WEBVTT - Larry Summers Talks CPI, Fed Moves 0:00:02.440 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:07.080 --> 0:00:09.559 We're joined right now by Larry Summers Harvard, a very 0:00:09.560 --> 0:00:12.559 special contributor here on Wall Street Week. So Larry, great 0:00:12.560 --> 0:00:15.000 to have you with us on short notice. We've been 0:00:15.040 --> 0:00:17.439 talking about inflation on Wall Street Week for some time now. 0:00:17.640 --> 0:00:19.959 I know you're not hoping for more inflation, but you've 0:00:19.960 --> 0:00:21.919 been warning about it. What do you make of the 0:00:22.000 --> 0:00:23.079 numbers we saw today? 0:00:25.239 --> 0:00:29.600 I was not hugely surprised by the numbers. In an 0:00:29.640 --> 0:00:34.040 economy that's growing faster than potential, with an unemployment rate 0:00:34.240 --> 0:00:39.400 that has a three handle, in the presence of massive 0:00:39.680 --> 0:00:46.080 and growing budget deficits and epically easy financial conditions, the 0:00:46.200 --> 0:00:51.479 idea that inflation would remain robust or even accelerate should 0:00:51.520 --> 0:00:55.080 not be a surprise to anyone, and that's what this 0:00:55.240 --> 0:00:59.960 data suggests. It was not me or some outside observed 0:01:00.560 --> 0:01:06.000 who emphasized the concept of supercore inflation, that is, taking 0:01:06.080 --> 0:01:12.320 out the transitory stuff and also taking out housing, and 0:01:12.360 --> 0:01:15.679 by that measure, the inflation is running an above a 0:01:15.760 --> 0:01:19.240 six percent rate, and the three month rate exceeds the 0:01:19.280 --> 0:01:23.480 six month rate, and the six month rate exceeds the 0:01:23.520 --> 0:01:29.600 one year rate. This confirms the idea that the neutral 0:01:29.680 --> 0:01:34.280 rate is way above the two point six percent level 0:01:34.720 --> 0:01:38.000 that the FED has been using as a north star. 0:01:38.760 --> 0:01:41.319 In my view, puts back on the table. It is 0:01:41.360 --> 0:01:44.760 still not what I would expect, But you have to 0:01:44.800 --> 0:01:48.600 take seriously the possibility that the next rate move will 0:01:48.600 --> 0:01:55.040 be upwards rather than downwards, and anything could happen. Markets 0:01:55.080 --> 0:02:00.720 could crash, the indicators could turn down. But on current facts, 0:02:01.720 --> 0:02:05.639 a rate cut in June, it seems to me would 0:02:05.680 --> 0:02:11.720 be a dangerous and egregious error, comparable to the errors 0:02:11.760 --> 0:02:16.840 the FED was making in the summer of twenty twenty 0:02:16.919 --> 0:02:21.360 one when it just didn't get the thread on inflation. 0:02:21.880 --> 0:02:24.280 Larry, you mentioned the supercore that, as I recalled, shared J. 0:02:24.480 --> 0:02:27.400 Powellmong others has talked about. Specifically, it raises the issue 0:02:27.400 --> 0:02:29.480 of are there aberrations you've seen in these data? We 0:02:29.520 --> 0:02:31.480 hear some people saying, wait a second, this is really 0:02:31.520 --> 0:02:34.239 housing and auto insurance. There are a couple of outliers, 0:02:34.480 --> 0:02:36.679 and that the rest isn't as trouble saying is that right? 0:02:38.000 --> 0:02:38.640 I don't think so. 0:02:38.760 --> 0:02:43.680 Look, you can always find particular indicators that are up 0:02:43.960 --> 0:02:47.919 or down, but when you're making up a story month 0:02:48.000 --> 0:02:54.079 after month, that's a problem. When commodity prices are spiking 0:02:55.480 --> 0:02:59.720 and those are being taken as a market indicator of 0:03:00.120 --> 0:03:08.400 inflation expectations, when break evens have risen, when the political 0:03:08.480 --> 0:03:14.440 economy of the country is heavily about inflation, trying to 0:03:14.560 --> 0:03:18.360 dismiss it on an indicator by indicator. 