WEBVTT - This Is What The Rate Cut Cycle Could Look Like 0:00:02.720 --> 0:00:16.040 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:19.000 --> 0:00:22.400 Hello and welcome to another episode of the Odd Lots Podcast. 0:00:22.440 --> 0:00:24.760 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:24.920 --> 0:00:27.000 Tracy, we're here in Jackson Hole. 0:00:27.240 --> 0:00:28.280 It's nice to be back. 0:00:28.480 --> 0:00:30.600 It's really nice to be back. So this is the 0:00:30.680 --> 0:00:34.480 second year we've come to the Big Kansas City FED 0:00:34.640 --> 0:00:38.960 Economic Policy Symposium, and I think it's fair to say, 0:00:39.360 --> 0:00:41.760 you know, we heard Powell this morning, there's a certain 0:00:41.920 --> 0:00:43.800 era of like victory. 0:00:43.479 --> 0:00:47.440 Right, Yeah, the vibe has shifted. I think last year 0:00:47.840 --> 0:00:50.839 there was a little bit more I guess comfort with 0:00:50.920 --> 0:00:54.000 the idea of inflation coming down, at least compared to 0:00:54.640 --> 0:00:57.640 the year before. So remember two years ago was the 0:00:57.680 --> 0:01:00.600 famous Powell speech here in Jackson Hole where he stood 0:01:00.640 --> 0:01:02.960 up and he basically said there's no way we're going 0:01:03.000 --> 0:01:06.240 to get inflation down without a degree of economic pain, 0:01:06.400 --> 0:01:09.920 i e. A pickup in the unemployment rate, job losses, 0:01:10.000 --> 0:01:13.120 that sort of thing. And now fast forward two years 0:01:13.840 --> 0:01:17.160 and he basically announced that it's time for rate cuts. 0:01:17.319 --> 0:01:20.680 And it wasn't a victory lap necessarily, but he sort 0:01:20.720 --> 0:01:24.039 of walked through how and why he thinks inflation has 0:01:24.080 --> 0:01:26.440 come down without those job losses. 0:01:26.680 --> 0:01:29.240 That's right, and of course we've seen that tick up 0:01:29.280 --> 0:01:32.679 in the unemployment rate, not through big layoffs however, so 0:01:32.720 --> 0:01:36.000 there's not been a major degree of cuts. But the 0:01:36.040 --> 0:01:38.800 other aspect of that is, like, you know, there was 0:01:38.840 --> 0:01:42.959 some expectation that to balance the economy achieve the inflation mandate, 0:01:42.959 --> 0:01:45.080 there would have to be some loosening of the labor market. 0:01:45.400 --> 0:01:46.920 But what he said, and I think it was the 0:01:46.920 --> 0:01:49.240 second line of the whole speech, is we don't want 0:01:49.280 --> 0:01:52.200 to see anymore we're good ones at this point. The 0:01:52.320 --> 0:01:55.600 risks to the labor market are what we're primarily concerned with, 0:01:55.920 --> 0:01:58.280 and we do not need to see any more weakness 0:01:58.280 --> 0:02:01.520 to be confident that inflation is no longer a major risk. 0:02:01.640 --> 0:02:05.600 Yeah, so the focus has certainly shifted from upside inflation 0:02:05.800 --> 0:02:10.240 risk to downside labor market risk. But this opens up 0:02:10.360 --> 0:02:13.400 a whole new set of issues and things that we 0:02:13.520 --> 0:02:16.519 need to discuss, and I guess everyone's going to be 0:02:16.520 --> 0:02:20.919 focused on a slightly different set of economic indicators going forward. 0:02:21.120 --> 0:02:23.920 Right, So now the question is like, okay, if you 0:02:24.080 --> 0:02:27.160 accept that the primary risk for the FED and Paul 0:02:27.280 --> 0:02:30.280 s edit, so it is is now protecting against further 0:02:30.320 --> 0:02:32.640 weakness in the labor market. What does that look like? 0:02:32.720 --> 0:02:35.720 Because yes, we know now basically for certain data rate 0:02:35.760 --> 0:02:38.440 cut is coming in September, but there are still all 0:02:38.600 --> 0:02:40.440 types of questions about the size of the cut, how 0:02:40.440 --> 0:02:43.560 many cuts, the sequencing, et cetera. And from a market 0:02:43.600 --> 0:02:47.320 perspective in particular, I would say this is actually still 0:02:47.320 --> 0:02:48.560 a very live and open question. 