Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe. Wisn't so Joe? I think,
Speaker 1: without question, the hottest topic in the world of economics, markets,
Speaker 1: finance right now has to be inflation and this debate
Speaker 1: over whether or not the higher than expected price levels
Speaker 1: that we have seen recently are in fact transitory. Absolutely.
Speaker 1: We got the October CPI numbers recently. They came in
Speaker 1: at either six or six point two percent. They're the
Speaker 1: hottest and I think thirty one years the debate over
Speaker 1: transitory nous is very hot right now. A lot of
Speaker 1: people are capetul later. I mean, I will say we
Speaker 1: have been spending a lot of time over the past
Speaker 1: year talking about supply chain issues, and I find them
Speaker 1: fascinating as sort of micro markets in and of themselves, um,
Speaker 1: and a really interesting exercise in looking at economic and
Speaker 1: business principles in a specific and sort of salient thing.
Speaker 1: But on the other hand, there is plenty of criticism
Speaker 1: now that there's too much focus on the supply chain issues.
Speaker 1: There's been too much focus on micro versus the macro
Speaker 1: explanation of inflation. Yeah, exactly right, And so this is
Speaker 1: the question, and I guess the question is can you
Speaker 1: tease out the two and so you look like aggregant
Speaker 1: demand for goods in the US is absolutely booming. We're
Speaker 1: recording this Wednesday, November seventeen. Yesterday we got the retail
Speaker 1: sales number. It was very strong. The number of containers
Speaker 1: coming to the ports. We've done a million sports episodes.
Speaker 1: It's very high. For all of the issues that they're having,
Speaker 1: there's a lot moving through. And so part of the
Speaker 1: question is if by focusing on a supply chain specifically
Speaker 1: or some of the critics might say, are we ignoring
Speaker 1: just the fact that aggregant demand is booming and that's
Speaker 1: pushing up prices. Yeah, and it is true that you
Speaker 1: can find an individual explanation to you know, explain almost
Speaker 1: any major price increase at the moment. But at the
Speaker 1: same time, it does seem to be rather broad based.
Speaker 1: There is this broader upwards pressure and it seems to
Speaker 1: be happening, you know, all around the world in lots
Speaker 1: of different things. So there might be a more macro
Speaker 1: story there. So today, in the interests of devoting more
Speaker 1: time and attention on the macro story, I am very
Speaker 1: pleased to say, we are going to be speaking with
Speaker 1: Jason Furman. He is a professor of practice over at
Speaker 1: Harvard University, also a senior fellow at the Peterson Institute
Speaker 1: for International Economics, and of course he was the former
Speaker 1: chair of President Obama's Council of Economic Advisors. And he's
Speaker 1: been tweeting a lot about his thoughts on inflation, the
Speaker 1: supply versus demand side of it, the micro versus the macro,
Speaker 1: and he is also in the process of publishing a
Speaker 1: paper on this exact topic. So really a great person
Speaker 1: to talk to. Jason, Welcome to the show. Great to
Speaker 1: be here. So maybe just to begin with so shall
Speaker 1: we start with an obvious question, like when you saw
Speaker 1: the CPI numbers last week, and again we're recording this
Speaker 1: on November, when the number came in hotter than expected,
Speaker 1: what did you think? I thought it came in hotter
Speaker 1: than expected. Um, but in a broader sense, I wasn't
Speaker 1: surprised because I had looked at the last couple of
Speaker 1: months and this actually is micro not macro. What I'm
Speaker 1: about to say that they had been of course, he'd
Speaker 1: had been temporarily lower because car prices fell and because
Speaker 1: things like hotels and airfares fell because of the delta variant,
Speaker 1: and I didn't expect all of those to continue falling.
Speaker 1: So in some sense, we had transitory low core inflation
Speaker 1: in August and September. I didn't expect that to last.
Speaker 1: And then stepping back, um, there's a bigger macro story
Speaker 1: that we'll be able to talk a lot about over
Speaker 1: the course of this podcast. So let's let's just jump
Speaker 1: into some of these macro questions. And part of these
Speaker 1: questions have to do, I think, with definitions. And so
Speaker 1: we talked about this term transitory a lot, and there's
Speaker 1: a lot of people that you know, we're all on Twitter,
Speaker 1: and they're like oil prays up again. So much for
Speaker 1: your transitory inflation. Obviously, you know, the existence of a
Speaker 1: price move itself, either in a category or in a index,
Speaker 1: does not prove or disprove transitory nous. What in your
Speaker 1: view is, how do you think about this question and
Speaker 1: what would you like to see or what do we
Speaker 1: need to see to sort of answer in a definitive
Speaker 1: manner whether this is lation we're seeing is transitory or
Speaker 1: the sign of like some new inflationary regime. Right, So
Speaker 1: I don't even know what the word transitory means, so
Speaker 1: I try to avoid it, try to use numbers and probabilities.
Speaker 1: So I'll give you what I think the most likely
Speaker 1: scenario is. I'll tell you why I think that is,
Speaker 1: and I'll tell you that I'm not sure about it.
Speaker 1: Inflation rate will likely come down next year. It will
Speaker 1: be lower than it was this year, in part because
Speaker 1: there were a bunch of temporary factors boosting prices, a
Speaker 1: huge fiscal stimulus, rise in the price of oil, unusual
Speaker 1: things happening in car markets. I think all of that
Speaker 1: is real. But when all the dust settles from all
Speaker 1: of that, I also think we're going to be left
Speaker 1: with an inflation rate that is higher than what the
Speaker 1: FED had been targeting, higher than what we had historically.
Speaker 1: I wouldn't be surprised by something in the three to
Speaker 1: four percent range. So I don't know if you want
Speaker 1: to call that transitory, you want to call that persistent um.
Speaker 1: But that's different than the view that inflation is going
Speaker 1: to go to two percent, or the view many have
Speaker 1: had that it's actually going to be below two percent
Speaker 1: in order to make up for the things above it.
Speaker 1: So baseline, that's my view, and I can give you
Speaker 1: my rationale for that view as well, if you want yeah,
Speaker 1: I think that would be YEA go ahead, my rationale. Um.
