months to cold winter weather months when you go from rain to snowfall. So the Fed basically doesn't take one month as sort
of gospel truth. They look at the pattern and the underlying trend, and you know, on that underlying trend, labor market looks quite strong. So the Fed is taking a signal from that, and that's one reason why they're more patient about cutting interest rates because they sort of feel like, you know, we can wait a little bit longer, and the risk that we're taking is very slow because look at how strong the US labor market is.
So let's talk about not one month, but the past couple of years of the labor market. You have an enormous number of people who are out on disability, reduced legal immigration for jobs dramatically. Early retirements have been taking place, a giant uptick in new business formation, so that's a big group of people who aren't in the hiring pool.
They were actually running their own firms. It seems like all the issues that have been taking place in the labor market, including the wage size side, is that we just don't have enough bodies to put to work in the United States. I think that was true a year ago. I think it's less true today.
If you look at the ratio of unfilled jobs to unemployed workers, that peaked at around two to one.
Yeah, it was almost record.
High, and now it's about one and a half to one. So the labor market is still really tight, but it's not quite as tight. You also think we got a big positive surprise last year in terms of the labor force growth.
I mean people coming back, people coming.
Back into the layor force. And also immigration and legal immigration into the US picked up dramatically last year. I mean, essentially we didn't have much legal immigration at all during the COVID period and then all of a sudden, we get a big bubble of that in twenty twenty three, and so what you've had is big, strong growth in payroll employment, but it hasn't translated through into a decline
in the unemployment rate. So looking at the unemployer rate, the labor mark is no tighter than it was a year ago, which is, you know, was a huge positive benefit to the US economy and to the Fed, because if we'd had that growth in payroll employment without the increase in the labor force, the labor mark would be too tight, wages too high, and the Federal Reserve wild still be worried about it too high inflation.
And we've seen wages go up. I think for the past six months real wages are actually growing faster than inflation.
Well that's one reason why the e commy is staying relatively strong. I mean, as inflation comes down and novel wages, you know, inflation comes down maybe a little bit less slow more slowly, real incomes increase and that supports the consumer spending. So I think the unwinding of goods price pressures, which is really the big driver of why inflations come down, that's sort of a windfall for consumers right now, and so that's actually sustaining real consumer spending.
And that shift from goods back to services, which is more or less where we were pre pandemic, is certainly easing prices in that sector.
Yeah. I mean, all the supply chain disruptions that we had, you know, a few years ago, caused by that shift in demand from services to goods that just sort of overwhelmed the capacity of the world to bring those goods to the US in a timely way. That's that's that's all unwound at this point.
So let's talk about the two percent inflation target. Your colleague Roger Ferguson in the Council on Foreign Relations last year criticized the two percent inflation target as some that randomly originated from New Zealand, and surprisingly it came not from an academic study but from an offhand comment during the television interview in the nineteen eighties. Is Ferguson right, Is this really just a big, silly round number.
Well, it's true that the Reserve Bank of New Zealand started by, you know, picking the two percent number, and then other central banks followed. But I think there are some logical reasons why they followed two percent was low enough that inflation wasn't going to be sort of important component of people's thinking in terms of their consumption investment decisions. Two percent inflation in the US, I think the thing could argue that that was mostly consistent with price stability.
You know, prices are only the double at two percent inflation compounded every thirty five years. So so but you're right, it was arbitrary. They could have picked a different number. They could have picked, you know, three percent or one percent. The reason why you want to have a little bit of inflation is it really allows you to do two things.
Number one, it provides a little bit of grease in the labor market because people don't like their normal wages to be cut, but relative wage rates have to change, and so if you have a little bit of inflation, it makes the labor market work more efficiently in terms of allowing wage adjustments that allow workers to be distributed appropriately.
So that's the first thing.
The second reason why you want a little bit of inflation is that if you have a little bit of inflation, the nominal federal funds rate can be a little bit higher, and so when you go into an economic downturn, the Federal Reserve has more room to cut interest rates before they hit the zero or bound for interest rates of zero.
