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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Joe Wisenthal and I'm Tracy Away. Tracy, you had

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Speaker 1: a great piece I want to say this morning for

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Speaker 1: our blog about some of the interesting dynamics happening in

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Speaker 1: the economy right now. Oh, thank you. I really appreciate that. Yeah. No,

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Speaker 1: we're in this weird moment. We're obviously, at least on

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Speaker 1: a headline basis, the economy still still seems to be

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Speaker 1: growing very rapidly out of the pandemic delta variance aside,

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Speaker 1: and we'll see how the effects that those have. On

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Speaker 1: the other hand, we are seeing inflation in a way

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Speaker 1: that we really haven't seen in years, and there are

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Speaker 1: significant debate about why that is, the degree to which

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Speaker 1: policy has contributed to that inflation, the degree to which

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Speaker 1: policy should fameliorate that inflation, and of course, as you

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Speaker 1: sort of discussed it, a very big picture framework and

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Speaker 1: that piece, there's just these sort of like these bigger

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Speaker 1: questions about supply side capacity and the various log jams

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Speaker 1: and supply chain bottlenecks that we're seeing really all over

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Speaker 1: the place right now. Totally. So I think I called

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Speaker 1: it the choke point economy um in that piece, and

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Speaker 1: the idea is that even though on an absolute level, uh,

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Speaker 1: you know, economic growth looks pretty good, there's a lot

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Speaker 1: of stuff being produced in the economy on an absolute level,

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Speaker 1: but on a relative basis, you can see these blockages,

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Speaker 1: these shortages showing up in lots of different things, um,

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Speaker 1: and in ways that are not always productive or helpful

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Speaker 1: to society or the wider economy. And so the question

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Speaker 1: then is do governments and policymakers start to step in

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Speaker 1: to try to relieve some of those blockages. Yeah, and yeah,

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Speaker 1: there's so many interesting policy things. And you know, there's,

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Speaker 1: of course something that we've talked about a long time.

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Speaker 1: There is the FEDS new framework seems to be much

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Speaker 1: more willing to tolerate some periods of higher inflation in

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Speaker 1: the pursuit of full employment. There's the massive amount of

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Speaker 1: fiscal spending the likes of which we've never seen before.

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Speaker 1: There's further there's a further infrastructure bill being debated. So

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Speaker 1: amid all of these sort of moving pieces in the

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Speaker 1: real economy, we're also it's sort of I guess you

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Speaker 1: could kind of say uncharted, uncharted policy territory as well. Yeah,

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Speaker 1: I get that it's a cliche to say that things

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Speaker 1: are uncharted um at this point in time, but it's true.

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Speaker 1: Like the economic shock that we just experienced in one

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Speaker 1: was very unusual and in many ways unprecedented, and now

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Speaker 1: we have an unprecedented period of fiscal stimulus. And also

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Speaker 1: that's coinciding with this new framework from the Federal Reserve

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Speaker 1: and new ways of central banks really thinking about monetary

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Speaker 1: policy and how it works with government. Well, I think

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Speaker 1: that is the perfect seg into our guests. I am

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Speaker 1: absolutely thrilled um to get to speak to our guests today.

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Speaker 1: It's a real treat to have him on. Odd lots

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Speaker 1: that he would come on. We're going to be speaking

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Speaker 1: with Rob Kaplan. He is the president of the Dallas

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Speaker 1: Federal Reserve, been in that role since late so he's

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Speaker 1: seen a lot and he's in the thick of it

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Speaker 1: with all the policy choices that have to be made

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Speaker 1: right now. President Kaplan, thank you so much for joining us.

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Speaker 1: Great to be with you, Joe and Tracy. This is

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Speaker 1: this is really a real treat to have you on.

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Speaker 1: Thank you so much. Let's just start a very big picture.

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Speaker 1: I mean, there, it still appears that we have this

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Speaker 1: rapid growth, this rapid rebound out of UM out of

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Speaker 1: the crisis. We do have this elevated inflation, clearly by

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Speaker 1: various readings. Some debates about whether how transitory it is,

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Speaker 1: when it will normalize, just give us. Let's just start

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Speaker 1: with your assessment of the macro picture right now. So

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Speaker 1: it's still our view at the Dallas FED that GDP

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Speaker 1: growth for one will be in the neighborhood of six

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Speaker 1: and a percent. That growth will moderate as we go

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Speaker 1: into you know, somewhere let's say between two and a

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Speaker 1: half and three We think that will trend down toward

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Speaker 1: four and a half percent unemployment rate by the end

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Speaker 1: of this year. But I'll come back to that. We

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Speaker 1: think will end the year with a PC inflation reading

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Speaker 1: of something like three point eight percent, so very elevated,

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Speaker 1: and I'll talk more about that. Uh, the big issues

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Speaker 1: we're facing between now certainly in the end of the

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Speaker 1: year are more about supply than demand. There's plenty of

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Speaker 1: demand in this economy. You you all were talking about

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Speaker 1: it in your conver station, but everything we see suggests

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Speaker 1: that consumer demand is strong and demand generally is strong.

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Speaker 1: The issues we have are working out these supply demand

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Speaker 1: and balances, not just on materials, but significantly on labor.

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Speaker 1: We've had substantial number of retirements, we have people who

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Speaker 1: are not in the workforce because their caregivers. We still

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Speaker 1: have fear of infection, and I think that supply demand

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Speaker 1: and balance regarding labor is going to be more persistent

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Speaker 1: than people might expect. What can the Fed and Central

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Speaker 1: banks more widely actually do to resolve supply demand imbalances?

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Speaker 1: So my own view on that is for starters to

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Speaker 1: be cognizant of them, and to be cognizant that that

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Speaker 1: our tools, and in particular in the short run, our

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Speaker 1: asset purchases are are much more adept at stimulating demand.

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Speaker 1: They're not so adept at dealing with supply demand and balances.

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Speaker 1: And so for me, I think patients the way I

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Speaker 1: would define patients would be, you might want to lower

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Speaker 1: the RPMs on the car now that we've gotten out

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Speaker 1: of the ditch from early one and we're on more

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Speaker 1: level land. I think I think we may want to

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Speaker 1: show patients by reducing the RPMs on the car and

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Speaker 1: be willing to allow these supply demand and balances time

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Speaker 1: to unfold. But for me, that doesn't mean continuing our

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Speaker 1: purchases like we were doing. It means showing some patients

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Speaker 1: by realizing we're in a different situations than early and

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Speaker 1: showing some restraint on our purchases. So I guess we're

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Speaker 1: just jumping right into the big policy question, is uh

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Speaker 1: that everyone wants to know. Do you agree with your

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Speaker 1: colleague Chris Waller then that perhaps it makes sense to

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Speaker 1: begin the taper soon, maybe as soon as October, get

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Speaker 1: it finished sometime early next year. So so to answer that,

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Speaker 1: let me step back for a moment. People talk a

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Speaker 1: lot about substantial further progress. We have a substantial further

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Speaker 1: progress benchmark. What I've been saying for the last number

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Speaker 1: of weeks and months is there's one other significant criteria,

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Speaker 1: and I would I would refer to that as efficacy.

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Speaker 1: So the first thing you want to look at, and

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Speaker 1: the best analogy I can if you're a doctor prescribing

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Speaker 1: medicine to someone who's been through a traumatic event, you

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Speaker 1: always want to first be assessing what's the efficacy of

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Speaker 1: the medication, and you want to be willing to adjust

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Speaker 1: your views on that, And and what I'm seeing now

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Speaker 1: is the efficacy the benefits of purchasing eighty billion of

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Speaker 1: treasuries and forty billion of mortgage backed securities a month.

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Speaker 1: I think it was very high efficacy in early twenty one.

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Speaker 1: As we sit here today, I see some unintended side effects.

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Speaker 1: And again, those purchases are more adept at stimulating demand,

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Speaker 1: but we don't have a demand problem right now. I

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Speaker 1: worry that they're creating excesses in risk taking, excesses in

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Speaker 1: the housing market, maybe exacerbating imbalances in the economy. And

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Speaker 1: so for me, therefore, the bar for substantial further progress

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Speaker 1: is lower because I don't see I'm starting to question

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Speaker 1: the efficacy of our purchases. So in that regard, I

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Speaker 1: would rather begin adjusting these purchases soon. I don't want

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Speaker 1: to actually get into what the months or the calendar,

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Speaker 1: but I would be supportive of adjusting these purchases soon.

