Plain English with Derek Thompson - Could the Fed Break the World Economy?

Episode Date: October 4, 2022

What if, in trying to fix the hangover of domestic inflation, the Federal Reserve is accidentally triggering a series of diabolical domino effects that could screw up the global economy? Joining the show today to walk us piece by piece through those dominos is Kyla Scanlon, a writer and brilliant economic explainer on TikTok and YouTube. Kyla is an expert at what I try to do with this show, which is to explain complicated ideas in simple ways without losing the nuance that makes them complicated in the first place. I’ve learned a lot from her. And I hope you do, too. If you have questions, observations, or ideas for future episodes, email us at [e-mail]. You can find us on TikTok at www.tiktok.com/@plainenglish_ Host: Derek Thompson Guest: Kyla Scanlon Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

I'm Yossi Sallick, and I'm the host of Bandsplain, a show where we explain cult bands and iconic artists by going deep into their histories and discographies. We're back with a brand new season at our brand new home, the Ringer podcast network, tackling a whole new batch of artists, from grunge gods to power pop pioneers to new metal legends and many, many more. Listen to new episodes every Thursday, only on Spotify. Today's episode is about the Federal Reserve and the possibility that the feds, actions and rising interest rates might accidentally wreck the global economy. So I was thinking about the best way into this particular episode. And a story occurred to me, a story from my past. When I was in my late teens, early 20s, I must confess that I used to drink a little bit more than I do today. And I got a lot of really, really bad hangovers. And when I got a bad hangover,

I would always do the same thing. I would take the drug, excedrine. And then if the first excetrine pill didn't do anything, I would take another excedrine. And sometimes when that second excedrine drug didn't do anything, I would take a third pill of excedrine. And sometimes this prescription of taking excetrine or in order to cure my hangovers worked really, really well.

But other times, I would start, like, shaking, jittering, having bad stomach aches, the side effects of the eczetrine would take hold before the hangover itself had gone away. And so it would end up with the worst of both worlds. A hangover, a headache, and all these negative side effects

from the drug that I was taking in order to get rid of the hangover and the headache. And to a certain extent, I think that is what might be happening, might be happening, with the Federal Reserve and the world economy. There is a clear malady here. a clear hangover equivalent in U.S. economics, it's inflation.

And the Fed has a clear drug of choice to get rid of that hangover effect of inflation. It's rising interest rates. Plus, like saying spooky things about how we won't stop doing this until unemployment rises a little bit. But what we're starting to see is negative side effects in credit markets, in emerging markets, in currency markets, in the housing market. All sorts of little things around the world seem to be breaking because of the Federal Reserve's policy. The negative side effects are taking hold even as the original inflation crisis isn't necessarily going away yet. And so my big anxiety at the moment is what if we are making a 22-year-old Derek error here?

What if in trying to fix the hangover of domestic inflation, we were accidentally scrambling. screwing up the nervous system of the world economy. So today's guest is no stranger to metaphor, analogy. Her name is Kyla Scanlan. Kyla has very, very quickly become one of my favorite economic commentators. She is wickedly smart and creative. Her analysis blends memes, TikToks, YouTube videos, essays. I really love the fact that she makes economics simple while holding on to the nuance,

and often she makes it funny as well. I think there's a sense among a lot of people that I know who aren't paid to cover economics that this stuff is unreasonably complicated and relatedly, extremely boring. And that's in part because I think a lot of financial commentary is written among insiders and by insiders. It's just this mess of acronyms and confident shorthand. It's totally inscrutable to the outside world. And Kyla is an expert in what I try to do with this show, which is to explain complicated ideas

in simple ways without losing the nuance that makes them complicated in the first place. I've learned a lot from reading her, and I hope you learn a lot from listening to her. As always, your feedback is very welcome. Please email me if you have any kind of commentary, negative or positive, at plain English at Spotify.com. I'm Derek Thompson. This is plain English. Kyla Scanlan, welcome to the podcast.

