00:00We start with the big story for the markets this week, the Federal Reserve's latest rate decision.
00:05Our special contributor, Larry Summers of Harvard, is here with his take.
00:10Larry, we heard from the Federal Reserve this week, and they cut again, second time in a row.
00:16Were you surprised at how far Chair Powell went in saying, don't expect it in December?
00:22I was slightly surprised, but much more importantly, I was glad.
00:26This was the right thing to do.
00:30Inflation is much further from its reasonable target than unemployment is.
00:35The Fed can have much more of a durable impact on inflation than it can on unemployment.
00:42Given deficits, given AI spending, we're probably at or below the neutral rate of interest.
00:50There was no reason to be committed into further rate cutting in this environment.
00:59So Chair Powell signaled a return to data dependence, to agnosticism about what was going to happen next.
01:06That was exactly the right thing to do.
01:09Yes, there are risks of a slowdown.
01:12But if we get a slowdown and the Fed does a 50 basis point cut six weeks later, that is not going to be important.
01:20But if the Fed loses its credibility around inflation at a moment of massive deficits, massive political pressure from the administration, substantial international uncertainties,
01:34evidence of higher inflation expectations, and it's been a long time since inflation was near 2 percent, in the face of all of that, this was really the right thing to do.
01:47The Fed may be data dependent, but it doesn't get the data that it once did out of the federal government.
01:52How much of a disadvantage is that for the Fed right now in figuring out where we are, particularly when it comes to inflation?
01:57It's a disadvantage, but there are now so many indicators, so many real-time data sets, things like the Million Price Project at MIT,
02:10all sorts of sensitive indicators that are being followed by people in the markets on an almost weekly basis,
02:19that this is unfortunate, and it's not what a serious government country does to have such a long slowdown.
02:28But I don't think it's an immense problem in the grand scheme of things.
02:33It's certainly a much smaller problem than politicization.
02:37It's a much smaller problem than dealing with budget deficits.
02:43This is not the major challenge facing the Fed.
02:46Chair Powell in the news conference talked certainly about inflation.
02:50He also talked about the role of tariffs.
02:53And at one point he said, look, if you take tariffs, the effect of tariffs, out of the numbers,
02:57we're actually not that far away from our 2 percent goal.
02:59If that's right, which way does that cut?
03:02What do we do with tariffs, incorporating that into monetary policy?
03:06Well, we're not that far away from 2 percent.
03:11And after five years of being above 2 percent, isn't that great a place to be, even if you accept that that's true.
03:21You can always take some things out of the numbers and then say we're near normal.
03:29That kind of argument reminds me of what was Chair Powell's darkest moment in what I think has been a really very distinguished term of service,
03:41which was the transitory inflation idea in 2021.
03:46Yes, maybe it's true that if you take out tariffs, the numbers will look good.
03:53But because people are spending more money on tariffed goods, they're spending less money on other goods whose price is lower.
04:01And that should be taken out as well.
04:04So I don't think cherry picking the components that have risen is a particularly good way of doing the analysis.
04:13I also think it's not clear what's going to feed through into people's expectations of inflation.
04:22One thing that was different about this Fed decision were the dissents.
04:27I mean, we went for a long time with no dissents.
04:29Last meeting, we had some dissents saying we should cut more.
04:32This time, we had them both ways.
04:34Don't cut it all and cut more.
04:36Is there a breakdown in the consensus on the Fed or is it just a more confusing picture we're seeing?
04:40I think it reflects two things.
04:43It reflects the confusion of the picture.
04:47And I think that the dissent from Kansas City in favor of raising rates reflects, or not cutting rates,
04:58reflects what is the genuine argument among serious economists in this moment.
05:03The dissent from Governor Maron reflects the bizarre spectacle of a government official, part of an administration that's at war with the Fed in its rhetoric,
05:18putting somebody on the Fed on a temporary basis while they're on their leave from their other Senate-confirmed job.
05:31I think that that's not to be taken seriously as anything but a politically aberrant moment.
05:41The Fed also said that as of December 1, they'd stop the roll-off of the balance sheet.
05:46Is that reflecting a real concern about liquidity?
05:49Did you expect them to keep the balance sheet this large?
05:52They signaled that this kind of thing was going to happen.
06:00I don't think particularly that the precise size of the Fed balance sheet in an era where we're paying interest on reserves is really that important a variable.
06:15In an earlier era when the other side of the balance sheet was money that paid zero interest, the era of monetarism,
06:24you could get very excited by the size of the Fed balance sheet, but I don't find it that exciting a variable to worry about its precise size.
06:37I do think it's important for the country as a whole to be terming out its debt more than we have.
06:46And from that point of view, the Fed reducing the size of its balance sheet is probably a good thing
06:53because it means a little less short-term obligation of the federal government and a little more long-term obligation.
07:03Shortly after we had the Fed meeting, we also had President Trump meet with President Xi Jinping of China over in South Korea.
07:11And there were a lot of things announced.
07:13President Trump said on a scale of 1 to 10, it was a 12.
07:16But there seemed to be a consensus that what we've done is basically just go back to where we were before,
07:20and this is going to be an ongoing period of negotiation.
07:22How significant, in terms of the economy, is what happened over in South Korea?
07:28Look, I think the most important thing is what didn't happen.
07:32And this situation didn't spiral out of control into massive confrontation and economic conflict.
07:41And it was managed in a way that avoided what potentially could have been very unfortunate and destabilizing outcomes.
07:51And that's the good news, and I think it genuinely is good news.
07:56I am glad for farmers that they are going to sell more soybeans in China.
08:04But ultimately, when one judges the prosperity of the United States in this period or the wisdom of economic policy in this period,
08:13it is not going to be about the level of soybean sales to China.
08:20So we're going to have to see what happens.
08:23The really big issues involve technology, involve competition in artificial intelligence.
08:33And it doesn't look to me like on the read we have so far that those have evolved a lot.
08:41But give credit where credit is due.
08:44I think there's a good chance that we elicited some real cooperation on fentanyl, which is not so much an economic issue, but is a hugely profound social issue.
08:57And give credit where credit where credit is due, we're managing the situation towards the avoidance of what could otherwise be very substantial turbulence.
09:11But this is a book that's got many chapters, and we are still in the early chapters.
09:19Larry, talk about that technology issue that you mentioned, and particularly when it comes to AI.
09:24One of the things that apparently was not discussed were some of the advanced microchips from NVIDIA.
09:29I mean, you are both a macroeconomist and also sit on the board of OpenAI, so you have a vantage point on this.
09:34How do you see the issue about export controls with respect to advanced microchips between the United States and China?
09:40On the one hand, there are national defense issues.
09:42On the other hand, we do want to have sort of a development of this new technology.
09:46I think it's a very difficult set of issues, and I don't know what the right answers are.
09:54I'm pretty sure that the right thing to do is to make judgments based on what will protect American national security now and in the future.
10:06And so the approach that President Trump took a couple months ago of saying he would relax the export controls, but only if the company involved would share some of the revenue with the federal government, did not strike me as consistent with our traditions.
10:25It struck me as more pointing towards a kind of deals capitalism that is more characteristic, frankly, of lesser nations than ours, rather than a more rules-based capitalism.
10:43Let's keep their choice.
10:44Let's keep in mind.
10:45Let's keep in mind.
10:47Let's keep in mind.
10:49Let's keep in mind.
10:53Pour simple.
10:56values for Process.
10:59Therefore, Arsenal.
10:59This has beenuko to review.
11:00Yes, sir.
11:01This is ко départ therefore has been made Wisconsin with United States Street and Organic Club.
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