Adam Posen on the Dangers of Jerome Powell's 'Rifle Shot' Jackson Hole Speech

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1:33Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. So Tracy, I don't know if I would describe the mood here at Jackson Hole. So by the way, we are recording this August 23rd, the day of Powell's big speech. I don't know if I would describe the mood as like declaring victory per se, But I would say on the narrow question of like, is the problem of inflation over? The verdict seems to be, yes, it is. I think the big difference for me is last year in 2023, there was a lot of discussion about the idea of the trajectory of inflation was looking pretty good.

2:17The direction of travel was where the central bank wanted it to go. But there was still a lot of caution about the risk of an upside surprise. and inflation could come back. And we saw that to some extent in Q1 of this year. But I don't think it was the degree that necessarily people were worried about in August 2023. But anyway, the big difference this year is I don't really see a lot of talk about that tail risk of inflation coming back. That's right. Yeah. Last year, we were all here in Jackson Hole looking out at the Grand Tetons and observing how the two mountains kind of resembled the two spikes in the inflation.

2:58Arthur Burns was sort of looming in the background. Yeah, it was basically the mountains look like a chart of 1970s inflation. It's like, oh, is there another wave? Anyway, most people are like, yeah, okay, the risks are on the labor market side. And there's probably many good reasons to think that's where the risk lies. But look, the Fed is pretty clearly going to start its cutting cycle in September. other than that fact, which is not technically a fact yet, but other than that fact, there is still a tremendous amount of uncertainty. What the cutting cycle will look like, the speed, the intensity, how the data will cooperate or not, many open questions.

3:33Absolutely. All right. Well, I'm very pleased to say we do have the perfect guest to talk about some of these themes and risks. We talked to him last year and had a great conversation. So like, let's follow up. We're going to be speaking with Adam Posen. He is the president of the Peterson Institute for International Economics. He was also at the BOE for a while. So perfect person to talk about some of these themes. So Adam, thank you so much for coming back on Avlats. Thank you for working me into your Jackson Hole tour schedule. We got it. We got it. So you were there in the room in the speech.

4:04Tracy and I weren't. We were just read it on the website. Although I think actually that's probably a faster, more efficient way to consume a speech than listening to the whole thing. But what was your takeaway? The speech was fine as far as it went, but it didn't go very far and it should have gone farther. So I think, Joe, he was very clear, the chair was very clear that we've reached the end of their hiking cycle, we're into the loosening cycle, and that their key concern is about a sharp fall off in employment in the US. And again, that's perfectly reasonable. The issue is though, narrow the speech was.

4:41It was narrow in terms of timeframe. It was really only relevant for the next couple of months. It doesn't touch anything about looking out beyond that. It was very narrow in its discussion, not only of the victory lap, although Powell would never call it that, reflecting on how we got here or going forward in that it basically talked about labor markets, labor markets, and a tiny bit about supply shocks. And it was very narrow in that we're at a conference, which topic is the important issue of monetary transmission mechanism, which in normal people speak is how effective and why are interest rates able to change the course of the economy.

5:24And he gave absolutely no hints about that issue. So it was a very limited speech. There are contexts where a very limited speech is good. Two years ago, Powell gave what I consider a perfect speech. It was a rifle shot. It was only eight minutes long. And all he was saying was they're going to keep going until inflation beast is slain. And at that time, with that facing them and them being so far away from where inflation needed to be was the right move. But in the context we are now, where we're not facing a crisis, where you're basically doing risk management over the next couple months, which means just trying to balance things, having the rifle shot is, to me, misleading the public.

6:13It's not a good speech. This is actually something that I've been thinking a lot about. And we should get into the transmission mechanism of monetary policy, but the point you just made about the narrow range in terms of timeframe, it does feel to me like the emphasis is very much on the short term at the moment. And there's all the talk about data dependency, which obviously puts the emphasis on the next jobs number. And there's not a lot of forward guidance over the longer term to your point about doing whatever it takes to crush inflation in 2022. Is that what's happening here? I think it is, Tracy, but I'd extend it or nuance it, depending on your view, in two ways.

