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Hello and welcome to another episode of the All Thoughts podcast.
I'm Tracy Alloway and I'm Joe Whysenthal.
Joe, how is your deep dish pizza?
It was so good?
You know, I actually don't know if I had ever really had a proper Chicago deep dish pizza before, but I went to this place, I think it's called Pea Quads Pizza. Yeah, pea Quads, and they sort of burned the crust a little bit, which I really like, highly recommended, seemed pretty legit as far as I could tell.
You definitely did the right thing, because I just went back to the airport to hop on a fly and I got to say, O'Hare is kind of even worse than I remember it. But anyway, Oh, in case you haven't figured it out yet, we both just got back from Chicago, where we interviewed the Chicago Fed President, Austin Gooldsby. That's right.
First of all, Chicago's so nice this time of year. I love visiting Chicago.
You know.
We could have talked to Austin over zoom or something, I guess, but it was great to actually go there, go to the Chicago FED at headquarters and talk to the president of the Chicago FED. And what I have to say is I think an extremely interesting sort of moment for Macro right now.
Oh, it is so interesting. I know people over use the term turning points. Yeah, but I really feel like this is a very like specific moment in time where we thought the labor market was weakening, the FED cut by fifty bases points, and then we had that blowout jobs report. Yes, and I have to say we recorded this interview with Austin on Wednesday, October ninth, which was
the day before the latest CPI figure came out. Also, we recorded it right when the FOMC minutes came out, so not the best planning in terms of timing on our part. But since then we've had CPI come in ever so slightly hotter than expected as well.
Yes, that's right.
So as you mentioned, recorded this Wednesday, you're listening to this presumably on a Friday. But even with the fact that we couldn't talk about CPI, I think there's like really two things that make this moment interesting. It's always interesting because we're never you know, we live in a world of incomplete information on a certainty. But the two things are really and Austin talked about this in our interview. The FED has changed focus.
Right.
For a couple of years, it was about inflation and getting it down, and now the risks are balanced. So it's a key thing that happened. And I would say that Chairman Powell's speech at Jackson Hole in August officially marked that moment of the pivot starting there. And then the other thing is like, Okay, maybe there's this pivot, but things right now are still really uncertain and we really don't know what it's going to happen. And you mentioned the hot inflation number and the strong jobs report
and all this stuff. So we're at a moment where pivot meets new uncertainty.
Yes, and who better to explain some of that uncertainty than Austin. So why don't we go ahead and take a listen. Here's Austin Goolsby from the Chicago Fed. Thank you so much for coming back on odd thoughts.
Welcome to where the magic happens.
We're very excited to be in Chicago. I have to say, being in the FED building. It's a gorgeous building. The architecture, Yeah.
It's a landmark. It's great. Yeah, it's it's over one hundred years old.
I heard you were celebrating one hundred year anniversary this year, right last.
Yeah, it was yeah last year.
Also, we probably could have caught up with you via zoom. But it's just such a great time to be in Chicago.
Yeah, this is the moment.
It's actually warmer in Chicago right now than it is in New York, which is kind of surprising. Okay, speaking of stuff that's warmer. We had a pretty hot jobs report recently ICs transition. Yeah, thank you, thank you. I'm a professional. Okay, blowout jobs report? What does that mean for you? Did it cause you to take pause? Maybe think about that fifty basis point cut?
Well, look, you know my thing is always let's take the long arc and find the through line, not overreact to one number. It's sixty days before that we got a disappointing number, and you had people going on publicly and saying by the time of the next FED meeting, they need to have one hundred and fifty basis point cut. Then we get a positive jobs number, and then we have a positive job number, and then people are saying, maybe we should raise I don't fault the market. That's
the market's business model. They got to react to every little Twitter and blip that happens. In my view, the fes not on a timetable like that. We got to take the broad view. So far, I think the broadview shows inflation come way down, the the job market has cooled from overly hot to something like sustainable full employment where we would like it to be. And if we could freeze it right there, that'd be a lovely picture. And so then the question is can you freeze it
there or is it going to get worse? If we got multiple months that showed big positives like what we just saw in the job's number, that would all I would alter my view. That would affect my view, But I don't think that. I think people can take that too far from one month.
