Surveillance: US Inflation with Barkin

on BAKIN alongside the brilliant Bloombeg's Mike McKay. You're happy with that introduction, Mike and the brilliant President Mail. It's sou'm great to catch up. Thanks for being with us. Yeah, thanks for having So we get some Fed speak sixty minutes after the inflation report, So let's start that. Your response to that CPI print we've got a little bit earlier.

It's about as expected. Uh, inflation is normalizing, but it's coming down slowly, and uh, you know, I just think there's gonna be a lot more inertia, a lot more persistence to an inflation then maybe we'd all want part of that is still COVID factors, access money in people's pockets, um uh, supply chain issues in places like cabinets and switch here's part of his business factors. There are businesses

out there is still trying to recover lost margin. But I think the biggest thing is that after the experience of the last couple of years, UM businesses have now understood that pricing is a lover again. And as I talked to the folks in my district, I'm hearing people still out there pushing chrice and trying to see to try to test through the levels of an elasticity really are so one thing we've heard from Fed officials, including the chamit is that the disinflationary process has started. Is

that something you agree with? Do you see much evidence of that? And where do you find the evidence? Well, if you look at the twelve month numbers, you can see they peaked several months ago and they're coming down steadily. UM. But that's one part of the puzzle, is inflation coming down. The other part is actually hitting our target and so just it's going to take a while to get to there. To the latest data that have come in, not just

today's CPI but the jobs report, etcetera. Cha change your view of how far the Fed will have to go beyond perhaps what was in the SEP for December uh, And does it change your view of inflation dynamics? Well, I try not to get to wound up in any particular data read, particularly a January data read, large seasonality factors, all that sort of stuff, um um. But I do think what we are now in a position to do is to react to multiple months of data as they

come in. We may or may not choose to take rates up further if inflation continues to persist, but we'll have to see what happens. Well. Based on what you're seeing right now in terms of the path of inflation, the dot plot said five point one in December. You think that's enough. I think we'll see we're going to get a pc at the end of the month, another CPI before the next meeting, and then I think as the meetings go on this year, we'll see what happens

to inflation. If inflation settles, maybe we don't go quite as far. But if inflation persists at levels well above our our target, maybe we'll have to do more. Do you think that maybe you and the markets are on a different timeframe. You're going meeting to meeting, and they're looking out towards the end of three saying you should be cutting rates by then. I'm not sure I understand markets.

You guys are much better than that than I am. UM. I'm very focused on what's happening in the demanding the economy. I'm very focused on what's happening to inflation, and I think, Uh, the way to think about my view on on rates is we're inflation to persists. We might have to do more. If inflation doesn't persist, maybe not. How to financial conditions thanked there into that code, into that view? How do you think about financial conditions? Well, there's lots of definitions

of financial UM. I think that as we raise rates, UM, the market and all markets, you know, sort of respond to how we're doing any thing in the path that we forecast. UM. There are people who are out there saying financial conditions are back where they were a year ago, and I say, I don't know. It looks like rates are higher than they are a year ago. Certainly if you're trying to get a mortgage, that's what you think. And so UM, the financial markets make their forecasts and

you know, lending conditions, whatever work off of that. UM I think you can try to manage it. But I'm in the world of trying to define your response function, try to live to your response function, and I think markets will catch up to what you're doing if we can dig a little bit deeper. We've had a decent equity market running here today. Credit sprints I think something like two dred basis points tighter than the whites of

of last year. Do you see that as complicating your ability to tighten financial conditions and bring inflation back towards target? Is it something that's on your mind a lot. I think trying to manage markets, at least for me, as a full's errand and so I'm in the world of trying to manage what we can control. If demand stays hot, if inflation comes and elevated, have rates move more. There are lots of other scenarios of what happens to the economy,

and we'll respond to those well. One of the questions that people are asking is does it make it harder? Does it is the market pushing back against you? And do you see inflation shouldn't maybe stickier because of that? Uh. And is it a question of you have to raise rates higher or leave them in place longer and wait for the cumulative weight of tightening to hit. Well, I think there's a very good case for leaving rates higher for a longer period of time to allow that tightening

to hit. I do think the lesson of the seventies was very clear, which is, don't give up too early. And anything I've read, and I've talked to lots of other people who seem to have understood that market, they say, you know, if you go back to the Arthur Burns years, it was raise rates, economy weekends, lower rates, inflation comes back stronger, raise rates, economy weakens more. Lower rates. That doesn't seem like a path that makes a lot of sense. Does history way on you when you refer back to

the seventies? Do you really feel the weight of that. I've done a lot of reading about it, and I think, for better for worse, we've got a really good episode where our predecessors did the right thing and got inflation back under control. And I think that's certainly an aspiration for for me and for us. You understand the view of market participants that and they hear things like the

disinflationary process has started. They get the sense that we're moving away from that language that we want to learn from the lesson of the nineteen seventies, we want to be tighter for longer. They see that as new information. The first step, and you'll hate this word, the first step towards a so called pivot. Why isn't it that, Why isn't this a pivot? The first step towards what

by acknowledging the disinflationary process has started? For some people, market participants that speak to us on a daily basis, they view that shift in language as a step away from the chairman power address we got in Jackson Hall, Wyoming, which was eight minutes down the camera, super blunt. That's going to be pain It's going to be painful, but if we don't do this, it's going to be even

more painful. Four or five months later, with an ECOD, the market rallying between and a bit of deceleration in inflation data, it's now the disinflationary process has started, and that's the focal point for so many people. Why isn't that the first step towards a pivot that says, okay,

we can back away. Should I just try to keep it simple for myself, which is, Um, nobody really knows how inflation is gonna play out over the next year, over the next two years, and so I think what I can do is talk about how I think about it. The way I think about it is inflation stays elevated.