7:00The first is there has been this general shortening of the Fed's time horizon. And it's not just the politics, but I think the fear of seeming partisan in the upcoming election is taking it further. But it's also, it's a fundamental change in, I think, the Fed's operating philosophy. So when Bernanke, Laubach, Michigan, and I wrote the book on inflation targeting, or before that, when the Bank of England, the Reserve Bank of New Zealand, Bank of Canada did inflation targeting, the emphasis was on what do you think is going to happen to the economy roughly two years out? What is your forecast? And again, if you have some sort of crisis, a financial market crisis, a pandemic, that's different.

7:45But the current FOMC seems to have forsaken somewhat deliberately the idea that they should be making a forecast and the idea that they should be acting on that forecast. And there's a lot of bad forecasts out there. But I think Alan Blinder made this point when he was vice chair of the Fed some 25 years ago. If you don't have a forecast, then it's even worse because then there's no discipline on what you're doing. It's just, okay, this is what we're seeing right now. Let's react to that. I find this idea of the two rifle shot speech is very interesting because in 2022, inflation was arguably at crisis levels.

8:29And in 2024, there has been weakening of the unemployment rate, But, you know, we're not at crisis levels of unemployment. So I think that's very interesting and perceptive, that sort of asymmetry of the two rifle speeches. You know, one of the stories for the last several years has been that the labor market was just got way overheated by various measures. There was a lot of focus on the number of job openings, and we've seen quite a change in that. And so one of the things that Powell said specifically was that by some measures, the labor market is weaker now than pre-COVID levels. And there are a number of charts we can bring up that would show this.

9:12Why the concern then from your perspective, even looking at the medium term, for example, why shouldn't we just put the inflation anxiety in the rearview mirror? I think there's several big reasons not to. And just, I'm saying this as someone who throughout most of my career, including my time serving at the Bank of England, was considered a dove. The first and biggest reason is because this is where the narrowness comes in. The labor markets is first among equals in terms of determinants of inflation in the business cycle, but there are equals. There are other things. So productivity growth matters.

9:48Fiscal policy matters. Supply shocks, as the chair mentions, matters. Currency matters. matters, trade policy matters. I don't mean you need to do the whole laundry list, but if you're sitting here and we're in a period where productivity growth has been up for most of the last two and a half years, is that going to continue? Is that going to fall back? That will have an effect on inflation. If Trump is elected, I don't know whether he is going to be or not, and obviously the FOMC cannot talk about that. But if Trump's going to be elected, there's going to be massive tariffs, and even more importantly, there's going to be massive deportations of workers.

10:25Those are inflationary. Full stop. So acting as though these other factors don't matter, that all that matters is the labor market, I think is misleading. The second reason is because, and this is something where there is a lot of useful discussion, although within the Fed could be more, is interpreting the labor market data. So yes, Yes, unquestionably, we're not at the very hot labor market we were a year and a half, two years ago. But equally, if you go in levels terms, we're at a multi-year high in labor force participation. And the unemployment level is still well below what we used to think of as full employment.

11:11And so to me, that says we may get a recession, but it sure looks and feels like there may not be one, or at least that we're not in it yet. And if you look at the latest GDP data, we're not in it yet. And so it's different. It is different. And this, again, is why I would like a little bit more complex, nuanced, broader discussion by the chair rather than right now, last few months of data show labor market softening. Right now, last several months of data show inflation coming down. We'll cut. Yeah, I did think it was interesting. He kind of alluded to the beverage curve, but didn't mention it by name and then just said, well, openings are falling without mass layoffs and it's normalizing from that perspective, but then didn't actually go into any detail about why that might be.

12:02Yeah. And to be fair, Tracy, I mean, I don't necessarily need the chair going into that. I do. Even though you and I are geeky enough to care about that. But as I think we talked about a bit last year, but anyway, Governor Waller, Governor Chris Waller made some very important contributions a year or two ago talking about vacancies and that. So again, it does matter to have a little bit richer discussion.

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13:25Support for the show comes from public.com. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic option plays on the side. The point is you're engaged with your investments and public gets that. That's why they built an investing platform for those who take it seriously. On public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus an industry leading 3.6 % APY, high yield cash account. Switch to the platform built for those who take investing seriously.

