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Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Wisenthal.
And I'm Tracy Alloway.
So, Tracy, I don't know if I would describe the mood here at Jackson Hole. So by the way, we are recording this August twenty third, the day of Powell's big speech. I don't know if I would describe the mood as like declaring victory per se. But I would say on the narrow question of like is the problem of inflation over the verdict seems to be yes, it is.
I think the big difference for me is last year, in twenty twenty three, there was a lot of discussion about the idea of the traject victory of inflation was looking pretty good. Yeah, the direction of travel was where the Central Bank wanted it to go, but there was still a lot of caution about the risk of an
upside surprise and inflation could come back. And we saw that to some extent in Q one of this year, but I don't think it was you know, the degree that necessarily people were worried about in August twenty twenty three. But anyway, the big difference this year is I don't really see a lot of talk about that tail risk of inflation coming back.
That's right. Yeah. Last year, you know, we were all like here in Jackson Hole looking out at the Grand Titans and observing how the two mountains kind of resembled the two spikes, and the inflation.
Burns was sort of looming in the background.
Yeah, basically the mountains looked like a chart of nineteen seventies inflation. Is like, oh, is there another way anyway? Most people it was like, yeah, Okay, the risks are on the labor market side, and there's probably many good reasons to think that's where the risk lies. But I look, the FED is pretty clearly going to start its cutting
cycle in September. Other than that fact, which is not technically a fact yet, but other than that fact, there's so a tremendous amount of uncertainty what the cutting cycle will look like, the speed, the intensity, how the data will cooperate or not, many open questions. Absolutely, All right, Well, I'm very pleased to say we do have the perfect guest to talk about some of these themes and risks. We talked to him last year and had a great conversation.
So like, let's follow up, we're going to be speaking with Adam Posen. He is the president of the Peterson Institute for International Economics who's also at the BOE for a while, so perfect person to talk about some of these themes. So Adam, thank you so much for coming back on odd lots.
Thank you for working me into your Jackson Home tour schedule.
We got it, We got it. So you were there in the room in the speech, Tracy and I we were just read it on the website. Although I think actually that's a probably faster or more efficient way to consume his speech than have been listening to the whole thing. But what was your takeaway?
The speech was fine as far as it went, but it didn't go very far and it should have gone farther. So I think Joe he was very clear, The chair was very clear that we've reached the end of their hiking cycle, we're into the loosening cycle, and that their key concern is about a sharp fall off in employment in the US, and again that's perfectly reasonable. The issue is, though, how narrow the speech was. It was narrow in terms of time frame. It was really only relevant for the
next couple months. It doesn't touch anything about looking out beyond that. It was very narrow in its discussion, not only of sort of the victory lap, although Powe will never call it that, reflecting on how we got here or going forward, in that it basically talked about labor markets,
labor markets, and a tiny bit about supply shocks. And it was very narrow in that we're at a conference which topic is the important issue of monetary transmission mechanism, which in normal people speak is how effective and why our interest rates able to change the course of the economy, and he gave absolutely no hints about that issue. So it was a very limited speech. There are contexts where a very limited speech is good. Two years ago Powell gave what I consider a perfect speech. It was a
rifle shot. It was only eight minutes long, and all he was saying was they're going to keep going until inflation beast is slain, and that at that time, with that facing them and then being so far away from where inflation wanted needed to be, was the right move. But in the context we are now where we're not facing a crisis where you're basically doing risk management over the next couple months, which means just trying to balance things. Having the rifle shot is to me misleading the public.
Not a good speech.
This is actually something that I've been thinking a lot about, and we should get into the transmission mechanism of monetary policy. But the point you just made about the narrow range in terms of time frame, it does feel to me like the emphasis is very much on the short term at the moment, and there's all the talk about data dependency, which obviously puts the emphasis on the next job's number, and there's not a lot of forward guidance over the longer term.
To your point about doing whatever it takes.
To crush inflation in twenty twenty two, is that what's happening here?
I think it is tracy, but I extended our nuance it depending on your view in two ways. The first is there has been this general shortening of the Fed's time horizon, and it's not just the politics, but I think the fear of seeming partisan in the upcoming election is taking it further. But it's also it's a fundamental
change in I think the fed's operating philosophy. So when Bernanki Laubach Michigan and I wrote the book on inflation targeting, or before that, when the Bank of England, the Reserve Bank of New Zealand, Bank of Canada did inflation targeting, the emphasis was on what do you think is going to happen to the economy roughly two years out? What is your forecast? And again, if you have some sort of crisis, a financial market crisis, of a pandemic, that's different.
