Neel Kashkari on the Fed’s Quest To Get To Full Employment

powerhouse of a job's report, really, I think, UM. I think payrolls climbed by I think it was ninety three thousand in July, which was much much higher than economist expectations of about eight hundred seventy thousand, And of course the unemployment rate keeps drifting lower. I think it came in at what was at five point four percent, which is basicly the lowest since the pandemic started. And we're not quite where we were before the outbreak of COVID nineteen,

but we're certainly getting closer, that's right. So, of course, in the early part of the summer you're probably recalled, there were like two reports or economists were looking for like big things. I got a million plus jobs and they didn't really materialize, and there's all kinds of concerns, Oh, what's holding back the labor market. The last two data points, however, have been quite strong, nearly a million each and no

signs of slowing. We see the headline unemployment rate coming down pretty rapidly now, so I would say some of the labor market healing that maybe people thought would come a little a little sooner. Just the spring, it seems to be kicking into gear. Of course, the delta wave and the ongoing pandemic notwithstanding. Yeah, but of course, the question is what exactly our policymakers looking for when it

comes to employment. And we've spoken about this quite a few times now out, but it does seem like the definition of full employment has changed to something much broader and inclusive, and everyone's trying to wrap their heads around exactly what that means at the same time that they're also trying to wrap their heads around average inflation targeting

and things like that. Yeah, exactly right. Like so, we know that the FED has seems to be and I think a big part of the framework that was unveiled basically a year ago this time at Jackson Hole was about taking the employment side of the mandate more seriously, or to put it another way, not hiking or not trying to fight off inflation just because employment hits some arbitrary number that some economist model says, oh, this is full employment, like actually sort of like waiting to see,

waiting to see it really happened. And so once again, you know, here we have the unemployment rate dropping rapidly at least as of last month. Hopefully it continues, and it seems like policymakers will once again be confronted maybe next year with questions of how much better can the

labor market get? Yeah, and of course, I mean the big thing that everyone is watching is wage growth, right, and I think we did see a relatively significant spike in the payrolls report UM in particular some of the sort of like lower wage workers, people working in restaurants and leisure, they saw a fairly big spike. So again the question is what is full employment? Is this enough

of a recovery to start boosting inflation through wages? And then what does that actually mean for um the average inflation framework that the Fed adopted last year exactly right, Well, once again we have the absolute perfect guest to speak to this. It's going to be a true treat. We're going to be speaking with Neil cash Cary. He's the

president of the Minneapolis FED. And of course we had Neil on basically a year ago exactly this time, and at that time, some of these questions about the feds new framework, they were just sort of theoretical and like thinking about this, and suddenly theory is now being put into practice and we'll have to learn more about what

the FED is going to do. I would characterize Neil as someone who has always taken the employment side of the Fed's mandate very seriously, long before, long before COVID hit, and so hearing how he'll think about some of these questions should be very interesting. Neil, thank you so much for coming back on odd lots. Thanks for having me. It's great to be with both of you. So what don't we just start, like, uh with you know, we got that job's report on Friday. We're recording this August nine.

I guess by the time people hear this it'll be like a week and a half. But uh, you know, uh, we just got this job's report, very strong on all basically all the metrics. What is your assessment of the labor markets trajectory and healing right now. Well, you're right,

the job report was very strong. I was very happy to see that we are making progress back towards the kind of labor market we had before the pandemic kid but as of you know, our math that we do it the Minneapolis feed, it still looks like we are six to eight million jobs below where we would have been had the COVID crisis not happened. And so that's

what I'm focused on. Is there still a lot of Americans that are not either employed in jobs or they're not looking for work, and how long is it going to take and what is it going to take to bring them back in because they represent a meaningful share of our economy's potential and so good progress, but we still have a ways to go. It feels kind of weird um asking this question, because I do think the labor market recovery has been faster than a lot of

people expected. But what do you think accounts for, um, you know, the need to create the fact that we haven't reached full employment just yet, Because of course, there are different theories. There's the idea that a lot of people people just got tired during COVID and decided to retire drop out of the labor force. There's the idea that people are risks about going back to work and

