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Why the Fed should not cut rates now · The Financial Exchange Show

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Speaker 1: Sata and Mark Fandetti.
1:11
Speaker 2: It's Chuck, Mark and Chucker with the and kicking off
1:16
Speaker 2: the second week of September, we got a busy week
1:20
Speaker 2: for economic data. Just when we look at it, there's
1:23
Speaker 2: nothing as far as earnings that's particularly interesting. You do
1:27
Speaker 2: have a couple of tech companies that are kind of
1:28
Speaker 2: that next tier down, Oracle and Adobe both reporting this week,
1:33
Speaker 2: But other than that, I don't think anyone gets particularly
1:36
Speaker 2: excited about what we're gonna be hearing from National Beverage
1:41
Speaker 2: after the bell today, just gonna fizzle out. See what
1:46
Speaker 2: I did there. The ticker's fizz which is a great ticker,
1:49
Speaker 2: I do have to say, but you're a three billion
1:52
Speaker 2: dollar company. You don't move the market. What we do
1:55
Speaker 2: have this week Tuesday, we get the non farm payrolls
1:58
Speaker 2: annual revision. This is gonna be much hyped, but ultimately
2:02
Speaker 2: really tells us more about what happened a year ago
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Speaker 2: than what's going on now. You can imply some things
2:08
Speaker 2: about what's going on now, but I don't think it's
2:10
Speaker 2: particularly pertinent data for you know, what's happening in the
2:14
Speaker 2: economy today Wednesday. This is one of those weird months
2:18
Speaker 2: where we have Producer Price Index data coming before Consumer
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Speaker 2: Price Index, and so the PPI is at at eight
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Speaker 2: thirty am on Wednesday. Thursday, at eight thirty we get
2:27
Speaker 2: CPI and also weekly jobless claims, and then Friday we're
2:31
Speaker 2: gonna get University of Michigan Consumer Sentiment, which I basically
2:35
Speaker 2: go back and forth every day of my life wondering
2:39
Speaker 2: whether we should even cover this series anymore, because I
2:42
Speaker 2: think since they moved to the online only survey, it's
2:44
Speaker 2: just gotten increasingly disconnected from what's actually going on. But
2:49
Speaker 2: that's neither here nor there. In any case, a lot
2:53
Speaker 2: of economic data this week. You've also got an iPhone
2:56
Speaker 2: event tomorrow from Apple where the iPhone seventeen is expected
3:00
Speaker 2: to be released, and so you know you've got some
3:04
Speaker 2: stuff to get through this week. But ultimately I think
3:09
Speaker 2: we'll start with a discussion of this annual revision to
3:14
Speaker 2: the Non farm Payrolls Report. It is a basically, it's
3:20
Speaker 2: an annual update that the Bureau of Labor Statistics does
3:23
Speaker 2: in order to try to improve the quality of the data.
3:26
Speaker 2: It's called the Quarterly Census on Unemployment in Wages, and
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Speaker 2: it pretty much looks at job growth from April of
3:34
Speaker 2: twenty four through March of twenty five, so it covers
3:37
Speaker 2: those four quarters and the expectations are that it will
3:41
Speaker 2: show somewhere in the ballpark of eight hundred thousand fewer
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Speaker 2: jobs created during that time than it did initially. And
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Speaker 2: this is pretty much what we saw last year where
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Speaker 2: the QCUW when it came out in September of last year,
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Speaker 2: sot about eight hundred thousand fewer jobs created over the
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Speaker 2: April twenty three to March twenty four period. And Mark,
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Speaker 2: I think the question that people ask is like, why
4:06
Speaker 2: is there such a big revision And the answer is
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Speaker 2: quite simple. Well, it's simple but complicated. The Bureau of
4:14
Speaker 2: Labor Statistics, in trying to estimate where employment is in
4:19
Speaker 2: any particular month, uses what's called a birth death model
4:23
Speaker 2: for their establishment survey, basically how many companies are being
4:27
Speaker 2: formed versus how many companies are being shut down, you know,
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Speaker 2: because they're no longer in business and pretty much at
4:36
Speaker 2: turning points in the economy, that birth death model for
4:40
Speaker 2: businesses gets skewed further and so they come in with,
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Speaker 2: you know, better data after being able to look at
4:47
Speaker 2: it for a year and say, yeah, there were fewer
4:50
Speaker 2: businesses that started than we think, or more businesses that
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Speaker 2: went out of business than we thought, and so as
4:56
Speaker 2: a result, we didn't have as many jobs created as
5:00
Speaker 2: we thought there were. That's what this is designed to do.
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Speaker 3: Correct, Yeah, that's my understanding anyway.
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Speaker 2: So all of this is a fancy way of saying,
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Speaker 2: you're going to see, you know, a bunch of chatter about, hey,
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Speaker 2: the US economy added you know, x thousand fewer jobs
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Speaker 2: than we originally thought. The question is what does this mean?
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Speaker 2: And for anyone looking at the economy today, the answer
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Speaker 2: is it means nothing. And I know that that sounds weird,
5:33
Speaker 2: but it means nothing because ultimately we're looking at this
5:38
Speaker 2: from the perspective of, yes, we want better data so
5:42
Speaker 2: that when we're looking back at it, we know that,
5:45
Speaker 2: you know, it's of higher quality than it initially was.
5:49
Speaker 2: But if we have fewer jobs created in May of
5:52
Speaker 2: twenty twenty four, does that change anything about what we're
5:56
Speaker 2: experiencing today in the economy on a day to day basis.
