Richard Clarida on This Tricky Moment for the Federal Reserve
43:13 Share

What do you see on the horizon? Uncertainty or opportunity? Whatever you see at pigeon, we can help you rise to the chAllenges of today when active investing and disciplines risk management unneeded most, drawing on deep expertise across the world's public and private markets in pursuit of long term returns. Our investments shape tomorrow, today, pursue your tomorrow with P, G, M, A leading global asset manager.

Are you looking for a new podcast about stuff related to money? Well, today's you're lucky day.

I might live in and i'm .

kt gray thought.

And we are the host of money stuff, the podcast. Every friday, we dive into the top stories about wall street finance and other stuff.

We have fun, we get weird, and we want you to join us. You can listen to many stuff of the podcast on apple podcasts, spotify, or ever. You get your podcasts.

Bloomberg audio studios, podcasts, radio news.

Hello and welcome to another episode of the all bots podcast. I'm Tracy .

alway and j wasn't 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 third of you that threw me off for that entire week. I think you were going .

to say the weird thing was having a fed meeting two days up to the election. But no, you're right. I was really confused. Just the fact that he was on the thursday at all, setting a side the fact that he was an extraordinary busy week. K.

I didn't realize how much of my sense of Normality in fluency by having the fed do something on the wedding day.

but anyway, uh.

so we just had a fed meeting. We are recording this on november twelve. And clearly, this is an interesting moment for the central bank.

totally. I saw a tweet today. I don't remember who is for me, so I can't you proper credit or maybe was a cell? I don't know. I just words that I saw on my screen at some point. But I think of what made this interesting is this moment or maybe is a tom doing out whatever IT was this moment where the fed is still clearly in the sort of short term data dependency are, we're going to see further progress on realized inflation.

And so for watching the data planned signals there, meanwhile, the market is very seemingly focused on the medium term and thinking a lot about trump in the new fiscal and macro O O policies that will emerge into 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.

And mo to say the is yeah. And I have to say, like I do not envy policymakers on the F M. C. At the moment because they happen emphasizing the data dependency, as you said, but there is all that uncertainty about how the trumpet 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 clara, the former fed advice chair, now economic advisor at pinko and the 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 F M. Meeting, on a thursday, I gotten, ask, watch those. Are you sort of watching them like wistfully wishing you were there? Or are you thinking like, oh, gosh, this is really tough now.

Well, IT can be tough. Uh, yeah. I've certainly involved in my four years there in thinking about crapping for the the press conferences, but yeah, I watched them as if had watch her now. And the chair has become quite polished and experience and navigating what can be some sometimes as some choppy waters.

By the way, Tracy, you didn't say IT, but I believe rico is the perfect guest. No, I just wanted establish that. I believe in this moment, we are talking to the perfect guest. And then listeners, why did you courage the perfect guess? So I just want to make .

sure that he was truly an overside more Tracy.

and I consider you to be the perfect guest. So we had that fifty basis point cut in the september. Then we had the quarter point the week of the election. As i'm looking at the work function on the terminal, expectation is for the sixty five percent chance of a cut in december, so not slam dunk, but that still seems to be the expected.

What do you give us as a fed water, your current read on the cross winds that the fed is going? Let's start with the short term still because then we can get into the term. The cross winds that are happening right now is the fed looks for the near term path of policy.

Well, theyve made some judgment ments. One, they judge that policy is restrictive, that they've done enough. And so they caught rates, they retaliate.

Ted, I think that was the turn the chair used in september. Important to note, they've begun to cut t rates even though inflation is still somewhat above target. Some of your listeners may wonder why.

The answer is monetary policy Operates with legs. And so they had weighted to cut rates until inflation for all the way to two. Then they they might have overdone IT.

So I do think I made sense to get the process is started. I do take them at their word. They are not on a preset path. The committee is uh united uh unanimous ous 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 in the committee are not gonna 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 dated 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 right cut in a december.

So just on this point, how do you square the proverbial legs in monetary policy with the desire to not be reacting to an income administration where policies are 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 U.

S. System, unlike, say, the U. K. System where you present a budget, yeah here there's a whole set of negotiations.

And so I do think that the chair gave a good inside into the process that that i'll follow, which is that over time, theyll learn about the content res of the plans for policy than what gets enacted. I do think no 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 that usually follow makes sense. You know there is a risk that if they don't start moving now than for certain scenarios, it's too late. But I think given more inflation is 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. In september since midd, 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, the Donald trumps odds in the polls also started rising. Therefore, it's a little tough to tease out how much of this is. okay.

