1 00:00:00,320 --> 00:00:03,080 Speaker 1: So, Joe, we have something pretty exciting coming up. That's right, 2 00:00:03,080 --> 00:00:05,360 Speaker 1: We're going to be doing a live episode of the 3 00:00:05,400 --> 00:00:08,600 Speaker 1: podcast and listeners are invited to join. Yep, we are 4 00:00:08,640 --> 00:00:11,879 Speaker 1: going to be playing host to Perry Maryland and Sultan 5 00:00:11,960 --> 00:00:14,200 Speaker 1: Posar that two of them are going to be debating 6 00:00:14,320 --> 00:00:17,880 Speaker 1: the future of the dollar. It's on September six at 7 00:00:17,960 --> 00:00:20,480 Speaker 1: three pm at Bloomberg h Q. And if you want 8 00:00:20,480 --> 00:00:22,959 Speaker 1: to come, Tracy, how can people sign up? It is 9 00:00:23,040 --> 00:00:25,320 Speaker 1: totally free. All you have to do is make sure 10 00:00:25,360 --> 00:00:27,960 Speaker 1: you r s v P in advance. Please send an 11 00:00:27,960 --> 00:00:40,760 Speaker 1: email to add Thoughts at Bloomberg dot net. Hello, and 12 00:00:40,880 --> 00:00:44,520 Speaker 1: welcome to another episode of the Odd Lots Podcast. I'm 13 00:00:44,600 --> 00:00:47,680 Speaker 1: Joe Wis and I'm Tracy Halloway. Tracy, what do you 14 00:00:47,760 --> 00:00:51,479 Speaker 1: think of when you think of the Federal Reserve and 15 00:00:51,560 --> 00:00:57,120 Speaker 1: August any sort of traditions or annual events come to mind? 16 00:00:58,000 --> 00:01:00,960 Speaker 1: Jackson Hole would be the obvious on yes, right, we 17 00:01:01,000 --> 00:01:06,360 Speaker 1: are recording this Monday, Augustine. And of course just on Friday, 18 00:01:06,440 --> 00:01:09,839 Speaker 1: we had Chairman Powell's Jackson Whole speech, which I would 19 00:01:09,880 --> 00:01:14,080 Speaker 1: say was very brief and the tone was definitely hawkish, 20 00:01:14,560 --> 00:01:16,840 Speaker 1: very to the point. I mean I think you actually 21 00:01:16,840 --> 00:01:18,960 Speaker 1: wrote this in the newsletter, but it's clear that the 22 00:01:18,959 --> 00:01:22,120 Speaker 1: FED means business when it comes to fighting inflation. And 23 00:01:22,160 --> 00:01:24,679 Speaker 1: the big news out of Jackson Hole was that Jerome 24 00:01:24,720 --> 00:01:29,160 Speaker 1: Powell is willing to stomach pain for households and businesses 25 00:01:29,240 --> 00:01:33,000 Speaker 1: in order to bring prices down. And the brevity of 26 00:01:33,000 --> 00:01:35,640 Speaker 1: the speech was sort of telling because I sort of 27 00:01:35,680 --> 00:01:38,399 Speaker 1: think of Jackson Hole typically as like this place for 28 00:01:38,480 --> 00:01:44,119 Speaker 1: like this venue for theoretical discussions of academic and this 29 00:01:44,240 --> 00:01:47,600 Speaker 1: was not an academic speech. Who was saying we're here 30 00:01:47,640 --> 00:01:50,000 Speaker 1: to fight inflation, and that's all I feel like saying 31 00:01:50,080 --> 00:01:52,320 Speaker 1: right now. I think that's right. But you know you 32 00:01:52,360 --> 00:01:55,920 Speaker 1: mentioned August traditions. There's another August FED tradition, isn't there? 33 00:01:56,040 --> 00:01:59,160 Speaker 1: There is another Fed August tradition, at least one that 34 00:01:59,240 --> 00:02:02,840 Speaker 1: I think of. That is, of course, having Neil cash Carry, 35 00:02:02,920 --> 00:02:06,000 Speaker 1: the president of the Minneapolis Fed, on our podcast. This 36 00:02:06,040 --> 00:02:08,800 Speaker 1: will be the third straight August. I don't know if 37 00:02:08,800 --> 00:02:10,800 Speaker 1: that's actually intentional. I think it sort of always works 38 00:02:10,800 --> 00:02:13,080 Speaker 1: out that way. I don't think we've purposely timed it 39 00:02:13,120 --> 00:02:16,359 Speaker 1: around Jackson Hall of each time. But we have Neil 40 00:02:16,400 --> 00:02:19,480 Speaker 1: on again. That's fantastic. There is clearly a lot to 41 00:02:19,520 --> 00:02:22,200 Speaker 1: talk about, and clearly things have changed since the last 42 00:02:22,200 --> 00:02:25,000 Speaker 1: time we spoke to him. I mean back then, inflation 43 00:02:25,160 --> 00:02:26,880 Speaker 1: was that I think it was something like five percent, 44 00:02:27,040 --> 00:02:31,919 Speaker 1: and now fast forward to the last data for July eight. Yeah, 45 00:02:31,919 --> 00:02:33,760 Speaker 1: it's a lot higher than it was in the past. 46 00:02:33,800 --> 00:02:36,400 Speaker 1: And of course over the last year we've seen this 47 00:02:36,800 --> 00:02:41,000 Speaker 1: fed pivot and this very aggressive attempt to now get 48 00:02:41,040 --> 00:02:44,079 Speaker 1: inflation under control. Anyway, no more talking from us, Let's 49 00:02:44,080 --> 00:02:46,399 Speaker 1: get right to our guests. So Neil cash Carry, thank 50 00:02:46,440 --> 00:02:49,680 Speaker 1: you so much for coming back on the podcast. Thanks 51 00:02:49,720 --> 00:02:51,400 Speaker 1: for having me. I was looking forward to it, and 52 00:02:51,520 --> 00:02:55,080 Speaker 1: I'm glad our tradition is continuing. I love this tradition. 53 00:02:55,240 --> 00:02:58,520 Speaker 1: So let's just get right into it. So, you know, 54 00:02:58,600 --> 00:03:01,400 Speaker 1: one of the lines that caught a lot of attention 55 00:03:01,919 --> 00:03:06,000 Speaker 1: from Sherman Powell's speech at Jackson Hole was that these 56 00:03:06,360 --> 00:03:09,400 Speaker 1: higher interest rates, this effort to fight inflation, will bring 57 00:03:09,680 --> 00:03:13,480 Speaker 1: some pain to households and businesses, and nobody knows exactly 58 00:03:13,680 --> 00:03:16,800 Speaker 1: how much, but it's clear that you and the rest 59 00:03:16,800 --> 00:03:19,360 Speaker 1: of the committee are willing to do what it takes, 60 00:03:19,480 --> 00:03:21,120 Speaker 1: or you're saying you're willing to do what it takes 61 00:03:21,160 --> 00:03:24,360 Speaker 1: to fight inflation, even if that means pain for the 62 00:03:24,440 --> 00:03:29,080 Speaker 1: labor market and an economic slowdown. In your research and analysis, 63 00:03:29,600 --> 00:03:32,160 Speaker 1: do you have any estimate for where you think the 64 00:03:32,240 --> 00:03:35,560 Speaker 1: labor market needs to go to? How high does unemployment 65 00:03:35,600 --> 00:03:37,960 Speaker 1: need to get from your perspective, or might it need 66 00:03:38,040 --> 00:03:41,320 Speaker 1: to get in order to get inflation under control. Well, 67 00:03:41,440 --> 00:03:43,560 Speaker 1: it's a good question, it's a very important question, and 68 00:03:43,720 --> 00:03:46,760 Speaker 1: unfortunately answers we don't know. You know, this is not 69 00:03:47,560 --> 00:03:51,040 Speaker 1: a labor market driven surge of inflation. This is not 70 00:03:51,200 --> 00:03:56,280 Speaker 1: the traditional story where labor market gets tight, wages climb, 71 00:03:56,320 --> 00:03:59,000 Speaker 1: businesses have to pass those costs on and then that 72 00:03:59,080 --> 00:04:03,280 Speaker 1: leads to inflation. This inflation has been driven by mostly 73 00:04:03,760 --> 00:04:07,440 Speaker 1: by supply chains, by the war in Ukraine, and by 74 00:04:07,480 --> 00:04:10,640 Speaker 1: a lot of fiscal and monetary stimulus putting money into 75 00:04:10,640 --> 00:04:14,119 Speaker 1: people's pockets, and wages have been climbing, but they've been 76 00:04:14,520 --> 00:04:17,800 Speaker 1: a lagging indicator, not a forward indicator of inflation. And 77 00:04:17,880 --> 00:04:20,400 Speaker 1: so when I think about that, that tells me it 78 00:04:20,440 --> 00:04:23,279 Speaker 1: really depends on do we get more help on the 79 00:04:23,279 --> 00:04:26,360 Speaker 1: supply chains, do we get more help from commodity prices, 80 00:04:26,720 --> 00:04:30,000 Speaker 1: And as fiscal stimulus wanes, that should relieve some of 81 00:04:30,040 --> 00:04:32,919 Speaker 1: the pressure and then the labor market will have to 82 00:04:32,960 --> 00:04:36,279 Speaker 1: carry less of the burden, so to speak, through monetary policy. 83 00:04:36,360 --> 00:04:38,359 Speaker 1: So I don't know the answer to that because it 84 00:04:38,400 --> 00:04:40,800 Speaker 1: really depends on do we get help from these other sectors. 85 00:04:41,520 --> 00:04:43,240 Speaker 1: So I'm sure we're going to dig into wages a 86 00:04:43,240 --> 00:04:47,000 Speaker 1: bit more. But one more big picture question before we do. 87 00:04:47,279 --> 00:04:49,600 Speaker 1: Last year, you were on the record saying that inflation 88 00:04:49,680 --> 00:04:52,960 Speaker 1: is transitory, and I think when we last spoke to you, 89 00:04:52,960 --> 00:04:56,000 Speaker 1: you were talking about how the FED shouldn't overreact to 90 00:04:56,160 --> 00:05:00,200 Speaker 1: temporary inflation measures. But now fast forward to today and 91 00:05:00,240 --> 00:05:04,600 Speaker 1: you basically transformed from the Fed's biggest dove into the 92 00:05:04,600 --> 00:05:07,839 Speaker 1: biggest hawk, and you were talking at Jackson Hole about 93 00:05:08,040 --> 00:05:11,440 Speaker 1: inflation now being a blazing inferno and things like that. 94 00:05:12,040 --> 00:05:15,239 Speaker 1: What accounts for for that transformation? What made you change 95 00:05:15,240 --> 00:05:19,200 Speaker 1: your mind? I changed my mind because the data didn't 96 00:05:19,240 --> 00:05:21,640 Speaker 1: react the way I expected it too. So when a 97 00:05:21,760 --> 00:05:23,960 Speaker 1: year ago when we were speaking, you know, we talked 98 00:05:23,960 --> 00:05:26,600 Speaker 1: about how much fiscal stimulus was in the pipeline. We talked, 99 00:05:26,640 --> 00:05:29,400 Speaker 1: we talked about workers who were probably going to return 100 00:05:29,760 --> 00:05:33,360 Speaker 1: to the labor market. And it's true the fiscal stimulus 101 00:05:33,560 --> 00:05:36,560 Speaker 1: ran its course. But if you look at consumer balance sheets. 102 00:05:36,600 --> 00:05:39,440 Speaker 1: Generally speaking, at the American consumer is still doing very 103 00:05:39,520 --> 00:05:42,640 Speaker 1: very well, even relative to where they were before the pandemic. 104 00:05:43,000 --> 00:05:46,719 Speaker 1: We've seen multiple waves of COVID, We've seen some workers return, 105 00:05:46,760 --> 00:05:49,160 Speaker 1: they have not returned as quickly as I had expected. 106 00:05:49,560 --> 00:05:52,920 Speaker 1: And at some point, even if those things ultimately proved 107 00:05:52,960 --> 00:05:57,200 Speaker 1: to be true, they're taking so long to resolve themselves 108 00:05:57,440 --> 00:05:59,520 Speaker 1: that we are running the risk at the feder Reserve 109 00:05:59,560 --> 00:06:04,000 Speaker 1: of allowing inflation expectations to become unanchored. So even if 110 00:06:04,040 --> 00:06:06,720 Speaker 1: in the end, when history writes the book, they might say, hey, 111 00:06:06,720 --> 00:06:09,680 Speaker 1: some of these factors were in fact still transitory, but 112 00:06:09,760 --> 00:06:12,919 Speaker 1: they're simply taking much longer than I had expected, and 113 00:06:13,000 --> 00:06:16,800 Speaker 1: that I am willing to tolerate for risk of unanchoring 114 00:06:16,800 --> 00:06:19,440 Speaker 1: inflation expectations. If we were to allow that to happen, 115 00:06:19,880 --> 00:06:23,479 Speaker 1: that would be very devastating to main Street, to our economy, 116 00:06:23,720 --> 00:06:26,599 Speaker 1: two people all across our country. How do you gauge 117 00:06:26,720 --> 00:06:32,000 Speaker 1: inflation expectations? Of course they're various private surveys or other surveys. 118 00:06:32,760 --> 00:06:36,000 Speaker 1: They don't seem to have picked up and in fact 119 00:06:36,440 --> 00:06:39,440 Speaker 1: recent measures. You know, on Friday, right as a Powell 120 00:06:39,640 --> 00:06:41,919 Speaker 1: spoke at ten am, you Sterring. We got the latest 121 00:06:41,960 --> 00:06:44,200 Speaker 1: Humish survey. It actually ticked down a little bit to 122 00:06:44,240 --> 00:06:48,320 Speaker 1: two point nine percent over the next five to ten years. Hey, 123 00:06:48,320 --> 00:06:51,680 Speaker 1: what do you look at on the inflation expectations measure? 124 00:06:51,880 --> 00:06:55,279 Speaker 1: And then more broadly, like what is the mechanism view 125 00:06:55,279 --> 00:06:58,680 Speaker 1: which high inflation become could become entrenched? You hear this 126 00:06:58,720 --> 00:07:01,280 Speaker 1: word a lot or concern of out it may be entrenched. 