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Speaker 1: We'd like to welcome you to Jackson Hole, and we

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Speaker 1: would like to welcome Austin Goldsby to our studios here.

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Speaker 1: Thank you very much for coming out on this gorgeous

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Speaker 1: day here. I know lunch is coming up, you'll want

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Speaker 1: to get to that, but we first have to ask

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Speaker 1: you about j.

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Speaker 2: Powell's speech.

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Speaker 1: There's been some feeling it was generally hawkish.

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Speaker 2: What's your take on.

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Speaker 1: It as somebody he's going to try to persuade one

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Speaker 1: way or another.

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Speaker 2: I don't totally no idea.

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Speaker 3: I don't not try to get in Jay's head. I

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Speaker 3: thought he rightfully was respectful on this is not a

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Speaker 3: mission accomplished to announcement. We've seen progress for a few

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Speaker 3: months on price inflation, which is what we need to see,

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Speaker 3: highlighting the kind of the three areas of goods, services

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Speaker 3: and housing, but that the job's not done. You know,

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Speaker 3: the inflation rate is still higher than where we want

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Speaker 3: it to be. And so the implication being all this

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Speaker 3: discussion about oh, the way we should change the target

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Speaker 3: clare victory, that you can't do that until you've hit

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Speaker 3: the target.

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Speaker 2: You can't just say, ah, we didn't want it anyway. Well,

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Speaker 2: once you're going to take to hit the target.

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Speaker 1: He raised the idea that the economy is growing faster

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Speaker 1: than you all had expected, and therefore that could be

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Speaker 1: inflationary and you might have to take action against it.

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Speaker 2: Yo, Look, we might.

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Speaker 3: I've been talking about what I call the golden path,

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Speaker 3: which is not normally feasible. It's not normally an option

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Speaker 3: for central banks that if you could get inflation down

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Speaker 3: without a big recession, that'd be a major triumph for

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Speaker 3: the FED or anybody.

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Speaker 2: It'd be virtually without precedent.

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Speaker 3: But we're part of the way down that road, and

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Speaker 3: we've been getting good news.

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Speaker 2: We just have to keep getting good news.

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Speaker 3: I mean, I think the argument that there's a stable

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Speaker 3: relationship let's call it, between economic growth or the unemployment

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Speaker 3: rate and the rate of inflation, that's a model, that's

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Speaker 3: a theory, and that theory hasn't hasn't done very well.

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Speaker 3: It wasn't doing that well even before the pandemic, and

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Speaker 3: it hasn't done that well coming out of the pandemic.

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Speaker 3: So yes, I would just have a note of caution.

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Speaker 3: Let's not over index on numbers like wage growth as

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Speaker 3: an indicator of inflation, because historically that has tended not

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Speaker 3: to be a leading indicator for price inflation. And let's

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Speaker 3: not over index on a quarterly growth rate as that

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Speaker 3: means what's about to happen to inflation, because we've been

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Speaker 3: several months now where those two haven't been that correlated.

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Speaker 1: Well, the implication of a faster growth rate is that

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Speaker 1: demand is going to be greater than supply, which will

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Speaker 1: be inflationary. Do you see the economy in that situation.

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Speaker 2: Well, now, hold on. It could mean that.

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Speaker 3: That could be one interpretation, but the other important interpretation,

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Speaker 3: and some of the researchers that are presenting their papers

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Speaker 3: here at the conference are highlighting, you can't forget about

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Speaker 3: what's happening on the supply side.

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Speaker 2: We went through this period where.

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Speaker 3: Some significant chunk of the inflation that we saw that

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Speaker 3: was unexpected came from the supply side deteriorating into interference,

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Speaker 3: supply chain interruptions, et cetera. So if you fixed the

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Speaker 3: supply chain interruptions, you could get a drop in inflation

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Speaker 3: without a decrease in output, or you could have GDP

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Speaker 3: growth that was faster than even trend without it being inflationary.

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Speaker 3: So that's part of the that's part of the confusing cloud.

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Speaker 3: That that we're, you know, try trying to see through.

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Speaker 3: So I do think we should keep both sides of

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Speaker 3: it in mind.

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Speaker 1: One of the things that was inflationary, as you point

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Speaker 1: out inflation, but that's wages. And now we're getting into

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Speaker 1: the contract pattern bargaining season, especially with auto workers.

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Speaker 2: You have a big auto workers district.

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Speaker 1: Are you concerned by the way the United Auto Workers

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Speaker 1: took their official strike mode today. You probably know that

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Speaker 1: that they could go on strike before September fifteenth.

