Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Away. Tracy, you had
Speaker 1: a great piece I want to say this morning for
Speaker 1: our blog about some of the interesting dynamics happening in
Speaker 1: the economy right now. Oh, thank you. I really appreciate that. Yeah. No,
Speaker 1: we're in this weird moment. We're obviously, at least on
Speaker 1: a headline basis, the economy still still seems to be
Speaker 1: growing very rapidly out of the pandemic delta variance aside,
Speaker 1: and we'll see how the effects that those have. On
Speaker 1: the other hand, we are seeing inflation in a way
Speaker 1: that we really haven't seen in years, and there are
Speaker 1: significant debate about why that is, the degree to which
Speaker 1: policy has contributed to that inflation, the degree to which
Speaker 1: policy should fameliorate that inflation, and of course, as you
Speaker 1: sort of discussed it, a very big picture framework and
Speaker 1: that piece, there's just these sort of like these bigger
Speaker 1: questions about supply side capacity and the various log jams
Speaker 1: and supply chain bottlenecks that we're seeing really all over
Speaker 1: the place right now. Totally. So I think I called
Speaker 1: it the choke point economy um in that piece, and
Speaker 1: the idea is that even though on an absolute level, uh,
Speaker 1: you know, economic growth looks pretty good, there's a lot
Speaker 1: of stuff being produced in the economy on an absolute level,
Speaker 1: but on a relative basis, you can see these blockages,
Speaker 1: these shortages showing up in lots of different things, um,
Speaker 1: and in ways that are not always productive or helpful
Speaker 1: to society or the wider economy. And so the question
Speaker 1: then is do governments and policymakers start to step in
Speaker 1: to try to relieve some of those blockages. Yeah, and yeah,
Speaker 1: there's so many interesting policy things. And you know, there's,
Speaker 1: of course something that we've talked about a long time.
Speaker 1: There is the FEDS new framework seems to be much
Speaker 1: more willing to tolerate some periods of higher inflation in
Speaker 1: the pursuit of full employment. There's the massive amount of
Speaker 1: fiscal spending the likes of which we've never seen before.
Speaker 1: There's further there's a further infrastructure bill being debated. So
Speaker 1: amid all of these sort of moving pieces in the
Speaker 1: real economy, we're also it's sort of I guess you
Speaker 1: could kind of say uncharted, uncharted policy territory as well. Yeah,
Speaker 1: I get that it's a cliche to say that things
Speaker 1: are uncharted um at this point in time, but it's true.
Speaker 1: Like the economic shock that we just experienced in one
Speaker 1: was very unusual and in many ways unprecedented, and now
Speaker 1: we have an unprecedented period of fiscal stimulus. And also
Speaker 1: that's coinciding with this new framework from the Federal Reserve
Speaker 1: and new ways of central banks really thinking about monetary
Speaker 1: policy and how it works with government. Well, I think
Speaker 1: that is the perfect seg into our guests. I am
Speaker 1: absolutely thrilled um to get to speak to our guests today.
Speaker 1: It's a real treat to have him on. Odd lots
Speaker 1: that he would come on. We're going to be speaking
Speaker 1: with Rob Kaplan. He is the president of the Dallas
Speaker 1: Federal Reserve, been in that role since late so he's
Speaker 1: seen a lot and he's in the thick of it
Speaker 1: with all the policy choices that have to be made
Speaker 1: right now. President Kaplan, thank you so much for joining us.
Speaker 1: Great to be with you, Joe and Tracy. This is
Speaker 1: this is really a real treat to have you on.
Speaker 1: Thank you so much. Let's just start a very big picture.
Speaker 1: I mean, there, it still appears that we have this
Speaker 1: rapid growth, this rapid rebound out of UM out of
Speaker 1: the crisis. We do have this elevated inflation, clearly by
Speaker 1: various readings. Some debates about whether how transitory it is,
Speaker 1: when it will normalize, just give us. Let's just start
Speaker 1: with your assessment of the macro picture right now. So
Speaker 1: it's still our view at the Dallas FED that GDP
Speaker 1: growth for one will be in the neighborhood of six
Speaker 1: and a percent. That growth will moderate as we go
Speaker 1: into you know, somewhere let's say between two and a
Speaker 1: half and three We think that will trend down toward
Speaker 1: four and a half percent unemployment rate by the end
Speaker 1: of this year. But I'll come back to that. We
Speaker 1: think will end the year with a PC inflation reading
Speaker 1: of something like three point eight percent, so very elevated,
Speaker 1: and I'll talk more about that. Uh, the big issues
Speaker 1: we're facing between now certainly in the end of the
Speaker 1: year are more about supply than demand. There's plenty of
Speaker 1: demand in this economy. You you all were talking about
Speaker 1: it in your conver station, but everything we see suggests
Speaker 1: that consumer demand is strong and demand generally is strong.
Speaker 1: The issues we have are working out these supply demand
Speaker 1: and balances, not just on materials, but significantly on labor.
Speaker 1: We've had substantial number of retirements, we have people who
Speaker 1: are not in the workforce because their caregivers. We still
Speaker 1: have fear of infection, and I think that supply demand
Speaker 1: and balance regarding labor is going to be more persistent
Speaker 1: than people might expect. What can the Fed and Central
Speaker 1: banks more widely actually do to resolve supply demand imbalances?
Speaker 1: So my own view on that is for starters to
Speaker 1: be cognizant of them, and to be cognizant that that
Speaker 1: our tools, and in particular in the short run, our
Speaker 1: asset purchases are are much more adept at stimulating demand.
Speaker 1: They're not so adept at dealing with supply demand and balances.
