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Speaker 1: Hello, and welcome to another episode All of the Odd

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Speaker 1: Lots podcast. I'm Joe Wisenthal. Unfortunately, my my colleague Tracy Alloway,

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Speaker 1: she is off today, so it's just me. But regardless,

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Speaker 1: I'm very excited about today's conversation. Nonetheless, so a couple

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Speaker 1: of the big themes this year that we've been talking about,

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Speaker 1: and they're pretty intimately linked. We've been talking a lot

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Speaker 1: about supply chain and supply chain disruptions, and we started

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Speaker 1: talking about those, I think at the end of last year,

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Speaker 1: very early this year. I mean, we've really been talking

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Speaker 1: about them since the beginning of the pandemic, but they

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Speaker 1: haven't gone away, and I think arguably in some cases

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Speaker 1: they continue to compound and get worse, and there is

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Speaker 1: not a day go by where there's not some type

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Speaker 1: of shortage that emerges. And I think the latest thing

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Speaker 1: I saw this week is that fertilizer prices are going up,

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Speaker 1: and there's droughts and Brazil and that's causing cause your

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Speaker 1: prices to go up. And there's no wind these days

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Speaker 1: in the UK, so that's causing energy prices to go up.

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Speaker 1: So in addition to the pandemic, all kinds of things

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Speaker 1: are going on. We know that by and large, there

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Speaker 1: is this sort of characterization of the elevated inflation that

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Speaker 1: we've seen so far is being transitory. A lot of

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Speaker 1: people are not satisfied with what that word actually means

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Speaker 1: or how that's defined. We know that under the Fed's

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Speaker 1: new framework there is a greater willingness to tolerate some

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Speaker 1: inflation overshoot in an aim to get back to maximum

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Speaker 1: employment or a full employment. But then there is also

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Speaker 1: a debate about how how the current supply chain driven

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Speaker 1: inflation plays into that. So there are so many sort

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Speaker 1: of like macro and micro themes which we've been discussing

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Speaker 1: a lot of odd lots intersected. So I'm very excited

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Speaker 1: about sort of exploring all of that. We really have

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Speaker 1: like two perfect guests to discuss it. They're actually colleagues,

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Speaker 1: and we're going to have a nice macro chat that

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Speaker 1: hopefully helps us understand what's actually happening right now and

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Speaker 1: what we should be looking ahead to next. My guests

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Speaker 1: for this week are Julia Coronado, she's the founder and

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Speaker 1: president of Macro Policy Perspectives, as well as Laura rosn

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Speaker 1: Or Warburton, who is a founding partner and the senior

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Speaker 1: economist also macro policy perspective. Very excited, uh for this conversation.

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Speaker 1: I expect I will be learning quit a bit. So

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Speaker 1: Julia and Laura, thank you so much for joining us.

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Speaker 1: Oh it's our pleasure. Thanks. Yeah, great to be here.

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Speaker 1: So why don't we kick it off. Let's just dive

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Speaker 1: into the inflation question and either of you can take this.

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Speaker 1: Lots of debate about what you know, we have this

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Speaker 1: elevated inflation, It doesn't you know, maybe rolling over a

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Speaker 1: little bit, but not particularly fast. And like I said,

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Speaker 1: every single day there's some it's like the shortage of

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Speaker 1: the day, something I hadn't even thought about this week.

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Speaker 1: Like I said, I think it's like fertilizer prices, which

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Speaker 1: of course is not going to help the food situation

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Speaker 1: at all. How would what do you characterize where we're

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Speaker 1: at or how you're thinking about inflation right now? Well,

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Speaker 1: we've had a huge shock and we're sort of parsing

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Speaker 1: through what we're learning about the nature of these inflationary impulses.

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Speaker 1: I mean, a lot of what we're seeing is one

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Speaker 1: of the biggest is a reflection of one of the

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Speaker 1: biggest shifts in relative demand that we've ever seen. So

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Speaker 1: one of the big shocks in the COVID crisis was not, uh,

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Speaker 1: just COVID itself and the shutdown of the global economy,

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Speaker 1: but it completely changed what consumers spent their money on.

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Speaker 1: So by virtue of being locked away at home and

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Speaker 1: everything being shut down, a huge chunk of your budget

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Speaker 1: got freed up. The the money that you spend on

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Speaker 1: personal care and entertainment and travel was suddenly unlocked and

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Speaker 1: you were sitting there at home, and so you started

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Speaker 1: ordering things. Uh. So we saw this gigantic shift from

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Speaker 1: services spending too good spending in the middle of a

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Speaker 1: huge recession, and of course we've never seen anything like that.

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Speaker 1: So on the other side of the equation, producers were

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Speaker 1: preparing for the worst. Uh. They followed their recession playbook playbooks,

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Speaker 1: So they shut down production, they cleared out inventories, they

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Speaker 1: canceled orders. So the combination of those two things led

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Speaker 1: to the just gigantic surge in goods prices. You know,

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Speaker 1: it was not the typical recession. Typical recessions, goods spending

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Speaker 1: gets hit really hard and services spending is more resilient,

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Speaker 1: And we saw exactly the opposite. Uh, and so producers

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Speaker 1: were caught off guard and had to scramble to restart

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Speaker 1: operations and restart supply chains. And then of course consumers

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Speaker 1: were delivered several trillions of dollars into their bank accounts

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Speaker 1: almost instantaneously. By April, disposable income was above uh pre

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Speaker 1: COVID levels, even though age and salary income was a

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Speaker 1: trillion dollars below. So consumers had money to spend and

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Speaker 1: they could only spend it on goods, and so that

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Speaker 1: that has just led to just tremendous bottlenecks and supply chains,

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Speaker 1: and that's probably the primary factor. And if that were

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Speaker 1: the only factor, then the whole transitory narrative would probably

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Speaker 1: be unfolding as expected. And I think the best example

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Speaker 1: of this is lumber, something that you've covered in your podcasts.

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Speaker 1: You know, it's not subject to all of the global

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Speaker 1: supply chains and container issue as in you know, COVID

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Speaker 1: disruptions to the same degree as other goods. So it's

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Speaker 1: already returned. You know, they've ramped up production, they've lumbers

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Speaker 1: getting delivered, prices have fallen, you know, case solved, but

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Speaker 1: there's these other frictions. COVID itself keeps it's just this

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Speaker 1: rolling series of port shutdowns, factory shutdowns, and it keeps coming.

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Speaker 1: You know, Delta is the latest wave and that's affected

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Speaker 1: semis particularly hard. And then increasing frequency of climate events

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Speaker 1: the Texas freeze, flooding, fires keep happening, and that's probably

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Speaker 1: something that's going to be with us more often. And

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Speaker 1: then there were some things, I mean, Laura's pointed out,

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Speaker 1: there are some things that were going on even before

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Speaker 1: COVID with supply chains that are kind of being revealed

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Speaker 1: by this crisis. Laura. But Juliet, before we even get there,

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Speaker 1: I just really want to emphasize the first point you made,

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Speaker 1: which is this epic shift into me end. You know

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Speaker 1: what the global pandemic and all of these social distancing

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Speaker 1: policies did was they increased the demand for space, so

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Speaker 1: people moved out of urban areas where they needed cars,

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Speaker 1: So they needed cars, housing, furniture. These are all very

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Speaker 1: cyclical items and they typically fall sharply in recessions UM

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Speaker 1: and so I think businesses when they saw a recession

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Speaker 1: on the horizon, they were planning for the worst, like

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Speaker 1: Julia said, and they actually cut their supply. They tried

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Speaker 1: to get rid of inventories. So we started at the

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Speaker 1: beginning of this epic shift in demand with way too

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Speaker 1: little supply because demand just raged for all of these items.

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Speaker 1: And I could say, from from an inflation forecasting perspective,

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Speaker 1: you know, one one thing I feel like forecasters got

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Speaker 1: wrong is maybe they looked at some of the more

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Speaker 1: cyclical prices and inflation, you know, components of inflation at

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Speaker 1: the beginning of the pandemic, and they said, Okay, I

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Speaker 1: think it's reasonable to expect some you know, vehicle deflation,

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Speaker 1: given that that's what we have seen every single cycle.

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Speaker 1: And so to get not just a lack of deflation

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Speaker 1: in the vehicle sector, but enormous inflation was a huge surprise.

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Speaker 1: And I think that was again twofold one was again

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Speaker 1: this shift in preferences, preferences that changed the composition of

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Speaker 1: demand and to the fiscal stimulus that made it possible

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Speaker 1: for consumers to spend more and made them more price

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Speaker 1: uh insensitive than they typically are. And and so the

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Speaker 1: vehicle sector has been a huge surprise this this time around.

