1 00:00:10,800 --> 00:00:14,240 Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast. 2 00:00:14,320 --> 00:00:19,520 Speaker 1: I'm Tracy Allaway and I'm Joe. Wisn't so Joe? I think, 3 00:00:19,720 --> 00:00:25,919 Speaker 1: without question, the hottest topic in the world of economics, markets, 4 00:00:26,040 --> 00:00:30,160 Speaker 1: finance right now has to be inflation and this debate 5 00:00:30,320 --> 00:00:33,880 Speaker 1: over whether or not the higher than expected price levels 6 00:00:33,960 --> 00:00:38,560 Speaker 1: that we have seen recently are in fact transitory. Absolutely. 7 00:00:39,000 --> 00:00:43,239 Speaker 1: We got the October CPI numbers recently. They came in 8 00:00:43,360 --> 00:00:46,040 Speaker 1: at either six or six point two percent. They're the 9 00:00:46,080 --> 00:00:49,640 Speaker 1: hottest and I think thirty one years the debate over 10 00:00:49,760 --> 00:00:53,360 Speaker 1: transitory nous is very hot right now. A lot of 11 00:00:53,360 --> 00:00:57,240 Speaker 1: people are capetul later. I mean, I will say we 12 00:00:57,320 --> 00:00:59,000 Speaker 1: have been spending a lot of time over the past 13 00:00:59,040 --> 00:01:03,160 Speaker 1: year talking about supply chain issues, and I find them 14 00:01:03,160 --> 00:01:08,319 Speaker 1: fascinating as sort of micro markets in and of themselves, um, 15 00:01:08,360 --> 00:01:11,679 Speaker 1: and a really interesting exercise in looking at economic and 16 00:01:11,760 --> 00:01:16,000 Speaker 1: business principles in a specific and sort of salient thing. 17 00:01:16,319 --> 00:01:19,400 Speaker 1: But on the other hand, there is plenty of criticism 18 00:01:19,400 --> 00:01:22,600 Speaker 1: now that there's too much focus on the supply chain issues. 19 00:01:22,680 --> 00:01:27,560 Speaker 1: There's been too much focus on micro versus the macro 20 00:01:27,880 --> 00:01:32,240 Speaker 1: explanation of inflation. Yeah, exactly right, And so this is 21 00:01:32,240 --> 00:01:34,679 Speaker 1: the question, and I guess the question is can you 22 00:01:34,760 --> 00:01:37,640 Speaker 1: tease out the two and so you look like aggregant 23 00:01:37,680 --> 00:01:41,679 Speaker 1: demand for goods in the US is absolutely booming. We're 24 00:01:41,720 --> 00:01:44,959 Speaker 1: recording this Wednesday, November seventeen. Yesterday we got the retail 25 00:01:45,000 --> 00:01:48,640 Speaker 1: sales number. It was very strong. The number of containers 26 00:01:48,680 --> 00:01:51,000 Speaker 1: coming to the ports. We've done a million sports episodes. 27 00:01:51,560 --> 00:01:54,200 Speaker 1: It's very high. For all of the issues that they're having, 28 00:01:54,440 --> 00:01:57,120 Speaker 1: there's a lot moving through. And so part of the 29 00:01:57,240 --> 00:02:02,160 Speaker 1: question is if by focusing on a supply chain specifically 30 00:02:02,640 --> 00:02:05,360 Speaker 1: or some of the critics might say, are we ignoring 31 00:02:06,080 --> 00:02:09,639 Speaker 1: just the fact that aggregant demand is booming and that's 32 00:02:09,680 --> 00:02:13,080 Speaker 1: pushing up prices. Yeah, and it is true that you 33 00:02:13,120 --> 00:02:18,040 Speaker 1: can find an individual explanation to you know, explain almost 34 00:02:18,080 --> 00:02:21,320 Speaker 1: any major price increase at the moment. But at the 35 00:02:21,360 --> 00:02:24,760 Speaker 1: same time, it does seem to be rather broad based. 36 00:02:24,760 --> 00:02:27,520 Speaker 1: There is this broader upwards pressure and it seems to 37 00:02:27,520 --> 00:02:30,360 Speaker 1: be happening, you know, all around the world in lots 38 00:02:30,360 --> 00:02:32,799 Speaker 1: of different things. So there might be a more macro 39 00:02:32,919 --> 00:02:37,679 Speaker 1: story there. So today, in the interests of devoting more 40 00:02:37,760 --> 00:02:40,679 Speaker 1: time and attention on the macro story, I am very 41 00:02:40,680 --> 00:02:42,760 Speaker 1: pleased to say, we are going to be speaking with 42 00:02:42,880 --> 00:02:47,200 Speaker 1: Jason Furman. He is a professor of practice over at 43 00:02:47,200 --> 00:02:51,840 Speaker 1: Harvard University, also a senior fellow at the Peterson Institute 44 00:02:51,880 --> 00:02:55,240 Speaker 1: for International Economics, and of course he was the former 45 00:02:55,320 --> 00:03:00,320 Speaker 1: chair of President Obama's Council of Economic Advisors. And he's 46 00:03:00,320 --> 00:03:03,760 Speaker 1: been tweeting a lot about his thoughts on inflation, the 47 00:03:03,840 --> 00:03:07,600 Speaker 1: supply versus demand side of it, the micro versus the macro, 48 00:03:08,120 --> 00:03:10,360 Speaker 1: and he is also in the process of publishing a 49 00:03:10,560 --> 00:03:13,480 Speaker 1: paper on this exact topic. So really a great person 50 00:03:13,800 --> 00:03:16,920 Speaker 1: to talk to. Jason, Welcome to the show. Great to 51 00:03:16,919 --> 00:03:20,920 Speaker 1: be here. So maybe just to begin with so shall 52 00:03:20,960 --> 00:03:24,200 Speaker 1: we start with an obvious question, like when you saw 53 00:03:24,240 --> 00:03:27,640 Speaker 1: the CPI numbers last week, and again we're recording this 54 00:03:27,760 --> 00:03:31,840 Speaker 1: on November, when the number came in hotter than expected, 55 00:03:32,360 --> 00:03:35,800 Speaker 1: what did you think? I thought it came in hotter 56 00:03:35,840 --> 00:03:41,520 Speaker 1: than expected. Um, but in a broader sense, I wasn't 57 00:03:41,560 --> 00:03:45,280 Speaker 1: surprised because I had looked at the last couple of 58 00:03:45,280 --> 00:03:48,960 Speaker 1: months and this actually is micro not macro. What I'm 59 00:03:48,960 --> 00:03:52,760 Speaker 1: about to say that they had been of course, he'd 60 00:03:52,920 --> 00:03:56,640 Speaker 1: had been temporarily lower because car prices fell and because 61 00:03:56,680 --> 00:04:00,640 Speaker 1: things like hotels and airfares fell because of the delta variant, 62 00:04:01,280 --> 00:04:05,160 Speaker 1: and I didn't expect all of those to continue falling. 63 00:04:05,240 --> 00:04:08,720 Speaker 1: So in some sense, we had transitory low core inflation 64 00:04:09,360 --> 00:04:13,760 Speaker 1: in August and September. I didn't expect that to last. 65 00:04:14,240 --> 00:04:17,000 Speaker 1: And then stepping back, um, there's a bigger macro story 66 00:04:17,120 --> 00:04:19,920 Speaker 1: that we'll be able to talk a lot about over 67 00:04:19,960 --> 00:04:23,200 Speaker 1: the course of this podcast. So let's let's just jump 68 00:04:23,279 --> 00:04:26,440 Speaker 1: into some of these macro questions. And part of these 69 00:04:26,520 --> 00:04:29,640 Speaker 1: questions have to do, I think, with definitions. And so 70 00:04:30,080 --> 00:04:33,040 Speaker 1: we talked about this term transitory a lot, and there's 71 00:04:33,040 --> 00:04:34,920 Speaker 1: a lot of people that you know, we're all on Twitter, 72 00:04:34,960 --> 00:04:37,160 Speaker 1: and they're like oil prays up again. So much for 73 00:04:37,200 --> 00:04:41,520 Speaker 1: your transitory inflation. Obviously, you know, the existence of a 74 00:04:41,560 --> 00:04:45,400 Speaker 1: price move itself, either in a category or in a index, 75 00:04:45,600 --> 00:04:48,720 Speaker 1: does not prove or disprove transitory nous. What in your 76 00:04:48,839 --> 00:04:52,600 Speaker 1: view is, how do you think about this question and 77 00:04:52,839 --> 00:04:55,919 Speaker 1: what would you like to see or what do we 78 00:04:55,960 --> 00:04:58,400 Speaker 1: need to see to sort of answer in a definitive 79 00:04:58,440 --> 00:05:02,680 Speaker 1: manner whether this is lation we're seeing is transitory or 80 00:05:02,720 --> 00:05:06,320 Speaker 1: the sign of like some new inflationary regime. Right, So 81 00:05:06,440 --> 00:05:10,360 Speaker 1: I don't even know what the word transitory means, so 82 00:05:10,440 --> 00:05:13,880 Speaker 1: I try to avoid it, try to use numbers and probabilities. 83 00:05:13,880 --> 00:05:16,280 Speaker 1: So I'll give you what I think the most likely 84 00:05:16,360 --> 00:05:19,599 Speaker 1: scenario is. I'll tell you why I think that is, 85 00:05:20,080 --> 00:05:21,920 Speaker 1: and I'll tell you that I'm not sure about it. 86 00:05:22,200 --> 00:05:26,520 Speaker 1: Inflation rate will likely come down next year. It will 87 00:05:26,560 --> 00:05:29,200 Speaker 1: be lower than it was this year, in part because 88 00:05:29,240 --> 00:05:33,440 Speaker 1: there were a bunch of temporary factors boosting prices, a 89 00:05:33,560 --> 00:05:37,800 Speaker 1: huge fiscal stimulus, rise in the price of oil, unusual 90 00:05:37,839 --> 00:05:40,080 Speaker 1: things happening in car markets. I think all of that 91 00:05:40,200 --> 00:05:42,840 Speaker 1: is real. But when all the dust settles from all 92 00:05:42,880 --> 00:05:45,560 Speaker 1: of that, I also think we're going to be left 93 00:05:45,680 --> 00:05:50,000 Speaker 1: with an inflation rate that is higher than what the 94 00:05:50,040 --> 00:05:52,880 Speaker 1: FED had been targeting, higher than what we had historically. 