Jan Hatzius on the Narrow Path to Avoid a Hard Landing

Can the FED hit the brakes on rising prices without pushing the US into a recession pushing up the unemployment rate? And I have to say history is not really on their side. We do not have a lot of successful examples of the FED being able to do exactly that. Although at the moment, if you look at market pricing we're recording this on August second, you know, if you

look at market inflation expectations, they do see inflation going down. Um, there is obviously some concern about recession risk, but I don't think we're yet at the point where people are pricing that as inevitable. So despite the lack of successful historic examples of the fed actually engineering a soft landing. It feels like a lot of the market thinks they're going to manage to do it this time. Well, you know you mentioned history, and yes, I think history is

not too kind. And I think many people would say, look, when inflation is this high historically, or when inflation is significantly elevated, the only way to bring it down is with a tough recession. On the flip side, maybe there's no reason we should be looking at history. Is the thing I keep coming back to everything that this time is different. Are you going to say it? Say it, Joe, say this time is different. I'll say this time could be different. And the reason I say that is not

because I'm naive or Pollyanna. But this has been unprecedented. Two years we had a pandemic. It was a matter of policy to bring the economy more or less to a halt with massive fiscal stimulus. We still have a pandemic. We have the shift from services to goods consumption, nothing like that we've ever really seen. At some point, we're going to see this renormalization, which is already happening, and so like, it seems very plausible to me that history as a guide is just not a useful roadmap for

the situation we're in right now. And maybe that's good news, but I wouldn't bet on that. I just think it's possible that history is not so useful here. I think that's a fair point. But you could also say that economic exceptionalism, or you know, thinking that our current economic cycle is somehow unique or exceptional in a way, helped to get us in the place where we are in right now, where inflation has come in has been and

stayed much hotter than expected. Right The failure of the FEDS trans a tory messaging starting in summer one really is kind of probably a lot of people who maybe thought like me, which is like, yeah, you know, this is like there are a bunch of disruptions, their one offs, and then the one offs are going to fade, and all the weird price shocks are going to fade too. But anyway, the stakes have gotten high because since then inflation has gotten only higher and higher, many false hopes

that it was gonna turn down. And now the question is how much more will the FED do and how much pain will we see because the Fed will you know, the FED is determined. It seems to get that in flash right down. How much pain do we have to bear for that to happen? Yeah, it's kind of funny. I was thinking about this the other day. But it's kind of funny that in order to make things affordable in general, or things more affordable in general, some people

have to like lose their income altogether. But anyway, it's perverse. Anyway, let's dive in with someone who knows way more about this than either of us. We've had them on the podcast several times over the years. I'm thrilled to have in studio. I'm in studio. Our guest is in studio. Tracy is on the line, sadly missing this in person. Thrilled to have him in studio. Jana is the chief economist at Goldman Sex. So, Jan, thank you so much for coming back on the show. It's so great to

be with you. Joe and Tracy. Really wonderful to have you, know the time to explore some of these issues. They obviously extremely central to everything that we're thinking about. We got plenty of time, so let's try to learn something. So let's just let me just ask you the the multi trillion dollar question, which is, can we see inflation get back to, if not two percent, something in that

vicinity without incurring a painful recession in the US. I think it's possible, and I do think that there is there is a path towards you know, something like two percent that doesn't involve a recession, but it's a it's a very narrow path, and obviously we've seen a lot of unanticipated shocks over the last two and a half year. You have to be very humble, I think in your ability to predict what's going to happen. You know, I'd say the first part of the inflation slow down, you know,

several percentage points. Maybe you know, right now we're a little over nine percent if you take the headline CP, I were a little bit low five percent if you take the core PC, you know, getting back down to the sort of four percent range or so, I think it's going to be relatively easy, because I do think that will be lapping a you know, significant amount of you know, weakness or significant significant increases in commodity prices.

I also think that if you look at the goods market, you know, supplier deliveries, indices and other measures of of supply chain issues, those have improved pretty rapidly. I mean, you look at the big in the service and there's there's really been an impressive amount of improvement just in the last few months. So I think that part is is not going to be too difficult. The harder part, I think, is to then get back down from four

percent to something in the vicinity of two. And I think for that we do need a labor market adjustment. The labor market continues to be very overheated. We still have you know, close to eleven million open positions and you know, less than six million unemployed workers. That's still a very large gap, basically unprecedented both in absolute terms and relative to the size of the population in post war history. And you know, I think that is the imbalance that the FED is going to have to address.