0:03:18.880 --> 0:03:22.079 Basis is an odd thing to do. 0:03:22.440 --> 0:03:29.639 Look, it is a technical subject, the priced indicaes for housing. 0:03:30.440 --> 0:03:32.480 I don't think there are many Americans who feel like 0:03:32.560 --> 0:03:34.519 housing is becoming lots more. 0:03:34.320 --> 0:03:37.360 Affordable these days. They really don't. 0:03:38.040 --> 0:03:43.120 And so to argue that somehow housing isn't a source 0:03:43.400 --> 0:03:49.000 of inflation psychology seems to me to be quite a surprising. 0:03:49.840 --> 0:03:51.840 View to take. 0:03:52.560 --> 0:03:56.280 Look, why is there Why are we thinking about rate 0:03:56.400 --> 0:04:01.040 cuts when the economy is below oh, what the FED. 0:04:00.800 --> 0:04:03.160 Thinks is the normal unemployment rate. 0:04:03.480 --> 0:04:07.520 When the economy is growing faster than what the FED 0:04:07.600 --> 0:04:13.440 thinks is potential, and when inflation is unambiguously above target 0:04:14.080 --> 0:04:17.360 and plausibly accelerating. 0:04:18.000 --> 0:04:19.479 The FED has. 0:04:19.440 --> 0:04:25.000 Once again, in important respects, lost its way over the 0:04:25.080 --> 0:04:29.760 last six or nine months, in the same way, making 0:04:29.880 --> 0:04:37.360 policy and making forecasts based on hope rather than on 0:04:38.200 --> 0:04:43.880 a hard headed look at reality. I think that the 0:04:43.960 --> 0:04:49.279 FED did a good job of cleaning up on the 0:04:49.400 --> 0:04:54.120 errors they had made in twenty twenty one, and I 0:04:54.160 --> 0:04:59.000 think it's reasonable to think that they will pivot off 0:04:59.440 --> 0:05:03.080 the error they made last fall that led markets to 0:05:03.120 --> 0:05:10.080 be ludicrously expecting six cuts this year, and I'm hopeful 0:05:10.160 --> 0:05:11.200 that that will happen. 0:05:11.880 --> 0:05:13.040 But I think the FED. 0:05:12.960 --> 0:05:23.800 Does need to learn some important lessons from this experience. 0:05:24.640 --> 0:05:26.640 Let me say one other thing if I could, David, 0:05:27.440 --> 0:05:30.880 there's been a lot of talk about nineteen ninety five 0:05:31.000 --> 0:05:33.040 as some kind of useful analogy. 0:05:33.920 --> 0:05:34.440 I think not. 0:05:35.120 --> 0:05:38.600 The unemployment rate was five point six percent in nineteen 0:05:38.720 --> 0:05:43.200 ninety five. Equity markets, as shown by what shown by 0:05:43.240 --> 0:05:46.960 the fact that they more than doubled subsequently, were not. 0:05:48.440 --> 0:05:52.440 Frothy. Particularly in nineteen. 0:05:52.120 --> 0:05:56.599 Ninety five, we had just come off a major program 0:05:56.920 --> 0:06:01.480 of deficit reduction rather than being in a program of 0:06:01.760 --> 0:06:09.039 unprecedented fiscal expansion, and we had really clear evidence of 0:06:09.080 --> 0:06:17.000 a kind we don't yet have now of productivity acceleration, and. 0:06:17.160 --> 0:06:20.080 Interest rates were higher than they are right now. 0:06:21.160 --> 0:06:25.560 So the case that somehow this moment looks like nineteen 0:06:25.680 --> 0:06:30.160 ninety five and that's a reason for cutting is something 0:06:30.200 --> 0:06:33.000 that I find inexplicable. 