Speaker 1: So, Joe, we have something pretty exciting coming up. That's right,
Speaker 1: We're going to be doing a live episode of the
Speaker 1: podcast and listeners are invited to join. Yep, we are
Speaker 1: going to be playing host to Perry Maryland and Sultan
Speaker 1: Posar that two of them are going to be debating
Speaker 1: the future of the dollar. It's on September six at
Speaker 1: three pm at Bloomberg h Q. And if you want
Speaker 1: to come, Tracy, how can people sign up? It is
Speaker 1: totally free. All you have to do is make sure
Speaker 1: you r s v P in advance. Please send an
Speaker 1: email to add Thoughts at Bloomberg dot net. Hello, and
Speaker 1: welcome to another episode of the Odd Lots Podcast. I'm
Speaker 1: Joe Wis and I'm Tracy Halloway. Tracy, what do you
Speaker 1: think of when you think of the Federal Reserve and
Speaker 1: August any sort of traditions or annual events come to mind?
Speaker 1: Jackson Hole would be the obvious on yes, right, we
Speaker 1: are recording this Monday, Augustine. And of course just on Friday,
Speaker 1: we had Chairman Powell's Jackson Whole speech, which I would
Speaker 1: say was very brief and the tone was definitely hawkish,
Speaker 1: very to the point. I mean I think you actually
Speaker 1: wrote this in the newsletter, but it's clear that the
Speaker 1: FED means business when it comes to fighting inflation. And
Speaker 1: the big news out of Jackson Hole was that Jerome
Speaker 1: Powell is willing to stomach pain for households and businesses
Speaker 1: in order to bring prices down. And the brevity of
Speaker 1: the speech was sort of telling because I sort of
Speaker 1: think of Jackson Hole typically as like this place for
Speaker 1: like this venue for theoretical discussions of academic and this
Speaker 1: was not an academic speech. Who was saying we're here
Speaker 1: to fight inflation, and that's all I feel like saying
Speaker 1: right now. I think that's right. But you know you
Speaker 1: mentioned August traditions. There's another August FED tradition, isn't there?
Speaker 1: There is another Fed August tradition, at least one that
Speaker 1: I think of. That is, of course, having Neil cash Carry,
Speaker 1: the president of the Minneapolis Fed, on our podcast. This
Speaker 1: will be the third straight August. I don't know if
Speaker 1: that's actually intentional. I think it sort of always works
Speaker 1: out that way. I don't think we've purposely timed it
Speaker 1: around Jackson Hall of each time. But we have Neil
Speaker 1: on again. That's fantastic. There is clearly a lot to
Speaker 1: talk about, and clearly things have changed since the last
Speaker 1: time we spoke to him. I mean back then, inflation
Speaker 1: was that I think it was something like five percent,
Speaker 1: and now fast forward to the last data for July eight. Yeah,
Speaker 1: it's a lot higher than it was in the past.
Speaker 1: And of course over the last year we've seen this
Speaker 1: fed pivot and this very aggressive attempt to now get
Speaker 1: inflation under control. Anyway, no more talking from us, Let's
Speaker 1: get right to our guests. So Neil cash Carry, thank
Speaker 1: you so much for coming back on the podcast. Thanks
Speaker 1: for having me. I was looking forward to it, and
Speaker 1: I'm glad our tradition is continuing. I love this tradition.
Speaker 1: So let's just get right into it. So, you know,
Speaker 1: one of the lines that caught a lot of attention
Speaker 1: from Sherman Powell's speech at Jackson Hole was that these
Speaker 1: higher interest rates, this effort to fight inflation, will bring
Speaker 1: some pain to households and businesses, and nobody knows exactly
Speaker 1: how much, but it's clear that you and the rest
Speaker 1: of the committee are willing to do what it takes,
Speaker 1: or you're saying you're willing to do what it takes
Speaker 1: to fight inflation, even if that means pain for the
Speaker 1: labor market and an economic slowdown. In your research and analysis,
Speaker 1: do you have any estimate for where you think the
Speaker 1: labor market needs to go to? How high does unemployment
Speaker 1: need to get from your perspective, or might it need
Speaker 1: to get in order to get inflation under control. Well,
Speaker 1: it's a good question, it's a very important question, and
Speaker 1: unfortunately answers we don't know. You know, this is not
Speaker 1: a labor market driven surge of inflation. This is not
Speaker 1: the traditional story where labor market gets tight, wages climb,
Speaker 1: businesses have to pass those costs on and then that
Speaker 1: leads to inflation. This inflation has been driven by mostly
Speaker 1: by supply chains, by the war in Ukraine, and by
Speaker 1: a lot of fiscal and monetary stimulus putting money into
Speaker 1: people's pockets, and wages have been climbing, but they've been
Speaker 1: a lagging indicator, not a forward indicator of inflation. And
Speaker 1: so when I think about that, that tells me it
Speaker 1: really depends on do we get more help on the
Speaker 1: supply chains, do we get more help from commodity prices,
Speaker 1: And as fiscal stimulus wanes, that should relieve some of
Speaker 1: the pressure and then the labor market will have to
Speaker 1: carry less of the burden, so to speak, through monetary policy.
Speaker 1: So I don't know the answer to that because it
Speaker 1: really depends on do we get help from these other sectors.
Speaker 1: So I'm sure we're going to dig into wages a
Speaker 1: bit more. But one more big picture question before we do.
Speaker 1: Last year, you were on the record saying that inflation
Speaker 1: is transitory, and I think when we last spoke to you,
Speaker 1: you were talking about how the FED shouldn't overreact to
Speaker 1: temporary inflation measures. But now fast forward to today and
Speaker 1: you basically transformed from the Fed's biggest dove into the
Speaker 1: biggest hawk, and you were talking at Jackson Hole about
Speaker 1: inflation now being a blazing inferno and things like that.
Speaker 1: What accounts for for that transformation? What made you change
Speaker 1: your mind? I changed my mind because the data didn't
Speaker 1: react the way I expected it too. So when a
Speaker 1: year ago when we were speaking, you know, we talked
Speaker 1: about how much fiscal stimulus was in the pipeline. We talked,
Speaker 1: we talked about workers who were probably going to return
Speaker 1: to the labor market. And it's true the fiscal stimulus
Speaker 1: ran its course. But if you look at consumer balance sheets.
Speaker 1: Generally speaking, at the American consumer is still doing very
Speaker 1: very well, even relative to where they were before the pandemic.
Speaker 1: We've seen multiple waves of COVID, We've seen some workers return,
Speaker 1: they have not returned as quickly as I had expected.
Speaker 1: And at some point, even if those things ultimately proved
Speaker 1: to be true, they're taking so long to resolve themselves
Speaker 1: that we are running the risk at the feder Reserve
Speaker 1: of allowing inflation expectations to become unanchored. So even if
Speaker 1: in the end, when history writes the book, they might say, hey,
Speaker 1: some of these factors were in fact still transitory, but
Speaker 1: they're simply taking much longer than I had expected, and
Speaker 1: that I am willing to tolerate for risk of unanchoring
Speaker 1: inflation expectations. If we were to allow that to happen,
Speaker 1: that would be very devastating to main Street, to our economy,
Speaker 1: two people all across our country. How do you gauge
Speaker 1: inflation expectations? Of course they're various private surveys or other surveys.
Speaker 1: They don't seem to have picked up and in fact
Speaker 1: recent measures. You know, on Friday, right as a Powell
Speaker 1: spoke at ten am, you Sterring. We got the latest
Speaker 1: Humish survey. It actually ticked down a little bit to
Speaker 1: two point nine percent over the next five to ten years. Hey,
Speaker 1: what do you look at on the inflation expectations measure?
Speaker 1: And then more broadly, like what is the mechanism view
Speaker 1: which high inflation become could become entrenched? You hear this
Speaker 1: word a lot or concern of out it may be entrenched.
