Moody's Talks - Inside Economics - Regional CPI and R-Star

Episode Date: May 13, 2022

Mark, Ryan, and Cris discuss the latest data on U.S. consumer prices. The big topic is monetary policy and what the Fed should do and whether the economy is more or less sensitive to changes in interest rates.Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight.  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 co-hosts, Ryan, Ryan Sweet, Director of Real Time Economics, and Chris DeReedies. Chris is the Deputy Chief Economist. Hey, guys, how is smart going? Good. Good. Hey, Chris, I've noticed Ryan is relentless. He's trolling me on Twitter, and he's getting annoyed him because I'm not responding. But, Ryan, in my defense, someone's got to work. I'm like, I'm crab. I can't keep up with. And where do you get these cartoons? I mean, they're not cartoons. They're memes.

Mark, my meme game is pretty strong. So you got to step it up. It's awesome. I mean, I don't know what to do with it. I mean, like I got,

I got to sit, you troll, it trolls is the right word, right? I say, we said trash talk last week, but it's probably trolling, yeah.

What's the difference between trash talking and trolling? Anyway, does anyone know? I don't know. Are they the same thing? Is it trolling behind the scenes? Like you're,

oh, maybe you're syrupitious. you're like a Russian hacker trolling. That's a bot or something. Maybe. It's not like, so when we trash talk, we're right in your face, right? Yeah, I see. I see.

That's how I would define it. So you're not checking the timestamps because I send these things at 11 o'clock, midnight. I know. I'm still working. Oh, that's a good point. Yeah. That's a good point. You're asleep.

I'm up doing work. Yeah. That's, that's, Ryan is the meme master, right? So for anyone in the audience who's looking for a meme, Ryan's your guy. That's true. So, oh, so you're not, you're not trolling me. You're trash talking me. So trash talk is the right word because you're like in my face.

There's no ambiguity who's saying all this stuff. To be honest, it's, it's been a lot of fun. I know, but I, and I will reengage, you know, like when I have a minute to read. That is fun. Take your time. Do I respond to my wife to the client or to Ryan's trash talking? Which would you do? You got to get your priorities.

I know. It's right next Thursday. It's going to be a Thursday. I think about it. You know, he's so clever. I got to think about it. You know, I can't just come back with anything because if I do, I'm, you know. You're just setting yourself up for more.

I know. I guess the most important question is, do you know what that movie was from? Or that meme? Oh, the one about deafening silence or what was that? Now, the one where they're both related, the one where there's three guys sitting in a car that's dressed like a dog. And then there was one where I talked about inflation being transitory. Oh, yeah. No, I don't know.

What movie was that? Yeah. You know, Chris? No. Are you serious? I don't know what you're talking about. Dumb and Dumber? You have to go to Twitter?

Oh, one of the greatest movies. It is. But, you know, unfortunately, I've never watched that movie from start to finish ever. I've only seen clips here and there. My favorite is that of him. Who's that Will Ferrell, right? Will Ferrell. Did you ever see Jim Carrey?

Jim Carrey. Oh, is it Jim Carrey? He's dumb and dumber? Oh, it's not Will Ferrell. No. I'm way off. Will Ferrell, though. I like Will Ferrell.

He's good. That one scene where his, I think it's his daughter, plays the landlord. Have you ever seen this? Yeah, yeah. That's really funny. I think that is just hilarious. Yeah. Anyway, back to business.

consumer price index, CPI inflation, kind of top of mind here for about a year. Maybe some good news, I think, sort of. Maybe what do you think, Ryan? What do you make of the CPI report? Yeah, well, I thought it was a mixed bag because the headline CPI, consumer price index, growth in that moderated month for month, and even year over year came down. I mean, we're still north of 8% on a year ago basis, but we're kind of heading in the right direction. I think the one surprise was core prices, which strips out.

food and energy, which are pretty volatile components and economists, we look at this because this is a pretty good predictor of where future inflation is headed. That actually accelerated month over month, but that has energy written all over it. And even though core CPI excludes energy, there's, you know, the pass-through to other parts of that basket. So look at airfares. You know, higher jet fuel prices led to a double-digit increase in airfare prices. transportation service prices went up. So I think we're moving in the right direction. It's just I think it's going to happen a little bit slower.

But all in all, I think, you know, if you look at the CPI and then you look at the producer price index, which came out yesterday, which, you know, was encouraging, those two feed into the Fed's preferred measure of core inflation, which is the PC deflator. And the core PC deflator is going to be up three tenths of a percent month over month compared to the core CPI, which was. up six-tenths or, you know, less than half, or roughly half. So, you know, all in, when you dig through all the CPI, I mean, I know, Chris, he can chime in on the shelter component. There's starting to be a little whiff with that, you know, that's picking up. So we need a lot of goods

disinflation to offset the services of inflation that's coming in. I think over the next few months, you're going to see the CPI report show more evidence of that. Okay, so there's a lot of cross-currents what you just said. So just a level set. CPI, consumer price inflation overall peaked on a year-over-year basis in March at 8.6 percent, came in April down a bit to 8.3 percent. Correct. The core CPI also decelerate on a year-over-year basis? Yeah, it did. But you're, but, and so you're saying, okay, broadly speaking, we're moving in a, the right direction. Maybe not as good as it looks because core CPI excluding food and energy accelerated a bit in the month. And so we're not kind of that before until we see that happens,

we can't feel like we're kind of definitively moving in the right direction. Yeah, until we see the core CPI settle in month over month into that 2.2%, 3%, 0.3% increase on a month foot to month basis sustained. Then, you know, we're, yeah, we got to get down there first. Right. Okay. And sorry, I'm just closing out my, you know, my outlook here just to, because it's going to be ringing the whole time, showing you how busy I am and why I can't respond to random memes. But anyway, what was I going to say? Oh, there was, now this is really getting into DNA very quickly, but I think it's important. There was a large increase in new vehicle prices, CPI prices. And that runs counter to the, we saw a decline in used vehicle prices. And we've been, you know, obviously we're looking at vehicle prices because that's kind of the poster child for sectors that have been disrupted by global supply chain issues. And if we start to see vehicle prices kind of roll over, that might make us feel a little bit

better about prices for other products that have been disrupted by the supply chains to start coming down too. So can you explain what's going on there? What's the reality of what's going on there? So used car prices have fallen for three consecutive months now, which I think gets to your point that they're starting to roll over, maybe not as fast or as large of a rollover that we would want. But new car prices, that stood out, but there was a methodology change by the BOS, the Bureau of Labor Statistics.

And they switched from, you know, surveying dealerships on what prices were to using transaction data. So, you know, they published the new series versus the old series. ahead of the report, and we could see that the new methodology was running hotter than showing larger increases than the old methodology. And that's one reason why our forecast for the CPI was above the consensus. Right. And just to give people a sense of it, how important this is, I mean, correct me if I'm wrong, but if you go back to March when inflation peaked, it was 8.8.6%. I think in that month, almost two percentage points of that was vehicle prices, I believe.

Is that correct? A little bit more. A little bit more than that. So this is a big deal. It is. Directly big deal, but also what it signifies for the rest of what's going on in supply chains and what it means for prices. So every month what I do is I update our supply chain constrained CPI, which includes

basically what we did is we went through all the bowels of the report and identified what components are being affected by global supply chains. and tops on that list is vehicle prices. But you can add in bedding, furniture, children's apparel. And we added all up in April, it added less than two percentage points to the CPI, whereas the last several months, you know, January, February, March, it was adding well north of two percentage points to year-over-year growth in the CPI. So that is a little glimmer of hope that we're, you know, if that's sustained,

we should see further improvement in the inflation picture. And I guess the other big thing here was, again, oil prices, energy prices more broadly. And that actually picked up a little bit in the month. It fell in. Do I have this right? No, no. Did it come in in April? I can't remember.

