WEBVTT - Neel Kashkari on the Fed's Commitment to Defeating Inflation 0:00:00.320 --> 0:00:03.080 So, Joe, we have something pretty exciting coming up. That's right, 0:00:03.080 --> 0:00:05.360 We're going to be doing a live episode of the 0:00:05.400 --> 0:00:08.600 podcast and listeners are invited to join. Yep, we are 0:00:08.640 --> 0:00:11.879 going to be playing host to Perry Maryland and Sultan 0:00:11.960 --> 0:00:14.200 Posar that two of them are going to be debating 0:00:14.320 --> 0:00:17.880 the future of the dollar. It's on September six at 0:00:17.960 --> 0:00:20.480 three pm at Bloomberg h Q. And if you want 0:00:20.480 --> 0:00:22.959 to come, Tracy, how can people sign up? It is 0:00:23.040 --> 0:00:25.320 totally free. All you have to do is make sure 0:00:25.360 --> 0:00:27.960 you r s v P in advance. Please send an 0:00:27.960 --> 0:00:40.760 email to add Thoughts at Bloomberg dot net. Hello, and 0:00:40.880 --> 0:00:44.520 welcome to another episode of the Odd Lots Podcast. I'm 0:00:44.600 --> 0:00:47.680 Joe Wis and I'm Tracy Halloway. Tracy, what do you 0:00:47.760 --> 0:00:51.479 think of when you think of the Federal Reserve and 0:00:51.560 --> 0:00:57.120 August any sort of traditions or annual events come to mind? 0:00:58.000 --> 0:01:00.960 Jackson Hole would be the obvious on yes, right, we 0:01:01.000 --> 0:01:06.360 are recording this Monday, Augustine. And of course just on Friday, 0:01:06.440 --> 0:01:09.839 we had Chairman Powell's Jackson Whole speech, which I would 0:01:09.880 --> 0:01:14.080 say was very brief and the tone was definitely hawkish, 0:01:14.560 --> 0:01:16.840 very to the point. I mean I think you actually 0:01:16.840 --> 0:01:18.960 wrote this in the newsletter, but it's clear that the 0:01:18.959 --> 0:01:22.120 FED means business when it comes to fighting inflation. And 0:01:22.160 --> 0:01:24.679 the big news out of Jackson Hole was that Jerome 0:01:24.720 --> 0:01:29.160 Powell is willing to stomach pain for households and businesses 0:01:29.240 --> 0:01:33.000 in order to bring prices down. And the brevity of 0:01:33.000 --> 0:01:35.640 the speech was sort of telling because I sort of 0:01:35.680 --> 0:01:38.399 think of Jackson Hole typically as like this place for 0:01:38.480 --> 0:01:44.119 like this venue for theoretical discussions of academic and this 0:01:44.240 --> 0:01:47.600 was not an academic speech. Who was saying we're here 0:01:47.640 --> 0:01:50.000 to fight inflation, and that's all I feel like saying 0:01:50.080 --> 0:01:52.320 right now. I think that's right. But you know you 0:01:52.360 --> 0:01:55.920 mentioned August traditions. There's another August FED tradition, isn't there? 0:01:56.040 --> 0:01:59.160 There is another Fed August tradition, at least one that 0:01:59.240 --> 0:02:02.840 I think of. That is, of course, having Neil cash Carry, 0:02:02.920 --> 0:02:06.000 the president of the Minneapolis Fed, on our podcast. This 0:02:06.040 --> 0:02:08.800 will be the third straight August. I don't know if 0:02:08.800 --> 0:02:10.800 that's actually intentional. I think it sort of always works 0:02:10.800 --> 0:02:13.080 out that way. I don't think we've purposely timed it 0:02:13.120 --> 0:02:16.359 around Jackson Hall of each time. But we have Neil 0:02:16.400 --> 0:02:19.480 on again. That's fantastic. There is clearly a lot to 0:02:19.520 --> 0:02:22.200 talk about, and clearly things have changed since the last 0:02:22.200 --> 0:02:25.000 time we spoke to him. I mean back then, inflation 0:02:25.160 --> 0:02:26.880 was that I think it was something like five percent, 0:02:27.040 --> 0:02:31.919 and now fast forward to the last data for July eight. Yeah, 0:02:31.919 --> 0:02:33.760 it's a lot higher than it was in the past. 0:02:33.800 --> 0:02:36.400 And of course over the last year we've seen this 0:02:36.800 --> 0:02:41.000 fed pivot and this very aggressive attempt to now get 0:02:41.040 --> 0:02:44.079 inflation under control. Anyway, no more talking from us, Let's 0:02:44.080 --> 0:02:46.399 get right to our guests. So Neil cash Carry, thank 0:02:46.440 --> 0:02:49.680 you so much for coming back on the podcast. Thanks 0:02:49.720 --> 0:02:51.400 for having me. I was looking forward to it, and 0:02:51.520 --> 0:02:55.080 I'm glad our tradition is continuing. I love this tradition. 