And the way they want to address it, of course, is by bringing down open positions without raising unemployment too much. If you if you see a you know, a large wave and layoffs, I mean, that's likely to mean a recession. In fact, you could say that is a recession, and

and and that's the goal. You know, I would say, on the slightly encouraging side, so far in you know, over the last three months, we've actually seen a fairly sizeable adjustment in open positions that are down more than a million, and you know, so far without an increase

in the in the unemployment rate. So I think the path that they're trying to, you know, stay on here is growth below trend with decline and labor demand and therefore an unwinding of that imbalance that ultimately brings down wage growth and that allows us to get back to something in the vicinity of two percent. You know, it's a tall order for sure, but I am somewhat encouraged

by what I've seen over the last several months. You know, you mentioned getting inflation back down to four and I wonder is there a chance that maybe the FED would be satisfied with four percent, and maybe in a new normal of strained commodities supply um and energy crises in Europe and things like that, maybe the two percent target.

I don't want to say it gets abandoned, but maybe the FED is willing to stomach slightly higher inflation at four percent without you know, having to tip the entire economy over into recession and really saying unemployment go up. I think four percent is more than than slightly higher inflation. I don't think four would be you know, remotely acceptable from from the Fed's perspective. You know, a to handle,

I think maybe that that may be okay. Two and a half percent, you know, in a still fairly strong labor market environment, I think would be would be fine from their perspective, because if you have two and a half in a strong labor market, then you know, from a an average inflation target perspective, you'd be, you know, expecting the economy to go into a session at some point that probably would bring inflation down to less than two percent. So, you know, I think that could be

consistent with a two percent average inflation target. Maybe you could push that a little bit more to two and three quarters, you know, I think a three handle and certainly a four handle would be too high from their perspective. And I think if you listen to what FED officials have been saying over the last several months, I mean, it's pretty striking that they really haven't deviated from saying, you know, we want to get back to two percent the and you know, in part I think that's because

inflation is very unpopular. I mean, one of the things we've discovered or maybe rediscovered, is that, you know, people really don't like inflation. So I think there's not much mileage in saying, oh yeah, maybe three percent or even something more is okay, because I don't think that's how

people think about it. So to think about what might cause the inflation rate to fall or how far it can fall, it might be helpful to think decompose the drivers of the upward move which is consistently caught everyone by surprise. The Feds certainly been caught by surprise economists, the market. In fact, we keep seeing these new highs.

How do you think about the different factors between sort of disruptions related to the pandemic, monetary and fiscal expansion in response to the pandemic, and then other idiosyncratic factors, most notably probably Russia's invasion of Ukraine. How do you think about waiting some of these factors for how we got here today? Well, it depends on which inflation indicator

you're looking at. If you take the headline numbers, then you know, of course the sharp increase in commodity prices is you know, a very important part of that, you know, the most important part in terms of the over shoot, and some of that is you know, driven by I think more structural issues under investment in the commodity industry, which my good colleague Jeff Curry has talked about. I

always talked about it on on your program. But then, of course we've also had some additional shocks that that also have had an impact, most notably the Russia Ukraine War.

You know, I think supply disruptions that are related to the pandemic and related to the fact that you know, in the spring of two thousand and twenty one, we thought the pandemic was receding into the background, but then you had delta, and then you had a macron, and then you had a macron again, and then you have you know, a sort of succession of B A waves. So you know, I think that that is has played

a role. I do think that that is abating at least as far as the supply disruptions are concerned, at least for now. So and you know, there are a number of things that are probably somewhat more temporary in nature. Uh. And you know, I would put into the agory of you know, unfortunate and unforeseen unforeseen sharks. But then I think the other big issue really is the labor market imbalance. And I would say that a lot of economists, certainly,

I have changed my thinking about labor market balance. If you had asked me about, you know, full employment and how I would define full employment a year and a half ago, I would have given you an answer that was based in part on the unemployment rate and in part on the employment of population ratio. But open positions would have been, you know, would have had only a

supporting role. And you know, if you if you look at unemployment or employment to population a year and a half ago, we were still really far away from the sort of pre pandemic level. I mean, it was very hard to sort of envisage that we'd be close to full employment even a year down the road. And you know, the truth is employment of population is still well be

oh where it was pre pandemic. But the job openings, I think are playing a much more central role because they basically give you the balance between total labor demand and total labor supply, a total number of jobs and total number of workers. And uh. And so I've I've definitely changed my thinking about labor market balance. And we are you know, we we are way out of balance,

and the labor market is very overheated. I want to dig into the labor market a little bit more, but just before we do, I feel like when it comes to inflation, we all agree that inflation has been higher than you know, a lot of people initially expected, but it feels like there's less agreement on exactly why. So there's still a lot of folk us on one off factors like Russia's invasion of Ukraine. But could you maybe just give us a sense of, you know, why has

it turned out this way? Why does inflation continue to be higher than expected? And you know, looking back, I suppose what in retrospect did people miss because we still have even people like Chairman Pal saying things like what was that quote? Um, we now understand how little we understand about inflation, and yet we're all focused on it at the moment. But like everyone seems to admit that

