#81 Former CEO of New York Federal Reserve Bank Bill Dudley on Inflation & Fiscal Recovery in the US

What this episode is about

Bill Dudley, former CEO of the New York Federal Reserve Bank, discusses the current state of the U.S. economy, emphasizing the need for the Federal Reserve to adopt a more hawkish stance to combat inflation and avoid unrealistic forecasts. He highlights the impact of pandemic recovery measures, including fiscal stimulus and vaccination rates, on the economy's resilience, while addressing concerns about the short-term effects of the Omicron variant.

Key takeaways

• Inflation's not a fairy tale; it's a monster in the closet, fueled by pandemic spending and unmet demand.
• The $5 trillion stimulus isn't just big; it's historic, rivaling wartime expenditures but with less precision.
• Vaccination is our economic lifebuoy. It'll turn COVID from a shipwreck into a stormy but navigable sea.
• Monetary policy may be like a sugar rush; exciting but unsustainable, especially with inflation now at 7%.
• Transitioning from 'pandemic' to 'endemic' may tame COVID, but don’t underestimate its potential to disrupt economies.

Who speaks in this episode?

• Lynn Tomen (Host) · 6 min speaking
• Bill Dudley (Guest) · 15 min speaking

What is discussed, and when

1. 0:00 – 5:00: Bill Dudley, Federal Reserve, Lynn Tomen, Goldman Sachs
2. 5:00 – 10:00: Federal Reserve
3. 10:00 – 15:00: Federal Reserve
4. 15:00 – 20:00: Federal Reserve

Notable quotes from "#81 Former CEO of New York Federal Reserve Bank Bill Dudley on Inflation & Fiscal Recovery in the US"

• President and CEO of the New York Federal Reserve Bank he has said that the Federal Reserve needs to get a lot more hawkish and that it can't remain in what he calls the…

  about Federal Reserve · at 0:31

• Made it as expansionary as they could and you can see that in terms of financial conditions so my old firm Goldman Sachs has a financial conditions index and up until about a…

  about Goldman Sachs · at 4:19

Who and what is mentioned in this episode?

People

• Bill Dudley — Person · Main guest · 2 mentions · first at 0:29
  Primary interview subject discussing U.S. monetary/fiscal policy, inflation risks, Fed credibility, and financial stability (incl. digital assets).
  Tomen hi everyone it's Lyn toen welcome to another episode today I'm excited to be with Bill Dudley former president and CEO of the New York Federal Reserve Bank he has said…
• Lynn Tomen — Person · Host · 1 mention · first at 0:21
  Introduces the show and conducts the interview, guiding the discussion through fiscal stimulus, Fed policy, inflation, and reserve-currency issues.
  Member of schools at Harvard Princeton and Columbia Lynn tomen hi everyone it's Lyn toen welcome to another episode today I'm excited to be with Bill Dudley former president and CEO of the New York Federal Reserve Bank he has said that.

Companies & orgs

• Federal Reserve — Company · Business focus · 8 mentions · first at 0:33
  Central to the discussion on monetary policy, inflation, and economic recovery strategies.
• Goldman Sachs — Company · Referenced expert · 1 mention · first at 4:26
  Mentioned in the context of financial conditions index and economic analysis.

Full transcript with timestamps

0:00 welcome to the three takeaways podcast which features short memorable conversations with the world's best thinkers Business Leaders writers politicians scientists and other newsmakers each episode ends with the three key takeaways that person has learned over their lives and their careers and now your host and board member of schools at Harvard Princeton and Columbia Lynn tomen hi everyone it's Lyn toen welcome to another episode today I'm excited to be with with Bill Dudley former president and CEO of the New York Federal Reserve Bank he has said that the Federal Reserve needs to get a lot more hawkish and that it can't remain in what he calls the Allison Wonderland Fantasy Land of its doish forecasts I'm looking forward to finding out what he means by Allison Wonderland fantasy land and what happens if that does not change welcome Bill and thanks so much for our conversation today thanks ly Bill how do

