WEBVTT - Kroszner: inflation cycle has changed

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<v Speaker 1>For those of you just joining us on radio, this

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<v Speaker 1>is a Bloomberg special report the Fed Decides. I'm Scarlett Fell,

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<v Speaker 1>along with Tom Keen and Mike McKee. Mike, Well, let's

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<v Speaker 1>find out what it must be like inside the room

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<v Speaker 1>today and talk with somebody who was inside the room

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<v Speaker 1>for several years. Former FED governor now University of Chicago

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<v Speaker 1>Booth School of Business professor Randall Krosner. He's joining us

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<v Speaker 1>live from Chicago. Randy, you know they're going to be

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<v Speaker 1>talking about the inflation numbers today, and you know they're

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<v Speaker 1>gonna be talking about the possibility that the Phillips curve

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<v Speaker 1>is back. We're gonna see wage inflation. The question is

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<v Speaker 1>can monetary policy stay ahead of inflation given that it's

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<v Speaker 1>so low, Can it catch up if it starts to

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<v Speaker 1>accelerate or is the FED going to be behind the curve?

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<v Speaker 1>Is that going to be one of the questions that

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<v Speaker 1>they're debating today. I think that's dead on. That's exactly

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<v Speaker 1>the issue that's on the table, exactly where is inflation going.

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<v Speaker 1>So we have seen very low inflation of the last

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<v Speaker 1>few years. We've now seen a few signs of a

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<v Speaker 1>little bit of an increase um if you look at

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<v Speaker 1>the core numbers from today, a little bit of move up,

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<v Speaker 1>But if you look to the labor market, you're really

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<v Speaker 1>not seeing much wage pressure there. We just had a

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<v Speaker 1>report out today that suggests that incomes were declining, real

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<v Speaker 1>wages were flat, And if you look at the numbers

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<v Speaker 1>that came at the beginning of the month, we saw

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<v Speaker 1>a decline in the work week and a slight decline

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<v Speaker 1>in nominal wages. So the traditional impact of low unemployment

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<v Speaker 1>rate would be towards more more wage pressure. We haven't

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<v Speaker 1>seen that, and so there's gonna be a lot of

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<v Speaker 1>debate about the table. When is it coming and is

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<v Speaker 1>it coming? Is it coming? That's the question. Do you

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<v Speaker 1>think that at this point we are set up for

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<v Speaker 1>an acceleration of inflation later in the year that is

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<v Speaker 1>going to lead the Fed to move more quickly to

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<v Speaker 1>raise rates and surprise the markets. Do the markets have

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<v Speaker 1>inflation right or does the Fed? Well? I think I

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<v Speaker 1>wish somebody knew. My crystal ball is pretty cloudy on that,

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<v Speaker 1>because the inflation performance has been different than it typically

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<v Speaker 1>has in the past. By this time the cycle, we

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<v Speaker 1>would normally be seeing a little bit more wage pressure

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<v Speaker 1>we'd be seeing a little bit more inflation. Certainly, the

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<v Speaker 1>FED has tried to provide a lot of liquidity to

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<v Speaker 1>the system to hopefully get the money supply growing and

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<v Speaker 1>get to get inflation towards a two percent goal. We

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<v Speaker 1>haven't gotten there yet. So this is unusual circumstance. And

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<v Speaker 1>in those unused room circumstance, reasonable people are going to disagree.

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<v Speaker 1>And you've got a lot of reasonable people around the table,

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<v Speaker 1>and I think there's a lot of disagreement. Professor Cross

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<v Speaker 1>and I believe there's a school north of the University

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<v Speaker 1>of Chicago. I think it's an Emisade, Illinois. I think

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<v Speaker 1>it's called Northwestern University. We've got to I can't hear you.

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<v Speaker 1>Here's Robert Gordon, the giant of Northwestern economics, saying to

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<v Speaker 1>us the other day, with great non Gordon optimism, that

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<v Speaker 1>if labor participation turns up, that's the signal. We've got

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<v Speaker 1>the signal. What does that mean for you? So we've

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<v Speaker 1>seen a little bit of a take up of labor

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<v Speaker 1>force participation, but it's still at very low levels compared

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<v Speaker 1>with where it was um So it would be great

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<v Speaker 1>to see more of that. I think that would be

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<v Speaker 1>tremendous because, as you were discussing before the even though

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<v Speaker 1>the unemployment rate may be down below five percent, people

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<v Speaker 1>are not feeling the benefits of five percent unemployment rate.

