Moody's Talks - Inside Economics - ECI and ECB

Episode Date: July 30, 2021

Kamil Kovar, Economist at Moody's Analytics, joins Mark, Cris and Ryan to discuss U.S. and euro zone GDP along with wages. They also discuss Mark's cancelled flight and the big topic was monetary policy in the U.S. and euro zone.  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. Welcome. Good to have you. I'm joined as per normal by Chris Duretis. Chris is the deputy chief economist. How's your week been, Chris? Pretty good. It's the last week of camp, though. So, you know, I don't know what happens after that. Oh, your kids are away at camp. Yeah, yeah. My son goes to day camp, and I don't know what happens next week. So, well, when does school start? School, unless Delta Varian, I guess has something to say. But when, when should it start? Yeah, his preschool starts first week of September. Okay.

Oh, you got a month. That'll be great. Yeah, good, good months of money. I'll see. Good. And we got Ryan Sweet. Sorry about that, Ryan. Ryan is the director of real-time economics.

And how's your child care situation? Everything okay there? Same with Chris. This was a, yesterday was the last day of camp. So the next few weeks are going to be Wow Yeah Very loud

Very loud well we'll keep that in mind for the next podcast And we have a guest Camille Kovar Camille Is joining us from Where are you Camille are you in Prague Today right now? Are you speaking? Yeah yeah right now I'm in Prague You're in Prague

And Camille how long have you been with us at Moody's I have been with Moody's for seven years now? it seems like a lot to me, but I know you old timers for you. It seems like a very little. He's coming in hot, calling us old timers. Yeah. Wow. Yeah. That's right.

Well, I am an old timer. Not you guys, though. Seven years. And you've been, you came to us as a student from one of the universities there in Prague, correct? Yeah, I started as an intern. then I filled in for some maternity leave and then I just didn't want to leave at all. Fantastic. Very good. Are you still, are you still in school? Are you teaching? What are you doing now?

So the first rule of talking to PhD students is never ask them about the status of their dissertation. And you just broke it. Oh, I'm sorry. I'm sorry. Actually, this is a good day to ask because I just send it finalized. to my supervisor. So now I will hope that the other people who will read it will like it as much as I do. Oh, so this is news. You're telling us today you feel like you actually crossed all the T's dot at all eyes.

You have completed your PhD thesis. Well, as far as I'm concerned, yes. But now comes the, you know, now comes the outside of Pinae and that's always tricky. The feedback. Yeah. Do you remember your thesis defense, Chris? I do. For sure. I think anyone who goes through that process has that scarred on the group.

You're not going to forget that. Yeah, I remember it quite vividly. Do you now since we're old timers, it sounds like we're Alzheimer's. Have things changed, Camille? I mean, do you have a defense where you actually present to your committee? they ask questions and then they say you passed or is that a thing of the past? No, that's still there. But as far as my school is concerned, and I think that might be more general, is that to get to the defense,

you need a bunch of people to read it, right? So there are some people inside of my school who have to say it's okay. Then there are some people outside of my school who have to say that it's okay. So by the time you make it to the last point, it's more like, running through the finishing line rather than the hard part, I would say. Well, congratulations. I know you've been working very hard for those. There's nothing. Look, I really admire your ability to work and complete a PhD thesis at the same time. How many people do that?

I mean, probably not many. Not many. That is a very difficult thing to do. So congratulations on that. We're very happy to have you today. And we have Camille on because Camille, as you can imagine, he does a lot of work tracking what's going on in Europe. But he's also our key person tracking the European Central Bank. And that goes to the podcast's big topic this week, and that is monetary policy.

So we'll be talking about monetary policy in some detail here in just a bit. But as you know, because you are a, I bet a, what's the word I'm looking for? A regular listener? Regular listener. That's what I'm looking for. Thank you, Chris. I wouldn't have gotten that. Yeah.

Actually, I've had a very bad week. That's part of my problem. I went on my first business trip on a plane this week since the pandemic hit. And wouldn't you know my plane last night coming home? was canceled. I'm not kidding. Literally canceled. So here I am scrambling. I forget, what, what happens when your plane is canceled? What do you do exactly? Now, usually I call Sarah, my assistant, but this was kind of late. I wasn't sure. So, you know, I had to figure, I had to remember those days when you're calling the, you know, American Airlines desk to get a thing changed and you got to get a

hotel. And then it dawned on me. I haven't used Uber in such a long time as my Uber. You know, That was a mess. It was a mess. It was a... Where'd you go? Milwaukee. Milwaukee. I'm on the board of directors of a large mortgage insurer headquarter in Milwaukee.

So I was there for a couple days. It was great, you know, seeing people and just being across from them at the dinner table and, you know, interacting. But now it reminds me why travel is a real bear, you know. So hopefully this isn't an omen. But anyway. So is that it? Is it, you know, is this... Is this it for travel in the future or your office?

No, no, no, I'm booking some, I'm booking some travel. You know, I, I'm not going back to the kind of travel I did before. That was, I mean, I enjoyed it, but in hindsight, it was over the top. You know, I'd be traveling three, maybe even four days a week. That's crazy. And not necessary in today's day and age, you know, with the Zoom. Like we have Camille on, right? I mean, we have all kinds of.

meetings now globally with everybody on at the same time, Zoom and other platforms. I just don't see the need. But, you know, I will get back to travel. You're trying to travel too, aren't you? I believe you are. I thought I thought you'd book some travel. No. I had a business lunch in Wilmington, Delaware a couple weeks ago. Oh, there you go. Let's travel. Baby steps. Baby steps. Yeah. You, Ryan, have you traveled yet? No, not yet. Not yet. It's coming. It's coming. Okay, let's dive in part one for the regular listener. As you know, we begin with the data and the statistics. And this was a pretty busy week.

I think we got a lot of data and statistics. And we're going to get a boatload next week, too, with the job numbers are coming out next week. We might want to talk about that a little bit as a preview. But let me begin with Ryan. Ryan, what's your statistic? What would you like to highlight? It was the most important number of the week and may cause us.

have to change our forecast for the second half of this year. Minus, so there's a minus, 166. I know what that is. Chris, Camille, I don't expect Camille. Camille, if you know this, you probably should have three PhDs by now, but I wouldn't expect that. But I think I know the answer. Chris, do you know the answer?

Oh, you're a piker, Chris. You're such a piker. Come on, man. Watch, I have it wrong. inventories. Correct. It's a change in inventories. Yeah. It was enormous. Yeah. What was that all about? Our tracking model, it had a decline, but not minus 166, under 66 billion. No, no. It was a big surprise. It was a big weight on second quarter GDP growth. And outside of recessions, declines of this magnitude just don't happen. And I think it gets back to the semiconductor shortage. And you saw a big drop in, vehicle inventories. Retail inventories are down a lot, and that's the shifting consumer spending away from

services to goods. But, you know, this is essentially just kicking GDP down the road. You know, we're going to get inventory rebuild, and that could really boost growth in the second half of this year, maybe first half of next. Yeah, explain for the listener to kind of the connected dots between inventories and what it means for GDP for growth. How does that work? Yeah, so the way they calculate it, it's weird.

