WEBVTT - Minneapolis Fed President Neel Kashkari On The Historic Challenges For Monetary Policy 0:00:11.039 --> 0:00:14.640 Well and welcome to another episode of the Odd Lots Podcast. 0:00:14.720 --> 0:00:18.680 I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, if it 0:00:19.160 --> 0:00:23.919 weren't for the coronavirus, this would be the week of 0:00:24.120 --> 0:00:28.840 a pretty important sort of gathering of the brightest minds 0:00:29.160 --> 0:00:33.280 in monetary policy feder reserve, central banking all around the world. 0:00:33.680 --> 0:00:36.040 That's kind of a big if, isn't it. Like, if 0:00:36.080 --> 0:00:40.080 it weren't for everything that threw into disarray, this other 0:00:40.120 --> 0:00:43.159 thing would be important. But yes, um, it is Jackson 0:00:43.200 --> 0:00:46.519 Whole Week. And Jackson Whole Week is traditionally when the 0:00:47.159 --> 0:00:50.919 sort of luminaries of economics gather to talk about the 0:00:51.040 --> 0:00:53.720 issues that are most pressing to them from an academic 0:00:53.720 --> 0:00:57.120 perspective and also from a real economy perspective. And it's 0:00:57.160 --> 0:00:59.880 usually the time when we have lots of interesting discussion, 0:01:00.280 --> 0:01:05.320 lots of interesting speeches coming out from policymakers, and lots 0:01:05.319 --> 0:01:09.520 of interesting academic papers as well. Right, And so today 0:01:10.040 --> 0:01:14.320 we are recording this on Wednesday, August, So by the 0:01:14.360 --> 0:01:18.399 time people here today's interview, um, the Jackson Whole event, 0:01:18.520 --> 0:01:22.360 it's actually still happening, but happening digitally sort of like 0:01:22.400 --> 0:01:25.680 all meetings are happening UH these days. But yes, this 0:01:25.800 --> 0:01:29.520 is the week of the famous Kansas City Fed Monetary 0:01:29.560 --> 0:01:33.800 Policy UH Symposium, and I think it comes at an 0:01:33.840 --> 0:01:38.679 extremely important and interesting time for the FED and for 0:01:38.720 --> 0:01:42.880 the economy and monetary policy. Yeah. Absolutely so. There there 0:01:42.920 --> 0:01:46.280 are two things I think that are really important this week, 0:01:46.319 --> 0:01:48.560 and one is sort of short term, and that's just 0:01:49.240 --> 0:01:53.760 the whole coronavirus induced economic crisis and the policy response 0:01:53.840 --> 0:01:56.480 to it. So clearly that's going to be up for 0:01:56.560 --> 0:01:59.720 debate and discussion at Jackson Hole this year. But the 0:01:59.760 --> 0:02:02.360 other one is a more long term development, which is 0:02:02.400 --> 0:02:08.080 that the Federal Reserve is rethinking its inflation targeting framework. 0:02:08.200 --> 0:02:10.800 So we could get something very interesting out of the 0:02:10.840 --> 0:02:13.640 fete this week. Yeah, that's exactly what I was thinking. 0:02:13.639 --> 0:02:15.800 It's like the two things happening at once. And I 0:02:15.800 --> 0:02:18.600 would actually even say it's beyond just the rethinking of 0:02:18.639 --> 0:02:22.560 the specific approach to monetary policy, and it's part of this. 0:02:23.120 --> 0:02:27.480 Even preceding coronavirus, there was the sort of rethinking of 0:02:27.760 --> 0:02:30.959 the role of monetary policy, the limits of monetary policy, 0:02:31.320 --> 0:02:35.560 that the economic costs of over reliance on monetary policy, 0:02:35.639 --> 0:02:38.400 what monetary policy actually does. So we really are in 0:02:38.480 --> 0:02:41.760 this moment where a sort of medium or short term 0:02:42.000 --> 0:02:46.959 economic situation is coinciding with a much sort of like bigger, 0:02:47.040 --> 0:02:50.760 deeper discussion that was already building to a head. Yeah. Absolutely, 0:02:50.800 --> 0:02:52.799 and the two are sort of feeding off of each other. 0:02:52.880 --> 0:02:55.359 So it's it's a very interesting moment in time, as 0:02:55.360 --> 0:02:59.760 you point out. So I am extremely excited about today's 0:02:59.800 --> 0:03:02.600 in your should be extremely special because we're going to 0:03:02.639 --> 0:03:07.880 be speaking to an actual active top Fed official today. 