Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe wisn't All and I'm Tracy all Away. So Tracy,
Speaker 1: this is a this is a fun time for us.
Speaker 1: This is a real treat. Last week, of course, we
Speaker 1: got to speak to UM Dallas FED President Rob Kaplan,
Speaker 1: and even since then, though, we've had a plenty going on,
Speaker 1: including a very big jobs report, yes, UM, like a
Speaker 1: powerhouse of a job's report, really, I think, UM. I
Speaker 1: think payrolls climbed by I think it was ninety three
Speaker 1: thousand in July, which was much much higher than economist
Speaker 1: expectations of about eight hundred seventy thousand, And of course
Speaker 1: the unemployment rate keeps drifting lower. I think it came
Speaker 1: in at what was at five point four percent, which
Speaker 1: is basicly the lowest since the pandemic started. And we're
Speaker 1: not quite where we were before the outbreak of COVID nineteen,
Speaker 1: but we're certainly getting closer, that's right. So, of course,
Speaker 1: in the early part of the summer you're probably recalled,
Speaker 1: there were like two reports or economists were looking for
Speaker 1: like big things. I got a million plus jobs and
Speaker 1: they didn't really materialize, and there's all kinds of concerns, Oh,
Speaker 1: what's holding back the labor market. The last two data points, however,
Speaker 1: have been quite strong, nearly a million each and no
Speaker 1: signs of slowing. We see the headline unemployment rate coming
Speaker 1: down pretty rapidly now, so I would say some of
Speaker 1: the labor market healing that maybe people thought would come
Speaker 1: a little a little sooner. Just the spring, it seems
Speaker 1: to be kicking into gear. Of course, the delta wave
Speaker 1: and the ongoing pandemic notwithstanding. Yeah, but of course, the
Speaker 1: question is what exactly our policymakers looking for when it
Speaker 1: comes to employment. And we've spoken about this quite a
Speaker 1: few times now out, but it does seem like the
Speaker 1: definition of full employment has changed to something much broader
Speaker 1: and inclusive, and everyone's trying to wrap their heads around
Speaker 1: exactly what that means at the same time that they're
Speaker 1: also trying to wrap their heads around average inflation targeting
Speaker 1: and things like that. Yeah, exactly right. Like so, we
Speaker 1: know that the FED has seems to be and I
Speaker 1: think a big part of the framework that was unveiled
Speaker 1: basically a year ago this time at Jackson Hole was
Speaker 1: about taking the employment side of the mandate more seriously,
Speaker 1: or to put it another way, not hiking or not
Speaker 1: trying to fight off inflation just because employment hits some
Speaker 1: arbitrary number that some economist model says, oh, this is
Speaker 1: full employment, like actually sort of like waiting to see,
Speaker 1: waiting to see it really happened. And so once again,
Speaker 1: you know, here we have the unemployment rate dropping rapidly
Speaker 1: at least as of last month. Hopefully it continues, and
Speaker 1: it seems like policymakers will once again be confronted maybe
Speaker 1: next year with questions of how much better can the
Speaker 1: labor market get? Yeah, and of course, I mean the
Speaker 1: big thing that everyone is watching is wage growth, right,
Speaker 1: and I think we did see a relatively significant spike
Speaker 1: in the payrolls report UM in particular some of the
Speaker 1: sort of like lower wage workers, people working in restaurants
Speaker 1: and leisure, they saw a fairly big spike. So again
Speaker 1: the question is what is full employment? Is this enough
Speaker 1: of a recovery to start boosting inflation through wages? And
Speaker 1: then what does that actually mean for um the average
Speaker 1: inflation framework that the Fed adopted last year exactly right, Well,
Speaker 1: once again we have the absolute perfect guest to speak
Speaker 1: to this. It's going to be a true treat. We're
Speaker 1: going to be speaking with Neil cash Cary. He's the
Speaker 1: president of the Minneapolis FED. And of course we had
Speaker 1: Neil on basically a year ago exactly this time, and
Speaker 1: at that time, some of these questions about the feds
Speaker 1: new framework, they were just sort of theoretical and like
Speaker 1: thinking about this, and suddenly theory is now being put
Speaker 1: into practice and we'll have to learn more about what
Speaker 1: the FED is going to do. I would characterize Neil
Speaker 1: as someone who has always taken the employment side of
Speaker 1: the Fed's mandate very seriously, long before, long before COVID hit,
Speaker 1: and so hearing how he'll think about some of these
Speaker 1: questions should be very interesting. Neil, thank you so much
Speaker 1: for coming back on odd lots. Thanks for having me.
Speaker 1: It's great to be with both of you. So what
Speaker 1: don't we just start, like, uh with you know, we
Speaker 1: got that job's report on Friday. We're recording this August nine.
Speaker 1: I guess by the time people hear this it'll be
Speaker 1: like a week and a half. But uh, you know, uh,
Speaker 1: we just got this job's report, very strong on all
Speaker 1: basically all the metrics. What is your assessment of the
Speaker 1: labor markets trajectory and healing right now. Well, you're right,
Speaker 1: the job report was very strong. I was very happy
Speaker 1: to see that we are making progress back towards the
Speaker 1: kind of labor market we had before the pandemic kid
Speaker 1: but as of you know, our math that we do
Speaker 1: it the Minneapolis feed, it still looks like we are
Speaker 1: six to eight million jobs below where we would have
Speaker 1: been had the COVID crisis not happened. And so that's
Speaker 1: what I'm focused on. Is there still a lot of
Speaker 1: Americans that are not either employed in jobs or they're
Speaker 1: not looking for work, and how long is it going
Speaker 1: to take and what is it going to take to
Speaker 1: bring them back in because they represent a meaningful share
Speaker 1: of our economy's potential and so good progress, but we
Speaker 1: still have a ways to go. It feels kind of
Speaker 1: weird um asking this question, because I do think the
Speaker 1: labor market recovery has been faster than a lot of
Speaker 1: people expected. But what do you think accounts for, um,
Speaker 1: you know, the need to create the fact that we
Speaker 1: haven't reached full employment just yet, Because of course, there
Speaker 1: are different theories. There's the idea that a lot of
Speaker 1: people people just got tired during COVID and decided to
Speaker 1: retire drop out of the labor force. There's the idea
Speaker 1: that people are risks about going back to work and
Speaker 1: potentially exposing themselves to covid um concerns around childcare. And
Speaker 1: there's also this idea of floating around about the Great Resignation,
Speaker 1: and this notion that people just, um, I guess sort
Speaker 1: of reconsidered their lives after a global pandemic and decided
Speaker 1: that they wanted to do something differently. So I'm curious
Speaker 1: how you're viewing I hesitate to call it sluggish recovery
Speaker 1: in the job market, but you know the fact that
Speaker 1: we're not quite there yet. What's going on? I put
Speaker 1: stock in all of the things you said, except for oh,
Speaker 1: people are reassessing their priorities in life. I'm one of
Speaker 1: the things we learned after the two thousand eight crisis.
