1 00:00:03,120 --> 00:00:18,160 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:20,400 --> 00:00:23,480 Speaker 2: Hello and welcome to another episode of the aud Lots podcast. 3 00:00:23,600 --> 00:00:24,920 Speaker 2: I'm Tracy Alloway. 4 00:00:24,600 --> 00:00:25,720 Speaker 3: And I'm Jico Wisenthal. 5 00:00:26,040 --> 00:00:29,400 Speaker 2: So, Joe, we have a treat for authoughts listeners. 6 00:00:29,680 --> 00:00:33,280 Speaker 3: That's right, we have a special episode of the podcast 7 00:00:33,360 --> 00:00:35,400 Speaker 3: with Richmond Fed President Tom Barkin. 8 00:00:35,600 --> 00:00:39,720 Speaker 2: So we were actually on a reporting trip shadowing Tom 9 00:00:39,760 --> 00:00:43,160 Speaker 2: as he goes through some of his district and speaks 10 00:00:43,200 --> 00:00:46,800 Speaker 2: to local business leaders there. We learned a lot, We 11 00:00:46,920 --> 00:00:49,200 Speaker 2: spent a lot of time with him. You'll hear more 12 00:00:49,240 --> 00:00:52,280 Speaker 2: from that trip in an upcoming odd Lots episode, But 13 00:00:52,360 --> 00:00:54,640 Speaker 2: in the meantime, we also talked to him about some 14 00:00:54,680 --> 00:00:58,400 Speaker 2: more macro trends, things that are happening right now that 15 00:00:58,440 --> 00:01:01,800 Speaker 2: he's seeing in the economy, and we're going to share 16 00:01:02,040 --> 00:01:04,559 Speaker 2: that portion of the interview with you right now. 17 00:01:05,440 --> 00:01:09,280 Speaker 3: So, so far in twenty twenty four, we've seen three 18 00:01:09,600 --> 00:01:13,360 Speaker 3: hotter than generally. The inflation data has been hotter than expected, 19 00:01:13,440 --> 00:01:15,839 Speaker 3: and some of the there's certainly been some cold water 20 00:01:15,880 --> 00:01:18,080 Speaker 3: on some of the soft landing optimism. What do you 21 00:01:18,280 --> 00:01:21,080 Speaker 3: attribute that too, is do you think this is a 22 00:01:21,120 --> 00:01:23,640 Speaker 3: new trend or is it a speed bump in the road, 23 00:01:23,640 --> 00:01:24,160 Speaker 3: as they say. 24 00:01:24,560 --> 00:01:26,400 Speaker 4: Well, so, I think there are two interesting things going 25 00:01:26,440 --> 00:01:29,720 Speaker 4: on with the data. One is demand has been pretty robust, 26 00:01:30,120 --> 00:01:34,200 Speaker 4: against most expectations that it would slow down. We got 27 00:01:34,280 --> 00:01:37,680 Speaker 4: retail sales this week very strong. We've got three strong 28 00:01:37,760 --> 00:01:41,120 Speaker 4: job reports this year, and so the economy in general 29 00:01:41,200 --> 00:01:44,120 Speaker 4: still seems to be very healthy, and I think a 30 00:01:44,120 --> 00:01:46,640 Speaker 4: lot of people wondered whether, you know, we weren't at 31 00:01:46,680 --> 00:01:49,360 Speaker 4: the end of a growth period. Still seems to be strong. 32 00:01:50,000 --> 00:01:54,480 Speaker 4: At the same time, inflation has remained stubbornly above three percent, 33 00:01:55,080 --> 00:01:58,960 Speaker 4: you know, on a monthly annualized rate, and you know, 34 00:01:58,960 --> 00:02:01,240 Speaker 4: there are lots of ways to interpret it. I am 35 00:02:01,280 --> 00:02:03,160 Speaker 4: from the school that no one's as good as they 36 00:02:03,200 --> 00:02:04,560 Speaker 4: are on their best day or as bad as they 37 00:02:04,560 --> 00:02:07,720 Speaker 4: are on their worst. The seven months before the end 38 00:02:07,720 --> 00:02:09,760 Speaker 4: of the year we ran at one point nine percent 39 00:02:10,120 --> 00:02:13,960 Speaker 4: headline inflation. The last three months have been somewhat higher. 