127 00:07:01,520 --> 00:07:05,040 Speaker 1: How does entrenched this happen? Well, I'll give you a 128 00:07:05,040 --> 00:07:06,920 Speaker 1: few examples. So first of all, we look at all 129 00:07:06,960 --> 00:07:09,840 Speaker 1: the different measures we can which are survey based measures 130 00:07:09,840 --> 00:07:13,080 Speaker 1: that you just mentioned, as well as indicators embedded into 131 00:07:13,080 --> 00:07:17,600 Speaker 1: financial markets, and they're all suggesting that, hey, inflation is 132 00:07:17,640 --> 00:07:20,960 Speaker 1: gonna come down fairly quickly, especially look at the financial markets. 133 00:07:21,400 --> 00:07:23,920 Speaker 1: The market seem to think inflation is gonna fall rapidly 134 00:07:23,960 --> 00:07:27,520 Speaker 1: next year, and I hope they're right. Now. Part of 135 00:07:27,560 --> 00:07:30,920 Speaker 1: the reason I think that all of these measures are 136 00:07:30,920 --> 00:07:33,480 Speaker 1: showing a lot of confidence inflation is going to fall 137 00:07:34,000 --> 00:07:36,760 Speaker 1: is because they are looking at us, and we're saying 138 00:07:36,800 --> 00:07:38,960 Speaker 1: we're on the job, we're on the case, we're not 139 00:07:38,960 --> 00:07:41,400 Speaker 1: going to let it high inflation remain. So partly it's 140 00:07:41,400 --> 00:07:44,960 Speaker 1: a reflection I think of confidence that we are going 141 00:07:44,960 --> 00:07:47,800 Speaker 1: to walk the walk, you know, not just talk a 142 00:07:47,800 --> 00:07:49,640 Speaker 1: big game, but we're actually gonna follow through and make 143 00:07:49,680 --> 00:07:53,280 Speaker 1: sure that inflation comes down. And so that it's comforting 144 00:07:53,320 --> 00:07:56,720 Speaker 1: that they seem to be trusting in us, but that 145 00:07:56,800 --> 00:07:59,520 Speaker 1: doesn't absolve us from needing to then follow through. It 146 00:07:59,560 --> 00:08:01,800 Speaker 1: means that more than ever, we need to follow through 147 00:08:02,080 --> 00:08:06,640 Speaker 1: to make sure that those expectations are vindicated. You mentioned 148 00:08:06,680 --> 00:08:09,480 Speaker 1: financial market indicators, and of course when you look at 149 00:08:09,560 --> 00:08:12,520 Speaker 1: treasury yields, and actually this was something you mentioned last year, 150 00:08:12,600 --> 00:08:16,680 Speaker 1: is something that you were watching which weren't necessarily implying 151 00:08:16,760 --> 00:08:20,320 Speaker 1: inflation at that time. And as you mentioned, bond yields 152 00:08:20,440 --> 00:08:24,120 Speaker 1: further out into next year suggests that inflation is going 153 00:08:24,200 --> 00:08:27,440 Speaker 1: to come down. But how much of that is predicated 154 00:08:27,680 --> 00:08:31,400 Speaker 1: on inflation coming down because of something like a recession? 155 00:08:31,480 --> 00:08:33,720 Speaker 1: How do you gauge that risk? When you look at 156 00:08:33,720 --> 00:08:37,000 Speaker 1: bond yields, look at the inverted curve, things like that, 157 00:08:37,040 --> 00:08:41,280 Speaker 1: a traditional recession indicator, what are they telling you? Yeah, 158 00:08:41,400 --> 00:08:43,280 Speaker 1: it's something I do. Pay a lot of attention to. 159 00:08:43,520 --> 00:08:46,800 Speaker 1: Both the nominal you'll curve and the real you'll curve. 160 00:08:46,840 --> 00:08:49,720 Speaker 1: They usually move together. But because of these inflation and 161 00:08:49,800 --> 00:08:52,480 Speaker 1: dynamics right now, there are some differences. So the last 162 00:08:52,480 --> 00:08:55,480 Speaker 1: time I looked, the nominal curve had inverted. I focused 163 00:08:55,520 --> 00:08:58,200 Speaker 1: mostly on the two ten curve. The real curve had 164 00:08:58,240 --> 00:09:01,760 Speaker 1: not yet inverted, but was getting close. Something interesting happened 165 00:09:01,800 --> 00:09:04,160 Speaker 1: in July. You remember the Bank of Canada raised interest 166 00:09:04,240 --> 00:09:06,520 Speaker 1: rates by a hundred basis points, and there was a 167 00:09:06,600 --> 00:09:09,880 Speaker 1: lot of chatter before our prior FMC meeting. Would the 168 00:09:09,960 --> 00:09:12,960 Speaker 1: FOMC raised by a hundred basis points? And the yield 169 00:09:12,960 --> 00:09:14,800 Speaker 1: curve did something very interesting. The front end of the 170 00:09:14,840 --> 00:09:16,920 Speaker 1: Yelk curve went up, as you would expect for a 171 00:09:16,960 --> 00:09:20,800 Speaker 1: more hawkish expectation of monetary policy, but the back end 172 00:09:20,840 --> 00:09:23,440 Speaker 1: of the real yo'l curve went down. So why would 173 00:09:23,480 --> 00:09:25,400 Speaker 1: the back end of the real yolk curve go down? 174 00:09:25,520 --> 00:09:29,040 Speaker 1: I interpreted it as markets were saying, hey, they may 175 00:09:29,040 --> 00:09:32,720 Speaker 1: be more aggressive with monetary policy. That may lead more 176 00:09:32,840 --> 00:09:36,600 Speaker 1: quickly to some type of slong of the economy and 177 00:09:36,640 --> 00:09:40,000 Speaker 1: a more a sooner achievement of the dual mandate goals, 178 00:09:40,400 --> 00:09:42,679 Speaker 1: which would then allow them to back off. Now does 179 00:09:42,720 --> 00:09:45,120 Speaker 1: that technically mean it would be a recession? I don't know, 180 00:09:45,800 --> 00:09:48,240 Speaker 1: but I interpreted it to mean markets thought we would 181 00:09:48,240 --> 00:09:51,080 Speaker 1: more quickly achieve our dual mandate goals and then we 182 00:09:51,120 --> 00:09:54,400 Speaker 1: would be able to relax somewhat. It's an interesting data 183 00:09:54,440 --> 00:09:56,840 Speaker 1: point that I pay attention to. It's it's not driving 184 00:09:57,200 --> 00:09:59,720 Speaker 1: my recommendations at this point, but it's something that I 185 00:09:59,760 --> 00:10:03,320 Speaker 1: think is giving us some information. Since we're talking about 186 00:10:03,480 --> 00:10:06,560 Speaker 1: bond markets, can you maybe talk a little bit about 187 00:10:06,640 --> 00:10:11,120 Speaker 1: FED communication at this point and how it's evolved. Because 188 00:10:11,280 --> 00:10:15,480 Speaker 1: when the FED did that first basis point hike after 189 00:10:15,720 --> 00:10:19,040 Speaker 1: ruling out one just a few weeks before, we did 190 00:10:19,080 --> 00:10:21,120 Speaker 1: have a bunch of bond traders who were talking about 191 00:10:21,120 --> 00:10:24,640 Speaker 1: how this was the death of forward guidance. So I 192 00:10:24,679 --> 00:10:27,400 Speaker 1: guess my question is was it because before it felt like, 193 00:10:27,480 --> 00:10:30,480 Speaker 1: even though you were stressing data dependency, you would still 194 00:10:30,520 --> 00:10:34,720 Speaker 1: try to avoid surprising the market. Yeah. I think this 195 00:10:34,840 --> 00:10:39,320 Speaker 1: notion of the death afford guidance is premature and probably 196 00:10:39,360 --> 00:10:42,960 Speaker 1: an exaggeration. What does Ford guidance even mean? I see 197 00:10:43,120 --> 00:10:45,840 Speaker 1: value and members of the aform C going out and 198 00:10:45,880 --> 00:10:49,840 Speaker 1: saying we are united in our commitment of getting inflation 199 00:10:49,840 --> 00:10:52,679 Speaker 1: back down to our two percent goal. That means we're 200 00:10:52,679 --> 00:10:54,319 Speaker 1: going to do what we need to do to achieve 201 00:10:54,360 --> 00:10:56,640 Speaker 1: that and how much we're gonna need to do. It's 202 00:10:56,640 --> 00:10:58,720 Speaker 1: going to depend on what happens in a lot of 203 00:10:58,760 --> 00:11:02,160 Speaker 1: the sectors of the economy or supply chains, etcetera. But 204 00:11:02,720 --> 00:11:06,520 Speaker 1: us expressing our commitment are united commitment to doing what 205 00:11:06,559 --> 00:11:08,840 Speaker 1: we need to do to get inflation back down. That's 206 00:11:08,840 --> 00:11:11,679 Speaker 1: a form of forward guidance. Should we not articulate that? 207 00:11:11,800 --> 00:11:14,200 Speaker 1: I don't agree with that at all, And so yes, 208 00:11:14,320 --> 00:11:16,600 Speaker 1: I want to say, there's a lot of uncertainty about 209 00:11:16,720 --> 00:11:18,720 Speaker 1: what's going to happen at the next meeting, or what's 210 00:11:18,720 --> 00:11:20,199 Speaker 1: going to happen by the end of the year. It's 211 00:11:20,200 --> 00:11:22,680 Speaker 1: going to depend on all of these different factors. That's 212 00:11:22,679 --> 00:11:25,320 Speaker 1: all true, and I think we should be honest about 213 00:11:25,360 --> 00:11:27,720 Speaker 1: how much uncertain e there is about these factors and 214 00:11:27,760 --> 00:11:30,760 Speaker 1: what's going to drive where monetary policy needs to go. 215 00:11:30,800 --> 00:11:34,720 Speaker 1: But certainly as forward guidance expressing our commitment to getting 216 00:11:34,720 --> 00:11:37,200 Speaker 1: inflation back down, I think it's very valuable for us 217 00:11:37,280 --> 00:11:56,880 Speaker 1: all to express that. So you mentioned there was some 218 00:11:57,040 --> 00:11:59,880 Speaker 1: discussion at the last meeting about whether the FED, like 219 00:12:00,040 --> 00:12:02,440 Speaker 1: Bank of Canada should go to a hundred basis points, 220 00:12:02,440 --> 00:12:05,959 Speaker 1: and I think you were among those who supported such 221 00:12:06,000 --> 00:12:09,160 Speaker 1: a strong move to stamp out this raging inferno of 222 00:12:09,360 --> 00:12:13,240 Speaker 1: inflation that we're seeing right now. Fast forward to right now, 223 00:12:13,640 --> 00:12:16,880 Speaker 1: the last couple inflation data points, and it's just it's 224 00:12:16,920 --> 00:12:18,600 Speaker 1: not a lot of data to work with. Have not 225 00:12:18,720 --> 00:12:21,720 Speaker 1: been that bad. We got that zero percent CPR report. 226 00:12:22,000 --> 00:12:26,800 Speaker 1: The PC for July was actually slight decline in prices sequentially, 227 00:12:27,000 --> 00:12:30,080 Speaker 1: It's just one month. We've had some pauses. Does that 228 00:12:30,200 --> 00:12:33,440 Speaker 1: affect your view on September, the meeting that's coming up 229 00:12:33,480 --> 00:12:36,319 Speaker 1: near the end of September, and you're thinking of whether 230 00:12:36,440 --> 00:12:40,680 Speaker 1: fifty versus seventy five basis points would be appropriate. Well, 231 00:12:40,720 --> 00:12:43,480 Speaker 1: as you said, Joe, it's, you know, basically one data point. 232 00:12:43,840 --> 00:12:46,280 Speaker 1: You know, we've been surprised for the past year almost 233 00:12:46,320 --> 00:12:49,760 Speaker 1: every time of inflation, surprising us to the upside. So 234 00:12:50,040 --> 00:12:52,520 Speaker 1: if we have one surprise somewhat to the downside, I'll 235 00:12:52,559 --> 00:12:55,480 Speaker 1: happily take it. But I don't take much signal from that. 236 00:12:55,800 --> 00:12:57,040 Speaker 1: You know, we need to be able, We need to 237 00:12:57,040 --> 00:12:59,840 Speaker 1: see a lot more before we get convinced inflation as 238 00:12:59,840 --> 00:13:01,840 Speaker 1: well on its way back down, or that we've seen 239 00:13:01,880 --> 00:13:06,400 Speaker 1: pek inflation. I'm not convinced of that yet. So you know, 240 00:13:06,480 --> 00:13:08,720 Speaker 1: to me, if the inflation reading is that we've gotten 241 00:13:08,760 --> 00:13:11,080 Speaker 1: since the last meeting. We're surprising us to the upside 242 00:13:11,160 --> 00:13:13,760 Speaker 1: yet again. Then I think you'd probably see people talking 243 00:13:13,800 --> 00:13:16,280 Speaker 1: more about Hey, would they consider a hundred basis points? 244 00:13:16,600 --> 00:13:18,840 Speaker 1: I think the fact that the chatter is fifty verses 245 00:13:18,880 --> 00:13:21,559 Speaker 1: seventy five, you know, we've got more data to see 246 00:13:21,559 --> 00:13:24,520 Speaker 1: before I would be ready to draw any conclusions from that. 247 00:13:24,880 --> 00:13:26,719 Speaker 1: But my guess is we're somewhere in that range of 248 00:13:26,760 --> 00:13:28,800 Speaker 1: fifty to seventy five for the next meeting. Based on 249 00:13:28,840 --> 00:13:31,680 Speaker 1: the data that has come in this week, we're getting 250 00:13:31,800 --> 00:13:36,520 Speaker 1: a job's report last months was particularly strong in the 251 00:13:36,679 --> 00:13:41,600 Speaker 1: absence of fresh inflation data. Would another surprisingly strong jobs 252 00:13:41,600 --> 00:13:43,280 Speaker 1: are port I mean, we got half a million new 253 00:13:43,360 --> 00:13:46,679 Speaker 1: jobs last month. How would you be thinking about that 254 00:13:46,760 --> 00:13:52,480 Speaker 1: and would that push you more towards well, I don't know. Certainly, 255 00:13:52,520 --> 00:13:54,319 Speaker 1: I want to see a strong labor market. I want 256 00:13:54,320 --> 00:13:56,120 Speaker 1: to see people getting jobs. I want to see real 257 00:13:56,160 --> 00:13:59,280 Speaker 1: wages going up, so that gives me more comfort that 258 00:13:59,280 --> 00:14:02,880 Speaker 1: we're probably not actually in a recession right now. Obviously 259 00:14:02,920 --> 00:14:04,840 Speaker 1: you've talked a lot about the first two quarters of 260 00:14:04,880 --> 00:14:07,440 Speaker 1: negative GDP growth and are we in a recession? And 261 00:14:07,480 --> 00:14:10,559 Speaker 1: as you know, you've talked about a lot. Typically recession 262 00:14:10,720 --> 00:14:13,160 Speaker 1: comes with a very weak labor market and a lot 263 00:14:13,160 --> 00:14:15,920 Speaker 1: of layoffs. So if we continue to see strong job growth, 264 00:14:15,960 --> 00:14:18,920 Speaker 1: that would give me confidence that we're not actually in 265 00:14:18,960 --> 00:14:21,320 Speaker 1: a recession, even though some of the data indicates we 266 00:14:21,440 --> 00:14:25,360 Speaker 1: might be. But ultimately I would be looking at wages. 