WEBVTT - Why Austan Goolsbee Is Still Concerned About Inflation 0:00:02.720 --> 0:00:16.480 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.560 --> 0:00:22.239 Hello and welcome to another episode of the Odd Lots podcast. 0:00:22.320 --> 0:00:24.640 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:24.840 --> 0:00:29.200 So, Tracy, we are recording this on Thursday, August twenty First, 0:00:29.240 --> 0:00:32.200 we are here at Jackson Hall. I need to note 0:00:32.400 --> 0:00:35.520 at the beginning we're recording this before the big Polo speech. 0:00:35.560 --> 0:00:37.280 I don't really think it matters too much because this, 0:00:37.640 --> 0:00:39.280 but I just want to like get that out of 0:00:39.280 --> 0:00:40.680 the way a little timing context. 0:00:41.600 --> 0:00:44.960 We're not going to talk about that speech for obvious reasons. 0:00:44.960 --> 0:00:46.239 We don't know what's going to be said. But what 0:00:46.280 --> 0:00:48.920 we can talk about is the economy right now. That's 0:00:48.960 --> 0:00:51.519 not going to change between you know, right now and 0:00:51.640 --> 0:00:52.640 tomorrow morning. 0:00:52.400 --> 0:00:55.800 Hopefully when Rivers comes out. Probably it's not going to 0:00:56.160 --> 0:00:58.800 change much. But you know, we've been very lucky. We've 0:00:58.800 --> 0:01:01.360 been talking to a lot of regional Fed presidents and 0:01:01.480 --> 0:01:03.240 it's really cool that we have access to them. 0:01:03.480 --> 0:01:05.520 Yes, and it's good to get a range of opinions 0:01:05.520 --> 0:01:08.679 as well, because as we've been discussing, the economy does 0:01:08.720 --> 0:01:10.880 look very uncertain right now, and you could make a 0:01:10.920 --> 0:01:14.760 case for everything from a rate cut to holding to 0:01:15.240 --> 0:01:19.520 possibly even maybe hiking, which you know Jeff Schmidt kind 0:01:19.520 --> 0:01:21.200 of alluded to when we interviewed him. 0:01:21.520 --> 0:01:24.080 Yeah, No, it was pretty extraordinary that, like, look, you 0:01:24.080 --> 0:01:26.800 could make a point that stock markets in your record highs, 0:01:27.120 --> 0:01:30.560 credit spreads in your record lows, employment low, and inflation 0:01:30.680 --> 0:01:33.280 still warm where we talk about RAE cuts. Anyway, we 0:01:33.360 --> 0:01:36.160 got to keep getting more takes and perspectives on this 0:01:36.240 --> 0:01:39.399 from the people who actually think about this the best. 0:01:39.440 --> 0:01:42.000 And can we get a prize if we interview every 0:01:42.080 --> 0:01:42.800 FED president? 0:01:43.400 --> 0:01:44.400 Well we should try. 0:01:44.400 --> 0:01:45.720 There's got to there should be a name for that. 0:01:45.840 --> 0:01:48.240 But we have a guest, perfect guest, someone we've talked 0:01:48.240 --> 0:01:51.600 to on the podcast before. Very excited to have live 0:01:51.720 --> 0:01:55.880 here in Jackson Hall, past Oddlot's guests, Chicago Fed President 0:01:55.880 --> 0:01:57.920 Austin Gouldsby. So, Austin, thank you so much. 0:01:57.920 --> 0:01:59.880 I'm gonna give you a prize. Now, I drove you. 0:02:00.520 --> 0:02:03.200 I just got here. It just got in an hour 0:02:03.280 --> 0:02:06.960 and a half ago. I believe that I've driven the 0:02:07.000 --> 0:02:10.680 farthest of anybody to begin here. And one of the 0:02:10.720 --> 0:02:16.000 things I did on the way was finish my fiftieth 0:02:16.080 --> 0:02:20.840 state on North Dakota. And it turns out there's a collise. 0:02:20.880 --> 0:02:23.560 A lot of people North dakost their last day and 0:02:23.600 --> 0:02:27.280 there's officially a club called the Best for Last Club, 0:02:27.840 --> 0:02:31.040 and I joined the Best for Last club. So who's 0:02:31.080 --> 0:02:34.640 going to be your twelfth Reserve bank president? They're going 0:02:34.680 --> 0:02:35.440 to get a prize. 0:02:35.480 --> 0:02:37.920 Congratulations. I saw your road trip, like on Twitter. I 0:02:37.919 --> 0:02:38.959 saw that you're posting. 