Speaker 1: Bloomberg Audio Studios, podcasts, radio news, The.
Speaker 2: Money, I need the Money, money, money, tariffs, egg prices, commodities, geopolitics, war,
Speaker 2: all of these things affect inflation.
Speaker 3: I'm Barry Ritolts, and we're going to bring you an
Speaker 3: extra special in large edition of At the Money, where
Speaker 3: we're going to discuss how investors should think about inflation
Speaker 3: to help us unpack all of this and what it
Speaker 3: means for your portfolio. Let's bring in Austin Goldsby. He's
Speaker 3: President of the Federal Reserve Bank of Chicago. He is
Speaker 3: a voting member of the f o MC. Previously, he
Speaker 3: was chairman of the Council of Economic Advisors and was
Speaker 3: in President Barack Obama's cabinet. So let's just start out
Speaker 3: with a simple question. You've talked about the golden path
Speaker 3: between inflation and recession. What lesson should the Federal Reserve
Speaker 3: take from our recent and rather successful about with disinflation.
Speaker 1: Yeah, Verry, thanks for having me on. I called the
Speaker 1: golden path. You remember, as I came into the Fed,
Speaker 1: I started at the very beginning of twenty twenty three.
Speaker 1: In December of twenty twenty two, it was the Bloomberg
Speaker 1: Economists who said there was a one hundred percent chance
Speaker 1: of recession in twenty twenty three, because the historical record
Speaker 1: suggested that to get rid of inflation you had to
Speaker 1: have a big, nasty recession. That's what had happened at
Speaker 1: old times. And what I called the Golden Path was
Speaker 1: in twenty three we had as almost as large ad
Speaker 1: in inflation that we have ever had.
Speaker 4: In a single year.
Speaker 1: And not only was there not a recession, the unemployment
Speaker 1: rate never even got above four percent, a level that
Speaker 1: a lot of folks thought is below full employment. So
Speaker 1: that was a golden Path year, and I think one
Speaker 1: of the principal lessons. There were a couple of principal
Speaker 1: lessons that explain how it was possible. One was the
Speaker 1: supply side was healing on the supply chain, and there
Speaker 1: was a big surge of labor force participation from a
Speaker 1: number of groups. I think a lot of it tied
Speaker 1: to the workforce flexibility, but if you looked at self
Speaker 1: described disabled workers, highest labor force participation ever, so you
Speaker 1: got a number of positive supply shocks that are exactly
Speaker 1: it allowed for the immaculate disinflation, which the people who
Speaker 1: thought that was impossible use that phrase mockingly, but that
Speaker 1: is exactly what happened. And now fast forward to today.
Speaker 1: So in a way, transitory became Steve Leisman's phrase transsatory.
Speaker 1: But it was all because the supply side. When you
Speaker 1: get negative supply shocks, they do heal. But one of
Speaker 1: the lessons of COVID was that might take longer than
Speaker 1: you thought ahead of time because the supply chain is complicated,
Speaker 1: the modern supply chain. And you know that the Chicago
Speaker 1: FED is the seventh District, and we're like the Saudi
Speaker 1: Arabia of auto production.
Speaker 4: In the seventh district, we.
Speaker 1: Got Indiana, Illinois, Michigan, Wisconsin. If you go talk to
Speaker 1: the auto suppliers, that something like the mother of all
Speaker 1: supply chains. Okay, so a single car has up to
Speaker 1: thirty thousand different parts and components in it, and every
Speaker 1: single one of them has its own supply chain. And
Speaker 1: you've probably seen some of these people that will track
Speaker 1: one individual part through the US supply chain and the
Speaker 1: way that it transistor came from Asia. Then they sent
Speaker 1: it to Mexico, they put it into a capacitor, they
Speaker 1: put the capacitor in a seat, get sent to the
Speaker 1: seat manufacturer in Michigan, it goes to Canada, comes back
Speaker 1: to the US, finally gets put in a car, and
Speaker 1: you go buy it on the lot and drive it out.
Speaker 1: In an environment like that, the spillovers can't take a
Speaker 1: long time. That's what we saw in COVID. That you
Speaker 1: couldn't get computer chips, so you couldn't make the electronic.
