1 00:00:10,800 --> 00:00:15,240 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:15,320 --> 00:00:20,160 Speaker 1: I'm Joe Wisnthal and I'm Tracy Alloway. Tracy, I was 3 00:00:20,200 --> 00:00:25,680 Speaker 1: thinking outside of like crisis, like outside of like you know, 4 00:00:25,880 --> 00:00:30,560 Speaker 1: spring of and obviously the sort of like year year 5 00:00:30,600 --> 00:00:33,720 Speaker 1: and a half like surrounding the Great Financial Crisis. I 6 00:00:33,800 --> 00:00:37,760 Speaker 1: think right now is probably maybe the most interesting time 7 00:00:37,800 --> 00:00:40,640 Speaker 1: we've seen in a long time for the Fed and 8 00:00:40,800 --> 00:00:44,640 Speaker 1: central banking. Yeah. Absolutely, I would agree with that. I mean, 9 00:00:44,720 --> 00:00:49,280 Speaker 1: we spent um, you know, immediately after two thousand eight, 10 00:00:49,400 --> 00:00:51,600 Speaker 1: there was obviously a lot to digest, but then it 11 00:00:51,680 --> 00:00:54,280 Speaker 1: was just years and years of basically the same thing, 12 00:00:54,440 --> 00:00:58,400 Speaker 1: really low inflation, uh, and the central banks kind of 13 00:00:58,480 --> 00:01:02,720 Speaker 1: arguing whether or not to why down various stimulus programs, 14 00:01:02,800 --> 00:01:05,800 Speaker 1: um what exits we're going to look like. But now 15 00:01:06,240 --> 00:01:09,440 Speaker 1: it feels like that conversation has just been ramped up, 16 00:01:09,560 --> 00:01:13,600 Speaker 1: you know, times a hundred, because you actually do have inflation. 17 00:01:14,080 --> 00:01:16,679 Speaker 1: You still have a lot of emergency liquidity lingering in 18 00:01:16,680 --> 00:01:19,400 Speaker 1: the system, and the question is what are central banks 19 00:01:19,520 --> 00:01:22,800 Speaker 1: going to do about it? And can they actually navigate 20 00:01:23,440 --> 00:01:30,040 Speaker 1: clamping down on price pressures without destabilizing the entire economic recovery. 21 00:01:31,480 --> 00:01:34,080 Speaker 1: You know, we paid a lot of attention to the 22 00:01:34,160 --> 00:01:36,959 Speaker 1: FED and other big central banks like you know, for 23 00:01:37,000 --> 00:01:40,400 Speaker 1: the last ten years. But in retrospect, like it's kind 24 00:01:40,400 --> 00:01:42,600 Speaker 1: of always the same story. It's like, inflation is mild, 25 00:01:42,920 --> 00:01:45,959 Speaker 1: so not quite a target. Maybe it will be how 26 00:01:46,040 --> 00:01:48,680 Speaker 1: local employment go. Oh it turns out it can go lower. 27 00:01:48,880 --> 00:01:51,160 Speaker 1: Maybe they'll try to hike a bit, maybe they use 28 00:01:51,160 --> 00:01:53,560 Speaker 1: a little premature way to It's like it was like 29 00:01:53,680 --> 00:01:57,080 Speaker 1: pretty repetitive and right now. And I think is interesting 30 00:01:57,160 --> 00:02:00,280 Speaker 1: is beyond just the price pressure, like an extreme only 31 00:02:00,320 --> 00:02:03,920 Speaker 1: wide disagreement, and some people think, oh, it's gonna fade 32 00:02:03,960 --> 00:02:06,880 Speaker 1: because things are going to normalize. People worry about some 33 00:02:06,960 --> 00:02:11,000 Speaker 1: sort of wage price inflationary spiral, like lots of legitimate 34 00:02:11,680 --> 00:02:14,880 Speaker 1: economists and people sort of like coming out the problem 35 00:02:14,960 --> 00:02:17,840 Speaker 1: or the question and good faith can arrive at extremely 36 00:02:17,880 --> 00:02:20,600 Speaker 1: different views for the next couple of years. I would 37 00:02:20,600 --> 00:02:25,160 Speaker 1: say from this starting point, absolutely, And I think we've 38 00:02:25,200 --> 00:02:28,280 Speaker 1: spoken about this before. But the thing that complicates everything 39 00:02:28,360 --> 00:02:31,720 Speaker 1: is that we don't really have a historical framework or 40 00:02:31,840 --> 00:02:36,320 Speaker 1: parallel to look at because we didn't experience anything like 41 00:02:36,480 --> 00:02:41,359 Speaker 1: the pandemic. Um well, I guess we had Spanish flu, 42 00:02:41,560 --> 00:02:44,320 Speaker 1: but the crisis response wasn't quite the same, and so 43 00:02:44,440 --> 00:02:47,040 Speaker 1: everyone is sort of trying to figure out what exactly 44 00:02:47,120 --> 00:02:49,280 Speaker 1: is going on. And to be honest, I don't think 45 00:02:49,360 --> 00:02:55,000 Speaker 1: anyone has a fool proof or bulletproof playbook just yet. 46 00:02:55,720 --> 00:02:58,600 Speaker 1: Right And also, and of course, in addition to the 47 00:02:58,639 --> 00:03:02,960 Speaker 1: pandemic itself, we had an extortiny amount of fiscal stimulus 48 00:03:03,000 --> 00:03:06,040 Speaker 1: this time around. We had the FED at the summer 49 00:03:06,080 --> 00:03:09,600 Speaker 1: of sort of adopting a new framework where they would 50 00:03:09,639 --> 00:03:12,680 Speaker 1: intentionally allow of things to overshoot. So there is a 51 00:03:12,720 --> 00:03:16,560 Speaker 1: lot to unpack. It's very new. Everything is different, and uh, 52 00:03:16,760 --> 00:03:19,519 Speaker 1: we're going to uh, we're going to talk about how 53 00:03:19,520 --> 00:03:21,280 Speaker 1: to make headser tails of this and what's going on. 54 00:03:21,680 --> 00:03:24,560 Speaker 1: Excellent looking forward to So our guest has actually been 55 00:03:24,760 --> 00:03:30,040 Speaker 1: on the podcast before, but very long time ago, way 56 00:03:30,080 --> 00:03:33,079 Speaker 1: back in and we just talked to him back then 57 00:03:33,160 --> 00:03:35,760 Speaker 1: about the sort of the art of FED watching. Well, 58 00:03:35,760 --> 00:03:39,560 Speaker 1: now fed watching is actually was really putting it into 59 00:03:39,560 --> 00:03:43,040 Speaker 1: practice these days. We're gonna be speaking to Tim Dewey. 60 00:03:43,120 --> 00:03:46,080 Speaker 1: He is the chief US economist at s G H. Macro. 61 00:03:46,600 --> 00:03:49,840 Speaker 1: He is also a professor of economics at the University 62 00:03:49,840 --> 00:03:52,680 Speaker 1: of Oregon, and I think he's had a very good 63 00:03:52,720 --> 00:03:57,560 Speaker 1: feel for both inflationary pressures and how the FED would 64 00:03:57,600 --> 00:04:01,720 Speaker 1: likely respond to them over the last year in his 65 00:04:01,840 --> 00:04:04,800 Speaker 1: writings on Twitter and so forth. So, uh, Tim, thank 66 00:04:04,840 --> 00:04:07,920 Speaker 1: you so much for coming back on odd lots. Well, 67 00:04:07,920 --> 00:04:10,680 Speaker 1: thank you for having me. I appreciate the opportunity. Yeah, 68 00:04:10,760 --> 00:04:14,960 Speaker 1: absotlutely so in retrospect or we right there, like six 69 00:04:16,680 --> 00:04:19,279 Speaker 1: pretty boring from a FED perspective, at least compared to 70 00:04:19,320 --> 00:04:22,880 Speaker 1: what we're doing with now. Yeah, the never ending expansion 71 00:04:23,040 --> 00:04:25,520 Speaker 1: was going to get old there pretty soon from a 72 00:04:25,520 --> 00:04:29,400 Speaker 1: FED watching perspective, that's for sure. Of course, you didn't 73 00:04:29,400 --> 00:04:33,039 Speaker 1: want it to end the way it ended, unfortunately. So 74 00:04:33,200 --> 00:04:36,440 Speaker 1: what is it about the current period that makes it 75 00:04:36,960 --> 00:04:40,760 Speaker 1: so unusual or so interesting for central bank watchers such 76 00:04:40,800 --> 00:04:46,480 Speaker 1: as yourself, Well, it's it's the uncertainty. We had gone 77 00:04:46,560 --> 00:04:49,480 Speaker 1: into the pandemic with a with a sense that we 78 00:04:49,600 --> 00:04:52,719 Speaker 1: knew a right, we knew the basic economic framework that 79 00:04:52,760 --> 00:04:55,640 Speaker 1: we're going to be working with you for the foreseeable future. 80 00:04:56,279 --> 00:05:00,480 Speaker 1: And that basic framework assumed that to me and was 81 00:05:00,839 --> 00:05:03,719 Speaker 1: really always an everywhere problem in the sense of being 82 00:05:03,839 --> 00:05:07,520 Speaker 1: too low. And we also thought that inflation was very, 83 00:05:07,640 --> 00:05:11,479 Speaker 1: very sticky around two percent and these were reasonable things 84 00:05:11,520 --> 00:05:14,719 Speaker 1: to believe, you know, in the pre pandemic period, because 85 00:05:14,800 --> 00:05:17,320 Speaker 1: that's that's the story that actually worked out well and 86 00:05:17,320 --> 00:05:20,200 Speaker 1: seemed to be proved by the evidence, and especially the 87 00:05:20,240 --> 00:05:23,839 Speaker 1: sticky inflation part. We've seen sticky inflation for twenty five 88 00:05:23,920 --> 00:05:27,760 Speaker 1: years around two percent. You know, we went into the 89 00:05:27,760 --> 00:05:33,440 Speaker 1: pandemic with really established consensus framework on how the economy worked, 90 00:05:33,839 --> 00:05:37,239 Speaker 1: and the pandemic has really blown that apart, at least 91 00:05:37,240 --> 00:05:39,920 Speaker 1: in the near term, because a lot of those predictions 92 00:05:40,000 --> 00:05:45,240 Speaker 1: of persistently weak demand, persistently slow job growth, persistently low 93 00:05:45,279 --> 00:05:49,800 Speaker 1: inflation near two percent, all of those uh predictions just 94 00:05:49,880 --> 00:05:52,640 Speaker 1: did not work out as expected in the in the 95 00:05:52,680 --> 00:05:56,680 Speaker 1: post pandemic era. This gets to sort of bigger picture 96 00:05:56,720 --> 00:05:58,960 Speaker 1: question that I've been asking myself a lot over the 97 00:05:59,040 --> 00:06:01,560 Speaker 1: last six months or a year, which is like, we 98 00:06:01,680 --> 00:06:05,760 Speaker 1: can list all the ways this current moment is extraordinary, right, 99 00:06:05,880 --> 00:06:11,360 Speaker 1: So we're still in a public health emergency by many measures. 