Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the All Thoughts podcast.
Speaker 3: I'm Tracy Alloway and I'm Joe Whysenthal.
Speaker 2: Joe, how is your deep dish pizza?
Speaker 4: It was so good?
Speaker 3: You know, I actually don't know if I had ever
Speaker 3: really had a proper Chicago deep dish pizza before, but
Speaker 3: I went to this place, I think it's called Pea
Speaker 3: Quads Pizza. Yeah, pea Quads, and they sort of burned
Speaker 3: the crust a little bit, which I really like, highly recommended,
Speaker 3: seemed pretty legit as far as I could tell.
Speaker 2: You definitely did the right thing, because I just went
Speaker 2: back to the airport to hop on a fly and
Speaker 2: I got to say, O'Hare is kind of even worse
Speaker 2: than I remember it. But anyway, Oh, in case you
Speaker 2: haven't figured it out yet, we both just got back
Speaker 2: from Chicago, where we interviewed the Chicago Fed President, Austin Gooldsby.
Speaker 2: That's right.
Speaker 3: First of all, Chicago's so nice this time of year.
Speaker 3: I love visiting Chicago.
Speaker 4: You know.
Speaker 3: We could have talked to Austin over zoom or something,
Speaker 3: I guess, but it was great to actually go there,
Speaker 3: go to the Chicago FED at headquarters and talk to
Speaker 3: the president of the Chicago FED. And what I have
Speaker 3: to say is I think an extremely interesting sort of
Speaker 3: moment for Macro right now.
Speaker 2: Oh, it is so interesting. I know people over use
Speaker 2: the term turning points. Yeah, but I really feel like
Speaker 2: this is a very like specific moment in time where
Speaker 2: we thought the labor market was weakening, the FED cut
Speaker 2: by fifty bases points, and then we had that blowout
Speaker 2: jobs report. Yes, and I have to say we recorded
Speaker 2: this interview with Austin on Wednesday, October ninth, which was
Speaker 2: the day before the latest CPI figure came out. Also,
Speaker 2: we recorded it right when the FOMC minutes came out,
Speaker 2: so not the best planning in terms of timing on
Speaker 2: our part. But since then we've had CPI come in
Speaker 2: ever so slightly hotter than expected as well.
Speaker 4: Yes, that's right.
Speaker 3: So as you mentioned, recorded this Wednesday, you're listening to
Speaker 3: this presumably on a Friday. But even with the fact
Speaker 3: that we couldn't talk about CPI, I think there's like
Speaker 3: really two things that make this moment interesting. It's always
Speaker 3: interesting because we're never you know, we live in a
Speaker 3: world of incomplete information on a certainty. But the two
Speaker 3: things are really and Austin talked about this in our interview.
Speaker 3: The FED has changed focus.
Speaker 4: Right.
Speaker 3: For a couple of years, it was about inflation and
Speaker 3: getting it down, and now the risks are balanced. So
Speaker 3: it's a key thing that happened. And I would say
Speaker 3: that Chairman Powell's speech at Jackson Hole in August officially
Speaker 3: marked that moment of the pivot starting there. And then
Speaker 3: the other thing is like, Okay, maybe there's this pivot,
Speaker 3: but things right now are still really uncertain and we
Speaker 3: really don't know what it's going to happen. And you
Speaker 3: mentioned the hot inflation number and the strong jobs report
Speaker 3: and all this stuff. So we're at a moment where
Speaker 3: pivot meets new uncertainty.
Speaker 2: Yes, and who better to explain some of that uncertainty
Speaker 2: than Austin. So why don't we go ahead and take
Speaker 2: a listen. Here's Austin Goolsby from the Chicago Fed. Thank
Speaker 2: you so much for coming back on odd thoughts.
Speaker 4: Welcome to where the magic happens.
Speaker 2: We're very excited to be in Chicago. I have to say,
Speaker 2: being in the FED building. It's a gorgeous building. The architecture, Yeah.
Speaker 4: It's a landmark. It's great. Yeah, it's it's over one
Speaker 4: hundred years old.
Speaker 2: I heard you were celebrating one hundred year anniversary this year,
Speaker 2: right last.
Speaker 4: Yeah, it was yeah last year.
Speaker 3: Also, we probably could have caught up with you via zoom.
Speaker 3: But it's just such a great time to be in Chicago.
Speaker 5: Yeah, this is the moment.
Speaker 2: It's actually warmer in Chicago right now than it is
Speaker 2: in New York, which is kind of surprising. Okay, speaking
Speaker 2: of stuff that's warmer. We had a pretty hot jobs
Speaker 2: report recently ICs transition. Yeah, thank you, thank you. I'm
Speaker 2: a professional. Okay, blowout jobs report? What does that mean
Speaker 2: for you? Did it cause you to take pause? Maybe
Speaker 2: think about that fifty basis point cut?
Speaker 4: Well, look, you know my thing is always let's take
Speaker 4: the long arc and find the through line, not overreact
Speaker 4: to one number. It's sixty days before that we got
Speaker 4: a disappointing number, and you had people going on publicly
Speaker 4: and saying by the time of the next FED meeting,
Speaker 4: they need to have one hundred and fifty basis point cut.
