Ex-New York Fed President Bill Dudley on Trump and Central Bank Independence | Trumponomics
Summary
Central Bank Independence: Bill Dudley emphasizes the importance of central bank independence, arguing that it allows for a long-term focus on monetary policy, which is crucial for economic stability.
Monetary Policy Debate: Dudley discusses the current debate over whether the Federal Reserve should continue cutting interest rates, weighing the risks of inflation against potential labor market deterioration.
Inflation Concerns: Dudley highlights the potential for inflation to remain above the Federal Reserve's 2% target due to factors like tariffs and the AI investment boom, which could lead to higher electricity prices.
Tariff Impact: The discussion touches on the delayed impact of tariffs on prices, with Dudley predicting that most of the tariff burden will eventually be passed through to consumers, affecting inflation.
Economic Performance: Despite uncertainties, Dudley notes that the economy is performing better than expected, suggesting that monetary policy may not be as restrictive as some believe.
Fed Independence Threats: Concerns are raised about political threats to the Federal Reserve's independence, particularly regarding potential changes in leadership and policy direction under the Trump administration.
Future Risks: Dudley warns that a politically compromised Fed could lead to poor economic outcomes, such as unanchored inflation expectations and a weakened dollar, if interest rates are manipulated for short-term gains.
Fed Credibility: The podcast underscores the potential damage to the Fed's credibility due to political pressures, with Dudley noting that questions about the Fed's independence are already affecting its reputation.
Transcript
[Music] Bloomberg Audio Studios podcasts radio news. >> This is exactly why we would like to see central bank independence because central bank independence is thinking about monetary policy not for the next 18 months but for the next few years. [Music] I'm Stephanie Fllanders, head of government and economics at Bloomberg, and this is a bonus episode of Trumpanomics, the podcast that looks at the economic world of Donald Trump. While I was in New York this week, I hosted a fireside chat with Bill Dudley about the future of the Federal Reserve and its monetary policy. Bill was once president of the Federal Reserve Bank of New York. Before that, he was a chief economist at Goldman Sachs, among other things. He's now a columnist for Bloomberg Opinion and a senior adviser to Bloomberg Economics. In our conversation, we discuss not only the political threats to Fed independence growing by the day under President Trump's administration, but also the US central bank's monetary policy right now and the implications of tariffs and the AI investment boom. I started the conversation by asking Bill why he thinks it would be a bad idea for the Fed to keep cutting interest rates over the next year or so, which is what the future markets are currently predicting. Well, I think there's a debate going on between uh what's the biggest risk uh inflation staying sticky above the Fed's 2% target for what if we go through next year, the fifth year in a row or the labor market continuing to deteriorate and potentially giving away and having a a recession. and Paul's trying to navigate between those two uh risks. And as he said, it's very difficult to figure out what to do in the current environment. Where he lands is that he thinks that the greater risk or the increasing risk at least is the downside risk to the labor market. And as a consequence of that, he wants to make monetary policy less restrictive to sort of reduce that downside risk to the labor market. Now I think you could make the argument that the upside risk to inflation still is very much uh germanine because the pass through of of tariff of tariffs into prices is probably quite incomplete. Uh and we have a number of other exogenous factors that are going to also put upward pressure on inflation. For example, what's happening with the AI investment boom and the consequences of that for uh electric prices. Now, I I I know we like to historically exclude food and energy from our calculation of inflation, and that's fine when the prices go up and the prices come right back down, but that's not going to happen for electricity. The prices are going to keep going up for the next few years. And so, I think that has to be considered a part of the inflation outlook. I think where I come out is a little differently than Paul. I I think that the inflation risks are just as substantive as the as the downside risk to the labor market. number one. And number two, I don't think policy is as as restrictive as he thinks it is. He thinks that policy is restrictive. So therefore, he wants to make it less restrictive. I think if you look at the economy at large, it doesn't look like monetary policy is holding back the economy uh hardly at all at this point. Uh you know, if you look at the Atlanta Fed GDP now forecast for the third quarter, uh it's tracking 3.8%. If you think about the exogenous AI investment spending boom, that's going to continue to support economic growth as we go through the rest of 2025 into 2026. So that's the first point of sort of mild disagreement. The second point is I just feel like the risk of inflation expectations rising is just as substantive as the labor market continuing to deteriorate. What Paul's worried about in the labor market is that when the labor market deteriorates about beyond a certain point, it tends to be self-reinforcing. And this is really summarized in the somal. Every time the unemployment rates gone up by half a percent, the US has fallen into recession with one important exception 2024. 