October 20, 2025 • 20 mins
In this special bonus episode of Trumponomics, host Stephanie Flanders sits down with former New York Fed President Bill Dudley for a candid conversation about the future of the Federal Reserve. Dudley offers rare insider insight into the balancing act facing Chair Jerome Powell—weighing sticky inflation, artificial intelligence-driven growth and a shaky labor market—while warning of the mounting threat to Fed independence posed by Donald Trump.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. This is exactly where
we like to see central bank independence, because central bank
independence is thinking about manitre palsy. Not for the next
eighteen months, but for the next few years.
Speaker 2 (00:27):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and this is a bonus episode of Trumponomics, the podcast
that looks at the economic world of Donald Trump. While
I was in New York this week, I hosted a
fireside chat with Bill Dudley about the future of the
Federal Reserve and its monetary policy. Bill was once President
of the Federal Reserve Bank of New York. Before that,
(00:48):
he was a chief economist at Goldman Sachs, among other things,
and he's now a columnist for Bloomberg Opinion and a
senior advisor to Bloomberg Economics. In our conversation, we discussed
not only the political threats to fail independence growing by
the day under President Trump's administration, but also the US
Central Bank's monetary policy right now and the implications of
(01:09):
tariffs and the AI investment boom. I started the conversation
by asking Bill why he thinks it would be a
bad idea for the FED to keep cutting interest rates
over the next year or so, which is what the
future markets are currently predicting.
Speaker 1 (01:27):
Well, I think there's a debate going on between what's
the biggest risk inflation staying sticky above the two percent
target for if we go through next year the fifth
year in a row, or the layer market to continue
to deteriorate and potentially giving away and having a recession,
and Pouls trying to navigate between those two risks, and
(01:50):
as he said, it's very difficult to figure out what
to do in the current environment. Where he lands is
that he thinks that the greater risk, or the increasing
risk at least, is the downs side risk to the
labor market, and as a consequence of that, he wants
to make manentre policy less restrictive to sort of reduce
that downside risk to the labor market. Now, I think
(02:11):
you could make the argument that the upside risk to
inflation still is very much germane because the pass through
of teriff of terrorists into prices is probably quite incomplete,
and we have a number of other exogenous factors that
are going to also put upward pressure on inflation. For example,
what's happening with the AI investment boom and the consequence
(02:32):
of that for electric prices. Now, I know we like
to historically exclude food and energy from our calculation of inflation,
and that's fine when the prices go up and the
prices come right back down, but that's not going to
happen for electricity. The prices are going to keep going
up for the next few years, and so I think
that have to be considered a part of the inflation outlook.
Speaker 3 (02:52):
I think where I come out is a little differently
than Paul.
Speaker 1 (02:55):
I think that the inflation risks are just as substantives
as the downside risk labor market number one and number two.
I don't think policy is as restrictive as he thinks
it is. He thinks that policy is restrictive, so they're
say before he wants to make it less restrictive. I
think if you look at the economy writ large, it
doesn't look like Madre policies holding back the economy hardly
(03:17):
at all at this point. You know, if you look
at the Atlanta Fed GDP now forecast for the third quarter,
it's tracking three point eight percent. If you think about
the exogenous AI investment spending boom that's going to continue
to support economic growth as we go through the rest
of twenty twenty five into twenty twenty six. So that's
the first point of sort of mild disagreement. The second
(03:40):
point is, I just feel like the risk of inflation
expectations rising is just as substantive as the labor market
continue to DETERIAD.
Speaker 3 (03:48):
What Paul's worried.
Speaker 1 (03:49):
About in the labor market is that when the labor
market det rate's beyond a certain point, it tends to
be self reinforcing. And this is really summarized in the
sum rule. Every time the unemploying rate's gone up by
half a percent, the US is all into reception, with
one important exception twenty twenty four. Twenty twenty four, we
had a mild trigger of this somrale. Nothing bad happened.
But I think that notion that labor marketed touring beyond
(04:11):
a certain point is still valid because what happened in
twenty twenty four was the unemploying rate went up not
because of labor market weakness, but because of a big
surge and labor supply. This year, if the unemploying rate
goes up by half a percentage point, it's going to
because of weakness and labor demand. What concerns me on
the inflation side is, you know, we were sort of
pushing the envelope here of how long inflation can be
(04:33):
above the Fed's target and inflation expectations state will anchored.
At some point people are going to start to believe
that the FED doesn't really care about getting inflation back
to two percent to three percent is good enough. And
if that happens, then inflation expectations will become a bit
less firmly anchored, and that'll be harder to get inflation
down in the future. So my own personal view is
(04:54):
I'd be a little bit more patient. Also, I think,
you know, they's just a tremands amount unsurty in terms
of that can We've never had a you know, a
TERRFF shock like this. We've never had an AI investment
spending boom like this before. We've never had such a
dramatic change in labor supply before. So there's a whole
bunch of you know, wild cards that I think, in
my mind make me less confident in my forecast. And
(05:17):
if I'm less confident in my forecasts, going to be
sort of like you don't want to take the Democratic
oath of do no harm.