Speaker 4: Then we get a positive jobs number, and then we
Speaker 4: have a positive job number, and then people are saying,
Speaker 4: maybe we should raise I don't fault the market. That's
Speaker 4: the market's business model. They got to react to every
Speaker 4: little Twitter and blip that happens. In my view, the
Speaker 4: fes not on a timetable like that. We got to
Speaker 4: take the broad view. So far, I think the broadview
Speaker 4: shows inflation come way down, the the job market has
Speaker 4: cooled from overly hot to something like sustainable full employment
Speaker 4: where we would like it to be. And if we
Speaker 4: could freeze it right there, that'd be a lovely picture.
Speaker 4: And so then the question is can you freeze it
Speaker 4: there or is it going to get worse? If we
Speaker 4: got multiple months that showed big positives like what we
Speaker 4: just saw in the job's number, that would all I
Speaker 4: would alter my view. That would affect my view, But
Speaker 4: I don't think that. I think people can take that
Speaker 4: too far from one month.
Speaker 3: That all makes sense to me. But I'm going to
Speaker 3: try to attack the present the same question and attack
Speaker 3: it in a slightly different way. A few of these. Okay,
Speaker 3: If I think about Chrman Powell's Jackson Hole speech, and
Speaker 3: I think about that fifty basis point right cut in
Speaker 3: mid September, intotality, like the basic way I think about
Speaker 3: it is like you at FMC, the fan is trying
Speaker 3: to cut off the left tail of a hard landing,
Speaker 3: and things are in a good spot currently, the levels
Speaker 3: are good. By trying to cut off that hard landing
Speaker 3: outcome with us with a sort of strong beginning of
Speaker 3: the rate cut cycle, by going fifty, does that strong
Speaker 3: jobs report change it all? How you think about the
Speaker 3: risks today of hard landing.
Speaker 4: I'm in the data dog caucus, one of the core
Speaker 4: members of the Kennel, so I'm never going to ignore
Speaker 4: any data point. I want all the data that we
Speaker 4: can get. If you take a step back and look
Speaker 4: at the dot plot in the SEPs, they ask independently.
Speaker 4: We don't talk about it, but they ask independently everybody,
Speaker 4: and the mass bulk of the dots say that the
Speaker 4: FOMC members think inflation's going to keep coming in close
Speaker 4: to the two percent target, They think unemployment is going
Speaker 4: to stay somewhere around full employment benchmark, and that the
Speaker 4: Fed funds rate is one hundred and fifty two hundred
Speaker 4: basis points above where they see it settling down. So
Speaker 4: the broad mass of people thinking the long run Fed
Speaker 4: funds would be two and a half to three and
Speaker 4: a half. You know, something in that range, and we're
Speaker 4: even with the cut, we're well above that. So I
Speaker 4: kind of think that's by far the biggest and even
Speaker 4: with information content. So the focusing too much on the
Speaker 4: short run, I was kind of teasing the market, but
Speaker 4: I guess I'll tease you. It sounds like you have
Speaker 4: the same You have that same short run focus that
Speaker 4: whether it was twenty five basis points at the first
Speaker 4: meeting versus zero or twenty five vers of fifty at
Speaker 4: the next meeting, and what does that mean for the
Speaker 4: meeting after that? That's smallish potatoes. The big pigture is
Speaker 4: inflation is way down, unemployment is up to a level
Speaker 4: that we're happy with, and the rates are well above
Speaker 4: what almost everyone on the FOMC is saying they think
Speaker 4: is the steady state. And as I keep saying, you
Speaker 4: just got to think about your restrictive and that includes me,
Speaker 4: and you got to think about how restrictive you want
Speaker 4: to be. If you got the dual mandate where you
Speaker 4: want it, do you want to have rates be that
Speaker 4: much higher than where you think they're going to settle
Speaker 4: or does that endanger the pretty picture? And so that's
Speaker 4: kind of where my head is it's not even technical.
Speaker 4: There's a ticki tac argument that I would just remind
Speaker 4: people that, A, you know, we meet every six weeks, okay,
Speaker 4: so we're constantly going back over the data and forecast
Speaker 4: of what's to come to try not to get behind
Speaker 4: the curve, or if we get behind the curve, not
Speaker 4: to be too far behind the curve. It's why the
Speaker 4: FED is the tip of the spear for economic stabilization.
Speaker 4: And there was a meeting where we had a meeting
Speaker 4: and there was no rate increase. Let's say it was
Speaker 4: between zero and twenty five. There are no twelve point fives,
Speaker 4: but if there could be a twelve point five, it
Speaker 4: was kind of a twelve point five meeting. And then
Speaker 4: we have a meeting where that's there's an argument in
Speaker 4: the market is are they twenty five or they fifty?
Speaker 4: There's no thirty seven point five move, but.
Speaker 2: I think I've joked about that.
Speaker 4: And over two meetings, Yeah, seven point five is a
Speaker 4: fifty point move, Okay, So over some longer period it
Speaker 4: doesn't feel it doesn't feel like if you're trying not
Speaker 4: to fall behind the curve. We move in discrete increments,
Speaker 4: And so I still think is taking a long view
Speaker 4: is the right way to think about what's happening. And
Speaker 4: I don't know why we don't do thirty seven point five?
Speaker 4: Why is it continuous? Why can't we picked like thirty three?
Speaker 4: I know what I know?
Speaker 5: Is there a rule?
Speaker 2: Actually, I'm really interested in the questions people realize thatous.
Speaker 4: So I don't know.