0:02:48.680 --> 0:02:51.200 No, absolutely, and the other thing that's happening, and we 0:02:51.200 --> 0:02:53.760 should get into this. But the FED has said so 0:02:53.960 --> 0:02:57.440 many times that it's data dependent now, and so if 0:02:57.440 --> 0:03:00.080 you say you're data dependent and you're really focused on 0:03:00.120 --> 0:03:03.280 what's going on in the labor market, then that's like 0:03:03.360 --> 0:03:06.880 a combination for everyone to be watching that next jobs 0:03:06.919 --> 0:03:09.320 report as an indicator of whether or not we get 0:03:09.320 --> 0:03:11.400 twenty five or fifty BIPs, or if it comes in 0:03:11.480 --> 0:03:13.359 better than expected, maybe you don't get a rate cut 0:03:13.360 --> 0:03:14.080 at all. I don't know. 0:03:14.800 --> 0:03:16.640 I guess nothing is locked in stone. 0:03:16.800 --> 0:03:17.880 Everything is possible. 0:03:17.960 --> 0:03:20.960 Anyway, I'm very excited. We have the perfect guest today, 0:03:21.000 --> 0:03:23.639 someone that we have had on odd lots several years 0:03:23.639 --> 0:03:27.400 ago talking about similar stuff, including I think it was 0:03:27.440 --> 0:03:30.119 a discussion about how you even ascertained the neutral rate 0:03:30.160 --> 0:03:32.960 of interest. But we're going to be talking about the 0:03:33.080 --> 0:03:36.600 question of what will this rate cut cycle look like 0:03:36.640 --> 0:03:39.760 that we're all expecting. So we were speaking with Peter Williams. 0:03:39.800 --> 0:03:42.560 He is the managing director of macro Research and Central 0:03:42.560 --> 0:03:46.440 Bank Policy at twenty two V Research. Previously he had 0:03:46.480 --> 0:03:49.480 been at the IMF, he was at Evercore. He lives 0:03:49.520 --> 0:03:53.280 in Bozeman, Montana. He just sort of drove down here 0:03:53.400 --> 0:03:56.080 to meet with us, do some fly fishing here in 0:03:56.200 --> 0:03:58.360 Jackson Hole, and also meet with us. She was not 0:03:58.520 --> 0:04:00.000 in the room, but Tracy and I weren in the 0:04:00.120 --> 0:04:02.400 room either. So we're all reading this speech. So Peter, 0:04:02.520 --> 0:04:04.560 thank you so much for coming on out locked. It's 0:04:04.640 --> 0:04:06.240 nice to meet you here. It's nice to see you here. 0:04:06.360 --> 0:04:07.960 Nice to meet you guys. Nice to be down and. 0:04:07.880 --> 0:04:10.200 We an intermitted person right before it was the first. 0:04:10.000 --> 0:04:11.520 Time we got We had to meet on a fishing 0:04:11.520 --> 0:04:11.960 boat ramp. 0:04:12.000 --> 0:04:14.640 Not so bad, Yeah, not too bad. So you've been 0:04:14.680 --> 0:04:19.559 writing even prior to the speech this morning, talking about like, okay, 0:04:19.600 --> 0:04:24.120 the rate cut cycle is clearly coming into view. How 0:04:24.120 --> 0:04:26.279 do you begin to think about the question? You know, 0:04:26.360 --> 0:04:29.520 twenty five fifty both seem kind of live at this point. 0:04:29.520 --> 0:04:31.680 How do you start trying to ascertain like what this 0:04:31.720 --> 0:04:32.120 looks like. 0:04:32.360 --> 0:04:34.040 Yeah, so I think you know the starting point is, 0:04:34.200 --> 0:04:36.560 you know, Powell says, obviously we're getting some cuts. They're 0:04:36.600 --> 0:04:39.040 starting soon. I would say, while Tracy wants to keep 0:04:39.040 --> 0:04:43.159 every possibility open, they're going to cut in September, and realistically, 0:04:43.400 --> 0:04:45.640 in the vast majority of cases, they're also probably cutting 0:04:45.680 --> 0:04:48.360 in November and December two. I think just penciling in 0:04:48.400 --> 0:04:50.200 some degree of front loading, because when you're in a 0:04:50.360 --> 0:04:52.920 risk management mode usually you move a little bit more 0:04:52.920 --> 0:04:54.920 aggressively than when you're in just kind of minding the 0:04:54.960 --> 0:04:57.120 base case. We were minding the base case in like 0:04:57.160 --> 0:05:01.080 twenty seventeen, twenty eighteen, policy was slow gradual the last 0:05:01.120 --> 0:05:03.599 three and a half years, right since COVID hit in 0:05:03.600 --> 0:05:06.680 different ways, you've been minding the extreme tales in both directions, 0:05:07.080 --> 0:05:08.880 and now we're starting to worry more about the downside. 