00:00I do want to start with that summary of economic projections and the balance between how the Fed looks at
00:04inflation and, of course, looks at economic activity and the labor market.
00:10Well, unfortunately, we're in a situation where with the shocking energy prices, oil, gas, etc., we're likely to see higher
00:21headline inflation than otherwise would have been the case.
00:24And at the same time, slower economic growth than otherwise would have been the case.
00:30Both of those developments are negative, and they certainly don't make it life any easier for Fed policymakers because, obviously,
00:38the Fed prefers low inflation and healthy economic growth.
00:43And the shock to energy prices and all the uncertainty associated with the war and its duration and how it
00:51ends, all of that is very unclear at the moment.
00:55And so it's very difficult for the Fed to come down with a lot of confidence on any side of
01:01how this will play out.
01:03And I think that means, as you've already suggested, that there's unlikely to be any change in policy coming out
01:11of the upcoming meeting.
01:12I think the Fed will emphasize uncertainty and will emphasize the negative implications for both inflation and growth of what's
01:24happened over the last two or three weeks.
01:26I am curious, particularly when it comes to having these energy shocks, which often are viewed as being transitory to
01:33a certain extent in terms of their price levels, but also the impact on the economy.
01:37And I think about your time at the Minneapolis Fed, and obviously what we're seeing today isn't quite – it's
01:43a little bit different in complexion than what we saw in the past.
01:46But I am curious as to what ends up being the debate.
01:48Do policymakers just say, let's look through this, or is there sort of a real read-through into how it
01:54might actually affect economic activity?
01:57Well, let me give you a couple of examples.
02:01You know, this will definitely raise headline inflation.
02:05It may not, and it shouldn't, raise core inflation over time as long as the Fed doesn't underwrite it, that
02:13is, doesn't adopt an excessively expansionary policy, doesn't react excessively strongly to what's likely to also depress economic growth.
02:25So we're in a situation where the higher energy prices will clearly have negative impacts on the incoming data for
02:34a time.
02:35The Fed will look through that.
02:37They will use their economic models and their analysis to understand as best they can, you know, how the size
02:45of the distortions,
02:46and whether the economy putting the distortions aside is performing as they expected and in a reasonably satisfactory way.
02:56If that turns out to be the case, then policy decisions going forward will not have been affected except to
03:04the extent that the timing will likely to be affected.
03:08Because it's very difficult to make changes in policy if some of the data is very, very noisy.
03:16For example, if you get some very high readings of inflation, even if you think they're going to be temporary,
03:22that's not going to be an environment where you're going to want to cut rates aggressively.
03:26Well, I raise that question because I think back to the Gulf War in the 1990s where you saw oil
03:33prices, I think, roughly double.
03:35And, of course, we ended up in a recession, that 1990-1991 recession that most people attribute to a certain
03:42degree to that energy shock.
03:45Did the Fed see that coming at the time?
03:48You know, when I think back about that period, I think just to a considerable extent, yes, we knew there
03:55would have a negative impact on the economy for a period of time.
04:01And if you look at that history, it did, but not for very long.
04:05Because after the 1991 recession, we had a very long, very healthy economic expansion that lasted through the balance of
04:14that decade.
04:14It lasted, in fact, until the dot-com bubble burst.
04:20So, you know, that's a good episode to recall why you don't want to react excessively to these sort of
04:31one-off events, even if they persist for a time.
04:34Of course, in this situation, we don't know yet when the end of war may be coming, what it will
04:41look like,
04:42how much disruption is provided to the global economy, not just the domestic economy.
04:49And it's going to take some time to sort all that out.
04:52And you don't want to act, you don't want to pretend that you're in the Fed, that you know more
04:58than you know.
04:58Yeah.
04:59So if uncertainty is very high, the best thing to do is to acknowledge it and to be cautious for
05:04the time being.
05:06If aggressive action is required in the future, then fine, go ahead and take it.
05:10Well, one thing that's also different now is the communication by the Fed, obviously having the press conferences after every
05:17decision.
05:18You did not have that.
05:19And not only that, but it seemed like communication overall from the Fed was a little bit more filtered through
05:23one person.
05:24I am curious as to how you communicate to a market where you have to address them after each meeting,
05:30and every Fed member is free to go out after that meeting and, you know, state their own opinions about
05:36why they voted the way they voted.
05:39Well, I think that there's an element of a double-edged sword to all that.
05:43But I think that Chair Powell is very effective at communicating at the press conference and subsequently if he chooses
05:51to do so.
05:52And I think it's good for market participants to bear in mind that they should pay most attention to what
05:59the chair has to say.
06:01If a lot of other Fed officials are commenting, obviously you don't want to ignore what they have to say,
06:08but you may want to take it with a substantial discount.
06:12They may be expressing simply their own views, which may or may not represent the mainstream,
06:17or which could be subject to significant change with the passage of time.
06:22So it's worthwhile if you're a market participant to gather that information,
06:27but it's also worthwhile to spend some time reflecting upon it and thinking about it
06:33and, you know, subjecting it to some scrutiny before you place any money on it.
06:42As I said, I would pay most attention to what the chair has to say.
06:46Well, speaking of the chair, I do have to ask you about some of the drama surrounding Jay Powell's tenure,
06:52the potential confirmation of Kevin Warsh, and the political pressure that has led us to this point.
06:59Do you have any concerns right now about the independence of the Fed to make monetary policy decisions as it
07:07sees fit?
07:09Well, so far, I would say that Chair Powell and his colleagues have done an extraordinarily good job
07:15of resisting pressure and maintaining the integrity of the monetary policy decision-making process,
07:23the objectivity of the process,
07:25and keeping their eye on the ball in terms of achieving stable prices and high employment,
07:33which benefit the residents, the citizens of our country.
07:37I think they've done a good job about that, or better than good.
07:41I do think that some of the political pressure is unfortunate.
07:45We haven't seen this since the years of Paul Volcker back in the 1980s.
07:50I don't think it's constructive.
07:52I don't think it adds value.
07:54But fortunately, the Fed does not appear to have been—the decision-making does not appear to have been affected by
08:02this.
08:03I hope it ceases, and I hope we get to a smoother relationship between officials in the administration
08:11and officials in the Federal Reserve.
08:13And I expect that will be the case going forward.
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