Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisntal and I'm Tracy Hall. Tracy, I feel
Speaker 1: like the big question right now from a macro perspective
Speaker 1: is can we get inflation down to a level that's
Speaker 1: consistent with the Fed's target around two percent or at
Speaker 1: least trending in that direction without a painful recession or
Speaker 1: a significant rise in the unemployment right? I think that's
Speaker 1: exactly right. So there's this is the whole soft landing issue.
Speaker 1: Can the FED hit the brakes on rising prices without
Speaker 1: pushing the US into a recession pushing up the unemployment rate?
Speaker 1: And I have to say history is not really on
Speaker 1: their side. We do not have a lot of successful
Speaker 1: examples of the FED being able to do exactly that.
Speaker 1: Although at the moment, if you look at market pricing
Speaker 1: we're recording this on August second, you know, if you
Speaker 1: look at market inflation expectations, they do see inflation going down. Um,
Speaker 1: there is obviously some concern about recession risk, but I
Speaker 1: don't think we're yet at the point where people are
Speaker 1: pricing that as inevitable. So despite the lack of successful
Speaker 1: historic examples of the fed actually engineering a soft landing.
Speaker 1: It feels like a lot of the market thinks they're
Speaker 1: going to manage to do it this time. Well, you
Speaker 1: know you mentioned history, and yes, I think history is
Speaker 1: not too kind. And I think many people would say, look,
Speaker 1: when inflation is this high historically, or when inflation is
Speaker 1: significantly elevated, the only way to bring it down is
Speaker 1: with a tough recession. On the flip side, maybe there's
Speaker 1: no reason we should be looking at history. Is the
Speaker 1: thing I keep coming back to everything that this time
Speaker 1: is different. Are you going to say it? Say it, Joe,
Speaker 1: say this time is different. I'll say this time could
Speaker 1: be different. And the reason I say that is not
Speaker 1: because I'm naive or Pollyanna. But this has been unprecedented.
Speaker 1: Two years we had a pandemic. It was a matter
Speaker 1: of policy to bring the economy more or less to
Speaker 1: a halt with massive fiscal stimulus. We still have a pandemic.
Speaker 1: We have the shift from services to goods consumption, nothing
Speaker 1: like that we've ever really seen. At some point, we're
Speaker 1: going to see this renormalization, which is already happening, and
Speaker 1: so like, it seems very plausible to me that history
Speaker 1: as a guide is just not a useful roadmap for
Speaker 1: the situation we're in right now. And maybe that's good news,
Speaker 1: but I wouldn't bet on that. I just think it's
Speaker 1: possible that history is not so useful here. I think
Speaker 1: that's a fair point. But you could also say that
Speaker 1: economic exceptionalism, or you know, thinking that our current economic
Speaker 1: cycle is somehow unique or exceptional in a way, helped
Speaker 1: to get us in the place where we are in
Speaker 1: right now, where inflation has come in has been and
Speaker 1: stayed much hotter than expected. Right The failure of the
Speaker 1: FEDS trans a tory messaging starting in summer one really
Speaker 1: is kind of probably a lot of people who maybe
Speaker 1: thought like me, which is like, yeah, you know, this
Speaker 1: is like there are a bunch of disruptions, their one offs,
Speaker 1: and then the one offs are going to fade, and
Speaker 1: all the weird price shocks are going to fade too.
Speaker 1: But anyway, the stakes have gotten high because since then
Speaker 1: inflation has gotten only higher and higher, many false hopes
Speaker 1: that it was gonna turn down. And now the question
Speaker 1: is how much more will the FED do and how
Speaker 1: much pain will we see because the Fed will you know,
Speaker 1: the FED is determined. It seems to get that in
Speaker 1: flash right down. How much pain do we have to
Speaker 1: bear for that to happen? Yeah, it's kind of funny.
Speaker 1: I was thinking about this the other day. But it's
Speaker 1: kind of funny that in order to make things affordable
Speaker 1: in general, or things more affordable in general, some people
Speaker 1: have to like lose their income altogether. But anyway, it's perverse. Anyway,
Speaker 1: let's dive in with someone who knows way more about
Speaker 1: this than either of us. We've had them on the
Speaker 1: podcast several times over the years. I'm thrilled to have
Speaker 1: in studio. I'm in studio. Our guest is in studio.
Speaker 1: Tracy is on the line, sadly missing this in person.
Speaker 1: Thrilled to have him in studio. Jana is the chief
Speaker 1: economist at Goldman Sex. So, Jan, thank you so much
Speaker 1: for coming back on the show. It's so great to
Speaker 1: be with you. Joe and Tracy. Really wonderful to have you,
Speaker 1: know the time to explore some of these issues. They
Speaker 1: obviously extremely central to everything that we're thinking about. We
Speaker 1: got plenty of time, so let's try to learn something.
Speaker 1: So let's just let me just ask you the the
Speaker 1: multi trillion dollar question, which is, can we see inflation
Speaker 1: get back to, if not two percent, something in that
Speaker 1: vicinity without incurring a painful recession in the US. I
Speaker 1: think it's possible, and I do think that there is
Speaker 1: there is a path towards you know, something like two
Speaker 1: percent that doesn't involve a recession, but it's a it's
Speaker 1: a very narrow path, and obviously we've seen a lot
Speaker 1: of unanticipated shocks over the last two and a half year.
Speaker 1: You have to be very humble, I think in your
Speaker 1: ability to predict what's going to happen. You know, I'd
Speaker 1: say the first part of the inflation slow down, you know,
Speaker 1: several percentage points. Maybe you know, right now we're a
Speaker 1: little over nine percent if you take the headline CP,
Speaker 1: I were a little bit low five percent if you
Speaker 1: take the core PC, you know, getting back down to
Speaker 1: the sort of four percent range or so, I think
Speaker 1: it's going to be relatively easy, because I do think
Speaker 1: that will be lapping a you know, significant amount of
Speaker 1: you know, weakness or significant significant increases in commodity prices.
Speaker 1: I also think that if you look at the goods market,
Speaker 1: you know, supplier deliveries, indices and other measures of of
Speaker 1: supply chain issues, those have improved pretty rapidly. I mean,
Speaker 1: you look at the big in the service and there's
Speaker 1: there's really been an impressive amount of improvement just in
Speaker 1: the last few months. So I think that part is
Speaker 1: is not going to be too difficult. The harder part,
Speaker 1: I think, is to then get back down from four
Speaker 1: percent to something in the vicinity of two. And I
Speaker 1: think for that we do need a labor market adjustment.
Speaker 1: The labor market continues to be very overheated. We still
Speaker 1: have you know, close to eleven million open positions and
Speaker 1: you know, less than six million unemployed workers. That's still
Speaker 1: a very large gap, basically unprecedented both in absolute terms
Speaker 1: and relative to the size of the population in post
Speaker 1: war history. And you know, I think that is the
Speaker 1: imbalance that the FED is going to have to address.
Speaker 1: And the way they want to address it, of course,
Speaker 1: is by bringing down open positions without raising unemployment too much.
Speaker 1: If you if you see a you know, a large
Speaker 1: wave and layoffs, I mean, that's likely to mean a recession.