95 00:05:53,360 --> 00:05:56,080 Speaker 1: I wouldn't be surprised by something in the three to 96 00:05:56,120 --> 00:05:59,520 Speaker 1: four percent range. So I don't know if you want 97 00:05:59,520 --> 00:06:03,560 Speaker 1: to call that transitory, you want to call that persistent um. 98 00:06:03,600 --> 00:06:06,080 Speaker 1: But that's different than the view that inflation is going 99 00:06:06,160 --> 00:06:08,159 Speaker 1: to go to two percent, or the view many have 100 00:06:08,240 --> 00:06:10,240 Speaker 1: had that it's actually going to be below two percent 101 00:06:10,480 --> 00:06:12,440 Speaker 1: in order to make up for the things above it. 102 00:06:12,520 --> 00:06:16,200 Speaker 1: So baseline, that's my view, and I can give you 103 00:06:16,279 --> 00:06:19,440 Speaker 1: my rationale for that view as well, if you want yeah, 104 00:06:19,480 --> 00:06:23,000 Speaker 1: I think that would be YEA go ahead, my rationale. Um. 105 00:06:23,040 --> 00:06:25,560 Speaker 1: There's a little bit of micro in it, which is 106 00:06:25,600 --> 00:06:27,680 Speaker 1: I think it does help to look at things like 107 00:06:27,800 --> 00:06:30,000 Speaker 1: car prices. They've gone up a lot, They're not going 108 00:06:30,040 --> 00:06:32,599 Speaker 1: to keep going up a lot. UM this micro stories 109 00:06:32,640 --> 00:06:35,280 Speaker 1: that go the other way though. UM shelter prices in 110 00:06:35,320 --> 00:06:39,400 Speaker 1: the c p I are recorded only with a lag, 111 00:06:39,960 --> 00:06:43,040 Speaker 1: and a lot of other indicators of how much rent 112 00:06:43,160 --> 00:06:47,120 Speaker 1: is going up are incredibly incredibly high. So there's some 113 00:06:47,320 --> 00:06:50,520 Speaker 1: of the individual components. I sometimes call that micro or 114 00:06:50,600 --> 00:06:55,000 Speaker 1: bottom up approach, but I find it much more useful 115 00:06:55,320 --> 00:06:59,080 Speaker 1: to use a macro approach because when you're thinking about inflation, 116 00:06:59,440 --> 00:07:02,120 Speaker 1: it's not why is happening to relative prices, it's what's 117 00:07:02,120 --> 00:07:06,440 Speaker 1: happening to the price level overall. And if people don't 118 00:07:06,480 --> 00:07:09,120 Speaker 1: have enough money, if one price goes up, then they 119 00:07:09,120 --> 00:07:11,120 Speaker 1: can't afford to buy as much of other things, and 120 00:07:11,160 --> 00:07:13,880 Speaker 1: other prices UM will go down. That's not what we're 121 00:07:13,920 --> 00:07:16,960 Speaker 1: seeing now. Now we're seeing everything UM go up. So 122 00:07:17,040 --> 00:07:20,520 Speaker 1: what's the big macro story? Supply and demand. Of course, 123 00:07:20,720 --> 00:07:24,040 Speaker 1: on the demand side, I expect a man to remain elevated, 124 00:07:24,080 --> 00:07:27,120 Speaker 1: because households have more money in their balance sheets, because 125 00:07:27,160 --> 00:07:30,680 Speaker 1: fiscal policy is pumping five billion dollars into the economy 126 00:07:30,720 --> 00:07:34,400 Speaker 1: this year based on laws that were already past, and 127 00:07:34,760 --> 00:07:40,600 Speaker 1: because interest rates and financial conditions more broadly, our ultra accommodative. 128 00:07:41,040 --> 00:07:43,240 Speaker 1: On the supply side, I don't know how long it's 129 00:07:43,240 --> 00:07:45,440 Speaker 1: going to take to unsnarls supply chains. The two of 130 00:07:45,480 --> 00:07:47,720 Speaker 1: you know more about that than I do. No one 131 00:07:47,800 --> 00:07:50,360 Speaker 1: knows how long it's going to take for labor markets 132 00:07:50,360 --> 00:07:53,600 Speaker 1: to recover. Just I don't think any of that's going 133 00:07:53,640 --> 00:07:56,920 Speaker 1: to be happen fully in the next year. So over 134 00:07:56,960 --> 00:07:59,160 Speaker 1: the next year, we continue to have a lot of 135 00:07:59,200 --> 00:08:03,960 Speaker 1: aggregate demand and we don't have enough aggregate supply, and 136 00:08:04,000 --> 00:08:08,720 Speaker 1: the mismatch between those two will keep upward pressure on inflation, 137 00:08:09,120 --> 00:08:13,160 Speaker 1: keep inflation well above two percent. I have what is 138 00:08:13,160 --> 00:08:19,480 Speaker 1: possibly simplistic question, but is inflation that's caused by stronger demand, 139 00:08:20,240 --> 00:08:24,800 Speaker 1: stronger household balance sheets? Is that a major problem for 140 00:08:24,840 --> 00:08:28,920 Speaker 1: the economy? Is that something that warrants the amount of 141 00:08:29,040 --> 00:08:32,520 Speaker 1: hand ringing that we have seen on social media and 142 00:08:32,600 --> 00:08:35,240 Speaker 1: in various op eds for the past week or so, 143 00:08:36,240 --> 00:08:39,800 Speaker 1: people don't like inflation. Economists tend to be less bothered 144 00:08:39,800 --> 00:08:44,319 Speaker 1: by inflation than people, and so I don't know if 145 00:08:44,360 --> 00:08:48,200 Speaker 1: I should sit here and say, you know, I'm just 146 00:08:48,320 --> 00:08:50,680 Speaker 1: an ignorant, out of touch elite. I should listen to 147 00:08:50,720 --> 00:08:53,480 Speaker 1: the people who really don't seem to like inflation, or 148 00:08:53,559 --> 00:08:56,600 Speaker 1: I should patiently explain to them why. Some of why 149 00:08:56,640 --> 00:08:59,200 Speaker 1: they don't like inflation is money illusion, because their wages 150 00:08:59,240 --> 00:09:01,680 Speaker 1: are also I'm going up faster, so I think it 151 00:09:01,760 --> 00:09:04,160 Speaker 1: is a reality. I don't think economists and the media 152 00:09:04,280 --> 00:09:08,880 Speaker 1: invented I think, if anything, economists tend to downplay inflation 153 00:09:08,960 --> 00:09:11,559 Speaker 1: and be less concerned about it than people. But there 154 00:09:11,559 --> 00:09:15,200 Speaker 1: are reasons to be um concerned. I think at the margin, 155 00:09:15,280 --> 00:09:18,920 Speaker 1: a lot of our policy is raising prices more than 156 00:09:19,040 --> 00:09:22,679 Speaker 1: it's improving employment. It's raising the risk of a hard landing. 157 00:09:23,000 --> 00:09:26,040 Speaker 1: People are seeing their real wages fall, and there's a 158 00:09:26,120 --> 00:09:30,320 Speaker 1: lot of fraud in financial markets right now. Low interest 159 00:09:30,400 --> 00:09:33,320 Speaker 1: rates have some negative side effects. Normally the benefits of 160 00:09:33,360 --> 00:09:37,040 Speaker 1: them outweigh the side effects. Right now, we have enough 161 00:09:37,080 --> 00:09:40,640 Speaker 1: fiscal support in the economy that I'm not sure that 162 00:09:41,360 --> 00:09:45,120 Speaker 1: the negative side effects of interest rates are worth it. 163 00:09:46,160 --> 00:09:50,480 Speaker 1: I want to get into the perceived costs of elevated inflation. 164 00:09:50,720 --> 00:09:53,280 Speaker 1: And I think your point is very well taken that 165 00:09:53,720 --> 00:09:57,800 Speaker 1: people don't like it, and that's you know, as journalists 166 00:09:57,920 --> 00:09:59,960 Speaker 1: or as economists, we could say, yes, well you come 167 00:10:00,040 --> 00:10:03,199 Speaker 1: out ahead when you include transfers, but people don't like it, 168 00:10:03,320 --> 00:10:06,240 Speaker 1: and that is what it is that Big said. You know, 169 00:10:06,320 --> 00:10:09,680 Speaker 1: we had the mother of all, you know, employment shocks. 170 00:10:09,760 --> 00:10:14,040 Speaker 1: I think unemployment, we're still in a pretty significant hole. 171 00:10:14,040 --> 00:10:17,360 Speaker 1: We had the mother of all real GDP shocks. Demand 172 00:10:17,400 --> 00:10:19,040 Speaker 1: collapsed for all kinds of you know, we had to 173 00:10:19,080 --> 00:10:21,480 Speaker 1: put the economy on life support, and we are still 174 00:10:21,480 --> 00:10:24,800 Speaker 1: in a hole, especially on the employment side. And so 175 00:10:25,400 --> 00:10:28,960 Speaker 1: you know, nominal growth or real growth has been very 176 00:10:29,000 --> 00:10:32,040 Speaker 1: fast as we get back to trent um, as we 177 00:10:32,080 --> 00:10:35,200 Speaker 1: return to something resembling normal and hopefully bring everyone back 178 00:10:35,280 --> 00:10:37,920 Speaker 1: to the workforce. So how do you think the cost. 179 00:10:38,000 --> 00:10:40,520 Speaker 1: I mean, we are still adding a lot of jobs. 180 00:10:40,840 --> 00:10:43,480 Speaker 1: I think the October jobs report, when you include revisions, 181 00:10:44,000 --> 00:10:46,880 Speaker 1: was over eight hundred thousand jobs. I think we're still 182 00:10:46,920 --> 00:10:49,719 Speaker 1: about seven to eight million jobs, shy of where we 183 00:10:49,760 --> 00:10:52,600 Speaker 1: would have been had non farm payrolls just kept growing 184 00:10:52,640 --> 00:10:55,280 Speaker 1: at the pace they would had we never had the pandemic. 185 00:10:55,840 --> 00:10:59,520 Speaker 1: So do you how do you think about you know, yes, 186 00:10:59,559 --> 00:11:03,120 Speaker 1: people don't like higher inflation, but also we have a 187 00:11:03,120 --> 00:11:04,880 Speaker 1: lot of uh, we have a big hole to still 188 00:11:04,880 --> 00:11:08,160 Speaker 1: dig out of. Yeah, you need to keep three thoughts 189 00:11:08,160 --> 00:11:12,920 Speaker 1: in your head simultaneously. One the economy is still in 190 00:11:12,960 --> 00:11:18,240 Speaker 1: a hole. To the economy is improving really rapidly, and 191 00:11:18,400 --> 00:11:23,760 Speaker 1: three inflation is bad. All three of those statements are true. 192 00:11:24,559 --> 00:11:26,600 Speaker 1: We have a lot less inflation than we had in 193 00:11:26,640 --> 00:11:30,800 Speaker 1: two thousand nine. I'd much rather have, um, the situation 194 00:11:30,840 --> 00:11:33,400 Speaker 1: we have now than the situation we had in two 195 00:11:33,440 --> 00:11:36,040 Speaker 1: thousand nine when we had a ten percent unemployment rate. 196 00:11:36,440 --> 00:11:39,959 Speaker 1: But you know, real wages are actually rising because inflation 197 00:11:40,080 --> 00:11:41,960 Speaker 1: was low. So but you need to keep all three 198 00:11:42,000 --> 00:11:46,479 Speaker 1: of those in your head um simultaneously. What the implications 199 00:11:46,480 --> 00:11:50,960 Speaker 1: of that are for policy? I think the second one, 200 00:11:51,000 --> 00:11:54,520 Speaker 1: that the economy is improving has important implications for policy. 201 00:11:54,559 --> 00:11:59,280 Speaker 1: We are no longer in a dire emergency situation in 202 00:11:59,400 --> 00:12:02,720 Speaker 1: terms of the policy should be acting. Four point six 203 00:12:02,760 --> 00:12:07,080 Speaker 1: percent unemployment rate is higher than it should be, but 204 00:12:07,160 --> 00:12:10,680 Speaker 1: it's not so extremely high that you want to be 205 00:12:11,000 --> 00:12:15,679 Speaker 1: in complete emergency mode in responding to it, Especially when 206 00:12:15,679 --> 00:12:18,839 Speaker 1: complete emergency mode has a lot of negative side effects 207 00:12:18,880 --> 00:12:22,720 Speaker 1: for issue number three, which is inflation. So this is 208 00:12:22,760 --> 00:12:26,120 Speaker 1: something that's come up in our previous conversations, which is 209 00:12:26,160 --> 00:12:29,360 Speaker 1: this idea that even though the Fed isn't I mean, 210 00:12:29,400 --> 00:12:31,760 Speaker 1: it just started tapering its balance sheet. But even if 211 00:12:31,800 --> 00:12:35,520 Speaker 1: the Fed weren't changing its asset purchases and if it 212 00:12:35,640 --> 00:12:40,720 Speaker 1: was keeping rates where they were, the economy itself is recovering. 