So people who are arguing for a higher inflation target today are basically arguing like it would be better to have even more room for the Fed to cut rates, because if the inflation target was three rather than two, the peak federal funds rate in the cycle would be a one percentage point higher, so the Fed would have more room to cut rates. I think there's virtually no chance that the Fed is going to change their two percent inflation virtually no chance. And there's a couple of
reasons for that. Number One, Congress sets the mandate for the FED, and they define it at Brice stability. The Fed has stretched that a bit to call that two percent inflation. I think stretching a little bit farther to call it three percent inflation. That's a bit of a stretch. The second reason I think that they're not going to move from two percent inflation is it's taken the FED a long time to get inflation expectations anchored around two percent.
If you move from two percent to three percent, all sun inflation expectations become unanchored, and it's not obviously you can get them re anchored back at three percent, because if you're willing to change the target once, why couldn't you change the target again, especially in a situation where the Fed US is running a massive fiscal deficit, huge fiscal problems, and people always wonder, well, one way out of a fiscal mess is is inflation and to monetize the dead.
So I don't think you're going to do it for that reason. The last reason why don't think they're going to do it is there's plenty of room to cut interest rates. Federal funds rates over five and a quarter percent, So if the Commie gets in trouble over the next year, the Fed has plenty of room to cut rates before they get to the zero loorbow for it. They could do three fifty bases point cuts and you're still way above.
Aach So it's just not going to happen. This is sort of an academic debate. I don't think it's a true FED reserved debate.
Really really interesting, So let's talk a little bit about different FED policies over the past decades and how those decisions have aged. Let's start with last decade the twenty tens, FED rates were essentially zero the whole time, and yet we couldn't get CPI to budget above two percent the whole decade following the financial crisis. What made that so challenging for monetary policy makers?
Well, I think the problem coming out of the Great Financial Crisis was how much damage was done to.
People's balance sheets and to their credit scores. And when you say people, you mean households, you mean operations for everybody.
Households mostly, but also businesses. Just a tremendous amount of damage caused by that very deep recession. I think of all the households who came out of that period where the value of their mortgage was higher than the value of their home. Think of all the people that were delinquent on their obligations and so then got bad credit scores, and then that reduced their access to credit. So there
were a lot of headwinds. The other thing that happened was fiscal policy that was eased pretty dramatically when Barack Obama became president. That got clawed back very very quickly in twenty eleven and twelve. So there were fiscal headwinds that we haven't faced this time around that also held the economy back. So you're absolutely right. The Fed's challenge during that period was to make monitor policy accommodative enough
to support the economy sufficiently to keep inflation at two percent. Now, the FED fell a little bit short of their inflation objective, but you know, if you really look at where we were, you know, on the eve of the pandemic, and it was a pretty good place.
And the fact that it took a decade is says more about the lack of fiscal spending Congress than what the FED did.
And you had a very long expansion. I mean, the reality of the expansion would have kept going except for the COVID pandemic.
Really interesting, So let's talk about the prior decade to two thousands. You had a speech around twenty fourteen where you said the FED was late in recognizing how long they kept rates low for and that the liftoff from four to six should have happened faster and sooner. Tell us a little bit about what the lessons were from that episode and what the FED should have done in the early two thousands.
So there's been a big debate going on for many, many years about how should the FED respond to financial imbalances in the economy, how should they respond to sort of incipient bubbles. The green Span view was it's very hard to recognize bubbles. It's not clear how you rain them in. So the best thing to do is just sort of let the bubbles take to run their course,
and then clean up after the bubble collapses. Here in the bus period, my view has been very much that, no, that's not a great strategy because the bursting of the bubble can cause a lot of financial knock on effects, and so better to identify the bubble in real time and try to sort of rain that bubble in. And I think, you know, if you look at the two thousand and four two thousand and seven to eight period, boy would have been really good if we'd done something
about subprime mortgage lending, about mortgage underwriting standards. If we'd done that, we would have had a much smaller housing bubble, and we would have had much less damage when that bubble collapsed in two thousand and eight. So my view has always been let's try to be a little bit
more proactive. Now, the problem with being proactive is, you know, how do you know it's a bubble, and the rally is you don't, and so it's very hard to convince people to take proactive steps to deal with sort of incipient problems because you can't really be sure with one hundred percent confidence of what's actually going on.
