[CC may contain inaccuracies] Do you agree. You've been warning that maybe the Fed could move too slowly on inflation and have to speed up too much. Is Paul
on the verge of a policy error. We'll see how things evolve. I mean obviously if the inflation
pressures do turn out to be transitory and the Fed Reserve has more time it's there actually is more slack in the labor market
than suggested by the level of unskilled jobs. And we'll be fine. We just don't know the answer to this questions at this
point. I think the important thing here is that the Federal Reserve is making a choice to really strive to find the maximum
level of employment consistent with their inflation objective. And by doing that there is a risk that they're gonna be late.
Well Bob you know you were the chief economist at Goldman Sachs. You worked with a lot of the guys on the bond desk every day
explaining the latest numbers. Then you ran the open markets desk at the New York Fed. Very important position buying and
selling securities or overseeing that before you became the Fed bank president. How would the markets take it. How would the
bond market take it as suddenly Jay Powers to say well you know we're going to speed up the taper so we can get to that rate
hike faster. Would that cause the kind of disruption they've been trying to avoid.
Oh absolutely. I mean I think that's one reason why the taper is pretty much locked in stone. You're right. I would be very
surprised if they split it up or if they slowed it down. They made it very clear today in their communications. Not only did
they announce that they're going to do for November they also announced what they're going to do for December. And they made
it clear that while they could vary the pace of economic conditions change that really wasn't there isn't very likely. I
think you were on a path where the Fed has basically eight months to assess the inflation outlook to assess assess the
state of the labor market and depending on how that plays out. The real sit on their hand some more in terms of raising short
term rates or low or they'll have to move in the second half of 2022. Well as an economist what is the likelihood that they'll
be able to sit tight that long and then inflation will prove to be transitory and this just goes as smoothly as they're hoping.
Well that's certainly their view although they in the statement today they they soften their views a little bit before they said
it was transitory factors. Now they deem it as factors that are expected to be transitory. So there's only slightly less
confidence in how transitory these factors are. The key thing though at the end of the day is not whether inflation pressures
are transitory or not but it doesn't get into wages and does it get into inflation expectations. And the most recent data we've
gotten on both those things are a little bit concerning. Wages have accelerated more than what's consistent I think with 2
percent inflation and inflation. Expectations by some measures are starting starting to show some upward pressure. But we'll
see we'll see how this plays out. I mean the good thing for the Fed from the Federal Reserve's perspective. They have eight
months to make a well considered choice in terms of what's next. In the meantime they supply side issues continue unabated. How
difficult is it modelling a policy response when this was quite unexpected. And there's a lot of concern that this may be sort
of deeper structural issues as opposed to just coming out of the pandemic.
I think the Federal Reserve view is that these are pressures that are going to turn out to be temporary even if temporary
turns out to last a lot longer than what they previously thought. Obviously once the pandemic it with a number of things
number one it shifted the demand away from services to goods. So you had a big creasing in goods
activity during the pandemic. You discourage people from working because of fears of getting sick. And then you have a big
reopening of the economy as the incidence of
Covid finished and the severity of when people get sick diminished as well. So this is a pretty big you know adjustment
that the economy is going through. And it's not surprising that there's a lot of frictions. What the Fed is basically saying is
we we accept the fact there's a lot of frictions right now that are affecting inflation is affecting the labor market. We think
over time those frictions will subside. Spreads continues to be narrowed. Yields continue to be fairly
low. The equities market seems to only know how to travel in one direction. I'm wondering when it comes to the actual tightening.
How high does that peak right need to be. Would they want to go. Would they want to sort of overshoot that so that they give
themselves more room more of a buffer for potentially the next time they need to ease.
I don't think they would do that sort of on purpose. I think what's going to have to happen though is financial conditions
are going to have to be tighter at some point. The financial provisions really have to be tighter. That's the thing that's
going to slow down the economy and keep and prevent the economy from overheating tighter financial conditions. That implies
higher short term rates higher bond yields lower stock prices some combination of the above. We can't be that confident about
what will happen in terms of how how the financial conditions will tighten. But I think we can be pretty confident the
financial conditions to three years from now will be a lot tighter than they are today. In the meantime are there any risks
of market instability financial instability if the Fed continues an ultra accommodative policy at a time when yes the economy is
slowing towards trend growth but we've seen signs of strength like that. I assume services pit PMI that came out today a
record high for the series. The economy is not weak. Inflation is high. Markets are surging. Will there'll be some risk on the
stability side there. I think the big risk is just that the Fed reserve will turn out
to be potentially could turn out to be an error and then they'll have to speed up because they'll be late and that means they
would have to tighten faster and buy more. And if that happens markets aren't going to like that. So markets won't like it. But
they do think that there is a possibility. It's interesting to me Bill that the last time we saw the dots they were evenly
divided between a rate hike. Next year three people wanted to see two rate hikes are expected that I should say the other
half. We're not there yet but more I'd move to 2023 the movement's Bedford rate hikes. And Jay Powell seems to be more
stuck on. Oh I don't think we're going to need to do it. Maybe we will. But he doesn't seem to be in that camp.
Well he's trying to draw the distinction between the taper which has to be complete in his mind before you start to lift off
versus lift off which doesn't have to start just because the taper is complete. Both of those things can be true at the same
time. So what he's trying to say is look we're finishing the taper which gives us the option of raising short term rates in
the second half of the year. And we'll see how things develop whether that's appropriate or not. I do think the dots are going
to continue to shift into 2020 to when we get the next to the summary of economic projections in the summer. And the reason
for that is that the wage trend the employment cost index report we got last week was very firm. It was the highest reading we've
seen in many many years. So it's not just that we're seeing high headline inflation pressures in terms of supply chain
disruptions for actually seeing that leak into into the labor market.