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Money, I need the Money, money, money, tariffs, egg prices, commodities, geopolitics, war, all of these things affect inflation.

Money, I need the Money, money, money, tariffs, egg prices, commodities, geopolitics, war, all of these things affect inflation.

I'm Barry Ritolts, and we're going to bring you an extra special in large edition of At the Money, where we're going to discuss how investors should think about inflation to help us unpack all of this and what it means for your portfolio. Let's bring in Austin Goldsby. He's President of the Federal Reserve Bank of Chicago. He is a voting member of the f o MC. Previously, he was chairman of the Council of Economic Advisors and was in President Barack Obama's cabinet. So let's just start out with a simple question. You've talked about the golden path between inflation and recession. What lesson should the Federal Reserve take from our recent and rather successful about with disinflation.

I'm Barry Ritolts, and we're going to bring you an extra special in large edition of At the Money, where we're going to discuss how investors should think about inflation to help us unpack all of this and what it means for your portfolio. Let's bring in Austin Goldsby. He's President of the Federal Reserve Bank of Chicago. He is a voting member of the f o MC. Previously, he was chairman of the Council of Economic Advisors and was in President Barack Obama's cabinet. So let's just start out with a simple question. You've talked about the golden path between inflation and recession. What lesson should the Federal Reserve take from our recent and rather successful about with disinflation.

Yeah, Verry, thanks for having me on. I called the golden path. You remember, as I came into the Fed, I started at the very beginning of twenty twenty three. In December of twenty twenty two, it was the Bloomberg Economists who said there was a one hundred percent chance of recession in twenty twenty three, because the historical record suggested that to get rid of inflation you had to have a big, nasty recession. That's what had happened at old times. And what I called the Golden Path was in twenty three we had as almost as large ad in inflation that we have ever had.

Yeah, Verry, thanks for having me on. I called the golden path. You remember, as I came into the Fed, I started at the very beginning of twenty twenty three. In December of twenty twenty two, it was the Bloomberg Economists who said there was a one hundred percent chance of recession in twenty twenty three, because the historical record suggested that to get rid of inflation you had to have a big, nasty recession. That's what had happened at old times. And what I called the Golden Path was in twenty three we had as almost as large ad in inflation that we have ever had.

In a single year.

In a single year.

And not only was there not a recession, the unemployment rate never even got above four percent, a level that a lot of folks thought is below full employment. So that was a golden Path year, and I think one of the principal lessons. There were a couple of principal lessons that explain how it was possible. One was the supply side was healing on the supply chain, and there was a big surge of labor force participation from a number of groups. I think a lot of it tied to the workforce flexibility, but if you looked at self described disabled workers, highest labor force participation ever, so you got a number of positive supply shocks that are exactly it allowed for the immaculate disinflation, which the people who thought that was impossible use that phrase mockingly, but that is exactly what happened. And now fast forward to today. So in a way, transitory became Steve Leisman's phrase transsatory. But it was all because the supply side. When you get negative supply shocks, they do heal. But one of the lessons of COVID was that might take longer than you thought ahead of time because the supply chain is complicated, the modern supply chain. And you know that the Chicago FED is the seventh District, and we're like the Saudi Arabia of auto production.

And not only was there not a recession, the unemployment rate never even got above four percent, a level that a lot of folks thought is below full employment. So that was a golden Path year, and I think one of the principal lessons. There were a couple of principal lessons that explain how it was possible. One was the supply side was healing on the supply chain, and there was a big surge of labor force participation from a number of groups. I think a lot of it tied to the workforce flexibility, but if you looked at self described disabled workers, highest labor force participation ever, so you got a number of positive supply shocks that are exactly it allowed for the immaculate disinflation, which the people who thought that was impossible use that phrase mockingly, but that is exactly what happened. And now fast forward to today. So in a way, transitory became Steve Leisman's phrase transsatory. But it was all because the supply side. When you get negative supply shocks, they do heal. But one of the lessons of COVID was that might take longer than you thought ahead of time because the supply chain is complicated, the modern supply chain. And you know that the Chicago FED is the seventh District, and we're like the Saudi Arabia of auto production.

In the seventh district, we.

In the seventh district, we.

Got Indiana, Illinois, Michigan, Wisconsin. If you go talk to the auto suppliers, that something like the mother of all supply chains. Okay, so a single car has up to thirty thousand different parts and components in it, and every single one of them has its own supply chain. And you've probably seen some of these people that will track one individual part through the US supply chain and the way that it transistor came from Asia. Then they sent it to Mexico, they put it into a capacitor, they put the capacitor in a seat, get sent to the seat manufacturer in Michigan, it goes to Canada, comes back to the US, finally gets put in a car, and you go buy it on the lot and drive it out. In an environment like that, the spillovers can't take a long time. That's what we saw in COVID. That you couldn't get computer chips, so you couldn't make the electronic.

Got Indiana, Illinois, Michigan, Wisconsin. If you go talk to the auto suppliers, that something like the mother of all supply chains. Okay, so a single car has up to thirty thousand different parts and components in it, and every single one of them has its own supply chain. And you've probably seen some of these people that will track one individual part through the US supply chain and the way that it transistor came from Asia. Then they sent it to Mexico, they put it into a capacitor, they put the capacitor in a seat, get sent to the seat manufacturer in Michigan, it goes to Canada, comes back to the US, finally gets put in a car, and you go buy it on the lot and drive it out. In an environment like that, the spillovers can't take a long time. That's what we saw in COVID. That you couldn't get computer chips, so you couldn't make the electronic.

