Latest / Stephanomics / Why the Fed Must Move Fast to Tame Inflation

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Why the Fed Must Move Fast to Tame Inflation · Stephanomics

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  Speaker 1: R S. First, though, I wanted to play you part
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  Speaker 1: of a webinar we held this week featuring the latest
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  Speaker 1: insights on the road ahead for the US economy, China,
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  Speaker 1: and the US Central Bank, featuring some of the brightest
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  Speaker 1: minds of Bloomberg Economics. It started naturally enough with a
• 0:55
  Speaker 1: great introduction by me. There does seem to be an
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  Speaker 1: unusually wide gap right now between where we are and
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  Speaker 1: where economists expect us to end up in a year
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  Speaker 1: or two time. I mean, the leading assumption when you
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  Speaker 1: look at the forecast for twenty three or four is
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  Speaker 1: that we're kind of heading back to normal in the
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  Speaker 1: global economy by by that time, probably by midy three.
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  Speaker 1: And that's fine, that's a traditional assumption that economists makes,
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  Speaker 1: sort of reversion to the mean. But you look around
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  Speaker 1: you and you think, wow, we're an awfully long way
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  Speaker 1: away from normal right now. You know, we've got a
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  Speaker 1: large chunk of the workforce isolating at home, maybe due
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  Speaker 1: to omicron. We have energy bills soaring in large parts
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  Speaker 1: of Europe, and for many American households, millions of workers
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  Speaker 1: missing from the labor market supply chain, still in a
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  Speaker 1: in a very troubled state. I mean, it all seems
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  Speaker 1: very out of whack. So, although it's probably always the
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  Speaker 1: case that economists are better at telling you where you're
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  Speaker 1: going to end up than how you're going to get there,
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  Speaker 1: I think this year that path from a to be
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  Speaker 1: from now to normal seems particularly hazardous and uncertain, and
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  Speaker 1: I think the potential role of central banks in that
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  Speaker 1: also feels particularly challenging. So I'm especially glad that we're
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  Speaker 1: focusing today on the downside and upside risks that we're
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  Speaker 1: seeing in the global economy. Um, and I'm also very
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  Speaker 1: glad that we're going to spend a bit of extra
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  Speaker 1: time talking about how the US Central Bank is positioned
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  Speaker 1: for this year with one of the former leaders of
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  Speaker 1: the Federal Reserve, the former Federals New York Federals President
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  Speaker 1: Bill Dudley. So that's all to come, but first I
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  Speaker 1: think we should set the scene with our chief US Economist,
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  Speaker 1: Anna Wall and how things looking, Thank you, Stephanie. So
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  Speaker 1: a big question heading into this year for US is
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  Speaker 1: when will the Fed begin to raise rates? And a
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  Speaker 1: March rate hike had looked uncertain when we were just
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  Speaker 1: entering into this year because omicron has swept through the
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  Speaker 1: US like wildfire and cost widespread workers absentaism. There were
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  Speaker 1: lots of anecdotes of temporary business closures. So we developed
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  Speaker 1: a daily GDP tracker to allow us to better track
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  Speaker 1: the disruption of Omicron, and it had pointed to a
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  Speaker 1: big plunge in activity in the first week of this year,
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  Speaker 1: and using this daily activity index as a tool, we
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  Speaker 1: forecast out what GDP would look like at the end
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  Speaker 1: of the quarter, and the model forecast the recovery would
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  Speaker 1: be in full swing by March and in a reassuring sign, indeed,
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  Speaker 1: our daily trecker is already showing signs of improvement in
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  Speaker 1: the second week of this year, So this is why
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  Speaker 1: we now believe that a March rate hike is in
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  Speaker 1: the cards. So then the next question is how many
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  Speaker 1: hikes will there be this year, and the FED future
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  Speaker 1: market currently expect four hikes, but that forecast is contingent
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  Speaker 1: on inflation and unemployment rate evolving as we have written down,
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  Speaker 1: and our baseline currently is for inflation to peak in
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  Speaker 1: February at seven point two and thereafter we expect it
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  Speaker 1: will slow to an average of three. In the labor market,
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  Speaker 1: we expect it to continue to show signs of being
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  Speaker 1: very tight. Wage growth is now at the highest in
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  Speaker 1: the early nineties. There's one point six open jobs for
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  Speaker 1: every unemployed person out there UM, and we project unemployment
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  Speaker 1: rate to fall to three point five percent or lower
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  Speaker 1: by the end of the second quarter. But let me
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  Speaker 1: emphasize that our forecast for the inflation is subject to
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  Speaker 1: a lot of uncertainty, and we see two non trivial
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  Speaker 1: risks in the near term that could push it much higher.
