Latest / Masters in Business / At the Money: Chicago Fed President Austan Goolsbee on Tariffs, Supply Chains and Inflation

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At the Money: Chicago Fed President Austan Goolsbee on Tariffs, Supply Chains and Inflation · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news, The.
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  Speaker 2: Money, I need the Money, money, money, tariffs, egg prices, commodities, geopolitics, war,
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  Speaker 2: all of these things affect inflation.
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  Speaker 3: I'm Barry Ritolts, and we're going to bring you an
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  Speaker 3: extra special in large edition of At the Money, where
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  Speaker 3: we're going to discuss how investors should think about inflation
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  Speaker 3: to help us unpack all of this and what it
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  Speaker 3: means for your portfolio. Let's bring in Austin Goldsby. He's
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  Speaker 3: President of the Federal Reserve Bank of Chicago. He is
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  Speaker 3: a voting member of the f o MC. Previously, he
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  Speaker 3: was chairman of the Council of Economic Advisors and was
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  Speaker 3: in President Barack Obama's cabinet. So let's just start out
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  Speaker 3: with a simple question. You've talked about the golden path
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  Speaker 3: between inflation and recession. What lesson should the Federal Reserve
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  Speaker 3: take from our recent and rather successful about with disinflation.
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  Speaker 1: Yeah, Verry, thanks for having me on. I called the
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  Speaker 1: golden path. You remember, as I came into the Fed,
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  Speaker 1: I started at the very beginning of twenty twenty three.
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  Speaker 1: In December of twenty twenty two, it was the Bloomberg
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  Speaker 1: Economists who said there was a one hundred percent chance
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  Speaker 1: of recession in twenty twenty three, because the historical record
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  Speaker 1: suggested that to get rid of inflation you had to
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  Speaker 1: have a big, nasty recession. That's what had happened at
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  Speaker 1: old times. And what I called the Golden Path was
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  Speaker 1: in twenty three we had as almost as large ad
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  Speaker 1: in inflation that we have ever had.
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  Speaker 4: In a single year.
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  Speaker 1: And not only was there not a recession, the unemployment
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  Speaker 1: rate never even got above four percent, a level that
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  Speaker 1: a lot of folks thought is below full employment. So
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  Speaker 1: that was a golden Path year, and I think one
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  Speaker 1: of the principal lessons. There were a couple of principal
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  Speaker 1: lessons that explain how it was possible. One was the
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  Speaker 1: supply side was healing on the supply chain, and there
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  Speaker 1: was a big surge of labor force participation from a
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  Speaker 1: number of groups. I think a lot of it tied
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  Speaker 1: to the workforce flexibility, but if you looked at self
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  Speaker 1: described disabled workers, highest labor force participation ever, so you
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  Speaker 1: got a number of positive supply shocks that are exactly
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  Speaker 1: it allowed for the immaculate disinflation, which the people who
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  Speaker 1: thought that was impossible use that phrase mockingly, but that
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  Speaker 1: is exactly what happened. And now fast forward to today.
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  Speaker 1: So in a way, transitory became Steve Leisman's phrase transsatory.
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  Speaker 1: But it was all because the supply side. When you
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  Speaker 1: get negative supply shocks, they do heal. But one of
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  Speaker 1: the lessons of COVID was that might take longer than
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  Speaker 1: you thought ahead of time because the supply chain is complicated,
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  Speaker 1: the modern supply chain. And you know that the Chicago
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  Speaker 1: FED is the seventh District, and we're like the Saudi
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  Speaker 1: Arabia of auto production.
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  Speaker 4: In the seventh district, we.
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  Speaker 1: Got Indiana, Illinois, Michigan, Wisconsin. If you go talk to
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  Speaker 1: the auto suppliers, that something like the mother of all
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  Speaker 1: supply chains. Okay, so a single car has up to
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  Speaker 1: thirty thousand different parts and components in it, and every
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  Speaker 1: single one of them has its own supply chain. And
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  Speaker 1: you've probably seen some of these people that will track
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  Speaker 1: one individual part through the US supply chain and the
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  Speaker 1: way that it transistor came from Asia. Then they sent
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  Speaker 1: it to Mexico, they put it into a capacitor, they
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  Speaker 1: put the capacitor in a seat, get sent to the
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  Speaker 1: seat manufacturer in Michigan, it goes to Canada, comes back
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  Speaker 1: to the US, finally gets put in a car, and
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  Speaker 1: you go buy it on the lot and drive it out.
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  Speaker 1: In an environment like that, the spillovers can't take a
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  Speaker 1: long time. That's what we saw in COVID. That you
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  Speaker 1: couldn't get computer chips, so you couldn't make the electronic.
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  Speaker 4: Seat, so they couldn't make the car. The price of
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  Speaker 4: cars went up.