Speaker 1: How does entrenched this happen? Well, I'll give you a
Speaker 1: few examples. So first of all, we look at all
Speaker 1: the different measures we can which are survey based measures
Speaker 1: that you just mentioned, as well as indicators embedded into
Speaker 1: financial markets, and they're all suggesting that, hey, inflation is
Speaker 1: gonna come down fairly quickly, especially look at the financial markets.
Speaker 1: The market seem to think inflation is gonna fall rapidly
Speaker 1: next year, and I hope they're right. Now. Part of
Speaker 1: the reason I think that all of these measures are
Speaker 1: showing a lot of confidence inflation is going to fall
Speaker 1: is because they are looking at us, and we're saying
Speaker 1: we're on the job, we're on the case, we're not
Speaker 1: going to let it high inflation remain. So partly it's
Speaker 1: a reflection I think of confidence that we are going
Speaker 1: to walk the walk, you know, not just talk a
Speaker 1: big game, but we're actually gonna follow through and make
Speaker 1: sure that inflation comes down. And so that it's comforting
Speaker 1: that they seem to be trusting in us, but that
Speaker 1: doesn't absolve us from needing to then follow through. It
Speaker 1: means that more than ever, we need to follow through
Speaker 1: to make sure that those expectations are vindicated. You mentioned
Speaker 1: financial market indicators, and of course when you look at
Speaker 1: treasury yields, and actually this was something you mentioned last year,
Speaker 1: is something that you were watching which weren't necessarily implying
Speaker 1: inflation at that time. And as you mentioned, bond yields
Speaker 1: further out into next year suggests that inflation is going
Speaker 1: to come down. But how much of that is predicated
Speaker 1: on inflation coming down because of something like a recession?
Speaker 1: How do you gauge that risk? When you look at
Speaker 1: bond yields, look at the inverted curve, things like that,
Speaker 1: a traditional recession indicator, what are they telling you? Yeah,
Speaker 1: it's something I do. Pay a lot of attention to.
Speaker 1: Both the nominal you'll curve and the real you'll curve.
Speaker 1: They usually move together. But because of these inflation and
Speaker 1: dynamics right now, there are some differences. So the last
Speaker 1: time I looked, the nominal curve had inverted. I focused
Speaker 1: mostly on the two ten curve. The real curve had
Speaker 1: not yet inverted, but was getting close. Something interesting happened
Speaker 1: in July. You remember the Bank of Canada raised interest
Speaker 1: rates by a hundred basis points, and there was a
Speaker 1: lot of chatter before our prior FMC meeting. Would the
Speaker 1: FOMC raised by a hundred basis points? And the yield
Speaker 1: curve did something very interesting. The front end of the
Speaker 1: Yelk curve went up, as you would expect for a
Speaker 1: more hawkish expectation of monetary policy, but the back end
Speaker 1: of the real yo'l curve went down. So why would
Speaker 1: the back end of the real yolk curve go down?
Speaker 1: I interpreted it as markets were saying, hey, they may
Speaker 1: be more aggressive with monetary policy. That may lead more
Speaker 1: quickly to some type of slong of the economy and
Speaker 1: a more a sooner achievement of the dual mandate goals,
Speaker 1: which would then allow them to back off. Now does
Speaker 1: that technically mean it would be a recession? I don't know,
Speaker 1: but I interpreted it to mean markets thought we would
Speaker 1: more quickly achieve our dual mandate goals and then we
Speaker 1: would be able to relax somewhat. It's an interesting data
Speaker 1: point that I pay attention to. It's it's not driving
Speaker 1: my recommendations at this point, but it's something that I
Speaker 1: think is giving us some information. Since we're talking about
Speaker 1: bond markets, can you maybe talk a little bit about
Speaker 1: FED communication at this point and how it's evolved. Because
Speaker 1: when the FED did that first basis point hike after
Speaker 1: ruling out one just a few weeks before, we did
Speaker 1: have a bunch of bond traders who were talking about
Speaker 1: how this was the death of forward guidance. So I
Speaker 1: guess my question is was it because before it felt like,
Speaker 1: even though you were stressing data dependency, you would still
Speaker 1: try to avoid surprising the market. Yeah. I think this
Speaker 1: notion of the death afford guidance is premature and probably
Speaker 1: an exaggeration. What does Ford guidance even mean? I see
Speaker 1: value and members of the aform C going out and
Speaker 1: saying we are united in our commitment of getting inflation
Speaker 1: back down to our two percent goal. That means we're
Speaker 1: going to do what we need to do to achieve
Speaker 1: that and how much we're gonna need to do. It's
Speaker 1: going to depend on what happens in a lot of
Speaker 1: the sectors of the economy or supply chains, etcetera. But
Speaker 1: us expressing our commitment are united commitment to doing what
Speaker 1: we need to do to get inflation back down. That's
Speaker 1: a form of forward guidance. Should we not articulate that?
Speaker 1: I don't agree with that at all, And so yes,
Speaker 1: I want to say, there's a lot of uncertainty about
Speaker 1: what's going to happen at the next meeting, or what's
Speaker 1: going to happen by the end of the year. It's
Speaker 1: going to depend on all of these different factors. That's
Speaker 1: all true, and I think we should be honest about
Speaker 1: how much uncertain e there is about these factors and
Speaker 1: what's going to drive where monetary policy needs to go.
Speaker 1: But certainly as forward guidance expressing our commitment to getting
Speaker 1: inflation back down, I think it's very valuable for us
Speaker 1: all to express that. So you mentioned there was some
Speaker 1: discussion at the last meeting about whether the FED, like
Speaker 1: Bank of Canada should go to a hundred basis points,
Speaker 1: and I think you were among those who supported such
Speaker 1: a strong move to stamp out this raging inferno of
Speaker 1: inflation that we're seeing right now. Fast forward to right now,
Speaker 1: the last couple inflation data points, and it's just it's
Speaker 1: not a lot of data to work with. Have not
Speaker 1: been that bad. We got that zero percent CPR report.
Speaker 1: The PC for July was actually slight decline in prices sequentially,
Speaker 1: It's just one month. We've had some pauses. Does that
Speaker 1: affect your view on September, the meeting that's coming up
Speaker 1: near the end of September, and you're thinking of whether
Speaker 1: fifty versus seventy five basis points would be appropriate. Well,
Speaker 1: as you said, Joe, it's, you know, basically one data point.
Speaker 1: You know, we've been surprised for the past year almost
Speaker 1: every time of inflation, surprising us to the upside. So
Speaker 1: if we have one surprise somewhat to the downside, I'll
Speaker 1: happily take it. But I don't take much signal from that.
Speaker 1: You know, we need to be able, We need to
Speaker 1: see a lot more before we get convinced inflation as
Speaker 1: well on its way back down, or that we've seen
Speaker 1: pek inflation. I'm not convinced of that yet. So you know,
Speaker 1: to me, if the inflation reading is that we've gotten
Speaker 1: since the last meeting. We're surprising us to the upside
Speaker 1: yet again. Then I think you'd probably see people talking
Speaker 1: more about Hey, would they consider a hundred basis points?
Speaker 1: I think the fact that the chatter is fifty verses
Speaker 1: seventy five, you know, we've got more data to see
Speaker 1: before I would be ready to draw any conclusions from that.
