Chapter 1: What is the main topic discussed in this episode?
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All investing is subject to risk. Vanguard Marketing Corporation Distributor. Bloomberg Audio Studios. Podcasts. Radio. News. PIMCO Global Economic Advisor and former Fed Vice Chair Rich Clarida joining us now. And Rich, what's your take on what we just heard from Fed Chair Jay Powell? Well, I think the chair certainly intended to open the door pretty wide to cutting in September.
Importantly, Lisa, he spent a lot of time on balance of risk, which is what policymakers do. But at the two key junctures, he highlighted the balance of risk to the labor market is to a weaker labor market. And he basically indicated that the balance of risk to higher inflation doesn't appear to be a first order concern in terms of persistent inflation. So I think the message was,
They think they're going to cut in September. We get some more data and the markets have reacted to that.
How much do you think that this is partly to maintain the Fed's credibility, not necessarily with respect to the president, but that right now, if they get it wrong on the labor market front, that it is that much more pernicious based on some of the job owning by what we hear from the president? Well, yeah.
I mean, as the chair said in the remarks, it's a curious kind of balance in the labor market. The payroll employment growth has been very, very weak in the private sector, but the unemployment rate has not gone up. And so they are really focused on the balance of risk. Look, the Fed has a dual mandate.
It's costly to let inflation move higher and stay there, but it's also costly to have a recession with the rise in the unemployment. And I think, Lisa, you're correct. They are tilting in that direction. direction now. It feels like a very different Jackson Hole.
And this is something that we've been talking about with all of our guests today, Rich, that people have come on and said there is a different tone about central banking independence and a question of how to communicate at a time of such political interference. What's your sense of where that was in the speech that we just heard from Fed Chair Jay Powell?
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Chapter 2: What insights does Richard Clarida provide on Fed Chair Powell's speech?
I've got two texts I want to take here that I think are important. You recently said that what matters is the institution, that this chairman and any future chairman has to protect the institution. What's the day one first mandate to protect the institution for the next chairman?
Well, I think first and foremost, it's to have in place a plan and communication that will deliver expectations of price stability. I think the chair was right today to emphasize that the Fed has to focus on getting price stability because that's going to deliver the ability to deliver maximum employment.
I've also written, Tom, that the Fed is sort of a complex and cumbersome institution with 19 folks around the table and the Reserve Bank presidents. But I do think that is a strength right now of the institution. Right. Well, this is really important because it's as fractious as a meeting of the bond team at PIMCO.
In the middle of the speech, Powell channeled a few years ago at PIMCO the new normal. For a moment, I thought Mohamed El-Erian had parachuted in to write this speech. What is your optimal new normal for the Fed, which Powell mentioned today?
Chapter 3: How does the balance of risk affect the labor market according to Clarida?
What's the best new normal for the next Fed? Well, I think a new normal would be inflation moving down towards the 2% target, which would let the next Fed chair cut rates down towards a neutral level. You know, PIMCO in 2014, we rolled out the idea of a new neutral, and we've been operating in that new neutral world now for more than a decade. And so I think...
Well anchored inflation expectations, getting tariffs in the rear view mirror would allow the Fed to cut rates by probably 150 basis points from here and achieving that ultimate soft landing. So I think that would be a good new normal destination for the next Fed chair.
What risks are there to that, given what we're seeing with the dollar, given the fact that we really have a very high level of uncertainty around which tariffs are going to stick and how much is going to get passed along to consumers? Sure. And I think the chair was right to point out that we are seeing evidence of tariffs showing up in the price indexes for imported goods.
But that's been offset to some extent with the decline in services inflation. Again, I think. Where they are focused is to make sure that what is an inevitable increase in the price level from tariffs does not over time result in persistent inflation.
And I think the speech today addressed their thinking right now, which is that their baseline is that that will not happen, which will give them the room possibly in September to cut rates. Lisa, I think it's important to mention within the market check that the market is putting on steam here an hour after the beginning of the speech and Mike McKee's bombshell headlines, a Dow lifting up.
I'm not told I can't leave Jackson Hole unless Dow goes up a thousand points. I'm getting pretty close to it. It sounds like you're going to be hiking for maybe another six hours and then all of a sudden not so much. I do want to know, though, about what this does in terms of the currency ramifications and where your preference lies in terms of the good investment backdrop.
Because what we heard from Fed Chair Jay Powell was so vastly different. from what we heard from Joachim Nagel of the German Central Bank, where he said, we have to focus on inflation. And right now, that is more concerning to them than trying to support growth by cutting rates or being stimulative.
The fact that that is the framework there, and it is such a different framework here, does that make you want to invest in Europe a little bit more? Well, I think one of our themes at PIMCO is we're in a world where taking advantage of a global opportunity set makes sense. Also, we're in a world where it makes sense to focus on valuations.
And without getting into particular markets or securities, there have been some pretty big divergences between valuation in the US and Europe, especially in equity markets. Also, the Europeans are much closer to their 2% target than is the Fed, because from the Europe point of view, the tariffs are really a disinflationary force.
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Chapter 4: What does Clarida say about the Fed's dual mandate and its implications?
And I think that expectations of inflation, we're sort of in a world in which The bond markets at least think that over a five-year period, the Fed is going to do whatever it takes to get inflation down what I call two point something. And I think that's an important victory that central banks are still benefiting from. And I would expect that and certainly hope that will continue.
Richard Clarida with us. For all of you on radio and TV, we've extended this wonderful show with a huge market move we see today off of the Powell speech. I want to turn to Michael McKee because my head's spinning. I've got Chairman Bullard, Chairman Clarida, Chairman Alloway, and the rest. So when they're in the Oval Office, And they're sitting on the couches.
And President Trump is going to turn to the people he trusts here. Let's start with the Secretary of Treasury. What is Besant going to say to him about the qualifications needed for a Trump chairman? Well, probably from Scott Bessons, you would hear the importance of being able to relate on Wall Street.
It was put once to me that the Treasury Secretary's job in terms of the markets is to be able to calm them down when something is going wrong. And so that would argue for a certain number of the candidates, maybe Ms. Alloway fits in that category, that have that gravitas to be able to do that. The idea that
Chapter 5: How are political factors impacting Federal Reserve independence?
Do you want to cut rates? That's not really part of it because you wouldn't be on the list if you didn't want to cut rates at this point. So it's going to be somebody who the president will feel comfortable with. Maybe this move, if the Fed cuts rates, he's more comfortable with a wider group of people because he's started to get what he wants. And Joe Weisenthal?
We could add Joe Weisenthal because, well, we don't know. If the president is a country music fan, we'd have to find that out first. But I think going forward, the one thing you could say maybe out of this speech is if in an ordinary administration, which wasn't going to be subject kind of the whims of the way Donald Trump does things, this would have really given a boost to Chris Waller.
Because essentially what they're saying is Chris Waller was right. Interesting. that inflation, look through inflation from tariffs because it will be a one-time price boost. Yeah, now the question's going to be, and ultimately, is this going to be a hawkish cut or a dovish cut in September? PIMCO's Rich Clarida, you've been incredibly generous with your time.
Thank you so much for being with us as we dissect that speech. It was a lot longer than his prior speeches, and it was one that signaled the beginning of a new rate-cutting cycle. They have not cut rates since December. in 2024. I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast.
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