WEBVTT - The Fed's Tom Barkin On the Impact of Higher Interest Rates 0:00:10.039 --> 0:00:13.280 Hello, and welcome to another episode of the Ad Thoughts Podcast. 0:00:13.400 --> 0:00:17.119 I'm Tracy Allaway. Joe is sick today and so I 0:00:17.160 --> 0:00:19.280 am very pleased to say that I have a guest 0:00:19.400 --> 0:00:24.520 co host, Matt Bosler. He is an economics editor for Bloomberg. Hi. 0:00:24.600 --> 0:00:26.599 Everyone, I'm Matt Bosler. Excited to be here. 0:00:26.880 --> 0:00:29.120 So, Matt, I'm so glad you're doing the show today. 0:00:29.400 --> 0:00:33.080 It is an interesting time in the US economy, and 0:00:33.120 --> 0:00:37.040 particularly this week. We're recording on September twenty eighth. We've 0:00:37.080 --> 0:00:40.040 just seen this massive sell off in the bond market 0:00:40.120 --> 0:00:44.200 following the recent FOMC meeting. There's lots of talk about 0:00:44.440 --> 0:00:48.000 higher rates for longer, lots of concerns over whether or 0:00:48.040 --> 0:00:51.000 not inflation is maybe picking up again given the rise 0:00:51.080 --> 0:00:54.600 that we've had in the oil price recently. But overall, 0:00:55.280 --> 0:00:59.320 it kind of feels surprising how resilient the US economy 0:00:59.360 --> 0:01:02.400 has so far proven to higher interest rates. 0:01:02.560 --> 0:01:04.600 Yeah, it's really interesting. You know, the Fed has been 0:01:04.720 --> 0:01:08.839 raising its benchmark short term interest rate for eighteen months now. 0:01:09.319 --> 0:01:13.160 We haven't really seen an aggressive move up in long 0:01:13.240 --> 0:01:15.640 term interest rates until just the last several weeks, so 0:01:15.640 --> 0:01:18.000 it's almost like, you know, the tightening cycle. Maybe it's 0:01:18.040 --> 0:01:19.240 just gotten started here. 0:01:19.240 --> 0:01:21.759 Right thirty year yield I think when I last looked 0:01:21.760 --> 0:01:24.520 at four point seven percent something like that. You also 0:01:24.600 --> 0:01:27.600 have all these headline risks sort of lurking. There is 0:01:27.680 --> 0:01:31.240 the looming government shut down of that might actually have 0:01:31.319 --> 0:01:34.760 started by the time we release this episode. There's questions 0:01:34.920 --> 0:01:39.520 over the UAW strike. All these sorts of idiosyncratic risks 0:01:39.600 --> 0:01:42.120 also starting to come into play. And here on odd lots. 0:01:42.120 --> 0:01:44.360 I think people know that we always like to try 0:01:44.360 --> 0:01:49.080 to tie the macroeconomic outlook and monetary policy to the 0:01:49.080 --> 0:01:52.000 real business stuff that's happening on the ground. So I 0:01:52.040 --> 0:01:54.360 am very pleased to say that we do, in fact 0:01:54.360 --> 0:01:56.880 have the perfect guest with us today to discuss all that. 0:01:56.920 --> 0:02:00.000 We're going to be speaking with Tom Barkin, the president 0:02:00.280 --> 0:02:02.720 of the Richmond Fed. Tom, thank you so much for 0:02:02.800 --> 0:02:03.600 joining all th lots. 0:02:03.760 --> 0:02:05.720 I'm looking forward to it, and you certainly laid out 0:02:05.720 --> 0:02:07.400 a long list of things we need to cover. 0:02:07.800 --> 0:02:09.960 I know, and we only have about forty minutes, but 0:02:10.120 --> 0:02:13.839 we'll try to do our best. Maybe just to begin with, 0:02:14.440 --> 0:02:18.040 I know you have taken a kind of I don't 0:02:18.040 --> 0:02:22.320 want to say unusual approach, but maybe a special approach 0:02:22.840 --> 0:02:25.480 to your job as president of the Richmond FED. You 0:02:25.680 --> 0:02:29.960 like to go out and talk to businesses within your region. 0:02:30.480 --> 0:02:34.120 And I'm curious. I know that you were previously at McKinsey, 0:02:34.320 --> 0:02:39.000 but how does that kind of feed into your thinking 0:02:39.080 --> 0:02:42.680 around monetary policy? What do you get out of those discussions. 0:02:43.120 --> 0:02:46.520 So we have a beautiful twenty four story building in Richmond. 