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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: I'm David Gerrett, joined in the studio by my co

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Speaker 2: host Sarah Holder.

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Speaker 3: Hi, David, Hey, Sarah. I just had to join you

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Speaker 3: because here at the big take. This day is just

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Speaker 3: too big for one host.

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Speaker 2: Indeed, it is. It is like our super Bowl, if

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Speaker 2: the super Bowl were to happen eight.

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Speaker 3: Times a year, exactly like the super Bowl. Today, the

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Speaker 3: Federal Reserve concluded its two day policy meeting, and.

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Speaker 2: No surprise, it did not change its target interest rate.

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Speaker 2: Here's Fed char Jerome Powell.

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Speaker 4: Today, the FMC decided to leave our policy interest rate unchanged.

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Speaker 3: That rate is around five point three percent at the moment,

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Speaker 3: which means the cost of borrowing from mortgages to car

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Speaker 3: loans is likely to stay high for a bit longer.

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Speaker 2: The Fed is doing this, of course, to try and

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Speaker 2: tame inflation, to make sure that the kind of price

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Speaker 2: spikes we saw during the pandemic doesn't come back now.

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Speaker 3: No one likes rising prices, and I for one, am

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Speaker 3: tired of spending a small fortune on a carton of eggs.

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Speaker 2: You in me, both but annoying as it is to

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Speaker 2: pay more for gas and rent and dinners out and

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Speaker 2: those eggs. Some inflation is seen as a good thing.

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Speaker 3: But increasingly, David, there's been this big debate about just

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Speaker 3: what number America's Central Bank should be aiming for, how

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Speaker 3: much we should expect prices to rise in the future.

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Speaker 2: So for over a decade that Goldilock's number not too

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Speaker 2: hot not too cold, has been two percent. It's something

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Speaker 2: that Chair Powell hammered home again and again and again

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Speaker 2: during the post meeting press conference.

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Speaker 4: We are strongly committed to returning inflation to our two

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Speaker 4: percent goal. We'll need to see more good data to

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Speaker 4: bolster our confidence that inflation is moving sustainably toward two percent.

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Speaker 4: We remain committed to bringing inflation back down to our

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Speaker 4: two percent goal into keeping longer term.

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Speaker 3: But David, you spoke to economist and Bloomberg opinion columnist

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Speaker 3: Mohammed el Arian, who has been making the case that

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Speaker 3: so much has changed recently that the Fed's inflation goal

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Speaker 3: needs to change too.

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Speaker 5: This two percent target may be inappropriate for the world

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Speaker 5: we're living in today.

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Speaker 3: This is the big take from Bloomberg News. I'm Sarah Holder.

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Speaker 2: And I'm David Gerra. Today on the show, muhammadel Arian,

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Speaker 2: who believes the fed's two percent inflation target is wrong

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Speaker 2: and what it could mean if it is for everyone

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Speaker 2: hoping to buy a home, or pay down student loans,

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Speaker 2: or preparing to retire. Now, before we get into why

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Speaker 2: the Federal reserves Goldilocks inflation number could be wrong, we

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Speaker 2: need to understand how policymakers settled on that two percent

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Speaker 2: target in the first place. It all started in the

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Speaker 2: wake of the global financial crisis, says Kate Davidson. She's

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Speaker 2: Bloomberg's managing editor for US Economic Policy.

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Speaker 1: The recovery from that crisis, even though the FED through

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Speaker 1: everything they had at it, it was just very slow,

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Speaker 1: very tepid. Inflation was very low.

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Speaker 2: This may be hard to imagine now given how high

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Speaker 2: inflation has been in recent years, but back then this

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Speaker 2: was a big issue. Low inflation prices were rising to two

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Speaker 2: slowly or not at all, and this is a problem

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Speaker 2: because it can cause people to put off big purchases.

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Speaker 2: Why would you buy now if the price isn't going

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Speaker 2: to move well. That made it difficult for the FED

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Speaker 2: to use its main tool, cutting interest rates, to help

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Speaker 2: the US economy grow after the crisis. That's because back

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Speaker 2: then rates were already at zero and the economy still

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Speaker 2: was not growing.

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Speaker 1: And that means that the FED just didn't have any

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Speaker 1: more room to cut rates further, and so this was

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Speaker 1: a position they didn't want to be, and they actually

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Speaker 1: wanted to get inflation back up again.

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Speaker 2: So the FED started looking for another lever to pull.

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Speaker 2: Policymakers commissioned studies and they looked at what other central

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Speaker 2: banks were doing, and that's when they found something that

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Speaker 2: seemed promising. On the other side of the globe, in

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Speaker 2: New Zealand in nineteen ninety, that country was grappling with

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Speaker 2: high inflation, so the Reserve Bank of New Zealand tried

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Speaker 2: something novel. It introduced an inflation target of two percent.

