Moody's Talks - Inside Economics - A Dove in Hawk's Clothing

Episode Date: July 10, 2026

Ethan Harris, former Head of Global Economic Research at Bank of America, joins the Inside Economics team to discuss his views on the economy’s resiliency, AI, and the Fed. Ethan expounds on the new Chair Kevin Warsh’s stance on inflation and how to interpret his views from the latest Fed minutes. The team discusses whether AI is affecting productivity and the risks it poses to the wider economy and labor market. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics. I'm joined by my two trusty co-host, Marissa Dina Talley and Chris Dorees. Hi, guys. Hey, Mark. Good morning. That was a strong hello. Forceful.

You know. Yeah. That's good. He's got my best. Friday. Yeah, very good. We've got a guest, guys. We've got Ethan Harris.

Hi, Ethan. Hi, how's it going, Mark? It's doing okay. I spent the, we were just talking before we came on, that we were both at the New Jersey shore. You were, you're in Cape May, and I was in Stone Harbor just up the coast a little bit. And you said you really liked the New Jersey Beach. Yeah, you know, so I grew up in Massachusetts, but my dad had aversion to going to Cape Cod because of the traffic jam at the bridge. Believe it or not, that was his argument. So we go to Cape May, which is, you know, like 100 miles to work.

There's another bridge. Yeah, right. And like my, my, my, my, My grandfather had a Victorian down here. And he also had bought other properties. So we'd have massive family gatherings in Cape May. And so I've been to Cape May since I was a little kid. It's still our go-to driving vacation. We now have a shared house with two of my brothers. and two blocks of the beach.

You know, it's a tough life. Yeah, I love Cape May. Somebody's got to do it. Yeah, I love Cape May. It's similar. Around July 4th, I have four siblings, we each have three kids. We all congregate in Stone Harbor and hang out for a week, and we just finished the week. And so I got back, just got back.

The weather was a little iffy, though, this past week, wasn't it? It was, like, brutally hot, and then we got a lot of rain. Yeah. Well, I mean, it wasn't as bad as up north. I live in suburbs in New York. And so our town had not only over 100 degree heat, but also had a nasty thunder shower come in and take down a bunch of trees. Meanwhile, we're down on the shore, and it's like 10 or 15 degrees cooler. Right. There was no wild storm here. So in relative terms, we did pretty good. Yeah, we did indeed.

Well, it's good to have you on the podcast. And, of course, we've known each other for many years. I mean, obviously, you were chief economists of Bank of America. What years were you chief economist at B of A? Yeah, so B of A was my last stop in my career. So I was there from 2000... Nine or ten. Right after the crisis hit.

Right in the middle of the crisis. I was on the good ship Lehman when it's saying. Oh, that's right. I've forgotten that. Yes. And so I went, so for a while there, I was working for Barclays. Barclays had taken on the U.S. operations of Lehman for free. So they got a free investment bank.

And they couldn't decide who should be their chief U.S. economist. So we had co-chief U.S. economists. And, you know, I was like, this isn't working. Who was the other economists? Can I ask? I don't remember. Who was the other economist? It was Dean Mackey. He was their economist. And so you had, you know that period. There were so many mergers and stuff that those are awful times because merging two departments together, and, you know, particularly when there's no natural way to divide the job is just doesn't work, you know, you can't, I didn't, you can't have one cover east of the Mississippi and the other of the west of the Mississippi. It doesn't work. And even though Dean and I both,

you know, we were quite, you know, quite willing to kind of work together as best we could. But anyways, when the B of A job opened up, that was the only good job on the street, as far as I could tell. And so I went to B of A and retired about two and a half years ago. And, you know, I'm still working. You know, economists don't die. They do blogs and part-time work. And so I'm still pretty active, but got. rid of the commute and got rid of the insane international travel.

Right, right. And you were a Fed economist back in the day, weren't you? Yeah, I came out of straight out of grad school to the New York Fed. Right. I actually finished my PhD, got married, and started my first job in the same month. Wow. That was a very active period. Yeah, so I worked for about 10 years at the New York Fed.

Great place to, but the Fed is a great place to transition out of, you know, PhD into practical economics. So, so, so Ethan, would you say you're retired now then? But you're, and how do you, how are you enjoying retirement? I mean, I know you're very active. you have a substack, which I'd highly recommend. But how do you feel about retirement? I like it. You know, what I wouldn't like is going cold turkey.

I mean, I love, I think for right now covering the economy is amazing. There's just like I could write a blog piece, you know, two a day at this stage. There's so much stuff going on. And I can't see not being intellectually active. And I've done a little bit of consulting work. But it's great, you know. So here, I'm on vacation now, and I can pop onto your podcast. And then to me, it's not an interruption of my life.

