WEBVTT - Ed Harrison Explains What the Fed Is Really Trying to Accomplish 0:00:10.600 --> 0:00:14.360 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:14.440 --> 0:00:18.799 I'm Joe and I'm Tracy Alloy. Tracy, we know a 0:00:18.920 --> 0:00:20.960 couple of things about the economy right now. We know 0:00:21.040 --> 0:00:25.680 that inflation is high, it's way too hot for the 0:00:25.720 --> 0:00:29.200 FED and the general public, and that the FED as 0:00:29.280 --> 0:00:32.320 of the moment, plans to hike aggressively over the next 0:00:32.760 --> 0:00:36.720 several meetings in order to bring down inflation. I don't 0:00:36.720 --> 0:00:39.879 think we actually know much more than that. Yeah, I 0:00:39.880 --> 0:00:42.960 think there are a lot of open questions on what exactly, 0:00:43.159 --> 0:00:47.120 well a, what impact our hikes actually going to have 0:00:47.440 --> 0:00:50.520 on the economy, how to interest rate hikes actually work 0:00:51.080 --> 0:00:54.520 to slow down price levels, And of course there's this 0:00:54.560 --> 0:00:56.600 big open question about whether or not we should be 0:00:56.640 --> 0:00:59.960 targeting demand when supply seems to be more of an issue. 0:01:00.480 --> 0:01:03.160 But the other thing we don't really know is how 0:01:03.200 --> 0:01:07.520 does the FED react once the impact or the effects 0:01:07.520 --> 0:01:10.240 of those hikes start working their way through the economy. 0:01:10.480 --> 0:01:13.600 What level of inflation is acceptable? Does it have to 0:01:13.640 --> 0:01:17.399 go back to two percent? Is the FED willing to 0:01:18.080 --> 0:01:22.040 I don't know, accept slightly higher levels of inflation in 0:01:22.120 --> 0:01:26.000 order to preserve I guess functioning financial markets and things 0:01:26.040 --> 0:01:32.160 like yeah, like like the question of okay, if it 0:01:32.160 --> 0:01:34.479 would the FED be happy with three and a half 0:01:34.480 --> 0:01:37.440 inflation three and a half inflation if it means it 0:01:37.480 --> 0:01:39.640 doesn't push us into a research Yeah, it strikes me 0:01:39.720 --> 0:01:42.160 is like an interesting question. It feels like, and I 0:01:42.240 --> 0:01:44.039 know we've been saying this for two years now, but 0:01:44.080 --> 0:01:47.120 it feels like we are actually in a different type 0:01:47.200 --> 0:01:49.960 of economic cycle, and so there are a lot of 0:01:50.000 --> 0:01:53.160 open questions swirling around exactly what that looks like and 0:01:53.480 --> 0:01:56.400 how potentially it ends. Yes, so I think there's this 0:01:56.520 --> 0:02:00.480 view that Okay, maybe uh, the inflation is expected to 0:02:00.480 --> 0:02:03.600 come down significantly, but it's unlikely to get back down 0:02:03.640 --> 0:02:05.600 to target by the end of the year. And so 0:02:05.680 --> 0:02:07.640 then the question is like, well, how hard does the 0:02:07.640 --> 0:02:10.280 FED push for those last one or two percent or 0:02:10.320 --> 0:02:13.240 does it ease off a little bit. But then also again, 0:02:13.520 --> 0:02:16.760 and it's a question that never really comes up, which 0:02:16.800 --> 0:02:21.560 is can the Fed articulate how rate hikes help, how 0:02:21.639 --> 0:02:24.560 they how they tame inflation. We have this idea, you 0:02:24.639 --> 0:02:29.120 hike rates inflation and theory goes down. But I think 0:02:29.120 --> 0:02:31.240 the FED is getting a little bit more explicit about this. 0:02:31.320 --> 0:02:32.919 It's like, yeah, well, maybe there's gonna be some pain. 0:02:32.960 --> 0:02:36.240 Maybe unemployment is going to rise, but again, most parts 0:02:36.240 --> 0:02:39.240 of the economy aren't really rate sensitive. It's like housing 0:02:39.320 --> 0:02:41.760 is obviously the big one, maybe autos, and so the 0:02:41.800 --> 0:02:45.400 connection between rate hikes and actually getting inflation of target, 0:02:45.960 --> 0:02:49.000 at least to me, I think there's still some ambiguity. Yeah, 0:02:49.040 --> 0:02:50.880 and I think, I mean, I think most of the 0:02:50.880 --> 0:02:53.359 people at the FED would readily admit that, and they're 0:02:53.400 --> 0:02:55.400 still talk talking about it and trying to work their 0:02:55.440 --> 0:02:57.760 way through it as well. So it's a weird time. 0:02:58.360 --> 0:03:00.560 And I think that, you know, right, there's all these 0:03:00.680 --> 0:03:03.280 questions about what is the Fed's goal, how does it 0:03:03.320 --> 0:03:06.120 accomplish them, what's it, what's it really trying to achieve? 