we're not entirely sure what's driving prices. I think again, it's a combination of some you know, unforeseen shocks and you know, an underestimation of how tight the labor market really was as of a year, a year or a year and a half ago. And I mean we certainly shared in that I didn't think that we were anywhere close to full employment, and now I think we're significantly beyond full employment, at least in terms of the balance between you know, a total number of jobs and total

number of workers. And so I think it's a it's a combination of things that were, you know, maybe harder to forecast, just because shocks, you know, by definition, shocks are shocks and things that you know, with a better model, we would have, you know, we would have anticipated. And you know, that's why we've kind of changed a model

of how to think about this. So you know, I'm looking at these two charts now in the terminal, and you have employment to population ratio, which is not only is it not back to pre crisis levels, it's actually turned down in the last few months, which maybe is a little bit of a source of concern. And then the job openings data, which has started to turn down, but that one is sort of off the charts, and that one shot with hair one quick question on job

job openings, isn't that high quality data? Like it's not hard to put up a job listing these days? And I forget who it was we did to speak to someone months ago that questioned this sort of there was some paper that questioned how long and this sort of time series. This is comparable given the you know, the proliferation of job boards and the ease with which one can post. But how do you think about like the

quality of that data. I think there's also a theory out there that some of this was driven by p p P and that if you say that you're still struggling to hire workers, you still get some support from the government. So there's also like a question over whether those pandemic policies actually have an impact too and encourage

people to keep job openings out there. No economic indicator is perfect, and that's certainly true for the job opening series, I mean, the official you know jolts series, which is published by the Labor to HAARTMENTED. I think it's higher quality than than a lot of the other job boards, which I would would use as maybe kind of confirmation of what I see in the in the Labor Department numbers.

The Labor Department numbers are verified openings. We have not really found a lot of evidence that the meaning of a job opening is you know, dramatically different relative to ten or twenty years ago, and if you look at the official series, you know, as of a year and a half ago. I mean, it wasn't out of line with history. It's only you know, and technologically obviously a year and a half ago wasn't that different from from

where we are now. It's it only really moved out of line with history in the summer of two thousand and twenty one. So to me, that is somewhat encouraging in terms of the quality of the of the data. But you know, I do think you want to verify tightness of the labor market via other indicators. Another indicator you can look at that I think it's pretty useful as the quit rate. And you know, broadly speaking, the quit rate confirms that were in a very tight labor market,

the one that is loosening at the margin. So we were we had literally an all time high in the quit rate, you know, several months ago, and we've come off of that slightly. I haven't seen as much of a downturn as in the job openings numbers, but I would say, broadly speaking, confirms what you see in the job openings data. It's just a you know, very very tight labor market. So going back to the employment population

ratio or some of these other measures. They have topped out, they never even got back to pre crisis levels, and they may be flatlining or even turning down. What do you attribute that too. What's like the big change in the composition or the size of the labor market that seems to be at least one factor contributing to this

big supplied to demand mismatching labor. So I'd say, looking at the household survey of employment in general, you know, it's been significantly weaker than the establishment survey over the last several months. So I would probably take the downturn that we've seen in the employment of population ratio, which of course is based on household employment. I would take that with a little bit of a grain of salt. I don't know that we really have, you know, a

lot of evidence that that it's turned down. I take more of an average between the establishment survey and the household survey, which would say definitely slower employment growth, but

probably not an outright decline. With that out of the way, I do think that the employment of population ratio probably will be lower in you know, at whatever the peak of this cycle is, then it was in the previous cycle, because I think aging of the population of course has continued, so that is a kind of structural driver of declines and employment of population. And then in addition, we've seen you know, some people withdraw from from the workforce. We've

seen you know, significant amounts of early retirement. And I don't think that that's really going to reverse either. I mean, over you know, over the very long term, the impact should should decline, but it's not going to reverse quickly, I suspect. Then then I think the last point, and

this is related to it. I don't think it's you know, visible of course in the employment of population ratio, is that we had very few immigrants for a year or two and unless we see kind of catch up immigration immigration flows that are actually larger than the pre pandemic rate to make up for that, you know, essentially whole we're also going to have a permanently smaller workforce than

we would have otherwise otherwise had. Again that's not for employment to population, but it's it's important for the overall number of workers. So how much can unemployment actually rise without tipping the US into a full blown recession. And then you know, secondly, when when you look at something like jolts falling, and we just had the jolt numbers come out today. We're recording this on August. Second, you know, we saw a higher than expected drop in job openings. Like,

how concerning is something like that to you? Given your new framework? So a decline and job openings is not concerning. In fact, in my view, it's a it's a good thing because we need a you know, rebalancing of the labor market, and it's much much better to have that rebalancing of the labor market occur via declines and job openings rather than increases in unemployment. And if firms get rid of job openings, that does not have you know,

negative second round effects. You're not cutting anybody's income by you know, removing job openings. You know, increases in the ployment and layoffs are a very different story. Then you you do cut people's income, you you know, impose hardship at the individual level, and you're also taking income out of the out of the economy, so you're you're you're