40 00:02:14,520 --> 00:02:17,160 Speaker 4: If you took the ten month number, it's not that 41 00:02:17,400 --> 00:02:20,920 Speaker 4: bad actually, and so I think the overall story that 42 00:02:21,000 --> 00:02:24,520 Speaker 4: inflation's moderating is still the right story. But I've been 43 00:02:24,560 --> 00:02:27,839 Speaker 4: of the view that inflation has been will be more 44 00:02:27,919 --> 00:02:30,360 Speaker 4: stubborn to come back to two percent than we would like, 45 00:02:30,919 --> 00:02:33,200 Speaker 4: and in particular in the last half of last year, 46 00:02:33,680 --> 00:02:36,120 Speaker 4: part of the reason the numbers came back so nicely 47 00:02:36,320 --> 00:02:41,600 Speaker 4: was that goods turned deflationary, and that offset still higher 48 00:02:41,600 --> 00:02:45,440 Speaker 4: than normal levels of inflation on services in shelter. We're 49 00:02:45,440 --> 00:02:49,320 Speaker 4: not trying to pick a particular mix of inflation, but 50 00:02:49,840 --> 00:02:54,400 Speaker 4: it did make me worry that if goods price reductions ceased, 51 00:02:54,720 --> 00:02:57,400 Speaker 4: you'd still be left with higher than normal services in shelter, 52 00:02:57,720 --> 00:03:01,400 Speaker 4: and that's what's happened in the first quarter year. Is 53 00:03:01,400 --> 00:03:03,920 Speaker 4: there still room for goods to reduce, of course? Is 54 00:03:03,919 --> 00:03:06,480 Speaker 4: there still a story of why shelter might come down 55 00:03:06,560 --> 00:03:09,440 Speaker 4: with new rents coming down, of course and with wages 56 00:03:09,480 --> 00:03:13,040 Speaker 4: normalizing services. Absolutely, but it hasn't happened yet. 57 00:03:13,760 --> 00:03:15,839 Speaker 2: On this note, the last time we spoke to on 58 00:03:15,960 --> 00:03:19,720 Speaker 2: the podcast, you talked about the need to maybe offset 59 00:03:19,720 --> 00:03:23,520 Speaker 2: housing strength in a different area. So if housing has 60 00:03:23,600 --> 00:03:26,919 Speaker 2: proved to be surprisingly resilient, maybe you need to see 61 00:03:27,200 --> 00:03:30,160 Speaker 2: an offset somewhere else in the economy. Is that still 62 00:03:30,160 --> 00:03:30,760 Speaker 2: your thinking. 63 00:03:32,040 --> 00:03:34,480 Speaker 4: Well, I'm open to housing coming down, and there are 64 00:03:34,480 --> 00:03:37,560 Speaker 4: folks who've done models that suggest that with new rents 65 00:03:37,600 --> 00:03:39,640 Speaker 4: coming down the way they have, we're just minutes away 66 00:03:39,680 --> 00:03:43,160 Speaker 4: from shelter inflation coming down as well, and that would 67 00:03:43,160 --> 00:03:45,440 Speaker 4: be great. If it doesn't come down and you want 68 00:03:45,440 --> 00:03:48,560 Speaker 4: to get to two percent, then either goods or services 69 00:03:48,640 --> 00:03:51,040 Speaker 4: or both need to run at less than their historic 70 00:03:51,480 --> 00:03:54,600 Speaker 4: levels of inflation. That's just simple, simple math. And if 71 00:03:54,600 --> 00:03:57,080 Speaker 4: it doesn't come down, that's what you'd be looking for 72 00:03:57,120 --> 00:04:00,160 Speaker 4: in some sense that relative prices have changed in a way. 73 00:04:00,960 --> 00:04:03,800 Speaker 4: And I want to make this point that that's entirely conceivable. 74 00:04:03,840 --> 00:04:06,880 Speaker 4: Relative prices change all the time. In the two thousands, 75 00:04:06,880 --> 00:04:10,160 Speaker 4: we had healthcare inflation that was quite significant and much 76 00:04:10,160 --> 00:04:12,200 Speaker 4: more than it was in the nineties. But you know, 77 00:04:12,280 --> 00:04:15,920 Speaker 4: goods price deflation came down, so the basket does shift, 78 00:04:16,480 --> 00:04:18,320 Speaker 4: and it's fine if it shifts, just needs to get 79 00:04:18,320 --> 00:04:18,839 Speaker 4: to two percent. 