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The Next Recession Could Come Courtesy of the Fed · Stephanomics

• 0:06
  Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the
• 0:09
  Speaker 1: global economy to you, and I'm Stephanie Flanders. This week
• 0:12
  Speaker 1: we're talking about money, how to make it and how
• 0:15
  Speaker 1: to make sure it keeps its value. It's something we
• 0:18
  Speaker 1: all have to think about, but if you're a central bank,
• 0:20
  Speaker 1: it's your only job, and the stakes are a lot
• 0:23
  Speaker 1: higher because the decisions of central bank takes can affect
• 0:26
  Speaker 1: the cost of living the life of an entire country,
• 0:30
  Speaker 1: maybe the whole world. The central bank you're sitting in
• 0:32
  Speaker 1: happens to be the US Federal Reserve. For the past
• 0:35
  Speaker 1: fifteen twenty years, the story of central banks and their
• 0:38
  Speaker 1: job has been dramatic but pretty easy to grasp. The rules.
• 0:42
  Speaker 1: Whenever economy has got into trouble, the central bank would
• 0:45
  Speaker 1: slash interest rates to new lows and flood the economy
• 0:48
  Speaker 1: with cheap cash. The economy got better, but never quite
• 0:53
  Speaker 1: enough to bring rates back to where they were before
• 0:55
  Speaker 1: the crisis, so money stayed cheap. This recovery, those feeling
• 1:00
  Speaker 1: a bit different. At least an advanced economies like the US,
• 1:04
  Speaker 1: demand is coming back faster than supply, and inflations hitting
• 1:08
  Speaker 1: rates we haven't seen in years it's all driving fears
• 1:12
  Speaker 1: that one of these central banks is about to monumentally
• 1:15
  Speaker 1: screw up, either keep the money flowing too long lose
• 1:19
  Speaker 1: control of prices, or raise interest rates too soon and
• 1:22
  Speaker 1: choke the recovery. Now the risks look rather different in
• 1:26
  Speaker 1: the US and the UK right now. So I've asked
• 1:28
  Speaker 1: Bloomberg economists on both sides of the Atlantic to come
• 1:31
  Speaker 1: on the show to explain it, or our chief a
• 1:33
  Speaker 1: mere economist, Jamie Rush, formerly at the UK Treasury, and
• 1:37
  Speaker 1: David Wilcox, now our Director of US Economic Research, but
• 1:40
  Speaker 1: for many years in charge of all the forecasts and
• 1:43
  Speaker 1: all the economic research produced by the Federal Reserve. You're
• 1:47
  Speaker 1: gonna hear them in a few minutes. But first, the
• 1:50
  Speaker 1: story of a central bank that tried something new just
• 1:53
  Speaker 1: under a year ago and changed the way money works
• 1:56
  Speaker 1: in the economy almost overnight. It's called Picks and his
• 2:01
  Speaker 1: brazil economy reporter Maria and Louisa Kapoora to explain how
• 2:06
  Speaker 1: it's taken the country by a store Feaston Peaks or
• 2:16
  Speaker 1: Mega Picks. Wasn't something in Brazilian's used to say a
• 2:19
  Speaker 1: year ago. But now you hate everywhere, I mean really everywhere,
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  Speaker 1: I beat my ren Thry big size split the restaurant
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  Speaker 1: built with friends Bia Biggs. I even paid my activities
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  Speaker 1: with Biggs and it's just millions like me. I don't know.
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  Speaker 1: I have picked since it came out in November. I
• 2:42
  Speaker 1: cho speaks because it was easy to make men transfers.
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  Speaker 1: That was in Carlo Garti Silva native from what are
• 2:48
  Speaker 1: and who I run into. He was having coffee in
• 2:51
  Speaker 1: a restaurant in the southeast region of Brasilia. Most of
• 2:54
  Speaker 1: the payments he makes nowadays on most of the transfers
• 2:57
  Speaker 1: he makes to his family. You speaks a new payment
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  Speaker 1: platform that's sweeping across Brazil. I made the picks of
• 3:08
  Speaker 1: three thousand three eyes as a low one. That was
• 3:10
  Speaker 1: my last PIX transaction. The mobile payment platform, created by
• 3:18
  Speaker 1: Brazil's Central Bank less than a year ago, has changed
• 3:22
  Speaker 1: the financial landscape of Brazil. Now, more than a hundred
• 3:26
  Speaker 1: and ten million users have transferred money through Pigs, which
• 3:30
  Speaker 1: lives within a bank's mobile phone app in just the
• 3:33
  Speaker 1: same way sell do us for US base banks. As
• 3:37
  Speaker 1: if to underline the bad streach of a new payment system.