Speaker 1: We heard, you know, there's something happens in macroeconomics whenever
Speaker 1: a shock gets the economy. Many macro economists reflectively raised
Speaker 1: the natural rate of unemployment their estimate of how low
Speaker 1: the unemployment rate can go without triggering high inflation. And
Speaker 1: they point to all sorts of theories and structural change
Speaker 1: ages and mismatches, and what we learned after the eight
Speaker 1: crisis is all of those stories were wrong. It turns
Speaker 1: out most Americans want to work. Most Americans find satisfaction
Speaker 1: in working. They need to work, they need to put
Speaker 1: food on the table. So that's my starting position. I
Speaker 1: believe the vast majority of Americans want to work if
Speaker 1: there are decent jobs available at decent wages. I do
Speaker 1: think that fear of COVID is real. You know, we
Speaker 1: the health professionals spent the last eighteen months telling us
Speaker 1: to take COVID seriously, and I think that they had
Speaker 1: a lot of success in doing that. It's going to
Speaker 1: take time for people to be confident again. I do
Speaker 1: think the child care issues are real, uh And I
Speaker 1: also think that they enhanced unemployment benefits are having some effect.
Speaker 1: If somebody says, well, I'm making just as much money
Speaker 1: on unemployment and it's gonna expire in a month, why
Speaker 1: shouldn't I wait a month before I go back into work.
Speaker 1: They're probably gonna be a lot of jobs available a
Speaker 1: month from now. So I think all of these factors
Speaker 1: are having some effect. But I start with the assumption
Speaker 1: of the vast majority of people want to work. If
Speaker 1: given the chance, you know, you mentioned, Okay, by the
Speaker 1: math that you've done at the Minneapolis FED, we're probably
Speaker 1: six to eight million jobs short of where we would
Speaker 1: have been absently where we would have been absent the
Speaker 1: COVID shock. So okay, that that's one starting point for
Speaker 1: thinking about how much slack there is. That big said,
Speaker 1: you know what, I guess the unemployment rate pre crisis was.
Speaker 1: I think it got down to three and a half percent.
Speaker 1: But one thing that we saw was that in the
Speaker 1: end economists are really it's real or let's just put
Speaker 1: this way, it's really difficult to know how good the
Speaker 1: labor market truly can be because we saw, you know,
Speaker 1: in the after the Great Financial crisis, so, oh, six
Speaker 1: and a half percent, maybe this is where full employment is.
Speaker 1: Then five and a half percent, there's like, oh, well,
Speaker 1: we can't go lower than five. Maybe four. Then we
Speaker 1: were down to four and we didn't get you know,
Speaker 1: even when we were three and a half percent. It's
Speaker 1: not like we had seen like some big like you know,
Speaker 1: inflationary wage price spiral. So you know, thinking back, okay,
Speaker 1: you start with that six to eight million, what else
Speaker 1: will you be looking for beyond I'm just sort of
Speaker 1: like pure number to think about. Okay, they're really the
Speaker 1: labor market really is in its best place, and we
Speaker 1: are not going to make some of the same mistakes
Speaker 1: last time as underestimating how good the jobs market can get. Well,
Speaker 1: I think we look at a lot of different measures, Joe.
Speaker 1: One of the things is what's happening to wage growth?
Speaker 1: And we are seeing wages pick up I think Tracy
Speaker 1: talked about a few minutes ago, and that's an important factor.
Speaker 1: But are those going to be sustained wage gains or
Speaker 1: those one time price adjustments as the economy is going
Speaker 1: through this reopening. So, just to back up, the economy
Speaker 1: went through a rapid shutdown and now it's going through
Speaker 1: a rapid reopening, and we're seeing lots of frictions as
Speaker 1: businesses are trying to make that adjustment, and you have
Speaker 1: this mismatch where the economy seems to be reopening more
Speaker 1: quickly than the full labor supply is coming online. Well,
Speaker 1: once we get to something more like normal, a new equilibrium,
Speaker 1: what does that look like and what wage growth are
Speaker 1: we seeing? We did see I think one of you
Speaker 1: mentioned that we did see faster wage growth at the
Speaker 1: end of the last expansion. So for the lowest income workers,
Speaker 1: that was great to see they were long overdue for
Speaker 1: a raise. But even if you look at their wage
Speaker 1: growth net of productivity, it was not suggesting high inflation
Speaker 1: was around the corner. So, just to your point, I'm
Speaker 1: not convinced we were actually at maximum employment before the
Speaker 1: COVID shock hit us. So that's that's exactly why I
Speaker 1: want us to be really humble about declaring where this
Speaker 1: is as good as it can get. Let's actually let
Speaker 1: the economy reopen, get people re engaged, and then let's
Speaker 1: see what the labor market looks like and what inflation
Speaker 1: looks like. Well, just on a similar note, can you
Speaker 1: maybe talk to us it full employment looks like from
Speaker 1: an inclusivity perspective, because this is something that Powell has
Speaker 1: talked about at the last Jackson Hole, this idea that
Speaker 1: the Fed is now going for a broad definition of
Speaker 1: full employment. It's a complicated topic and a lot of people,
Speaker 1: you know, we all look at a lot of different
Speaker 1: measures and trying to make this determination. For me, it
Speaker 1: really does come back to inflation, which is how tight
Speaker 1: can we get the labor market that is consistent with
Speaker 1: long run inflation at two. So to me, there are
Speaker 1: like two sides of a seesaw. If we think they're
Speaker 1: still slack in the labor market, then it's like they're
Speaker 1: going to have low inflation in the future. So let's
Speaker 1: try to tighten the labor market so we can actually
Speaker 1: get to our two percent inflation target over time. So
Speaker 1: that to me, ultimately is where we're going to know.
