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Speaker 1: Now joining us now Randy Krasner, University of Chicago Boo School,

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Speaker 1: a business professor and former Federal Reserve governor. Randy always

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Speaker 1: good to see you. So we heard the hawkish talk,

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Speaker 1: and our question of the day that I want to

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Speaker 1: bring to you, is a central bank talk still pack

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Speaker 1: a punch?

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Speaker 2: I think it certainly does in the bond market, maybe

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Speaker 2: not quite as much in the equity market.

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Speaker 1: So talk to me about that, because yes, we're seeing

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Speaker 1: a really chunky move. You got sixteen basis points higher

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Speaker 1: in the two year. Why do you think we're seeing

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Speaker 1: divergent interpretations within different markets?

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Speaker 3: So certainly the bond market.

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Speaker 2: I think there's a realization that the Fed really is

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Speaker 2: going to keep at this. They've been talking about this

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Speaker 2: really since a year ago that the message became really focused.

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Speaker 3: Our primary goal is fighting inflation. We're going to do that.

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Speaker 2: Remember the Jackson whole speech last August when Jpowell ripped

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Speaker 2: up the normal script and said the same thing eight times,

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Speaker 2: that we're going after inflation. Markets still took a long

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Speaker 2: time to kind of get their arms around that, but

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Speaker 2: I think that but I think the bond markets are

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Speaker 2: now started to see these guys are serious the equity

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Speaker 2: markets are thinking, wow, maybe we can still have this

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Speaker 2: immaculate disinflation, that is, that we can have the inflation

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Speaker 2: rate come down, and it has come down quite significantly

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Speaker 2: from the peaks of last year, although still quite a

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Speaker 2: bit above the fifth two percent goal, that we could

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Speaker 2: have that come down without significant increase in the unplumbing rate.

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Speaker 2: I mean, so far, we're still seeing very robust job market.

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Speaker 2: I mean, the most recent numbers this morning show that

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Speaker 2: claims are still low. You know, we're near record levels

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Speaker 2: of low unemployment. But I think it's going to be

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Speaker 2: very hard to make it from where we are of

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Speaker 2: three point nine to four point seven percent inflation, depending

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Speaker 2: what your favorite measure is, to get.

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Speaker 3: Down to two.

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Speaker 2: And I think that's only going to come with a

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Speaker 2: significant rise in the unplumber rate.

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Speaker 3: Yeah.

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Speaker 4: I mean, who am I, Randy to disagree with the

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Speaker 4: meat eating bond traders and inside on with the equity

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Speaker 4: traders in law law Land. But I mean, if you

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Speaker 4: just look at the data today, we had growth revised up,

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Speaker 4: inflation revised down, the claims RUG was pulled. Inflation, as

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Speaker 4: you said, Randy, it is coming down without employment seriously spiking.

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Speaker 4: I mean, does that not suggest that trajectory on its

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Speaker 4: own that the immaculate disinflation it could potentially happen.

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Speaker 3: It's certainly possible.

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Speaker 2: We've never had it before, and so that's why I

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Speaker 2: think many people like myself are skeptical of it. But

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Speaker 2: I've been through enough having but at the feder and

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Speaker 2: the global financial crisis, I never say never about anything,

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Speaker 2: So it is certainly possible. But what I worry is

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Speaker 2: that the fan's going to have to bring things to

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Speaker 2: the breaking point.

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Speaker 3: I think Jay made it clear that got.

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Speaker 2: At least one or two more increases up their sleeve

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Speaker 2: for the rest of the year. That means that their

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Speaker 2: resting point will probably be a little bit closer to

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Speaker 2: six than it will be.

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Speaker 3: Two to five. As inflation starts to come down.

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Speaker 2: That means that the inflation adjusted interest trade, the so

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Speaker 2: called real interest trait, will be going up as inflation

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Speaker 2: comes down. That means it's harder and harder for firms

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Speaker 2: to beat that hurdle rate and investment going down, Maybe

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Speaker 2: you see some adjustment of asset prices, and so you

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Speaker 2: could get into a more difficult situation towards the end

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Speaker 2: of the year beginning.

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Speaker 3: Of next year.

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Speaker 1: Do you just say six percent.

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Speaker 2: I did remember we're in the loaf where five and

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Speaker 2: five and a quarter. If they do two more rises

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Speaker 2: will be at five and a half to five and

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Speaker 2: three quarters, which will get us closer to six than

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Speaker 2: it will be to five.

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Speaker 1: Well, that would be happening. I also wonder to that point,

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Speaker 1: where might we see the most action. We're clearly seeing

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Speaker 1: a rebrating in the bond market. To some extent, it

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Speaker 1: feels like the equity market is moving on say earnings,

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Speaker 1: for example, I understand the MIC runs down. We have

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Speaker 1: some solid numbers from like H and M and Renault

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Speaker 1: like kind of calling the trough and some of the

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Speaker 1: worrying sectors. What about FX. I just wonder how strong

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Speaker 1: the dollar gets until it starts to bite, and that

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Speaker 1: that has to worry about it.

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Speaker 3: I think the FED doesn't primarily focus on the dollar.

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Speaker 2: They want to make sure that there's no disorderly movements

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Speaker 2: either up or down in the in the dollar.

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Speaker 3: But that can have an impact.

