00:00Chair Kevin Walsh, making changes at the central bank, limited forward guidance, creating task forces and putting even more weight
00:06on signals from financial markets.
00:08The former New York Fed president, Bill Dudley-Wang, in writing this, a fresh look is appropriate, but this needs
00:14to be done with greater care than Walsh has shown to date.
00:17Bill joins us now for more. Bill, welcome to the show. It's nice to reflect on these kind of things
00:21with you, so thanks for being with us.
00:22What are you reflecting on right now? What are you concerned about as this comes together?
00:26What I'm concerned about is that I'm perfectly fine with getting rid of forward guidance, but what I'm concerned about
00:32is Walsh is not disclosing what his monetary policy reaction function is.
00:36In other words, how would the Fed adjust policy as the economic environment changes?
00:40And I think that's a big mistake. The idea that you can rely on financial markets to tell you what
00:44you should do in terms of monetary policy, that won't work because markets price to what they think the Fed
00:48will do.
00:49So if the Fed's looking at the markets and the markets are looking at the Fed, how is policy actually
00:53set?
00:54It's really important in the United States that markets understand how the Fed's going to react, because monetary policy works
01:01mainly through financial conditions, the effect of short-term rates on bonds, stocks, credit spreads, the dollar.
01:07So if the markets don't understand what the Fed is doing, those markets aren't going to be priced appropriately relative
01:12to what the Fed is actually going to do.
01:14And that's going to both slow down the transmission of monetary policy to the real economy, but it's also going
01:20to make it less efficient.
01:23So it seems to me like you've got to provide more guidance about how you're actually going to react if
01:28things evolve differently than you anticipate.
01:31To your point, Bill, I think you're picking up on a tension we all witnessed in the news conference.
01:35He seemed to find it difficult to separate forward guidance from communicating, articulating a reaction function.
01:42Where do you think that came from? Why is that difficult? Do you think it's straightforward?
01:45I think it's straightforward. I mean, I think forward guidance is really basically saying, here's what we expect to do
01:51next.
01:51The monetary policy reaction function isn't about what we're going to do next.
01:54It's about how we would react to different sorts of incoming information.
01:58So I think he needs to distinguish between those two things.
02:01Right now, I don't really understand how he expects to set monetary policy.
02:05The job of monetary policy is the Fed's job, not the market's job. And so the Fed needs to do
02:09its job.
02:10Part of his argument, perhaps, just being generous, might be that there are task forces for that.
02:16And essentially, they have to understand what data they're looking at before they understand exactly how they should react.
02:23Do you buy that argument?
02:25Well, obviously, it makes sense to take a fresh look at what data is available.
02:29But at the end of the day, these task forces have a finite life.
02:32I mean, the Fed has basically got to conduct monetary policy, not just over the next six months, but over
02:36the next number of years.
02:37So I think the reliance on task forces, maybe it buys him some time to think about what he really
02:42wants to do.
02:43But at the end of the day, these task forces are not a replacement for the Fed communicating about how
02:49it's going to act as economic conditions change.
02:52Right now, Bill, when you take a look at the inflation rate, when you take a look at the oil
02:56input,
02:56but also the broadening as we're seeing it in PCE, which we're going to get in about nine minutes' time,
03:02do you think it is appropriate for them to hike at least once, if not twice or three times this
03:06year?
03:07Well, I think that the case for monetary policy becoming a bit tighter is pretty compelling to me for two
03:14reasons.
03:15Number one, we've been at this level of rates or higher for three years, and the economy is still at
03:19a 4.3 percent unemployment rate.
03:21So what's the evidence that monetary policy is restrictive?
03:24And second, financial conditions are really accommodative.
03:27The board has this model of financial conditions, and right now it shows the impulse to growth over the next
03:33year is over 1 percent positive on GDP growth.
03:36That's the highest since late 2001, early 2022.
03:40So I think that easy financial conditions, no evidence that monetary policy is restrictive,
03:46a time that you've missed your target for more than five years, does create a strong argument for tightening monetary
03:53policy.
03:53So I'm aligned with, you know, Alberto Musil and Lori Logan, but what I think doesn't really matter is really
03:59what Kevin Walsh is ultimately going to do.
04:01One thing that's going to help a little bit in his, you know, giving him a little bit more time
04:05is this is probably the really last bad headline inflation report we're going to have for a while.
04:10Because with the decline in oil prices, when we get the inflation data for June,
04:15headline inflation at both the CPI and PCE level is going to decline quite significantly.
04:19But what about the housing market? Isn't it still fair to say what we have is highly restrictive for housing?
04:25Well, I think housing is not doing well for a couple reasons.
04:29The main reason, though, is lack of demand because we don't have any labor force growth.
04:34So if you don't have labor force growth, you don't have household formation.
04:37If you don't have household formation, you don't have a lot of demand for houses.
04:40There's also an affordability issue in terms of what, you know, what level of income you have to achieve to
04:46be able to buy a house.
04:48But I don't think, you know, you look at mortgage rates, are mortgage rates particularly high?
04:51I mean, they're high relative to the last 15 years or so.
04:54But if you go back prior to the great financial crisis, you know, mortgage rates in the six and a
04:59half percent range, no one would view that as particularly high.
05:01Well, it is high, though, if you're sitting on a three percent rate and you refuse to move because then
05:06it doesn't offer up a lot more housing for everyone else.
05:10Well, there is a lock in effect that people are deciding not to move because they don't want to lose
05:15the advantage of those very low mortgage rates.
05:17But if they move, they're demanding another house.
05:20So I'm not sure that, you know, that really is going to have a big effect on housing affordability.
05:24The big question, I think, for housing affordability is what can you do about zoning?
05:27What can you do about land use to basically allow more homes to actually be produced?
05:33Increasing the supply of housing would then weigh on housing prices and that would make housing more affordable.
05:39But I don't think it's really a big interest rate problem, frankly.
05:41Bill, just a final thread, a few questions.
05:43Just on this institution, you've worked at it a long time from your position at the New York Fed going
05:48down to Washington on so many occasions.
05:50How easy is it to change this institution?
05:54Well, there's certainly a lot of inertia in the sense that you have staff that are going to be there
05:59a lot longer than Kevin Walsh is going to be there, for example.
06:02And the staff has a lot of pride in their work, and deservedly so, because they have a tremendous amount
06:08of expertise.
06:09But you can definitely move things if you have a better mousetrap.
06:12When I went down to the New York Fed after the first day, second day I was president of the
06:17New York Fed, I basically said, my mantra is best idea wins.
06:20Best idea that people come up with should actually dominate, regardless of where it comes from.
06:24And I think the board staff, the staffs of the Federal Reserve Banks really subscribe to that.
06:30So if Kevin Walsh and the task force has come up with better ideas, I think those best ideas will
06:35actually win.
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