There is a big debate going on right now in the market not so much about how aggressive the Fed will be but I guess more
importantly whether the Fed will be able to engineer that proverbial soft landing.
And it's one of the toughest things to try to do because they've been a little bit behind the curve. They let inflation get a
little bit higher than they would have liked. Kept talking about it being transitory wasn't transitory. Now they've gotten
religion and they're moving quickly or they're open to move very quickly. And that's really really tough because the economy is
clearly slowing down. GDP print was a little bit lower than it had been hoped for. I think with the continuing war sanctions
continuous supply shocks going to see the unemployment rate going up we're going to be seeing
GDP growth slow but they still need to raise those rates. I think the probability of recession has gone up quite
significantly. They still might be able to do it but it's going to be really tough. It's going to be really tough. And I'm
curious if you when you look back at pass rate tightening cycles and the economic conditions that were around then are the
conditions today worse than they were and some of those previous rate hiking cycles.
Well they're very different because we've had with the pandemic is just so unusual having these contractions of one third of GDP
annualized rate and then no growth of 5 or 6 percent suddenly. And so and then you've got more sanctions all that. So it's
really hard to use the past as a very useful predictor of what's going to be going on now. And that's why it's one of the
toughest things for the Fed. But I think they really do have to continue on the path for increasing their rates because they
have a window right now. They haven't lost credibility. So unlike the late 70s when the Fed had lost credibility and
Volcker had to raise rates to 19 percent to bring the inflation rate down they don't have to go that far. If they move quickly
but if they don't move quickly then they risk losing loosing credibility and then have to push rates really high and
then that will push the economy down much further. Well that seemed to be part of the sort of negative market reaction that
we saw after the last Fed meeting when we only got a 25 basis point cut. And more recently Paul has signaled that a 50 basis
point cut is certainly on the table at the meeting for discussion next week. And there are a lot of people think that
there will be more than one 50 basis point increase I should say over the course of the year here. Does that constitute an
aggressive enough base to get us to where the Fed wants us to be.
Well it's certainly I think it's as aggressive as the Fed wants to be at least right now. And as I said you know they have this
window because they've not lost credibility over the last couple of weeks. Inflation expectations have started to move up more
rapidly. And that's the thing that's really scary for central bankers because if they lose credibility if inflation
expectations start moving up they've got to move up much more aggressively. So what they'd like to do is move quickly. Now
you'll Volcker. Paul Volcker is now being invoked by Jay Powell. You hadn't talked about it before. And now he's he's bringing
them in because he wants to say I'm going to I'm going to do it. I want people to believe that I'm going to do it. And and
hopefully by invoking him you won't have to do it as aggressively and as as Volcker did and go to double digit
levels. Well he's certainly rattled markets when he invoked Paul Volcker his name and Paul Volcker as methods. I am curious.
There's sort of a broader I guess theoretical question here as to what the Fed is managing. Are they managing inflation. Are
they trying to tame inflation itself or is it more about the expectations around it that they're focused on.
