Speaker 1: We start with Chairman Powell's remarks in Jackson Hole and
Speaker 1: welcome back our very special contributor Larry Summers of Harvard. So, Larry,
Speaker 1: we heard this week from share Powell. What did you
Speaker 1: make of what he had to say?
Speaker 2: Look, I think he's in the right broad place.
Speaker 3: Inflation is coming down, the economy is slowing.
Speaker 2: On current facts.
Speaker 3: Absolutely, the next move should be towards monetary policy easing.
Speaker 3: And that's what he said, and I'm glad he said that.
Speaker 3: I think there were a number of really important issues
Speaker 3: that are likely to be shaping of the policies for
Speaker 3: the FED and for the economy more broadly that he
Speaker 3: didn't address. He didn't say anything about epic budget deficit
Speaker 3: challenges in the years ahead. At the same time, we've
Speaker 3: got a huge investment demand for the green economy and
Speaker 3: a huge investment demand for data centers and the like.
Speaker 3: And so the question of what the neutral interest rate
Speaker 3: is was one he talked pat He didn't really engage
Speaker 3: with the FED is saying that the neutral interest rate
Speaker 3: is somewhere in the twos.
Speaker 2: I think that's extremely unlikely.
Speaker 3: And if you don't have the right north star, you
Speaker 3: don't navigate very accurately, and so I think the FEDS
Speaker 3: making a serious mistake by believing that the neutral interest
Speaker 3: strate is so low, and therefore is misjudging how restrictive
Speaker 3: any given level of policy is. So I'd be surprised,
Speaker 3: quite surprised if it actually proves possible with sustainable ability
Speaker 3: to bring inflation down by nearly as much as the
Speaker 3: market is expecting, or bring interest rates down by nearly
Speaker 3: as much as the market is expecting over the next
Speaker 3: two years.
Speaker 2: The other thing that the FED must.
Speaker 3: Be aware of, and I understand why the Chair didn't
Speaker 3: address it, but it seems to me it's something they
Speaker 3: have to be keeping in mind. Is we've got what
Speaker 3: people regard as a fifty to fifty presidential election coming,
Speaker 3: and one of the candidates says that the FED shouldn't
Speaker 3: be independent anymore. That same candidate, Donald Trump, says that
Speaker 3: we need a much weaker dollar. That same candidate says
Speaker 3: we need to push tariffs way up, meaning higher prices
Speaker 3: of consumer goods and more of an inflation a threat.
Speaker 3: That same candidate talks about sending millions of workers home,
Speaker 3: which would create epically tight labor markets in our country
Speaker 3: and would surely go back to labor shortages and wage inflation.
Speaker 1: Larry turning back for a minute to Jay Powell's remarks
Speaker 1: this week, he had sort of an initial explanation of
Speaker 1: what happened with inflation, where it came from what the
Speaker 1: FED did in response, and at least my take on
Speaker 1: it was we had really supply shocks that were really unprecedented.
Speaker 1: It took a longer sort of out, and we had
Speaker 1: this big demand push, particularly in goods, that spilled over
Speaker 1: into services. So it was sort of understandable why we
Speaker 1: sort of made a mistake on team transitory.
Speaker 3: What's your reaction, Look, I guess it's under I guess
Speaker 3: it's understandable. I think I was reasonably clear in the
Speaker 3: spring of twenty and twenty one that it seemed to
Speaker 3: me that.
Speaker 2: There were enormous inflation risks.
Speaker 3: I think, looking back, it's kind of incredible that the
Speaker 3: Fed could have said in May of twenty twenty one
Speaker 3: that it expected to hold interest rates at zero until
Speaker 3: the summer of twenty twenty four, and so the misjudgment
Speaker 3: was a pretty egregious one. They're trying to leave the
Speaker 3: impression that it was all surprising supply shocks, and I
Speaker 3: think there are two problems with that view. One is
Speaker 3: there shouldn't have been anything very surprising about it. It's
Speaker 3: not like everybody didn't know that COVID was affecting the
Speaker 3: supply capacity of the economy. So when the supply capacities down,
Speaker 3: that means you have to adjust the demand.
Speaker 2: And the other.