0:03:06.160 --> 0:03:08.440 What success look like. So we're going to talk about 0:03:08.440 --> 0:03:10.800 that today. We're going to be speaking to one of 0:03:10.840 --> 0:03:14.040 our colleagues at Bloomberg, one of the sharpest people here, 0:03:14.480 --> 0:03:17.160 one of the great writer and someone that we've been 0:03:17.200 --> 0:03:20.560 fans of for years before he even came to Bloomberg. 0:03:20.600 --> 0:03:22.639 So it's real treat and he's a colleague. We're gonna 0:03:22.639 --> 0:03:25.280 be speaking with Ed Harrison, he's a senior editor on 0:03:25.320 --> 0:03:28.079 the Markets team, and he will answer, he will tell 0:03:28.160 --> 0:03:30.880 us all the answers to these questions. He has the answers, 0:03:31.600 --> 0:03:33.680 he's gonna give us a edit. Thank you so much 0:03:33.720 --> 0:03:35.880 for coming on odd lots, well, thank you for having me, 0:03:35.840 --> 0:03:38.640 and I hope I have some of the our colleague 0:03:38.640 --> 0:03:41.600 now at Bloomberg coming up on the year. Actually next 0:03:41.640 --> 0:03:44.400 month it will be one year. I don't want to say, 0:03:44.480 --> 0:03:46.840 I don't want to like sidetrack because this is not 0:03:46.960 --> 0:03:49.960 the topic of the conversation of them. Maybe we could 0:03:49.960 --> 0:03:53.000 get into it, but you know, I've been reading your 0:03:53.080 --> 0:03:56.200 blog and your newsletter. Credit right now is for year. 0:03:56.240 --> 0:03:58.400 It's probably coming out a decade, and I was thinking, 0:03:58.480 --> 0:04:00.480 I was actually talked to someone about it the other day, 0:04:00.480 --> 0:04:03.120 and you know, you're there's sort of like indispensable source. 0:04:03.160 --> 0:04:06.400 During the euro crisis, Italian spreads are widening again, Like 0:04:06.400 --> 0:04:09.119 where's a little bit of tension in Europe again, isn't there? Yeah, 0:04:09.240 --> 0:04:13.360 I mean there are all sorts of weird externalities that happened. 0:04:13.400 --> 0:04:15.560 When I mean, because the way I remember the euro 0:04:15.640 --> 0:04:20.719 crisis anyway was Dubai World. Yeah, I remember Dubai. That 0:04:21.040 --> 0:04:26.200 was the event that kicked off people questioning UH sovereign 0:04:26.240 --> 0:04:30.960 debt and bizarrely then it moves straight to Europe. So 0:04:31.200 --> 0:04:36.240 Dubai degrees exactly. It's almost like a butterfly flat effect. Uh, 0:04:36.279 --> 0:04:39.320 this is bringing back euro crisis flashbacks. So I'm going 0:04:39.360 --> 0:04:43.400 to bring us back to firmly because we have a Yeah, yeah, 0:04:43.560 --> 0:04:45.919 we'll just talk about the e CP for for thirty minutes, 0:04:45.960 --> 0:04:49.640 and it speaks seven languages, so he's actually anyway, let's 0:04:49.640 --> 0:04:51.960 go back, We'll talk about the ECB in court Uguese 0:04:52.279 --> 0:04:56.520 and greet No, let's talk about inflation and the economy 0:04:56.760 --> 0:04:59.000 in the US and try to focus it a little bit. 0:04:59.000 --> 0:05:02.440 So maybe just to begin with the really broad question 0:05:02.760 --> 0:05:04.680 that Joe was kind of hinting at in the intro, 0:05:05.240 --> 0:05:09.480 but what exactly our interest rate hikes supposed to do 0:05:09.720 --> 0:05:13.720 in the current situation. I think that they're basically supposed 0:05:13.760 --> 0:05:16.360 to from what I understand, the FED saying is bring 0:05:16.440 --> 0:05:21.280 supply demand into balance. And ultimately, when they say that, 0:05:21.320 --> 0:05:24.400 what they're saying essentially is is that if the supply 0:05:24.800 --> 0:05:27.720 is limited, then we're going to limit the demand. We're 0:05:27.760 --> 0:05:31.200 going to bring demand down to the limited level that 0:05:31.279 --> 0:05:37.880 supply is. So they're essentially