Inflation, Interest Rates and Economic Growth

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>> Sherry Bauer: Good afternoon, thank you all for being here with us today. I'm Shari Bower, I'm the regional executive based here at our Miami branch in Doral.

But I work for the Federal Reserve Bank of Atlanta. Fun fact, so one of the many roles that the Federal Reserve plays is to provide financial services to financial institutions, one of which is distribution of cash and plain. And the Miami branch here, based in Doral, is actually the third largest distributor of cash and plain for the Federal Reserve system after New York and San Francisco.

So we have a very exciting program for you today. We're joined by two esteemed economists who will answer all of your pressing questions about inflation and interest rates. But first, I would like to thank Miami Bay College for hosting our event here today at the Wolfson campus. And also thank you to the Economic Club for having this great event with us here today.

Before we dive in, I'd like to introduce Dr. Malou Harrison, executive vice president and provost, who will give some welcoming remarks. And then I will introduce our two speakers I`m going to do some sort of abridged bios. Because if I read everyone's bios in the hall, you would be here for hours.

So Dr. Harrison is a respected leader with more than 35 years of transformative leadership experience, championing the cause of underserved students in public higher education. She has served in various capacities at the college, including president of multiple campuses and US students. Throughout her tenure, she has led the establishment of many high impact partnership initiatives at the college that have further equity, academic excellence.

And student success, as well as holistic service such as single stop, year up, and educate tomorrow. She's also a prolific writer on educational issues, served on several boards, and has been recognized for her leadership with numerous awards. So Dr. Harrison, thank you.

>> Dr. Malou C. Harrison: Thank you so much, Shari, and good afternoon.

 

>> Audience: Good afternoon.

>> Dr. Malou C. Harrison: It is such a pleasure to welcome each and every one of you here to Miami Dade College for this convening this evening. We have many students in the audience and I have to tell you that partnering with the Economic Club of Miami is truly meaningful for us for that very reason.

The fact that we are able to provide the opportunity to our students, our Miami Dade college students to learn from experts and economists such as David Altig. And let's give Mr. Altig a round of applause and a welcome.

>> Dr. Malou C. Harrison: But we're growing global citizens here at Miami Dade College.

And along with our students, we have faculty here, we have chairpersons, we have our unit of business and other colleagues in addition to the Miami community. And this is one of the most important weeks on the academic calendar for Miami Dade College. And so we're happy that this convening is taking place this week.

On Saturday, we will graduate over 12,000 students from Miami Dade College, students who are earning associate degrees, baccalaureate degrees, as well as career certificates. Why is that important in the economic schema?

>> Dr. Malou C. Harrison: It's so important because Miami Dade College is contributing to the socioeconomic impact here in our community.

We're coupling a very robust liberal arts and science program, with a workforce development and training program that really provides a synergy for students to go out into the world. To be on the world stage as employees, as entrepreneurs, as leaders, if you will, because of their start at Miami Dade College.

And so we're very proud of the outputs that our college produces in terms of graduates. And we're also proud of the partnerships that we're able to procure and to convene with companies all over Miami Dade county, throughout South Florida, regionally and also internationally. And so with that, I want to again, welcome the Economic Club of Miami, we are your partner.

We were so happy to partner with you recently when you had a fireside chat with Ken Griffin right here in our auditorium. And apart from the academic and workforce training aspects of life, so to speak, Miami Dade College is also a cultural convener. Miami Book fair hails from Miami Dade College, the Miami Film Festival hails from our institution.

And as a matter of fact, as it relates to Tech Month, this month, you may have seen where the college yesterday launched its second artificial intelligence center right here at this campus. The first one of which was at our north campus, again, bringing that economic impact to Miami Dade county in so very many ways.

So tonight, I know I'm very much interested in learning more about inflation, what we can look forward to, not only here, but throughout the United States and internationally. And I'd like to welcome you once more on behalf of President Madeline Pumariega and the 123,000 students that are enrolled here at Miami Dade College across our eight campuses.

Welcome here in, thank you.

>> Sherry Bauer: Let me quickly introduce Dave and Jon, and then we can get started. So, John Hartley, is an economist, investor and researcher. He's also currently a research fellow at the foundation for Research on Equal Opportunity and an economics PhD student at Stanford University.

He previously graduated from the University of Chicago with a DA in economics and mathematics with honors. An MBA from the Wharton School, University of Pennsylvania, and an MPP from the Harvard Kennedy School. John worked in various roles at Goldman Sachs, the World bank, the Committee on Capital Markets Regulation.

US Congress to Economic Committee, and also the Federal Reserve Banks of New York and Chicago. And Dr. David Altig is the executive vice president and director of research at the Atlanta Fed. In addition to advising the Atlanta Fed president on monetary policy and related matters, Dr. Altig oversees the research division which includes a team of economists.

The regional economic information network, and the community economic development function. Dr. Altig is a fellow and immediate past president of the National Association for Business Economics. In addition, he is a member of the advisory council of the Global Interdependence center and its College of Central Bankers and a member of the National Business Economic Issues Council.

With that, Dave Atlig, thank you.

>> Jon  Hartley: Thank you for that very kind introduction and I also just want to thank Miami Dade College for hosting us. For those who aren't aware, Miami Dade College is an unbelievable institution. I believe it is actually the largest school in the United States by enrollment and just in terms of the services they're providing students here in Miami is just unparalleled in scope.

And so again, if you could have just a round of applause for my name is Paul.

