Odd Lots - Lots More on What We Just Learned at Jackson Hole

Episode Date: August 23, 2024

Every year, the Federal Reserve Bank of Kansas City hosts an economic symposium in Jackson Hole, Wyoming. It’s a chance for central bankers and other policymakers to talk about issues facing the global economy, debate academic literature, and provide further guidance on the future path of monetary policy. This week’s symposium marked a step change for the Fed, with Chair Jerome Powell announcing that the “time has come” for rate cuts after years of hikes. So what makes him confident that inflation’s been tamed? And what are the key pressure points to watch out for in the US economy now? On this episode, recorded in Jackson Hole shortly after Powell delivered his speech, we speak with Bloomberg TV’s Tom Keene and Mike McKee — both veteran Jackson Hole attendees — about what we just learned. Read more: Powell Says ‘Time Has Come’ for Fed to Cut Interest RatesFull Text of Jerome Powell's Jackson Hole SpeechOnly Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at  bloomberg.com/subscriptions/oddlots See omnystudio.com/listener for privacy information.

The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off.

And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend.

Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Bloomberg Audio Studios. Podcasts, Radio, News. It's Gadabat Gattas and Grand Teton's fishing. Our guest today, Tracy Alloway, catcher of the fish. Let me tell you, Tom, I have strong opinions on Euro-Nimthing,

which we can talk about. Very impressive. I had never heard that term until Tracy and I went fishing, but that Euro-nympting is a thing. So Google it, folks. Also, Finfluensers, people who are on Instagram impressively catching fish, but also cheating in the way they're doing it. Did you, have you done any fly fishing, Tom? Very little.

We had a close friend, close family friend who has had a research for Eastman Kodak, really important in the chemistry of developing all the films that we know and use was Jack Penny. Basically, he worked so he could fly fish. And I would sit there and watch Mr. Pony. Everyone has to work for something. Watch Mr. Pity make the flies. And that's about as close as I got. I did a deadlift. One, two, three.

Hedgemi. Okay, go. What's true? GEMany. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Where's the best with impostin?

These are the important questions. Is it robots taking over the world? No, I think that, like, In a couple of years, the AI will do a really good job of making the Odd Lots podcast. And people are saying, I don't really need to listen to Joe and Tracy anymore. We do have... Cha-ching. The perfect guest.

Welcome to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have The Perfect Guest. Do we talk a little monetary policy? Yeah, let's do it. Okay, so one thing I'm curious to hear. your opinion on Tom, you've been at multiple Jackson Hole economic symposiums at this point. What's the vibe of this year, especially compared to, you know, two years ago, Powell basically

stood up and said, like, it might be painful to bring down inflation. Then last year, they were very much talking about progress on inflation and maybe complications from the real world economy. And then fast forward to today, and it's all about the labor market. I was in Davos a million years ago. I was standing with three. Nobel Prize winners. And they're going to blah, blah, blah, blah, blah. And one of their wives said after me, this is in the heart of the crisis. She said, Tom, they're just bewildered.

And I think there's a lot of bewilderment here about the future of America, witnessing the Milwaukee in Chicago. And that what we got today, which I was blown away by the speech, I literally will go back and reread it. Trust me, I never do that, is this was a real, statement by Powell about the bewilderment that's out there and clearly was at this Jackson Hall this year. One of the things just on the like sort of pure macro front that struck me is right up top saying we're not going to tolerate any more labor market weakness. And I found that

really striking. And you saw it in the market reaction. By the way, we're talking with Tom King of Bloomberg TV. As you said, the Tom King. The Tom King, just in case I guess we haven't formally introduced to me. But, you know, clearly everyone sort of expected, right, that this speech would be used to announce something about the September rate cut cycle. But there's still been in the chat, the Fed chat over the last couple of weeks, still this seeming like not total sure, maybe this sort of willingness to say, like, we could rise into the high 4% unemployment and that still be sort of consistent with what we're going for. And I sort of feel like the market reaction was to like, we're done with letting the labor market weakness.