creating the preconditions for a recession. Now, 0:05:37.880 --> 0:05:42.200 if they bring the demand down to a level to 0:05:42.320 --> 0:05:45.680 think of it in sort of like a Goldilocks or well, 0:05:45.720 --> 0:05:48.480 actually I think it's the one with the too hot 0:05:48.480 --> 0:05:54.200 too cold forwards. What was um that they're thinking, Okay, 0:05:54.240 --> 0:05:57.920 we'll bring it down, demand down, but not so far 0:05:58.000 --> 0:06:00.599 down that we have a recession. How All has started 0:06:00.600 --> 0:06:03.520 to dance around that issue, and I think he is 0:06:03.720 --> 0:06:07.520 mirroring something that I heard Loretta Master, who's the Cleveland 0:06:07.600 --> 0:06:11.680 FED president say. She mentioned to Mike McKee, one of 0:06:11.680 --> 0:06:16.600 our colleagues, that maybe we'll get another quarter or two 0:06:17.160 --> 0:06:20.040 of negative growth to go along with the Q one 0:06:20.160 --> 0:06:23.480 negative growth that we had. Mike McKee was like, that 0:06:23.520 --> 0:06:26.400 sounds kind of like a recession, and she was like, no, no, 0:06:26.480 --> 0:06:30.640 maybe not. And so now the new code word is softish, 0:06:32.080 --> 0:06:36.839 soft soft landing soft ish. So what does that mean? 0:06:37.040 --> 0:06:39.800 I think what it means to me is what the 0:06:39.839 --> 0:06:44.360 FED is effectively doing is they're telling you that a 0:06:44.480 --> 0:06:49.320 mild recession is not a problem. And to some extent, 0:06:49.600 --> 0:06:53.440 I mean, look, I don't think the FED wants a recession. Clearly, 0:06:53.480 --> 0:06:56.080 like all things being equal, it would clearly prefer growth 0:06:56.120 --> 0:07:00.360 to recession. But there is something about that sick knowing 0:07:00.520 --> 0:07:04.320 it seems like it's an expression of seriousness. When the 0:07:04.360 --> 0:07:07.880 FED is telling us that it might be willing to 0:07:07.880 --> 0:07:11.560 tolerate a recession if that's what it takes to bring 0:07:11.600 --> 0:07:15.000 down demand such to a level such that we're back 0:07:15.040 --> 0:07:18.080 and balanced and don't have this high inflation anymore. It's 0:07:18.120 --> 0:07:23.120 sort of indicating a a seriousness about the degree to 0:07:23.160 --> 0:07:26.120 which it will undertake its task definitely. And so I 0:07:26.160 --> 0:07:29.440 think then the question for us is are what are 0:07:29.480 --> 0:07:32.640 their hopes and dreams and what are their prognostications about 0:07:32.680 --> 0:07:35.840 what's likely to occur? You know, is the is the FED, 0:07:36.320 --> 0:07:41.040 unlike what Bill Dudley saying, actually pulling its punches. Is 0:07:41.080 --> 0:07:44.200 the FED not giving us the full story? Maybe the 0:07:44.200 --> 0:07:49.160 FED actually believes that soft dish is the base case. 0:07:50.120 --> 0:07:52.080 Why don't you go out and say that. But they're 0:07:52.120 --> 0:07:54.720 not saying that. What they're saying is is we're hoping 0:07:55.280 --> 0:07:58.160 that we can get this down and the economy keeps growing. 0:07:58.600 --> 0:08:03.360 But more and more of financial markets are pricing themselves 0:08:03.400 --> 0:08:06.160 as if that is more likely to be the case. 0:08:07.240 --> 0:08:09.600 So there's another thing that I think we take for 0:08:09.680 --> 0:08:12.080 granted at this point in time, and I think it 0:08:12.120 --> 0:08:14.080 should be discussed a lot more and that is the 0:08:14.480 --> 0:08:17.760 pace of the hiking cycle. So we just saw fifty 0:08:17.920 --> 0:08:21.400 basis points at the last decision, and I think the 0:08:21.400 --> 0:08:25.040 Fed's talking about doing fifty basis points at the next decision. 