If it persists, we'll have to do more. Well. Your struggle with what the markets are thinking, But you're probably very good on what companies are thinking, because of course that's your background and you talk to CEOs all the time. What are companies thinking? You mentioned that some are still pushing the envelope on prices, but what's their outlook for growth and particularly employment and wages over the next six to nine months. So the way the way I put

it is, everybody's got a recession playbook. It's in the drawer. Um, they've taken it out, they've dusted it off, they've updated it. Right, they have a very clear sense of if things were to turn south, what they do. For the most part, they haven't turned the pages of the playbook. And the reason they haven't turned the pages is that their business actually remains pretty sound. Now that's not true if you're

in mortgage lending. That's not true obviously recently in the tech but in most of the businesses I talked to, it's still not the point where they pull that. And part of it is they've really fought hard for eighteen months to get workers, and they're really reluctant to shed workers if it turns out that they didn't need to.

And so I think there's still a reluctance. And when you see things like the recent jobs report or some of the consumer spending data we've seen for January, you start to see that in the businesses actual demands that and they're just saying, we're not there yet. But of course we all know it. The world could turn and they could get there. I just don't think they're there yet. Well, that brings up an important question about your reaction function.

When you're predicting that unemployment is going to rise significantly because you're trying to clamp down on demand and it doesn't happen, how do you incorporate that into your thinking about where you are. Well, I think we've taken rates to where we've taken and we've signaled, or at least

i've signaled that if inflation persists, I'll continue to respond appropriately. UM, you do know that they're long and variable lags with rates, and so you're watching the demand side, not because the objective is to manage demand, but because the objective is to manage inflation, and so you're looking for signals that inflation comes down. You're looking for signals that demand is weakening, softening in places where that would be relevant to inflation

coming down, and you play it out. Can you explain longer variable leans to us? Because some people have come on in the last twelve months and they've said to Mike, that sets myself to Lesa, it's on on Bloomberg TV and radio, and said, they're not that long at till they're pretty sure financial conditions will price it all in immediately they're tightened and you'll feel it pretty quickly. Are they that long? Are they that variable? You didn't like

financial conditions a second ago, and so we'll work on that. UM. I do think we've seen in a number of sectors, particularly interest sensitive sectors, particularly sectors with the strength of the dollar matters, you've seen demand moved very very quickly and well before we started increasing rates. Mortgage rates increased and that of course meant the lag in that sector was less than the world we used to hide what

we're doing. On the other hand, if you go in lots of other places, think health care for a second, a big part of the economy, it's not at all clear that the rate stuff we've done or doing is having that much impact on demand there. I think that's where it takes more time, and the studies I've seen suggests that there's a period of time to go from

raising rates to the impact on demand. But I think the real issue here is from impact on demand in cract on inflation, and that's really when you talk about the long and variables to inflation. And then I get back to where I started, and I would just say, you know, there's the sales department, the finance department. The finance department loves raising prices because you know, it's the

fastest way to move the bottom line. The sales department historically has been very nervous about doing it, either because of incentives or market share or whatever. After the experience of the last couple of years, the finance department has a lot more sway in that conversation than they used to. So how would you characterize the balance of risk at the moment with all of that in mind, that it's

tremendously difficult. It's confront as a policymaker. Chapman Pal said repeatedly a few times last year that the risk of doing two little outweight the risk of doing so much. Is that still the case? It is for me? I mean, we're still in a three point four percent unemployment economy with inflation depending on which measure you want to look at, well over our target five six six on a twelve month basis. Um, feels to me like the risk is on the inflation side at this point rather than the

economy side. We are talking with Richmond Fed President Tom Barkatt at Bloomberg Television and Radio. Thank you to all of our viewers and listeners around the world. Uh, what is your view in terms of the growth outlook at this point? It seems like we went through a phase of recessions inevitable then we're gonna have a soft landing. You have people saying no landing. Where do you come

down on all of them? Um? You know, I keep trying to look at past recessions or past economic down you know, tightening cycles and ask the question of which this is most like. And of course the ones that are most recent in our memory are all recessions. Were something winged in from left field, whether that be nine

eleven or the financial crisis or the pandemic UM. And so I think we may be looking at it economy more like the one that I remember back in the early nineties, where there was a tightening cycle UM and different sectors got hit one at a time. It seemed like much more of a rolling situation. And so the overall numbers perhaps aren't going to be as UH. Again, I'm assuming nothing comes in from left field, but aren't going to be as bad as the ones we remember