It's kind of where I am now, that I do some work and some play. And I'm very happy with my decision. Great. Well, you were telling us, you've been doing a lot of work around the Fed. in the changeover and to chair Warsh, and we'll come back to that. But let's get into the conversation around the economy and just a very open-ended question

and take it wherever you'd like to go. You know, how are you feeling about the economy's performance and I'll throw in near-term prospects? How are you feeling about that? Yeah. Well, it's been a bit of a death-defying act by the economy. And I've become more optimistic over time, as I've seen the economy seems to be able to handle shocks better than I would have expected. You know, my initial view with Trump coming into office was that the uncertainty he creates would mean a weak growth but not a recession.

And the economy's done better than I expected. People seem to have adapted to high levels of uncertainty. And there's also been tailwinds that have been quite helpful, as you well know. The AI boom is hugely supportive of the economy. It's not only creating an investment boom, but it's also creating a wealth boom. And as you know, we've now have this economy that's basically driven by AI, you know, is through both of those channels. And so my view in the economy is that, you know, we'll muddle through. I know you've been, you're one of the big proponents of, you know,

the unbalanced economy and the risk that brings, and I certainly agree with that. But I think that these drivers, the AI-driven aspect of the, it's, have some persistence to them. So for example, it's going to take a while for them to really build out the infrastructure. And so that investment boom will continue in. And it doesn't matter what interest rates are or anything else. There's credit just being poured into that sector. So that, I think, has a lot of legs. And the wealth-driven consumer spending, I think, has a lot of legs too, because the accumulation of wealth for upper income families has been massive. And so even if the stock market starts to wobble a bit, you know, as you know, they're long and variable

lags and the wealth effect. So that will continue to grow. That spending will continue to grow. And so the question is kind of when does the economy crack under all the various pressures on middle and low income families? And I'm kind of cautiously optimistic until I see something happen. You know, you've got the slow erosion of household finances. But I'm kind of thinking that the vulnerability of the economy, will be when it starts to crack and the optimism reverses, you'll then see it weaken more than you would have expected after spending a long time doing better than expected. So I don't, I'm not thinking a recession's imminent, but I certainly agree that the risks are above average.

and, you know, we need to see a catalyst because up to now, you know, we've stress tested the economy a bunch of times and it's hung in there. Yeah, I'd just like to explore that point you started with about resilience and to shocks. And I assume you mean things like the broad-based tariffs, the immigration policy, the Iran, war, these are shocks to the economy and that the economy has kind of navigated those things more gracefully than one might have thought. Do you think there's abstracting from the tailwinds created by AI in particular, do you think there's some fundamental reasons why the economy would be more resilient? I mean, my kind of frame is the economy is growing 2%. That's real GDP growth. That's what we grew last year.

That's what we're growing so far this year. Yeah. If not for AI, we'd be growing one to one and a half percent, and that would feel very uncomfortable. I mean, obviously, very uncomfortable. But is there something beyond the AI that is inherently supporting the economy and allowing to digest these shocks in a more graceful way? Well, I think there's one of the things that I think is underappreciated is that it does

feel like we've had a small upward shift in productivity growth, not due to AI. I think that's a story for a year or two from now, or maybe longer. Who knows exactly when it will kick in. But it's about the, as you know, after, you know, during the COVID lockdown and if you track non-farm productivity, you can see that it kind of moved to a higher trend. in roughly 2022. And, of course, that is nothing to do in administration policies, although they're taking credit for something that happened before Trump came into office for the second time. I think there has been some real innovation around COVID,

the increased investment in, you know, tech equipment and the use of a home office. because I do think that the way the American workforce was organized before COVID was a corner solution. It was kind of like nobody works from home unless there's something very special about their job. And that was kind of imposed on everyone. When in fact, there are a lot of jobs that work quite well remote and hybrid. And so I think that there was a productivity gain in the reorganization of the way we do work. Now, whether that's a level shift or a growth shift, I'm not sure. But it's definitely productivity growth has been higher since 22.

And it's been going on for long enough. So when you look at the supply side of the economy, you've got kind of two stories going. going on. You've got what looks like a modest increase in trend productivity that's already there. And then against that, you have immigrant reduction policy and uncertainty in business and so on that are undercutting growth. So my view on trend growth has gone from, I think we're running maybe a little below 2% to above 2%. So that part of the resilience, I think, can last and will be enhanced further by AI. AI could be a significant productivity enhancement. I mean, I'm already using it with a great deal of success. I use AI as my research assistant.

and like with a research assistant, I'm checking the results because I don't fully... I hope none of your team is listening to the call here. But anyways, I don't fully trust it. It's hallucinates. And, you know, it's like on LSD at times. But it's been very helpful to me.