267 00:14:25,920 --> 00:14:28,240 Speaker 1: I will be looking at real wage growth, and ultimately 268 00:14:28,280 --> 00:14:30,920 Speaker 1: I'm very focused more than anything on the inflation data 269 00:14:30,960 --> 00:14:35,000 Speaker 1: and the inflation expectation data. So for me, individually, I 270 00:14:35,040 --> 00:14:37,160 Speaker 1: don't think the labor market itself is going to be 271 00:14:37,200 --> 00:14:40,880 Speaker 1: determinative of fifty verse seventy five or what the what 272 00:14:40,960 --> 00:14:44,440 Speaker 1: the subsequent reading needs to be. Actually that reminds me. 273 00:14:44,560 --> 00:14:47,200 Speaker 1: You know, at Jackson Hole, you made that distinction between 274 00:14:47,320 --> 00:14:50,720 Speaker 1: running the economy hot and the current situation, which you 275 00:14:50,840 --> 00:14:55,160 Speaker 1: called a blazing inferno. Can you elaborate on that a 276 00:14:55,200 --> 00:14:59,040 Speaker 1: little more, Like, what is the difference between benign heat 277 00:14:59,200 --> 00:15:01,680 Speaker 1: in the economy me where you have a healthy labor 278 00:15:01,760 --> 00:15:07,040 Speaker 1: market versus damaging inferno heat? Like how do you gauge 279 00:15:07,080 --> 00:15:10,760 Speaker 1: those two? Does it just come down to the inflation 280 00:15:10,840 --> 00:15:14,480 Speaker 1: expectations spiral that you described, or do you look at 281 00:15:14,520 --> 00:15:18,560 Speaker 1: broader types of damage like you know, people being unable 282 00:15:18,600 --> 00:15:21,640 Speaker 1: to afford rent and pay off their debt and things 283 00:15:21,640 --> 00:15:25,400 Speaker 1: like that. Well, I would say it starts with the 284 00:15:25,480 --> 00:15:28,520 Speaker 1: actual inflation that American families are experiencing. So let's just 285 00:15:28,560 --> 00:15:31,280 Speaker 1: go back in time. A few years before the pandemic, 286 00:15:31,680 --> 00:15:34,120 Speaker 1: we had three and a half percent unemployment. For the 287 00:15:34,160 --> 00:15:37,000 Speaker 1: four or five years before the pandemic, we at the 288 00:15:37,160 --> 00:15:40,800 Speaker 1: FED kept thinking, oh, we're at maximum employment, and then 289 00:15:40,840 --> 00:15:43,120 Speaker 1: we started raising interest rates, and I objected to those 290 00:15:43,120 --> 00:15:45,160 Speaker 1: because I wasn't sure that we were actually at maximum 291 00:15:45,200 --> 00:15:48,360 Speaker 1: employment and inflation was coming in under our two percent target. 292 00:15:48,880 --> 00:15:51,480 Speaker 1: And then the job, the job market, the economy kept 293 00:15:51,480 --> 00:15:55,360 Speaker 1: creating jobs, much to our surprise, suggesting we were not 294 00:15:55,480 --> 00:15:59,480 Speaker 1: in fact in maximum employment because inflation stayed low and 295 00:15:59,560 --> 00:16:02,280 Speaker 1: wage owth was picking up, picking up only moderately. So 296 00:16:02,320 --> 00:16:06,440 Speaker 1: in that context, we asked ourselves, is there some way 297 00:16:06,480 --> 00:16:08,920 Speaker 1: we could provide more of a boost to the economy 298 00:16:09,400 --> 00:16:12,800 Speaker 1: using monetary policy during times of low inflation. And that's 299 00:16:12,800 --> 00:16:14,560 Speaker 1: how we came up with our new framework that we 300 00:16:14,600 --> 00:16:18,560 Speaker 1: adopted a year or so ago. And that framework is 301 00:16:18,600 --> 00:16:22,520 Speaker 1: literally designed to provide more stimulus in those low inflation periods. 302 00:16:22,840 --> 00:16:25,320 Speaker 1: But once you get back to a high inflation period 303 00:16:25,360 --> 00:16:27,760 Speaker 1: two per cent or above. Then the new framework is 304 00:16:27,760 --> 00:16:30,280 Speaker 1: the old framework. It just goes back to connecting monetary 305 00:16:30,320 --> 00:16:32,480 Speaker 1: policy the way we did in the past. So in 306 00:16:32,520 --> 00:16:35,200 Speaker 1: that context, we were asking, how do we provide a 307 00:16:35,200 --> 00:16:37,080 Speaker 1: little bit more of a boost to the economy and 308 00:16:37,120 --> 00:16:39,680 Speaker 1: periods of low inflation. And that's what I would define 309 00:16:39,760 --> 00:16:44,920 Speaker 1: is running the economy hot in that context. Now, in contrast, 310 00:16:45,360 --> 00:16:48,000 Speaker 1: where are we now. We had multi trillion dollars of 311 00:16:48,080 --> 00:16:51,320 Speaker 1: fiscal stimulus, We have supply chains that were gummed up 312 00:16:51,360 --> 00:16:54,680 Speaker 1: because of COVID, we have millions of missing workers relative 313 00:16:54,720 --> 00:16:58,200 Speaker 1: to what we expected. We also have a war Russia 314 00:16:58,280 --> 00:17:00,720 Speaker 1: launching war in Ukraine, which is up end in commodity 315 00:17:00,760 --> 00:17:05,000 Speaker 1: markets and energy markets. Those are two wildly different scenarios. 316 00:17:05,000 --> 00:17:07,720 Speaker 1: And so that's why in the meeting I was pushing 317 00:17:07,720 --> 00:17:10,520 Speaker 1: back on the notion of well, this proves that there's 318 00:17:10,560 --> 00:17:13,600 Speaker 1: really dangerous to running economy hot. This is not what 319 00:17:13,680 --> 00:17:15,760 Speaker 1: we were talking about a few years ago. This is 320 00:17:15,800 --> 00:17:20,080 Speaker 1: a completely different situation. And while one might eventually conclude, hey, 321 00:17:20,119 --> 00:17:22,240 Speaker 1: you don't want to run an economy hot, at least 322 00:17:22,240 --> 00:17:25,240 Speaker 1: for me, it's entirely premature to draw that conclusion. Right 323 00:17:25,280 --> 00:17:27,639 Speaker 1: now in the context of what we meant about a 324 00:17:27,640 --> 00:17:31,080 Speaker 1: hot economy a few years ago. That's an interesting way 325 00:17:31,080 --> 00:17:34,720 Speaker 1: to frame it. You know, the flexible average inflation targeting. 326 00:17:34,960 --> 00:17:38,520 Speaker 1: It was unveiled at the August Jackson Hole, so I think, 327 00:17:38,560 --> 00:17:41,000 Speaker 1: I think, yeah, so it's it's two years old at 328 00:17:41,040 --> 00:17:44,359 Speaker 1: this point. Was it basically an example of the FED 329 00:17:44,880 --> 00:17:47,480 Speaker 1: fighting the last war? Which is a charge that's been 330 00:17:47,560 --> 00:17:50,679 Speaker 1: levied that's sort of the fiscal expansion, etcetera. That the 331 00:17:50,720 --> 00:17:54,680 Speaker 1: FED overlearned the lessons of two thousand, two thousand nine. 332 00:17:55,240 --> 00:17:58,640 Speaker 1: So he is this is fate, uh fighting the last war, 333 00:17:59,080 --> 00:18:01,600 Speaker 1: and in order to stay consistent with fate, what does 334 00:18:01,640 --> 00:18:04,480 Speaker 1: that actually mean in practice? Because in theory, if you're 335 00:18:04,560 --> 00:18:06,800 Speaker 1: supposed to get a two percent average, we've had like, 336 00:18:06,920 --> 00:18:09,520 Speaker 1: you know, eight nine percent, we have to run sub 337 00:18:09,560 --> 00:18:13,080 Speaker 1: two percent inflation for a while in order to actually 338 00:18:13,520 --> 00:18:17,159 Speaker 1: fulfill that framework. And I think everybody always says that 339 00:18:17,200 --> 00:18:19,600 Speaker 1: everybody is always guilty of fighting the last war, whether 340 00:18:19,640 --> 00:18:22,960 Speaker 1: it's an economics or it's in the military. You know, 341 00:18:23,040 --> 00:18:25,040 Speaker 1: you you have to learn from the last war, and 342 00:18:25,080 --> 00:18:27,399 Speaker 1: you have to make yourself stronger so that you're not 343 00:18:27,520 --> 00:18:29,879 Speaker 1: vulnerable the way you were last time, and so go 344 00:18:29,960 --> 00:18:34,040 Speaker 1: back in time. The big mistake in hindsight that Congress 345 00:18:34,080 --> 00:18:36,080 Speaker 1: and the Fed made coming out of the O eight 346 00:18:36,119 --> 00:18:39,720 Speaker 1: oh nine downturn was we were not aggressive enough collectively 347 00:18:39,800 --> 00:18:42,800 Speaker 1: in supporting the economy and supporting main street, and it 348 00:18:42,880 --> 00:18:45,560 Speaker 1: took ten years to put Americans back to work. That 349 00:18:45,720 --> 00:18:49,400 Speaker 1: is way too slow. This time, Congress said we're gonna 350 00:18:49,400 --> 00:18:52,200 Speaker 1: act very They're gonna act very aggressively. In the COVID downturn, 351 00:18:52,640 --> 00:18:55,719 Speaker 1: they passed big fiscal stimuli, and when most of that 352 00:18:55,760 --> 00:18:59,560 Speaker 1: stimulus was passed, we had no idea when and if 353 00:18:59,640 --> 00:19:02,320 Speaker 1: vaccine means would be available. I was talking to the 354 00:19:02,359 --> 00:19:04,199 Speaker 1: best health experts in the country and they said, we 355 00:19:04,240 --> 00:19:06,399 Speaker 1: just don't know how long it's going to take. And 356 00:19:06,480 --> 00:19:08,960 Speaker 1: so it's actually a miracle of science that we have 357 00:19:09,080 --> 00:19:13,679 Speaker 1: multiple highly effective vaccines available within a year. And so 358 00:19:13,760 --> 00:19:19,000 Speaker 1: the economic downturn was much shorter than had been expected 359 00:19:19,040 --> 00:19:21,640 Speaker 1: at the time the stimulus was passed. And so now 360 00:19:21,680 --> 00:19:25,240 Speaker 1: we've got a very strong labor market recovery. Did Congress, 361 00:19:25,720 --> 00:19:27,600 Speaker 1: you know, learn the wrong lesson from OH eight or 362 00:19:27,640 --> 00:19:29,679 Speaker 1: O nine, I don't think so. I was very I 363 00:19:29,720 --> 00:19:33,119 Speaker 1: was emphatic better Aaron doing too much than too little. 364 00:19:33,480 --> 00:19:35,600 Speaker 1: So now we're in a position that we collectively have 365 00:19:35,640 --> 00:19:37,879 Speaker 1: done too much and we need to adjust. But I 366 00:19:37,880 --> 00:19:39,760 Speaker 1: don't want to go to those millions of Americans who 367 00:19:39,800 --> 00:19:42,760 Speaker 1: are working today and said, you know what, you shouldn't 368 00:19:42,760 --> 00:19:45,080 Speaker 1: have your job. We should have been much more timid 369 00:19:45,080 --> 00:19:47,280 Speaker 1: in our recovery because all of a sudden we might 370 00:19:47,280 --> 00:19:49,200 Speaker 1: have been in a new regime that we didn't foresee. 371 00:19:50,359 --> 00:19:54,320 Speaker 1: What does it mean to apply flexible average inflation targeting? Now? 372 00:19:54,440 --> 00:19:57,879 Speaker 1: Does it have to overshoot to the downside? Yeah? I 373 00:19:57,880 --> 00:19:59,800 Speaker 1: don't think so. I mean we left ourselves a lot 374 00:19:59,800 --> 00:20:02,040 Speaker 1: of eagle room, you know, we don't. I've never been 375 00:20:02,080 --> 00:20:06,040 Speaker 1: a subscriber of rigid monetary rules because strange things happen 376 00:20:06,200 --> 00:20:08,840 Speaker 1: in the economy, and if you tie yourself to this 377 00:20:08,960 --> 00:20:11,920 Speaker 1: rigid monetary rule, then you end up doing very damaging things. 378 00:20:12,440 --> 00:20:13,879 Speaker 1: And so no, I don't think so. I think that 379 00:20:13,960 --> 00:20:16,400 Speaker 1: we will be able to get inflation back down over 380 00:20:16,440 --> 00:20:19,120 Speaker 1: the next several years to our two percent target. And 381 00:20:19,280 --> 00:20:20,919 Speaker 1: I don't think we're gonna then say, well, we have 382 00:20:21,000 --> 00:20:23,640 Speaker 1: to go run a one percent inflation for the next 383 00:20:23,760 --> 00:20:26,920 Speaker 1: X number of years to average mechanically average two percent. 