Speaker 1: And so for me, I think patients the way I
Speaker 1: would define patients would be, you might want to lower
Speaker 1: the RPMs on the car now that we've gotten out
Speaker 1: of the ditch from early one and we're on more
Speaker 1: level land. I think I think we may want to
Speaker 1: show patients by reducing the RPMs on the car and
Speaker 1: be willing to allow these supply demand and balances time
Speaker 1: to unfold. But for me, that doesn't mean continuing our
Speaker 1: purchases like we were doing. It means showing some patients
Speaker 1: by realizing we're in a different situations than early and
Speaker 1: showing some restraint on our purchases. So I guess we're
Speaker 1: just jumping right into the big policy question, is uh
Speaker 1: that everyone wants to know. Do you agree with your
Speaker 1: colleague Chris Waller then that perhaps it makes sense to
Speaker 1: begin the taper soon, maybe as soon as October, get
Speaker 1: it finished sometime early next year. So so to answer that,
Speaker 1: let me step back for a moment. People talk a
Speaker 1: lot about substantial further progress. We have a substantial further
Speaker 1: progress benchmark. What I've been saying for the last number
Speaker 1: of weeks and months is there's one other significant criteria,
Speaker 1: and I would I would refer to that as efficacy.
Speaker 1: So the first thing you want to look at, and
Speaker 1: the best analogy I can if you're a doctor prescribing
Speaker 1: medicine to someone who's been through a traumatic event, you
Speaker 1: always want to first be assessing what's the efficacy of
Speaker 1: the medication, and you want to be willing to adjust
Speaker 1: your views on that, And and what I'm seeing now
Speaker 1: is the efficacy the benefits of purchasing eighty billion of
Speaker 1: treasuries and forty billion of mortgage backed securities a month.
Speaker 1: I think it was very high efficacy in early twenty one.
Speaker 1: As we sit here today, I see some unintended side effects.
Speaker 1: And again, those purchases are more adept at stimulating demand,
Speaker 1: but we don't have a demand problem right now. I
Speaker 1: worry that they're creating excesses in risk taking, excesses in
Speaker 1: the housing market, maybe exacerbating imbalances in the economy. And
Speaker 1: so for me, therefore, the bar for substantial further progress
Speaker 1: is lower because I don't see I'm starting to question
Speaker 1: the efficacy of our purchases. So in that regard, I
Speaker 1: would rather begin adjusting these purchases soon. I don't want
Speaker 1: to actually get into what the months or the calendar,
Speaker 1: but I would be supportive of adjusting these purchases soon.
Speaker 1: But the other thing I would say is, once we
Speaker 1: start the adjustment process, I would probably be preferred to
Speaker 1: have it be more gradual. And what does gradual mean
Speaker 1: to me? Probably means baseline over eight months, let's say,
Speaker 1: so that would be ten million of treasuries and five
Speaker 1: million billion a month of mortgage backed securities. So I
Speaker 1: would like to start sooner rather than later. Start soon,
Speaker 1: but I would probably like to be more gradual than
Speaker 1: than than others you've mentioned. So in recent history, I
Speaker 1: think one of the big criticisms of the FED has
Speaker 1: always been that they sort of jumped the gun and
Speaker 1: hiked rates too soon and basically started undercutting the employment
Speaker 1: recovery without actual evidence that inflation was becoming a problem.
Speaker 1: I realized our current situation is somewhat different because we
Speaker 1: have low interest rates in addition to monetary easing that
Speaker 1: you just mentioned. But how are you thinking about the
Speaker 1: risks of tightening policy versus the risks of UM staying
Speaker 1: loose for too long? So in that regard, I would
Speaker 1: differentiate what are what our action are going to be
Speaker 1: on the FED funds rate from what our actions are
Speaker 1: going to be on our asset purchases. I think those
Speaker 1: are those two subjects for me should be more fully divorced.
Speaker 1: On the FED funds rate, that's not a decision in
Speaker 1: my opinion, for that's something will debate based on conditions.
Speaker 1: In I think the near term judgment is on purchases.
Speaker 1: There may be arguments that in years past we might
Speaker 1: have move the FED funds rate earlier than we should have.
Speaker 1: I actually I'm not sure those those arguments. I'm not
Speaker 1: sure I agree with those arguments. But even setting that aside,
Speaker 1: I am much more confident about the efficacy of keeping
Speaker 1: the FED funds rate where it is right now. I
Speaker 1: am much more doubtful about the value of these purchases.
Speaker 1: My concern is they accentuate excesses and balances. They tend
Speaker 1: to be more beneficial to people who own asset than
Speaker 1: those who don't. This inflation discussion, which I know we
Speaker 1: can get into, effects big businesses differently than small mid
Speaker 1: sized businesses. And I think, uh, these supplied demand and
Speaker 1: balances and inflation pressures affect load and moderate income communities
Speaker 1: differently than they do higher income communities. And I think
Speaker 1: for which I can get into what why I say that,
Speaker 1: But for all those reasons I would I think adjusting
Speaker 1: these purchases sooner might actually allow us to be more
Speaker 1: patient on the FED funds right down the road, and
Speaker 1: the analogy you've heard and the uses, I'd rather take
Speaker 1: my foot off the accelerator soon, so we don't need
Speaker 1: to hit the brakes down the road. And I think
Speaker 1: that's that may be the case in this situation. That's
Speaker 1: really interesting. And you know, obviously I think early some
Speaker 1: in the market would interpret the commencement of a taper
Speaker 1: reducing purchases as some sort of signal on rates. So
Speaker 1: it's like, okay, we're starting the let's say the Federal
Speaker 1: to start tapering in October, and then maybe the market
Speaker 1: implicitly pulls forward its estimated date for the first rate hike.
Speaker 1: Do you think there's uh Therefore then that to your
Speaker 1: point exactly, that the commencement of a tapering should be
Speaker 1: paired with some sort of communication, some sort of specific communication,
Speaker 1: to your point that this should not necessarily be interpreted
Speaker 1: as a sign of some sequencing sign that okay, those
Speaker 1: first rate hikes are therefore right around the corner. Yes,
Speaker 1: I do think that, and in all my communications I've
Speaker 1: emphasized that by adjusting purchases sooner, it may actually allow
Speaker 1: us to be more patient in the future on the
Speaker 1: Fed funds rate and and in my in my view,
Speaker 1: those two subjects should be divorced, and we should be
Speaker 1: clear in our public communication that those two pro to
Speaker 1: caes or divorced. I think the these purchases and injecting
Speaker 1: this amount of liquidity into the economy every month has
Speaker 1: its own set of considerations and its own set of
Speaker 1: side effects, which I think are different than the considerations
Speaker 1: and side effects of how we handle the FED funds rate.