It's the change in the change in inventories that matters for GDP growth. So next quarter, if inventories fall less than they did in the second quarter, they will actually add to GDP growth. And I mean, that's kind of getting in the weeds of how they calculate GDP. But one thing that I looked at, you know, why we were, you know, too optimistic on second quarter GDP, and everyone's saying it's a big disappointment. But when you get an inventory drop like that, you know they're going to have to restock, that's good for manufacturing going forward, and that's going to add to GDP.

So I think that was far from a disappointment. I think that was a very strong second quarter GDP number and suggest that we're going to get, you know, more growth in the second half of this year. Yeah. The way I kind of explain that is GDP gross domestic product is the value of all the goods and services that we produce. And so if, you know, you look at consumer spending, that can be strong. production isn't keeping up, GDP won't increase. And in fact, if consumption is outpacing

production, that's when inventory is declined. But ultimately, businesses, they target a certain level of inventory. And if they're below that, at some point, they're going to ramp up production. They're going to ramp up GDP. And so that's what you're saying. We had lower, less of an increase in production than we thought we'd get in the quarter. But that's just drawing down inventory. Businesses are going to rebuild those inventories. And that's coming. It may not be in the current quarter of Q3 because of the global supply chain issues and other issues, but it's coming and that's going to add a lot of growth. So it's not that we didn't get the growth. We're going to get the growth we expect it. It's just the timing is going to be different, a little different. Yeah,

I mean, if you strip out inventories, GDP was much stronger in the second quarter. And then when you strip out net exports as well, and that's essentially consumption plus investment plus government. That's like the domestic economy. That was booming in the second quarter. So demand is really, really strong. We just got to get, you know, the production side picking up. Yeah. So just to back up a little bit. So GDP in the second quarter for the United States came out last week. It came in at 6.5 percent analyzed. We were expecting 7.5. By the way, 6.5 is booming. It's just, you know, we thought it was going to boom more, 7 and a half. And the consensus was 8.5. And the difference, the reason why we came in light,

in the large part was this inventory drawdown. Also, you mentioned trade or trade balance deteriorated. That was another reason. What's going on there? What, how do you feel about that? Is that a worry for the future or not? No, because the trade deficit normally widens when you get a lot of fiscal stimulus. You know, we're going to, we can't produce everything that we consume, you know, from a consumption perspective.

So we're going to be importing a lot of more goods and services, and that's what's happening. So I'm not concerned about the deterioration and the trade deficit. Yeah. And also the fact is that the U.S. has recovered more quickly than most everywhere else in the world, save for, let's say, China. And so because we're recovering and demand is picked up, we're importing all this stuff to meet demand, but because the rest of the world is still struggling, we're not exporting as much stuff because they're still not consuming.

But that's going to turn, presumably, you know, as we get vague. Over time. The other source of weakness in the GDP, and again, remember, this is, it was really strong, boom-like, it just came in a little light compared to, you know, what we expected. The other reason was government spending. So, you know, that declined, overall government spending, which seems a little weird in the context of all the fiscal support that's being provided. So what's going, what happened there and what does that mean? No idea. I got to look into it deeper, but that was another source of, what?

why our estimate was a little bit high. We didn't expect a decline in government. Federal government. It's really hard to pinpoint accurately, and that's always been a source of error in the high-frequency GDP model that we have because a lot of source data does come out. We usually have a really good idea

what consumption is going to be, residential investment, usually inventories, except for this time around. All the components of GDP, except for government, we have a lot of, you know, a good idea of what it's going to be. Yeah. Is that just a timing issue once again?

It could be. Yeah, that would be my sense of it, that just when it shows up, you know, in the numbers. And also, obviously, the good chance, now we're going to get a lot more fiscal support coming, right? It looks like Congress is going to pass that bipartisan infrastructure plan, 550 billion in transportation infrastructure

over the next 10 years. And we've got another even more massive fiscal support package that looks like it's kind of come down the train, the two and a half, three, three and a half trillion in social investments that the Democrats are working in Congress. So a lot more government spending coming. Okay. Anything else on the GDP numbers that you wanted to call out, Ryan? I don't want to use too many numbers because I don't know if you or Chris are going to dip into it,

but GDP is now back above where it was pre-pandemic, but, you know, we're, we still haven't fully recovered. I mean, just from a GDP perspective, because if the pandemic didn't happen, GDP would have probably been 2% higher than it is today. So we still have some room for improvement. Hey, Camille, did you know that minus 166 was an inventory? I bet you knew you just didn't want to show us up. Well, I knew that the inventory is declined, but I definitely didn't remember the number. But I would dispute that it was the most important number of the week.

that would be, of course, if you're sitting in the U.S., but from Europe, it wasn't the most important number of the week. Okay, so, okay, we're going to turn to you then. Do you have a statistic you want to bring up? What do you think is the most important statistic of the week? Well, I didn't want to bring it. Camille, Camille, can I just say, if one of us gets this number,

that would be impressive, wouldn't it? Well, this one is easy, and I didn't want to use it as my statistic, because that would be just too easy. for you. Okay, go ahead. That was in the headlines. So, of course, it was 2%, right, which was Eurozone GDP. Exactly, right. That was, that's too easy. So I have a better statistic, which came out also this week for later on and that ties into our topic. But we had a very, very strong growth in Eurozone, much stronger than we or the market were expecting. So that's 2% non-annualized, which would mean more than 8% annualized.

So we did beat the Americans for once. Right, right. And what was a surprise in that number? What caused it to be higher than expected? Well, so this goes into the difference in the way we work in Europe and you are guys in the U.S. You have all this detailed information and all we get is 2%. So we don't even know the breakdown into the components. No transparency.

Oh, geez. So you get it eventually, you know. Yeah, we do, but like in a month from now. So that's a lot of guessing up until then. But the important factor there was more the geographical composition because Italy and Spain just flew on. They grew by almost 3% each non-annualized. So that's huge.

Opposite of that, the surprise was that Germany grew really slowly. that was very not expected if you would look at the high frequency data and everything. So that's a big puzzle mind. And it might be speaking to the supply constraints, even though I don't feel like those are big enough to cause the number to be so much lower. But overall, the geographical composition was definitely the highlight in terms of the release. Could I proffer an explanation? As an economist, I can explain anything.

So not that it's right, but it's, Tourism came back, so that helped Italy and Spain, and the vehicle industry was encumbered by the chip shortage. And, of course, Germany, the German economy relies very heavily on the auto industry. Do you think that goes towards explaining what yours are? That's the explanation. It is. It is. Went forward with, exactly.

Especially the Spain and Italy strongly suggests there was also strong growth in Greece. So in Portugal was also good. So overall, clearly the tourism season kicked in and kicked in well. The supply side constraints, the shortage of chips, it's just not big enough to shade off of like a one percentage from GDP. It just isn't there. So it has to be something more, but it's hard to speculate without any further detail on the data. Well, I know my daughter in London helped contribute to Greece's GDP.