Speaker 2 (05:24):
That's fantastically useful to run through all those Let's just
pick up there. There's a couple of things from there
about what constitutes restricted but also about the pass through
the of the tariffs. You know, there is just a
lot of uncertainty, and so far things have not necessarily
played out certainly the way we might have expected from
the models. It's a puzzle, frankly on all sides of
(05:45):
the newsroom in Bloomberg as well, because we're talking to
people in senior business figures who appear to be kind
of nervous of mentioning tariffs in their earnings calls. If
it's not being shown in prices, these tariffs, which are
definitely being paid at the board, you'd expect it to
be shown in earnings, but we're not seeing an obvious
effect there. Our own Anna Wong has suggested that even
(06:06):
just the sheer uncertainty attached to the tariffs this time around,
the fact that they're jumping around so much, has actually
stayed manufacturers, how retailers hand in changing prices because they think, oh, well,
he may there may be a tweet next week and
he may suspend it for another few months. So just
on that, what's your sort of solution to the puzzle
of how tariffs are or are not actually being shown
(06:29):
in the economy and prices particularly, Well.
Speaker 1 (06:32):
First of all, I think the path through process just
takes a little bit longer than we expect because the
goods have to move from abroad to the US, they
have to be unloaded, shift to the retailer, and the
retailer actually has to sell the goods at the higher price,
and that takes a number of months. Number two, to
your point, the encertainty level is really high. And I
think when a certainty is really high and there's a
(06:53):
cost of raising prices in terms of your customer relations,
you want to get more certainty before you decide how
big a price rise that you want to put into place.
So it's better to raise the prices once and rather
than raise the prices multiple times. So I fully expect
that you know, most of the tariff burden is ultimately
going to be passed through, you know, probably on the
(07:14):
order of eighty percent, and I think that's probably going
to be worth you know, one to one percent to
one and a half percent on the level of prices.
So I'm pretty confident that inflation is going to be
three percent or more, you know, well in well through
the first half of twenty twenty six. So I think
it's I think it's more delayed than not coming, because
to your point, if it's not showing up in earnings,
(07:36):
then we're going to be seeing it at some point.
Speaker 2 (07:39):
And on the question of whether it's restricted, obviously, one
of the arguments that's been used by Stephen Myron and
others for why it is actually more restrictive than we
think the policy currently is that the natural rate has
fallen for reasons that he described in his testimony. I
think that the house view is certainly that that's not
the case. But is that one of the things that
(08:01):
you're thinking about in looking at considering where the policy
is restrictive enough?
Speaker 1 (08:07):
As cher Paaloa says, we know our star by its works,
and what he means by that is we look outside
see how the commedy is performing. If the comedy is
stronger than we thought, then we tend to revise up
our estimate of our star. And if the e commedy
is weaker than we thought, we tend to revise down
our estimate of our store. I'd say, right now, given
all the uncertainty in policy, the tariff shock, you know,
(08:27):
it is a tightening of physical policy. Given all that,
you'd have to say, the commedy is performing better than expected.
In fact, you know, it's the last FED meeting, the
FED revised up their growth forecast for twenty twenty six
by a couple tenths of a percent. So that to
me tells me that our star is probably a little
bit higher than we think now. You know, Stephen Moran
made a number of arguments why our star is lowered,
(08:49):
and I think some of the arguments are actually sensible,
but some of them are not. And of course he conveniently,
I think, ignored some of the factors that are also
resulting in a higher our star. The investment spending boom,
for it was just totally not even mentioned by Marian
in his remarks. And it's hard to believe that the
investment spending boom in the short term doesn't increase the
demand for capital and result in a higher interest rate
(09:11):
to consistent with a neutral manetary policy.
Speaker 3 (09:14):
You know what.
Speaker 1 (09:14):
The argument where I agree with him is on the
slower growth of the population, slower growth of liver force,
that one, I think is you know, a good argument
because I think if you have less people, you need
less capital to equip them to work. So I think
that one was something I agree with. But the some
of the other arguments I think are btr cherry picking
the arguments to support his point of view.
Speaker 3 (09:34):
But the biggest problem is how does he explain if.
Speaker 1 (09:37):
The policy is as restrictive as he says it is,
then why is the economy performing so well?
Speaker 2 (09:42):
There is this kind of mystic meg aspect to the
our Star debate. You have this feeling of you never
can see it, never can put it down, But we
talk about it a lot. We're going to talk about
it more later. Finally, just on the short term situation,
given that you have been, unlike most of the people
in the room round the table for these discussions, how
will the FMC be thinking about the shutdown? And how
(10:03):
important is it the timing If the government goes back
to work, say this week or that it's seeming pretty unlikely,
what kind of difference does that make relative to it
being what seems likely to be a pretty prolonged shutdown.