0:06:33.839 --> 0:06:36.200 Another thing that seems to me is. 0:06:36.400 --> 0:06:43.880 Problematic is the notions that are increasingly being brooded about 0:06:44.080 --> 0:06:47.760 that the FED is going to slow QT. Of course, 0:06:48.240 --> 0:06:51.560 one of the things that today's movement and interest rates, 0:06:51.600 --> 0:06:56.560 the interstrates that interst rates moves that we've seen over 0:06:56.600 --> 0:07:02.560 the last month mean is that the fed's efforts to 0:07:04.200 --> 0:07:08.080 do parry trades in the bond market have proven to 0:07:08.080 --> 0:07:11.880 be extremely expensive for taxpayers. 0:07:12.480 --> 0:07:14.680 And the length of time for which. 0:07:15.240 --> 0:07:20.560 The FED is going to be showing annual losses or 0:07:20.600 --> 0:07:25.280 on a mark to market basis large balance sheet losses. 0:07:25.680 --> 0:07:30.680 That looks like it's longer than we thought some months ago. 0:07:31.080 --> 0:07:36.960 So we need a FED that stays focused on what 0:07:37.160 --> 0:07:41.560 is very clearly the focus of the American people, which 0:07:41.760 --> 0:07:47.120 is price stability. And I'm afraid there are some signs 0:07:47.160 --> 0:07:52.920 that in the last few months they have lost their 0:07:53.000 --> 0:07:59.960 focus in favor of more ambitious economic theories about preempting. 0:08:00.920 --> 0:08:02.520 Slack that's not happening. 0:08:02.680 --> 0:08:05.360 Were some such lar You're always the first to warness 0:08:05.440 --> 0:08:07.960 that things can change, so we can't predict what's going 0:08:08.040 --> 0:08:10.240 to happen in the fall and into next year. You've 0:08:10.240 --> 0:08:12.760 said you think it's definitely a mistake for the FED 0:08:12.760 --> 0:08:15.920 to cut in June. But given where we are now, 0:08:15.920 --> 0:08:17.680 what you know right now, if you had to make 0:08:17.680 --> 0:08:20.080 a decision, are we going to see any cuts this year? 0:08:20.520 --> 0:08:22.680 And what is the likelihood of actually an increase? 0:08:26.320 --> 0:08:30.080 Just to quibble with what you said, I said, on 0:08:30.400 --> 0:08:33.480 current facts, I see no case. 0:08:33.280 --> 0:08:36.840 For a cut in June. But facts can change. 0:08:36.960 --> 0:08:40.560 Inflation indicators could come in much lower than most of 0:08:40.640 --> 0:08:41.559 us are expecting. 0:08:41.920 --> 0:08:43.760 The economy could turn down. 0:08:44.280 --> 0:08:49.640 So never make an absolute judgment about policy several months 0:08:49.640 --> 0:08:53.760 from now, because all kinds of surprises. 0:08:55.160 --> 0:08:55.840 Could happen. 0:08:56.520 --> 0:09:01.040 I think the odds are that the next rate cut 0:09:01.120 --> 0:09:05.200 will be down rather than up. But I think you 0:09:05.320 --> 0:09:08.560 have to assign a greater probability to the next rate 0:09:08.600 --> 0:09:12.600 cut rate move being up than you did. 0:09:13.200 --> 0:09:14.160 Several months ago. 0:09:14.640 --> 0:09:17.120 I don't know whether it's fifteen percent or it's twenty 0:09:17.160 --> 0:09:22.559 five percent, but somewhere in that range is what I 0:09:22.600 --> 0:09:26.080 would say for the next rate cut rate being up. 0:09:26.760 --> 0:09:32.080 I still think the odds probably favor another rate cut 0:09:33.240 --> 0:09:38.280 this year, but not by very much, and not by 0:09:38.320 --> 0:09:42.040 as much as is priced into the markets. Even after 0:09:42.120 --> 0:09:49.280 the adjustment that we have seen. So reality markets are 0:09:49.400 --> 0:09:55.800 adjusting to reality. The FED is adjusting to reality, but 0:09:55.880 --> 0:10:01.600 I think the process is slower than would be ideal. 