Well, this was a very finely balanced
speech. Uh, I think he had to emphasize
that the Fed is still looking for more
data. At the same time, he had to
acknowledge the fact that, you know, uh
there's a lot of pressure on the Fed to
uh essentially acquire to the government
and cut rates. So he had to nod to both
sides uh saying the Fed will do what it
has to do but it's not ignoring the
government and and there that's why uh I
think it was actually quite masterful
the way he managed to uh sway uh
expectations uh slightly more towards a
cut but with a subtle change in words.
What he said was, and I'm going to read
this, uh, the shifting balance of risks
may warrant adjusting our policy stance.
Note the word may. That means he's not
committing to it, but he's saying we're
bending a little more towards cutting in
September.
So that balance of risk shifting, I
think toward the possibility of a cut, I
think specifically with respect to
labor. and he did talk about the balance
of risks on labor tilting to the
downside even as inflation risk tits to
the upside. What's your take on the
shape of the US labor market today?
Well, it does look like it's softening.
Now, uh you know, you don't see layoffs
in a big way yet. uh what you do see is
the pace of hiring has been relatively
slow and partly because of the fact that
immigration has come down a lot uh the
labor force is not growing so much so
even with the low pace of hiring you're
not seeing unemployment go up what that
means I think from his perspective is
that labor market is weak enough that he
doesn't see a substant stantial uh
increase uh because of second round
effects of inflation. Now this is
central bank speak for saying look
tariffs are going to push inflation up
but what we really worry about is the
worker asking for higher wages which
creates more inflation down the line. He
discounted that in his speech saying he
doesn't see that that will uh push
inflation up because labor mark the
labor market is relatively weak at this
point.
At at the same time we do have core
inflation that's well above that 2%
target that he reiterated once again. Uh
when was the last time that the Federal
Reserve cut rates with the core
inflation at that level? Well, it's not
just that it has that it is at that
level. It is that it hasn't budged
downwards for quite some time. In fact,
the last readings looked like they going
upwards. That was the point where I
concluded that he was being uh quite
doubbish uh because there's no mention
of the fact that we haven't seen a
downward adjustment in inflation.
Typically, central banks cut when they
see uh inflation coming down. that puts
a lot of weight on weakness in the labor
market bringing inflation down further
uh into the Fed's comfort zone. There is
no evidence for that at this point. uh
it is a hope
we have u ambiguous or maybe even
conflicting data on inflation on the one
hand labor on the other and that's
against the backdrop of a fair amount of
uncertainty uh particularly uncertainty
because the Trump administration is
really quite explicitly trying to change
the narrative particularly with tariffs
what about the risk of tariffs how much
have we seen how much of a risk is
opposed
well um uh we haven't seen a lot though
uh one should note and and chair P noted
that goods inflation which was coming
down
actually it was not inflation the goods
prices were coming down so inflation was
negative that has shifted around to a
positive rate of inflation on goods we
still haven't seen a full pass through
of the tariffs into prices uh that is
coming and uh the chair said look uh we
think it is going to be a one-off. What
we worry about is it either feeding into
inflationary expectations, that is
people think inflation is going to be
higher, or it feeds into wages through a
tight labor market. He discounted the
tight labor market issue, but he said
inflationary expectations, we're going
to be watching that and we certainly
will do what it takes to keep
inflationary expectations anchored.
Broadly, he seemed to suggest that
tariffs were manageable. What he didn't
talk about, as we've said before, is
that he didn't talk about the fact that
inflation is way higher than the Fed
should be comfortable with.
As you noted, professor, he was very
careful in saying that the shifting
risks may won't not necessarily, but may
warrant an adjustment. At the same time,
the markets certainly took it as almost
a guarantee in September there's going
to be a cut given where all the data are
are and what he had to say. What do you
think the Fed should be doing?
Well, I think he's bought the Fed some
room. Uh what will be critical are the
August labor market numbers. If they
look as weak as the July numbers looked,
the Fed will have a cast iron case for
cutting. If however you see again a
shift back towards higher
employment numbers, I think the Fed will
really be uh conflicted at that point.
The part of chair pow's speech that got
the most attention certainly from the
market uh was the part about what's
likely to happen September where we are
on cutting uh but there was another half
of the speech which had to do with the
so-called framework which the Fed tends
to revisit every 5 years or so and of
course last time was August of 2020. It
was a very different world as he noted
in his speech. What did you take about
what he had to say about how they're
changing that framework?
Well, it was very very interesting. He
essentially said uh we were tackling a
problem which no longer is that
important which was the fact that uh the
Fed had been tackling low inflation for
a long time. Inflation was lower than
where the Fed wanted it to be and the
Fed essentially was at what they call
the effective lower bound. It couldn't
cut interest rates anymore. And in that
kind of environment, really the
objective of the framework that the Fed
brought in then was to push inflation
up. And just a few months after they
brought that new framework in in 2020,
the problem was exactly the opposite,
which is high inflation. And the Fed now
had to bring inflation down. And
essentially what chair pow said was look
uh you know uh we had the uh right
framework for the wrong problem and at
this point what we're trying to do is
move back to our old framework and
finally professor this was his last
speech by all appearances at Jackson
Hole as he noted it was his eighth
straight speech uh reflect on his legacy
and particularly I really remember it
wasn't that long ago we were talking
about hard landing, soft landing. A lot
of people saying we're going to have to
have a recession. In retrospect, it
looks like the soft landing happened
under his watch.
Well, yes, and and I think unfortunately
uh he will not get as much credit as he
should for navigating the Fed through
very difficult times uh towards what
seemed like a soft landing at the
beginning of this year. Of course, the
volatility uh from uh the new
administration's policies has uh has uh
put that into some question. But from
the Fed's perspective, after the uh sort
of mistake that was made in uh in in the
early days of the pandemic in thinking
the inflation then would be transitory,
uh the Fed did a very credible job in
getting things back into line. Um so one
he should get more credit for that. The
second I think is that he's displayed
immense uh qu calm and equanimity
at a time when the Fed has been pummeled
by outside forces. Uh I think that's
that's also very creditable that he has
led the Fed uh from the front but also
shown that you know uh despite all the
pressures from outside he can uh focus
and uh and offer uh a reasonable view of
what a central bank should do. uh that
may also in the years to come be seen as
a very important legacy. He's led with
honor and he's been very s uh very
careful but also uh um you know uh
reflected uh great integrity uh while
leading the Fed.