I can tell you that. And actually, remote work may be helping these guys too, because they kind of hung out longer. My daughter and her boyfriend hung out longer than they would typically because they could work from anywhere. A lot of people doing that, a lot of people doing that. So definitely supporting it. Overall, basically this kind of brings us to a situation where France, Germany, and Italy are in a similar. level of GDP relative to the pre-pandemic altogether. So the heterogeneity across the countries has decreased is this quarter.

They kind of aligned nicely. Spain is still farther behind because of its sectoral composition, but it did caught up a lot. So overall, it's bringing us back to a situation where everybody is looking more alike. Got it. Okay, good. Did you say that that wasn't your statistic? You just brought that up because of the conversation.

No, that was too easy. That was too easy. Oh, too easy. Okay. I have very one which ties up into our monetary policy topic. Oh, well, why don't you wait? Why don't you wait? We'll use that as a segue when we get to the topic. How does that sound? Okay. That sounds good. Okay, very good. Chris, let's turn to you. What's your statistic of the week? All right. I'm going to give you two numbers, but the same concept, two different geographies.

And this is in honor of our guest here. I wanted to make it fair. Yeah, that's fair. That's good. First number up 153% plus 153%. Okay. The second number is down 26%. Minus 26%.

Wow. So here in the U.S., this is up 153%. And in Europe, continental Europe, Well, you didn't include the UK. Are you included the UK? It's not Europe. It's a country in Europe. Oh, it's a country in Europe.

Oh, okay. You said it down? 26%. Down 26%. Well, is it UK and is it the number of new cases? It is the number of new cases, but it's not the UK. The 153% increase is in the U.S. over the last two weeks.

And down 26% is the number of cases in the Czech Republic over the last two weeks. Oh, that was a good one. That was a good one. Actually, Oh, you hit home. And I gave Camille credit for that. He went right to it.

Yeah, that was very good. Ryan wasn't going to get that. I could see it on his face. He was like sweating over there. Like, oh. I was thinking housing, because Chris always goes to housing. He always goes out.

I got to mix it up. You know, I know you're on to me. Chris says three things. Housing, COVID cases, and crypto. I know. That's right. You're exactly right. Those are my assignments. We just wrote a great piece on global house prices. I thought it might have some of you, but 153, I couldn't, that, not even in Boise, Idaho. They're not experiencing. Although they're getting another year or two, it might be. Yeah.

Boy, things are going there. Yeah, very good. Those are good statistics. Okay. I've got, I think it's pretty easy. It's two part, though. It's two part. It's this week, right? None of this. It is. It is.

It is. It is this week, because we did get a, as you would say, a plethora of data, good data. And the statistic is 3.5%. 3.5%. Is that the year-over-year increase in the core PC deflator?

Bingo, you got it. Very good. 3.5%. And of course, that's high, right? I mean, the Fed through the business cycle would like to see something closer to 2%, willing to live with a little higher than that in the near term so that through the cycle they get two, but we're at 3.5. I don't know, Ryan, did you do any work decomposing that? How much of that?

So of that 3.5% or let's say the acceleration from to the target to 3.5% is due to things that are directly linked back to the pandemic, like just a normalization of prices in the in the hotel industry or the increase in vehicle prices because of the global supply chain issues. Do you give a sense of that? I haven't decomposed it for the PC deflated yet because I don't think we have all the details banked yet, but I can do that. I mean, based on the CPI, which a lot of that feeds into the PC deflator source data, would suggest that most of it is the reopening of the economy, the normalization of airline prices, rental car prices, things like that. Of course, base effects, too, right? Correct. Based on the June data, this was CPI, again, not PCE data, but June CPI,

the core CPI inflation rate, I think through June, was like 4.5%, I think. But if you look at it over the past two years, so June of 2019 through June of 2021, the annualized rate, it's closer to three, which is still a low on the high side, but that, you know, that gives you a sense of how significant the decline in or the weakness in prices was this time last year in the middle of pandemic. So the so-called base effects are also playing the role. Okay, here's the second part, though. What is the other key statistic that came out during the week? Because I knew you'd get that one pretty quickly. What is the other key statistic that came out this week that is also 3.5%. Oh, yeah.

This is a good one. Is it something in the GDP numbers? No, not GDP. No. Can you give us a hit without giving it away? It's a labor market statistic. That should help a lot. Think about what labor market statistics came out during the conference board.

I'm trying to think. Is it in the conference board survey? No. Nope. That's a good one too because that showed. That was really good. Yeah, to explain that one. Within the conference board survey, it's a survey of consumers, consumer confidence,

but they asked them about their expectations, assessment of present conditions, and there's labor market questions. And something that we look at attracts the unemployment rate is the so-called labor market differential, which is the difference between the percent of consumers saying jobs are plentiful, mine is hard to get. And that differential was 44.2, I think. I might be off a little bit. But that's the highest since the early 2000.

Yeah, very, very high. You say, suggest strongly that unemployment should come in pretty quickly. By the way, can I ask just lightning around question? What do you expect unemployment rate to be for, for July when we get that next Friday. Do you have a number yet? Because we're at 5.9. I'd say six.

Going up? It's going to be, it's going to rise for the right reason, though. I think we're going to pull more people in. Interesting. Okay. I don't know. I'm not confident in that. I'm more confident in the payroll number.

Okay. We'll come. Oh, we'll come back to that. All right. Okay. Back to my question. 3.5%. Oh, sorry.

Camille. What'd you want to say? I started interrupt. Well, on this. topic of unemployment rate, we have seen interesting release in Eurozone where there was a large increase in labor force,

but even larger increase in the employment. So the unemployment rate actually declined significantly. So it seems like the labor markets are able to absorb all the people coming back in quite quickly, so far at least.

So the US unemployment is 5.9. What is it in the Eurozone? It dropped to 7.7 from 8.0. Now, this seems high, but you have to remember that the natural rate of unemployment rate in Eurozone is higher. So we are almost back to where we were in beginning of 2020. We are just 0.3 percentage points above the pre-pandemic level. So that's very, very close. This reminds me, we've got to have you back more often because there's so much to talk about

with regard to Europe. I was going to bring up the furlough schemes there, but I don't think we have time to go down that path. We'll hold that for the next conversation. Chris, do you have an idea? I have one more stab, but I'll let Chris go first. I was thinking employment cost index. Yep, that's what I was thinking. Okay. DCI for private workers. That is, that is it bingo, bingo, bingo. You got it. So the employment cost index, which is probably the best measure of wages because it controls for the mix of jobs across occupations and industry. So if you've got a

a lot of job loss or job growth in certain occupation industries that are with wages outside in the middle of the distribution. You can mess up your sense of what's going on with wage growth. And that's not a problem with the ECI, the employment cost index. And probably the best window into the strength of the labor market is wage growth for private industry workers. and that was on a year-over-year basis up 3.5%. It was briefly, roughly that strong right before the financial crisis, and then you have to go back, you know, all the way into the early 2000s

to find the time when it was that strong. So very, very strong wage growth, labor market conditions, which is not surprising. So inflation 3.5, wage growth 3.5, but I will say I do think wage growth will be persistent and, you know, we may even get stronger wage growth given the way the labor market's going, but the inflation rate will moderate because most of that is base effects and also the pandemic. And as we get through the other side of the pandemic, and businesses iron out their global supply chains, people get back to work. I think that will come back in,

which was, of course, a topic for other podcasts and I'm sure for future podcasts as well. Okay, before we move on, we have, each of us have identified a strategic. that we've been following week to week. So let's just go through that to catch everyone up. Chris, your statistic is initially unemployment insurance claims 400,000, down 24,000 from the week before. So moving in the right direction, but still relatively high compared to history or an equilibrium level.