• 3:40
  Speaker 1: While waiting at a stoplight in Brasilia, I noticed a
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  Speaker 1: woman going car to car packing for money. Her cardboard
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  Speaker 1: sign said she accepted pigs. Pigs was creating an attempt
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  Speaker 1: to simplify banking transfers and make them cheaper, while also
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  Speaker 1: boosting competition. But the success of Picks has highlighted another
• 4:02
  Speaker 1: potential benefits of the system, an increasing financial inclusion by
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  Speaker 1: bringing people like the woman I saw at the spotlight
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  Speaker 1: into the country's banking system. And that's just huge for Brazil,
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  Speaker 1: where three percent of people don't have a bank account.
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  Speaker 1: You need to have a bank account to access Peaks,
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  Speaker 1: but once you do, you can enter the platform just
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  Speaker 1: by registering your phone number, your textually or just your email.
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  Speaker 1: Here's bank chief Roberto campus net To speaking in an
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  Speaker 1: interview with the Council of the America's in August. I
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  Speaker 1: think Picks became a very popular, you know, gain a
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  Speaker 1: lot of space, a very popular project that the Central
• 4:41
  Speaker 1: Bank did. The message from the very beginning was it's
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  Speaker 1: not only a substitution effect, but also you increase the
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  Speaker 1: number of payments if you're gonna enable new business models,
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  Speaker 1: which should increase the volume overall, should increase the ability
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  Speaker 1: of small companies or companies that sell things that have
• 5:00
  Speaker 1: a small chicken to get into the market people the
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  Speaker 1: self employed. We actually see people sending things on the
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  Speaker 1: street and accepting picks this day, so it's becoming again
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  Speaker 1: a very popular thing. We never expected the reach. You know,
• 5:12
  Speaker 1: we have two eighty two million keys, we have seven
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  Speaker 1: point four million entities companies using Picks is catching on
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  Speaker 1: so quickly, in part because it's just so easy to use,
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  Speaker 1: said Brenda Lovo, senior advisory at Bussis Central Bank and
• 5:27
  Speaker 1: part of the team managing Picks. It's always available for
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  Speaker 1: four hours a day, seven days a week. The funds
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  Speaker 1: are instantly available at the peas accounts. So uh, it's
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  Speaker 1: a very easy and people intuitive way of transferring money
• 5:43
  Speaker 1: using the themartphone. The pandemic turn not to be fertile
• 5:47
  Speaker 1: ground for the growth of Picks. People were cooked at home,
• 5:51
  Speaker 1: avoiding contact, and businesses were closed and suddenly here comes Peaks,
• 5:56
  Speaker 1: making digital transfers as easy and fast as using cash.
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  Speaker 1: By September, about eighty nine billion dollars have moved through
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  Speaker 1: the system, And just to give you an idea of
• 6:07
  Speaker 1: what that means, PIX moves fifty times the amount of
• 6:11
  Speaker 1: money ordinary text too. Here's again Brazil's Central Bank. We
• 6:16
  Speaker 1: expected that PICKS would be very used here in Brazil,
• 6:21
  Speaker 1: but we thought that it would take a certain amount
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  Speaker 1: of time because people have their own abits of using
• 6:31
  Speaker 1: means of payments. For here in Brazil, we use a
• 6:34
  Speaker 1: lot of cash, and we use a lot of cred
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  Speaker 1: cards and that cards, so Brazilians were not familiar to use.
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  Speaker 1: There's much funds to start a payment, and PIX was
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  Speaker 1: a really new thing that came in Brazil, but it
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  Speaker 1: ocplied this space really really really fast. Uh. Picks UH
• 6:56
  Speaker 1: is the instant payments seems that that that have the
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  Speaker 1: fast adoption in its first year. Picks has been especially
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  Speaker 1: game changing for small business owners like Hanada's Leveda Pets,
• 7:10
  Speaker 1: who runs a small cat sitting business in the central
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  Speaker 1: Brazilian city of Ours Class. Picks lower the costs for
• 7:19
  Speaker 1: my customers because the transfer feed that each bank charged
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  Speaker 1: me could be as high as thirty percent of my take.
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  Speaker 1: So PIGS brought me more financial control element cannot with
• 7:37
  Speaker 1: a sales vaccination great growing every day. The economy now
• 7:41
  Speaker 1: is almost fully reopened and people are entering out stopping
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  Speaker 1: by the bank now it's much easier, and yet PIGS
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  Speaker 1: is still growing. In July, it broke its own record
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  Speaker 1: of fourty million payments in just one day. Julian Afraida
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  Speaker 1: works at a pastor shop which began using pigs just
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  Speaker 1: five months ago. The work with all credit and debit cards.