2024 we had a mild trigger of the su nothing bad happens. But I think that notion that labor market deteriorating beyond a certain point is still valid because what happened in 2024 was the unemployment rate went up not because of labor market weakness because but because of a big surge in labor supply this year if the unemployment rate goes up by a half a percentage point it's going to be because of weakness in labor demand. What concerns me on the on the inflation side is, you know, we we're sort of pushing the envelope here of how long inflation can be be be above the Fed's target and inflation expectations stay will anchor. At some point, people are going to start to believe that the Fed doesn't really care about getting inflation back to 2% that 3% is good enough. And if that happens, then inflation expectations will become a bit less firmly anchored, and that'll be harder to get inflation down uh in the future. So my own personal view is I'd be a little bit more patient. Uh also I think you know there's just a tremendous amount of uncertainty in terms of the economic outlook. We've never had a you know a tariff shock like this. We've never had an AI investment spending boom like this before. We've never had such a dramatic change in labor supply before. So there's a whole bunch of you know wild cards that I think would in my mind make me less confident in my forecast. And if I'm less confident in my forecast, I'm going to be sort of like, you won't want to take the hypocratic oath of do no harm. >> That's fantastically useful to to run through all those. Let's just pick up there's a there's a couple of things from there um about what constitutes restrictive, but also about uh the pass through of the of the tariffs. You know, there is just a lot of uncertainty and so far things have not necessarily played out certainly the way we might have expected from the models. It's a puzzle, frankly, on all sides of the newsroom in Bloomberg as well because we're talking to people in, you know, senior business figures who appear to be kind of nervous of mentioning tariffs in their earnings calls. If it's not being shown in prices, these tariffs, which are definitely being paid at the border, you'd expect it to be shown in earnings, but we're not seeing an obvious effect there. Our own Anna Wong has suggested um that even just the sheer uncertainty attached to the tariffs this time around. The fact that they're jumping around so much has actually stayed manufacturers retailers hand in changing prices because they think oh well he may there may be a tweet next week and he may suspend it for another few months. So just on that what's your sort of solution to the puzzle of how tariffs are or are not actually being shown in the economy in prices particularly? Well, first of all, I think the pass through process just takes a little bit longer than we expect because the goods have to move from abroad to the US. They have to be uh unloaded, shipped to the retailer, and the retailer actually has to sell the goods at the higher price, and that takes a number of months. Number two, to your point, the uncertainty level is really high. And I think when uncertainty is really high uh and there's a cost of raising prices in terms of your customer relations, you want to get more certainty before you decide how big of a price rise that you want to put into place. So it's better to raise the prices once uh rather than raise the prices multiple times. So I I I fully expect that, you know, most of the tariff burden is ultimately going to be passed through, you know, probably on the order of 80%. And I think that's probably going to be worth, you know, one 1% to one and a half% on the level of prices. So I'm pretty confident that inflation's going to be 3% or more, you know, well in well through the first half of 2026. Uh so I think it's I think it's more delayed than not coming. Uh because to your point, if it's not showing up in earnings, uh then we're going to be seeing it at some point. And on the question of whether it's restricted, obviously one of the arguments that's been used by Steven Meyer and others for why it is actually more restrictive than we think the policy currently is that the natural rate has fallen for reasons that he described in his testimony. Um I think that the House view is certainly that that's not the case. But um is that one of the things that you're thinking about in looking at considering whether policy is restrictive enough or >> well as as chair Paulo says we know our star by its works. And what he means by that is we look outside see how the economy is performing. If the economy is stronger than we thought then we tend to revise up our estimate of our star and if the economy is weaker than we thought we tend to revise down our estimate of our star. I'd say right now given all the uncertainty in policy, the tariff shock, you know, it is a it is a tightening of fiscal policy. Given all that, you'd have to say the economy is performing better than expected. In fact, you know, at the last Fed meeting, the Fed revised up their growth forecast for 2026 by a couple ten of a percent. So that to me tells me that our star is probably a little bit higher than than we think. Now, you know, Stephen Moran made a number of arguments about why our star is lower. And I think some of the arguments are actually sensible, but some of them are not. And of course, he conveniently, I think, ignored some of the factors that are also resulting in a higher RSTAR. Uh the investment spending boom, for example, was just totally not even mentioned by Moran in his remarks. And it's hard to believe that the investment spending boom in the short term doesn't increase the demand for capital and result in a higher interest rate consistent with a neutral monetary policy. you know the one the argument where I agree with them is on slower growth of the population, slower growth of the labor force. That one I think is you know a good argument because I think if you have less people you