Moody's Talks - Inside Economics - Canberra and CPI

Episode Date: February 11, 2022

Interest rates are on the rise and the Fed is set to normalize monetary policy. Damien Moore, Director of Economic Research at Moody's Analytics, joins the podcast to discuss. 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 Zandi, the chief economist of Moody's Analytics. I've joined today by three of my colleagues, my two co-hosts, Chris DeReedies. Chris is the Deputy Chief Economist. I can see him smiling there in his office. And Ryan, Ryan Sweet, Director of Real-Time Economics. Ryan never really smiles, but no, even there. I always smile. I see a frown.

Okay. Yeah. And then we've got Damien. Damien Moore. Damien, this is a colleague of ours at Moody's Analytics. Damien, this is your first time on this podcast. Welcome. Hey, Mark.

Thanks for inviting me. And hi, everyone can tell you have a accent, an Aussie accent. Where from Australia are you from? So I grew up in the capital city, Canberra, so did all my education and undergraduate education in Canberra. I moved to Sydney for about five years in part while I was doing my graduate studies in the US and I studied at Northwestern in the US. So then I've been back and forth to the US and Australia ever since.

Oh, you know, there's this spy TV series. I can't, it's Netflix or centered in Canberra. Have you seen this? I haven't seen it. I haven't seen it. I don't have to check it out. Yeah, it's, it's kind of the dynamics between Australia and China and Russia and US mixed in there as well.

But it's, you know, these kind of the, the, the, the, the vexed relationship. that the spy community has, I think, with each other. Yeah, it's very interesting times right now. Camper is really a beautiful place. I've never been, but, you know, judging by the TV series, it looks great. It's great. It's great if you like to exercise because there's bike piles everywhere. It's like it's a planned city.

And it was originally planned for a lot of foot traffic. So you can jump on a bike and ride pretty much anywhere. And it's a big sprawling city too. Like it doesn't have a really built up central business district or anything. So it's great for exercise. In the weather? Weather, good?

It's definitely a little cooler than city. It's inland, so you don't have the temperate effect of the ocean and so on. It's a little further south in Sydney too. But it's nice, pretty much you around. It's a little cooler in the wintertime, but you get the four seasons much more than you do further north. Very nice. And so you went to Northwestern. Is that where you got your PhD in Northwest?

Yeah, it is. Oh, it is. It is a lot. It is an extended. thing because I took an academic job in Australia for a while during that process. So then I was kind of back and forth to the U.S. and back to my job at Sydney while I was teaching. And were you in financial, you're in a financial economist?

Yeah, so I was in a business school when I was teaching. I taught in a finance department taught sort of the standard financial stream courses, corporate finance, investment theory, options pricing type stuff. Right. And then how did you find your way to, The way we met a long time ago now was you were at the Congressional Budget Office, the CBO, the nonpartisan group that does the budgeting for the U.S. How did you get there?

That's right. Well, I always had an interest in policy. I'd actually done some time at a consulting shop in Australia or in Canberra, who did a lot of the budget estimate. So I had some familiarity with that type of work. And then my dissertation advisor, Debbie Lucas, had worked with CBO on and off. I didn't know Debbie was your, I guess I knew that and I forgot that. Oh, I see.

That's right. So she was chief economist at CBO for a while and then left. And then I told her I was sort of interested in getting out of academia. And she said, well, you should look at this policy shop because it's a great place to work. So I interviewed with them and it went well and spent 10 years with them, more than 10 years. Yeah. Well, Debbie is the godfather of, I guess that's okay to say, the godfather of fair value accounting, isn't she? That's right.

That's right. Are you a disciple of the fair value accounting method? In part, in part. Yeah, I can't. Probably a large part. One of these days, I've got to tell you my theory on fair value and how to improve it. I'm curious. Maybe I've already told you this and you kind of looked at me.

Have you noticed, guys, Damien never disagrees with you, just kind of looks at you and doesn't say anything. and then looks away. That's kind of the way he handles it. Have you noticed? That's what you know you're wrong. Yeah. That's what you're wrong. Yeah.

It's exactly right. Yeah. I'm an agreeable person as a real polite. So it's hard for me to openly dismiss an opinion. Well, since we're on TV series, have you guys watched, and I'm not saying I like this all that much, but in every once in a while, the Witcher, have you seen The Witcher? Nope. It's a little too fairy taleish for me, but the Witcher, you remind me a little bit of the Witcher.

You know, the Witcher, just kind of. kind of, he doesn't say very much and he kind of grunts, you know. By the way, that's a compliment. If you want to be the Witcher. Okay. He's a good guy because I haven't seen that show. Very smart and he kills all the monsters. So that's all good.

You know, so. So and then you joined us. How long ago now has it been? It's coming up for five years. Unbelievable. It's gone pretty quick. No way. No, that's amazing.

And I know your youngest is five, right? It's got to be five, right? Because I remember you're... Turning five this year, so he's four. Oh, he's four. He turned four back in November. Yeah. Oh, that's right.

Okay. Yeah, he came during my first year and he came early. I remember that. He just trained and all of a sudden, you were kind of in a difficult time, but it all worked out. That's good. That's right. Yeah, very good. Well, we're just thrilled to have you here on Inside Economics.

I know I've been trying to get you on for a while, but you've been resistant, but you're here. Yeah, because you have me doing lots of other things and I juggle a lot of responsibility for our market risk clients. That is true. Absolutely, you're a busy guy. I appreciate you taking the time out. Hey, we're going to do a few things here. One is we're going to talk about, well, the statistic of the week is the consumer price inflation. It feels like, you know, hair on fire. We've got to talk about that. Then we're going to go into our statistics game. And I'm guessing a lot of that's going to revolve around this consumer price index as well. but who knows. Damien's definitely going to try to trip us up here on the game.

And everyone knows the game, right? Each of us come up with the statistic. The rest of the group tries to figure that out. The statistic can't be too hard, too easy, got to be related to the topic of the day and come out in the past week. Although for the guests, they don't need to stick to that religiously. Ryan has to follow those rules. Everyone else can kind of, you know.

you know, do what they want. And then we're going to talk about interest rates, and that's, wow, do we have a lot to talk about there. Just looking at that 10-year treasury yield over 2%. That's something to talk about. So that's the game plan. So let's dive right in. Hey, Ryan, give us the lay of the land on the – well, whatever you think is important, but I'm guessing it's the Consumer Price Index.