Speaker 1: There's a little bit of micro in it, which is
Speaker 1: I think it does help to look at things like
Speaker 1: car prices. They've gone up a lot, They're not going
Speaker 1: to keep going up a lot. UM this micro stories
Speaker 1: that go the other way though. UM shelter prices in
Speaker 1: the c p I are recorded only with a lag,
Speaker 1: and a lot of other indicators of how much rent
Speaker 1: is going up are incredibly incredibly high. So there's some
Speaker 1: of the individual components. I sometimes call that micro or
Speaker 1: bottom up approach, but I find it much more useful
Speaker 1: to use a macro approach because when you're thinking about inflation,
Speaker 1: it's not why is happening to relative prices, it's what's
Speaker 1: happening to the price level overall. And if people don't
Speaker 1: have enough money, if one price goes up, then they
Speaker 1: can't afford to buy as much of other things, and
Speaker 1: other prices UM will go down. That's not what we're
Speaker 1: seeing now. Now we're seeing everything UM go up. So
Speaker 1: what's the big macro story? Supply and demand. Of course,
Speaker 1: on the demand side, I expect a man to remain elevated,
Speaker 1: because households have more money in their balance sheets, because
Speaker 1: fiscal policy is pumping five billion dollars into the economy
Speaker 1: this year based on laws that were already past, and
Speaker 1: because interest rates and financial conditions more broadly, our ultra accommodative.
Speaker 1: On the supply side, I don't know how long it's
Speaker 1: going to take to unsnarls supply chains. The two of
Speaker 1: you know more about that than I do. No one
Speaker 1: knows how long it's going to take for labor markets
Speaker 1: to recover. Just I don't think any of that's going
Speaker 1: to be happen fully in the next year. So over
Speaker 1: the next year, we continue to have a lot of
Speaker 1: aggregate demand and we don't have enough aggregate supply, and
Speaker 1: the mismatch between those two will keep upward pressure on inflation,
Speaker 1: keep inflation well above two percent. I have what is
Speaker 1: possibly simplistic question, but is inflation that's caused by stronger demand,
Speaker 1: stronger household balance sheets? Is that a major problem for
Speaker 1: the economy? Is that something that warrants the amount of
Speaker 1: hand ringing that we have seen on social media and
Speaker 1: in various op eds for the past week or so,
Speaker 1: people don't like inflation. Economists tend to be less bothered
Speaker 1: by inflation than people, and so I don't know if
Speaker 1: I should sit here and say, you know, I'm just
Speaker 1: an ignorant, out of touch elite. I should listen to
Speaker 1: the people who really don't seem to like inflation, or
Speaker 1: I should patiently explain to them why. Some of why
Speaker 1: they don't like inflation is money illusion, because their wages
Speaker 1: are also I'm going up faster, so I think it
Speaker 1: is a reality. I don't think economists and the media
Speaker 1: invented I think, if anything, economists tend to downplay inflation
Speaker 1: and be less concerned about it than people. But there
Speaker 1: are reasons to be um concerned. I think at the margin,
Speaker 1: a lot of our policy is raising prices more than
Speaker 1: it's improving employment. It's raising the risk of a hard landing.
Speaker 1: People are seeing their real wages fall, and there's a
Speaker 1: lot of fraud in financial markets right now. Low interest
Speaker 1: rates have some negative side effects. Normally the benefits of
Speaker 1: them outweigh the side effects. Right now, we have enough
Speaker 1: fiscal support in the economy that I'm not sure that
Speaker 1: the negative side effects of interest rates are worth it.
Speaker 1: I want to get into the perceived costs of elevated inflation.
Speaker 1: And I think your point is very well taken that
Speaker 1: people don't like it, and that's you know, as journalists
Speaker 1: or as economists, we could say, yes, well you come
Speaker 1: out ahead when you include transfers, but people don't like it,
Speaker 1: and that is what it is that Big said. You know,
Speaker 1: we had the mother of all, you know, employment shocks.
Speaker 1: I think unemployment, we're still in a pretty significant hole.
Speaker 1: We had the mother of all real GDP shocks. Demand
Speaker 1: collapsed for all kinds of you know, we had to
Speaker 1: put the economy on life support, and we are still
Speaker 1: in a hole, especially on the employment side. And so
Speaker 1: you know, nominal growth or real growth has been very
Speaker 1: fast as we get back to trent um, as we
Speaker 1: return to something resembling normal and hopefully bring everyone back
Speaker 1: to the workforce. So how do you think the cost.
Speaker 1: I mean, we are still adding a lot of jobs.
Speaker 1: I think the October jobs report, when you include revisions,
Speaker 1: was over eight hundred thousand jobs. I think we're still
Speaker 1: about seven to eight million jobs, shy of where we
Speaker 1: would have been had non farm payrolls just kept growing
Speaker 1: at the pace they would had we never had the pandemic.
Speaker 1: So do you how do you think about you know, yes,
Speaker 1: people don't like higher inflation, but also we have a
Speaker 1: lot of uh, we have a big hole to still
Speaker 1: dig out of. Yeah, you need to keep three thoughts
Speaker 1: in your head simultaneously. One the economy is still in
Speaker 1: a hole. To the economy is improving really rapidly, and
Speaker 1: three inflation is bad. All three of those statements are true.
Speaker 1: We have a lot less inflation than we had in
Speaker 1: two thousand nine. I'd much rather have, um, the situation
Speaker 1: we have now than the situation we had in two
Speaker 1: thousand nine when we had a ten percent unemployment rate.
Speaker 1: But you know, real wages are actually rising because inflation
Speaker 1: was low. So but you need to keep all three
Speaker 1: of those in your head um simultaneously. What the implications
Speaker 1: of that are for policy? I think the second one,
Speaker 1: that the economy is improving has important implications for policy.
Speaker 1: We are no longer in a dire emergency situation in
Speaker 1: terms of the policy should be acting. Four point six
Speaker 1: percent unemployment rate is higher than it should be, but
Speaker 1: it's not so extremely high that you want to be
Speaker 1: in complete emergency mode in responding to it, Especially when
Speaker 1: complete emergency mode has a lot of negative side effects
Speaker 1: for issue number three, which is inflation. So this is
Speaker 1: something that's come up in our previous conversations, which is
Speaker 1: this idea that even though the Fed isn't I mean,
Speaker 1: it just started tapering its balance sheet. But even if
Speaker 1: the Fed weren't changing its asset purchases and if it
Speaker 1: was keeping rates where they were, the economy itself is recovering.
