Transcript: Bill Dudley, NY Fed Chief

The transcript from this week’s, MiB: Bill Dudley, NY Fed Chief, is below.

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This is Masters in business with Barry Ritholtz on Bloomberg Radio

00:00:09 [Barry Ritholtz] This week on the podcast, what can I say? Bill Dudley, former New York Fed President, multiple positions at Goldman Sachs on the Federal Reserve at the New York Fed. Really a masterclass in how monetary policy is not only made but executed and put into actual operations. There are few people in the world who understand the interrelationships between central banks, the economy, and markets like Bill Dudley does this, this is just a master class in, in understanding all the factors that affect everything from the economy to inflation, to the labor market, the housing market, and of course, federal Reserve policy. I, I could go on and on, but instead I, I’ll just say with no further ado my conversation with former New York Fed President, bill Dudley.

00:01:10 [Bill Dudley] Great to be here, Barry. It,

00:01:11 [Barry Ritholtz] It’s great to have you. So I feel like I have to call you Bill.

00:01:15 [Barry Ritholtz] Bill. That’s how,

00:01:15 [Barry Ritholtz] Because that’s what I always hear you described as not a William. Yep. Let, let’s talk a little bit about your background. You get an economics PhD from California, Berkeley in 82, and around the same time you become an economist at the Federal Reserve Board from 81 to 83. Tell, tell us a little bit about that role.

00:01:34 [Bill Dudley] I, I was there in the, what’s called, called the financial studies section, which is one of the very small places in the Fed that is not macroeconomics driven. It’s microeconomics. So we worked on things like payments policy, you know, regulatory policy. So all, all sorts of micro issues, not macro issues. It was a pretty interesting period because the, the congress had just passed what’s called
the Monetary Control Act, where they were forcing the Fed to charge for all its services to, so, so, so to sort of level the playing field with the private sector. So we had to figure out how are we gonna price all these services in a way that we can still sort of stay in business and be a viable competitor to the private sector. Huh.

00:02:11 [Barry Ritholtz] That, that’s kind of bizarre. I would imagine in 1982, the Fed was a much smaller entity than it is today. What was a day in the life of a Fed economist like back then?

00:02:23 [Speaker Changed] So, I was working on issues, you know, on payments. I worked on issues on, you know, some, some, some, some of them were quite esoteric. So, for example, the treasury was thinking about moving to direct deposit, but they wanted to know how much it was gonna cost them because direct deposit, they, they, they, they, the money clears, you know, sorry, almost instantly, right? When you write a check, you get check float, it takes time for the checks to come back to the hit the treasury account. So they wanna know how many days does it take a, a treasury check to get back to us. So we actually set, set up this project where we went out to the reserve banks and sampled checks
to find out how long did it actually take someone to get their treasury check and deposit it somewhere and have it get back to the Fed and debit the treasury of the county. It turned out to be like eight or nine days on average,

00:03:07 [Speaker Changed] And, and on a couple of billion dollars, that float is real money.

00:03:10 [Speaker Changed] It’s real money. So we wanted to make sure that under PE people understood what the cost was. Now, obviously, it’s a good thing to do. I mean, it does cost the treasury money, but it’s a much more efficient and more reliable payments medium.

00:03:23 [Speaker Changed] Did you overlap with Chairman Paul Volker when you were there?

00:03:27 [Speaker Changed] Yes, I did. I didn’t have a lot of interactions with him. I remember one time though, I did do a briefing of the, of the Board of Governors, and at the time they had, they had this very long table in the board in the main, you know, board of governor’s meeting room. And Volcker sat at one end and the, the briefer sat all the way at the other end, which was made it sort of complicated because Volcker had a, usually had a cigar stuck in his mouth, and he would actually quiet, like, and you could like straining to hear them. The, the senior staff was ready to rescue you if you said something inappropriate. I mean, right. They set the bar, the tension bar so high because you, you actually couldn’t actually do a briefing until you’ve actually taken a course.

00:04:08 [Speaker Changed] No kidding. So

00:04:08 [Speaker Changed] That means like, you’re not exactly relaxed when you’re going to, to brief the governors. I’m, it’s not a lot of give and take. It’s very, it was a very formal process

00:04:16 [Speaker Changed] And even without a cigar in his mouth, I only got to meet Tall Paul once, but he’s kind of gruff and mumbles, like not a clear projecting voice, kind of a, a horse mumbling voice. I can imagine with a cigar in his mouth, who could even tell what he’s saying.

00:04:31 [Speaker Changed] Well, I seem to have, have gotten it good enough. And you know, what’s interesting about that? I didn’t really have that much interaction with Paul over the next, you know, 15, 20 years. But once I got to the Fed, we started to actually see each other on a much more regular basis. I got involved with a group of 30, Paul was a member of the group of 30, and we gradually became pretty good friends. So it started like very slow and started it matured like fine wine.

00:04:56 [Speaker Changed] He’s a, he’s a fascinating guy. And what, what an amazing career. So before you come back to the Fed, there’s a private sector interval. Tell us a little bit about the 20 years you spent at Goldman Sachs, where you not only became a managing director and a partner, but you know, really very much rose through the ranks.

00:05:16 [Speaker Changed] Well, first I went to JP Morgan. I was their, the regulatory comm, JP Morgan at the time had one regulatory commiss. And so when the job came open and they approached me at the Fed, I thought, boy, if I don’t take this job, it’s not gonna be available, you know, a few years later. So I went to JB Morgan and I worked on a lot of bank regulatory matters, and that’s why I’m still very
interested in bank regulatory issues. But that seemed to me like not a really great long-term career. ’cause as you know, bank regulation changes very slowly, and I sort of wanted a faster tempo. So Goldman Sachs had me into interview for a macroeconomics job, and I thought, well, I don’t really know a lot of macroeconomics, but I do know about how the Federal Reserve operates, how the payment
system operates, how the plumbing works, how reserves, you know, move through the system. And I
think they liked the fact that I knew about how things worked at sort of a micro level. So they hired me
to do macroeconomics.

00:06:11 [Speaker Changed] You were chief US economist for, for a decade over a, a really fascinating period, really, the heart of the bull market. Tell us a little bit what you remember from that role in that era.

00:06:27 [Speaker Changed] Well, I remember how, how, how it was a period of sort of stars for, for, for, for equity analysts, much more than it is today. And one of the biggest stars was Abby, Joseph Cohen Sure. Who was the equity analyst for Goldman Sachs. So trying to find some space between Abby and your audience was a little bit challenging. But, but, you know, we, I focused mostly on fixed income and foreign exchange. So there was sort of room for me to, to, to do my business. Probably the highlight of my career at Goldman Sachs was that, I can’t remember exactly the year, but it was in the early two thousands when people in the markets were, couldn’t figure out if the Fed was going to move by 25 basis points or by 50 basis points. And unlike today going into the meeting, it really was 50 50. 00:07:13 Right. And Lloyd Blankfine called me up the night before and sort of said, you know, we have a lot of risk on, on this notion that they’re gonna do 50. How do you, how do you feel about that? And that was my call. I said, I, I told Lloyd, I said, I don’t know what’s gonna happen, but the probability of 50 is a lot more than 50 50 at this point. Next day I had to go to Boston for a client meeting. It was really sort of sad because I wasn’t on the floor at the time that the announcement came, but apparently people stood up and cheered for me,

00:07:40 [Speaker Changed] And it was a 50 point mark.

00:07:41 [Speaker Changed] Yeah, yeah. So I got that, that, so that, that was probably the highlight. And I sort of got to miss the best part of it actually.

00:07:47 [Speaker Changed] So, so after, you know, more than 20 years at Goldman, you joined the New York Fed in 2007, overseeing domestic and foreign exchange trading operations, 2007, that, that’s some timing. It’s really, it’s after real estate rolled over, but it’s kind of before the market peaked and the real trouble began in oh 8, 0 9.

00:08:11 [Speaker Changed] Yeah. Well, I had about I seven months of calm and then chaos started in August of 2007. I remember it really well because I just finished building this house in West Virginia and we, we were taking occupancy in early August, and it was, it was literally the same day that BMP Paraba shut off redemptions from some of their mutual funds, caused all sorts of chaos in Europe. And then the
question is, well, what are we gonna do about adding liquidity in the us? So, didn’t get outta the house, my new house for the next two days as we tried to figure out how to calm markets after the BNP Paraba event

00:08:48 [Speaker Changed] And, and the US market kept going higher. I don’t think we peaked till like
October oh seven, something like that.

00:08:53 [Speaker Changed] Yeah. People didn’t really understand the, the, the consequences of
subprime, you know, I thought

00:09:00 [Speaker Changed] For years, I mean, literally for years if you mentioned it, you would be
mocked on tv.

00:09:05 [Speaker Changed] Yeah. I mean, you know, one thing I am proud about when I joined the Fed
is in January, 2007, that was my first briefing of the FOMC. And I, I actually talked about how this could
turn out poorly. You know, that subprime was being supported by, you know, subprime was being, you
know, the credit was flowing to subprime, subprime was enabling people to buy houses. Home prices
were going up as, ’cause home prices were going up. Subprime wasn’t a problem, right? But at some
point, supply was gonna increase in response to the higher home prices. And once prices stopped going
up, subprime was gonna start to go the wrong direction. I said, this is a possibility. I didn’t say it was
going to happen, but I said it was a possibility. So I was sort of pleased that I got off on the right track.

00:09:48 [Speaker Changed] And, and then in January, 2009, we we’re deep into the financial crisis.
We’re post Lehman and post a IG you get named 10th president, CEO of the New York Fed. Again,
fantastic timing. What was taking up your attention right in the midst of, of the CRI financial crisis?