potentially exposing themselves to covid um concerns around childcare. And there's also this idea of floating around about the Great Resignation, and this notion that people just, um, I guess sort of reconsidered their lives after a global pandemic and decided that they wanted to do something differently. So I'm curious how you're viewing I hesitate to call it sluggish recovery in the job market, but you know the fact that

we're not quite there yet. What's going on? I put stock in all of the things you said, except for oh, people are reassessing their priorities in life. I'm one of the things we learned after the two thousand eight crisis. We heard, you know, there's something happens in macroeconomics whenever a shock gets the economy. Many macro economists reflectively raised the natural rate of unemployment their estimate of how low

the unemployment rate can go without triggering high inflation. And they point to all sorts of theories and structural change ages and mismatches, and what we learned after the eight crisis is all of those stories were wrong. It turns out most Americans want to work. Most Americans find satisfaction in working. They need to work, they need to put food on the table. So that's my starting position. I believe the vast majority of Americans want to work if

there are decent jobs available at decent wages. I do think that fear of COVID is real. You know, we the health professionals spent the last eighteen months telling us to take COVID seriously, and I think that they had a lot of success in doing that. It's going to take time for people to be confident again. I do think the child care issues are real, uh And I also think that they enhanced unemployment benefits are having some effect.

If somebody says, well, I'm making just as much money on unemployment and it's gonna expire in a month, why shouldn't I wait a month before I go back into work. They're probably gonna be a lot of jobs available a month from now. So I think all of these factors are having some effect. But I start with the assumption

of the vast majority of people want to work. If given the chance, you know, you mentioned, Okay, by the math that you've done at the Minneapolis FED, we're probably six to eight million jobs short of where we would have been absently where we would have been absent the COVID shock. So okay, that that's one starting point for thinking about how much slack there is. That big said, you know what, I guess the unemployment rate pre crisis was. I think it got down to three and a half percent.

But one thing that we saw was that in the end economists are really it's real or let's just put this way, it's really difficult to know how good the labor market truly can be because we saw, you know, in the after the Great Financial crisis, so, oh, six and a half percent, maybe this is where full employment is. Then five and a half percent, there's like, oh, well, we can't go lower than five. Maybe four. Then we were down to four and we didn't get you know,

even when we were three and a half percent. It's not like we had seen like some big like you know, inflationary wage price spiral. So you know, thinking back, okay, you start with that six to eight million, what else will you be looking for beyond I'm just sort of like pure number to think about. Okay, they're really the labor market really is in its best place, and we are not going to make some of the same mistakes

last time as underestimating how good the jobs market can get. Well, I think we look at a lot of different measures, Joe. One of the things is what's happening to wage growth? And we are seeing wages pick up I think Tracy talked about a few minutes ago, and that's an important factor. But are those going to be sustained wage gains or those one time price adjustments as the economy is going

through this reopening. So, just to back up, the economy went through a rapid shutdown and now it's going through a rapid reopening, and we're seeing lots of frictions as businesses are trying to make that adjustment, and you have this mismatch where the economy seems to be reopening more quickly than the full labor supply is coming online. Well, once we get to something more like normal, a new equilibrium, what does that look like and what wage growth are

we seeing? We did see I think one of you mentioned that we did see faster wage growth at the end of the last expansion. So for the lowest income workers, that was great to see they were long overdue for a raise. But even if you look at their wage growth net of productivity, it was not suggesting high inflation was around the corner. So, just to your point, I'm not convinced we were actually at maximum employment before the

COVID shock hit us. So that's that's exactly why I want us to be really humble about declaring where this is as good as it can get. Let's actually let the economy reopen, get people re engaged, and then let's see what the labor market looks like and what inflation

looks like. Well, just on a similar note, can you maybe talk to us it full employment looks like from an inclusivity perspective, because this is something that Powell has talked about at the last Jackson Hole, this idea that the Fed is now going for a broad definition of full employment. It's a complicated topic and a lot of people, you know, we all look at a lot of different

measures and trying to make this determination. For me, it really does come back to inflation, which is how tight can we get the labor market that is consistent with long run inflation at two. So to me, there are like two sides of a seesaw. If we think they're still slack in the labor market, then it's like they're going to have low inflation in the future. So let's try to tighten the labor market so we can actually

