Chair Powell Remains Very Dovish, Dudley Says

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Bloomberg May 1 23:30

Former New York Fed President and Bloomberg Opinion columnist Bill Dudley says US Federal Reserve Chair Jerome Powell's game plan is unchanged and he remains dovish. He speaks on "The Fed Decides."

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Transcript

  • 00:00 Bill, what did you make of that performance in that news conference?
  • 00:03 I think your interpretation is exactly right.
  • 00:06 It was quite dovish.
  • 00:07 I mean, he basically said that despite the news that's come in, economy's stronger than expected.
  • 00:11 Inflation not so good in the first three months of the year.
  • 00:14 The whole game plan is basically unchanged.
  • 00:17 We're going to keep rates here
  • 00:19 until we're highly confident that we're going to get inflation down at 2%.
  • 00:22 No hint whatsoever of a rate hike,
  • 00:25 no hint that it's not going to work.
  • 00:28 So Mark reaction I think was pretty appropriate given what he said.
  • 00:32 You know, he basically said we've got it
  • 00:35 back to Dudley Mckelvey of a few years ago.
  • 00:38 Bill Dudley, you're in the trenches at Goldman Sachs gaming, the labor economy.
  • 00:42 What data in the labor economy
  • 00:45 is important to Chairman Powell to really become accommodative?
  • 00:52 Well, I think it's the
  • 00:53 notion that the labor market is really starting to some somehow fall apart and
  • 00:57 the unemployment rate is starting to rise significantly.
  • 00:59 He was asked pretty explicitly about that and he's basically said one or 2/10 of a percent rise in the unemployment rate wouldn't really disturb him.
  • 01:07 You know, I think the interesting question is if the labor market really starts to deteriorate, You know, the problem is that the next stop typically is a is a
  • 01:14 is a recession.
  • 01:16 We've never had a half a percent rise in the unemployment rate without having a recession.
  • 01:20 So I think it's, you know, if the unemployment rate goes up a couple of tenths, I don't think it really bothers them, but it feels like the labor market is really giving way,
  • 01:27 then the Fed will put a lot of weight on that almost regardless of what's inflation's doing.
  • 01:31 Bill, you said something.
  • 01:32 He basically said we got it.
  • 01:33 The playbook hasn't changed.
  • 01:35 Was that the right move?
  • 01:37 Well, time will tell
  • 01:38 if if the playbook is, it will actually work as as well as as as he thinks.
  • 01:43 I mean my own personal view is that
  • 01:44 the legs of monetary policy probably are not not as long and and variable as he thinks and I put a lot more weight on financial conditions I think than he is currently.
  • 01:52 The fact that people are taking his comments
  • 01:55 in a very positive way from from, from from a financial market perspective means that we're having an easing of financial conditions which will support the economy.
  • 02:03 So I think it just reinforces the the hire for longer story over the over the medium term.
  • 02:07 He doesn't seem perturbed about that.
  • 02:09 And he also didn't really deal with a lot of the fundamental questions, as we were just saying, that have been dividing.
  • 02:13 Wall Street didn't address the higher terminal rate.
  • 02:16 He didn't address this question of what would make him
  • 02:19 really
  • 02:20 second guess, the whole idea of restrictiveness or long and variable lags.
  • 02:23 Do you think that means he's not thinking about it, or that he has rejected it, or do you think he just doesn't want to deal with it in the public right now?
  • 02:29 I
  • 02:31 think he's certainly thinking about it, but I think he's basically saying from his perspective,
  • 02:35 the evidence hasn't convinced them
  • 02:37 that they're on the wrong track.
  • 02:39 So
  • 02:40 he thinks policy is restrictive,
  • 02:42 sufficiently restrictive to do the job.
  • 02:44 So maybe our star, you know, maybe the neutral rate is a little bit higher, but it's not as high as where they are today.
  • 02:49 So yes, could could our star be revised up at the next June summary of economic projections probably will be up revised up a bit.
  • 02:56 But policy in his mind is still sufficiently tight
  • 03:00 that he's not worried about that particular variable.
  • 03:03 Bill Dudley, Ethan Harris has been on fire Retired from Bank of America almost daily on LinkedIn with really intelligent work
  • 03:11 on trim inflation.
  • 03:13 Means
  • 03:14 which inflation statistic is most informative now to our audience?
  • 03:20 Well, I like to focus on
  • 03:22 services, ex housing,
  • 03:24 for two reasons.
  • 03:25 Number one, this is the problem where the wage inflation drives the actual outcome in terms of services inflation.
  • 03:31 And #2,
  • 03:33 you know, it's not being
  • 03:35 bounced around by, you know the supply chain normalization process which is pulling down as good prices.
  • 03:39 I think one of the things that's probably distorting the inflation news
  • 03:42 recently is the fact that goods prices came down a lot
  • 03:46 because of the normalization of supply chains.
  • 03:49 But we ignored
  • 03:50 the transitory inflation on the way up.
  • 03:52 We also have to ignore it on the way down.
  • 03:53 So we don't,
  • 03:54 we don't want to overstate that goods price inflation weakness.
  • 03:58 So I think services sector XX housing is probably it's a really important thing to focus on
  • 04:03 and you know that's the so-called last mile of inflation and that's the that's the part that's turning out to be more difficult.
  • 04:08 Bill, we
  • 04:09 need to talk to you about the balance sheet as well.
  • 04:10 So the Federal Reserve announcing today they'll slow the pace of balance sheet runoff
  • 04:14 starting in June.
  • 04:15 The central bank to lower the treasury runoff cap to 25 billion from 60 billion bill market participants right now trying to work out OK if QT wasn't bearish is tapering QT bullish.
  • 04:27 Bill, can you help me understand because we were told it's like watching paint dry.
  • 04:31 It has been
  • 04:32 when they start to undo it, unwind some of it, what does it all mean?
  • 04:36 I think it is like watching pink, right.
  • 04:38 You can see that in the press conference today there were virtually no questions about the balance sheet
  • 04:42 and he made it very clear that the balance sheet
  • 04:44 decisions are not a
  • 04:46 part of the monetary policy
  • 04:48 process of of making policy either either easier or tighter.
  • 04:51 I don't think it had much effect the the, the taper because the the destination is the same.
  • 04:56 The Fed's going to a balance sheet size
  • 04:58 that generates reserves.
  • 05:00 That are ample but not abundant like they are today.
  • 05:03 So may we may get there slightly
  • 05:06 over a longer period of time because we're now running off securities at a somewhat slow pace,
  • 05:10 but we're going to the same place and so it really has virtually no market implications.
  • 05:14 If you are on the Fed stub bill,
  • 05:15 would you have voted for this type of thing or would you have aired a little bit more as you were talking about before
  • 05:21 about financial conditions easing too much
  • 05:23 to allow inflation to stay sticky for too long.
  • 05:27 I don't think we're at this stage where you know rate hikes are warranted and so I I would have agreed with the decision today.
  • 05:33 I think where I would have
  • 05:35 maybe bit differed from
  • 05:36 chair Paul a little bit is I would just be a little bit more cautious about the confidence that he that he's got it.