0:02:55.240 --> 0:02:58.520 So let's just get right into it. So, you know, 0:02:58.600 --> 0:03:01.400 one of the lines that caught a lot of attention 0:03:01.919 --> 0:03:06.000 from Sherman Powell's speech at Jackson Hole was that these 0:03:06.360 --> 0:03:09.400 higher interest rates, this effort to fight inflation, will bring 0:03:09.680 --> 0:03:13.480 some pain to households and businesses, and nobody knows exactly 0:03:13.680 --> 0:03:16.800 how much, but it's clear that you and the rest 0:03:16.800 --> 0:03:19.360 of the committee are willing to do what it takes, 0:03:19.480 --> 0:03:21.120 or you're saying you're willing to do what it takes 0:03:21.160 --> 0:03:24.360 to fight inflation, even if that means pain for the 0:03:24.440 --> 0:03:29.080 labor market and an economic slowdown. In your research and analysis, 0:03:29.600 --> 0:03:32.160 do you have any estimate for where you think the 0:03:32.240 --> 0:03:35.560 labor market needs to go to? How high does unemployment 0:03:35.600 --> 0:03:37.960 need to get from your perspective, or might it need 0:03:38.040 --> 0:03:41.320 to get in order to get inflation under control. Well, 0:03:41.440 --> 0:03:43.560 it's a good question, it's a very important question, and 0:03:43.720 --> 0:03:46.760 unfortunately answers we don't know. You know, this is not 0:03:47.560 --> 0:03:51.040 a labor market driven surge of inflation. This is not 0:03:51.200 --> 0:03:56.280 the traditional story where labor market gets tight, wages climb, 0:03:56.320 --> 0:03:59.000 businesses have to pass those costs on and then that 0:03:59.080 --> 0:04:03.280 leads to inflation. This inflation has been driven by mostly 0:04:03.760 --> 0:04:07.440 by supply chains, by the war in Ukraine, and by 0:04:07.480 --> 0:04:10.640 a lot of fiscal and monetary stimulus putting money into 0:04:10.640 --> 0:04:14.119 people's pockets, and wages have been climbing, but they've been 0:04:14.520 --> 0:04:17.800 a lagging indicator, not a forward indicator of inflation. And 0:04:17.880 --> 0:04:20.400 so when I think about that, that tells me it 0:04:20.440 --> 0:04:23.279 really depends on do we get more help on the 0:04:23.279 --> 0:04:26.360 supply chains, do we get more help from commodity prices, 0:04:26.720 --> 0:04:30.000 And as fiscal stimulus wanes, that should relieve some of 0:04:30.040 --> 0:04:32.919 the pressure and then the labor market will have to 0:04:32.960 --> 0:04:36.279 carry less of the burden, so to speak, through monetary policy. 0:04:36.360 --> 0:04:38.359 So I don't know the answer to that because it 0:04:38.400 --> 0:04:40.800 really depends on do we get help from these other sectors. 0:04:41.520 --> 0:04:43.240 So I'm sure we're going to dig into wages a 0:04:43.240 --> 0:04:47.000 bit more. But one more big picture question before we do. 0:04:47.279 --> 0:04:49.600 Last year, you were on the record saying that inflation 0:04:49.680 --> 0:04:52.960 is transitory, and I think when we last spoke to you, 0:04:52.960 --> 0:04:56.000 you were talking about how the FED shouldn't overreact to 0:04:56.160 --> 0:05:00.200 temporary inflation measures. But now fast forward to today and 0:05:00.240 --> 0:05:04.600 you basically transformed from the Fed's biggest dove into the 0:05:04.600 --> 0:05:07.839 biggest hawk, and you were talking at Jackson Hole about 0:05:08.040 --> 0:05:11.440 inflation now being a blazing inferno and things like that. 0:05:12.040 --> 0:05:15.239 What accounts for for that transformation? What made you change 0:05:15.240 --> 0:05:19.200 your mind? I changed my mind because the data didn't 0:05:19.240 --> 0:05:21.640 react the way I expected it too. So when a 0:05:21.760 --> 0:05:23.960 year ago when we were speaking, you know, we talked 0:05:23.960 --> 0:05:26.600 about how much fiscal stimulus was in the pipeline. We talked, 0:05:26.640 --> 0:05:29.400 we talked about workers who were probably going to return 0:05:29.760 --> 0:05:33.360 to the labor market. And it's true the fiscal stimulus 0:05:33.560 --> 0:05:36.560 ran its course. But if you look at consumer balance sheets. 