1 00:00:02,440 --> 00:00:06,800 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:07,080 --> 00:00:09,559 Speaker 2: We're joined right now by Larry Summers Harvard, a very 3 00:00:09,560 --> 00:00:12,559 Speaker 2: special contributor here on Wall Street Week. So Larry, great 4 00:00:12,560 --> 00:00:15,000 Speaker 2: to have you with us on short notice. We've been 5 00:00:15,040 --> 00:00:17,439 Speaker 2: talking about inflation on Wall Street Week for some time now. 6 00:00:17,640 --> 00:00:19,959 Speaker 2: I know you're not hoping for more inflation, but you've 7 00:00:19,960 --> 00:00:21,919 Speaker 2: been warning about it. What do you make of the 8 00:00:22,000 --> 00:00:23,079 Speaker 2: numbers we saw today? 9 00:00:25,239 --> 00:00:29,600 Speaker 3: I was not hugely surprised by the numbers. In an 10 00:00:29,640 --> 00:00:34,040 Speaker 3: economy that's growing faster than potential, with an unemployment rate 11 00:00:34,240 --> 00:00:39,400 Speaker 3: that has a three handle, in the presence of massive 12 00:00:39,680 --> 00:00:46,080 Speaker 3: and growing budget deficits and epically easy financial conditions, the 13 00:00:46,200 --> 00:00:51,479 Speaker 3: idea that inflation would remain robust or even accelerate should 14 00:00:51,520 --> 00:00:55,080 Speaker 3: not be a surprise to anyone, and that's what this 15 00:00:55,240 --> 00:00:59,960 Speaker 3: data suggests. It was not me or some outside observed 16 00:01:00,560 --> 00:01:06,000 Speaker 3: who emphasized the concept of supercore inflation, that is, taking 17 00:01:06,080 --> 00:01:12,320 Speaker 3: out the transitory stuff and also taking out housing, and 18 00:01:12,360 --> 00:01:15,679 Speaker 3: by that measure, the inflation is running an above a 19 00:01:15,760 --> 00:01:19,240 Speaker 3: six percent rate, and the three month rate exceeds the 20 00:01:19,280 --> 00:01:23,480 Speaker 3: six month rate, and the six month rate exceeds the 21 00:01:23,520 --> 00:01:29,600 Speaker 3: one year rate. This confirms the idea that the neutral 22 00:01:29,680 --> 00:01:34,280 Speaker 3: rate is way above the two point six percent level 23 00:01:34,720 --> 00:01:38,000 Speaker 3: that the FED has been using as a north star. 24 00:01:38,760 --> 00:01:41,319 Speaker 3: In my view, puts back on the table. It is 25 00:01:41,360 --> 00:01:44,760 Speaker 3: still not what I would expect, But you have to 26 00:01:44,800 --> 00:01:48,600 Speaker 3: take seriously the possibility that the next rate move will 27 00:01:48,600 --> 00:01:55,040 Speaker 3: be upwards rather than downwards, and anything could happen. Markets 28 00:01:55,080 --> 00:02:00,720 Speaker 3: could crash, the indicators could turn down. But on current facts, 29 00:02:01,720 --> 00:02:05,639 Speaker 3: a rate cut in June, it seems to me would 30 00:02:05,680 --> 00:02:11,720 Speaker 3: be a dangerous and egregious error, comparable to the errors 31 00:02:11,760 --> 00:02:16,840 Speaker 3: the FED was making in the summer of twenty twenty 32 00:02:16,919 --> 00:02:21,360 Speaker 3: one when it just didn't get the thread on inflation. 33 00:02:21,880 --> 00:02:24,280 Speaker 2: Larry, you mentioned the supercore that, as I recalled, shared J. 34 00:02:24,480 --> 00:02:27,400 Speaker 2: Powellmong others has talked about. Specifically, it raises the issue 35 00:02:27,400 --> 00:02:29,480 Speaker 2: of are there aberrations you've seen in these data? We 36 00:02:29,520 --> 00:02:31,480 Speaker 2: hear some people saying, wait a second, this is really 37 00:02:31,520 --> 00:02:34,239 Speaker 2: housing and auto insurance. There are a couple of outliers, 38 00:02:34,480 --> 00:02:36,679 Speaker 2: and that the rest isn't as trouble saying is that right? 