0:05:08.920 --> 0:05:12.160 So you know, maybe base case from listening to thegitality 0:05:12.160 --> 0:05:14.800 of FED speak besides just Powell kind of still sounds 0:05:14.800 --> 0:05:17.400 like a fit a twenty five, but especially if the 0:05:17.440 --> 0:05:19.680 labor market data comes in a little bit softer than expected. 0:05:20.400 --> 0:05:22.880 All eyes on this sort of August payroll print for sure, 0:05:22.920 --> 0:05:25.240 but also the job was claims data as well, sort 0:05:25.240 --> 0:05:27.960 of cumulating over time. Yeah, I think it's a fifty 0:05:28.360 --> 0:05:31.800 certainly seems very possible and maybe even prudent. But I'm 0:05:31.800 --> 0:05:33.560 also not the guy in the room making the decisions. 0:05:33.720 --> 0:05:36.799 Well, just on that note, are there pros and cons 0:05:36.880 --> 0:05:40.279 to twenty five BIPs versus fifty BIPs? So, for instance, 0:05:40.680 --> 0:05:43.800 maybe you want to be early and proactive, so you 0:05:43.839 --> 0:05:47.000 cut by fifty bases points. But on the other hand, 0:05:47.160 --> 0:05:49.919 I might imagine that there would be some investors or 0:05:49.960 --> 0:05:52.640 some people in the market who think, oh, the Fed's 0:05:52.720 --> 0:05:55.479 really worried about the labor market and that's why they're 0:05:55.520 --> 0:05:59.040 cutting so dramatically in September. It seems like there are 0:05:59.040 --> 0:06:01.800 benefits and all so downsides for each of those moves. 0:06:02.120 --> 0:06:04.120 Yeah, I think at this point, with Powis saying that 0:06:04.160 --> 0:06:07.000 we're no longer really worried about inflation on the inflation 0:06:07.080 --> 0:06:10.800 expectation side or labor market driven inflation, the case for 0:06:10.880 --> 0:06:13.239 sort of not fifty to some extent, like not pretty 0:06:13.240 --> 0:06:16.159 aggressively front loading, you know, largely boils down to sort 0:06:16.160 --> 0:06:19.440 of institutional inertia. They tend to move relatively slowly unless 0:06:19.440 --> 0:06:21.600 you're in the midst of a very deep financial crisis 0:06:21.680 --> 0:06:24.560 or something like COVID. You know, these mid cycle adjustments, 0:06:24.600 --> 0:06:26.720 at least hopefully that's what this is that we've had 0:06:26.760 --> 0:06:29.880 before have tended to be relatively gradual and small in nature, 0:06:29.920 --> 0:06:32.000 so like you don't often get these very large drops 0:06:32.000 --> 0:06:35.600 and rates in relatively stable times. But against that is, 0:06:35.640 --> 0:06:37.920 we know rates are very high, we know interest rate 0:06:38.000 --> 0:06:40.560 sensitive parts of the economy have been struggling for a 0:06:40.640 --> 0:06:43.080 year and a half or two years now, and so 0:06:43.200 --> 0:06:46.479 the case sort of against fifty feels more of like 0:06:46.560 --> 0:06:49.359 an institutional one and sort of a desire not to 0:06:49.360 --> 0:06:51.760 spook market participants. But like we all kind of see 0:06:51.800 --> 0:06:53.160 the same data. If it is a little bit of 0:06:53.160 --> 0:06:55.400 private data we don't see, but we see the big data. 0:06:55.440 --> 0:06:57.240 We all see the employment report, we all see claims, 0:06:57.279 --> 0:06:59.520 we all see inflation. And if you're just looking at 0:06:59.520 --> 0:07:01.560 that data, it's sort of harder to make a case 0:07:01.800 --> 0:07:04.520 that you shouldn't just front load, you know, the initial 0:07:04.520 --> 0:07:06.560 part of the rate cutting cycle, and then from there 0:07:06.600 --> 0:07:08.120 you can kind of move into like weight and see 0:07:08.120 --> 0:07:10.680 mode or just pause, see what happens in twenty twenty five, 0:07:10.680 --> 0:07:13.480 But at least early on payback, some of the hawkish 0:07:13.520 --> 0:07:15.640 insurance they took out in late