Speaker 1: You know, we we do not have the ability of targeting,
Speaker 1: for example, the black unemployment rate and saying we need
Speaker 1: to get the black unemployment rate to x and we're
Speaker 1: not going to be at full of ployment until we
Speaker 1: get it too X because we have to pay attention
Speaker 1: to what that means for on the inflation side of
Speaker 1: our dual mandate. So it really these two things are
Speaker 1: fundamentally linked in the way at least I think about
Speaker 1: monetary policy that Big said. I mean, one of the
Speaker 1: things we see is that in good economies or at
Speaker 1: the end of the long expansion, we did see that
Speaker 1: spread compressed between white unemployment and black unemployment. And you
Speaker 1: know you mentioned, okay, you get the answer to some
Speaker 1: of these questions is answered in inflation. But we have
Speaker 1: elevated the inflation right now. Now we could tell a
Speaker 1: story about the elevated inflation is like, oh, it's reopening
Speaker 1: and it's used cars, and it's semiconductors and its bottlenecks
Speaker 1: at the port. No, like, you know, that's just that's
Speaker 1: just one story to explain why elevated inflation is right
Speaker 1: now while there is still a high unemployment and be
Speaker 1: a high spread between white and black unemployment. So how
Speaker 1: do you, I mean, if if inflation is going to
Speaker 1: be the signal that you use, how do you sort
Speaker 1: of say, incorporate this moment right now in which if
Speaker 1: we're just going on inflation is like, oh, well, I
Speaker 1: guess we're there. Well, we look at a lot of
Speaker 1: different measures of inflation, so you know, just as you said,
Speaker 1: we know that the high inflation readings we're seeing right
Speaker 1: now are highly concentrated in a few sectors, whether it's
Speaker 1: autos or traveled and transportation related sectors. The vast majority
Speaker 1: of the inflation that we're seeing or in those sectors
Speaker 1: that is skewing the results if you look at broader
Speaker 1: based measures of inflation, if you look at various trim
Speaker 1: mean surveys, we're not seeing a high uptick and one
Speaker 1: thing is this math. You know, if the prices fell
Speaker 1: a year ago because of the shutdowns and now they're
Speaker 1: bouncing back, just the math of that says you're gonna
Speaker 1: see high inflation readings. So if you look at a
Speaker 1: two year inflation reading, you know, average inflation over two years,
Speaker 1: so you get away from this this v in the
Speaker 1: middle of it, you're around two point three percent or
Speaker 1: two point four percent inflation. So there are a lot
Speaker 1: of different measures that we look at to try to
Speaker 1: understand what is underlying inflation in the economy. And that's
Speaker 1: what gives me confidence that most of what we're seeing
Speaker 1: is associated with this reopening. And fundamentally, are we really
Speaker 1: going to have sustained high inflation if there's all this
Speaker 1: labor market slack still available? I find that hard to understand. Now,
Speaker 1: if the six to eight million Americans are never coming back,
Speaker 1: for whatever reason, into the workforce, then I think we
Speaker 1: need to reassess the economy's potential and reassess inflation. But
Speaker 1: I think it is far premature to draw that conclusion.
Speaker 1: So I have a slightly weird question, and I'm trying
Speaker 1: to think how exactly to phrase this. But you know,
Speaker 1: we have employment at five point four pc. We're talking
Speaker 1: about a sort of tail end of America that remains unemployed,
Speaker 1: and I guess I'm just wondering, is monetary policy the
Speaker 1: correct tool to get those people back into the workforce
Speaker 1: or does it need to be paired with some other
Speaker 1: type of policy um on on the fiscal or the
Speaker 1: government side, there's a lot of fiscal policy obviously there's
Speaker 1: been coming out of Washington over the last year in
Speaker 1: response to COVID, now the likely infrastructure bill, and then
Speaker 1: maybe more so, I do think fiscal policy is providing
Speaker 1: a big impulse to try to get the economy moving
Speaker 1: and get people back in so to me that both
Speaker 1: of them have an important role to play, I'll say
Speaker 1: things like targeted interventions such as worker retraining. I mean,
Speaker 1: all of these things are well meaning. Most programs that
Speaker 1: I've seen along the worker retraining side, they're very hard
Speaker 1: to do at scale. The best worker retraining programs I've
Speaker 1: seen are really where employers say, you know what, I
Speaker 1: need someone to run this machine, and I don't care
Speaker 1: if you've never done it before, I'll train you. That
Speaker 1: seems to have much more success than government oriented training programs,
Speaker 1: just because they're too blunt. So I think fiscal policy
Speaker 1: is doing a lot monetary policy has a role to play,
Speaker 1: and a lot of it is going to be business
Speaker 1: is saying, you know what, we're gonna bring you in,
Speaker 1: We're gonna teach you how to do this, and we're
Speaker 1: going to invest in you. And we saw that when
Speaker 1: businesses said they couldn't find workers, they started investing a
Speaker 1: lot more in training to develop the workforce that they needed. Right,
Speaker 1: And so does that get to this idea? I mean,
Speaker 1: you know, I think often economists think of like supply
Speaker 1: as a thing and demand as a thing. But if
Speaker 1: ultimately the key to getting retraining and there in the
Speaker 1: key to creating workforce with more skills is to get
Speaker 1: businesses to want to invest in their own employees and
Speaker 1: to get businesses to essentially want to meet be able
Speaker 1: to meet the demand they're saying. Does that speak to
Speaker 1: sort of like a fundamental power of I guess I
Speaker 1: would a demand side economics that maintain aggregant demand either
Speaker 1: through robust monetary policy ongoing aggressive fiscal policy, and then
Speaker 1: that you know, incentivizes the businesses to increase productivity through
Speaker 1: more training. I absolutely believe that. I mean, I think
Speaker 1: one of the things about this broad fiscal policy, of
Speaker 1: broad monetary policy is it actually works at scale of
Speaker 1: the US economy and by just creating this tight economy