Hey, thanks for having me on. Before we talk about the news and the Fed and prospects of a global economic meltdown and all that fun stuff, I actually want to talk a little bit about your style of economic analysis. I really think you are unlike just about every other economic commentator that I know and follow. I think that the economic and finance media community can be very insular, just lots of acronyms, lots of interior memes. And you seem like a popularizer. Your analysis has broad memes and short story quotations,

and it's sprinkled through with all sorts of other pieces that just make it fun to read about economics. And I'm just interested as sort of a first-order question, like, what are you trying to do? What are you trying to accomplish with this style of covering economic news? So for me, it's all about making economics more, human-centric. So everybody is an economic entity, but if you tell the average person that, they're like, no, I don't like the economy. I have nothing to do with it. I don't like finance.

I don't like the stock market. And that's mostly because they haven't been given the tools to understand properly everything that's going on. So my goal is to make it more accessible. And the main way to do that is to make it more fun because it is fun. Like economics, finance, lots of it is inherently goofy. So there's a lot to pull from. So the goal is just to help people understand what's going on in the world around them because they deserve that, right? Like, it's crazy that we don't have that accessibility right now. No, I think it's fairly stunning how little economics is taught in, let's say, high schools. I remember myself, I took a couple of macro classes in college when the Atlantic, I don't know

that I've told the show on, told this story on the podcast. When the Atlantic first offered me a writing job in 2009, it was a writing job with the economic team of the Atlantic. And my first response was to say, absolutely not. Please don't make me right about economics. Like, I love the news. When I read the Washington Post at home, I read every single section of that newspaper except for the business section. I throw it away because there's too many numbers. There's too many three-letter acronyms. There's nothing that is legible to someone who just is a generalist. And I love the fact that you're constantly trying to pierce that and say, no, Like the people who are in charge of the machinery of the global economy, they're not smarter than you.

They're not more sophisticated than you. They just have a different vocabulary. It's like if we can explain their vocabulary in a human vocabulary, we can all participate in this game. Yeah, that's the little thing. And I imagine like GDP would grow if more people understood the world around them. Like there's like inherent benefits that would come from people understanding like conspiracy theories might decrease. Like there's so much value that would come from people just being like, okay, this is what the federal Reserve does. There's not like secret door closed meetings that are like a big secret. Like those

are normal. You just have to like give people the tools so they aren't confused, you know, like that's super important. And you also, you know, you're on TikTok, you're on YouTube, you have a newsletter with Substack. I think it's also important that you try to hit people in different ways because some people learn through social media and some people learn through 45-minute podcasts and some people, some of my closest friends, hate TikTok and hate podcasts through just read. And so you're trying to find them wherever they live and however they consume media. I think it's a really wonderful part of your work as well. So let's push you to the test. How would you explain in Kyla English what the Fed is trying to accomplish right now and why

they're trying to accomplish it? Yeah. So right now the Fed is trying to battle inflation. So I'm sure everybody knows inflation has been raging. And the Federal Reserve has a dual mandate of price stability. inflation and maximum employment. And right now, they are very much focused on price stability, so returning that back to normal. And the main way that they do that is right now through raising rates. They can also shrink their balance sheet, but really it's about raising rates. Because the whole goal with that is to make it more expensive for people to be alive, right? So they stop demanding things, and then hopefully inflation would go back down. So it's kind of like a roundabout way to tackle the inflation problem that we do have by making people stop demanding

things so that way the supply side can sort of recover and get back to normal. It's so interesting. You said that it's not a great tool. It's sort of a weirdly indirect tool. And I'm constantly astonished by how limited the Fed's toolkit is. This is on the one hand, potentially the most powerful institution in the world. Like it's very rare that an institution has the ability to change prices and unemployment levels in the U.S., but also have all these domino effects that surround the world, that crisscrossed the world. And yet their main tool is interest rates. And when you think, well, wait, what is it that the Federal Reserve wants to accomplish? They want to bring down core inflation, right? They want to bring down

