00:00What actually transpires over these next few months with the possibility that we could actually see a sort of a
00:06chair pro tem situation with Jay Powell.
00:08We could see him stay on as governor, particularly as this DOJ subpoena case, whatever we want to call it,
00:14remains unresolved and could actually hold up Kevin Warsh's confirmation.
00:19So clearly he wanted to put that statement out there today to be very clear that his leaving the board
00:28would be contingent on that criminal investigation being terminated.
00:33And of course, that lines up with Senator Tom Tillis, who has said that he will not move forward on
00:41the vote for incoming nominee Kevin Warsh until that criminal inquiry is dropped.
00:49And the administration has a very clear path to do so.
00:52The statement on the part of the district court judge, very clear there.
00:58They did not see a case here.
01:00And so by simply not moving forward with an appeal, it would clear that path at least to get Kevin
01:07Warsh a vote and to get him onto the board.
01:09What happens after that, Jay Powell wouldn't say.
01:13He would not say.
01:14He also wouldn't say a whole lot about the inflation situation.
01:18He was asked.
01:19He answered it.
01:20I think the best that he could.
01:21But he also seemed to make clear that right now no one really seems to know anything.
01:25I thought his comment about the summary of economic projections, which was basically, hey, we had to write something.
01:29So we wrote it down.
01:31But that didn't sound like there was a whole lot of conviction that that forecast, whether it's on the GDP
01:36side or the inflation side, is something the market should put a whole lot of stock in.
01:40How did you view it?
01:42Yeah, I found it surprising.
01:44We did not learn really anything about how the committee is thinking about the effects on inflation and the economy
01:55from the oil price shock, neither in the statement nor in the summary of economic projections.
02:00Yes, they marked up core inflation a few tenths, but that could simply be reflecting the reality that core PCE
02:07has actually moved up a bit in the last few months and is expected to be a bit stickier than
02:13before.
02:14But what was interesting is that he wouldn't use the word transitory, but essentially they look like they are treating
02:21the oil price shock as transitory.
02:24Well, yeah, and he was very careful not to use the T word.
02:28But I am curious about this idea of just the compounding effects of everything, because I think one reason why
02:34I think the market talks about it being transitory, because we've kind of been here before, whether it was obviously
02:38the supply chain issues with regards to COVID.
02:41And then obviously whatever happened with the start of the Russia-Ukraine war here.
02:45Is there a reason not to view this as potentially transitory?
02:50Well, I think that we have to at least consider two reasons this time may, in fact, be different.
02:57One is that the size of this oil shock is unprecedented.
03:03The Straits of Hormuz have not been closed before 20 percent of oil production.
03:08That is very material.
03:10And nobody knows how long this is going to go on.
03:13The second reason that I think we have to be a little bit cautious before we dismiss this as transitory
03:20is this oil price shock comes on the heel of a series of supply shocks.
03:26Very significant tariff shock, shock to the supply of labor.
03:30And, of course, coming off even earlier, a period of high inflation.
03:34In the kind of circumstance where you have a series of supply shocks that individually might be actually transitory, you
03:43do have to worry, and I did back when Russia invaded Ukraine, you have to worry about the cumulative effect
03:51on inflation being somewhat more persistent.
03:54With regards to that balance of monetary policy or the balance between the dual mandate, there's been a lot of
04:00talk about how the labor market is in a different place than where it was in 2022.
04:04And obviously, the circumstances around COVID were entirely different.
04:08How do you view the labor market right now, particularly through the lens of the potential for a more meaningful
04:15move up in inflation?
04:17Well, it's certainly the case that in 2022, the labor market was strengthening.
04:22And now, of course, we've seen it barely treading water over the last year.
04:26And it's hard to read, as the chair said, because we've seen a reduction in the supply of labor at
04:33the same time.
04:33So they are putting a lot of store on that unemployment rate just remaining very steady, even though we've seen
04:40payrolls growth be essentially zero for the last little while.
04:45So I think there is a risk to both sides of the dual mandate from this oil price shock, both
04:51more unemployment and more inflation.
04:54And that is why this could be quite a difficult balancing act for the Fed in the months ahead.
05:01But the other piece that I think is an important contrast to 2022, in 2022, inflation was just starting to
05:09really spike up after a long period of being very quiescent.
05:14Now we are seeing an additional shock to inflation after five years in which inflation has been quite high relative
05:23to its target.
05:24Well, this also gets to this idea, though, too.
05:26I mean, we've heard from a couple of consumer product companies over the last couple of weeks that have made
05:30it clear that a prolonged increase in oil prices
05:34and effectively for consumers, that means higher gas prices, is going to have a material effect, particularly on discretionary buying,
05:41but even on buying of essentials.
05:42If that does potentially end up being the case, how confident can you even be in some of those GDP
05:48projection numbers?
05:51Well, I do think that consumers are stressed by high prices.
05:56I've done a bunch of roundtables with consumers who essentially point to food prices going up, electricity prices going up,
06:05housing prices not seeing any relief.
06:07And now, of course, gas prices for the first time in over a year are going up.
06:13So I do think consumers were already feeling stressed, and we could, in fact, see some consumption pullback.
06:21Now, on the other side of that, people are getting their checks, their tax refunds, and so that might help
06:27insulate if this is not a prolonged shock.
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