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Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway and I'm Joe Wisenthal. Joe, I feel like it's fair to say there are a lot of weird things that have been going on lately. You know what the weirdest was for me recently? Go on having the FED meeting on a Thursday. Yeah, that threw me off for that entire week.
I thought you were going to say the weird thing was having a FED meeting two days after the election, But no, you're right. I was really confused just the fact that it was on the Thursday at all, Setting aside the fact that it was an extraordinarily busy week, which was just last week.
I didn't realize how much of my sense of normality was in fact influenced by having the FED do something on a Wednesday.
But anyway, that through me too.
So we just had a FED meeting. We are recording this on November twelfth, and clearly this is an interesting moment for the Central Bank totally.
I saw a tweet today. I don't remember who is from, so I can't give proper credit. Or maybe it was a sell side. I don't know just words that I saw on my screen at some point, but I think what made this interesting is this moment, or maybe it was a toom doing note, whatever it was, this moment where the FED is still clearly in the sort of short term data dependency. Are we going to see further progress on realized inflation and so forth? Watching the data?
Plenty of miss signals there. Meanwhile, the market is very seemingly focused on the medium term and thinking a lot about Trump and the new fiscal and macro policies that will emerge under this administration. And I thought that was a really good way to frame it, which is that right now there's two different time frames that people are in, and people are trying to resolve the two, and it makes for some very interesting times in macro, to say the least.
Yeah, And I have to say, like I do not envy policy makers on the FMC at the moment because they have been emphasizing the data dependency, as you said, But there is all that uncertainty about how the Trump administration is going to unfold and what its economic policies will actually look like. It seems really difficult to me to have to react to that from a monetary policy perspective. So basically, there are a lot of questions. Yeah, lots to talk about, and who better to ask these questions
of than a former FED person. So we are going to be speaking with Richard Clarita, the former FED Vice chair, now economic advisor at PIMCO and a professor of economics at Columbia. Richard, thank you so much for coming on.
All thoughts, I'm glad to be on the show, big fan.
Oh, thank you.
So.
First of all, you know last week the FMC meeting on a Thursday. I got to ask, when you watch those, are you sort of watching them like wistfully wishing you are there, or are you thinking like, oh gosh, this is really tough.
Now, well, it can be tough. Yeah, I've certainly involved during my four years there in thinking about and prepping for the press conferences. But yeah, I watched them as a FED watcher now and the chair has become quite polished and experienced and navigating what can be some sometimes some choppy waters.
By the way, Tracy, you didn't say it, but I believe rich is the perfect guest. Oh, I'm sorry, No, I just want to establish that I believe in this moment we are talking to the perfect guest. And then listeners, why didn't you call Rich the perfect guest? So I just want to make sure that.
It was truly an oversight.
Both Tracy and I consider you to be the perfect guest. So we had that fifty basis point cut in September, then we had the quarter point the week of the election. As I'm looking at the warp function on the terminal expectation is for there's sixty five percent chance of a cut in December. So not a slam dunk, but that still seems to be the expectation. What do you give us, as a FED watcher your current read on the crosswinds
that the Fed is going. Let's start with the short term still, because then we can get into the term the crosswinds that are happening right now as the FED looks for the near term path of policy.
Well, they've made some judgments. One they judge that policy is restrictive, that they've done enough, and so they cut rates. They recalibrated. I think that was the term the chair used in September. Important to note they've begun to cut rates even though inflation is still somewhat above target. Some of your listeners may wonder why, and the answer is, monetary policy operates with lags, and so if they had waited to cut rates until inflation fall all the way
to two, then they might have overdone it. So I do think it made sense to get the process started. I do take them at their word. They're not on a preset path. The committee is united a unanimous decision to cut rates, and I think importantly, and I'm sure we'll get to this later. You know, the chairs made very clear that he and the Committee are not going to be making policy decisions in twenty twenty four based upon what might happen in twenty twenty five, and so
I think it's important to clarify that. I think they are data dependent. But my sense is that the probabilities that you quoted seem pretty sensible to me. Not a slam dunk, but I think more likely than not that we get a rate cut in December.