39 00:02:38,000 --> 00:02:38,640 Speaker 1: I don't think so. 40 00:02:38,760 --> 00:02:43,680 Speaker 3: Look, you can always find particular indicators that are up 41 00:02:43,960 --> 00:02:47,919 Speaker 3: or down, but when you're making up a story month 42 00:02:48,000 --> 00:02:54,079 Speaker 3: after month, that's a problem. When commodity prices are spiking 43 00:02:55,480 --> 00:02:59,720 Speaker 3: and those are being taken as a market indicator of 44 00:03:00,120 --> 00:03:08,400 Speaker 3: inflation expectations, when break evens have risen, when the political 45 00:03:08,480 --> 00:03:14,440 Speaker 3: economy of the country is heavily about inflation, trying to 46 00:03:14,560 --> 00:03:18,360 Speaker 3: dismiss it on an indicator by indicator. 47 00:03:18,880 --> 00:03:22,079 Speaker 1: Basis is an odd thing to do. 48 00:03:22,440 --> 00:03:29,639 Speaker 3: Look, it is a technical subject, the priced indicaes for housing. 49 00:03:30,440 --> 00:03:32,480 Speaker 3: I don't think there are many Americans who feel like 50 00:03:32,560 --> 00:03:34,519 Speaker 3: housing is becoming lots more. 51 00:03:34,320 --> 00:03:37,360 Speaker 1: Affordable these days. They really don't. 52 00:03:38,040 --> 00:03:43,120 Speaker 3: And so to argue that somehow housing isn't a source 53 00:03:43,400 --> 00:03:49,000 Speaker 3: of inflation psychology seems to me to be quite a surprising. 54 00:03:49,840 --> 00:03:51,840 Speaker 1: View to take. 55 00:03:52,560 --> 00:03:56,280 Speaker 3: Look, why is there Why are we thinking about rate 56 00:03:56,400 --> 00:04:01,040 Speaker 3: cuts when the economy is below oh, what the FED. 57 00:04:00,800 --> 00:04:03,160 Speaker 1: Thinks is the normal unemployment rate. 58 00:04:03,480 --> 00:04:07,520 Speaker 3: When the economy is growing faster than what the FED 59 00:04:07,600 --> 00:04:13,440 Speaker 3: thinks is potential, and when inflation is unambiguously above target 60 00:04:14,080 --> 00:04:17,360 Speaker 3: and plausibly accelerating. 61 00:04:18,000 --> 00:04:19,479 Speaker 1: The FED has. 62 00:04:19,440 --> 00:04:25,000 Speaker 3: Once again, in important respects, lost its way over the 63 00:04:25,080 --> 00:04:29,760 Speaker 3: last six or nine months, in the same way, making 64 00:04:29,880 --> 00:04:37,360 Speaker 3: policy and making forecasts based on hope rather than on 65 00:04:38,200 --> 00:04:43,880 Speaker 3: a hard headed look at reality. I think that the 66 00:04:43,960 --> 00:04:49,279 Speaker 3: FED did a good job of cleaning up on the 67 00:04:49,400 --> 00:04:54,120 Speaker 3: errors they had made in twenty twenty one, and I 68 00:04:54,160 --> 00:04:59,000 Speaker 3: think it's reasonable to think that they will pivot off 69 00:04:59,440 --> 00:05:03,080 Speaker 3: the error they made last fall that led markets to 70 00:05:03,120 --> 00:05:10,080 Speaker 3: be ludicrously expecting six cuts this year, and I'm hopeful 71 00:05:10,160 --> 00:05:11,200 Speaker 3: that that will happen. 72 00:05:11,880 --> 00:05:13,040 Speaker 1: But I think the FED. 73 00:05:12,960 --> 00:05:23,800 Speaker 3: Does need to learn some important lessons from this experience. 74 00:05:24,640 --> 00:05:26,640 Speaker 3: Let me say one other thing if I could, David, 75 00:05:27,440 --> 00:05:30,880 Speaker 3: there's been a lot of talk about nineteen ninety five 76 00:05:31,000 --> 00:05:33,040 Speaker 3: as some kind of useful analogy. 