WEBVTT - John Taylor on Jackson Hole (Radio)

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<v Speaker 1>Let's get to our guest. John Taylor joins this professor

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<v Speaker 1>of economics set Stanford University and author of the famous

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<v Speaker 1>tailor rule. So lots to talk about, Professor, A simple question. First,

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<v Speaker 1>can we argue that we've seen peak inflation but not

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<v Speaker 1>yet peak Fed hawkishness? Well, we certainly can, because they're

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<v Speaker 1>they're a little bit out of line. We had a

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<v Speaker 1>big conference here just a while ago which the title

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<v Speaker 1>was how the FED get so behind and what to

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<v Speaker 1>do about it? So there is a little imbalance and

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<v Speaker 1>people are thinking about it. I hope inflation comes down,

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<v Speaker 1>but the FED is still a little bit too low.

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<v Speaker 1>So to speak, um, Professor. When we look at what's

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<v Speaker 1>happening in terms of inflation, the narrative a few months

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<v Speaker 1>ago that the supply side and therefore perhaps the monestry

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<v Speaker 1>policy was not the right tool to be using. Has

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<v Speaker 1>that really gone by the wayside, because inflation could become structural.

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<v Speaker 1>I don't think it's gone by the wayside because so far,

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<v Speaker 1>you know, what is the interest rate in the US

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<v Speaker 1>two and a third or something, that it's still low

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<v Speaker 1>compared to any reasonable measure of inflation, even if it

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<v Speaker 1>was two percent inflation. But the inflation rate is higher,

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<v Speaker 1>and so there's sort of normal policy policy which worked,

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<v Speaker 1>has worked in the past, was suggests it's still Monterrey

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<v Speaker 1>policy now. The budget deficit has been vague, it's coming down.

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<v Speaker 1>There's other factors, but I think the key, and this

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<v Speaker 1>is what we've emphasized so many of us who have

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<v Speaker 1>talked about it as the Monterrey side. So that's why

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<v Speaker 1>I keep mentioning that. And it's of course there's going

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<v Speaker 1>to be dispute as no one likes higher interest rates,

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<v Speaker 1>especially when they've been low for so long. But that's

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<v Speaker 1>what I think we're facing. So the Taylor rule looks

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<v Speaker 1>at GDP and also inflation levels. To to get some

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<v Speaker 1>advice on what to do with the Fed funds rate.

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<v Speaker 1>What do you think the Fed funds rate should be

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<v Speaker 1>at the moment given the conditions that we have, Well,

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<v Speaker 1>I think you should start moving up. In fact, one

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<v Speaker 1>of the meetings we had here some of the members

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<v Speaker 1>of the f O m C suggests that it should

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<v Speaker 1>be over three at three and a quarter. I think

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<v Speaker 1>it's probably gonna have to be higher than that. Polet's

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<v Speaker 1>get to that point and see where it is, and

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<v Speaker 1>and we you know, we've had some good news, but

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<v Speaker 1>it's still a high inflation rate. It's seven eight and so.

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<v Speaker 1>And also you think about this globally. It's not just

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<v Speaker 1>the United States, it's Korea, it's Europe, it's Latin America,

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<v Speaker 1>it's all over and that's what's happened in the past.

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<v Speaker 1>We need to prevent that. There's still time. This is

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<v Speaker 1>a fairly new phenomenon. This is not something that's been

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<v Speaker 1>with us for a whole decade like in the nineteen seventies.

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<v Speaker 1>So there's still time to do it. It's and it's

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<v Speaker 1>still relatively painless to get rid of this inflationary built

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<v Speaker 1>up and after all, we'd be better off. And given

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<v Speaker 1>that call that you just made, do you think a

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<v Speaker 1>hundred basis points is on the table for September, Well,

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<v Speaker 1>they're talking about seventy five, and I think that's probably

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<v Speaker 1>what they're gonna do. They you know, any central bank

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<v Speaker 1>has to be careful of the how fast it's moving

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<v Speaker 1>and and that as long as they signal, and I

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<v Speaker 1>think this is something that gets emphasized that there's some

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<v Speaker 1>signaling that they may have to do more, and that's

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<v Speaker 1>what they've tried to do a little bit maybe not

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<v Speaker 1>the chair as much as others, but that would help

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<v Speaker 1>ease the adjustment because people know, well, if there's not

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<v Speaker 1>an adjustment, there needs to be somewhat higher interest rates,

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<v Speaker 1>not as high as as men you are worried about,

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<v Speaker 1>but somewhat higher. What would you say of the risks

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<v Speaker 1>here of a deep recession, of shadow recession and the like,

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<v Speaker 1>and you know, how should the Fed be balancing those risks? Well,

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<v Speaker 1>there are risks. I think the risks is historically we've

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<v Speaker 1>seen the FED gets behind and that has to catch up.