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Speaker 3: It shouldn't.
6:02
Speaker 4: No, markets are forward looking. Expectations are forward looking by definition.
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Speaker 2: Now, if you do want to say here's one thing
6:09
Speaker 2: that it could change and and not could, but probably already.
6:13
Speaker 2: Has The FED pays attention to this stuff because they
6:16
Speaker 2: obviously are, you know, trying to be in tune with
6:19
Speaker 2: what's going on in the labor market. And if you
6:23
Speaker 2: want to make a case that this could matter, it
6:26
Speaker 2: would be okay. Could the FED extrapolate this to mean
6:30
Speaker 2: that job growth is weaker today than currently estimated because
6:34
Speaker 2: we've now had two years of significant downward revisions. Maybe,
6:39
Speaker 2: but the counter to that, and why I continue to
6:41
Speaker 2: think that this doesn't really matter for markets and and honestly,
6:45
Speaker 2: before last year, I don't think anyone even knew this
6:47
Speaker 2: existed outside of you know, a handful of people in
6:51
Speaker 2: the in the industry. The FED does not look at
6:55
Speaker 2: the number of jobs created when it is trying to
6:59
Speaker 2: determine it's It looks at the unemployment rate, which does
7:03
Speaker 2: not come from the Establishment survey. It comes from a
7:05
Speaker 2: survey of households. And so this revision to the Establishment
7:11
Speaker 2: survey doesn't actually impact the numbers that the FED looks at.
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Speaker 4: Yeah, probably not a good measure of slack in the economy,
7:22
Speaker 4: which is what the FED is interested in. The FED
7:25
Speaker 4: tries to balance economic growth. A proxy for that is
7:28
Speaker 4: the unemployment rate, A lower unemployment rate is all lseqal better,
7:33
Speaker 4: or an unemployment rate that is too low could point
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Speaker 4: to an economy that is overheating. And overheating economy tends
7:39
Speaker 4: to put upward pressure on prices. We call that rising inflation,
7:43
Speaker 4: where inflation is just the average change in prices in
7:46
Speaker 4: the economy. The unemployment rate has been historically, though displaced
7:52
Speaker 4: lightly by the vacancy to unemployed ratio that we sometimes
7:56
Speaker 4: that you and Mike and others sometimes talk about. The
8:00
Speaker 4: unemployment rate is the traditional measure of slack in the economy.
8:03
Speaker 5: It's the one that FED uses.
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Speaker 2: Now, it doesn't mean that you won't have everyone in
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Speaker 2: their grandmother looking at this and saying, oh, look at this,
8:12
Speaker 2: like it has to mean something, and this is why
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Speaker 2: the FED should cut rates more quickly, or look how
8:16
Speaker 2: weak this job grow. Everyone's going to want to talk
8:21
Speaker 2: about this, But the fact is the most recent period
8:24
Speaker 2: that this covers is, you know, not anything that is
8:29
Speaker 2: relevant today. I mean, you're talking about this is going
8:32
Speaker 2: through March of this year. You're talking about something that
8:34
Speaker 2: the data that's being modified by this. The closest we
8:38
Speaker 2: get to today is six months ago, right, So it's
8:42
Speaker 2: not something where you know, you look at this and say, og,
8:47
Speaker 2: you know, does this mean that you know the economy
8:49
Speaker 2: is different today than otherwise.
8:52
Speaker 1: No.
8:54
Speaker 2: Nvidia doesn't suddenly wake up and say, hey, there were
8:57
Speaker 2: fewer jobs created last year, so we're going to hell
9:00
Speaker 2: fewer chips today. Chipotle doesn't suddenly wake up and say, hey,
9:05
Speaker 2: there were eight hundred thousand fewer jobs added between April
9:09
Speaker 2: and twenty four in March of twenty five. We gotta
9:12
Speaker 2: lay people off. No like that. That's not how any
9:15
Speaker 2: of this works. Companies that are making sales in this
9:17
Speaker 2: environment have been making sales in this environment regardless of
9:21
Speaker 2: what the economic data shows. This is simply the BLS
9:26
Speaker 2: trying to hone in on greater accuracy for its data,
9:31
Speaker 2: and it does so with an extreme delay in this case,
9:35
Speaker 2: to try to understand the data that they're getting from
9:39
Speaker 2: businesses at a better level, just because it takes a
9:42
Speaker 2: while to actually extrapolate what's going on there.
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Speaker 4: Yeah, I mean, at best, it underscores the uncertainty in
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Speaker 4: the initial estimates. Any statistic and we use that number
9:52
Speaker 4: advisedly as statistic means you're estimating some value you don't
9:57
Speaker 4: know the true figure for, and statistics are as a result,
10:04
Speaker 4: not only accurate to within a degree of confidence, and
10:10
Speaker 4: big revisions underscore the uncertainty associated with the month to
10:13
Speaker 4: month estimates, rather than use them as political fodder.
10:18
Speaker 5: Which happens inevitably.
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Speaker 4: I get that they should be used to underscore the
10:22
Speaker 4: uncertainty in the month to month estimates. And there's uncertainty
10:25
Speaker 4: with respect to inflation and other variables that the federal
10:28
Speaker 4: government tries to get a handle on too. But this
10:30
Speaker 4: is especially true of the payrolls data.