100 00:06:11,360 --> 00:06:14,200 Speaker 1: We had a very intense O macron wave, we had 101 00:06:14,480 --> 00:06:17,880 Speaker 1: Dealta wave before that. That's not over. There are still 102 00:06:17,880 --> 00:06:20,680 Speaker 1: many disruptions. They seem to be winding down, but they're 103 00:06:20,680 --> 00:06:23,960 Speaker 1: going away, but they but there's still many, um, sort 104 00:06:24,000 --> 00:06:27,480 Speaker 1: of interventions and masks and school issues. Then of course 105 00:06:27,520 --> 00:06:31,840 Speaker 1: we had the massively expansion, the aggressive fiscal stimulus, and 106 00:06:31,880 --> 00:06:35,440 Speaker 1: of course the FED which made a decision in that 107 00:06:35,440 --> 00:06:37,880 Speaker 1: they did not want to make the same mistakes they 108 00:06:37,880 --> 00:06:39,560 Speaker 1: did in the past, and they said, Okay, we're going 109 00:06:39,640 --> 00:06:43,520 Speaker 1: to let it overshoot this time. Well, my question is, 110 00:06:43,720 --> 00:06:47,840 Speaker 1: why wouldn't things return to normal, Why after the sort 111 00:06:47,880 --> 00:06:51,920 Speaker 1: of pandemic ends. Why wouldn't it necessarily be safe to say, Okay, 112 00:06:51,920 --> 00:06:54,120 Speaker 1: we're just gonna go back to the sort of like 113 00:06:54,520 --> 00:06:58,719 Speaker 1: the medium economy that we had pre crisis. I think 114 00:06:58,760 --> 00:07:02,200 Speaker 1: that's uh an excellent question. Um, you know, I think, 115 00:07:02,240 --> 00:07:05,240 Speaker 1: you know, particularly with respect to the inflation story, that 116 00:07:05,279 --> 00:07:09,080 Speaker 1: inflation trend, the pre pandemic, you know, trend of two 117 00:07:09,160 --> 00:07:11,800 Speaker 1: percent inflation that we've seen for twenty five years, that 118 00:07:11,920 --> 00:07:15,360 Speaker 1: was presumably a very sticky trend, and there's a good 119 00:07:15,400 --> 00:07:17,840 Speaker 1: reason to think that that you don't want to just 120 00:07:17,880 --> 00:07:21,440 Speaker 1: sort of turn your back on a deeply established trend 121 00:07:21,560 --> 00:07:25,240 Speaker 1: like that. Now. On the other hand, one idea that 122 00:07:25,280 --> 00:07:28,640 Speaker 1: I play around with quite a bit is that the 123 00:07:28,680 --> 00:07:33,800 Speaker 1: pre pandemic economy was more finely balanced than we appreciated. 124 00:07:34,080 --> 00:07:39,400 Speaker 1: That we essentially had just enough labor market pressure to 125 00:07:39,480 --> 00:07:43,000 Speaker 1: keep downward pressure on unemployment, keep pulling people into the 126 00:07:43,080 --> 00:07:48,200 Speaker 1: labor market, keep wages rising in nominal and real terms. Uh. 127 00:07:48,240 --> 00:07:51,680 Speaker 1: And also you're not not having an overheat in the 128 00:07:51,720 --> 00:07:53,960 Speaker 1: sense that there were any real threats to that two 129 00:07:54,760 --> 00:07:59,440 Speaker 1: inflation trend that though might have been a more unique 130 00:07:59,440 --> 00:08:04,560 Speaker 1: economy then we realized by how we got nine. How 131 00:08:04,680 --> 00:08:08,400 Speaker 1: much of the inflation pressures do you see as down 132 00:08:08,440 --> 00:08:13,320 Speaker 1: to supply issues, um, such as the various logistics problems 133 00:08:13,360 --> 00:08:15,040 Speaker 1: that we've been talking about on the show over the 134 00:08:15,040 --> 00:08:20,360 Speaker 1: past year or so, versus demand coming from consumers, many 135 00:08:20,440 --> 00:08:23,560 Speaker 1: of whom you know, in terms of household balance sheets, 136 00:08:23,680 --> 00:08:26,320 Speaker 1: seem to be in better positions than they were going 137 00:08:26,440 --> 00:08:30,440 Speaker 1: into the crisis. You know, I get concerned when we 138 00:08:30,520 --> 00:08:33,120 Speaker 1: try to say that that, you know, things are either 139 00:08:33,200 --> 00:08:35,800 Speaker 1: demand or supply related, because I'm not sure that we 140 00:08:35,840 --> 00:08:40,040 Speaker 1: can really tease out those factors as easily as as 141 00:08:40,040 --> 00:08:42,400 Speaker 1: we think we can. You know, demand and supply are 142 00:08:42,440 --> 00:08:45,560 Speaker 1: like two sides of let's like compair of scissors, right, 143 00:08:46,080 --> 00:08:48,640 Speaker 1: and so both both are cutting the papers. So which 144 00:08:48,679 --> 00:08:52,680 Speaker 1: which which which blade is doing the job is hard 145 00:08:52,720 --> 00:08:56,600 Speaker 1: to In many cases determined. I've thought that demand was 146 00:08:56,640 --> 00:08:59,880 Speaker 1: a large factor here, that if we look at factors 147 00:09:00,080 --> 00:09:03,640 Speaker 1: like nominal spending power on the part of consumers, that 148 00:09:03,679 --> 00:09:09,160 Speaker 1: they really were spending more nominal terms and basically stretching 149 00:09:09,480 --> 00:09:12,640 Speaker 1: the ability to the economy to produce those goods and services. 150 00:09:13,080 --> 00:09:15,760 Speaker 1: So I thought that that the supply angle has been 151 00:09:15,800 --> 00:09:21,280 Speaker 1: overplayed and the demand angle underplayed. So that's that's where 152 00:09:21,320 --> 00:09:25,679 Speaker 1: I sit on the subject we look forward into the future. 153 00:09:25,960 --> 00:09:29,280 Speaker 1: I do think it still relies depends a lot about 154 00:09:29,679 --> 00:09:34,200 Speaker 1: how much consumers are able to and um willing to accept. 155 00:09:34,920 --> 00:09:38,640 Speaker 1: And it looks right now that they have the capacity 156 00:09:38,679 --> 00:09:43,200 Speaker 1: to continue to absorb price increases, and I suspect will 157 00:09:43,440 --> 00:09:46,360 Speaker 1: continue to do so, although maybe not at a you know, 158 00:09:46,520 --> 00:09:49,000 Speaker 1: six or seven or eight percent analyzed rate as we've 159 00:09:49,000 --> 00:09:53,240 Speaker 1: been as we've kind of been seeing. So we're like 160 00:09:53,320 --> 00:09:56,120 Speaker 1: ten minutes into this conversation already, and I think it's 161 00:09:56,160 --> 00:09:59,719 Speaker 1: really interesting that inflation dominates the story right now, but 162 00:09:59,840 --> 00:10:02,199 Speaker 1: the labor market and the sort of the other half 163 00:10:02,200 --> 00:10:05,280 Speaker 1: of the fedual mandate, it's just been incredibly strong, and 164 00:10:05,320 --> 00:10:09,319 Speaker 1: no one I think would have predicted some four percent unemployment. 165 00:10:09,880 --> 00:10:13,760 Speaker 1: Uh So, you know, early or I guess we're at 166 00:10:13,760 --> 00:10:17,800 Speaker 1: four percent right now. My question is, in your view, 167 00:10:18,480 --> 00:10:21,080 Speaker 1: was there a way to have this fast of a 168 00:10:21,160 --> 00:10:26,319 Speaker 1: labor market recovery without the inflationary pressures that we've seen, 169 00:10:27,000 --> 00:10:31,600 Speaker 1: or are these inflationary pressures the inevitable byproduct of an 170 00:10:31,600 --> 00:10:36,320 Speaker 1: economy that moved so fast back to normal. The rapid 171 00:10:36,320 --> 00:10:39,920 Speaker 1: recovery of the labor market was certainly unexpected, and you know, 172 00:10:40,080 --> 00:10:43,480 Speaker 1: the Federal Reserve and the the U. S. Government dumped 173 00:10:43,600 --> 00:10:46,800 Speaker 1: enormous amounts of resources uh in the economy on the 174 00:10:46,800 --> 00:10:50,280 Speaker 1: assumption that that it would not recover very quickly, and 175 00:10:51,000 --> 00:10:57,040 Speaker 1: it did. Had we known really that COVID, you know, 176 00:10:57,080 --> 00:11:03,160 Speaker 1: the COVID shock in twenty funny was going to be 177 00:11:03,240 --> 00:11:06,240 Speaker 1: more like a snowstorm than a persistent source of demand 178 00:11:06,679 --> 00:11:10,040 Speaker 1: lost demand, I'm not sure that we would have dumped 179 00:11:10,280 --> 00:11:14,000 Speaker 1: that much policy stimulus into it. We'd be at a 180 00:11:14,080 --> 00:11:17,800 Speaker 1: situation where where the labor market did recover quickly. It's 181 00:11:17,920 --> 00:11:21,880 Speaker 1: very much true that going into the pandemic, we would 182 00:11:21,880 --> 00:11:25,199 Speaker 1: not have expected labor demand to rebound quite as quickly 183 00:11:25,200 --> 00:11:29,040 Speaker 1: as it did, and that was really our experience in 184 00:11:29,080 --> 00:11:32,040 Speaker 1: the last last couple of processions. The fact that that 185 00:11:32,200 --> 00:11:36,920 Speaker 1: recovery did happen very quickly, probably helped contribute to inflationary 186 00:11:36,960 --> 00:11:40,520 Speaker 1: pressures when you take into account the additional stimulus that 187 00:11:40,559 --> 00:11:44,880 Speaker 1: we added onto the um UH system. In some ways, 188 00:11:44,880 --> 00:11:47,120 Speaker 1: it comes down to me, for there's a question of, 189 00:11:47,440 --> 00:11:50,400 Speaker 1: you know, what was the original COVID shock, like a 190 00:11:50,480 --> 00:11:53,880 Speaker 1: big demand shock like the financial crisis in two thousand 191 00:11:53,960 --> 00:11:57,440 Speaker 1: and seven two nine era, or was it more like 192 00:11:57,679 --> 00:12:02,680 Speaker 1: a snowstorm? And you would expect fairly rapid recovery after 193 00:12:02,679 --> 00:12:06,000 Speaker 1: a snowstorm, and and that's that's kind of what what 194 00:12:06,040 --> 00:12:08,840 Speaker 1: we've seen. UH. And I do think you know that 195 00:12:08,840 --> 00:12:11,480 Speaker 1: that the additional stimulas we put on top of that 196 00:12:11,559 --> 00:12:15,720 Speaker 1: then helped contribute to to the the inflationary pressures we 197 00:12:15,760 --> 00:12:19,280 Speaker 1: see now, how do you disaggregate the speed of that 198 00:12:19,480 --> 00:12:24,160 Speaker 1: recovery from the policy response? Though, right, I think that's 199 00:12:24,200 --> 00:12:26,320 Speaker 1: a that's a great question that would be the subject 200 00:12:26,320 --> 00:12:30,520 Speaker 1: of a thousand PhD dissertations in the future. I don't 201 00:12:31,000 --> 00:12:33,600 Speaker 1: I don't. I don't know that that I'm able to 202 00:12:33,640 --> 00:12:38,640 Speaker 1: take a stand on that at this point. I really 203 00:12:38,880 --> 00:12:41,880 Speaker 1: this comes down to some sense, really what kind of 204 00:12:41,920 --> 00:12:46,280 Speaker 1: framework you had going into the crisis, or we're adjusting 205 00:12:46,280 --> 00:12:49,160 Speaker 1: that framework. I think where we started seeing the economy 206 00:12:49,200 --> 00:12:53,840 Speaker 1: bounced back in the middle of it really started to 207 00:12:53,880 --> 00:12:58,320 Speaker 1: strike me that there's a lot of underlying structural there's 208 00:12:58,360 --> 00:13:02,080 Speaker 1: a lot of underlying structural very going on here, and 209 00:13:02,800 --> 00:13:05,240 Speaker 1: we probably don't need quite the amount of stimulus as 210 00:13:05,240 --> 00:13:08,559 Speaker 1: well as we're putting into the system. But but in 211 00:13:08,720 --> 00:13:12,480 Speaker 1: some sense that was that was a hunch feel for 212 00:13:12,480 --> 00:13:32,320 Speaker 1: the data more than anything else. So, Tim, you mentioned 213 00:13:32,679 --> 00:13:37,160 Speaker 1: um frameworks going into this, and one of the criticisms 214 00:13:37,400 --> 00:13:41,400 Speaker 1: now that we've seen the return of inflation or this 215 00:13:41,440 --> 00:13:48,160 Speaker 1: new inflation, is that either traditional economics failed to predict 216 00:13:48,200 --> 00:13:54,440 Speaker 1: this or heterodox economics like modern monetary