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on today's show we will focus on
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inflation and the FED Wharton Finance
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Professor Nick rusanov joins us in a bit
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to discuss the latest inflation data off
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of the CPI and PPI reports the last few
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days as well as what the thinking of
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leaders of the Federal Reserve currently
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is and what their path is around rate
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Cuts or maybe even rate increases then
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we'll be joined by Wharton legal studies
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and business ethics Professor Peter KY
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Brown to look at what the FED has done
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in the last couple of years to manage
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inflation and how this path Compares
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with other times in our country's
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history as well as how the FED reacted
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back then well we mentioned moments ago
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the data that has come out in the last
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two days around inflation looking at the
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numbers they would show some heating up
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but the question we ask is is this the
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beginning of a path where there might be
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higher levels of concern or is this just
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a blip on the radar pleasure to be
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joined right now by Wharton Finance
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Professor Nick ROV to break down the
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data Nick great to talk to you again how
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are you I'm well Dan I'm great uh as
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always happy to be here thank you sir
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all right so let's dig into the data
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that we've gotten the last two days and
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give us your read on what it tells you
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about where inflation is at the
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moment right so markets were uh jostled
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a bit yesterday by the by the news of
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the CPI uh report uh that came in higher
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than expected and in particular
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uh core inflation uh so CPI excluding
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food and energy uh came in quite a bit
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higher than expected at about 3.3% year
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on year uh but that even masks a little
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bit the fact that there was an actually
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an increase uh the monthly uh monthly
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rate uh to the highest level that we've
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seen since April of
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2023 um and so what happens uh pretty
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much every time that there's a kind of
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positive Sur Pro positive as in higher
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than expected uh reading in the in the
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core CPI uh Market s off across the
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board so equities down bonds uh and
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dollar dollar up as as other currencies
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slide with the uh kind of expectation
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that well the FED will pause um uh the
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rate Cuts even even for even longer than
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uh than perhaps was anticipated now uh
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if we dig into the numbers a bit what
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what was driving it is it really
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seasonal some um some bits might suggest
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so that the transportation services were
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a big contributor uh but also shelter
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shelter has been going going up in
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recent months um and that is I think
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again concerning uh for for Powell in
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the fed and and for for all of us uh
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consumers uh now it's too too early to
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tell whether this is going to uh really
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lead to a a new pickup uh in uh in
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inflation but certainly uh is not
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helping bring it down right so even if
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we look at you of year onye inflation
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numbers slowly slowly uh grinding down
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this this this tick up is is not kind of
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going in the right direction um and in
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fact if we look at uh specific of
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measures of inflation that emphasize
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stickiness versus kind of how how
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quickly prices change so Atlanta fed
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puts out numbers for a stick CPI as well
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as a flexible CPI a sticky CPI of course
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has been know sticky meaning going down
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particularly uh particularly slowly but
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this month it had picked up in January
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so um it does not bode well for um uh
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the FED reaching its uh its Target of of
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2% uh of 2% inflation now uh the FED
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looks at the pce personal consumption
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expenditure index which is a bit
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different from from the CPI uh and that
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will come in a bit L lower somewhere in
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between uh two two and three probably
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2.4 2 2.5 and and I think uh that's some
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some commentators feel like that's going
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to give fed enough uh uh enough uh cover
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toh to continue easing maybe sometime uh
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in the in the fall but it's too too
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early to see and today we've had another
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reading from the producer price index
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which also surprised in the upside um at
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3 and a half% % year on year um but
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nevertheless Market seem to be shrugging
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it off in fact there's kind of recovery
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across across the board uh perhaps
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because the surprise was not as big uh
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in relative terms of course ppi is more
