Summers: We are on the Foothills of Bubbles
Summary
TLDRThe transcript discusses recent jobs numbers, suggesting they don't significantly alter the perception of a strong economy with controlled inflation. It raises questions about the Federal Reserve's monetary policy, suggesting a higher neutral interest rate than previously thought. The speaker advises caution regarding rate cuts and highlights the potential for economic bubbles. The conversation also touches on President Biden's State of the Union address, emphasizing the need for a balanced approach to economic policies to avoid short-sighted benefits at the expense of long-term investment.
Takeaways
- 📉 The recent jobs numbers were slightly lower than expected, but did not significantly alter the overall perception of a strong economy.
- 💹 Inflation has decreased but is still above the Federal Reserve's 2% target.
- 📈 Job growth, albeit slower, is outpacing population growth, indicating a robust economy.
- 💭 There's a debate about the neutral interest rate, with the speaker suggesting it's higher than the Fed's current estimate of 2.5%.
- 🔄 The speaker believes that the market's perception of normal inflation is above 2%, influenced by factors like deficits, investments, and an aging population.
- 💹 The speaker argues that the current monetary policy is not as restrictive as it seems, given the economy's resilience.
- 🚫 The Fed should be cautious about shifting from a restrictive to an easing monetary policy regime.
- 📉 Market expectations for rate cuts in 2024 have decreased from six to three, and the speaker suggests there might be even less cutting.
- 🤔 The speaker sees potential for financial bubbles and advises caution in economic policymaking.
- 🗣️ President Biden's State of the Union address emphasized a strong and energetic economic agenda, focusing on the middle class.
- 🚨 The speaker warns against economic nationalism and short-sighted policies that could harm long-term investment.
Q & A
What was the reaction to the jobs numbers released on Friday?
-The jobs numbers were slightly lower than expected, but they did not fundamentally change the perception of the economy's strength.
How does the speaker view the current state of the economy?
-The speaker believes the economy is strong, with inflation coming down and job growth remaining rapid relative to population growth.
What is the speaker's opinion on the Federal Reserve's 2% inflation target?
-The speaker suggests that the neutral interest rate is higher than the Fed's 2% target, and that the market perceives normal inflation to be somewhat above 2%.
What factors does the speaker believe contribute to a higher neutral real interest rate?
-The speaker mentions large deficits, increased spending on renewables, investments in resilience, capital costs related to AI, and an aging population as factors.
What is the speaker's view on the current monetary policy?
-The speaker thinks the monetary policy is less restrictive than generally believed, given the robust economy despite the high interest rates.
How does the speaker assess the likelihood of rate cuts by the Fed in the near future?
-The speaker estimates a 15% chance of no rate cuts this year, suggesting that the market's expectation of rate cuts may be adjusted.
What concerns does the speaker have about the President's economic policies?
-The speaker is concerned about potential populist economic policies that could lead to big deficits, anti-trade stances, and economic nationalism, which might reduce businesses' ability to invest in the future.
How does the speaker describe President Biden's State of the Union address?
-The speaker appreciates the president's vigor and strength, and sees him as having a plan with many ideas and an energetic agenda.
What is the speaker's stance on the market's current state in relation to bubbles?
-The speaker believes the market is at the foothills of bubbles, not yet exhibiting the characteristics of past financial bubbles, but not far from it either.
What advice does the speaker give to the Fed regarding monetary policy?
-The speaker advises the Fed to be very careful in its judgment, considering the potential for an epochal shift in policy and the need to avoid short-sighted benefits.
What is the speaker's prediction for the Fed's next move?
-The speaker suggests that the next move is likely to be a rate cut, but warns against treating this as a certainty and emphasizes the need for careful policymaking.
Outlines
📈 Economic Analysis and Monetary Policy
The speaker discusses the recent jobs numbers, noting they were slightly lower than expected but not enough to change the overall strong economic picture. They mention inflation has decreased but not reached the Federal Reserve's 2% target. The speaker suggests that the neutral interest rate is higher than the Fed's estimate, influenced by factors like market perception of normal inflation, deficits, investments, and an aging population. They argue that the current monetary policy is not as restrictive as perceived and that the Fed should be cautious about shifting to a more accommodative stance, as the market has adjusted expectations for rate cuts from six to three for the year 2024.
🌐 Economic Policies and Market Conditions
The speaker reflects on President Biden's State of the Union address, appreciating the president's strong and energetic economic agenda. They express concern about the potential for populist economic policies that could lead to large deficits, anti-trade measures, and economic nationalism, which might undermine businesses' ability to invest in the future. The speaker also comments on the current state of financial markets, suggesting they are not far from bubbly characteristics, which should inform policymaking.
Mindmap
Keywords
💡jobs numbers
💡economy
💡inflation
💡Fed
💡neutral interest rate
💡monetary policy
💡rate cuts
💡market expectations
💡economic nationalism
💡State of the Union address
💡populist tradition
Highlights
Jobs numbers were lower than expected, but did not fundamentally change the economic outlook.