384 00:20:27,000 --> 00:20:28,760 Speaker 1: I think that would be silly for us to do that. 385 00:20:29,440 --> 00:20:32,159 Speaker 1: You were talking about time frames just then, and the 386 00:20:32,280 --> 00:20:36,119 Speaker 1: idea of the vaccine coming out, you know, possibly quicker 387 00:20:36,119 --> 00:20:39,120 Speaker 1: than a lot of people expected at the time. How 388 00:20:39,160 --> 00:20:42,680 Speaker 1: are you gauging policy lags at the moment? Because this 389 00:20:42,720 --> 00:20:44,880 Speaker 1: is something that f o MC has talked a little 390 00:20:44,880 --> 00:20:47,760 Speaker 1: bit about in the statement, this idea that you know, 391 00:20:48,200 --> 00:20:51,200 Speaker 1: an interest rate hike takes some time to filter into 392 00:20:51,240 --> 00:20:56,040 Speaker 1: the real economy now that rates are higher and presumably 393 00:20:56,119 --> 00:20:59,560 Speaker 1: closer to you know, neutral, although you tell me if 394 00:20:59,560 --> 00:21:02,640 Speaker 1: you don't think that's the case, does it get harder 395 00:21:02,920 --> 00:21:06,040 Speaker 1: to gauge that? Do you have to start thinking more 396 00:21:06,160 --> 00:21:10,280 Speaker 1: about the impact of previous policy decisions as you start 397 00:21:10,320 --> 00:21:14,560 Speaker 1: to make new ones. It's it's hard and it's complicated. 398 00:21:15,000 --> 00:21:17,800 Speaker 1: We know that interest rate sectors of the economy will 399 00:21:17,800 --> 00:21:20,720 Speaker 1: be affected most and most quickly, and they already are, 400 00:21:21,000 --> 00:21:23,919 Speaker 1: housing being the best example of that. But we also 401 00:21:23,960 --> 00:21:25,840 Speaker 1: know we you know, we study history a lot, and 402 00:21:25,880 --> 00:21:28,639 Speaker 1: we study what has worked in history for policy and 403 00:21:28,680 --> 00:21:31,680 Speaker 1: what has not worked. And one of the biggest mistakes 404 00:21:31,680 --> 00:21:34,000 Speaker 1: they made in the nineties seventies at the FED is 405 00:21:34,000 --> 00:21:36,399 Speaker 1: they thought that inflation was on its way down the 406 00:21:36,440 --> 00:21:39,840 Speaker 1: economy was weakening, and then they backed off, and then 407 00:21:39,840 --> 00:21:43,040 Speaker 1: inflation flare back up again before they had finally quashed it. 408 00:21:43,480 --> 00:21:45,480 Speaker 1: And so that to me is something that I'm very 409 00:21:45,520 --> 00:21:48,359 Speaker 1: focused on. We can't repeat that mistake. So to deal 410 00:21:48,400 --> 00:21:51,719 Speaker 1: with these lags, You're right, the lags are there. They're 411 00:21:51,720 --> 00:21:54,520 Speaker 1: hard to see, they're hard to measure exactly. There's a 412 00:21:54,520 --> 00:21:56,520 Speaker 1: lot of things happening in the economy. I would be 413 00:21:56,600 --> 00:21:59,879 Speaker 1: much more comfortable raising rates to some endpoint, you know, 414 00:22:00,040 --> 00:22:01,960 Speaker 1: let's say it's four, let's say it's four and a half, 415 00:22:02,240 --> 00:22:06,080 Speaker 1: maybe higher, whatever we think is needed at the time, 416 00:22:06,600 --> 00:22:09,959 Speaker 1: and then just sitting there and let's just press pause 417 00:22:10,119 --> 00:22:14,000 Speaker 1: and wait to see how some of these underlying dynamics evolved. 418 00:22:14,160 --> 00:22:17,320 Speaker 1: To me, the most costly mistake we will make is 419 00:22:17,359 --> 00:22:20,720 Speaker 1: if we get fooled thinking, oh, we've got inflation licked. Now, 420 00:22:20,800 --> 00:22:24,000 Speaker 1: let's go cut interest rates because the economy is showing 421 00:22:24,040 --> 00:22:28,520 Speaker 1: signs of weakening. That to me has a potential um 422 00:22:28,560 --> 00:22:32,720 Speaker 1: really dramatically negative effect on our credibility and on people's 423 00:22:32,720 --> 00:22:34,560 Speaker 1: belief that, hey, they're just going to repeat the mistakes 424 00:22:34,560 --> 00:22:36,400 Speaker 1: of the nineteen seventies. And so the way to deal 425 00:22:36,400 --> 00:22:39,240 Speaker 1: with the lags for me is just to get somewhere 426 00:22:39,240 --> 00:22:41,880 Speaker 1: and sit there until we're really convinced that we've got 427 00:22:41,880 --> 00:22:45,560 Speaker 1: inflation licked. Is four or five? Is that your definition 428 00:22:45,560 --> 00:22:48,960 Speaker 1: of restrictive knowing what we know now, I mean the 429 00:22:49,040 --> 00:22:51,840 Speaker 1: challenges so we have to look at first of all, 430 00:22:51,960 --> 00:22:54,000 Speaker 1: I think that the overnight interest rate is interesting, but 431 00:22:54,080 --> 00:22:58,000 Speaker 1: not that interesting. What's much more important are longer term 432 00:22:58,000 --> 00:23:01,480 Speaker 1: real rates. That's what I believe lives economic activity, five 433 00:23:01,560 --> 00:23:04,600 Speaker 1: year real rates, ten year reel rates. They're positive now. 434 00:23:05,200 --> 00:23:08,119 Speaker 1: Now the question is, though embedded in those real rates 435 00:23:08,440 --> 00:23:12,680 Speaker 1: are market expectations for inflation expectations over the next five 436 00:23:12,760 --> 00:23:16,760 Speaker 1: or ten years. Four to five is probably where I 437 00:23:16,760 --> 00:23:19,679 Speaker 1: would guess right now the level of restriction needs to 438 00:23:19,720 --> 00:23:23,320 Speaker 1: be given what we and what financial markets believe about 439 00:23:23,320 --> 00:23:26,679 Speaker 1: inflation over the next few years. The biggest risk, not 440 00:23:26,800 --> 00:23:29,960 Speaker 1: the most likely risk, but the most damaging risk, is 441 00:23:30,000 --> 00:23:34,760 Speaker 1: if we and financial markets are fundamentally misreading the underlying 442 00:23:34,760 --> 00:23:38,439 Speaker 1: inflationary dynamics, and if markets believe that inflation is going 443 00:23:38,480 --> 00:23:40,600 Speaker 1: to come quickly back down to two pc over the 444 00:23:40,600 --> 00:23:44,040 Speaker 1: next couple of years. If that's just wrong, then you 445 00:23:44,080 --> 00:23:48,080 Speaker 1: could see markets discovering that we discover that and all 446 00:23:48,119 --> 00:23:49,800 Speaker 1: of a sudden we need to be in a substantially 447 00:23:49,880 --> 00:23:52,760 Speaker 1: higher interest rate environment. I'm not ready to forecast that now, 448 00:23:53,119 --> 00:23:55,040 Speaker 1: but I'm also not ready to rule it out. So 449 00:23:55,320 --> 00:23:59,520 Speaker 1: just for your forecast specifically, I think at the last 450 00:23:59,640 --> 00:24:04,040 Speaker 1: Dot July you indicated your inclination was for FED policy 451 00:24:04,080 --> 00:24:06,119 Speaker 1: to go three point nine percent by the end of 452 00:24:06,119 --> 00:24:10,119 Speaker 1: the year four point four next year. Has anything changed 453 00:24:10,359 --> 00:24:14,119 Speaker 1: since your last forecast, either to the upside or downside 454 00:24:14,200 --> 00:24:17,680 Speaker 1: regarding what you see is the sort of optimal trajectory 455 00:24:17,720 --> 00:24:20,399 Speaker 1: of the FED funds, right, you know, sitting where I 456 00:24:20,440 --> 00:24:22,399 Speaker 1: am today and there's more data to come in between 457 00:24:22,400 --> 00:24:25,520 Speaker 1: now and the September meeting, nothing has really changed that 458 00:24:25,560 --> 00:24:29,520 Speaker 1: would dramatically change my rate path outlook. But again I 459 00:24:29,520 --> 00:24:31,159 Speaker 1: don't want to prejudge it. I need to look at 460 00:24:31,240 --> 00:24:33,200 Speaker 1: the remaining data that comes in. And this is something 461 00:24:33,200 --> 00:24:35,760 Speaker 1: that I deliberate on a lot with our research department 462 00:24:35,800 --> 00:24:38,960 Speaker 1: here as we look at different scenarios. But from the 463 00:24:39,040 --> 00:24:42,120 Speaker 1: data I've seen, it hasn't uh doesn't imply a big 464 00:24:42,200 --> 00:24:44,520 Speaker 1: change to my rate path. So let me ask you 465 00:24:44,520 --> 00:24:48,080 Speaker 1: a slightly bigger picture question about you know, as you 466 00:24:48,160 --> 00:24:50,959 Speaker 1: think about setting policy, you know One of the things 467 00:24:51,000 --> 00:24:53,600 Speaker 1: that we've discussed, or that you've discussed with me for 468 00:24:53,640 --> 00:24:57,720 Speaker 1: a long time, is this idea that economists, both maybe 469 00:24:57,760 --> 00:25:00,639 Speaker 1: withinside of the FED and outside the FED, have a 470 00:25:00,680 --> 00:25:04,560 Speaker 1: bad habit of sort of changing their structural outlook of 471 00:25:04,600 --> 00:25:08,159 Speaker 1: the labor market after a recession. And so you, um, 472 00:25:08,200 --> 00:25:10,359 Speaker 1: you know, you have this big shock in two thousand 473 00:25:10,320 --> 00:25:13,399 Speaker 1: and eight, two thousand nine, and everybody sort of sets 474 00:25:13,480 --> 00:25:16,480 Speaker 1: lower sights on what full employment actually it looks like. 475 00:25:16,720 --> 00:25:18,560 Speaker 1: And it turned out after two thousand and eight two 476 00:25:18,560 --> 00:25:21,320 Speaker 1: thousand nine that actually we could get back to old levels. 477 00:25:21,400 --> 00:25:24,800 Speaker 1: We just needed more growth. There wasn't some inherent structural barrier, 478 00:25:25,040 --> 00:25:27,880 Speaker 1: But it seems to be a habit of economists everywhere 479 00:25:27,920 --> 00:25:31,800 Speaker 1: in the US Europe. Right now, the employment of population 480 00:25:31,920 --> 00:25:36,000 Speaker 1: ratio in the US is six whereas pre crisis February 481 00:25:36,040 --> 00:25:39,680 Speaker 1: two thousand, twenty sixty one point two. So by that measure, 482 00:25:39,880 --> 00:25:43,160 Speaker 1: by that labor market measure, there hasn't been a recovery. 483 00:25:43,560 --> 00:25:47,480 Speaker 1: Do you worry that this could again be a mistake 484 00:25:47,640 --> 00:25:49,960 Speaker 1: where everyone's like, Okay, this time it really is different. 485 00:25:50,600 --> 00:25:54,280 Speaker 1: There's been a lot of boomers retiring, etcetera. There's a 486 00:25:54,280 --> 00:25:58,760 Speaker 1: structural shift but that actually is just another cyclical change 487 00:25:58,800 --> 00:26:02,600 Speaker 1: and it's going to be a little wild for normalization. Yeah, 488 00:26:02,600 --> 00:26:04,800 Speaker 1: it's a good question, Joe. The answer is, I don't know. 489 00:26:05,280 --> 00:26:09,399 Speaker 1: Back in the earlier recovery, the last recovery, people just 490 00:26:09,440 --> 00:26:13,320 Speaker 1: kind of wave their hands and said mismatches and structural changes. 491 00:26:13,320 --> 00:26:15,800 Speaker 1: They couldn't point anything. Right now, you actually can point 492 00:26:15,800 --> 00:26:18,080 Speaker 1: to something, which is, uh, there are a lot of 493 00:26:18,080 --> 00:26:21,040 Speaker 1: people who have long COVID. There are people who continue 494 00:26:21,080 --> 00:26:23,439 Speaker 1: to get sick from COVID multiple times, and even if 495 00:26:23,440 --> 00:26:26,760 Speaker 1: that doesn't permanently exit them from the labor force, there's 496 00:26:26,800 --> 00:26:28,800 Speaker 1: some cohort of folks that are not in the labor 497 00:26:28,840 --> 00:26:32,160 Speaker 1: force today because they're sick with COVID, And so it's 498 00:26:32,200 --> 00:26:35,200 Speaker 1: this health dimension. It seems to be more real than 499 00:26:35,240 --> 00:26:37,800 Speaker 1: just this people making stuff up for why why the 500 00:26:37,880 --> 00:26:40,000 Speaker 1: natural rate of unemployment would be higher or why the 501 00:26:40,040 --> 00:26:43,560 Speaker 1: epop ratio would be lower. Retirements is another one that 502 00:26:43,600 --> 00:26:47,040 Speaker 1: you've mentioned. There is some evidence that retirees can come 503 00:26:47,040 --> 00:26:49,919 Speaker 1: back if the labor market looks attractive, you know. And 504 00:26:49,960 --> 00:26:53,440 Speaker 1: the other thing is there's some new technologies that might 505 00:26:53,520 --> 00:26:55,760 Speaker 1: mean that somebody who used to work forty hours a 506 00:26:55,760 --> 00:26:58,440 Speaker 1: week they want to retire, but maybe they work twenty 507 00:26:58,440 --> 00:27:01,520 Speaker 1: hours a week remotely because technology enables it. So some 508 00:27:01,600 --> 00:27:04,080 Speaker 1: of the developments of the last two years could actually 509 00:27:04,119 --> 00:27:07,639 Speaker 1: point in a positive direction. But it's the health the 510 00:27:07,680 --> 00:27:11,560 Speaker 1: health elements that I think are almost unequivocally negative, and 511 00:27:11,600 --> 00:27:13,240 Speaker 1: that's the one that I just need to see. We 512 00:27:13,280 --> 00:27:16,800 Speaker 1: need more time to figure out. So maybe talk to 513 00:27:16,880 --> 00:27:20,200 Speaker 1: us a little bit about productivity, because it feels like 514 00:27:20,480 --> 00:27:23,040 Speaker 1: wages kind of get all the attention because everyone's worried 515 