That all makes sense to me. But I'm going to try to attack the present the same question and attack it in a slightly different way. A few of these. Okay, If I think about Chrman Powell's Jackson Hole speech, and I think about that fifty basis point right cut in mid September, intotality, like the basic way I think about it is like you at FMC, the fan is trying to cut off the left tail of a hard landing, and things are in a good spot currently, the levels
are good. By trying to cut off that hard landing outcome with us with a sort of strong beginning of the rate cut cycle, by going fifty, does that strong jobs report change it all? How you think about the risks today of hard landing.
I'm in the data dog caucus, one of the core members of the Kennel, so I'm never going to ignore any data point. I want all the data that we can get. If you take a step back and look at the dot plot in the SEPs, they ask independently.
We don't talk about it, but they ask independently everybody, and the mass bulk of the dots say that the FOMC members think inflation's going to keep coming in close to the two percent target, They think unemployment is going to stay somewhere around full employment benchmark, and that the Fed funds rate is one hundred and fifty two hundred basis points above where they see it settling down. So the broad mass of people thinking the long run Fed funds would be two and a half to three and
a half. You know, something in that range, and we're even with the cut, we're well above that. So I kind of think that's by far the biggest and even with information content. So the focusing too much on the short run, I was kind of teasing the market, but
I guess I'll tease you. It sounds like you have the same You have that same short run focus that whether it was twenty five basis points at the first meeting versus zero or twenty five vers of fifty at the next meeting, and what does that mean for the meeting after that? That's smallish potatoes. The big pigture is inflation is way down, unemployment is up to a level that we're happy with, and the rates are well above what almost everyone on the FOMC is saying they think
is the steady state. And as I keep saying, you just got to think about your restrictive and that includes me, and you got to think about how restrictive you want to be. If you got the dual mandate where you want it, do you want to have rates be that much higher than where you think they're going to settle or does that endanger the pretty picture? And so that's kind of where my head is it's not even technical.
There's a ticki tac argument that I would just remind people that, A, you know, we meet every six weeks, okay, so we're constantly going back over the data and forecast of what's to come to try not to get behind the curve, or if we get behind the curve, not to be too far behind the curve. It's why the FED is the tip of the spear for economic stabilization. And there was a meeting where we had a meeting and there was no rate increase. Let's say it was
between zero and twenty five. There are no twelve point fives, but if there could be a twelve point five, it was kind of a twelve point five meeting. And then we have a meeting where that's there's an argument in the market is are they twenty five or they fifty? There's no thirty seven point five move, but.
I think I've joked about that.
And over two meetings, Yeah, seven point five is a fifty point move, Okay, So over some longer period it doesn't feel it doesn't feel like if you're trying not to fall behind the curve. We move in discrete increments, And so I still think is taking a long view is the right way to think about what's happening. And I don't know why we don't do thirty seven point five? Why is it continuous? Why can't we picked like thirty three? I know what I know?
Is there a rule?
Actually, I'm really interested in the questions people realize thatous.
So I don't know.
I don't know, but I think maybe some of the confusion comes around because the FED has emphasized data dependency so much in recent years, and data, by its very nature is backward looking. And then we we can talk about that, okay, But then you get to turning points in the business cycle, and now it kind of feels like you're shifting more into You talked about being behind the curve. It feels like you're trying to get ahead of something. And so I think there's that tension.
There is some tension between how much do you want to look back how much do you want to look forward? You got to do both. If you want a soft landing, you can't be behind the curve. And the hardest thing, as I say that that Central Bank has to do is to get the timing exactly right when there are moments of transition. It's why we meet every six weeks, so that you don't have to make one decision and
figure out the thing. My only objection to the characterization is that to be data dependent I do not think means you commit I won't make any forward looking judgments. I only want to look backward. I think it's a mistake to do that, and especially because there are lags to monetary policy, and the lags, if anything, were even longer for this weird business cycle. And so if your decision rule was going to be I'm just gonna wait until we see, say, the job market start falling apart before.
Once we're in recession.