Speaker 1: A slightly related question, but you know, I'm looking at
Speaker 1: the terminal right now, and I see the yield on
Speaker 1: the benchmark tenure U S Treasury is a like one
Speaker 1: point one percent, and the downward trends in bonds has
Speaker 1: been something that's confusing a lot of people, and a
Speaker 1: lot of people have been racking their brains over why
Speaker 1: this is happening. Is that a concern for the Fed
Speaker 1: as it starts to discuss things like tapering, Maybe not
Speaker 1: interest rate hikes, but tapering. Are you worried at all
Speaker 1: that the bond market seems to be either anticipating that
Speaker 1: thing is going to stick around for a long time
Speaker 1: or anticipating that growth might slow in the future. So
Speaker 1: I'll give you my own take on what when I'm
Speaker 1: seeing in the bond market over the horizon. In other words,
Speaker 1: after we get out of this rebound from the COVID pandemic,
Speaker 1: there's no question that labor force growth, we think in
Speaker 1: the outyears is decelerating due to aging and we felt
Speaker 1: that pre pandemic, that trend is still alive and well
Speaker 1: and is a challenge we have to face. Our our
Speaker 1: population growth is decelerating, Our labor folks growth is going
Speaker 1: to decelerate, and then the question is will productivity improvements
Speaker 1: help off set that that, and so far they haven't
Speaker 1: and why haven't they? Our own view at the Dallas
Speaker 1: FED is that if you've got a college education, your
Speaker 1: technology and technology enable disruption is probably helping your productivity.
Speaker 1: If you're one of the forty six million people of
Speaker 1: the high school education are less, technology and technology enabled
Speaker 1: disruption mean your job is being regularly either restructured or
Speaker 1: even eliminated, and we're not seeing the productivity improvements. So
Speaker 1: we've got to improve early childhood literacy, skills, training, and
Speaker 1: the whole educational ecosystem in order to get the benefits
Speaker 1: for the whole population of these of these technology investments.
Speaker 1: So how does that get to the mind market? If if,
Speaker 1: if productivity growth doesn't help offset slowing labor force growth,
Speaker 1: the out your growth is sluggish. And I think the
Speaker 1: bond market is recognizing that out your growth, not just
Speaker 1: in the United States but globally is relatively sluggish because
Speaker 1: of aging populations and skepticism about productivity. Off setting that,
Speaker 1: that's number one. The other thing you can't quite tell.
Speaker 1: And I always a caution myself and my team with
Speaker 1: the FED purchasing this uh much treasuries and mortgage backed securities,
Speaker 1: the signal that you might get from the bond market
Speaker 1: might be a little bit distorted right now. It's certainly
Speaker 1: distorted as it relates to credit spreads, real yields, et cetera.
Speaker 1: And so that's another factor. But I'm very conscious of
Speaker 1: what the Tenure is saying is something I'm mindful of
Speaker 1: as we assess the economy and think through what's appropriate
Speaker 1: monetary policy. Let's talk more about the productivity problem. I mean,
Speaker 1: we started this discussion man Tracy talking about some of
Speaker 1: these supply chain issues, these sort of like real breaks
Speaker 1: that are in the economy. There is a limit to say,
Speaker 1: how many homes can be built because there's a limit
Speaker 1: to how much child lumber could be delivered. There's a
Speaker 1: limit to how many cars could be made because there
Speaker 1: is only so many semiconductors. And I'm sure you know
Speaker 1: all of these things are very things you're very aware
Speaker 1: of when you think about like, all right, you mentioned
Speaker 1: say early childhood education and literacy, sitting aside the specific
Speaker 1: bills that are big debated in d C. Is there
Speaker 1: a role in your view for sort of aggressive UH
Speaker 1: fiscal expansion infrastructure investment to simply improve the supply side
Speaker 1: capacity of the economy such that we don't have these
Speaker 1: breaks going forward when we have a period of potentially
Speaker 1: high growth. So I do believe that investment in infrastructure,
Speaker 1: including WiFi, is different than fiscal policy that simply stimulates
Speaker 1: current spending, i e. Fiscal policy, either tax related or otherwise.
Speaker 1: It just stimulates current spending, gives you a short term bump,
Speaker 1: and then you revert back down to trend based on
Speaker 1: all the work we've done here. Infrastructure spending on the
Speaker 1: other hand, and those type of investments ideally, if they're
Speaker 1: well done, should be twenty or thirty year investments should
Speaker 1: that should help improve productivity. And then related to that,
Speaker 1: we need to improve early childhood literacy, particularly for the
Speaker 1: fastest growing demographic groups, and we need to improve skills training.
Speaker 1: Some of that can be done with local money, by
Speaker 1: the way, may not take government money, but I think
Speaker 1: that's another investment that will help improve productivity, and I
Speaker 1: think all those investments, my own view would be money
Speaker 1: well spent. How do you see monetary policy more generally
Speaker 1: interacting with fiscal stimulus and a greater propensity, at least
Speaker 1: in the US, towards government spending. So we hear a
Speaker 1: lot from central banks talking about you know, monetary policy
Speaker 1: can augment fiscal stimulus, and there's the potential for a
Speaker 1: sort of virtuous cycle there. But I'd love to get
Speaker 1: your thoughts on it and maybe talk specifically about how
Speaker 1: it's changed or hasn't changed the way you and the
Speaker 1: FED um think about monetary policy. My own view is
Speaker 1: I do not think it's the role of the Federal
Speaker 1: Reserve to either monetize the debt or to facilitate government spending.
Speaker 1: Now in the in the height of the crisis, I
Speaker 1: think it was important that the FED bolstered the function
Speaker 1: of the treasury market and took a number of the
Speaker 1: extraordinary actions we took in order to ensure that the
Speaker 1: government can do what it needed to do from a
Speaker 1: fiscal side to fight this crisis. But setting aside what
Speaker 1: we did in a crisis, I think in more normal
Speaker 1: times which were now emerging into I don't think the
Speaker 1: FED it's an appropriate role for the FED to be
Speaker 1: monetized in the debt or for fcilitating government spending, and
Speaker 1: I think it's very critical that we don't convey the
Speaker 1: impression of the public that that's part of our role,
Speaker 1: and I think there might be some confusion out there
Speaker 1: on that. On that subject, let's zoom out a little
Speaker 1: bit actually and talk more about the conduct of monetary policy.