0:02:46.560 --> 0:02:48.760 If you drive down nine ninety five you'll see it. 0:02:48.760 --> 0:02:51.400 It's quite literally an ivory tower. And so one thing 0:02:51.440 --> 0:02:54.400 I figured out pretty early, and my tenure was that 0:02:54.440 --> 0:02:57.320 the data comes in late, it's then revised three times, 0:02:57.560 --> 0:02:59.760 and so it's awfully hard to know what's actually going on. 0:03:00.040 --> 0:03:02.440 And so I just made a personal commitment that with 0:03:02.520 --> 0:03:04.800 the exception of the two weeks around the FOMC meeting, 0:03:05.040 --> 0:03:07.440 I'm going to be out every week. And in the 0:03:07.480 --> 0:03:09.240 last month, I've been on the Eastern Shore, I've been 0:03:09.280 --> 0:03:11.920 in the cold country in South Carolina. I've been in 0:03:12.120 --> 0:03:15.359 southern Virginia. I've been in the northern Virginia suburbs. I've 0:03:15.360 --> 0:03:18.040 been in western Virginia. And in every one of those trips, 0:03:18.440 --> 0:03:21.400 I'm meeting with business people, I'm meeting with nonprofits, I'm 0:03:21.440 --> 0:03:24.679 trying to understand what's actually, you know, happening in the economy, 0:03:24.680 --> 0:03:27.600 and that's where I get my information to sanity check 0:03:27.639 --> 0:03:30.000 the data as it's coming in and try to develop 0:03:30.320 --> 0:03:32.160 my own unique perspective on what's happening. 0:03:32.520 --> 0:03:35.280 I think, to my knowledge, you're the only FED president 0:03:35.400 --> 0:03:38.560 who has actually mentioned the Beyonce and the Taylor Swift 0:03:38.600 --> 0:03:41.200 concerts in a speech, a formal speech. 0:03:41.880 --> 0:03:43.600 I don't know if that's true, but my daughter also 0:03:43.600 --> 0:03:45.320 wanted me to put in a few quotes from the 0:03:45.440 --> 0:03:48.200 Barbie movie, and I managed to withstand doing that. 0:03:49.400 --> 0:03:51.480 You know, we have so many people here in New York, 0:03:51.520 --> 0:03:54.280 in this building and in the surrounding area right just 0:03:54.320 --> 0:03:59.160 pouring over every monthly economic statistic, whether it's the jobs report, 0:03:59.200 --> 0:04:01.600 the inflation report. When you're going out to all of 0:04:01.600 --> 0:04:05.000 these places, are you hearing things from businesses that are 0:04:05.040 --> 0:04:08.400 not necessarily being reflected in the data right now? 0:04:09.200 --> 0:04:12.520 Yeah, So a couple great examples. Demand If you look 0:04:12.520 --> 0:04:15.480 at the recent data we've gotten on consumer spending, it's 0:04:15.680 --> 0:04:19.800 been unbelievably resilient. As you said up front, when you 0:04:19.800 --> 0:04:23.240 talk to businesses, you'll hear it's okay, right, that's a 0:04:23.279 --> 0:04:26.440 pretty big gap and I was with a big retailer 0:04:26.880 --> 0:04:29.719 about three weeks ago that started talking about, you know, 0:04:29.760 --> 0:04:33.280 what they perceive to be the different segments of consumer spending. 0:04:33.320 --> 0:04:37.240 The high end consumer who's still spending on experiences, you know, 0:04:37.360 --> 0:04:40.560 like Taylor Swift and Beyonce. There you go, I got 0:04:40.560 --> 0:04:43.920 it in there again, versus the low income consumer who 0:04:43.960 --> 0:04:46.120 we all know, you know, saving has been somewhat depleted. 0:04:46.680 --> 0:04:48.840 And he started talking about the middle income consumer, and 0:04:48.880 --> 0:04:52.599 the way he described it was, they're trading down. You know, 0:04:52.600 --> 0:04:56.320 they're going to the grocery store, the branded grocery store 0:04:56.320 --> 0:04:59.560 for their food, but they're buying the kids notebooks at 0:04:59.560 --> 0:05:02.560 a dollar store. And you know, you hear those sorts 0:05:02.600 --> 0:05:04.240 of things, and then you try to find the evidence 0:05:04.600 --> 0:05:06.640 in the data to talk about what's happening on the 0:05:06.720 --> 0:05:09.839 labor side. I was with a manufacturer in South Carolina 0:05:09.960 --> 0:05:14.080 who said that they're losing people to Bojangles, which was 0:05:14.120 --> 0:05:15.960 an awfully, you know, strange idea for those of you 0:05:15.960 --> 0:05:18.320 who don't know. Bo Jngless a fried chicken place largely 0:05:18.320 --> 0:05:20.440 in my district in the South. But it