So, just on this point, how do you square the proverbial lags in monetary policy with the desire to not be reacting to an incoming administration where policies are not necessarily clear at the moment.
It's a great point. Luckily, we have a lot of historical examples because as you know, we have presidential elections every four years, and the FED as an institution in the staff have a lot of experience. And one of the things I learned is especially in the US system, unlike say the UK system, where you present a budget,
and here there's a whole set of negotiations. And so I do think that the chair gave a good insight into the process that they'll follow, which is, over time they'll learn about the contours of the plans for policy, then what gets enacted. I do think, you know, it is a good point. I think initial conditions here are quite relevant, and so in particular with inflation running close to target if a bit above, I think the general
playbook they usually follow makes sense. You know, there is a risk that if they don't start moving now, then for certain scenarios it's too late. But I think given where inflation as, they're making the correct call.
So I don't know if economics is really a science or not, but if it is a science, I feel like economists are cursed to never have the pure experiments in the real world that they would like to see and I'm thinking about that specifically since September. Since mid September early October we got that fifty basis point cut. Since then, rates at the long end in particular have been rising. Unfortunately, from a pure scientific experiment, that is around the same time that Donald Trump's odds in the
polls also started rising. Therefore, it's a little tough to tease out how much of this is. Okay, We're going to have more reflationary policies in the next administration, which we can get to versus you know what, the economy is stronger than we thought, neutral is stronger than we thought, and the terminal rate is not going to be as low as we thought, simply due to existing economic conditions.
When you look at that rise in the long end, the higher terminal rate, and so forth, how do you try to disambiguate the two and what signal, if any, do you read in post September market activity.
Great question, and I think you know the simple answer would be you look at all the above. But I think we can make a couple of informed observations. The first and if I were back on my old FED job, I'd be looking at this is longer term measures of longer term inflation expectations, either in the tips market or surveys, and those are very well behave. Secondly, we also have had some pretty strong macro data, big revisions to GDP, which in some ways really change in important ways the
assessment of where the economy is right now. We got a very soft labor market report, but I think the markets in the FED are inclined to look through that given the storm and other related consequences of that. A term perhaps you've used on your show before is also look at the term premium. How much of this move and yields is essentially bond investors saying I want to get paid more in terms of a higher yield given what may happen to fiscal policy or growth. And I
think all of the above has been going on. It has been some moving term premium, some stronger data, backward looking data, and probably some repricing of the path for the economy given the election. I would point out that at this stage, I think you want to distinguish between a phenomenon where by knowing the election victor, I think we know something about the contours, for example, tax policy,
It's more likely that the twenty seventeen. Trump tax cuts are going to get extended more or less intact, and that probably would not have been the outcome if we'd had an opposite election outcome. So I think in this early stage, it's hard to determine how much of this is a repricing of the level of markets versus a new trend, because I think both could be going on.
I feel like I should just mention again, we're recording this on November twelfth, and there is something happening tomorrow that might have a bearing on this conversation, which is we're going to get the latest CPI reading when it comes to inflation. Obviously there has been improvement on this front, but in the most recent FMC meaning Powell was emphasizing, you know, really making the point that he expects this
to be a sort of bumpy path going forward. When a FED chair is saying something like that, should we assume that the risk is to the upside on prices?
I don't think so. I don't think that's the message he was trying to convey. I take him at his word that it is a bumpy path. Maybe I'll put something back into that conversation that sort of fell out
of favor. There's a lot of talk a year ago about the last mile being tough to navigate, and I would point out that, you know, if you look at inflation on a twelve month basis, in December of last year, inflation fell to two point nine the Fed's preferred measure on the core PCEE and that was a big moment. That was the first time in almost three years inflation
had was two points something. It's very likely that this year will end in inflation will end on a twelve month basis anyway at around two eight or two nine. So at least by that metric, you know, this is a year when we've not moved backwards. But you could argue that, you know, progress on inflation at minimum has been slow. And so the way I take the conversation from the Chair and other members of the FED is they have a view that disinflation will continue, but they're
also open to the risk that it may stall. I don't think necessarily it means inflation is going to go up to frightening levels, but progress could stall, and I think that they're very attuned and attentive to evidence in the data on that.