Speaker 2: I don't know, but I think maybe some of the
Speaker 2: confusion comes around because the FED has emphasized data dependency
Speaker 2: so much in recent years, and data, by its very
Speaker 2: nature is backward looking. And then we we can talk
Speaker 2: about that, okay, But then you get to turning points
Speaker 2: in the business cycle, and now it kind of feels
Speaker 2: like you're shifting more into You talked about being behind
Speaker 2: the curve. It feels like you're trying to get ahead
Speaker 2: of something. And so I think there's that tension.
Speaker 4: There is some tension between how much do you want
Speaker 4: to look back how much do you want to look forward?
Speaker 4: You got to do both. If you want a soft landing,
Speaker 4: you can't be behind the curve. And the hardest thing,
Speaker 4: as I say that that Central Bank has to do
Speaker 4: is to get the timing exactly right when there are
Speaker 4: moments of transition. It's why we meet every six weeks,
Speaker 4: so that you don't have to make one decision and
Speaker 4: figure out the thing. My only objection to the characterization
Speaker 4: is that to be data dependent I do not think
Speaker 4: means you commit I won't make any forward looking judgments.
Speaker 4: I only want to look backward. I think it's a
Speaker 4: mistake to do that, and especially because there are lags
Speaker 4: to monetary policy, and the lags, if anything, were even
Speaker 4: longer for this weird business cycle. And so if your
Speaker 4: decision rule was going to be I'm just gonna wait
Speaker 4: until we see, say, the job market start falling apart before.
Speaker 2: Once we're in recession.
Speaker 4: Well no, exactly. By that point it's too late to
Speaker 4: do anything about that. So I do think there's a
Speaker 4: risk management argument for being in a being in a
Speaker 4: more nimble spot.
Speaker 3: Since you mentioned lags, I want to ask you a
Speaker 3: question about that. When the FED started jacking up rates aggressively,
Speaker 3: one of the theories for why it didn't have a
Speaker 3: sharper impact on the economy is that so many households
Speaker 3: and corporations had in say twenty twenty first half of
Speaker 3: twenty one turned out their debt, and so there was
Speaker 3: not a lot of sensitivity to debt. The flip side
Speaker 3: of that now, and people have been writing about this,
Speaker 3: is that even though the FED has now commenced a
Speaker 3: cutting cycle, that the weighted average cost of debt is
Speaker 3: probably going to rise in twenty twenty five basically just
Speaker 3: mathematically right, because eventually they'll have to be refired at
Speaker 3: higher rates and so forth. How do you think about
Speaker 3: that dynamic now when you're thinking about these lags, you're
Speaker 3: starting a cutting cycle, but at the same time, probably
Speaker 3: cost of debt is actually going to rise for a
Speaker 3: fair number of economic actors in this economy.
Speaker 4: You have remarked on this subject and thought it through.
Speaker 4: In my world, that goes into the economic conditions, and
Speaker 4: that's there are many things that have made this a hairy,
Speaker 4: strange time for central banks because the business cycle, both
Speaker 4: down and up, looked almost nothing like the historical precedence.
Speaker 4: This is one aspect of that. We've analyzed this specifically
Speaker 4: thinking about mortgages. Okay, So if I had told you
Speaker 4: the premise of your question one hundred percent agree with
Speaker 4: six years ago, if you said the FED is going
Speaker 4: to raise five hundred basis points in a single year,
Speaker 4: what is going to happen. I think most all economists
Speaker 4: would say, yikes, there's going to be a major, major contraction,
Speaker 4: and it's going to be concentrated. Autos down the tubes,
Speaker 4: consumer durables bye bye, business, fixed investment, construction all going
Speaker 4: to collapse because they're very interest rate sensitive. We didn't
Speaker 4: really see the economy go into the steepness of collapse
Speaker 4: that you would have expected. And so that brings us
Speaker 4: back to this question. It's kind of a twofold. Is
Speaker 4: there something about this unusual business cycle that makes economic
Speaker 4: activity less sensitive to the interest rate or is there
Speaker 4: something strange about this moment that the lag effect is longer,
Speaker 4: And it can be both and they can run together.
Speaker 4: But in the case of mortgages, one of the things
Speaker 4: that has made monetary policy transmission less direct is the
Speaker 4: fact that a vastly higher share of mortgages are thirty
Speaker 4: year fixed mortgages now than they were in two thousand
Speaker 4: and five, two thousand and nine, whenever you want to
Speaker 4: look at and so when they change the interest rate,
Speaker 4: in some countries, virtually all mortgages are adjustable rate mortgage.
Speaker 4: So when their central bank raises rates, they bring out
Speaker 4: parents onto TV. The Central Bank is killing us. You know,
Speaker 4: our mortgage payment went up in the US. If everybody's
Speaker 4: on a thirty year fixed in a way, that's just
Speaker 4: a delay. But it's a thirty year delay. So I
Speaker 4: do think that notion that there are companies that don't
Speaker 4: have a lot of the debt, so they aren't as
Speaker 4: especially sense of the interest rate, that the term structure
Speaker 4: of their debt may be such that the average rates
Speaker 4: they're paying might even be higher as a FED cuts,
Speaker 4: I think that's not a problem. That's just a fact,
Speaker 4: and we just need to we need to understand it
Speaker 4: and see what the magnitude is.
Speaker 2: Let me ask you the same question in an extremely yeah,
Speaker 2: but my question is going to be ultra simplistic. Can
Speaker 2: you explain to us in excruciating detail, what exactly you
Speaker 2: expect happens in the economy now as you cut interest rates?