10:33
Speaker 2: Let's take a quick break when we return. We just
10:36
Speaker 2: talked a little bit about, you know, some of the
10:38
Speaker 2: you know again weakness on the job side that that's
10:41
Speaker 2: going to be talked about. But when we come back,
10:43
Speaker 2: we got a piece from the Financial Times. It's titled
10:45
Speaker 2: why the Fed should not cut rates. Now we'll discuss
10:49
Speaker 2: that when we return.
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11:58
Speaker 2: Peace in the Financial Times is titled why the Fed
12:02
Speaker 2: should not cut rates now? And the case for cutting
12:06
Speaker 2: rates is pretty straightforward. I think the labor market is
12:12
Speaker 2: pretty stagnant at the moment, and the unemployment rate now
12:16
Speaker 2: in the last couple months has ticked up from four
12:17
Speaker 2: point one to four point three percent. And so if
12:21
Speaker 2: you believe that when unemployment moves, it tends to move nonlinearly,
12:26
Speaker 2: that is, it tends to accelerate upward, not move at
12:29
Speaker 2: a constant pace, then the best thing to do is
12:32
Speaker 2: to typically start to react sharply or strongly simply because
12:39
Speaker 2: it takes a while for monetary policy to potentially have
12:42
Speaker 2: any impact on the overall economy. What does this piece
12:48
Speaker 2: lay out as the case for not cutting interest rates today?
12:52
Speaker 4: Well, Sharma, who I like in this case, makes an
12:56
Speaker 4: argument that financial conditions, which we talk about a lot,
13:00
Speaker 4: and there are some nice measures that aggregate the state
13:04
Speaker 4: of capital markets the state of lending markets. They ask
13:07
Speaker 4: loan officers, are you being more or less lenient with
13:12
Speaker 4: potential borrowers and all other types of variables.
13:16
Speaker 3: If you bundle all.
13:18
Speaker 4: These together and look at them as overall financial conditions,
13:21
Speaker 4: which the Chicago Fed does.
13:23
Speaker 5: You can google it.
13:23
Speaker 4: They have a national Financial Conditions Index and you'll see
13:27
Speaker 4: if you do that, financial conditions are as loose as
13:29
Speaker 4: they've been at any time this cycle since twenty twenty one.
13:34
Speaker 4: So Sharma's main argument, as far as I can tell,
13:36
Speaker 4: hinges on loose financial conditions and shorthand for that is
13:41
Speaker 4: simply stocks are at an all time high, interest rates
13:44
Speaker 4: are still reasonably low, nobody's having trouble getting access to capital.
13:51
Speaker 4: Argue the way the Fed works on the well, go ahead,
13:54
Speaker 4: let me stop there, and that says argument, I don't
13:56
Speaker 4: want to talk.
13:56
Speaker 5: I don't want to go on for too much.
13:57
Speaker 3: It's not an attractive quality.
13:59
Speaker 4: So that's his argument in a nutshell, it's it's a
14:03
Speaker 4: flawed argument though he's not looking at other.
14:05
Speaker 2: Talk to me about why it's flawed.
14:06
Speaker 3: Yeah, well, I find nobody.
14:07
Speaker 4: FED doesn't look for The FED does look at financial conditions,
14:10
Speaker 4: but none of their models incorporate a variable for financial conditions.
14:14
Speaker 3: They look at rising.
14:17
Speaker 4: Grow I was gonna say rising unemployment, but the rise
14:21
Speaker 4: of unemployment over the past several months has been modest,
14:23
Speaker 4: And you could make an argument that it's structural. We're
14:25
Speaker 4: shrinking the labor supply, we're making it harder because of
14:29
Speaker 4: immigration policy, and you could say this is a good thing.
14:30
Speaker 4: By the way, I'm not making a political argument. I'm
14:32
Speaker 4: just making economic sort of factual.
14:34
Speaker 2: If I get fewer people in the workforce, it's going
14:37
Speaker 2: to be tighter.
14:37
Speaker 4: We're making it harder to match workers with jobs. Sure,
14:41
Speaker 4: friction is growing. That would increase the so called natural
14:44
Speaker 4: rate of unemployment, which is the rate above which inflation
14:47
Speaker 4: comes down below. It's theoretical, but you know it should exist,
14:51
Speaker 4: and the.
14:52
Speaker 2: Reason why is simple. Like let's say that, as an example,
14:54
Speaker 2: you are running a you're a subcontractor that does drywall,
14:59
Speaker 2: just as an exact, and you need five workers a day,
15:03
Speaker 2: and you'd show up to home depot and you'd say, okay,
15:07
Speaker 2: you know I need five of you to come with me.
15:08
Speaker 2: I'm paying you, guess twenty bucks an hour for the day.
15:10
Speaker 2: Come on, let's go. If there previously were ten people
15:13
Speaker 2: there and you know five would take it. Now there
15:16
Speaker 2: are seven people there and four taken, and say well, okay,
15:20
Speaker 2: last one, look, I'll give you twenty five bucks if
15:22
Speaker 2: you come with me for the day. That's effectively what
15:25
Speaker 2: we're talking example.
15:25
Speaker 4: That's a great example of why the natural rates, so
15:28
Speaker 4: to speak, might be rising. Maybe the right natural rate
15:31
Speaker 4: now is. And this is the way monetary folks that
15:35
Speaker 4: you know, economists think about this, not necessarily the way
15:38
Speaker 4: financial journalists do. So the way I'm framing it might
15:40
Speaker 4: sound weird, but I'm.
