00:00:00
on today's show we will focus on inflation and the FED Wharton Finance Professor Nick rusanov joins us in a bit
00:00:07
to discuss the latest inflation data off of the CPI and PPI reports the last few
00:00:12
days as well as what the thinking of leaders of the Federal Reserve currently is and what their path is around rate
00:00:18
Cuts or maybe even rate increases then we'll be joined by Wharton legal studies
00:00:23
and business ethics Professor Peter KY Brown to look at what the FED has done in the last couple of years to manage
00:00:30
inflation and how this path Compares with other times in our country's history as well as how the FED reacted
00:00:37
back then well we mentioned moments ago the data that has come out in the last two days around inflation looking at the
00:00:44
numbers they would show some heating up but the question we ask is is this the beginning of a path where there might be
00:00:52
higher levels of concern or is this just a blip on the radar pleasure to be joined right now by Wharton Finance
00:00:59
Professor Nick ROV to break down the data Nick great to talk to you again how are you I'm well Dan I'm great uh as
00:01:06
always happy to be here thank you sir all right so let's dig into the data that we've gotten the last two days and
00:01:12
give us your read on what it tells you about where inflation is at the moment right so markets were uh jostled
00:01:22
a bit yesterday by the by the news of the CPI uh report uh that came in higher than expected and in particular
00:01:30
uh core inflation uh so CPI excluding food and energy uh came in quite a bit higher than expected at about 3.3% year
00:01:41
on year uh but that even masks a little bit the fact that there was an actually an increase uh the monthly uh monthly
00:01:48
rate uh to the highest level that we've seen since April of 2023 um and so what happens uh pretty
00:01:56
much every time that there's a kind of positive Sur Pro positive as in higher
00:02:02
than expected uh reading in the in the core CPI uh Market s off across the board so equities down bonds uh and
00:02:11
dollar dollar up as as other currencies slide with the uh kind of expectation that well the FED will pause um uh the
00:02:21
rate Cuts even even for even longer than uh than perhaps was anticipated now uh if we dig into the numbers a bit what
00:02:30
what was driving it is it really seasonal some um some bits might suggest so that the transportation services were
00:02:37
a big contributor uh but also shelter shelter has been going going up in recent months um and that is I think
00:02:45
again concerning uh for for Powell in the fed and and for for all of us uh consumers uh now it's too too early to
00:02:56
tell whether this is going to uh really lead to a a new pickup uh in uh in inflation but certainly uh is not
00:03:05
helping bring it down right so even if we look at you of year onye inflation numbers slowly slowly uh grinding down
00:03:13
this this this tick up is is not kind of going in the right direction um and in fact if we look at uh specific of
00:03:21
measures of inflation that emphasize stickiness versus kind of how how quickly prices change so Atlanta fed
00:03:27
puts out numbers for a stick CPI as well as a flexible CPI a sticky CPI of course
00:03:33
has been know sticky meaning going down particularly uh particularly slowly but this month it had picked up in January
00:03:41
so um it does not bode well for um uh the FED reaching its uh its Target of of 2% uh of 2% inflation now uh the FED
00:03:53
looks at the pce personal consumption expenditure index which is a bit different from from the CPI uh and that
00:03:59
will come in a bit L lower somewhere in between uh two two and three probably 2.4 2 2.5 and and I think uh that's some
00:04:09
some commentators feel like that's going to give fed enough uh uh enough uh cover
00:04:16
toh to continue easing maybe sometime uh in the in the fall but it's too too
00:04:21
early to see and today we've had another reading from the producer price index
00:04:25
which also surprised in the upside um at 3 and a half% % year on year um but nevertheless Market seem to be shrugging
00:04:34
it off in fact there's kind of recovery across across the board uh perhaps because the surprise was not as big uh
00:04:41
in relative terms of course ppi is more volatile than the C than the CPI and and kind of parsing these
00:04:48
numbers has led many observers to conclude that well the pce reading will not be that bad and again the PC is what
00:04:55
the FED ostensibly really cares about most so it what's interesting is that when you look at this at the ground
00:05:02
level a lot uh you see uh a lot of the commentary about how good the economy is right now but then you also talk to
00:05:11
people who say it's really challenging when you're thinking about the prices of
00:05:15
food when they go to the grocery store obviously gasoline has been up and down and some of the other factors in play