Seat, so they couldn't make the car. The price of cars went up.

Seat, so they couldn't make the car. The price of cars went up.

Then that meant the rental car companies couldn't get new cars, so the price of rental cars went up. Then the whatever the US car salesman who used the rental car, and so that thing played out over years, not weeks. My fear now is that if you're going to do something negative on the supply side, and make no doubt about it, tariffs on intermediate goods like steel, like parts and components like the things that are getting sent from auto factories from suppliers in Canada that are getting sent over the border to be fabricated into the car in Michigan. That's a negative supply shock. And I hope that it's small enough or short lived enough that it doesn't reteach us the lessons of COVID, But it might The lesson of COVID was that can have if it's big enough, that can have a longer lasting impact than you might have thought at the beginning.

Then that meant the rental car companies couldn't get new cars, so the price of rental cars went up. Then the whatever the US car salesman who used the rental car, and so that thing played out over years, not weeks. My fear now is that if you're going to do something negative on the supply side, and make no doubt about it, tariffs on intermediate goods like steel, like parts and components like the things that are getting sent from auto factories from suppliers in Canada that are getting sent over the border to be fabricated into the car in Michigan. That's a negative supply shock. And I hope that it's small enough or short lived enough that it doesn't reteach us the lessons of COVID, But it might The lesson of COVID was that can have if it's big enough, that can have a longer lasting impact than you might have thought at the beginning.

So let me ask you a question about that recession that never showed up. Forget one hundred percent chance of recession twenty two, twenty three, twenty four, half of the Wall Street economists were forecasting recessions, and no less in August and well regarded economist than Lauren Summers was saying, Hey, you'll need ten percent unemployment to bring this inflation down.

So let me ask you a question about that recession that never showed up. Forget one hundred percent chance of recession twenty two, twenty three, twenty four, half of the Wall Street economists were forecasting recessions, and no less in August and well regarded economist than Lauren Summers was saying, Hey, you'll need ten percent unemployment to bring this inflation down.

What was it.

What was it.

About the historical models that seems to have gotten this economic cycle so wrong?

About the historical models that seems to have gotten this economic cycle so wrong?

Well, that's the critical question, and Summers said it either had to go to ten percent or if it went to six percent, it would take five years of unemployment above six percent. I think the thing that got wrong that worldview got wrong is that it was rooted in almost all previous business cycles were regular demand driven business cycles, and that's the logic.

Well, that's the critical question, and Summers said it either had to go to ten percent or if it went to six percent, it would take five years of unemployment above six percent. I think the thing that got wrong that worldview got wrong is that it was rooted in almost all previous business cycles were regular demand driven business cycles, and that's the logic.

In a demand driven.

In a demand driven.

Business cycle, you overstimulate, inflation goes up, inflation expectations go up, and you have a hell of a time getting it out of there.

Business cycle, you overstimulate, inflation goes up, inflation expectations go up, and you have a hell of a time getting it out of there.

As you know, I was an old.

As you know, I was an old.

Dear friend with Paul Volker, and he was a mentor of mine and a personal he wrote really and one of the lessons of the Vulgar episode, which was a time when inflation expectations went way up, is that it's extremely painful if the FED or the central Bank does not have credibility.

Dear friend with Paul Volker, and he was a mentor of mine and a personal he wrote really and one of the lessons of the Vulgar episode, which was a time when inflation expectations went way up, is that it's extremely painful if the FED or the central Bank does not have credibility.

It's extremely painful to.

It's extremely painful to.

Get rid of inflation in an environment where the FED is credible. So that even as headline CPI inflation was approaching double digits, the FED was announcing, we will get inflation back to two percent. And if you go look at the market estimation from tips or from others, people believed it. If you looked at the what do you think inflation will be in five years, they were saying it will be back to two percent.

Get rid of inflation in an environment where the FED is credible. So that even as headline CPI inflation was approaching double digits, the FED was announcing, we will get inflation back to two percent. And if you go look at the market estimation from tips or from others, people believed it. If you looked at the what do you think inflation will be in five years, they were saying it will be back to two percent.

That is a.

That is a.

Sign of credibility of the central bank. So A, you must have credibility, and B you must have the good fortune that positive supply shocks in our case one a big increase in labor force participation that was enabled I think by some of the more flexible work arrangements. Two that we had had such a horrible supply chain experience coming through COVID with shortages.

Sign of credibility of the central bank. So A, you must have credibility, and B you must have the good fortune that positive supply shocks in our case one a big increase in labor force participation that was enabled I think by some of the more flexible work arrangements. Two that we had had such a horrible supply chain experience coming through COVID with shortages.

Et cetera. That could heal, and then three a pretty.

Et cetera. That could heal, and then three a pretty.

Subst stanchel uptick in the rate of productivity growth. That combination was a lovely combination that allowed inflation to come down without a recession. And I think that the chat GPTAI version of a central bank would have got it wrong because it would have been based on a training sample that was a whole bunch of demand shocks, and this really wasn't a demand shock induced business cycle. And you know, look, it doesn't take somebody with the market acumen that you have, Barry, and it certainly doesn't take a PhD to look out and recognize that the COVID business cycle was driven by industries that are not normally cyclical. Normally cyclicals like consumer durables or business investment are the thing that drives the recession. And here the demand for consumer durables went up because people could not spend money on services. But this is the only recession we ever had that came from people not being able to go to the dentist.