0:03:08.440 --> 0:03:12.320 Um our guest is well known. He is the president 0:03:12.440 --> 0:03:16.280 of the Minneapolis for A Reserve. He is also known 0:03:16.360 --> 0:03:19.679 during the last crisis when he was on the treasury 0:03:19.760 --> 0:03:23.160 side when he was involved with the workings of the 0:03:23.200 --> 0:03:26.400 Tart program, to a public figure for a long time 0:03:26.680 --> 0:03:31.480 now on the monetary policy side. Really interesting thinker Neil 0:03:31.560 --> 0:03:33.959 cash Carry is joining us, so we're going to be 0:03:34.120 --> 0:03:37.800 talking about the intersection of all these different things. So Neil, 0:03:37.920 --> 0:03:40.920 thank you very much for joining us. Thank you, Joe 0:03:40.920 --> 0:03:44.480 and Tracy, thanks for having me. Let's just start off 0:03:44.520 --> 0:03:48.480 with actually just this moment um in time. And I'm curious, 0:03:48.520 --> 0:03:51.080 like you know, the unemployment rate is back down to 0:03:51.480 --> 0:03:55.960 just over ten um. A lot of economic indicators have 0:03:56.080 --> 0:04:00.840 actually held up surprisingly well given the devastation. There's actually 0:04:01.000 --> 0:04:04.680 arguably v shaped recovery and housing auto is doing well, 0:04:05.120 --> 0:04:08.560 retail sales doing well. Have you been surprised by the 0:04:08.560 --> 0:04:11.200 strength of the economic data that we've seen so far. 0:04:11.920 --> 0:04:13.600 I think it cuts both ways. I mean, yes, in 0:04:13.640 --> 0:04:16.560 some sense the economy has bounced back, but I think 0:04:16.560 --> 0:04:20.800 that's because we've reopened more quickly than the health experts recommended. 0:04:20.839 --> 0:04:23.120 And so yes, it's great. I mean I want to 0:04:23.160 --> 0:04:26.039 put Americans back to work as quickly as possible. But 0:04:26.120 --> 0:04:29.520 if the if in doing so, we allow the virus 0:04:29.560 --> 0:04:32.600 to flare back up again and to start raging, continuing 0:04:32.640 --> 0:04:35.120 to rage across the country, then it seems like it's 0:04:35.120 --> 0:04:37.640 going to be a short term game gain, not a 0:04:37.720 --> 0:04:40.839 long term solution, and so I'm cautious about the recovery. 0:04:41.640 --> 0:04:44.680 M Um, I think you previously said that you're worried 0:04:44.680 --> 0:04:47.840 about a wave of bankruptcies. Can you maybe give us 0:04:47.880 --> 0:04:52.080 some color about what you're seeing um out in your 0:04:52.120 --> 0:04:55.720 region in the Midwest. Is that actually happening? And are 0:04:55.760 --> 0:04:59.480 you worried about contagion from bankruptcies to the financial system. 0:05:00.560 --> 0:05:03.320 Yes to both, I mean we're seeing it already with 0:05:03.720 --> 0:05:07.000 lots of small businesses restaurants that very quickly in a 0:05:07.040 --> 0:05:11.039 restaurant margins in good times pre COVID, we're pretty slim 0:05:11.120 --> 0:05:14.080 for most restaurants, and then when they get got shut 0:05:14.200 --> 0:05:17.520 because of the COVID crisis. A bridge was provided in 0:05:17.560 --> 0:05:20.200 the form of the p p P program from Congress, 0:05:20.240 --> 0:05:22.640 but even some restaurants said that bridge is not enough 0:05:22.680 --> 0:05:24.839 for us. We're gonna close up. So I've been surprised. 0:05:25.160 --> 0:05:28.680 Even in Minneapolis, some very well known restaurants have already 0:05:28.680 --> 0:05:30.680 closed up shop and said we're not going to reopen. 0:05:31.120 --> 0:05:34.560 And the longer this goes on, the more bankruptcies we're 0:05:34.600 --> 0:05:39.640 going to see. Unfortunately, restaurants, coffee shops, you know, gyms, etcetera. 0:05:40.160 --> 0:05:42.840 And think about this way. Some restaurants have said, well, 0:05:42.839 --> 0:05:46.120 we're going to reopen at fifty capacity. Well, if their 0:05:46.160 --> 0:05:49.560 margins were so slim at a percent capacity, how long 0:05:49.600 --> 0:05:53.600 can they run at fifty percent capacity to maintain social distancing? 