Speaker 1: or a tight labor market. You know, we saw in
Speaker 1: eighteen nineteen businesses saying, you know what, I'm no longer
Speaker 1: going to drug test for certain jobs because these jobs
Speaker 1: I don't need to. I don't need to do the
Speaker 1: drug test. It's safe without it. Or I'm gonna give
Speaker 1: x cons a chance for certain types of jobs, or
Speaker 1: you know, you mentioned that, Joe, that you started to
Speaker 1: see some compression between black white unemployment to spread. This
Speaker 1: is what happens in a tight labor market. Businesses say,
Speaker 1: you know what, it's in my own interest to make
Speaker 1: these changes and develop the workforce that I need. And
Speaker 1: what I saw was there were profound benefits to society
Speaker 1: when they did that. M So, we just had your colleague,
Speaker 1: Robert Kaplan, the Dallas Fed President, on All Thoughts UM
Speaker 1: just the other day, and he was talking a lot
Speaker 1: about the difference between the situations facing large businesses versus
Speaker 1: small to medium sized businesses, and he was making the
Speaker 1: point that smaller businesses are going to find it more
Speaker 1: difficult to deal with rising inflation because their profit margins
Speaker 1: are probably narrower than big businesses that have scale and
Speaker 1: pricing power and can negotiate with their suppliers and things
Speaker 1: like that. I imagine that dynamic to some degree also
Speaker 1: applies to the labor markets. So the biggest businesses are
Speaker 1: going to have some power over wages. They're going to
Speaker 1: be able to pay more, and they're also probably going
Speaker 1: to be able to provide more training opportunities. Maybe to
Speaker 1: band together with other large business is to sort of
Speaker 1: share workers and exchange workers, and we've seen some examples
Speaker 1: of that. Is that something that's on your radar, like
Speaker 1: the idea of discrepancies between the experience of small and
Speaker 1: larger businesses here, Well, I think that there are always
Speaker 1: differences along the lines that you're saying, Tracy, But I
Speaker 1: don't think, at least for me, I don't think it
Speaker 1: leads me to can make a different conclusion about assessing
Speaker 1: the stance of monetary policy. Let's say that that thesis
Speaker 1: is right, that big businesses are going to do better
Speaker 1: in this current environment for all the reasons you just said,
Speaker 1: does that mean that we should make monetary policy less
Speaker 1: accommodative to slow the recovery sort of speak, to try
Speaker 1: to bring that into balance. That doesn't make sense to me.
Speaker 1: To me when I look at you know, there's some
Speaker 1: comments that workers have a lot of power right now
Speaker 1: relative to the past. Number one, what's wrong with that?
Speaker 1: You know, workers should have more power than they've had
Speaker 1: in the past. Number Two, When the six to eight
Speaker 1: million Americans come, can the labor force. My expectation is
Speaker 1: we're going to see that power balance become more balanced.
Speaker 1: So the power imbalance become more balanced and more normal
Speaker 1: over time, and so I don't want to overreact to
Speaker 1: what I would call frictions and imbalances as the economy
Speaker 1: goes through this reopening. Let's actually get the economy fully recovered,
Speaker 1: and then we can assess where the power lies. I
Speaker 1: want to pivot soon to some of the other questions,
Speaker 1: including inflation right now and how to interacts with the
Speaker 1: FED new framework one year on, but just sticking with
Speaker 1: employment for a little bit longer. You know, one of
Speaker 1: the things is we have seen the unemployment right now
Speaker 1: come dropped down rapidly five points uh four percent, I think,
Speaker 1: and you know, it could easily be not hard to
Speaker 1: imagine it in the fours, maybe early next year, maybe
Speaker 1: maybe at the end. At the end of this year.
Speaker 1: Labor force participation rate, however, even for prime age workers,
Speaker 1: remains considerably below crisis levels. Should that be incorporated? Is that?
Speaker 1: How how much is l FPR on your dashboard? And
Speaker 1: thinking about getting those numbers up, not just the unemployment
Speaker 1: right down. Oh, it's a fundamental Joe, I mean LFP
Speaker 1: and employment to population you know their cousins. Uh, those
Speaker 1: are fundamental measures. And this is one of the things
Speaker 1: we learned. You know, a lot of macro economists will say, well,
Speaker 1: the trend line of labor force participation has been declining,
Speaker 1: and that's why oftentimes we'll look at prime age. But
Speaker 1: even there they'll say, well, the trend line is declining.
Speaker 1: And one of my one of my good friends, the
Speaker 1: late great Eddie Lazier, who's a problem, who was a
Speaker 1: prominent labor market economist when I first joined the FED,
Speaker 1: he called me up and he said, the FED is
Speaker 1: misreading the labor market. The macro economists just think the
Speaker 1: trend lines are a certain direction, and they take that
Speaker 1: as gospel, and therefore it's always going to be trending down.
Speaker 1: And there's no good reason why it's trending down. And
Speaker 1: Eddie Lazier was correct, and so to me, that's why
Speaker 1: you know, getting LFP in employment to population at least
Speaker 1: act to where they were before, but not necessarily even
Speaker 1: declaring victory when we do that, I think that's a
Speaker 1: reasonable thing for us to try to achieve. You know,
Speaker 1: when when a lot of Americans they answer these surveys,
Speaker 1: they'll say, do you have a job? No? Are you
Speaker 1: looking for a job no? So then they're considered not
Speaker 1: in the labor force. Those same folks, many of them,
Speaker 1: the next month they take a job. All right, that's
Speaker 1: not it's not supposed to work that way, but that's
Speaker 1: the way it actually does work. So let's actually see
Speaker 1: let's not just ask people are you looking, Let's actually
Speaker 1: see what happens in the wage data, what happens in
Speaker 1: the jobs data, what happens in the inflation data. So
Speaker 1: on that note, why don't we move over to the
Speaker 1: inflation discussion. And you're on the record as saying that
Speaker 1: you think, um, the current price increases are probably transitory.