213 00:12:40,840 --> 00:12:43,600 Speaker 1: And so, you know, keeping rates near zero and having 214 00:12:43,679 --> 00:12:47,120 Speaker 1: a very large balance sheet effectively means that things are 215 00:12:47,160 --> 00:12:51,480 Speaker 1: getting easier and easier. Financial conditions are getting looser, even 216 00:12:51,480 --> 00:12:55,680 Speaker 1: though the Fed isn't explicitly you know, loosening monetary policy. 217 00:12:55,880 --> 00:12:58,640 Speaker 1: Is that something that concerns you at the moment. You 218 00:12:58,679 --> 00:13:03,040 Speaker 1: mentioned the idea of low rates fueling bubbles and things 219 00:13:03,120 --> 00:13:06,520 Speaker 1: like that. It seems like that has become an issue 220 00:13:07,280 --> 00:13:10,920 Speaker 1: for the economy, especially looking at real rates which still 221 00:13:10,960 --> 00:13:14,839 Speaker 1: remain incredibly low. I completely agree with you. Let me 222 00:13:14,880 --> 00:13:17,600 Speaker 1: just say that implicit in your question are two really 223 00:13:17,600 --> 00:13:22,240 Speaker 1: important features of monetary policy. One is it's a continuum. 224 00:13:22,280 --> 00:13:25,120 Speaker 1: It's a whole range of policy options you could choose, 225 00:13:25,200 --> 00:13:28,520 Speaker 1: not just reducible to the nominal FED funds. Right, And 226 00:13:28,559 --> 00:13:31,040 Speaker 1: we've chosen a point on that continuum that actually is 227 00:13:31,080 --> 00:13:33,720 Speaker 1: not the most expansionary it could be. We could have said, 228 00:13:34,000 --> 00:13:35,600 Speaker 1: you know, we're going to keep rates at zero for 229 00:13:35,640 --> 00:13:38,120 Speaker 1: a decade. We could have bought five billion dollars of 230 00:13:38,160 --> 00:13:41,520 Speaker 1: assets a month. We we chose to do something intermediate 231 00:13:41,880 --> 00:13:45,680 Speaker 1: because effectively, everyone agrees we need to balance the risks 232 00:13:45,679 --> 00:13:48,680 Speaker 1: of doing too much and too little. The second important 233 00:13:48,720 --> 00:13:53,679 Speaker 1: point is that monetary policy is constantly changing. Yes, the 234 00:13:53,720 --> 00:13:56,000 Speaker 1: Fed funds rate has been at zero for a year 235 00:13:56,040 --> 00:13:59,960 Speaker 1: and a half, but when expected inflation rises, that means 236 00:14:00,080 --> 00:14:02,640 Speaker 1: the real Fed funds right, the Fed funds right adjusted 237 00:14:02,679 --> 00:14:07,640 Speaker 1: for inflation falls, um that's happened, so that means monetary 238 00:14:07,640 --> 00:14:10,839 Speaker 1: policy has gotten more expansionary. The interest rates that really 239 00:14:10,880 --> 00:14:14,240 Speaker 1: matter are long term interest rates. Those have fallen a 240 00:14:14,280 --> 00:14:16,440 Speaker 1: lot in the last couple of months, and when you 241 00:14:16,440 --> 00:14:18,800 Speaker 1: adjust for inflation, you can look at the tips market, 242 00:14:18,840 --> 00:14:21,720 Speaker 1: they've fallen even more. So that's one of the strange 243 00:14:21,760 --> 00:14:23,960 Speaker 1: things is over the last year, the economy has gotten 244 00:14:24,000 --> 00:14:27,920 Speaker 1: better very rapidly, and monetary policy is moving into a 245 00:14:28,000 --> 00:14:33,040 Speaker 1: more and more emergency response setting. And then you look 246 00:14:33,040 --> 00:14:37,200 Speaker 1: around you at financial markets they'll probably be okay, but 247 00:14:38,160 --> 00:14:41,320 Speaker 1: you know, there's more reason to be nervous than there 248 00:14:41,320 --> 00:14:59,440 Speaker 1: should be, So I want to you know, one thing 249 00:14:59,480 --> 00:15:03,640 Speaker 1: that I really appreciate about your approach and about your 250 00:15:03,680 --> 00:15:06,960 Speaker 1: clarity is essentially what I guess I would say, your humility. 251 00:15:07,000 --> 00:15:10,040 Speaker 1: And probably all of us and all economys should have 252 00:15:10,600 --> 00:15:13,360 Speaker 1: quite a big dose of humility about our ability to 253 00:15:13,840 --> 00:15:18,800 Speaker 1: forecast anything, whether it's employment, the effective macro policy, what 254 00:15:18,800 --> 00:15:21,000 Speaker 1: inflation is going to be next year, in the year beyond. 255 00:15:21,440 --> 00:15:25,920 Speaker 1: That's an important quality. It seems to me that going 256 00:15:25,960 --> 00:15:29,520 Speaker 1: back to the FED, that this is also a um 257 00:15:29,520 --> 00:15:32,560 Speaker 1: of you held by or a sort of an important 258 00:15:32,600 --> 00:15:36,040 Speaker 1: value to the current FED chair J. Powell, who knows 259 00:15:36,040 --> 00:15:37,920 Speaker 1: whether by the time this comes out whether it will 260 00:15:37,920 --> 00:15:41,320 Speaker 1: be the nominee. But this idea of like humility, and 261 00:15:41,320 --> 00:15:43,600 Speaker 1: I kind of think that was bolstered with the new 262 00:15:43,640 --> 00:15:47,880 Speaker 1: flexible average inflation targeting, which struck me as a recognition 263 00:15:47,960 --> 00:15:50,280 Speaker 1: that's like, you know, we thought we could like aim this, 264 00:15:50,360 --> 00:15:52,000 Speaker 1: and we thought we had these models that would tell 265 00:15:52,040 --> 00:15:54,240 Speaker 1: us when we're hitting NEHRU and all this stuff, and 266 00:15:54,440 --> 00:15:57,120 Speaker 1: it turned out the economy could get better than we thought. 267 00:15:57,160 --> 00:16:00,400 Speaker 1: It turned out the employment rate could fall for than 268 00:16:00,400 --> 00:16:03,360 Speaker 1: we thought, and so let's try to build in some 269 00:16:03,480 --> 00:16:06,280 Speaker 1: guardrails so that we're not so you know, they were 270 00:16:06,280 --> 00:16:09,760 Speaker 1: not too wed to these models. Do you get concerned 271 00:16:09,800 --> 00:16:13,320 Speaker 1: when thinking about this, that like this could be another 272 00:16:14,040 --> 00:16:18,440 Speaker 1: mistake the likes of which we've seen kind of since 273 00:16:18,480 --> 00:16:22,040 Speaker 1: the Great Financial Crisis, that it's like, you know, look, 274 00:16:22,120 --> 00:16:26,160 Speaker 1: we made a lot of premature pullbacks. We certainly did. 275 00:16:26,200 --> 00:16:29,200 Speaker 1: I think you would probably almost certainly agree on fiscal 276 00:16:29,840 --> 00:16:32,840 Speaker 1: in the wake of the GFC and rate hikes that 277 00:16:32,880 --> 00:16:36,720 Speaker 1: in retrospect, maybe we're too early or unnecessary or reversed, 278 00:16:37,160 --> 00:16:40,920 Speaker 1: and that maybe given these sort of inherent uncertainty, it 279 00:16:41,000 --> 00:16:43,800 Speaker 1: still might make sense to just air on the side 280 00:16:43,840 --> 00:16:47,240 Speaker 1: of let's wait until we see the full the full recovery, 281 00:16:47,280 --> 00:16:51,240 Speaker 1: the maximum employment. Yeah, so, Joe, I agree we should 282 00:16:51,400 --> 00:16:54,760 Speaker 1: err on the side, Uh, exactly the direction you're saying. 283 00:16:55,600 --> 00:16:57,960 Speaker 1: The question is how much we should err on that 284 00:16:58,040 --> 00:17:01,360 Speaker 1: side based on what we know. I think we're erring 285 00:17:01,800 --> 00:17:04,879 Speaker 1: too much on that side right now, and so we 286 00:17:04,880 --> 00:17:07,800 Speaker 1: should err less on that side. But continue to let 287 00:17:07,880 --> 00:17:11,200 Speaker 1: me explain why I think that, And I won't relitigate 288 00:17:11,200 --> 00:17:13,680 Speaker 1: the past except to say hundred percent agree with you 289 00:17:14,200 --> 00:17:18,520 Speaker 1: on fiscal policy being overly contractionary, insufficiently expansionary, and then 290 00:17:18,520 --> 00:17:24,000 Speaker 1: overly contractionary. And agree with you on what the FED 291 00:17:24,080 --> 00:17:27,920 Speaker 1: did from two thousand fifteen forward and I had I'll 292 00:17:27,960 --> 00:17:32,119 Speaker 1: take that's pretty good. I'm glad to get. And just 293 00:17:32,200 --> 00:17:35,240 Speaker 1: to be clear, I um, I was, you know, partially 294 00:17:35,280 --> 00:17:37,119 Speaker 1: responsible for the fiscal policy, and I had nothing to 295 00:17:37,119 --> 00:17:39,960 Speaker 1: do with the monetary policy that I'm more defensive of. 296 00:17:40,560 --> 00:17:43,879 Speaker 1: So just to understand, there's an irony in the FED framework. 297 00:17:44,080 --> 00:17:47,879 Speaker 1: It was all about our models don't work. In the past, 298 00:17:47,960 --> 00:17:50,479 Speaker 1: we made this mistake that we forecast there was going 299 00:17:50,520 --> 00:17:53,520 Speaker 1: to be all this inflation. We made changes based on 300 00:17:53,560 --> 00:17:56,879 Speaker 1: that forecast, and then that forecast turned out to be wrong. 