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Speaker 1: So you mentioned vehicles, and Julie, you mentioned lumber. Lumber

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Speaker 1: has already started to correct vehicles. I don't know, I mean,

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Speaker 1: there was some rolling over of the used vehicle prices,

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Speaker 1: but not very much. And I actually saw a stat

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Speaker 1: that maybe they're already going back up again. We know

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Speaker 1: that overall vehicle demand has been impaired by the semiconductor shortage,

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Speaker 1: and that doesn't seem to be easing anytime soon. In fact,

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Speaker 1: I think every you know, again, it's another one of

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Speaker 1: these things where every day there's like another headline about

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Speaker 1: some major automobile. Oh, I'm saying that they're not going

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Speaker 1: to be able to expand production. We could chalk up

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Speaker 1: we could look at vehicles and say, okay, we could

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Speaker 1: tell a pretty codid story about what's going on in vehicles?

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Speaker 1: Is it spreading? Does this type of inflation that we

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Speaker 1: could chalk up to the factors that you've described, which

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Speaker 1: is the change in consumption patterns owing to the pandemic,

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Speaker 1: plus uh, the increased demand and so forth, is it

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Speaker 1: spreading beyond categories that we can easily tell the story about.

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Speaker 1: Or when you look at it, is it still seemed

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Speaker 1: like yep, you know, check all the boxes. This is

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Speaker 1: fairly fairly clearly connected to the pandemic. I think that

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Speaker 1: it's still fairly clearly connected to the pandemic, although it

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Speaker 1: is a little bit broader than just vehicles. So you know,

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Speaker 1: where are we seeing it. We're seeing it within recreation goods,

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Speaker 1: you know, televisions, We're seeing it in gaming consoles, We're

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Speaker 1: seeing it a little bit in computers, and we're seeing

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Speaker 1: it in furniture. And I think, what of what are

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Speaker 1: those categories have it common? Either they're being affected by

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Speaker 1: the chip shortage, or they're being affected by shipping congestion

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Speaker 1: and higher input prices. So I still think it's fairly specific.

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Speaker 1: We haven't seen it broaden out, and we certainly haven't

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Speaker 1: seen it in services yet. I would add that two things. One,

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Speaker 1: even within goods, there are some interesting examples where these

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Speaker 1: costs aren't being passed along to the same extent, like apparel. So,

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Speaker 1: you know, one of the interesting questions that were kind

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Speaker 1: of passing through the data and sifting through the data

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Speaker 1: to figure out is what is the consumers reaction to

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Speaker 1: these prices. What we knew before the pandemic is that

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Speaker 1: consumers had been for decades incredibly resistant to absorbing price increases.

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Speaker 1: If you tried to pass through price increases, they would

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Speaker 1: shift their spending. And what we saw in the pandemic,

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Speaker 1: was there was this period when they were had, you know,

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Speaker 1: trillions slashing around that they were less price sensitive. And

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Speaker 1: now the question going forward is, okay, that fiscal impulse

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Speaker 1: is fading, some of a lot of that money has

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Speaker 1: gotten spent or saved or invested. How price sensitive will

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Speaker 1: consumers be. We are not seeing still any passed through

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Speaker 1: in terms of the apparel UH and definitely all of

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Speaker 1: it's imported and subject to these bottlenecks. So that's one

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Speaker 1: interesting example. And then another pandemic related dynamic that we

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Speaker 1: are still seeing is that there is still services disinflation

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Speaker 1: that's very sensitive to the pandemic. Airfairs just went down again,

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Speaker 1: Hotel prices just went down again. There is excess capacity

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Speaker 1: in those sectors. And probably as long as this if

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Speaker 1: we're looking at kind of a semi permanent pandemic dynamic,

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Speaker 1: you know, for the foreseeable future, where people remain reluctant,

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Speaker 1: our variants keep rising UH and falling, is that you know,

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Speaker 1: these sectors will be oversupplied. People are not going to

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Speaker 1: go back to the same level of business travel or

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Speaker 1: personal travel that they were comfortable with before, and so

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Speaker 1: those prices can go up and down with much greater frequency,

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Speaker 1: even as the goods prices exhibit sort of the mirror

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Speaker 1: image of that. And then I guess that the bigger

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Speaker 1: open question is is rents right now in terms of

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Speaker 1: what's what's something that could be more persistent and sticky

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Speaker 1: is you know, what are we seeing in the rental

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Speaker 1: market and and how will that pass through? You know,

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Speaker 1: how will some of these market measures that we see

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Speaker 1: pass into cp I, how persistent will that be? And

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Speaker 1: then how will the FED react to that? You know,

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Speaker 1: there are so many following questions that I have just

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Speaker 1: from this so far, but you mentioned um both talked

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Speaker 1: about the consumer response. And one of the stories that

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Speaker 1: economists like to tell is that from the sort of

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Speaker 1: vulgar era, I guess for about forty years that the

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Speaker 1: FED had won the credibility by showing its commitment to

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Speaker 1: fight inflation, and that that restrained inflation expectations themselves, and

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Speaker 1: that by restraining expectations that had a feedback effect of

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Speaker 1: restraining inflation until you get this sort of like nice

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Speaker 1: positive feedback loop. And therefore central bankers are extremely reluctant

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Speaker 1: to erin the other way. They're like, look, we spent

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Speaker 1: decades and decades convincing consumers that inflation will be mild.

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Speaker 1: That's caused inflation to be mild. We've got to be

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Speaker 1: really careful. And there's still even with the tolerance of

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Speaker 1: the overshooting the new framework, you could tell that central

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Speaker 1: bankers are still extremely reluctant to give up what they

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Speaker 1: perceive as their hard won gains of restraining inflation expectations.

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Speaker 1: And I'm curious what both of you make about this

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Speaker 1: idea of inflation expectations. Is this a powerful force, is

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Speaker 1: this a real thing that affects inflation, or is this

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Speaker 1: a way for central bankers to pat themselves on the

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Speaker 1: back and talk about and sort of trumpet their further accomplishments.

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Speaker 1: That's a great question. And what we're we're we are

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Speaker 1: in the midst of is one of the coolest experiments

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Speaker 1: you could ever design to test this um. You know,

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Speaker 1: central bankers, as you say, put themselves very much at

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Speaker 1: the center of taking credit for this low inflation regime

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Speaker 1: and stable inflation expectations dynamic that we've seen in recent decades.

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Speaker 1: But of course we didn't even start to measure inflation

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Speaker 1: expectations until that post volca era, So we don't have long,

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Speaker 1: long time series of consistent measures of inflation expectations. We've

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Speaker 1: only measured them in the era of low and stable

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Speaker 1: inflation and inflation expectations, so we've never tested what it

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Speaker 1: looks like when inflation expectations drift higher and how that

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Speaker 1: actually affect X pricing decisions and dynamics and behavior. So

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Speaker 1: I would say it's fair to say we're a little

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Speaker 1: bit more skeptical of that, you know, I mean, certainly,

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Speaker 1: central bank credibility has been an incredibly important global force,

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Speaker 1: but it's not the only force, And there's a few

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Speaker 1: other secular forces, uh that we attribute the era of

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Speaker 1: lower inflation too, And so that's we're looking to both

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Speaker 1: inflation expectations as well as these other secular forces. I

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Speaker 1: don't know, or you want to outline the things that

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Speaker 1: we tend to focus on in addition to expectations, sure, So,

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Speaker 1: I mean, one thing we're focused on is demographics. So

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Speaker 1: as the population ages um, they tend to consume more

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Speaker 1: healthcare in particular, and the healthcare market is not a

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Speaker 1: competitive market. The government has a very large footprint and

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Speaker 1: they actually set prices for medicare and Medicaid services, which

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Speaker 1: is about forty of the market. So because the government's

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Speaker 1: liabilities are tied to healthcare prices going forward, they have

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Speaker 1: a very strong incentive to keep healthcare inflation low. And

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Speaker 1: an example of this playing out right now are proposals

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Speaker 1: to lower drug prices um so, so we've actually noticed

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Speaker 1: a low and stable trend in healthcare inflation despite tightness

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Speaker 1: in the labor market that might call for upward pressure.

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Speaker 1: We think that this is a large component that will

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Speaker 1: continue to see downward pressure. Another secular trend has just

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Speaker 1: been globalization and international trade, which has kept goods inflation low.

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Speaker 1: Of course that is coming into question now just given

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Speaker 1: all of the disruptions, but it certainly has been something

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Speaker 1: that has limited goods inflation in the pass I think, sorry,

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Speaker 1: go ahead, Well no, I mean, I'm glad. I'm glad

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Speaker 1: you brought this up because we did a recent episode

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Speaker 1: with Dan Wong, who is a China China analyst, and

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Speaker 1: he brought this up. You know, he's like, China has

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Speaker 1: closed its borders, and he's like it maybe several years

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Speaker 1: before they fully opened up their borders, and I'm curious

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Speaker 1: from your perspective. That got a lot of questions and

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Speaker 1: of all the things he said on that episode that

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Speaker 1: may have caused people's attention the most. What would it

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Speaker 1: mean for inflation if our relationships or our trade relationship

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Speaker 1: with China were to never normalize whatever that word means.