Speaker 1: But my guess is we're somewhere in that range of
Speaker 1: fifty to seventy five for the next meeting. Based on
Speaker 1: the data that has come in this week, we're getting
Speaker 1: a job's report last months was particularly strong in the
Speaker 1: absence of fresh inflation data. Would another surprisingly strong jobs
Speaker 1: are port I mean, we got half a million new
Speaker 1: jobs last month. How would you be thinking about that
Speaker 1: and would that push you more towards well, I don't know. Certainly,
Speaker 1: I want to see a strong labor market. I want
Speaker 1: to see people getting jobs. I want to see real
Speaker 1: wages going up, so that gives me more comfort that
Speaker 1: we're probably not actually in a recession right now. Obviously
Speaker 1: you've talked a lot about the first two quarters of
Speaker 1: negative GDP growth and are we in a recession? And
Speaker 1: as you know, you've talked about a lot. Typically recession
Speaker 1: comes with a very weak labor market and a lot
Speaker 1: of layoffs. So if we continue to see strong job growth,
Speaker 1: that would give me confidence that we're not actually in
Speaker 1: a recession, even though some of the data indicates we
Speaker 1: might be. But ultimately I would be looking at wages.
Speaker 1: I will be looking at real wage growth, and ultimately
Speaker 1: I'm very focused more than anything on the inflation data
Speaker 1: and the inflation expectation data. So for me, individually, I
Speaker 1: don't think the labor market itself is going to be
Speaker 1: determinative of fifty verse seventy five or what the what
Speaker 1: the subsequent reading needs to be. Actually that reminds me.
Speaker 1: You know, at Jackson Hole, you made that distinction between
Speaker 1: running the economy hot and the current situation, which you
Speaker 1: called a blazing inferno. Can you elaborate on that a
Speaker 1: little more, Like, what is the difference between benign heat
Speaker 1: in the economy me where you have a healthy labor
Speaker 1: market versus damaging inferno heat? Like how do you gauge
Speaker 1: those two? Does it just come down to the inflation
Speaker 1: expectations spiral that you described, or do you look at
Speaker 1: broader types of damage like you know, people being unable
Speaker 1: to afford rent and pay off their debt and things
Speaker 1: like that. Well, I would say it starts with the
Speaker 1: actual inflation that American families are experiencing. So let's just
Speaker 1: go back in time. A few years before the pandemic,
Speaker 1: we had three and a half percent unemployment. For the
Speaker 1: four or five years before the pandemic, we at the
Speaker 1: FED kept thinking, oh, we're at maximum employment, and then
Speaker 1: we started raising interest rates, and I objected to those
Speaker 1: because I wasn't sure that we were actually at maximum
Speaker 1: employment and inflation was coming in under our two percent target.
Speaker 1: And then the job, the job market, the economy kept
Speaker 1: creating jobs, much to our surprise, suggesting we were not
Speaker 1: in fact in maximum employment because inflation stayed low and
Speaker 1: wage owth was picking up, picking up only moderately. So
Speaker 1: in that context, we asked ourselves, is there some way
Speaker 1: we could provide more of a boost to the economy
Speaker 1: using monetary policy during times of low inflation. And that's
Speaker 1: how we came up with our new framework that we
Speaker 1: adopted a year or so ago. And that framework is
Speaker 1: literally designed to provide more stimulus in those low inflation periods.
Speaker 1: But once you get back to a high inflation period
Speaker 1: two per cent or above. Then the new framework is
Speaker 1: the old framework. It just goes back to connecting monetary
Speaker 1: policy the way we did in the past. So in
Speaker 1: that context, we were asking, how do we provide a
Speaker 1: little bit more of a boost to the economy and
Speaker 1: periods of low inflation. And that's what I would define
Speaker 1: is running the economy hot in that context. Now, in contrast,
Speaker 1: where are we now. We had multi trillion dollars of
Speaker 1: fiscal stimulus, We have supply chains that were gummed up
Speaker 1: because of COVID, we have millions of missing workers relative
Speaker 1: to what we expected. We also have a war Russia
Speaker 1: launching war in Ukraine, which is up end in commodity
Speaker 1: markets and energy markets. Those are two wildly different scenarios.
Speaker 1: And so that's why in the meeting I was pushing
Speaker 1: back on the notion of well, this proves that there's
Speaker 1: really dangerous to running economy hot. This is not what
Speaker 1: we were talking about a few years ago. This is
Speaker 1: a completely different situation. And while one might eventually conclude, hey,
Speaker 1: you don't want to run an economy hot, at least
Speaker 1: for me, it's entirely premature to draw that conclusion. Right
Speaker 1: now in the context of what we meant about a
Speaker 1: hot economy a few years ago. That's an interesting way
Speaker 1: to frame it. You know, the flexible average inflation targeting.
Speaker 1: It was unveiled at the August Jackson Hole, so I think,
Speaker 1: I think, yeah, so it's it's two years old at
Speaker 1: this point. Was it basically an example of the FED
Speaker 1: fighting the last war? Which is a charge that's been
Speaker 1: levied that's sort of the fiscal expansion, etcetera. That the
Speaker 1: FED overlearned the lessons of two thousand, two thousand nine.
Speaker 1: So he is this is fate, uh fighting the last war,
Speaker 1: and in order to stay consistent with fate, what does
Speaker 1: that actually mean in practice? Because in theory, if you're
Speaker 1: supposed to get a two percent average, we've had like,
Speaker 1: you know, eight nine percent, we have to run sub
Speaker 1: two percent inflation for a while in order to actually
Speaker 1: fulfill that framework. And I think everybody always says that
Speaker 1: everybody is always guilty of fighting the last war, whether
Speaker 1: it's an economics or it's in the military. You know,
Speaker 1: you you have to learn from the last war, and
Speaker 1: you have to make yourself stronger so that you're not
Speaker 1: vulnerable the way you were last time, and so go
Speaker 1: back in time. The big mistake in hindsight that Congress
Speaker 1: and the Fed made coming out of the O eight
Speaker 1: oh nine downturn was we were not aggressive enough collectively
Speaker 1: in supporting the economy and supporting main street, and it
Speaker 1: took ten years to put Americans back to work. That
Speaker 1: is way too slow. This time, Congress said we're gonna
Speaker 1: act very They're gonna act very aggressively. In the COVID downturn,
Speaker 1: they passed big fiscal stimuli, and when most of that
Speaker 1: stimulus was passed, we had no idea when and if
Speaker 1: vaccine means would be available. I was talking to the
Speaker 1: best health experts in the country and they said, we
Speaker 1: just don't know how long it's going to take. And
Speaker 1: so it's actually a miracle of science that we have
Speaker 1: multiple highly effective vaccines available within a year. And so
Speaker 1: the economic downturn was much shorter than had been expected
Speaker 1: at the time the stimulus was passed. And so now
Speaker 1: we've got a very strong labor market recovery. Did Congress,
Speaker 1: you know, learn the wrong lesson from OH eight or
Speaker 1: O nine, I don't think so. I was very I
Speaker 1: was emphatic better Aaron doing too much than too little.
Speaker 1: So now we're in a position that we collectively have
Speaker 1: done too much and we need to adjust. But I
Speaker 1: don't want to go to those millions of Americans who
Speaker 1: are working today and said, you know what, you shouldn't
Speaker 1: have your job. We should have been much more timid
Speaker 1: in our recovery because all of a sudden we might
Speaker 1: have been in a new regime that we didn't foresee.
Speaker 1: What does it mean to apply flexible average inflation targeting? Now?
Speaker 1: Does it have to overshoot to the downside? Yeah? I
Speaker 1: don't think so. I mean we left ourselves a lot
Speaker 1: of eagle room, you know, we don't. I've never been
Speaker 1: a subscriber of rigid monetary rules because strange things happen
Speaker 1: in the economy, and if you tie yourself to this
Speaker 1: rigid monetary rule, then you end up doing very damaging things.
Speaker 1: And so no, I don't think so. I think that
Speaker 1: we will be able to get inflation back down over
Speaker 1: the next several years to our two percent target. And
Speaker 1: I don't think we're gonna then say, well, we have
Speaker 1: to go run a one percent inflation for the next
Speaker 1: X number of years to average mechanically average two percent.
Speaker 1: I think that would be silly for us to do that.