Yeah, it came in in April. Cape in April. But it may, oh, actually, it may be a source of increased inflation in May because we saw a little bit of a bounce and oil prices. Yeah, okay. Yeah. And the other area to watch is food prices. Sorry, Chris, just food prices because rising commodity prices for wheat, corn, I mean, across the, you know, pretty much across the board, you know, food prices have been

increasing quite rapidly over the last, you know, several months, and that's likely going to continue. Oh, isn't that mostly energy, too, though, diesel prices, getting things from warm? Okay. So a lot of it just goes back to oil. So as soon as hopefully oil starts heading south, oil prices start heading south, we should start to see some real relief here on the inflation front. Okay.

Chris, I know you're biting at the bit. So what did you want to do? No, no, just, you were talking about energy. Electricity prices were up quite a bit as well. So that's also hitting consumers, right? It's not just oil prices, gas prices directly. Yeah, right. And Ryan alluded to this, but maybe you want to flesh it out, Chris, about the cost of housing.

So rent growth has been very strong and that's now bleeding through in full force into the measures that are in the consumer price index. Yeah, there's a little bit of acceleration in rents, rent growth as well. And we've talked about this in previous sessions that rent is a bit lagging in terms of how new rent increases. Rents, well, increases on new rentals takes time to feed into the CPI calculations. But they are doing so now. And I think 4.8% year over year for rent and owner's equivalent rent. So that's significant. There was a large increase actually in hotel and motel prices, but that's a relatively small

component of the overall CPI, but nonetheless, I think it was like 22% year over year, if I'm not mistaken. Okay. So, you know, if you look at our forecast for CPI inflation, it's, we peaked at 8.5%, excuse me, 8.6% year over year in March. We're going to be closer to five, five and a half percent by December. And we're going to be close to two and a half percent by the end of 2023, December of 2023, which is.

pretty close to, if not on top of the Fed's target, which is two to two and a half percent, depending on which inflation measure you're using. On the CPI, it could be about two and a half percent. Does that feel right to you, Chris? Does that still feel roughly consistent with the way you think things are going to play out here? Yeah, I think so. I'm still, maybe it's optimistic, but I guess it's realistic in the sense that I think the Fed will slam on the brakes. if needed.

So we'll get there. But whether we get there gracefully or not, that's the open question. Yeah, great point. One way or the other, we're getting there. Either everything kind of sticks to script, the pandemic fades, supply chains iron out, oil prices recede as the worst of the fall from Russia's invasion of Ukraine starting to get behind us. You know, and we get back to those more typical kind of inflation numbers we're comfortable with on our own.

Or if that doesn't happen, we're going to be a recession. then recession. If that says enough of this, I'm literally just, I'm going to push you, I'm going to push this economy into recession to get inflation down. Yeah. I'm a little worried about the lockdowns in China over the next few months, that feeding into inflation. So I agree with you and Chris that, you know, the contours of the forecast are correct. We might just, you know, it might just be delayed a little bit because of what goes on in China. Yeah. And that goes to the COVID lockdowns, right, related to Amacron. It feels like it's just going on forever now. I mean, and I guess,

I guess that's the risk because we know Amicron, you just, how do you get, how do you stop Amacron? I mean, it's like, I don't know if these lockdowns, you know, ultimately work. I mean, it feels like you're going to be doing this forever, you know, trying to keep things at bay. That's practically a non-vaccinated or unvaccinated population as well, right? So it's because they were all using the kind of the poor quality Chinese vaccine. Correct.

Yeah, right. So. Yeah. It's highly susceptible to spread. Let me ask you, Ryan, on that front, I know we put a stress index, the supply chain stress index to try to capture these things that are going on in the supply chains, including what's going on in China. Is that starting to tick up higher?

I mean, I know the stress level of stress was very, very high last fall when Delta hit. I think it peaked in the index. And it's an index of freight rates and reports coming out of. purchasing managers, what's going on in the labor market in terms of field position, transportation, distribution, a bunch of things. That peaked in last September, started to come in late last year into this. I haven't looked. What's happened in the last month or two or three?

So the last few months is stabilized. And when we get the new data point, we're just missing one or two inputs that we get next week. It's going to tick back up. And I think that's really tied to what's going on in China with the lockdowns. Right. Something that doesn't feed into the index, but why? I watch is the number of ships that are basically parked offshore on China.

And it looks like an enormous parking lot. It's just that there's so many bottlenecks right now. Oh, boy. Okay. All right. Hopefully, U.S. companies have kind of figured out different ways to source what they need.

Yeah. Okay. That's the risk. That's their point. Correct. Yep. Yeah. Okay.

Let me on that one other question. I mean, obviously going back to vehicle prices in the context of the disruptions to the Chinese production. Have you noticed, is global vehicle production still, and it's off bottom. Is it improving or is it stalled out? Do you have any sense of that? What's going on with global vehicle production? I've seen Mexico, U.S. and Germany.

and overall both of them are rising, but not that quickly. So I don't know what overall global production is, but for those three, it seems like they're starting to move in the right direction. That's a big chunk of it. You're missing Japan, but that's a big chunk of it. Okay. I guess we should watch that very carefully. Okay. Okay.

Anything else on the CPI, consumer price report? Anything else on the inflation front? No. Okay. Any other statistics that came out, and I don't want to take away from the game, but if I am, then to stop me and we'll go right to the game. But is there any other major statistics that came out that you want to call out before we move on? No?

Okay. I noticed the University of Michigan survey. Did you notice that? That came out, I think, today. Yep. To a new low. Yeah. Well, what's crushing that is gasoline prices and a stock market.

Because the University of Michigan survey is very sensitive to personal finances. This is all based on the questions that they ask that's related to. you know, more are related to finances. Yeah, okay. I mean, I'm not overly worried. I mean, I know historically when sentiment falls by a lot in a very short period of time, that's a concern. That's kind of a recession indicator.

But if it's low and stable, it's not great, obviously, but I don't think it's signaling anything going off the rails here. Would that be consistent with your interpretation, Ryan? Yeah, now I've got a new number. Oh, oh, damn. I would have gotten that right then if we played the game. All right, then I'll give it to you. I'll come up a new number for the game, but 40.9.

Negative. Oh, negative 40.9? Oh, this is your differential between income and no. That's Michigan. Oh, University of Michigan survey. Negative 40. It's a combination of different measures and survey, right? Nope, just straight up.

Straight up. It comes right out of the survey. Oh, no, no. You got to calculate it. Oh, that's what I mean. You got to calculate it. Is it something minus something? Is it a decline from peak or something? Yep. Very good, Chris. Yeah.

Oh. So from its post-pandemic peak, not its pre-pendemic peak, but post-pendemic peak. The University of Michigan survey is down 40 points, which is a lot. It's about half almost, isn't it? Yeah. It's a pretty sizable drop. Right. Okay.

Okay. I'll give you one while we're on the topic. This is this part of the game. Are we doing the game? Not really, because we're talking to University of Michigan. This is an appetizer. It's the University of Michigan. So we're already in the ballpark here.

Yeah. But I looked at the report as well, 76.1 and 41.2. I don't know. There's a lot buried into that service. There is. That is. Probably not fair. How deep are you going?

Are we going like buying plans? No, no, top level, but. Is it regional? A demographic. Income group. It's by income group. No. By Democrat versus Republican.

Exactly. Oh, there you go. So for those of you listening on the podcast, I think you really should hug a Republican, if you know one, because 41.2 is the lowest level of consumer sentiment in the history of the data. So they're really feeling it. Hold it. Wait a second. Say that again? Republican sentiment.

41.2 is the lowest in the history of the series. That is amazing. Yeah. The lowest in history. Yes, yes. Going back to the 60s? Whenever the, whenever it started.

