Surveillance: Jackson Hole

from New Jersey, Raphael Bostick. What an interesting path out of Harvard and Stanford, really first rate academics and a different fed president Michael indeed, and now the president of the Atlanta Federal Reserve, Rafael Bostick, and we welcome you to Surveillance this morning. At you're in Atlanta, where it's gonna be a lot warmer. I looked this morning, Rafael, and it was thirty seven degrees out on the back lawn of the Jackson Lake Lodge. So in some ways

we're better off. It's not as it's not as beautiful, but in subways we're better off. Uh, let me ask you first about the numbers that we just got four point two percent on the year over year headline PC three point six percent for the core. Is that out of line at all with what you were anticipating? And does that maybe put more pressure on you to decide you would like to see sooner taper? Well, Mike, first of all, I'm glad we're not sitting out in thirty

degree weather. Uh. That makes for a much less comfortable interview. Uh, you know. And and for the numbers that came out today, you know, I've I've been in studio, so I have not a chance to look at the numbers, UM more deeply. But I would say this sort of number is not a It's not a huge surprise for me. We know that there have been a lot of price pressures, UM,

and those have continued. UM. I heard you guys talking before about the notion of transitory and you know when I to businesses, but they've told me is that, UM, this is episodic. They do believe that this is really driven by the pandemic circumstance. But what it also become clear is that this episode is gonna last longer than people expected. So UM, we're trying, We're going to figure

out how to incorporate that into our modeling. I would say, for me, what I'm seeing is really consistent with the outlook that I had before. So I'm still comfortable that we're on a good trajectory with the economy and we should still see fairly robust growth. Llow, we put you on the other side of that big mahogany table at the FED and those who might argue for a delay, is there an argument there because what seems to be happening is a problem on the supply side, and you

guys address the demand side. Well, it's certainly true that there are supply side challenges, and you know, you've, I've we've all heard many stories about supply chain issues and trying to get goods to product to meet the robust demand that's out there. I definitely worried about that and

thinking about that. What I would also say, though, is that what we have seen and businesses consistently tell me they're getting having record volumes, the demand is super strong, uh, And so I don't think that pushes in a different direction than the types of things that we're thinking about in terms of removing some of the accommodation. I think the economy is performing extremely strong, and any weakness that we're going to see is just pulling us off of

very high numbers. Initially, there seems to be a feeling on Wall Street that if you end tapering, and particularly if you do it quickly, that that will remove us support from the equity markets. Uh. The FED has been contributing to the big rise we have seen in the indexes and maybe even to inflation with QUWI purchases. How much do you worry about financial market stability with this switch in policy coming up? Well, you know, I always

worry about financial stability. I think it's important that we make sure that our financial system remains wrong and resilient so they can provide the services that are needed for our economy. Uh. What I do think though, in terms of our policies is that we're really aimed at two other things. We're looking at maximum employment and stable prices.

I think that we're doing a pretty well, uh, making good progress in both, which suggests that we should be trying to get our our our policies back into a more normal situation. You know, we've been at a very extreme level accommodation, and I think that the strength of the economy calls for us to pull off of that a little bit and let the economy stand on his own. Uh.

We still have a fair amount of energy momentum. I think that we can do our tapering faster than we have in previous episodes because of that momentum and my expectations the economy will continue to operate in a strong way. We were talking earlier about whether the inflation impulse that

we're seeing now will less longer than you anticipated. Is the idea of getting the taper underway, and uh, you have said, get it done fairly quickly, so that you have some freedom to be able to address interest rates if you need to. Well, I mean, certainly, I think it's important that we move one tool, one lever at a time. Uh. It's much more complicated to communicate what we're trying to accost with policy if we're moving interest

rates and doing things and asset purchases at the same time. So, you know, getting the asset purchases done is going to be an important thing, uh, in terms of the sequencing of our policy. But I do really think about them in very different ways. UM. I think about a lot of the asset purchase impetus coming out of the deep recession that was triggered through the pandemic. UH. And as the economy has moved further and further away from those those lows, I think the need for the type that

uh those purchases starts to decline. UH. And at that point, I think we should move on to other things. US that's done. I think what I'm going to do is really look at the data and have the data inform me as to how I should be thinking about when we should do lift off with interest rates. Right now, I have the that projected as the end of two. But you know, as I always say, a lot's going to happen between now and then, UH, and that will really inform the actual decision that we make in terms

of when we start to move interest rates. Well, when you talk to CEOs in your district, or even the mom and pop stores in your district, what are they telling you about how long they think this inflation will last? Well? Yeah, they actually don't talk about it usually in terms of inflation. They talk about it in their ability to meet product demand. And so business leaders UH that I talked to UH

tell me that the supply chain challenges are significant. What we thought were going to be or what they thought were going to be short term challenges are starting to look like they're gonna last a bit longer into too UH, and that has implications for what's going to happen in terms of prices. But I do think and I think

it's important for everyone to keep this in mind. This is all part of an episode, and so I've I've moved away from transitory or permanent and really try to talk about this as an episodic uh period of inflation. And for me, with a long episode, the thing that I'm going to be most concerned about is whether people start to take the length of the episode as a signal that they need to start doing things fundamentally differently.