So moving in the right direction, a little disappointing was that we had a little bit of a tick up in continuing claims. So that's also somewhat concerning. But again, not a time to get over to overreact at this point. Initial claims are moving down. So hopefully they continue. And Ryan, you said, I think you said last week, you don't use, historically you have used unemployment insurance claims as an input into your estimate for job creation in the monthly

employment report. But you have stopped doing that because of the problems, the measurement issues with regard to UI claims. Is that correct? Correct. There's a possibility of multiple filings. So UI benefits count the number of people that file, not necessarily receive unemployment insurance benefits.

And normally that's not a problem. But when you get expanded UI benefits that are running out, you know, states are ending them early, people might be refiling. So I think it's sending a miss. I don't want to, you know, totally dis, you know, just pair of park versus indicator. But it's not, it's hard to interpret, you know,

the signal versus the noise. Well, and Ryan, you just did terrapartisan. Yeah, I know. I felt bad. That's all right. Okay. It'll be back.

You can always change your indicator, too, if you want. So you don't, you know, there's no rule here that you can't change the indicator. We should be watching if you want to do that. I don't know. Once we normalize, it'll once again be a. Okay. I would say by mid-August, claims will be useful again. That's only two weeks from now.

Yeah. So you should stick with it. Okay, fine. All right, good. Hey, Ryan, you've been following the 10-year yield, one-and-a-quarter percent. What was it last week? Was it one and a quarter percent last week? Yeah, it actually fell today.

It's down to 1.23%. Oh, my goodness. So, and it dropped after the PC deflator came out. It came in weaker than the consensus expected. And I think that's kind of, you know, pulling inflation expectations a little bit lower. What came in weaker than expected? The core PC deflator. but did that was below expectations that the consensus was 0.5.6 and what came in at 0.4 month to

which is what we thought yeah which was our forecast but markets were taken back a little bit that okay good so inflation expectations are coming back in I believe so okay okay very good um so oh um this is probably a pretty good time to ask lightning round, what is your employment estimate for July that comes out next Friday? I'll go last. You guys can do you first. You want to wait? Okay.

I don't want to influence anybody. Oh, you're looking to us for employment estimates? Yeah. Oh, okay. Chris, do you have one? I haven't really. You haven't thought about it either? I haven't thought about it deeply, Ryan.

I mean, it would be an uneducated guesstimate. I know you think about it all night. All day, all night. All day. Oh, yeah. Yeah. So can you give us a sense of it? It can change because we do get ADP on Wednesday, which is, you know, I use it.

I look at it. We get some more high frequency data. But right now, I'm close to a million. Really? Wow. Anything technical in that? Is that seasonal adjustment? Yeah.

Seasonal adjustment issues with leisure and hospitality and state and local government employment. Good to know. All right. down. My gut is I'm high. Maybe more reasonable would be like 900, 850 to 900. See how he does that. He sees how we react and then, you know, then he starts shading it. Oh, yeah. Well, it depends what ADP does. If ADP comes out strong, I'll go weak. If it comes out weak, I'll go strong. What? You don't get it? That is rude.

He's been traveling. Are you, you're dissing the ADP? I'm just kidding. I'm just I'm just, I'm allowed, you're allowed, permitted, yeah,

that's fair, it's fair, all's fair and love and statistics, as they say. Someone said that. Okay, and my,

this statistic I've been following is copper prices. Did you guys notice it's back up again, $4.50 a pound. Had been, anything over four again

is like, that's a strong global economy and a lot of inflationary pressures. Three is typical in any close to two. is consistent with a tough economy like we had back in the teeth of the pandemic.

So $4.50 a pound, that's back close, pretty close to record highs. So I'm surprised to see that. Is there anything technical going on there, Ryan or Chris, that you've noticed or Camille? No, I didn't see anything. So very interesting.

I had to expect that to continue to migrate lower, but hasn't so far. Did you see that, did you see coffee prices? dropped a lot. First thing I thought of was Chris. We were talking about that last week. They were high.

They've come debt back in. Yeah, they dropped a lot this week. Is that just technical trading? People were speculating and they got rung out or anything else. So it was that they spiked because of the Brazil drought, right? That was the. Yeah. It's not as bad as they thought it would be or?

I guess. I'm not a, you're not a coffee. later on the side. But all Ryan cares about is he gets his Wawa coffee a little cheaper, hopefully. And we're down the road here. Camille, do you know about Wawa there in Prague? Have you heard about Wawa?

Has that made it to- I heard about Wawa on one of your podcasts. But we don't have it in Prague or in Europe, to be honest. But it's going to come. Wawa will be everywhere, you know, at some point. So just you wait. It's coming. When you visit, it could be bad.

But I'm not a coffee guy, so maybe it is already here, and I just don't know about it. Oh. Well, are you a tea guy? I'm a water guy and a beer guy, obviously. Did he say vodka? He's a vodka guy? Water, water. Water, water.

I thought he said vodka. It is almost 10 o'clock there. I know. He's drinking vodka. Yeah. that's what's going on that's why he's so funny he's been drinking vodka what do you what do you i'm always funny are you are you do you put do you put anything in your with your vodka or is it just like straight up vodka well you know when i was in vodka

it would be straight up vodka but i'm not in my vodka stage anymore i'll just tell you i just had a gin and tonic the other night it was a mistake i'm getting old or something Yeah, it's huge, huge mistake. I felt it all the next day. Anyway, oh, back to the matter at hand. So you had one other statistic you wanted to bring up in the context of monetary policy, which is where we're going next. So what's that statistic?

It's 0.7. Zero points, could that be monthly inflation, you know, Hickpa inflation in the hero zone? So I will say that once we realize what it is, it's going to look like we coordinate it. I got it. I got it right. No, no. It's you're in inflation, but it's something else.

It's year-over-year number. Oh, it is year-over-year. Wages? No, he's saying inflation was year-over-year. Are you sure? it was not not the headline inflation oh core inflation was zero point seven oh core inflation was year over years only point seven in in the eurozone i lost track of that exactly yeah that's that's why i picked it because i think in all the u.s. driven narrative people kind of think that it's very similar in eurozone but in eurozone we have just the

headline which is well high well above 2% but not much high right yeah zero point zero is the core and it hasn't gone above one person at all. So we are in very, very different situation. And sometimes I see a market commentary like, you know, inflation is high. It's putting up pressure on ECB. And I'm like, well, the inflation is really low if you strip out the, you know, energy and food. So why would there be any pressure on ECB, right?