Well no, exactly. By that point it's too late to do anything about that. So I do think there's a risk management argument for being in a being in a more nimble spot.
Since you mentioned lags, I want to ask you a question about that. When the FED started jacking up rates aggressively, one of the theories for why it didn't have a sharper impact on the economy is that so many households and corporations had in say twenty twenty first half of twenty one turned out their debt, and so there was
not a lot of sensitivity to debt. The flip side of that now, and people have been writing about this, is that even though the FED has now commenced a cutting cycle, that the weighted average cost of debt is probably going to rise in twenty twenty five basically just mathematically right, because eventually they'll have to be refired at
higher rates and so forth. How do you think about that dynamic now when you're thinking about these lags, you're starting a cutting cycle, but at the same time, probably cost of debt is actually going to rise for a fair number of economic actors in this economy.
You have remarked on this subject and thought it through. In my world, that goes into the economic conditions, and that's there are many things that have made this a hairy, strange time for central banks because the business cycle, both down and up, looked almost nothing like the historical precedence. This is one aspect of that. We've analyzed this specifically
thinking about mortgages. Okay, So if I had told you the premise of your question one hundred percent agree with six years ago, if you said the FED is going to raise five hundred basis points in a single year, what is going to happen. I think most all economists would say, yikes, there's going to be a major, major contraction, and it's going to be concentrated. Autos down the tubes, consumer durables bye bye, business, fixed investment, construction all going
to collapse because they're very interest rate sensitive. We didn't really see the economy go into the steepness of collapse that you would have expected. And so that brings us back to this question. It's kind of a twofold. Is there something about this unusual business cycle that makes economic activity less sensitive to the interest rate or is there something strange about this moment that the lag effect is longer, And it can be both and they can run together.
But in the case of mortgages, one of the things that has made monetary policy transmission less direct is the fact that a vastly higher share of mortgages are thirty year fixed mortgages now than they were in two thousand and five, two thousand and nine, whenever you want to look at and so when they change the interest rate, in some countries, virtually all mortgages are adjustable rate mortgage. So when their central bank raises rates, they bring out
parents onto TV. The Central Bank is killing us. You know, our mortgage payment went up in the US. If everybody's on a thirty year fixed in a way, that's just a delay. But it's a thirty year delay. So I do think that notion that there are companies that don't have a lot of the debt, so they aren't as especially sense of the interest rate, that the term structure of their debt may be such that the average rates they're paying might even be higher as a FED cuts,
I think that's not a problem. That's just a fact, and we just need to we need to understand it and see what the magnitude is.
Let me ask you the same question in an extremely yeah, but my question is going to be ultra simplistic. Can you explain to us in excruciating detail, what exactly you expect happens in the economy now as you cut interest rates? How does that cut get transmitted?
Okay? As a general matter, the FED has only one tool, really, which is a screwdriver that can tighten or can loosen. And I always say, if you're problem is a loose fender, that's great. If your problem is can you make breakfast, no, you kind of can't do that. With a screwdriver. So the main channels of monetary policy impact on the economy, I think are on the real economy side, and they are on interest rates sensitive parts of the economy like
consumer durables, business, fixed investment, construction, things like that. Now there are other channels of monetary transmission where there's a lot of argument how important are they, and they are. Well, if you change the value of assets like the value of housing, the value of stocks, et cetera, is there a wealth effect so that consumer spending might go up as the asset values go up, or if you contract
and asset values go down, would that limit spending. There's a dollar chance that if rates in the US are moving relative to how rates are moving in other places, can affect the currency, and that could affect imports and exports.
Those are probably a lot of the of the main channels, and it's always in the counterfactual what would be happening if we didn't do this, So to the extent that there's already a debt structure, or to the extent that we went through a business cycle that, for the first time ever was not driven by cyclical industries but was driven by services because nobody could spend money on that,
and services aren't especially interest rates sensitive. That's another reason why you might think monetary transmission, the monetary transmission mechanism, which is actually a whole bunch of different transmission mechanisms, just looks different this time than before. Now, well, everything that looks different is not bad. Okay. In a way, this is frustrating that monetary policy doesn't have the same impact. But at the same time, in twenty twenty three, we
hit what I called the golden path. Inflation came down almost as much as it ever came down in a single year, and there was no recession, and that never happened before. And so the unusualness of this thing sometimes it is good.