15:42
Speaker 3: Doing it this way for a reason.
15:43
Speaker 4: So suppose the natural rate where what four point three
15:46
Speaker 4: is of last week, yes, in the rate of unemployment.
15:48
Speaker 4: Suppose it's ticked up to the estimate prior to all
15:51
Speaker 4: this new immigration policy was like four point one four
15:54
Speaker 4: point two.
15:55
Speaker 3: Suppose it's s ticked up to five.
15:56
Speaker 4: So anything below five will put up with pressure on
15:58
Speaker 4: prices without helping the the real economy in a way
16:02
Speaker 4: that we can all relate to and benefit from. So
16:05
Speaker 4: this is the pickle that the FED is in. So
16:07
Speaker 4: the argument Sharma makes here is I think the right one,
16:11
Speaker 4: which is, beware we the FED might be misreading signs
16:15
Speaker 4: of labor market weakness. They might actually be pointing to
16:18
Speaker 4: structural problems which the FED can't do anything about. He
16:22
Speaker 4: rather emphasizes financial conditions, which I get. But that's not
16:25
Speaker 4: the way the FED thinks about the world. It's certainly not.
16:28
Speaker 4: It's certainly not what's what's what they're attentive too.
16:31
Speaker 2: Right now, as I've said before, any efforts by j.
16:34
Speaker 2: Powell to increase the labor force are strictly on his
16:38
Speaker 2: personal time. It is not something that he can do
16:42
Speaker 2: like it. It's not something that is part of his
16:44
Speaker 2: efficient hobb duties.
16:47
Speaker 4: So right, and can we could you explain should we
16:49
Speaker 4: explain why? Like what the FED can do and what
16:51
Speaker 4: it can't do?
16:51
Speaker 2: Or you want to here, here's the example that I
16:53
Speaker 2: love to give it. It's short and simple. Let's say
16:56
Speaker 2: that you have an economy that has one hundred people
16:58
Speaker 2: in it, and ninety six of them are employed, and
17:00
Speaker 2: so you've got a four percent unemployment rate. If all
17:04
Speaker 2: of a sudden, you have one person come into the
17:10
Speaker 2: country and they gain a job, and you still have
17:15
Speaker 2: a four percent unemployment rate, do you look at that
17:18
Speaker 2: and say that that is meaningfully worse or better than
17:21
Speaker 2: if one of the people with a job leaves and
17:24
Speaker 2: now you've got ninety five people employed out of ninety nine,
17:28
Speaker 2: which one of those. What does the FED do in
17:31
Speaker 2: those different situations. The answer is they don't do anything
17:35
Speaker 2: differently because the FED is not controlling the size of
17:39
Speaker 2: the workforce. That's not something that they can control. And
17:43
Speaker 2: so if the population is growing versus shrinking for that
17:48
Speaker 2: working age population, that's not what the FED pays attention
17:52
Speaker 2: to because they can't impact that. So that this is
17:55
Speaker 2: why the FED looks at the unemployment rate is because ultimately,
18:00
Speaker 2: if that person comes into the country and can't get
18:03
Speaker 2: a job in the unemployment rate goes from four to five,
18:06
Speaker 2: then they say, Okay, now there's too much slack here. Yes,
18:08
Speaker 2: we need to cut rates because the unemployment rate went up.
18:12
Speaker 2: On the other hand, if a person leaves the country
18:16
Speaker 2: and someone else who's you know in the country gets
18:18
Speaker 2: a job and now you've got ninety six out of
18:19
Speaker 2: ninety nine people employed. The FED may say, hey, you
18:22
Speaker 2: know what that might result in, you know, too much demand,
18:25
Speaker 2: and so that could result in, you know, too much
18:28
Speaker 2: upward pressure on prices. We've got a hike interest rates there.
18:31
Speaker 3: Yeah.
18:31
Speaker 4: The Fed can only influence demand.
18:33
Speaker 2: Correct, They can't influence labor supply. You know, cutting interest
18:39
Speaker 2: rates or raising interest rates does not get more or
18:42
Speaker 2: less fewer workers into the workforce. It doesn't. The FED
18:47
Speaker 2: can't print workers.
18:49
Speaker 5: Yeah.
18:50
Speaker 4: Yeah, So if there's not a big demand deficiency right now,
18:53
Speaker 4: and the real time GDP, the so called NowCast don't
18:56
Speaker 4: suggest that there is, h is the FED doing something
19:02
Speaker 4: that's likely to be ineffectual or worse, exacerbate an elevated
19:07
Speaker 4: underlying inflation problem.
19:09
Speaker 2: So this is why, ultimately I think that you could
19:13
Speaker 2: still have a there's a really convincing case for the
19:15
Speaker 2: Fed should cut right now, which is the labor market
19:19
Speaker 2: appears to be weakening, and when it usually does, it
19:21
Speaker 2: tends to not move linearly. Counter to that is that
19:25
Speaker 2: core inflation still running three to three and a quarter percent,
19:28
Speaker 2: and that's a little bit hot. Let's take a quick break.
19:31
Speaker 2: When we returns Wall Street Watch, Like us.
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19:45
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19:54
Speaker 1: a complete look at what's moving markets so far today
19:57
Speaker 1: right here on the Financial Exchange Radio Network.