0:02:39.080 --> 0:02:41.680 So there are some amazing national parks on the on 0:02:41.720 --> 0:02:41.960 the way. 0:02:41.960 --> 0:02:44.919 We're a great country, don't Yeah, we got amazing country. 0:02:46.080 --> 0:02:48.560 How's the economy look at you these days? 0:02:48.600 --> 0:02:53.080 Well, depends which direction you're facing. As you know, I 0:02:53.200 --> 0:02:57.760 thought for Q one, coming into April, it was looking 0:02:57.800 --> 0:03:02.160 pretty good. We had to stay bowl full employment. The 0:03:02.240 --> 0:03:06.919 unemployment rate a little above four inflation while having been 0:03:06.960 --> 0:03:11.040 above the target for four years, looked to me like 0:03:11.080 --> 0:03:13.240 it was heading It was coming down and down and 0:03:13.280 --> 0:03:16.799 down and was headed to two percent, and so I thought, 0:03:17.200 --> 0:03:22.080 reasonable approximation rates need to start heading down to where 0:03:22.080 --> 0:03:24.040 we think they're going to settle, which is a fair 0:03:24.080 --> 0:03:28.280 bit below where where we were, then where we are today. 0:03:28.480 --> 0:03:31.399 Then we go through some bumps. I've heard of them, 0:03:31.440 --> 0:03:33.360 through a bunch of dirt in the air. All of 0:03:33.360 --> 0:03:36.680 this stuff that it's like is the economy still where 0:03:36.720 --> 0:03:40.080 it was in January February March, or are we on 0:03:40.200 --> 0:03:46.840 some different path. I still closet the hope slash think 0:03:47.520 --> 0:03:53.280 that we're where we were before, and that tariffs important 0:03:53.280 --> 0:03:57.000 goods are only eleven percent of GDP. If they'll kind 0:03:57.040 --> 0:04:00.560 of stay in their lane, if we don't keep escalating them, 0:04:01.040 --> 0:04:05.680 if we don't willing nearly apply them to intermediate goods 0:04:05.720 --> 0:04:10.000 so that they turn into higher cost of production, it'd 0:04:10.000 --> 0:04:14.160 probably be okay. And we had a couple of months 0:04:14.280 --> 0:04:19.560 of benign inflation numbers, and then we got the last 0:04:19.600 --> 0:04:24.360 inflation number, which is a little less benign, and the 0:04:24.480 --> 0:04:27.480 rise of services inflation through me for a little bit 0:04:27.480 --> 0:04:31.440 of a cross current. So I'd say I've still got 0:04:31.440 --> 0:04:34.720 one eye on inflation. We're now four and a half 0:04:34.800 --> 0:04:37.920 years above the target. It's one thing to be four 0:04:37.920 --> 0:04:40.240 and a half years above the target, but we're still 0:04:40.279 --> 0:04:43.920 clearly trending down. If we start trending up and you 0:04:44.080 --> 0:04:48.680 start seeing inflation rising in non tariff affected categories like 0:04:48.760 --> 0:04:50.760 what we saw in services, then am I get a 0:04:50.800 --> 0:04:54.440 little more nervous on that side? And on the job side, 0:04:54.760 --> 0:04:58.480 I still feel like we're something like stable full employment. 0:04:59.480 --> 0:05:04.320 The re visions they are concerning. We also know that 0:05:04.400 --> 0:05:09.280 the labor supply and population growth when there's big immigration 0:05:09.880 --> 0:05:15.080 things happening, add a lot of noise to just monthly payroll. 0:05:15.279 --> 0:05:18.280 So I don't want to over index on that. I 0:05:18.360 --> 0:05:23.120 want to take multiple measures. The four horsemen of truth 0:05:23.160 --> 0:05:27.800 and justice, in my view, are rates. They're less susceptible 0:05:28.200 --> 0:05:32.600 to the immigration and population labor support problems. They're the 0:05:32.680 --> 0:05:36.800 unemployment rate, the hiring rate, the layoff rate, the vacancy rate. 0:05:37.440 --> 0:05:40.960 If you look at those rates, three of them still 0:05:41.080 --> 0:05:44.400 say this is basically full employment, and it's looking fine. 0:05:44.480 --> 0:05:48.880 It looks very similar to twenty eighteen, twenty nineteen, a 0:05:48.920 --> 0:05:53.720 strong job market. The hiring rate is low, and if 0:05:53.720 --> 0:05:57.720 you talk to parents of kids graduating from college, you 