Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: We're joined right now by Larry Summers Harvard, a very
Speaker 2: special contributor here on Wall Street Week. So Larry, great
Speaker 2: to have you with us on short notice. We've been
Speaker 2: talking about inflation on Wall Street Week for some time now.
Speaker 2: I know you're not hoping for more inflation, but you've
Speaker 2: been warning about it. What do you make of the
Speaker 2: numbers we saw today?
Speaker 3: I was not hugely surprised by the numbers. In an
Speaker 3: economy that's growing faster than potential, with an unemployment rate
Speaker 3: that has a three handle, in the presence of massive
Speaker 3: and growing budget deficits and epically easy financial conditions, the
Speaker 3: idea that inflation would remain robust or even accelerate should
Speaker 3: not be a surprise to anyone, and that's what this
Speaker 3: data suggests. It was not me or some outside observed
Speaker 3: who emphasized the concept of supercore inflation, that is, taking
Speaker 3: out the transitory stuff and also taking out housing, and
Speaker 3: by that measure, the inflation is running an above a
Speaker 3: six percent rate, and the three month rate exceeds the
Speaker 3: six month rate, and the six month rate exceeds the
Speaker 3: one year rate. This confirms the idea that the neutral
Speaker 3: rate is way above the two point six percent level
Speaker 3: that the FED has been using as a north star.
Speaker 3: In my view, puts back on the table. It is
Speaker 3: still not what I would expect, But you have to
Speaker 3: take seriously the possibility that the next rate move will
Speaker 3: be upwards rather than downwards, and anything could happen. Markets
Speaker 3: could crash, the indicators could turn down. But on current facts,
Speaker 3: a rate cut in June, it seems to me would
Speaker 3: be a dangerous and egregious error, comparable to the errors
Speaker 3: the FED was making in the summer of twenty twenty
Speaker 3: one when it just didn't get the thread on inflation.
Speaker 2: Larry, you mentioned the supercore that, as I recalled, shared J.
Speaker 2: Powellmong others has talked about. Specifically, it raises the issue
Speaker 2: of are there aberrations you've seen in these data? We
Speaker 2: hear some people saying, wait a second, this is really
Speaker 2: housing and auto insurance. There are a couple of outliers,
Speaker 2: and that the rest isn't as trouble saying is that right?
Speaker 1: I don't think so.
Speaker 3: Look, you can always find particular indicators that are up
Speaker 3: or down, but when you're making up a story month
Speaker 3: after month, that's a problem. When commodity prices are spiking
Speaker 3: and those are being taken as a market indicator of
Speaker 3: inflation expectations, when break evens have risen, when the political
Speaker 3: economy of the country is heavily about inflation, trying to
Speaker 3: dismiss it on an indicator by indicator.
Speaker 1: Basis is an odd thing to do.
Speaker 3: Look, it is a technical subject, the priced indicaes for housing.
Speaker 3: I don't think there are many Americans who feel like
Speaker 3: housing is becoming lots more.
Speaker 1: Affordable these days. They really don't.
Speaker 3: And so to argue that somehow housing isn't a source
Speaker 3: of inflation psychology seems to me to be quite a surprising.
Speaker 1: View to take.
Speaker 3: Look, why is there Why are we thinking about rate
Speaker 3: cuts when the economy is below oh, what the FED.
Speaker 1: Thinks is the normal unemployment rate.
Speaker 3: When the economy is growing faster than what the FED
Speaker 3: thinks is potential, and when inflation is unambiguously above target
Speaker 3: and plausibly accelerating.
Speaker 1: The FED has.
Speaker 3: Once again, in important respects, lost its way over the
Speaker 3: last six or nine months, in the same way, making
Speaker 3: policy and making forecasts based on hope rather than on
Speaker 3: a hard headed look at reality. I think that the
Speaker 3: FED did a good job of cleaning up on the
Speaker 3: errors they had made in twenty twenty one, and I
Speaker 3: think it's reasonable to think that they will pivot off
Speaker 3: the error they made last fall that led markets to
Speaker 3: be ludicrously expecting six cuts this year, and I'm hopeful
Speaker 3: that that will happen.
Speaker 1: But I think the FED.
Speaker 3: Does need to learn some important lessons from this experience.
Speaker 3: Let me say one other thing if I could, David,
Speaker 3: there's been a lot of talk about nineteen ninety five
Speaker 3: as some kind of useful analogy.