Speaker 1: And so, you know, keeping rates near zero and having
Speaker 1: a very large balance sheet effectively means that things are
Speaker 1: getting easier and easier. Financial conditions are getting looser, even
Speaker 1: though the Fed isn't explicitly you know, loosening monetary policy.
Speaker 1: Is that something that concerns you at the moment. You
Speaker 1: mentioned the idea of low rates fueling bubbles and things
Speaker 1: like that. It seems like that has become an issue
Speaker 1: for the economy, especially looking at real rates which still
Speaker 1: remain incredibly low. I completely agree with you. Let me
Speaker 1: just say that implicit in your question are two really
Speaker 1: important features of monetary policy. One is it's a continuum.
Speaker 1: It's a whole range of policy options you could choose,
Speaker 1: not just reducible to the nominal FED funds. Right, And
Speaker 1: we've chosen a point on that continuum that actually is
Speaker 1: not the most expansionary it could be. We could have said,
Speaker 1: you know, we're going to keep rates at zero for
Speaker 1: a decade. We could have bought five billion dollars of
Speaker 1: assets a month. We we chose to do something intermediate
Speaker 1: because effectively, everyone agrees we need to balance the risks
Speaker 1: of doing too much and too little. The second important
Speaker 1: point is that monetary policy is constantly changing. Yes, the
Speaker 1: Fed funds rate has been at zero for a year
Speaker 1: and a half, but when expected inflation rises, that means
Speaker 1: the real Fed funds right, the Fed funds right adjusted
Speaker 1: for inflation falls, um that's happened, so that means monetary
Speaker 1: policy has gotten more expansionary. The interest rates that really
Speaker 1: matter are long term interest rates. Those have fallen a
Speaker 1: lot in the last couple of months, and when you
Speaker 1: adjust for inflation, you can look at the tips market,
Speaker 1: they've fallen even more. So that's one of the strange
Speaker 1: things is over the last year, the economy has gotten
Speaker 1: better very rapidly, and monetary policy is moving into a
Speaker 1: more and more emergency response setting. And then you look
Speaker 1: around you at financial markets they'll probably be okay, but
Speaker 1: you know, there's more reason to be nervous than there
Speaker 1: should be, So I want to you know, one thing
Speaker 1: that I really appreciate about your approach and about your
Speaker 1: clarity is essentially what I guess I would say, your humility.
Speaker 1: And probably all of us and all economys should have
Speaker 1: quite a big dose of humility about our ability to
Speaker 1: forecast anything, whether it's employment, the effective macro policy, what
Speaker 1: inflation is going to be next year, in the year beyond.
Speaker 1: That's an important quality. It seems to me that going
Speaker 1: back to the FED, that this is also a um
Speaker 1: of you held by or a sort of an important
Speaker 1: value to the current FED chair J. Powell, who knows
Speaker 1: whether by the time this comes out whether it will
Speaker 1: be the nominee. But this idea of like humility, and
Speaker 1: I kind of think that was bolstered with the new
Speaker 1: flexible average inflation targeting, which struck me as a recognition
Speaker 1: that's like, you know, we thought we could like aim this,
Speaker 1: and we thought we had these models that would tell
Speaker 1: us when we're hitting NEHRU and all this stuff, and
Speaker 1: it turned out the economy could get better than we thought.
Speaker 1: It turned out the employment rate could fall for than
Speaker 1: we thought, and so let's try to build in some
Speaker 1: guardrails so that we're not so you know, they were
Speaker 1: not too wed to these models. Do you get concerned
Speaker 1: when thinking about this, that like this could be another
Speaker 1: mistake the likes of which we've seen kind of since
Speaker 1: the Great Financial Crisis, that it's like, you know, look,
Speaker 1: we made a lot of premature pullbacks. We certainly did.
Speaker 1: I think you would probably almost certainly agree on fiscal
Speaker 1: in the wake of the GFC and rate hikes that
Speaker 1: in retrospect, maybe we're too early or unnecessary or reversed,
Speaker 1: and that maybe given these sort of inherent uncertainty, it
Speaker 1: still might make sense to just air on the side
Speaker 1: of let's wait until we see the full the full recovery,
Speaker 1: the maximum employment. Yeah, so, Joe, I agree we should
Speaker 1: err on the side, Uh, exactly the direction you're saying.
Speaker 1: The question is how much we should err on that
Speaker 1: side based on what we know. I think we're erring
Speaker 1: too much on that side right now, and so we
Speaker 1: should err less on that side. But continue to let
Speaker 1: me explain why I think that, And I won't relitigate
Speaker 1: the past except to say hundred percent agree with you
Speaker 1: on fiscal policy being overly contractionary, insufficiently expansionary, and then
Speaker 1: overly contractionary. And agree with you on what the FED
Speaker 1: did from two thousand fifteen forward and I had I'll
Speaker 1: take that's pretty good. I'm glad to get. And just
Speaker 1: to be clear, I um, I was, you know, partially
Speaker 1: responsible for the fiscal policy, and I had nothing to
Speaker 1: do with the monetary policy that I'm more defensive of.
Speaker 1: So just to understand, there's an irony in the FED framework.
Speaker 1: It was all about our models don't work. In the past,
Speaker 1: we made this mistake that we forecast there was going
Speaker 1: to be all this inflation. We made changes based on
Speaker 1: that forecast, and then that forecast turned out to be wrong.
Speaker 1: The irony is the main argument for not being more
Speaker 1: aggressive now is a forecast, a forecast that inflation is
Speaker 1: going to come down next year. And so the FED
Speaker 1: has found itself back pretty heavily in a forecast, potentially
Speaker 1: making the opposite mistake that it made before now relying
Speaker 1: on all these you know, different theories as to why
Speaker 1: it would be transitory. As I said, when I do
Speaker 1: my best forecast, which you know, I'm going to be
Speaker 1: embarrassed bugs it's gonna be wrong. Um, I think inflation
Speaker 1: three to four percent next year, but I don't really know.
Speaker 1: No one knows, and so that's you have to do
Speaker 1: the best you can, and I'd rely more on the
Speaker 1: actual data we've seen than a forecast. So that would
Speaker 1: be my first point. Um. The second point is it's
Speaker 1: relevant where we're lifting off from. The unemployment rate right
Speaker 1: now is four point six percent. Last time we lifted
Speaker 1: off when the unemployment rate was five percent, and I
Speaker 1: grant your point could have waited a bit longer. On
Speaker 1: there's a number of reasons to lift off. Those should
Speaker 1: happen sooner than what would have been optimal last time.