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Speaker 2: Do you worry about that?

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Speaker 3: I definitely worry about that. It seems like every three

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Speaker 3: to four years, in the seventh District, where Chicago's the head,

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Speaker 3: that's the most auto intensive of all the FED districts,

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Speaker 3: every three or four years we think about this issue.

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Speaker 3: If there was a big strike that affected multiple auto

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Speaker 3: manufacturers and lasted for a long time, my fear is

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Speaker 3: that would have a pretty material impact on the manufacturing economy.

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Speaker 2: So that's where my head is about wages.

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Speaker 3: As I highlight as we've just described, I think wages

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Speaker 3: move slower than prices. When things happen in the economy,

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Speaker 3: go up first, then wages go up. As prices come down,

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Speaker 3: then wages will come down. If your decision rule were

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Speaker 3: I'm going to just keep slamming on the brakes until

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Speaker 3: I finally see wages get down to growth of two

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Speaker 3: percent a year or consistent with two percent a year,

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Speaker 3: you will almost certainly overshoot because the prices will have

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Speaker 3: happened that will have happened in.

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Speaker 2: Prices before before wages.

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Speaker 3: So I do think we should keep that in mind

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Speaker 3: as we're going into contract season. Much of what we're

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Speaker 3: seeing on wages now are reflecting what happened with prices

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Speaker 3: six months ago.

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Speaker 1: Well, if we get big increases, do you think the

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Speaker 1: auto companies and then all the parts suppliers A, We're

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Speaker 1: going to see a trickle up of higher prices.

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Speaker 2: To make up for it.

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Speaker 3: Well, I think that's describing a wage price spiral that

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Speaker 3: it's like, tell you necessarily wages went up, would that

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Speaker 3: lead to higher prices? Rather than talk about that in theory,

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Speaker 3: I would like to think about that in the data.

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Speaker 3: Historically and in this current period, we're not seeing really

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Speaker 3: any evidence of wage price pribal At this point. What

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Speaker 3: we're seeing in wage growth is largely what we saw

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Speaker 3: in price growth from six months ago. They're a lagging

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Speaker 3: indicator not a leading indicator. So that's why I've tried

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Speaker 3: to highlight let's look at the new months of price

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Speaker 3: inflation data, especially goods and housing, which in the short run,

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Speaker 3: those are the things that got to start coming down.

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Speaker 3: Notably they did for a couple of months, and that

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Speaker 3: needs to continue for the FED to feel like it's

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Speaker 3: on the golden path.

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Speaker 2: You mentioned housing.

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Speaker 1: It's an unusual situation because we went into this higher

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Speaker 1: inflation period with so many people having very low mortgages

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Speaker 1: as the housing market is essentially frozen. Now have you

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Speaker 1: sort of destroyed the housing market for a generation?

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Speaker 2: I hope not. I mean, I think you're right. It's unusual.

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Speaker 3: And as interest rates change in the short run, especially

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Speaker 3: when they go up rapidly like they have over the

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Speaker 3: last year and a half, it affects both the demand

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Speaker 3: for housing the traditional channel, but also the supply of housing,

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Speaker 3: and people are like, well, I don't want to sell

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Speaker 3: my house. I've I got three and a half percent mortgage.

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Speaker 3: If I buy a new house, I'm gonna have a

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Speaker 3: seven and a half percent mortgage, so it can come up.

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Speaker 3: The works a little bit. I don't feel like that's

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Speaker 3: a permanent effect. I mean this in a way, like

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Speaker 3: with all the housing in inflation, it just takes some

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Speaker 3: time to work its way through.

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Speaker 1: And do we ever get down to a three and

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Speaker 1: a half percent mortgage again? Does the FED get down

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Speaker 1: interest rates low enough that we see the market rates

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Speaker 1: come down as well?

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Speaker 2: That far? WHOA, Now you're in a this is a deep.

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Speaker 1: Definitely trying not to use the word our You don't.

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Speaker 2: Want to use the word our star.

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Speaker 3: But that's kind of the question of if you come

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Speaker 3: back five years from now, will we be back in

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Speaker 3: this environment where the FIDS trying to figure.

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Speaker 2: Out what to do in the interest rate at zero percent?

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Speaker 2: I don't think anybody really knows.

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Speaker 3: I think there are a lot of people have opinions

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Speaker 3: about will we go back to what things were in

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Speaker 3: the mid two thousands where rates where zero, or will

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Speaker 3: we go back to more historical norms. Some of that

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Speaker 3: has to do with demographics. We get a little too

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Speaker 3: big for our bridges, you know, in the central bank world.