0:05:36.600 --> 0:05:39.440 Generally speaking, at the American consumer is still doing very 0:05:39.520 --> 0:05:42.640 very well, even relative to where they were before the pandemic. 0:05:43.000 --> 0:05:46.719 We've seen multiple waves of COVID, We've seen some workers return, 0:05:46.760 --> 0:05:49.160 they have not returned as quickly as I had expected. 0:05:49.560 --> 0:05:52.920 And at some point, even if those things ultimately proved 0:05:52.960 --> 0:05:57.200 to be true, they're taking so long to resolve themselves 0:05:57.440 --> 0:05:59.520 that we are running the risk at the feder Reserve 0:05:59.560 --> 0:06:04.000 of allowing inflation expectations to become unanchored. So even if 0:06:04.040 --> 0:06:06.720 in the end, when history writes the book, they might say, hey, 0:06:06.720 --> 0:06:09.680 some of these factors were in fact still transitory, but 0:06:09.760 --> 0:06:12.919 they're simply taking much longer than I had expected, and 0:06:13.000 --> 0:06:16.800 that I am willing to tolerate for risk of unanchoring 0:06:16.800 --> 0:06:19.440 inflation expectations. If we were to allow that to happen, 0:06:19.880 --> 0:06:23.479 that would be very devastating to main Street, to our economy, 0:06:23.720 --> 0:06:26.599 two people all across our country. How do you gauge 0:06:26.720 --> 0:06:32.000 inflation expectations? Of course they're various private surveys or other surveys. 0:06:32.760 --> 0:06:36.000 They don't seem to have picked up and in fact 0:06:36.440 --> 0:06:39.440 recent measures. You know, on Friday, right as a Powell 0:06:39.640 --> 0:06:41.919 spoke at ten am, you Sterring. We got the latest 0:06:41.960 --> 0:06:44.200 Humish survey. It actually ticked down a little bit to 0:06:44.240 --> 0:06:48.320 two point nine percent over the next five to ten years. Hey, 0:06:48.320 --> 0:06:51.680 what do you look at on the inflation expectations measure? 0:06:51.880 --> 0:06:55.279 And then more broadly, like what is the mechanism view 0:06:55.279 --> 0:06:58.680 which high inflation become could become entrenched? You hear this 0:06:58.720 --> 0:07:01.280 word a lot or concern of out it may be entrenched. 0:07:01.520 --> 0:07:05.040 How does entrenched this happen? Well, I'll give you a 0:07:05.040 --> 0:07:06.920 few examples. So first of all, we look at all 0:07:06.960 --> 0:07:09.840 the different measures we can which are survey based measures 0:07:09.840 --> 0:07:13.080 that you just mentioned, as well as indicators embedded into 0:07:13.080 --> 0:07:17.600 financial markets, and they're all suggesting that, hey, inflation is 0:07:17.640 --> 0:07:20.960 gonna come down fairly quickly, especially look at the financial markets. 0:07:21.400 --> 0:07:23.920 The market seem to think inflation is gonna fall rapidly 0:07:23.960 --> 0:07:27.520 next year, and I hope they're right. Now. Part of 0:07:27.560 --> 0:07:30.920 the reason I think that all of these measures are 0:07:30.920 --> 0:07:33.480 showing a lot of confidence inflation is going to fall 0:07:34.000 --> 0:07:36.760 is because they are looking at us, and we're saying 0:07:36.800 --> 0:07:38.960 we're on the job, we're on the case, we're not 0:07:38.960 --> 0:07:41.400 going to let it high inflation remain. So partly it's 0:07:41.400 --> 0:07:44.960 a reflection I think of confidence that we are going 0:07:44.960 --> 0:07:47.800 to walk the walk, you know, not just talk a 0:07:47.800 --> 0:07:49.640 big game, but we're actually gonna follow through and make 0:07:49.680 --> 0:07:53.280 sure that inflation comes down. And so that it's comforting 0:07:53.320 --> 0:07:56.720 that they seem to be trusting in us, but that 0:07:56.800 --> 0:07:59.520 doesn't absolve us from needing to then follow through. It 0:07:59.560 --> 0:08:01.800 means that more than ever, we need to follow through 0:08:02.080 --> 0:08:06.640 to make sure that those expectations are vindicated. You mentioned 0:08:06.680 --> 0:08:09.480 financial market indicators, and of course when you look at 0:08:09.560 --> 0:08:12.520 treasury yields, and actually this was something you mentioned last year, 0:08:12.600 --> 0:08:16.680 is something that you were watching which weren't necessarily implying 0:08:16.760 --> 0:08:20.320 inflation at that time. And as you mentioned, bond yields 0:08:20.440 --> 0:08:24.120 further out into next year suggests that inflation is going 0:08:24.200 --> 0:08:27.440 to come down. But how much of that is predicated 0:08:27.680 --> 0:08:31.400 on inflation coming down because of something like a recession? 