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Speaker 1: If we were to never say, go back to twenty

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Speaker 1: nineteen trading patterns with China because of both the disruptions

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Speaker 1: but also policy choices, or maybe the Biden relationship with

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Speaker 1: chij and Ping, what would it What could that actually

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Speaker 1: mean on an ongoing basis for inflation. So I think

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Speaker 1: that's a great question because we're not going back to that.

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Speaker 1: I mean, we know that was a trend before COVID

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Speaker 1: that you know, the trade war was centered around China.

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Speaker 1: China has its own express intentions to delink its technology

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Speaker 1: supply chain from the US and is making rapid progress

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Speaker 1: on that front. That was one of the contributing factors

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Speaker 1: to the semiconductor shortage. So we know that we're going

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Speaker 1: to We're in the midst of a structural reallocation of

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Speaker 1: global supply chains in which the U S and China

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Speaker 1: are seeking to realign their own supply chains to be

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Speaker 1: more not just domestically dependent, but amongst allies. So you

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Speaker 1: see a lot of investment, for example, in semiconductor capacity

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Speaker 1: domestically in the US and the UK and amongst allies,

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Speaker 1: and the same thing with raw materials. There's a lot

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Speaker 1: more policy focus on designing more ally friendly resil aliency

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Speaker 1: in supply chains. So that is gonna add to costs

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Speaker 1: in the next couple of years. You know, we've already

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Speaker 1: seen that doing so. And then the question is, you know,

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Speaker 1: when we talk about inflation, it is more of an

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Speaker 1: you know, are we going to reallocate those and there's

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Speaker 1: this one time re resetting in price levels, or is

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Speaker 1: it going to become an ongoing force of repeated price

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Speaker 1: increases year after year after year, reflecting ever more expensive

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Speaker 1: supply chains. You know, we do see some deglobalization between

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Speaker 1: the US and China, but globalization as a force is

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Speaker 1: more about competitive forces that you know, US companies face

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Speaker 1: global competition for the consumer, the consumer's wallet, and it

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Speaker 1: interacts with technology. Technology is another secular force that we

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Speaker 1: focus a lot on. Technology is something that allows companies

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Speaker 1: to become constantly implementing cost saving changes in business production

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Speaker 1: uh and business models. And that's on the one side

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Speaker 1: of technology, So constant source of improvements uh and cost savings.

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Speaker 1: And then the other is that technology brings brutal price transparency.

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Speaker 1: It allows consumers, that allows you know, even at the

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Speaker 1: wholesale level suppliers to visibility into costs and pricing. That

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Speaker 1: forces this competition in pricing even in you know, markets

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Speaker 1: that are somewhat concentrated. So yes, I would say we see,

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Speaker 1: um that there is this reallocation of global supply chains

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Speaker 1: that will add to costs that has already done so,

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Speaker 1: is already doing so. But whether it becomes an inflationary dynamic,

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Speaker 1: I think we're still skeptical. We still see the forces

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Speaker 1: of the global marketplace and the influence of technology as

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Speaker 1: disinflationary forces on an ongoing basis. Just to radiorate which

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Speaker 1: really is just said, I think I think we should

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Speaker 1: really be careful to distinguish between a level shift in

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Speaker 1: costs and kind of ongoing increases in costs that leads

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Speaker 1: to kind of a self fulfilling dynamic of inflation. And

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Speaker 1: I agree, I think decoupling from China, where it's cheap

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Speaker 1: to produce and labor is cheap, would over time increase

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Speaker 1: the cost of doing business for for a lot of manufacturers.

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Speaker 1: I think also during the pandemic. You know, all of

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Speaker 1: these supply chain issues that have arisen probably are causing

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Speaker 1: companies to question you know, their their current supply chain operations.

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Speaker 1: You know, it is maybe that maybe they need to

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Speaker 1: be more simple, you know, maybe they need to be

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Speaker 1: more diversified. Uh, and maybe that means higher costs as well,

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Speaker 1: maybe they need to hold more inventory than they thought.

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Speaker 1: So all of this suggests maybe higher a level shift

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Speaker 1: up in cost. The question is how much of that

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Speaker 1: is just absorbed in profits by the company and how

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Speaker 1: much is actually gets passed on to consumers. And I

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Speaker 1: think that's where the fiscal stimulus comes back as as

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Speaker 1: a key factor. We saw companies during this unprecedented fiscal

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Speaker 1: stimulus passing on a lot of cost cost increases to consumers.

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Speaker 1: Will that continue as fiscal stimulus starts to fade and

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Speaker 1: consumers become more price sensitive and and and in this

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Speaker 1: regard that, there's some interesting global comparisons. You know, you

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Speaker 1: can see greater passed through of say vehicle inflation, for example,

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Speaker 1: in the US then in Europe where there wasn't as

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Speaker 1: generous a fiscal support. And that kind of speaks to

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Speaker 1: um that unique moment where we had extremely like unprecedented

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Speaker 1: strong support to consumer demand in the United States and

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Speaker 1: again next year this year already that's that's largely behind us. Again,

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Speaker 1: what is the behavioral response of consumers to hire prices,

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Speaker 1: particularly for goods that that are easy to postpone or

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Speaker 1: you know, shift around to other producers. The vehicle market

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Speaker 1: is an extremely competitive market, will they and and cars

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Speaker 1: are a car purchases easy to postpone, what kind of

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Speaker 1: behavioral response will we see In fact, you know, arguably

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Speaker 1: in the new car market, it's it's still quite a

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Speaker 1: moderate degree of passed through of the supply chain issues

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Speaker 1: that they're facing because it is such a competitive market.

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Speaker 1: You know, I want to get into inflation um and

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Speaker 1: we've talked about this before. It gets people going, people

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Speaker 1: who have very strong feelings about it. And I think

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Speaker 1: part of the reason it gets people going is because

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Speaker 1: there's a sort of It affects different people differently. And

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Speaker 1: one cliche that people often say, which I'm a little

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Speaker 1: skeptical about, is like, oh, inflation it it mostly hurts

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Speaker 1: the poor. And I'm sure that in some cases that

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Speaker 1: is the case. On the other hand, as you mentioned,

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Speaker 1: one of the contributing factors perhaps to some of the

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Speaker 1: inflation that we've seen in the US so far this year,

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Speaker 1: the aggressive fiscal response, which was incredibly well targeted at

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Speaker 1: people with a high marginal propensity to consume. Service workers

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Speaker 1: who aren't typically particularly high paid, who had lost their

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Speaker 1: jobs had seen income replacement like they've never seen before.

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Speaker 1: And what we've seen, even as things have begun to

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Speaker 1: return to normal a little bit, is that wages at

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Speaker 1: the low end, which had been fairly stagnant for some time,

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Speaker 1: clearly seemed to be growing at a more rapid pace

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Speaker 1: than high end wages. Setting aside uh, the expansion of

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Speaker 1: the unemployment insurance and so forth. So I'm curious about

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Speaker 1: how you think overall the policy mix, but the policy

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Speaker 1: mix in the sort of the data outcomes that we've seen,

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Speaker 1: the distributional effects of them. How how are you thinking

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Speaker 1: about the distributional effects of different uh, sort of levels

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Speaker 1: of income, different levels of wealth from what we've seen

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Speaker 1: so far. Yeah, So, So the grand experiment that we're

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Speaker 1: running is what does it look like when you actually

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Speaker 1: air on the side of going too much rather than

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Speaker 1: too little and supporting and having a demand lead recovery.

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Speaker 1: I think if we Look, you know, the old cliche

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Speaker 1: as you as you call it, um, was based on

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Speaker 1: you know, supply chain inflation is not new. It's something

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Speaker 1: that we've typically ascribed mostly to you know, food and energy. Right,

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Speaker 1: food and energy are subject to repeated constant supply chain issues,

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Speaker 1: supply side issues year after year, from geopolitics, from weather,

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Speaker 1: and so that's one reason we exclude food and energy

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Speaker 1: and look at core inflation. And that's also the reason

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Speaker 1: people tend to think of inflation is harming lower income

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Speaker 1: people because they spend more of their budgets on food

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Speaker 1: and energy. But as you say, this cycle has been

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Speaker 1: unique in a lot of ways, and um, we did

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Speaker 1: see very progressive sort of support for lower income, lower

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Speaker 1: wage workers who got higher than even replacement rates through

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Speaker 1: unemployment insurance. These lump sum stimulus payments are of course

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Speaker 1: a bigger share of income for lower income households, so

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Speaker 1: very progressively structured fiscal support. Low wage workers were hit

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Speaker 1: the hardest by job losses, but are seeing the biggest

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Speaker 1: wage gains upon reemployment and recovery. So I think the

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Speaker 1: distributional if we look at sort of the labor and

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Speaker 1: price side of things, there's a lot of different things

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Speaker 1: going on. A lot of the goods that are inflating,

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Speaker 1: like cars, are luxury goods. Meanwhile, large wage games for

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Speaker 1: lower wage workers are certainly kind of a welcome development

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Speaker 1: after years of rising wage inequality. So I think it's

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Speaker 1: hard to just say, oh, lower wage workers are getting

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Speaker 1: hit the hardest by this high inflation because they are

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Speaker 1: getting the biggest wage increases as well. So we're going

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Speaker 1: to have to see how this settles out going forward.

