WEBVTT - Surveillance: Inflation Target With Posen 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz Jaily. We bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot com, 0:00:23.920 --> 0:00:30.240 and of course on the Bloomberg terminal. Let's cut to 0:00:30.280 --> 0:00:33.319 the chase, folks. This is about inflation, your fears, your 0:00:33.360 --> 0:00:37.000 confidence in the American economy. We began this discussion as 0:00:37.040 --> 0:00:40.159 a singular high point of our trip to Washington for 0:00:40.200 --> 0:00:42.720 the World Bank and IMF meetings, and that was a 0:00:42.800 --> 0:00:47.120 conversation heated with Adam Posen of the Peterson Institute. We 0:00:47.240 --> 0:00:50.960 continue today the discussion Chairman Powell is looking at on 0:00:51.120 --> 0:00:55.639 inflation targeting. Adam rejuify why we need to move from 0:00:55.680 --> 0:00:59.640 a two percent acceptable inflation level to something that so 0:01:00.040 --> 0:01:04.360 they are scared of a three percent level. Thanks Tom, 0:01:04.440 --> 0:01:07.400 and thanks for having me back on surveillance. I think 0:01:07.680 --> 0:01:10.360 we've got to get to a three percent target level 0:01:10.480 --> 0:01:13.760 rather than a two percent target level for two big reasons. 0:01:14.560 --> 0:01:18.520 First is, as we've seen repeatedly for the last twelve years, 0:01:18.880 --> 0:01:22.000 when you're this close your target is too low. That 0:01:22.120 --> 0:01:24.480 means your interest rates are too low. That means the 0:01:24.560 --> 0:01:28.039 FED doesn't have that much flexibility, and so it's less 0:01:28.160 --> 0:01:33.240 effective encountering recessions and it's more intrusive into markets to 0:01:33.319 --> 0:01:35.960 get its work done. The second reason you want to 0:01:36.000 --> 0:01:39.360 see an inflation target that's a little higher, not currently 0:01:39.520 --> 0:01:42.600 hugely higher, but a little higher, is because it helps 0:01:42.720 --> 0:01:46.920 restructure the economy. We're seeing this right now that labor 0:01:47.040 --> 0:01:50.240 markets are undergoing massive change in the US, and you 0:01:50.360 --> 0:01:53.760 need space for people to get adjustments and to make 0:01:54.000 --> 0:01:57.440 changes both to wages into where they work. And that's 0:01:57.520 --> 0:02:00.200 easier when they're not as close to the lower down 0:02:00.280 --> 0:02:03.800 because people don't get don't get great wage cuss, they 0:02:03.880 --> 0:02:07.720 only get wage zeros or wage up. What does the 0:02:07.840 --> 0:02:12.600 linkage here of a reflation of an economy over to 0:02:12.800 --> 0:02:16.799 nominal GDP to the great fear of the conservatives of 0:02:16.880 --> 0:02:22.280 an overheating of the economy and those ill effects explain 0:02:22.360 --> 0:02:26.880 the sequence of three percent persistent inflation over to a 0:02:27.000 --> 0:02:32.320 whopping large nominal GDP. Well, the two are separate right 0:02:32.520 --> 0:02:36.359 Overheating in some ways is driven by real factors. It's 0:02:36.400 --> 0:02:39.960 when you have more demand than you have supplat whereas 0:02:40.040 --> 0:02:43.280 the three percent is basically a nominal factor. It's about 0:02:43.360 --> 0:02:46.440 what price level you you're taking, you're expecting and taking 0:02:46.440 --> 0:02:50.840 into account. And so to talk about overheating, whether it's 0:02:50.880 --> 0:02:55.720 a supply constraint, bottleneck or excessive fiscal policy, is something 0:02:55.840 --> 0:02:59.400 that's it is to use the dread word transitor doesn't 0:02:59.440 --> 0:03:03.000 mean short term over. In five minutes, Pow finally picked 0:03:03.040 --> 0:03:04.720 up in the press conference what you and I have 0:03:04.800 --> 0:03:09.160 been talking about for months. The transitory for economic policy 0:03:09.240 --> 0:03:12.960 purposes needs It doesn't affect the underlying trend. Doesn't mean 0:03:13.000 --> 0:03:17.200 it's over like that, Adam, How does the Fed keeping 0:03:17.320 --> 0:03:21.040 rates where they are continuing to buy bonds help the 0:03:21.160 --> 0:03:24.720 job creation