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Hello and welcome to another episode of the Odd Lots podcast.
I'm Joe Wisenthal and I'm Tracy Alloway.
So, Tracy, we are recording this on Thursday, August twenty First, we are here at Jackson Hall. I need to note at the beginning we're recording this before the big Polo speech. I don't really think it matters too much because this, but I just want to like get that out of the way a little timing context.
We're not going to talk about that speech for obvious reasons. We don't know what's going to be said. But what we can talk about is the economy right now. That's not going to change between you know, right now and tomorrow morning.
Hopefully when Rivers comes out. Probably it's not going to change much. But you know, we've been very lucky. We've been talking to a lot of regional Fed presidents and it's really cool that we have access to them.
Yes, and it's good to get a range of opinions as well, because as we've been discussing, the economy does look very uncertain right now, and you could make a case for everything from a rate cut to holding to possibly even maybe hiking, which you know Jeff Schmidt kind of alluded to when we interviewed him.
Yeah, No, it was pretty extraordinary that, like, look, you could make a point that stock markets in your record highs, credit spreads in your record lows, employment low, and inflation still warm where we talk about RAE cuts. Anyway, we got to keep getting more takes and perspectives on this from the people who actually think about this the best.
And can we get a prize if we interview every FED president?
Well we should try.
There's got to there should be a name for that. But we have a guest, perfect guest, someone we've talked to on the podcast before. Very excited to have live here in Jackson Hall, past Oddlot's guests, Chicago Fed President Austin Gouldsby. So, Austin, thank you so much.
I'm gonna give you a prize. Now, I drove you. I just got here. It just got in an hour and a half ago. I believe that I've driven the farthest of anybody to begin here. And one of the things I did on the way was finish my fiftieth state on North Dakota. And it turns out there's a collise. A lot of people North dakost their last day and there's officially a club called the Best for Last Club, and I joined the Best for Last club. So who's
going to be your twelfth Reserve bank president? They're going to get a prize.
Congratulations. I saw your road trip, like on Twitter. I saw that you're posting.
So there are some amazing national parks on the on the way.
We're a great country, don't Yeah, we got amazing country. How's the economy look at you these days?
Well, depends which direction you're facing. As you know, I thought for Q one, coming into April, it was looking
pretty good. We had to stay bowl full employment. The unemployment rate a little above four inflation while having been above the target for four years, looked to me like it was heading It was coming down and down and down and was headed to two percent, and so I thought, reasonable approximation rates need to start heading down to where we think they're going to settle, which is a fair bit below where where we were, then where we are today. Then we go through some bumps. I've heard of them,
through a bunch of dirt in the air. All of this stuff that it's like is the economy still where it was in January February March, or are we on some different path. I still closet the hope slash think that we're where we were before, and that tariffs important goods are only eleven percent of GDP. If they'll kind of stay in their lane, if we don't keep escalating them, if we don't willing nearly apply them to intermediate goods so that they turn into higher cost of production, it'd
probably be okay. And we had a couple of months of benign inflation numbers, and then we got the last inflation number, which is a little less benign, and the rise of services inflation through me for a little bit of a cross current. So I'd say I've still got one eye on inflation. We're now four and a half years above the target. It's one thing to be four and a half years above the target, but we're still
clearly trending down. If we start trending up and you start seeing inflation rising in non tariff affected categories like what we saw in services, then am I get a little more nervous on that side? And on the job side, I still feel like we're something like stable full employment. The re visions they are concerning. We also know that the labor supply and population growth when there's big immigration things happening, add a lot of noise to just monthly payroll.
So I don't want to over index on that. I want to take multiple measures. The four horsemen of truth and justice, in my view, are rates. They're less susceptible to the immigration and population labor support problems. They're the unemployment rate, the hiring rate, the layoff rate, the vacancy rate. If you look at those rates, three of them still say this is basically full employment, and it's looking fine. It looks very similar to twenty eighteen, twenty nineteen, a
strong job market. The hiring rate is low, and if you talk to parents of kids graduating from college, you hear it's tough to get a job. We're in a low separations, low hiring environment. But that might be full employment. Okay. So that's why I say I don't come to it averse to cutting of rates. If we get through this and we can get some stuff settled on the tariff side, we might easily still be on the golden path. It
might still make perfect sense to keep going down. But we've just got a couple of flags at the same time.
I think you just hit all of our talking points in that one. We will dig into all these things, but just before we do, I have one question. Maybe it's a bit like asking someone who their favorite child is, But what's occupying most of your headspace at the moment?