80 00:04:18,880 --> 00:04:22,200 Speaker 3: Overall, there's sort of whispers out there and some people 81 00:04:22,320 --> 00:04:24,240 Speaker 3: talk about it, and you can kind of see it 82 00:04:24,279 --> 00:04:27,000 Speaker 3: in the rates options markets and stuff. But there is 83 00:04:27,080 --> 00:04:30,360 Speaker 3: this talk like, what if the hiking cycle isn't actually over? 84 00:04:30,440 --> 00:04:33,200 Speaker 3: What if the next rate move is not a cut 85 00:04:33,240 --> 00:04:36,440 Speaker 3: as has been the presumption for a while, What do 86 00:04:36,480 --> 00:04:38,440 Speaker 3: you think it would have to take or what would 87 00:04:38,480 --> 00:04:41,960 Speaker 3: you have to see in the data to say, no, 88 00:04:42,160 --> 00:04:46,000 Speaker 3: this isn't just a matter of waiting for the improvement 89 00:04:46,080 --> 00:04:48,839 Speaker 3: to occur. There is a reason to do more work. 90 00:04:49,279 --> 00:04:51,960 Speaker 4: It would have to be around inflation reaccelerating, and you know, 91 00:04:52,200 --> 00:04:53,560 Speaker 4: having conviction that you need to do. 92 00:04:53,600 --> 00:04:55,640 Speaker 3: And when like, I mean, okay, so we've had this 93 00:04:55,680 --> 00:04:58,800 Speaker 3: little three month pick up from the previous seven months, 94 00:04:58,920 --> 00:05:02,720 Speaker 3: what is like, Okay, this is actually inflation reaccelerated rather. 95 00:05:02,520 --> 00:05:05,960 Speaker 2: Than just a durable trend versus a blip. 96 00:05:06,120 --> 00:05:12,240 Speaker 3: Yeah, what does that look like? Well, put, I'm gonna 97 00:05:12,520 --> 00:05:15,040 Speaker 3: say what is the durable? What constitutes a durable trend? 98 00:05:15,680 --> 00:05:20,360 Speaker 4: I mean a trend that is durable. I think it's 99 00:05:20,360 --> 00:05:23,320 Speaker 4: really hard to get into hypotheticals here, you know, what 100 00:05:23,440 --> 00:05:26,200 Speaker 4: I'll what I'll say is we're in a situation today 101 00:05:26,240 --> 00:05:30,160 Speaker 4: where demand is robust, but I see no signs yet 102 00:05:30,200 --> 00:05:34,440 Speaker 4: that it's overheating. And overheating would lead to pressure on wages, 103 00:05:34,480 --> 00:05:37,479 Speaker 4: woul lead to pressure on prices such the things we're escalating, 104 00:05:37,920 --> 00:05:40,240 Speaker 4: and you can't find that in the wage numbers or 105 00:05:40,240 --> 00:05:42,920 Speaker 4: even in the three month price numbers. And you can't 106 00:05:42,920 --> 00:05:46,080 Speaker 4: find that. So you know, demand is robust but not overheating, 107 00:05:46,400 --> 00:05:49,000 Speaker 4: and inflation is has come down and it's still coming 108 00:05:49,040 --> 00:05:51,480 Speaker 4: down on a twelve month basis, but it is stubbornly 109 00:05:52,080 --> 00:05:54,040 Speaker 4: you know, at least over the last three months plateaued 110 00:05:54,279 --> 00:05:57,320 Speaker 4: above our target. And so I think that makes policy 111 00:05:57,360 --> 00:06:00,560 Speaker 4: pretty straightforward. With today's world, which is you have restrictive 112 00:06:00,600 --> 00:06:03,560 Speaker 4: rates and you want to be restrictive and bring inflation down. 113 00:06:03,880 --> 00:06:07,040 Speaker 4: You can come up with scenarios where those the two 114 00:06:07,080 --> 00:06:09,479 Speaker 4: parts of our mandate are in different balance. But right 115 00:06:09,520 --> 00:06:12,360 Speaker 4: now I think you've got healthy but not overheated demand 116 00:06:12,360 --> 00:06:15,080 Speaker 4: and you've got inflation that remain stubbornly high. So I think, 117 00:06:15,160 --> 00:06:17,040 Speaker 4: to me, the polsipath is pretty straightforward. 118 00:06:17,320 --> 00:06:20,919 Speaker 2: I think you anticipated my next question. But you say 119 00:06:21,200 --> 00:06:24,680 Speaker 2: rates are restrictive, how are you judging the restrictiveness of 120 00:06:24,800 --> 00:06:28,520 Speaker 2: monetary policy, Because when I look at something like the 121 00:06:28,560 --> 00:06:32,320 Speaker 2: financial Conditions Index, up until the past week or so, 122 00:06:32,520 --> 00:06:36,200 Speaker 2: or even few days, it was pretty loose. And so 123 00:06:36,240 --> 00:06:39,440 Speaker 2: there seems to be a disconnect between a certain number 124 00:06:39,440 --> 00:06:42,640 Speaker 2: of Fed officials who will say policy is restrictive versus 125 00:06:42,800 --> 00:06:46,080 Speaker 2: looking at something like that financial conditions index, or even 126 00:06:46,080 --> 00:06:49,800 Speaker 2: the amount of refinancing being undertaken by the corporate bond 127 00:06:49,800 --> 00:06:51,320 Speaker 2: market or the loan market recently. 