them from two years ago or fifteen years ago. But we'll see. Well, when you sit down on March two with your new UH projections for the economy, are you marking up growth? Are you marking down growth? What do you think is going to have I've got a month before. I hate to make those projections, and I'm teasing, but I'm quite serious about it. We we have a real serious process. We run multiple models on this, We've taken

all the more most recent data. We will get another jobs report, one perhaps with less seasonality impact, We'll get another PC and a CPI, and so I wouldn't want to front run our team and our models on that. For just in terms of risks around the few already projective from December, upside risk for growth, for inflation, for the terminal rate. How are you thinking about things currently? Well,

the biggest surprise has been the jobs market. I mean the jobs report we got a couple of weeks ago was quite significant and much stronger than what I had anticipated. And so the question of my mind is going to be, are we gonna get another one like that in February or we're gonna get something in February that revises, corrects, moves it down. So I think that's that's really the key thing I'm looking at. In terms of growth. It's been surprising for all of us to see unemployment come lower.

There was a take, I think last year, even I talk about it all the time, this is the Fed's job. They need to get unemployment up to get inflation down. And it sounded ugly, it was brutal. It's difficult to communicate as a policymaker. Do you still see it that way? Do you need to get an employment up to get inflation down. I see, we need to get inflation down to get inflation down. And what I mean by that is, um.

You know, our tools work on demand, they work on lots of various things, but the key to this whole thing is getting inflation down. I don't start with unemployment. I start with inflation. And we'll see what happens on the employment market. We're still at three point four percent unemployment. That's a historically low number. You're talking nineteen sixty nine and before that, nineteen fifty one, and so um. You know, there's been a lot of talk about the jobs market

so far quite strong. We'll see what happens. Are people in the companies in the Richmond district telling you that they are still having trouble finding people or as that eased, Um, it's not as desperate as it was a year ago or a year and a third ago. But it's still very tight um on the professionals, though I think that has kind of loosened. Some of the layoff announcements recently have sort of hit home. People trying to hire tech

workers are having an easier time doing it. UM for the frontline service workers, still very tight UM, but people are getting by, whether it's lower service levels or not cleaning the hotel room every day. The place it's still screaming tight is skilled trades, construction, nurses, truck drivers. We just don't have as many as we need. Demand in a lot of those places remains elevated, and folks are really struggling to find those those folks. That's really where

it's the titus. Let me actually about the balance sheet. It's been running in the background, it's been paint drying, but there have been concerns expressed in the short term money markets, and we're still seeing a lot of money put back into the REPO facility. Is it working the way you want it to? Are you getting the results that you want or is this also a case where the markets are not reflecting necessarily what you're trying to

accomplish with QT. I think UH we did a bunch of actions we thought important at the time in terms of UH simulus and you know, supporting the markets back in. We're now trying to unwind that. I think our primary tool is the rate tool, it's not the balance sheet tool. The objective is to unwind the balance sheet UH expansion that we did and do it in a way that doesn't change any focus on our primary tool, which is

the rate tool. You guys still seem to be focused on the rate tool, so I think, so far, so good. We're focused on the balance sheet too. So let's not that I'm sure you please that faith. We see it as plaint trying, but it's not. It wasn't just an objective to get the balance sheet up. You were looking for a consequence from doing that. You said the objective was to get the balance sheet down. You're not expecting

to be a consequence there. I mean, first of all, the analysis of the impact of balance sheet movements is unbelievably difficult, arcane, opaque, and tortured, and so I've really struggled as i've kind of come into this to come to ground to it. Where I've landed is it's got to be symmetric. If you believe that a ain't the balance sheet does something, then you got to believe that drinking the ballot sheet does something else. So I've got

no question about that. I do believe that on both the expansion side and the reduction side, it's a lot smaller than some of the estimates you'll see, um and you know people talk about the uh, the impact of buying more bonds, there's also a signaling effect when you're buying UM. I think the signal effect may actually outweigh the impact of buying the bonds um signal effect in terms of when you would finally raise rates or whatever.

When you're shrinking the balance sheet, there's a shrinkage effect, and then there's a signaling effect. The shrinking effect, of course, I would say, is parallel to the expansion. And then the question is what is the signaling. The signaling tends to be around liquidity. That's the conversation that gets raised. I just would come back and say, UM, compared today's balance sheet to or nineteen's balance sheet, it's still so much larger that I have trouble seeing that liquid is

actually being driven by what we're doing right now. Back at home, What worries the people of the Richmond district. I mean, we have the idea of a possibility of recession. We've got what's going on with energy prices because we don't know what's happening in Ukraine. There's this whole idea of the debt limit leading to a default. How much are people in your area focused on those things. Uh. The what I hear over and over and over again is that people hate inflation. Um, And that's what they're

focused on. I mean, people hate inflation because it seems unfair. I mean you you you get a raise and then you spend the money you just got at the gas pump. It feels whichrarely taken away, creates uncertainty, um, and it's it's just exhausting. Uh. You know, it's exhausting to shop around for better prices, is exhausting to defend your prices to a to a customer. And so people are really excited about the pro the prospect that we might get

inflation under control. But you don't have to look much beyond the sentiment and disease to see what people think about inflation. And that still is the overwhelming conversation we're having. I have to ask you this, Uh, it appears that at the Federal Reserve, you're going to be in the market for a new vice chairman, uh laale Braider. What does she bring to the FED and to the Open

Market Committee? How would you characterize her tenure? Well, I don't know what will or won't happen, and from the administration. But Lales an asset. I mean, she's very smart, she's very capable, and she's an asset to us, and if she does something else, I'm sure she'll be an asset there. She's been seen as one of the doves on the board.