Well, this gets to by a question, and I sort of wonder whether us in the media or you and economics are going to be cursed with debating the transitory verse non transitory debate of twenty twenty two for literally the rest of our lives. But at this point in I guess October twenty twenty four, okay, and we talked with you when you first started talking about the golden path,
and that looks great. It's even more golden today than it was at the time we were talking, but like why like how much credit like for you know, if like how much credit do you give yourselves at the FED versus like how much of it was were weird and then got normal?
I think mostly things were weird and then got normal. We made the mistake. And look, I made the mistake. I was in the declare. I wasn't on the FED at that time. But team Transitory, I, like many people in the market, thought it would be transitory if we had it to do over. I think you would call
it team supply shock. Okay, and they're in life take the victory, just with a slightly different Well, so Steve Lessman said, well, it turns out team Tradessa Tory was right, you know, and there is a sense in which the language should have been about what's the nature of the shock that's happening, not the how long is that going to last? It was. I was wrong. I thought if you get a supply shock, that's going to heal itself
pretty quickly. It didn't. It lasted. The supply shocks we learned last did a lot longer because if the ports are messed up and the chips are not getting produced, then they can't get cars. But then the people who are buying the cars to use for delivery, they're delayed, and so this supply chain having more steps in it ended up being a bigger deal.
Just real quickly on this point, though, If this is the story, then does that mean labor market strength now does not necessarily pose renewed inflation risk?
Yes, does not necessarily. I agree with it. So let me finish two Sorry, two thoughts is not a one. Did the FED have anything to do with it? That's kind of the question. If it was all supply shocks, then the FED didn't really. Yes, the FED can't be blamed for the inflation going up, but then the FED shouldn't take credit for coming down. There is some component
that as supply shocks heel you get immaculate disinflation. I do think that the fundamentally different thing that happened this time than the last time we were getting supply shocks, like at the end of the seventies, is that the market expectations of inflation basically never went up in the seventies. As actual inflation went up, the expectations went up. And part of what made the Voger experience so hard is
You didn't have to just slay the inflation dragon. You had to go convince everyone that we will hold this thing underwater for as long as it takes until it surrenders. And that's a brutal that's a brutal process. I do think that the that expectations stayed even as actual inflation was almost double digit, stayed exactly at PC two percent as the inflation target said, was fundamentally the FED making
a promise. It may look bad, but we're going to get it back, and that the market to facto believed it, and that is to the FED, is about FED credibility, and I do think it made a big difference it.
I want to ask one more question on the Golden Path and the interview we did with you about I guess it was almost a little over a.
Year ago, like a year and a half. Yeah.
In that conversation, you talked about housing costs coming down being essential to the Golden Path scenario. And yet here we are, as we discussed earlier, mortgage rates aren't really coming down. In fact, some people expect them to, you know, either stay where they are or go higher from here. Shelter costs in CPI still you know kind of high. How did we manage to get here without housing costs really substantially coming down?
Okay, now I'm afraid you're remembering, you know each thing I said back from over a year ago, but my emphasis was about the shelter costs and the inflation aspect.
And to our previous discussion, I had just given this speech at the Peterson Institute in which I said, we were getting a series of very strong jobs numbers, yet inflation was coming down, and I was arguing, don't lose sight of if you're getting positive supply shocks, labor force participation coming back after a severe drops that is a supply shock. If you see the supply chain's healing, all
of those would be reasons. And I wasn't fully cognizant of the impact of immigration that it was going to have at that time, but all of those supply shocks mean don't just take at face value if you got a big aggregate GDP growth number, or you got a big monthly payroll job gain number, that doesn't mean that doesn't have to mean that the economy is overheating. And if you're seeing inflation falling while that's happening, and you
know there are supply shocks. Tone it back a little in the argument that it's demand overheating, because this is just the inverse of the thing that made it so strange on the way up. That lesson, I kind of think is a little bit applicable now too, potentially. And the question that you asked, how do we do that if inflation housing didn't come down, you said it was essential.