Speaker 1: In fact, you could say that is a recession, and
Speaker 1: and and that's the goal. You know, I would say,
Speaker 1: on the slightly encouraging side, so far in you know,
Speaker 1: over the last three months, we've actually seen a fairly
Speaker 1: sizeable adjustment in open positions that are down more than
Speaker 1: a million, and you know, so far without an increase
Speaker 1: in the in the unemployment rate. So I think the
Speaker 1: path that they're trying to, you know, stay on here
Speaker 1: is growth below trend with decline and labor demand and
Speaker 1: therefore an unwinding of that imbalance that ultimately brings down
Speaker 1: wage growth and that allows us to get back to
Speaker 1: something in the vicinity of two percent. You know, it's
Speaker 1: a tall order for sure, but I am somewhat encouraged
Speaker 1: by what I've seen over the last several months. You know,
Speaker 1: you mentioned getting inflation back down to four and I
Speaker 1: wonder is there a chance that maybe the FED would
Speaker 1: be satisfied with four percent, and maybe in a new
Speaker 1: normal of strained commodities supply um and energy crises in
Speaker 1: Europe and things like that, maybe the two percent target.
Speaker 1: I don't want to say it gets abandoned, but maybe
Speaker 1: the FED is willing to stomach slightly higher inflation at
Speaker 1: four percent without you know, having to tip the entire
Speaker 1: economy over into recession and really saying unemployment go up.
Speaker 1: I think four percent is more than than slightly higher inflation.
Speaker 1: I don't think four would be you know, remotely acceptable
Speaker 1: from from the Fed's perspective. You know, a to handle,
Speaker 1: I think maybe that that may be okay. Two and
Speaker 1: a half percent, you know, in a still fairly strong
Speaker 1: labor market environment, I think would be would be fine
Speaker 1: from their perspective, because if you have two and a
Speaker 1: half in a strong labor market, then you know, from
Speaker 1: a an average inflation target perspective, you'd be, you know,
Speaker 1: expecting the economy to go into a session at some
Speaker 1: point that probably would bring inflation down to less than
Speaker 1: two percent. So, you know, I think that could be
Speaker 1: consistent with a two percent average inflation target. Maybe you
Speaker 1: could push that a little bit more to two and
Speaker 1: three quarters, you know, I think a three handle and
Speaker 1: certainly a four handle would be too high from their perspective.
Speaker 1: And I think if you listen to what FED officials
Speaker 1: have been saying over the last several months, I mean,
Speaker 1: it's pretty striking that they really haven't deviated from saying,
Speaker 1: you know, we want to get back to two percent
Speaker 1: the and you know, in part I think that's because
Speaker 1: inflation is very unpopular. I mean, one of the things
Speaker 1: we've discovered or maybe rediscovered, is that, you know, people
Speaker 1: really don't like inflation. So I think there's not much
Speaker 1: mileage in saying, oh yeah, maybe three percent or even
Speaker 1: something more is okay, because I don't think that's how
Speaker 1: people think about it. So to think about what might
Speaker 1: cause the inflation rate to fall or how far it
Speaker 1: can fall, it might be helpful to think decompose the
Speaker 1: drivers of the upward move which is consistently caught everyone
Speaker 1: by surprise. The Feds certainly been caught by surprise economists,
Speaker 1: the market. In fact, we keep seeing these new highs.
Speaker 1: How do you think about the different factors between sort
Speaker 1: of disruptions related to the pandemic, monetary and fiscal expansion
Speaker 1: in response to the pandemic, and then other idiosyncratic factors,
Speaker 1: most notably probably Russia's invasion of Ukraine. How do you
Speaker 1: think about waiting some of these factors for how we
Speaker 1: got here today? Well, it depends on which inflation indicator
Speaker 1: you're looking at. If you take the headline numbers, then
Speaker 1: you know, of course the sharp increase in commodity prices
Speaker 1: is you know, a very important part of that, you know,
Speaker 1: the most important part in terms of the over shoot,
Speaker 1: and some of that is you know, driven by I
Speaker 1: think more structural issues under investment in the commodity industry,
Speaker 1: which my good colleague Jeff Curry has talked about. I
Speaker 1: always talked about it on on your program. But then,
Speaker 1: of course we've also had some additional shocks that that
Speaker 1: also have had an impact, most notably the Russia Ukraine War.
Speaker 1: You know, I think supply disruptions that are related to
Speaker 1: the pandemic and related to the fact that you know,
Speaker 1: in the spring of two thousand and twenty one, we
Speaker 1: thought the pandemic was receding into the background, but then
Speaker 1: you had delta, and then you had a macron, and
Speaker 1: then you had a macron again, and then you have
Speaker 1: you know, a sort of succession of B A waves.
Speaker 1: So you know, I think that that is has played
Speaker 1: a role. I do think that that is abating at
Speaker 1: least as far as the supply disruptions are concerned, at
Speaker 1: least for now. So and you know, there are a
Speaker 1: number of things that are probably somewhat more temporary in nature. Uh.
Speaker 1: And you know, I would put into the agory of
Speaker 1: you know, unfortunate and unforeseen unforeseen sharks. But then I
Speaker 1: think the other big issue really is the labor market imbalance.