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Speaker 2: In other words, it to old the public what it

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Speaker 2: thought inflation should be. And it worked, and eventually several

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Speaker 2: other big central banks followed New Zealand's example.

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Speaker 1: The idea here was that by setting this target they

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Speaker 1: would just be very transparent and clear and like, look,

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Speaker 1: this is what we're going for, and that that would

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Speaker 1: help the public's understanding and nudge that number up to

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Speaker 1: the around the place where they wanted it to be.

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Speaker 2: It seemed promising, and it also appealed to then FED

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Speaker 2: Chair Ben bernank I've been working to make the FED

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Speaker 2: more transparent with the public and investors and lawmakers. As

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Speaker 2: an economics professor at Princeton, Bernanki co authored an influential

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Speaker 2: paper on inflation targeting. So in twenty twelve, after years

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Speaker 2: of debate and deliberation, the FED decided to adopt its

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Speaker 2: own inflation target of two percent. Bernanki introduced it at

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Speaker 2: a news conference in January of that year.

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Speaker 6: Clearly communicating to the public this two percent goal for

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Speaker 6: inflation over the longer run should help foster price stability

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Speaker 6: and moderate long term interest rates, and will enhance the

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Speaker 6: Committee's ability to promote maximum employment in the face of

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Speaker 6: significant economic disturbances.

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Speaker 2: Buried in all that FED speak is a reference to

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Speaker 2: what's known as the Central Bank's dual mandate. Kate explains,

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Speaker 2: the FED has two big objectives.

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Speaker 1: One is to achieve maximum employment and the other is

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Speaker 1: to keep prices stable.

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Speaker 2: This is pretty rare among central banks, and it can

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Speaker 2: sometimes pose a challenge for the Fed's policymakers because a

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Speaker 2: growing economy that's creating jobs can also sometimes overheat as

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Speaker 2: people spend more, causing prices to rise, and of course

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Speaker 2: taming prices can sometimes slow economic activity and lead to

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Speaker 2: job losses. But for a while, this inherent tension wasn't

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Speaker 2: really a problem. Even after the FED introduced this target.

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Speaker 1: I remember just month after month after month going and

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Speaker 1: covering these inflation reports, and every month that was the

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Speaker 1: same story. The FED has undershot its inflation target again

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Speaker 1: and again and again, just having a very difficult time

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Speaker 1: bringing inflation up to where they wanted it to be, which,

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Speaker 1: you know, given where we are today, just seems like

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Speaker 1: really another world, right.

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Speaker 2: Well, about a decade later, prices spiked during the pandemic

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Speaker 2: as supply chain bottlenecks made everything more expensive. For a while,

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Speaker 2: the FED misjudged why inflation surged, and that damaged its reputation.

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Speaker 2: According to Muhammad al Arian, he's the chief economic advisor

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Speaker 2: at the Financial Services from Alians and the president of

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Speaker 2: Queen's College, Cambridge. As we mentioned, he's also a columnist

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Speaker 2: for Bloomberg Opinion.

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Speaker 5: The infati and credibility of the FED was hit very

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Speaker 5: hard by the massive mistake they made in twenty twenty one.

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Speaker 5: People remember in twenty twenty one, when inflation started going up,

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Speaker 5: the FED rushed to call it transitory.

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Speaker 4: Current high inflation readings are likely to prove transitory. So

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Speaker 4: I think the word transitory has different meanings to different people.

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Speaker 4: The concept of transitory is really this. It is that

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Speaker 4: the increases will happen. We're not saying they will reverse.

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Speaker 4: That's not what transitory means.

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Speaker 5: And David transitor is a very dangerous word in economics

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Speaker 5: because it implies a phenomenon is temporary, it's reversible. Therefore

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Speaker 5: should look through it and not do anything about it.

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Speaker 5: By the time the FED realized at the end of

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Speaker 5: November that they had made that basic analytical mistake, they

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Speaker 5: then didn't move fast enough, so we had the ridiculous

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Speaker 5: situation that in the following March, when inflation hits seven percent,

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Speaker 5: the FED was still injecting liquidity into the economy and

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Speaker 5: infustrate was still at zero.

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Speaker 2: Now, Alarian says the FED has done a remarkable job

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Speaker 2: bringing down high inflation without causing massive job losses or

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Speaker 2: a huge hit to the economy, but it is so

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Speaker 2: weary that inflation could spike again that it's keeping interest

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Speaker 2: rates high in the hopes of hitting that magic two

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Speaker 2: percent target.

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Speaker 5: The FED is understandably seeking to hit that target because

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Speaker 5: it has missed it for such a long time, and

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Speaker 5: if it changes the target now, it will significantly erode

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Speaker 5: its credibility, which is already being tested.