0:05:54.040 --> 0:05:57.400 And yes, the longer this goes on, the more bankruptcies 0:05:57.400 --> 0:06:00.240 we're gonna see, both small, midsize and large business is 0:06:00.560 --> 0:06:03.440 and ultimately those losses roll up into the banking sector 0:06:03.520 --> 0:06:07.680 because if a restaurant goes out of business, then whoever 0:06:07.800 --> 0:06:10.960 held the lease where they're releasing their space, it's harder 0:06:11.000 --> 0:06:12.880 for them to make their mortgage payment. That ends up 0:06:12.960 --> 0:06:15.119 rolling up into the banking sector. And so there's great 0:06:15.200 --> 0:06:18.680 uncertainty about the path of the economy because there's great 0:06:18.760 --> 0:06:21.479 uncertainty about the path of the virus, and therefore there's 0:06:21.520 --> 0:06:24.720 great uncertainty about how many losses the banking sector is 0:06:24.800 --> 0:06:28.560 ultimately going to face. You said early on, I think 0:06:28.880 --> 0:06:31.080 I think it might have even been like in April, UM, 0:06:31.120 --> 0:06:34.040 I think you said in the ft that UM banks 0:06:34.040 --> 0:06:38.760 should stop paying dividends actually take this time to raise capital. UM. 0:06:38.839 --> 0:06:41.520 Do you still feel that that that would be a 0:06:41.600 --> 0:06:44.680 smart move? Are you still urging banks to take steps 0:06:44.680 --> 0:06:46.920 to both the their balance sheet because at this point 0:06:47.760 --> 0:06:51.479 investors really, you know, just don't seem particularly concerned about 0:06:51.520 --> 0:06:55.279 systemic financial system health. Well, I think I am still 0:06:55.279 --> 0:06:57.400 concerned about it. I think the reason you're seeing the 0:06:57.480 --> 0:07:01.200 markets recover the way they have is frankly because of 0:07:01.240 --> 0:07:03.680 the FED. I mean, the Federal Reserve has taken extraordinary 0:07:03.720 --> 0:07:07.920 action beginning in March, responding to the coronavirus. We're we've 0:07:07.960 --> 0:07:11.880 acted much more quickly and much more aggressively than the 0:07:11.880 --> 0:07:14.520 FED acted even in the two thousand eight crisis, and 0:07:14.560 --> 0:07:16.320 I applaud us for doing that. It was the right 0:07:16.320 --> 0:07:18.600 thing to do. So I think markets are saying, well, 0:07:18.600 --> 0:07:21.000 the FED has taken some of the financial risk off 0:07:21.000 --> 0:07:24.120 the table, so we can now focus more on the upside. 0:07:24.520 --> 0:07:25.920 But I think that you know, if you look at 0:07:25.920 --> 0:07:29.280 where bank stocks are, they're not performing as well as 0:07:29.320 --> 0:07:31.800 the broader stock market. I think there's still concerned that 0:07:31.880 --> 0:07:35.040 the losses that the banks are exposed to. It's really 0:07:35.240 --> 0:07:38.320 unclear and really uncertain, and so I'm still focused on it. 0:07:39.040 --> 0:07:43.040 Mhm h. You mentioned the policy response to the COVID 0:07:43.120 --> 0:07:47.080 nineteen crisis versus the policy response from the financial crisis 0:07:47.080 --> 0:07:49.640 of two thousand eight, and this is something that obviously 0:07:49.720 --> 0:07:51.640 Joe and I have been talking about a lot. But 0:07:52.120 --> 0:07:55.400 when you look at what the FED has done this year, 0:07:55.800 --> 0:07:59.600 what stands out to you as the most helpful policy 0:07:59.760 --> 0:08:06.560 and what would you have done perhaps differently, if anything. Basically, 0:08:06.640 --> 0:08:10.320 we just said through all of these myriad facilities, we said, 0:08:10.360 --> 0:08:13.000 we are going to exercise our lender of last resort 0:08:13.080 --> 0:08:15.680 function as aggressively as we need to to support the 0:08:15.720 --> 0:08:18.880 financial system and to support the economy and that I 0:08:19.120 --> 0:08:21.480 completely support it. And you know, there are certain programs 0:08:21.480 --> 0:08:24.440 that have been bigger uptake than others. Some programs you 0:08:24.480 --> 0:08:27.480 would argue, well, there's not much uptake because markets have 0:08:27.600 --> 0:08:30.720 something largely recovered. The whole theory of central banking is 0:08:30.720 --> 0:08:33.360 you in an emergency, you lend at a penalty rate. 0:08:33.679 --> 0:08:37.880 That penalty rate is relative to normal market conditions, not 0:08:37.960 --> 0:08:42.480 relative to stressed market conditions. And so if markets are recovering, 