Speaker 1: And I would say that a lot of economists, certainly,
Speaker 1: I have changed my thinking about labor market balance. If
Speaker 1: you had asked me about, you know, full employment and
Speaker 1: how I would define full employment a year and a
Speaker 1: half ago, I would have given you an answer that
Speaker 1: was based in part on the unemployment rate and in
Speaker 1: part on the employment of population ratio. But open positions
Speaker 1: would have been, you know, would have had only a
Speaker 1: supporting role. And you know, if you if you look
Speaker 1: at unemployment or employment to population a year and a
Speaker 1: half ago, we were still really far away from the
Speaker 1: sort of pre pandemic level. I mean, it was very
Speaker 1: hard to sort of envisage that we'd be close to
Speaker 1: full employment even a year down the road. And you know,
Speaker 1: the truth is employment of population is still well be
Speaker 1: oh where it was pre pandemic. But the job openings,
Speaker 1: I think are playing a much more central role because
Speaker 1: they basically give you the balance between total labor demand
Speaker 1: and total labor supply, a total number of jobs and
Speaker 1: total number of workers. And uh. And so I've I've
Speaker 1: definitely changed my thinking about labor market balance. And we
Speaker 1: are you know, we we are way out of balance,
Speaker 1: and the labor market is very overheated. I want to
Speaker 1: dig into the labor market a little bit more, but
Speaker 1: just before we do, I feel like when it comes
Speaker 1: to inflation, we all agree that inflation has been higher
Speaker 1: than you know, a lot of people initially expected, but
Speaker 1: it feels like there's less agreement on exactly why. So
Speaker 1: there's still a lot of folk us on one off
Speaker 1: factors like Russia's invasion of Ukraine. But could you maybe
Speaker 1: just give us a sense of, you know, why has
Speaker 1: it turned out this way? Why does inflation continue to
Speaker 1: be higher than expected? And you know, looking back, I
Speaker 1: suppose what in retrospect did people miss because we still
Speaker 1: have even people like Chairman Pal saying things like what
Speaker 1: was that quote? Um, we now understand how little we
Speaker 1: understand about inflation, and yet we're all focused on it
Speaker 1: at the moment. But like everyone seems to admit that
Speaker 1: we're not entirely sure what's driving prices. I think again,
Speaker 1: it's a combination of some you know, unforeseen shocks and
Speaker 1: you know, an underestimation of how tight the labor market
Speaker 1: really was as of a year, a year or a
Speaker 1: year and a half ago. And I mean we certainly
Speaker 1: shared in that I didn't think that we were anywhere
Speaker 1: close to full employment, and now I think we're significantly
Speaker 1: beyond full employment, at least in terms of the balance
Speaker 1: between you know, a total number of jobs and total
Speaker 1: number of workers. And so I think it's a it's
Speaker 1: a combination of things that were, you know, maybe harder
Speaker 1: to forecast, just because shocks, you know, by definition, shocks
Speaker 1: are shocks and things that you know, with a better model,
Speaker 1: we would have, you know, we would have anticipated. And
Speaker 1: you know, that's why we've kind of changed a model
Speaker 1: of how to think about this. So you know, I'm
Speaker 1: looking at these two charts now in the terminal, and
Speaker 1: you have employment to population ratio, which is not only
Speaker 1: is it not back to pre crisis levels, it's actually
Speaker 1: turned down in the last few months, which maybe is
Speaker 1: a little bit of a source of concern. And then
Speaker 1: the job openings data, which has started to turn down,
Speaker 1: but that one is sort of off the charts, and
Speaker 1: that one shot with hair one quick question on job
Speaker 1: job openings, isn't that high quality data? Like it's not
Speaker 1: hard to put up a job listing these days? And
Speaker 1: I forget who it was we did to speak to
Speaker 1: someone months ago that questioned this sort of there was
Speaker 1: some paper that questioned how long and this sort of
Speaker 1: time series. This is comparable given the you know, the
Speaker 1: proliferation of job boards and the ease with which one
Speaker 1: can post. But how do you think about like the
Speaker 1: quality of that data. I think there's also a theory
Speaker 1: out there that some of this was driven by p
Speaker 1: p P and that if you say that you're still
Speaker 1: struggling to hire workers, you still get some support from
Speaker 1: the government. So there's also like a question over whether
Speaker 1: those pandemic policies actually have an impact too and encourage
Speaker 1: people to keep job openings out there. No economic indicator
Speaker 1: is perfect, and that's certainly true for the job opening series,
Speaker 1: I mean, the official you know jolts series, which is
Speaker 1: published by the Labor to HAARTMENTED. I think it's higher
Speaker 1: quality than than a lot of the other job boards,
Speaker 1: which I would would use as maybe kind of confirmation
Speaker 1: of what I see in the in the Labor Department numbers.
Speaker 1: The Labor Department numbers are verified openings. We have not
Speaker 1: really found a lot of evidence that the meaning of
Speaker 1: a job opening is you know, dramatically different relative to
Speaker 1: ten or twenty years ago, and if you look at
Speaker 1: the official series, you know, as of a year and
Speaker 1: a half ago. I mean, it wasn't out of line
Speaker 1: with history. It's only you know, and technologically obviously a
Speaker 1: year and a half ago wasn't that different from from
Speaker 1: where we are now. It's it only really moved out
Speaker 1: of line with history in the summer of two thousand
Speaker 1: and twenty one. So to me, that is somewhat encouraging
Speaker 1: in terms of the quality of the of the data.
Speaker 1: But you know, I do think you want to verify
Speaker 1: tightness of the labor market via other indicators. Another indicator
Speaker 1: you can look at that I think it's pretty useful
Speaker 1: as the quit rate. And you know, broadly speaking, the
Speaker 1: quit rate confirms that were in a very tight labor market,
Speaker 1: the one that is loosening at the margin. So we
Speaker 1: were we had literally an all time high in the
Speaker 1: quit rate, you know, several months ago, and we've come
Speaker 1: off of that slightly. I haven't seen as much of
Speaker 1: a downturn as in the job openings numbers, but I
Speaker 1: would say, broadly speaking, confirms what you see in the
Speaker 1: job openings data. It's just a you know, very very
Speaker 1: tight labor market. So going back to the employment population
Speaker 1: ratio or some of these other measures. They have topped out,
Speaker 1: they never even got back to pre crisis levels, and
Speaker 1: they may be flatlining or even turning down. What do
Speaker 1: you attribute that too. What's like the big change in
Speaker 1: the composition or the size of the labor market that
Speaker 1: seems to be at least one factor contributing to this
Speaker 1: big supplied to demand mismatching labor. So I'd say, looking
Speaker 1: at the household survey of employment in general, you know,
Speaker 1: it's been significantly weaker than the establishment survey over the
Speaker 1: last several months. So I would probably take the downturn
Speaker 1: that we've seen in the employment of population ratio, which
Speaker 1: of course is based on household employment. I would take
Speaker 1: that with a little bit of a grain of salt.
Speaker 1: I don't know that we really have, you know, a
Speaker 1: lot of evidence that that it's turned down. I take
Speaker 1: more of an average between the establishment survey and the
Speaker 1: household survey, which would say definitely slower employment growth, but
Speaker 1: probably not an outright decline. With that out of the way,
Speaker 1: I do think that the employment of population ratio probably
Speaker 1: will be lower in you know, at whatever the peak
Speaker 1: of this cycle is, then it was in the previous cycle,
Speaker 1: because I think aging of the population of course has continued,
Speaker 1: so that is a kind of structural driver of declines
Speaker 1: and employment of population. And then in addition, we've seen
Speaker 1: you know, some people withdraw from from the workforce. We've
Speaker 1: seen you know, significant amounts of early retirement. And I
Speaker 1: don't think that that's really going to reverse either. I mean,
Speaker 1: over you know, over the very long term, the impact
Speaker 1: should should decline, but it's not going to reverse quickly,
Speaker 1: I suspect. Then then I think the last point, and
Speaker 1: this is related to it. I don't think it's you know,
Speaker 1: visible of course in the employment of population ratio, is
Speaker 1: that we had very few immigrants for a year or
Speaker 1: two and unless we see kind of catch up immigration
Speaker 1: immigration flows that are actually larger than the pre pandemic
Speaker 1: rate to make up for that, you know, essentially whole
Speaker 1: we're also going to have a permanently smaller workforce than
Speaker 1: we would have otherwise otherwise had. Again that's not for
Speaker 1: employment to population, but it's it's important for the overall
Speaker 1: number of workers. So how much can unemployment actually rise
Speaker 1: without tipping the US into a full blown recession. And
Speaker 1: then you know, secondly, when when you look at something
Speaker 1: like jolts falling, and we just had the jolt numbers
Speaker 1: come out today. We're recording this on August. Second, you know,
Speaker 1: we saw a higher than expected drop in job openings. Like,
Speaker 1: how concerning is something like that to you? Given your
Speaker 1: new framework? So a decline and job openings is not concerning.