turns out 0:05:20.839 --> 0:05:25.279 it's an indoor environment, not an outdoor environment. Shift flexibility 0:05:25.720 --> 0:05:27.480 is obtainable so you can work the hours you want 0:05:27.480 --> 0:05:30.120 to work, and the pay abou jngles has actually narrowed 0:05:30.160 --> 0:05:33.040 most of the gap with the manufacturer. Then two weeks later, 0:05:33.080 --> 0:05:34.400 I told you I was in coal country. I was 0:05:34.400 --> 0:05:36.599 talking to a guy who owns a coal mine, and 0:05:36.680 --> 0:05:39.120 he was describing his problems getting workers, and I said, 0:05:39.160 --> 0:05:41.520 wait a second. You know this is West Virginia. There's 0:05:41.520 --> 0:05:43.480 all these stories of the coal mines not being able 0:05:43.520 --> 0:05:46.880 to operate enough in all these unemployed workers. He said, yeah, 0:05:46.920 --> 0:05:49.920 but the thing you have to understand is that cell 0:05:49.960 --> 0:05:53.200 phones don't work inside of mine, and people don't want 0:05:53.200 --> 0:05:55.839 to work if they can't bring their cell phone to work. 0:05:56.160 --> 0:05:58.919 And so I've been you know, you ask what's different 0:05:58.920 --> 0:06:01.320 from the data. Data would suggest to you that the 0:06:01.400 --> 0:06:04.440 labor market has settled. But what I'm hearing is that 0:06:04.920 --> 0:06:07.120 the labor market, which was very stable for a long 0:06:07.200 --> 0:06:10.000 time and the hierarchy of jobs has gotten thrown up 0:06:10.000 --> 0:06:12.039 in the air. And there's a set of jobs that 0:06:12.120 --> 0:06:14.360 used to be paid X and are now paid Y 0:06:14.839 --> 0:06:18.400 where they're more advantaged, and other people are being left behind. 0:06:18.440 --> 0:06:20.760 Think state and local governments that can increase their pay. 0:06:21.200 --> 0:06:24.680 There are other jobs that offer remote work versus or 0:06:24.720 --> 0:06:28.160 you know, cell phone access in your workplace, and others don't, 0:06:28.200 --> 0:06:31.480 and those are getting ahead, and so employers are struggling 0:06:31.480 --> 0:06:34.159 to catch up with the new hierarchy of jobs. And 0:06:34.240 --> 0:06:37.320 if you're in one of those jobs, think childcare or teachers, 0:06:37.400 --> 0:06:40.280 or state and local government or nonprofits, you know, those 0:06:40.320 --> 0:06:43.799 folks still have more to do to get their jobs filled, 0:06:43.920 --> 0:06:46.760 to get people into jobs, to retain people. And there's 0:06:46.839 --> 0:06:49.560 wage inflation, you know, potentially related to that. So that's 0:06:49.600 --> 0:06:52.120 the kind of thing I'm trying to pick up when 0:06:52.120 --> 0:06:54.080 I'm out there, and I think it helps make me 0:06:54.160 --> 0:06:56.400 think about the economy in a totally different way than 0:06:56.480 --> 0:06:57.520 just what the data shows. 0:06:57.720 --> 0:06:59.599 That's so interesting because of course, when you look at 0:06:59.600 --> 0:07:02.320 the data, it's all aggregated, so you can't see those 0:07:02.400 --> 0:07:06.760 types of like qualitative variations that you just described, just 0:07:06.839 --> 0:07:10.160 on the notion of companies. Some companies maybe still struggling 0:07:10.320 --> 0:07:13.480 to find workers. You had a really good speech, I 0:07:13.480 --> 0:07:16.680 thought back in August where you basically argued that one 0:07:16.680 --> 0:07:19.080 of the big reasons we haven't seen a recession in 0:07:19.120 --> 0:07:22.040 the US yet is that memories of the pandemic are 0:07:22.080 --> 0:07:26.200 still very fresh, and so companies are still reacting to 0:07:26.680 --> 0:07:30.800 past shortages as opposed to really worrying about excess capacity. 0:07:31.400 --> 0:07:35.280 Do you think that dynamics starts to change as interest 0:07:35.400 --> 0:07:38.400 rates go higher? And what I mean by that is, 0:07:38.480 --> 0:07:42.040 at some point, does the added expense of investment at 0:07:42.120 --> 0:07:46.600 higher rates kind of start to outweigh concerns over future capacity. 