Speaker 1 (10:16):
So historically these government shutdowns have not had a big
effect on the economic trajectory.
Speaker 3 (10:22):
And the reason for that is people.
Speaker 1 (10:24):
Ultimately get paid even for their or even for the
time that they were furloughed, so that they don't actually
adjust their spending habits in any significant way. But this
shutdown could be a little bit different because there are
people that apparently are going to be furloughed, there are
people who are not getting paid, so it might have
a more damaging consequence to the economy. Now, I think
(10:44):
everybody's of the view that this is not going to
last sort of indefinitely. You know, maybe it goes a month,
maybe it goes five weeks, but I don't think anyone
is expecting it to last through the end of the year.
And so at the end of the day, the size
of the shock that this is going to generate to
the economy is pretty small, and I would think that
it's unlikely that it's going to have a real big
(11:04):
consequence for MONTARC policy. Now the October meeting, I think
the FED is definitely going to ease at this point.
Once you started to ease, you're almost going to certainly
go in the same direction unless you get a new
set of information that contradicts your motivation for easing in
the first place. Since the FED is getting virtually no information,
of course they're going to keep going in the same direction.
Speaker 2 (11:25):
There's a yeah, of course, that's a good point in
terms of the BLS numbers and other things. Okay, So,
I mean, one thing that I like about your columns
that you do for Bloomberg Bill, and certainly why they
get read, is that you have these admirably direct headlines
that say basically what you're going to say. And if
you'll forgive me fourth of August column, the FED is
(11:45):
under siege and it'll be just fine. That was one column.
Speaker 3 (11:49):
Yeah, I changed my mind on that one three weeks later.
Speaker 2 (11:52):
Three weeks later, just about the time that Lisa Cook
was attempted to be fired. I wasn't very worried about
the FED now I am. So if you are, why
isn't Wall Street.
Speaker 3 (12:05):
That's a good question. I don't have a good answer
for that.
Speaker 1 (12:07):
I guess Wall Street is just very uncertain how this
all is going to play out. Obviously, the Lisa Cook
case is going up to the Supreme Court, and how
they rule is going to be really important. If they
rule that President Trump can dismiss Lisa Cook for cause
then in principle, President Trump can dismiss other members of
(12:28):
the Board of Governors for cause, and it's not even
clearer whether what his authority would be over the Federals
or bank prisons. The fear in markets is that the
Trump administration will soon get could soon get control of
the Board of Governors, and then those that majority on
the Board of Governors could then start to decide not
to reappoint Federals or bank presidence when they're five year
(12:50):
two terms come due in February of next year. So
you can see that how you can bootstrap control of
the Board of Governors to having control full of the
broad Federal Open Market Committee, even if the Lisa Cook
case has decided in favor of the president. I don't
think this is preordained. We don't really know what, you know,
(13:10):
Chris Waller and Michelle Bowman would do. I thought it
was interesting at the last meeting that they went along
with the majority for a twenty five base point raycut,
not the fifty bass point raycut that Stephen Moran supported.
So you know, just because you're a Trump appoint he
doesn't mean that you're necessarily willing to do things as
radical as not reappointing a federal Reserve banks these five
(13:31):
year the five reappointments historically have been absolutely routine. You know,
they're they're not they're not ever, They've never been consequential
in the past. So to not reappoint a federal resert
president because you're afraid that they're not a supporter of
much lower interest rates would be without president. So I'm
looking at, you know, a couple of things. Number one,
the Lisa Cook case, hugely consequential. Number two, where are
(13:56):
where are Michelle Bowman and Chris Waller and all this?
And how far are they willing to go in terms
of transforming the FED? You know, basically, you know, dismissing
federis or presence because you don't like how they're going
to vote on monetary policy would be the end of
FED independence. And I think, you know, to your point,
(14:17):
it's remarkable that people are so optimistic about this, because
even if it's a twenty percent probability, it's a twenty
percent probability of a very bad event. As you talked
at the top of the of the of this session.
You know, if Donald Trump were to get his way
and get one percent interest rates, we would have a
(14:38):
much more significant inflation problem. Inflation expectations would become un anchored,
and the heel care would steepen. The bond market vigilantis
would almost certainly return, the dollar would weaken sharply.
Speaker 3 (14:51):
You know, we would have a pretty big mess on
your hands.
Speaker 1 (14:54):
And if that's you know, even if that's only a
twenty percent probability, that seems like something that you want
to price in.