Subst stanchel uptick in the rate of productivity growth. That combination was a lovely combination that allowed inflation to come down without a recession. And I think that the chat GPTAI version of a central bank would have got it wrong because it would have been based on a training sample that was a whole bunch of demand shocks, and this really wasn't a demand shock induced business cycle. And you know, look, it doesn't take somebody with the market acumen that you have, Barry, and it certainly doesn't take a PhD to look out and recognize that the COVID business cycle was driven by industries that are not normally cyclical. Normally cyclicals like consumer durables or business investment are the thing that drives the recession. And here the demand for consumer durables went up because people could not spend money on services. But this is the only recession we ever had that came from people not being able to go to the dentist.

And the thing.

And the thing.

About that, and like the dentist is normally recession proof. And so that's why we everybody should have been more humble in pronouncing what the future would be coming out of such a weird o business cycle and we're still kind.

About that, and like the dentist is normally recession proof. And so that's why we everybody should have been more humble in pronouncing what the future would be coming out of such a weird o business cycle and we're still kind.

Of living with that.

Of living with that.

So let's talk about humility. You have specifically mentioned that the FED needs to be quote more careful and more prudent about rate cuts due to the risk of inflation kicking back up again. So what specific inflation indicators are you watching closely in twenty twenty five.

So let's talk about humility. You have specifically mentioned that the FED needs to be quote more careful and more prudent about rate cuts due to the risk of inflation kicking back up again. So what specific inflation indicators are you watching closely in twenty twenty five.

Okay, I'm thankful, Barry. I thought you were gonna be like, let's.

Okay, I'm thankful, Barry. I thought you were gonna be like, let's.

Talk about humility, you once said, and I thought you're going to be like, You're You're not a humble person. Look, I have actually been before we got to this dust in the air period where everybody's talking about major either geopolitical changes to conditions or changes of policy conditions that might affect inflation. I've been more confident. I've had comfort we're still on the path to get inflation to two percent and we could cut rates.

Talk about humility, you once said, and I thought you're going to be like, You're You're not a humble person. Look, I have actually been before we got to this dust in the air period where everybody's talking about major either geopolitical changes to conditions or changes of policy conditions that might affect inflation. I've been more confident. I've had comfort we're still on the path to get inflation to two percent and we could cut rates.

Now.

Now.

I'm open to being proven wrong, and if I adjust the.

I'm open to being proven wrong, and if I adjust the.

I'm in the data dog caucus.

I'm in the data dog caucus.

If the data come in and the outlook is changing, for sure, I would change my view. But the I think it's critical to answer your question specifically, what should we look at inflation? I think number one, you want to look at the through line on inflation, not get overly indexed on monthly gyrations. It's a very noisy series, okay, So looking over a longer period and what matters is the new months coming in the inflation that's a twelve month backward looking average, which is usually what we're reporting in Eleven of the twelve months that are included in that are not new information.

If the data come in and the outlook is changing, for sure, I would change my view. But the I think it's critical to answer your question specifically, what should we look at inflation? I think number one, you want to look at the through line on inflation, not get overly indexed on monthly gyrations. It's a very noisy series, okay, So looking over a longer period and what matters is the new months coming in the inflation that's a twelve month backward looking average, which is usually what we're reporting in Eleven of the twelve months that are included in that are not new information.

We already knew that.

We already knew that.

We knew, for example, that the blip up in inflation last January more than a year ago, was going to fall out the back and so that it would be very likely that the twelve month average would start dropping here in the first quarter, but that would not be a sign that the inflation is falling right now. The inflation already fell.

We knew, for example, that the blip up in inflation last January more than a year ago, was going to fall out the back and so that it would be very likely that the twelve month average would start dropping here in the first quarter, but that would not be a sign that the inflation is falling right now. The inflation already fell.

It is just like how we do the average.

It is just like how we do the average.

So Number one, I put a lot of weight on the new months coming in and trying to get the through line of.

So Number one, I put a lot of weight on the new months coming in and trying to get the through line of.

That, not just react to one month.

That, not just react to one month.

And second thing that helps me that I find outpal is looking at the components of core inflation. Now I know it can drive people nuts, like to drive my mom nuts, that we put our focus on core inflation and not food and energy inflation, because.

And second thing that helps me that I find outpal is looking at the components of core inflation. Now I know it can drive people nuts, like to drive my mom nuts, that we put our focus on core inflation and not food and energy inflation, because.

My mom's like, what do you mean you're not.

My mom's like, what do you mean you're not.

Paying attention to food and energy inflation that's very public top of mind for her. It's because those are so variable, they're up there, down we think the better observation is to look at core, and then within core, there's goods, there's services, there's housing. Our problem has been goods inflation had returned to deflation and.

Paying attention to food and energy inflation that's very public top of mind for her. It's because those are so variable, they're up there, down we think the better observation is to look at core, and then within core, there's goods, there's services, there's housing. Our problem has been goods inflation had returned to deflation and.

Was looking good.

Was looking good.

Housing inflation's in the biggest puzzle, and services inflation pretty persistent. The things that have given me a little more confidence lately is that even as we had a bit of a blip up in the inflation here, the components still look pretty good. The housing inflation has finally started falling on a pretty persistent basis, as we've been wanting it to, Services getting closer, much closer to what it was pre COVID, housing back close to what.

