Ed Harrison Explains What the Fed Is Really Trying to Accomplish

think we actually know much more than that. Yeah, I think there are a lot of open questions on what exactly, well a, what impact our hikes actually going to have on the economy, how to interest rate hikes actually work to slow down price levels, And of course there's this big open question about whether or not we should be targeting demand when supply seems to be more of an issue.

But the other thing we don't really know is how does the FED react once the impact or the effects of those hikes start working their way through the economy. What level of inflation is acceptable? Does it have to

go back to two percent? Is the FED willing to I don't know, accept slightly higher levels of inflation in order to preserve I guess functioning financial markets and things like yeah, like like the question of okay, if it would the FED be happy with three and a half inflation three and a half inflation if it means it doesn't push us into a research Yeah, it strikes me

is like an interesting question. It feels like, and I know we've been saying this for two years now, but it feels like we are actually in a different type of economic cycle, and so there are a lot of open questions swirling around exactly what that looks like and how potentially it ends. Yes, so I think there's this view that Okay, maybe uh, the inflation is expected to come down significantly, but it's unlikely to get back down

to target by the end of the year. And so then the question is like, well, how hard does the FED push for those last one or two percent or does it ease off a little bit. But then also again, and it's a question that never really comes up, which is can the Fed articulate how rate hikes help, how they how they tame inflation. We have this idea, you hike rates inflation and theory goes down. But I think the FED is getting a little bit more explicit about this.

It's like, yeah, well, maybe there's gonna be some pain. Maybe unemployment is going to rise, but again, most parts of the economy aren't really rate sensitive. It's like housing is obviously the big one, maybe autos, and so the connection between rate hikes and actually getting inflation of target,

at least to me, I think there's still some ambiguity. Yeah, and I think, I mean, I think most of the people at the FED would readily admit that, and they're still talk talking about it and trying to work their way through it as well. So it's a weird time. And I think that, you know, right, there's all these questions about what is the Fed's goal, how does it accomplish them, what's it, what's it really trying to achieve? What success look like. So we're going to talk about

that today. We're going to be speaking to one of our colleagues at Bloomberg, one of the sharpest people here, one of the great writer and someone that we've been fans of for years before he even came to Bloomberg. So it's real treat and he's a colleague. We're gonna be speaking with Ed Harrison, he's a senior editor on the Markets team, and he will answer, he will tell us all the answers to these questions. He has the answers,

he's gonna give us a edit. Thank you so much for coming on odd lots, well, thank you for having me, and I hope I have some of the our colleague now at Bloomberg coming up on the year. Actually next month it will be one year. I don't want to say, I don't want to like sidetrack because this is not the topic of the conversation of them. Maybe we could get into it, but you know, I've been reading your blog and your newsletter. Credit right now is for year.

It's probably coming out a decade, and I was thinking, I was actually talked to someone about it the other day, and you know, you're there's sort of like indispensable source. During the euro crisis, Italian spreads are widening again, Like where's a little bit of tension in Europe again, isn't there? Yeah, I mean there are all sorts of weird externalities that happened. When I mean, because the way I remember the euro

crisis anyway was Dubai World. Yeah, I remember Dubai. That was the event that kicked off people questioning UH sovereign debt and bizarrely then it moves straight to Europe. So Dubai degrees exactly. It's almost like a butterfly flat effect. Uh,

this is bringing back euro crisis flashbacks. So I'm going to bring us back to firmly because we have a Yeah, yeah, we'll just talk about the e CP for for thirty minutes, and it speaks seven languages, so he's actually anyway, let's go back, We'll talk about the ECB in court Uguese and greet No, let's talk about inflation and the economy in the US and try to focus it a little bit.