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Speaker 1: Of course, if we broadened out to wealth and equality,

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Speaker 1: it's unambiguous because part of the aggressive response was supporting

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Speaker 1: asset prices, and that benefits the wealthy disproportionately, and that's

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Speaker 1: just an ongoing byproduct of the fed's toolkit, and that

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Speaker 1: argues not for the FED to do nothing or to

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Speaker 1: do less to support the economy. It argues for exploring

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Speaker 1: a different toolkit for the FED, which we're all in

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Speaker 1: favor of a more blue sky exploration of toolkit the

431
00:29:27,840 --> 00:29:33,360
Speaker 1: FEDS toolkit. But I think distributionally, another thing that came

432
00:29:33,400 --> 00:29:36,840
Speaker 1: out of this pandemic was, because of all of that

433
00:29:36,920 --> 00:29:42,120
Speaker 1: cash support, a huge reduction in distress. Loan delinquencies for

434
00:29:42,160 --> 00:29:45,600
Speaker 1: the first time ever fell during a recession, you know,

435
00:29:45,600 --> 00:29:48,280
Speaker 1: one of the interesting dynamics in the used car market

436
00:29:48,560 --> 00:29:51,680
Speaker 1: was one of the limitations in supply came from the

437
00:29:51,720 --> 00:29:55,920
Speaker 1: fact that cars weren't getting repossessed because people normally you

438
00:29:55,960 --> 00:29:58,920
Speaker 1: see a recession, uh, and you know a lot of

439
00:29:58,960 --> 00:30:02,080
Speaker 1: people can't make their car payments and they lose their cars. Well,

440
00:30:02,120 --> 00:30:05,160
Speaker 1: they could make their car payments and they kept their cars.

441
00:30:05,200 --> 00:30:10,200
Speaker 1: In fact, repose were lower than normal, even in which

442
00:30:10,240 --> 00:30:13,400
Speaker 1: was a great year. So that's a that's kind of

443
00:30:13,440 --> 00:30:17,800
Speaker 1: a unsung hero of this fiscal package is that people

444
00:30:17,840 --> 00:30:21,280
Speaker 1: didn't fall into distress. They didn't lose their homes, they

445
00:30:21,320 --> 00:30:26,200
Speaker 1: didn't lose their cars as a result of the recession.

446
00:30:26,280 --> 00:30:28,760
Speaker 1: And that's usually those sort of knock on effects that

447
00:30:28,840 --> 00:30:33,280
Speaker 1: really hit lower income people the hardest, these sort of

448
00:30:33,320 --> 00:30:35,800
Speaker 1: repeated shocks. You lose your job, and you lose your house,

449
00:30:35,840 --> 00:30:37,800
Speaker 1: then you lose your car. That makes it harder to

450
00:30:37,800 --> 00:30:40,960
Speaker 1: get a job, etcetera. And and really there was a

451
00:30:41,000 --> 00:30:45,239
Speaker 1: short circuiting of of that domino effect that you know,

452
00:30:45,320 --> 00:30:50,080
Speaker 1: as we look back over time and sort of evaluate

453
00:30:50,120 --> 00:30:52,960
Speaker 1: the recession, that's gonna, I think be one of the

454
00:30:53,080 --> 00:31:13,760
Speaker 1: unambiguous victories of this kind of approach to policy I

455
00:31:13,800 --> 00:31:17,840
Speaker 1: want to go back to something. So we're recording this September,

456
00:31:19,560 --> 00:31:24,360
Speaker 1: and this morning we got a strong housing number, and

457
00:31:24,640 --> 00:31:27,360
Speaker 1: this idea of the supply side response, and you're talking

458
00:31:27,360 --> 00:31:31,600
Speaker 1: about it a little bit with semiconductors, and uh, you know,

459
00:31:31,640 --> 00:31:34,320
Speaker 1: we might see some greater investment, and I think there's

460
00:31:34,360 --> 00:31:36,960
Speaker 1: some hope, you know, I think there's some hope that

461
00:31:37,440 --> 00:31:41,120
Speaker 1: with tightness, with tightness in the labor market, with tightness

462
00:31:41,120 --> 00:31:45,880
Speaker 1: in supply chains, that we may see a supply side

463
00:31:45,880 --> 00:31:50,680
Speaker 1: expansion or a capital deepening of some sort, that companies

464
00:31:50,720 --> 00:31:54,200
Speaker 1: will invest more, and that we will just have a

465
00:31:54,280 --> 00:31:58,280
Speaker 1: more productive supply side sector than we would have had otherwise,

466
00:31:58,680 --> 00:32:02,680
Speaker 1: because tightness and very US market will result in greater

467
00:32:02,720 --> 00:32:06,960
Speaker 1: building of factories, higher more aggressive training of workers so

468
00:32:07,040 --> 00:32:12,200
Speaker 1: that they are more productive, greater investment in automation and

469
00:32:12,200 --> 00:32:15,320
Speaker 1: so forth. On the flip side, if this is all

470
00:32:15,400 --> 00:32:17,520
Speaker 1: like a temporary so that's like the hope, but you know,

471
00:32:17,560 --> 00:32:20,080
Speaker 1: people have been talking about this more on the flip side.

472
00:32:20,680 --> 00:32:25,800
Speaker 1: If this is all just uh pandemic disruption, and Okay,

473
00:32:25,960 --> 00:32:28,720
Speaker 1: the pandemic isn't over yet, but maybe it'll be over

474
00:32:28,960 --> 00:32:31,440
Speaker 1: in three or six months, and then we've returned to

475
00:32:31,840 --> 00:32:36,600
Speaker 1: something resembling normal, and then we get that fiscal policy tightening,

476
00:32:36,640 --> 00:32:40,600
Speaker 1: which has already begun because some of these uh pandemic

477
00:32:40,680 --> 00:32:44,640
Speaker 1: era programs have come are are winding down. Then maybe

478
00:32:44,760 --> 00:32:47,640
Speaker 1: things won't be so tight in six months, and then

479
00:32:47,720 --> 00:32:52,200
Speaker 1: maybe some of that investment will have proven to be unnecessary.

480
00:32:52,240 --> 00:32:57,240
Speaker 1: What is your outlook for a sort of sustained change.

481
00:32:57,360 --> 00:32:59,480
Speaker 1: I guess I would say a sustained change in the

482
00:32:59,600 --> 00:33:05,680
Speaker 1: KPE trajectory. I think that thinking of going back to

483
00:33:06,760 --> 00:33:11,880
Speaker 1: normal is not It's almost never a useful concept. We

484
00:33:11,960 --> 00:33:15,120
Speaker 1: never go back, We're always going forward. The pandemic has

485
00:33:15,200 --> 00:33:18,480
Speaker 1: disrupted a lot of things that are not going to

486
00:33:19,080 --> 00:33:23,800
Speaker 1: return to their prior state. Consumer preferences on where they

487
00:33:23,840 --> 00:33:28,280
Speaker 1: want to live, how they want to work, business preferences

488
00:33:28,320 --> 00:33:31,720
Speaker 1: for you know, how they want to conduct their businesses,

489
00:33:32,320 --> 00:33:35,640
Speaker 1: the importance of you know, face to face client contact

490
00:33:35,800 --> 00:33:40,920
Speaker 1: versus virtual meetings, business travel, etcetera. Like, these things aren't

491
00:33:40,960 --> 00:33:44,920
Speaker 1: going back, even even if the delta variant fades and

492
00:33:45,000 --> 00:33:48,880
Speaker 1: vaccinations broaden and things feel a lot safer on a

493
00:33:48,920 --> 00:33:53,720
Speaker 1: more sustained basis. Um we've seen businesses realize a lot

494
00:33:53,760 --> 00:33:56,120
Speaker 1: of things about how they can do things more efficiently

495
00:33:56,680 --> 00:34:01,280
Speaker 1: and consumers realize things about how they and work more efficiently.