Speaker 2: How does that cut get transmitted?
Speaker 4: Okay? As a general matter, the FED has only one tool, really,
Speaker 4: which is a screwdriver that can tighten or can loosen.
Speaker 4: And I always say, if you're problem is a loose fender,
Speaker 4: that's great. If your problem is can you make breakfast, no,
Speaker 4: you kind of can't do that. With a screwdriver. So
Speaker 4: the main channels of monetary policy impact on the economy,
Speaker 4: I think are on the real economy side, and they
Speaker 4: are on interest rates sensitive parts of the economy like
Speaker 4: consumer durables, business, fixed investment, construction, things like that. Now
Speaker 4: there are other channels of monetary transmission where there's a
Speaker 4: lot of argument how important are they, and they are. Well,
Speaker 4: if you change the value of assets like the value
Speaker 4: of housing, the value of stocks, et cetera, is there
Speaker 4: a wealth effect so that consumer spending might go up
Speaker 4: as the asset values go up, or if you contract
Speaker 4: and asset values go down, would that limit spending. There's
Speaker 4: a dollar chance that if rates in the US are
Speaker 4: moving relative to how rates are moving in other places,
Speaker 4: can affect the currency, and that could affect imports and exports.
Speaker 4: Those are probably a lot of the of the main channels,
Speaker 4: and it's always in the counterfactual what would be happening
Speaker 4: if we didn't do this, So to the extent that
Speaker 4: there's already a debt structure, or to the extent that
Speaker 4: we went through a business cycle that, for the first
Speaker 4: time ever was not driven by cyclical industries but was
Speaker 4: driven by services because nobody could spend money on that,
Speaker 4: and services aren't especially interest rates sensitive. That's another reason
Speaker 4: why you might think monetary transmission, the monetary transmission mechanism,
Speaker 4: which is actually a whole bunch of different transmission mechanisms,
Speaker 4: just looks different this time than before. Now, well, everything
Speaker 4: that looks different is not bad. Okay. In a way,
Speaker 4: this is frustrating that monetary policy doesn't have the same impact.
Speaker 4: But at the same time, in twenty twenty three, we
Speaker 4: hit what I called the golden path. Inflation came down
Speaker 4: almost as much as it ever came down in a
Speaker 4: single year, and there was no recession, and that never
Speaker 4: happened before. And so the unusualness of this thing sometimes
Speaker 4: it is good.
Speaker 3: Well, this gets to by a question, and I sort
Speaker 3: of wonder whether us in the media or you and
Speaker 3: economics are going to be cursed with debating the transitory
Speaker 3: verse non transitory debate of twenty twenty two for literally
Speaker 3: the rest of our lives. But at this point in
Speaker 3: I guess October twenty twenty four, okay, and we talked
Speaker 3: with you when you first started talking about the golden path,
Speaker 3: and that looks great. It's even more golden today than
Speaker 3: it was at the time we were talking, but like
Speaker 3: why like how much credit like for you know, if
Speaker 3: like how much credit do you give yourselves at the
Speaker 3: FED versus like how much of it was were weird
Speaker 3: and then got normal?
Speaker 4: I think mostly things were weird and then got normal.
Speaker 4: We made the mistake. And look, I made the mistake.
Speaker 4: I was in the declare. I wasn't on the FED
Speaker 4: at that time. But team Transitory, I, like many people
Speaker 4: in the market, thought it would be transitory if we
Speaker 4: had it to do over. I think you would call
Speaker 4: it team supply shock. Okay, and they're in life take
Speaker 4: the victory, just with a slightly different Well, so Steve
Speaker 4: Lessman said, well, it turns out team Tradessa Tory was right,
Speaker 4: you know, and there is a sense in which the
Speaker 4: language should have been about what's the nature of the
Speaker 4: shock that's happening, not the how long is that going
Speaker 4: to last? It was. I was wrong. I thought if
Speaker 4: you get a supply shock, that's going to heal itself
Speaker 4: pretty quickly. It didn't. It lasted. The supply shocks we
Speaker 4: learned last did a lot longer because if the ports
Speaker 4: are messed up and the chips are not getting produced,
Speaker 4: then they can't get cars. But then the people who
Speaker 4: are buying the cars to use for delivery, they're delayed,
Speaker 4: and so this supply chain having more steps in it
Speaker 4: ended up being a bigger deal.
Speaker 3: Just real quickly on this point, though, If this is
Speaker 3: the story, then does that mean labor market strength now
Speaker 3: does not necessarily pose renewed inflation risk?
Speaker 4: Yes, does not necessarily. I agree with it. So let
Speaker 4: me finish two Sorry, two thoughts is not a one.
Speaker 4: Did the FED have anything to do with it? That's
Speaker 4: kind of the question. If it was all supply shocks,
Speaker 4: then the FED didn't really. Yes, the FED can't be
Speaker 4: blamed for the inflation going up, but then the FED
Speaker 4: shouldn't take credit for coming down. There is some component
Speaker 4: that as supply shocks heel you get immaculate disinflation. I
Speaker 4: do think that the fundamentally different thing that happened this
Speaker 4: time than the last time we were getting supply shocks,
Speaker 4: like at the end of the seventies, is that the
Speaker 4: market expectations of inflation basically never went up in the seventies.