0:07:47.040 --> 0:07:48.480 And I'll say two things I was getting at in 0:07:48.520 --> 0:07:50.880 that speech. One of them is that if you just 0:07:50.920 --> 0:07:53.920 spent a year trying desperately to fill empty jobs, you're 0:07:53.920 --> 0:07:57.000 going to be a little cautious before laying people off cavalierly. 0:07:57.360 --> 0:07:59.960 And I think if you look at the layoff announcements 0:08:00.040 --> 0:08:02.640 by businesses over the first half of the year, for example, 0:08:03.000 --> 0:08:07.800 you'll see they're massively disproportionately professionals, not frontline workers, not 0:08:08.040 --> 0:08:12.400 skilled skilled trades and manufacturing construction workers. And I think 0:08:12.440 --> 0:08:15.720 that's because people genuinely are concerned they won't be able 0:08:15.760 --> 0:08:18.360 to find those people, you know, if they lay them off. 0:08:18.800 --> 0:08:20.520 You Know. The other thing I was getting at there 0:08:20.720 --> 0:08:23.280 is we've been predicting this recession for a long time. 0:08:23.760 --> 0:08:26.880 It's been sixteen seventeen months where the leading economic indicators 0:08:26.880 --> 0:08:29.800 have all been pointing to recession. If you're a business 0:08:30.120 --> 0:08:31.840 and I've talked to a bunch of businesses about this 0:08:32.480 --> 0:08:35.880 last year's plan, they scaled back. This year's plan, in 0:08:35.920 --> 0:08:38.520 other words, the twenty twenty four plan, they're scaling back, 0:08:38.559 --> 0:08:41.760 so they're being cautious. They're not investing in discretionary spending 0:08:43.040 --> 0:08:45.760 or extra they're making those kind of investments. And so 0:08:45.880 --> 0:08:48.679 if you do have a downturn, right the implications are 0:08:48.720 --> 0:08:51.520 just going to be much less because people have already 0:08:51.520 --> 0:08:54.679 prepared for it. When it comes to the question of 0:08:54.760 --> 0:08:58.120 business investment, businesses, interest rates and how they affect it. 0:08:58.200 --> 0:09:01.559 I saw a great chart last week that was interest 0:09:01.600 --> 0:09:04.880 expense as a percent of revenue, yeah, for American corporates, 0:09:05.160 --> 0:09:07.400 And what it showed is, I think it's now basically 0:09:07.440 --> 0:09:10.040 exactly where it was in twenty nineteen. That doesn't mean 0:09:10.080 --> 0:09:12.080 there's some people who aren't paying a lot more, but 0:09:12.240 --> 0:09:16.320 on average, a lot of people refinanced, you know, during 0:09:16.360 --> 0:09:19.000 the COVID era, a lot of people aren't as dependent 0:09:19.200 --> 0:09:23.400 on borrowing, and so in total, people aren't paying more 0:09:23.400 --> 0:09:25.720 in interest. Corporations aren't paying more in interest right now, 0:09:26.040 --> 0:09:27.640 not yet, I mean, presuming that'll come. 0:09:28.080 --> 0:09:30.080 Just on that note, I'd be curious to hear what 0:09:30.120 --> 0:09:32.680 you have to say about the impact of higher rates 0:09:32.720 --> 0:09:35.880 in general and where you see the effects of the 0:09:35.920 --> 0:09:39.520 recent tightening the most in terms of the real economy. So, 0:09:39.600 --> 0:09:42.840 for instance, it sounds like it's not having that much 0:09:42.960 --> 0:09:45.400 of an impact on investment for the reasons that you 0:09:45.520 --> 0:09:48.400 just laid out, But is it having a noticeable effect on, 0:09:48.640 --> 0:09:49.840 for instance, consumption. 0:09:51.120 --> 0:09:53.080 Well so, the place you can see it most clearly 0:09:53.200 --> 0:09:59.080 is what i'll call interest sensitive sectors. Housing obviously was 0:09:59.160 --> 0:10:01.960 in very fraud when we start our interest rate increases, 0:10:02.040 --> 0:10:06.760 It's gotten less fro the you know, automobiles, durables, furniture, 0:10:06.760 --> 0:10:10.000 all those sorts of things. Banking you obviously see have 0:10:10.080 --> 0:10:14.280 seen the impact so far. You know, on the consumer side, 0:10:14.320 --> 0:10:16.439 you'd expect to see and I would have expected to 0:10:16.480 --> 0:10:19.360 see more impact than we've seen today. I have to 0:10:19.400 --> 0:10:21.800 say there's still a lot of the pandemic in the economy, 0:10:21.800 --> 0:10:24.280 and what I mean by that is the excess savings 0:10:24.280 --> 0:10:27.040 that came through for people not spending as much or 0:10:27.080 --> 0:10:31.640 retaining whatever stimulus. Another interesting thing I ran into the 0:10:31.640 --> 0:10:36.320 other day is that adjustable rate mortgages, which back in 0:10:36.360 --> 0:10:38.640 the two thousand era were a very large part of 0:10:38.679 --> 0:10:42.680 the mortgage base. Options and all of that, exactly in 0:10:42.720 --> 0:10:46.080 two thousand and three are eight percent of all mortgages. 