that you're talking about help people rEFInd a 0:03:24.800 --> 0:03:27.079 position at a time when prices are going up of 0:03:27.160 --> 0:03:32.239 things like rent, which is directly affected by the feds policies. No, 0:03:32.280 --> 0:03:34.240 at least that you're right that there is a trade 0:03:34.280 --> 0:03:37.520 off here. That's always in economics. Nothing is costless. So 0:03:37.680 --> 0:03:40.120 the point of going from two to three percent is 0:03:40.200 --> 0:03:43.520 your target isn't because it's cost less. It's because the 0:03:43.600 --> 0:03:47.200 downside risks are worse in terms of what you're focusing 0:03:47.280 --> 0:03:50.400 on rightly, which is the finding of jobs. What we're seeing, 0:03:50.520 --> 0:03:53.040 for example, of the massive move of workers have a 0:03:53.120 --> 0:03:58.160 small medium enterprises to employers like Amazon, Walmart, McDonald's, Bank 0:03:58.200 --> 0:04:00.840 of America is we've got a fact a rise in 0:04:00.920 --> 0:04:04.480 the minimum wage in a lot of the big employers. 0:04:04.960 --> 0:04:08.200 And this is really important to get people to make 0:04:08.280 --> 0:04:12.440 adjustments and to resort workers into the places that are 0:04:12.520 --> 0:04:16.040 more productive, because if you're low income worker, it's really 0:04:16.200 --> 0:04:18.680 risky and tough to look around and move for a 0:04:18.720 --> 0:04:21.760 new job. But if the wages go up, then there's 0:04:21.800 --> 0:04:25.400 an incentive to get past those fixed costs. So there 0:04:25.520 --> 0:04:27.840 was a great paper at Jackson Hole this some we're 0:04:27.880 --> 0:04:32.640 talking about how a loose, slightly looser monetary policy environment, 0:04:32.720 --> 0:04:36.680 slightly higher inflation environment helps you make adjustments the labor market. 0:04:37.040 --> 0:04:39.080 This was a point I wrote about twenty five years 0:04:39.120 --> 0:04:41.880 ago with reference to Japan, and we saw it bear 0:04:42.000 --> 0:04:46.880 fruit under Abbey that you keep monetary policy looser if 0:04:46.960 --> 0:04:50.200 you want to have real structural adjustment in the labor market. So, 0:04:50.240 --> 0:04:52.440 in other words, you think that the US can draw 0:04:52.600 --> 0:04:56.440 a direct analogy from Japan at this point, from Japan 0:04:56.680 --> 0:04:59.480 or from Germany after the Heart's for reforms in the 0:04:59.720 --> 0:05:02.600 in the early two thousand's. What what I think is 0:05:02.680 --> 0:05:04.920 going on in the labor market right now Leaves in 0:05:04.920 --> 0:05:07.360 the US is there's a structural change. As though we've 0:05:07.360 --> 0:05:09.960 got a labor market perform we haven't had some big 0:05:10.040 --> 0:05:13.560 legislative package. It's not government driven, but it's people, as 0:05:13.640 --> 0:05:15.880 you've been talking about on surveillance for a while now, 0:05:16.800 --> 0:05:18.960 it's people making up their minds that they need a 0:05:19.040 --> 0:05:21.880 different form of work, and it's employers making up their 0:05:21.920 --> 0:05:23.920 minds that yeah, I can afford to be a bit 0:05:24.000 --> 0:05:26.520 more to get the rank workers and the rank relationships. 0:05:27.080 --> 0:05:30.280 So that's a structural change for about twenty percent of 0:05:30.320 --> 0:05:34.159 our workforce who are in the in the low income 0:05:34.279 --> 0:05:39.239 service workers, and so we want to facilitate that change. Adam, 0:05:39.279 --> 0:05:41.760 you've been at a central bank at these inflection points. 0:05:41.839 --> 0:05:43.159 You were at the Bank of Inman coming down at 0:05:43.200 --> 0:05:45.719 the two thousand and night two thousand and nine Tobacco. 0:05:46.080 --> 0:05:47.800 I just wonder if you look to the Bank of England. 