It is. So the Consumer Price Index for January came out this week, and it increased – a lot more than economists were anticipating. So the consensus was for a four-tenth of a percent increase month over a month. So December to January came in that six-tenths. That raised the year-over-year growth from seven percent to seven and a half percent. And that's what's getting a lot of the attention in the press. But when you dig through it, you know, price pressures are broadening. The only components that fell in January were energy-related. And that's temporary because energy prices have moved back up in February, so we should see energy add to inflation over the next couple of

months. But if you strip out volatile food and energy prices, so the so-called core CPI, that was still up 6% year-over-year, which is the highest since the early 1980s. So that's garnering a ton of attention. So Mark, I knew you would want me to update this. So remember the average increase in household expenditures with inflation at 7.5% versus 2%. percent yeah two hundred and seventy six dollars per month now so there are real economic costs to uh inflation well that's good you know you got to 276 because i got exactly to 276 but i rounded to 275 so you got to get to precision 276 okay all right yeah too so that's the typical american household that's the household making let's say the median income which is probably close

to uh 70k 65 70k is now spending $275 more a month to buy the same goods and services that they were buying a year ago. Correct. So that's a lot, you know, just think about that for a second. Adds up quickly. And that's why, I mean, we saw Michigan consumer confidence came out this morning. That dropped a lot. That's some of it, if you look at the details, is inflation.

The other part's interest rates. Yeah. Okay. You were a bit surprised by the CPI. You had expected, and you're really good. good at this. You know, you put expectations together four tens of a percent month a month increase in CPI, consumer price index, and a 7.3 percent year over year, or was it correct?

Yeah, something like that. I mean, you know, I mean, I think we're stretching this a little bit, but I'm just curious, what in the report came in more hot than you expected at higher rates of inflation than you expected? And when you go into the, you know, specific goods and services. I thought you're going to get a lot of weakness in some of the services that were tied to the pandemic. So airfares, for example, I thought they were going to drop. They increased. Lodging away from home wasn't as weak as I suppose expecting. So it doesn't seem like the Omocron variant was as disinflationary as the Delta wave was on some of these components of the CPI.

And then the other thing is amateur mistake. I used last, I didn't use the updated weights. So if you did that, I would have been a little bit closer. Still, it wouldn't have gotten six-tenths, but it would be closer. Just to bring folks up to speed. So Bureau of Labor Statistics, the agency that puts the data together, every year, I guess, or is that every two years? Every two years. Every two years.

Updates the weights that they attach to each of the individual components of the CPI, for all the various goods and services and those weights are determined by consumer spending patterns. So if I am spending more on, you know, a car or a consumer electronic or going out to a restaurant, it gets a higher weight. And something else has to reduce, reduce because it adds up to 100%. And with the January 2022 CPI report that came out yesterday on Thursday, the BLS updated the weights using 2019 and 2020 average consumer spending patterns. And that's what you're referring to. And the reason that had an impact was because that includes the pandemic 2020. And we spent a lot more on stuff, goods, a lot less on services. And of course, goods prices are rising a lot faster than services. And so

it causes this measurement change. And that's what you're referring to. And by my calculation, that was a couple, worth a couple of tenths of a percent on year over your CPI. So that, that could simply be the difference, right? It is a difference, right? I was thinking, yeah, I had seven three. I had two tens and you get seven five, which is what we got. Yeah. I should say, right here's a good place to say it.

We are going to record what we're going to call a mini podcast or a data deep dive. And it's going to be 10, 15, 20 minutes where we're going to go deep into the bowels of a report. and the first one's going to be on the CPI. So we'll probably go over this again when we do that mini podcast that we'll post tonight along with the podcast that we're recording right now. So this is an experiment.

I'm really curious what people think if they find it's really, really wonky. Damien, you'll love this. You know, I know you'll love it. Sounds good. I hope there's video. There's definitely video. There's definitely video. Yeah, definitely.

I guess we've got to change our, you know, what we're wearing for the deep. dive. I'm not sure. No, no. No, we're good as we are. We're good. Okay. Some charts, Damien? What are you, what do you mean? You just want to, oh, if we're going to talk numbers, we got to, we've got to have some tables, right? Oh, that's a good idea. He's got it, he's got a point. Maybe we'll whip that up. We'll whip up a couple of things. Maybe, maybe give a link. Give a, oh, give it out. It's still a podcast, though. Yeah, right. We should have him more

often. He's like a fountain of ideas. You notice this? Yeah, and I have this, I have a feeling all these ideas are going to end up on my plate. Ryan's laugh. That's where they belong. That is actually a pretty good point. That's right. Hey, Ryan, can you help us out with that? Yeah, let's get some tables.

Put some tables together. Yeah. You're good at that. Okay. No, no, promise. Not that I won't do that. I think we're one last thing on the CPI. I think we're at the peak.

If it doesn't peak in February, that wasn't seven and a half wasn't the peak in January, February would be the worst. the worst of it. Even with energy? Yeah, I was going to ask about that. Yeah. Well, that's why I'm thinking February.

Like, initially we're thinking January was going to be the peak. I think February is the peak. And then after that, you know, we'll be on the downside. And by the way, I say, I say that we've already peaked that this year over your stuff is very misleading. Oh, it is. Because there's base effects. I mean, last year this time, we were coming out of the, the deep depths of the pandemic, businesses are still slashing prices.

Inflation was incredibly low close to 1. 1%. So you get these year over year what economists call base effects, which by the way, it's going to be working in the opposite direction a year from now pushing down measured inflation. So, you know, in this kind of when people are trying to gauge, are we, you know, kind of moving in the right direction here on inflation, we should be looking at month to month, I think, changes in inflation. And that actually peaked back in October, you know, and that was in the depths of the the delta wave of the virus.

And that goes to my narrative. what you guys think. But my sense is that the acceleration and inflation that we've observed in the last, you know, several months, the last six months or so, where it's gotten uncomfortably high, you know, this is top of mind high, is related to the supply side disruptions to the economy due to primarily the delta wave of the pandemic. When that happened back in the summer and fall last year, it completely upended global supply chains because that creamed Asia. Southeast Asia where all the supply chains begin. And it really disrupted labor markets, again, because people got sick or had to take care of sick people or were fearful of getting sick.

So that created all these labor shortages, caused wage growth to accelerate, particularly for low-wage workers and industries that have gotten directly hit by the pandemic. Think restaurants or leisure hospitality, recreational activities, that kind of thing. And also just scrambled demand and supply dynamics in other markets like the oil market and the natural gas markets. And And that's what's behind the current very high inflation. And as if you buy into the idea that the pandemic is going to wind down going forward, that is each new wave of the virus and we'll probably see more waves, is less disruptive than the previous wave to the economy, to the healthcare system that we'll see inflation moderate.

Not quickly because ironing out these supply chains and labor market and dynamics or, you know, or it's going to take some time because it's a mess out there. And other things are kind of adding to the mess. you know the Canadian truckers you know stopping stuff coming over the ambassador bridge but but as a as a pandemic phase inflation will fade that is the core to our at least my thinking about where we're headed on on future inflation anyone what do you think of that narrative and anyone disagree with that or want to push back on that no I think the the data supports that view if you look at you

US manufacturing surveys, they have a component called a supplier delivery index. So when that is increasing, that indicates slower deliveries. So all of them are improving. They're heading in the right direction. And we maintain this U.S. supply chain stress index, which basically just takes a bunch of indicators that are related to supply chains. So shipping costs, commodity prices, match them up, make an index out of it. And that's coming down.