00:05:21
you mentioned uh obviously uh uh housing and some of the components around there
00:05:26
so it's a dynamic that's very much you know kind of one playing off against the
00:05:30
other in terms of how much impact we are seeing in these different areas right now uh absolutely and if we look at the
00:05:39
kind of the the readings of the real economy that uh the FED really pays attention to primarily employment again
00:05:46
it it is full employment that is in the fed's Mandate along with price stability
00:05:50
uh the unemployment has been healthy we've been around 4.1 um since since the fall uh and again
00:05:58
today's reading of the initial unemployment claims went came in a bit lower than previous week and it's been
00:06:05
going up and down the last few uh the last few months but nothing indicating uh any sort of serious weakness in the
00:06:13
labor market unlike a bit of a scare that we had um in the fall August September when it looked like U
00:06:22
employment employment was was softening and maybe maybe Fed was not cutting fast
00:06:26
enough that was the talk uh of the town then not anymore it looks like employment situation is healthy um now
00:06:36
the different side of it of course is that the real incomes of many Americans have not caught up yet with the the
00:06:43
inflation that we've had uh over the last uh basically four postco years right so it's it's not surprising that
00:06:52
people feel like the economy is not as uh as good as uh as they had hoped because is if if your income is not gone
00:07:01
up with one for one with inflation um then then you yeah you feel like you're
00:07:06
falling behind you may still have the job yeah um but uh but it's it's not the
00:07:11
same it's not the same feeling having the job the job that uh that pays uh well and having the job that pays maybe
00:07:20
just enough to scrape by which is I guess what a lot of consumers a feeling what do you think then this means for
00:07:26
the mindset of the FED winner thinking about potential rate cuts and I guess to a degree do we even have to start
00:07:33
throwing in the component of a potential rate increase uh here at some point and
00:07:37
I say that because you know former fed Vice chair Roger Ferguson did an interview earlier today where he even
00:07:43
hinted at that as something that at least you have to keep on the radar especially if this path of inflation
00:07:49
continues to stay in the same manner so if today turns out to be not just a blip meaning today I mean the
00:07:58
last kind of three day two days of uh of CPI and BPI readings and in fact uh proves to be a kind of a resumption of
00:08:06
an upward Trend in inflation um that is certainly within the realm of possibility the problem is if fed is
00:08:13
facing a very uh kind of delicate uh balance here uh they again they they they would like to keep in keep
00:08:23
employment or unemployment roughly at where where where it is now while bring inflation down if they have to resume
00:08:31
rate hikes uh to combat the rising inflation if it if it picks up again that of course is going to do some
00:08:40
damage to employment uh that's not a not a big surprise um and I feel like it's
00:08:48
it's highly unlikely that they will really go that that route unless inflation really accelerates in the
00:08:54
coming months and and there's a lot of unknowns there as as CH chairman Powell
00:08:59
uh made clear there's uncertainty about tariffs there's uncertainty about tax
00:09:05
cuts and deficits all of those uh will weigh on consumers and investors and firms expectations right firms are
00:09:14
already raising prices uh just based on kind of the expectation of tariffs uh and of course the some of the announced
00:09:22
tariffs so Metals Futures prices are up between five and 7% uh since kind of the talk of the
00:09:31
tariffs on steel and aluminum um and of course that is going to reverberate throughout uh the economy the
00:09:39
construction sector is going to be affected shelter is not going to be become cheaper if construction is going
00:09:45
to get more expensive so there there is quite a bit of uncertainty of how much policy is going to contribute to the
00:09:54
inflationary pressures that's what uh that's what I think Powell and the rest
00:09:58
of fomc are worried about um and it's not necessarily clear that that rate hikes
00:10:06
that would put additional pressure on the real sector would would do enough to undo any potential damage from uh you
00:10:14
know Pro inflationary policies Nick great to talk to you today thanks very much for your time and your Insight all
00:10:20
the best thank you too Dan you got it Nick rusen Finance Professor here at the Wharton School well as we have been
00:10:28
mentioning the the last few years is very unique when you think about fiscal policy the country obviously going
00:10:34