So you're really pointing out two issues. First, I want to say, the FED had taken rates under two percent for about three years and under one percent for a year, so that was pretty unprecedented until you know the post financial crisis here. But you're also pointing out to the FED as regulator, and you know, to cast blame. Greenspan was very much anti regulator, a little bit more lovely care and he allowed a lot of non GSE, non
traditional banks to make all sorts of loans. It's not like he gave them permission, he just didn't really regulate them. And that's where a lot of the really sketchy prime can and the FED actually did have some authority in terms of regulating the mortgage market, authority that they didn't really use. Need Gramlik was a governor at the FED, and he sort of brought his concerns, Oh boy did
he to Alan Greenspan, and nothing really really happened. I mean, I mean, even when I was at Goldman Sachs, you know, and working with my successor, Yan Hostis, we were very focused on how this mortgage, this housing bubble was fueling
consumption through what was called mortgage equity withdrawal. People were basically taking their appreciated gains in their houses and they were pulling it out in terms of you know, Helock's home equity loans, and we felt that that was also contributing to stronger consumption and this was going to potentially end quite badly. Ed Gramlik was an unsung hero of that era because he really identified what was going on in real time and not in a you know, hair
on fire historyonic way. He was very sober and thoughtful and academic, and you know, had had Green spent paid more attention to Gromlik, could have been a very different outcome. Well, I think you would.
Have had a smaller bubble, maybe you'd have less you know, financial innovation. You could wait against some of the triple
A cdo stuff. I mean, you know, that's a that was I mean, some of the innovations in the financial industry in terms of products also contributed to the to the bubble, sure, right, because you managed to sell all these you know, you took a bunch of bad subprime mortgages, then you trunched the cash flows and turned these subprime mortgages into seventy percent triple A rated securities, and so
that sort of kept the whole thing going. So the financial engineering was also an aspect of the problem that contributed to the to the bubble.
The rating agencies changed their model. They were being paid by the underwriters instead of being paid by the mode purchasers. That's a big factor that. Yeah, I think a lot of people overlook all right, So we could spend forever talking about the financial crisis, but I want to get to the nineteen nineties, and we've referenced the Maestro. I was on a trading desk back then, and I always thought green Span was way too solicitous. I'm not sure if that's the right word. He was way too concerned
about how Wall Street perceived him. Is that a fair criticism of green Span? Because it felt like he was much more accommodative of short term market reactions anytime there was a problem for a lais a fair randy and he went right to you know, the interventionist policy so we had the long term capital management issue, we had the Thai crisis and the Russian ruble crisis, and every time there was a hiccup in the markets, green Span didn't hesitate to cut rates. I think that's you know, fair.
But at the same time, I think green Span you did a reasonable job being inflation control. So the consequences of coming to the market's aid to sort of sort of smooth out market dysfunction, you know, didn't have a really negative consequence for inflation. So I think he sort
of got mostly got away with it. But I agree with you he was probably a little bit more willing to address relatively you know, small, not large, not persistent movements in markets that maybe the FED could have looked looked past, you know that said, I mean, you know, his track record was really good. I mean, I think the blind spot was really just more about not having this view that we can identify bubbles and we should deal with bubbles in real time rather than waiting for
the bubble to burst. And that was that was his big mistake. If you know, if you think about when when Ben Bernaki came in in two thousand and six, you know, the die was already cast right in terms of what was going to happen at that point. It's just what no one had yet recognized it.
