Transcription
We start with the big question for Global Wall Street this week, as the Fed issued its long-awaited decision and summary of economic projections. Our special contributor, Larry Summers of Harvard, takes us through what we learned.
- It wasn't far off what the market was expecting or I was expecting. I was glad to see Jay lean into all the uncertainties in the moment--the uncertainties about inflation, the uncertainties about future policy, the uncertainties about unemployment, the uncertainties about the political environment, about tariffs. And I thought that was broadly appropriate. My own guess is that policy is currently a little looser, looking at all financial conditions, than people view it as being, and that the current configuration, the balance of risks is a bit more tilted towards inflation rather than unemployment. So I think we're a bit on the loose side with respect to monetary policy and monetary policy signaling. But that's very much a difference of degree. And I was glad to see the emphasis on humility and on flexibility in the chairman's statement.
Westin: Chair Powell more than once talked about how unusual the situation is, because there are really conflicting risks here. We got both inflation risk and employment risk at the same time. How unusual is that? If you go back through history, is that a really strange situation to face?
- Well, it's completely unprecedented for a member of the administration on leave to be a governor of the Fed. That's completely unprecedented. It's completely unprecedented for the president on a basis that many people regard as protectional to be trying to remove a member of the Fed. It's completely unusual for the Fed chair to be acting in a context where the president of the United States has called him a moron. On the question of the narrow sort of economic movements, this is what happens when you have a supply shock. When you have a supply shock, it pushes up prices and pushes down purchasing power. So you can make a case for going to the brake because of the increase in prices or going to the accelerator because of the reduction in purchasing power. And, you know, I'd say the dilemma probably takes that form 20% of the time perhaps. So it's not the norm, but it's also something that's not unprecedented.
Westin: Chair Powell said that when it comes to tariffs, which is part of the uncertainty, that the consensus of the Fed right now is that is a one-time price hit. He didn't use the word transitory, but he sort of came close to "transitory." Is he right? Does he have reason to be confident that after an initial spike up, it'll come back down?
- Well, I think it's important to distinguish two concepts of one shot for transitory. There's what we had in 2021 when, for example, the price of used cars spiked up, and the right assumption would be that the price of used cars would come back to the normal price level. That's not what is reasonable to expect with tariffs. With tariffs, you're getting a permanent increase in the price of the goods that are tariffed. But the question is whether that's going to be an ongoing rate of change or a one-off level of adjustment. Nobody thinks particularly that it's going to be a reverse change. So this is already more problematic than the kind of supply shock people saw in 2021. And the chair's clearly right that if you're just looking at, is the tariff going to get raised again and again and again, that's very unlikely. I think the question is, will this increase be processed through into an increase in inflation expectations, which will then feed through into higher wages and higher prices and set off a cycle? And that's hard to know. And I'm certainly not sure that it will be. And less of that happened after 2021 than would have been my guess, David. But we now have had a recent experience of substantial inflation. We now have a more politicized Fed. It's a process that's playing out over a long time period. So I'm not sure we'd want to be entirely confident of the idea that it will be one and done for the inflation impact of these tariffs. He may well turn out to be right, but this is an area where I would have a lot of humility and doubt. And I regard the biggest risk in this situation is being that we lose contact with our 2% inflation target and become a country with an inflation psychology.
Westin: There has been a fair amount of political pressure, as you say, in what the president has said, what members of the administration have said, in the challenge to Lisa Cook, the appointment of Stephen Miran, as you say, who's still working for the White House, even though he's taking a leave of absence. Did Chair Powell and the Fed put some of that to rest in their conduct this week? That is to say, did it really make any difference in what they decided and what they said?
- I don't think that anything different happened because Steve Miran was in that room. I don't think there was a different word in the communique. I don't think there was a different anything. If anything, it probably made it harder for there to be the kind of more dovish language that the president preferred. And I think the same thing is true with respect to the attack on Governor Cook. I think that if anything, that created a need to project vigor and rigor. I thought it was interesting that Governor Waller, who's clearly very eager to be the next chairman of the Fed, nonetheless went along with a consensus view that there should be one cut rather than two. And I was gratified by that. And if the president knows his interest well, the president will have enhanced respect for Chris Waller because of this.
Westin: The Fed decision was big news this week, but it wasn't the only news affecting the financial community and companies. As we now hear from the administration, they would like to change the rules so that companies don't report quarterly. Instead, they report semiannually. Is that a good idea?
- I think it's a bad idea whose time should never have come. It's a bad idea because accountability and transparency have been the key to the success of America's capital markets. And quarterly earnings reports and frequent accountability and substantial sharing of information has been central to that. Whenever I hear a CEO saying they don't want to have to deal with quarterly earnings, I think of my students who don't want to have to deal with grades. And, yes, sometimes they'd be more flexible to pursue their intellectual passions if they didn't have grades. But many more times, they'd be free to drink beer if they didn't have grades. And I think it's the same kind of thing, frankly, with our business leaders. It seems to me that we have had the most extraordinarily successful capital markets in the world. Who could have thought 25 years ago, 30 years ago, when the Dow Jones average was only a small fraction of what the Nikkei average was, that 2/3 of all the market value of all the companies on Earth would be American? That's a tribute to the economy. That's a tribute to those companies. But it's also a tribute to our market institutions and the way our capital markets work. That's why we have so much higher multiples on American firms. So to try to erode all of that, who are you trying to help? You're trying to help people who don't want to be accountable. Why are those the people who should be the objects of our affection? You're trying to help people who have special access to company information rather than the broader public. I always thought the idea of an honest, fair market was to try to reduce the advantage of insiders relative to outsiders. This goes in exactly the wrong direction.