But the current FMC seems to have forsaken, somewhat deliberately, the idea that they should be making a forecast and the idea that they should be acting on that forecast. And there's a lot of bad forecasts out there. But I think Alan Blinder made this point when he was Vice chair of the FED some twenty five years ago. If you don't have a forecast, then it's even worse
because then there's no discipline on what you're doing. It's just Okay, this is what we're seeing right now, let's react to that.
I find like this idea of that, the two rifle shots speech is very interesting because you know, in twenty twenty two inflation was arguab like at crisis levels, yes, And in twenty twenty four there has been weakening of the unemployment rate, but you know, we're not at crisis levels of unemployment. So I think that's very interesting and perceptive,
that sort of asymmetry of the two rifle speeches. You know, one of the stories for the last several years has been that the labor market has just got way overheated by various measures. There was a lot of focus on the number of job openings and we've seen quite a change in that, and so one of the things that Powell said specifically was that by some measures, the labor market is weaker now than pre COVID levels in their number of charts we can bring up that would show this.
Why the concern then, from your perspective, even looking at the medium term, for example, why shouldn't we just put the inflation anxiety in the rearview mirror.
I think there's several big reasons not to, and just I'm saying this as someone who throughout most of my career, including my time serving at the Bank of England, was considered a dove. The first and biggest reason is because this is where the narrowness comes in the labor markets is first among equals in terms of determinants of inflation in the business cycle, but there are equals, there are
other things. So productivity growth matters, Fiscal policy matters, supply shocks, as the chair mentions, matters, currency matters, trade policy matters. I don't mean you need to do the whole laundry list. But if you're sitting here and we're in a period where productivity growth has been up for most of the last two and a half years, is that going to continue, Is that going to fall back? That will have an
effect on inflation. If Trump is elected. I don't know whether he is going to be or not, and obviously the FMC cannot talk about that, But if Trump's going to be elected, There's going to be massive tariffs, and even more importantly, there's going to be massive deportations of workers. Those are inflationary full stop. So acting as though these other factors don't matter, that all the matters is the
labor mark, I think is misleading. The second reason is because and this is something where there is a lot of useful discussion, although within the FED could be more, is interpreting the labor market data. So yes, unquestionably we're not at the very hot labor market we were a year and a half two years ago. But equally, if you go in levels terms, we're at a multi year high and labor force participation and the unemployment level is still well blow what we used to think of as
full employment. And so to me, that says we may get a recession, but it sure looks and feels like there may not be one, or at least that we're not in it yet. And if you look at the latest GDP data, we're not in it yet, and so it's different. It is different, And this again is why I would like a little bit more complex, nuanced, broader discussion by the chair rather than right now, last few
months of data show labor market's softening. Right now, last several months of data show inflation coming down, we'll.
Cut Yeah, I did think it was interesting. He kind of alluded to the beverage curve but didn't mention it by name, and then just said, well, openings are falling without mass layoffs and it's normalizing from that perspective, but then didn't actually go into any detail about why that might be.
Yeah, And to be fair, Tracy, I mean I don't necessarily need the chair going into that, even though you and I are geeky enough to care about that. But you know, as I think we talked about a bit last year. But anyway, Governor Waller, Governor Chris Waller, you know, made some very important contributions a year or two ago talking about vacancies and that. So it again, it does matter to have a little bit richer discussion.
How are you thinking about the labor market dynamics and how they might unfold at this point, because there's obviously a conversation at the moment about how quickly things could deteriorate in the labor market. People talk about, you know, unemployment being exponential. Once it starts, it can get worse, very very quickly.
I think that's a valid concern. But I think the more you look at it, the less worried you get. Oftentimes I'll say something and I'm saying, I hope I'm wrong. In this case, I hope I'm right. So there is as I know, you've discussed this so called psalm rule, and to doctor Sam's credit, she has said very clearly it's not a mechanistic role. It may not apply right now. So I give her credit for being honest about that.