Speaker 1: The unemployment rates still falling quickly, there's a lot of
Speaker 1: job openings. With expected inflation higher, that means the real
Speaker 1: interest rate is lower. And then of course inflation is
Speaker 1: much higher this time than it was before. So all
Speaker 1: of that said, if we lifted off in the middle
Speaker 1: of next year when the unemployment rate was four percent,
Speaker 1: and we lift off all the way to the sky
Speaker 1: high interest rate of five to fifty basis points, I
Speaker 1: just there definitely is a chance that's too much, But
Speaker 1: you know, I'm just not that worried about it. So
Speaker 1: having made those two points. I mean, I don't think
Speaker 1: anyone is arguing for the FED to suddenly raise interest rates,
Speaker 1: you know, in a major, major way. And it does
Speaker 1: have different levers that it could pull to try to
Speaker 1: offset some of the inflationary pressure. So, yes, it has
Speaker 1: announced that it's going to start tapering it's asset purchases.
Speaker 1: It's not stopping those completely. Um, it could raise rates slightly,
Speaker 1: or it could try to guide the market towards a
Speaker 1: faster pace of interest rate hikes in the future. What's
Speaker 1: your sort of ideal policy response given how you're viewing
Speaker 1: the inflation risk at the moment. Yeah, what the Fed
Speaker 1: should do should be dependent on the data. But what
Speaker 1: I would do would be to flip the default. Right now,
Speaker 1: they're effectively saying, we think this inflation is going to disappear,
Speaker 1: so we're not planning to raise rates, but if the
Speaker 1: inflation surprises us, will do something. I'd rather see them
Speaker 1: flip that we're planning to lift off in the first
Speaker 1: half of next year. We're planning on something like three
Speaker 1: rate hikes next year. But you know, if all the
Speaker 1: transitory stories that I think Joe believes more than I do.
Speaker 1: UM and Joe's more right than I am. UM will
Speaker 1: will delay that. If there's another wave of COVID and
Speaker 1: employment is bad, or employment is bad for any other reason,
Speaker 1: UM will delay that. And so changing the default matters.
Speaker 1: It would show up in long term interest rates right now.
Speaker 1: It also would reduce the disconnect between what I think
Speaker 1: the FED is likely to end up doing, at least
Speaker 1: based on my forecast of the world, and what the
Speaker 1: market thinks. It's always better if those two are more
Speaker 1: in sync. Right now, everyone's guessing, you know, if inflation
Speaker 1: ends up high but we're not yet maximum employment, what
Speaker 1: are they going to do? No one quite knows the
Speaker 1: answer to that question. So flip the default. Send signals
Speaker 1: to markets, but be data dependent and adjust if you
Speaker 1: need to. Well, let me ask you about those signals
Speaker 1: to markets, and you know you said I disagree. I Look,
Speaker 1: I'm a I'm a straight news journalist. I don't have
Speaker 1: opinions on or forecast or anything. Is everybody knows. I
Speaker 1: don't have your point, but I will say that a
Speaker 1: lot of them more sort of like mm T people
Speaker 1: that I talked to, and this is a key question
Speaker 1: that I have about what this sort of signal is
Speaker 1: supposed to accomplish. They say, you know, the only way
Speaker 1: that rate hikes actually um or that FED policy tightening
Speaker 1: can actually fight inflation is through the demand channel, by
Speaker 1: weakening the economy, and weakening the economy when we do
Speaker 1: as you admit to have this whole still unemployment is
Speaker 1: ill advised. And I think we probably all agree, and
Speaker 1: it's kind of become a cliche by now. It's like,
Speaker 1: rate hikes aren't going to make throughput at the Port
Speaker 1: of Los Angeles any faster. Rate hikes aren't going to
Speaker 1: get more truckers on the road, and rate hikes aren't
Speaker 1: going to get chip factories in Malaysia working any faster.
Speaker 1: So I think we all agree there's no supply side benefit.
Speaker 1: What do you see, though, specifically as the channel view
Speaker 1: which these signaled hikes, even if it's a very moderate pace,
Speaker 1: could help team inflation or does it end up being
Speaker 1: through the recession channel, which probably you would almost certainly agree,
Speaker 1: you know, is undesirable given the employment hole. Yeah, so,
Speaker 1: first of all, i'd flipped the point you just made.
Speaker 1: The big problems in our economy is not enough shots
Speaker 1: and arms, not enough microchips being produced, not enough throughput
Speaker 1: through ports. Buying assets isn't helping any of those. Low
Speaker 1: interest rates isn't helping any of those. So none of
Speaker 1: the fundamental problems in our economy are being cured by
Speaker 1: expansionary monetary policy right now. I'd still keep the setting
Speaker 1: expansionary because I think there's probably some m lingering demand,
Speaker 1: but I don't think it will do very much for
Speaker 1: of what ails us. At the margin, most of our
Speaker 1: policy options in macro affect both prices and quantities. And
Speaker 1: there's some people that look at them and it was like, oh,
Speaker 1: you know, the stimulus didn't do anything to help the economy.
Speaker 1: It's all inflation. It's all Biden's fault. Other people look
Speaker 1: at and say, oh, the stimulus, you know, rescued the
Speaker 1: economy and had nothing to do with inflation. The answer
Speaker 1: is always both some combination. When you expand fiscal policy,
Speaker 1: expand monetary policy, get some combination on output and inflation.
Speaker 1: In my judgment, and this is a judgment right now.
Speaker 1: At the margin, when we're talking about moving settings up
Speaker 1: or down, it's affecting prices much more than quantities. That's
Speaker 1: because the quantities are constrained by the supply side of
Speaker 1: the economy, So an awful lot is passing through to prices.
Speaker 1: So that would be the first point. The second point
Speaker 1: would be we may need to do less if we
Speaker 1: act sooner, and if we act later, um, it may
Speaker 1: be more costly. We all know, Um, the Phillips curve
Speaker 1: is very flat. There's not much relationship between inflation and unemployment.