twenty two and over 0:07:15.680 --> 0:07:17.600 the course of twenty twenty three, and you can be 0:07:17.640 --> 0:07:18.840 a bit more level set. 0:07:19.040 --> 0:07:23.280 You know, every cycle is different, But what do past 0:07:23.480 --> 0:07:26.760 rate cut cycles generally say about the way the Fed 0:07:26.800 --> 0:07:29.840 approaches it. I mean, it's different because the economy more 0:07:29.920 --> 0:07:32.640 or less seems fine. There is not, certainly not a 0:07:32.680 --> 0:07:36.280 consensus that we're in a recession currently. We're not in 0:07:36.320 --> 0:07:40.760 a financial crisis currently. But what does history say about 0:07:40.760 --> 0:07:42.000 how rate cut cycles work? 0:07:42.280 --> 0:07:44.480 So you basically get two versions. There's a sort of 0:07:44.520 --> 0:07:48.600 mid cycle correction which ninety five, ninety six, ninety seven, 0:07:48.640 --> 0:07:52.240 ninety eight around LTCM and then arguably although people might 0:07:52.240 --> 0:07:55.520 have different views, instead of twenty eighteen nineteen yeah as well, 0:07:55.520 --> 0:07:57.960 and those tend to be relatively moderate in sort of 0:07:57.960 --> 0:08:01.040 cumulative size, like seventy five maybe one hundred basis points. 0:08:01.520 --> 0:08:04.120 And then on the other hand, you ever sessions, and 0:08:04.160 --> 0:08:06.200 these are basically the two varieties of rate cutting cycles 0:08:06.200 --> 0:08:08.400 we've had in the sort of modern, kind of post 0:08:08.480 --> 0:08:11.200 vulgar era of FED central banking. And so I think 0:08:11.280 --> 0:08:14.400 even now it feels a little bit different because compared 0:08:14.440 --> 0:08:16.760 to those prior periods. You know, the assumptions about where 0:08:16.800 --> 0:08:19.320 interest rate should be in the long run, especially from 0:08:19.320 --> 0:08:21.560 the Fed's perspective. I think market participants probably thin they're 0:08:21.560 --> 0:08:23.400 a little bit higher, but from most people the Fed, 0:08:23.440 --> 0:08:26.160 you know, the comedian still says two eight, and we're 0:08:26.160 --> 0:08:28.280 sort of looking at a pretty large gap to that 0:08:28.320 --> 0:08:30.840 compared to a lot of those other prior mid cycle corrections. 0:08:31.000 --> 0:08:33.160 So you're, you know, you're seeing a somewhat different sort 0:08:33.160 --> 0:08:35.400 of base rate on how far you might normally expect 0:08:35.400 --> 0:08:37.439 to cut. So the sample size of history is in 0:08:37.480 --> 0:08:38.960 a somewhat structurally different world. 0:08:39.200 --> 0:08:43.160 Yes, So the other thing I've been sort of thinking about, 0:08:43.400 --> 0:08:45.960 and it's kind of remarkable about the current cycle, But 0:08:46.840 --> 0:08:48.880 you know, just a week or so ago, I think 0:08:48.920 --> 0:08:52.400 on August thirteenth, Bostic for instance, was talking about how 0:08:52.400 --> 0:08:54.600 the FED needs to see a little bit more data 0:08:54.880 --> 0:08:57.719 before it decides on rate cuts. And then fast forward. 0:08:57.400 --> 0:09:01.120 To literally ten days later, yeah. 0:09:00.600 --> 0:09:02.800 Exactly, he was talking about the potential for a fifty 0:09:02.840 --> 0:09:07.040 basis point cut. And then today at Jackson Hole we 0:09:07.080 --> 0:09:10.040 see Pow come out with an extremely ubbish speech where 0:09:10.080 --> 0:09:12.120 he puts the emphasis on the labor market and says 0:09:12.120 --> 0:09:15.600 we don't want to see further weakening. What happened in 0:09:15.640 --> 0:09:18.920 this sort of like two week period, Well, I. 0:09:18.920 --> 0:09:19.880 Think part of it is for a lot of the 0:09:19.920 --> 0:09:23.679 more hawkish committee members, you've seen better inflation data. You know, 0:09:23.880 --> 0:09:26.760 the Q one shock looks a little bit farther in 0:09:26.760 --> 0:09:28.920 the rear of your mirror. Now you have relatively more confidence. 