0:08:31.480 --> 0:08:33.720 How do you gauge that risk? When you look at 0:08:33.720 --> 0:08:37.000 bond yields, look at the inverted curve, things like that, 0:08:37.040 --> 0:08:41.280 a traditional recession indicator, what are they telling you? Yeah, 0:08:41.400 --> 0:08:43.280 it's something I do. Pay a lot of attention to. 0:08:43.520 --> 0:08:46.800 Both the nominal you'll curve and the real you'll curve. 0:08:46.840 --> 0:08:49.720 They usually move together. But because of these inflation and 0:08:49.800 --> 0:08:52.480 dynamics right now, there are some differences. So the last 0:08:52.480 --> 0:08:55.480 time I looked, the nominal curve had inverted. I focused 0:08:55.520 --> 0:08:58.200 mostly on the two ten curve. The real curve had 0:08:58.240 --> 0:09:01.760 not yet inverted, but was getting close. Something interesting happened 0:09:01.800 --> 0:09:04.160 in July. You remember the Bank of Canada raised interest 0:09:04.240 --> 0:09:06.520 rates by a hundred basis points, and there was a 0:09:06.600 --> 0:09:09.880 lot of chatter before our prior FMC meeting. Would the 0:09:09.960 --> 0:09:12.960 FOMC raised by a hundred basis points? And the yield 0:09:12.960 --> 0:09:14.800 curve did something very interesting. The front end of the 0:09:14.840 --> 0:09:16.920 Yelk curve went up, as you would expect for a 0:09:16.960 --> 0:09:20.800 more hawkish expectation of monetary policy, but the back end 0:09:20.840 --> 0:09:23.440 of the real yo'l curve went down. So why would 0:09:23.480 --> 0:09:25.400 the back end of the real yolk curve go down? 0:09:25.520 --> 0:09:29.040 I interpreted it as markets were saying, hey, they may 0:09:29.040 --> 0:09:32.720 be more aggressive with monetary policy. That may lead more 0:09:32.840 --> 0:09:36.600 quickly to some type of slong of the economy and 0:09:36.640 --> 0:09:40.000 a more a sooner achievement of the dual mandate goals, 0:09:40.400 --> 0:09:42.679 which would then allow them to back off. Now does 0:09:42.720 --> 0:09:45.120 that technically mean it would be a recession? I don't know, 0:09:45.800 --> 0:09:48.240 but I interpreted it to mean markets thought we would 0:09:48.240 --> 0:09:51.080 more quickly achieve our dual mandate goals and then we 0:09:51.120 --> 0:09:54.400 would be able to relax somewhat. It's an interesting data 0:09:54.440 --> 0:09:56.840 point that I pay attention to. It's it's not driving 0:09:57.200 --> 0:09:59.720 my recommendations at this point, but it's something that I 0:09:59.760 --> 0:10:03.320 think is giving us some information. Since we're talking about 0:10:03.480 --> 0:10:06.560 bond markets, can you maybe talk a little bit about 0:10:06.640 --> 0:10:11.120 FED communication at this point and how it's evolved. Because 0:10:11.280 --> 0:10:15.480 when the FED did that first basis point hike after 0:10:15.720 --> 0:10:19.040 ruling out one just a few weeks before, we did 0:10:19.080 --> 0:10:21.120 have a bunch of bond traders who were talking about 0:10:21.120 --> 0:10:24.640 how this was the death of forward guidance. So I 0:10:24.679 --> 0:10:27.400 guess my question is was it because before it felt like, 0:10:27.480 --> 0:10:30.480 even though you were stressing data dependency, you would still 0:10:30.520 --> 0:10:34.720 try to avoid surprising the market. Yeah. I think this 0:10:34.840 --> 0:10:39.320 notion of the death afford guidance is premature and probably 0:10:39.360 --> 0:10:42.960 an exaggeration. What does Ford guidance even mean? I see 0:10:43.120 --> 0:10:45.840 value and members of the aform C going out and 0:10:45.880 --> 0:10:49.840 saying we are united in our commitment of getting inflation 0:10:49.840 --> 