Felt to say Chicago is your favorite bank? And I was going to say good choice, good choice.
No, is it inflation or the labor market? What are you thinking most about?
I'd say inflation. I'm still thinking inflation. If we had four be nine months of inflation that looked like those kind of early ones, that would have helped me be much more comfortable with the idea. It's not going to be you know, tariff state in their eleven percent lane. People aren't freaking out. It's gonna be fine. Let's just go think about the employment side. Now that we are seeing a couple of bumps and things ticking up, I fear we we gotta think about that inflation side. Just
given what the history was. If we were having this discussion in twenty nineteen and we hadn't had the team transitory and the very same arguments like nah, nah, this is a one time thing, and so the inflation should just go away real quickly. If we hadn't had that, I would be much more comfortable making that argument. But now that I don't even like using that word.
Plus, everyone has experienced inflation.
Everyone's experience, so they're more hyped up. They're more amped up. Not hyped up there, they're amped up to see it. And look, you see this consumer confidence numbers going down, your somewhat significantly survey measures of inflation expectations, which I, in fairness always said I put less weight on than market based measures. That said, I don't put zero weight
on them. And if you see people in surveys as what do you think inflation is going to be over the next one year, two years, now even longer, they're saying it's higher. So we got to think about that.
You mentioned those labor market revisions, and when we got that last job supporters mediocre, but even more than mediocre, as it was the pull down of the prior two months. And there's actually it strikes me as two ways of looking at this. One is, oh, you know what, the labor market is really decelerating. Probably we have to have cut soon if we want to hold on to full employment.
But there's another tig. It actually has come up in a couple of recent episodes, which is, well, yeah, that was the post April second volatility.
We're through that now that.
Actually we have more tariff certainty than we certainly have more terre if certainty.
Than we did.
That was maybe the trough. We got an S and P flash PMI today that actually showed a positive employment rading. This came up in our conversation with Jeff Schmid, who's throwing this event for the Kansas City event, that maybe that was the cyclical low for the year. Just the craziness of those.
Couple of months fascinating. I thought, you're going to go totally different. Okay, So those are two schools of thought, both of which are premised on using monthly payroll as an indicator of where we are in the business cycle, and in normal times that's perfectly appropriate. My third category is at moments when there are population growth shifts and labor supply, especially from immigration, be careful using monthly payroll the business site that wasn't one of them because and
I have no is it remorse not remorse? I have no I don't feel guilty talking about this topic now, because you can go back and look a year and a half ago and more, when we were getting jobs numbers that were far higher than what we thought the break even was. There was a one group that was saying, we're about to have inflation kick way back up, because one hundred and eighty thousand jobs a month is faster than break even. Break even is like eighty five thousand
a month, So we're overheating. And at that time I said, not pay no attention, but pay less attention than you normally would to what the payroll and jobs numbers say, because we know there's a whole bunch of immigrant that's happening behind the scenes that is not showing up yet. Now when we look back, everybody says, oh, yeah, obviously that's why we generate as many jobs. This is just the exact same idea, but in reverse. Now it may prove not to be true. This might be an indicator
of the business cycle. But we learned the last time around that those four horsemen of truth were rates, not aggregates. Okay, so if you don't know what the population growth rate is, or if it's different than what you expected, be extra suspicious about total payroll, employment, and total GDP growth. So if you started to see GDP growth overall is slowing down, but the components don't really suggest that, or if you
start seeing payroll growth you characterize it as mediocre. I don't think it's like seventy five thousand that's right around the break. Even if you're seventy five thousand plus or minus one hundred thousand, which is normally what you are for monthly payroll, you're gonna get months where you have low payroll. And then if you add this immigration thing on top of it, Like I say, I'm not saying
ignore it, I'm just saying, be very careful. I was a little not puzzled, but I was a little concerned that the market reaction seemed to be let's take our understanding of monthly payroll numbers circa twenty eighteen and say that must mean we're on the verge of recession. If that's where your head is that you say, well, a low monthly payroll in the past has been an indicator the beginning of recession, then you got to explain why these other ones don't show that. Why is the layoff
rate as low as it is. You haven't seen it up to can layoffs. The vacancy rate is actually rising a little and is better than it was in twenty nineteen. I think. So this doesn't look like a normal business cycle yet if it starts to I'll be the first one saying this is what the beginning of a recession looks like.
So the idea is that weaker payrolls can be offset or are being offset by weaker labor supply because we're getting less immigration, so the break even.
