Let's get to our guest. John Taylor joins this professor of economics set Stanford University and author of the famous tailor rule. So lots to talk about, Professor, A simple question. First, can we argue that we've seen peak inflation but not yet peak Fed hawkishness? Well, we certainly can, because they're they're a little bit out of line. We had a big conference here just a while ago which the title was how the FED get so behind and what to do about it? So there is a little imbalance and
people are thinking about it. I hope inflation comes down, but the FED is still a little bit too low. So to speak, um, Professor. When we look at what's happening in terms of inflation, the narrative a few months ago that the supply side and therefore perhaps the monestry policy was not the right tool to be using. Has that really gone by the wayside, because inflation could become structural.
I don't think it's gone by the wayside because so far, you know, what is the interest rate in the US two and a third or something, that it's still low compared to any reasonable measure of inflation, even if it was two percent inflation. But the inflation rate is higher, and so there's sort of normal policy policy which worked, has worked in the past, was suggests it's still Monterrey policy now. The budget deficit has been vague, it's coming down.
There's other factors, but I think the key, and this is what we've emphasized so many of us who have talked about it as the Monterrey side. So that's why I keep mentioning that. And it's of course there's going to be dispute as no one likes higher interest rates, especially when they've been low for so long. But that's what I think we're facing. So the Taylor rule looks at GDP and also inflation levels. To to get some advice on what to do with the Fed funds rate.
What do you think the Fed funds rate should be at the moment given the conditions that we have, Well, I think you should start moving up. In fact, one of the meetings we had here some of the members of the f O m C suggests that it should be over three at three and a quarter. I think it's probably gonna have to be higher than that. Polet's get to that point and see where it is, and and we you know, we've had some good news, but it's still a high inflation rate. It's seven eight and so.
And also you think about this globally. It's not just the United States, it's Korea, it's Europe, it's Latin America, it's all over and that's what's happened in the past. We need to prevent that. There's still time. This is a fairly new phenomenon. This is not something that's been with us for a whole decade like in the nineteen seventies. So there's still time to do it. It's and it's still relatively painless to get rid of this inflationary built
up and after all, we'd be better off. And given that call that you just made, do you think a hundred basis points is on the table for September, Well, they're talking about seventy five, and I think that's probably
what they're gonna do. They you know, any central bank has to be careful of the how fast it's moving and and that as long as they signal, and I think this is something that gets emphasized that there's some signaling that they may have to do more, and that's what they've tried to do a little bit maybe not the chair as much as others, but that would help ease the adjustment because people know, well, if there's not an adjustment, there needs to be somewhat higher interest rates,
not as high as as men you are worried about, but somewhat higher. What would you say of the risks here of a deep recession, of shadow recession and the like, and you know, how should the Fed be balancing those risks? Well, there are risks. I think the risks is historically we've seen the FED gets behind and that has to catch up. It gets way behind, then it has to rate raizor rates even higher. So that's the risk. Right now. We've had two quarters of negative growth and we may get
a little bit more. It's been very mild in the US and with there's other things going and other other explanations, but it's two quarters and that's something that people worry about. But another hand, hasn't the inflation hasn't passed through to a lot of things. Gasoline prices are coming down, that's great, but wages are still going up and other things are
going up. So they need to address that, I think for sure, in a in a gradual way, not not overwhelmed the economy, not surprised people doing it in in a way that's understandable, predictable, and that's what's needed. Yeah, that sort of brings me to because some investors would say the feed you use this opportunity. The U s economy has some underlying strength, particularly look at at the jobs sector at the moment. So what is the underlying strength
in the economy. And if you have a recession but no no banking crisis like we had in the GFC or no housing crisis, is there scope for quick recovery? There is. It's a it's a very powerful economy. There's lots of innovations going on in California where I had living, and Silicon Valley. It's all over the place, and so I think there is an opportunity. But again, we have to encourage people to do this and not scare them, not frighten them. And it's it's not just Monterrey policies.
Fiscal policy and regulatory policy and tax policy. O those things go together to make a stronger economy. We have to work on all of those. Okay, So if you um J. Powell, what would you be doing right now? What would the effort what would like the f AMC to be doing. I think the main thing is I'd be signaling a little more than they have that this is not an equilibrium. There needs to be an adjustment.
And if it's done in a gradual way, a predictable way, a clear way, the rate of inflation will not pick up, wage inflation will not pick up. It'll come down to a nice healthy level. Remember two percent, that target target inflationary two percent were so far above that. But if they can get back to that by being clear and predictable, and I hope that's what J Paul does. It doesn't sound like you two downbeat. So I think a lot
of investors would would take some heart from that. If if QE pushed investors into riskier assets QT, which is really supposed to be begin with some vigor next month, will that push them into what areas of of let's say, less risky ascids. Is the quality stocks? Is it treasuries? Is it? Is it? Or is it into cash? It's a good question. I think that there's really doubts about how much impact q E had, and so the main thing is to be predictable when there's don't surprise people
that obviously convinced smaller balance sheet. It doesn't have to come down overnight, it can down come down gradually. And I think that's part of the system of being predictable, not surprised people, so that they can know what's going on. The same just like with interest rates, just like with the balance sheet, the same ideas is undo qu e in a in a sensible gradual way, and I think
it will work better. And Professor, just a ten second, Stian, where do you actually think the terminal rate will be in this cycle? I think it'll be you know this, when we're all through this, it's is three four percent some other words. Take an inflation rate target of two, take a real interest rate of one. That's what the latest is. I used to think it was two. Let's say it's one and three is where we're in. But we probably have to go above three before we get there. Alright, Professor,
thanks so much for joining us. Really appreciate it. Good session. John Taylor, Professor of economics at Stanford University,