WEBVTT - Austan Goolsbee on the 'Golden Path' to a Soft Landing 0:00:10.119 --> 0:00:14.160 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.240 --> 0:00:16.720 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:16.840 --> 0:00:19.919 Tracy, how about that? How about that Jolts report? 0:00:21.040 --> 0:00:22.040 How about them Jolts? 0:00:22.120 --> 0:00:23.040 About them jolts? 0:00:23.239 --> 0:00:23.479 Uh? 0:00:23.560 --> 0:00:26.360 Yeah, a lot stronger than expected, But I think there's 0:00:26.480 --> 0:00:29.360 there's a lot of uncertainty around jolts from what I remember. 0:00:29.800 --> 0:00:32.519 Yeah, well, it's like a I mean, we're recording this 0:00:32.720 --> 0:00:37.280 October third. These are August Jolts, so you know already. 0:00:37.280 --> 0:00:40.560 I guess that's like two months ago. I'm always sort 0:00:40.600 --> 0:00:43.600 of skeptical about job openings data, like what is it 0:00:43.680 --> 0:00:47.800 really measuring? But nonetheless, this is a measure the number 0:00:47.800 --> 0:00:49.640 of job openings that there are that people have been 0:00:49.640 --> 0:00:53.080 paying attention to. It had been coming down, it's jumped 0:00:53.120 --> 0:00:56.120 back up, and then it just does raise this whole 0:00:56.200 --> 0:00:59.440 question of like is the economy really sort of the 0:00:59.600 --> 0:01:02.840 celery into a nice smooth, soft landing or are we 0:01:02.920 --> 0:01:03.600 still really hot? 0:01:03.880 --> 0:01:04.120 Well? 0:01:04.280 --> 0:01:06.360 I know you were looking at jolts, but I've been 0:01:06.400 --> 0:01:09.920 watching the bond market, yes today, because the other big 0:01:10.040 --> 0:01:13.760 story in markets is, of course the big bond sell off. Yes, 0:01:13.840 --> 0:01:16.559 the thirty year treasury yield now at the highest since 0:01:16.640 --> 0:01:19.040 two thousand and seven, I think something like four point 0:01:19.080 --> 0:01:21.759 eight percent. Yeah, that's pretty crazy. And there's a lot 0:01:21.800 --> 0:01:25.679 of discussion right now over what is driving that long 0:01:25.800 --> 0:01:28.759 end sell off. Is it the higher for a longer 0:01:28.840 --> 0:01:31.160 stance that we saw from the Federal Reserve a couple 0:01:31.200 --> 0:01:36.479 of weeks ago, is it worries over supply, could be anything, really, right. 0:01:36.400 --> 0:01:39.400 We don't really know. And again, the moves that we're 0:01:39.440 --> 0:01:42.600 seeing in rates really like across the curve, but yet 0:01:42.680 --> 0:01:45.440 really at the long end, like they do not scream 0:01:45.640 --> 0:01:48.440 to me like we're in for a soft landing, right, 0:01:48.800 --> 0:01:51.120 They do not scream to me inflation is about to 0:01:51.160 --> 0:01:53.480 come down back to target. The Fed is going to 0:01:53.520 --> 0:01:56.360 be is going to cut sometime soon, and we're going 0:01:56.440 --> 0:01:59.200 to be, you know, back in like twenty eighteen, twenty 0:01:59.360 --> 0:02:03.960 nineteen Goldilock's territory. Like, we may get that, but it 0:02:04.000 --> 0:02:06.160 does not look like what the bond market. 0:02:05.960 --> 0:02:06.720 Is saying right now. 0:02:06.760 --> 0:02:09.520 It screams uncertainty to me. Like if you look at 0:02:09.520 --> 0:02:11.519 the bond sell off and you look at what's going 0:02:11.560 --> 0:02:13.600 on with jolts, it just seems like we are still 0:02:13.639 --> 0:02:17.679 in this period where even three years after the absolute 0:02:17.760 --> 0:02:20.640 depths of the pandemic. It feels like we're not quite 0:02:20.680 --> 0:02:23.960 sure how the economy is actually operating, what the impact 0:02:24.000 --> 0:02:27.399 of interest rates are, what's going on with inflation. It's 0:02:27.440 --> 0:02:29.320 come down, but we're not really sure if we can 0:02:29.360 --> 0:02:31.600 attribute that to the rate hikes or something else. 0:02:32.120 --> 0:02:35.120 You mentioned, by the way, the thirty year, but you know, 0:02:35.360 --> 0:02:38.640 mortgage thirty or mortgages they're coming on eight percent, so 0:02:38.680 --> 0:02:40.880 regardless or whatever I mean, like talk about a real 0:02:40.919 --> 0:02:44.040 effect on rates and their effect on rates to the 0:02:44.040 --> 0:02:47.440 broader economy may be kind of ambiguous, but no, no, no certain. 