weakening the cycle. History would say that you can only see you know, a small increase in the unemployment rate without going into recession at least you know, in US history, we've never seen an increase in the three month average of the unemployment rate of more than thirty five basis points without a recession. If you look outside the US,

you know, that looks a little bit different. So I certainly wouldn't view it as a as a law of nature, but I think it does drive home that sizeable increases in the unemployment rate have historically been associated with with recessions, and probably in part, you know, through kind of causal forces that you've seen, you know, declines and despol stable income on the back of layoffs, which have then fed into weakness in in spending. You know, historically, I think

that's often been been a factor. You know, now I think we might be in a somewhat different situation because weakness and disposable income, at least in in two thousand and twenty two, you know, it's driven by inflation and fiscal tightening as opposed to labor market forces. So you know, it may not be quite the same situation as over the entire stretch of postible history, but but it's definitely something to watch. If the labor market is so tight,

why have we seen negative real wage growth? I think because you know, wage decisions are really more around nominal wages than than around real wages, and there's you know, a sufficient amount of inertia in the in the process that if you try to explain the ups and owns of wages with labor market tightness variables generally do a

much better job if you focus on nominal wages. Then if you focus on on real wages, it's also a little bit hard to know, you know, what real wage expectations that you know might be set via the labor market process too, you know, bargaining at the individual level or even the collective level, what that really is. You know, backward looking inflation is nine percent, but if you look at expected inflation depending on the horizon, you know, it's

it's much much lower. Um. So, you know, I do think the what we've seen in wages has been quite consistent with an overheated labor market. I mean, i'd focus on the fact that you know, most wage indicators are showing something like five and a half percent year and year growth, and that is, you know, that's very high. That's way higher than what's consistent with a you know, two percent inflation. Right. Let me ask you you know, Tracy mentioned like, Okay, at what point does an increase

in the unemployment rate constitute a recession? And basically, if it starts ticking up, there's a good chance we're going to get a recession. At what point does the Fed seriously have a problem on its hands about the correct course of policy? If unemployment we're to start ticking up, but inflation falls much slower than Hope did, so you know, you start to say, like, this is a real recession, but we still have we still have a long way

to go to two percent? Walk is through how you're thinking about that risk, like the real stag inflation risk, I guess is what's out there? Yeah, I think it depends on what you see another indicators. I mean, you wouldn't just want to focus on the realized inflation numbers because that is, you know, going to be pretty backward looking. I think you want to look at overall measures of supply versus demand and the labor market. You want to

look at the at the wage numbers. But yeah, I mean, it certainly could be that you're you'd be in a difficult situation because you know, while you do want to focus on forecasts, forecasting is always difficult, and it's probably more difficult in the current environment then it has been in previous cycles. So I think there is a real risk that if you if you did see you know, a sharper downturn, that it would be difficult to you know, know exactly at what point you should you know, reverse

course on monetary policy. You know. With that said, if I focus on the last efform C meeting, I think there was some reassurance from Chair Powell as far as markets were concerned, that you know, he said, we we are going to look at at both sides of this. I mean, I don't think it was a you know, particularly doublsh meeting, you know, to the degree that that that perhaps you might gauge from where market pricing has gone.

But it was reassuring in the sense that, you know, he certainly didn't say, well only for a stone inflation. Joe asked you that question about if the job market is so tight, why haven't wages gone up more? And this is I guess one of the maybe one of the few good things that we have going at the moment, which is that inflation expectations so far seemed to be

reasonably well anchored. Unfortunately, a lot of people don't think they're going to get massive pay increases, and a lot of people, at least according to the survey measures, still think of inflation as transitory. How much does that help the FED? And is there a risk that at some point those expectations become unmoored or more unmoored. I think it's you know, hugely helpful, certainly if you you know,

compared with the with the alternative. I mean, if if inflation expectations were you know, anywhere close to current actual inflation headline and and even core, I think would be much harder to have any realistic scenario of bringing inflation

down without a very significant amount of economic pain. I mean, if I look at the kind of economic history of the late nineteen seventies early nineteen eighties, inflation expectations, based on the indicators we have had become you know, very significantly unmoored on the back of repeated increases and an ongoing trend increases in inflation over the previous fifteen years, and it turned out to be you know, extremely painful to bring inflation back down to the kind of you know,

two or three percent range in the in the subsequent decade. So I, you know, I do think that we with the with the you know, most of the long term inflation indicators, inflation expectations indicators still consistent with something like two percent, we're in a much much better position. And I'd say it's one of the real signific again upside surprises that we've seen over the last you know, a

year or a year and a half. I mean, if you had given me all of the inflation related indicators other than the expectations measures a year ago and had asked me to predict what the expectations measures are, I would have given me a much higher number. And that also, I think is important for the second part of your question, because you know, while of course we need to watch

whether this anchored you know, environment changes. You know, I guess I'd be surprised if we had a you know, a major change having watched what these uh, you know, what what these indicators have shown. You know, obviously you don't want to over you know, overstress your your your your luck in this. You do need to watch it, but I would expect inflation expectations to stay anchored. So here's a question that I can post you because your