0:10:01.920 --> 0:10:03.600 Laurie, let me ask you what for someone'st be the 0:10:03.640 --> 0:10:05.760 scary question, which is does the FED have the power 0:10:06.120 --> 0:10:08.800 to get their arms around inflation at this point through 0:10:08.840 --> 0:10:11.400 monetary policy or are there other factors that are larger 0:10:11.440 --> 0:10:14.000 than what they can really effect over the shorter medium term. 0:10:16.200 --> 0:10:17.240 I big FED. 0:10:17.120 --> 0:10:24.800 Has considerable influence over inflation expectations, which are an important 0:10:24.880 --> 0:10:32.000 determinant of subsequent inflation. I think monetary restraint does influence 0:10:32.040 --> 0:10:40.160 the economy, which feeds through into the inflation process. But gosh, 0:10:40.240 --> 0:10:44.600 we ought to be doing everything we can on the 0:10:44.679 --> 0:10:45.680 supply side. 0:10:45.800 --> 0:10:47.679 Anytime anybody sees. 0:10:47.400 --> 0:10:51.680 A bottleneck, we ought to be going after it. 0:10:51.880 --> 0:10:53.640 I am all for. 0:10:55.640 --> 0:11:03.400 Effective competition policy that restrain means price increases. I think 0:11:03.440 --> 0:11:09.760 the most important competition policy is maintaining economic openness and 0:11:10.720 --> 0:11:16.400 allowing competition for US goods from less expensive foreign goods. 0:11:16.720 --> 0:11:21.079 That's the most important competition policy. That's the most important. 0:11:21.200 --> 0:11:26.640 Anti gouging policy, that's the most important. Contain excessive profit 0:11:26.800 --> 0:11:31.960 margins policy. And so I'm sorry to see the extent 0:11:32.080 --> 0:11:42.280 of bipartisan consensus in favor of policies that are relatively protectionist. 0:11:43.000 --> 0:11:48.160 Do people really think there is an overwhelming danger that 0:11:48.200 --> 0:11:51.400 we're going to have excessive production of batteries in the 0:11:51.400 --> 0:11:56.840 world given climate change? Do people really think there's an 0:11:56.920 --> 0:12:00.080 overwhelming danger that we're going to elect we're going to 0:12:00.120 --> 0:12:05.480 have an excessive effort to use solar power. If not, 0:12:06.000 --> 0:12:13.439 I worry in inflationary times about policymakers decrying the growth 0:12:13.480 --> 0:12:16.679 of capacity, and there's been a certain amount of that 0:12:17.320 --> 0:12:25.600 on Secretary Yellen's trip to Shida and in US rhetoric 0:12:26.200 --> 0:12:28.079 on a bipartisan basis. 0:12:28.440 --> 0:12:32.719 So yes, we should complement the FED with. 0:12:34.160 --> 0:12:40.280 Fiscal policies that are oriented towards restoring credibility, recognizing the 0:12:40.360 --> 0:12:44.240 defense spending that's going to need to come and allowing 0:12:44.360 --> 0:12:50.479 for it, and with microeconomic policies that are competition promoting, 0:12:51.000 --> 0:12:55.760 the most important of which is openness to the global 0:12:55.800 --> 0:13:01.880 economy with respect to goods, with respect to to labor, 0:13:02.480 --> 0:13:04.120 with respect. 0:13:05.600 --> 0:13:07.840 With respect to the flow of capital. 0:13:08.120 --> 0:13:11.720 So, Larry, you mentioned nineteen ninety five in productivity. Is 0:13:11.760 --> 0:13:13.960 there some hope perhaps that we can get some relief 0:13:13.960 --> 0:13:16.920 from inflation because of a general of AI. You're on 0:13:16.960 --> 0:13:19.120 the board of Open AI. We had Jamie Dimond this 0:13:19.120 --> 0:13:20.920 week come up with his letter saying it's like the 0:13:21.120 --> 0:13:22.920 steam engine you at one point, I think that was 0:13:22.920 --> 0:13:25.680 like fire. Is there a prospect that we could get 0:13:25.720 --> 0:13:29.079 some downside risk, as it were to inflation from general 0:13:29.120 --> 0:13:29.760 of AI. 0:13:31.320 --> 0:13:33.959 Andy, it's a question about horizon shaved. 