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Speaker 1: But the other thing I would say is, once we

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Speaker 1: start the adjustment process, I would probably be preferred to

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Speaker 1: have it be more gradual. And what does gradual mean

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Speaker 1: to me? Probably means baseline over eight months, let's say,

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Speaker 1: so that would be ten million of treasuries and five

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Speaker 1: million billion a month of mortgage backed securities. So I

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Speaker 1: would like to start sooner rather than later. Start soon,

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Speaker 1: but I would probably like to be more gradual than

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Speaker 1: than than others you've mentioned. So in recent history, I

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Speaker 1: think one of the big criticisms of the FED has

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Speaker 1: always been that they sort of jumped the gun and

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Speaker 1: hiked rates too soon and basically started undercutting the employment

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Speaker 1: recovery without actual evidence that inflation was becoming a problem.

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Speaker 1: I realized our current situation is somewhat different because we

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Speaker 1: have low interest rates in addition to monetary easing that

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Speaker 1: you just mentioned. But how are you thinking about the

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Speaker 1: risks of tightening policy versus the risks of UM staying

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Speaker 1: loose for too long? So in that regard, I would

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Speaker 1: differentiate what are what our action are going to be

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Speaker 1: on the FED funds rate from what our actions are

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Speaker 1: going to be on our asset purchases. I think those

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Speaker 1: are those two subjects for me should be more fully divorced.

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Speaker 1: On the FED funds rate, that's not a decision in

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Speaker 1: my opinion, for that's something will debate based on conditions.

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Speaker 1: In I think the near term judgment is on purchases.

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Speaker 1: There may be arguments that in years past we might

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Speaker 1: have move the FED funds rate earlier than we should have.

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Speaker 1: I actually I'm not sure those those arguments. I'm not

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Speaker 1: sure I agree with those arguments. But even setting that aside,

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Speaker 1: I am much more confident about the efficacy of keeping

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Speaker 1: the FED funds rate where it is right now. I

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Speaker 1: am much more doubtful about the value of these purchases.

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Speaker 1: My concern is they accentuate excesses and balances. They tend

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Speaker 1: to be more beneficial to people who own asset than

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Speaker 1: those who don't. This inflation discussion, which I know we

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Speaker 1: can get into, effects big businesses differently than small mid

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Speaker 1: sized businesses. And I think, uh, these supplied demand and

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Speaker 1: balances and inflation pressures affect load and moderate income communities

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Speaker 1: differently than they do higher income communities. And I think

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Speaker 1: for which I can get into what why I say that,

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Speaker 1: But for all those reasons I would I think adjusting

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Speaker 1: these purchases sooner might actually allow us to be more

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Speaker 1: patient on the FED funds right down the road, and

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Speaker 1: the analogy you've heard and the uses, I'd rather take

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Speaker 1: my foot off the accelerator soon, so we don't need

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Speaker 1: to hit the brakes down the road. And I think

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Speaker 1: that's that may be the case in this situation. That's

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Speaker 1: really interesting. And you know, obviously I think early some

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Speaker 1: in the market would interpret the commencement of a taper

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Speaker 1: reducing purchases as some sort of signal on rates. So

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Speaker 1: it's like, okay, we're starting the let's say the Federal

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Speaker 1: to start tapering in October, and then maybe the market

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Speaker 1: implicitly pulls forward its estimated date for the first rate hike.

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Speaker 1: Do you think there's uh Therefore then that to your

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Speaker 1: point exactly, that the commencement of a tapering should be

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Speaker 1: paired with some sort of communication, some sort of specific communication,

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Speaker 1: to your point that this should not necessarily be interpreted

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Speaker 1: as a sign of some sequencing sign that okay, those

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Speaker 1: first rate hikes are therefore right around the corner. Yes,

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Speaker 1: I do think that, and in all my communications I've

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Speaker 1: emphasized that by adjusting purchases sooner, it may actually allow

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Speaker 1: us to be more patient in the future on the

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Speaker 1: Fed funds rate and and in my in my view,

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Speaker 1: those two subjects should be divorced, and we should be

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Speaker 1: clear in our public communication that those two pro to

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Speaker 1: caes or divorced. I think the these purchases and injecting

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Speaker 1: this amount of liquidity into the economy every month has

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Speaker 1: its own set of considerations and its own set of

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Speaker 1: side effects, which I think are different than the considerations

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Speaker 1: and side effects of how we handle the FED funds rate.

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Speaker 1: A slightly related question, but you know, I'm looking at

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Speaker 1: the terminal right now, and I see the yield on

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Speaker 1: the benchmark tenure U S Treasury is a like one

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Speaker 1: point one percent, and the downward trends in bonds has

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Speaker 1: been something that's confusing a lot of people, and a

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Speaker 1: lot of people have been racking their brains over why

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Speaker 1: this is happening. Is that a concern for the Fed

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Speaker 1: as it starts to discuss things like tapering, Maybe not

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Speaker 1: interest rate hikes, but tapering. Are you worried at all

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Speaker 1: that the bond market seems to be either anticipating that

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Speaker 1: thing is going to stick around for a long time

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Speaker 1: or anticipating that growth might slow in the future. So

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Speaker 1: I'll give you my own take on what when I'm

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Speaker 1: seeing in the bond market over the horizon. In other words,

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Speaker 1: after we get out of this rebound from the COVID pandemic,

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Speaker 1: there's no question that labor force growth, we think in

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Speaker 1: the outyears is decelerating due to aging and we felt

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Speaker 1: that pre pandemic, that trend is still alive and well

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Speaker 1: and is a challenge we have to face. Our our

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Speaker 1: population growth is decelerating, Our labor folks growth is going

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Speaker 1: to decelerate, and then the question is will productivity improvements

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Speaker 1: help off set that that, and so far they haven't

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Speaker 1: and why haven't they? Our own view at the Dallas

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Speaker 1: FED is that if you've got a college education, your

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Speaker 1: technology and technology enable disruption is probably helping your productivity.

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Speaker 1: If you're one of the forty six million people of

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Speaker 1: the high school education are less, technology and technology enabled

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Speaker 1: disruption mean your job is being regularly either restructured or

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Speaker 1: even eliminated, and we're not seeing the productivity improvements. So

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Speaker 1: we've got to improve early childhood literacy, skills, training, and

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Speaker 1: the whole educational ecosystem in order to get the benefits

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Speaker 1: for the whole population of these of these technology investments.

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Speaker 1: So how does that get to the mind market? If if,

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Speaker 1: if productivity growth doesn't help offset slowing labor force growth,

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Speaker 1: the out your growth is sluggish. And I think the

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Speaker 1: bond market is recognizing that out your growth, not just

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Speaker 1: in the United States but globally is relatively sluggish because

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Speaker 1: of aging populations and skepticism about productivity. Off setting that,

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Speaker 1: that's number one. The other thing you can't quite tell.

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Speaker 1: And I always a caution myself and my team with

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Speaker 1: the FED purchasing this uh much treasuries and mortgage backed securities,

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Speaker 1: the signal that you might get from the bond market

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Speaker 1: might be a little bit distorted right now. It's certainly

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Speaker 1: distorted as it relates to credit spreads, real yields, et cetera.

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Speaker 1: And so that's another factor. But I'm very conscious of

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Speaker 1: what the Tenure is saying is something I'm mindful of

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Speaker 1: as we assess the economy and think through what's appropriate

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Speaker 1: monetary policy. Let's talk more about the productivity problem. I mean,

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Speaker 1: we started this discussion man Tracy talking about some of

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Speaker 1: these supply chain issues, these sort of like real breaks

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Speaker 1: that are in the economy. There is a limit to say,

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Speaker 1: how many homes can be built because there's a limit

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Speaker 1: to how much child lumber could be delivered. There's a

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Speaker 1: limit to how many cars could be made because there

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Speaker 1: is only so many semiconductors. And I'm sure you know

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Speaker 1: all of these things are very things you're very aware

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Speaker 1: of when you think about like, all right, you mentioned

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Speaker 1: say early childhood education and literacy, sitting aside the specific

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Speaker 1: bills that are big debated in d C. Is there

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Speaker 1: a role in your view for sort of aggressive UH

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Speaker 1: fiscal expansion infrastructure investment to simply improve the supply side

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Speaker 1: capacity of the economy such that we don't have these

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Speaker 1: breaks going forward when we have a period of potentially

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Speaker 1: high growth. So I do believe that investment in infrastructure,

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Speaker 1: including WiFi, is different than fiscal policy that simply stimulates

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Speaker 1: current spending, i e. Fiscal policy, either tax related or otherwise.