77 00:05:33,920 --> 00:05:34,440 Speaker 1: I think not. 78 00:05:35,120 --> 00:05:38,600 Speaker 3: The unemployment rate was five point six percent in nineteen 79 00:05:38,720 --> 00:05:43,200 Speaker 3: ninety five. Equity markets, as shown by what shown by 80 00:05:43,240 --> 00:05:46,960 Speaker 3: the fact that they more than doubled subsequently, were not. 81 00:05:48,440 --> 00:05:52,440 Speaker 1: Frothy. Particularly in nineteen. 82 00:05:52,120 --> 00:05:56,599 Speaker 3: Ninety five, we had just come off a major program 83 00:05:56,920 --> 00:06:01,480 Speaker 3: of deficit reduction rather than being in a program of 84 00:06:01,760 --> 00:06:09,039 Speaker 3: unprecedented fiscal expansion, and we had really clear evidence of 85 00:06:09,080 --> 00:06:17,000 Speaker 3: a kind we don't yet have now of productivity acceleration, and. 86 00:06:17,160 --> 00:06:20,080 Speaker 1: Interest rates were higher than they are right now. 87 00:06:21,160 --> 00:06:25,560 Speaker 3: So the case that somehow this moment looks like nineteen 88 00:06:25,680 --> 00:06:30,160 Speaker 3: ninety five and that's a reason for cutting is something 89 00:06:30,200 --> 00:06:33,000 Speaker 3: that I find inexplicable. 90 00:06:33,839 --> 00:06:36,200 Speaker 1: Another thing that seems to me is. 91 00:06:36,400 --> 00:06:43,880 Speaker 3: Problematic is the notions that are increasingly being brooded about 92 00:06:44,080 --> 00:06:47,760 Speaker 3: that the FED is going to slow QT. Of course, 93 00:06:48,240 --> 00:06:51,560 Speaker 3: one of the things that today's movement and interest rates, 94 00:06:51,600 --> 00:06:56,560 Speaker 3: the interstrates that interst rates moves that we've seen over 95 00:06:56,600 --> 00:07:02,560 Speaker 3: the last month mean is that the fed's efforts to 96 00:07:04,200 --> 00:07:08,080 Speaker 3: do parry trades in the bond market have proven to 97 00:07:08,080 --> 00:07:11,880 Speaker 3: be extremely expensive for taxpayers. 98 00:07:12,480 --> 00:07:14,680 Speaker 1: And the length of time for which. 99 00:07:15,240 --> 00:07:20,560 Speaker 3: The FED is going to be showing annual losses or 100 00:07:20,600 --> 00:07:25,280 Speaker 3: on a mark to market basis large balance sheet losses. 101 00:07:25,680 --> 00:07:30,680 Speaker 3: That looks like it's longer than we thought some months ago. 102 00:07:31,080 --> 00:07:36,960 Speaker 3: So we need a FED that stays focused on what 103 00:07:37,160 --> 00:07:41,560 Speaker 3: is very clearly the focus of the American people, which 104 00:07:41,760 --> 00:07:47,120 Speaker 3: is price stability. And I'm afraid there are some signs 105 00:07:47,160 --> 00:07:52,920 Speaker 3: that in the last few months they have lost their 106 00:07:53,000 --> 00:07:59,960 Speaker 3: focus in favor of more ambitious economic theories about preempting. 107 00:08:00,920 --> 00:08:02,520 Speaker 1: Slack that's not happening. 108 00:08:02,680 --> 00:08:05,360 Speaker 2: Were some such lar You're always the first to warness 109 00:08:05,440 --> 00:08:07,960 Speaker 2: that things can change, so we can't predict what's going 110 00:08:08,040 --> 00:08:10,240 Speaker 2: to happen in the fall and into next year. You've 111 00:08:10,240 --> 00:08:12,760 Speaker 2: said you think it's definitely a mistake for the FED 112 00:08:12,760 --> 00:08:15,920 Speaker 2: to cut in June. But given where we are now, 113 00:08:15,920 --> 00:08:17,680 Speaker 2: what you know right now, if you had to make 114 00:08:17,680 --> 00:08:20,080 Speaker 2: a decision, are we going to see any cuts this year? 115 00:08:20,520 --> 00:08:22,680 Speaker 2: And what is the likelihood of actually an increase? 