inflation that doesn't necessarily measure the prices of energy and food. One of the largest parts of core inflation is rent inflation, shelter inflation. It's like, okay, well, if you raise interest rates, that's not immediately going to make people stop demanding shelter. They're still going to demand shelter. It's just that raising interest rates might make mortgages more expensive. That might slow, like the real estate industry, that might raise unemployment and reduce demand, and that might finally cash out in lower prices for housing. But it's a fairly indirect thing. It's sort of stunningly indirect. And it's like, it's wild to me sometimes. Like, how indirect the Fed's toolkit is. I mean, in your writing of this and you're listening to people talk

about this, are you sometimes just like taken aback by how indirect these tools are that the Federal Reserve uses? Yeah, I mean, you know, some people will say it's burning down the house to kill a spider, right? So like you have this one, it's a big problem, but you're going about it in a very, like, slamming a hammer onto everything way and pretending that everything is a nail. So using two analogies back to back there. But yeah, I mean, it's a super indirect way to solve what is mainly like supply side issues, right? So we are seeing supply chains recovering. We're seeing a relatively robust labor market. And the Fed is like, no, like none of this is okay. We have to make sure that we get inflation back down right away. But as you're saying, like all of that takes time to show up in

the economy. And they look backwards instead of forwards to make policy. Yeah. When you and I were exchanging messages before this show, I said I wanted to talk to you now because I felt like you and I were both circling the same analogy for the way that U.S. monetary policy was affecting national and international events. And that metaphor is a domino effect. And there are some domino effects that we're seeing with Fed policy. They're very straightforward. Like when the Fed raises interest rates, mortgage rates go up. That's obvious. But there's some domino effects that we're seeing that are very indirect. Like, I think that there is, and we're going to talk about it very soon, like a chain of causality that connects the Fed to a lot of the madness that we're seeing

in emerging markets, where the effect is like a little bit more either indirect or there's lots of dominoes that connect. Domino one, the Fed fund rate, funds rate goes up. And, you know, domino seven, you know, Sri Lanka or Pakistan has a currency crisis. So what I want to talk about for the rest of the show is about these dominoes, starting with the most obvious of these dominoes, which is the U.S. labor market. As you said, the Fed has this dual mandate to have price stabilization, but also have low unemployment. Right now, it seems to be sacrificing low unemployment or trying to sacrifice low unemployment in order to stabilize

prices. In other words, I guess put in simple language, the Fed seems to be willing to risk higher unemployment, more joblessness in order to bring down inflation. Why does it seem like the Fed wants workers to suffer in this way? I mean, they're planning on it. So they have their summary of economic projections, and they're expecting unemployment to take up. Like, that is part of the plan. And the reason that they would want, like,

I don't think they want workers to suffer. And like that, that's just how it has to be. Like, it's one of the unfortunate consequences of this policy that we talked about, like being relatively roundabout way of fixing the issue. So for them, they're like, you know, if people are, out of work, that means they're not going to be demanding things as much, which inherently would push down inflation too. Companies would have to cut costs because of this, and that also helps push down

inflation. So it's just a relatively painful way to sort of push that fighting inflation stuff through the economy. Yeah. So they want to soften the labor market. Yeah, sorry to jump in there. Are you surprised how much it doesn't seem to be working? No. The BLS just reported another scorcher for job growth. 315,000 jobs, I believe, are created. I think over the last six months, an average of 300 to 400,000 jobs have been created every single month.