need less capital to equip them to work. So I think that one was something I agree with. But the one some of the other arguments I think are he's sort of cherrypicking the arguments to support his point of view. But the biggest problem is how does he explain if the policy is as restrictive as he says it is then why is the economy performing so well? There is this kind of mystic meg aspect to the ourstar debate. You have this feeling of you never can see it, never can put it down, but we talk about it a lot. We're going to talk about it more later. Finally, just on the short-term situation, given that you have been, unlike most of the people in the room, round the table for these discussions, how will the FOMC be thinking about the shutdown and how important is it the timing if if a government goes back to work, say this week, although it's seeming pretty unlikely? What kind of difference does that make relative to it being what seems likely to be a pretty prolonged shutdown? So historically these government shutdowns have not had a big effect on the e economic trajectory and the reason for that is people ultimately get paid even for their even for the time that they were furled. So they don't actually adjust their spending habits in any significant way. But this shutdown could be a little bit different because there are people that apparently are going to be furled. There are people who are not getting paid. So it might have a more damaging consequence to the economy. Now, I think everybody's of the view that this is not going to last sort of indefinitely. You know, maybe it goes a month, maybe it goes 5 weeks, but I don't think anyone's expecting it to last through the end of the year. And so, at the end of the day, the size of the shock that this is going to generate to the economy is pretty small. And I I would think that it's unlikely that it's going to have a real big consequence for monetary policy. Now, the October meeting, I think the Fed is definitely going to ease at this point. Once you started to ease, you're almost going to certainly go in the same direction unless you get a new set of information that contradicts your motivation for easing in the first place. Since the Fed is getting virtually no information, of course, they're going to keep going in the same direction. >> There's uh yeah, of course, that's that's a good point in terms of the BLS numbers and other things. Okay. So, I mean, one thing that I like about your columns that you do for Bloomberg, Bill, and I'm certainly why they get read is that you have these admirably direct headlines that say basically what you're going to say. And if you'll forgive me, fourth of August column, the Fed is under siege and it'll be just fine. That was one column. >> Yeah, I changed my mind on that one. >> Three weeks later, three week three weeks later, just about the time that Lisa Cook was attempted to be fired, I wasn't very worried about the Fed. Now I am. So if you are, why isn't Wall Street? >> That's a good question. I don't have a good answer for that. I guess Wall Street is just very uncertain how this all is going to play out. Obviously, the Lisa Cook case is going up to the Supreme Court and how they rule is going to be really important. If they rule that President Trump can dismiss Lisa Cook for cause, then in principle, President Trump can dismiss other members of the board of governors for cause. And it's not even clear whether what his authority would be over the Federal Reserve bank prisons. The fear in in markets is that the Trump administration will soon get could soon get control of the board of governors and then those that majority on the board of governors could then start to decide not to reappoint Federal Reserve bank presidents when their five-year t terms become come due in February of next year. And so you can see that how you could bootstrap control of the board of governors to having control of the broad federal open market committee. Even if the Lisa Cook case is decided in favor of the president, I don't think this is pre-ordained, we don't really know what uh you know, Chris Waller and Michelle Bowman would do. I thought it was interesting at the last meeting that they they went along with the majority for a 25 basis point rate cut, not the 50 basis point rate cut that Steven Moran supported. So, you know, just because you're a Trump appointee doesn't mean that you're necessarily willing to do things as radical as not reappointing a Federal Reserve bank res. These five-year reo the five reappoints historically have been absolutely routine. Um, you know, they're they're not they're not ever they've never been consequential in the past. So to not reappoint a Federal Reserve president because you're afraid that they're not a supporter of of much lower interest rates would be without precedent. So I'm looking at, you know, a couple things. Number one, the Lisa Cook case, hugely consequential. Number two, u where are where are Michelle Bowman and Chris Waller in all of this? and how far are they willing to go in terms of transforming the Fed? You know, basically, you know, dismissing Federal Reserve presidents because you don't like how they're uh going to vote on on on monetary policy uh would be the end of Fed independence. And I think, you know, to your point, what it's remarkable that people are so optimistic about this because even if it's a 20% probability, it's a a 20% probability of a very bad event. as you talked at the top of the of of this uh session, you know, if the if the f if Donald Trump were to get his way and get 1% interest rates, we would have a much more significant inflation problem. Inflation expectations would become unanchored. Uh and the yield curve would steepen. Uh the bond market vigilantes would almost certainly return. The dollar would weaken sharply. Um you know, we would have a pretty big mess on on your hands. And