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Unfortunately, he's been dreading this all week. Richard Clarida with us now. His work at Columbia University definitive on fancy economics called dynamic stochastic general equilibrium theory, holding court at the Fed as vice chairman. I'm not going to mince words, and frankly, Professor Clarida, are you still at Columbia?
You get a piece of chalk out every... See, the problem is Xavier Sala-i-Martin wouldn't allow AI in the class. You would allow AI in a freshman class to make the kids smarter, right?
I don't teach freshmen anymore, but...
Would you let AI in the class?
Well, not in the classroom, but when I teach, I assume the students are making reference to it, which is why I've actually put a focus on having in-class presentations.
There you go. Old-fashioned Socratic dialogue.
I'm going to cut to the chase. Socratic dialogue. You saved Jerome Powell. Folks, I'm not going to mince words about it. It's called a dual-engine leadership model. And it was Clarida as vice chairman and a guy from Wall Street as chairman. And when he came in, you allowed him to relax and grow with your prodigious academic abilities. Does Chairman Wars need a Clarida?
Well, that'll be his discussion. I enjoyed my four years, that's for sure. But there are a lot of good people at the Fed, and I think that's a decision he'll make. He's got a very good vice chair right now in Phil Jefferson. But at some point there will be a vice chair vacancy.
Is that something that the committee, when he goes in front of these tough guys on the Hill, they can demand he have a vice chair of the academic skills of you?
Well, it's not clear that that's what would be on their wish list, but a possibility, I suppose. I mean, they could request that, certainly.
Kevin Wars has called for a new accord with the Treasury Department. What does he mean by that?
Well, you know, this is one of those things where this is very what they call in DC very big tent language. It means different things to different people. The one accord that we do know about, which is the one that was struck in 1951 between the Treasury and the Fed, was a signal moment in Fed independence because it got the Fed out of the business of essentially capping Treasury yields. In fact, as I like to teach my students, we all know that World War II ended in 1945, but the Fed didn't get the memo till 1951 because the Truman administration pressured the Fed to keep a cap on rates. The Fed declared independence in the accord. I think now, if there is a Treasury-Fed accord, it would not be so much focused on that. It would be focused on, for example, should the Fed hold $2 trillion of mortgage-backed securities? Should the composition of the Fed's portfolio really be tilted toward T-bills and less toward holding 10- and 30-year Treasuries? So I think there are a lot of conversations to have, and even during my time on the Fed, there were discussions before the pandemic about rethinking the Fed's portfolio composition. And so I think that's entirely appropriate, but I think we're a long way away from any formal accord.
So what do you expect this Federal Reserve to do in calendar year 26?
Well, first we have to get the chair confirmed.
And that's not a foregone conclusion, right?
I think once he has a hearing, he will get confirmed because he's very well qualified, but it may be a while before he has a hearing. I think it's important to note that the Powell Fed in December, when they released those dots, those famous or infamous dots, the Powell Fed, or at least a majority of the Fed in December, thought at least one rate cut this year would be appropriate. And I think eight folks thought maybe two rate cuts would be appropriate. So I do think that when Wars gets in, if the economic data play out the way that I and others expect, I think he'll be able to persuade the committee to continue to cut rates down to around 3%.
Richard Clarida with us, folks, the former vice chairman of the Fed, hugely visible, does a great job helping us on the Fed day the Fed decides. Thrilled he could be in studio with us for you across the nation and around the world. Thank you for your attendance on YouTube. Subscribe to Bloomberg Podcasts. I look at all this, I look at the parlor game, and just what it comes down to is staggering from meeting to meeting. When Mr. Wars joins, do we have a theory of monetary policy, or is it every president and governor for themselves?
Tom, fantastic question, because I do think that based upon what Kevin has said with his very voluminous paper trail over the last 15 years, I think that will be a discussion. I think Kevin has expressed some skepticism for reliance on what he believes are flawed models, too much of a backward-looking approach. What I would point out, at least during my four years, is the Powell Fed and certainly Clarida as vice chair was not handcuffed to the models, even though I developed many of them.
I give you great credit. Paul, can I editorialize? I give you great credit for this. You were the one person who could have said we'd go for the models.
Well, and in fact, my first speech in October of 2018, I basically made the case that the economy appeared to have stronger growth potential and a potential for lower unemployment than the Fed models thought, and that the Powell Fed should be willing, if the labor market was continuing to blossom and inflation didn't appear to allow that to happen. In fact, I think I said, you know, monetary policy is not a problem if too many people are working, right? And indeed, the Powell Fed cut rates in 2019 with an unemployment rate at a 50-year low. So I think the Fed has probably been less handcuffed to models than Kevin's remarks might suggest. But I certainly think based upon that there will be a discussion of the best way to incorporate modeling into Fed analysis.
What happens to Jay Powell when he does step down from the Fed? Does he stay at the Fed? Does he leave? Typically they ride off into the sunset, right?
They do. In fact, there's only one example in Fed history of a chair that did not ride off into the sunset, and a very important Fed chair, a gentleman named Marriner Eccles. So important he has a building named after him.