0:08:25.680 --> 0:08:29.239 And it seems like they are moving, and they've used 0:08:29.320 --> 0:08:33.880 the specific word, but they're moving quickly and expeditiously, and 0:08:33.920 --> 0:08:37.320 it feels like there's really a sense of urgency. But 0:08:37.440 --> 0:08:41.000 on the other hand, they will also openly talk about 0:08:41.520 --> 0:08:45.160 the economy is already slowing. We think that inflation is 0:08:45.400 --> 0:08:49.040 currently peaking. So I guess my question is, like, why 0:08:49.080 --> 0:08:52.040 that urgency? What exactly are they worried about here? Is 0:08:52.040 --> 0:08:55.840 it inflation expectations becoming unmoored, is it some sort of 0:08:55.920 --> 0:08:59.360 wage price spiral, or is it something really simple like 0:08:59.559 --> 0:09:02.120 credit city they have to come in and convince people 0:09:02.160 --> 0:09:05.320 that they are serious about prices. Yeah, I think it's 0:09:05.360 --> 0:09:07.440 all of that. Um And you know, there are three 0:09:07.440 --> 0:09:10.640 words that I've been listening to that I find very interesting, 0:09:10.679 --> 0:09:13.080 and the way that they talk about it expeditiously as 0:09:13.120 --> 0:09:16.079 one of the words. Cadence is another word, and then 0:09:16.120 --> 0:09:19.640 there's that softish word. I think that when you combine 0:09:19.679 --> 0:09:22.520 the three of them together, what it says is that 0:09:22.559 --> 0:09:25.120 they want to front load, meaning that they want to 0:09:25.120 --> 0:09:28.079 do it at a specific cadence fifty basis points, and 0:09:28.120 --> 0:09:31.079 then have the optionality after that to be able to 0:09:31.160 --> 0:09:33.839 do whatever they need. You know, Loretta Mester, who I 0:09:33.960 --> 0:09:38.760 mentioned before, I find her talking points very beneficial. They're 0:09:38.880 --> 0:09:41.760 very much on point in terms of, you know, what 0:09:41.840 --> 0:09:44.400 the FED is looking to do. And she talked about 0:09:44.559 --> 0:09:48.120 the optionality question, and so that's what frontloading is supposed 0:09:48.120 --> 0:09:50.840 to do. It's supposed to say, if we at the 0:09:50.840 --> 0:09:54.800 time that we start hiking hike more aggressively in the beginning, 0:09:55.240 --> 0:09:57.560 then we have the option to go zero, we have 0:09:57.559 --> 0:09:59.360 the option to go twenty five, we have the option 0:09:59.400 --> 0:10:02.800 to go fifth. We have more optionality that way. And 0:10:02.840 --> 0:10:05.959 given the fact that our policy acts with a lag, 0:10:06.840 --> 0:10:11.160 then that's beneficial because the stuff that we did three 0:10:11.240 --> 0:10:13.480 or four months ago, we'll start to see that filter 0:10:13.600 --> 0:10:16.640 into the system, and then we might even be able 0:10:16.720 --> 0:10:20.240 to completely miss a meeting. We might be able to 0:10:20.280 --> 0:10:23.040 go that meeting, we might be able to speed it up. 0:10:23.400 --> 0:10:27.439 But by front loading, by going at this specific cadence, 0:10:27.559 --> 0:10:32.160 this fifty basis points cadence, we're giving ourselves more optionality 0:10:32.240 --> 0:10:52.120 rather than less I want to actually go back to 0:10:52.160 --> 0:10:55.360 the first question because there's another component of it. When 0:10:55.360 --> 0:10:57.040 we talk about what is the FED trying to do? 0:10:57.120 --> 0:10:59.680 It is you by raising rage and as you say that, 0:11:00.280 --> 0:11:02.840 it's trying to bring supply and demand into balance and 0:11:02.840 --> 0:11:06.360 a supply constrained environment, it means bring demand down. But 0:11:06.400 --> 0:11:10.960 there's another step, which is what is the transmission mechanism 0:11:11.000 --> 0:11:14.800 between higher rates and bringing demand down? How do you 0:11:14.840 --> 0:11:16.839 think it works or how does the FED thing that 0:11:16.960 --> 0:11:20.480 works mechanically? They had marks, they're like fifty and may 0:11:20.480 --> 0:11:23.720 probably gonna get another. How does the higher rates translate 0:11:23.760 --> 0:11:25.960 into lower demand? Yeah, I mean, and that is the 0:11:26.000 --> 0:11:29.880 tricky question. I mean, that's the dollar question because there 0:11:29.880 --> 0:11:32.640 are a lot of different thoughts about that. It's so 0:11:32.840 --> 0:11:36.520 wild that like this is the primary tool that we 0:11:36.640 --> 0:11:41.040 have in the developed world to manage inflation, which economists 0:11:41.040 --> 0:11:43.920 considered basically to be the top test, and that actually 0:11:43.920 --> 0:11:46.840 we don't really know or have like a clear