0:09:29.679 --> 0:09:32.160 And while we haven't gotten that much more marginal labor 0:09:32.160 --> 0:09:35.080 market data, none of it looks dramatically better, Like jobless 0:09:35.080 --> 0:09:37.120 claims have been pretty well behaved. The last couple of weeks, 0:09:37.360 --> 0:09:39.600 maybe had these very large downside revisions to sort of 0:09:39.600 --> 0:09:43.160 trend NFP growth from April twenty three to sort of 0:09:43.160 --> 0:09:45.760 March of twenty twenty four, and it just makes the 0:09:45.800 --> 0:09:47.640 economy look a little bit more like it's been enough 0:09:47.679 --> 0:09:50.320 funk for longer. And so that probably helps you reassess, 0:09:50.400 --> 0:09:51.880 like what your view on the medium tournament is, and 0:09:51.880 --> 0:09:53.880 if you're a little bit less optimistic about the steady 0:09:53.880 --> 0:09:55.920 state of where the thing should be headed, maybe you 0:09:55.920 --> 0:09:57.600 should be a little bit more proactive and trying to 0:09:57.840 --> 0:09:59.520 cut off some downside risks there because you've a bit 0:09:59.559 --> 0:10:00.839 less buffer in that sort of a world. 0:10:01.280 --> 0:10:04.440 Does the first move tell us something about what the 0:10:04.480 --> 0:10:05.280 second move will be. 0:10:06.280 --> 0:10:09.200 Yes, more so if it's a fifty, I think because 0:10:09.240 --> 0:10:12.320 either if you'd to fifty, I would say realistically, either 0:10:12.360 --> 0:10:15.520 the August employment report was pretty bad, so the direction 0:10:15.559 --> 0:10:17.760 of the economy walks worse. If you're still trying to 0:10:17.760 --> 0:10:20.080 head off something really bad from happening, you'll be more 0:10:20.120 --> 0:10:23.559 aggressive with it. Or if the August employment report was 0:10:23.600 --> 0:10:25.280 fine and they still go fifty, then that tells you 0:10:25.320 --> 0:10:27.400 something about the reaction function and their desire just to 0:10:27.440 --> 0:10:31.199 be a little bit more proactively cautious in trying to 0:10:31.200 --> 0:10:33.160 get rates down. So I think there if you see 0:10:33.160 --> 0:10:36.320 a fifty in September, realistically you should expect that, like 0:10:36.360 --> 0:10:39.000 the reaction function at least through early twenty five is 0:10:39.040 --> 0:10:41.839 going to be relatively more duffish than otherwise, whether that's 0:10:41.840 --> 0:10:43.920 pusis the data itself, or just the way they're seeing 0:10:43.960 --> 0:10:44.280 the world. 0:10:44.600 --> 0:10:46.800 The other thing I've been thinking about the last time, 0:10:46.920 --> 0:10:48.640 or the first time we had you on all Blots, 0:10:48.800 --> 0:10:52.000 it was to talk about our star or the neutral rate, 0:10:52.679 --> 0:10:56.160 and since then, certainly this year, our star has kind 0:10:56.200 --> 0:10:58.600 of fallen out of favor. So I think the Bank 0:10:58.640 --> 0:11:01.440 for International Settlements came out and they were talking about 0:11:01.800 --> 0:11:06.280 it's better to base policy on observable inputs, like the 0:11:06.320 --> 0:11:11.599 actual data, rather than unobservable models. And I'm trying to 0:11:11.600 --> 0:11:14.280 figure out, like there's so much talk about data dependency. 0:11:14.720 --> 0:11:17.000 Our star is kind of out of fashion, but is 0:11:17.040 --> 0:11:20.000 it still alive and well and sort of in the 0:11:20.040 --> 0:11:23.120 background of Jackson Hole And we're just not talking about 0:11:23.160 --> 0:11:25.319 it because it's no longer fashionable. 0:11:26.000 --> 0:11:28.840 It's certainly not the operative concern for policy, right, Like, 0:11:29.400 --> 0:11:31.680 you know, if the primary motivating force at this point 0:11:31.760 --> 0:11:33.040 is like we don't want to see the labor market 0:11:33.080 --> 0:11:35.559 fall apart, powerful this stuff this morning, this is what's 0:11:35.640 --> 0:11:38.760 driving it, And you know our star maybe helps you 0:11:38.760 --> 0:11:41.679 inform like how restrictive your current policy stance is, but 0:11:42.320 --> 0:11:44.720 on like a quarter by quarter or meeting by meeting basis, 0:11:45.080 --> 0:11:47.120 