We do the same thing for APAC, Asia Pacific. and that's improving as well. So I may or may not have another number for you that supports your view. Yep. Okay. Well, that makes sense. Chris, anything we want to say on that? I would say broad strokes, I'd agree in terms of the pandemic, but there are other risks

that are emerging, right? Yeah, there go. Here comes the pushback. Go ahead. Fire away. Energy, as we mentioned, you got Russia, Ukraine, you've got some other risks to geopolitical risks out there that are building. I think that that's going to cause energy prices to remain high.

for a while, because I don't see that being resolved quickly. And then more technically, I'm focused on the rental prices, right? Rents continue, they're going to continue to support inflation or drive inflation higher for a while. So that maybe I could buy in, yeah, if there's no other wave and the energy doesn't get too far out of whack, we could be at peak and things continue to fall. it'll be a slow gradual decline versus something very immediate. Yeah, those are good points about energy.

In fact, we have a, this is another, it seems like another advertisement, sorry, but we've got a podcast coming on Tuesday on the Ukraine-Russia kerfuffle. I guess that's not a conflict, you know, we're going to be talking about that. Certainly about what it means for energy markets and prices. So that's coming on Tuesday. And I hear you on rent growth. That's clearly it's going to be an issue for a while, given the very severe shortage of housing,

which is just juicing up rents. Hey, Damien, anything you want to add on that? Any pushback on kind of our, I guess, generally sanguine view on inflation? Maybe more of a question is, do you think the latest, like the month over month, is that roughly in line with where you're thinking it would come out or is it a little higher, a little lower? Yeah. Is it giving you a sense that the price pressures will come off sooner than you might have

thought or take longer? Well, no, I'd say the, like Ryan, I was a bit surprised by the six-tenths of a percent that increased month to month in January. I thought it would be, you know, I think it was four or five-tenths of a percent. I was, but I do think part of that is that measurement issue. I mean, who, you know, it's two-tenths of a percent year over year, so that's, you know, a bit of an ad every month along the way. So, and it probably had more of an impact on January. But I was, I'd call out the one thing that I was surprised by.

And, you know, an ex post, I probably shouldn't have been, but I was surprised was the big increase in electricity prices, which, you know, totally makes sense, right? because you know electric utilities are facing higher input costs, higher natural gas prices, and not a lot of oil fired, you know, electricity, but you know, it adds to the pressures. And we saw a really large increase in electricity prices. Also weather. Oh, you think, oh, I didn't know, weather can factor into that. You're right. You're probably weather too.

Yeah, I hadn't thought of that. So that surprised me a little bit. So I explained the gap between what I expected. So my thinking about where inflation had it. has headed as a result of that January report has not changed. But when you say, when I say that, you know, when you're in the, when you're forecasting and you're thinking you're at an inflection point for anything, it's really tough, right?

Because you're in the middle of the data and the data is screaming something and you're saying, no, it's going to change. But, you know, it just makes you uncomfortable and makes you less confident in what you're saying. So I'd have to say I'm a less confident. I'd say that's just a natural state of affairs when you're at an inflection point for something you're thinking is going to turn, you know, like inflation. Yeah, I hear that.

I hear that definitely. Yeah. What about wage pressures? You think the wage pressures won't start to kick in and push inflation? Well, I'd say in, I'm worried about it. By saying my baseline view, this goes back to the disruptions to the labor market related to the pandemic as the pandemic phase and people get back to work, particularly in those industries where wages have really gotten juiced. You know, it's all in the leisure

hospitality, restaurant, recreational activity, health care, education. You know, these are where, you know, people have not gone to work because they're on the front lines. I mean, they're the one, those are the folks that are, you know, interfacing with everything. They're not you and I sitting in our, you know, office in our home and not being exposed. But they're exposed every day. So as that settles in, I expect that wage growth to decelerate. And if you look at the Atlanta data, the Fed wage tracker data, which is, in my view, among the best wage data we have, the acceleration wages has really been in the bottom half of the wage distribution for young workers, for, you know, workers that are less educated in those industries. So as the pandemic phase, I expect that wage growth

to moderate. But having said all of that, that's definitely a worry, that, you know, the longer inflation remains high and persistent and particularly those gasoline prices because that you know we can see that really affects people's thinking and they're I'm sure they're going back to their boss and saying hey you've got to pay me more because I just filled my gas tank for 50 bucks and if you only come to your off come to work you know you got to pay me more so the longer that sticks around the more I worry that you know wages start in prices start to feed on each other and then that's a whole different world I heard so we're not there yet but I worry about that Sure. Yeah, that's my main worry. That's your main worry. Yeah, I agree with you. Okay, let's, a lot there. Let's, we can keep going, and we'll probably will when we come back to talk about interest rates, but let's go to the game. Let's go to Chris. Chris, let's go to you first. What's your statistic this week? All right, we're going to have some fun. 12.2% and 2.8%. 12.2% and 2%. 2.8%. Okay. Does it have to do with the CPI report? Yes, it does. Okay. Is it your

inflation for certain components of the CPI? Yes, it is. Okay. Okay. So he's got to be clever here in some way that, you know, he can't pick some wacko esoteric down into the bells. Okay. Would the 12.2 and the 2.8 kind of defined sort of certain points in the distribution of price growth across goods and services? Boy, that's a mouthful. You don't understand what I'm saying, though. Kind of sort of. Did you go coffee again?

I did not go coffee, but 9.3% what the heck, what the heck? What? 9.3% food price. Okay, he's been clever. He's being clever. Yes, it is two food prices. Oh, it is two food prices. Oh, meat.

Is it meats? Meats is one, 12.2%. Hot dogs. Nope. because you have kids at home, right? Do you guys, when I was a kid, I'm telling him, this is true. This is a true story. When I was a kid, you know, I have three brothers and a sister.

I'm in a big family. And my dad made a good living, but, you know, he wasn't a wealthy guy. And, you know, he get paid, I think, once a month. And then by the end of the month, we're running out of money. And the reason I know that is because I'm having hot dogs, you know, four days. The last week, I'm having hot dogs. By the way, I love hot dogs. Hot dogs are the best.

They're the best. They are the best. But we're not talking a hot dog. Okay. What are we talking about? Okay. Damien, do you know what he's talking about? What food is 12.8% food item is up?

2.8. 2.8. 2.2. And 2.8 is meat. Wine? Ice cream. No. No.

No, because I heard ice cream. I was trying to be clever. I was trying to be clever. Not just some random bar. Something in Wawa. Think Wawa. Do you give up? Yeah, I give up.

No, wait. That's not wine. Wine. What are you talking about? Chris. Oh, yeah. Wine is a good one because alcohol beverages were 2.7. Was that what you meant?