That's, I knew it was low, but I thought it would start to pick up now that Europe is recovering. And I would have thought the same kind of dynamics are starting to. take hold there with demand and supply, but not so. That's not what's happening. At least not yet, right? You're not seeing airline fees go up, ticket price go up, you're not seeing hotel room rates go up, you're not seeing rental car. You're not seeing any. So, so there, we might be behind a bit, so it might come. That's one thing. But I would, my suspicion is that it might also be a measurement issue. Like, my feeling is, for example, that the car prices did go up in Europe

pretty much, maybe not as much as US, but quite a bit, at least, you know, reading news analysis and all that. But I don't think it's showing up in the inflation data per se. So I think it might be just that the statistical office is having, is having harder time measuring this stuff in Europe than in US where you have such a good, you know, high quality, high frequency data. that's interesting. Well, in the UK, it's somewhere in between, right? It's, I think inflation is like, it's up, but it's like two and a half to three. It's not four and a half to five. Yeah. No, no, no. It's, it's still straight. It's somewhere in between the UK, UK is somewhere in between the US and the EC, and the Eurozone.

But, okay, that's a good, that was a good statistic. Very good. And that is a good segue into the talk, discussion around monetary policy. And I guess I wanted to begin with just, and I should also point out. I didn't mention this, but Ryan, in addition to his work as tracking real-time statistics, also is a key observer of what's going on at the Fed. And so I'm going to ask Ryan first, and then you, Camille, for your assessment of how the Fed and ECB have done during the pandemic. What kind of grade would you give them in? Why? So, Ryan, what about the Fed? What kind of grade would you give them? There's no other grade than an A-plus.

I mean, the way they responded that quickly, they took interest rates down to zero. They didn't, you know, hesitate, reopened all the credit facilities. I mean, the advantage the Fed had this time around is that they had these facilities. They were time-tested during the financial crisis, and then they just launched them. And, you know, that helped calm financial markets. And then they also got creative with additional lending facilities. So in the end, I think, you know, the Fed really did exactly. what they needed to do to keep markets functioning yeah Chris would you push back on that a plus at

all I mean I mean you're a harder greater maybe an A yeah why not the plus why wouldn't you give them you know you could always do a little bit more but but I agree really with with Ryan sentiment here they did everything within their pub perhaps you know maybe even a little bit beyond with expanding into the corporate bond market they also have some of the limitations in terms of their powers, right? Right. Well, I would give them an A plus, but I'd say still the semester, the class is not over yet, right? I mean, the pandemic is not over.

And to really get an A plus, you have to get everything back to normal, right? Get rates, get NQE, you start winding it down, get short-term rates back to something more consistent with the well-functioning economy. and that may actually turn out to be the hard part. You know, it's one thing to step on the accelerator. It's another thing. And, you know, keep the car moving, so to speak. But it's another take your foot off and make sure that car is still going down the highway as it should. So we'll see.

But I think you're right. I agree with you. A plus so far, but incomplete, right? Camille, I know you're a tough grader. You're a tough grader. Right. So how would you rate the EC? kind of grade would you give the ECB for their conduct during the pandemic?

Well, B, but turning into B minus, I would say. So they started bad. They had to stumble in the very beginning of the march, which was a communication error up to some point. But they did get their act together very quickly. and then they did get innovative and they pushed their political limits pretty well, pretty far. So that was definitely good, but because of the stumble, that cannot be an A, that has to be at least a B. The reason why I'm going into minus is because, you know, what's up with the being complacent when your inflation outlook is so bad? the ECB projection right now has inflation at the end of 2023 at 1.5, and they are not doing anything. It's like, well, if you are not hitting your target within two years, shouldn't you do something?

That's, or two and a half years even. So it's more like right now they should probably do more. I know it's politically tricky, but, you know, I'm not grading the politics here. I'm grading the conduct. Well, I don't know if that, let me ask you it this way. Taking in consideration the political constraints, do you still give them a B going on B minus? Still B, I will, you know, I will wait another half year with the minus. Maybe Lagar will surprise me and show some strength in the next half year.

I have two questions based on what you said. First is what was the communication error they made? They made back in March of 2020 when the pandemic hit. What was that error you're referring to? So in March, Lagarde said the truth, and you should never say the truth as a best central bankers. The Lagarde is the president of ECB. And she said that ECB is not here to control the spreads or push down the spreads of the government bonds. And of course, the reaction was everybody going crazy and spreads going through the roof.

We had one percentage point move in an Italian spread during a few days. So that that was huge. And they reacted a couple days later with a massive action. So they kind of mopped up the communication error pretty quickly. So that deserves a B. Make a mistake, but fix it. That's good. I have a good story about the ECB.

I'm going to tell it real quick. And then I'm going to ask you the second question. So I've been to the ECB a number of times. They asked me to come in. This was after the kind of, after the financial crisis, maybe a few years after the crisis hit. And there was still a lot of debate about what they should be doing around monetary policy. The debate was around quantitative easing and whether they should QE in some form. And so I go into a small conference room.

This is, you know, obviously when we still got into conference rooms as a group. And in the meeting, they had, and I guess, is very common in all ECB meetings. They have two representatives from each country there. So two Italians, two Spaniards, two Germans, two French, so forth and so on. And I made a very strong case that they needed to be more aggressive and they should, you know, ramp up their QE and that they were being too slow. And, of course, the German, the Spanish representatives, the Italian representative were shaking their heads up and down. Yeah, absolutely.

Absolutely right. After the, I gave my talk, I felt pretty good about it. And I was just standing there, you know, talking with someone when one of the German representatives came over, this guy was six, seven looking straight down at me. And he goes, you know, in a strong, perfect English, but strong German accent, he said, and I may have this not exactly right, but basically he says, you have no idea what you're talking about. And you don't know anything because you said, Chairman Draghi, you know, and it's,

president Draghi. And I said, Chairman Draghi, of course, it's the chairman at the Federal Reserve is president at DCB. And the fact that I said chairman, that was a disqualifying event, you know, because anybody else else I said was worthless, you know, because of that. That's a B minus right there. B minus right. But those guys, they, the German representatives were dead set against, you know, that kind of support, you know. for the thought it's more stressful presenting before the ECB or the Fed or Congress. It's probably more stressful presenting before the Fed because I don't, because I don't know what I don't know when I'm speaking to the ECB.

I'm more, you know, there's things I don't know, but I don't care. You know, it's okay. But I don't have all the nuance, right? I don't have all the political nuance and, you know, all the, the nuance. And they, you know, I'm speaking more in broad terms. So if you're at the Fed, though, you're speaking with very clear, significant granularity, right? So it's a little bit more nerve-wracking. Anyway. Okay. I did want to ask, though, your view, and going back to Camille, this is about your point that they need to do more, the ECB needs to do more.

What can they do? I mean, what do you think of negative interest rates? I mean, do you think they have been helpful at all? And can you go even more negative? And if you're not going to negative rates, what else do you have in mind when you say, do more? So this is a tricky discussion, but I think it was just made easier a couple weeks ago

because a couple of weeks ago, we concluded the strategic review of ECB, right? and they change the inflation target from the very confusing and horrible, close but below 2%, to 2% symmetrically, right? So that's a good step in a direction. But you can make more, right? I think it's clear that we have a structure problem in Eurozone right now with inflation expectations being below 2%. So let's change it up.