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  Speaker 1: The pigs was very practical and many clients wanted it,
• 8:12
  Speaker 1: and it makes payments for deliveris easier. In three seconds,
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  Speaker 1: she sees the payments in her account see pick. Sometimes
• 8:20
  Speaker 1: it takes less than that. It's super fast and we
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  Speaker 1: don't pay fees to banks. Credit cards can take as
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  Speaker 1: long as thirty days for us to see the money,
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  Speaker 1: and with debit cards, if the purchase is made on
• 8:32
  Speaker 1: a weekend, we'll always see it the next Monday. But
• 8:35
  Speaker 1: Pigs is automatic. There's just one hitch. Brazil is a
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  Speaker 1: high crime country and criminals have also begun to capitalize
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  Speaker 1: on the success of pigs. Express Kidnappings are also back,
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  Speaker 1: and people are being snatched off the street at gunpoint
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  Speaker 1: and forced to pull out all their stabings from the
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  Speaker 1: closest ATM machine. To now the bad guys only need
• 9:02
  Speaker 1: to force them to make up pigs. Accounts are traceable
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  Speaker 1: in picks, but criminals use fake ones or false names.
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  Speaker 1: The Central Bank responded rather quickly with new limits on
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  Speaker 1: transfers at night, and other safety measures have also been
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  Speaker 1: taken to address the possibility of hackers entering PICKS database.
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  Speaker 1: And if the numbers tell us anything is that for
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  Speaker 1: hundreds of thousands of resilience, the risk of using Peaks
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  Speaker 1: is outweighed by the reward in costs and convenience. But
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  Speaker 1: Picks needs to grow to achieve financial inclusion. Here's Leonard
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  Speaker 1: Roja Suarez, director of the Latin American Initiative at the
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  Speaker 1: Center for Global Development in Washington, d C. And so
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  Speaker 1: Peaks is great for at lower in financial cost, increase
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  Speaker 1: the security, and improve the consumer spirit. But that is
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  Speaker 1: true only for those that have a bank account, because
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  Speaker 1: that's a requirement of PIGS. For those that do not
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  Speaker 1: have a bank account, bank account, or do not have
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  Speaker 1: a smartphone, they will not be able to access the
• 10:18
  Speaker 1: up and so that would leave about thirty of the
• 10:22
  Speaker 1: Brazilian population out of being able to use the app.
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  Speaker 1: Some of those changes seem to be already happening. Offline
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  Speaker 1: payments are in the words, along with programs that will
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  Speaker 1: allow people to withdraw money from stores using PICKS and
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  Speaker 1: bank chief Campus Nettle says we haven't seen the full
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  Speaker 1: scope of PICKS yet. In fact, he estimates we've only
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  Speaker 1: seen five of its posessial and if that is true,
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  Speaker 1: Brazil could be on the brink of a digital revolution.
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  Speaker 1: For Blue Venus, I'm Maria least couple well, no good
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  Speaker 1: deed goes unpunished. Our brazil economist Adriana Dupeter just informed
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  Speaker 1: me that PICKS has been so successful the government's thinking
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  Speaker 1: of slapping a financial transactions tax on it to help
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  Speaker 1: fill the whole in the government's public finances. So I
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  Speaker 1: guess there are some things about Brazil that technology can't change.
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  Speaker 1: But now we move from a digital revolution for central
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  Speaker 1: banks to just a very difficult decision. As I mentioned
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  Speaker 1: at the start of the show, the rapid recovery we've
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  Speaker 1: seen in a lot of advanced economies this year has
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  Speaker 1: produced something we haven't seen in a long time inflation
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  Speaker 1: rising prices. The annual rate of inflation last month in
• 11:45
  Speaker 1: the US hit five point four percent. That's the highest
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  Speaker 1: in more than a decade, and only the second highest
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  Speaker 1: reading this century. Now, this was supposed to be a
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  Speaker 1: short term blip, a temporary side effect of the extraordinary
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  Speaker 1: impact of COVID nineteen. But it's dragging on a bit,
• 12:03
  Speaker 1: and some pretty influential economists, including my old boss, the
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  Speaker 1: former Treasury Secretary Larry Summers, say the Federal Reserve and
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  Speaker 1: maybe other central banks are in danger of falling asleep
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  Speaker 1: at the wheel. Well. As mentioned at the start, I
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  Speaker 1: have our Director of US Economic Research, David Wilcox, and
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  Speaker 1: chief a Mere economist, Jamie Rush here to discuss all this.