116 00:08:26,320 --> 00:08:30,080 Speaker 3: Just to quibble with what you said, I said, on 117 00:08:30,400 --> 00:08:33,480 Speaker 3: current facts, I see no case. 118 00:08:33,280 --> 00:08:36,840 Speaker 1: For a cut in June. But facts can change. 119 00:08:36,960 --> 00:08:40,560 Speaker 3: Inflation indicators could come in much lower than most of 120 00:08:40,640 --> 00:08:41,559 Speaker 3: us are expecting. 121 00:08:41,920 --> 00:08:43,760 Speaker 1: The economy could turn down. 122 00:08:44,280 --> 00:08:49,640 Speaker 3: So never make an absolute judgment about policy several months 123 00:08:49,640 --> 00:08:53,760 Speaker 3: from now, because all kinds of surprises. 124 00:08:55,160 --> 00:08:55,840 Speaker 1: Could happen. 125 00:08:56,520 --> 00:09:01,040 Speaker 3: I think the odds are that the next rate cut 126 00:09:01,120 --> 00:09:05,200 Speaker 3: will be down rather than up. But I think you 127 00:09:05,320 --> 00:09:08,560 Speaker 3: have to assign a greater probability to the next rate 128 00:09:08,600 --> 00:09:12,600 Speaker 3: cut rate move being up than you did. 129 00:09:13,200 --> 00:09:14,160 Speaker 1: Several months ago. 130 00:09:14,640 --> 00:09:17,120 Speaker 3: I don't know whether it's fifteen percent or it's twenty 131 00:09:17,160 --> 00:09:22,559 Speaker 3: five percent, but somewhere in that range is what I 132 00:09:22,600 --> 00:09:26,080 Speaker 3: would say for the next rate cut rate being up. 133 00:09:26,760 --> 00:09:32,080 Speaker 3: I still think the odds probably favor another rate cut 134 00:09:33,240 --> 00:09:38,280 Speaker 3: this year, but not by very much, and not by 135 00:09:38,320 --> 00:09:42,040 Speaker 3: as much as is priced into the markets. Even after 136 00:09:42,120 --> 00:09:49,280 Speaker 3: the adjustment that we have seen. So reality markets are 137 00:09:49,400 --> 00:09:55,800 Speaker 3: adjusting to reality. The FED is adjusting to reality, but 138 00:09:55,880 --> 00:10:01,600 Speaker 3: I think the process is slower than would be ideal. 139 00:10:01,920 --> 00:10:03,600 Speaker 2: Laurie, let me ask you what for someone'st be the 140 00:10:03,640 --> 00:10:05,760 Speaker 2: scary question, which is does the FED have the power 141 00:10:06,120 --> 00:10:08,800 Speaker 2: to get their arms around inflation at this point through 142 00:10:08,840 --> 00:10:11,400 Speaker 2: monetary policy or are there other factors that are larger 143 00:10:11,440 --> 00:10:14,000 Speaker 2: than what they can really effect over the shorter medium term. 144 00:10:16,200 --> 00:10:17,240 Speaker 1: I big FED. 145 00:10:17,120 --> 00:10:24,800 Speaker 3: Has considerable influence over inflation expectations, which are an important 146 00:10:24,880 --> 00:10:32,000 Speaker 3: determinant of subsequent inflation. I think monetary restraint does influence 147 00:10:32,040 --> 00:10:40,160 Speaker 3: the economy, which feeds through into the inflation process. But gosh, 148 00:10:40,240 --> 00:10:44,600 Speaker 3: we ought to be doing everything we can on the 149 00:10:44,679 --> 00:10:45,680 Speaker 3: supply side. 150 00:10:45,800 --> 00:10:47,679 Speaker 1: Anytime anybody sees. 151 00:10:47,400 --> 00:10:51,680 Speaker 3: A bottleneck, we ought to be going after it. 152 00:10:51,880 --> 00:10:53,640 Speaker 1: I am all for. 153 00:10:55,640 --> 00:11:03,400 Speaker 3: Effective competition policy that restrain means price increases. I think 154 00:11:03,440 --> 00:11:09,760 Speaker 3: the most important competition policy is maintaining economic openness and 155 00:11:10,720 --> 00:11:16,400 Speaker 3: allowing competition for US goods from less expensive foreign goods. 