Odd Lots - Neel Kashkari on the Fed’s Quest To Get To Full Employment

Episode Date: August 16, 2021

The last two jobs reports have been strong, but the unemployment rate remains over 5%. And by some estimates, the economy is still 8 million jobs shy of where it would have been had it not been for the crisis. So when will the Fed declare "victory" in hitting its employment mandate? It's a question that's been complicated by the recent rise in inflation. On this episode, we speak with Neel Kashkari, the President of the Minneapolis Fed, a longtime proponent of pushing for a strong labor market. He explains what he's looking for, and how the labor market situation meshes with both the inflation situation and the Fed's new framework unveiled last year at Jackson Hole.See omnystudio.com/listener for privacy information.

I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law, and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars and policy experts to break down what the rulings really mean. We do this every weekday,

then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day, and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So Tracy, this is a fun time for us. This is a real treat. Last week, of course, we got to speak to Dallas Fed President, Rob Kaplan. And even since then, though, we've had plenty going on, including a very big jobs report. Yes, like a powerhouse of a jobs report, really.

I think payrolls climbed by, I think it was 943,000 in July, which was much, much higher than economist expectations of about 870,000. And of course, the unemployment rate keeps drifting lower. I think it came in at, what was it, 5.4%, which is basically the lowest since the pandemic started. And we're not quite where we were before the outbreak of COVID-19, but we're certainly getting close. That's right. So, of course, in the early part of the summer, you probably recall, there were like two reports where economists were looking for like big things, like a million plus jobs and they didn't really materialize and there's all kinds of concerns. Oh, what's holding back the labor market? The last two data points, however, have been quite strong, nearly a million each and no signs of slowing. We see the headline unemployment rate coming down pretty rapidly now. So I would say some of the labor market healing that, maybe people thought would come a little sooner, maybe just this spring. It seems to be kicking into gear, of course, the delta wave of the ongoing pandemic, notwithstanding. Yeah, but of course the question is what exactly are policymakers looking for when it comes to employment?

And we've spoken about this quite a few times now, but it does seem like the definition of full employment has changed to something much broader and inclusive. and everyone's trying to wrap their heads around exactly what that means. At the same time that they're also trying to wrap their heads around average inflation targeting and things like that. Yeah, exactly right. So we know that the Fed has seems to be, and I think a big part of the framework that was unveiled basically a year ago this time at Jackson Hole was about taking the employment side of the mandate more seriously or, to put it another way, not hiking or not trying to fight off

inflation just because employment hit some arbitrary number that some economist model says, oh, this is full employment. Like actually sort of like waiting to see, waiting to see it really happen. And so once again, you know, here we have the unemployment rate dropping rapidly, at least as of last month. Hopefully it continues. And it seems like policymakers will once again be confronted maybe next year with questions of like how much better can the labor market get. Yeah. And of course, I mean, the big thing that everyone is watching is, growth, right? And I think we did see a relatively significant spike in the payrolls report. In particular, some of the sort of like lower wage workers, people working in restaurants and

leisure, they saw a fairly big spike. So again, the question is, what is full employment? Is this enough of a recovery to start boosting inflation through wages? And then what does that actually mean for the average inflation framework that the Fed adopted last year. Exactly right. Well, once again, we have the absolute perfect guest to speak to this. It's going to be a true treat. We're going to be speaking with Neil Kashkari. He's the president of the Minneapolis Fed. And of course, we had Neil on basically a year ago exactly this time. And at that time, some of these questions about the Fed's new framework, they were just sort of theoretical and like thinking about this. And suddenly theory is now being put into practice and we'll have to

learn more about what the Fed is going to do. I would characterize Neil as someone who has always taken the employment side of the Fed's mandate very seriously long before, long before COVID hit. And so hearing how he'll think about some of these questions should be very interesting. Neil, thank you so much for coming back on Oddlots. Thanks for having me. It's great to be with both of you. So why do we just start? Like with, you know, we got that jobs report on Friday. We're recording this August 9th. I guess by the time people hear this, it'll have been like a week and a half. But, you know, we just got this jobs report. Very strong on all, basically all the metrics. What is your assessment of the labor market's trajectory in healing right now? Well, you're right. The job report was very strong. I was very happy to see that. We are making progress back towards a kind of labor market. we had before the pandemic hit. But as of our math that we do with the Minneapolis Fed, it still looks