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  Speaker 1: So first, um, with China hosting the Winter Olympics in
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  Speaker 1: early February and for the s time really open its
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  Speaker 1: borders to international visitors, there could be a risk that
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  Speaker 1: Amochron will infiltrate into China and with their zero COVID policy,
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  Speaker 1: this could um disrupt the production there and re intensify
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  Speaker 1: supply chains. And the second risk is that there is
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  Speaker 1: a risk of port strikes in June of this year
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  Speaker 1: and the along the ports along the West Coast in
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  Speaker 1: US as the contract expires between the port workers longshoremen
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  Speaker 1: and the ports. So overall we think that the risk
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  Speaker 1: are on the upside for more hikes in store than
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  Speaker 1: what the market currently expects. But for this year and
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  Speaker 1: next year, thank you, Anna, there's a lot there. But
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  Speaker 1: I'm interested in what you said about wage growth picking
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  Speaker 1: up and also the potential for us to hear from
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  Speaker 1: from some union activity or at least in the sort
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  Speaker 1: of crucial deal at the ports. And I think power
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  Speaker 1: workers have also got potentially a dispute coming down the track.
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  Speaker 1: I mean, are we are we going to see a
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  Speaker 1: very different kind of US labor market this year than
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  Speaker 1: we've seen in recent years? Or is this with more
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  Speaker 1: with workers actually um able to extract real wage increases,
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  Speaker 1: or is this really just about trying to catch up
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  Speaker 1: with with the very high level of inflation. I think
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  Speaker 1: that when the labor market is tight as you you're
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  Speaker 1: we are seeing right now, as I was saying, one
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  Speaker 1: point six open jobs for every unemployed person out there.
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  Speaker 1: Just the threat of um you know, your workers quitting.
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  Speaker 1: It's that latent threat there that can cause um um
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  Speaker 1: employers to raise the wage and you know, submit to
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  Speaker 1: request of the workers. And when it comes to the
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  Speaker 1: port workers in historically, whenever there's uh where where the
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  Speaker 1: port workers are up for renegotiating their UM wages, there
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  Speaker 1: has been significant slow down in ports. It happened in,
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  Speaker 1: It happened in and at a time when these port
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  Speaker 1: workers had been asked to work twenty four hours per
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  Speaker 1: day by the by the Biden administration. I think they're
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  Speaker 1: fed up, and uh so, the likelihood of that is high.
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  Speaker 1: But but back to the you know, to to the
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  Speaker 1: your question, I do think that the labor market now
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  Speaker 1: is different than what we have seen in the last
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  Speaker 1: ten years, just because um there's just just this latent
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  Speaker 1: threat of quitting, quitting, which gives a lot of bargaining
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  Speaker 1: powers to workers. Those missing workers. We have that the
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  Speaker 1: several million workers who as far as we could tell,
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  Speaker 1: we were in jobs before COVID struck and maybe lost
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  Speaker 1: their jobs during the recession but have not gone back.