Oh, I'd love to know the answer to how far back that. That is incredible. Isn't wild? Yeah. That is wild. Oh, my gosh. Okay. Oh, back to 1980.

Well, still. Still. It's Ronald Reagan. Back to Ronald Reagan. Yeah. Yeah, very, very interesting. Yeah, we're talking Great Recession. Yeah, you're talking Great Recession.

What was it in the Great Recession? Oh, my gosh. Do you have that in front of you? Let me... Well, while you're doing that, let me explain the game because we're going to go dive in the game. Oh, by the way, I should have said up top, the topic at hand here is monetary policy. So we're going to play the game and then we're going to dive into the Fed.

You know, what the Fed has done, what the Fed is going to do, what the Fed should do. Ryan's got a lot of opinions around this. So, you know, we're going to dive deep. 48.2. What was it? 48.2. That is just, yeah. So they're blowing.

You know, when the high, get this. When do you think the Republicans had the highest consumer sentiment? When we invaded Afghanistan with, during Bush, you know, early 90s, no? No. Because confidence was really high. And you would have thought, Republicans. sentiment would have been really, really high. That's not it, though. I should say there's a, you know, there's some gaps in there. So I don't have the full 90s or. So really,

it's consistently reported since 2006. When President Trump was elected? No. It also, you know, got high. It's all right there. Yeah. When? February 2020. You're kidding. The month before the pandemic. The month before the pandemic. pandemic. This is weird. I don't know what's going on there, but it hit 127.2. Well, confidence was high then. I mean, so. The economy was booming. The stock market was rising. Yes. Was the stock market rising at that point? I mean, yeah. Before. Right before. Cases in Seattle started showing up yet. Right. Wow. Gas prices were low. Oil prices were relatively low. Boy, that is, that is really a the tax cut had been in place, right? Okay. Do you have the Democrats up?

Now, too? You want Democrats right now? Well, I want to know when their low point was and when their high point was. Do you have that? Oh, let me. Yeah, you find that. I'm going to explain the game. The statistics game is pretty straightforward.

We each put forward a statistic. The rest of us try to figure what that out, what that statistic is by questioning and guessing and clue giving. the statistic can't be so easy, which shouldn't be so easy that we get it right away, can't be too hard so that we can't get it at all. And the best statistic is one that's relevant to the topic at hand, which is any statistic that came out recently or anything that's kind of top of mind. Did you get it, Chris, before we dive in?

The low was October 2008. Okay, that makes sense. That makes sense. That's the financial crisis, yeah. And I'm looking for that. And the Fannie Mae, Freddie Mac, and everyone, the financial system went belly up. And the high seems to be April of 2021. April, really?

Yeah. And it really stuck out, right? Well, you know, that's the vaccines were rolling out. People were feeling pretty good. They thought the pandemic was over, right? And that, you know, the Biden administration at that point, you know, was getting a lot of credit It's a vaccine rollout. So, you know, maybe that was what was going on.

Interesting. Anyway, that's fascinating. Yeah. It's fascinating. That's fascinating. Fascinating. Okay. Who wants to go first?

Ryan, Chris? Who wants to go? I've got to get a new number. Let Chris go first. Okay. Chris, you go. Okay. I'll give you a number that came out this week and I'm going to tie it to another number

that came out last week. Okay. We're elevating the game now. I know. 3.2%. That's the number I want you to guess. That came out this week. Came out this week.

3.2% and 9.9%. And it's linked back to something that came out last week. Yes. Is it inflation related? Yes. All right. Price related, yes. Does it come out of the Consumer Price Index report?

It does. Is it year over year? Well, the first one does. The other one was last week. Yeah, right. Okay. Is it year over year or month? It's not the CPI.

It is year over year. 3.2% year over year. Yes. And it's a good or service. It's a good or it's good. It is a service. It's a service. 2.

And you're going to tie it back to something last week? Yeah, that's interesting. It's not airfares, is it? Oh, no. Airfers are a lot more than that. Year over year? It's like 22% or something. I'm trying to do that.

Most things are up close at double digits. Yeah. Are you going health care? Medical care service? No, not health care, but you're getting close. Very close. Can you can you? And that's something very near and dear to Ryan's heart, I think.

Oh. It's got to be recreational activities. Got to be like tickets to the ballgame or something. Nope. No. No. Veterinary services? No.

Oh, you're, you're circling the drain there. Oh, my gosh. So it's medical. Yes. Not medical. Not medical. my wife's a veterinarian. Veterinarian, right.

It's near and dear to Ryan's heart. I think it affects him. Dog food? No. No, it's got to be more than that. Can you give us any other hints? Alex's family life. Oh, are you, wait, are you going with,

wait, does the CPI have baby formula? Oh, no, but that would be a good one. Well, that's, any shortages about baby formula? It's crazy. It's a price has gone up a lot more for, baby. Why, I would have snoop, yeah. I'm out. I might throw up the white flag. It's in, is it, when you look at the CPI, they've got different, you know, categories, big, top line categories. Is it in medical services? I, I believe it's actually in educational services.

Oh, okay. Daycare? Daycare. Child care. Care prices. Oh, that's less than I would have thought. Yeah. That's what I thought. 3.2%. Can you guess what the next? 9.9% refers to. Is that the peak to date decline in employment for daycare workers? Oh, that's 11%. But you're on the right track. 9.9% is the increase in the average hourly earnings of daycare workers. That's a good one.

So prices up 3.2, but the input cost, you know, the price they're paying, the wage they're paying to child care workers up 9.9. That's interesting. Not sustainable, right? That is interesting. Although I had a hard time believing it that it's only 3.2% because I thought there's a real shortage of daycare centers available for parents. Yeah, so employment's down 11%. Yeah, right.

From the pre-pid pandemic, right? So we're still short. Where if there's some kind of measurement issue there, you know, what they're measuring exactly? I think the contracts are sticky. Right? So I don't think the price of daycare can adjust that quickly. I see. It only goes up like once a year. Well, you think the season, well, maybe it's a seasonal, oh, maybe seasonal adjustment.

There could be something in there, too. Yeah, that could be too. Yeah, it could be something like that. We've had this debate before. Mark, you remember when we were looking at physician prices, we had really strong wage growth among physicians, but the CPI for physicians was really, really weak. because you're puzzled. One thing to look at is the response rate,

because the response rate or the share of people are responding to the BLS with the price, the inflation data has just steadily declined. And it's really, it's almost to the point where you just can't believe it. Yeah, that's a good point. Okay. That was a good one, Chris, though. That was a good one. Yeah, a little counterintuitive.

I mean, if you had said 12.2 percent, that would have been more intuitive. That's why I chose it. Yeah, yeah. And I wanted to prove one. Once a fraud, there is no collusion, Ryan. No, no, okay. That was. That was good.

Or there was, and this is a way to do it with a head fake, you know? Yeah. Or Mark was just too busy to check his email. Oh, it was just too busy. Yeah. Yeah, exactly. I didn't have time. I didn't have time check my email.

I got too many emails. Yeah, good point. All right, Ryan, you go. You're up. Did you come up with one? Yeah, I got one. Okay, very good. Minus 50%.

All these negative numbers. You're coming up with big negative numbers. Negative 50%. Okay. I don't think it's in the CPI report, is it? No, it's not. It's not inflation related. Is it cryptocurrency related?

It is not. Is it an asset price? It is not, no. No, no asset. It's an economic data. Oh, it is it a release that came out this week? It did. Oh.

Is it in the small business service? It is. Oh, I know what it is. It is the, diffusion index for expectations about how the economy is going to do six months ago. Yep, excellent. Very good. Oh, baby. That's a Caldell.