496
00:34:01,760 --> 00:34:04,880
Speaker 1: You know, these are still early measures of GDP data,

497
00:34:04,960 --> 00:34:09,520
Speaker 1: but it's been a productivity boom. We track earnings reports

498
00:34:09,800 --> 00:34:15,680
Speaker 1: by companies across industries, and every industry is reporting intentions

499
00:34:15,719 --> 00:34:21,279
Speaker 1: and active projects of exploring, you know, ways to do

500
00:34:21,400 --> 00:34:24,960
Speaker 1: things better and cheaper and more efficiently. And investments in

501
00:34:25,080 --> 00:34:29,879
Speaker 1: technology have been enormous. Cap X is again above pre

502
00:34:30,000 --> 00:34:35,960
Speaker 1: pandemic levels, still with decent momentum. It's not falling back,

503
00:34:36,320 --> 00:34:41,400
Speaker 1: you know, and so we expect continued pretty radical transformation,

504
00:34:42,040 --> 00:34:47,480
Speaker 1: uh in business models and operations. And it's not again

505
00:34:47,520 --> 00:34:51,160
Speaker 1: it's it's it's pulled forward. I think a dynamic that

506
00:34:51,239 --> 00:34:56,520
Speaker 1: we've long expected, things like machine learning and artificial intelligence,

507
00:34:56,520 --> 00:34:59,400
Speaker 1: where things that all industries had kind of been looking

508
00:34:59,440 --> 00:35:04,759
Speaker 1: and explore, worrying and you know, thinking about implementing projects

509
00:35:04,880 --> 00:35:10,280
Speaker 1: over the coming years, and it really concentrated that those

510
00:35:10,320 --> 00:35:14,359
Speaker 1: efforts and brought them forward and forced you know, things

511
00:35:14,400 --> 00:35:18,960
Speaker 1: like telehealth. You know, the behavioral resistance to change is

512
00:35:19,120 --> 00:35:23,720
Speaker 1: often slows things down. It's an impediment to adopting new processes,

513
00:35:24,280 --> 00:35:28,520
Speaker 1: and things like telehealth was always slow on implementation because

514
00:35:28,640 --> 00:35:33,840
Speaker 1: you know, the more established doctors were resistant to it, etcetera. Well,

515
00:35:33,880 --> 00:35:35,840
Speaker 1: in a pandemic, you had to get it up and

516
00:35:35,920 --> 00:35:39,919
Speaker 1: running and guess what, it works. So it's cheaper, it's

517
00:35:39,920 --> 00:35:43,000
Speaker 1: more efficient, and it's not going away. So that's just

518
00:35:43,040 --> 00:35:46,440
Speaker 1: one example, but I think there's many examples across industries,

519
00:35:46,880 --> 00:35:50,120
Speaker 1: and I think that's also contributes to one reason, Like

520
00:35:50,160 --> 00:35:53,399
Speaker 1: we see so many frictions in the labor market. What

521
00:35:53,640 --> 00:35:58,360
Speaker 1: consumers want to do, what businesses need from workers is

522
00:35:58,840 --> 00:36:03,120
Speaker 1: shifting very quickly, and business models need to shift quickly,

523
00:36:03,680 --> 00:36:08,240
Speaker 1: and so you hear the loudest complaints from the people

524
00:36:08,239 --> 00:36:11,960
Speaker 1: that are having the hardest time re orienting their business models.

525
00:36:12,000 --> 00:36:14,879
Speaker 1: But we again, if you read earnings reports, you hear

526
00:36:14,920 --> 00:36:17,400
Speaker 1: a lot of non complainers. People are that are saying,

527
00:36:17,719 --> 00:36:21,040
Speaker 1: we implemented this and it was amazing, and our profits

528
00:36:21,040 --> 00:36:24,520
Speaker 1: are higher than expected because you know, we've been able

529
00:36:24,600 --> 00:36:28,239
Speaker 1: to you know, do more with fewer workers or you know,

530
00:36:28,320 --> 00:36:33,640
Speaker 1: transform these processes. So I guess we're pretty optimistic that

531
00:36:33,760 --> 00:36:37,520
Speaker 1: the productivity performance this cycle is going to be better

532
00:36:37,600 --> 00:36:41,560
Speaker 1: than last cycle, and you know that's also a good

533
00:36:41,560 --> 00:36:44,879
Speaker 1: news for the inflation front. We do think that that

534
00:36:45,200 --> 00:36:51,000
Speaker 1: this is sort of a transformational period these frictions. You

535
00:36:51,000 --> 00:36:53,320
Speaker 1: you watch, you know, these companies dealing with these supply

536
00:36:53,400 --> 00:36:58,399
Speaker 1: chain issues, they're re engineering what they need and how

537
00:36:58,440 --> 00:37:01,600
Speaker 1: to do things more effectively, inefficiently, and you know they're

538
00:37:01,640 --> 00:37:03,960
Speaker 1: they're going to be better at things when they come

539
00:37:04,000 --> 00:37:06,680
Speaker 1: out on the other side of this. So we don't

540
00:37:06,719 --> 00:37:10,320
Speaker 1: really know what's going to happen with some of these

541
00:37:10,760 --> 00:37:14,720
Speaker 1: democratic stimulus or spending plans that are in the works.

542
00:37:15,400 --> 00:37:18,000
Speaker 1: Some might not pass at all. Really, it's it's all

543
00:37:18,200 --> 00:37:21,759
Speaker 1: very ambiguous. There is one provision in one of the

544
00:37:21,800 --> 00:37:25,600
Speaker 1: bills that would give the government greater flexibility to negotiate

545
00:37:25,760 --> 00:37:31,560
Speaker 1: on I think medicare negotiate on drug prices, and there's

546
00:37:31,600 --> 00:37:33,719
Speaker 1: some question who knows whether it will actually make it

547
00:37:33,760 --> 00:37:37,359
Speaker 1: in the bill. And then furthermore, beyond that, I think

548
00:37:37,360 --> 00:37:42,400
Speaker 1: there was some language that it wouldn't kick in until power,

549
00:37:42,880 --> 00:37:44,719
Speaker 1: So even if it were to make it in the bill,

550
00:37:45,280 --> 00:37:47,319
Speaker 1: it would probably be kind of irrelevant to some of

551
00:37:47,320 --> 00:37:51,640
Speaker 1: the inflation pressures that we're seeing right now. Nonetheless, I'm

552
00:37:51,680 --> 00:37:55,440
Speaker 1: curious your take on that and how much you know

553
00:37:56,080 --> 00:37:59,600
Speaker 1: something like that. It's pretty obvious that there are pretty

554
00:38:00,719 --> 00:38:04,120
Speaker 1: contributors to the inflation metrics that have nothing to do

555
00:38:04,160 --> 00:38:06,800
Speaker 1: with monetary policy or macro and might be as simple

556
00:38:06,880 --> 00:38:10,440
Speaker 1: as well, what are the government rules that can govern

557
00:38:10,760 --> 00:38:15,000
Speaker 1: the price of prescription drugs? How are you thinking about that?

558
00:38:15,160 --> 00:38:19,000
Speaker 1: And how much difference could it make were the were

559
00:38:19,040 --> 00:38:22,440
Speaker 1: the law to change such that the government could exercise

560
00:38:22,520 --> 00:38:25,360
Speaker 1: some of its clause. I'm an option e buying power

561
00:38:25,600 --> 00:38:29,319
Speaker 1: of prescription drugs for so many people uh to be

562
00:38:29,360 --> 00:38:33,520
Speaker 1: able to more aggressively push prices down. I think it

563
00:38:33,560 --> 00:38:35,840
Speaker 1: could have a material impact. I haven't. I don't have

564
00:38:35,880 --> 00:38:39,120
Speaker 1: an estimate for you, but um, it's it's not something

565
00:38:39,160 --> 00:38:44,120
Speaker 1: that we have factored into our baseline expectation for inflation.

566
00:38:44,800 --> 00:38:48,640
Speaker 1: We had health care inflation actually pick up quite substantially

567
00:38:48,920 --> 00:38:52,279
Speaker 1: in January, and that's something that is very unlikely to

568
00:38:52,360 --> 00:38:57,040
Speaker 1: repeat in January two and that I've estimated will reduce

569
00:38:57,600 --> 00:39:01,759
Speaker 1: core PC inflation by about twenty five basis points just

570
00:39:01,880 --> 00:39:06,160
Speaker 1: that that that not repeating. I think more broadly, our

571
00:39:06,239 --> 00:39:11,040
Speaker 1: view is that healthcare inflation will remain low relative to

572
00:39:11,800 --> 00:39:14,600
Speaker 1: you know, the two early two thousands when it was

573
00:39:14,800 --> 00:39:17,880
Speaker 1: a lot higher, and that will be just a source

574
00:39:17,920 --> 00:39:24,399
Speaker 1: of structural downward pressure on prices. That should help alleviate

575
00:39:24,480 --> 00:39:27,239
Speaker 1: maybe some of this supply chain inflation that we're going

576
00:39:27,280 --> 00:39:32,200
Speaker 1: to see in Yeah, it's kind of interesting because I

577
00:39:32,239 --> 00:39:36,439
Speaker 1: think for years there were a few categories they were

578
00:39:36,480 --> 00:39:42,680
Speaker 1: seen as these like really consistent upward contributors to inflation,

579
00:39:42,880 --> 00:39:46,560
Speaker 1: and obviously healthcare is one of them. Education, if I'm

580
00:39:46,560 --> 00:39:48,879
Speaker 1: not mistaken, there's another area that for a long time

581
00:39:48,880 --> 00:39:51,279
Speaker 1: was putting up a lot of upward pressure, but now

582
00:39:51,400 --> 00:39:55,520
Speaker 1: that really seems to have called off. Yeah, yeah, Yeah,

583
00:39:55,560 --> 00:39:59,600
Speaker 1: that's another one of the examples of the demographic headwind.