0:08:42.520 --> 0:08:44.880 so that market participants will say, well, we'll just transact 0:08:44.920 --> 0:08:47.160 with each other because we can get better terms from 0:08:47.200 --> 0:08:48.640 each other and we don't need to go to the 0:08:48.640 --> 0:08:51.640 FED for their penalty rate terms. In a sense, that 0:08:51.679 --> 0:08:54.760 means our programs have been effective. So I think we could, 0:08:54.760 --> 0:08:57.120 probably with the benefit of hindsight and over more time, 0:08:57.120 --> 0:08:59.600 look back at one program here, one program there, and 0:08:59.640 --> 0:09:02.040 say we might tweak this or that, But overall I 0:09:02.080 --> 0:09:04.720 would give Jairmyan Powell, the feder Reserve, my colleagues high 0:09:04.720 --> 0:09:07.880 marks for playing our role. But this is not like 0:09:07.920 --> 0:09:09.480 the O eight crisis. I mean, this is as you 0:09:09.520 --> 0:09:12.160 all know, this isn't first and foremost a health crisis, 0:09:12.559 --> 0:09:15.160 and so we are not the first responders the first 0:09:15.160 --> 0:09:17.839 responders with the doctors, the scientists, the nurses, and then 0:09:17.880 --> 0:09:20.880 Congress has been very bold so far. I think the 0:09:20.960 --> 0:09:23.200 question now is going to be what does Congress do 0:09:23.280 --> 0:09:26.160 from here? We're playing our part, but our tools are 0:09:26.200 --> 0:09:30.040 limited in this crisis. Well, so this gets to what 0:09:30.080 --> 0:09:33.840 I would say is probably one of the biggest sources 0:09:33.840 --> 0:09:37.520 of criticism of the FED, which is that when the 0:09:37.559 --> 0:09:40.640 FED does its part, but Congress maybe kind of only 0:09:41.000 --> 0:09:43.400 partially does its part, or does its part, it fits 0:09:43.520 --> 0:09:46.760 starts that it exacerbates inequality. And right now we have 0:09:46.840 --> 0:09:50.960 unemployment that's still over ten percent, but the stock market 0:09:51.160 --> 0:09:53.559 is higher than it ever was, and like the Nasdaq 0:09:53.760 --> 0:09:57.880 is up over this year, just extraordinary gains um in 0:09:57.960 --> 0:10:01.240 financial assets people who owned their house have seen in 0:10:01.280 --> 0:10:04.960 many cases housing has done really well. So what do 0:10:05.040 --> 0:10:08.880 you say to critics who say that a huge impact 0:10:09.000 --> 0:10:12.560 of these FED actions is to exacerbate inequality? And how 0:10:12.600 --> 0:10:16.160 do you think about the impact the sort of cost 0:10:16.320 --> 0:10:19.800 of increasing inequality when you weigh it against the benefits 0:10:19.880 --> 0:10:23.560 of easing to support the economy. Yeah, well, I would say, 0:10:23.679 --> 0:10:25.960 let's just for the sake of argument, let's just accept 0:10:26.080 --> 0:10:29.640 their premise. Let's say that the stock market is because 0:10:29.679 --> 0:10:32.800 of the FED, and housing prices is because of the FED. 0:10:33.600 --> 0:10:36.680 What's the alternative to try to keep the stock market down? 0:10:36.720 --> 0:10:39.040 Should we punish those who are out of work today 0:10:39.240 --> 0:10:41.160 by making it harder for them to find a job. 0:10:41.400 --> 0:10:45.040 The people who especially the anonymous trolls on Twitter, squawk 0:10:45.080 --> 0:10:48.120 about this year in year out, and we were finally 0:10:48.280 --> 0:10:52.640 seeing at the end of the recovery, real wage games 0:10:52.800 --> 0:10:55.960 wage gains net of inflation. We're growing the fastest for 0:10:56.120 --> 0:10:58.760 the lowest income Americans, and we were finally seeing a 0:10:58.840 --> 0:11:01.640 job market strong enough where we were bringing back in 0:11:01.720 --> 0:11:04.480 people who had been left on the sidelines. The most 0:11:04.520 --> 0:11:07.760 valuable asset the vast majority of Americans have is not 0:11:07.880 --> 0:11:10.640 their house because many Americans don't own a home. It's 0:11:10.679 --> 0:11:13.600 not stocks because they don't own stocks. It's their job. 0:11:14.120 --> 0:11:17.479 And by having a strong economy and a stronger recovery 0:11:17.520 --> 0:11:20.360 and a stronger job market, we are benefiting the vast 0:11:20.360 --> 0:11:22.440 majority of Americans. And again, I just go back and say, 0:11:22.840 --> 0:11:26.559 let's say your goal is to tamp down the stock market. Okay, 0:11:26.600 --> 0:11:28.400 let's go tamp down the stock market. But if the 0:11:28.440 --> 0:11:31.240 cost of that is to have more Americans out of work, 0:11:31.280 --> 0:11:34.280 with lower wage growth, that's a really high cost. In 0:11:34.320 --> 0:11:37.479 my book, I have a bunch more questions on inequality. 