Speaker 1: In fact, in my view, it's a it's a good
Speaker 1: thing because we need a you know, rebalancing of the
Speaker 1: labor market, and it's much much better to have that
Speaker 1: rebalancing of the labor market occur via declines and job
Speaker 1: openings rather than increases in unemployment. And if firms get
Speaker 1: rid of job openings, that does not have you know,
Speaker 1: negative second round effects. You're not cutting anybody's income by
Speaker 1: you know, removing job openings. You know, increases in the
Speaker 1: ployment and layoffs are a very different story. Then you
Speaker 1: you do cut people's income, you you know, impose hardship
Speaker 1: at the individual level, and you're also taking income out
Speaker 1: of the out of the economy, so you're you're you're
Speaker 1: weakening the cycle. History would say that you can only
Speaker 1: see you know, a small increase in the unemployment rate
Speaker 1: without going into recession at least you know, in US history,
Speaker 1: we've never seen an increase in the three month average
Speaker 1: of the unemployment rate of more than thirty five basis
Speaker 1: points without a recession. If you look outside the US,
Speaker 1: you know, that looks a little bit different. So I
Speaker 1: certainly wouldn't view it as a as a law of nature,
Speaker 1: but I think it does drive home that sizeable increases
Speaker 1: in the unemployment rate have historically been associated with with recessions,
Speaker 1: and probably in part, you know, through kind of causal
Speaker 1: forces that you've seen, you know, declines and despol stable
Speaker 1: income on the back of layoffs, which have then fed
Speaker 1: into weakness in in spending. You know, historically, I think
Speaker 1: that's often been been a factor. You know, now I
Speaker 1: think we might be in a somewhat different situation because
Speaker 1: weakness and disposable income, at least in in two thousand
Speaker 1: and twenty two, you know, it's driven by inflation and
Speaker 1: fiscal tightening as opposed to labor market forces. So you know,
Speaker 1: it may not be quite the same situation as over
Speaker 1: the entire stretch of postible history, but but it's definitely
Speaker 1: something to watch. If the labor market is so tight,
Speaker 1: why have we seen negative real wage growth? I think
Speaker 1: because you know, wage decisions are really more around nominal
Speaker 1: wages than than around real wages, and there's you know,
Speaker 1: a sufficient amount of inertia in the in the process
Speaker 1: that if you try to explain the ups and owns
Speaker 1: of wages with labor market tightness variables generally do a
Speaker 1: much better job if you focus on nominal wages. Then
Speaker 1: if you focus on on real wages, it's also a
Speaker 1: little bit hard to know, you know, what real wage
Speaker 1: expectations that you know might be set via the labor
Speaker 1: market process too, you know, bargaining at the individual level
Speaker 1: or even the collective level, what that really is. You know,
Speaker 1: backward looking inflation is nine percent, but if you look
Speaker 1: at expected inflation depending on the horizon, you know, it's
Speaker 1: it's much much lower. Um. So, you know, I do
Speaker 1: think the what we've seen in wages has been quite
Speaker 1: consistent with an overheated labor market. I mean, i'd focus
Speaker 1: on the fact that you know, most wage indicators are
Speaker 1: showing something like five and a half percent year and
Speaker 1: year growth, and that is, you know, that's very high.
Speaker 1: That's way higher than what's consistent with a you know,
Speaker 1: two percent inflation. Right. Let me ask you you know,
Speaker 1: Tracy mentioned like, Okay, at what point does an increase
Speaker 1: in the unemployment rate constitute a recession? And basically, if
Speaker 1: it starts ticking up, there's a good chance we're going
Speaker 1: to get a recession. At what point does the Fed
Speaker 1: seriously have a problem on its hands about the correct
Speaker 1: course of policy? If unemployment we're to start ticking up,
Speaker 1: but inflation falls much slower than Hope did, so you know,
Speaker 1: you start to say, like, this is a real recession,
Speaker 1: but we still have we still have a long way
Speaker 1: to go to two percent? Walk is through how you're
Speaker 1: thinking about that risk, like the real stag inflation risk,
Speaker 1: I guess is what's out there? Yeah, I think it
Speaker 1: depends on what you see another indicators. I mean, you
Speaker 1: wouldn't just want to focus on the realized inflation numbers
Speaker 1: because that is, you know, going to be pretty backward looking.
Speaker 1: I think you want to look at overall measures of
Speaker 1: supply versus demand and the labor market. You want to
Speaker 1: look at the at the wage numbers. But yeah, I mean,
Speaker 1: it certainly could be that you're you'd be in a
Speaker 1: difficult situation because you know, while you do want to
Speaker 1: focus on forecasts, forecasting is always difficult, and it's probably
Speaker 1: more difficult in the current environment then it has been
Speaker 1: in previous cycles. So I think there is a real
Speaker 1: risk that if you if you did see you know,
Speaker 1: a sharper downturn, that it would be difficult to you know,
Speaker 1: know exactly at what point you should you know, reverse
Speaker 1: course on monetary policy. You know. With that said, if
Speaker 1: I focus on the last efform C meeting, I think
Speaker 1: there was some reassurance from Chair Powell as far as
Speaker 1: markets were concerned, that you know, he said, we we
Speaker 1: are going to look at at both sides of this.
Speaker 1: I mean, I don't think it was a you know,
Speaker 1: particularly doublsh meeting, you know, to the degree that that
Speaker 1: that perhaps you might gauge from where market pricing has gone.
Speaker 1: But it was reassuring in the sense that, you know,
Speaker 1: he certainly didn't say, well only for a stone inflation.
Speaker 1: Joe asked you that question about if the job market
Speaker 1: is so tight, why haven't wages gone up more? And
Speaker 1: this is I guess one of the maybe one of
Speaker 1: the few good things that we have going at the moment,
Speaker 1: which is that inflation expectations so far seemed to be
Speaker 1: reasonably well anchored. Unfortunately, a lot of people don't think
Speaker 1: they're going to get massive pay increases, and a lot
Speaker 1: of people, at least according to the survey measures, still
Speaker 1: think of inflation as transitory. How much does that help
Speaker 1: the FED? And is there a risk that at some
Speaker 1: point those expectations become unmoored or more unmoored. I think
Speaker 1: it's you know, hugely helpful, certainly if you you know,
Speaker 1: compared with the with the alternative. I mean, if if
Speaker 1: inflation expectations were you know, anywhere close to current actual
Speaker 1: inflation headline and and even core, I think would be
Speaker 1: much harder to have any realistic scenario of bringing inflation
Speaker 1: down without a very significant amount of economic pain. I mean,
Speaker 1: if I look at the kind of economic history of
Speaker 1: the late nineteen seventies early nineteen eighties, inflation expectations, based
Speaker 1: on the indicators we have had become you know, very
Speaker 1: significantly unmoored on the back of repeated increases and an
Speaker 1: ongoing trend increases in inflation over the previous fifteen years,
Speaker 1: and it turned out to be you know, extremely painful
Speaker 1: to bring inflation back down to the kind of you know,
Speaker 1: two or three percent range in the in the subsequent decade.
