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Speaker 1: Betsy Stevenson, University of Michigan Professor of Economics and Public Policy,

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Speaker 1: joins US now. She's also a Bloomberg opinion columnist. Betsy,

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Speaker 1: great to see you, Thank you for joining us. Can

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Speaker 1: we take a victory lap? Has inflation been beaten? Have

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Speaker 1: we slain the dragon?

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Speaker 2: Whether you take that victory lap or not, I think

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Speaker 2: is about how superstitious you are. I am always a

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Speaker 2: little nervous to take victory laps. But I can certainly

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Speaker 2: say that it's remarkable what's been achieved. And I think

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Speaker 2: we can say, using the past tense been achieved.

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Speaker 3: I mean, you just said.

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Speaker 2: Six months core PCE running below the Fed's target.

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Speaker 3: Nobody was predicting, not a year ago.

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Speaker 2: Eighty five percent of economists were predicting a year ago

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Speaker 2: that we would have had a recession this year.

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Speaker 3: Who would have had to have.

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Speaker 2: High unemployment, declining economic growth in order to bring inflation down,

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Speaker 2: or we would have had ongoing inflation at rates above

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Speaker 2: the Fed's target. Instead, we got the absolute sweet spot

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Speaker 2: of ongoing economic growth and inflation moderating to the Fed's target.

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Speaker 3: So it's certainly a time for celebration.

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Speaker 2: Even if you might be a little nervous to take

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Speaker 2: that victory left.

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Speaker 4: Well, the question is does it lead to a stronger

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Speaker 4: case for rate cuts into next year and how many.

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Speaker 3: You know?

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Speaker 2: That's obviously what's on everybody's mind, that should the FED

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Speaker 2: start cutting rates. I've always thought that the FED will

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Speaker 2: that FED needed to raise rates and hold them and

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Speaker 2: hold them longer than people expect them to hold them.

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Speaker 2: They're not seeing any signs of a labor market faltering,

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Speaker 2: of an economy cooling, so I don't think there's a

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Speaker 2: lot of pressure for them to raise rates. And I

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Speaker 2: think they absolutely are sorry to cut rates right now.

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Speaker 2: And I think that they absolutely see is a pressure

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Speaker 2: to make sure that they have really put all the

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Speaker 2: nails in the coffin of inflation of their target. So

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Speaker 2: I think they're going to be more cautious than people expect.

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Speaker 2: But if we continue in the direction we're going, we're

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Speaker 2: obviously going to see right cuts in twenty twenty four.

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Speaker 1: Basice is growth the bigger threat in twenty four than inflation.

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Speaker 2: Therefore, you know, the thing is both of them are

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Speaker 2: doing so well. I don't know that I want to

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Speaker 2: put probability weights on which thing is going to cause

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Speaker 2: us a problem I think it's really going to be

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Speaker 2: related to what kinds of shocks do we face in

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Speaker 2: the new year. There are lots of things that happen,

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Speaker 2: they're just difficult to predict.

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Speaker 3: What will happen in terms of global.

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Speaker 2: Political conflict that obviously can you reverberate through all sorts

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Speaker 2: of economies, not just the United States. What's going to

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Speaker 2: happen to economies around the globe that we trade with,

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Speaker 2: and how might that affect the United States? What might

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Speaker 2: happen to supply chains that affect whether we're able to

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Speaker 2: meet demand.

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Speaker 3: I think there's a lot of unknowns.

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Speaker 2: They could risk growth, they could risk inflation, But right

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Speaker 2: now we're really in a sweet spot with I think

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Speaker 2: pretty strong economic growths and and inflation coming down. You know,

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Speaker 2: there's a real question here that we're going to have

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Speaker 2: to dig into, which is was potential GDP higher other

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Speaker 2: than the FED?

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Speaker 3: And many economists.

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Speaker 2: Thought, because how were we able to grow at a

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Speaker 2: rate that's so far above what people thought was above

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Speaker 2: potential while bringing prices down? And for me, there's only

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Speaker 2: one answer to that, which is our potential was greater

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Speaker 2: than people anticipated.

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Speaker 4: Speaking of what people are anticipating when you think about

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Speaker 4: the risks to inflation moving forward. There are a lot

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Speaker 4: of questions about wage inflation moving forward.

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Speaker 3: Where are the biggest risks?

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Speaker 2: Obviously inflation expectations is always a risk, but we've seen

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Speaker 2: inflation expectations moderate and we haven't seen them really take off.

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Speaker 2: There is issues around, you know, wage growth. But I

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Speaker 2: think that we want to keep two things in mind now.

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Speaker 2: When inflation goes up, what a lot of people don't

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Speaker 2: like to realize is that means somebody's.

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Speaker 3: Incomes going up.

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Speaker 2: So on average incomes are going up when prices are

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Speaker 2: going up. There's a difference between the average wage level

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Speaker 2: going up and the wage distribution shifting.

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Speaker 3: So we can see a lot of wage growth at the.

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Speaker 2: Bottom in the middle and not and have that offset

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Speaker 2: by slower wage growth at the top. That's about inequality

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Speaker 2: and that doesn't have anything to.

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Speaker 3: Do with inflation.

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Speaker 2: So when we're looking at wage growth, we have to

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Speaker 2: be really cautious in interpreting what it means for inflation.