Speaker 4: Seat, so they couldn't make the car. The price of
Speaker 4: cars went up.
Speaker 1: Then that meant the rental car companies couldn't get new cars,
Speaker 1: so the price of rental cars went up. Then the
Speaker 1: whatever the US car salesman who used the rental car,
Speaker 1: and so that thing played out over years, not weeks.
Speaker 1: My fear now is that if you're going to do
Speaker 1: something negative on the supply side, and make no doubt
Speaker 1: about it, tariffs on intermediate goods like steel, like parts
Speaker 1: and components like the things that are getting sent from
Speaker 1: auto factories from suppliers in Canada that are getting sent
Speaker 1: over the border to be fabricated into the car in Michigan.
Speaker 1: That's a negative supply shock. And I hope that it's
Speaker 1: small enough or short lived enough that it doesn't reteach
Speaker 1: us the lessons of COVID, But it might The lesson
Speaker 1: of COVID was that can have if it's big enough,
Speaker 1: that can have a longer lasting impact than you might
Speaker 1: have thought at the beginning.
Speaker 3: So let me ask you a question about that recession
Speaker 3: that never showed up. Forget one hundred percent chance of
Speaker 3: recession twenty two, twenty three, twenty four, half of the
Speaker 3: Wall Street economists were forecasting recessions, and no less in
Speaker 3: August and well regarded economist than Lauren Summers was saying, Hey,
Speaker 3: you'll need ten percent unemployment to bring this inflation down.
Speaker 2: What was it.
Speaker 3: About the historical models that seems to have gotten this
Speaker 3: economic cycle so wrong?
Speaker 1: Well, that's the critical question, and Summers said it either
Speaker 1: had to go to ten percent or if it went
Speaker 1: to six percent, it would take five years of unemployment
Speaker 1: above six percent. I think the thing that got wrong
Speaker 1: that worldview got wrong is that it was rooted in
Speaker 1: almost all previous business cycles were regular demand driven business cycles,
Speaker 1: and that's the logic.
Speaker 4: In a demand driven.
Speaker 1: Business cycle, you overstimulate, inflation goes up, inflation expectations go up,
Speaker 1: and you have a hell of a time getting it
Speaker 1: out of there.
Speaker 4: As you know, I was an old.
Speaker 1: Dear friend with Paul Volker, and he was a mentor
Speaker 1: of mine and a personal he wrote really and one
Speaker 1: of the lessons of the Vulgar episode, which was a
Speaker 1: time when inflation expectations went way up, is that it's
Speaker 1: extremely painful if the FED or the central Bank does
Speaker 1: not have credibility.
Speaker 4: It's extremely painful to.
Speaker 1: Get rid of inflation in an environment where the FED
Speaker 1: is credible. So that even as headline CPI inflation was
Speaker 1: approaching double digits, the FED was announcing, we will get
Speaker 1: inflation back to two percent. And if you go look
Speaker 1: at the market estimation from tips or from others, people
Speaker 1: believed it. If you looked at the what do you
Speaker 1: think inflation will be in five years, they were saying
Speaker 1: it will be back to two percent.
Speaker 4: That is a.
Speaker 1: Sign of credibility of the central bank. So A, you
Speaker 1: must have credibility, and B you must have the good
Speaker 1: fortune that positive supply shocks in our case one a
Speaker 1: big increase in labor force participation that was enabled I
Speaker 1: think by some of the more flexible work arrangements. Two
Speaker 1: that we had had such a horrible supply chain experience
Speaker 1: coming through COVID with shortages.
Speaker 4: Et cetera. That could heal, and then three a pretty.
Speaker 1: Subst stanchel uptick in the rate of productivity growth. That
Speaker 1: combination was a lovely combination that allowed inflation to come
Speaker 1: down without a recession. And I think that the chat
Speaker 1: GPTAI version of a central bank would have got it
Speaker 1: wrong because it would have been based on a training
Speaker 1: sample that was a whole bunch of demand shocks, and
Speaker 1: this really wasn't a demand shock induced business cycle. And
Speaker 1: you know, look, it doesn't take somebody with the market
Speaker 1: acumen that you have, Barry, and it certainly doesn't take
Speaker 1: a PhD to look out and recognize that the COVID
Speaker 1: business cycle was driven by industries that are not normally cyclical.