if that's, you know, even if that's only a 20% probability, that seems like something that you want to price in. >> We did some scenarios uh thinking about how you might uh euphemistically call a different reaction function of the Fed uh under a under a new chair. Um I mean, one distinguishing feature of all of them, even the more extreme one, is that things look pretty good for a while and then they're really bad. And just looking at Donald Trump's policies sort of through time, he's been quite good at picking policies that were quite good for a while that he wouldn't necessarily pay the consequences of. Isn't that a reason to be a bit nervous? >> Well, this is exactly why we like to see central bank independence because central bank independence is thinking about monetary policy not for the next 18 months but for the next few years. You know, if you have an independent central bank, it can think medium to long term. If you have a central bank that's controlled by the executive branch and is worried about how things are going to look for the next election, yeah, you can basically make monetary policy very stimulative, make the economy look very strong, and the inflation consequence of that usually shows through later. There's been a lot of academic studies that have looked at economic performance based on how independent the central bank is and the jury is in. The more independent the central bank, the better the economic outcomes. And this is the reason why we've been engaged in a movement to more central bank independence over the last 30 years. Um, you know, this is not a new trend. So, if Trump moves this in the opposite direction, this is unwinding a lot of momentum that's been in place for several decades. >> We're going to run out of time, but I got a couple of quick ones. I mean one is just as a matter of fact given all the the conversation around this given the focus on the particular candidates the Fed is traditionally the FMC is a bit different certainly from the bank of England that you tend to have unonymity the chairman tends to command a lot of the room so to speak you don't have the governor or the head of the bank doesn't tend to be voted down in their decisions that as many people have said that depends on the respect that the people around the table have for the chair. Do you think that anybody coming in in these circumstances now is tainted because of the process that's led up to it? >> No, I think it depends on how they perform in the job. So, it's sort of up to them when they come in. Federal Reserve is a consensus driven institution. I mean, the chair can lead, but it only leads so far. So, the last meeting is a good example. There were some people who didn't want to cut rates at the last meeting. So, you look at the outcome of the meeting, all the people except Moran voted for the 25 basis point rate cut. And so that's basically telling you is when the when the committee has confidence in the chairman, if the issues are small, uh the committee is often times willing to defer to the chairman. Uh but if the if the chairman wants to take the interest rates down 200 basis points and the committee thinks that's inappropriate, uh then it's not going to happen. So I think, you know, it's so the chair can lead, but he can only lead so far. >> There's a question that came up in a meeting we had this morning. Do you personally think that JP will stick around as he suggested? >> Uh, I think I think he's keeping his options open. I mean, I think if he thought that his presence was standing between good monetary policy and bad monetary policy, then I think he would stay on board. If he thought that his presence wouldn't make much difference, then I think he'll step down. So, I think he's right now I don't think he knows the answer to that question. So, I don't think he knows what he's going to do at this point. And the final question which just taking us full circle to the discussion we had around where the risks lie in the current decision. All this debate you know another potential consequences I've actually heard investors talk about is that in a year or so's time if you've had a sort of continued boost to the economy from some of these rate cuts and it's actually inflation is starting to come back or come through. It could look like you really need to raise rates again and the the fear would be that a slightly more politically compromised Fed, whoever the chair is, will will not want to do that in the leadup to a midterm election. Do you think that's another reason for holding now? Well, I think you know what you're getting to is that as we start this discussion about, you know, the independence of the Fed, even if the Fed retains its independence, uh there's always the question of whether the Fed is starting to pull its punches because it's worried about the consequence of it if it doesn't do the administration's bidding. I mean, already I' I've been asked a number of times, do you think the Fed cut rates in September because of the political pressure of the Trump administration? I don't think so. I think Paul believes that it's appropriate to worry about the downside risk to the labor market, but the very fact that people are asking me that question shows that there's already been some damage to the Fed's credibility. >> Yeah, that is just the kind of question that anyone on the Fed always hated and certainly you always used to say that. Bill Dudley, thank you so much. >> Thank you. [Music] Thanks for listening to Trumpomics from Bloomberg. And this special episode was hosted by me, Stephanie Flanders, and I was joined by Bill Dudley. Trumponomics was produced by Summer Sadi and Moses Andam with help from Amy Keane. And special thanks to Rachel Lewis Krisky. Sound design is by Blake Maples and Sage Bowman is Bloomberg's head of podcasts. To help others find us, please rate and review us highly wherever you listen.