So maybe just to begin with the really broad question that Joe was kind of hinting at in the intro, but what exactly our interest rate hikes supposed to do in the current situation. I think that they're basically supposed to from what I understand, the FED saying is bring supply demand into balance. And ultimately, when they say that, what they're saying essentially is is that if the supply

is limited, then we're going to limit the demand. We're going to bring demand down to the limited level that supply is. So they're essentially creating the preconditions for a recession. Now, if they bring the demand down to a level to think of it in sort of like a Goldilocks or well, actually I think it's the one with the too hot too cold forwards. What was um that they're thinking, Okay, we'll bring it down, demand down, but not so far

down that we have a recession. How All has started to dance around that issue, and I think he is mirroring something that I heard Loretta Master, who's the Cleveland FED president say. She mentioned to Mike McKee, one of our colleagues, that maybe we'll get another quarter or two of negative growth to go along with the Q one negative growth that we had. Mike McKee was like, that sounds kind of like a recession, and she was like, no, no, maybe not. And so now the new code word is softish,

soft soft landing soft ish. So what does that mean? I think what it means to me is what the FED is effectively doing is they're telling you that a mild recession is not a problem. And to some extent, I mean, look, I don't think the FED wants a recession. Clearly, like all things being equal, it would clearly prefer growth to recession. But there is something about that sick knowing

it seems like it's an expression of seriousness. When the FED is telling us that it might be willing to tolerate a recession if that's what it takes to bring down demand such to a level such that we're back and balanced and don't have this high inflation anymore. It's sort of indicating a a seriousness about the degree to which it will undertake its task definitely. And so I think then the question for us is are what are their hopes and dreams and what are their prognostications about

what's likely to occur? You know, is the is the FED, unlike what Bill Dudley saying, actually pulling its punches. Is the FED not giving us the full story? Maybe the FED actually believes that soft dish is the base case. Why don't you go out and say that. But they're not saying that. What they're saying is is we're hoping that we can get this down and the economy keeps growing. But more and more of financial markets are pricing themselves as if that is more likely to be the case.

So there's another thing that I think we take for granted at this point in time, and I think it should be discussed a lot more and that is the pace of the hiking cycle. So we just saw fifty basis points at the last decision, and I think the Fed's talking about doing fifty basis points at the next decision. And it seems like they are moving, and they've used the specific word, but they're moving quickly and expeditiously, and

it feels like there's really a sense of urgency. But on the other hand, they will also openly talk about the economy is already slowing. We think that inflation is currently peaking. So I guess my question is, like, why that urgency? What exactly are they worried about here? Is it inflation expectations becoming unmoored, is it some sort of wage price spiral, or is it something really simple like credit city they have to come in and convince people

that they are serious about prices. Yeah, I think it's all of that. Um And you know, there are three words that I've been listening to that I find very interesting, and the way that they talk about it expeditiously as one of the words. Cadence is another word, and then

there's that softish word. I think that when you combine the three of them together, what it says is that they want to front load, meaning that they want to do it at a specific cadence fifty basis points, and then have the optionality after that to be able to do whatever they need. You know, Loretta Mester, who I mentioned before, I find her talking points very beneficial. They're very much on point in terms of, you know, what

the FED is looking to do. And she talked about the optionality question, and so that's what frontloading is supposed to do. It's supposed to say, if we at the time that we start hiking hike more aggressively in the beginning, then we have the option to go zero, we have the option to go twenty five, we have the option

to go fifth. We have more optionality that way. And given the fact that our policy acts with a lag, then that's beneficial because the stuff that we did three or four months ago, we'll start to see that filter into the system, and then we might even be able to completely miss a meeting. We might be able to go that meeting, we might be able to speed it up.

But by front loading, by going at this specific cadence, this fifty basis points cadence, we're giving ourselves more optionality rather than less I want to actually go back to the first question because there's another component of it. When we talk about what is the FED trying to do? It is you by raising rage and as you say that, it's trying to bring supply and demand into balance and

a supply constrained environment, it means bring demand down. But there's another step, which is what is the transmission mechanism between higher rates and bringing demand down? How do you think it works or how does the FED thing that works mechanically? They had marks, they're like fifty and may probably gonna get another. How does the higher rates translate into lower demand? Yeah, I mean, and that is the tricky question. I mean, that's the dollar question because there