20:04
Speaker 6: All markets are a mixed territory to begin the week
20:06
Speaker 6: as investors a way more inflation than jobs data duout
20:10
Speaker 6: this week ahead of the FEDS meeting next week. The
20:13
Speaker 6: size of the likely ray cut, however, is the big
20:17
Speaker 6: question that remains on Wall Street right now. The Dow
20:21
Speaker 6: is down by only nineteen points, so pretty much flat.
20:25
Speaker 6: SMP five hundred is up a quarter of a percent
20:28
Speaker 6: or seventeen points higher, and NASDAC up by seven tenths
20:33
Speaker 6: of one percent, or one hundred and sixty five points higher.
20:36
Speaker 6: Russell two thousand is off four tenths of one percent.
20:38
Speaker 6: Ten year treasure yield down three basis points at four
20:42
Speaker 6: point zero five three percent, and crude oil is up
20:46
Speaker 6: over half a percent today, trading at sixty two dollars
20:50
Speaker 6: and twenty one cents a barrel. Robinhood and app Lovin
20:54
Speaker 6: are set to join the SMP five hundred on September
20:58
Speaker 6: twenty second. That news came out on Friday of last week.
21:02
Speaker 6: Robinherd is surging nearly fifteen percent, while app Love and
21:06
Speaker 6: shares is also seeing a nice game today of about
21:09
Speaker 6: eleven percent on that news. Meanwhile, the Wall Street Journal
21:13
Speaker 6: reported that PNC Financial Services agreed to buy privately held
21:18
Speaker 6: First Bank in a four point one billion dollar deal.
21:21
Speaker 6: PNC shares or pulling back by one percent. Elsewhere, Summit
21:25
Speaker 6: Therapeutic stock is sinking eighteen percent after the biopharmaceutical company's
21:31
Speaker 6: results from a Phase three trial forwards lung cancer drug
21:35
Speaker 6: showed fewer improvements in patients. Tesla stock seeing another modest
21:40
Speaker 6: game today, falling news from late last week that the
21:43
Speaker 6: ev maker's board proposed a near one trillion dollar pay
21:46
Speaker 6: package for CEO Elon Musk. Outside of Tesla, Musk's SpaceX
21:52
Speaker 6: agreed to pay seventeen billion dollars for the rights to
21:55
Speaker 6: some of EchoStar's wireless spectrum. EchoStar shares are seventeen percent,
22:01
Speaker 6: while AT and T Verizon and T Mobile are down
22:05
Speaker 6: over two percent on that news, and Chewy received an
22:08
Speaker 6: upgrade from Missouo, where the bank anticipates strong results in
22:13
Speaker 6: Ray's guidance. When the pet supplies e commerce retailer reports
22:16
Speaker 6: their quarterly results on Wednesday, Chewy shares are down just
22:20
Speaker 6: over half a percent.
22:21
Speaker 5: Today.
22:22
Speaker 6: I'm Tucker Silva and that is Wallstree watch.
22:26
Speaker 3: Mark.
22:26
Speaker 2: I want to talk a little bit about this piece
22:28
Speaker 2: in Bloomberg Opinion. It's titled Besson's FED critique misses the
22:32
Speaker 2: big picture. And Beson's not alone in saying, hey, look,
22:37
Speaker 2: the FED has, you know, created some problems with its policy.
22:42
Speaker 2: But what specifically does Besson talk about when it comes to,
22:47
Speaker 2: you know, kind of how he is calling out the FED?
22:50
Speaker 2: And do you believe that he is accurate or inaccurate
22:54
Speaker 2: when talking about what he sees from the FED.
22:58
Speaker 4: I sympathize with a lot of the critique coming from
23:02
Speaker 4: I'll just call it the right, those who are on
23:05
Speaker 4: the right politically, because I think I'm among them.
23:08
Speaker 3: The FED has been.
23:10
Speaker 4: The FEDS changed its policy framework over the last few years.
23:15
Speaker 4: The twenty twenty change was a big one. It shifted
23:18
Speaker 4: the emphasis from unemployment and inflation. It actually reversed the
23:22
Speaker 4: order of those two prior to that. The re order
23:25
Speaker 4: was in the reverse of what I just said prior
23:26
Speaker 4: to that, excuse me, it shifted the emphasis in some
23:29
Speaker 4: way subtle, in some ways meaningful in terms of the
23:32
Speaker 4: mechanics of the way it conducts monetary policy to unemployment
23:36
Speaker 4: over inflation. Besen didn't spend a lot of time on that,
23:39
Speaker 4: but I will because I think that's the biggest chink
23:42
Speaker 4: in the Fed's arm or over the past few years.
23:44
Speaker 4: Too much emphasis on employment something sort of wokish like
23:48
Speaker 4: and I hate that word, but you know it in
23:49
Speaker 4: politically correct like inclusive employment, whatever the heck that means.
23:54
Speaker 4: Giving inflation secondary status turned out to be a very
23:59
Speaker 4: consequent error. Their timing could have been better to not
24:03
Speaker 4: their fault, go ahead, Sorry.
24:04
Speaker 2: Do you think that this was largely due to the
24:11
Speaker 2: fact that if you look at the twenty tens, oh sure, yeah, yeah,
24:17
Speaker 2: despite all of the concern about hey, you know, there
24:20
Speaker 2: was all this you know, money printing in this and that,
24:22
Speaker 2: inflation never really perked up in the twenty tens. Yeah,
24:25
Speaker 2: and so they just viewed it as kind of a
24:27
Speaker 2: dead issue. Yes, And then because of the massive amount
24:33
Speaker 2: of fiscal stimulus that was pushed into the economy in
24:36
Speaker 2: twenty twenty and early twenty one, they found themselves behind
24:42
Speaker 2: the eight ball, and that policy change just like happened
24:46
Speaker 2: to come at the exact wrong time because the fiscal
24:49
Speaker 2: framework completely changed from what it was previously and disrupted
24:52
Speaker 2: the whole thing.