through an unprecedented period uh with little to no inflation uh only to see the impact from the pandemic send the
00:10:41
country back to levels of inflation not seen in several decades Peter Connie Brown is a professor of legal studies
00:10:47
and business ethics here at the Wharton School he's also author of the book The
00:10:51
Power and Independence of the Federal Reserve great to see you again my friend it's been a while pleasure to chat so
00:10:56
good to be here with you Dan thank you all right so before we dig into the history side of of this I wanted to kind
00:11:01
of get your thoughts on what we have seen from the FED over the last several years in terms of how they are kind of
00:11:08
having to move and and duck and dive because of all these Dynamics app play yeah I think ducking and Diving is uh is
00:11:15
a good uh is a good description I think that the FED went through a rather searing episode in uh kind of the post
00:11:23
crisis era and that is we had interest rates just stuck at the zero lower bound from November 2008 uh through December
00:11:32
2015 and yet we just didn't get the bounce back the post crisis uh post recession bounce back uh to to Full
00:11:41
Employment it was just agonizingly slow so unemployment rates at a very high level you know at the 9% 8% 7% 6% just
00:11:50
coming down just just uh little by little and those numbers as opposed to Full Employment uh you know being with
00:11:56
an unemployment rate being around you know 4% or something like that that means just millions of people
00:12:03
demoralized uh trying to get a job and failing Y and you know part of that is going to be structural there are issues
00:12:10
that the in the economy has nothing to do with the central bank but part of that is a question that Central Bankers
00:12:15
really they engage in some soul searching which is what should we be doing fast forward March 2020 remember
00:12:20
that oh yeah yeah sticks sticks in my memory for a long time for all of us uh and it does for the FED in a profound
00:12:28
way and the year 2020 was a period of extraordinary experimentation inside the FED they dusted off the 2008 Playbook
00:12:36
and added to it by just injecting so much monetary stimulus and liquidity and setting up emergency facilities and
00:12:43
here's what's important working hand in love with the first Trump Administration
00:12:47
to uh and Congress to support a fiscal monetary response to the effectual closure of the global economy and what's
00:12:58
astonishing just how successful that was yeah so we had unemployment just go uh Spike Skyhigh yeah and then collapse so
00:13:07
the so the employment rate reach full employment faster than anything we'd ever seen in history and so when the
00:13:13
Biden Administration comes in we had just uh stimulated the economy uh uh with unprecedented packages in the Trump
00:13:21
Administration two of them and Biden wants you know the Biden Administration want to do Theirs to two gigantic
00:13:28
stimulus packages and the Federal Reserve which had been cheerleading the fiscal stimulus through 2020 now starts
00:13:36
to see early signs they're still they're still kind of in that posture and
00:13:39
they're starting to see early signs wait did we overdo it yeah and so they find
00:13:44
themselves come 2022 a little bit flat-footed for the first time since the vulker era Ronald Reagan was President
00:13:50
first Administration the transitory comment yeah this is where everybody was like okay here's inflation uh and we
00:13:56
think it is transitory this is going to work itself out um and again in hindsight that looks uh obviously wrong
00:14:02
although I'll tell you um uh uh economists are still debating exactly what was the nature of this inflation uh
00:14:10
it it shot up came back down but is still with us it's not reaching debt back down to that 2% Target what does
00:14:17
that mean for the Federal Reserve it means that it's had to Pivot and pivot again and try to be nimble and flexible
00:14:23
and when you have a an Administration so here I'm talking about the president and
00:14:28
Congress the politicians who give the FED its due and say okay we may not like this maybe we do maybe we don't but you
00:14:36
have the space beable then the FED feels so much more comfortable how how does then how do you look at this from a
00:14:42
historical perspective because going back over you know decade upon decade I was looking at some of the numbers we've
00:14:49
obviously seen double digit inflation before but usually it it's been tied to
00:14:55
some big event like World War I World War II to a degree then you had the 70s and obviously there were some Dynamics
00:15:02
at play there that I think but so how do you look at what the FED has had to deal
00:15:06
with in the scope of from a historical perspective what we've seen play out for
00:15:11
for many decades well the FED is uh deeply invested in its history I mean think about a family reunion where you