are a lot of different thoughts about that. It's so wild that like this is the primary tool that we have in the developed world to manage inflation, which economists considered basically to be the top test, and that actually we don't really know or have like a clear sustinct answer from anyone, but how that works? But any what,

what's what's the thinking generally on how this works? Well, let me throw a curveball into the conversation, because you know, every once in a while get a chance to talk to Warren Moser, the godfather of mm T. Yeah, and as controversial is some of the things he says are. The thing that I find the most interesting in the controversy is his concept that when the Fed hikes rates,

they're actually adding interest income to the private sector. So literally, yesterday I was walking down the street and I got an email. It was from my savings account. The savings account said, your interest rate is going up. It's going up from like almost nail to a little bit more than nil. But that amount that it went up by a new team is uh. You know, that potentially could add to aggregate demand. So when we talk about interest rates going up only working against uh, the economy, it's

not entirely true. When you look at the mechanisms offen what's sort of like the mainstream view of the transmission. Yeah, so I think the mainstream view of the transmission mechanism is mostly about financial conditions tightening. And you know, there are two things in particular that I would think of, one as mortgages and interest rates for businesses, and then the other is discount rates. So you think about stocks and bonds going down because interest rates are going up,

that's financial conditions tightening. But also when you think about mortgage rates going up, when you think about bond yields going up, that's also financial conditions tightening. And the biggest tricky point for the FED is that the United States is an economy, especially in the household sector, that is leveraged to fixed rate mortgages. You know, in the UK, when you raise interest rates immediately, everyone's mortgages goes up

relatively quickly. In the United States, there's been a massive refive boom that has been stopped out now and so there are a lot of people who are at very very low thirty year of mortgage rates and so increase seen interest rates just a little bit, you know, fifty basis points, a hundred basis points may not be enough to have a tightening of conditions in that market. That

is interesting. Does that mean that they have to pull other levers or they have to wait for other components of financial conditions to start tightening, And you know, things like asset prices will feed into that, right right, So I mean they're looking at an aggregate picture, and so they have to if they want the feed through mechanism to work, then they might have to do more or get more from one of those other areas, and obviously the more that you get, the greater the chance for

discontinuity where you get sort of liquidity problems, where you get crises and things of that nature. Yeah, So this is what I was sort of alluding to in the intro about market functioning. But it does feel like we are in this environment. You know, things are unclear at the best of times, and no one seems to know how inflation actually works or how interest rates actually worked to tame inflation. And then add in this unusual situation, uh,

post COVID, where we have supply issues. Uh, we have things just being very different to how they were before. And it feels like that there's a potential here for something to go wrong, or for something to break, or for the FED to overdo it in some way. So how do you think they're thinking about and trying to manage that particular risk? You know, that is a very good question, because it's not clear that they have a

specific strategy on that. Uh. The thing that I found most interesting from the FED recently is that some of the speakers, and I think actually most of the speakers that I've heard including the most hawkish speaker, mentioned the

tightening of financial conditions. And I think that the terminology that Jim Bullard, who is the St. Louis FED President and who is uh one of the more openly hawkish members, the terminology use was quite a bit or you know, a lot, So to me, that's sort of a messaging that it sort of undercuts this whole thing that we're moving expeditious lee and will you know, we want to

soft this potentially mild recession landing. But at the same time, it tells you that they're looking at financial conditions so they won't let things unravel. Uh, is I think what the messaging is that. I mean, that's the best they can do. So this is something Tracy and I were actually just talking about this at lunch, and you know, stock trading is really hard and I could never do

it professionally, and I'm glad that's not my job. But you know, stocks are financial conditions or the you know, when stocks go up, that represents a loosening of financial conditions when they go down. In some sense, the FED basically said by saying that a we wanna defeat inflation by tightening policy and be our policy works through tightening

financial conditions. In some sense, the FED sort of told you that they were going to make stocks go down, right, And you know, I think it's interesting because the number of former FED officials and people in the know who have been telling the FED, and Build Dudley in particular, that by the way, if stocks aren't going down, you're really not tightening plants of conditions. I think it's interesting