That is a booming labor market in the face of one of the fastest increases in the federal funds rate on record. Are you surprised by the degree to which higher interest rates just do not seem to be cashing out in this explicit goal of softening the labor market. Yes. Well, so I'm not necessarily, you actually had a good tweet on this, how it's not impacting the labor-intensive domestic industry. So if you look at construction, mining utilities, like they're all getting wage gains, but if you look at tech and finance, they're having layoffs, right? So it's sort of like two different labor markets right now because construction, utilities,

mining, they all fired way too many people during the pandemic. And there was a quote in the Wall Street Journal, I think, that said you can't lay off what you don't hire. So it's kind of like these companies don't have people that they can lay off. They don't have people where they can force an increase in the unemployment rate. Like they have to have these people working. And so that gets back to the point, like how far would the Fed have to push the market to where, you know, these companies all of a sudden are like, oh, hey, well, we don't need these people after all, you know, it gets that bad. So it is, it's concerning. Yeah. And, you know, by GDP and by share of employment, the U.S. isn't dominated by sectors that are sometimes called rate sensitive, right, like construction or manufacturing.

The U.S. economy is fundamentally a professional services economy. And when the BLS just came out with its report last month, they said that the notable job gains occurred in, and I'm quoting right now from the federal government, professional and business services, healthcare and retail trade. there's not a very clear mechanism by which higher interest rates immediately reduce retail trade employment, right? It's not like interest rates go up and people immediately buy less toilet paper. It's not like interest rates go up and people immediately demand fewer marketing and media services and professional and business services. When interest rates go up, people don't necessarily demand less health care. So it's in a weird way, the Fed is raising rates for the price.

purpose of weakening a labor market that is booming in industries that aren't rate sensitive. And that kind of scares me because it suggests that we're going to have to take on a lot of pain for higher interest rates to really cash out in higher unemployment in the services I just talked or the sectors I talked about, healthcare, retail, professional business services. Are you thinking about things in the same way or, you know, how do you see this connection between, you know, rising rates and rising unemployment in these sectors that aren't rate-sensitive. Yeah, I mean, I think it would be tough. Like, you just have to push so much harder in order for that to fall through.

And the thing is, like, consumers are healthy-ish right now. Like, savings have been rapidly depleted, but there's still a lot of savings because we were in lockdown for two years, you know? And people are taking out more credit. They're, like, consumers are still willing to spend money. Like, retail sales came in a little bit stronger than expected the other week. So you're still seeing people willing to go out and take on, you know, these jobs that people are working. So it's tough.

And like one way that it could work out in terms of like a softening labor market is we see an increase in the labor force participation rate. So more people start going back to work. And that way we would have to rely on layoffs, but rather just more people going into the labor force. That would be preferable. So hopefully it would end up being that. I'm really glad you mentioned that. Just unpack that a little bit. why would more labor market participation make a so-called soft landing easier for the U.S.

economy? Yeah. Well, so you would see, like, theoretically, an increase in unemployment rate until those people get employed. So that would enable, the companies wouldn't have to raise wages as much because there's more people to hire from. There's just a whole larger labor pool to pick from. Like, right now, part of the problem is there's just not enough people to hire. So if you have more people going into the labor force, that fixes that.

part of it. And then you wouldn't have to rely on people getting fired, but rather more people to choose from. Another domino that I want to talk about is the U.S. housing market. You did a really great TikTok video, which I saw on your YouTube channel explaining what you see happening in housing right now. So just take the stage here. Tell me about the housing piece and what you're fixated on in terms of the effect that higher interest rates are having on the U.S. housing market. Yeah, well, it's making a mess out of it. So the mortgage rates are up near 7%. I think they're over 7%. So affordability has decreased by one-third since the beginning of the year. So you can get like one-third the house that you would have been able to at the beginning of the year than you can now. And that disqualified, you know, 18 million households from qualifying for $400,000 mortgage, just this increase in mortgage rates. So you're seeing a lot of people not being able to even get a mortgage. You're seeing people not being able to get a mortgage. You're seeing people not being able to get a mortgage. the houses that they want to get. There's a little bit of decline in home prices. Redfin titled it