156 00:11:16,720 --> 00:11:21,079 Speaker 3: That's the most important competition policy. That's the most important. 157 00:11:21,200 --> 00:11:26,640 Speaker 3: Anti gouging policy, that's the most important. Contain excessive profit 158 00:11:26,800 --> 00:11:31,960 Speaker 3: margins policy. And so I'm sorry to see the extent 159 00:11:32,080 --> 00:11:42,280 Speaker 3: of bipartisan consensus in favor of policies that are relatively protectionist. 160 00:11:43,000 --> 00:11:48,160 Speaker 3: Do people really think there is an overwhelming danger that 161 00:11:48,200 --> 00:11:51,400 Speaker 3: we're going to have excessive production of batteries in the 162 00:11:51,400 --> 00:11:56,840 Speaker 3: world given climate change? Do people really think there's an 163 00:11:56,920 --> 00:12:00,080 Speaker 3: overwhelming danger that we're going to elect we're going to 164 00:12:00,120 --> 00:12:05,480 Speaker 3: have an excessive effort to use solar power. If not, 165 00:12:06,000 --> 00:12:13,439 Speaker 3: I worry in inflationary times about policymakers decrying the growth 166 00:12:13,480 --> 00:12:16,679 Speaker 3: of capacity, and there's been a certain amount of that 167 00:12:17,320 --> 00:12:25,600 Speaker 3: on Secretary Yellen's trip to Shida and in US rhetoric 168 00:12:26,200 --> 00:12:28,079 Speaker 3: on a bipartisan basis. 169 00:12:28,440 --> 00:12:32,719 Speaker 1: So yes, we should complement the FED with. 170 00:12:34,160 --> 00:12:40,280 Speaker 3: Fiscal policies that are oriented towards restoring credibility, recognizing the 171 00:12:40,360 --> 00:12:44,240 Speaker 3: defense spending that's going to need to come and allowing 172 00:12:44,360 --> 00:12:50,479 Speaker 3: for it, and with microeconomic policies that are competition promoting, 173 00:12:51,000 --> 00:12:55,760 Speaker 3: the most important of which is openness to the global 174 00:12:55,800 --> 00:13:01,880 Speaker 3: economy with respect to goods, with respect to to labor, 175 00:13:02,480 --> 00:13:04,120 Speaker 3: with respect. 176 00:13:05,600 --> 00:13:07,840 Speaker 1: With respect to the flow of capital. 177 00:13:08,120 --> 00:13:11,720 Speaker 2: So, Larry, you mentioned nineteen ninety five in productivity. Is 178 00:13:11,760 --> 00:13:13,960 Speaker 2: there some hope perhaps that we can get some relief 179 00:13:13,960 --> 00:13:16,920 Speaker 2: from inflation because of a general of AI. You're on 180 00:13:16,960 --> 00:13:19,120 Speaker 2: the board of Open AI. We had Jamie Dimond this 181 00:13:19,120 --> 00:13:20,920 Speaker 2: week come up with his letter saying it's like the 182 00:13:21,120 --> 00:13:22,920 Speaker 2: steam engine you at one point, I think that was 183 00:13:22,920 --> 00:13:25,680 Speaker 2: like fire. Is there a prospect that we could get 184 00:13:25,720 --> 00:13:29,079 Speaker 2: some downside risk, as it were to inflation from general 185 00:13:29,120 --> 00:13:29,760 Speaker 2: of AI. 186 00:13:31,320 --> 00:13:33,959 Speaker 1: Andy, it's a question about horizon shaved. 187 00:13:34,080 --> 00:13:42,559 Speaker 3: And again I never make completely confident predictions because the 188 00:13:42,600 --> 00:13:44,720 Speaker 3: one thing we know about. 189 00:13:44,400 --> 00:13:48,160 Speaker 1: The economy is that it surprises us. 190 00:13:49,760 --> 00:13:53,680 Speaker 3: I think that's potentially a very important factor if you 191 00:13:53,760 --> 00:13:57,040 Speaker 3: look three or four years out. I would be very 192 00:13:57,080 --> 00:14:01,640 Speaker 3: surprised if it was an important factor in. 193 00:14:01,080 --> 00:14:02,120 Speaker 1: The next year or two. 194 00:14:02,880 --> 00:14:06,200 Speaker 3: And I think the fact that open AI or not 195 00:14:06,280 --> 00:14:11,880 Speaker 3: open AI artificial intelligence is a potential competitor for commentators 196 00:14:13,000 --> 00:14:18,160 Speaker 3: leads this to kind of have more saliency commentary. 