because clearly they're listening to what Bill Dudley has to say. Well, and then the other follow on that striking is I think if you look at like corporate behavior, you can see a pretty clear link between a following stock market

and hiring and decisions to hold back on hiring. And so we know that the most intense um selling in the stock market is a lot of these high flying tech stocks, and one after another, you're reading these memos like we're putting on a hiring freeze because investors want to see free cash flow. They don't want us to spend a lot. So to the extent that the goal of for the FED is to have the softish landing and to sap demand. And one way you sap demand

is by weakening the labor market. Maybe increasing unemployment. You can draw a pretty straight line between they've tightened, they've hit stocks, and stocks the companies who stocks have fallen are slowing hiring, right, and so unemployment. I think Bill Dudley at one point during the last business cycle, when he was a FED official, you know, New York Fed president, he mentioned something about to load two low unemployment, low low unemployment, and I think he said too low unemployment.

So you know, mentally, this whole Phillips curve thinking, which is what that's representative of. It says that you need to throw people out of work and uh, and that's going and that's ultimately how demand gets slowed down. So when we think about the transmission mechanism, ultimately it's about people losing their jobs, which is difficult just on a human level to think about. That's that's our transmission mechanism.

So one thing I was reading just before I came in here, there's a big paper published by the Bank

for International Settlements. Actually I think they called it a book, and it is very long, and it's all about inequality in recent years, the fact that inequality has been going up and what it means for central banks and the contention there is that inequality actually makes monetary policy less effective because you know a lot of people are sort of the wealthiest percentile or the wealthiest chunk of the population are insulated from things like mortgage rates going up

to your point earlier. So I guess my question is, is is there a better way to try to bring supply and demand into balance than a pure blunt interest rate hike. Yeah, And it's to me that question automatically makes you think about fiscal and monetary policy and some of the debates that you might have about what you should do and where there is a quasi fiscal monetary policy where the

line gets drawn, etcetera. And I think what we've seen is that the FED believes, and it's probably true that these other substitute policies like quantitative easy are squishy, They're not as easy to deal with, and there are externalities like we saw with the repot crisis in two thousand and nineteen, that they wish to avoid. So quantitative tightening

is seen as an adjunct to the primary tools. I think there between a rock and a hard place in terms of coming up with other mechanisms regulatory certainly, but you know this hard blunt instrument really is what they have, and then you ask yourself what else can be done

from a policy perspective, and that obviously begs the fiscal question. UH. I think what we're seeing, especially with the degree of in the United States at least wrangling discord ward that if you want things to get done because you're behind the curve or because inflation is moving quickly, it's very difficult to think that fiscal is a replacement for monetary policy. And I think that one of the reasons that we've been leaning on monetary policy, and these are unelected officials obviously,

is because they can get it done very quickly. Well, and if if we sort of accept and I don't know that we necessarily should, but if we sort of accept this premise that people need to be thrown out of work in order to bring supply and demand into balance, I guess at some level politicians maybe like getting doubt source that to UH, unelected officials at the at the Federal Reserve, rather than having to make a policy decision

that would have that effect. Yeah, I think that you know, we we would need a complete rework of our police, little cool policy making institutions, and not just in the United States, but I would say generally speaking in western or in industrialized economies. So where do you stand and what is history tell us about this prospect of either the soft or the soft dish landing, because there are

some few of its like this is a fantasy. It never happens every time they go into one of these hiking cycles, especially with inflation as high as it is eight percent, so they have a lot of work to do to bring into the target. And so the argument is, there is no historical precedent for this much of an inflation collapse, without a recession, without a meaningful increase in the unemployment rate. To my mind, the only counter argument is, yeah,

maybe there's no historical precedent for that. There's also no historical precedent really for a pandemic and this sort of extremely strange business cycle or this cycle that we've seen over the last two years. But in your reading of history, is the soft dish landing possible? I would say that's not my base case. I'll give you two things that I'm looking at, which some of the Fed officials point to,