Speaker 2 (15:00):
We did some scenarios thinking about how you might euphemistically
call a different reaction function of the FED under a
new chair. I mean, one distinguishing feature of all of them,
even the more extreme one, is that things look pretty
good for a while and then they're really bad. And
just looking at Donald Trump's policies sort of through time,
(15:21):
he's been quite good at picking policies that were quite
good for a while that he wouldn't necessarily pay the
consequences of. Isn't that a reason to be a bit nervous?
Speaker 1 (15:28):
Well, this is exactly why we like to see central
bank independence, because central bank independence is thinking about maitre policy,
not for the next eighteen months, but for the next
few years. You know, if you have an independence central bank,
it can think medium to long term. If you have
a central bank that's controlled by the executive branch and
is worried about how things are going to look for
(15:50):
the next election, yeah, you can basically make Maitre policy
very stimuli, make the economy look very strong, and the
inflation consequence of that usually shows through later. There's been
a lot of academic studies that have looked at economic
performance based on how independent the central bank is, and
the jury is in the more independent the central bank,
(16:10):
the better the economic outcomes. And this is the reason
why we've been engaged in a movement to more central
bank independence over the last thirty years. This is not
a new trend. So if Trump moves this in the
opposite direction, this is unwinding a lot of momentum that's
been in place for several decades.
Speaker 2 (16:29):
We're going to run out of time. But I've got
a couple of quick ones. I mean one is just
as a matter of fact, given all the conversation around this,
given the focus on the particular candidates, the FED is
traditionally the fmc's a bit different certainly from the Bank
of England that you tend to have unanimity. The chairman
tends to command a lot of the room, so to speak.
You don't have the governor or the head of the
bank doesn't tend to be voted down in their decisions.
(16:52):
That as many people who have said that depends on
the respect that the people around the table have for
the chair. Do you think that anybody coming in in
these circumstances now is tainted because of the process that's
led up to it.
Speaker 1 (17:04):
No, I think it depends on how they perform in
the job. So it's sort of up to them when
they come in. Cet A Reserve is a consensus driven institution.
I mean, the chair can lead, but it only leads
so far. So the last meeting is a good example.
There were some people who didn't want to cut rates
at the last meeting, so you look at the outcome
of the meeting. All the people except Moran voted for
the twenty five basis point raycut.
Speaker 3 (17:25):
And so that's basically telling.
Speaker 1 (17:26):
You is when the committee has confidence in the chairman.
If the issues are small, the committee is oftentimes willing
to defer to the chairman, But if the if the
chairman wants to take the interest rates down two hundred
basis points and the committee thinks that's inappropriate, then it's
not going to happen. So I think, you know, it's
so the chair can lead, but it can only lead
(17:49):
so far.
Speaker 2 (17:50):
There's a question that came up at a meeting we
had this morning. Do you personally think that Jay Powe
will stick around as he suggested?
Speaker 1 (17:56):
I think I think he's keeping his options open. I mean,
I think if he's that his presence was standing between
good manitary policy and bad manitary policy, then I think
he would stay on board. If he thought that his
presence wouldn't make much difference, then I think he'll step down.
So I think he's right now. I don't think he
knows the answer to that question. So I don't think
(18:17):
he knows what he's going to do at this point.
Speaker 2 (18:19):
And the final question was just taking us full circle
to the discussion we had around where the risks lie
in the current decision all this debate. You know, another
potential consequences I've actually heard investors talk about is that
in a year or so's time, if you've had a
sort of continued boost to the economy from some of
these rate cuts and it's actually inflation is starting to
(18:41):
come back or come through it could look like you
really need to raise rates again, and the fear would
be that a slightly more politically compromised FED, whoever the
chair is, will not want to do that in the
lead up to a mid term election. Do you think
that's another reason for holding now?
Speaker 1 (18:58):
Well, I think you know what you're getting to is
is that as we start this a discussion about the
independence of the FED, even if the FED retains its independence,
there's always the question of whether the FED is starting
to pull its punches because it's worried about the consequence
of it if it doesn't do the administration's bidding. I mean, already,
I've been asked a number of times. Do you think
(19:18):
the FED cut rates in September because of the political
pressure of the Trump administration.
Speaker 3 (19:23):
I don't think so.
Speaker 1 (19:24):
I think Paul believes that it's appropriate to worry about
the downside risk to the labor market. But the very
fact that people are asking me that question shows that
there's already been some damage to the Fed's credibility.
Speaker 2 (19:36):
Yeah, that is just the kind of question that anyone
on the FED always hated, and certainly you always used
to say that, Bill Dudley, Thank you so much.
Speaker 3 (19:43):
Thank you.
Speaker 2 (19:51):
Thanks for listening to Trumpnomics from Bloomberg and this special
episode was hosted by me, Stephanie Flanders and I was
joined by Bill Dudley. Trumpnomics was produced by some of
Saddi and Moses and Dam with help from Amy Keene
and special thanks to Rachel Lewis Chriskey. Sound design is
by Blake Maples and Sage Bowman is Bloomberg's head of podcasts.