you just know that rates are substantially higher than they 0:11:47.120 --> 0:11:49.880 were a few years ago. Looking at rates in ceative 0:11:49.880 --> 0:11:51.640 parts of the economy, you know they've growing up, been 0:11:51.640 --> 0:11:54.280 doing great. Overall economic activity has done surprisingly the wall 0:11:54.280 --> 0:11:55.960 over the last couple of years, and suggests that our 0:11:55.960 --> 0:11:58.120 star has probably moved up some post COVID for sure. 0:11:58.760 --> 0:12:00.440 But you don't really want to base Paul, you have 0:12:00.520 --> 0:12:03.160 like a very uncertain structural variable and say like, oh, 0:12:03.200 --> 0:12:05.400 we should only cut you know, fifty basis points because 0:12:05.400 --> 0:12:08.000 we're going to do a much higher our star because 0:12:08.040 --> 0:12:10.199 you can only solve those sort of longer run problems 0:12:10.280 --> 0:12:11.680 a little bit in the future. But like if you 0:12:11.840 --> 0:12:15.960 accidentally create a recession, that's a very persistent problem you 0:12:15.960 --> 0:12:17.680 have to deal with four years after the fact. So 0:12:17.720 --> 0:12:20.160 it's sort of like different horizons for risk management, siness, 0:12:20.200 --> 0:12:20.679 the kind of. 0:12:36.800 --> 0:12:39.360 So we know that the sort of our star is 0:12:39.400 --> 0:12:42.440 this sort of in economics that you can't directly observe it, 0:12:42.520 --> 0:12:45.280 but we believe theoretically exists that there is some rate 0:12:45.320 --> 0:12:49.120 that brings the economy into balance. What is the sort 0:12:49.160 --> 0:12:52.599 of economic explanation for why that changes over time? And 0:12:53.000 --> 0:12:55.560 just to add on to that, like why in twenty 0:12:55.600 --> 0:12:58.360 twenty four do economists believe it's higher than say it 0:12:58.400 --> 0:12:59.280 was in twenty eighteen. 0:13:00.000 --> 0:13:01.480 Out of that, I think in the sort of post 0:13:01.520 --> 0:13:04.880 GFC decade, you had, you know, a banking system that 0:13:04.920 --> 0:13:07.600 was having to sort of you know, re solidify its 0:13:07.600 --> 0:13:09.480 balance sheets. There was a lot of new regulation about 0:13:09.480 --> 0:13:11.400 the banks making them kind of de risk. You had 0:13:11.440 --> 0:13:14.640 fiscal policy that after sort of the Obama Ryan deal 0:13:14.720 --> 0:13:16.880 was in much more restrictive territory given where the sort 0:13:16.880 --> 0:13:20.280 of business cycle was, and you had, you know, sentiment 0:13:20.360 --> 0:13:22.760 generally speaking, like on a corporate perspective, was just quite 0:13:22.760 --> 0:13:25.079 subdued for a long time. Afterwards, you'd had this massive shock, 0:13:25.160 --> 0:13:26.960 and I think a lot of these very persistent but 0:13:27.000 --> 0:13:30.040 not necessarily permanent forces were dragging it down. You used 0:13:30.040 --> 0:13:32.600 to have like longer run forces like productivity and demographics 0:13:32.640 --> 0:13:34.600 that are sort of weighing on our star. But all 0:13:34.640 --> 0:13:37.520 of this sort of persistent but not permanent stuff has 0:13:37.559 --> 0:13:39.640 now sort of faded out, especially because the post COVID 0:13:39.679 --> 0:13:42.000 experience was the exact opposite of all those things. It 0:13:42.000 --> 0:13:44.760 was massive, fiscal policy was very loose. Financial conditions, it 0:13:44.800 --> 0:13:48.000 was an absence of spending restraint on the part of 0:13:48.000 --> 0:13:49.600 households and the government were large. 