Speaker 1: Normally cyclicals like consumer durables or business investment are the
Speaker 1: thing that drives the recession. And here the demand for
Speaker 1: consumer durables went up because people could not spend money
Speaker 1: on services. But this is the only recession we ever
Speaker 1: had that came from people not being able to go
Speaker 1: to the dentist.
Speaker 4: And the thing.
Speaker 1: About that, and like the dentist is normally recession proof.
Speaker 1: And so that's why we everybody should have been more
Speaker 1: humble in pronouncing what the future would be coming out
Speaker 1: of such a weird o business cycle and we're still kind.
Speaker 4: Of living with that.
Speaker 3: So let's talk about humility. You have specifically mentioned that
Speaker 3: the FED needs to be quote more careful and more
Speaker 3: prudent about rate cuts due to the risk of inflation
Speaker 3: kicking back up again. So what specific inflation indicators are
Speaker 3: you watching closely in twenty twenty five.
Speaker 4: Okay, I'm thankful, Barry. I thought you were gonna be like, let's.
Speaker 1: Talk about humility, you once said, and I thought you're
Speaker 1: going to be like, You're You're not a humble person. Look,
Speaker 1: I have actually been before we got to this dust
Speaker 1: in the air period where everybody's talking about major either
Speaker 1: geopolitical changes to conditions or changes of policy conditions that
Speaker 1: might affect inflation. I've been more confident. I've had comfort
Speaker 1: we're still on the path to get inflation to two
Speaker 1: percent and we could cut rates.
Speaker 4: Now.
Speaker 1: I'm open to being proven wrong, and if I adjust the.
Speaker 4: I'm in the data dog caucus.
Speaker 1: If the data come in and the outlook is changing,
Speaker 1: for sure, I would change my view. But the I
Speaker 1: think it's critical to answer your question specifically, what should
Speaker 1: we look at inflation? I think number one, you want
Speaker 1: to look at the through line on inflation, not get
Speaker 1: overly indexed on monthly gyrations. It's a very noisy series, okay,
Speaker 1: So looking over a longer period and what matters is
Speaker 1: the new months coming in the inflation that's a twelve
Speaker 1: month backward looking average, which is usually what we're reporting
Speaker 1: in Eleven of the twelve months that are included in
Speaker 1: that are not new information.
Speaker 4: We already knew that.
Speaker 1: We knew, for example, that the blip up in inflation
Speaker 1: last January more than a year ago, was going to
Speaker 1: fall out the back and so that it would be
Speaker 1: very likely that the twelve month average would start dropping
Speaker 1: here in the first quarter, but that would not be
Speaker 1: a sign that the inflation is falling right now. The
Speaker 1: inflation already fell.
Speaker 4: It is just like how we do the average.
Speaker 1: So Number one, I put a lot of weight on
Speaker 1: the new months coming in and trying to get the
Speaker 1: through line of.
Speaker 4: That, not just react to one month.
Speaker 1: And second thing that helps me that I find outpal
Speaker 1: is looking at the components of core inflation. Now I
Speaker 1: know it can drive people nuts, like to drive my
Speaker 1: mom nuts, that we put our focus on core inflation
Speaker 1: and not food and energy inflation, because.
Speaker 4: My mom's like, what do you mean you're not.
Speaker 1: Paying attention to food and energy inflation that's very public
Speaker 1: top of mind for her. It's because those are so variable,
Speaker 1: they're up there, down we think the better observation is
Speaker 1: to look at core, and then within core, there's goods,
Speaker 1: there's services, there's housing. Our problem has been goods inflation
Speaker 1: had returned to deflation and.
Speaker 4: Was looking good.
Speaker 1: Housing inflation's in the biggest puzzle, and services inflation pretty persistent.