00:10:08 [Speaker Changed] Well, you know, that was a tremendously fortunate event for me. I always
tell people like, B Barack Obama had to become president. Tim Geitner had to become treasury
secretary, and then the board of directors in your fed had to pick me. So it’s sort of like a low probability
times, low probability times low probability. So I,

00:10:25 [Speaker Changed] So sometimes it works out. Yeah,

00:10:26 [Speaker Changed] Sort of a bank, a bank, a triple bank shot. You know, a lot, lot of things we
were focused on at the time was trying to provide support to financial markets. So, if you remember, we
were, we were still rolling out various facilities like the, the, the term asset backed, the lending facility,
for example. We were running the commercial paper funding facility. We were trying to figure out how
to do stress test, the first stress test of banks, right? So that was a big job in the spring of, of 2009. And
those stress tests were probably the critical turning point in the financial crisis. I remember the, the day
after we published the stress test, and for the Fed, we were actually pretty transparent about what we
did and what our assumptions were. And here’s the results. Bridgewater published a piece, and I think
the headline said something like, we agree.

00:11:13 And I, and I said, okay, we’ve, now that’s, that’s really important because if our analysis is
viewed as credible, and we have the tarp money being able to supply the capital that’s needed, then
people can start to rest assured that the banking system is, is gonna stabilize and, and it’s gonna stop
deteriorating. Now, it also helped that the economy was showing signs of bottoming out, right? So it
didn’t look like we’re just heading down into a, a deep hole. But, you know, it was very touch, touch,
touch and go there in the first part of 2009. And there, you know, there were still some major financial
firms that were pretty darn shaky. I mean, Citi was pretty shaky. Morgan Stanley was pretty shaky. Some
of the banks were still pretty shaky. So it, you know, until you actually hit bottom and start to pull up,
you’re really wondering, are you gonna get through this in, in one piece?

00:12:00 [Speaker Changed] So, so the Bridgewater piece raises a really interesting question. The New
York Fed is kind of, I don’t know how to say this first, amongst the regional feds, because you’re located
right in the heart of the financial community. What is the communication like back and forth between
the New York Fed and major players in finance, especially in the midst of a crisis like that?

00:12:29 [Speaker Changed] So the New York Fed is sort of unique among central banking entities
because most central banks, they, they do the policy and strategy and the operations all in the same
place. But in the Fed is split. You have policy done in Washington, the operational implement
implementation of that policy. Almost all of that takes place at, at the New York Fed. So the New York
Fed is sort of the eyes and ears of, of the Federal Reserve for markets. I think that, you know, one thing
that helped me a lot during the financial crisis is I knew a lot of people on Wall Street. And so when
something was happening, I could call up people I knew and and just ask their opinion, recognizing that
oftentimes their opinion does have a touch of self-interest. Sure. So you need to talk to three or four
people to sort of triangulate and figure out what you think is really going on.

00:13:15 I mean, I’ll give you an example of one thing that really struck me during the, that period, I
called up someone and I said, here, here’s a complex, you know, CDO obligation, you know, with, you
know, with all these different mortgages and all these different tranches, how long would it take you to
actually go through that and value it appropriately to come up with a appropriate valuation? He said, oh,
it’d take at least two or three weeks, really? And I thought, oh boy, we’re in big trouble. Wow. You
know, if you don’t really know what things are worth when you’re going through a period of financial
stress, that’s gonna be, make things much, much more difficult,

00:13:49 [Speaker Changed] I would’ve guessed they would break that up into five parts, give it to a
bunch of juniors, and they’d have an answer in three hours

00:13:55 [Speaker Changed] At the most. Well, it’s, it scared me. Wow. It scared

00:13:56 [Speaker Changed] Me. I, I, I can imagine. So, so from the New York Fed, you ultimately end up
as vice chairman of the FOMC helping to formulate US monetary policy. What was that like going from
New York to, to dc?

00:14:14 [Speaker Changed] Well, it wasn’t such a big change because I had already been going to the
FMC meetings and briefing the, the, the, the, the FMC members as

00:14:21 [Speaker Changed] As president of the New York Fed. You have a seat on

00:14:23 [Speaker Changed] That. What what what what happened though is, is as I sort of switch sides,
so there, so the, the, the day that Tim Geer was named Treasury Secretary was basically the day before
an FOMC meeting. And I literally didn’t know when I went down to Washington that Monday evening,
whether I was gonna be briefing the FOMC participants or whether I was gonna be an FOMC participant
myself. So I actually prepared two sets of notes. Here’s my briefing notes, if I’m, I’m the so manager, and
here’s my remarks if I’m the president of New York Feds. Wow. So I was ready for both.

00:14:56 [Speaker Changed] And what happened that day?

00:14:57 [Speaker Changed] He was, he was named on that Monday and so on Tuesday I was, I was the,
I was the president of New York Fed. Wow. And, you know, I didn’t, you know, so I, and I, when I got
back to New York on, you know, I think Thursday morning, I, we had a town hall and I gave my first
remarks to the New York Fed people and had a very simple message for them. Best idea wins because I
was really struck by how hierarchical central banks tend to be. And I wanted to sort of push aga against
that idea and basically say, it doesn’t matter where the idea comes, if it’s the best idea, that’s the idea
that should win out.

00:15:34 [Speaker Changed] Huh. Ma makes a lot of sense. And, and since then, you, you’ve gone on to
do some work reforming L-I-B-O-R as the benchmark for rates. Tell us, I always get the name SOR the
new one that replaced it. sofa. Yeah. So, so tell us a little bit about the work you did. ’cause L-I-B-O-R
was probably the most important number, certainly in credit, maybe in all of finance.

00:16:00 [Speaker Changed] So LIBR for while was there was a real question whether Central banks were
gonna take this on or not. And I remember I was in Basel for the BIS meetings and I wrote a one page
memo to, to Ben Bernanke, to hand to Mervin King. Mervin King was the head of the, sort of the
policymaking group at the BIS at the time. And the memo was basically arguing why Central banks
needed to own the L-I-B-O-R problem. ’cause if they didn’t own it, it wouldn’t get fixed. It’d be a problem
again. And then the central banks would be blamed for, well, why didn’t you fix that problem? So I don’t
know how much import that memo had, but I was very pleased to see the central banks take it up. And
as you know, it was a huge undertaking, which took, you know, many, many years to complete.

00:16:44 [Speaker Changed] And, and, and for those people who may not be familiar with the London
Interbank offered rate offered rate literally was a survey where they call up various bond debts and say,
so what are you charging for an overnight loan? And eventually traders figured out they could game that
by, let’s just call it, talking their books, so to speak, in a way that would move the L-I-B-O-R in their
direction. You could, you could do a bunch of things with derivatives and eventually L-I-B-O-R kind of
spiraled outta control the new improved version. How do we prevent that from taking place? What,
what were the structural changes?

00:17:26 [Speaker Changed] Well, the, the problem, I mean, the problem of of L-I-B-O-R was that you
had a small cash lib i bor market that was, was referencing a very large futures market year at dollar
futures market. And so you had a situation where you could take big positions in the euro dollar market,
affect the price and the cash market and actually make a profit. So the sort of the tail was wagging the
dog for SOFR, the secured overnight funding rate for repo. You have a big repo market. I mean it’s, you
know, hundreds and hundreds of billions of dollars. So the idea, and it’s a real market. I mean, there’s
real transactions that are traded and you can sort of track what the prices are and where trades are. So
it’s, so it’s almost impossible to imagine someone manipulating the this so, so R market.

00:18:07 [Speaker Changed] Huh. Really, really interesting. So, so first, before we start talking about
policy, I have to ask, you’re at Goldman Sachs for 20 years and, and you get the phone call to join the
New York Fed. What was that like? Was that a tough call or was that an easy decision to make?

00:18:24 [Speaker Changed] Well, what happened actually is Tim Geer called me several months earlier
and said, would you like to come over to be a senior advisor? And I said, I’d love to be a senior advisor to
you, Tim, but what do I do with the rest of my, you know, 40, 50 hour work week? And he didn’t have a
really good answer for that.

00:18:39 [Speaker Changed] Was this a full-time gig? I means he was economies position.

00:18:42 [Speaker Changed] He, he, he was per, well, I didn’t, when I left Goldman, I didn’t really know
what my next thing was. So I did not have the next job. I was just assuming that I would, I, something
would come along that would be

00:18:51 [Speaker Changed] Right. Fair assumption.

00:18:52 [Speaker Changed] It would be interesting. So he, he offered that. And I thought, well, you
know, I I, you know, Tim and I had a very good relationship and you know, I, I sort of liked the idea of
working for him, but I thought a senior advisor was a little bit too informed. And a couple months later
he came back and said, can you run the markets group at the New York Fed? That’s completely different.
You’re running the group that actually implements monetary policy, oversees market analysis, deal deals
with the primary dealer community. That was a real opportunity. So that one I didn’t have to think very
hard about.

00:19:21 [Speaker Changed] And, and what’s, what, not long after Tim gets elevated, you, you take the
role of New York Fed President, what’s a day in the life of New York Fed Pres? Like

00:19:33 [Speaker Changed] There’s a lot to, to do because the New York Fed does lots of different
things. So you, you know, we have supervision, we oversee some of the largest financial institutions in
the world from a supervisory perspective. We’re the international arm of the Fed. So pretty much every
two months I would go to B to to the BIS in Basel, be part of the Bank for International Settlement
meetings. New York Fed President as, as well as the chairman of the FO of the Board of Governors is on
the board of directors of the BIS. As Alan Blinder once joked to me, he says, New York Fed is the only
only institution that’s treated it like their their own country because they have this board of directors
position. You know, there’s lots of things and, you know, payments their Fed, New York Fed runs fed
wire, the, the New York Fed runs Central Bank International Services for a bunch of foreign central
banks.

00:20:24 They have, I don’t know, three, $4 trillion of custody assets from foreign. Wow. So there’s a lot,
there’s lots of pieces to the Fed, and then there’s a research department and there’s a lot of outreach to
try to get information about what’s really happening in the world. I mean, the one thing that I did that
was probably a little new from the Fed’s perspective is I tried to broaden out the, the people that the
New York Fed was talking to historically, the New York Fed had typically talked mainly to the primary
dealer community. So that’s where they obtained their information from. And I thought that that was
too narrow. We need, we need, we need a broader set of perspectives. And so I hired a, a woman
named Hailey Bosky who came in and, and literally built out a whole operation so we could actually
interact not just with the sell side, but also with the buy side.