Because if that's true, then a lot of the relationships that we've seen historically may not hold any longer, and we may do to think about our policies differently. So a lot of the surveys that we're going to be doing on inflation expectations and the like, um, those are going to be the things that will inform what makes the best sense for for policy moving forward. Raphail. The theme of this conference the title is Macroeconomic Policy in

an uneven economy at this point. Do you think that there one and twenty billion dollars of monthly bond purchase is helps even out the unequal recovery or do you think it exacerbates at this point given the recovery and the labor market some of the inequalities, given the fact that lower rates and better financial conditions tends to help

wealthier individuals more because of their assets. Well, you know, I think of the purchases, the goal is really to make sure that the economy stays robust so that people come and get employed, because if you don't have a job, then you're going to have a higher level of precariousness, and that precariousness could trigger and translate into uh, significant hardships.

And I think so what I'm trying to weigh is sort of, uh, the hardships or the potential for hardships that many at the lower end of the wealth distribution could could face without a strong economy versus some of the benefits that are going to accrue to those at the top because we have a strong economy. Uh. And for me right now, the precariousness side is of more concern, uh, in part because of how the pandemic has played out.

We know that in this pandemic, jobs at the lower end of the wate retributionn't have been hit much harder, and so there is an imperative that we make sure our policies are in position so they can come back more quickly. Uh. That is starting to happen now, and and for me, I found it heartening that a lot of those gaps in terms of job losses and categories are starting to narrow, and that gives me some comfort

that the policies have been effective. Mike McKie, why don't you drop in here for one final question with the good President from Atlanta. Well, let me point out that the Good President from Atlanta is one of the voting members of the Open Market Committee this year, So what you say really matters. And I'm wondering, I'm sitting here listening to what you're saying, and I'm thinking of the how the print headlines are gonna say. You know, Bostick joins group of hawks. I'm wonder if this is really

hawkish or if it's just time? Um is there? At some point would anybody notice in terms of market interest rates if you start cutting back on QUEWI purchases. So I actually think that the markets will not respond very strongly to this UM. The economy is in a very strong way and strong position, and I think the UH asset purchases at this point have been something of an insurance policy. I think that we don't need that insurance

nearly as much as we have in previous episodes. Because of that, I think the markets are going to really absorb this pretty smoothly. And UH, we'll we'll see the economy continues to just roll on. Raphael Bostick, You more than anyone I know inside the Beltway has thought harder and harder about our nation's social policy, our fabric, your

CV out of USC, etcetera. Is extraordinary. You talk years ago about trying to get the doors wider in America, having you do with housing in the black experience in America. Where are we right now? Can our institutions and particularly this FED get the doors open wider? Well, you know,

I think we're definitely gonna try. And let me step back and start by saying, you know, the gaps in homeownership or as large as they've ever been since we started tracking this, UH, and that means that there is a challenge that we face in terms of UM families of of African, American and Latino backgrounds UM getting assets

that allow them to accrue wealth. What I'll tell you is for the FED, our monetary policy and the policy framework that we announced last year is really designed to make sure that the employment market, the labor markets work better for all UH. And we are also advancing a number of other things we're convening. So we have a Racism in the Economy series to highlight a number of

the barriers and potential solutions. We're working for, solutions in communities to try to make those differences to really change how the economy works for people UH and make sure their institutions are well positioned to succeed. So I think there's progress that can be made and I'm gonna work hard with my colleagues to a push to make that happen. Dr Boston, thank you so much for joining us today. What I love about this, folks, is everybody has a

different path to their economic excellence. And Michael McKee, I don't think I've ever said this to see someone of interesting business academics and then took the toughest job in the country no, not the chairman of the FED. The president of the University of Delaware. That's a tough job. That was a tough job. And Pat Harker just totally bailed on that. Excuse me, the president of the Philadelphia Fed, and he joins us. Now, thank you very much for

joining us. Pat, And as I mentioned Roba El earlier, we are a lot warmer here in the studio, and I'm sure you are in Philadelphia, then we would be on the back lawn at Jackson Lake Lodge where it was thirty seven degrees a short time ago. Uh, I'm wondering about heat. In terms of inflation, we got inflation numbers today. The headline PCE goes up to four point two percent, faster than you had anticipated and higher than

had been anticipated by the Fed. Does that suggest to you that we might need to see uh, and I know taper comes first, but that we might need to see interest rates rise sooner than the market has been expecting. First. Good morning. Yeah, we're a little warmer, although I do miss the view. The view from my my office is my home office is a lot different. And go fighting blue hands, go University of Dolaware. So yeah, so on inflation.

I mean, clearly it is a concern. Um. The word transitory I think has been used probably in some ways too much. Uh. But there are clearly sectors of the economy which are accelerating faster than others. That's always the case. The question in my mind to watch on inflation is are we seeing spillover from these COVID infected sectors to the non COVID infected sectors and our expectations becoming unanchored so far on the latter point, the answer is no,

but it is clearly something we need to watch. And what we're hearing from our business contacts is that this may be longer lasting than we had expected they had expected, So is clearly a risk that we have to be cognizant of with respect to policy. Are those people telling you that they're going to have to keep raising prices in order to make up their margins? R I hear from our contacts business contexts they're working very hard not to raise prices. They are seeing some increase in productivity.

Good news. This We are seeing across the economy and in individual sectors increases in productivity, which helps to mitigate some of the challenges they're facing but that doesn't completely get rid of them. So yeah, they're they're concerned about this right now. I think generally they're very concerned. One major national homebuilder I was talking to you recently said, you know, the supply chain disruptions we taught were temporary.

It looks as temporary as we thought. They will eventually solve themselves, like appliances, But right now they're putting in used appliances and the new homes and promising to deliver a new appliance because they simply can't get the appliances in that case because of chips. To a large extent, we think about cars and chips, Well, there are chips in your dishwasher, and sometimes they don't work in my dishwasher.