and the seventies. So with regard to ninety four, one of the reasons that we look at that is because that was a soft ish landing. Not just softish, it was soft in the sense that, you know, you had a fourteen percent correction in the NASDAC at that particular juncture, interest rates went up, people were thrown out of work. You know what we've the financial condition adjustment that we've seen thus far is commensurate with that particular period. It

would be nice if that were the analog. There there are multiple problems with that analog. However, one of the problems that you mentioned is that inflation is much higher now. Second problem is because inflation is much higher, we have to be more aggressive, or at least the FED believes that it has to be more aggressive. In there was never any back to back rate hikes of more than issues points. Uh. The last time that there were back to back rate hikes greater than basis points and those

are the last two before recession. And now the Feds talking about back to back to back fifty basis point rate hikes plus the potential for more after that. So that's a differential in terms of the adjustment process, which is much greater than and then the last thing, going back to the inflation question, when you look at the FED funds rate and the real rate of inflation that

people experience. So when you think about real rates rather than you know, Treasury inflation protected securities, tips look at FED funds minus CPR and what you find is is is that in order to break the back of inflation, you had FED funds above cp I materially for a continuous period of time in the early eighties, and and we're nowhere close to that. So that would be like, right, I can't even imagine exactly, And you know, I'm actually I was writing a piece right before this about the

seventies in that regard. You know, if you look at the seventies early seventies, before the oil shock, we had FED funds above cp I as inflation was going up. But then the oil shock hit and the Fed relented. They allowed the Fed funds to fall below the cp I and then inflation kept on going down, but it dipped only to five point nine percent before it started going up again. And then that's when Boker came in and really went to town. Can I say something weird?

You know, people talk about low interest rates and easy money, but when I hear like ten percent Fed funds, right, and I think, like I just put money in a bank account and get ten percent back, Like that seems like the really easy money to me. But I guess obviously you'd be losing a lot on inflation, and that's the whole point of having higher interest rates, and you might not have an income in an environment. Setting that aside,

temperacent sounds great, okay um. On a serious note, so I feel like to the recession point, one of the things that has happened most recently is we've also seen some questions swirling around the health of the U. S. Consumer. And this was supposed to be the thing that was

really underpinning the expansion. Consumers were resilient. Now we've seen consumer sentiment readings for the past few months that have come in quite poorly, and then more recently we've seen some major major retailers start to warn on the profit forecast. So Target and Walmart were the big names most recently.

We're recording this on May nineteen. I should add, what is going on there and does is that an early sign of the economy slowing or an early sign that perhaps we've misinterpreted and inventory build as underlying economic strength

and maybe we're hiking too fast. Yeah. My view on that is that the markets are looking forward, and they're looking forward to concerns about the consumer, and those concerns are in the future, and that the data that we've seen thus far do not show the consumer melting at this point in time. So, first, on consumer sentiment, I think that in the last two recessions, what we saw is there's no correlation between consumer sentiment and actual consumer spending.

That the concept that because sentiment has been low for a while, but spending we just got April data is fantasic, is great. I don't know what economists use consumer sentiment for in order from a predictive tool, but I'm very skeptical about that tool as a you know, foreshadowing of

ekening consumer demand. Then the second thing when you look at Target and Walmart in particular, I was looking at Target just the other day when it came out comparable store sales were up three percent versus expectations for like zero points something percent, zero point three or zero point five. I think it was so they beat on the top line basis. Their problem was that the margins were cut in half. And obviously, since your stock is based upon

your net income, you know, the free cash flow. That's a problem for the stock, but it's not a problem for consumer spending. It was really interesting reading the Target earning this call because it was strange. I mean, so Target came out of their quarterlier part and they then the stock proceeded to plunge, had a worst day since.

But as you say, the top line was okay, and they actually said, like, demand is fine and people keep coming to the storage and Travis, it was basically their costs are going up, and they really misread apparently the ship aft in consumption, which we all knew was coming, and so everyone's been talking for like probably at least a year and a half it's like at some point we're gonna switch back from household durable goods to services, and they really misread the timing and now they have

this huge inventory pile. But it was interesting how they kind of said, like, but actually help the consumers, okay, right, And so in the context of correction and the worst day since n it tells you that, you know, it tells you something about the sentiment of the markets and the jitteriness. It doesn't tell you anything about actual consumer demand.