>> Jon  Hartley: So Dave, I wanna get thrown into this. And for the students who are here and maybe those that are a little less familiar with the Fed, I just want to get into how the Fed is structured and what is the Atlanta Fed role in Miami?

There are 12 regional Fed banks out there, they're part of the Federal Reserve systems. They're the Federal Reserve Board of governors based in DC. What one does it mean when the Miami falls into the Atlanta Feds regional district? Why don't we have our own federal board, bank of Miami here?

Can you explain a little bit about how Miami falls into the sort of greater scope of monetary policy making and infantry regulation?

>> David Altig: Sure, I wanna thank you for the invitation to come here, especially Miami college. We have a long relationship, the Atlanta Fed, and a very happy relationship, and a big fan of everything that happens here.

So you're trying to create a coup, I think, by my colleagues here. So if you wanna know why the Federal Reserve is structured geographically as it is, I don't know the answer to that exactly. I'm not sure anyone exactly knows the answer to it, it goes back to 1913.

Essentially, the 12 district banks were designed to be bankers to banks. And it was roughly sort of organized around the lines of population where the banks were, in terms of the market capitalization, all sorts of things, not to mention some political elements that came into play. We're the 6th district of the Federal reserve system, we actually have five branches.

Our region covers from, basically Nashville east and Tennessee, all of Georgia, all of Florida, all of Alabama. Southern Mississippi from about Jackson down, and southern Louisiana from about Baton Rouge now. So we actually have the very best cities in the country in our district. And it represents, in terms of its industrial mix, it looks very much like the United States.

Because if you think about Miami versus Nashville versus New Orleans, these are very, very different places with very different cultures, with very different business mix across. And so we're able to use that footprint to get a pretty good picture about what's happening in the national economy. And that is one of the fundamental roles of all of our branches and the work that my colleagues here at the Atlanta and the Miami branch do.

For that, we're about a week and a half from an FOMC meeting, and so we are deep into the rhythm of an FOMC meeting. So that rhythm sort of starts this week, really. So Shari and her colleagues have been out ever since the last FOMC meeting, trying to get answered with boots on the ground, getting information from business contacts throughout the South Florida in the Miami branch case.

Answers the questions that are, we wanna know about, which are the questions I think are probably gonna come up in our conversation. We will meet with the board of directors for the Miami branch on Friday, and we will ask them these same questions and basically ask for their input on what's going on in the economy from their business point of view.

And what should we do about it as policymakers? That will all go back to Atlanta next week, when Shari and her colleagues will report to the president, President Bostick. What they've been hearing over the past eight weeks or so we'll have in Atlanta. And then a bunch of economists will wait, a bunch of economist stuff.

So one day is data, what the data is telling us, what models are telling us, and another day is what people in the real world are telling us about what's going on. And then we'll have an Atlanta board of directors meeting. We'll try to all consolidate it all at the end of next week and writing kind of the policy positions and statements about the economy that President Bostick will take to Washington.

Very, very much the stuff that we hear from, maybe many of you, and the information that Shari and the other members of our team in the branches throughout the district collect makes its way to the table in Washington. I can't remember, I've been at this a while. I can't remember a single meeting where part of our statement at the table to Raphael's colleagues on the committee.

Where some anecdote, the set of information that we had collected from our outreach in the district didn't end up as part of the conversation at the table. So the branch, really, are the voice of our constituents, which is you, directly to the policy making body in Washington.

>> Jon  Hartley: Fantastic.

I'm a big fan of Rafael, since I seem to be, as well, I`m a bit biased in terms of your role, research director. One of your big responsibilities is putting together economic forecasts for the Fed and briefing the president. And leading policy decision making process within the Atlanta FedEx, which we get up to the FOMC meetings that come up every six weeks or so.

Let's dig into your outlook and your forecast. Where do you think GDP, inflation, unemployment, where do you see those going? What part of your forecast?

>> David Altig: GDP down, inflation down, unemployment up. So, we go through this exercise where four times a year we actually publish what our forecast on those things are.

So we won't do it at this meeting, but at the last one we did publish that, the narrative about the, I thought I was gonna actually have to show a couple weeks ago. I thought I was gonna have to show up here today and completely change my tune about what was happening after.

I know we'll probably talk about the failures of a couple California entities later on. But I was a little bit fearful that my story was gonna have to fundamentally change to ask. And I don't think our story, and so when I say our, and we, I got, I mean, I have, I'm contractually obligated to say the views that I express are not necessarily those in the Federal Reserve system.

And when I say we, I`m really talking in our role as a policy advisors of the Atlanta Fed. So what is the Atlanta Fed staff thinking? So by the time we got to the end of last year, our story was pretty much that it was likely that we were going to see some softening in the economy associated that would be continued, but slow progress on inflation.

And associated with some of that softening in the economy would see some cooling off in labor markets and some noticeable but not really dramatic increases in the unemployment rate or slowdown in pace of employment growth. That's my story and I'm sticking to it. I mean, as of yet, that seems to be the track we're on.

What that means for policy, the policymakers are gonna decide. But if you look at the summary of economic projections that were published in March, the story was that kind of outlook with growth kind of flat for the rest of this year. Kind of do the math and think about what the first quarter looked like.

The minutes from the FOMC meeting came out and one of the big splash eating pieces of news from it was. So there are two things that happened in immediate one and two things. One of the things happens at the meeting is there is a presentation by the staff and the board of governors and they give their outlook.