301 00:17:57,760 --> 00:18:01,520 Speaker 1: The irony is the main argument for not being more 302 00:18:01,520 --> 00:18:06,119 Speaker 1: aggressive now is a forecast, a forecast that inflation is 303 00:18:06,119 --> 00:18:11,399 Speaker 1: going to come down next year. And so the FED 304 00:18:11,640 --> 00:18:16,119 Speaker 1: has found itself back pretty heavily in a forecast, potentially 305 00:18:16,119 --> 00:18:21,040 Speaker 1: making the opposite mistake that it made before now relying 306 00:18:21,160 --> 00:18:23,720 Speaker 1: on all these you know, different theories as to why 307 00:18:23,760 --> 00:18:26,600 Speaker 1: it would be transitory. As I said, when I do 308 00:18:26,720 --> 00:18:29,639 Speaker 1: my best forecast, which you know, I'm going to be 309 00:18:29,680 --> 00:18:33,280 Speaker 1: embarrassed bugs it's gonna be wrong. Um, I think inflation 310 00:18:33,359 --> 00:18:36,360 Speaker 1: three to four percent next year, but I don't really know. 311 00:18:36,960 --> 00:18:39,159 Speaker 1: No one knows, and so that's you have to do 312 00:18:39,200 --> 00:18:41,280 Speaker 1: the best you can, and I'd rely more on the 313 00:18:41,320 --> 00:18:43,840 Speaker 1: actual data we've seen than a forecast. So that would 314 00:18:43,880 --> 00:18:46,880 Speaker 1: be my first point. Um. The second point is it's 315 00:18:46,920 --> 00:18:50,280 Speaker 1: relevant where we're lifting off from. The unemployment rate right 316 00:18:50,280 --> 00:18:53,240 Speaker 1: now is four point six percent. Last time we lifted 317 00:18:53,240 --> 00:18:56,080 Speaker 1: off when the unemployment rate was five percent, and I 318 00:18:56,119 --> 00:18:58,840 Speaker 1: grant your point could have waited a bit longer. On 319 00:18:58,880 --> 00:19:00,960 Speaker 1: there's a number of reasons to lift off. Those should 320 00:19:00,960 --> 00:19:03,920 Speaker 1: happen sooner than what would have been optimal last time. 321 00:19:04,440 --> 00:19:07,560 Speaker 1: The unemployment rates still falling quickly, there's a lot of 322 00:19:07,640 --> 00:19:11,680 Speaker 1: job openings. With expected inflation higher, that means the real 323 00:19:11,800 --> 00:19:15,480 Speaker 1: interest rate is lower. And then of course inflation is 324 00:19:15,600 --> 00:19:19,280 Speaker 1: much higher this time than it was before. So all 325 00:19:19,320 --> 00:19:22,760 Speaker 1: of that said, if we lifted off in the middle 326 00:19:22,760 --> 00:19:25,439 Speaker 1: of next year when the unemployment rate was four percent, 327 00:19:25,920 --> 00:19:27,720 Speaker 1: and we lift off all the way to the sky 328 00:19:27,840 --> 00:19:32,040 Speaker 1: high interest rate of five to fifty basis points, I 329 00:19:32,200 --> 00:19:35,840 Speaker 1: just there definitely is a chance that's too much, But 330 00:19:37,040 --> 00:19:40,080 Speaker 1: you know, I'm just not that worried about it. So 331 00:19:41,119 --> 00:19:43,320 Speaker 1: having made those two points. I mean, I don't think 332 00:19:43,359 --> 00:19:48,880 Speaker 1: anyone is arguing for the FED to suddenly raise interest rates, 333 00:19:48,920 --> 00:19:51,800 Speaker 1: you know, in a major, major way. And it does 334 00:19:51,920 --> 00:19:55,320 Speaker 1: have different levers that it could pull to try to 335 00:19:55,400 --> 00:19:58,359 Speaker 1: offset some of the inflationary pressure. So, yes, it has 336 00:19:58,480 --> 00:20:01,000 Speaker 1: announced that it's going to start tapering it's asset purchases. 337 00:20:01,240 --> 00:20:06,000 Speaker 1: It's not stopping those completely. Um, it could raise rates slightly, 338 00:20:06,280 --> 00:20:09,320 Speaker 1: or it could try to guide the market towards a 339 00:20:09,680 --> 00:20:13,879 Speaker 1: faster pace of interest rate hikes in the future. What's 340 00:20:13,920 --> 00:20:20,240 Speaker 1: your sort of ideal policy response given how you're viewing 341 00:20:20,600 --> 00:20:23,280 Speaker 1: the inflation risk at the moment. Yeah, what the Fed 342 00:20:23,320 --> 00:20:26,280 Speaker 1: should do should be dependent on the data. But what 343 00:20:26,400 --> 00:20:29,680 Speaker 1: I would do would be to flip the default. Right now, 344 00:20:29,720 --> 00:20:33,520 Speaker 1: they're effectively saying, we think this inflation is going to disappear, 345 00:20:34,280 --> 00:20:37,080 Speaker 1: so we're not planning to raise rates, but if the 346 00:20:37,080 --> 00:20:40,399 Speaker 1: inflation surprises us, will do something. I'd rather see them 347 00:20:40,440 --> 00:20:43,760 Speaker 1: flip that we're planning to lift off in the first 348 00:20:43,800 --> 00:20:47,200 Speaker 1: half of next year. We're planning on something like three 349 00:20:47,320 --> 00:20:51,679 Speaker 1: rate hikes next year. But you know, if all the 350 00:20:51,720 --> 00:20:54,640 Speaker 1: transitory stories that I think Joe believes more than I do. 351 00:20:55,160 --> 00:20:57,920 Speaker 1: UM and Joe's more right than I am. UM will 352 00:20:58,000 --> 00:21:00,399 Speaker 1: will delay that. If there's another wave of COVID and 353 00:21:00,440 --> 00:21:03,160 Speaker 1: employment is bad, or employment is bad for any other reason, 354 00:21:03,520 --> 00:21:07,280 Speaker 1: UM will delay that. And so changing the default matters. 355 00:21:07,359 --> 00:21:10,040 Speaker 1: It would show up in long term interest rates right now. 356 00:21:10,600 --> 00:21:13,240 Speaker 1: It also would reduce the disconnect between what I think 357 00:21:13,280 --> 00:21:16,160 Speaker 1: the FED is likely to end up doing, at least 358 00:21:16,160 --> 00:21:20,280 Speaker 1: based on my forecast of the world, and what the 359 00:21:20,320 --> 00:21:22,880 Speaker 1: market thinks. It's always better if those two are more 360 00:21:22,920 --> 00:21:25,840 Speaker 1: in sync. Right now, everyone's guessing, you know, if inflation 361 00:21:25,960 --> 00:21:29,120 Speaker 1: ends up high but we're not yet maximum employment, what 362 00:21:29,160 --> 00:21:31,359 Speaker 1: are they going to do? No one quite knows the 363 00:21:31,400 --> 00:21:35,440 Speaker 1: answer to that question. So flip the default. Send signals 364 00:21:35,440 --> 00:21:40,480 Speaker 1: to markets, but be data dependent and adjust if you 365 00:21:40,520 --> 00:21:43,800 Speaker 1: need to. Well, let me ask you about those signals 366 00:21:43,840 --> 00:21:46,360 Speaker 1: to markets, and you know you said I disagree. I Look, 367 00:21:46,359 --> 00:21:49,280 Speaker 1: I'm a I'm a straight news journalist. I don't have 368 00:21:49,320 --> 00:21:52,399 Speaker 1: opinions on or forecast or anything. Is everybody knows. I 369 00:21:52,440 --> 00:21:55,119 Speaker 1: don't have your point, but I will say that a 370 00:21:55,119 --> 00:21:57,879 Speaker 1: lot of them more sort of like mm T people 371 00:21:58,000 --> 00:22:00,520 Speaker 1: that I talked to, and this is a key question 372 00:22:00,560 --> 00:22:03,359 Speaker 1: that I have about what this sort of signal is 373 00:22:03,359 --> 00:22:06,359 Speaker 1: supposed to accomplish. They say, you know, the only way 374 00:22:06,400 --> 00:22:10,440 Speaker 1: that rate hikes actually um or that FED policy tightening 375 00:22:10,440 --> 00:22:14,200 Speaker 1: can actually fight inflation is through the demand channel, by 376 00:22:14,320 --> 00:22:18,120 Speaker 1: weakening the economy, and weakening the economy when we do 377 00:22:18,240 --> 00:22:21,000 Speaker 1: as you admit to have this whole still unemployment is 378 00:22:21,359 --> 00:22:24,520 Speaker 1: ill advised. And I think we probably all agree, and 379 00:22:24,560 --> 00:22:26,760 Speaker 1: it's kind of become a cliche by now. It's like, 380 00:22:27,000 --> 00:22:29,280 Speaker 1: rate hikes aren't going to make throughput at the Port 381 00:22:29,280 --> 00:22:32,520 Speaker 1: of Los Angeles any faster. Rate hikes aren't going to 382 00:22:32,600 --> 00:22:35,400 Speaker 1: get more truckers on the road, and rate hikes aren't 383 00:22:35,400 --> 00:22:38,760 Speaker 1: going to get chip factories in Malaysia working any faster. 384 00:22:38,840 --> 00:22:41,000 Speaker 1: So I think we all agree there's no supply side benefit. 385 00:22:41,240 --> 00:22:45,879 Speaker 1: What do you see, though, specifically as the channel view 386 00:22:45,920 --> 00:22:49,639 Speaker 1: which these signaled hikes, even if it's a very moderate pace, 387 00:22:50,160 --> 00:22:54,399 Speaker 1: could help team inflation or does it end up being 388 00:22:54,760 --> 00:22:58,120 Speaker 1: through the recession channel, which probably you would almost certainly agree, 389 00:22:58,480 --> 00:23:02,600 Speaker 1: you know, is undesirable given the employment hole. Yeah, so, 390 00:23:02,720 --> 00:23:05,000 Speaker 1: first of all, i'd flipped the point you just made. 391 00:23:05,359 --> 00:23:07,800 Speaker 1: The big problems in our economy is not enough shots 392 00:23:07,840 --> 00:23:11,960 Speaker 1: and arms, not enough microchips being produced, not enough throughput 393 00:23:12,040 --> 00:23:16,480 Speaker 1: through ports. Buying assets isn't helping any of those. Low 394 00:23:16,520 --> 00:23:19,879 Speaker 1: interest rates isn't helping any of those. So none of 395 00:23:19,880 --> 00:23:24,240 Speaker 1: the fundamental problems in our economy are being cured by 396 00:23:24,440 --> 00:23:29,000 Speaker 1: expansionary monetary policy right now. I'd still keep the setting 397 00:23:29,160 --> 00:23:32,840 Speaker 1: expansionary because I think there's probably some m lingering demand, 398 00:23:33,400 --> 00:23:36,480 Speaker 1: but I don't think it will do very much for 399 00:23:37,480 --> 00:23:40,680 Speaker 1: of what ails us. At the margin, most of our 400 00:23:40,760 --> 00:23:45,119 Speaker 1: policy options in macro affect both prices and quantities. And 401 00:23:45,160 --> 00:23:47,400 Speaker 1: there's some people that look at them and it was like, oh, 402 00:23:47,480 --> 00:23:49,960 Speaker 1: you know, the stimulus didn't do anything to help the economy. 403 00:23:49,960 --> 00:23:53,160 Speaker 1: It's all inflation. It's all Biden's fault. Other people look 404 00:23:53,160 --> 00:23:55,760 Speaker 1: at and say, oh, the stimulus, you know, rescued the 405 00:23:55,800 --> 00:23:58,879 Speaker 1: economy and had nothing to do with inflation. The answer 406 00:23:58,920 --> 00:24:02,600 Speaker 1: is always both some combination. When you expand fiscal policy, 407 00:24:02,640 --> 00:24:06,960 Speaker 1: expand monetary policy, get some combination on output and inflation. 408 00:24:07,920 --> 00:24:10,919 Speaker 1: In my judgment, and this is a judgment right now. 409 00:24:11,200 --> 00:24:14,000 Speaker 1: At the margin, when we're talking about moving settings up 410 00:24:14,080 --> 00:24:18,560 Speaker 1: or down, it's affecting prices much more than quantities. That's 411 00:24:18,600 --> 00:24:22,560 Speaker 1: because the quantities are constrained by the supply side of 412 00:24:22,600 --> 00:24:26,200 Speaker 1: the economy, So an awful lot is passing through to prices. 413 00:24:26,240 --> 00:24:28,440 Speaker 1: So that would be the first point. The second point 414 00:24:28,480 --> 00:24:30,439 Speaker 1: would be we may need to do less if we 415 00:24:30,480 --> 00:24:33,600 Speaker 1: act sooner, and if we act later, um, it may 416 00:24:33,640 --> 00:24:36,760 Speaker 1: be more costly. We all know, Um, the Phillips curve 417 00:24:36,800 --> 00:24:41,240 Speaker 1: is very flat. There's not much relationship between inflation and unemployment. 