If if the rest of the Open Market Committee follows your advice and decides to start tapering fairly soon, what kind of message does that send at a time time when people are very unsure about the impact of COVID on the economy. So delta is clearly a problem, and the next one. It's not just going to be delta. First and foremost. We've got to get this endemic under control under way. To do that is get people vaccinated.

It started with a health crisis. It's going to end by solving the health crisis, not by raising rates or lowering rates. So we need to keep that first and foremost right in front of our mind, and we need to tell everybody. So yeah, I mean, given that, given that this is a health crisis, I think we need to follow. As our colleagues and Raphael was just on have said, we really need to follow the data and see how things turn out over the next couple of months.

We put these systems in place. We put this accommodation in place because of the health crisis, and we will be able to remove it now because we are slowly careful. We chipping away at the health crisis, but we're not there yet. We talked a lot about inflation this morning, but what about the labor market? Of the committee and it's minutes of the last meeting suggested you've made progress, but not nearly enough. And even if we get a similar jobs report next Friday to what we had, you're

still gonna be about six million short. I'm wondering if you expect to make up that difference very quickly, or if the participation rate is going to stay low and that might change your thought about the proper path for policy. To separate two things there, it's a good question. One is the path of policy, but also, uh, what is causing this? Uh, what's causing this? It's not a lack of demand. It's clearly not a lack of demand. We see that in the JULT data, lots of open jobs.

People are still concerned about coming back to work. People are concerned about getting on transit thing city like Philadelphia to get to the workplace. People are concerned about going to the restaurant with the delta variant, etcetera, etcetera. And so again. Until we solve those problems and childcare and all the other things holding people back from entering the workforce, that's going to be an issue. Unemployment insurance is rolling off,

I mean the expanded unemployment insurance. We are starting to see some of those early early results from some states that removed the federal unemployment early. Yeah, you know, it doesn't seem like that's having a huge impact on getting more people into the labor force. It's these other factors life, but simply as life right, taking care of kids, taking care of elderly parents, getting to and from work, it's

causing us. So what does that mean for policy? If that, if what I just said is true, then adding accommodation or keeping highly accommodative policy is not going to solve that problem. It's not going to close back gap. It's not a demand problem, it's a supply problem. Well within the Patrick Carker, I think you're best situated of anybody within the FED. I note that the Philadelphia FED was four or five of the American population sitting on one

percent of the land. It's a micro cosm of this nation. The manufacturing index back great. What do you hear from the small, the mid and the large business people of your district? So they're nervous. I mean, I think generally people are nervous and about what the future holds. But that said, they are seeing lots of demand. I mean, our manufacturing contacts are manufacturing business Outlook survey. Although it's ticked down a little bit in terms of future activity,

it's still an expansionary territory. Their biggest problem, and you know this is getting skilled labor. And by the way, we should put this in context and some of the work we're doing in the Philly FED. This problem of skilled labor and labor generally with us before the pandemic hit. The pandemic has just exascerbated the problem, it hasn't created

the problem. We still need long term structural solutions to solving our labor woes, and that's kind of work we're doing in our community development function at the Philly Fed and really across the federal reserve system. Well. At the Philly Fed, you said something that I think is just fascinating Patrick, that some of the supply side issues that we're seeing in the labor market, the frictions there are

not solved by monetary policy. This isn't something that holding rates low for a longer period of time or even up trying a hundred twenty billion dollars of bonds every month is going to solve in its own right. So how do you determine the potential negative ramifications from the ongoing a hundred twenty billion dollars of purchases with the lack of influence, frankly on solving these labor market dynamics.

So I have been on record and I continue to be on record that I would like to start papering sooner rather than later. I'd like to start it sooner rather than later. And I like to keep keep it as simple as possible. The old engineer, and I'm trained as an engineer, you know, the old kiss principal, keep it simple, stupid. Let's just start this process. Let's get that over with and then we can start to think about the FED funds rate and normalizing the FED fundry.

We're not there yet. I'm still forecasting late probably twenty three before we do lift off. But let's get the capering process underway. Mike, let's engineer this Jackson hole right now? Is this the Jackson hole? A complexity or simplicity? As a president speaks of, Well, it depends on whether you're reading the papers which are complex, or whether you are

talking about raising interest rates or starting to taper. I'm wondering, Pat, if you think that starting to taper is going to have an impact uh this soon on the whole FED, the new framework. Uh, the idea that you're waiting. Will people take that the wrong way and think that you're giving up too soon? They might, But again I don't think that's that's appropriate. Uh. We have achieved our inflation

goal essentially, I mean we're above two again. Good news, is explications have not become an anchored But we are averaging about two percent and keeping this accommodation through tapering there for a long period of time. Uh. And it's not solving the labor problem. That's not the problem. Just look at how many jobs are open in the US economy,

the jokes data. I just think it's the proven thing to do to just take this first move and then let's see how things play out before we think about any change in At that country, we talked about whether or not the FED has contributed to inflation by propping up asset prices. A lot of people have said fiscal policy is contributing to inflation by putting a lot of money into the economy and now down and watching in their debating hundreds of billions more. Are you worried that that?