00:21:10 And so we started an advisory group of people, you know, hedge funds, pension funds,
insurance companies, you know, buy side investors. And so we have them in periodically to talk to. And
so we got a much broader network of information that we could sort of take on board. And I think that’s
valuable because, you know, where you sit really does influence your perspective and you sort of wanna
understand what biases and, you know, self-promotion sometimes that people are talking their book
that you want to be able to make sure you, you don’t get to fooled by that.

00:21:42 [Speaker Changed] Now, you could go back not all that far in the Fed history, and there was
none of this communication. There wasn’t transcripts released, there wasn’t a reporter Scrum and, and
a q and a. There wasn’t even an announcement of change in interest rates. You had to follow the bond
market to see when rates changed. What are the pros and cons of being so clear and so transparent
with market participants? Is the risk that maybe we’re too clear?

00:22:13 [Speaker Changed] Well, I think there’s a strong argument in favor of transparency as opposed
to opacity. And, you know, this has been debated within the Fed for many years. I mean, Alan
Greenspan, Paul Volcker definitely preferred to be opaque. I mean, Alan Greenspan famously said, if you
understand, if you think you understand what I said, then I wasn’t, wasn’t unclear enough or something
to that effect, right? So I, the, the value of transparency is, is if, if is that if markets understand how the
Federal Reserve is gonna react to incoming information, the market can essentially price in what the Fed
hasn’t even yet done. And so that can make monetary policy work much more rapidly. So let’s think
about it today. So the market is pricing in roughly five to 6 25 basis point rate cuts between now and the
end of the year. So that means monetary policy is easier, even though the Fed reserve hasn’t cut rates
yet. So the,