24:53
Speaker 4: Yeah, they were responding to inflation that was too low,
24:56
Speaker 4: to expectations that were well anchored. The problem were very
25:00
Speaker 4: different in twenty twenty than they are today. They were
25:02
Speaker 4: good problems to have in some sense. The FED could
25:04
Speaker 4: be reckless and not jeopardize state and not not jeopardize
25:08
Speaker 4: the stability of inflation expectations. We have the opposite problem today.
25:11
Speaker 4: So some of Besson's critiques I think are well founded
25:15
Speaker 4: and should be particularly and I forget whether he said
25:19
Speaker 4: it in his Wall Street Journal editorial or he has
25:22
Speaker 4: set it in others of his ill could set it previously.
25:25
Speaker 4: The FED needs to get back to emphasizing price stability
25:27
Speaker 4: full stop.
25:28
Speaker 3: Now.
25:29
Speaker 4: Part of that is on Congress. They need to change
25:30
Speaker 4: Humphrey Hawkins. They need to h They need to legislate
25:34
Speaker 4: price stability, maybe even an inflation target.
25:37
Speaker 2: Part of it is you can't just say something like
25:39
Speaker 2: that and then not explain what it means. Oh okay,
25:41
Speaker 2: because I don't think any one listening still under.
25:45
Speaker 4: You and Mike talk about this a lot, the FED
25:48
Speaker 4: having a so called dual mandate. It's actually a three
25:50
Speaker 4: part mandate, but one of the parts is subsumed by
25:54
Speaker 4: one of the others, so that the FED has a
25:57
Speaker 4: two part mandate for all intents and purposes, price stability,
26:00
Speaker 4: keep inflation low and stable, is how that's been interpreted.
26:02
Speaker 4: Bernank operationalized that by saying it's going to be two percent.
26:06
Speaker 4: Possibly a mistake, but that's the world we live in.
26:09
Speaker 4: The other is, of course, maximum employment, which has been
26:13
Speaker 4: read up until twenty twenty. Anyway, in the change in
26:16
Speaker 4: the policy framework, is employment consistent.
26:18
Speaker 5: With price stability.
26:20
Speaker 4: So inflation, particularly after the experience of the nineteen eighties,
26:23
Speaker 4: was always weighted more heavily. And I think I'm going
26:26
Speaker 4: to charitably interpret besence critique because he's echoing critiques made
26:30
Speaker 4: by others, guys like Rand Paul and before him his
26:33
Speaker 4: dad Ron Paul, which I'm sympathetic with, So I'm gonna
26:35
Speaker 4: paint them in a favorable light. FED needs to focus
26:37
Speaker 4: on price stability, period forget about all these ancillary goals
26:41
Speaker 4: FED is you talked about in the last segment. FED
26:43
Speaker 4: can't do anything about this labor supply or the weather
26:48
Speaker 4: or inequality. Probably some would argue with that, but I
26:51
Speaker 4: would argue that it's dangerous once you start getting going
26:55
Speaker 4: down that path.
26:56
Speaker 3: So I'm gonna interpret.
26:57
Speaker 4: Besson's critique as charitably as possible and say, this guy's
27:00
Speaker 4: got a point. Congress should let May control Congress, so
27:03
Speaker 4: they should take advantage of that Act on it. The
27:05
Speaker 4: President should sign something that makes the FEDS do what.
27:08
Speaker 3: Okay, so do what?
27:09
Speaker 4: Specifically, revise the nineteen seventy seven to seventy eight law
27:14
Speaker 4: that ensrying the dual mandate in legislation, change the Fed's
27:18
Speaker 4: focus to make it solely on price stability and controlling
27:21
Speaker 4: inflation expectations. I, for what it is worth, agree with
27:25
Speaker 4: those who say strip out the maximum employment mandate. It's
27:28
Speaker 4: what gets the FED into trouble. It's what got them
27:30
Speaker 4: into trouble in twenty twenty twenty twenty one, they decided
27:33
Speaker 4: to let the economy as you said in the last segment,
27:34
Speaker 4: although you weren't referring to this period, but they appear
27:37
Speaker 4: to be doing it again. It causes them to get
27:39
Speaker 4: the economy to run hot because they think they can
27:40
Speaker 4: do something about a supply problem when their tools just
27:44
Speaker 4: don't enable them to. So I think Congress could and
27:47
Speaker 4: just following the footsteps of Ron and Ran Paul. Here again,
27:49
Speaker 4: this is me the ideologue, not me the analyst talking.
27:52
Speaker 4: But by constraining the Fed's mandate, you prevent it from
27:55
Speaker 4: getting into trouble and better help. I think keep inflation
27:57
Speaker 4: expectations under control is how I interpret besense critique.
28:02
Speaker 2: When you look at some of the items that are
28:07
Speaker 2: in here. The one place that I always kind of
28:10
Speaker 2: run into problems with the criticism of the FED is
28:13
Speaker 2: it always seems to be like, damned if you do,
28:15
Speaker 2: damned if you don't. In that for the entire twenty
28:19
Speaker 2: ten decade, all I heard over and over and over
28:24
Speaker 2: was the FED is keeping interest rates artificially low, and
28:29
Speaker 2: it's propping up home prices, and it's preventing Americans from
28:32
Speaker 2: buying homes and Americans can't get anything on their savings. Correct.
