1
00:00:10,039 --> 00:00:13,280
Speaker 1: Hello, and welcome to another episode of the Ad Thoughts Podcast.

2
00:00:13,400 --> 00:00:17,119
Speaker 1: I'm Tracy Allaway. Joe is sick today and so I

3
00:00:17,160 --> 00:00:19,280
Speaker 1: am very pleased to say that I have a guest

4
00:00:19,400 --> 00:00:24,520
Speaker 1: co host, Matt Bosler. He is an economics editor for Bloomberg. Hi.

5
00:00:24,600 --> 00:00:26,599
Speaker 2: Everyone, I'm Matt Bosler. Excited to be here.

6
00:00:26,880 --> 00:00:29,120
Speaker 1: So, Matt, I'm so glad you're doing the show today.

7
00:00:29,400 --> 00:00:33,080
Speaker 1: It is an interesting time in the US economy, and

8
00:00:33,120 --> 00:00:37,040
Speaker 1: particularly this week. We're recording on September twenty eighth. We've

9
00:00:37,080 --> 00:00:40,040
Speaker 1: just seen this massive sell off in the bond market

10
00:00:40,120 --> 00:00:44,200
Speaker 1: following the recent FOMC meeting. There's lots of talk about

11
00:00:44,440 --> 00:00:48,000
Speaker 1: higher rates for longer, lots of concerns over whether or

12
00:00:48,040 --> 00:00:51,000
Speaker 1: not inflation is maybe picking up again given the rise

13
00:00:51,080 --> 00:00:54,600
Speaker 1: that we've had in the oil price recently. But overall,

14
00:00:55,280 --> 00:00:59,320
Speaker 1: it kind of feels surprising how resilient the US economy

15
00:00:59,360 --> 00:01:02,400
Speaker 1: has so far proven to higher interest rates.

16
00:01:02,560 --> 00:01:04,600
Speaker 2: Yeah, it's really interesting. You know, the Fed has been

17
00:01:04,720 --> 00:01:08,839
Speaker 2: raising its benchmark short term interest rate for eighteen months now.

18
00:01:09,319 --> 00:01:13,160
Speaker 2: We haven't really seen an aggressive move up in long

19
00:01:13,240 --> 00:01:15,640
Speaker 2: term interest rates until just the last several weeks, so

20
00:01:15,640 --> 00:01:18,000
Speaker 2: it's almost like, you know, the tightening cycle. Maybe it's

21
00:01:18,040 --> 00:01:19,240
Speaker 2: just gotten started here.

22
00:01:19,240 --> 00:01:21,759
Speaker 1: Right thirty year yield I think when I last looked

23
00:01:21,760 --> 00:01:24,520
Speaker 1: at four point seven percent something like that. You also

24
00:01:24,600 --> 00:01:27,600
Speaker 1: have all these headline risks sort of lurking. There is

25
00:01:27,680 --> 00:01:31,240
Speaker 1: the looming government shut down of that might actually have

26
00:01:31,319 --> 00:01:34,760
Speaker 1: started by the time we release this episode. There's questions

27
00:01:34,920 --> 00:01:39,520
Speaker 1: over the UAW strike. All these sorts of idiosyncratic risks

28
00:01:39,600 --> 00:01:42,120
Speaker 1: also starting to come into play. And here on odd lots.

29
00:01:42,120 --> 00:01:44,360
Speaker 1: I think people know that we always like to try

30
00:01:44,360 --> 00:01:49,080
Speaker 1: to tie the macroeconomic outlook and monetary policy to the

31
00:01:49,080 --> 00:01:52,000
Speaker 1: real business stuff that's happening on the ground. So I

32
00:01:52,040 --> 00:01:54,360
Speaker 1: am very pleased to say that we do, in fact

33
00:01:54,360 --> 00:01:56,880
Speaker 1: have the perfect guest with us today to discuss all that.

34
00:01:56,920 --> 00:02:00,000
Speaker 1: We're going to be speaking with Tom Barkin, the president

35
00:02:00,280 --> 00:02:02,720
Speaker 1: of the Richmond Fed. Tom, thank you so much for

36
00:02:02,800 --> 00:02:03,600
Speaker 1: joining all th lots.

37
00:02:03,760 --> 00:02:05,720
Speaker 3: I'm looking forward to it, and you certainly laid out

38
00:02:05,720 --> 00:02:07,400
Speaker 3: a long list of things we need to cover.

39
00:02:07,800 --> 00:02:09,960
Speaker 1: I know, and we only have about forty minutes, but

40
00:02:10,120 --> 00:02:13,839
Speaker 1: we'll try to do our best. Maybe just to begin with,

41
00:02:14,440 --> 00:02:18,040
Speaker 1: I know you have taken a kind of I don't

42
00:02:18,040 --> 00:02:22,320
Speaker 1: want to say unusual approach, but maybe a special approach

43
00:02:22,840 --> 00:02:25,480
Speaker 1: to your job as president of the Richmond FED. You

44
00:02:25,680 --> 00:02:29,960
Speaker 1: like to go out and talk to businesses within your region.

45
00:02:30,480 --> 00:02:34,120
Speaker 1: And I'm curious. I know that you were previously at McKinsey,

46
00:02:34,320 --> 00:02:39,000
Speaker 1: but how does that kind of feed into your thinking

47
00:02:39,080 --> 00:02:42,680
Speaker 1: around monetary policy? What do you get out of those discussions.

48
00:02:43,120 --> 00:02:46,520
Speaker 3: So we have a beautiful twenty four story building in Richmond.

49
00:02:46,560 --> 00:02:48,760
Speaker 3: If you drive down nine ninety five you'll see it.

50
00:02:48,760 --> 00:02:51,400
Speaker 3: It's quite literally an ivory tower. And so one thing

51
00:02:51,440 --> 00:02:54,400
Speaker 3: I figured out pretty early, and my tenure was that

52
00:02:54,440 --> 00:02:57,320
Speaker 3: the data comes in late, it's then revised three times,

53
00:02:57,560 --> 00:02:59,760
Speaker 3: and so it's awfully hard to know what's actually going on.

54
00:03:00,040 --> 00:03:02,440
Speaker 3: And so I just made a personal commitment that with

55
00:03:02,520 --> 00:03:04,800
Speaker 3: the exception of the two weeks around the FOMC meeting,

56
00:03:05,040 --> 00:03:07,440
Speaker 3: I'm going to be out every week. And in the

57
00:03:07,480 --> 00:03:09,240
Speaker 3: last month, I've been on the Eastern Shore, I've been

58
00:03:09,280 --> 00:03:11,920
Speaker 3: in the cold country in South Carolina. I've been in

59
00:03:12,120 --> 00:03:15,359
Speaker 3: southern Virginia. I've been in the northern Virginia suburbs. I've

60
00:03:15,360 --> 00:03:18,040
Speaker 3: been in western Virginia. And in every one of those trips,

61
00:03:18,440 --> 00:03:21,400
Speaker 3: I'm meeting with business people, I'm meeting with nonprofits, I'm

62
00:03:21,440 --> 00:03:24,679
Speaker 3: trying to understand what's actually, you know, happening in the economy,

63
00:03:24,680 --> 00:03:27,600
Speaker 3: and that's where I get my information to sanity check

64
00:03:27,639 --> 00:03:30,000
Speaker 3: the data as it's coming in and try to develop

65
00:03:30,320 --> 00:03:32,160
Speaker 3: my own unique perspective on what's happening.

66
00:03:32,520 --> 00:03:35,280
Speaker 1: I think, to my knowledge, you're the only FED president

67
00:03:35,400 --> 00:03:38,560
Speaker 1: who has actually mentioned the Beyonce and the Taylor Swift

68
00:03:38,600 --> 00:03:41,200
Speaker 1: concerts in a speech, a formal speech.

69
00:03:41,880 --> 00:03:43,600
Speaker 3: I don't know if that's true, but my daughter also

70
00:03:43,600 --> 00:03:45,320
Speaker 3: wanted me to put in a few quotes from the

71
00:03:45,440 --> 00:03:48,200
Speaker 3: Barbie movie, and I managed to withstand doing that.

72
00:03:49,400 --> 00:03:51,480
Speaker 2: You know, we have so many people here in New York,

73
00:03:51,520 --> 00:03:54,280
Speaker 2: in this building and in the surrounding area right just

74
00:03:54,320 --> 00:03:59,160
Speaker 2: pouring over every monthly economic statistic, whether it's the jobs report,

75
00:03:59,200 --> 00:04:01,600
Speaker 2: the inflation report. When you're going out to all of

76
00:04:01,600 --> 00:04:05,000
Speaker 2: these places, are you hearing things from businesses that are

77
00:04:05,040 --> 00:04:08,400
Speaker 2: not necessarily being reflected in the data right now?

78
00:04:09,200 --> 00:04:12,520
Speaker 3: Yeah, So a couple great examples. Demand If you look

79
00:04:12,520 --> 00:04:15,480
Speaker 3: at the recent data we've gotten on consumer spending, it's

80
00:04:15,680 --> 00:04:19,800
Speaker 3: been unbelievably resilient. As you said up front, when you

81
00:04:19,800 --> 00:04:23,240
Speaker 3: talk to businesses, you'll hear it's okay, right, that's a

82
00:04:23,279 --> 00:04:26,440
Speaker 3: pretty big gap and I was with a big retailer

83
00:04:26,880 --> 00:04:29,719
Speaker 3: about three weeks ago that started talking about, you know,

84
00:04:29,760 --> 00:04:33,280
Speaker 3: what they perceive to be the different segments of consumer spending.

85
00:04:33,320 --> 00:04:37,240
Speaker 3: The high end consumer who's still spending on experiences, you know,

86
00:04:37,360 --> 00:04:40,560
Speaker 3: like Taylor Swift and Beyonce. There you go, I got

87
00:04:40,560 --> 00:04:43,920
Speaker 3: it in there again, versus the low income consumer who

88
00:04:43,960 --> 00:04:46,120
Speaker 3: we all know, you know, saving has been somewhat depleted.

89
00:04:46,680 --> 00:04:48,840
Speaker 3: And he started talking about the middle income consumer, and

90
00:04:48,880 --> 00:04:52,599
Speaker 3: the way he described it was, they're trading down. You know,

91
00:04:52,600 --> 00:04:56,320
Speaker 3: they're going to the grocery store, the branded grocery store

92
00:04:56,320 --> 00:04:59,560
Speaker 3: for their food, but they're buying the kids notebooks at

93
00:04:59,560 --> 00:05:02,560
Speaker 3: a dollar store. And you know, you hear those sorts

94
00:05:02,600 --> 00:05:04,240
Speaker 3: of things, and then you try to find the evidence

95
00:05:04,600 --> 00:05:06,640
Speaker 3: in the data to talk about what's happening on the

96
00:05:06,720 --> 00:05:09,839
Speaker 3: labor side. I was with a manufacturer in South Carolina

97
00:05:09,960 --> 00:05:14,080
Speaker 3: who said that they're losing people to Bojangles, which was

98
00:05:14,120 --> 00:05:15,960
Speaker 3: an awfully, you know, strange idea for those of you

99
00:05:15,960 --> 00:05:18,320
Speaker 3: who don't know. Bo Jngless a fried chicken place largely

100
00:05:18,320 --> 00:05:20,440
Speaker 3: in my district in the South. But it turns out

101
00:05:20,839 --> 00:05:25,279
Speaker 3: it's an indoor environment, not an outdoor environment. Shift flexibility

102
00:05:25,720 --> 00:05:27,480
Speaker 3: is obtainable so you can work the hours you want

103
00:05:27,480 --> 00:05:30,120
Speaker 3: to work, and the pay abou jngles has actually narrowed

104
00:05:30,160 --> 00:05:33,040
Speaker 3: most of the gap with the manufacturer. Then two weeks later,

105
00:05:33,080 --> 00:05:34,400
Speaker 3: I told you I was in coal country. I was

106
00:05:34,400 --> 00:05:36,599
Speaker 3: talking to a guy who owns a coal mine, and

107
00:05:36,680 --> 00:05:39,120
Speaker 3: he was describing his problems getting workers, and I said,

108
00:05:39,160 --> 00:05:41,520
Speaker 3: wait a second. You know this is West Virginia. There's

109
00:05:41,520 --> 00:05:43,480
Speaker 3: all these stories of the coal mines not being able

110
00:05:43,520 --> 00:05:46,880
Speaker 3: to operate enough in all these unemployed workers. He said, yeah,

111
00:05:46,920 --> 00:05:49,920
Speaker 3: but the thing you have to understand is that cell

112
00:05:49,960 --> 00:05:53,200
Speaker 3: phones don't work inside of mine, and people don't want

113
00:05:53,200 --> 00:05:55,839
Speaker 3: to work if they can't bring their cell phone to work.