Speaker 4: As actual inflation went up, the expectations went up. And
Speaker 4: part of what made the Voger experience so hard is
Speaker 4: You didn't have to just slay the inflation dragon. You
Speaker 4: had to go convince everyone that we will hold this
Speaker 4: thing underwater for as long as it takes until it surrenders.
Speaker 4: And that's a brutal that's a brutal process. I do
Speaker 4: think that the that expectations stayed even as actual inflation
Speaker 4: was almost double digit, stayed exactly at PC two percent
Speaker 4: as the inflation target said, was fundamentally the FED making
Speaker 4: a promise. It may look bad, but we're going to
Speaker 4: get it back, and that the market to facto believed it,
Speaker 4: and that is to the FED, is about FED credibility,
Speaker 4: and I do think it made a big difference it.
Speaker 2: I want to ask one more question on the Golden
Speaker 2: Path and the interview we did with you about I
Speaker 2: guess it was almost a little over a.
Speaker 3: Year ago, like a year and a half. Yeah.
Speaker 2: In that conversation, you talked about housing costs coming down
Speaker 2: being essential to the Golden Path scenario. And yet here
Speaker 2: we are, as we discussed earlier, mortgage rates aren't really
Speaker 2: coming down. In fact, some people expect them to, you know,
Speaker 2: either stay where they are or go higher from here.
Speaker 2: Shelter costs in CPI still you know kind of high.
Speaker 2: How did we manage to get here without housing costs
Speaker 2: really substantially coming down?
Speaker 4: Okay, now I'm afraid you're remembering, you know each thing
Speaker 4: I said back from over a year ago, but my
Speaker 4: emphasis was about the shelter costs and the inflation aspect.
Speaker 4: And to our previous discussion, I had just given this
Speaker 4: speech at the Peterson Institute in which I said, we
Speaker 4: were getting a series of very strong jobs numbers, yet
Speaker 4: inflation was coming down, and I was arguing, don't lose
Speaker 4: sight of if you're getting positive supply shocks, labor force
Speaker 4: participation coming back after a severe drops that is a
Speaker 4: supply shock. If you see the supply chain's healing, all
Speaker 4: of those would be reasons. And I wasn't fully cognizant
Speaker 4: of the impact of immigration that it was going to
Speaker 4: have at that time, but all of those supply shocks
Speaker 4: mean don't just take at face value if you got
Speaker 4: a big aggregate GDP growth number, or you got a
Speaker 4: big monthly payroll job gain number, that doesn't mean that
Speaker 4: doesn't have to mean that the economy is overheating. And
Speaker 4: if you're seeing inflation falling while that's happening, and you
Speaker 4: know there are supply shocks. Tone it back a little
Speaker 4: in the argument that it's demand overheating, because this is
Speaker 4: just the inverse of the thing that made it so
Speaker 4: strange on the way up. That lesson, I kind of
Speaker 4: think is a little bit applicable now too, potentially. And
Speaker 4: the question that you asked, how do we do that
Speaker 4: if inflation housing didn't come down, you said it was essential.
Speaker 4: Housing inflation has come down a bit, But the real
Speaker 4: answer is services inflation came down even more than we
Speaker 4: thought it would be able to, and goods inflation has
Speaker 4: come down and stayed down into the mild deflation that
Speaker 4: it was before COVID, And I kind of think that's
Speaker 4: how we did it, and the market rents say that
Speaker 4: it did happen. The inflation rate of shelter in the
Speaker 4: market is down to something like what it was before COVID.
Speaker 4: It just hasn't yet been fully reflected in the CPI,
Speaker 4: which I think it is, but is you know, every
Speaker 4: month it's not, we again say what in the world
Speaker 4: is happening.
Speaker 3: We've been hearing that those Zillow market rented disease are
Speaker 3: going to feed through in the next three months. For
Speaker 3: about two years, and now two years, I know some
Speaker 3: people have figured out the I'm still.
Speaker 2: Trying to use them to negotiate with my landlord. I
Speaker 2: can say it's been mildly effective.
Speaker 4: Yeah, how did it work?
Speaker 2: Since a little bit? I think I managed to negotiate
Speaker 2: like a ten percent increase down to a five percent increase.
Speaker 2: So I guess that's a win for New York.
Speaker 3: But since you've actually tuned me off here on another question,
Speaker 3: I had you off. Thank you, no, in like a
Speaker 3: good way.
Speaker 4: You said it.
Speaker 3: On housing starts, multi family in particular have come way down,
Speaker 3: and some people would blame the FED, just in the
Speaker 3: strict sense that higher rates project finance it comes down.
Speaker 3: Do you worry about the effect that that has on
Speaker 3: housing supply in the coming years and therefore on the
Speaker 3: effect of shelter inflation?
Speaker 5: A little?
Speaker 4: I mean, I do think we've seen that housing markets
Speaker 4: are complicated markets, and A it's not just one housing
Speaker 4: market for the whole nation. It's very different in different
Speaker 4: parts of the country, and there's a supply and a
Speaker 4: demand component. But that's always true, Okay, It's always true
Speaker 4: that when the FED raises interest rates that the impact
Speaker 4: on housing demand, the demand goes down because it's more expensive,
Speaker 4: but there is also a supply component. And now we
Speaker 4: add on top of it. Because we got so many
Speaker 4: people with thirty or fixed mortgages, there is on the
Speaker 4: margin a group of people who don't want to leave
Speaker 4: their house. I'm not gonna move because I got a
Speaker 4: three and a half percent mortgage and I would have
Speaker 4: to have an eight percent mortgage if I moved, So
Speaker 4: we have to think about that. But this is the
Speaker 4: only tool we have. We have balance sheet and interest rate,
Speaker 4: but it's basically just we can tighten, we can loosen that.