1:00 you see the US economy now well it's doing pretty well all things considered obviously the pandemic threw it for a loop back in 2020 but it's a combination of very stimulative monetary policy lots of fiscal stimulus and of course the vaccines led to a very strong recovery we've had a little setback right now due to Omicron that's obviously gonna have some effects on GDP in the first quarter but the general view is that AMR is probably not going to have a lasting effect for several reasons number one a lot more people are vaccinated so they're better protected number two omnicron is less virulent so if you are vaccinated you're probably not gonna get as sick and even if you aren't vaccinated you probably won't get as sick and so I think this is going to be something that's going to be receding pretty quickly and we also see that in the case numbers the places where omnicron took off very early like New

1:52 York City are already turning down very sharply so it feels to me like this is going to be mostly passed in a couple months that said I don't think covid-19 is going away I think we're making the transition from pandemic to endemic is people have some protection now against the virus but the virus will obviously keep mutating spreading across the population so I think it's going to be more something that is part of our environment for many years to come but it be more like I think it's going to become more like influenza which obviously causes a lot of people to die every year so you don't want to be dismissive of it but not something that leads to widespread shutdowns of economic activity can you put some numbers in perspective the Trump Administration spent over $3 trillion and President Biden has spent about $2 trillion so far for a total of $5 trillion of spending can you put some perspective on $5 trillion of spending

2:50 and what do you think of all of this spending well it's a lot it's more than 20% of GDP it's probably the biggest fiscal stimulus that you've ever had outside of World War II where the stimulus was not intentional was due to build up the productive capacity of the United States economy to fight the war that was quite different so basically the biggest ever and the thing about it was it was handed out fairly indiscriminately people got checks regardless of whether they really needed the checks or not and so one consequence of this fiscal stimulus is that household balance sheets are in unusually good shape coming out of recession so this is very different than following the great financial crisis where balance sheets were in bad shape people had sorts of damaged credit histories this time we're coming out in really good shape people took the money that they got from the government and about a third of it was spent about a

3:38 third of it was saved and about a third of it was used to pay down debt and so you're in a situation now where people have very good finances so if Co starts to moderate a bit I think there's still quite a bit of support for further gains and spending big wild card though is that fiscal policy which was very stimulative is now going to turn quite restrictive and so there's a question mark about how much that the end of the fiscal stimulus is going to impact economic activities that's a big wild card for 2022 and how about monetary policy which is to say the amount of money that the Federal Reserve has provided to the markets and the interest rates how expansionary has monetary policy been well the FED has basically made it as expansionary as they could and you can see that in terms of financial conditions so my old firm Goldman Sachs has a financial conditions index and up until about a month ago ago

4:30 it was as accommodative as it had ever been now the FED cut interest rates to zero and then they went out and bought trillions and trillions of dollars of Treasury Securities and agency mortgage back Securities and they did this even after the economy began its recovery even today as we speak the FED is still buying assets they're still adding accommodation which is quite remarkable given the fact that the headlin Consumer Price Index is up 7% year-over-year and the unemployment rate is down to 3. 9% it's strange I mean if you look at the trajectory of the economy the Federal Reserve is still adding stimulus at this point fed chairman Jay Powell who we both know said with seeming certainty that inflation wouldn't be a problem that it would only be transitory he's been wrong so far which he has admitted but he still seems very certain that going forward inflation is not going to be a problem how do you see his

5:27 certainty in his own forecast Ing and his forecast of very low inflation I agree with the notion that a lot of the inflation that we're seeing right now has been generated by transitory factors the two transitory factors were the shift in demand away from Services towards Goods during the pandemic and the second Factor was just the supply disruptions caused by Co itself so those two things have caused a lot of upward pressure on prices and those should mitigate once the the co starts to subside that said price pressures have been high enough for long enough now that the transitory component may actually have some persistence to it because you see that the labor market is very very tight right now the ratio of unfilled jobs to the number of people are unemployed it's an all-time record there's never been so many jobs available relative to the number of people that are unemployed right now and we're starting to see an