So, as you mentioned, you know, there's a confluence of factors. One of the things that may explain why the market has repriced its terminal rate or the depth of the rate cut cycle this time. And you mentioned that we had some pot we got that strong job support, there was some positive GDP revisions that make it look like the economy is in a higher state. The one thing that's been bandied about for years now is this idea that post pandemic, like so called our star is higher.
I don't know what it is, whether it is higher or not, but if it is higher, what's different. Suppose it is higher changed in your view? That would explain a higher neutral rate of interest?
Good point. I think a couple of factors. First of all, why was our star believed to be pretty low in the decade before the pandemic Maybe you know a bit of an anecdote. There was also uncertainty about our star in twenty eighteen when I arrived at the FED range of views, I think from the fund rate maybe two and a half up to three and a half in that cycle, the Palfed sort of found out where neutral was because when we got the fund rate to two and a half, the economy was in a pretty good place.
In fact, if anything, inflation began to slow. So it is true that you don't know it precisely, but you can sort of have a sense if you're in the right ballpark. So why might it have gone up? Well, there are some positive reasons and maybe some more negative reasons. The positive reason is our star is thought to be related to growth. So if potential growth is higher, either because of innovation or AI or list your favorite contributor, that could push up our star. It could also reflect,
you know, demand for capital. We have had some evidence at least in certain sectors of expanded capital spending. We went through a decade when capital spending was was was weak. On the other side of the ledger, A lot of the factors that we're keeping our star pretty low have not really changed, you know, Demographic factors have not really moved,
and if anything, saving has been moving up. So I think they will find it in this cycle as we did in the last cycle by looking at the data and as they get close, you know, rethinking.
That could government spending be a contributor, given that deficits to the share of GDP are very high, given where the unemployment rate in resource utilization generally.
Certainly, and here maybe if I could be a little wonkish for your listeners, never never worry about that. And I wrote a recent essay in the in the FT on this on this topic. Here, I do think you want to distinguish between the neutral rate that the FED focuses on, which is really the front end of the yield curve. So where's the funds rate going to end up when inflation gets to target? Right now? That FED
thinks that numbers around three percent. If you ask me the question, where are bond yields going to end up? My own view, and I think the Pimco view is higher than we saw in the decade before the pandemic. So in other words, we think the front end of the curve may not be all that higher, but long rates could be higher because the curve will be steeper. In other words, markets will adjust not so much because the FED has to do something different, but because the
yuel curve will be steeper. It was very flat in the decade before the pandemic. For example, in twenty eighteen, when we got the funds rate up to two and a half, tenure treasure eels were three and so for the reasons you mentioned deficits and debt probably in a world with higher longer yields than we saw in the decade before the pandemic.
Since we're on the topic of higher long term yields, one of the things we've been speaking about on the show recently is mortgage rates, and even though the FED has been cutting, those haven't really gone down, partly because they are influenced by longer term treasury yields and those are going up. Given that, you know, affecting the cost of housing or the mortgage rate is supposed to be a primary tool in which a central bank actually influences
the real economy. Does that pose a problem at all for the central bank?
I think it's a reality for the central bank because for the most part, although the FED has been very active in supporting the mortgage market through the QE programs, it's mortgage portfolio is running off, and if anything, tracy, they've indicated that may well continue even when they stop qt In general, and you are correct, mortgages will tend yields will tend to move closely, not so much with the funds rate, but the longer end of the yield curve.
I would say it's more of a reality. As they think about the appropriate stance of policy, they will need to factor that in to what they project they need to do to achieve their inflation employment target. So I think the in the FEDS thinking it's just a reality of the way the financial markets work, and that may call them to adjust policy in one way or another in the future.