Speaker 4: That's what we can different.
Speaker 2: You mentioned the importance of inflation expectations earlier on and
Speaker 2: I have to say, in the course of preparing for
Speaker 2: this interview, I think I did just a search on
Speaker 2: my phone of my inbox going inflation, and one thing
Speaker 2: that came up from yesterday was there is a JP
Speaker 2: Morgan note talking about the potential for a reflation trade
Speaker 2: now that the FED has cut and China is stimulating.
Speaker 2: I know you're not in control of what Wall Street
Speaker 2: banks recommend their clients do, but it is kind of
Speaker 2: interesting that in the course of the FED cutting in
Speaker 2: trust rates, some people are pitching well, inflation's going to
Speaker 2: come back in this scenario.
Speaker 4: Look, don't believe everything you get in an email. And
Speaker 4: the market gives you actual estimates of what do they
Speaker 4: think inflation is going to be over the next year,
Speaker 4: over the next five years, the five years after that.
Speaker 4: So there's some survey based measures and there are market
Speaker 4: based measures. You don't have to rely on a newsletter
Speaker 4: to say, well, is this a sign that expectations have
Speaker 4: become unhinged? Tip spread?
Speaker 2: Sure, But the question is more generally, as you cut,
Speaker 2: is there the potential that inflation somehow comes back?
Speaker 4: Of course, and the job of central bank is to
Speaker 4: be paranoid about everything, and that's why the through line
Speaker 4: is the main line. Overall, inflation's way down over a
Speaker 4: long period. And we had one ump and Q one
Speaker 4: of this year, but you had six months where inflation
Speaker 4: was at or below two percent. Then we have a bump,
Speaker 4: and now we've had four. I will see tomorrow what
Speaker 4: happens with CPI, But on the implied PCEE, we've been
Speaker 4: coming in the new months at or below two percent.
Speaker 4: The only thing I'd say for the scare scenario that
Speaker 4: inflation's coming back is expectations for a five year inflation
Speaker 4: are actually down if you think PCEE inflation is like
Speaker 4: CPI minus two tenths. If anything, the expectations are that
Speaker 4: PCE inflation would be below two percent as it was
Speaker 4: before COVID, and the three month actual headline has been
Speaker 4: like one and a half percent. So there is now
Speaker 4: opened us a window that seemed inconceivable not that long ago,
Speaker 4: where inflation is actually undershooting the two percent target. So
Speaker 4: it could be it could come back and be high,
Speaker 4: it could come back and be low. And my my
Speaker 4: is it my read is my statement about doing a
Speaker 4: fifty basis point cut to start what looks to me
Speaker 4: like a cycle over a twelve to eighteen month period
Speaker 4: is I think it's fine to have a demarcation when
Speaker 4: something has changed. And the demarcation is we went through
Speaker 4: a long period since I've been on the Fed, we've
Speaker 4: had an almost exclusive focus on the inflation side of
Speaker 4: the mandate, as we should have, and now I like
Speaker 4: that's changed. Now we're back to thinking about both sides
Speaker 4: of the mandate and thinking about the trade offs and
Speaker 4: trying to stabilize the picture. Pretty much exactly where we
Speaker 4: are right now that the new months of inflation are
Speaker 4: at two percent, and the unemployment rate is kind of
Speaker 4: stable around four point two four point three some some
Speaker 4: measure of full employment. And when you're in that circumstance,
Speaker 4: you got to think about both sides. You can't just
Speaker 4: think about inflation.
Speaker 3: This is good because we'll get one of those headlines,
Speaker 3: you know, Chicago Feds risk to both sides. Yeah, this
Speaker 3: will be a nice This will be a nice like
Speaker 3: pippy headline. We cannot shoot out when this comes out
Speaker 3: on this episode. But I take your point. I think
Speaker 3: the job of a central banker, as you said, to
Speaker 3: sort of be paranoid. The risk management. It's always risk
Speaker 3: management that's probably never going to change, right, It's always
Speaker 3: about thinking about risks. And did you mentioned okay, maybe
Speaker 3: there's risks to both sides. Just to delve deeper on this,
Speaker 3: and it kind of relates to Tracy's question. If you're
Speaker 3: thinking about inflation risks, if let's say six months from now,
Speaker 3: we come back and we're talking to and we'd love
Speaker 3: to visit again in the spring, if we're out here in.
Speaker 4: The springtime in Chicago is only fourteen days and they're
Speaker 4: not in a row.
Speaker 3: That's the only part to stick with fall visits, let's
Speaker 3: stick with all of positis. Then if an inflation were
Speaker 3: to be higher, like you know, when you're like up
Speaker 3: at night and you're paranoid, thinking is your job is
Speaker 3: what would concern you? Is it the say China stimulus,
Speaker 3: is it the wars that we're seeing.
Speaker 4: I was going to distinguish demand overheating is the kind
Speaker 4: of inflation that we want to be the most attuned to.
Speaker 4: But that's not necessarily either. That's not a supply shock inflation.