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  Speaker 1: I mean, David, you spent a long time at the FED.
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  Speaker 1: They say, institutions always at risk of fighting the last war?
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  Speaker 1: Is it? Is it too focused on lack of demand,
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  Speaker 1: which has been such a problem off and on for
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  Speaker 1: the past ten or twenty years, and now not focused
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  Speaker 1: enough on too much demand and actually too much inflation.
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  Speaker 1: I don't think so, Stephanie. For sure, the Federal Reserve
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  Speaker 1: is facing challenging circumstances with pandemic induced economic collapse the
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  Speaker 1: likes of which we haven't seen in at least a
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  Speaker 1: century in the United States. But let's remind ourselves the
• 13:03
  Speaker 1: dominant narrative in the US for the past two decades
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  Speaker 1: has been inflation that ran too low, not too high.
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  Speaker 1: It was frustrating for the Federal Reserve that they persistently
• 13:16
  Speaker 1: undershot their two percent objective. Another key ingredient in the
• 13:21
  Speaker 1: environment right now in the US has been the astonishing
• 13:24
  Speaker 1: downward move in interest rates around the globe, and that's
• 13:28
  Speaker 1: left central banks, including the Federal Reserve, with too little
• 13:32
  Speaker 1: room to cut rates in order to fight recessions. To
• 13:36
  Speaker 1: try to push back against those two developments, the FED
• 13:39
  Speaker 1: put in place a new framework one year ago under
• 13:43
  Speaker 1: which they pledged to be more tolerant of inflation running
• 13:46
  Speaker 1: a little above the two percent objective. So, while the
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  Speaker 1: situation remains very fluid and very uncertain, the bigger risk
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  Speaker 1: from the Fed's point of view, in my assessment, is
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  Speaker 1: that inflation set eggs below the two percent objective once
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  Speaker 1: again after the current set of snarl ups in the
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  Speaker 1: supply chains are resolved. I think they're right to stack
• 14:10
  Speaker 1: the odds on inflation in favor of inflation running a
• 14:14
  Speaker 1: little above two I guess there's two things here. There's
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  Speaker 1: that the forecasts that the Federal Reserve might have or
• 14:20
  Speaker 1: policy makers might have a different that they just don't
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  Speaker 1: think inflation is going to stick around as long as
• 14:26
  Speaker 1: as other forecasters do. And then there's something else which
• 14:29
  Speaker 1: just to say we we do think inflation maybe we'll
• 14:31
  Speaker 1: stick around for a bit, but we think that's we're
• 14:34
  Speaker 1: more tolerant of that than we might have been in
• 14:37
  Speaker 1: previous eras. Yes, I think that's just right. Monetary policy
• 14:43
  Speaker 1: is risky business. It's not for the timid of heart. Um. Certainly,
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  Speaker 1: there are some prominent voices, and you mentioned Larry Summers
• 14:52
  Speaker 1: being perhaps the loudest of all, that are warning the
• 14:56
  Speaker 1: FED that they are on the brink of losing control
• 14:59
  Speaker 1: of inflation. But the consensus view remains much more benign
• 15:03
  Speaker 1: than that. My own views tend towards the more benign
• 15:08
  Speaker 1: end of the range. I think we're likely to have inflation,
• 15:12
  Speaker 1: that's a little about two a year or two from now,
• 15:17
  Speaker 1: but I don't anticipate that. The most likely outcome is
• 15:22
  Speaker 1: that I will see inflation as a persistent problem for
• 15:26
  Speaker 1: the FED to deal with by them. And I guess
• 15:29
  Speaker 1: when you talk about FED stuff until not very long ago,
• 15:32
  Speaker 1: a lot of those people used to used to work
• 15:34
  Speaker 1: for you. It's all very well saying, well, we want
• 15:36
  Speaker 1: to build ourselves a bit of room for maneuver for
• 15:38
  Speaker 1: the future, so if inflation goes higher, that's not such
• 15:41
  Speaker 1: a big issue. But if you've lost credibility, if you
• 15:46
  Speaker 1: seem to be acting too late, then I guess the
• 15:50
  Speaker 1: risk is that you then have to do too much.
• 15:53
  Speaker 1: I mean, how concerned will they be about that? To think, Well,
• 15:58
  Speaker 1: let's distinguish two instituencies here. The job of the staff
• 16:04
  Speaker 1: is to try to give their best professional judgment. They're
• 16:07
  Speaker 1: acting like physicists, admittedly in an improve in an imperfect world.