Now, you guys are, now, Chris is thinking I'm colluding with you. Yes. Yes. I know. That's a good thing. The tangled web we weave. You know why I know that statistic. You know, you know, you know why I know that statistic? Why? So, because I was, as part of my travels, I was at a meeting of economists. It's called the Conference Board.

what is it called? Conference of business economists. And these are economists that are in the business community. They're like chief economists of different businesses. Like Jonathan Smoke. Remember we had Jonathan on from Cox out of him? He's in this group. And people present.

Well, one of the folks on this, I hope I'm not giving you, I'm saying something I shouldn't be saying. I don't think so. But anyway, one of the people in this group is Bill Dunkleberg, or Dunkleberg, or Dunk, short. Can you believe this? Bill started that survey 50 years ago, 50 years ago. Get out of here. I'm not kidding. I'm not kidding. And so he was talking about these numbers because they, you know,

it just come out. And if you take a look at some of the survey results for some of these questions, it's like a floor is dropped out of the survey, which is spooky, a little spooky, right? I mean, because I do think recession is kind of a loss of faith. You kind of lose faith. And you can see that in these sentiment measures. They start caving. Now, we haven't seen it in the consumer sentiment indices. Except for the Republicans, right?

Oh, except for the, oh, oh, cool. And there's a point. The small business survey is very Republican. I was about to mention that. Yeah. You want to tie them together. Yeah. There you go.

Circle of life. Actually, this would be a good tweet, Brian. I think I'm going to tweet this out. This is really- Yeah, I was sent it to you. In the past, you know, we looked at, you know, how well does the NFIB survey do in predicting economic activity? And it overstates economic activity when there's a Republican president.

And it grossly underestimates it when there's a Democratic president. So I think there's some political bias, which it makes sense. I mean, small businesses, you know, Republicans' tendency are more pro-business. So, you know, it's not to tell you. I'd say at least a quarter. of the emails I'm getting are from people that, you know, pretty upset about everything and they're Republican. I mean, generally. So, yeah, very, very upset. Interesting. That is interesting. Okay. But you were surprised I got that one, Ryan. You thought you had me? Yeah, I was a little,

I'm impressed. I'm impressed with that. Okay, there you go. Okay. I've got, I've got one. It's a little different. It's a little different. I'm trying to mix things up a little bit too, right? So just to spice things up. And I'm going to give you part of it already. It's in the CPI report and it goes to the inflation numbers for cities, metropolitan areas. So the BLS Bureau of Labor Statistics put this together, they put together CPI numbers for about 28, 25 different cities across the country. Okay. Tell me, and of course right now, Europe, your nationwide is 8.3%.

Give me, there are four cities who have inflation year over year that's in double digits. If you can give me any of those cities, I consider that to be. I got to remember which ones the BLS does. Is it similar to the ones they do for the employment cost index? Yeah, pretty similar. They're big cities. They're not, you know, they're not small areas. These are big areas.

And then also I'm going to ask you which cities have had the, Lowest. So you want to guess? Think about it logically. Think about it logically. Think about it like where would you expect inflation to be higher regionally? You know, because areas out of the country that are really rip-orren strong, a lot of migration inflows due to remote work, you would expect house prices going skyward, right?

How about Atlanta? Atlanta? Oh, I should check. I'm also assuming that. Sure. I think it is Atlanta. It is Atlanta. It is Atlanta. Absolutely. Atlanta. All right, Chris. I would guess Austin, but I don't know if that it's covered. That's too small. Too small, right? How about a Phoenix? Phoenix. Phoenix is one of the four. Seattle? Seattle? No. No, because that's actually lost people, right? I think so. I mean, Boise, which is the poster child for

you know, surging housing markets and remote workers coming in. A lot of them are coming from from Seattle. Okay. Miami. No, not Miami.

Miami's pretty good though. It's pretty right up there. It's just below 10%. Well, that's not good. What do you mean? That's not good. You don't want high inflation. You don't want 10% inflation.

Oh, no, but it's indicative of, I think, largely the housing market. Because the biggest component of the CPI is housing, like a third of the CPI is housing. Right. And, you know, if you've got rip-bore and housing markets and therefore rapid rank growth, that's going to show up as high inflation in that market. So markets where you've got rip-bore and housing markets generally have high rates of inflation and vice. How about Chicago? No, no, that's the lowest in the country.

Yeah, dead in the water. They're losing people like mad. You know, it's a lot of net outflow, remote work. I love Chicago. Actually, it's not the weakest. The weakest is San Francisco. That's the week. And again, same deal.

A lot of people leave in San Francisco for, you know, Boise. Boise. Is it Boise, Boise? Boise. We were corrected on this. I know. I don't remember.

Anyway. Okay, you got two more to go unless you give up. L.A. No, L.A. is weak. Remember, L.A. is losing people. Yeah, you there. Okay. Are there any in the northeast?

Anything in the northeast? I would be surprised there is. All south. Dallas. I can tell you. Dallas. Am I speaking into the ether here? Come on.

What areas that are gaining people? Not losing people. Actually, they also calculates CPIs for broad regions. So you can look at census regions and then by size of city in the census regions. And the weakest census region in terms of the CPI inflation, and it's not so weak at 7% is New England. So that's the weakest. And Mid-Atlantic where we live in Pennsylvania is pretty darn close. All right.

I'm not ready to give up on you guys. Dallas. Dallas. Yeah. Crystal Dallas. No, no. Houston. No, no.

We're just going to name every metro area. Galveston. Stop, stop, stop. I'm going to put you out of your misery. Orlando. Tampa. Tampa. Okay. Yeah, Tampa.

It's like, everything goes back to Tampa. Yeah, right. And here's the other one. It makes logical sense. Riverside, California, because Riverside is the county that's east of L.A. So all those folks from L.A., actually the biggest migration. We know this from the Equifax Credit Fawda. So we track people's address changes month to month.

And the biggest movement of people, County County, you know what that is? L.A. to Riverside. That is the largest, and sheer numbers of people, that's the largest number of outflows in the country, from L.A. to Riverside. So, Riverside's been booming. And San Francisco is really weak. Chicago is really weak. New York is really weak. D.C. is weak. When I say week, when I say weak, it's not really weak. I mean, it's 70%. Yeah. I don't know. What do you think? I think that was a pretty good. statistic or was that was a good one that was a good one right yeah kind of cool yeah and people out there wanted to talk about regions and I did I thought that was pretty graceful the way I did that

yeah okay anyway uh okay anything else all in the game before I star us leave a comment yes right right right okay let's talk about monetary policy a lot to talk about there let me begin the conversation this way do you think obviously we got big economic problems that you know now it's inflation. Inflation is raging. The Fed has gone to, on the high alert, raised laid out of path for much higher interest rates going forward to try to quell, slow growth so we don't become,

it doesn't blow past full employment and exacerbate the wage and price pressures and try to get those inflation, get inflation back down. How much of what we're observing today on the inflation front is the Fed's fault? Do you think the Fed is any cost? Do you think the Fed is any culpability in these high inflation numbers? Ryan, what do you think? I'll let Chris go first.

Okay. What? You're going to do the Thumper principle. If you can't say anything nice, you're not going to be. I'm trying to use the Thumper principle. By the way, you sent me, did you send me the clip? Oh, no. One of our clients sent me the clip was the movie clip.

And I got it exactly right on the Thumbus. Yeah. Anyway, Chris, what do you think? Do they deserve any blame for this mess we're in? So it's a good question. I think there's a fair amount of Monday morning quarterbacking going on, right? In retrospect, sure, we can look back and say, oh, well, clearly they should have been raising rates or engaging in quantitative tightening earlier on to fight off the inflation.