Rate is at the break evenness it is less.
Yeah, okay, you mentioned the market reaction. Just then, can we talk a little bit more about the market, because, as Joe mentioned, you know, stocks are still kind of nearer their record highs. I know they've been falling a bit this week. Credit spreads at like a twenty seven year low. I still hear FED officials talk about rates
being restrictive even though inflation is still above target. But when I look at the market, when I look at financial conditions, it doesn't look that restrictive to me.
Careful, we're just in the weird glass onion version of the same discussions we've been having for several years now that I've been in the Fed. I'm coming on three years. At that time, it was positive supply shocks, and the whole question was are we about to reoverheat? Do we need to maintain do we need to keep raising, Do we need to maintain the rates this high? Or can we start cutting. I kind of think that a large component of what's in expectations and what's in the market's
reaction is the reflection problem. That if they think that the FED is going to succeed, then you could see conditions loosen, but that wouldn't be a reason that the FED should raise necessarily because they're premised on thinking that it's going to work. That's what I was saying before, and I kind of now think in the same way. It might be an indication. But if you just look at rates and you look at kind of the traditional credit channels of monetary policy, I still think that rates
are relatively restrictive. And so that's why I say, if you start to see deterioration in the labor market, you start to see layoffs going up, and it starts looking more like a the turning point in the labor market, then I think we're going to have to seriously contemplate
cutting of rates. If we're in an environment where we're actually in pretty stable full employment and the only thing that's happening is population is making the break even monthly jobs number forty thousand instead of one hundred thousand, and inflation is going up in a bunch of categories that are not Terear related. Now, we got to be a little more circumspective.
So I want to ask a question. It's something that I'm very increasingly interested in and want to talk to a lot more people about, et cetera. But their aspects of this economy that, as you say, may kind of resemble twenty eighteen, twenty nineteen, et cetera. One thing that strikes me it's very different is the long term rate and the implied therefore what people will call the neutral rate or whatever. And maybe rate cuts are coming soon, but the market is not expecting at deep cutting cycle
of that terminal rates. What's changed? What's the fundamental difference in twenty twenty five verse twenty eighteen such that for the Fed to hit it's two percent inflation target, the market is pricing in so much higher rates than what it had anticipated.
To COVID, I don't I mean, I should ask you, You've talked a lot of no. I would say there's one way to look at that that if you asked historically, which of those is weird? Twenty eighteen, twenty nineteen, what's weird? You know what I mean? Like the lower rates now are look very, very similar to kind of historical patterns. There's a whole tremendous almost industry in research trying to diagnose that. And that bleeds into the question of are we going back to super low rates ultra low rates
because is it global savings glut? Is there something happening with productivity? Do they think demand is going to be low? Is there a feeling that Treasury is going to have to issue so much debt? I mean, there's been a big increase intent to GDP ratios worldwide. I do find informedive this increase in loan rates is not exclusive to the US. You see it in a lot of countries. So I don't totally know. There's probably some of many
of those explanations. And for whatever reason, what the market thinks the Fed is going to do in short rates does seem to have a outsized impact on thirty year rates, So that's part of it. Is probably just reflecting how steep or how shallow a path do they think the FED is going to take.
So, just going back to inflation for a second, you've mentioned a couple of times now that you're worried about maybe you know, tariff induced inflation in goods starting to seep into services. Can you talk a little bit more about how you see that channel actually working. And then also you're head of the seventh District and you have some interesting states in there. You've got Michigan, which still
makes cars. You've got Iowa which has farmers. Like, what are you seeing in terms of the pass through from goods to services there?
Okay, these are both important topics for us to think through. Let's go backwards in order. The seventh District, headquartered in Chicago, is the most manufacturing intentsive of all the districts, and by far the most auto production of all the districts. It's one of the big agriculture heavy districts. But Kansas City, Minneapolis, there's a couple of others. I would say in the run up to April second and through April second into
May almost to June, their hair was on fire. I mean, this is going to wipe us out if anything's like the rates of what they just announced the auto suppliers that we had small margines to begin with, that we're gonna die. We don't know you, we don't know what's
going to happen. That's why I was getting amped up about it at the time as we kind of got some clarity on what the raids are going to be, and particularly when they begin exempting, if it's USMCA compliant, it's not going to apply for a bunch of intermediate goods. It's not going to apply common influence. I would say as I talk to people now for manufacturing and for agriculture, they're still in that space. In agriculture they were particularly
heartened by as some of the negotiations got concluded. Even if they weren't going back to no tariffs, the fact that they were going to something that would not lead to retaliation was a very big thing for agriculture because a lot of their biggest markets are overseas. I was just recently in Iowa. Though they're still nervous in that space that in some ways the damage has already done and it takes a lot long time to build up
these export relationships. And if you smash that, and they start buying soy beans from Brazil that even if you go back to zero tariffs, they might have already set it up. So there is like a nagging that the longer run impact will be different than the short run impact. But I would characterize short run impact scaled down from I always get the deaf cons backward. Death Con five is the worst, right, so so one was the worst.