• 16:13
  Speaker 1: But their job is to lay out their expectation the
• 16:17
  Speaker 1: range of uncertainties around that expectation. Policymakers, you're absolutely right,
• 16:24
  Speaker 1: have to take into consideration a larger constellation of issues,
• 16:29
  Speaker 1: including things like credibility and reinforcing the meaning of the
• 16:37
  Speaker 1: new framework that the FED adopted just a year ago. Um,
• 16:41
  Speaker 1: the FED staff is as good as they get, uh,
• 16:46
  Speaker 1: and I think they are really free of any kind
• 16:50
  Speaker 1: of larger sort of pressures that that might be on
• 16:56
  Speaker 1: other elements. Their job is to just simply if their
• 17:00
  Speaker 1: best professional judgment, they don't need to take into account
• 17:04
  Speaker 1: issues of credibility or other matters like that. What would
• 17:09
  Speaker 1: it take to change the fat's mind? Do you think
• 17:12
  Speaker 1: that how much inflation would you have to see? For
• 17:15
  Speaker 1: how long? I mean, when we see these numbers. You
• 17:17
  Speaker 1: see very high house price inflation, you see rents taking off,
• 17:21
  Speaker 1: you know some things which are not one would think,
• 17:24
  Speaker 1: not entirely just related to these supply chain issues that
• 17:28
  Speaker 1: we've had coming out of COVID. Yeah, what will be
• 17:32
  Speaker 1: required to change the FATS mind is really, I think
• 17:35
  Speaker 1: a break and inflationary psychology that we haven't seen really
• 17:40
  Speaker 1: since the early nineteen eighties. Um, if it becomes the
• 17:46
  Speaker 1: dominant narrative that businesses are putting in place price increases
• 17:52
  Speaker 1: because they know their competitors are, if they're granting wage
• 17:57
  Speaker 1: increases because they know that they're workers are being bid
• 18:01
  Speaker 1: away by others who were offering higher salaries. If workers
• 18:05
  Speaker 1: are demanding larger pay increases because their cost of living
• 18:10
  Speaker 1: is going up not only over the past year, but
• 18:13
  Speaker 1: they expected over the coming year. Those are the basic
• 18:17
  Speaker 1: ingredients of a classic wage price spiral, and that's what
• 18:21
  Speaker 1: will prompt the FIT to conclude that inflation expectations are
• 18:25
  Speaker 1: no longer anchored as they have been for the past
• 18:28
  Speaker 1: two decades, and that in turn will prompt the FIT
• 18:33
  Speaker 1: to slow the economy in order to contain inflation pressures.
• 18:44
  Speaker 1: I'm going to bring Jamie Russian now are a mere
• 18:47
  Speaker 1: chief chief economists because if you we tend to think
• 18:51
  Speaker 1: of terms of hawks and doves at central banks, and
• 18:53
  Speaker 1: it greatly annoys the policymakers that sitting there because they
• 18:56
  Speaker 1: think they have very interesting, nuanced views. But the hulks,
• 18:59
  Speaker 1: broadly speaking, are the ones who want to raise interest
• 19:01
  Speaker 1: rates with money more expensive, and the doves are the
• 19:03
  Speaker 1: ones who want to keep money very flowing, very loosely
• 19:07
  Speaker 1: and freely. If we have a flock of doves still
• 19:12
  Speaker 1: encamped at the Federal Reserve building in the US, there
• 19:17
  Speaker 1: are certainly a few hawks, and one very prominent hawk
• 19:21
  Speaker 1: we've been hearing from from the Bank of England recently.
• 19:25
  Speaker 1: Jamie talk us through the situation there, because it feels
• 19:27
  Speaker 1: like the forecasters and the central bank are facing the
• 19:30
  Speaker 1: same uncertainties in the UK and some of the same inflation,
• 19:34
  Speaker 1: but coming up with rather different conclusions. Yeah, I think
• 19:37
  Speaker 1: that's right. So if you go back even just a
• 19:39
  Speaker 1: few months, there seemed to be a consensus among global
• 19:43
  Speaker 1: central banks that they were just tread carefully, if in
• 19:47
  Speaker 1: fact there was any treading to be done at all,
• 19:49
  Speaker 1: and so the bank wasn't expected to lift interest rates
• 19:53
  Speaker 1: until three in the UK, and they were going to
• 19:57
  Speaker 1: tolerate any sort of inflation if as long as it
• 20:01
  Speaker 1: was going to be temporary. But now wage pressure is
• 20:04
  Speaker 1: picked up a bit, and not just in the places
• 20:07
  Speaker 1: that have been affected by COVID, the most energy costs
• 20:11
  Speaker 1: are up, which is obviously pushing headline inflation up a lot.