418 00:24:41,560 --> 00:24:43,760 Speaker 1: The flip side of that is something that we used 419 00:24:43,760 --> 00:24:46,240 Speaker 1: to call the sacrifice ratio is very high. You may 420 00:24:46,280 --> 00:24:49,399 Speaker 1: need a lot of unemployment to ring out some inflation, 421 00:24:49,800 --> 00:24:53,080 Speaker 1: so it's better to be precautionary get rid of a 422 00:24:53,119 --> 00:24:56,120 Speaker 1: little bit of its sooner. Um. And finally, I don't 423 00:24:56,160 --> 00:24:59,000 Speaker 1: place a lot of weight on inflation expectations. They seem 424 00:24:59,040 --> 00:25:01,840 Speaker 1: a little bit like the ether. The people invoke um 425 00:25:02,359 --> 00:25:05,359 Speaker 1: to explain the holes in their theories. But you know, 426 00:25:05,480 --> 00:25:09,960 Speaker 1: I think there's a chance inflation expectations matter, and so 427 00:25:10,040 --> 00:25:13,080 Speaker 1: why not keep them in better control? Is there not 428 00:25:13,119 --> 00:25:16,440 Speaker 1: an argument though, that keeping interest rates relatively low could 429 00:25:16,560 --> 00:25:21,120 Speaker 1: maybe help increase capital investment? And if you know, if 430 00:25:21,200 --> 00:25:24,760 Speaker 1: one of the issues here is supply, then that would 431 00:25:24,800 --> 00:25:27,000 Speaker 1: be something that you would want to see relatively quickly. 432 00:25:27,080 --> 00:25:28,680 Speaker 1: And one of the reasons I bring it up is 433 00:25:28,680 --> 00:25:31,919 Speaker 1: because The Bank for International Settlements just did UM that 434 00:25:31,960 --> 00:25:35,159 Speaker 1: paper last week basically saying that one of the solutions 435 00:25:35,200 --> 00:25:38,399 Speaker 1: to inflation in the current environment is capital investment and 436 00:25:38,640 --> 00:25:43,080 Speaker 1: the expansion of production capacity. Yeah. In fact, it is 437 00:25:43,119 --> 00:25:45,760 Speaker 1: an underappreciated thing. We all spend all our time looking 438 00:25:45,760 --> 00:25:48,320 Speaker 1: at consumer spending because we have our own images of 439 00:25:48,320 --> 00:25:52,280 Speaker 1: ourselves ordering lots of you know, sports equipment on Amazon 440 00:25:52,320 --> 00:25:54,679 Speaker 1: because we're not going to the gym, or now you 441 00:25:54,720 --> 00:25:57,960 Speaker 1: start going back to restaurants, now you stop, So consumer 442 00:25:58,040 --> 00:26:00,840 Speaker 1: spending a set of the economy makes sense to look at. 443 00:26:00,920 --> 00:26:04,560 Speaker 1: You talked about retail sales earlier in our discussion, but 444 00:26:04,640 --> 00:26:09,119 Speaker 1: the big shortfall in the economy is capital investment, and 445 00:26:09,680 --> 00:26:14,160 Speaker 1: capital investment is sensitive to interest rates, and capital investment 446 00:26:14,320 --> 00:26:18,960 Speaker 1: matters for capacity and supply as well as for demands. 447 00:26:19,000 --> 00:26:22,240 Speaker 1: So I think that is a very good argument for 448 00:26:22,520 --> 00:26:26,439 Speaker 1: low interest rates and keeping them low. It still begs 449 00:26:26,440 --> 00:26:29,000 Speaker 1: the question of how low do you want to keep them? 450 00:26:29,320 --> 00:26:32,080 Speaker 1: Um and I would argue interest rates have effectively fallen 451 00:26:32,119 --> 00:26:34,920 Speaker 1: over the last year because of the rise and expected inflation. 452 00:26:35,000 --> 00:26:37,399 Speaker 1: That means the real rate has fallen, and we we 453 00:26:37,440 --> 00:26:39,560 Speaker 1: don't want that. We want to move a little bit 454 00:26:39,600 --> 00:26:41,760 Speaker 1: in the other direction. And I would just remind you 455 00:26:41,800 --> 00:26:44,520 Speaker 1: that everyone, including all the mm T people in this debate, 456 00:26:45,000 --> 00:26:49,760 Speaker 1: want monetary policy that's not maximually expansionary. There's no one saying, well, 457 00:26:49,800 --> 00:26:51,600 Speaker 1: there are a few people, but very few people saying 458 00:26:51,680 --> 00:26:54,320 Speaker 1: rates should be zero forever. I don't think there's anyone 459 00:26:54,400 --> 00:26:58,359 Speaker 1: saying we should. I'll invite you into the Twitter, the 460 00:26:58,400 --> 00:27:01,800 Speaker 1: Twitter group d MS. I'm in, Jason, you can, well, 461 00:27:01,840 --> 00:27:04,040 Speaker 1: you could join it. So there are a few people things, 462 00:27:06,000 --> 00:27:09,119 Speaker 1: but even they aren't saying let's buy five billion dollars 463 00:27:09,119 --> 00:27:11,240 Speaker 1: of assets and money. That's true, that's true. You know, 464 00:27:11,280 --> 00:27:14,600 Speaker 1: there's always something more expansionary for monetary policy than what 465 00:27:14,640 --> 00:27:16,800 Speaker 1: we're doing. I mean, we could have yield curve control. 466 00:27:17,080 --> 00:27:18,840 Speaker 1: That said, the thirty year we're gonna keep it at 467 00:27:18,920 --> 00:27:21,560 Speaker 1: zero UM, and we're gonna just buy enough treasuries to 468 00:27:21,640 --> 00:27:24,000 Speaker 1: keep that rated zero forever. The thirty year treasury not 469 00:27:24,880 --> 00:27:28,480 Speaker 1: so in some sense, everyone is saying we're gonna have 470 00:27:28,480 --> 00:27:32,280 Speaker 1: slower growth in order to have less of some other problem. Um, 471 00:27:32,359 --> 00:27:36,160 Speaker 1: whether that other problem is overly high inflation, overly big 472 00:27:36,280 --> 00:27:39,320 Speaker 1: risk of a recession, overly for au the asset markets. 473 00:27:39,359 --> 00:27:41,639 Speaker 1: We all agree on that the question just is where 474 00:27:42,200 --> 00:27:44,679 Speaker 1: I want to ask you a question before we about 475 00:27:45,200 --> 00:27:49,320 Speaker 1: history sists and reverse historicists and the benefits of a 476 00:27:49,400 --> 00:27:52,760 Speaker 1: high pressure economy. But before we do, you mentioned the 477 00:27:52,800 --> 00:27:55,240 Speaker 1: pace of bond buying, and you had an interesting tweet 478 00:27:55,320 --> 00:27:59,879 Speaker 1: thread the other day were essentially really interesting that I thought, 479 00:28:00,000 --> 00:28:01,680 Speaker 1: which is that you know, it's like, well, we're not 480 00:28:01,720 --> 00:28:05,919 Speaker 1: buying of assets a month, theoretically we could be like 481 00:28:06,000 --> 00:28:10,320 Speaker 1: buying way more. And yet and you noted this, there 482 00:28:10,359 --> 00:28:14,440 Speaker 1: does seem to be this divergence between how economists view 483 00:28:14,520 --> 00:28:17,879 Speaker 1: the effective asset purchases. And this goes long before the 484 00:28:17,960 --> 00:28:20,400 Speaker 1: US ever, did QUEI going back to like the Bank 485 00:28:20,440 --> 00:28:25,320 Speaker 1: of Japan and Milton Friedman, they waved economists talked about 486 00:28:25,359 --> 00:28:29,359 Speaker 1: the effective asset purchases which is potentially powerful channel versus 487 00:28:29,440 --> 00:28:32,639 Speaker 1: the markets where it's really not clear at all. And 488 00:28:32,720 --> 00:28:35,479 Speaker 1: this is I sort of basically side with the markets 489 00:28:35,560 --> 00:28:38,960 Speaker 1: on this, that asset purchases really do anything, and that 490 00:28:39,080 --> 00:28:43,200 Speaker 1: the size of the balance sheet is itself a important lever. 491 00:28:43,600 --> 00:28:46,120 Speaker 1: I'm curious your view on this because you noted in 492 00:28:46,240 --> 00:28:49,240 Speaker 1: your tweet thread this divergence between economists and market views 493 00:28:49,280 --> 00:28:52,720 Speaker 1: about balance sheet size, and I'm curious where you stand 494 00:28:52,880 --> 00:28:55,240 Speaker 1: and also what you view is the channel via which 495 00:28:55,560 --> 00:28:59,800 Speaker 1: these asset purchases actually contribute to loosening policy. Ye. So, 496 00:29:00,400 --> 00:29:02,800 Speaker 1: so when I teach my students something, I often teach 497 00:29:02,880 --> 00:29:06,320 Speaker 1: it to them, explain the theory, and then tell them 498 00:29:06,960 --> 00:29:09,600 Speaker 1: what probability I attached to what I just told them 499 00:29:09,680 --> 00:29:12,719 Speaker 1: being true is. I try not to waste a lot 500 00:29:12,800 --> 00:29:15,000 Speaker 1: of time with things that are below a thirty percent 501 00:29:15,120 --> 00:29:17,560 Speaker 1: chance of being true. Rarely do I say it's a 502 00:29:17,640 --> 00:29:19,920 Speaker 1: hundred percent chance of being true. Usually that's with an 503 00:29:19,920 --> 00:29:23,200 Speaker 1: accounting identity, but hopefully I have more credibility um when 504 00:29:23,240 --> 00:29:27,920 Speaker 1: I do that. There's a longstanding holy war between economists, 505 00:29:27,960 --> 00:29:30,600 Speaker 1: including the staff of the Fed, who basically think the 506 00:29:30,920 --> 00:29:32,800 Speaker 1: size of the balance sheet is what matters. When you 507 00:29:32,840 --> 00:29:36,720 Speaker 1: have more assets, that's what's expansionary, and markets, which tend 508 00:29:36,800 --> 00:29:38,600 Speaker 1: to think things like the change in the pace of it. 509 00:29:38,680 --> 00:29:41,320 Speaker 1: If you're raising the pace of the purchases, that's expansionary, 510 00:29:41,760 --> 00:29:45,720 Speaker 1: lowering and it's contractionary. And even there, with some uncertainty around, 511 00:29:45,800 --> 00:29:49,160 Speaker 1: I've given the ability to substitute between different assets. I 512 00:29:49,280 --> 00:29:52,720 Speaker 1: should say I'm not incredibly deep into this fight. I 513 00:29:53,440 --> 00:29:55,760 Speaker 1: have read some of the different sides. I've talked to 514 00:29:55,840 --> 00:29:59,120 Speaker 1: people about it. I guess I sort of out of 515 00:29:59,200 --> 00:30:02,800 Speaker 1: loyalty always side with my tribe. But I'll put myself 516 00:30:02,880 --> 00:30:06,960 Speaker 1: at that the economists are right on this, and the 517 00:30:07,040 --> 00:30:10,600 Speaker 1: size of the balance is what matters. Well, but just 518 00:30:10,760 --> 00:30:14,000 Speaker 1: real quickly, what would be the why? Like, what is 519 00:30:14,080 --> 00:30:17,040 Speaker 1: the reason why you believe that that would be an 520 00:30:17,080 --> 00:30:20,400 Speaker 1: important Like? Well, how would that impact the real economy? Yeah, 521 00:30:20,600 --> 00:30:24,120 Speaker 1: because you look at the supply and demand of credit, 522 00:30:24,760 --> 00:30:29,040 Speaker 1: and when