Bloomberg Audio Studios, Podcasts, radio News.

Bloomberg Audio Studios, Podcasts, radio News.

I'm David Gerrett, joined in the studio by my co host Sarah Holder.

I'm David Gerrett, joined in the studio by my co host Sarah Holder.

Hi, David, Hey, Sarah. I just had to join you because here at the big take. This day is just too big for one host.

Hi, David, Hey, Sarah. I just had to join you because here at the big take. This day is just too big for one host.

Indeed, it is. It is like our super Bowl, if the super Bowl were to happen eight.

Indeed, it is. It is like our super Bowl, if the super Bowl were to happen eight.

Times a year, exactly like the super Bowl. Today, the Federal Reserve concluded its two day policy meeting, and.

Times a year, exactly like the super Bowl. Today, the Federal Reserve concluded its two day policy meeting, and.

No surprise, it did not change its target interest rate. Here's Fed char Jerome Powell.

No surprise, it did not change its target interest rate. Here's Fed char Jerome Powell.

Today, the FMC decided to leave our policy interest rate unchanged.

Today, the FMC decided to leave our policy interest rate unchanged.

That rate is around five point three percent at the moment, which means the cost of borrowing from mortgages to car loans is likely to stay high for a bit longer.

That rate is around five point three percent at the moment, which means the cost of borrowing from mortgages to car loans is likely to stay high for a bit longer.

The Fed is doing this, of course, to try and tame inflation, to make sure that the kind of price spikes we saw during the pandemic doesn't come back now.

The Fed is doing this, of course, to try and tame inflation, to make sure that the kind of price spikes we saw during the pandemic doesn't come back now.

No one likes rising prices, and I for one, am tired of spending a small fortune on a carton of eggs.

No one likes rising prices, and I for one, am tired of spending a small fortune on a carton of eggs.

You in me, both but annoying as it is to pay more for gas and rent and dinners out and those eggs. Some inflation is seen as a good thing.

You in me, both but annoying as it is to pay more for gas and rent and dinners out and those eggs. Some inflation is seen as a good thing.

But increasingly, David, there's been this big debate about just what number America's Central Bank should be aiming for, how much we should expect prices to rise in the future.

But increasingly, David, there's been this big debate about just what number America's Central Bank should be aiming for, how much we should expect prices to rise in the future.

So for over a decade that Goldilock's number not too hot not too cold, has been two percent. It's something that Chair Powell hammered home again and again and again during the post meeting press conference.

So for over a decade that Goldilock's number not too hot not too cold, has been two percent. It's something that Chair Powell hammered home again and again and again during the post meeting press conference.

We are strongly committed to returning inflation to our two percent goal. We'll need to see more good data to bolster our confidence that inflation is moving sustainably toward two percent. We remain committed to bringing inflation back down to our two percent goal into keeping longer term.

We are strongly committed to returning inflation to our two percent goal. We'll need to see more good data to bolster our confidence that inflation is moving sustainably toward two percent. We remain committed to bringing inflation back down to our two percent goal into keeping longer term.

But David, you spoke to economist and Bloomberg opinion columnist Mohammed el Arian, who has been making the case that so much has changed recently that the Fed's inflation goal needs to change too.

But David, you spoke to economist and Bloomberg opinion columnist Mohammed el Arian, who has been making the case that so much has changed recently that the Fed's inflation goal needs to change too.

This two percent target may be inappropriate for the world we're living in today.

This two percent target may be inappropriate for the world we're living in today.

This is the big take from Bloomberg News. I'm Sarah Holder.

This is the big take from Bloomberg News. I'm Sarah Holder.

And I'm David Gerra. Today on the show, muhammadel Arian, who believes the fed's two percent inflation target is wrong and what it could mean if it is for everyone hoping to buy a home, or pay down student loans, or preparing to retire. Now, before we get into why the Federal reserves Goldilocks inflation number could be wrong, we need to understand how policymakers settled on that two percent target in the first place. It all started in the wake of the global financial crisis, says Kate Davidson. She's Bloomberg's managing editor for US Economic Policy.