And then all of the participants, all the presidents and all the governors go around and give their outlook, some of it which is published in some of the economic projections. Interestingly, staff projected a recession, and that was in the minutes. It was not kind of hidden or anything.

The committee numbers don't really quite add up to that, but it is kind of flattish soft growth for the rest of the year. The rate of inflation ending the year, kind of low, three ish area, any unemployment rate ticking up some. The story I just exactly said, and as I said, I mean, I don't think that there is anything happening yet that we've seen.

We're gonna hear a lot in the next week from lots of people, but we still seem to be on track for what feels like the proverbial soft land.

>> Jon  Hartley: I wanna get into first, I wanna talk about inflation. A lot of people are, general, a little bit upset about inflation or trying to figure out what's going on with it.

Inflation is now one that sort of heat that some of the greatest ties since the 1980s, inflation hit nearly 8%. It's now back down to about 5% in the headline measure, almost 5.5% core inflation. So the Fed has had this 2% inflation target officially since I think 2012, but sort of unofficially since the early 90s, there's been a number of commentators and comments that said, maybe we should change this to 3% or 4%.

Why 2%, why should the fed think of it?

>> David Altig: Yeah, so I think it's sometimes forgotten by people that the 2% was not a number pulled out to hair. There had actually been a lot of thought about it. I mean, kind of the pad answer is, so New Zealand had already done 2%, so why shouldn't everyone else did 2%?

In fact, all kind of advanced comedies decided they'd latch on to 2%. But there's actually some great articles written by Ben Bernanke back in the early two thousands where he kind of laid out the case for 2%. And the logic went as follows, we want low inflation. And in fact, in some world, zero would be the best.

And actually, if you're old macroeconomic students, Milton Friedman says, actually negative. Well, that did not seem to be the ideal rate of inflation, because there was an issue of when times get tough, you want to be able to cut interest rates. And if rates of inflation are very, very low, then the buffer for being able to cut interest rates is going to be small.

So what you're trying to do is you're trying to set a balance between what's an interest rate that would give policy room to maneuver if needed. And rates of inflation that were not so high that they were significantly distorting decision making in the economy. So there was a bunch of analysis done, this is maybe not reflecting well on my profession.

 

>> David Altig: There's no reason for it to, so I'd try to hide anything. There was a bunch of analysis done at the time that indicated 2% was a number that was low enough to actually not determine much damage to the economy. And there are various views of how you define what price ability is.

Allen Greenspan used to say all the time the rate of inflation is low enough that nobody thinks about it. 2% seemed like that was plausibly fitting that definition. And then the analysis that was done was basically modeling that says, well, if you ran a 2% rate of inflation, the circumstances under which you would have to drive interest rates to zero would be relatively rare.

That is essentially a time when people believe that the inflation adjusted rate of return on treasuries was going to be something like 2%. Or the normal ten year treasury rate was 4% or something like that and all the way, reality kind of mug this. And that turned out to be period of time post 2000, when kind of structural interest rates just fell a lot.

Of course, we've now hit the zero bound on interest rates several times. That is sort of the rationale behind people saying, well, maybe we gotta up the inflation target to reflect the fact that kind of the structure of interest rates in the world economy, not in the United States, but in the global economy, has changed.

But the problem is then you run into the issue of, well, if you go above 2%, are you still honoring this notion that you want inflation rates that are so low or low enough that people aren't really thinking about it. And they're not having to protect themselves significantly against inflation, wages aren't kind of consistently falling on.

And chair Powell and every member of the federal marketing committee has been very clear that they're not inclined to revisit the 2% question. And if you wanted to rationale for why that's more than just being stubborn, this would be my rationale. My rationale would be, look, I mean, one of the things we've discovered in this episode, inflation kind of is ravaging to the economy and not least by individuals who are the most vulnerable in the economy.

So you don't wanna run into this world and I've heard various views on how high is too high. But to say something like 4%, I think that started territory where you really have to worry about whether you fixing the problem of running too low on interest rates by doing something that is in the end, of course, for the economy.

 

>> Jon  Hartley: Yeah, and remember, to chair Bernays, you talked many times about risks of inflationary spiral treatment and that's why we should have a 2% inflation target, 0% inflation target, I think it was by folks like Paul Volcker and others. So, why not?

>> Jon  Hartley: Yeah, it's very interesting to think that podcast period in the early nineties when this, I guess the Fed was transitioning from the Goldberg era, inflation revenue came in.

I want to talk a little bit about the balance sheet, just a little bit. So interest rates are at 5%, just below 5% now, federal funds rate 5%. And it's certainly one the Fed's main tools helping to bring down inflation. What is the balance sheet role in bringing down inflation and where do you think the best balance sheet should be?

 

>> David Altig: Well, that's a determinant. It's easier for me to consider it going much harder for me to answer. So again, there's gonna be differences of opinion kind of on, but I think that most in any event tend to think of the balance sheet and interest rate policy at substitutes for one another.

Don't forget the reason that, on that kind of discourse I had about choosing 2%, the reason they wanted to stay away from zero is because once you get to zero, you got two choices. Do nothing, make interest rates negative, which is number been felt to be viable. Actually in unique us economy we're not bank centric enough.

There's too much opportunity for disintermediation. It would be a problem. So balance sheet policy came into play during the financial crisis. Exactly because we had hit zero and couldn't really cut interest rates anymore. And so balance sheet policy was a substitute for what otherwise would have been cuts in interest rate.

The committee has said many times, times that it wishes or that it chooses to make interest rates the primary tool of monetary policy. And there's a recognition that the balance sheet needs to be lower, but it's going to be made lower. Kind of running in the background, there are various estimates of what the so called quantitative tightening plan would imply.