0:13:34.080 --> 0:13:42.559 And again I never make completely confident predictions because the 0:13:42.600 --> 0:13:44.720 one thing we know about. 0:13:44.400 --> 0:13:48.160 The economy is that it surprises us. 0:13:49.760 --> 0:13:53.680 I think that's potentially a very important factor if you 0:13:53.760 --> 0:13:57.040 look three or four years out. I would be very 0:13:57.080 --> 0:14:01.640 surprised if it was an important factor in. 0:14:01.080 --> 0:14:02.120 The next year or two. 0:14:02.880 --> 0:14:06.200 And I think the fact that open AI or not 0:14:06.280 --> 0:14:11.880 open AI artificial intelligence is a potential competitor for commentators 0:14:13.000 --> 0:14:18.160 leads this to kind of have more saliency commentary. 0:14:17.200 --> 0:14:21.440 Than it otherwise would. 0:14:21.880 --> 0:14:24.760 So yes, for the long run, I think this could 0:14:24.800 --> 0:14:29.120 be a huge event for inflation, a huge event for 0:14:29.480 --> 0:14:33.479 productivity growth. But I'd be pretty surprised if the effects 0:14:33.520 --> 0:14:36.000 were really large in the short run. 0:14:36.080 --> 0:14:38.400 And I thank you for mentioning commentators and not interviewers 0:14:38.480 --> 0:14:41.160 in that sense. I really appreciate that one last question 0:14:41.240 --> 0:14:44.920 is important to Bloomberg audiences in particular financial conditions. You 0:14:45.040 --> 0:14:48.600 referred to the signaling of cut's last fall. Financial conditions 0:14:48.600 --> 0:14:50.520 have been sort of off to the races here. To 0:14:50.560 --> 0:14:53.040 what extent do you think financial conditions played a significant 0:14:53.120 --> 0:14:54.640 role in these numbers we got today? 0:14:56.640 --> 0:14:59.360 Well, I think there's no question that. 0:15:00.640 --> 0:15:05.480 The twelve trillion dollars of wealth that have been created 0:15:06.120 --> 0:15:13.960 have contributed to greater spending, which has contributed to inflationary pressure. 0:15:14.520 --> 0:15:18.840 I think the availability of credit has had similar kinds 0:15:19.080 --> 0:15:24.600 of effects, So I don't I think it's hard to 0:15:24.720 --> 0:15:29.280 quantify precisely, but I think there's no question. 0:15:30.960 --> 0:15:34.240 That financial conditions have had a role. 0:15:34.800 --> 0:15:40.000 But look, David, sometimes the indicators or different indicators are 0:15:40.040 --> 0:15:46.200 pointing in different directions. This time, activity is super fast, 0:15:47.480 --> 0:15:57.640 Unemployment is very low, fiscal is highly expansionary, financial conditions 0:15:57.720 --> 0:15:59.359 are very loose. 0:16:00.240 --> 0:16:00.920 On the ground. 0:16:01.000 --> 0:16:08.800 Inflation measures are above target and possibly accelerating. What is 0:16:09.080 --> 0:16:17.479 the theory of our rate cut into that that configuration 0:16:18.240 --> 0:16:22.800 right now? I don't think there is one, and I 0:16:22.840 --> 0:16:29.400 think that the FED has a communication challenge in keeping 0:16:29.440 --> 0:16:33.000 it on the table, because again, anything can happen. It 0:16:33.080 --> 0:16:37.320 can be financial accidents, there can be sudden changes towards 0:16:37.400 --> 0:16:44.320 reduced employment. There can be global developments, so never rule 0:16:44.520 --> 0:16:50.320 anything out, but I think there is a communication challenge 0:16:50.920 --> 0:16:53.119 around the fact. 0:16:52.840 --> 0:16:58.600 That in the mainstream scenario, we do not need rate 0:16:58.680 --> 0:16:59.640 cuts right now.