The thing that they said that worried me the most was the point that you said they used to be very good at reading consumer demand, but the pandemic and supply chain shortages has wrought havoc on their ability to forecast. And I think that this is the hidden problem from an inflationary perspective, because when you have one of the best companies in terms of being able to do that having those problems, then the question becomes a how long

does that last? And be why are they having those problems. I think one of the reasons that they're having the problems is because we're in a new era. That era is not the previous era, which was a just in time inventory era. We're in an era where supply chains are less just in time inventory builds, and then by the time you realize that you've not gotten it right, then suddenly you have to purge those inventors and demand

is moved to somewhere else. That's much more akin to the period that we had pre China integration into the global this system. That's more like, you know, the nineteen seventies and nineteen eighties and nine nineties, and now we're going back to that. So if we go back to the soft landing question. You pointed out like history is not very encouraging on this front, but I guess they you know, to me, I can think of like a few counter reasons, and one is, look, we've we're in

We're not in a business cycle classically. The recession that we saw in spring of is not like a true It was an exogenous shock. It we bounced back very quickly. The recovery was not a normal expansion. It was um so.

And I think if you listen to feed officials, even Powell, there's if the you know, eight plus eight point five percent inflation that we see today, there's some chunk of it that would still be characterized as transitory factors, right, things related supply chain pressure is like the sort of things we used to talk about on this podcast a year ago, you know, cars and chips and all that. And then there's something I was like, some sort of

like underlying pressure. And I guess the sort of like the optimistic arguments is that a big chunk of that eight and a half percent is still things that we would call it transitory event will normalize when all the effects of the pandemic are gone. How do you think about that? Coursure, like, how do you wait, why do you think we have eight and a half percent inflation right now? Like, how do you sort of like wait

the different drivers of it? Yeah, and I think it's a great question, but I don't know any more than anyone else obviously. But that's the that's another you know, sixt or four thousand other question in terms of should we wait? Where where's our terminal rate? In terms of how we think about this, because let's say let's disaggregate the eight point three percent and say that four percent of that is temporary, four point three percent of that

is remaining. We're going to bring demand down to the supply level, and so that four point three percent will fall to two percent over time. That's one way to look at it. What does that mean in terms of the terminal rate? It means three rate hikes up to two percent and then say, uh, basis point hikes until you get to say three point five percent. By the time you get to three point five percent, actually the Fed Funds rate is above or about the same as the c p I. So that's a scenario, and that's

a very benign scenario. A less benign scenario is one in which only say two percent of that is actually supply chain related, and that you bring demand down. You bring it down to say where the CPI is at five and a half percent, and then you said that your terminal rate is three and a half percent, You cause a recession with inflation still at five and it takes down to say three and a half percent, but then it starts to go up again because at that

point the economy is re accelerating. So you've miscalculated. I would say that that's what happened in the seventies, is that, uh, they miscalculated how much in seventy seventy five they needed to deal with the inflation problem. So what's your estimate for how long it could take to get to a point where the Fed would have to reassess what it's doing, Like what is the sort of make or break time frame?

I think you're looking at the beginning of two thousand twenty three, when they will be able to see what the discrepancy sort of in the March time frame. By that time you can get to they're the FED funds forward terminal rate of three fifty, So Fed funds forwards say the FED will get to three fifty by March of two three. If you're at that level and the c p I is five, then you have a question as to do you want to stop there, do you

want to continue to go higher? What are financial conditions and what's the state of the economy at that particular juncture, Because those are the three variables that you're playing with, and you know that leaves the FED less room obviously to to operate if two of those things are problematic as opposed to one. So the other thing that I think is worth thinking about as we discuss the timing of all of this and the pace or of the cadence um as the FED has put it, is political considerations.