If you translate it into an interest rate effect, 50 basis points is maybe something that kind of comes up very often, but the idea is to make it kind of invisible and really do the work of fighting inflation. Keeping the economy on even keel while you do it, is going to be done by the bank of.

What the terminal point of that process of running down the balance sheet actually turned out to be a much trickier question than I ever thought it would have been. You'll remember we were doing it at one point, not all that long ago, and then we ran into the fall of 2019.

And we found that the size of the balance sheet, which we thought would be appropriate for smooth functioning treasury markets, for example, was much larger than we stopped in well over a trillion dollar range like that.

>> David Altig: Yeah, and thought we would get down. Estimates kind of varied again, but thought we would get down to 500 to 800 billion in reserves in the banking system.

That turned out to not really be appropriate for the smooth functioning of financial markets, for reasons that I don't fully, really worked out quite yet.

>> David Altig: That almost certainly has to do with regulatory changes after the financial crisis. So we're so far away from where kind of, probably the size of the balance sheet needs to go that it's not really a live question at this point, but sooner it's going to kind of pop back up.

And this sort of issue of how low is too low on the balance sheet is actually going to reemerge and be one of the next really important credit policy questions we have to answer once we get over this inflation.

>> Jon  Hartley: I'm curious about inflation expectations. How important do you think inflation expectations are for monetary policy?

And there's a couple different schools of thought. I think sort of pre traditional school of thought is that they matter a lot in that they sort of shift inflation expectations, then sort of shift inflation. But there's some people that argue that there's sort of like an identification problem there.

Like maybe the inflation expectations are going up because inflation is going up, causality kind of thing. How important do you think inflation expectations are for policymakers?

>> David Altig: Well, there's always an identification, so that never goes away. But in my mind, and I think that this is, again, a pretty conviction view.

Certainly for policymakers in the Federal Reserve system, expectations are everything. If you lose control, if you conduct your affairs in such a way that people began to expect the rate inflation five years from now, whatever the time frame might be, is not going to revert to something like you say it's going to revert to, you have lost that.

He would say things like, there were always these accusations that when Paul Volcker made a big change, he made in 79, saying, we aren't gonna target interest rates, we're gonna target kind of money grows. And the consequence of that was interest rates went through the roof. He was always sort of accused by people of hiding his true motive, that what he really wanted to do was raise interest rates for the topic.

He always said, no, that's not what I wanted at all, because, yeah, I thought two things. The first was, everything we were trying to do to beat inflation in the seventies wasn't working. So Milton Franklin had been bugging us for a long time about controlling money supply to control inflation.

So I said, well, why not try that? The second thing was, I thought I would walk into the room, I would say, I'm here to bring the rate of inflation down, and everyone would salute, and inflation expectations would moderate and all would be good. He said, I walked into the room again, nobody saluted.

 

>> David Altig: And so consequently, the price of bringing the inflation rate down was so high as we went into the kind of early eighties, precisely because you had to convince people that you really meant it. And the only way to convince people that you really meant it was to stick to your guns and endure the pain.

And that was fully because inflation expectations bad have been lost, and those expectations are starting to build to wages. The whole wage spiral story is really about expectations becoming self fulfilling in the economy and making it very difficult to reverse. We are not in that circumstance now. And I think one of the ways to interpret the public pronouncements of Fed policymakers is we have no intention of that happens.

 

>> Jon  Hartley: I wanna get into just unemployment a little bit, and you talked a little bit about top planning earlier. Sort of whole debate around the Phillips curve is something that Phillips Curve is sort of the classic trade off between unemployment and inflation, that the idea is that if you get higher unemployment, you get lower inflation.

And the number of people, summers and others have argued that in order to get inflation down we need to get unemployment up to 5% and I guess if you think that we could have a soft landing. And so far we haven't seen any signs on a planet going up even though inflation has been falling it's like what your take is on sort of the state of the folks curve and this potential for a soft landing.

Where we get sort of disinflation like we've been seeing but without a significant how likely this.

>> David Altig: So the Phillips curve is a story that persists because-

>> Jon  Hartley: That's good.

>> David Altig: Because we can't think of another. So I don't know, I guess everyone's familiar with Phillips curve, this notion that high unemployment will put downward pressure on inflation and low unemployment put up pressure on inflation.

So policy job as an engineer these changes in the unemployment rate in such a way that control inflation. Now, the relationship between inflation and employment rate kind of broke down on us so we kind of came up with these stories that well the Phillips curve used to be.

And now it's really flat.

>> David Altig: So we made up the explanation for why it works. We're doing our best, I mean, but confession is victim's soul, I want to have a stage or life, I want to have a to meet my maker on this way. So I got to say, look, the philistor is not a stable relationship, it is a narrative, and I think it's best understood as a narrative.

And the narrative goes along the lines of, look, yeah, I mean, if you've got a significant mismatch between demand and supply in the economy, you've gotta close that mismatch somewhere. And if you're a monetary policymaker, you can't do much on the supply side of the economy. Basically, the only thing you can do is kind of try to soften demand.

And I do think there is truth in that story. Precise estimates of what it kind of tanks and whether in all circumstances you have to drive the rate of equipment up to some specific, precisely, estimated level is sort of a lost path, I think. The soft range scenario really kind of relies on the notion that, as we begin to close the gap between demand and supply in the labor market, and I think it is showing some signs of closing.