Speaker 1: The flip side of that is something that we used
Speaker 1: to call the sacrifice ratio is very high. You may
Speaker 1: need a lot of unemployment to ring out some inflation,
Speaker 1: so it's better to be precautionary get rid of a
Speaker 1: little bit of its sooner. Um. And finally, I don't
Speaker 1: place a lot of weight on inflation expectations. They seem
Speaker 1: a little bit like the ether. The people invoke um
Speaker 1: to explain the holes in their theories. But you know,
Speaker 1: I think there's a chance inflation expectations matter, and so
Speaker 1: why not keep them in better control? Is there not
Speaker 1: an argument though, that keeping interest rates relatively low could
Speaker 1: maybe help increase capital investment? And if you know, if
Speaker 1: one of the issues here is supply, then that would
Speaker 1: be something that you would want to see relatively quickly.
Speaker 1: And one of the reasons I bring it up is
Speaker 1: because The Bank for International Settlements just did UM that
Speaker 1: paper last week basically saying that one of the solutions
Speaker 1: to inflation in the current environment is capital investment and
Speaker 1: the expansion of production capacity. Yeah. In fact, it is
Speaker 1: an underappreciated thing. We all spend all our time looking
Speaker 1: at consumer spending because we have our own images of
Speaker 1: ourselves ordering lots of you know, sports equipment on Amazon
Speaker 1: because we're not going to the gym, or now you
Speaker 1: start going back to restaurants, now you stop, So consumer
Speaker 1: spending a set of the economy makes sense to look at.
Speaker 1: You talked about retail sales earlier in our discussion, but
Speaker 1: the big shortfall in the economy is capital investment, and
Speaker 1: capital investment is sensitive to interest rates, and capital investment
Speaker 1: matters for capacity and supply as well as for demands.
Speaker 1: So I think that is a very good argument for
Speaker 1: low interest rates and keeping them low. It still begs
Speaker 1: the question of how low do you want to keep them?
Speaker 1: Um and I would argue interest rates have effectively fallen
Speaker 1: over the last year because of the rise and expected inflation.
Speaker 1: That means the real rate has fallen, and we we
Speaker 1: don't want that. We want to move a little bit
Speaker 1: in the other direction. And I would just remind you
Speaker 1: that everyone, including all the mm T people in this debate,
Speaker 1: want monetary policy that's not maximually expansionary. There's no one saying, well,
Speaker 1: there are a few people, but very few people saying
Speaker 1: rates should be zero forever. I don't think there's anyone
Speaker 1: saying we should. I'll invite you into the Twitter, the
Speaker 1: Twitter group d MS. I'm in, Jason, you can, well,
Speaker 1: you could join it. So there are a few people things,
Speaker 1: but even they aren't saying let's buy five billion dollars
Speaker 1: of assets and money. That's true, that's true. You know,
Speaker 1: there's always something more expansionary for monetary policy than what
Speaker 1: we're doing. I mean, we could have yield curve control.
Speaker 1: That said, the thirty year we're gonna keep it at
Speaker 1: zero UM, and we're gonna just buy enough treasuries to
Speaker 1: keep that rated zero forever. The thirty year treasury not
Speaker 1: so in some sense, everyone is saying we're gonna have
Speaker 1: slower growth in order to have less of some other problem. Um,
Speaker 1: whether that other problem is overly high inflation, overly big
Speaker 1: risk of a recession, overly for au the asset markets.
Speaker 1: We all agree on that the question just is where
Speaker 1: I want to ask you a question before we about
Speaker 1: history sists and reverse historicists and the benefits of a
Speaker 1: high pressure economy. But before we do, you mentioned the
Speaker 1: pace of bond buying, and you had an interesting tweet
Speaker 1: thread the other day were essentially really interesting that I thought,
Speaker 1: which is that you know, it's like, well, we're not
Speaker 1: buying of assets a month, theoretically we could be like
Speaker 1: buying way more. And yet and you noted this, there
Speaker 1: does seem to be this divergence between how economists view
Speaker 1: the effective asset purchases. And this goes long before the
Speaker 1: US ever, did QUEI going back to like the Bank
Speaker 1: of Japan and Milton Friedman, they waved economists talked about
Speaker 1: the effective asset purchases which is potentially powerful channel versus
Speaker 1: the markets where it's really not clear at all. And
Speaker 1: this is I sort of basically side with the markets
Speaker 1: on this, that asset purchases really do anything, and that
Speaker 1: the size of the balance sheet is itself a important lever.
Speaker 1: I'm curious your view on this because you noted in
Speaker 1: your tweet thread this divergence between economists and market views
Speaker 1: about balance sheet size, and I'm curious where you stand
Speaker 1: and also what you view is the channel via which
Speaker 1: these asset purchases actually contribute to loosening policy. Ye. So,
Speaker 1: so when I teach my students something, I often teach
Speaker 1: it to them, explain the theory, and then tell them
Speaker 1: what probability I attached to what I just told them
Speaker 1: being true is. I try not to waste a lot
Speaker 1: of time with things that are below a thirty percent
Speaker 1: chance of being true. Rarely do I say it's a
Speaker 1: hundred percent chance of being true. Usually that's with an
Speaker 1: accounting identity, but hopefully I have more credibility um when
Speaker 1: I do that. There's a longstanding holy war between economists,
Speaker 1: including the staff of the Fed, who basically think the
Speaker 1: size of the balance sheet is what matters. When you
Speaker 1: have more assets, that's what's expansionary, and markets, which tend
Speaker 1: to think things like the change in the pace of it.