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volatile than the C than the
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CPI and and kind of parsing these
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numbers has led many observers to
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conclude that well the pce reading will
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not be that bad and again the PC is what
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the FED ostensibly really cares about
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most so it what's interesting is that
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when you look at this at the ground
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level a lot uh you see uh a lot of the
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commentary about how good the economy is
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right now but then you also talk to
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people who say it's really challenging
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when you're thinking about the prices of
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food when they go to the grocery store
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obviously gasoline has been up and down
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and some of the other factors in play
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you mentioned uh obviously uh uh housing
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and some of the components around there
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so it's a dynamic that's very much you
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know kind of one playing off against the
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other in terms of how much impact we are
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seeing in these different areas right
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now uh absolutely and if we look at the
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kind of the the readings of the real
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economy that uh the FED really pays
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attention to primarily employment again
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it it is full employment that is in the
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fed's Mandate along with price stability
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uh the unemployment has been healthy
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we've been around
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4.1 um since since the fall uh and again
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today's reading of the initial
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unemployment claims went came in a bit
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lower than previous week and it's been
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going up and down the last few uh the
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last few months but nothing indicating
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uh any sort of serious weakness in the
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labor market unlike a bit of a scare
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that we had um in the fall August
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September when it looked like U
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employment employment was was softening
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and maybe maybe Fed was not cutting fast
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enough that was the talk uh of the town
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then not anymore it looks like
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employment situation is healthy um now
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the different side of it of course is
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that the real incomes of many Americans
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have not caught up yet with the the
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inflation that we've had uh over the
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last uh basically four postco years
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right so it's it's not surprising that
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people feel like the economy is not as
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uh as good as uh as they had hoped
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because is if if your income is not gone
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up with one for one with inflation um
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then then you yeah you feel like you're
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falling behind you may still have the
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job yeah um but uh but it's it's not the
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same it's not the same feeling having
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the job the job that uh that pays uh
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well and having the job that pays maybe
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just enough to scrape by which is I
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guess what a lot of consumers a feeling
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what do you think then this means for
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the mindset of the FED winner thinking
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about potential rate cuts and I guess to
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a degree do we even have to start
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throwing in the component of a potential
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rate increase uh here at some point and
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I say that because you know former fed
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Vice chair Roger Ferguson did an
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interview earlier today where he even
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hinted at that as something that at
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least you have to keep on the radar
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especially if this path of inflation
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continues to stay in the same
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manner so if today turns out to be not
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just a blip meaning today I mean the
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last kind of three day two days of uh of
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CPI and BPI readings and in fact uh
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proves to be a kind of a resumption of
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an upward Trend in inflation um that is
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certainly within the realm of
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possibility the problem is if fed is
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facing a very uh kind of delicate uh
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balance here uh they again they they
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they would like to keep in keep
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employment or unemployment roughly at
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where where where it is now while bring
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inflation down if they have to resume
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rate hikes uh to combat the rising
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inflation if it if it picks up again
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that of course is going to do some
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damage to employment uh that's not a not
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a big surprise um and I feel like it's
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it's highly unlikely that they will
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really go that that route unless
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inflation really accelerates in the
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coming months and and there's a lot of
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unknowns there as as CH chairman Powell
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uh made clear there's uncertainty about
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tariffs there's uncertainty about tax
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cuts and deficits all of those uh will
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weigh on consumers and investors and
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firms expectations right firms are
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already raising prices uh just based on