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  Speaker 1: Then that meant the rental car companies couldn't get new cars,
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  Speaker 1: so the price of rental cars went up. Then the
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  Speaker 1: whatever the US car salesman who used the rental car,
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  Speaker 1: and so that thing played out over years, not weeks.
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  Speaker 1: My fear now is that if you're going to do
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  Speaker 1: something negative on the supply side, and make no doubt
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  Speaker 1: about it, tariffs on intermediate goods like steel, like parts
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  Speaker 1: and components like the things that are getting sent from
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  Speaker 1: auto factories from suppliers in Canada that are getting sent
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  Speaker 1: over the border to be fabricated into the car in Michigan.
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  Speaker 1: That's a negative supply shock. And I hope that it's
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  Speaker 1: small enough or short lived enough that it doesn't reteach
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  Speaker 1: us the lessons of COVID, But it might The lesson
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  Speaker 1: of COVID was that can have if it's big enough,
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  Speaker 1: that can have a longer lasting impact than you might
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  Speaker 1: have thought at the beginning.
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  Speaker 3: So let me ask you a question about that recession
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  Speaker 3: that never showed up. Forget one hundred percent chance of
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  Speaker 3: recession twenty two, twenty three, twenty four, half of the
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  Speaker 3: Wall Street economists were forecasting recessions, and no less in
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  Speaker 3: August and well regarded economist than Lauren Summers was saying, Hey,
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  Speaker 3: you'll need ten percent unemployment to bring this inflation down.
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  Speaker 2: What was it.
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  Speaker 3: About the historical models that seems to have gotten this
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  Speaker 3: economic cycle so wrong?
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  Speaker 1: Well, that's the critical question, and Summers said it either
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  Speaker 1: had to go to ten percent or if it went
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  Speaker 1: to six percent, it would take five years of unemployment
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  Speaker 1: above six percent. I think the thing that got wrong
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  Speaker 1: that worldview got wrong is that it was rooted in
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  Speaker 1: almost all previous business cycles were regular demand driven business cycles,
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  Speaker 1: and that's the logic.
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  Speaker 4: In a demand driven.
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  Speaker 1: Business cycle, you overstimulate, inflation goes up, inflation expectations go up,
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  Speaker 1: and you have a hell of a time getting it
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  Speaker 1: out of there.
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  Speaker 4: As you know, I was an old.
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  Speaker 1: Dear friend with Paul Volker, and he was a mentor
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  Speaker 1: of mine and a personal he wrote really and one
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  Speaker 1: of the lessons of the Vulgar episode, which was a
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  Speaker 1: time when inflation expectations went way up, is that it's
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  Speaker 1: extremely painful if the FED or the central Bank does
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  Speaker 1: not have credibility.
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  Speaker 4: It's extremely painful to.
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  Speaker 1: Get rid of inflation in an environment where the FED
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  Speaker 1: is credible. So that even as headline CPI inflation was
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  Speaker 1: approaching double digits, the FED was announcing, we will get
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  Speaker 1: inflation back to two percent. And if you go look
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  Speaker 1: at the market estimation from tips or from others, people
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  Speaker 1: believed it. If you looked at the what do you
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  Speaker 1: think inflation will be in five years, they were saying
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  Speaker 1: it will be back to two percent.
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  Speaker 4: That is a.
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  Speaker 1: Sign of credibility of the central bank. So A, you
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  Speaker 1: must have credibility, and B you must have the good
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  Speaker 1: fortune that positive supply shocks in our case one a
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  Speaker 1: big increase in labor force participation that was enabled I
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  Speaker 1: think by some of the more flexible work arrangements. Two
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  Speaker 1: that we had had such a horrible supply chain experience
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  Speaker 1: coming through COVID with shortages.
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  Speaker 4: Et cetera. That could heal, and then three a pretty.
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  Speaker 1: Subst stanchel uptick in the rate of productivity growth. That
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  Speaker 1: combination was a lovely combination that allowed inflation to come
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  Speaker 1: down without a recession. And I think that the chat
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  Speaker 1: GPTAI version of a central bank would have got it
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  Speaker 1: wrong because it would have been based on a training
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  Speaker 1: sample that was a whole bunch of demand shocks, and
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  Speaker 1: this really wasn't a demand shock induced business cycle. And
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  Speaker 1: you know, look, it doesn't take somebody with the market
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  Speaker 1: acumen that you have, Barry, and it certainly doesn't take
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  Speaker 1: a PhD to look out and recognize that the COVID
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  Speaker 1: business cycle was driven by industries that are not normally cyclical.
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  Speaker 1: Normally cyclicals like consumer durables or business investment are the
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  Speaker 1: thing that drives the recession. And here the demand for
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  Speaker 1: consumer durables went up because people could not spend money
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  Speaker 1: on services. But this is the only recession we ever
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  Speaker 1: had that came from people not being able to go
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  Speaker 1: to the dentist.
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  Speaker 4: And the thing.
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  Speaker 1: About that, and like the dentist is normally recession proof.