There was a famous paper that came out staying on the subject of housing called Housing is the Business Cycle. And one of the things that was interesting was that during twenty twenty two, when the you know, when mortgage rates really started to rocket higher, we did get this freeze in the housing market that we didn't see a plungin home prices, but we really saw, Yeah, the market
sort of came to a freeze. And there still is a lot of diminished activity, and we still see fewer housing starts, and we still don't see a lot of sales and all this stuff. Do you think the relationship has changed in some way between the housing market and the broader macroeconomy.
Great question, because you know, you look at I've been doing this now for four decades, so you look at business cycle history and there are some common features and then there are always some surprises, and in particular in this cycle, one thing that has been different is the fact that so many folks in the years before the FED raised rates were able to lock in low rate
mortgages that you've had less mobility. People are less likely to move and if they want to, simply because if they sell their house, they then got to get a mortgage at a much higher rate. Now, this phenomenon is always evident in the data, because people can lock in low rates and then rates move up. But what's different in this cycle is the magnitude of the gap between the spot mortgage rate and the rate that millions and
tens of millions of people locked in. So I think in that respect, this is a different cycle, and it's been a factor that's been supporting house prices even though the Fed's been raising rates dramatically. Typically you would not have seen that in past.
Just related to this topic, the FED has been talking a lot about how it's necessary to I guess, ease up on the restrictiveness of monetary policy and therefore cut rates. And I'm always a little bit confused because when I look at financial conditions on the Bloomberg, they look pretty easy to me. And you know, obviously this has happened post the FMC meeting, but we have, for instance, junk bond spreads getting pretty close to historical lows, Equity markets
obviously at a record. Where's the restrictiveness actually showing up?
Great point, and I look at the same screens that you both do as well. The FED, the Board of Governors actually about a year ago or so, developed its own index of financial conditions, and that also shows conditions,
you know, trending in an easier direction. The chair got a question or two on this and the press conference last week, and I'm paraphrasing, but his answer was more along the lines of they try not to get up in high frequency, you know, day to day, week to week moves, but they do want to look at longer run trends, I would argue, And if you look at longer run trends, now you know conditions are certainly moving in an easier direction. Now you know that's okay, But
it's also important. I think as the FED communicates through press conferences and speeches, you know that they clarify what they are looking at, because sometimes FED officials will talk about the funds rate being restrictive relative to inflation and history, and that's that's true, But the conversation I think also needs to acknowledge what we're looking at in different parts
of the of the markets. Now, again, inflation is on the path down to two percent, so and easing a conditions relative to say twenty twenty two, and they're very restrictive, is not necessarily a problem, but it certainly I think needs to be a factor in the outlook.
I'm going to ask you.
A sort of I think it would be a variation on Tracy's question, and it came up in also a recent episode we did with Chicago Fed President Austin goulds, Now, when you look at the progress that we've made on inflation since it peaked, given that many financial indices have surged, given that the unemployment rate is still only four point one percent, what's your store for it and what's your story for the connection between the move up in short term interest rates by the Fed and how that fed
through to lower realized inflation.
Well, you know, the in my youth used to call it the sixty four thousand dollars question. Maybe this is sixty four billion dollar.
Inflation hypothetical questions, Mobully.
The sixty four trillion dollar question. The good news is relative to real time, and I can tell you as a FED official in twenty twenty one, we had so many conflicting signals, but with the benefit of hindsight and also looking across the globe, I think some pretty clear patterns helped to account for this. You know, I should also confess that I was a charter member of Team Transitory.
This is where people come up odd lots. Is confession confession time.
I was a charter member of Team Transitory. And obviously it took a while for inflation to get back to two points something. A couple of things. For first of all, in retrospect, a lot of the surgeon inflation in the US and globally was driven by supply disruptions. You know, it turned out to be more timely and costly to reopen the global economy than it was to shut it down.
You know.