When a recession hits. Generally, unemployment spikes quickly, not like it did in twenty twenty with COVID, but that is usually the pattern. It goes from very low to very high, accelerates a lot. But that's kind of like saying you
know you're in a recession. When you're in a recession, it's not a causal argument, and so you need something, some kind of story that tells you what triggers it to behave that way, the labor market to behave that way, and a lot of the things we're seeing and hearing in the US data aren't consistent with that kind of story. So investment outside of the big tech giants has not been high. Well, it wasn't high since two thousand and eight,
and we've had large expansion since then. We're not seeing layoffs, and as the chair acknowledge, I mean that is almost always what you see before a recession. We in fact see more people entering the labor force, and as you've noted, we have a revision downward in total number of jobs created from early twenty twenty three to early twenty twenty four. But that's another way of saying, well, g productivity growth was higher because we didn't revise down GDP, but we
revised down the number of work hours. So again, you don't usually it's not impossible. We don't usually see a jump in productivity growth right before you have a recession. So again I want to distinguish between my assessant of the economy and going forward, looking out beyond this month versus fine for the FED to cut preemptively given their low inflation risk right now.
You know, since you mentioned it, I kind of just want to jump to this this time next year, it's very possible that we will have a president who does not believe that the current institutional arrangement of FED independence is a good thing. Does this come up in conversations around here? And is there anxiety about it? I'm certain that that would is a concept or a thing that would make you in particular anxious. But how much your people talk about it's the.
This is something you don't talk about, okay, or rather you don't talk about currently sitting officials. That makes sense, But I mean all of us in the game, at whatever degree of remove who are not currently sitting officials talk about it a lot. So two of my colleagues at Peterson, David Wilcox, who used to be the head of the Division of Research Statistics mean the chief honestly the FED, has written about very real dangers to FED
independence and how scary it is. And more Sobsfeld, who used to be chief econos of the IMF and was on Obama CEA, has also written about how scared he is for central bank independence in the FED if Trump wins. So, I mean, it's a very live issue. But of all the things I would expect, current Federal Reserve efficient not going to say any They're not going to apply on it, even in private, because it's just there's no upside to them talking about it.
Just going back to the short termism versus making a longer term forecast and the importance there. I do have some sympathy with the difficulty of doing that right before US election, where you have two potential administrations that seem to have very different ideas of what they want to do and how the economy works. How do policy makers take into account or how should they take into account those sort of binary outcomes when making longer term decisions.
Let me try give you based on my reading of the history and the current situation, I think there are three levels of response. The first level of response is simply getting underneath the seemingly binary and trying to understand and what the actual policies would be. And this is why my forecast for twenty twenty five is roughly if Harris gets in, there will be slightly more inflation, slightly more growth, nothing crazy, and therefore a lot of the
cuts that are priced in for twenty twenty five. Rate cuts for twenty twenty five are not going to happen, but the Fed's not likely not going to have to raise rates. If Trump gets in and he does what he says he's going to do, which we have very good reasona believe he will, then you've got tariffs, deportations, explicit threats to FED independence, attempts to talk down the dollar, a boombus cycle in fossil fuels through deregulation. Then you've
got very significant inflation potentially. So if you say, I
have no idea who's going to win the election. So if you say fifty percent Harris basically slight increase in inflation because of fiscal laxity, which I think is going to come because she's still adhering to the asinine no taxes on anybody making under four hundred thousand a year, you know, and then fifty percent, the Trump's going to jump inflation by two to three percentage points, and you average those, you end up with a mean scenario in my view, or excuse me, a modal scenario in my view,
that inflation will be up one to one point five percent by this time next year in a very visible way, and no recession. So if I'm forecasting, that's where I'm going. So then, second, boice, how does the FED deal with that? There are two things you can do. The first is you can, like the FED does on all kinds of things, make vague warnings that appeal directly to fundamental economic principles.
So Chair Powell, to his credit, at some point in the last couple of months, said, you know, having positive migration was part of why we got the soft landing. It was good supply shock for the US. So there you go one step further and say, you know, if we reverse migration, it would be in economic terms and
negative supply shock to the US or caraffs. You know, all kinds of reasons trade policy gets set, But in terms of inflation, it's very clear what happens when you do terrorsts and you say that, and then the third thing,
which goes back to the forecast idea. So if as the Bank of England and a number of other central banks do, you are doing a quarterly or a semi annual or whatever it is, regular release and update of your forecast, your committee's forecast, you can build in some fudge factors into the forecast where you don't say what they are, so nobody can take a paragraph and snapshot it and say you're being anti Trump or anti Harris,
but just build it into the forecast. And since we're not the FED is not doing that, they can't do that.
I'm going to ask a random question. Maybe you won't even want to answer what I'm trying to. I'm gonna try to think about how to ask this plately from an American perspective. When I when we look at what's going on in the UK, it always just seems like one mess after another, and they hate to go through all these different leaders and all these like weird scandals about who is at a random party or whatever, etcetera. That I don't understand. What should Americans know about how
the UK works? That we don't having served on the Monetary Policy Committee. Well, I read these headlines and the Telegraph. I don't get it. What do as an American? What should I know about?