But that was 2.7? No, I said 2.8. Are you going early Valentine's Day? Are you going chocolate? No, I think you're way off. Oh. Oh, that would have been good, though. That was a good one.

Is this a chocolate category? I don't think they're... What about prodgies? There you go. There you go. Oh, wait, wait, wait. He got it. I think there's a cowbell.

No, wait. Hold on. What? I'm like, I'm way behind here. What is that? What is that? What are you talking? Vegetables?

Fresh vegetables. Oh, fresh vegetables. Produce. I didn't hear Damien say that. Oh, I thought he said parogis. I thought it's what I said, too. Really? Perogis.

He said parogi. You got to be tuned into the accent. Come on. Oh, you said vegetables. Yes. Oh, I thought he said pieroges. I thought it was some Italian thing. Yeah, I haven't.

What? Perogies. My wife is vegetarian and she hasn't been complaining about the price of anything so far. But the bill's been somewhat expensive lately. That's exactly the point. See, like, if there was ever time to be a vegetarian. What was I saying? What was I thinking? Oh, we're still, we got to get the high price, the 12 point something. It was meats. Oh, hold it. Just generic meats. Catch up here. It's meat, poultry and eggs if you want the full category.

Yeah, geez. I thought, see, here's my problem. I thought he was going to be a lot more clever than that, didn't you, Ryan? Yeah, I mean, I thought some generic vegetable and some generic meat, you know, kind of thing. All right, if you want one for the The Super Bowl, 11.6%. Wings, chicken. Exactly. Yeah, exactly. Frozen chicken parts. All right.

Yeah, it's a wing shortage. I know. Why? Do we know? I don't know. All right. Probably something to do with processing. Probably.

Anyway, we're having too much fun. I am. There you go. Yeah. I don't know why I'm having so much fun. Okay. All right. Hey, Damon, do you want to play this game?

Yeah, sure, I can have a show. It's going to be a little specialized because financial markets, guys, so you can kind of maybe pick the genre. It's going to be inflation related, of course, and related to the main topic. Oh, here we go. Swap. That's what I thought. That's in my mind when immediately went there.

Let's go real time. Okay. Real time. Oh, he's looking at his screen by the show. As of now. As of now. As of now. As of 11 a.m. on Friday.

63.7% has of right now. Is that the probability of a Fed rate hike in February? No, no, 50 basis points in March. 50 basis point hike in March, right? Correct, correct. Niled it. Oh, that is embarrassing. I'd have to say, for Ryan, that's totally embarrassing.

Are you using Fed? No, it's 100% in March. No, no, 50 basis point hike in March. It's 100%. Oh, yeah, yeah, yeah. Yes, right. It's 100% of any increase. Any increase, right.

Oh, oh, yeah. That's what you're saying. Right, right, right. 36% of a 25 to 50 basis point increase in 63.7% of a 50% of a 50% sorry, I'm talking about the range. So 25 to 50 basis point range versus 63.7% chance of a 50 to 75 basis point increase. Yeah. Now these same numbers yesterday, the most.

market said 93.8% of a 50 to 75 range. And then a month ago, they said 4.8%. So things have moved a lot. Yeah. Yeah, they got whipsawed by Bullard. Yeah. Bullard. That's all good. What does Damien Moore say, though? That's what I want to know. In the short term, I agree with the market. I always, short term, I always agree with the market. So we're looking out maybe out to a quarter. I think the market indicates are great for predicting just aggregating all. the information that's out there and and sort of coming up with a good clean forecast signal. Do you think they're going to go 50 or 25 at March sitting here today based on what you? I'm going to say 50. Oh, okay. What do you think, Chris?

I'm sticking with 25. 25, yeah. I think 50 is a panic signal. That is a panic signal. You agree with that, Ryan? Yeah, I'd say 25. So Marcus got website like seeing a lot. was Fed President Bullard yesterday said that the Fed should go 50 in March or do an intermediate

right hike, which is they only do that in crisis. It's the opposite. They're easy. Yeah. The only time that happens last time was pandemic, right, when it hit. Right. Yeah. Then you had other regional Fed presidents come out today saying that, you know, we can go 25 in March.

So unless Powell's buying into the 50 argument, they're going to one shot. What do you think, Mark? Well, I think 25, although I would be willing to have a nice debate about whether it should be 50. You know, my sense is that financial conditions remain too easy, compared relative to current expectations the markets have with regard to future of monetary policy. So markets are fully anticipating at this point for rate hikes, I think, right, this year? Is that, is that, would you, would, I looked at it was seven hikes fully priced in by January of next year. Seven rate hikes by January. Okay.

So that's what is embedded in equity prices. That's what's embedded in, in theory, in, you know, credit spreads in the bond market. That's what's embedded in cap rates for commercial real estate. And markets have not, they've reacted a little bit. I mean, stock prices may be down what, you know, six, seven, eight percent from their all-time high at the beginning of the year. Credit spreads tell me if I'm wrong, but they haven't really risen all that much, have they? A cap rates remain in the commercial real estate market remain incredibly low.

And monetary policy affects the real economy, the economy, which is what they're trying to do here, you know, slow things up through financial conditions. And also, adding to the mix, I don't sense any tightening and underwriting standards, right, in the banking system. You have to go look at the senior loan officer survey from the Federal Reserve that was released, I think, last week. It's a survey of bank credit officers. They say they're still easing, you know, policy for seeing commercial industrial loans and consumer loans and credit cards and everything else. So it feels like to me that the Fed needs to really send a source. strong signal, you know, to investors, hey, guys, you know, we got to, you know, this, this is,

we're moving rates a lot more quickly to get those asset markets to react to tighten up financial conditions so that it actually has an impact on the real economy. Well, if it's still easing, they're still easing. Because quantitative easing is still going on. Well, that's a good point. That's actually a good point. I mean, right now they're still buying, a lot less, this winding down is going to end next week or a couple of weeks, three weeks from now.

You're right. Yeah, so I say a quarter point. I mean, I think that's what they're going to do. But I would, you know, if I were in that room, I'd be debating, you know, maybe we should go stronger in surprise markets, you know, guide them to a different place so that, you know, we get some tightening in financial conditions because they're not, they're not tightening enough to get the kind of growth rates we need. I don't know.

What do you think of that argument? The rates have risen, though, right? Things are time. Mortgage rates are rising. They're going to have an effect. back. There's some delay or lag, I would argue. But it's not as well. So there's been some tightening in conditions. Yeah. The 10 year yield has gone from, you know, it was 130, 1.3, 1.4 back a couple months ago. We're now two. Mortgage rates are up about the same. They were sub 3% for 30-year

fixed are now 365, 3.7. So they're moving up. And the two-year jumped just on the talk, right, of potential 50 basis point hike. So if the market's doing the work for the Fed, That's what I'm saying. Are they really doing the work? You know, I'm not sure. Are they doing enough work? Not doing enough work, to you're saying. Yeah, enough. You're doing some. I'm a little, I'm just, I'm a little confused why we haven't seen more of a market reaction.