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<v Speaker 1>It gets way behind, then it has to rate raizor

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<v Speaker 1>rates even higher. So that's the risk. Right now. We've

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<v Speaker 1>had two quarters of negative growth and we may get

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<v Speaker 1>a little bit more. It's been very mild in the

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<v Speaker 1>US and with there's other things going and other other explanations,

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<v Speaker 1>but it's two quarters and that's something that people worry about.

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<v Speaker 1>But another hand, hasn't the inflation hasn't passed through to

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<v Speaker 1>a lot of things. Gasoline prices are coming down, that's great,

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<v Speaker 1>but wages are still going up and other things are

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<v Speaker 1>going up. So they need to address that, I think

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<v Speaker 1>for sure, in a in a gradual way, not not

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<v Speaker 1>overwhelmed the economy, not surprised people doing it in in a

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<v Speaker 1>way that's understandable, predictable, and that's what's needed. Yeah, that

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<v Speaker 1>sort of brings me to because some investors would say

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<v Speaker 1>the feed you use this opportunity. The U s economy

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<v Speaker 1>has some underlying strength, particularly look at at the jobs

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<v Speaker 1>sector at the moment. So what is the underlying strength

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<v Speaker 1>in the economy. And if you have a recession but

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<v Speaker 1>no no banking crisis like we had in the GFC

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<v Speaker 1>or no housing crisis, is there scope for quick recovery?

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<v Speaker 1>There is. It's a it's a very powerful economy. There's

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<v Speaker 1>lots of innovations going on in California where I had living,

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<v Speaker 1>and Silicon Valley. It's all over the place, and so

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<v Speaker 1>I think there is an opportunity. But again, we have

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<v Speaker 1>to encourage people to do this and not scare them,

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<v Speaker 1>not frighten them. And it's it's not just Monterrey policies.

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<v Speaker 1>Fiscal policy and regulatory policy and tax policy. O those

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<v Speaker 1>things go together to make a stronger economy. We have

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<v Speaker 1>to work on all of those. Okay, So if you

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<v Speaker 1>um J. Powell, what would you be doing right now?

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<v Speaker 1>What would the effort what would like the f AMC

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<v Speaker 1>to be doing. I think the main thing is I'd

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<v Speaker 1>be signaling a little more than they have that this

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<v Speaker 1>is not an equilibrium. There needs to be an adjustment.

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<v Speaker 1>And if it's done in a gradual way, a predictable way,

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<v Speaker 1>a clear way, the rate of inflation will not pick up,

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<v Speaker 1>wage inflation will not pick up. It'll come down to

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<v Speaker 1>a nice healthy level. Remember two percent, that target target

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<v Speaker 1>inflationary two percent were so far above that. But if

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<v Speaker 1>they can get back to that by being clear and predictable,

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<v Speaker 1>and I hope that's what J Paul does. It doesn't

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<v Speaker 1>sound like you two downbeat. So I think a lot

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<v Speaker 1>of investors would would take some heart from that. If

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<v Speaker 1>if QE pushed investors into riskier assets QT, which is

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<v Speaker 1>really supposed to be begin with some vigor next month,

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<v Speaker 1>will that push them into what areas of of let's say,

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<v Speaker 1>less risky ascids. Is the quality stocks? Is it treasuries?

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<v Speaker 1>Is it? Is it? Or is it into cash? It's

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<v Speaker 1>a good question. I think that there's really doubts about

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<v Speaker 1>how much impact q E had, and so the main

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<v Speaker 1>thing is to be predictable when there's don't surprise people

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<v Speaker 1>that obviously convinced smaller balance sheet. It doesn't have to

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<v Speaker 1>come down overnight, it can down come down gradually. And

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<v Speaker 1>I think that's part of the system of being predictable,

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<v Speaker 1>not surprised people, so that they can know what's going on.

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<v Speaker 1>The same just like with interest rates, just like with

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<v Speaker 1>the balance sheet, the same ideas is undo qu e

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<v Speaker 1>in a in a sensible gradual way, and I think

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<v Speaker 1>it will work better. And Professor, just a ten second, Stian,

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<v Speaker 1>where do you actually think the terminal rate will be

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<v Speaker 1>in this cycle? I think it'll be you know this,

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<v Speaker 1>when we're all through this, it's is three four percent

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<v Speaker 1>some other words. Take an inflation rate target of two,

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<v Speaker 1>take a real interest rate of one. That's what the

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<v Speaker 1>latest is. I used to think it was two. Let's

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<v Speaker 1>say it's one and three is where we're in. But

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<v Speaker 1>we probably have to go above three before we get there. Alright, Professor,

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<v Speaker 1>thanks so much for joining us. Really appreciate it. Good session.

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<v Speaker 1>John Taylor, Professor of economics at Stanford University,