Speaker 1: The things that have given me a little more confidence
Speaker 1: lately is that even as we had a bit of
Speaker 1: a blip up in the inflation here, the components still
Speaker 1: look pretty good. The housing inflation has finally started falling
Speaker 1: on a pretty persistent basis, as we've been wanting it to,
Speaker 1: Services getting closer, much closer to what it was pre COVID,
Speaker 1: housing back close to what.
Speaker 4: It was pre COVID.
Speaker 1: And the thing that has been firmed up here in
Speaker 1: the last couple of months has actually been goods.
Speaker 4: And the thing about goods.
Speaker 1: Inflation is, as you know, and as some of my
Speaker 1: research showed before I ever got to the FED, goods
Speaker 1: inflation over long periods is actually deflation. The two percent
Speaker 1: inflation that we were at before COVID was housing three
Speaker 1: and a half the four per year, services two and
Speaker 1: a half per year, and goods minus a half to
Speaker 1: minus one per year. And so I think it's overwhelmingly
Speaker 1: likely that goods will go back to that very long
Speaker 1: standing trend and as it does, so that's Those are
Speaker 1: the kinds of things that give me confidence.
Speaker 3: So you mentioned housing. We seem to have two ongoing
Speaker 3: issues with housing. The first is it appears that since
Speaker 3: the financial crisis we've significantly underbuilt single family homes as
Speaker 3: built yeah as the population can and multifamily. So you
Speaker 3: have the population growing, you still have fairly decent immigration numbers.
Speaker 3: Too much demand, not enough supply. The first question is
Speaker 3: what can we do to generate more supply in housing?
Speaker 3: Do higher rates operate as a headwind against builders, contractors,
Speaker 3: developed helopers putting up more housing.
Speaker 1: Look, this is a tangled This is a tangled web
Speaker 1: that is critically important to the economy. You've seen the
Speaker 1: relative price of housing go way up post COVID. But
Speaker 1: the one thing that I want to highlight is, yes,
Speaker 1: it's very noticeable, but it's not new. If you look
Speaker 1: like I said, for the whole decade plus pre COVID,
Speaker 1: you had house prices going up three and a half
Speaker 1: percent a year, goods prices going down one percent a year.
Speaker 1: If you just compare housing relative price versus going to
Speaker 1: costco relative price a thing that compounds five percent a
Speaker 1: year for fifteen or twenty years, Yeah, that's gonna be
Speaker 1: a really big difference at the end of that time.
Speaker 1: And so I think one component that people are seeing,
Speaker 1: and they're not wrong. You see the frustration of young people.
Speaker 1: They say, you know, when my dad was twenty five
Speaker 1: years old, he on one job could afford a decent house,
Speaker 1: and I can't buy a condo. And they're not wrong.
Speaker 1: The relative price of housing has gone way up. I
Speaker 1: think some component of.
Speaker 4: That is.
Speaker 1: Regulatory in nature and business permits. And I've been convinced
Speaker 1: by a bunch of the evidence that land use regulation
Speaker 1: have made it very difficult for us to build housing
Speaker 1: of any form, single family homes, multi family homes. I
Speaker 1: have a I did some research. It was about the
Speaker 1: construction industry, and another thing going on is that overall
Speaker 1: productivity in the construction industry has not only been stagnant,
Speaker 1: actually over long periods of time, been negative that we've
Speaker 1: got worse at building the same things that that we
Speaker 1: did twenty thirty years ago.
Speaker 4: So I think that's part of it.
Speaker 1: And I think you're highlighting that rates do have.
Speaker 4: A twin.
Speaker 1: They do have a twin twined effect. One as they
Speaker 1: affect demand, but the other is they do affect construction.
Speaker 1: And so I think in a higher rate environment, if
Speaker 1: you're trying to cool the economy, this.
Speaker 4: Is always true.
Speaker 1: But the shift of more and more of our mortgages
Speaker 1: to being thirty year fixed than they were saying two
Speaker 1: thousand and seven have meant that changing rates can have
Speaker 1: more of a lock in effect than and it kind
Speaker 1: of dull the immediate impact of monetary policy than it
Speaker 1: does in a more immediate mortgage impact environment.