And he added another line. It's not just normalization. By some measures, the labor market is worse than pre-COVID. And you see that in things like the hiring rate. So I found that to be pretty powerful. Yeah, as we talked about as we walked over here to your luxurious about, it's incredible. You know, the view is stunning. And, you know, I think that the unemployment rate chart, I think Colby Smith had it in the

FTA, it's curvilinear. It's what we call convex. we're showing an accelerated tendency and I asked any number of guests today, I said,

okay, where's the number that hurts? I don't think it's 4.9% or even 5.5.1%. I think it's much more towards

4-7. 4-7's a big number for a lot of America. Joe, do you remember Tom Keene used to write some commentary pieces for Bloomberg.com

and I used to edit them. Oh, yeah. And there's one that always sticks in my mind. You mentioned convexity just then, Tom. And I remember you had one. It might have been about the yield curve, but I think the headline was just slope matters. Slope matters. This is a Tom King, this is a Tom King's signature line. What does that mean? It is a signature line, but it's really, really important. And I'll go through it right now because it's great that you have the time of Adelot's interviews instead of 30 seconds. We're going. Okay, here's the way it

works. The core financial equation is FV equals PV 1 plus R to the T. That's a discrete or in a continuous function. FV, the future value, equals a present value times E to the RT. E is in the exponential function. And the answer across that that is so, so important is what you do in the phrase that we all learned in school is you go to logs. You go to logs. And the way you do it on a chart is you have a sum of a log chart with a log y-axis. And that gives you the first derivative is the slope. So if you go to log on any given financial series is a rule of thumb, you can look at the slope. You can say it matters. And here's what Chairman Powell would say, he would say, and then the change of the slope really matters. And that's that confidence you got

today that move the markets. And this is, of course, you know, when we talk, We talked to Claudia Somm recently, and everyone's talking about the SOM rule, and they get really hung up on like, well, like, oh, you know, the exact, the exact measurement. The exact point. But really, and that's fine, and maybe that's a good guy. But the real embedded wisdom or insight is that before you have a big increase in the unemployment rate, you have a small increase. Or to put it another way, historic history tells us that every time you have a modest rise in the unemployment rate, it leads to a large increase. Yeah, but the key thing here is the financial media loves point estimates. Yeah.

What's going to be 4.2%? And you two have been really historic in developing a conversation about the rate of change or the rate of change or the rate of change. The word we use is dynamics, the dynamics of the moment. And I thought Powell today was just great on the dynamics of the moment. So speaking of the dynamics of the moment, one thing that has clearly changed is like the emphasis of what the market and investors are looking at is shifting in real time from inflation to the labor market data. And one thing I'm wondering is the Fed has emphasized its data dependency so much

at this point that it feels like suddenly that jobs number becomes even more important than ever. And part of me is wondering what happens if we get a stronger than expected jobs number between now and September 17th. That's out there in Adam Posen, who we had on today, the Peterson Institute, his FT essay two days ago, I think was blistering on that, where this embedded idea that we're in a disinflationary mode, one report, two reports can upset the apple. And no one's predicting that. You guys know the standard error like anyone else, but the answer, the certitude of disinflation now is probably suspect.

I mean, and of course, that's what sort of roiled the market in Q1 of this year, which is there was a similar feeling of certitude. and then we did get those hotter than expected inflation. You know, I think one of the things, and we talked about this on TV just a few minutes ago that I've been wondering, thinking about and it's something we talk a lot about, the business memory that price increases are a thing you can do

is I think it would be a really interesting question. Maybe for like the next decade, the memory of 2022, that actually sometimes you can raise prices, you know, you don't lose market share per se, whether that will keep a sort of like floor on the rate of inflation for a while because that's sort of like muscle memory of price increases is still there. I think an interesting question.

It's a political moment right now to say the least. What I will say, my study of this, and this goes back to England, the Clementally, England, it's really hard to lower prices. Yeah. You sit there with a dozen eggs and you go, let's bring the price down. Let's not. You mentioned political moment just then. And I feel like this is the other thing.

that maybe is shifting a little bit because, you know, maybe six weeks ago, there was a lot of talk about how the Fed can't cut in September because it will be seen to be politically motivated. That conversation, for the most part, seems to have gone away, it feels like. I thought his voice changed in the last press conference. You listen for that. His voice changed, and I thought the last paragraph today beautifully captured their humility and somewhat indirectly the statement, they're just not going to get involved in the politics.

Tom, here's the really important question. Are you coming with us to the million-dollar cowboy bar tonight? No, I have to jet back. Paul Sweney says they've better be there Monday morning. His private jet is on the tarmac right now. We should paint the picture of this if we have time. You fly into Jackson Hole on the confidence building plane I was on. It was like right out of the movie Airplane, the comedy.

And the guy was the pilot was great about it. We've got two captains. We've got more gold bars on shoulders than any airplane I've ever been on. And they're co-certifying each other to land at 6,000 feet. Like they're doing like their required certification. That was a confidence builder. So you come in and you're coming in from north to south. You land.