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Speaker 1: It just stimulates current spending, gives you a short term bump,

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Speaker 1: and then you revert back down to trend based on

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Speaker 1: all the work we've done here. Infrastructure spending on the

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Speaker 1: other hand, and those type of investments ideally, if they're

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Speaker 1: well done, should be twenty or thirty year investments should

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Speaker 1: that should help improve productivity. And then related to that,

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Speaker 1: we need to improve early childhood literacy, particularly for the

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Speaker 1: fastest growing demographic groups, and we need to improve skills training.

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Speaker 1: Some of that can be done with local money, by

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Speaker 1: the way, may not take government money, but I think

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Speaker 1: that's another investment that will help improve productivity, and I

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Speaker 1: think all those investments, my own view would be money

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Speaker 1: well spent. How do you see monetary policy more generally

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Speaker 1: interacting with fiscal stimulus and a greater propensity, at least

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Speaker 1: in the US, towards government spending. So we hear a

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Speaker 1: lot from central banks talking about you know, monetary policy

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Speaker 1: can augment fiscal stimulus, and there's the potential for a

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Speaker 1: sort of virtuous cycle there. But I'd love to get

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Speaker 1: your thoughts on it and maybe talk specifically about how

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Speaker 1: it's changed or hasn't changed the way you and the

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Speaker 1: FED um think about monetary policy. My own view is

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Speaker 1: I do not think it's the role of the Federal

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Speaker 1: Reserve to either monetize the debt or to facilitate government spending.

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Speaker 1: Now in the in the height of the crisis, I

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Speaker 1: think it was important that the FED bolstered the function

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Speaker 1: of the treasury market and took a number of the

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Speaker 1: extraordinary actions we took in order to ensure that the

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Speaker 1: government can do what it needed to do from a

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Speaker 1: fiscal side to fight this crisis. But setting aside what

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Speaker 1: we did in a crisis, I think in more normal

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Speaker 1: times which were now emerging into I don't think the

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Speaker 1: FED it's an appropriate role for the FED to be

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Speaker 1: monetized in the debt or for fcilitating government spending, and

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Speaker 1: I think it's very critical that we don't convey the

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Speaker 1: impression of the public that that's part of our role,

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Speaker 1: and I think there might be some confusion out there

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Speaker 1: on that. On that subject, let's zoom out a little

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Speaker 1: bit actually and talk more about the conduct of monetary policy.

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Speaker 1: Because it is August, so we are approaching the one

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Speaker 1: year anniversary of the Jackson Whole conference. We're gonna have

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Speaker 1: another one, but the last year's was pretty consequential, and

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Speaker 1: the Federal Reserve, the chairman rolled out this new of framework,

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Speaker 1: flexible average inflation targeting, with this uh premise in mind

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Speaker 1: that you know, two percent would not necessarily be the ceiling,

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Speaker 1: that there would be some catch up potentially, that the

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Speaker 1: Fed would be more patient, and furthermore, the that that

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Speaker 1: framework was bolstered by further messaging that there is going

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Speaker 1: to be a real renewed focus on hitting the employment

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Speaker 1: side of the mandate and that it was not going

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Speaker 1: to be this sort of like preemptive tightening. Tracy already

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Speaker 1: sort of referenced it, but I really want to see

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Speaker 1: like evidence of the employment side of the economy maxing out.

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Speaker 1: You were sort of skeptical, and you were dissented a

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Speaker 1: little bit, and you also worried that some of the

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Speaker 1: policies that established would quote tie the hands of future committees.

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Speaker 1: How do you feel about them now? Wasn't right for

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Speaker 1: the FED to adopt this view of let's really, uh

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Speaker 1: go as far as we can on the employment side,

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Speaker 1: and how do you see in auguste your concerns about

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Speaker 1: future committees hands being tied? So the on the framework,

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Speaker 1: I supported and voted for the framework, But on the

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Speaker 1: premise my interpretation of the framework was we needed to

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Speaker 1: anchor inflation expectations so that they were more appropriately anchored

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Speaker 1: at two percent, and we've been running behind two p

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Speaker 1: and for a number of years, and so it was

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Speaker 1: appropriate to be willing to tolerate inflation running moderately above

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Speaker 1: two percent in order to anchor those expectations at two percent.

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Speaker 1: I support that. I also supported being somewhat less preemptive

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Speaker 1: and anticipating inflation at the cost of potentially improving employment

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Speaker 1: and inclusive employment in the economy. So that's on the

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Speaker 1: one hand, after we approved the framework, then we got

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Speaker 1: into forward guidance in our September meeting. That's where I dissented,

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Speaker 1: and here's why. For two reasons. What that forward guidance

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Speaker 1: said is we're going to keep rates at zero until

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Speaker 1: we've reached full employment and we've reached price stability. And

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Speaker 1: I felt I dissented for two reasons their Number one,

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Speaker 1: I don't think it's good practice for the FED to

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Speaker 1: be specifically making commitments on the FED funds rate literally

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Speaker 1: years in advance to a future context where we don't

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Speaker 1: know the facts of that context. Today is a great example.

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Speaker 1: I don't think in September we anticipated in inflation would

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Speaker 1: be running as high as it is now. We didn't

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Speaker 1: anticipate the supply demand and balances on the labor side

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Speaker 1: that we're seeing. That's a classic case where you want

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Speaker 1: to be very careful about making forward commitments. Number Two,

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Speaker 1: I would have been willing to say in September that

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Speaker 1: we would have been we would remain highly accommodative until

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Speaker 1: we reach full employment and price stability. But that's different

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Speaker 1: than keeping rates at zero. As you as you approach

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Speaker 1: full employment and price stability, the neutral rate starts to

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Speaker 1: drift up, as if as the neutral rate drifts up.

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Speaker 1: If you're committed to keeping the FED funds rated zero,

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Speaker 1: it means you're actually getting more and more and more

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Speaker 1: accommodative as you approach full employment and price stability. I

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Speaker 1: don't think you want to get more and more and

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Speaker 1: more accommodative. I think you might be willing to stay

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Speaker 1: highly accommodative. But I think, uh, I think it's probably appropriate,

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Speaker 1: and future committees, my guests will think so too, that

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Speaker 1: you want to make some adjustments to remain highly accommodative.

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Speaker 1: But there's a difference between doing that and keeping rates

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Speaker 1: at zero. So I felt it was too rigid in

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Speaker 1: tying the hands of future committees, and that's why I

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Speaker 1: the sent it. You mentioned the importance of anchoring inflation

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Speaker 1: expectations at two percent, and of course there is some

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Speaker 1: irony that you know, as soon as the FED introduced

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Speaker 1: this new framework and said it would tolerate inflation um

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Speaker 1: going above or under two um, sort of moving in

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Speaker 1: this range. Of course, after many, many years, the FED

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Speaker 1: finally seems on track to reach its inflation target at

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Speaker 1: precisely the moment that it said. It's you know, less important.

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Speaker 1: I wonder, how are you thinking about inflation expectations at

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Speaker 1: the moment, and are you seeing any evidence that those

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Speaker 1: are starting to increase? Yes, So what Here's what I'm seeing,

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Speaker 1: broadly from from contexts. We're seeing in our work of

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Speaker 1: the Dallas FED a broadening of price pressures. So on

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Speaker 1: the on the positive side, some of the extreme moves

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Speaker 1: and say use cards, lumber, other individual items, we're expecting those, uh,

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Speaker 1: may well moderate somewhat. But on the other hand, what

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Speaker 1: we're seeing is a broadening of price pressures. Why due

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Speaker 1: to the semiconductor shortage that's starting to ripple to a

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Speaker 1: broader range of consumer items. Material shortages we think will

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Speaker 1: be more persistent than some might expect. And again the

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Speaker 1: supply demand on labor that in those imbalances, we think

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Speaker 1: here at the Dallas FED will take longer. And so

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Speaker 1: our expectation for two is that the headline PC number

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Speaker 1: will be in the neighborhood of two and a half percent.

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Speaker 1: So it won't be it might not be the eye

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Speaker 1: popping numbers that we're seeing this year, but it will

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Speaker 1: be still be elevated. What I'm learning in discussions with contacts,

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Speaker 1: big businesses will be able to handle elevated inflation much

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Speaker 1: better than small mid sized businesses. Big businesses can use scale,

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Speaker 1: they're they're actively merging, they can invest in technology. Small

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Speaker 1: mid sized businesses don't have those levers. And what I'm

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Speaker 1: hearing pretty broadly is is most businesses I talked to

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Speaker 1: are are raising prices, intended to raise prices more, and

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Speaker 1: are getting more confident about their ability to raise prices.