Speaker 1: You were talking about time frames just then, and the
Speaker 1: idea of the vaccine coming out, you know, possibly quicker
Speaker 1: than a lot of people expected at the time. How
Speaker 1: are you gauging policy lags at the moment? Because this
Speaker 1: is something that f o MC has talked a little
Speaker 1: bit about in the statement, this idea that you know,
Speaker 1: an interest rate hike takes some time to filter into
Speaker 1: the real economy now that rates are higher and presumably
Speaker 1: closer to you know, neutral, although you tell me if
Speaker 1: you don't think that's the case, does it get harder
Speaker 1: to gauge that? Do you have to start thinking more
Speaker 1: about the impact of previous policy decisions as you start
Speaker 1: to make new ones. It's it's hard and it's complicated.
Speaker 1: We know that interest rate sectors of the economy will
Speaker 1: be affected most and most quickly, and they already are,
Speaker 1: housing being the best example of that. But we also
Speaker 1: know we you know, we study history a lot, and
Speaker 1: we study what has worked in history for policy and
Speaker 1: what has not worked. And one of the biggest mistakes
Speaker 1: they made in the nineties seventies at the FED is
Speaker 1: they thought that inflation was on its way down the
Speaker 1: economy was weakening, and then they backed off, and then
Speaker 1: inflation flare back up again before they had finally quashed it.
Speaker 1: And so that to me is something that I'm very
Speaker 1: focused on. We can't repeat that mistake. So to deal
Speaker 1: with these lags, You're right, the lags are there. They're
Speaker 1: hard to see, they're hard to measure exactly. There's a
Speaker 1: lot of things happening in the economy. I would be
Speaker 1: much more comfortable raising rates to some endpoint, you know,
Speaker 1: let's say it's four, let's say it's four and a half,
Speaker 1: maybe higher, whatever we think is needed at the time,
Speaker 1: and then just sitting there and let's just press pause
Speaker 1: and wait to see how some of these underlying dynamics evolved.
Speaker 1: To me, the most costly mistake we will make is
Speaker 1: if we get fooled thinking, oh, we've got inflation licked. Now,
Speaker 1: let's go cut interest rates because the economy is showing
Speaker 1: signs of weakening. That to me has a potential um
Speaker 1: really dramatically negative effect on our credibility and on people's
Speaker 1: belief that, hey, they're just going to repeat the mistakes
Speaker 1: of the nineteen seventies. And so the way to deal
Speaker 1: with the lags for me is just to get somewhere
Speaker 1: and sit there until we're really convinced that we've got
Speaker 1: inflation licked. Is four or five? Is that your definition
Speaker 1: of restrictive knowing what we know now, I mean the
Speaker 1: challenges so we have to look at first of all,
Speaker 1: I think that the overnight interest rate is interesting, but
Speaker 1: not that interesting. What's much more important are longer term
Speaker 1: real rates. That's what I believe lives economic activity, five
Speaker 1: year real rates, ten year reel rates. They're positive now.
Speaker 1: Now the question is, though embedded in those real rates
Speaker 1: are market expectations for inflation expectations over the next five
Speaker 1: or ten years. Four to five is probably where I
Speaker 1: would guess right now the level of restriction needs to
Speaker 1: be given what we and what financial markets believe about
Speaker 1: inflation over the next few years. The biggest risk, not
Speaker 1: the most likely risk, but the most damaging risk, is
Speaker 1: if we and financial markets are fundamentally misreading the underlying
Speaker 1: inflationary dynamics, and if markets believe that inflation is going
Speaker 1: to come quickly back down to two pc over the
Speaker 1: next couple of years. If that's just wrong, then you
Speaker 1: could see markets discovering that we discover that and all
Speaker 1: of a sudden we need to be in a substantially
Speaker 1: higher interest rate environment. I'm not ready to forecast that now,
Speaker 1: but I'm also not ready to rule it out. So
Speaker 1: just for your forecast specifically, I think at the last
Speaker 1: Dot July you indicated your inclination was for FED policy
Speaker 1: to go three point nine percent by the end of
Speaker 1: the year four point four next year. Has anything changed
Speaker 1: since your last forecast, either to the upside or downside
Speaker 1: regarding what you see is the sort of optimal trajectory
Speaker 1: of the FED funds, right, you know, sitting where I
Speaker 1: am today and there's more data to come in between
Speaker 1: now and the September meeting, nothing has really changed that
Speaker 1: would dramatically change my rate path outlook. But again I
Speaker 1: don't want to prejudge it. I need to look at
Speaker 1: the remaining data that comes in. And this is something
Speaker 1: that I deliberate on a lot with our research department
Speaker 1: here as we look at different scenarios. But from the
Speaker 1: data I've seen, it hasn't uh doesn't imply a big
Speaker 1: change to my rate path. So let me ask you
Speaker 1: a slightly bigger picture question about you know, as you
Speaker 1: think about setting policy, you know One of the things
Speaker 1: that we've discussed, or that you've discussed with me for
Speaker 1: a long time, is this idea that economists, both maybe
Speaker 1: withinside of the FED and outside the FED, have a
Speaker 1: bad habit of sort of changing their structural outlook of
Speaker 1: the labor market after a recession. And so you, um,
Speaker 1: you know, you have this big shock in two thousand
Speaker 1: and eight, two thousand nine, and everybody sort of sets
Speaker 1: lower sights on what full employment actually it looks like.
Speaker 1: And it turned out after two thousand and eight two
Speaker 1: thousand nine that actually we could get back to old levels.
Speaker 1: We just needed more growth. There wasn't some inherent structural barrier,
Speaker 1: But it seems to be a habit of economists everywhere
Speaker 1: in the US Europe. Right now, the employment of population
Speaker 1: ratio in the US is six whereas pre crisis February
Speaker 1: two thousand, twenty sixty one point two. So by that measure,
Speaker 1: by that labor market measure, there hasn't been a recovery.
Speaker 1: Do you worry that this could again be a mistake
Speaker 1: where everyone's like, Okay, this time it really is different.
Speaker 1: There's been a lot of boomers retiring, etcetera. There's a
Speaker 1: structural shift but that actually is just another cyclical change
Speaker 1: and it's going to be a little wild for normalization. Yeah,
Speaker 1: it's a good question, Joe. The answer is, I don't know.
Speaker 1: Back in the earlier recovery, the last recovery, people just
Speaker 1: kind of wave their hands and said mismatches and structural changes.
Speaker 1: They couldn't point anything. Right now, you actually can point
Speaker 1: to something, which is, uh, there are a lot of
Speaker 1: people who have long COVID. There are people who continue
Speaker 1: to get sick from COVID multiple times, and even if
Speaker 1: that doesn't permanently exit them from the labor force, there's
Speaker 1: some cohort of folks that are not in the labor
Speaker 1: force today because they're sick with COVID, And so it's
Speaker 1: this health dimension. It seems to be more real than
Speaker 1: just this people making stuff up for why why the
Speaker 1: natural rate of unemployment would be higher or why the
Speaker 1: epop ratio would be lower. Retirements is another one that
Speaker 1: you've mentioned. There is some evidence that retirees can come
Speaker 1: back if the labor market looks attractive, you know. And
Speaker 1: the other thing is there's some new technologies that might
Speaker 1: mean that somebody who used to work forty hours a
Speaker 1: week they want to retire, but maybe they work twenty
Speaker 1: hours a week remotely because technology enables it. So some
Speaker 1: of the developments of the last two years could actually
Speaker 1: point in a positive direction. But it's the health the
Speaker 1: health elements that I think are almost unequivocally negative, and
Speaker 1: that's the one that I just need to see. We
Speaker 1: need more time to figure out. So maybe talk to
Speaker 1: us a little bit about productivity, because it feels like
Speaker 1: wages kind of get all the attention because everyone's worried
Speaker 1: about inflation, but productivity has been trending down as well.