that you should think of those in terms 523 00:30:29,080 --> 00:30:32,600 Speaker 1: of stocks. And when the stock of that amount of 524 00:30:32,760 --> 00:30:35,160 Speaker 1: credit that is out there goes up, which is what 525 00:30:35,360 --> 00:30:39,720 Speaker 1: happens effectively when the FED increases its balance sheet, than 526 00:30:40,240 --> 00:30:44,120 Speaker 1: the interest rate on that credit goes down, and that 527 00:30:44,360 --> 00:30:49,400 Speaker 1: spills over into other assets equity and other forms of 528 00:30:49,520 --> 00:30:53,760 Speaker 1: debt as well, and so you get higher market prices, 529 00:30:54,160 --> 00:30:57,840 Speaker 1: lower interest rates, and all of that credit market you 530 00:30:57,960 --> 00:31:02,080 Speaker 1: want to understand, just like the labor market as the 531 00:31:02,240 --> 00:31:05,920 Speaker 1: stock that you observe at a point in time. That's 532 00:31:05,960 --> 00:31:24,680 Speaker 1: the economic argument. So can I just ask something on 533 00:31:24,800 --> 00:31:28,920 Speaker 1: the financial stability point? So one of the reasons it 534 00:31:29,120 --> 00:31:31,480 Speaker 1: is difficult for the FED to tighten at the moment, 535 00:31:31,640 --> 00:31:36,480 Speaker 1: even in response to rising inflationary risks is the idea 536 00:31:36,600 --> 00:31:40,120 Speaker 1: that we've basically built up massive excesses um in the 537 00:31:40,200 --> 00:31:44,600 Speaker 1: financial markets, in valuations, in the amount of money that's 538 00:31:44,680 --> 00:31:48,400 Speaker 1: been borrowed, um duration, and interest rate risk, and so 539 00:31:48,560 --> 00:31:53,120 Speaker 1: everyone's nervous to sort of topple or inadvertently topple that 540 00:31:53,600 --> 00:31:56,920 Speaker 1: entire thing. Over, What does it mean if the FED 541 00:31:57,040 --> 00:31:59,760 Speaker 1: were to change its priorities in the way that you 542 00:32:00,720 --> 00:32:04,720 Speaker 1: just described, Like, how would you expect the markets to 543 00:32:04,960 --> 00:32:07,800 Speaker 1: react to that? And would that not be a potential 544 00:32:07,880 --> 00:32:12,240 Speaker 1: credibility problem for the FED, which you know, just finished 545 00:32:12,480 --> 00:32:17,960 Speaker 1: explaining and convincing the market about its flexible average inflation 546 00:32:18,240 --> 00:32:23,640 Speaker 1: target regime. So, first of all, I don't think the 547 00:32:23,720 --> 00:32:27,240 Speaker 1: FED should change its framework midstream. When they do the 548 00:32:27,320 --> 00:32:30,600 Speaker 1: next framework review, they should update it. I would update 549 00:32:30,640 --> 00:32:32,760 Speaker 1: it with a higher inflation target, but we can come 550 00:32:32,800 --> 00:32:35,080 Speaker 1: back to that if you want to, or just leave 551 00:32:35,160 --> 00:32:37,760 Speaker 1: it to the side for now. So they should do 552 00:32:37,960 --> 00:32:41,440 Speaker 1: flexible average inflation targeting. But the fact is we've hit 553 00:32:41,520 --> 00:32:44,760 Speaker 1: the average, we're in fact above the average, and so 554 00:32:45,360 --> 00:32:50,400 Speaker 1: that framework itself is consistent with the changes I'm talking 555 00:32:50,440 --> 00:32:54,800 Speaker 1: about you. So, Tracy, I would be worried about how 556 00:32:55,480 --> 00:33:00,120 Speaker 1: what rate hikes that we're very abrupt would do to 557 00:33:00,200 --> 00:33:03,160 Speaker 1: the market. But in some sense, the longer you wait 558 00:33:03,440 --> 00:33:06,800 Speaker 1: to telegraph you're doing it, the larger those changes will 559 00:33:06,840 --> 00:33:09,600 Speaker 1: need to be, and the more of the shock and risk. 560 00:33:09,680 --> 00:33:12,480 Speaker 1: So there's a risk now, there's an even bigger risk later. 561 00:33:12,880 --> 00:33:17,040 Speaker 1: But absolutely the changes should be still relatively slow and gradual. 562 00:33:17,080 --> 00:33:21,600 Speaker 1: I mean, I'm talking about three hikes in starting in 563 00:33:21,880 --> 00:33:25,280 Speaker 1: the first half of the year. That's not you know, 564 00:33:25,760 --> 00:33:31,200 Speaker 1: raising interest rates to one point five tomorrow. I teased 565 00:33:31,520 --> 00:33:33,920 Speaker 1: head to this a little bit my last question, but 566 00:33:34,080 --> 00:33:36,680 Speaker 1: you know, one of the I think Janney Ellen's most 567 00:33:36,720 --> 00:33:41,160 Speaker 1: interesting speeches and this idea of hystory sis, And I'm 568 00:33:41,200 --> 00:33:43,400 Speaker 1: curious what you think about it. So the idea is that, 569 00:33:43,560 --> 00:33:47,080 Speaker 1: you know, if you have persistently slow growth, then you 570 00:33:47,280 --> 00:33:52,920 Speaker 1: the economy's potential supply diminishes, people lose skills, factories go idle, 571 00:33:52,960 --> 00:33:54,760 Speaker 1: and then they rushed and so forth. And then when 572 00:33:54,800 --> 00:33:57,960 Speaker 1: you try to have accelerated growth, you run into supply 573 00:33:58,080 --> 00:34:01,160 Speaker 1: side constraints and this is bad. And so the idea is, 574 00:34:01,240 --> 00:34:04,480 Speaker 1: in theory, what if you could really press hard down 575 00:34:04,560 --> 00:34:07,880 Speaker 1: on the accelerator And and Tracy brought this up with 576 00:34:08,000 --> 00:34:10,520 Speaker 1: perhaps one of the benefits of a low interest rate 577 00:34:10,640 --> 00:34:15,400 Speaker 1: regime and essentially force the supply side to invest and 578 00:34:15,600 --> 00:34:18,320 Speaker 1: sort of create a reverse histories where people really have 579 00:34:18,480 --> 00:34:21,279 Speaker 1: to train workers and they get up skilled, and they 580 00:34:21,320 --> 00:34:23,400 Speaker 1: have to build new factories and so forth. And you 581 00:34:23,440 --> 00:34:26,879 Speaker 1: really like keep that accelerator down, not just to get 582 00:34:26,960 --> 00:34:29,160 Speaker 1: back out of the hall that you're in, but to 583 00:34:29,280 --> 00:34:33,800 Speaker 1: actually sustainably improve the supply side capacity of the economy. 584 00:34:34,320 --> 00:34:36,160 Speaker 1: And I think about this question too, because you know, 585 00:34:36,200 --> 00:34:38,399 Speaker 1: we're always looking at these like trend lines, and by 586 00:34:38,480 --> 00:34:41,840 Speaker 1: some measures, maybe like real GDP or real consumption, we 587 00:34:41,880 --> 00:34:45,319 Speaker 1: have like erased the COVID gap, and maybe we're back 588 00:34:45,400 --> 00:34:47,960 Speaker 1: on trend, but there is this bigger trend line that 589 00:34:48,120 --> 00:34:51,480 Speaker 1: was going up until about two thou seven, and I think, 590 00:34:51,520 --> 00:34:54,080 Speaker 1: according to most of those lines were still in this 591 00:34:54,280 --> 00:34:57,480 Speaker 1: huge um hole. And so I'm curious whether you see 592 00:34:57,560 --> 00:35:01,480 Speaker 1: any argument for again, you I, as you've already established, 593 00:35:01,960 --> 00:35:04,879 Speaker 1: and not just airing on the side of doing too much, 594 00:35:05,480 --> 00:35:09,080 Speaker 1: but really trying to kick start the economy into a 595 00:35:09,160 --> 00:35:13,319 Speaker 1: sustainably higher gear, used this moment to not just make 596 00:35:13,400 --> 00:35:17,439 Speaker 1: up for the COVID shock, but actually years of under 597 00:35:17,520 --> 00:35:22,080 Speaker 1: investment and um, sort of a decaying supply side capacity. 598 00:35:23,400 --> 00:35:29,920 Speaker 1: D agree with the impulse behind your question, but my 599 00:35:30,080 --> 00:35:33,240 Speaker 1: qualification would be that the pace of doing it matters. 600 00:35:34,239 --> 00:35:37,719 Speaker 1: So I like the idea of heating the economy one 601 00:35:37,880 --> 00:35:41,320 Speaker 1: log at a time and just keep adding those logs. 602 00:35:41,880 --> 00:35:45,239 Speaker 1: What I don't like is throwing all the logs on 603 00:35:45,320 --> 00:35:48,680 Speaker 1: the fire at once. We've had two experiments that worked 604 00:35:48,680 --> 00:35:52,560 Speaker 1: out really well. The late ninety nineties, the unemployment rate 605 00:35:52,680 --> 00:35:55,200 Speaker 1: was pushed below where people thought it could go at 606 00:35:55,239 --> 00:35:58,319 Speaker 1: the time views of the natural radar near U where 607 00:35:58,360 --> 00:36:01,800 Speaker 1: six or seven percent. We went down to four and 608 00:36:01,920 --> 00:36:05,920 Speaker 1: it was great again. In the last cycle up prior 609 00:36:06,000 --> 00:36:09,959 Speaker 1: to COVID, people thought the NHU was four or five, 610 00:36:11,120 --> 00:36:13,680 Speaker 1: more more than thought five than four, and kept pushing 611 00:36:13,800 --> 00:36:16,200 Speaker 1: at three and a half it was great. Now. So 612 00:36:16,360 --> 00:36:18,880 Speaker 1: we know that if you lower the unemployment rate by 613 00:36:18,920 --> 00:36:21,480 Speaker 1: let's say seven tenths a year, I'm making that number up. 614 00:36:21,520 --> 00:36:23,920 Speaker 1: I don't I wouldn't place too much weight on it. 615 00:36:23,960 --> 00:36:26,319 Speaker 1: If you lower it by seven tenths a year, UM 616 00:36:26,360 --> 00:36:29,480 Speaker 1: that that actually works and works out quite well. What 617 00:36:29,640 --> 00:36:31,480 Speaker 1: we don't know is could we have gotten to three 618 00:36:31,520 --> 00:36:34,120 Speaker 1: point five percent unemployment in two thousand eleven and we 619 00:36:34,239 --> 00:36:37,040 Speaker 1: just blew it and waited too long, or if we 620 00:36:37,160 --> 00:36:39,040 Speaker 1: tried to get there in two thousand eleven, a lot 621 00:36:39,080 --> 00:36:40,800 Speaker 1: of things would have blown up in our face a 622 00:36:40,840 --> 00:36:43,600 Speaker 1: little bit the way we're seeing this year. So I 623 00:36:43,680 --> 00:36:47,160 Speaker 1: don't think the evidence is clear that you can jump 624 00:36:47,239 --> 00:36:49,319 Speaker 1: all the way to histories. I think what histories has 625 00:36:49,400 --> 00:36:52,640 Speaker 1: says is keep pushing and never give up. But it 626 00:36:52,680 --> 00:36:54,239 Speaker 1: does say something at the speed if you're pushing. And 627 00:36:54,320 --> 00:36:55,600 Speaker 1: by the way, histories, this is a little bit of 628 00:36:55,640 --> 00:36:59,560 Speaker 1: a double edged sword. We just went through very high unemployment. 