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Speaker 2: But that reticence is a mistake, Elian argues, because he

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Speaker 2: says that inflation target, which the FED introduced more than

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Speaker 2: ten years ago, is no longer fit for purpose.

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Speaker 5: We have to remember, David does nothing special about this

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Speaker 5: two percent. It emerged in New Zealand back in the

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Speaker 5: early nineties. It was an experiment for inflation targeting. It

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Speaker 5: seems to work there, and suddenly the two percent became

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Speaker 5: the target for central banks that vary in circumstances. Now

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Speaker 5: it didn't matter because we were in a disinflationary world,

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Speaker 5: so the two percent wasn't binding for decades, and now

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Speaker 5: we live in an inflationary world where we have to

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Speaker 5: asked a question, is two percent still the right target?

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Speaker 2: Coming up after the break the huge risk to the

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Speaker 2: economy if the Fed's inflation target is wrong. People who

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Speaker 2: argue not so fast, and who would be hit the hardest. Sarah,

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Speaker 2: We've been talking about something so big, so exciting, it

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Speaker 2: required two hosts.

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Speaker 3: That's right, David. We're talking about June's FED meeting and

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Speaker 3: the Central banks decision to keep interest rates at their

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Speaker 3: current level.

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Speaker 2: But something else happened on Wednesday that got economic policy

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Speaker 2: wonks like the two of us fired up.

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Speaker 3: Yeah, it was a real embarrassment of riches for the

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Speaker 3: ECON heads. Just before policymakers sat down for the second

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Speaker 3: day of their meeting, the Bureau of Labor Statistics released

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Speaker 3: the monthly Consumer Price Index for May. That's a key

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Speaker 3: measure of inflation.

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Speaker 2: It is, and it surprised a lot of people by

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Speaker 2: showing that price increases cooled last month. Overall, prices rose

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Speaker 2: by three zero point three percent compared to last year,

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Speaker 2: and if you compared May prices just to April, they

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Speaker 2: didn't climb at all.

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Speaker 3: Okay, So, David, we know the Fed prefers a different

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Speaker 3: inflation gauge, the PCE deflator, But does the CPI news

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Speaker 3: help or hurt Mohammed el Arian's case.

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Speaker 2: Well, his argument is not just related to these statistics,

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Speaker 2: but to what he sees as a broader shift in

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Speaker 2: the global economy and what that means for prices.

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Speaker 5: We no longer live in a world of deregulation, liberalization,

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Speaker 5: and fiscal prudence. We live in a world of protectionism,

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Speaker 5: of regulation, industrial policy, and unfortunately fiscal irresponsibility. And globally,

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Speaker 5: we're no longer in a world of disinflation globalization. We

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Speaker 5: are in a world of fragmentation, which is inflationer.

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Speaker 2: To impact that trade wars, geopolitics and those supply chain

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Speaker 2: shocks are changing the way goods are priced. In a

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Speaker 2: world with less globalization, prices get stickier and they can

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Speaker 2: stay higher. In other words, he believes the downside of

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Speaker 2: keeping rates high just to hit the fed's target isn't

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Speaker 2: worth it. It's too dangerous. What are the potential consequences

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Speaker 2: of the FED getting this wrong? What are the risks

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Speaker 2: to the economy?

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Speaker 5: At the minimum it is foregone output. There is also

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Speaker 5: the possibility of destabilizing the financial system. But what I'm

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Speaker 5: really worried about, David, is the unnecessary burden that will

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Speaker 5: be carried, especially by low income people.

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Speaker 2: Ellarian is now perhaps the loudest voice in a small

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Speaker 2: chorus of experts who want the FED to retire its

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Speaker 2: two percent target, and they're trying to win converts. It

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Speaker 2: has been a tough sell. The FED spent years arguing

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Speaker 2: internally and speaking with stakeholders before it introduced that two

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Speaker 2: percent target. Over a decade ago, and there's a big

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Speaker 2: argument for saying that changing it now in the middle

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Speaker 2: of this fight against high inflation could erode credibility. You

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Speaker 2: think that more people are coming around to the argument

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Speaker 2: that you've you've been making that now is the time

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Speaker 2: to revisit this number.

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Speaker 5: I definitely think more people are coming around good as view.

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Speaker 2: Nobel Prize winning economist Paul Krugman has written about revisiting

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Speaker 2: the two percent target, and so has Olivier Blanchard, the

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Speaker 2: former chief economist of the International Monetary Fund. And some

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Speaker 2: US lawmakers have started to question why the FED is

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Speaker 2: so steadfast when it comes to its two percent inflation target,

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Speaker 2: including Democratic Senator Catherine Cortes Masto of Nevada. She brought

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Speaker 2: it up when the FED chair testified before the Senate

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Speaker 2: Banking Committee last year.