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Speaker 1: I'm also seeing that again, if you're a low moderate

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Speaker 1: income person with a job, higher inflation is biting into

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Speaker 1: your share of wallet more so than it does somebody

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Speaker 1: who's more affluent. And I'm hearing a lot from low

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Speaker 1: modern income communities and their representatives that we we to

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Speaker 1: extensive outreach rich that there's seen real stress in trying

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Speaker 1: to make ends meet even though their constituents are heavily employed.

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Speaker 1: And so what does it tell me? Tells me it's

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Speaker 1: very important that the FED anchor inflation expectations at two

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Speaker 1: and that yes, we we want to meet our inflation

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Speaker 1: target of two percent, but we also want to be

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Speaker 1: cognizant of the impacts of letting infration run a little

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Speaker 1: bit to access. And so I take that two percent

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Speaker 1: commitment very seriously. And it back to where we started.

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Speaker 1: That's one reason why I'd rather not soon take the

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Speaker 1: foot somewhat off the accelerator, reduce some of these excesses

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Speaker 1: and imbalances, or or do less to be perpetuating them

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Speaker 1: so that we maybe have more flexibility down the road

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Speaker 1: and how we can handle the FED funds rate in

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Speaker 1: and beyond. Do you see momentum building on the committee

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Speaker 1: for that viewed start to take the foot off the

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Speaker 1: accelerator on the asset purchases side. Probably I'll avoid speaking

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Speaker 1: for the committee, but I do believe when I started

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Speaker 1: speaking out, I guess it's now two two and a

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Speaker 1: half months ago, I felt it was very important that

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Speaker 1: the tapering discussion get on the agenda, that we begin

433
00:28:19,480 --> 00:28:23,040
Speaker 1: the debate. And I think I, at least I am

434
00:28:23,080 --> 00:28:25,960
Speaker 1: a much more comfortable that as a committee were in

435
00:28:25,960 --> 00:28:29,040
Speaker 1: a much better place and that we're actively having the debate.

436
00:28:29,640 --> 00:28:32,919
Speaker 1: We're obviously having disagreement, but I think that's healthy. But

437
00:28:33,000 --> 00:28:34,720
Speaker 1: I have a lot of confidence in the f O

438
00:28:34,840 --> 00:28:37,159
Speaker 1: m C that when we debate and disagree and we

439
00:28:37,240 --> 00:28:40,320
Speaker 1: put these items on the table, you know we'll we'll

440
00:28:40,360 --> 00:28:44,200
Speaker 1: get to better policy judgments. So I'm much more comfortable

441
00:28:44,280 --> 00:28:46,280
Speaker 1: where we are right now than where we were, say

442
00:28:46,320 --> 00:28:49,080
Speaker 1: a couple of months ago. You know, I want to

443
00:28:49,080 --> 00:28:50,640
Speaker 1: go back to what you were just talking about, the

444
00:28:50,680 --> 00:28:55,800
Speaker 1: moment before context um that you have in your district,

445
00:28:55,880 --> 00:28:58,400
Speaker 1: and you kind of talked about this earlier, that you

446
00:28:58,640 --> 00:29:02,479
Speaker 1: expect labor in balot Is to persist a while Dallas

447
00:29:02,520 --> 00:29:06,600
Speaker 1: fed President Texas is one of the states that ended

448
00:29:06,840 --> 00:29:10,840
Speaker 1: the unemployment insurance expansion earlier than the rest of the country.

449
00:29:11,240 --> 00:29:14,480
Speaker 1: And it's sort of like this real time laboratory or

450
00:29:14,520 --> 00:29:16,920
Speaker 1: some of these states, a real time test the degree

451
00:29:16,920 --> 00:29:21,520
Speaker 1: to which that has had an impact on labor availability.

452
00:29:21,520 --> 00:29:24,200
Speaker 1: And so I'm curious in those conversations you have, particularly

453
00:29:24,200 --> 00:29:27,720
Speaker 1: with business leaders in your district, what are they seeing

454
00:29:27,840 --> 00:29:30,000
Speaker 1: on the labor side, What was the impact of that,

455
00:29:30,080 --> 00:29:33,680
Speaker 1: and why do you expect that these labor imbalances will continue,

456
00:29:33,720 --> 00:29:37,320
Speaker 1: perhaps for longer than people think. So I've felt for

457
00:29:37,400 --> 00:29:41,040
Speaker 1: some time, and I've said this publicly, that the unemployment

458
00:29:41,080 --> 00:29:45,360
Speaker 1: benefits were only one piece of a larger puzzle. And

459
00:29:45,440 --> 00:29:51,320
Speaker 1: what's the larger puzzle. We've had three million retirements since February.

460
00:29:51,320 --> 00:29:54,520
Speaker 1: We have a million and a half approximately workers who

461
00:29:54,600 --> 00:30:00,080
Speaker 1: are caregivers who have left the workforce. Uh. Uh, we

462
00:30:00,080 --> 00:30:03,960
Speaker 1: we still have fear of infection, and some of these

463
00:30:04,000 --> 00:30:07,480
Speaker 1: workers will come back into the workforce. But some of

464
00:30:07,520 --> 00:30:10,400
Speaker 1: these workers are fifty five and older and they're in

465
00:30:10,480 --> 00:30:14,440
Speaker 1: reasonably good financial shape, and COVID has caused them to

466
00:30:14,560 --> 00:30:17,120
Speaker 1: rethink whether they really want to re enter the workforce.

467
00:30:17,400 --> 00:30:21,600
Speaker 1: I'm hopeful that with expanded childcare in person school that

468
00:30:21,680 --> 00:30:24,920
Speaker 1: will help get a chunk of the caregivers back into

469
00:30:24,920 --> 00:30:29,680
Speaker 1: the workforce. But uh, this aging issue, which has been

470
00:30:29,720 --> 00:30:32,520
Speaker 1: with us for years, is going to stay with us

471
00:30:32,680 --> 00:30:36,280
Speaker 1: for the foreseeable future. And every data point we look

472
00:30:36,280 --> 00:30:39,480
Speaker 1: at and all of talk with my contexts also suggest

473
00:30:39,560 --> 00:30:42,880
Speaker 1: the labor force is now much tighter than these headline

474
00:30:42,880 --> 00:30:46,840
Speaker 1: statistics would indicate. And uh, and I think when you

475
00:30:46,920 --> 00:30:49,520
Speaker 1: lose three million workers to retirement, in a million and

476
00:30:49,520 --> 00:30:52,640
Speaker 1: a half to caregiving, even if you get some number

477
00:30:52,640 --> 00:30:56,160
Speaker 1: of them back, and again, with demand being very strong,

478
00:30:56,360 --> 00:30:59,320
Speaker 1: we don't have a demand problem. With great recession aftermath

479
00:30:59,440 --> 00:31:02,239
Speaker 1: was about all a could demand. The aftermath of the

480
00:31:02,320 --> 00:31:07,440
Speaker 1: COVID downturn is more about supply and supply demand issues.

481
00:31:07,680 --> 00:31:09,920
Speaker 1: It's not a lack of demand. And I think it's

482
00:31:10,080 --> 00:31:15,040
Speaker 1: very critical that we recognize that so a question related

483
00:31:15,160 --> 00:31:19,200
Speaker 1: to the labor tightness points. The FED has been describing

484
00:31:19,360 --> 00:31:23,960
Speaker 1: the recent increase in inflation as transitory, and a lot

485
00:31:23,960 --> 00:31:26,480
Speaker 1: of people have been trying to figure out what exactly

486
00:31:26,560 --> 00:31:30,240
Speaker 1: that means. Could you maybe describe whether or not the

487
00:31:30,280 --> 00:31:33,680
Speaker 1: FED has sort of signposts or things that it is

488
00:31:33,760 --> 00:31:37,760
Speaker 1: looking at to determine whether or not inflation has gone

489
00:31:37,760 --> 00:31:41,360
Speaker 1: from transitory to something um that is more of a

490
00:31:41,360 --> 00:31:46,479
Speaker 1: permanent problem. And then secondly, I often wonder if the

491
00:31:46,520 --> 00:31:51,120
Speaker 1: FED kind of regrets the choice of words um on transitory,

492
00:31:51,240 --> 00:31:53,640
Speaker 1: like maybe maybe the right way to frame it would

493
00:31:53,640 --> 00:31:58,480
Speaker 1: have been narrow inflation, like inflation in specific areas and

494
00:31:58,520 --> 00:32:02,240
Speaker 1: specific things, and what you're looking out for is broader

495
00:32:02,600 --> 00:32:07,240
Speaker 1: signs of inflation. So, Tracy, you'll notice from my public