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<v Speaker 1>A lot of people are outside in the labor market.

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<v Speaker 1>We need to get people back into the labor market.

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<v Speaker 1>We need to be creating jobs and hopefully raising real wages. Randy,

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<v Speaker 1>are we at full employment or will we only know

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<v Speaker 1>it after the fact? Well, this is one of these

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<v Speaker 1>questions that we're not even sure that the concept of

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<v Speaker 1>full employment really fits anymore, because we typically looked at

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<v Speaker 1>something like the unemployment rate, um, but now there are

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<v Speaker 1>these broader measures that Janet Yellen and others have talked about,

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<v Speaker 1>the so called U six that includes people who are

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<v Speaker 1>part time, would prefer prefer to be full time, people

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<v Speaker 1>who are have not looked for a job in the

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<v Speaker 1>last month, but it looked some time the last year

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<v Speaker 1>and one a job. That number is much higher. That

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<v Speaker 1>number is over ten percent, and that number is always

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<v Speaker 1>higher than the regular unemployment rate. But maybe that's telling

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<v Speaker 1>us more about the true state of the labor market

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<v Speaker 1>than the traditional unemployment rate. So the debates on even

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<v Speaker 1>what number to look at to try to assess that

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<v Speaker 1>that question one of the numbers the FED likes to

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<v Speaker 1>look at. And let's go inside the Bloomberg terminal and

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<v Speaker 1>look at inflation expectations to five year forward. For those

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<v Speaker 1>of you on radio, we've gained twenty one basis points

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<v Speaker 1>over the last two weeks to three weeks in terms

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<v Speaker 1>of inflation expectations. They've completely turned around to what extent

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<v Speaker 1>does the FED have to uh ratify the markets Randy

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<v Speaker 1>and say, you know, we are aware of this. How

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<v Speaker 1>far can they go? Well, I think that the Fed

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<v Speaker 1>has been very clear in its first paragraph about talking

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<v Speaker 1>about not only inflation but inflation expectations, and they had

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<v Speaker 1>noted how the market based measures had declined reasonably significantly,

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<v Speaker 1>And and my guess is they will acknowledge a bit

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<v Speaker 1>of a turnaround in those as well as a bit

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<v Speaker 1>of a turnaround and core inflation. Does that mean that

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<v Speaker 1>they're going to be moving immediately. No, But I think

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<v Speaker 1>that gives them the foundation for at least having a

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<v Speaker 1>serious discussion over the summertime about moving rates. You know,

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<v Speaker 1>we talked earlier about the distinction between good inflation and

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<v Speaker 1>bad inflation. I just had a gloomber customer message me

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<v Speaker 1>and say, good inflation is demanded induced inflation. Bad inflation

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<v Speaker 1>is fed induced inflation. Well, you know that can be

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<v Speaker 1>part of it. You could say the same with deflation

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<v Speaker 1>or disinflation. Professor Krasner, quickly here and then we'll have

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<v Speaker 1>you back for for more. Aren't banks supposed to surprise

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<v Speaker 1>when it's least expected? Why couldn't we get a droggy

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<v Speaker 1>moment out of our fed today? I don't think that's

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<v Speaker 1>what Janet Yellen is going for because, as you know,

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<v Speaker 1>with what happened with with Europe the e c B,

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<v Speaker 1>when they made the announcement of their big Bazuka the

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<v Speaker 1>the europlummeted, interest rates plummeted. Then at the press conference

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<v Speaker 1>when Aero Roggy said well there may be limits to hello,

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<v Speaker 1>we can go on interest rate because of concerns about banks,

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<v Speaker 1>you had this whipsaw and the euro uh spiked up,

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<v Speaker 1>interest rates spiked up. I don't think that's what Jenne

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<v Speaker 1>Ellen is trying to achieve. I think she wants to

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<v Speaker 1>minimize volatility, not add to it. All right, Randy Krasser

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<v Speaker 1>of the University of Chicago Booths School of Business, you

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<v Speaker 1>will be sticking with us, will also have more with

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<v Speaker 1>Richard Clarada of PIMCO. Shortly and over the next few

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<v Speaker 1>hours full fed coverage, Alan Blinder of Princeton University joining

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<v Speaker 1>us along with Bill Gross of Janni's Capital. Not to

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<v Speaker 1>mention Ira Jersey of uppen Higher Capital