0:11:37.679 --> 0:11:40.800 But um, before we get there, you mentioned Twitter and 0:11:40.840 --> 0:11:43.959 anonymous trolls on Twitter, and I mean, you are an 0:11:43.960 --> 0:11:47.760 active presence on that platform, and I've always they were 0:11:47.760 --> 0:11:50.880 getting straight to the important, the really important things. But 0:11:51.000 --> 0:11:54.480 I've always wondered why, like, is there an element of 0:11:54.520 --> 0:11:57.160 masochism there, because, like Joe and I know that as 0:11:57.160 --> 0:11:59.600 soon as you tweet something about the FED on Twitter, 0:11:59.720 --> 0:12:02.200 you will get a bunch of people who are going, like, ah, 0:12:02.280 --> 0:12:05.280 the Fed, they don't know anything, ridiculous, you know, making 0:12:05.320 --> 0:12:07.840 the rich richer all of that, Like, why are you 0:12:07.920 --> 0:12:10.160 on that platform? And what is the benefit that you 0:12:10.160 --> 0:12:13.600 get out of it? Well, it's a good question. I mean, 0:12:13.640 --> 0:12:15.880 it was an experiment. When I joined the FED, I said, 0:12:15.960 --> 0:12:18.640 let me I think many people across the FED are 0:12:18.679 --> 0:12:21.120 the most you know j Powell, Jenny Yelling before him, 0:12:21.600 --> 0:12:24.400 want to increase transparency, want to make us more accessible 0:12:24.440 --> 0:12:27.080 to the public. So this was an experiment that I said, 0:12:27.120 --> 0:12:29.120 let me go try and see if this is a 0:12:29.200 --> 0:12:31.560 useful way to in a genuine, authentic way, engage with 0:12:31.600 --> 0:12:34.280 the public. And I think there's benefit to it. I 0:12:34.320 --> 0:12:36.640 do think that I have been able to get my 0:12:36.720 --> 0:12:38.960 message out. I have been able to engage with people 0:12:38.960 --> 0:12:41.360 who wanted to engage in a genuine way, and I 0:12:41.400 --> 0:12:44.560 think that's been positive. I mean the cost is, as 0:12:44.600 --> 0:12:47.240 you said, if the signal to noise ratio is quite 0:12:47.240 --> 0:12:50.320 low for every Ernie todes She, they're a hundred angry 0:12:50.320 --> 0:12:53.280 anonymous cranks out there, And how do you focus on 0:12:53.360 --> 0:12:55.880 finding the Ernie Twodesh She's who are doing really thoughtful 0:12:55.920 --> 0:12:58.080 analysis that I can learn from and just have to 0:12:58.120 --> 0:13:01.480 tune out the anonymous crank. So, you know, I don't 0:13:01.520 --> 0:13:04.720 know when when future presidents or whoever eventually succeeds me, 0:13:04.720 --> 0:13:07.240 will I recommend that they have an active Twitter presence. 0:13:07.440 --> 0:13:10.079 I'm not sure it hasn't. There hasn't been a big 0:13:10.120 --> 0:13:12.920 cost to me because I'm pretty I think I'm pretty 0:13:12.920 --> 0:13:16.760 comfortable just being criticized and tuning out the cranks. But 0:13:17.000 --> 0:13:19.719 you know, it's not overwhelmingly positive. I'll just say that. 0:13:34.600 --> 0:13:37.920 So let's get to uh, you know, this tension and 0:13:37.960 --> 0:13:39.880 it comes up on Twitter all the time, but it's 0:13:39.920 --> 0:13:44.439 really sort of proceed Twitter, which is that, Yes, perhaps 0:13:44.640 --> 0:13:49.200 monetary policy plays this role in inflating financial assets. But 0:13:49.280 --> 0:13:51.880 as you point out, the sort of number one asset 0:13:51.920 --> 0:13:54.960 that most people have is is their job. And ultimately 0:13:55.520 --> 0:13:59.040 we have to get the unemployment numbers down. But okay, 0:13:59.080 --> 0:14:03.439 so we agree ten unemployment at least, it's still long 0:14:03.520 --> 0:14:08.920 way from normal, just absolutely unacceptably high by any standards. 