00:00Here's the latest this morning. President Trump calling for the Fed to cut interest rates once again, saying it's, quote, not fair to America after a soft CPI report out just yesterday.
00:08Former New York Fed President Bill Dudley writing the following. The Fed has little choice when it doesn't know which way the risk skew. It must wait for more information.
00:16Right now, any major move would have only a 50-50 chance of a positive outcome. Bill joins us now for more.
00:23But welcome to the program, sir. Why such a negative assessment of the position that they're in right now?
00:27They don't know where the tariffs are going to land, number one. And two, they don't know what the effects of the tariffs are going to be on growth versus inflation.
00:35So they're uncertain about two dimensions. So they can't really just sort of flip a coin and say, oh, we're going to worry about the growth dimension because that could turn out to be wrong.
00:43So they have to sit and wait to wait for more information. I mean, if you were driving a car in a thunderstorm, you wouldn't just put the car on autopilot and hope that you would get through it safely.
00:53So he pulled to the side of the road until the weather cleared up. And that's what the Fed has to do.
00:59You know, the Fed is going to be criticized for waiting. They have to wait. And because they are waiting, they're probably ultimately going to be late.
01:07But it's not the Fed's fault. I would behave exactly the same way in this set of circumstances.
01:12Bill, what's their definition of late? And what's your definition of late? Because he reflected on the move last summer and he said, in some ways, we were a little late.
01:20And other people thought he was being preemptive. What's late to you?
01:24Well, I think late is responding only after you've seen a sizable increase in the unemployment rate, because at that point, it's really hard to avert a recession.
01:32You know, when I evaluate the risks to inflation versus the risks to growth here, I guess I worry more about the downside risks to growth.
01:38But the Fed can't put all their marbles on that on that side of the equation because inflation has been running above the Fed's target for five years.
01:48And if they're wrong and inflation expectations get unanchored, then it's a really difficult problem getting inflation back down.
01:55So I think they have to wait because they wait because they will be forced to wait.
01:59They'll probably be late. Trump will blame the Fed for being late.
02:03But the reality is Trump created the conditions that forces the Fed to have to wait.
02:08Bill, I'm just curious, going forward, how much you see the Fed unwilling to move, even if the unemployment rate rises by half a percentage point,
02:16which is sort of the trigger that a lot of people are looking at.
02:18If you do see those inflationary pressures coming back?
02:23Well, I think if the unemployment rate rose by, you know, above four and a half percent, that would change the Fed's calculus.
02:28They would be much more worried about the self-reinforcing deterioration in the labor market leading to a full-blown recession.
02:33So I think the unemployment rate is really the single most important indicator.
02:37If it stays around where it is today, if it's going to just sit and wait, if the unemployment rate starts rising quickly, then the Federal Reserve will start to respond.
02:45But I think it's going to take some time.
02:46I mean, the hard data on the economy shows that the economy is still just fine.
02:51I mean, the first quarter GDP report was very misleading because it was mainly the fact that they couldn't count inventories properly to match up with the big surge in imports.
03:00Bill, if you were still on the Fed and you have been on the Fed through crises and through really difficult times where the market was moving faster than the underlying economy,
03:08what data would you look at to get a real read on what was going on in the United States?
03:13Well, I think some of the banks have actually pretty good real-time data in terms of what's happening in sort of credit cards,
03:21and they're not seeing much of a slowdown at this point.
03:24Initial unemployment claims, it gives you a pretty high-frequency look at what's happening to the labor market.
03:29That doesn't show any deterioration yet of note.
03:32So I think you're looking at things at the margin that suggest that weaknesses are starting to accumulate.
03:38Now, what's interesting is the tariffs are actually starting to bring in revenue.
03:40So fiscal policy right now is actually starting to become tighter.
03:44And I'd also look at low-income households because I think that's where the squeeze is going to be the most significant.
03:50So if you start to see delinquency rates on subprime, all loans really start to hit up.
03:54I mean, they're already high.
03:56If they start to hit up even more substantially, that would be also a sign of a growing strain on the growth side.
04:02Bill, at some point, the Fed will have to update their numbers.
04:04On March 19th, they put out these forecasts, GDP at 1.7% for 2025, PCE at 2.8%, unemployment at 4.4%.
04:14On June 18th, they'll have to deliver an update.
04:17When we get that update, Bill, what do you think it will look like relative to March?
04:22I think it'll show somewhat slower growth to reflect the fact that tariffs have gone up more than they anticipated
04:27and somewhat higher inflation to reflect the same consequence.
04:32So I think it'll be even a more pessimistic forecast in the sense that the Fed will be missing both of its dual mandate objectives by a bigger magnitude.
04:40But they still don't have clarity on what's happening to tariffs and the impact of tariffs on the economy.
04:44And so I think it's going to take a while for that to be realized.
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