128 00:06:52,240 --> 00:06:55,200 Speaker 4: Right, so there are many financial conditions indices, some of 129 00:06:55,240 --> 00:06:58,120 Speaker 4: them show looser than others. The ones that seem to 130 00:06:58,160 --> 00:06:59,560 Speaker 4: sort the loosest are the ones that put the most 131 00:06:59,560 --> 00:07:02,920 Speaker 4: weight on the equity markets. Obviously we were with our 132 00:07:02,960 --> 00:07:07,280 Speaker 4: carport manufacturer today. He would certainly say financial conditions are tight. 133 00:07:07,480 --> 00:07:10,560 Speaker 4: And it's very clear to me as I talk around 134 00:07:10,600 --> 00:07:13,600 Speaker 4: the economy that there are significant sectors where financial conditions 135 00:07:13,640 --> 00:07:16,080 Speaker 4: are tight, and they do tend to be those sectors 136 00:07:16,120 --> 00:07:20,440 Speaker 4: like this guy who's most vulnerable to construction and to 137 00:07:20,560 --> 00:07:23,960 Speaker 4: home right and people spending around their home, and in 138 00:07:24,000 --> 00:07:27,320 Speaker 4: his case RVs, RV garage covers are a big part 139 00:07:27,320 --> 00:07:29,720 Speaker 4: of what he does. And of course RVs went crazy, 140 00:07:29,720 --> 00:07:32,720 Speaker 4: but people aren't buying r v's at the same pace anymore. 141 00:07:32,800 --> 00:07:35,520 Speaker 4: So I do see interest rates going to the economy, 142 00:07:35,520 --> 00:07:37,760 Speaker 4: and I see that answering. But I also think it's 143 00:07:37,760 --> 00:07:40,560 Speaker 4: fair to say the level of re strictness is something 144 00:07:40,560 --> 00:07:43,160 Speaker 4: you take at some faith. I do like to look 145 00:07:43,160 --> 00:07:46,120 Speaker 4: at you know, real tip yields to give me some sense, 146 00:07:46,640 --> 00:07:49,720 Speaker 4: But you are comparing it to a hypothetical, not a hypothetical, 147 00:07:49,800 --> 00:07:53,360 Speaker 4: a estimated our star. That is hard to know where 148 00:07:53,360 --> 00:07:55,280 Speaker 4: you really are. And there are lots of estimates, including 149 00:07:55,280 --> 00:07:58,040 Speaker 4: one from the Richmond FED, that are higher than most 150 00:07:58,080 --> 00:08:00,760 Speaker 4: people's standard are stars. So yeah, be open to the 151 00:08:00,800 --> 00:08:04,160 Speaker 4: notion that the level of restrictiveness is less than you think. 152 00:08:04,440 --> 00:08:06,280 Speaker 4: And you would learn that through the economy. You learn 153 00:08:06,360 --> 00:08:09,720 Speaker 4: that through demand accelerating more than you'd think it would, 154 00:08:09,720 --> 00:08:12,440 Speaker 4: and that's something you have to be attentive to. I 155 00:08:12,480 --> 00:08:15,720 Speaker 4: haven't yet concluded that the overheating would be that would 156 00:08:15,720 --> 00:08:18,600 Speaker 4: be part of your case for doing more would be overheating. 157 00:08:18,680 --> 00:08:20,280 Speaker 4: So you don't think as you're as restrictive as you 158 00:08:20,320 --> 00:08:22,000 Speaker 4: thought you were, which meant you have to do a 159 00:08:22,040 --> 00:08:22,520 Speaker 4: little more. 160 00:08:22,800 --> 00:08:24,760 Speaker 3: I just have one more question. But when it comes 161 00:08:24,800 --> 00:08:27,000 Speaker 3: to you know, housing obviously just you know, it's a 162 00:08:27,000 --> 00:08:31,040 Speaker 3: big driver of the upward pressure on inflation through various measures. 