Speaker 1: If you're raising the pace of the purchases, that's expansionary,
Speaker 1: lowering and it's contractionary. And even there, with some uncertainty around,
Speaker 1: I've given the ability to substitute between different assets. I
Speaker 1: should say I'm not incredibly deep into this fight. I
Speaker 1: have read some of the different sides. I've talked to
Speaker 1: people about it. I guess I sort of out of
Speaker 1: loyalty always side with my tribe. But I'll put myself
Speaker 1: at that the economists are right on this, and the
Speaker 1: size of the balance is what matters. Well, but just
Speaker 1: real quickly, what would be the why? Like, what is
Speaker 1: the reason why you believe that that would be an
Speaker 1: important Like? Well, how would that impact the real economy? Yeah,
Speaker 1: because you look at the supply and demand of credit,
Speaker 1: and when that you should think of those in terms
Speaker 1: of stocks. And when the stock of that amount of
Speaker 1: credit that is out there goes up, which is what
Speaker 1: happens effectively when the FED increases its balance sheet, than
Speaker 1: the interest rate on that credit goes down, and that
Speaker 1: spills over into other assets equity and other forms of
Speaker 1: debt as well, and so you get higher market prices,
Speaker 1: lower interest rates, and all of that credit market you
Speaker 1: want to understand, just like the labor market as the
Speaker 1: stock that you observe at a point in time. That's
Speaker 1: the economic argument. So can I just ask something on
Speaker 1: the financial stability point? So one of the reasons it
Speaker 1: is difficult for the FED to tighten at the moment,
Speaker 1: even in response to rising inflationary risks is the idea
Speaker 1: that we've basically built up massive excesses um in the
Speaker 1: financial markets, in valuations, in the amount of money that's
Speaker 1: been borrowed, um duration, and interest rate risk, and so
Speaker 1: everyone's nervous to sort of topple or inadvertently topple that
Speaker 1: entire thing. Over, What does it mean if the FED
Speaker 1: were to change its priorities in the way that you
Speaker 1: just described, Like, how would you expect the markets to
Speaker 1: react to that? And would that not be a potential
Speaker 1: credibility problem for the FED, which you know, just finished
Speaker 1: explaining and convincing the market about its flexible average inflation
Speaker 1: target regime. So, first of all, I don't think the
Speaker 1: FED should change its framework midstream. When they do the
Speaker 1: next framework review, they should update it. I would update
Speaker 1: it with a higher inflation target, but we can come
Speaker 1: back to that if you want to, or just leave
Speaker 1: it to the side for now. So they should do
Speaker 1: flexible average inflation targeting. But the fact is we've hit
Speaker 1: the average, we're in fact above the average, and so
Speaker 1: that framework itself is consistent with the changes I'm talking
Speaker 1: about you. So, Tracy, I would be worried about how
Speaker 1: what rate hikes that we're very abrupt would do to
Speaker 1: the market. But in some sense, the longer you wait
Speaker 1: to telegraph you're doing it, the larger those changes will
Speaker 1: need to be, and the more of the shock and risk.
Speaker 1: So there's a risk now, there's an even bigger risk later.
Speaker 1: But absolutely the changes should be still relatively slow and gradual.
Speaker 1: I mean, I'm talking about three hikes in starting in
Speaker 1: the first half of the year. That's not you know,
Speaker 1: raising interest rates to one point five tomorrow. I teased
Speaker 1: head to this a little bit my last question, but
Speaker 1: you know, one of the I think Janney Ellen's most
Speaker 1: interesting speeches and this idea of hystory sis, And I'm
Speaker 1: curious what you think about it. So the idea is that,
Speaker 1: you know, if you have persistently slow growth, then you
Speaker 1: the economy's potential supply diminishes, people lose skills, factories go idle,
Speaker 1: and then they rushed and so forth. And then when
Speaker 1: you try to have accelerated growth, you run into supply
Speaker 1: side constraints and this is bad. And so the idea is,
Speaker 1: in theory, what if you could really press hard down
Speaker 1: on the accelerator And and Tracy brought this up with
Speaker 1: perhaps one of the benefits of a low interest rate
Speaker 1: regime and essentially force the supply side to invest and
Speaker 1: sort of create a reverse histories where people really have
Speaker 1: to train workers and they get up skilled, and they
Speaker 1: have to build new factories and so forth. And you
Speaker 1: really like keep that accelerator down, not just to get
Speaker 1: back out of the hall that you're in, but to
Speaker 1: actually sustainably improve the supply side capacity of the economy.
Speaker 1: And I think about this question too, because you know,
Speaker 1: we're always looking at these like trend lines, and by
Speaker 1: some measures, maybe like real GDP or real consumption, we
Speaker 1: have like erased the COVID gap, and maybe we're back
Speaker 1: on trend, but there is this bigger trend line that
Speaker 1: was going up until about two thou seven, and I think,
Speaker 1: according to most of those lines were still in this
Speaker 1: huge um hole. And so I'm curious whether you see
Speaker 1: any argument for again, you I, as you've already established,
Speaker 1: and not just airing on the side of doing too much,
Speaker 1: but really trying to kick start the economy into a
Speaker 1: sustainably higher gear, used this moment to not just make
Speaker 1: up for the COVID shock, but actually years of under
Speaker 1: investment and um, sort of a decaying supply side capacity.
Speaker 1: D agree with the impulse behind your question, but my
Speaker 1: qualification would be that the pace of doing it matters.
Speaker 1: So I like the idea of heating the economy one
Speaker 1: log at a time and just keep adding those logs.
Speaker 1: What I don't like is throwing all the logs on
Speaker 1: the fire at once. We've had two experiments that worked
Speaker 1: out really well. The late ninety nineties, the unemployment rate
Speaker 1: was pushed below where people thought it could go at
Speaker 1: the time views of the natural radar near U where
Speaker 1: six or seven percent. We went down to four and
Speaker 1: it was great again. In the last cycle up prior
Speaker 1: to COVID, people thought the NHU was four or five,
Speaker 1: more more than thought five than four, and kept pushing
Speaker 1: at three and a half it was great. Now. So
Speaker 1: we know that if you lower the unemployment rate by
Speaker 1: let's say seven tenths a year, I'm making that number up.
Speaker 1: I don't I wouldn't place too much weight on it.
Speaker 1: If you lower it by seven tenths a year, UM
Speaker 1: that that actually works and works out quite well. What
Speaker 1: we don't know is could we have gotten to three
Speaker 1: point five percent unemployment in two thousand eleven and we
Speaker 1: just blew it and waited too long, or if we
Speaker 1: tried to get there in two thousand eleven, a lot
Speaker 1: of things would have blown up in our face a
Speaker 1: little bit the way we're seeing this year. So I
Speaker 1: don't think the evidence is clear that you can jump
Speaker 1: all the way to histories. I think what histories has
Speaker 1: says is keep pushing and never give up. But it
Speaker 1: does say something at the speed if you're pushing. And
Speaker 1: by the way, histories, this is a little bit of
Speaker 1: a double edged sword. We just went through very high unemployment.