Speaker 1: I'm curious, is there something that would make you think
Speaker 1: that inflation was something more than transitory, something that's more
Speaker 1: broad based based um, something potentially more permanent. Is it just, uh,
Speaker 1: the wage growth that that you just mentioned wage, The
Speaker 1: wage growth is one piece of it. It is looking
Speaker 1: at the sectors that are seeing high inflation readings. As
Speaker 1: we mentioned a few minutes ago, it's highly concentrated in
Speaker 1: autos and in travel and transportation sectors right now, and
Speaker 1: so if we saw it more broadly, that would be
Speaker 1: another factor that I would pay a lot of attention to. Then,
Speaker 1: going back to the labor market, if we thought these
Speaker 1: six day million Americans were not coming in coming back,
Speaker 1: that would also give me pause. You know, if the
Speaker 1: delta variant really puts a chill on hiring and chilling
Speaker 1: people returning, that would also give me pause. And then,
Speaker 1: of course, we also pay attention to market based measures
Speaker 1: of inflation and inflation expectations. And as you all know,
Speaker 1: I know you follow the treasury market very closely. Long
Speaker 1: term treasury yields are not they're not implying high inflation
Speaker 1: five or ten years from now. And so all of
Speaker 1: those things right now are indicating to me that this
Speaker 1: high inflation is likely going to be transitory. If those
Speaker 1: measures were to change, that would cause me to reassess
Speaker 1: that conclusion. Let's talk about the interaction of the data
Speaker 1: with the new framework, and of course, again about almost
Speaker 1: a year on here since Jackson Hole, where the FED
Speaker 1: unveiled it's flexible average inflation targeting framework. And you know
Speaker 1: my general interpretation of the new framework, and you use
Speaker 1: the word humble before, and I think it is intended
Speaker 1: to be more humble framework and to not over react
Speaker 1: to now try to preempt inflation, to tolerate some short
Speaker 1: term overshoots. Does the inflation that we're seeing that we
Speaker 1: can ascribe to reopening I guess the question is doesn't
Speaker 1: count for that. So when you think about, like, okay,
Speaker 1: over time, this two percent, if we get this sort
Speaker 1: of inflation, that's oh, it's there's something we're going on
Speaker 1: with used cars and bottlenecks at the ports because imports
Speaker 1: are so high, because people still aren't spending money on
Speaker 1: services and all of these things. Do these periods of
Speaker 1: elevated inflation that we can reasonably chalk up to those things,
Speaker 1: do they count towards towards the average? Well, that's a
Speaker 1: very good question, Joe, and I think that my guess
Speaker 1: is there would be a wide range of opinions, uh,
Speaker 1: and the Federal Open Market Committee about that. The answer
Speaker 1: to that question, in my mind, because I have a
Speaker 1: lot of confidence that these inflation readings are transitory, That's
Speaker 1: not what I intended when I said we should achieve
Speaker 1: a modest overshoot. You know what motivated the new framework.
Speaker 1: What motivated the new framework was basically, we were undershooting
Speaker 1: our inflation target for ten years, and we know the
Speaker 1: zero lower bound is a constraint on policy, and so
Speaker 1: we said, look, let's allow for a modest overshoot so
Speaker 1: we can actually average two inflation over time and get
Speaker 1: you know, our estimates are that underlying inflation is roughly
Speaker 1: around one point eight percent or it has been. Let's
Speaker 1: get underlying inflation back to two percent. In my mind,
Speaker 1: temporary transit tory high inflation readings because of the reopening
Speaker 1: are not actually going to be effective in boosting underlying
Speaker 1: inflation to two on average over time, and that's why
Speaker 1: in my mind they don't really count. But I think
Speaker 1: there's probably a wide range of opinions around the committee
Speaker 1: as to that. As to that question, it certainly wasn't
Speaker 1: what I intended a year ago. Do you think the
Speaker 1: market understands the Fed's new framework. And I mean the
Speaker 1: reason I asked that is because, as you just noted,
Speaker 1: bond yields remain incredibly stubbornly low, despite ostensibly a willingness
Speaker 1: from the FED to tolerate higher levels of price increases.
Speaker 1: So I think they do. I don't want to declare victory,
Speaker 1: but if you look at the market measures of inflation
Speaker 1: expectations embedded in tips, for example, in nominal treasuries, you're
Speaker 1: seeing higher inflation for the next few years, let's say,
Speaker 1: the next five years, and then not much action out
Speaker 1: at ten years or beyond. That's completely consistent with what
Speaker 1: our framework is attempting to engineer, which is the framework
Speaker 1: essentially is trying to boost inflation expectations for the next
Speaker 1: few years while leaving long term inflation expectations anchored at
Speaker 1: two over the long term. That's what the market indicators
Speaker 1: are saying. So I think that sophisticated market participants have
Speaker 1: paid very close attention to the new framework, and I
Speaker 1: do think it is it seems to be working as
Speaker 1: intended in generating those kinds of outcomes. But you know,
Speaker 1: it's still early. It's only been a year we're going
Speaker 1: through this reopening. You know, it's it's far too soon
Speaker 1: to draw any firm conclusions. This is it's funny you
Speaker 1: ended up saying it's too soon to draw any conclusions,
Speaker 1: because that's what I was thinking about. Something I was
Speaker 1: thinking about is okay. So one of the sort of
Speaker 1: I guess it seems to be one of the new
Speaker 1: guiding principles of this sort of more humble fed of like, Okay,
Speaker 1: let's see how let's see where we can go. Let's
Speaker 1: actually wait to see evidence that we've hit our targets
Speaker 1: before we start um raising rates and so forth. And
Speaker 1: yet you're you, as a member of the FOMC, are
Speaker 1: tasked with coming up with dots and uh, you know,
Speaker 1: put out your okay three and beyond like forecast for
Speaker 1: what rates are. Do you think there is a tension
Speaker 1: between a destination based framework of let's wait and see
Speaker 1: versus a dots requirement, which implicitly is sort of asking
Speaker 1: you to make a prediction of what the trajectory of
Speaker 1: the economy, employment, and inflation will look like over the
Speaker 1: next couple of years. I think the dot plot is
Speaker 1: deeply flawed for a lot of reasons. Joe for the
Speaker 1: reason you mentioned, but I just think in general it
Speaker 1: draws way too much attention from the press, from market participants,
Speaker 1: from the public. Uh, They're not meant to be forecasts.