Housing inflation has come down a bit, But the real answer is services inflation came down even more than we thought it would be able to, and goods inflation has come down and stayed down into the mild deflation that it was before COVID, And I kind of think that's how we did it, and the market rents say that it did happen. The inflation rate of shelter in the market is down to something like what it was before COVID.
It just hasn't yet been fully reflected in the CPI, which I think it is, but is you know, every month it's not, we again say what in the world is happening.
We've been hearing that those Zillow market rented disease are going to feed through in the next three months. For about two years, and now two years, I know some people have figured out the I'm still.
Trying to use them to negotiate with my landlord. I can say it's been mildly effective.
Yeah, how did it work?
Since a little bit? I think I managed to negotiate like a ten percent increase down to a five percent increase. So I guess that's a win for New York.
But since you've actually tuned me off here on another question, I had you off. Thank you, no, in like a good way.
You said it.
On housing starts, multi family in particular have come way down, and some people would blame the FED, just in the strict sense that higher rates project finance it comes down. Do you worry about the effect that that has on housing supply in the coming years and therefore on the effect of shelter inflation?
A little?
I mean, I do think we've seen that housing markets are complicated markets, and A it's not just one housing market for the whole nation. It's very different in different parts of the country, and there's a supply and a demand component. But that's always true, Okay, It's always true that when the FED raises interest rates that the impact on housing demand, the demand goes down because it's more expensive, but there is also a supply component. And now we
add on top of it. Because we got so many people with thirty or fixed mortgages, there is on the margin a group of people who don't want to leave their house. I'm not gonna move because I got a three and a half percent mortgage and I would have to have an eight percent mortgage if I moved, So we have to think about that. But this is the only tool we have. We have balance sheet and interest rate, but it's basically just we can tighten, we can loosen that. That's what we can different.
You mentioned the importance of inflation expectations earlier on and I have to say, in the course of preparing for this interview, I think I did just a search on my phone of my inbox going inflation, and one thing that came up from yesterday was there is a JP Morgan note talking about the potential for a reflation trade now that the FED has cut and China is stimulating.
I know you're not in control of what Wall Street banks recommend their clients do, but it is kind of interesting that in the course of the FED cutting in trust rates, some people are pitching well, inflation's going to come back in this scenario.
Look, don't believe everything you get in an email. And the market gives you actual estimates of what do they think inflation is going to be over the next year, over the next five years, the five years after that. So there's some survey based measures and there are market based measures. You don't have to rely on a newsletter to say, well, is this a sign that expectations have become unhinged? Tip spread?
Sure, But the question is more generally, as you cut, is there the potential that inflation somehow comes back?
Of course, and the job of central bank is to be paranoid about everything, and that's why the through line is the main line. Overall, inflation's way down over a long period. And we had one ump and Q one of this year, but you had six months where inflation was at or below two percent. Then we have a bump, and now we've had four. I will see tomorrow what happens with CPI, But on the implied PCEE, we've been coming in the new months at or below two percent.
The only thing I'd say for the scare scenario that inflation's coming back is expectations for a five year inflation are actually down if you think PCEE inflation is like CPI minus two tenths. If anything, the expectations are that PCE inflation would be below two percent as it was before COVID, and the three month actual headline has been like one and a half percent. So there is now opened us a window that seemed inconceivable not that long ago,
where inflation is actually undershooting the two percent target. So it could be it could come back and be high, it could come back and be low. And my my is it my read is my statement about doing a fifty basis point cut to start what looks to me like a cycle over a twelve to eighteen month period is I think it's fine to have a demarcation when
something has changed. And the demarcation is we went through a long period since I've been on the Fed, we've had an almost exclusive focus on the inflation side of the mandate, as we should have, and now I like that's changed. Now we're back to thinking about both sides of the mandate and thinking about the trade offs and
trying to stabilize the picture. Pretty much exactly where we are right now that the new months of inflation are at two percent, and the unemployment rate is kind of stable around four point two four point three some some measure of full employment. And when you're in that circumstance, you got to think about both sides. You can't just think about inflation.