00:23:06 [Speaker Changed] They do some of the work for the Fed for

00:23:08 [Speaker Changed] Them. Yeah. And, and it makes it, and it also means that as new coming
information is coming in the market can reprice. And so that can cause the impulse of the economic
news to be filtered into financial conditions much more, more quickly. I’m a big believer in financial
conditions as a framework for thinking about monetary policy. You know, 20 something years ago, Jan
Hottes and I introduced the Goldman Sachs Financial Conditions index, and it took about 20 plus years
for the Federal Reserve to sort sort of endorse it. I mean, Jay Powell talks about financial conditions a lot
more than any other chair of the Fed ever has. The reason why financial conditions are so important is in
the United States, the economy doesn’t really run on short-term interest rates. It really runs on how
short-term interest rates affect long-term rates, mortgage rates, stock market, the dollar credit spreads,
you know, we have a big capital market compared to other countries.
00:23:58 And so short-term rates are not really the driver. Now, if short-term rates and financial
conditions were, you know, rigidly connected, so if I move the short term rate by XI, I know exactly how
much financial conditions are moved by y you wouldn’t have to worry about financial conditions, but
there’s actually a lot of give between the two. And so financial conditions can move a lot, even as short-
term interest rates haven’t changed very much. I mean, good example is just the last three months, last
three months since the end of October till now, financial conditions have eased dramatically. I mean, the
Goldman Sachs financial Conditions index has moved by about a one point half per points, which is a big
move for that index, even as the Fed hasn’t done anything in terms of short term rates. So
00:24:39 [Speaker Changed] Part of the problem with everybody anticipating Fed actions is there’s a
tendency for many people, sometimes most people to get it wrong. Wall Street has been anticipating a
Fed cut for, what is it now? This, we’re in the seventh month, eighth month of, hey, if the Fed’s gonna
start cutting any, any day now, what does it mean when anticipating Fed actions almost becomes a Wall
Street parlor game and there’s less focus on, on what’s happening in the broad economy and more focus
on, well, what does the second and third derivative of this mean to this economist advising this Fed
governor and the impact on the FOMC?
00:25:23 [Speaker Changed] I mean, sometimes I think you’re right that there’s almost too much focus
on what’s gonna happen at the next meeting. I mean, you know, when you go to the press conference
now, if Powell’s just asked multiple different varieties of the question, okay, so what would cause you to
move at, at, at, at the March meeting or at or at the May meeting? And of course, Powell’s not gonna
answer that question, you know, because it depends, it depends on how the economy evolves between
now and then. So I think, you know, one of the problems I think you, you have is that the Fed Reserve
does publish a forecast, the Summary of economic projections, which is the forecast of all the 19 FMC
participants. So that gives you an idea of what they sort of think is gonna happen at any given point in
time. But those forecasts are, you know, not particularly reliable. And so as
00:26:06 [Speaker Changed] All forecasts are
00:26:07 [Speaker Changed] On, yeah, it’s all four kind stars. So you, you don’t want to, you don’t want
to take it sort of literally, but it, you know, like right now there’s a bit of a, a gap, right? The feds is
talking about three rate cuts in, in, in 2024, and the market’s got five to six priced in. So you know, what
will happen is the economic news will come out and that will drive, make the Fed either go more quickly
or more slowly, and that that will, will, what actually is, is important. So I, I always tell people, focus on
the data more than what the Federal Reserve says beyond the next meeting.
00:26:39 [Speaker Changed] Although, to be fair, and I find this perplexing, say what people will say
about Jerome Powell, he has said what his position is, is he has said what he’s going to do. And then he
has done exactly that for the past three years. And it’s almost as if Wall Street just doesn’t believe him.
Like, no, no, we’re not gonna cut this year. You got, you got three or four quarters, settle down, no, no,
go cut next month says Wall Street. He has said what he meant and then stuck to it. And yet the street
seems to doubt him.
00:27:10 [Speaker Changed] Well, there’s two reasons why the market could disagree with the Fed. One
is they could misunderstand the Fed’s reaction function. So you give them the Fed have set of economic
data, how are they gonna react to it? But it also could be a disagreement about how the economy itself
is gonna evolve. The Fed might be more optimistic or more pessimistic on the economy than than
market participants right now. It’s really hard to sort of say, what, what’s the, what’s the disagreement
about, does Wall Street think that economy is gonna be weaker than the Fed does, or does the, or or
does the market just think that the Fed is going to be more aggressive than the Fed thinks at this point?
00:27:44 [Speaker Changed] Right. Sometimes it just looks like pure wishful thinking.
00:27:48 [Speaker Changed] I think sometimes the markets are just gets ahead of itself. It’s almost like
there’s, we’re now talking about easing, so the bell’s about to go off and I don’t want to miss out. And so
I’m gonna be pretty aggressive about positioning for that. And I, I think there’s a little bit of, you know,
and sometimes things tend to go too far because people get caught off size and then people have to
close out the, the trades that went wrong. And so everyone’s sort of moving all, all at once to the other
side of the boat. And so things can get overdone at the end of the day though. I mean the Fed Reserve,
you know, writes the story, you know, the market has to converge to what the Fed ultimately does. And
so this is why the Fed’s not particularly worried about when the market prices in more or less because at
the end of the day, the Fed’s view is, you know, we’ll do what we need to do and the market will have to
come along with us.
00:28:32 [Speaker Changed] It, it, it, it’s inevitable. So. So we mentioned Jerome Powell, he’s been as
clear as any Fed Chief in history. What are your thoughts on how the modern Federal Reserve
communicates with markets and the public today versus how they used to do it? I you don’t even have
to go that far back 20 years ago. I think
00:28:51 [Speaker Changed] It’s, as I said earlier, I think it’s a lot better way of communicating. ’cause
then markets can understand what the Fed is up to. They can interpret economic information in real
time and figure out what that means for the likely path of short term rates. So financial conditions can
move long before the Federal Reserve actually acts. Now, obviously, you know, there’s, there’s, there’s a
risk in all this because what the Fed says may not be borne out by the economic information. And so I
think the important thing in all this is not to take what the Federal Reserve says as gospel when they
have a forecast, that’s their forecast today and that forecast will change as the incoming information
warrants it. I think where Poll has done a really good job is being very clear about his commitment to
getting inflation back down to 2%. Because the biggest risk over the last couple years was that people
would start to doubt the Fed’s willingness to be tough and, and, and, and finish the job. And if that were
to happen, inflation expectations would’ve become unanchored and that would’ve made the Fed’s job a
lot more difficult. One of the great developments of the last couple years is even though we did have a
period of very high inflation, long-term inflation expectations really stayed un anchored through that
entire period. And so Paul deserves quite a bit of credit for
00:30:05 [Speaker Changed] That. So, so we’re recording this a few days after his 60 minutes interview,
broadcast some things that I took away from that. First, it’s a complicated job with a, a lot of moving
parts. And second, the Fed as an institution is apolitical. It, it, they serve the public, not any one branch
or any one party of the electorate. I thought he was very intelligent and reassuring. What was your
reaction to that interview?
00:30:34 [Speaker Changed] I thought it was a very good interview and I thought he actually broke a
little bit of new ground when he talked about the, you know, the fiscal sustainability issue. And he also
talked about the importance of the US role in the world in terms, I
00:30:48 [Speaker Changed] I picked that up also in terms of, I thought that was the first time I’ve heard
of Fed Chief talk about liberal democracy is an important aspect of global leadership.
00:30:57 [Speaker Changed] Yeah, exactly. And so I thought that was a, a inter, a very noteworthy, a
new, new piece. I thought the rest of it was, you know, pretty much tracked, you know, his remarks at
the press conference, you know, I think that, you know, it’s good for him to get out there and sort of
demystify the Fed. I mean the, the Fed is, you know, not so, you know, easy for the average person to
understand. And so going on 60 Minutes is, is a, is a good idea from from, from time to time. I thought
he did a, you know, I thought he did a good job. I thought he was very, very clear. You know, this, this is
not the first Fed chair that’s been on 60 Minutes.
00:31:32 [Speaker Changed] Bernanke has done it, right?
00:31:33 [Speaker Changed] Yeah. Bernanke has done it. I, I’m not, I can’t remember if Janet Yellen did it
or not, but
00:31:37 [Speaker Changed] I’m, you know, she definitely did it as treasury secretary. I don’t remember
if she did it as
00:31:41 [Speaker Changed] We’ve been very lucky in terms of the leadership of the Fed. I mean to
have, I mean, Greenspan obviously, you know, was on sort of without parallel and then, and then to
have Bernanke Yellen and Powell in a row, those are three exceptionally good Fed chair. I mean, my
only, you know, critique of the Fed and you know, I write for Bloomberg and you know, sometimes I,
you know, I say what I, what I think and let the chips fall, they may, the one, the one I think mistake the
Fed made, you know, over the last few years was they were really, really late to get off the dime in
terms of starting to tighten monetary policy.
00:32:12 [Speaker Changed] Now, isn’t that historically true? Is it? So the Fed throughout the 2010s
were late to recognize, hey, we don’t have to be on emergency footing anymore. Not only were they
late to start tightening in, in 2001, they they 2021, they were late to recognize inflation peaked in 22. I
mean, it’s, you could easily make the argument that they could have begun cutting any this meeting, last
meeting two meetings ago. Take the past six months of inflation we’re at 2%. Yeah,
00:32:42 [Speaker Changed] I think the reason why they’re not cutting it is, is, is there’s really two
reasons for that. Number one, the economy’s a lot stronger than they thought it was gonna be. And so
that means the risk of waiting is a lot lower than they thought it was gonna be because the economy,
you know, grew three three over 3% in the fourth quarter. The Atlanta Fed GDP now forecast for the
first quarter is over 4%. I mean, obviously it probably won’t be that strong when all the data comes in,
but the economy has a lot of momentum and so the pressure on the Fed to cut rates because of
weakness and growth, weakness in the labor market just isn’t there. And that allows them to be more
patient. The second thing is important is, is a little bit of delay is not gonna have a huge consequence
because look what’s happened to financial conditions over the last few months, they, they ease
dramatically. So the Fed’s already getting a lot of additional support to the economy without actually
having, having to cut, cut rates in some ways. The Fed can sort of have its cake keep, you know, show
that they’re tough minded and they’re gonna get inflation all the way down,
00:33:37 [Speaker Changed] Let the market do the work
00:33:37 [Speaker Changed] For ’em and, and, and, and, and, and, and, you know, they can have their
cake and eat it too. And have the market basically ease financial conditions and provide support to the
economy. So I think it’s, you know, it’s worked out very well from the Fed’s perspective.
00:33:48 [Speaker Changed] So, so you mentioned you, you contribute to Bloomberg opinion. One of
the criticisms that took place in the prior administration was then President Trump kind of haranguing j
Powell to cut rates and you wrote an op-ed tell after you had left the Fed saying the Fed shouldn’t
enable Donald Trump. In other words, the independence of the institution is much more important than
any one rate cut or rate hike at, at any time. Te tell us about that. That generated a, a lot of controversy.
00:34:25 [Speaker Changed] Yeah, I think people, you know, I probably didn’t say it the way I needed to
say it. It was really more of a thought experiment about how, you know, if the Fed Reserve really cares
about the country, they just need to, you know, and the economy, which is their mandate, they just
need to do the right thing and, and let the chips fall where they may. I think that, you know, the, the
Trump administration’s attacks on the Fed, I think are really, you know, counterproductive for the
Trump administration and they’re also damaging to the Fed because if the Fed is viewed as politicized,