0:05:48.279 --> 0:05:50.160 You looked at Red Nato Street where you used to be, 0:05:50.839 --> 0:05:52.760 and they start talking about a life meeting at the 0:05:52.760 --> 0:05:55.720 Bank of England, this like on thread Nato Street, And 0:05:55.920 --> 0:05:57.560 what are you learning from the moment we're in and 0:05:57.640 --> 0:05:59.640 what would you recommend to those at the Bank of 0:05:59.800 --> 0:06:03.560 the can about making a move at this point, Jonathan, 0:06:03.640 --> 0:06:07.440 I think we're now moving. We're now not just moving countries, 0:06:07.520 --> 0:06:10.400 but we're moving themes because the UK is not like 0:06:11.440 --> 0:06:14.559 the US, or like Europe or Japan right now because 0:06:14.600 --> 0:06:18.520 of Brexit, people have underplayed I think despite all this 0:06:18.600 --> 0:06:21.839 German drawn they've underplayed the really good effects of Brexit. 0:06:22.320 --> 0:06:24.320 And so I've been saying for a few years, including 0:06:24.360 --> 0:06:27.919 on this program, that bregsit takes the Bank of England 0:06:27.960 --> 0:06:30.040 part way back to the nine seventies, and what that 0:06:30.160 --> 0:06:33.960 means is they can't just focus on domestic inflation target 0:06:34.279 --> 0:06:35.880 the way they had when I was there, on the 0:06:35.920 --> 0:06:38.960 way they have. They have to keep one eye on 0:06:39.080 --> 0:06:42.240 the markets. And that's why they're moving forward in my 0:06:42.400 --> 0:06:46.760 view rightly though sadly, to a much sooner liftoff than 0:06:46.880 --> 0:06:49.960 other central banks. The other thing about BREGGS is that 0:06:50.080 --> 0:06:54.440 it exacerbates shocks that require flexibility and supply, and we're 0:06:54.440 --> 0:06:57.280 seeing this that they're having the same reopening shock, the 0:06:57.360 --> 0:07:00.280 same commodity shock as the euro Area or the ass 0:07:00.680 --> 0:07:03.520 but because they've cut themselves off from workers in Europe, 0:07:03.560 --> 0:07:06.640 which were their labors apply because they've cut themselves off 0:07:06.680 --> 0:07:09.840 from easy importance and exports to some degree, the shock 0:07:10.000 --> 0:07:13.640 is that much worse for Brexit, for breksit post Brexit UK. 0:07:14.400 --> 0:07:16.640 So for these two reasons, the Bank of England is 0:07:16.720 --> 0:07:22.360 facing a much less salutary set of outcomes than the 0:07:22.480 --> 0:07:24.480 other central banks, and that's why it has to move 0:07:24.560 --> 0:07:26.880 sooner in my view, even though again, to go back 0:07:26.920 --> 0:07:29.160 to least there's a cost to it. You'll more polite 0:07:29.200 --> 0:07:31.320 than I am. The rude way of saying everything you 0:07:31.400 --> 0:07:33.040 just said would be that the bank having that now 0:07:33.160 --> 0:07:36.800 has an emerging market flavor to the policy dilemma. Would 0:07:36.800 --> 0:07:39.920 you agree with Adam? Yeah, I mean I I choose 0:07:39.960 --> 0:07:42.280 to say part went back to the seventies. Emergant market 0:07:42.400 --> 0:07:45.480 is waving a red flag. But I agree what what 0:07:45.640 --> 0:07:48.280 you have is for no fault in the Bank of 0:07:48.360 --> 0:07:51.680 England's the credibility of their anchor and the stabilization of 0:07:51.760 --> 0:07:56.000 their economy is less closet Brexit and therefore less likely 0:07:56.080 --> 0:07:59.440 other high income economies than it was. Pretty so, John, 0:07:59.480 --> 0:08:02.480 do we need a banner on television and for radio? That, 0:08:02.600 --> 0:08:07.040 says Posen, says uk his banana Republic work that the 0:08:07.080 --> 0:08:08.760 governor of the Bank of England, it's the governor of 0:08:09.160 --> 0:08:12.680 the Merchant Marquet Center. You can quite I'd rather, I'd 0:08:12.800 --> 0:08:15.040 rather go with the child, the running around child in 0:08:15.080 --> 0:08:20.160 the background. Governor by with the child in the background 0:08:20.200 --> 0:08:22.400 at him. You want to do that, Adam Pison, thank 0:08:22.480 --> 0:08:26.120 you said, it's fantastic. As a wife of the Patison 0:08:26.320 --> 0:08:35.160 it's the cheap never dull a moment. And Steve Shiveron 0:08:35.320 --> 0:08:37.599 knows that he is with federated or measures thrilled he 0:08:37.640 --> 0:08:41.320 could join us this morning. Steve, if you guys change 0:08:41.360 --> 0:08:46.199 your asset allocation or wisdom across the capitalization view from 0:08:46.280 --> 0:08:50.320 large cap obviously a federated heritage, over to mid cap 0:08:50.440 --> 0:08:53.640 and indeed the small cap juggernaut we're on right now, 0:08:54.000 --> 0:08:58.480 has there been a federated shift now, we've been pretty 0:08:58.520 --> 0:09:03.439 consistent um being overweight cyclicals amongst the large caps being neutral, 0:09:03.520 --> 0:09:08.360 overweight small caps having some preference for international and quite frankly, Tom, 0:09:08.440 --> 0:09:12.199 you know, there's nothing that I heard yesterday, uh from 0:09:12.240 --> 0:09:14.559 the Federal Reserve that would that would change our thinking. 