0:10:52.679 back down to our two percent goal. That means we're 0:10:52.679 --> 0:10:54.319 going to do what we need to do to achieve 0:10:54.360 --> 0:10:56.640 that and how much we're gonna need to do. It's 0:10:56.640 --> 0:10:58.720 going to depend on what happens in a lot of 0:10:58.760 --> 0:11:02.160 the sectors of the economy or supply chains, etcetera. But 0:11:02.720 --> 0:11:06.520 us expressing our commitment are united commitment to doing what 0:11:06.559 --> 0:11:08.840 we need to do to get inflation back down. That's 0:11:08.840 --> 0:11:11.679 a form of forward guidance. Should we not articulate that? 0:11:11.800 --> 0:11:14.200 I don't agree with that at all, And so yes, 0:11:14.320 --> 0:11:16.600 I want to say, there's a lot of uncertainty about 0:11:16.720 --> 0:11:18.720 what's going to happen at the next meeting, or what's 0:11:18.720 --> 0:11:20.199 going to happen by the end of the year. It's 0:11:20.200 --> 0:11:22.680 going to depend on all of these different factors. That's 0:11:22.679 --> 0:11:25.320 all true, and I think we should be honest about 0:11:25.360 --> 0:11:27.720 how much uncertain e there is about these factors and 0:11:27.760 --> 0:11:30.760 what's going to drive where monetary policy needs to go. 0:11:30.800 --> 0:11:34.720 But certainly as forward guidance expressing our commitment to getting 0:11:34.720 --> 0:11:37.200 inflation back down, I think it's very valuable for us 0:11:37.280 --> 0:11:56.880 all to express that. So you mentioned there was some 0:11:57.040 --> 0:11:59.880 discussion at the last meeting about whether the FED, like 0:12:00.040 --> 0:12:02.440 Bank of Canada should go to a hundred basis points, 0:12:02.440 --> 0:12:05.959 and I think you were among those who supported such 0:12:06.000 --> 0:12:09.160 a strong move to stamp out this raging inferno of 0:12:09.360 --> 0:12:13.240 inflation that we're seeing right now. Fast forward to right now, 0:12:13.640 --> 0:12:16.880 the last couple inflation data points, and it's just it's 0:12:16.920 --> 0:12:18.600 not a lot of data to work with. Have not 0:12:18.720 --> 0:12:21.720 been that bad. We got that zero percent CPR report. 0:12:22.000 --> 0:12:26.800 The PC for July was actually slight decline in prices sequentially, 0:12:27.000 --> 0:12:30.080 It's just one month. We've had some pauses. Does that 0:12:30.200 --> 0:12:33.440 affect your view on September, the meeting that's coming up 0:12:33.480 --> 0:12:36.319 near the end of September, and you're thinking of whether 0:12:36.440 --> 0:12:40.680 fifty versus seventy five basis points would be appropriate. Well, 0:12:40.720 --> 0:12:43.480 as you said, Joe, it's, you know, basically one data point. 0:12:43.840 --> 0:12:46.280 You know, we've been surprised for the past year almost 0:12:46.320 --> 0:12:49.760 every time of inflation, surprising us to the upside. So 0:12:50.040 --> 0:12:52.520 if we have one surprise somewhat to the downside, I'll 0:12:52.559 --> 0:12:55.480 happily take it. But I don't take much signal from that. 0:12:55.800 --> 0:12:57.040 You know, we need to be able, We need to 0:12:57.040 --> 0:12:59.840 see a lot more before we get convinced inflation as 0:12:59.840 --> 0:13:01.840 well on its way back down, or that we've seen 0:13:01.880 --> 0:13:06.400 pek inflation. I'm not convinced of that yet. So you know, 0:13:06.480 --> 0:13:08.720 to me, if the inflation reading is that we've gotten 0:13:08.760 --> 0:13:11.080 since the last meeting. We're surprising us to the upside 0:13:11.160 --> 0:13:13.760 yet again. Then I think you'd probably see people talking 0:13:13.800 --> 0:13:16.280 more about Hey, would they consider a hundred basis points? 