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Okay, we're gonna go walk on you now as you go to Richard Clareda, who changed Columbia economics forever now at pimcoh and we're thrilled the Vice Sherman could join us this morning. What an honorative Michael Spence and the laureate and Richard Porters of London Business School talking about John Hicks and long ago there was a thing that was invented called the Hicks Hanson model, which now we
call the ISLM model. And the bottom line is the financial media completely focuses on financial LM dynamics money this you know, the interest rate? What's inflation can do? Oh yeah, there's an is curve which has to ask some zab the real economy on it. Rich Clareda, is this fed completely riveted to inflation or can they perchance look at the American leader of me. If you'd asked me.
That question, which I think you did two years ago, I'd say they're focused on inflation because it was too damn high for to today they're saying, and I believe that they do see the risk as two sided. I think if we did see a sharp slowing in the labor market, they would respond because inflation is now close enough to target, they can afford to be flexible two years ago when inflation was six seven percent.
Now with the fancy PhD is often Columbia at the Eckles Building when you quote unquote focus on labor by definition your ex post you have to wait for the labor economy to break. You can't anticipate it in a given central bank.
That's a very fundamental question because ideally central bankers, and based on including on my own research with Gertler and Galley, in a perfect world, you would anticipate if you saw the labor market slowing, you try to get ahead. That's forwardlooking monetary policy, as I learned in practice. However, the economy is always changing, and what was a good model five years ago it may not be a good model now. So there's a real element of risk management as well.
But I well a good example of that Tom when during my time there, the models were saying, you guys are got to keep hiking rates because the unemployment rates at four point two percent. In our models say inflation's coming. And Jay Pall and I the committee didn't see inflation so we didn't hike rates in twenty nineteen. In fact, we cut a little bit so the economy could keep going. So there's risk on both sides, and I think good monetary policy needs to be nimble and assess that.
You know, central bank inflation targeting I mean, Richard, I mean this is something that you know. I mean, we felt, at least in emerging markets that central banks had found religion. And here we are, and we're seeing central banks cutting in the face of a FED on hold. And my question for you is how long can that last?
This divergence? Certainly, I think there was some talk at the beginning of the year other countries would not even begin to cut until the FED diad. I never believe that, And I see, we've already seen Sweden, We've seen Switzerland. We're almost certainly going to see Madame Leguarde and the ECB tomorrow. So I think certainly central banks can get those rate cuts, and I think they could proceed much further than the FED if their inflation data supports that decision.
I think the challenge right now in Europe and the UK is the inflation data at best is moving sideways, and some measures is moving up, so that may limit the number of cuts they get in this year, not because they're focused on the FED, but because inflation is not cooperating.
I mean, you just hit the nail on the head. I mean, look, this inflation is not cooperating right now with the ECB and Madam lecguard is this is an interesting experiment, Tom, I mean, can the ECB, I mean it's twenty five BIPs? What are they going to cut the deeper way to four seventy five? Is that really going to juice growth in the Eurozone? I mean, do you think that's enough? Do you think they're going to have to continue to go more or can they cut pause and wait and see what the FED does.
My guess now is that that that they will pause in the sense I don't see them moving at the meeting after the June meeting based upon on the data. Now. In fact, maybe I just a venture there could be a little bit of seller's remorse because they really signals this rate cut beginning in March, and I think they're going to get it in, and I think it makes sense to get it in, But I would not extrapolate from this that it's going to be every meeting, I
really do think. And I saw a wonderful speech that Madame Leguard gave at the ECB Watchers, where I also spoke in March. It was one of her best speeches, and the message I got from that is she is very data dependent and if the data doesn't cooperate, right, that's going to be a factor.
Inner jackson whole speech, which recovered was the same ideas, Okay, we're data dependent, but let's have a longer vision as well. Richard Clarita, I have to have a nerd book of the summer. And it's Adam Posen's fault. We'll blame him out of Peterson Institute, Marie Sobsfeld and Douger when talking about trade, talking about what's out there and all of this, and we're going to get Brad Setzer in here. But I deglobalization. Defen's got to worry about the rest of
the world as well. Do they work within regional trading blocks now or do we still have a hybrid trade economy that can be part of our growth.
Well, obviously globalization, I think it's clear has peaked, and so the real question for the next five, ten, fifteen, twenty years is what does on sharing, friends, sharing, supply chain rethink. How does that translate? But I will say it's very relevant tom to monetary policy because in the thirty years before the pandemic, globalization made the FED job easier because it put dowur rice pressure on goods and
in labor markets. And if it reverses, that means that the margin that does jobs harder.
Right now, and this goes to the meeting next week, You've got a partition of domestic final sales which are actually pretty good. But I'm sorry you bolt on a few other statistics, including trade, and it's a sub two percent economy. Yeah, which is it?
My own sense is that we're heading down to around a two percent economy, with a risk that we could overshoot in the other direction. I think it's too soon to tell, but some of the data, including the Bloomber Surprise indest it has moved into negative territory. We saw Atlanta FED marked down from four to one eight in the last couple of weeks, so Bear's watching rich.
We talk about data dependence here in the US, and we have two big data points coming out. We have the ISM services coming up tomorrow and then followed by payrolls. But I think it's those sub components. So I'm asking you, what are you really looking at? Within the data, You're looking at prices, paid, new orders. In the ising data you looking at you know, libor force size, average hourly earnings. I mean, what are you most focused on over the next couple of years.
At some level, the flip answer would be all the all the above. You know, certainly when you're at the FED, you are looking at everything. But I would say that, if I had to prioritize, I'm focused more on the cost side of the economy right now, in the sense that everyone agrees that the labor market needs to adjust to be consistent with the inflation mandate, and I would
say that the numbers there are are encouraging. We've seen a big disceleration and wage inflation that may create some political problems for the incumbent, but from the Fed's point of view, it's moving wage inflation in the direction of consistent with price to ability, unlike, for example, what we're seeing in the year Zone in the UK. So I think labor market and the cost side of the economy is what I be focused on. I think the demand side will take care of itself.
I'm out of time. Can you come back, of course if we can get you in for fed DA great, Thank you so much so, former vice chairman of the fed. I can't say enough about what he did to rebuild Columbia economics a number of years ago. He's at a small shop or they play golf. Pimo Small West Coast, Coast