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  Speaker 1: And so that's why we everybody should have been more
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  Speaker 1: humble in pronouncing what the future would be coming out
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  Speaker 1: of such a weird o business cycle and we're still kind.
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  Speaker 4: Of living with that.
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  Speaker 3: So let's talk about humility. You have specifically mentioned that
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  Speaker 3: the FED needs to be quote more careful and more
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  Speaker 3: prudent about rate cuts due to the risk of inflation
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  Speaker 3: kicking back up again. So what specific inflation indicators are
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  Speaker 3: you watching closely in twenty twenty five.
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  Speaker 4: Okay, I'm thankful, Barry. I thought you were gonna be like, let's.
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  Speaker 1: Talk about humility, you once said, and I thought you're
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  Speaker 1: going to be like, You're You're not a humble person. Look,
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  Speaker 1: I have actually been before we got to this dust
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  Speaker 1: in the air period where everybody's talking about major either
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  Speaker 1: geopolitical changes to conditions or changes of policy conditions that
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  Speaker 1: might affect inflation. I've been more confident. I've had comfort
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  Speaker 1: we're still on the path to get inflation to two
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  Speaker 1: percent and we could cut rates.
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  Speaker 4: Now.
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  Speaker 1: I'm open to being proven wrong, and if I adjust the.
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  Speaker 4: I'm in the data dog caucus.
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  Speaker 1: If the data come in and the outlook is changing,
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  Speaker 1: for sure, I would change my view. But the I
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  Speaker 1: think it's critical to answer your question specifically, what should
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  Speaker 1: we look at inflation? I think number one, you want
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  Speaker 1: to look at the through line on inflation, not get
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  Speaker 1: overly indexed on monthly gyrations. It's a very noisy series, okay,
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  Speaker 1: So looking over a longer period and what matters is
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  Speaker 1: the new months coming in the inflation that's a twelve
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  Speaker 1: month backward looking average, which is usually what we're reporting
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  Speaker 1: in Eleven of the twelve months that are included in
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  Speaker 1: that are not new information.
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  Speaker 4: We already knew that.
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  Speaker 1: We knew, for example, that the blip up in inflation
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  Speaker 1: last January more than a year ago, was going to
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  Speaker 1: fall out the back and so that it would be
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  Speaker 1: very likely that the twelve month average would start dropping
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  Speaker 1: here in the first quarter, but that would not be
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  Speaker 1: a sign that the inflation is falling right now. The
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  Speaker 1: inflation already fell.
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  Speaker 4: It is just like how we do the average.
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  Speaker 1: So Number one, I put a lot of weight on
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  Speaker 1: the new months coming in and trying to get the
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  Speaker 1: through line of.
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  Speaker 4: That, not just react to one month.
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  Speaker 1: And second thing that helps me that I find outpal
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  Speaker 1: is looking at the components of core inflation. Now I
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  Speaker 1: know it can drive people nuts, like to drive my
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  Speaker 1: mom nuts, that we put our focus on core inflation
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  Speaker 1: and not food and energy inflation, because.
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  Speaker 4: My mom's like, what do you mean you're not.
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  Speaker 1: Paying attention to food and energy inflation that's very public
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  Speaker 1: top of mind for her. It's because those are so variable,
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  Speaker 1: they're up there, down we think the better observation is
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  Speaker 1: to look at core, and then within core, there's goods,
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  Speaker 1: there's services, there's housing. Our problem has been goods inflation
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  Speaker 1: had returned to deflation and.
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  Speaker 4: Was looking good.
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  Speaker 1: Housing inflation's in the biggest puzzle, and services inflation pretty persistent.
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  Speaker 1: The things that have given me a little more confidence
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  Speaker 1: lately is that even as we had a bit of
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  Speaker 1: a blip up in the inflation here, the components still
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  Speaker 1: look pretty good. The housing inflation has finally started falling
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  Speaker 1: on a pretty persistent basis, as we've been wanting it to,
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  Speaker 1: Services getting closer, much closer to what it was pre COVID,
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  Speaker 1: housing back close to what.
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  Speaker 4: It was pre COVID.
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  Speaker 1: And the thing that has been firmed up here in
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  Speaker 1: the last couple of months has actually been goods.
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  Speaker 4: And the thing about goods.
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  Speaker 1: Inflation is, as you know, and as some of my
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  Speaker 1: research showed before I ever got to the FED, goods
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  Speaker 1: inflation over long periods is actually deflation. The two percent
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  Speaker 1: inflation that we were at before COVID was housing three
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  Speaker 1: and a half the four per year, services two and
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  Speaker 1: a half per year, and goods minus a half to
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  Speaker 1: minus one per year. And so I think it's overwhelmingly
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  Speaker 1: likely that goods will go back to that very long
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  Speaker 1: standing trend and as it does, so that's Those are
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  Speaker 1: the kinds of things that give me confidence.