496
00:32:07,280 --> 00:32:11,200
Speaker 1: comments over the last three months, I've resisted using the

497
00:32:11,320 --> 00:32:15,680
Speaker 1: term transitory. I would have preferred that the f O

498
00:32:15,840 --> 00:32:18,320
Speaker 1: m C did not use the word largely the term

499
00:32:18,440 --> 00:32:21,840
Speaker 1: largely transitory, and I've been fairly vocal about that. I've

500
00:32:21,880 --> 00:32:26,040
Speaker 1: said consistently, I don't want to put a label on

501
00:32:26,040 --> 00:32:29,520
Speaker 1: on what we're seeing. What we are seeing is Yes,

502
00:32:29,600 --> 00:32:34,240
Speaker 1: to your point, A number of extreme price moves use

503
00:32:34,320 --> 00:32:39,480
Speaker 1: cars as an example, But what we're also seeing is

504
00:32:39,520 --> 00:32:43,800
Speaker 1: a broadening of price pressures. Contacts I have in semiconductor

505
00:32:43,840 --> 00:32:46,720
Speaker 1: industry and a range of industries are telling me that

506
00:32:46,800 --> 00:32:50,120
Speaker 1: these supply demand and balances for materials are gonna last

507
00:32:50,160 --> 00:32:54,080
Speaker 1: longer then people might have expected. And and I do

508
00:32:54,160 --> 00:32:57,480
Speaker 1: believe the supply demand and balances for labor will last

509
00:32:57,560 --> 00:33:01,680
Speaker 1: longer UH and will be more persist. So no, it's

510
00:33:01,800 --> 00:33:04,320
Speaker 1: it's a term I would have preferred not to have used,

511
00:33:04,560 --> 00:33:08,280
Speaker 1: and superb it's a term I've avoided use. You know.

512
00:33:08,600 --> 00:33:10,560
Speaker 1: I want to go back to something you said that

513
00:33:10,720 --> 00:33:13,640
Speaker 1: was interesting, and this idea that if if the FED

514
00:33:13,760 --> 00:33:18,320
Speaker 1: is committed to keeping rates that say zero until full

515
00:33:18,360 --> 00:33:23,440
Speaker 1: employment maximum employment is reached, then implicitly it's actually increasing

516
00:33:23,520 --> 00:33:27,800
Speaker 1: the UH stance of accommodation because the neutral interest rate

517
00:33:28,000 --> 00:33:30,520
Speaker 1: is theoretically going up as that approaches, and if the

518
00:33:30,520 --> 00:33:34,000
Speaker 1: nominal rate of FED policy is the same, then you're

519
00:33:34,040 --> 00:33:38,200
Speaker 1: increasing accommodation. That being said, I do feel like in

520
00:33:38,320 --> 00:33:43,480
Speaker 1: recent years there has been UH some growing skepticism that

521
00:33:43,680 --> 00:33:47,200
Speaker 1: some of these variables, like say the neutral rate of interest,

522
00:33:47,440 --> 00:33:50,440
Speaker 1: are really noble in real time. And I think even

523
00:33:50,800 --> 00:33:53,400
Speaker 1: Sherman Powell I don't remember whether it was his twenty

524
00:33:53,560 --> 00:34:01,400
Speaker 1: nineteen Jackson Hole speech or maybe speech right question whether

525
00:34:01,440 --> 00:34:04,200
Speaker 1: a sort of real time stars, so to speak, our

526
00:34:04,280 --> 00:34:07,440
Speaker 1: star and so forth are useful that in real time

527
00:34:07,840 --> 00:34:11,799
Speaker 1: we can actually sort of like know these things. How

528
00:34:11,840 --> 00:34:14,920
Speaker 1: have you personally or have you personally in you know,

529
00:34:15,400 --> 00:34:18,960
Speaker 1: sitting aside the pandemic and watching the unemployment rate fall

530
00:34:19,360 --> 00:34:20,800
Speaker 1: from five and a half percent to four and a

531
00:34:20,840 --> 00:34:23,319
Speaker 1: half percent to three and a half percent without a

532
00:34:23,360 --> 00:34:27,560
Speaker 1: meaningful pickup and inflation, have you personally, I don't know,

533
00:34:27,840 --> 00:34:31,440
Speaker 1: changed any of your views or premises about the noble

534
00:34:31,520 --> 00:34:34,879
Speaker 1: nous of some of these very variables. Yeah, and I'll

535
00:34:34,880 --> 00:34:37,719
Speaker 1: start with the background. I'm not a PhD economist. I'm

536
00:34:37,719 --> 00:34:41,279
Speaker 1: a business person. So as a business person I was

537
00:34:41,360 --> 00:34:47,760
Speaker 1: trained over a couple of three decades that theoretical data

538
00:34:47,800 --> 00:34:51,560
Speaker 1: points are useful to think about, but you've got to

539
00:34:51,600 --> 00:34:56,759
Speaker 1: be very careful about understanding there's a great deal of

540
00:34:56,840 --> 00:35:01,160
Speaker 1: unpredictability uncertainty about them. Having said that, I think the

541
00:35:01,239 --> 00:35:05,279
Speaker 1: concept that there's an equilibrium rate is a is a

542
00:35:05,320 --> 00:35:09,799
Speaker 1: good concept. Trying to get to specific as to what

543
00:35:10,000 --> 00:35:12,399
Speaker 1: that neutral rate is that that's the part I would

544
00:35:12,400 --> 00:35:16,480
Speaker 1: be careful about and so I think the concept that

545
00:35:16,600 --> 00:35:20,279
Speaker 1: there's probably some equilibrium rate and that that, by the way,

546
00:35:20,280 --> 00:35:25,600
Speaker 1: that equally liberum rate because of aging demographics, I think,

547
00:35:25,600 --> 00:35:28,840
Speaker 1: has been declining. Uh and you can see it in

548
00:35:28,880 --> 00:35:32,480
Speaker 1: the the clients and treasury yields and government bond yields

549
00:35:32,480 --> 00:35:36,200
Speaker 1: around the world. That's a pretty good indicator that prospects

550
00:35:36,239 --> 00:35:40,200
Speaker 1: for future growth are more sluggish and that tends to

551
00:35:40,239 --> 00:35:42,640
Speaker 1: have a downward impact on the neutral rate. And so

552
00:35:43,800 --> 00:35:47,120
Speaker 1: that helps explain why the FED funds rate and other

553
00:35:47,200 --> 00:35:50,000
Speaker 1: central banks around the world have had much lower interest

554
00:35:50,080 --> 00:35:53,600
Speaker 1: rates than they have historically. It's because prospects for future

555
00:35:53,600 --> 00:35:56,640
Speaker 1: growth are more sluggish. So I think that concept is

556
00:35:56,680 --> 00:35:59,320
Speaker 1: a useful concept. Now. The other thing we've done a

557
00:35:59,360 --> 00:36:02,040
Speaker 1: lot of work here in the Dallas Fed though, regarding inflation,

558
00:36:02,640 --> 00:36:06,319
Speaker 1: is there's a big structural trend that's been going on

559
00:36:06,400 --> 00:36:08,080
Speaker 1: for the last number of years in the economy, and

560
00:36:08,120 --> 00:36:13,080
Speaker 1: it's technology and technology enabled disruption that has limited the

561
00:36:13,120 --> 00:36:17,000
Speaker 1: pricing power of businesses. And and this is why I've said,

562
00:36:17,600 --> 00:36:21,400
Speaker 1: as you see more wage pressure and supply demand and

563
00:36:21,440 --> 00:36:25,359
Speaker 1: balances for labor, those businesses that have scale and then

564
00:36:25,400 --> 00:36:29,560
Speaker 1: can use technology to work around that have a distinct

565
00:36:29,600 --> 00:36:35,400
Speaker 1: advantage small mid sized businesses, local restaurant, retail store don't

566
00:36:35,400 --> 00:36:39,239
Speaker 1: really have those levers, and that's why we're seeing a

567
00:36:39,400 --> 00:36:43,960
Speaker 1: divergence between how small midsized businesses are dealing with these

568
00:36:44,000 --> 00:36:48,319
Speaker 1: wage pressures and inability to hire and large businesses. And

569
00:36:48,360 --> 00:36:52,200
Speaker 1: for small businesses, it's it's really it's restricting their hours,

570
00:36:52,239 --> 00:36:55,520
Speaker 1: it's eating into their margins, it's causing the question their

571
00:36:55,560 --> 00:36:59,080
Speaker 1: business model. It's pushing many businesses I talked to to

572
00:36:59,200 --> 00:37:04,000
Speaker 1: think about and getting scale, and I think that's, uh,

573
00:37:04,040 --> 00:37:23,360
Speaker 1: that's an important trend to be away. So we've talked

574
00:37:23,440 --> 00:37:26,719
Speaker 1: quite a bit about the inflation question. I'm wondering if

575
00:37:26,800 --> 00:37:29,920
Speaker 1: you could maybe zoom in a little bit more on

576
00:37:30,080 --> 00:37:33,279
Speaker 1: the full employment target and talk to us about how

577
00:37:33,360 --> 00:37:38,200
Speaker 1: you're seeing that and how exactly you're measuring full employment,

578
00:37:38,360 --> 00:37:42,719
Speaker 1: especially at a time when Chairman Pale has expressed a

579
00:37:42,719 --> 00:37:47,279
Speaker 1: desire to tackle inequality in the job market. So what

580
00:37:47,360 --> 00:37:53,279
Speaker 1: does full employment actually look like to you? So pre pandemic.