13:58Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. How are you thinking about the labor market dynamics and how they might unfold at this point? Because there's obviously a conversation at the moment about how quickly things could deteriorate in the labor market.

14:37People talk about unemployment being exponential. Once it starts, it can get worse very, very quickly. I think that's a valid concern, but I think the more you look at it, the less worried you get. Oftentimes, I'll say something and I say, I hope I'm wrong. In this case, I hope I'm right. So there is, as I know you've discussed, the so-called SOM rule. And to Dr. SOM's credit, she has said very clearly, it's not a mechanistic rule, it may not apply right now. So I give her credit for being honest about that. When a recession hits, generally unemployment spikes quickly, not like it did in 2020 with COVID, but that is usually the pattern.

15:18It goes from very low to very high, accelerates a lot. But that's kind of like saying, you know you're in a recession when you're in a recession. It's not a causal argument. And so you need something, some kind of story that tells you what triggers it to behave that way, the labor market to behave that way. and a lot of the things we're seeing and hearing in the US data aren't consistent with that kind of story. So investment outside of the big tech giants has not been high. Well, it wasn't high basically since 2008 and we've had large expansions since then. We're not seeing layoffs and as the chair acknowledged, I mean, that is almost always what you see before a recession.

16:06We, in fact, see more people entering the labor force. And as you've noted, we have a revision downward in total number of jobs created from early 2023 to early 2024. But that's another way of saying, well, gee, productivity growth was higher because we didn't revise down GDP, but we revised down the number of work hours. So again, you don't usually, it's not impossible, but you don't usually see a jump in productivity growth right before you have a recession. So again, I want to distinguish between my assessment of the economy and going forward, looking out beyond this month versus it's fine for the Fed to cut preemptively given there are low inflation risks right now.

17:00You know, since you mentioned it, I kind of just want to jump to this. This time next year, it's very possible that we will have a president who does not believe that the current institutional arrangement of Fed independence is a good thing. Does this come up in conversations around here? And is there anxiety about it? I'm certain that that would, is it a concept or a thing that would make you in particular anxious, but how much are people talking about it? What's the - This is something you don't talk about. Or rather, you don't talk about currently sitting officials. Yeah, that makes sense. But I mean, all of us in the game at whatever degree of remove who are not currently sitting officials talk about it a lot.

17:46So two of my colleagues at Peterson, David Wilcox, who used to be the head of the Division of Research and Statistics, meaning the chief economist of the Fed, has written about very real dangers to Fed independence and how scary it is. And Morris Obesfeld, who used to be chief economist of the IMF and was on Obama's CEA, has also written about how scared he is for central bank independence in the Fed if Trump wins. So, I mean, it's a very live issue, but of all the things I would expect current Federal Reserve officials not going to say. They're not going to plan on it even in private because there's no upside to them talking about it.

18:25Just going back to the short-termism versus making a longer-term forecast and the importance there, I do have some sympathy with the difficulty of doing that right before US election where you have two potential administrations that seem to have very different different ideas of what they want to do and how the economy works. How do policymakers take into account, or how should they take into account those sort of binary outcomes when making longer-term decisions? Let me give you, based on my reading of the history and the current situation, I think there are three levels of response. The first level of response is simply getting underneath the seemingly binary and trying to understand what the actual policies would be.

19:14And this is why my forecast for 2025 is roughly, if Harris gets in, there will be slightly more inflation, slightly more growth, nothing crazy. And therefore, a lot of the cuts that are priced in for 2025, rate cuts for 2025 are not going to happen, but the Fed's likely not going to have to raise rates. If Trump gets in and he does what he says he's going to do, which we have very good reason to believe he will, then you've got tariffs, deportations, explicit threats to the Fed independence, attempts to talk down the dollar, a boom-bust cycle in fossil fuels through deregulation. Then you've got very significant inflation potential.

20:00So if you say, I have no idea who's going to win the election. So if you say 50 % Harris, basically slight increase in inflation because of fiscal laxity, which I think is going to come because she's still adhering to the asinine, no taxes on anybody making under 400 ,000 a year. And then 50 % that Trump's going to jump inflation by two to three percentage points. and you average those, you end up with a mean scenario in my view, or excuse me, a modal scenario in my view, that inflation will be up 1 % to 1.5 % by this time next year in a very visible way and no recession. So if I'm forecasting, that's where I'm going.