That, and we still see persistently higher than pre pandemic levels of wage growth, as real wages catch up to the inflation, that that's gonna be kind of absorbed in business margins. Earnings are going to soften, and those costs on the labor side will not be fully, in any event, passed on the consumers.

So the soft landing is you don't have to hammer absolutely the labor market to see progress on inflation, which was created in this event by concealing some things. Some of them are resolving themselves already, some are not resolving themselves so quick. One of those things to resolve is accommodating monetary policy, which is now moved into restrictive phase.

So I think this general, when I said to me, I'm gonna stick to my story I've been at for about six months, it is this story that there's enough organic adjustment in the inflation rate. As a result of the extraordinarily unusual circumstances of the pandemic, that we can rely on that in combination with appropriate adjustments in policy.

Some slowing down in the economy to get to where we need to get on inflation without an outsized amount of pain to workers.

>> Jon  Hartley: I appreciate your confession on the Phillips curve, and maybe someone can come up with an alti curve as maybe that would, that would be a.

 

>> Jon  Hartley: I wanna get to sort of the big elephant in the room, and that is Silicon Valley Bank and Signature Bank failures. And what do you think their implications are for the banking industry and and could they weigh on it? And how do you diagnose this whole potential banking crisis?

 

>> David Altig: Well, I mean, there's lots of things to diagnose, and one of them is obviously what happened, that this SVB and Signature Bank were allowed to get into the state that they were clearly in. They were very unusual entities, they didn't look at all like normal banks. There will be questions about, well, okay, then who noticed?

How did they know this? What was done about it? I won't say anything more than that, for two reasons. One is, I like my job.

>> David Altig: And if there's anything under potent, it's about this.

>> David Altig: It's okay during the scientists, we're all part of the same team. And also, I mean, I actually don't know, I mean, honestly, this is easy for me to point on this, because I do not know what happened and why it happened.

And that will be the subject of one report from the board of Governors Vice Chair Barr, who issued his report on kind of post analysis of the events in May. I'm sure there will be a bunch of others weighing in on exactly what went wrong. I was talking to some folks this morning about it and I said, well, I hope as that analysis takes place, part of that analysis is also what went right with so many other institutions.

Because one of the things that I said earlier was that I was fearful that I was gonna have to show up and kind of tell me a very different story about my collapse very broadly. It didn't happen, some of that's because of the policy response to the events.

But also because I think there were lots of things done right in this environment where the key channel by which monetary policy is working now is this sort of credit channel associated with interest rates that has emerged. So, I mean, here's another confession I'll make, we like to show and tell you what we think.

I'll tell you what, I like that. So, monetary policy tightening cycles are of course about constraining credit. Now, you can constrain credit either on the demand side of the credit markets or the supply of credit market. And very honestly, in Atlanta, we were kind of pre SVB among the economists, not necessarily the regulators, and I don't want to paint them with this brush, but we were very focused on the demand side.

Okay, what sectors of the economy are really sensitive to higher borrowing costs, and has that changed over time? So does that make our tools less powerful now than maybe they were in the past? These are kind of things we were discussing and contemplating. And I think what SVB revealed, one of the lessons of this was that, no, no, no, this one's gonna be about the supply side of the credit markets.

And it's gonna be about kind of credit constraints operating through the banking system. It was already kind of obvious before SVB, because if you look at things like the senior loan officers survey, which, by the way, has become kind of a bellwether indicator in this particular cycle. It was already showing that the supply side of the credit markets was going to be the story, and was already a story of the monetary policy effects of the interest rate increases by the FOMC.

So we learned, I think, an important lesson there, maybe lesson's too strong. But it really refocused our attention on, okay, as we go forward and we think about things like how high is too high and where should we be looking for kind of the real effects of monetary policy operating.

That's gonna be on that credit supply side. The other thing we learned is that this was an exercise that we had never in the Federal Reserve done before, which is truly separated out interest rate policy. Or policies designed to fight the inflation rate, from financial stability policies, aimed at keeping things from blowing up, like we did in the Great Recession or global financial crisis.

So if you think of last time we kind of worried about instability in financial markets, it was the global financial crisis. So we introduced a whole bunch of kind of new facilities to kind of make sure that the financial market system did not collapse, but we did that simultaneously with cutting rates down to zero.

Same thing in the pandemic, the pandemic hit, we opened up a bunch of lending facilities to kind of get financial markets through this period, and we cut interest rates back down to zero. This is the first time where we've actually implemented a policy combination where we threw a bunch of liquidity into the system through the bank funding program to make sure that the issues that confronted SVB.

With respect to having to go to market and sell your securities, if you were losing deposits and losing in a day, $2 billion or whatever it was. At the same time, the committee turned around and continued to raise interest rates to fight inflation. So I think it was an important event in the sense that there was the demonstration that we could actually deal with financial crisis.

At the same time, not give up our macroeconomic goals and implement the policies that are important to achieve those goals. And it's early, so I always should say so far so good, and I could show up here in six months and the story will be very much different.

But I think this is really sort of an important recognition that this was feasible, and a feasible policy combination that allows us to fight the fight on the many fronts where it's presenting itself.

>> Jon  Hartley: One last question before opening up questions from the audience, and this is a big one.

On the future path of interest rates, I think it's something on a lot of people's minds. The Fed comes futures and Euro-Dollar futures markets expect pricing in the expected Fed to decrease interest rates by the end of this year. The federal funds rate, as I mentioned earlier, just below 5%.