Speaker 1: So I, you know, I do think that we with
Speaker 1: the with the you know, most of the long term
Speaker 1: inflation indicators, inflation expectations indicators still consistent with something like
Speaker 1: two percent, we're in a much much better position. And
Speaker 1: I'd say it's one of the real signific again upside
Speaker 1: surprises that we've seen over the last you know, a
Speaker 1: year or a year and a half. I mean, if
Speaker 1: you had given me all of the inflation related indicators
Speaker 1: other than the expectations measures a year ago and had
Speaker 1: asked me to predict what the expectations measures are, I
Speaker 1: would have given me a much higher number. And that also,
Speaker 1: I think is important for the second part of your question,
Speaker 1: because you know, while of course we need to watch
Speaker 1: whether this anchored you know, environment changes. You know, I
Speaker 1: guess I'd be surprised if we had a you know,
Speaker 1: a major change having watched what these uh, you know,
Speaker 1: what what these indicators have shown. You know, obviously you
Speaker 1: don't want to over you know, overstress your your your
Speaker 1: your luck in this. You do need to watch it,
Speaker 1: but I would expect inflation expectations to stay anchored. So
Speaker 1: here's a question that I can post you because your
Speaker 1: Goldman's chief economist the globe. You know, inflation isn't just
Speaker 1: high in the US, for it, art at the map,
Speaker 1: and there's a good chance you're going to hit a
Speaker 1: country where inflation is it like fourty year highs. And
Speaker 1: there are different factors. You know, Germany obviously headline inflation
Speaker 1: very exposed to electricity prices and the increase in the
Speaker 1: cost of gas. But it's not just Germany, and it's
Speaker 1: not just headline and core in Europe. In the Euro
Speaker 1: Area continues to march higher. We haven't seen that turned
Speaker 1: down either. And you know, you can't in Europe blame
Speaker 1: the extra checks or anything like that. Just looking at
Speaker 1: inflation on a global basis inform can it be used
Speaker 1: to inform anything about root causes and the drivers of it?
Speaker 1: I think so. I think it does show that common shocks,
Speaker 1: as opposed to country specific policy choices, you know, played
Speaker 1: a very important role in this. But I also think
Speaker 1: that you see some evidence of country specific developments. So
Speaker 1: if you take the Euro Area versus the US, you know,
Speaker 1: certainly both headline and core inflation, you know, have converged
Speaker 1: to some degree. But on the labor market side, you know,
Speaker 1: I think we still have a pretty significant difference. Yes,
Speaker 1: wage growth is accelerating in in Europe, but you know,
Speaker 1: it's moving to three percent, whereas in the US it's
Speaker 1: moved to to five and a half percent, and you know,
Speaker 1: three percent is still that's still relatively well behaved. I
Speaker 1: think it's much harder to argue that the European labor
Speaker 1: market in aggregate is is overheated. So I think there
Speaker 1: still are some differences, you know. With that said, I
Speaker 1: think those differences don't look quite as stark as they
Speaker 1: did maybe six months ago or twelve months ago. And
Speaker 1: you know, not only because of additional shocks, also because
Speaker 1: I think we've you know, probably learned a little more
Speaker 1: about you know, what's happened to core inflation, not just
Speaker 1: not just you know, oiland and natural gasper an electracitory prices.
Speaker 1: So Joe asked the global question on inflation, and I'm
Speaker 1: going to go right back to asking a very granular
Speaker 1: US inflation question, But can you talk to us about
Speaker 1: rental inflation in the States, there has been some concern
Speaker 1: about rents going up um and people are sort of
Speaker 1: wondering when and where that might stop. And also people
Speaker 1: asking questions about how higher rents interact with the housing
Speaker 1: market as well. So you know, at what point does
Speaker 1: it maybe make more sense to buy a house versus
Speaker 1: renting if everything is going up. So I'm just wondering
Speaker 1: how how you're sort of thinking about that. Rental inflation
Speaker 1: certainly has been you know, an ongoing upside surprise. I
Speaker 1: would say in the in the last few months, actually
Speaker 1: the most important upside surprise, I mean, more important I
Speaker 1: think than the then the commodity numbers, because we sort
Speaker 1: of know where those are coming from. You know, both
Speaker 1: Rand and Honest equivalent brand have, you know, continue to accelerate,
Speaker 1: and the last couple of numbers, you know, in the
Speaker 1: in the sort of eight percent annualized range. You know,
Speaker 1: I think there is good reason to believe that we'll
Speaker 1: see lower rent inflation as we go kind of into
Speaker 1: two thousand and and twenty three. If we look at
Speaker 1: some of the more bottom up indicators on you know, rents,
Speaker 1: on on new leases, those have decelerated. The housing market
Speaker 1: more broadly, you know, clearly is is decelerating. The labor
Speaker 1: market is decelerating, I mean statistically that is an important
Speaker 1: driver of of rent inflation. So I think by two
Speaker 1: thousand and twenty three, I would be reasonably confident that
Speaker 1: will will see a deceleration, but over the next few months.
Speaker 1: I think it's a major upside risk to the inflation numbers.
Speaker 1: And we actually just you know, up our core PC forecast,
Speaker 1: you know, somewhat further because rent has continued to come
Speaker 1: in where they have CORPC going to know, we have
Speaker 1: it at four and a half percent by the end
Speaker 1: of the year and we're in over at four right now,
Speaker 1: so very so not much progress, not much progress through
Speaker 1: the end of two thousand and uh and twenty two,
Speaker 1: and that you know, there are a number of factors
Speaker 1: going into that, but an important factor is the rent situation.
Speaker 1: Can you describe just sort of what you your your
Speaker 1: current shortened medium term outlook for both I guess for
Speaker 1: both inflation but also for the fence policy. How many
Speaker 1: more hikes through this year and then what beyond after
Speaker 1: this year? So for inflation, you know, we have core
Speaker 1: inflation come down you know, very modestly through the end
Speaker 1: of the year and then more significantly in two thousand
Speaker 1: and twenty three. That's also partly related to two rent.
Speaker 1: So we have you know, COREPC two and a half
Speaker 1: by the end of two thousand and twenty three. That's
Speaker 1: a pretty significant deceleration. Obviously still you know, somewhat above
Speaker 1: the two percent, but probably more consistent with where they
Speaker 1: would be comfortable at least in a continued expansion. And
Speaker 1: then on on on Fed policy. You know, we're expecting
Speaker 1: a fifty basis point move at the September meeting, so
Speaker 1: ratcheting down the pace. And then we have two more
Speaker 1: twenty five basis point moves in November and December, which
Speaker 1: takes us to three and a quarter to three and
Speaker 1: a half percent for the funds rate, consistent with the
Speaker 1: latest dot plot and consistent with the fed's latest thinking
Speaker 1: based on what Chair Paul said in the latest press conference.
Speaker 1: And then in two thousand and twenty twenty three, we
Speaker 1: actually have nothing continued three to three and a quarter
Speaker 1: to three and a half percent funds rate. As the
Speaker 1: economy cools off, inflation comes down, and the growth is
Speaker 1: below the long term trend. You know, I think in
Speaker 1: that environment, they probably would keep the funds rate somewhat
Speaker 1: above where they think it's going to settle in the
Speaker 1: longer term, because you know, after all, inflation is still
Speaker 1: too high. So I think the hurdle for cuts in
Speaker 1: two thousand and twenty three is is high. If I
Speaker 1: look at market pricing, the market is obviously pricing some
Speaker 1: pretty significant cuts, but I think that probably would require
Speaker 1: an even weaker growth environment than we have no forecast.