And I'm David Gerra. Today on the show, muhammadel Arian, who believes the fed's two percent inflation target is wrong and what it could mean if it is for everyone hoping to buy a home, or pay down student loans, or preparing to retire. Now, before we get into why the Federal reserves Goldilocks inflation number could be wrong, we need to understand how policymakers settled on that two percent target in the first place. It all started in the wake of the global financial crisis, says Kate Davidson. She's Bloomberg's managing editor for US Economic Policy.

The recovery from that crisis, even though the FED through everything they had at it, it was just very slow, very tepid. Inflation was very low.

The recovery from that crisis, even though the FED through everything they had at it, it was just very slow, very tepid. Inflation was very low.

This may be hard to imagine now given how high inflation has been in recent years, but back then this was a big issue. Low inflation prices were rising to two slowly or not at all, and this is a problem because it can cause people to put off big purchases. Why would you buy now if the price isn't going to move well. That made it difficult for the FED to use its main tool, cutting interest rates, to help the US economy grow after the crisis. That's because back then rates were already at zero and the economy still was not growing.

This may be hard to imagine now given how high inflation has been in recent years, but back then this was a big issue. Low inflation prices were rising to two slowly or not at all, and this is a problem because it can cause people to put off big purchases. Why would you buy now if the price isn't going to move well. That made it difficult for the FED to use its main tool, cutting interest rates, to help the US economy grow after the crisis. That's because back then rates were already at zero and the economy still was not growing.

And that means that the FED just didn't have any more room to cut rates further, and so this was a position they didn't want to be, and they actually wanted to get inflation back up again.

And that means that the FED just didn't have any more room to cut rates further, and so this was a position they didn't want to be, and they actually wanted to get inflation back up again.

So the FED started looking for another lever to pull. Policymakers commissioned studies and they looked at what other central banks were doing, and that's when they found something that seemed promising. On the other side of the globe, in New Zealand in nineteen ninety, that country was grappling with high inflation, so the Reserve Bank of New Zealand tried something novel. It introduced an inflation target of two percent. In other words, it to old the public what it thought inflation should be. And it worked, and eventually several other big central banks followed New Zealand's example.

So the FED started looking for another lever to pull. Policymakers commissioned studies and they looked at what other central banks were doing, and that's when they found something that seemed promising. On the other side of the globe, in New Zealand in nineteen ninety, that country was grappling with high inflation, so the Reserve Bank of New Zealand tried something novel. It introduced an inflation target of two percent. In other words, it to old the public what it thought inflation should be. And it worked, and eventually several other big central banks followed New Zealand's example.

The idea here was that by setting this target they would just be very transparent and clear and like, look, this is what we're going for, and that that would help the public's understanding and nudge that number up to the around the place where they wanted it to be.

The idea here was that by setting this target they would just be very transparent and clear and like, look, this is what we're going for, and that that would help the public's understanding and nudge that number up to the around the place where they wanted it to be.

It seemed promising, and it also appealed to then FED Chair Ben bernank I've been working to make the FED more transparent with the public and investors and lawmakers. As an economics professor at Princeton, Bernanki co authored an influential paper on inflation targeting. So in twenty twelve, after years of debate and deliberation, the FED decided to adopt its own inflation target of two percent. Bernanki introduced it at a news conference in January of that year.

It seemed promising, and it also appealed to then FED Chair Ben bernank I've been working to make the FED more transparent with the public and investors and lawmakers. As an economics professor at Princeton, Bernanki co authored an influential paper on inflation targeting. So in twenty twelve, after years of debate and deliberation, the FED decided to adopt its own inflation target of two percent. Bernanki introduced it at a news conference in January of that year.

Clearly communicating to the public this two percent goal for inflation over the longer run should help foster price stability and moderate long term interest rates, and will enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances.

Clearly communicating to the public this two percent goal for inflation over the longer run should help foster price stability and moderate long term interest rates, and will enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances.

Buried in all that FED speak is a reference to what's known as the Central Bank's dual mandate. Kate explains, the FED has two big objectives.

Buried in all that FED speak is a reference to what's known as the Central Bank's dual mandate. Kate explains, the FED has two big objectives.

One is to achieve maximum employment and the other is to keep prices stable.

One is to achieve maximum employment and the other is to keep prices stable.