114
00:05:56,160 --> 00:05:58,919
Speaker 3: And so I've been you know, you ask what's different

115
00:05:58,920 --> 00:06:01,320
Speaker 3: from the data. Data would suggest to you that the

116
00:06:01,400 --> 00:06:04,440
Speaker 3: labor market has settled. But what I'm hearing is that

117
00:06:04,920 --> 00:06:07,120
Speaker 3: the labor market, which was very stable for a long

118
00:06:07,200 --> 00:06:10,000
Speaker 3: time and the hierarchy of jobs has gotten thrown up

119
00:06:10,000 --> 00:06:12,039
Speaker 3: in the air. And there's a set of jobs that

120
00:06:12,120 --> 00:06:14,360
Speaker 3: used to be paid X and are now paid Y

121
00:06:14,839 --> 00:06:18,400
Speaker 3: where they're more advantaged, and other people are being left behind.

122
00:06:18,440 --> 00:06:20,760
Speaker 3: Think state and local governments that can increase their pay.

123
00:06:21,200 --> 00:06:24,680
Speaker 3: There are other jobs that offer remote work versus or

124
00:06:24,720 --> 00:06:28,160
Speaker 3: you know, cell phone access in your workplace, and others don't,

125
00:06:28,200 --> 00:06:31,480
Speaker 3: and those are getting ahead, and so employers are struggling

126
00:06:31,480 --> 00:06:34,159
Speaker 3: to catch up with the new hierarchy of jobs. And

127
00:06:34,240 --> 00:06:37,320
Speaker 3: if you're in one of those jobs, think childcare or teachers,

128
00:06:37,400 --> 00:06:40,280
Speaker 3: or state and local government or nonprofits, you know, those

129
00:06:40,320 --> 00:06:43,799
Speaker 3: folks still have more to do to get their jobs filled,

130
00:06:43,920 --> 00:06:46,760
Speaker 3: to get people into jobs, to retain people. And there's

131
00:06:46,839 --> 00:06:49,560
Speaker 3: wage inflation, you know, potentially related to that. So that's

132
00:06:49,600 --> 00:06:52,120
Speaker 3: the kind of thing I'm trying to pick up when

133
00:06:52,120 --> 00:06:54,080
Speaker 3: I'm out there, and I think it helps make me

134
00:06:54,160 --> 00:06:56,400
Speaker 3: think about the economy in a totally different way than

135
00:06:56,480 --> 00:06:57,520
Speaker 3: just what the data shows.

136
00:06:57,720 --> 00:06:59,599
Speaker 1: That's so interesting because of course, when you look at

137
00:06:59,600 --> 00:07:02,320
Speaker 1: the data, it's all aggregated, so you can't see those

138
00:07:02,400 --> 00:07:06,760
Speaker 1: types of like qualitative variations that you just described, just

139
00:07:06,839 --> 00:07:10,160
Speaker 1: on the notion of companies. Some companies maybe still struggling

140
00:07:10,320 --> 00:07:13,480
Speaker 1: to find workers. You had a really good speech, I

141
00:07:13,480 --> 00:07:16,680
Speaker 1: thought back in August where you basically argued that one

142
00:07:16,680 --> 00:07:19,080
Speaker 1: of the big reasons we haven't seen a recession in

143
00:07:19,120 --> 00:07:22,040
Speaker 1: the US yet is that memories of the pandemic are

144
00:07:22,080 --> 00:07:26,200
Speaker 1: still very fresh, and so companies are still reacting to

145
00:07:26,680 --> 00:07:30,800
Speaker 1: past shortages as opposed to really worrying about excess capacity.

146
00:07:31,400 --> 00:07:35,280
Speaker 1: Do you think that dynamics starts to change as interest

147
00:07:35,400 --> 00:07:38,400
Speaker 1: rates go higher? And what I mean by that is,

148
00:07:38,480 --> 00:07:42,040
Speaker 1: at some point, does the added expense of investment at

149
00:07:42,120 --> 00:07:46,600
Speaker 1: higher rates kind of start to outweigh concerns over future capacity.

150
00:07:47,040 --> 00:07:48,480
Speaker 3: And I'll say two things I was getting at in

151
00:07:48,520 --> 00:07:50,880
Speaker 3: that speech. One of them is that if you just

152
00:07:50,920 --> 00:07:53,920
Speaker 3: spent a year trying desperately to fill empty jobs, you're

153
00:07:53,920 --> 00:07:57,000
Speaker 3: going to be a little cautious before laying people off cavalierly.

154
00:07:57,360 --> 00:07:59,960
Speaker 3: And I think if you look at the layoff announcements

155
00:08:00,040 --> 00:08:02,640
Speaker 3: by businesses over the first half of the year, for example,

156
00:08:03,000 --> 00:08:07,800
Speaker 3: you'll see they're massively disproportionately professionals, not frontline workers, not

157
00:08:08,040 --> 00:08:12,400
Speaker 3: skilled skilled trades and manufacturing construction workers. And I think

158
00:08:12,440 --> 00:08:15,720
Speaker 3: that's because people genuinely are concerned they won't be able

159
00:08:15,760 --> 00:08:18,360
Speaker 3: to find those people, you know, if they lay them off.

160
00:08:18,800 --> 00:08:20,520
Speaker 3: You Know. The other thing I was getting at there

161
00:08:20,720 --> 00:08:23,280
Speaker 3: is we've been predicting this recession for a long time.

162
00:08:23,760 --> 00:08:26,880
Speaker 3: It's been sixteen seventeen months where the leading economic indicators

163
00:08:26,880 --> 00:08:29,800
Speaker 3: have all been pointing to recession. If you're a business

164
00:08:30,120 --> 00:08:31,840
Speaker 3: and I've talked to a bunch of businesses about this

165
00:08:32,480 --> 00:08:35,880
Speaker 3: last year's plan, they scaled back. This year's plan, in

166
00:08:35,920 --> 00:08:38,520
Speaker 3: other words, the twenty twenty four plan, they're scaling back,

167
00:08:38,559 --> 00:08:41,760
Speaker 3: so they're being cautious. They're not investing in discretionary spending

168
00:08:43,040 --> 00:08:45,760
Speaker 3: or extra they're making those kind of investments. And so

169
00:08:45,880 --> 00:08:48,679
Speaker 3: if you do have a downturn, right the implications are

170
00:08:48,720 --> 00:08:51,520
Speaker 3: just going to be much less because people have already

171
00:08:51,520 --> 00:08:54,679
Speaker 3: prepared for it. When it comes to the question of

172
00:08:54,760 --> 00:08:58,120
Speaker 3: business investment, businesses, interest rates and how they affect it.

173
00:08:58,200 --> 00:09:01,559
Speaker 3: I saw a great chart last week that was interest

174
00:09:01,600 --> 00:09:04,880
Speaker 3: expense as a percent of revenue, yeah, for American corporates,

175
00:09:05,160 --> 00:09:07,400
Speaker 3: And what it showed is, I think it's now basically

176
00:09:07,440 --> 00:09:10,040
Speaker 3: exactly where it was in twenty nineteen. That doesn't mean

177
00:09:10,080 --> 00:09:12,080
Speaker 3: there's some people who aren't paying a lot more, but

178
00:09:12,240 --> 00:09:16,320
Speaker 3: on average, a lot of people refinanced, you know, during

179
00:09:16,360 --> 00:09:19,000
Speaker 3: the COVID era, a lot of people aren't as dependent

180
00:09:19,200 --> 00:09:23,400
Speaker 3: on borrowing, and so in total, people aren't paying more

181
00:09:23,400 --> 00:09:25,720
Speaker 3: in interest. Corporations aren't paying more in interest right now,

182
00:09:26,040 --> 00:09:27,640
Speaker 3: not yet, I mean, presuming that'll come.

183
00:09:28,080 --> 00:09:30,080
Speaker 1: Just on that note, I'd be curious to hear what

184
00:09:30,120 --> 00:09:32,680
Speaker 1: you have to say about the impact of higher rates

185
00:09:32,720 --> 00:09:35,880
Speaker 1: in general and where you see the effects of the

186
00:09:35,920 --> 00:09:39,520
Speaker 1: recent tightening the most in terms of the real economy. So,

187
00:09:39,600 --> 00:09:42,840
Speaker 1: for instance, it sounds like it's not having that much

188
00:09:42,960 --> 00:09:45,400
Speaker 1: of an impact on investment for the reasons that you

189
00:09:45,520 --> 00:09:48,400
Speaker 1: just laid out, But is it having a noticeable effect on,

190
00:09:48,640 --> 00:09:49,840
Speaker 1: for instance, consumption.

191
00:09:51,120 --> 00:09:53,080
Speaker 3: Well so, the place you can see it most clearly

192
00:09:53,200 --> 00:09:59,080
Speaker 3: is what i'll call interest sensitive sectors. Housing obviously was

193
00:09:59,160 --> 00:10:01,960
Speaker 3: in very fraud when we start our interest rate increases,

194
00:10:02,040 --> 00:10:06,760
Speaker 3: It's gotten less fro the you know, automobiles, durables, furniture,

195
00:10:06,760 --> 00:10:10,000
Speaker 3: all those sorts of things. Banking you obviously see have

196
00:10:10,080 --> 00:10:14,280
Speaker 3: seen the impact so far. You know, on the consumer side,

197
00:10:14,320 --> 00:10:16,439
Speaker 3: you'd expect to see and I would have expected to

198
00:10:16,480 --> 00:10:19,360
Speaker 3: see more impact than we've seen today. I have to

199
00:10:19,400 --> 00:10:21,800
Speaker 3: say there's still a lot of the pandemic in the economy,

200
00:10:21,800 --> 00:10:24,280
Speaker 3: and what I mean by that is the excess savings

201
00:10:24,280 --> 00:10:27,040
Speaker 3: that came through for people not spending as much or

202
00:10:27,080 --> 00:10:31,640
Speaker 3: retaining whatever stimulus. Another interesting thing I ran into the

203
00:10:31,640 --> 00:10:36,320
Speaker 3: other day is that adjustable rate mortgages, which back in

204
00:10:36,360 --> 00:10:38,640
Speaker 3: the two thousand era were a very large part of

205
00:10:38,679 --> 00:10:42,680
Speaker 3: the mortgage base. Options and all of that, exactly in

206
00:10:42,720 --> 00:10:46,080
Speaker 3: two thousand and three are eight percent of all mortgages.