Goldman's chief economist the globe. You know, inflation isn't just high in the US, for it, art at the map, and there's a good chance you're going to hit a country where inflation is it like fourty year highs. And there are different factors. You know, Germany obviously headline inflation very exposed to electricity prices and the increase in the cost of gas. But it's not just Germany, and it's not just headline and core in Europe. In the Euro

Area continues to march higher. We haven't seen that turned down either. And you know, you can't in Europe blame the extra checks or anything like that. Just looking at inflation on a global basis inform can it be used to inform anything about root causes and the drivers of it? I think so. I think it does show that common shocks, as opposed to country specific policy choices, you know, played a very important role in this. But I also think

that you see some evidence of country specific developments. So if you take the Euro Area versus the US, you know, certainly both headline and core inflation, you know, have converged to some degree. But on the labor market side, you know, I think we still have a pretty significant difference. Yes, wage growth is accelerating in in Europe, but you know, it's moving to three percent, whereas in the US it's moved to to five and a half percent, and you know,

three percent is still that's still relatively well behaved. I think it's much harder to argue that the European labor market in aggregate is is overheated. So I think there still are some differences, you know. With that said, I think those differences don't look quite as stark as they

did maybe six months ago or twelve months ago. And you know, not only because of additional shocks, also because I think we've you know, probably learned a little more about you know, what's happened to core inflation, not just not just you know, oiland and natural gasper an electracitory prices.

So Joe asked the global question on inflation, and I'm going to go right back to asking a very granular US inflation question, But can you talk to us about rental inflation in the States, there has been some concern about rents going up um and people are sort of wondering when and where that might stop. And also people asking questions about how higher rents interact with the housing market as well. So you know, at what point does it maybe make more sense to buy a house versus

renting if everything is going up. So I'm just wondering how how you're sort of thinking about that. Rental inflation certainly has been you know, an ongoing upside surprise. I would say in the in the last few months, actually the most important upside surprise, I mean, more important I think than the then the commodity numbers, because we sort

of know where those are coming from. You know, both Rand and Honest equivalent brand have, you know, continue to accelerate, and the last couple of numbers, you know, in the in the sort of eight percent annualized range. You know, I think there is good reason to believe that we'll see lower rent inflation as we go kind of into two thousand and and twenty three. If we look at some of the more bottom up indicators on you know, rents, on on new leases, those have decelerated. The housing market

more broadly, you know, clearly is is decelerating. The labor market is decelerating, I mean statistically that is an important driver of of rent inflation. So I think by two thousand and twenty three, I would be reasonably confident that will will see a deceleration, but over the next few months. I think it's a major upside risk to the inflation numbers.

And we actually just you know, up our core PC forecast, you know, somewhat further because rent has continued to come in where they have CORPC going to know, we have it at four and a half percent by the end of the year and we're in over at four right now, so very so not much progress, not much progress through the end of two thousand and uh and twenty two, and that you know, there are a number of factors going into that, but an important factor is the rent situation.

Can you describe just sort of what you your your current shortened medium term outlook for both I guess for both inflation but also for the fence policy. How many more hikes through this year and then what beyond after this year? So for inflation, you know, we have core inflation come down you know, very modestly through the end of the year and then more significantly in two thousand and twenty three. That's also partly related to two rent. So we have you know, COREPC two and a half

by the end of two thousand and twenty three. That's a pretty significant deceleration. Obviously still you know, somewhat above the two percent, but probably more consistent with where they would be comfortable at least in a continued expansion. And then on on on Fed policy. You know, we're expecting a fifty basis point move at the September meeting, so

ratcheting down the pace. And then we have two more twenty five basis point moves in November and December, which takes us to three and a quarter to three and a half percent for the funds rate, consistent with the latest dot plot and consistent with the fed's latest thinking based on what Chair Paul said in the latest press conference. And then in two thousand and twenty twenty three, we actually have nothing continued three to three and a quarter

to three and a half percent funds rate. As the economy cools off, inflation comes down, and the growth is below the long term trend. You know, I think in that environment, they probably would keep the funds rate somewhat above where they think it's going to settle in the longer term, because you know, after all, inflation is still too high. So I think the hurdle for cuts in

two thousand and twenty three is is high. If I look at market pricing, the market is obviously pricing some pretty significant cuts, but I think that probably would require an even weaker growth environment than we have no forecast.