28:38
Speaker 5: Yeah, that was a pretty common critique.
28:40
Speaker 2: And now all I hear is the Fed's keeping interest
28:43
Speaker 2: rates artificially high, and because of those high interest rates,
28:46
Speaker 2: Americans can't buy homes. Well, it can't be that the
28:50
Speaker 2: FED is keeping rates both too low and too high,
28:54
Speaker 2: like what's the right rate of interest? And this is
28:58
Speaker 2: the problem that I get to with a lot of
29:00
Speaker 2: these FED critiques is it's based on the fact that
29:05
Speaker 2: maybe this maybe gets it what you're saying. Maybe the
29:09
Speaker 2: problem isn't the FED when it comes to these things.
29:12
Speaker 2: Maybe it's broader policy, either on a national level or
29:17
Speaker 2: at a local level, that is preventing homeownership from being affordable. Yes, yes, yes,
29:23
Speaker 2: And we need to move past just trying to blame
29:26
Speaker 2: the FED. And this is kind of what I get
29:28
Speaker 2: at a lot is people want to blame the FED
29:31
Speaker 2: for what their own city council has done to home prices.
29:34
Speaker 4: Locally, eliminating the dual one prong of the dual mandate
29:40
Speaker 4: to mix metaphors a little bit would achieve that it's
29:43
Speaker 4: probably not going to happen because it's convenient for politicians
29:46
Speaker 4: to shift blame or to assign blame. Sometimes you can't
29:50
Speaker 4: do anything about a recession. It's the way the economy
29:52
Speaker 4: naturally realigns in response to changes in technology and their
29:56
Speaker 4: effect on productivity, and you get this frictional structural sometimes
30:01
Speaker 4: unemployment when industry when when when industries EBB and flow
30:04
Speaker 4: in terms of dominance. The FED can't do can do
30:07
Speaker 4: very little about that. The federal government could cushion a blow,
30:11
Speaker 4: but it's a way for politicians to shift blame, so
30:13
Speaker 4: to me doing what the ECB does. By the way,
30:15
Speaker 4: this is not some radical policy. There are plenty of
30:17
Speaker 4: central banks around the world that don't have a so
30:19
Speaker 4: called dual mandate. Allowing them to focus just on price
30:23
Speaker 4: stability would make it easier to set and anchor inflation
30:26
Speaker 4: expectations and maybe shift the responsibility for some of these
30:30
Speaker 4: other things that, as we've talked about, the FED can't do,
30:34
Speaker 4: back to the bodies that can accomplish them, like Congress.
30:39
Speaker 2: Let me ask you the counterpoint to that, and then
30:42
Speaker 2: we're going to take a quick break and answer it
30:43
Speaker 2: on the back end. Is there a convincing case that
30:48
Speaker 2: responsibility for price stability should instead lie with Congress. Let's
30:53
Speaker 2: take a quick break and discuss that when we return.
30:56
Speaker 1: Text does six one seven, three, six two one three
30:59
Speaker 1: eight five with your comments and questions about today's show.
31:02
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31:27
Speaker 2: In the last segment, as we're winding things down there,
31:31
Speaker 2: Mark said, look, one of the things that Congress should
31:33
Speaker 2: look to do is to take back control of one
31:36
Speaker 2: side of the Fed's dual mandate and remove the unemployment
31:41
Speaker 2: piece from the puzzle. So the FED is just targeting
31:44
Speaker 2: price stability. And I responded with, you know, kind of
31:48
Speaker 2: a smart ass response, but you know, also a smart
31:51
Speaker 2: response because you can't smell, you can't spell smart ass
31:54
Speaker 2: without smart Hey, what if the FED, I'm sorry, what
31:58
Speaker 2: if Congress decided to take control over the price stability
32:03
Speaker 2: mandate instead? And look, the obvious answer is they probably
32:08
Speaker 2: can't do either of these because no one ever wants
32:11
Speaker 2: to do any bad things when they're in Congress. It's
32:15
Speaker 2: just not a responsible institution at this point. Yeah, if
32:19
Speaker 2: we're being honest. But I'll make the point that, hey,
32:24
Speaker 2: if Congress effectively said, you know what, we generally can
32:33
Speaker 2: more directly influence the amount of aggregate demand in the
32:38
Speaker 2: system that impacts you know, price stability through policies that
32:43
Speaker 2: we pass, maybe we should be responsible and try to
32:47
Speaker 2: you know, handle that side of the equation instead. And
32:52
Speaker 2: the case I'll make is the inflation that we saw
32:56
Speaker 2: in twenty one and twenty two does not happen without
33:01
Speaker 2: Congress passing a bunch of fiscal Is that a fair statement.
33:05
Speaker 4: Some would disagree with that, but I think most think
33:07
Speaker 4: that monetary and fiscal factors and supply shocks contributed.
33:11
Speaker 2: The supply shocks obviously would be there. The monetary side
33:15
Speaker 2: wouldn't have necessarily been the problem if it weren't for
33:18
Speaker 2: the fiscal side being so out of whack.
33:22
Speaker 4: Well, they accommodated the supply shocks.
33:23
Speaker 5: The FED didn't. By that, I mean they didn't push
33:25
Speaker 5: against them. Look, I don't want to split hairs.