Speaker 1: They're meant to be this is what we think optimal
Speaker 1: policy is to achieve the goals that we have. So
Speaker 1: to I think the dot plot is does more harm
Speaker 1: than good, and if you're up to me, I would
Speaker 1: kill it. So a related question, but is there something
Speaker 1: you would do differently at the FED or you know,
Speaker 1: if you had the chance to maybe change the way
Speaker 1: the FED currently operates, is there something that you would
Speaker 1: alter or get rid of, like the dot plot or
Speaker 1: I don't know the use of the word transitory in
Speaker 1: describing inflation things like that. Well, I mean, I think
Speaker 1: the dot plot is one clearer one that I've said
Speaker 1: for a long time we should get rid of. The
Speaker 1: second thing is, you know, it's it's funny the fo
Speaker 1: m C statement itself. It's quite a cumbersome statement to read,
Speaker 1: and when I read it with a fresh set of eyes,
Speaker 1: it feels kind of clunky. And what's difficult about it
Speaker 1: is it's not simply the words on the page that
Speaker 1: convey the information. The real information is the change in
Speaker 1: the words on the page. And every meeting, you know,
Speaker 1: we go through great deliberations and people are very thoughtful
Speaker 1: about how they want to change the words on the
Speaker 1: page to convey the message to the public and the
Speaker 1: financial markets. But then after a year or two, you
Speaker 1: end up with this thing and it says, well, wait
Speaker 1: a second, if I read this with a clean sheet
Speaker 1: of you know, with a clean set of eyes, so
Speaker 1: to speak, would I write it this way if I
Speaker 1: was starting over? The answers probably know. So that's one
Speaker 1: that I struggle with, which is, you know, could we
Speaker 1: do a refresh on the statement. It's hard to do
Speaker 1: a refresh because you know, you are conveying information by
Speaker 1: the changes that you're making, and if you just said
Speaker 1: we're going to start with a clean sheet of paper, uh,
Speaker 1: it'll probably introduce a lot of uncertainty. These people try
Speaker 1: to get a new baseline, so to speak, of what
Speaker 1: the statement is telling us. Well, you're certainly offering a
Speaker 1: full employment for professional FED watchers who who do the
Speaker 1: whole red line strike through and try to tell us what,
Speaker 1: you know, some further progress versus progress means and put
Speaker 1: those into actual English. You know. One of the things
Speaker 1: that's being debated that debated right now and in terms
Speaker 1: of ranges is obviously um the asset purchases and asset
Speaker 1: purchases were really cranked up when the crisis hit for
Speaker 1: all kinds of reasons for financial market plumbing in your view,
Speaker 1: I mean, I guess it's kind of a two part question,
Speaker 1: but what do you think asset purchases accomplished and at
Speaker 1: this point, like what are they doing? And to sort
Speaker 1: of where do you stand? Do you think that the
Speaker 1: economy is in a position where they can start to
Speaker 1: be wound down without causing a major setback. You know,
Speaker 1: I'm always reminded when we study the asset purchases with
Speaker 1: my economists at ME and said, I'm always reminded of
Speaker 1: former Chairman Bernanke's very famous quip that quantitative easing works
Speaker 1: in practice but not in theory. And that's I mean,
Speaker 1: I think that's he really nails it with that, because
Speaker 1: when when the economists go through their models and you
Speaker 1: get very modest effects, but we can actually see very
Speaker 1: large effects. Because I think it's sending a message about
Speaker 1: the committees over all stance on monetary policy. Are we
Speaker 1: committed to being a commodative for the foreseeable future. And
Speaker 1: that's why modest changes can lead to big changes in
Speaker 1: expectations and potentially big moves. And that's where that's why
Speaker 1: the Taper tantrum was such a big effect, had such
Speaker 1: a big effect in and so I do think right
Speaker 1: now it is still providing support to the economy. I
Speaker 1: think it is still signaling that the Committee is committed
Speaker 1: to achieving our dual mandate goals, to really achieving maximum employment,
Speaker 1: and it's sending a message that we are not going
Speaker 1: to prematurely normalized monetary policy and declare victory before we've
Speaker 1: actually achieved our goals. So that to me is useful
Speaker 1: and powerful. But as you know, the Committee said that
Speaker 1: when we see substantial further progress then we would normalize
Speaker 1: our asset purchases. I think if we see a few
Speaker 1: more jobs reports like the one we just got, then
Speaker 1: I would feel comfortable saying, yeah, we are maybe haven't
Speaker 1: completely filled the whole that we've been in, but we've
Speaker 1: made a lot of progress and now and will be
Speaker 1: the time to start tapering our asset purchases. So on
Speaker 1: this note, you are one of the more dovish people
Speaker 1: at the Fed, possibly the most devilish person at the FED,
Speaker 1: and at the same time, you were very, very active
Speaker 1: during the two thousand and eight financial crisis. I think,
Speaker 1: you know, you have the perfect sort of vantage point
Speaker 1: to see everything that was happening and also to see
Speaker 1: just how bad things had gotten. So I'm curious, how
Speaker 1: are you weighing the sort of the risks of tightening
Speaker 1: monetary policy too early versus the risks of keeping it
Speaker 1: too loose for too long and getting some sort of
Speaker 1: imbalance built up in the financial system. Well, I'm very
Speaker 1: focused on the I mean the risk. We pay a
Speaker 1: lot of attention to financial stability risk, we pay a
Speaker 1: lot of attention to risk of inflation. I see the
Speaker 1: bigger risk if if monetary policy is too accommodative for
Speaker 1: too long. To me, I think that the biggest risk
Speaker 1: is that it shows up in high inflation into these
Speaker 1: transitory readings end up not being transitory and it becomes
Speaker 1: more broad based, and then we would have to adjust
Speaker 1: monetary policy to make sure that inflation expectations are anchored.
Speaker 1: I don't think I've not seen any evidence that monetary
Speaker 1: policy is the right tool to address financial stability risks.
Speaker 1: You know, I don't want to say never, but whenever
Speaker 1: I analyze it with our economists, it just seems like
Speaker 1: Monterrey policy is such a blunt instrument that it allows
Speaker 1: you a way to try to rein in potential accesses
Speaker 1: on Wall Street. I would much rather, for example, raised
Speaker 1: the countercyclical capital buffer to make sure that the biggest
Speaker 1: banks have enough capital so they can withstand any downturns.