We are 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 in 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 disembark the two? In what signal, if any, do read in post september market activity?

Great question. And I think you know the simple answer would be look at all the above. But I think we can make a couple of informed observations. The first thing, if I were back on my old feed job i'd be looking at, at this is longer term and measures of longer term inflation expectation, either in the tips market or or surveys, and those are very well a behaved.

Secondly, we also have add some pretty strong mro 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 fatter inclined to look through that given you the storm and other related consequences of that, a term perhaps he views on your show before is also look at the term premium. How much of this move and yields is essentially bond, 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 been some move in term premium, some stronger data in a 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 wanted distinguish between A A phenomenon where by knowing the election, Victor, I think we know something about the controls of example, tax policy.

It's more likely that the twenty seventeen trump tax cuts, we're 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, new trend because I think both could be going on.

I feel like I should just mention again, we're recording this on november twelve, and there is something happening tomorrow that might have a bearing on this conversation, which is we're gonna get the latest C P I when IT comes to inflation. Obviously, there has been improvement on this front. But in the most recent F, O, M, C, meaning powers emphasizing, you know, really making the point that he expects us 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 you was trying to convey. I take him at his word that IT is a bumpy half. Maybe i'll put something back into the conversation that sort of fell out of favor. There is 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 feds preferred measure on the core PC e and that was a big moment. That was the first time in almost three years inflation head was two point something. It's very likely that this year will end an inflation will end on a traveling faces anyway at around two eight or two nine.

So at least by that metric. You this is a year when we've not moved backwards, but you could argue that you know progress on inflation minimum has been slow. And so the way I take the conversation from the chair and other members of of the fed is they have a view that disappears.

Tion will continue, but they're also open to the risk that I may stall. I I don't think necessarily means inflations going to go up to frightening levels, but progress could stall. And I think that they're very attuned and attentive to to evidence in the data on that.

What do you .

see on the horizon? Uncertainty or opportunity? Whatever you see at pigeon, we can help you rise to the chAllenges of today when active investing and disciplines risk management, unneeded most, drawing on deep expertise across the worlds public and private markets in pursuit of long term returns. Our investments shape tomorrow, today, pursue your tomorrow. With P, G, M, A leading global asset manager.

success is more than the final destination. It's a path you take one step at a time. It's discipline, it's teamwork and it's a drive and passion. The side of us that comes before all recognition.

It's what Stephen's been doing for over one hundred and thirty years, quietly yet strategically, Stephens become one of the fastest growing wealth management and investment banking firms in the country. Our financial advisers go beyond traditional wealth management to provide clients with direct access to one of the industry's largest equity research franchise and a leading midd market investment. Because success is the drive IT takes to keep climbing, the passion to keep investing.

The best of each of us made Better by the best in all of us, and that is where success meets success. Start your journey. At steep of that come .

the sti fl ics c company. So as you mention, you know, there's a confluence of factors. One of the things that may explain why the market is replaced, ed, its terminal rate or the of the rate cut cycle this time, and you mention that we had some pot week out, that strong jobs report, there was a positive GDP p revisions that make IT look like the economy is in a higher state.

The one thing that's been banded about for years now is this idea, the post pandemic, like so called our star, yeah, is, is tired. I don't know what IT is, whether IT is higher or not. But if IT is higher, what is difference? Suppose IT is higher, what is changed in your view that would explain a higher .

neutral rated interest? Good point. I think, uh, couple of factors. First of all, why was our star believed to be pretty low in the decade before the pant? Maybe a bit of an anodos.

There is so uncertainty about our star in twenty eighteen when I arrived at at the fed in a range of views, I think from the funding may be two and a half up to three and a half in this cycle. The palferine ort of found out where neutral was because when we got the fund rate to two and half, the economy isn't a pretty good place. In fact, if anything, inflation to slow.

So IT is true that you don't know precisely. Be concerned to have a sense of you in the right ballpark. So why might IT have gone up? Well, there are some positive reasons and and maybe some more negative reasons.

The positive reason is our stars thought to be related to growth, of potential growth is hie either because of innovation or A I or or list your favorite contributor that could push up our star IT could also reflect your 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 weak.

On the other side of the ledger, a lot of the factors that we're keeping our star pretty low of not really change. No demographic factors have not really moved. And if if anything, saving has been moving up. So I think they will find IT in this cycle as we did the last cycle by looking at the data and as as they get close, you know, rethinking that. Could government .

spending be a contributor given the deficit to the share of gd p are very high, given where the unemployment rate in resource utilization generally?