I think it's primarily the expectations around it because a lot of the shocks are coming on the supply side they're outside of
their control. Some of it does have to do with demand for sure. Despite growth has been very very strong. And so it's partially
from the Fed's actions partially from outside. The main thing they have to worry about is that on anchoring of expectations
that we're starting to see a little bit of evidence of not not enough yet. And that's what the Fed needs to move quickly. Also
I think politically it's much more difficult for the Fed to start moving when the unemployment rate is 5 6 percent than when
it's below 4 percent. Well that leads to a kind of a key point. The idea that we've
never really had a soft landing in a rate hiking cycle when the Fed has had to push the unemployment rate up. Do you buy into
that. Well it's something that's very difficult to do. But as I said
I'm not quite sure that if you just look at the previous cycles it's exactly like what we're seeing now because there's so many
unusual circumstances. But I do think that one of the challenges is that in the old days like when Volker was there. People
understood that the Fed has to take the punchbowl away at some point because it can be overheating. Over the last 20 25 years
it's not been the Fed's not been taking the punchbowl away. It's always been trying to provide support if this is sort of a
negative shock. As we've now had a generation or two of both people in the markets as well as policymakers who have not seen
the Fed try to pull the punchbowl away. It's always been seen as something to provide support. And that's why I think it's going
to be much trickier politically for the Fed to do the right thing. I mean Volcker of course had it really tough right. There
were a lot of people who understood he needed to do the right thing. Now there's not that many people around to who
experienced that and understand what the right thing is to do. Well let's talk a little bit more about that punchbowl because
the punch bowl is a lot bigger today than what it was back then. And it's probably a little bit more layered. I mean you're at
the Fed back in 0 6 0 9. Kind of with those sort of the dawn of the global financial crisis. A lot of accommodate a policy that
is in this market right now was born out of that crisis out of that recession that came out of it. Whether it's the fourth
iteration of quantitative easing or the near-zero rates that we've been in I've been at basically a lot of policies that came
out of that are still with us today to some degree or another. So instead of just sort of trying to reverse the own policies
that Powell himself has overseen he's now effectively trying to reverse policies that two previous Fed presidents have overseen.
Well to some extent. I mean you know the response to the global financial crisis
I think what we did was was necessary to provide that to prevent the Great Recession becoming the Great Depression. And then we
had a decade where inflation was very low. And then the pandemic hit. And then the then Jay and his colleagues sort of open the
same playbook to make sure that we didn't have a collapse of the economy. I think that was exactly the right thing. The challenge
was that there's been so much more fiscal stimulus both in the U.S. and globally than there was previously.
And you then have supply shocks and then you have war and sanctions that it's been much more complicated set of things for
the Fed to respond to. The challenge was that it would have been much better if the Fed had not said this is all transitory. This
is just supply shocks outside of our control. We can take our time to deal with it. If they had acted a little bit earlier we
wouldn't be quite in this pickle. But but I think they now realize they need to move quickly to do it.
I think a significant slowdown would have been inevitable even if they had of started earlier because of all the other shocks
that are coming in. But I think the probability of a recession is is much higher
than it had. Well Powell at least publicly is of course I tried to talk that idea down here. I want to bring you some of the
comments that he made back in that March 21st speech before the NABE conference where he effectively said that there have been a
recent examples of the Fed hiking into this type of environment and avoiding recession. He specifically cited 1965 nineteen
eighty four and more importantly he invoked Alan Greenspan's name with that rate hiking cycle that we saw in 1994 where we
effectively went up three full percentage points in a barely a year's time. And he uses that as an example at least in his
words that you can avoid a recession at the same time tame inflation.
That's for sure. It's by no means necessary. And so I think the Fed could do it
but I think you're in a very different position. I think ninety four is probably the closest the closest example because it's
closer in time and you know trying to bring inflation down relatively quickly
making sure inflation expectations don't get out of control. But we're in a very different environment we're in. We're going
to war with and there are major sanctions that are in place. We are facing lots of supply disruptions. So it's a different
environment than in 94 and I think a trickier one. And it's you know it doesn't really matter whether it's the Fed's fault or
not. The Fed owns it if inflation is high because of supply disruptions or sanctions or war. The Fed can't say well it's not
our fault. The Fed the Fed owns high inflation and has to respond. And
that's why I think a lot of it is about inflation expectations and not just the particulars of what may be driving inflation in
one particular month or another. All right. We'll hear in 2022. Final question here for you Dr. Krassner. If you were still on
the Fed committee would you advocate for a 25 basis point 50 basis points or something more.
So I think they need to move 50 at the next meeting and also give a very clear plan for starting to reduce the balance sheet.
I think the Fed is going to continue to focus on the interest rate as their main policy tool. I don't think they're going to
say oh well we'll use that balance sheet as a policy tool. But I do think they need to give a clear plan for the run off of the
balance sheet. So it effectively would be more than a 50 basis point cut because they'd be talking about pulling back the
village.