6:23 acceleration and wages so even if J Paul is right that most of the initial impulse inflation was things that are going to turn out to be transitory in the medium run you still could ultimately have a bit of an inflation problem and I think the Federal Reserve has been late to be very blunt about it they basically said that under their new monetary policy framework where they're targeting 2% inflation on average that they wouldn't begin to lift off until three things had to happen inflation had to be 2% they had to be confident that inflation was above 2% sometime in the future and they had to be at full employment so what they essentially committed themselves to doing was not even beginning to tighten policy until we were at full employment and that's where we are today that's why the FED is late so what has been the effect of the fed's essentially zero interest rates well it has had a positive effect on the

7:15 economy I mean you look at the interest rate sensitive sectors of the economy they've actually responded quite well car sales are only restrained by the lack of Supply housing has been extremely strong and housing has been constrained by the lack of Supply too the demand for houses is far greater than the supply of houses that's why home prices are going up so rapidly and stock prices have been very high and Bs have been very low all engineered by the Fed so I think the FED has helped support the economy through the pandemic I think the problem is that they didn't step off the gas and hit the bricks a little bit earlier and what happens if they don't now well I think they're going to I think they're finally going to J Paul and his last press conference made it pretty clear that we're going to start tightening at the March Federal Open Market Committee meeting and the FED has said things that suggest that

8:05 they're going to do a substantial amount of tiing now in in 2022 much more than what they wrote down in their projections back in December so there's been a big shift just in the last month or two one of the FED policies has been essentially zero interest rates do you think that those zero interest rates have had an impact on inequality well this is one of the unfortunate consequences of the fed's monetary policy it follows a very aggressive stimulative monetary policy it lists financial asset prices and the beneficiaries of that increase in financial asset prices are wealthy people not poor people so the consequences of the fed's policies at least initially benefit wealthy people a lot more than poor people now that's done with the idea of stimulating the economy so the end goal is to try to get more people employed and the FED has been pretty successful in that in the sense that we've seen a big Dro in the

8:59 unemployment rate over the last 6 months last summer the unemployment rate was 5.9% now we're at 3.9% so the labor market has improved pretty sharply if interest rates went up to 5% or even 10% how much would the annual cost of servicing the US debt increase can you put that in some perspective and can the US afford it I don't think interest rates are going to have to go that high but you're absolutely correct that we've had this very benign period because even though the debt levels have gone up pretty dramatically over the last 11 12 years debt service costs have only gone up trivially so we've tripled the amount of outstanding debt but debt service costs have only gone up on the order of 15 20 25% that's because interest rates have collapsed once the FED starts to tighten interest rates are going to start to rise and the debt service costs of the US government are going to go up pretty dramatically I think this is

9:53 going to really show up just in terms of chronic budget deficits and there may be some pressure from Congress and the administration on the FED don't raise interest rates so much that's increasing our debt service costs but I don't think the FED really has that option the fed's Mandate from Congress is pretty clear try to keep inflation around 2% and try to get the unemployment level as high as possible consistent with that inflation Target there's nothing about worrying about debt service costs or worrying about budget deficits so I think the FED will at the end of the day do their job now you know how high does the FED have to go in terms of raising short-term interest rates the markets there are really optimistic about this they think that the peak in the federal fund rate this cycle is only going to be about 2% which is really remarkable because if you go back through history all the way

10:37 back to the mid1 1950s the peak in every other cycle has been above that so it's be a little strange at a time where inflation is high and the economy looks like it's going to do quite well that the Federal Reserve could just tap on the brakes a few times and then everything would be fine so I think the peak in short ter interest rate is going to be considerably higher before I ask you more about that can we go back to what if interest rates go up to 5% or even 10% what would be the impact on the US government deficit how much more money would it cost the US government to pay the interest on its debt oh it would go multiple times I don't remember exactly what the current debt service costs of the US are as a percentage of GDP but let's just for the sake argument say it was 2% of GDP today if we push interest rates up to that level we take a little bit of time because the debt has to mature and be refinanced but I

11:31 would think you'd be seeing debt service costs you know in the 5 six 7% of GDP range so I would think that debt service costs would trip all pretty quickly so it definitely a significant problem yeah Bill we both knew former Federal Reserve chair Paul voker who was wonderful it was quite extraordinary that he had the courage and the fortitude to quell 9% inflation by raising the federal funds rate the overnight money rate to over 20% and 19 80 and then he held it high for several years his high interest rates in tight monetary policy was successful inflation fell from 9% to less than 4% but the cost was a recession and a rise in unemployment to a peak of about 10% before it steadily declined Paul was appointed Federal Reserve Chair by President Jimmy Carter a Democrat and reappointed by President Ronald Reagan a republican if inflation remains a problem do you think that the chair of the Federal Reserve will be