207
00:10:46,280 --> 00:10:48,520
Speaker 3: And so whereas you might have thought that interest rates

208
00:10:48,559 --> 00:10:52,480
Speaker 3: would reset very quickly, they actually haven't reset all that quickly.

209
00:10:52,640 --> 00:10:54,880
Speaker 3: Commercial real estate is a place you clearly see it

210
00:10:54,880 --> 00:10:58,480
Speaker 3: another intrasensitive sector. So we see it in intrasensitive sectors.

211
00:10:58,760 --> 00:11:02,880
Speaker 3: Business investment is fly, is how i'd put it. Consumption

212
00:11:03,080 --> 00:11:06,680
Speaker 3: still remains very healthy, but I still think there's impact

213
00:11:06,720 --> 00:11:09,319
Speaker 3: of the rates in train. I still think it's coming

214
00:11:09,360 --> 00:11:12,200
Speaker 3: in train, but I'd agree it hasn't been nearly as

215
00:11:12,520 --> 00:11:15,199
Speaker 3: impactful as you would have imagined when we started increasing

216
00:11:15,280 --> 00:11:15,840
Speaker 3: rates a year.

217
00:11:15,720 --> 00:11:22,200
Speaker 4: And a half.

218
00:11:32,720 --> 00:11:34,440
Speaker 2: You mentioned housing, and I mean, I think that's a

219
00:11:34,480 --> 00:11:38,240
Speaker 2: really interesting example to look at here because we usually

220
00:11:38,240 --> 00:11:41,360
Speaker 2: think about that as the sector that is traditionally most

221
00:11:41,400 --> 00:11:44,959
Speaker 2: linked to monetary policy, and of course it's also historically

222
00:11:45,000 --> 00:11:49,480
Speaker 2: played such an important role in the US business cycle overall. Right,

223
00:11:49,760 --> 00:11:52,120
Speaker 2: but we're in a situation here with housing now where

224
00:11:52,720 --> 00:11:56,200
Speaker 2: mortgage rates have shot up, people are not moving, so

225
00:11:56,280 --> 00:12:00,160
Speaker 2: you're seeing that impact on kind of sales and construction,

226
00:12:00,800 --> 00:12:03,760
Speaker 2: and yet house prices are already back at record highs.

227
00:12:04,280 --> 00:12:07,880
Speaker 2: So how do you assess the impact that you're having

228
00:12:08,160 --> 00:12:10,559
Speaker 2: in a situation like that where activity has fallen off

229
00:12:10,600 --> 00:12:13,080
Speaker 2: a lot, but you're not really seeing any sort of

230
00:12:13,120 --> 00:12:16,280
Speaker 2: follow through at the price level, which is perhaps one

231
00:12:16,360 --> 00:12:18,880
Speaker 2: might think what FED officials care most about.

232
00:12:19,240 --> 00:12:21,120
Speaker 3: Well, so let me just talk for ten seconds about

233
00:12:21,160 --> 00:12:23,959
Speaker 3: housing before getting to your question, which is, I just

234
00:12:24,000 --> 00:12:26,800
Speaker 3: think there's been a secular change in the priority people

235
00:12:26,840 --> 00:12:31,079
Speaker 3: placed on housing, in their demand, in their wallet. Right,

236
00:12:31,120 --> 00:12:34,080
Speaker 3: if you're spending five days a week at home, three

237
00:12:34,160 --> 00:12:36,080
Speaker 3: days a week at home, seven days a week at home,

238
00:12:36,720 --> 00:12:38,800
Speaker 3: you know your house matters a lot more. Your office

239
00:12:38,840 --> 00:12:42,240
Speaker 3: matters more, your patio manage matters more, your furniture matters more.

240
00:12:42,280 --> 00:12:44,920
Speaker 3: And we saw that during COVID, and so I just

241
00:12:44,960 --> 00:12:48,520
Speaker 3: think people are much more focused on their house than

242
00:12:48,559 --> 00:12:52,000
Speaker 3: they were before, and that has created a demand increase.

243
00:12:52,400 --> 00:12:55,160
Speaker 3: In addition, you had a generation of millennials who are

244
00:12:55,200 --> 00:12:57,280
Speaker 3: now having kids and thinking I kind of need a house,

245
00:12:57,320 --> 00:13:00,240
Speaker 3: and that has also been a demand increase in a

246
00:13:00,280 --> 00:13:03,240
Speaker 3: generation of seniors who think that nursing homes aren't quite

247
00:13:03,240 --> 00:13:05,800
Speaker 3: as attractive as they were before COVID, and that's had

248
00:13:05,840 --> 00:13:10,240
Speaker 3: a supply decrease we increase interest rates. I do think

249
00:13:10,320 --> 00:13:12,280
Speaker 3: that has brought demand down. I mean when you hear

250
00:13:12,320 --> 00:13:15,480
Speaker 3: from home builders and others who are selling houses, demand

251
00:13:15,480 --> 00:13:19,600
Speaker 3: for houses has clearly moderated from the frothy twelve offers

252
00:13:19,600 --> 00:13:22,440
Speaker 3: for every house at twenty thousand over lists that we

253
00:13:22,480 --> 00:13:24,800
Speaker 3: had about a year and a half ago. That said,

254
00:13:24,840 --> 00:13:27,400
Speaker 3: the supply is still short, and it's short for the

255
00:13:27,400 --> 00:13:30,040
Speaker 3: obvious reason that if you have a three percent mortgage,

256
00:13:30,280 --> 00:13:32,840
Speaker 3: you're not dying to sell that house and get into

257
00:13:32,840 --> 00:13:36,640
Speaker 3: a seven percent mortgage. It just changes the financial formula.

258
00:13:36,720 --> 00:13:38,840
Speaker 3: And so what we see in terms of the effect

259
00:13:39,000 --> 00:13:41,679
Speaker 3: is you still very limited supply of houses for sale.

260
00:13:42,320 --> 00:13:46,199
Speaker 3: Residential construction, which you said is cyclical and normally, it's

261
00:13:46,240 --> 00:13:48,559
Speaker 3: actually not as weak as you'd think it would be

262
00:13:48,559 --> 00:13:51,120
Speaker 3: because the big home builders are saying I can sell

263
00:13:51,160 --> 00:13:54,360
Speaker 3: every house I can make, and so they're building houses.

264
00:13:54,760 --> 00:13:58,080
Speaker 3: Right that ten percent of the market is actually pretty vibrant.

265
00:13:58,200 --> 00:14:01,120
Speaker 3: Because people still need houses is they can't find them,

266
00:14:01,360 --> 00:14:04,120
Speaker 3: and so they're buying new houses as opposed to existing houses.

267
00:14:04,320 --> 00:14:07,000
Speaker 3: But the existing house market is I'll say, the supply

268
00:14:07,120 --> 00:14:10,000
Speaker 3: is very weak. The demand is coming off, but it's

269
00:14:10,000 --> 00:14:13,280
Speaker 3: still an excess to supply and that's what's keeping the prices. Hi,

270
00:14:13,800 --> 00:14:16,160
Speaker 3: how do we look at impact? I mean, we have

271
00:14:16,200 --> 00:14:19,040
Speaker 3: one tool called interest rates. It's a pretty blunt tool.

272
00:14:19,160 --> 00:14:22,560
Speaker 3: When I talk to home builders and realders, you know,

273
00:14:22,640 --> 00:14:25,160
Speaker 3: I'm asking questions is demand coming off or not? It

274
00:14:25,200 --> 00:14:28,040
Speaker 3: is quite clear that demand's coming off. It's quite clear

275
00:14:28,040 --> 00:14:30,640
Speaker 3: there are fewer bids per house. You know, when is

276
00:14:30,680 --> 00:14:34,560
Speaker 3: price coming down? That's a much more difficult, you know,

277
00:14:34,640 --> 00:14:37,680
Speaker 3: thing to get to. And it's definitely stabilized from the

278
00:14:38,120 --> 00:14:40,120
Speaker 3: you know, extreme spikes we were seeing a year and

279
00:14:40,160 --> 00:14:42,200
Speaker 3: a half ago, but it certainly hasn't come down in

280
00:14:42,240 --> 00:14:43,160
Speaker 3: any kind of scale.

281
00:14:43,440 --> 00:14:46,160
Speaker 2: So two quick follow ups then, is the upshot basically

282
00:14:46,200 --> 00:14:48,960
Speaker 2: that perhaps the most you can hope for here in

283
00:14:49,000 --> 00:14:51,760
Speaker 2: this kind of supply constraint environment is just that you

284
00:14:52,400 --> 00:14:56,200
Speaker 2: are going to slow the rate of growth of price increases.

285
00:14:56,600 --> 00:14:59,280
Speaker 2: And then also does that kind of then change the

286
00:14:59,280 --> 00:15:02,400
Speaker 2: way you think about the monetary policy transmission mechanism in

287
00:15:02,440 --> 00:15:05,520
Speaker 2: that maybe you have to lean harder on other sectors

288
00:15:05,560 --> 00:15:08,480
Speaker 2: of the economy to get the overall type of slow

289
00:15:08,520 --> 00:15:10,800
Speaker 2: down that you're trying to achieve with higher interest rates.

290
00:15:10,960 --> 00:15:13,040
Speaker 2: If housing is not going to play as central of

291
00:15:13,120 --> 00:15:15,000
Speaker 2: a role to the whole story. Yeah, because this.

292
00:15:15,040 --> 00:15:17,920
Speaker 1: Is also slightly different to what Palell said I think

293
00:15:17,960 --> 00:15:19,720
Speaker 1: like a year or maybe two years ago, where he

294
00:15:19,800 --> 00:15:23,040
Speaker 1: was talking about the need to put some sort of

295
00:15:23,080 --> 00:15:25,080
Speaker 1: dampening pressure on house prices.

296
00:15:25,880 --> 00:15:29,200
Speaker 3: Here's what I'd think about it. To bring pricing into alignment,

297
00:15:29,240 --> 00:15:31,240
Speaker 3: you want supply and demand to get into better balance.

298
00:15:32,440 --> 00:15:35,200
Speaker 3: That means both the supply side and the demand side matter.

299
00:15:35,960 --> 00:15:38,360
Speaker 3: We are seeing progress on the supply side. A lot

300
00:15:38,360 --> 00:15:40,200
Speaker 3: of the supply chain issues we had a year or

301
00:15:40,200 --> 00:15:43,200
Speaker 3: two ago, with the exception of chips and switch gears,

302
00:15:43,200 --> 00:15:46,160
Speaker 3: seem to be in much better shape. You've seen labor

303
00:15:46,160 --> 00:15:48,920
Speaker 3: force returning to the market at much higher level. So

304
00:15:48,960 --> 00:15:51,480
Speaker 3: you're getting some help on the supply side, and we're

305
00:15:51,480 --> 00:15:54,400
Speaker 3: doing what we do on the demand side, right, and

306
00:15:54,520 --> 00:15:57,800
Speaker 3: we're just trying to calibrate that. And so to get

307
00:15:57,880 --> 00:16:00,000
Speaker 3: to where you need to get into balance, you can

308
00:16:00,080 --> 00:16:02,840
Speaker 3: get there with lots of different goods and services pricing

309
00:16:02,880 --> 00:16:04,680
Speaker 3: in very different ways. You don't just have to get

310
00:16:04,680 --> 00:16:07,400
Speaker 3: one element shape. Now, housing is a big part of

311
00:16:07,440 --> 00:16:09,560
Speaker 3: the economy, and so if rents come into line and

312
00:16:09,600 --> 00:16:13,040
Speaker 3: housing comes into line, that would be useful. But you know,

313
00:16:13,080 --> 00:16:15,480
Speaker 3: relative prices move all the time, and if what we've

314
00:16:15,520 --> 00:16:18,560
Speaker 3: had is a secular shift toward more demand for housing,

315
00:16:18,600 --> 00:16:22,400
Speaker 3: that might mean somewhat less lessening of housing prices and

316
00:16:22,440 --> 00:16:24,800
Speaker 3: somewhat more lessening about other set of prices.