like we are 6 to 8 million jobs below where we would have been had the COVID crisis not happened. And so that's what I'm focused on, is there's still a lot of Americans that are not either employed in jobs or they're not looking for work and how long is it going to take and what is it going to take to bring them back in because they represent a meaningful share of our economy's potential. And so good progress, but we still have a way to do. to go. It feels kind of weird asking this question because I do think the labor market recovery has been faster than a lot of people expected. But what do you think accounts for, you know, the need to, or the fact that we haven't reached full employment just yet? Because of course,

there are different theories. There's the idea that a lot of people, people just got tired during COVID and decided to retire, drop out of the labor force. There's the idea that, that people are nervous about going back to work and potentially exposing themselves to COVID, concerns around child care. And there's also this idea of floating around about the great resignation and this notion that people just, I guess, sort of reconsidered their lives after a global pandemic and decided that they wanted to do something differently. So I'm curious how you're viewing, I hesitate to call it sluggish recovery in the job market, but the fact that we're not quite there yet, what's going on? I put stock in all of the things you said,

except for, oh, people are reassessing their priorities in life. I mean, one of the things we learned after the 2008 crisis, we heard, you know, there's something happens in macroeconomics. Whenever a shock hits the economy, many macroeconomists reflexively raised the natural rate of unemployment, their estimate of how low the unemployment rate can go without triggering high inflation. And they point to all sorts of theories and structural changes and mismatches. And what we learned after the 08 crisis is all of those stories were wrong. It turns out most Americans want to work. Most Americans find satisfaction in working. They need to work. They need to put food on the table. So that's my starting position.

I believe the vast majority of Americans want to work if there are decent jobs available at decent wages. I do think that fear of COVID is real. You know, the health professionals spent the last 18 months telling us to take COVID seriously, and I think that they had a lot of success in doing that. It's going to take time for people to be confident again. I do think the child care issues are real. And I also think that the enhanced unemployment benefits are having some effect. If somebody says, well, I'm making just as much money on unemployment and it's going to expire in a month, why shouldn't I wait a month before I go back into work? There are probably going to be a lot of jobs available a month from now.

So I think all of these factors are having some effect. But I start with the assumption of the vast majority of people want to work, if given the chance. You know, you mentioned, okay, by the math that you've done at the Minneapolis Fed, we're probably six to eight million jobs short of where we would have been absent the, where we would have been absent the COVID shock. So, okay, that's one starting point for thinking about how much slack there is. That being said, you know, I guess the unemployment rate pre-crisis was, I think it got down to three and a half percent.

But one thing that we saw was that in the end, economists are really, it's real, let's just put this way, it's really difficult to know how good the labor market truly can be. because we saw, you know, after the great financial crisis, we saw, oh, six and a half percent, maybe this is where our full employment is. Then five and a half percent. There's like, oh, well, we can't go lower than five, maybe four. Then we were down to four. And we didn't get, you know, even when we were at three and a half percent, it's not like

we had seen like some big, like, you know, inflationary wage price spiral. So, you know, thinking back, okay, you start with that six to eight million. What else will you be looking for? beyond some just sort of like pure number to think about, okay, the labor market really is in its best place. And we are not going to make some of the same mistakes last time as underestimating how good the job's market can get. Well, I think we look at a lot of different measures, Joe. One of the things is what's happening to wage growth. And we are seeing wages pick up. I think Tracy talked about a few minutes ago. And that's an important factor. But are those going to be sustained

wage gains or those one-time price adjustments as the economy is going through this reopening. So just to back up, the economy went through a rapid shutdown and now is going through a rapid reopening. And we're seeing lots of frictions as businesses are trying to make that adjustment. And you have this mismatch where the economy seems to be reopening more quickly than the full labor supply is coming online. Well, once we get to something more like normal, a new equilibrium, what does that look like and what wage growth are we seeing? We did see, I think one of you mentioned, that we did see faster wage growth at the end of the last expansion, so 2018, 2019, for the lowest income workers. That was great to see. They were long overdue for a raise,

but even if you looked at their wage growth, net of productivity, it was not suggesting high inflation was around the corner. So just to your point, I'm not convinced we were actually at maximum employment before the COVID shock hit us. So that's exactly why I want us to be really humble about declaring where this is as good as it can get. Let's actually let the economy reopen, get people re-engaged, and then let's see what the labor market looks like and what inflation looks like. Well, just on a similar note, can you maybe talk to us what full employment looks like from an inclusivity perspective? Because this is something that Powell has talked about at the last Jackson Hole, this idea that the Fed is now going for a broad definition of full