Speaker 3: Let's walk out a little bit about housing owner's equivalent.
Speaker 3: Rent has been this bugaboo for a long time that
Speaker 3: some people following the financial crisis said had understated housing inflation.
Speaker 3: Now there's some people saying something similar. How do we
Speaker 3: And I know the FED has looked at this. There's
Speaker 3: been a number of white papers that have come out
Speaker 3: of the FED. How should we think about the equivalent
Speaker 3: of renting versus ownership? In terms of the impact on inflation.
Speaker 1: You raise several critical points if we're going to walk
Speaker 1: out on housing and inflation. Point one, it's not single
Speaker 1: family home sales prices, its owner equivalent rent plus rents.
Speaker 1: And the reason it's that is because part of buying
Speaker 1: a house is a financial asset. So if you're buying
Speaker 1: a house and the values going up and you're selling
Speaker 1: it for more, and if there's speculation, that's not really housing.
Speaker 1: What you're trying to get, that's not really inflation, but
Speaker 1: you're trying to get for housing inflation is something like
Speaker 1: the CPI how much more does it cost for the
Speaker 1: same housing services, And that's why they try to compute
Speaker 1: owner equivalent rent and similar Point two, that's there's a
Speaker 1: heavy lag in the way they do it. So in
Speaker 1: a way, the critics were correct that it was understating
Speaker 1: inflation on the way up, and the other critics are
Speaker 1: right that now it's overstating inflation on the way down.
Speaker 1: For the same reason that it's kind of like if
Speaker 1: you were measuring average rent and people were raising that
Speaker 1: it was a time when the market was raising the rent.
Speaker 1: It's gonna take time before that shows up in average
Speaker 1: rents because the contracts last for a year and turning over,
Speaker 1: so you get this automatic lag in there. I think
Speaker 1: that has been a major component of measured housing inflation
Speaker 1: because if you go look at market based measures like
Speaker 1: from Zillo or others, they were showing rapid drops in
Speaker 1: the inflation rate back to or in some cases even
Speaker 1: below what inflation was before COVID started. And so that's
Speaker 1: been the puzzle. That's it's been our impatience. Why hasn't
Speaker 1: it shown up yet? That's been true for quite a while,
Speaker 1: and the lag theory it should start showing up.
Speaker 4: Well, finally it has, and.
Speaker 1: That's why I have a little more confidence that the
Speaker 1: housing inflation improvement will be lasting.
Speaker 4: Is it was, it.
Speaker 1: Took a long time to run up, and now it's
Speaker 1: finally started coming down, So I think it's it's probably
Speaker 1: got legs of coming down. So I think those are
Speaker 1: two key components on the housing inflation side.
Speaker 4: We could get it.
Speaker 1: We could even go into a third layer of wonky,
Speaker 1: but it's more subtle, which is the component. If you
Speaker 1: think about rents and say market rents in Zillo, or
Speaker 1: who are renters versus who are new home buyers, they're
Speaker 1: sort of different markets, and so it doesn't have to
Speaker 1: be that the inflation rate of the zilo market rents
Speaker 1: matches the owner equivalent rents that they're measuring at the BLS,
Speaker 1: because they might be different. New renters and existing tenants
Speaker 1: might be a little bit too separate markets.
Speaker 3: It makes a lot of sense. You mentioned the two
Speaker 3: percent inflation target. In the twenty tens, an era dominated
Speaker 3: by monetary policy, the FED had a two percent inflation target.
Speaker 3: Now in the twenty twenties, we have a primarily fiscally
Speaker 3: driven economy, or at least post pandemic. That's what it
Speaker 3: feels like. You've said, you've turned one hundred and eighty
Speaker 3: degrees on the inflation target question since your initial thoughts
Speaker 3: in twenty twelve. Tell us about that. Explain that.
Speaker 1: Okay, so in twenty twelve there had been vague targets.
Speaker 1: In twenty twelve, I believe is when the FED officially said,
Speaker 1: where you have a two point zero zero zero percent
Speaker 1: inflation target, and you go back and look, I wasn't
Speaker 1: at the FED.
Speaker 4: I was critical.