How an American or even an American investor or well informed person needs to know that much about Okay, I mean I think that's cutting. Yeah, no, but I mean I think you know, and it's very hurtful to friends of mine in the UK. But it has interesting lessons, like a lot of countries do. For economic policy generally, there are a huge number of cultural and other exports we get from the UK then that you want to
think about and be interested in. There is a genuine special relationship, as it's called, on national security issues in terms of sharing not just intelligence at a very detailed level, but there are boots on the ground, usually from British troops like they were in Afghanistan and Rock when we
went in. But in terms of economics, basically terms of institutional structure and everything, well, I mean the deal is they changed the rules on elections a while back, which meant that they are now a hybrid between a presidential system and a parliamentary system. So in a parliamentary system, if people who's faith in the government. You have a cabinet reshuffle and you normally have a question called and the government turns over and you get a new government.
In a presidential system, at a certain fixed interval, you get a new government they push through under David Cameron a change so that now if you lose the faith of the rest of parliam n or the faith of the people, you don't automatically have an election. You have a fixed term until the next election. But yet it's a parliamentary system, so it does have turnover and who's
on top anyway. The upshot of all this is this is why you like having independent institutions like the Bank of England to try to keep things under control even if the government keeps cycling.
Since Joe asked a random question, do I also get to ask a random question about the BOE? What happened to the.
Fan charts, the inflation fan charts? Do you remember those?
Oh? Indeed, the rivers of blood. I remember discussing with the people who created the fan charts. The fan charts, for those who don't know, is they were an attempt to show graphically not just the central point of the macroeconomic forecast but a probability distribution. So the idea there were these colored bands and whatever color they were, red, blue, green, towards the center of the most likely part of the forecast, they would be a darker color, and then they would
go out from their lighter and lighter colors. And they were never perfect, but they were an attempt to say, there isn't just a point estimate forecast range of probabilities.
You were capturing that uncertainty to your point.
Right exactly, and you were able to make the fan charts say asymmetric, so the balance of risks is much
more towards the inflationary towards the disinflationary side. What ended up happening was they did it a long time and the general publics never seemed to latch onto it, and then financial markets would, as they are want to do, keep trying to deduce very specific things from within the fan charts by like measuring the bands and trying to calculate backwards what caused the van charts to be the way they were so and I think the Bernanki review of the Bank of England took some issues with this
and had some recommendations on how to change it. The bottom line, though, I think, is of why the fan charts were there is right, which is, even if you agree with me and you want the bank center bank to have a clear forks, you don't want the forecast to be next month or next year or next decade inflation will be two point seven percent. You want it to be a little more scenario ish, if that's a word, than just that.
So I think I have just one last question. But you know, Tracy mentioned a certain binariness of this electoral outcome. There is a sense a part in which there's alignment, which is on the question of trade with China specifically, which has been one of these topics in which a rare sense of bipartisan agreement that a hard line on things like imports or tariffs or technology exports, so things
like that is good. And I when we talked to you last year, you're quite concerned about some of these policies and how they could get worse, so with very serious consequences in your view. Here in August twenty twenty four, and that's more or less continued, and every once in a while, every few weeks there's another headline about export technology, export controls or whatever, what's concerning to you? Where are we on this path? And how dangerous is it right now?
To you? I think, Joe, it's a pretty dangerous path, because, as you said, there has been an extreme convergence between both the Trump camp and the Hairs camp, between different party members in Congress on very great deal of wariness, if not anger, against China, and a desire to keep ramping up technology, export controls, economic challenges, and so on. Why is this dangerous? It's dangerous to me for two reasons.
The first, actually the more important one, is it reinforces this so called security dilemma narrative that if I'm convinced China is trying to do the US in I'm going to take actions either preemptive or defensive and want to deprive them of various things in hopes of weakening their
ability to harm me. And then when I start doing that, the Chinese say, well, the US is out to get me, so I have to take measures and pre empt and defend and this and that's mostly usually talked about in a more strictly military security context, but I think here and now the economics is reinforcing that, and so I worry it pushes US towards a conflict that may maybe avoidable. Again.
None of this, for me is because I think the communist part of China, our president, she is doing good in the world, or that I'm deluded into thinking they only have good thoughts towards the US economy. But it is this realm now of escalation and group think in both capitals Washington and Beijing, that they're out to get me.