• 20:14
  Speaker 1: And it seems that the Bank of England's lost its nerve.
• 20:18
  Speaker 1: The governor is increasingly vocal about the risks of inflation,
• 20:24
  Speaker 1: and that's prompted markets to bring forward the timing of
• 20:27
  Speaker 1: expected rate hikes not two but to next month. So um,
• 20:32
  Speaker 1: it's been a really really big shift in the Bank's
• 20:35
  Speaker 1: rhetoric and how markets are perceiving it, and indeed they're
• 20:38
  Speaker 1: expecting another eight basis points or so of of hikes
• 20:42
  Speaker 1: next year as well. So it's just worth it's worth
• 20:44
  Speaker 1: emphasizing just how big a change that was. So, as
• 20:47
  Speaker 1: you said at the start, only a few months ago,
• 20:50
  Speaker 1: probably the beginning of the summer, we were expecting interest
• 20:52
  Speaker 1: rates to stay basically at zero, just above zero in
• 20:56
  Speaker 1: the UK for at least another year or a year
• 21:00
  Speaker 1: in a bit, so no change until three and now
• 21:04
  Speaker 1: we're not only expecting maybe three quarters of a percentage
• 21:09
  Speaker 1: point worth of cuts next year, but even a rise
• 21:12
  Speaker 1: this year, so that interest rates in the year's time,
• 21:14
  Speaker 1: the official base rate could be one percentage point rather
• 21:18
  Speaker 1: than more or less zero. Now, I can't think of
• 21:21
  Speaker 1: a time when you've had such a dramatic change. You
• 21:24
  Speaker 1: said that the bank, the bad governor had lost its
• 21:27
  Speaker 1: lost his nerve. That normally sounds like a bad thing.
• 21:30
  Speaker 1: Do you think he's making a mistake? Well, so, I
• 21:33
  Speaker 1: think there's two questions here. Are they making mistake about
• 21:36
  Speaker 1: the policy that they're taking now? So they have they
• 21:39
  Speaker 1: are accommodating market expectations and higher rates, which is tightening.
• 21:43
  Speaker 1: It's happen. That's happening right now. Basically it's feeding through
• 21:45
  Speaker 1: to borrowing costs in the wider economy as we speak.
• 21:49
  Speaker 1: So people expecting rates to go up and pushes the
• 21:52
  Speaker 1: market rates. So when I go and get a bortgage
• 21:55
  Speaker 1: or where if I'm trying to borrow as a business,
• 21:57
  Speaker 1: I'm already paying more because people are expecting interests exactly right.
• 22:00
  Speaker 1: So if you think about the five year borrowing cost
• 22:03
  Speaker 1: in markets, like the risk free rate that's gone up
• 22:05
  Speaker 1: fifty basis points over the past few months, eventually that's
• 22:08
  Speaker 1: going to feed through to your five year mortgage if
• 22:09
  Speaker 1: that's if that's what you've chosen. Um, so these things
• 22:12
  Speaker 1: are going to start affecting people even before interest rates
• 22:15
  Speaker 1: have actually gone up. So I think that's an important point.
• 22:18
  Speaker 1: So if there is a policy mistake happening, it's being
• 22:21
  Speaker 1: made now. It's not something that's about to happen, it's
• 22:24
  Speaker 1: it's already happening. So so there's that, and I think,
• 22:28
  Speaker 1: you know, is it a mistake? Well, we don't actually know.