584
00:40:00,080 --> 00:40:05,520
Speaker 1: You know, the class size of every incoming college classes shrinking,

585
00:40:06,120 --> 00:40:10,120
Speaker 1: and the education sector is not a nimble sector that

586
00:40:10,239 --> 00:40:15,880
Speaker 1: adjusts capacity at high frequency. So we're oversupplied with higher

587
00:40:16,000 --> 00:40:20,520
Speaker 1: education capacity in the United States. And you know, for years,

588
00:40:21,120 --> 00:40:25,759
Speaker 1: higher education institutions tried to fill those empty seats with

589
00:40:26,040 --> 00:40:30,520
Speaker 1: UM foreign students, and that's become more difficult, although that's

590
00:40:30,520 --> 00:40:34,480
Speaker 1: still you know, an important source of of UM students.

591
00:40:34,520 --> 00:40:37,359
Speaker 1: But at the end of the day, we still do

592
00:40:37,480 --> 00:40:42,440
Speaker 1: have more higher education capacity than uh, we have excess capacity,

593
00:40:42,480 --> 00:40:46,400
Speaker 1: and so we've seen downward pressure on higher on education

594
00:40:46,440 --> 00:40:49,560
Speaker 1: inflation from that. You know, what one thing that we're

595
00:40:49,600 --> 00:40:54,520
Speaker 1: exploring right now is how would some of these other

596
00:40:54,800 --> 00:40:59,680
Speaker 1: subsidies to education. So some of these other policy variables

597
00:41:00,320 --> 00:41:04,640
Speaker 1: that are going to impact education feed into CPI inflation.

598
00:41:04,800 --> 00:41:07,960
Speaker 1: So one thing that we've been posing questions to b

599
00:41:08,200 --> 00:41:14,000
Speaker 1: LS about is how would for example, free community college

600
00:41:14,160 --> 00:41:18,040
Speaker 1: or you know, the subsidies to higher education feed into

601
00:41:18,080 --> 00:41:20,799
Speaker 1: cp I. It's a it's more of an open and

602
00:41:20,920 --> 00:41:24,359
Speaker 1: unsettled question right now. What they do is they tend

603
00:41:24,360 --> 00:41:27,919
Speaker 1: to drop zeros out of their their calculation. They would

604
00:41:27,920 --> 00:41:30,919
Speaker 1: just sort of ignore these subsidies. These subsidies would would

605
00:41:31,000 --> 00:41:36,960
Speaker 1: tend to actually potentially increase higher education inflation. Also, what

606
00:41:37,040 --> 00:41:40,560
Speaker 1: about these subsidies to daycare that are being included in

607
00:41:40,640 --> 00:41:44,160
Speaker 1: some of the bills that are you know, in the

608
00:41:44,239 --> 00:41:48,239
Speaker 1: Reconciliation bill that that's being debated right now, how would

609
00:41:48,280 --> 00:41:52,120
Speaker 1: that feed into daycare pricing in cp I. So there's

610
00:41:52,160 --> 00:41:56,480
Speaker 1: some open questions about how the education pricing. It's it's

611
00:41:56,520 --> 00:41:58,920
Speaker 1: a sector that is the subject of a lot of

612
00:41:59,000 --> 00:42:03,280
Speaker 1: policy focus. Uh, and it could that source of inflation

613
00:42:03,320 --> 00:42:07,439
Speaker 1: could evolve in different ways going forward. So I think

614
00:42:07,480 --> 00:42:11,960
Speaker 1: demographically higher education we've seen the disinflation. There's no reason

615
00:42:12,000 --> 00:42:14,920
Speaker 1: to expect that to reverse some of the other areas,

616
00:42:14,960 --> 00:42:18,040
Speaker 1: though you know, we'll have to think through how that's

617
00:42:18,040 --> 00:42:21,759
Speaker 1: going to be captured and factored into measures of inflation

618
00:42:22,680 --> 00:42:26,480
Speaker 1: as they get more government support. So we're running a

619
00:42:26,600 --> 00:42:29,440
Speaker 1: little bit of a risk here. Like I said, we're

620
00:42:29,440 --> 00:42:32,799
Speaker 1: recording this UH twenty one, it's actually the day before

621
00:42:32,840 --> 00:42:36,040
Speaker 1: a FED decision. But I don't think anyone you know, nothing,

622
00:42:36,239 --> 00:42:38,799
Speaker 1: nothing that we've really talked about, or I think going

623
00:42:38,840 --> 00:42:41,640
Speaker 1: to talk about it here is going to matter much.

624
00:42:41,880 --> 00:42:45,960
Speaker 1: You know, whether some minor language they changed to the taper, well,

625
00:42:46,000 --> 00:42:48,480
Speaker 1: by the time people are listening to this that big said,

626
00:42:48,520 --> 00:42:51,640
Speaker 1: I want to talk about the FED a little bit

627
00:42:52,000 --> 00:42:54,239
Speaker 1: because one of the subjects that we've dwelled a lot

628
00:42:54,320 --> 00:42:58,319
Speaker 1: about on is sort of this new FED framework that

629
00:42:58,520 --> 00:43:05,400
Speaker 1: was unveiled August at Jackson Hole, and basically, you know,

630
00:43:05,520 --> 00:43:10,160
Speaker 1: tolerate some overshoot of inflation in order to do a

631
00:43:10,200 --> 00:43:13,560
Speaker 1: better job of hitting its employment goals. And I think

632
00:43:13,600 --> 00:43:16,719
Speaker 1: if you look at some of the uh the hikes

633
00:43:16,719 --> 00:43:19,120
Speaker 1: that we saw in the post grade financial crisis, the

634
00:43:19,200 --> 00:43:23,759
Speaker 1: FED clearly underestimated the degree to which unemployment could fall,

635
00:43:23,880 --> 00:43:26,920
Speaker 1: and it was sort of perhaps premature and expecting inflation.

636
00:43:27,040 --> 00:43:29,080
Speaker 1: So I think my first you know, the first thing

637
00:43:29,160 --> 00:43:34,520
Speaker 1: I'm curious about is do you see so far a

638
00:43:34,640 --> 00:43:38,840
Speaker 1: meaningful change since this new FED framework has emerged? Do

639
00:43:38,920 --> 00:43:42,800
Speaker 1: you see evidence that the FED has behaved meaningfully different

640
00:43:43,200 --> 00:43:48,560
Speaker 1: than they otherwise would have in the absence of uh,

641
00:43:48,600 --> 00:43:50,880
Speaker 1: this new framework? Is the is the Is the current

642
00:43:50,960 --> 00:43:53,719
Speaker 1: power FED different than the old power FED? Is it

643
00:43:53,800 --> 00:43:57,160
Speaker 1: different than the yelling Fed? Is it Is there evidence

644
00:43:57,200 --> 00:43:59,640
Speaker 1: of a significant change in thinking? Or is it is

645
00:43:59,680 --> 00:44:03,320
Speaker 1: it pre marginal? Oh my goodness, I think there's huge

646
00:44:03,360 --> 00:44:08,560
Speaker 1: evidence of the change already. I mean, part of the

647
00:44:08,600 --> 00:44:12,319
Speaker 1: review that wasn't formalized as much as some of the

648
00:44:12,320 --> 00:44:15,440
Speaker 1: other elements was the idea that you go big in

649
00:44:15,480 --> 00:44:20,640
Speaker 1: a recession because the biggest risk is the lingering malaise.

650
00:44:21,160 --> 00:44:23,840
Speaker 1: You don't mess around time is of the essence, you

651
00:44:23,960 --> 00:44:26,600
Speaker 1: go big, you go early. That was one of the

652
00:44:26,640 --> 00:44:29,279
Speaker 1: things that came out of the review for Powell in particular,

653
00:44:29,719 --> 00:44:34,520
Speaker 1: and he did exactly that in the heat of the

654
00:44:34,560 --> 00:44:38,160
Speaker 1: pandemic when it was becoming a financial crisis. He short

655
00:44:38,160 --> 00:44:42,239
Speaker 1: circuited that very quickly. So that's evidence. And then I

656
00:44:42,280 --> 00:44:45,640
Speaker 1: think you can see it in their tolerance of the

657
00:44:45,719 --> 00:44:49,480
Speaker 1: supply chain inflation so far, there are Hawks on the

658
00:44:49,520 --> 00:44:52,920
Speaker 1: committee that are less comfortable share Powell is more of

659
00:44:52,960 --> 00:44:55,760
Speaker 1: a dove, and he's more comfortable. I mean, his Jackson

660
00:44:55,800 --> 00:45:00,000
Speaker 1: whole speech was, you know, pretty devish on that front.