0:05:57.800 --> 0:06:00.760 hear it's tough to get a job. We're in a 0:06:00.920 --> 0:06:06.960 low separations, low hiring environment. But that might be full employment. Okay. 0:06:07.040 --> 0:06:09.720 So that's why I say I don't come to it 0:06:10.480 --> 0:06:16.520 averse to cutting of rates. If we get through this 0:06:17.240 --> 0:06:20.520 and we can get some stuff settled on the tariff side, 0:06:21.520 --> 0:06:24.080 we might easily still be on the golden path. It 0:06:24.160 --> 0:06:27.680 might still make perfect sense to keep going down. But 0:06:27.839 --> 0:06:30.120 we've just got a couple of flags at the same time. 0:06:30.720 --> 0:06:32.960 I think you just hit all of our talking points 0:06:33.080 --> 0:06:37.799 in that one. We will dig into all these things, 0:06:37.880 --> 0:06:40.680 but just before we do, I have one question. Maybe 0:06:40.720 --> 0:06:44.320 it's a bit like asking someone who their favorite child is, 0:06:44.560 --> 0:06:47.360 But what's occupying most of your headspace at the moment? 0:06:47.960 --> 0:06:50.839 Felt to say Chicago is your favorite bank? And I 0:06:50.839 --> 0:06:52.960 was going to say good choice, good choice. 0:06:53.080 --> 0:06:54.919 No, is it inflation or the labor market? What are 0:06:54.960 --> 0:06:56.400 you thinking most about? 0:06:58.600 --> 0:07:03.000 I'd say inflation. I'm still thinking inflation. If we had 0:07:03.680 --> 0:07:06.920 four be nine months of inflation that looked like those 0:07:07.040 --> 0:07:10.920 kind of early ones, that would have helped me be 0:07:11.160 --> 0:07:14.160 much more comfortable with the idea. It's not going to 0:07:14.200 --> 0:07:17.800 be you know, tariff state in their eleven percent lane. 0:07:17.920 --> 0:07:20.960 People aren't freaking out. It's gonna be fine. Let's just 0:07:21.040 --> 0:07:24.320 go think about the employment side. Now that we are 0:07:24.520 --> 0:07:28.440 seeing a couple of bumps and things ticking up, I 0:07:28.520 --> 0:07:32.400 fear we we gotta think about that inflation side. Just 0:07:32.480 --> 0:07:34.520 given what the history was. If we were having this 0:07:34.600 --> 0:07:39.440 discussion in twenty nineteen and we hadn't had the team 0:07:39.560 --> 0:07:43.480 transitory and the very same arguments like nah, nah, this 0:07:43.600 --> 0:07:47.160 is a one time thing, and so the inflation should 0:07:47.200 --> 0:07:50.120 just go away real quickly. If we hadn't had that, 0:07:50.880 --> 0:07:53.320 I would be much more comfortable making that argument. But 0:07:53.480 --> 0:07:56.679 now that I don't even like using that word. 0:07:56.800 --> 0:07:59.240 Plus, everyone has experienced inflation. 0:07:59.080 --> 0:08:02.920 Everyone's experience, so they're more hyped up. They're more amped up. 0:08:03.080 --> 0:08:05.600 Not hyped up there, they're amped up to see it. 0:08:05.920 --> 0:08:10.080 And look, you see this consumer confidence numbers going down, 0:08:10.120 --> 0:08:15.640 your somewhat significantly survey measures of inflation expectations, which I, 0:08:16.120 --> 0:08:20.080 in fairness always said I put less weight on than 0:08:20.160 --> 0:08:23.640 market based measures. That said, I don't put zero weight 0:08:23.720 --> 0:08:27.360 on them. And if you see people in surveys as 0:08:27.440 --> 0:08:29.360 what do you think inflation is going to be over 0:08:29.400 --> 0:08:33.280 the next one year, two years, now even longer, they're 0:08:33.840 --> 0:08:37.120 saying it's higher. So we got to think about that. 0:08:37.320 --> 0:08:40.280 You mentioned those labor market revisions, and when we got 0:08:40.280 --> 0:08:43.600 that last job supporters mediocre, but even more than mediocre, 0:08:43.600 --> 0:08:45.920 as it was the pull down of the prior two months. 0:08:46.360 --> 0:08:48.640 And there's actually it strikes me as two ways of 0:08:48.679 --> 0:08:51.520 looking at this. One is, oh, you know what, the 0:08:51.720 --> 0:08:55.920 labor market is really decelerating. Probably we have to have 0:08:55.960 --> 0:08:58.320 cut soon if we want to hold on to full employment. 