Optimistic on the U.S. Economy | Claudia Sahm and Jimmy Connor
Summary
Macro Stance: Guest is cautiously optimistic on the United States economy, citing resilient consumers and a solid labor market despite ongoing shocks.
Inflation Outlook: Emphasizes sticky inflation around 3% and notes five consecutive years above the Fed’s 2% target; tariffs and supply shocks are key contributors.
Fed Policy: Expects a prolonged interest rates pause with risk management bias; potential hikes are on the table if energy shocks seep into core inflation.
Energy and Oil: Higher oil prices ($100–$115) are a consumer headwind but not recessionary on their own; the U.S. as a major energy producer provides a partial buffer.
Cost Pass-through: Fuel and diesel spikes are raising costs for airlines and logistics, with knock-on effects to ticket prices and freight surcharges (e.g., DAL, AMZN, FDX, UPS).
Labor Market: Unemployment near 4.3% with a “low hire, low fire” dynamic; immigration shifts and demographics dampen labor supply growth.
AI Productivity: AI is early but potentially supportive of productivity; some tech layoffs reflect prior over-hiring more than AI displacement.
Fiscal and Debt: Bond market crisis risk seen as longer-term; true sustainability hinges on entitlement reform rather than discretionary cuts.
Transcript
Claudia, thank you very much for joining us today. We have seen a lot of economic data here in the last few days, so you're the perfect person to speak to. The CPI continues to be very strong. The most recent number came in at 3.5% annualized, including fuel and food. GDP, Q1 GDP came in at 2% annualized. And I want to dive into both of these numbers. But before we do that, why don't we just start with a very top down highle approach. What is your overall assessment of the US economy as it stands right now? Are you bullish or bearish? >> Oh goodness. Confused? No. I mean, I I'm pro I'm more on the bullish side than the bearish side, but but we certainly have some we have a lot to navigate, you know, and and I think until we get more clarity on what's happening in the Middle East and with the energy supply, it's it's until that that is resolved, it's hard for me to be bearish because there's still some pretty bad pretty bad outcomes on the path. But but I will say you know looking at the US economy you've been and not just AI investment which is certainly uh really firing on all cylinders but the American consumer overall has been been pretty resilient and I think the US labor market overall is pretty good and and that is despite the fact that it has been we've been hit by a lot of big policy changes since President Trump came in uh to office and a lot of uncertainty and you know just keep motoring along. So I don't I don't want to like um I don't want to bet against the US economy right now but we but I do worry I think there are definitely risks out there and you put enough pressure on even a great economy and it it's going to start to show some wear and tear >> and I think you hit the nail right on the head when you use that word uncertainty. We hear that quite a bit from Jay Powell and uh but it's amazing how this how resilient the economy is and also the stock market. And I know the stock market is not the economy, but it continues to climb this wall of worry. Like every day the S&P and the NASDAQ just keep grinding higher, >> right? And I've I've described this economy. So I write on a Substack stay-at-home macro play on my last name some and I have a piece recently about the whiplash economy, right? So this is part of it's not just this uncertainty piece but one of the thing that particularly in the last five or six years the US economy and also the global economy to a large extent has just been hit by one supply shock after another and supply shocks you know and these are like the pandemic which the the snarled uh global supply chains. We also had a lot of disruptions to labor markets because of the pandemic. people trying to avoid the disease and then we have you know big energy shocks with Russia and Ukraine and then now with the Middle East and in the US the the increase in tariffs I mean that's another cause shock and one that I spend a lot of time because I look a lot at labor markets is we've had huge swings in immigration uh from a big buildup right after the pandemic to in recent years a really sharp decline and these are all and then we're talking about AI right we're in the early innings of that but that's another supply shock and these are just it's like you're rewiring the fundamentals of the economy. The details matter. It's very hard to forecast the time horizons like how long it takes to adjust to these things. Um and it can really mess with some of our rules of thumb like how to read the economy or for policy makers how to handle it. The Fed's tools are are reasonably good at like demand management. supply shocks are a lot harder because it especially say for the Fed, it puts their dual mandate in tension because a negative supply shock pushes up prices and pushes down employment and growth. And so then there's there's this tension and so I just think this has been kind of unusual the frequency of these shocks and it it gives a lot to kind of think about the structure of the economy. So um and they've been big in terms of you know in