0:09:14.640 --> 0:09:17.760 We think you still have an environment where it's risk 0:09:17.840 --> 0:09:20.320 on for the time being. Is there a risk here 0:09:20.440 --> 0:09:23.480 as we talk about sequencing, that all the central banks 0:09:23.520 --> 0:09:28.040 and developed world all pushed back rate hiking and frankly 0:09:28.120 --> 0:09:31.839 tightening policy until next year, until the data becomes indisputable 0:09:32.120 --> 0:09:35.240 that we get a sort of collective tightening that really 0:09:35.320 --> 0:09:39.600 puts the brakes on a rally. Yes, I think that's 0:09:39.640 --> 0:09:42.400 absolutely a risk, and I think that you know, it 0:09:42.520 --> 0:09:44.120 was interesting you were talking about the b o E 0:09:44.240 --> 0:09:47.320 and sequencing in a very rare move. The Americans were 0:09:47.360 --> 0:09:49.920 more subtle than the British. But but I think we 0:09:50.000 --> 0:09:51.800 were doing exactly the same thing. You know. The two 0:09:51.840 --> 0:09:55.400 takeaways from yesterday from the Fed, from my perspective, we're humility. 0:09:55.600 --> 0:09:58.160 You know, they recognized and admitted that they've had a 0:09:58.240 --> 0:10:01.920 misread on inflation and then op ftionality. But by saying 0:10:02.000 --> 0:10:04.720 that they would or would take the opportunity to vary 0:10:04.800 --> 0:10:07.560 the speed of tapering, you know, come January. I think 0:10:07.559 --> 0:10:09.760 what they're saying is that if inflation continues to come 0:10:09.800 --> 0:10:11.800 in hot we think it will because we think that 0:10:11.880 --> 0:10:15.160 they're misreading the labor market here, that they would speed 0:10:15.280 --> 0:10:17.360 up that pace. Well, why would they do that so 0:10:17.440 --> 0:10:20.160 that they can start rate hikes earlier? And I thought 0:10:20.200 --> 0:10:22.920 it was very telling. When Scheifel had the opportunity to 0:10:23.000 --> 0:10:26.480 push back harder against where the market was pricing in 0:10:26.679 --> 0:10:29.920 rate hikes for next year, he didn't. Um and admitting 0:10:29.960 --> 0:10:31.680 that we could get the full employment by the middle 0:10:31.679 --> 0:10:34.240 of next year suggests that the market is not crazy 0:10:34.320 --> 0:10:37.280 and thinking about rate hike number one in June or July. 0:10:37.800 --> 0:10:39.760 So I'm looking right now at the fact that two 0:10:39.800 --> 0:10:43.640 year yields the US are moving lower in sympathy with 0:10:43.840 --> 0:10:46.280 two year guilt yields, and I wonder how much some 0:10:46.440 --> 0:10:49.920 of the central bank world is interconnected. In other words, 0:10:50.120 --> 0:10:53.280 the rate market will move collectively or it won't move 0:10:53.480 --> 0:10:55.800 at all. How much is that the dynamic that we're 0:10:55.840 --> 0:10:58.640 in right now for the developed world? I think it 0:10:58.720 --> 0:11:01.760 makes sense because I think the the inflation impulses are similar. 