Speaker 4: That's much more complicated. And so if you had war
Speaker 4: in the Middle East spreading to a big run up
Speaker 4: in the price of oil. We know, we've seen that
Speaker 4: movie several times and it stinks. You know, the original
Speaker 4: was bad and all the sequels are bad. It's a
Speaker 4: stagflationary impulse, and that's what would happen. You would get
Speaker 4: the economy turning sour and inflation rising. But it's not
Speaker 4: obvious what the central banks response to a supply shock
Speaker 4: would be. For sure, you'd have to think through is
Speaker 4: this a temporary or is it a permanent It's going
Speaker 4: to be uncomfortable, but that doesn't automatically mean the FED
Speaker 4: should tighten or the fed should loosen them. It would
Speaker 4: very much depend on conditions. So I'm thinking more on
Speaker 4: the demand excess demand, and if you started to see that,
Speaker 4: then you'd have to react.
Speaker 3: And just right now. And I kind of I tried
Speaker 3: to interject this earlier and didn't get it because you
Speaker 3: were completing a train of thought.
Speaker 4: We have seen it right now, Maybe just ignor it.
Speaker 3: But okay, like this with if the labor market continues strong,
Speaker 3: does that give you any pause or anxiety about demander
Speaker 3: of an inflation.
Speaker 4: It could give pause if A it's sustained and b
Speaker 4: you see it in all the measures. Okay, so that's
Speaker 4: the long If you take now vacancies to unemployed, ratio,
Speaker 4: hiring rates, quit rates, the UI claims coming in all
Speaker 4: of the measures broadly have been showing a labor market
Speaker 4: that is cooling from a white hot level to something
Speaker 4: like sustainable full employment. I haven't seen anything that is
Speaker 4: yet convincing that there's a new trend that we're not
Speaker 4: stabilizing at full employment, that we are in fact going
Speaker 4: back to white hot, overly overheated. But I'm that you
Speaker 4: never as a core member of the data dog kennel,
Speaker 4: you will never hear me say, oh, data came in.
Speaker 4: Do you just ignore it? No, I don't ignore it.
Speaker 4: That's but it's only one data.
Speaker 2: Point, the data dog kennel. Is this why you've sort
Speaker 2: of become the go to FED speaker on big data days?
Speaker 2: So I know you were. You were on Bloomberg TV
Speaker 2: when that jobs report came out. Why why do you
Speaker 2: do that out of curiosity? Because you know you put
Speaker 2: yourself out there at a time when.
Speaker 3: You talk to the media.
Speaker 2: Oh no, I don't think I'm a sensitive days.
Speaker 4: The thing is you are more interested in opinion on
Speaker 4: the days when it is salient, like when the data
Speaker 4: come out. I feel like at moments of transition, like
Speaker 4: kind of this spirit we're in here, I feel like
Speaker 4: it behooves us. And it is our responsibility in the
Speaker 4: FED to give a description of here's what we're seeing,
Speaker 4: to remind people we're not on a day trader's timetable.
Speaker 4: You know, the market is up, the market is down.
Speaker 4: Let's take the through line. I don't think I'm the
Speaker 4: only one going out. I certainly see my colleagues and
Speaker 4: I value their their views quite a lot. But I
Speaker 4: think an openness and transparency this is the field guide
Speaker 4: to openness and transparency, talking about our reaction function and
Speaker 4: the data, not just releasing SEP dots.
Speaker 3: My takeaway is that Austin thinks that the market is
Speaker 3: too attuned to the short term and therefore they need
Speaker 3: to remind us every single I was.
Speaker 4: I'm gonna run through my maybe let's pull down.
Speaker 5: Don't do that.
Speaker 2: I have one more weird media related question though, but
Speaker 2: since you mentioned filibustering, if you were going to filibuster
Speaker 2: this entire interview, like say you had to, you had
Speaker 2: to speak for at least two hours, what would you
Speaker 2: talk about?
Speaker 4: I appreciate that you don't think that's what I did.
Speaker 2: No, you didn't, but I'm curious what I would talk.
Speaker 4: About would be the cash department at the Chicago Fed
Speaker 4: and the way that we have a lot of money
Speaker 4: and this is a this is a live operational bank.
Speaker 4: We are the bank to other banks, and I would
Speaker 4: love to give your well listeners insight.
Speaker 2: We promise we will have Austin give us as a
Speaker 2: very detailed breakdown of the cash ops here at the
Speaker 2: Chicago Fed.
Speaker 3: There is a follow up episode to this lend coming
Speaker 3: in the coming weeks, all about the Chicago Feds. Cash operation.
Speaker 3: It's so great of Austin. They give a little tease
Speaker 3: for that next episode.
Speaker 2: That's perfect. Can I ask one more serious question before
Speaker 2: we wind it down? But you talked about restrictiveness earlier
Speaker 2: in this conversation, and you know, I get where that
Speaker 2: comes from. And people look at things like real yields
Speaker 2: and stuff. But if you look at stock market prices
Speaker 2: we're recording this on October ninth, I think stock indices
Speaker 2: are at records. Again, if you look at credit spreads,
Speaker 2: those are like at multi year lows. Where's the restrictiveness
Speaker 2: Because I don't see it in the financial parts of
Speaker 2: the financial market. Let me put it that.