I would expect stock prices to be off more than what we've seen. And I think it goes to the lot of liquidity out there, a lot of cash sitting in people's accounts and they, you know, are jumping in when prices go down. So I guess I just feel like the Fed's going to have to give a stronger push, you know, to investors and say, hey, you know, this, you got this isn't enough we need to see more of a reaction here but Ryan do you think they can do anything on the QA side to tighten up more rapidly and that they would do anything at the next meeting well quantitative ease is going to end in a few weeks like Mark said I mean what they could do is start uh letting the balance sheet run off so much you know some of the treasuries or mbs on their

balance sheet as they matured just don't replace them right and then their balance sheet would start to contract. They could do that, you know, a meeting, two meetings after the first rate height. Do you think, I mean, we've kind of blended into the topic that we wanted to talk about interest rates, and we'll come back to the game, but since we're on the topic of monetary policy, I've been starting to get some questions about the so-called quantitative tightening. You know, QE is quantitative easing. They buy bonds to help bring down longer-term interest rates. That's coming to an end. Then the question is, do they stay? start quantitative tightening. And that means allowing their balance sheet, the securities they

own that they bought, Treasury securities, mortgage securities, to start to run off, mature or prepay if they're a mortgage security. Or, you know, if they really wanted to go into, you know, extreme tightening mode, actually selling securities. That's a panic. That's a panic move. That's a panic move. But do you think just the going from QE to QT is that big a deal? I mean, in terms of what it means for interest rates in the markets? I mean, does that, is that a, is there something that,

I've heard the questions that, you know, QT is unusual in some way and therefore is going to be more disruptive. Do you, do you, no, they've done this before.

We've done this before, right? Yeah, we've done it before. The only difference is this time, rates are going to be moving higher at the same time that they're doing QT. Oh, so if you go back to 2013, They were paused. I think they were paused for a while.

They were still paused. Of course, Bernanke's spooked markets when he started. The tapered hans. He linked that to interest rate hikes, I guess. The QT to interest rate hikes, and that's spook markets. And that was now deemed to be a mistake that he, the way he managed that transition from quantitative using the quantity coming out of the financial crisis.

But I think QT will move long-term rates. The term premium is still negative. And usually when the Fed's reducing its balance sheet, It's going to be positive, so the tenure can go even higher. Well, let's come back to that because there's, because people don't understand, a lot of people wouldn't understand what you just said. So, but we want to flesh that out, but we'll come back to that. Do you know how much the runoff would be if they didn't replace treasuries or MBS?

100 billion a month. 100 billion? 100 billion. And what's on, what do they have like 9 trillion on the balance sheet right now? Correct. There's something close to that. And a normalized balance sheet, meaning, you know, where they would actually want it to see in the long run would be half that really, right?

Yeah, we won't get back down that far. But that's, that would be kind of the bogey, wouldn't it be like four and a half trillion or something like that? So 100 billion a month, that's $1.2 trillion a year that gives you a sense of how long it would take to get, you know, at least take four years, five years of that to get back to, you know, where they would want it, I think. Okay. Okay.

Ryan, what's your statistic? I'll give you guys a choice. I have one that kind of up Damien's alley or I have one that's related to the CPI. We can do both. Yeah. I think I think this is let's give Damien a win here. He needs a cowbell. He's never gotten a cowbell as far as I know.

Damian, you're ready? I'm pretty quick on these things. So there's two numbers. All right. Go first. All right. 12% and $8 trillion and they're related. 12%, $8 trillion.

And this is to do. It's tied to the big topic, rising interest rates, but is having an impact on this. Okay, 12% and $8 trillion. All right. So for context, it was $18 trillion at the end of 2020. Oh, $18 trillion at the end of 2020. This has something to do with their emergency credit facilities. Don't think Fed.

Oh, don't think Fed. All right. It's the number that came out this week. Yes. I think it's real time maybe. Yeah. You keep calculating it. Yeah.

Okay. Damien, do you have any idea what he's talking about? $8 trillion and 12%. Public debt related. Oh, you're close. Not public debt. A lot of it's in Europe. Oh, in Europe?

Mm-hmm. Where interest rates recently turned positive. These aren't like the outstanding covered bonds. Oh, the amount of. Well, I was going to say negative or debt with a negative interest rate. Yep. Oh, Chris. That's a good one though, Chris.

Yeah, Chris definitely. Yeah. Yep. So the market value. So the market value of all bonds with negative yields, so that negative interest rate policy has dropped an enormous amount given the increase in global interest rates. Now only $8 trillion of bonds have a negative. field. What was it at its peak, roughly? Close to 20. I'm surprised it's still eight. Yeah. I saw

German tenure German buns are positive 20, 25 basis points, a quarter point, something like that, right? So you're still saying, oh, this is outstanding. These are outstanding. Okay, that makes more sense. Right. Well, no, no. That's interesting. It's still $8 trillion. And is that mostly in Europe, or is that Japanese debt? Or is it? It's a, it's a, it's In those two areas. Most of it. In those two areas. Wow.

What I was paying attention to is, you know, you are starting to see some movement and high yield U.S. corporate bond spreads. And now with, you know, that search for yield is kind of diminishing. So I wonder if you're going to see corporate bonds spreads start to widen out. Well, so what's the 12%? Unless the share of all, the value of all bonds outstanding. That's global, non-sovereign debt, 12% of global. global non-government debt has a negative interest rate.

Yeah, and you're saying that's, I guess that must be down from like a third or something. Yeah, it's done a lot. Down a lot. Interesting. Oh, that's a great one. That's a perfect one. So what's your other one on the, you said you had another one on the CPI? This one's easy.

You should get this one. 3%. 3%. Oh, I know what that is. What is it? You take the CPI, seven and a half, you X out the amount related to supply chain disruptions. Okay. That's two and a half or something like that.

Then you take out the amount that's related to the mess and energy market, supply demand and balance. That's probably another two and a half. Two. So two. and so you go seven and a half minus two and a half minus two gets you three. Very good. Yeah, you got it right. Okay.

Excellent. There's a cowbell. It's right here. Okay. Oh, that's, but okay, that's a really good thing for people to hear because that is consistent with what we were saying about the outlook for inflation, right? Right. Right.

So a big chunk of what we're, of the seven and a half percent CPI inflation. inflation is directly related to the supply side disruptions to the economy, particularly for vehicles. And if you look at the month-to-month growth in new and used car prices, it's moderating. So I think that's another reason why we're going to see inflation start to decelerate. Well, that was a good one. Those were both really good ones. Okay. All right. I got one for you. 61.7 percent. Something in Michigan. Yeah. You violated the first one. Yeah, that's too easy.

Too easy. Yeah, University of Michigan. Okay. And I knew that was going to be easy. Therefore, that wasn't the end of what I was going to say. Oh, okay. You jumped the gun. You jumped the gun.