20:47So then second point is how does the Fed deal with that? There are two things you can do. The first is you can, like the Fed does on all kinds of things, make vague warnings that appeal directly to fundamental economic principles. So Chair Powell, to his credit, at some point in the last couple months said, you know, having positive migration was part of why we got the soft landing. It was good supply shock for the US. So there you go one step further and say, you know, if we reverse migration, it would be, in economic terms, a negative supply shock to the US or tariffs. You know, all kinds of reasons trade policy gets set.

21:26But in terms of inflation, it's very clear what happens when you do tariffs. And you say that. And then the third thing, which goes back to the forecast idea. So if, as the Bank of England and a number of other central banks do, you are doing a quarterly or a semiannual or whatever it is, regular release and update of your forecast, your committee's forecast, you can build in some fudge factors into the forecast where you don't say what they are. So nobody can take a paragraph and snapshot it and say, you're being anti-Trump or anti-Harris, but just build it into the forecast. And since we're not, the Fed is not doing that, they can't do that.

22:13I'm going to ask a random question. And maybe you won't even want to answer. I'm going to try to think about how to ask this politely. From an American perspective, when we look at what's going on in the UK, it always just seems like one mess after another. And they have to go through all these different leaders and all these weird scandals about who is at a random party or whatever, et cetera, that I don't understand. What should Americans know about how the UK works that we don't? Having served on the Monetary Policy Committee, I read these headlines in the Telegraph. I don't get it. What do I, as an American, what should I know about how England and UK works?

22:53An American or even an American investor or well-informed person needs to know that much about the UK. Well, that's a good answer. I mean, I think - But like, what's the deal? That's cutting. No, no. But I mean, I think, you know, and it's very hurtful to friends of mine in the UK, but it has interesting lessons like a lot of countries do for economic policy in general. There are a huge number of cultural and other exports we get from the UK that you want to think about and be interested in. There is a genuine special relationship, as it's called, on national security issues in terms of sharing not just intelligence at a very detailed level, but there are boots on the ground usually from British troops like they were in Afghanistan and Iraq when we went in.

23:39But in terms of economics, basically - In terms of institutional structure and everything. Well, I mean, the deal is they changed the rules on elections a while back, which meant that they are now a hybrid between a presidential system and a parliamentary system. So in a parliamentary system, if people lose faith in the government, you have a cabinet reshuffle and you normally have a question called and the government turns over and you get a new government. in a presidential system at a certain fixed interval, you get a new government. They push through under David Cameron a change so that now if you lose the faith of the rest of parliament or the faith of the people, you don't automatically have an election.

24:28You have a fixed term until the next election, but yet it's a parliamentary system. So it does have turnover and who's on top. Anyway, the upshot of all this is, this is why you like having independent institutions like the Bank of England to try to keep things under control, even if the government keeps cycling. Thank you.

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26:34Since Joe asked a random question, do I also get to ask a random question about the BOE? What happened to the fan charts, the inflation fan charts? Do you remember those? Oh, indeed. The rivers of blood. I remember discussing with the people who created the fan charts. The fan charts, for those who don't know, is they were an attempt to show graphically not just the central point of the macroeconomic forecast, but a probability distribution. So the idea there were these colored bands and whatever color they were, red, blue, green, towards the center of the most likely part of the forecast, they would be a darker color, and then they would go out from there lighter and lighter colors.

27:17And they were never perfect, but they were an attempt to say there isn't just a point estimate forecast, there's a range of probabilities. You were capturing that uncertainty to your point earlier. Exactly. And you were able to make the fan chart say asymmetric. So the balance of risks is much more towards the inflationary, towards the disinflationary side. What ended up happening was they did it a long time, and the general public never seemed to latch onto it. And then financial markets would, as they want to do, keep trying to deduce very specific things from within the fan charts by measuring the widths of the bands and trying to calculate backwards what caused the fan charts to be the way they were.