Speaker 1: So I'm wondering, is that something you're looking at as
Speaker 1: something that needs to go up in order for inflation
Speaker 1: to start coming down, or how are you thinking about
Speaker 1: that aspect of it? It's right now for me, it's
Speaker 1: a curiosity. I mean a little bit of its math.
Speaker 1: We talked about earlier Tracy that the labor market has
Speaker 1: been hiring a lot of people, creating a lot of jobs,
Speaker 1: which is good news. Well, you know, if you end
Speaker 1: up hiring a lot of people and you don't have
Speaker 1: very strong uh GDP growth, and you put those two
Speaker 1: things together, you're gonna get up with very low or
Speaker 1: even negative productivity. Growth. So the negative productivity growth is
Speaker 1: not really a surprise. It's just it's just those two
Speaker 1: factors adding together. I think it'll be interesting to see
Speaker 1: what happens with GDP. Does it get revised up over time,
Speaker 1: does it come closer to gross domestic income um? And
Speaker 1: then more broadly, at some point these firms, you know,
Speaker 1: one theory is these firms are hoarding labor. They're just
Speaker 1: hiring a lot of people because they wanted to hire
Speaker 1: them over the last few years, and when they become available,
Speaker 1: they hire them. You know, firms can't do that for
Speaker 1: very long. They're gonna have to make rational decisions. Uh,
Speaker 1: And so it and it should end up showing up
Speaker 1: in the labor market. And so it's something we pay
Speaker 1: attention to the productivity data, but it's not the driver
Speaker 1: of the economy as I see it right now, but
Speaker 1: long term it clearly is critically important. I just want
Speaker 1: to ask one more question about the labor market, and again,
Speaker 1: going back to that last jobs report, you know, half
Speaker 1: a million jobs, it's not you know, the ability of
Speaker 1: firms to hire half a million people in a month
Speaker 1: does not necessarily seem consistent with an economy that's sort
Speaker 1: of out of workers. On the other hand, other measures
Speaker 1: such as job things and just sort of the difficulty
Speaker 1: that firms have with hiring causes of people to say, oh,
Speaker 1: the account the labor market is extremely tight. Do you
Speaker 1: think there could still be slack in the labor market
Speaker 1: right now, especially again given some of these measures of
Speaker 1: employment to population or LFPR or however you want alternate
Speaker 1: measures of UH, labor market utilization, Could there still be slack?
Speaker 1: I think there could be. I mean, I think it's
Speaker 1: going to be people's decisions, which is, you know, as unfortunately,
Speaker 1: this high inflation is really punishing families UH, and lower
Speaker 1: income folks are the least able to bear it. So
Speaker 1: you couldn't you could see people saying, Hey, I didn't
Speaker 1: want to go back to work, but I need to
Speaker 1: go back to work because this is getting too expensive
Speaker 1: to put food on the table. And as wages climb,
Speaker 1: people are saying, I need to go back to work
Speaker 1: or I'm going to go back to work. And so
Speaker 1: you know, to me, ultimately maximum employment is as many
Speaker 1: people working that is consistent with our underlying two percent
Speaker 1: inflation objective. Those two things are in my mind tightly
Speaker 1: linked concepts, and so yes, there may still be slack,
Speaker 1: but we need to get inflation back down to two
Speaker 1: percent and then we'll be in a position to understand
Speaker 1: is the economy in equilibrium or not so. Setting aside
Speaker 1: strengthen the labor market and higher inflation, which have been
Speaker 1: two of the big hallmarks of our economic situation this summer,
Speaker 1: the other thing that's been going on is the very
Speaker 1: very strong dollar. And I'm wondering if the FED takes
Speaker 1: into account the impact of its rate hikes, particularly, you know,
Speaker 1: a stronger currency on the rest of the world, because
Speaker 1: at a time when places like Europe certain emerging markets
Speaker 1: are having an energy crisis, it feels like the impact
Speaker 1: of US rate hikes and a stronger dollar could be
Speaker 1: even greater than before. And it does feel like global
Speaker 1: pressures are building even as the U s economy remains
Speaker 1: relatively strong for now. So how are you thinking about
Speaker 1: the impact of US economic policy on the rest of
Speaker 1: the world. Well, we pay attention to it. We have
Speaker 1: a really talented team of economists who focus on the
Speaker 1: whole global economy at the Board of Governors, and we've
Speaker 1: got a lot of international economists here at the Minneapolis Fed.
Speaker 1: But we pay attention to it because it's a feedback
Speaker 1: loop back to the American economy. We have to our
Speaker 1: charge is to conduct monetary policy to optimum outcomes of
Speaker 1: our dual mandate for the US economy, And so we
Speaker 1: run these scenarios. If the dollar goes up, what does
Speaker 1: that mean for imports, what does that mean for growth
Speaker 1: around the world, and then ultimately what does it mean
Speaker 1: for inflation and employment in America? And so we are
Speaker 1: we are aware of it, but we are focused on
Speaker 1: optimizing our polly sees based on what the outcomes are
Speaker 1: for the U. S economy and for the American people.
Speaker 1: So you mentioned fiscal stimulus. It was quite a bit
Speaker 1: of it in and also and it's you know, it's
Speaker 1: winding down, it's mostly being withdrawn. That being said, it's
Speaker 1: not entirely being withdrawn. And I think you would one
Speaker 1: could say that the White Houses student debt relief is
Speaker 1: a form of fiscal stimulus. Are you thinking about the
Speaker 1: inflationary impact of that and do you see that affecting
Speaker 1: the trajectory of your policy. Well, you know, we analyze
Speaker 1: whatever Congress passes in terms of phisical the fiscal environment,
Speaker 1: and then that goes into our models as an input.
Speaker 1: My guess is it's not a huge number. You know,
Speaker 1: if you look at the student loan relief as an example,
Speaker 1: generally speaking, it's it's pretty regressive, meaning attempts to skew
Speaker 1: towards people who are relatively better off in our economy.
Speaker 1: The lowest income American generally didn't go to college and
Speaker 1: don't have student owned debts, so to speak. And the
Speaker 1: more it's regressive, which is, you know, not a I
Speaker 1: don't think that's a policy objective of the authors. But
Speaker 1: the more it's regressive in a curious way, the less
Speaker 1: inflationary it is because those folks are less likely to
Speaker 1: spend the money on consumption, They're more likely to save
Speaker 1: the money or pay down other forms of debt as
Speaker 1: an example. My you know, I haven't studied it very carefully.
Speaker 1: My best guess is it's not a big deal one
Speaker 1: way or the other in terms of outlook for inflation
Speaker 1: in the near term. Just like the the Inflation Reduction Act.
Speaker 1: I think the CBO scored it as net deficit reducing
Speaker 1: over ten years. My guess is it's not going to
Speaker 1: have a big effect on inflation in the near term,
Speaker 1: but we will analyze it, we will put it into
Speaker 1: our economic models and ultimately will factor that in as
Speaker 1: we come up with an interest rate outlook. So you
Speaker 1: mentioned the Inflation Reduction Act unlikely, and I think almost
Speaker 1: all economists agree unlikely to really affect inflation in the
Speaker 1: short term or perhaps even the medium term in a
Speaker 1: meaningful way. That being said, would you would the FED
Speaker 1: welcome UH the government building out more I guess anti
Speaker 1: inflationary tools such that the such that the burden or
Speaker 1: the job of fighting inflation is not entirely tied to
Speaker 1: the central Bank. And I remember, you know again post
Speaker 1: Great Financial Crisis, there's a lot of talk about you know,
Speaker 1: there are fiscal policy, fiscal expansion that it was difficult
Speaker 1: for the FED to sort of engineer that all by itself.