Leaving aside the political merits of this, are you worried it could be inflationary? Let's start with what we know almost exists, not done yet, but the infrastructure bill. As an old civil engineer, I'm all for fixing our infrastructure. It's in woeful shape across our economy. We need to fix it. So what's the implication, what impact will that

have on the economy. Well, I mean the evidence I've seen, at least the modeling i've seen, you know that chillion dollars will have maybe one two tenths of a percent impact on GDP. So we're not talking about a huge overall impact in certain sectors, absolutely, but not overall. My biggest concern right now is not that it's going to overstand that bill itself is going to overstimulate the economy, is that where are we going to get the labor, the skilled labor, to fix the roads, to do the

broad bad work, and so forth. That we need a really intensive effort to get people into the labor force with those skills. Now, the broader issue of the three three and a half trillion that is right now, I don't have picks opinion on that because really that's a moving target every single day, and it's very hard to model, uh, such a moving target. All right, very quickly, pat next Thursday, September two, Delaware Blue Hens versus the Black Bears of Maine. Winner. Well,

I'm always going to go with the blue Hens. Come on, everyone will be fully vaccinated. Petrick Harker, thank you so much, greatly, greatly appreciated this morning. The voice of Philadelphia. This is wonderful, folks, because it's a changeable feast of what the FED invented, the geography of the nation, and Michael McKee, it's pretty simple to say the culture of the fabric of Philadelphia radically different what capital holds court in in Dallas. Yes,

certainly the lture is a little bit different. Robert Kaplan much more likely to be wearing cowboy boots than Pat Harker. Robert Kaplan is the president of the Dallas Federal Reserve. And this is, I guess, uh, Rob a little bit like, Uh, we're all sitting around the table at the FED meeting, the Open Market Committee meeting, because each one of you

is getting, in turn your chance to describe the economy. Uh. Let's let's ask you, um in Dallas, in the in your region, what are CEOs and company officials saying about whether this inflationary spike that we've seen is going to continue because maybe COVID is going to disrupt supply lines even longer. What they're gonna what they're saying is the materials supply demand balances are gonna last longer than people may be expecting. Now certain material imbalances are going to

get resolved. That semiconductors. My contexts are telling me it could take much longer to see those balances resolved. One of the reasons is a lot of the changes we're making to the economy. Electrification of the auto grid, for example, takes a lot of semi conductors, and so we're going to produce more semi conductors, but demand is growing. So

that's the that's the materials. The one that I think is gonna be even more persistent is the labor supply demanding balances and that we've had three million retirements since February. We have a million a quarter million half people who have left the workforce to be caregivers. You have a fear of infection, and broadly, businesses are becoming resolved to the idea it's gonna be hard to attract labor. They're gonna pay more. The wage increases are are certainly for

labor welcome. But I think businesses are actively thinking about how to manage their business, and if they're a big business, they're going to use more technology more scale. Small mid sized businesses, the only thing they option they have is to raise prices. UH and they're doing that, and they're

more confident that they can raise prices and have them stick. Well, I'm sure you've probably heard Pat Harker just a moment ago talking about if we get this stimulus bill, the infrastructure bill, we could see inflationary impacts because there aren't enough workers. How much do you worry that inflation is going to be embedded in these companies thoughts going forward because they can't find workers. Uh. I think these labor supply demand and balances will be with us for an

extended period. So so do I worry about I think. I think it's going to be part of our economy, a feature of our economy. And uh I think that as a result of that. Are our year end at the Dallas FT, our year end PC inflation forecast is three point a three point nine percent. I could see affirming even to four percent by the end of the year.

We think the extreme moves will moderate, like used car prices, some of those extreme moves from the reopening will moderate, but we we think price pressures will broaden because of these some of these persistent imbalances, particularly on labor. So headline for next year we think right now is in the range of two and a half percent, and I could see us, you know, revising that up versus down as we go through the next few months. So I'm watching it carefully. And we've got a commitment at the

FED to anchoring average inflation at two percent. We're willing to run moderately above. We've also got a commitment to anchor it. And low moderate income communities I'm talking to actively are seeing a greater share of their wallet going to to uh, you know, gasoline, food, rents, autos, and they're they're, they're, they're they're feeling that those effects. Well, I know your two thousand twenty two guy for raising interest rates, and you also want to get the taper

over with. Is it possible that, uh, we see the Fed have to move up the date of liftoff for the Fed funds rate. Uh. I've been very careful with emphasize that decisions on the asset purchases should be separated from decisions on the Fed funds rate. We've got a number of months and into next year to assess how the economy unfolds, how these dynamics unfold. Will make that judgment next year. I do believe we should start the asset persons adjustment process soon. I mean literally as soon

as possible. And I would like to see us move do that process gradually over stay eight months. Uh, And I think we've got to get started on that, and I think the extent we get moving on that, it may actually give us more flexibility down the road on our decisions on the FED funds. Right if you're just joining us, Robert Kepit of the Dallas Fed with us on radio and television worldwide as we elebrate what we do at Bloomberg and all of Bloomberg surveillance is economics.

Michael McKee leading our coverage in this hour as we go to the speech of the Chairman of the Federal Reserve System and we see show you worldwide the geography of this nation, from Philadelphia to Caplan's Dallas and on to Bullard St. Louis as well. Robert Caplan, good morning to you. You know, I bust your chops about Dallas research because you're the only Fed president that actually reads

his research. You have a spectacular research piece linking surging home prices into rent inflation and buried in Jim Dolmus's peace is six point nine percent rent increases in two thousand twenty three. Is your FED ready for that? Uh? I think low modern income communities are not ready for that, and they're they're very cognizant of having to deal with it.