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  Speaker 1: Is there any sign of of some of those coming
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  Speaker 1: back into the picture? Yeah? So you had a estimated
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  Speaker 1: how much workers have in their bank by income destiles,
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  Speaker 1: and our expectation is that um, the workers which are
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  Speaker 1: in shortage there their savings give them enough about to
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  Speaker 1: two months of runway to cover their spending. And UM,
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  Speaker 1: we were expecting that there would be a flood of
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  Speaker 1: labor supply starting this year because of that estimate. And
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  Speaker 1: I do see signs of the labor market loosening, but
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  Speaker 1: that is right before omicron hit. Okay, so we've got
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  Speaker 1: a good picture on the state of the economy and
• 8:39
  Speaker 1: as far as we can see it, and we can
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  Speaker 1: see a bit better with those high frequency indicators. But
• 8:44
  Speaker 1: clearly there's the center of a lot of the debate,
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  Speaker 1: and certainly what financial markets are focused on is what's
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  Speaker 1: the Fed gonna do? Is it going to do too
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  Speaker 1: much or too little UM this year? Having now resolved
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  Speaker 1: to raise interest rates UM several times in two And
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  Speaker 1: it's great to have a versation with Bill Dudley about
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  Speaker 1: these things, former chief economists for Goldman Sex and former
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  Speaker 1: President of the New York Federal Reserve now a senior
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  Speaker 1: adviser to Bloomberg Economics and Bloomberg Opinion columnists. Um, Bill,
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  Speaker 1: if we just stepped back briefly, I mean, there's a
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  Speaker 1: lot to talk about. But if we think about the
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  Speaker 1: FEDS handling of the past two years of the pandemic,
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  Speaker 1: did they win the war but lose the piece? You
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  Speaker 1: have a lot of people in the peanut gallery now
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  Speaker 1: critiquing their view all through last year that inflation was
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  Speaker 1: going to be transitory. I think Muhammad al Arian has
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  Speaker 1: called it probably the worst inflation call in the history
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  Speaker 1: of the Federal Reserve, wasn't it. Well. I think they
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  Speaker 1: did a great job at the early stages of the
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  Speaker 1: pandemic in terms of their interventions to restore market function. Uh,
• 9:44
  Speaker 1: these financial conditions push into tras to zero. So I
• 9:47
  Speaker 1: give them, you know, a plus, you know, back in
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  Speaker 1: March two thousand, twenty April two thy But since then,
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  Speaker 1: I think they've made a number of errors. And some
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  Speaker 1: of the errors are related to how they implement monetary policy,
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  Speaker 1: and some the ears are just bad forecasting. On the
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  Speaker 1: monterary policy implementation side, they operationalize their two percent average
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  Speaker 1: inflation target regime by essentially tying their hands and saying
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  Speaker 1: we cannot lift off, we cannot raise short term rates
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  Speaker 1: until three conditions are satisfied. Inflation at two expected to
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  Speaker 1: be above two percent for some time in the future,
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  Speaker 1: and we've also have to achieve our estimate of maximum
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  Speaker 1: sustainable employment. So what that meant was the FED was
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  Speaker 1: gonna have policy extremely easy even as the economy reach
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  Speaker 1: full employment, so be a big gap between where the
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  Speaker 1: FED needed to be versus where the FED was completely
• 10:37
  Speaker 1: self induced er on their part. The second thing that
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  Speaker 1: was self induces they were so worried about a taper
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  Speaker 1: tantrum that they were very slow to actually taper the
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  Speaker 1: rate of asset purchases. So we've ended up in this
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  Speaker 1: odd situation today where everyone's talking about FED tightening, but
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  Speaker 1: the FED even as we speak, is still buying assets
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  Speaker 1: adding accommodation. The other two areas they made I think
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  Speaker 1: our heart heart, you know, I would give them less
• 11:01
  Speaker 1: grief about because they were forecasting errors. The first forecasting error,
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  Speaker 1: which was significant, was that the inflation shock turned out
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  Speaker 1: to be much bigger and lasted much longer than they
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  Speaker 1: were anticipating. Nobody was expecting at the beginning of two thousand,
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  Speaker 1: uh and and and twenty that we were going to
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  Speaker 1: see seven percent CPI inflation by the end of one
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  Speaker 1: and so that was a surprise to them. The supply
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  Speaker 1: chain disruption just lasted longer than they expected. The second surprise,
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  Speaker 1: and it wasn't all completely a bad surprise, is that
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  Speaker 1: the labor market tightened much faster than they expected. UH.
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  Speaker 1: As you went through and twenty the first part of FETE,
• 11:42
  Speaker 1: officials were focused on the shortfall of employment relative to
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  Speaker 1: where it was in February and pointing to the fact
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  Speaker 1: that there's still a lot of We're still a lot
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  Speaker 1: of jobs short from where we were in February. Well,
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  Speaker 1: that's still the case today. We're still three million jobs
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  Speaker 1: short of where we were in February. But that ignored
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  Speaker 1: the fact that there a lot of people that left
• 12:01
  Speaker 1: the labor forces, and pointed out the labor force participate
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  Speaker 1: participation rate did not come back like the FETE expected.
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  Speaker 1: There are retirements, There are people that didn't want to
• 12:10
  Speaker 1: work because of COVID risk. Uh there are people who
• 12:13
  Speaker 1: are still sick because of COVID long COVID and all
• 12:16
  Speaker 1: those things. They have made the labor market tighten much
• 12:18
  Speaker 1: faster than what the FETE expect. Now, be fine if
• 12:21
  Speaker 1: the labor market tighten faster than the FETE expected and
• 12:23
  Speaker 1: the FED responded by tightening Monterrey policy. But we're in
• 12:26
  Speaker 1: a situation today where the labor market is very, very
• 12:29
  Speaker 1: very tight and monetary policy is is still extraordinarily easy.
