Jon Hartley interviewed Dave Altig, Research Director of the Federal Reserve Bank of Atlanta, at an Economic Club of Miami event held at Miami-Dade College on April 19, 2022. Topics discussed include inflation, interest rate and economic growth.
Sherry: “Good afternoon. Thank you all for being here with us today. I'm Sherry Bauer, the Regional Executive based here at our Miami branch in Doral, but I work for the Federal Reserve Bank of Atlanta. Fun fact: one of the many roles that the Federal Reserve plays is to provide Financial Services to financial institutions, one of which is the distribution of passion point. The Miami Branch here, based in Doral, is actually the third largest distributor of fashion plane for the Federal Reserve System, out there in New York and San Francisco. So, we have a very exciting program for you today as we're joined by two esteemed economists who will answer all of your pressing questions about inflation and interest rates. But first, I would like to thank Miami Dade College for hosting our event here today at the Wilson campus. Also, thank you to the Economic Club for having this joint event with us here today. Before we dive in, I'd like to introduce Dr. Malu Harrison, Executive Vice President and Provost, who will give some welcoming remarks. Then I will introduce our speakers. I'm going to do some sort of bridge bios because if I read everyone's biodical, I think it would be here for hours. Dr. Harrison is a respected leader with more than 35 years of transformative leadership experience, championing the cause of underserved students in public higher education. She has served in various capacities at the college, including president of multiple campuses and New York students and after 10 years, she led the establishment of many high-impact partnership initiatives at the college that have furthered equity, academic excellence, and student success, as well as holistic services such as single staff Europe and HPA tomorrow. She is also a prolific writer on educational issues, serves on several boards, and has been recognized for her leadership with numerous awards. So, Dr. Harrison, thank you.”
Malu: “Thank you so much Sherry and good afternoon. It is such a pleasure to welcome each and every one of you here to Miami-Dade College for this convening this evening. We have many students in the audience, and I have to tell you that partnering with the Economic Club of Miami is truly meaningful for us, for that very reason—the fact that we are able to provide the opportunity to our students, our Miami-Dade College students, to learn from experts and economists such as Vivaldi. And let's give a special round of applause. (Applause.) But you know, we're growing global citizens here at Miami-Dade College, and along with our students, we have faculty here, we have share persons, we have our Dean of Business, and other colleagues. In addition to the Miami community, and this is one of the most important weeks on the academic calendar for Miami-Dade College. So, we're happy that this convening is taking place this week. But on Saturday, we will graduate over 12,000 students from Miami-Dade College, students who are earning associate degrees, baccalaureate degrees, as well as career certificates. Why is that important? It's so important because Miami-Dade College is contributing to the socio-economic impact here in our community. We're coupling a very robust liberal arts and science program with a workforce development and training program that really provides the synergy for students to go out into the world, to be on the world stage as employees, as entrepreneurs, as leaders if you will because of their start at Miami-Dade College. And so, we're very proud of the outputs that our college produces in terms of graduates. And we're also proud of the partnerships that we're able to procure and to convene with companies all over Miami-Dade County, throughout South Florida regionally, and also internationally. And so, with that, I want to again welcome the Economic Club of Miami. We are your partner. We were so happy to partner with you recently when you had a fireside chat with Kent Griffin right here in our auditorium. And apart from the academic and workforce training aspects of life, so to speak, Miami-Dade College is also a cultural convener. Miami Book Fair hails from Miami-Dade College. The Miami Film Festival hails from our institution. And as a matter of fact, as it relates to Tech Month this month, you may have seen where the college yesterday launched its second Artificial Intelligence Center right here at this campus, the first one of which was at our North Campus. Again, bringing that economic impact to Miami-Dade County in so very many ways. So tonight, I know I'm very much interested in learning more about inflation, what we can look forward to not only here but throughout the United States and internationally. And I'd like to welcome you once more on behalf of President Madeline Pumariega and the 123,000 students that are enrolled here at Miami-Dade College across our eight campuses. Welcome. Thank you. Thank you.”
Sherry: “So let me quickly introduce Dave and Jon, and then we can get started. So Jonathan Hartley is an economist, investor, and researcher who's also currently a research fellow at the Foundation for Research on Equal Opportunity and economics Ph.D. student at Stanford University. He previously graduated from the University of Chicago with a B.A. in Economics and Mathematics with honors and an M.B.A. from the Wharton School, University of Pennsylvania, and an M.P.P. from the Harvard Academy School. Various roles at Goldman Sachs, the World Bank, the Committee on Capital Markets Regulation, U.S. Congress to an economic committee, and also the Federal Reserve Banks of New York and Chicago. And Dr. David Austin is the Executive Vice President and Director of Research at the Atlanta Fed. In addition to advising the Atlanta Fed president on monetary policy and related matters, Dr. Austin oversees the research division, which includes the team of economists, the Regional Economic Information Network, and the Community Economic Development function. Dr. Austin is a fellow and immediate past president of the National Association for Business Economics. In addition, he is a member of the Advisory Council of the Global Interdependent Center and its College of Central Bankers and a member of the National Business Economic Issues Council. With that, David, Jon, thank you.”
Jon: “Well, thank you for that very kind introduction. And I just want to thank Miami-Dade College for hosting us. For those more aware of Miami-Dade College, it's an unbelievable institution. I believe it is actually the largest school in the United States by enrollments. In terms of the service that the Brian assumes here in Miami is just unparalleled. It's open, so again, if you could have a just a round plat for Miami to talk, yeah. So, Dave, I want to get thrown into this. And for the students who are here and maybe those that are a little less familiar with the FED, I just want to go to how the Fed's structure and what is the Atlanta Fed's rule in Miami? We sort of, there are 12 Regional Fed Banks out there, and they're part of the Federal Reserve System. They're the Federal Reserve Board of Governors based in D.C. But what does it mean when you're in Miami, falls into the Atlanta Fed's Regional District? Why don't we have our own Federal Reserve Bank of Miami here? Can you explain a little bit about how you know how mine falls into the sort of greater scope of monetary policy-making and regulation?”