Is there such a thing and was she? We have nineteen really really capable people in the committee, and I listened to every one of them, um, because they're every one of them brings a unique view and as we've learned in the UM you know, last few years, people's views changes the data comes in and so you know, I've got colleagues that you might think are doves who might go to the other I mean, I think so.

It's I think people take the job very seriously and they're very genuinely interested in landing the plane on whatever is actually the situation in the moment, as opposed to i'll call it a pre existing leaning. There's really any descent? Why is that? Um? You mean descents or descent singular?

Because UM, I have the privilege of sitting in the meeting, and there's lots of points of view, uh that are phrased, so I wouldn't be confused about the idea that there are a lot of different points of view, more clamority on that, because from the outside looking in sometimes it feels like group thick. There are people that come out, Let's say, I disagree with the decision, and this is

why it's incredibly rat particularly from the board. How much of that is actually taking place inside the building around these decisions that we're just not aware of. Why isn't this group think? Well, Um, I spend my time every six weeks seven weeks for meetings. I go into the market. I don't spend a lot of time in my building. I'm trying to figure out as best I can what's

happening in the economy from people who are participating in it. Um. I try to come up with my own points of view in terms of, you know, what's happening to economic conditions and where we ought to go with policy, And I show up with my points of view, and then every time I go there, I learned something, and I learned from people who are doing the exact same thing

with their own independent views. I think the structure of the system is very well set up to gather independent views, and then of course the meetings are very well Uh. Lad an effort to put those on the table and try to to land on a place where you know you can get some version of consensus. One of the things people have been critical of is uh that there are nineteen members of the Open Market Committee who are speaking all the time and it can be confusing through

markets and to the public. Do you see that as a valid critique? Well, Um, I'm privileged to be here, so I guess if I say no, then I'm exactly Um. I see a huge part of my job as trying to translate what we do into the district that I serve, and so um, like I said, I really am on

the ground all the time. I'm doing chambers of commerces and small cities, and I think there's a real thirst for understanding, and I think there's real value to the people in our community hearing from an understanding people who they think are actually rational, not you know, people from Washington, if I could put it that way. And so I think there's huge value in that. You guys choose to cover it. I'll leave it to you whether that's the

right thing to do or not. But but I don't see it as getting out the mess is actually talking to the constituents in my district. Just one final question, and you've been incredibly rightious with your time, so thank you for that song. It's the third year of pandemic economics, China's reopening. I feel like the consensus has been dead wrong every single year on every major risk. As we go into the third year rule of that, of all of this, how are you thinking about that challenge as

a policy maker? Is there something you're hesitant on drawing too many conclusions on two prematurely right? I think we're normalizing, but you can't ignore the impact of the pandemic. That the pandemic is still having in the economy. Some of the things we've talked about. Business is reluctant to shed workers because of the history. Shortages and switch gears and cabinets A trillion plus and excess savings still out there,

the infrastructure bill still being deployed. All of these things are if I could call it, um, you know, not normal artificial things that are in the economy today that um, we're in the economy three years ago. Now for me or for us, you have to take it as a given, and so you try to make policy against the economy you've got not the economy, and you wish you had UM, but but I think for sure you've still got that

in the economy. Thank you. You can do as much for speak as you like, just so long as it's like you know, like every weekday day. I appreciate the time. Thanks for having Thank you. Thank you. Stephen Stanley joins US now chief you as economiscendender US Capital Marcus Steve Stanley, thank you for joining us with a brief here. You and I remember the idiocy where the world would stop M one, M two, M three. I think it was Thursday afternoon, long ago and far away. How silly are

we being right now here eleven minutes twenty eight seconds away. Well, I do think there's a lot of seasonal noise in the data. We saw it with the January employment report. I think we'll see it again tomorrow with the retail sales numbers and to some degree with the c p I. And you had three very low readings to end last year, and everyone got really excited about inflation is under control UM.

