00:00What is the strongest argument against not cutting interest rates right now?
00:04Well, I think two things. Number one, the risks of inflation have increased, obviously, because of the continued rise in
00:10energy prices.
00:11And number two, that the labor market seems to be pretty stable.
00:14We're not seeing a lot of job growth, but we're seeing enough job growth to keep the unemployment rate from
00:18from rising.
00:19So I think that the balance of risk is actually shifting more to the inflation side away from the labor
00:25market side.
00:25And second thing is that there's not real evidence that monetary policy is actually restrictive right now.
00:30We've had supposedly a restrictive monetary policy for quite some time, yet the economy is operating at full employment and
00:36inflation is well above the Fed's two percent objective.
00:39So the evidence that monetary policy is actually holding back the economy, I think, is pretty weak in the current
00:44environment.
00:44But what do you make of the AI argument? It wasn't something that was articulated in the hearing,
00:48but it's something we've heard from Kevin Walsh before in the lead up to his confirmation that ultimately it will
00:53lead to lower prices
00:53and will give them room to reduce interest rates. What's the pushback to that?
00:57I think the pushback to that is twofold. Number one, AI in the short term is actually increasing investment demand.
01:03So that's actually pushing upward pressure on interest rates.
01:06Number two, there's a lot of uncertainty about how fast the AI productivity benefits will materialize.
01:11And it's not really clear whether that will, you know, what will dominate the downward effect on inflation
01:16or the upward effect on the demand for capital and the effect of that on interest rates.
01:21There was a poll of economists that basically found that over 80 percent of the economists said,
01:26no, I would not recommend cutting rates now prospectively on the basis of an AI productivity boom.
01:33The other weakness of the argument is Kevin Walsh cited the Greenspan experience in the late 1990s as a reason
01:39to cut.
01:40Well, the reality is Greenspan did not cut in the 1990s. He just didn't raise interest rates.
01:45And interest rates at the time were well above where they are today.
01:48Bill, do you think that's just a sequencing problem?
01:50What's your ultimate view, your personal view on the matter?
01:52Is that a sequencing issue that is expensive up front?
01:54It pushes up costs. There's a clamor to buy all kinds of things.
01:58And then later on, costs fall?
02:00Well, I think AI, if we do get a productivity surge, it's going to be good for the outlook for
02:05inflation.
02:05I think it's less clear what that means for interest rates, because if AI results in a, you know,
02:10obsoletes a lot of the capital stock and you need to sort of build new capital to take full benefits
02:15of AI,
02:15you could actually see continued upward pressure on real interest rates.
02:18No good reason to cut rates. That was the title of your piece right now, Bill.
02:22You echo that in this conversation. It does beg the question, why is the current Fed chair and the committee
02:27maintaining an easing bias?
02:30I think they can start with the presumption that, number one, monetary policy is restrictive, which I don't really agree
02:35with.
02:35And number two, that they're concerned about the downside risks to the labor market.
02:39I think those downside risks to the labor market were probably pretty relevant, you know, a few months ago.
02:44But the labor market seems to have stabilized.
02:45Look at the level of initial unemployment claims and total unemployment claims.
02:49They're really basically as low as they've been in many, many years.
02:51So there really is very little evidence that the labor market is falling apart at this point.
02:55Bill, what do you make of Chair Jay Powell staying on for longer than many have anticipated,
03:01given he will be a former Fed chair at the next meeting?
03:04Well, it's clearly unusual, but not without precedent.
03:08And, you know, for the people that are criticizing, you know, Jay Powell for staying on, I think that's not
03:13really fair.
03:14I mean, he didn't start this whole situation.
03:17You know, the Fed has been under a merciful attack, merciless attack from the president.
03:23And the Fed's independence is under question.
03:26And I think Powell thinks that by staying on the Fed, that's going to actually bolster the Fed's perception of
03:32the Fed's independence.
03:33So I think it makes sense for him to stay on if he's willing to do so.
03:36I believe over the weekend, the Treasury secretary called it an overreaching shadow Fed chair.
03:42Do you believe that this will be confusing for financial markets to have what some might think two co-chairs?
03:49Well, I think Powell has made it very clear that he's going to keep a very low profile.
03:53So I don't think you're going to see Powell going out and giving a lot of speeches about the economic
03:56outlook and the implications for monetary policy.
03:59But obviously, around the committee, when you have the actual FOMC meeting,
04:04it's going to be pretty relevant in what Chair Powell says about the economic outlook.
04:08People are certainly going to continue to listen to him.
04:10Bill, obviously, the incoming Fed chair is going to want to do it his own way.
04:13What kind of changes would you advocate for in communication, whatever it might be, fewer speeches, the dot plot?
04:19What would you change?
04:20I think there are a lot of things that they could change and improve.
04:23I mean, I think that, number one, you need a framework for quantitative easing and quantitative tightening.
04:28They don't have one right now.
04:29When do you do it?
04:30How do you do it?
04:31How do you exit from it?
04:33How do you evaluate the cost and benefits of it?
04:35Number two, I think they really do need to improve their communications.
04:38And I think what I would recommend, and this is something that Ben Bernanke recommended,
04:43is to actually publish a staff forecast with scenarios, alternate scenarios.
04:47Scenario analysis right now is so relevant in an environment where we don't know how high oil prices are going
04:53to go
04:53or how long they're going to stay high.
04:56So having different scenarios that basically say how you would respond if things turn out differently than you expect
05:01is very helpful information to guide markets.
05:04So I think the ECB does this.
05:06I had a conversation with Christine Lagarde a couple weeks ago about this.
05:09They have three scenarios, baseline, adverse, and severe.
05:14And she basically said every day that the situation in Iran stays the way it is today,
05:19we're taking one more step away from the baseline scenario towards the adverse one.
05:23So having alternative scenarios I think would help people think better about monetary policy.
05:27But is it harder when you have a dual mandate?
05:30I don't think so.
05:31I mean, I think the dual mandate, I think people overestimate the tension in the dual mandate.
05:35At the end of the day, I mean, I think the Fed's view is we need to keep inflation at
05:392%
05:39because that's actually going to help us more easily achieve our employment objectives.
05:43So the two are not quite as much tension in the long run.
05:46They're in tension in the short run at times.
05:48But in the long run, you really need to keep inflation at 2%
05:51if you're actually going to achieve your objective in terms of employment.
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