33:28
Speaker 3: Yeah, go ahead, I'm with you so far.
33:30
Speaker 2: So part of me wonders, Look, in an ideal world,
33:32
Speaker 2: could you have Congress, you know, adjusting its policy there.
33:36
Speaker 2: But the problem is, as I said, I don't think
33:38
Speaker 2: Congress is a responsible institution at this point to be
33:41
Speaker 2: able to react as needed when those things come up.
33:45
Speaker 2: And the evidence of that is there's a reason why
33:48
Speaker 2: the deficit is moving only in one direction in the
33:50
Speaker 2: last twenty five years, and that's up.
33:52
Speaker 4: And there's a reason why we are where we are today.
33:53
Speaker 4: If you read an economics textbook that was written in
33:55
Speaker 4: the seventies or eighties, it would have touted fiscal policy.
33:57
Speaker 5: People all, remember this.
33:58
Speaker 4: You stimulate agreg get the mead, Congress passes a tax cut.
34:01
Speaker 4: How do we get to the point where monetary policy
34:03
Speaker 4: is the key output stabilization tool. Well, people realize that
34:06
Speaker 4: there are so called inside and outside lags associated with
34:09
Speaker 4: fiscal policy. Inside lag being amount of time it gets
34:11
Speaker 4: the bill to pass, requires is required to build a pass.
34:14
Speaker 4: Pardon me for he's talking so fast, but this is
34:16
Speaker 4: I'm gonna get it all in here. Outside lag is
34:18
Speaker 4: the amount of time it takes for whatever the fiscal
34:20
Speaker 4: policy makers did to affect the real economy that takes
34:22
Speaker 4: too long. Monetary policy can act on a dime and
34:25
Speaker 4: it can stimulate the economy quickly. They could do a
34:27
Speaker 4: helicopter drop, as Milton Friedman joked, of money into the economy.
34:30
Speaker 4: So that's how we got to monetary policy being the
34:33
Speaker 4: key counter cyclical, a recession mitigating tool.
34:41
Speaker 2: Do you think they would ever use actual helicopters.
34:46
Speaker 4: If the stunt, you know, worked from a pr point
34:49
Speaker 4: of view, somebody might as it.
34:50
Speaker 2: Feels like we might get there eventually. Yeah, right, Like
34:53
Speaker 2: you want to make the FED more popular? Put j
34:57
Speaker 2: up there in a purple tide dropping dollars down.
35:00
Speaker 3: Yeah, there was saying this is good.
35:01
Speaker 4: I'm just saying like when they started with QE and
35:04
Speaker 4: eight oh nine, an investment manager, well known one, was
35:07
Speaker 4: giving away ties at Christmas of Bernanky in a helicopter.
35:11
Speaker 4: It was a little hard to get the thing on
35:13
Speaker 4: a tome. You get one, I've got like three of them.
35:15
Speaker 4: You do Bernanke helicopter draw not ties. Yeah, I tried to.
35:18
Speaker 5: Sell the money bay. There wasn't much of an audience.
35:20
Speaker 2: You should drop those from a helicopter and see what happens.
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36:29
Speaker 2: Trash complaints in Boston last week quadrupled from their norm.
36:36
Speaker 2: On an average day in twenty twenty five, Bostonians submitted
36:39
Speaker 2: fifty six complaints about improper storage of trash to the
36:46
Speaker 2: city's Public Works Department, But from September one to September third,
36:51
Speaker 2: that jumped to more than two hundred per day. And
36:53
Speaker 2: this is what happens every year. Because Boston's a big
36:56
Speaker 2: college town. Lisa's run September through August, and so you
37:00
Speaker 2: get a bunch of moving that happens on or around there.
37:03
Speaker 2: And because it's a bunch of college students who don't
37:06
Speaker 2: necessarily have cars. You get them basically just throwing their
37:09
Speaker 2: junk out on the street, and people complain about, you know,
37:12
Speaker 2: the volume of junk that is out there. I can
37:16
Speaker 2: sympathize with both sides of the equation here. On one hand,
37:22
Speaker 2: if you live in the city of Boston, you don't
37:24
Speaker 2: want to just be walking by giant piles of furniture
37:26
Speaker 2: and stuff. Like they talked about someone throw a cat
37:29
Speaker 2: tower out and they were like a couple of cats
37:31
Speaker 2: that had moved into the cat tower out on the
37:33
Speaker 2: street just because they were like, Oh, this sounds you know, cozy.
37:36
Speaker 2: So I can understand like the problem there. On the
37:39
Speaker 2: other hand, I don't really know what you want people
37:44
Speaker 2: to do, Like this is kind of how cities tend
37:46
Speaker 2: to work. Your trash goes out on the sidewalk and
37:50
Speaker 2: waits for the trash people to come through, and so
37:56
Speaker 2: I don't know, do you like find a way to increase,
37:58
Speaker 2: you know, pick up volume during that time. I don't
38:03
Speaker 2: know where you just keep these like backup trash, you know,
38:06
Speaker 2: garbage men on on on duty the rest of the year.
38:08
Speaker 2: But I don't know what the answer is to this.
38:11
Speaker 2: Wood chippers just give everybody woodchippers. Problem solved in the units.
38:16
Speaker 2: Yes we got mulch. What a great thing. Let's take
38:20
Speaker 2: a quick break when we come back. Our two in
38:22
Speaker 2: just a bit