Housing inflation's in the biggest puzzle, and services inflation pretty persistent. The things that have given me a little more confidence lately is that even as we had a bit of a blip up in the inflation here, the components still look pretty good. The housing inflation has finally started falling on a pretty persistent basis, as we've been wanting it to, Services getting closer, much closer to what it was pre COVID, housing back close to what.

It was pre COVID.

It was pre COVID.

And the thing that has been firmed up here in the last couple of months has actually been goods.

And the thing that has been firmed up here in the last couple of months has actually been goods.

And the thing about goods.

And the thing about goods.

Inflation is, as you know, and as some of my research showed before I ever got to the FED, goods inflation over long periods is actually deflation. The two percent inflation that we were at before COVID was housing three and a half the four per year, services two and a half per year, and goods minus a half to minus one per year. And so I think it's overwhelmingly likely that goods will go back to that very long standing trend and as it does, so that's Those are the kinds of things that give me confidence.

Inflation is, as you know, and as some of my research showed before I ever got to the FED, goods inflation over long periods is actually deflation. The two percent inflation that we were at before COVID was housing three and a half the four per year, services two and a half per year, and goods minus a half to minus one per year. And so I think it's overwhelmingly likely that goods will go back to that very long standing trend and as it does, so that's Those are the kinds of things that give me confidence.

So you mentioned housing. We seem to have two ongoing issues with housing. The first is it appears that since the financial crisis we've significantly underbuilt single family homes as built yeah as the population can and multifamily. So you have the population growing, you still have fairly decent immigration numbers. Too much demand, not enough supply. The first question is what can we do to generate more supply in housing? Do higher rates operate as a headwind against builders, contractors, developed helopers putting up more housing.

So you mentioned housing. We seem to have two ongoing issues with housing. The first is it appears that since the financial crisis we've significantly underbuilt single family homes as built yeah as the population can and multifamily. So you have the population growing, you still have fairly decent immigration numbers. Too much demand, not enough supply. The first question is what can we do to generate more supply in housing? Do higher rates operate as a headwind against builders, contractors, developed helopers putting up more housing.

Look, this is a tangled This is a tangled web that is critically important to the economy. You've seen the relative price of housing go way up post COVID. But the one thing that I want to highlight is, yes, it's very noticeable, but it's not new. If you look like I said, for the whole decade plus pre COVID, you had house prices going up three and a half percent a year, goods prices going down one percent a year. If you just compare housing relative price versus going to costco relative price a thing that compounds five percent a year for fifteen or twenty years, Yeah, that's gonna be a really big difference at the end of that time. And so I think one component that people are seeing, and they're not wrong. You see the frustration of young people. They say, you know, when my dad was twenty five years old, he on one job could afford a decent house, and I can't buy a condo. And they're not wrong. The relative price of housing has gone way up. I think some component of.

Look, this is a tangled This is a tangled web that is critically important to the economy. You've seen the relative price of housing go way up post COVID. But the one thing that I want to highlight is, yes, it's very noticeable, but it's not new. If you look like I said, for the whole decade plus pre COVID, you had house prices going up three and a half percent a year, goods prices going down one percent a year. If you just compare housing relative price versus going to costco relative price a thing that compounds five percent a year for fifteen or twenty years, Yeah, that's gonna be a really big difference at the end of that time. And so I think one component that people are seeing, and they're not wrong. You see the frustration of young people. They say, you know, when my dad was twenty five years old, he on one job could afford a decent house, and I can't buy a condo. And they're not wrong. The relative price of housing has gone way up. I think some component of.

That is.

That is.

Regulatory in nature and business permits. And I've been convinced by a bunch of the evidence that land use regulation have made it very difficult for us to build housing of any form, single family homes, multi family homes. I have a I did some research. It was about the construction industry, and another thing going on is that overall productivity in the construction industry has not only been stagnant, actually over long periods of time, been negative that we've got worse at building the same things that that we did twenty thirty years ago.

Regulatory in nature and business permits. And I've been convinced by a bunch of the evidence that land use regulation have made it very difficult for us to build housing of any form, single family homes, multi family homes. I have a I did some research. It was about the construction industry, and another thing going on is that overall productivity in the construction industry has not only been stagnant, actually over long periods of time, been negative that we've got worse at building the same things that that we did twenty thirty years ago.

So I think that's part of it.

So I think that's part of it.

And I think you're highlighting that rates do have.

And I think you're highlighting that rates do have.

A twin.

A twin.

They do have a twin twined effect. One as they affect demand, but the other is they do affect construction. And so I think in a higher rate environment, if you're trying to cool the economy, this.

They do have a twin twined effect. One as they affect demand, but the other is they do affect construction. And so I think in a higher rate environment, if you're trying to cool the economy, this.

Is always true.

Is always true.

But the shift of more and more of our mortgages to being thirty year fixed than they were saying two thousand and seven have meant that changing rates can have more of a lock in effect than and it kind of dull the immediate impact of monetary policy than it does in a more immediate mortgage impact environment.

But the shift of more and more of our mortgages to being thirty year fixed than they were saying two thousand and seven have meant that changing rates can have more of a lock in effect than and it kind of dull the immediate impact of monetary policy than it does in a more immediate mortgage impact environment.