• 22:30
  Speaker 1: It may prove to be the case that inflation does
• 22:32
  Speaker 1: pick up sustainably and actually this is going to look
• 22:36
  Speaker 1: like quite a smart move in a year or so
• 22:38
  Speaker 1: is time. Equally, you could see that unemployment goes up
• 22:41
  Speaker 1: as the end of the furlough scheme in the UK happens,
• 22:45
  Speaker 1: and and that pushes down on on on wage pressure
• 22:49
  Speaker 1: and therefore inflation tips back downwards, which case would look
• 22:54
  Speaker 1: like a mistake because it needlessly delayed the recovery. I
• 22:57
  Speaker 1: think the bigger question though, is whether there is a
• 23:00
  Speaker 1: TJ error being made here? Is that is it better
• 23:03
  Speaker 1: to be if you're going to be wrong? Is it
• 23:05
  Speaker 1: is it better to be wrong by going too early
• 23:08
  Speaker 1: or by going too late, And in my opinion, it
• 23:11
  Speaker 1: is better to be to to raise interest rate it's
• 23:13
  Speaker 1: too late, because a little bit of extra inflation isn't
• 23:16
  Speaker 1: going to be too damaging into the bank's credibility, is
• 23:18
  Speaker 1: not going to hurt people too much, especially if it's
• 23:21
  Speaker 1: it's driven by wage increases UM. Compared with what we've seen,
• 23:26
  Speaker 1: which is a rapid repricing of interest rates. The possibility
• 23:29
  Speaker 1: that this has actually some some some nonlinear effects, meaning
• 23:35
  Speaker 1: that the economy could respond worse to a sudden increase
• 23:38
  Speaker 1: in interest rates than than than one that's been very
• 23:41
  Speaker 1: carefully choreographed over the course of say six months UM.
• 23:45
  Speaker 1: And so I think that is actually the bigger danger.
• 23:47
  Speaker 1: You could have a position here where the bank is
• 23:49
  Speaker 1: as has endorsed a lot of tightening, and that it
• 23:52
  Speaker 1: could it could affect demand, it could affect the housing market.
• 23:55
  Speaker 1: It could have really quite a few unintended consequences. So
• 24:00
  Speaker 1: the strategic decision from from in my view, is probably
• 24:03
  Speaker 1: not the right one. It sounds like you're making a
• 24:06
  Speaker 1: similar argument to what one would make in the US.
• 24:09
  Speaker 1: I guess one argument is that the UK is in
• 24:14
  Speaker 1: a worse position than the US and particularly is a
• 24:19
  Speaker 1: bit more vulnerable to inflation taking off because it's also
• 24:23
  Speaker 1: just had this kind of recently self inflicted wound of Brexit.
• 24:27
  Speaker 1: Is there a sense in which the Bank of England
• 24:29
  Speaker 1: needs to be a bit more concerned about triggering an
• 24:33
  Speaker 1: inflationary spiral than the US. We've also had quite a
• 24:36
  Speaker 1: lot more inflation than the US. We haven't really had
• 24:39
  Speaker 1: a deflation concern in the UK the way that you
• 24:43
  Speaker 1: have in say America or the Eurozone. We've been able
• 24:46
  Speaker 1: to deliver quite a lot of inflation even through these
• 24:48
  Speaker 1: last few years. I don't think the Bank needs needs
• 24:51
  Speaker 1: to be especially concerned just because of the additional disruptions
• 24:55
  Speaker 1: caused by Brexit. I mean, we always have this this
• 24:57
  Speaker 1: this backdrop of supply chain disruption more broadly due to COVID.
• 25:01
  Speaker 1: It's very difficult to unpick the Brexit distructions from the
• 25:04
  Speaker 1: COVID disruptions. So I think, in in short, there isn't
• 25:08
  Speaker 1: an obvious reason why you should adopt a different policy
• 25:12
  Speaker 1: in Britain from the one that is being adopted in
• 25:15
  Speaker 1: the Europe and in the US. And in fact, by
• 25:17
  Speaker 1: going quite by adopting a very different strategy, you do
• 25:21
  Speaker 1: introduce some new risks, and that you are going to
• 25:23
  Speaker 1: see some potentially big movements in the exchange rate. For example,
• 25:27
  Speaker 1: if the if you if the UK goes and goes
• 25:29
  Speaker 1: alone on Manuch policy and raises raising interest rates a
• 25:32
  Speaker 1: year before the FED, so that there is there is
• 25:34
  Speaker 1: I mean, there is some safety in in in sticking
• 25:37
  Speaker 1: with the herd. And I guess I had a final
• 25:39
  Speaker 1: question for both of you, which is before two thousand
• 25:42
  Speaker 1: and eight, and certainly all the time I was learning
• 25:45
  Speaker 1: economics in in high school and university. You know, we
• 25:49
  Speaker 1: tended to think that recessions were going to be caused
• 25:51
  Speaker 1: one way or another by central banks, because that was
• 25:54
  Speaker 1: how most recessions have been. The immediate trigger for most
• 25:57
  Speaker 1: recessions had been central banks checking up interest rates in
• 26:01
  Speaker 1: response to inflation that they'd allowed to get out of control.