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  Speaker 1: So the Fed is late. They're trying to catch up,
• 12:35
  Speaker 1: and they'll start to catch up in March when they
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  Speaker 1: tightened at the March of Home c meeting. So what's
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  Speaker 1: the road from here? Do you think the Fed's gonna
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  Speaker 1: end up having to raise interest rates much more than
• 12:46
  Speaker 1: people currently expect. Yeah, I think they are gonna have
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  Speaker 1: to do more than people expect, because you know, if
• 12:51
  Speaker 1: you look at the Federal Reserves forecast, it's a incredibly
• 12:54
  Speaker 1: benign forecast. If you look at their forecast twenty four
• 12:58
  Speaker 1: in the Summary of Economic Projection, what they show is
• 13:01
  Speaker 1: that inflation is going to magically melt away two point
• 13:04
  Speaker 1: six this year, two point three percent next year two
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  Speaker 1: point on. The Federal funds rate is not gonna go
• 13:11
  Speaker 1: very high two point one percent by the end of
• 13:15
  Speaker 1: uh and the uneplanyer rate is gonna even even as
• 13:17
  Speaker 1: the undeployer rate is persistently below beyond full employment, So
• 13:21
  Speaker 1: it's not obvious how the FED forecast works. Why does
• 13:24
  Speaker 1: inflation fall if the economy is operating below beyond full
• 13:28
  Speaker 1: employment for three years and monetary policy never gets to
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  Speaker 1: a tight setting. So I think the FED hasn't you know,
• 13:33
  Speaker 1: they've they've been in the bullet partly in the sense
• 13:35
  Speaker 1: that they've admitted that they're behind the curve, and then
• 13:37
  Speaker 1: so they're speeding up the pace of removing monetary policy accommodation,
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  Speaker 1: but they haven't gotten to the situation place where they
• 13:44
  Speaker 1: actually recognize that they have to actually make monetary policy tight.
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  Speaker 1: And I think the last couple of weeks, our market
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  Speaker 1: is starting to come to the uh conclusion that monetary
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  Speaker 1: policy at some point the cycle is gonna have to
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  Speaker 1: be tight. It's not there yet, but we're moving in
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  Speaker 1: that direction. And just to continue that thought, I mean,
• 14:02
  Speaker 1: some are suggesting that in order to indicate that it's
• 14:05
  Speaker 1: taking inflation more seriously, the Fed could go for a
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  Speaker 1: half a percentage point increase the first time they raise
• 14:13
  Speaker 1: interest rates, rather than this very gradual path people are
• 14:17
  Speaker 1: expecting of a quarter of a percentage point each time
• 14:20
  Speaker 1: do you think that's something that they should be thinking about. Well,
• 14:23
  Speaker 1: I'm certainly certainly worth thinking about it, but I'd be
• 14:25
  Speaker 1: very surprised if they did that. I mean, this FED
• 14:27
  Speaker 1: has tried to be very predictable, you know, in terms
• 14:31
  Speaker 1: of how they communicate and how they act following their communications.