Speaker 3: Is that if you look at nominal GDP growth, so that's.
Speaker 2: Dollar GEDP, it's the money.
Speaker 3: Stock adjusted for the velocity, it averaged ten percent in
Speaker 3: twenty twenty one, in twenty twenty two, and above eight
Speaker 3: percent for the three years twenty twenty one to twenty
Speaker 3: twenty three. So how can you think with eight to
Speaker 3: ten percent nominal GDP growth that you're going to have
Speaker 3: anything like target inflation? And that nominal GDP is just
Speaker 3: a measure of demand, which is what monetary policy is
Speaker 3: supposed to be all about. So I think the FED
Speaker 3: got it wrong, and in all honesty, I don't think
Speaker 3: it was I goes a low point in terms of
Speaker 3: monetary policy judgment. But you know, we all make lots
Speaker 3: of mistakes, and the important thing is when you make
Speaker 3: a mistake, to recognize it and fix it. And I've
Speaker 3: got to give the FED credit for the fact that
Speaker 3: while it wasn't always obvious that this would be the case,
Speaker 3: they moved strongly enough and vigorously enough to keep expectations anchored.
Speaker 2: And that's why it now looks more.
Speaker 3: Frankly than I would have expected, like we're going to
Speaker 3: get out of this very costly inflation episode without a
Speaker 3: major recession.
Speaker 1: Larry, you mentioned the possibility of Donald Trump being elected
Speaker 1: in November. There is another candidate. You also said, it's
Speaker 1: at this point it looks like a virtual toss up
Speaker 1: between Donald Trump and Kamala Harris. We now are beginning
Speaker 1: to get some indications from Kamala Harris about what she
Speaker 1: might do for and to the economy. What do you
Speaker 1: make of her positions you've heard so far.
Speaker 2: I have been in.
Speaker 3: Active in these policy debates on the Democratic side for
Speaker 3: a long time, and I've always tended to be part
Speaker 3: of the group that favors policies that are more growth oriented,
Speaker 3: that worry more about financial responsibility, that stress letting markets
Speaker 3: operate strongly and vigorously. I've liked universalist themes rather than
Speaker 3: themes that pit business against labor, or one class or
Speaker 3: one identity group against another, And so I was very
Speaker 3: encouraged by.
Speaker 2: The speech last night.
Speaker 3: There was one word that came through so strongly when
Speaker 3: the Vice President talked about the economy, and that was opportunity.
Speaker 2: And I think that's.
Speaker 3: Exactly the right word, because it's a word that embraces everybody.
Speaker 2: It's a word that embraces the need to.
Speaker 3: Make sure that poor children get the help they need
Speaker 3: from head start. It's a word that embraces making sure
Speaker 3: that families have the resources they need to support their
Speaker 3: newborn and then their children as they go on. It's
Speaker 3: a word that embraces the need for affordability of higher education.
Speaker 3: It's a word that embraces and I think this is
Speaker 3: critical and I hope that Vice President Harris will talk
Speaker 3: much more about this, not just celebrating public education, but
Speaker 3: recognizing that public actions case needs to be made much better. Because,
Speaker 3: you know, David, in an earlier and much more elitist age,
Speaker 3: the Duke of Wellington said in Britain in the nineteenth
Speaker 3: century that the Battle of Waterloo had been won on
Speaker 3: the playing fields of Eton. I'm here to tell you
Speaker 3: that the battle for America's future will be won or
Speaker 3: lost in our nation's public schools. And I heard all
Speaker 3: that when I heard the Vice President talking about opportunity,
Speaker 3: and I hope that those themes, rather than some of
Speaker 3: the themes that I think are harder to justify, about
Speaker 3: gouging and the like, even if they do have their
Speaker 3: political appeal, I hope those will be a larger fraction
Speaker 3: of the campaign going forward, and much much more important.
Speaker 3: I hope that, if, as I expect, Vice President Harris
Speaker 3: is elected a president, that the broad economic strategy is
Speaker 3: going to be one that's all about opportunity.
Speaker 1: Well, Larry, thank you so much. It's always a treat
Speaker 1: to have you with us that as our special contributor
Speaker 1: here on Wall Street Week. He's Larry Summers of Harvard