And then last Friday we got new seasonal adjustment. UH. They ran this seasonal adjustment program again and they revised up October, November, and December for the course. So all of a sudden, that downward momentum and inflation is kind of dissipated, and I think we're going to see more of that, more of that today. I'm I'm looking for a point for reading on the core with maybe some upside risk to that. Stephen, this conversation about super cool, can you just shine a light on some of the

conversations you have with clients at the moment? Are they asking about that a lot to the expect an estimate from you? What do you say? Yeah, people are definitely starting to try to focus on that. I think you know, the key here really is the is this housing piece. I mean, we're taking that out. Um, it's over of the core. So you know, when you take that out,

you're taking out a pretty big chunk. But the presumption is that that housing expenses are going up fast right now, but they're gonna come off later in the year because of the lags involved. We know that the housing market has is cool off, and so people are wanting to focus on, you know, on the other pieces in the core. But the broad point is that services prices tend to be very sticky and they've accelerated, and I think it's just going to take quite a bit of time for

them to come back off with all of these seasonal adjustments. Steven, And as we watch some of the upward revisions even on the prior month's CPI that's heading into this current report, are we going to look back and say there wasn't that much disinflation at this point, that that was sort of a head fake at a time when services still were re accelerating. Yeah, well, if you look at what happened late last year, it was just a handful of

very volatile categories that were pushing things down. I mean, gasoline was the most obvious one, but used car prices were falling rapidly. Airfares were falling rapidly, which was really the same thing as as gasoline prices. It was the you know, the reversal of the the big um spike that we saw an energy costs after the Russian invasion

in Ukraine. So you could see at the time that it was not sustainable, the the low core readings that we were getting, the low headline readings that we were getting, And I think now we're getting back to something more in line with with where the fundamentals are all right. So now we're gonna get a FED parade, uh, including Tom Barkin joining John Farrell, Michael McKee coming up here.

What are they gonna say if this is a heart of than expected print, Well, the FED has actually been leaning against the market enthusiasm and saying, hey, look, this is gonna be a tough task ahead of us. It's gonna take quite a bit of time. So it's not gonna be I told you so, but it's gonna be I think, much more steady as she goes for the FED than it had than it will be for the markets. Um. It feels like to me that the FED has really

almost locked in a game plan here. They want to get rates just abuff five percent, which probably means two more quarter point hikes, and then they want to pause and give it a few months and see what happens. Um. And so I think the bar is probably relatively high for divergence from that short term game plan on either side. This is even to the breathlessness eight minutes six seconds away?

Is this idiocy? Excuse me, I editorializer, John, Please excuse me, sir John, I'm sorry this s C. Mr Stanley of now casting. The beloved geniuses at Cleveland who I adore for their work on inflation for twenty in thirty years even they have dived into the value of now casting. Is there any statistical value to naval gazing now casting? Well, you know, I guess we've all, you know, as economists,

we've all been doing that to a degree. I don't like to advertise my number on a day to day basis, but really, at the end of the day, the one price that we all can track very closely on a day to day basis is gasoline prices, and that is responsible for a good part of the uh, the high frequency noise in the data. Otherwise, I think, you know,

it's pretty tough. I mean, how do we know there's gonna winther is gonna be an upside or downside surprise for example, And shelter costs or recreation costs or medical care. I mean, you know, we don't have a lot of data on that. So, um, there's certain things that we can track and others that we can't. Stephen, you've had time to dive into a first look at this interesting day, Ada, what's the adult take? So uh, it was largely as expected.

But I would say it could have been worse. Um, we saw big decline and use car prices again, we saw big decline and airfares again, those things are not likely to continue for much longer. Medical care services prices were down point seven. That's probably, you know, an exaggeration of of what we're likely to see in that category.

So I mean, obviously there are upside surprises too, But my point being that some of these volatile categories that had been driving down the readings in late continued in January and we still got a point four, which again I think speaks to what we were discussing before that as long as shelter costs are going up as rapidly as they have been, um, it's gonna be tough to get inflation down anywhere close to where the FED would like to see it. This is absolutely critical. There's no

other way to put it here, folks. When we see it from an equity strategist like Lisien Saunders, an economist like Mr Stanley idea of housing is being overwhelming, How overwhelming is It's give us a percentage of our lives

that are based off the set of housing data. You have, sure well, the c P I I think maybe exaggerates a little bit, but if you just combine rent and owner's equivalent rent, that those two account for a little over of course c p I. So when we talk about, you know, the super core idea, I mean we're taking out a big chunk of the numbers now that the weights are a little bit smaller in the PC deflator, which is the inflation indicator that FED most closely focuses on.

But yeah, I mean within the CPI housing is is maybe the story we're gonna talk here with Steven Stanley of Santantier. Michael McKee is digging into the data, and we're thrilled to bring you Kenneth Rogoff of Harvard University with this perspective here in a bit, we're commercial free here to the top of the hour at least. Ye as we watch the yo yo action in markets, which really builds on what we've seen some kind of year, I mean it's really it's like a child's toy. What's

going on right now in markets? And I am wondering, Steven, whether you're looking at the inclination to rally, which is something that we have seen so far this year, how much of a challenge does that present to a federal reserve on the margins is seeing seeing the disinflationary process that is too slow for comfort? Yeah? Well, I think, you know, the markets and the FED have not quite been on the same page for a while now. The markets have you know, embraced slower inflation late last year.