get to our two percent inflation target over time. So that to me, ultimately is where we're going to know. You know, we we do not have the ability of targeting, for example, the black unemployment rate and saying we need to get the black unemployment rate to x and we're not going to be at full of ployment until we get it too X because we have to pay attention to what that means for on the inflation side of

our dual mandate. So it really these two things are fundamentally linked in the way at least I think about monetary policy that Big said. I mean, one of the things we see is that in good economies or at the end of the long expansion, we did see that spread compressed between white unemployment and black unemployment. And you know you mentioned, okay, you get the answer to some of these questions is answered in inflation. But we have

elevated the inflation right now. Now we could tell a story about the elevated inflation is like, oh, it's reopening and it's used cars, and it's semiconductors and its bottlenecks at the port. No, like, you know, that's just that's just one story to explain why elevated inflation is right now while there is still a high unemployment and be

a high spread between white and black unemployment. So how do you, I mean, if if inflation is going to be the signal that you use, how do you sort of say, incorporate this moment right now in which if we're just going on inflation is like, oh, well, I guess we're there. Well, we look at a lot of different measures of inflation, so you know, just as you said, we know that the high inflation readings we're seeing right now are highly concentrated in a few sectors, whether it's

autos or traveled and transportation related sectors. The vast majority of the inflation that we're seeing or in those sectors that is skewing the results if you look at broader based measures of inflation, if you look at various trim mean surveys, we're not seeing a high uptick and one thing is this math. You know, if the prices fell a year ago because of the shutdowns and now they're bouncing back, just the math of that says you're gonna

see high inflation readings. So if you look at a two year inflation reading, you know, average inflation over two years, so you get away from this this v in the middle of it, you're around two point three percent or two point four percent inflation. So there are a lot of different measures that we look at to try to understand what is underlying inflation in the economy. And that's what gives me confidence that most of what we're seeing

is associated with this reopening. And fundamentally, are we really going to have sustained high inflation if there's all this labor market slack still available? I find that hard to understand. Now, if the six to eight million Americans are never coming back, for whatever reason, into the workforce, then I think we need to reassess the economy's potential and reassess inflation. But I think it is far premature to draw that conclusion. So I have a slightly weird question, and I'm trying

to think how exactly to phrase this. But you know,

we have employment at five point four pc. We're talking about a sort of tail end of America that remains unemployed, and I guess I'm just wondering, is monetary policy the correct tool to get those people back into the workforce or does it need to be paired with some other type of policy um on on the fiscal or the government side, there's a lot of fiscal policy obviously there's been coming out of Washington over the last year in response to COVID, now the likely infrastructure bill, and then

maybe more so, I do think fiscal policy is providing a big impulse to try to get the economy moving and get people back in so to me that both of them have an important role to play, I'll say things like targeted interventions such as worker retraining. I mean, all of these things are well meaning. Most programs that I've seen along the worker retraining side, they're very hard

to do at scale. The best worker retraining programs I've seen are really where employers say, you know what, I need someone to run this machine, and I don't care if you've never done it before, I'll train you. That seems to have much more success than government oriented training programs,

just because they're too blunt. So I think fiscal policy is doing a lot monetary policy has a role to play, and a lot of it is going to be business is saying, you know what, we're gonna bring you in, We're gonna teach you how to do this, and we're going to invest in you. And we saw that when businesses said they couldn't find workers, they started investing a lot more in training to develop the workforce that they needed. Right,

And so does that get to this idea? I mean, you know, I think often economists think of like supply as a thing and demand as a thing. But if ultimately the key to getting retraining and there in the key to creating workforce with more skills is to get businesses to want to invest in their own employees and to get businesses to essentially want to meet be able

to meet the demand they're saying. Does that speak to sort of like a fundamental power of I guess I would a demand side economics that maintain aggregant demand either through robust monetary policy ongoing aggressive fiscal policy, and then that you know, incentivizes the businesses to increase productivity through

more training. I absolutely believe that. I mean, I think one of the things about this broad fiscal policy, of broad monetary policy is it actually works at scale of the US economy and by just creating this tight economy or a tight labor market. You know, we saw in eighteen nineteen businesses saying, you know what, I'm no longer going to drug test for certain jobs because these jobs I don't need to. I don't need to do the

