Summers: We are on the Foothills of Bubbles

Summary

The 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

00:00

📈 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.

05:04

🌐 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.

Keywords

💡jobs numbers

The term 'jobs numbers' refers to the statistics on employment and unemployment released by a country's labor department. In the context of the video, it's about the latest data that indicates the current state of the economy. The speaker mentions that the jobs numbers were lower than expected, suggesting a potential concern for economic growth.

💡economy

The 'economy' is the system of production, consumption, and trade of goods and services in a region. The video discusses the strength of the economy, suggesting that despite the lower jobs numbers, the overall economic situation is still robust, with inflation coming down and job growth outpacing population growth.

💡inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video mentions that inflation has come down but has not yet reached the Federal Reserve's target of 2%, indicating that the economy is still being monitored for signs of overheating or underperformance.

💡Fed

The 'Fed' is short for the Federal Reserve, the central banking system of the United States. The video discusses the Fed's monetary policy, particularly the debate over whether to cut interest rates. The speaker suggests that the Fed may not fully realize the implications of a higher neutral interest rate, which could affect their policy decisions.

💡neutral interest rate

The 'neutral interest rate' is the theoretical interest rate that neither stimulates nor slows down economic growth. The speaker argues that the Fed's perception of the neutral rate is too low and that a higher rate is more appropriate given current economic conditions, such as deficits, investments, and demographic changes.

💡monetary policy

Monetary policy refers to the actions taken by a central bank to influence the economy, typically through adjustments to interest rates. The video discusses the Fed's monetary policy, with the speaker suggesting that the current policy is not as restrictive as it seems due to the higher neutral interest rate.

💡rate cuts

A 'rate cut' is when a central bank lowers its benchmark interest rate to stimulate economic growth. The video mentions that the market has been adjusting its expectations for rate cuts, with the Fed having already moved to ease monetary policy since December.

💡market expectations

Market expectations refer to the predictions or forecasts made by investors and traders about future economic conditions or policy actions. In the video, the speaker refers to how market expectations have shifted from expecting multiple rate cuts to fewer, reflecting a change in the perceived economic outlook.

💡economic nationalism

Economic nationalism is a policy that prioritizes domestic economic interests over international economic cooperation. The video criticizes this approach, suggesting that it can lead to short-sighted benefits for consumers at the expense of long-term business investment and growth.

💡State of the Union address

The State of the Union address is an annual speech delivered by the President of the United States to Congress, outlining the administration's goals and legislative agenda. The video mentions President Biden's address, highlighting the president's plans and ideas for the economy.

💡populist tradition

A 'populist tradition' in economics refers to policies that appeal to the common people by promising immediate benefits, often at the expense of long-term economic stability. The video warns against such an approach, suggesting it can lead to unsustainable deficits and anti-trade policies.

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.