This is pretty rare among central banks, and it can sometimes pose a challenge for the Fed's policymakers because a growing economy that's creating jobs can also sometimes overheat as people spend more, causing prices to rise, and of course taming prices can sometimes slow economic activity and lead to job losses. But for a while, this inherent tension wasn't really a problem. Even after the FED introduced this target.

This is pretty rare among central banks, and it can sometimes pose a challenge for the Fed's policymakers because a growing economy that's creating jobs can also sometimes overheat as people spend more, causing prices to rise, and of course taming prices can sometimes slow economic activity and lead to job losses. But for a while, this inherent tension wasn't really a problem. Even after the FED introduced this target.

I remember just month after month after month going and covering these inflation reports, and every month that was the same story. The FED has undershot its inflation target again and again and again, just having a very difficult time bringing inflation up to where they wanted it to be, which, you know, given where we are today, just seems like really another world, right.

I remember just month after month after month going and covering these inflation reports, and every month that was the same story. The FED has undershot its inflation target again and again and again, just having a very difficult time bringing inflation up to where they wanted it to be, which, you know, given where we are today, just seems like really another world, right.

Well, about a decade later, prices spiked during the pandemic as supply chain bottlenecks made everything more expensive. For a while, the FED misjudged why inflation surged, and that damaged its reputation. According to Muhammad al Arian, he's the chief economic advisor at the Financial Services from Alians and the president of Queen's College, Cambridge. As we mentioned, he's also a columnist for Bloomberg Opinion.

Well, about a decade later, prices spiked during the pandemic as supply chain bottlenecks made everything more expensive. For a while, the FED misjudged why inflation surged, and that damaged its reputation. According to Muhammad al Arian, he's the chief economic advisor at the Financial Services from Alians and the president of Queen's College, Cambridge. As we mentioned, he's also a columnist for Bloomberg Opinion.

The infati and credibility of the FED was hit very hard by the massive mistake they made in twenty twenty one. People remember in twenty twenty one, when inflation started going up, the FED rushed to call it transitory.

The infati and credibility of the FED was hit very hard by the massive mistake they made in twenty twenty one. People remember in twenty twenty one, when inflation started going up, the FED rushed to call it transitory.

Current high inflation readings are likely to prove transitory. So I think the word transitory has different meanings to different people. The concept of transitory is really this. It is that the increases will happen. We're not saying they will reverse. That's not what transitory means.

Current high inflation readings are likely to prove transitory. So I think the word transitory has different meanings to different people. The concept of transitory is really this. It is that the increases will happen. We're not saying they will reverse. That's not what transitory means.

And David transitor is a very dangerous word in economics because it implies a phenomenon is temporary, it's reversible. Therefore should look through it and not do anything about it. By the time the FED realized at the end of November that they had made that basic analytical mistake, they then didn't move fast enough, so we had the ridiculous situation that in the following March, when inflation hits seven percent, the FED was still injecting liquidity into the economy and infustrate was still at zero.

And David transitor is a very dangerous word in economics because it implies a phenomenon is temporary, it's reversible. Therefore should look through it and not do anything about it. By the time the FED realized at the end of November that they had made that basic analytical mistake, they then didn't move fast enough, so we had the ridiculous situation that in the following March, when inflation hits seven percent, the FED was still injecting liquidity into the economy and infustrate was still at zero.

Now, Alarian says the FED has done a remarkable job bringing down high inflation without causing massive job losses or a huge hit to the economy, but it is so weary that inflation could spike again that it's keeping interest rates high in the hopes of hitting that magic two percent target.

Now, Alarian says the FED has done a remarkable job bringing down high inflation without causing massive job losses or a huge hit to the economy, but it is so weary that inflation could spike again that it's keeping interest rates high in the hopes of hitting that magic two percent target.

The FED is understandably seeking to hit that target because it has missed it for such a long time, and if it changes the target now, it will significantly erode its credibility, which is already being tested.

The FED is understandably seeking to hit that target because it has missed it for such a long time, and if it changes the target now, it will significantly erode its credibility, which is already being tested.

But that reticence is a mistake, Elian argues, because he says that inflation target, which the FED introduced more than ten years ago, is no longer fit for purpose.

