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Speaker 1: We start with Chairman Powell's remarks in Jackson Hole and

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Speaker 1: welcome back our very special contributor Larry Summers of Harvard. So, Larry,

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Speaker 1: we heard this week from share Powell. What did you

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Speaker 1: make of what he had to say?

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Speaker 2: Look, I think he's in the right broad place.

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Speaker 3: Inflation is coming down, the economy is slowing.

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Speaker 2: On current facts.

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Speaker 3: Absolutely, the next move should be towards monetary policy easing.

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Speaker 3: And that's what he said, and I'm glad he said that.

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Speaker 3: I think there were a number of really important issues

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Speaker 3: that are likely to be shaping of the policies for

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Speaker 3: the FED and for the economy more broadly that he

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Speaker 3: didn't address. He didn't say anything about epic budget deficit

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Speaker 3: challenges in the years ahead. At the same time, we've

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Speaker 3: got a huge investment demand for the green economy and

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Speaker 3: a huge investment demand for data centers and the like.

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Speaker 3: And so the question of what the neutral interest rate

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Speaker 3: is was one he talked pat He didn't really engage

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Speaker 3: with the FED is saying that the neutral interest rate

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Speaker 3: is somewhere in the twos.

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Speaker 2: I think that's extremely unlikely.

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Speaker 3: And if you don't have the right north star, you

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Speaker 3: don't navigate very accurately, and so I think the FEDS

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Speaker 3: making a serious mistake by believing that the neutral interest

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Speaker 3: strate is so low, and therefore is misjudging how restrictive

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Speaker 3: any given level of policy is. So I'd be surprised,

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Speaker 3: quite surprised if it actually proves possible with sustainable ability

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Speaker 3: to bring inflation down by nearly as much as the

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Speaker 3: market is expecting, or bring interest rates down by nearly

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Speaker 3: as much as the market is expecting over the next

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Speaker 3: two years.

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Speaker 2: The other thing that the FED must.

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Speaker 3: Be aware of, and I understand why the Chair didn't

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Speaker 3: address it, but it seems to me it's something they

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Speaker 3: have to be keeping in mind. Is we've got what

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Speaker 3: people regard as a fifty to fifty presidential election coming,

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Speaker 3: and one of the candidates says that the FED shouldn't

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Speaker 3: be independent anymore. That same candidate, Donald Trump, says that

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Speaker 3: we need a much weaker dollar. That same candidate says

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Speaker 3: we need to push tariffs way up, meaning higher prices

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Speaker 3: of consumer goods and more of an inflation a threat.

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Speaker 3: That same candidate talks about sending millions of workers home,

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Speaker 3: which would create epically tight labor markets in our country

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Speaker 3: and would surely go back to labor shortages and wage inflation.

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Speaker 1: Larry turning back for a minute to Jay Powell's remarks

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Speaker 1: this week, he had sort of an initial explanation of

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Speaker 1: what happened with inflation, where it came from what the

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Speaker 1: FED did in response, and at least my take on

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Speaker 1: it was we had really supply shocks that were really unprecedented.

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Speaker 1: It took a longer sort of out, and we had

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Speaker 1: this big demand push, particularly in goods, that spilled over

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Speaker 1: into services. So it was sort of understandable why we

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Speaker 1: sort of made a mistake on team transitory.

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Speaker 3: What's your reaction, Look, I guess it's under I guess

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Speaker 3: it's understandable. I think I was reasonably clear in the

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Speaker 3: spring of twenty and twenty one that it seemed to

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Speaker 3: me that.

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Speaker 2: There were enormous inflation risks.

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Speaker 3: I think, looking back, it's kind of incredible that the

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Speaker 3: Fed could have said in May of twenty twenty one

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Speaker 3: that it expected to hold interest rates at zero until

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Speaker 3: the summer of twenty twenty four, and so the misjudgment

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Speaker 3: was a pretty egregious one. They're trying to leave the

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Speaker 3: impression that it was all surprising supply shocks, and I

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Speaker 3: think there are two problems with that view. One is

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Speaker 3: there shouldn't have been anything very surprising about it. It's

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Speaker 3: not like everybody didn't know that COVID was affecting the

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Speaker 3: supply capacity of the economy. So when the supply capacities down,

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Speaker 3: that means you have to adjust the demand.

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Speaker 2: And the other.