So anyways, I do think there's a productivity acceleration, it's already started and will continue going forward as AI kicks in. So that's where I would see the resilience. Other than that, I think it's all about confidence. I don't believe in consumer confidence surveys. I think they're telling you what their view of politics are more than the economy. So I think there's, but I think on the supply side, there's a little bit of extra kick there in the economy. Chris, so how would you respond to that question around resilience? Is there something

more fundamental going on, abstracting again from the juice we're getting from AI? Yeah, I'd agree with Ethan's point about the post-COVID productivity growth and some of the changes organizationally that have happened. So I think businesses are just in a better spot to be able to react or respond to shocks as they come from that perspective. You also have, I've also been amazed by the continued growth in business formations, right? So thinking about the household or the consumer side, right, it seems like the labor market is also dynamic in that sense. People are willing to start new businesses or maybe adjust to new opportunities that come along. So I think that's certainly part of it. I think, but I think the other point Ethan made is needs to be highlighted just we've gotten

a little bit lucky here with AI. It's just created a lot of additional demand, a lot of additional movement in the economy, and that's allowed, again, us to absorb some of the shocks, perhaps a bit better than we otherwise would. Mercer, anything to add there on the question of resilience? I don't think so. I've always thought on the hybrid work, post-COVID remote work question, that that's been productivity enhancing. I know that's very controversial, and some people think the opposite, but I've always

thought it opened up a broader labor market for employers. it opened up more, you know, better job matching for job seekers, right? So I have to believe that that lends to better productivity growth. I'll throw in one other that's not unrelated, and that is all the quitting that went on after the pandemic. I mean, people shuffled into better, presumably into better jobs. It takes a little while to get up the learning curve. Now you're up the learning curve and that. You get some productivity gains there as well.

Yeah, I think that I think that the, The question is not that whether there's a productivity enhancement because I think there clearly is. Again, we were in a corner solution where people just didn't do it, you know. But I think the real question is, is it a level shift or a growth shift? And that remains to be seen. Now, this is all, of course, going to be mixed in with the impact of AI. And but yeah, I'll go back to what Marissa said. There's a big element of luck here, you know.

Yeah. COVID turns out to be productivity enhancing. Who would have thunk. Who would have thunk. Yeah. And then you get the AI boom. And, you know, it looks like it's, it is having a. small impact now and will eventually have a significant impact. So, you know, and it, by the way, it has

nothing to do with administration policy. So, for example, let's, you know, we've had these corporate tax cuts and other tax cuts and you've got the kind of ad hoc deregulation going on and all that stuff could be enhancing trend growth. But then, you know, you know, you. have all the stuff on the other side of the equation. You're running massive budget deficits. So if you believe there's any crowding outstory, you're hurting investment. You have, you know, you've got tremendous business uncertainty about where tariffs are going to land. And if the government interfering with the private sector repeatedly. So it's, and then, of course, you have immigration policy, reducing the labor force. So there's,

The idea that whatever benefits we get going forward are due to policy choices, I think, is wrong. It's AI, which had nothing to do with either political party. It happened in the tech sector. Well, I want to come back to AI a bit in terms of the risks. Because as you point out, it's really critical to what's going on. And I just want to talk through a little bit about the risk there. But before we do, I want to talk to. talk about one other aspect of the economy before we get to the Fed that is problematic. I mean,

you know, and that's inflation. I mean, inflation, obviously these shocks have resulted in higher rates of inflation. Tariffs raised inflation. The immigration policy is presumably raising inflation. Of course, the Iran war is adding to inflation. How big a deal do you think this is, Ethan? I mean, is the inflation going to be more persistent, or is this something that's going to come back in pretty quickly once we get to the other side of the war? Yeah, so I've, I mean, my view on inflation's always been pessimistic that it will stay persistent.

And I didn't support the Fed's rate cuts last year. And I think there are a few things that are getting swept under the rug in the discussion. One is that while you can argue that inflation expectations are anchored, the anchors slipping a lot. If you look at household expectations, which I thought were what we're supposed to focus on, not the views of economists, but of actual people making wage and price decisions, you know, they're high. And I don't think we should put zero weight on one year ahead inflation expectations. We should be adjusting those expectations for the distortions from overreaction to energy prices and other short-term effects and looking at the residual, which is the underlying near-term inflation expectations. And they're high.

The Michigan long run measure is high, not like in stratosphere, and it's been bouncing around from very high levels to modestly high levels. But I think inflation expectations have picked up. And certainly, if I was at the Fed, I'd be pretty worried that the unanchoring could happen any time. The second thing is that all the discussion about the spare capacity in the economy focuses on the unemployment rate. But most measures of the output gap, even if you adjust for a better trend in productivity, show a tight economy overall. So why are we putting zero weight on the output gap when we talk about inflation? It's been kind of forgotten in the discussion. A third thing I think that makes me concern is these shocks, these supply shocks are not going away.

