00:00The world lit up. Anna Wong, with legit crud out of Lucas's Chicago, was fiery. The news
00:07conference was rich in philosophy, process, and institutional aspirations, but poor in
00:12operational guidance. The absence of Clarida-like analytical specificity appears to have spoken
00:19louder than Warsh's words. So Lucas did what he did. CGG, Clarida, Ghali, and Gertner reinvented
00:27modern economics with something called dynamic stochastic general equilibrium theory. We come
00:34out now, and as Claudia Somm says, we have a chairman who's not sure what he's looking
00:39at in inflation. How does he get the rails back on? Does he need to reaffirm PCE as the inflation
00:45series? Well, I think what he said at the press conferences is for now until next January at
00:52least. That's going to be correct. The Fed adopted that again in January. He left open
00:56the possibility that the task forces could recommend other measures. They could go to
01:01an average. Instead of picking one index, they could look at CPI, PPI. There are a lot of
01:05things they could do, but I think Anna, as usual, raises an important point, is that an inflation
01:11targeting central bank needs to be clear about what it is it's targeting. It can and may evolve,
01:16and so I think that will be important. Very importantly then here, if we need to get the
01:22system back with a confidence about the Fed, how does he do that at Jackson Hole? Does he have to
01:29reaffirm, as Somm says, that inflation is the appropriate measurement and not a policy?
01:37Well, I think Jackson Hole may serve a couple purposes. Historically, as we've seen,
01:42chairs have used Jackson Hole as sort of a sneak preview of coming attractions at the September,
01:48November, and December meetings. Chairman Warsh Hennedy may do that. He's also interested in what
01:53he called some big picture questions that he sort of previewed at this meeting, and he's also
02:00talking to the task forces. I think it's too early to tell what he'll do at Jackson Hole, but he
02:04may
02:05do that as well. I find it really interesting that he doesn't want to tell the bond market a whole
02:10lot
02:11of things, and he's kind of waiting to take his cue from the bond market. From a layperson's point
02:15view, it feels very circular, right? The central bank sets a benchmark interest rate. The bond
02:18market takes its cue from that. What's the rationale for the Fed to take its cue from the
02:23bond market that's relying on the Fed to set policy? Help me understand that.
02:26So here's the way I would express it. The Fed is a very important part of 10-year treasury yields.
02:35It's not the only thing that drives yields. So I think the chairman was important to emphasize
02:39that the Fed does want to step back and interrupt movements in bond yields. It could be inflation.
02:44It could be global growth, Middle East, hostilities. But certainly the chairman and the Fed understands
02:49that an important part of 10-year yields is the expected path of the funds rate. And to Scarlett's
02:54point, and I actually, Ben Bernanke gave a speech on this, as did I as vice chair. It's called,
02:58sometimes called, the hall of mirrors problem in central banking, which is the central bank looks
03:03at the market. The market looks at the central bank. It can get circular.
03:07Let's go back to your paper. Galley and Gertler didn't know this. Richard Clarita channeling
03:11Alan Blinder, having looked at monetary policy from Joni Mitchell's both sides now, I can testify
03:17that central banking in practice is as much an art as a science. How does Warsh get back
03:24to science, declare it a silence versus some mom and pop philosophy you learned at Stanford?
03:31Oh, well, I think Kevin Warsh and the committee understand that. Look, Kevin came in, Chairman
03:37Warsh came in with an ambitious agenda. And I think that they're going to both focus on
03:44implementing that agenda as well as getting to where they need to be on policy. I guess
03:49where I would try to relate Claire to Galley Gertler to the current conversation is perhaps
03:54specifically in the domain of forward guidance. And so in the CGG model, there's actually not a
04:00role for forward guidance because the market understands the Fed's reaction function and
04:05the Fed understands the market. If you're not going to do forward guidance, then it's incumbent
04:10for the markets to have a broad understanding of how the central bank will react to data.
04:15If we had six bad months in a row of inflation data, would they hike and buy how much? They're
04:20not committing to that, but they're saying if the data comes out this way. For everybody
04:24on Bloomberg Money and Scott, I got goosebumps. This is like the real deal. I mean, this is
04:29what the adults in the room are arguing about.
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