00:00There has been a pretty aggressive push to reduce interest rates. At the same time, this Federal Reserve is shifting
00:05towards articulating a more symmetrical reaction function.
00:08Not there yet, but getting closer to it, Kevin. Supporting that is the economic data from earlier on this morning.
00:14Do you think there is space just to wait, to see, to work out how things turn out before thinking
00:19about reducing interest rates?
00:21Right. Well, first of all, let's talk about the economic data for a second because it was just kind of
00:26a whole bunch of blackbuster numbers, a 2% number.
00:29Actually, you know, for me, being capital spending guy, I used to be the capital spending guy at the Fed
00:34when I was a young economist,
00:35that the thing that was amazing, as you know, and you highlighted, the capital spending boom.
00:40And one of the things that sort of dragged it down from a really high number was that the quality
00:45of the imports has skyrocketed.
00:47And so almost half of the imports were capital goods, which were coming in to build factories in the U
00:52.S.
00:52Typically in the past, you know, our imports are things like consumer goods that are perishable.
00:56And so the bottom line is that it's really strong data.
01:00We've got initial claims the lowest they've been since the 1960s.
01:03We've got government employment the lowest has been since the Second World War.
01:06We've got all these positive movements in terms of fiscal responsibility and economic growth moving forward.
01:12And so then but we do have this temporary disruption with energy markets, which is very serious.
01:17As you mentioned, the energy prices are high. Gasoline prices are high.
01:21But, you know, my read of the academic literature on what you do when you have an oil shock like
01:26this is not that you raise rates into it,
01:28especially given how I think we're highly confident that this is going to be a temporary disruption.
01:33Futures markets agree with that as well.
01:35And so I think it would be a policy error for, you know, the ECB or the Fed to hike
01:41rates into a temporary spike in energy prices.
01:44And their own, you know, economic studies sort of suggest this is true, because if you look at it, if
01:51you what they want to do is make sure that future inflation goes back towards the target.
01:55The best forecast of future inflation is not top line inflation, but core inflation and core inflation in the last
02:01CPI number was fine.
02:02The PCs kind of crept up a little bit, but but it doesn't tell the story of the top line.
02:07And the top line is the kind of thing that I think someone could overreact to.
02:10It might not be appropriate, Kevin, to have a rate hike at this point.
02:14But do you agree with your colleague, Treasury Secretary Scott Besson, who came out and said it might be appropriate
02:18to stay on hold for a while as this does progress and works itself out?
02:25Again, I am highly confident that the productivity boob is going to keep core prices under control.
02:33And that, you know, my old friend Alan Greenspan in the 90s saw that because of the computer revolution that
02:40we could have high growth and there wasn't a flips curve kind of thing that you needed to respond to
02:44as he let us have four or five of the best economic years that we've seen in my lifetime.
02:49And I think that we have that opportunity again.
02:52And it would be a shame if we squandered it.
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