employment. It's a complicated topic. And a lot of people, we all look at a lot of different measures in trying to make this determination. For me, it really does come back to inflation, which is how tight can we get the labor market that is consistent with long run inflation at 2%. So to me, there are like two sides of a seesaw. If we're, we think there's still slack in the labor market, then it's likely we're going to have low inflation in the future. So let's try to tighten the labor market so we can actually get to our 2% inflation target over time. So that to me ultimately is where we're going to know. We do not have the ability of targeting, for example, the black unemployment rate and saying we need to get

the black unemployment rate to X and we're not going to be at full employment until we get it to X because we have to pay attention to what that means for on the inflation side of our dual mandate. So these two things are fundamentally linked in the way, at least I think, about monetary policy. That being said, I mean, one of the things we see is that in good economies, or at the end of the long expansion, we did see that spread compressed between white unemployment and black unemployment. And, you know, you mentioned, okay, the answer to some of these questions is answered in inflation, but we have elevated the inflation right now. Now, we could tell a story about, about the elevated inflation is like, oh, it's reopening, and it's used cars, and it's semiconductors,

and it's bottlenecks at the port. But, you know, that's just one story to explain why elevated inflation is right now, while there is still a high unemployment and be a high spread between white and black unemployment. So how do you, I mean, if inflation is going to be the signal that you use, how do you sort of, say, incorporate this moment right now? And, which if we were just going on inflation, it's like, oh, well, I guess we're there. Well, we look at a lot of different measures of inflation. So, you know, just as you said, we know that the high inflation readings we're seeing right now are highly concentrated in a few sectors, whether it's autos or travel and transportation related sectors. The vast majority of the inflation that we're seeing

are in those sectors that is skewing the results. If you look at broader based measures of inflation, if you look at various trim mean surveys, we're not seeing a high uptick. And one thing is just math. You know, if the prices fell a year ago because of the shutdowns, and now they're bouncing back, just the math of that says you're going to see high inflation readings. So if you look at a two-year inflation reading, you know, average inflation over two years, so you get away from this V in the middle of it, you're around 2.3% or 2.4% inflation. So there are a lot of different measures that we look at to try to understand what is underlying inflation in the economy. and that's what gives me confidence that most of what we're seeing is associated with this reopening.

And fundamentally, are we really going to have sustained high inflation if there's all this labor market slack still available? I find that hard to understand. Now, if these six to eight million Americans are never coming back for whatever reason into the workforce, then I think we need to reassess the economy's potential and reassess inflation. But I think it is far premature to draw that conclusion. 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

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television, radio, and wherever you get your podcasts. So I have a slightly weird question, and I'm trying to think how exactly to phrase this. But, you know, we have employment at 5.4%. We're talking about a sort of tail end of America that remains unemployed. And I guess I'm just wondering, is monetary policy the correct tool to get those people back into the workforce? Or does it need? to be paired with some other type of policy on the fiscal or the government side? There's a lot of fiscal policy, obviously, that's been coming out of Washington over the last year in response to COVID, now the likely infrastructure bill, and then maybe more.

So I do think fiscal policy is providing a big impulse to try to get the economy moving and get people back in. So to me, the both of them have an important role to play. I'll say things like targeted interventions such as worker retraining. I mean, all of these things are well-meaning. Most programs that I've seen are along the worker retraining side. They're very hard to do at scale. The best worker retraining programs I've seen are really where employers say, you know what, I need someone to run this machine,

and I don't care if you've never done it before, I'll train you. That seems to have much more success than government-oriented training programs just because they're too blunt. So I think fiscal policy is doing a lot. Monetary policy has a role to play, and a lot of it is going to be businesses saying, you know what, we're going to bring you in, we're going to teach you how to do this, and we're going to invest in you. And we saw that in 2018, 2019, when businesses said they couldn't find workers, they started investing a lot more in training to develop the workforce that they needed. Right. And so does that get to this idea? I mean, And, you know, I think often economists think of like supply as a thing and demand as a thing.