0:14:08.960 --> 0:14:11.440 But this gets to sort of the bigger question, and 0:14:11.480 --> 0:14:14.720 I think it's the one that proceeds coronavirus, which is, 0:14:15.240 --> 0:14:19.320 how in the future are you thinking about ways in 0:14:19.360 --> 0:14:24.080 which the FED could truly incorporate the employment mandate into 0:14:24.200 --> 0:14:27.640 its framework, Because we saw the FED first high grades 0:14:27.720 --> 0:14:32.400 post last crisis, and long before we reached full employment, 0:14:32.560 --> 0:14:36.640 we just kept dropping, no real inflation, no real wage gains. 0:14:36.960 --> 0:14:40.400 We saw a round of hikes eighteen that needed to 0:14:40.400 --> 0:14:43.880 be reversed twenty nineteen. Meanwhile the unemployment rate just kept dropping. 0:14:44.600 --> 0:14:47.760 How are you thinking about the challenge going forward of 0:14:47.840 --> 0:14:51.760 when we sort of have a normal economy, of not 0:14:51.880 --> 0:14:54.840 repeating some of the errors in the past where the 0:14:54.880 --> 0:14:57.600 FED high grades too early when there were still lots 0:14:57.640 --> 0:15:00.600 of labor gains to be had out there. Well, so, 0:15:00.800 --> 0:15:03.480 first of all, I agree with the premise of your question. 0:15:03.920 --> 0:15:07.280 The tightening cycle that began in was a mistake. It 0:15:07.400 --> 0:15:09.840 was predicated on a misreading of the labor market. We 0:15:09.960 --> 0:15:12.160 thought we were at full employment and or in some 0:15:12.200 --> 0:15:13.840 cases beyond it, and we needed to hurry up and 0:15:13.920 --> 0:15:17.120 raise rates before inflation came. And obviously inflation didn't come. 0:15:17.400 --> 0:15:18.920 So we have to learn from that, and we have 0:15:18.960 --> 0:15:22.120 to recognize that the vast majority of people want to work. 0:15:22.200 --> 0:15:24.040 You know, one of the big frustrations I have in 0:15:24.080 --> 0:15:28.120 the economics profession is every time there's a recession, they 0:15:28.120 --> 0:15:31.320 then immediately the economist immediately ratchet up this thing called 0:15:31.640 --> 0:15:34.200 the natural rate of unemployment, like all these people have 0:15:34.280 --> 0:15:38.040 been dislocated. Now the natural rate of unemployment is five 0:15:38.120 --> 0:15:39.960 or six and if you get below that, it's going 0:15:40.040 --> 0:15:43.440 to lead to inflation. And it's just bunk. It's total bunk. 0:15:44.040 --> 0:15:46.680 And so first thing we should do is stop doing that. 0:15:47.240 --> 0:15:49.800 The vast majority of Americans want to work, and have 0:15:49.920 --> 0:15:52.920 given the chance and decent wages, they will surprise us 0:15:53.200 --> 0:15:55.600 and continue to and to re enter the labor market. 0:15:55.600 --> 0:15:57.400 That's one of the things that we learned, I hope 0:15:57.440 --> 0:16:00.720 we've learned. I've learned in the last recovery that that 0:16:00.840 --> 0:16:03.440 is profoundly true, so we just we have to learn 0:16:03.440 --> 0:16:06.760 from that and not raise rates ahead of inflation. If 0:16:06.800 --> 0:16:09.400 you look at our inflation target it was officially adopted 0:16:09.400 --> 0:16:13.480 in two we basically undershot two percent the entire time, 0:16:13.960 --> 0:16:16.720 I mean, we blew it. And so let's not raise 0:16:16.840 --> 0:16:21.520 rates this time until we actually get inflation sustainably back 0:16:21.560 --> 0:16:23.960 at our target or even above it to make up 0:16:24.000 --> 0:16:28.600 for prior shortfalls. Mhm. So something I've been wondering. But 0:16:28.640 --> 0:16:31.360 if we say that the FED has been pretty bad 0:16:31.400 --> 0:16:35.520 about achieving its two percent inflation target, and that it's 0:16:35.520 --> 0:16:39.240 also difficult to confidently come up with an estimate of 0:16:39.480 --> 0:16:43.480 full employment, would it make more sense to target something 0:16:43.600 --> 0:16:49.080 like wages instead of the actual employment level. Mhm. Well, 0:16:49.080 --> 0:16:51.600 that's that's how we think it's supposed to work. So here, 0:16:52.000 --> 0:16:55.440 think about two bridges. One bridge is from how many 0:16:55.440 --> 0:16:58.720 people have jobs the unemployment rate or the inverse the 0:16:58.800 --> 0:17:01.920 employment rate, So you get the way it's supposed to work. 0:17:02.000 --> 0:17:04.399 As the labor market titans, people go back to work, 0:17:04.800 --> 0:17:07.639 businesses have to compete to find workers, and then that 0:17:07.680 --> 0:17:10.880 bids up wages. So the first bridge is between unemployment 0:17:11.320 --> 0:17:14.520 and wages, and then the second bridge is wage growth. 