581
00:37:53,800 --> 00:37:56,799
Speaker 1: I looked at a full dashboard, but I board in

582
00:37:57,040 --> 00:38:01,600
Speaker 1: specifically on the headline unemployment rates for the whole population,

583
00:38:02,760 --> 00:38:07,200
Speaker 1: for black citizens, Hispanics, women, those with high school education

584
00:38:07,239 --> 00:38:11,560
Speaker 1: are less, as well as a measure called you six

585
00:38:12,120 --> 00:38:15,239
Speaker 1: unemployed plus discouraged workers most people who work part time

586
00:38:15,280 --> 00:38:18,200
Speaker 1: would rather work full time. I still look at all

587
00:38:18,239 --> 00:38:21,960
Speaker 1: those measures today, but I've we broadened out our dashbark

588
00:38:22,239 --> 00:38:26,400
Speaker 1: dashboard even further to look at things like open jobs,

589
00:38:26,719 --> 00:38:30,879
Speaker 1: the quits rate, some of the Conference Board measures. And

590
00:38:31,320 --> 00:38:35,399
Speaker 1: I think that I think it's very appropriate to be

591
00:38:35,480 --> 00:38:39,120
Speaker 1: looking at different groups, to look at their um, their

592
00:38:39,200 --> 00:38:42,920
Speaker 1: labor force participation and unemployment rate, and trying to look

593
00:38:42,960 --> 00:38:46,480
Speaker 1: at opportunities to reduce the slack in those groups and

594
00:38:46,520 --> 00:38:49,319
Speaker 1: get them back into the workforce. But I think in

595
00:38:49,400 --> 00:38:52,839
Speaker 1: assessing how tight the labor force is, it's never been

596
00:38:52,840 --> 00:38:56,400
Speaker 1: more important to look at a wide, wider set of

597
00:38:56,560 --> 00:39:00,520
Speaker 1: benchmarks than before. And that's why you're probably not gonna

598
00:39:00,560 --> 00:39:05,200
Speaker 1: hear me use pre pandemic targets in thinking about full

599
00:39:05,200 --> 00:39:09,520
Speaker 1: employment today. I think structurally, these supplied demand and balances

600
00:39:09,560 --> 00:39:13,080
Speaker 1: are more pronounced. I think we've got more structural issues.

601
00:39:13,120 --> 00:39:15,840
Speaker 1: So it makes me look at a much wider number

602
00:39:15,960 --> 00:39:19,520
Speaker 1: of items and a much bigger dashboard that I looked

603
00:39:19,560 --> 00:39:22,480
Speaker 1: that I looked at pre pandemic, and that's caused me

604
00:39:22,520 --> 00:39:24,799
Speaker 1: to say, and we wrote a piece on this two

605
00:39:24,800 --> 00:39:27,680
Speaker 1: months ago. The labor force, from what we can tell,

606
00:39:27,840 --> 00:39:32,960
Speaker 1: is much tighter than the headline measures would suggest. Can

607
00:39:33,000 --> 00:39:35,640
Speaker 1: you explain that why? Because you know one of the

608
00:39:35,680 --> 00:39:38,960
Speaker 1: things obviously and you mentioned it, economists on Wall Street

609
00:39:39,000 --> 00:39:41,759
Speaker 1: now are now looking at things like the black white

610
00:39:41,840 --> 00:39:43,759
Speaker 1: unemployment gap, and I don't think I would have ever

611
00:39:43,840 --> 00:39:47,399
Speaker 1: recalled seeing Wall Street research really like focus on that

612
00:39:48,000 --> 00:39:50,520
Speaker 1: as one of them, you know, two years ago, let

613
00:39:50,560 --> 00:39:53,000
Speaker 1: alone a year ago even, and we've been looking at it.

614
00:39:53,120 --> 00:39:54,799
Speaker 1: We've been looking at it here at the Dallas fit

615
00:39:55,040 --> 00:39:57,359
Speaker 1: ever since I for five. So what do you see

616
00:39:57,440 --> 00:39:59,840
Speaker 1: like when you see that? And it had started to

617
00:40:00,040 --> 00:40:04,560
Speaker 1: narrow significantly um pre crisis and then then god blown

618
00:40:04,560 --> 00:40:06,759
Speaker 1: out again. But what do you see now when you

619
00:40:06,800 --> 00:40:08,239
Speaker 1: look at that? And when you say you think the

620
00:40:08,320 --> 00:40:12,920
Speaker 1: labor market maybe tighter than some of the traditional measures suggest,

621
00:40:12,960 --> 00:40:15,000
Speaker 1: what do you what are you looking at on your dashboards?

622
00:40:15,360 --> 00:40:20,680
Speaker 1: We took a step backward unfortunately uh during COVID, and

623
00:40:20,719 --> 00:40:25,440
Speaker 1: we saw it. We were seeing uh improvement pre COVID,

624
00:40:25,600 --> 00:40:29,200
Speaker 1: and now we're seeing more divergence. It's it's starting to

625
00:40:29,280 --> 00:40:32,279
Speaker 1: improve and a little and there's some narrowing, but we've

626
00:40:32,320 --> 00:40:36,720
Speaker 1: taken a step backward even worse. We've seen a number

627
00:40:36,760 --> 00:40:39,880
Speaker 1: of issues. We've seen a drop in enrollment in skills

628
00:40:39,920 --> 00:40:44,480
Speaker 1: training among black and Hispanic students, and I hear this

629
00:40:44,600 --> 00:40:49,840
Speaker 1: from superintendence. We've seen senior classes in at risk communities

630
00:40:49,920 --> 00:40:53,480
Speaker 1: having a lower graduation rates. We're seeing higher dropout rates,

631
00:40:53,800 --> 00:40:56,600
Speaker 1: and we're hearing lots of reports from school superintendence I

632
00:40:56,680 --> 00:40:59,560
Speaker 1: speak with who are telling me they worried that, you know,

633
00:40:59,640 --> 00:41:04,200
Speaker 1: great school kids, particularly those who had to work remotely

634
00:41:05,120 --> 00:41:08,680
Speaker 1: and from at risk communities, have probably fallen behind more

635
00:41:08,719 --> 00:41:10,280
Speaker 1: and they're trying to figure out a way to catch

636
00:41:10,320 --> 00:41:14,279
Speaker 1: them up. So we're seeing all that. So some of

637
00:41:14,320 --> 00:41:17,160
Speaker 1: that can be dealt with through monetary policy, and some

638
00:41:17,320 --> 00:41:22,040
Speaker 1: of it means real local action and maybe in some

639
00:41:22,120 --> 00:41:26,040
Speaker 1: cases national action to improve early childhood literacy, full day

640
00:41:26,120 --> 00:41:30,120
Speaker 1: versus half day pre K, more access to WiFi, better

641
00:41:30,280 --> 00:41:34,399
Speaker 1: childcare access, a more childcare access where kids are read

642
00:41:34,440 --> 00:41:37,800
Speaker 1: to beefed up skills training. I think it's going to

643
00:41:37,920 --> 00:41:41,000
Speaker 1: take all those pieces of the puzzle to help address

644
00:41:41,080 --> 00:41:46,200
Speaker 1: these issues. A very broad question for you now, but

645
00:41:46,640 --> 00:41:49,560
Speaker 1: I'd love to hear your answer. So the past year

646
00:41:49,640 --> 00:41:53,520
Speaker 1: or so has clearly been unprecedented in many ways. Is

647
00:41:53,560 --> 00:41:56,400
Speaker 1: there one thing in particular that stands out to you

648
00:41:57,160 --> 00:42:04,239
Speaker 1: as surprising or unexpected. I think that the structure of

649
00:42:04,280 --> 00:42:11,839
Speaker 1: the economy continues to evolve, So technology, technology enabled disruption

650
00:42:12,040 --> 00:42:17,319
Speaker 1: and scale was important pre pandemic, It's become even more

651
00:42:17,400 --> 00:42:23,280
Speaker 1: critical today. I think the importance of access to child care,

652
00:42:24,520 --> 00:42:30,280
Speaker 1: early childhood literacy, improving awareness, and access to skills training

653
00:42:30,520 --> 00:42:35,720
Speaker 1: is even more important today because I think I'm disappointed.