But if ultimately the key to getting retraining and the key to creating workforce with more skills is to get businesses to want to invest in their own employees and to get businesses to essentially want to meet, be able to meet the demand they're seeing, does that speak to sort of like a fundamental power of, I guess I would say demand side economics that maintain aggregate demand. either through robust monetary policy, ongoing aggressive fiscal policy, and then that, you know, incentivizes the businesses to increase productivity through more training. I absolutely believe that. I mean, I think one of the things about this broad fiscal policy or broad monetary policy is it actually works at scale of the U.S. economy. And by just creating this tight economy or a tight labor market, you know, we saw in 2017, 18, 19, businesses saying, you know what, I'm no longer going to drug test for certain jobs because these jobs, I don't need to do the drug test. It's safe without it. Or I'm going to give X-cons a chance

for certain types of jobs. Or, you know, you mentioned it, Joe, that you started to see some compression between black, white unemployment, the spread. This is what happens in a tight labor market. Businesses say, you know what? It's in my own interest to make these changes and to develop the workforce that I need. And what I saw was there were profound benefits to society when they did that. So we just had your colleague, Robert Kaplan, the Dallas Fed president on all thoughts just the other day. And he was talking a lot about the difference between the situations facing large businesses versus small to medium-sized businesses. And he was making the point that smaller businesses are going to find it more difficult to deal with rising inflation.

because their profit margins are probably narrower than big businesses that have scale and pricing power and can negotiate with their suppliers and things like that. I imagine that dynamic to some degree also applies to the labor market. So the biggest businesses are going to have some power over wages. They're going to be able to pay more. And they're also probably going to be able to provide more training opportunities, maybe to band together with other large businesses to sort of share workers and exchange workers, and we've seen some examples of that.

Is that something that's on your radar, like the idea of discrepancies between the experience of small and larger businesses here? Well, I think that there are always differences along the lines that you're saying, Tracy. But I don't think, at least for me, I don't think it leads me to make a different conclusion about assessing the stance of monetary policy. Let's say that that thesis is right, that big businesses are going to do better in this current environment for all the reasons you just said. Does that mean that we should make monetary policy less accommodative to slow the recovery, so to speak, to try to bring that into balance? That doesn't make sense to me. To me, when I look at, you know,

there's some comments that workers have a lot of power right now relative to the past. Number one, what's wrong with that? You know, workers should have more power than they've had in the past. Number two, when the six to eight million Americans come back in the labor force, my expectation is we're going to see that power balance become more balance. So the power imbalance become more balance and more normal over time. And so I don't want to overreact to what I would call frictions and imbalances as the economy goes through this reopening. Let's actually get the economy fully recovered, and then we can assess where the power lies. I want to pivot soon to some of the other questions, including inflation right now and how

it interacts with the Fed's new framework one year on. But just sticking with employment for a little bit longer, you know, one of the things is we have seen the unemployment right now come drop down rapidly, 5.4%, I think, and, you know, could easily be not hard to imagine it in the fours, maybe early next year, maybe at the end of this year. Labor force participation rate, however, even for prime age workers, remains considerably below pre-crisis levels. Should that be incorporated? How much is LFPR on your dashboard and thinking about getting those numbers up, not

just the unemployment rate down? Oh, it's fundamental, Joe. I mean, LFP and employment to population, you know, they're cousins. those are fundamental measures. And this is one of the things we learned. A lot of macroeconomists will say, well, the trend line of labor force participation has been declining. And that's why oftentimes we'll look at prime age. But even there, they'll say, well, the trend line is declining. And one of my good friends, the late great Eddie Lazier, who was a prominent labor market economist, when I first joined the Fed, he called me up. He said the Fed is misleading

the labor market. The macroeconomists just think the trend lines are in a certain direction. and they take that as gospel and therefore it's always going to be trending down and there's no good reason why it's trending down. And Eddie Lazier was 100% correct. And so to me, that's why, you know, getting LFP and employment to population at least back to where they were before, but not necessarily even declaring victory when we do that. I think that's a reasonable thing for us to try to achieve. You know, when a lot of Americans, they answer these surveys, they'll say, do you have a job? No. Are you looking for a job? No. So, then they're considered not in the labor force. Those same folks, many of them, the next month,