So one of the unusual things about the current economic situation, and there are a bunch of unusual things about it, but one of the bigger ones, I would say, is the difference between soft versus hard data, so the survey based measures versus the actual numbers that are coming in. So even though you look at things like consumer sentiment that you know that survey is now at its lowest and I can't remember exactly, but like very very low, but if you look at the actual consumer spending figure

that's been relatively resilient, how do you explain that discrepancy? Well, I think even among the soft data there are some important discrepancies. Because the University of Michigan consumer sentiment number is close to an all time law, goes back to the late nineteen sixties. I mean, it just came off

an all time law, but it's still very close. But then the Conference Board survey, which is the other longstanding you know, consumer confidence survey is actually not particularly low, and that's a that's a much bigger gap than normal, and it reflects the fact that the Conference Board indicator puts more weight on the labor market situation, and you know, people recognize that the labor market is still very strong, but confidence has taken a large hit, in particular from

the inflation increase and the increase in gas prices. You see a somewhat similar gap up in the business surveys. A number of the business surveys have fallen kind of below the you know, zero or or or fifty line, depending on which of the serveys you you take, so basically into contractionary territory. But harder indicators of activity are are still somewhat somewhat firmer. You know, industrial production generally has looked looked somewhat better. Um So, yeah, it's a

there are a lot of different indicators out there. I think you generally want to put some weight on on a range of indicators. I generally take averages of different indicators. And consumer confidence I think it's probably a bit of an outlier to the low side or consumer sentiment. Rather most of the indicators, in my view are still consistent with positive growth, though very slow growth. I want to ask you a question, and it's sort of long term, and maybe it even is about the entirety of this

coming decade. But when I think of the last decade, you know, the dominant economic phenomenon to some extent was slack and there was always ample workers ready to be hired. We had loose, uh, commodity markets. Oil was not only cheap, it was plentiful. It was the shale era. It was not you know, shortages and elsewhere. And of course that's tight commodity markets. And we've had multiple conversations with your colleague Jeff Curry. Is expected to be a persistent feature

of the economy, at least for the foreseeable future. It doesn't seem like there's gonna be some major change in the supplied dynamic of copper or lithium or oil or anything like that. Does that change what this next decade is going to be like and does it impose to some extent a lower speed limit on what what growth can be in the years ahead. Yeah, I think it potentially does. I do think it's important for from a

from a speed limit perspective, you know, over time. Of course, there will be you know, substitution and there will be innovation, and you know, whatever constraint exists in the in the short term can be relieved via investment and you know, ingenuity.

But but but I do think it's a uh, you know, a significant significant issue at least relative to the sort of post two thousand and fourteen period when you had a you know, much much kind of looser supply environment, especially in the in the commodity industry, which then kind of begat the the the underinvestment for which we're now

we're now paying the price, you know. I think another another issue, though, was on the macroeconomic side, that in the aftermath of the two thousand and eight crisis, monetary and fiscal policy we're you know, very reluctant to provide stimulus even in an environment where we are still you know, very far away from from from full employment. And it took a long time for that to end. You know. I do think that it was you know, the low

inflation environment. In part it was planetful supply of commodities, but in part it probably also was overly tight policy. Do you find yourself I'm just curious, you know, professional question but obviously, like we've been doing the podcast over for years and years now, and you know, the last year our conversation to become much more micro, and we want to learn about the ports, and we want to

learn about copper production. And you know, now when thinking about, well, where electricity prices going to go in the US, it's like you have to know, like how soon are they going to get that export terminal in Louisiana back open? They would presumably put upward pressure on natural gas prices. Do you find yourself and in your conversation feeling the impulse to get more micro to understand some of these

things as how they're going to inform the broader economy. Yeah, and more of a crisis situation, I think you always have to learn more, you know about details of the

economy or the financial system or healthcare. Then then you really perhaps anticipated And that was true of course in the run up to two thousand and eight, and you know the immediate aftermath in terms of the financial system, in the in the mortgage market, and you know, securitization, and in the early days of the pandemic, it was around health health and and I think in the aftermath

of the pandemic. A lot is around supply chain and and commodity industries, So I do think it's a hallmark in some ways of being in more of a crisis situation.

The other thing I'd say on this is that different parts of the economy, you know, having very different experiences, and that's probably going to continue to make it harder to figure out the macro because you know, you've got good spending still at pretty high levels, and even in a decent econdom, you know, in a decent macro environment, good spending is probably not going to develop very well

over the next next year or so. Where service spending is you know, service consumption is still well below the pre pandemic level, and there even in a not so good economic environment, we probably will still see increases in you know, say office adjacent consumption or you know, high touch recreation services and and and and travel and spectator

events and things like that. And I think that's also going to make it harder to extrapolate from kind of partial indicators, you know, one sector of the economy to say that you know, this is this is what's telling us that we're in a recession. Now that we're not in a recession, and you really do have to look at the whole picture and and and the you know, macroeconomy has made made up of a lot of different sectors and separate micro indicators. Just on this note, how