• 26:04
  Speaker 1: But that hasn't been true of the last two recessions,
• 26:07
  Speaker 1: and we've kind of maybe forgotten about that dynamic. But
• 26:09
  Speaker 1: are we back in the world where you would bet
• 26:12
  Speaker 1: that the next recession, whenever it comes on either side
• 26:15
  Speaker 1: the Atlantic, is most likely to come from a screw
• 26:19
  Speaker 1: up by the central banks. David, I think the risk
• 26:24
  Speaker 1: of that is much higher now. Than it was previously. UM.
• 26:29
  Speaker 1: What we know is that the macro environment is a
• 26:32
  Speaker 1: risky place to operate, and recessions come from lots of
• 26:37
  Speaker 1: different causes. The two thousand recession in the United States
• 26:40
  Speaker 1: was caused by an asset bubble collapse, the two thousand
• 26:44
  Speaker 1: eight by the housing market collapse, two thousand twenty the pandemic.
• 26:50
  Speaker 1: Each one has its own narrative. Classically, the textbooks that
• 26:56
  Speaker 1: I grew up with emphasized that the that the Fed
• 27:01
  Speaker 1: Reserve let inflation get out of control more or less
• 27:04
  Speaker 1: because of a lack of focus. I don't think that's
• 27:08
  Speaker 1: going to be the storyline that the textbook five and
• 27:12
  Speaker 1: ten years from now tells as its main narrative. But
• 27:17
  Speaker 1: we just don't know. And so that's why I, for one,
• 27:20
  Speaker 1: I'm going to stay tuned and Jamie, next time we
• 27:24
  Speaker 1: have a recession that you're going to be looking first talk.
• 27:28
  Speaker 1: I agree with David. I think it's become much more risky.
• 27:30
  Speaker 1: I mean, one one one obvious risk is just that
• 27:32
  Speaker 1: the impressed in support means it's going to be uncommonly
• 27:35
  Speaker 1: difficult to unwind UM. But I think one interesting thing
• 27:39
  Speaker 1: would be if central banks have to choose to have
• 27:42
  Speaker 1: a recession in order to get information, and I mean
• 27:44
  Speaker 1: we haven't had that from really a long time. It's
• 27:47
  Speaker 1: one thing caused one by mistake. And let let it
• 27:49
  Speaker 1: be said they have done that in the past. They
• 27:51
  Speaker 1: used to make I think that's actually a book. But
• 27:54
  Speaker 1: it's fear of doing having to do that which is
• 27:56
  Speaker 1: driving a lot of central bank behavior now as we
• 28:00
  Speaker 1: see it, um certainly from parts for the banking especially.
• 28:04
  Speaker 1: But yeah, I think if they had to choose to
• 28:06
  Speaker 1: have a recession to get inflation back under control, I
• 28:09
  Speaker 1: think that would be keeping me up at nine hours
• 28:10
  Speaker 1: a central bank Jamie Rush, David Wilcox, thank you very much,
• 28:14
  Speaker 1: Thanks so much. Good to be with you. Since we're
• 28:23
  Speaker 1: talking about hawks and doves, I should mention that one
• 28:26
  Speaker 1: of the great hawks in the European central banking scene
• 28:28
  Speaker 1: has just announced he's standing down against Wiedman, head of
• 28:32
  Speaker 1: the German Bunder's Bank. For more than a decade. He
• 28:35
  Speaker 1: became known as Doctor No for voting against pretty much
• 28:39
  Speaker 1: all of the European Central Bank did to support the
• 28:41
  Speaker 1: Eurozone economy in the crisis years. With him going, the
• 28:46
  Speaker 1: hawks that the ECB have lost their strong man, but
• 28:49
  Speaker 1: don't worry. Something tells me there's plenty more just like him,
• 28:53
  Speaker 1: waiting in Frankfort to take his place. Well that's it
• 29:01
  Speaker 1: for this episode of Stephonomics. We'll be back next week
• 29:03
  Speaker 1: in the meantime. If you like the program, please rate
• 29:06
  Speaker 1: it and follow at Economics on Twitter for more news
• 29:10
  Speaker 1: and analysis from Bloomberg Economics. This episode was produced by
• 29:13
  Speaker 1: Magnus Hendrickson, and the story from Brazil was based on
• 29:17
  Speaker 1: reporting by Shannon Sims and Maria Eloisa Couple. Special thanks
• 29:21
  Speaker 1: also to Danielle Cavallo, is Adora Columbia, Luana Race, Jamie Rush,
• 29:26
  Speaker 1: and David Wilcox. Mike Sasso is executive producer of Stephonomics
• 29:31
  Speaker 1: and the head of Bloomberg podcast Is francescan Lead