0:10:46.280 --> 0:10:48.520 And so whereas you might have thought that interest rates 0:10:48.559 --> 0:10:52.480 would reset very quickly, they actually haven't reset all that quickly. 0:10:52.640 --> 0:10:54.880 Commercial real estate is a place you clearly see it 0:10:54.880 --> 0:10:58.480 another intrasensitive sector. So we see it in intrasensitive sectors. 0:10:58.760 --> 0:11:02.880 Business investment is fly, is how i'd put it. Consumption 0:11:03.080 --> 0:11:06.680 still remains very healthy, but I still think there's impact 0:11:06.720 --> 0:11:09.319 of the rates in train. I still think it's coming 0:11:09.360 --> 0:11:12.200 in train, but I'd agree it hasn't been nearly as 0:11:12.520 --> 0:11:15.199 impactful as you would have imagined when we started increasing 0:11:15.280 --> 0:11:15.840 rates a year. 0:11:15.720 --> 0:11:22.200 And a half. 0:11:32.720 --> 0:11:34.440 You mentioned housing, and I mean, I think that's a 0:11:34.480 --> 0:11:38.240 really interesting example to look at here because we usually 0:11:38.240 --> 0:11:41.360 think about that as the sector that is traditionally most 0:11:41.400 --> 0:11:44.959 linked to monetary policy, and of course it's also historically 0:11:45.000 --> 0:11:49.480 played such an important role in the US business cycle overall. Right, 0:11:49.760 --> 0:11:52.120 but we're in a situation here with housing now where 0:11:52.720 --> 0:11:56.200 mortgage rates have shot up, people are not moving, so 0:11:56.280 --> 0:12:00.160 you're seeing that impact on kind of sales and construction, 0:12:00.800 --> 0:12:03.760 and yet house prices are already back at record highs. 0:12:04.280 --> 0:12:07.880 So how do you assess the impact that you're having 0:12:08.160 --> 0:12:10.559 in a situation like that where activity has fallen off 0:12:10.600 --> 0:12:13.080 a lot, but you're not really seeing any sort of 0:12:13.120 --> 0:12:16.280 follow through at the price level, which is perhaps one 0:12:16.360 --> 0:12:18.880 might think what FED officials care most about. 0:12:19.240 --> 0:12:21.120 Well, so let me just talk for ten seconds about 0:12:21.160 --> 0:12:23.959 housing before getting to your question, which is, I just 0:12:24.000 --> 0:12:26.800 think there's been a secular change in the priority people 0:12:26.840 --> 0:12:31.079 placed on housing, in their demand, in their wallet. Right, 0:12:31.120 --> 0:12:34.080 if you're spending five days a week at home, three 0:12:34.160 --> 0:12:36.080 days a week at home, seven days a week at home, 0:12:36.720 --> 0:12:38.800 you know your house matters a lot more. Your office 0:12:38.840 --> 0:12:42.240 matters more, your patio manage matters more, your furniture matters more. 0:12:42.280 --> 0:12:44.920 And we saw that during COVID, and so I just 0:12:44.960 --> 0:12:48.520 think people are much more focused on their house than 0:12:48.559 --> 0:12:52.000 they were before, and that has created a demand increase. 0:12:52.400 --> 0:12:55.160 In addition, you had a generation of millennials who are 0:12:55.200 --> 0:12:57.280 now having kids and thinking I kind of need a house, 0:12:57.320 --> 0:13:00.240 and that has also been a demand increase in a 0:13:00.280 --> 0:13:03.240 generation of seniors who think that nursing homes aren't quite 0:13:03.240 --> 0:13:05.800 as attractive as they were before COVID, and that's had 0:13:05.840 --> 0:13:10.240 a supply decrease we increase interest rates. I do think 0:13:10.320 --> 0:13:12.280 that has brought demand down. I mean when you hear 0:13:12.320 --> 0:13:15.480 from home builders and others who are selling houses, demand 0:13:15.480 --> 0:13:19.600 for houses has clearly moderated from the frothy twelve offers 0:13:19.600 --> 0:13:22.440 for every house at twenty thousand over lists that we 0:13:22.480 --> 0:13:24.800 had about a year and a half ago. That said, 0:13:24.840 --> 0:13:27.400 the supply is still short, and it's short for the 0:13:27.400 --> 0:13:30.040 obvious reason that if you have a three percent mortgage, 0:13:30.280 --> 0:13:32.840 you're not dying to sell that house and get into 0:13:32.840 --> 0:13:36.640 a seven percent mortgage. It just changes the financial formula. 