The markets want a quick pet FED pivot later this year, and the FET has been trying to push back against that to no avail. Um. I thought, you know, Jarren Powe had a nice chance to really kind of um, you know, push back at the FMC meeting when he was asked about financial conditions, and he didn't. So I think the FED has taken the tack of we'll let the data, um, you know, determine how the markets react, and we think the data are going to play out in a way that will get things closer to where

we think they should be. Um. You know, it's always a dangerous game when the FED tries to tries to influence asset prices. It's a dangerous game when they try to influence asset prices. And yet traditionally this was one of their main transmission mechanisms of monetary policy. How much do they get further away from their goal as financial conditions, by most measures ease substantially to some of the lowest levels going back some of the most accommodative levels, going

back to early Yeah, and there's no doubt. I mean, as as the minute the market's sniff, you know that the Fed might not have to go quite as much. Uh, financial conditions ease so in in some ways it kind of um, it's a self equilibrating process. But from the Fed's perspective, the concern is that even if you get somewhat weak real economic data, inflation might prove sticky or stubborn. And that's the scenario that the market really hasn't been

willing to contemplate much. Steven Stanley, thank you so much with Santanta this morning. This is a joy on a on a busy inflation day to have Kenneth brokeoff with us to say he's professor at Harvard University. His work for the nation at the International Monetary Fund defies the

description of this time is different. A seminal book here that is must read, must own, but far more his courageous The Curse of Cash, which was on a number of years ago on this Inflation day, on this day where Lyle Brainerd will join the White House, there's things to talk about, but we will talk about crypto here in a moment with Professor Rogoff Kent. Thank you so much for joining us this morning to be here. Uh.

There's some people making news on inflation. One of them is a guy named Summers, who I think you've got an in acquaintance with UT Cambridge. Is the character of this inflation the shock disinflations pre Eisenhower forty seven and through the fifties, Is it like the sixties and the worry prevocer or is this a different inflation? Well, I think the clearly is more alert than at an earlier time. On the other hand, I think, as Lisa has been

saying and others, inflation still here. Uh, the economy is still strong, and I think they have to decide how to play it. And one thing I think people maybe aren't paying enough attention to is that when inflation comes down, don't be sure interest rates are going to come down as much as people got used to before nineteen two twenty two. I think the next decade we're going to land at a higher real interest rate. Interest before. So it's not just where that the fat doesn't just have

to figure out, you know, how much is inflation? They have to figure out where do we put the interest rate long term so that we don't have inflation. My book of the summer's Olivia Blanchard's new monograph that's out. There's just absolutely brilliant on something academic our minus g to keep it simple as well. The heart of Professor Blanchard's thesis is there's other things going on here we're really not observing right now. It's just not as cookie

cutter is simple. Is all the simple analysis that goes on day today. What's a thing going on here post pandemic? The changes our financing, particularly as Olivier talks about changes our debt analysis, Well, I think there are two things. One is I think inflation adjusted interest rates are going to land higher than Olivier does. I think if you look at history, yes there's a slight downward trend in the inflation adjusted interest rate, but it's very tiny compared

to how much it fell after the financial crisis. And I think there's going to be more mean reversion than perhaps he does, but who knows. I mean, that's a lot of uncertainty. And I'd say a second point is China is not going to be the same in the next decade as they were in the last decade. Yeah, they're rebounding off COVID lockdown, but I think that's also really going to Those are two big changes and trends that we're going to see after the pandemic that we

didn't have before. Why then, is it is it important for there to be essentially tighter financial conditions for longer? Right, because higher real interest rates imply it's not just an inflation story. Well, we had lower financial conditions for longer for a long time because people were scared after the financial crisis. Saving was really high, investment was really low. Now we've entered an era where debt has really gone up quite a bit, private and public, which has leads

to some adjustment in the interest rate. Probably defense spending is going to go up, Spending on green transition is going to go up. More populous governments from Latin America to the United States to Europe. So I here a lot of factors that will lead to more of a normalization. So people are listening to you and they're thinking to themselves, is that good or bad for stocks? You know, ultimately

is this good or bad for the markets? Because that's sort of how people have viewed all FED actions in recent years. Basically, tighter financials have been bad for markets, and yet an effective tightening has allowed markets to rally that much more. Can you see that sort of sustained momentum of financial markets even in the face of tighter monetary conditions of higher real rates, So higher reil rates

will mean lower asset prices in general. But what's going on right now, of course, is that the economy is stronger than we would have guessed if the numbers were right from the last labor market reporting that that was incredible, it was eye popping, and then the economy is doing pretty well and that's good news. So if the interest rates are tighter from that, that's obviously good for markets. If you're just joining us on radio and television, welcome

to Bloomberg Surveillance, a key inflation report Lisa's monitoring. Can I say green on the screen now? I think just here from the second features up three and they're really there's some serious gyration going on here before we get to the opening. Uh Vic's nineteen point four one the two year yield four point five to percent. We're thrilled to have a substantial conversation this morning with Professor Rogoff

of Harvard University. Long ago and far away you exited the I m F and then but Chard was there with stiglets and post GFC. They looked at four percent inflation. What an uproar that ensued? And then I would suggest that Peterson Adam Posen has talked about three percent is a new appropriate level? Are we going to get away from an anchor two percent verbiage? Are we going to reset? I gonna make some news here can help me? Are we gonna Are we gonna reset this morning higher than

a two percent level? I'm not gonna be able to help you, Tom. I think that's extraordinarily unlikely and frankly not a good idea. Yes, probably back in the day they should have set three percent instead of two percent, but they didn't. And you know they've really made commitments. If you change it, it means you might change it again. So I think what in fact will happen. I don't think we're going to have a soft landing, by the way. I think we're and a half soft, But not the landing.