But if you think back and you put yourself in those months, when we had Delta, Omicron, or even further back, if you're thinking about the vaccines and what was going on there and all the projections of a very extended period of time, you know, I think they did the best they could. And actually, I think we are paying the price of our success in avoiding a depression with the inflation. So could they have done certain things better? Yes. I never understood the MBS purchases going out for so long with the housing market so hot.

That I would fault them. Okay, NBS, mortgage-backed securities. That's part of their quantitative easing their bond buying. They bought treasuries. They bought mortgage-backed securities. That brought down mortgage rates. And you're saying, why are you buying those securities and bring down mortgage rates when the housing market is on fire? On fire.

Right. So, okay. Yeah, we can critique and say there are things they could have done better, certainly. And maybe they could have started the tightening process a bit earlier. but what are we talking about? Three months, maximum six months? I don't know that you would have started a year ago, given the evidence that you had. So I don't know, I still give them a, you know, if you want a letter grade a B plus, at least.

Sorry. Yeah. Okay. What about you, Ryan? What do you think? I know you're a grader. You're a prof, I believe. Yeah. Yeah.

I got to use grades this weekend. Oh, really? Mm-hmm. Their final, yeah, they have to complete their first grader. final tonight. Do you want to scare your students right now and say anything about how it looks? Yeah, the average grade is going to be less than Chris's grade on for the Fed. They're quaking now, baby. They all did really well.

They all did well? It was a good group. All right. They get a little bit of the blame, but if I had a rank order, you know, why we have the inflation we have today, I would say pandemic. Yeah. fiscal policy, energy, Fed. So, I mean, they're, they're lowest on the list of reasons for inflation.

And the Fed because they're just too slow to pivot and start raising rates, or what? No, I think they did the quantitative easing for too long. They could have started dialing that back sooner, maybe get a little bit of tightening. Frankly, it's on the margin, right? Oh, yeah, all this is. Yeah, I don't, that's why the Fed's the lowest on the total poll. So I think the number one reason we have inflation is the pandemic, followed by, fiscal policy and then the energy price price shock really fiscal policy yeah that it was too much money

all at once that why do we have supply chain issues because the supply chains were stressed and then the u.s. consumer bought a boat load of things that just amplified it you haven't been listening to me on this podcast carefully enough uh all right well okay i i i'm with you on the pandemic right because that's then that goes to supply chains and scrambly labor markets. You wouldn't put the Russian right now, with the inflation we're experiencing right now, you wouldn't put higher oil prices in Russian invasion higher than fiscal policy? No, I'm breaking it.

Straight up on energy prices. That's adding to do and a half percentage points to inflation. Yeah, I'm doing it overall since. No, but right now, inflation right now. All right. If you want, we can flip-flop fiscal policy and energy. Okay, now I feel like that. Okay, okay.

I'm with you on that. Okay. All right. All right. So we said pandemic. We have the Russian invasion and the surge in all prices. You say fiscal policy, I don't think that's definitely there in all this. I'd say the Fed doesn't really deserve any blame here.

I'm with you. I mean, the only thing that is a little cautionary, and maybe we'll learn something from this, is when they changed policy and said, look, we want, they actually added to their, their objectives. Like from the beginning of time since they were put on the planet, I believe in 1913, their objective was, you know, low stable inflation and ultimately they were added to that was full employment.

And then they said, okay, the next thing they added was we have to be more inclusive in terms of the growth that we receive. And obviously, that is a very laudable objective, you know, to, that's great. We need to do that. But can monetary policy actually accomplish that in a way that doesn't result in broader problems? And there, I'm not so sure. And I think that might have contributed to the decision to wait longer to begin to react, you know, end QE earlier and begin to start talking to the marketplace and saying, hey, start preparing for rate increases and get long-term interest rates up a little bit faster than they had to take some of the juice.

out of the housing market economy. So I don't, I don't want to stretch that too far, but I just throw that out there as maybe something they should have, they should be, you know, thinking about more carefully. It felt like they kind of slipped that in on the fly, felt good when they said it. And everyone's kind of shaking their head. Yeah, that's what we should do. But really can the Fed actually accomplish all of those objectives in a reasonably reasonable way? And I'm not so sure. Not with their primary tool, the Fed funds, right? Yeah, that's an instrument. They got one tool, really, maybe two now. They can buy, well, I view QE just as an extension of normal monetary policy.

Yeah, it's the new normal now. Yeah. So you've got one tool and now you've got three objectives. That becomes goals. That becomes pretty tough. Well, they've got other tools too, right? There's regulation. They can.

Yeah, okay. I'm all for that. Yeah, I'm all for that. You know, that goes to things like CRA and inclusive credit, extending credit in the banking system. that kind of stuff. But in terms of monetary, the conduct of monetary policy, which is what we're talking about. Yeah. You think, though, that that was a consideration this cycle? It was in all their speeches. It was like a talk. I don't think that was the primary.

I think it was really a reaction to the pandemic. It was all about the pandemic for me. Well, here's the other thing that I wonder. So they changed their framework and said, look, we're not targeting 2% inflation at any point in time. We're targeting 2% and this is the core consumer expenditure deflator, which is a lower rate of inflation than the CPI. But we're targeting core CPEC at 2% not at a point in time, but through the business cycle. So that means if I'm suffering through low inflation below two for an extended period, which was happening for a decade after the financial crisis, I need to be above two for an extended period. I don't think that's a mistake. I actually think that's good.

I agree. Yeah. Okay. All right. Yeah. I mean, I think they just got dealt, you know, bad luck. I mean, inflation was leaking, and then the delta variant hit, and then supply chains just went AWOL and inflation accelerated.

Yeah. And they could not predict, you know, Delta coming along and knocking out global supply chains and stopping vehicle production and causing vehicle prices going. You thought everyone thought with the vaccines, this thing was over or close to, certainly didn't envision these supply chain issues. And then no way that you can have in your thinking Russian invasion of Ukraine, right? That just was you can't do that. It can't be part of your thinking. And so those two things, those two massive supply shocks came along, very surprising and they've had to adjust. So I don't, I just have a very difficult time blaming, putting any real

blame on them for. I mean, hindsight. What do you think of my MBS argument? I'm with you on that. You know, I'm not sure. I mean, I think a key channel, we're going to get to this a second, but a key channel through which monetary policy affects economic activities through asset prices, right? You lower interest rates, that causes stock prices to rise, that causes housing values rise. So they're using that as a real tool lever to get the economy growing more quickly, ensure that we don't go into recession. And it also is very beneficial because it helps with refinancing activity, right? because you got rates so low down to 3% below 3% at one point.

I think I got down to 265 and I'm 306. Everyone's in the money. Everyone can refine. They can lock in these low interest rates, which by the way, does call into question the efficacy of higher interest rates going forward. But anyway, we'll come back to that. But I don't know, maybe, maybe, you know,

they went overboard on the NBS. It does complicate things now because I think the MBS they purchased is MBS nobody wants to buy. Right. It makes sense when you're in a crisis. You buy the stuff nobody wants to buy. That's stuff that has higher prepayment rates, right? That, you know, and you don't, if you're an investor, you don't want a high

prepayment rate. So selling that's going to be more difficult. And so it makes it more difficult for them to get out of this, you know, in terms of quantitative technique. So, yeah, maybe you're right on that one. I give you, I have to think about that some more, but I think it's reasonable. All right. Well, I think we've come to the conclusion that the Fed may be.

on the list of culprits here, but way at the bottom of the list and debatable whether they should be on the list at all. Okay. All right, let's turn to looking forward. What is the appropriate monetary policy? And to get a sense of that, what does the market now expect the Fed do? And I think this is important because I don't think I've ever, I've been following the Fed for a long time, 30 years. I don't think I've ever remembered the time when the Fed has been so explicit about what it wants to do with interest rates going forward. It's like, it feels like it's crystal clear. So what is embedded in market expectations is probably a very good representation of the reality of where the Fed wants to take the economy at this point. So, so let me, Ryan, turn back to you,

what are the markets saying? What are futures market saying about future monetary policy? Yeah, so based on Fed Fund's futures, they have two more aggressive rate hikes by the Federal Reserve, So 50 basis points in June, another 50 basis points in July. And then they're followed by more modest 25 basis points increments at each of the following meetings for the rest of the year. So futures expect the Fed funds rates be close to the Fed's estimate of the neutral Fed fund rate, where interest rates are neither stimulatory or contractionary for the economy by the end of the year, which is around 2, 2.5%. But then they expect the Fed to have to do even more heavy lifting and go even higher.