0:13:36.720 --> 0:13:38.840 And so what we see in terms of the effect 0:13:39.000 --> 0:13:41.679 is you still very limited supply of houses for sale. 0:13:42.320 --> 0:13:46.199 Residential construction, which you said is cyclical and normally, it's 0:13:46.240 --> 0:13:48.559 actually not as weak as you'd think it would be 0:13:48.559 --> 0:13:51.120 because the big home builders are saying I can sell 0:13:51.160 --> 0:13:54.360 every house I can make, and so they're building houses. 0:13:54.760 --> 0:13:58.080 Right that ten percent of the market is actually pretty vibrant. 0:13:58.200 --> 0:14:01.120 Because people still need houses is they can't find them, 0:14:01.360 --> 0:14:04.120 and so they're buying new houses as opposed to existing houses. 0:14:04.320 --> 0:14:07.000 But the existing house market is I'll say, the supply 0:14:07.120 --> 0:14:10.000 is very weak. The demand is coming off, but it's 0:14:10.000 --> 0:14:13.280 still an excess to supply and that's what's keeping the prices. Hi, 0:14:13.800 --> 0:14:16.160 how do we look at impact? I mean, we have 0:14:16.200 --> 0:14:19.040 one tool called interest rates. It's a pretty blunt tool. 0:14:19.160 --> 0:14:22.560 When I talk to home builders and realders, you know, 0:14:22.640 --> 0:14:25.160 I'm asking questions is demand coming off or not? It 0:14:25.200 --> 0:14:28.040 is quite clear that demand's coming off. It's quite clear 0:14:28.040 --> 0:14:30.640 there are fewer bids per house. You know, when is 0:14:30.680 --> 0:14:34.560 price coming down? That's a much more difficult, you know, 0:14:34.640 --> 0:14:37.680 thing to get to. And it's definitely stabilized from the 0:14:38.120 --> 0:14:40.120 you know, extreme spikes we were seeing a year and 0:14:40.160 --> 0:14:42.200 a half ago, but it certainly hasn't come down in 0:14:42.240 --> 0:14:43.160 any kind of scale. 0:14:43.440 --> 0:14:46.160 So two quick follow ups then, is the upshot basically 0:14:46.200 --> 0:14:48.960 that perhaps the most you can hope for here in 0:14:49.000 --> 0:14:51.760 this kind of supply constraint environment is just that you 0:14:52.400 --> 0:14:56.200 are going to slow the rate of growth of price increases. 0:14:56.600 --> 0:14:59.280 And then also does that kind of then change the 0:14:59.280 --> 0:15:02.400 way you think about the monetary policy transmission mechanism in 0:15:02.440 --> 0:15:05.520 that maybe you have to lean harder on other sectors 0:15:05.560 --> 0:15:08.480 of the economy to get the overall type of slow 0:15:08.520 --> 0:15:10.800 down that you're trying to achieve with higher interest rates. 0:15:10.960 --> 0:15:13.040 If housing is not going to play as central of 0:15:13.120 --> 0:15:15.000 a role to the whole story. Yeah, because this. 0:15:15.040 --> 0:15:17.920 Is also slightly different to what Palell said I think 0:15:17.960 --> 0:15:19.720 like a year or maybe two years ago, where he 0:15:19.800 --> 0:15:23.040 was talking about the need to put some sort of 0:15:23.080 --> 0:15:25.080 dampening pressure on house prices. 0:15:25.880 --> 0:15:29.200 Here's what I'd think about it. To bring pricing into alignment, 0:15:29.240 --> 0:15:31.240 you want supply and demand to get into better balance. 0:15:32.440 --> 0:15:35.200 That means both the supply side and the demand side matter. 