terms of how how big the shocks are. So that that's been a a thing that's really been preoccupying me is kind of thinking about how to read that whiplash economy. >> So you mentioned the Fed a couple of times and we just had a meeting. So uh when we started this year we were expecting I I think two or three rate cuts and then here we are a few months later and of course what's happening in the Middle East has changed all that. But during the recent meeting the Fed kept interest rates unchanged. The vote was 8 to4. It's the first time we've had four to center since 1992. What were your thoughts on what Jay Powell said during the presser? >> Right. So, the Fed had uh at the beginning of the year went on pause. They they had done some rate cuts the end of last year, some concerns about risks in the labor market and and so but when they started this year, labor market looked like it was stabilizing and there were still concerns. I mean, inflation still elevated. And I will point out with today's data, we got the March uh personal consumption expenditure, which is the Fed's kind of target measure of inflation, and we have now hit a full 5 years of inflation above the Fed's 2% target. Now, we are much closer to the target, kind of running something in the 3% range or a little above 3%. It's not the 9% that we saw in, you know, 2022, but it's still above uh it's above. It's above what Americans have been used to. Kind of the pre- pandemic pace was actually a little below 2%. And and it does add up. Every year you're off on inflation. The price level just keeps drifting up higher. So that is a you know that's a that's a sour note, right? For someone finishing up their 10 years as Fed chair. I certainly don't blame J. Powell for all of the inflation. the Fed made some mistakes in terms of probably timing of you know low raising rates and you know not doing the balance sheet expansion quite as long we would have had inflation anyways but it's still that's part of his legacy is walk away with that 5 years above target so but the Fed even before the conflict in the Middle East was kind of in this holding pattern they wanted to see good news on inflation and the story had been a lot of and I think it it held up with the data I don't think it's just a story that uh core goods inflation So take out the food and energy, but look at the core goods. It had been uh really picked up last year. Fits a lot with the tariff story because tariffs are a tax on imported goods and often, you know, business are going to pass those those extra costs on to consumers. And also, you know, tariffs make a less competitive environment. So other companies that don't have to deal with the tariffs, they may raise their prices, too. So it very much looks like in the data the core goods inflation is elevated and pretty pretty notably elevated and so but with a tariff the the standard uh thinking on it is well it's it's a tax so it's going to fit into the price level as it's adjusting up the price level it is going to increase inflation because it's a change in the price level but if it's a one-time adjustment in prices which makes sense given you know as long as the tariff sits still and President Trump could move tariffs around a lot. But if once they sit still, you have a one level one time adjustment in the price level and then once that adjustment in the price level is done, then inflation should drift back down. And that and there's been a lot of research both at the Fed, other academics, people using, you know, various types of data, and you can kind of see the tariff effects. And we're at about the time where those should start rolling off. Now this Fed having been burned by you know being transitory pandemic inflation and again supply shocks are very hard to uh forecast and we also had a lot stronger demand picture um back coming right out of the pandemic but so now the Fed has been very much in a risk management. They have a baseline tariffs are going to run off but they want to see it. They want to see evidence of that rolling over on the tariffs before they start cutting rates. So that was the idea of like this we'd start to see this the middle of the year. I think there's some hints of it in the data. Not quite yet, but there's some hints. And then in the second half of the year, you'd have some good news cuts. Like the Fed could say, "Oh, inflation is back. We'll start cutting." Well, I mean, the conflict in the Middle East has completely upended that timeline. We are still waiting, and Pow has said this, we're still waiting to see those tariff effects roll off. So the Fed was going to be in wait and see anyways. And now there's the issue of energy prices and and having to watch very carefully for any spillovers where it starts seeping into core. And so that's just that's going to take a lot of time to you know even once kind of the once we get to a place where there's some resolution on the conflict itself it takes time to kind of heal the energy supply chains get the stuff going and you know and it's and it still is a wild card with the American consumer because after 5 years of higher inflation the Fed does worry that people are just going to throw in the towel and be like it's just 3%. Like we're not going back. And so I think they're, you know, it's they're very much in a hold