Not really fair. Yeah. When's the last time it was 61.7%? Oh, God. I violated the second rule. That's too hard. So did it get down there during the pandemic? It did not.

Okay. It's lower than it has been throughout the pandemic. Great recession? Yes. Yeah, but here, you know, and I was going to ask because I'm confused by it, there was a big drop in sentiment in the summer of 2011, August of 2011. You know, obviously we were coming out of the financial crisis and there was still a lot of angst and uncertainty. Does anyone remember what happened there? Could have been a hurricane.

Oh, maybe. Maybe that was there. Let me check. Was that the high gas price summer? I think we did higher gas prices then, yeah. That might maybe played a bit of a role. But I didn't. I don't think they spiked, you know, at that point.

It was her thing. Here's another one. You ready? 97.1. Are we still in UMish? No. Related, though. Oh, no.

Did you CNN back to normal index? That would have been a good one, but no. That was 89%. That is foundering, floundering. I've always wanted to. Is it floundering or foundering? Floundering? Floundering?

Can you say foundering? I don't think that's a word. Language, can you say foundering? Maybe in Philly. Yeah, I think so. I think you can say foundering. Yeah. Yeah.

Yeah. Anyway. Then you're not a fish. Then you're not a, that's why floundering I always thought was related to a fish. Yeah, exactly. All right. You guys give up, 97.1. It came out this week.

Indeed, it did. All right. I'm surprised. Yeah. Ah, okay. Not Uish, related. Related in the same genre of statistics. That's a big hand.

NFIB. Oh, NFIB. Very good, NFIB. And that was down. And that's not quite a new low in the pandemic. You know, there was one month in the teeth of the pandemic early on when we were lower. And that goes to a broader point. And that is sentiment is pretty weak.

You know, I mentioned UMIS, the University of Michigan survey. the NFIB, that's the National Federation of Independent Small Business Survey. And then we have our own business survey, right, that we've been doing every week. And it's down a lot. It's actually, we asked nine questions to the respondents, and then we create a diffusion index, the percent of positive response is less negative. And we were firmly positive, you know, from March of last year to basically last week, a couple weeks ago, we are now negative again. So, you know, people are nervous. And

sentiment is on edge. And that just shows you the the corrosive nature of high inflation. I mean, that really bugs people, you know, really makes them nervous. It's almost like that. I think people feel, and maybe they're right, they're just getting ripped off, right? Because they, I'm paying 275 bucks more a month now for the same stuff I was buying a year ago. How's that possible? You know, how's that possible? But that just goes to to show you how how worried people are. Well, UMISH got the double wamy

because it's really sensitive. The questions they ask to personal finances. The stock markets down and gas prices are up and that just is going to crush UMish. This crush UMISH. Yeah,

the University of Michigan. One year outlook for inflation was 5% right? It was. So consumers are thinking this is not going out of... That goes back to gas prices, though.

Again, you know, very, very tied to gasoline prices. And food prices. And food. Yeah. Yeah, very good. Okay. Okay, that is the game.

I actually had another pretty good one, but we're kind of getting short on time. Should I do the other one? No. Yeah. We'll move. Should I? Really? Yeah, we'll do it quick.

Okay. This is, okay, I'll make it easy. Okay. It's related to inflation. And there's four parts. Each part is a little harder than the previous part. Okay. Damien, are you playing?

I see you're, you're, looking away. I don't know. No, I'm listening. I'm just trying to trade. Yeah, yeah, yeah, yeah. It's my thinking. Thinking.

Damien's pointing. Okay. 7%. Oh, excuse me, seven and a half percent. Sorry. Okay. What's that?

Headline. CBI. Lined. Consumer price inflation, year over year through January. 6%. That's core. Core.

5.4%. Median. No, that's a good guess. Are you sure? Oh, Trim. That's trimmed. Okay, trimmed. So this is, I take off the goods and services whose price increases were in the top 8% of the distribution and the bottom 8% of the distribution.

That's called the trimmed mean, and that was 5'4. Because the thinking is, you know, you got some of these outliers that month to month might screw up the underlying message in the data. So throw those out. So 5.4. 4.4 and a quarter. 4 and a quarter percent. Median. Median.

Median. Very good. Do you know what else was also four and a quarter? What? The sticky CPI. And that just looks at... Explain that one. Explain what that is.

That looks at the CPI based on components that move, like price changes move slowly. So this is kind of like a persistent inflation that's going to linger for a period of time. Yeah. And rent would be in there, for example. Correct. Yeah. Yeah. Okay.

Like gives you a sense of thing. So, you know, obviously things are all juice. They're going to come in, but it does feel like kind of the underlying rate of inflation is certainly moving north here. So something to worry about. All right. Let's talk about interest. We talked about monetary policy.

And so just to round that out, in our baseline, this is our collective view. I'm just going to lay it out. Tell me if you're all, we kind of talked about it. But we have four, we have the Fed ending QE bond buying soon next few weeks. We have them Q2. QTing, letting the quantitative tightening, letting their balance sheet runoff beginning in June. We have the first rate high quarter point,

percentage point at the March meeting of the Federal Open Market Committee, the Policy Committee of the Fed, that's mid-March. And then they raise each quarter, a quarter point. And they actually, we have that in our forecast in 2023 and first part of 2024, and they get the funds rate target, the key rate they control up to two and a half percent,

by mid-20204, and that's the long-run equilibrium, right, so-called R-star. That's where things settle in. Okay, that's our baseline. Anyone think that we should change that? Should we, and I don't think anyone would say make it less aggressive at this point, but that's kind of where we are. Damien, do you have a view on that or Chris Ryan? Well, you already pinned me down on my next.

In the 50-bips. Next quarter forecast. Yeah. And you're near term, so you don't want to go, you don't feel comfortable going beyond that. So historically, I've always thought we've been too aggressive in anticipating rate increases. This time around, I think maybe we're too slow because I feel like the inflation concern is real. And that it could be a lot quicker than we think and probably will be. So 50 basis points in March and maybe more rate hikes.

through the remaining. I'm definitely on the fence about March, but I feel like it could be, it's probably going to be a bit quicker through the summer. Yeah. That's an interesting observation. I think in my mind's eye, it feels right, that we've been in other cycles, we're a little quick to expect the Fed. Certainly that was a case after the financial crisis, no doubt about that.

Yeah. Okay. It makes sense. So Ryan, Chris, are we, I guess similar to what Damien. Yeah, okay. Kind of as reasonable. The risks are to more rate increases more quickly than we have, you know, in our baseline view. Yeah, that makes sense.

Okay. All right. I mean, they're in a bind in March. They can't win this one because if they raise by 50, it looks like they're panicking. Right. They raise by 25. Then market concerns they're behind the curve even more. So March is just a no-win situation for them.