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kind of the expectation of tariffs uh
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and of course the some of the announced
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tariffs
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so Metals Futures prices are up between
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five and
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7% uh since kind of the talk of the
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tariffs on steel and aluminum um and of
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course that is going to reverberate
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throughout uh the economy the
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construction sector is going to be
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affected shelter is not going to be
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become cheaper if construction is going
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to get more expensive so there there is
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quite a bit of uncertainty of how much
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policy is going to contribute to the
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inflationary pressures that's what uh
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that's what I think Powell and the rest
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of fomc are
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worried about um and it's not
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necessarily clear that that rate hikes
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that would put additional pressure on
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the real sector would would do enough to
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undo any potential damage from uh you
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know Pro inflationary policies Nick
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great to talk to you today thanks very
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much for your time and your Insight all
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the best thank you too Dan you got it
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Nick rusen Finance Professor here at the
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Wharton School well as we have been
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mentioning the the last few years is
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very unique when you think about fiscal
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policy the country obviously going
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through an unprecedented period uh with
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little to no inflation uh only to see
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the impact from the pandemic send the
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country back to levels of inflation not
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seen in several decades Peter Connie
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Brown is a professor of legal studies
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and business ethics here at the Wharton
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School he's also author of the book The
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Power and Independence of the Federal
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Reserve great to see you again my friend
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it's been a while pleasure to chat so
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good to be here with you Dan thank you
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all right so before we dig into the
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history side of of this I wanted to kind
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of get your thoughts on what we have
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seen from the FED over the last several
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years in terms of how they are kind of
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having to move and and duck and dive
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because of all these Dynamics app play
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yeah I think ducking and Diving is uh is
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a good uh is a good description I think
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that the FED went through a rather
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searing episode in uh kind of the post
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crisis era and that is we had interest
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rates just stuck at the zero lower bound
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from November 2008 uh through December
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2015 and yet we just didn't get the
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bounce back the post crisis uh post
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recession bounce back uh to to Full
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Employment it was just agonizingly slow
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so unemployment rates at a very high
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level you know at the 9% 8% 7% 6% just
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coming down just just uh little by
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little and those numbers as opposed to
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Full Employment uh you know being with
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an unemployment rate being around you
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know 4% or something like that that
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means just millions of people
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demoralized uh trying to get a job and
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failing Y and you know part of that is
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going to be structural there are issues
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that the in the economy has nothing to
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do with the central bank but part of
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that is a question that Central Bankers
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really they engage in some soul
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searching which is what should we be
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doing fast forward March 2020 remember
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that oh yeah yeah sticks sticks in my
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memory for a long time for all of us uh
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and it does for the FED in a profound
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way and the year 2020 was a period of
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extraordinary experimentation inside the
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FED they dusted off the 2008 Playbook
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and added to it by just injecting so
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much monetary stimulus and liquidity and
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setting up emergency facilities and
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here's what's important working hand in
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love with the first Trump Administration
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to uh and Congress to support a fiscal
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monetary response to the effectual
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closure of the global economy and what's
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astonishing just how successful that was
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yeah so we had unemployment just go uh
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Spike Skyhigh yeah and then collapse so
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the so the employment rate reach full
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employment faster than anything we'd
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ever seen in history and so when the
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Biden Administration comes in we had
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just uh stimulated the economy uh uh
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with unprecedented packages in the Trump
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Administration two of them and Biden
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wants you know the Biden Administration
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want to do Theirs to two gigantic
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stimulus packages and the Federal
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Reserve which had been cheerleading the