629 00:37:00,200 --> 00:37:03,240 Speaker 1: Histories has says right now, the natural rate is higher 630 00:37:03,560 --> 00:37:06,520 Speaker 1: than it was when we began this episode. So um, 631 00:37:06,600 --> 00:37:09,680 Speaker 1: but absolutely, like you know, you know, I hope for 632 00:37:09,719 --> 00:37:12,920 Speaker 1: the next many years, I never think the unemployment rate 633 00:37:13,000 --> 00:37:15,000 Speaker 1: is too low, and because I think, you know, we 634 00:37:15,080 --> 00:37:16,920 Speaker 1: can keep lowering it by half a point a year, 635 00:37:16,960 --> 00:37:19,200 Speaker 1: and I'd like to see a lot of evidence that 636 00:37:19,280 --> 00:37:21,600 Speaker 1: we can't do that before I want to halt that process. 637 00:37:23,320 --> 00:37:26,640 Speaker 1: So I realized we've been very focused on the monetary 638 00:37:26,719 --> 00:37:29,000 Speaker 1: policy side of things, but I feel like we would 639 00:37:29,040 --> 00:37:32,680 Speaker 1: be very remiss if we didn't ask you at least 640 00:37:32,680 --> 00:37:37,239 Speaker 1: a little bit about the fiscal given your experience in Washington, 641 00:37:37,560 --> 00:37:40,719 Speaker 1: And I'm curious whether or not you think that a 642 00:37:40,960 --> 00:37:46,360 Speaker 1: higher than expected or a more stubborn inflation rate perhaps 643 00:37:46,560 --> 00:37:51,279 Speaker 1: changes some attitudes towards fiscal spending in d C. And 644 00:37:51,360 --> 00:37:53,480 Speaker 1: we've sort of been touching on this um with the 645 00:37:53,600 --> 00:37:57,080 Speaker 1: MMT references in this entire conversation. But do you think 646 00:37:57,120 --> 00:38:00,719 Speaker 1: it's going to start encouraging people to think twice when 647 00:38:00,800 --> 00:38:05,800 Speaker 1: it comes to fiscal stimulus. It appears to be leading 648 00:38:05,880 --> 00:38:09,800 Speaker 1: some members of Congress to think twice about fiscal measures 649 00:38:10,640 --> 00:38:14,200 Speaker 1: because they're concerned about inflation. I think that's a mistake, 650 00:38:14,800 --> 00:38:16,319 Speaker 1: by the way. I think that's a mistake made by 651 00:38:16,480 --> 00:38:19,319 Speaker 1: m m T. Mm T thinks that you should use 652 00:38:19,400 --> 00:38:22,239 Speaker 1: fiscal policy to control inflation, at least some versions of 653 00:38:22,320 --> 00:38:25,200 Speaker 1: it do. I'd like the FED to be in charge 654 00:38:25,239 --> 00:38:28,719 Speaker 1: of inflation. Fiscal policy should do something the Fed can't do, 655 00:38:29,239 --> 00:38:35,800 Speaker 1: which is invest in children, address climate change, bolster our infrastructure, 656 00:38:35,880 --> 00:38:39,040 Speaker 1: a whole bunch of things that the monetary policy can 657 00:38:39,080 --> 00:38:43,239 Speaker 1: do very very little about. The legislation that's currently under 658 00:38:43,320 --> 00:38:47,880 Speaker 1: debate is on an annual basis, one tenth the gross 659 00:38:47,960 --> 00:38:51,360 Speaker 1: size of what we just did this past year. Moreover, 660 00:38:51,440 --> 00:38:55,280 Speaker 1: it's mostly paid for. Some of it increases the productive 661 00:38:55,320 --> 00:38:58,680 Speaker 1: capacity of the economy. Don't think it puts much upward 662 00:38:58,719 --> 00:39:01,560 Speaker 1: pressure on inflation of the medium term, and if it 663 00:39:01,680 --> 00:39:05,160 Speaker 1: did on the FED could just offset it. So I've 664 00:39:05,239 --> 00:39:08,000 Speaker 1: been in twenty five years of debates about fiscal policy. 665 00:39:08,480 --> 00:39:11,400 Speaker 1: Almost never has anyone brought up inflation as a pro 666 00:39:12,160 --> 00:39:14,960 Speaker 1: or a con of the Affordable Care Act or the 667 00:39:15,000 --> 00:39:17,520 Speaker 1: Trump tax cuts or whatever it is. I don't think 668 00:39:17,560 --> 00:39:19,560 Speaker 1: it belongs in the pro and con of this debate. 669 00:39:19,760 --> 00:39:22,120 Speaker 1: People should debate whether this is good for children and 670 00:39:22,200 --> 00:39:25,560 Speaker 1: good for climate change, not what what'll do to inflation. Well, 671 00:39:25,760 --> 00:39:27,239 Speaker 1: let me ask you, you know, we just have a 672 00:39:27,400 --> 00:39:31,280 Speaker 1: couple of minutes left. You were the chair of Obama's CIA, 673 00:39:31,920 --> 00:39:34,680 Speaker 1: and inherently, like a lot of the there is no 674 00:39:34,920 --> 00:39:39,120 Speaker 1: way to really disentangle any of these questions from politics. 675 00:39:39,320 --> 00:39:43,960 Speaker 1: And it seems like the elevated inflation right now, Democrats 676 00:39:44,000 --> 00:39:46,480 Speaker 1: specifically appear to be paying a price for it. And 677 00:39:46,640 --> 00:39:49,960 Speaker 1: that's a political question, but it's real. So Democrats got 678 00:39:50,000 --> 00:39:53,400 Speaker 1: clawbored in some recent elections, the polling looks bad, etcetera. 679 00:39:53,680 --> 00:39:56,440 Speaker 1: In your DC experience, in your capacity as someone who 680 00:39:56,480 --> 00:39:59,600 Speaker 1: advised a president in your capacity as someone who thinks 681 00:39:59,640 --> 00:40:03,319 Speaker 1: about how politicians should react to this, what is your 682 00:40:03,440 --> 00:40:06,680 Speaker 1: view on how the leaders in d C should think 683 00:40:06,719 --> 00:40:12,000 Speaker 1: about I don't know, reframing the debate, messaging, what's going on, etcetera, 684 00:40:12,600 --> 00:40:16,000 Speaker 1: such that the case can be made. Look, we've just 685 00:40:16,120 --> 00:40:18,719 Speaker 1: had the most incredible employment recovery ever. We're having the 686 00:40:18,800 --> 00:40:22,799 Speaker 1: fastest nominal wage growth ever. We were like unemployment. How 687 00:40:22,840 --> 00:40:24,800 Speaker 1: do you go about turning that debate or how do 688 00:40:24,880 --> 00:40:29,080 Speaker 1: you think about reframing the messaging, because clearly, if we're 689 00:40:29,120 --> 00:40:31,720 Speaker 1: just talking about inflation, it's sort of a a loser 690 00:40:31,800 --> 00:40:36,120 Speaker 1: for the current Whitehouse. Yeah, so, I you know, barely. 691 00:40:36,719 --> 00:40:38,680 Speaker 1: I'm having a hard time trying to understand what's going 692 00:40:38,719 --> 00:40:41,560 Speaker 1: on in the economy and with only mixed success, and 693 00:40:41,800 --> 00:40:45,200 Speaker 1: so my ability to give communications advice to anyone who 694 00:40:45,520 --> 00:40:49,080 Speaker 1: is considerably inferior to that um if forced too, I'd 695 00:40:49,120 --> 00:40:54,560 Speaker 1: say one is be more realistic about your outlook. That's 696 00:40:54,600 --> 00:40:58,520 Speaker 1: something that Secretary Yellen did. She recently said, we don't 697 00:40:58,560 --> 00:41:01,799 Speaker 1: expect prices to start slowing anytime soon. It'll take till 698 00:41:01,840 --> 00:41:04,360 Speaker 1: the second half of next year. So be more realistic. 699 00:41:05,040 --> 00:41:08,320 Speaker 1: You have to do the combination of touting the strengths 700 00:41:08,440 --> 00:41:11,360 Speaker 1: the low unemployment rate still too high, but it's fallen 701 00:41:11,400 --> 00:41:15,640 Speaker 1: a lot, while acknowledging the pain that people feel and 702 00:41:15,760 --> 00:41:19,719 Speaker 1: not being dismissive of inflation and saying it's real. And finally, 703 00:41:20,560 --> 00:41:22,680 Speaker 1: I think President Biden needs to say I'm doing what 704 00:41:22,800 --> 00:41:25,160 Speaker 1: I can in terms of the ports and the supply chains. 705 00:41:25,239 --> 00:41:28,040 Speaker 1: You do understand it better than I do. But you know, 706 00:41:28,120 --> 00:41:31,640 Speaker 1: this is primarily responsibility the FED. That's why I'm nominating 707 00:41:31,719 --> 00:41:34,160 Speaker 1: or renominating so and so, and I want to make 708 00:41:34,200 --> 00:41:39,200 Speaker 1: sure that they get inflation under control. It's their job. 709 00:41:39,320 --> 00:41:41,560 Speaker 1: I'm expecting them to do it. It's kind of wild 710 00:41:41,600 --> 00:41:43,560 Speaker 1: to think by the time this episode comes out, we 711 00:41:43,680 --> 00:41:49,320 Speaker 1: might um, we might know who. Yeah, all right, well Jason, 712 00:41:49,560 --> 00:41:51,960 Speaker 1: I'm conscious of the time. So thank you so much 713 00:41:52,160 --> 00:41:56,400 Speaker 1: for coming on all thoughts. Really appreciate it. Thanks, that's fantastic. Okay, 714 00:41:56,840 --> 00:42:12,399 Speaker 1: Thanks Tracy, Joe, great talking to both of you. So, Joe, 715 00:42:12,520 --> 00:42:15,759 Speaker 1: I thought that was a really interesting conversation and you know, 716 00:42:15,840 --> 00:42:18,960 Speaker 1: an important viewpoint to have someone who's sort of straddling 717 00:42:19,360 --> 00:42:24,239 Speaker 1: extreme wonky uh monetary policy with you know, very sort 718 00:42:24,280 --> 00:42:28,080 Speaker 1: of realist um political considerations. Given his experience in TC. 719 00:42:28,880 --> 00:42:31,360 Speaker 1: One thing that is jumping out at me in this 720 00:42:31,560 --> 00:42:34,920 Speaker 1: whole debate is I really feel that it's sort of 721 00:42:34,960 --> 00:42:38,479 Speaker 1: boils down to not necessarily supply versus demand, but which 722 00:42:38,719 --> 00:42:43,160 Speaker 1: of the feds to mandates people value the most, um, 723 00:42:43,360 --> 00:42:47,920 Speaker 1: you know, bringing down unemployment or having price stability. And 724 00:42:48,040 --> 00:42:53,240 Speaker 1: I do think there's something about the price stability mandate 725 00:42:53,360 --> 00:42:56,000 Speaker 1: that makes it a lot more important and accessible to 726 00:42:56,200 --> 00:42:59,759 Speaker 1: a much larger number of people. Like I think most 727 00:43:00,000 --> 00:43:03,719 Speaker 1: probably aren't that concerned that the unemployment rate is, you know, 728 00:43:03,920 --> 00:43:06,920 Speaker 1: four percent when maybe it could be three percent. But 729 00:43:07,040 --> 00:43:11,600 Speaker 1: because inflation tends to touch almost everyone's lives on a 730 00:43:11,719 --> 00:43:14,800 Speaker 1: daily basis, if you're buying stuff, it just feels like 731 00:43:15,719 --> 00:43:19,920 