0:08:58.640 --> 0:09:01.120 But there's another tig. It actually has come up in 0:09:01.160 --> 0:09:05.360 a couple of recent episodes, which is, well, yeah, that 0:09:05.520 --> 0:09:07.480 was the post April second volatility. 0:09:07.679 --> 0:09:09.439 We're through that now that. 0:09:09.559 --> 0:09:12.880 Actually we have more tariff certainty than we certainly have 0:09:12.920 --> 0:09:14.400 more terre if certainty. 0:09:13.960 --> 0:09:14.520 Than we did. 0:09:14.960 --> 0:09:17.080 That was maybe the trough. We got an S and 0:09:17.080 --> 0:09:20.400 P flash PMI today that actually showed a positive employment rading. 0:09:20.800 --> 0:09:23.600 This came up in our conversation with Jeff Schmid, who's 0:09:23.640 --> 0:09:27.040 throwing this event for the Kansas City event, that maybe 0:09:27.080 --> 0:09:30.480 that was the cyclical low for the year. Just the 0:09:30.559 --> 0:09:31.600 craziness of those. 0:09:31.440 --> 0:09:34.199 Couple of months fascinating. I thought, you're going to go 0:09:34.280 --> 0:09:37.120 totally different. Okay, So those are two schools of thought, 0:09:37.960 --> 0:09:44.200 both of which are premised on using monthly payroll as 0:09:44.200 --> 0:09:46.360 an indicator of where we are in the business cycle, 0:09:46.520 --> 0:09:53.080 and in normal times that's perfectly appropriate. My third category 0:09:53.600 --> 0:09:59.640 is at moments when there are population growth shifts and 0:09:59.720 --> 0:10:05.960 labor supply, especially from immigration, be careful using monthly payroll 0:10:07.760 --> 0:10:10.880 the business site that wasn't one of them because and 0:10:11.080 --> 0:10:14.520 I have no is it remorse not remorse? I have 0:10:14.600 --> 0:10:18.440 no I don't feel guilty talking about this topic now, 0:10:18.600 --> 0:10:21.360 because you can go back and look a year and 0:10:21.360 --> 0:10:25.960 a half ago and more, when we were getting jobs 0:10:26.040 --> 0:10:29.560 numbers that were far higher than what we thought the 0:10:29.600 --> 0:10:33.400 break even was. There was a one group that was saying, 0:10:33.760 --> 0:10:37.719 we're about to have inflation kick way back up, because 0:10:38.280 --> 0:10:42.079 one hundred and eighty thousand jobs a month is faster 0:10:42.640 --> 0:10:45.120 than break even. Break even is like eighty five thousand 0:10:45.160 --> 0:10:49.080 a month, So we're overheating. And at that time I said, 0:10:50.040 --> 0:10:53.840 not pay no attention, but pay less attention than you 0:10:53.960 --> 0:10:57.240 normally would to what the payroll and jobs numbers say, 0:10:57.480 --> 0:11:00.520 because we know there's a whole bunch of immigrant that's 0:11:00.559 --> 0:11:03.680 happening behind the scenes that is not showing up yet. 0:11:04.320 --> 0:11:07.680 Now when we look back, everybody says, oh, yeah, obviously 0:11:07.800 --> 0:11:11.640 that's why we generate as many jobs. This is just 0:11:11.720 --> 0:11:16.480 the exact same idea, but in reverse. Now it may 0:11:16.600 --> 0:11:20.600 prove not to be true. This might be an indicator 0:11:20.640 --> 0:11:23.240 of the business cycle. But we learned the last time 0:11:23.240 --> 0:11:29.880 around that those four horsemen of truth were rates, not aggregates. Okay, 0:11:29.960 --> 0:11:33.520 so if you don't know what the population growth rate is, 0:11:34.040 --> 0:11:37.600 or if it's different than what you expected, be extra 0:11:37.800 --> 0:11:43.720 suspicious about total payroll, employment, and total GDP growth. So 0:11:44.360 --> 0:11:48.280 if you started to see GDP growth overall is slowing down, 0:11:48.400 --> 0:11:54.120 but the components don't really suggest that, or if you 0:11:54.320 --> 0:11:59.120 start seeing payroll growth you characterize it as mediocre. I 0:11:59.120 --> 0:12:02.559 don't think it's like seventy five thousand that's right around 0:12:02.600 --> 0:12:07.000 the break. Even if you're seventy five thousand plus or 0:12:07.040 --> 0:12:09.920 minus one hundred thousand, which is normally what you are 0:12:10.320 --> 0:12:14.640 for monthly payroll, you're gonna get months where you have 0:12:15.120 --> 0:12:18.679 low payroll. And then if you add this immigration thing 0:12:18.720 --> 0:12:21.000 on top of it, Like I say, I'm not saying 0:12:21.080 --> 0:12:25.000 ignore it, I'm just saying, be very careful. I was 0:12:25.520 --> 0:12:28.200 a little not puzzled, but I was a little concerned 0:12:28.640 --> 0:12:33.559 that the market reaction seemed to be let's take our 0:12:33.760 --> 0:12:39.280 understanding of monthly payroll numbers circa twenty eighteen and say 0:12:39.840 --> 0:12:42.320 that must mean we're on the verge of recession. If 0:12:42.400 --> 0:12:45.160 that's where your head is that you say, well, a 0:12:45.240 --> 0:12:48.839 low monthly payroll in the past has been an indicator 0:12:49.440 --> 0:12:53.760 the beginning of recession, then you got to explain why 0:12:53.800 --> 0:12:56.600 these other ones don't show that. Why is the layoff 0:12:56.720 --> 0:12:59.679 rate as low as it is. You haven't seen it 0:12:59.760 --> 0:13:03.280 up to can layoffs. The vacancy rate is actually rising 0:13:03.320 --> 0:13:08.439 a little and is better than it was in twenty nineteen. 0:13:08.880 --> 0:13:12.480 I think. So this doesn't look like a normal business 0:13:12.520 --> 0:13:15.720 cycle yet if it starts to I'll be the first 0:13:15.760 --> 0:13:19.160 one saying this is what the beginning of a recession 0:13:19.200 --> 0:13:19.600 looks like. 0:13:19.920 --> 0:13:23.000 So the idea is that weaker payrolls can be offset 0:13:23.240 --> 0:13:26.120 or are being offset by weaker labor supply because we're 0:13:26.120 --> 0:13:28.080 getting less immigration, so the break even. 0:13:27.920 --> 0:13:29.960 Rate is at the break evenness it is less. 0:13:30.080 --> 0:13:34.280 Yeah, okay, you mentioned the market reaction. Just then, can 0:13:34.320 --> 0:13:36.000 we talk a little bit more about the market, because, 0:13:36.040 --> 0:13:38.959 as Joe mentioned, you know, stocks are still kind of 0:13:39.200 --> 0:13:42.000 nearer their record highs. I know they've been falling a 0:13:42.000 --> 0:13:45.199 bit this week. Credit spreads at like a twenty seven 0:13:45.280 --> 0:13:49.320 year low. I still hear FED officials talk about rates 0:13:49.360 --> 0:13:53.080 being restrictive even though inflation is still above target. But 0:13:53.120 --> 0:13:55.160 when I look at the market, when I look at 0:13:55.200 --> 0:13:58.760 financial conditions, it doesn't look that restrictive to me. 0:14:00.040 --> 0:14:05.199 Careful, we're just in the weird glass onion version of 0:14:05.240 --> 0:14:09.800 the same discussions we've been having for several years now 0:14:10.200 --> 0:14:12.360 that I've been in the Fed. I'm coming on three years. 0:14:13.480 --> 0:14:18.080 At that time, it was positive supply shocks, and the 0:14:18.160 --> 0:14:22.400 whole question was are we about to reoverheat? Do we 0:14:22.480 --> 0:14:25.240 need to maintain do we need to keep raising, Do 0:14:25.240 --> 0:14:27.240 we need to maintain the rates this high? Or can 0:14:27.280 --> 0:14:32.560 we start cutting. I kind of think that a large 0:14:32.600 --> 0:14:38.320 component of what's in expectations and what's in the market's 0:14:38.320 --> 0:14:43.640 reaction is the reflection problem. That if they think that 0:14:43.680 --> 0:14:49.120 the FED is going to succeed, then you could see 0:14:49.160 --> 0:14:53.760 conditions loosen, but that wouldn't be a reason that the 0:14:53.880 --> 0:14:59.480 FED should raise necessarily because they're premised on thinking that 0:14:59.520 --> 0:15:02.080 it's going to work. That's what I was saying before, 0:15:02.080 --> 0:15:04.920 and I kind of now think in the same way. 0:15:05.120 --> 0:15:09.360 It might be an indication. But if you just look 0:15:09.360 --> 0:15:12.840 at rates and you look at kind of the traditional 0:15:13.920 --> 0:15:18.560 credit channels