Ex-New York Fed President Bill Dudley on Trump and Central Bank Independence | Trumponomics
Summary
Transcript
[Music] Bloomberg Audio Studios podcasts radio news. >> This is exactly why we would like to see central bank independence because central bank independence is thinking about monetary policy not for the next 18 months but for the next few years. [Music] I'm Stephanie Fllanders, head of government and economics at Bloomberg, and this is a bonus episode of Trumpanomics, the podcast that looks at the economic world of Donald Trump. While I was in New York this week, I hosted a fireside chat with Bill Dudley about the future of the Federal Reserve and its monetary policy. Bill was once president of the Federal Reserve Bank of New York. Before that, he was a chief economist at Goldman Sachs, among other things. He's now a columnist for Bloomberg Opinion and a senior adviser to Bloomberg Economics. In our conversation, we discuss not only the political threats to Fed independence growing by the day under President Trump's administration, but also the US central bank's monetary policy right now and the implications of tariffs and the AI investment boom. I started the conversation by asking Bill why he thinks it would be a bad idea for the Fed to keep cutting interest rates over the next year or so, which is what the future markets are currently predicting. Well, I think there's a debate going on between uh what's the biggest risk uh inflation staying sticky above the Fed's 2% target for what if we go through next year, the fifth year in a row or the labor market continuing to deteriorate and potentially giving away and having a a recession. and Paul's trying to navigate between those two uh risks. And as he said, it's very difficult to figure out what to do in the current environment. Where he lands is that he thinks that the greater risk or the increasing risk at least is the downside risk to the labor market. And as a consequence of that, he wants to make monetary policy less restrictive to sort of reduce that downside risk to the labor market. Now I think you could make the argument that the upside risk to inflation still is very much uh germanine because the pass through of of tariff of tariffs into prices is probably quite incomplete. Uh and we have a number of other exogenous factors that are going to also put upward pressure on inflation. For example, what's happening with the AI investment boom and the consequences of that for uh electric prices. Now, I I I know we like to historically exclude food and energy from our calculation of inflation, and that's fine when the prices go up and the prices come right back down, but that's not going to happen for electricity. The prices are going to keep going up for the next few years. And so, I think that has to be considered a part of the inflation outlook. I think where I come out is a little differently than Paul. I I think that the inflation risks are just as substantive as the as the downside risk to the labor market. number one. And number two, I don't think policy is as as restrictive as he thinks it is. He thinks that policy is restrictive. So therefore, he wants to make it less restrictive. I think if you look at the economy at large, it doesn't look like monetary policy is holding back the economy uh hardly at all at this point. Uh you know, if you look at the Atlanta Fed GDP now forecast for the third quarter, uh it's tracking 3.8%. If you think about the exogenous AI investment spending boom, that's going to continue to support economic growth as we go through the rest of 2025 into 2026. So that's the first point of sort of mild disagreement. The second point is I just feel like the risk of inflation expectations rising is just as substantive as the labor market continuing to deteriorate. What Paul's worried about in the labor market is that when the labor market deteriorates about beyond a certain point, it tends to be self-reinforcing. And this is really summarized in the somal. Every time the unemployment rates gone up by half a percent, the US has fallen into recession with one important exception 2024. 2024 we had a mild trigger of the su nothing bad happens. But I think that notion that labor market deteriorating beyond a certain point is still valid because what happened in 2024 was the unemployment rate went up not because of labor market weakness because but because of a big surge in labor supply this year if the unemployment rate goes up by a half a percentage point it's going to be because of weakness in labor demand. What concerns me on the on the inflation side is, you know, we we're sort of pushing the envelope here of how long inflation can be be be above the Fed's target and inflation expectations stay will anchor. At some point, people are going to start to believe that the Fed doesn't really care about getting inflation back to 2% that 3% is good enough. And if that happens, then inflation expectations will become a bit less firmly anchored, and that'll be harder to get inflation down uh in the future. So my own personal view is I'd be a little bit more patient. Uh also I think you know there's just a tremendous amount of uncertainty in terms of the economic outlook. We've never had a you know a tariff shock like this. We've never had an AI investment spending boom like this before. We've never had such a dramatic change in labor supply before. So there's a whole bunch of you know wild cards that I think would in my mind make me less confident