theory failed to 217 00:13:54,559 --> 00:13:58,240 Speaker 1: predict this. And it kind of feels like everyone everyone 218 00:13:58,320 --> 00:14:01,360 Speaker 1: is criticizing everything at at the moment. But do you 219 00:14:01,360 --> 00:14:05,320 Speaker 1: think that's fair. Did economists, you know, fail to see 220 00:14:05,440 --> 00:14:11,760 Speaker 1: this coming? So forecasting is hard, and the underlying structure 221 00:14:11,800 --> 00:14:15,800 Speaker 1: the economy could shift, and so you know, this is 222 00:14:15,840 --> 00:14:20,920 Speaker 1: something that could hammer an economist no matter what they're worth, 223 00:14:20,920 --> 00:14:24,320 Speaker 1: their initial framework is. And so I try to be 224 00:14:25,440 --> 00:14:30,880 Speaker 1: fairly humble in thinking about these kinds of economic developments, 225 00:14:30,960 --> 00:14:34,520 Speaker 1: because I really do believe you have to be flexible 226 00:14:35,000 --> 00:14:39,840 Speaker 1: to you know, basically react in real time to you know, 227 00:14:39,880 --> 00:14:42,880 Speaker 1: what the what the data is telling you. And I 228 00:14:42,920 --> 00:14:45,680 Speaker 1: don't know if there's really a failure of anyone given 229 00:14:46,040 --> 00:14:50,600 Speaker 1: sort of strand of economic thought or macroeconomic framework. It's 230 00:14:50,600 --> 00:14:53,640 Speaker 1: more of um, what I see just a willingness to 231 00:14:54,480 --> 00:14:58,120 Speaker 1: evolve from whatever your fixed position is as that incoming 232 00:14:58,200 --> 00:15:02,560 Speaker 1: data arrives. Well, let's talk a little bit more about 233 00:15:02,600 --> 00:15:05,960 Speaker 1: that data, because I do think that you know, even 234 00:15:06,160 --> 00:15:12,680 Speaker 1: I think winter late, the COVID numbers were picking up again, 235 00:15:12,800 --> 00:15:15,240 Speaker 1: we didn't have a vaccine. There was a lot of 236 00:15:15,280 --> 00:15:17,800 Speaker 1: reason to think that if we didn't get like another 237 00:15:17,920 --> 00:15:22,760 Speaker 1: round of substantial physical expansion, we could like have another downturn. 238 00:15:23,160 --> 00:15:26,800 Speaker 1: You were like pretty I think, pretty optimistic then, and 239 00:15:26,920 --> 00:15:29,840 Speaker 1: I think, you know, starting in the summer or maybe 240 00:15:29,880 --> 00:15:35,320 Speaker 1: the spring of I think you're pretty concerned that maybe 241 00:15:35,800 --> 00:15:39,280 Speaker 1: the the accelerating inflation wasn't just a temporary thing, it 242 00:15:39,400 --> 00:15:41,960 Speaker 1: wasn't just going to be base effects, that there was 243 00:15:42,040 --> 00:15:45,000 Speaker 1: something more sustained here, and that the FED at some 244 00:15:45,080 --> 00:15:47,920 Speaker 1: point would attempt to play catch up and ramp up 245 00:15:47,960 --> 00:15:50,480 Speaker 1: the number of hikes sooner and faster. So what was 246 00:15:50,560 --> 00:15:53,680 Speaker 1: it that you were seeing in the data, and how 247 00:15:53,680 --> 00:15:56,000 Speaker 1: did you then sort of like synthesize that through some 248 00:15:56,120 --> 00:15:59,080 Speaker 1: sort of macro framework that I think, at least so 249 00:15:59,120 --> 00:16:01,520 Speaker 1: far has proven to be a good read on the 250 00:16:01,560 --> 00:16:05,280 Speaker 1: inflationary pressure. I think the first thing said even with that, 251 00:16:05,440 --> 00:16:09,960 Speaker 1: that that wave and the late twenty one early you 252 00:16:10,000 --> 00:16:14,160 Speaker 1: know that that wave excu I think even at that 253 00:16:14,200 --> 00:16:18,360 Speaker 1: point we started to recognize that the subsequent waves of 254 00:16:18,400 --> 00:16:20,160 Speaker 1: the virus we're going to have less and less of 255 00:16:20,160 --> 00:16:24,520 Speaker 1: an economic impact. And so that that became a critical 256 00:16:24,800 --> 00:16:28,320 Speaker 1: sort of element to my thinking going forward, is that 257 00:16:28,360 --> 00:16:31,000 Speaker 1: we're going to continue to have COVID, that it was 258 00:16:31,040 --> 00:16:34,280 Speaker 1: going to be more endemic than than certainly zero COVID 259 00:16:34,480 --> 00:16:37,360 Speaker 1: at that point was was not really a possibility, and 260 00:16:37,400 --> 00:16:41,200 Speaker 1: that we would learn to to live around the pandemic. 261 00:16:41,320 --> 00:16:44,240 Speaker 1: So that was what was one element. The other element 262 00:16:44,320 --> 00:16:47,640 Speaker 1: that I just couldn't shake was how type job markets 263 00:16:47,640 --> 00:16:51,360 Speaker 1: were getting. Uh and this really speaks to the perhaps 264 00:16:51,400 --> 00:16:55,440 Speaker 1: finally balanced economy prior to the pandemic. When I saw 265 00:16:55,960 --> 00:17:00,480 Speaker 1: how quickly job opening surged, you know, the fairly slow 266 00:17:00,560 --> 00:17:03,720 Speaker 1: response of labor supply, and I'd say the fairly sol 267 00:17:03,840 --> 00:17:07,679 Speaker 1: responsive labor supply is pretty typical that we see in 268 00:17:08,160 --> 00:17:11,879 Speaker 1: post recession a periods. It really started to say to 269 00:17:11,920 --> 00:17:14,520 Speaker 1: me that there's there's a lot more pressure in this 270 00:17:14,600 --> 00:17:17,920 Speaker 1: economy than than I think of the FED at the 271 00:17:17,960 --> 00:17:21,720 Speaker 1: point was thinking about and was probably, um, you know, 272 00:17:21,760 --> 00:17:24,000 Speaker 1: the FED at that point, I think, had had estimates 273 00:17:24,000 --> 00:17:27,800 Speaker 1: of wear full employment was going to to be that. 274 00:17:28,119 --> 00:17:31,439 Speaker 1: We're optimistic relative to what I was seeing in the 275 00:17:31,520 --> 00:17:34,800 Speaker 1: labor market. So that sort of said to me, Look, 276 00:17:35,080 --> 00:17:36,960 Speaker 1: there's gonna be a lot of pressure in this labor market. 277 00:17:37,000 --> 00:17:38,600 Speaker 1: It's going to be cult a lot of pressure and 278 00:17:38,800 --> 00:17:42,000 Speaker 1: upward uppropression wages. That's going to be that the kind 279 00:17:42,040 --> 00:17:46,480 Speaker 1: of thing that can really sustain inflationary pressures over time. 280 00:17:47,160 --> 00:17:49,239 Speaker 1: And I felt eventually that was something that was going 281 00:17:49,280 --> 00:17:52,080 Speaker 1: to catch up to the FED. It does feel like 282 00:17:52,160 --> 00:17:55,840 Speaker 1: the FED was very focused on this idea of yes, 283 00:17:56,320 --> 00:18:01,040 Speaker 1: jobs have rebounded, Um, you know, the employment recovery has 284 00:18:01,080 --> 00:18:05,320 Speaker 1: been stronger than expected, but we're still digging ourselves out 285 00:18:05,359 --> 00:18:09,000 Speaker 1: of a COVID related whole. I guess, um, and we 286 00:18:09,040 --> 00:18:12,560 Speaker 1: still have further to go. Were they wrong to do that? 287 00:18:12,720 --> 00:18:16,880 Speaker 1: In retrospect? I think the FED did not basically adjust 288 00:18:16,960 --> 00:18:21,280 Speaker 1: their their you know models as as quickly as the 289 00:18:21,359 --> 00:18:24,040 Speaker 1: data would suggest that they should. I think that they 290 00:18:24,080 --> 00:18:27,000 Speaker 1: became although the although the FED says that they think, 291 00:18:27,040 --> 00:18:30,640 Speaker 1: you know, full employments a moving target, they became very 292 00:18:30,720 --> 00:18:34,879 Speaker 1: much attached to the pre pandemic economy. We all liked 293 00:18:34,920 --> 00:18:38,040 Speaker 1: the pre pandemic economy. I think would have been you know, 294 00:18:38,200 --> 00:18:40,680 Speaker 1: we would have thought was a great year if we'd 295 00:18:40,720 --> 00:18:43,840 Speaker 1: been able to enjoy it, because came down on it's 296 00:18:43,880 --> 00:18:46,960 Speaker 1: so hard. So there was really good reason to look 297 00:18:46,960 --> 00:18:50,760 Speaker 1: at that period and think that's where we need to 298 00:18:50,760 --> 00:18:53,200 Speaker 1: get back to. And I think the FED just did 299 00:18:53,240 --> 00:18:59,520 Speaker 1: not just held onto that vision for too long and 300 00:18:59,520 --> 00:19:03,520 Speaker 1: and as a consequence sort of missed the development of 301 00:19:04,200 --> 00:19:08,320 Speaker 1: what I think are still substantial inflation impressures. Even even 302 00:19:08,359 --> 00:19:10,479 Speaker 1: if you know, even if they ease off, do they 303 00:19:10,520 --> 00:19:12,439 Speaker 1: ease off enough to get us back to two percent 304 00:19:12,560 --> 00:19:16,119 Speaker 1: is still an open question. I want to press you 305 00:19:16,160 --> 00:19:18,479 Speaker 1: on this a little bit further because I remember, like 306 00:19:18,600 --> 00:19:25,200 Speaker 1: post Great Financial Crisis, one of the criticisms then is like, oh, 307 00:19:25,240 --> 00:19:28,200 Speaker 1: we can't get back to two thousand six, two seven, 308 00:19:28,600 --> 00:19:31,520 Speaker 1: and that maybe there's something structural, And it turned out 309 00:19:32,160 --> 00:19:34,000 Speaker 1: it was kind of just a matter of time, and 310 00:19:34,720 --> 00:19:39,080 Speaker 1: the FED back then I would say, and grossly sort 311 00:19:39,119 --> 00:19:42,000 Speaker 1: of like underestimated for a long time, like how low 312 00:19:42,040 --> 00:19:47,040 Speaker 1: the unemployment rate could get without spurring labor market pressure, 313 00:19:47,440 --> 00:19:49,480 Speaker 1: which I guess again bring me to the question is 314 00:19:49,520 --> 00:19:51,880 Speaker 1: the error of like, oh, we want to get back 315 00:19:51,880 --> 00:19:55,280 Speaker 1: to some four percent unemployment or is the err in 316 00:19:55,400 --> 00:19:58,920 Speaker 1: thinking that it can happen that fast because we are 317 00:19:58,920 --> 00:20:01,680 Speaker 1: still I mean, we just had a uh jobs number 318 00:20:01,720 --> 00:20:03,560 Speaker 1: in January. We are still bring a lot of people 319 00:20:03,560 --> 00:20:06,159 Speaker 1: back into the labor market. You know, I think we 320 00:20:06,200 --> 00:20:10,960 Speaker 1: could argue that in the post financial crisis era, the 321 00:20:11,240 --> 00:20:15,159 Speaker 1: FED did make an error, and I think again for 322 00:20:15,160 --> 00:20:18,280 Speaker 1: for the same reason. We became enamored with a pre 323 00:20:18,359 --> 00:20:21,920 Speaker 1: you know, a pre financial market sort of framework, financial 324 00:20:21,960 --> 00:20:25,000 Speaker 1: crisis sort of framework. And you know, we saw right 325 00:20:25,080 --> 00:20:28,520 Speaker 1: in the in the post era, post um crisis era, 326 00:20:29,280 --> 00:20:33,280 Speaker 1: estimates of the short run natural rate of unemployment rights right, 327 00:20:33,560 --> 00:20:35,679 Speaker 1: and we all now think we all look back at 328 00:20:35,720 --> 00:20:37,560 Speaker 1: that and say, no, that was that was crazy, right, 329 00:20:37,600 --> 00:20:41,280 Speaker 1: that that never happened. And so we sort of took 330 00:20:41,320 --> 00:20:44,760 Speaker 1: that same framework and applied it to this crisis, and 331 00:20:44,800 --> 00:20:47,760 Speaker 1: we didn't raise our estimates of the short term rate 332 00:20:47,760 --> 00:20:51,160 Speaker 1: of of of a natural unemployment and maybe we should 333 00:20:51,240 --> 00:20:53,879 Speaker 1: have right, And so you know, it's sort of a 334 00:20:53,960 --> 00:20:56,400 Speaker 1: question do you always get caught fighting the last war? 335 00:20:57,000 --> 00:21:00,720 Speaker 1: And I think, again, I have no problem. It was 336 00:21:00,760 --> 00:21:02,720 Speaker 1: the right thing to think of in in the spring 337 00:21:02,760 --> 00:21:06,840 Speaker 1: of That was our framework, and that was a reasonable framework. 