0:13:16.600 --> 0:13:18.840 I think the fact that the chatter is fifty verses 0:13:18.880 --> 0:13:21.559 seventy five, you know, we've got more data to see 0:13:21.559 --> 0:13:24.520 before I would be ready to draw any conclusions from that. 0:13:24.880 --> 0:13:26.719 But my guess is we're somewhere in that range of 0:13:26.760 --> 0:13:28.800 fifty to seventy five for the next meeting. Based on 0:13:28.840 --> 0:13:31.680 the data that has come in this week, we're getting 0:13:31.800 --> 0:13:36.520 a job's report last months was particularly strong in the 0:13:36.679 --> 0:13:41.600 absence of fresh inflation data. Would another surprisingly strong jobs 0:13:41.600 --> 0:13:43.280 are port I mean, we got half a million new 0:13:43.360 --> 0:13:46.679 jobs last month. How would you be thinking about that 0:13:46.760 --> 0:13:52.480 and would that push you more towards well, I don't know. Certainly, 0:13:52.520 --> 0:13:54.319 I want to see a strong labor market. I want 0:13:54.320 --> 0:13:56.120 to see people getting jobs. I want to see real 0:13:56.160 --> 0:13:59.280 wages going up, so that gives me more comfort that 0:13:59.280 --> 0:14:02.880 we're probably not actually in a recession right now. Obviously 0:14:02.920 --> 0:14:04.840 you've talked a lot about the first two quarters of 0:14:04.880 --> 0:14:07.440 negative GDP growth and are we in a recession? And 0:14:07.480 --> 0:14:10.559 as you know, you've talked about a lot. Typically recession 0:14:10.720 --> 0:14:13.160 comes with a very weak labor market and a lot 0:14:13.160 --> 0:14:15.920 of layoffs. So if we continue to see strong job growth, 0:14:15.960 --> 0:14:18.920 that would give me confidence that we're not actually in 0:14:18.960 --> 0:14:21.320 a recession, even though some of the data indicates we 0:14:21.440 --> 0:14:25.360 might be. But ultimately I would be looking at wages. 0:14:25.920 --> 0:14:28.240 I will be looking at real wage growth, and ultimately 0:14:28.280 --> 0:14:30.920 I'm very focused more than anything on the inflation data 0:14:30.960 --> 0:14:35.000 and the inflation expectation data. So for me, individually, I 0:14:35.040 --> 0:14:37.160 don't think the labor market itself is going to be 0:14:37.200 --> 0:14:40.880 determinative of fifty verse seventy five or what the what 0:14:40.960 --> 0:14:44.440 the subsequent reading needs to be. Actually that reminds me. 0:14:44.560 --> 0:14:47.200 You know, at Jackson Hole, you made that distinction between 0:14:47.320 --> 0:14:50.720 running the economy hot and the current situation, which you 0:14:50.840 --> 0:14:55.160 called a blazing inferno. Can you elaborate on that a 0:14:55.200 --> 0:14:59.040 little more, Like, what is the difference between benign heat 0:14:59.200 --> 0:15:01.680 in the economy me where you have a healthy labor 0:15:01.760 --> 0:15:07.040 market versus damaging inferno heat? Like how do you gauge 0:15:07.080 --> 0:15:10.760 those two? Does it just come down to the inflation 0:15:10.840 --> 0:15:14.480 expectations spiral that you described, or do you look at 0:15:14.520 --> 0:15:18.560 broader types of damage like you know, people being unable 0:15:18.600 --> 0:15:21.640 to afford rent and pay off their debt and things 0:15:21.640 --> 0:15:25.400 like that. Well, I would say it starts with the 0:15:25.480 --> 0:15:28.520 actual inflation that American families are experiencing. So let's just 0:15:28.560 --> 0:15:31.280 go back in time. A few years before the pandemic, 0:15:31.680 --> 0:15:34.120 we had three and a half percent unemployment. For the 0:15:34.160 --> 0:15:37.000 four or five years before the pandemic, we at the 0:15:37.160 --> 0:15:40.800 FED kept thinking, oh, we're at maximum employment, and then 0:15:40.840 --> 0:15:43.120 we started raising interest rates, and I objected to those 0:15:43.120 --> 0:15:45.160 because I wasn't sure that we were actually at maximum 0:15:45.200 --> 0:15:48.360 employment and inflation was coming in under our two percent target. 0:15:48.880 --> 0:15:51.480 And then the job, the job market, the economy kept 0:15:51.480 --> 0:15:55.360 creating jobs, much to our surprise, suggesting we were not 0:15:55.480 --> 0:15:59.480 in fact in maximum employment because inflation stayed low and 0:15:59.560 --> 0:16:02.280 wage owth was picking up, picking up only moderately. So 0:16:02.320 --> 0:16:06.440 in that context, we asked ourselves, is there some way 0:16:06.480 --> 0:16:08.920 we could provide more of a boost to the economy 0:16:09.400 --> 0:16:12.800 using monetary policy during times of low inflation. And that's 0:16:12.800 --> 0:16:14.560 how we came up with our new framework that we 0:16:14.600 --> 0:16:18.560 adopted a year or so ago. And that framework is 0:16:18.600 --> 0:16:22.520 literally designed to provide more stimulus in those low inflation periods. 