(20:12):
To help others find us, please rate and review us
highly wherever you listen
Bloomberg Audio Studios, Podcasts, radio News. This is exactly where
we like to see central bank independence, because central bank
independence is thinking about manitre palsy. Not for the next
eighteen months, but for the next few years.
Speaker 2 (00:27):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and this is a bonus episode of Trumponomics, the podcast
that looks at the economic world of Donald Trump. While
I was in New York this week, I hosted a
fireside chat with Bill Dudley about the future of the
Federal Reserve and its monetary policy. Bill was once President
of the Federal Reserve Bank of New York. Before that,
(00:48):
he was a chief economist at Goldman Sachs, among other things,
and he's now a columnist for Bloomberg Opinion and a
senior advisor to Bloomberg Economics. In our conversation, we discussed
not only the political threats to fail independence growing by
the day under President Trump's administration, but also the US
Central Bank's monetary policy right now and the implications of
(01:09):
tariffs and the AI investment boom. I started the conversation
by asking Bill why he thinks it would be a
bad idea for the FED to keep cutting interest rates
over the next year or so, which is what the
future markets are currently predicting.
Speaker 1 (01:27):
Well, I think there's a debate going on between what's
the biggest risk inflation staying sticky above the two percent
target for if we go through next year the fifth
year in a row, or the layer market to continue
to deteriorate and potentially giving away and having a recession,
and Pouls trying to navigate between those two risks, and
(01:50):
as he said, it's very difficult to figure out what
to do in the current environment. Where he lands is
that he thinks that the greater risk, or the increasing
risk at least, is the downs side risk to the
labor market, and as a consequence of that, he wants
to make manentre policy less restrictive to sort of reduce
that downside risk to the labor market. Now, I think
(02:11):
you could make the argument that the upside risk to
inflation still is very much germane because the pass through
of teriff of terrorists into prices is probably quite incomplete,
and we have a number of other exogenous factors that
are going to also put upward pressure on inflation. For example,
what's happening with the AI investment boom and the consequence
(02:32):
of that for electric prices. Now, I know we like
to historically exclude food and energy from our calculation of inflation,
and that's fine when the prices go up and the
prices come right back down, but that's not going to
happen for electricity. The prices are going to keep going
up for the next few years, and so I think
that have to be considered a part of the inflation outlook.
Speaker 3 (02:52):
I think where I come out is a little differently
than Paul.
Speaker 1 (02:55):
I think that the inflation risks are just as substantives
as the downside risk labor market number one and number two.
I don't think policy is as restrictive as he thinks
it is. He thinks that policy is restrictive, so they're
say before he wants to make it less restrictive. I
think if you look at the economy writ large, it
doesn't look like Madre policies holding back the economy hardly
(03:17):
at all at this point. You know, if you look
at the Atlanta Fed GDP now forecast for the third quarter,
it's tracking three point eight percent. If you think about
the exogenous AI investment spending boom that's going to continue
to support economic growth as we go through the rest
of twenty twenty five into twenty twenty six. So that's
the first point of sort of mild disagreement. The second
(03:40):
point is, I just feel like the risk of inflation
expectations rising is just as substantive as the labor market
continue to DETERIAD.
Speaker 3 (03:48):
What Paul's worried.
Speaker 1 (03:49):
About in the labor market is that when the labor
market det rate's beyond a certain point, it tends to
be self reinforcing. And this is really summarized in the
sum rule. Every time the unemploying rate's gone up by
half a percent, the US is all into reception, with
one important exception twenty twenty four. Twenty twenty four, we
had a mild trigger of this somrale. Nothing bad happened.
But I think that notion that labor marketed touring beyond
(04:11):
a certain point is still valid because what happened in
twenty twenty four was the unemploying rate went up not
because of labor market weakness, but because of a big
surge and labor supply. This year, if the unemploying rate
goes up by half a percentage point, it's going to
because of weakness and labor demand. What concerns me on
the inflation side is, you know, we were sort of
pushing the envelope here of how long inflation can be
(04:33):
above the Fed's target and inflation expectations state will anchored.
At some point people are going to start to believe
that the FED doesn't really care about getting inflation back
to two percent to three percent is good enough. And
if that happens, then inflation expectations will become a bit
less firmly anchored, and that'll be harder to get inflation
down in the future. So my own personal view is
(04:54):
I'd be a little bit more patient. Also, I think,
you know, they's just a tremands amount unsurty in terms
of that can We've never had a you know, a
TERRFF shock like this. We've never had an AI investment
spending boom like this before. We've never had such a
dramatic change in labor supply before. So there's a whole
bunch of you know, wild cards that I think, in
my mind make me less confident in my forecast. And
(05:17):
if I'm less confident in my forecasts, going to be
sort of like you don't want to take the Democratic
oath of do no harm.