00:27:23,040 --> 00:27:27,440 Speaker 1: about inflation, but productivity has been trending down as well. 516 00:27:27,520 --> 00:27:30,040 Speaker 1: So I'm wondering, is that something you're looking at as 517 00:27:30,200 --> 00:27:33,480 Speaker 1: something that needs to go up in order for inflation 518 00:27:33,560 --> 00:27:36,080 Speaker 1: to start coming down, or how are you thinking about 519 00:27:36,160 --> 00:27:39,960 Speaker 1: that aspect of it? It's right now for me, it's 520 00:27:39,960 --> 00:27:42,080 Speaker 1: a curiosity. I mean a little bit of its math. 521 00:27:42,560 --> 00:27:44,959 Speaker 1: We talked about earlier Tracy that the labor market has 522 00:27:44,960 --> 00:27:46,960 Speaker 1: been hiring a lot of people, creating a lot of jobs, 523 00:27:46,960 --> 00:27:49,439 Speaker 1: which is good news. Well, you know, if you end 524 00:27:49,520 --> 00:27:51,400 Speaker 1: up hiring a lot of people and you don't have 525 00:27:51,560 --> 00:27:55,119 Speaker 1: very strong uh GDP growth, and you put those two 526 00:27:55,160 --> 00:27:56,960 Speaker 1: things together, you're gonna get up with very low or 527 00:27:56,960 --> 00:27:59,960 Speaker 1: even negative productivity. Growth. So the negative productivity growth is 528 00:28:00,040 --> 00:28:02,960 Speaker 1: not really a surprise. It's just it's just those two 529 00:28:03,000 --> 00:28:06,440 Speaker 1: factors adding together. I think it'll be interesting to see 530 00:28:06,480 --> 00:28:09,200 Speaker 1: what happens with GDP. Does it get revised up over time, 531 00:28:09,520 --> 00:28:13,320 Speaker 1: does it come closer to gross domestic income um? And 532 00:28:13,359 --> 00:28:16,000 Speaker 1: then more broadly, at some point these firms, you know, 533 00:28:16,040 --> 00:28:18,760 Speaker 1: one theory is these firms are hoarding labor. They're just 534 00:28:18,840 --> 00:28:20,680 Speaker 1: hiring a lot of people because they wanted to hire 535 00:28:20,720 --> 00:28:22,840 Speaker 1: them over the last few years, and when they become available, 536 00:28:22,880 --> 00:28:25,000 Speaker 1: they hire them. You know, firms can't do that for 537 00:28:25,080 --> 00:28:28,000 Speaker 1: very long. They're gonna have to make rational decisions. Uh, 538 00:28:28,040 --> 00:28:30,080 Speaker 1: And so it and it should end up showing up 539 00:28:30,080 --> 00:28:32,280 Speaker 1: in the labor market. And so it's something we pay 540 00:28:32,320 --> 00:28:36,080 Speaker 1: attention to the productivity data, but it's not the driver 541 00:28:36,320 --> 00:28:38,000 Speaker 1: of the economy as I see it right now, but 542 00:28:38,080 --> 00:28:40,960 Speaker 1: long term it clearly is critically important. I just want 543 00:28:40,960 --> 00:28:44,240 Speaker 1: to ask one more question about the labor market, and again, 544 00:28:44,360 --> 00:28:47,160 Speaker 1: going back to that last jobs report, you know, half 545 00:28:47,200 --> 00:28:50,320 Speaker 1: a million jobs, it's not you know, the ability of 546 00:28:50,360 --> 00:28:52,520 Speaker 1: firms to hire half a million people in a month 547 00:28:52,600 --> 00:28:56,080 Speaker 1: does not necessarily seem consistent with an economy that's sort 548 00:28:56,080 --> 00:28:59,000 Speaker 1: of out of workers. On the other hand, other measures 549 00:28:59,040 --> 00:29:02,080 Speaker 1: such as job things and just sort of the difficulty 550 00:29:02,120 --> 00:29:04,760 Speaker 1: that firms have with hiring causes of people to say, oh, 551 00:29:04,760 --> 00:29:07,840 Speaker 1: the account the labor market is extremely tight. Do you 552 00:29:07,840 --> 00:29:10,320 Speaker 1: think there could still be slack in the labor market 553 00:29:10,440 --> 00:29:13,320 Speaker 1: right now, especially again given some of these measures of 554 00:29:13,360 --> 00:29:17,320 Speaker 1: employment to population or LFPR or however you want alternate 555 00:29:17,320 --> 00:29:21,600 Speaker 1: measures of UH, labor market utilization, Could there still be slack? 556 00:29:22,280 --> 00:29:23,920 Speaker 1: I think there could be. I mean, I think it's 557 00:29:23,920 --> 00:29:27,480 Speaker 1: going to be people's decisions, which is, you know, as unfortunately, 558 00:29:27,520 --> 00:29:32,080 Speaker 1: this high inflation is really punishing families UH, and lower 559 00:29:32,080 --> 00:29:35,239 Speaker 1: income folks are the least able to bear it. So 560 00:29:35,320 --> 00:29:37,760 Speaker 1: you couldn't you could see people saying, Hey, I didn't 561 00:29:37,760 --> 00:29:39,040 Speaker 1: want to go back to work, but I need to 562 00:29:39,040 --> 00:29:41,120 Speaker 1: go back to work because this is getting too expensive 563 00:29:41,120 --> 00:29:43,840 Speaker 1: to put food on the table. And as wages climb, 564 00:29:44,680 --> 00:29:46,400 Speaker 1: people are saying, I need to go back to work 565 00:29:46,440 --> 00:29:47,840 Speaker 1: or I'm going to go back to work. And so 566 00:29:48,320 --> 00:29:52,040 Speaker 1: you know, to me, ultimately maximum employment is as many 567 00:29:52,080 --> 00:29:55,320 Speaker 1: people working that is consistent with our underlying two percent 568 00:29:55,360 --> 00:29:58,800 Speaker 1: inflation objective. Those two things are in my mind tightly 569 00:29:58,880 --> 00:30:02,160 Speaker 1: linked concepts, and so yes, there may still be slack, 570 00:30:02,520 --> 00:30:04,360 Speaker 1: but we need to get inflation back down to two 571 00:30:04,360 --> 00:30:06,760 Speaker 1: percent and then we'll be in a position to understand 572 00:30:07,200 --> 00:30:26,880 Speaker 1: is the economy in equilibrium or not so. Setting aside 573 00:30:26,920 --> 00:30:30,600 Speaker 1: strengthen the labor market and higher inflation, which have been 574 00:30:30,760 --> 00:30:34,800 Speaker 1: two of the big hallmarks of our economic situation this summer, 575 00:30:35,320 --> 00:30:38,680 Speaker 1: the other thing that's been going on is the very 576 00:30:38,800 --> 00:30:43,000 Speaker 1: very strong dollar. And I'm wondering if the FED takes 577 00:30:43,080 --> 00:30:47,600 Speaker 1: into account the impact of its rate hikes, particularly, you know, 578 00:30:47,800 --> 00:30:51,600 Speaker 1: a stronger currency on the rest of the world, because 579 00:30:51,640 --> 00:30:56,160 Speaker 1: at a time when places like Europe certain emerging markets 580 00:30:56,240 --> 00:31:00,640 Speaker 1: are having an energy crisis, it feels like the impact 581 00:31:01,120 --> 00:31:04,640 Speaker 1: of US rate hikes and a stronger dollar could be 582 00:31:04,800 --> 00:31:08,240 Speaker 1: even greater than before. And it does feel like global 583 00:31:08,360 --> 00:31:11,920 Speaker 1: pressures are building even as the U s economy remains 584 00:31:12,320 --> 00:31:15,960 Speaker 1: relatively strong for now. So how are you thinking about 585 00:31:16,280 --> 00:31:19,080 Speaker 1: the impact of US economic policy on the rest of 586 00:31:19,120 --> 00:31:22,720 Speaker 1: the world. Well, we pay attention to it. We have 587 00:31:23,000 --> 00:31:25,840 Speaker 1: a really talented team of economists who focus on the 588 00:31:25,880 --> 00:31:28,520 Speaker 1: whole global economy at the Board of Governors, and we've 589 00:31:28,560 --> 00:31:31,080 Speaker 1: got a lot of international economists here at the Minneapolis Fed. 590 00:31:31,360 --> 00:31:33,480 Speaker 1: But we pay attention to it because it's a feedback 591 00:31:33,480 --> 00:31:36,720 Speaker 1: loop back to the American economy. We have to our 592 00:31:36,840 --> 00:31:41,840 Speaker 1: charge is to conduct monetary policy to optimum outcomes of 593 00:31:41,840 --> 00:31:44,480 Speaker 1: our dual mandate for the US economy, And so we 594 00:31:44,560 --> 00:31:46,920 Speaker 1: run these scenarios. If the dollar goes up, what does 595 00:31:46,960 --> 00:31:49,360 Speaker 1: that mean for imports, what does that mean for growth 596 00:31:49,440 --> 00:31:51,640 Speaker 1: around the world, and then ultimately what does it mean 597 00:31:51,680 --> 00:31:55,400 Speaker 1: for inflation and employment in America? And so we are 598 00:31:55,880 --> 00:31:58,040 Speaker 1: we are aware of it, but we are focused on 599 00:31:58,200 --> 00:32:01,719 Speaker 1: optimizing our polly sees based on what the outcomes are 600 00:32:01,760 --> 00:32:03,680 Speaker 1: for the U. S economy and for the American people. 601 00:32:04,680 --> 00:32:08,600 Speaker 1: So you mentioned fiscal stimulus. It was quite a bit 602 00:32:08,640 --> 00:32:13,240 Speaker 1: of it in and also and it's you know, it's 603 00:32:13,320 --> 00:32:17,280 Speaker 1: winding down, it's mostly being withdrawn. That being said, it's 604 00:32:17,320 --> 00:32:20,720 Speaker 1: not entirely being withdrawn. And I think you would one 605 00:32:20,760 --> 00:32:24,720 Speaker 1: could say that the White Houses student debt relief is 606 00:32:24,760 --> 00:32:28,120 Speaker 1: a form of fiscal stimulus. Are you thinking about the 607 00:32:28,160 --> 00:32:31,600 Speaker 1: inflationary impact of that and do you see that affecting 608 00:32:31,760 --> 00:32:37,240 Speaker 1: the trajectory of your policy. Well, you know, we analyze 609 00:32:37,240 --> 00:32:41,520 Speaker 1: whatever Congress passes in terms of phisical the fiscal environment, 610 00:32:41,600 --> 00:32:43,800 Speaker 1: and then that goes into our models as an input. 611 00:32:44,120 --> 00:32:46,320 Speaker 1: My guess is it's not a huge number. You know, 612 00:32:46,680 --> 00:32:49,400 Speaker 1: if you look at the student loan relief as an example, 613 00:32:50,040 --> 00:32:54,760 Speaker 1: generally speaking, it's it's pretty regressive, meaning attempts to skew 614 00:32:54,800 --> 00:32:58,440 Speaker 1: towards people who are relatively better off in our economy. 615 00:32:58,800 --> 00:33:01,320 Speaker 1: The lowest income American generally didn't go to college and 616 00:33:01,360 --> 00:33:03,960 Speaker 1: don't have student owned debts, so to speak. And the 617 00:33:04,040 --> 00:33:07,600 Speaker 1: more it's regressive, which is, you know, not a I 618 00:33:07,640 --> 00:33:10,200 Speaker 1: don't think that's a policy objective of the authors. But 619 00:33:10,280 --> 00:33:13,200 Speaker 1: the more it's regressive in a curious way, the less 620 00:33:13,200 --> 00:33:16,320 Speaker 1: inflationary it is because those folks are less likely to 621 00:33:16,320 --> 00:33:19,680 Speaker 1: spend the money on consumption, They're more likely to save 622 00:33:19,680 --> 00:33:22,280 Speaker 1: the money or pay down other forms of debt as 623 00:33:22,280 --> 00:33:25,600 Speaker 1: an example. My you know, I haven't studied it very carefully. 624 00:33:25,640 --> 00:33:27,640 Speaker 1: My best guess is it's not a big deal one 625 00:33:27,680 --> 00:33:30,400 Speaker 1: way or the other in terms of outlook for inflation 626 00:33:30,480 --> 00:33:34,400 Speaker 1: in the near term. Just like the the Inflation Reduction Act. 627 00:33:34,960 --> 00:33:37,960 Speaker 1: I think the CBO scored it as net deficit reducing 628 00:33:38,000 --> 00:33:40,400 Speaker 1: over ten years. My guess is it's not going to 629 00:33:40,440 --> 00:33:42,480 Speaker 1: have a big effect on inflation in the near term, 630 00:33:42,960 --> 00:33:44,960 Speaker 1: but we will analyze it, we will put it into 631 00:33:45,000 --> 00:33:48,400 Speaker 1: our economic models and ultimately will factor that in as 632 00:33:48,440 --> 00:33:51,800 Speaker 1: we come up with an interest rate outlook. So you 633 00:33:51,920 --> 00:33:55,760 Speaker 1: mentioned the Inflation Reduction Act unlikely, and I think almost 634 00:33:55,760 --> 00:34:00,600 Speaker 1: all economists agree unlikely to really affect inflation in the 635 00:34:00,640 --> 00:34:03,200 Speaker 1: short term or perhaps even the medium term in a 636 00:34:03,240 --> 00:34:07,360 Speaker 1: meaningful way. That being said, would you would the FED 637 00:34:07,640 --> 00:34:13,440 Speaker 1: welcome UH the government building out more I guess anti 638 00:34:13,480 --> 00:34:17,239 Speaker 1: inflationary tools such that the such that the burden or 639 00:34:17,280 --> 00:34:21,200 Speaker 1: the job of fighting inflation is not entirely tied to 640 00:34:21,600 --> 00:34:24,280 Speaker 1: the central Bank. And I remember, you know again post 641 00:34:24,520 --> 00:34:27,040 Speaker 1: Great Financial Crisis, there's a lot of talk about you know, 642 00:34:27,440 --> 00:34:31,480 Speaker 1: there are fiscal policy, fiscal expansion that it was difficult 643 00:34:31,560 --> 00:34:34,160 Speaker 1: for the FED to sort of engineer that all by itself. 