0:13:49.800 --> 0:13:54.200 So the other noteworthy change between this year's Jackson Hole 0:13:54.360 --> 0:13:58.360 and last year is last year, even though the trajectory 0:13:58.480 --> 0:14:01.720 or the momentum overall on inflation was good, it was 0:14:01.800 --> 0:14:04.520 coming down. There was a lot of talk about the 0:14:04.600 --> 0:14:07.400 idea that, well, there's always the possibility that it comes 0:14:07.440 --> 0:14:10.760 rearing back, and this could be the nineteen seventies all 0:14:10.800 --> 0:14:13.160 over again where it comes down dramatically and then it 0:14:13.240 --> 0:14:17.440 spikes a little bit later on. This year, it feels 0:14:17.480 --> 0:14:20.320 like there's not much talk about that. There isn't even 0:14:20.320 --> 0:14:24.000 that much talk about inflation expectations being embedded, like all 0:14:24.040 --> 0:14:26.520 of that seems to have gone in the rear view 0:14:26.800 --> 0:14:30.280 mirror and it's all about the labor market. Do you 0:14:30.320 --> 0:14:34.560 think consideration of the return of inflation is warranted here? 0:14:34.640 --> 0:14:37.600 Should there be more discussion about the potential for inflation 0:14:37.720 --> 0:14:38.640 to come back. 0:14:39.080 --> 0:14:41.480 Over the medium term? I think, you know, post COVID 0:14:41.520 --> 0:14:43.680 and especially you know during the contrast with the sort 0:14:43.680 --> 0:14:46.840 of like post GFC era, you know, inflation, that trend 0:14:46.920 --> 0:14:49.720 in inflation seems like it has moved somewhat higher. Trying 0:14:49.720 --> 0:14:51.440 to pin it down seems like kind of a fraud endeavor, 0:14:51.480 --> 0:14:52.880 but it certainly moved higher. There it was it was 0:14:52.920 --> 0:14:55.800 sort of substantially too low after the GFC. Now it's 0:14:55.800 --> 0:14:58.200 preps a little bit too high, but it's not so 0:14:58.280 --> 0:15:00.200 high that it's obviously a problem for the FED, because 0:15:00.200 --> 0:15:02.160 I don't think most people notice if core PCE is 0:15:02.360 --> 0:15:04.080 two and are quarter percent or two percent or one 0:15:04.080 --> 0:15:06.280 point nine. Realistically, as long as like the labor market 0:15:06.320 --> 0:15:08.680 is okay, and that's sort of a world It like 0:15:08.720 --> 0:15:10.720 adds a little bit of a bias towards policy over 0:15:10.720 --> 0:15:12.200 the medium term. And they've definitely been you know, some 0:15:12.240 --> 0:15:16.680 structural shifts post COVID that seems somewhat inflationary, but in general, 0:15:16.760 --> 0:15:18.480 at the moment, it's not really the operative concern as 0:15:18.480 --> 0:15:20.040 we had into like twenty five or twenty six. If 0:15:20.080 --> 0:15:22.560 the economy really reheats, that could be a problem down 0:15:22.560 --> 0:15:24.680 the road, but that's a problem for a very optimistic 0:15:25.360 --> 0:15:28.640 view of the world two plus years from now, not today. 0:15:28.840 --> 0:15:31.880 So in Q one of this year, we did get 0:15:32.240 --> 0:15:35.160 warmer than expected data. You know, one point that we 0:15:35.160 --> 0:15:36.680 was talking about there are a lot of people thought 0:15:36.680 --> 0:15:38.440 the rate cutting cycle was going to start in March, 0:15:38.960 --> 0:15:41.240 and then we got that warmer than expected data to 0:15:41.320 --> 0:15:45.360 start the year, and then they had to push that back. So, okay, 0:15:46.000 --> 0:15:49.200 what if we have like another period just to you know, 0:15:49.440 --> 0:15:52.240 for whatever reason, some component or something, you know, let's 0:15:52.240 --> 0:15:55.000 say Q four does run on the warm side, and 0:15:55.040 --> 0:15:58.200 they feel, you know, there's some let's say, questions emerge 0:15:58.200 --> 0:16:01.160 about whether they should continue the rate cut cycle in 0:16:01.200 --> 0:16:02.840 the face of this data. You know, let's say the 0:16:02.880 --> 0:16:05.080 job's coming strong and suddenly things look warmer in the 0:16:05.120 --> 0:16:08.880 short term, not twenty twenty five, twenty twenty six. What 0:16:09.000 --> 0:16:12.600 are the costs for the FED if the rate cut 0:16:12.680 --> 0:16:16.080 cycle is you know, sort of aborted so to speak, 0:16:16.200 --> 0:16:18.120 I mean, or if they feel, you know, it's like 0:16:18.120 --> 0:16:19.680 you're like, you know what, actually, we don't want to 0:16:19.680 --> 0:16:21.680 be cutting rates as fast for whatever because the data 0:16:21.760 --> 0:16:23.520 does not come into way they expect. 