What is your forecast for where the Fed fund rate goes over the next few years? And has any of that sort of thinking changed around what happens with crisis in future? You mentioned that there's a potential there for credit supply shock that could sort of introduce tightening on top of the existing tightening that the Fed has introduced to the system over the past year, I'm curious what you think about future monetary policy.

 

>> David Altig: Well, I do I like my job, so I will not venture a personal opinion, I will simply point out that in the summary of economic projections that stand really from the narratives you hear from Fed speakers, the story is pretty clear, this notion is, so Raphael has many times kinda told the story.

You wanna think of this tightening cycle in two phases. The first phase was just getting back to neutral, so you can think about kind of the ramping up into the 75 basis point per medium move as a recognition of we gotta at least get back to neutral pretty, pretty quickly.

And then in the second phase, which really sort of takes us to the end of the year, is actually getting into tightening monetary policy region, the median summary of economic projections have, and of course the dispersion of those. So the summary of economic projections, which are the forecasts of the FOMC, as most of you know, they're not a single forecast, it's 18 or 19, depending on how many governors you have shown up who are on the board at the moment.

They all submit their own forecast, so they publish the median and they publish the full distribution of the projections for the federal funds rate, the GDP growth per inflation. The median is at five and four sections, 1.25 basis points, holding there until the end of the year. The timing is not specified in those, obviously, but we don't know whose you don't know who's are who's, but if you pay attention, you can figure it out pretty easily for the most part.

I mean, I like to kinda point this out, the thing about Chair Paul, the thing about virtually all of the Fed FOMC participants is what you see is what you get. I mean, I've listened to the press conferences religiously, and it is an attempt to be completely transparent about the nature of the conversation and the thinking of the committee.

And sometimes it's clearer than others, and that almost always reflects the range of opinion in that room. I mean, the chair is trying to do his level best at really conveying the sense of what the conversation was and how that led to a decision. So everyone's been pretty clear that kinda the intention is get to where they think they gotta go and then Raphael's language is, be purposeful, be resolute and patient.

So resolute in getting to where we think we need to go meet our objectives about inflation, and resolute in not blinking the first time the going gets a little bit tough. I like to point out that if you're my age and there's quite a few people in the Federal Reserve System who are at the top, who are roughly my age, you grew up in the 70s and 80s.

I mean, you grew up with the experience of what happens when monetary policy goes wrong and allows the inflation rate to run out of control. And it was traumatic, it was traumatic for the economy, it was traumatic for real people, so that lesson is not forgotten by the folks on the committee.

The market clearly has a different view, one of us is gonna be right, we'll find out who. I think for the most part, as far as I can tell, that many people in this room who actually can speak more authoritatively about this than I can, I think, in general, the difference of opinion really has to do with different natural forecasts.

So I think that the market seems to be articulating the view, to the extent that the market can articulate the view, that the inflation rate is gonna come down faster and the economy is going to weaken more significantly than what is reflected in the summary of economic projections by the committee.

And that, in the end, is gonna be borne out by the facts, who has a more accurate assessment of the way this is gonna go? I don't think it's because of confusion about what the Fed is likely to do. I don't think it's a real difference of opinion about objectives that the market may have versus.

I think it has to do with just different views of the way the economy's gonna evolve. If you're skeptical about the soft landing story, then the question is going to be come whether it's resolute.

>> Jon  Hartley: I love the whole inflation experiences discussion, too. It's fascinating economics literature just about how people's sort of behavioral economics think about how people's childhood experiences, things like recessions or inflation, certainly impact their beliefs for the rest of their lives.

So yeah, I guess folks my age were running or they have sort of a different forecast about things. Well, before opening for questions, I just wanted, if we can get a round of applause for Dave, I think that would be.

>> Jon  Hartley: And how we're gonna do this is, first, you're gonna put up your hand, I'm gonna point to you, and then what's gonna happen is you're going to actually go to the microphone here.

 

>> Speaker 2: Guys can just line up.

>> Jon  Hartley: Yeah, actually, you guys, even better, you guys can just line up in front of the microphone.

>> Speaker 3: And by the way, for those of you that use Twitter, feel free to tweet about the event using the hashtag EconClubMiami for any questions or comments you wanna put, so thanks.

 

>> Jon  Hartley: And while people-. Also, keep the questions very brief so we can get to as many of them as possible. If it's a question, not a comment, and while people line up here, for those that are interested in learning more about the Economic Club of Miami, you can go to our website, economicclubofmiami.org, and learn about our future events.

Along with if you're interested in becoming a member, you can fill out an application form and submit it to us, which we will review. There's benefits of being a member of the Economic Club of Miami, including you get to attend events like this for free, you also get access to additional member retreats and VIP events with our speakers.

And without any further ado, I will let Radolf start with our first question.

>> Radolf: I was just wondering if you would agree with me that the orgy of government spending which passed last year that was named the Inflation Reduction Act, to me, that was brazen, even by Washington DC's low standards for honesty, I wonder if you would agree with me on that.

 

>> David Altig: Good Lord.

>> Jon  Hartley: I've never been at a Federal Reserve event before,

>> Jon  Hartley: Where the words orgy and confession were both uttered, so I think we're breaking new ground here.

>> David Altig: Look, I'm gonna put it this way. So it's not only an interesting, it's a very important question to say, how do we get this sort of inflation kinda outcome that we got?