Speaker 1: So one of the unusual things about the current economic situation,
Speaker 1: and there are a bunch of unusual things about it,
Speaker 1: but one of the bigger ones, I would say, is
Speaker 1: the difference between soft versus hard data, so the survey
Speaker 1: based measures versus the actual numbers that are coming in.
Speaker 1: So even though you look at things like consumer sentiment
Speaker 1: that you know that survey is now at its lowest
Speaker 1: and I can't remember exactly, but like very very low,
Speaker 1: but if you look at the actual consumer spending figure
Speaker 1: that's been relatively resilient, how do you explain that discrepancy? Well,
Speaker 1: I think even among the soft data there are some
Speaker 1: important discrepancies. Because the University of Michigan consumer sentiment number
Speaker 1: is close to an all time law, goes back to
Speaker 1: the late nineteen sixties. I mean, it just came off
Speaker 1: an all time law, but it's still very close. But
Speaker 1: then the Conference Board survey, which is the other longstanding
Speaker 1: you know, consumer confidence survey is actually not particularly low,
Speaker 1: and that's a that's a much bigger gap than normal,
Speaker 1: and it reflects the fact that the Conference Board indicator
Speaker 1: puts more weight on the labor market situation, and you know,
Speaker 1: people recognize that the labor market is still very strong,
Speaker 1: but confidence has taken a large hit, in particular from
Speaker 1: the inflation increase and the increase in gas prices. You
Speaker 1: see a somewhat similar gap up in the business surveys.
Speaker 1: A number of the business surveys have fallen kind of
Speaker 1: below the you know, zero or or or fifty line,
Speaker 1: depending on which of the serveys you you take, so
Speaker 1: basically into contractionary territory. But harder indicators of activity are
Speaker 1: are still somewhat somewhat firmer. You know, industrial production generally
Speaker 1: has looked looked somewhat better. Um So, yeah, it's a
Speaker 1: there are a lot of different indicators out there. I
Speaker 1: think you generally want to put some weight on on
Speaker 1: a range of indicators. I generally take averages of different indicators.
Speaker 1: And consumer confidence I think it's probably a bit of
Speaker 1: an outlier to the low side or consumer sentiment. Rather
Speaker 1: most of the indicators, in my view are still consistent
Speaker 1: with positive growth, though very slow growth. I want to
Speaker 1: ask you a question, and it's sort of long term,
Speaker 1: and maybe it even is about the entirety of this
Speaker 1: coming decade. But when I think of the last decade,
Speaker 1: you know, the dominant economic phenomenon to some extent was
Speaker 1: slack and there was always ample workers ready to be hired.
Speaker 1: We had loose, uh, commodity markets. Oil was not only cheap,
Speaker 1: it was plentiful. It was the shale era. It was
Speaker 1: not you know, shortages and elsewhere. And of course that's
Speaker 1: tight commodity markets. And we've had multiple conversations with your
Speaker 1: colleague Jeff Curry. Is expected to be a persistent feature
Speaker 1: of the economy, at least for the foreseeable future. It
Speaker 1: doesn't seem like there's gonna be some major change in
Speaker 1: the supplied dynamic of copper or lithium or oil or
Speaker 1: anything like that. Does that change what this next decade
Speaker 1: is going to be like and does it impose to
Speaker 1: some extent a lower speed limit on what what growth
Speaker 1: can be in the years ahead. Yeah, I think it
Speaker 1: potentially does. I do think it's important for from a
Speaker 1: from a speed limit perspective, you know, over time. Of course,
Speaker 1: there will be you know, substitution and there will be innovation,
Speaker 1: and you know, whatever constraint exists in the in the
Speaker 1: short term can be relieved via investment and you know, ingenuity.
Speaker 1: But but but I do think it's a uh, you know,
Speaker 1: a significant significant issue at least relative to the sort
Speaker 1: of post two thousand and fourteen period when you had
Speaker 1: a you know, much much kind of looser supply environment,
Speaker 1: especially in the in the commodity industry, which then kind
Speaker 1: of begat the the the underinvestment for which we're now
Speaker 1: we're now paying the price, you know. I think another
Speaker 1: another issue, though, was on the macroeconomic side, that in
Speaker 1: the aftermath of the two thousand and eight crisis, monetary
Speaker 1: and fiscal policy we're you know, very reluctant to provide
Speaker 1: stimulus even in an environment where we are still you know,
Speaker 1: very far away from from from full employment. And it
Speaker 1: took a long time for that to end. You know.
Speaker 1: I do think that it was you know, the low
Speaker 1: inflation environment. In part it was planetful supply of commodities,
Speaker 1: but in part it probably also was overly tight policy.
Speaker 1: Do you find yourself I'm just curious, you know, professional
Speaker 1: question but obviously, like we've been doing the podcast over
Speaker 1: for years and years now, and you know, the last
Speaker 1: year our conversation to become much more micro, and we
Speaker 1: want to learn about the ports, and we want to
Speaker 1: learn about copper production. And you know, now when thinking about, well,
Speaker 1: where electricity prices going to go in the US, it's
Speaker 1: like you have to know, like how soon are they
Speaker 1: going to get that export terminal in Louisiana back open?
Speaker 1: They would presumably put upward pressure on natural gas prices.
Speaker 1: Do you find yourself and in your conversation feeling the
Speaker 1: impulse to get more micro to understand some of these
Speaker 1: things as how they're going to inform the broader economy. Yeah,
Speaker 1: and more of a crisis situation, I think you always
Speaker 1: have to learn more, you know about details of the
Speaker 1: economy or the financial system or healthcare. Then then you
Speaker 1: really perhaps anticipated And that was true of course in
Speaker 1: the run up to two thousand and eight, and you
Speaker 1: know the immediate aftermath in terms of the financial system,
Speaker 1: in the in the mortgage market, and you know, securitization,
Speaker 1: and in the early days of the pandemic, it was
Speaker 1: around health health and and I think in the aftermath
Speaker 1: of the pandemic. A lot is around supply chain and
Speaker 1: and commodity industries, So I do think it's a hallmark
Speaker 1: in some ways of being in more of a crisis situation.
Speaker 1: The other thing I'd say on this is that different
Speaker 1: parts of the economy, you know, having very different experiences,
Speaker 1: and that's probably going to continue to make it harder
Speaker 1: to figure out the macro because you know, you've got
Speaker 1: good spending still at pretty high levels, and even in
Speaker 1: a decent econdom, you know, in a decent macro environment,
Speaker 1: good spending is probably not going to develop very well
Speaker 1: over the next next year or so. Where service spending
Speaker 1: is you know, service consumption is still well below the
Speaker 1: pre pandemic level, and there even in a not so
Speaker 1: good economic environment, we probably will still see increases in
Speaker 1: you know, say office adjacent consumption or you know, high
Speaker 1: touch recreation services and and and and travel and spectator
Speaker 1: events and things like that. And I think that's also
Speaker 1: going to make it harder to extrapolate from kind of
Speaker 1: partial indicators, you know, one sector of the economy to
Speaker 1: say that you know, this is this is what's telling
Speaker 1: us that we're in a recession. Now that we're not
Speaker 1: in a recession, and you really do have to look
Speaker 1: at the whole picture and and and the you know,
Speaker 1: macroeconomy has made made up of a lot of different
Speaker 1: sectors and separate micro indicators. Just on this note, how
Speaker 1: has the pandemic changed the economy? I mean, you mentioned
Speaker 1: tweaking your labor market model, but I can imagine, you know,
Speaker 1: in the early days of the pandemic, when all this
Speaker 1: new fiscal stimulus was unleashed, there was some talk that, oh,
Speaker 1: this is a new paradigm that from now on, whenever
Speaker 1: there's a recession, we're going to get you know, the
Speaker 1: government writing checks and things like that. But now that
Speaker 1: we have higher than expected inflation, it seems like that
Speaker 1: might be in doubt. So I'm wondering if you think
Speaker 1: that something permanent has changed because of our pandemic experience.