Speaker 1: Then say, you know what, we're going to slow the
Speaker 1: labor market recovery because we're worried about some froththiness in
Speaker 1: Wall Street. And then, you know, one more quick comment,
Speaker 1: think about the tech bubble bursting in two thousand and
Speaker 1: two thousand one, uh that that was clearly a bubble.
Speaker 1: It burst, It didn't lead to a deep recession. It
Speaker 1: led to a very mild recession. And if the did
Speaker 1: try to use monetary policy to keep the to keep
Speaker 1: the tech bubble from inflating in the first place, the
Speaker 1: cost of the economy would have been much much larger
Speaker 1: than what ended up happening when the tech bubble burst.
Speaker 1: And so we have to be very careful about saying
Speaker 1: we're going to use monetary policy to try to rein
Speaker 1: in Wall Street just one more thing on financial stability.
Speaker 1: There is um currently some concern about this idea of
Speaker 1: lots of excess reserves just sort of slashing away in
Speaker 1: the financial system, showing up on bank balance sheets. Um
Speaker 1: so that banks are actually turning away some large depositors.
Speaker 1: Is that a concern for you when it comes to
Speaker 1: the Fed's asset purchase program or does it not really read?
Speaker 1: Is something that's top of mind. You know, we paid
Speaker 1: close attention to it, and I know the overnight reverse
Speaker 1: repo facilities has been getting a lot of attention because
Speaker 1: the volumes are going up. The purpose of that is
Speaker 1: to keep short term interest rates in the roughly related
Speaker 1: to the band that the Committee is set for the
Speaker 1: Federal funds rate. And so in a sense, you could
Speaker 1: think of it as a as a way of having
Speaker 1: some type of yield curve control where the FED is
Speaker 1: buying a lot of long term assets, but then we
Speaker 1: don't want short term rates to go negative, and so
Speaker 1: we have this floor in a sense which is keeping
Speaker 1: uh which is allowing banks to park some of their
Speaker 1: reserves essentially at the FED to keep short term rates
Speaker 1: from going negative. And so I think this is not
Speaker 1: it doesn't trike me as highly concerning. It's kind of understandable,
Speaker 1: especially when the FED made a technical adjustment and raise
Speaker 1: the rate that it pays on reserves at the after
Speaker 1: the last meeting. So it isn't highly concerning to me,
Speaker 1: and you know, we're gonna just keep watching it. I
Speaker 1: have one last question, and it actually relates to the
Speaker 1: first part of the conversation, but I you know, I
Speaker 1: thinking back to you know, you're talking about the spread
Speaker 1: between um white unemployment and black unemployment and how far
Speaker 1: that can go down and other indicators of when the
Speaker 1: economy has meet met maximum employment potential, and the gauge
Speaker 1: that you're using is on the inflation side. And it
Speaker 1: seems to me, therefore that even with this new framework
Speaker 1: that you know, there's still this sort of like deeply
Speaker 1: embedded I guess it's like Philip's curve idea that ultimately
Speaker 1: there is some tension that ultimately, like the overemployment to
Speaker 1: the extent that that could be such a thing, is
Speaker 1: indicated by overly hot inflation or undesirable inflation. And I'm curious,
Speaker 1: you know, obviously again there's this Philip's curve. This trade
Speaker 1: off contributed arguably to some of premature hiking that we
Speaker 1: saw post crisis, the idea that, okay, five and a
Speaker 1: half percent, four and a half percent, these must be
Speaker 1: levels that which inflation is going to take off. Do
Speaker 1: you ever question that core premise, the premise of a
Speaker 1: trade off, and whether the two things, inflation and employment,
Speaker 1: maybe do they even have much to do with each other.
Speaker 1: I do. It's a it's a good question, I do.
Speaker 1: You know, we we we debate it once in a
Speaker 1: while with my economists. You know, if, for example, if
Speaker 1: the Fed just gave everybody twice as many dollars, so
Speaker 1: they said, your the dollar you have in your pocket
Speaker 1: or in your PayPal account is not two dollars, you
Speaker 1: would expect to see prices double in the economy if
Speaker 1: everybody's money got worth half as much, or you know,
Speaker 1: had to two x the amount. And that's got nothing
Speaker 1: to do with the labor market. That's just how much
Speaker 1: money is in people's pockets trying to buy the same
Speaker 1: number of goods and services. But fundamentally, I do believe
Speaker 1: that there is a linkage. I do believe that for
Speaker 1: most firms, the bulk of their expenses are their employee
Speaker 1: base and their wages and that if we're going to
Speaker 1: see firms having higher prices and passion those on the consumers,
Speaker 1: that wages is going to be a very important piece
Speaker 1: of that. And so I do believe that there is
Speaker 1: a linkage between the labor market and inflation. I'm not
Speaker 1: ready to write that off, but we do. You know,
Speaker 1: we do debate one another about some of these more
Speaker 1: fundamental questions about how prices are set and how monitory
Speaker 1: policy can affect the economy. Neil, there's such a real
Speaker 1: treat to have you back on odd LODs, Neil cash Kari,
Speaker 1: thank you so much for joining us. Thanks for having me.
Speaker 1: It's great to be with you both. Yeah, that was great.