they take a job. It's not supposed to work that way, but that's the way it actually does work. So let's actually see, let's not just ask people, are you looking? Let's actually see what happens in the wage data, what happens in the jobs data, what happens in the inflation data. So on that note, why don't we move over to the inflation discussion? And you're on the record as saying that you think the current price increases are probably transitory. I'm curious, is there something that would make you think that inflation was something more than transitory, something that's more broad-based, something potentially more permanent? Is it just the wage growth that you just mentioned? The wage growth is one piece of it. It is looking at the sectors that are seeing

high inflation readings. As we mentioned a few minutes ago, it's highly concentrated. in autos and in travel and transportation sectors right now. And so if we saw it more broadly, that would be another factor that I would pay a lot of attention to. Then going back to the labor market, if we thought these $68 million Americans were not coming in, coming back, that would also give me pause. You know, if the Delta variant really puts a chill on hiring and chill on people returning, that would also give me pause.

And then, of course, we also pay attention to market-based measures of inflation and inflation expectations. And as you all know, I know you follow the Treasury market very closely. Long-term Treasury yields are not implying high inflation five to ten years from now. And so all of those things right now are indicating to me that this high inflation is likely going to be transitory. If those measures were to change, that would cause me to reassess that conclusion. Let's talk about the interaction of the data with the new framework. And of course, Again, about almost a year on here since Jackson Holt where the Fed unveiled its flexible average

inflation targeting framework. And, you know, my general interpretation of the new framework, and you used the word humble before, and I think it is intended to be a more humble framework and to not overreact, to not try to preempt inflation to tolerate some short-term overshoot. Does inflation that we're seeing that we can ascribe to reopening? I guess the question is, does it count for that? So when you think about like, okay, over time this 2%, if we get this sort of inflation that's, oh, there's something going on with used cars and bottlenecks at the ports because imports are so high because people still aren't spending money on services and all of these things, do these periods of elevated

inflation that we could reasonably chalk up to those things, do they count towards the average? Well, that's a very good question, Joe. And I think that my guess is there would be a wide range of opinions in the Federal Open Market Committee about the answer to that question. In my mind, because I have a lot of confidence that these inflation readings are transitory, that's not what I intended when I said we should achieve a modest overshoot. You know, what motivated the new framework? What motivated the new framework was basically we were undershooting our inflation target for 10 years. And we know the zero lower bound is a constraint on policy. And so we said, look, let's allow for a modest overshoot so we can actually average 2% inflation over time. And get, you know, our estimates are that underlying inflation is roughly around 1.8% or it has been. Let's get underlying inflation back to 2%. In my mind, temporary transitory high inflation readings because of the reopening are not actually going to be effective in boosting underlying inflation to 2% on average over time. And that's why, in my mind, they don't really count. but I think there's probably a wide range of opinions around the committee as to that question.

It certainly wasn't what I intended a year ago. Do you think the market understands the Fed's new framework? And I mean, the reason I ask that is because, as you just noted, bond yields remain incredibly, stubbornly low, despite ostensibly a willingness from the Fed to tolerate higher levels of price increases. So I think they do. I don't want to declare victory, but if you look at the market measures of inflation expectations embedded in tips, for example, and nominal treasuries, you're seeing higher inflation for the next few years, let's say the next five years, and then not much action out at 10 years or beyond. That's completely consistent with what our framework is attempting to engineer, which is the framework essentially is trying to boost inflation expectations for the next few years. years while leaving long-term inflation expectations anchored at 2% over the long-term. That's what the market indicators are saying. So I think that sophisticated market participants have paid very close attention to the new framework. And I do think it is, it seems to be

working as intended in generating those kinds of outcomes. But, you know, it's still early. It's only been a year. We're going through this reopening. You know, it's far too soon to draw any firm conclusions. It's funny you ended that saying it's too soon to draw any conclusions because that's what I was thinking about, something I was thinking about is, okay, so one of the, this sort of, I guess, it seems to be one of the new guiding principles of the sort of more humble fed of like, okay, let's see how, let's see where we can go. Let's see, let's actually wait to see evidence that we hit our targets before we start raising rates and so forth.