0:02:47.520 --> 0:02:50.680 This is why I mentioned the thirty year yield because 0:02:50.720 --> 0:02:53.000 this is the thing that mortgages are priced off of 0:02:53.600 --> 0:02:57.120 commercial paper, corporate debt. It is like a big benchmark 0:02:57.160 --> 0:02:58.160 for the wider economy. 0:02:58.320 --> 0:03:01.160 So I guess there's questions like what's going on and 0:03:01.440 --> 0:03:04.440 can we achieve that soft landing are still like huge 0:03:04.560 --> 0:03:05.560 questions that are. 0:03:05.440 --> 0:03:06.240 On everyone's mind. 0:03:06.520 --> 0:03:07.160 Absolutely. 0:03:07.560 --> 0:03:09.280 You know what I think is a better term than 0:03:09.320 --> 0:03:12.280 soft landing, by the way, uh. 0:03:12.320 --> 0:03:15.160 No, Golden path, Golden path. 0:03:15.360 --> 0:03:18.880 The golden path, I think you know soft landing and knights, 0:03:18.880 --> 0:03:22.080 but the golden path towards that sort of you know, 0:03:22.480 --> 0:03:26.760 low unemployment, low inflation, and our guest today recently gave 0:03:26.800 --> 0:03:31.120 a speech on the prospects of can we achieve that 0:03:31.280 --> 0:03:34.720 golden path? Can we walk this golden path into the 0:03:34.800 --> 0:03:37.320 sort of economic nirvana that we all want to see? 0:03:37.400 --> 0:03:39.560 I know you brought up the golden path just than 0:03:39.840 --> 0:03:42.240 your new term, but I kind of read it as 0:03:42.560 --> 0:03:45.800 this time is different speech, and it takes like it's 0:03:45.840 --> 0:03:48.640 pretty brave to make a this time is different speech. 0:03:48.640 --> 0:03:50.640 But on the other hand, if any time is going 0:03:50.720 --> 0:03:53.440 to be different, it might actually be the period after 0:03:53.480 --> 0:03:56.160 the worst pandemic that we've seen in over one hundred. 0:03:55.960 --> 0:03:59.360 Years, right exactly. Well, rather than us speculating about whether 0:03:59.400 --> 0:04:02.000 we can achieve the soft landing, or whether this time 0:04:02.040 --> 0:04:04.560 will be different, or whether we can walk down this 0:04:04.680 --> 0:04:09.160 golden path, let's bring onto the podcast. I'm very excited 0:04:09.240 --> 0:04:11.600 it's his first time on the show. But someone we've 0:04:11.640 --> 0:04:14.960 on to talk to forever Austin Goldsby, who is the 0:04:15.080 --> 0:04:19.960 relatively new president of the Chicago Fed. Austin thrilled to 0:04:20.000 --> 0:04:22.680 have you on the show. I love that term golden path. 0:04:22.839 --> 0:04:25.080 Can we continue to walk down it? Can we continue 0:04:25.080 --> 0:04:28.400 to see disinflation with unemployment as low as it is. 0:04:29.120 --> 0:04:33.320 Ray see Joe, longtime listener, first time caller. Thank you 0:04:33.360 --> 0:04:34.680 for having me on. 0:04:34.880 --> 0:04:35.320 Thanks. 0:04:35.920 --> 0:04:39.240 I've been saying this golden path, I kind of few 0:04:39.240 --> 0:04:41.680 it as that that would be the mother of all 0:04:41.760 --> 0:04:46.799 soft landings. Yeah, it's just the to get inflation down 0:04:47.400 --> 0:04:51.520 as much as we need to get inflation down, and 0:04:51.800 --> 0:04:55.720 we're part of the way through without having a big recession. 0:04:56.440 --> 0:04:58.280 As you know, there are a lot of economists who 0:04:58.279 --> 0:05:02.279 said that is not poss I don't know that it's 0:05:02.320 --> 0:05:08.280 still probable, but I have been highlighting it is possible 0:05:08.440 --> 0:05:12.839 now for a variety of reasons that we might be 0:05:12.880 --> 0:05:16.960 able to do it. And my recent speech was less 0:05:18.600 --> 0:05:22.640 whether the golden path is possible and more like Tracy said, 0:05:23.200 --> 0:05:25.960 it wasn't really why this time is different. But I 0:05:26.000 --> 0:05:29.400 know that's a loaded term. Argument, that's