163 00:08:31,120 --> 00:08:35,120 Speaker 3: It's also sort of this major societal problem that people 164 00:08:35,440 --> 00:08:39,079 Speaker 3: are frustrated with almost across the country. When you're thinking 165 00:08:39,080 --> 00:08:42,920 Speaker 3: about rate policy, how much like do you think about 166 00:08:43,200 --> 00:08:45,719 Speaker 3: now just okay, what's going to happen in the next 167 00:08:45,800 --> 00:08:49,079 Speaker 3: three months or whatever, but how much does restrictive policy 168 00:08:49,120 --> 00:08:53,080 Speaker 3: today restrain the housing supply of tomorrow, whether it's like 169 00:08:53,400 --> 00:08:57,680 Speaker 3: a multifamily. We got recent numbers that new multifamily development 170 00:08:57,720 --> 00:09:00,800 Speaker 3: has really fallen off quite a bit. In theory, that 171 00:09:00,920 --> 00:09:05,560 Speaker 3: means housing more scarcity in twenty twenty six or whatever. 172 00:09:05,840 --> 00:09:07,920 Speaker 3: Do you fold that into your thinking in terms of 173 00:09:07,960 --> 00:09:08,720 Speaker 3: policy today. 174 00:09:09,240 --> 00:09:11,160 Speaker 4: You try to think it through as best you can. 175 00:09:11,480 --> 00:09:14,280 Speaker 4: Don't forget that the impact of higher rates on housing 176 00:09:14,360 --> 00:09:17,880 Speaker 4: demand is pretty immediate, and the impact of higher rates 177 00:09:17,880 --> 00:09:20,679 Speaker 4: on housing supply, because it gets delivered two years later, 178 00:09:21,240 --> 00:09:24,760 Speaker 4: is more further out. And when we started raising rates, 179 00:09:24,760 --> 00:09:27,120 Speaker 4: we were in the middle of as frothy a period 180 00:09:27,120 --> 00:09:30,360 Speaker 4: in the housing market. As I remember, you know, twelve 181 00:09:30,400 --> 00:09:34,040 Speaker 4: bids per house, houses going for forty thousand dollars over list, 182 00:09:34,640 --> 00:09:37,200 Speaker 4: and you know, so low rates wasn't the answer to 183 00:09:37,240 --> 00:09:40,960 Speaker 4: that particular supply and demand issue. I think this theory 184 00:09:40,960 --> 00:09:43,360 Speaker 4: of the case is that you raise rates, it brings 185 00:09:43,400 --> 00:09:46,480 Speaker 4: down demand to levels more in balance with supply, and 186 00:09:46,520 --> 00:09:49,160 Speaker 4: while it may have an impact with supply, you get 187 00:09:49,160 --> 00:09:51,560 Speaker 4: inflation under control, and then you can lower rates again 188 00:09:51,600 --> 00:09:53,920 Speaker 4: so that supply can blossom. I think that's the theory 189 00:09:53,920 --> 00:09:57,000 Speaker 4: of the case. I'll point out that in this and 190 00:09:57,080 --> 00:09:59,319 Speaker 4: I mean you mentioned multi family, but single family starts 191 00:09:59,320 --> 00:10:02,840 Speaker 4: are quite strong, been much stronger than normal in this cycle. 192 00:10:02,880 --> 00:10:05,240 Speaker 4: In part because I think availability of existing homes has 193 00:10:05,280 --> 00:10:08,520 Speaker 4: been so low, and multifamily starts have come down a bunch, 194 00:10:08,559 --> 00:10:11,640 Speaker 4: but that was from a very very high peak, and 195 00:10:11,720 --> 00:10:13,840 Speaker 4: so they're not that far off today where they were 196 00:10:14,120 --> 00:10:17,520 Speaker 4: before the pandemic, and so we're stuff still getting built. 197 00:10:17,880 --> 00:10:22,040 Speaker 4: There is a future potential challenge and supply, but I 198 00:10:22,080 --> 00:10:24,440 Speaker 4: think the hope is that, you know, demand comes off 199 00:10:25,040 --> 00:10:27,319 Speaker 4: enough that we can bring that market into better balance. 200 00:10:44,120 --> 00:10:47,120 Speaker 2: Just going back to the inflation outlook, I think at 201 00:10:47,120 --> 00:10:49,480 Speaker 2: this point there have been a number of FED officials 202 00:10:49,520 --> 00:10:53,800 Speaker 2: who seem to have suggested that the worst outcome of 203 00:10:54,000 --> 00:10:57,559 Speaker 2: the current monetary policy cycle, or one of the worst outcomes, 204 00:10:57,760 --> 00:11:01,480 Speaker 2: would be if they decided to start easing only to 205 00:11:01,520 --> 00:11:05,120 Speaker 2: see inflation pick back up again. And I guess my 206 00:11:05,240 --> 00:11:09,240 Speaker 2: question is, why, why is that so bad? Because couldn't 207 00:11:09,240 --> 00:11:13,559 Speaker 2: you just alter course? Couldn't you start tightening again if 208 00:11:13,600 --> 00:11:14,679 Speaker 2: you saw that in the data. 209 00:11:15,640 --> 00:11:17,360 Speaker 4: Well, I think it's hard to do my job and 210 00:11:17,480 --> 00:11:20,720 Speaker 4: not be aware of the seventies. And I remember the seventies. 