It's this lovely little airport. And you turn. Super short runway. Yeah, super short runway. The brakes come on fast. Yes. And you turn and you'll go by the wall of Jackson, Wyoming. Lear Jets, golf streams, and the rest, it looks like Davos. It looks like Zurich, you know, in a smaller scale.

At some point, we're going to do an episode about the economics of Jackson, Wyoming, because it's fascinating and it's wild. Yeah. It really is. There's a really good book called billionaire wilderness that I recommend to everyone listening to this podcast. It's sort of a mix of economics and anthropology. This guy studying like the billionaires who are building massive houses in Jackson and then the maids and the cooks and the driver. that work for them. And it was very interesting. This is Tom Keen, inviting you to join us for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of the U.S. market open. We cover stocks, bonds, commodities, even crypto, all the information you need to excel.

And I'm Alexis Christophores. Bloomberg Surveillance also brings you the analysis behind the headlines. We do that through conversations with the smartest names in economics, finance, investment and international relations. We do all this live each and every weekday that bring you the best analysis in our daily podcast. Search for Bloomberg Surveillance on Apple, Spotify, YouTube, or anywhere else you listen.

On the East Coast, listen at lunch. And on the West Coast, listen as soon as you wake up. That's the Bloomberg Surveillance Podcast with Tom Keene, Paul Sweeney, and me, Alexis Christophores. Subscribe today, wherever you get your podcasts. Bloomberg Surveillance, Essential Listening, each and every business day. I'm looking forward to the rodeo.

So you already went to the rodeo once? We went to the rodeo on Wednesday night. Is it never enough rodeo? Yeah. For those who are listening and not watching, which is everyone because there's not on video, Mike McKee is truly our most Western member. He's in a cowboy hat, Western shirt.

It's very natural. He's in his natural habitat, for sure. You're not one of the just, you know, billionaire is here playing dress-out. No, I wish I were a billionaire. But, no, I grew up in Colorado. So this is natural and normal. Is it true that you travel with a hat box for your hats?

It is not true. I wear the hat on the plane. Someone told me once that you had a hat box. No. Well, I have a hat box that I'd ever use, which it could use if I wanted to bring out multiple hats. Ah, I see. It would be a little much. So what did you think of the speech?

I thought it was a little more direct that I anticipated in his flat-out statement, it's time to adjust policy. But beyond that, it was pretty much as expected. And he didn't say, by how much. He did drop the idea of, we've got to wait for more data. So markets are reacting to that because they anticipated that he would be a little more cautious. You mentioned he didn't provide much guidance on the pace of rate cuts. I'm kind of wondering at this point, if it even really matters, if the market's already pricing in 100 bits of easing, it doesn't matter if that's like 250 basis point cuts or if it's 3, 25 basis point cuts or, like, they're there already pretty much.

Yeah, it's more in the optics. If you do 50, then maybe people think there's something wrong. And if you do 50 off the top, the markets are going to kind of expect you to do it again. And they'll look back at the rate increase cycle and say, well, they did 25, then they did 50, than they did 75. And they don't want to create that impression. And they don't feel they need to, that the economy is strong enough, in good enough shape, that they can bring down rates gradually.

And when you talk to the Fed Bank presidents, they say all the CEOs in their regions all want a predictable path for interest rates so they can plan going forward. Say more about that. Actually, you know, we talk a lot about what hiking cycles have historically looked like. What do cutting cycles? I hadn't thought about this idea that if you start off with 50, then people might expect the next move to be 50 at all, which is, again, you know, I know, there's still a lot of data to come.

But is that sort of like the norm where if you start off with that, then people expect that pace to continue? Well, there's no real norm. There's not a lot of historical record because we haven't had that many recessions that you could say this is a particular pattern. But what we have seen is basically 25 basis points at a time. And that once they start, they do at least three before they stop. And that's about the only historical record we have because every recession and the following economy are different.

Yeah. And so they're reacting in different ways. The only time they've really cut by 50 basis points or more is when there's a crisis. And there's no crisis now. So there's no reason to think they would do that. So, Mike, you're one of the journalists who is actually in the room of the symposium. And for those who don't know how Jackson Hole works, there is a limited number of journalists that are allowed in the room where the policymakers and central bankers are all speaking. What is that like? And what's the, I guess,

scuttle butt between all the presentations? What are people gossiping about or what's on everyone's minds? Tracy and I only get to hang out in the lobby. So give us a little insight. You know, I get asked that all the time as though, what are people talking about there? Well, during the coffee breaks and before the sessions, they're talking about their kids. They're talking about their vacations. They're normal people like everybody else. There is some talk about the papers. that are presented. And once they've been presented, you know, people go back and chat about them. In the room, it's an academic conference.