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Speaker 3: As we contemplate that in the here and now, I

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Speaker 3: think this, let's watch the immediate inflation numbers, the new

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Speaker 3: numbers that are coming in to get whether we convince

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Speaker 3: ourselves that we can stay on this path where we

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Speaker 3: can get inflation down on approaching target without having a

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Speaker 3: big recession. That will be a triumph. I can I

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Speaker 3: emphasize it up. That's virtually unprecedented. That would absolutely be

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Speaker 3: a triumph, and that's where we should put our eye

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Speaker 3: right now.

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Speaker 1: Long invariable LAG's theory would suggest we're still going to

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Speaker 1: see restraint hit the economy and we could see a

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Speaker 1: real drop in growth, and some of the soft data

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Speaker 1: that we're getting, the sentiment data, suggests that maybe that's coming.

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Speaker 1: Do you think that's a danger at this point or

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Speaker 1: can we put the hard landing to bed?

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Speaker 3: Is definitely a concern, and I don't see how you

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Speaker 3: can look at the historical record and not think hard

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Speaker 3: landing should be a concern. It's virtually unprecedented to get

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Speaker 3: inflation down a lot without generating a hard landing and

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Speaker 3: a tough recession. That said, for the last four or

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Speaker 3: five months, we've done something that if you asked a

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Speaker 3: year ago, is that possible, they probably would have said, no,

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Speaker 3: it's not possible.

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Speaker 2: You can't get.

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Speaker 3: Inflation down as much as we have without unemployment soaring.

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Speaker 3: So in a way, we just we're going to have

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Speaker 3: to continue to play by ear on the data and

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Speaker 3: and manage point to point.

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Speaker 2: As it were.

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Speaker 1: If you don't know where neutral is. Essentially, but you

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Speaker 1: have a continuing drop at inflation, you're going to get

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Speaker 1: real rates going up and adding to the tightness of

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Speaker 1: the credit markets. So do you anticipate that sometime next

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Speaker 1: year you might be essentially cutting rates but basically trying

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Speaker 1: to adjust them, rather.

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Speaker 3: Than get in the hypothetical of what would happen if

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Speaker 3: we had done this and conditions came in. I think

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Speaker 3: you're right to highlight the real rate is our preferred measure,

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Speaker 3: that is the rate minus inflation. That's the right way

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Speaker 3: to think about how tight is the environment. And holding

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Speaker 3: the rate at some whatever five and a half, five

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Speaker 3: and a quarter or something as inflation goes down is

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Speaker 3: implicitly tightening because the.

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Speaker 2: Real rate will be going up.

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Speaker 3: It all depends nothing's off the table, nothing's on the

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Speaker 3: table automatically. It all depends on on how's inflation going.

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Speaker 3: And you know, we were meeting every six weeks to

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Speaker 3: try to stay stay up to date with that, and

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Speaker 3: that's what makes the job difficult. I mean, that's why

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Speaker 3: it's still going to be a time before Chad GPT

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Speaker 3: replace the FOMC.

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Speaker 2: You know, it's not always obvious.

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Speaker 3: Were out talking to business people, talking to consumers on

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Speaker 3: the ground, trying to get a real time update that's

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Speaker 3: not yet showed up in the data.

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Speaker 1: We could both get replaced out here, but I hope

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Speaker 1: not because we like the view. One last quick question,

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Speaker 1: and that is about the balance sheet. You haven't really

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Speaker 1: hit your targets until very recently, the monthly targets, just

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Speaker 1: because of the maturity profile of what the FAT is holding.

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Speaker 1: Do you think you need to speed it up?

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Speaker 2: Look, it's a fair question.

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Speaker 3: We should be thinking about the balance sheet side, separate

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Speaker 3: from just the race. So all, it seems like a

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Speaker 3: lot of the debate is about the rates. I feel

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Speaker 3: like there should be a high bar to.

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Speaker 2: Get off of.

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Speaker 3: There be planned approach to q T, just as we

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Speaker 3: learned in the run up of QE, some forecastable certainty

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Speaker 3: is worth a fair amount so you avoid taper tantrum

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Speaker 3: type situations. I feel like on the downside, there could

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Speaker 3: be conditions that we would want to change it, but

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Speaker 3: overall it's got to be a high bar to change

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Speaker 3: it from what's expected.

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Speaker 1: Awesome Goolsby, Thanks very much for joining us the presidency

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Speaker 1: of the Chicago Federal Reserve Bank,