No, there's no doubt about that. And in fact, by six real estate had peaked. You saw it in the homebuilders and the banks and the brokers like there were market signals that there was problems, but the overall stock market kept going until you know, late seven. So let's talk you mentioned earlier about surveys. I always look at surveys askance because A people don't know, and B even when they know about what's happening today, it tends to be on a lag. And then lastly, they have no idea.
When you ask, hey, where's inflation going to be five years from now? That seems to be like about as silly. A. Nobody has any idea, much less a layperson. Why do we put so much emphasis on inflation expectations? Well, I don't think that.
I mean, I think you're right that people don't have a really good sense of and we talked about earlier at price level versus rate of inflation. But it's interesting to see how their views change over time. So it's probably not the level of what they perceive inflation is going to be over the next ten years.
That's interesting.
It's whether they think it's higher or lower than it was, you know, a month ago, six months ago, a year ago. The reason why inflation expectations are so important is that people think inflation expectations are truly going to be higher, then that's going to set the wage setting process, and wages are going to be higher. And if wages are going to be higher, that's going to feed into prices and that's going to cause actual inflation to be higher.
That was a very nineteen seventies problem that seemed to be what why inflation was so sticky? Yeah, and we had such a hard time until Vulf came along getting out of that cycle.
And one good thing is too we have other ways of measuring inflation expectations now that we didn't have thirty years ago. We have the treasure you tips market, so we can look at tips shields versus nonal treasure yields and we can sort of calculate what are people willing to pay for inflation protection and that gives us a sense of how much inflation is into the into in people's expectations.
Marketing expectations do the inflation expectation surveys and the spread between the tip shield and treasuries. Do they correlate well or are their occasional big divergence.
I think they I think they correlate well in the large, but I don't think they correlate well at all in the small. I mean, one example is, people look at tip shields and they look at what's called the five x five forward rates of what's inflation going to be five years from now for the next five years, and that five year forward inflation rate moves along around with
current oil prices. So when the rest go over town, it seems to affect the people's inflation expectations through the tips market five years from now, which makes no you know, no sense.
Part of the.
Problem is it is also the liquidity of the tips market is different than the liquidity of the nominal treasury market, and so that also can cause some noise in terms of your measurement. But you know, two separate sets of of of numbers. And then you also have you know,
professional forecasters, you know what do they think? So that's a third set, and so you look at these three pretty disparate sources of information on inflation expectations, you can get a pretty good sense of, you know, is it broadly stable or is it moving in a bad way.
So let's talk about the biggest part of CPI, which is shelter. When we're looking at inflation, we really want to know what shelter costs are. The way bls, the way the Bureau of Labor Statistics measures shelter is owner's equivalent rent and full caveat everybody's aware there's issues with this and there are some changes coming. But let's talk a little bit. As it's been for the past couple of years. It's survey based. Hey what could you rent your property for? Seems to be a funny question. So
it's laggy versus real time measures. And yet this is the single biggest part of CPI. George Box famously said all models are wrong, but some are useful. Is this a model that is both wrong and useful.
Well, I think you've underscored some of the shortcomings of owner's equivalent rent, as you know, both in terms of timeliness and also in terms of you know, it's not even a cash outlay that people are making. So when you started thinking about what's having to people's real incomes, you're sort of imputing a cost that they don't actually really incur. So when you're started thinking about how much can people actually afford to buy, well, I'm not really renting my house from myself.
So you're absolutely right. You have a budget line for shelter, but it doesn't include you've already sort of right, it's already in your budget.
It's already in your budget exactly. So I think this is one reason why the Fed puts more emphasis on the personal consumption expenditure deflator because it has a much lower weight for shelter. But you're right, the legs here are sort of crazy. So one reason why we're going to see lower core PC deflator and lower core CPI over the next twelve months is because rents did come down and then with a lag of about a year or so.