• 14:34
  Speaker 1: So you know, a fifty basis point rate hike, which
• 14:37
  Speaker 1: which certainly you know you could argue it's appropriate, would
• 14:40
  Speaker 1: be a huge shock to markets, and I think it
• 14:42
  Speaker 1: goes very much against you know, everything that Powell has
• 14:46
  Speaker 1: told us over the last eight months. I think would
• 14:49
  Speaker 1: be a huge surprise, and I'd be very surprised if
• 14:51
  Speaker 1: they actually do that. Smiling because I'm remembering I think
• 14:55
  Speaker 1: it was was it Paul Volca in the early eighties
• 14:58
  Speaker 1: who just decided on a Sunday night to raise interest
• 15:00
  Speaker 1: rates by two percentage points and to help with the
• 15:03
  Speaker 1: markets or what they were expecting. You just can't imagine
• 15:06
  Speaker 1: a FED chair doing that these days. Goodness, Stephanie on
• 15:09
  Speaker 1: that is that the markets still have quite a bit
• 15:11
  Speaker 1: of confidence in the FED. You know, if we have
• 15:14
  Speaker 1: a tight labor market, we have higher wages, but inflation
• 15:17
  Speaker 1: expectations are still pretty well anchored, and I think if
• 15:20
  Speaker 1: if inflation expectations were to become unanchored, that would be
• 15:24
  Speaker 1: a science. The markets were losing conference in the FED,
• 15:27
  Speaker 1: and that's why I think we pushed the FED into
• 15:28
  Speaker 1: having to be more aggressive. Well, Bill, we're going to
• 15:40
  Speaker 1: run out of time. But I think there is one
• 15:42
  Speaker 1: big question I was interested in your answer to you
• 15:47
  Speaker 1: have to bet that by the end of this year,
• 15:49
  Speaker 1: the chances are policymakers will either have done too much
• 15:52
  Speaker 1: to tame inflation or too little. And we've had many
• 15:56
  Speaker 1: years where the assumption has been that you should air
• 16:00
  Speaker 1: on the side of of having policy be too loose
• 16:04
  Speaker 1: rather than too tight. The risks of of not giving
• 16:09
  Speaker 1: enough support for the economy but much greater than the
• 16:11
  Speaker 1: risks of doing too much. Has that changed. Are we
• 16:15
  Speaker 1: now looking at a situation where the FED should be
• 16:19
  Speaker 1: more concerned about not doing enough to tame inflation. Well,
• 16:24
  Speaker 1: I think that's that's that's absolutely correct because last cycle
• 16:27
  Speaker 1: inflation was too low for most of the cycle, so
• 16:30
  Speaker 1: the federers are could actually try to see how far
• 16:33
  Speaker 1: they can how tight they can make the labor market
• 16:35
  Speaker 1: without any really big risk of that as a consequence,
• 16:38
  Speaker 1: this time we're starting from a point that inflation is
• 16:41
  Speaker 1: too high, it's above what the FEDS objective is, and
• 16:43
  Speaker 1: the labor market is already very very tight. So I
• 16:46
  Speaker 1: think using the last economic cycle as a template for
• 16:49
  Speaker 1: this cycle, I think it is a very very poor choice. Uh.
• 16:53
  Speaker 1: This cycle is very different in terms of where we're
• 16:55
  Speaker 1: starting in terms of inflation and the unimplant rate. And
• 16:58
  Speaker 1: it's also a very different cycle where we're starting in
• 17:01
  Speaker 1: terms of household balance sheets. Household balance sheets, death service
• 17:04
  Speaker 1: costs are really low, households have a lot of savings.
• 17:08
  Speaker 1: Last cycle, we had lots of damage caused by the
• 17:11
  Speaker 1: Great Financial Crisis. So people who are using the last
• 17:14
  Speaker 1: cycle as a template for this secle, I think are
• 17:16
  Speaker 1: going to be disappointed. Thanks very much for that, Bill Dudley. Now,
• 17:20
  Speaker 1: we're not trying to cover everything in this webinar, everything
• 17:23
  Speaker 1: that's going on in the global economy. We're just trying
• 17:25
  Speaker 1: to zero in on some of the key risks that
• 17:29
  Speaker 1: people are thinking about, and I think the top of
• 17:31
  Speaker 1: that list is China. So we're going to hear now
• 17:35
  Speaker 1: from our chief global economist, frequent participant on Stephanomics, Tom Olig,
• 17:40
  Speaker 1: who also spent eleven years in Beijing and has written
• 17:43
  Speaker 1: two books about the Chinese economy. Tom Thanks, Stephanie Um.