Certainly here, maybe if I could be a little wank h your listeners worry about. And I wrote a recent S A in the F, T. On this, on this topic here.

I do think you wanted distinguished between the neutral rate that the fed focuses on, which is really the front into the yellow curve. So where's the funds rate going to end up when inflation gets to target? Right now, the fed thinks that numbers around three percent.

If you ask me the question where a bone's going to end up my own view, and I think the pic view is higher than we saw in the decade before the pandemics. S, R, in other words, we think the front into the curve may not be all that higher, but low rates could be hard as the curve be steeper. In other words, markets will adjust not so much because the fed has to do something different, but because the yellow curve will be stepped IT was very flat in the decade before the the pandemic. For example, in in twenty eighteen, we got the up to two and a half ten year treasury yields were three. And so for the reasons you mention deficits and debt, probably in a world with with higher longer yields than we saw in the decade before the pandemic .

since were on the topic of higher long term yields, one of the things we've been speaking about on the show recently is mortgage tes. yes. 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 of 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 more its portfolio I was running off. And if anything, Tracy, they have indicated that may well continue even when they stop Q T. In general.

And you are correct, mortgage will tend yields will tend to move closely and 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 they will need a fact of that in to what they project they need to do to achieve their inflation and employment target. So I think in the feed thinking is just a reality of the way the financial markets work, and that may call them to adjust policy in one way or or another in the future.

There was a famous paper that came out saying on the subject of housing called housing is the business cycle. And one of the things that was interesting is that during twenty twenty two, we know in margate, eries really started to rock at hired. We did get this freeze in the housing market that we didn't see a plunge in home Prices, but we really saw ah the market sort to freeze. And there's still as a lot of diminishing activity and we still save your housing starts and we still don't see a lot of sales on all this stuff. Do you think the relationship has changed in the same way between the housing market and the broader macro economy?

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 there are always some surprises. And in particular, in in this cycle.

One one thing that has been different is the fact that so many folks in the years before the fed raise 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 saw their house, they then to get a mortgage on a much higher rate. Now this phenomenon is always evident in the data because people can lock in low rates, 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 tensions ds of people locked in. So I think in that respect, this is a different cycle. And it's been a factor. It's been supporting house Prices even though the feds been raising rates dramatically. Typically, you would not have seen that in in past.

Just related to this topic, the fed has been talking a lot about how it's necessary too, I guess, ease up on the restrictive veness of monetary policy and therefore, cut rates. And i'm always 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, meaning but we have, for instance, junk bonds spreads getting pretty close to historic lows. Equity markets obviously at a record. Where's the restrictive veness 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, so developed its own index of financial conditions and and that also shows conditions trending in an easier direction.

The chair got a question or two on this and the press conference last week, and i'm partha acing, but his answer was more along the lines of they try not to get up in in high frequency in day to day a week to weak moves, but they do wana look at longer run friends. I would argue, if you look at longer on trends now, you know, conditions are certainly moving in an easier direction. Now you know that's okay, but is 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 role of to inflation and history and that's that's true. But the conversation, I think also that 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 in easing a conditions rolled to, say, twenty, twenty two and they're very restrictive is not necessarily a problem. But it's certainly, I think needs to be a factor in, in the outlook.

I'm going to get sort of I think that would be a variation traces question. And I came up and IT also a recent episode we did with chicago fed president Austin. When you look at the progress that we've made on inflation since IT peaks, given that many financial indexes have surged, given that the unemployment rate is still only four point one percent, what's your story for IT? And what's your story for the connection between the move up in shorter interest rates by the fed and how that fed through to lower realized inflation?

Well, the in in my youth he used to call the sixty four thousand dollar question. Maybe this is sixty four billion .

dollar and inflation has hypothetical question .

in the sixty four trillion dog question. The good news is relative to a real time. And I can tell you a fed official in in twenty twenty one, we had so many conflicting h signals. But with the benefit of of of hind sight and also looking across a the globe, I think so i'm pretty clear patterns help to account for this. I should also confess that I was a charger member of team transitory.

This people come up. All loss is confession. Confession time I was charge.

remember of team transitory. And obviously, IT took a while for inflation to get back to two point something. A couple of things. First of all, in retrospect, CT, a lot of the surgeon inflation in the us. And globally was driven by supply disruptions.