12:34 willing to raise interest rates that high and do you think the president will let him as presidents Carter and President Reagan let Paul voker well I think we're a long way from the kind of inflation problem that Paul voker had to address for the simple reason that wage Trends are much more subdued and most importantly inflation expectations are still relatively well anchored when vulker took over people had lost confidence in the FED lost confidence that we'd ever get inflation down again and so he was forced to engage in sort of a shock and awe policy of essentially saying hey there's a new sheriff in town we're going to do things differently now and he had to do that to bring inflation expectations back down when inflation expectations become unanchored that feeds into wages directly and then it becomes very very hard to get inflation back down I think in the current environment inflation's lower wages are

13:25 lower inflation expectations are well anchored so I don't think we're going to have to see the FED act as dramatically as it did then the inflation that Paul vuler had to wrestle with was created over many many years it really started back in the 1960s with the Vietnam War and the Great Society programs then we had wage price controls and then we had oil price shock one in 1973 74 than oil price shock two so it took about almost 15 years to get from 2% inflation to 10% inflation so I think it's conceivable that we're on that Journey today but I don't think so and if we are on that Journey we've just started we're just in the first couple hundred yards of a mile race I hope you're right Bill what are the three things that you worry about the most three things I worry about the most well obviously I worry about Co sending us another wild card in terms of a variant that's more varent and more

14:16 contagious rather than more contagious but less virulent like omnicron I mean I mean omnicron could turn out to be a blessing in disguise if it allows people to develop immunity without a huge amount of of sickness resulting from that but you know it doesn't have to be that way you can have something much more horrible come out of the virus I certainly worry about that now the second thing I obviously worry about is what's going on internationally right now I mean Russia invades Ukraine Russian relations deteriorate you always worry when two countries get manage other that both have nuclear weapons at their disposal you never know where that's going going to necessarily lead so I certainly worry about that certainly worry about climate change because we're already not going to do well and if we don't get started we're going to do even worse I feel somewhat lucky that I don't have children because

15:04 I think they're going to have to cope with a much much worse environment even if we get going a lot faster than we have to date so there are plenty of things to be still concerned about even as we look like we're going to have a sustained economic recovery do you worry about the US dollar losing its status as the world's Reserve currency and what happens if it does I'm not worried about that in the very short term because I think that there's no really great Alternatives but obviously if we run our Economic Policy badly so that the US dollar is not a stable store of value then people will look around for Alternatives and there's already a bunch of people that would like to have Alternatives in the cryptocurrency space I personally don't think that the cryptocurrencies that are outstanding are very good as an alternative to the US dollar because they're not stable stores of value I mean look at Bitcoin

15:53 we've seen how volatile it is is that something that you want to pick all the prices of goods and services to I don't think so but if the US follows a bad set of economic policies over a sustained period of time then I think the dollar as a reserve currency will come under question but there's a lot of inertia to this there's a tremendous amount of inertia to the reserve currency we saw the UK hold on to the pound sterling as a reserve currency long past the time where the US had already been emerged as the dominant economy and so I think you know that's same thing is likely this time you China would like to be competitive to the US but the problem you have there is the Chinese also are a little bit reluctant to have fully open Capital markets complete controvert ability of the currency and there's also the question of the rule of law a currency becomes a reserve currency because people feel that they know how

16:43 they're going to be treated in that particular situation so stability well- defined rule of law is also very very important in terms of supporting a currency World Reserve currency status what happens if the US status as the world's Reserve Curr currency slowly diminishes over time well if it's slow it might be like the frog in the pan of warming water that you don't really feel it you know I think it basically means that the US just will will lose its exorbitant privilege of being the reserve currency and the reserve currency basically means that there's lots of demand for your currency abroad and you don't have to pay any interest on it most of the US currency outstanding doesn't circulate in the United States it circulates abroad so that's essentially 0% loans that we're getting from the rest of the world because people P dollars as a store of value and as a medium of payment so you would lose that but I think reality is I