Unless they start telegraphing now, right? Yeah, they could. Control the communication. Yeah. Right. right they still have time right we're a month away so there's still plenty of room here for them to do that yeah okay um okay let's turn to the 10 year treasury yield and let's talk about that and uh dam india you want to give us the lay of the land on the 10 year you know where are we where

we've been i'm not really a lay of the land guy i think brian he's been right you do it okay yeah where are we i didn't look today see what he does i told you he just moved more work my way I know the bus, Ryan. Hey, do we really want Chris to do this, Ryan? Damien, she's got to be careful. Damien lives right down the street from me. So I know where he lives. So long-term interest rates, so the 10-year treasury yield has jumped recently.

I don't know the exact increase on the top of my head. But we talked about this in past podcast. When you break down or decompose the 10-year treasury yield into its three main components, So inflation expectations is a market-based inflation expectations, the expected path of the real short-term rate, and then something called the term premium, which is the extra compensation that investors need to hold long-term treasuries versus short-term bonds. So when you break it down, the recent increase is mostly, almost entirely because of an adjustment in the expected path of real short-term rates. And then that gets back to monetary policy, fed signaling that we may have to be a little bit more aggressive. to curb inflation. So what's really driving both ends of the yield curve, the long end and the short end is monetary policy. Right. So the 10 year is treasury yield, kind of the benchmark

interest rate, long-term interest rate, is sitting around two. Let's just use two, give or take. And that's up a lot. I think it rose a tenth of a percent, 10 to 12 basis points yesterday. That's a big, big move in the bond market. And if you decompose it, the 2%, inflation expectations are sitting just south of two, I think, like one in three quarters percent, I believe. And by the way, that's come down, right, from where it was. I want to come back to that in a second. That means that real short-term interest rates plus the term premium are still negative, right?

They are. They're still negative, which seems a little weird. So there's a lot of weird things in that decomposition. First weird thing is why are inflation expectations going down? And by the way, adding to my confusion, historically, and you're the one who pointed this out to me, Ryan, is that those market-based expectations are closely tied to oil prices. So when oil prices go up, you would have expected inflation expectations.

to go up, and we've always found that mysterious, but that is definitely true. I heard a really good bond guy yesterday when I was talking to that group of economists mentioning this anomaly. So what do you think is going on there? I mean, you know, why are inflation expectations and better in the bond market going down when everything's screaming that they should be going up? Do you have any idea? I don't know.

I'm confused by it. Is any... Damien? Damien. me any sense of that? No, it's really puzzling. I think it's an enduring puzzle. Like, inflation expectations in the long run haven't really moved at all. And that's the, the numbers you're quoting are, I guess, the tips. Well, I was thinking five year, five year, five year forward. So, yeah. And so the five year, five year four is pulling out just the part

of inflation expectations that look ahead in five years time, basically. And so I think some of that It speaks to the secular stagnation type argument that we have a temporary transitory bout of inflation that we need to address because we have an overheating economy relative to where it needs to be today. But over the longer term, we still have all these other demographic and other factors that are slowing growth that will keep inflation pretty low. Yeah. That makes sense.

And it's almost like what the bond market is saying, when I say bond market, in investors who are putting their money where their mouth is. And five year, five year forward, just to explain it again, you look at the 10-year yield and it's inflation five years from now over the subsequent five-year period. So this is, you know, abstracting from all this mess that we're in right now. It's in the long run where will inflation be. And that has not moved up and has actually moved down. Could it be the case that bond, and this is a signal that bond investors think we're going to

have a recession or some really really. tough economic times, you know, down the road because they're saying, okay, we got all this inflation now. And that's the reason to think that the Fed's going to step on the brakes really hard, misstep, misfire, push too hard and push us into recession, you know, somewhere down the road. Inflation is actually going to be lower than it is now. Is that? Well, you're really way too much into that. I don't think so. Your, your favorite recession indicator, the yield curve is flattening out. That's right, but it's not, it's not, it's not, You're not negative.

It's not negative. It's not. Short rates have not risen above long rates by a long shot, right? But you're saying that has flattened short rates have gotten closer to the long rates. So that's a signal that bond market investors are thinking the economy is going to be weaker down the road. And then it would be consistent with the idea that inflation expectations are tame and gone down.

They think the Fed, well, the charitable interpretation is the Fed got control over this. They've got us. They got our back on inflation. They're going to figure this out one way. They're going to get their target. The non-charable or less, the more worrisome interpretation is that they're thinking they're going to step too hard and push us into some kind of really weak economy or even a recession down the road. Maybe that that explanation squares the circle here. Does that make sense?

At least the probability is higher, right? It doesn't have to be binary, right, if they just think that the odds are higher now. Yeah. That would. Yeah, just the odds are higher. That would be sufficient, yeah. All right. Well, here's the other thing, you know, and this goes to the outlook for 10-year

treasury yields. Inflation expectations are, they're not, you know, they are where they are. I don't think they go lower. You know, they're pretty consistent with where the Fed would want to see them. But to have the real short-term interest rate and the term premium negative, that doesn't make sense in the long run, right? In the context of everything we know, I think. That's a statement.

I'm curious what you think about that. In terms of Fed policy, it feels like it shouldn't be negative real rates, should it? I mean, that should be moving higher. In terms of the term premium, that's a compensation that investors get for investing long run versus short run. That shouldn't be negative, right? Should it? So shouldn't, doesn't everything I just say argue for even higher long-term interest rates?

higher than today, yes. Yeah. So they're going to be moving up. Yeah. Hey. A conventional, let me just jump in real quick on the term premium part. So a conventional, so we used to think before the financial crisis that the term premium was basically this pretty stable thing.

And it was always positive, maybe around 100 basis points of spread between. short-term rates and long-term rates over a business cycle where sort of the moves in the different rates even out. And post-crisis, that term premium, by all estimates, went negative, or at least went much lower than 100 basis points, and it stayed very low and negative for over a decade. And one of the explanations for that, a very financing sort of explanation is it's related to inflation risks. Yeah. and that when inflation risks dip towards the pessimistic side where inflation might become deflation,

then it's actually good to hold treasuries and you'll be willing to accept a lower term premium or even a negative term premium because you're sort of going to receive a payoff in fixed normal dollars that become more valuable if inflation underperforms. And so that's one explanation. So that the balance of inflation risks

are going to remain tilted towards, the downside will keep the long-term Treasury yields lower than they should be. Oh, I said, okay, sorry, go ahead. Now, there's another factor, which is we've had a big regulatory shift after the financial crisis that's created all this extra demand for treasury debt. And I'm sure that has to have some impact on where yields come out, where long-term yields come out relative to short-term yields. Yeah, so I thought you were going to say something a little bit different on inflation.

My sense is that built into the term premium is some compensation to investors for the volatility of inflation. And that post-financial crisis, inflation was low and there was no volatility. We weren't even thinking about it. But now, volatility is the name of the game. There's a lot of volatility. So you would think that would add to the term premium, right? And then on your point about Treasury demand due to banks and other financial institutions needing liquid assets on the other side of the financial crisis, that, you know, that's in the market, right? That can't be getting bigger, can it?