You know, I turned out to be more timely and costly to reopen the global economy that I was to t 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.

And twenty twenty, we had six million dollars of physical support in twelve months. And so from eon, one of one of the demand curve shift, right, and the supply her so sleep, you're going to get move up in Prices, and that's what we got. There was a lot of uncertainty when the profit started hiking in twenty twenty two about what 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 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 power fed did raise rates aggressively, the reactor inflation expectations I think if I can editor realize a bit here, I think we're in a world we're unlike on year show. We're going to have thirty or forty minutes. A lot of economics contrary takes place on twitter and one hundred and forty characters.

And there are a lot of topics in economics and finance that are really you can do justice to 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 in all of the move in response to a once in a century shock. And there was also a global phenomenon as as well. And so I think that the received wisdom now was not obvious. Two or three years go.

I feel like this is my chance to ask you what powers burner account on twitter actually is. But that probably a long shot. okay.

So speaking of like the overall macro picture and the story that we tell ourselves, richmond d fed president tom barkin was just speaking and he played 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 and investment.

And so everything stays very unpleasant and the economy keeps going strong. And then the downside scenario is that as Prices cool, companies feel more pressure to cut in order to either maintain or boost their margins. And that's when you start getting a labor market that is weakening you even further than some of the softness that we've seen in recent months. What's your sort of a scenario analysis for, let's say, twenty, twenty five?

Well, thank you for introducing scenario because that's also quite important. So I do think the baseline but I called the baseline scenarios, 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 that sketched out. Now my former colleagues at the fed won't call off the soft landing, but but IT looks like i'll call off the soft landing.

So inflation continue 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 tooth. But an alternative of scenario is what I and I think this is where to 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.

Get stock at between two and half and three percent. I think that 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 in the least likely of the three is one that maybe also mentioned in the context of time speech, where we've had tightening in financial conditions in policy is 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 least frontally and the one that would be the tough as called for the fed. And so I would think it's of the three the least likely that not a zero.

Direct lending has been one of the most dynamic areas of the private alternative space these last few years, having grown massively as a source of capital for both corporate borrowers but also a financial sponsors that have yet going from strength to strength. And i've needed that private capital to Foster the growth the David experiencing .

for leading alternative investing insights. Listen to speaking of alternatives from p gm.

Success is more than the final destination. It's a path you take one step at a time. It's discipline, its teamwork, and it's the drive and passion in the side of us that comes before all recognition. It's what Steve has been doing for over one hundred and thirty years. Quietly yet strategically, Stephen become one of the fastest growing wealth management and investment banking firms in the country.

Our financial advisers go beyond traditional wealth management to provide clients with direct taxes to one of the industry, y's largest equity research franchises and a leading middle investment paying because success is the drive that takes to keep climbing. The passion to keep investing the best of each of us made Better by the best in all of us. And that is where success made. Start your journey at Steve of that com, the S T, I F B L.

that com ica c, porc and N Y, S C. So we could say that in the twenty tens, we start ahead the reverse of that sticky inflation and that for much of the time during that decade, inflation did not. He was missing from the bottle.

Yes, nice. I have, I kind of, but he was missing from the bottom. But arguably, you could say the fed tolerated IT and the fed was OK with that, even though technically I 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 robot. But IT is technically you IT is missing the world. IT is missing the Mandate. Took a little bit more about that sort of not the end of the world, slightly sticky scenario and how the I think.

well, and again, I I can clarify, not the end of the world, you commas, so long as inflation expectations remain anchored. And that's why you'll hear that officials, almost a nosier always put in that qualifier. So you know, once a fed efficient is a fed efficient, so long as inflation expected 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 often times 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 I had been before the financial crisis.

And so one of the big differences as we got back very quickly to maximum employment here. So I think so long as act people are expecting that inflation will continue to fall if IT gets stuck. I don't think that's anything the triggers, you know, a dramatic fed reaction.

What I could do, however, is IT could mean that the fed just pauses rate cuts or slows down th Epace o f r ate c uts a nd y ou d oesn't d eliver, getting the fund rate all the way down to neutral, as many folks thought in september when they cut reached by fifty basis points. Maybe elaborate a bit. The fed is undergoing on a five years schedule right now or commencing a review of its monetary policy framework.

I was there during the last framework review in which we all a great up on unanimously to reaffirm the two percent inflation target. I get a lot of questions, you know, well, the pound fit, you rage the target. It's an easy question to answer because powers band asked that a number of times, and they always gives the same answer.

