00:00Richard Clarida is with us with PIMCO of Columbia University, always, and always the vice chairman,
00:06former vice chairman, I should say, of the Federal Reserve System. And I think, you know,
00:10we're going to straddle here between Bloomberg money and everything else.
00:12Yeah, and we got to start with what we saw in the bond market this week, because we had a
00:16sell-off
00:17and the 30-year yield this week reached a 19-year high, 5.26%. Rich Clarida, does the sell-off
00:23in
00:23the long bond tell us anything about the U.S. economy and therefore how people's prospects
00:27might change? Well, there are a lot of reasons bond yields can go up and down, not just the Fed.
00:33The Fed's an important part of it. What I would point to is that so far, Kevin Warsh has been
00:39chair
00:40really only six, seven weeks, but an important measure in the bond market, which is break-even
00:44inflation, so sort of traders' expectation of inflation, is at or below where it was at least
00:50out to 10 years when he became chairman. But certainly the reaction during the press conference
00:55was probably not one that was welcome. Right. We know the first Trump administration
00:59cared a lot about the stock market. And the second one seems to have added the bond market
01:04to its list of things that it's watching. Which part of the bond market does the administration
01:09care most about, the 30-year yield, the 10-year yield? Oh, my goodness. I'm not sure. I would defer
01:15probably to Secretary Besson. I do think at one point he may have said that he's focused more on the
01:1910-year yield than he is on the Fed funds rate. Well, so much of the economy, people borrow long
01:24for car
01:25loans or mortgages or corporate loans. And so that's probably what he had in mind.
01:29So what we're going to do here, it's Bloomberg Monday. We do personal finance. We do wealth
01:33management. We do retirement. But we also have Richard Clarida with us, who's in the heart of
01:39this debate over the chairman of the Fed. So it's going to be a little bit sort of like Scarfu
01:43and
01:44Tom doing Bloomberg surveillance, like more protect the children at home.
01:48Their minds are blurry.
01:49Yeah, protect the children at home.
01:50Surveillance for that.
01:51Okay. So, so former vice chairman, with great respect, I don't want to turn this into a history
01:56lesson, but you have Warsh, nominally of Stanford, talking about the Lucas critique and then going
02:03over it. And what people don't know is you're directly involved with this. Let's first listen
02:08to Chairman Warsh on Wednesday.
02:11Some version of the Lucas critique should remind us that when we talk about measures of inflation or
02:22something else, and we describe those measures as being consistent with our objectives, we might
02:28make them such that they're not very good measures or very good objectives.
02:33The chairman, before he had the questions from Michael McKee of Bloomberg, the world lit up.
02:39Anna Wong with legit crud out of Lucas's Chicago was fiery. The news conference was rich in
02:46philosophy, process, and institutional aspirations, but poor in operational guidance. The absence
02:52of Clare-to-like analytical specificity appears to have spoken louder than Warsh's words.
03:00So Lucas did what he did. CGG, Clare-to-Galley and Gertner reinvented modern economics with something
03:07called dynamic, stochastic, general equilibrium theory. We come out now, and as Claudia Somm
03:13says, we have a chairman who's not sure what he's looking at in inflation. How does he get
03:19the rails back on? Does he need to reaffirm PCE is the inflation series?
03:25Well, I think what he said at the press conferences is for now until next January, at least, that's
03:30going to be. Correct. The Fed adopted that again in January. He left open the possibility that the
03:35task forces could recommend other measures. They could go to an average. Instead of picking one
03:40index, they could look at CPI, PPI. There are a lot of things they could do. But I think, Anna,
03:45as usual, raises an important point, is that an inflation targeting central bank needs to be clear
03:51about what it is it's targeting. It can and may evolve. And so I think that will be important.
03:56Very importantly, then, here, if we need to get the system back with a confidence about the Fed,
04:03how does he do that at Jackson Hole? Does he have to reaffirm, as Somm says, that inflation is the
04:11appropriate measurement and not a policy? Well, I think Jackson Hole may serve a couple purposes.