Let's change the strategy and go for what the Fed did, right? Why wouldn't we do that? So we could do more, probably not in terms of the tools per se, that that's a bit pushing on a string, but we could do more in terms of, you know, how we set the big picture and that's going to influence the expectations and behavior of agents, right? So in that way, we could do more. So in my opinion, go ahead. I was just going to say, just to give context, because you said a lot, just so for people. So both the European Central Bank and the Fed since the end of last year have changed their framework for conducting monetary policy for setting interest rates and other policy. The Fed changed the framework so that now their inflation target is 2% on the core consumer expenditure deflator through the business cycle.

So that means if you're below two for an extended period, you need to be above two for an extended period to be above two for an extended period to be on average equal to two. And by the way, in my mind, that makes perfect sense because just doing the arithmetic, I won't go into it. But if you don't have that kind of policy, you'll never get to two because inflation expectations will never get to two. So, but anyway, that's a whole other discussion. Exactly. But the ECB previously before the change in the last couple of weeks was the two percent, they had a two percent targeted on inflation, but it was a ceiling. We're not going over two percent. And it was a hard ceiling. And of course, we're well below two for an extended period.

And now they're still not willing to have 2% through the cycle. They're not saying I have a hard ceiling anymore. I can go over to, but they're not saying on average through the business cycle to. And you're saying, well, why? Why are you doing that? It makes no sense. You should have the same similar framework as the Fed. Do I have that right?

Did I get that right? Exactly right. exactly for the reason you said, right? If you say, well, you know, it's 2% but if we miss, it's not something we will do about it, right? Which kind of makes you stuck, especially if you are starting from below 2%, it kind of doesn't make you go much higher, right?

While Fed makes it clear, well, you know, if we miss, we will make it up for it, which makes people expect, well, you know, they might miss, but we will get there eventually. actually. So that makes your expectations very different. Yeah. Okay. I just wonder if that really, you can get it's a big enough deal that that would make a difference, that it would really have an impact on. I think so. I mean, I'm not saying we would go to 2% to, you know, in spend of a month. But it would help us in medium term for sure. And right now, ECB expects it's going to be undershooting for another two and a half years.

that doesn't seem like being, you know, being very serious about hitting 2%. What do you think about negative rates? Of course, in Europe, rates, interest rates have gone negative. In Japan, they're negative. The U.S. Fed never took the short-term interest rates that controls into negative territory. There's a zero lower bound that goes to zero, but no lower. How do you think negative rates have, well, of course, the idea was, negative rates would help to incent the banking system and other financial institutions to extend

out credit because if they, you know, have to pay the central bank an interest on the funds that they're that they're not, that they're not lending out. That's a penalty and therefore they have an incentive to go out, lend the money, and that would create more economic activity. That's the theory behind negative interest rates. How do you think, what do you think about that? How did that work out? Well, I think it's hard to argue that they were not helpful. They were helpful, but of course, marginally. So we decreased by half a percentage point. So that's not a terribly lot, but still better than nothing.

But as you hinted earlier, there are limits to this approach to negative rates, right? Lovering what is called the deposit rate farther. At some point, you start hurting the bank's profitability, and that might be counterproductive. So I think we hit the right spot in the amount we went and it helped. It helped a little. It didn't help a terribly lot, but a little better than none. Yeah. Hey, Ryan, do you think the Fed is wrong not to go negative on rates?

No, no. I think the only thing they hate more than negative interest rates is these cryptocurrencies, but the Fed is always stressed that they don't want. to adopt negative interest rates, partly because unlike in Europe, our money market, part of our financial system is really large. And they're worried that if you go negative Fed funds rate, that that could cause a lot of disruptions in the money market. Right, because the money markets, they can't make any money. And if they can't make money, they break the so-called buck. If they break the buck, then that just will create chaos. Because the money market funds are key source of cash liquidity to businesses and households.

They are key to the flow of funds within the financial system. And if they're broken, then the system is going to be broken. Right. And if they didn't go negative during the pandemic, it's hard to see them ever adopting negative interest. So I think we have this whole laundry list of tools that they can do during a recession. and negative interest rates is probably at the bottle. Right.

Well, what do you, now, of course, they are, have wholeheartedly embraced quantitative easing, you know, as another tool. And QE is simply buying longer term bond. So they, you know, the traditional monetary policy kind of in typical times, they are managing short-term interest rates or buying and selling short-term securities. But once short-term interest rates get to the zero lower bound, then they say, oh, So I'm going to now start trying to get long-term interest rates down and ask QE by buying bonds. What do you think of QE?

I think it was really successful. I mean, it did what it was supposed to do. I mean, not only just bringing down long-term interest rates, but when you lower long-term rates, you're going to push investors into the stock market, which is going to boost stock prices and help spending through the wealth effect. So I think QE has been effective. And I think it's a permanent tool now with the Fed. Yeah, of course, do you have a different perspective on that or anything you want to add on the QE?

I'd agree. I think overall, right, the Fed is the fireman of the economy and they need to have all these tools, but they're not the most precise tools, right? You take the axe, you take the hose, right? They're good tools to have. But, you know, in a crisis, that's exactly what you need. You can't wait for Congress to act and produce or provide the fiscal stimulus that might provide support to the economy. So I think QE is a useful tool. It's kind of proven itself. And

yeah, I think we would have been in a far worse situation without it. Just like how you guys wouldn't give VED, you're saying that it's incomplete. I mean, QE is still incomplete because they got to unwind this MBS holdings, these mortgage-backed securities that they have on their balance sheet, which is a massive amount. And it's unclear how they're going to do that. But they just keep kicking the can down the road. I mean, that's, you know, a long way off that they do address this. But at some point, they are going to have to address their MBS holdings. So at what's your, what's your forecast? I was always thought that they would do this new a repeat of the Fed Treasury accord where, you know, the Treasury take all the MBS and then

in return just give the Fed Treasuries because that's what they want their balance sheet to be mostly is treasuries. And when we're talking this massive amount of MBS and I just don't know how they're going to do it. Why? I'm a little confused by that.

I mean, just let it mature, mortgage-backed securities or securities that are backed by single-family mortgages that are guaranteed by Fannie Mae, Freddie Mac, FHA, VA, and USDA,

government-backed institutions or government entities. Why, what's the problem of just letting the mortgage securities just mature or prepay, you know, just through refinancing. That would cause their balance sheet to decline if you don't replace it with something. So they could do, you know, replace the MBS that's maturing with treasuries,

but that's a lot coming and that's going to cause problems. But again, this isn't something that's the next year, 10 years from now. It's like it's way down the road. But if you let the MBS just roll off, that's going to be a significant amount of monetary tightening because their balance sheet's going to, you know, drop quite significantly. Well, they did that after the financial crisis, right? A little bit. Their balance sheet dipped.

It did not, I wouldn't even say it really contracted that much. And then they got nervous because, you know, financial market conditions were tightening. The economy was slowing down. So they, they stopped that and they, you know, stabilize their balance sheet. So you don't seem convinced. I'm not overly worried about it. No. By the time that we have to have a podcast on this, you'll be on the beach somewhere, you know,

retired. I mean, it is a long ways off. Did you, he just called me, did you hear that? That, you know, everyone's 40. It's like, I think it's 2040, 2050 that this is going to be. First Camille, now Ryan, pretty soon, Chris. No, no. Yeah. All right.

Hey, Camille, do you have a view on QE, the European-style QE? Well, I wonder what's there not to like, right? Not much downside. Definitely some upside, right? there might be problems down the road, right? Because it's the large balance sheets. If you start raising rates, it means that in the European Central Bank world, you start paying large money to banks who have these deposits at the Central Bank.

So that could create political tensions. But yeah, that's a worry for the next decade or more likely the decade after that. So probably not a big worry. Yeah, I'm with you on that. So there's two potential worries, which I think we've kind of alluded to. One is, well, how do you kind of wind this down? I mean, right now the Federal Reserve, through its quantitative easing, its bond buying, is buying $120 billion of securities every month, $80 billion in treasury securities,

$40 billion in mortgage-backed securities, MBS. And, you know, they're coming up to a place where they're going to start talking about what they say, tapering QE, which is, means buy fewer bonds each month. So instead of $120 billion, I don't know, $110 billion and then a few months down the road, $100 billion, so forth and so on. And that could be tricky, right, Ryan? And because the last time we were here in 2013, when coming out of the financial crisis, the Fed had been queuing and was now starting to thinking about tapering QE, that didn't go so well. Right. No, we had the so-called taper tantrum where, you know, Bernanke kind of had a foot

mouth moment where he hinted that, you know, or Marcus interpreted his comments that tapering was going to start sooner than they had anticipated. I don't think we're going to have a taper tantrum this time around. I mean, the Fed is doing everything that they can to make sure that nobody is surprised when the tapering process starts. They dropped their first hint in the last FOMC post-meeting statement. And another hints politically coming in either August when Powell speaks at Jackson Hole or at the September meeting. So they're going to start. talking about tapering in the next couple of months. Not August, but you're thinking September, they'll start talking about it.

They'll start, yeah, that's when they'll make the first, you know, provide a little bit more clarity. So they're going to talk to talk for a few months. And then they'll walk to walk with actually tapering early next year. And in our forecast, we're saying January of next year. Correct. Right to you? Okay. Sounds about right.

So, so one thing to be. be nervous about, maybe not to dislike, but do you nervous about is how do you get out of this gracefully? You know, you're buying all these bonds. And, you know, if you stop buying all these bonds, what does that mean for the bond market, for interest rates for the broader economy? So that's one thing to consider. I did want to, this might be really getting into the weeds, but there was an interesting development at the FOMC meeting. That's the Open Market Committee meeting of the Federal Reserve that sets monetary policy. They did it this week. And one of the reasons why we're talking about monetary policy this week, was they established a new standing repo facility. I thought that was interesting.

You may even want to explain what that is and what that's all about, how important that is? The way to think about this is, I mean, they had a facility that was very similar to this. It's just now becoming a permanent tool for the Fed. It's basically part of their lender of last resort. I mean, they're now the lender of last resort for the repo market. And what's creative about this is now it gives banks a place where they can easily, you know, park their cash at the Fed or tap it without, you know, going through the discount window, which has a stigma that, you know, if a bank goes to the discount window, there's, there's financial issues.

So this standing repo facility is a way for banks to park their reserves and earn a little bit of a return at the Federal Reserve. So this is kind of how I'm thinking about, tell me if I've had this right. I could have it wrong. The thing about this standing repo facility is that if the Fed stops buying as many treasury or securities or more MBS, they need someone else to step in and start buying. Otherwise, interest rates might rise more quickly than anticipated. They're giving the banking system a kind of easy way to do this, a profitable way to do this. So that a bank can take a treasury, say a 10-year treasury at one and a quarter percent, they can repo it, which means they use the treasuries as collateral.

They basically fund the ownership of that treasury with the repo facility. And the cost of those funds is very low. So I think they set the interest rate on that facility at a quarter point. So think about that. I can borrow at a quarter point. I can then buy an asset, a treasury, at one and a quarter point, or I can buy an MBS. I don't know what they're probably going at for 175 on the run, mortgage back security. And that's without much, very little risk there.

And I can book a lot of money. I can make money doing that, right? So that's a really strong incentive to get the banks to kind of step into any void that's created by the Fed pulling back from its bond buying, its quantitative using. Right, exactly. Is that right? Yeah, this is like the first step towards actually beginning to taper. They're setting up, you know, a mechanism where, you know, if something does go wrong,

you know, they can address any liquidity issues right away. Because this facility won't be used in normal times. It's only going to be used in periods where there's financial stress. Oh, well, I guess right now, it's going to be used now, right? Because there's going to be, as they try to taper, there's going to be. Right. Okay. I guess we're still in a period of stress.

stress is what you're saying. Correct. They're still stress in the system. But I mean, you know, down the road. It's still not normal. When we're back to normal, this, no one's going to be tapping this facility. Yeah. Okay. Here's the other thing that people complain about when they think about, well, people complain about everything, you know, about the Fed and QE's. Most of it, I think Camille said it right. What's not to like about QE? So it's just, you know, just moaning without much merit. But one concern that may be reasonable is that QE is jacking up asset prices, right? It's bringing down long-term interest rates.

Long-term interest rates are key to all asset valuations, stock prices, you know, bond prices, real estate values, housing values, you know, what's going on in the crypto market, that, you know, all those things have been juiced up by the QE, and that's a problem. What do you think of that concern? Is that a reasonable concern? And by the way, Camille, is that narrative I just described? Is that even part of the debate discussion in Europe? Do people worry about that in Europe?

Of course they do. That's the one thing I don't like about QE, and that's a lot of people are using it as, to me, sometimes an excuse for prices of assets they didn't expect. So they are like, I thought it should be lower. It must be QE, which is of course a genius excuse because you can always, always use it. But personally, I was always very skeptical. There is a part true to that story, and that's what you described, right? I mean, if long-term interest rates are lower, then assets should be higher,

but that's not talking about tens of percentage. points. And people usually say, you know, the central banks, they bought trillions of dollars of assets, and that's why the stock markets are so high. And if you look at the numbers, it just doesn't it up. So Fed, for example, they bought a four trillion of assets since the start of pandemic, which sounds like a lot. But if you think about it, the value of the stock market in US is 50 trillion, and the value of the bond market in the US is another 50 trillion. So even if it would be mechanical. We are talking about the 4% of the valuation. So that just doesn't add up as like, you know, that's why the stock markets went up by 20, 30%. So I was always skeptical of this

argument being used personally. It's kind of weird what he said, isn't it? He says, you're okay with QE and you think this criticism of QE about jacking up asset prices and making stock prices and housing values overvalued is you have no problem. You have no problem. with that. You're just mad that people use that as an excuse to explain away the higher asset prices. That's what you're mad about. Exactly. Yeah. That's a, Chris, do you find that weird? That's a little weird. That is a little weird. The lower interest rates are fueling the speculative bubbles, but the Fed is not responsible for those lower interest rates in any way? Is that, is that No, I'm saying, yeah, they are not, the speculative bubbles are not the result of fed behavior, at least to my mind.