Speaker 1: We'll do it again next August. You know, Tracy, I
Speaker 1: was thinking about Neil's point about sort of ripping up
Speaker 1: the approach to the statement and just starting with like
Speaker 1: a clearer, clearer form of communication. And one thing I
Speaker 1: really do admire about Neil is although he not a
Speaker 1: trend economist, he's obviously very deep in it and one
Speaker 1: of the better policymakers at sort of just talking about
Speaker 1: what they're up to in a plain English that anyone
Speaker 1: can understand. Yeah, that's definitely true. I remember there was
Speaker 1: a study gosh, I guess it was like five or
Speaker 1: six years back now, but there was a study that
Speaker 1: went through all the f O m C statements over
Speaker 1: time and crunch some of the numbers on word length
Speaker 1: and also on readability, and you could see this really
Speaker 1: strong trend that the statements were getting longer and longer
Speaker 1: basically since the financial crisis, and also the reading level
Speaker 1: that you needed in order to understand them was going up,
Speaker 1: so it used to be high school level, I think,
Speaker 1: and by the end of it, in theory you would
Speaker 1: have needed a PhD to kind of understand it. And then,
Speaker 1: of course Neil's point was that you know, not only
Speaker 1: would you have to be able to um read it
Speaker 1: and comprehend it that way, but you'd also have to
Speaker 1: be able to compare it to the previous statement to
Speaker 1: get you know, to try to discern the signals from
Speaker 1: the Central Bank. So point taken there for sure. And
Speaker 1: also on the dot plot, like again, that seems to
Speaker 1: be a major point of contention at the food Yeah,
Speaker 1: it's interesting because all these things, like, you know, you
Speaker 1: have the dot plot and um of course, the press conference,
Speaker 1: which under Paul has actually gone to every meeting. Before
Speaker 1: they were just I think four times a year. But
Speaker 1: they're essentially like all these new monetary policy innovations, so
Speaker 1: to speak, all that came out of the Great Financial Crisis,
Speaker 1: like bernanke, like the dots didn't exist before that, the
Speaker 1: press conference didn't exist prior to before that. So it's
Speaker 1: interesting to see, like, you know, Okay, maybe some of
Speaker 1: these things made sense during the Great Financial Crisis when
Speaker 1: it was like particularly important to communicate to the public
Speaker 1: or to market that uh, you know how the sort
Speaker 1: of the battle mindset, the battle footing that the FED
Speaker 1: was on. But you know it is it does raise
Speaker 1: questions whether at some point, in a different environment, some
Speaker 1: of these tools and approaches will need to change totally.
Speaker 1: And again we've we've had the change to the FEDS framework,
Speaker 1: but you kind of wonder if an experience as big
Speaker 1: and as idiosyncratic as the pandemic might lead to um
Speaker 1: new communication styles and tools as well. I guess, you know,
Speaker 1: we might find out at Jackson Hole. Yeah, this is
Speaker 1: the coming Jackson Hole will be interesting. You know, I
Speaker 1: still think it's interesting going back to I'm still a
Speaker 1: little bit hung up on what I see as some
Speaker 1: ambiguity in um the thinking right now, So as Neil
Speaker 1: put it, inflation is still the indicator that tells us
Speaker 1: when the economy has reached full potential. But then you
Speaker 1: could have inflation like we have right now, in which
Speaker 1: you can tell story that it has nothing to do
Speaker 1: with full potential and it's all about idiosyncratic shocks. But then,
Speaker 1: I guess my where I'm hung up still is Okay,
Speaker 1: if we can establish and accept that some kind of
Speaker 1: inflations are not really related to full potential or to
Speaker 1: maximum employment, then how good of a guide is it really?
Speaker 1: Because no matter where we are, I mean, we could
Speaker 1: have employment unemployment at three percent, and then you could
Speaker 1: still imagine a world in which inflation picks up, and
Speaker 1: yet economists remained divided about what's the cause. Maybe it's oil,
Speaker 1: I mean, you know, you let's imagine, let's say imagine
Speaker 1: unemployment where to follow a three percent and you had
Speaker 1: an oil shock in the Middle East. Right, you could
Speaker 1: always come up with stories about, well, this isn't the
Speaker 1: real inflation, or this isn't the inflation that we're targeting
Speaker 1: with our new framework, or this inflation can be ascribed
Speaker 1: to X or y, and so it still seems like
Speaker 1: there is this tension that emerges in which, if inflation
Speaker 1: is going to be the ultimate arbiter, well what happens
Speaker 1: if you you know, you could still tell stories about
Speaker 1: why that doesn't really count. And so I think there
Speaker 1: are still areas of ambiguity about, you know, what is
Speaker 1: the FED going to do? And when is the FED
Speaker 1: going to act, uh, you know, next year and the
Speaker 1: year beyond, if employment, if unemployment keeps dropping, right, it
Speaker 1: feels like the inflation story is almost always open to
Speaker 1: some interpretation um and cherry picking the data inflation tells
Speaker 1: us when we're at maximum employment, except when it doesn't,
Speaker 1: because except when it's about something else. I was about
Speaker 1: to say, I really liked, um, I really liked your
Speaker 1: your Phillips curve question, because I think that kind of
Speaker 1: gets to the heart of it as well, Like we're
Speaker 1: sort of assuming that there's still some relationship now. But
Speaker 1: you know, before COVID, everyone was sort of giving up
Speaker 1: on the Phillips curve because we were, you know, we
Speaker 1: had an unemployment at something like three percent and inflation
Speaker 1: hadn't gone up for years. And now inflation seems to
Speaker 1: be the signal, which is kind of weird and definitely
Speaker 1: to your point, ambiguous in many ways. Again, this is
Speaker 1: why I like talking to Neil, because I really think
Speaker 1: he's probably one of the most like, sort of open
Speaker 1: minded thinkers on all this stuff. And you know, he
Speaker 1: comes at it from a non academic perspective, but I
Speaker 1: think he does genuinely sort of like wrestle with this
Speaker 1: stuff in an intellectually honest manner and sort of see
Speaker 1: some of the same tensions that a lot of people
Speaker 1: who aren't you know, lifetime steeped in the academy see
Speaker 1: with some of these some of these debates. He's definitely
Speaker 1: very candid and open on these thorny issues, which we
Speaker 1: appreciate on all lots. Absolutely, shall we leave it there,
Speaker 1: Let's leave it there? Okay. This has been another episode
Speaker 1: of the All Thoughts podcast. I'm Tracy Halloway. You can
Speaker 1: follow me on Twitter at Tracy Halloway and I'm Joe
Speaker 1: Why Isn't Thal. You can follow me on Twitter at
Speaker 1: the Stalwart. Follow our guests on Twitter. Neil cash car
Speaker 1: He's at Neil cash Cary one of the only I
Speaker 1: think probably the only f O m C member who's
Speaker 1: sort of like regularly tweets, like a Twitter at Neil
Speaker 1: cash Cary. Follow our producer Laura Carlson. She's at Laura M. Carlson.
Speaker 1: Followed the Bloomberg head of podcast, Francesca Levi at Francesca Today.
Speaker 1: And check out all of our podcast at Bloomberg under
Speaker 1: the handle at podcasts. Thanks for listening.