0:11:01.800 --> 0:11:04.760 I mean, they certainly are connected to what's going on 0:11:05.080 --> 0:11:07.760 with with with the pandemic and the supply chain shortages 0:11:07.800 --> 0:11:09.559 that are part of that. I think in the United 0:11:09.600 --> 0:11:11.720 States the labor markets tighter than it is in other 0:11:11.800 --> 0:11:13.679 parts of the world and will remain so. But I 0:11:13.720 --> 0:11:17.319 think that the drivers are are very similar. Lisa um 0:11:17.640 --> 0:11:21.480 and so that's that's not unexpected. In the perfection of 0:11:21.640 --> 0:11:25.360 federating or mes Steve, there's gonna be no window dressing, 0:11:26.040 --> 0:11:27.880 but to the end of the year there's a bye 0:11:27.960 --> 0:11:32.719 side sweat. How big is the sweat this year? I 0:11:32.800 --> 0:11:34.880 think there's sweat because I think folks have been on 0:11:34.960 --> 0:11:37.679 the wrong side of a lot of trades, and I 0:11:37.800 --> 0:11:39.640 think you're gonna have momentum and at the end of 0:11:39.679 --> 0:11:42.360 the year, you know, my take from the fetis equities 0:11:42.360 --> 0:11:45.079 are going to really like the patient's message. I think 0:11:45.120 --> 0:11:48.000 in terms of Washington, we've defanged some of the most 0:11:48.360 --> 0:11:51.480 or potentially some of the most disruptive policy options will see. 0:11:52.000 --> 0:11:53.880 And so I think you can have a scenario where 0:11:54.040 --> 0:11:56.440 you know, kind of like you've got a real strong 0:11:56.520 --> 0:11:58.480 finishing at the end of the year. And it's been 0:11:58.559 --> 0:12:01.040 hard to stay with it because as instructive as we've been, 0:12:01.640 --> 0:12:03.319 you know, you'd have to have been blind not to 0:12:03.400 --> 0:12:05.719 see some of the risks that have occurred. So I 0:12:06.160 --> 0:12:08.240 think for folks that have been in our camp, which 0:12:08.320 --> 0:12:11.560 is to say the fundamentals are positive, respond to bad 0:12:11.640 --> 0:12:14.520 news if it happens, don't anticipate it and get caught 0:12:14.559 --> 0:12:18.040 off sides. You're fine. If you've been a little bit 0:12:18.120 --> 0:12:20.959 too reactive too early. You're gonna be on the wrong 0:12:21.040 --> 0:12:23.040 side of something. I think that's gonna be quite positive 0:12:23.040 --> 0:12:24.240 between now on the end of the year, and you're 0:12:24.240 --> 0:12:26.439 gonna try to window address and catch up. See just 0:12:26.520 --> 0:12:28.480 real quick here, what's the bad news you'd respond to? 0:12:30.640 --> 0:12:32.520 So I think you've got to look at what policy 0:12:32.520 --> 0:12:34.920 comes out of Washington, if there's something really disruptive there 0:12:34.960 --> 0:12:36.400 on the tax of the spending side. I think what 0:12:36.480 --> 0:12:38.920 it really comes down to, Lisa, is we are in 0:12:39.200 --> 0:12:42.199 a heightened risk of dual policy error, either on the 0:12:42.280 --> 0:12:46.160 monetary policy side or the fiscal policy side. We've never 0:12:46.240 --> 0:12:50.240 spent money like this after economies at full capacity. We've 0:12:50.320 --> 0:12:54.000 never been this reactionary to inflation rather than anticipatory, and 0:12:54.120 --> 0:12:56.439 those both of those things may be fine, but we 0:12:56.559 --> 0:12:58.840 don't know. So I think you've got to have humility, 0:12:59.240 --> 0:13:01.319 and quite frankly, really good hearing the Feds say that 0:13:01.400 --> 0:13:03.760 they're having some humility as well, because we are in 0:13:03.880 --> 0:13:07.120 uncharted waters on both monetary and fiscal policy. Steve, thank you, 0:13:07.200 --> 0:13:10.199 sir for your humble opinion on this market. Stave Chevron, 0:13:10.559 --> 0:13:13.440 Federated Steve, thank you, buddy. Good to see you. At 0:13:13.520 --> 0:13:15.839 least that's the moment, we're in the wide range of 0:13:15.880 --> 0:13:18.000 outcomes through next year. I've had some great interviews so 0:13:18.120 --> 0:13:20.480 far this week. Already it was Francis Donald that called 0:13:20.480 --> 0:13:23.800 it the anti forecast for next year. I'll be interested 0:13:23.840 --> 0:13:25.760 to see what her research looks like into year end, 0:13:26.040 --> 0:13:28.319 into the outlook into next year. What's the balance of 0:13:28.440 --> 0:13:30.520 risks to use Federal Reserve language. I think the Bank 0:13:30.559 --> 0:13:33.480 of England rate decision is fascinating because they pointed as 0:13:33.480 --> 0:13:36.880 a slowdown in growth that they experienced over the late summer, 0:13:36.960 --> 0:13:39.959 the idea of the delta variant. I do wonder whether 0:13:40.280 --> 0:13:43.880 