317
00:16:25,320 --> 00:16:29,000
Speaker 1: Can I ask more generally, how you're thinking about you know,

318
00:16:29,040 --> 00:16:31,480
Speaker 1: if we assume that a lot of the recent inflation

319
00:16:31,760 --> 00:16:34,800
Speaker 1: has been driven on the supply side, and you know,

320
00:16:34,840 --> 00:16:38,360
Speaker 1: maybe that's a big assumption, but when you raise interest rates,

321
00:16:38,360 --> 00:16:43,520
Speaker 1: there is this argument that maybe you're dampening future expansion

322
00:16:43,600 --> 00:16:45,600
Speaker 1: and investment at a time when you really want to

323
00:16:45,640 --> 00:16:48,640
Speaker 1: see it expand, and housing is kind of an example

324
00:16:48,680 --> 00:16:51,040
Speaker 1: of that, even though a lot of construction has been

325
00:16:51,080 --> 00:16:54,640
Speaker 1: stronger than people have expected. How are you sort of

326
00:16:54,720 --> 00:16:59,320
Speaker 1: viewing that tension between higher rates maybe impacting capacity versus

327
00:16:59,640 --> 00:17:01,520
Speaker 1: trying to reduce demand.

328
00:17:01,920 --> 00:17:05,240
Speaker 3: I think it's just a time horizon question, because inflation

329
00:17:05,359 --> 00:17:08,320
Speaker 3: doesn't help in building capacity either. And so if we

330
00:17:08,320 --> 00:17:10,600
Speaker 3: can raise rates for a relatively short period of time,

331
00:17:11,000 --> 00:17:13,439
Speaker 3: get inflation under control, and bring the economy back to

332
00:17:13,520 --> 00:17:16,760
Speaker 3: the kind of economy we've had with stable prices and

333
00:17:16,840 --> 00:17:20,119
Speaker 3: you know, good employment and strong GDP, that will be

334
00:17:20,119 --> 00:17:23,280
Speaker 3: good for investment. If we don't. Then you know, you've

335
00:17:23,280 --> 00:17:26,320
Speaker 3: seen countries that don't control their inflation. That's a totally

336
00:17:26,320 --> 00:17:29,520
Speaker 3: different investment stature. So it's one thing if you said,

337
00:17:29,600 --> 00:17:31,280
Speaker 3: oh no, wait a second, we're going to constrain the

338
00:17:31,320 --> 00:17:35,040
Speaker 3: economy forever. But people who invest aren't investing based on

339
00:17:35,040 --> 00:17:37,720
Speaker 3: one or two year horizons. They're investing on long term horizons.

340
00:17:37,720 --> 00:17:40,640
Speaker 3: And I think they think us taking the moves we're

341
00:17:40,680 --> 00:17:43,760
Speaker 3: taking to get inflation under control are actually helpful for investment,

342
00:17:43,800 --> 00:17:45,680
Speaker 3: not the other way around. So I'm talking to lots

343
00:17:45,680 --> 00:17:47,600
Speaker 3: of businesses and one of the questions I ask them is,

344
00:17:48,200 --> 00:17:51,800
Speaker 3: you know, what's your investment posture going forward? And folks

345
00:17:51,840 --> 00:17:54,159
Speaker 3: are still leaning forward on investment. We got a Durables

346
00:17:54,200 --> 00:17:57,560
Speaker 3: Goods report this morning that was actually pretty healthy. Businesses

347
00:17:57,560 --> 00:18:01,280
Speaker 3: are still investing. Now, that doesn't mean they're going crazy,

348
00:18:01,359 --> 00:18:04,000
Speaker 3: you know, I talked about that earlier. But they're still investing.

349
00:18:04,040 --> 00:18:06,679
Speaker 3: Their investing levels are actually pretty solid. I think that

350
00:18:06,840 --> 00:18:10,360
Speaker 3: is completely just to bet on the medium to long

351
00:18:10,520 --> 00:18:12,720
Speaker 3: term perceived health of this economy.

352
00:18:13,200 --> 00:18:15,200
Speaker 1: We touched on house prices, but I wanted to ask

353
00:18:15,240 --> 00:18:18,399
Speaker 1: you a sort of wider question on pricing decisions that

354
00:18:18,440 --> 00:18:21,320
Speaker 1: businesses are making. Now, I would be really curious to

355
00:18:21,359 --> 00:18:24,440
Speaker 1: get your thoughts on this whole idea of seller's inflation

356
00:18:24,800 --> 00:18:29,360
Speaker 1: or profit led inflation. So we've heard some ECB members

357
00:18:29,440 --> 00:18:32,480
Speaker 1: talk about it, this idea that maybe companies are using

358
00:18:32,920 --> 00:18:37,560
Speaker 1: these industry wide shocks to propagate higher prices, and we

359
00:18:37,640 --> 00:18:39,840
Speaker 1: have seen a lot of shocks over the past couple

360
00:18:39,880 --> 00:18:43,440
Speaker 1: of years. I think Brennard might have mentioned this way

361
00:18:43,440 --> 00:18:45,720
Speaker 1: back in January, but of course she's not at the

362
00:18:45,720 --> 00:18:50,080
Speaker 1: FED anymore. Is the FED thinking about this dynamic at all?

363
00:18:50,440 --> 00:18:53,160
Speaker 3: I'll put a little different because I do believe in capitalism,

364
00:18:53,200 --> 00:18:55,800
Speaker 3: and I do believe that companies raise price when they

365
00:18:55,840 --> 00:18:57,280
Speaker 3: have an opportunity and lower price.

366
00:18:57,280 --> 00:18:59,919
Speaker 1: I'm very carefully avoided the greedflation.

367
00:19:00,520 --> 00:19:04,000
Speaker 3: Yeah, but here's I think what's going on. It's been

368
00:19:04,040 --> 00:19:06,880
Speaker 3: twenty or thirty years before COVID of two to three

369
00:19:06,920 --> 00:19:10,720
Speaker 3: percent inflation, very stable prices. Part of that, I hope

370
00:19:10,880 --> 00:19:13,240
Speaker 3: you think was good leadership by the FED, But part

371
00:19:13,280 --> 00:19:16,080
Speaker 3: of that was a set of elements in the economy

372
00:19:16,440 --> 00:19:19,280
Speaker 3: that held businesses back. E Commerce meant that people could

373
00:19:19,280 --> 00:19:22,159
Speaker 3: electronically shop prices. You go to a bookstore and you

374
00:19:22,200 --> 00:19:26,520
Speaker 3: just click and compare it to Amazon, Big companies, autos

375
00:19:26,560 --> 00:19:29,000
Speaker 3: being the first, but many big companies invested in big

376
00:19:29,040 --> 00:19:32,320
Speaker 3: purchasing departments that allowed people to negotiate. Your big box

377
00:19:32,359 --> 00:19:35,640
Speaker 3: retailers were famous for saying, don't give me any price increases,

378
00:19:35,720 --> 00:19:39,800
Speaker 3: or I'll take manufactured to China. You had offshore production,

379
00:19:39,880 --> 00:19:42,760
Speaker 3: you had offshore labor, you had demographics, you had fracking.

380
00:19:43,119 --> 00:19:45,560
Speaker 3: There was a whole set of things that kept pricing

381
00:19:45,640 --> 00:19:48,760
Speaker 3: under control and frankly, kept businesses away from pricing. So

382
00:19:49,200 --> 00:19:51,280
Speaker 3: when the tariffs happened in twenty eighteen, I talked to

383
00:19:51,280 --> 00:19:53,640
Speaker 3: a lot of businesses affected by the tariffs and I said,

384
00:19:53,640 --> 00:19:55,880
Speaker 3: are you going to increase price? And they said, well,

385
00:19:55,920 --> 00:19:58,480
Speaker 3: I'll increase them to this segment of my customer base,

386
00:19:58,520 --> 00:20:00,320
Speaker 3: but I can't take it to one of the big

387
00:20:00,359 --> 00:20:04,280
Speaker 3: home improvement chains because they won't accept it. And that's

388
00:20:04,359 --> 00:20:08,080
Speaker 3: market power, and that was being deployed in an effort

389
00:20:08,119 --> 00:20:11,040
Speaker 3: to keep price in a control. But businesses also didn't

390
00:20:11,040 --> 00:20:13,639
Speaker 3: have the confidence to raise prices. So then you have

391
00:20:13,680 --> 00:20:16,520
Speaker 3: these supply constraints, you have the stimulus, you have the

392
00:20:16,520 --> 00:20:19,800
Speaker 3: inflation comes in in every boardroom in this country. Some

393
00:20:20,040 --> 00:20:22,880
Speaker 3: business person put their plan together and the board said, well,

394
00:20:23,000 --> 00:20:25,639
Speaker 3: why aren't you being more aggressive with price? And so

395
00:20:26,320 --> 00:20:30,320
Speaker 3: those folks who had big cost squeezes or availability problems,

396
00:20:30,359 --> 00:20:33,960
Speaker 3: they increased their price. And those people who colorably could

397
00:20:34,040 --> 00:20:36,680
Speaker 3: explain that they might have those things also increase their price.

398
00:20:37,119 --> 00:20:40,120
Speaker 3: And I don't think that's greedflation or I mean, that's

399
00:20:40,200 --> 00:20:42,560
Speaker 3: just how businesses react. And the way I think about

400
00:20:42,600 --> 00:20:45,199
Speaker 3: it is, after twenty years, thirty years of price not

401
00:20:45,320 --> 00:20:47,800
Speaker 3: being on the table as a lever, it's now on

402
00:20:47,840 --> 00:20:50,440
Speaker 3: the table as a lever. And I would say, having

403
00:20:50,480 --> 00:20:53,080
Speaker 3: been a consultant in my life, it is the quickest

404
00:20:53,160 --> 00:20:56,000
Speaker 3: way to make more money. If you're successful, price goes

405
00:20:56,000 --> 00:20:57,600
Speaker 3: straight to the bottom line. You don't have to hire

406
00:20:57,600 --> 00:21:00,439
Speaker 3: any other people. You know, it's a very good profit

407
00:21:00,600 --> 00:21:03,359
Speaker 3: lever if it works. And so businesses that got that

408
00:21:03,440 --> 00:21:08,720
Speaker 3: opportunity aren't going to stop trying until either their customers

409
00:21:08,760 --> 00:21:11,520
Speaker 3: or their competitors, you know, make them stop. Now you

410
00:21:11,560 --> 00:21:14,159
Speaker 3: see in many sectors, you know, prices coming down or

411
00:21:14,200 --> 00:21:18,119
Speaker 3: even going the other way. Apparel, used cars, you know,

412
00:21:18,200 --> 00:21:21,040
Speaker 3: being example. So I'm not saying this is a permanent thing,

413
00:21:21,400 --> 00:21:24,679
Speaker 3: but it's part of why I think inflation, once having blossomed,

414
00:21:25,080 --> 00:21:27,919
Speaker 3: is somewhat slower to settle, because I just think it

415
00:21:27,960 --> 00:21:31,000
Speaker 3: takes time to get back. I'd remind you that we

416
00:21:31,080 --> 00:21:35,520
Speaker 3: didn't get the vulgar inflation fighting team. I think the

417
00:21:35,600 --> 00:21:38,199
Speaker 3: number is in by nineteen eighty six had gotten inflation

418
00:21:38,320 --> 00:21:40,280
Speaker 3: down to four percent, and it took down to the

419
00:21:40,359 --> 00:21:42,720
Speaker 3: nineties to get it to two percent. Just takes a

420
00:21:42,760 --> 00:21:45,480
Speaker 3: while once you've unleashed inflation to put it back in

421
00:21:45,520 --> 00:21:45,960
Speaker 3: the box.