211 00:11:20,760 --> 00:11:24,600 Speaker 4: It wasn't pretty. I also had bad hair in that era. 212 00:11:24,720 --> 00:11:26,880 Speaker 4: But you know what happened in the seventies. This is 213 00:11:26,960 --> 00:11:30,760 Speaker 4: the fundamental object lesson of monetary policy is every time 214 00:11:30,920 --> 00:11:33,520 Speaker 4: there was the slightest hint that the economy could be 215 00:11:33,600 --> 00:11:37,120 Speaker 4: turning down, they lowered rates, and then inflation came back up, 216 00:11:37,440 --> 00:11:40,880 Speaker 4: and then they increased rates. And the issue is when 217 00:11:41,480 --> 00:11:45,040 Speaker 4: the FED doesn't look like it's resolute on inflation, inflation 218 00:11:45,120 --> 00:11:46,880 Speaker 4: doesn't come back to where it was before, it comes 219 00:11:47,200 --> 00:11:49,679 Speaker 4: to higher than it was before, which means that every 220 00:11:49,720 --> 00:11:51,920 Speaker 4: time to fight it, you've got to take rates even higher, 221 00:11:52,520 --> 00:11:54,520 Speaker 4: which means that the damage you do the economy is 222 00:11:54,559 --> 00:11:58,200 Speaker 4: even more. And so letting it expectations spiral out of control, 223 00:11:58,240 --> 00:12:01,040 Speaker 4: I think is just a very risky thing for the economy. 224 00:12:01,080 --> 00:12:04,120 Speaker 4: And that's not some theoretical model. We actually lived it 225 00:12:04,320 --> 00:12:06,920 Speaker 4: in the seventies and and much like me, the seventies 226 00:12:06,920 --> 00:12:07,520 Speaker 4: weren't pretty. 227 00:12:08,679 --> 00:12:11,520 Speaker 2: Just because you mentioned our star and the neutral rate 228 00:12:11,640 --> 00:12:14,360 Speaker 2: and I get the sense. And this is just based 229 00:12:14,360 --> 00:12:17,040 Speaker 2: off of a Bank for International Settlements paper that came 230 00:12:17,080 --> 00:12:19,520 Speaker 2: out a couple of weeks ago, but they basically suggested 231 00:12:19,559 --> 00:12:24,240 Speaker 2: that maybe our star is that our stars time in 232 00:12:24,280 --> 00:12:27,160 Speaker 2: the spotlight has kind of come and gone, and the 233 00:12:27,240 --> 00:12:29,760 Speaker 2: ideas that while we should be focused more on what 234 00:12:29,800 --> 00:12:34,559 Speaker 2: the actual inflation data is telling us rather than some hypothetical, unknown, 235 00:12:34,640 --> 00:12:38,079 Speaker 2: neutral rate that we're having to estimate and triangulate from 236 00:12:38,080 --> 00:12:41,760 Speaker 2: a variety of factors. Does our stars still loom large 237 00:12:41,880 --> 00:12:43,959 Speaker 2: in the fed's thinking or do you think it's been 238 00:12:44,040 --> 00:12:47,040 Speaker 2: sort of superseded by what we've seen in the real economy. 239 00:12:47,760 --> 00:12:50,240 Speaker 4: Well, I think we certainly spend a lot of time 240 00:12:50,360 --> 00:12:52,679 Speaker 4: trying to understand and think about our star and where 241 00:12:52,679 --> 00:12:57,720 Speaker 4: it's headed. Not because I believe that there's one precise 242 00:12:57,800 --> 00:13:02,720 Speaker 4: point estimate. The standard deviations around most estimates are quite wide, 243 00:13:02,880 --> 00:13:04,160 Speaker 4: but because I think you have to do have to 244 00:13:04,160 --> 00:13:07,440 Speaker 4: ask yourself the question, are you restrictive or restrictive enough 245 00:13:07,440 --> 00:13:10,040 Speaker 4: for what you're trying to do to inflation? So you 246 00:13:10,080 --> 