0:16:22.840 --> 0:16:25.320 But once you get back to a high inflation period 0:16:25.360 --> 0:16:27.760 two per cent or above. Then the new framework is 0:16:27.760 --> 0:16:30.280 the old framework. It just goes back to connecting monetary 0:16:30.320 --> 0:16:32.480 policy the way we did in the past. So in 0:16:32.520 --> 0:16:35.200 that context, we were asking, how do we provide a 0:16:35.200 --> 0:16:37.080 little bit more of a boost to the economy and 0:16:37.120 --> 0:16:39.680 periods of low inflation. And that's what I would define 0:16:39.760 --> 0:16:44.920 is running the economy hot in that context. Now, in contrast, 0:16:45.360 --> 0:16:48.000 where are we now. We had multi trillion dollars of 0:16:48.080 --> 0:16:51.320 fiscal stimulus, We have supply chains that were gummed up 0:16:51.360 --> 0:16:54.680 because of COVID, we have millions of missing workers relative 0:16:54.720 --> 0:16:58.200 to what we expected. We also have a war Russia 0:16:58.280 --> 0:17:00.720 launching war in Ukraine, which is up end in commodity 0:17:00.760 --> 0:17:05.000 markets and energy markets. Those are two wildly different scenarios. 0:17:05.000 --> 0:17:07.720 And so that's why in the meeting I was pushing 0:17:07.720 --> 0:17:10.520 back on the notion of well, this proves that there's 0:17:10.560 --> 0:17:13.600 really dangerous to running economy hot. This is not what 0:17:13.680 --> 0:17:15.760 we were talking about a few years ago. This is 0:17:15.800 --> 0:17:20.080 a completely different situation. And while one might eventually conclude, hey, 0:17:20.119 --> 0:17:22.240 you don't want to run an economy hot, at least 0:17:22.240 --> 0:17:25.240 for me, it's entirely premature to draw that conclusion. Right 0:17:25.280 --> 0:17:27.639 now in the context of what we meant about a 0:17:27.640 --> 0:17:31.080 hot economy a few years ago. That's an interesting way 0:17:31.080 --> 0:17:34.720 to frame it. You know, the flexible average inflation targeting. 0:17:34.960 --> 0:17:38.520 It was unveiled at the August Jackson Hole, so I think, 0:17:38.560 --> 0:17:41.000 I think, yeah, so it's it's two years old at 0:17:41.040 --> 0:17:44.359 this point. Was it basically an example of the FED 0:17:44.880 --> 0:17:47.480 fighting the last war? Which is a charge that's been 0:17:47.560 --> 0:17:50.679 levied that's sort of the fiscal expansion, etcetera. That the 0:17:50.720 --> 0:17:54.680 FED overlearned the lessons of two thousand, two thousand nine. 0:17:55.240 --> 0:17:58.640 So he is this is fate, uh fighting the last war, 0:17:59.080 --> 0:18:01.600 and in order to stay consistent with fate, what does 0:18:01.640 --> 0:18:04.480 that actually mean in practice? Because in theory, if you're 0:18:04.560 --> 0:18:06.800 supposed to get a two percent average, we've had like, 0:18:06.920 --> 0:18:09.520 you know, eight nine percent, we have to run sub 0:18:09.560 --> 0:18:13.080 two percent inflation for a while in order to actually 0:18:13.520 --> 0:18:17.159 fulfill that framework. And I think everybody always says that 0:18:17.200 --> 0:18:19.600 everybody is always guilty of fighting the last war, whether 0:18:19.640 --> 0:18:22.960 it's an economics or it's in the military. You know, 0:18:23.040 --> 0:18:25.040 you you have to learn from the last war, and 0:18:25.080 --> 0:18:27.399 you have to make yourself stronger so that you're not 0:18:27.520 --> 0:18:29.879 vulnerable the way you were last time, and so go 0:18:29.960 --> 0:18:34.040 back in time. The big mistake in hindsight that Congress 0:18:34.080 --> 0:18:36.080 and the Fed made coming out of the O eight 0:18:36.119 --> 0:18:39.720 oh nine downturn was we were not aggressive enough collectively 0:18:39.800 --> 0:18:42.800 in supporting the economy and supporting main street, and it 0:18:42.880 --> 0:18:45.560 took ten years to put Americans back to work. That 0:18:45.720 --> 0:18:49.400 is way too slow. This time, Congress said we're gonna 