Secondly, in the US, there was a lot of demand support that was flooding the system. The FED went all in without apology in twenty twenty. We had six trillion dollars of physical support in twelve months. And so you know, from econ one oh one, if the demand curve shift's right and the supply curslift's left, you're going to get a move up in prices, and that's what we got. There was a lot of uncertainty when the palt Fed started hiking in twenty twenty two about would they succeed,
what would it take to get inflation down? And I think, you know, we're all pleased that, in fact, inflation has come down pretty close to target without a real disruption in the economy. And I think that's due to some of the supply shocks reversing here and abroad, and it's also due to the fact that the pal Fed did raise rates aggressively they reactored inflation expectations. I think, if I can editorialize a bit here, I think we're in a world where, unlike on your show, we're going to
have thirty or forty minutes. A lot of economics contary takes place on Twitter and one hundred and forty characters, and there are a lot of topics and economics and finance that are really you can't do justice too and in a tweet, and I think this is one of them. So some folks look at this and they say, well, it has to be supply, or it has to be demand,
or it has to be monetary policy. And in fact, it was really an all of the above in response to a once in a century shock, and it was also a global phenomenon as well, And so I think that's the received wisdom now. It was not obvious two or three years ago.
I feel like this is my chance to ask you what Powell's burner account on Twitter actually is, but it's probably a long shot.
Okay.
So, speaking of like the overall macro picture and the story that we tell ourselves, Richmond FED President Tom Barkin was just speaking and he sort of laid out two opposing paths for the economy going forward. And one is a pretty optimistic path where election uncertainty is behind us, and so companies feel more confident in terms of hiring an investment, and so everything stays very pleasant and the
economy keeps going strong. And then the downside scenario is that as price is cool, companies feel more pressure to cut costs in order to either maintain or boost their margins. And that's when you start getting a labor market that is weakening, you know, even further than some of the softness that we've seen in recent months. What's your sort of scenario analysis for let's say twenty twenty five.
Well, thank you for introducing scenarios, because that's also quite important. So I do think the baseline I called the baseline scenario, which is the most likely outcome, is the one the FED has more or less, and really, you know, most Wall Street economists and forecasters have sketched out Now my former colleagues at the FED won't call it the soft landing, but it looks like I'll call it the soft landing.
So inflation continues to return gradually to two percent in the context of a fully employed economy, perhaps a modest downshift in growth from maybe three percent down to somewhere in the twos But an alternative scenario is what I and I think this is where Tom bark and land as well, is what I've called the sticky inflation scenario. Basically, inflation doesn't get worse, it just doesn't get better. It gets stuck it between two and a half and three percent.
I think that, you know, that's not the end of the world, but that's a scenario where probably the FED is not delivering on the rate cuts that the markets expect, and then I think third and the least likely of the three is one that maybe you also mentioned in the text of Tom's speech, where we've had tightening in financial conditions and policy. It's just taken a while to show up, and when it does, you will have a slowing economy, rising unemployment, perhaps in the context of maybe
even some sticky inflation. And that's probably of the three scenarios, the one that that is the you know, the least friendly, and the one that would be the toughest call for the FED. And so I would think it's of the three, the least likely, but certainly not a zero.
Some could say that in the twenty tens we sort of had the reverse of that sticky inflation and that for much of the time during that decade inflation did not It was missing from the bottom. Yeah, it's a nice problem to have, I kind of think, but it was missing from the bottom. But arguably you could say the FED tolerated it, and the FED was okay with it,
even I know technically it wasn't hitting the goal. Talk a little bit more about that scenario in which inflation is running at two and a half percent, as you put it, that's not the end of the world, especially if employment remains robust, but it is technically you know, it is missing the goal. It is missing the mandate. Talk a little bit more about that sort of not the end of the world, slightly sticky scenario and how the FED things are well.