• 17:47
  Speaker 1: So if we were having this conversation a year or
• 17:51
  Speaker 1: so ago, there would be a pretty positive story to
• 17:55
  Speaker 1: tell about how China had weathered the COVID storm. From
• 17:59
  Speaker 1: where we are at the start of twenty two, though,
• 18:02
  Speaker 1: and there's some pretty significant risks and obstacles which China
• 18:07
  Speaker 1: now faces, in particular the Evergrand property slump. It's difficult
• 18:12
  Speaker 1: to disagree with Beijing's strategy here. The property sector is
• 18:18
  Speaker 1: over built and over leaver Ridge, and the entire rickety
• 18:22
  Speaker 1: structure rests on a foundation of moral hazard. An ever
• 18:27
  Speaker 1: Grand in many ways is the poster child for those problems,
• 18:31
  Speaker 1: so allowing ever Grand to default and go into restructuring
• 18:36
  Speaker 1: absolutely makes sense. The trouble is that with so many
• 18:40
  Speaker 1: other developers in a similar position to ever Grand in
• 18:44
  Speaker 1: terms of their leverage levels, and with property such an
• 18:47
  Speaker 1: important driver of growth across the economy as a whole,
• 18:52
  Speaker 1: even making that modest down payment on addressing the problem
• 18:56
  Speaker 1: of moral hazard comes with some significant costs attached. There's
• 19:01
  Speaker 1: confidence in the sector ebbs away, We're seeing sales and
• 19:05
  Speaker 1: investment weekend, and with property directly and indirectly driving about
• 19:10
  Speaker 1: a quarter of China's overall GDP. That has to come
• 19:14
  Speaker 1: at a cost to growth in the year ahead. The
• 19:18
  Speaker 1: second big risk for China looking forward is what happens
• 19:23
  Speaker 1: when the omicron variant hits. Now in China's COVID strategy
• 19:29
  Speaker 1: was brutally effective. It saves lives, It provided the basis
• 19:34
  Speaker 1: for a V shaped recovery in g d P, But
• 19:38
  Speaker 1: now they face some new and some difficult questions, in particular,
• 19:42
  Speaker 1: what's the end game for their strategy. That strategy works
• 19:47
  Speaker 1: in terms of keeping the population healthy, but it does
• 19:50
  Speaker 1: come at a cost of growth. Lockdown's hit consumption. We
• 19:54
  Speaker 1: saw that last summer when retail sales stumbled in the
• 19:58
  Speaker 1: face of the Delta outbreak, and as we heard from Anna,
• 20:02
  Speaker 1: in a nightmare scenario with widespread lockdowns, factories and ports
• 20:06
  Speaker 1: closing down, we could see China contributing to the global
• 20:10
  Speaker 1: supply crunch. We don't think that's the baseline scenario. China
• 20:14
  Speaker 1: so far has done a good job at keeping production
• 20:17
  Speaker 1: on track, but certainly, as cases in the Chian outbreak rise,
• 20:22
  Speaker 1: it's a risk which is worth keeping in mind. So
• 20:25
  Speaker 1: if we pull those pieces together our base case for
• 20:29
  Speaker 1: China's GDP this year is actually pretty positive. We think
• 20:32
  Speaker 1: growth could come in above five for the year, but
• 20:36
  Speaker 1: risks to that outlook from Evergrand from the omicron variant
• 20:40
  Speaker 1: affirmly to the downside, and a much lower number is
• 20:44
  Speaker 1: certainly possible. With all that in mind, it's no surprise
• 20:47
  Speaker 1: that the People's Bank of China has already moved towards stimulus.
• 20:51
  Speaker 1: So just coming back to the question of the property risk,
• 20:55
  Speaker 1: obviously everyone's had to learn the name ever Grand and
• 20:59
  Speaker 1: even think about how to pronounce it. Apart from these
• 21:03
  Speaker 1: monetary policy tools you've talked about, are there any specific
• 21:06
  Speaker 1: policies that China has for managing the boom and bust
• 21:10
  Speaker 1: of the property cycle and maybe getting to a situation
• 21:13
  Speaker 1: where they're not so dependent on property for driving the
• 21:17
  Speaker 1: driving the growth of the economy. Yes, you're you're completely right, Stephanie,
• 21:21
  Speaker 1: and I should have gone with the more flamboyant ever
• 21:23
  Speaker 1: Grandy pronunciation, which which I hear in Hong Kong is
• 21:27
  Speaker 1: a little bit more fun um. So, what China can't
• 21:31
  Speaker 1: do is control the kind of the fundamental problem in
• 21:36
  Speaker 1: the property sector. They can't they can't get away from
• 21:39
  Speaker 1: the problem, that there's massive overbuilding, that the country is
• 21:43
  Speaker 1: littered with ghost towns, the developers have borrowed too much money.
• 21:47
  Speaker 1: That sort of fundamental characteristics of the problem they can't change.
• 21:51
  Speaker 1: What they do have, though, is a very refined and
• 21:54
  Speaker 1: granular set of tools that they can try and use
• 21:57
  Speaker 1: to manage the problem down. So they can They don't
• 22:01
  Speaker 1: just set interest rates. They set interest rates for mortgages specifically,
• 22:06
  Speaker 1: and they can set them at different rates for first
• 22:09
  Speaker 1: time buyers and second time buyers and third time buyers.