Is it that much? I always thought it was a couple of six months months, quarter or two.
It's six months at least six months, like, because the rent's only repriced periodically, right every year or two, every year or two, and so they have to reprice before they get into the So it's that lag because you know rents repriced instantaneously, then everything would be sort of up to date. But rents price slowly when you know, the least comes due, and so it's lagging behind reality.
So this is something that's going to probably feed into the core PC deflator and keep inflation a little bit lower over the next six to twelve months.
But is it really you know, real.
In terms of what's actually actually happening to inflation on the ground, it's probably you know, going to be a little bit misleading.
So there are a couple of real estate entities, the Apartment List Index or Zillow does the real time in K Shiller, right, So even k Shiller is a little bit of a lag, not as much as owner's equivalent rent. But the interesting thing is the real time indicies have showed falling real estate prices the past, i don't know, three months, four months hasn't gotten into the CPI yet, right,
And so it's interesting it's coming, it's coming. That's that's got to be very optimistic to think, Hey, even all these people are concerned about reacceleration of inflation, we know the biggest part of CPI is going to keep drifting lower. That's got to be positive for future Fed policy.
Right, But the question is is it temporary or is it more persistent? So to figure that out. To figure that out, we have to look at the housing market. So how is the housing market performing? Well, the housing market actually looks like it's starting to come back. Why is it coming back? Because mortgage rates have fallen by you know, one percentage point, and so that's actually stimming in the housing sector. So I think the interesting question is.
Not like just what's the next chapter as this stuff feeds through the CPI, it's what's the chapter after that?
Based on how quickly does the housing market recover in response to lower interest rates.
So so Powell was asked, I think it was on sixty minutes about the commercial real estate. So as opposed to up every year or two, you have leases that go five, ten, twenty years. So this seems to be taking place in slow motion. But it seems like commercial real estate is a genuine risk factor, certainly for some
of the regional and community banks. How should we be contextualizing what's been taking place with remote work and work from home and the return to office process that still has lots of vacancies in urban centers.
Yeah, I mean I would define it more nearly than commercial real estate. I would just find it as office building space because that's really where you have very high vacancies, rates, very underutilized resource, and prices are coming down, especially for you know, class B and Class C buildings, not the best stuff coming down quite significantly. You know, you're absolutely right.
This is sort of a slow burn rather than a fast burn, because the problem typically arises, not you know, immediately arises when the mortgage has to be the commercial real estate loan has to be refinanced. As long as the income on the property covers the interest on the loan, the borrower isn't going to default when the loan comes due, though the lender typically says, hey, your building is worth forty percent less than it was before. I'm sorry, we're
not going to lend you as much money. You need to come up with more collateral. And at that point the borrow might say, I don't have the collateral. The building's yours, and so then that crystallizes in the loss for the commercial bank. I think there are definitely commercial banks that are going to have trouble due to their concentrated commercial office building portfolio, But I don't view this as big enough or fast enough to really be you know, systemic from a financial stability perspective.
Huh really interesting. All right. We've talked about the housing market, the office spased market. One question we really haven't gotten to has been the stock and bond market. They've been very chaotic the past couple of years. How does the FED think about stock or bond market volatility? How does that impact decision making?
Well, I think, as Paul has said many times, you know, monitary policy in the US works through financial conditions, and two key components of financial conditions are the bond and stock market. So if the bond market eels are low, the stock prices are high and rising, that's making financial conditions more accommodative and that's actually supporting the economy. So
the FED is going to take that into consideration. So, you know, we talked earlier about why the FED isn't moving yet because they want to be confident they're going to actually achieve their two percent objective. They're not moving yet because the labor market is strong. But they're also not moving yet because financial conditions have eased a lot, and so the market is doing quite a bit of
work for the FED. Even before the Fed actually has cut interest rates, So the FED, you know, I don't think I think it's important to understand that the FED doesn't really target financial market prices. So people sometimes say, well, if the stock market goes down, the Federal Reserve is going to react to that. No, the Fed's going to react to the stock market if the FED thinks the stock market has gone down far enough, persistently enough to affect the real economy to impede the ability of the
FED to achieve its its inflation and employment objectives. Fed doesn't care about the stock market itself. It cares about how the stock market affects the real economy.
So sometimes you get a market crash and the economy shrugs it off. Nineteen eighty seven, one day, twenty three percent, the economy couldn't care less. And then even the dot com implosion, which was modest on the Dow and the SMP if you consider thirty percent modest, it was brutal on the Nasdaq, which was something like eighty one percent. But we had a very mild recession in two thousand and one. So does that basically argue for less intervention
by the FED, or does the subsequent FED intervention. Is that what prevented this like A one, from becoming much worse.
Well, I think one was really you know, also nine eleven was really a significant event, and that I think provoked a more and more much more aggressive FED. I think the Fed, you know, is aware what the bond market is doing and where what the stock market is doing, because that affects the transmission of monetary policy. The real e commy, but they don't have a view that we need to target a particular level of the stock market or the bond market. That never comes up as an issue,
you know. It's not like the Fed. You know, if the stock market went down ten percent tomorrow, it's not like this the Fed would go, oh, we need to change monetary policy. If it went down twenty five to thirty percent and stayed persistently lower, that would probably have implications for the economic growth, and that would then affect monetary policy. But it's all through the effects on economic growth. Paul has talked about this. It's it's the persistence of
the change in financial conditions that matters. It's not what the stock market does over a day or a week. It's what the stock market does over six months or a year that really matters.
So before I get to my favorite questions, I just have to ask, really, what you're focusing on today. You join the Princeton Griswold Center as a senior advisor, You chair the Bretton Woods Committee, you serm on the Group of thirty and Council form relations. Are you still doing all those actively today? Tell us what's keeping you busy these days?
Those things the Brenton Woods Committee, I'm the chair and we've been broadening out the work that we do at the Brendon Woods Committee. I mean to just give to tell you what the Brenton Wicks Committee is about. It's basically dedicated to the notion that international cooperation and coordination
lead to better outcomes. So along the lines of what Paul said in a sixty minutes interview and basically trying to build strong international institutions that can facilitate cooperation on important issues like you know, financial stability, climate change, digital finance, it's health trade where countries working together can lead to
better outcomes. So the Bretonwitz Committee, uh, you know, we it's been growing, the work has been expanding or doing work on digital finance, climate finance, sovereign debt future of the multilateral of financial institutions like the World Bank and IMF, what should their role be going forward. So it's pretty exciting and I spend you know, quite a bit of time on it.
What's the Group of thirty?
Group of thirty is a is a group of people. It's a it's a It's an organization that was set up several decades.
Ago of.
People that are either currently very senior in academia policy or we're involved in academy and policy at a very senior level. You know, people like Paul Volker was a member of the of the Group of thirty. Jean Clautchochet is a is a current member of the of the Group of thirty. People of you know, Mark Karney is is the is the person who's in charge of running the Group of thirty from from a member of perspective, so a lot of senior people that focus on important
issues of the day. So, for example, a number of months ago, the Group of thirty asked me to lead a project on you know, financial supervision reform. You know, what we do in terms of the regulatory policy with respect to the banking system in light of what happened in March of twenty twenty three with respect to Silicon Valley Bank and a number of other banks. And in January we published a report and we basically argued for
a number of reforms that need to be made. And you know, I've been talking to the people at the FED nails. We're trying to get some traction for some of the proposals that we've made.
Really interesting, all right, I know I only have you for so much time, so let me jump to my favorite questions that we ask all of our guests, starting with what's keeping you entertained these days? What are you watching or listening to?
I usually want, you know, stream things to you know, television series that strike my fancy, you know right now, you know, right now, it's a little bit of a you know, sometimes it's a little bit of science fiction like Foundation.
Or are you do you watching the second or third season of fa I'm.
In the second season right Sometimes it's things like poker Face, which is on Peacock. Another one I'm watching my wife and I now mister and Missus Smith.
Just started on Amazon, just started, so.
You know, it's you know, we usually watch one show at night and that's us also tolerance. I never It's a great way to just errow and wind.
At the end of the day, I would not have pegged you as a sci fi fan. And I'm going to give you the two recommendations I give everybody. Okay, one is on Amazon Prime, the expanse, which is, Yeah, I did I did read. I did watch about five five of did you like it? It got a little wacky at the end.
I sartainly ran out of gas after about yeah, fifth season. I did watch a lot of a lot of.
That fascinating political US. And then the other one was it's only two seasons altered Carbon It's really good. I haven't seen that one. Fascinating story and filled with all sorts of really interesting as a sci fi geek, those are my two favs. Do you liked? For all Mankind? I haven't seen it?
So?
That one is.
About the sort of alternate space race between Russia and the US where Russia actually gets a man on the moon first, and then it follows sort of the develop of the NASA program over the subsequent.
How is the series? It's quite good? Oh really, I'm gonna I'm going to add that to my list. I am a soccer for a great space venture. Let's talk about some of your mentors who helped shape your career.
So the most important one, by far, I think, was my professor at Berkeley, James PEARSK. He worked at Yale, then he went to work at the Federal Reserve Board in Washington. He was the social director of research, and then he went to Berkeley. And I was his research assistant at Berkeley for five years, wow, which is a very long stretch as being someone's research assistant. And he sort of got me interested in policy and got me sort of knowledgeable about what the.
Federal Reserve was all about.
And so I think the reason why I went to the feder Reserve rather than went into academy is because of his counseling. And he became a really good friend. But there are a lot of you know, there's a lot of other people along the way, but he's the one that sort of, you know, stands out.
Huh. Let's talk about books. What are some of your favorites and what are you reading right now?
Right now, I haven't really gotten into anything particularly that's like grabbed me. I just finished Andy Wear's a book, Hail Mary I don't know if you've had science fiction one. I don't read a lot of science fiction, but every once in a while I get a hankering for it. I typically read more things that are like thriller detective
kind of things. But you know, I'm not a I took a lot of literaually in college, but I don't read a lot of heavy literature now because I usually by the end of the day i'm I'm I'm a little wiped out and and and to read really good literature, it takes it takes focus, takes a lot of attention. So I like things like Dennis Lane. I think he's he does really good stuff. Uh don Winslow, I know the name for sure, it does some.
Really good stuff.
Uh So I like the stuff that's like a little bit you know better than you know, sort of Lee Child's you know a little bit deeper.
Sure, Lee Child's. My wife is a giant. Lee Child read everything.
Lee Child is entertaining, but every story is sort of along the same same lines. So so that's the sort of stuff that I like to read, and I read.
I read a fair amount the sci fi book I have sitting on my nightstand that I'm almost afraid to start. Is the three body problem, and it's each book is nine hundred pages. Three books is it's actually by a Chinese author and references. Is the inability to forecast the location of heavenly bodies of planets moon stars. We can calculate too once you bring a third one in. It's just the outcomes. I'll take a look at that. It's fascinating.
Have you read Tediang. He's a short story writer. He writes short story of fiction. He's got two books science fiction. It's fabulous.