But that reticence is a mistake, Elian argues, because he says that inflation target, which the FED introduced more than ten years ago, is no longer fit for purpose.

We have to remember, David does nothing special about this two percent. It emerged in New Zealand back in the early nineties. It was an experiment for inflation targeting. It seems to work there, and suddenly the two percent became the target for central banks that vary in circumstances. Now it didn't matter because we were in a disinflationary world, so the two percent wasn't binding for decades, and now we live in an inflationary world where we have to asked a question, is two percent still the right target?

We have to remember, David does nothing special about this two percent. It emerged in New Zealand back in the early nineties. It was an experiment for inflation targeting. It seems to work there, and suddenly the two percent became the target for central banks that vary in circumstances. Now it didn't matter because we were in a disinflationary world, so the two percent wasn't binding for decades, and now we live in an inflationary world where we have to asked a question, is two percent still the right target?

Coming up after the break the huge risk to the economy if the Fed's inflation target is wrong. People who argue not so fast, and who would be hit the hardest. Sarah, We've been talking about something so big, so exciting, it required two hosts.

Coming up after the break the huge risk to the economy if the Fed's inflation target is wrong. People who argue not so fast, and who would be hit the hardest. Sarah, We've been talking about something so big, so exciting, it required two hosts.

That's right, David. We're talking about June's FED meeting and the Central banks decision to keep interest rates at their current level.

That's right, David. We're talking about June's FED meeting and the Central banks decision to keep interest rates at their current level.

But something else happened on Wednesday that got economic policy wonks like the two of us fired up.

But something else happened on Wednesday that got economic policy wonks like the two of us fired up.

Yeah, it was a real embarrassment of riches for the ECON heads. Just before policymakers sat down for the second day of their meeting, the Bureau of Labor Statistics released the monthly Consumer Price Index for May. That's a key measure of inflation.

Yeah, it was a real embarrassment of riches for the ECON heads. Just before policymakers sat down for the second day of their meeting, the Bureau of Labor Statistics released the monthly Consumer Price Index for May. That's a key measure of inflation.

It is, and it surprised a lot of people by showing that price increases cooled last month. Overall, prices rose by three zero point three percent compared to last year, and if you compared May prices just to April, they didn't climb at all.

It is, and it surprised a lot of people by showing that price increases cooled last month. Overall, prices rose by three zero point three percent compared to last year, and if you compared May prices just to April, they didn't climb at all.

Okay, So, David, we know the Fed prefers a different inflation gauge, the PCE deflator, But does the CPI news help or hurt Mohammed el Arian's case.

Okay, So, David, we know the Fed prefers a different inflation gauge, the PCE deflator, But does the CPI news help or hurt Mohammed el Arian's case.

Well, his argument is not just related to these statistics, but to what he sees as a broader shift in the global economy and what that means for prices.

Well, his argument is not just related to these statistics, but to what he sees as a broader shift in the global economy and what that means for prices.

We no longer live in a world of deregulation, liberalization, and fiscal prudence. We live in a world of protectionism, of regulation, industrial policy, and unfortunately fiscal irresponsibility. And globally, we're no longer in a world of disinflation globalization. We are in a world of fragmentation, which is inflationer.

We no longer live in a world of deregulation, liberalization, and fiscal prudence. We live in a world of protectionism, of regulation, industrial policy, and unfortunately fiscal irresponsibility. And globally, we're no longer in a world of disinflation globalization. We are in a world of fragmentation, which is inflationer.

To impact that trade wars, geopolitics and those supply chain shocks are changing the way goods are priced. In a world with less globalization, prices get stickier and they can stay higher. In other words, he believes the downside of keeping rates high just to hit the fed's target isn't worth it. It's too dangerous. What are the potential consequences of the FED getting this wrong? What are the risks to the economy?

To impact that trade wars, geopolitics and those supply chain shocks are changing the way goods are priced. In a world with less globalization, prices get stickier and they can stay higher. In other words, he believes the downside of keeping rates high just to hit the fed's target isn't worth it. It's too dangerous. What are the potential consequences of the FED getting this wrong? What are the risks to the economy?