defferring rate hikes means fewer of them or just simply 0:13:44.440 --> 0:13:46.760 concentrating them more when the data is more clear the 0:13:46.840 --> 0:13:50.400 growth outlook as we can since August on supply issues, 0:13:50.760 --> 0:13:52.720 was Adam Posting that talked about the lack of flexibility 0:13:52.960 --> 0:13:55.079 around some of those supply issues, particularly in the UK. 0:13:55.240 --> 0:13:58.400 Some unique circumstances there, perhaps tom But more broadly, if 0:13:58.480 --> 0:14:00.839 these central banks make can move, are they making a 0:14:00.960 --> 0:14:03.600 move into a weaker economy? And I said we could 0:14:03.600 --> 0:14:06.240 tellmas relative because if we're talking about full percent GDP 0:14:06.400 --> 0:14:09.280 next year in the United States and five to six 0:14:09.720 --> 0:14:12.839 in the UK five to six real, wouldn't you in 0:14:12.920 --> 0:14:15.520 the summer, John, We are migrating a vector to what 0:14:15.840 --> 0:14:20.440 three percent two percent sub potential GDP? That's out the window. 0:14:20.840 --> 0:14:22.840 We don't know where the X axis is. I really 0:14:22.920 --> 0:14:25.640 have trouble right now with the Fed parlor game. I'm 0:14:25.680 --> 0:14:29.200 focused on what corporations are doing, Beckton Dickinson today with 0:14:29.280 --> 0:14:37.640 a major buy back, speaking of decades, and you're Denny 0:14:37.760 --> 0:14:40.960 joins us right now, Dr R Denny of your Denny research, 0:14:41.040 --> 0:14:43.320 And I just want to get to the inflation story 0:14:43.440 --> 0:14:46.040 right away, and let's go back to the seventies even 0:14:46.120 --> 0:14:49.440 sixties playbook. There is the cost, there is the push, 0:14:49.960 --> 0:14:53.560 there is the demand, There is the poll. What kind 0:14:53.680 --> 0:14:59.400 of inflation are we enjoying? Well? It does have some 0:14:59.520 --> 0:15:02.240 similarity is with the nineteen seventies. In the nineteen seventies, 0:15:02.320 --> 0:15:05.040 everything that could go wrong on the inflation front seemed 0:15:05.080 --> 0:15:09.360 to go wrong. For example, uh, we closed the gold 0:15:09.440 --> 0:15:11.760 window and so the dollar took a dive, which then 0:15:11.880 --> 0:15:15.160 caused commodity prices to soar. Food prices went up. There 0:15:15.240 --> 0:15:18.280 was an issue with anchovies off the coast of Peru, 0:15:18.400 --> 0:15:22.240 which somehow had an impact on soybean prices. Don't ask 0:15:22.320 --> 0:15:25.080 me how that worked exactly, but it did. And then 0:15:25.120 --> 0:15:27.400 we had two oil shocks and we had costs of 0:15:27.480 --> 0:15:31.000 living adjustments, so all those shocks went right through into wages. 0:15:31.120 --> 0:15:34.320 We don't have a cost of living adjustments anymore. But 0:15:34.400 --> 0:15:39.640 we've probably got the UH labor movement in UH in 0:15:39.760 --> 0:15:42.720 control now more so than ever before UH. And it's 0:15:42.760 --> 0:15:44.760 not really a movement, it's just a shortage of workers, 0:15:44.920 --> 0:15:47.440 and so wages are going up. And I think the 0:15:47.440 --> 0:15:50.640 supply disruptions explained why productivity it took a dive there 0:15:50.680 --> 0:15:53.920 in the in the third quarter. But I think companies 0:15:53.960 --> 0:15:58.000 are already responding anecdotally anyways to the labor shortages. They're 0:15:58.040 --> 0:16:00.240 going to be chronic, and I think we are going 0:16:00.280 --> 0:16:03.040 to see a tremendous amount of automation. Do the mere 0:16:03.120 --> 0:16:07.880 mortals at the FED risk of policy error? Well, they 0:16:07.920 --> 0:16:09.920 are mere mortals, So we gotta start. We got to 0:16:09.960 --> 0:16:14.000 start with that insight, which you correctly point out. But 0:16:14.640 --> 0:16:17.840 I think that there's sort of a view out there 0:16:17.880 --> 0:16:20.880 which I share, that they are behind the curve. Contrary 0:16:20.920 --> 0:16:24.640 to what the FED chair has been saying, the economy's 0:16:25.160 --> 0:16:28.120 done awfully well, certainly in the first half of the 0:16:28.240 --> 0:16:31.320 year and