So they have the Fed fund rate peaking at 3.1% this tightening cycle. Then the Fed pauses for an extended period of time and then starts cutting rates in early 2024 or late 2023. So the markets think they're going to, to Chris's points earlier, slam on the brakes, and then try to navigate a soft landing by easing down the road. Oh, I didn't realize that. So if you look in futures markets out into the distance, you said 2024 is when they markets expect the Fed to start cutting rates? Okay. Oh, that's interesting. Okay, so our forecast

isn't quite as aggressive. We have the fund rate. We have a half point increase in June. We have a half point increase in July. We have the fund rate at the equilibrium, our star of about two and a half percent by the end of the year. And just to make that clear, our star equilibrium is kind of what people think, what the Fed thinks, what we think is consistent with an economy that is at full employment, growing at potential with inflation at target. Of course, we have none of that. So we're saying we're going to go above that. But in our forecast, we have the peak of rates, the so-called terminal rate, at 2.75%. So just a quarter point above the equilibrium rate. And then it comes in a little bit in 24, 25, comes back down to the equilibrium rate,

which is about 2.5%. So, you know, we're about, I think we're about 50 basis points. The terminal rate in our forecast is about 50, at least a quarter point, 50 basis points, I have a point below the market expectations. Do I have that right, roughly right? Yeah, exactly right. Okay. Okay, what do you think of that forecast? Do you think, well, that's it.

What do you think of that forecast? That's our forecast, by the way. That's our baseline outlook for the Federal Reserve, which is different what the market thinks, different what the Fed wants the market to think. So we're a little bit out of consensus here, right? Yeah, but that's where we should be. I mean, the market's doing some of the feds work for them.

Financial market conditions have tightened quite substantially recently. That reduces the need for some rate hikes down the road. So I think being below where the consensus expects, expenses to be is where we should be. And I think that's what the Fed's going to do. You think ultimately that the economy is going to slow, inflation is going to soften, inflation expectations are going to normalize to a sufficient degree that 2.75 terminal rate is good enough. We don't need to go higher than that. No, I don't think they need to go any higher than that. But you do think that that would, that path is going to result in recession.

Yeah, I mean, one reason why I don't think we might risk the forecast, I would say, are actually weighted towards fewer rate hikes. Because I think the Fed's going to break something before we get to 2.75%. So, I mean, just a quote's going on now. I mean, financial market conditions are going to tighten further. You know, the Fed put, you know, the Powell put, which is this idea that, you know, stocks can only fall so much before the Fed rides in on their white horse and saves the day is a lot lower than what. I think people are anticipating. I mean, Powell wants financial market conditions to continue to tighten. So I think that's, he's getting what he wants. And we'll just see if the economy can weather it. Yeah. Okay. So just because I assumed a lot, there's folks out there that don't know

that you, we've had discussions in the past on this podcast about recession risks. And you have said in previous episodes last week, maybe, certainly when Nureal Rabini was on, you were feasting on his darkness, you were all in. You put the recession odds at what, at 65%, I think? I think it was 75. 75%. So before you start, you know, jumping off the thumper principle. You see that, you see, I think was it Chris's LinkedIn poll?

Ask who do you agree with my recession odds, 75%, Chris is, which is 50%, which is right down the middle of the fairway. And then you're 35%? Mine was, uh, 45, 45. Was it 30? No, is it 30? No, over the next couple of years. Oh, yeah.

I think 40 or 18 months. I'm at the bottom. Yeah. Okay. But the majority of the people are with me. That means you're doomed. Yes. You're doomed.

The consensus is always wrong. By a sample. How many people responded, by the way? That's not important. That is not important. All right. How many times did you respond? How many time did you respond to this?

Once. I did. Oh. Oh my gosh. Because I was afraid I was going to be the lowest one. I was like, I got to pump this up here. But at least you're honest. That's a very honest.

I don't know. I'm not sure I would have fessed up to that. But okay. All right. Chris, what do you think? You see our forecast. It's 275 terminal rate, 2.75 terminal rate. The market, just to be sure, Ryan, is the terminal rate for the market 3.25, 3.25 or 35?

3.25? 3.1. Oh, it's only 3.1. Okay. We're not even that far off. Okay. All right. I thought it was higher than that.

Okay. Chris, what do you think of our forecast? Yeah, I think that's right. It's reasonable to me. I think actually the hiking will be front-loaded, right? So I think we'll get 50 in June July. Yeah. And then, you know, easing off.

But, yeah, the contours in terms of going to 250, 275 by this time next year, I think that makes sense. Okay. So you guys, what you guys are saying, I believe, is that financial conditions, and I'm going to define that in a second, but financial conditions are consistent, already consistent with an economy that's going to slow and inflation is going to moderate. We don't need to see stock prices fall anymore. We don't need to see mortgage interest rates rise anymore. We don't need to see corporate spreads wide. We don't need to see the value of the dollar increase. By the way, those are all different measures of financial conditions.

And this is important because one of the key ways that monetary policy, interest rate changes, impact the real economy is first through its impact on financial conditions, on financial markets, on lending, financial institutions. So stock prices, mortgage yields, corporate interest rate on corporate bonds, value of the dollar, lending standards, all those kind of things. So you're saying you feel like where these markets are now, where the stock market is now, where the dollar is now, that's consistent with, you know, where monetary policy should be. We don't need any seem more corrections in these markets. Is that right? Do I have that roughly right? Okay. Yeah, abstracting from some volatility, right?

You could certainly see markets go up and down a bit here. Yeah. One thing we should probably debate, not necessarily on the podcast, but for the next forecast is I think there's a reasonable scenario where the Fed gets rates up to their estimate of the neutral Fed funds rate, which is currently 2.4%. And then they pause, you know, whether it's six months, nine months, just to kind of reassess.

And they've done that in the past. I kind of, let's make sure we didn't break anything before we go even higher. Right, right. Yeah, that kind of makes sense. That kind of makes sense. So they, 50 basis points next month, 50 basis point, half a point the following month, get it up to the two and a half. I'm using two and a half because it's just rounding and that's where it was before last meeting.

Although, by the way, that might come down lower because we have two new board members coming on, I believe. That's right. Correct. And if they join with what the consensus is among the Fed governors for what the neutral fund rate is, it could drop to 2.1. Oh, really? That low? Mm-hmm.

Okay, very interesting. Okay, I want to come back then in a second, but you're saying that, what were you saying about that? I just, I don't know. Oh, they would pause. Well, they would pause. They would pause, right? Yeah, which makes a lot of sense.

Okay. So I mentioned a number of measures of financial conditions, equity prices, mortgage yields, corporate bond yields, value of the dollar lending standards. Am I missing anything? Is that an exhaustive list? Are there anything else that would go into? I know there's different financial condition indices that are created.

Those are kind of the standard fare, right? Cryptocurrency. Yeah. Cryptocurrency, right? Yeah, well, that's, yeah, that's broken too, right? That came down by a bit, yeah. Okay. It's a good sign, right?