I think inflations they're gonna allow to be altobated for longer, but they're gonna say it's going to get back to two percent. We're just taking longer. I think that's going to be the rhetoric. I want to shift here to China, as you mentioned earlier, and to me, what's so important Kennon? I mentioned there's this guy named Obsfelder wrote a textbook a few years ago, a guy named Rogoff. It's it's I think it's nine thousand pages. Well, it's like in

the Game of Thrones where they take it off. It just feels like it just feels it just feels like that. But Ken, what's so important here? As we go from Obsfeld and Rogoff to the work that Lal Brainer did with David Reicher twenty years ago on trade in labor some in your international economics with a challenge U Dr Brainer is going to have at the White House with this evil thing out there now China. She's expert on trade and labor multinational dynamics. Where are we heading on

that with China? Well, first, let me say I have the utmost respect for Lyle. I actually worked under her at Brookings when I was a visiting scholar in her section. I've known her for a long time. She's terrific. I think trade economists are looking at the data so far and saying, what deglobalization. Everybody's talking about it, but it's

not in the data yet. But if you look at the tensions with China, and I have to say, particularly if something goes on in Ukraine, say with Russia really escalating with nuclear neutron bomb or something, and China continuing to trade, we are going to have to be talking about secondary sanctions, which we had done with a round in North Korea, but we've absolutely not done with Russia. You want to trade with Russia, it's your business, it's fine.

And and then that that really will be something. And a lot of the effects we saw in the labor market could be partly reversed. But short of that, uh, it's you know, modest the changes that were likely to see.

The shift from Leo Brainerd from chair to the head of the Economic Council for President Biden does highlight also the very political nature of making some of the decisions that you talk about, the sort of adam pose and take on it that can of throw off take on it that the FED will allow inflation to remain higher for longer. How much is that a response to the sort of deglobalization that policy is going to hope for this admission that you don't want to kill the economy.

How political is that decision of allowing inflation to run hot heading into later this year? Well, I mean, I personally have long said I just thought it was the right decision because basically we don't know what's going on. The labor market, you know, has all these distortions that are coming off. The economy has all these distortions that are coming off, and you don't want to, you know, raise a head like you know what you're doing. For sure, I wouldn't be surprised if interest rates und up at

six to bring down inflation. But why do you want to get there right away? Why do you want to rush to that judgment? Maybe they're going to end up much lower. So I think I don't think it's it's clearly very political at some level because growth is strong but inflation is high. Which way do we choose? That is a political defision. It affects people differently. But the FED tries to approach it in a technocratic way. What you just said there that race could get to six,

but why rush it? Right? This is an important point. So do you think that it is appropriate to do basis point increments or do you think that they should just sort of sit on their hands and wait for a number of months to really get underway, since there isn't a rush in your view. Honestly speaking, either strategy would be reasonable at this point, but they're kind of committed.

I would say to do two quarter point hikes at this point, given the labor market data, given the inflation data, and I don't think it matters a lot one way. It would matter more if suddenly we don't know what they're doing. But I think the real message is that the who knew what was going to happen with the supermarket report and so I think there's a lot of uncertainty around and that means to move slower and cautiously.

But you can't predict too far ahead. Ken I want to get and do this without first order difference equations, or they'll all turn the channel or drive off the road. I remember post Vulcar and Olivier mentioned this is in his book He and Jeff Sex wrote an essay, and boy were they taken to task that higher rates can

be not crucial for worrying about debt sustainability. So many of our listeners and viewers are scared stiff that if we get higher rates or where we are now or the six percent you talk of, that we're not going to be able to fund our debt and our deficit. Are they linked or is it separate? I can we be comfortable with the higher rate regime given the debt of the nation, well, first of all, the United States as the global currency, so we have a lot of

debt capacity. The questions how much it costs us the real outcome If we have too much doubt, as we'll get more inflation at some point. That's what just happened. We just had an effective partial default on debt. Inflation was much higher than anyone was expecting, and that put money in the government's pockets that options there. It's a soft partial default. That's what we're not talking about not paying the bills and last some crazy people in Congress

decide to do that, and no time for crypto. There's a more important question. I believe it's a vacancy at the FED, would you consider being vice chairman of the Federal Reserve System. I don't think I'm likely to be a candidate for that, but thank you for asking. He's good because it's his it's his to offer the job, so it's good that he has checked it today. I

disagree inflation. There was a lot though. This is a really important point because it was sort of edifying this adam pose in view, where why is there a push to get back to two percent inflation? Are we going to get that? Kind of you even if you want to see disinflation, then at what point is it enough disinflation to be okay? These are some of the discussions at a time when it is a political decision and