They're not going to go away. You know, I think it was, I forget, it was Barkin who talked about this, President Barkin. So there's been a series of shocks, and we should be asking yourself, are they going to go away or not? And there's a natural tendency to say, okay, when this shock is over, we go back to normal. But what is normal now? Normal is shocks. It's all kinds of stuff coming up, all kinds of business uncertainties and potential additional wars. We haven't finished the job of acquiring Greenland.

So from Cuba, I guess. And then you look at the Middle East. Why would we think that, you know, we're going to go back to normal in the oil market going forward? Because unless Iran loses its ability to close the straits, they could easily come back and do it again. So I don't think, and in fact, we don't know how close they are now, right? Because the data is my impression is that the number of ships going through is quite low. Yeah. So I think that I think there are a lot of reasons to worry about persistent inflation.

I would add another one, which is, you know, the Fed economists have done a great job at looking at core inflation. You know, Worse discovered the trim mean at his testimony for his confirmation. And that was the first time he's ever talked about. the trim mean. And he discovered a better measure of core. I like the trim mean. But the Fed's like two steps ahead of them. The Cleveland and Dallas Fed are busy really looking in the weeds at how to properly measure underlying inflation, you know, given skew in the distribution and given that you want to eliminate all outliers regardless of whether they're, you're food or energy or anything else. So the trimming, as you know, trims off the wings of all the high

and low inflation items. And so what they're doing is they're looking very closely at what's the best way to get to underlying inflation where you stripped out the noise and their work shows that core inflation is still high. And that this kind of shift to the trim mean, this is a bad time to be using it. Yeah, somewhat to my chagrin because in my blog, I write about the trim mean every time the CPI or PC. Oh, yeah, right, right. But yeah, so the measurement of inflation, you know,

if you measure core properly, or in fact, most core measures and the best core measures all show persistent high inflation. I'll throw one other in there that John Williams, the president of the New York Fed, put forward, I think yesterday in his speech, and that's AI, right? Because AI, to your point, is juicing up demand. You see that in the infrastructure spending. You see that in the wealth effects on high-end consumer spending.

And we haven't seen much on the productivity side, at least not ostensibly. So more demand, not as much supply. That's inflationary. You can see in electricity prices and chip prices, which goes into obviously everything. So that doesn't feel like that's going away anytime soon. Yeah, and I think that, yeah, absolutely. AI is inflationary in the short run and disinflationary in the long run.

Right. And if I'm a central banker, I'm focused more on the short run than the long run, because the short run is now. You know? Right. And the long run is way out there somewhere, and we'll deal with that when we get there. Yeah, so that certainly is a part of it. And it's hard to measure, but it's been very important to both the economy and inflation.

Hey, Marissa, I'm going to put you on the spot. You want to push back on anything that Ethan has said about inflation? Are you more sanguine than he is? You know, you're lucky now, Ethan, you don't have to actually put down an actual forecast anymore. I do put numbers down. Do you? The reason you put numbers down is to be accountable. Yeah.

You know, so I've been arguing that inflation would stay close to 3% this year and next year. Consumer expenditure deflator, PC deflator, 3%. A top line or core? Yeah, well, the idea would be that... Well, now that you say put numbers down, I'm asking very explicitly what your numbers are. Oh, you're putting... Now you're accountable, man. Yeah.

Yeah, I'm not that accountable. I got to be able to punch. Oh, yeah, I said it was about three and it came in at 2.1. So that's, you know, you round it to three. I was pretty much right. That sounds like Chris. That sounds like Chris. I've just...

Got a hedge. Got a hedge. Yeah, I haven't... So at the beginning of the year, I did a year ahead piece, just as a memory of my former job, and I put down specific numbers and I had just under three for core and core, yeah, and maybe a tenth low or four.

So it was something like two eight and two seven or something. Oh, you're, that would be a little higher. Well, but in the headline, it would be a lot higher, but, um. So three percent, a point above the Fed's target.

Yep. Through next year. Yeah. You probably would have been right if not in the war. Yeah. So, so, Marcia, would you push back on Ethan's inflation forecast? Not really. I mean, we haven't been at the Fed's target 2% for years, right?

I mean, it seems like we're closer to three is sort of the new normal. And, I mean, as Ethan said, it's just shock after shock after shock. That seems to be the norm. And every time you have that, it's very difficult. difficult to get back down to where you were before. I don't push back with the Iran war. I think, despite the fact that oil prices are lower than where I thought they would be, given what's going on, I still think there's significant supply disruptions. And there's been passed through to other, you know, commodities, other prices, like food prices, that it's going to be stickier.

The only thing I'd push back on is, Ethan, you said you don't trust consumer sentiment surveys, and I don't either really, but then you were saying you put some stock in the inflation expectations of consumers. I don't put a lot of stock in that, the inflation expectations that come out of the consumer sentiment surveys. They seem wild from month to month. They're very impacted by the price of gas. I think, and I don't know how much consumers are really keyed into sort of the long run

effects of inflation. That's the only thing I'd really push back on. What I would say about that, so my view in inflation is kind of like a smelt check more than the data, right? I was struck by the Fed's denial that inflation was unanchoring lower from 2015 to 2020. I looked at the data and I remember going to a John Williams speech and he concludes by saying, he concludes with the table showing that almost all the measures showed lower expectations. And then he says, well, there's a risk of unanchoring.