If you're at all familiar with that, the people listening out there, somebody gets up and presents an econometrics, dense paper on economic theory. A discussant comes up and tells what they think about it, and then the audience can ask questions or offer comments. There's not a sense of, we're trying to figure out a problem here, and we're going to come up with a solution. It's just presentation of papers so that these central bankers can learn something about economic theory. And the theme for this year's conference is, you know, basically how does monetary policy transmission actually work? And I think even though we did sort of get this,

you know, quasi-declosure of victory from Powell this morning, you know, there's this mix. And he said a big chunk of it was the fact that although it took longer than expected, pandemic-related distortions plus the war, it took longer to adjust than expected, and the role that monetary policy played in reducing aggregate demand. But like that mix, no one really knows. Nobody really knows. And every recession is different. This time we had some really unusual situations that are being addressed many of them by the papers that are being presented here. Normally, when the Fed is raising or lowering interest rates, they affect the housing market a lot because it's interest rate sensitive. But this time, everybody had refinanced interest rates at about 2 to 3%.

So when the Fed raised rates, nobody wanted to move. And so that killed off the housing market for a couple of years. And that's just kind of a really weird situation for them. Also, the lags, we talk about long and variable lags when monetary policy hits. Because of Bloomberg and other people who provide data instantly to everyone, we all know what the Fed knows. So there's a feeling that lags might be short. order and work on the economy in a different time frame. So there's a lot of things that have been exposed

by this cycle here that the Fed is going to try to understand. But speaking of lags and also the housing market is kind of interesting that even with the recent decline in mortgage rates, activity hasn't really picked up. And I kind of wonder, like, that's another, there are so many instances of the business cycle of the past few years not behaving the way you would expect it to. This feels kind of like the latest one. Like another one. to add on to the pile. It is a bit bizarre. Talking to the Fed Bank presidents about their regions, they have told me that they see mortgage activities starting to pick up, especially when they're talking to bankers who are making loans and things like that. It's not roaring yet, but it is starting

to come back. People have, there's pent up demand to move. The young people with families want bigger houses, but till the people who own the bigger houses have retired and moved out because they can get a lower mortgage. They're not going to get that. So they anticipate, that the market will get back into something of an equilibrium once rates get low enough. Now, that's the key question. What psychological rate, after hearing all your neighbors brag about their two and a half percent mortgage, what psychological rate do you have to get to before people really go out and start taking out mortgage applications? Okay, here's my other question. We're all at this lodge together. One of the cool things about

this event is everyone is just kind of, obviously some are locked away in the room, but after the presentations. Everyone comes out to the bar. They go outside and admire the view. When you inevitably run into Powell, what question are you going to ask him? Well, I've already run into him, and I asked him if he had been in Salt Lake City, because I saw somebody at the airport that looked like. I mean, he said no. But we don't talk policy in these informal situations. It's a chance to get to know people on a more personal basis. And we know a little bit about their family. They know a little bit about ours, so we chat like that, and it makes it easier to do your job going forward because there's more trust between the interviewer and interviewee. Do we know whether

Paolo has seen Dead & Coe at the sphere? That's Joe asking the really important questions. Okay, if I can give a new answer to Tracy, I'll say, that's the question I'll ask him. I don't think so, but it is possible. I didn't see him. How many times have you, did you go to see that? Four. Four. I went once. I would have gone more if I had the time. I thought it was incredible. It was. I mean, the sphere is definitely a bucket list item. And if you could see the dead there, then that's even better. Lots more is produced by Carmen Rodriguez and Dashel Bennett with help from Moses Ondom and Kail Brooks. Our sound engineer is Blake Maples. Sage Bowman is the head of Bloomberg podcasts.

Please rate, review, and subscribe to Odd Lots and Lots more on your favorite podcast platforms. And remember that Bloomberg subscribers can listen to all our podcasts ad-free by connecting through Apple Podcasts. Thanks for listening. San Francisco. On April 4th, 2023, around two in the morning, a man was found stabbed

multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts,

this is Foundering, the Killing of Bob Lee, beginning April 16, Thank you.