I do think there are three elements of the story, and I don't know exactly how to weigh each of those elements. But one was clearly the supply disruptions in the economy, which persisted much longer than what we really thought. One is clearly the fact that there was a lot of demand stimulus that came out of the reaction to the pandemic, and especially after the pandemic had sort of played itself out for the most part.

You can think however you want to think about that, but I think that that's kind of an environmental fact. And then there's Fed policy, which was very accommodative for quite a while. The rapid reaction of rates last year, over the past year has been a reflection of the fact that, yeah, we were stuck in a very accommodative kind of place and the committee decided it needed to get out of it.

All three of those kinda are in play. And as we kinda get to the other side of all of this, there will be lots of dissertations written on how you apportion the influence of each of those elements. But I think you have to say, fiscal policy was part of the story.

 

>> Jon  Hartley: I like that dissertation idea

>> Jon  Hartley: The dominant idea.

>> Anthony Popascio: Yes, hi, I'm Anthony Popascio, I'm here as an Institute for Wealth Management student. It's a pleasure to have you here, thank you so much for. I'm very excited, so I'm gonna throw a few things at you and I apologize.

So with obviously a lot of everything going on, you talked about this soft landing, which I truly want to believe you, but I mean, when you look at the economy, there's not much room to go out, if you look at political demands on both sides. McCarthy's proposed another bill for a debt ceiling and it's still going to come up.

What are some, I guess, positive things like that that give you this notion that it's still possible for and how does doing your job with all of these other factors, how does it work?

>> David Altig: Yeah, so I think the best case to be optimistic rests on how unusual this whole event has been.

Typically, you get late into the cycle of Late to the business cycle, and what you find is there is, a ton of leverage that people have gotten themselves. Kind of out over their skis in terms of the balance sheets of households, the balance sheets of businesses. The financial condition of the private sector is precarious for lots of different reasons, that just absolutely is not characteristic of this time around.

I've never, really kind of seeing the degree of mismatch between the amount of workers that firms want to hire and the amount of workers available to do the work. Particularly given the kind of demographics of the labor market, this is a problem that's not gonna resolve itself. And I think we have a sense that businesses are going to be less inclined to rapidly shed workers, particularly if the slowdown is modest and mild.

So look I mean I will again, this is Dave confession thing, history is not on our side on this. There's no doubt about it, and I don't think any fed speaker has said anything different. Usually these sorts of tightening cycles end up with a downturn in the economy, but this doesn't look normal history, and it doesn't feel normal history.

And, I mean I guess I would even maybe point to sort of the government support which helps shore up household balance sheets. That just sort of put us into a much steadier place by which to, from which to kind of deal with the hit that's maybe coming to the economy, and maybe that hit, that reason won't be so bad.

 

>> Jon  Hartley: Good confession, Greg, with our next question.

>> Greg Ferrero: Greg Ferrero, thank you for being here this afternoon, by the way, speaking of 70s and 80s, this week in Miami, we've served up 70s, five gas lines for you.

>> Greg Ferrero: Anyway, the question relates to the real estate market, so I've been hearing for a little while now, particularly in the office space and some of the northern cities.

As the loans on real estate roll over somewhere in the neighborhood of $2 billion in the next three years. Let's say that the terms are gonna be much different, much higher interest rates, and it makes some of the deals that were made by the owners of those buildings non economic at this point.

And the story goes that the keys and the banks are gonna to get stuck with these buildings that are not worth nearly as much as they used to be and potentially grow holes in their balance sheet may create or add to another banking crisis. I was curious if this is something that keep your radar screen yet, and if you guys are looking at that.

 

>> David Altig: The answer is yeah, I mean, different question, whether we've drawn a conclusion about it. But that, I mean even before kind of the SVB event, I mean, that was clearly on our mind. Was the one place where we saw a real effect in the interest rate increase was residential housing, of course, and the CRE that basically moving out there.

We knew it, we know it so, Sherry and many of our efforts, obviously, all the time, I mean that is one of the kind of key data points to how this is gonna go. Some of the things you mentioned, there's obviously a lot of geographic kind of differences.

Northeast says whenever I come down here and I'm collecting information from our business contacts. I always remind myself, I've got a flight in south Florida, discount rate, because this is not a representative place in many ways, and so. But several places are doing great, I was even in Chicago last week, and I was talking to someone who was kind of moving into a new office space, and he said, I'm taking his work for it.

But he told me that office occupancy is in Duluth, I mean, in downtown Chicago, it was 90%. So that, we're not seeing is all I can say, the work home from home phenomenon is really kind of interesting because I mean it is a fact. I see it on Mondays and Fridays and Friday it's real.

I'm here to stay my friend Nick Blue spend a lot of time thinking about this. But what it means for something kind of the physical space is really kind of an interesting question because. At the bank, we have in the research department, through most of the bank, we have a three day in person requirement.

And so most people come in Tuesday, Wednesday, Thursday, and then they work remotely, well look, that everyone's in on Tuesday, Wednesday, Thursday. We need the same amount of space to do our work, even though we're not kind of completely occupying using it to its maximum capacity all the time.

So there's a lot of moving pieces in all of this, and as I said, as of yet, the warning signs of kind of impending real severe distress is not there. But that doesn't mean it's not going to be there, particularly we do the same thing as reset, I begin to kind of come into full bloom.

We'll see how that plays out but, of the many things we watch, that's nearly.

>> Jon  Hartley: Next question.

>> Speaker 4: My question was regarding bank reserve requirements. It's back in March of 2020

>> David Altig: Yeah, I don't know, I mean, the short answer to that is I don't know any reserve requirements and not very often been used as a active policy tool.