Yeah, real interest rates. Yeah, so let's talk. So there's other measures that are important in trying to understand if monetary policy, how it's going to affect the real economy and growth. And one other way people look at it. Well, we mentioned financial conditions. And the other is real short-term interest rate. So take the short-term interest rate, the Fed pegs the funds rate at, and then subtract,

I suppose you should subtract inflation expectations, right? Yes. Yeah. Right. To get to the real yield. Right now, if we get to the terminal rate of two and a half, half inflation expectations, certainly kind of one year, five year, five year, five year break evens is higher than that, right?

So it's closer to two and a half to three, depending on the measure. So that means real yields, even when we're at the equilibrium rate, the R star will be negative, right? Two and a half less inflation expectations. You're in negative territory. That doesn't feel like that's enough, right? So the economy's growth rate. How do you think about that?

I think we're arguing that expectations are going to come in, right? Okay. So you think the expectations are going to come in below two and a half, come back down into that two to two and a half percent range? So we get a positive real yield. Still very low, though, in the grand scheme. Yeah. Yeah.

Okay. All right. Let me ask you one other question about this while we're on the topic. Why is 2.4%, 2.5%, 2.1%, you know, what makes that so magical? I mean, how do how are people getting at that number? I mean, I've got my way of getting to it. And I don't really want to go into it because it's like a pretty long explanation. But do you have a sense of that?

I mean, why do people think that's the equilibrium yield interest rate? Any sense of it? Chris. That's where the IS curve cross. There you go. Okay. That explains it. You got to draw it out now.

Yeah. Okay. I get it in theory, but why empirically is that where it's landing? Why do people think that's where it's landed? Is there anything rooted in our empirical world that says that's the right number? I mean, why did we settle on that? There's some econometric models, right? I can't remember.

Ryan will know. LW. HLW. Libok. Williams. Yeah, but they put it in that. They don't even publish that anymore. They still do. Do they? I thought they stopped. I thought they got broken and they weren't publishing it anymore. I thought they, yeah, I thought they stopped during the pandemic. But if you go before the pandemic. Yeah, but it wasn't a half was a lot lower than two and a half, right? A lot lower than two and a half. I thought it was two and a half. Okay, that's the best explanation we can come up with. This is this kind of number that everyone says, okay, it's two and a half, but we, no one really knows why it's two and a half. It's kind of like what Inflation targets. Why I think it's two and a half?

It's kind of similar with inflation. Why does a Fed aim for 2% inflation? Well, that, I mean, that's, I think that's because at 2%, no major part of the economy is going to be suffering deflation. Because once you start suffering deflation, that's pretty hard to manage through. And you're,

you're going to hurt that industry, that part of the economy. But if you keep it at two, then, you know, people some parts of the economy will have less inflation than that but it's not deflation you know it's still positive inflation right and i don't know two spare sense the right number it could be higher it should be i think it should be higher than that but that but that's the logic i think the logic behind but what's the logic behind two and a half okay i mean definitionally is that that's the rate

that they think the fed fund rate should be with no no no yeah yeah employment stable prices Okay, how did I, how did you get there empirically? How did you get to two and a half percent? Do you want me to explain how the summary of economic projections? No, no, you know, you're, you're playing coy with me. You're playing coy. No, I, yeah. Okay.

All right, here. Let me. It's kind of like Nairu, like, full point. We have two and a half percent in our, in our, in our, in our forecast, right? So you're saying, well, Mark, why, why is it two and a half? What is it two and a half? Okay. I have an anchor for the tenure treasury yield.

In the long run, the 10-year treasury yield should equal the economy's nominal potential growth rate. I think that's theoretically and empirically held true. And nominal potential growth is 4% when the economy is at full employment and growing in its potential inflation is in two. It's 2% real growth. That's 2% inflation, 4% tenure treasury. Then I say, in the long run, through the business cycles, the spread between the 10-year and the Fed funds rate is 150 basis points. And you can go calculate.

So I take four, I minus one and a half, I get to two and a half percent. That's how I get to two and a half percent. But I don't know another way of getting there in why other people think it's two and a half percent. Because I don't, I think very many people have kind of that framework in their minds when they're thinking about industry. Does that make sense though the way I described it? Would you buy into that?

It does, but isn't it tautological? So the Fed set, they're, fed funds rate previously at this magical number. And now you're saying, oh, well, the spread to the magical number is 150. Well, yeah, what's magical? What's the stake in the ground? What is economically determined is that long-term interest rate. And you do need some difference between, because there's, you know, lots of reasons why there's a difference in short and long rates. And that, you know, inflation expectations, volatility of inflation, volatility of real economic growth. And when you look at it historically, that is roughly, it's 150 basis points,

of 1.5 percentage points through the business cycle. And that's how you get to 2.5%. Anyway, I know I belabor this, because it bothers me to no end, that we kind of just take this as given, but I'm not sure why. I'm not sure why. Well, it's like all these theoretical concepts. What is the full employment, right? What's Nehru?

what's a potential GDP. But there's some empirical basis to it, right? Well, they're really in some theory, primarily. And then we try to come up with some empirical basis, but our history is limited, right? So you're saying I shouldn't be so annoyed that no one can explain to me why it's 2.5%. But it also changes.

So if you look at the Fed's median projection. Yeah. So throughout the last expansion, you know, we started north of 5'4, got down closer to 3, three so yeah but i but you know that that that empirical rule that the 10 years should equal nominal GDP that's over a long period of time there can be long periods of time where they don't hold for lots of different reasons which we'll talk we i think i've talked about in previous podcast but i won't do that here okay all right i don't i don't want to be labor that uh i do want to ask this

though and this is also bothering me um about monetary policy the appropriate monetary policy in our forecast. Do you think there are things that are idiosyncratic to the situation that we're in that will make the relationship between monetary policy and economic growth that has historically held on average different this time around, meaning less sensitive, the economy is going to be less sensitive to monetary policy or more sensitive to monetary policy? Now, if I do that in my own, I'm not going to, I'm not going to say anything more than say

when I think about that question, I land in a place that says the economy is going to be less sensitive to economic activity. Therefore, the Fed is going to have to raise rates more aggressively than we think. Not 275, not 3.1, not 3.5, but something higher than that to get the economy to slow. So what do you think of that? Any of you on that? And I can go through my reasoning around that, but I'm just curious if you've got a view on that. I mean, the one that jumps out is that, you know, the share of just debt outstanding that's fixed is a lot higher now. Yeah, exactly.

That's the first one that I always go to. Like debt service for household sector, that's the share of income that you're voting to principal interest on debt during current on it is pretty close to a record low. And it looks like it's going to be very hard for that thing to rise because everyone's locked in through the refinancing waves that got into 30-15-year mortgage. So that feels like debt service isn't going to rise very quickly here. And that, you know, obviously makes it more difficult for the federal economy. A lot of corporate debts fixed. Is that too? I don't know that as well.

Is that right? Yeah, more than it was in past decades. Is that right? Can we get, I haven't seen that data. Do you have that? There's still a lot of refinancing that has to happen just naturally. But, you know, businesses aren't taken out. these variable rates.

Yeah, if you've got, I'd love to see that data. I haven't seen that data. But what do you think, what do you think, what do you think, what do you think the economy is more or less sensitive or is it all awash? I'm just splitting hairs here. No, I agree with you. I was going to go with the moral hazard argument. Right.

Because we've put all this support into the economy, now through the last two cycles that kind of along the lines of the Powell put that consumers, investors are going to be expecting it, right? So the sensitivity then is going to be reduced, right? They have to be even more aggressive to really send the message that we're on the case. Oh, everyone thinks. Everyone thinks, oh, you're going to, you're going to bail me out. You can't tolerate any economic pain.

I am not worried. Things start going off the rails. You're going to cut interest rates and bail me out. Therefore, I'm not going to stop anything that I'm doing. Right. I'm not going to curtail expansion plans. I'm going to keep hiring, that kind of thing. that's interesting.