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  Speaker 3: So you mentioned housing. We seem to have two ongoing
• 15:25
  Speaker 3: issues with housing. The first is it appears that since
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  Speaker 3: the financial crisis we've significantly underbuilt single family homes as
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  Speaker 3: built yeah as the population can and multifamily. So you
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  Speaker 3: have the population growing, you still have fairly decent immigration numbers.
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  Speaker 3: Too much demand, not enough supply. The first question is
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  Speaker 3: what can we do to generate more supply in housing?
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  Speaker 3: Do higher rates operate as a headwind against builders, contractors,
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  Speaker 3: developed helopers putting up more housing.
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  Speaker 1: Look, this is a tangled This is a tangled web
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  Speaker 1: that is critically important to the economy. You've seen the
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  Speaker 1: relative price of housing go way up post COVID. But
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  Speaker 1: the one thing that I want to highlight is, yes,
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  Speaker 1: it's very noticeable, but it's not new. If you look
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  Speaker 1: like I said, for the whole decade plus pre COVID,
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  Speaker 1: you had house prices going up three and a half
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  Speaker 1: percent a year, goods prices going down one percent a year.
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  Speaker 1: If you just compare housing relative price versus going to
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  Speaker 1: costco relative price a thing that compounds five percent a
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  Speaker 1: year for fifteen or twenty years, Yeah, that's gonna be
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  Speaker 1: a really big difference at the end of that time.
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  Speaker 1: And so I think one component that people are seeing,
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  Speaker 1: and they're not wrong. You see the frustration of young people.
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  Speaker 1: They say, you know, when my dad was twenty five
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  Speaker 1: years old, he on one job could afford a decent house,
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  Speaker 1: and I can't buy a condo. And they're not wrong.
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  Speaker 1: The relative price of housing has gone way up. I
• 17:19
  Speaker 1: think some component of.
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  Speaker 4: That is.
• 17:23
  Speaker 1: Regulatory in nature and business permits. And I've been convinced
• 17:28
  Speaker 1: by a bunch of the evidence that land use regulation
• 17:31
  Speaker 1: have made it very difficult for us to build housing
• 17:35
  Speaker 1: of any form, single family homes, multi family homes. I
• 17:39
  Speaker 1: have a I did some research. It was about the
• 17:42
  Speaker 1: construction industry, and another thing going on is that overall
• 17:48
  Speaker 1: productivity in the construction industry has not only been stagnant,
• 17:52
  Speaker 1: actually over long periods of time, been negative that we've
• 17:56
  Speaker 1: got worse at building the same things that that we
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  Speaker 1: did twenty thirty years ago.
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  Speaker 4: So I think that's part of it.
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  Speaker 1: And I think you're highlighting that rates do have.
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  Speaker 4: A twin.
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  Speaker 1: They do have a twin twined effect. One as they
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  Speaker 1: affect demand, but the other is they do affect construction.
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  Speaker 1: And so I think in a higher rate environment, if
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  Speaker 1: you're trying to cool the economy, this.
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  Speaker 4: Is always true.
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  Speaker 1: But the shift of more and more of our mortgages
• 18:33
  Speaker 1: to being thirty year fixed than they were saying two
• 18:37
  Speaker 1: thousand and seven have meant that changing rates can have
• 18:43
  Speaker 1: more of a lock in effect than and it kind
• 18:46
  Speaker 1: of dull the immediate impact of monetary policy than it
• 18:51
  Speaker 1: does in a more immediate mortgage impact environment.
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  Speaker 3: Let's walk out a little bit about housing owner's equivalent.
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  Speaker 3: Rent has been this bugaboo for a long time that
• 19:03
  Speaker 3: some people following the financial crisis said had understated housing inflation.
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  Speaker 3: Now there's some people saying something similar. How do we
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  Speaker 3: And I know the FED has looked at this. There's
• 19:17
  Speaker 3: been a number of white papers that have come out
• 19:18
  Speaker 3: of the FED. How should we think about the equivalent
• 19:22
  Speaker 3: of renting versus ownership? In terms of the impact on inflation.
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  Speaker 1: You raise several critical points if we're going to walk
• 19:32
  Speaker 1: out on housing and inflation. Point one, it's not single
• 19:38
  Speaker 1: family home sales prices, its owner equivalent rent plus rents.
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  Speaker 1: And the reason it's that is because part of buying
• 19:49
  Speaker 1: a house is a financial asset. So if you're buying
• 19:52
  Speaker 1: a house and the values going up and you're selling
• 19:55
  Speaker 1: it for more, and if there's speculation, that's not really housing.
• 20:01
  Speaker 1: What you're trying to get, that's not really inflation, but
• 20:04
  Speaker 1: you're trying to get for housing inflation is something like
• 20:08
  Speaker 1: the CPI how much more does it cost for the
• 20:11
  Speaker 1: same housing services, And that's why they try to compute
• 20:16
  Speaker 1: owner equivalent rent and similar Point two, that's there's a
• 20:20
  Speaker 1: heavy lag in the way they do it. So in
• 20:25
  Speaker 1: a way, the critics were correct that it was understating
• 20:31
  Speaker 1: inflation on the way up, and the other critics are
• 20:36
  Speaker 1: right that now it's overstating inflation on the way down.