I don't wanna say anything too definitive about that because, once I do something without writing papers, but I know.

>> Jon  Hartley: Under construction.

>> Speaker 5: Hey, John, how are you? It's good to see you, Dave, thanks for this, thanks to Miami Dade College here. So a question for eBay, one of the things that Chair Powell's been citing is in terms of inflation metrics, CPI services, less shelter.

Now to that point, my question is, but I'm happy to keep it open ended and hear your thoughts on this. It seems the only time we've ever had that deescalate fairly quickly has been when we've been dwelling into a recession. So does it essentially imply, and this kind of goes back to the conversation earlier about filter, instability and strength today and how it's somewhat Wimbledon.

Essentially meaning that we use job losses because that's the only other time being able to get that measure at least down in a failure fashion.

>> David Altig: Yeah so, I mean, there the reason chair Powell has kind of focused on it, of course, is that we do, we're already seeing pretty significant disinflation in goods.

So and for every reason to believe, I was talking earlier about the PPI, there's every reason to believe that we'll continue on and we'll get back to the level of goods. Basically, deflation characterized most of the pre pandemic period, we know the housing elements change with a lag, and the dynamics of that are in some ways it's taking much longer than the panel technically we thought it would, but so we'll see relieve pressure on that.

So what's left is this kind of services x housing and the other element that makes that important, of course, is that's most sensitive to wages, labor is a major part of that kind of sector of the economy. It does not have to go back down to 2%, it just has to moderate because it's all going to average out the world does the 2% was never 2% uniformity, so the reason that's being emphasized is because it feels like it may be a stickier part of the inflation picture.

And it's a part that is mostly kind of Philip's question, really, if you think about it, because of the wage component and it's sticking up there and not changing. So seeing moderation in that segment of the price market basket is kind of, I think the key signal that we are entering we are in a period of dynamics that are truly moving us in the right direction.

We were going to get disinflation as a result of these other elements, we'll continue to get some disinflation result of these some elements the question is, where do we get stuck? If we do get stuck, and that's probably gonna show up, show up there, I wish I could give you a forecast of kind of whether that can be successful without job the story about how it can be successful without job loss is twofold.

I mentioned one of them earlier if wage pressures persist in that sector, the adjustment need not be a crisis to consumers the adjustment may come in margins for businesses. The second element of it, I forgot

>> Speaker 5: So for background, center post,

>> David Altig: So look, here's how we measure these gaps between labor demand and supply.

There's a lot of open job vacancies relative to the supply of workers so you can close the gap between labor demand and labor supply by destroying jobs, by just having some destroy jobs. But you can also close the gap by having jobs step back on their plans for expansion, so it means growth slowing, moving employment grows slower than it otherwise would have been.

But it doesn't need to be an outright contraction of size, so that's kind of logical some of this is an adjustment in planned expansion, some of it is an adjustment in margin. And that really is the essence of software.

>> Speaker 5: I guess this introduces job openings and how that's

 

>> David Altig: Of course yeah.

>> Speaker 5: Good that's tribute to also appreciate it thank you.

>> Jon  Hartley: Jose.

>> Jose: Hi, Dave thanks a lot curious on your thoughts on residential real estate coming out of the pandemic, we saw a lot of investors talents multifamily asset class rents have been softening, residential real estate single family hands has been quite robust.

Haven't been many transactions, but prices have stayed elevated I think based on affordability, you see some softness in price. Here is your advice.

>> David Altig: Yeah, I mean, the fact is we have kind of a structural problem with housing, right and we kind of structurally have access to may the fact that the cost of construction are high and were high before, I'm not even sure.

Interest rates are prime culprit on the supply side, but almost certainly not alcohol feeding demand in the short run the cost of land, I mean, look, I mean, you're in a place. What's the issue? The issue is cost of land and the material cost of building there is not really a dynamic in place that kind of sets us up for softness in the labor market for an extended period of time.

You can see it through a cycle, of course, and we may, but at the end of I say at the end of all of this, we're going to be faced with the same problems that we were faced with before the pandemic only works, and that is we don't have enough workers.

We don't have workers with the right combination of skills, we don't have enough housing affordability, we have kind of an urgent mean labor market and infrastructure to support that labor market. I mean, these are huge challenges and they're not going away maybe part of the good news is it kind of puts a floor kind of on how, you know, soft things will get and for how long, but it also makes the inflation issue that much more difficult.

As I said, I mean, we're a little bit surprised that the housing elements of prices have not softened more than they have, and we're still seeing kind of the influence from that sector inflation measures. I think it's probably a technical problem, but I would not dismiss entirely the fact that there are a lot of structural issues in that market in particular that just simply are going to stick with us.

 

>> Jon  Hartley: Next question.

>> Speaker 6: I am, I understand that it's difficult for any central bank to control inflation when the inflation factor that are affecting inflation come from the supply chain. In this case, we have three supply shops, three bits of workshops, and then the oil shop, and then the work is, and obviously that has increased in lectures for HCM because I think that maybe before or the Fed was expected, that the shock would be a temporary shock.

This is my shock, noise shock, to be temporarily shocked and they think that the United States, that the inflation rate persists at the levels that we have now for the next year or next two years for Messi Pacific. And I understand that we said that we, for example, change the inflation tariff is not on the table, but what will happen in that situation?

The national expertise and the expectation are already affected, and maybe we have supply chops, what could happen?

>> David Altig: Well, I mean I could only kind of repeat the position that has been taken by.