that basically reduces people’s trust in, in, in the Central bank. And I think if the Fed Trust in the Central
bank is reduced, that makes the Federal Reserve less effective as the institution. One reason why I think
the Fed, you know, doesn’t take politics into consideration.
00:35:12 And in, in my experience, I was at the FMC table for 11 and a half years, never talked about
politics, never a consideration in terms of monetary policy decisions for very simple reason. If you start
to take politics into consideration, you’ve politicized the Fed and if you politicize the Fed, you’ve
basically compromised the independence of the Fed and its ability to be effective. So you just don’t want
to go down that path at all. And I think, you know, I think Jay Powell completely understands that. And
you know, I, I gave him a lot of credit. I mean, when, when Trump was attacking him, pretty vociferously,
Powell did not rise to the bait. He, he was completely silent. He just did his job. It’s gotta be tough to be,
you know, being beaten up publicly by
00:35:55 [Speaker Changed] The president.
00:35:56 [Speaker Changed] But he showed a tremendous amount of discipline and I think that basically,
you know, enhanced the credibility and independence of the Fed.
00:36:03 [Speaker Changed] So that comment we were discussing earlier that he made on 60 Minutes,
here’s the quote, there’s a real desire for American leadership since World War ii. The US has been the
indispensable nation supporting and defending democracy, security arrangements and economic
arrangements. We’re the leading voice on that. It’s clear the world wants that. I would want the people
in the US in the United States to know this has benefited our country enormously. It benefits our
economy so much to have this role. And I just hope that continues. Am I reading too much into that to
say, hey, this is an argument against President Trump who is trying to realign the world and pull back
from US leadership? I
00:36:50 [Speaker Changed] Think it’s, I think it’s a, something that j Paul very much believes in, that US
engagement in the world leads to better outcomes, both in a security perspective, economic
perspective, absolutely essential for, for addressing issues like climate change. And I think he was just
expressing his opinion. Obviously if, if there is a next Trump administration and they, they decide to file
fo follow a very isolationist policy, I imagine that, you know, Powell will not agree with that, but I think
he’ll be very silent about the fact that he doesn’t agree with it because he won’t want to, you know,
engage in that political process because that will compromise the independence of the Fed. So, so to
your point, this was pretty, you know, this is a, a step out for Powell relative to what he said, but there
was nothing in there about who was in favor of what,
00:37:43 [Speaker Changed] It’s not a political statement, it’s not a political state. It’s a fact that, hey,
this US leadership in global economics has done nothing but benefit the country. Yeah.
00:37:52 [Speaker Changed] It’s his opinion that this, this is in the US’ interest, it has been in the US
interest, it’s in the US interest today, and it’ll be in the US interest in the future. That’s his, his view. And
I have to say, I, I very much agree with it. I,
00:38:04 [Speaker Changed] I don’t disagree. And if there are some candidates that don’t have that
belief system well is that being political or is that just, here’s a historical fact, this is what’s helped the US
Well,
00:38:14 [Speaker Changed] I think he’s allowed to, you know, have his, have his beliefs and I don’t think
that, you know, his, his, his belief that he’s expressed as should be viewed as a controversial one. I think
that’s, that’s, that’s something that, you know, a a a a, a high number of people in the country, I think
would, would, would, would support.
00:38:34 [Speaker Changed] I, I don’t disagree at all. So, so let’s talk a little bit about the, the history of
the Federal Reserve, starting with the dual mandate price stability, namely inflation and and
unemployment. How does the Fed balance those two and what are the data points that they follow
most closely?
00:38:55 [Speaker Changed] So the Fed’s due mandate was actually established by Congress, not by the
Fed Congress in the Humphrey Hawkson Act. Basically said, here’s what we want the Fed to do. We want
want, we want to have the maximum sustainable employment in the country consistent with price
stability, which the Fed then subsequently defined to be 2% inflation. And so the Fed basically is trying
to manage the economy with both of these goals in mind. And sometimes one of the goals turns out to
be more significant because the fed’s doing more poorly on, on, on, on, on, on that side. So over the last
couple years, the problem was not that, that that the economy was far away from full employment. The
economy was either at full employment or maybe even a little beyond full employment when we saw
how tight the liver market was, especially in 2022.
00:39:42 So the fed’s focus was on inflation because if inflation was well above the Fed’s 2% objective.
What’s happened recently is inflation’s come down. And so the Fed can start to talk about both sides of
the mandate, not just the inflation side, but also the, the, the labor market side. And so now you’re
gonna see a lot more balanced messaging from the Fed. Now the good news from the Fed is that things
are going really, really well. You know, you know, the inflation on a six month change basis for the core
PCE deflator, which is the fed’s, you know, preferred measure of inflation is tracking 2%. So all we need
is another six months of the same as, as chair Paul said in his press conference. And we’re basically at
the fed’s 2% objective. And the labor market’s doing gangbusters, frankly, I mean payroll employment
growth over 300,000 last month. So we have sort of the best of both worlds. Inflation’s come down and
the labor market is still very, very robust. So, you know, it’s, it’s interesting when you look at polling
results of, of Americans, they’re, they’re very unhappy about the economy and what they’re unhappy
about is how much prices went up over the last four,
00:40:49 [Speaker Changed] Four years. Not current rate of inflation exactly, but absolute prices. It’s
00:40:52 [Speaker Changed] A price level problem, not an inflation rate problem. ’cause if you look at
the, so-called misery index, which economists like to talk about, very low about, which is the sum of
inflation plus the unemployment rate. It’s really at a historically low level. Yeah. So, you know, I think
what’s gonna happen over time is, is if we keep inflation, you know, around 2%, some of the
unhappiness about the price level will gradually fade away. People just sort of start to accept it and then
people will start to assess the economy in a more favorable way for, for the Biden administration,
there’s a little bit of race going on, right? Will this change in, in, in set sediment occur fast enough
relative to the November election,
00:41:33 [Speaker Changed] They, they got seven months to hope that the polling data, the economic
data is going in favor,
00:41:39 [Speaker Changed] Consumer consumer confidence. So it does, does seem to be improving,
right? I mean if you look at the most recent consumer confidence surveys, it does look like consumer
confidence is improving. So people are starting to, you know, understand that the inflation rate does
seem to be much lower, but they’re still very unhappy. ’cause you know, when you go to the grocery
store, you just remember that this thing that I bought for, you know, $3, you know, four, four years ago
now costs four 50, right? And you know that just every time you go to the grocery store, you go to the
gas station, you see it, you’re reminded by about the higher price level.
00:42:10 [Speaker Changed] I I see it more in the grocery store than gas stations. Yeah, I agree. ’cause
gas is three and change and 20 years ago gas was three and change. Yeah, that’s been flat for two
decades. But food prices definitely have, and shelter prices have moved up. So before I get to 2%, ’cause
I have a lot of questions about that. Let, let’s talk a little bit about the, the labor market. So first we’re,
again, we’re recording this February, 2023. We just had a giant number, a giant upside surprise in
payrolls. When the Fed looks at at that number, are they thinking, well, you know, it’s January, there are
a lot of one-time adjustments and seasonal effects. Or are they saying, Hey, this labor market is really
booming, we can sit back a little bit,
00:42:56 [Speaker Changed] A little bit of both. I mean, in other words, you get, you, you understand
that the data is noisy and so reality is not exactly what the data is, is telling you the data is, you know, is
sampled, you know, they’d go out and poll people. And so there’s sampling bias also in the winter.
Things get very affected by the weather, right? As you go from, you know, warm weather, you know,
warm winter weather months to cold winter weather months when you go from rain to snowfall. So the
Fed basically doesn’t take one month as sort of gospel truth. They look at the, the, the pattern and the,
and the underlying trend. And you know, on that underlying trend, labor markets looks quite strong. So
the Fed is taking a signal from that and that’s one reason why they’re more patient about cutting,
cutting interest rates. ’cause they sort of feel like, you know, we can wait a little bit longer and the risk
that we’re taking is very slow because look at how strong the US labor market is.
00:43:51 [Speaker Changed] So, so let’s talk about not one month, but the past couple of years of the
labor market, you have enormous number of people who are out on disability. We’ve reduced legal
immigration for, for jobs dramatically. Early retirements have been taking place a giant uptick in new
business formation. So that’s a big group of people who aren’t in the hiring pool, they’re actually running
their own firms. It seems like all the issues that have been taking place in the labor market, including the
wage size side, is that we just don’t have enough bodies to put to work in the United States.
00:44:31 [Speaker Changed] I think that was true a year ago. I think it’s l less true today. If you look at,
you know, the ratio of unfilled jobs to unemployed workers that peaked at around two to one. Yeah,
00:44:41 [Speaker Changed] It was u it was a a a almost record high
00:44:44 [Speaker Changed] And now it’s about one and a half to one. So the labor market’s still really
tight, but it’s not quite as tight. You also think we got a a a, a big positive surprise last year in terms of
labor force growth,
00:44:54 [Speaker Changed] Meaning people coming back into the
00:44:56 [Speaker Changed] Label, people coming back into the labor force and, and also immigration,
legal immigration into the US picked up dramatically last year. I mean, so essentially we didn’t have
much legal immigration at all during the covid period, right? And then all of a sudden we get a big
bubble of that in in 2023. And so what you’ve had is big strong growth in payroll employment, but it
hasn’t translated through into a decline in the unemployment rate. So looking at the unemployment
rate, the labor market is no tighter than it was a year ago, which is, you know, was a huge positive
benefit to, to the US economy and to the Fed because if we’d had that growth in payroll employment
without the increase in the labor force, the labor market would be too tight, wages would too high and
the Federal Reserve would still be worried about it too. High inflation. And,
00:45:43 [Speaker Changed] And we’ve seen wages go up, I think for the past six months, real wages are
actually growing faster than inflation
00:45:50 [Speaker Changed] Agenda. Well that’s one reason why the economy is staying, you know,
relatively strong. I mean as inflation comes down and novel wages, you know, inflation comes down
maybe little bit less slow, more slowly, real, real, real incomes increase and that supports the consumer
spending. So I think the unwinding of goods, price pressures, which is really the big driver of why
inflation’s come down, that’s sort of a windfall for consumers right now. And so that’s actually sustaining
real consumer spending and,
00:46:20 [Speaker Changed] And that shift from goods back to services, which is more or less where we
were pre pandemic is certainly easing prices in that, in that sector.
00:46:30 [Speaker Changed] Yeah, I mean all the supply chain disruptions that we had, you know, a few
years ago caused by that shift in demand from services to goods that just sort of overwhelm the capacity
the world to bring those goods to the US in a timely way. That’s, that’s, that’s, that’s all unwound at this
point.
00:46:46 [Speaker Changed] So, so let’s talk about the 2% inflation target. Your colleague Roger
Ferguson in the Council on foreign relations last year criticized the 2% inflation target as something that
randomly originated from New Zealand. And surprisingly it came not from an academic study, but from
an offhand comment during the television interview in the 1980s, I is Ferguson Wright, is this really just
a big, silly round number?
00:47:16 [Speaker Changed] Well it’s true that the Reserve Bank of New Zealand started by, you know,
picking the 2% number and then other central banks followed. But I think there are some logical reasons
why they followed 2% was low enough that it inflation wasn’t gonna be sort of important component of