Speaker 4: Way, I'd say two things. I told you my focus
Speaker 4: is primarily on the real side of the economy. I
Speaker 4: think those are the biggest, most impactful parts of the
Speaker 4: monetary policy transmission mechanism historically. So I'm less of a
Speaker 4: fan of interpreting financial conditions in dioses as a measure
Speaker 4: of monetary restrictiveness or what monetary policy should do, because
Speaker 4: in my view, it's got a major reflection problem that
Speaker 4: let's say the market, which is forward looking, decides they
Speaker 4: think it's going to work, that there will be a
Speaker 4: soft landing that rates are going to come down because
Speaker 4: inflation has been tamed and is at two percent, then
Speaker 4: equity markets go up. Long rates would come down, and
Speaker 4: that would then be interpreted as a loosening of financial conditions,
Speaker 4: and it would be like, oh, you better stop cutting,
Speaker 4: you better raise But that's just self referential. So I
Speaker 4: think that's a little problematic. And the inverted yield curve
Speaker 4: for two years, which everybody has been saying, is an
Speaker 4: indication that there's about to be a recession. That's not normal.
Speaker 4: It's not if we go back to a regularly shaped
Speaker 4: yield curve like we're in more normal conditions, that's not
Speaker 4: the end of the world. My view of restrictiveness is
Speaker 4: we set the Fed funds rate, We set it high
Speaker 4: and held it there for more than a year, and
Speaker 4: as inflation came down, the real Fed funds rate just
Speaker 4: kept going up, passive tightening. As a highest the real
Speaker 4: Fed funds rate it have been in decades, and so
Speaker 4: to me, that's where the restrictiveness is.
Speaker 5: All right.
Speaker 2: Austin Woolsby, thank you so much for.
Speaker 4: Coming back online and thanks for coming out Todan, thanks
Speaker 4: for having us here, thanks for we're the guests this time.
Speaker 6: That's right, Joe.
Speaker 2: That was so interesting, And I really appreciate Austin sitting
Speaker 2: down with us for like forty five minutes and really
Speaker 2: explaining how he's thinking about these things.
Speaker 3: Austin is really game to chat and he really likes it,
Speaker 3: and I appreciate that he sort of he seems to
Speaker 3: enjoy it quite a bit, just sort of going back
Speaker 3: and forth and thinking things out, and he's very energetic.
Speaker 3: You know, in the intro we talked about it is
Speaker 3: it very This is a very interesting, uncertain moment for Macro,
Speaker 3: and of course that's always true. But part of what
Speaker 3: makes the moment interesting is that the last four years
Speaker 3: have been really interesting, and to this day we're still
Speaker 3: trying to piece together the puzzle of why inflation surged
Speaker 3: as it did and why inflation came down as it did.
Speaker 2: Yeah, and going back to that tension between the data
Speaker 2: dependency and the sort of forward looking stuff, it does
Speaker 2: feel to me like the FED is trying to get
Speaker 2: ahead of something right now, which is slightly at odds
Speaker 2: with this idea of data dependency. But on the other hand,
Speaker 2: to Austin's point, if it's been a really weird business cycle,
Speaker 2: then maybe it makes sense to you know, deviate a
Speaker 2: little bit and try new things and maybe try to
Speaker 2: be more forward looking getting ahead of labor market weakness.
Speaker 3: Totally, you know. I think it's interesting too, the sort
Speaker 3: of revisiting of the transitory debate, and I think a
Speaker 3: very compelling point is just objectively, it might have made
Speaker 3: more sense to describe the whole thing as sort of
Speaker 3: team supply.
Speaker 2: Set this before. In fact, I think I asked someone,
Speaker 2: possibly from the FED, if they regret kind of calling
Speaker 2: it transitory and if it should have been called something else.
Speaker 3: I think I remember who you asked? Who I asked? Well,
Speaker 3: it might have been an off the record conversation. Oh oops, okay,
Speaker 3: well no, no, no, it's okay. But we could say
Speaker 3: our part, but we can't say who was okay. And
Speaker 3: it's funny because when I tell you afterwards who it was,
Speaker 3: it'll make it better.
Speaker 2: I feel so bad that you remember this and I don't.
Speaker 2: But anyway, it's funny that that came up again.
Speaker 3: Well, totally. And then so like transitory to some people
Speaker 3: is a specific amount of time.
Speaker 2: Yeah, well it implies that it's going to be like
Speaker 2: fairly short lived.
Speaker 3: So that was wrong, but the idea that it's still
Speaker 3: the big thing. So there's two things still. The big
Speaker 3: thing is maybe, as we put it in the conversation,
Speaker 3: things were weird and then got normal, which is a
Speaker 3: big part of the story. But also, and I think
Speaker 3: there will be a lot of debate about this question,
Speaker 3: is Austin put it, maybe why things got weird and
Speaker 3: normal but then things didn't keep getting weirder and weirder.
Speaker 3: Is this idea of inflation expectations having remained well anchored,
Speaker 3: which is sort of a vindication of the sort of
Speaker 3: fed's traditional approach to dealing with this, or you know,
Speaker 3: it's an idea, law, it's a it is a logical vindication.
Speaker 3: If you buy that, then that explains why, regardless of
Speaker 3: the causes of the inflation, the right thing to do
Speaker 3: is to hike so aggressively.
Speaker 2: Yeah, all right, Well, lots to mole over, for sure,
Speaker 2: and obviously there's going to be more data coming out
Speaker 2: relatively soon. But shall we leave it there for now?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the aud Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3: I'm Jill Wisenthal. You can follow me at the Stalwart.
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