position. Uh that was the policy decision yesterday. It's we don't have there's nothing in the evidence, nothing in inflation expectations that's or kind of regular experience with energy shocks that really says this is going to be the worst case and inflation expectation will be un like we just don't see anything that looks like that yet. But they're going to be um very careful and hold. But the the vote so was eight individuals voting for a hold, four voting against uh against the the hold in the statements and one person so Steven Myron who's come from the White House to the Fed he voted once again for a rate cut. Uh but the other three dissenters they agreed that the Fed should hold but they felt it was important that the statement make clear that the next move that the Fed makes could be a hike. No normal human being would read the Fed's statement and see oh the next move is a cut. But the way the statement has evolved and kind of the thinking of it because it talks about further adjustments. The adjustments they've made so far have all been cuts. And so the Fed still has this messaging that the the majority of the the members think that it is most likely that the next move is a cut. But there is a growing contingent and I think Powell was saying you know the way things are going it might be a majority by the next time they meet in June. Right? The news has not been good on the oil and you know price front but the majority still felt like it was okay to kind of signal next move cut though they're on pause. But but there's a growing contingent that really wants to start at least setting it up as a a real possibility that there's a a hike. So that's a it's a pretty marketked shift. And I' um the when uh Kevin Worsh takes the reigns as FedEure and he is well on his way. He hasn't had his full Senate confirmation yet, but he made it through committee uh yesterday. This it's going to be tough, especially if he thinks rates need to come down. This is not a Fed that is positioned to be cutting rates anytime soon. >> And you raised a very good point there because a big job of what the chair has to do is form a consensus. Do you think he's going to be able to do that? >> It's going to take time and you know Kevin Worsh so I um I worked at the Federal Reserve from 2007 to 2019. So I overlapped. I remember Kevin Worsh as a governor. He was there from 2006 to 2011. uh and you know he he's been there like he he knows how the institution works. He knows how I mean he's you know he was a policy maker right like he was one of those one of those 12 votes um but you know the the chair is is a very important role it the chair has one vote just like the other 12 members of the committee so there's um there's seven governors the chair is is a governor at the board in DC and then on a rotating basis five of the 12 reserve banks which are all across the country uh vote so that's how you get your 12 every meeting there's all 19 of them like talking away with their views. So they really do work as a whole body but in terms of who votes there's there's 12 of them and the the chair only has one vote and sometimes from the outside people have this view of like the Fed is the chair like whatever the chair wants is what they get and this is really not the way it works. Uh but the fair the the Fed chair sets the agenda is the leader and I mean of course if you set the agenda for a meeting you you do have a lot of pull in terms of where the direction the meeting can could go in. Um the the Fed chairs often was needs to be in constant communication with all of the other uh Fed officials to kind of understand where they're at. kind of thinks about, you know, strate like kind of moving a discussion along. And then the Fed chair has, I'd say, more resources because all of the the Fed staff and there's like 400 plus economists at the the board in DC. I mean, there's many more like attorneys and like there's just lots of people, but they all report to the chair. So, if he has things, I mean, he's talked about want a new theory of inflation and wants to look at productivity. I mean he has an army of trained to go off and do analysis on questions that he is interested in. So there is a you know there's an advantage uh to being chair but it is an institution that people take their jobs very seriously. They're very um datadriven evidence and so frankly it's like the world the world really drives the Fed. I mean, it's what's happening, you know, what happens in the Middle East, what happens with the I mean, that really kind of sets up the possible options. Um, and and there's often outside of a crisis, the Fed is not a fastmoving body, right? Like they're going to they will change and they will pivot, but it's it's deliberative, right? So I so there could be some we might see some changes particularly maybe in communication or the press conferences. Kevin Wars has a style that is different than a lot of uh Fed officials. So we'll we'll notice a change when he um takes takes the reigns in June which is not that far away. Uh, but I do not expect big changes in interest rates, big changes in the balance sheet anytime soon. And really, it's going to hinge on learning more about the economy. I think the Fed is is really is in this wait and see or pause for for quite some time. >> I'm going to digress