of monetary policy, I still think that rates 0:15:18.640 --> 0:15:22.680 are relatively restrictive. And so that's why I say, if 0:15:22.720 --> 0:15:26.240 you start to see deterioration in the labor market, you 0:15:26.280 --> 0:15:29.800 start to see layoffs going up, and it starts looking 0:15:29.840 --> 0:15:33.440 more like a the turning point in the labor market, 0:15:34.320 --> 0:15:37.080 then I think we're going to have to seriously contemplate 0:15:37.320 --> 0:15:41.880 cutting of rates. If we're in an environment where we're 0:15:41.960 --> 0:15:45.960 actually in pretty stable full employment and the only thing 0:15:46.000 --> 0:15:50.440 that's happening is population is making the break even monthly 0:15:50.560 --> 0:15:56.280 jobs number forty thousand instead of one hundred thousand, and 0:15:56.640 --> 0:15:59.200 inflation is going up in a bunch of categories that 0:15:59.240 --> 0:16:02.600 are not Terear related. Now, we got to be a 0:16:02.600 --> 0:16:04.440 little more circumspective. 0:16:19.760 --> 0:16:21.280 So I want to ask a question. It's something that 0:16:21.320 --> 0:16:25.040 I'm very increasingly interested in and want to talk to 0:16:25.080 --> 0:16:28.080 a lot more people about, et cetera. But their aspects 0:16:28.080 --> 0:16:29.800 of this economy that, as you say, may kind of 0:16:29.800 --> 0:16:33.120 resemble twenty eighteen, twenty nineteen, et cetera. One thing that 0:16:33.160 --> 0:16:36.640 strikes me it's very different is the long term rate 0:16:36.920 --> 0:16:40.560 and the implied therefore what people will call the neutral 0:16:40.640 --> 0:16:43.600 rate or whatever. And maybe rate cuts are coming soon, 0:16:43.640 --> 0:16:45.800 but the market is not expecting at deep cutting cycle 0:16:45.800 --> 0:16:49.520 of that terminal rates. What's changed? What's the fundamental difference 0:16:49.720 --> 0:16:52.640 in twenty twenty five verse twenty eighteen such that for 0:16:52.720 --> 0:16:56.040 the Fed to hit it's two percent inflation target, the 0:16:56.080 --> 0:16:58.720 market is pricing in so much higher rates than what 0:16:58.840 --> 0:17:00.240 it had anticipated. 0:17:00.240 --> 0:17:03.400 To COVID, I don't I mean, I should ask you, 0:17:03.400 --> 0:17:08.160 You've talked a lot of no. I would say there's 0:17:08.200 --> 0:17:11.520 one way to look at that that if you asked historically, 0:17:12.040 --> 0:17:15.960 which of those is weird? Twenty eighteen, twenty nineteen, what's weird? 0:17:16.240 --> 0:17:18.320 You know what I mean? Like the lower rates now 0:17:18.400 --> 0:17:23.040 are look very, very similar to kind of historical patterns. 0:17:23.600 --> 0:17:29.000 There's a whole tremendous almost industry in research trying to 0:17:29.080 --> 0:17:33.800 diagnose that. And that bleeds into the question of are 0:17:33.840 --> 0:17:38.760 we going back to super low rates ultra low rates 0:17:39.320 --> 0:17:44.360 because is it global savings glut? Is there something happening 0:17:44.400 --> 0:17:48.480 with productivity? Do they think demand is going to be low? 0:17:49.640 --> 0:17:53.080 Is there a feeling that Treasury is going to have 0:17:53.119 --> 0:17:55.520 to issue so much debt? I mean, there's been a 0:17:55.520 --> 0:17:59.600 big increase intent to GDP ratios worldwide. I do find 0:17:59.640 --> 0:18:04.919 informedive this increase in loan rates is not exclusive to 0:18:04.960 --> 0:18:07.800 the US. You see it in a lot of countries. 