the economy is still strong. I'm going to defend the land of Rogoff and that the common feature even if they disagree, so he mentioned at the beginning, he disagrees with Professor Blanchard, who's more quiescent about when we can come back in the real reaking stay down and all that. But the answer is these people have a hard earned humility by knowing the history of inflation. Fear is in Reinhardt and Rogoff. There's a there's a humility here, Lisa that I don't hear in the noise of Twitter and

the noise of the rest of it. No one else on inflation to speak to after Kenneth Rogoff of Harvard and David Rosenberg of Toronto. David Rosenberg iconic here in parsing inflation. David, do you find any value in the new rationalization of looking at super core inflation a service sector toxic cocktail? Is that a value or not? Well, you know what the FETE is telling you with this new super duper core core index. It's of the CPI. So if the FET is focusing on of the index,

then Lord help us. All uh, you know, but it's it's the same j. Powell that told us a year ago that you know that his new favorite yield curve, you know, was a three months three months forwards eighteen months from now because at that point it was the only curve that was possibly sloping, and now that's converted. So you know, I think that looked too fat for a host of reasons. Wants to maintain a type policy stance. I think inflation look inflation is like a race between

watching grass grow and paint dry. But it's clearly peaked. It is coming. But David, to be serious here, the owner's equivalent red ticked up year over year seven point five to seven point eight. I find a super core fixation, basically juvenile. How does an adult like you look at this when our listeners in Canada in America are getting crushed by housing costs? Right? Well, look, just mentioned the number. I mean that the new Powell number was up point four.

Call it a five percent annual rate um. So that's what's going to give them the green light to continue to raise rates. Uh, and they clearly want to go not just for the next meeting, with the meeting afterwards. Look, Tom, you know so much of the CPI, which Alan Greenspan famously called applauded statistic at an fl m C meeting UM several decades ago. So much of the service sector, the service sector that the FITS focused on, are imputed.

I mean, these aren't real numbers. Their guestimates by the BLS. You know, whether you look at how do you measure inflation and financial services? I mean they look at the yeld herve or health services for example, they look at profit martians in the health insurance sector. I mean so much of this is just pure fluff. What I'm going to say is that, you know, let's take a look and see what inflation is doing for the things that

you can see, touch or feel. Uh. And I'm talking, for example, about the core goods component, which is the most hyper cifical part of the CPI. And it was up, you know, it was almost flat, was up less than point one, you know, after a string of numbers that are either flat or negative, and that year or year trend is just literally collapsed. It was eleven point eight percent this time last year. Year on year, the core goods CPI is running at one point three right now, Tom.

That's the lowest dispensince October. So I'd like to focus on things that don't evolve guestswork. I like to focus on things that don't require imputations from the BLS. I know that's what the best focused on, UM. But I think that the significant downdraft you're actually seeing in the core good CPI, to me, that is telling the tale. David. You know, you look at the markets here just this morning. The future is kind of mixed. Not really much going

on in the yield market as well. It seems like investors are really don't know what to take out of this report here. What do you think, more importantly, the Federal Reserve will take out of today's data. Well, I think that based on what they're looking at, it's gonna add justification for them to go again in March. They clearly want to go again in May. Who knows what they're gonna do by the end of the year. They wanted the markets to price out those dual rate cuts

by the end of three. They successfully done that, But who knows what we're gonna end up at the end of the year. I mean, look at the same feed that told us with their dot plots back in the beginning of two that we're going to finish last year less than one percent on the funds, right, we ended up north to four. So it's gonna be situational. But for the here and now, if you're looking at what the FET is looking at, the skis in the green light to go in March and to maintain a tightening

bias and of the May meeting. How about on the just the broad economic front, David, I mean kind of hearing that the rhetoric shift away from recession talk, how do you think about that. Well, you know, it's funny how one number has influenced so many people's perception on the economy. I mean, be one thing, if we had like eight economic numbers coming in week eight, coming and strong, and then wow, we get this five seventeen on non farm payrolls. But every number has been lining up week.

I mean, we know coming out of the fourth quarter that real private final sales as flat as a pancake. Virtually every real macro indicator was negative on a three month basis heading into the end of two and then bang, we get the non farm payroll number and it's everybody's expectations. But we know that employment, employment, like inflation, is a coincidence lagging indicator. It tells you nothing about the future.

So I think people's minds have been muddled. They don't talk about what the household survey did, population account adjusted, They don't talk what happened. Let me ask a question, what happened to a DP worst number in twenty three months? It was it was forty hours before and non to become a relic. So I say that's a view of like, I think it's actually a bit of a joke. It's a classic case of hope climbing over experience. David, we're out of time. We're gonna have you back on when

Montreal stops wearing those ridiculous light blue jerseys. David Rosenberg from Canada this morning. They're on the inflation for it. Honored to have him on. Subscribe to the Bloomberg Surveillance Podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the I Heart Radio app, tune In, and the Bloomberg Business app. You can watch us live.

I'm Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is Bloomberg