the new weird. It's just a very bizarre housing market because it's still sort of a seller's market, but it's increasingly becoming a buyer's market. So it's just like a funky housing market. And there's just not enough supply. And home builders are freaking out because they're like, man, houses are so expensive. It would be kind of crazy to build one because like who's going to buy it right now with mortgage rates at 7%. So you're seeing that have a drain on supply too. And then you're also seeing like 32 million people have no mortgage at all. So like why would they sell their house? They have no reason. They're just going to sit on like the absolute money bags that they have. So like you're just seeing a huge constraint and supplies. And then you're also seeing

just a bunch of price pressure because of what's happening with mortgage rates because of what the Fed is doing. Yeah. Tell me more about Redfin's new weird. I mean, the way that I think about, what I think they were talking about when they, when they said that the housing market is in this new era, a new weird. It's that on the one hand, so much of what you said makes it seem like the housing market should be deeply, deeply troubled.

Mortgage rates have gone up over 7%. You have lots of people who can't afford to get into the housing game. That suggests that housing prices should be really steeply falling. But they're not falling. In many, many places, sales prices are still going up

on an annual basis. How can both things be true at the same time? Yeah, I mean, it's just the constraint of supplies. So in that piece, Redfin highlights that, like, a lot of people are just not moving because they've locked in, you know, a 3% mortgage rate. Like, why would you move? You don't need to. So there's just not a lot of supply hitting the markets. So the supply that is on the markets,

you know, buyers are going to have to be a little bit more receptive to what those prices are being offered. Like, when the Fed raised by 75 basis points the other week, I think that same week, home prices went up by 1%, which is like not, like, that shouldn't be like quite the case, you know? And so, yeah, it's just funny. It's still a seller's market. Right. Yeah, low inventory means that the sellers, yeah, have the power. Which in a weird way means that, you know, it's the reason that prices are going up

arguably has less to do with what's happened in the last 18 months and more to do with what's happened in the last 20 years. We just built so few homes and especially so few single family homes in the last 20 years. There's just not enough inventory where people actually want to live. rising interest rates mean that a lot of people might be sitting on their homes. That means there aren't a lot of homes in the market. It means that if you do want to buy a house, you still have to pay out the nose for that house, even with higher interest rates, which is not a great environment at all for buyers. The third category that I want to talk to you about in terms

of domino effects is the way that the Fed's rising interest rate policy is leading to a stronger dollar, and that that's creating a lot of problems in emerging markets. Set the stage here for us. Why are rising interest rates leading to a stronger dollar? Yeah. So when the Fed raises interest rates, the dollar gets treated as a safe haven. So people are like, oh, man, the dollar looks super good relative to other things. Like their central bank has it together compared to like Japan, which is still doing elements of quantitative easing. China doing elements of quantitative easing. Europe has a land war. So it's kind of like the dollar looks pretty good in comparison to everything else. So investors are going to go to that. And also higher rates mean higher yields.

So people are going to demand more dollars to go into U.S. dollar denominated assets. So that's sort of a double whammy for the U.S. dollar. Yeah, no, exactly. No, you've played it very well, very efficiently. Yeah, inflation is high all over the world. So you have a lot of central banks that are, it seems to be rising, that seem to be raising rates. But also, it's, you know, it's, it's incredibly ironic that the U.S. perceiving problems in the U.S. economy, raising rates in order to fix the problems in the U.S. economy, end up strengthening

the dollar. And now I'm concerned about the way that a stronger dollar is going to cash out for a lot of emerging markets because if, you know, dollar priced energy is, or dollars-nominated energy is really expensive, that means that you have troubled countries like Sri Lanka, India, Pakistan, that are really, really going to struggle because suddenly, on top of everything else that's happening in the world, their energy prices are going to go up and up and up because of a strong dollar. More and more people now, it seems to me. You got Paul Krugman is writing a column about this, Adam Tuse has written about it, Noah Smith has written about it. Lots of people now seem to writing about the fact that the world economy is dangerously close to breaking. That's the word