At the minimum it is foregone output. There is also the possibility of destabilizing the financial system. But what I'm really worried about, David, is the unnecessary burden that will be carried, especially by low income people.

At the minimum it is foregone output. There is also the possibility of destabilizing the financial system. But what I'm really worried about, David, is the unnecessary burden that will be carried, especially by low income people.

Ellarian is now perhaps the loudest voice in a small chorus of experts who want the FED to retire its two percent target, and they're trying to win converts. It has been a tough sell. The FED spent years arguing internally and speaking with stakeholders before it introduced that two percent target. Over a decade ago, and there's a big argument for saying that changing it now in the middle of this fight against high inflation could erode credibility. You think that more people are coming around to the argument that you've you've been making that now is the time to revisit this number.

Ellarian is now perhaps the loudest voice in a small chorus of experts who want the FED to retire its two percent target, and they're trying to win converts. It has been a tough sell. The FED spent years arguing internally and speaking with stakeholders before it introduced that two percent target. Over a decade ago, and there's a big argument for saying that changing it now in the middle of this fight against high inflation could erode credibility. You think that more people are coming around to the argument that you've you've been making that now is the time to revisit this number.

I definitely think more people are coming around good as view.

I definitely think more people are coming around good as view.

Nobel Prize winning economist Paul Krugman has written about revisiting the two percent target, and so has Olivier Blanchard, the former chief economist of the International Monetary Fund. And some US lawmakers have started to question why the FED is so steadfast when it comes to its two percent inflation target, including Democratic Senator Catherine Cortes Masto of Nevada. She brought it up when the FED chair testified before the Senate Banking Committee last year.

Nobel Prize winning economist Paul Krugman has written about revisiting the two percent target, and so has Olivier Blanchard, the former chief economist of the International Monetary Fund. And some US lawmakers have started to question why the FED is so steadfast when it comes to its two percent inflation target, including Democratic Senator Catherine Cortes Masto of Nevada. She brought it up when the FED chair testified before the Senate Banking Committee last year.

For the general public, for those working families of people, why two percent? Why is getting it to two percent so important?

For the general public, for those working families of people, why two percent? Why is getting it to two percent so important?

So that's that has become the globally agreed Essentially all major central banks target two percent inflation in one form or another.

So that's that has become the globally agreed Essentially all major central banks target two percent inflation in one form or another.

And how does that help my Nevada families?

And how does that help my Nevada families?

How does that help people in the Yeah?

How does that help people in the Yeah?

It does, and it's I guess it's it's obviously not it's not obvious how that is. But two percent inflation. To have people believe that inflation is going to go back to two percent really anchors inflation there, because you know, the evidence is and the modern belief is that people's expectations about inflation actually have an effect on inflation. If you expect inflation to go up five percent, then it will.

It does, and it's I guess it's it's obviously not it's not obvious how that is. But two percent inflation. To have people believe that inflation is going to go back to two percent really anchors inflation there, because you know, the evidence is and the modern belief is that people's expectations about inflation actually have an effect on inflation. If you expect inflation to go up five percent, then it will.

Cortes Masto was getting at a tension that's emerged recently between strong economic data and how Americans feel about the economy. Now, sentiment may be a little squishy, but Bloomberg's Kate Davidson says it's still significant. Policymakers and politicians pay attention to it. Can we talk about vibes a little bit?

Cortes Masto was getting at a tension that's emerged recently between strong economic data and how Americans feel about the economy. Now, sentiment may be a little squishy, but Bloomberg's Kate Davidson says it's still significant. Policymakers and politicians pay attention to it. Can we talk about vibes a little bit?

Sure?

Sure?

It strikes me that in this debate, vibes matter. People I think are getting frustrated with how long this fight has been going on and what it's meant for them and their pocketbooks.

It strikes me that in this debate, vibes matter. People I think are getting frustrated with how long this fight has been going on and what it's meant for them and their pocketbooks.

Absolutely, I mean it. You see it every day, almost every day in the polling and the consumer sentiment surveys, in the way that people talk about this economy. They go to the grocery store, they go to buy something they can see prices are higher than they were several years ago. But I think that they also feel like it's getting more expensive to carry dead, it's getting more expensive to take out loans to borrow, and so it's this combination of factors where they feel like, well, things are maybe not that great.