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Speaker 2: Is this a relative change about inequality or is this

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Speaker 2: really ongoing inflation. But there's certainly some workers out there

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Speaker 2: lobbying for higher wages, and I think some of them

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Speaker 2: are going to get them.

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Speaker 1: Bet see, does the fact have to cut because the

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Speaker 1: federal government simply can't afford the bill that it's now

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Speaker 1: facing As a result of these higher rates, we now

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Speaker 1: in a scenario where Jae Howe needs to listen to

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Speaker 1: Chreasury Secretary Yellen, and fiscal dominance is now increasingly becoming

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Speaker 1: the reality.

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Speaker 2: I think that that's a pretty messy game for the

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Speaker 2: Fed to be playing. I don't think that they cut

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Speaker 2: rates to make it easier for the government to borrow.

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Speaker 2: I think higher rates has certainly been a burden on

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Speaker 2: government borrowing. But you know, the right answer to that

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Speaker 2: is not the Fed cutting rates to help fiscal responsibility.

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Speaker 2: It's Congress raising taxes in order to bring more revenue in.

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Speaker 2: And you know, I can imagine a lot of listeners bristling,

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Speaker 2: why would we raise taxes. We have to understand, our

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Speaker 2: revenue is incredibly low and has been low since those

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Speaker 2: twenty seventeen tax cuts. Nobody we can't We literally can't

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Speaker 2: get spending as low as our revenue is right now,

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Speaker 2: we have to raise revenue. These Bush tax cuts, sorry,

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Speaker 2: these Trump tax cuts are going to be expiring in

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Speaker 2: twenty twenty five, and I think we need.

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Speaker 3: To have a really hard look.

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Speaker 2: At our tax system to figure out how.

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Speaker 3: We have more sustainable revenue.

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Speaker 2: That's the answer to physcal responsibility, not BED policy.

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Speaker 4: Well, it's interesting because if you think about those kind

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Speaker 4: of fiscal constraints moving into even twenty twenty five, as

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Speaker 4: you're saying election year next year, there's a lot of

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Speaker 4: focus on short term rates, but how much control is

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Speaker 4: there on the long term.

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Speaker 3: There's an extraordinary.

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Speaker 4: Amount of issuance coming up. There's a lot of concern

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Speaker 4: about bank balance sheets tightening into next year. It's hard

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Speaker 4: to believe that you can get away with twenty twenty

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Speaker 4: four without a hiccup.

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Speaker 3: You know, you're sort of right, it's hard to believe.

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Speaker 2: It was hard to believe when we got through twenty

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Speaker 2: twenty three was such a strong economy. I think what

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Speaker 2: it relies on is being very nimble at being very

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Speaker 2: data dependent, and being very cautious in making moves slowly

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Speaker 2: and deliberately and communicating them well.

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Speaker 3: The FED has I mean.

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Speaker 2: This is why I think when we look back, the

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Speaker 2: history books is going to write this as the most

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Speaker 2: successful time for FED policy that we've had, maybe in history,

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Speaker 2: because they nailed all of those factors. That's what they're

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Speaker 2: going to have to nail in twenty twenty four to

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Speaker 2: prevent the kind of hiccups that you're worried about.

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Speaker 1: But Betsy, though you talk about the history books, You

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Speaker 1: look at the history books. Look at the seventies. Inflation

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Speaker 1: went up, it came down, we thought we'd done it,

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Speaker 1: and then it reaccelerated. What are the chances of that

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Speaker 1: happening again here? I'm going to try and nail you

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Speaker 1: down here. Can we ignore that historical precursor to what

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Speaker 1: we're watching here?

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Speaker 3: Now?

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Speaker 5: Do you think this time is different? And if so,

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Speaker 5: why I think this time is different? I think we

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Speaker 5: should never ignore our history. It's the only pieces of

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Speaker 5: information we have. But equally, it's a mistake to take

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Speaker 5: our history and think that.

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Speaker 3: That forecasts our future.

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Speaker 2: So, you know, what is really different here is we

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Speaker 2: don't have the kind of inflation indexation through widespread union

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Speaker 2: contracts that we had in the nineteen seventies.

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Speaker 3: So that was one of the reasons in the seventies we.

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Speaker 2: Worried so much about that link between a wage growth

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Speaker 2: and inflation. You know, the UAW didn't even have a

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Speaker 2: cost of living adjustment in their contract. They obviously have

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Speaker 2: that now, but we're we're also a country with six

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Speaker 2: percent of the private sector unionized.

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Speaker 3: They're not driving anything here in terms of wage inflation linkages.

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Speaker 2: I think that's very different. I think inflation expectations.

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Speaker 3: Are very different.

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Speaker 2: But equally, you know, I started this by saying, the

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Speaker 2: FED will keep rates higher for longer than most people anticipate,

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Speaker 2: and that's because they don't want to get caught out

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Speaker 2: by saying, oh, look, we did it too quickly, bringing

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Speaker 2: rates down too quickly and having to pull back again,

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Speaker 2: you know, two.

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Speaker 3: Three, four months later.

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Speaker 2: So I do think you're going to see a very

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Speaker 2: conservative FED in terms of making decisions about when it's

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Speaker 2: going to cut rates, and I think that might cut

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Speaker 2: people a little bit by surprise.

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Speaker 4: Certainly a timely conversation, and that chorus is getting louder

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Speaker 4: our thanks to Professor Vetzi Stephenson from the University of Michigan,