And I think while I think what we're saying, uh, part of our two and a half percent plus forecast for next year is we need to anticipate this appreciation at home prices is gonna is going to translate into higher rents down the road, and that's got to be part of our thinking. It's been highly publicized rob that and FED Chair J. Powell seems to be a little bit more dubbish or a little bit more patient when it comes to the taper, when it comes to the

rate hiking cycle. Where do you guys disagree most? I mean, where do you see him wrong in his thinking in terms of being patient at a time of rents going up that quickly. Well, I actually reframe, uh what you as slightly. I think the role of the chair is to encourage a process of debate and disagreement. This is why I thought it was so important to get asset

purchases on the table. But his job is to I believe the chair's job is to encourage debate and disagreement, try to forge a consensus and understand views in order to come up with policy and have a good process. And I think j Pal does a superb job at that. Are you expecting him to make any kind of announcement today in terms of paper timing? I would not go near commenting on what j Pal is going to say in his speech. I don't I don't think it'd be

appropriate to captain doesn't expect that from you? You know, I had to try right anywhere near there? All right? Would you? Would you expect that the Open Market Committee on September two would announce the beginning of paper or that it would come at the next couple of meetings. So right now I'll speak to my own process, and that may reflect on what others are doing. Um when we've seen we've I've been talking pre research and I thought we ought to be moving soon on asset purchases

and beginning that process. With the resurgence, we've gone back at the Dallas fit and redoubled our efforts over the last X number of weeks and intensively over the last ten days, even to look at high frequency data, real time surveys, stepping up, talking to contacts and what I'm seeing and what I think we're gonna see up until the meeting. But I'm gonna keep reconfirming this is resiliency.

That doesn't mean that you won't see some slowing and say the August jobs numbers because the matching process will slow because of fear of infection. It won't be because a lack of demand for jobs. You might see a little near term slowing in g d P, but I don't think. I don't think what we're seeing is going to change the outlook. And that's the process I'm going through leading up to the meeting, and I would guess others are doing the same process. Robert Caplen, thank you

so much, greatly, greatly appreciated this morning. With the Dallas FED as well, we have spoken with the Harker of Philadelphia. It is rather different in Dallas. And then there's the absolute unique characteristics of St. Louis FED. If you think of modern economic research, guess what St. Louis invented it years ago. And they have Mike the chart service, they have the facts service, they have the only one I know that can actually use the thing. It's so wonderfully complicated,

is James Bullard. I was using Frasier the other day, which comes from Minnesota, which I mean all this historical stuff. Uh. Jim Bullard is the president of the Federal Reserve Bank of St. Louis, And I guess, uh, we could ask have you ever seen anything like this before in the economy, but I kind of know the answer. This is a

unique experience. You were among the first to say that the FED should start tapering, and I'm wondering if that's because you are afraid of inflation hanging around and may need to raise rates sooner than the markets anticipate. Yeah, I think we do Fraser as well, uh in St. Louis. So just to set the record straight on that one.

UM uh so yeah, I think, um. The key word is optionality for we want to or I would like to anyway taper now and and get it finished by the end of the first quarter, and then at that point I think we could assess what's happening in the economy with respect to inflation. By that time, we'll have many more jobs reports, and you know, it certainly looks

like they'll all be strong to varying degrees. Um. Unemployment will tick down with a fore handle at that point, and then we'll be able to see in the first half of two if inflation is moderating or not. And if it's moderating, then we're in great shape. And if it's not moderating, uh, then we might have to be more aggressive. So I think that optionality has a lot of value right now. Um. I think the purchases don't have much value right now. So um, it seems like

the tradeoff is just right to me. Let's phase out the purchases and let's give ourselves some breathing room. In well, as you look over the forecast horizon, do you think that inflation sticks around? Yeah? I think, uh, right now I'm sitting here today, I'd say two and a half percent or higher in core PC inflation. Uh, so we're all, you know, right now, we're at three and a half

on core PC inflation. That's the committees preferred smooth measure of inflation, the one that's enshrined in the sep TO Summary of Economic Projections. So it looks like we're going

to have quite a bit of inflation this year. That three and a half percent number of measures from one year ago is higher than it's been in thirty years, and it is enough to bring the average inflation rate, however you want to calculate it on that measure over any five year period, either looking back or looking forward up to two percent. So UM, then in the question is how how fast is inflation going to moderate? UM.

If it moderates quickly, then then we're fine. But if if it doesn't moderate, and I'm right and we're two and a half percent or higher, then the Fed might have to start to try to put downward pressure on inflation in order to keep it at the right level.

Do you worry that interrupts the new framework? The idea that you could have to raise rates because inflation is higher than new anticipated, but you don't get the unemployment rate down as far as you would like to, or at least in terms of the diverse and inclusive unemployment rates.

Now we'd be hitting the new framework exactly. Uh. You know, beautiful monetary policy under what I'm describing, because we would have at that point had UH inflation above the two percent targets for some time, and then inflation on a core PC basis would be averaging two over some kind of five year window either backward looking or or centered and forward looking, and so you'd be you'd be hitting

it on that dimension. And then I think on the jobs, you know, you've got to think about not exactly where we are today, but where we're gonna be at the end of the taper. The key thing here is when is the taper going to end? And uh it certainly looks like you're gonna have a very strong jobs from

market at that point. I mean, you can make the argument today that this is one of the tightest job markets we've seen, UH in in recent decades, because the unemployment of vacancies ratio has gone down below one, so

more than one job opening for every unemployed worker. If you want a broad measure of labor market performance, you can look at the Kansas City FEDS Labor Market Conditions Index that's moved up into positive territory and is headed toward very high numbers, which will be again indicating one of the strongest job markets that we've seen in recent decades.

