Speaker 1: Let's get to our guest. John Taylor joins this professor
Speaker 1: of economics set Stanford University and author of the famous
Speaker 1: tailor rule. So lots to talk about, Professor, A simple question. First,
Speaker 1: can we argue that we've seen peak inflation but not
Speaker 1: yet peak Fed hawkishness? Well, we certainly can, because they're
Speaker 1: they're a little bit out of line. We had a
Speaker 1: big conference here just a while ago which the title
Speaker 1: was how the FED get so behind and what to
Speaker 1: do about it? So there is a little imbalance and
Speaker 1: people are thinking about it. I hope inflation comes down,
Speaker 1: but the FED is still a little bit too low.
Speaker 1: So to speak, um, Professor. When we look at what's
Speaker 1: happening in terms of inflation, the narrative a few months
Speaker 1: ago that the supply side and therefore perhaps the monestry
Speaker 1: policy was not the right tool to be using. Has
Speaker 1: that really gone by the wayside, because inflation could become structural.
Speaker 1: I don't think it's gone by the wayside because so far,
Speaker 1: you know, what is the interest rate in the US
Speaker 1: two and a third or something, that it's still low
Speaker 1: compared to any reasonable measure of inflation, even if it
Speaker 1: was two percent inflation. But the inflation rate is higher,
Speaker 1: and so there's sort of normal policy policy which worked,
Speaker 1: has worked in the past, was suggests it's still Monterrey
Speaker 1: policy now. The budget deficit has been vague, it's coming down.
Speaker 1: There's other factors, but I think the key, and this
Speaker 1: is what we've emphasized so many of us who have
Speaker 1: talked about it as the Monterrey side. So that's why
Speaker 1: I keep mentioning that. And it's of course there's going
Speaker 1: to be dispute as no one likes higher interest rates,
Speaker 1: especially when they've been low for so long. But that's
Speaker 1: what I think we're facing. So the Taylor rule looks
Speaker 1: at GDP and also inflation levels. To to get some
Speaker 1: advice on what to do with the Fed funds rate.
Speaker 1: What do you think the Fed funds rate should be
Speaker 1: at the moment given the conditions that we have, Well,
Speaker 1: I think you should start moving up. In fact, one
Speaker 1: of the meetings we had here some of the members
Speaker 1: of the f O m C suggests that it should
Speaker 1: be over three at three and a quarter. I think
Speaker 1: it's probably gonna have to be higher than that. Polet's
Speaker 1: get to that point and see where it is, and
Speaker 1: and we you know, we've had some good news, but
Speaker 1: it's still a high inflation rate. It's seven eight and so.
Speaker 1: And also you think about this globally. It's not just
Speaker 1: the United States, it's Korea, it's Europe, it's Latin America,
Speaker 1: it's all over and that's what's happened in the past.
Speaker 1: We need to prevent that. There's still time. This is
Speaker 1: a fairly new phenomenon. This is not something that's been
Speaker 1: with us for a whole decade like in the nineteen seventies.
Speaker 1: So there's still time to do it. It's and it's
Speaker 1: still relatively painless to get rid of this inflationary built
Speaker 1: up and after all, we'd be better off. And given
Speaker 1: that call that you just made, do you think a
Speaker 1: hundred basis points is on the table for September, Well,
Speaker 1: they're talking about seventy five, and I think that's probably
Speaker 1: what they're gonna do. They you know, any central bank
Speaker 1: has to be careful of the how fast it's moving
Speaker 1: and and that as long as they signal, and I
Speaker 1: think this is something that gets emphasized that there's some
Speaker 1: signaling that they may have to do more, and that's
Speaker 1: what they've tried to do a little bit maybe not
Speaker 1: the chair as much as others, but that would help
Speaker 1: ease the adjustment because people know, well, if there's not
Speaker 1: an adjustment, there needs to be somewhat higher interest rates,
Speaker 1: not as high as as men you are worried about,
Speaker 1: but somewhat higher. What would you say of the risks
Speaker 1: here of a deep recession, of shadow recession and the like,
Speaker 1: and you know, how should the Fed be balancing those risks? Well,
Speaker 1: there are risks. I think the risks is historically we've
Speaker 1: seen the FED gets behind and that has to catch up.