644 00:34:34,360 --> 00:34:37,440 Speaker 1: Would you like to see more work done on non 645 00:34:37,480 --> 00:34:42,520 Speaker 1: monetary UH anti inflation measures being built out anti anti 646 00:34:42,520 --> 00:34:47,200 Speaker 1: inflation tools. Well, absolutely. The more help we can get 647 00:34:47,239 --> 00:34:49,480 Speaker 1: from other parts of the economy and potentially other parts 648 00:34:49,520 --> 00:34:52,160 Speaker 1: of the government, the less we have to do. As 649 00:34:52,160 --> 00:34:55,439 Speaker 1: you all know, we can only limit demand. We can't 650 00:34:55,440 --> 00:34:58,359 Speaker 1: do anything on supply, and if supply comes online, then 651 00:34:58,400 --> 00:35:00,800 Speaker 1: that limit that reduces how much we need to reduce 652 00:35:00,840 --> 00:35:03,359 Speaker 1: demand to get those two things into balance. Now, it's 653 00:35:03,360 --> 00:35:06,680 Speaker 1: also hard. I mean, it's hard for the fiscal authority 654 00:35:06,719 --> 00:35:09,719 Speaker 1: in the short run to create more supply. It takes 655 00:35:09,719 --> 00:35:13,040 Speaker 1: a long time. So actually I'm looking at the government 656 00:35:13,040 --> 00:35:15,760 Speaker 1: will welcome it, but I'm also looking at the private sector. 657 00:35:15,920 --> 00:35:19,399 Speaker 1: You know, private sector firms are very focused on trying 658 00:35:19,440 --> 00:35:22,880 Speaker 1: to fix their supply chains to meet their customer demand 659 00:35:22,920 --> 00:35:27,000 Speaker 1: to keep their costs low. They're making some progress. From 660 00:35:27,000 --> 00:35:29,480 Speaker 1: what I can tell, the progress is uneven. But the 661 00:35:29,560 --> 00:35:32,280 Speaker 1: more progress that they can make, the less the burden 662 00:35:32,280 --> 00:35:34,400 Speaker 1: falls to the Federal Reserve, and the more likely we 663 00:35:34,400 --> 00:35:36,839 Speaker 1: would be able to engineer a soft landing. Yeah. I 664 00:35:36,920 --> 00:35:39,759 Speaker 1: was going to ask about this sort of short term 665 00:35:39,800 --> 00:35:43,240 Speaker 1: pain versus long term gain of some of these big 666 00:35:43,280 --> 00:35:47,280 Speaker 1: inflation reduction um measures or projects, because I can imagine 667 00:35:47,280 --> 00:35:50,440 Speaker 1: a situation where, you know, if everyone starts building out 668 00:35:50,480 --> 00:35:54,319 Speaker 1: capacity all at once, then that basically just ramps up 669 00:35:54,360 --> 00:35:58,200 Speaker 1: demand further. And like it seems like that would be 670 00:35:58,840 --> 00:36:02,959 Speaker 1: a particularly problematic for the Federal Reserve if you're trying 671 00:36:02,960 --> 00:36:09,320 Speaker 1: to reduce inflation as soon as possible. Yeah, I'm not theoretically, 672 00:36:09,320 --> 00:36:11,440 Speaker 1: I agree with you, Tracy I'm not seeing much evidence 673 00:36:11,480 --> 00:36:13,879 Speaker 1: of that. You know, just take the oil sector, where 674 00:36:13,920 --> 00:36:17,439 Speaker 1: oil prices have been very high. There's been a maybe 675 00:36:17,520 --> 00:36:19,560 Speaker 1: less investment than I would have guessed going in to 676 00:36:19,600 --> 00:36:21,879 Speaker 1: try to take advantage of these high prices, in part 677 00:36:21,960 --> 00:36:24,760 Speaker 1: because if you look at the futures markets for oil, 678 00:36:25,800 --> 00:36:28,160 Speaker 1: prices are expected to come down over the next few years, 679 00:36:28,160 --> 00:36:31,120 Speaker 1: and so you can understand why investors are hesitant to 680 00:36:31,160 --> 00:36:34,840 Speaker 1: pour a lot more money into more more rigs, example, 681 00:36:35,440 --> 00:36:38,120 Speaker 1: to take advantage of these high prices. And so theoretically, 682 00:36:38,120 --> 00:36:40,200 Speaker 1: I agree with you, I'm not seeing much evidence of that, 683 00:36:40,440 --> 00:36:43,360 Speaker 1: and that would ultimately show up in higher borrowing costs, 684 00:36:43,640 --> 00:36:47,000 Speaker 1: higher long term interest rates, and those rates still are 685 00:36:47,120 --> 00:36:49,879 Speaker 1: quite low relative to history. Well, let me ask you 686 00:36:49,960 --> 00:36:53,200 Speaker 1: the flip side, because one area in which there seems 687 00:36:53,239 --> 00:36:56,520 Speaker 1: to be widespread agreement um that we're in shortage of 688 00:36:57,120 --> 00:37:00,439 Speaker 1: is housing. And we've seen rent prices go up quite 689 00:37:00,440 --> 00:37:02,440 Speaker 1: a bit, and we all know the frustrations of the 690 00:37:02,480 --> 00:37:06,680 Speaker 1: public about buying housing the cost of housing. And yet 691 00:37:07,360 --> 00:37:10,239 Speaker 1: uh likely in large part due to the rise and 692 00:37:10,280 --> 00:37:12,719 Speaker 1: interest rates and therefore the rise of mortgage rates, were 693 00:37:12,760 --> 00:37:17,759 Speaker 1: already seeing a significant cooling of home builder activity. Do 694 00:37:17,800 --> 00:37:20,719 Speaker 1: you worry about the perverse effects of Like, Okay, we 695 00:37:20,800 --> 00:37:23,960 Speaker 1: want to expand the supply side. One of the most 696 00:37:24,000 --> 00:37:27,319 Speaker 1: important areas of the supply side is a resident and 697 00:37:27,400 --> 00:37:30,120 Speaker 1: yet one of the first order effects of higher interest 698 00:37:30,200 --> 00:37:34,280 Speaker 1: rates is actually to constrain production in this crucial sector. 699 00:37:36,000 --> 00:37:38,239 Speaker 1: I mean, it's a fair point, but I think the 700 00:37:38,280 --> 00:37:41,759 Speaker 1: effects on the supply side are much slower than the 701 00:37:41,880 --> 00:37:44,400 Speaker 1: effects on demand, and so our hope is that we 702 00:37:44,440 --> 00:37:47,480 Speaker 1: can get demand down into some form of equilibrium with 703 00:37:47,480 --> 00:37:50,840 Speaker 1: two percent inflation over the next couple of years, and 704 00:37:50,880 --> 00:37:53,319 Speaker 1: then we get the economy back to what we would 705 00:37:53,320 --> 00:37:56,000 Speaker 1: call something like normal, and then you could really unlock 706 00:37:56,080 --> 00:37:59,200 Speaker 1: the supply. The supply is just too much slower moving 707 00:38:00,040 --> 00:38:02,120 Speaker 1: mechanism than it is on the demand side. So it's 708 00:38:02,120 --> 00:38:05,600 Speaker 1: a fair point, but I think the timing errors towards 709 00:38:06,160 --> 00:38:10,000 Speaker 1: effects and demand rather than effects and supply. Looking ahead, 710 00:38:10,160 --> 00:38:13,359 Speaker 1: is there anything that would make you more comfortable with 711 00:38:13,840 --> 00:38:18,720 Speaker 1: either smaller rate hikes or a slower pace like because 712 00:38:18,760 --> 00:38:21,520 Speaker 1: I think one thing that's come through this conversation is 713 00:38:21,560 --> 00:38:25,600 Speaker 1: that you're very, very keen to air on the side 714 00:38:25,680 --> 00:38:29,640 Speaker 1: of being too aggressive versus being too loose. So what 715 00:38:29,680 --> 00:38:32,960 Speaker 1: would you need to see to give you comfort that 716 00:38:33,040 --> 00:38:36,400 Speaker 1: maybe things are changing and the Fed can relax a 717 00:38:36,440 --> 00:38:40,320 Speaker 1: little bit. Well, I think if we if we continue 718 00:38:40,360 --> 00:38:44,239 Speaker 1: to see inflation readings that inflation is coming down like 719 00:38:44,320 --> 00:38:49,960 Speaker 1: subsequent multiple subsequent readings, then that would probably argue for 720 00:38:50,040 --> 00:38:54,759 Speaker 1: me that we could raise interest rates more slowly. Or 721 00:38:54,800 --> 00:38:57,040 Speaker 1: maybe we are getting to the point where hey, in 722 00:38:57,080 --> 00:38:59,440 Speaker 1: a few more hikes, we could get to something and 723 00:38:59,520 --> 00:39:02,520 Speaker 1: just sit their pause until we really are sure that 724 00:39:02,600 --> 00:39:04,879 Speaker 1: it has done. To me, you know where how high 725 00:39:04,920 --> 00:39:09,000 Speaker 1: we get and how fast we get there that is 726 00:39:09,120 --> 00:39:13,120 Speaker 1: less important than us not backing off. I mean, to me, 727 00:39:13,239 --> 00:39:16,399 Speaker 1: the bar to actually cut interest rates that is going 728 00:39:16,440 --> 00:39:19,640 Speaker 1: to be for me, very very high. We can raise 729 00:39:19,719 --> 00:39:22,799 Speaker 1: more slowly, we can sit there for longer. All of 730 00:39:22,800 --> 00:39:25,399 Speaker 1: that I'm open minded about, and the inflation data should 731 00:39:25,400 --> 00:39:28,960 Speaker 1: guide us. But to me, the big error that we 732 00:39:29,080 --> 00:39:31,800 Speaker 1: could make but I don't expect us to, is cutting 733 00:39:31,880 --> 00:39:36,040 Speaker 1: interest rates prematurely. Have you been surprised? I mean, everyone 734 00:39:36,120 --> 00:39:38,640 Speaker 1: seems to be scratching their head. You guys keep coming 735 00:39:38,640 --> 00:39:41,480 Speaker 1: out and saying it. You know, we're not gonna We're 736 00:39:41,480 --> 00:39:43,800 Speaker 1: not gonna cut rates, and yet the market has had 737 00:39:44,120 --> 00:39:47,000 Speaker 1: raid cut pricing for a while what do you attribute 738 00:39:47,000 --> 00:39:51,680 Speaker 1: that disconnect to? You know, I don't know. I have 739 00:39:51,760 --> 00:39:55,480 Speaker 1: said publicly I didn't event um at Aspen at the 740 00:39:55,520 --> 00:39:58,239 Speaker 1: Aspen Institute a few weeks ago, and I said, the 741 00:39:58,320 --> 00:40:01,520 Speaker 1: markets are not consistent with my outlook for interest rates 742 00:40:01,960 --> 00:40:06,120 Speaker 1: and inflation. All I can read from that is they 743 00:40:06,160 --> 00:40:09,080 Speaker 1: think we are going to achieve our dual mandate goals 744 00:40:09,160 --> 00:40:12,160 Speaker 1: more quickly than I do, and then we would be 745 00:40:12,160 --> 00:40:15,200 Speaker 1: in a position to cut interest rates. And I certainly 746 00:40:15,239 --> 00:40:19,040 Speaker 1: hope they're right, but that's not my forecast right now. Yeah, 747 00:40:19,080 --> 00:40:21,920 Speaker 1: I was actually going to ask about financial conditions, but 748 00:40:22,080 --> 00:40:25,840 Speaker 1: you know, just to quickly get on that, like achieving 749 00:40:25,880 --> 00:40:27,680 Speaker 1: the dual mandate, and I think this is the key thing, 750 00:40:27,719 --> 00:40:31,440 Speaker 1: achieving goals. Let's say, okay, inflation comes down much faster 751 00:40:31,480 --> 00:40:33,799 Speaker 1: than everyone's expecting, sometime in the middle of the next year, 752 00:40:33,880 --> 00:40:37,600 Speaker 1: you're on two percent. That's still like the point is, though, 753 00:40:37,800 --> 00:40:41,040 Speaker 1: that's not a reason to cut right. No, if we 754 00:40:41,120 --> 00:40:43,480 Speaker 1: achieve the goals, absolutely that would be a reason to 755 00:40:44,000 --> 00:40:48,719 Speaker 1: relax our contraction and monitory and policy. I'm just surprised 756 00:40:48,719 --> 00:40:50,520 Speaker 1: that markets would think that we're going to achieve that 757 00:40:50,560 --> 00:40:53,200 Speaker 1: goal as quickly as they seem to again. I hope 758 00:40:53,239 --> 00:40:56,280 Speaker 1: they're right. Uh, and we'll take that data on board 759 00:40:56,320 --> 00:40:58,640 Speaker 1: if they are right. But that's where that's where I 760 00:40:58,680 --> 00:41:02,799 Speaker 1: think the disconnect is. Is there attention They're just going 761 00:41:02,840 --> 00:41:04,920 Speaker 1: back to financial conditions. But you know, one of the 762 00:41:04,960 --> 00:41:07,880 Speaker 1: things that has surprised people is that financial conditions have 763 00:41:08,280 --> 00:41:12,319 Speaker 1: remained relatively loose even as the FED hikes at the 764 00:41:12,360 --> 00:41:16,200 Speaker 1: fastest pace in decades. Is there attention between the market 765 00:41:16,360 --> 00:41:19,320 Speaker 1: thinking that the FED is going to succeed in bringing 766 00:41:19,320 --> 00:41:23,400 Speaker 1: inflation down and then not actually taking into account the 767 00:41:23,480 --> 00:41:26,040 Speaker 1: impact of some of these rate hikes, like bond yields 768 00:41:26,040 --> 00:41:29,560 Speaker 1: should be higher, stock should be lower. We're not necessarily 769 00:41:29,560 --> 00:41:33,360 Speaker 1: seeing that reflected, and so financial conditions remain relatively loose. 