0:18:08.400 --> 0:18:13.080 So I don't totally know. There's probably some of many 0:18:13.119 --> 0:18:19.480 of those explanations. And for whatever reason, what the market 0:18:19.560 --> 0:18:21.680 thinks the Fed is going to do in short rates 0:18:21.760 --> 0:18:26.560 does seem to have a outsized impact on thirty year rates, 0:18:26.960 --> 0:18:30.840 So that's part of it. Is probably just reflecting how 0:18:31.480 --> 0:18:34.080 steep or how shallow a path do they think the 0:18:34.119 --> 0:18:34.960 FED is going to take. 0:18:35.480 --> 0:18:37.840 So, just going back to inflation for a second, you've 0:18:37.880 --> 0:18:40.280 mentioned a couple of times now that you're worried about 0:18:40.359 --> 0:18:44.679 maybe you know, tariff induced inflation in goods starting to 0:18:44.840 --> 0:18:47.920 seep into services. Can you talk a little bit more 0:18:47.960 --> 0:18:52.320 about how you see that channel actually working. And then 0:18:52.400 --> 0:18:55.600 also you're head of the seventh District and you have 0:18:55.680 --> 0:18:58.520 some interesting states in there. You've got Michigan, which still 0:18:58.560 --> 0:19:01.879 makes cars. You've got Iowa which has farmers. Like, what 0:19:01.960 --> 0:19:04.000 are you seeing in terms of the pass through from 0:19:04.119 --> 0:19:05.600 goods to services there? 0:19:06.440 --> 0:19:10.880 Okay, these are both important topics for us to think through. 0:19:11.880 --> 0:19:17.680 Let's go backwards in order. The seventh District, headquartered in Chicago, 0:19:18.359 --> 0:19:21.800 is the most manufacturing intentsive of all the districts, and 0:19:21.840 --> 0:19:24.760 by far the most auto production of all the districts. 0:19:25.840 --> 0:19:32.280 It's one of the big agriculture heavy districts. But Kansas City, Minneapolis, 0:19:32.320 --> 0:19:34.480 there's a couple of others. I would say in the 0:19:34.600 --> 0:19:38.439 run up to April second and through April second into 0:19:38.920 --> 0:19:44.160 May almost to June, their hair was on fire. I mean, 0:19:44.720 --> 0:19:47.520 this is going to wipe us out if anything's like 0:19:47.560 --> 0:19:51.160 the rates of what they just announced the auto suppliers 0:19:51.240 --> 0:19:54.440 that we had small margines to begin with, that we're 0:19:54.440 --> 0:19:57.760 gonna die. We don't know you, we don't know what's 0:19:57.800 --> 0:20:00.639 going to happen. That's why I was getting amped up 0:20:00.680 --> 0:20:05.040 about it at the time as we kind of got 0:20:05.080 --> 0:20:07.840 some clarity on what the raids are going to be, 0:20:08.119 --> 0:20:13.320 and particularly when they begin exempting, if it's USMCA compliant, 0:20:13.359 --> 0:20:16.960 it's not going to apply for a bunch of intermediate goods. 0:20:17.000 --> 0:20:22.960 It's not going to apply common influence. I would say 0:20:23.119 --> 0:20:27.520 as I talk to people now for manufacturing and for agriculture, 0:20:27.560 --> 0:20:31.080 they're still in that space. In agriculture they were particularly 0:20:31.080 --> 0:20:37.160 heartened by as some of the negotiations got concluded. Even 0:20:37.240 --> 0:20:41.480 if they weren't going back to no tariffs, the fact 0:20:41.480 --> 0:20:43.920 that they were going to something that would not lead 0:20:43.960 --> 0:20:47.600 to retaliation was a very big thing for agriculture because 0:20:47.640 --> 0:20:51.560 a lot of their biggest markets are overseas. I was 0:20:51.640 --> 0:20:55.119 just recently in Iowa. Though they're still nervous in that 0:20:55.280 --> 0:20:58.879 space that in some ways the damage has already done 0:20:59.160 --> 0:21:01.840 and it takes a lot long time to build up 0:21:02.240 --> 0:21:06.920 these export relationships. And if you smash that, and they 0:21:06.960 --> 0:21:10.840 start buying soy beans from Brazil that even if you 0:21:11.000 --> 0:21:13.800 go back to zero tariffs, they might have already set 0:21:13.840 --> 0:21:16.720 it up. So there is like a nagging that the 0:21:16.800 --> 0:21:19.560 longer run impact will be different than the short run impact. 0:21:19.920 --> 0:21:23.600 But I would characterize short run impact scaled down from 0:21:24.160 --> 0:21:27.200 I always get the deaf cons backward. Death Con five 0:21:27.359 --> 0:21:31.199 is the worst, right, so so one was the worst. 