David: “Sure, sure. And I want to, I want to thank you for the invitation to come here, and especially Miami-Dade College. I mean, we're, I have a long relationship with the Atlanta Fed, and a very happy relationship. And we're big fans of everything that happens here. So, you're trying to create a coup, I think, by my colleagues. So, if you want to know why the Federal Reserve is structured geographically, as it is, I don't know the answer to that exactly, and I'm not sure anyone exactly knows the answer to it. It goes back to 1913. Essentially, the 12 District Banks were designed to be Banks, Bankers to Banks. And it was roughly sort of organized around the lines of population, where the banks were in terms of the market capitalization and all sorts of things, not to mention some political elements that came into play. We're the sixth district of the Federal Reserve System. We actually have five branches. Our region covers from basically Nashville, East and Tennessee, all of Georgia, all of Florida, all of Alabama, Southern Mississippi from about Jackson down, and Southern Louisiana from about Baton Rouge. So, we actually have the very best cities in the country in our district. And it represents, in terms of its industrial mix, it looks very much like the United States because if you think about Miami versus Nashville versus New Orleans, these are very, very different places with very different cultures with very different business mix across. And so, we're able to use that footprint to get a pretty good picture about what's happening in the National economy. And that is one of the fundamental roles of all of our branches and the work that my colleagues here at the Atlanta Fed and the Miami Branch do. We're about a week and a half from a necromancy meeting, and so we are deep into the rhythm of an FOMC meeting. So that rhythm starts this week, really. So, Sherry and her colleagues have been out ever since the last FOMC meeting, trying to get answers with boots on the ground, getting information from business contacts throughout South Florida and the Miami Branch case answers the questions that we want to know about, which are the questions I think are probably going to come up in our conversation. We will meet with the board of directors for the Miami Branch on Friday, and we will ask them these same questions and basically ask for their input on what's going on in the economy from their business's point of view. And what should we do about it as policy makers? That will all go back to Atlanta next week, where Sherry and her colleagues will report to President Boston what they've been hearing over the past eight weeks or so. We’ll have Atlanta and a bunch of economists will wait for a bunch of economisty stuff. One day is data, telling us what the date is, what models we're telling us. Another day is what people in the real world are telling us about what's going on. Then we'll have an Atlanta Board of Directors meeting. We'll try to all consolidate it all, and at the end of next week, and writing kind of the policy positions and statements about the economy the president past that will take to Washington. Very much the stuff that we hear from, you know, maybe many of you, and the information that Sherry and other members of our teams and the branches throughout the district collect makes its way to the table in Washington. I can't remember. I've been at this a while. I can't remember a single meeting where part of our statement at the table to Rafael's colleagues on the committee, um, did you know where some anecdote and set of information that we had collected from our Outreach and in the district didn't end up as part of the conversation with the table. So that's, that's, you know, it's the branches really are The Voice of our constituents which is you directly to the policy-making body in Washington.”
Jon: “Fantastic. I'm a big fan of Raphael's. It's um, I'm a bit biased in terms of your world's research director. One of your big responsibilities is putting together economic forecasts for the Atlanta fed in briefing president. Believe that policy decision-making process within the Atlanta FedEx which we get up to the f1c meetings that come up every six weeks or so. Once again to your outlook in your forecast, what do you think GDP inflation unemployment where do you see those going, uh, what are your forecasts?”
David: “GDP down, inflation down, unemployment up. So, you know, we go through this exercise where four times a year we actually publish what our forecast on those things are. So, at the last, we won't do it at this meeting but at the last one we did coverage that, you know, the narrative about the I thought it was going to actually have to show a couple of weeks ago. I thought I was going to have to show up here today and completely change my tune about what was happening after I know we'll probably talk about the failures of a couple of California entities later on, but I was a little bit fearful that my story was going to have to fundamentally change. It hasn't, and I don't think our story. And so, when I say R and we, I got, I mean I have I'm contractually obligated to say the views that I express are not necessarily those in the Federal Reserve System. And when I say we I really am talking in our role as uh as a policy advisor that they plan to Fed. So, what is the Atlanta fence staff thinking? So, you know, by the time we got to the end of last year our story was I was pretty much that it was likely that we were going to see some softening of the economy. Associated that would be continued but slow progress on inflation and associated with some of that softening the economy would see some cooling off in labor markets and some um noticeable but not really dramatic increases in the unemployment rate or slowdown in Pace of Employment Pro that's my story I'm sticking to it. I mean it's as of yet that seems to be the track, we're on. Um, what that means for policy the policymakers are going to decide but if you look at the summary of economic objections that were published in March, you know the story was that kind of Outlook with growth kind of flat from the rest of this year just kind of doing the math and think about what the first quarter looked like. The Minnesota FOC meeting came out and one of the big splashing pieces of news from it was so there are two things that happen in a media one of the main ones who thinks it's funds but one of the things happens at the meeting is there is a presentation by the staff and the Board of Governors and they give their Outlook and then all of the participants all the presidents and all the governors go around and give their Outlook some of it which is published in the summary of economic projections projected a recession and that was in the minutes it was not kind of hidden or anything. The committee numbers don't really quite add up to that but, it is uh kind of flattish softboard for the rest of the year the rate of inflation ending the year and then the kind of low three-ish area and the unemployment rate picking up some the story I just exactly said and you know as I said I mean I don't think that there is anything happening yet that we've seen we're going to hear a lot in the next week from lots of people but we've still seem to be on track for what feels like the proverbial software.”
Jon: “I want to get into our appointment first I want to talk about inflation a lot of people are in general a little bit upset about inflation was trying to figure out what's going on with it. Inflation is now one that sort of heat that some of the greatest ties and 40 years since the 80s nearly eight percent it's now back down to about five percent in the headline measure almost five and a half percent core inflation the FedXx had this two percent inflation target officially since I think 2012 went for unofficial since the early 90s and why there's been you know a number of I think common feeders in economist that said you know maybe we should change this to three percent or four percent uh why two percent why should the FedEx.”