338 00:21:07,560 --> 00:21:10,600 Speaker 1: It was kind of just a slow adjustment to to 339 00:21:10,680 --> 00:21:12,960 Speaker 1: maybe that framework is not quite the right right way 340 00:21:13,000 --> 00:21:15,120 Speaker 1: we should be thinking about the economy and the post 341 00:21:15,200 --> 00:21:20,080 Speaker 1: pandemic era. Is there something about the FEDS structure or 342 00:21:20,200 --> 00:21:23,679 Speaker 1: culture that makes it hard for them to be flexible 343 00:21:24,080 --> 00:21:27,360 Speaker 1: or to pivot as the data changes. I think that 344 00:21:27,840 --> 00:21:32,239 Speaker 1: institutions in general can be slow to pivot. And you 345 00:21:32,280 --> 00:21:36,760 Speaker 1: see this, I think in in any kind of bureaucratic structures. 346 00:21:37,320 --> 00:21:40,960 Speaker 1: Uh so, once you've spent ten years developing your models 347 00:21:40,960 --> 00:21:44,240 Speaker 1: in your framework, you're gonna have a hard time breaking 348 00:21:44,600 --> 00:21:49,160 Speaker 1: from that framework. So I think that's just a national 349 00:21:49,200 --> 00:21:53,800 Speaker 1: consequence of of of what happens. You know within institutions 350 00:21:53,840 --> 00:21:57,119 Speaker 1: that you know the FED could not adjust as quickly 351 00:21:57,119 --> 00:22:00,199 Speaker 1: as as maybe they should have. Would you say, just 352 00:22:00,400 --> 00:22:04,480 Speaker 1: as they should have? Was there a could we currently 353 00:22:04,720 --> 00:22:09,480 Speaker 1: in February two have less inflation than we have right now? 354 00:22:09,960 --> 00:22:13,480 Speaker 1: Had they done something different like what what was the 355 00:22:13,560 --> 00:22:16,720 Speaker 1: moment in your view in which if they had taken 356 00:22:16,720 --> 00:22:20,679 Speaker 1: a different tag, maybe started hiking earlier, etcetera, may have 357 00:22:21,400 --> 00:22:23,440 Speaker 1: allowed us to be in a better situation than we 358 00:22:23,480 --> 00:22:25,919 Speaker 1: are right now. Like, what does that alternate scenario look 359 00:22:26,000 --> 00:22:30,680 Speaker 1: like to you? Right? And given the lags in these processes, 360 00:22:32,240 --> 00:22:35,120 Speaker 1: how you know was was by the time we did, 361 00:22:35,640 --> 00:22:40,000 Speaker 1: you know, the fiscal stimulus and the monetary stimulus, and 362 00:22:40,080 --> 00:22:44,240 Speaker 1: by the time we got to the end one or 363 00:22:44,280 --> 00:22:47,679 Speaker 1: excuse me, at the end of the beginning one, was 364 00:22:47,720 --> 00:22:50,320 Speaker 1: this pretty much already baked in the cake. Really, what 365 00:22:50,680 --> 00:22:54,680 Speaker 1: we're thinking about is how persistent these inflationary pressures will 366 00:22:54,720 --> 00:22:58,080 Speaker 1: be going forward. So for me, a couple of things 367 00:22:58,119 --> 00:23:00,879 Speaker 1: that I think that that the Vetch probably should have 368 00:23:00,880 --> 00:23:05,920 Speaker 1: thought of differently. UM One is basically the asset purchases QUEI. 369 00:23:06,520 --> 00:23:10,320 Speaker 1: Those were really initially UM put in place to deal 370 00:23:10,359 --> 00:23:13,119 Speaker 1: with financial market functioning. Right, if you remember the spring 371 00:23:13,160 --> 00:23:17,679 Speaker 1: of it's not clear that that such emergency measures were 372 00:23:17,760 --> 00:23:22,200 Speaker 1: necessary really even even past the middle of twenty twenty 373 00:23:22,760 --> 00:23:26,080 Speaker 1: that the financial markets had rebounded and we're functioning quite 374 00:23:26,080 --> 00:23:29,199 Speaker 1: well by that point, So you know, we did, we 375 00:23:29,240 --> 00:23:33,639 Speaker 1: did years of que that I don't wasn't probably necessary 376 00:23:34,160 --> 00:23:36,240 Speaker 1: to support the economy, and now we have to sort 377 00:23:36,240 --> 00:23:38,000 Speaker 1: of think, how is the FED going on? Wine that 378 00:23:38,520 --> 00:23:41,080 Speaker 1: The other thing that that I think that a critical 379 00:23:41,119 --> 00:23:44,400 Speaker 1: space here was the FED, you know, from my perception, 380 00:23:44,480 --> 00:23:49,280 Speaker 1: was cheerleading fiscal policy, and I think that they really 381 00:23:49,359 --> 00:23:51,520 Speaker 1: pushed back or couldn't do any sort of fiscal or 382 00:23:51,560 --> 00:23:56,879 Speaker 1: monetary offset even after that last last of fiscal stimulus 383 00:23:56,880 --> 00:23:59,639 Speaker 1: we had that really gave the economy a good push 384 00:23:59,680 --> 00:24:03,320 Speaker 1: and and I think that might have been a real 385 00:24:03,480 --> 00:24:07,120 Speaker 1: real air on on the Fed's power. Is by not 386 00:24:07,320 --> 00:24:10,320 Speaker 1: sort of writing off any any hope of of any 387 00:24:10,359 --> 00:24:13,479 Speaker 1: fiscal push or any monetary offset pretty early in the 388 00:24:13,520 --> 00:24:18,120 Speaker 1: process also kind of set the stage in motion for 389 00:24:18,680 --> 00:24:22,720 Speaker 1: you know, the possible persistence of these inflationary pressures. I 390 00:24:22,720 --> 00:24:26,000 Speaker 1: want to jump to. I guess what the FED should 391 00:24:26,040 --> 00:24:28,840 Speaker 1: be doing now, because you know, on the one hand, 392 00:24:28,880 --> 00:24:31,760 Speaker 1: as we've been discussing, we have inflation that's been higher 393 00:24:31,800 --> 00:24:34,800 Speaker 1: than expected. We've had a pretty strong recovery in the 394 00:24:34,880 --> 00:24:38,320 Speaker 1: jobs market, although you know, there are some people who 395 00:24:38,320 --> 00:24:42,840 Speaker 1: say it can get even better. The recovery overall has 396 00:24:42,880 --> 00:24:46,879 Speaker 1: been quite strong. But again there are those who argue 397 00:24:47,040 --> 00:24:51,200 Speaker 1: that in some ways, the economy is still quite fragile. 398 00:24:51,240 --> 00:24:53,960 Speaker 1: There's still a lot going on in the global economy 399 00:24:54,040 --> 00:24:57,800 Speaker 1: with covid um and various economic pressures that could come 400 00:24:57,840 --> 00:25:03,040 Speaker 1: back and impact the US. So taking all of that together, 401 00:25:03,280 --> 00:25:05,960 Speaker 1: you know, if you were in the Fed's place right now, 402 00:25:06,400 --> 00:25:09,960 Speaker 1: what would you be doing. That's a that that's a 403 00:25:09,960 --> 00:25:14,760 Speaker 1: great question, um, because we'ren't very I think this is 404 00:25:14,800 --> 00:25:20,080 Speaker 1: potentially really challenging time for monetary policy because if these 405 00:25:20,119 --> 00:25:24,040 Speaker 1: inflationary pressures have become embedded deeper than the Fed FED 406 00:25:24,080 --> 00:25:27,879 Speaker 1: really believes, then you're you're really coming to the party 407 00:25:27,920 --> 00:25:31,600 Speaker 1: too late, and you're going to have a hard time 408 00:25:32,240 --> 00:25:37,720 Speaker 1: really really containing these inflationary pressures without creating a recession. So, 409 00:25:38,160 --> 00:25:40,760 Speaker 1: you know, I think the FEDS should should do a 410 00:25:40,800 --> 00:25:43,160 Speaker 1: little bit more clearly what I think they're they're kind 411 00:25:43,160 --> 00:25:45,760 Speaker 1: of positioned to do, and that's to try to get 412 00:25:46,400 --> 00:25:50,320 Speaker 1: rates up to something closer to neutral as as quickly 413 00:25:50,320 --> 00:25:54,360 Speaker 1: as they can. Uh So I would probably define that 414 00:25:54,480 --> 00:25:58,240 Speaker 1: objective at least right now, so that you'd be better 415 00:25:58,320 --> 00:26:02,720 Speaker 1: prepared in the to find objective more clearly, so you'd 416 00:26:02,760 --> 00:26:06,040 Speaker 1: be pre prepared to prepared to adjust policy in the 417 00:26:06,080 --> 00:26:09,480 Speaker 1: second half of this year as necessary, and that would mean, 418 00:26:09,720 --> 00:26:12,159 Speaker 1: you know, I think you're starting out with there's always 419 00:26:12,160 --> 00:26:14,800 Speaker 1: a question should you start out with fifty basis points? Um, 420 00:26:15,200 --> 00:26:17,679 Speaker 1: you know, I think uximately you'd like to be you know, 421 00:26:17,840 --> 00:26:21,120 Speaker 1: at HUD and fifty basis points by the second half 422 00:26:21,160 --> 00:26:23,560 Speaker 1: of this year. And the Fed's not not positioned to 423 00:26:23,600 --> 00:26:28,080 Speaker 1: do that and hasn't hasn't really primed markets to expect 424 00:26:28,080 --> 00:26:31,040 Speaker 1: that kind of grate hike. That's what I would be 425 00:26:31,640 --> 00:26:37,360 Speaker 1: thinking about pretty pretty aggressively if if I was the FED. Yeah, 426 00:26:37,440 --> 00:26:40,320 Speaker 1: I wanna talk about this more and maybe the idea Okay, 427 00:26:40,320 --> 00:26:42,800 Speaker 1: they got there too late. You wrote something in one 428 00:26:42,800 --> 00:26:44,800 Speaker 1: of your notes a couple of weeks ago that I 429 00:26:44,800 --> 00:26:47,800 Speaker 1: thought was pretty provocative, and you said, you know, look, historically, 430 00:26:48,359 --> 00:26:51,720 Speaker 1: when inflation is like this, the answer ends up being 431 00:26:52,400 --> 00:26:54,879 Speaker 1: it took a recession to bring it down. And so 432 00:26:54,960 --> 00:26:56,840 Speaker 1: of course everyone hopes that you can have sort of 433 00:26:56,880 --> 00:26:59,600 Speaker 1: like you know, the so called smooth landing where just 434 00:26:59,680 --> 00:27:03,240 Speaker 1: the relation side goes