So I think you know, all of that corroborates what you're hearing on this show and everywhere across the economy about jobs, which is that firms are having a really tough time hiring. They're offering wage increases, are offering bonuses, are offering retention signing bonuses, retention bonuses. Uh, they have job affairs where going shows up. So lots of things, uh seem to be pointing to a very strong jobs

market right now. And if you're gonna have six percent growth in the US economy over the second half this year and four percent growth next year, that's just going to improve all that much more. So I think we'll be in great shape in uh in the first half of two, but we have to have some optionality there in case inflation doesn't moderate. Well, what are companies telling you about what they're having to pay and how long they think they're gonna have to pay it, both for

input goods and for labor. Is this going to be something that at this point they're anticipating a bit of a cycle. Well, one of my top concerns, and I've heard it on listening to you guys, is CEOs will come in and they'll say, yeah, my input costs are way up, but we don't think this is a problem. We're gonna pass that right on in raise prices and uh, you know, my labor costs are up, but we're going to pass that on into prices. That sounds like a

worrisome dynamic to me, and one that you know. We certainly want real wages to go up, but for everyone. I want those to be as high as possible. But um, we don't want to get into a cycle where that just feeds through to the inflation process in the economy. Jim Bowler toom Keenan good morning to your thrilled to speak to you before Chairman Pal Jim Boward, I want to go back five years to two big things of

two thousand and sixteen. One of them was Marvin good Friend in the uproar over his paper at Jackson all the late Marvin good Friend folks of Carnegie Mellon on zero interest in the negative rates. Well, guess what, Jim Bollard good Friend was right. Negative rates up, up, up, up worldwide as well. And also you may recall in two thousand and sixteen somebody in St. Louis said, forget about a single point outcome. We are going to have the different states of a regime chain dovetail what happened

five years ago and take us out ten years. Can we get to a constructive different state given them huge negative interest rates worldwide. Yeah, I think uh after Professor good Friends paper h. Central banks around the world did experiment with negative rates, I think with very mixed success, and I think that's why we've tried to avoid that

outcome in the US. UM With respect to the regime, I mean I did switch in sixteen to saying that I thought we were just in a low inflation low now anal interest rate low real interest rate environment, uh, slow growth, and that that wasn't gonna change very readily, and that meant that monetary policy didn't have to be as aggressive as we had previously been. So I was

kind of on the Davers side at that point. But now we're coming through this pandemic um and policy has been a human tragedy of course, of unimaginable dimensions, but from the economy's point of view, have played it very well as a nation with the fiscal policy and the

monetary policy. And now we're coming out of the pandemic with a very strong economy, and I think it's very possible that we're switching into a high productivity growth regime and that means somewhat higher interest rates than you'd otherwise have seen. It means faster growth than you otherwise would have seen, and I'm hopeful that all of that occurs.

The last time we had a faster growth, higher productivity growth economy was the late ninety nineties where we boomed for four years and started talking about paying off the entire national debt. Well, and Jim, you're talking about nap that didn't happen. But Jim, you're talking about negative interest rates and how that's been problematic in certain ways, and certainly in the United States it wouldn't be as as smooth as it has been other places, for the money

market fund and a variety of other reasons. But you've talked about the need to get interest rates up so that we can use that in combat the next downturn, have some ammunition. If we cannot get rates substantially higher, how important How do you foresee us IT purchases factoring into future stimulus. Yeah. They've become a standard part of the toolkit, and we used it after the global financial crisis, pioneered by uh former chairman Bernanke and kudos to him

for that. And then uh, you know, when this crisis came along, we went right back to it with considerable success, I would say, in the March April period where we really were staring at possible depression and a possible financial crisis, and I thought Chaire Powell did a excellent job during that time frame in getting us into a policy that avoided the financial crisis that could have occurred on top of the pandemic and put us on very good footing.

It wasn't too long after UH March April that financial stress measures came way down from from very high levels and we got back to UH normality, at least with respect to financial markets. So UM, asset purchases are part of the toolkit and they're here to stay. But right now, I don't think they're helping us that much, and they may be causing harm, especially in housing, where we don't

want to feed into an incipient UH housing bubble. We got into a lot of trouble in the mid two thousands with housing, and I'm not too anxious to try to UH to see that happen again. So UM, I think that just time has come to end these purchases and get the Committee and the nation some optionality for what we may have to do in two But we're not. We're certainly going to keep sharp control over our our

interest rate decisions. We're not gonna be on any kind of mechanical path, but we're going to want to assess where we are in the spring of two to see what the what course we want to chart U to keep inflation under control. Uh. From that point forward to let me ask you one last question, and that's about how you think the Wall Street folks are going to

react to this. Uh. There's been a feeling that you guys are propping up the big gains that we've seen in the indexes, and the fact that the bond market has kept rates so low indicates they believe that we're not going to have an inflation problem. If if you send a message that maybe we will and it's time to stop giving you guys support, we're gonna have a problem.

I don't think so. I mean you you talked to pretty much everybody in the markets, and my sense is that you know, at some level the tapering process has already been priced in. Maybe not that all the details around it or exactly h exactly how long fold and so there's a little bit more there, But certainly seems like commentators and traders are well aware that UH there will be a tapering process, and and that it makes sense at this point given how well the economy has done.