I mean, that would be getting smaller, right? So both those things you just said, I think, are, well, you said something a little bit different about inflation, the inflation part of the term premium. But everything seems to suggest that instead of being a drag on the term pyramid, making it more negative, it should be less of a drag and allowing it to go more positive. Yeah, so the unfolding, like the latest sort of data where we have this idea that we're going to have this bout of inflation, that should be bringing the term premium up and it's not, and that's a puzzle. That's a puzzle. Yeah.

All right. Well, just here I've got we are running out of time, but I want to run one other thing by you. And this goes again to the forecast for long-term, 10-year treasury yields, long-term interest rates. The way, so if you look at our forecast, we have the 10-year treasury yield rising in an orderly way over the course of the next two and a half years, similar to the increase in the funds rate. And we settle in, the 10-year yield settles in in the long run at 4%. So we're two now, we double, you know, over this period. Obviously, interest rates don't move in a straight line. They go up down.

They go all around all over the place. So this is not going to be straight from two to four, but that's where we're headed and that's we're going to settle. And the anchor here has been, at least my thinking, is that in the long run, when the economy's at full employment, inflation is at target, we're growing at potential. The world is, you know, orderly in equilibrium. that the 10-year treasury yield should equal the nominal potential GDP growth in the economy. Empirically, in the long run, that holds.

If you go back 60 years and you say, what's nominal potential GDP growth? And you look at the average of the 10-year treasury yield, I'll tell you, it's equal to the basis point, 4.6%, 2%, they're exactly equal. So that's kind of sort of where we have things going. Does that framework about thinking about long-term interest rates and where the 10-year Treasury yields are setted, does that resonate with you? Does that make sense to you? So I think in what you're saying sort of very much lines up with sort of the natural rate

models and the story in the natural rate models, right? That when growth is strong interest rates should be strong, strong to growth. is high interest rates will be high. But then you look at the last decade of what the natural models predict, and there's a real sort of break in the linkage between growth and what the natural rate models are saying, that interest rates are so much lower than what the long-run growth outlook looks like. Long-run growth rate has come down since the Great Recession began,

but not by as much as the natural rate has really come down. Okay, let me say, agreed, there can be long periods of time when 10-year treasury yields do not equal nominal potential growth. So go back into the 70s and 80s when the last time we were suffering a wage price spiral, inflation was out of control. The Fed said enough of this. Paul Volcker was chair of the Fed.

He said, I'm going to crush this thing. And so you had interest rates that were above nominal potential growth, you know, as the Federal Reserve worked hard to get inflation, inflation expectations down. Flip of that is after the financial crisis, we were de-leveraging. The banking system has to capitalize, has to gain liquidity, and that's a global event. That's not just a U.S. event. And the central banks, the Fed were working hard to get inflation back up. It was too low.

So they kept interest rates, every interest rates were low. The 10-year yield was consistently below nominal GDP growth. So agreed, you can have long stretches of time when these things, too, things like signed up, but in the, you know, the sufficiently long run that these things have to, you know, roughly, that these things roughly equal each other. And that's kind of the anchor in terms of, you know, the, the, what's in our long-term forecast for long-term interest rates. Does that, does that resonate? I certainly agree that growth rates should be a core part of what your long-run view of long-term interest rate should be. And then there are some other facts. And then there are some

other factors like the relative sort of value, sort of safe haven value of the dollar relative to other currencies might have impacts on that over long term. Like some people think the dollar's going to lose its, lose some of its value there. And that would tend to sort of raise interest rates a little bit. But then there are account of ailing factors that might go the other way. Yeah. Okay. Well, we are at the end of the podcast, but before we end, we're going to go on the record. By the way, I think in one of these early podcasts, we were talking about 10-year treasury yields, and we were doing the same forecasting. And I think I was on the right side of this compared to, like, well, Chris was in the middle.

Ryan, you were, I was saying Rachel were going to be higher. You said they were going to be lower. Did I have that right? We got to go back and check. I don't know about that. I was lower than you and Chris. All right, fair enough. You're definitely lower.

But we are definitely going to go back and check. April marks the one-year anniversary of our podcast. We'll go back and look. Oh, okay. So let's do the forecast. Okay, so you heard my forecast, right? The fund rate goes from zero to two and a half percent, kind of an orderly way between now and mid-20204. The 10-year treasury yield goes from 2 to 4 percent, not in a nice orderly way, but, you know,

up and down and all around, but gets to 4 percent by mid-20204. So what do you guys think in terms of that outlook for interest rates? Anyone want to take another side? I'll take the low. I think you're a rule of thumb where a 10-year equals nominal GDP. I think that applied 50 years ago, but times of change, market's much more global. So I think it's going to be less than that, right? I think I would average in say the rates on buns, for example.

I see. That's an example. That's reasonable. So something south of that, maybe three, let's go with three eight. Oh, geez. Right. All right. Three five, four eight.

Somewhere there. Talk about prices right. But okay. Fair enough. You know, that's a reasonable argument. Damien, any perspectives on that? on the on the outlook are you you have a view you're talking about the 10 years specifically yeah I have the fund rate at two and a half that's our star equilibrium and four percent

on the 10 year long run so long run for the 10 I think it's low I think it's going to stay low I think it's going to stay under I've hard time believing we're going to see 10 year rate above 3% any time soon okay wow Very interesting. And part of the reason is like sovereign debt globally is massive. And I think there's going to be a strong push to keep interest rates low without, and manufacturing in a way that doesn't cause inflation inflation to explode. Yeah.

Okay. So I'll say 2% Fed funds rate, 3% 10 year. Okay. So you're in the Damian camp. Yeah, I'll give you a non-trivial possibility that the Fed funds rates back down to zero by mid-2020. I'm on board with that actually This is a boom bus cycle A boom bus, yeah

I mean we talked about this last week or a week before But yeah, you're right That's definitely got a probability to it Yeah And then we'll never get the four Geez, okay All right, well we got a lot to think about We're on the record again

So we'll see how this plays out And Damien, we're going to have you back Thank you for participating Very good of you And guys, any parting word? Okay. Okay. We're going to, you know what? I didn't, I didn't hawk my at Marks, Andy, did I? The Twitter feed. And Ryan, you're tweeting a lot, I've noticed. I've gone down a rabbit hole.

You pulled me into this rabbit hole. Well, you've got to be careful about that. You've got to be very disappointed about not going into that rabbit hole too far. So I only do it. I have like scheduled, you know, at the end of the workday, I'm like, all, I'll put up, you know, two or three tweets. Yeah. See, I don't, I don't do it that often. That feels like too much to me.

Yeah. But if, you know, you're a young guy, you can do it. Not that young. Yeah. What's your Twitter handle? At Real Time underscore Econ. There you go. Okay.

Thanks so much. Take care. We'll talk to you soon. Bye-bye.