down but employment keeps chugging along. Fine, 435 00:27:03,280 --> 00:27:05,520 Speaker 1: that'd be great, but talk to us about, you know, 436 00:27:05,800 --> 00:27:08,639 Speaker 1: the historical analogies of like, yeah, this is what it 437 00:27:08,720 --> 00:27:12,760 Speaker 1: actually took to get inflation done. Yeah, this is something 438 00:27:12,840 --> 00:27:16,359 Speaker 1: that struck me just looking at the charts of wage 439 00:27:16,400 --> 00:27:20,560 Speaker 1: growth and particularly inflation in the sort of the the 440 00:27:20,680 --> 00:27:25,359 Speaker 1: era not associated with with two percent inflation, that really 441 00:27:25,400 --> 00:27:28,480 Speaker 1: once you sort of shifted your equilibrium, it was it 442 00:27:28,560 --> 00:27:31,760 Speaker 1: was pretty sticky. Wage growth really stayed at you know 443 00:27:31,800 --> 00:27:35,399 Speaker 1: whatever it's it's it's prerecession level was until until you 444 00:27:35,440 --> 00:27:38,200 Speaker 1: came to a recession. And the same was was really 445 00:27:38,240 --> 00:27:42,000 Speaker 1: true of inflation. So it really started to look in 446 00:27:42,080 --> 00:27:47,240 Speaker 1: the data like to me that changing these dynamics was 447 00:27:47,240 --> 00:27:51,480 Speaker 1: was actually very hard once once they had become established, 448 00:27:52,000 --> 00:27:55,520 Speaker 1: and it was probably going to be harder than we anticipated, 449 00:27:55,680 --> 00:27:58,640 Speaker 1: especially since all of the models I think right now 450 00:27:58,680 --> 00:28:01,960 Speaker 1: are are calibrated on the pre pandemic period. So you know, 451 00:28:02,000 --> 00:28:05,000 Speaker 1: when inflation never really deviates more than say, your core 452 00:28:05,080 --> 00:28:09,919 Speaker 1: inflation never deviates more than basis points away from the 453 00:28:09,960 --> 00:28:13,320 Speaker 1: two percent target, in that case, you're fairly fairly easy 454 00:28:13,359 --> 00:28:15,480 Speaker 1: to see how you could guide the economy back to 455 00:28:15,560 --> 00:28:20,680 Speaker 1: target without a recession. If you're to two d four 456 00:28:20,760 --> 00:28:24,520 Speaker 1: hundred basis points away from target, the historical data suggests 457 00:28:24,640 --> 00:28:28,280 Speaker 1: you you you guide it back towards a lower number 458 00:28:28,520 --> 00:28:33,640 Speaker 1: by by inducing a recession. So that's that's something that's 459 00:28:33,640 --> 00:28:36,200 Speaker 1: been just sticking in the back of my mind as 460 00:28:36,240 --> 00:28:42,200 Speaker 1: a as a real risk. Going into particular just tells 461 00:28:42,240 --> 00:28:46,760 Speaker 1: me how much we're all leveraged on the idea that 462 00:28:46,880 --> 00:28:49,040 Speaker 1: inflation is going to ease by the end of this 463 00:28:49,120 --> 00:28:51,960 Speaker 1: year sort of on its on its own accord. This 464 00:28:52,080 --> 00:28:55,800 Speaker 1: might just be a question about semantics, but I'd still 465 00:28:55,960 --> 00:28:59,240 Speaker 1: be curious to get your your response. But if if 466 00:28:59,400 --> 00:29:04,400 Speaker 1: the only way historically UM to end inflation or avert 467 00:29:04,480 --> 00:29:07,520 Speaker 1: price pressures is to have a recession and the FED 468 00:29:07,640 --> 00:29:10,640 Speaker 1: raises rates and induces a recession, can we still call 469 00:29:10,680 --> 00:29:16,400 Speaker 1: that a policy error? That's a um, you know, that's 470 00:29:16,440 --> 00:29:19,760 Speaker 1: a that's a good question. Um, the policy here would 471 00:29:19,760 --> 00:29:23,080 Speaker 1: have been made prior to you, prior to that point, right. 472 00:29:23,480 --> 00:29:26,880 Speaker 1: You know, one thing I think about is in retrospect, 473 00:29:27,720 --> 00:29:30,880 Speaker 1: the FED actually did a pretty good job in the 474 00:29:31,240 --> 00:29:34,960 Speaker 1: post Greed financial crisis era. And uh, you know, at 475 00:29:34,960 --> 00:29:38,680 Speaker 1: the time, you know, myself included criticize the FED for 476 00:29:38,720 --> 00:29:42,720 Speaker 1: maybe moving to aggressively, but but we still ended up 477 00:29:42,760 --> 00:29:48,320 Speaker 1: in the economy, which I think we can all agree 478 00:29:48,400 --> 00:29:50,920 Speaker 1: was really an excellent economy. We'd like to be back there, 479 00:29:51,440 --> 00:29:55,240 Speaker 1: and that was managed by essentially, you know, guidance, loose 480 00:29:55,320 --> 00:29:58,040 Speaker 1: guidance on a Philips curve. And then I would argue, 481 00:29:58,200 --> 00:30:00,480 Speaker 1: you know, later in the crisis and later later in 482 00:30:00,480 --> 00:30:03,880 Speaker 1: the expansion, some loose guidance on the basis of not 483 00:30:03,960 --> 00:30:06,920 Speaker 1: letting the yield curve invert, and that sort of slow 484 00:30:06,960 --> 00:30:10,440 Speaker 1: and steady return brought us to a good outcome. And 485 00:30:10,480 --> 00:30:13,480 Speaker 1: we all ended up complaining because inflation was twenty basis 486 00:30:13,520 --> 00:30:17,520 Speaker 1: points below two percent, And maybe you know that that 487 00:30:17,080 --> 00:30:20,000 Speaker 1: you know that we should have appreciated that that response 488 00:30:20,080 --> 00:30:24,200 Speaker 1: more than we did at the time. So I have 489 00:30:24,240 --> 00:30:26,960 Speaker 1: a really basic question, but you know, uh, two percent 490 00:30:27,000 --> 00:30:31,280 Speaker 1: inflation target in retrospect, maybe it wasn't that bad having 491 00:30:31,720 --> 00:30:37,760 Speaker 1: years of subpar below target inflation. Like should we should 492 00:30:37,800 --> 00:30:40,120 Speaker 1: we be trying to I mean, I know they change 493 00:30:40,160 --> 00:30:44,840 Speaker 1: the inflation framework um to something more flexible, the flexible 494 00:30:44,840 --> 00:30:49,120 Speaker 1: average targeting stuff, But should we be aiming for something 495 00:30:49,160 --> 00:30:51,960 Speaker 1: other than two percent inflation at this point in time? 496 00:30:52,600 --> 00:30:55,760 Speaker 1: You know, there's a a big view that we shouldn't 497 00:30:55,760 --> 00:30:59,000 Speaker 1: be aiming for inflation greater than two percent. We should 498 00:30:59,000 --> 00:31:01,800 Speaker 1: have picked a three percent four percent target given our 499 00:31:01,880 --> 00:31:05,560 Speaker 1: proximity to the lower bound. That maybe that would raise 500 00:31:05,680 --> 00:31:08,800 Speaker 1: what we consider the neutral rate of nominal interest rates. 501 00:31:09,600 --> 00:31:13,360 Speaker 1: And I do think there's some truth to that story. Certainly, 502 00:31:13,360 --> 00:31:17,400 Speaker 1: given the current circumstances, I don't know that it's really 503 00:31:17,560 --> 00:31:20,880 Speaker 1: politically possible for the FED to target something other than 504 00:31:20,960 --> 00:31:24,120 Speaker 1: two percent. I think they'd have a hard time basically 505 00:31:24,200 --> 00:31:28,200 Speaker 1: creating support within Congress for for a higher inflation target, 506 00:31:28,600 --> 00:31:31,160 Speaker 1: even though you know, there's the reason to think the 507 00:31:31,200 --> 00:31:34,640 Speaker 1: economy could operate at at three percent now. At the 508 00:31:34,680 --> 00:31:38,680 Speaker 1: same time, I think if right now monetary policy almost 509 00:31:38,680 --> 00:31:42,680 Speaker 1: has to have an inflationary bias because of the proximity 510 00:31:42,680 --> 00:31:45,960 Speaker 1: to the lower bound, you can't really target something less 511 00:31:46,000 --> 00:31:50,040 Speaker 1: than two percent because you can't. You can't take the 512 00:31:50,160 --> 00:31:54,080 Speaker 1: chance of of tipping yourself into recession when you're this 513 00:31:54,200 --> 00:31:57,640 Speaker 1: close to the zero bound. So, you know, this is 514 00:31:57,840 --> 00:32:00,160 Speaker 1: kind of one interesting thing I don't know if has 515 00:32:00,200 --> 00:32:07,000 Speaker 1: been properly or completely recognized, is the FED really can't 516 00:32:07,000 --> 00:32:10,920 Speaker 1: sort of do average inflation targeting at two percent right now. 517 00:32:11,160 --> 00:32:12,880 Speaker 1: Right they can't sort of go into the future and 518 00:32:12,880 --> 00:32:15,440 Speaker 1: say we want, we want, we want average two percent 519 00:32:15,480 --> 00:32:17,920 Speaker 1: over the next five years, average inflation of two percent 520 00:32:17,960 --> 00:32:20,160 Speaker 1: over the next five years, because that's going to imply 521 00:32:20,360 --> 00:32:23,840 Speaker 1: some period of less than two percent inflation and they 522 00:32:23,880 --> 00:32:29,840 Speaker 1: can't do that. You know, you mentioned that the nineteen 523 00:32:30,040 --> 00:32:34,560 Speaker 1: economy was pretty good, and I agree, but two was 524 00:32:34,640 --> 00:32:37,240 Speaker 1: eight years no, like, you know, yeah, eight years after 525 00:32:37,920 --> 00:32:40,880 Speaker 1: the crisis. And so when I think back to those years, 526 00:32:40,960 --> 00:32:42,480 Speaker 1: I don't think like, oh, it's so bad that we 527 00:32:42,520 --> 00:32:45,560 Speaker 1: only had one point eight percent unappointment or sorry inflation. 528 00:32:45,640 --> 00:32:47,520 Speaker 1: I think like, oh, we had like a pretty big 529 00:32:48,040 --> 00:32:52,280 Speaker 1: um employment shortfall for a very long time post GFC. 530 00:32:52,440 --> 00:32:54,680 Speaker 1: So what we're talking about, how good of a job 531 00:32:54,920 --> 00:32:58,760 Speaker 1: the Fed in retrospect did? Do you think, like, does 532 00:32:58,800 --> 00:33:01,480 Speaker 1: that apply applied to the labor side of the mandate 533 00:33:01,560 --> 00:33:05,200 Speaker 1: as well? I think again that's a that's a good question. 534 00:33:05,440 --> 00:33:07,800 Speaker 1: Is you know, in that post in that post Greek 535 00:33:07,800 --> 00:33:11,400 Speaker 1: financial crisis period, that was certainly a slow period of 536 00:33:11,400 --> 00:33:14,080 Speaker 1: of of recovery relative to you know, what we would 537 00:33:14,120 --> 00:33:17,840 Speaker 1: have optially expected. And I do think that sometimes gets 538 00:33:17,840 --> 00:33:19,520 Speaker 1: you the question of what can you expect out of 539 00:33:19,560 --> 00:33:22,400 Speaker 1: monetary policy? Uh? And I think again, if we go 540 00:33:22,440 --> 00:33:25,080 Speaker 1: back to that period of time, we all, I think 541 00:33:25,520 --> 00:33:28,680 Speaker 1: basically universally agree that we should have had more fiscal 542 00:33:28,760 --> 00:33:31,760 Speaker 1: policy and maybe that would have been the thing that 543 00:33:31,840 --> 00:33:35,080 Speaker 1: would have boosted job growth. Now, it may be that 544 00:33:35,200 --> 00:33:38,040 Speaker 1: neither of those things would have been as important as 545 00:33:38,120 --> 00:33:40,680 Speaker 1: we we we'd like to think it was that, you know, 546 00:33:40,720 --> 00:33:43,640 Speaker 1: for whatever structural reasons, the economy was just in a 547 00:33:43,680 --> 00:33:47,440 Speaker 1: low real growth mode as we had to you know, recover, 548 00:33:47,800 --> 00:33:51,760 Speaker 1: rebuild the financial system from the from the Great Financial Crisis, 549 00:33:51,760 --> 00:33:54,120 Speaker 1: and sort of rebuild the economy from the housing bubble. 