Speaker 1: people will naturally naturally gravitate more towards that issue than 732 00:43:20,000 --> 00:43:23,880 Speaker 1: they will unemployment. Yeah, I think that's right. I mean, 733 00:43:23,920 --> 00:43:27,839 Speaker 1: I look, it's very real, especially and we we've talked 734 00:43:27,840 --> 00:43:31,480 Speaker 1: about this before, but inflation it feels very really Look, 735 00:43:32,000 --> 00:43:35,040 Speaker 1: even in the depths of a downturn, most people don't 736 00:43:35,120 --> 00:43:37,400 Speaker 1: lose their jobs, and so I think this sort of 737 00:43:37,520 --> 00:43:42,640 Speaker 1: gets But even in but everyone buy stuff usually every day, 738 00:43:42,719 --> 00:43:44,440 Speaker 1: and so you do get this sort of like disparate 739 00:43:44,480 --> 00:43:49,959 Speaker 1: effect where it's like inflation always affects everyone, and unemployment, 740 00:43:50,840 --> 00:43:52,919 Speaker 1: even though that's the other half of the mandate, only 741 00:43:52,960 --> 00:43:57,560 Speaker 1: affects some people at any given moment. And therefore it 742 00:43:57,680 --> 00:44:00,839 Speaker 1: does seem like inflation in per particular, and we're seeing 743 00:44:00,880 --> 00:44:02,360 Speaker 1: that in some of the data right now, and we 744 00:44:02,400 --> 00:44:04,880 Speaker 1: see that politically, you do pay a heavy price for it. 745 00:44:05,200 --> 00:44:08,759 Speaker 1: It is interesting what Jason said. I kind of half 746 00:44:08,840 --> 00:44:12,919 Speaker 1: believe it that economists that actually economists are less worried 747 00:44:12,920 --> 00:44:15,439 Speaker 1: about inflation than the public. It's kind of weird because 748 00:44:15,440 --> 00:44:17,160 Speaker 1: at some level maybe that's true, and I get his 749 00:44:17,280 --> 00:44:21,279 Speaker 1: point that, actually, okay, maybe a lot of economists and say, yeah, 750 00:44:21,280 --> 00:44:23,160 Speaker 1: we could have a three percent inflation rate, we could 751 00:44:23,160 --> 00:44:25,600 Speaker 1: have a four percent inflation rate. It's fine. But on 752 00:44:25,680 --> 00:44:29,120 Speaker 1: the other hand, like economists really seemed to think that 753 00:44:29,239 --> 00:44:31,280 Speaker 1: fight is blowing it when it's blowing. When it's blowing 754 00:44:31,320 --> 00:44:34,160 Speaker 1: it on the inflation side as opposed to the employment side. 755 00:44:34,239 --> 00:44:37,680 Speaker 1: As you said, I mean, there's definitely been it feels 756 00:44:37,680 --> 00:44:41,080 Speaker 1: like there's been a big shift um since the CPI number, 757 00:44:41,200 --> 00:44:43,200 Speaker 1: which you know, kind of makes sense. But I do 758 00:44:43,320 --> 00:44:45,440 Speaker 1: feel like a lot of this boils down to you know, 759 00:44:45,520 --> 00:44:48,760 Speaker 1: if I put on my old um like international relations 760 00:44:48,800 --> 00:44:53,400 Speaker 1: had on this feels like an absolute versus relative argument 761 00:44:53,520 --> 00:44:56,840 Speaker 1: to me, Like, on the one hand, the economy, you know, 762 00:44:57,320 --> 00:44:59,680 Speaker 1: a big important part of the economy might on the 763 00:44:59,760 --> 00:45:01,800 Speaker 1: whole will be better off in the form of a 764 00:45:02,080 --> 00:45:05,680 Speaker 1: lower unemployment rate, But on the other hand, people sort 765 00:45:05,719 --> 00:45:09,840 Speaker 1: of feel the relative disadvantage of higher prices more. I 766 00:45:09,840 --> 00:45:11,799 Speaker 1: don't know if that makes sense. I mean, I think 767 00:45:11,840 --> 00:45:14,319 Speaker 1: it makes sense. It's just it's if that's why I'm 768 00:45:14,360 --> 00:45:16,800 Speaker 1: trying to say, Like, I think that's why economists probably 769 00:45:16,880 --> 00:45:19,040 Speaker 1: feel better about it, you know, if they're if they're 770 00:45:19,080 --> 00:45:22,840 Speaker 1: looking at it from a whole perspective versus the individual. 771 00:45:22,920 --> 00:45:25,719 Speaker 1: I think that's where that cover comes from. But so 772 00:45:25,840 --> 00:45:27,840 Speaker 1: the other thing I would just say on the transitory 773 00:45:27,960 --> 00:45:31,400 Speaker 1: argument is I also think people are sort of forgetting 774 00:45:31,600 --> 00:45:35,160 Speaker 1: the time frame here. And we've spoken about this before, 775 00:45:35,360 --> 00:45:37,640 Speaker 1: but at the moment, it feels like most people are 776 00:45:37,719 --> 00:45:42,920 Speaker 1: coalescing around the first quarter of two, as you know, 777 00:45:43,080 --> 00:45:46,960 Speaker 1: the moment when price pressures should start to ease or 778 00:45:47,000 --> 00:45:50,320 Speaker 1: I guess the second quarter of two, and so you know, 779 00:45:50,440 --> 00:45:54,799 Speaker 1: at that point, if you don't see some improvement, then 780 00:45:55,040 --> 00:45:59,359 Speaker 1: it feels like the macro argument, the demand argument um 781 00:45:59,640 --> 00:46:02,759 Speaker 1: probably will be on a much much stronger footing. It 782 00:46:02,920 --> 00:46:05,239 Speaker 1: is also becoming completely clear to me that no one 783 00:46:05,360 --> 00:46:09,160 Speaker 1: knows how inflation works. There are some people who say, 784 00:46:09,320 --> 00:46:11,200 Speaker 1: I air on this, I want to air on the 785 00:46:11,280 --> 00:46:13,480 Speaker 1: side of doing too much, But I kind of don't 786 00:46:13,520 --> 00:46:15,439 Speaker 1: believe them, and I kind of like, well, you're really 787 00:46:15,480 --> 00:46:18,440 Speaker 1: like obsessed about inflation. I don't believe Jason is in 788 00:46:18,520 --> 00:46:21,600 Speaker 1: that category. I think I think, in total good faith, 789 00:46:21,920 --> 00:46:24,360 Speaker 1: he is not one of those people. I think he 790 00:46:24,440 --> 00:46:28,000 Speaker 1: actually still for his like framework, does think airring on 791 00:46:28,120 --> 00:46:31,640 Speaker 1: the side of due too much is still the right approach, 792 00:46:31,680 --> 00:46:34,440 Speaker 1: And I think he means that the big said, I 793 00:46:34,560 --> 00:46:37,560 Speaker 1: still don't feel like I have a satisfactory answer as 794 00:46:37,600 --> 00:46:41,359 Speaker 1: to what is the channel via which a modest pace 795 00:46:41,440 --> 00:46:45,120 Speaker 1: of rate hikes changes the inflation picture. I get that 796 00:46:45,239 --> 00:46:47,960 Speaker 1: you can, you know, you could do a vulcar and 797 00:46:48,080 --> 00:46:52,359 Speaker 1: induce a recession, and I believe that would probably bring 798 00:46:52,440 --> 00:46:55,160 Speaker 1: inflation down. If you're like slammed the brakes on the 799 00:46:55,239 --> 00:46:59,080 Speaker 1: economy through a series of several aggressive rate hikes, raised 800 00:46:59,160 --> 00:47:02,560 Speaker 1: unemployment when we're already in the hall, dropped aggregate demand 801 00:47:02,680 --> 00:47:06,160 Speaker 1: for housing and washing machines. You build up inventories of housing, 802 00:47:06,200 --> 00:47:08,920 Speaker 1: washing machines, price of watch of stuff falls, you probably 803 00:47:09,120 --> 00:47:13,279 Speaker 1: defeat inflation. I believe that channel exists, but I don't 804 00:47:13,280 --> 00:47:16,840 Speaker 1: think clearly like that is not a channel that Jason favors. 805 00:47:17,280 --> 00:47:22,120 Speaker 1: It's not obvious to me still what is achieved on 806 00:47:22,280 --> 00:47:25,239 Speaker 1: the inflation front from the sort of like mild like 807 00:47:25,520 --> 00:47:28,520 Speaker 1: middle path where you're not really affecting anything on the 808 00:47:28,800 --> 00:47:31,480 Speaker 1: you know, you're not really hitting anything substantial on the 809 00:47:31,560 --> 00:47:34,560 Speaker 1: demand side that would like meaningfully slow the job's recovery. 810 00:47:35,480 --> 00:47:39,000 Speaker 1: I feel like that is the part of the equation 811 00:47:39,120 --> 00:47:40,880 Speaker 1: that like in my mind I used to like, I 812 00:47:41,000 --> 00:47:45,040 Speaker 1: don't I'm not fully getting it. But this is what 813 00:47:45,280 --> 00:47:49,239 Speaker 1: the endless debate is for. I'm taking the nihilists view 814 00:47:49,440 --> 00:47:52,279 Speaker 1: of inflation, which is that like, having spent more than 815 00:47:52,320 --> 00:47:55,719 Speaker 1: a decade trying to push it up and get out 816 00:47:55,760 --> 00:47:58,320 Speaker 1: of deflation and get closer to the two percent target 817 00:47:58,400 --> 00:48:01,319 Speaker 1: and not having any success just naturally makes me very, 818 00:48:01,440 --> 00:48:04,160 Speaker 1: very nervous when people start saying that they're gonna, you know, 819 00:48:04,600 --> 00:48:06,720 Speaker 1: bring it down when it's heading in the other direction. 820 00:48:06,800 --> 00:48:10,480 Speaker 1: I'm just suspicious of all attempts to control inflation at 821 00:48:10,520 --> 00:48:16,040 Speaker 1: this point in Time's let's peg the thirty year at 822 00:48:16,160 --> 00:48:18,600 Speaker 1: zero and get out of the business of that's the 823 00:48:18,640 --> 00:48:21,680 Speaker 1: executive ZURP forever and then just let the market sort 824 00:48:21,719 --> 00:48:27,319 Speaker 1: of out. I'm with you, Karen, Oh God, alright, um? 825 00:48:27,640 --> 00:48:29,880 Speaker 1: Should we leave it there? Let's leave it there. This 826 00:48:30,080 --> 00:48:32,759 Speaker 1: has been another episode of the All Thoughts podcast. I'm 827 00:48:32,800 --> 00:48:35,880 Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy Alloway, 828 00:48:36,440 --> 00:48:39,080 Speaker 1: and I'm Joe Wisenthal. You can follow me on Twitter 829 00:48:39,280 --> 00:48:42,720 Speaker 1: at the Stalwart. Follow our guests on Twitter. Jason Furman, 830 00:48:42,880 --> 00:48:46,759 Speaker 1: professor at Harvard former chairman of President Obama ci A. 831 00:48:46,960 --> 00:48:51,200 Speaker 1: He's at Jason Furman. Follow our producer Laura Carlson. She's 832 00:48:51,320 --> 00:48:54,680 Speaker 1: at Laura M. Carlson. Follow the Bloomberg head of podcast, 833 00:48:54,760 --> 00:48:58,400 Speaker 1: Francesca Leavy at Francesca Today. And check out all of 834 00:48:58,480 --> 00:49:02,560 Speaker 1: our podcasts on Twitter under the handle AD Podcasts. Thanks 835 00:49:02,600 --> 00:49:03,040 Speaker 1: for listening.