a loaded term. 0:05:29.960 --> 0:05:35.839 I was just making the argument why the intuition that 0:05:36.520 --> 0:05:40.719 going back and looking what things were like the last time, 0:05:40.760 --> 0:05:45.320 the unemployment way was three point seven percent. That's not 0:05:45.360 --> 0:05:49.400 a great that's not that accurate of a measure at 0:05:49.400 --> 0:05:54.040 times when there are supply shocks bumping around, at times 0:05:54.080 --> 0:05:58.920 when expectations are not unhinged like they were the last 0:05:58.960 --> 0:06:02.080 time inflation got out of control in the nineteen seventies, 0:06:02.640 --> 0:06:07.839 and because of those differences, just be cautious about using 0:06:08.000 --> 0:06:14.000 lessons from past periods to be analyzing what's happening right now. 0:06:14.200 --> 0:06:17.960 And you see it every month when the data come out. 0:06:18.080 --> 0:06:21.640 You'll see analysts look and say, ooh, the jolts ticked up. 0:06:21.960 --> 0:06:25.840 That must mean we're overheating. And implicit in that is 0:06:26.400 --> 0:06:29.680 a logic that the last time the unemployment rate was 0:06:29.720 --> 0:06:34.280 low and inflation was high, it meant we were overheating. 0:06:35.000 --> 0:06:38.680 So I just want to be careful of using historical 0:06:38.720 --> 0:06:41.960 analogies that might not be totally appropriate. 0:06:42.160 --> 0:06:44.200 I think that's totally fair and something that we've been 0:06:44.200 --> 0:06:47.440 discussing on this podcast, the idea that everyone tends to 0:06:47.480 --> 0:06:50.719 reach for the vulgar period of high inflation as their 0:06:50.760 --> 0:06:54.600 preferred historical analogy, but of course there are others out there, 0:06:54.960 --> 0:06:58.680 like what happened in the aftermath of the Spanish Flu. 0:06:58.760 --> 0:07:01.840 We've spoken about that before. But Austin, maybe before we 0:07:01.880 --> 0:07:03.920 move on, can you just give us give us a 0:07:03.960 --> 0:07:06.599 little snapshot of the speech that you gave, because you 0:07:06.640 --> 0:07:10.440 had this great series of charts in there which kind 0:07:10.440 --> 0:07:13.200 of pointed out I know this time is different is 0:07:13.240 --> 0:07:16.400 not a preferred term, but you kind of pointed out that, well, 0:07:16.440 --> 0:07:21.040 things have already been different compared to what traditional economic 0:07:21.320 --> 0:07:22.680 theory would have suggested. 0:07:23.400 --> 0:07:29.000 Yeah, look tremendously different. So the starting point, as I've 0:07:29.080 --> 0:07:32.360 started with this anecdote about my grandfather, who was a 0:07:32.480 --> 0:07:36.800 wise old guy, and he lived on a ranch in Abilene, Texas, 0:07:37.480 --> 0:07:41.320 and normally he was a great giver of life advice. 0:07:41.520 --> 0:07:44.360 But when I took my first job, he wanted to 0:07:44.360 --> 0:07:50.240 call and tell me never buy stocks. And I, as 0:07:50.280 --> 0:07:52.720 I said in this speech, I didn't know those my 0:07:52.840 --> 0:07:56.920 grandpa jack efficient markets guy. I said, you don't buy 0:07:56.920 --> 0:08:00.680 individual stocks. No, he said, don't buy any stocks. Your 0:08:00.680 --> 0:08:03.360 grandmother and I knew people that bought stocks. They lost 0:08:03.560 --> 0:08:09.880 everything when the market crashed. And that idea that one 0:08:10.120 --> 0:08:15.200 historical episode could live with you for sixty seventy years 0:08:15.640 --> 0:08:19.840 and influence your behavior, even when it's not necessarily the 0:08:19.880 --> 0:08:24.880 perfect lesson. There's a little element of that looking back 0:08:25.000 --> 0:08:29.360 to the Vocar episode or to past history and assuming 0:08:29.440 --> 0:08:32.160 that there's a let's call it a stable Phillips curve 0:08:32.679 --> 0:08:37.040 or something like that. So point one is when you 0:08:37.200 --> 0:08:42.000 have supply shocks going on negative or positive the normal 0:08:42.120 --> 0:08:50.160 relationship between the contemporaneous economic conditions and the future inflation, 