in my forecast. And if I'm less confident in my forecast, I'm going to be sort of like, you won't want to take the hypocratic oath of do no harm. >> That's fantastically useful to to run through all those. Let's just pick up there's a there's a couple of things from there um about what constitutes restrictive, but also about uh the pass through of the of the tariffs. You know, there is just a lot of uncertainty and so far things have not necessarily played out certainly the way we might have expected from the models. It's a puzzle, frankly, on all sides of the newsroom in Bloomberg as well because we're talking to people in, you know, senior business figures who appear to be kind of nervous of mentioning tariffs in their earnings calls. If it's not being shown in prices, these tariffs, which are definitely being paid at the border, you'd expect it to be shown in earnings, but we're not seeing an obvious effect there. Our own Anna Wong has suggested um that even just the sheer uncertainty attached to the tariffs this time around. The fact that they're jumping around so much has actually stayed manufacturers retailers hand in changing prices because they think oh well he may there may be a tweet next week and he may suspend it for another few months. So just on that what's your sort of solution to the puzzle of how tariffs are or are not actually being shown in the economy in prices particularly? Well, first of all, I think the pass through process just takes a little bit longer than we expect because the goods have to move from abroad to the US. They have to be uh unloaded, shipped to the retailer, and the retailer actually has to sell the goods at the higher price, and that takes a number of months. Number two, to your point, the uncertainty level is really high. And I think when uncertainty is really high uh and there's a cost of raising prices in terms of your customer relations, you want to get more certainty before you decide how big of a price rise that you want to put into place. So it's better to raise the prices once uh rather than raise the prices multiple times. So I I I fully expect that, you know, most of the tariff burden is ultimately going to be passed through, you know, probably on the order of 80%. And I think that's probably going to be worth, you know, one 1% to one and a half% on the level of prices. So I'm pretty confident that inflation's going to be 3% or more, you know, well in well through the first half of 2026. Uh so I think it's I think it's more delayed than not coming. Uh because to your point, if it's not showing up in earnings, uh then we're going to be seeing it at some point. And on the question of whether it's restricted, obviously one of the arguments that's been used by Steven Meyer and others for why it is actually more restrictive than we think the policy currently is that the natural rate has fallen for reasons that he described in his testimony. Um I think that the House view is certainly that that's not the case. But um is that one of the things that you're thinking about in looking at considering whether policy is restrictive enough or >> well as as chair Paulo says we know our star by its works. And what he means by that is we look outside see how the economy is performing. If the economy is stronger than we thought then we tend to revise up our estimate of our star and if the economy is weaker than we thought we tend to revise down our estimate of our star. I'd say right now given all the uncertainty in policy, the tariff shock, you know, it is a it is a tightening of fiscal policy. Given all that, you'd have to say the economy is performing better than expected. In fact, you know, at the last Fed meeting, the Fed revised up their growth forecast for 2026 by a couple ten of a percent. So that to me tells me that our star is probably a little bit higher than than we think. Now, you know, Stephen Moran made a number of arguments about why our star is lower. And I think some of the arguments are actually sensible, but some of them are not. And of course, he conveniently, I think, ignored some of the factors that are also resulting in a higher RSTAR. Uh the investment spending boom, for example, was just totally not even mentioned by Moran in his remarks. And it's hard to believe that the investment spending boom in the short term doesn't increase the demand for capital and result in a higher interest rate consistent with a neutral monetary policy. you know the one the argument where I agree with them is on slower growth of the population, slower growth of the labor force. That one I think is you know a good argument because I think if you have less people you need less capital to equip them to work. So I think that one was something I agree with. But the one some of the other arguments I think are he's sort of cherrypicking the arguments to support his point of view. But the biggest problem is how does he explain if the policy is as restrictive as he says it is then why is the economy performing so well? There is this kind of mystic meg aspect to the ourstar debate. You have this feeling of you never can see it, never can put it down, but we talk about it a lot. We're going to talk about it more later. Finally, just on the short-term situation, given that you have been, unlike most of the people in the room, round the table for these discussions, how will the FOMC be thinking about the shutdown and how important is it the timing if if a government goes back to work, say this