sustinct 0:11:46.840 --> 0:11:49.120 answer from anyone, but how that works? But any what, 0:11:49.280 --> 0:11:51.640 what's what's the thinking generally on how this works? Well, 0:11:51.720 --> 0:11:54.559 let me throw a curveball into the conversation, because you know, 0:11:54.600 --> 0:11:55.960 every once in a while get a chance to talk 0:11:56.000 --> 0:11:59.240 to Warren Moser, the godfather of mm T. Yeah, and 0:11:59.840 --> 0:12:02.080 as controversial is some of the things he says are. 0:12:02.520 --> 0:12:05.360 The thing that I find the most interesting in the 0:12:05.400 --> 0:12:10.680 controversy is his concept that when the Fed hikes rates, 0:12:10.960 --> 0:12:17.000 they're actually adding interest income to the private sector. So literally, 0:12:17.480 --> 0:12:20.200 yesterday I was walking down the street and I got 0:12:20.200 --> 0:12:23.640 an email. It was from my savings account. The savings 0:12:23.640 --> 0:12:26.480 account said, your interest rate is going up. It's going 0:12:26.520 --> 0:12:29.880 up from like almost nail to a little bit more 0:12:29.880 --> 0:12:35.280 than nil. But that amount that it went up by 0:12:35.679 --> 0:12:40.720 a new team is uh. You know, that potentially could 0:12:40.720 --> 0:12:43.600 add to aggregate demand. So when we talk about interest 0:12:43.679 --> 0:12:48.679 rates going up only working against uh, the economy, it's 0:12:48.720 --> 0:12:53.160 not entirely true. When you look at the mechanisms offen 0:12:53.440 --> 0:12:57.040 what's sort of like the mainstream view of the transmission. Yeah, 0:12:57.040 --> 0:12:59.439 so I think the mainstream view of the transmission mechanism 0:12:59.640 --> 0:13:02.800 is mostly about financial conditions tightening. And you know, there 0:13:02.800 --> 0:13:05.200 are two things in particular that I would think of, 0:13:05.320 --> 0:13:09.120 one as mortgages and interest rates for businesses, and then 0:13:09.160 --> 0:13:13.200 the other is discount rates. So you think about stocks 0:13:13.200 --> 0:13:16.760 and bonds going down because interest rates are going up, 0:13:17.080 --> 0:13:19.840 that's financial conditions tightening. But also when you think about 0:13:19.840 --> 0:13:23.600 mortgage rates going up, when you think about bond yields 0:13:23.640 --> 0:13:27.880 going up, that's also financial conditions tightening. And the biggest 0:13:27.880 --> 0:13:31.240 tricky point for the FED is that the United States 0:13:31.520 --> 0:13:35.600 is an economy, especially in the household sector, that is 0:13:35.800 --> 0:13:40.680 leveraged to fixed rate mortgages. You know, in the UK, 0:13:41.440 --> 0:13:46.400 when you raise interest rates immediately, everyone's mortgages goes up 0:13:46.520 --> 0:13:50.080 relatively quickly. In the United States, there's been a massive 0:13:50.160 --> 0:13:53.480 refive boom that has been stopped out now and so 0:13:53.520 --> 0:13:56.160 there are a lot of people who are at very 0:13:56.280 --> 0:13:59.880 very low thirty year of mortgage rates and so increase 0:14:00.000 --> 0:14:03.760 seen interest rates just a little bit, you know, fifty 0:14:03.800 --> 0:14:07.600 basis points, a hundred basis points may not be enough 0:14:08.000 --> 0:14:11.400 to have a tightening of conditions in that market. That 0:14:11.600 --> 0:14:13.720 is interesting. Does that mean that they have to pull 0:14:14.440 --> 0:14:16.880 other levers or they have to wait for other components 0:14:16.880 --> 0:14:19.680 of financial conditions to start tightening, And you know, things 0:14:19.720 --> 0:14:22.760 like asset prices will feed into that, right right, So 0:14:22.800 --> 0:14:24.880 I mean they're looking at an aggregate picture, and so 0:14:24.920 --> 0:14:29.280 they have to if they want the feed through mechanism 0:14:29.320 --> 0:14:32.080 to work, then they might have to do more or 0:14:32.160 --> 0:14:35.760 get more from one of those other areas, and obviously 0:14:35.800 --> 0:14:38.640 the more that you get, the greater the chance for 0:14:38.800 --> 0:14:42.800 discontinuity where you get sort of liquidity problems, where you 0:14:42.840 --> 0:14:46.120 get crises