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Speaker 3: Is that if you look at nominal GDP growth, so that's.

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Speaker 2: Dollar GEDP, it's the money.

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Speaker 3: Stock adjusted for the velocity, it averaged ten percent in

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Speaker 3: twenty twenty one, in twenty twenty two, and above eight

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Speaker 3: percent for the three years twenty twenty one to twenty

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Speaker 3: twenty three. So how can you think with eight to

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Speaker 3: ten percent nominal GDP growth that you're going to have

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Speaker 3: anything like target inflation? And that nominal GDP is just

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Speaker 3: a measure of demand, which is what monetary policy is

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Speaker 3: supposed to be all about. So I think the FED

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Speaker 3: got it wrong, and in all honesty, I don't think

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Speaker 3: it was I goes a low point in terms of

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Speaker 3: monetary policy judgment. But you know, we all make lots

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Speaker 3: of mistakes, and the important thing is when you make

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Speaker 3: a mistake, to recognize it and fix it. And I've

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Speaker 3: got to give the FED credit for the fact that

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Speaker 3: while it wasn't always obvious that this would be the case,

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Speaker 3: they moved strongly enough and vigorously enough to keep expectations anchored.

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Speaker 2: And that's why it now looks more.

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Speaker 3: Frankly than I would have expected, like we're going to

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Speaker 3: get out of this very costly inflation episode without a

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Speaker 3: major recession.

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Speaker 1: Larry, you mentioned the possibility of Donald Trump being elected

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Speaker 1: in November. There is another candidate. You also said, it's

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Speaker 1: at this point it looks like a virtual toss up

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Speaker 1: between Donald Trump and Kamala Harris. We now are beginning

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Speaker 1: to get some indications from Kamala Harris about what she

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Speaker 1: might do for and to the economy. What do you

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Speaker 1: make of her positions you've heard so far.

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Speaker 2: I have been in.

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Speaker 3: Active in these policy debates on the Democratic side for

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Speaker 3: a long time, and I've always tended to be part

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Speaker 3: of the group that favors policies that are more growth oriented,

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Speaker 3: that worry more about financial responsibility, that stress letting markets

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Speaker 3: operate strongly and vigorously. I've liked universalist themes rather than

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Speaker 3: themes that pit business against labor, or one class or

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Speaker 3: one identity group against another, And so I was very

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Speaker 3: encouraged by.

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Speaker 2: The speech last night.

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Speaker 3: There was one word that came through so strongly when

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Speaker 3: the Vice President talked about the economy, and that was opportunity.

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Speaker 2: And I think that's.

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Speaker 3: Exactly the right word, because it's a word that embraces everybody.

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Speaker 2: It's a word that embraces the need to.

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Speaker 3: Make sure that poor children get the help they need

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Speaker 3: from head start. It's a word that embraces making sure

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Speaker 3: that families have the resources they need to support their

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Speaker 3: newborn and then their children as they go on. It's

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Speaker 3: a word that embraces the need for affordability of higher education.

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Speaker 3: It's a word that embraces and I think this is

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Speaker 3: critical and I hope that Vice President Harris will talk

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Speaker 3: much more about this, not just celebrating public education, but

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Speaker 3: recognizing that public actions case needs to be made much better. Because,

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Speaker 3: you know, David, in an earlier and much more elitist age,

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Speaker 3: the Duke of Wellington said in Britain in the nineteenth

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Speaker 3: century that the Battle of Waterloo had been won on

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Speaker 3: the playing fields of Eton. I'm here to tell you

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Speaker 3: that the battle for America's future will be won or

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Speaker 3: lost in our nation's public schools. And I heard all

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Speaker 3: that when I heard the Vice President talking about opportunity,

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Speaker 3: and I hope that those themes, rather than some of

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Speaker 3: the themes that I think are harder to justify, about

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Speaker 3: gouging and the like, even if they do have their

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Speaker 3: political appeal, I hope those will be a larger fraction

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Speaker 3: of the campaign going forward, and much much more important.

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Speaker 3: I hope that, if, as I expect, Vice President Harris

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Speaker 3: is elected a president, that the broad economic strategy is

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Speaker 3: going to be one that's all about opportunity.

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Speaker 1: Well, Larry, thank you so much. It's always a treat

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Speaker 1: to have you with us that as our special contributor

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Speaker 1: here on Wall Street Week. He's Larry Summers of Harvard