0:08:50.840 --> 0:08:55.280 those relationships break down or they bend a lot. And 0:08:55.400 --> 0:09:01.720 if you take kind of a traditional va are in 0:09:01.800 --> 0:09:05.400 the academic language set up in which you just look 0:09:05.520 --> 0:09:11.880 at the historical patterns of when they have monetary policy 0:09:12.000 --> 0:09:17.800 changes and then just look over the average what happens 0:09:17.880 --> 0:09:22.800 in the quarters and the years that follow. I put 0:09:22.800 --> 0:09:26.920 that up on a chart and it showed that you 0:09:27.160 --> 0:09:31.520 usually have long legs to monetary policy. When they take 0:09:31.559 --> 0:09:35.480 the monetary actions, it's really two years plus before you 0:09:35.559 --> 0:09:39.000 get the full impact on the economy, and it leads 0:09:39.040 --> 0:09:44.319 to big drops in GDP. And when inflation starts to drop, 0:09:44.480 --> 0:09:48.280 it drops a lot, and it only starts dropping after 0:09:48.880 --> 0:09:54.200 the recession has begun. That's the normal historical pattern. And 0:09:54.360 --> 0:09:58.839 if you look now, the same logic that says the 0:09:58.880 --> 0:10:01.960 FED will not be able to pull off the golden 0:10:02.040 --> 0:10:06.200 path because past history shows that if you want to 0:10:06.200 --> 0:10:09.720 get inflation down a lot, you must have a serious 0:10:09.760 --> 0:10:15.440 trade off with economic performance. The last six months are impossible. Okay, 0:10:16.120 --> 0:10:20.680 inflation has come down a lot, Employment really went up, 0:10:20.880 --> 0:10:24.000 didn't go down, and we haven't had any recession. So 0:10:24.400 --> 0:10:27.839 if you looked at that graph, it's kind of the 0:10:27.960 --> 0:10:33.120 predicted from nine months ago from what the FED has 0:10:33.240 --> 0:10:35.720 done over the last year or year and a half. 0:10:37.840 --> 0:10:43.240 What we've experienced looks nothing like the historical record. So, Teresa, 0:10:43.320 --> 0:10:46.600 you can hear me resisting a little bit using the 0:10:46.640 --> 0:10:50.439 phrase this time. I get it. It's just when supply 0:10:50.679 --> 0:10:54.480 shocks are going on, there's no reason to think that 0:10:54.520 --> 0:10:59.760 the historical relationship would be holding, and you would run 0:10:59.760 --> 0:11:05.280 a danger of overshooting if you pay too close attention 0:11:06.200 --> 0:11:09.680 to those kind of metrics. If you're looking at metrics 0:11:09.720 --> 0:11:13.360 that say we must get the unemployment rate back to 0:11:13.440 --> 0:11:18.800 four and a half percent, you're going to overshoot if 0:11:18.880 --> 0:11:21.600 there are positive supply shocks or if the supply chain 0:11:21.640 --> 0:11:28.280 is healing. And I do think that's extremely relevant on 0:11:28.400 --> 0:11:33.160 any month of data separate from just individual months are noisy. 0:11:34.280 --> 0:11:41.280 I think this broader philosophical almost issue that the past 0:11:41.400 --> 0:11:44.120 is not that great of a guide when you got 0:11:44.320 --> 0:11:48.960 weird things happening, and the COVID business cycle was maybe 0:11:49.000 --> 0:11:53.440 the weirdest of all. We just need to keep that 0:11:53.520 --> 0:11:56.199 in mind as we're deliberating and thinking this through. 0:11:56.720 --> 0:11:59.000 Yeah, the way I like to think about this or 0:11:59.080 --> 0:12:02.800 framness in my head is that the last six nine months, 0:12:02.800 --> 0:12:06.880 maybe a year, it shows that the golden path soft 0:12:06.960 --> 0:12:10.680 landing is possible in practice, but there still seems to 0:12:10.720 --> 0:12:15.320 be a considerable, considerable debate about whether it's possible in theory. 0:12:16.040 --> 0:12:20.200 And that's sort of within determine whether exactly whether we 0:12:20.320 --> 0:12:23.920 get to target there is I mean, inflation is coming down. 0:12:23.960 --> 0:12:26.760 The last core PCE print that we got I think 0:12:26.760 --> 0:12:29.920 it was just this past Friday benign, but you know, 0:12:30.240 --> 0:12:33.600 most measure is still some heat. The story is, and 0:12:33.640 --> 0:12:35.800 I think most economists have come around to it, most 0:12:35.840 --> 0:12:39.760 of the improvement that we've seen in realized disinflation is 0:12:39.880 --> 0:12:44.440 due to supply side healing. Is there more supply side healing? 