0:16:23.400 --> 0:16:25.560 Well, if you get surprised by the data, you should 0:16:25.560 --> 0:16:27.480 respond to it. And I think fundamentally the issue that 0:16:27.480 --> 0:16:28.800 I've had with a lot of some of the FED 0:16:28.800 --> 0:16:31.560 speakers recently is that they're sort of premising this notion 0:16:31.600 --> 0:16:33.960 on doing the appropriate thing now about something that eventually 0:16:33.960 --> 0:16:37.000 down the future could maybe be a surprise. Yeah, and like, 0:16:37.040 --> 0:16:39.080 you know, some part of policy needs to be consistent 0:16:39.120 --> 0:16:41.800 over time, but you know a lot of shocks happen 0:16:41.840 --> 0:16:43.840 in the economy. It's always evolving. And I think the 0:16:43.880 --> 0:16:46.440 notion that like, you can't do something today for the 0:16:46.440 --> 0:16:48.520 most predominant risk because you might get a little bit 0:16:48.520 --> 0:16:50.280 of a surprise direction a year, for an hour, six 0:16:50.320 --> 0:16:50.760 months from now. 0:16:50.960 --> 0:16:53.280 People really do talk about this. They like there's like, oh, 0:16:53.360 --> 0:16:55.200 the Oh, the worst thing that would happen is they 0:16:55.200 --> 0:16:58.720 have to backtrack or something. And I'm trying to understand, like, okay, 0:16:58.720 --> 0:17:01.200 if that's so bad, what exacts is so bad about it? 0:17:01.240 --> 0:17:03.280 I think there's a fear that by changing your mind, 0:17:03.360 --> 0:17:06.439 maybe you you know, elevate risk premium, you make markets 0:17:06.440 --> 0:17:07.439 a little bit less certain. 0:17:08.040 --> 0:17:11.000 But I mean we did just see massive drama in 0:17:11.080 --> 0:17:15.320 the market. Yeah, because of like a reconsideration what the 0:17:15.359 --> 0:17:16.119 FED was doing. 0:17:16.800 --> 0:17:19.639 Yeah. True, It's just I think, you know, the worst 0:17:19.800 --> 0:17:22.240 thing rather than not respond, you know, if you're worried 0:17:22.240 --> 0:17:23.639 that like you might have to change your mind, but 0:17:23.640 --> 0:17:26.920 it's much worse to not respond, I think, you know, fundamentally, 0:17:26.920 --> 0:17:29.080 Like yes, maybe it shifts you in a little bit 0:17:29.200 --> 0:17:30.600 on the margin of like well we should do a 0:17:30.640 --> 0:17:33.240 little bit less because of the medium the inflation story 0:17:33.359 --> 0:17:36.800 or something. But the softening in the labor market, you see, 0:17:36.800 --> 0:17:38.520 power was very clear, Like that's in the data. You 0:17:38.560 --> 0:17:40.560 can interpret it in different ways, but like the labor 0:17:40.600 --> 0:17:43.159 market is back to normal, maybe even a little bit soft. 0:17:43.640 --> 0:17:45.520 And if you're worried about that as the sort of 0:17:45.520 --> 0:17:48.760 dominant kind of breaking things risk because you know, presumably 0:17:48.800 --> 0:17:52.120 once recessions start, they get going pretty darn quick. That's 0:17:52.440 --> 0:17:54.960 something you really have to sort of trunkate away pretty quickly, like, okay, 0:17:55.040 --> 0:17:57.240 it didn't happen, Well, okay, that's fine. You can sort 0:17:57.240 --> 0:17:58.480 of move on. It's like, you know, you buy a 0:17:58.520 --> 0:18:00.960 bunch of insurance for your house and then like the 0:18:01.000 --> 0:18:03.320 wildfire doesn't come. There are worse fates. 0:18:04.359 --> 0:18:06.680 I mean, I still think it's a pretty big shift. 0:18:07.440 --> 0:18:10.640 Post financial crisis, it was very much about forward guidance 0:18:10.680 --> 0:18:12.879 and sort of trying to pin yields to where you 0:18:12.920 --> 0:18:15.960 wanted them, and then I think it was twenty twenty 0:18:16.000 --> 0:18:20.480 two it moved to the data dependency very very short term. 0:18:20.800 --> 0:18:23.919 It does feel to me that there's a downside here 0:18:24.160 --> 0:18:27.160 to saying that we're going to react to every data point, 0:18:27.359 --> 0:18:31.080 especially when there's still big question marks over the quality 0:18:31.080 --> 0:18:33.600