And of course the Federal Reserve is supposed to be an independent body. They're not supposed to care about politics, but in practice I suspect that it may play some sort of role, or it would at least be at the back of their minds that later this year we're going to have an election. Yeah, and you know you asked at the top of the show about considerations that you didn't mention the politics and the time, but I didn't. I suspect that that could play a role. I mean,

is it. Here's a question, is it preferable to hike fifty and then ease into other rate hikes well before a midterm a contentious, contentious mid term election, or would you rather be going, you know, fifty basis points at a time in a November and December f o m C. And I think that, you know, it's preferable to do

the first as opposed to the ladder. I look at the speech that Jerome Powell gave at the beginning of the last fom C meeting as highly unusual and a representation of the level of political pressure that he must be under. Because when you speak to the American people, I want to speak directly to the American people. He said to me. That's a sign that he feels political pressure to speak to the American people. And so, as

a political is AFT would like to be. The reality is is that they are a creature of Washington, and they're in Washington, and they work at the behest of Congress. You know. My my senses is that by the time September comes around, Yeah, and that's when people are gonna be on the campaign course, the economy will have decelerated, meaning that right now we're not seeing full on deceleration. The consumers still holding up, but by September we will

see some deceleration. And then the calculus from a political perspective is do we want you to go on inflation and do we want you to go on growth? Yeah, we're sort of and then we're back to UH to having these discussions again about unemployment versus UH price stability. Because you know, when the jobless claims that came out today,

I'm up, Yes, I thought that. I mean, that number is historically no low number, but so it seems like the bull case just on like on labor is So since the middle of March weekly initial job was claimed, it's clearly been ticking up. There's clearly um, there's clearly an uptrend, but the absolute levels are low. So I feel like there is this hope and maybe it sort of relates to the soft dish landing again. You know, I remember, like the early two thousands of people used

to talk about the jobless recovery. Right, So we had the recession after the dot com crash and after nine eleven, and then the economy started growing again, but it was

not producing a ton of jobs. And I feel like the hope is that we have sort of like the the unemployment list recession whatever, the opposite of a jobless recovery is that basically there is some way to slow down the economy, but that we're starting in such a good position and that there's so much labor demand and that there's so much like room to slow that we can actually have a slow down without a meaningful rise

in the unemployment rate. Because like that feels like like that's the bull scenario, and you hear people talking about that. I don't know if it's possible that it does sound like people are talking about that, and I think that the missing pieces um the participation rate that they're saying essentially that the pandemic is still having a residual effect

on the participation rate. And uh, even if we get an uptick in jobless claims and things of that nature, there's still lots of people who are on the sidelines. And as long as we get the softest landing, as soon as we start to re accelerate, those people will come back into the workforce and all will be well. I'm not gonna comment on that, but I will say that the political situation is going to be quite different.

If that doesn't come to pass. If between now you know, May and say September, when the FED is going to have to decide are they going to go for the fourth fifty, you have a considerable uptick in either unemployment or slow down in the economy, then the political calculus chan is tremendously before we go. There's one other question that I want to ask about, which is this year of course, and you know everyone talks about it is the two sort of unexpected again fresh exogenous shocks. There's

the core. There's of course Russia's invasion of Ukraine, which has various destabilizing effects. It has effects on energy and so forth. And then the extremely hard lockdowns in China, which are creating new supply chain stress. How does the FED incorporate you know, they're gonna be tempted the effects of them. They're not you know, they don't reflect underlying conditions, but they're real. And uh, they've pushed gasoline prices up and again we heard Cisco earnings, they said that they're

having real supply chain issues out of China. Again, how do these sort of outside shocks that are outside of like the cycle effect the Fed's thinking at this point, I would think that it gives them more impetus to front load in order to have greater optionality on the back side, you know, the quicker they can get these

hikes in there. The quicker they can come to say that we're at the neutral rate, We've gotten to a level that we feel is justifiable over the long term, and then whatever shock hits the economy, they can then deal with that shock at that time without having to worry about, you know, being at a level that's lower than the neutral rate. I mean, the worst thing for them would be that the shock happens when interest rates