Speaker 1: Would you like to see more work done on non
Speaker 1: monetary UH anti inflation measures being built out anti anti
Speaker 1: inflation tools. Well, absolutely. The more help we can get
Speaker 1: from other parts of the economy and potentially other parts
Speaker 1: of the government, the less we have to do. As
Speaker 1: you all know, we can only limit demand. We can't
Speaker 1: do anything on supply, and if supply comes online, then
Speaker 1: that limit that reduces how much we need to reduce
Speaker 1: demand to get those two things into balance. Now, it's
Speaker 1: also hard. I mean, it's hard for the fiscal authority
Speaker 1: in the short run to create more supply. It takes
Speaker 1: a long time. So actually I'm looking at the government
Speaker 1: will welcome it, but I'm also looking at the private sector.
Speaker 1: You know, private sector firms are very focused on trying
Speaker 1: to fix their supply chains to meet their customer demand
Speaker 1: to keep their costs low. They're making some progress. From
Speaker 1: what I can tell, the progress is uneven. But the
Speaker 1: more progress that they can make, the less the burden
Speaker 1: falls to the Federal Reserve, and the more likely we
Speaker 1: would be able to engineer a soft landing. Yeah. I
Speaker 1: was going to ask about this sort of short term
Speaker 1: pain versus long term gain of some of these big
Speaker 1: inflation reduction um measures or projects, because I can imagine
Speaker 1: a situation where, you know, if everyone starts building out
Speaker 1: capacity all at once, then that basically just ramps up
Speaker 1: demand further. And like it seems like that would be
Speaker 1: a particularly problematic for the Federal Reserve if you're trying
Speaker 1: to reduce inflation as soon as possible. Yeah, I'm not theoretically,
Speaker 1: I agree with you, Tracy I'm not seeing much evidence
Speaker 1: of that. You know, just take the oil sector, where
Speaker 1: oil prices have been very high. There's been a maybe
Speaker 1: less investment than I would have guessed going in to
Speaker 1: try to take advantage of these high prices, in part
Speaker 1: because if you look at the futures markets for oil,
Speaker 1: prices are expected to come down over the next few years,
Speaker 1: and so you can understand why investors are hesitant to
Speaker 1: pour a lot more money into more more rigs, example,
Speaker 1: to take advantage of these high prices. And so theoretically,
Speaker 1: I agree with you, I'm not seeing much evidence of that,
Speaker 1: and that would ultimately show up in higher borrowing costs,
Speaker 1: higher long term interest rates, and those rates still are
Speaker 1: quite low relative to history. Well, let me ask you
Speaker 1: the flip side, because one area in which there seems
Speaker 1: to be widespread agreement um that we're in shortage of
Speaker 1: is housing. And we've seen rent prices go up quite
Speaker 1: a bit, and we all know the frustrations of the
Speaker 1: public about buying housing the cost of housing. And yet
Speaker 1: uh likely in large part due to the rise and
Speaker 1: interest rates and therefore the rise of mortgage rates, were
Speaker 1: already seeing a significant cooling of home builder activity. Do
Speaker 1: you worry about the perverse effects of Like, Okay, we
Speaker 1: want to expand the supply side. One of the most
Speaker 1: important areas of the supply side is a resident and
Speaker 1: yet one of the first order effects of higher interest
Speaker 1: rates is actually to constrain production in this crucial sector.
Speaker 1: I mean, it's a fair point, but I think the
Speaker 1: effects on the supply side are much slower than the
Speaker 1: effects on demand, and so our hope is that we
Speaker 1: can get demand down into some form of equilibrium with
Speaker 1: two percent inflation over the next couple of years, and
Speaker 1: then we get the economy back to what we would
Speaker 1: call something like normal, and then you could really unlock
Speaker 1: the supply. The supply is just too much slower moving
Speaker 1: mechanism than it is on the demand side. So it's
Speaker 1: a fair point, but I think the timing errors towards
Speaker 1: effects and demand rather than effects and supply. Looking ahead,
Speaker 1: is there anything that would make you more comfortable with
Speaker 1: either smaller rate hikes or a slower pace like because
Speaker 1: I think one thing that's come through this conversation is
Speaker 1: that you're very, very keen to air on the side
Speaker 1: of being too aggressive versus being too loose. So what
Speaker 1: would you need to see to give you comfort that
Speaker 1: maybe things are changing and the Fed can relax a
Speaker 1: little bit. Well, I think if we if we continue
Speaker 1: to see inflation readings that inflation is coming down like
Speaker 1: subsequent multiple subsequent readings, then that would probably argue for
Speaker 1: me that we could raise interest rates more slowly. Or
Speaker 1: maybe we are getting to the point where hey, in
Speaker 1: a few more hikes, we could get to something and
Speaker 1: just sit their pause until we really are sure that
Speaker 1: it has done. To me, you know where how high
Speaker 1: we get and how fast we get there that is
Speaker 1: less important than us not backing off. I mean, to me,
Speaker 1: the bar to actually cut interest rates that is going
Speaker 1: to be for me, very very high. We can raise
Speaker 1: more slowly, we can sit there for longer. All of
Speaker 1: that I'm open minded about, and the inflation data should
Speaker 1: guide us. But to me, the big error that we
Speaker 1: could make but I don't expect us to, is cutting
Speaker 1: interest rates prematurely. Have you been surprised? I mean, everyone
Speaker 1: seems to be scratching their head. You guys keep coming
Speaker 1: out and saying it. You know, we're not gonna We're
Speaker 1: not gonna cut rates, and yet the market has had
Speaker 1: raid cut pricing for a while what do you attribute
Speaker 1: that disconnect to? You know, I don't know. I have
Speaker 1: said publicly I didn't event um at Aspen at the
Speaker 1: Aspen Institute a few weeks ago, and I said, the
Speaker 1: markets are not consistent with my outlook for interest rates
Speaker 1: and inflation. All I can read from that is they
Speaker 1: think we are going to achieve our dual mandate goals
Speaker 1: more quickly than I do, and then we would be
Speaker 1: in a position to cut interest rates. And I certainly
Speaker 1: hope they're right, but that's not my forecast right now. Yeah,
Speaker 1: I was actually going to ask about financial conditions, but
Speaker 1: you know, just to quickly get on that, like achieving
Speaker 1: the dual mandate, and I think this is the key thing,
Speaker 1: achieving goals. Let's say, okay, inflation comes down much faster
Speaker 1: than everyone's expecting, sometime in the middle of the next year,
Speaker 1: you're on two percent. That's still like the point is, though,
Speaker 1: that's not a reason to cut right. No, if we
Speaker 1: achieve the goals, absolutely that would be a reason to
Speaker 1: relax our contraction and monitory and policy. I'm just surprised
Speaker 1: that markets would think that we're going to achieve that
Speaker 1: goal as quickly as they seem to again. I hope
Speaker 1: they're right. Uh, and we'll take that data on board
Speaker 1: if they are right. But that's where that's where I
Speaker 1: think the disconnect is. Is there attention They're just going
Speaker 1: back to financial conditions. But you know, one of the
Speaker 1: things that has surprised people is that financial conditions have
Speaker 1: remained relatively loose even as the FED hikes at the
Speaker 1: fastest pace in decades. Is there attention between the market
Speaker 1: thinking that the FED is going to succeed in bringing
Speaker 1: inflation down and then not actually taking into account the
Speaker 1: impact of some of these rate hikes, like bond yields
Speaker 1: should be higher, stock should be lower. We're not necessarily
Speaker 1: seeing that reflected, and so financial conditions remain relatively loose.