drug test. It's safe without it. Or I'm gonna give x cons a chance for certain types of jobs, or you know, you mentioned that, Joe, that you started to see some compression between black white unemployment to spread. This is what happens in a tight labor market. Businesses say, you know what, it's in my own interest to make these changes and develop the workforce that I need. And what I saw was there were profound benefits to society

when they did that. M So, we just had your colleague, Robert Kaplan, the Dallas Fed President, on All Thoughts UM just the other day, and he was talking a lot about the difference between the situations facing large businesses versus small to medium sized businesses, and he was making the point that smaller businesses are going to find it more difficult to deal with rising inflation because their profit margins are probably narrower than big businesses that have scale and

pricing power and can negotiate with their suppliers and things like that. I imagine that dynamic to some degree also applies to the labor markets. So the biggest businesses are going to have some power over wages. They're going to be able to pay more, and they're also probably going to be able to provide more training opportunities. Maybe to band together with other large business is to sort of share workers and exchange workers, and we've seen some examples

of that. Is that something that's on your radar, like the idea of discrepancies between the experience of small and larger businesses here, Well, I think that there are always differences along the lines that you're saying, Tracy, But I don't think, at least for me, I don't think it leads me to can make a different conclusion about assessing

the stance of monetary policy. Let's say that that thesis is right, that big businesses are going to do better in this current environment for all the reasons you just said, does that mean that we should make monetary policy less accommodative to slow the recovery sort of speak, to try to bring that into balance. That doesn't make sense to me. To me when I look at you know, there's some comments that workers have a lot of power right now relative to the past. Number one, what's wrong with that?

You know, workers should have more power than they've had in the past. Number Two, When the six to eight million Americans come, can the labor force. My expectation is we're going to see that power balance become more balanced. So the power imbalance become more balanced and more normal over time, and so I don't want to overreact to what I would call frictions and imbalances as the economy goes through this reopening. Let's actually get the economy fully recovered,

and then we can assess where the power lies. I want to pivot soon to some of the other questions, including inflation right now and how to interacts with the FED new framework one year on, but just sticking with employment for a little bit longer. You know, one of the things is we have seen the unemployment right now come dropped down rapidly five points uh four percent, I think, and you know, it could easily be not hard to imagine it in the fours, maybe early next year, maybe

maybe at the end. At the end of this year. Labor force participation rate, however, even for prime age workers, remains considerably below crisis levels. Should that be incorporated? Is that? How how much is l FPR on your dashboard? And thinking about getting those numbers up, not just the unemployment right down. Oh, it's a fundamental Joe, I mean LFP and employment to population you know their cousins. Uh, those are fundamental measures. And this is one of the things

we learned. You know, a lot of macro economists will say, well, the trend line of labor force participation has been declining, and that's why oftentimes we'll look at prime age. But even there they'll say, well, the trend line is declining. And one of my one of my good friends, the late great Eddie Lazier, who's a problem, who was a prominent labor market economist when I first joined the FED, he called me up and he said, the FED is

misreading the labor market. The macro economists just think the trend lines are a certain direction, and they take that as gospel, and therefore it's always going to be trending down. And there's no good reason why it's trending down. And Eddie Lazier was correct, and so to me, that's why you know, getting LFP in employment to population at least act to where they were before, but not necessarily even declaring victory when we do that, I think that's a

reasonable thing for us to try to achieve. You know, when when a lot of Americans they answer these surveys, they'll say, do you have a job? No? Are you looking for a job no? So then they're considered not in the labor force. Those same folks, many of them, the next month they take a job. All right, that's not it's not supposed to work that way, but that's

the way it actually does work. So let's actually see let's not just ask people are you looking, Let's actually see what happens in the wage data, what happens in the jobs data, what happens in the inflation data. So on that note, why don't we move over to the inflation discussion. And you're on the record as saying that you think, um, the current price increases are probably transitory.