Speaker 1: Histories has says right now, the natural rate is higher
Speaker 1: than it was when we began this episode. So um,
Speaker 1: but absolutely, like you know, you know, I hope for
Speaker 1: the next many years, I never think the unemployment rate
Speaker 1: is too low, and because I think, you know, we
Speaker 1: can keep lowering it by half a point a year,
Speaker 1: and I'd like to see a lot of evidence that
Speaker 1: we can't do that before I want to halt that process.
Speaker 1: So I realized we've been very focused on the monetary
Speaker 1: policy side of things, but I feel like we would
Speaker 1: be very remiss if we didn't ask you at least
Speaker 1: a little bit about the fiscal given your experience in Washington,
Speaker 1: And I'm curious whether or not you think that a
Speaker 1: higher than expected or a more stubborn inflation rate perhaps
Speaker 1: changes some attitudes towards fiscal spending in d C. And
Speaker 1: we've sort of been touching on this um with the
Speaker 1: MMT references in this entire conversation. But do you think
Speaker 1: it's going to start encouraging people to think twice when
Speaker 1: it comes to fiscal stimulus. It appears to be leading
Speaker 1: some members of Congress to think twice about fiscal measures
Speaker 1: because they're concerned about inflation. I think that's a mistake,
Speaker 1: by the way. I think that's a mistake made by
Speaker 1: m m T. Mm T thinks that you should use
Speaker 1: fiscal policy to control inflation, at least some versions of
Speaker 1: it do. I'd like the FED to be in charge
Speaker 1: of inflation. Fiscal policy should do something the Fed can't do,
Speaker 1: which is invest in children, address climate change, bolster our infrastructure,
Speaker 1: a whole bunch of things that the monetary policy can
Speaker 1: do very very little about. The legislation that's currently under
Speaker 1: debate is on an annual basis, one tenth the gross
Speaker 1: size of what we just did this past year. Moreover,
Speaker 1: it's mostly paid for. Some of it increases the productive
Speaker 1: capacity of the economy. Don't think it puts much upward
Speaker 1: pressure on inflation of the medium term, and if it
Speaker 1: did on the FED could just offset it. So I've
Speaker 1: been in twenty five years of debates about fiscal policy.
Speaker 1: Almost never has anyone brought up inflation as a pro
Speaker 1: or a con of the Affordable Care Act or the
Speaker 1: Trump tax cuts or whatever it is. I don't think
Speaker 1: it belongs in the pro and con of this debate.
Speaker 1: People should debate whether this is good for children and
Speaker 1: good for climate change, not what what'll do to inflation. Well,
Speaker 1: let me ask you, you know, we just have a
Speaker 1: couple of minutes left. You were the chair of Obama's CIA,
Speaker 1: and inherently, like a lot of the there is no
Speaker 1: way to really disentangle any of these questions from politics.
Speaker 1: And it seems like the elevated inflation right now, Democrats
Speaker 1: specifically appear to be paying a price for it. And
Speaker 1: that's a political question, but it's real. So Democrats got
Speaker 1: clawbored in some recent elections, the polling looks bad, etcetera.
Speaker 1: In your DC experience, in your capacity as someone who
Speaker 1: advised a president in your capacity as someone who thinks
Speaker 1: about how politicians should react to this, what is your
Speaker 1: view on how the leaders in d C should think
Speaker 1: about I don't know, reframing the debate, messaging, what's going on, etcetera,
Speaker 1: such that the case can be made. Look, we've just
Speaker 1: had the most incredible employment recovery ever. We're having the
Speaker 1: fastest nominal wage growth ever. We were like unemployment. How
Speaker 1: do you go about turning that debate or how do
Speaker 1: you think about reframing the messaging, because clearly, if we're
Speaker 1: just talking about inflation, it's sort of a a loser
Speaker 1: for the current Whitehouse. Yeah, so, I you know, barely.
Speaker 1: I'm having a hard time trying to understand what's going
Speaker 1: on in the economy and with only mixed success, and
Speaker 1: so my ability to give communications advice to anyone who
Speaker 1: is considerably inferior to that um if forced too, I'd
Speaker 1: say one is be more realistic about your outlook. That's
Speaker 1: something that Secretary Yellen did. She recently said, we don't
Speaker 1: expect prices to start slowing anytime soon. It'll take till
Speaker 1: the second half of next year. So be more realistic.
Speaker 1: You have to do the combination of touting the strengths
Speaker 1: the low unemployment rate still too high, but it's fallen
Speaker 1: a lot, while acknowledging the pain that people feel and
Speaker 1: not being dismissive of inflation and saying it's real. And finally,
Speaker 1: I think President Biden needs to say I'm doing what
Speaker 1: I can in terms of the ports and the supply chains.
Speaker 1: You do understand it better than I do. But you know,
Speaker 1: this is primarily responsibility the FED. That's why I'm nominating
Speaker 1: or renominating so and so, and I want to make
Speaker 1: sure that they get inflation under control. It's their job.
Speaker 1: I'm expecting them to do it. It's kind of wild
Speaker 1: to think by the time this episode comes out, we
Speaker 1: might um, we might know who. Yeah, all right, well Jason,
Speaker 1: I'm conscious of the time. So thank you so much
Speaker 1: for coming on all thoughts. Really appreciate it. Thanks, that's fantastic. Okay,
Speaker 1: Thanks Tracy, Joe, great talking to both of you. So, Joe,
Speaker 1: I thought that was a really interesting conversation and you know,
Speaker 1: an important viewpoint to have someone who's sort of straddling
Speaker 1: extreme wonky uh monetary policy with you know, very sort
Speaker 1: of realist um political considerations. Given his experience in TC.