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fiscal stimulus through 2020 now starts
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to see early signs they're still they're
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still kind of in that posture and
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they're starting to see early signs wait
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did we overdo it yeah and so they find
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themselves come 2022 a little bit
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flat-footed for the first time since the
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vulker era Ronald Reagan was President
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first Administration the transitory
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comment yeah this is where everybody was
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like okay here's inflation uh and we
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think it is transitory this is going to
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work itself out um and again in
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hindsight that looks uh obviously wrong
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although I'll tell you um uh uh
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economists are still debating exactly
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what was the nature of this inflation uh
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it it shot up came back down but is
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still with us it's not reaching debt
00:14:15
back down to that 2% Target what does
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that mean for the Federal Reserve it
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means that it's had to Pivot and pivot
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again and try to be nimble and flexible
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and when you have a an Administration so
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here I'm talking about the president and
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Congress the politicians who give the
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FED its due and say okay we may not like
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this maybe we do maybe we don't but you
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have the space beable then the FED feels
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so much more comfortable how how does
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then how do you look at this from a
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historical perspective because going
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back over you know decade upon decade I
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was looking at some of the numbers we've
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obviously seen double digit inflation
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before but usually it it's been tied to
00:14:55
some big event like World War I World
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War II to a degree then you had the 70s
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and obviously there were some Dynamics
00:15:02
at play there that I think but so how do
00:15:04
you look at what the FED has had to deal
00:15:06
with in the scope of from a historical
00:15:09
perspective what we've seen play out for
00:15:11
for many decades well the FED is uh
00:15:15
deeply invested in its history I mean
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think about a family reunion where you
00:15:19
go to and your great aunt who always
00:15:20
likes to tell the stories about like
00:15:22
your grandparents or whatever you know
00:15:23
who like they have the family history
00:15:25
there and they want to tell you about it
00:15:27
the the Federal Reserve has its family
00:15:29
history and in this instance uh J pal
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and crew were laser focused on on Paul
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vulker which is ironic because when uh J
00:15:39
pal first stepped in he was thinking
00:15:41
about different kinds of examples that
00:15:43
the FED had done too little during the
00:15:45
banki and Yellen era and so now um pal
00:15:49
wanted to do more uh and then he flipped
00:15:51
back thinking about it in a different
00:15:52
way the Federal Reserve went through an
00:15:54
extraordinarily painful period not just
00:15:56
in the 70s but 1965 roughly till 1984
00:15:59
right where inflation was temperamental
00:16:02
uh Skyhigh in the late 70s uh and early
00:16:05
80s uh and very hard to calibrate
00:16:08
monetary policy relative to the
00:16:10
inflationary environment they were
00:16:11
encountering now that was a global
00:16:13
phenomenon um and so there were some non
00:16:16
us uh contributors to it economic
00:16:18
historians still argue about the extent
00:16:20
to which oil shocks during the uh OPEC
00:16:23
LED oil embargo in response to um uh uh
00:16:27
war in the Middle East and and much else
00:16:30
we still argue about the contribution
00:16:31
that those policies have the so-called
00:16:33
supply side factors um but virtually
00:16:36
everybody agrees the Federal Reserve
00:16:37
policy During the period was just wrong
00:16:39
how important then as we move forward
00:16:41
and you wrote about this in your book is
00:16:43
the independence of the FED in terms of
00:16:45
trying to get inflation under control in
00:16:49
terms of you know having the mandates
00:16:51
and having the paths that they need to
00:16:53
to go forward in yeah let me let me give
00:16:56
two and a half cheers for fed
00:16:57
Independence not three cheers okay um
00:17:00
and Central Bankers want to give want us
00:17:02
to give three cheers or four cheers or
00:17:03
five cheers Central Bankers want to see
00:17:06
uh their role as being entirely focused
00:17:10
on the long-term health of the economy
00:17:12
without any other kind of distraction
00:17:14
they have no other issues we just heard
00:17:16
from pal this week where he really was
00:17:18
just saying you know how he doesn't use
00:17:20
religious terminology but it really does
00:17:22
feel like a kind of priesthood that
00:17:23
they're holding the sacred relics right
00:17:26
of uh of the macroeconomy inside uh you
00:17:30
know their Great temple um and I'm going
00:17:32
to say that for the most part they're
00:17:35
right that fed Independence is doing a
00:17:38
thing it's a
00:17:39
political answer to a political problem
00:17:41
and that is that all politicians not
00:17:43
just Donald Trump are going to be
00:17:45
focused much more on the next election
00:17:47
than they are on the state of the
00:17:49
economy 10 years from now that's just
00:17:51
the way that Democratic uh uh procedures
00:17:55
work and fed Independence such as it is
00:17:58
does a pretty good job of resting the
00:18:02
attention from politicians from the
00:18:04
immediate term to that medium term but
00:18:07
it's got a lot of problems with it and
00:18:09
the biggest problem of all is that
00:18:11
Central Bankers are making value
00:18:12
judgments about how to prioritize
00:18:15
different aspects of their remit the
00:18:18
remit is written by politicians Congress
00:18:20
is their boss all right their uh Central
00:18:23
Bankers themselves are appointed by
00:18:24
politicians picked by the president
00:18:27
confirmed by the Senate um but just
00:18:29
because it suffers from what uh
00:18:33
theorists like me call the a democratic
00:18:36
deficit this is not a democratic
00:18:38
institution right um that does make it
00:18:41
imperfect right the question we got to
00:18:43
ask is compared to what yeah and if it's
00:18:47
compared to Central Bankers who take a
00:18:49
an oath of loyalty to a person right as
00:18:53
opposed to you know policies then what
00:18:55
we have right now is not just better
00:18:57
than the alternative it's much better
00:19:00
and in that sense we'd want to preserve
00:19:01
it um and that's the thing that I fear
00:19:04
and that's what I'll be watching most of
00:19:06
all is in the current
00:19:08
Administration um uh it is it is just
00:19:11
basic democratic theory right that the
00:19:14
Federal Reserve and every other organ of
00:19:16
government should shift its policies in
00:19:19
response to the election sure yeah to do
00:19:21
otherwise is anti-democratic yeah what
00:19:23
we don't want to see is even in response
00:19:25
to that election is for the central
00:19:27
Bankers to give up on the law give up on
00:19:30
the traditions and the history in favor
00:19:33
of what one person thinks is in that
00:19:35
person's best interest that even if that
00:19:37
person happens to see the president
00:19:39
Peter great to see you thanks very much
00:19:40
pleasure thank you Dan thank you Peter
00:19:42
kti Brown from here at the Wharton
00:19:44
School well that does it for our
00:19:46
inaugural Voyage on Wharton business
00:19:49
today I'm Dan Looney please join us
00:19:50
again for our next show and for of
00:19:52
course follow all of our content on our
00:19:54
social channels as well as the knowledge
00:19:56
at Warden website