and things of that nature. Yeah, So this 0:14:46.160 --> 0:14:48.080 is what I was sort of alluding to in the 0:14:48.080 --> 0:14:53.200 intro about market functioning. But it does feel like we 0:14:53.240 --> 0:14:56.480 are in this environment. You know, things are unclear at 0:14:56.600 --> 0:14:58.480 the best of times, and no one seems to know 0:14:58.520 --> 0:15:01.960 how inflation actually works or how interest rates actually worked 0:15:01.960 --> 0:15:06.240 to tame inflation. And then add in this unusual situation, uh, 0:15:06.480 --> 0:15:10.800 post COVID, where we have supply issues. Uh, we have 0:15:10.920 --> 0:15:13.600 things just being very different to how they were before. 0:15:14.280 --> 0:15:16.840 And it feels like that there's a potential here for 0:15:16.920 --> 0:15:19.480 something to go wrong, or for something to break, or 0:15:19.520 --> 0:15:22.520 for the FED to overdo it in some way. So 0:15:22.560 --> 0:15:25.400 how do you think they're thinking about and trying to 0:15:25.520 --> 0:15:29.440 manage that particular risk? You know, that is a very 0:15:29.440 --> 0:15:33.960 good question, because it's not clear that they have a 0:15:34.080 --> 0:15:37.320 specific strategy on that. Uh. The thing that I found 0:15:37.360 --> 0:15:42.080 most interesting from the FED recently is that some of 0:15:42.080 --> 0:15:44.080 the speakers, and I think actually most of the speakers 0:15:44.120 --> 0:15:48.640 that I've heard including the most hawkish speaker, mentioned the 0:15:48.840 --> 0:15:51.760 tightening of financial conditions. And I think that the terminology 0:15:51.800 --> 0:15:54.680 that Jim Bullard, who is the St. Louis FED President 0:15:54.920 --> 0:15:58.760 and who is uh one of the more openly hawkish members, 0:15:59.120 --> 0:16:02.600 the terminology use was quite a bit or you know, 0:16:02.680 --> 0:16:06.560 a lot, So to me, that's sort of a messaging 0:16:06.720 --> 0:16:09.680 that it sort of undercuts this whole thing that we're 0:16:09.720 --> 0:16:12.800 moving expeditious lee and will you know, we want to 0:16:12.840 --> 0:16:18.280 soft this potentially mild recession landing. But at the same time, 0:16:18.360 --> 0:16:22.520 it tells you that they're looking at financial conditions so 0:16:22.520 --> 0:16:25.440 they won't let things unravel. Uh, is I think what 0:16:25.480 --> 0:16:27.120 the messaging is that. I mean, that's the best they 0:16:27.120 --> 0:16:29.440 can do. So this is something Tracy and I were 0:16:29.480 --> 0:16:33.080 actually just talking about this at lunch, and you know, 0:16:33.480 --> 0:16:36.280 stock trading is really hard and I could never do 0:16:36.360 --> 0:16:38.840 it professionally, and I'm glad that's not my job. But 0:16:39.560 --> 0:16:42.320 you know, stocks are financial conditions or the you know, 0:16:42.360 --> 0:16:44.880 when stocks go up, that represents a loosening of financial 0:16:44.920 --> 0:16:49.080 conditions when they go down. In some sense, the FED 0:16:49.160 --> 0:16:54.920 basically said by saying that a we wanna defeat inflation 0:16:55.080 --> 0:16:58.640 by tightening policy and be our policy works through tightening 0:16:58.680 --> 0:17:02.800 financial conditions. In some sense, the FED sort of told 0:17:02.800 --> 0:17:04.959 you that they were going to make stocks go down, right, 0:17:05.280 --> 0:17:08.520 And you know, I think it's interesting because the number 0:17:08.560 --> 0:17:12.280 of former FED officials and people in the know who 0:17:12.280 --> 0:17:15.879 have been telling the FED, and Build Dudley in particular, 0:17:16.119 --> 0:17:19.880 that by the way, if stocks aren't going down, you're 0:17:19.920 --> 0:17:22.680 really not tightening plants of conditions. I think it's interesting 0:17:22.920 --> 0:17:28.520 because clearly they're listening to what Bill Dudley has to say. Well, 0:17:28.520 --> 0:17:33.320 and then the other follow on that striking is I 0:17:33.359 --> 0:17:36.000 think if you look at like corporate behavior, you can 0:17:36.040 --> 0:17:40.359 see a pretty clear link between a following stock market 0:17:40.600 --> 0:17:44.040 and hiring and decisions