Former FED Vice chair and now pimco's Global economic advisor, Rich Clara joining us right now to give us his thoughts on I guess I don't know if it's a conundrum, Rich, maybe that's not the best way to put it, but this is a fad that has made clear that that last mile down to two percent, to a two percent inflation target was going to be a little bit bumping. I think we saw that certainly in the inflation reports last week, and we certainly saw that to a certain extent in the minutes and the discussions that were had behind closed doors at the end of January.

Former FED Vice chair and now pimco's Global economic advisor, Rich Clara joining us right now to give us his thoughts on I guess I don't know if it's a conundrum, Rich, maybe that's not the best way to put it, but this is a fad that has made clear that that last mile down to two percent, to a two percent inflation target was going to be a little bit bumping. I think we saw that certainly in the inflation reports last week, and we certainly saw that to a certain extent in the minutes and the discussions that were had behind closed doors at the end of January.

I think that's right.

I think that's right.

I think, in particular, the phrase that jumped out at me Romaine.

I think, in particular, the phrase that jumped out at me Romaine.

Was the most they said.

Was the most they said.

Most of the members noted the risk of moving too quickly to cut rates. There was also a reference to some of the progress on disinflation may have been due to idiosyncratic factors, so that skewed a little bit in a bit of a hawk ish a direction.

Most of the members noted the risk of moving too quickly to cut rates. There was also a reference to some of the progress on disinflation may have been due to idiosyncratic factors, so that skewed a little bit in a bit of a hawk ish a direction.

Of course, since.

Of course, since.

That meeting, you know, we and the FED have gotten the CPI inflation data which came in very hot, and a gangbuster's employment report. So, as is often is the case, these are a little bit stale. But my bottom line is maybe a bit more, a bit a touch more hawkish than perhaps we got out.

That meeting, you know, we and the FED have gotten the CPI inflation data which came in very hot, and a gangbuster's employment report. So, as is often is the case, these are a little bit stale. But my bottom line is maybe a bit more, a bit a touch more hawkish than perhaps we got out.

Of the chair's press conference in January.

Of the chair's press conference in January.

Are you convinced that where rates right now, where rates are right now, meaning the FED funds rate, that that is indeed the peak?

Are you convinced that where rates right now, where rates are right now, meaning the FED funds rate, that that is indeed the peak?

Well, you start with what they think, and they think it's the peak, and the minutes confirmed that, and share Pal more or less said that as his press conference. So I think that has to be the baseline. You know, in life and in FED policy, there are risks on both sides, and so you wouldn't want to attach a zero probability to the fact that they may need to hike if inflation moves up, which they don't expect and we don't expect. But yeah, they think they're done then and they probably are done.

Well, you start with what they think, and they think it's the peak, and the minutes confirmed that, and share Pal more or less said that as his press conference. So I think that has to be the baseline. You know, in life and in FED policy, there are risks on both sides, and so you wouldn't want to attach a zero probability to the fact that they may need to hike if inflation moves up, which they don't expect and we don't expect. But yeah, they think they're done then and they probably are done.

Which talk to us a little bit about the role of the jobs market is playing in the FED decision process. So when they're thinking about growth and they're thinking about jobs and sort of stickiness of the jobs market, is that the key factor here? Well, we're all focus on the inflation numbers and getting back to two percent, isn't it really about are we seeing enough jobs weakness to really justify a cut.

Which talk to us a little bit about the role of the jobs market is playing in the FED decision process. So when they're thinking about growth and they're thinking about jobs and sort of stickiness of the jobs market, is that the key factor here? Well, we're all focus on the inflation numbers and getting back to two percent, isn't it really about are we seeing enough jobs weakness to really justify a cut.

You know, I think the FEDS thinking has evolved.

You know, I think the FEDS thinking has evolved.

The traditional macro model would say, if you want to slow inflation, you got to see at least summarizing the unemployment rate. We have had a slow down of wage inflation. Indeed, the employment cost index, which I think is the one they follow the most closely, has pass shifted down into the high threes. And so I think this is a FED in particular, a lot of new folks around the table relative to when I was on the committee.

The traditional macro model would say, if you want to slow inflation, you got to see at least summarizing the unemployment rate. We have had a slow down of wage inflation. Indeed, the employment cost index, which I think is the one they follow the most closely, has pass shifted down into the high threes. And so I think this is a FED in particular, a lot of new folks around the table relative to when I was on the committee.

This is a fad that is.

This is a fad that is.

Perfectly happy to have the labor market adjust through wages and vacancy, so long as it doesn't necessarily require rising in unemployment.

Perfectly happy to have the labor market adjust through wages and vacancy, so long as it doesn't necessarily require rising in unemployment.

So I think so far that view has been borne out.

So I think so far that view has been borne out.

And then how do you think they incorporate the signals from the market itself. Obviously, the bond market has been pretty frin edic around the last couple of months, pricing in for several cuts and now really contemplating maybe a hike. Do they care what the bond market is doing around these times? Are they a little bit concerned about the degree of volatility that has emerged in the bond market?