654
00:42:35,760 --> 00:42:40,439
Speaker 1: I guess one surprise is a disappointment is I think

655
00:42:40,560 --> 00:42:43,440
Speaker 1: some of these supply demand and balances on the labor side,

656
00:42:44,200 --> 00:42:46,480
Speaker 1: some of it can be addressed with monetary policy, but

657
00:42:46,560 --> 00:42:50,280
Speaker 1: we need a broader action. I think the structural changes

658
00:42:50,320 --> 00:42:54,000
Speaker 1: in the economy and these persistence supply demand and balances

659
00:42:54,000 --> 00:42:57,920
Speaker 1: in the labor force is an unfortunate development and a surprise.

660
00:42:58,080 --> 00:43:00,480
Speaker 1: We can do something about it, but we gotta call

661
00:43:00,520 --> 00:43:04,920
Speaker 1: it out first and then take actions broadly to address it.

662
00:43:05,640 --> 00:43:09,000
Speaker 1: Um and and so I'm I'm hopeful that by me

663
00:43:09,400 --> 00:43:11,920
Speaker 1: talking about this and talking to local leaders about it

664
00:43:12,000 --> 00:43:14,960
Speaker 1: and national leaders and taking actions here at the Dallas

665
00:43:15,040 --> 00:43:18,280
Speaker 1: FT will take some of those steps to address these issues.

666
00:43:18,719 --> 00:43:22,080
Speaker 1: But that's probably the biggest challenge, and I guess development

667
00:43:22,640 --> 00:43:28,960
Speaker 1: since the pandemic that is more pressing. And I just

668
00:43:29,000 --> 00:43:32,120
Speaker 1: have one last um, you know, sort of real time question.

669
00:43:32,200 --> 00:43:36,440
Speaker 1: But obviously COVID isn't over, and you know, there's concerns

670
00:43:36,480 --> 00:43:41,360
Speaker 1: about new variants, the delta variant potentially delivering a setback

671
00:43:41,760 --> 00:43:43,920
Speaker 1: in terms of some of the returns of the services

672
00:43:44,120 --> 00:43:46,759
Speaker 1: economy that we saw. I'm just curious, like from a

673
00:43:46,800 --> 00:43:50,160
Speaker 1: sort of like risk management perspective, and you know, thinking

674
00:43:50,200 --> 00:43:53,760
Speaker 1: about the next the net the sequencing of policy going forward,

675
00:43:54,080 --> 00:43:56,880
Speaker 1: is that something that you're that you're thinking about and

676
00:43:56,920 --> 00:43:59,520
Speaker 1: watching were really are and spend an enormous amount of

677
00:43:59,520 --> 00:44:02,920
Speaker 1: time and I'm talking infectious disease experts every couple of

678
00:44:03,000 --> 00:44:06,840
Speaker 1: days and doctors and broadly when we've been doing this

679
00:44:06,960 --> 00:44:09,960
Speaker 1: for months. As long as it's still the case that

680
00:44:10,160 --> 00:44:18,160
Speaker 1: vaccines are effective in minimizing hospitalizations and death, you might

681
00:44:18,200 --> 00:44:21,200
Speaker 1: get COVID, but you probably won't get very ill. As

682
00:44:21,200 --> 00:44:23,759
Speaker 1: long as that continues to be the case, I think

683
00:44:23,760 --> 00:44:27,200
Speaker 1: the impact of the delta variant will be we will

684
00:44:27,239 --> 00:44:30,040
Speaker 1: not see a step backward in the economy, but we

685
00:44:30,160 --> 00:44:32,720
Speaker 1: might not see the progress we were hoping to see.

686
00:44:33,040 --> 00:44:36,080
Speaker 1: And I think it's going to delay the matching process

687
00:44:36,640 --> 00:44:41,000
Speaker 1: between businesses who are trying to hire workers and workers

688
00:44:41,040 --> 00:44:44,759
Speaker 1: stepping into the economy, and it probably will exacerbate some

689
00:44:44,880 --> 00:44:48,000
Speaker 1: of these materials supply demand of balances and labor supply

690
00:44:48,080 --> 00:44:51,520
Speaker 1: demand and balances. It doesn't mean we'll grow more slowly,

691
00:44:52,120 --> 00:44:53,759
Speaker 1: but I think it may. We're gonna have to be

692
00:44:53,800 --> 00:44:57,400
Speaker 1: even more patient in seeing this matching process occur. It

693
00:44:57,440 --> 00:45:02,080
Speaker 1: would be my guests. So you mentioned at the very

694
00:45:02,120 --> 00:45:05,360
Speaker 1: beginning of this conversation that one of the reasons you

695
00:45:05,480 --> 00:45:09,600
Speaker 1: were keen on tapering sooner rather than later was because

696
00:45:09,600 --> 00:45:14,000
Speaker 1: of excesses and risks building up in the market. And

697
00:45:14,320 --> 00:45:18,200
Speaker 1: I just wonder, you know, interest rates and asset purchases

698
00:45:18,320 --> 00:45:22,719
Speaker 1: tend to be a very blunt tool to change behavior

699
00:45:22,840 --> 00:45:25,839
Speaker 1: in financial markets. Is there something that the FED could

700
00:45:25,840 --> 00:45:30,200
Speaker 1: be doing on the macro prudential side to address that issue.

701
00:45:32,000 --> 00:45:34,440
Speaker 1: So let me talk about what I'm seeing, then we'll

702
00:45:34,440 --> 00:45:37,600
Speaker 1: talk about what can be done. UM. I worry that

703
00:45:37,640 --> 00:45:42,600
Speaker 1: there's excess people are moving out the risk curve, whether

704
00:45:42,680 --> 00:45:47,040
Speaker 1: it's institutions, individuals, people are taking more risk because they

705
00:45:47,080 --> 00:45:49,799
Speaker 1: can't earn from cash and in some cases they can't

706
00:45:49,840 --> 00:45:52,960
Speaker 1: even learn from you know, unless they're taking duration, they

707
00:45:52,960 --> 00:45:55,520
Speaker 1: can't really learn from bonds. And so what we're seeing

708
00:45:55,600 --> 00:45:57,839
Speaker 1: pretty broadly and all the measures I look at people

709
00:45:57,880 --> 00:46:01,760
Speaker 1: are moving out the risk and IT spreads are historically typed.

710
00:46:02,120 --> 00:46:07,040
Speaker 1: The question is then when when those excesses get more normalized,

711
00:46:08,040 --> 00:46:10,399
Speaker 1: that could be a jarring adjustment. And then I look

712
00:46:10,400 --> 00:46:13,319
Speaker 1: at the housing market and we see that the FED

713
00:46:13,440 --> 00:46:17,160
Speaker 1: is bying a meaningful, meaningful percentage of net new mortgage

714
00:46:17,160 --> 00:46:22,080
Speaker 1: backed securities issuance, and we're seeing elevated home prices, which

715
00:46:22,160 --> 00:46:25,279
Speaker 1: is going to translate into higher rents. Again, what I

716
00:46:25,320 --> 00:46:28,600
Speaker 1: worry about is for low moderate income communities. Brand increases

717
00:46:28,640 --> 00:46:31,719
Speaker 1: are coming for those communities, and I worry about their

718
00:46:31,719 --> 00:46:34,479
Speaker 1: ability to absorb them. So what what can be done?

719
00:46:34,600 --> 00:46:36,640
Speaker 1: I think a lot of these issues are not with

720
00:46:36,680 --> 00:46:41,480
Speaker 1: the banks UH. I think while not perfect, stress testing

721
00:46:42,360 --> 00:46:46,640
Speaker 1: UH and tough capital requirements with the banking sector have

722
00:46:46,640 --> 00:46:50,040
Speaker 1: have had a very have had a meaningful positive impact.