770 00:41:35,200 --> 00:41:36,719 Speaker 1: I mean, I think it goes back to something we 771 00:41:36,800 --> 00:41:40,759 Speaker 1: spoke about a few moments ago, which is markets expectations 772 00:41:40,840 --> 00:41:44,120 Speaker 1: and our expectations that inflation expectations are well anchored and 773 00:41:44,120 --> 00:41:46,919 Speaker 1: then inflation is going to come down, you know, rather 774 00:41:47,000 --> 00:41:50,480 Speaker 1: quickly over the next few years. If that assumption is 775 00:41:50,520 --> 00:41:53,759 Speaker 1: wrong that we share and financial markets share even though 776 00:41:53,760 --> 00:41:56,759 Speaker 1: they're more bullish than I am. If we're all collectively 777 00:41:56,760 --> 00:42:01,759 Speaker 1: wrong about the underlying inflationary dynamics. When that reality is 778 00:42:01,800 --> 00:42:04,640 Speaker 1: revealed and we realize it and they realize it, then 779 00:42:04,680 --> 00:42:08,239 Speaker 1: you would expect to see financial markets fundamentally reset at 780 00:42:08,239 --> 00:42:10,680 Speaker 1: a much tighter setting and you see longer term real 781 00:42:10,760 --> 00:42:14,400 Speaker 1: yields much higher than they are today. That's not my forecast, 782 00:42:14,719 --> 00:42:17,120 Speaker 1: but that's why I think what it would take to 783 00:42:17,280 --> 00:42:20,040 Speaker 1: really see a dramatic tightening of financial conditions from here. 784 00:42:20,480 --> 00:42:24,240 Speaker 1: Chuer Polo has said press conferences like look, FED policy 785 00:42:24,360 --> 00:42:28,360 Speaker 1: works through financial conditions, and financial conditions as what we 786 00:42:28,520 --> 00:42:30,560 Speaker 1: just talked about it, it's like, you know, it's spreads 787 00:42:30,719 --> 00:42:33,480 Speaker 1: on the corporate debt, it's you know, mortgage rights and 788 00:42:33,640 --> 00:42:36,560 Speaker 1: stock market. The stock market is a component of it. 789 00:42:36,880 --> 00:42:40,160 Speaker 1: When you see the stock market rallying as it did, 790 00:42:40,360 --> 00:42:42,840 Speaker 1: you know, from and I know, like the stock market 791 00:42:42,880 --> 00:42:45,000 Speaker 1: is not your goal by any stretch. But when you 792 00:42:45,040 --> 00:42:48,200 Speaker 1: see the stock market rallying from you know, the bottom 793 00:42:48,239 --> 00:42:50,160 Speaker 1: in June to what we saw at least up until 794 00:42:50,160 --> 00:42:53,560 Speaker 1: like two weeks ago, is that interpreted as working as 795 00:42:53,719 --> 00:42:56,600 Speaker 1: cross purposes for your goals? You know? I think so. 796 00:42:57,160 --> 00:42:59,480 Speaker 1: I certainly was not excited to see the stock market 797 00:42:59,560 --> 00:43:03,839 Speaker 1: rallying after our last Federal Open Market Committee meeting because 798 00:43:03,840 --> 00:43:07,120 Speaker 1: I know how committed we all are to getting inflation down, 799 00:43:07,120 --> 00:43:10,359 Speaker 1: and I somehow I think the markets were misunderstanding that. 800 00:43:10,440 --> 00:43:13,800 Speaker 1: And I was actually happy to see how chare Pell's 801 00:43:13,880 --> 00:43:17,000 Speaker 1: Jackson Hole speech was received. You know, people now understand 802 00:43:17,040 --> 00:43:19,799 Speaker 1: the seriousness of our commitment to getting inflation back down 803 00:43:19,840 --> 00:43:22,359 Speaker 1: to two percent. But you know, if it goes back, 804 00:43:22,480 --> 00:43:24,960 Speaker 1: think about it. We talked about real bond yields, so 805 00:43:25,120 --> 00:43:28,920 Speaker 1: think long term real yields. They're positive, you know, depending 806 00:43:28,920 --> 00:43:32,120 Speaker 1: on your measure, slightly positive, up to zero plus zero 807 00:43:32,120 --> 00:43:34,640 Speaker 1: point five percent, maybe up to one percent by some 808 00:43:34,680 --> 00:43:37,160 Speaker 1: measures over the last several months. It's kind of an 809 00:43:37,200 --> 00:43:41,400 Speaker 1: intellectual exercise. If we wanted to push long reel yields 810 00:43:41,719 --> 00:43:45,440 Speaker 1: to plus two percent or plus three percent, could we 811 00:43:45,520 --> 00:43:48,640 Speaker 1: even do that? And the reason why we're limited in 812 00:43:48,640 --> 00:43:50,959 Speaker 1: our ability to do that is because embedded in those 813 00:43:51,000 --> 00:43:54,440 Speaker 1: markets our market expectations of what's going to happen to 814 00:43:54,480 --> 00:43:57,320 Speaker 1: inflation over the next few years. And that's where I 815 00:43:57,400 --> 00:44:00,960 Speaker 1: keep going back to until and unless we and markets 816 00:44:01,000 --> 00:44:06,200 Speaker 1: collectively believe the inflation inflation and dynamics are different, are 817 00:44:06,280 --> 00:44:09,080 Speaker 1: hotter and more embedded than we understand them to be. 818 00:44:09,200 --> 00:44:11,440 Speaker 1: Right now, I think there's a limit to how much 819 00:44:11,480 --> 00:44:14,880 Speaker 1: we can drive long term really yields higher, and so 820 00:44:15,000 --> 00:44:17,640 Speaker 1: that's gonna be a limit to how tight we can 821 00:44:17,640 --> 00:44:21,400 Speaker 1: make broader financial conditions until that recognition of the different 822 00:44:21,400 --> 00:44:25,920 Speaker 1: inflation and dynamics becomes clear. So one thing we haven't 823 00:44:25,920 --> 00:44:29,440 Speaker 1: really spoken about is the impact of quantitative tightening on 824 00:44:29,560 --> 00:44:32,520 Speaker 1: inflation um and I mean things like bond yields and 825 00:44:32,640 --> 00:44:37,360 Speaker 1: asset prices. So the FED started winding down the balance 826 00:44:37,400 --> 00:44:39,879 Speaker 1: sheet or reducing the balance sheet in the summer, but 827 00:44:40,120 --> 00:44:43,440 Speaker 1: it hasn't really ramped that effort up, and I think 828 00:44:43,520 --> 00:44:46,840 Speaker 1: it's expected to start doing so in September. What would 829 00:44:46,840 --> 00:44:51,080 Speaker 1: be the impact of that on inflation and the market 830 00:44:51,160 --> 00:44:54,880 Speaker 1: as well, you know, unclear. If you look at a 831 00:44:54,880 --> 00:44:58,800 Speaker 1: lot of different models of how cute quantitative easing works, 832 00:44:58,840 --> 00:45:00,920 Speaker 1: it suggests that it doesn't a big impact. You know, 833 00:45:01,040 --> 00:45:05,200 Speaker 1: Chairman bernanke famously equipped many years ago QUI works in practice, 834 00:45:05,200 --> 00:45:08,040 Speaker 1: but not in theory, and the way we think it 835 00:45:08,080 --> 00:45:11,600 Speaker 1: works that those models cannot capture is really about a 836 00:45:11,640 --> 00:45:16,120 Speaker 1: signaling mechanism for the future overall stands of monetary policy, 837 00:45:16,160 --> 00:45:19,080 Speaker 1: and so a lot of the effects of QUEI or 838 00:45:19,200 --> 00:45:23,160 Speaker 1: QT get priced in right away, as soon as we 839 00:45:23,560 --> 00:45:25,640 Speaker 1: lay out here's our plan for the balance sheet. So 840 00:45:25,680 --> 00:45:28,279 Speaker 1: when we announced here's our plan for the roll off, 841 00:45:28,680 --> 00:45:31,400 Speaker 1: here's how many billion dollars a month, here's the path, 842 00:45:32,080 --> 00:45:34,600 Speaker 1: A lot of that gets priced in right away. And 843 00:45:34,640 --> 00:45:37,120 Speaker 1: that's why if you look at long term real yields, 844 00:45:37,600 --> 00:45:41,760 Speaker 1: you can see that they reversed themselves this spring really rapidly. 845 00:45:42,000 --> 00:45:45,040 Speaker 1: I mean they climbed in the spring much faster than 846 00:45:45,080 --> 00:45:48,280 Speaker 1: they fell in the spring of when we were flooding 847 00:45:48,280 --> 00:45:51,520 Speaker 1: the economy with liquidity. And I think the reason that 848 00:45:51,560 --> 00:45:54,560 Speaker 1: they tightened so quickly is because markets were pricing in 849 00:45:55,040 --> 00:45:59,000 Speaker 1: the quantitative tightening to come in addition to the federal 850 00:45:59,080 --> 00:46:02,760 Speaker 1: funds rate hikes. So it's a it's an inexact science. 851 00:46:02,800 --> 00:46:04,400 Speaker 1: I mean, I don't think a hundred percent of it 852 00:46:04,440 --> 00:46:07,160 Speaker 1: gets priced in. I think some of it does actually 853 00:46:07,320 --> 00:46:11,080 Speaker 1: happen over time as the balance sheet actually shrinks, but 854 00:46:11,160 --> 00:46:13,440 Speaker 1: I think some a lot of the action has already 855 00:46:13,440 --> 00:46:17,319 Speaker 1: taken place. Would be my guests, So one of the 856 00:46:17,719 --> 00:46:20,400 Speaker 1: you know, one of the since you became the president 857 00:46:20,400 --> 00:46:24,080 Speaker 1: of the Minneapolis FED, you've been innovative in your communication, 858 00:46:24,400 --> 00:46:28,320 Speaker 1: writing blog post, medium posts, even tweeting and I remember 859 00:46:28,320 --> 00:46:30,160 Speaker 1: one of I think it might have been your first 860 00:46:30,880 --> 00:46:34,319 Speaker 1: post after after getting the job, and you were talking 861 00:46:34,320 --> 00:46:38,000 Speaker 1: about your non dogmatic and you talked about salt water 862 00:46:38,160 --> 00:46:40,640 Speaker 1: versus freshwater economics and say, you don't you don't belong 863 00:46:40,640 --> 00:46:42,799 Speaker 1: to his school. You want to see what the data is. 864 00:46:42,880 --> 00:46:46,160 Speaker 1: You want to always be reevaluating. And I think you know, 865 00:46:46,400 --> 00:46:49,640 Speaker 1: you've definitely demonstrated that by going from someone who had 866 00:46:49,640 --> 00:46:51,759 Speaker 1: a reputation as being one of the biggest doves on 867 00:46:51,800 --> 00:46:54,760 Speaker 1: the committee to now being up there with the biggest 868 00:46:54,800 --> 00:46:58,320 Speaker 1: hawks and the most aggressive pace of hiking. What is 869 00:46:58,400 --> 00:47:00,360 Speaker 1: that like? What's that? What's that been like? To go 870 00:47:00,600 --> 00:47:04,560 Speaker 1: from uh, one of the yeah to that evolution from 871 00:47:04,600 --> 00:47:07,000 Speaker 1: someone who has seen as a major dove to someone 872 00:47:07,040 --> 00:47:09,680 Speaker 1: who's now seen as a major hawk. You know, it's 873 00:47:09,680 --> 00:47:13,440 Speaker 1: actually been um it's been easy for me because I 874 00:47:13,480 --> 00:47:15,400 Speaker 1: just look at the data with our economist here and 875 00:47:15,440 --> 00:47:17,600 Speaker 1: we try to assess where the economy is and what 876 00:47:18,120 --> 00:47:21,399 Speaker 1: monetary policy makes sense. You know, these labels of dove 877 00:47:21,480 --> 00:47:25,440 Speaker 1: and hawk, I understand why people give them their convenient shorthand, 878 00:47:25,920 --> 00:47:28,640 Speaker 1: but they're really flawed. I mean, if if I always 879 00:47:28,680 --> 00:47:30,920 Speaker 1: were dobbish, no matter what the state of the economy 880 00:47:31,120 --> 00:47:33,719 Speaker 1: was I always said we need to keep interest rates low. 881 00:47:33,840 --> 00:47:37,719 Speaker 1: I wouldn't be a very useful policymaker. And so, you know, uh, 882 00:47:37,800 --> 00:47:40,359 Speaker 1: the economy changeing now. Esther George, my good friend from 883 00:47:40,360 --> 00:47:42,759 Speaker 1: the Kansas City FED, who was considered to be one 884 00:47:42,760 --> 00:47:45,359 Speaker 1: of the more hawkish, has now been identified as one 885 00:47:45,360 --> 00:47:47,880 Speaker 1: of the more dovish in this scenario. You know, Esther 886 00:47:48,080 --> 00:47:51,759 Speaker 1: is a very thoughtful, experienced policymaker. She's looking at the data, 887 00:47:52,120 --> 00:47:54,960 Speaker 1: she's making her best recommendations based on how she sees 888 00:47:54,960 --> 00:47:57,160 Speaker 1: the economy. And that's what all of my colleagues are 889 00:47:57,160 --> 00:48:00,920 Speaker 1: trying to do. And so the labels are shorthands, but 890 00:48:00,960 --> 00:48:05,360 Speaker 1: they're pretty they're pretty imperfect. So that's interesting too about 891 00:48:05,480 --> 00:48:08,920 Speaker 1: you know that not everyone has sort of traveled in 892 00:48:08,960 --> 00:48:11,560 Speaker 1: the same direction, and there are differences of views on 893 00:48:11,600 --> 00:48:16,040 Speaker 1: the trajectory of inflation in the economy within uh, you know, 894 00:48:16,239 --> 00:48:20,600 Speaker 1: at the Federal Reserve that Big said, I think there is, obviously, 895 00:48:20,920 --> 00:48:23,840 Speaker 1: going back to last year, a fair amount of regret 896 00:48:24,320 --> 00:48:28,480 Speaker 1: that the FED misread or sort of the use of 897 00:48:28,520 --> 00:48:32,080 Speaker 1: the term transitory perhaps waiting too long from the Fed's 898 00:48:32,160 --> 00:48:36,000 Speaker 1: perspective on hiking rates. Is there anything that you know, 899 00:48:36,200 --> 00:48:39,800 Speaker 1: maybe it's the intellectual climate or sort of like different 900 00:48:39,800 --> 00:48:43,600 Speaker 1: approach that you take from the any lessons of the 901 00:48:43,719 --> 00:48:47,040 Speaker 1: last year that you think the FED should or could 902 00:48:47,120 --> 00:48:50,200 Speaker 1: internalize to make better decision to have a better decision 903 00:48:50,200 --> 00:48:53,520 Speaker 1: making process going forward. You know, it's tough. It's something 904 00:48:53,560 --> 00:48:55,440 Speaker 1: I think about a lot, and I go back in time. 905 00:48:55,520 --> 00:48:58,560 Speaker 1: So for the eight or ten years before the pandemic hit, 906 00:48:58,680 --> 00:49:01,000 Speaker 1: we struggle with inflation and that was a little too low. 907 00:49:01,360 --> 00:49:04,160 Speaker 1: And as we talked about earlier, Joe and Tracy, we 908 00:49:04,239 --> 00:49:06,480 Speaker 1: kept getting surprised that we thought we were a maximum 909 00:49:06,480 --> 00:49:08,520 Speaker 1: employment and there were a lot more workers to come. 910 00:49:09,040 --> 00:49:11,080 Speaker 1: And before the pandemic we had three and a half 911 00:49:11,080 --> 00:49:14,520 Speaker 1: percent unemployment rate and modest wage growth and low inflation. 