• 20:40
  Speaker 1: For the same reason that it's kind of like if
• 20:43
  Speaker 1: you were measuring average rent and people were raising that
• 20:49
  Speaker 1: it was a time when the market was raising the rent.
• 20:53
  Speaker 1: It's gonna take time before that shows up in average
• 20:56
  Speaker 1: rents because the contracts last for a year and turning over,
• 21:00
  Speaker 1: so you get this automatic lag in there. I think
• 21:04
  Speaker 1: that has been a major component of measured housing inflation
• 21:10
  Speaker 1: because if you go look at market based measures like
• 21:13
  Speaker 1: from Zillo or others, they were showing rapid drops in
• 21:19
  Speaker 1: the inflation rate back to or in some cases even
• 21:23
  Speaker 1: below what inflation was before COVID started. And so that's
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  Speaker 1: been the puzzle. That's it's been our impatience. Why hasn't
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  Speaker 1: it shown up yet? That's been true for quite a while,
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  Speaker 1: and the lag theory it should start showing up.
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  Speaker 4: Well, finally it has, and.
• 21:44
  Speaker 1: That's why I have a little more confidence that the
• 21:49
  Speaker 1: housing inflation improvement will be lasting.
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  Speaker 4: Is it was, it.
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  Speaker 1: Took a long time to run up, and now it's
• 21:57
  Speaker 1: finally started coming down, So I think it's it's probably
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  Speaker 1: got legs of coming down. So I think those are
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  Speaker 1: two key components on the housing inflation side.
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  Speaker 4: We could get it.
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  Speaker 1: We could even go into a third layer of wonky,
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  Speaker 1: but it's more subtle, which is the component. If you
• 22:18
  Speaker 1: think about rents and say market rents in Zillo, or
• 22:24
  Speaker 1: who are renters versus who are new home buyers, they're
• 22:29
  Speaker 1: sort of different markets, and so it doesn't have to
• 22:32
  Speaker 1: be that the inflation rate of the zilo market rents
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  Speaker 1: matches the owner equivalent rents that they're measuring at the BLS,
• 22:43
  Speaker 1: because they might be different. New renters and existing tenants
• 22:49
  Speaker 1: might be a little bit too separate markets.
• 22:52
  Speaker 3: It makes a lot of sense. You mentioned the two
• 22:55
  Speaker 3: percent inflation target. In the twenty tens, an era dominated
• 23:00
  Speaker 3: by monetary policy, the FED had a two percent inflation target.
• 23:05
  Speaker 3: Now in the twenty twenties, we have a primarily fiscally
• 23:10
  Speaker 3: driven economy, or at least post pandemic. That's what it
• 23:14
  Speaker 3: feels like. You've said, you've turned one hundred and eighty
• 23:17
  Speaker 3: degrees on the inflation target question since your initial thoughts
• 23:21
  Speaker 3: in twenty twelve. Tell us about that. Explain that.
• 23:25
  Speaker 1: Okay, so in twenty twelve there had been vague targets.
• 23:32
  Speaker 1: In twenty twelve, I believe is when the FED officially said,
• 23:36
  Speaker 1: where you have a two point zero zero zero percent
• 23:40
  Speaker 1: inflation target, and you go back and look, I wasn't
• 23:43
  Speaker 1: at the FED.
• 23:43
  Speaker 4: I was critical.
• 23:44
  Speaker 1: I was publicly critical on the grounds that that conveyed
• 23:50
  Speaker 1: a way false sense of precision. To me, that if
• 23:55
  Speaker 1: I asked you just take the take the standard deviation
• 24:00
  Speaker 1: of the inflation series and ask yourself how many observations
• 24:06
  Speaker 1: would you need to get to be able to distinguish
• 24:09
  Speaker 1: between a two point zero percent inflation rate and a
• 24:13
  Speaker 1: two point one percent inflation rate.
• 24:16
  Speaker 4: And the answer was like decades.
• 24:18
  Speaker 1: You need decades a monthly observation before you could tell no, no,
• 24:22
  Speaker 1: this is two point one not two point zero. So
• 24:25
  Speaker 1: that was my critique. Fast forward to the inflation. Now
• 24:31
  Speaker 1: it goes way up. And the one wonky thing that
• 24:36
  Speaker 1: you got to know, what you already know, Barry, but
• 24:39
  Speaker 1: the average person might not know, is the two point
• 24:43
  Speaker 1: zero percent inflation target is for personal consumption expenditure inflation
• 24:49
  Speaker 1: PCEE inflation. That's not CPI. It's a little different. They
• 24:53
  Speaker 1: have different weightings of what goes into it. We believe
• 24:57
  Speaker 1: the PCEE measure, which instead of the CPI measures a
• 25:01
  Speaker 1: basket and the pce measures everything consumers spend money on,
• 25:06
  Speaker 1: so it's the better measure.