550 00:33:54,480 --> 00:33:57,240 Speaker 1: And also, I think demographics were probably in play there. 551 00:33:57,640 --> 00:34:00,160 Speaker 1: You know, the boomers were aging out of the the 552 00:34:00,640 --> 00:34:05,160 Speaker 1: workforce and being replaced by the Gen xers, which is 553 00:34:05,200 --> 00:34:09,000 Speaker 1: a demographic whole. And so we actually have the opposite 554 00:34:09,080 --> 00:34:11,719 Speaker 1: right now, where now the millennials are going to be 555 00:34:11,760 --> 00:34:14,720 Speaker 1: aging into their prime working years in their home buying years. 556 00:34:15,360 --> 00:34:17,440 Speaker 1: There might have been a bit of a demographic weight 557 00:34:17,480 --> 00:34:21,360 Speaker 1: on the economy and that that post grade financial crisis period. Again, 558 00:34:21,400 --> 00:34:24,239 Speaker 1: it's it's easy to criticize after the fact, but I'm 559 00:34:24,280 --> 00:34:26,960 Speaker 1: not sure the Fed could have done, you know, this 560 00:34:27,120 --> 00:34:30,120 Speaker 1: magic job that we all sort of thought at the 561 00:34:30,160 --> 00:34:33,239 Speaker 1: time that they should be doing. So you said, so 562 00:34:33,280 --> 00:34:36,000 Speaker 1: the interesting and that is like what can we expect 563 00:34:36,120 --> 00:34:38,080 Speaker 1: out of monetary policy? And I think that's like a 564 00:34:38,160 --> 00:34:42,360 Speaker 1: very fair question in both directions. You mentioned, you know, 565 00:34:42,400 --> 00:34:44,920 Speaker 1: a few minutes ago, Okay, if we really want to 566 00:34:44,920 --> 00:34:48,680 Speaker 1: crush inflation, we could probably do it by engineering a recession, 567 00:34:48,719 --> 00:34:51,080 Speaker 1: but we all don't. We don't want that to happen. 568 00:34:51,760 --> 00:34:54,520 Speaker 1: When when you know, thinking from the Fed's perspective, and 569 00:34:54,600 --> 00:34:56,960 Speaker 1: they hope, okay, maybe four hikes this year, maybe five, 570 00:34:57,040 --> 00:35:00,680 Speaker 1: maybe three, something like that, what is the channel via 571 00:35:00,760 --> 00:35:05,360 Speaker 1: which theoretically these rate hikes do bring down inflation? Like, 572 00:35:05,440 --> 00:35:07,359 Speaker 1: how does it how does a rate hike or any 573 00:35:07,440 --> 00:35:10,960 Speaker 1: number of rate hikes feed through to real activity and prices. 574 00:35:12,000 --> 00:35:15,760 Speaker 1: There's this typical idea, right of a Philips curve, where 575 00:35:15,840 --> 00:35:19,600 Speaker 1: the idea of the rate hike is to to raise unemployment. 576 00:35:19,719 --> 00:35:23,239 Speaker 1: Essentially there should trade off between unemployment and inflation. And 577 00:35:23,280 --> 00:35:26,120 Speaker 1: we didn't really see that, uh, you know, in the 578 00:35:26,200 --> 00:35:28,959 Speaker 1: in the pre pandemic era, we thought that Philips curve 579 00:35:29,040 --> 00:35:33,200 Speaker 1: was was fairly flat. So so that's you know, was 580 00:35:33,239 --> 00:35:37,000 Speaker 1: a mechanism we weren't necessarily relying on as heavily u 581 00:35:37,200 --> 00:35:39,840 Speaker 1: instead of we're relying on I think what would be 582 00:35:39,920 --> 00:35:43,640 Speaker 1: more more vague idea that it's financial conditions you know, 583 00:35:43,800 --> 00:35:48,520 Speaker 1: tightened that we'd see possibly monetary policy evolved through through 584 00:35:48,960 --> 00:35:51,640 Speaker 1: a number of different channels, wor be you know, the 585 00:35:51,880 --> 00:35:54,560 Speaker 1: the exchange way would would possibly be higher, and that 586 00:35:54,600 --> 00:35:58,400 Speaker 1: would create you know, a slowing of of of demand 587 00:35:58,560 --> 00:36:03,480 Speaker 1: where firms would find themselves facing higher interest costs and 588 00:36:03,520 --> 00:36:06,680 Speaker 1: that would flow slow their their cash flow and you know, 589 00:36:06,840 --> 00:36:10,279 Speaker 1: consequently that would cause them to you know, slow back, 590 00:36:10,600 --> 00:36:15,080 Speaker 1: pull back on activity. You can also think about, you know, 591 00:36:15,160 --> 00:36:17,840 Speaker 1: whether this is how this is operating through home mortgages. 592 00:36:18,320 --> 00:36:22,279 Speaker 1: So there's a number of channels. But clearly, you know, 593 00:36:22,400 --> 00:36:24,399 Speaker 1: one way that we've always thought of this is that 594 00:36:24,680 --> 00:36:27,920 Speaker 1: you you're you're trying to find a mechanism by which 595 00:36:27,960 --> 00:36:33,640 Speaker 1: to soften aggurate demand. And historically, you know, areas that 596 00:36:33,640 --> 00:36:38,120 Speaker 1: that has really been prominent is in consumer durables and housing. 597 00:36:38,400 --> 00:36:42,319 Speaker 1: This is the challenge is that can you sort of 598 00:36:42,360 --> 00:36:45,560 Speaker 1: make fine tuning adjustments at the economy at this point 599 00:36:45,560 --> 00:36:49,120 Speaker 1: like we became more accustomed to in the pre pandemic era, 600 00:36:49,719 --> 00:36:53,040 Speaker 1: or are you you know, at the verge of of 601 00:36:53,040 --> 00:36:57,000 Speaker 1: of more major changes in policy that then do have 602 00:36:57,160 --> 00:37:17,399 Speaker 1: these these um pretty dramatic impact on economic activity. Thinking 603 00:37:17,400 --> 00:37:21,279 Speaker 1: about financial markets and one of the things are one 604 00:37:21,280 --> 00:37:25,440 Speaker 1: of the ideas that set in after the two crisis UM, 605 00:37:25,480 --> 00:37:28,480 Speaker 1: and the FEDS policy response was this idea of a 606 00:37:28,760 --> 00:37:31,960 Speaker 1: central bank put and that the FED would always come 607 00:37:32,000 --> 00:37:36,319 Speaker 1: in UM when markets showed signs of wobbling and stabilize 608 00:37:36,400 --> 00:37:39,640 Speaker 1: things because they didn't want to risk um a tightening 609 00:37:39,640 --> 00:37:44,080 Speaker 1: of financial conditions and you know, potentially hitting the real economy. 610 00:37:45,040 --> 00:37:49,120 Speaker 1: How are we thinking about that aspect of the FEDS 611 00:37:49,719 --> 00:37:53,240 Speaker 1: policy workings, like its relationship with markets at the moment, 612 00:37:53,280 --> 00:37:57,640 Speaker 1: because we have seen stocks fall quite a bit. But 613 00:37:57,840 --> 00:38:00,759 Speaker 1: part of me feels like the FED doesn't necessarily care, 614 00:38:00,960 --> 00:38:06,080 Speaker 1: you know, if big tech valuations come down UM to 615 00:38:06,520 --> 00:38:10,879 Speaker 1: arguably more reasonable multiples. But where I think they might 616 00:38:10,920 --> 00:38:13,720 Speaker 1: start to get concerned is when something like the credit 617 00:38:13,760 --> 00:38:18,399 Speaker 1: market starts to show signs of strains. So I guess 618 00:38:18,400 --> 00:38:20,400 Speaker 1: the question is like, how is the FED thinking of 619 00:38:20,440 --> 00:38:24,319 Speaker 1: financial stability and is there still a possibility here that 620 00:38:24,440 --> 00:38:28,600 Speaker 1: if markets really start to get pressured, that they might 621 00:38:29,080 --> 00:38:34,520 Speaker 1: um sacrifice rate hikes, you know, in order to preserve them. 622 00:38:34,600 --> 00:38:37,680 Speaker 1: I agree with you that it's it's not necessarily stock prices, 623 00:38:37,680 --> 00:38:41,520 Speaker 1: are big tech prices, are bitcoin prices that that's going 624 00:38:41,560 --> 00:38:46,080 Speaker 1: to be influencing monetary policy decisions you know, obviously if 625 00:38:46,120 --> 00:38:49,120 Speaker 1: we had twenty drop in overnight, that would that would 626 00:38:49,160 --> 00:38:52,400 Speaker 1: probably be something interesting. But no, it's it's not asset prices. 627 00:38:52,440 --> 00:38:54,960 Speaker 1: I think you're right. It's it's it's a credit or 628 00:38:55,840 --> 00:38:58,759 Speaker 1: market functioning. So you know, obviously the FED doesn't like 629 00:38:58,800 --> 00:39:02,600 Speaker 1: the situations we've had um where where trenching markets don't 630 00:39:02,600 --> 00:39:05,080 Speaker 1: seem to be functioning properly. So that would be certainly 631 00:39:05,080 --> 00:39:10,000 Speaker 1: one issue and might apply to quantitative tightening um going forward, 632 00:39:10,040 --> 00:39:12,600 Speaker 1: which which we really haven't talked about. The other thing 633 00:39:12,840 --> 00:39:15,680 Speaker 1: is if you saw corporate debts but it's really wide, 634 00:39:15,719 --> 00:39:18,200 Speaker 1: and that would be I think a red flag for 635 00:39:18,239 --> 00:39:20,440 Speaker 1: the fact that something was was going wrong. They'd like, 636 00:39:20,719 --> 00:39:23,560 Speaker 1: you know, they would like credit to be a bit tighter, right, 637 00:39:23,640 --> 00:39:26,440 Speaker 1: that's you know, they want a slow activity, but they 638 00:39:26,440 --> 00:39:28,640 Speaker 1: don't want those credits feds to blow out as you 639 00:39:28,760 --> 00:39:32,040 Speaker 1: often see, you know, before or around a recession. And 640 00:39:32,080 --> 00:39:34,440 Speaker 1: so that's where you know, that's where I think the 641 00:39:34,480 --> 00:39:37,880 Speaker 1: FED would be much more worried that they needed to 642 00:39:38,480 --> 00:39:43,080 Speaker 1: reassess what their what their expectations were. So you mentioned 643 00:39:43,600 --> 00:39:46,960 Speaker 1: quantitative tightening, and of course the FED expanded its balance 644 00:39:46,960 --> 00:39:52,319 Speaker 1: sheet quite a bit since March and you hear some members, 645 00:39:52,320 --> 00:39:54,919 Speaker 1: some regional FED presidents sometimes talk about it's like, well, 646 00:39:54,960 --> 00:39:58,240 Speaker 1: maybe we could do one or two less rate hikes 647 00:39:58,360 --> 00:40:01,839 Speaker 1: in the short term, but sort of counteract that by 648 00:40:01,960 --> 00:40:05,359 Speaker 1: a more rapid wind down of the balance sheet. It's 649 00:40:05,360 --> 00:40:09,120 Speaker 1: a little unclear what effect that had. Highly sort of controversial. 