And I somewhat obnoxiously raised my hand and said, well, it's half a percent below normal these measures. Isn't that unanchoring? Of course, you can never say expectations are unanchoring if you're a central market. That's like admitting that you're a total failure. So I look at it now and I think what do average people think about the inflation picture? And as you pointed out, we've had five years of high inflation and we've had five years of bad forecast. So they've been told over and over again that this is transitory. And now you've got a new shot.

coming in that gives you another little burst of inflation. So my view is kind of like, why wouldn't people have raised their inflation expectations? So I kind of turn the question around. So, yeah, I would agree with you that surveys are getting increasingly unreliable. And so that's a good point. I should be more cautious about. And I should flip my argument and focus on the smell test

and not on the survey because you're right. There's so much other stuff going into expectation measures. And Ethan, do you discount the bond market measures of inflation expectations? Like if you look at the five or 10-year break-evens, they're all the way back in to where they were. You discount those? Yeah. Well, first of all, as I said earlier, when we were talking about the survey measures,

I wouldn't completely ignore the short-term expectations of the bond market. Right. This is another area where the Fed set itself a pretty low bar, right? Oh, as long as people expect inflation to be normal five years from now, expectations are anchored. Right. I'm sorry, but unless you're a professional athlete, you don't base your expectations and what the world's going to be in five years.

and, you know, your contract and wage demands and everything else based on your short-run view of inflation. Yeah. So, yeah, but I'm a little surprised that the bond market isn't more skeptical. Right, right. Because you're right. It's kind of, it's never lost confidence in the Fed's long run capability of bring inflation under control. Right. Chris, anything on the inflation front before we move on to the Fed?

No, I generally agree. I'm also concerned about the persistence. I guess the one metric I'll throw out there that I track or pay closer attention to is the services inflation component. So like the super core excluding housing and energy services, and that has remained persistently high relative to pre-pandemic. And that shouldn't be affected all that much by tariffs and energy, certainly. that suggests to me that there's kind of an underlying persistence there that, you know, maybe immigration driven or other factors are certainly playing a role here. So, yeah.

Well, let's move on to the Fed, Ethan, because you were saying you've done a fair amount of thinking on this and it's a law outside the consensus perspective on the new Fed chair, chairwash. What are you thinking? What are your thoughts on the Fed? Well, I think the big question now is, is Warsh a hawk or a dove, right? Right. Uh-huh. And there's... Could he be both? Could he be something?

What would be kind of... How do you square the circle? Yeah. Yeah. Well, if you look at what he's doing, right? So he's swearing on a stack of Bibles that he cares about inflation and the Fed's going to hit the target, right? Okay, why is he doing that, right? Is the Fed ever said that it wants to raise the target?

Is there anyone in the FMC who doesn't believe in the target? Why is he so insistent on this? I think because he's worried that people think he isn't serious about the target. He's the one who's arguing that we don't need to raise rates. In fact, we can cut interest rates because productivity is going to do all the dirty work for us. And we can make a bet on that. We can bet that AI will solve the inflation problem, will deliver a high growth, low inflation economy. And therefore, the Fed is wrong to be talking about rate hikes.

That was the centerpiece of his campaign for Fed chair. He found an argument that could satisfy Trump's demand that he only appointed chair who's going to cut rates and is intellectually consistent, right? It's a supply-side-driven disinflation, and therefore the Fed doesn't need to do the dirty work. And in fact, the Fed needs to stand aside and let the economy rip. And so that was his campaign. Since then, if you read, and I have a piece coming out shortly called Warsh's Decoder Ring, or my Worse's Decoder Ring. Right. You remember the good old days with Greenspan.

Yes, exactly. You know, you read the speech. I hated it when it came out when I was doing some desk work. coverage, you know. I wasn't the desk economist, but I was kind of the big think chief economist standing at the desk when information would come out. And there'd be a Greenspan speech or testimony or something. And you'd grab it and you'd be reading and where's the sentence there?

You know, where's Waldo? Right. What's the sentence that the market's going to care about? Right. Right. Irrational exuberance. That's it. That sounds pretty, that's going to definitely get the attention of the markets.

So I think we're back to where's, to where's Warsh or having a Warsh decoder ring. And the reason I say that is, so he said he really doesn't want to communicate any forward guidance. But that doesn't mean you can't get some signals out of what he says. And so when you look at his speech at Centra and you look at what he said at the press conference, and now it's harder to get to understand what he's saying because he's hiding a lot of his views. But you can see that he has not totally given up on the productivity coming to the rescue argument. He talks about productivity a lot. You know, he says that the committee agreed with him.

that strong productivity would be disinflationary. Who didn't think that already? I mean, just had the new paradigm example. So he says that as though it's new information. And so he's talking about productivity, and it's sprinkled in his center speech too. He still's holding out this idea that productivity he's going to rescue us from inflation.