• 22:12
  Speaker 1: They can change down payment requirements city by city and
• 22:16
  Speaker 1: change down payment requirements for first time buyers and second
• 22:19
  Speaker 1: time buyers and third time buyers. They can open the
• 22:22
  Speaker 1: credit taps for real estate developers in different ways for
• 22:28
  Speaker 1: different categories of developer. So they can't magically make the
• 22:33
  Speaker 1: problem go away. But what they've done over the last
• 22:36
  Speaker 1: decade is developed this rather precise set of tools for
• 22:40
  Speaker 1: managing it, and I expect we'll see those coming into
• 22:43
  Speaker 1: play in the months ahead. And finally, Tom sh Jingping,
• 22:47
  Speaker 1: we've seen him become more and more powerful as a
• 22:52
  Speaker 1: Chinese president, leader of the Chinese Communist Party, and he's
• 22:56
  Speaker 1: also through that increased the hold of the party over
• 23:01
  Speaker 1: um the economy. We're now seeing him seek a third
• 23:06
  Speaker 1: term as leader, maybe even leadership for life, as someone
• 23:10
  Speaker 1: calling it. What are the economic implications of that? Yes,
• 23:14
  Speaker 1: so she has been moving the sort of pieces into
• 23:19
  Speaker 1: place to ensure that he can have a third term
• 23:23
  Speaker 1: as president and as general secretary of the Communist Party,
• 23:27
  Speaker 1: and that process will sort of reach its endgame at
• 23:31
  Speaker 1: the end of this year, and very likely she will succeed.
• 23:34
  Speaker 1: So there are some short term and some long term
• 23:37
  Speaker 1: implications of that. The short term implication is, well, China
• 23:42
  Speaker 1: in the best of times, has very little tolerance for
• 23:45
  Speaker 1: bad news in the run up to big political events,
• 23:49
  Speaker 1: and appointing she for a third term as president will
• 23:52
  Speaker 1: be a big political event. They have zero tolerance for
• 23:55
  Speaker 1: bad news. So that's a reason to think that they
• 24:00
  Speaker 1: will stay very strict in terms of containing the spread
• 24:03
  Speaker 1: of COVID, and it's also a reason to think I
• 24:06
  Speaker 1: think that in the final analysis, they're not going to
• 24:09
  Speaker 1: allow property to trigger a collapse in the economy this year.
• 24:14
  Speaker 1: Looking longer term, well, one of the big successes of
• 24:17
  Speaker 1: dong Hao Ping, China's great reformer, was getting in place
• 24:21
  Speaker 1: a process for orderly leadership succession and orderly handover from
• 24:26
  Speaker 1: Dong to jang Zamin, from jang Zamin to Jujuin Tao,
• 24:29
  Speaker 1: and from Jujun Tao to shijim ping Um. If Hi
• 24:33
  Speaker 1: Jimping succeeds in getting a third term as China's leader,
• 24:37
  Speaker 1: well there's going to be some new questions about that
• 24:40
  Speaker 1: orderly succession process. The wheels are not going to come
• 24:44
  Speaker 1: off the wagon of Chinese governance immediately, but I think
• 24:48
  Speaker 1: we'd be looking for problems in that area in the
• 24:51
  Speaker 1: years ahead. Thank you very much. So that was a
• 25:02
  Speaker 1: big dollop of economic intelligence from Bloomberg. Next week we
• 25:06
  Speaker 1: might let some non Bloomberg folks get a word in. Finally,
• 25:11
  Speaker 1: David Hood from Bloomberg Tax has this sorry tale of
• 25:15
  Speaker 1: the overburdened Inland Revenue Service switchboard and very long suffering
• 25:19
  Speaker 1: accountants c p a s who are finding they can't
• 25:23
  Speaker 1: ever ever get through. Welcome to the Internal Revenue Service.
• 25:28
  Speaker 1: You can also visit us at www dot IRS dot gov.