This economy is producing more national income than the one

that existed before the pandemic. The pre pandemic economy didn't have zero interest rates, by the way, UH, So I think UM, I think markets would UH react, you know, in some broad sense, they'd react well to this because it would mean that the Fed is going to stay in good position to handle all the possibilities that might come if inflation all rates in two and a great position for that, and if we get the tabor out of the way, UH, then we'll also be a good

position if we have to tamp down a little bit on inflation pressure in the economy. Dr Bullard, thank you so much for joining us today from St. Louis. Jim Bullard. Right now, get to Gopinath with us with the International Monetary Fund and their chief economists. Their director of research Maurice Hobsfeld, will be on the UH podium later at Jackson Old today someone else who has held that position over the years. Gita, thank you so much for joining

us UH this morning. Before we get to the affairs of Jackson Hole, Gita, I am required to address a bit outside your remit at the International Monetary Fund and that is what all are why ching, which is how the i m F will adapt and adjust to Afghanistan and the Taliban. This has to do with special drawing rights. Explain to our audience the choice set that the Managing Director and all of you at the i m F have with these unusual events in Afghanistan. HI tell them

it's a pleasure to join your show. Now a SDRs are allocated to all the member countries. Now, which countries can actually use the SDRs depends upon whether the government in that country is being recognized by the membership off the i m F. And at this point, with the recent developments that we've seen, which is a heartbreaking, there is no recognition. So at this point, uh, you know, the SDRs will not be available to be used by Afghanistan.

If we can look at your panel today with a former Vice Channel and Alan Blinder also were leaper of Virginia as well, it is to me the most interesting event at Jackson Hall. And I'm gonna be honest Kit too, It's more interesting than what the Chairman's gonna say, we live in a time where we've never seen linkages of fiscal and monetary policy. It's literally, we're doing MMT within your panel, Will you people discuss modern monetary theory? Are we doing MMT in two thousand twenty two? So I'm

now I don't believe we are doing MMT. Oh, you know, it's a decade before the COVID crisis was one where everybody was complaining that monitored policy cannot be the only game in town, and that was appropriate. And then COVID struck and fiscal policy came to town in a big way. So we've seen interaction of the kind that we've never seen before. But it was necessary. It was needed for the kind of challenge the world economy was facing, and

it helped to prevent a much deeper recession. I mean, our estimates that the recession would have been three times worse last year had it not been for both fiscal

and monitary policy support. Now that said, would be very clear why this is good policy, because ultimately decision making, central bank decision making has to be controlled by central bank priority, central bank goals uh and so central like independence has served countries very well, and it makes sense to do quantitative easing and asset purchases as long as you're doing this independently. This is not about being pressured

by governments to the monetary financing. You're meeting your goals, You're keeping inflation expectations anchored, and that's what the difference is.

Get this is such a delicate dance. How do you avoid politicizing at the central banking community at a time when low interest rates that they're helping continue really is what is allowing some of the fiscal impulse that we see in Washington, d C. How fraught does this become, as with inequality as a focus for the Federal reserve for central banks at a time when that really is the purview of fiscal policy and not monetary policy. There are some things indeed that fiscal policy is just much

a better place to address. And again issues of inequality is a great example of that. Now, what we when we look at which countries are able to do large scale asset purchases, it is countries that have built up very credible central banks, very transparent central banks, with good rules based policy making. So we have to keep that in mind. I mean, the exception doesn't make the rule.

You have to maintain your reputation for keeping your eye on inflation and inflation expectations, and if you do that in good times, and then when you have hit by a crisis, you can do exceptional measures. So you know, we are living in times of low interest rates, and I suspect that will be the case going forward for many years. So this is a challenge that both fiscal

and monetary policy has to deal with. And I would bring in there what's happening in financial markets because what we are seeing, of course is very high valuations and frankly complacency in financial markets. So there's very little room for surprises at this time. And this is exactly going to be the challenge which is what we will see in Jackson all which is how do you communicate you're very clear of it when you're going to move without

creating tantrums GA. There's also the flip side of this that easy monetary conditions can plug a hole and actually take the pressure off fiscal policymakers from actually putting through some of the policies necessary to bridge some of the issues in society that FED policy is increasingly becoming aware of how do you sort of view that the idea that when the Fed creates this calm, creates the stasis in markets, it can make people, at least in Washington,

d C. Feel like there isn't as much of a problem. I mean that exactly was the problem before this crisis, right, I mean everything was left to monitory polity and fiscal policy wasn't doing anything. This time around, at least in the advanced economies, we have seen the recognition that montreal

policy cannot do it all. And uh, you know that the one of the messages I will make is to make sure this continues and this is not a one off, you know, intervention that happened with fiscal policy, That this is durable and this continues because one of policy cannot solve kinds of problems. You're talking about the one final question. I'm gonna get you in trouble here. My my apologies up front as well. We have had a wonderful set of Federal Reserve chairman's, including a guy named Bernanky, who

I think you have a nodding acquaintance with. We've got clarative Columbia holding Ford on monetary theory, and others. Talk to me about the reappointment of a non PhD economists Chairman of the Fed. Do you care that your own Powell isn't a PhD economist? I didn't share. Powell has been in doing a great job in very difficult times, and no, I don't care whether he has a PhD

or not. I think it's important to get the right inputs from all kinds of people, with all kinds of backgrounds, and and he's been very clear about that, and he's been reacting very well to the kinds of advice he's been getting. To Dr Copeneff, thank you so much for joining us today. Get to go open at the International