And again I can clarify, not the end of the world, you know, COMMA, so long as inflation expectations remain anchored. And that's why you'll hear FED officials almost ad nauseum, always put in that qualifier, so you know, once a FED official, always a FED official, so long as an inflation expectation, because the FED really does want people to expect inflation to be two percent. And I think I'm glad you brought up the prior decade because in the
prior decade inflation was operating below target. That was oftentimes in the context of a soft labor market as well. Remember it took like six or seven years for the labor market to get back to where it had been before the financial crisis, and so one of the big differences is we got back very quickly to maximum employment here. So I think, so long as people are expecting that inflation will continue to fall if it gets stuck. I don't think that's anything that triggers, you know, a dramatic
FED reaction. What it could do, however, is it could mean that the FED just pauses rate cuts or slows down the pace of rate cuts and you know, doesn't deliver getting the funds rate all the way down to neutral, as many folks thought in September when they cut rates by fifty bases points. Maybe elaborate a bit. You know, the Fed is undergoing on a five year schedule right now or commencing a review of its monetary policy framework.
I was there during the last framework review in which we all agreed upon unanimously to reaffirm the two percent inflation target. I get a lot of questions, you know, will the Poal Fed, you know, raised the It's an easy question to answer because Pal's been asked that a number of times and he always gives the same answer. No, we will not raise the inflation target. So the Pala
FED is targeting two percent inflation. But just as in the decade before inflation was a little bit below to we operated there, we may operate for some time a bit above two as well.
So we've been very focused on the macro but I feel like we do have to ask some political questions sure as well, And I think you were actually nominated by President Trump, was that right? So I guess, first question, how would you characterize Trump's relationship with the Central Bank or the way that he views the role of an institution like the Federal Reserve.
Well, I think he's made that clear through his public comments over the years. He certainly opined on interest rates during his time as as president. That was not unprecedented. Indeed, if you go back and FED history in the olden days, before all of us were active in markets, you had presidents like Truman and Johnson and Nixon opining on the FED. More recently, really, since the eighties and nineties, publicly, presidents have not weighed in to FED discussions, although sometimes their
Treasury secretaries and their staffs, do you know. More recently, during the campaign, he was asked about it, and as I recall, his answer with something along the lines of I should be able to offer my opinion on policy. So I think it's pretty clear how he thinks about that.
But I guess the wild card this time around is it certainly feels like a second Trump administration might be or at least feel more empowered yea in certain things. And there's also the involvement of guys like Elon Musk who is tweeting about ending the FED. How does that bear on the central bank and policy makers there?
Well, I think the simple answer is the FED has The FED has a mandate from Congress. So the FED. First of all, the FED is a creation of Congress. You know, in many countries the central banks are actually part of the finance ministry. The FED is a creation of Congress. Congress says the Fed's job is price stability and maximum employment. And I can tell you the culture of the FED, not only the board, but the twelve reserve bank presidents you know, takes that mandate and that
responsibility seriously. So I fully expect my former colleagues just to do their job and to set policy based upon achieving that mandate and to filter out, you know, distractions or other such things.
Tracy, I'm just going to say, you know, there was that recent mid October interview Trump with Bloomberg editor in chief John mclis waite where he said, you show up to the office once a month and you say, let's see flip a coin and everybody talks about you like you're a god. Just to be clear, there's no actual coin flip, right, there.
Is no coin flip. At least in my four years.
At least of the four years, you never saw a coin flip. At Paul's most recent press conference, he was asked about, you know, some of policy changes that could come under the next administration, and how they're always studying and if it looks like something could pass, you know,
they run the models, et cetera. You mentioned taxes, and I think there probably is a general consensus that at least on the big things, we're probably not going to see tons of movement because you know, the most likely outcome is some sort of extension of the Tax Cut and Jobs Act. But the two big wild cards potentially from a macro standpoint, outside of taxes are tariff policy, which we don't know we know that Trump lakes tariffs, and immigration policy, which could be everything from a harder
border to deportations, potentially mass deportations. Undocumented workers are very heavy in both agriculture, residential constructions, speaking of housing and so forth. Say, these things are coming down the line, and the FED is going to think about modeling changes under the economy under these various scenarios. As an economist, what do the things theoretically mean? And again I'm aware we don't know the size scale, but we understand some of the major priorities.