Speaker 1: I think that's still an open question. On the on
Speaker 1: the labor market, you know, kind of rethinking of our
Speaker 1: labor market model. I don't think that's necessarily directly related
Speaker 1: to the to the pandemic. I think it's just thinking
Speaker 1: through how labor demand and labor supply interact in a
Speaker 1: in a in a more careful way. I think. I
Speaker 1: mean I think it's it's it could have that could
Speaker 1: have occurred in a you know, very different kind of
Speaker 1: healthcare and pandemic environment. It just so happened that because
Speaker 1: we've seen these massive changes in job openings, that that's
Speaker 1: what really made the whole job openings issue very salient.
Speaker 1: How the economy is going to look from a structural perspective,
Speaker 1: you know, what what the average level of say, service
Speaker 1: consumption versus goods consumption is going to be, and you
Speaker 1: know how many people, how much time people spending offices
Speaker 1: versus working remotely. I think a lot of those things
Speaker 1: are still somewhat up in the air. My own view is,
Speaker 1: you know, probably more towards the the side that a
Speaker 1: lot of these things are going to continue to normalize
Speaker 1: relative to pre pandemic levels. I think we've already seen
Speaker 1: a sizeable amount of normalization. I think that probably will continue,
Speaker 1: although it's taking in a lot of areas, it's taking
Speaker 1: longer than anticipated. I think on economic policy, the you know,
Speaker 1: economic policy kind of goes in goes in waves and
Speaker 1: and and you know, there's there's always a risk of
Speaker 1: kind of fighting the last war for central banks and
Speaker 1: fiscal policy makers, and you know, in the kind of
Speaker 1: nine nineties and two thousands, and much of the two
Speaker 1: thousands and tens, I think central banks were very focused
Speaker 1: on high inflation and the risk of inflation recurring, and
Speaker 1: so they tended to run too tight a monetary poll. See.
Speaker 1: Then in the course of the posto eight recovery, you know,
Speaker 1: they learned basically that they probably should be setting their
Speaker 1: sights on full employment somewhat higher, should be more aggressive.
Speaker 1: When the pandemic struck. They were very decharmined, We're not
Speaker 1: going to make this mistake again. We're going to be
Speaker 1: very aggressive. And you know, in two thousand and twenty
Speaker 1: that was actually extremely fortuitous because they were very aggressive
Speaker 1: in forestalling what could have been a significantly worse crisis.
Speaker 1: But then in two thousand and twenty one, this thinking
Speaker 1: led them to overdo it, and uh, you know, it
Speaker 1: took it took too long to sort of bring about
Speaker 1: a change in in policy, and and so in two
Speaker 1: thousand and twenty two they've been they've been catching up.
Speaker 1: I mean, yeah, it's late Jackson Hole. That's when they
Speaker 1: unveiled the flexible average inflation targeting, which in retrospect seems
Speaker 1: like it might have been the ideal policy for the
Speaker 1: post GFC recession that might have led to better outcomes
Speaker 1: than what we got. I guess still to be determined
Speaker 1: whether they could pull off the soft landing here or not.
Speaker 1: What's the buzz going to be like at Jackson Hole?
Speaker 1: You think this year where you know, what do you
Speaker 1: I guess just you know, high inflation. But I'm curious,
Speaker 1: like what you're going to be listening for and what
Speaker 1: the most important central bankers in the world, what's on
Speaker 1: their mind. I think the question of how do you
Speaker 1: think about you know, demand and supply in the economy
Speaker 1: and labor market balance, and you know, what will it
Speaker 1: take to bring the parts of the economy that central
Speaker 1: banks and the FED can you have some control over
Speaker 1: back into balance? And you know how much of the
Speaker 1: inflation is you know, perhaps driven by by factors that
Speaker 1: they really can't control. I think that's going to be
Speaker 1: import And the question you asked earlier about, you know,
Speaker 1: how do you trade off inflation still above the target
Speaker 1: against an economy that is maybe at risk of falling
Speaker 1: into a session or has fallen into our session. I
Speaker 1: think that's going to be in an important one. You know,
Speaker 1: how do you interpret the dual mandate. To what extent
Speaker 1: do you, you know, put significant weight on on both
Speaker 1: sides of the mandate, And to what extent do you
Speaker 1: really focus primarily on on inflation and at what time horizon?
Speaker 1: You know, I think these are really the the bread
Speaker 1: and butter, really central questions of macroeconomic policy that are
Speaker 1: going to be very much in in focus. You know,
Speaker 1: at times in Jackson Hole in the past, um, you know,
Speaker 1: they've talked about issues that are maybe a little bit
Speaker 1: further away from the you know, from these kind of
Speaker 1: bread and butter questions, But right now it's really blocking
Speaker 1: and tact in central making pretty course part the job.
Speaker 1: I just want to go back again to this question
Speaker 1: of like, you know, you mentioned fighting the last war,
Speaker 1: and you know that's a natural human phenomenon and sort
Speaker 1: of anchoring to old conditions or old paradigms or thinking
Speaker 1: that we can't really see high sustained inflation. And you
Speaker 1: mentioned in your own models, say with you know, what
Speaker 1: were the signs that things were more out of kilter
Speaker 1: than maybe people appreciated, And you point a job, job openings.
Speaker 1: Is there anything else deeper that over the course of
Speaker 1: the last year that you might have learned or have
Speaker 1: incorporated into your thinking, or is it not much more
Speaker 1: than we should have picked a different input. I mean,
Speaker 1: I think in general the inflation indicators that I think
Speaker 1: also have been important and we're flashing you know, amber
Speaker 1: or orange or or read in two thousand and twenty one,
Speaker 1: the supply delivery and disease. I mean, we're you know,
Speaker 1: pretty extreme and a lot of the supply chain issues,
Speaker 1: you know, quite quite extreme. And you know, they they
Speaker 1: while they have improved in recent months, it took a
Speaker 1: long time for them for them to improve again. Some
Speaker 1: of that was because of recurring shocks delta omicron Ukraine
Speaker 1: and you know, an omicron again. But but but I
Speaker 1: do think these are indicators that are that are very
Speaker 1: useful and it's important to take them, take them very seriously.