00:13:13,319 Speaker 4: ask yourself that question, and if the economy comes in 247 00:13:13,400 --> 00:13:15,480 Speaker 4: more robust and inflation comes in more orbust, than you 248 00:13:15,520 --> 00:13:18,280 Speaker 4: ask yourself the question whether your prior assumption was right 249 00:13:18,360 --> 00:13:20,960 Speaker 4: or not, and if it comes in south of where 250 00:13:20,960 --> 00:13:22,559 Speaker 4: you thought, which is what happened for most of the 251 00:13:22,600 --> 00:13:25,280 Speaker 4: twenty tens, then you ask yourself the question of whether 252 00:13:25,440 --> 00:13:27,640 Speaker 4: your estimate of our star was too high. And so 253 00:13:27,760 --> 00:13:31,120 Speaker 4: most estimates in the twenty tens came down significantly. Some 254 00:13:31,160 --> 00:13:32,760 Speaker 4: of that was done by models. Some of that was 255 00:13:32,800 --> 00:13:35,520 Speaker 4: done by just observation of an economy that didn't seem 256 00:13:35,600 --> 00:13:39,520 Speaker 4: very robust despite extremely low rates. If we if our 257 00:13:39,760 --> 00:13:42,520 Speaker 4: economy continues to be as robust it is with rates 258 00:13:42,679 --> 00:13:44,520 Speaker 4: where they are, I think that'll tell you something. 259 00:13:44,800 --> 00:13:45,679 Speaker 3: If it's changed. 260 00:13:45,800 --> 00:13:48,480 Speaker 4: Why there are a lot of people who are better 261 00:13:48,520 --> 00:13:51,800 Speaker 4: at those models than i am. I think productivity would 262 00:13:51,800 --> 00:13:53,920 Speaker 4: be a very simple way to explain the change. A 263 00:13:54,000 --> 00:13:56,640 Speaker 4: higher productivity economy is a higher trend growth economy, which 264 00:13:57,200 --> 00:13:59,800 Speaker 4: would do it. You might argue fiscal you know, has 265 00:13:59,800 --> 00:14:01,720 Speaker 4: some thing to do with it, and certainly we're at 266 00:14:01,720 --> 00:14:03,760 Speaker 4: a different level of fiscal spend today than we were 267 00:14:03,840 --> 00:14:07,000 Speaker 4: in the early twenty tens. But again I'm not going 268 00:14:07,040 --> 00:14:08,400 Speaker 4: to profess to be the expert on that. 269 00:14:09,840 --> 00:14:12,880 Speaker 2: I ask a question, why is it two percent? 270 00:14:12,960 --> 00:14:16,200 Speaker 4: Is it because of the expectations part is more important 271 00:14:16,200 --> 00:14:18,600 Speaker 4: than the actual number. That's like you're trying to set up. 272 00:14:20,000 --> 00:14:22,320 Speaker 4: So there was a debate, you know why two percent? 273 00:14:22,320 --> 00:14:24,600 Speaker 4: There was a debate in the nineties actually, and the 274 00:14:24,720 --> 00:14:26,040 Speaker 4: Richmond Fed was right in the middle of it. Al 275 00:14:26,080 --> 00:14:29,480 Speaker 4: brought us about what the right target should be. Interestingly, 276 00:14:29,520 --> 00:14:32,760 Speaker 4: at the time, the choice was between zero and two right, 277 00:14:32,840 --> 00:14:35,000 Speaker 4: because our mandate is stable prices, and there were those 278 00:14:35,040 --> 00:14:39,040 Speaker 4: who thought stable means stable. Stable zero is stable. It 279 00:14:39,120 --> 00:14:41,280 Speaker 4: was widely debated the way, all the way till it 280 00:14:41,320 --> 00:14:44,320 Speaker 4: was announced in twenty twelve. But nowhere in that debate 281 00:14:44,400 --> 00:14:46,480 Speaker 4: can you find evidence that people were debating three, four 282 00:14:46,520 --> 00:14:48,280 Speaker 4: or five. They were debating one or one and a 283 00:14:48,320 --> 00:14:51,880 Speaker 4: half or two or zero. Why pick two? Well, a 284 00:14:51,920 --> 00:14:54,640 Speaker 4: few things that are relevant. Pretty much every central bank 285 00:14:54,640 --> 00:14:56,840 Speaker 4: in the world has two plus or minus. Some have 286 00:14:57,040 --> 00:14:58,800 Speaker 4: up to two or one and a half to two 287 00:14:58,840 --> 00:15:01,680 Speaker 4: and a half. Second, it seems to have worked for 288 00:15:01,800 --> 00:15:03,920 Speaker 4: thirty years. I mean we actually delivered it, so it's 289 00:15:03,920 --> 00:15:05,840 Speaker 4: not some random number you could never get to. 290 00:15:06,640 --> 00:15:06,840 Speaker 3: Third. 