What do you think of that explanation, Ryan? He's not buying it. He's not. No, no, I'm going to. Oh, you are. Okay. I mean, he's like, thinking about it the other way around. So with interest rates so low, when there's any sign of economic weakness or a looming recession, they're much more.

They don't wait. They get down to zero as fast as they can. And then they restart QE. So, you know, I think on the other side, the flip side, it works the same way. Yeah. Here's a couple, there's a few other things. I think make the economy feel like it's a little less sensitive to what the Fed has in mind. Pent-up vehicle demand.

People couldn't buy cars because of the pandemic, supply chain disruptions, lack of inventory. They still want the cars. So, you know, when those cars become available, as supply chains iron out and there's more production, we'll see vehicle sales increase, even though historically, at this point, point when the Fed's tightening monetary policy in auto lending rates arising, it puts downward pressure on vehicle sales. So instead vehicle sales falling like they typically do, they're going to arrive. What do you think of that explanation or that theory?

Well, don't you think affordability is going to continue to a road? Like, as a higher rates go up and if new vehicle prices don't fall as fast as we think, then, yeah, you may want a car, but. But we know there's pent up demand there. We know there's latent pen up demand. People want to buy cars, right? Yeah, they want to buy a car. Yeah, there's a difference between willing and able to buy a car.

Yeah. Okay. So you think that they just won't be able to purchase the car. Well, I'm assuming you get supply chains ironing out more production, more inventory, prices start coming in, you know. And that the price declines. Obviously, auto loan rates are going up. But the net of all that may be. Also, gasoline prices are going to come in if everything sticks.

script. But we know that people wanted to buy cars and haven't been able to buy cars. And some people will need to buy cars, right? Regardless. Okay. How about this? Home building. There's a shortage of homes, a stand of shortage of homes. We, you know, we peg the shortfall. We've talked about this many times, 1.5, 1.6 million housing units. That's what's the shortfall in new housing construction relative to underlying demand. Maybe home building doesn't, and generally in most cycles, you raise mortgage rates, housing gets crushed, and home building gets hammered, right? And that's the principal way that rates affect housing markets in the economy, because

really home sales fall, but that's no big deal to economic output. It's really about home building. That's what really matters. But maybe home building does not fall or doesn't fall nearly to the same degree because you've got all this pent up kind of vacancy rates are very low, rents are very high, a lot of incentives to build. What do you think, Chris? Yeah, I think there's some, I think it relates to the auto argument. So it might smooth things out. I don't know that that trend gets reversed though, right? Meaning I don't expect, you know, house, home building to remain at its level,

regardless of what happens to interest rates, right? But maybe it doesn't decline as much as you otherwise would expect. So, of course, we have a bet on this one. don't we? We do. You do. Right. I'm winning, but. You think you're winning.

In your mind, you're winning. Oh, I forgot. Revisions, yes. Mark's going to hang on to that revision. What are you talking about? I'm winning three months in. Geez, Louise. What was I going to say?

Three months in, that's a quarter of the way there. Okay. How about this one? How about excess savings? All the cash sitting in people's checking accounts because of of, you know, COVID, sheltering in place, all the government support. And, you know, high-income households, they're sitting on a lot of cash. We know, what do we estimate the total excess saving at, right?

2.6 trillion over 10% of GDP, right? Most of that's high-income households. So stock market comes down. Historically, that had an effect on spending, right? Because I'm less wealthy. I'm going to spend less. There's a wealth effect, negative wealth. Maybe there's no wealth effect.

because, okay, stock prices are down, but I still got a lot of cash sitting in the bank account. I'm going to keep on spending. What do you think? I think the psychological piece is there. You do. I'm with you, though. I think it cushions the blow from dropping stock market. It's helped cushion the blow to the economy from higher gasoline prices.

But, yeah, when you're seeing market moves like this, the sentiment. This is all to go to say this. I'm not sure in our, I believe in our forecast. I'm nervous about it. I don't know if you want to say that publicly. How about how about let me push back. How about some spent up? We saw durable goods spending go through the roof during the pandemic.

How about some spent up demand on, I don't know, power washers and pelotones and all the other durable goods out there, right? So there's some counter effect here, right? Yeah, but we've already pulled forward a lot of the spending. True. But overall consumer spending, all in. goods, services is precisely where it should be if there have been no pandemic. It's not like there's any big pent up or spend up demand here. Generally, coming into recessions, you got a lot of spent up demand.

The people have spent well beyond their main saving rates are low, debt loads are high. There's no cash. People have run out of cash. They've levered up. You don't see any of that. You don't see any of that. Yeah, but the distribution's all out of whack, right? What do you mean?

Meaning they've already done their durable goods spending, right? So going forward, they're not going to spend your, are you arguing that they're going to double up on services? Yeah, so I'm arguing. They're going to go travel, we're going to go to restaurants, you're going to go to ball games. Yeah, exactly. You're saying beyond the trend, right? No, no. Yes, beyond the trend.

There's spent up demand for non-vehicle goods, a lot of pen-up demand for vehicles, which is very rate sensitive. with and pent up demand for services, healthcare, travel, you know, everything on the service side that I couldn't do in Penda. So Ryan's going to go to dinner's tonight instead of- Right. That's what's about to say. I don't know what's going on in this. No, no, no, no, no.

No. I'm not going to Applebee's. I'm going to go to, you know, wherever you go. that's higher, higher end on the beach or something. I don't know, but don't worry. I can figure out how to spend that money. I can double and I get three. Even with 15% inflation.

I get, I get dessert. I didn't get before. I get two cocktails, not one, maybe three, more likely two. But I'm just saying. Anyway, all right. So here's what I'm saying. I'm just throwing out there. I like what you're saying, Ryan, about they take it up to

that neutral rate, they take it there really fast. So by the end of the year, we're there to an half percent. They stop. They took a look around and then they figure out, maybe this economy is not slowing as much as I thought it was slow. And then they, then they, it's not two seven five. It's something measurable higher than that. And you know, obviously, you know, that becomes even trickier for the economy going

forward. But anyway, I think we cover a lot of ground. Anything I missed on monetary policy you wanted to say? that you think under that scenario is that recession then I think that I think that with that yeah it lowers the odds of recession in the near term right in the next 12 maybe 18 months but it raises the odds of recession a little bit further down the road as you move into the mid part of the decade yeah that's what it would do so really it's bimodal again either we're going to skate through this you know skin of the teeth or we're going in recession right there's not a whole lot of in between

Or maybe the Fed kind of looks through everything I just said and they just do what the market's thinking. They're going to three and a quarter, three and a half. You know, it's steadily by the mistake. Yeah, but maybe that's what they're doing. They will do. I don't know, but it's obviously pretty tricky here. Okay. All right.

I think that was a pretty fulsome discussion around the Fed. I think at the end of the day, we decided not to change our forecast, though. Well, we'll have to. We've got some time. I'll talk you into the pause. Oh, the pause, right? We've got to get the pause. Well, actually, if you look at the forecast, it's not, I only go, we only go a quarter point above the two and a half.

It feels like, yeah. It's a quasi-pause. You know, it's not, I'm not too far off from what you're saying. No. Yeah. Okay. All right, very good. So if you want to follow Ryan's memes and is trash talking slash trolling in my non-response, you can do that on Twitter.

What's your, what's your handle, Ryan? At real time underscore Econ. Very good. And I'm at Mark Zandi. And Chris is on LinkedIn, not on Twitter. Anything else I should be saying to the folks out there? Respond to that survey about recession probabilities. That would be good because we have a, we're going to do a special podcast, Evergreen podcast. We call them Evergreens on Monday around recession. So be on the watch out for that. And we'll talk about the recession probabilities. So with that, we will call it a podcast. See you next week. Take care now.