I'm curious, is there something that would make you think that inflation was something more than transitory, something that's more broad based based um, something potentially more permanent. Is it just, uh, the wage growth that that you just mentioned wage, The wage growth is one piece of it. It is looking

at the sectors that are seeing high inflation readings. As we mentioned a few minutes ago, it's highly concentrated in autos and in travel and transportation sectors right now, and so if we saw it more broadly, that would be another factor that I would pay a lot of attention to. Then, going back to the labor market, if we thought these six day million Americans were not coming in coming back, that would also give me pause. You know, if the delta variant really puts a chill on hiring and chilling

people returning, that would also give me pause. And then, of course, we also pay attention to market based measures of inflation and inflation expectations. And as you all know, I know you follow the treasury market very closely. Long term treasury yields are not they're not implying high inflation five or ten years from now. And so all of those things right now are indicating to me that this

high inflation is likely going to be transitory. If those measures were to change, that would cause me to reassess that conclusion. Let's talk about the interaction of the data with the new framework, and of course, again about almost a year on here since Jackson Hole, where the FED

unveiled it's flexible average inflation targeting framework. And you know my general interpretation of the new framework, and you use the word humble before, and I think it is intended to be more humble framework and to not over react to now try to preempt inflation, to tolerate some short term overshoots. Does the inflation that we're seeing that we can ascribe to reopening I guess the question is doesn't

count for that. So when you think about, like, okay, over time, this two percent, if we get this sort of inflation, that's oh, it's there's something we're going on with used cars and bottlenecks at the ports because imports are so high, because people still aren't spending money on services and all of these things. Do these periods of elevated inflation that we can reasonably chalk up to those things,

do they count towards towards the average? Well, that's a very good question, Joe, and I think that my guess is there would be a wide range of opinions, uh, and the Federal Open Market Committee about that. The answer to that question, in my mind, because I have a lot of confidence that these inflation readings are transitory, That's not what I intended when I said we should achieve a modest overshoot. You know what motivated the new framework.

What motivated the new framework was basically, we were undershooting our inflation target for ten years, and we know the zero lower bound is a constraint on policy, and so we said, look, let's allow for a modest overshoot so we can actually average two inflation over time and get you know, our estimates are that underlying inflation is roughly around one point eight percent or it has been. Let's

get underlying inflation back to two percent. In my mind, temporary transit tory high inflation readings because of the reopening are not actually going to be effective in boosting underlying inflation to two on average over time, and that's why in my mind they don't really count. But I think there's probably a wide range of opinions around the committee as to that. As to that question, it certainly wasn't what I intended a year ago. Do you think the

market understands the Fed's new framework. And I mean the reason I asked that is because, as you just noted, bond yields remain incredibly stubbornly low, despite ostensibly a willingness from the FED to tolerate higher levels of price increases.

So I think they do. I don't want to declare victory, but if you look at the market measures of inflation expectations embedded in tips, for example, in nominal treasuries, you're seeing higher inflation for the next few years, let's say, the next five years, and then not much action out

at ten years or beyond. That's completely consistent with what our framework is attempting to engineer, which is the framework essentially is trying to boost inflation expectations for the next few years while leaving long term inflation expectations anchored at two over the long term. That's what the market indicators are saying. So I think that sophisticated market participants have paid very close attention to the new framework, and I do think it is it seems to be working as

intended in generating those kinds of outcomes. But you know, it's still early. It's only been a year we're going through this reopening. You know, it's it's far too soon to draw any firm conclusions. This is it's funny you ended up saying it's too soon to draw any conclusions, because that's what I was thinking about. Something I was thinking about is okay. So one of the sort of I guess it seems to be one of the new guiding principles of this sort of more humble fed of like, Okay,

let's see how let's see where we can go. Let's actually wait to see evidence that we've hit our targets before we start um raising rates and so forth. And yet you're you, as a member of the FOMC, are tasked with coming up with dots and uh, you know, put out your okay three and beyond like forecast for

what rates are. Do you think there is a tension between a destination based framework of let's wait and see versus a dots requirement, which implicitly is sort of asking you to make a prediction of what the trajectory of the economy, employment, and inflation will look like over the next couple of years. I think the dot plot is

deeply flawed for a lot of reasons. Joe for the reason you mentioned, but I just think in general it draws way too much attention from the press, from market participants, from the public. Uh, They're not meant to be forecasts. They're meant to be this is what we think optimal policy is to achieve the goals that we have. So to I think the dot plot is does more harm than good, and if you're up to me, I would