• 25:34
  Speaker 1: Got a tax question, who are you going to call
• 25:36
  Speaker 1: to continue in England? Not the i r S in fact,
• 25:39
  Speaker 1: anyone but the I r S, unless, of course, you
• 25:43
  Speaker 1: or your c p A have time to wait wait, wait,
• 25:52
  Speaker 1: and wait some more on hold. That's the opinion of
• 25:55
  Speaker 1: frustrated taxpairs, tax preparers, the White House, and even the
• 26:00
  Speaker 1: agency itself. During peaks tax season, your c p A
• 26:04
  Speaker 1: can expect to be on hold for ninety minutes or more,
• 26:08
  Speaker 1: even if they call what some pros called the bat phone,
• 26:11
  Speaker 1: a dedicated line to the I R S for cp
• 26:14
  Speaker 1: as to call when they have a complicated question. The
• 26:18
  Speaker 1: films have been particularly difficult when certain big things have happened.
• 26:27
  Speaker 1: For instance, if you needed to get ahold of the
• 26:30
  Speaker 1: I R S to deal with a certain penalty notice
• 26:34
  Speaker 1: around the same time that something would happen with the
• 26:37
  Speaker 1: stimulus payments, that would be particularly difficult. That was Rochelle
• 26:44
  Speaker 1: Holds a principle in Crows Washington National Tax Office. Many
• 26:48
  Speaker 1: big things happened in one like more stimulus payments, advanced
• 26:53
  Speaker 1: child tax credit checks, and of course the pandemic. The
• 26:57
  Speaker 1: free market did come up with an idea to help
• 27:00
  Speaker 1: tax professionals. They can, for a fee, hire robots to
• 27:04
  Speaker 1: wait in line for them. A startup called n Q Inc.
• 27:07
  Speaker 1: Offers a service starting around a hundred dollars a month
• 27:11
  Speaker 1: that makes robocalls to the agency's special so called bat
• 27:14
  Speaker 1: phone waits on hold and then when it makes a connection,
• 27:18
  Speaker 1: puts the client through to an I r S agent
• 27:21
  Speaker 1: or your CPA can just call, wait on hold, maybe
• 27:24
  Speaker 1: get some lunch and come back, and of course stay
• 27:28
  Speaker 1: on hold. Thankfully, the agency recognizes these problems and has
• 27:34
  Speaker 1: a strategy in the works to fix them. The I
• 27:37
  Speaker 1: r S has plans to ramp up hiring for its
• 27:39
  Speaker 1: call centers around the country, which have felt the same
• 27:42
  Speaker 1: labor shortage crunch as other businesses. The agency is also
• 27:46
  Speaker 1: rolling out natural language service spots to help taxpayers set
• 27:49
  Speaker 1: up payment plans and get help quicker. However, these plans
• 27:55
  Speaker 1: hinge on the country's and most notoriously unreliable group. That's right, Congress.
• 28:03
  Speaker 1: If Congress can pass President Joe Biden's Build Back Better Bill,
• 28:06
  Speaker 1: it will hand the I r S eight billion dollars
• 28:09
  Speaker 1: a year for the next ten years. That tax pros
• 28:12
  Speaker 1: say will go long way to help hire more people,
• 28:15
  Speaker 1: open more call centers, and roll out better technology. But
• 28:20
  Speaker 1: a bill isn't the magic wand the agency would still
• 28:23
  Speaker 1: need to recruit, hire, train and routine more folks, update
• 28:27
  Speaker 1: I T systems, and tell the public phone lines are
• 28:30
  Speaker 1: open for business. If everything goes perfectly, We're still some
• 28:34
  Speaker 1: years off from solving these problems, said Bill Smith, National
• 28:37
  Speaker 1: director of tax Technical Services for c BIZ. M h M.
• 28:42
  Speaker 1: It would go a long way towards helping that situation
• 28:46
  Speaker 1: get a lot better. Is it? Is it going to
• 28:50
  Speaker 1: happen immediately even with the funding? I don't think so.
• 28:56
  Speaker 1: From Bloomberg tax I'm David Hood. H that's it for
• 29:17
  Speaker 1: this week. Join me for another Stephonomics next week, and
• 29:20
  Speaker 1: if you want more on the global economy, do follow
• 29:22
  Speaker 1: at Economics on Twitter. Also rate this podcast if you
• 29:26
  Speaker 1: like it. This episode was produced by Magnus Henrison, with
• 29:29
  Speaker 1: special thanks to Anna Wong, Bill Dudley, Tom Rlick, and
• 29:33
  Speaker 1: David Hood. Mike Sasso is executive producer of Stephanomics and
• 29:37
  Speaker 1: the head of Bloomberg Podcast is Francesca Levi.