No, we will not raise the inflation target. So the palace at is targeting two percent inflation. But just as that in the decade before, inflation was little bit below to we Operate there, we may Operate for some time a bit above to as well.

So we've been very focused on the mro, but I feel like we do have to ask some political question as well. And I think you were actually nominated by president from I that right. So I I guess first question, how would you characterize trumps relationship with the central bank or the way that he use 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 strates during his time as as president that was not impressed and IT indeed, if you go back in fed history in the olden days before all of us were active in markets, you had presidents like tumen and Johnson and nixon opining on on the fed more recently. Really since the eighties and nineties, publicly, presidents have not weight in the feed discussions, although sometimes their treasury secretary and their staff s do you know more recently during the campaign, he was asked about IT, and I recall his answer was something along the lines of I should be able to offer my opinion on, on, 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 and in certain things. And there's also the involvement of guys like elon mosque who is tweet about ending the fed. How does that bear on the central bank and policymakers there?

Well, I think the the simple answer is the the fed has a the fed has a Mandate from congress. So the fed first fall, the fed is a creation of of congress. In many countries, the central banks are actually part of the finance ministry.

The fed is a creation of congress. Congress says the feed 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 president IT takes that Mandate in that responsibility seriously. So I fully expect my former colleagues is 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 gonna say, you know, there is that recent midd october interview trump with a blue, greedier chief hn mk up right where he said you shop to the office once a month that you say, let's see, flip a coin and everybody talks about you like you're god just to be clear, there is no actual coin flip, right? There is no, at least at the years, you never saw a conflate.

At polis 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 prepares, you know, they run the models is that you mentioned taxes. And I think there probably is a general consensus that at least on the big things were trying, I not going to see tons of movement because you are the most likely outcome is some sort of extension of the tax cut and jobs.

Ec, but the two big wild cards, potential from a microstrip outside of taxes, are there of policy, which we don't know what we know, that trump like terrorist 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 construction, 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 scenes. S, as an economist, what do these things theoretically mean? And again, i'm aware we don't know the sizes and scale, but we understand some other major priorities.

So let's take these in turn. So tarifa, the sort of the textbook way to think about if you're policymaker, are you you think about a one time tariff is is gonna be an increase in the Price of those goods to the extent passed through? I think governor water was recently quoted as as saying, you know, a terrified of itself is not really inflationary, pushes up the Price of goods affected by the if I think the temptation at the fed would be to look through that.

And I think in many circumstances that, that would be the way to go IT could be a bit chAllenging this time, you know, because to look through an increase ed in the Price level from terrace, we mean invoking some form of the version of we think is transitory. And so that, that guides 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 office. There's both legal and undocumented immigration that does influence the labor supplies. As you all know, we had a big revision in washington official account of undocumented immigration recently about a year. So go showing much more of of that.

I do think importantly that I think regardless of who had one the election, we were probably going to have a flow of immigration a lot less than we have been sing and may be comparable to prior period. So the fed staff could begin to factor that. And I think in terms of the details of what the trumpet administration will do beyond that, I think it's too soon.

It's too soon to tell. I do think the sectoral the sectoral impact that you radio is a good one. You know not all immigrants document or undocumented flow evenly across all sectors. There are more concentrated in certain sectors than others. And so I would imagine that when the feds doing staff work, IT would be looking at at that bottom up a toral level.

There is one other question that I wanted to ask you, and i'm trying to think how to phrase or 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 uh, surveys showing that people are very happy with the way things are going. We see that 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. Of course, there are a lot of different sentiment surveys in a particular or also you can compare, for example, the element of fortune five hundred ceos versus independent bidness. I myself, I used to look a lot at the N F I B survey data for small businesses.

They're often a leading indicator, at least in certain circumstances. Maybe one thing I can weigh a little bit because I think IT has been um IT. It's been an important part of the last several years and it's actually an area where macro economist uh, don't do a great job.

You know macro often. About adding up the economy. You've got GDP, you've got employment. But we have we have had a period where I I do think that the distributional ripples of the way the economy is involved in the last several years has been relevant. Let me get give a very concrete example.

So you know, if you're in the sixty percent of americans who live in on the occupied housing and you own stuck last four years looks pretty good. Your portfolios up, the value of house is up. But that means there are forty percent of folks who actually don't know their own home or don't have a lot of stock in for them.