David: “Yeah, so I think that sometime as forgotten, by people that the two percent was not a number pulled out of thin air. There had actually been a lot of thought about it. I mean, kind of the bad answer is, so New Zealand had already done two percent, so why shouldn't everyone else did a two percent? In fact, all kind of enhanced economies decided they had to latch on to two percent, but there's actually some great, uh, articles written by Ben Andy back in the early 2000s where he kind of laid out the case for two percent. And, the logic went as follows: we want low inflation, and in fact, in some world zero would be the best. And actually, if you're wrong, if any of you are old macroeconomic students, Milton Friedman said it should be actually negative. Well, that did not seem to be the ideal rate of inflation because there was an issue of when times get tough, you want to be able to cut interest rates. And if rates of inflation are very, very low, then the buffer for being able to cut interest rates is going to be small. So, what you're trying to do is you're trying to set a balance between what's an interest rate that would give policy room to maneuver if needed and rates of inflation that were not so high that they were significantly distorting decision making and the economy. So, there was a bunch of analysis done. Right, this is maybe not reflecting well on my profession so and right together there's no reason for it to, so I mean, I'm trying to hide anything there was a bunch of analysis done at the time that indicated two percent was a number that was low enough to actually not do much damage to the economy, and you know, there are various views of how you define what price ability is. How engrave families, to say all the time the rate of inflation is low enough that nobody thinks about it, uh, two percent, um, you know, seeing like that was closely, uh, fitting that definition. And then the analysis that was done was basically modeling that says, well, if you ran a two percent rate of inflation, the circumstances under which you would perhaps drive interest rates to zero would be relatively rare. That was essentially a time when people believed that the inflation-adjusted rate of return on treasuries was going to be something like two percent or the normal 10-year treasury rate was four percent or something like that. And on the way, reality kind of mugged us, and that turned out to be a period of time post-2000 when kind of structural interest rates just fell a lot. And of course, we have now hit the zero bound on interest rates several times. That is sort of the rationale behind people saying, well, maybe we gotta up the inflation target to reflect the fact that kind of the structure and the structure of interest rates in the world economy, not in the United States but in the global economy, has changed. But the problem is then you run into the issue of well, if you go up two percent, are you still honoring this notion that you want inflation rates that are so low or low enough that people aren't really thinking about it and they're not having to protect themselves significantly against inflation? Wages aren't kind of consistently following on, and Chair Powell and every member of the Federal Open Market Committee has been very clear that they're not inclined to revisit the two percent question. And if you wanted a rationale for why that that's more than you just didn't stubborn, this would be my reaction. Now, my rationale would be look, I mean, one of the things we've discovered in this episode, inflation kind of is ravaging to, uh, to the economy, and, you know, not least by individuals who are the most vulnerable in the economy. So, we, you know, you don't want to run into this world, and I turn into various views on how high it's too high, but if you say something like four percent, I think that's starting to get into the territory where you really have to worry about whether you're fixing the problem of running too low on interest rates by doing something that is, in the [Inaudible 24:24] economist.”
Jon: “Yeah, normally or two, [Inaudible 25:15] and that's why we want to be sure that two percent inflation, guard over zero percent, uh, it looks like um, Paul Walker and others so in Schaefer is a little more adamant about it, why not definitely, yeah, it, yeah, it's very interesting to think that you know, period, and, uh, talk about appear in the 90s one was I guess the Fed was transitioning from uh, the whole period to the union I came in, I want to talk a little bit about that balance just a little bit, um, so interest rates are at, five percent just below five percent now outside of one trade, uh, five percent, um, and it's certainly one of the Fed's main tools, uh, in helping to bring down inflation. Um, what is the balance sheet role in bringing down inflation and where do you think the best balance sheet?”
David: “Oh well that's it, your kind of an answer that was easier [Inaudible 26:27] so the role so it again there's going to be, you know there's going to be differences of opinion kind of on this but I think that most kind of comments in any event tend to think of the balance sheet and interest rate policy as substitutes for one another. Don't forget the um the reason that you know on that kind of discourse I had about choosing two percent. The reason they wanted to stay away from zero is because once you get to zero you got two choices do nothing, make interest rates negative which has never been about to be viable actually in the U.S economy. We're not Bank Centric enough there's too much uh opportunity for disintermediation it would be a problem so balancing policy came into play during the financial crisis exactly because we attend zero and couldn't move insurance anymore and so balance sheet policy was a substitution for what otherwise would have been cuts in interest rate. The committee has said many times that it wishes or that it chooses to make interest rates. The primary school of monetary policy and there's a recognition that the balance sheet needs to be lower but it's going to be made lower kind of running in the background there are various estimates of what the so-called quantitative typing. Plan when applied if you translate into an interest rate of fact. 50 basis points is maybe something that kind of comes up very often but the idea is to make it kind of invisible and really do the work of fighting inflation keeping the economy on either you know why you do it is going to be done by the Final Fantasy service. What the terminal point of that process of running down the balance sheet is actually turned out to be a much trickier question than I kind of have a thought in a little bit. You'll remember we were doing it at one point uh not all that long ago and then we ran into the fall of 2019 and we found that the size of the balance sheet which we thought would be appropriate for smooth functioning of Treasury markets for example, was much larger than kind of the plants I you know we stopped and well over a trillion-dollar range.”
Jon: “[Inaudible 29:13]”
David: “Yeah and we thought we would get down estimates kind of varied again but I thought we would get down to 500 to 800 billion in reserves in the banking system that turned out to not really be appropriate for the smooth functioning and financial markets for reasons that I definitely don't fully haven't fully worked out quite yet. They almost certainly have to do with regulatory changes after the financial crisis. So, we're so far away from where kind of you know probably the size of the boundaries should need to go that it's not really a live question at this point but sooner or later it's going to kind of pop back up and this issue how low is too low on the balance sheet was actually going to re-emerge. And be one of the [Inaudible 30:12]. We have to answer once we get over this inflation episode.”
Jon: “I’m curious about inflation expectations. How important do you think completion expectations are for monetary policy and there's a couple different schools of thought, I think of sort of pre-traditional school of thoughts that no matter what and that they sort of can shift and place an expectations then maybe you can sort of shift inflation but then there's some people that I remember there's sort of like an identification problem there like well maybe it's maybe the uh completion expectations are going up with completion Toyota calls out kind of thing like. How important thing inflation expectations are for policy makers.”