Speaker 1: I think not.
Speaker 3: The unemployment rate was five point six percent in nineteen
Speaker 3: ninety five. Equity markets, as shown by what shown by
Speaker 3: the fact that they more than doubled subsequently, were not.
Speaker 1: Frothy. Particularly in nineteen.
Speaker 3: Ninety five, we had just come off a major program
Speaker 3: of deficit reduction rather than being in a program of
Speaker 3: unprecedented fiscal expansion, and we had really clear evidence of
Speaker 3: a kind we don't yet have now of productivity acceleration, and.
Speaker 1: Interest rates were higher than they are right now.
Speaker 3: So the case that somehow this moment looks like nineteen
Speaker 3: ninety five and that's a reason for cutting is something
Speaker 3: that I find inexplicable.
Speaker 1: Another thing that seems to me is.
Speaker 3: Problematic is the notions that are increasingly being brooded about
Speaker 3: that the FED is going to slow QT. Of course,
Speaker 3: one of the things that today's movement and interest rates,
Speaker 3: the interstrates that interst rates moves that we've seen over
Speaker 3: the last month mean is that the fed's efforts to
Speaker 3: do parry trades in the bond market have proven to
Speaker 3: be extremely expensive for taxpayers.
Speaker 1: And the length of time for which.
Speaker 3: The FED is going to be showing annual losses or
Speaker 3: on a mark to market basis large balance sheet losses.
Speaker 3: That looks like it's longer than we thought some months ago.
Speaker 3: So we need a FED that stays focused on what
Speaker 3: is very clearly the focus of the American people, which
Speaker 3: is price stability. And I'm afraid there are some signs
Speaker 3: that in the last few months they have lost their
Speaker 3: focus in favor of more ambitious economic theories about preempting.
Speaker 1: Slack that's not happening.
Speaker 2: Were some such lar You're always the first to warness
Speaker 2: that things can change, so we can't predict what's going
Speaker 2: to happen in the fall and into next year. You've
Speaker 2: said you think it's definitely a mistake for the FED
Speaker 2: to cut in June. But given where we are now,
Speaker 2: what you know right now, if you had to make
Speaker 2: a decision, are we going to see any cuts this year?
Speaker 2: And what is the likelihood of actually an increase?
Speaker 3: Just to quibble with what you said, I said, on
Speaker 3: current facts, I see no case.
Speaker 1: For a cut in June. But facts can change.
Speaker 3: Inflation indicators could come in much lower than most of
Speaker 3: us are expecting.
Speaker 1: The economy could turn down.
Speaker 3: So never make an absolute judgment about policy several months
Speaker 3: from now, because all kinds of surprises.
Speaker 1: Could happen.
Speaker 3: I think the odds are that the next rate cut
Speaker 3: will be down rather than up. But I think you
Speaker 3: have to assign a greater probability to the next rate
Speaker 3: cut rate move being up than you did.
Speaker 1: Several months ago.
Speaker 3: I don't know whether it's fifteen percent or it's twenty
Speaker 3: five percent, but somewhere in that range is what I
Speaker 3: would say for the next rate cut rate being up.
Speaker 3: I still think the odds probably favor another rate cut
Speaker 3: this year, but not by very much, and not by
Speaker 3: as much as is priced into the markets. Even after
Speaker 3: the adjustment that we have seen. So reality markets are
Speaker 3: adjusting to reality. The FED is adjusting to reality, but
Speaker 3: I think the process is slower than would be ideal.
Speaker 2: Laurie, let me ask you what for someone'st be the
Speaker 2: scary question, which is does the FED have the power
Speaker 2: to get their arms around inflation at this point through
Speaker 2: monetary policy or are there other factors that are larger
Speaker 2: than what they can really effect over the shorter medium term.
Speaker 1: I big FED.
Speaker 3: Has considerable influence over inflation expectations, which are an important
Speaker 3: determinant of subsequent inflation. I think monetary restraint does influence
Speaker 3: the economy, which feeds through into the inflation process. But gosh,
Speaker 3: we ought to be doing everything we can on the
Speaker 3: supply side.
Speaker 1: Anytime anybody sees.
Speaker 3: A bottleneck, we ought to be going after it.
Speaker 1: I am all for.
Speaker 3: Effective competition policy that restrain means price increases. I think
Speaker 3: the most important competition policy is maintaining economic openness and
Speaker 3: allowing competition for US goods from less expensive foreign goods.