Speaker 1: I was publicly critical on the grounds that that conveyed
Speaker 1: a way false sense of precision. To me, that if
Speaker 1: I asked you just take the take the standard deviation
Speaker 1: of the inflation series and ask yourself how many observations
Speaker 1: would you need to get to be able to distinguish
Speaker 1: between a two point zero percent inflation rate and a
Speaker 1: two point one percent inflation rate.
Speaker 4: And the answer was like decades.
Speaker 1: You need decades a monthly observation before you could tell no, no,
Speaker 1: this is two point one not two point zero. So
Speaker 1: that was my critique. Fast forward to the inflation. Now
Speaker 1: it goes way up. And the one wonky thing that
Speaker 1: you got to know, what you already know, Barry, but
Speaker 1: the average person might not know, is the two point
Speaker 1: zero percent inflation target is for personal consumption expenditure inflation
Speaker 1: PCEE inflation. That's not CPI. It's a little different. They
Speaker 1: have different weightings of what goes into it. We believe
Speaker 1: the PCEE measure, which instead of the CPI measures a
Speaker 1: basket and the pce measures everything consumers spend money on,
Speaker 1: so it's the better measure.
Speaker 4: But just as a technical.
Speaker 1: CPI of two point three is about the equivalent of
Speaker 1: a PCEE of two point zero. Okay, we go through COVID,
Speaker 1: the inflation post COVID source to almost double digits. In
Speaker 1: long run inflation expectations measured in the market never go up.
Speaker 1: They remain exactly and they're off of CPI. Importantly, they
Speaker 1: remain exactly two point three percent. And so I said,
Speaker 1: either that's the biggest coincidence in the history of price indices,
Speaker 1: or else the inflation target of two point zero is
Speaker 1: serving as exactly the anchor that it's advocates said it
Speaker 1: would be.
Speaker 4: And at that point I changed one hundred and eighty degrees.
Speaker 1: And I not only am I not opposed to the
Speaker 1: inflation target, I think it's critical, it's vital, and it
Speaker 1: is serving as exactly the anchor that we needed.
Speaker 3: So it's a magnet, not necessarily a landing spot. Really
Speaker 3: interesting you mentioned will be.
Speaker 1: The landing spot it will be.
Speaker 4: You may get.
Speaker 3: You mentioned inflation expectations when when we look at some
Speaker 3: of the survey data in twenty twenty and twenty one,
Speaker 3: right before inflation really exploded higher, they were really low.
Speaker 3: And then go fast forward to June twenty twenty two,
Speaker 3: just as inflation was peaking, they were really high. How
Speaker 3: close attention does the FED pay to inflation expectation? It
Speaker 3: seems that it's very much a lagging not leading indicator.
Speaker 1: Now fascinating in a way a I should have said
Speaker 1: at the beginning.
Speaker 4: You know the rules.
Speaker 1: I'm not allowed to speak for the fomcing er, the FED,
Speaker 1: only for myself. That gives them great relief, That gives
Speaker 1: my colleagues great relive. In the world of food safety,
Speaker 1: the thing that characterizes almost every worker in the food
Speaker 1: supply chain is frustration. Why do we have to wash
Speaker 1: our hands all the time. There's no nobody's ever getting
Speaker 1: sick from the food, And it's only because they're washing
Speaker 1: their hands all the time that nobody's getting sick from
Speaker 1: the food. I feel that way a little bit about
Speaker 1: inflation expectations. They are lagging indicators if the FED has
Speaker 1: credibility and is doing it right. As soon as that's
Speaker 1: not true, they become very instructive, forward looking indicators. The
Speaker 1: only thing that I want to emphasize as well is
Speaker 1: now we've actually started to get a couple of observations
Speaker 1: where not short run expectations, but longer run expectations actually
Speaker 1: bumped up in the University of Michigan survey. And since
Speaker 1: I had said this about how important inflation expectations, where
Speaker 1: as a measure. A couple of folks asked me, well,
Speaker 1: does that make you nervous? And yes, but a I've
Speaker 1: always said I value the market based measures more than
Speaker 1: survey based measures, and one month is no months. But
Speaker 1: make no doubt about it. If what we started to
Speaker 1: see was persistent, a persistent increase in long run expectations
Speaker 1: of inflation in surveys and market and for example, if
Speaker 1: you started to see long rates rising one for one
Speaker 1: with long run inflation expectations, then that fundamentally, to me,
Speaker 1: means the Fed's job is not done, and we've got
Speaker 1: to go address that because if you's that's one of
Speaker 1: the main lessons of the vulgar experience and central banks
Speaker 1: around the world. If the expectations start rising, it is
Speaker 1: really hard to slay. You don't have to just slay
Speaker 1: the inflation dragon. You have to go convince people that
Speaker 1: it's going to stick. And it kind of the only
Speaker 1: way we know, the only way we know central banks
Speaker 1: have been able to convey that is to have awful
Speaker 1: recessions where they grind down wages to convince people look
Speaker 1: that we will keep the job market as suppressed as
Speaker 1: we need to. As proved that We're serious, so we
Speaker 1: don't ever want to get back into that situation if
Speaker 1: we can help.