David: Well, there's always an identification problems away and I think that this is again a pretty pervasive view certainly policymakers in the Federal Reserve System. Expectations are everything, if you lose control if you conduct your affairs in such a way that that people began to expect the rate of inflation. In five years from now whatever the time frame might be is not going to revert to something like you say it's going to reverb to you have lost you have lost a path kind of listen to them. Even saying things like we're always these accusations that when Paul Walker made the big change, he made in 79 saying we aren't going to target an empty trade. We're going to target kind of how fast money grows and the consequence of that was interest rates went through the roof. He was always sort of accused by people of hiding his true motive that when you really wanted to do was raise interest rates that was high. He always said no that's not what I wanted involve because you know I thought here's what yeah, I thought two things. The first was everything we were trying to do to keep the inflation in the 70s wasn't working so Milton Friedman had been bugging us for a long time about control the money supply and total inflation so I thought well why not buy that the second thing was is that I thought I would walk into the room I would say I'm here to bring a rate of inflation down and everyone would salute and inflation expectations with moderate and all would be good and he said I walk into the room. Again nobody saluted and so consequently the price upgrading inflation rate down was so high as we went into the kind of early 80s precisely because you had to convince people that you really meant and the only way to convince people that you really meant it was to stick to your guns and to wear the pain and that was fully because inflation expectations loss. And those expectations are starting to feel them to wages the whole wage price spiral story is really about expectations becoming self-fulfillment in an economy and making it very difficult to reverse. We are not in that circumstance now and I think one of the ways to interpret the public pronounces of defense policy makers is we have no intention of it.”
Jon: “I want to get into just unemployment a little bit and you talk a little bit about talk friendly earlier the whole debate around uh the film's curve is something with the sort of purpose that is sort of the classic trade-off between the unemployment the inflation that and the idea is that if you get higher unemployment to get lower inflation and a number of people and like Summers and others have argue that. In order to inflation down we want to get unemployment up to five percent and I guess if you think that we can have a stop playing I mean so far away are you haven't really seen any signs of unemployment [Inaudible 34:50] in this potential for a soft landing where we get sort of that I guess a disinflation like we've been seeing but without uh I think what do you think that size how likely it is so.”
David: “So, he Phillips curve is a story that persists say solutions.”
Jon: “That's good.”
David: “Because I can't think of them. So, the way we use again so I don't know I guess everybody's familiar with a couple stories this notion that high unemployment will put downward pressure on inflation the tougher pressure on inflation so the policies job as an engineer these changes and employment rate in such a way that the control in inflation. Now, the relationship between inflation, unemployment rate, and broke down on us. So, we kind of came up with these stories that, well, the Phillips curve used to be kind of driven steep, and now it's really flat. So, it looks like we made up the explanation for why it wasn't working. Um, you know, we're doing our best, but confession is good for the soul. And I want to have a, you know, when I, when I stage or in flight, if I want to have a maker on this way, so I gotta say, look, the Phillips curve is not a stable relationship. It is a narrative, and I think it's best understood as a narrative. The narrative goes along the lines of, look, yeah, I mean, if you've got a significant mismatch between demand and supply in the economy, you've got to close that and smash something. And if you're a monetary policy maker, you can't do much on the supply side of the economy. Basically, the only thing you can do is kind of try to soften demand. And I do, you know, I do think there is truth in that story. Precise estimates of what it kind of takes and whether in all circumstances you have to drive the rate of unemployment up to some specific, precisely estimated level and sort of a loss of the soft-landing scenario really kind of relies on the notion that as real wages begin to close the gap between demand and supply in the labor market—and I think it is showing some signs of closing that—we still see persistently higher than pre-pandemic levels of wage growth. As real wages catch up to the inflation, that's going to be absorbed in business margins. Earnings are going to soften, and those prices, those costs on the labor side, will not be fully, in any event, passed on to the consumers. So, the soft landing is, and you don't have to hammer absolutely the labor market to see progress on inflation, which was created in this event by its influence of things—some of them are resolving themselves already, some are not resolving themselves so quick. One of those things to dissolve is very accommodating monetary policy, which is, you know, now moved into the restrictive phase. So, I think this generally, when I said to you, you know, I'm going to stick to my story that I've been at for about six months, it is this story that we've been blocked that there's enough organic adjustment in the inflation rate as a result of the extraordinarily unusual circumstances of the pandemic that we could rely on that in combination with appropriate adjustments in policy, some slowing down in the economy, to get to where we need to get on inflation without an outsized amount of pain that will come to workers.”
Jon: “I appreciate your compassion on that. The Phillips curve and maybe if someone can come up with an ulcy curve as maybe a program. I want to get to sort of the big elephants in the room, and that is Silicon Valley Bank and bank failures and what do you think their implications are for the banking industry and the potential stability? And, you know, could they weigh on it and how do you diagnose this whole potential banking crisis?”
David: “Well, I mean, there's lots of, there's lots of things with diets, and one of them is obviously what happened—you know, that this kind of that SUV and Signature Bank were allowed to get into the state, but they were clearly in—they were very unusual entities. They didn't look at all like a like normal banks. There will be questions about, well, okay, then who noticed, how you may know this, what was done about it? Um, I won't say anything more than that for two reasons. One is I like my job, and there's anything about who just mentioned it's about this.”
Jon: “Inaudible 40:51].”
David: “We’re all set, we're all part of the same team and also, I mean, this is easy one because I do not know, what happened and why it happened. That will be the subject of one report from the board of Governor Vice-chair Park. We want to shoot his report on the kind of exposed analysis of the events in May. I'm sure there will be a bunch of others weighing in on exactly what went wrong. And, you know, I was talking to some folks this morning about it, and I said, well, you know, I hope as that analysis takes place, part of that analysis is also what went right with so many other institutions because one of the things that, you know, I said earlier was that I was fearful that I was going to have to show up and kind of be telling me a very different story about a collapse, a very broad one. It didn't happen. Some of that's because of the policy response to the events, but also because I think there were lots of things done right in this environment where the key channel by which monitoring policy is working now is this sort of credit Channel associated with interest raiders that has kind of emerged. So, I mean, here's another confession on me, we don't like to show, and you know, we'd like to show up and tell you what we're thinking. Uh, I'll tell you what.”
Jon: “We like that.”