Let's walk out a little bit about housing owner's equivalent. Rent has been this bugaboo for a long time that some people following the financial crisis said had understated housing inflation. Now there's some people saying something similar. How do we And I know the FED has looked at this. There's been a number of white papers that have come out of the FED. How should we think about the equivalent of renting versus ownership? In terms of the impact on inflation.

Let's walk out a little bit about housing owner's equivalent. Rent has been this bugaboo for a long time that some people following the financial crisis said had understated housing inflation. Now there's some people saying something similar. How do we And I know the FED has looked at this. There's been a number of white papers that have come out of the FED. How should we think about the equivalent of renting versus ownership? In terms of the impact on inflation.

You raise several critical points if we're going to walk out on housing and inflation. Point one, it's not single family home sales prices, its owner equivalent rent plus rents. And the reason it's that is because part of buying a house is a financial asset. So if you're buying a house and the values going up and you're selling it for more, and if there's speculation, that's not really housing. What you're trying to get, that's not really inflation, but you're trying to get for housing inflation is something like the CPI how much more does it cost for the same housing services, And that's why they try to compute owner equivalent rent and similar Point two, that's there's a heavy lag in the way they do it. So in a way, the critics were correct that it was understating inflation on the way up, and the other critics are right that now it's overstating inflation on the way down. For the same reason that it's kind of like if you were measuring average rent and people were raising that it was a time when the market was raising the rent. It's gonna take time before that shows up in average rents because the contracts last for a year and turning over, so you get this automatic lag in there. I think that has been a major component of measured housing inflation because if you go look at market based measures like from Zillo or others, they were showing rapid drops in the inflation rate back to or in some cases even below what inflation was before COVID started. And so that's been the puzzle. That's it's been our impatience. Why hasn't it shown up yet? That's been true for quite a while, and the lag theory it should start showing up.

You raise several critical points if we're going to walk out on housing and inflation. Point one, it's not single family home sales prices, its owner equivalent rent plus rents. And the reason it's that is because part of buying a house is a financial asset. So if you're buying a house and the values going up and you're selling it for more, and if there's speculation, that's not really housing. What you're trying to get, that's not really inflation, but you're trying to get for housing inflation is something like the CPI how much more does it cost for the same housing services, And that's why they try to compute owner equivalent rent and similar Point two, that's there's a heavy lag in the way they do it. So in a way, the critics were correct that it was understating inflation on the way up, and the other critics are right that now it's overstating inflation on the way down. For the same reason that it's kind of like if you were measuring average rent and people were raising that it was a time when the market was raising the rent. It's gonna take time before that shows up in average rents because the contracts last for a year and turning over, so you get this automatic lag in there. I think that has been a major component of measured housing inflation because if you go look at market based measures like from Zillo or others, they were showing rapid drops in the inflation rate back to or in some cases even below what inflation was before COVID started. And so that's been the puzzle. That's it's been our impatience. Why hasn't it shown up yet? That's been true for quite a while, and the lag theory it should start showing up.

Well, finally it has, and.

Well, finally it has, and.

That's why I have a little more confidence that the housing inflation improvement will be lasting.

That's why I have a little more confidence that the housing inflation improvement will be lasting.

Is it was, it.

Is it was, it.

Took a long time to run up, and now it's finally started coming down, So I think it's it's probably got legs of coming down. So I think those are two key components on the housing inflation side.

Took a long time to run up, and now it's finally started coming down, So I think it's it's probably got legs of coming down. So I think those are two key components on the housing inflation side.

We could get it.

We could get it.

We could even go into a third layer of wonky, but it's more subtle, which is the component. If you think about rents and say market rents in Zillo, or who are renters versus who are new home buyers, they're sort of different markets, and so it doesn't have to be that the inflation rate of the zilo market rents matches the owner equivalent rents that they're measuring at the BLS, because they might be different. New renters and existing tenants might be a little bit too separate markets.

We could even go into a third layer of wonky, but it's more subtle, which is the component. If you think about rents and say market rents in Zillo, or who are renters versus who are new home buyers, they're sort of different markets, and so it doesn't have to be that the inflation rate of the zilo market rents matches the owner equivalent rents that they're measuring at the BLS, because they might be different. New renters and existing tenants might be a little bit too separate markets.

It makes a lot of sense. You mentioned the two percent inflation target. In the twenty tens, an era dominated by monetary policy, the FED had a two percent inflation target. Now in the twenty twenties, we have a primarily fiscally driven economy, or at least post pandemic. That's what it feels like. You've said, you've turned one hundred and eighty degrees on the inflation target question since your initial thoughts in twenty twelve. Tell us about that. Explain that.

It makes a lot of sense. You mentioned the two percent inflation target. In the twenty tens, an era dominated by monetary policy, the FED had a two percent inflation target. Now in the twenty twenties, we have a primarily fiscally driven economy, or at least post pandemic. That's what it feels like. You've said, you've turned one hundred and eighty degrees on the inflation target question since your initial thoughts in twenty twelve. Tell us about that. Explain that.

Okay, so in twenty twelve there had been vague targets. In twenty twelve, I believe is when the FED officially said, where you have a two point zero zero zero percent inflation target, and you go back and look, I wasn't at the FED.

Okay, so in twenty twelve there had been vague targets. In twenty twelve, I believe is when the FED officially said, where you have a two point zero zero zero percent inflation target, and you go back and look, I wasn't at the FED.

I was critical.

I was critical.