Speaker 1: Because it is August, so we are approaching the one
Speaker 1: year anniversary of the Jackson Whole conference. We're gonna have
Speaker 1: another one, but the last year's was pretty consequential, and
Speaker 1: the Federal Reserve, the chairman rolled out this new of framework,
Speaker 1: flexible average inflation targeting, with this uh premise in mind
Speaker 1: that you know, two percent would not necessarily be the ceiling,
Speaker 1: that there would be some catch up potentially, that the
Speaker 1: Fed would be more patient, and furthermore, the that that
Speaker 1: framework was bolstered by further messaging that there is going
Speaker 1: to be a real renewed focus on hitting the employment
Speaker 1: side of the mandate and that it was not going
Speaker 1: to be this sort of like preemptive tightening. Tracy already
Speaker 1: sort of referenced it, but I really want to see
Speaker 1: like evidence of the employment side of the economy maxing out.
Speaker 1: You were sort of skeptical, and you were dissented a
Speaker 1: little bit, and you also worried that some of the
Speaker 1: policies that established would quote tie the hands of future committees.
Speaker 1: How do you feel about them now? Wasn't right for
Speaker 1: the FED to adopt this view of let's really, uh
Speaker 1: go as far as we can on the employment side,
Speaker 1: and how do you see in auguste your concerns about
Speaker 1: future committees hands being tied? So the on the framework,
Speaker 1: I supported and voted for the framework, But on the
Speaker 1: premise my interpretation of the framework was we needed to
Speaker 1: anchor inflation expectations so that they were more appropriately anchored
Speaker 1: at two percent, and we've been running behind two p
Speaker 1: and for a number of years, and so it was
Speaker 1: appropriate to be willing to tolerate inflation running moderately above
Speaker 1: two percent in order to anchor those expectations at two percent.
Speaker 1: I support that. I also supported being somewhat less preemptive
Speaker 1: and anticipating inflation at the cost of potentially improving employment
Speaker 1: and inclusive employment in the economy. So that's on the
Speaker 1: one hand, after we approved the framework, then we got
Speaker 1: into forward guidance in our September meeting. That's where I dissented,
Speaker 1: and here's why. For two reasons. What that forward guidance
Speaker 1: said is we're going to keep rates at zero until
Speaker 1: we've reached full employment and we've reached price stability. And
Speaker 1: I felt I dissented for two reasons their Number one,
Speaker 1: I don't think it's good practice for the FED to
Speaker 1: be specifically making commitments on the FED funds rate literally
Speaker 1: years in advance to a future context where we don't
Speaker 1: know the facts of that context. Today is a great example.
Speaker 1: I don't think in September we anticipated in inflation would
Speaker 1: be running as high as it is now. We didn't
Speaker 1: anticipate the supply demand and balances on the labor side
Speaker 1: that we're seeing. That's a classic case where you want
Speaker 1: to be very careful about making forward commitments. Number Two,
Speaker 1: I would have been willing to say in September that
Speaker 1: we would have been we would remain highly accommodative until
Speaker 1: we reach full employment and price stability. But that's different
Speaker 1: than keeping rates at zero. As you as you approach
Speaker 1: full employment and price stability, the neutral rate starts to
Speaker 1: drift up, as if as the neutral rate drifts up.
Speaker 1: If you're committed to keeping the FED funds rated zero,
Speaker 1: it means you're actually getting more and more and more
Speaker 1: accommodative as you approach full employment and price stability. I
Speaker 1: don't think you want to get more and more and
Speaker 1: more accommodative. I think you might be willing to stay
Speaker 1: highly accommodative. But I think, uh, I think it's probably appropriate,
Speaker 1: and future committees, my guests will think so too, that
Speaker 1: you want to make some adjustments to remain highly accommodative.
Speaker 1: But there's a difference between doing that and keeping rates
Speaker 1: at zero. So I felt it was too rigid in
Speaker 1: tying the hands of future committees, and that's why I
Speaker 1: the sent it. You mentioned the importance of anchoring inflation
Speaker 1: expectations at two percent, and of course there is some
Speaker 1: irony that you know, as soon as the FED introduced
Speaker 1: this new framework and said it would tolerate inflation um
Speaker 1: going above or under two um, sort of moving in
Speaker 1: this range. Of course, after many, many years, the FED
Speaker 1: finally seems on track to reach its inflation target at
Speaker 1: precisely the moment that it said. It's you know, less important.
Speaker 1: I wonder, how are you thinking about inflation expectations at
Speaker 1: the moment, and are you seeing any evidence that those
Speaker 1: are starting to increase? Yes, So what Here's what I'm seeing,
Speaker 1: broadly from from contexts. We're seeing in our work of
Speaker 1: the Dallas FED a broadening of price pressures. So on
Speaker 1: the on the positive side, some of the extreme moves
Speaker 1: and say use cards, lumber, other individual items, we're expecting those, uh,
Speaker 1: may well moderate somewhat. But on the other hand, what
Speaker 1: we're seeing is a broadening of price pressures. Why due
Speaker 1: to the semiconductor shortage that's starting to ripple to a
Speaker 1: broader range of consumer items. Material shortages we think will
Speaker 1: be more persistent than some might expect. And again the
Speaker 1: supply demand on labor that in those imbalances, we think
Speaker 1: here at the Dallas FED will take longer. And so
Speaker 1: our expectation for two is that the headline PC number
Speaker 1: will be in the neighborhood of two and a half percent.