0:15:35.960 --> 0:15:38.360 We are seeing progress on the supply side. A lot 0:15:38.360 --> 0:15:40.200 of the supply chain issues we had a year or 0:15:40.200 --> 0:15:43.200 two ago, with the exception of chips and switch gears, 0:15:43.200 --> 0:15:46.160 seem to be in much better shape. You've seen labor 0:15:46.160 --> 0:15:48.920 force returning to the market at much higher level. So 0:15:48.960 --> 0:15:51.480 you're getting some help on the supply side, and we're 0:15:51.480 --> 0:15:54.400 doing what we do on the demand side, right, and 0:15:54.520 --> 0:15:57.800 we're just trying to calibrate that. And so to get 0:15:57.880 --> 0:16:00.000 to where you need to get into balance, you can 0:16:00.080 --> 0:16:02.840 get there with lots of different goods and services pricing 0:16:02.880 --> 0:16:04.680 in very different ways. You don't just have to get 0:16:04.680 --> 0:16:07.400 one element shape. Now, housing is a big part of 0:16:07.440 --> 0:16:09.560 the economy, and so if rents come into line and 0:16:09.600 --> 0:16:13.040 housing comes into line, that would be useful. But you know, 0:16:13.080 --> 0:16:15.480 relative prices move all the time, and if what we've 0:16:15.520 --> 0:16:18.560 had is a secular shift toward more demand for housing, 0:16:18.600 --> 0:16:22.400 that might mean somewhat less lessening of housing prices and 0:16:22.440 --> 0:16:24.800 somewhat more lessening about other set of prices. 0:16:25.320 --> 0:16:29.000 Can I ask more generally, how you're thinking about you know, 0:16:29.040 --> 0:16:31.480 if we assume that a lot of the recent inflation 0:16:31.760 --> 0:16:34.800 has been driven on the supply side, and you know, 0:16:34.840 --> 0:16:38.360 maybe that's a big assumption, but when you raise interest rates, 0:16:38.360 --> 0:16:43.520 there is this argument that maybe you're dampening future expansion 0:16:43.600 --> 0:16:45.600 and investment at a time when you really want to 0:16:45.640 --> 0:16:48.640 see it expand, and housing is kind of an example 0:16:48.680 --> 0:16:51.040 of that, even though a lot of construction has been 0:16:51.080 --> 0:16:54.640 stronger than people have expected. How are you sort of 0:16:54.720 --> 0:16:59.320 viewing that tension between higher rates maybe impacting capacity versus 0:16:59.640 --> 0:17:01.520 trying to reduce demand. 0:17:01.920 --> 0:17:05.240 I think it's just a time horizon question, because inflation 0:17:05.359 --> 0:17:08.320 doesn't help in building capacity either. And so if we 0:17:08.320 --> 0:17:10.600 can raise rates for a relatively short period of time, 0:17:11.000 --> 0:17:13.439 get inflation under control, and bring the economy back to 0:17:13.520 --> 0:17:16.760 the kind of economy we've had with stable prices and 0:17:16.840 --> 0:17:20.119 you know, good employment and strong GDP, that will be 0:17:20.119 --> 0:17:23.280 good for investment. If we don't. Then you know, you've 0:17:23.280 --> 0:17:26.320 seen countries that don't control their inflation. That's a totally 0:17:26.320 --> 0:17:29.520 different investment stature. So it's one thing if you said, 0:17:29.600 --> 0:17:31.280 oh no, wait a second, we're going to constrain the 0:17:31.320 --> 0:17:35.040 economy forever. But people who invest aren't investing based on 0:17:35.040 --> 0:17:37.720 one or two year horizons. They're investing on long term horizons. 0:17:37.720 --> 0:17:40.640 And I think they think us taking the moves we're 0:17:40.680 --> 0:17:43.760 taking to get inflation under control are actually helpful for investment, 0:17:43.800 --> 0:17:45.680 not the other way around. So I'm talking to lots 0:17:45.680 --> 0:17:47.600 of businesses and one of the questions I ask them is, 0:17:48.200 --> 0:17:51.800 you know, what's your investment posture going forward? And folks 0:17:51.840 --> 0:17:54.159 are still leaning forward on investment. We got a Durables 0:17:54.200 --> 0:17:57.560 Goods report this morning that was actually pretty healthy. Businesses 0:17:57.560 --> 0:18:01.280 are still investing. Now, that doesn't mean they're going crazy, 0:18:01.359 --> 0:18:04.000 you know, I talked about that earlier. But they're still investing. 0:18:04.040 --> 0:18:06.679 Their investing levels are actually pretty solid. I think that 0:18:06.840 --> 0:18:10.360 is completely just to bet on the medium to long 0:18:10.520 --> 0:18:12.720 term perceived health of this economy. 