661
00:45:00,440 --> 00:45:03,239
Speaker 1: And then even if you look at their projections, you

662
00:45:03,280 --> 00:45:06,480
Speaker 1: know that they are projecting lift off. Whether they pull

663
00:45:06,560 --> 00:45:11,080
Speaker 1: it forward to or leave it in three at the

664
00:45:11,120 --> 00:45:15,359
Speaker 1: September meeting, it's still you know, given the inflation that

665
00:45:15,440 --> 00:45:18,880
Speaker 1: we've seen in the old days, you would have seen

666
00:45:19,440 --> 00:45:23,879
Speaker 1: way more panicking over this kind of inflation. Number one

667
00:45:24,000 --> 00:45:27,560
Speaker 1: and number two. You know that the agreement is that

668
00:45:27,600 --> 00:45:31,760
Speaker 1: you're going to let that unemployment rate fall to very

669
00:45:31,880 --> 00:45:35,160
Speaker 1: right around the longer run rate, whatever you think that is,

670
00:45:35,840 --> 00:45:39,560
Speaker 1: before liftoff. And so even in the Hawks projections, they

671
00:45:39,640 --> 00:45:42,319
Speaker 1: might have a view that the labor market is going

672
00:45:42,360 --> 00:45:46,560
Speaker 1: to be stronger, faster and therefore lift off will come sooner.

673
00:45:47,200 --> 00:45:50,400
Speaker 1: But you know, even somebody like Jim Bullard is on

674
00:45:50,480 --> 00:45:55,200
Speaker 1: board with this reaction function. So I definitely see strong

675
00:45:55,320 --> 00:46:00,360
Speaker 1: support for the new reaction function being put into two action.

676
00:46:00,400 --> 00:46:03,120
Speaker 1: I mean the fact that we're just talking about tapering now,

677
00:46:03,480 --> 00:46:07,080
Speaker 1: which is way beyond anything they would have done before

678
00:46:07,440 --> 00:46:12,359
Speaker 1: last cycle. They like each tapering, each QUEI program was

679
00:46:13,239 --> 00:46:16,520
Speaker 1: so hard fought to get put into place, and they

680
00:46:16,520 --> 00:46:18,640
Speaker 1: were always rushing to end it as soon as they

681
00:46:18,680 --> 00:46:23,720
Speaker 1: possibly could. And and this is just a completely different mindset. Um.

682
00:46:23,880 --> 00:46:26,960
Speaker 1: I don't know, Laura, do you want to add anything? Yeah, no,

683
00:46:27,040 --> 00:46:31,200
Speaker 1: I agree. I think Um, earlier this year, you know,

684
00:46:31,280 --> 00:46:35,040
Speaker 1: when you had the major fiscal stimulus bill passed and

685
00:46:35,360 --> 00:46:41,000
Speaker 1: the FED stop plot was unchanged, right, was evidence of,

686
00:46:41,560 --> 00:46:44,640
Speaker 1: you know, a shift towards some more devish reaction function.

687
00:46:44,680 --> 00:46:47,759
Speaker 1: I'm a little bit less sure on the supply chain inflation.

688
00:46:48,640 --> 00:46:50,840
Speaker 1: I feel like in the past, if you thought the

689
00:46:50,840 --> 00:46:54,800
Speaker 1: inflation was going to be temporary, then you wouldn't respond

690
00:46:54,840 --> 00:47:00,080
Speaker 1: to it. Only if it impacted inflation expectations would you,

691
00:47:00,080 --> 00:47:02,960
Speaker 1: you know, really be concerned about it. So I don't

692
00:47:02,960 --> 00:47:08,200
Speaker 1: know if we've seen, you know, so far, necessarily a

693
00:47:08,239 --> 00:47:11,560
Speaker 1: shift in thinking about supply chain inflation from the FED.

694
00:47:12,120 --> 00:47:15,240
Speaker 1: I think the one difference is that there was general

695
00:47:15,280 --> 00:47:20,640
Speaker 1: consensus that most measures of inflation expectations were at the

696
00:47:20,719 --> 00:47:24,279
Speaker 1: low end of the range consistent with their mandate, and

697
00:47:24,360 --> 00:47:26,879
Speaker 1: they would like to see them move higher. So we've

698
00:47:26,880 --> 00:47:32,520
Speaker 1: seen kind of a tolerance for reflation that maybe would

699
00:47:32,600 --> 00:47:36,680
Speaker 1: not have been as welcome, you know, if inflation expectations

700
00:47:36,840 --> 00:47:40,520
Speaker 1: were in a more normal, healthier range. So that's been

701
00:47:40,560 --> 00:47:45,000
Speaker 1: a that's been a difference as well. So obviously, you know,

702
00:47:45,239 --> 00:47:49,680
Speaker 1: part of the whole reason for this rethink there's ultimately

703
00:47:50,120 --> 00:47:53,640
Speaker 1: about you know, and and and I think a lot

704
00:47:53,680 --> 00:47:55,920
Speaker 1: of people give Poll credit for this of taking the

705
00:47:56,000 --> 00:48:02,560
Speaker 1: employment side of the FED mandate extremely seriously, and that

706
00:48:02,719 --> 00:48:06,960
Speaker 1: the recognition, even a pre crisis, unemployment can go very

707
00:48:07,000 --> 00:48:12,160
Speaker 1: low without triggering inflation. I think unemployment got to I

708
00:48:12,239 --> 00:48:16,320
Speaker 1: think we've got down to three point four percent in February.

709
00:48:16,360 --> 00:48:19,000
Speaker 1: There was not meaningful inflation, and there was probably at

710
00:48:19,000 --> 00:48:21,000
Speaker 1: the time no reason to think it couldn't it couldn't

711
00:48:21,040 --> 00:48:25,120
Speaker 1: have gotten into the twos without triggering a significant rise

712
00:48:25,239 --> 00:48:29,840
Speaker 1: in inflation. This time around, assuming we get back to

713
00:48:29,960 --> 00:48:33,600
Speaker 1: those numbers, what what what's victory going to look like

714
00:48:34,040 --> 00:48:37,479
Speaker 1: from the Fed's perspective in the end, because you're still

715
00:48:37,840 --> 00:48:39,960
Speaker 1: I still see this issue where you still have this

716
00:48:40,040 --> 00:48:43,399
Speaker 1: sort of like Phillips curve logic. We're in the end,

717
00:48:44,480 --> 00:48:47,200
Speaker 1: they're still going to rely on inflation measures to tell

718
00:48:47,239 --> 00:48:49,399
Speaker 1: them that they've reached the speed limit or the max

719
00:48:49,480 --> 00:48:52,919
Speaker 1: capacity or something like that. But I'm curious what you think.

720
00:48:53,560 --> 00:48:57,600
Speaker 1: How the fed itself, we'll be able to tell itself. Okay,

721
00:48:57,960 --> 00:49:00,680
Speaker 1: we've we've achieved victory. We've we've hit our goals, and

722
00:49:00,760 --> 00:49:06,200
Speaker 1: we've got to maximum employment. Well, I mean, most participants

723
00:49:06,200 --> 00:49:13,280
Speaker 1: on the f WEMC express satisfaction with the labor market.

724
00:49:13,360 --> 00:49:16,680
Speaker 1: They were happy with that labor market. They they all

725
00:49:16,760 --> 00:49:20,000
Speaker 1: kind of agree that that kind of looked like full employment.

726
00:49:20,320 --> 00:49:22,600
Speaker 1: We didn't have a lot of inflation, we didn't have

727
00:49:22,640 --> 00:49:25,520
Speaker 1: a lot of wage inflation, but we had a lot

728
00:49:25,560 --> 00:49:29,799
Speaker 1: of narrowing disparities, a lot of very healthy dynamics, and

729
00:49:29,840 --> 00:49:32,040
Speaker 1: so at a minimum, they'd like to see something that

730
00:49:32,080 --> 00:49:35,000
Speaker 1: looks like that. They would like to see. You know,

731
00:49:35,160 --> 00:49:39,080
Speaker 1: there's some debate about you know, aging boomers and weather

732
00:49:39,320 --> 00:49:42,040
Speaker 1: those that left will come back. But let's look at,

733
00:49:42,520 --> 00:49:46,440
Speaker 1: you know, the primate employment population ratio that should at

734
00:49:46,520 --> 00:49:51,880
Speaker 1: least return to levels. Maybe it could go to levels

735
00:49:52,360 --> 00:49:56,239
Speaker 1: depending on the productivity trends that we see UH and

736
00:49:56,400 --> 00:50:01,080
Speaker 1: the policies that support labor supply, but definitely we can

737
00:50:01,120 --> 00:50:05,520
Speaker 1: at least get back to levels of prime age employment

738
00:50:05,560 --> 00:50:08,480
Speaker 1: to population. That seems to be a metric that most

739
00:50:08,520 --> 00:50:13,120
Speaker 1: people on the committee agree to and broad based wage gains,

740
00:50:13,360 --> 00:50:16,440
Speaker 1: wage gains that are not just the top but shared

741
00:50:16,640 --> 00:50:21,320
Speaker 1: at the bottom, and narrowing disparities by race and ethnicity

742
00:50:21,360 --> 00:50:25,200
Speaker 1: and gender. So I mean, I think they were seeing

743
00:50:25,280 --> 00:50:29,880
Speaker 1: all of those things in uh, and it looked pretty great.