422
00:21:46,600 --> 00:21:49,879
Speaker 2: This is so interesting, So let's bring wages into the

423
00:21:49,920 --> 00:21:53,439
Speaker 2: picture now, right, because it seems like there's a lot

424
00:21:53,520 --> 00:21:58,040
Speaker 2: of new research emerging from various corners of the FED system.

425
00:21:58,680 --> 00:22:01,360
Speaker 2: Some FED presents have been talking about this idea that

426
00:22:01,880 --> 00:22:04,880
Speaker 2: it looks like in the data, wages are more likely

427
00:22:04,960 --> 00:22:07,760
Speaker 2: to follow prices than the other way around. Now, of course,

428
00:22:07,880 --> 00:22:10,080
Speaker 2: when we think about kind of the textbook explanation of

429
00:22:10,080 --> 00:22:12,639
Speaker 2: how monetary policy works, it's like you raise interest rates,

430
00:22:12,680 --> 00:22:16,480
Speaker 2: that loosens the labor market, that puts downward pressure on wages,

431
00:22:16,520 --> 00:22:19,440
Speaker 2: and then that downward pressure on wages filters through to prices.

432
00:22:19,480 --> 00:22:22,560
Speaker 2: So which side of this argument do you kind of

433
00:22:22,560 --> 00:22:23,320
Speaker 2: come down on.

434
00:22:24,160 --> 00:22:25,920
Speaker 3: Well, I'm not a trained economist, but I kind of

435
00:22:25,920 --> 00:22:27,720
Speaker 3: want to say both sides. So let me try to

436
00:22:27,720 --> 00:22:28,440
Speaker 3: explain that you.

437
00:22:28,359 --> 00:22:30,960
Speaker 1: Can get away with italy as an untrained economist.

438
00:22:31,520 --> 00:22:35,040
Speaker 3: So there's no question in my mind that this bout

439
00:22:35,119 --> 00:22:37,880
Speaker 3: of inflation wasn't driven by wages. It was driven by

440
00:22:38,480 --> 00:22:41,640
Speaker 3: a set of other things, supply constraints and fiscal stimulus

441
00:22:41,680 --> 00:22:44,280
Speaker 3: which increased demand and that sort of thing, And so

442
00:22:44,840 --> 00:22:47,520
Speaker 3: prices went up. And then a bunch of people, including

443
00:22:47,560 --> 00:22:49,760
Speaker 3: I'm sure the two of you, said, huh, I wonder

444
00:22:49,800 --> 00:22:51,680
Speaker 3: why my merit increase is only two and a half

445
00:22:51,720 --> 00:22:54,199
Speaker 3: percent when inflation's five or six. Shouldn't I have a

446
00:22:54,240 --> 00:22:57,120
Speaker 3: higher merit increase. I mean, that's how the war works.

447
00:22:57,160 --> 00:23:00,520
Speaker 3: So in that part of the world, prices drove wages.

448
00:23:00,680 --> 00:23:03,040
Speaker 3: And when I talk to people this year about merit increases,

449
00:23:03,359 --> 00:23:05,920
Speaker 3: they'll say, well, inflation's come down, so maybe I won't

450
00:23:05,920 --> 00:23:09,280
Speaker 3: give three, maybe i'll give four. Prices are driving wages.

451
00:23:09,680 --> 00:23:12,119
Speaker 3: But there are other places where wages drive prices, And

452
00:23:12,160 --> 00:23:15,199
Speaker 3: the most obvious places are service sectors where most of

453
00:23:15,200 --> 00:23:18,560
Speaker 3: your cost structure is wages, and people had availability issues

454
00:23:18,560 --> 00:23:21,119
Speaker 3: and so you had to pay more for gardeners or

455
00:23:21,160 --> 00:23:24,040
Speaker 3: barbers or whatever, and so you have no option but

456
00:23:24,080 --> 00:23:27,720
Speaker 3: to pass that through in price. So I definitely believe

457
00:23:27,760 --> 00:23:31,320
Speaker 3: in this episode the price inflation drove wage inflation. But

458
00:23:31,400 --> 00:23:34,800
Speaker 3: there are sectors even now. Hospitals will be a great example.

459
00:23:35,880 --> 00:23:41,159
Speaker 3: Hospitals nurses increased in price significantly during COVID. Hospitals have

460
00:23:41,280 --> 00:23:43,399
Speaker 3: very little pricing power, at least in the short term.

461
00:23:43,560 --> 00:23:45,800
Speaker 3: They get their money from Medicaid and from the health insurers.

462
00:23:46,800 --> 00:23:49,200
Speaker 3: But hospitals whose margins are squeezed are going to have

463
00:23:49,240 --> 00:23:51,399
Speaker 3: to go back to commercial insurers and ask for more,

464
00:23:51,640 --> 00:23:54,080
Speaker 3: and those commercial insurers will, in fact, it will then

465
00:23:54,119 --> 00:23:56,720
Speaker 3: pass that on to customers. And so in that case,

466
00:23:56,760 --> 00:24:01,480
Speaker 3: wages will drive prices. You maybe prices drove wages within

467
00:24:01,560 --> 00:24:04,199
Speaker 3: dry prices. That's how you get into this circular argument.

468
00:24:04,680 --> 00:24:07,520
Speaker 1: This is a nice segue into some of the labor

469
00:24:07,720 --> 00:24:11,640
Speaker 1: issues that I mentioned at the top, notably the United

470
00:24:11,720 --> 00:24:15,480
Speaker 1: Auto Workers strike. How are you thinking about the potential

471
00:24:15,560 --> 00:24:20,560
Speaker 1: impact on the auto supply chain and inflation and GDP

472
00:24:20,800 --> 00:24:22,920
Speaker 1: given that it seems like it's coming at a time

473
00:24:23,640 --> 00:24:25,840
Speaker 1: right when we were beginning to see the price of

474
00:24:26,119 --> 00:24:31,480
Speaker 1: used cars start to drop after many, many months of

475
00:24:31,640 --> 00:24:35,600
Speaker 1: abnormal activity there. What does that suggest to you? And

476
00:24:36,000 --> 00:24:39,800
Speaker 1: are those strikes kind of looming a bit larger in

477
00:24:39,840 --> 00:24:42,160
Speaker 1: the FEDS thinking nowadays.

478
00:24:42,160 --> 00:24:46,520
Speaker 3: Well, we've had a series of labor disputes or near disputes,

479
00:24:46,640 --> 00:24:50,040
Speaker 3: starting with I guess there were some airlines and ups,

480
00:24:50,080 --> 00:24:53,080
Speaker 3: and of course the writers just settled their strike. You

481
00:24:53,160 --> 00:24:57,680
Speaker 3: get the autos, and in all those cases their implications

482
00:24:57,680 --> 00:25:02,720
Speaker 3: for supply and their implications for employment, and potentially that

483
00:25:02,760 --> 00:25:06,240
Speaker 3: we'll see implications on pricing, and all those fit as

484
00:25:06,320 --> 00:25:09,879
Speaker 3: best I can tell, into the we'll see category. You know,

485
00:25:09,920 --> 00:25:12,439
Speaker 3: one of things I liked about our posture coming out

486
00:25:12,480 --> 00:25:16,679
Speaker 3: of the last meeting is that with demand relatively strong

487
00:25:16,760 --> 00:25:21,000
Speaker 3: by all accounts, labor markets still relatively strong, and inflation cooling,

488
00:25:21,359 --> 00:25:24,240
Speaker 3: we have the latitude to say, let's see how this developed.

489
00:25:24,280 --> 00:25:27,840
Speaker 3: So I could tell you stories of this creating inflationary pressure.

490
00:25:27,840 --> 00:25:31,919
Speaker 3: I could tell you stories of this creating excess labor,

491
00:25:33,040 --> 00:25:34,639
Speaker 3: but I'd just be telling you stories. I think we

492
00:25:34,680 --> 00:25:35,880
Speaker 3: have to see how this turns out.

493
00:25:36,680 --> 00:25:41,040
Speaker 2: So Voker famously attributed the breaking of the air traffic

494
00:25:41,080 --> 00:25:46,520
Speaker 2: controller strike as kind of an elemental turning point in

495
00:25:47,160 --> 00:25:52,480
Speaker 2: bringing the inflationary period of the nineteen seventies to heal.

496
00:25:53,560 --> 00:25:54,840
Speaker 2: Do you think about it similarly?

497
00:25:55,440 --> 00:25:57,440
Speaker 3: I'm actually pleased to say I remember that that was

498
00:25:57,520 --> 00:26:03,240
Speaker 3: nineteen eighty one, so that was what forty two years ago. Yeah,

499
00:26:03,320 --> 00:26:07,000
Speaker 3: I believe in the seventies and eighties, the common wisdom

500
00:26:07,119 --> 00:26:10,360
Speaker 3: on inflation was that there were two sets of sources,

501
00:26:10,800 --> 00:26:13,680
Speaker 3: you know. One was the role of the FED and

502
00:26:14,280 --> 00:26:17,600
Speaker 3: its unwillingness to stay the course in terms of battling inflation,

503
00:26:18,119 --> 00:26:22,880
Speaker 3: and the second was, you know, wage price pressure, where

504
00:26:23,320 --> 00:26:25,880
Speaker 3: wages were in fact driving prices. So I haven't heard

505
00:26:25,880 --> 00:26:28,840
Speaker 3: that quote. If he said it, he's probably talking about

506
00:26:28,960 --> 00:26:31,520
Speaker 3: union power and what that did to that part of

507
00:26:31,560 --> 00:26:36,720
Speaker 3: the equation. But I was in college studying monetary policy

508
00:26:36,720 --> 00:26:38,920
Speaker 3: at the time. But all I've read and learned about

509
00:26:38,960 --> 00:26:42,160
Speaker 3: monetary policy would give Vulcar a lot more credit than

510
00:26:42,200 --> 00:26:44,800
Speaker 3: to say, breaking of one strike. I think the willingness

511
00:26:44,800 --> 00:26:47,480
Speaker 3: to stand up to high inflation and say we will

512
00:26:47,520 --> 00:26:49,560
Speaker 3: do what we need to do to get it under

513
00:26:49,600 --> 00:26:53,000
Speaker 3: control in a way that was broadly seen eventually as

514
00:26:53,119 --> 00:26:56,359
Speaker 3: quite credible has to be the key element in getting

515
00:26:56,359 --> 00:26:59,920
Speaker 3: inflation under control, as opposed to anyone, you know, government

516
00:27:00,080 --> 00:27:01,240
Speaker 3: union in the strike.