And yet you as a member of the FOMC are tasked with coming up with dots and, you know, put out your, okay, 2022 and 23 and beyond like forecast for what rates are. Do you think there is a tension between a destination-based framework of let's wait and see versus a dots requirement, which implicitly is sort of asking you to make a prediction of what the trajectory of the economy, employment, and inflation will look like? over the next couple of years? I think the dot plot is deeply flawed for a lot of reasons, Joe, for the reason you mentioned, but I just think in general it draws way too much attention from the press, from market participants, from the public. They're not meant to be forecasts. They're meant to be, this is what we think optimal policy is to achieve the goals that we have. So to me, I think the dot plot does more harm than good. And if it were up to me, I would kill it.

related question, but is there something you would do differently at the Fed or, you know, if you had the chance to maybe change the way the Fed currently operates, is there something that you would alter or get rid of like the dot plot or, I don't know, the use of the word transitory in describing inflation, things like that? Well, I mean, I think the dot plot is one clear one that I've said for a long time we should get rid of. Second thing is, you know, it's funny. The FMC statement itself, it's quite a cumbersome statement to read. And when I read it with a fresh set of eyes, it feels kind of clunky. And what's difficult about it is it's not simply the words on the page that convey the information. The real information is the change in the words on the page.

And every meeting, we go through great deliberations and people are very thoughtful about how they want to change the words on the page to convey the message to the public and the financial markets. But then after a year or two, you end up with this thing and it says, well, wait a second, if I read this with a clean sheet of, you know, with a clean set of eyes, so to speak, would I write it this way if I was starting over? And the answer is probably no. So that's one that I struggle with, which is, you know, could we do a refresh on the statement? It's hard to do a refresh because, you know, you are conveying information by the changes that you're making. And if you just said, we're going to start with a clean sheet of paper, it'll probably introduce a lot of uncertainty as

people try to get a new baseline, so to speak, of what the statement is telling us. Well, you're certainly offering out full employment for professional Fed watchers who do the whole red line strike through and try to tell us what, you know, some further progress versus progress means and put those into actual English. You know, one of the things that's being debated right now and in terms of changes is obviously the asset purchases and asset purchases were really cranked up when the crisis hit for all kinds of reasons for financial market plumbing. In your view, I mean, I guess it's kind of a two-part question, but what do you think asset purchases accomplish at this point?

Like, what are they doing? And two, sort of where do you stand? Do you think that the economy is in a position where they can start to be wound down without? causing a major setback. You know, I'm always reminded when we study the asset purchases with my economists at the Minneapolis said, I'm always reminded of former chairman Bernanke's very famous quip that quantitative easing works in practice, but not in theory. And that's, I mean, I think that's, he really nails it with that because when the economists go through their models and you get very modest effects, but we can actually see

very large effects because I think it's sending a message about the committee's overall stance on monetary policy, or are we committed to being accommodative for the foreseeable future? And that's why modest changes can lead to big changes and expectations and potentially big moves. And that's why the taper tantrum was such a big effect, had such a big effect in 2013. And so I do think right now it is still providing support to the economy. I think it is still signaling that the committee is committed to achieving our dual mandate goals to really achieving maximum employment and it's sending a message that we are not going to prematurely normalize monetary policy and declare victory before we've actually achieved our goals.

So that to me is useful and powerful. But as, you know, this committee said that when we see substantial further progress, then we would normalize our asset purchases. I think if we see a few more jobs reports like the one we just got, then I would feel comfortable saying, yeah, we are maybe haven't completely filled the hole that we've been in, but we've made a lot of progress. And now then we'll be the time to start tapering our asset purchases. So on this note, you are one of the more doveish people at the Fed, and possibly the most duffish person at the Fed. And at the same time, you were very, very active during the 2008 financial crisis. I think, you know, you had the perfect sort of vantage point to see everything that was happening

and also to see just how bad things had gotten. So I'm curious, how are you weighing the sort of the risks of tightening monetary policy too early versus the risks of keeping it too loose for too long and getting some sort of imbalance built up in the financial system? Well, I'm very focused on the, I mean, the risk, we pay a lot of attention. to financial stability risk, we pay a lot of attention to risks of inflation. I see the bigger risk if monetary policy is too accommodative for too long. To me, I think that the biggest risk is that it shows up in high inflation, these transitory readings end up not being transitory,

and it becomes more broad-based, and then we would have to adjust monetary policy to make sure that inflation expectations are anchored. I don't think. I've not seen any evidence that monetary policy is the right tool to address financial stability risks. You know, I don't want to say never, but whenever I analyze it with our economists, it just seems like monetary policy is such a blunt instrument that it's a lousy a way to try to rein in potential excesses on Wall Street. I would much rather, for example, raise the countercyclical capital buffer to make sure that the biggest banks have enough capital so they can withstand any downturns, then say, you know what, we're going to slow the labor market recovery because we're worried about some frothiness in Wall Street.