0:18:13.200 --> 0:18:15.200 We touched on house prices, but I wanted to ask 0:18:15.240 --> 0:18:18.399 you a sort of wider question on pricing decisions that 0:18:18.440 --> 0:18:21.320 businesses are making. Now, I would be really curious to 0:18:21.359 --> 0:18:24.440 get your thoughts on this whole idea of seller's inflation 0:18:24.800 --> 0:18:29.360 or profit led inflation. So we've heard some ECB members 0:18:29.440 --> 0:18:32.480 talk about it, this idea that maybe companies are using 0:18:32.920 --> 0:18:37.560 these industry wide shocks to propagate higher prices, and we 0:18:37.640 --> 0:18:39.840 have seen a lot of shocks over the past couple 0:18:39.880 --> 0:18:43.440 of years. I think Brennard might have mentioned this way 0:18:43.440 --> 0:18:45.720 back in January, but of course she's not at the 0:18:45.720 --> 0:18:50.080 FED anymore. Is the FED thinking about this dynamic at all? 0:18:50.440 --> 0:18:53.160 I'll put a little different because I do believe in capitalism, 0:18:53.200 --> 0:18:55.800 and I do believe that companies raise price when they 0:18:55.840 --> 0:18:57.280 have an opportunity and lower price. 0:18:57.280 --> 0:18:59.919 I'm very carefully avoided the greedflation. 0:19:00.520 --> 0:19:04.000 Yeah, but here's I think what's going on. It's been 0:19:04.040 --> 0:19:06.880 twenty or thirty years before COVID of two to three 0:19:06.920 --> 0:19:10.720 percent inflation, very stable prices. Part of that, I hope 0:19:10.880 --> 0:19:13.240 you think was good leadership by the FED, But part 0:19:13.280 --> 0:19:16.080 of that was a set of elements in the economy 0:19:16.440 --> 0:19:19.280 that held businesses back. E Commerce meant that people could 0:19:19.280 --> 0:19:22.159 electronically shop prices. You go to a bookstore and you 0:19:22.200 --> 0:19:26.520 just click and compare it to Amazon, Big companies, autos 0:19:26.560 --> 0:19:29.000 being the first, but many big companies invested in big 0:19:29.040 --> 0:19:32.320 purchasing departments that allowed people to negotiate. Your big box 0:19:32.359 --> 0:19:35.640 retailers were famous for saying, don't give me any price increases, 0:19:35.720 --> 0:19:39.800 or I'll take manufactured to China. You had offshore production, 0:19:39.880 --> 0:19:42.760 you had offshore labor, you had demographics, you had fracking. 0:19:43.119 --> 0:19:45.560 There was a whole set of things that kept pricing 0:19:45.640 --> 0:19:48.760 under control and frankly, kept businesses away from pricing. So 0:19:49.200 --> 0:19:51.280 when the tariffs happened in twenty eighteen, I talked to 0:19:51.280 --> 0:19:53.640 a lot of businesses affected by the tariffs and I said, 0:19:53.640 --> 0:19:55.880 are you going to increase price? And they said, well, 0:19:55.920 --> 0:19:58.480 I'll increase them to this segment of my customer base, 0:19:58.520 --> 0:20:00.320 but I can't take it to one of the big 0:20:00.359 --> 0:20:04.280 home improvement chains because they won't accept it. And that's 0:20:04.359 --> 0:20:08.080 market power, and that was being deployed in an effort 0:20:08.119 --> 0:20:11.040 to keep price in a control. But businesses also didn't 0:20:11.040 --> 0:20:13.639 have the confidence to raise prices. So then you have 0:20:13.680 --> 0:20:16.520 these supply constraints, you have the stimulus, you have the 0:20:16.520 --> 0:20:19.800 inflation comes in in every boardroom in this country. Some 0:20:20.040 --> 0:20:22.880 business person put their plan together and the board said, well, 0:20:23.000 --> 0:20:25.639 why aren't you being more aggressive with price? And so 0:20:26.320 --> 0:20:30.320 those folks who had big cost squeezes or availability problems, 0:20:30.359 --> 0:20:33.960 they increased their price. And those people who colorably could 0:20:34.040 --> 0:20:36.680 explain that they might have those things also increase their price. 0:20:37.119 --> 0:20:40.120 And I don't think that's greedflation or I mean, that's 0:20:40.200 --> 0:20:42.560 just how businesses react. And the way I think about 0:20:42.600 --> 0:20:45.199 it is, after twenty years, thirty years of price not 0:20:45.320 --> 0:20:47.800