Everybody says, how often are we declaring what it is?
There was a high deaf Con, dangerous, deaf Con as high as you could be, and now it's gone back not background noise, but the sentiment like, we can live with this if this is what it is. As long as this stops when we're not going to face new ones, we can deal with this. Now that said, it sort of goes to your second.
To your original, Defcon one is the highest state of military writing.
Now deaf Con one is the highest. So they were at def Con one and we're back to deaf Con five. I just looked at up. Okay, I added backward, which is embarrassing because I'm always like Nodo, you know, that's that's the opposite, But now I opposite it myself. Yeah, I've done that. So the question about what is the
mechanism that the tariff inflation turns into services inflation? Permit me a slight dedoer, what is the mechanism that tariffs turn into inflation of goods as opposed to just a one time price increase, because there is an argument that for the platonic ideal of a theoretical one and done tariff, it's just a one time price increase. So no matter what it is, just look through.
It, right, And a one time pricing increase, just to be clear, doesn't count as inflation under traditional economic frameworks.
Because base, if you go measure inflation, inflation would be high for one year and then the inflation would go away. But that was the very argument of Team Transitory in twenty twenty one was, yes, here this thing hit supply, we're gonna let bygones be bygones. We'll eat the inflation for one year and then it's gonna go away. Now, remember this is for a one and done tariff, and this is not one and this is not done. So well, let's be a little more circumspect of just saying, hey,
theoretically it's just gonna go away. We learned in COVID that if it's a big enough impact on the supply chain, and especially if it's going industry A to industry B, industry B makes inputs for C that process takes a lot longer than we thought it would in twenty nineteen and twenty twenty. When we got to twenty twenty one, we're like, yeah, hey, it'll fix itself. You know, probably
six months. That was the argument of transitory. So I'm a little concerned about just the impact of tariffs on goods inflation itself lasting longer than we wanted to, and people getting mixed up. You'll recall the perfectly valid arguments in twenty one, in twenty two and into twenty three where people said it doesn't matter if it's supply shock induced inflation. If it's high for too long, it's going to fold into expectations and then we'll never get rid
of it. That didn't prove true this last time, but if people are more attuned to price increases, it could, and we just got to be careful on that front. Now, ask the question how does it turn into services inflation? One part, what if the servi inflation isn't coming from tariffs? Okay, So that's the the danger of services inflation is you kind of can't really give a simple mechanism of why
services inflation would be rising. The new month of services inflation was quite terrible, and some part of that are non market determined, so I put a little less weight on those, but it wasn't good that Probably the mechanisms that you think through how would tariffs cause that, they think you'd be hard pressed to figure out how it would cause it. But that doesn't make you feel better.
That makes you feel worse because it's like, whoaa, wait a minute, maybe some inflationary dynamic was never put out, and you ever like make the campfire and it's like, ah, yeah, it's done, and then you look away, its back. It's back on fire again. We can't let that happen. We've been four and a half years above the target. We were making progress. Now we've stopped making progress. If it's spreading into services inflation this immediately, it's probably not coming
from tariffs. The other mechanisms how does it move into services inflation is sort of wage price spiral, where people say, well, I think prices are going to go up, so I'm going to be that much more aggressive in my wage negotiations with the employer. The only reason I'm hesitating to go down this lane is then you're probably going to say, well, what about wages? Are wages compatible with two percent inflation?
And you can't answer that and tell you know what the productivity growth rate is, which has been one of the bright spots. But that's actually my one of my bigger fears about the tariffs is there's a long literature of research in economics showing you raise tariffs, especially on components supplies, it drives down productivity growth.
Yeah, Tracy and I were in Alaska recently, and I feel like we've heard multiple ways. Whether it's like the company's making tubular goods for the oil patch out there and that's gonna make it increased break evene. Whether it's like just the uncertain just.
Doing the paperwork for customs sounds like a huge live.
Okay, it sounds like a productivity destroy factor.