kill it. So a related question, but is there something you would do differently at the FED or you know, if you had the chance to maybe change the way the FED currently operates, is there something that you would alter or get rid of, like the dot plot or I don't know the use of the word transitory in describing inflation things like that. Well, I mean, I think the dot plot is one clearer one that I've said for a long time we should get rid of. The second thing is, you know, it's it's funny the fo

m C statement itself. It's quite a cumbersome statement to read, and when I read it with a fresh set of eyes, it feels kind of clunky. And what's difficult about it is it's not simply the words on the page that convey the information. The real information is the change in the words on the page. And every meeting, you know, we go through great deliberations and people are very thoughtful about how they want to change the words on the page to convey the message to the public and the

financial markets. But then after a year or two, you end up with this thing and it says, well, wait a second, if I read this with a clean sheet of you know, with a clean set of eyes, so to speak, would I write it this way if I was starting over? The answers probably know. So that's one that I struggle with, which is, you know, could we

do a refresh on the statement. It's hard to do a refresh because you know, you are conveying information by the changes that you're making, and if you just said we're going to start with a clean sheet of paper, uh, it'll probably introduce a lot of uncertainty. These people try to get a new baseline, so to speak, of what

the statement is telling us. Well, you're certainly offering a full employment for professional FED watchers who who do the whole red line strike through and try to tell us what, you know, some further progress versus progress means and put

those into actual English. You know. One of the things that's being debated that debated right now and in terms of ranges is obviously um the asset purchases and asset purchases were really cranked up when the crisis hit for all kinds of reasons for financial market plumbing in your view, I mean, I guess it's kind of a two part question, but what do you think asset purchases accomplished and at this point, like what are they doing? And to sort

of where do you stand? Do you think that the economy is in a position where they can start to be wound down without causing a major setback. You know, I'm always reminded when we study the asset purchases with my economists at ME and said, I'm always reminded of former Chairman Bernanke's very famous quip that quantitative easing works

in practice but not in theory. And that's I mean, I think that's he really nails it with that, because when when the economists go through their models and you get very modest effects, but we can actually see very large effects. Because I think it's sending a message about the committees over all stance on monetary policy. Are we committed to being a commodative for the foreseeable future. And that's why modest changes can lead to big changes in

expectations and potentially big moves. And that's where that's why the Taper tantrum was such a big effect, had such a big effect in and so I do think right now it is still providing support to the economy. I think it is still signaling that the Committee is committed to achieving our dual mandate goals, to really achieving maximum employment, and it's sending a message that we are not going to prematurely normalized monetary policy and declare victory before we've

actually achieved our goals. So that to me is useful and powerful. But as you know, the Committee said that when we see substantial further progress then we would normalize our asset purchases. I think if we see a few more jobs reports like the one we just got, then I would feel comfortable saying, yeah, we are maybe haven't completely filled the whole that we've been in, but we've made a lot of progress and now and will be

the time to start tapering our asset purchases. So on this note, you are one of the more dovish people at the Fed, possibly the most devilish person at the FED, and at the same time, you were very, very active during the two thousand and eight financial crisis. I think, you know, you have the perfect sort of vantage point to see everything that was happening and also to see

just how bad things had gotten. So I'm curious, how are you weighing the sort of the risks of tightening monetary policy too early versus the risks of keeping it too loose for too long and getting some sort of imbalance built up in the financial system. Well, I'm very focused on the I mean the risk. We pay a lot of attention to financial stability risk, we pay a lot of attention to risk of inflation. I see the bigger risk if if monetary policy is too accommodative for

too long. To me, I think that the biggest risk is that it shows up in high inflation into these transitory readings end up not being transitory and it becomes more broad based, and then we would have to adjust monetary policy to make sure that inflation expectations are anchored. I don't think I've not seen any evidence that monetary policy is the right tool to address financial stability risks.

You know, I don't want to say never, but whenever I analyze it with our economists, it just seems like Monterrey policy is such a blunt instrument that it allows you a way to try to rein in potential accesses on Wall Street. I would much rather, for example, raised the countercyclical capital buffer to make sure that the biggest banks have enough capital so they can withstand any downturns.