And then, you know, one more quick comment. think about the tech bubble bursting in 2000, 2001. That was clearly a bubble. It burst. It didn't lead to a deep recession. It led to a very mild recession. And if the Fed had tried to use monetary policy to keep the tech bubble from inflating in the first place, the cost of the economy would have been much, much larger than what

ended up happening when the tech bubble burst. And so we have to be very careful about saying we're going to use monetary policy to trying to rain in Wall Street. I'm Francine Lacroix, an award-winning journalist, and I've got a new podcast, leaders with Francine Laquois from Bloomberg Podcasts. I've interviewed everyone from heads of state to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision.

Listen to new episodes every other Monday. Follow leaders with Francine Lacois. wherever you get your podcasts. Just one more thing on financial stability. There is currently some concern about this idea of lots of excess reserves, just sort of sloshing away in the financial system, showing up on bank balance sheets so that banks are actually turning away some large depositors. Is that a concern for you when it comes to the Fed's asset purchase program?

Or does it not really register as something that's top of mind? You know, we've paid close attention to it, and I know the overnight reverse repo facility has been getting a lot of attention because the volumes are going up. The purpose of that is to keep short-term interest rates in roughly related to the ban that the committee is set for the federal funds rate. And so in a sense, you could think of it as a way of having some type of yield curve control where the Fed is buying a lot of long-term assets, but then we don't want short-term rates to go negative. until we have this floor in a sense, which is allowing banks to park some of their reserves, essentially at the Fed to keep short-term rates from going negative. And so I think this is not, it doesn't strike me as highly concerning. It's kind of understandable, especially when the Fed made a technical adjustment and raised the rate that it pays on reserves after the last meeting. So it isn't highly concerning to me.

And, you know, we're going to just keep watching it. I have one last question, and it actually relates to the first part of the conversation. But thinking back to, you know, you were talking about the spread between white unemployment and black unemployment and how far that can go down. And other indicators of when the economy has met maximum employment potential, and the gauge that you're using is on the inflation side. And it seems to me, therefore, that even with this new framework that, you know, there's still this sort of like deeply embedded, I guess it's like Phillips curve idea that ultimately there is some tension, that ultimately like the overemployment to the extent that that could be such a thing is indicated by overly hot inflation or undesirable inflation. And I'm curious, you know, obviously, again, there's this Phillips curve, this tradeoff, could. contributed arguably to some of the premature hiking that we saw post-crisis, the idea that, okay, five and a half percent, four and a half percent, these must be levels at which inflation

is going to take off. Do you ever question that core premise, the premise of a trade-off, and whether the two things, inflation and employment, maybe do they even have much to do with each other? I do. It's a good question. I do, you know, we debate it once in a while with my economists. You know, if, for example, if the Fed just gave everybody twice as many dollars, so they said, the dollar you have in your pocket or in your PayPal account is now $2, you would expect to see prices double in the economy if everybody's money got worth half as much or, you know, had two X, the amount. And that's got nothing to do with the labor market.

That's just how much money is in people's pockets trying to buy the same number of goods and services. But fundamentally, I do believe that there are. is a linkage. I do believe that for most firms, the bulk of their expenses are their employee base and their wages. And that if we're going to see firms having higher prices and passion those on to consumers, that wages is going to be a very important piece of that. And so I do believe that there is a linkage between the labor market and inflation. I'm not ready to write that off, but we do, you know, we do debate one another about some of these more fundamental questions about

how prices are set and how monetary policy can affect the economy. Neil, there's such a real treat to have you back on odd lots. Neil Cashcarry, thank you so much for joining us. Thanks for having me. It's great to be with you both. Yeah, that was great, Neil. Thanks so much, Neil. Yeah.