that people are using. The world economy is dangerously close to breaking. How do you evaluate that claim? What do you see is the most dangerous part of the Fed domino effect? And do you think they're sort of overstating their case? I would say the dollar is the most dangerous part because it's a wrecking ball, as you just said. So not only is energy denominated in dollars, but so is debt for emerging market countries, for a lot of them. So that's like a whole issue, like a debt crisis going

on, energy crisis going on. And then there's this concept called the dollar doom loop that was coined by cheap convexity. It talks about a stronger dollar putting pressure on trade and manufacturing, and that creates slower economic growth. So the dollar is kind of like this accidental

secret weapon that the Federal Reserve has, and it's creating so many issues. Like they're trying to fix inflation and they created this like monster, like Frankenstein's monster in the back room that is causing a bunch of issues. So I would definitely say like there's to the point of like are things breaking? The UN came out and was like, hey, central bank stop hiking rates because you're causing a bunch of problems.

So it definitely seems like there's a lot of stress fractures beginning to show. in the global economy. And I would just say it seems like, you know, to the point earlier, the Fed is taking a hammer to everything and not everything is a nail. I want to actually just go one level deeper in the dollar doom loop

because it's such an interesting idea that I think could play a really big role over the next six months of global economics. Tell me if you think that this explanation is often anyway. Putting all the domino pieces together. Number one, you had the phenomenon of inflation in the U.S.

that led to number two, right, rate hikes. that led number three to rate hikes actually around the world, which made a bunch of investors want to pull their money out of other countries and put it into U.S. bonds. Because in a world where interest rates are rising and the threat of a recession is getting higher, you want your money to be living in the safest house in the bad neighborhood, and that is in U.S. bonds. That leads the dollar to, you have to have dollars in order to buy U.S. bonds. that makes the dollar stronger. There's more demand for dollars. That makes other currencies relatively weaker, which means that if you're Turkey, Sri Lanka, Pakistan, it becomes more expensive

to buy the energy that you need in order to make your economy work. That means that you have less money left over for everything else. That means that there's a higher potential for recession. That means that people are even more likely to want to put their dollars in a global recessionary environment in, sorry, the global currencies, in dollars, which makes this doom loop sort of cycle over and over and over again. Did I miss some aspect of the dollar doom loop, or did I, did I do an okay sort of connecting some of the domino pieces there? Well, I mean, I think also it puts pressure on domestic corporations. So it's not just emerging market nations that feel the brutal force of the US dollar. It's also companies based here in the United States

that do business abroad. So it's kind of like, you know, it's really tough for everybody. And, that's like a big part of the doom loop too. The last domino that I want to talk about is credit markets. I have to confess a certain amount of ignorance here. I know basically nothing about credit markets. I am not a financial journalist. But over the last few days, I've just been reading nonstop about how people are worried that the bank credit suisse is going to blow up, that is going to potentially create another

2007, 2008 kind of moment where the global financial markets become absolutely catastrophically thrown out of balance. Let me start with the simple catastrophe question. Are you concerned that we are in anything close to a global financial crisis moment right now? And question number two, what's happening with Credit Suisse? Yes. So, okay, so we in a financial crisis and then Credit Suisse.

Like, there's flashes, flashing red bells everywhere, right? Like, if you look at investment-grade debt, if you look at high yield debt. So if you're talking about credit markets here in the United States, like yields on those have increased. So like there are concerns. Would I say like it's financial crisis worthy? Probably not. Like they're not trading at really distressed levels. But things are starting to be like, okay, like, whoa, everybody, things are going to little weird out here. And then in terms of credit suites, I don't know. Like that sort of came from one tweet over the weekend where this person was like, I know that a bank is going to be insolvent soon. And everyone was like, whoa, it's credit.

sues. But if you look at something called credit default swabs for credit sues, which is just basically a way for investors to buy risk. So to protect against default from the bonds that they do buy on credit suites or however they invest in it, you can buy something called credit default swaps to still make money, even if the company does default. So it's going to price in an amount of default risk. And you can calculate the implied probability of default from the spreads on the CDS. and it's less than 10% for Credit Suisse. So the market is not pricing in like a global catastrophe. There's definitely some flashing red bells within Credit Suisse.