You know the big increase in the Price level on the erosion in real income was quite relevant. So I do think that macro often times does focus on adding up across and talking about the representative individual. But we have 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 and I think you I think that will be relevant going forward. And again, that certainly that when I was the fed, you know the staff was doing a lot of work on as well. Yeah, the divergences.

I think you're really important. And you see IT also in in corporate borrowing. So you if you're a smaller business and you're getting a bank loan, that interesting is 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 OK because I do, in fact, forgiving. Thank you. But you know, you are a fed person who went to being a fed watch. What's your one piece of advice for people who are watching the fan at this juncture?

Adv, well, I have to your .

protect OK the .

first bit of advice. You there are night when the feda full strength, which is now there, twelve resort bank presidents in their seven governors, including the chair. So that means an any given day there could be nineteen speeches or interviews you can get pretty overwhelming.

But in the moderna, which really do I define with the branche fed, you know, fed chairs are now very much in the public domain. There are now a press conferences a year. Jackson and whole chair power typically doesn't, on the record, sit down three or four other times a year.

So almost every month, maybe the exception of there's one month in their chair, power is out there. And so I think if you want to be a fed while you're just listen to j 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. We tend to think about sort of like of your nfl fan, there's a game every sunday. The reality though is that when you're inside the fed and certainly if you're jay power, my former colleagues and i'm sure current fed officials, you're really looking at ahead at least twelve months, if not a longer.

You know, the further you got, the more uncertain you go out. But the idea that, you know, each fed meeting is a meeting by meeting, yes, there's data dependence. You're on the preset court. But the fed also has to develop a plan for a baseline view and an art for communication and policy and often time to think. Commentary on the fed IT maybe focuses a little bit more on the noise and not so much on on the arc of the signal.

All right, Richard clara, truly the perfect guest for this particular conversation. Thank you so much for coming on off.

So that was a great conversation, really good timing to be staying with someone like clara. I do think I like you're framing of like the sort of two track policy, right? Yeah the short term versus the long term.

I do think there is attention 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 emphasize 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 things is tRicky.

By the way, I do want to give I confirmed a specific shadow to tim dui past out lodges, guests at S. G. H. macro. The first line of his note this morning was the fed near term focus remains on the data, while market participants continue to digest the economic implications of triumph, Victory last week. So that point about the dull time I like .

that you care about attribution? absolutely.

You know, I came up at the age of blogging and linking. So this is like people before people used to just steal up. So what I do think that from tim, which I then transmitted with IT, is a very useful way of explaining why this moment seems so complicated. And you know, as I mentioned and we talked about with ridge, it's arguably very complicated ever since, simultaneously, trumps odds started rising in the polls, and we got that huge september jobs report, which is rich mention, sort of caused this rethink about how strong or how weak the economy really was when they cut fifty basis points. And so 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, yellow is to trump policies. What I will say is we have CPI on yeah 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 settled this question, Tracy. Yes, nothing is ever settled. How do you at there how many years you when will you stop believing that any question in economics could .

ever that there are, in fact, answered that will never .

have to give that up at some point. We will never have answers.

only new questions.

The thing i'm already given into this.

I even if i'm personally disappointed by a lack of answers, having a continuous stream of questions means we have never being content, always something to talk about OK. Shall we leave there? leave. This been another episode of the all thoughts podcast. I'm Tracy l way you can follow me at Tracy away.

I'm joe wasn't though you can follow me at the store followers. I guess Richard clear that he's at R H C two. T O O. I don't know if you post there very much, but he has follow our producers, common rud rigas at common urman dash bennet, a dash butt and kill Brooks and kill Brooks. Thank you to our producer. Mosses on them for more of lots content go of lumber dog com slash outlaws where a transcripts of blog and a new daily newsletter that you should sign up for. And you want to chat about all of these topics, especially check out our discord, discord that G, G, slash up lots.

And if you enjoy all bots, if you like, IT, when we talk about the fed with a former fed device chair, then please leave us a positive review on your favorite podcast platform. And remember, if you are a bloomberg subscriber, in addition to getting that new daily robots newsletter, you can also listen to all of our episodes, absolutely add free. All you need to do is fine bloomberg channel on apple podcast and follow the instructions there. Thanks for listening.

This is.

Uncurl me and I .

know and we want to tell .

you about bloomberg news now it's 不。 Minutes less, that brings you the latest headlines .

with context, twenty four hours a day in a minute .

s from around the world on smart phone.

on apple, the or anywhere you listen.