• 25:08
  Speaker 4: But just as a technical.
• 25:12
  Speaker 1: CPI of two point three is about the equivalent of
• 25:16
  Speaker 1: a PCEE of two point zero. Okay, we go through COVID,
• 25:21
  Speaker 1: the inflation post COVID source to almost double digits. In
• 25:28
  Speaker 1: long run inflation expectations measured in the market never go up.
• 25:34
  Speaker 1: They remain exactly and they're off of CPI. Importantly, they
• 25:41
  Speaker 1: remain exactly two point three percent. And so I said,
• 25:47
  Speaker 1: either that's the biggest coincidence in the history of price indices,
• 25:52
  Speaker 1: or else the inflation target of two point zero is
• 25:56
  Speaker 1: serving as exactly the anchor that it's advocates said it
• 26:00
  Speaker 1: would be.
• 26:01
  Speaker 4: And at that point I changed one hundred and eighty degrees.
• 26:04
  Speaker 1: And I not only am I not opposed to the
• 26:06
  Speaker 1: inflation target, I think it's critical, it's vital, and it
• 26:10
  Speaker 1: is serving as exactly the anchor that we needed.
• 26:13
  Speaker 3: So it's a magnet, not necessarily a landing spot. Really
• 26:17
  Speaker 3: interesting you mentioned will be.
• 26:19
  Speaker 1: The landing spot it will be.
• 26:22
  Speaker 4: You may get.
• 26:24
  Speaker 3: You mentioned inflation expectations when when we look at some
• 26:27
  Speaker 3: of the survey data in twenty twenty and twenty one,
• 26:31
  Speaker 3: right before inflation really exploded higher, they were really low.
• 26:36
  Speaker 3: And then go fast forward to June twenty twenty two,
• 26:40
  Speaker 3: just as inflation was peaking, they were really high. How
• 26:44
  Speaker 3: close attention does the FED pay to inflation expectation? It
• 26:48
  Speaker 3: seems that it's very much a lagging not leading indicator.
• 26:53
  Speaker 1: Now fascinating in a way a I should have said
• 26:56
  Speaker 1: at the beginning.
• 26:58
  Speaker 4: You know the rules.
• 26:59
  Speaker 1: I'm not allowed to speak for the fomcing er, the FED,
• 27:02
  Speaker 1: only for myself. That gives them great relief, That gives
• 27:05
  Speaker 1: my colleagues great relive. In the world of food safety,
• 27:09
  Speaker 1: the thing that characterizes almost every worker in the food
• 27:16
  Speaker 1: supply chain is frustration. Why do we have to wash
• 27:19
  Speaker 1: our hands all the time. There's no nobody's ever getting
• 27:22
  Speaker 1: sick from the food, And it's only because they're washing
• 27:26
  Speaker 1: their hands all the time that nobody's getting sick from
• 27:28
  Speaker 1: the food. I feel that way a little bit about
• 27:30
  Speaker 1: inflation expectations. They are lagging indicators if the FED has
• 27:36
  Speaker 1: credibility and is doing it right. As soon as that's
• 27:39
  Speaker 1: not true, they become very instructive, forward looking indicators. The
• 27:44
  Speaker 1: only thing that I want to emphasize as well is
• 27:48
  Speaker 1: now we've actually started to get a couple of observations
• 27:51
  Speaker 1: where not short run expectations, but longer run expectations actually
• 27:56
  Speaker 1: bumped up in the University of Michigan survey. And since
• 28:02
  Speaker 1: I had said this about how important inflation expectations, where
• 28:06
  Speaker 1: as a measure. A couple of folks asked me, well,
• 28:09
  Speaker 1: does that make you nervous? And yes, but a I've
• 28:14
  Speaker 1: always said I value the market based measures more than
• 28:18
  Speaker 1: survey based measures, and one month is no months. But
• 28:23
  Speaker 1: make no doubt about it. If what we started to
• 28:25
  Speaker 1: see was persistent, a persistent increase in long run expectations
• 28:32
  Speaker 1: of inflation in surveys and market and for example, if
• 28:37
  Speaker 1: you started to see long rates rising one for one
• 28:41
  Speaker 1: with long run inflation expectations, then that fundamentally, to me,
• 28:46
  Speaker 1: means the Fed's job is not done, and we've got
• 28:50
  Speaker 1: to go address that because if you's that's one of
• 28:54
  Speaker 1: the main lessons of the vulgar experience and central banks
• 28:59
  Speaker 1: around the world. If the expectations start rising, it is
• 29:04
  Speaker 1: really hard to slay. You don't have to just slay
• 29:06
  Speaker 1: the inflation dragon. You have to go convince people that
• 29:10
  Speaker 1: it's going to stick. And it kind of the only
• 29:14
  Speaker 1: way we know, the only way we know central banks
• 29:17
  Speaker 1: have been able to convey that is to have awful
• 29:20
  Speaker 1: recessions where they grind down wages to convince people look
• 29:25
  Speaker 1: that we will keep the job market as suppressed as
• 29:29
  Speaker 1: we need to. As proved that We're serious, so we
• 29:33
  Speaker 1: don't ever want to get back into that situation if
• 29:37
  Speaker 1: we can help.