Speaker 2 (05:24):
That's fantastically useful to run through all those Let's just
pick up there. There's a couple of things from there
about what constitutes restricted but also about the pass through
the of the tariffs. You know, there is just a
lot of uncertainty, and so far things have not necessarily
played out certainly the way we might have expected from
the models. It's a puzzle, frankly on all sides of
(05:45):
the newsroom in Bloomberg as well, because we're talking to
people in senior business figures who appear to be kind
of nervous of mentioning tariffs in their earnings calls. If
it's not being shown in prices, these tariffs, which are
definitely being paid at the board, you'd expect it to
be shown in earnings, but we're not seeing an obvious
effect there. Our own Anna Wong has suggested that even
(06:06):
just the sheer uncertainty attached to the tariffs this time around,
the fact that they're jumping around so much, has actually
stayed manufacturers, how retailers hand in changing prices because they think, oh, well,
he may there may be a tweet next week and
he may suspend it for another few months. So just
on that, what's your sort of solution to the puzzle
of how tariffs are or are not actually being shown
(06:29):
in the economy and prices particularly, Well.
Speaker 1 (06:32):
First of all, I think the path through process just
takes a little bit longer than we expect because the
goods have to move from abroad to the US, they
have to be unloaded, shift to the retailer, and the
retailer actually has to sell the goods at the higher price,
and that takes a number of months. Number two, to
your point, the encertainty level is really high. And I
think when a certainty is really high and there's a
(06:53):
cost of raising prices in terms of your customer relations,
you want to get more certainty before you decide how
big a price rise that you want to put into place.
So it's better to raise the prices once and rather
than raise the prices multiple times. So I fully expect
that you know, most of the tariff burden is ultimately
going to be passed through, you know, probably on the
(07:14):
order of eighty percent, and I think that's probably going
to be worth you know, one to one percent to
one and a half percent on the level of prices.
So I'm pretty confident that inflation is going to be
three percent or more, you know, well in well through
the first half of twenty twenty six. So I think
it's I think it's more delayed than not coming, because
to your point, if it's not showing up in earnings,
(07:36):
then we're going to be seeing it at some point.
Speaker 2 (07:39):
And on the question of whether it's restricted, obviously, one
of the arguments that's been used by Stephen Myron and
others for why it is actually more restrictive than we
think the policy currently is that the natural rate has
fallen for reasons that he described in his testimony. I
think that the house view is certainly that that's not
the case. But is that one of the things that
(08:01):
you're thinking about in looking at considering where the policy
is restrictive enough?
Speaker 1 (08:07):
As cher Paaloa says, we know our star by its works,
and what he means by that is we look outside
see how the commedy is performing. If the comedy is
stronger than we thought, then we tend to revise up
our estimate of our star. And if the e commedy
is weaker than we thought, we tend to revise down
our estimate of our store. I'd say, right now, given
all the uncertainty in policy, the tariff shock, you know,
(08:27):
it is a tightening of physical policy. Given all that,
you'd have to say, the commedy is performing better than expected.
In fact, you know, it's the last FED meeting, the
FED revised up their growth forecast for twenty twenty six
by a couple tenths of a percent. So that to
me tells me that our star is probably a little
bit higher than we think now. You know, Stephen Moran
made a number of arguments why our star is lowered,
(08:49):
and I think some of the arguments are actually sensible,
but some of them are not. And of course he conveniently,
I think, ignored some of the factors that are also
resulting in a higher our star. The investment spending boom,
for it was just totally not even mentioned by Marian
in his remarks. And it's hard to believe that the
investment spending boom in the short term doesn't increase the
demand for capital and result in a higher interest rate
(09:11):
to consistent with a neutral manetary policy.
Speaker 3 (09:14):
You know what.
Speaker 1 (09:14):
The argument where I agree with him is on the
slower growth of the population, slower growth of liver force,
that one, I think is you know, a good argument
because I think if you have less people, you need
less capital to equip them to work. So I think
that one was something I agree with. But the some
of the other arguments I think are btr cherry picking
the arguments to support his point of view.
Speaker 3 (09:34):
But the biggest problem is how does he explain if.
Speaker 1 (09:37):
The policy is as restrictive as he says it is,
then why is the economy performing so well?
Speaker 2 (09:42):
There is this kind of mystic meg aspect to the
our Star debate. You have this feeling of you never
can see it, never can put it down, But we
talk about it a lot. We're going to talk about
it more later. Finally, just on the short term situation,
given that you have been, unlike most of the people
in the room round the table for these discussions, how
will the FMC be thinking about the shutdown? And how
(10:03):
important is it the timing If the government goes back
to work, say this week or that it's seeming pretty unlikely,
what kind of difference does that make relative to it
being what seems likely to be a pretty prolonged shutdown.