for a moment um before we start talking economics again, but I'm kind of curious. Do all the governors get together in person or do some show up over video conference or a Zoom call or how do they do it? >> So, in in the time that I was there, uh the governors are in residence, right? Like so they'll they show up and there's regular staff briefings, regular meetings that they're in. They all have, you know, fancy offices and I mean the the the building, of course, this is what's been part of the criminal investigation. The building is under renovation. the main the Eckles building the main uh board building but they all have space and it's a pretty collegial place like that they can kind of go down the hall and talk to each other now there have been times I don't know that this is at this moment but there have been times where people were more remote like and and in the world after the world of Zoom I mean everything can be done like by having people video in to to meetings and such uh but I I think in general you you have people that are present now the the the um Reserve Bank presidents again are scattered all across the country. So they're they're just coming in for the Fed meets eight times a year and so they they come in um for those meetings but you know there's a lot of discussion I'm pretty I mean the chair is talking to everybody uh before meeting like it's not you know they they're in communication uh with each other but yeah there's a they you know the governors they're they're together it's a big group so >> yeah very interesting. So the other big news that came out of yesterday's presser was that Powell has opted to stay on the board as a governor. It would mark the first time a sitting chair didn't leave the board of governors since Eckles in 1948. And at that time Eckles was under pressure from Truman to cut interest rates just like Jay Powell is now. Uh he's under pressure to cut by Trump. But what are your thoughts on this and on Jay Powell staying on it as a governor? Is he being political or is he being patriotic? >> Right. So, first one one little historical footnote. Uh so Truman uh in World War II, the Fed had worked with Treasury and the White House to keep interest rates low to help finance the war effort. And as they came out of World War II, the Fed Treasury I mean they like low interest rates, right? All right. So, I agree like Truman wanted to lower the interest rates low and the Fed was trying to uh get back having control over interest rates because there have been some bouts of inflation. So, it is a very similar like the Fed at that time felt interest rates should be higher than the White House did. And and furthermore, it was um who who should be in control of interest rates, who should decide what the interest rates were. Again, during the war, there had been an agreement that the White House Treasury would say what it is. The Fed was trying to move out of it. Then in 1951 they did have the Fed Treasury Accord which said the Fed has control over like they get to decide the interest rates. Um but yes there absolutely are parallels between now and then. And and pal in talking you know this was a big question. People were curious was he going to stay or go? The way the Fed works the the seven governors are on 14-year terms and they're staggered. That's that was one of the protections of the Fed's independence is Congress created these these terms that um don't turn over every time a president changes, right? Like you got to you got to wait until you you know a term comes up and so but the um chair is a four-year term. So you have to like you're a governor and then you like get elevated to be a chair. Uh, and so that meant that Powell was finishes on May 15th, his his second four-year term as chair. So, he was first elevated, well, he's so fas the end of an era really for DC, but Pal was actually put on the board by President Obama. Powell is a Republican, but this was back in the time where at the Fed there was often kind of a cross party. Um this again is something that's completely dis disappeared from DC but POW was put on the board by Obama and then it was uh President Trump in his first term who made him chair and immediately regretted making him chair but he did make him chair and then he was renewed by President Biden. So Pal has this very interesting like a cross party kind of um setup, but he will finish on May 15th as chair, but his uh term as governor because his 14-year term is not done until January of 2028. So I mean he's he's on the clock like he can stay legally he still has a position. It won't be chair after May 15th. But typically his traditionally chairs once their chair term has they have left to give space to the incoming person. But uh Pal is saying he was very clear that he is only staying because there are some you know loose ends with the investigation regarding the building renovation. There have been some really unusual efforts by the White House to pressure the Fed to lower interest rates and he's going to stay on in the spirit of, you know, protecting Fed independence. So, and and again, this is very similar. Eckles had a a similar theme to it. I will note that Eckles's name is now on the Fed building. I mean, this was a big deal what Eckle stayed to do. So, we'll we'll see if Powell gets uh