Then say, you know what, we're going to slow the labor market recovery because we're worried about some froththiness in Wall Street. And then, you know, one more quick comment, think about the tech bubble bursting in two thousand and two thousand one, uh that that was clearly a bubble. It burst, It didn't lead to a deep recession. It

led to a very mild recession. And if the did try to use monetary policy to keep the to keep the tech bubble from inflating in the first place, the cost of the economy would have been much much larger than what ended up happening when the tech bubble burst. And so we have to be very careful about saying we're going to use monetary policy to try to rein in Wall Street just one more thing on financial stability.

There is um currently some concern about this idea of lots of excess reserves just sort of slashing away in the financial system, showing up on bank balance sheets. Um so that banks are actually turning away some large depositors. Is that a concern for you when it comes to the Fed's asset purchase program or does it not really read?

Is something that's top of mind. You know, we paid close attention to it, and I know the overnight reverse repo facilities has been getting a lot of attention because the volumes are going up. The purpose of that is to keep short term interest rates in the roughly related to the band that the Committee is set for the

Federal funds rate. And so in a sense, you could think of it as a as a way of having some type of yield curve control where the FED is buying a lot of long term assets, but then we don't want short term rates to go negative, and so we have this floor in a sense which is keeping uh which is allowing banks to park some of their reserves essentially at the FED to keep short term rates from going negative. And so I think this is not

it doesn't trike me as highly concerning. It's kind of understandable, especially when the FED made a technical adjustment and raise the rate that it pays on reserves at the after the last meeting. So it isn't highly concerning to me,

and you know, we're gonna just keep watching it. I have one last question, and it actually relates to the first part of the conversation, but I you know, I thinking back to you know, you're talking about the spread between um white unemployment and black unemployment and how far that can go down and other indicators of when the economy has meet met maximum employment potential, and the gauge

that you're using is on the inflation side. And it seems to me, therefore that even with this new framework that you know, there's still this sort of like deeply embedded I guess it's like Philip's curve idea that ultimately there is some tension that ultimately, like the overemployment to the extent that that could be such a thing, is indicated by overly hot inflation or undesirable inflation. And I'm curious,

you know, obviously again there's this Philip's curve. This trade off contributed arguably to some of premature hiking that we saw post crisis, the idea that, okay, five and a half percent, four and a half percent, these must be levels that which inflation is going to take off. Do you ever question that core premise, the premise of a trade off, and whether the two things, inflation and employment, maybe do they even have much to do with each other. I do. It's a it's a good question, I do.

You know, we we we debate it once in a while with my economists. You know, if, for example, if the Fed just gave everybody twice as many dollars, so they said, your the dollar you have in your pocket or in your PayPal account is not two dollars, you would expect to see prices double in the economy if everybody's money got worth half as much, or you know, had to two x the amount. And that's got nothing

to do with the labor market. That's just how much money is in people's pockets trying to buy the same number of goods and services. But fundamentally, I do believe that there is a linkage. I do believe that for most firms, the bulk of their expenses are their employee base and their wages and that if we're going to see firms having higher prices and passion those on the consumers, that wages is going to be a very important piece of that. And so I do believe that there is

a linkage between the labor market and inflation. I'm not ready to write that off, but we do. You know, we do debate one another about some of these more fundamental questions about how prices are set and how monitory policy can affect the economy. Neil, there's such a real treat to have you back on odd LODs, Neil cash Kari, thank you so much for joining us. Thanks for having me. It's great to be with you both. Yeah, that was great.

We'll do it again next August. You know, Tracy, I was thinking about Neil's point about sort of ripping up the approach to the statement and just starting with like a clearer, clearer form of communication. And one thing I really do admire about Neil is although he not a trend economist, he's obviously very deep in it and one of the better policymakers at sort of just talking about what they're up to in a plain English that anyone

can understand. Yeah, that's definitely true. I remember there was a study gosh, I guess it was like five or six years back now, but there was a study that went through all the f O m C statements over time and crunch some of the numbers on word length and also on readability, and you could see this really strong trend that the statements were getting longer and longer basically since the financial crisis, and also the reading level that you needed in order to understand them was going up,