That is reminiscent of times in the Cold War. That's reminiscent of other times in US foreign policy history when we've done things that probably were self harming and dangerous. The other side is the pure economic that there are a lot of issues to have tension with China about. The one that currently gets the most attention is the so called issue of overcapacity. That they are able to
produce vast amounts of steel, electric vehicles, solar panels. There's a list, it's a very long list, and that they do this having cheated by putting in huge industrial subsidies and not letting other people, including US exports into their country, and they've forcibly extracted or stolen intellectual property. Anyway, I think there's a measure of truth in all of those accusations,
but I also think they're not the whole story. China's ability to produce a very relationable, functional electric vehicle that they can sell at five thousand dollars a year isn't just due to subsidies. It isn't just due to cheating. And as a number of China experts have pointed out, yeah, they're pretty aggressive towards foreign producers, but they've got a huge competition within China. There are many, many producers. It's
not just BYD and Tesla, yeah exactly. So you know, the story isn't quite as all one sided as the Americans make it out to be. But there is an issue that China's growth is slowing down for the reasons I wrote about a year ago in Foreign Affairs, and we talked about and they are looking for other places to do growth, and so they want to export lots
of this stuff. And usually the economist's response to that is great, you want to give us basically free solar panels, and don't we just we get faster adoption of green tech?
Why not? And so where the rubber hits the road is the discussion of what is the damage of in each industry adding a dominant position for some amount of time, and on evs, there's a huge amount of emotional political national security for all kinds of reasons why Americans and even Europeans don't want to have large numbers of Chinese evs. But we have to at least recognize that that's setting back the pace of our green technology revolution quite a bit.
Adam Posen, thank you so much. So glad we were able to make this happen, and I'm able to do it again next year.
Here it'll be an annual event at least at a minimum.
Tracy, I really like catching up with Adam, just going backwards. You know, I've always been a little bit unsatisfied by the China overcapacity argument, because a country can't just become really great at producing large scales of competitive products by subsidies alone. It's impossible. Otherwise every country would do it, and many have tried and most have failed. So like this simple story that people tell us, like, oh, they cheated and they gave all this money to their local companies,
and that's why it's okay to have retaliatory tariffs. Like I've never really been satisfied with that argument.
I mean, I think there's an additional layer to it, which is the complaint is that they've cheated in terms of like patents and key and that too. Sure, but without getting too into the weeds, I do think Adam's point about like the one upmanship is real between China and the US, and now also within the US with two political candidates that both seem to be vying on the same issue.
Totally so on the speech itself, on Powell's speech, I found Adam's critique to actually be very interesting and I hadn't thought about this sort of in the last three years. Accellent hole. He's given two is he characterized at rifle shot speeches, So twenty twenty two basically a kind of whatever it takes ish speech that we're going to get inflation down, and then another short speech this year we're not going to let the labor market deteriorate.
You know.
It's funny because this thing that we've talked about is what would the markets be anxious if the FED went fifty braces points or whatever. And if you take Adam's perspective to its conclusion, it's like if somehow FED seriousness about tackling unemployment is a reason for you to get spooked, then why not get spooked by the speech today? Why
even talk about the fifty basis point risk? Why not get spooked by the fact that they're talking about fighting unemployment with the same sort of focus and approach as they're fighting inflation.
Yeah, I think that's a really good take. This has come up a number of times. But like also that short termism, yeah, point, I do really wonder about that. Part of me thinks the A is trying to maintain some optionality, obviously at a very uncertain time. But on the other hand, I do wonder between now and September seventeenth, eighteenth, if you were to get a really good jobs report, or I'm not even a really good jobs report, a slightly better than expected jobs report, what would the market
do and what would the Fed do? Yeah?
I mean maybe, I mean a good jobs report probably just means, you know, it's a very a comfortable pace of twenty five's right, or something like that. But yeah, I mean, and you know, since we got that week July jobs report, we've had pretty benign initial jobless claims readings. We've also had some survey data that's not been that bad. Some of the private sector data. So indeed dot com puts out their own measures of labor market health actually
not that bad. So there's some interesting stuff coming up between now, for sure, Between now and that September meeting.
Plenty more to talk about, for sure.
Shall we leave it there for now, Let's leave it there.
This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez at Carman armand dash Ol Bennett at Dashbot and Kilbrooks and Kilbrooks. And thank you to our producer Moses Onam. More odd Lots content go to Bloomberg dot com slash odd Lots. Were have transcripts, a blog and a newsletter and you can chat about all of these topics twenty four to seven in our discord Discord dot gg slash offlins.
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