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Speaker 1: For the general public, for those working families of people,

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Speaker 1: why two percent? Why is getting it to two percent

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Speaker 1: so important?

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Speaker 4: So that's that has become the globally agreed Essentially all

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Speaker 4: major central banks target two percent inflation in one form

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Speaker 4: or another.

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Speaker 6: And how does that help my Nevada families?

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Speaker 1: How does that help people in the Yeah?

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Speaker 4: It does, and it's I guess it's it's obviously not

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Speaker 4: it's not obvious how that is. But two percent inflation.

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Speaker 4: To have people believe that inflation is going to go

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Speaker 4: back to two percent really anchors inflation there, because you know,

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Speaker 4: the evidence is and the modern belief is that people's

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Speaker 4: expectations about inflation actually have an effect on inflation. If

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Speaker 4: you expect inflation to go up five percent, then it will.

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Speaker 2: Cortes Masto was getting at a tension that's emerged recently

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Speaker 2: between strong economic data and how Americans feel about the economy. Now,

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Speaker 2: sentiment may be a little squishy, but Bloomberg's Kate Davidson

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Speaker 2: says it's still significant. Policymakers and politicians pay attention to it.

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Speaker 2: Can we talk about vibes a little bit?

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Speaker 6: Sure?

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Speaker 2: It strikes me that in this debate, vibes matter. People

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Speaker 2: I think are getting frustrated with how long this fight

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Speaker 2: has been going on and what it's meant for them

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Speaker 2: and their pocketbooks.

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Speaker 1: Absolutely, I mean it. You see it every day, almost

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Speaker 1: every day in the polling and the consumer sentiment surveys,

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Speaker 1: in the way that people talk about this economy. They

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Speaker 1: go to the grocery store, they go to buy something

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Speaker 1: they can see prices are higher than they were several

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Speaker 1: years ago. But I think that they also feel like

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Speaker 1: it's getting more expensive to carry dead, it's getting more

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Speaker 1: expensive to take out loans to borrow, and so it's

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Speaker 1: this combination of factors where they feel like, well, things

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Speaker 1: are maybe not that great.

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Speaker 2: What makes the FED chair and other FED officials so

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Speaker 2: reluctant to revisit the Fed's two percent target is this

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Speaker 2: fear it could affect consumer expectations and consumer behavior. On

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Speaker 2: top of that, the FED is in a tough spot

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Speaker 2: in an election year. It's a fiercely independent institution, and policymakers,

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Speaker 2: including Powell, don't want to do anything that could be

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Speaker 2: construed as political. But Elarian argues the FED has to

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Speaker 2: be more pragmatic. You said that keeping this low two

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Speaker 2: percent target could hurt low income people, but aren't they

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Speaker 2: already being hurt by eyeh inflation as well in addition

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Speaker 2: to these higher interest rates.

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Speaker 5: I mean, that's a tragedy. Your first hit them with

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Speaker 5: an unanticipated inflation shock, and let's not forget inflation went

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Speaker 5: over nine percent, and let's not forget that inflation was

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Speaker 5: higher than average for the goods consumed by less privileged

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Speaker 5: segments of the household, those who capture a much bigger

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Speaker 5: part of their budget, so they got hit hot. That's

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Speaker 5: why inflation coming down is important. But if the difference

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Speaker 5: between being at two percent or being nearer to three

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Speaker 5: percent is losing your job, is income insecurity, that is

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Speaker 5: simply adding insult to injury, and that is what I'm

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Speaker 5: worried about. The difference between a two percent inflation and

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Speaker 5: nearer to three percent is very small if the consequences

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Speaker 5: of being at one or the other is your job.

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Speaker 2: But for now, the Fed remains committed to its two

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Speaker 2: percent target that his Powell said at the end of

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Speaker 2: Wednesday's news conference he still believes having it benefit all Americans,

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Speaker 2: including those with lower incomes.

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Speaker 4: We had a period of high inflation. Inflation has come

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Speaker 4: down really significantly, and we're doing everything we can to

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Speaker 4: bring that inflationary episode fully to a halt and fully

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Speaker 4: restore price stability. We're confident that we'll get there, and

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Speaker 4: in the meantime, you know it's going to be painful

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Speaker 4: for people, but the ultimate pain would be a period

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Speaker 4: of long a long period of high inflation.

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Speaker 2: This is the big take from Bloomberg News I'm David Gura.

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Speaker 3: And I'm Sarah Holder. This episode was produced and mixed

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Speaker 3: by Alex Ugura. It was edited by Stacy Vanick Smith.

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Speaker 3: It was fact checked by David Fox.

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Speaker 2: Our senior producers are Kim Gittleson and Naomi Shaven. Our

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Speaker 2: executive producer. Sage Bauman is our head of podcasts.

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