We'll do it again next August. You know, Tracy, I was thinking about Neil's point about sort of ripping up the approach to the statement and just starting with like a clearer form of communication. And one thing I really do admire about Neil is, although he's not a trained economist, he's obviously very deep in it and one of the better policymakers at sort of just talking about what they're up to in a plain English that anyone can understand. Yeah, that's definitely true. I remember there was a study, gosh, I guess it was like five or six years back now,

but there was a study that went through all the FOMC statements over time and crunched some of the numbers on word length and also on readability. And you could see this really strong trend that the statements were getting longer and longer basically since the financial crisis and also the reading level that you needed in order to understand them was going up. So it used to be high school level, I think. And by the end of it, in theory, you would have needed a PhD to kind of understand it. And then, of course, Neil's point was that, you know, not only would you have to be able

to read it and comprehend it that way, but you'd also have to be able to compare it to the previous statement to get, you know, to try to discern the signals from the central bank. So point taken there, for sure. And also on the dot plot, like, again, that seems to be a major point of contention at the Fed. Yeah, it's interesting because all these things like, you know, you have the dot plot and, of course, the press conference, which under Paul has actually gone to every meeting before there just, I think, four times a year. But there essentially, like, all these new monetary policy innovations, so to speak, all that came out of the great financial crisis, like Bernanke, like the dots didn't exist before that. The press conference didn't exist prior to before that.

So it's interesting to see, like, you know, okay, maybe some of these things made sense during the great financial crisis when it was, like, particularly important to communicate to the public or to market that, you know, how the sort of the battle mindset, the battle footing that the Fed was on. But, you know, it does raise questions whether at some point in a different environment, some of these tools and approaches will need to change. Totally. And again, we've had the change to the Fed's framework, but you kind of wonder if an experience as big and as idiosyncratic as the pandemic might lead to new communication.

styles and tools as well. I guess, you know, we might find out at Jackson Hole. Yeah, the coming Jackson Hole will be interesting. You know, I still think it's interesting going back to, I'm still a little bit hung up on what I see is some ambiguity in the thinking right now. So as Neil put it, inflation is still the indicator that tells us when the economy has reached full potential. But then you could have inflation like we have right. right now in which you can tell a story that it has nothing to do with full potential, and it's all about idiosyncratic shocks. But then I guess where I'm hung up still is, okay, if we can establish and accept that some

kind of inflations are not really related to full potential or to maximum employment, then how good of a guide is it really? Because no matter where we are, I mean, we could have unemployment at 3%. And then you could still imagine a world in which. which inflation picks up and yet economists remain divided about what's the cause. Maybe it's oil. I mean, you know, let's say imagine unemployment were to fall to 3 percent and you get an oil shock in the Middle East, right? You could always come up with stories about, well, this isn't the real inflation, or this isn't the inflation that we're targeting with our new framework, or this

inflation can be ascribed to X or Y. And so it still seems like there is this tension that emerges in which if inflation is going to be the ultimate arbiter, well, what happens if you, you know, you can still tell stories about why that doesn't really count? And so I think there are still areas of ambiguity about, you know, what is the Fed going to do? And when is the Fed going to act, you know, next year and the year beyond if employment, if unemployment keeps dropping? Right. It feels like the inflation story is almost always open to some interpretation and cherry picking the data. inflation tells us when we're at maximum employment, except when it doesn't, except when it's about something else. I was about to say, I really liked your Phillips curve question, because I think

that kind of gets to the heart of it as well. Like, we're sort of assuming that there's still some relationship now, but, you know, before COVID, everyone was sort of giving up on the Phillips curve because we were, you know, we had unemployment at something like 3%, and inflation had, you know, hadn't gone up for years. And now inflation seems to be the signal, which is kind of weird and definitely to your point, ambiguous in many ways. Again, this is why I like talking to Neil, because I really think he's probably one of the most, like, sort of open-minded thinkers on all this stuff. And, you know, he comes at it from a non-academic perspective, but I think he does genuinely sort of, like, wrestle with this stuff in an intellectually honest manner and sort of sees some of the

same tensions that a lot of people who aren't, you know, lifetime steeped in the academy see with some of these debates. He's definitely very candid and open on these thorny issues, which we appreciate on Aughts. Absolutely. Shall we leave it there? Let's leave it there. Okay.

This has been another episode of the Aoblots podcast. I'm Tracy Alaway. You can follow me on Twitter at Tracy Holloway. And I'm Joe Wisenthall. You can follow me on Twitter on Twitter. Twitter at the stalwart. Follow our guests on Twitter. Neil Cashcarry, he's at Neil Cashcarry,

one of the only, I think probably the only FOMC member who sort of like regularly tweets like a Twitterer at Neil Cashcarry. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Followed the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg, under the handle at podcasts.

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