Speaker 1: I mean, I think it goes back to something we
Speaker 1: spoke about a few moments ago, which is markets expectations
Speaker 1: and our expectations that inflation expectations are well anchored and
Speaker 1: then inflation is going to come down, you know, rather
Speaker 1: quickly over the next few years. If that assumption is
Speaker 1: wrong that we share and financial markets share even though
Speaker 1: they're more bullish than I am. If we're all collectively
Speaker 1: wrong about the underlying inflationary dynamics. When that reality is
Speaker 1: revealed and we realize it and they realize it, then
Speaker 1: you would expect to see financial markets fundamentally reset at
Speaker 1: a much tighter setting and you see longer term real
Speaker 1: yields much higher than they are today. That's not my forecast,
Speaker 1: but that's why I think what it would take to
Speaker 1: really see a dramatic tightening of financial conditions from here.
Speaker 1: Chuer Polo has said press conferences like look, FED policy
Speaker 1: works through financial conditions, and financial conditions as what we
Speaker 1: just talked about it, it's like, you know, it's spreads
Speaker 1: on the corporate debt, it's you know, mortgage rights and
Speaker 1: stock market. The stock market is a component of it.
Speaker 1: When you see the stock market rallying as it did,
Speaker 1: you know, from and I know, like the stock market
Speaker 1: is not your goal by any stretch. But when you
Speaker 1: see the stock market rallying from you know, the bottom
Speaker 1: in June to what we saw at least up until
Speaker 1: like two weeks ago, is that interpreted as working as
Speaker 1: cross purposes for your goals? You know? I think so.
Speaker 1: I certainly was not excited to see the stock market
Speaker 1: rallying after our last Federal Open Market Committee meeting because
Speaker 1: I know how committed we all are to getting inflation down,
Speaker 1: and I somehow I think the markets were misunderstanding that.
Speaker 1: And I was actually happy to see how chare Pell's
Speaker 1: Jackson Hole speech was received. You know, people now understand
Speaker 1: the seriousness of our commitment to getting inflation back down
Speaker 1: to two percent. But you know, if it goes back,
Speaker 1: think about it. We talked about real bond yields, so
Speaker 1: think long term real yields. They're positive, you know, depending
Speaker 1: on your measure, slightly positive, up to zero plus zero
Speaker 1: point five percent, maybe up to one percent by some
Speaker 1: measures over the last several months. It's kind of an
Speaker 1: intellectual exercise. If we wanted to push long reel yields
Speaker 1: to plus two percent or plus three percent, could we
Speaker 1: even do that? And the reason why we're limited in
Speaker 1: our ability to do that is because embedded in those
Speaker 1: markets our market expectations of what's going to happen to
Speaker 1: inflation over the next few years. And that's where I
Speaker 1: keep going back to until and unless we and markets
Speaker 1: collectively believe the inflation inflation and dynamics are different, are
Speaker 1: hotter and more embedded than we understand them to be.
Speaker 1: Right now, I think there's a limit to how much
Speaker 1: we can drive long term really yields higher, and so
Speaker 1: that's gonna be a limit to how tight we can
Speaker 1: make broader financial conditions until that recognition of the different
Speaker 1: inflation and dynamics becomes clear. So one thing we haven't
Speaker 1: really spoken about is the impact of quantitative tightening on
Speaker 1: inflation um and I mean things like bond yields and
Speaker 1: asset prices. So the FED started winding down the balance
Speaker 1: sheet or reducing the balance sheet in the summer, but
Speaker 1: it hasn't really ramped that effort up, and I think
Speaker 1: it's expected to start doing so in September. What would
Speaker 1: be the impact of that on inflation and the market
Speaker 1: as well, you know, unclear. If you look at a
Speaker 1: lot of different models of how cute quantitative easing works,
Speaker 1: it suggests that it doesn't a big impact. You know,
Speaker 1: Chairman bernanke famously equipped many years ago QUI works in practice,
Speaker 1: but not in theory, and the way we think it
Speaker 1: works that those models cannot capture is really about a
Speaker 1: signaling mechanism for the future overall stands of monetary policy,
Speaker 1: and so a lot of the effects of QUEI or
Speaker 1: QT get priced in right away, as soon as we
Speaker 1: lay out here's our plan for the balance sheet. So
Speaker 1: when we announced here's our plan for the roll off,
Speaker 1: here's how many billion dollars a month, here's the path,
Speaker 1: A lot of that gets priced in right away. And
Speaker 1: that's why if you look at long term real yields,
Speaker 1: you can see that they reversed themselves this spring really rapidly.
Speaker 1: I mean they climbed in the spring much faster than
Speaker 1: they fell in the spring of when we were flooding
Speaker 1: the economy with liquidity. And I think the reason that
Speaker 1: they tightened so quickly is because markets were pricing in
Speaker 1: the quantitative tightening to come in addition to the federal
Speaker 1: funds rate hikes. So it's a it's an inexact science.
Speaker 1: I mean, I don't think a hundred percent of it
Speaker 1: gets priced in. I think some of it does actually
Speaker 1: happen over time as the balance sheet actually shrinks, but
Speaker 1: I think some a lot of the action has already
Speaker 1: taken place. Would be my guests, So one of the
Speaker 1: you know, one of the since you became the president
Speaker 1: of the Minneapolis FED, you've been innovative in your communication,
Speaker 1: writing blog post, medium posts, even tweeting and I remember
Speaker 1: one of I think it might have been your first
Speaker 1: post after after getting the job, and you were talking
Speaker 1: about your non dogmatic and you talked about salt water
Speaker 1: versus freshwater economics and say, you don't you don't belong
Speaker 1: to his school. You want to see what the data is.
Speaker 1: You want to always be reevaluating. And I think you know,
Speaker 1: you've definitely demonstrated that by going from someone who had
Speaker 1: a reputation as being one of the biggest doves on
Speaker 1: the committee to now being up there with the biggest
Speaker 1: hawks and the most aggressive pace of hiking. What is
Speaker 1: that like? What's that? What's that been like? To go
Speaker 1: from uh, one of the yeah to that evolution from
Speaker 1: someone who has seen as a major dove to someone
Speaker 1: who's now seen as a major hawk. You know, it's
Speaker 1: actually been um it's been easy for me because I
Speaker 1: just look at the data with our economist here and
Speaker 1: we try to assess where the economy is and what
Speaker 1: monetary policy makes sense. You know, these labels of dove
Speaker 1: and hawk, I understand why people give them their convenient shorthand,
Speaker 1: but they're really flawed. I mean, if if I always
Speaker 1: were dobbish, no matter what the state of the economy
Speaker 1: was I always said we need to keep interest rates low.
Speaker 1: I wouldn't be a very useful policymaker. And so, you know, uh,
Speaker 1: the economy changeing now. Esther George, my good friend from
Speaker 1: the Kansas City FED, who was considered to be one
Speaker 1: of the more hawkish, has now been identified as one
Speaker 1: of the more dovish in this scenario. You know, Esther
Speaker 1: is a very thoughtful, experienced policymaker. She's looking at the data,
Speaker 1: she's making her best recommendations based on how she sees
Speaker 1: the economy. And that's what all of my colleagues are
Speaker 1: trying to do. And so the labels are shorthands, but
Speaker 1: they're pretty they're pretty imperfect. So that's interesting too about
Speaker 1: you know that not everyone has sort of traveled in
Speaker 1: the same direction, and there are differences of views on
Speaker 1: the trajectory of inflation in the economy within uh, you know,
Speaker 1: at the Federal Reserve that Big said, I think there is, obviously,
Speaker 1: going back to last year, a fair amount of regret
Speaker 1: that the FED misread or sort of the use of
Speaker 1: the term transitory perhaps waiting too long from the Fed's
Speaker 1: perspective on hiking rates. Is there anything that you know,
Speaker 1: maybe it's the intellectual climate or sort of like different
Speaker 1: approach that you take from the any lessons of the
Speaker 1: last year that you think the FED should or could
Speaker 1: internalize to make better decision to have a better decision
Speaker 1: making process going forward. You know, it's tough. It's something
Speaker 1: I think about a lot, and I go back in time.