197 00:14:17,200 --> 00:14:21,440 Speaker 1: Than it otherwise would. 198 00:14:21,880 --> 00:14:24,760 Speaker 3: So yes, for the long run, I think this could 199 00:14:24,800 --> 00:14:29,120 Speaker 3: be a huge event for inflation, a huge event for 200 00:14:29,480 --> 00:14:33,479 Speaker 3: productivity growth. But I'd be pretty surprised if the effects 201 00:14:33,520 --> 00:14:36,000 Speaker 3: were really large in the short run. 202 00:14:36,080 --> 00:14:38,400 Speaker 2: And I thank you for mentioning commentators and not interviewers 203 00:14:38,480 --> 00:14:41,160 Speaker 2: in that sense. I really appreciate that one last question 204 00:14:41,240 --> 00:14:44,920 Speaker 2: is important to Bloomberg audiences in particular financial conditions. You 205 00:14:45,040 --> 00:14:48,600 Speaker 2: referred to the signaling of cut's last fall. Financial conditions 206 00:14:48,600 --> 00:14:50,520 Speaker 2: have been sort of off to the races here. To 207 00:14:50,560 --> 00:14:53,040 Speaker 2: what extent do you think financial conditions played a significant 208 00:14:53,120 --> 00:14:54,640 Speaker 2: role in these numbers we got today? 209 00:14:56,640 --> 00:14:59,360 Speaker 1: Well, I think there's no question that. 210 00:15:00,640 --> 00:15:05,480 Speaker 3: The twelve trillion dollars of wealth that have been created 211 00:15:06,120 --> 00:15:13,960 Speaker 3: have contributed to greater spending, which has contributed to inflationary pressure. 212 00:15:14,520 --> 00:15:18,840 Speaker 3: I think the availability of credit has had similar kinds 213 00:15:19,080 --> 00:15:24,600 Speaker 3: of effects, So I don't I think it's hard to 214 00:15:24,720 --> 00:15:29,280 Speaker 3: quantify precisely, but I think there's no question. 215 00:15:30,960 --> 00:15:34,240 Speaker 1: That financial conditions have had a role. 216 00:15:34,800 --> 00:15:40,000 Speaker 3: But look, David, sometimes the indicators or different indicators are 217 00:15:40,040 --> 00:15:46,200 Speaker 3: pointing in different directions. This time, activity is super fast, 218 00:15:47,480 --> 00:15:57,640 Speaker 3: Unemployment is very low, fiscal is highly expansionary, financial conditions 219 00:15:57,720 --> 00:15:59,359 Speaker 3: are very loose. 220 00:16:00,240 --> 00:16:00,920 Speaker 1: On the ground. 221 00:16:01,000 --> 00:16:08,800 Speaker 3: Inflation measures are above target and possibly accelerating. What is 222 00:16:09,080 --> 00:16:17,479 Speaker 3: the theory of our rate cut into that that configuration 223 00:16:18,240 --> 00:16:22,800 Speaker 3: right now? I don't think there is one, and I 224 00:16:22,840 --> 00:16:29,400 Speaker 3: think that the FED has a communication challenge in keeping 225 00:16:29,440 --> 00:16:33,000 Speaker 3: it on the table, because again, anything can happen. It 226 00:16:33,080 --> 00:16:37,320 Speaker 3: can be financial accidents, there can be sudden changes towards 227 00:16:37,400 --> 00:16:44,320 Speaker 3: reduced employment. There can be global developments, so never rule 228 00:16:44,520 --> 00:16:50,320 Speaker 3: anything out, but I think there is a communication challenge 229 00:16:50,920 --> 00:16:53,119 Speaker 3: around the fact. 230 00:16:52,840 --> 00:16:58,600 Speaker 1: That in the mainstream scenario, we do not need rate 231 00:16:58,680 --> 00:16:59,640 Speaker 1: cuts right now.