And he's still denying that the AI rollout is inflationary in the short run. He was asked about that, and he said, I'm not ready to reach a conclusion on that. Wow. This is like one of the big stories of the day on inflation. You're the chair of the Federal Reserve, and you don't have a, an opinion on whether AI buildout is inflationary. He's still, he is still, he's yet to acknowledge that tariffs are inflationary. Why not?

What, what literature is he reading here? So there's a lot of little hints in, in the way he talks, the little bits of information that he's letting through his filter. The fact that he's still talking about productivity, the fact that he's not willing to make a decision around whether AI is inflationary in the short run. He's also, when he's saying that, you know, basically the task forces will solve all our problems, right? To me, that's an excuse to do nothing for the next six months. These are the task.

There's five different tasks forces that he's down. We've got five different task force, communication, inflation, and all the rest. Data and balance sheet. And if you ask him what his view is, he says, well, wait for the task force. That task force is not going to, those are not going to produce a report for at least six months. And the report will be controversial. I'm almost certain about that. Because it will include the true believers and the productivity boom and disinflation, all that.

And it'll include other economists that have the more conventional view that we shouldn't be waiting for productivity to fix the problem and that we do need to worry about these other inflationary supply side shocks. So I can see some hints in his ongoing dialogue, even though he's, you know, declassionary supply side shocks. So I can see some hints in his ongoing dialogue, even though he's, you know, declared himself radio silent here on everything. So my interpretation of what you're saying is he's a dove in hawk's clothing, that he's speaking tough, you know, price stability. And it's actually kind of work since he, since he's been saying these things, that inflation, bond market inflation expectations have come in pretty strongly. So investors kind of buy into it, but you're saying this is kind of a way to establish his cred on inflation and therefore you can argue to it. Without doing anything, right. I think that's exactly what he's doing.

And ultimately lower rates, presumably. Well, I think the thing we need to remember is the rest of the committee completely disagrees with him. Right, right. You can see it. The minutes were, first of all, all, everything that's happened around that meeting was exactly what I expected. Yeah. Toot my horn too much here.

But all the stuff he did around, communication, exactly what I expected. The minutes were what I expected. In the minutes, you see a committee that's not drinking the Kool-Aid. There's talking all about, tons of talk about different inflation risks, tons of talk about how tariffs are inflationary, AI build out as inflationary. The stuff that he's kind of like trying to push aside they're talking about.

So the committee has decided they're not going to directly rebuke him in public. Although John William's speech yesterday was pretty much a refutation of his AI perspective, right? I mean, he said it's inflationary. Yeah, but I mean, he's not, but he's, so they're stating their view, but not referencing him.

Yeah, right. And that was one of the things I also expected, that the Fed will, the two sides will talk past each other. And there are 18 other, you know, there are 11 voters that are not Kevin Warsh, and they will set monetary policy. So putting your pen to paper again, where do you have the funds rate target, you know,

at the end of the year, end of next year? So I've been, so I came into the year expecting it to be flat this year, and then I bumped it up to one or two hikes. Oh, you've got two hikes in there? Okay. Yeah. So I think that, I think that there's better than even odds of September and then probably again in December. So the rest of the committee basically over Wednesday day and. Yeah.

They're like, I think you can see that there's a bit. of a gathering at zero, you know, in terms of rate change, those are people who don't want to make a real commitment. But I'll bet among that group, there are a lot of people leaning towards a hike. And so I think that, I don't know, better than even Oz at September, they hike. I think the bond market has priced the Fed reasonably well recently. and but my I've been hawkish relative to the Fed commentary and the bond market for a while but now I think we're kind of converged to um and uh you know I mean the other thing one of the other very important points here is I've never believed the Fed's estimate of our star you know I mean the estimates of so the Fed says that the neutral thing Fed funds rate is, you know, 2% plus a 1% real rate, right? Now, that's up from much a lower number, you know, a few years back. But my view has always been that people are taking too

much of a lesson from the post-crate, you know, financial crisis policy of zero rates. That was an extraordinary period, economy recovering from a devastating blow, very slow, moved back to full employment, and it required the Fed to basically keep its foot on the accelerator well into the recovery. But it was, they were reacting to headwinds, you know, fiscal tightening, you know, banking system, a mess, housing market a mess. And so it was an unusual. long cyclically negative period. And so the estimates of our star, which are based on how the economy performs at different interest rates, got too low. They were being completely dominated by that episode. And so I felt, and this, I wrote a monetary, I was a co-author of a monetary

policy forum paper back in, I think in 2018. It was a while ago. And that was my part of the contribution to that paper was an argument that basically R-star is 4%. Oh. We should be measuring it, you know, the nominal R-star. Yeah. So the neutral nominal funds rate, 4%. And I feel even stronger about that now. So right now the funds rate is 3.5 to 3 and 3 quarters.