I have one last question, and I'm turning this into my question that I ask every FED president that we.
Can Tracy rolling around from.
This is this is.
My question, but I think it might be important down the line. Why are descents rare at the FM's wire.
Descents rare I have. I've only been there a short time. FED years are like reversed dog years or something like, you've been there seven years. They're like, oh, he's the new guy. Okay, so I'm coming up on three years. Yeah, there been some dissents.
I can I tell you what I'm trying to get at. Yeah, at some point the chair is going to be replaced. And what I'm trying to understand is when there's the new guy is in that position? To what degree does the fact that most of the time the voting members align with Powell? How much of it is the fact that you more or less think about the economy in roughly similar ways and looking at the same data, And how much is it about Powell has done a good job of.
Navigating navigating the board.
And so this is why I'm asking the question, because I'm thinking about what those dynamics are.
I feel like it's more the latter. You know the rules. I'm not allowed to speak for anybody speak for the chair. You know. I'm a longtime fan of J. Powell. I think he's a first ballot Hall of Fame FED chair, and he has great judgment. He is all as navigated a pretty diverse set of world views on that committee. That's what makes me feel it's less the first thing, everybody just has the same world view. You can see from the minutes that that's not true. People have different
world views. He's been remarkably skilled at whether it's through statements, whether it's like what's written on the page that everybody you coming from different size, but you can agree. Yes, I agree with that, and I think that's why there are fewer dissents. But in the time I've been there, there have been numerous.
Can I ask, in general, what are the vibes like right now? When you guys are cutting together.
It's joking Rolla's eyes. The presidents get together pretty frequently. The presidence of the reserve banks get together pretty frequent. We have a conference of presidents. There are a whole bunch of operational things that we have to do, and we're a quirky bunch, and it's usually the vibe is pretty fun. From that, the f MC meeting itself is much more formal, and it's probably secret information for me to tell you what the vibes are if it's not stated in the minute.
Probably there's a normal way for that to be expressed, and it was going to be expressed. Aust you so much for amazing.
You guys were ever famous. I was in there, I was friend of the show.
But no, that was fantastic and definitely won't be the last time we have you on the show.
Thank you, Tracy.
It really is pretty striking the degree to which it feels like the rate cut question is not settled.
No, not at all, not at all, And at this point, I mean, I guess we have to talk to more fed presidents. But it does seem like maybe the market has gotten a little ahead of itself in terms of expectations. Again, we're recording this on Thursday, August twenty first, and we're going to get the Pal speech tomorrow, so who knows what he's going to say. Maybe markets will recalibrate their
expectations after that. But you do hear a lot of convincing arguments for why you should look through things like weaker payrolls.
Right.
I really really liked the four Horsemen of truth and this idea that in the time of volatile population measures, you want to look at rates. I'm going to remember that it's very clearly articulated by Austin. There so like vacancy rates, hiring rates, firing rates, these are the things that actually give us clean signal across the cycle when population levels are in fluxed.
Well.
Pale made a similar argument in the questions after the last meeting, Right, didn't he say, like he's looking at the unemployment rate because he thinks that's more meaningful at a time when you are having these changes.
Yeah, No, I do think I have to I have to actually take that. Yes, I could be wrong to internalize this.
I could be hallucinating statements from Powell because he has.
Remained fairly low. And I think that's important. But I'd like Austin's point is like that he said at the end that if you can't tie sort of the services of inflation in some way, that's even the fact that we don't have a good story for it. Like, if you have a good story for it, that's one thing.
But this idea that's like, well, what if this is just that ember that didn't go out, you like throw a cigarette in the trash or whatever, and there's that little spark that like that is a little bit more ominous.
Yeah, And I do think like the starting level is important here. So you have to remember the FED spent the past three years fighting inflation. It's still not down to two percent, and everyone has higher prices on their minds, like we've all experienced it at this point, and so the concern is that, like the impulse to raise prices and tolerate more high prices is higher than it once was. I think that's important. It doesn't get discussed enough potentially, all right, shall we leave it there.
Let's leave it there.
This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Jill Wisenthal. You can follow me at the Stalwart. Follow our guest Austin Goulesby at Austin Goulesby. Follow our producers Kerman Rodriguez at Kerman armand dash Ol Bennett at Dashbot and Kale Brooks at Kalebrooks. For more Odd Lots content, go to Bloomberg dot com slash odd Lots. We're of a daily newsletter and all of our episodes, and you can chet about all of these topics twenty four seven in our discord Discord dot gg slash odd.
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