291 00:15:06,920 --> 00:15:10,640 Speaker 4: There is mismeasurement in there, and the mismeasurement is actually 292 00:15:11,000 --> 00:15:13,360 Speaker 4: thought by most people to say that actual inflation is 293 00:15:13,360 --> 00:15:15,400 Speaker 4: a little bit less than the two percent number. A 294 00:15:15,440 --> 00:15:19,680 Speaker 4: good example would be encyclopedias. Used to buy and I 295 00:15:19,760 --> 00:15:22,640 Speaker 4: used to buy encyclopedia. No one buys an encyclopedia Today. 296 00:15:22,640 --> 00:15:25,360 Speaker 4: It's on your phone, and so it's out of the index, 297 00:15:25,680 --> 00:15:29,080 Speaker 4: and so it's gone from being whatever world book was, 298 00:15:29,280 --> 00:15:31,200 Speaker 4: you know, three hundred and ninet nine dollars to zero. 299 00:15:31,720 --> 00:15:34,920 Speaker 4: That's deflation, but it's out of the index. And so technology, 300 00:15:34,960 --> 00:15:37,280 Speaker 4: actually you're not buying a camera anymore or film is 301 00:15:37,320 --> 00:15:39,600 Speaker 4: taking the set of things out of the index that 302 00:15:40,080 --> 00:15:43,360 Speaker 4: you know deflationary. But maybe the best reason is it's 303 00:15:43,360 --> 00:15:46,360 Speaker 4: really hard to hit your target exactly. If you set 304 00:15:46,360 --> 00:15:48,640 Speaker 4: a target at zero and you don't hit it exactly, 305 00:15:48,680 --> 00:15:52,240 Speaker 4: you're in deflationary territory. And deflation is where everything tomorrow 306 00:15:52,320 --> 00:15:54,840 Speaker 4: costs less than it does today. So the incentive to 307 00:15:54,880 --> 00:15:57,680 Speaker 4: buy today goes down, which means an economy you know, 308 00:15:57,760 --> 00:16:00,800 Speaker 4: tends to stagnate, and that's Japan and what has been through. 309 00:16:00,840 --> 00:16:02,800 Speaker 4: So two gives you a little bit of room against zero, 310 00:16:02,920 --> 00:16:04,880 Speaker 4: means we can do a little bit to cut rates 311 00:16:04,880 --> 00:16:06,440 Speaker 4: when we need to. That's the theory of it. 312 00:16:06,680 --> 00:16:09,480 Speaker 2: And you said, since it's work, there's no need to 313 00:16:09,520 --> 00:16:10,000 Speaker 2: change it. 314 00:16:11,080 --> 00:16:13,680 Speaker 4: Yeah, And in particular, you'd never change it before you 315 00:16:13,760 --> 00:16:16,600 Speaker 4: hit it. And so we're out there trying to hit 316 00:16:16,600 --> 00:16:20,320 Speaker 4: a target. If inflation is at three and you decide 317 00:16:20,640 --> 00:16:23,440 Speaker 4: new targets three, I just don't think that works for 318 00:16:23,480 --> 00:16:25,760 Speaker 4: your credibility. And that's really the major tool the FED 319 00:16:25,840 --> 00:16:26,880 Speaker 4: has is credibility. 320 00:16:28,320 --> 00:16:31,200 Speaker 3: All Right, Tom thank you so much. That was fantastic. 321 00:16:31,320 --> 00:16:32,880 Speaker 4: No, I love you guys. Great to with you. 322 00:16:32,960 --> 00:16:33,520 Speaker 3: Thank you so much. 323 00:16:33,520 --> 00:16:33,760 Speaker 4: Thank you. 324 00:16:34,280 --> 00:16:39,360 Speaker 2: Keep that in Dash. That was our conversation with Tom Barkin. 325 00:16:39,720 --> 00:16:42,640 Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway. 326 00:16:42,800 --> 00:16:45,600 Speaker 3: And I'm Joe Wisenthal. You can follow me at the Stalwart. 327 00:16:45,840 --> 00:16:49,120 Speaker 3: Follow our producers Carman Rodriguez at Carman armand Dash, Ol 328 00:16:49,120 --> 00:16:52,240 Speaker 3: Bennett at Dashbot and kill Brooks at kil Brooks. And 329 00:16:52,280 --> 00:16:55,000 Speaker 3: thank you to our producer Moses Ondom. 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