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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. But we begin with

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Speaker 1: the number one issue that's been on the mind of

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Speaker 1: Global Wall Street since inflation numbers first shot up back

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Speaker 1: in twenty twenty, something our special contributor Larry Summers warned

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Speaker 1: us about at the time.

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Speaker 2: I think there's a real possibility that within the year

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Speaker 2: we're going to be dealing with the most serious incipient

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Speaker 2: inflation problem that we have faced in the last forty years.

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Speaker 1: Throughout the three year battle with inflation, there's been a

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Speaker 1: question whether it could be tamed without higher unemployment.

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Speaker 3: I've said that I'd be surprised if we get to

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Speaker 3: the two percent inflation target without an unemployment rate that

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Speaker 3: approaches or exceeds six percent.

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Speaker 1: But on Friday this week we got the latest jobs

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Speaker 1: numbers and unemployment stayed under four percent, even as inflation

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Speaker 1: continues to moderate, and it's led Larry to reassess the

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Speaker 1: possibility of a so called soft landing, one where inflation

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Speaker 1: comes back in line without a lot of people losing

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Speaker 1: their jobs.

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Speaker 3: Things did come back in a way that was more

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Speaker 3: favorable than standard models would have expected, though I'm much

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Speaker 3: less prepared to declare that it's all over.

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Speaker 1: And we are joined once again by our very special

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Speaker 1: contributor here in Wall Streeteek. He is Larry Summers of

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Speaker 1: Harvard Lari, thanks so much for being with us on Friday,

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Speaker 1: we got the jobs numbers out. They were a little

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Speaker 1: lower than some people expect that and particularly when you

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Speaker 1: look at the revisions from last month, what did you

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Speaker 1: make of these jobs numbers?

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Speaker 3: I don't think they changed anybody's picture very fundamentally of

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Speaker 3: the economy. We've got a strong economy. Inflation has come down,

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Speaker 3: Inflation is not yet at the FEDS two percent target,

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Speaker 3: but growth, even on a slower basis, remains considerably more

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Speaker 3: rapid than underlying population growth. So we've got a relatively

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Speaker 3: strong economy.

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Speaker 1: Well, and that raises the question what does that mean

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Speaker 1: for monetary policy. I mean, one question we ask sometimes

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Speaker 1: if people at the FED is why are we talking

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Speaker 1: about rate cuts right now when the economy seems to

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Speaker 1: be doing so well and weathering this five and a

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Speaker 1: half percent rate.

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Speaker 3: There's something very fundamental that has happened that I'm not

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Speaker 3: sure that the FED is fully realized. I think the

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Speaker 3: neutral interest strait is way above the two and a

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Speaker 3: half percent that the FED likes to talk about. I think,

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Speaker 3: given the experience of the last several years, that the

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Speaker 3: market perceives normal inflation as probably being somewhat above two percent,

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Speaker 3: at least on a CPI basis, And I think that

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Speaker 3: huge deficits more spending to come, substantial investments in renewables,

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Speaker 3: substantial investments in resilience, substantial capital costs of various kinds

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Speaker 3: associated with artificial intelligence, and aging population meaning more dissavers

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Speaker 3: less capital flow coming from abroad. I think all of

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Speaker 3: that means a much higher neutral real interest rate. So

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Speaker 3: I think when the Fed compares five percent with the

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Speaker 3: two and a half percent neutral rate it sees and

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Speaker 3: people say that monetary policy is substantially restrictive, that's wrong.

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Speaker 3: The neutral rate is much higher than that, and so

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Speaker 3: monetary policy is much less restrictive than is generally supposed.

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Speaker 3: And the clear evidence of that is that we have

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Speaker 3: this supposedly really restrictive monetary policy and still have a

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Speaker 3: quite robust economy. So I think the Fed needs to

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Speaker 3: be very careful in its judgments about what would be

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Speaker 3: Anypockel shift from the regime we've had for the last

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Speaker 3: several years to a regime of easing monetary policy. They've

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Speaker 3: moved substantially since December. Market used to be expecting six

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Speaker 3: cuts in twenty twenty four. Now the market's expecting three cuts,

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Speaker 3: and the Fed's carried that off skillfully. There hasn't been

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Speaker 3: much disruption or dislocation as that change has taken place.

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Speaker 3: But I think that's going to be there with us

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Speaker 3: for the next while. And my own guests is probably

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Speaker 3: that there's a little more adjustment to come and the

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Speaker 3: FED may end up not deciding to cut quite as

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Speaker 3: much as markets are now expecting. But I do think

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Speaker 3: we need to get ourselves to an idea that neutral

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Speaker 3: rates are closer to having a four handle than they

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Speaker 3: are to having a two handle.

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Speaker 1: Larry, You, of course are data dependent, just the way

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Speaker 1: that Jay Powe's data dependent, but consistent with the need

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Speaker 1: for more data. We had Torston Slock of Apollo this

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Speaker 1: week come out and say he doesn't think there'll be

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Speaker 1: any cuts this year for some of the reasons you suggest.

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Speaker 1: I'm not asking you to commit on what will happen,

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Speaker 1: but does that seem plausible to you?

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Speaker 3: Yeah? I think I said on the show maybe a

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Speaker 3: month ago, several weeks ago, that there was a fifteen

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Speaker 3: percent chance that we wouldn't have cuts this year. I think,

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Speaker 3: if anything, that fifteen percent may have drifted slightly upwards,

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Speaker 3: and markets are kind of consistent with that if you

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Speaker 3: look at options markets. So I think the base or

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Speaker 3: presumptive case is probably that the next move is going

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Speaker 3: to be down. But I think it'd be a real

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Speaker 3: mistake for people to regard that as any kind of certainty.

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Speaker 3: And I think the fan has to be really quite

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Speaker 3: careful here, because I certainly think we're at least at

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Speaker 3: the foothills of bubbles. To mix a metaphor, I don't

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Speaker 3: think right now financial markets have the kind of bubbly

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Speaker 3: characteristics that they've famously had at other times. But it's

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Speaker 3: not that we're a million miles away from that either,

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Speaker 3: And so I think that's something that also has to

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Speaker 3: inform the policymaking process.

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Speaker 1: So on the eve of the jobs imbers are going

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Speaker 1: on Friday, we actually heard from President Biden in the

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Speaker 1: State of the Union address. I'd be curious to hear

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Speaker 1: what your take was on the economic portion of what

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Speaker 1: he had to say.

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Speaker 3: You know, I was glad to see the President being

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Speaker 3: as vigorous and strong as he was certainly the President

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Speaker 3: looked like a man with a plan, indeed, a man

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Speaker 3: with many plans and ideas and an energetic agenda going forward.

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Speaker 3: That was a lot that I heard that I liked

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Speaker 3: in terms of building and investing in the strength the

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Speaker 3: country's future economy for the benefit of the middle class.

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Speaker 3: I do think we need to be very careful in

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Speaker 3: our country about a kind of populist tradition in economics

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Speaker 3: that lurches towards big deficits, towards anti trade, international economic

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Speaker 3: policies that focuses on economic nationalism. And there's concern there

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Speaker 3: on short sighted benefits to consumers that may ultimately reduce businesses'

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Speaker 3: ability to invest in the future. And so I think

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Speaker 3: that's something we all need to be careful about.

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Speaker 1: Okay, Larry, thank you so very much for being back

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Speaker 1: with us. That's Larry Summers, our very special contributor here

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Speaker 1: on Wall Street Week.