uh second half it's the supply distructions that 0:16:31.440 --> 0:16:35.200 we don't want to see, the pressures on the pricing 0:16:35.240 --> 0:16:38.440 inflations I go into wages. Uh So I think they're 0:16:38.440 --> 0:16:40.920 a little bit late. But look, my job isn't to 0:16:41.520 --> 0:16:43.479 tell the Fed what to do, is just to anticipate 0:16:43.560 --> 0:16:45.880 what they're gonna do. And what they're gonna do is 0:16:46.120 --> 0:16:48.400 uh taper as we know, as we all know, and 0:16:48.640 --> 0:16:51.360 they're probably gonna stick with it through the middle of 0:16:51.480 --> 0:16:54.200 next year, and then I actually will not be surprised 0:16:54.200 --> 0:16:56.360 if they raised the inflation target from two percent to 0:16:56.440 --> 0:16:59.200 three percent, because it's going to be an even more liberal, 0:16:59.280 --> 0:17:02.560 more progressive it next year the way I see it. Wait, 0:17:02.600 --> 0:17:04.399 hold on a second, Can you elaborate a little bit 0:17:04.440 --> 0:17:06.240 on that, because that's the point that Adam Posen has 0:17:06.280 --> 0:17:08.720 made as well, that perhaps they're not going to try 0:17:08.800 --> 0:17:11.960 to fight higher inflation on a base level, but rather 0:17:12.200 --> 0:17:17.720 embrace it. What will sort of trigger that shift in mentality, Well, 0:17:17.800 --> 0:17:19.160 I think the Feds are going to have to at 0:17:19.200 --> 0:17:21.800 some point concede the inflation is not transitory, but it 0:17:21.960 --> 0:17:24.639 is persistent. Right now. What they're saying is that the 0:17:24.680 --> 0:17:28.160 supply chain disruptions are persistent. Well yeah, so what does 0:17:28.240 --> 0:17:31.040 that mean. It means that inflation ry pressures are gonna 0:17:31.040 --> 0:17:34.560 stay persistent. So I think, um, I think much will 0:17:34.600 --> 0:17:38.439 depend on the FED chair. I don't think it's going 0:17:38.520 --> 0:17:40.879 to be pale. I think it's likely to be brainer. 0:17:40.960 --> 0:17:43.600 I think there's gonna be a couple of openings that 0:17:43.680 --> 0:17:46.600 get filled by more progressive kind of people. If it 0:17:47.000 --> 0:17:50.840 is simply going to become more politicized, more progressive, and uh, 0:17:50.960 --> 0:17:52.720 I think more inclined to say, well, you know what, 0:17:53.480 --> 0:17:56.199 two percent too low? Three percents fine, and if it's 0:17:56.240 --> 0:17:57.800 a little bit above three percent for a while, we 0:17:57.840 --> 0:17:59.520 can live with it. They really don't want to raise 0:17:59.560 --> 0:18:02.960 interest right, um more than they have to, and they'll 0:18:03.119 --> 0:18:06.600 move the gold post. Okay, So you mentioned the nineteen seventies, 0:18:06.640 --> 0:18:08.840 which is basically a trigger for a lot of people 0:18:08.880 --> 0:18:12.240 watching the bond market. I wonder where the analogy start 0:18:12.320 --> 0:18:14.680 and where they drop off, especially if you do have 0:18:14.880 --> 0:18:17.400 a more devish FED that is more willing to allow 0:18:17.520 --> 0:18:20.159 inflation to hover around the three percent level. Are we 0:18:20.359 --> 0:18:23.639 really heading into a period where inflation could get away 0:18:23.720 --> 0:18:25.240 from the FED? Or do you think that the Fed 0:18:25.359 --> 0:18:27.879 can keep control over it just i'lbeit perhaps in a 0:18:27.960 --> 0:18:30.320 bit of a higher rate. Yeah, well, I'm I'm actually 0:18:30.960 --> 0:18:33.760 an optimist on the inflation outlook in terms of over 0:18:33.800 --> 0:18:35.720 the next few years. I don't think this is going 0:18:35.760 --> 0:18:38.960 to be the nineteen seventies all over again. The big differences. 