• 29:37
  Speaker 3: The last question on inflation, you have mentioned that prioritizing
• 29:43
  Speaker 3: real economic channels the real economy over wealth effects. Can
• 29:48
  Speaker 3: you can you explain this perspective. Why does the real
• 29:52
  Speaker 3: economy channels matter more to the wealth effects. I always
• 29:56
  Speaker 3: thought the wealth effect was so dramatically over st because
• 30:01
  Speaker 3: you know, it's typically the wealthy that owns most of
• 30:03
  Speaker 3: the stocks, and the real economy is the real economy.
• 30:06
  Speaker 3: But I'm curious as to your perspective.
• 30:09
  Speaker 1: Yeah, look, I would expand it a little more than
• 30:13
  Speaker 1: just the wealth effect.
• 30:14
  Speaker 4: My view is the.
• 30:16
  Speaker 1: Federal Reserve Act tells us we should be looking at
• 30:20
  Speaker 1: the real economy, maximizing employment and stabilizing prices. The stock
• 30:26
  Speaker 1: market other financial markets can influence those two things, partly
• 30:33
  Speaker 1: through the wealth effect. But by the very first speech
• 30:37
  Speaker 1: I gave when I got to the FED, I went
• 30:40
  Speaker 1: out to Indiana and a factory where they where they
• 30:44
  Speaker 1: make our vs. A community college where they train people
• 30:48
  Speaker 1: for advanced manufacturing, and I said this, look, the FED,
• 30:51
  Speaker 1: by law, is supposed to be looking at the real
• 30:54
  Speaker 1: economy and financial markets to the extent they're affecting the
• 30:58
  Speaker 1: real economy. We should pay attention to them. But that's it, Like,
• 31:03
  Speaker 1: let's remember the priorities. I quantitatively agree with you. I
• 31:08
  Speaker 1: think there are a number of people who overweight the
• 31:11
  Speaker 1: wealth effect and its impact on consumer spending. And I
• 31:16
  Speaker 1: don't want us to get into a mindset that the
• 31:20
  Speaker 1: FED has an accomplishment. If it does something and it
• 31:23
  Speaker 1: changes the financial markets, that's an indirect in my worldview.
• 31:28
  Speaker 1: If you get the real economy right, the financial markets
• 31:31
  Speaker 1: will benefit. But doing something to try to create higher
• 31:37
  Speaker 1: equity prices or benefit the financial market, that should not
• 31:41
  Speaker 1: be the fed's goal.
• 31:42
  Speaker 4: The Fed's goal should be.
• 31:44
  Speaker 1: Stabilized prices, maximize employment, and focus on the realese.
• 31:48
  Speaker 3: And if you do both of those, stock market tends
• 31:51
  Speaker 3: to do well under those.
• 31:54
  Speaker 4: That's how it should be. That's how it should be.
• 31:56
  Speaker 3: So you've mentioned that conditions have not materially changed despite
• 32:01
  Speaker 3: recent economic data. Do you still expect to see interest
• 32:06
  Speaker 3: rates a fair bit lower over the next twelve to
• 32:08
  Speaker 3: eighteen months.
• 32:10
  Speaker 4: I still do.
• 32:12
  Speaker 1: If we can get out of this dusty environment, look
• 32:15
  Speaker 1: at the horizon and look at the through line. And
• 32:18
  Speaker 1: when we're having a bunch of uncertainties that are about
• 32:24
  Speaker 1: things that will increase prices.
• 32:26
  Speaker 4: It's just throwing.
• 32:27
  Speaker 1: Lots and lots of dust in the air and it's
• 32:29
  Speaker 1: hard to see the through line. I still think that
• 32:32
  Speaker 1: underneath there is a robust, healthy economy with employment pretty
• 32:39
  Speaker 1: much stable at full employment, inflation headed back to two percent,
• 32:45
  Speaker 1: GDP growth solid and strong, and we can get back
• 32:50
  Speaker 1: to the resting point of normal in that kind of environment.
• 32:56
  Speaker 1: If we're going to have an escalating trade war that
• 33:02
  Speaker 1: leads to higher prices and a stagflationary kind of environment
• 33:07
  Speaker 1: where GDP growth is falling, I could revise my economic outlook,
• 33:12
  Speaker 1: but I still think if we can get past this
• 33:15
  Speaker 1: dusty part over twelve to eighteen months, the SEP dot
• 33:20
  Speaker 1: plot tells you that the vast majority of members of
• 33:24
  Speaker 1: the committee believe that the ultimate settling point for rates
• 33:29
  Speaker 1: is well below where we are today, and so I
• 33:32
  Speaker 1: still think that we can get there.