Monetary Fund right now. Lisa Brandma's Taylor Rigs and I are honored to present to you Mark Kimmitt, Brigadier General, retired Brigadier General, former Assistant Secretary of State for the Bush Administration. General Kimmit, thank you so much. You came out of West Point and you had to wander up to Camp Stanley and Korea, which wasn't a Hollywood TV set of mash but it was the real deal back in nineteen fifty four with real day. We face real danger today in cobble. How do we in adapt an

adjust on this Friday afternoon in Afghanistan. Well, I think the two issues, one of the near term issues and the long term issues. The near term issue, we tighten up the security, We push out the perimeter UH so that the screening is done further out by fewer people UH, and candidly we quit UH asking permission of the Taliban

to protect our troops. In the long term, we've got to understand the implications of the Cobble bombing and understand that that's a recruiting poster for every terrorist outfit in the world. And we better start getting ready to adapt to this new pre nine eleven period that we're going to be going through. Lisa and Taylor have some important questions. I have to ask a difficult question which alludes to section sixty at Arlington Cemetery. How do we defend people

like you against suicide attack? Well, the most important issue is how do we defend America against suicide attacks? And that is continue the policies that we've had, which is unflinching offensive operations, fight them forward, don't wait for them to come to us, general commit going forward. How concerned are you about the strategic importance of Afghanistan and the US not having a footprint there at a time of

increasing chaos. Yeah, I don't think we have a strategic interest in Afghanistan except to prevent it from becoming yet again another safe haven and sanctuary for terrorism as it had been pre nine eleven. We're already seeing indications that it is that everybody's now coming back to this ungoverned space and they're suiting up. For lack of a better term, we need to not have the pre nine eleven view

of just keeping an eye on things there. But as we see these terrorist training camp and we see these activities and hear these activities being planned, we've got to take action against these camps through air strikes and candidly, sometimes we're gonna have to put our people on the ground to make sure that these people never have a chance to achieve a critical mass to attack us again, because they look at what's happening at Kabbal and they say it's time to go after the Americans again. We've

shown weakness and we can't show weakness going forward. In general. Is their political capital to do that At a time when most people in the United States were for withdrawing the troops and when frankly, the allies of the United States perhaps don't trust the commitment to go in and to have their backs. Well, first of all, I don't

want to talk about political capital. The fact remains most Americans agreed with the withdrawal, but they have not agreed with this debacle that we're seeing over the last couple of weeks. Uh, those of us that have watched this for a long time had policy positions focused on this. I believe that we should have done us at a longer pace, during the winter, not the fighting season, and we should have left the commitment on the ground to

continue to put some backbone into the Afghan army. The sloppy way we did it, this shambolic way we did it, I think is directly demonstrated by what happened yesterday and as of yesterday, I mean, what do you think of we're asking terrorists to support us in fighting the other terrorists? In general? Mackenzie yesterday said the Taliban was our front line of security. Somehow that suicide bomber got through to

the US forces as that second line of security. Unfortunately, the suicide been went off and thank god it didn't get on the airplane. Are we trusting the Taliban enough to stop those suicide bombers from getting through to American forces? Well, we shouldn't be trusting the Taliban at all. Since the Doha Talks, they have demonstrated their unwillingness to abide by any agreement or commitment that they've made. Look, this isn't an evacuation. This is a hostage situation. We're not doing

aid evacuation. We're asking the Taliban to release these hostages. I don't know who's kidding who, but the Taliban can't be trusted, shouldn't be trusted. And this and this uh this uh uh strategic communications campaign, their wrning seems to

have a lot of people fooled. General kimmen, we have had a lot of academic experts on and they really emphasize the tribal nature of society among Sunni and she You are truly expert at tribal tensions from the Levant all the way over east into Afghanistan and indeed to Pakistan. Please advise us on the new relationship America will have

with the fractured Pakistan. Well, first of all, this this is less about the shoe Sunni Shia divide UH, and it's more about tribal politics, and candidly, it's about Pakistan's UH supposed national security concerns where they want to use Afghanistan. It's sort of a ford border between them and India.

They don't want to be surrounded UH. Candidly, even though Pakistan is expressing grief and sorrow for what happened yesterday, we know the Pakistani fingerprints all over the support of the Taliban, and candidly could very well be UH their support for isis K. This is a country that harbored Osama bin Laden for years UM and the relationship that

we have with them is somewhat questionable. But they have forty nuclear weapons and we certainly don't want to have their government overturned and taken over by a bunch of tribal types inside of Pakistan. General Kibet, before we let you go, you were talking about the messiness of the operation, and I want to talk about some of the strategy. What would the rationale be for abandoning the Bagram air

base and not just in focusing resources on the Kabbal Airport. Yeah, look, I'm I'm a little bit UH conflicted about that issue with Bagram Airport. Yeah, it's more secure, but it's also much further out in the Taliban would have set up checkpoints um for anybody to get to the Bagram airfield. So yeah, I think it's convenient excuse, but Bogram, while it was easier to defend, it would have been harder for people to evacuate too, because it's so far away

from the city of Kabul. General Kimmitt, what do you tell the man the woman coming out of the class of two thousand twenty one at West Point Um. This is a long war. It's been going on since the nine eleven and it's not going to stop anytime soon. You need to look at what your predecessors from the last twenty years have done to defend this country and you better rock up and be ready to defend it as well. Mark Kimmitt, we look forward to speaking to

you again. Mark Kimmitt, I retired Brigadier General and of course working with the Bush administration as Assistant Deputy Assistant Director of Defense for the Middle East. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and

international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg