Moody's Talks - Inside Economics - Isn't It Ironic?

Episode Date: November 11, 2024

Mark joins the podcast from Europe to provide the European perspective on the U.S. election and how the outcome may affect their economies.  The team then dissects the reactions of the stock, bond, and cryptocurrency markets before turning to listener questions.  Marisa asks the group for their views on the vibecession, a term coined by Kyla Scanlon, to explain the disconnect between economists and the general public, and the integrity of economic data.  Cris's dog makes a special guest appearance. https://genius.com/Alanis-morissette-ironic-lyricshttps://kyla.substack.com/p/the-vibecession-the-self-fulfilling Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Mercy Dean Natali and Chris Duretis. Hi, guys. Hi, Mark. How have you been? I've been traveling a lot. This is a Saturday, a rare Saturday podcast. We generally podcast on a Friday, but I've been in Europe, and it was on a plane most of yesterday from Rome to London. So thus we're talking today on the Saturdays. But it's good to be talking with you guys. Good to see you.

Very good. Nice to see you. So I'm picturing you in a cellar in Rome. I think Keonti. You know what? Now that you say that, Rome was really nice. I have to say it. I mean, I had been in Rome for a number of years.

I can't even remember when. but it's a beautiful city. And the weather was picture perfect. You know, 70, 75 degrees, sunshine. Really, really nice weather. And I got to meet a lot of government officials and Bank of Italy. Oh, wow. Yeah, it was pretty, pretty interesting couple days.

So I really enjoyed it. But now I've found my way to London. We have our conference in London next week. going to meet a lot of clients in the next few days. So it's been a good couple of weeks. But, you know, tough time to be away from the U.S., given all the activity over there. Yeah, but you have an international perspective on the election. I do.

What is that like? Of course, we're talking about the election, right? The U.S. election. That's what we're talking about. That's what we're talking. Yeah. I think there's a fair amount. amount I'd have to say intrepidation over here. They're nervous about trade war tariffs.

They're worried about a lot of geopolitical issues. I mean, of course, what's going to happen with Ukraine? Will that, and I think there's a general consensus that the Trump administration is going to put pressure on Ukraine to come to terms with Russia quickly. And what does that mean? You know, one positive perspective was, well, that might be near-term positive because the war is over, but then what does that mean for the longer run, you know, particularly if Putin is empowered by that, that move? They're worried about NATO. You know, President Trump has talked skeptically of NATO and what the future there is. And, you know, that goes to their security, so they're quite nervous about that. Oh, and of course, some nervousness around the fact that they're probably going to have to

ante up more for their own defense. Interestingly, they all feel like, well, you know, we probably should do that. You know, we agreed to 2% of GDP going to defense. So, you know, but nonetheless, you know, having to do that is going to be very difficult financially given their fiscal situation and given all the other demands that they have in terms of trying to improve their productivity and underlying growth rates. You know, Mario Draghi, the former head of the ECB and a former Prime Minister of Italy, and what else?

He's been kind of a fixture in European matters since the financial crisis or even before. He came out with a study focused on why. why Europe is lagging the United States in terms of productivity growth, something we were talking about last week, and what to do about it, and what to do about it requires resources, requires cash. And so if more of it's going to defense, that means less for, you know, whatever else that can be done to improve productivity. So I'd say a fair amount of hand-wringing over here, you know, about that. Were they surprised by the result, do you think? Yeah. Not so much that Trump President Trump won, because that seemed like a real possibility.

Right. You know, even in our scenarios, we attach to an equal probability to him winning being president than with Harris. So that, I don't think that was particularly a surprise, but the way he won, he won with a pretty significant majority. I mean, he won the popular vote. By what, five, six million votes, I think. So, you know, that's not, not inconsequential.

So I think that was surprising. Were you surprised by that, Marissa, by the size of his victory? Sort of. I mean, I was sort of bracing myself for the polls to be wrong because they have been in the past. But, yeah, ultimately, I think, ultimately, I was surprised that, you know, he didn't win a single swing state, right? Like every single swing state, I think, went to him. him. And so it was just that was surprising. I stopped kind of paying attention when he, because Nevada, Arizona, did they? I guess, yeah, Nevada and Arizona, I believe, went to him.

Okay. So he got every, I kind of stopped paying attention to. But yeah, the fact that he won every single swing state was surprising to me. Right. Pennsylvania, Mark, you know, Georgia, North Carolina, like the whole blue wall was down. Right. So that, that was surprising. to me. Not surprised that he won, but surprised that it was that. Yeah, that big. Widespread. Yeah. Chris, what about you? Were you surprised by that? Not so surprised by, again, I guess with Mercer. Not so surprised that he won, but yeah. But the margin of victory was so wide, right? The polls kind of threw us off there again. Right, right. Well, you know, one reason that is being put forward for the, for what happened,

for the size of his victory is the so-called, if you want to put it into a phrase, the vibe session that people just aren't feeling it. I mean, even all this happy talk from economists like us, like me, I mean, obviously the economy is performing very well, but that isn't resonating with many Americans given the fact they're paying a lot higher price for many things compared to a couple, three years ago, you know, rent and food and to a less degree gasoline. Do you think that's what's going on here? Do you think that a big part of it, Chris?

I think so, certainly. That's at least what, again, well, if you trust the polls, people say that that's certainly one of the criticisms. Yeah, I think that has a lot to do with it. And then I think a lot has to do with the messaging, right? I've been thinking about that a lot as well. You know, if the situation was reversed and Trump had been given the card of economic indicators that we have today, how would the messaging have been different? Right.

Well, you know, he would have downplayed the inflation certainly and upplayed all the other good things that are going right in the economy. So I think that certainly has part of the reason why he was victorious. he was able to play his cards very well. Yeah, yeah. Marissa, by obsession, you think that's a big part of what happened? Yeah, I think it's more than just, we get asked this. We've talked about this so much, right? Why do we think the economy is so good?

I mean, we've said it's the best ever, maybe. Yeah. But the average person does not. And it's really, it's every, everybody, I mean, every single demographic group, even the ones that went majority for Kamala Harris leaned more right in this election than they had in 2020, right? So even the margins by which she won, every single demographic group, age, sex, race, income were less for her than they were for Biden. 2020. So I don't even think it's like this TikTok thing we've talked about, right, among young people. I think it's really everybody from all walks of life is feeling like they are being squeezed and they're upset about what they perceive to be still high inflation and high prices. And I

100% agree with Chris that I think the Democrats just they keep doing it. They just keep falling down on the messaging in every election. And the Republicans are kicking their butt when it comes to how to message things. Well, you know, it's interesting. This vibe session, it's definitely here in Europe. I mean, even abstracting from the election results, which, you know, obviously made people more nervous. And in my visits, especially what I find, I'm learning from my visits with, you know, here in Italy, and I didn't mention, but I was also in Brussels, a meeting with a lot of European Commission officials and give a presentation there. And what I find most interesting, disconcerting, worrisome is that young people, people in their 30s are really very nervous about things.

I mean, to me, surprisingly nervous. I ran across this, I'm going to tell you who, Italian woman in her 30, she was 39. I asked, after I, I was a little, once I asked, I felt a little reticent about asking her, but she was very good about it, because I was very curious how old she was because of the conversation we were having.

And she was saying that she wants to buy a car, Now, I should say she's working a very professional job in a government institution that is, you know, backstops a lot of trade that Italian companies do, kind of like the XM bank, you know, in the United States. And she won't buy the car. She wants to buy the car. She's got it picked out. She told me the make and the model of the car, but she's not going to do it because she's, she's, she's, She's, in her words, nervous. She mentioned to me the flooding in Valencia as a reason

because her home, she has a home. It's close to a river. She's afraid that same thing could happen to her that happens to the folks in Spain. I just found that so really fascinating. And it dovetailed with the conversation I had at the Bank of Italy because the folks there, and I'm not saying anyone is,

doesn't know that the saving rate in Italy and in Europe, I think more broadly, is on the rise. That it started to rise and to the point where their models aren't working. So they have a model that forecasts economic growth and consumer spending. And the amount of consumer spending they're getting is well below what they expect, the saving rate is rising. And the question is to, you know, why, you know, what's going on? And their theory was so-called precautionary saving, this vibe session. You know, these people, folks are very nervous.

And if you got a lot of people like that 39-year-old who isn't going to buy that car, that's a problem. That's a problem. Actually, another interesting point in the context of the election and what may follow, this becomes even more important in the context of a trade war. Because if you have tariffs and trade war, and you can't get growth from external trade, which the Italians and the rest of Europeans do. It's a big driver of their economy.

If they can't get that growth, then they've got to have domestic demand. You kind of drive the train, but that's not happening. The saving rate is rising. So just really very fascinating. So other things she was worried about? Because I kind of questioned her and what's going on. Of course, the Middle East, what's going on in the Middle East? Obviously, Ukraine and in Russia, what's going on there?

and now, of course, the election in the United States. So I found that, you know, very, very fascinating. So this so-called vibe session is really, it's real. It's having real life implications, I think. You know, it's a big deal. Chris, the other thing that I found perplexing, we talked a little bit, maybe a little bit about it last week, what's going on in financial markets.

You know, in the post-election period, in the last few days, we've seen a rally in stock prices in what we talked about last week, an increase in bond yields. They've come back a little bit in the last day or two, but they're still up a lot from where they were a few months, a couple months ago. The dollar is up, crypto prices are up, credit spreads are down, narrow. That's the difference between yields on corporate bonds and treasury yields, which measures the kind of the risk in those bonds, the credit risk in those bonds. That's become thinner. So markets have really moved here in recent weeks and certainly since the election. What do you think is going on? How do you interpret all these moves in the financial markets?

What are they saying about what investors are thinking is going to happen here? Well, it's certainly all policy driven, our assumptions of policy. So tax rates, corporate tax rates likely to be cut to 15%. That's certainly positive for equities, right? You know, universally. So that kind of explains that rally. The assumption of increased deficits, additional spending, tax, even if we just, if we did nothing else but just extend the Tax Cut Jobs Act, right? We're talking deficits. So there's going to be additional deficits. That's going to, you know, require additional bond issuance. That explains the higher yields on bonds, right? I think of the short term, certainly all arrows point to growth, right? We're going to get this

a little bit of a sugar rush, perhaps, with these tax cuts. So it's all positive, at least for this foreseeable future here. Even with, I mean, if terrorists come along, it's going to take some time for those to go into effect, right? The deportations also unlikely that that's, you know, a day, maybe a day one decision, but in terms of actually seeing the effects of that on the economy, it's going to take some time. So I think, I think that explains the rally mode that we're in. The crypto, I think, is a combination of more favorable treatment of crypto, right? That's been promised that the government's going to open up or allow more activities, provide a little bit more just enough regulatory guidance to give investors more confidence in that market,

but not so much that it cripples it. That at least that's the vibe I'm hearing. And then maybe you do have inflation investors looking at crypto as an inflation hedge potentially. So both of those factors might be driving that upward. Right, right. Marissa, the same interpretation of the market action we've seen? Yeah, I think businesses are, I like your sugar rush announcement. Chris. I think, you know, businesses are happy that tax rates likely coming down,

regulations, loosening or going away. That would explain the rally in the stock market. And yeah, I think everybody who's analyzed the plans of Trump and Harris have seen that under Trump's proposed policies, that deficits in debt widen out. So it's probably likely a reaction to what his policy proposals look to be over the course of the next four years. Yeah, I think when he talks about corporate tax cuts, you know, going from a 21% rate to a 15, although it's not quite clear that means to all corporations or domestic companies or domestic manufacturers. I'm not sure, but I think the interpretation is kind of broader-based corporate tax rates.

That one-for-one is a lift to stock prices, right? That means after-tax corporate profits, earnings are higher. I mean, the tax rates lower, the amount of money that's going to the corporation and the shareholder rises. And if you just assume a constant price earnings multiple, you know, price of stock divided by the earnings after-tax earnings, you get a higher stock price by definition. It's just simple arithmetic. So that I think is a big part of the run-up in stock prices. And, of course, if you have more earnings and cash flow, that makes it much less likely you're going to default on a,

on a bond, therefore credit spreads come in, the corporate yield, bond yield comes in relative to the treasury yield. The other thing on the stock, in terms of the stock market, less regulation, right? I mean, in the financial services industry, banking, in telecommunications and technology, in healthcare, fossil fuels, you know, they're more lightly regulated. That means, again, more earnings and, you know, higher stock prices. And then probably, I haven't heard, this, but I think it might be also important. More mergers and acquisitions, right? I mean, I think the Biden administration was looked at M&A, with John Desai. They were, you know, focused on market concentration and pricing. And I suspect that the Trump administration will be

less suspicious of MNA activity, which then again is also positive for stocks. And then, if you have tariffs and you have deportation, which means it disrupts labor markets that are already pretty tight in the construction trades and agriculture, manufacturing, transportation, distribution, retailing, leisure hospitality, and of course deficit-manced tax cuts in a full employment economy, all that is inflationary. And I think we have seen inflation expectations pick up. If you go look at five-year break-evens, which is a measure of inflation expectations, they're up quite a bit in recent weeks. And also more, as you point out, deficits in debt.

And so that explains higher bond yields. So that's how you get to the higher bond yields. So there might be an element of more growth there, but I suspect that's kind of, if I had to list all the factors driving what we're observing in markets, that'd be closer to the bottom of the list at this point. But, you know, okay. I understand we have a lot of listener questions that we've been collecting here over the past few weeks. You want to turn to those?

Marissa, do you have any good ones? And I think you said there's a few of them there are relevant to this conversation. Yeah, there's quite a lot. I mean, there are two questions just sort of about this vibe session that you were talking about, right? Like we have talked week after week about how good we think the economy is. We're economists. We're looking at broad metrics of the macro economy. We're looking at GDP growth and wage growth and the labor market, right?

We're looking at everything. I mean, fundamentally, why do you think that that is, excuse me, not jiving with the way seemingly most of the country is looking at the economy? And is there something that we need to do better as economists to make people understand how the economy is doing? Or is it just, you know, this is the way people feel about their own financial situation and it is what it is? My sense is that when economists talk about the state of the current economy, they're talking about growth, the GDP jobs. We're talking about unemployment.

They're talking about stock prices, housing values, and inflation, the rate of growth in the prices for goods and services as of this point in time. So, you know, here we are at this point in time. All those things look good. The economy looks like it's on very solid ground. It doesn't account for the fact that we had very high inflation back not long ago, two, three years ago. And that caused the price.

price for many things that we buy, staples, you know, groceries, rent, gasoline are higher, much higher than they were three years ago. I mean, I think groceries are 20, 25 percent higher. Even though the inflation for grocery inflation is moderated and is back close to, you know, prices aren't really rising all that much. There's some items that are for very idiosyncratic reasons, like, you know, egg prices are up a lot because of avian flow. But, you know, if you look across all groceries, the prices for those things haven't risen all that much over the past year, but they are still up 20, 25 percent from where they were three years ago. So rent, the same thing. Rents are flat. They've gone nowhere on rents, probably not for a couple of years. But they're also

up 20, 25 percent from where they were three years ago, three, four years ago. Gasoline, that's less of an issue now, but still, that's up as well. So, you know, when people think about their financial situation and by extension of the economy, they're still paying a lot for those items that they need and their incomes in many cases on average have risen consistent with that, but just barely consistent with that. They're certainly not, we're not seeing wage gains that are higher than that. And that's on average. So that means half the population is experiencing wage gains that are less over this three-year period

that are less than, and I'm picking three years, you know, roughly speaking, three, three, and a half, four years, something like that during this period. Their wage gains have not kept pace with, you know, the prices for these things. And so they're kind of so-called real income, real purchasing power has been depressed. The other thing is for many of the folks that are really upset, when inflation was high, they turned to credit cards and consumer finance loans in other debt vehicles to kind of supplement their income to maintain their purchasing power in the face of the high inflation. And, you know, it's one thing when rates were very, very low and they were borrowing back in

2021 and early 22. But now rates are very high. The average credit card rate, I think it's 23, 24%, which is just crazy high. I mean, can you imagine that? That's usurious. It feels usurious. It's a record high. And so you're paying a lot of interest on what you borrowed to help supplement your income just not too long ago, you know, two, three, four years ago.

And, you know, that's just made life even more difficult for you. And a lot of the, a lot of the folks that are, again, really, really upset, you know, they don't, they don't own stocks. You know, they haven't enjoyed the run up in stock values. In many cases, they don't even own their own home. I mean, two thirds of Americans do, but one third don't. And the one third that don't, you know, they haven't enjoyed the run-up in house prices. And by the way, that means it's much less likely they'll ever be able to afford to buy a home if they want to. You know, the first time potential first-time home buyer has really been sidelined here.

So that'd be my sense of it that, you know, that's what's going on. You know, there's no game-changing event here that, you know, will change that, the reality of that. it's something that only change over time, you know, assuming that the economy remains good, unemployment law, wage growth strong, inflation, you know, as low as it is, people will steadily feel better, you know, as we go forward. So, you know, I don't know that there's anything that can change people's perceptions of that. I will say also, I think politics have played a role. I mean, you know, if not for the election and everyone, you know, hitting a situation, you know, other over the head and making an issue and spinning, you know, the data and the reality of things,

I think that is also played a role. Because you can look at consumer, we've talked about this in the past, if you look at consumer sentiment surveys that like the University of Michigan, if you're a Republican, you're feeling a lot worse about things than if you're a Democrat. So that just goes to the fact that, you know, people's perceptions are colored by their political kind of perspective. It's much deeper and broader than that. Trump won and he won by a good amount, so it's much deeper than that. But that, I feel confident as part of the story that, you know, the politics that we've been, environment that we've been in

has, you know, exacerbated that the vibe session, you know, this feeling that I'm being left behind. Chris, what do you think? Yeah, I think that that makes a lot of sense. I guess what I would add to that, what I've been thinking about is just how people's perceptions of their own economy are different as well. Right. So even if we just focus on households, individuals who actually have seen their incomes keep up with inflation or even exceed, right? Maybe slightly faster than that inflation. Even those people are upset, right? They're feeling the pinch as well. I think there's a difference in how people view income growth, right? So they're seeing their incomes rise. I think people put that in the boxes. Well, I earn that. Right. That's because of my performance. That's, you know, that's a,

that's a reward for what I've been doing and achieving. But that price increase that they're seeing, the inflationary increase that they're seeing, that's a tax. That's, you know, that's external to me and that's not fair, right? That's being imposed on me. You know, whatever the source of that is. And then we can go into kind of some of the politics in terms of blaming certain individuals or situations, whatever.

But I think at its core, I think that's part of the vibe session. It's just in terms of how people view the different forces. going on. So even if, again, real wages, real incomes might actually be improved, even if wealth is up, right? I feel I am wealthier, but still, that price really bothers me because that's an external force. That doesn't, that's not because that's not the result of a good investment decision I made. That's the result of some other external force that's been imposed on me. So that's, I think, part of the issue as well. And now I'm thinking, and I kind of post this to you in an email mark, is this an election kind of a referendum on the Fed's dual mandate as well? Should the Fed

now, based on this, really be focused much more on price stability, lower inflation, and less on full employment, right? I'm not saying that it goes to zero. It's all about price stability. But maybe the weighting, which historically you could have said it was 50-50, both are important. Maybe it's not. Maybe they should be putting a little bit more emphasis. on prices and more hawkish policy versus, you know, bearing in mind the full employment. I don't know. What do you think of that? It's a very interesting thought and definitely worth exploring.

My instinct is we only feel that way now. When unemployment's high, we're going to feel very differently. So I'm not so sure, you know, I would change the weights. And once you change the weights, then it feels like we're going into recession. Think about if the weights were, you know, two-thirds, one-third in this last couple of years. We'd be in recession by now. We would. We would.

For no good reason. But prices would be low. Prices would be low. Yeah. But for no good reason. I don't know. I don't think that would land us in a good place. But, you know, if you go to other parts of the world, I think most other parts of the world,

developed world, central banks put a much higher weight on inflation. In fact, in many cases, like the European Central Bank doesn't, it's all on inflation, right? They have one objective, and that's low inflation. Although that's a good case and point. They made some pretty egregious errors because of that, right, over the years, you know. That's right. I remember one episode when I was in Europe in, I think it was 2011 in the, was a 2011? It was very clear, I think we were just coming out of the financial crisis. And they prematurely raised interest rate. And that may have been one of the causes of the European sovereign debt crisis that soon followed. It completely crushed their economy. It was like the most crazy thing to do. I remember being in Germany, the Germans really,

they wanted this, right? Because they're all about they were at that time in particular, they're all about the single mandate, low and stable inflation. And they crush their economy. And I think That's a good case study. If you want to change the weights, go take a look at what happened there. I'm not so sure that I would do that. But anyway, it's an interesting thought. I don't, Mercy, have any views on this, you know, why people are feeling the way they are? Yeah, I think let's take the job market, right?

The job market is, I think, objectively great. The unemployment rate is low. It's been low for years. we're not seeing massive layoffs. But for your average American, they don't really care what the unemployment rate is as long as they have a job, right? But with prices, that's something everybody faces

every single day. And so whether GDP growth is 2.5 or 2%, or the unemployment rate is 4.1 or 4.5. that doesn't, who cares, right, to your day to day life if you have a job and you're still getting a paycheck. But when you're out living your life and going to the grocery store and booking flights and hotel rooms and paying for daycare and going grocery shopping, that's something every single day that you face. And people are, I just get a sense, people are really, angry and they are, there's a sense that it's not fair, right? There's a sense of this unfairness. I mean,

even when I talk to sort of the people in my sphere and they're constantly asking me about this, and these are well-educated people with good jobs who make good money. And there's a sense of like, I don't understand why, you know, I get, I get what happened during the pandemic. I get the supply chain stuff. I get Russia, Ukraine, I get the spike in energy prices that resulted. I understand why goods prices were high. But why is it now when I go to a hotel, there's a list of 20 fees I have to pay and to park my car overnight. It's now $75 a day. And it used to be 50. Like, what explains that? You know, it just seems like corporate breed. It just seems like companies trying to just squeeze every little bit that they can. And it's this real palpable anger from people that I see

all across the board when I talk to people. And that is something we all, I mean, it gets me upset too some of this stuff that I see, right? So I just think it's, it's, this is like a universal part of the economy that everybody interacts with every second of the day. That's American consumerism that we all see. So all these other statistics about the economy don't matter to anybody except us on this call, right, who are trying to make assessments of the broader economy. Your average person doesn't really care. Yeah, no, that's a great point. I'm going to throw out one other thing, and I might not articulate this well, but it's exacerbating this kind of discomfort with regard to people's financial situation is just a general angst about

everything that's going on in the world, that may be lots of reasons, because there's a lot of things going on in the world that are just not fun to, they're very disturbing to look at. but it's amplified by our media, by our social media. Like that, I go back to that 39-year-old Italian woman worried about the flooding in Valencia. You know, I pointed out to her that that kind of flooding probably happened 100 years ago, but you didn't even know about it because there was no way to know about it, right? So, and even more, 100 years ago, no government is going to come to your rescue. I mean, I know the Spanish people are very upset that the Spanish government didn't come to the rescue more quickly, but, you know, they eventually came.

100 years ago, I'm pretty sure no one came. You're on your own. You know, so, and you didn't have insurance. You know, many people have insurance that can help them, you know, kind of navigate through on the other side. But you're, you know, there's, so if it's the same kinds of things that are happening over the years and the decades in the millennia, but you know about it. firsthand and you know about it viscerally. You can see the pictures. You can see, you know, kids that are, or dogs or animals that are struggling, you know, it affects you much more deeply, much more quickly. So I wonder if, you know, we're just the vibe session and our angst around the economy is just, you know, even more amplified by the fact that we've got all these things going on around us and they're in our face all the time.

And it's feeding on each other. It's feeding on it. It's just reinforcing each of these interactions that are occurring that are just reinforcing these and are thinking about what's going on. Let me ask you this. And this is sort of a corollary to this question. Do you think there's anything that, let's say, Vice President Harris's campaign should have done differently in terms of messaging around the economy and inflation? Well, yeah, I think there was probably a couple things that were just kind of errors. Like, you know, when B.P. Harris was asked, was there anything in the Biden administration that she could have done differently?

And she said, no, I can't think of anything. That was probably, that was a mistake, you know, because there are things they should have done better and differently. And I think she could have handled something like that, you know, that kind of a question. And turn that to her advantage as opposed to making that, you know, something that, you know, people said, well, really? And you can't, you don't think if there's nothing you could have done differently, then you're not going to solve my problem going forward for sure. You know, so I think that's the case. What more substantively, pretty tough, right? Think about it. I mean, it's the Federal Reserve's job to get inflation back down, not fiscal policymakers.

That's certainly not quickly. And, you know, there are things you can do, but they play out over long periods of time. Like her housing plan to increase supply to help moderate house price and rent increases, which goes to the cost of, you know, cost of housing. Or, you know, her focus on prescription drug pricing. You know, she did focus on food prices via gouging. And, you know, that might have turned some people off, but it, you know, goes back to your point that people feel like they're getting ripped off.

So that actually resonated with people, a lot of people, because, you know, they felt like they're getting ripped off. But to your interesting question, substantively, probably hard, pretty hard, not something you can solve very easily. Because you're talking about getting prices back down. You're not talking, you know, you accomplish getting the rate of growth down. Inflation is low and stable, but actually getting prices back down. I mean, yeah, that's a tough one. certainly in a reasonable period of time. Anyway, you want to pose another question?

That was a really good one consistent with that. Yeah, I'll just add one thing to that one, which is, sure, I agree. There's not much that she could do in the capacity of the president to get prices down. But I don't know why they didn't go after Trump's policies being inflationary more. I mean, people are upset about inflation. She was all about the national sales tax, the tariffs of national sales tax. I mean, it's $4,000 per household, if he got what he wanted. They should have hammered that more.

I mean, I just think people are upset about inflation, but they just elected somebody whose policies are highly inflationary. And I don't think it's going to happen. We don't know, right? We don't know how the tariff thing is going to play out in over what time period. This isn't going to be like a day one thing. It may not even be 2025. It might be 2026.

But putting a 10% tariff on every import, 60% tariffs on China, even if it's not that, tax cuts for very wealthy people, all of these things are inflationary. And she could have harped on that more, I think. Yeah. I don't know. That's a tough one. I'm not sure. But you're absolutely right. I mean, it's fascinating. It's really, I think the word is ironic. I always have to use that word because I'm not sure what it really means. But this feels ironic to me. This feels ironic. People voted her out because of inflation, the higher prices. And his policies are inflationary. But to convince somebody of that. And that's the other thing. I was reading that. made this typical. I think it was Peter Coy in the Wall Street Journal wrote about economists are also big losers here because no one is paying any attention to us. We say this, but you guys aren't really, you don't know what you're talking about.

So I don't know. Yeah, and we've actually gotten questions about that. Like, as economists, what's our responsibility in terms of getting this, message out to people and how do we more accurately explain things so people understand the difference between, you know, year on year, CPI growth and month on month and what is inflation and, you know, do we have a responsibility in this sphere as well? Or do people, or do people even listen? I don't, other than the people listening to this podcast, you know. I believe in on Chris. It's just Chris's fault. That's all I know. Somehow, some way. I think it also,

comes down back to interpretation, right? I think a lot of voters, they don't expect that the tariffs are actually going to go through, that this is a, this is a negotiating tactic. Right. You know, President Xi is going to call up President Trump and they'll work it out, you know, try to buy two trillion dollars worth of goods and we won't actually go down the tariff. I think that there's still that uncertainty. I'm sure you're right. I'm sure. The more I read post-election, the more I'm confident that we're going down the tariff path and the deportation path.

I think we are. I think we are. Pretty soon, not 2026. This is a 2025 event. Because he's ready, he's raring to go. The president Trump's raring to go. And it just feels like this is going to happen. I do think the tariff thing is going to be in negotiation, though, probably over the

course of several years and they'll make changes to it. And people, other countries will relent and retaliate. And it's going to be this back and forth thing, I think. I mean, yeah, I think that he'll certainly start the process of all of this stuff on day one. And I don't know why people would think that he's not serious or he's just saying things. I mean, we saw in his first term in office, he tried to execute or did execute on pretty much everything that he said in one form or another. So I don't know why people wouldn't believe that he's going to do these things. I absolutely believe he's going to try.

And now he has a Congress behind him, right? So it's going to be much easier to do a lot of these things than it was during his first term in office. Yeah, I agree. I think it's a question of degree, right? Yeah, yeah, exactly. That's what I mean by negotiation. Yeah, so it'll be something, though. It'll be higher than what it is today, certainly.

Yeah. Well, the other thing to consider is even if it's a negotiation, that creates a consequence, right? Because that creates a ton of uncertainty for businesses. which products have a tariff, which countries, you know, over what period of time? I mean, I was just looking at a list of products that have tariffs on them already. You look at this and you go, oh, my gosh, this is like incredibly complex, you know, very complex. So for a lot of these businesses trying to figure that out, they're just going to throw up their hands and say, you know, I can't figure this out. And if you can't figure it out, you just stop.

You stop investing. You stop improving supply chain resilience, which adds to lowers productivity and adds to cost and inflation. So there is a cost borne by the uncertainty created by what certainly will be a negotiate. You're right. There's going to be negotiation. But if it takes a couple three years and it's going to do that by itself is going to do some meaningful damage anyway.

Are you expecting a surge in imports or the next couple of quarters? It's happening. It's happening. It's happening. Have you seen the number of containers coming through L.A. Oh, yeah. It's straight up. It's straight up.

Actually, here's the other thing's going to happen. I suspect, just listening to people. They're going to start going buying things that they think might get a tariff. Go buy a washing. You better buy that washing machine. I've heard that. Washing machines, you know, I think there's going to, there might actually be a spurt of spending here pretty soon because people are going to want to get under in before the tariffs

actually take effect. Yeah, I think it'll be a good retail sales holiday season. Yeah. The holiday could be really gangbusters, you know? Could really be gangbusters. Want to take another question? Marissa, do you have another one? I have lots.

Let's just take questions. No game today. No game today. Okay. We're already close to an hour in. Let's take a few more questions. Okay. So we kind of touched on this at the beginning of the conversation, but there's questions about,

okay, now the Fed met this week. They lowered, decided to lower interest rates another 25. Yeah, it's not all about that. Yeah, there was that. That was that. Yes. Right. Right.

So they met the day after the election. They lowered the target rate another 25 basis points. So now we're down 75 basis points from where we started. Why then can you explain the relationship between the Fed's short term moves and why we've actually seen tenure treasury yields rise? And we saw that before the election. So there wasn't, there, there is not this relationship, this tight relationship between what the Fed does and longer term interest rates and certainly not mortgage rates. I mean, mortgage rates actually rose over the last few weeks. They're up around. I don't know what they are. They were yesterday. They were like 6.9%. Right. So the Fed's lowering rates. We're not seeing that translate to mortgage rates or other long term bond yields. So what's what's up with that? Can you explain the relationship there? Chris, did I see you grab some kind of animal?

Yes, my dog is very upset about the monetary policy. Oh, cute doggy. Yeah. Very concerned, I should say. Very, very concerned. So, Chris, you hear the question. It's around what the Fed did, lowering rates, but yet long-term interest rates have risen. The 10-year yield treasury yield is up.

I was just looking at this earlier, 0.7. 75 percentage points, 70, 75 basis points since hitting a low back in early September. What's going on? How do you explain that? Yeah, I think it's a difference between the short term and long term. Short term, we're still on the right path, right, in terms of inflation coming in. We've continued to see pretty good reports. Rent, growth is moderating, right?

We could see things kind of moving in that right direction. but now there is concern about that longer run fiscal trajectory in particular. So I keep coming back to the deficits and the debt, but then also the tariffs, the other policies that could be inflationary. Those would be longer term. And that therefore requires a higher yield in the 10-year and the longer-term rates, mortgage rates up substantially as well. So then you're saying this was kind of all being baked in even prior to the election?

I think the probabilities were certainly shifting in that direction. It's a really interesting chart in terms of, what was it? The increase in the 10 year and so the expectations, if you will, and the betting markets, right? Yeah, absolutely. It was one for one, right? As the probability of Trump winning went up, you know, bond investors were taking that to heart and immediately pushing up the bond yield. Yeah, I mean, I think the recent low in the tenure was like 3.7, 3.65%. That was early September. That's when Harris was leading the most in the polls. That was the apex of her popularity. And the betting markets thought that she had a chance to win. Since that point in time, things changed dramatically. And by the time of the election, betting markets were, saying Trump's going to win. And of course, Trump did win. And 10-year yields are up now to

three, excuse me, 4.3, 4.35 percent. That's that 70, 75 basis point increase. And in my mind, that goes to inflation, inflation expectations, right? I'm going to have tariffs. I'm going to have deportation. I'm going to have deficit finance tax cut in a full employment economy. That's inflation. So that adds to 10-year treasury yields relative to what the Fed's doing. And then I'm also going have more debt, bigger deficits in debt, and that adds to the so-called term premium that, again, goes to the difference between short and long-term interest rates. So in my mind, it's really about the election and the election results. That's why we've seen this disconnect between, you know, what the Fed is doing and what

10-year treasury yields are doing. And, of course, the 30-year fixed rate mortgage is tied to the 10-year treasury yield plus a spread. And that spread also has widened, I think, a little bit here. because, you know, the increased volatility in interest rates that we're observing in this environment, because there's a lot of uncertainty. Things are moving around quite a bit. And the market itself has got all kinds of structural issues.

Broker dealers aren't expanding their balance sheets to be consistent with the growth in the amount of debt outstanding. So you see all this, you know, two, three decades ago, a two, three basis point moving to 10-year yield was a big deal in a given day. Now it's moving 20, 30 basis points in the end. an hour, you know, and that adds to volatility. That add, that volatility adds to the so-called prepayment risk. I'm not going to go down and explain that, but it's just jargon for fixed mortgage rates are going to be higher because of the volatility and interest rates. So that's, that's also been, goes right back to the election. So Fed Governor's Andy, what do you do next month? I keep cutting, you know, because I've achieved my goals. I have two goals, full employment,

check. I have a 4% unemployment rate, rock solid. And the other objective is low and stable inflation. The definition is a 2% inflation rate on a consumer expenditure deflator. I've achieved that, check. So therefore, the federal funds rate, the rate I control, should be consistent with its so-called equilibrium rate, that rate at which it's neither supporting or restraining growth. And I think there's appropriately widespread agreement that even with the cut in rate so far, it's still too high.

You know, four and three quarters is still well above that equilibrium rate. So I keep cutting until I get to 4%-ish, and then I might slow, you know, at that point. So that would be a December rate cut. We've got one in November. We'll get another one in December. Maybe in January. there's another meeting in January and then in March, you know, something like that.

But once I get to four, then I slow up because there's a lot of uncertainty with that equilibrium rate is and, you know, could be as high as 4%. So then I slow, take a look around and make decisions after that. Do you take? Do you anticipate policies in the future? So we get to February. Yeah. If we do see tariffs are destined to rise, do you take that in?

slow down, right? I mean, I cut in December, I cut in January, that puts the fund rate at four and a quarter, you know, maybe in March, depending on what's going on with President Trump and fiscal policy. Maybe not, you know, tariffs are coming. Deportations, I say, oh, I don't know what that implies for inflation. I'm going to slow up here. And by the way, they're also focused on inflation expectations, not just about inflation. That's right. It's inflation expectations, and they're up. So that would argue they should slow. They should slow. they should slow up their rate cutting. So that would argue for them to slow, to pause on their rate cutting to see, you know,

exactly what the Trump administration has in mind and let the dust settle before they start cutting rates again, I think. Yeah. What do you say? I agree with you. I agree with you. Yeah. I think we're going to see a slower path.

Certainly. Do you want to know, Dean Attali, would you agree? Yeah. Yeah. And I don't know if you guys watched the press conference. Oh, that was great. I was press conference and read the statement. And, you know, they were in the statement, they addressed the election.

They basically said, we're not factoring this into our near-term policy decisions because we don't know what fiscal policy is going to look like. We're not in the business of speculating what's going to happen. And we're just focused on our dual mandate right now. And as far as we can see, the risks, you know, between the labor market and inflation are balanced. So we're just going to keep marching ahead until we have more information. And then in the press conference, which was kind of funny, if you haven't watched it,

you should go watch clips of it. Jay Powell was asked several times about whether if Donald Trump or someone in the administration asked him to resign, which has been bloated around, right? His term doesn't end until the middle of 26. and he just gave a very terse, no, I won't resign. And then the reporter said, can you elaborate that on that? And he said, no. And then there was a follow-up question,

do you think it's legal if they asked you to resign? He said, no, it's not allowed under the law to basically mess with the FOMC before people's terms are up. I have to tell you, though, if President Trump, say, March, April says, I want the chair of the Federal Reserve to resign. I want to put my own person in there. I don't trust what he's doing. I know J. Powell probably has a legal authority to say no, but would he actually say no? Would he actually say no? Well, the irony is that J. Powell was Donald Trump's pick for. There's that word again. Yes. It's everywhere. That is his person. Yeah. Yeah, I saw that clip here in Europe. And what I found even most amusing was the reporter was totally flummoxed. You know, you know.

Yeah, she said, back to you to resign. You say more? No. Can you see something more about that? Elaborate on the piece. No. I thought that was great. Good for him.

Good for him. But back to the 10-year yield and long-term bond yield thing, I mean, basically, like, the Fed is cutting. They've cut 75 basis points, but sort of almost gone nowhere because inflation expectations are up. Bond yields are up because of this expectation that Trump's policies will be inflationary, and the debt-to-GDP ratio will expand over time. So the fact that they've cut 75 basis points almost hasn't really done much. Yeah. The irony of the irony is that President Trump would be better off if J-PAL doesn't leave because if he left and the 10-year-year-old would go scound. And, you know, the fixed mortgage rate

would be 8%. So he's actually saving him by not leaving. Yeah. Great, great point. All right. Let's take one more question. How about some, this is a really, this one is kind of near and dear to my heart. I don't really know the answer to it, but I think it's a good question. Oh, okay. My favorite kind of question. One that I don't know the answer to or just... Well, I'm assuming I don't know. I don't know the answer either. So this is around economic data integrity. So this listener said, thinking about the incoming administration, this is a bit of a biased question, I will say. I'm wondering what kind of checks exist at our federal reporting agencies

to publish accurate data. Is there a way to confirm that numbers, for example, in the jobs report are accurate and have not been tampered with? And I'll say that over the years, well, really, since Donald Trump came on the scene,

there's been these repeated accusations that the jobs report has been tampered with in some way by whatever Democratic administration is in office. I used to work at the Bureau of Labor Statistics. I used to write the employment situation report on a rotating basis with my colleagues and have some insight into this. But do either of you, and Chris, you worked in federal government too.

I don't know if you were ever in an agency where you had to have security clearance to, well, sort of outside government, I guess. Vanney made. Yeah, but that was a private institution when you were there, right? Yes, with a strong government influence. Okay, okay, fair enough. Okay, fair enough. So, I mean, I'm happy to talk about this, having been in this, but do you guys have anything to? Well, my first reaction is, oh, geez, we're now questioning every single institution that we have, and we distrust every single institution we have.

And that goes to the core of a well-functioning democracy. If you don't trust your institutions, if you don't trust the Bureau of Labor Statistics or the Federal Reserve or Consumer Financial Protection Bureau of whomever it is, you don't trust your government. Democracy becomes more difficult. It's just more fragile. It's not going to work. So I find that such a worrisome question, disturbing question.

but I'll let you respond to do you think the BLS or other government statistical agencies have been compromised in any way politically? I don't think I'll defend. I've certainly I've

I've colleagues in these institutions. I've worked with folks. These are professionals with the highest degree of integrity, right? People who are generally trying to do the best job. in terms of measurement. So I don't see this as a risk at all that someone would be compromised to, you know, fudge the numbers here. I am more concerned about the very real problems we've

seen in terms of response rates, right, in terms of survey response rates and some of the data, right? I worried about that response rate going down. So the numbers may be inaccurate it because of, you know, the data collection process, but not because someone is putting their thumb on the scale. I see a difference or a, what gives me some hope is that, you know, we live in this very open society. We have a lot of other data sources now, too, that we can look at when we think about the labor market.

We don't, we don't rely just on the BLS statistics, although they are still the gold standard. But we have other confirming data or other data that we can use to test. know, whether or not the numbers coming out of the BLS are accurate or not or reasonable or not. And we have private sources, other private sources. We have some other kind of state or local government sources. So we have a richness of data still that we can look to to test whether or not someone actually is attempting to manipulate the data. So I'd be much more, again, I'm worried about the data collection.

And then I would be worried about the narratives that get spun around the numbers, right? That's another issue. But the number itself, I think we have, again, high integrity individuals in these agencies who are, you know, they're just focused on doing the best job possible with the data that they have. Can I say, though, I do worry a little bit about it. I mean, do you remember President Trump in his first term front ran the BLS employment report? One report? He kind of said, he put forward the number or gave people a sense of what the number was going to be before the number was actually released. least. So that's a problem with the process. So, yeah, certainly I'd be worried about that, but I don't

think he gave a false number, right? No, I don't think so. And I think the number was accurate. No, no, no, no. He didn't follow the right protocols. Yeah, that's very important, though. I don't remember that. Yeah, it goes to the integrity of the process, doesn't it? I mean, if he's, yeah, it's certainly, certainly. So that, that, that's definitely. I'm what I, I would be concerned about some of those procedural things, whether he knew what the right procedure. is and didn't follow it or just was ignorant of it. I don't know. So I'd be concerned about that.

But not, again, I think there's this conspiracy theory has been put forward several times over the last decade in terms of folks actually within the BLS, you know, changing the numbers. Can I ask, Marissa, from your experience, is that even possible because there's like so many moving parts here? Players, yeah. There's so many people involved and all of these people have. a certain level of security clearance. So if you come in contact with a market-moving economic statistic,

you have to undergo a background check, right? Like, you have to have to have a level of security clearance. And then the number, you know, the data are actually collected at the US Census Bureau, not by BLS, at least on the household survey side. So if we're talking about the unemployment rate, right, right? right? That's collected by the Census Bureau, the results of the current population survey. It's transmitted to BLS, where the data are then aggregated by a data team. And then it's sent to another group that then is responsible for creating the sort of employment report and writing

up the description of what's going on, the narrative. There's people on both the payroll survey and the household survey offices involved, only the people that need to know, no. So not everybody is aware of what the number is. Only like the handful of people that are actually working on the report in these offices knows. Then at that sort of end of the week,

it goes up to the BLS commissioner. They pour through every single word of the report in agonizing detail, you know, looking at it to make sure it's sort of just a descriptive narrative of what the numbers are. And then it gets transmitted to some key people in the government, like the Council of Economic Advisors, some people in Congress and the president. It's hand-delivered in a envelope. I mean, it's very, it's, there's so many, so many people involved at each individual step, right, that it would be almost impossible

for somebody to come in and change this or manipulate it in any way. Just like every conspiracy theory, it would be too hard and it would involve too many people to actually have any chance of working. Yeah. Okay. Well, it makes me feel better. But I found that that's a really actually disconcerting question that we're thinking along those lines. Oh, and there was, you have to ask the question. Yeah, right. Yeah. Yeah.

It's entertaining the question. Right. There was, you know, last year, the BLS was talking about how Congress was going to cut funding for the BLS and specifically for the current population survey, which is where the unemployment rate comes from. That actually, that did not happen. so the funding was put in place. And the result of that cut to funding was that they were going to cut the sample size of the CPS. So right now, the CPS is 60,000 households across the U.S.

They were going to cut it to something like 50,000 households with reduced funding. It's as of now, budget that was passed this past year, they're not going to cut the sample size of the CPS. But who knows. Sure, we'd be worried about that, right? I think we should be. Yes, I think just given sort of the narrative from this administration about just sort of overall trying to shrink the size of government, drain the swamp, all of the stuff, right? Cutting the number of bureaucrats in government, yeah, that's what I would be the most worried about, is, as Chris said, as just the integrity of the statistics declines because we're not funding these agencies. that collect economic data and think about how important that is. I mean, we wouldn't have jobs

if we didn't have economic statistics coming out of the government. The Federal Reserve wouldn't be able to do its job. They have to look at all these data, right, in order to take a pulse of the economy and figure out what monetary policy is going to be. So it's very important. And I know I come from a statistical background. So I have a lot of strong thoughts on this. But I mean, that that is my fear is that funding will be cut for these agencies, the BEA and the BLS. In the context of what Chris said, the polling response rate anyway, I mean, and I think some central banks are already having trouble in other parts of the world. I think the British are having a real hard time with their unemployment rate, right? They had difficulty measuring it and they've,

I think, fixed the issues, but their response rates have been so low that they were, for a while, they weren't getting, they weren't getting, they couldn't measure the unemployment rate, I think. I hope I don't, I'm stating that, but something along those lines. So it's already happening. So what we're saying is there might not be direct intention to mess with the data, but indirectly through the funding combined with all the other things that are going on anyway around response rates. You know, they could mess up the data to a point where they're going to be a real issue. Yeah.

Yeah. Okay. All right. I think we'll be relying more and more on private sources anyway, right? That's going to happen anyway, right? We're exploring those today. Yeah, we're exploring those. Right.

And actually, we have some really kind of interesting data sets that are helpful in trying to understand what's going on. Not on the job side, though. I'd like to get more information there. Okay. I think we, there's a lot, we cover a lot of ground. I, you know, took a few listener of questions. Didn't play the game, but I think we'll save that for next week.

Anything else you want to bring up before we call it a podcast, Marissa, Chris? You guys are good? Yeah. Okay, I think we're going to call us a podcast, dear listener. I hope you enjoyed the conversation. We'll talk to you next week. Take care now.