has the pandemic changed the economy? I mean, you mentioned tweaking your labor market model, but I can imagine, you know, in the early days of the pandemic, when all this new fiscal stimulus was unleashed, there was some talk that, oh, this is a new paradigm that from now on, whenever there's a recession, we're going to get you know, the government writing checks and things like that. But now that we have higher than expected inflation, it seems like that

might be in doubt. So I'm wondering if you think that something permanent has changed because of our pandemic experience. I think that's still an open question. On the on the labor market, you know, kind of rethinking of our labor market model. I don't think that's necessarily directly related to the to the pandemic. I think it's just thinking through how labor demand and labor supply interact in a

in a in a more careful way. I think. I mean I think it's it's it could have that could have occurred in a you know, very different kind of healthcare and pandemic environment. It just so happened that because we've seen these massive changes in job openings, that that's what really made the whole job openings issue very salient.

How the economy is going to look from a structural perspective, you know, what what the average level of say, service consumption versus goods consumption is going to be, and you know how many people, how much time people spending offices versus working remotely. I think a lot of those things are still somewhat up in the air. My own view is, you know, probably more towards the the side that a lot of these things are going to continue to normalize

relative to pre pandemic levels. I think we've already seen a sizeable amount of normalization. I think that probably will continue, although it's taking in a lot of areas, it's taking

longer than anticipated. I think on economic policy, the you know, economic policy kind of goes in goes in waves and and and you know, there's there's always a risk of kind of fighting the last war for central banks and fiscal policy makers, and you know, in the kind of nine nineties and two thousands, and much of the two thousands and tens, I think central banks were very focused on high inflation and the risk of inflation recurring, and so they tended to run too tight a monetary poll. See.

Then in the course of the posto eight recovery, you know, they learned basically that they probably should be setting their sights on full employment somewhat higher, should be more aggressive. When the pandemic struck. They were very decharmined, We're not going to make this mistake again. We're going to be

very aggressive. And you know, in two thousand and twenty that was actually extremely fortuitous because they were very aggressive in forestalling what could have been a significantly worse crisis. But then in two thousand and twenty one, this thinking led them to overdo it, and uh, you know, it took it took too long to sort of bring about a change in in policy, and and so in two thousand and twenty two they've been they've been catching up.

I mean, yeah, it's late Jackson Hole. That's when they unveiled the flexible average inflation targeting, which in retrospect seems like it might have been the ideal policy for the post GFC recession that might have led to better outcomes than what we got. I guess still to be determined whether they could pull off the soft landing here or not. What's the buzz going to be like at Jackson Hole? You think this year where you know, what do you

I guess just you know, high inflation. But I'm curious, like what you're going to be listening for and what the most important central bankers in the world, what's on their mind. I think the question of how do you think about you know, demand and supply in the economy and labor market balance, and you know, what will it take to bring the parts of the economy that central banks and the FED can you have some control over

back into balance? And you know how much of the inflation is you know, perhaps driven by by factors that they really can't control. I think that's going to be import And the question you asked earlier about, you know, how do you trade off inflation still above the target against an economy that is maybe at risk of falling into a session or has fallen into our session. I think that's going to be in an important one. You know,

how do you interpret the dual mandate. To what extent do you, you know, put significant weight on on both sides of the mandate, And to what extent do you really focus primarily on on inflation and at what time horizon? You know, I think these are really the the bread and butter, really central questions of macroeconomic policy that are

going to be very much in in focus. You know, at times in Jackson Hole in the past, um, you know, they've talked about issues that are maybe a little bit further away from the you know, from these kind of bread and butter questions, But right now it's really blocking and tact in central making pretty course part the job.

I just want to go back again to this question of like, you know, you mentioned fighting the last war, and you know that's a natural human phenomenon and sort of anchoring to old conditions or old paradigms or thinking that we can't really see high sustained inflation. And you mentioned in your own models, say with you know, what were the signs that things were more out of kilter than maybe people appreciated, And you point a job, job openings.

Is there anything else deeper that over the course of the last year that you might have learned or have incorporated into your thinking, or is it not much more than we should have picked a different input. I mean, I think in general the inflation indicators that I think also have been important and we're flashing you know, amber or orange or or read in two thousand and twenty one, the supply delivery and disease. I mean, we're you know, pretty extreme and a lot of the supply chain issues,

you know, quite quite extreme. And you know, they they while they have improved in recent months, it took a long time for them for them to improve again. Some of that was because of recurring shocks delta omicron Ukraine and you know, an omicron again. But but but I do think these are indicators that are that are very useful and it's important to take them, take them very seriously. Just a final question, what else are you sort of

looking out for right now? Like what okay, obviously unemployment, the inflation data, anything else big that will sort of inform your thinking, especially like you know, going into the end of the year and thinking about whether the pace of hikes could even be faster than what we're expecting right now, The pace of hikes could be faster of course, if the you know, inflation adjustment is you know, takes

longer and the labor market adjustment takes takes longer. So I think that's very closely related to the you know, to these core issues that we've been discussing. I am focused, of course, on what happens globally. I mean, we're looking at at least a mild recession in the euro Area, and if there is no Russian gas at all that will end up flowing, then you know, potentially a significantly deeper recession. There is a question about the spillovers from

that into the US. I would say, if it's a supply side driven recession because German and Italian industrial companies don't get gas and therefore have to shut down production, that may not have you know, a large spillovers. But there's also the question, you know, what happens more broadly in Europe. There's an election in Italy on September twenty five.