17:35 mean life would go on UK lost the Sterling as a reserve currency status and UK is still viable healthy economy I mean obviously they have some issues now with making the transition through brexit but clearly you can be still a healthy economy even if you aren't the reserve currency I would think that the situation would evolve from us being Reserve currency to not it' probably be evolved to the us being Reserve currency to a lesser degree some competitive currencies emerging different regions of the world might transact more in dollars other regions of the world might transact more in rem andb I think it'd be more involved in that way it's probably over a 20 30 year timeline and that's something you know much faster than that before I ask for the three takeaways you'd like to leave the audience with today is there anything else you'd like to mention that you haven't already touched upon or what

18:27 should I have asked you that I didn't well the one thing that I I would mention is that we need to do a lot better in terms of getting our arms around what's going on in the digital currency space because right now it's largely unrelevant unregulated it's growing really really fast we have hundreds of billions of dollars of stable coins outstanding supposedly backed by Dollar assets but there's no oversight regime there's no requirements there's no regular audit function that ensures that those stable coins are well backed I think if we don't get our arms around this quickly there's going to be an accident and then people are going to be asking well why didn't you do something about this could you see that this was going to be a significant problem so I think we need to figure out a way to regulate it but we need to regulate in a way that we don't kill off all the Innovation all the technology I

19:12 mean the part about the digital currency space that I find very interesting is all the technology part of it the distributed Ledger blockchain smart contracts we got to figure out a way to regulate this but not kill it and that's going to be very very challenging so that's something that I'm very focused on and what are the three takeaways you'd like to leave the audience with number one I think that at the end of the day people still think the Federal Reserve is going to do its job the job might be messy but people still feel the Federal Reserve is going to do their job if you look at the spread between treasury Securities and treasury inflation protected securities five years out people still think that inflation is going to be five years from now around 2% so that's good news that the Federal Reserve even though they've gotten off to maybe a bad start in this cycle that they're on the right track the second

20:01 thing I would say the key takeway is don't be dogmatic about what's going to happen in terms of the financial environment because we don't have any experience emerging from a pandemic at least none since 1918 and I wouldn't argue that's probably not so derain to the current situation so there's probably gonna be a lot of twists and turns in the road and anybody who says that they know it's going to happen I think you want to dismiss them almost immediately and the third takeaway is I'm really concerned about us democracy I am really concerned about the fact that there seems to be a contingent in the United States that doesn't have respect for our democracy for the rule of law and that is a very very dangerous thing Bill thank you for our conversation today this has been terrific thank you if you enjoyed today's episode and would like to receive the show notes or get new Fresh weekly episodes be sure to sign up for

20:57 our newsletter at 3 thre takeaway.com or follow us on Instagram Twitter and Facebook note that 3 takeaway.com is with the number three three is not spelled out see you soon at 3 takeaways tocom

Questions about this episode

Who speaks in "#81 Former CEO of New York Federal Reserve Bank Bill Dudley on Inflation & Fiscal Recovery in the US"?

Lynn Tomen (Host), Bill Dudley (Guest).

What is "#81 Former CEO of New York Federal Reserve Bank Bill Dudley on Inflation & Fiscal Recovery in the US" about?

Bill Dudley, former CEO of the New York Federal Reserve Bank, discusses the current state of the U.S. economy, emphasizing the need for the Federal Reserve to adopt a more hawkish stance to combat inflation and avoid unrealistic forecasts. He highlights the impact of pandemic recovery measures, including fiscal stimulus and vaccination rates, on the economy's resilience, while addressing…

What is mentioned in this 3 Takeaways episode?

4 people, works and ideas are mentioned, including Federal Reserve, Bill Dudley, Lynn Tomen, Goldman Sachs. Each one on this page links to its own page with every episode that mentions it.

How long is "#81 Former CEO of New York Federal Reserve Bank Bill Dudley on Inflation & Fiscal Recovery in the US"?

The episode runs 21 min; the transcript is about 4,089 words in 25 timestamped sections.

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