Speaker 3: The last question on inflation, you have mentioned that prioritizing
Speaker 3: real economic channels the real economy over wealth effects. Can
Speaker 3: you can you explain this perspective. Why does the real
Speaker 3: economy channels matter more to the wealth effects. I always
Speaker 3: thought the wealth effect was so dramatically over st because
Speaker 3: you know, it's typically the wealthy that owns most of
Speaker 3: the stocks, and the real economy is the real economy.
Speaker 3: But I'm curious as to your perspective.
Speaker 1: Yeah, look, I would expand it a little more than
Speaker 1: just the wealth effect.
Speaker 4: My view is the.
Speaker 1: Federal Reserve Act tells us we should be looking at
Speaker 1: the real economy, maximizing employment and stabilizing prices. The stock
Speaker 1: market other financial markets can influence those two things, partly
Speaker 1: through the wealth effect. But by the very first speech
Speaker 1: I gave when I got to the FED, I went
Speaker 1: out to Indiana and a factory where they where they
Speaker 1: make our vs. A community college where they train people
Speaker 1: for advanced manufacturing, and I said this, look, the FED,
Speaker 1: by law, is supposed to be looking at the real
Speaker 1: economy and financial markets to the extent they're affecting the
Speaker 1: real economy. We should pay attention to them. But that's it, Like,
Speaker 1: let's remember the priorities. I quantitatively agree with you. I
Speaker 1: think there are a number of people who overweight the
Speaker 1: wealth effect and its impact on consumer spending. And I
Speaker 1: don't want us to get into a mindset that the
Speaker 1: FED has an accomplishment. If it does something and it
Speaker 1: changes the financial markets, that's an indirect in my worldview.
Speaker 1: If you get the real economy right, the financial markets
Speaker 1: will benefit. But doing something to try to create higher
Speaker 1: equity prices or benefit the financial market, that should not
Speaker 1: be the fed's goal.
Speaker 4: The Fed's goal should be.
Speaker 1: Stabilized prices, maximize employment, and focus on the realese.
Speaker 3: And if you do both of those, stock market tends
Speaker 3: to do well under those.
Speaker 4: That's how it should be. That's how it should be.
Speaker 3: So you've mentioned that conditions have not materially changed despite
Speaker 3: recent economic data. Do you still expect to see interest
Speaker 3: rates a fair bit lower over the next twelve to
Speaker 3: eighteen months.
Speaker 4: I still do.
Speaker 1: If we can get out of this dusty environment, look
Speaker 1: at the horizon and look at the through line. And
Speaker 1: when we're having a bunch of uncertainties that are about
Speaker 1: things that will increase prices.
Speaker 4: It's just throwing.
Speaker 1: Lots and lots of dust in the air and it's
Speaker 1: hard to see the through line. I still think that
Speaker 1: underneath there is a robust, healthy economy with employment pretty
Speaker 1: much stable at full employment, inflation headed back to two percent,
Speaker 1: GDP growth solid and strong, and we can get back
Speaker 1: to the resting point of normal in that kind of environment.