Speaker 1: One thing that is jumping out at me in this
Speaker 1: whole debate is I really feel that it's sort of
Speaker 1: boils down to not necessarily supply versus demand, but which
Speaker 1: of the feds to mandates people value the most, um,
Speaker 1: you know, bringing down unemployment or having price stability. And
Speaker 1: I do think there's something about the price stability mandate
Speaker 1: that makes it a lot more important and accessible to
Speaker 1: a much larger number of people. Like I think most
Speaker 1: probably aren't that concerned that the unemployment rate is, you know,
Speaker 1: four percent when maybe it could be three percent. But
Speaker 1: because inflation tends to touch almost everyone's lives on a
Speaker 1: daily basis, if you're buying stuff, it just feels like
Speaker 1: people will naturally naturally gravitate more towards that issue than
Speaker 1: they will unemployment. Yeah, I think that's right. I mean,
Speaker 1: I look, it's very real, especially and we we've talked
Speaker 1: about this before, but inflation it feels very really Look,
Speaker 1: even in the depths of a downturn, most people don't
Speaker 1: lose their jobs, and so I think this sort of
Speaker 1: gets But even in but everyone buy stuff usually every day,
Speaker 1: and so you do get this sort of like disparate
Speaker 1: effect where it's like inflation always affects everyone, and unemployment,
Speaker 1: even though that's the other half of the mandate, only
Speaker 1: affects some people at any given moment. And therefore it
Speaker 1: does seem like inflation in per particular, and we're seeing
Speaker 1: that in some of the data right now, and we
Speaker 1: see that politically, you do pay a heavy price for it.
Speaker 1: It is interesting what Jason said. I kind of half
Speaker 1: believe it that economists that actually economists are less worried
Speaker 1: about inflation than the public. It's kind of weird because
Speaker 1: at some level maybe that's true, and I get his
Speaker 1: point that, actually, okay, maybe a lot of economists and say, yeah,
Speaker 1: we could have a three percent inflation rate, we could
Speaker 1: have a four percent inflation rate. It's fine. But on
Speaker 1: the other hand, like economists really seemed to think that
Speaker 1: fight is blowing it when it's blowing. When it's blowing
Speaker 1: it on the inflation side as opposed to the employment side.
Speaker 1: As you said, I mean, there's definitely been it feels
Speaker 1: like there's been a big shift um since the CPI number,
Speaker 1: which you know, kind of makes sense. But I do
Speaker 1: feel like a lot of this boils down to you know,
Speaker 1: if I put on my old um like international relations
Speaker 1: had on this feels like an absolute versus relative argument
Speaker 1: to me, Like, on the one hand, the economy, you know,
Speaker 1: a big important part of the economy might on the
Speaker 1: whole will be better off in the form of a
Speaker 1: lower unemployment rate, But on the other hand, people sort
Speaker 1: of feel the relative disadvantage of higher prices more. I
Speaker 1: don't know if that makes sense. I mean, I think
Speaker 1: it makes sense. It's just it's if that's why I'm
Speaker 1: trying to say, Like, I think that's why economists probably
Speaker 1: feel better about it, you know, if they're if they're
Speaker 1: looking at it from a whole perspective versus the individual.
Speaker 1: I think that's where that cover comes from. But so
Speaker 1: the other thing I would just say on the transitory
Speaker 1: argument is I also think people are sort of forgetting
Speaker 1: the time frame here. And we've spoken about this before,
Speaker 1: but at the moment, it feels like most people are
Speaker 1: coalescing around the first quarter of two, as you know,
Speaker 1: the moment when price pressures should start to ease or
Speaker 1: I guess the second quarter of two, and so you know,
Speaker 1: at that point, if you don't see some improvement, then
Speaker 1: it feels like the macro argument, the demand argument um
Speaker 1: probably will be on a much much stronger footing. It
Speaker 1: is also becoming completely clear to me that no one
Speaker 1: knows how inflation works. There are some people who say,
Speaker 1: I air on this, I want to air on the
Speaker 1: side of doing too much, But I kind of don't
Speaker 1: believe them, and I kind of like, well, you're really
Speaker 1: like obsessed about inflation. I don't believe Jason is in
Speaker 1: that category. I think I think, in total good faith,
Speaker 1: he is not one of those people. I think he
Speaker 1: actually still for his like framework, does think airring on
Speaker 1: the side of due too much is still the right approach,
Speaker 1: And I think he means that the big said, I
Speaker 1: still don't feel like I have a satisfactory answer as
Speaker 1: to what is the channel via which a modest pace
Speaker 1: of rate hikes changes the inflation picture. I get that
Speaker 1: you can, you know, you could do a vulcar and
Speaker 1: induce a recession, and I believe that would probably bring
Speaker 1: inflation down. If you're like slammed the brakes on the
Speaker 1: economy through a series of several aggressive rate hikes, raised
Speaker 1: unemployment when we're already in the hall, dropped aggregate demand
Speaker 1: for housing and washing machines. You build up inventories of housing,
Speaker 1: washing machines, price of watch of stuff falls, you probably
Speaker 1: defeat inflation. I believe that channel exists, but I don't
Speaker 1: think clearly like that is not a channel that Jason favors.
Speaker 1: It's not obvious to me still what is achieved on
Speaker 1: the inflation front from the sort of like mild like
Speaker 1: middle path where you're not really affecting anything on the
Speaker 1: you know, you're not really hitting anything substantial on the
Speaker 1: demand side that would like meaningfully slow the job's recovery.
Speaker 1: I feel like that is the part of the equation
Speaker 1: that like in my mind I used to like, I
Speaker 1: don't I'm not fully getting it. But this is what
Speaker 1: the endless debate is for. I'm taking the nihilists view
Speaker 1: of inflation, which is that like, having spent more than
Speaker 1: a decade trying to push it up and get out
Speaker 1: of deflation and get closer to the two percent target
Speaker 1: and not having any success just naturally makes me very,
Speaker 1: very nervous when people start saying that they're gonna, you know,
Speaker 1: bring it down when it's heading in the other direction.
Speaker 1: I'm just suspicious of all attempts to control inflation at
Speaker 1: this point in Time's let's peg the thirty year at
Speaker 1: zero and get out of the business of that's the
Speaker 1: executive ZURP forever and then just let the market sort
Speaker 1: of out. I'm with you, Karen, Oh God, alright, um?
Speaker 1: Should we leave it there? Let's leave it there. This
Speaker 1: has been another episode of the All Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy Alloway,
Speaker 1: and I'm Joe Wisenthal. You can follow me on Twitter
Speaker 1: at the Stalwart. Follow our guests on Twitter. Jason Furman,
Speaker 1: professor at Harvard former chairman of President Obama ci A.
Speaker 1: He's at Jason Furman. Follow our producer Laura Carlson. She's
Speaker 1: at Laura M. Carlson. Follow the Bloomberg head of podcast,
Speaker 1: Francesca Leavy at Francesca Today. And check out all of
Speaker 1: our podcasts on Twitter under the handle AD Podcasts. Thanks
Speaker 1: for listening.