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Speaker 1: Bloomberg Audio Studios, podcasts, radio News.

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Speaker 2: Then this week we got a reminder that we aren't

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Speaker 2: past the inflation dragon yet, as USCPI numbers came in

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Speaker 2: surprisingly hot, holding at three point nine percent year over year,

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Speaker 2: way above that two percent target. To take us through

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Speaker 2: these CPI numbers is the person who has warned us

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Speaker 2: about the risks for three years now, our special contributor,

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Speaker 2: Larry Summers of Harvard. So, Larry, thanks all very much

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Speaker 2: for being with us. I suspect that you being right

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Speaker 2: about this is not really good news necessarily. But where

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Speaker 2: are we right now in your estimation and inflation? It's

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Speaker 2: certainly not at the five or six number level, but

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Speaker 2: it doesn't look like it's getting out to two.

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Speaker 3: Look, it's always a mistake to over interpret one month's number,

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Speaker 3: and that's especially true in January, where calculating seasonality is difficult.

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Speaker 3: But I think we have to recognize the possibility of

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Speaker 3: a mini paradigm shift. The soft landing paradigm with the

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Speaker 3: assumption that inflation was headed down to two in a tranquil,

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Speaker 3: healthy real economy has certainly been called into.

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Speaker 1: Question by these data.

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Speaker 3: There had been a strong assumption that housing was headed

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Speaker 3: towards being a major inflationary force that doesn't show up

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Speaker 3: in these numbers on owner occupied housing, and as I've

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Speaker 3: looked carefully at these numbers, I think there's good reasons

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Speaker 3: for that.

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Speaker 1: The idea is that when.

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Speaker 3: We judge the cost of owner occupied houses, we try

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Speaker 3: to estimate what it would cost to rent the residents

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Speaker 3: in question, and many people have done that by looking

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Speaker 3: at at all rentals, but most rentals are apartments, and

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Speaker 3: those don't have much to do with the price of

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Speaker 3: owner occupied housing. If you look at the data focus

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Speaker 3: on single family housing, houses, lawns and suburbs and the like,

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Speaker 3: you don't get nearly as deflationary a picture. The model

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Speaker 3: I've been using for several years now with my co

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Speaker 3: authors at the NBER is still looking for three four

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Speaker 3: percent owner equivalent rental inflation through the remainder of this year.

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Speaker 3: That's thirty percent of core CPI inflation. If it's running

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Speaker 3: at three and a half, that uses up a lot

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Speaker 3: of the room there is, and under a two percent

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Speaker 3: inflation target, I think the Fed is going to have

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Speaker 3: to be very careful. They were never right to be

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Speaker 3: focused on March for a cut. I had been saying

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Speaker 3: that that seemed premature, and they and the markets have

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Speaker 3: come around on that. I think that may is odds

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Speaker 3: off at this point and probably should be odds off.

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Speaker 3: And gosh, I think we've got to recognize what no

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Speaker 3: one's talking about. There's a meaningful chance, maybe it's fifteen

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Speaker 3: percent that the next move is going to be upwards

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Speaker 3: in rates, not downwards in rates. You know, to use

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Speaker 3: a metaphor, David, that I used to use on this show.

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Speaker 3: The worst thing you can do when the doctor prescribes

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Speaker 3: you antibiotics is finish part of the course. Feel better,

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Speaker 3: give up on the antibiotics because you don't like taking them.

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Speaker 1: And see what happens.

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Speaker 3: The disease tends to come back, and it tends to

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Speaker 3: be harder to go after the time, and interst rates

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Speaker 3: elevated to contain inflation are like antibiotics.

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Speaker 1: So I think the FED has.

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Speaker 3: To be very careful in this environment. And I think

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Speaker 3: that many people who confused what they wanted with what

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Speaker 3: was real were in much too much of a hurry

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Speaker 3: to declare that we were obviously in a phase of

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Speaker 3: major easing with respect to monetary policy.

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Speaker 2: So Larry, let me continue your analogy to a disease,

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Speaker 2: and perhaps what we have here is we're not recovering

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Speaker 2: fully to two percent. On the other hand, the fevers

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Speaker 2: not spiking up the five six seven percent the way

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Speaker 2: it was before. What happens that we have just a

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Speaker 2: low grade fever at the three to three plus level.