Speaker 1: So it won't be it might not be the eye
Speaker 1: popping numbers that we're seeing this year, but it will
Speaker 1: be still be elevated. What I'm learning in discussions with contacts,
Speaker 1: big businesses will be able to handle elevated inflation much
Speaker 1: better than small mid sized businesses. Big businesses can use scale,
Speaker 1: they're they're actively merging, they can invest in technology. Small
Speaker 1: mid sized businesses don't have those levers. And what I'm
Speaker 1: hearing pretty broadly is is most businesses I talked to
Speaker 1: are are raising prices, intended to raise prices more, and
Speaker 1: are getting more confident about their ability to raise prices.
Speaker 1: I'm also seeing that again, if you're a low moderate
Speaker 1: income person with a job, higher inflation is biting into
Speaker 1: your share of wallet more so than it does somebody
Speaker 1: who's more affluent. And I'm hearing a lot from low
Speaker 1: modern income communities and their representatives that we we to
Speaker 1: extensive outreach rich that there's seen real stress in trying
Speaker 1: to make ends meet even though their constituents are heavily employed.
Speaker 1: And so what does it tell me? Tells me it's
Speaker 1: very important that the FED anchor inflation expectations at two
Speaker 1: and that yes, we we want to meet our inflation
Speaker 1: target of two percent, but we also want to be
Speaker 1: cognizant of the impacts of letting infration run a little
Speaker 1: bit to access. And so I take that two percent
Speaker 1: commitment very seriously. And it back to where we started.
Speaker 1: That's one reason why I'd rather not soon take the
Speaker 1: foot somewhat off the accelerator, reduce some of these excesses
Speaker 1: and imbalances, or or do less to be perpetuating them
Speaker 1: so that we maybe have more flexibility down the road
Speaker 1: and how we can handle the FED funds rate in
Speaker 1: and beyond. Do you see momentum building on the committee
Speaker 1: for that viewed start to take the foot off the
Speaker 1: accelerator on the asset purchases side. Probably I'll avoid speaking
Speaker 1: for the committee, but I do believe when I started
Speaker 1: speaking out, I guess it's now two two and a
Speaker 1: half months ago, I felt it was very important that
Speaker 1: the tapering discussion get on the agenda, that we begin
Speaker 1: the debate. And I think I, at least I am
Speaker 1: a much more comfortable that as a committee were in
Speaker 1: a much better place and that we're actively having the debate.
Speaker 1: We're obviously having disagreement, but I think that's healthy. But
Speaker 1: I have a lot of confidence in the f O
Speaker 1: m C that when we debate and disagree and we
Speaker 1: put these items on the table, you know we'll we'll
Speaker 1: get to better policy judgments. So I'm much more comfortable
Speaker 1: where we are right now than where we were, say
Speaker 1: a couple of months ago. You know, I want to
Speaker 1: go back to what you were just talking about, the
Speaker 1: moment before context um that you have in your district,
Speaker 1: and you kind of talked about this earlier, that you
Speaker 1: expect labor in balot Is to persist a while Dallas
Speaker 1: fed President Texas is one of the states that ended
Speaker 1: the unemployment insurance expansion earlier than the rest of the country.
Speaker 1: And it's sort of like this real time laboratory or
Speaker 1: some of these states, a real time test the degree
Speaker 1: to which that has had an impact on labor availability.
Speaker 1: And so I'm curious in those conversations you have, particularly
Speaker 1: with business leaders in your district, what are they seeing
Speaker 1: on the labor side, What was the impact of that,
Speaker 1: and why do you expect that these labor imbalances will continue,
Speaker 1: perhaps for longer than people think. So I've felt for
Speaker 1: some time, and I've said this publicly, that the unemployment
Speaker 1: benefits were only one piece of a larger puzzle. And
Speaker 1: what's the larger puzzle. We've had three million retirements since February.
Speaker 1: We have a million and a half approximately workers who
Speaker 1: are caregivers who have left the workforce. Uh. Uh, we
Speaker 1: we still have fear of infection, and some of these
Speaker 1: workers will come back into the workforce. But some of
Speaker 1: these workers are fifty five and older and they're in
Speaker 1: reasonably good financial shape, and COVID has caused them to
Speaker 1: rethink whether they really want to re enter the workforce.
Speaker 1: I'm hopeful that with expanded childcare in person school that
Speaker 1: will help get a chunk of the caregivers back into
Speaker 1: the workforce. But uh, this aging issue, which has been
Speaker 1: with us for years, is going to stay with us
Speaker 1: for the foreseeable future. And every data point we look
Speaker 1: at and all of talk with my contexts also suggest
Speaker 1: the labor force is now much tighter than these headline
Speaker 1: statistics would indicate. And uh, and I think when you
Speaker 1: lose three million workers to retirement, in a million and
Speaker 1: a half to caregiving, even if you get some number
Speaker 1: of them back, and again, with demand being very strong,
Speaker 1: we don't have a demand problem. With great recession aftermath
Speaker 1: was about all a could demand. The aftermath of the
Speaker 1: COVID downturn is more about supply and supply demand issues.
Speaker 1: It's not a lack of demand. And I think it's
Speaker 1: very critical that we recognize that so a question related
Speaker 1: to the labor tightness points. The FED has been describing
Speaker 1: the recent increase in inflation as transitory, and a lot
Speaker 1: of people have been trying to figure out what exactly
Speaker 1: that means. Could you maybe describe whether or not the
Speaker 1: FED has sort of signposts or things that it is
Speaker 1: looking at to determine whether or not inflation has gone
Speaker 1: from transitory to something um that is more of a
Speaker 1: permanent problem. And then secondly, I often wonder if the
Speaker 1: FED kind of regrets the choice of words um on transitory,
Speaker 1: like maybe maybe the right way to frame it would
Speaker 1: have been narrow inflation, like inflation in specific areas and
Speaker 1: specific things, and what you're looking out for is broader
Speaker 1: signs of inflation. So, Tracy, you'll notice from my public
Speaker 1: comments over the last three months, I've resisted using the
Speaker 1: term transitory. I would have preferred that the f O
Speaker 1: m C did not use the word largely the term
Speaker 1: largely transitory, and I've been fairly vocal about that. I've
Speaker 1: said consistently, I don't want to put a label on
Speaker 1: on what we're seeing. What we are seeing is Yes,
Speaker 1: to your point, A number of extreme price moves use
Speaker 1: cars as an example, But what we're also seeing is
Speaker 1: a broadening of price pressures. Contacts I have in semiconductor
Speaker 1: industry and a range of industries are telling me that
Speaker 1: these supply demand and balances for materials are gonna last
Speaker 1: longer then people might have expected. And and I do
Speaker 1: believe the supply demand and balances for labor will last
Speaker 1: longer UH and will be more persist. So no, it's
Speaker 1: it's a term I would have preferred not to have used,
Speaker 1: and superb it's a term I've avoided use. You know.