I was just saying, you know, like, I don't like that PPC use QE as an argument for why the SPNP 500 went up by 30%. But that's just bogus. Yeah, I hear you. You're mad at other economists and market pundits that are using QE, you know, as excuse for everything. Yeah. Yeah, I would agree. I would agree. I mean, there's that awful chart that people use.

It's like the S&P 500, the level versus the Fed's balance sheet, you know, and they go, you know. Oh, yeah. But there's no causal relationship between. Yes, that's always the causation or correlation. Right, exactly. And that chart just drives me nuts. Yeah. You're both weird.

Yeah. Okay. Well, we're getting down to the end here. And I do want to look a little forward. We heard from Ryan about QE and tapering QE beginning early next year. But when do you think the ECB and Fed will actually begin to take their foot off of the accelerator and start normalizing short-term interest rates? Who wants to go first?

Camille, do you want to go first? Do you want Ryan to go first? I can go first. So I think it's pretty clear it's not going to happen in 22, unless something crazy happens. ECB, we're talking ECB now. Yeah, ECB. The deposit rate, you're talking about the deposit rate for the ECB controls.

So no rate hikes in 2022. And most likely not 23. It would really have to be extraordinary rebounding economic activity and rise in prices to change that. but it's very, very unlikely. Basically, we are talking sometime in 2024, the earliest, of course, if things go according to plan. We personally in Moody's, we have a fall of 2020-24.

It could be sooner, but it could, of course, go later. After all, we haven't seen a raid hike in Europe in 10 years. So predicting a raid hike is a tricky business down here. That's an interesting point. I hadn't, they'd forgotten that. There hasn't been a rate hike in 10 years. Wow. That should be longer.

They shouldn't have raised rates in 2000. No, you're right. You're exactly right. They made a huge error when they've raised rates in 2009, in 2009, in 2008 and 2008 and 2011, 2011, both. 11, 2011 is what I was thinking about. Yeah, that was crazy. That was crazy.

That's when I was at the ECB when they were. I was going to ask that in the world. Yeah. Yeah. I thought that was just nuts. Of course, in hindsight, it was nuts. Just a huge man. So you're saying the first rate hike is likely in 20204 is what you're saying.

Three years from now. Okay. And what do you think the inflation rate and unemployment rate will be when that happens, when they start raising rates? So the unemployment rate you said is 76, I think you said? 7.7 now. We were at 7.4 in the beginning of pandemic. We will get back to around 7, maybe even lower. It seems like some of the structural changes have helped to bring the natural rate down. So we might go around 7, maybe slightly below 7 in next year to 2 years. Inflation, however, right now it's going to continue to go up because of base effects. But come January, there is going to be. going to be a large drop as the tax changes and other issues will disappear from the comparison.

So then in 2022 and 2023, we will be, you know, somewhere around 1.1 to 1.5. And only in 24, we will probably start converging to 2%. So your thinking is they will not raise rates until we're close to 2%. It's very obvious. We're getting to 2% in European inflation. And, And unemployment sub-7, you know, pretty close to its full employment level. That's what you're saying. Yeah. Okay. I think we will have unemployment rate at the natural level.

And then we need some for the inflationary pressures to build up. So it's going to be a while. 20-24. Okay. Okay, Ryan. And I should preface this by saying that Ryan is probably wrong, but, you know, we want to hear from Ryan. Go ahead, Ryan. I was going to ask, do you want you to explain what our forecast is?

What will actually happen? Oh, I want you to say three things. Here's three things. One, first tell me what the market expects. What do investors think? Two, what is the quarter of two? Oh, wait a second, three things. Second, tell what our official forecast is, you know, that with this consensus view,

maybe I have a stronger vote than most, but consensus view on, on the federal funds, right? And then third, your view. So go ahead, far away. I might need some support from Chris on this one. But the market's expectation is first quarter of 20, 23. Okay. They kind of have been flowed between late 2022 and early 2023, but for the most part,

they're right around there. Our official forecast is also first quarter of 2023. And we got there first, right? We got their first. Yes, I do give you credit for that. We've been there. You've been there for a while. A while.

Yeah. But assuming that Powell still chair of the Federal Reserve, I think it's going to be late 2023 before they raise interest rates. You do. Okay. So the reason the market in I think early 2023 is because we think the economy is going to be at full employment. That's a, you know, mid-3% unemployment rate.

And inflation is going to be. consistently above, just above its 2% target by early 2023. So is it that your forecast for when we get to full employment and the inflation rate different than that? It's a little bit later. And also I think the Fed has clearly sent the message that they're going to run this economy hot to kind of get to the labor market that we had pre-pandemic. And it's not just the unemployment rate.

They're going to look at minority unemployment rates. They're going to look at employment to population ratios. They don't have a whole slew of things that they're going to look at to assess where the labor market is. And they're hell bent on getting back to where we were pre-pandemic. And I just think we'll get there. It's just it may take a little bit longer than what our official forecast has. Right. Okay.

Chris, you have a different. Chris, back me up. Yeah, what do you think, Chris? Yeah, I think the baseline is right. You shifted on me. No, no. Did he? No, no.

I've been consistent. I've always... Are you late 2023? No. Oh. Early 2023. I think inflation might be a little hotter than what you're saying. And that's why they act more quickly, but...

Yeah. Well, okay. Well, we'll see. We'll see. I do worry about asset prices, though, between now and then. If you keep the foot on the accelerator for too long, given where asset prices are now, Just think what they're going to be a year or two from now.

I don't know. It's going to be tough to avoid raising rates for very long. But reasonable debate. And, of course, we're going to be debating this for a long time to come. Anything else on monetary policy you guys want to bring up before we sign off? Camille, Chris, Ryan, anything? We didn't talk about crypto. We didn't talk about digital currency, which is actually a very,

interesting topic that's kind of come to the fore for central banks. And we're going to do that. I'm going to have a guest on to help us with that, external guest to help us with that. Any other issues that you wanted to bring up, though, before we move on? No, I think we tackled it. We did. Okay. Good. I do want to remind everybody, you can go to economy.com, go to when you're there, inside economics and you'll be able to let us know what you think, what topics you think we should tackle. We're, you know, very keen on that. We're listening to you. Apparently, a lot of people want to talk about China in the U.S. relationship. And I got a great guest for that. This fellow

named Dan Rosen from the Rodion Group, who's just out, he just wrote a piece in the foreign affairs. And he's really, I know him quite well. He's really very good. And so he's going to be a good guest for that. But I'd like to hear from you. Let us know what you want, what topics you'd like us to opine about on the podcast, and we'd be very happy to do that. So with that, let's call it a podcast. Thank you, everyone. Catch you next week.