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Speaker 2: And obviously a lot of it is what people are

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Speaker 2: assessing the FED is going to do relative to the

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Speaker 2: ECB or other banks around around the world.

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Speaker 3: I think there's a lot of worry that.

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Speaker 2: The at some point Bank of Japan is going to

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Speaker 2: have to pull back, and that could cause a little

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Speaker 2: bit of tumult in those Japanese markets that have.

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Speaker 3: Been lying for decades on the.

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Speaker 2: On the center bank to always buy equities and by

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Speaker 2: by securities. So I think there could be some some

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Speaker 2: tumult coming both in the forex markets, but also I

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Speaker 2: think I keep my eye on Japan.

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Speaker 4: Yeah, I was going to say the biggest surprise out

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Speaker 4: of yesterday's panel was Japan, not in what they said

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Speaker 4: about policy, Randy, but was the absolute jokester Casio Ueida

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Speaker 4: having the audience in the absolute uproar multiple times is

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Speaker 4: definitely my favorite point. But but Randy to kind of

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Speaker 4: a different point.

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Speaker 2: Dar RYO.

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Speaker 4: Perkins of TS Lombard has this really great note out

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Speaker 4: today talking about our start, the value of equilibrium that

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Speaker 4: we use to judge whether policy is restrictive or not,

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Speaker 4: basically saying, look, the models for this are often wrong.

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Speaker 4: Are we thinking things wrong here when we're trying to

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Speaker 4: judge whether policy is restrictive or not? Is our start

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Speaker 4: actually a measure we should be looking to?

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Speaker 3: Yeah?

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Speaker 2: The charage with this book called our star the equilibrium

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Speaker 2: rate is that It used to be seen as a

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Speaker 2: constant around the real rate being two percent and then

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Speaker 2: two percent inflation, so two plus two getkistioned to four.

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Speaker 2: Now it's seen is that underlying real rate is bouncing

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Speaker 2: around a lot, with demographics and supply constraints, all these

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Speaker 2: sorts of things coming into to affect it.

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Speaker 3: So it's much less of a guide guide post than

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Speaker 3: it once was.

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Speaker 2: But this gets back to what I had said before

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Speaker 2: that as FED, I think holes in the let's say

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Speaker 2: roughly five and a half percent area, inflation will start

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Speaker 2: to come down a bit more.

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Speaker 3: But that means that the real rate, the inflation adjust rate,

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Speaker 3: is going to.

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Speaker 2: Be higher, So the real borrowing costs, the real burden

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Speaker 2: is going to be going up, and I think that's

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Speaker 2: going to make it more difficult to sustain the kind

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Speaker 2: of growth that we've been seeing over time.

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Speaker 1: Yeah, So as sort of that delayed monetary policy effect,

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Speaker 1: which has been quite delayed. Really, why why has monetary

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Speaker 1: policy transmission been so delayed? And part of me fixes

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Speaker 1: it on the housing market, because if you have so

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Speaker 1: much wealth that's been unlocked over the last couple of

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Speaker 1: years because rates are so low, that doesn't just go

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Speaker 1: away that's going to stay.

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Speaker 2: So I think one of the things that's happened is

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Speaker 2: that so many people find, at least in the US,

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Speaker 2: finance it to long term fixed rate mortgages at really

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Speaker 2: low levels back over the last couple of years, that

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Speaker 2: no one wants to move. This is one of the

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Speaker 2: reasons why we see such a tight housing market, that

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Speaker 2: there's so few there's so little inventory out there, and

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Speaker 2: so that normally one of the key transmission mechanisms is

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Speaker 2: fed changes rates that it affects the tenure rate, that.

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Speaker 3: Affects the baring costs for most households.

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Speaker 2: Well, if everybody's on a short term a low long

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Speaker 2: term fixed rate, it has a much much less of

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Speaker 2: an effect.

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Speaker 3: That's going to take more time for that to have

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Speaker 3: an effect. Also, something that happened, which I think is

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Speaker 3: helping to support the economy is.

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Speaker 2: That effectively we had a stimulus that came from that

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Speaker 2: people by refinancing to much much lower fixed rate mortgages,

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Speaker 2: they've got a few hundred dollars or a few thousand

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Speaker 2: dollars a month that they didn't have before because they've

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Speaker 2: got those low rates, and so effectively that was like

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Speaker 2: a stimulus on top of people not responding because they're

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Speaker 2: not having to respond until they have to sell their homes.

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Speaker 2: And hopefully we won't see the unplumber rate go up

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Speaker 2: too much. But if we do see the unteplomer ate

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Speaker 2: go up much, then you get to this one two

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Speaker 2: punch in the housing market. A lot more supply coming

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Speaker 2: on and then new people coming in having to pay

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Speaker 2: much higher interest rates.

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Speaker 3: That'll probably put a lot of down with pressure on prices.

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Speaker 4: Randy, I'm afraid we're out of time. You're gonna have

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Speaker 4: to join us again, though, and explain to me why

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Speaker 4: UK doesn't have lower inflation than because we obviously have

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Speaker 4: a very different mortgage rate structure here. I don't know,

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Speaker 4: it's a lot of it is confusing at this moment.

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Speaker 4: Thank you for helping us figure it out. That is

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Speaker 4: Randy Krasner, University of Chicago Booth School of Business, professor

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Speaker 4: and of course, formal Federal Reserve governor.