So let's take these in turn. So tariff's the sort of the textbook way to think about if you're a policymaker, how you think about a one time tariff is going to be an increase in the price of those goods to the extent it's passed through. I think Governor Waller was recently quoted as saying, you know, a tariff in it of itself is not really inflationary. It pushes up
the price of goods affected by the tariff. I think the temptation at the FED would be to look through that, and I think in many circumstances that would be the way to go. It could be a bit challenging this time, you know, because to look through an increase in the price level from tariffs we mean in invoking some form of the version of we think it's transitory, and so that guidance might need to be refined a bit. But I do think that that's largely the way that they
would look at it initially again monitoring inflation expectations. And in terms of immigration, there's obviously, you know, there's both legal and undocumented immigration that does influence the labor supply. As you all know, we had a big revision in Washington's official count of undocumented immigration recently, about a year
or so ago, showing much more of that. I do think importantly that I think, regardless of who had won the election, we were probably going to have a flow of immigration a lot less than we have been seeing and maybe comparable to prior period. So the FED staff could begin to factor that in. I think in terms of the details of what the Trump administration will do beyond that, I think it's too soon. It's too soon to tell. I do think the sector the sectoral impact
that you raised, Joe, is a good one. You know, not all immigrants, document or undocumented, flow evenly across all sectors. They're more concentrated in certain sectors than others, and so I would imagine that when the Fed's doing staff work, it would be looking at at that bottom up sectoral level.
There's one other question that I wanted to ask you, and I'm trying to think how to phrase it. Or how to word it. But the past couple of years, one of the big debates when it comes to the economy has been, I guess, the discrepancy between the heart and the soft data the vibes. So, you know, lots of the surveys showing that people aren't very happy with the way things are going. We see that in you know,
declining confidence numbers. Now the vibes potentially are shifting. But I guess I'm just curious how the FED thinks about sentiment when it comes to judging the real strength or weakness of the economy.
Well, it's certainly something that the FED looks at. And of course there are a lot of different sentiment surveys, and in particular also you can compare, for example, the sentiment of Fortune five hundred CEOs versus independent business. Myself, I used to look a lot at the NFIB survey data for small businesses. They're often a leading indicator, at
least in certain circumstances. Maybe one thing I can weigh in a little bit, because I think it has been it's been an important part of the last several years, and it's actually an area where macroeconomists don't do a great job. You know, macro oftentimes is about adding up the economy. You've got GDP, you've got employment. But we have had a period where I do think that the distributional ripples of the way the economy has evolved in the last several years has been relevant. Let me get
to give it a very concrete example. So you know, if you're in the sixty percent of Americans who live in owner occupied housing and you own stock, last four years, looks pretty good. Your portfolio is up, the value of your house is up. But that means they're forty percent of folks who actually don't own their own home or don't have a lot of stock, and for them, you know, the big increase in the price level and the erosion
and real income was quite relevant. So I do think that macro oftentimes does focus on adding up across and talking about the representative individual. Well, but I think we have been through a period in a pretty compressed period of time when there have been some pretty big divergences across different parts of the economy, and I think, you know,
I think that will be relevant going forward. And again that's certainly something that when I was the FED, you know, the staff was doing a lot of work on as well.
Yeah, the divergences I think are really important, and you see it also in corporate borrowing. So if you're a smaller business and you're getting a bank loan, that interest rate is probably pretty high. But if you're a huge company tapping the bond market, you know it's not that bad. Right now. I lied earlier when I said I only had one more question.
Okay, because I do. In fact, you're forgiven, thank you.
But you know you are a FED person who went to being a FED watcher. What's your one piece of advice for people who are watching the FED at this juncture?