people’s thinking in terms of their consumption investment decisions. 2% inflation in the US I think the
Fed could argue that that was mostly consistent with price stability. You know, prices are only going to
double at 2% inflation compounded every 35 years. So, so, but you’re right, it was arbitrary. They could
have picked a different number, they could have picked, you know, 3% or 1%. The reason why you want
to have a little bit of inflation is it is it really allows you to do two things. Number one, it provides a little
bit of grease in the labor market ’cause people don’t like their normal wages to be cut, right?
00:48:08 And, but relative wage rates have to change. And so if you have a little bit of inflation, it makes
the labor market work more efficiently in terms of allowing wage adjustments that allow workers to be
distributed appropriately. So that’s the first thing. The second reason why you want a little bit of
inflation is that if you have a little bit of inflation, the the nominal federal funds rate can be a little bit
higher. And so when you go into an economic downturn, the Federal Reserve has more room to cut
interest rates before they hit the zero lower bound for interest rates of zero. So people who are arguing
for a higher inflation target today are basically arguing like it would be better to have even more room
for the fed to cut rates. ’cause if the inflation target was three rather than two, the peak federal funds
rate and the cycle would be at one percentage point higher so the Fed would have more room to cut
rates.
00:48:55 I think there’s virtually no chance that the Fed’s gonna change their 2% inflation effective,
virtually no chance. And there’s a couple of reasons for that. Number one, congress sets the mandate
for the Fed and they define it at price stability. The Fed has stretched that a bit to call that 2% inflation. I
think stretching it a little bit further to call it 3% inflation, that’s a bit of a stretch. The second reason I
think that they’re not gonna move from 2% inflation is it’s taken the fed a long time to get inflation
expectations anchored around 2%. If you move from 2% to 3%, all of a sudden inflation expectations
become unan anchored. And it’s not obvious that you can get ’em re-anchor back at 3% because if
you’re willing to change the target once, why wouldn’t you? Why couldn’t you change the target again,
especially in a situation where the fed us is running a massive fiscal deficit, huge fiscal problems. And
people always wonder, well, one way out of a fiscal mess is to, is inflation and to monetize the debt. So I
don’t think you’re gonna do it for that reason. And the last reason why I don’t think they’re gonna do it is
there’s plenty of room to cut interest rates, right? Federal funds rates over five point a quarter percent.
So if the economy gets in trouble over the next year, the Fed has plenty of room to cut rates before they
get to the zero lower bond for
00:50:10 [Speaker Changed] Interest rates, they could do three 50 basis point cuts. And you’re still way
above target.
00:50:14 [Speaker Changed] Exactly. So I, it’s just not gonna happen. This is sort of an academic debate. I
I don’t think it’s a true federal reserve
00:50:20 [Speaker Changed] Debate. Really, really interesting. So, so let’s talk a little bit about different
Fed policies over the past decades and, and how those decisions have aged. Let’s start with last decade.
The 2010s fed rates were essentially zero the whole time, and yet we couldn’t get CPI to budget above
2% the whole decade following the financial crisis. What made that so challenging for monetary policy
makers?
00:50:50 [Speaker Changed] Well, I think the problem coming outta the great financial crisis was how
much damage was done to people’s balance sheets and to their, you know, credit scores and their, their,
00:50:58 [Speaker Changed] When you say people, you mean households, you mean corporations,
households, or everybody?
00:51:01 [Speaker Changed] Households mostly, but also businesses. Just a tremendous amount of
damage caused by that very deep recession. You know, think of all the households who came out of that
period where, where the, the value of their mortgage was higher than the value of their home. Think of
all the people that were delinquent on their, on their obligations, and so then got bad credit scores and
then that reduced their access to credit. So there were a lot of headwinds. The other thing that
happened was fiscal policy that was eased pretty dramatically when Barack Obama became president.
That got clawed back very, very quickly in 2011 and 12. So there were fiscal headwinds that we haven’t
faced this time around that also held the economy back. So you’re absolutely right. The Fed’s challenge
during that period was to make monetary policy accommodative enough to support the economy
sufficiently to keep inflation at 2%. Now the Fed fell a little bit short of their inflation objective, but you
know, if you really look at where we were, you know, on the eve of the pandemic in February, 2020, it
was a pretty good place. Right?
00:52:02 [Speaker Changed] And the fact that it took a decade is says more about the lack of fiscal
spending of Congress than what the Fed did. And you had
00:52:10 [Speaker Changed] A very long expansion. I mean, the reality of the expansion would’ve kept
going except for the Covid pandemic. Hmm.
00:52:16 [Speaker Changed] Really interesting. So, so let’s talk about the prior decade, the two
thousands. You had a speech around 2014 where you said the Fed was late in recognizing how long they
kept rates low for, and that the liftoff from oh four to oh six should have happened faster and sooner.
Tell us a little bit about what the lessons were from that episode and what the Fed should have done in
the early two thousands.
00:52:47 [Speaker Changed] So there’s been a big, big debate going on for many, many years about, you
know, how should the Fed respond to financial imbalances in the economy? You know, how should they
respond to sort of incipient bubbles? The Greenspan view was, it’s very hard to recognize bubbles. It’s
not clear how you reign them in. So the best thing to do is just sort of let the bubbles take the, run their
course and then clean up after the bubble collapse. It’s, and you’re in the bus period. My view has been
very much that no, that’s, that’s not a great strategy because the bursting of the bubble can cause a lot
of financial knock on effects. And so better to identify the bubble in real time and try to sort of reign
that bubble in. And I think, you know, if you look at the 2004, 2007, eight period, boy, it would’ve been
really good if we’d done something about subprime mortgage lending, about mortgage underwriting
standards.
00:53:43 If we’d done that, we would’ve had a much smaller housing bubble and we would’ve had much
less damage when that bubble collapsed in, in 2008. So my view has always been, let’s, let’s try to be a
little bit more proactive. Now, the problem with, with being proactive is, you know, how do you know
it’s a bubble? And the reality is you don’t. And so it’s very hard to convince people to take proactive
steps to deal with sort of incipient problems because you can’t really be sure with a hundred percent
confidence of what’s actually going on.
00:54:14 [Speaker Changed] Huh. So you’re really pointing out two issues. First, I wanna say the, the Fed
had taken rates under 2% for about three years and under 1% for a year. So that was pretty
unprecedented until, you know, the post financial crisis here. But you’re also pointing out to the Fed as
regulator and, you know, to, to cast blame. Greenspan was very much a anti regulator.
00:54:41 [Speaker Changed] Sorry, LA A little more, a little bit more LA there.
00:54:43 [Speaker Changed] Yeah. Okay. And, and he allowed a lot of non GSE non-traditional banks to
make all sorts of loans. It’s not like he gave them permission, he just didn’t really regulate them. And
that’s where a lot of the really sketchy and the Fed and subprime came from. And
00:55:03 [Speaker Changed] The Fed actually did have some authority in terms of regulating the
mortgage market authority that they didn’t really use. Nick Graham luck was a governor at the Fed, and
he sort of brought his concerns to
00:55:12 [Speaker Changed] Oh boy, did he,
00:55:13 [Speaker Changed] To Alan Greenspan. And, and nothing really, really happened. I mean, I, I
mean, even when I was at Goldman Sachs, you know, and, and working with my successor Jan Hostage,
we were very focused on how this mortgage, this housing bubble was fueling consumption through
what was called mortgage equity withdrawal. People were basically taking their, you appreciated gains
in their houses and they were pulling it out in terms of, you know, HELOCs, home equity loans. And we
felt that that was also contributing to stronger consumption. And this was gonna potentially end quite
badly.
00:55:45 [Speaker Changed] Ed Grl was an unsung hero of that era. ’cause he really identified what was
going on in real time and not in a, you know, hair on fire histrionic way. He was very sober and
thoughtful and academic and, you know, had, had Greenspan paid more attention to Gromek could
have been a very different outcome.
00:56:06 [Speaker Changed] Well, I think he would’ve had a, a smaller bubble. Maybe he’d have less,
you know, financial innovation you could weight against some of the triple A-A-C-D-O stuff. I mean, you
know, that, that, that’s an, that was, I mean, some of the innovations in the financial industry in terms of
products also contributed to the, to, to the bubble for sure. Right. ’cause you managed to sell all these,
you know, you, you, you took a ba a bunch of bad subprime mortgages, then you tranched the cash
flows and turned these, these subprime mortgages into 70% AAA rated securities. And so that sort of
kept the whole thing going. So the financial engineering was also an aspect of the problem, right? That
contributed to the, to the bubble.
00:56:46 [Speaker Changed] The, the rating agencies changed their model. They were being paid by the
underwriters instead of being paid by the bond purchasers. That’s a big factor that Yeah, I think a lot of
people overlook. Alright. So we could spend forever talking about the financial crisis, but I want to get to
the 1990s, and we’ve referenced the maestro. I was on a trading desk back then, and I always thought
Greenspan was way too solicitous. I’m not sure if that’s the right word. He was way too concerned about
how Wall Street perceived him. I, is that a fair criticism of Greenspan? Because it felt like he was much
more accommodative of short term market reactions. Anytime there was a problem for, for a laissez
fair, Randy. And he went right to, you know, the interventionist policy. So we had the long-term capital
management issue. We had the Thai crisis and the Russian ruble crisis, and every time there was a
hiccup in the markets, Greenspan didn’t hesitate to cut rates.
00:57:54 [Speaker Changed] I think that’s, you know, fair. But at the same time, I think Greenspan, you
know, did a reasonable job of keeping inflation control. So the consequences of, you know, of of coming
to the market’s aid to sort of sort of smooth out market dysfunction, you know, didn’t have a really
negative consequence for inflation. So I think he sort of got, mostly got away with it. But I, I agree with
you, he was probably a little bit more willing to address relatively, you know, small, not large, not
persistent movements in markets that maybe the Fed could have looked, looked past, you know, that
said, I mean, you know, his track record was, you know, really good. I mean, I think the, the, the blind
spot was really just more about not having this view that we can identify bubbles and we should deal
with bubbles in real time rather than waiting for the bubble to burst. And that was, that was his big
mistake. If, you know, if you think about when, when Ben Bernanke came in in 2006, you know, the die
was already cast, right. In terms of what, what was gonna happen at that point. It’s just what no one had
yet recognized it.
00:58:59 [Speaker Changed] Yeah, no, there’s, there’s no doubt about that. And in fact, by oh six, real
estate had peaked. You saw it in the home builders and the banks and the brokers. Like there were
market signals that there was problems, but the overall stock market kept going until, you know, late oh
seven. So let’s talk, you mentioned earlier about surveys. I always look at surveys as scance, because A,
people don’t know, and b, even when they know about what’s happening today, it tends to be on a lag.
And then lastly, they have no idea when you ask, Hey, where’s inflation gonna be five years from now?
That that seems to be like about as silly a nobody has any idea, much less a lay person. Why do we put
so much emphasis on inflation expectations?
00:59:52 [Speaker Changed] Well, I I don’t think that, I mean, I think you’re right that people don’t have
a really good sense of, we, and we talked about earlier price level versus rate of inflation. But it’s
interesting to see how their views change over time. So it’s probably not the level of what they perceive
inflation’s gonna be over the next 10 years. That’s interesting. It’s whether they think it’s higher or lower
than it was, you know, a month ago, six months ago, a year ago. The reason why inflation expectations
are so important is that if people think inflation expectations are truly gonna be higher, then that’s
gonna set the wage setting process and wages are gonna be higher. And if wages are gonna be higher,
that’s gonna feed into prices and that’s gonna cause actual inflation to be higher. That,