I was publicly critical on the grounds that that conveyed a way false sense of precision. To me, that if I asked you just take the take the standard deviation of the inflation series and ask yourself how many observations would you need to get to be able to distinguish between a two point zero percent inflation rate and a two point one percent inflation rate.

I was publicly critical on the grounds that that conveyed a way false sense of precision. To me, that if I asked you just take the take the standard deviation of the inflation series and ask yourself how many observations would you need to get to be able to distinguish between a two point zero percent inflation rate and a two point one percent inflation rate.

And the answer was like decades.

And the answer was like decades.

You need decades a monthly observation before you could tell no, no, this is two point one not two point zero. So that was my critique. Fast forward to the inflation. Now it goes way up. And the one wonky thing that you got to know, what you already know, Barry, but the average person might not know, is the two point zero percent inflation target is for personal consumption expenditure inflation PCEE inflation. That's not CPI. It's a little different. They have different weightings of what goes into it. We believe the PCEE measure, which instead of the CPI measures a basket and the pce measures everything consumers spend money on, so it's the better measure.

You need decades a monthly observation before you could tell no, no, this is two point one not two point zero. So that was my critique. Fast forward to the inflation. Now it goes way up. And the one wonky thing that you got to know, what you already know, Barry, but the average person might not know, is the two point zero percent inflation target is for personal consumption expenditure inflation PCEE inflation. That's not CPI. It's a little different. They have different weightings of what goes into it. We believe the PCEE measure, which instead of the CPI measures a basket and the pce measures everything consumers spend money on, so it's the better measure.

But just as a technical.

But just as a technical.

CPI of two point three is about the equivalent of a PCEE of two point zero. Okay, we go through COVID, the inflation post COVID source to almost double digits. In long run inflation expectations measured in the market never go up. They remain exactly and they're off of CPI. Importantly, they remain exactly two point three percent. And so I said, either that's the biggest coincidence in the history of price indices, or else the inflation target of two point zero is serving as exactly the anchor that it's advocates said it would be.

CPI of two point three is about the equivalent of a PCEE of two point zero. Okay, we go through COVID, the inflation post COVID source to almost double digits. In long run inflation expectations measured in the market never go up. They remain exactly and they're off of CPI. Importantly, they remain exactly two point three percent. And so I said, either that's the biggest coincidence in the history of price indices, or else the inflation target of two point zero is serving as exactly the anchor that it's advocates said it would be.

And at that point I changed one hundred and eighty degrees.

And at that point I changed one hundred and eighty degrees.

And I not only am I not opposed to the inflation target, I think it's critical, it's vital, and it is serving as exactly the anchor that we needed.

And I not only am I not opposed to the inflation target, I think it's critical, it's vital, and it is serving as exactly the anchor that we needed.

So it's a magnet, not necessarily a landing spot. Really interesting you mentioned will be.

So it's a magnet, not necessarily a landing spot. Really interesting you mentioned will be.

The landing spot it will be.

The landing spot it will be.

You may get.

You may get.

You mentioned inflation expectations when when we look at some of the survey data in twenty twenty and twenty one, right before inflation really exploded higher, they were really low. And then go fast forward to June twenty twenty two, just as inflation was peaking, they were really high. How close attention does the FED pay to inflation expectation? It seems that it's very much a lagging not leading indicator.

You mentioned inflation expectations when when we look at some of the survey data in twenty twenty and twenty one, right before inflation really exploded higher, they were really low. And then go fast forward to June twenty twenty two, just as inflation was peaking, they were really high. How close attention does the FED pay to inflation expectation? It seems that it's very much a lagging not leading indicator.

Now fascinating in a way a I should have said at the beginning.

Now fascinating in a way a I should have said at the beginning.

You know the rules.

You know the rules.

I'm not allowed to speak for the fomcing er, the FED, only for myself. That gives them great relief, That gives my colleagues great relive. In the world of food safety, the thing that characterizes almost every worker in the food supply chain is frustration. Why do we have to wash our hands all the time. There's no nobody's ever getting sick from the food, And it's only because they're washing their hands all the time that nobody's getting sick from the food. I feel that way a little bit about inflation expectations. They are lagging indicators if the FED has credibility and is doing it right. As soon as that's not true, they become very instructive, forward looking indicators. The only thing that I want to emphasize as well is now we've actually started to get a couple of observations where not short run expectations, but longer run expectations actually bumped up in the University of Michigan survey. And since I had said this about how important inflation expectations, where as a measure. A couple of folks asked me, well, does that make you nervous? And yes, but a I've always said I value the market based measures more than survey based measures, and one month is no months. But make no doubt about it. If what we started to see was persistent, a persistent increase in long run expectations of inflation in surveys and market and for example, if you started to see long rates rising one for one with long run inflation expectations, then that fundamentally, to me, means the Fed's job is not done, and we've got to go address that because if you's that's one of the main lessons of the vulgar experience and central banks around the world. If the expectations start rising, it is really hard to slay. You don't have to just slay the inflation dragon. You have to go convince people that it's going to stick. And it kind of the only way we know, the only way we know central banks have been able to convey that is to have awful recessions where they grind down wages to convince people look that we will keep the job market as suppressed as we need to. As proved that We're serious, so we don't ever want to get back into that situation if we can help.