744
00:50:29,960 --> 00:50:35,120
Speaker 1: Powell was very pleased with a labor market, often and

745
00:50:35,160 --> 00:50:38,200
Speaker 1: repeatedly talked about it. Uh. He loved to see what

746
00:50:38,280 --> 00:50:40,279
Speaker 1: he was seeing, and he would like to get back

747
00:50:40,280 --> 00:50:44,879
Speaker 1: to that. That's one version of victory. Maybe you could

748
00:50:44,920 --> 00:50:49,000
Speaker 1: go even maybe you could even improve upon that. We'll see,

749
00:50:49,080 --> 00:50:51,960
Speaker 1: And I think wage growth is the other metric now

750
00:50:51,960 --> 00:50:53,560
Speaker 1: that we've seen. I mean, I think one of the

751
00:50:53,600 --> 00:50:57,879
Speaker 1: important takeaways of the COVID crisis is that we can

752
00:50:58,120 --> 00:51:04,520
Speaker 1: see consumers accepting higher prices. We can see these inflationary dynamics.

753
00:51:04,600 --> 00:51:08,320
Speaker 1: So I think wage growth becomes a very important metric

754
00:51:08,400 --> 00:51:11,960
Speaker 1: in this environment. Do we see broad based wage gains?

755
00:51:12,320 --> 00:51:16,680
Speaker 1: Are they ongoing? Uh? Do they support a higher run

756
00:51:16,840 --> 00:51:20,080
Speaker 1: rate of inflation? Again, not just all these crazy, wild

757
00:51:20,080 --> 00:51:24,000
Speaker 1: pandemic relative price shifts, but a process that's broad based

758
00:51:24,000 --> 00:51:28,400
Speaker 1: and ongoing. Wage growth is kind of the essential ingredient

759
00:51:28,480 --> 00:51:29,680
Speaker 1: to that. So I think there's going to be a

760
00:51:29,760 --> 00:51:33,400
Speaker 1: lot of focus on after all of this noise settles down,

761
00:51:34,040 --> 00:51:37,239
Speaker 1: what are the trends and wage growth across the spectrum?

762
00:51:37,760 --> 00:51:40,799
Speaker 1: And you know, does that does that deliver you that

763
00:51:40,960 --> 00:51:44,759
Speaker 1: higher run rate on inflation that you're seeking? And I

764
00:51:44,800 --> 00:51:48,759
Speaker 1: would say that, you know, beyond, once we're past the

765
00:51:48,920 --> 00:51:54,400
Speaker 1: supply chain issues, can we achieve a moderate overshoot of

766
00:51:54,440 --> 00:51:57,160
Speaker 1: the feds two percent target at the peak of the cycle.

767
00:51:57,320 --> 00:52:00,360
Speaker 1: We couldn't last time? Can we do that this time?

768
00:52:00,920 --> 00:52:05,879
Speaker 1: And can that bring up measures of inflation expectations from

769
00:52:05,880 --> 00:52:08,640
Speaker 1: the lower end of their normal range a little bit

770
00:52:08,920 --> 00:52:11,360
Speaker 1: closer to the mid or even a little bit higher.

771
00:52:11,520 --> 00:52:16,239
Speaker 1: Can that Can that anchor them there on a sustainable

772
00:52:16,280 --> 00:52:21,200
Speaker 1: basis that maybe lifts interest rates neutral interest rates a

773
00:52:21,239 --> 00:52:24,320
Speaker 1: little bit and brings us a little bit away from

774
00:52:24,360 --> 00:52:26,919
Speaker 1: this risk of the zero lower bound. That would be

775
00:52:27,320 --> 00:52:30,360
Speaker 1: that would be a clear victory for the Fed. Again,

776
00:52:30,400 --> 00:52:34,440
Speaker 1: the challenge right now is we've moved so far above target. Uh,

777
00:52:34,480 --> 00:52:37,279
Speaker 1: you know what, what is the inflation landscape gonna look

778
00:52:37,360 --> 00:52:39,920
Speaker 1: like once these supply chain issues are resolved? Are we

779
00:52:40,040 --> 00:52:43,239
Speaker 1: going to move back below? Will we continue to run

780
00:52:43,760 --> 00:52:47,200
Speaker 1: significantly above? I think the Fed is really hoping for

781
00:52:47,600 --> 00:52:50,760
Speaker 1: a moderate overshoot at the peak of the cycle, which

782
00:52:50,960 --> 00:52:57,640
Speaker 1: it really didn't get in the last expansion. Well on that,

783
00:52:58,080 --> 00:53:02,719
Speaker 1: on that hopeful note, I guess optimistic note and hopeful note,

784
00:53:03,000 --> 00:53:05,279
Speaker 1: I think that's a good place to stop. Could talk

785
00:53:05,320 --> 00:53:07,959
Speaker 1: about these topics with both of you for a long time.

786
00:53:08,000 --> 00:53:11,279
Speaker 1: But Julia and Laura, thank you so much for coming

787
00:53:11,320 --> 00:53:14,960
Speaker 1: on a lot. It was a pleasure. Thank you. Thanks,

788
00:53:15,120 --> 00:53:16,759
Speaker 1: That was a lot of fun. Thank you so much.

789
00:53:16,800 --> 00:53:30,440
Speaker 1: Julian and Laura, take care of thanks well here. Obviously

790
00:53:30,600 --> 00:53:34,319
Speaker 1: I would do a long chat with Tracy, or a

791
00:53:34,360 --> 00:53:37,440
Speaker 1: moderate chat with Tracy on what we just learned. But

792
00:53:37,560 --> 00:53:42,560
Speaker 1: I found that conversation to be incredibly helpful, very interesting

793
00:53:42,600 --> 00:53:46,839
Speaker 1: to think through the different moving parts of inflation and

794
00:53:46,960 --> 00:53:50,400
Speaker 1: think about the degree to which you know. Obviously this

795
00:53:50,719 --> 00:53:53,479
Speaker 1: to me, this is the big macro question, or one

796
00:53:53,560 --> 00:53:57,360
Speaker 1: of maybe like three or four big macro questions. Easy

797
00:53:57,520 --> 00:54:01,239
Speaker 1: enough to sit here in September one and point to

798
00:54:01,280 --> 00:54:05,360
Speaker 1: elevated inflation is having something to do with supply chains

799
00:54:05,520 --> 00:54:09,440
Speaker 1: and uh so forth. But if it, if it extends further,

800
00:54:09,680 --> 00:54:12,200
Speaker 1: if it goes into rents, if we do not see

801
00:54:12,239 --> 00:54:17,440
Speaker 1: anything resembling normalization, if we continue to see these rolling shutdowns,

802
00:54:17,480 --> 00:54:21,800
Speaker 1: obviously things get quite a bit tricky, and of course

803
00:54:22,040 --> 00:54:26,040
Speaker 1: Julia and Laura did a fantastic job breaking that all down.

804
00:54:26,200 --> 00:54:30,879
Speaker 1: So on that note, this has been another episode of

805
00:54:30,920 --> 00:54:34,719
Speaker 1: the Odd Lots podcast. I'm Joe Wisn't though. You can

806
00:54:34,760 --> 00:54:38,080
Speaker 1: follow me on Twitter at the Stalwart, follow my normal

807
00:54:38,200 --> 00:54:41,520
Speaker 1: co host Tracy Alloway or she's normally my co host

808
00:54:41,560 --> 00:54:45,320
Speaker 1: on the show. She's also normal. She's at Tracy Alloway,

809
00:54:45,440 --> 00:54:48,280
Speaker 1: and be sure to follow our guests on Twitter. Julia

810
00:54:48,360 --> 00:54:53,520
Speaker 1: Coronado she is it at j c Underscore econ and

811
00:54:53,600 --> 00:54:58,960
Speaker 1: Laura Rosner Warburton she is at it is Rosner. Follow

812
00:54:58,960 --> 00:55:03,000
Speaker 1: our producer Laura rack Carlson. She's at Laura M. Carlson.

813
00:55:03,360 --> 00:55:07,440
Speaker 1: Followed the Bloomberg head of podcast Francesco Levi at Francesca Today,

814
00:55:07,800 --> 00:55:10,839
Speaker 1: and check out all of our podcasts at Bloomberg under

815
00:55:10,880 --> 00:55:13,480
Speaker 1: the handle at podcasts. Thanks for listening.