01:00:31 [Speaker Changed] That was a very 1970s problem. That seemed to be what, why inflation was
so sticky. Yeah. And we had such a hard time until Volcker came along getting, getting outta that cycle.
01:00:43 [Speaker Changed] And one good thing is too, we have other ways of measuring inflation
expectations now that we didn’t have 30 years ago. We have the re, you know, tips markets. So we can
look at tips, shields versus nominal treasury yields, and we can sort of calculate what are people willing
to pay for inflation protection. And that gives us a sense of how much inflation is embedded into the,
into, in, in people’s expectations. Market expectations Do,
01:01:04 [Speaker Changed] Do the inflation expectation surveys and the spread between the tip shield
and treasuries, do they correlate well or are there occasional big divergences?
01:01:12 [Speaker Changed] I I think they, I think they correlate well in the large, but I don’t think they
correlate well at all in the small, I mean, one example is people look at tip shields and they look at
what’s called the five by five forward rate. So what, what’s inflation gonna be five years from now for
the next five years? And that five year forward inflation rate moves along round with current oil prices.
So when oil prices go up or down, it seems to affect the, the, the people’s inflation expectations through
the tips market five years from now, which makes no, you know, no sense. Part of the problem is, is also
the liquidity of the T market is different than the liquidity of, of the nominal treasury market. And so
that also can cause some noise in terms of your measurement. But, you know, two separate sets of, of,
of, of, of numbers. And then you also have the, you know, professional forecasters, you know, what do
they think? So that’s a third set. And so you look at these three pretty disparate sources of information
on inflation expectations, you can get a pretty good sense of, you know, is it broadly stable or is it
moving in a, in a, in a, in a bad way.
01:02:10 [Speaker Changed] So, so let’s talk about the biggest part of CPI, which is shelter. When we’re
looking at inflation, we really wanna know what shelter costs are. The way BLS, the way the Bureau of
Labor statistics measures shelter is owner’s equivalent rent. And and full caveat, everybody’s aware
there’s issues with this and there are some changes coming, but, but let’s talk a little bit as it’s been for
the past couple of years, it’s survey based, Hey, what could you rent your property for? Seems to be a
funny question. So it’s laggy versus realtime measures. And yet this is the single biggest part of, of CPI
George Box famously said, all models are wrong, but some are useful. I, is this a, a model that is both
wrong and useful?
01:03:00 [Speaker Changed] Well, I I think you’ve underscored some of the shortcomings of owner’s
equivalent rent as, you know, both in terms of timeliness and also in terms of, you know, it’s not even a
cash outlay that people are making. So, so when you’re sort of thinking about what’s happening to
people’s real incomes, you’re sort of imp inputting a cost that they don’t actually really incur. So when
you’re sort of thinking about how much can people actually afford to buy, well, I’m not really renting my
house from myself, so, so it’s a, so you’re absolutely right. It’s,
01:03:26 [Speaker Changed] You, you have a budget line for shelter, but
01:03:29 [Speaker Changed] It doesn’t include, you’ve already sort of, you’re, it’s right.
01:03:31 [Speaker Changed] It’s already in your budget.
01:03:32 [Speaker Changed] It’s already in your budget. Exactly. So I think this is one, one reason why
the Fed puts more emphasis on the personal consumption, ex expenditure deflator, because it has a mu
much lower weight for shelter. But you’re right, the, the lags here are sort of crazy. So one reason why
we’re gonna see lower core PCE deflator and lower core CPI over the next 12 months is because rents
did come down and then with a lag of about a year or so, it
01:03:57 [Speaker Changed] Is it that much, I always thought it was a couple of six months, a quarter or
01:04:00 [Speaker Changed] Two. It’s, it’s six months, at least six months because so, so like, because
the rents only pre reprice periodically, right? So
01:04:06 [Speaker Changed] Every year or two, every
01:04:07 [Speaker Changed] Year or two. And so they have to reprice before they get into the, so it’s, so
it’s that lag bec, you know, if rents repriced instantaneously, then everything would be sort of up to
date, but rents re price slowly when you know the lease comes due. And so it’s lagging behind reality. So
this is something that’s gonna probably feed into the core PC deflator and keep inflation a little bit lower
over the next six to 12 months. But is it really, you know, real in terms of what’s actually actually
happening to inflation on the ground? It’s probably, you know, gonna be a little bit misleading.
01:04:39 [Speaker Changed] So, so there are a couple of real estate entities. The Apartment list index or
Zillow does a realtime index case,
01:04:45 [Speaker Changed] Case Schiller,
01:04:46 [Speaker Changed] Right? So even K Shiller is a little bit of a, a lag, not as much as owner’s
equivalent rent. But the interesting thing is, the real time indices have showed falling real estate prices
the past, I dunno, three months, four months,
01:04:59 [Speaker Changed] It hasn’t gotten into the CPI yet.
01:05:01 [Speaker Changed] Right? And it, so it’s interesting. It’s
01:05:03 [Speaker Changed] Coming, it’s coming.
01:05:04 [Speaker Changed] That’s, that’s gotta be very optimistic to think, hey, even all these people
are concerned about reacceleration of inflation, we know the biggest part of CPI is gonna to keep
drifting lower. That’s gotta be positive for future fed policy,
01:05:21 [Speaker Changed] Right? But your question is, is it temporary or is it more persistent? So to
figure that, who those, to figure that out, we have to look at the housing market, right? So how is the
housing market performing? Well, the housing market actually looks like it’s starting to come back,
right? Why is it coming back? Because mortgage rates have fallen by, you know, one percentage point.
And so that’s actually stimulating in the housing sector. So I think the interesting question is not like just
what’s the next chapter as this stuff feeds through the CPI, it’s, what’s the chapter after that based on
how quickly does the housing market recover in response to lower interest rates?
01:05:51 [Speaker Changed] So, so Powell was asked, I I think it was on 60 minutes, about the
commercial real estate. So as opposed to coming up every year or two, you have leases that go 5, 10, 20
years. So this seems to be taking place in slow motion, but it seems like commercial real estate is a, a
genuine risk factor certainly for, for some of the regional and community banks. How should we be
contextualizing what’s been taking place with remote work and work from home and the slow return to
office process that still has lots of vacancies in in urban centers?
01:06:30 [Speaker Changed] Yeah, I mean, I would define it more narrowly than commercial real estate.
I would define it as office building space, because that’s really where you have very high vacancies rates,
very underutilized resource and prices are coming down, especially for, you know, class B and class C
buildings. Not the, the best stuff coming down quite significantly. You know, you, you’re absolutely right,
this is sort of a slow burn rather than a fast burn because the problem typically arises not, you know,
immediately it, it, it arises when the mortgage has to be, or the commercial real estate loan has to be
refinanced. As long as the income on the property covers the interest on the loan, the, the, the, the
borrower isn’t gonna default when the loan comes due though, the lender typically says, Hey, your
building is worth, you know, 40% less than it was before. I’m sorry. We’re not gonna lend you as much
money. You need to come up with more collateral. And at that point, the, the, the, the borrower might
say, I don’t have the collateral, the building’s yours. And so then that, that crystallizes in a loss for the,
for, for the, for the commercial bank. I think there are definitely commercial banks that are gonna have
trouble due to their concentrated commercial office building portfolio. But I don’t view this as big
enough or fast enough to really be, you know, systemic from a financial stability perspective. Huh.
01:07:50 [Speaker Changed] Real, really interesting. All right. We’ve talked about the housing market,
the office based market. One question we really haven’t gotten to has been the stock and bond markets.
They’ve been very co chaotic the past couple of years. How does the Fed think about stock or bond
market volatility? How does that impact decision making?
01:08:10 [Speaker Changed] Well, I think as Paul has said many times, you know, monetary policy in the
US works through financial conditions. And two key components of financial conditions are the bond
and stock market. So if the bond market yields are low, the stock prices are are high and rising, that’s
making financial conditions more accommodative and that’s actually supporting the economy. So the
fed’s gonna take that into consideration. So, you know, we talked earlier about why the Fed isn’t moving
yet, because they wanna be confident they’re gonna actually achieve their 2% objective. They’re not
moving yet because the labor market is strong, but they’re also not use moving yet because financial
conditions have eased a lot, right? And so the market’s doing quite a bit of work for the Fed, even before
the Fed actually has cut, cut interest rates. So the Fed, you know, I don’t think, I think it’s important to
understand that the Fed doesn’t really target financial market prices. So people sometimes say, well, if
the stock market goes down, the Federal Reserve is gonna react to that. No, the fed’s gonna react to the
stock market. If, if the Fed thinks the stock market’s gone down far enough, persistently enough to
affect the real economy to impede the ability of the Fed to achieve its, its inflation and employment
objectives. The Fed doesn’t care about the stock market itself. It cares about how the stock market
affects the real economy. So,
01:09:24 [Speaker Changed] So sometimes you get a market crash and the economy shrugs it off 19 87,
1 day 23%, the economy couldn’t care less. And then even the.com implosion, which was modest on the
Dow and the s and p, if you consider 30% modest, it was brutal on the nasdaq, which was, you know,
something like 81%. But we had a very mild recession in 2001. So does that basically argue for less
intervention by the Fed or does the subsequent Fed intervention, is that what prevented this like oh one
from becoming much worse?
01:10:06 [Speaker Changed] Well, I think oh one was really, you know, also,
01:10:08 [Speaker Changed] You know, nine 11 on top
01:10:09 [Speaker Changed] Of nine 11 was really a significant event. And that I think provoked a more,
more, much more aggressive fed, I think the Fed, you know, is aware of what’s the mar bond market’s
doing, aware of what the stock market’s doing, because that affects the transmission of monetary
policy, the real economy. But they don’t have a view that we need to tar target a particular level of the
stock market or the bond market. That never comes up as an issue. You know, it’s not like the fed, you
know, if the stock market went down 10% tomorrow, it’s not like this, the Fed would go, oh, we need to
change monetary policy. If it went down 25, 30% and stayed persistently lower, that would probably
have implications for the economic growth and that would then affect monetary policy. But it’s all
through the effects on economic growth. Paul has talked about this, it’s, it’s, it’s the persistence of the
change in financial conditions that matters. It’s not what the stock market does over a day or week. It’s
what the stock market does over six months or a year. That really matters.
01:11:03 [Speaker Changed] So before I get to my favorite questions, I just have to ask really what
you’re focusing on today. You joined the PRIs, Princeton Griswold Center as a senior advisor, you chair
the Bretton Woods Committee, you serve on the group of 30 and Council foreign relations are, are you
still doing all those actively today? Tell us what, what’s keeping you busy these days,
01:11:27 [Speaker Changed] Those things. The Bretton Woods Committee, I’m the chair and we’ve been
broadening out the work that we do at the Bren Woods Committee. I mean, to just give tell you what
the Bren Wicks Committee is about. It’s, it’s basically dedicated the notion that international
cooperation and coordination lead to better outcomes. So along the lines of what Powell said in his 60
minutes interview, and basically trying to build strong international institutions that can facilitate
cooperation on, you know, important issues like, you know, financial stability, climate change, digital
finance, health trade, where countries working together can lead to better outcomes. So the Brad and
Woods committee, you know, we, it it’s been growing. The work has been expanding. We’re doing work
on digital finance, climate finance, sovereign debt, future of the multilateral financial institutions like the
World Bank and IMF, what should their role be going forward? So it’s pretty exciting. And I spend, you
know, quite a bit of time on it.
01:12:27 [Speaker Changed] What’s the group of 30?