What's it's very intellectual stuff. It's he writes. He writes sometimes in the New Yorker magazine. So there's a book of his. I'm trying to remember. I think he's had two volumes of all stories. Yeah, all short stories. The movie The Arrival was based on was based on his short So the one I just got is Stories of your Life and other tells. But the one before that is Revelation Ascendancy. Yeah, it's so funny you mentioned that literally just and I gave that to a few friends
for holidays and stuff. Is great because really I'm excited. That is like the book I Bring on Planes where all I go Now to read. Let me let me go through a chapter. Really, and there's this really fascinating collection of short stories. I'll never remember it, but i'll but I'll email it to you. Diary of an interstellar refrigerator repairman, something along those lines. And it's it's brilliant science fiction, but it's also surprisingly amusing and funny. It's
it's out. If you like those, I think you'll you'll appreciate that they're not it's not all the same story. They're kind of like just very loose set in the same universe, but unrelated type of uh stuff, but really really fascinating. And our final two questions, what sort of advice would you give a college grad who is interested in a career in either economics or central banking or monetary policy.
Find an interesting job, build your human capital. You find that your human capital is no longer going up at a particularly rapid rate, find a new job. I mean, I was very lucky because I jumped around in my career, and I feel like every place I moved, I learned a new set of skills and information which sort of
helped me do better at the next endeavor. So I think it's really important not to get stale and you know, and the second really most important thing is find something that you that you can be you know, that really interests you, that you can be enthusiastic about it. Because if you can't go to work and be enthusiastic about it, you're not going to do very well and you're not gonna.
Be very happy.
I mean, ideally, you know, you like your work, and the difference between work and pleasure so starts to blur and you don't really aren't resentful when there's more, you know, demands for your work. I mean, during the financial crisis, you can imagine I worked pretty long hours, but I wouldn't have had it any other way. I mean, it was absolutely a fascinating period of time, and yeah it was work, but but I got a lot out of it.
My wife describes me as being gainfully unemployed, which is exactly along those things. I would do it if I was getting paid or not. So it works out really well. And our final question, what do you know about the world of investing today, markets, investing, monetary policy that you wish you knew thirty or forty years ago when you were first getting started.
Well, I mean when I first started investing. I started investing in nineteen seventy four, seventy five, and I have to say I was so naive about investing at that time. I didn't really understand you know, you know what really drove stock market evaluation, you know, what determined the success of companies. You know, you'll learn a lot by doing it. And I personally think a lot of people over overinvest
in the sense of making transaction. I found over time that you know, I have good ideas once every like five ten years, and you know you have to wait for that good idea to to and then implement that investment thesis. You know, well, one thing I'm good at it coming out with ideas, but I'm terrible at trading on them.
You know, like Bob Rubin a.
Number of years ago at Goldman's you know, you know, you know, suggested that, well maybe you should, you know, should actually start trading things trying try that. I said, no, Bob, I don't think my my risk tolerance is right for that. And the second reason not to do it is that if you start trading things, then it sort of leaks into your interpretation of information and events, because then you
start to talk your book and try to contribute. You know, this is the reason why the ten year bond yield.
Should fall, because well, I have a position.
I have a position, you know, And I said to me, now, you don't really want me to do that, because when I wouldn't be very good at it, and then I might lose some of my you know, objectivity with quotes around it.
I do like the idea of low frequency trading as a.
Yeah, I mean, I think for most people, buying an ETF on a broad based stock market and then putting it away for twenty years is the right approach.
Can't really just agree, Bill, Thank you for being so generous with your time. This has just been absolutely delightful. We have been speaking with Bill Dudley. He is the former US economist for Goldman Sachs and head of the New York Fed, as well as his many policy roles at the Federal Reserve. If you enjoy this conversation, well, be sure and check out any of the five hundred or so we've done over the past. Hey, it's almost ten years. You can find those at iTunes, Spotify, YouTube,
wherever you find your favorite podcasts. Sign up for my daily reading list at Ridhelts dot com. Follow me on Twitter at Ridolts. Check out my new podcast At the Money, short ten minute conversations with experts about the most important elements of your earning money, spending money, and most importantly, investing money. I would be remiss if I did not thank the crack team of people who help us put these conversations together each week. Kayla Lapara is my audio engineer.
Attika val Bron is my project manager. Anna Luke is my producer. Sean Russo is my researcher. I'm Rid Holts. You've been listening to Masters in Business on key birth ratio