0:17:14.560 --> 0:17:17.840 Starts to pick up between wages and the broader measure 0:17:17.920 --> 0:17:21.320 of prices and inflation. So you're right, I would say 0:17:21.320 --> 0:17:24.320 that wages is better than focusing on the unemployment rate. 0:17:24.520 --> 0:17:27.080 But even better yet, let's just cut the bridges out 0:17:27.359 --> 0:17:29.760 and let's just focus on inflation. So a year more 0:17:29.760 --> 0:17:32.800 than a year ago, I proposed that the Committee adopted 0:17:32.800 --> 0:17:36.040 forward guidance that says we will not raise rates until 0:17:36.119 --> 0:17:39.800 core inflation gets back to two percent on a sustained basis. 0:17:40.040 --> 0:17:41.520 And by the way, I would note a few months 0:17:41.600 --> 0:17:44.440 later the e c B European Central Bank adopted a 0:17:44.560 --> 0:17:47.879 version of this publicly in their in their policy statement. 0:17:47.920 --> 0:17:51.120 I think forward guidance that is anchored to an outcome 0:17:51.359 --> 0:17:54.520 of actually achieving our inflation target would be a big 0:17:54.600 --> 0:17:58.960 step forward relative to where we are today. So you mentioned, 0:17:59.119 --> 0:18:01.720 um the inflation an outlook there on the inflation target, 0:18:01.760 --> 0:18:04.080 and one of the things that is supposedly up for 0:18:04.119 --> 0:18:06.919 a discussion at Jackson Hole is the notion of the 0:18:06.920 --> 0:18:11.280 FED moving to some sort of average inflation targeting. But 0:18:11.640 --> 0:18:14.880 I guess my question is are there any tools out 0:18:14.920 --> 0:18:19.000 there to make that policy approach any more effective than 0:18:19.040 --> 0:18:25.199 the previous inflation targeting regime, and exactly what would you 0:18:25.320 --> 0:18:28.840 at the central bank do differently to achieve average inflation 0:18:28.880 --> 0:18:31.480 of two percent more quickly? Wouldn't it make more sense 0:18:31.480 --> 0:18:34.560 to maybe just jettison the forecast of inflation rather than 0:18:34.600 --> 0:18:37.640 to actually change the policy approach. So rather than saying 0:18:37.640 --> 0:18:40.120 we're going to get an average two percent, why not 0:18:40.240 --> 0:18:42.960 just sort of get rid of that and target something 0:18:43.000 --> 0:18:45.920 else over the longer term? Well, I mean, are the 0:18:46.000 --> 0:18:47.879 number one job of central banks? That I mean, at 0:18:47.880 --> 0:18:49.879 first they were created for lender of lash resort, but 0:18:49.960 --> 0:18:53.120 beyond that, it's making sure that prices are in check. 0:18:53.160 --> 0:18:54.879 And we talk about our dual mandate that Congress has 0:18:54.880 --> 0:18:58.360 given us of stable prices and maximum employment. We can 0:18:58.400 --> 0:19:01.640 measure inflation. It's not of we can measure inflation, as 0:19:01.680 --> 0:19:04.640 you said earlier, Crazy, it's very difficult to know are 0:19:04.720 --> 0:19:07.760 we in fact at maximum employment? And so in my book, 0:19:08.200 --> 0:19:10.840 given the mistakes that we made in this recovery, I 0:19:10.880 --> 0:19:14.280 think a much stronger focus on actually achieving our inflation target. 