0:12:44.640 --> 0:12:44.720 Is? 0:12:44.880 --> 0:12:47.760 Do you see that channel as having Are we are 0:12:47.760 --> 0:12:51.160 we healed? Or do we need to see something on 0:12:51.280 --> 0:12:55.040 the demand mitigation side? Like sort of the difference between 0:12:55.080 --> 0:12:57.600 where we are right now on inflation and where like 0:12:57.679 --> 0:12:59.920 the FED is like, Okay, we are comfortable, We've done that, 0:13:00.280 --> 0:13:05.040 Like can that still be achieved through normalization? Whatever that means? 0:13:05.520 --> 0:13:07.760 Well, I want to make two points here. One, let's 0:13:07.760 --> 0:13:11.240 think about the supply side, but let's loop back and 0:13:11.320 --> 0:13:15.960 think about the role of expectations in bringing inflation down, 0:13:15.960 --> 0:13:20.040 because it's critically important and it's it's one of the 0:13:20.240 --> 0:13:24.880 other things that make our experience of twenty one, twenty 0:13:24.920 --> 0:13:29.199 two to twenty three very different looking in the fundamentals 0:13:29.240 --> 0:13:34.360 than the nineteen seventies and make our job different perhaps 0:13:34.400 --> 0:13:39.480 than than the what the Volker moment was. On the 0:13:39.520 --> 0:13:43.600 supply side, I talked to a lot of business contacts 0:13:44.440 --> 0:13:47.320 in the seventh District, you know, which is part of 0:13:47.320 --> 0:13:52.520 the Midwest. It definitely has been substantial improvement on a 0:13:52.520 --> 0:13:55.920 lot of supply chain. I think most measures of supply 0:13:56.040 --> 0:14:00.000 chain say there's still some to come, and it's important 0:14:00.080 --> 0:14:05.400 and remember when the supply chain fixes, it still works 0:14:05.400 --> 0:14:08.240 its way through the economy. It's still going to take 0:14:08.360 --> 0:14:12.240 some time to work its way through the inflation rate. 0:14:12.360 --> 0:14:15.640 It's not going to be an instant adjustment of inflation 0:14:16.520 --> 0:14:19.880 when the supply shocks. When the supply socks hit, So 0:14:20.240 --> 0:14:23.240 I do think there's still some to come. And if 0:14:23.240 --> 0:14:25.880 you go down in the weeds, if you take like 0:14:25.920 --> 0:14:28.800 the New York Fed's Supply Chain Index, the New York 0:14:28.880 --> 0:14:33.720 Fed uses historical data to make a prediction of what 0:14:33.760 --> 0:14:36.600 are going to be the impacts on inflation, and their 0:14:36.800 --> 0:14:41.800 index shows that we've mostly returned to where we were 0:14:41.960 --> 0:14:49.120 before COVID, but that there's still some material amount of 0:14:49.880 --> 0:14:53.240 dropping inflation that will still come through that channel. So 0:14:54.200 --> 0:14:57.280 I think both the anecdotes and the data tell you 0:14:57.320 --> 0:15:02.280 that that's been improving. Now I feel okay because I 0:15:02.280 --> 0:15:05.200 ident what I'm about to say. I've been saying for 0:15:05.280 --> 0:15:09.440 a long time that I put on the board here's 0:15:09.520 --> 0:15:12.880 what we're going to need to see to believe that 0:15:12.960 --> 0:15:15.640 we are still on the golden path. So I'm not 0:15:16.360 --> 0:15:19.120 after the fact looking back and saying, oh, it was 0:15:19.160 --> 0:15:23.080 a B and C. I said before the first thing 0:15:23.160 --> 0:15:28.480 that has to happen loosely, before COVID, we had two 0:15:28.600 --> 0:15:32.400 percent inflation or even less on a stable basis, and 0:15:32.480 --> 0:15:36.800 that was coming. It wasn't that all inflation was at 0:15:36.840 --> 0:15:41.000 a two percent level. It's that goods were minus one 0:15:41.080 --> 0:15:46.720 percent a year on average, housing was growing about three 0:15:47.080 --> 0:15:50.920 or even three and a half percent