David: “So, um, tightening monetary policy, Titan Cycles are, of course, about, you know, constraining credit. Um, now you can constraint credit either on the demand side of the credit market, so the supply side effects. And very honestly, in Atlanta, we were kind of pre-SEB among the economists, not necessarily the Regulators. I don't want to paint them with this brush, but we were very, uh, focused on the demand side. Okay, what sectors of the economy are really sensitive to higher borrowing costs? And has that changed over time? So, does that make our tools less powerful now than maybe they were in the past? These are the kind of things that were discussing and contemplating. And I think what SVB revealed, one of the lessons of this was that, no, no, this was going to be about the supply side of the credit markets, and it's going to be about kind of credit constraints operating through the banking system. It was already kind of obvious before SVB because if you looked at things like the senior loan officers survey, which, by the way, has become kind of a bellwether in this particular cycle, he was already showing that the supply side of the credit markets, uh, was going to be the story and it was already a story of the monetary policy effects of industry increases by the Oklahoma City. So, we learned, I think, an important lesson there. I mean, unless it's too strong, but it really refocused our attention on, okay, as we go forward and we think about things like how high is too high and, you know, what, where should we be looking for kind of the real effects of monetary policy operating, that's going to be on that credit supply side. The other thing we learned is that we, this was an exercise that we had never in the Federal Reserve done before, which is truly separated out interest rate policy or policies designed to fight the inflation rate from financial stability of policies aimed at keeping things from blowing up, like we did in the great, great recession of global financial crisis. So, if you think of the last times, we kind of worried about instability in financial markets, it was the global financial crisis. So, we introduced a whole bunch of kind of new facilities to kind of make sure that the financial mark system did not collapse. But we did that simultaneously with cutting rates down to zero. Same thing in the pandemic. The pandemic yet we opened up a bunch of lending facilities to kind of get kind of financial markets through this period, and we cut interest rates back down to zero. This is the first time where we've actually implemented a policy combination where we threw a bunch of liquidity in the system through the bank term funding program to make sure that the issues that confronted SVB with respect to having to go to market and sell your securities if you are losing deposits and losing, you know, a day two billion dollars or whatever it was at the same time, the committee turned around to continue to raise interest to fight inflation. So, I think it was an important event in the sense that there was a demonstration that we could actually deal with financial crisis at the same time not give up our macroeconomic goals and implemented the policies that are important to achieve those goals. And you know, it's early, you know, so I always should say, so far, so good. Um, and you know, I could show up here in six months, and the story will be very much different, but I think this has really sort of an important kind of um recognition that this was feasible and a feasible policy combination that allows us to fight, to fight, uh, on the many fronts where it's presented.”
Jon: “So, one last question, before coping it up, questions from the audience. And this is a big one on the future path of interest rates. I think that's something on a lot of people's minds. The veterans, uh, Futures, the euro dollar futures markets expect or a pricing and, they expect a Fed she decreased interest rates by the end of this year after the federal funds rate sentence earlier just four or five percent. Um, what is your forecast for where the Fed funds, uh, rate goes to over the next few years? And has any of that sort of thinking changed around, you know, what's just happened and the crisis as you sort of mentioned that there's a potential there for a supply shop that could sort of introduce, uh, Titan on top of the existing Titan, uh, that is introduced to the system over the past year? I'm curious when you think about future monetary policy.”
David: “Well, if you know like my job so, I will not Venture a personal opinion. I will simply point out that in the summary of economic projections and really from the narratives you hear from Fed speakers, the story is pretty clear. And this notion is so Raphael has many times kind of a bone story. You want to think of this tightening cycle in two phases. The first phase was just getting back to neutral. So, you can think about kind of the semi bike, you know, the ramping up in the 75-basis point per meeting move, and it's a recognition, okay, we got to release it back to neutral pretty quickly. And then the second phase, which really sort of takes us to the end of the year, is actually getting into tightening monetary policy region. The median summary of economic projections has and, of course, the dispersion of the for me so the summary of economic projections, which are the forecast in the FOMC as most of you know, they're not it's not a single forecast. It's at 18 or 19 depending on how many governors you've been showing up who are on the board at the moment. They all have, they all submit their own forecast. So they publish the median, and they publish the full distribution of the projections for the federal fundraising e-growth inflation. The median has is at like a private court, uh, that's actually 425 basis points holding there until the end of the year. The timing is not specified in those, obviously, but um, we don't know whose dots, you don't know who's our, who's, but if you pay attention, you can figure it out pretty, pretty for the most part. I mean, you know, the thing about I like to kind of point this out, um, the thing about chair Paul, uh, the thing about virtually all of the Fed, FOMC participants is what you see is what you get. I mean, there isn't you know, I've listened to the press conferences religiously and, um, I you know, it is an attempt to be completely transparent about the nature of the conversation and the thinking of the of the committee. And sometimes it's clear, it's clear that others, and that almost always reflects the range of opinion in that room. I mean, the chair is crying to do his level best and really convey the sense of what the conversation was and how that led to a decision. So, you know, they everyone's been pretty clear that kind of the intentions get to where they think they got to go. And then Raphael's language is, be purposeful, be resolute, be resolute and patient. So resolute and get into where um, you know, we think we need to go to be our objectives and allow inflation and resolute and not blinking the first time gets a little bit tough. I like to point out uh, that if you're some if you're my age and there's quite a few people in the Federal Reserve System who are, uh, people are roughly my age, you grew up in the 70s 80s. I mean, you grew up with, uh, with the experience of what happens when monetary policy goes wrong and allows the inflation rate to run out of control, and it was traumatic. I mean, it was traumatic for the economy and schematic for real people. Um, so that lesson is not forgotten by the by the folks on the committee. The market clearly has a different view. Um, one of us is going to be right. Um, we'll find out who, I think for the most part, as far as you know, I impounded many people in this room who actually, uh, can see more authoritatively about this than I can. I think in general; the difference of opinion really has to be with different macro forecasts. So, I think that the market seems to be articulating immune to the extent that the market can articulate review that the inflation rate is going to come down faster and the economy is going to weaken more significantly than what is reflected in the summary economic projection by the committee, and that, you know, in the end is, you know, there's going to be borne out by the facts who has the more accurate assessment in the way this is going to go. I don't think it's because of confusion about what defends likely to do. I don't think it's, um, a real difference of opinion about objectives that the market may have versus the if you're skeptical about the soft-landing story, then then the question is going to become, well, what does resolute mean.”