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Speaker 2: What does that mean for the economy?

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Speaker 3: Gosh, German Powell has said so many times two two percent,

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Speaker 3: two percent. As you'll recall from our previous conversations, I

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Speaker 3: didn't think it was a great idea to have had

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Speaker 3: so specific and tight a target, But we've had one,

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Speaker 3: and we've set it, and we've repeated it a large

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Speaker 3: number of times. If we decide that two sort of

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Speaker 3: has lost its meaning and it's not something we have

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Speaker 3: to accept when there's strong political pressures to ease, if

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Speaker 3: we send that signal, I wonder why anyone would believe

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Speaker 3: that we're going to stick with two and a half

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Speaker 3: or three or whatever it is that we settle into.

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Speaker 3: And then when that feeds into expectations, it'll get harder

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Speaker 3: to hold the level we have. And of course we

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Speaker 3: are headed into David as populous election period is you

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Speaker 3: or I can remember in our lifetimes, and we usually

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Speaker 3: think of the FED as a bulwark against populism, not

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Speaker 3: as a reinforcer of populist pressures.

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Speaker 2: Let's continue on the subject of that populist election, as

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Speaker 2: you call it, and specifically respect a fiscal policy. You

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Speaker 2: and I have talked before about the deficit and the

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Speaker 2: debt that is mounting here. I know you've just helped

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Speaker 2: launch something new called the Tax Reform Project, and in

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Speaker 2: the introduction that you talk about that issue of the

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Speaker 2: debt and the deficit, but it's somewhat of a new approach.

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Speaker 2: There are a lot of people who have tax policies,

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Speaker 2: but we haven't heard from the practitioners.

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Speaker 3: So I'm supporting my former student and wonderful colleague, Natasha

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Speaker 3: Saren at the Ye Law School.

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Speaker 1: Who's the driving force.

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Speaker 3: She's focused on IRS reform, and we're focused on IRS reform.

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Speaker 1: Just to enforce the tax law we have.

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Speaker 3: And there was important new research showing that from the IRS,

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Speaker 3: showing that if we're able to carry through on the

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Speaker 3: eighty billion dollar program that was part of President Biden's

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Speaker 3: Recovery Act, that can pay off ten to one in

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Speaker 3: eight hundred and fifty billion dollars of revenue collections. In addition,

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Speaker 3: to making our tax code fairer and that's where tax

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Speaker 3: reform discussions should start.

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Speaker 2: And finally, Larry, Yeah, there's a lot of talk about

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Speaker 2: commercial real estate, particularly in the office space area. Obviously,

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Speaker 2: the increased interest rates and failure to return to the

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Speaker 2: office on some parts is really putting pressure on the valuations.

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Speaker 2: So clearly there are some people who are hurting because

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Speaker 2: of the reduced valuations. But my question is is a

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Speaker 2: matter of individual banks for that matter, as well as

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Speaker 2: owners being hurt or is there a potential for a

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Speaker 2: more systemic problem here with commercial real estate.

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Speaker 3: I think that this is something that our Central Bank

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Speaker 3: is right to be looking at, and right to be

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Speaker 3: looking at with an awareness that almost always in the

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Speaker 3: past we have acted too slowly to force banks to

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Speaker 3: stop distributing capital, to force banks to raise new capital

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Speaker 3: where that's appropriate, to force banks to fortify liquidity. I

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Speaker 3: think it would be much more productive for our central

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Speaker 3: Bank to be focused on the question of real estate

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Speaker 3: portfolios in the banks they supervise, and what the genuine

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Speaker 3: value and credit worthiness of those assets is. Think that

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Speaker 3: would be a much more productive focus for the Fed

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Speaker 3: than some of the more abstract and politically driven arguments

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Speaker 3: about various kinds of capital charges on the largest banks.

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Speaker 1: The second set.

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Speaker 3: Of arguments is an important one to have, but I

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Speaker 3: think it's less urgent than the first.

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Speaker 2: Okay, Larry, thank you so very much for joining us again.

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Speaker 2: That's our special contributor here on Wall Street Week. He

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Speaker 2: is Larry Summers of Harvard