00:15:19
go to and your great aunt who always likes to tell the stories about like your grandparents or whatever you know
00:15:23
who like they have the family history there and they want to tell you about it the the Federal Reserve has its family
00:15:29
history and in this instance uh J pal and crew were laser focused on on Paul vulker which is ironic because when uh J
00:15:39
pal first stepped in he was thinking about different kinds of examples that the FED had done too little during the
00:15:45
banki and Yellen era and so now um pal wanted to do more uh and then he flipped back thinking about it in a different
00:15:52
way the Federal Reserve went through an extraordinarily painful period not just in the 70s but 1965 roughly till 1984
00:15:59
right where inflation was temperamental uh Skyhigh in the late 70s uh and early 80s uh and very hard to calibrate
00:16:08
monetary policy relative to the inflationary environment they were encountering now that was a global
00:16:13
phenomenon um and so there were some non us uh contributors to it economic historians still argue about the extent
00:16:20
to which oil shocks during the uh OPEC LED oil embargo in response to um uh uh war in the Middle East and and much else
00:16:30
we still argue about the contribution that those policies have the so-called supply side factors um but virtually
00:16:36
everybody agrees the Federal Reserve policy During the period was just wrong how important then as we move forward
00:16:41
and you wrote about this in your book is the independence of the FED in terms of
00:16:45
trying to get inflation under control in terms of you know having the mandates and having the paths that they need to
00:16:53
to go forward in yeah let me let me give two and a half cheers for fed Independence not three cheers okay um
00:17:00
and Central Bankers want to give want us to give three cheers or four cheers or five cheers Central Bankers want to see
00:17:06
uh their role as being entirely focused on the long-term health of the economy without any other kind of distraction
00:17:14
they have no other issues we just heard from pal this week where he really was just saying you know how he doesn't use
00:17:20
religious terminology but it really does feel like a kind of priesthood that they're holding the sacred relics right
00:17:26
of uh of the macroeconomy inside uh you know their Great temple um and I'm going
00:17:32
to say that for the most part they're right that fed Independence is doing a
00:17:38
thing it's a political answer to a political problem and that is that all politicians not
00:17:43
just Donald Trump are going to be focused much more on the next election than they are on the state of the
00:17:49
economy 10 years from now that's just the way that Democratic uh uh procedures
00:17:55
work and fed Independence such as it is does a pretty good job of resting the attention from politicians from the
00:18:04
immediate term to that medium term but it's got a lot of problems with it and
00:18:09
the biggest problem of all is that Central Bankers are making value judgments about how to prioritize
00:18:15
different aspects of their remit the remit is written by politicians Congress is their boss all right their uh Central
00:18:23
Bankers themselves are appointed by politicians picked by the president confirmed by the Senate um but just
00:18:29
because it suffers from what uh theorists like me call the a democratic deficit this is not a democratic
00:18:38
institution right um that does make it imperfect right the question we got to ask is compared to what yeah and if it's
00:18:47
compared to Central Bankers who take a an oath of loyalty to a person right as opposed to you know policies then what
00:18:55
we have right now is not just better than the alternative it's much better and in that sense we'd want to preserve
00:19:01
it um and that's the thing that I fear and that's what I'll be watching most of
00:19:06
all is in the current Administration um uh it is it is just basic democratic theory right that the
00:19:14
Federal Reserve and every other organ of government should shift its policies in
00:19:19
response to the election sure yeah to do otherwise is anti-democratic yeah what we don't want to see is even in response
00:19:25
to that election is for the central Bankers to give up on the law give up on the traditions and the history in favor
00:19:33
of what one person thinks is in that person's best interest that even if that
00:19:37
person happens to see the president Peter great to see you thanks very much pleasure thank you Dan thank you Peter
00:19:42
kti Brown from here at the Wharton School well that does it for our inaugural Voyage on Wharton business
00:19:49
today I'm Dan Looney please join us again for our next show and for of course follow all of our content on our
00:19:54
social channels as well as the knowledge at Warden website