All you have to do is go to their Wikipedia page and look at the controversy section. But in terms of them being a Lehman Brothers, no, like that discounts the actual Lehman Brothers moment. The banking industry has changed substantially since then. And also Credit Suisse is already in trouble because of what happened with Arcagos. they already have higher capital controls. So it isn't like a whole Lehman Brothers moment. Like back then, I was really young, so I wasn't around like a whole lot.

I was in elementary school. But like that nobody really thought that banks could blow up that big, right? But here, like we are very, very aware that banks can blow up. So I would say it's just like a different regulatory environment. And it's a different market environment too. What would you have to see? to think that the Fed had gone too far too fast? I think that when you start seeing stress in credit markets,

that's a little bit worrying. I think that 10-year... So, like, basically what happens when the Fed shrinks their balance sheet is they stop buying bonds. And that can push up yields, too, because there's less people buying those bonds. J.P. Morgan actually issued a note, and they were like, we don't know who's going to be buying bonds.

Like, we're a little bit worried about that. So I'd say, like, that's a little bit concerning is like what does happen in the bond market. Stocks are noisy, I would say, but like what happens in credit markets is a pretty good signal for what's going to go down because like bonds are so sensitive. Those traders are so sensitive. Those companies are so sensitive. So I'd say like treasury markets, you know, high yield markets, investment grade markets, all of those things. Those would probably tell us if the Fed is going too fast. And then I think if you see like a big pile up in an emerging market nation where they do have, as you've talked about, like an exasperated

rate a problem because of how strong the dollar has gotten, that would be like the Fed going too far. I want to tell you what my concern is right now. And it reflects something that I've already mentioned in this episode. I'm concerned not only that the Fed has a limited toolkit, that it's trying to solve problems that it has very indirect weaponry to solve, but also that it has a bad dashboard. Rent inflation, shelter inflation. is a huge part of the core inflation picture right now. But if you look at Zillow and you look at apartment list and you look at Redfin, and you ask their chief economist,

do you see inflation for newly listed rental units declining? They'll say, yes, we've seen it for about four to five months. We know for almost a fact that core CPI trails, sorry, that I don't want to use too many acronyms. so don't want to violate the rule that I try to put at the top. We know that rental inflation is measured by the government lags these sort of Zillow apartment list inflation measures by about six months, which means that we have a great deal of certainty

that like two, three and a half months from now, rent inflation is going to go down. But the Fed is treating core inflation as if we don't know that. It's got this back, looking dashboard. So I'm concerned that the combination of a bad dashboard and a limited toolkit might lead reasonable central bankers into raising rates too fast for too long in a way that can scramble and break lots of stuff that no one actually wants to break. To what extent do you

share my anxiety or not share it? No, I agree. Yeah, I would say you're seeing recovery and rents for sure. And like the whole, like, CPR, rinse are, you know, one third of how we measure inflation, shelter costs are. So that's like a huge component of it. So like when that does begin to slow down, it'll slow down inflation metrics. And we've already seen a huge recovery and energy. We've seen supply chains almost start to have like that bullwhip effect where it's like, okay, we had huge problems. But now companies have so much inventory. That's going to be hugely deflationary. So there's like, yeah, there's all these things that are pointing. to inflation really beginning to slow.

And the Fed is pretty focused on the metrics that are in the past. Right. I agree. It's like the Fed has like an extremely high fidelity 4K rearview mirror. Like they can see with exquisite clarity the conditions of the economy from like, you know, six weeks ago to like three months ago. But there are higher frequency data sources. that if they paid equal attention to those, they might have a different impression of inflation.