And then how do you think they incorporate the signals from the market itself. Obviously, the bond market has been pretty frin edic around the last couple of months, pricing in for several cuts and now really contemplating maybe a hike. Do they care what the bond market is doing around these times? Are they a little bit concerned about the degree of volatility that has emerged in the bond market?

You know, I think there and I've pointed out to this before.

You know, I think there and I've pointed out to this before.

You know, there was a disconnect that opened up after the December meeting. At the December meeting, they indicated that most participants thought that three cuts this year would would make sense, and the market at one point was pricing in six. Yeah.

You know, there was a disconnect that opened up after the December meeting. At the December meeting, they indicated that most participants thought that three cuts this year would would make sense, and the market at one point was pricing in six. Yeah.

So since we got that hotter.

So since we got that hotter.

CPI and employment data, there's now a pretty good alignment between at least where the Fed was until recently and where market is pricing.

CPI and employment data, there's now a pretty good alignment between at least where the Fed was until recently and where market is pricing.

So, you know, I think that's going to be part of the cycle. It's been part of other cycles.

So, you know, I think that's going to be part of the cycle. It's been part of other cycles.

If you look at the record, you know, when the Fed says they think they're done, the markets will will be off to the racist to price.

If you look at the record, you know, when the Fed says they think they're done, the markets will will be off to the racist to price.

In those cuts.

In those cuts.

So I think more or less this is part of what they're expecting. But I think there's a better alignment now than there was after the December meeting.

So I think more or less this is part of what they're expecting. But I think there's a better alignment now than there was after the December meeting.

Is the labor market right now rich the job market? Is that also aligned with that same narrative.

Is the labor market right now rich the job market? Is that also aligned with that same narrative.

It's moving in that direction.

It's moving in that direction.

Romain, I think they have pointed out, if not in the minutes, then certainly other times that you know, wage inflation compensations about two thirds of costs for many companies is still you know, a little bit hot relative to the number that would be consistent with price stability. On the other hand, we haven't given some good news on productivity productivity now, even if you average through the pandemic gyrations, which were substantial, productivity growth is probably at the high end of where it was before the pandemic, and that's quite important. Unfortunately, productivity is hard to forecast, but strong productivity numbers definitely moving the direction they want.

Romain, I think they have pointed out, if not in the minutes, then certainly other times that you know, wage inflation compensations about two thirds of costs for many companies is still you know, a little bit hot relative to the number that would be consistent with price stability. On the other hand, we haven't given some good news on productivity productivity now, even if you average through the pandemic gyrations, which were substantial, productivity growth is probably at the high end of where it was before the pandemic, and that's quite important. Unfortunately, productivity is hard to forecast, but strong productivity numbers definitely moving the direction they want.

Well, I'm glad you went there, because there's been a lot of concerns as to why we haven't seen a more meaningful shift in productivity, higher productivity, at least in past economic cycles. We're getting some of that now. But as you know, Rich, there's a lot of talk about artificial intelligence and all the companies involved in that and what it could potentially mean for labor, productivity and just the overall efficiency of this economy. I know it's kind of early, but do you see a promise that AI and some of the technologies associated with it could lead to greater productivity.

Well, I'm glad you went there, because there's been a lot of concerns as to why we haven't seen a more meaningful shift in productivity, higher productivity, at least in past economic cycles. We're getting some of that now. But as you know, Rich, there's a lot of talk about artificial intelligence and all the companies involved in that and what it could potentially mean for labor, productivity and just the overall efficiency of this economy. I know it's kind of early, but do you see a promise that AI and some of the technologies associated with it could lead to greater productivity.

Sure, there's that promise.

Sure, there's that promise.

You know, technologists thinks it's potentially is at least as big a deal as you know, Internet connectivity, and personal computing was, and of course that led for at least a decade or so to about a percentage point increase in productivity. I think it's too soon to tell, but obviously you know that that's a real possibility, and part of what stock markets do is try to value you know that possibility. I think right now the PALFED is really focused more on the pier and now they've also benefited.

You know, technologists thinks it's potentially is at least as big a deal as you know, Internet connectivity, and personal computing was, and of course that led for at least a decade or so to about a percentage point increase in productivity. I think it's too soon to tell, but obviously you know that that's a real possibility, and part of what stock markets do is try to value you know that possibility. I think right now the PALFED is really focused more on the pier and now they've also benefited.

The economy's benefited from an.

The economy's benefited from an.

Increase in labor force supply as well, so I think that's their focus, all.

Increase in labor force supply as well, so I think that's their focus, all.

Right, rich got to leave it there.

Right, rich got to leave it there.

Great to talk to you. Richard Clara, a former vice chair now pimco's Global Economic Advisor, helping us count down to the closing bills

Great to talk to you. Richard Clara, a former vice chair now pimco's Global Economic Advisor, helping us count down to the closing bills