0:19:14.440 --> 0:19:17.720 Some people have suggested adopting a formal makeup strategy like 0:19:17.760 --> 0:19:20.879 a price level target or a formal average inflation target 0:19:21.359 --> 0:19:24.520 UH to me mechanically tying ourselves to such a rule 0:19:25.160 --> 0:19:27.960 can be problematic because there might be circumstances that you 0:19:27.960 --> 0:19:29.560 don't want to stick to it. But I think that 0:19:29.600 --> 0:19:33.359 there are ways of being better, having more success in 0:19:33.359 --> 0:19:37.879 achieving our inflation target and not preemptively raising rates. So 0:19:37.920 --> 0:19:40.600 I want to go back to something you said, uh 0:19:40.600 --> 0:19:43.280 where you mentioned that economists have this sort of bad 0:19:43.320 --> 0:19:45.760 habit of every time there's a recession, they mark up 0:19:45.800 --> 0:19:48.200 what they view as the natural rate of unemployment. And 0:19:48.320 --> 0:19:52.160 so that implicitly means that if the FED were did 0:19:52.160 --> 0:19:54.760 take that seriously, it would tighten too soon. And just 0:19:54.840 --> 0:19:58.280 in general, you know, there's a lot of skepticism that 0:19:58.440 --> 0:20:01.320 you have about some of these sort of assumptions about 0:20:01.400 --> 0:20:06.160 this sort of relationship between employment and inflation. And I'm curious, 0:20:06.240 --> 0:20:11.560 like neither you nor the current FED chairman Powell have 0:20:12.440 --> 0:20:15.960 sort of formal academic economic training, and I'm just curious 0:20:16.440 --> 0:20:20.159 whether that gives you more comfort or your sort of 0:20:20.240 --> 0:20:22.760 um less attached to some of these old models, some 0:20:22.800 --> 0:20:26.080 of these models that posit some sort of mechanical relationship 0:20:26.160 --> 0:20:29.200 between this or that unemployment goes here, Therefore in play, 0:20:29.200 --> 0:20:30.959 SI will go up there if we don't do X. 0:20:31.520 --> 0:20:33.680 Do you feel like you can sort of be a 0:20:33.720 --> 0:20:36.120 little more skeptical or less tied to them, in part 0:20:36.200 --> 0:20:40.640 because you don't haven't spent years sort of in academia 0:20:40.720 --> 0:20:44.280 doing economic work, you know, I think so, I mean, look, 0:20:44.320 --> 0:20:46.159 I will say I benefit from the fact that we 0:20:46.160 --> 0:20:48.679 have a brilliant team of PhD economists at the Minneapolis 0:20:48.760 --> 0:20:51.760 FED and around the fudders Or system who I learned from, 0:20:51.800 --> 0:20:54.159 and I debate and I discussed. So I don't want 0:20:54.200 --> 0:20:57.400 to discount that they're enormously important part of the process. 0:20:57.400 --> 0:20:59.840 But I'm not when to some model I was taught 0:20:59.840 --> 0:21:02.040 for two years ago and graduate school that this is 0:21:02.080 --> 0:21:03.680 the way the world works, and you need to just 0:21:03.720 --> 0:21:05.800 think about the world through this one framework. And I 0:21:05.840 --> 0:21:08.280 think that, you know, just the discussion of the natural 0:21:08.320 --> 0:21:11.840 rate of unemployment, why is it that economists always assume 0:21:12.160 --> 0:21:15.320 when there's a recession, the natural rate of unemployment ratchets 0:21:15.400 --> 0:21:18.879 up and then only falls back down, only gradually over time. 0:21:19.080 --> 0:21:22.760 And they come up with all sorts of dislocations, fancy words, skills, 0:21:22.840 --> 0:21:27.520 mismatch skills, diminish boy, this is an enormously costly error 0:21:27.560 --> 0:21:30.800 that we keep making people want to work. And that's 0:21:30.840 --> 0:21:32.040 one of the things that we've learned, and if we 0:21:32.119 --> 0:21:33.959 just allowed the economy to recover, I think where they 0:21:33.960 --> 0:21:36.600 will continue to surprise us. And so yes, I do 0:21:36.680 --> 0:21:39.080 think that not being an economist has helped me at 0:21:39.160 --> 0:21:42.320 least see that. But that's not to say that economists 0:21:42.320 --> 0:21:47.680 can't see that too. So what is the reluctance so 0:21:47.760 --> 0:21:52.920 far to adopt a more formal forward guidance state contingent 0:21:53.000 --> 0:21:56.800 forward guidance framework? What do people what do people see 0:21:57.200 --> 0:21:59.639 at the FED when you're having these discussions. What are 0:21:59.680 --> 0:22:02.680 pers even as the cost of saying like, Okay, we're 0:22:02.680 --> 0:22:05.919 not even gonna think about thinking about raising rates until 0:22:06.200 --> 0:22:10.120 either inflation is above X for so long and or 0:22:10.200 --> 0:22:13.359 unemployment is below X. Why the why the discomfort with it? 0:22:13.600 --> 0:22:15.959 I don't think there is right now great discomfort with it. 0:22:16.000 --> 0:22:19.159