• 33:35
  Speaker 3: And our final question, I love your self description. You
• 33:39
  Speaker 3: have said, I'm neither a hawk nor a dove. I'm
• 33:44
  Speaker 3: a data dog. So now we have to add right, hawks, dogs, birds, hawks,
• 33:48
  Speaker 3: doves and dogs. So explain how you, as a data dog,
• 33:54
  Speaker 3: how does that affect your approach to monetary policy, especially
• 33:58
  Speaker 3: in twenty twenty five you're a voting member.
• 34:03
  Speaker 4: I try to get out there either.
• 34:05
  Speaker 1: The first rule of the data dog kennel is that
• 34:09
  Speaker 1: there's a time for walking, and there's a time for sniffin,
• 34:12
  Speaker 1: and know the difference, and the time for sniffin is
• 34:16
  Speaker 1: exactly when there is not clarity, okay, And that is
• 34:20
  Speaker 1: go get every data series you can, every frequency, don't
• 34:26
  Speaker 1: throw anything away. If you can get private sector price information.
• 34:31
  Speaker 4: Get it.
• 34:31
  Speaker 1: If you are looking at the job market, don't just
• 34:35
  Speaker 1: look at payroll employment when there's a bunch of stuff
• 34:39
  Speaker 1: with population growth and immigration that make it noisier. Don't
• 34:42
  Speaker 1: just look at the unemployment rate when labor force participation
• 34:45
  Speaker 1: changes can can affect it. Take ratios of unemployment, of vacancies,
• 34:51
  Speaker 1: look at.
• 34:51
  Speaker 4: The hiring weight and the quit rate.
• 34:53
  Speaker 1: Get out and talk to the business people in our regions.
• 34:59
  Speaker 1: And the kind of inform that goes into the base book.
• 35:02
  Speaker 1: All of those things are more real time than just
• 35:05
  Speaker 1: the data series.
• 35:07
  Speaker 4: But that mentality that.
• 35:10
  Speaker 1: If you have a question, get out there and sniff.
• 35:13
  Speaker 1: That's the essence of the data dog credo. If you
• 35:17
  Speaker 1: want to and look. It comes with some downsides. If
• 35:21
  Speaker 1: you are more theoretical, ideological, there are times when you
• 35:25
  Speaker 1: might be right and you can get to the answer quicker.
• 35:29
  Speaker 1: But this seems like a very uncertain environment, unusual, unprecedented
• 35:36
  Speaker 1: business cycles, nothing like things we've seen before. So just personally,
• 35:41
  Speaker 1: I'm more comfortable with that kind of approach.
• 35:44
  Speaker 3: So to wrap up, if you're an investor interested in
• 35:48
  Speaker 3: what's going on in the economy, looking at inflation, looking
• 35:52
  Speaker 3: at monetary policy, it's simply not as black and white
• 35:56
  Speaker 3: as you often hear about. Many of the vote members
• 36:00
  Speaker 3: of the FOMC look at the data that's out there
• 36:04
  Speaker 3: as complex and not binary. Don't think that what you're
• 36:09
  Speaker 3: hearing in these headline reports are remotely giving you the
• 36:14
  Speaker 3: full color of what's happening. There are obviously a whole
• 36:17
  Speaker 3: lot of moving parts here, a lot of complexity, and
• 36:22
  Speaker 3: it's reassuring when you hear from people like Chicago Federal
• 36:27
  Speaker 3: Reserve President and FMC voting member Austin Goolsby, who are
• 36:33
  Speaker 3: data driven, who do focus on filtering out the noise
• 36:38
  Speaker 3: but paying attention to the most recent trends, but following
• 36:43
  Speaker 3: the through line. It's not simple, it's complicated. We really
• 36:48
  Speaker 3: need to bring a more intelligent approach than we often
• 36:53
  Speaker 3: see as investors. We think about what the Federal Reserve
• 36:57
  Speaker 3: is going to do in response to what in flat
• 37:00
  Speaker 3: is doing. Perhaps if we had a little more sophisticated
• 37:04
  Speaker 3: approach and a little less binary, we wouldn't see people
• 37:08
  Speaker 3: being so wrong about when the Fed's gonna cut, when
• 37:11
  Speaker 3: a recession is going to happen, what's going on overall
• 37:15
  Speaker 3: with the robustness of the economy. Hey, it turns out
• 37:18
  Speaker 3: that economics is hard. It's complicated. There are lots of
• 37:22
  Speaker 3: moving parts. We oversimplify this at our own risk. I'm
• 37:28
  Speaker 3: Barry Redolts. You've been listening to Bloomberg's At the Money