I'm not allowed to speak for the fomcing er, the FED, only for myself. That gives them great relief, That gives my colleagues great relive. In the world of food safety, the thing that characterizes almost every worker in the food supply chain is frustration. Why do we have to wash our hands all the time. There's no nobody's ever getting sick from the food, And it's only because they're washing their hands all the time that nobody's getting sick from the food. I feel that way a little bit about inflation expectations. They are lagging indicators if the FED has credibility and is doing it right. As soon as that's not true, they become very instructive, forward looking indicators. The only thing that I want to emphasize as well is now we've actually started to get a couple of observations where not short run expectations, but longer run expectations actually bumped up in the University of Michigan survey. And since I had said this about how important inflation expectations, where as a measure. A couple of folks asked me, well, does that make you nervous? And yes, but a I've always said I value the market based measures more than survey based measures, and one month is no months. But make no doubt about it. If what we started to see was persistent, a persistent increase in long run expectations of inflation in surveys and market and for example, if you started to see long rates rising one for one with long run inflation expectations, then that fundamentally, to me, means the Fed's job is not done, and we've got to go address that because if you's that's one of the main lessons of the vulgar experience and central banks around the world. If the expectations start rising, it is really hard to slay. You don't have to just slay the inflation dragon. You have to go convince people that it's going to stick. And it kind of the only way we know, the only way we know central banks have been able to convey that is to have awful recessions where they grind down wages to convince people look that we will keep the job market as suppressed as we need to. As proved that We're serious, so we don't ever want to get back into that situation if we can help.

The last question on inflation, you have mentioned that prioritizing real economic channels the real economy over wealth effects. Can you can you explain this perspective. Why does the real economy channels matter more to the wealth effects. I always thought the wealth effect was so dramatically over st because you know, it's typically the wealthy that owns most of the stocks, and the real economy is the real economy. But I'm curious as to your perspective.

The last question on inflation, you have mentioned that prioritizing real economic channels the real economy over wealth effects. Can you can you explain this perspective. Why does the real economy channels matter more to the wealth effects. I always thought the wealth effect was so dramatically over st because you know, it's typically the wealthy that owns most of the stocks, and the real economy is the real economy. But I'm curious as to your perspective.

Yeah, look, I would expand it a little more than just the wealth effect.

Yeah, look, I would expand it a little more than just the wealth effect.

My view is the.

My view is the.

Federal Reserve Act tells us we should be looking at the real economy, maximizing employment and stabilizing prices. The stock market other financial markets can influence those two things, partly through the wealth effect. But by the very first speech I gave when I got to the FED, I went out to Indiana and a factory where they where they make our vs. A community college where they train people for advanced manufacturing, and I said this, look, the FED, by law, is supposed to be looking at the real economy and financial markets to the extent they're affecting the real economy. We should pay attention to them. But that's it, Like, let's remember the priorities. I quantitatively agree with you. I think there are a number of people who overweight the wealth effect and its impact on consumer spending. And I don't want us to get into a mindset that the FED has an accomplishment. If it does something and it changes the financial markets, that's an indirect in my worldview. If you get the real economy right, the financial markets will benefit. But doing something to try to create higher equity prices or benefit the financial market, that should not be the fed's goal.

Federal Reserve Act tells us we should be looking at the real economy, maximizing employment and stabilizing prices. The stock market other financial markets can influence those two things, partly through the wealth effect. But by the very first speech I gave when I got to the FED, I went out to Indiana and a factory where they where they make our vs. A community college where they train people for advanced manufacturing, and I said this, look, the FED, by law, is supposed to be looking at the real economy and financial markets to the extent they're affecting the real economy. We should pay attention to them. But that's it, Like, let's remember the priorities. I quantitatively agree with you. I think there are a number of people who overweight the wealth effect and its impact on consumer spending. And I don't want us to get into a mindset that the FED has an accomplishment. If it does something and it changes the financial markets, that's an indirect in my worldview. If you get the real economy right, the financial markets will benefit. But doing something to try to create higher equity prices or benefit the financial market, that should not be the fed's goal.

The Fed's goal should be.

The Fed's goal should be.

Stabilized prices, maximize employment, and focus on the realese.

Stabilized prices, maximize employment, and focus on the realese.

And if you do both of those, stock market tends to do well under those.

And if you do both of those, stock market tends to do well under those.

That's how it should be. That's how it should be.

That's how it should be. That's how it should be.

So you've mentioned that conditions have not materially changed despite recent economic data. Do you still expect to see interest rates a fair bit lower over the next twelve to eighteen months.

So you've mentioned that conditions have not materially changed despite recent economic data. Do you still expect to see interest rates a fair bit lower over the next twelve to eighteen months.

I still do.

I still do.

If we can get out of this dusty environment, look at the horizon and look at the through line. And when we're having a bunch of uncertainties that are about things that will increase prices.

If we can get out of this dusty environment, look at the horizon and look at the through line. And when we're having a bunch of uncertainties that are about things that will increase prices.

It's just throwing.

It's just throwing.

Lots and lots of dust in the air and it's hard to see the through line. I still think that underneath there is a robust, healthy economy with employment pretty much stable at full employment, inflation headed back to two percent, GDP growth solid and strong, and we can get back to the resting point of normal in that kind of environment. If we're going to have an escalating trade war that leads to higher prices and a stagflationary kind of environment where GDP growth is falling, I could revise my economic outlook, but I still think if we can get past this dusty part over twelve to eighteen months, the SEP dot plot tells you that the vast majority of members of the committee believe that the ultimate settling point for rates is well below where we are today, and so I still think that we can get there.