Speaker 1: I want to go back to something you said that
Speaker 1: was interesting, and this idea that if if the FED
Speaker 1: is committed to keeping rates that say zero until full
Speaker 1: employment maximum employment is reached, then implicitly it's actually increasing
Speaker 1: the UH stance of accommodation because the neutral interest rate
Speaker 1: is theoretically going up as that approaches, and if the
Speaker 1: nominal rate of FED policy is the same, then you're
Speaker 1: increasing accommodation. That being said, I do feel like in
Speaker 1: recent years there has been UH some growing skepticism that
Speaker 1: some of these variables, like say the neutral rate of interest,
Speaker 1: are really noble in real time. And I think even
Speaker 1: Sherman Powell I don't remember whether it was his twenty
Speaker 1: nineteen Jackson Hole speech or maybe speech right question whether
Speaker 1: a sort of real time stars, so to speak, our
Speaker 1: star and so forth are useful that in real time
Speaker 1: we can actually sort of like know these things. How
Speaker 1: have you personally or have you personally in you know,
Speaker 1: sitting aside the pandemic and watching the unemployment rate fall
Speaker 1: from five and a half percent to four and a
Speaker 1: half percent to three and a half percent without a
Speaker 1: meaningful pickup and inflation, have you personally, I don't know,
Speaker 1: changed any of your views or premises about the noble
Speaker 1: nous of some of these very variables. Yeah, and I'll
Speaker 1: start with the background. I'm not a PhD economist. I'm
Speaker 1: a business person. So as a business person I was
Speaker 1: trained over a couple of three decades that theoretical data
Speaker 1: points are useful to think about, but you've got to
Speaker 1: be very careful about understanding there's a great deal of
Speaker 1: unpredictability uncertainty about them. Having said that, I think the
Speaker 1: concept that there's an equilibrium rate is a is a
Speaker 1: good concept. Trying to get to specific as to what
Speaker 1: that neutral rate is that that's the part I would
Speaker 1: be careful about and so I think the concept that
Speaker 1: there's probably some equilibrium rate and that that, by the way,
Speaker 1: that equally liberum rate because of aging demographics, I think,
Speaker 1: has been declining. Uh and you can see it in
Speaker 1: the the clients and treasury yields and government bond yields
Speaker 1: around the world. That's a pretty good indicator that prospects
Speaker 1: for future growth are more sluggish and that tends to
Speaker 1: have a downward impact on the neutral rate. And so
Speaker 1: that helps explain why the FED funds rate and other
Speaker 1: central banks around the world have had much lower interest
Speaker 1: rates than they have historically. It's because prospects for future
Speaker 1: growth are more sluggish. So I think that concept is
Speaker 1: a useful concept. Now. The other thing we've done a
Speaker 1: lot of work here in the Dallas Fed though, regarding inflation,
Speaker 1: is there's a big structural trend that's been going on
Speaker 1: for the last number of years in the economy, and
Speaker 1: it's technology and technology enabled disruption that has limited the
Speaker 1: pricing power of businesses. And and this is why I've said,
Speaker 1: as you see more wage pressure and supply demand and
Speaker 1: balances for labor, those businesses that have scale and then
Speaker 1: can use technology to work around that have a distinct
Speaker 1: advantage small mid sized businesses, local restaurant, retail store don't
Speaker 1: really have those levers, and that's why we're seeing a
Speaker 1: divergence between how small midsized businesses are dealing with these
Speaker 1: wage pressures and inability to hire and large businesses. And
Speaker 1: for small businesses, it's it's really it's restricting their hours,
Speaker 1: it's eating into their margins, it's causing the question their
Speaker 1: business model. It's pushing many businesses I talked to to
Speaker 1: think about and getting scale, and I think that's, uh,
Speaker 1: that's an important trend to be away. So we've talked
Speaker 1: quite a bit about the inflation question. I'm wondering if
Speaker 1: you could maybe zoom in a little bit more on
Speaker 1: the full employment target and talk to us about how
Speaker 1: you're seeing that and how exactly you're measuring full employment,
Speaker 1: especially at a time when Chairman Pale has expressed a
Speaker 1: desire to tackle inequality in the job market. So what
Speaker 1: does full employment actually look like to you? So pre pandemic.
Speaker 1: I looked at a full dashboard, but I board in
Speaker 1: specifically on the headline unemployment rates for the whole population,
Speaker 1: for black citizens, Hispanics, women, those with high school education
Speaker 1: are less, as well as a measure called you six
Speaker 1: unemployed plus discouraged workers most people who work part time
Speaker 1: would rather work full time. I still look at all
Speaker 1: those measures today, but I've we broadened out our dashbark
Speaker 1: dashboard even further to look at things like open jobs,
Speaker 1: the quits rate, some of the Conference Board measures. And
Speaker 1: I think that I think it's very appropriate to be
Speaker 1: looking at different groups, to look at their um, their
Speaker 1: labor force participation and unemployment rate, and trying to look
Speaker 1: at opportunities to reduce the slack in those groups and
Speaker 1: get them back into the workforce. But I think in
Speaker 1: assessing how tight the labor force is, it's never been
Speaker 1: more important to look at a wide, wider set of
Speaker 1: benchmarks than before. And that's why you're probably not gonna
Speaker 1: hear me use pre pandemic targets in thinking about full
Speaker 1: employment today. I think structurally, these supplied demand and balances
Speaker 1: are more pronounced. I think we've got more structural issues.