517
00:27:02,320 --> 00:27:04,520
Speaker 1: So I promise that we would try to get to

518
00:27:04,680 --> 00:27:07,199
Speaker 1: all of the sort of headline risks and developments that

519
00:27:07,240 --> 00:27:09,159
Speaker 1: I mentioned in the intro, and you're right, there were

520
00:27:09,200 --> 00:27:10,960
Speaker 1: a lot of them, but one of them is the

521
00:27:11,359 --> 00:27:14,560
Speaker 1: bond market sell off that we've seen. Were you surprised

522
00:27:14,560 --> 00:27:18,280
Speaker 1: at all by the market reaction to last week's meeting,

523
00:27:18,400 --> 00:27:20,480
Speaker 1: given that, you know, we had the dot plot kind

524
00:27:20,480 --> 00:27:24,400
Speaker 1: of suggesting higher for longer, but it came with better

525
00:27:24,440 --> 00:27:28,879
Speaker 1: growth projections as well. And yet fast forward a little

526
00:27:28,920 --> 00:27:31,440
Speaker 1: over a week and it feels like there has been

527
00:27:31,560 --> 00:27:34,480
Speaker 1: this very dramatic reaction in the market.

528
00:27:34,840 --> 00:27:36,679
Speaker 3: I don't think I understand the market well enough to

529
00:27:36,680 --> 00:27:39,359
Speaker 3: give you much commentary on it. It does move around,

530
00:27:39,920 --> 00:27:42,800
Speaker 3: and it moves around for lots of reasons, which undoubtedly

531
00:27:42,800 --> 00:27:45,680
Speaker 3: include what we do, but also include a lot of

532
00:27:45,720 --> 00:27:49,480
Speaker 3: foreign country dynamics, you know, Japan or China, and who's

533
00:27:49,480 --> 00:27:54,160
Speaker 3: buying and who's not. Treasury supply, you know, and all that.

534
00:27:54,200 --> 00:27:57,080
Speaker 3: And so my interpretation of the SEP, and I should

535
00:27:57,160 --> 00:28:01,719
Speaker 3: remind everybody that it's nineteen individuals individual forecast and then

536
00:28:01,720 --> 00:28:04,159
Speaker 3: there's a median, and so the median is not the

537
00:28:04,160 --> 00:28:08,360
Speaker 3: median individual, it's the median inflation and the median GDP.

538
00:28:08,560 --> 00:28:11,119
Speaker 3: But it seemed pretty straightforward to me that it marked

539
00:28:11,160 --> 00:28:15,000
Speaker 3: up GDP based on a pretty strong summer of growth.

540
00:28:15,720 --> 00:28:18,440
Speaker 3: It marked down the unemployment rate based on a pretty

541
00:28:18,440 --> 00:28:23,399
Speaker 3: strong summer of growth, and it kept inflation the same.

542
00:28:23,840 --> 00:28:26,080
Speaker 3: And the only way to square those would be to

543
00:28:26,119 --> 00:28:28,720
Speaker 3: have a somewhat higher for longer rate path so that

544
00:28:29,040 --> 00:28:33,320
Speaker 3: those things went together, at least in my estimate. If

545
00:28:33,320 --> 00:28:36,199
Speaker 3: I'm wrong on my inflation forecast or I'm wrong on

546
00:28:36,200 --> 00:28:39,240
Speaker 3: my unemployment forecast, then I'm wrong on my Fed funds

547
00:28:39,320 --> 00:28:41,160
Speaker 3: rate forecast. We'll see what happens.

548
00:28:41,680 --> 00:28:44,360
Speaker 2: So you can definitely let us know if you're out

549
00:28:44,360 --> 00:28:46,720
Speaker 2: of step with the median after I asked this question.

550
00:28:46,760 --> 00:28:49,640
Speaker 2: But you know, one of the striking things about those

551
00:28:49,680 --> 00:28:53,280
Speaker 2: projections that you put out last week was the pretty

552
00:28:53,320 --> 00:28:57,640
Speaker 2: decent upgrade to GDP growth in twenty twenty four. So

553
00:28:57,920 --> 00:28:59,880
Speaker 2: the story kind of coming into this meeting is that,

554
00:29:00,520 --> 00:29:01,959
Speaker 2: you know, a lot of people earlier in the year

555
00:29:01,960 --> 00:29:04,040
Speaker 2: I thought we were going to have a recession and

556
00:29:04,200 --> 00:29:06,400
Speaker 2: the growth forecasts were very weak, and then over the

557
00:29:06,480 --> 00:29:09,880
Speaker 2: last several months people have been surprised by the resiliency

558
00:29:09,920 --> 00:29:13,280
Speaker 2: of the economy, so they've dropped the recession forecast. I

559
00:29:13,280 --> 00:29:16,320
Speaker 2: guess my question is, is this the kind of situation

560
00:29:16,400 --> 00:29:20,000
Speaker 2: where we've been surprised by growth over the last three

561
00:29:20,040 --> 00:29:22,680
Speaker 2: months or so, and therefore we're marking up our growth

562
00:29:22,680 --> 00:29:24,760
Speaker 2: forecasts all the way through the end of next year.

563
00:29:25,240 --> 00:29:26,320
Speaker 2: How do you think about that.

564
00:29:26,520 --> 00:29:29,200
Speaker 3: Second quarter GDP came in at two point one percent,

565
00:29:29,680 --> 00:29:32,920
Speaker 3: higher than trend and significantly higher than most people would

566
00:29:32,920 --> 00:29:35,480
Speaker 3: have thought, you know, six or nine months ago. We'll

567
00:29:35,480 --> 00:29:38,800
Speaker 3: see what happens to third quarter GDP. But one of

568
00:29:38,840 --> 00:29:41,680
Speaker 3: the big forecasting firms I saw today marked it down

569
00:29:41,680 --> 00:29:44,680
Speaker 3: from four to three point six percent. So that's a

570
00:29:44,840 --> 00:29:48,040
Speaker 3: very healthy number of three point six percent. And I

571
00:29:48,040 --> 00:29:50,920
Speaker 3: think there is a case to be made that the

572
00:29:51,000 --> 00:29:53,640
Speaker 3: US economy is a lot more resilient than we thought

573
00:29:53,640 --> 00:29:56,280
Speaker 3: it was, resilient to interest rates, resilient to all the

574
00:29:56,280 --> 00:29:59,560
Speaker 3: shocks we've talked about, and those people who believe that,

575
00:30:00,360 --> 00:30:03,480
Speaker 3: you know, I think might well be sensible to mark

576
00:30:03,560 --> 00:30:06,800
Speaker 3: up their growth forecast for twenty twenty four. I still

577
00:30:06,840 --> 00:30:08,920
Speaker 3: want to believe, personally, not want to believe. I still

578
00:30:08,920 --> 00:30:12,640
Speaker 3: believe personally the rates have an effect with a lag

579
00:30:13,120 --> 00:30:15,040
Speaker 3: that some of the things we're talking about are going

580
00:30:15,080 --> 00:30:17,040
Speaker 3: to have you know, we haven't talked about oil prices

581
00:30:18,600 --> 00:30:21,120
Speaker 3: are going to feed through to the US economy. That

582
00:30:21,200 --> 00:30:24,560
Speaker 3: inflation is going to be more stubborn than we think,

583
00:30:24,760 --> 00:30:30,240
Speaker 3: and that eventually, you know, people will start to trim

584
00:30:30,280 --> 00:30:34,440
Speaker 3: back just a little bit on their way to a

585
00:30:34,480 --> 00:30:39,200
Speaker 3: somewhat slower economy in twenty twenty four. So that's my instinct.

586
00:30:40,080 --> 00:30:41,920
Speaker 3: You know, if you said, there's a great question in

587
00:30:41,960 --> 00:30:44,040
Speaker 3: the SEP, which is do you think the risks are

588
00:30:44,080 --> 00:30:45,520
Speaker 3: on the high side of the low side, and do

589
00:30:45,560 --> 00:30:48,360
Speaker 3: you think uncertainties higher or lower? I think uncertainty is

590
00:30:48,360 --> 00:30:51,480
Speaker 3: a lot higher because the economy in the third quarter

591
00:30:51,520 --> 00:30:53,280
Speaker 3: looks like it's going to come in and we're only

592
00:30:53,280 --> 00:30:55,400
Speaker 3: a day away from being done with it a lot

593
00:30:55,440 --> 00:30:57,920
Speaker 3: stronger than I would have said just a quarter ago.

594
00:30:58,000 --> 00:30:59,920
Speaker 3: So I have to open myself up to the pot

595
00:31:00,000 --> 00:31:02,280
Speaker 3: disability that maybe my forecasting is wrong.

596
00:31:18,240 --> 00:31:21,360
Speaker 1: You mentioned oil. I'm going to take the bait because,

597
00:31:21,360 --> 00:31:23,960
Speaker 1: of course, when we look at that sell off in bonds,

598
00:31:24,200 --> 00:31:26,520
Speaker 1: it wasn't just the FOMC meeting. There are a lot

599
00:31:26,520 --> 00:31:29,640
Speaker 1: of concerns over supplies you mentioned, but also we've seen

600
00:31:29,680 --> 00:31:31,720
Speaker 1: the price of oil start to pick up again and

601
00:31:31,760 --> 00:31:35,000
Speaker 1: that's been fueling the sell off. How's the FED thinking

602
00:31:35,320 --> 00:31:39,520
Speaker 1: about energy prices as an inflationary risk at this point

603
00:31:39,520 --> 00:31:43,200
Speaker 1: in time. Is it sort of an idiosyncratic thing that

604
00:31:43,240 --> 00:31:45,680
Speaker 1: you can look through, or is it the type of

605
00:31:45,720 --> 00:31:49,080
Speaker 1: thing that you worry about, because maybe it propagates and

606
00:31:49,240 --> 00:31:52,680
Speaker 1: spreads to a whole bunch of other things that happened

607
00:31:52,680 --> 00:31:55,840
Speaker 1: to be in the CPI index, like airfares and food

608
00:31:56,000 --> 00:31:57,320
Speaker 1: and stuff like that.

609
00:31:57,800 --> 00:32:01,640
Speaker 3: Yeah. Both, Okay, I thought Jay said it pretty well.

610
00:32:01,680 --> 00:32:05,200
Speaker 3: If what you have is a modest and time limited

611
00:32:05,320 --> 00:32:10,440
Speaker 3: increase in oil prices or gasoline prices, gasoline prices are

612
00:32:10,440 --> 00:32:13,400
Speaker 3: a very visible signal to the American people. It's just

613
00:32:13,440 --> 00:32:15,840
Speaker 3: in front of you every day. It absolutely has an

614
00:32:15,880 --> 00:32:19,200
Speaker 3: impact on consumer sentiment. It absolutely has an impact on

615
00:32:19,240 --> 00:32:23,160
Speaker 3: consumption because people reprioritize consumption toward gas and away from

616
00:32:23,400 --> 00:32:27,280
Speaker 3: other things. And it absolutely has an impact on headline inflation.

