Very big news this week from the Fed. What was your reaction to what you saw
and what they did but also heard from them.
Look I think they're moving in a necessary painful direction.
It's clear that they're manifesting determination on inflation that they're
recognizing that you don't stop a car that's going much too fast and
completely comfortable that way. I think that is all welcome.
I still think they're too optimistic about how easy it's going to be.
They are forecast that peak unemployment will be four and a half percent even as
unemployment comes down even as inflation comes down to 2 percent I
think is a very optimistic view. It was also very optimistic when it was
echoed by Secretary Yellen. It's the right thing to hope for but
we're not going to beat the level of inflation that we have now out of the
system without some quite substantial dislocations.
No one should take any satisfaction in those dislocations or want those
dislocations or want to see anyone unemployed.
But the necessary medicine from where we are is likely to involve a recession.
As chairman Powell is being increasingly clear in recognizing.
So I'm glad to see the Fed adjusting in the direction of seeing the need for
more tightening and recognizing that unfortunately that tightening will have
consequences that we've been talking about on this show for a year.
I still think there may be a bit of underestimation of what's going to be
necessary in terms of tightening but policy is now much closer certainly with
current market expectations to the appropriate place.
The markets now expecting that Fed funds will be four and three quarters percent
next May. Little wasn't much more than a year ago
that they were forecasting that it would be zero or very close to that next May.
That's a major change. But when you get as far behind the curve
as the Fed did then you really have to hit the brakes very very hard.
As you know well it's not just United States.
It's also for example Great Britain. And it strikes me there's a big contrast
there. Certainly Bank of England says we've got
a tightening that went up 50 basis points is weak.
In the meantime you've got a new government over there that's going for
fiscal stimulus tax cutting. And whereas at least the big
demonstration is getting out of the way of the Fed.
What do you make of what's going on in the U.K..
It makes me very sorry to say but I think the U.K.
is behaving a bit like an emerging market turning itself into
a submerging market. There's nothing in the pattern of market
response in the U.K. that suggests anything but fear rather
than confidence in the policy approaches being taken.
It would not surprise me if the pound eventually gets below a dollar if the
current policy path is maintained. This is simply not a moment for the kind
of naive wishful thinking supply side economics
that is being pursued in Britain between Brexit how far the
Bank of England got behind the curve. And now these fiscal policies.
I think Britain will be remembered for having pursued the worst macroeconomic
policies of any major country in a long time.
I hope that at some point this policy package will be reversed or that somehow
I am misjudging the situation. But I am very fearful for Britain on the
path that it is travelling. Well let's even go beyond the United
States and the U.K.. This week central banks around the world
added 700 basis points to interest rates.
So it's a global phenomenon when the one thing that comes out of all of that is a
newly strengthened dollar. I mean it sets record after record after
record. What does that mean for the global
economy. Look a a strong dollar is causing
inflation in the United States to be lower than it otherwise would be because
it reduces import prices but it's pushing inflation up everywhere else.
And because the dollar is the currency of international trade it's taking
lubrication out of the system and it's putting extra burdens on countries that
have borrowed. Because when they borrowed and for a
foreign currency it's usually been in the dollar.
So this is going to complicate macro economic management in many countries.
There's going to be continuing a fear distress.
Countries are attempting to counteract this with intervention as the Japanese
did. I think we've mostly learned that when
you're intervening against the trend when you're intervening against the
direction of monetary policy which is certainly the case in Japan your
intervention is as likely to create opportunities for speculators as it is
to really be effective in changing the path of currencies.
So I think this is going to be an issue that is going to be with us for some
time. But I suspect for the period ahead
countries are going to have to be adjusting to a very strong U.S.
dollar. Finally we'd like to talk sports with
you. Normally it's golf because you're such a
golfer at center. Let's talk about some professional
football here particularly at the Tampa Bay Buccaneers.
Tom Brady the legendary quarterback. This week we learned Tom Brady is own
form of maybe quiet quitting. He's just got to work four days a week.
From now on he's gonna take Wednesdays off.
Is there a larger issue here in the United States economy of people not
being willing to work hard. I'm seeing some evidence of that at
least anecdotally. People may work a bit shorter hours when
they're working at home. People may be just a little more prone
in a economy that is so red hot and we can get a new job.
I easily to tell their bosses where to take it.
We've had this phenomenon for the last half year or so of terrible terrible
productivity performance. Some of that's probably just an offset
to the strong performance we had earlier.
But it may be that people are just working a little less hard.
You know if everybody worked a seven hour and 45 minute day rather than an
eight hour day practically that would be the equivalent of a 3 percent wage
increase or equivalently 3 percent decline in
productivity. So I'm going to be watching what's
happening to unit labor costs wages relative to productivity very carefully.
But my suspicion is that this is an additional contributor to the inflation
factor that hasn't fully been recognized.
And I think some of it goes back to Covid in the long term consequences of
the pandemic. Some of this may be a byproduct of the
very tight labor markets that we've had where workers have big increases in
their leverage.