0:18:39.000 --> 0:18:42.879 Productivity collapsed during the nineteen seventies. It went all the 0:18:42.920 --> 0:18:45.400 way down to zero. I don't think that's where we're heading, 0:18:45.440 --> 0:18:50.480 notwithstanding this morning's disappointing news or surprising news, whatever it was. 0:18:51.040 --> 0:18:53.600 But I think productivity is going to make a comeback, 0:18:53.640 --> 0:18:57.360 and that's uh, that's an important offset to wages going 0:18:57.440 --> 0:19:00.200 up faster than prices. You folks mentioned that we're gonna 0:19:00.200 --> 0:19:02.960 be putting a lot of weight on real wages, but 0:19:03.080 --> 0:19:04.560 I think we want we want to look at real 0:19:04.640 --> 0:19:08.119 wages relative to productivity. The only way that real wages 0:19:08.160 --> 0:19:11.240 can actually go up is if productivity makes a comeback. 0:19:11.320 --> 0:19:13.280 If it doesn't, then we're gonna have a wage s 0:19:13.320 --> 0:19:15.800 price spiral, which was really what the nineteen seventies was 0:19:15.840 --> 0:19:20.000 all about. Okay, how do we calculate will calculate that 0:19:20.200 --> 0:19:22.800 our guests that and when do we do it? Is 0:19:22.880 --> 0:19:27.200 that a first half two thousand twenty two exercise, or 0:19:27.200 --> 0:19:31.679 are we that data dependent on rising wages? Well, at 0:19:31.760 --> 0:19:35.000 this point, the productivity story really is anecdotal. You know, 0:19:35.160 --> 0:19:38.600 we can see that companies are scrambling to increase their 0:19:38.600 --> 0:19:43.440 productivity with robotics, with automation, with artificial intelligence. The good 0:19:43.520 --> 0:19:46.280 news is the technologies there and it's relatively cheap and 0:19:46.520 --> 0:19:50.320 implementable to to make that happen. So I don't think 0:19:50.359 --> 0:19:52.280 we're gonna have to wait all that long. I think 0:19:52.320 --> 0:19:54.680 by the second half of next year we're gonna see 0:19:54.720 --> 0:19:58.399 that inflationary pressures abate, partly because of productivity and partly 0:19:58.400 --> 0:20:03.440 because supply chain distrust options get amaliorated. Um and uh 0:20:04.160 --> 0:20:07.600 that's a big issue, is uh, the supply chain disruptions. 0:20:08.280 --> 0:20:10.720 So I think we're gonna have more cars by the 0:20:10.760 --> 0:20:13.760 second half of next year, more supply and that could 0:20:13.760 --> 0:20:17.680 take a lot of pressure off inflation. The bond vigilance 0:20:17.840 --> 0:20:21.800 stay in hibernation, the net well, you know, it's hard 0:20:21.840 --> 0:20:24.720 to uh for them to have much of an impact 0:20:24.760 --> 0:20:27.800 when the Fed basically has been rigging the bond market. 0:20:27.920 --> 0:20:30.440 I mean, they've been so aggressive in that market that 0:20:30.760 --> 0:20:32.720 it's it's hard to even call it a market. It's 0:20:32.760 --> 0:20:37.159 not a free market, certainly, but I think by by 0:20:37.280 --> 0:20:40.320 some time next year we'll see two on the on 0:20:40.480 --> 0:20:43.840 the ten year. We also have to factor in demographic factors. 0:20:43.880 --> 0:20:46.639 Here in the seventies we had a tremendous influx of 0:20:46.680 --> 0:20:50.680 baby boom workers. Now they're retiring and we're seeing that 0:20:50.760 --> 0:20:53.280 the growth rate in the labor force is close to zero. 0:20:53.440 --> 0:20:55.800 The only way this economy is going to grow on 0:20:55.840 --> 0:20:58.800 a tent trend basis is of productivity makes a comeback, 0:20:58.840 --> 0:21:01.720 and I'm optimistic on gonna catch up at as always 0:21:01.840 --> 0:21:04.840 Edie Antenny, the original man of coining the phrase, the 0:21:04.920 --> 0:21:14.679 author of Bond Vigilantes. Ellen Wald, Senior Fellow in Atlantic Council, 0:21:14.800 --> 0:21:17.240 joining us for a brief visit this morning. Ellen, the 0:21:17.320 --> 0:21:20.479 spread is narrowed between West Texas Intermediate and Brent Crude. 0:21:20.760 --> 0:21:24.080 Do you just apply within your macro view that Brent 0:21:24.240 --> 0:21:31.520 will widen out higher or or West Texas Intermediate comeback lower? Well, 0:21:31.680 --> 0:21:33.600 you know, one of the one of the interesting things 0:21:33.720 --> 0:21:36.800 is that w t I has been doing better recently, 0:21:37.320 --> 0:21:42.600 particularly with foreign buyers, because it was it was priced 0:21:42.640 --> 0:21:45.720 a bit lower, and so we saw some increase in 0:21:45.880 --> 0:21:50.200 exports from the US to China and other countries. If 0:21:50.240 --> 0:21:55.639