per year on average, 0:15:51.000 --> 0:15:54.640 and services not counting housing were two and a half 0:15:54.680 --> 0:15:58.520 to three. And that combination is how we were getting 0:15:58.560 --> 0:16:01.240 to one point eight. So we even have a little 0:16:01.280 --> 0:16:03.960 bit of wiggle room. Any one component could be a 0:16:03.960 --> 0:16:06.360 little higher than it was before and we could still 0:16:06.400 --> 0:16:10.520 get to two percent. Definitely. What needed to happen first 0:16:10.800 --> 0:16:13.360 was goods prices needed to come down. That's the thing 0:16:13.360 --> 0:16:18.960 that went completely bonkers during the COVID times because it 0:16:19.000 --> 0:16:22.320 was the first downturn ever where demand for durable goods 0:16:22.320 --> 0:16:25.840 went up and demand for going to the dentist went down, 0:16:26.120 --> 0:16:28.600 and that kind of tells you everything you need to 0:16:28.640 --> 0:16:34.920 know about why this cycle is extremely unusual. Goods prices 0:16:34.960 --> 0:16:40.040 have largely returned to where they were pre COVID. Then 0:16:40.080 --> 0:16:44.360 the second thing that has to happen is housing inflation 0:16:44.480 --> 0:16:49.160 needs to come down, and we believe that it would 0:16:50.600 --> 0:16:55.240 because of this mechanical part that as market rents change, 0:16:55.800 --> 0:17:00.520 that's going to slowly filter through the CPI type measures 0:17:00.560 --> 0:17:04.600 of housing, and you have seen that begin and that 0:17:05.080 --> 0:17:11.920 needs to continue. The issue of non housing services, we've 0:17:12.080 --> 0:17:15.919 always known that's the most persistent part of inflation. It 0:17:16.000 --> 0:17:18.479 doesn't need to get down to two percent for us 0:17:18.520 --> 0:17:21.840 to hit the target. It wasn't at two percent before COVID, 0:17:22.960 --> 0:17:27.159 and so in the short to medium run, the critical 0:17:27.200 --> 0:17:30.000 component to whether we can stay on the golden path 0:17:30.680 --> 0:17:35.160 is actually about housing because that's the thing that's supposed 0:17:35.200 --> 0:17:38.760 to come down and needs to keep coming down. There 0:17:38.800 --> 0:17:43.520 are I do have. Are they concerns? They're probably concerns. 0:17:43.560 --> 0:17:47.400 They're not yet elevated to the level of fears that 0:17:48.320 --> 0:17:56.240 the normal dynamics on residential house prices have had some 0:17:56.440 --> 0:18:01.280 bumps with this aspect that there are a bunch of 0:18:01.320 --> 0:18:04.119 people locked in because rates were so low for a 0:18:04.160 --> 0:18:06.520 long time. There are a bunch of people with three 0:18:06.560 --> 0:18:11.040 percent mortgages who are resisting putting their house on the market. 0:18:11.960 --> 0:18:15.560 So the supply of existing homes is not what you 0:18:16.240 --> 0:18:19.880 might normally think, and that's pushed prices the other way, 0:18:19.960 --> 0:18:25.359 and eventually that could slow the decline of inflation on 0:18:25.400 --> 0:18:32.040 the CPI style measures of residential inflation. This is the 0:18:32.160 --> 0:18:35.879 long wind up to say I think the supply chain 0:18:36.200 --> 0:18:41.760 mostly goes through goods and goods inflation. We've seen the 0:18:41.800 --> 0:18:47.320 progress that we wanted, So the danger on the goods side, 0:18:47.320 --> 0:18:51.919 of course, is now with oil prices going up. We 0:18:52.040 --> 0:18:54.879 know what happens when you get negative supply shocks. We 0:18:55.080 --> 0:18:58.040 just live through that. So that's an area of concern. 0:18:59.160 --> 0:19:03.360 And then the second is about labor supply. So there 0:19:03.440 --> 0:19:06.679 was a big negative shock to the supply of labor. 