650 00:40:09,320 --> 00:40:12,480 Speaker 1: What is your view on this sort of like the 651 00:40:12,560 --> 00:40:14,400 Speaker 1: I guess I don't know if it's a sequencing question 652 00:40:14,680 --> 00:40:18,319 Speaker 1: or the the impact of quantitative tightening and how they 653 00:40:18,360 --> 00:40:20,520 Speaker 1: sort of like translate to rate hikes, Like, how do 654 00:40:20,520 --> 00:40:23,000 Speaker 1: you think about that question? Yeah, I think the FED 655 00:40:23,080 --> 00:40:25,680 Speaker 1: has to be really careful about how they approached that 656 00:40:25,800 --> 00:40:29,480 Speaker 1: that particular question, because you know, Paul said, you know 657 00:40:29,640 --> 00:40:32,200 Speaker 1: in the Prosperous bull streets and press conference that there's 658 00:40:32,239 --> 00:40:35,600 Speaker 1: you know, some some capacity to estimate some trade offs 659 00:40:35,600 --> 00:40:39,439 Speaker 1: between QT and rate hikes, But but were they something 660 00:40:39,440 --> 00:40:42,759 Speaker 1: you really wanted to count on? And that's that's you know, 661 00:40:42,920 --> 00:40:45,719 Speaker 1: that's my opinion too. I'm not sure you want to 662 00:40:45,760 --> 00:40:50,960 Speaker 1: start setting expectations about the path of rate hikes on 663 00:40:51,000 --> 00:40:53,200 Speaker 1: the basis of what you're doing with the balance sheet. 664 00:40:53,719 --> 00:40:56,120 Speaker 1: What the FED really should think about doing is Okay, 665 00:40:56,160 --> 00:40:58,960 Speaker 1: here's here's what our objectives for the balance sheet are 666 00:40:59,200 --> 00:41:01,160 Speaker 1: and I don't really know if that if we're clear 667 00:41:01,239 --> 00:41:03,239 Speaker 1: on what those are yet, right? Is it about getting 668 00:41:03,280 --> 00:41:06,400 Speaker 1: the size down? Is about getting NBS down? How quickly 669 00:41:06,440 --> 00:41:08,640 Speaker 1: do you want to get this down? They need to 670 00:41:08,640 --> 00:41:11,320 Speaker 1: set the objectives to the balance sheet and they should 671 00:41:11,320 --> 00:41:13,840 Speaker 1: probably just let that run in the autopilot on the 672 00:41:13,920 --> 00:41:17,200 Speaker 1: back until there's some kind of concern from financial market 673 00:41:17,239 --> 00:41:21,000 Speaker 1: functioning that they need to adjust on that front, and 674 00:41:21,000 --> 00:41:24,680 Speaker 1: then just say that's going on. Here's what we're doing 675 00:41:24,719 --> 00:41:28,319 Speaker 1: with interest rates. That's really a separate thing, rather than 676 00:41:28,360 --> 00:41:31,800 Speaker 1: trying to, you know, say at the front of this, well, 677 00:41:32,000 --> 00:41:34,840 Speaker 1: if we do this much q QT, we're going to 678 00:41:35,000 --> 00:41:38,400 Speaker 1: get you know, fifty basis points less of tightening going forward. 679 00:41:38,520 --> 00:41:41,880 Speaker 1: I think that's you know, something that's just too unknown 680 00:41:41,960 --> 00:41:44,799 Speaker 1: for the FED to really commit to. I want to 681 00:41:44,840 --> 00:41:48,480 Speaker 1: just go back to inflation for a little bit, because 682 00:41:48,480 --> 00:41:51,719 Speaker 1: I realized we didn't talk about this, and we are 683 00:41:51,760 --> 00:41:55,840 Speaker 1: recording this on visit February nine, and I guess CPI 684 00:41:56,000 --> 00:42:01,480 Speaker 1: is coming up relatively soon. Do inflation next? But stations matter? 685 00:42:02,320 --> 00:42:07,239 Speaker 1: And further to that, should we be differentiating between consumer 686 00:42:07,640 --> 00:42:12,080 Speaker 1: versus corporate inflation? Expectations, and I realized that might be 687 00:42:13,040 --> 00:42:15,320 Speaker 1: maybe that's an odd question or a new question. But 688 00:42:15,360 --> 00:42:17,560 Speaker 1: I've been thinking about it because I've been watching your 689 00:42:17,600 --> 00:42:20,520 Speaker 1: tweets and you've been focused a lot on what companies 690 00:42:20,560 --> 00:42:23,600 Speaker 1: are actually saying about price increases, and you made the 691 00:42:23,640 --> 00:42:28,200 Speaker 1: point that shareholders seem to be rewarding companies who say 692 00:42:28,200 --> 00:42:31,080 Speaker 1: that they're going to raise their prices in response to 693 00:42:31,840 --> 00:42:35,080 Speaker 1: cost pressures, and so I guess the question is, most 694 00:42:35,120 --> 00:42:39,000 Speaker 1: consumers seem to think that a lot of the inflation 695 00:42:39,120 --> 00:42:42,040 Speaker 1: pressures are still transitory and that things like used car 696 00:42:42,080 --> 00:42:44,920 Speaker 1: prices are going to get better. But on the other hand, 697 00:42:45,440 --> 00:42:49,120 Speaker 1: companies seem to have entirely different motivations and therefore different 698 00:42:49,120 --> 00:42:52,920 Speaker 1: ways of thinking about this. So how how are you 699 00:42:52,960 --> 00:42:58,319 Speaker 1: thinking about expectations broadly? So, I'm not convinced that consumers 700 00:42:58,440 --> 00:43:00,600 Speaker 1: right now have a good sense of really what what 701 00:43:00,719 --> 00:43:02,960 Speaker 1: inflation is going to be out five years in the future, 702 00:43:03,080 --> 00:43:05,359 Speaker 1: ten years in the future. It would be amazing if 703 00:43:05,360 --> 00:43:07,600 Speaker 1: they did, wouldn't it. I Yeah, I think that would 704 00:43:07,600 --> 00:43:11,080 Speaker 1: be really, really amazing. More likely to me is that 705 00:43:11,239 --> 00:43:16,080 Speaker 1: does long term inflation expectations adjust as the short term 706 00:43:16,200 --> 00:43:21,160 Speaker 1: inflation remains sticky? Above those those current long form inflation 707 00:43:21,239 --> 00:43:23,640 Speaker 1: numbers you know. Right now, we know that short term 708 00:43:23,640 --> 00:43:29,000 Speaker 1: inflation expectations are elevated um and consequently, if the continues 709 00:43:29,040 --> 00:43:31,759 Speaker 1: to be matt right, if those expectations continue to matt 710 00:43:32,160 --> 00:43:35,960 Speaker 1: then that will probably put expect upward pressure on inflation 711 00:43:36,000 --> 00:43:38,600 Speaker 1: expectations over those long term So I think when the 712 00:43:38,680 --> 00:43:41,560 Speaker 1: FED you know, looks at these long term inflation expectation 713 00:43:41,640 --> 00:43:45,440 Speaker 1: numbers as if they're they're really signaling some some intense 714 00:43:45,719 --> 00:43:48,520 Speaker 1: um attitudes about long term inflation on the part of 715 00:43:48,520 --> 00:43:52,439 Speaker 1: consumers um, I think that's that's probably misleading, that those 716 00:43:52,440 --> 00:43:56,680 Speaker 1: are almost certainly lagging indicators, so especially after a twenty 717 00:43:56,719 --> 00:43:59,680 Speaker 1: five year period of very low inflation. Now, I do 718 00:43:59,800 --> 00:44:05,239 Speaker 1: think that what firms are telling us right now, so 719 00:44:05,280 --> 00:44:07,840 Speaker 1: they're telling us essentially they can raise prices and then 720 00:44:07,920 --> 00:44:11,160 Speaker 1: not get any consumer push back. That tells me two 721 00:44:11,200 --> 00:44:15,239 Speaker 1: things is that there's lots of nominal spending power. Also 722 00:44:15,360 --> 00:44:19,040 Speaker 1: that that consumers are expecting higher prices and willing to 723 00:44:19,080 --> 00:44:22,560 Speaker 1: pay it because they have that nominal spending power. That 724 00:44:22,760 --> 00:44:26,160 Speaker 1: suggests to me again sort of more of an embedded 725 00:44:26,600 --> 00:44:31,279 Speaker 1: inflation dynamic than then we would like to see you know, 726 00:44:31,719 --> 00:44:33,759 Speaker 1: earlier in the conversation, we talked about this idea of 727 00:44:33,800 --> 00:44:37,279 Speaker 1: like inevitably policymakers fight the last war, and we you know, 728 00:44:37,480 --> 00:44:40,920 Speaker 1: it's obvious why that happens. But there are some elements 729 00:44:40,920 --> 00:44:44,800 Speaker 1: of the current economy, even with elevated inflation, that strike 730 00:44:44,920 --> 00:44:47,919 Speaker 1: me and potentially like are much better than they were 731 00:44:48,040 --> 00:44:50,400 Speaker 1: pre crisis. And so we see the fastest wage of 732 00:44:50,440 --> 00:44:54,560 Speaker 1: growth at least currently happening at lower income scales. It 733 00:44:54,680 --> 00:44:57,560 Speaker 1: seems like there is a potential you know, for years 734 00:44:57,800 --> 00:45:03,600 Speaker 1: Larry Summers great stagnation, like very mediocre productivity numbers for 735 00:45:03,640 --> 00:45:06,840 Speaker 1: the ten years after the Great Financial Crisis, it seems 736 00:45:06,880 --> 00:45:09,960 Speaker 1: like there's a potential here for capital expenditure to maybe 737 00:45:10,280 --> 00:45:14,239 Speaker 1: kick into a higher gear. On the matter of you know, 738 00:45:14,400 --> 00:45:17,560 Speaker 1: people bemoan for years inequality, well, you know, it's like 739 00:45:17,600 --> 00:45:21,560 Speaker 1: in a in a tight labor market, obviously the powers 740 00:45:21,600 --> 00:45:24,800 Speaker 1: shifts somewhat to workers. I mean that by definition almost 741 00:45:25,120 --> 00:45:28,560 Speaker 1: is there a potential here for the jolt that we've 742 00:45:28,680 --> 00:45:33,319 Speaker 1: seen to kick us into a superior equilibrium when all 743 00:45:33,360 --> 00:45:37,400 Speaker 1: of Sadden done right, and I think about this um 744 00:45:37,440 --> 00:45:40,200 Speaker 1: a lot, is you know, obviously you want to get 745 00:45:40,200 --> 00:45:44,000 Speaker 1: back to at least as a good place, but maybe 746 00:45:44,040 --> 00:45:46,680 Speaker 1: even a better place, right, because we'd like to see, 747 00:45:46,760 --> 00:45:49,120 Speaker 1: you know, a productivity be higher, right, And maybe is 748 00:45:49,160 --> 00:45:52,600 Speaker 1: that requires some investment? And is that investment something wrong? 749 00:45:52,640 --> 00:45:54,799 Speaker 1: You're going to see if we if we run the 750 00:45:54,840 --> 00:45:58,600 Speaker 1: economy high right? Right? And so is there a potential 751 00:45:58,640 --> 00:46:00,759 Speaker 1: here to get to a better player? And I think 752 00:46:00,840 --> 00:46:04,000 Speaker 1: you're the answers, Yes, there is that potential. And I 753 00:46:04,080 --> 00:46:07,600 Speaker 1: just think it's how do you moderate the economy during 754 00:46:07,640 --> 00:46:10,320 Speaker 1: that adjustment? Because I think you know, what what Sherman 755 00:46:10,360 --> 00:46:13,560 Speaker 1: Paul has said has been I think generally correct in 756 00:46:13,680 --> 00:46:19,520 Speaker 1: that if you want to you know, maintain and extend 757 00:46:19,600 --> 00:46:24,320 Speaker 1: these benefits, you need to know basically have inflation under control. 