04:18Historically, as we've seen, chairs have used Jackson Hole as sort of a sneak preview of coming
04:24attractions at the September, November and December meetings. Chairman Walsh Hennedy may do
04:29that. He's also interested in what he called some big question, big picture questions that he sort
04:34of previewed at this meeting. And he's also talking to the task forces. I think it's too early to tell
04:41what he'll do at Jackson Hole, but he may he may do that as well. I find it really interesting
04:46that he
04:46doesn't want to tell the bond market a whole lot of things. And he's kind of waiting to take his
04:50cue
04:51from the bond market. From a layperson's point of view, it feels very circular, right? The central
04:54bank sets a benchmark interest rate. The bond market takes its cue from that. What's the rationale
04:59for the Fed to take its cue from the bond market that's relying on the Fed to set policy? Help
05:03me
05:04understand that. So so here's the way I would express it. The Fed is a very important part of 10
05:11year
05:11treasury yield. It's not the only thing that drives yield. So I think the chairman was important to
05:16emphasize that the Fed does want to step back and interpret movements in bond yields. It could be
05:21inflation. It could be global growth, Middle East hostilities. But certainly the chairman and the
05:26Fed understands that an important part of 10 year yields is the expected path of the funds rate. And
05:31to Scarlett's point, and I actually Ben Bernanke gave a speech on this, as did I as vice chair,
05:36it's called sometimes called the hall of mirrors problem in central banking, which is the central bank
05:40looks at the market. The market looks at the central bank. It gets circular. Let's go back to your
05:45paper. Galley and Gertler didn't know this. Richard Clarida channeling Alan Blinder. Having looked at
05:50monetary policy from Joni Mitchell's both sides now, I can testify that central banking in practice is
05:57as much an art as a science. How does Warsh get back to science, to Clarida's silence versus some mom
06:05and pop philosophy you learned at Stanford? Oh, well, I think Kevin Warsh and the committee understand
06:13that look, Kevin came in, Chairman Warsh came in with an ambitious agenda. And I think that they're
06:20going to both focus on implementing that agenda as well as getting to where they need to be on policy.
06:26I guess where I would try to relate Clarida Galley-Gertler to the current conversation is
06:31perhaps specifically in the domain of forward guidance. And so in the CGG model, there's actually
06:38not a role for forward guidance because the market understands the Fed's reaction function and the
06:43Fed understands the market. If you're not going to do forward guidance, then it's incumbent for the
06:49markets to have a broad understanding of how the central bank will react to data. If we had six bad
06:54months in a row of inflation data, would they hike and buy how much? They're not committing
06:58to that, but they're saying if the data comes out this way.
07:01For everybody on Bloomberg Money and Scarlett, I got goosebumps. This is like the real deal. I mean,
07:06this is what the adults in the room are arguing about right now.
07:10Well, for people who are watching this and don't quite know all the names that you and Rich are
07:14throwing out there, I want to bring it back to the real economy and to real people's concerns.
07:18Do you agree with those people who say that we have a K-shaped economy where the higher income
07:23and asset owners are doing well and everyone else is kind of struggling, that downward arm?
07:26And if so, how do we solve for that? Well, yes, broadly, we do and have had a K-shaped
07:33economy
07:34for some time, but the K, the branches of the K have been diverging more widely in the last six
07:39or
07:39seven years. The way I like to think about it, Scarlett, is roughly 60% of Americans live in a
07:46house
07:47that's owner-occupied housing, sometimes with their parents, but it's owned, about 40% rent. Most of that
07:5360% owns stocks, most of the other 40% doesn't. So we've been in an economy for some time,
07:59but
07:59especially in the last six years when stocks have gone up, house prices have gone up. So the top of
08:04that K is doing pretty well. If you're in the other part of the K, you don't own your house,
08:08you don't
08:09own a lot of stocks, you're living paycheck to paycheck. It's been a tough six years. And so
08:13there's no doubt we're in a K-shaped economy. Yeah, those services costs just keep getting more
08:17expensive as well. Bloomberg Money is about how you invest and make your money, but it's also about how you
08:22spend your money. So, Rich Claude, I want to ask you on this Friday, what's your splurge, first of all,
08:27and how do you save? What do you save? Well, I leave the saving to my wife. She's pretty good
08:33at it.
08:34My splurge is, my hobby is music. So I buy guitars, I buy recording equipment. Really? I spend money on
08:41recording my albums. So, yeah, that's my splurge. Didn't you record an album in 2016? I did,
08:47available Spotify, Apple Music, stream for free on YouTube. The new album's coming out later this
08:53year. Maybe we'll do a rollout party on this show. Oh, it's a follow-up? Yeah, yeah. Oh,
08:57what's it called? It's going to be called Take Two. Take Two. Okay. And what, folk music? Like,
09:03what's your vibe? Folk rock. Yeah. Folk rock. Someone who listened to too many Beatles albums.
09:07I will editorialize as I have heard it. It is not a vanity album. It is exquisite. I was shocked.
09:14Well, thank you. It's really, really quite good. Thank you. And you're the solo star. Like,
09:18I don't hear a band name in there. No, you're a band. So I write the songs and do the
09:21vocals,
09:22but I work with professional studio musicians in London, LA, and Nashville. So all the music you
09:26hear is really good playing, and then I do some singing on it. All right. Richard Clarida's new
09:30album coming out. What day? Well, by December 31st. By December 31st. Richard Clarida,
09:35thank you so much.
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