0:19:07.480 --> 0:19:10.959 I think that explains part of the persistence and the 0:19:11.080 --> 0:19:18.040 rise of inflation in other components. But that is also easy. 0:19:18.400 --> 0:19:19.919 If you look at the job market or if you 0:19:20.000 --> 0:19:23.840 talk to businesses, it's not fully back to where it 0:19:23.920 --> 0:19:28.159 was before, but there's been dramatic improvement in the ability 0:19:28.200 --> 0:19:33.680 to hire and retain new workers. You've seen labor supply, 0:19:34.400 --> 0:19:39.440 labor force participation of women hitting record levels, labor supply 0:19:39.760 --> 0:19:44.439 of people of workers with disabilities hitting record levels, both 0:19:44.520 --> 0:19:48.560 suggesting maybe some of the increased flexibility in the workplace 0:19:49.320 --> 0:19:52.800 is going to operate a bit like a positive supply shock, 0:19:53.000 --> 0:19:58.439 so that's kind of promising, and immigration levels returning to 0:19:59.080 --> 0:20:03.000 something like what the were before also a positive impact 0:20:03.080 --> 0:20:06.960 on labor supply. So on the real side, I still 0:20:07.000 --> 0:20:11.600 feel like nothing has happened so far that is convincing 0:20:11.640 --> 0:20:14.640 evidence that we're off the golden path. And a lot 0:20:14.680 --> 0:20:18.040 of the markers that we've been hitting are the things 0:20:18.080 --> 0:20:20.040 that months ago I was saying we would have to 0:20:20.119 --> 0:20:23.520 hit these markers to believe that this thing is still possible, 0:20:23.880 --> 0:20:25.480 and so far we've been hitting those. 0:20:25.320 --> 0:20:45.640 Markers soft landing, golden path, whatever you want to call it. 0:20:45.640 --> 0:20:49.440 It's very clear why that is a desirable target for 0:20:49.600 --> 0:20:52.400 the FED to be aiming at. But I guess one 0:20:52.400 --> 0:20:54.600 of the questions I would have is if we say 0:20:54.640 --> 0:20:57.000 that a lot of the inflation that we have experienced 0:20:57.040 --> 0:21:00.639 is driven by supply shocks, is it reason for the 0:21:00.720 --> 0:21:04.680 FED to take credit for a soft landing in that context? 0:21:04.800 --> 0:21:08.200 Or like, what would the central bank think it has done? 0:21:08.520 --> 0:21:12.000 Or what has the impact of higher interest rates actually 0:21:12.119 --> 0:21:13.840 been in this scenario. 0:21:15.480 --> 0:21:19.719 Yeah, it's it's important that we think about that in 0:21:19.760 --> 0:21:24.040 a different way. What matters is the is the actual pudding? 0:21:24.200 --> 0:21:26.960 You know what I mean, what does it taste like? 0:21:27.480 --> 0:21:32.600 It's not fighting over the who deserves the credit? Is 0:21:33.920 --> 0:21:40.040 only informative if it's telling you about the effectiveness of policy. 0:21:41.119 --> 0:21:45.640 In a way, I think the FED has played an 0:21:45.680 --> 0:21:53.399 important role in preventing inflation from spiraling upward, and it 0:21:53.520 --> 0:21:57.320 kind of brings us into the area of inflation expectations. 0:21:57.520 --> 0:22:01.480 Yeah, sorry, can I ask one really technical question before 0:22:01.680 --> 0:22:04.680 before we do that, But when you talk about inflation 0:22:04.760 --> 0:22:07.439 expectations as you did in your recent speech, are you 0:22:07.480 --> 0:22:11.280 looking at market based measures or surveys or what is 0:22:11.280 --> 0:22:12.480 your benchmark? Exactly? 0:22:13.760 --> 0:22:16.800 In that speech, I identified both. There's, as you know, there's 0:22:16.800 --> 0:22:21.919 a lot of argument by analysts and by economists about 0:22:22.000 --> 0:22:27.119 exactly that question. And my point was, take any measure 0:22:27.160 --> 0:22:29.879 you want, take them all. I put up graphs of 0:22:30.280 --> 0:22:33.920 market based measures, which personally I do like the market 0:22:33.920 --> 0:22:39.840 based measures and survey measures and estimates from the FED 0:22:40.000 --> 0:22:45.359 of what those what the market expectations were back in 0:22:45.400 --> 0:22:49.119 the nineteen seventies. And the crucial thing to see that 0:22:49.640 --> 0:22:52.840 really came out of a lot of the academic literature 0:22:53.119 --> 0:23:01.320 on inflation, is that if expectations remain anchored at say 0:23:01.400 --> 0:23:05.040 two percent, you outline an inflation target of two percent. 