Jon: “I hope the whole inflation experiences it's a fascinating economic literature just about how people's, it's sort of a hemo economics thing about how it but. Childhood experience, things like conceptions or inflation that can impact their beliefs for the rest of their life. [Inaudible 53:37] And how we're going to do this is, once I'm going to first, you're going to put up your hand, I'm going to point you, and then what's going to happen is, you're going to actually go to the microphone here. You guys can just line up in front of the microphone.”
Speaker 1: “By the way, for those of you that use Twitter, feel free to tweet about the event using the hashtag #econClubMiami for any questions or comments.”
Jon: “Welcome, and let's keep the questions very brief so we can get to as many as possible. A question, it's a question on the comments. While people line up here, for those that are interested in learning more about the Econ Club in Miami, you can go to our website miami.org and learn about our future events. If you're interested in becoming a member, you can fill out an application form and submit it to us with Google review. There are benefits to being a member of the Econ Club Miami, including attending events like this for free, and you also get access to additional member retreats and VIP events with our speakers. Without any further ado, I will let Randolph start with our first question.”
Radolf: “I was just wondering if you would agree with me that the orgy of government spending which passed last year, named the Inflation Reduction Act, was, in fact, an engraves and even by Washington DC's low standards for honesty. I wonder if you agree on that.”
David: “Good lord.”
Jon: “[Inaudible 56:41]”
David: “Look, I’m going to put it this way. Um, so you know, it's not only an interesting, it's a very important question. How do we get this sort of inflation kind of outcome that we've gotten. I do think there are three elements of the story and you know. I don't know exactly how to weigh each of those elements, but one was clearly the supply instructions in the economy, which persisted much longer than what we really thought. Another is clearly the fact that there was a lot of demand stimulus that came out of the reaction to the pandemic, especially after the pandemic had played out for the most part. I don't consider you can think however you want to think about that, but I think that's kind of an environmental fact. Then you have set policy, which was very accommodated for a final quite a while. The rapid reaction of the Fed last year has been a reflection of the fact that we were stuck in a very accommodated kind of place, and the committee decided it needed to get out of it. All three of those kind of are in play, and as we kind of get to the other side of all of this, there will be lots of dissertations written on how you portion the influence of each of those elements. You know I think I could say physical very similar in the fiscal policy was part of the story.”
Jon: “I like that [Inaudible 58:36]
Radolf: “[Inaudible 58:42] Thank you so much. I'm very excited, so I'm gonna throw a lot of things. I apologize, but with everything going on to talk about this software, I truly want to believe you. But when you look at the economy, there's not much room to go out. [Inaudible 59:11]. What are some positive things that give you this notion that it's still possible for a self-winding, and how does doing your job with all of these other factors, how does it work?”
David: “Yeah, so I think the best case to be optimistic rests on how unusual this whole event has been. Typically, you get late into the cycle of a maintenance business cycle, and what you find is there is a ton of leverage that people have gotten themselves kind of out over their skis in terms of balance sheets of households, the balance sheets of businesses. The financial condition of the private sector is precarious for lots of different reasons that just absolutely is not characteristic of this time around. I've never really seen the degree of mismatch between the amount of workers that firms want to hire and the amount of workers available to do the work, particularly given the demographics of the labor market. This is a problem that's not going to resolve itself, and I think we have a sense that businesses are going to be less inclined to rapidly shed workers, particularly if the slowdown is modest and mild. I will again, this is a big confession thing. History is not on our side on this. There's no doubt about it, and I don't think any Fed speaker is saying anything different. Usually, these tightening cycles end up with kind of a downer in the economy, but this doesn't look like normal history, and it doesn't feel like normal history. I wouldn't even make a point to the government supports, which helps shore up household balance sheets, that just put us into a much steadier place from which to deal with the hit that may be coming to the economy. Maybe that debt, for that reason, won't be so bad.”
Jon: “A good compassion I great with her our next question.”
Audience 1: “Thank you for being here this afternoon, by the way. Speaking of 1780s, this week in Miami, we served up to '70s style gas lines for you. Anyway, the question relates to the real estate market. I've been hearing for a little while now, particularly in the office space in some of the northern cities, that [Inaudible 1:02:41] the terms are going to be much different with much higher interest rates. It makes some of the deals that were made by the brokers in those buildings economically disappointing. The story goes that they basically put back the keys, and the banks are going to get stuck with these buildings that are not worth nearly the buckets they used to be. Could the potential balance sheets create or add to another banking crisis? I was curious. [Inaudible 1:03:21]”
David: The answer is, yeah, I mean, a different question, whether we draw any conclusion about it. Even before the SDB event and the... I mean, that was clearly on the market. This is the one place where we saw a real effect in the interest rate increases: residential housing, of course, and the CRE bit basically and moving out there. We knew it. We know it. So, you know, share and community of our efforts. I mean, obviously, we talk to bankers all the time. That is one of the key data points and let's do how tough this is going to go. Some of the things you mentioned, there's obviously a lot of geographic differences. The Northeast has... You know, whenever I come down here and collect information from our business contacts, I always remind myself I've got a quiet in South Florida discount rate because this is a non-representative place in many ways. But several places are doing great. I would say even in Chicago last week, I was talking to someone who was kind of moving into a new office space, and he said, "I'm taking his work for it, but he told me that office occupancy in the loop, I mean, in downtown Chicago, was like 90." So that, you know, I... We're not saying that all. I can say the work from home phenomena is really kind of interesting because, I mean, it is a fact. I see it on Mondays and Fridays. You're trying to learn to let us down in Atlanta. It's real, I'm here to say. My friend Nick Williams spends a lot of time thinking about this, but what it means for something like the physical space needed is really kind of an interesting question because, you know, my mom, and at the back, we have in the research department through most of the bank, we have like a three-day in-person requirement. So, most people come in Tuesday, Wednesday, Thursday, and then they work remotely. Well, look, everyone's in on Tuesday, Wednesday, Thursday. I mean, we need the same amount of space to do our work, even though we're not completely occupying or using a kid's maximum capacity all the time. There's a lot of moving pieces, and as I said, it hasn't yet shown the warning signs of impending real severe distress, but that doesn't mean it's not going to be that particularly. We do the same thing, you know, as resets begin to kind of come in before we'll see how that uh, how that plays out. But it's, you know, of the many things we watched, that's nearby next question, yeah.”