Look, I might be wrong. I'm not a central banker. I just said, like, what was it, 35 minutes ago that my reaction to business news when I was 22 years old was to throw away the business section so I could read the A section and sports section. So I'm not saying that anyone should necessarily listen to me. I just want to put my anxiety on the record now because, like, this is my anxiety. I'm afraid that the Fed has a great backward-looking mirror. Yeah, I would say a lot of people agree with you.

And, like, you know, Brayle Brinard, who is the vice chair of the Fed, she gave a speech where she highlighted that, like, okay, yeah, like, things are showing up. We notice that there are cracks within financial stability. We see some potential liquidity issues. We see some debt sustainability problems. But because inflation is so high, like, we cannot return to a problem. accommodate of monetary policy right now. So easy monetary policy. We have to prove our credibility because to the point I made earlier about the Fed having this toolkit of raising rates, shrinking the

balance sheet, et cetera, they also have to have their credibility. So if the Fed sort of pivots too quickly in this market environment, people are going to be like, oh, they're always going to be pivoting. Don't trust them. Don't trust them. And that's honestly half of their power is them just speaking. That's why we have so many Fed speakers every week if they're not in a blackout period is because what they say impacts markets. And if they lose that, that's a huge thing for them to lose. So I think that's also a big component of it. And maybe why they're not paying attention to what you've accurately highlighted to be a big issue is because they're trying to preserve that too. And this is a great place to land for the last question because my first observation was that

you're a really talented multimedia communicator of complex economic ideas who tries to meet the public where they are, not just on substack, but also on YouTube, on TikTok, where people's, you know, eyeballs and ears actually live. And it's interesting to think that in a way, the Fed is powerful as this blunt tool of interest rates is, the Fed is kind of an influencer. Like, the Fed is, I'm not in like a jokey way. Like, the Fed understands that the way that they talk, and even maybe the way that they look when they talk, because they're on camera and we're a television society, is a market-moving mechanism.

And that's just a fascinating thing to think, that, like, you can make central banks seem complicated and spooky, and you can do, like, a 405 seminar-style thing on, like, how rising federal funds rates can affect global market currency crises, or you can kind of be, like, Marshall McLuhan about it and be like, this is fundamentally about the Fed being, an influencer. And right now, they're just being kind of a confusing influencer. And they're not necessarily getting exactly what they want at the moment that they wanted. And people are just kind of

looking around and shrugging and saying, are these people going to accidentally break the world? Yeah. Yeah, I actually tweeted about the Fed being an influencer once. Oh, really? I'm sorry. I didn't realize that I stole your tweet. No, no, you didn't steal it. Yeah, I think it's really true. And I'm glad you said it. Because like, that's kind of what's going on is like they have these, you know, it's wild to me. The Fed meetings have become in certain corners. It's sort of like Super Bowl madness. Like people are like, what are they going to say? What are they going to do?

You have them working with different news outlets to send out information beforehand so they don't spook the markets. It's really wild. And, you know, when the Fed, when people live tweet the Fed meetings like Walter Bloomberg, which is a Twitter account that always tweets out Bloomberg headlines, it gets hundreds of retweets what they say. So it's, yeah, they're absolutely an influencer, and their cutability is what they're really focused on right now.

It is what they're focused on. And in a way, I wish they leaned into it a little bit more. Like if the Fed understood that they were the monetary Kardashian of the global economy, and they took that job seriously, like I'm making a joke, but I'm also like being serious, as you are when you say that, you know, Fed Minutes, which is the essentially the transcript of Fed meetings, it's a Super Bowl event because when people read them, they gather about on Twitter or other social networks and talk about it and gossip about it

and write articles about it. It's a massive event. They should take this responsibility more seriously, I think, and recognize just how powerful their words are and understand that their information in a way is just as powerful as their interest rates. Kyla Scanlan, thank you so much. This was a blast. We'll have you back very soon. Thanks for having me.

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