Absolutely, I mean it. You see it every day, almost every day in the polling and the consumer sentiment surveys, in the way that people talk about this economy. They go to the grocery store, they go to buy something they can see prices are higher than they were several years ago. But I think that they also feel like it's getting more expensive to carry dead, it's getting more expensive to take out loans to borrow, and so it's this combination of factors where they feel like, well, things are maybe not that great.

What makes the FED chair and other FED officials so reluctant to revisit the Fed's two percent target is this fear it could affect consumer expectations and consumer behavior. On top of that, the FED is in a tough spot in an election year. It's a fiercely independent institution, and policymakers, including Powell, don't want to do anything that could be construed as political. But Elarian argues the FED has to be more pragmatic. You said that keeping this low two percent target could hurt low income people, but aren't they already being hurt by eyeh inflation as well in addition to these higher interest rates.

What makes the FED chair and other FED officials so reluctant to revisit the Fed's two percent target is this fear it could affect consumer expectations and consumer behavior. On top of that, the FED is in a tough spot in an election year. It's a fiercely independent institution, and policymakers, including Powell, don't want to do anything that could be construed as political. But Elarian argues the FED has to be more pragmatic. You said that keeping this low two percent target could hurt low income people, but aren't they already being hurt by eyeh inflation as well in addition to these higher interest rates.

I mean, that's a tragedy. Your first hit them with an unanticipated inflation shock, and let's not forget inflation went over nine percent, and let's not forget that inflation was higher than average for the goods consumed by less privileged segments of the household, those who capture a much bigger part of their budget, so they got hit hot. That's why inflation coming down is important. But if the difference between being at two percent or being nearer to three percent is losing your job, is income insecurity, that is simply adding insult to injury, and that is what I'm worried about. The difference between a two percent inflation and nearer to three percent is very small if the consequences of being at one or the other is your job.

I mean, that's a tragedy. Your first hit them with an unanticipated inflation shock, and let's not forget inflation went over nine percent, and let's not forget that inflation was higher than average for the goods consumed by less privileged segments of the household, those who capture a much bigger part of their budget, so they got hit hot. That's why inflation coming down is important. But if the difference between being at two percent or being nearer to three percent is losing your job, is income insecurity, that is simply adding insult to injury, and that is what I'm worried about. The difference between a two percent inflation and nearer to three percent is very small if the consequences of being at one or the other is your job.

But for now, the Fed remains committed to its two percent target that his Powell said at the end of Wednesday's news conference he still believes having it benefit all Americans, including those with lower incomes.

But for now, the Fed remains committed to its two percent target that his Powell said at the end of Wednesday's news conference he still believes having it benefit all Americans, including those with lower incomes.

We had a period of high inflation. Inflation has come down really significantly, and we're doing everything we can to bring that inflationary episode fully to a halt and fully restore price stability. We're confident that we'll get there, and in the meantime, you know it's going to be painful for people, but the ultimate pain would be a period of long a long period of high inflation.

We had a period of high inflation. Inflation has come down really significantly, and we're doing everything we can to bring that inflationary episode fully to a halt and fully restore price stability. We're confident that we'll get there, and in the meantime, you know it's going to be painful for people, but the ultimate pain would be a period of long a long period of high inflation.

This is the big take from Bloomberg News I'm David Gura.

This is the big take from Bloomberg News I'm David Gura.

And I'm Sarah Holder. This episode was produced and mixed by Alex Ugura. It was edited by Stacy Vanick Smith. It was fact checked by David Fox.

And I'm Sarah Holder. This episode was produced and mixed by Alex Ugura. It was edited by Stacy Vanick Smith. It was fact checked by David Fox.

Our senior producers are Kim Gittleson and Naomi Shaven. Our senior editor is Elizabeth Ponso. Nicole Beemster Bor is our executive producer. Sage Bauman is our head of podcasts.

Our senior producers are Kim Gittleson and Naomi Shaven. Our senior editor is Elizabeth Ponso. Nicole Beemster Bor is our executive producer. Sage Bauman is our head of podcasts.

Thanks so much for listening. Please follow and review The Big Take wherever you get your podcasts. It helps new listeners find the show.

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