Speaker 1: So for the eight or ten years before the pandemic hit,
Speaker 1: we struggle with inflation and that was a little too low.
Speaker 1: And as we talked about earlier, Joe and Tracy, we
Speaker 1: kept getting surprised that we thought we were a maximum
Speaker 1: employment and there were a lot more workers to come.
Speaker 1: And before the pandemic we had three and a half
Speaker 1: percent unemployment rate and modest wage growth and low inflation.
Speaker 1: So then the pandemic hits a lot of fiscal stimulus,
Speaker 1: and in May one, just over a year ago, core
Speaker 1: inflation finally ticked above two and the unemployment rate was
Speaker 1: still five point nine percent. So we had achieved three
Speaker 1: point five percent with no real inflation before now it
Speaker 1: was five point nine percent at that moment. Should we
Speaker 1: have just declared, oh my gosh, we're in a new regime.
Speaker 1: I actually don't think so. I think, I mean, yeah, sure,
Speaker 1: knowing what we know now, but knowing what we knew
Speaker 1: at the time, I think it's eminently sensible that we
Speaker 1: would take a few months to figure out is this
Speaker 1: really a new world or are we going back to
Speaker 1: the old world before we adjusted our stance of policy.
Speaker 1: You know, people call us all the time with all
Speaker 1: sorts of predict actions about how the world is totally
Speaker 1: different and we're totally missing something here or there. If
Speaker 1: we listen to all of them, or if we listen
Speaker 1: to all the cranks on Twitter, we would be completely
Speaker 1: paralyzed for making any decision because somebody is always predicting
Speaker 1: something one direction or another. And so to me, I
Speaker 1: think we need to be very thoughtful when we just
Speaker 1: abandon what we have recently experienced and just assuming we're
Speaker 1: in a whole new world. In this case, we are
Speaker 1: in a new world. How long is that we're gonna last?
Speaker 1: I don't know. We got to see it in the
Speaker 1: data cranks on Twitter. I have no idea the cranks
Speaker 1: on Twitter. I I don't see it. I've never seen cranks,
Speaker 1: never seen it never. Neil cash Carry, president of Minneapolis FED,
Speaker 1: thrilled to have you back on the podcast. That was
Speaker 1: great and we will we will talk to you next
Speaker 1: dog all right, thank you both. Great to be with you. Thanks.
Speaker 1: That was fantastic. Well, I feel like we packed a
Speaker 1: lot in there, Tracy. I'm trying to remember everything that
Speaker 1: we just talked about. There was a lot. I mean, okay,
Speaker 1: so I mentioned this already, but one thing that clearly
Speaker 1: comes through in that conversation is just the extent of
Speaker 1: Neil's um change from Dove to Hawk and the idea
Speaker 1: that he is much more comfortable with getting to a
Speaker 1: very very restrictive level of policy and then sort of
Speaker 1: pausing as opposed to starting to cut or even slow down. Right.
Speaker 1: And I think you know this was do you think
Speaker 1: about the mood music or what Powell said Jackson Hole.
Speaker 1: He was very specific about the lessons of the nine seventies,
Speaker 1: and I think he said that, you know, sort of
Speaker 1: modern central bank fury was born out of that inflationary period,
Speaker 1: and there's no reason not to take the lessons of
Speaker 1: that period. And as Neil said, you know, one of
Speaker 1: the lessons from that period of was don't declare victory
Speaker 1: on inflation too soon, don't get comfortable, don't just be
Speaker 1: oh here's a month or two of we're going in
Speaker 1: the right direction, let's ease off. So the bar is
Speaker 1: going to be very high before something I would say
Speaker 1: resembling a pivot, whatever that means. Yeah, But of course
Speaker 1: with that very aggressive stance comes the question of are
Speaker 1: they going to overshoot? And I know we asked Neil
Speaker 1: the question about policy lags, and that seems to be
Speaker 1: possibly problematic for the FED. And then the other thing
Speaker 1: that was interesting to me was his response on the
Speaker 1: global economy and the impact of the dollar, and he
Speaker 1: mentioned that boomerang effect and the FED viewing the rest
Speaker 1: of the world, what's happening there as something that can
Speaker 1: come back and impact the US. And I think that's
Speaker 1: still a big question as well. Right we're going into
Speaker 1: the winter, almost everyone expects Europe to be in a recession. Now,
Speaker 1: it's quite clear that emerging markets are suffering from higher dollar,
Speaker 1: tighter financial conditions in the US, plus higher energy costs,
Speaker 1: weather related disruptions, all of that. What is the impact
Speaker 1: going to be on the US and does that potentially
Speaker 1: become problematic for the FED? You know what I found
Speaker 1: striking was Neil saying that he welcome welcomed the market
Speaker 1: reaction to Jackson hole, Yeah, there's quite a sell off
Speaker 1: on Friday right afterwards. And there is that cliche the
Speaker 1: traders say all the time, don't fight, and here he's saying, yeah,
Speaker 1: there's a good reason for that cliche because when the
Speaker 1: FETE is fighting inflation, higher stock prices don't help that
Speaker 1: goal because monetary policy works through financial conditions. So he's
Speaker 1: kind of saying, he's like, yeah, there's a good reason
Speaker 1: not to fight us. Yeah. I feel like the FED
Speaker 1: is explicitly saying that it thinks that stocks should be lower,
Speaker 1: or not explicitly, but I mean that is the explicit
Speaker 1: conclusion from the conversation. And this is something that we've
Speaker 1: actually written about in the newsletter a number of times,
Speaker 1: and I think we said it before we had the
Speaker 1: big bearer market in the summer, Like the FED is
Speaker 1: telling you that asset prices are too high because financial
Speaker 1: conditions need to tighten. Right, they talked about financial conditions.
Speaker 1: Financial conditions means something is commonly understood, it's spreads in
Speaker 1: the stock market and so forth. So there FED is
Speaker 1: saying we work through financial conditions and they need financial
Speaker 1: conditions to tighten. In order to defeat inflation. They're telling
Speaker 1: you something about where they think the market should go.
Speaker 1: Or also you can disaggregate what makes up financial conditions.
Speaker 1: Mortgage rates are a lot tighter, Bond yields to some extent,
Speaker 1: you know, have gone up. It's really stocks that are
Speaker 1: the sort of odd one out here. Yeah, I gotta
Speaker 1: get bitcoined down to tent though. That's when Yeah, actually,
Speaker 1: you know, that's a good argument for putting crypto into
Speaker 1: the financial conditions index. That would be interesting. One day,
Speaker 1: it will probably happen. Okay, let's leave it there. Oh,
Speaker 1: I was gonna say. We also we need to start
Speaker 1: thinking up like a tradition for the Neil kush Cary episode.
Speaker 1: I feel like we have to like unboxed like gifts
Speaker 1: or sing carols or something thing something August or something seasonal.
Speaker 1: Let's do it live next year, and let's do it
Speaker 1: in a really nice location, because I'm always super jealous
Speaker 1: of like late August in Jackson's Let's find you know,
Speaker 1: let's find a nice place to do it somewhere where
Speaker 1: we have an excuse to wear cowboy hats. I love
Speaker 1: it all right, shall we leave it there? Let's leave
Speaker 1: it there This has been another episode of the All
Speaker 1: Thoughts podcast. I'm Tracy Alloway. You can follow me on
Speaker 1: Twitter at Tracy Alloway, and I'm Joe Wisn't All. You
Speaker 1: can follow me on Twitter at the Stalwart. Follow our guest,
Speaker 1: Minneapolis FED President Neil cash Cary. He's at Neil cash Cary.
Speaker 1: Follow our producer Carmen rod Reguez at Carmen Arman. And
Speaker 1: check out all of our podcasts at Bloomberg On Twitter
Speaker 1: onto the handle at podcasts. Thanks for listening to