week, although it's seeming pretty unlikely? What kind of difference does that make relative to it being what seems likely to be a pretty prolonged shutdown? So historically these government shutdowns have not had a big effect on the e economic trajectory and the reason for that is people ultimately get paid even for their even for the time that they were furled. So they don't actually adjust their spending habits in any significant way. But this shutdown could be a little bit different because there are people that apparently are going to be furled. There are people who are not getting paid. So it might have a more damaging consequence to the economy. Now, I think everybody's of the view that this is not going to last sort of indefinitely. You know, maybe it goes a month, maybe it goes 5 weeks, but I don't think anyone's expecting it to last through the end of the year. And so, at the end of the day, the size of the shock that this is going to generate to the economy is pretty small. And I I would think that it's unlikely that it's going to have a real big consequence for monetary policy. Now, the October meeting, I think the Fed is definitely going to ease at this point. Once you started to ease, you're almost going to certainly go in the same direction unless you get a new set of information that contradicts your motivation for easing in the first place. Since the Fed is getting virtually no information, of course, they're going to keep going in the same direction. >> There's uh yeah, of course, that's that's a good point in terms of the BLS numbers and other things. Okay. So, I mean, one thing that I like about your columns that you do for Bloomberg, Bill, and I'm certainly why they get read is that you have these admirably direct headlines that say basically what you're going to say. And if you'll forgive me, fourth of August column, the Fed is under siege and it'll be just fine. That was one column. >> Yeah, I changed my mind on that one. >> Three weeks later, three week three weeks later, just about the time that Lisa Cook was attempted to be fired, I wasn't very worried about the Fed. Now I am. So if you are, why isn't Wall Street? >> That's a good question. I don't have a good answer for that. I guess Wall Street is just very uncertain how this all is going to play out. Obviously, the Lisa Cook case is going up to the Supreme Court and how they rule is going to be really important. If they rule that President Trump can dismiss Lisa Cook for cause, then in principle, President Trump can dismiss other members of the board of governors for cause. And it's not even clear whether what his authority would be over the Federal Reserve bank prisons. The fear in in markets is that the Trump administration will soon get could soon get control of the board of governors and then those that majority on the board of governors could then start to decide not to reappoint Federal Reserve bank presidents when their five-year t terms become come due in February of next year. And so you can see that how you could bootstrap control of the board of governors to having control of the broad federal open market committee. Even if the Lisa Cook case is decided in favor of the president, I don't think this is pre-ordained, we don't really know what uh you know, Chris Waller and Michelle Bowman would do. I thought it was interesting at the last meeting that they they went along with the majority for a 25 basis point rate cut, not the 50 basis point rate cut that Steven Moran supported. So, you know, just because you're a Trump appointee doesn't mean that you're necessarily willing to do things as radical as not reappointing a Federal Reserve bank res. These five-year reo the five reappoints historically have been absolutely routine. Um, you know, they're they're not they're not ever they've never been consequential in the past. So to not reappoint a Federal Reserve president because you're afraid that they're not a supporter of of much lower interest rates would be without precedent. So I'm looking at, you know, a couple things. Number one, the Lisa Cook case, hugely consequential. Number two, u where are where are Michelle Bowman and Chris Waller in all of this? and how far are they willing to go in terms of transforming the Fed? You know, basically, you know, dismissing Federal Reserve presidents because you don't like how they're uh going to vote on on on monetary policy uh would be the end of Fed independence. And I think, you know, to your point, what it's remarkable that people are so optimistic about this because even if it's a 20% probability, it's a a 20% probability of a very bad event. as you talked at the top of the of of this uh session, you know, if the if the f if Donald Trump were to get his way and get 1% interest rates, we would have a much more significant inflation problem. Inflation expectations would become unanchored. Uh and the yield curve would steepen. Uh the bond market vigilantes would almost certainly return. The dollar would weaken sharply. Um you know, we would have a pretty big mess on on your hands. And if that's, you know, even if that's only a 20% probability, that seems like something that you want to price in. >> We did some scenarios uh thinking about how you might uh euphemistically call a different reaction function of the Fed uh under a under a new chair. Um I mean, one distinguishing feature of all of them, even the more extreme one, is that things look pretty good for a while and then they're really