0:21:31.359 --> 0:21:35.000 Everybody says, how often are we declaring what it is? 0:21:36.080 --> 0:21:41.040 There was a high deaf Con, dangerous, deaf Con as 0:21:41.119 --> 0:21:44.560 high as you could be, and now it's gone back 0:21:45.280 --> 0:21:49.880 not background noise, but the sentiment like, we can live 0:21:49.920 --> 0:21:52.080 with this if this is what it is. As long 0:21:52.119 --> 0:21:55.720 as this stops when we're not going to face new ones, 0:21:56.440 --> 0:21:59.520 we can deal with this. Now that said, it sort 0:21:59.520 --> 0:22:01.359 of goes to your second. 0:22:01.200 --> 0:22:03.520 To your original, Defcon one is the highest state of 0:22:03.520 --> 0:22:04.240 military writing. 0:22:04.320 --> 0:22:06.160 Now deaf Con one is the highest. So they were 0:22:06.200 --> 0:22:08.920 at def Con one and we're back to deaf Con five. 0:22:09.200 --> 0:22:12.840 I just looked at up. Okay, I added backward, which 0:22:12.880 --> 0:22:15.080 is embarrassing because I'm always like Nodo, you know, that's 0:22:15.480 --> 0:22:18.800 that's the opposite, But now I opposite it myself. Yeah, 0:22:18.840 --> 0:22:24.440 I've done that. So the question about what is the 0:22:24.520 --> 0:22:30.320 mechanism that the tariff inflation turns into services inflation? Permit 0:22:30.400 --> 0:22:34.720 me a slight dedoer, what is the mechanism that tariffs 0:22:35.119 --> 0:22:39.560 turn into inflation of goods as opposed to just a 0:22:39.640 --> 0:22:43.240 one time price increase, because there is an argument that 0:22:43.280 --> 0:22:47.360 for the platonic ideal of a theoretical one and done tariff, 0:22:48.000 --> 0:22:50.040 it's just a one time price increase. So no matter 0:22:50.080 --> 0:22:52.760 what it is, just look through. 0:22:52.520 --> 0:22:54.760 It, right, And a one time pricing increase, just to 0:22:54.800 --> 0:22:59.280 be clear, doesn't count as inflation under traditional economic frameworks. 0:22:58.840 --> 0:23:02.720 Because base, if you go measure inflation, inflation would be 0:23:02.800 --> 0:23:05.639 high for one year and then the inflation would go away. 0:23:05.920 --> 0:23:10.800 But that was the very argument of Team Transitory in 0:23:10.840 --> 0:23:15.399 twenty twenty one was, yes, here this thing hit supply, 0:23:15.440 --> 0:23:19.400 we're gonna let bygones be bygones. We'll eat the inflation 0:23:19.640 --> 0:23:23.600 for one year and then it's gonna go away. Now, 0:23:24.119 --> 0:23:27.760 remember this is for a one and done tariff, and 0:23:27.800 --> 0:23:31.280 this is not one and this is not done. So well, 0:23:31.320 --> 0:23:35.520 let's be a little more circumspect of just saying, hey, 0:23:35.600 --> 0:23:40.720 theoretically it's just gonna go away. We learned in COVID 0:23:41.160 --> 0:23:43.840 that if it's a big enough impact on the supply chain, 0:23:43.920 --> 0:23:49.280 and especially if it's going industry A to industry B, 0:23:49.600 --> 0:23:54.760 industry B makes inputs for C that process takes a 0:23:54.800 --> 0:23:59.080 lot longer than we thought it would in twenty nineteen 0:23:59.119 --> 0:24:02.240 and twenty twenty. When we got to twenty twenty one, 0:24:02.880 --> 0:24:06.119 we're like, yeah, hey, it'll fix itself. You know, probably 0:24:06.160 --> 0:24:11.200 six months. That was the argument of transitory. So I'm 0:24:11.240 --> 0:24:17.080 a little concerned about just the impact of tariffs on 0:24:17.240 --> 0:24:22.560 goods inflation itself lasting longer than we wanted to, and 0:24:23.280 --> 0:24:28.080 people getting mixed up. You'll recall the perfectly valid arguments 0:24:28.080 --> 0:24:30.760 in twenty one, in twenty two and into twenty three 0:24:31.280 --> 0:24:35.960 where people said it doesn't matter if it's supply shock 0:24:36.040 --> 0:24:39.840 induced inflation. If it's high for too long, it's going 0:24:39.920 --> 0:24:42.320 to fold into expectations and then we'll never get rid 0:24:42.359 --> 0:24:46.520 of it. That didn't prove true this last time, but 0:24:46.760 --> 0:24:51.080 if people are more attuned to price increases, it could, 0:24:51.200 --> 0:24:54.400 and we just got to be careful on that front. Now, 0:24:54.600 --> 0:24:57.600 ask the question how does it turn into services inflation? 0:24:58.359 --> 0:25:03.840