01:12:28 [Speaker Changed] Group of 30 is a is a group of people. It’s a, it’s a, it’s an organization that
was set up several decades ago of, of, of, of people that are either currently very senior in academia
policy or were involved in academia and policy at a very senior level. You know, people like Paul Volcker
was a member of the, of the group of 30, Jean Kla is a, is a current member of the, of the group of 30 a a
people of, you know, Mark Carney. Is, is, is, is the, is the, the person who’s in charge of running the
group of 30 from a, from a, from a member perspective. So there’s a lot of senior people that focus on
important issues of the day. So for example, a number of months ago, the group of 30 asked me to lead
a project on, you know, financial supervision reform, you know, what should we do in terms of the
regulatory policy with, with respect to the banking system in light of what happened in March of, of
2023 with respect to Silicon Valley Bank and a number, number of other banks. And in January we, we
published a report and we basically argued for a number of reforms that need to be made. And, you
know, I’ve been talking to people at the Fed elsewhere and trying to get some traction for some of the
proposals that we’ve made. Huh.
01:13:42 [Speaker Changed] Really interesting. All right. I know I only have you for so much time. So let
me jump to my favorite questions that we ask all, all of our guests. Starting with what’s keeping you
entertained these days? What are you watching or listening to?
01:13:56 [Speaker Changed] I usually, you know, stream things, you know, television series that strike
my fancy, you know, right now, you know, right now it’s a little bit of a, you know, sometimes it’s a little
bit of science fiction like foundation or
01:14:08 [Speaker Changed] Are you, do you watching the second or third season of Foundation? No,
I’m,
01:14:11 [Speaker Changed] I’m like, I’m in the second season of it. Right? Sometimes it’s things like
Poker Face, which is on Peacock. Another one I’m, we’re watching my wife and I now Mr. And Mrs.
Smith
01:14:22 [Speaker Changed] Just started on Amazon,
01:14:23 [Speaker Changed] Just started. So, you know, it’s, you know, we usually watch one show a
night that’s, that’s,
01:14:28 [Speaker Changed] That’s us also. So that’s
01:14:29 [Speaker Changed] Sort of our tolerance.
01:14:30 [Speaker Changed] I never, I would,
01:14:31 [Speaker Changed] And it’s a, it’s a great way to just sort unwind. At the end of the day,
01:14:34 [Speaker Changed] I would not have pegged you as a sci-fi fan, and I’m gonna give you the two
recommendations I give everybody. Okay. One is on Amazon Prime, the Expanse, which is, I did,
01:14:45 [Speaker Changed] I did read, I did watch about five, five
01:14:48 [Speaker Changed] Of the seasons. Did you like it? It got a little wacky at the end. Yeah, I,
01:14:50 [Speaker Changed] I sort ran outta gas after about Yeah. The fifth, fifth season. But I did, I did
watch a lot of, a lot of that
01:14:56 [Speaker Changed] Fascinating political. And then the other one was, it’s only two Seasons
Altered Carbon. It’s really good. Okay.
01:15:04 [Speaker Changed] I haven’t seen that one.
01:15:05 [Speaker Changed] Fascinating story and filled with all sorts of really in interesting as a sci-fi
geek. Those are my two
01:15:13 [Speaker Changed] Favorites. Do you like for all mankind?
01:15:16 [Speaker Changed] Haven’t seen it.
01:15:17 [Speaker Changed] So that one is about the sort of alternate space race between Russia and
the US where Russia actually gets man on the moon first and then it follows sort of the develop of the
NASA program over, over the subsequent several
01:15:29 [Speaker Changed] Decades. How is the series?
01:15:30 [Speaker Changed] It’s quite good. It’s
01:15:31 [Speaker Changed] Quite good. Oh really? I’m gonna, I’m gonna add that, add that to my list. I
am a sucker for a great space venture. Let’s talk about some of your mentors who helped shape your
career.
01:15:43 [Speaker Changed] So the most important one by far, I think was my professor at Berkeley.
James Pierce. He worked at Yale, then he went to work at the Federal Reserve Board in Washington. He
was the Associate Director of research. And then he went to Berkeley and I was his research assistant at
Berkeley for, for five years. Wow. Which is a very long stretch as being someone’s research assistant.
And he sort of got me interested in policy and got me sort of knowledgeable about what the Federal
Reserve was all about. And so I think the reason why I went to the Fed Reserve rather than went into
academia is because of, of his counseling. And he became a, a, a a, a really good friend. But there are a
lot of, you know, there’s a lot of other people along the way, but he’s the one that sort of com you
know, stands out.
01:16:27 [Speaker Changed] Huh? Let’s talk about books. What are some of your favorites and what are
you reading right now?
01:16:33 [Speaker Changed] Right now I haven’t really gotten into anything particularly that’s like
grabbed me. I just finished Andy Weir’s book, hail Mary. I don’t know if you’ve, that’s the science fiction
one.
01:16:44 [Speaker Changed] I have not read to yet.
01:16:45 [Speaker Changed] I don’t read a lot of science fiction, but every once in a while I get a a, a
hank ring for it. I, I, I typically read more things that are like thriller detective kind of things. Like, you
know, I’m not a, I I I took a lot of literature when I was in college. Same. But I don’t read a lot of heavy
literature now because I usually, by the end of the day, I’m, I’m, I’m, I’m a little wiped out. And, and, and
to read really good literature, it takes a, it takes quite focus. It takes a lot of attention. So I like things like
Dennis Lehan, I think he’s, he, he does really good stuff. Don Winslow,
01:17:15 [Speaker Changed] I know the name for Yeah,
01:17:16 [Speaker Changed] For sure. He does some really good stuff. So I like the stuff that’s like a little
bit, you know, better than, you know, sort of Lee Child, you know, a little bit deeper. Oh, sure. You
know, Lee Child’s entertaining.
01:17:29 [Speaker Changed] My wife is a giant Lee child. She spread everything.
01:17:31 [Speaker Changed] Le Lee Child is entertaining. But, but every story is sort of along the same,
same lines. So, so that’s the sort of stuff that I, I like to read. And I, and I read a fair, I read a fair amount,
01:17:43 [Speaker Changed] The sci-fi book I have sitting on my nightstand that I’m almost afraid to start
is the Three Body problem. And it’s, each book is 900 pages. Oh wow. And there’s three books. It’s, it’s
actually by a, a Chinese author and it references the inability to forecast the location of heavenly bodies
of planets. Moon stars we could calculate too. Once you bring a third one in, it’s just, it’s gone. The
outcome is I’ll,
01:18:13 [Speaker Changed] I’ll, I’ll take a look at that.
01:18:14 [Speaker Changed] It’s fascinating. Have
01:18:15 [Speaker Changed] You, have you read Ted Chang?
01:18:17 [Speaker Changed] I
01:18:17 [Speaker Changed] Know the name. He’s, he’s a short story writer. He writes Short Story of
fiction. He’s got two books, science fiction. It’s fabulous.
01:18:25 [Speaker Changed] What what’s
01:18:26 [Speaker Changed] It’s very, it’s very intellectual stuff. It’s, it’s, he, he write, he he writes
sometimes in the New Yorker magazine.
01:18:31 [Speaker Changed] So there’s a book of his, I’m trying to remember. He,
01:18:35 [Speaker Changed] He’s, I think he’s had two volumes
01:18:37 [Speaker Changed] Of all
01:18:38 [Speaker Changed] Exhalation Short stories. Yeah. All short stories. I’m the, the, the movie The
Arrival was based on Yes. Was based on one of his
01:18:45 [Speaker Changed] Short stories. So the one I just got is Stories of Your Life and Other tales.
Yeah. It’s fabulous. But the one before that is Revelation ascendancy. Yeah. So it’s so funny you
mentioned that literally just, and I gave that to a few friends for holidays. His stuff
01:18:58 [Speaker Changed] Is great. ’cause
01:18:59 [Speaker Changed] It’s really, really, I’m excited that
01:19:00 [Speaker Changed] It’s really mind bending.
01:19:01 [Speaker Changed] That is like the book I bring on planes where, all right, I got an hour to read.
Let me, let me go through a chapter, really. And there’s this really fascinating collection of short stories.
I, I’ll never remember it, but I’ll, but I’ll email it to you. Diary of an interstellar refrigerator repair
meeting, something along those lines. And it’s, it’s brilliant science fiction, but it’s also surprisingly
amusing and funny. It’s, it’s, if you like those, I think you’ll, you’ll appreciate that they’re not, it’s not all
the same story. They’re kind of like, just very loose set in the same universe, but unrelated type of Yeah.
Stuff. But really, really fascinating. And our final two questions. What sort of advice would you give a
college grad who is interested in a career in either economics or central banking or, or monetary policy?
01:19:56 [Speaker Changed] Find an interesting job. Build your human capital. Once you find that your
human capital is, is no longer going up at a particularly rapid rate, find a new job. I mean, I was very
lucky ’cause I jumped around in my career and I, and I feel like every place I moved, I, I learned a new set
of skills and information which sort of helped me do better at the next endeavor. So I think it’s really
important not to get stale. And, you know, and the second really most important thing is find something
that you, that you can be, you know, that really interests you. That you can be enthusiastic about it.
’cause if you can’t go to work and be enthusiastic about it, you’re not gonna do very well and you’re not
gonna be very happy. I mean, ideally, you know, you like your work and the difference between work
and pleasure starts, starts to blur. And you don’t really aren’t resentful when there’s more, you know,
demands for your work. I mean, during the financial crisis, you can imagine I worked pretty long hours,
but I wouldn’t have had it any other way. I mean, it was absolutely a fascinating period of time. And
yeah, it was work, but, but I, I got a lot out of it.
01:20:58 [Speaker Changed] My, my wife describes me as being gainfully unemployed, which is exactly
along those things. I, I would do it if I was getting paid or not. So it, it works out really well. And, and our
final question, what do you know about the world of investing today, markets investing monetary policy
that you wish you knew 30 or 40 years ago when you were first getting started?
01:21:22 [Speaker Changed] Well, I mean, when I first started investing, I started investing in 19 74, 75.
And I have to say, I was so naive about investing at that time. I didn’t really understand, you know, you
know what, what really drove stock market valuation, you know, what determined the success of
companies, you know, you, you learn a lot by doing it. And I, I, and I personally think a lot of people
over, over invests in, in the sense of making transactions. I found over time that, you know, I have good
ideas once every like five, 10 years. And, and, you know, you have to wait for that good idea to, to, and
then implement that investment thesis. You know, well, one thing I’m good at it, coming out with ideas,
but I’m terrible at, at, at trading on them. You know, like Bob Rubin a number of years ago at Goldman’s,
you know, you know, you know, suggested that, well, maybe you should, you know, should actually start
trading things. Try, try that. I said, no, Bob, I don’t think my, my risk tolerance is, is, is right for that. And
the second reason not to do it is that if you start trading things, then it sort of leaks into your
interpretation of, of, of information and events. Sure. ’cause you then you start to talk your book and try
to contribute, you know, this is the reason why the 10 year bond yield should fall. Because, well,
01:22:36 [Speaker Changed] ’cause I have a position.
01:22:37 [Speaker Changed] ’cause I have a position and that’s, you know, I, and I said to him, no, you
don’t really want me to do that because one, I wouldn’t be very good at it. And then I might lose some
of my, you know, ob objectivity with quotes around it.
01:22:47 [Speaker Changed] I, I do like the idea of low frequency trading as a,
01:22:50 [Speaker Changed] Yeah. I mean, I think for most people buying an ETF on a broad based stock
market and then putting it away for 20 years is the right
01:22:58 [Speaker Changed] Approach. Can’t, can’t really disagree. Bill, thank you for being so generous
with your time. This has just been absolutely delightful. We have been speaking with Bill Dudley. He is
the former US economist for Goldman Sachs and head of the New York Fed, as well as his many policy
roles at the Federal Reserve. If you enjoy this conversation, well be sure, check out any of the 500 or so
we’ve done over the past. Hey, it’s almost 10 years. You can find those at iTunes, Spotify, YouTube,
wherever you find your favorite podcasts. Sign up for my daily reading list@riol.com. Follow me on
Twitter at ritholtz. Check out my new podcast at the money short, 10 minute conversations with experts
about the most important elements of your earning money, spending money, and most importantly,
investing money. I would be remiss if I did not thank the correct team of people who help us put these
conversations together each week. Kaylee Lapper is my audio engineer. Atika Val is my project manager.
Anna Luke is my producer. Sean Russo is my researcher. I ‘m Barry Ritholtz you’ve been listening to
Masters in Business on Bloomberg Radio.

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