Speaker 1: So it makes me look at a much wider number
Speaker 1: of items and a much bigger dashboard that I looked
Speaker 1: that I looked at pre pandemic, and that's caused me
Speaker 1: to say, and we wrote a piece on this two
Speaker 1: months ago. The labor force, from what we can tell,
Speaker 1: is much tighter than the headline measures would suggest. Can
Speaker 1: you explain that why? Because you know one of the
Speaker 1: things obviously and you mentioned it, economists on Wall Street
Speaker 1: now are now looking at things like the black white
Speaker 1: unemployment gap, and I don't think I would have ever
Speaker 1: recalled seeing Wall Street research really like focus on that
Speaker 1: as one of them, you know, two years ago, let
Speaker 1: alone a year ago even, and we've been looking at it.
Speaker 1: We've been looking at it here at the Dallas fit
Speaker 1: ever since I for five. So what do you see
Speaker 1: like when you see that? And it had started to
Speaker 1: narrow significantly um pre crisis and then then god blown
Speaker 1: out again. But what do you see now when you
Speaker 1: look at that? And when you say you think the
Speaker 1: labor market maybe tighter than some of the traditional measures suggest,
Speaker 1: what do you what are you looking at on your dashboards?
Speaker 1: We took a step backward unfortunately uh during COVID, and
Speaker 1: we saw it. We were seeing uh improvement pre COVID,
Speaker 1: and now we're seeing more divergence. It's it's starting to
Speaker 1: improve and a little and there's some narrowing, but we've
Speaker 1: taken a step backward even worse. We've seen a number
Speaker 1: of issues. We've seen a drop in enrollment in skills
Speaker 1: training among black and Hispanic students, and I hear this
Speaker 1: from superintendence. We've seen senior classes in at risk communities
Speaker 1: having a lower graduation rates. We're seeing higher dropout rates,
Speaker 1: and we're hearing lots of reports from school superintendence I
Speaker 1: speak with who are telling me they worried that, you know,
Speaker 1: great school kids, particularly those who had to work remotely
Speaker 1: and from at risk communities, have probably fallen behind more
Speaker 1: and they're trying to figure out a way to catch
Speaker 1: them up. So we're seeing all that. So some of
Speaker 1: that can be dealt with through monetary policy, and some
Speaker 1: of it means real local action and maybe in some
Speaker 1: cases national action to improve early childhood literacy, full day
Speaker 1: versus half day pre K, more access to WiFi, better
Speaker 1: childcare access, a more childcare access where kids are read
Speaker 1: to beefed up skills training. I think it's going to
Speaker 1: take all those pieces of the puzzle to help address
Speaker 1: these issues. A very broad question for you now, but
Speaker 1: I'd love to hear your answer. So the past year
Speaker 1: or so has clearly been unprecedented in many ways. Is
Speaker 1: there one thing in particular that stands out to you
Speaker 1: as surprising or unexpected. I think that the structure of
Speaker 1: the economy continues to evolve, So technology, technology enabled disruption
Speaker 1: and scale was important pre pandemic, It's become even more
Speaker 1: critical today. I think the importance of access to child care,
Speaker 1: early childhood literacy, improving awareness, and access to skills training
Speaker 1: is even more important today because I think I'm disappointed.
Speaker 1: I guess one surprise is a disappointment is I think
Speaker 1: some of these supply demand and balances on the labor side,
Speaker 1: some of it can be addressed with monetary policy, but
Speaker 1: we need a broader action. I think the structural changes
Speaker 1: in the economy and these persistence supply demand and balances
Speaker 1: in the labor force is an unfortunate development and a surprise.
Speaker 1: We can do something about it, but we gotta call
Speaker 1: it out first and then take actions broadly to address it.
Speaker 1: Um and and so I'm I'm hopeful that by me
Speaker 1: talking about this and talking to local leaders about it
Speaker 1: and national leaders and taking actions here at the Dallas
Speaker 1: FT will take some of those steps to address these issues.
Speaker 1: But that's probably the biggest challenge, and I guess development
Speaker 1: since the pandemic that is more pressing. And I just
Speaker 1: have one last um, you know, sort of real time question.
Speaker 1: But obviously COVID isn't over, and you know, there's concerns
Speaker 1: about new variants, the delta variant potentially delivering a setback
Speaker 1: in terms of some of the returns of the services
Speaker 1: economy that we saw. I'm just curious, like from a
Speaker 1: sort of like risk management perspective, and you know, thinking
Speaker 1: about the next the net the sequencing of policy going forward,
Speaker 1: is that something that you're that you're thinking about and
Speaker 1: watching were really are and spend an enormous amount of
Speaker 1: time and I'm talking infectious disease experts every couple of
Speaker 1: days and doctors and broadly when we've been doing this
Speaker 1: for months. As long as it's still the case that
Speaker 1: vaccines are effective in minimizing hospitalizations and death, you might
Speaker 1: get COVID, but you probably won't get very ill. As
Speaker 1: long as that continues to be the case, I think
Speaker 1: the impact of the delta variant will be we will
Speaker 1: not see a step backward in the economy, but we
Speaker 1: might not see the progress we were hoping to see.
Speaker 1: And I think it's going to delay the matching process
Speaker 1: between businesses who are trying to hire workers and workers
Speaker 1: stepping into the economy, and it probably will exacerbate some
Speaker 1: of these materials supply demand of balances and labor supply
Speaker 1: demand and balances. It doesn't mean we'll grow more slowly,
Speaker 1: but I think it may. We're gonna have to be
Speaker 1: even more patient in seeing this matching process occur. It
Speaker 1: would be my guests. So you mentioned at the very
Speaker 1: beginning of this conversation that one of the reasons you
Speaker 1: were keen on tapering sooner rather than later was because
Speaker 1: of excesses and risks building up in the market. And
Speaker 1: I just wonder, you know, interest rates and asset purchases
Speaker 1: tend to be a very blunt tool to change behavior
Speaker 1: in financial markets. Is there something that the FED could
Speaker 1: be doing on the macro prudential side to address that issue.