to hold back on hiring. And 0:17:44.119 --> 0:17:47.359 so we know that the most intense um selling in 0:17:47.400 --> 0:17:49.359 the stock market is a lot of these high flying 0:17:49.840 --> 0:17:53.840 tech stocks, and one after another, you're reading these memos 0:17:53.880 --> 0:17:56.800 like we're putting on a hiring freeze because investors want 0:17:56.800 --> 0:17:58.560 to see free cash flow. They don't want us to 0:17:58.960 --> 0:18:02.119 spend a lot. So to the extent that the goal 0:18:02.160 --> 0:18:04.520 of for the FED is to have the softish landing 0:18:04.600 --> 0:18:07.560 and to sap demand. And one way you sap demand 0:18:08.000 --> 0:18:12.560 is by weakening the labor market. Maybe increasing unemployment. You 0:18:12.600 --> 0:18:16.440 can draw a pretty straight line between they've tightened, they've 0:18:16.520 --> 0:18:20.720 hit stocks, and stocks the companies who stocks have fallen 0:18:20.720 --> 0:18:24.520 are slowing hiring, right, and so unemployment. I think Bill 0:18:24.600 --> 0:18:28.600 Dudley at one point during the last business cycle, when 0:18:28.640 --> 0:18:31.320 he was a FED official, you know, New York Fed president, 0:18:31.480 --> 0:18:35.200 he mentioned something about to load two low unemployment, low 0:18:35.280 --> 0:18:37.880 low unemployment, and I think he said too low unemployment. 0:18:38.440 --> 0:18:43.440 So you know, mentally, this whole Phillips curve thinking, which 0:18:43.480 --> 0:18:46.720 is what that's representative of. It says that you need 0:18:46.800 --> 0:18:49.480 to throw people out of work and uh, and that's 0:18:49.520 --> 0:18:52.159 going and that's ultimately how demand gets slowed down. So 0:18:52.160 --> 0:18:56.240 when we think about the transmission mechanism, ultimately it's about 0:18:56.280 --> 0:19:01.320 people losing their jobs, which is difficult just on a 0:19:01.400 --> 0:19:05.240 human level to think about. That's that's our transmission mechanism. 0:19:05.400 --> 0:19:07.520 So one thing I was reading just before I came 0:19:07.560 --> 0:19:10.280 in here, there's a big paper published by the Bank 0:19:10.320 --> 0:19:12.960 for International Settlements. Actually I think they called it a book, 0:19:13.240 --> 0:19:15.959 and it is very long, and it's all about inequality 0:19:16.240 --> 0:19:18.640 in recent years, the fact that inequality has been going 0:19:18.760 --> 0:19:21.240 up and what it means for central banks and the 0:19:21.280 --> 0:19:26.160 contention there is that inequality actually makes monetary policy less 0:19:26.160 --> 0:19:29.920 effective because you know a lot of people are sort 0:19:29.960 --> 0:19:33.879 of the wealthiest percentile or the wealthiest chunk of the 0:19:33.920 --> 0:19:38.639 population are insulated from things like mortgage rates going up 0:19:38.680 --> 0:19:42.040 to your point earlier. So I guess my question is, is 0:19:41.160 --> 0:19:45.879 is there a better way to try to bring supply 0:19:45.920 --> 0:19:51.280 and demand into balance than a pure blunt interest rate hike. Yeah, 0:19:51.480 --> 0:19:55.879 And it's to me that question automatically makes you think 0:19:55.920 --> 0:19:58.600 about fiscal and monetary policy and some of the debates 0:19:58.640 --> 0:20:01.719 that you might have about what you should do and 0:20:01.760 --> 0:20:05.879 where there is a quasi fiscal monetary policy where the 0:20:05.880 --> 0:20:08.720 line gets drawn, etcetera. And I think what we've seen 0:20:09.520 --> 0:20:13.960 is that the FED believes, and it's probably true that 0:20:14.720 --> 0:20:21.280 these other substitute policies like quantitative easy are squishy, They're 0:20:21.320 --> 0:20:25.120 not as easy to deal with, and there are externalities 0:20:25.320 --> 0:20:27.520 like we saw with the repot crisis in two thousand 0:20:27.600 --> 0:20:31.320 and nineteen, that they wish to avoid. So quantitative tightening 0:20:32.359 --> 0:20:34.960 is seen as an adjunct to the primary tools. I 0:20:34.960 --> 0:20:37.359 think there between a rock and a hard place in 0:20:37.440 --> 0:20:42.119 terms of coming up with other mechanisms regulatory certainly, but 