are at one percent. Then their hands are tied. Then you have to start thinking about reversing, quantitative tightening, all these kinds of things. That's gonna be a very difficult situation. Uh, Ed Harrison, so great to have you on finally, and uh there's a great chat, and I genuinely feel I have a better understanding of like how the FED and how we should be thinking about the FEDS challenge for the rest of the year after that. So thanks for

coming on. And you're writing a new newsletter at Bloomberg. Oh yeah, that's right, good Tracy. You are very good. I have to everything risk and if I could give it a plus, what I would say is is that it's about the concept that we are now post a great financial crisis, living in a world in which there are risks that are embedded in the system in ways

that we can't understand. And I think that we're seeing that this whole discussion was a manifestation of a risk that I, as a you know, hardcore deflationists, would have told you what didn't exist two years ago, and yet here it is. Yeah, no, absolutely, And I think, like, you know, we're all sort of like figuring out is this is this a true? What I'll say is this the twenty tens are starting to feel like a long time ago. You know, It's one point it was like oh,

I kind of it's like, oh, we just normalize. It's also back to like that, but that is starting to feel like a lot that that economy that we had in feels like a long time ago. But it's also just kind of crazy that we spent like a decade worried about why inflation was under target and and doing a lot of stuff to try to get it up, and then suddenly it's like, oh, inflations up, Oops, a little bit too much? Yeah. Who whatever thought that we

wanted to go back to the days of secular stechniques. Yeah, exactly, this makes secular stagnation look good nineteen. And the big issues where are we going to teach coal miners to code? And what are we going to do about truck drivers when AI robots put you know, the big those were like the big products back then. This is like, anyway, thank you so much for coming out. I have to say, Tracy hearing Ed talk about this sort of history is the poor prospects of a soft landing, at least based

on history, we're not encouraging. Like I sort of got a little bit more pessimistic of that part. Yeah, I mean, I think the overarching thing that comes through on that conversation is just how difficult it is to balance everything that's going on. And as we discussed, you know, it's interest rate hikes aren't necessarily the best tool for an environment where supply is more of the issue than demand.

And then the other thing that I was thinking, and I'm going to repeat it again, but it seems like so many of our problems at the moment stem from the unusual nous of the situation and the fact that we don't really have I know, we reach for historical analogies and parallels like the seventies, but actually there isn't

a really good example of this happening. Maybe like post nineteen eighteen Spanish flu kind of thing, but the and and honestly, that actually to me is like the optimistic thing, which is like, Okay, in the past, we had to get FED funds up above inflation in order to bring it down, which means that you know, we're no work close to enough the optimistic cases, yes, but this is not like any of those scenarios. There is still a

large residual transitory effect. I'm still sort of I'm pretty sympathetic to that view and that for natural reasons things will roll over. But we have no idea. And you know what else, we have no idea. You know, I'm thinking back to some of the episodes we did in summer of even before inflation started picking out right in the middle of It's like we would like ask people,

ask central banks, central bankers, like what causes inflation? And we get like no idea, Like no one had any good answers back then, Like we don't really know what caused inflation. For being honest, and now we have inflation, but it's still not obvious to me that even now

with that, that we actually know why. I would like to see this is slightly off topic, but I would like to see anthropological look at inflation, or like a social sociology social theology look at inflation, Like look at it from the perspective of the people who are making the decisions to raise prices and why they're doing. Yeah, let's get let's get a manager from like Procter and gamble on and talk to how they and then the people just forget, forget the central bankers. They'll just blame

the person they're buying the commodities from. Some then we got to talk to the commodity person and so on. But okay, well, let's do a series on that, all right. Yeah, we just got an idea for you know, an in number of episodes. Okay, shall we leave it there. Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't All?

You can follow me on Twitter at The Stalwart. Follow our guest Ed Harrison, He's at Edward and h. Follow our producer Carmen Rodriguez at Carmen Rman. Follow the Bloomberg ahead of podcast Francesca leaving at Francisco Today, and check out all of our podcasts under the handle at podcasts. Thanks for listening to