This is good because we'll get one of those headlines, you know, Chicago Feds risk to both sides. Yeah, this will be a nice This will be a nice like pippy headline. We cannot shoot out when this comes out on this episode. But I take your point. I think the job of a central banker, as you said, to sort of be paranoid. The risk management. It's always risk management that's probably never going to change, right, It's always about thinking about risks. And did you mentioned okay, maybe
there's risks to both sides. Just to delve deeper on this, and it kind of relates to Tracy's question. If you're thinking about inflation risks, if let's say six months from now, we come back and we're talking to and we'd love to visit again in the spring, if we're out here in.
The springtime in Chicago is only fourteen days and they're not in a row.
That's the only part to stick with fall visits, let's stick with all of positis. Then if an inflation were to be higher, like you know, when you're like up at night and you're paranoid, thinking is your job is what would concern you? Is it the say China stimulus, is it the wars that we're seeing.
I was going to distinguish demand overheating is the kind of inflation that we want to be the most attuned to. But that's not necessarily either. That's not a supply shock inflation. That's much more complicated. And so if you had war in the Middle East spreading to a big run up in the price of oil. We know, we've seen that movie several times and it stinks. You know, the original was bad and all the sequels are bad. It's a stagflationary impulse, and that's what would happen. You would get
the economy turning sour and inflation rising. But it's not obvious what the central banks response to a supply shock would be. For sure, you'd have to think through is this a temporary or is it a permanent It's going to be uncomfortable, but that doesn't automatically mean the FED should tighten or the fed should loosen them. It would very much depend on conditions. So I'm thinking more on the demand excess demand, and if you started to see that, then you'd have to react.
And just right now. And I kind of I tried to interject this earlier and didn't get it because you were completing a train of thought.
We have seen it right now, Maybe just ignor it.
But okay, like this with if the labor market continues strong, does that give you any pause or anxiety about demander of an inflation.
It could give pause if A it's sustained and b you see it in all the measures. Okay, so that's the long If you take now vacancies to unemployed, ratio, hiring rates, quit rates, the UI claims coming in all of the measures broadly have been showing a labor market that is cooling from a white hot level to something like sustainable full employment. I haven't seen anything that is yet convincing that there's a new trend that we're not stabilizing at full employment, that we are in fact going
back to white hot, overly overheated. But I'm that you never as a core member of the data dog kennel, you will never hear me say, oh, data came in. Do you just ignore it? No, I don't ignore it. That's but it's only one data.
Point, the data dog kennel. Is this why you've sort of become the go to FED speaker on big data days? So I know you were. You were on Bloomberg TV when that jobs report came out. Why why do you do that out of curiosity? Because you know you put yourself out there at a time when.
You talk to the media.
Oh no, I don't think I'm a sensitive days.
The thing is you are more interested in opinion on the days when it is salient, like when the data come out. I feel like at moments of transition, like kind of this spirit we're in here, I feel like it behooves us. And it is our responsibility in the FED to give a description of here's what we're seeing, to remind people we're not on a day trader's timetable. You know, the market is up, the market is down. Let's take the through line. I don't think I'm the
only one going out. I certainly see my colleagues and I value their their views quite a lot. But I think an openness and transparency this is the field guide to openness and transparency, talking about our reaction function and the data, not just releasing SEP dots.
My takeaway is that Austin thinks that the market is too attuned to the short term and therefore they need to remind us every single I was.
I'm gonna run through my maybe let's pull down.
Don't do that.
I have one more weird media related question though, but since you mentioned filibustering, if you were going to filibuster this entire interview, like say you had to, you had to speak for at least two hours, what would you talk about?
I appreciate that you don't think that's what I did.
No, you didn't, but I'm curious what I would talk.
About would be the cash department at the Chicago Fed and the way that we have a lot of money and this is a this is a live operational bank. We are the bank to other banks, and I would love to give your well listeners insight.
We promise we will have Austin give us as a very detailed breakdown of the cash ops here at the Chicago Fed.
There is a follow up episode to this lend coming in the coming weeks, all about the Chicago Feds. Cash operation. It's so great of Austin. They give a little tease for that next episode.