some real estate named after him many years in the future. But he but he was also extremely clear at the press conference and I absolutely believe him that he will follow through on this that there is only one chair when his position is as chair is done. He is no longer chair. He is a governor. Kevin Wars will be chair and he will be there to be supportive as a colleague. like he is not staying because he's concerned about the direction of monetary policy or the balance sheet or he wants to like get in the way of Kevin Worsh because he could if he wanted to. Like Pal is very popular at the Fed, but he's like I'm not going to do that. I'm just I'm just here to see through some of the extraordinary pressure being put on the Fed. And I think that's really smart for a lot of reasons, but it it is it comes with a risk, too. Like not everybody's happy about um Palang. And if this if it provokes the White House more and something else happen like it yeah it's not without its risk but I think it'll and and hopefully it'll resolve and it'll be it'll be a really great day when Pal says I'm ready to retire. It's okay. I can go now. I'm really hoping for that. So we'll see. You mentioned that Jay Powell's legacy is going to be the fact that inflation stayed above the 2% um target rate for five consecutive years. I can't believe it's been five years, but um do you think 2% inflation is a thing of the past? Are we ever going to see it again? Or maybe is 3% the new number? >> Yeah, this is where you know and I talked about in the beginning with the supply shocks, right? and and any given supply sh as long as it's kind of within bounds, it's like a it's a hit to the price level pop to inflation, but it ought to be temporary. But if you get really bad supply shocks, and the pandemic really was a mess. I mean, globally it was a mess. Um, or like what we've seen in the last so many years, you get a whole like a rapid succession of lots of shocks. Well, then you get a bunch of them and they all push up. I mean then inflation looks like it's just running higher because you've had a successive stocks but as I said with the supply shift you're rewiring the economy right there's nothing 2% inflation target like the you know the I mean one one can debate the history of it but in in a lot of ways it was 2% was chosen because that's kind of where the economy had settled like that was you know it was a reflection back of oh it looks like in normal times when things are going well I mean this is kind of into the say in the '9s or early 2000s that's kind of what inflation was if you averaged it across so many years it was just 2% um in the United States and actually there are a lot of countries kind of peer country that like 2% kind of just looked like where the economy wanted to settle and that's and then it's like choosing that as a target kind of reinforces and and and there was a Um, and I don't want to act like, you know, oh, it's a supply shock. The Fed or or a central bank can't react. That's not true. I mean, you can pull demand out of the economy even if there's a supply, you know, so like there is an aspect of I mean, Kevin Worsh likes to talk about like inflation is a choice, like a very monetrist kind of idea and like, yeah, yeah, you can you can choose 2%. But but if the economy kind of tends to that, it's a lot easier than if the economy is tending to 3%. And I don't the discussion about a target is a really fraught one to have when you're off the target because it can feel very much like a moving the goalpost. But I think it is useful for us to at least kind of understand like as as one example with the the the not just with the tariff trade wars but I think there there have been other pieces of like how we think about global supply chains. One of the reasons inflation has been low like the core goods inflation as I was talking about before like is we had we opened up trade and there was a lot more trade for the US. It was particularly important when we started having a lot more trade from uh China that was helping like push down consumer good prices. Um it's not the only thing that was pushing down prices but it was in the mix. And if you start reversing that well like that can you can you get the 2% if you don't have that constant kind of uh you know pulling down on inflation from cheaper and cheaper goods. Uh so I think it's something that we do have to keep an eye on. I think, you know, over time there are some countries that have gone to something that's more of a a range, you know, looking at something that's not as precise on 2%, but I don't think that really gets at this question of what's what's kind of what's good, like what what's a reasonable thing um to shoot for. And you know and I will say like I I emphasize you know under PO we've had this 5 years of elevated inflation but inflation also came down without a recession. We came down from you know really notably elevated inflation in 2022 and there were a lot of economists these words never came out of my mouth but plenty of my peers that were like the only way to get inflation down is we have to have a recession. And you know we didn't get in inflation didn't come all the way down to the 2% target but we have not had a recession. I mean the the US economy whether you look at the labor market you look at