bad. And just looking at Donald Trump's policies sort of through time, he's been quite good at picking policies that were quite good for a while that he wouldn't necessarily pay the consequences of. Isn't that a reason to be a bit nervous? >> Well, this is exactly why we like to see central bank independence because central bank independence is thinking about monetary policy not for the next 18 months but for the next few years. You know, if you have an independent central bank, it can think medium to long term. If you have a central bank that's controlled by the executive branch and is worried about how things are going to look for the next election, yeah, you can basically make monetary policy very stimulative, make the economy look very strong, and the inflation consequence of that usually shows through later. There's been a lot of academic studies that have looked at economic performance based on how independent the central bank is and the jury is in. The more independent the central bank, the better the economic outcomes. And this is the reason why we've been engaged in a movement to more central bank independence over the last 30 years. Um, you know, this is not a new trend. So, if Trump moves this in the opposite direction, this is unwinding a lot of momentum that's been in place for several decades. >> We're going to run out of time, but I got a couple of quick ones. I mean one is just as a matter of fact given all the the conversation around this given the focus on the particular candidates the Fed is traditionally the FMC is a bit different certainly from the bank of England that you tend to have unonymity the chairman tends to command a lot of the room so to speak you don't have the governor or the head of the bank doesn't tend to be voted down in their decisions that as many people have said that depends on the respect that the people around the table have for the chair. Do you think that anybody coming in in these circumstances now is tainted because of the process that's led up to it? >> No, I think it depends on how they perform in the job. So, it's sort of up to them when they come in. Federal Reserve is a consensus driven institution. I mean, the chair can lead, but it only leads so far. So, the last meeting is a good example. There were some people who didn't want to cut rates at the last meeting. So, you look at the outcome of the meeting, all the people except Moran voted for the 25 basis point rate cut. And so that's basically telling you is when the when the committee has confidence in the chairman, if the issues are small, uh the committee is often times willing to defer to the chairman. Uh but if the if the chairman wants to take the interest rates down 200 basis points and the committee thinks that's inappropriate, uh then it's not going to happen. So I think, you know, it's so the chair can lead, but he can only lead so far. >> There's a question that came up in a meeting we had this morning. Do you personally think that JP will stick around as he suggested? >> Uh, I think I think he's keeping his options open. I mean, I think if he thought that his presence was standing between good monetary policy and bad monetary policy, then I think he would stay on board. If he thought that his presence wouldn't make much difference, then I think he'll step down. So, I think he's right now I don't think he knows the answer to that question. So, I don't think he knows what he's going to do at this point. And the final question which just taking us full circle to the discussion we had around where the risks lie in the current decision. All this debate you know another potential consequences I've actually heard investors talk about is that in a year or so's time if you've had a sort of continued boost to the economy from some of these rate cuts and it's actually inflation is starting to come back or come through. It could look like you really need to raise rates again and the the fear would be that a slightly more politically compromised Fed, whoever the chair is, will will not want to do that in the leadup to a midterm election. Do you think that's another reason for holding now? Well, I think you know what you're getting to is that as we start this discussion about, you know, the independence of the Fed, even if the Fed retains its independence, uh there's always the question of whether the Fed is starting to pull its punches because it's worried about the consequence of it if it doesn't do the administration's bidding. I mean, already I' I've been asked a number of times, do you think the Fed cut rates in September because of the political pressure of the Trump administration? I don't think so. I think Paul believes that it's appropriate to worry about the downside risk to the labor market, but the very fact that people are asking me that question shows that there's already been some damage to the Fed's credibility. >> Yeah, that is just the kind of question that anyone on the Fed always hated and certainly you always used to say that. Bill Dudley, thank you so much. >> Thank you. [Music] Thanks for listening to Trumpomics from Bloomberg. And this special episode was hosted by me, Stephanie Flanders, and I was joined by Bill Dudley. Trumponomics was produced by Summer Sadi and Moses Andam with help from Amy Keane. And special thanks to Rachel Lewis Krisky. Sound design is by Blake Maples and Sage Bowman is Bloomberg's head of podcasts. To help others find us, please rate and review us highly wherever you listen.