It's saying that it's somewhat support. supportive of growth. Yeah, policy is modestly easy. I don't think they needed to do the cuts last year. And the reason I say that is it's kind of like our star is so hard to measure that you really need to accumulate evidence over time of how the markets and the economy are performing at different interest rates. Well, the economy is done fine over this period where allegedly the Fed had very tight policy. It had the funds rate at 5% for a while there. That should have been really hurting the economy.

Now, there are other things going on, the recovery from COVID and so on. But the other evidence that not only has the economy been quite resilient in the face of allegedly tight monetary policy, but the financial markets have been fantastic. Now, maybe... AI. Yeah, AI. driven, but, you know, that's financial conditions right now are very supportive of growth. Yeah.

And so, you know, it may be that the long run R star, you know, where we're going to go and there's not the AI boom and so on is maybe that could be 3%. But right now, the neutral policy rate is, I think, is 4%. And that's one of the reasons I've been hawkish in the Fed for the last two years. So given all this, is there a reason to be nervous about Fed independence? I mean, Warsh must have given some signal to the presidency with supportive of lower rates and thus trim mean inflation, thus AI is disinflationary, not inflationary. You know, all those things were consistent with that. But now he's saying price stability, talking much more hawkishly, so on.

how do you interpret that? I mean, is it, should we be nervous about that independence or not so much? Well, well, for, in terms of Warsh's independence, I mean, in the near term, I think he's he's tap dancing and trying to avoid saying anything that would offend the president. Right. He's, because he hasn't, listen to what both Trump and Hassett have said, right? They basically said, we're going to leave Kevin alone because he's going to do the right thing. Kevin Warsh, yeah, as opposed to Kevin Huss. He's going to do the right thing. We're not worried.

Fed's independent. But Warsh is still giving the same story that he gave during his, or in a more quiet way. And this, HACID was very explicit. Kevin knows that growth is not inflationary. Kevin knows that AI is going to rescue us from inflation. He'll do the right thing and set policy accordingly. So it's not about being intrinsically hawkish or dovish. It's about having a dovish narrative that justifies doveish policy.

And going back to his insistence on, that he'll achieve price stability. That's completely consistent with being dovish in the short run if you believe in the productivity miracle. We're going to get inflation down. You can be sure of it because I'm sure that AI is going to solve inflation. So the Hock Dove thing is people are, we really need to drill down to what do we mean by hawk dove in terms of current policy. In terms of current policy, it's what's your plan for getting

inflation down? A hawk wants to slow the economy and impose some pain to get inflation down. A dove either doesn't care about inflation or thinks the economy is going to generate low inflation on its own. So that's the distinction in the near term. between a hawk and a dove. It's not about, do you care about inflation or not? It's about, well, it is for some doves. A true dove will raise the target to 4% or something. But you can be a dove and still believe in the target

if you have a very aggressive productivity story to tell. So that's what matters. And so Warsh, I think, will be outvoted by the committee later this year. Well, we've kept you a long time away from the beach. And when I left Stone Harbor, it was nice and sunny. It was 80 degrees. I'm sure you want to get back on.

I thought we might end the conversation of going back to kind of the conversation around AI. And there's two risks or threats that keep coming up, near-term threats, you know, in our phase. One is the AI stock market boom is. is overdone, that, you know, speculation, maybe even a bubble, and that could burst and be an issue. And the other is kind of a job dystopia kind of view, which is almost the opposite, where we're going to get all these productivity gains, are going to happen really fast, kind of the worse disinflationary scenario. And, but that creates a lot of dislocation in the labor market, higher unemployment, we got a problem.

How do you think about those, did I, is that a reasonably good frame? around the risk around it. And how do you think about that? Yeah. So I'm going to pull a war share and That sounds like forward guidance to me. But on the, yeah, so I think there's a high risk of both of the things you just talked about. I think that there's so much optimism in the markets. I mean, you and I were around. for the dot-com bubble. And I remember, you know, talking to the traders on the, the NASDAQ desk at Lehman Brothers and them, and I said, well, you know, this has got to be a bubble, right? Yes, we agree.

So why are people shorting the market? Well, because you get run over if you short the market. So we're not going to short the market. And so it was just like everyone was like, okay, Let her rip, you know. And the same, there's a similar problem for AI as the dot-com, and that is there are too many players trying to achieve the same goal, right? That the, who's going to be of the best AI product?