912 00:49:15,000 --> 00:49:17,719 Speaker 1: So then the pandemic hits a lot of fiscal stimulus, 913 00:49:18,080 --> 00:49:21,759 Speaker 1: and in May one, just over a year ago, core 914 00:49:21,800 --> 00:49:27,080 Speaker 1: inflation finally ticked above two and the unemployment rate was 915 00:49:27,080 --> 00:49:30,120 Speaker 1: still five point nine percent. So we had achieved three 916 00:49:30,120 --> 00:49:33,239 Speaker 1: point five percent with no real inflation before now it 917 00:49:33,320 --> 00:49:36,480 Speaker 1: was five point nine percent at that moment. Should we 918 00:49:36,520 --> 00:49:39,240 Speaker 1: have just declared, oh my gosh, we're in a new regime. 919 00:49:39,840 --> 00:49:42,200 Speaker 1: I actually don't think so. I think, I mean, yeah, sure, 920 00:49:42,320 --> 00:49:44,719 Speaker 1: knowing what we know now, but knowing what we knew 921 00:49:44,760 --> 00:49:48,120 Speaker 1: at the time, I think it's eminently sensible that we 922 00:49:48,160 --> 00:49:50,799 Speaker 1: would take a few months to figure out is this 923 00:49:50,920 --> 00:49:53,000 Speaker 1: really a new world or are we going back to 924 00:49:53,040 --> 00:49:56,160 Speaker 1: the old world before we adjusted our stance of policy. 925 00:49:56,200 --> 00:49:59,200 Speaker 1: You know, people call us all the time with all 926 00:49:59,239 --> 00:50:01,600 Speaker 1: sorts of predict actions about how the world is totally 927 00:50:01,640 --> 00:50:04,839 Speaker 1: different and we're totally missing something here or there. If 928 00:50:04,880 --> 00:50:07,200 Speaker 1: we listen to all of them, or if we listen 929 00:50:07,239 --> 00:50:10,040 Speaker 1: to all the cranks on Twitter, we would be completely 930 00:50:10,040 --> 00:50:13,320 Speaker 1: paralyzed for making any decision because somebody is always predicting 931 00:50:13,400 --> 00:50:16,840 Speaker 1: something one direction or another. And so to me, I 932 00:50:16,880 --> 00:50:19,400 Speaker 1: think we need to be very thoughtful when we just 933 00:50:19,560 --> 00:50:24,000 Speaker 1: abandon what we have recently experienced and just assuming we're 934 00:50:24,000 --> 00:50:26,080 Speaker 1: in a whole new world. In this case, we are 935 00:50:26,120 --> 00:50:28,719 Speaker 1: in a new world. How long is that we're gonna last? 936 00:50:28,800 --> 00:50:30,279 Speaker 1: I don't know. We got to see it in the 937 00:50:30,360 --> 00:50:34,440 Speaker 1: data cranks on Twitter. I have no idea the cranks 938 00:50:34,480 --> 00:50:37,360 Speaker 1: on Twitter. I I don't see it. I've never seen cranks, 939 00:50:38,040 --> 00:50:41,920 Speaker 1: never seen it never. Neil cash Carry, president of Minneapolis FED, 940 00:50:42,560 --> 00:50:44,800 Speaker 1: thrilled to have you back on the podcast. That was 941 00:50:44,840 --> 00:50:46,879 Speaker 1: great and we will we will talk to you next 942 00:50:46,960 --> 00:50:50,000 Speaker 1: dog all right, thank you both. Great to be with you. Thanks. 943 00:50:50,320 --> 00:51:07,360 Speaker 1: That was fantastic. Well, I feel like we packed a 944 00:51:07,360 --> 00:51:10,400 Speaker 1: lot in there, Tracy. I'm trying to remember everything that 945 00:51:10,440 --> 00:51:13,240 Speaker 1: we just talked about. There was a lot. I mean, okay, 946 00:51:13,280 --> 00:51:15,960 Speaker 1: so I mentioned this already, but one thing that clearly 947 00:51:16,000 --> 00:51:18,960 Speaker 1: comes through in that conversation is just the extent of 948 00:51:19,320 --> 00:51:23,240 Speaker 1: Neil's um change from Dove to Hawk and the idea 949 00:51:23,320 --> 00:51:26,719 Speaker 1: that he is much more comfortable with getting to a 950 00:51:26,800 --> 00:51:30,000 Speaker 1: very very restrictive level of policy and then sort of 951 00:51:30,320 --> 00:51:34,640 Speaker 1: pausing as opposed to starting to cut or even slow down. Right. 952 00:51:34,719 --> 00:51:37,399 Speaker 1: And I think you know this was do you think 953 00:51:37,400 --> 00:51:40,839 Speaker 1: about the mood music or what Powell said Jackson Hole. 954 00:51:41,040 --> 00:51:45,120 Speaker 1: He was very specific about the lessons of the nine seventies, 955 00:51:45,160 --> 00:51:46,440 Speaker 1: and I think he said that, you know, sort of 956 00:51:46,520 --> 00:51:51,440 Speaker 1: modern central bank fury was born out of that inflationary period, 957 00:51:51,520 --> 00:51:54,759 Speaker 1: and there's no reason not to take the lessons of 958 00:51:54,840 --> 00:51:57,560 Speaker 1: that period. And as Neil said, you know, one of 959 00:51:57,600 --> 00:52:02,160 Speaker 1: the lessons from that period of was don't declare victory 960 00:52:02,200 --> 00:52:05,799 Speaker 1: on inflation too soon, don't get comfortable, don't just be 961 00:52:05,840 --> 00:52:07,600 Speaker 1: oh here's a month or two of we're going in 962 00:52:07,640 --> 00:52:10,920 Speaker 1: the right direction, let's ease off. So the bar is 963 00:52:10,960 --> 00:52:14,839 Speaker 1: going to be very high before something I would say 964 00:52:14,880 --> 00:52:17,760 Speaker 1: resembling a pivot, whatever that means. Yeah, But of course 965 00:52:18,000 --> 00:52:23,080 Speaker 1: with that very aggressive stance comes the question of are 966 00:52:23,080 --> 00:52:25,319 Speaker 1: they going to overshoot? And I know we asked Neil 967 00:52:25,360 --> 00:52:29,120 Speaker 1: the question about policy lags, and that seems to be 968 00:52:29,640 --> 00:52:32,600 Speaker 1: possibly problematic for the FED. And then the other thing 969 00:52:33,239 --> 00:52:36,759 Speaker 1: that was interesting to me was his response on the 970 00:52:36,760 --> 00:52:39,200 Speaker 1: global economy and the impact of the dollar, and he 971 00:52:39,239 --> 00:52:42,759 Speaker 1: mentioned that boomerang effect and the FED viewing the rest 972 00:52:42,800 --> 00:52:45,120 Speaker 1: of the world, what's happening there as something that can 973 00:52:45,160 --> 00:52:48,480 Speaker 1: come back and impact the US. And I think that's 974 00:52:48,520 --> 00:52:51,279 Speaker 1: still a big question as well. Right we're going into 975 00:52:51,320 --> 00:52:55,319 Speaker 1: the winter, almost everyone expects Europe to be in a recession. Now, 976 00:52:55,360 --> 00:52:59,520 Speaker 1: it's quite clear that emerging markets are suffering from higher dollar, 977 00:53:00,040 --> 00:53:03,960 Speaker 1: tighter financial conditions in the US, plus higher energy costs, 978 00:53:04,400 --> 00:53:07,640 Speaker 1: weather related disruptions, all of that. What is the impact 979 00:53:07,640 --> 00:53:10,120 Speaker 1: going to be on the US and does that potentially 980 00:53:10,719 --> 00:53:13,360 Speaker 1: become problematic for the FED? You know what I found 981 00:53:13,480 --> 00:53:17,400 Speaker 1: striking was Neil saying that he welcome welcomed the market 982 00:53:17,440 --> 00:53:20,640 Speaker 1: reaction to Jackson hole, Yeah, there's quite a sell off 983 00:53:20,760 --> 00:53:23,799 Speaker 1: on Friday right afterwards. And there is that cliche the 984 00:53:23,840 --> 00:53:27,799 Speaker 1: traders say all the time, don't fight, and here he's saying, yeah, 985 00:53:27,800 --> 00:53:30,080 Speaker 1: there's a good reason for that cliche because when the 986 00:53:30,080 --> 00:53:33,480 Speaker 1: FETE is fighting inflation, higher stock prices don't help that 987 00:53:33,680 --> 00:53:37,919 Speaker 1: goal because monetary policy works through financial conditions. So he's 988 00:53:37,960 --> 00:53:39,800 Speaker 1: kind of saying, he's like, yeah, there's a good reason 989 00:53:39,800 --> 00:53:41,480 Speaker 1: not to fight us. Yeah. I feel like the FED 990 00:53:41,600 --> 00:53:45,200 Speaker 1: is explicitly saying that it thinks that stocks should be lower, 991 00:53:45,280 --> 00:53:47,960 Speaker 1: or not explicitly, but I mean that is the explicit 992 00:53:48,000 --> 00:53:51,359 Speaker 1: conclusion from the conversation. And this is something that we've 993 00:53:51,400 --> 00:53:54,680 Speaker 1: actually written about in the newsletter a number of times, 994 00:53:54,680 --> 00:53:56,640 Speaker 1: and I think we said it before we had the 995 00:53:56,800 --> 00:53:59,920 Speaker 1: big bearer market in the summer, Like the FED is 996 00:54:00,040 --> 00:54:02,440 Speaker 1: telling you that asset prices are too high because financial 997 00:54:02,440 --> 00:54:05,640 Speaker 1: conditions need to tighten. Right, they talked about financial conditions. 998 00:54:05,840 --> 00:54:10,200 Speaker 1: Financial conditions means something is commonly understood, it's spreads in 999 00:54:10,280 --> 00:54:12,880 Speaker 1: the stock market and so forth. So there FED is 1000 00:54:12,920 --> 00:54:16,840 Speaker 1: saying we work through financial conditions and they need financial 1001 00:54:16,880 --> 00:54:20,360 Speaker 1: conditions to tighten. In order to defeat inflation. They're telling 1002 00:54:20,400 --> 00:54:23,839 Speaker 1: you something about where they think the market should go. 1003 00:54:24,000 --> 00:54:28,520 Speaker 1: Or also you can disaggregate what makes up financial conditions. 1004 00:54:28,680 --> 00:54:32,200 Speaker 1: Mortgage rates are a lot tighter, Bond yields to some extent, 1005 00:54:32,280 --> 00:54:35,200 Speaker 1: you know, have gone up. It's really stocks that are 1006 00:54:35,360 --> 00:54:37,439 Speaker 1: the sort of odd one out here. Yeah, I gotta 1007 00:54:37,440 --> 00:54:41,040 Speaker 1: get bitcoined down to tent though. That's when Yeah, actually, 1008 00:54:41,280 --> 00:54:43,400 Speaker 1: you know, that's a good argument for putting crypto into 1009 00:54:43,440 --> 00:54:46,319 Speaker 1: the financial conditions index. That would be interesting. One day, 1010 00:54:46,360 --> 00:54:48,759 Speaker 1: it will probably happen. Okay, let's leave it there. Oh, 1011 00:54:49,000 --> 00:54:51,239 Speaker 1: I was gonna say. We also we need to start 1012 00:54:51,239 --> 00:54:54,760 Speaker 1: thinking up like a tradition for the Neil kush Cary episode. 1013 00:54:54,800 --> 00:54:57,920 Speaker 1: I feel like we have to like unboxed like gifts 1014 00:54:58,040 --> 00:55:02,240 Speaker 1: or sing carols or something thing something August or something seasonal. 1015 00:55:02,400 --> 00:55:04,640 Speaker 1: Let's do it live next year, and let's do it 1016 00:55:04,680 --> 00:55:07,680 Speaker 1: in a really nice location, because I'm always super jealous 1017 00:55:07,760 --> 00:55:11,279 Speaker 1: of like late August in Jackson's Let's find you know, 1018 00:55:11,360 --> 00:55:13,319 Speaker 1: let's find a nice place to do it somewhere where 1019 00:55:13,360 --> 00:55:16,319 Speaker 1: we have an excuse to wear cowboy hats. I love 1020 00:55:16,320 --> 00:55:18,200 Speaker 1: it all right, shall we leave it there? Let's leave 1021 00:55:18,200 --> 00:55:20,759 Speaker 1: it there This has been another episode of the All 1022 00:55:20,800 --> 00:55:23,520 Speaker 1: Thoughts podcast. I'm Tracy Alloway. You can follow me on 1023 00:55:23,560 --> 00:55:26,480 Speaker 1: Twitter at Tracy Alloway, and I'm Joe Wisn't All. You 1024 00:55:26,480 --> 00:55:29,959 Speaker 1: can follow me on Twitter at the Stalwart. Follow our guest, 1025 00:55:30,000 --> 00:55:34,080 Speaker 1: Minneapolis FED President Neil cash Cary. He's at Neil cash Cary. 1026 00:55:34,480 --> 00:55:38,440 Speaker 1: Follow our producer Carmen rod Reguez at Carmen Arman. And 1027 00:55:38,560 --> 00:55:41,400 Speaker 1: check out all of our podcasts at Bloomberg On Twitter 1028 00:55:41,719 --> 00:56:01,640 Speaker 1: onto the handle at podcasts. Thanks for listening to