758 00:46:24,719 --> 00:46:26,920 Speaker 1: And if you don't get inflation under control, you know 759 00:46:27,040 --> 00:46:30,880 Speaker 1: we're going to end up with these instabilities that eventually 760 00:46:31,520 --> 00:46:35,719 Speaker 1: prompt us to create a recession. So even if you're 761 00:46:35,719 --> 00:46:37,880 Speaker 1: getting a jolt, can you have too much of a 762 00:46:37,920 --> 00:46:40,680 Speaker 1: good thing in a short run that you actually lose 763 00:46:40,719 --> 00:46:42,960 Speaker 1: some of those long run benefits? And I think that's 764 00:46:43,040 --> 00:46:49,480 Speaker 1: the concern that the FED should have at at this juncture. Well, Tim, 765 00:46:49,520 --> 00:46:51,800 Speaker 1: I mean, I think that's like a that's a great 766 00:46:51,920 --> 00:46:54,560 Speaker 1: spot to leave it. It does seem like, yeah, there 767 00:46:54,640 --> 00:46:56,960 Speaker 1: is some reasons to be excited, but can they get 768 00:46:56,960 --> 00:47:00,279 Speaker 1: it just right? It seems like an incredible chill for 769 00:47:00,320 --> 00:47:03,160 Speaker 1: the FED in two So maybe maybe we'll have you 770 00:47:03,239 --> 00:47:05,960 Speaker 1: on in December again of this year and we're like, 771 00:47:06,200 --> 00:47:08,880 Speaker 1: we'll see how they did with the hikes. Assuming the 772 00:47:09,040 --> 00:47:11,840 Speaker 1: h that's great, and we'll see, you know, it's inflation 773 00:47:11,920 --> 00:47:15,160 Speaker 1: moderates back towards two percent, as many people expect, then 774 00:47:15,640 --> 00:47:18,480 Speaker 1: the fan is gonna look brilliant because we'll be it 775 00:47:18,480 --> 00:47:21,960 Speaker 1: will be near neutral with a you know, a pretty 776 00:47:21,960 --> 00:47:25,319 Speaker 1: tight job market and inflation back to two percent, and 777 00:47:25,400 --> 00:47:28,319 Speaker 1: that's that's, you know, the optimal outcome. All right, Well, 778 00:47:28,440 --> 00:47:31,000 Speaker 1: knock on wood. I don't have any wood, but knock 779 00:47:31,000 --> 00:47:34,440 Speaker 1: gonna lead that. That is the set of conditions at 780 00:47:34,480 --> 00:47:36,759 Speaker 1: the end of this year. Tim Dooey, thank you so 781 00:47:36,840 --> 00:47:39,200 Speaker 1: much for coming up. Thanks for having me appreciate it. 782 00:47:39,480 --> 00:47:55,960 Speaker 1: Thanks Tim, I really enjoyed that tracing. I mean, I 783 00:47:56,000 --> 00:47:59,359 Speaker 1: think it's clear regardless like this is going to be 784 00:47:59,600 --> 00:48:03,120 Speaker 1: a tricky year for the FED because obviously it wants 785 00:48:03,160 --> 00:48:07,120 Speaker 1: to consolidate its gains. It wants to is to mention 786 00:48:07,239 --> 00:48:09,640 Speaker 1: the end, It wants to sort of preserve the potential 787 00:48:09,719 --> 00:48:12,560 Speaker 1: for the benefits that you get from a hot economy 788 00:48:12,719 --> 00:48:16,560 Speaker 1: while making the economy less hot, but also not so hot, 789 00:48:16,640 --> 00:48:19,560 Speaker 1: so less hot that we're in a recession so hot 790 00:48:20,880 --> 00:48:24,080 Speaker 1: something like that, less hot but not too less hot. Yeah, 791 00:48:24,120 --> 00:48:26,560 Speaker 1: I think that's right. The other thing that stood out 792 00:48:26,560 --> 00:48:30,719 Speaker 1: to me was, you know, Tim's point about how difficult 793 00:48:30,719 --> 00:48:34,120 Speaker 1: it is to separate supply from demand issues at the moment, 794 00:48:34,160 --> 00:48:36,680 Speaker 1: But I kind of I sort of follow that to 795 00:48:36,880 --> 00:48:39,839 Speaker 1: a different conclusion, which is, I still think a lot 796 00:48:40,000 --> 00:48:42,640 Speaker 1: of the demand that we're seeing is actually a result 797 00:48:42,880 --> 00:48:45,920 Speaker 1: of the supply shortages, and people are you know, just 798 00:48:45,960 --> 00:48:48,600 Speaker 1: getting things when they can and sort of stalking up 799 00:48:48,640 --> 00:48:51,800 Speaker 1: and seeing a bunch of other people improve their houses 800 00:48:52,000 --> 00:48:54,920 Speaker 1: and do this and that and jumping in so that 801 00:48:54,960 --> 00:48:59,120 Speaker 1: they're not left behind. But I mean it does. It 802 00:48:59,200 --> 00:49:02,560 Speaker 1: does just high how difficult it is at the moment 803 00:49:02,640 --> 00:49:05,960 Speaker 1: for for policymakers. And I know it's their job and 804 00:49:06,200 --> 00:49:08,680 Speaker 1: everyone likes to criticize them, but it does seem like 805 00:49:08,719 --> 00:49:12,120 Speaker 1: a particularly challenging time. Yeah. No, I mean I do 806 00:49:12,200 --> 00:49:15,080 Speaker 1: think like the the sort of like, oh, did the 807 00:49:15,239 --> 00:49:19,680 Speaker 1: massive like boom in demand that we saw one turned 808 00:49:19,719 --> 00:49:24,920 Speaker 1: into Glutch and three uh as you've written a lot 809 00:49:24,920 --> 00:49:27,520 Speaker 1: about this sort of bull whip effect, is like is 810 00:49:27,640 --> 00:49:31,839 Speaker 1: a underdiscussed scenario still like we don't really know, like 811 00:49:32,080 --> 00:49:34,040 Speaker 1: you know how long it's going to go. But to 812 00:49:34,120 --> 00:49:36,640 Speaker 1: your question, and you asked the important question, like and 813 00:49:36,680 --> 00:49:39,839 Speaker 1: Tim has been pointing it out, It's like if companies 814 00:49:40,239 --> 00:49:44,120 Speaker 1: are saying, like, well, shareholders, we a we can raise prices, 815 00:49:44,160 --> 00:49:46,319 Speaker 1: like Chipotle is like, yeah, we can raise the price 816 00:49:46,360 --> 00:49:49,520 Speaker 1: of a burrito without hitting demands, and be investors are 817 00:49:49,560 --> 00:49:52,480 Speaker 1: rewarding us for raising the prices of a burrito without 818 00:49:52,520 --> 00:49:55,200 Speaker 1: hitting demand, then that is like a sort of like 819 00:49:55,320 --> 00:50:00,040 Speaker 1: level of corporate motivation that could sustain sustain priced in 820 00:50:00,040 --> 00:50:02,840 Speaker 1: creases for some time totally. And this to me is, 821 00:50:02,960 --> 00:50:06,000 Speaker 1: you know when people are saying, oh, inflation and expectations 822 00:50:06,040 --> 00:50:09,359 Speaker 1: don't matter anymore, they're looking at consumers, and I kind 823 00:50:09,360 --> 00:50:11,480 Speaker 1: of I agree with that, but I really do think 824 00:50:11,560 --> 00:50:15,840 Speaker 1: company inflation expectations matter quite a lot because they have 825 00:50:16,160 --> 00:50:18,759 Speaker 1: the pricing power, um, and those are eventually going to 826 00:50:18,800 --> 00:50:22,200 Speaker 1: feed into consumer expectations. UM. So I think that's a 827 00:50:22,239 --> 00:50:25,279 Speaker 1: really important point. Um. And possibly you know, one of 828 00:50:25,360 --> 00:50:27,920 Speaker 1: the things that the FED might have gotten right in 829 00:50:28,000 --> 00:50:31,880 Speaker 1: recent years. Is its point about MONOPSYNY and big companies 830 00:50:31,920 --> 00:50:34,920 Speaker 1: and pricing power, and we might start to see that 831 00:50:35,120 --> 00:50:37,680 Speaker 1: um or we might really start to see the impact 832 00:50:37,719 --> 00:50:41,160 Speaker 1: of that over the next year or so. Yeah. I 833 00:50:41,200 --> 00:50:45,319 Speaker 1: mean everyone is like criticizing Elizabeth Warren and the White 834 00:50:45,320 --> 00:50:48,280 Speaker 1: House for pointing out the sort of like the corporate 835 00:50:48,280 --> 00:50:52,400 Speaker 1: profitability driven inflation, But you know, you look, look, you 836 00:50:52,400 --> 00:50:56,440 Speaker 1: know yesterday, um February a Chipotle earnings came out, and 837 00:50:56,440 --> 00:50:58,719 Speaker 1: it's like they're doing very well, and they see more 838 00:50:58,760 --> 00:51:02,120 Speaker 1: pricing power, and they're mares are holding up well and 839 00:51:02,320 --> 00:51:05,359 Speaker 1: they're raising prices in part because they can make more 840 00:51:05,400 --> 00:51:07,640 Speaker 1: money when they raise prices, and so the companies that 841 00:51:07,680 --> 00:51:10,720 Speaker 1: can do that are in a position to dictate prices 842 00:51:10,960 --> 00:51:14,120 Speaker 1: are obviously doing really well. There's just like so many, uh, 843 00:51:14,320 --> 00:51:18,280 Speaker 1: there's so many moving parts to this, and I thought 844 00:51:18,280 --> 00:51:21,399 Speaker 1: that was a very helpful conversation. Can I just say, 845 00:51:21,440 --> 00:51:23,120 Speaker 1: I've been in New York about a week and I've 846 00:51:23,120 --> 00:51:26,200 Speaker 1: had Chipotle like two times now. It is so good. 847 00:51:26,239 --> 00:51:28,560 Speaker 1: I missed it so much. They didn't have to put 848 00:51:28,600 --> 00:51:32,080 Speaker 1: there's Chippotle in Hong Kong. No, there's also just a 849 00:51:32,160 --> 00:51:35,960 Speaker 1: broader shortage of good Mexican food. But yeah, I missed it. 850 00:51:36,480 --> 00:51:39,200 Speaker 1: It's it's worth the price increase for me at least 851 00:51:39,400 --> 00:51:43,319 Speaker 1: for now. You're one of the consumers, Yeah, fresh back 852 00:51:43,320 --> 00:51:46,200 Speaker 1: out of American soil. Who's like really to absorb any 853 00:51:46,239 --> 00:51:51,040 Speaker 1: price price price insensitive for for American Mexican food? All right, um, 854 00:51:51,080 --> 00:51:53,560 Speaker 1: shall we leave it there. Let's leave it there. This 855 00:51:53,640 --> 00:51:56,799 Speaker 1: has been another episode of the Odd Thoughts podcast. I'm 856 00:51:56,840 --> 00:51:59,640 Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy 857 00:51:59,640 --> 00:52:02,240 Speaker 1: Alloway and I'm Joe wi. Isn't thought you could follow 858 00:52:02,280 --> 00:52:05,200 Speaker 1: me on Twitter at the Stalwart. Follow our guest Tim 859 00:52:05,280 --> 00:52:09,000 Speaker 1: Dewey on Twitter He's at Tim Dewey. Follow our producer 860 00:52:09,200 --> 00:52:12,960 Speaker 1: Laura Carlson at Laura M. Carlson. Follow the Bloomberg head 861 00:52:12,960 --> 00:52:16,839 Speaker 1: of podcast, Francesco Leady at Francesca Today, and check out 862 00:52:16,880 --> 00:52:20,839 Speaker 1: all of our podcasts at Bloomberg under the handle at podcasts. 863 00:52:21,000 --> 00:52:21,800 Speaker 1: Thanks for listening.