so it used to be high school level, I think, and by the end of it, in theory you would have needed a PhD to kind of understand it. And then, of course Neil's point was that you know, not only would you have to be able to um read it and comprehend it that way, but you'd also have to be able to compare it to the previous statement to get you know, to try to discern the signals from

the Central Bank. So point taken there for sure. And also on the dot plot, like again, that seems to be a major point of contention at the food Yeah, it's interesting because all these things, like, you know, you have the dot plot and um of course, the press conference, which under Paul has actually gone to every meeting. Before

they were just I think four times a year. But they're essentially like all these new monetary policy innovations, so to speak, all that came out of the Great Financial Crisis, like bernanke, like the dots didn't exist before that, the

press conference didn't exist prior to before that. So it's interesting to see, like, you know, Okay, maybe some of these things made sense during the Great Financial Crisis when it was like particularly important to communicate to the public or to market that uh, you know how the sort of the battle mindset, the battle footing that the FED

was on. But you know it is it does raise questions whether at some point, in a different environment, some of these tools and approaches will need to change totally. And again we've we've had the change to the FEDS framework, but you kind of wonder if an experience as big and as idiosyncratic as the pandemic might lead to um new communication styles and tools as well. I guess, you know, we might find out at Jackson Hole. Yeah, this is

the coming Jackson Hole will be interesting. You know, I still think it's interesting going back to I'm still a little bit hung up on what I see as some ambiguity in um the thinking right now, So as Neil put it, inflation is still the indicator that tells us when the economy has reached full potential. But then you could have inflation like we have right now, in which you can tell story that it has nothing to do

with full potential and it's all about idiosyncratic shocks. But then, I guess my where I'm hung up still is Okay, if we can establish and accept that some kind of inflations are not really related to full potential or to maximum employment, then how good of a guide is it really? Because no matter where we are, I mean, we could have employment unemployment at three percent, and then you could still imagine a world in which inflation picks up, and

yet economists remained divided about what's the cause. Maybe it's oil, I mean, you know, you let's imagine, let's say imagine unemployment where to follow a three percent and you had

an oil shock in the Middle East. Right, you could always come up with stories about, well, this isn't the real inflation, or this isn't the inflation that we're targeting with our new framework, or this inflation can be ascribed to X or y, and so it still seems like there is this tension that emerges in which, if inflation is going to be the ultimate arbiter, well what happens if you you know, you could still tell stories about

why that doesn't really count. And so I think there are still areas of ambiguity about, you know, what is the FED going to do? And when is the FED going to act, uh, you know, next year and the year beyond, if employment, if unemployment keeps dropping, right, it feels like the inflation story is almost always open to some interpretation um and cherry picking the data inflation tells us when we're at maximum employment, except when it doesn't,

because except when it's about something else. I was about to say, I really liked, um, I really liked your your Phillips curve question, because I think that kind of gets to the heart of it as well, Like we're sort of assuming that there's still some relationship now. But you know, before COVID, everyone was sort of giving up on the Phillips curve because we were, you know, we had an unemployment at something like three percent and inflation

hadn't gone up for years. And now inflation seems to be the signal, which is kind of weird and definitely to your point, ambiguous in many ways. Again, this is why I like talking to Neil, because I really think he's probably one of the most like, sort of open

minded thinkers on all this stuff. And you know, he comes at it from a non academic perspective, but I think he does genuinely sort of like wrestle with this stuff in an intellectually honest manner and sort of see some of the same tensions that a lot of people who aren't you know, lifetime steeped in the academy see with some of these some of these debates. He's definitely very candid and open on these thorny issues, which we appreciate on all lots. Absolutely, shall we leave it there,

Let's leave it there? Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Halloway. You can follow me on Twitter at Tracy Halloway and I'm Joe Why Isn't Thal. You can follow me on Twitter at the Stalwart. Follow our guests on Twitter. Neil cash car He's at Neil cash Cary one of the only I think probably the only f O m C member who's sort of like regularly tweets, like a Twitter at Neil cash Cary. Follow our producer Laura Carlson. She's at Laura M. Carlson.

Followed the Bloomberg head of podcast, Francesca Levi at Francesca Today. And check out all of our podcast at Bloomberg under the handle at podcasts. Thanks for listening.