0:20:42.280 --> 0:20:45.680 you know this hard blunt instrument really is what they have, 0:20:46.200 --> 0:20:48.280 and then you ask yourself what else can be done 0:20:48.280 --> 0:20:53.240 from a policy perspective, and that obviously begs the fiscal question. UH. 0:20:53.280 --> 0:20:56.440 I think what we're seeing, especially with the degree of 0:20:56.720 --> 0:21:01.040 in the United States at least wrangling discord ward that 0:21:01.520 --> 0:21:04.680 if you want things to get done because you're behind 0:21:04.680 --> 0:21:09.320 the curve or because inflation is moving quickly, it's very 0:21:09.320 --> 0:21:13.840 difficult to think that fiscal is a replacement for monetary policy. 0:21:13.840 --> 0:21:16.800 And I think that one of the reasons that we've 0:21:16.840 --> 0:21:21.240 been leaning on monetary policy, and these are unelected officials obviously, 0:21:21.800 --> 0:21:25.639 is because they can get it done very quickly. Well, 0:21:25.680 --> 0:21:28.920 and if if we sort of accept and I don't 0:21:28.920 --> 0:21:31.080 know that we necessarily should, but if we sort of 0:21:31.119 --> 0:21:35.800 accept this premise that people need to be thrown out 0:21:35.800 --> 0:21:39.480 of work in order to bring supply and demand into balance, 0:21:39.960 --> 0:21:43.960 I guess at some level politicians maybe like getting doubt 0:21:44.000 --> 0:21:48.080 source that to UH, unelected officials at the at the 0:21:48.119 --> 0:21:51.760 Federal Reserve, rather than having to make a policy decision 0:21:51.800 --> 0:21:54.560 that would have that effect. Yeah, I think that you know, 0:21:55.480 --> 0:22:00.000 we we would need a complete rework of our police, 0:22:00.000 --> 0:22:03.480 little cool policy making institutions, and not just in the 0:22:03.560 --> 0:22:07.520 United States, but I would say generally speaking in western 0:22:07.720 --> 0:22:11.959 or in industrialized economies. So where do you stand and 0:22:12.040 --> 0:22:16.320 what is history tell us about this prospect of either 0:22:16.400 --> 0:22:19.840 the soft or the soft dish landing, because there are 0:22:19.880 --> 0:22:21.879 some few of its like this is a fantasy. It 0:22:21.920 --> 0:22:23.840 never happens every time they go into one of these 0:22:23.920 --> 0:22:26.600 hiking cycles, especially with inflation as high as it is 0:22:26.880 --> 0:22:28.679 eight percent, so they have a lot of work to 0:22:28.720 --> 0:22:31.040 do to bring into the target. And so the argument is, 0:22:31.400 --> 0:22:35.280 there is no historical precedent for this much of an 0:22:35.280 --> 0:22:39.200 inflation collapse, without a recession, without a meaningful increase in 0:22:39.240 --> 0:22:43.160 the unemployment rate. To my mind, the only counter argument is, yeah, 0:22:43.160 --> 0:22:45.399 maybe there's no historical precedent for that. There's also no 0:22:45.520 --> 0:22:48.800 historical precedent really for a pandemic and this sort of 0:22:48.920 --> 0:22:52.880 extremely strange business cycle or this cycle that we've seen 0:22:52.880 --> 0:22:56.320 over the last two years. But in your reading of history, 0:22:56.640 --> 0:23:00.960 is the soft dish landing possible? I would say that's 0:23:00.960 --> 0:23:04.680 not my base case. I'll give you two things that 0:23:04.680 --> 0:23:09.520 I'm looking at, which some of the Fed officials point to, 0:23:09.680 --> 0:23:13.199 and the seventies. So with regard to ninety four, one 0:23:13.240 --> 0:23:14.680 of the reasons that we look at that is because 0:23:14.720 --> 0:23:17.720 that was a soft ish landing. Not just softish, it 0:23:17.800 --> 0:23:20.399 was soft in the sense that, you know, you had 0:23:20.400 --> 0:23:24.160 a fourteen percent correction in the NASDAC at that particular juncture, 0:23:24.520 --> 0:23:27.359 interest rates went up, people were thrown out of work. 0:23:28.800 --> 0:23:31.880 You know what we've the financial condition adjustment that we've 0:23:31.920 --> 0:23:35.280 seen thus far is commensurate with that particular period. It 0:23:35.280 --> 0:23:39.679 would be nice if that were the analog. There there 0:23:39.680 --> 0:23:42.520