Speaker 1: It gets way behind, then it has to rate raizor
Speaker 1: rates even higher. So that's the risk. Right now. We've
Speaker 1: had two quarters of negative growth and we may get
Speaker 1: a little bit more. It's been very mild in the
Speaker 1: US and with there's other things going and other other explanations,
Speaker 1: but it's two quarters and that's something that people worry about.
Speaker 1: But another hand, hasn't the inflation hasn't passed through to
Speaker 1: a lot of things. Gasoline prices are coming down, that's great,
Speaker 1: but wages are still going up and other things are
Speaker 1: going up. So they need to address that, I think
Speaker 1: for sure, in a in a gradual way, not not
Speaker 1: overwhelmed the economy, not surprised people doing it in in a
Speaker 1: way that's understandable, predictable, and that's what's needed. Yeah, that
Speaker 1: sort of brings me to because some investors would say
Speaker 1: the feed you use this opportunity. The U s economy
Speaker 1: has some underlying strength, particularly look at at the jobs
Speaker 1: sector at the moment. So what is the underlying strength
Speaker 1: in the economy. And if you have a recession but
Speaker 1: no no banking crisis like we had in the GFC
Speaker 1: or no housing crisis, is there scope for quick recovery?
Speaker 1: There is. It's a it's a very powerful economy. There's
Speaker 1: lots of innovations going on in California where I had living,
Speaker 1: and Silicon Valley. It's all over the place, and so
Speaker 1: I think there is an opportunity. But again, we have
Speaker 1: to encourage people to do this and not scare them,
Speaker 1: not frighten them. And it's it's not just Monterrey policies.
Speaker 1: Fiscal policy and regulatory policy and tax policy. O those
Speaker 1: things go together to make a stronger economy. We have
Speaker 1: to work on all of those. Okay, So if you
Speaker 1: um J. Powell, what would you be doing right now?
Speaker 1: What would the effort what would like the f AMC
Speaker 1: to be doing. I think the main thing is I'd
Speaker 1: be signaling a little more than they have that this
Speaker 1: is not an equilibrium. There needs to be an adjustment.
Speaker 1: And if it's done in a gradual way, a predictable way,
Speaker 1: a clear way, the rate of inflation will not pick up,
Speaker 1: wage inflation will not pick up. It'll come down to
Speaker 1: a nice healthy level. Remember two percent, that target target
Speaker 1: inflationary two percent were so far above that. But if
Speaker 1: they can get back to that by being clear and predictable,
Speaker 1: and I hope that's what J Paul does. It doesn't
Speaker 1: sound like you two downbeat. So I think a lot
Speaker 1: of investors would would take some heart from that. If
Speaker 1: if QE pushed investors into riskier assets QT, which is
Speaker 1: really supposed to be begin with some vigor next month,
Speaker 1: will that push them into what areas of of let's say,
Speaker 1: less risky ascids. Is the quality stocks? Is it treasuries?
Speaker 1: Is it? Is it? Or is it into cash? It's
Speaker 1: a good question. I think that there's really doubts about
Speaker 1: how much impact q E had, and so the main
Speaker 1: thing is to be predictable when there's don't surprise people
Speaker 1: that obviously convinced smaller balance sheet. It doesn't have to
Speaker 1: come down overnight, it can down come down gradually. And
Speaker 1: I think that's part of the system of being predictable,
Speaker 1: not surprised people, so that they can know what's going on.
Speaker 1: The same just like with interest rates, just like with
Speaker 1: the balance sheet, the same ideas is undo qu e
Speaker 1: in a in a sensible gradual way, and I think
Speaker 1: it will work better. And Professor, just a ten second, Stian,
Speaker 1: where do you actually think the terminal rate will be
Speaker 1: in this cycle? I think it'll be you know this,
Speaker 1: when we're all through this, it's is three four percent
Speaker 1: some other words. Take an inflation rate target of two,
Speaker 1: take a real interest rate of one. That's what the
Speaker 1: latest is. I used to think it was two. Let's
Speaker 1: say it's one and three is where we're in. But
Speaker 1: we probably have to go above three before we get there. Alright, Professor,
Speaker 1: thanks so much for joining us. Really appreciate it. Good session.
Speaker 1: John Taylor, Professor of economics at Stanford University,