And so you're just throwing money into the sector. Now, with the dot-com bubble, it was much worse because there was so many companies that failed coming out of the boom. But in this case, yeah, there's still this challenge that maybe only one or two of these companies are going to be hugely profitable and the others will just get competed out of business or, you know, or just not do well or certainly not justify their stock price. So I do think there's a risk of a serious correction in the markets. I just have no idea when. And I, and I, I'm kind of thinking that something has to show, they have to, there has to be more evidence that, that there's either overspending or something has to signal

to people that this is not the, not as profitable as people are expecting. So, and I'm very reluctant to make a call on that, because I don't, to have any confidence about the timing. On the labor market disruption, that's a pretty serious risk. Before you move on, because you brought up to dot com, and I think that's probably our best analog, you know, trying to understand how things play out here for AI, imperfect as it is, but it, you know, it is a historical, a good historical basis for what's going on. Do you recall what was the catalyst for the sell-off in the AI bubble?

that was there an event or I can't remember actually now that you bring that up well that's a great question and since that's an obvious place to look we should we should ask Clyde that's exactly what I'm doing you can ask Clyde okay yes like what what was the what was something what was the that caused everything to come unraveled yeah I mean there there was the stock prices were basically going vertical at the end. Yeah. And I think it was kind of, I don't remember what the exact catalyst was, but it was kind of like

everyone looking around saying, we are in outer space here. But you're right, that's a very, I don't have an answer. It's a very good question, you know, what's the kind of, but it can be sometimes something small that pricks the bubble, right? And so, but that's definitely worth, worth looking at. That's what you've given me an idea for my next. Yeah, well, and Marissa's hot on the job here trying to figure that out. Does Claude saying anything, Marissa?

It's saying there wasn't a single event, but there was a lot of disappointing earnings reports coming out. Like, so, you know, there was just this huge run-up, and then eventually all these companies started, coming out with earnings reports where they, you know, weren't making any money. And so then people started selling. I don't know if you found something different, Chris, but it doesn't say there was a single thing that happened. That's right. It was more of a series of disappointing reports. Disappointed report. But then you also had Fed tightening going on.

Yeah. Yeah. Right. Right. Yeah. You had the, um, some of the lockups kind of expiring. And then all of a sudden you had, you know, extra supply. You had the accounting scandal. then. And you had some Y2K spending that had been pulled forward and then as that expired, the valuation has plummeted. So it says it's just a mix of. Mix of stuff. Stuff, right? And I think that's typical, right? It's too. I think I know what the catalyst was. I bought the URL economy.com exactly at the peak of the market. And people said, you moron, I'm selling. So what are you buying these days, Mark. Yes, exactly.

That's the question. Tell me the next time you're ready to invest in something. Yeah, exactly. You know, to short it. On the job market question, I think there's a pretty big risk. This is going to roll through the economy very fast. And, I mean, my experience has been, I literally can use it as my research assistant. And it's as good as a research assistant, you know, in the sense that it does make mistakes,

but, you know, a young economist coming out of college is going to make mistakes too. It's nice to talk to also. It always treats me with respect. Yeah, yeah, exactly. It tells you every once in a while, I didn't think of that. That's a great idea. Let me go explore that. So I asked it a question. I couldn't remember a quote from, it was actually I asked it about the piece I did on the R-Star back in 2018. I asked it about to, because I couldn't find it handy. I sometimes will just use it because I can't find a file or something. So I asked it about what we said in that report and I asked it for some quotes out of the report because I wanted to, And it comes back to me and tells me that it gives me some argument that we didn't make in the paper.

And that was like totally made up. I remember the paper well enough to know that you didn't say that. And I challenged it. And it came back, oh, I'm sorry. Yeah, wrong paper. Closer inspection, the paper didn't say anything about that. And I was like, well, why did you tell me that? Right, right, right.

Well, anything else on this before we call it a podcast? Because we've kept you for an hour, and I don't want to keep you any longer. I know you got seashells to collect and send fleas to capture. And, you know, I don't know. So what else you do on that beach in Cape May? but yeah regressions to run regressions to run you know the one thing about the beach Ethan I was maybe you can answer this question I don't know if you run but I run and when I run on on the you know in Stone Harbor it's flat as a pancake obviously

it's the hardest run I ever have do you have any theories as to why that's the case well I mean it's you don't get any spring in your step right yeah I I agree with you. Walking or running on the beach is a lot of work. It's a lot of work. It's a very good work. Even walking is a good workout. Yeah.

Yeah. So. Anyway, another mystery we'll have to solve with the AI. So, guys, anything else you want to bring up before we call to a podcast? Chris, Marissa? I don't think so. No, you're good. Okay.

Hey, Ethan, thanks so much. Really do appreciate it. Really enjoyed the conversation. And again, thank you for taking time on your vacation to come out and speak to us. Thank you. Thank you. Thanks, everyone. Nice meeting you all.

Nice meeting you. And with that, dear listener, we're going to call this a podcast. We'll talk to you next week. Take care now.