Speaker 3: That's the most important competition policy. That's the most important.
Speaker 3: Anti gouging policy, that's the most important. Contain excessive profit
Speaker 3: margins policy. And so I'm sorry to see the extent
Speaker 3: of bipartisan consensus in favor of policies that are relatively protectionist.
Speaker 3: Do people really think there is an overwhelming danger that
Speaker 3: we're going to have excessive production of batteries in the
Speaker 3: world given climate change? Do people really think there's an
Speaker 3: overwhelming danger that we're going to elect we're going to
Speaker 3: have an excessive effort to use solar power. If not,
Speaker 3: I worry in inflationary times about policymakers decrying the growth
Speaker 3: of capacity, and there's been a certain amount of that
Speaker 3: on Secretary Yellen's trip to Shida and in US rhetoric
Speaker 3: on a bipartisan basis.
Speaker 1: So yes, we should complement the FED with.
Speaker 3: Fiscal policies that are oriented towards restoring credibility, recognizing the
Speaker 3: defense spending that's going to need to come and allowing
Speaker 3: for it, and with microeconomic policies that are competition promoting,
Speaker 3: the most important of which is openness to the global
Speaker 3: economy with respect to goods, with respect to to labor,
Speaker 3: with respect.
Speaker 1: With respect to the flow of capital.
Speaker 2: So, Larry, you mentioned nineteen ninety five in productivity. Is
Speaker 2: there some hope perhaps that we can get some relief
Speaker 2: from inflation because of a general of AI. You're on
Speaker 2: the board of Open AI. We had Jamie Dimond this
Speaker 2: week come up with his letter saying it's like the
Speaker 2: steam engine you at one point, I think that was
Speaker 2: like fire. Is there a prospect that we could get
Speaker 2: some downside risk, as it were to inflation from general
Speaker 2: of AI.
Speaker 1: Andy, it's a question about horizon shaved.
Speaker 3: And again I never make completely confident predictions because the
Speaker 3: one thing we know about.
Speaker 1: The economy is that it surprises us.
Speaker 3: I think that's potentially a very important factor if you
Speaker 3: look three or four years out. I would be very
Speaker 3: surprised if it was an important factor in.
Speaker 1: The next year or two.
Speaker 3: And I think the fact that open AI or not
Speaker 3: open AI artificial intelligence is a potential competitor for commentators
Speaker 3: leads this to kind of have more saliency commentary.
Speaker 1: Than it otherwise would.
Speaker 3: So yes, for the long run, I think this could
Speaker 3: be a huge event for inflation, a huge event for
Speaker 3: productivity growth. But I'd be pretty surprised if the effects
Speaker 3: were really large in the short run.
Speaker 2: And I thank you for mentioning commentators and not interviewers
Speaker 2: in that sense. I really appreciate that one last question
Speaker 2: is important to Bloomberg audiences in particular financial conditions. You
Speaker 2: referred to the signaling of cut's last fall. Financial conditions
Speaker 2: have been sort of off to the races here. To
Speaker 2: what extent do you think financial conditions played a significant
Speaker 2: role in these numbers we got today?
Speaker 1: Well, I think there's no question that.
Speaker 3: The twelve trillion dollars of wealth that have been created
Speaker 3: have contributed to greater spending, which has contributed to inflationary pressure.
Speaker 3: I think the availability of credit has had similar kinds
Speaker 3: of effects, So I don't I think it's hard to
Speaker 3: quantify precisely, but I think there's no question.
Speaker 1: That financial conditions have had a role.
Speaker 3: But look, David, sometimes the indicators or different indicators are
Speaker 3: pointing in different directions. This time, activity is super fast,
Speaker 3: Unemployment is very low, fiscal is highly expansionary, financial conditions
Speaker 3: are very loose.
Speaker 1: On the ground.
Speaker 3: Inflation measures are above target and possibly accelerating. What is
Speaker 3: the theory of our rate cut into that that configuration
Speaker 3: right now? I don't think there is one, and I
Speaker 3: think that the FED has a communication challenge in keeping
Speaker 3: it on the table, because again, anything can happen. It
Speaker 3: can be financial accidents, there can be sudden changes towards
Speaker 3: reduced employment. There can be global developments, so never rule
Speaker 3: anything out, but I think there is a communication challenge
Speaker 3: around the fact.
Speaker 1: That in the mainstream scenario, we do not need rate
Speaker 1: cuts right now.