Jon: “Next question.”
Audience 2: “My question was regarding bank reserve required because back in March of 2020. And now the better things to do in this program is I wonder if there's a different actor to raise [Inaudible 1:07:04].”
David: “Yeah, I don’t know, I mean short answer for that is, I don’t know any [1:07:15] requirements and not very often been used as an active policy tool. Um, I don't want to say anything too definitive about that because you know, one of the ones I hear something about it right, but I know a no plan to go to the library.”
Jon: “Under construction.”
Audience 3: “Hey John, how are you? Uh, it's good to see you. Dave thanks for this. Thanks to Miami-Dade College, economic program, it's been outstanding a little person because I see the lines up on the back here. So, a question for Dave. One of the things that chair Powell's inciting is, in particular, in terms of inflation entrance CPI Services, less shelter. Now to that point, my question is and it's any point but I'm happy to, you know, keep it open-ended and hear your thoughts on this. It seems like the only time we've ever had that de-escalate fairly quickly has been when we've been well into a recession so does it essentially imply and this kind of goes back to the commentary again when you're about Phillips’s curve and disability and strength today and how it's somewhat dwindled this is essentially me when you use job losses because that's the only other time we've been able to get that measure at least [Inaudible 1:08:31].”
David: “Yeah, so um, I mean they're the reason chair Powell has kind of focused on their courses that um, we do it, we are already seeing pretty significant disinflation in goods so and for every reasonably earlier about the PPI there's every reason to believe and we'll continue on and we'll get back to the level of goods and basically deflation and characterize most of the pre-pandemic period. We know the housing elements change with a lag, and the dynamics of that are in some ways making the case. It's taking much longer, though technically it would. So, we'll see relief of pressure on that. What's left is kind of services that are housing, and the other element that makes that important, of course, is that it's the most sensitive to wages. [Inaudible 1:09:37] It does not have to go back down to two percent. What it just has to do is moderate because there's always an average hourly lowest cost. Two percent was never two percent, you know? So, the reason that's being emphasized is that it feels like it may be a stickier part of the inflation picture. In its apartment, it is most related. It's kind of the film's current question, really, if you think about it because of the range component, and it's sticking up there and not changing. Seeing moderation in that segment of a [Inaudible 1:29:20] where we are in the period of dynamics that are truly moving us in the right direction. We were going to get this inflation as a result of these other elements, and we'll continue to get some disinflation resulted in some elements. The question is, where do we get stuck if we do get stuck, and that's probably going to show up there. I wish I could give you a forecast of what, whether that can be successful without job laws. The story about how it can be successful without job laws is twofold. I mentioned once before, one of them earlier, if wage pressure consists in that sector, the adjustment may not be in crisis to consumers; the adjustment may come in margins for businesses. The second element of it, I forgot.”
Audience 3: “I know it's a tricky one. So, for background, I actually work at a fixed signals in terms of this is fun center.”
David: “Of course, yeah.”
Audience 3: “I appreciate that.”
David: “Here's how we measure these gaps between labor demand supply. You know, there's a lot of open job vacancies relative in the supply of workers. So, you can close the gap between labor demand related by destroying jobs by just, you know, having firms destroy jobs, but you can also close the gap by having jobs step back on their plans for expansion. It means growth swimming movies the employment grows slower than it otherwise would have been, but it doesn't need to be about classifieds. So that's kind of, I don't know if you look at the logic of this, some of this is an adjustment in planned expansion, some of it is an adjustment in margin, and that's really, it's the assets of the software.”
Jon: “I guess this introduces job openings.”
Audience 3: “Yeah, that's a form of reception that's certain tricky also but I appreciate it. Thank you.”
Jon: “Jose.”
Jose: “Hi Dave, thanks a lot. Curious on your thoughts on residential real estate. I'm now the pandemic we saw a lot of investors piling so multi-family asset class, rents have been softening residential real estate team family on the other hand that's quite robust haven't been implementing transactions but prices have stayed elevated. I think based on affordability you can see some stockers in price curious your advance thanks.”
David: “Yeah, I mean, I mean the fact is we have kind of a structural problem with housing right, and we kind of structurally have excess demand. The fact that the cost of construction is high, so we're high before I'm not even sure interest rates are the sort of try and culprit on the supplies I think only as a kind of feed and demand in the shortcuts. The cost of land I mean a year in a place where you know what what's the issue the issue is cost of land and the materials cost of building. There is not really a dynamic in place that kind of sets us up for softness in the labor market for an extended period. You can see it through a cycle of course and we may but at the end, you know, I say you know at the end of all of this, we're going to be faced with the same problems that we were faced with before the pandemic only works and that is we don't have enough workers, we don't have workers with the right combination of skills. We don't have enough housing affordability. We have kind of an urbanism between the labor market and infrastructure to support that labor market I mean these are huge sandwiches and they're not going away. May be part of the good news is it kind of puts a floor kind of like how you know soft things will get in for how long but it also makes the inflation issue that much more kind of difficult as I said I mean we're a little bit surprised quite a bit of that the kind of housing elements of prices have not softened more than that they had and we're still seeing kind of influence from that sector on the inflation measures. I think it's probably a technical problem but I would not dismiss entirely the fact that there are a lot of structural issues in that marketing particularly, just simply I'm going to stick with because [Inaudible 1:15:47].”
Jon: “Next question [Inaudible 1:15:50].”
Audience 4: “[Inaudible 1:15:52] Thank you [Inaudible 1:16:01] difficult for anything to Central particular session when inflation [Inaudible 1:16:08] comes from the supply side and college [Inaudible 1:16:18] and then the oil shop and then the world okay and obviously that's a increase the connections foreign [Inaudible 1:16:39] and I understand that we said that the for example change the impression parish is not on the table and but what will happen in that situation in the National advice process and his professionals already affected and it's amazing we have a nice shot. [Inaudible 1:17:39]”
David: “Well, I mean I could only kind of repeat the position that has been taken by the people who are making the decisions and that is that would be an unacceptable outcome. It is still my belief in any event that whatever the source of a persistent inflation is you know however you want to point monetary policy can fix at the end of the day you know there's a real economy and the nominal economy and the nominal economy is you know it is controlled by monetary policy at the end the question becomes how painful is it to control it um inflation persisting at the levels at that panel would be it would be a failure to be at home objectives and seems like that it's not in their playbooks [Inaudible 1:12:50]”
Jon: “Next question.”