617
00:32:27,760 --> 00:32:29,800
Speaker 3: If two months from now it comes back down again,

618
00:32:30,120 --> 00:32:32,200
Speaker 3: then it's the kind of thing you look through. If,

619
00:32:32,240 --> 00:32:34,720
Speaker 3: on the other hand, you get an extended period of

620
00:32:34,800 --> 00:32:37,120
Speaker 3: higher oil and gas prices, then it does have the

621
00:32:37,120 --> 00:32:42,400
Speaker 3: potential to feed through everything to cost to plastics, to

622
00:32:42,640 --> 00:32:46,720
Speaker 3: parcel delivery surcharges or airfare surge charges and those sorts

623
00:32:46,720 --> 00:32:50,120
Speaker 3: of things. And so it's really hard to make much

624
00:32:50,160 --> 00:32:51,880
Speaker 3: out of it at the moment, you kind of have

625
00:32:51,960 --> 00:32:54,160
Speaker 3: to follow demand and follow inflation as you go.

626
00:32:54,840 --> 00:32:59,200
Speaker 1: I have sort of an existential question based on that response.

627
00:32:59,320 --> 00:33:02,160
Speaker 1: But you know, both Joe and I actually Matt as well,

628
00:33:02,240 --> 00:33:04,600
Speaker 1: we were all at Jackson Hole and we listened to

629
00:33:04,760 --> 00:33:09,040
Speaker 1: Christine Legard's ECB speech and she was kind of talking

630
00:33:09,040 --> 00:33:12,640
Speaker 1: about this idea that maybe monetary policy has to take

631
00:33:12,760 --> 00:33:15,680
Speaker 1: a back seat at a time when we have war,

632
00:33:16,120 --> 00:33:19,840
Speaker 1: the lingering effects of pandemic, ongoing supply shocks, and of

633
00:33:19,880 --> 00:33:23,280
Speaker 1: course a lot of big fiscal still a lot of

634
00:33:23,320 --> 00:33:29,400
Speaker 1: green energy investment that might be driving inflation. Given that backdrop,

635
00:33:29,960 --> 00:33:33,280
Speaker 1: how does the FED know when they've reached the two

636
00:33:33,360 --> 00:33:38,160
Speaker 1: percent inflation target or are getting closer to it, particularly

637
00:33:38,280 --> 00:33:42,360
Speaker 1: at a time like now where it feels like oil again,

638
00:33:42,480 --> 00:33:45,000
Speaker 1: like a sort of outside factor that you don't necessarily

639
00:33:45,080 --> 00:33:49,080
Speaker 1: have a lot of control over is clouding that picture.

640
00:33:49,640 --> 00:33:51,320
Speaker 3: First of all, I saw her speech a little differently

641
00:33:51,400 --> 00:33:53,520
Speaker 3: now I heard it. But maybe what I heard her

642
00:33:53,560 --> 00:33:57,200
Speaker 3: saying is maybe over the last twenty years, we benefited

643
00:33:57,240 --> 00:34:01,240
Speaker 3: from a set of deflation disinflationary forces in fracking, you know,

644
00:34:01,240 --> 00:34:04,520
Speaker 3: which reduced oil prices in this country significantly. Would be

645
00:34:04,520 --> 00:34:06,720
Speaker 3: a good example of that, and that maybe over the

646
00:34:06,760 --> 00:34:09,719
Speaker 3: next twenty years, I thought I heard her saying, we're

647
00:34:09,719 --> 00:34:12,360
Speaker 3: going to be having we run the risk of facing

648
00:34:12,360 --> 00:34:15,839
Speaker 3: a bunch of inflationary forces. I don't think I heard

649
00:34:15,880 --> 00:34:19,239
Speaker 3: her say run away from monetary policy, and that standpoint.

650
00:34:18,800 --> 00:34:21,480
Speaker 1: Not run away from monetary policy, but maybe it's harder

651
00:34:21,520 --> 00:34:24,880
Speaker 1: for monetary policy to combat these inflationary forces.

652
00:34:25,080 --> 00:34:27,759
Speaker 3: Well, so you know, it's like sailing. You can go

653
00:34:27,800 --> 00:34:30,239
Speaker 3: a lot faster downwind, but you can also sail into

654
00:34:30,280 --> 00:34:32,080
Speaker 3: the wind. You just have to tighten your sales. And

655
00:34:32,120 --> 00:34:34,720
Speaker 3: I think that's the kind of spirit to think about

656
00:34:35,400 --> 00:34:37,720
Speaker 3: in terms of if we are in a more inflationary environment.

657
00:34:37,719 --> 00:34:40,719
Speaker 3: I gave a speech on this last year. You know,

658
00:34:40,960 --> 00:34:44,359
Speaker 3: we just have to we have to manage understanding that

659
00:34:45,160 --> 00:34:46,840
Speaker 3: inflation is more of a day to day risk than

660
00:34:46,880 --> 00:34:49,320
Speaker 3: it might otherwise have been. And so there were periods,

661
00:34:49,320 --> 00:34:53,839
Speaker 3: I want to say twenty fifteen when oil prices spiked

662
00:34:53,960 --> 00:34:57,640
Speaker 3: and we didn't respond with monetary policy, right because inflation

663
00:34:57,760 --> 00:34:59,880
Speaker 3: was still under our two percent target. Nobody was all

664
00:35:00,239 --> 00:35:04,040
Speaker 3: worried about the fact that inflation would sort of suddenly spur. Well,

665
00:35:04,080 --> 00:35:06,880
Speaker 3: you might operate with you might be less willing to

666
00:35:06,920 --> 00:35:08,960
Speaker 3: see through those one time shocks. To look through those

667
00:35:08,960 --> 00:35:11,840
Speaker 3: one time shocks if you were worried about inflationary pressure.

668
00:35:11,880 --> 00:35:14,360
Speaker 3: More broadly, I think it's I go with the sailing

669
00:35:14,400 --> 00:35:17,560
Speaker 3: analogy a little bit more than saying monetary policy can't

670
00:35:17,600 --> 00:35:18,480
Speaker 3: do it. It certainly can.

671
00:35:19,360 --> 00:35:22,400
Speaker 2: Okay, So zooming back in on inflation over the next

672
00:35:22,520 --> 00:35:25,160
Speaker 2: few months, right, because I guess it's kind of an

673
00:35:25,160 --> 00:35:27,640
Speaker 2: evergreen statement, but you could certainly make a case that

674
00:35:27,680 --> 00:35:30,439
Speaker 2: we're at another critical juncture for monetary policy. The FED

675
00:35:30,560 --> 00:35:34,680
Speaker 2: is trying to decide whether to hike rates again or

676
00:35:34,719 --> 00:35:38,480
Speaker 2: not at this point. And another thing that was really

677
00:35:38,520 --> 00:35:40,960
Speaker 2: striking about the projections that you guys put out last

678
00:35:40,960 --> 00:35:43,800
Speaker 2: week that a lot of analysts noted was that your

679
00:35:44,040 --> 00:35:46,480
Speaker 2: forecast for inflation just for the end of this year

680
00:35:46,600 --> 00:35:50,759
Speaker 2: is looking pretty high versus what we've been getting over

681
00:35:50,760 --> 00:35:52,879
Speaker 2: the last couple of months. It kind of implies that

682
00:35:52,920 --> 00:35:54,839
Speaker 2: there's going to be a step up in the rate

683
00:35:54,880 --> 00:35:58,239
Speaker 2: of monthly inflation over the next several reports to take

684
00:35:58,320 --> 00:36:01,040
Speaker 2: us into the end of the year here, So is

685
00:36:01,080 --> 00:36:04,680
Speaker 2: that your view as well? Do you see these last

686
00:36:04,680 --> 00:36:08,560
Speaker 2: few months of really a lot better inflation reports as

687
00:36:08,920 --> 00:36:10,719
Speaker 2: kind of a blip and we're going back up to

688
00:36:10,719 --> 00:36:11,600
Speaker 2: a higher run rate.

689
00:36:12,200 --> 00:36:14,319
Speaker 3: Don't know, and I won't get these right, but for

690
00:36:14,360 --> 00:36:18,680
Speaker 3: the last five months, the monthly PCEE core has been

691
00:36:18,840 --> 00:36:21,279
Speaker 3: point three point three point three point two point two,

692
00:36:21,880 --> 00:36:24,080
Speaker 3: and most forecasters would assume the one we're going to

693
00:36:24,080 --> 00:36:26,640
Speaker 3: get tomorrow looks in the range of point two. If

694
00:36:26,640 --> 00:36:29,759
Speaker 3: that's the case, then we're running last six months at

695
00:36:29,800 --> 00:36:32,680
Speaker 3: about three percent inflation, in the last twelve months at

696
00:36:32,719 --> 00:36:37,520
Speaker 3: about three and a half percent core inflation. And someone

697
00:36:37,640 --> 00:36:40,320
Speaker 3: might want to help me, but I think the median

698
00:36:40,400 --> 00:36:42,600
Speaker 3: was somewhere in the three point six range, three point seven,

699
00:36:42,680 --> 00:36:45,400
Speaker 3: three point seven, So that would imply you have some

700
00:36:45,480 --> 00:36:48,040
Speaker 3: point three's coming in the next few months. It's not

701
00:36:48,080 --> 00:36:52,839
Speaker 3: that precise. So there are definitely inflationary forces out there.

702
00:36:52,880 --> 00:36:56,200
Speaker 3: You mentioned oil being a good example, and I think

703
00:36:56,200 --> 00:36:59,120
Speaker 3: we'll see. And my view on this thing is, you know,

704
00:36:59,120 --> 00:37:00,720
Speaker 3: if you ask me to sell my is the world's

705
00:37:00,760 --> 00:37:03,279
Speaker 3: greatest forecaster, I wouldn't you know what I would sell

706
00:37:03,320 --> 00:37:06,840
Speaker 3: myself as as a practical evaluator of what comes in

707
00:37:06,880 --> 00:37:09,520
Speaker 3: the door. And we're going to see what happens with

708
00:37:09,600 --> 00:37:13,160
Speaker 3: inflation and a higher set of inflation forecasts lead to

709
00:37:13,200 --> 00:37:16,399
Speaker 3: a belief that, wow, we're not through. A lesser set

710
00:37:16,400 --> 00:37:19,440
Speaker 3: of inflation forecast might give you a little bit more calm.

711
00:37:20,120 --> 00:37:22,400
Speaker 1: I have just one more question, which is, you know

712
00:37:22,920 --> 00:37:26,839
Speaker 1: we're talking again on September twenty eighth, and we've seen

713
00:37:26,920 --> 00:37:29,520
Speaker 1: this big sell off in bonds, the thirty year yields

714
00:37:29,600 --> 00:37:32,280
Speaker 1: at four point seven. This is the thing that feeds

715
00:37:32,280 --> 00:37:36,439
Speaker 1: into things like mortgages and commercial paper and stuff like that.

716
00:37:37,080 --> 00:37:40,400
Speaker 1: I have seen at least two research notes this week

717
00:37:40,640 --> 00:37:44,759
Speaker 1: talking about the potential for something to break again, and

718
00:37:44,800 --> 00:37:47,840
Speaker 1: of course we had the Silicon Valley bank drama earlier

719
00:37:47,840 --> 00:37:51,279
Speaker 1: in the year. Does that become another concern for you

720
00:37:51,440 --> 00:37:54,279
Speaker 1: as you see these yields start to go higher, or

721
00:37:54,320 --> 00:37:56,520
Speaker 1: some of the interest rate pressures that we talked about

722
00:37:56,560 --> 00:38:00,160
Speaker 1: earlier start to feed through into the economy, especially if

723
00:38:00,200 --> 00:38:02,520
Speaker 1: the expectation is now that rates are going to be

724
00:38:02,560 --> 00:38:03,360
Speaker 1: higher for longer.

