You wrote a scathing piece in the Financial Times this week. I want to start with a quote from it. Failure to act promptly
would turn the feds increasingly discredited transitory characterization from one of the worst inflation calls in
decades to also a big policy mistake with widespread and unnecessary damage. Mohammed I want to start with that single
piece there. One of the worst inflation calls in decades. Why do you think it's this bad.
Because that initial humility at the beginning of the process and that's something that you and I talked about. There are lots
of structural changes going on in the post pandemic economy even though we're not quite there but post immediate shock.
You can't simply dismiss them as transitory. You've got to respect the fact that behaviors change.
And they just didn't have the open mindset enough to see that. So they got stuck on the narrative and they held on to it for
too long. And the result of which is they're looking at inflation that is much higher than they ever expected. They're
looking at inflation that's much broader than they expected and they're looking at inflation that's going to last even longer
than they say they expect even now. So it is a is gonna go down in history as one of the worst inflation calls by the Federal
Reserve. Well let's work through the incoming data. Mohammed what is it about the incoming data that's making you more
confident of this call not less. So dry up and Covid up the school for awhile because I talked to
lots of companies and you clearly see what's going on. From a bottom up perspective which wages are going up. Prices are going
up. Expectations are that supply chain disruptions and labor
shortages would last into next year. And there is confidence that pricing power remains support all these things together and
you get this cost push inflation. There's also a demand pull inflation component in it. So when you put all these things
together you've got to respect the probability that inflation will remain high and will persist for much longer than most
people expected. Mohamed what do you think it would take to change the minds of people that disagree with you. I asked Vice
Chair Rich clarify earlier this year what would be the towel. How would he know that you might be wrong. And he would say it
would be the turn of the year. That's what he said earlier this year. He said the turn of the year would get a better idea of
how temporary these factors are. The turn of the year is right in front of us right now. And I don't hear this Federal Reserve
changing their mind or pivoting anytime soon. What do you think it would take.
So I think the vice chair in his latest remarks did show a little bit of acknowledgment that inflation is well above what
he expected. And what will it take. It will take a few more prints. It will take labor force participation not bouncing back
as fast as we all wanted to. To be clear I want to be wrong on this call.
I desperately want to be wrong on this call because if inflation ends up to be hotter for longer it has very unfortunate economic
financial institutional social and political implications. So we all want to be wrong on this call and we all hope that inflation
is going to come down very quickly very soon. But I don't think that's going to happen. You'll make it to Coles had one. This is
the worst inflation Cole in decades. You think we're already there. That sounds like a conclusion to me. The next Cole is
that we could make the biggest policy mistake. Now it's the policy mistake that you don't think we've made as yet. You think
the window though is closing. How big do you think the window is.
It's small. It was wide open when you and I started talking about this in March and April. The economy was doing extremely
well. This is the. That was the time DAX would have started tapering.
They didn't. Now they're going to start tapering. And the concern is that the time between ending the taper and interest
rate hikes is not going to be significant. In fact they may even overlap. Look at what how the Bank of England is thinking right
now. And in addition they're gonna have to raise rates much faster than they would have otherwise. That's a policy mistake
that you could have eased your foot off the accelerator but you didn't.
And now you're going to start tapping the brakes at a time when there will be three other contractionary impulses on this
economy. That's what the policy mistake would look like. John. I hope it doesn't happen. There's still a window to avoid it. And
it would start in December by the Fed accelerating its taper program. Why do you think accelerating the taper would make a
difference Mohammed within the piece of acknowledge the supply chain bottlenecks which have contributed to elevate elevated
inflation although we can both acknowledge just sitting here that it's not just that.
Why do you think accelerating the taper would make a difference. Because initial conditions Matt Miller when you set policy
you've got to know where you're starting from. And we are starting from emergency level or monetary policy at a time when
the immediate emergency has passed. So if we continue with this pedal to the metal approach to monetary policy we are going to
destabilise inflation expectations. And if we destabilize them in a serious manner then are going to have an additional layer
of inflation driver in the mix. So we want to limit it right now to demand pull which will come down with time cost push which
will come down. But at a slower pace over time. The last thing you want to do is add a third one which is a fundamental the
anchoring of inflation expectations. It is the Fed's responsibility to ensure that it doesn't destabilise inflation
expectations. Well this seems to come down to is a disagreement on what it would take to have a sustainable recovery that leads
to the objectives that you want to achieve and the Fed of reserve wants to achieve as well Mohammed. What I've witnessed
this week is an acceleration of the calls that speak to what you're talking about more rate hikes next year to from Wells
Fargo Bank of America looking for more of the same. Wells Fargo put out a call though along with that rate hike call this
morning Muhammad than I thought was interesting. They're looking for 5 percent CPI next year on an annual basis 5.2. But real GDP
growth with a 4 handle. This is where I want to understand from your perspective Mohammed are you looking for elevated CPI
through next year. That hurts growth or can we still achieve real GDP as something not a 4 percent.
So we can achieve high GDP we have to achieve high GDP also. We have to make sure that the most vulnerable segments of our
society don't suffer because of inflation. Remember inflation taxes the poor the most. So this is doable John. Policy wise
this is doable. I want to stress there is a window. Yes you can have
relatively stable inflation and you can have satisfactory economic growth. But the concern I have is the
following is that not only are we going to have lower growth than we would have otherwise because the Fed is going to be late
and there is going to have to overcompensate. But in addition we risk in the risk scenario. I want to stress the risk scenario
the following configuration in the middle of next year monetary tightening
financial conditions tightening household tightening because savings have been eroded and fiscal policy impulse. Dying down
and that would be tragic if we inadvertently end up creating these four headwinds to our economy. And you know why some
people disagree with you Mohammed. They look at the last cycle and they say we should have been more patient. They've been
conditioned by their experience for the previous 10 years there applying it to this cycle. I think that's where we need to
finish Mohammed Wise. This cycle for you this environment right now so different to what we experienced 10 years ago and why the
conclusions from the previous cycle not applicable to what we're witnessing at the moment. Anthony is the count because the
previous cycle was characterized by deficient aggregate demand. The problem was demand was not supply.
This cycle is characterized by deficient aggregate supply. Demand has been bolstered by massive and inflows of liquidity
directly and indirectly and by all sorts of fiscal transfers. The problem is not demand right now. Overall there are segments
the most vulnerable again where there was a problem. But overall the problem is deficient aggregate supply. And and the problem
in the community is people's mindset is still anchored by deficient aggregate demand. I've seen it before dawn coming out
of the global financial crisis when my PIMCO colleague and I was saying be careful. This is a new normal. These are second love
forces in play. We were dismissed by all those were had just a cyclical mindset. It took four years for that mindset to change
and we lost a golden opportunity to maintain living standards.