Speaker 1 (10:16):
So historically these government shutdowns have not had a big
effect on the economic trajectory.
Speaker 3 (10:22):
And the reason for that is people.
Speaker 1 (10:24):
Ultimately get paid even for their or even for the
time that they were furloughed, so that they don't actually
adjust their spending habits in any significant way. But this
shutdown could be a little bit different because there are
people that apparently are going to be furloughed, there are
people who are not getting paid, so it might have
a more damaging consequence to the economy. Now, I think
(10:44):
everybody's of the view that this is not going to
last sort of indefinitely. You know, maybe it goes a month,
maybe it goes five weeks, but I don't think anyone
is expecting it to last through the end of the year.
And so at the end of the day, the size
of the shock that this is going to generate to
the economy is pretty small, and I would think that
it's unlikely that it's going to have a real big
(11:04):
consequence for MONTARC policy. Now the October meeting, I think
the FED is definitely going to ease at this point.
Once you started to ease, you're almost going to certainly
go in the same direction unless you get a new
set of information that contradicts your motivation for easing in
the first place. Since the FED is getting virtually no information,
of course they're going to keep going in the same direction.
Speaker 2 (11:25):
There's a yeah, of course, that's a good point in
terms of the BLS numbers and other things. Okay, So,
I mean, one thing that I like about your columns
that you do for Bloomberg Bill, and certainly why they
get read, is that you have these admirably direct headlines
that say basically what you're going to say. And if
you'll forgive me fourth of August column, the FED is
(11:45):
under siege and it'll be just fine. That was one column.
Speaker 3 (11:49):
Yeah, I changed my mind on that one three weeks later.
Speaker 2 (11:52):
Three weeks later, just about the time that Lisa Cook
was attempted to be fired. I wasn't very worried about
the FED now I am. So if you are, why
isn't Wall Street.
Speaker 3 (12:05):
That's a good question. I don't have a good answer
for that.
Speaker 1 (12:07):
I guess Wall Street is just very uncertain how this
all is going to play out. Obviously, the Lisa Cook
case is going up to the Supreme Court, and how
they rule is going to be really important. If they
rule that President Trump can dismiss Lisa Cook for cause
then in principle, President Trump can dismiss other members of
(12:28):
the Board of Governors for cause, and it's not even
clearer whether what his authority would be over the Federals
or bank prisons. The fear in markets is that the
Trump administration will soon get could soon get control of
the Board of Governors, and then those that majority on
the Board of Governors could then start to decide not
to reappoint Federals or bank presidence when they're five year
(12:50):
two terms come due in February of next year. So
you can see that how you can bootstrap control of
the Board of Governors to having control full of the
broad Federal Open Market Committee, even if the Lisa Cook
case has decided in favor of the president. I don't
think this is preordained. We don't really know what, you know,
(13:10):
Chris Waller and Michelle Bowman would do. I thought it
was interesting at the last meeting that they went along
with the majority for a twenty five base point raycut,
not the fifty bass point raycut that Stephen Moran supported.
So you know, just because you're a Trump appoint he
doesn't mean that you're necessarily willing to do things as
radical as not reappointing a federal Reserve banks these five
(13:31):
year the five reappointments historically have been absolutely routine. You know,
they're they're not they're not ever, They've never been consequential
in the past. So to not reappoint a federal resert
president because you're afraid that they're not a supporter of
much lower interest rates would be without president. So I'm
looking at, you know, a couple of things. Number one,
the Lisa Cook case, hugely consequential. Number two, where are
(13:56):
where are Michelle Bowman and Chris Waller and all this?
And how far are they willing to go in terms
of transforming the FED? You know, basically, you know, dismissing
federis or presence because you don't like how they're going
to vote on monetary policy would be the end of
FED independence. And I think, you know, to your point,
(14:17):
it's remarkable that people are so optimistic about this, because
even if it's a twenty percent probability, it's a twenty
percent probability of a very bad event. As you talked
at the top of the of the of this session.
You know, if Donald Trump were to get his way
and get one percent interest rates, we would have a
(14:38):
much more significant inflation problem. Inflation expectations would become un anchored,
and the heel care would steepen. The bond market vigilantis
would almost certainly return, the dollar would weaken sharply.
Speaker 3 (14:51):
You know, we would have a pretty big mess on
your hands.
Speaker 1 (14:54):
And if that's you know, even if that's only a
twenty percent probability, that seems like something that you want
to price in.
Speaker 2 (15:00):
We did some scenarios thinking about how you might euphemistically
call a different reaction function of the FED under a
new chair. I mean, one distinguishing feature of all of them,
even the more extreme one, is that things look pretty
good for a while and then they're really bad. And
just looking at Donald Trump's policies sort of through time,
(15:21):
he's been quite good at picking policies that were quite
good for a while that he wouldn't necessarily pay the
consequences of. Isn't that a reason to be a bit nervous?