That's perfect. Can I ask one more serious question before we wind it down? But you talked about restrictiveness earlier in this conversation, and you know, I get where that comes from. And people look at things like real yields and stuff. But if you look at stock market prices we're recording this on October ninth, I think stock indices are at records. Again, if you look at credit spreads,
those are like at multi year lows. Where's the restrictiveness Because I don't see it in the financial parts of the financial market. Let me put it that.
Way, I'd say two things. I told you my focus is primarily on the real side of the economy. I think those are the biggest, most impactful parts of the
monetary policy transmission mechanism historically. So I'm less of a fan of interpreting financial conditions in dioses as a measure of monetary restrictiveness or what monetary policy should do, because in my view, it's got a major reflection problem that let's say the market, which is forward looking, decides they think it's going to work, that there will be a soft landing that rates are going to come down because inflation has been tamed and is at two percent, then
equity markets go up. Long rates would come down, and that would then be interpreted as a loosening of financial conditions, and it would be like, oh, you better stop cutting, you better raise But that's just self referential. So I think that's a little problematic. And the inverted yield curve for two years, which everybody has been saying, is an indication that there's about to be a recession. That's not normal.
It's not if we go back to a regularly shaped yield curve like we're in more normal conditions, that's not the end of the world. My view of restrictiveness is we set the Fed funds rate, We set it high and held it there for more than a year, and as inflation came down, the real Fed funds rate just kept going up, passive tightening. As a highest the real Fed funds rate it have been in decades, and so to me, that's where the restrictiveness is.
All right.
Austin Woolsby, thank you so much for.
Coming back online and thanks for coming out Todan, thanks for having us here, thanks for we're the guests this time.
That's right, Joe.
That was so interesting, And I really appreciate Austin sitting down with us for like forty five minutes and really explaining how he's thinking about these things.
Austin is really game to chat and he really likes it, and I appreciate that he sort of he seems to enjoy it quite a bit, just sort of going back and forth and thinking things out, and he's very energetic. You know, in the intro we talked about it is it very This is a very interesting, uncertain moment for Macro,
and of course that's always true. But part of what makes the moment interesting is that the last four years have been really interesting, and to this day we're still trying to piece together the puzzle of why inflation surged as it did and why inflation came down as it did.
Yeah, and going back to that tension between the data dependency and the sort of forward looking stuff, it does feel to me like the FED is trying to get ahead of something right now, which is slightly at odds with this idea of data dependency. But on the other hand, to Austin's point, if it's been a really weird business cycle, then maybe it makes sense to you know, deviate a little bit and try new things and maybe try to be more forward looking getting ahead of labor market weakness.
Totally, you know. I think it's interesting too, the sort of revisiting of the transitory debate, and I think a very compelling point is just objectively, it might have made more sense to describe the whole thing as sort of team supply.
Set this before. In fact, I think I asked someone, possibly from the FED, if they regret kind of calling it transitory and if it should have been called something else.
I think I remember who you asked? Who I asked? Well, it might have been an off the record conversation. Oh oops, okay, well no, no, no, it's okay. But we could say our part, but we can't say who was okay. And it's funny because when I tell you afterwards who it was, it'll make it better.
I feel so bad that you remember this and I don't. But anyway, it's funny that that came up again.
Well, totally. And then so like transitory to some people is a specific amount of time.
Yeah, well it implies that it's going to be like fairly short lived.
So that was wrong, but the idea that it's still the big thing. So there's two things still. The big thing is maybe, as we put it in the conversation, things were weird and then got normal, which is a big part of the story. But also, and I think there will be a lot of debate about this question, is Austin put it, maybe why things got weird and normal but then things didn't keep getting weirder and weirder.
Is this idea of inflation expectations having remained well anchored, which is sort of a vindication of the sort of fed's traditional approach to dealing with this, or you know, it's an idea, law, it's a it is a logical vindication. If you buy that, then that explains why, regardless of the causes of the inflation, the right thing to do is to hike so aggressively.
Yeah, all right, Well, lots to mole over, for sure, and obviously there's going to be more data coming out relatively soon. But shall we leave it there for now?
Let's leave it there.
This has been another episode of the aud Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and.
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