0:18:49.400 --> 0:18:52.200 act very They're gonna act very aggressively. In the COVID downturn, 0:18:52.640 --> 0:18:55.719 they passed big fiscal stimuli, and when most of that 0:18:55.760 --> 0:18:59.560 stimulus was passed, we had no idea when and if 0:18:59.640 --> 0:19:02.320 vaccine means would be available. I was talking to the 0:19:02.359 --> 0:19:04.199 best health experts in the country and they said, we 0:19:04.240 --> 0:19:06.399 just don't know how long it's going to take. And 0:19:06.480 --> 0:19:08.960 so it's actually a miracle of science that we have 0:19:09.080 --> 0:19:13.679 multiple highly effective vaccines available within a year. And so 0:19:13.760 --> 0:19:19.000 the economic downturn was much shorter than had been expected 0:19:19.040 --> 0:19:21.640 at the time the stimulus was passed. And so now 0:19:21.680 --> 0:19:25.240 we've got a very strong labor market recovery. Did Congress, 0:19:25.720 --> 0:19:27.600 you know, learn the wrong lesson from OH eight or 0:19:27.640 --> 0:19:29.679 O nine, I don't think so. I was very I 0:19:29.720 --> 0:19:33.119 was emphatic better Aaron doing too much than too little. 0:19:33.480 --> 0:19:35.600 So now we're in a position that we collectively have 0:19:35.640 --> 0:19:37.879 done too much and we need to adjust. But I 0:19:37.880 --> 0:19:39.760 don't want to go to those millions of Americans who 0:19:39.800 --> 0:19:42.760 are working today and said, you know what, you shouldn't 0:19:42.760 --> 0:19:45.080 have your job. We should have been much more timid 0:19:45.080 --> 0:19:47.280 in our recovery because all of a sudden we might 0:19:47.280 --> 0:19:49.200 have been in a new regime that we didn't foresee. 0:19:50.359 --> 0:19:54.320 What does it mean to apply flexible average inflation targeting? Now? 0:19:54.440 --> 0:19:57.879 Does it have to overshoot to the downside? Yeah? I 0:19:57.880 --> 0:19:59.800 don't think so. I mean we left ourselves a lot 0:19:59.800 --> 0:20:02.040 of eagle room, you know, we don't. I've never been 0:20:02.080 --> 0:20:06.040 a subscriber of rigid monetary rules because strange things happen 0:20:06.200 --> 0:20:08.840 in the economy, and if you tie yourself to this 0:20:08.960 --> 0:20:11.920 rigid monetary rule, then you end up doing very damaging things. 0:20:12.440 --> 0:20:13.879 And so no, I don't think so. I think that 0:20:13.960 --> 0:20:16.400 we will be able to get inflation back down over 0:20:16.440 --> 0:20:19.120 the next several years to our two percent target. And 0:20:19.280 --> 0:20:20.919 I don't think we're gonna then say, well, we have 0:20:21.000 --> 0:20:23.640 to go run a one percent inflation for the next 0:20:23.760 --> 0:20:26.920 X number of years to average mechanically average two percent. 0:20:27.000 --> 0:20:28.760 I think that would be silly for us to do that. 0:20:29.440 --> 0:20:32.159 You were talking about time frames just then, and the 0:20:32.280 --> 0:20:36.119 idea of the vaccine coming out, you know, possibly quicker 0:20:36.119 --> 0:20:39.120 than a lot of people expected at the time. How 0:20:39.160 --> 0:20:42.680 are you gauging policy lags at the moment? Because this 0:20:42.720 --> 0:20:44.880 is something that f o MC has talked a little 0:20:44.880 --> 0:20:47.760 bit about in the statement, this idea that you know, 0:20:48.200 --> 0:20:51.200 an interest rate hike takes some time to filter into 0:20:51.240 --> 0:20:56.040 the real economy now that rates are higher and presumably 0:20:56.119 --> 0:20:59.560 closer to you know, neutral, although you tell me if 0:20:59.560 --> 0:21:02.640 you don't think that's the case, does it get harder 0:21:02.920 --> 0:21:06.040 to gauge that? Do you have to start thinking more 0:21:06.160 --> 0:21:10.280 about the impact of previous policy decisions as you start 0:21:10.320 --> 0:21:14.560 to make new ones. It's it's hard and it's complicated. 0:21:15.000 --> 0:21:17.800 We know that interest rate sectors of the economy will 0:21:17.800 --> 0:21:20.720 be affected most and most quickly, and they already are, 0:21:21.000 --> 0:21:23.919 housing being the best example of that. But we also 0:21:23.960 --> 0:21:25.840