Probably will be some nervousness around in the run up to that election because if you have a more Euroskeptic government in Italy and you have increases in rates in in the your area, upward pressure on Italian spreads, you know, I think the risk is that you revisit at least some of the European crisis kind of experiences, because you know, there'll be a question of at what point can the can the e c B you know, really step in if the Italian government is less willing to cooperate. So

that's definitely something I'm focused on. You know, the latest developments in China, I think a very important question. Obviously we've seen some very strong, very strong rebound from the Shanghai lockdown, but the latest data again show that the renewed kind of virus spread is starting to have a negative impact again. So I mean our our China forecast has been you know, on the more cautious side for

for a while. We're currently at three point three percent for the year as a whole for for GDP growth, government target officially is still five and a half. And frankly, I think the risks are forecasts are you know, probably still pretty clearly on the downside. So there's a lot going on globally, uh, you know, a lot of a lot of downside risks to activity. Despite the fact that you know, we're we're still we're still mostly discussed inflation

today art Is, chief economist at Goldman Sex. Always a treat to chat with you, and with so much going on right now, really appreciate you coming back on the show. Thank you so much, Joe, Thank you so much. Tracy. Great to be with you. Thanks you, and there's a lot of fun. Thanks. Yeah, that was great, Tracy. I always obviously enjoy speaking to Jan. I guess it's you know,

there's still a chance of a soft landing. You know, it's not it doesn't seem that high, especially getting inflation down from say like four percent to two percent, seems like it's going to take a lot of pain. But I guess it's not outside of the realm of possibility when you look at the unemployment rate staying low despite the drop in job opening So I don't know if

you causes for hope. Maybe I was about to say, I thought Yan's point about the difference between job openings going down versus the unemployment rate going up is a

really important one. But the other thing I would say is I keep coming back to historic parallels, and I know everyone tends to reach for the seventies or the nine eighties, but really it feels like and we've we've talked about this before, I'm sure, but the post eighteen Spanish flu um situation like that feels just really relevant to me at the moment because you did have a

period of high inflation there. You did have the FED start raising rates in order to bring prices down, and they did underestimate the impact that rising rates would have on the job market, so you saw a big contraction in job openings actually, and eventually that fed into unemployment and it basically tipped the US back into recession um a couple of years later. So I'm thinking, yeah, well

that too. Yeah, obviously, yes, there was a very large pandemic, but it does seem like the big worry to my mind, would be if we got some unexpected jump, of of a meaningful unexpected jump in the unemployment rate over the course of a few meetings while realized inflation remained very high.

Because again, you know, you could like look at the math and say inflation should come down, and inflation expectations are anchored, but we know that there's sort of this very heavy emphasis on like we want to see it, right, we want to see evidence that inflation is coming down, it's coming down, sustained that it's a month over a

month over month that it's heading back towards target. And so I do you know, like we do know that initial claims have been picking up, corporate layoff announcements have been picking up, not massively. There hasn't been some like massive weakness in the labor market, but it feels like

that would be the one worry. And then the Fed's in a really tricky problem of having to decide which is the which is the fire it wants to put out inflation or recession the other thing that struck me or that jumped out and we probably should have talked about this a little bit more, but just what a terrible position Europe seems to be in at the moment. Like as bad as things are in the US in terms of inflation, it just feels like in Europe um

there's the potential for things to get even worse. Right, So it's the combination of very high UH inflation, particularly headline but also core rising, and then it has not seen the wage growth that we've seen in the US. And then you know there's all of the issues that are like never getting never seemed to be solved about fragmentation of the bond market, and so the question is do you need intervention to hold down Italian dead and then to different politics. We need to do another Europe

episode soon, that's for sure. Yeah, and just can you actually bring down inflation while also trying to um narrow the difference in bond spreads like that? Seems like a really big challenge. But yeah, we should do a Europe episode. That would be fun. Flashbacks to a two thousand twelve. All right, shall we leave it there? 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 Wisenthal. You can follow me on Twitter at the Stalwart. Follow our producer Kerman Rodriguez on Twitter at Kerman Erman, and check out all of our podcasts bloom under the handle AD Podcasts. Thanks for listening.