Speaker 1 (15:28):
Well, this is exactly why we like to see central
bank independence, because central bank independence is thinking about maitre policy,
not for the next eighteen months, but for the next
few years. You know, if you have an independence central bank,
it can think medium to long term. If you have
a central bank that's controlled by the executive branch and
is worried about how things are going to look for
(15:50):
the next election, yeah, you can basically make Maitre policy
very stimuli, make the economy look very strong, and the
inflation consequence of that usually shows through later. There's been
a lot of academic studies that have looked at economic
performance based on how independent the central bank is, and
the jury is in the more independent the central bank,
(16:10):
the better the economic outcomes. And this is the reason
why we've been engaged in a movement to more central
bank independence over the last thirty years. This is not
a new trend. So if Trump moves this in the
opposite direction, this is unwinding a lot of momentum that's
been in place for several decades.
Speaker 2 (16:29):
We're going to run out of time. But I've got
a couple of quick ones. I mean one is just
as a matter of fact, given all the conversation around this,
given the focus on the particular candidates, the FED is
traditionally the fmc's a bit different certainly from the Bank
of England that you tend to have unanimity. The chairman
tends to command a lot of the room, so to speak.
You don't have the governor or the head of the
bank doesn't tend to be voted down in their decisions.
(16:52):
That as many people who have said that depends on
the respect that the people around the table have for
the chair. Do you think that anybody coming in in
these circumstances now is tainted because of the process that's
led up to it.
Speaker 1 (17:04):
No, I think it depends on how they perform in
the job. So it's sort of up to them when
they come in. Cet A Reserve is a consensus driven institution.
I mean, the chair can lead, but it only leads
so far. So the last meeting is a good example.
There were some people who didn't want to cut rates
at the last meeting, so you look at the outcome
of the meeting. All the people except Moran voted for
the twenty five basis point raycut.
Speaker 3 (17:25):
And so that's basically telling.
Speaker 1 (17:26):
You is when the committee has confidence in the chairman.
If the issues are small, the committee is oftentimes willing
to defer to the chairman, But if the if the
chairman wants to take the interest rates down two hundred
basis points and the committee thinks that's inappropriate, then it's
not going to happen. So I think, you know, it's
so the chair can lead, but it can only lead
(17:49):
so far.
Speaker 2 (17:50):
There's a question that came up at a meeting we
had this morning. Do you personally think that Jay Powe
will stick around as he suggested?
Speaker 1 (17:56):
I think I think he's keeping his options open. I mean,
I think if he's that his presence was standing between
good manitary policy and bad manitary policy, then I think
he would stay on board. If he thought that his
presence wouldn't make much difference, then I think he'll step down.
So I think he's right now. I don't think he
knows the answer to that question. So I don't think
(18:17):
he knows what he's going to do at this point.
Speaker 2 (18:19):
And the final question was just taking us full circle
to the discussion we had around where the risks lie
in the current decision all this debate. You know, another
potential consequences I've actually heard investors talk about is that
in a year or so's time, if you've had a
sort of continued boost to the economy from some of
these rate cuts and it's actually inflation is starting to
(18:41):
come back or come through it could look like you
really need to raise rates again, and the fear would
be that a slightly more politically compromised FED, whoever the
chair is, will not want to do that in the
lead up to a mid term election. Do you think
that's another reason for holding now?
Speaker 1 (18:58):
Well, I think you know what you're getting to is
is that as we start this a discussion about the
independence of the FED, even if the FED retains its independence,
there's always the question of whether the FED is starting
to pull its punches because it's worried about the consequence
of it if it doesn't do the administration's bidding. I mean, already,
I've been asked a number of times. Do you think
(19:18):
the FED cut rates in September because of the political
pressure of the Trump administration.
Speaker 3 (19:23):
I don't think so.
Speaker 1 (19:24):
I think Paul believes that it's appropriate to worry about
the downside risk to the labor market. But the very
fact that people are asking me that question shows that
there's already been some damage to the Fed's credibility.
Speaker 2 (19:36):
Yeah, that is just the kind of question that anyone
on the FED always hated, and certainly you always used
to say that, Bill Dudley, Thank you so much.
Speaker 3 (19:43):
Thank you.
Speaker 2 (19:51):
Thanks for listening to Trumpnomics from Bloomberg and this special
episode was hosted by me, Stephanie Flanders and I was
joined by Bill Dudley. Trumpnomics was produced by some of
Saddi and Moses and Dam with help from Amy Keene
and special thanks to Rachel Lewis Chriskey. Sound design is
by Blake Maples and Sage Bowman is Bloomberg's head of podcasts.
(20:12):
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