Larry you've been calling for quite some time on this program and elsewhere for the Fed to really wake up smell the coffee and
realize we need to be focusing on inflation we need to increase interest rates. They took a big step in that direction this
week. Was it enough. They did and I was glad to see it. I think they're recognizing
that they're behind the curve. I think they've still got a long way to go. They've got a long way to go in forecasting
realistically. I just don't believe that it is plausible that we're gonna have three years of three and a half percent
unemployment while inflation falls precipitously. Nor do I believe that inflation is likely to fall precipitously on a path
where the nominal interest rate never gets within 2 percentage points of where the inflation rate is right now. Not at any
point in the next three years. I also think that the Fed needs to recognize that its 2020 framework was perhaps a good idea in
the deflationary context of that moment though I'm not sure it was but it is surely not. Got anything connected with our
current kinds of challenges. So perhaps institutions adjust with some gradualism. So perhaps we're moving in the right direction.
But I think there's a long way to go and I don't think the Fed has really done all that will be necessary to preserve its
credibility in the face of the substantial inflation that I think is likely to come to us
in recent months. You know I just had a chance to review what is the best data on wages. The data from the Atlanta Fed. And
depending on which of the indices you use how you weight the data and so forth on some measures is wage inflation is now
getting close to 7 percent. And that is just not consistent with the kind of places that we want to go in terms of inflation. So
Laurie to focus very specifically inflation which you've been asking us to do now as I say for over a year. If you take a
reasonable projection of inflation out over the next year or two years what kind of Fed funds rate do we need to get it down.
Clearly we need to get into a positive real yield. No. And what do you need to get the rates to be in order to really have the
rates be higher than the inflation rate. Here's the problem with Fed think David. They assume 2 percent
long term inflation and then they say that the neutral rate is two point four and then they say look we're going to raise rates
to two point seven so we're going to be above the neutral rate. So aren't we great. But the problem is that that whole
calculation is based on the assumption that we're going to get inflation down to 2 and they don't provide a basis for believing
that. A simpler and more direct way to think about it is to say that when inflation goes up. If you just raise interest rates as
much as inflation went up then you're not changing real interest rates at all.
If you want to tighten policy you have to raise interest rates by more than inflation went up.
We used to be a 2 percent inflation country. Now we're almost certainly a 6 percent inflation country and on some measures
we're an 8 percent inflation country. And so we've got to raise interest rates by more than 4 percentage points.
We've got to raise them by 4 percent to stay neutral and we probably have to raise them more than that. So I think
ultimately we're going to need a four or five 5 percent interest rates levels they're not even thinking of as conceivable. Now
the reason for this is that they believe as do many to be fair to them in the markets that the main problem with team
transitory was the marketing not the reality. So they think inflation is going to come way down without any action on their
part to bring it down. Maybe I see rental inflation which is 40 percent to the core CPI is likely to rise substantially this
year. I see more bottlenecks coming as China gets into very substantial lock down. I read a story this morning about airline
prices really taking off as people start to travel again. Their numbers suggesting
low medical care inflation prices. But every hospital in the country is desperately short on nurses and other medical
personnel. So I don't think we can count on the transitory inflation view and I don't think we can count on the restraint
they're providing because by the standard measures they're not meeting the test of providing any restraint on their path. And
that's why I think we have a long way to go. One of the things that certainly people at the pump are feeling as the price of
gas. And we had the president this week weigh in and it's weak actually really saying wait a second the price of oil at that
point was down to ninety six dollars a barrel. Last time I was there it was only like three dollars and thirty cents at the
pump. Now it's 440. It must be that the oil comes are padding their profits. How about that economic analysis.
You know I wish the president got more help from his economic advisers. Those spreads between gasoline prices and refine or
refine prices very substantially on a range of factors. There's lags between the price of oil and the price of gasoline when
natural gas is in short supply with diesel is in desperately short supply. It affects the mix of products that refiners
provide in ways to change that spread. Maybe there is a basis for thinking that profits are being padded but there's nothing
that would support that in the president's tweet. And I haven't seen any analysis coming out of the administration or any place
else that provided serious support for that. Look at a time when we have a war to fight at a time when energy security is a
central issue for us at a time when over time we're going to have to cooperate with our energy companies on the necessary
transition away from fossil fuels. I think we should be very careful about accusing them of bad behavior unless we've got
clear evidence. Now the administration may have clear evidence and if so I'll be the first to admit that and to want to look at
evaluate the evidence. But this kind of comparison that was contained in the president's tweet I'm afraid does not represent
that kind of clear evidence. Me let me pick up on your reference to the war because this week certainly we did not see a
conclusion to that war. Quite the opposite in many respects. At the same time we're trying to bring in China at least keep them
neutral or maybe Covid come in on the United States side to discourage Russia. If you can't take a look forward when this
war ends it will at some point. What is the world look like in that world. Some people I've heard say look we're moving for a
world of globalization and cooperation into the rivalry of great powers like the late 19th century.
I don't know the answer to that. I'm not sure anybody does. It demands very large amounts of
very hard and I think it will often be painful thought. What I would hope that we would recognize is that we would bring a kind
of tragic realism to this and we may be well be right about all that is evil and wrong. Yet China and Saudi Arabia in Iran in
Russia in other countries. On the other hand we need to make our way in the world. And I'm
not sure a posture of outrage towards all the other countries in the world that have substantial leverage or even towards a large
fraction of those countries is going to be a viable strategy for us. From my perspective the central challenge as we go forward
in the world is finding a way for the United States and China to mutually accommodate
each other not necessarily to be friends but to have respect for each other. That's what I believe. Ultimately our success
depends on. Ultimately the stability of the world depends on it. And I think as we carry on all of our other relationships we
need to maintain a strong awareness of that central reality.