The economy remains strong despite slower job growth compared to population growth.
Inflation has decreased but is still not at the Federal Reserve's 2% target.
The neutral interest rate might be higher than the Fed's current perception of 2.5%.
Markets perceive normal inflation to be above 2%, influenced by recent years' experiences.
Large deficits, increased spending in various sectors, and an aging population suggest a higher neutral real interest rate.
The Fed's comparison of 5% rates with a 2.5% neutral rate may be misleading.
Monetary policy is less restrictive than commonly believed due to the robust economy.
The Fed has adjusted expectations for rate cuts from six to three since December.
The speaker suggests that the neutral rate might be closer to 4% than 2%.
There's a possibility that there might not be any rate cuts this year, with a 15% chance mentioned.
The speaker advises caution regarding the Fed's policy shift from tightening to easing.
The speaker hints at the potential for financial bubbles, though not as severe as in the past.
President Biden's State of the Union address emphasized a strong and energetic economic agenda.
The president's focus on building and investing in the economy for the middle class was appreciated.
Concerns were raised about a populist economic tradition that could negatively impact long-term investment.
Transcripts
On Friday. We got the jobs numbers out.
They were a little lower than some people expected, and particularly when
you look at the revisions from last month.
What did you make of these jobs numbers? I don't think they changed anybody's
picture very fundamentally of the economy.
We've got a strong economy. Inflation has come down.
Inflation is not yet at the Fed's 2% target.
But job growth, even on a slower basis, is remains considerably more rapid than
underlying population growth. So we've got a relatively strong
economy. Well, and that raises the question of
what does it mean for monetary policy? I mean, one question we ask sometimes of
people at the Fed is why are we talking about rate cuts right now when the
economy seems to be doing so well and weathering this five and a half percent
rate? There's something very fundamental that
has happened that I'm not sure that the Fed has fully realized.
I think the neutral interest rate is way above the two and a half percent that
the Fed likes to talk about. I think given the experience of the last
several years that the market perceives normal inflation as probably being
somewhat above 2%, at least on a CPI basis.
And I think that huge deficits, more spending to come, substantial
investments in renewables, substantial investment in resilience, substantial
capital costs of various kinds associated with artificial intelligence,
an aging population meaning more savers, less capital flow coming from abroad.
I think all of that means a much higher neutral real interest rate.
So I think when the Fed compares 5% with the two and a half percent neutral rate
it sees and people say that monetary policy is substantially restrictive.
That's wrong. The neutral rate is much higher than
that. And so monetary policy is much less
restrictive than is generally supposed. And the clear evidence of that is that
we have this supposedly really restrictive monetary policy and still
have a quite robust economy. So I think the Fed needs to be very
careful in its judgment about what would be an epochal shift from the regime
we've had for the last several years to a regime of easing monetary policy.
They've moved substantially since December.
Market used to be expecting six cuts in 2024.
Now the market's expecting three cuts.
And the Fed's carried that off skillfully.
There hasn't been much disruption or dislocation as that change has taken
place. But I think that's going to be
there with us for the next while. And my own guess is probably that
there's a little more adjustment to come and the Fed may end up not deciding to
cut quite as much as markets are now expecting.
But I do think we need to get ourselves to an idea that neutral rates are
certain are closer to having a four handle than they are to having a two
handle. Larry, you, of course, are data
dependent just the way that Jay Powell is dependent, but consistent with the
need for more data. We had Torsten Slok of Apollo this week
come out and say he doesn't think there will be any cuts this year for some of
the reasons you suggest. I'm not asking you to commit on what
will happen, but does that seem plausible to you?
Yeah, I think I said on the show maybe a month ago that several weeks ago that
there was a 15% chance that we wouldn't have cuts this year.
I think if anything, that 15% may have drifted slightly upwards and markets are
kind of consistent with that. If you look at options markets.
So I think the base or presumptive case is probably that the next move is going
to be down. But I think it'd be a real mistake for
people to regard that as. Any kind of certainty.
And I think the Fed has to be really quite careful
here, because I certainly think we're at least at the foothills of
bubbles. To mix a metaphor, I don't think right
now financial markets have the kind of bubbly characteristics that they
famously had at other times. But it's not that we're a million miles
away from that either.
And so I think that's something that also has to inform the policymaking
process. So on the eve of the jobs numbers going
out Friday, we actually heard from President Biden in his State of the
Union address. I'll be curious to hear what you your
take was on the economic portion of what he had to say.
You know, I was glad to see the president being as vigorous and strong
as he was. Certainly, the president looked like a
man with a plan, indeed a man with many plans and ideas and an energetic agenda
going going forward. There was a lot that I heard that I
liked in terms of building and investing in the strength as the country's future
economy for the benefit of the middle class.
I do think we need to be very careful in our country about a kind of populist
tradition in economics that lurches towards big deficits, towards anti-trade
international economic policies, that focuses on economic nationalism.
And there's concern there on short sighted benefits to consumers that may
ultimately reduce businesses ability to invest in
the future. And so I think that's something we all
need to be careful about.
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