Speaker 1: So let me talk about what I'm seeing, then we'll
Speaker 1: talk about what can be done. UM. I worry that
Speaker 1: there's excess people are moving out the risk curve, whether
Speaker 1: it's institutions, individuals, people are taking more risk because they
Speaker 1: can't earn from cash and in some cases they can't
Speaker 1: even learn from you know, unless they're taking duration, they
Speaker 1: can't really learn from bonds. And so what we're seeing
Speaker 1: pretty broadly and all the measures I look at people
Speaker 1: are moving out the risk and IT spreads are historically typed.
Speaker 1: The question is then when when those excesses get more normalized,
Speaker 1: that could be a jarring adjustment. And then I look
Speaker 1: at the housing market and we see that the FED
Speaker 1: is bying a meaningful, meaningful percentage of net new mortgage
Speaker 1: backed securities issuance, and we're seeing elevated home prices, which
Speaker 1: is going to translate into higher rents. Again, what I
Speaker 1: worry about is for low moderate income communities. Brand increases
Speaker 1: are coming for those communities, and I worry about their
Speaker 1: ability to absorb them. So what what can be done?
Speaker 1: I think a lot of these issues are not with
Speaker 1: the banks UH. I think while not perfect, stress testing
Speaker 1: UH and tough capital requirements with the banking sector have
Speaker 1: have had a very have had a meaningful positive impact.
Speaker 1: The issues I'm talking about will likely occur either in
Speaker 1: the non bank financial sector. So what I would love
Speaker 1: to see then is in other parts of the government
Speaker 1: that that can oversee capital requirements, transparency, good disclosure to
Speaker 1: be monitoring UH these excess risks. I worry about the
Speaker 1: ability of the financial sector to intermediate the flows when
Speaker 1: things normalize, and I do worry about in addition, away
Speaker 1: from macropudential, just excesses and imbalances in the economy. Higher
Speaker 1: rents would be one of those examples that real people
Speaker 1: have to pay. That's not a macroprudential issue. That's probably
Speaker 1: just an economic side effect that we need to be
Speaker 1: aware of at the FED. Rob Kaplan, thank you so
Speaker 1: much for coming on Oudlock. Thanks Tracy and Joe. Great
Speaker 1: to talk to both of you. That was greatly appreciate it.
Speaker 1: Thanks so much. That makes sense to walking. That was
Speaker 1: just right all right. Thanks your rates talked about of you,
Speaker 1: Thank you, Thank you. Trazy. I don't know, I always
Speaker 1: sort of have to like pinch myself that these important
Speaker 1: policymakers come on our podcast. It's always like such a
Speaker 1: treat to hear from them. No, for real, it's really cool, No, totally. Um,
Speaker 1: it's always fascinating to hear directly from a policymaker who
Speaker 1: is actually thinking about this day in and day out
Speaker 1: and trying to address it. Um. One of the things
Speaker 1: I thought was interesting and I think one of our
Speaker 1: previous guests, it might have been John Turik, brought up
Speaker 1: this idea that as you approach full employment while keeping
Speaker 1: rates and monetary policy low, you're clearly sort of easing
Speaker 1: more and more and more. And and when when you
Speaker 1: look at it through that perspective, then Rob's call to
Speaker 1: taper sooner rather than later doesn't look so extreme. Yeah,
Speaker 1: I mean that is very much a John Turret point
Speaker 1: yourr spot on. Though I did think it was interesting
Speaker 1: that Rob specifically talked about um disassociating the taper with
Speaker 1: the start of the rate hike cycle, which is really
Speaker 1: like because there is going to be you know, we
Speaker 1: all remember what it was, and so I do think
Speaker 1: that like there is going to you know, there's going
Speaker 1: to be some language trickiness whenever it does begin, because
Speaker 1: the market will interpret that is tightening. And you know,
Speaker 1: President Camplan just now point out there's like two things.
Speaker 1: They're taking your foot off the accelerator, but there's also
Speaker 1: hitting the break, and his and his point of well,
Speaker 1: we don't necessarily this just because we maybe want to
Speaker 1: take our foot off the accelerator doesn't mean it's anywhere
Speaker 1: time to hit the break. It'll be interesting to see
Speaker 1: if and when the FED does begin to taper what
Speaker 1: sort of communication they have around that, basically to affect
Speaker 1: his point that the market should not read into it
Speaker 1: that Okay, therefore, the next rate high is gonna be
Speaker 1: in six months or whatever total um, and it definitely
Speaker 1: sounds like it's something that they're thinking about already. Um.
Speaker 1: On that note, the other thing that struck me from
Speaker 1: the conversation is, I guess how much of a change
Speaker 1: there's been in the FEDS framework, which is kind of obvious,
Speaker 1: but all the new communication problems that that kind of
Speaker 1: throws up. I guess based on the conversation around full
Speaker 1: employment and inflation, you know, looking through temporary high levels
Speaker 1: of inflation, it just feels like there's so much more
Speaker 1: room for interpretation nowadays, and everyone is trying to get
Speaker 1: a better sense of what exactly those two goals average
Speaker 1: inflation you know, over what time frame? Um, full employment
Speaker 1: measured by what actually means? Yeah, no, exactly right. Tons
Speaker 1: of ambiguity still, and new policies in a new uncharted
Speaker 1: territory to use that plie again, fascinating time in a
Speaker 1: fascinating conversation. Yeah, uncharted squared Okay, shall we leave it there?
Speaker 1: Let's leave it there. Okay. This has been another episode
Speaker 1: of the All Thoughts Podcast. I'm Tracy Alloway. You can
Speaker 1: follow me on Twitter at Tracy Alloway and I'm Joe
Speaker 1: Why Isn't Thal? You can follow me on Twitter at
Speaker 1: the Stalwart. And you can follow our guest on Twitter,
Speaker 1: Rob Kaplan, President and CEO of the Dallas Fed. He's
Speaker 1: at Rob s Kaplan on Twitter. Follow our producer Laura Carlson.
Speaker 1: She's at Laura M. Carlson. Followed the Bloomberg head of podcast,
Speaker 1: Francesco Leady at Francesco Today, and check out all of
Speaker 1: our podcasts at Bloomberg under the handle at podcasts. Thanks
Speaker 1: for listening. Three year