725
00:38:03,920 --> 00:38:07,200
Speaker 3: I think this idea of looking at financial conditions broadly

726
00:38:07,760 --> 00:38:10,359
Speaker 3: and saying we only have this one tool we raise

727
00:38:10,440 --> 00:38:13,759
Speaker 3: rates or lower rates, what does it do to financial conditions?

728
00:38:13,920 --> 00:38:17,200
Speaker 3: Financial conditions include long term bond rates. They also include

729
00:38:17,280 --> 00:38:22,760
Speaker 3: equity valuations, house prices, oil prices, all of those things

730
00:38:23,120 --> 00:38:25,319
Speaker 3: feed into what are the conditions that you're living in.

731
00:38:25,760 --> 00:38:27,759
Speaker 3: I think you could argue that three months ago it

732
00:38:27,800 --> 00:38:30,839
Speaker 3: was a little surprising that long rates had dropped as

733
00:38:30,880 --> 00:38:33,719
Speaker 3: much as they had, and not surprising after Silk and Valley,

734
00:38:33,719 --> 00:38:37,560
Speaker 3: but noteworthy, and that equity markets were as vibrant as

735
00:38:37,600 --> 00:38:40,279
Speaker 3: they were today, you might say equity markets have come

736
00:38:40,320 --> 00:38:42,640
Speaker 3: down a little bit. And so all I take from

737
00:38:42,680 --> 00:38:45,799
Speaker 3: that is conditions are tighter today than they were a

738
00:38:45,840 --> 00:38:49,040
Speaker 3: month ago. And I'm evaluating what is the impact of

739
00:38:49,040 --> 00:38:52,640
Speaker 3: those Titan conditions on demand and on inflation. Demand being

740
00:38:52,719 --> 00:38:57,480
Speaker 3: both revenues core demand, and also you know, the employment markets,

741
00:38:58,080 --> 00:38:59,959
Speaker 3: and I think you want to evaluate those Titan finance

742
00:39:00,239 --> 00:39:03,520
Speaker 3: conditions against that, against that backdrop.

743
00:39:03,160 --> 00:39:03,560
Speaker 4: I lied.

744
00:39:03,600 --> 00:39:06,239
Speaker 1: I actually have one more question, which is, can you

745
00:39:06,239 --> 00:39:09,000
Speaker 1: give us a sneak peek of the Fed's Taylor Swift

746
00:39:09,040 --> 00:39:09,840
Speaker 1: reaction function.

747
00:39:11,560 --> 00:39:13,319
Speaker 3: Well, I will tell you this, those of you who

748
00:39:13,320 --> 00:39:17,440
Speaker 3: are worried about demand. Travis Kelcey jerseys, I'm told increased

749
00:39:17,520 --> 00:39:21,280
Speaker 3: six times yes in sales after just one Skybox appearance,

750
00:39:21,320 --> 00:39:23,879
Speaker 3: So I think she's doing very well in Kansas City.

751
00:39:23,920 --> 00:39:26,680
Speaker 1: We got to go check on the pricing of those jerseys. Matt,

752
00:39:26,719 --> 00:39:28,640
Speaker 1: and see whether the prices have gone up or not.

753
00:39:28,840 --> 00:39:30,880
Speaker 2: Yeah, the question is if we're just pulling forward the

754
00:39:30,920 --> 00:39:33,960
Speaker 2: demand writer, this is a sustainable trend going forward.

755
00:39:34,040 --> 00:39:36,600
Speaker 1: Yeah, we'll do Jerseys as a microcosm for the US

756
00:39:36,640 --> 00:39:37,480
Speaker 1: inflation story.

757
00:39:37,800 --> 00:39:40,600
Speaker 3: All right, well, I feel like saying, there's a blank space, baby,

758
00:39:40,600 --> 00:39:41,560
Speaker 3: and I'll write your inflation.

759
00:39:43,520 --> 00:39:47,000
Speaker 1: Very good, Tom, it was lovely speaking with you. Thank

760
00:39:47,000 --> 00:39:49,239
Speaker 1: you so much for coming on all thoughts. Really appreciate it.

761
00:39:49,320 --> 00:39:50,080
Speaker 3: Great to be with you all.

762
00:39:50,080 --> 00:40:03,120
Speaker 4: Thanks Matt.

763
00:40:03,280 --> 00:40:05,759
Speaker 1: That was really fun. Love the I love that we

764
00:40:05,880 --> 00:40:09,600
Speaker 1: ended it with a Taylor Swift reference. That was pretty good.

765
00:40:09,719 --> 00:40:11,320
Speaker 2: Yeah. From Taylor Role to Taylor Swift.

766
00:40:11,320 --> 00:40:11,719
Speaker 4: There you go.

767
00:40:12,360 --> 00:40:15,400
Speaker 1: Oh God, we're just gonna keep going. No, all of

768
00:40:15,400 --> 00:40:18,280
Speaker 1: that conversation was really interesting to me. Definitely a treat

769
00:40:18,320 --> 00:40:21,440
Speaker 1: to hear how a FED president, even if he has

770
00:40:21,520 --> 00:40:25,880
Speaker 1: non voting like super interesting. Also hearing about what he's

771
00:40:25,960 --> 00:40:29,760
Speaker 1: discussing on the ground with real businesses. Again, that point

772
00:40:29,960 --> 00:40:37,200
Speaker 1: about people still being concerned about capacity shortages versus capacity excess,

773
00:40:37,680 --> 00:40:42,040
Speaker 1: I think does explain a lot of the resiliency that

774
00:40:42,040 --> 00:40:44,120
Speaker 1: we've seen so far, at least in the labor market.

775
00:40:44,680 --> 00:40:47,040
Speaker 2: Yeah, and he mentioned that uncertainty, right. I mean, I

776
00:40:47,040 --> 00:40:48,759
Speaker 2: feel like that was really the through line throughout the

777
00:40:48,880 --> 00:40:51,400
Speaker 2: entire conversation. And you can go on the fed's website

778
00:40:51,440 --> 00:40:54,960
Speaker 2: and actually look up their projections. He referenced this and

779
00:40:55,440 --> 00:40:58,200
Speaker 2: you will see that. You know, the question that they

780
00:40:58,280 --> 00:41:01,920
Speaker 2: answer in there about whether uncertainty about GDP growth is

781
00:41:02,120 --> 00:41:05,040
Speaker 2: higher or lower than say, the last twenty years on average,

782
00:41:05,520 --> 00:41:07,759
Speaker 2: the vast majority of them are saying it's higher. So

783
00:41:07,920 --> 00:41:10,319
Speaker 2: I think that's clearly the theme here for the next

784
00:41:10,360 --> 00:41:10,960
Speaker 2: several months.

785
00:41:11,080 --> 00:41:13,319
Speaker 1: Yeah, and I think to that point, the estimates are

786
00:41:13,320 --> 00:41:15,280
Speaker 1: all over the place, because I think the Atlanta FED

787
00:41:15,320 --> 00:41:19,440
Speaker 1: model is like four point nine percent for the third quarter,

788
00:41:19,760 --> 00:41:21,920
Speaker 1: and then like the New York FED model is two

789
00:41:22,000 --> 00:41:25,200
Speaker 1: point one percent, and then economists think it's one point

790
00:41:25,280 --> 00:41:29,320
Speaker 1: four percent, and it's just this huge disparity in estimates

791
00:41:29,320 --> 00:41:29,880
Speaker 1: at the moment.

792
00:41:30,480 --> 00:41:34,080
Speaker 2: Yeah, we actually got revisions to the second quarter GDP

793
00:41:34,200 --> 00:41:38,960
Speaker 2: numbers today, oh yeah, And they slashed personal consumption expenditures

794
00:41:39,160 --> 00:41:42,440
Speaker 2: in the second quarter, and yet the third quarter consumer

795
00:41:42,480 --> 00:41:45,160
Speaker 2: spending numbers are looking really strong. So it's a bit

796
00:41:45,200 --> 00:41:47,360
Speaker 2: of a rollercoaster right now with the data.

797
00:41:47,000 --> 00:41:49,319
Speaker 1: And of course things are about to get more complicated

798
00:41:49,400 --> 00:41:52,160
Speaker 1: if we do have that government shut down. I actually

799
00:41:52,239 --> 00:41:54,600
Speaker 1: meant to ask Tom about this. It's a shame I

800
00:41:54,640 --> 00:41:57,560
Speaker 1: totally forgot. But you know, a lot of the economic

801
00:41:57,640 --> 00:42:00,880
Speaker 1: data that we are used to seeing could potentially be

802
00:42:01,320 --> 00:42:04,400
Speaker 1: postponed for the foreseeable future, so kind of wild.

803
00:42:04,640 --> 00:42:06,920
Speaker 2: That's right, And a lot of those federal government employees

804
00:42:06,960 --> 00:42:08,920
Speaker 2: would be in his district, so maybe good for a

805
00:42:08,920 --> 00:42:09,400
Speaker 2: follow up?

806
00:42:09,560 --> 00:42:11,120
Speaker 1: Yeah, shall we leave it there for now?

807
00:42:11,280 --> 00:42:12,520
Speaker 2: Let's leave it there. Okay.

808
00:42:12,800 --> 00:42:15,960
Speaker 1: This has been another episode of the Audlots podcast. I'm

809
00:42:16,000 --> 00:42:19,320
Speaker 1: Tracy Alloway. You can follow me at Tracy Alloway.

810
00:42:19,080 --> 00:42:23,560
Speaker 2: And I'm Matt Bosler. You can follow me at Boes Underscore.

811
00:42:23,960 --> 00:42:27,920
Speaker 2: Follow our producers Carmen Rodriguez at Carmen Arman and Dashill

812
00:42:27,960 --> 00:42:31,920
Speaker 2: Bennett at dashbot Special, thanks to Moses on and follow

813
00:42:31,960 --> 00:42:34,799
Speaker 2: all our podcasts at podcasts.

814
00:42:34,160 --> 00:42:36,680
Speaker 1: And if you enjoy Audlots content, if you want to

815
00:42:36,719 --> 00:42:39,960
Speaker 1: talk about this episode, then please check out our discord.

816
00:42:40,080 --> 00:42:43,040
Speaker 1: We have lots of listeners who are chatting about monetary

817
00:42:43,080 --> 00:42:46,359
Speaker 1: policy on a daily basis, and you should definitely subscribe

818
00:42:46,440 --> 00:42:50,560
Speaker 1: to our weekly Adlots newsletter. Joe and I write about

819
00:42:50,560 --> 00:42:52,799
Speaker 1: some of the things that we discuss in these episodes,

820
00:42:52,800 --> 00:42:55,640
Speaker 1: and other interesting things that we notice in markets and

821
00:42:55,680 --> 00:42:59,759
Speaker 1: the economy and business. And if you enjoy adlots, if

822
00:42:59,800 --> 00:43:02,719
Speaker 1: you want us to work our way through all the

823
00:43:02,960 --> 00:43:05,360
Speaker 1: f o MC members, all the way up to Jerome

824
00:43:05,440 --> 00:43:08,839
Speaker 1: Poal maybe then please leave us a positive review on

825
00:43:08,880 --> 00:43:10,799
Speaker 1: your favorite podcast platform.

826
00:43:10,800 --> 00:43:11,600
Speaker 4: Thanks for listening.