Well, I have two your pro tip okay. The first bit of advice is, you know, there are nights when the Fed's at full strength, which it is now. They're twelve vers bank presidents and their seven governors, including the chair, so that means in any given day there could be nineteen speeches or interviews. It can get pretty overwhelming. But in the modern era, which really I define with the Brnanke Fed, you know FED chairs are now very much in the public domain. There are now eight press conferences
a year. There's Jackson Hole chair pal typically doesn't on the record sit down three or four other times a year. So almost every month, maybe with the exception of there's one month in there. Chair Pale is out there, and so I think, if you want to be a FEDA washer, just listen to Jay pal He's a straight shooter. He writes his own speeches, and so you get a pretty
clear sense of where he is. I think the second bit of advice I would get, and it's not a deep point, but it's often forgotten because there are only eight FED meetings a year. You know, we tend to think about sort of like if you're an NFL fan, you know there's a game every Sunday. The reality, though, is that when you're inside the FED, and certainly if you're Jay Powell or my former column because I'm sure current FED officials, you're really looking at ahead at least
twelve months, if not longer. You know, the further you go out, the more uncertain you go out. But the idea that you know, each FED meeting is a meeting by meeting. Yeah, there's data dependence and you're not in a preset court, but the FED also has to develop a plan for a baseline view and an arc for communication and policy, and oftentimes I think commentary on the FED it maybe focuses a little bit more on the noise and not so much on the arc or the signal.
All right, Richard Claria truly the perfect guest for this particular conversation. Thank you so much for coming on off of you.
Thanks for having me, Joe.
That was a great conversation, Really good timing to be speaking with someone like Clarida. I do think I like your framing of like the sort of two track policy right now, the short term versus the long term. I do think there is a tension embedded in that where you know, clearly the people talk about the FED being ahead or behind of the curve right, and Richard brought up the long and variable legs. I do think there
is a desire to get ahead of some things. But at the same time, you know they've emphasized that data dependence for so long, and the future is so uncertain at this current moment in time. I don't know how they square those two things.
It's tricky.
By the way, I do want to give I confirmed a specific shout out to Tim Dewey pasted odd Lad's guests at sgh Macro. The first line of his note this morning was the Fed's in your term focus remains on the data while market participants continue to digest the economic implications of Trump's victory last week. So that point about the dual time.
I like that you care about attribution absolutely.
You know, I came up with the age of blo and linking, so this is like people before people used to just steal stuff. So but I do think that from Tim, which I then transmitted, is a very useful way of
explaining why this moment seems so complicated. And you know, as I mentioned and we talked about with Rich, it's arguably been very complicated ever since simultaneously Trump's odds started rising in the polls and we got that huge September jobs report, which is Rich mentioned, sort of caused this rethink about how strong or how weak the economy really was when they cut fifty bases points.
And so for books, you and I differ a little bit on this point because I think like it is becoming clearer that a lot of that reaction in long term yields is to Trump.
Yeh, these policies.
What I will say is we have CPI on Wednesday. By the time this episode comes out, will have gotten that number and we will have seen the market reaction to it. I think that might be an interesting one to watch to try to further settle this question.
Tracy. Yes, nothing is ever settled. Yeah, how do you After how many years will you when will you stop believing that any question in economics could.
Ever believing that there are in fact answers.
That will never you have to give that up at some point. We will never have answers, only new questions.
The nice thing is.
I've already given into this idea, even.
If I'm personally disappointed by a lack of answers. Having a continuous stream of questions means we have never ending content for this podcast. It is great, always something to talk about.
Absolutely, Okay, shall we leave it there.
Let's leave it there.
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
I'm Joe Isn't though. You can follow me at the Stalwart. Follow our guest Richard Clarday. He's at r HC two too. I don't know if you post there very much, but he has follow Our producers Carmen Rodriguez at Carmen Ermann dash ol Bennett at dashbot and kill Brooks at Kilbrooks. Thank you to our producer Moses Onam. From our All Thoughts content, go Toloomberg dot com, slash odd lots where transcripts, a blog, and a new daily newsletter that you should
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