Speaker 1: If we're going to have an escalating trade war that
Speaker 1: leads to higher prices and a stagflationary kind of environment
Speaker 1: where GDP growth is falling, I could revise my economic outlook,
Speaker 1: but I still think if we can get past this
Speaker 1: dusty part over twelve to eighteen months, the SEP dot
Speaker 1: plot tells you that the vast majority of members of
Speaker 1: the committee believe that the ultimate settling point for rates
Speaker 1: is well below where we are today, and so I
Speaker 1: still think that we can get there.
Speaker 3: And our final question, I love your self description. You
Speaker 3: have said, I'm neither a hawk nor a dove. I'm
Speaker 3: a data dog. So now we have to add right, hawks, dogs, birds, hawks,
Speaker 3: doves and dogs. So explain how you, as a data dog,
Speaker 3: how does that affect your approach to monetary policy, especially
Speaker 3: in twenty twenty five you're a voting member.
Speaker 4: I try to get out there either.
Speaker 1: The first rule of the data dog kennel is that
Speaker 1: there's a time for walking, and there's a time for sniffin,
Speaker 1: and know the difference, and the time for sniffin is
Speaker 1: exactly when there is not clarity, okay, And that is
Speaker 1: go get every data series you can, every frequency, don't
Speaker 1: throw anything away. If you can get private sector price information.
Speaker 4: Get it.
Speaker 1: If you are looking at the job market, don't just
Speaker 1: look at payroll employment when there's a bunch of stuff
Speaker 1: with population growth and immigration that make it noisier. Don't
Speaker 1: just look at the unemployment rate when labor force participation
Speaker 1: changes can can affect it. Take ratios of unemployment, of vacancies,
Speaker 1: look at.
Speaker 4: The hiring weight and the quit rate.
Speaker 1: Get out and talk to the business people in our regions.
Speaker 1: And the kind of inform that goes into the base book.
Speaker 1: All of those things are more real time than just
Speaker 1: the data series.
Speaker 4: But that mentality that.
Speaker 1: If you have a question, get out there and sniff.
Speaker 1: That's the essence of the data dog credo. If you
Speaker 1: want to and look. It comes with some downsides. If
Speaker 1: you are more theoretical, ideological, there are times when you
Speaker 1: might be right and you can get to the answer quicker.
Speaker 1: But this seems like a very uncertain environment, unusual, unprecedented
Speaker 1: business cycles, nothing like things we've seen before. So just personally,
Speaker 1: I'm more comfortable with that kind of approach.
Speaker 3: So to wrap up, if you're an investor interested in
Speaker 3: what's going on in the economy, looking at inflation, looking
Speaker 3: at monetary policy, it's simply not as black and white
Speaker 3: as you often hear about. Many of the vote members
Speaker 3: of the FOMC look at the data that's out there
Speaker 3: as complex and not binary. Don't think that what you're
Speaker 3: hearing in these headline reports are remotely giving you the
Speaker 3: full color of what's happening. There are obviously a whole
Speaker 3: lot of moving parts here, a lot of complexity, and
Speaker 3: it's reassuring when you hear from people like Chicago Federal
Speaker 3: Reserve President and FMC voting member Austin Goolsby, who are
Speaker 3: data driven, who do focus on filtering out the noise
Speaker 3: but paying attention to the most recent trends, but following
Speaker 3: the through line. It's not simple, it's complicated. We really
Speaker 3: need to bring a more intelligent approach than we often
Speaker 3: see as investors. We think about what the Federal Reserve
Speaker 3: is going to do in response to what in flat
Speaker 3: is doing. Perhaps if we had a little more sophisticated
Speaker 3: approach and a little less binary, we wouldn't see people
Speaker 3: being so wrong about when the Fed's gonna cut, when
Speaker 3: a recession is going to happen, what's going on overall
Speaker 3: with the robustness of the economy. Hey, it turns out
Speaker 3: that economics is hard. It's complicated. There are lots of
Speaker 3: moving parts. We oversimplify this at our own risk. I'm
Speaker 3: Barry Redolts. You've been listening to Bloomberg's At the Money