723
00:46:50,320 --> 00:46:54,160
Speaker 1: The issues I'm talking about will likely occur either in

724
00:46:54,200 --> 00:46:57,120
Speaker 1: the non bank financial sector. So what I would love

725
00:46:57,160 --> 00:47:00,960
Speaker 1: to see then is in other parts of the government

726
00:47:01,480 --> 00:47:08,000
Speaker 1: that that can oversee capital requirements, transparency, good disclosure to

727
00:47:08,120 --> 00:47:12,320
Speaker 1: be monitoring UH these excess risks. I worry about the

728
00:47:12,360 --> 00:47:16,239
Speaker 1: ability of the financial sector to intermediate the flows when

729
00:47:16,320 --> 00:47:19,560
Speaker 1: things normalize, and I do worry about in addition, away

730
00:47:19,560 --> 00:47:23,960
Speaker 1: from macropudential, just excesses and imbalances in the economy. Higher

731
00:47:24,000 --> 00:47:26,960
Speaker 1: rents would be one of those examples that real people

732
00:47:27,040 --> 00:47:30,560
Speaker 1: have to pay. That's not a macroprudential issue. That's probably

733
00:47:30,600 --> 00:47:33,120
Speaker 1: just an economic side effect that we need to be

734
00:47:33,160 --> 00:47:37,839
Speaker 1: aware of at the FED. Rob Kaplan, thank you so

735
00:47:37,920 --> 00:47:41,480
Speaker 1: much for coming on Oudlock. Thanks Tracy and Joe. Great

736
00:47:41,560 --> 00:47:44,000
Speaker 1: to talk to both of you. That was greatly appreciate it.

737
00:47:44,360 --> 00:47:48,640
Speaker 1: Thanks so much. That makes sense to walking. That was

738
00:47:48,719 --> 00:47:51,200
Speaker 1: just right all right. Thanks your rates talked about of you,

739
00:47:51,320 --> 00:48:08,760
Speaker 1: Thank you, Thank you. Trazy. I don't know, I always

740
00:48:08,760 --> 00:48:11,120
Speaker 1: sort of have to like pinch myself that these important

741
00:48:11,160 --> 00:48:13,759
Speaker 1: policymakers come on our podcast. It's always like such a

742
00:48:13,840 --> 00:48:17,920
Speaker 1: treat to hear from them. No, for real, it's really cool, No, totally. Um,

743
00:48:17,960 --> 00:48:22,040
Speaker 1: it's always fascinating to hear directly from a policymaker who

744
00:48:22,160 --> 00:48:25,200
Speaker 1: is actually thinking about this day in and day out

745
00:48:25,239 --> 00:48:28,160
Speaker 1: and trying to address it. Um. One of the things

746
00:48:28,200 --> 00:48:31,959
Speaker 1: I thought was interesting and I think one of our

747
00:48:32,239 --> 00:48:36,359
Speaker 1: previous guests, it might have been John Turik, brought up

748
00:48:36,400 --> 00:48:40,760
Speaker 1: this idea that as you approach full employment while keeping

749
00:48:40,840 --> 00:48:44,880
Speaker 1: rates and monetary policy low, you're clearly sort of easing

750
00:48:45,360 --> 00:48:48,960
Speaker 1: more and more and more. And and when when you

751
00:48:49,000 --> 00:48:53,160
Speaker 1: look at it through that perspective, then Rob's call to

752
00:48:53,440 --> 00:48:58,399
Speaker 1: taper sooner rather than later doesn't look so extreme. Yeah,

753
00:48:58,440 --> 00:49:00,680
Speaker 1: I mean that is very much a John Turret point

754
00:49:00,760 --> 00:49:03,719
Speaker 1: yourr spot on. Though I did think it was interesting

755
00:49:04,680 --> 00:49:10,800
Speaker 1: that Rob specifically talked about um disassociating the taper with

756
00:49:11,000 --> 00:49:13,120
Speaker 1: the start of the rate hike cycle, which is really

757
00:49:13,239 --> 00:49:15,319
Speaker 1: like because there is going to be you know, we

758
00:49:15,360 --> 00:49:21,200
Speaker 1: all remember what it was, and so I do think

759
00:49:21,239 --> 00:49:24,000
Speaker 1: that like there is going to you know, there's going

760
00:49:24,040 --> 00:49:28,120
Speaker 1: to be some language trickiness whenever it does begin, because

761
00:49:28,320 --> 00:49:31,040
Speaker 1: the market will interpret that is tightening. And you know,

762
00:49:32,080 --> 00:49:34,200
Speaker 1: President Camplan just now point out there's like two things.

763
00:49:34,280 --> 00:49:36,160
Speaker 1: They're taking your foot off the accelerator, but there's also

764
00:49:36,280 --> 00:49:39,279
Speaker 1: hitting the break, and his and his point of well,

765
00:49:39,320 --> 00:49:41,480
Speaker 1: we don't necessarily this just because we maybe want to

766
00:49:41,480 --> 00:49:43,920
Speaker 1: take our foot off the accelerator doesn't mean it's anywhere

767
00:49:43,920 --> 00:49:46,280
Speaker 1: time to hit the break. It'll be interesting to see

768
00:49:46,320 --> 00:49:49,360
Speaker 1: if and when the FED does begin to taper what

769
00:49:49,560 --> 00:49:53,800
Speaker 1: sort of communication they have around that, basically to affect

770
00:49:53,800 --> 00:49:55,799
Speaker 1: his point that the market should not read into it

771
00:49:55,840 --> 00:49:58,320
Speaker 1: that Okay, therefore, the next rate high is gonna be

772
00:49:58,320 --> 00:50:01,200
Speaker 1: in six months or whatever total um, and it definitely

773
00:50:01,200 --> 00:50:04,400
Speaker 1: sounds like it's something that they're thinking about already. Um.

774
00:50:04,440 --> 00:50:06,400
Speaker 1: On that note, the other thing that struck me from

775
00:50:06,440 --> 00:50:10,080
Speaker 1: the conversation is, I guess how much of a change

776
00:50:10,280 --> 00:50:13,040
Speaker 1: there's been in the FEDS framework, which is kind of obvious,

777
00:50:13,200 --> 00:50:17,080
Speaker 1: but all the new communication problems that that kind of

778
00:50:17,080 --> 00:50:20,799
Speaker 1: throws up. I guess based on the conversation around full

779
00:50:20,800 --> 00:50:25,800
Speaker 1: employment and inflation, you know, looking through temporary high levels

780
00:50:25,800 --> 00:50:28,439
Speaker 1: of inflation, it just feels like there's so much more

781
00:50:28,640 --> 00:50:33,880
Speaker 1: room for interpretation nowadays, and everyone is trying to get

782
00:50:33,920 --> 00:50:38,520
Speaker 1: a better sense of what exactly those two goals average

783
00:50:38,520 --> 00:50:42,600
Speaker 1: inflation you know, over what time frame? Um, full employment

784
00:50:42,960 --> 00:50:48,319
Speaker 1: measured by what actually means? Yeah, no, exactly right. Tons

785
00:50:48,400 --> 00:50:53,440
Speaker 1: of ambiguity still, and new policies in a new uncharted

786
00:50:53,520 --> 00:50:56,840
Speaker 1: territory to use that plie again, fascinating time in a

787
00:50:56,920 --> 00:51:00,880
Speaker 1: fascinating conversation. Yeah, uncharted squared Okay, shall we leave it there?

788
00:51:01,320 --> 00:51:05,200
Speaker 1: Let's leave it there. Okay. This has been another episode

789
00:51:05,200 --> 00:51:08,000
Speaker 1: of the All Thoughts Podcast. I'm Tracy Alloway. You can

790
00:51:08,040 --> 00:51:11,839
Speaker 1: follow me on Twitter at Tracy Alloway and I'm Joe

791
00:51:11,880 --> 00:51:14,520
Speaker 1: Why Isn't Thal? You can follow me on Twitter at

792
00:51:14,560 --> 00:51:17,200
Speaker 1: the Stalwart. And you can follow our guest on Twitter,

793
00:51:17,320 --> 00:51:19,879
Speaker 1: Rob Kaplan, President and CEO of the Dallas Fed. He's

794
00:51:19,960 --> 00:51:24,719
Speaker 1: at Rob s Kaplan on Twitter. Follow our producer Laura Carlson.

795
00:51:24,880 --> 00:51:28,640
Speaker 1: She's at Laura M. Carlson. Followed the Bloomberg head of podcast,

796
00:51:28,680 --> 00:51:32,400
Speaker 1: Francesco Leady at Francesco Today, and check out all of

797
00:51:32,400 --> 00:51:36,560
Speaker 1: our podcasts at Bloomberg under the handle at podcasts. Thanks

798
00:51:36,560 --> 00:52:05,560
Speaker 1: for listening. Three year