0:23:05.520 --> 0:23:09.119 If it is credible and people believe that the FED 0:23:09.200 --> 0:23:11.920 will do whatever it takes to get to the target, 0:23:12.880 --> 0:23:18.320 that is a powerful draw bringing actual inflation down if 0:23:18.359 --> 0:23:24.840 it's above two percent. So when they're having negotiations or 0:23:24.920 --> 0:23:30.960 thinking about price increases, what the private market participants believe 0:23:31.520 --> 0:23:36.040 is going to happen overall will heavily influence wage and 0:23:36.080 --> 0:23:41.960 price determinations right now. And if you look at expectations 0:23:41.960 --> 0:23:47.639 in the nineteen seventies, they clearly became massively unhinged. They 0:23:47.680 --> 0:23:52.680 would ratchet up with each experience of rising inflation. The 0:23:52.720 --> 0:23:56.440 measures of expectations would rise and not come back down. 0:23:56.680 --> 0:24:01.080 So you know, if inflation was at two and jumps 0:24:01.119 --> 0:24:06.520 to six, the expectations, long term inflation expectations would rise, 0:24:06.600 --> 0:24:09.400 let's say, to three and a half. And then when 0:24:09.440 --> 0:24:12.000 inflation comes down, it doesn't go back to two, it 0:24:12.040 --> 0:24:14.479 goes back to three and a half. And then when 0:24:14.520 --> 0:24:17.160 you get your next bout of inflation, the long run 0:24:17.200 --> 0:24:20.359 expectations jump up to five and a half. And so 0:24:20.840 --> 0:24:25.000 you get this ratchet effect. And I showed the graph. 0:24:25.200 --> 0:24:28.920 It became totally unhinged in the seventies and the experience 0:24:29.000 --> 0:24:33.160 of the seventies with expectations are what made the Voker 0:24:33.400 --> 0:24:38.080 experience so difficult and so painful. Now you probably know 0:24:38.520 --> 0:24:42.040 Paul Voker was a great mentor of mine. I worked 0:24:42.040 --> 0:24:46.520 with him through the financial crisis, and he's personal hero. 0:24:47.040 --> 0:24:50.760 And I would ask him all the time about the 0:24:50.840 --> 0:24:53.240 Voker experience and what was it like in the seventies, 0:24:53.240 --> 0:24:56.560 and was it hard to convince the FOMC to go along? 0:24:57.160 --> 0:25:00.760 And you know, what did you think when and interest 0:25:00.800 --> 0:25:06.160 rates we're twenty percent and things like that, and that experience, 0:25:06.400 --> 0:25:12.640 the scarring experience of trying to fight inflation when expectations 0:25:12.680 --> 0:25:18.359 are unhinged, that should be on everyone's mind. And that 0:25:18.640 --> 0:25:22.680 looks nothing like what happened in twenty one and twenty two. 0:25:23.000 --> 0:25:26.960 If you plot market based measures of expectations or survey 0:25:27.000 --> 0:25:32.040 based measures, they go up modestly and they return and 0:25:32.119 --> 0:25:38.800 they are now they remain very well anchored at something 0:25:38.920 --> 0:25:42.199 close to the target rate. And that is a sign 0:25:42.760 --> 0:25:48.520 of FED credibility, and that is crucial. It's absolutely crucial 0:25:48.920 --> 0:25:54.000 that the FED maintain that credibility because if they don't 0:25:54.600 --> 0:25:59.439 and the thing becomes unanchored, it becomes dramatically harder to 0:25:59.520 --> 0:26:04.040 achieve a Golden Path like outcome. If you just go look, 0:26:04.119 --> 0:26:07.080 and partly I went through some of the theory, We've 0:26:07.080 --> 0:26:10.800 got two economists at the Chicago FED who kind of 0:26:10.840 --> 0:26:18.320 redid the traditional model but incorporated market based expectations of 0:26:18.400 --> 0:26:22.280 several of the variables. In the normal analysis, there is 0:26:22.359 --> 0:26:28.399 no role for future expectations of the unemployment rate, of 0:26:28.440 --> 0:26:32.679 the inflation rate, at GDP growth. There is only the 0:26:32.760 --> 0:26:37.240 backward looking monetary policy happened, how long does it take 0:26:37.320 --> 0:26:40.400 to have an impact? So what they did is go 0:26:40.560 --> 0:26:43.919 take some of these expectations measures and put them in 0:26:43.960 --> 0:26:47.640