Lots and lots of dust in the air and it's hard to see the through line. I still think that underneath there is a robust, healthy economy with employment pretty much stable at full employment, inflation headed back to two percent, GDP growth solid and strong, and we can get back to the resting point of normal in that kind of environment. If we're going to have an escalating trade war that leads to higher prices and a stagflationary kind of environment where GDP growth is falling, I could revise my economic outlook, but I still think if we can get past this dusty part over twelve to eighteen months, the SEP dot plot tells you that the vast majority of members of the committee believe that the ultimate settling point for rates is well below where we are today, and so I still think that we can get there.

And our final question, I love your self description. You have said, I'm neither a hawk nor a dove. I'm a data dog. So now we have to add right, hawks, dogs, birds, hawks, doves and dogs. So explain how you, as a data dog, how does that affect your approach to monetary policy, especially in twenty twenty five you're a voting member.

And our final question, I love your self description. You have said, I'm neither a hawk nor a dove. I'm a data dog. So now we have to add right, hawks, dogs, birds, hawks, doves and dogs. So explain how you, as a data dog, how does that affect your approach to monetary policy, especially in twenty twenty five you're a voting member.

I try to get out there either.

I try to get out there either.

The first rule of the data dog kennel is that there's a time for walking, and there's a time for sniffin, and know the difference, and the time for sniffin is exactly when there is not clarity, okay, And that is go get every data series you can, every frequency, don't throw anything away. If you can get private sector price information.

The first rule of the data dog kennel is that there's a time for walking, and there's a time for sniffin, and know the difference, and the time for sniffin is exactly when there is not clarity, okay, And that is go get every data series you can, every frequency, don't throw anything away. If you can get private sector price information.

Get it.

Get it.

If you are looking at the job market, don't just look at payroll employment when there's a bunch of stuff with population growth and immigration that make it noisier. Don't just look at the unemployment rate when labor force participation changes can can affect it. Take ratios of unemployment, of vacancies, look at.

If you are looking at the job market, don't just look at payroll employment when there's a bunch of stuff with population growth and immigration that make it noisier. Don't just look at the unemployment rate when labor force participation changes can can affect it. Take ratios of unemployment, of vacancies, look at.

The hiring weight and the quit rate.

The hiring weight and the quit rate.

Get out and talk to the business people in our regions. And the kind of inform that goes into the base book. All of those things are more real time than just the data series.

Get out and talk to the business people in our regions. And the kind of inform that goes into the base book. All of those things are more real time than just the data series.

But that mentality that.

But that mentality that.

If you have a question, get out there and sniff. That's the essence of the data dog credo. If you want to and look. It comes with some downsides. If you are more theoretical, ideological, there are times when you might be right and you can get to the answer quicker. But this seems like a very uncertain environment, unusual, unprecedented business cycles, nothing like things we've seen before. So just personally, I'm more comfortable with that kind of approach.

If you have a question, get out there and sniff. That's the essence of the data dog credo. If you want to and look. It comes with some downsides. If you are more theoretical, ideological, there are times when you might be right and you can get to the answer quicker. But this seems like a very uncertain environment, unusual, unprecedented business cycles, nothing like things we've seen before. So just personally, I'm more comfortable with that kind of approach.

So to wrap up, if you're an investor interested in what's going on in the economy, looking at inflation, looking at monetary policy, it's simply not as black and white as you often hear about. Many of the vote members of the FOMC look at the data that's out there as complex and not binary. Don't think that what you're hearing in these headline reports are remotely giving you the full color of what's happening. There are obviously a whole lot of moving parts here, a lot of complexity, and it's reassuring when you hear from people like Chicago Federal Reserve President and FMC voting member Austin Goolsby, who are data driven, who do focus on filtering out the noise but paying attention to the most recent trends, but following the through line. It's not simple, it's complicated. We really need to bring a more intelligent approach than we often see as investors. We think about what the Federal Reserve is going to do in response to what in flat is doing. Perhaps if we had a little more sophisticated approach and a little less binary, we wouldn't see people being so wrong about when the Fed's gonna cut, when a recession is going to happen, what's going on overall with the robustness of the economy. Hey, it turns out that economics is hard. It's complicated. There are lots of moving parts. We oversimplify this at our own risk. I'm Barry Redolts. You've been listening to Bloomberg's At the Money

So to wrap up, if you're an investor interested in what's going on in the economy, looking at inflation, looking at monetary policy, it's simply not as black and white as you often hear about. Many of the vote members of the FOMC look at the data that's out there as complex and not binary. Don't think that what you're hearing in these headline reports are remotely giving you the full color of what's happening. There are obviously a whole lot of moving parts here, a lot of complexity, and it's reassuring when you hear from people like Chicago Federal Reserve President and FMC voting member Austin Goolsby, who are data driven, who do focus on filtering out the noise but paying attention to the most recent trends, but following the through line. It's not simple, it's complicated. We really need to bring a more intelligent approach than we often see as investors. We think about what the Federal Reserve is going to do in response to what in flat is doing. Perhaps if we had a little more sophisticated approach and a little less binary, we wouldn't see people being so wrong about when the Fed's gonna cut, when a recession is going to happen, what's going on overall with the robustness of the economy. Hey, it turns out that economics is hard. It's complicated. There are lots of moving parts. We oversimplify this at our own risk. I'm Barry Redolts. You've been listening to Bloomberg's At the Money