Speaker 1: Just a final question, what else are you sort of
Speaker 1: looking out for right now? Like what okay, obviously unemployment,
Speaker 1: the inflation data, anything else big that will sort of
Speaker 1: inform your thinking, especially like you know, going into the
Speaker 1: end of the year and thinking about whether the pace
Speaker 1: of hikes could even be faster than what we're expecting
Speaker 1: right now, The pace of hikes could be faster of course,
Speaker 1: if the you know, inflation adjustment is you know, takes
Speaker 1: longer and the labor market adjustment takes takes longer. So
Speaker 1: I think that's very closely related to the you know,
Speaker 1: to these core issues that we've been discussing. I am focused,
Speaker 1: of course, on what happens globally. I mean, we're looking
Speaker 1: at at least a mild recession in the euro Area,
Speaker 1: and if there is no Russian gas at all that
Speaker 1: will end up flowing, then you know, potentially a significantly
Speaker 1: deeper recession. There is a question about the spillovers from
Speaker 1: that into the US. I would say, if it's a
Speaker 1: supply side driven recession because German and Italian industrial companies
Speaker 1: don't get gas and therefore have to shut down production,
Speaker 1: that may not have you know, a large spillovers. But
Speaker 1: there's also the question, you know, what happens more broadly
Speaker 1: in Europe. There's an election in Italy on September twenty five.
Speaker 1: Probably will be some nervousness around in the run up
Speaker 1: to that election because if you have a more Euroskeptic
Speaker 1: government in Italy and you have increases in rates in
Speaker 1: in the your area, upward pressure on Italian spreads, you know,
Speaker 1: I think the risk is that you revisit at least
Speaker 1: some of the European crisis kind of experiences, because you know,
Speaker 1: there'll be a question of at what point can the
Speaker 1: can the e c B you know, really step in
Speaker 1: if the Italian government is less willing to cooperate. So
Speaker 1: that's definitely something I'm focused on. You know, the latest
Speaker 1: developments in China, I think a very important question. Obviously
Speaker 1: we've seen some very strong, very strong rebound from the
Speaker 1: Shanghai lockdown, but the latest data again show that the
Speaker 1: renewed kind of virus spread is starting to have a
Speaker 1: negative impact again. So I mean our our China forecast
Speaker 1: has been you know, on the more cautious side for
Speaker 1: for a while. We're currently at three point three percent
Speaker 1: for the year as a whole for for GDP growth,
Speaker 1: government target officially is still five and a half. And frankly,
Speaker 1: I think the risks are forecasts are you know, probably
Speaker 1: still pretty clearly on the downside. So there's a lot
Speaker 1: going on globally, uh, you know, a lot of a
Speaker 1: lot of downside risks to activity. Despite the fact that
Speaker 1: you know, we're we're still we're still mostly discussed inflation
Speaker 1: today art Is, chief economist at Goldman Sex. Always a
Speaker 1: treat to chat with you, and with so much going
Speaker 1: on right now, really appreciate you coming back on the show.
Speaker 1: Thank you so much, Joe, Thank you so much. Tracy.
Speaker 1: Great to be with you. Thanks you, and there's a
Speaker 1: lot of fun. Thanks. Yeah, that was great, Tracy. I
Speaker 1: always obviously enjoy speaking to Jan. I guess it's you know,
Speaker 1: there's still a chance of a soft landing. You know,
Speaker 1: it's not it doesn't seem that high, especially getting inflation
Speaker 1: down from say like four percent to two percent, seems
Speaker 1: like it's going to take a lot of pain. But
Speaker 1: I guess it's not outside of the realm of possibility
Speaker 1: when you look at the unemployment rate staying low despite
Speaker 1: the drop in job opening So I don't know if
Speaker 1: you causes for hope. Maybe I was about to say,
Speaker 1: I thought Yan's point about the difference between job openings
Speaker 1: going down versus the unemployment rate going up is a
Speaker 1: really important one. But the other thing I would say
Speaker 1: is I keep coming back to historic parallels, and I
Speaker 1: know everyone tends to reach for the seventies or the
Speaker 1: nine eighties, but really it feels like and we've we've
Speaker 1: talked about this before, I'm sure, but the post eighteen
Speaker 1: Spanish flu um situation like that feels just really relevant
Speaker 1: to me at the moment because you did have a
Speaker 1: period of high inflation there. You did have the FED
Speaker 1: start raising rates in order to bring prices down, and
Speaker 1: they did underestimate the impact that rising rates would have
Speaker 1: on the job market, so you saw a big contraction
Speaker 1: in job openings actually, and eventually that fed into unemployment
Speaker 1: and it basically tipped the US back into recession um
Speaker 1: a couple of years later. So I'm thinking, yeah, well
Speaker 1: that too. Yeah, obviously, yes, there was a very large pandemic,
Speaker 1: but it does seem like the big worry to my mind,
Speaker 1: would be if we got some unexpected jump, of of
Speaker 1: a meaningful unexpected jump in the unemployment rate over the
Speaker 1: course of a few meetings while realized inflation remained very high.
Speaker 1: Because again, you know, you could like look at the
Speaker 1: math and say inflation should come down, and inflation expectations
Speaker 1: are anchored, but we know that there's sort of this
Speaker 1: very heavy emphasis on like we want to see it, right,
Speaker 1: we want to see evidence that inflation is coming down,
Speaker 1: it's coming down, sustained that it's a month over a
Speaker 1: month over month that it's heading back towards target. And
Speaker 1: so I do you know, like we do know that
Speaker 1: initial claims have been picking up, corporate layoff announcements have
Speaker 1: been picking up, not massively. There hasn't been some like
Speaker 1: massive weakness in the labor market, but it feels like
Speaker 1: that would be the one worry. And then the Fed's
Speaker 1: in a really tricky problem of having to decide which
Speaker 1: is the which is the fire it wants to put
Speaker 1: out inflation or recession the other thing that struck me
Speaker 1: or that jumped out and we probably should have talked
Speaker 1: about this a little bit more, but just what a
Speaker 1: terrible position Europe seems to be in at the moment.
Speaker 1: Like as bad as things are in the US in
Speaker 1: terms of inflation, it just feels like in Europe um
Speaker 1: there's the potential for things to get even worse. Right,
Speaker 1: So it's the combination of very high UH inflation, particularly
Speaker 1: headline but also core rising, and then it has not
Speaker 1: seen the wage growth that we've seen in the US.
Speaker 1: And then you know there's all of the issues that
Speaker 1: are like never getting never seemed to be solved about
Speaker 1: fragmentation of the bond market, and so the question is
Speaker 1: do you need intervention to hold down Italian dead and
Speaker 1: then to different politics. We need to do another Europe
Speaker 1: episode soon, that's for sure. Yeah, and just can you
Speaker 1: actually bring down inflation while also trying to um narrow
Speaker 1: the difference in bond spreads like that? Seems like a
Speaker 1: really big challenge. But yeah, we should do a Europe episode.
Speaker 1: That would be fun. Flashbacks to a two thousand twelve.
Speaker 1: All right, shall we leave it there? Leave it there?
Speaker 1: This has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway. And I'm Joe Wisenthal. You can follow me
Speaker 1: on Twitter at the Stalwart. Follow our producer Kerman Rodriguez
Speaker 1: on Twitter at Kerman Erman, and check out all of
Speaker 1: our podcasts bloom under the handle AD Podcasts. Thanks for listening.