Audience 4: “Thank you Dave, thank you Jon. I'd love to hear your comments around the potential need to accelerate policy response time during a crisis especially around no you've seen as an evolution of bank runs you know I think the stats on the post kind of point to our you know Ramu and 08 was effectively 17 billion withdrawn in 10 days and SCPE was 40 billion withdrawn in three days a lot of that was because of complete suplex so I'd love to just hear your comments around them.”
David: “So you need the response time of the of the run. Look I think I think this is you know if you know this is not a surprise to anyone this is not an original phone. “We're in a world now where you know you don't have to make much effort to run on a bank uh and I don't think anybody has a very clear notion of what the implications are that entirely I fully anticipate that you know long stretch of analysis about what happened you know in California, proceeds you that will be one of the questions are we more susceptible to the bankrupts as we were in the past what is the appropriate regulatory response to that, you know that that you know obviously is a dominant question. We haven't seen of the world that we live in before right now so this is going to be a challenge to think about what the right infrastructure is it's a sort of deal with deal with the changing circumstances in terms of financial questions. That said I got to say it was a pretty old-fashioned response to what happened I mean you know remember a last resort. Two things, two things happen there's a bank run whenever Bank runs kind of go in your head you immediately go to the closet insurance or on the economist time and it was possible deposits who won Nobel Prize to the idea you know upon us a long time ago the solution. To the safeguard against Bank runs is Deposit Insurance um instead of cost that we're going to happen really serious and think about and work through and the other thing is that the Arizona last resort when it's needed and the reason that Monday March 13th you know the sun came up and the world did not collapse because I think because it was kind of very old-fashioned policies and the new guys who couldn’t play.”
Audience 4: “Thank you and thankfully we had the weekend to decide so yeah.”
Jon: “It's funny how a lot of banks closed on Fridays, it's funny how these prices play over the weekend last two questions um if we can go quickly though before.”
Audience 5: “I thank you Dave, I appreciate it. [Inaudible 1:22:09] everyone continues that and what about Regional things like [Inaudible 1:22:24].”
David: “Yeah so rather they kind of throw out my own analysis of that and it would point you to a payment paper that was noted in the Wall Street Journal I think yesterday so it's a national theory of economic research anchored by Erica Jang and a bunch of co-authors who really do what I think was a pretty prepare for analysis kind of the exposure of the banking system to be awesome. I really do think that you know look I mean the bank term funding program was federal reserve’s stepping up and saying you know you have to go to market because of deposit outflows like this inspection of portfolios you will not suffer capital losses. We will lend against them at par with no margin whatsoever which is a very unusual policy so it seems unlikely by the way that's also indemned the Federal Reserve has indemnified to some amount like 25 million dollars’ worth of losses by the treasury against that lending. So this isn't it you know when taxpayers are put on the book I think it belongs kind of in the legislative kind of part of the world and it is in this case so I think that really sort of helps us kind of see the way through those problems that they arrive it drives and they arise primarily in a crisis sense if the positors in this conference and begin to flee the banking system or some big regional or a big reflection of Community Banks Fleet is a big Banks to a presumably fail label on it. These policies so far appeared to have a broader confidence that would keep that scenario from a rising it's still early days everyone knows that but I think we kind of scoped the problem and with some pretty good analysis now necessarily in the Federal Reserve but throughout the kind of observers and all this stuff and have put in place kind of the policy responses that are appropriate.”
Jon: “Last question.”
Calvin: “Thank you for your time today I'm Calvin Cooper I worked in the capital markets industry so Venture Capital One real estate investment banking. My question is about data how the FED collects and reports data to anybody who's like in technology or real estate offering the federal court especially between reporting cycles extremely off to people who have access to real-time data so just curious how you could continue today and how you're transitioning like with real-time streaks that are you thinking about real-time streaming, pricing information from brochures the themes and others because it often to relax what people think the industry knows going on like very strong existence a real-time analysis.”
David: “Yeah, I heard him.”
Calvin: “It’s everybody in our space like [Inaudible 1:25:44].”
David: “Yeah, I think everyone else [Inaudible 1:25:47] a real time analysis I'm not quite sure it's all proven out at this point I mean there's a couple of an obvious one is kind of thinking about spending from kind of credit card information. There's noise in that information and so it's imperfect but we you know spend the same amount of time everyone else does. First of all if there's any impression that the those of us in the criminal reserve have access to very much information that the public doesn't as wrong we don't we're getting information from the same sort of sources as everyone else you know sometimes some people will talk to this who will kind of you know necessarily be broadcasting that information but that's not that's the that that would be an exception not a rule. Quite, honestly the most important information we get in real time is what Sherry does and other colleagues and Nashville Jacksonville, Birmingham, New Orleans do and that is get out talk to people like you saying look you know we're not we're confused about what's happening here or we're worried about CRE or you know whatever it might be what if you see from where you sit and Jerry and her colleagues in the regional economic information network that we have spent all of that time in face-to-face interviews. We run multiple surveys, we're our best data is the people who are engaging havens that create the data down the road and that really is if anything is our kind of secret kind of staying on top of things. Somebody mentioned the T word uh earlier on the transitory inflation sort of thing and when we knew that this was going to be a problem of the Atlanta Fed it was because we were out talking to people who were saying and you need to think about it and then you begin to understand what data we needed to look at and we went out and looked at uh changed in some ways the way it requires. So, you know my summary of that is you know all the kind of high frequency stuff that we can get our hands on we look at we try to do the analysis of it. No silver bullet that we've really found and all of that so I'm going to keep pounding the pavement and trying to find out what real people [Inaudible 1:28:37].”
Jon: “What a great question on that [Inaudible 1:28:44] I just want to thank Dave for joining us along with [Inaudible 1:28:53].”