inflationadjusted consumer spending I mean a lot of metrics of how we think of like well-being like the broad aggregates it's really impressive. So then it's you know and the Fed you know not all central banks have this but because the Fed has an explicit dual mandate there is an aspect of trading off between the employment side and the inflation side. Um the Fed has been explicit about a 2% target on the inflation and doesn't have kind of an explicit on the employment side and really there's I mean the inflation is it is has a very um is very focal right but but there is still this idea of like at 3% inflation is that really worth a recession like you and I think the Fed in the last two years when they've done their cutting cycle it is stepping because they got worried about the downside risks to employment and then we're going to protect that you know recovery. So these are all really I mean these are super difficult uh trade-offs to make even if you have like great data and understand what's going on then it comes down to a value you know kind of a a judgment and I think the power fed over time and both learning by doing learning from mistake I think has gotten to a place where this kind of risk management follow the data like I think this is a good way to approach this these supply shocks but you know It's it's too soon to really write the verdict on this because you might come back and say, "Well, no, those economists were right. A recession really would have been smart. We just get that down to 2% and reset the clock." So, I that's not my view, but I think it's a uh it's been certainly an interesting time to work through. >> So, one of the big things that's leading to all this uncertainty in the economy is with what's happening with the oil price and what's happening in the Middle East. No one has any idea on how this is going to be resolved, but um even though energy is a small component of the CPI, we still see a lot of negative headlines associated with it. Delta came out and said that they're going to have to spend an additional $2 billion on fuel in Q2. I'm sure all the other airlines are saying the same sort of thing. Amazon, FedEx, UPS have all said they're going to start imposing search charges. uh do you think like if we continue to see oil trade at a hundred bucks or above a hundred bucks, what kind of negative impact will that have on the economy and also on consumer spending? >> So with the the US economy with with an higher energy prices, you got to be careful because there's there's a lot of a lot of moving pieces. Let's let's start with the consumers. Um the staying the kind of like seeing these oil prices hundred some you know somewhere between the 100 115 range kind of um this is this will be I mean it's and it's going to be a weight you know kind of a downdraft on consumer because it does cut into disposable income energy or say gasoline is a you know kind of the the most direct energy good that's being affected and in and in the US We saw um national gas prices I think as of yesterday were at like $4.30. Uh in the month of March they jumped by a full dollar. So I mean it's not just the level like these aren't historically like really outrageously high levels but things moved really fast right so like things have moved up and and it's not clear we're done with this right in terms of um oil prices moving higher which has show been gas. So at this point it's not like this kind of these these type of gasoline prices even if they were to go on for months and months this is not a bring the economy down kind of um price level. Um, I think oil prices would have to go a lot higher and stay higher longer and and you know I think the some of the market reaction after the first ceasefire was called was a a kind of oh the worstc case scenarios are much less likely now like the kind of mass destruction of the energy supply networks in the Middle East that seems less likely that we're going to kind of grind through this but it it is still um uh just first on the economic effects I mean, it is, you know, the gasoline. This is this is not a negotiable for most people. Like, you got to get to work, you got to pick your kids up at school. So, so that means that when it's just it's like money just flying out of your wallet, right? So, you're going to have to adjust somehow. And for, you know, many Americans cut it pretty close by choice or by preference in terms of, you know, money coming in, money going out. So, if they're paying more for their gasoline, it's going to cut into other kind of discretionary purchases. Um, some people just can work through it with their savings, but it it should have a hit to spending. So far, I mean, we've only really got the March spending data. It doesn't look too worrisome. I mean, things are still holding up, but like one month in is not enough to to understand the the response, but it it should be a drag for consumers because it hits into their disposable income. But again, I think it's within um within what's kind of manageable. But gasoline is a very um kind of in-your-face price in the US. So, it has a lot of political like it's a very politically charged price. And this year in the fall, we will have midterm elections. and and so $4 and you know there are parts of the US that are already up at $5. California is at $6, you know, because there's variation because of the taxes uh across the the gas tax across the country, but I mean those it people are already pretty pretty unhappy, right? And the consumer sentiment surveys really show this quite clearly. Uh so I think that's uh that adds to the complication for like the White House that they're going to have to you know these are these are prices people respond to and then as you said like the energy prices you the diesel diesel fuel prices in the US have gone up even more uh than you know gasoline has and that for there's some consumers that use diesel but it's also it seeps into all of these other um you know freight costs some of the packaging like it just it can show up And that is the that's the piece that the Fed other central banks you kind of trying to look for these these um where it's bleeding in now historically from and and you know the the reality of the economy over many decades is we've had energy shocks from time to time. So there's a lot of evidence to look at and that that seepage has tended to be pretty modest. So unless you get a really big energy shock, you're not going to have really big broadbase shocks, but things like airline ticket like there are places where I mean we can already see it in just the the March data and and they will um have an effect. So that's just that's all on the consumer side. It is not good. It is a negative though I think it is one that we will push through. the US because it is a large energy producer does have something of a buffer relative to some of maybe some of our other peer countries that like there there is a plus when energy prices are higher that tends to be that's that's very profitable for energy producing firms. Um there aren't many signs right now that we've had a big step or any step up in in energy production, but that could happen particularly if it's prolonged. And that kind of gives economywide something of a buffer. But like most Americans don't hold energy stocks, so like they're not better off from this. But but it does make the the I mean it's the US is more insulated from the negative economic consequences of this shock than probably almost any other country and kind of started this. So it is it it's kind of an unfortunate but the US is not um spared from it right the price effects are are there >> well I think to your point because you see it every day you know what the price of gas is uh it becomes like perception becomes reality and I know that's the case with me I started so I'm based in Toronto in January of this year I was paying $1.15 Canadian per liter now I'm paying about 17580 if you do a conversion that works out to $5 a gallon. Um, which is getting up there, right? >> Mhm. >> Not as bad as the state of California, thank God. But, uh, it's getting up there. >> Yeah. No, and people do notice it. I mean it it really is the one price that we are most exposed to and and certainly in 2022 after Russia invaded Ukraine and the gas prices started moving the US. I mean that really was at a point where the the switch flipped with the Fed cuz they're like that that's it, you know, not only was inflation going but it's like this is spreading and it's so salient that that's the place where that kind of the inflation expectations going unhinged. And so, uh, yeah, it's just it's a and for anything in the US, like it had been one of the selling points for the administration, how low gas prices had been, and that really that that disappeared really fast. So, >> so let's uh move on and talk about the unemployment rate. Now, um, I guess we're going to see the April unemployment numbers here in the next couple of days, but the last number we saw, the unemployment rate was at 4.3%. and it continues to tick higher, but you know, historically speaking, still relatively low. But what's your your take on the jobs numbers? Are you concerned? Do you think we're like moving toward a normalization period? Maybe we overhired during the pandemic and now we're stagnant in terms of hiring. >> Yeah. So, the unemployment rate at 4.3% and it's been, you know, on balance pretty stable uh since last fall. So it's this is a it's a low number historically. I do like to point out it's you know we have an older workforce more educa. So like there there's a re like it should be like this is really it's a good number and it's and it's a pretty appropriate kind of you know the Fed doesn't have an exact number for maximum employment but if you look at demographics this is this is pretty much like where you would where you would want to be. Um now it is the unemployment rate has risen since it's low after the pandemic and it's it's a little unusual again I think this whole the soft landing the getting inflation down the Fed what you know the 5 percentage point increase in the federal funds rate it did cool off the labor market so I mean we can see some signs like I said of the the unemployment rate drifting up and historically it's unusual as much as it's drifted up without a recession but it happened very gradually right So, and again at 4.3% where we're sitting now, this is uh seems uh like a good like a labor market imbalance. Now, there's a couple things going on that have as uh pal has referred to it as a curious kind of balance. So, one thing that is has been pretty notable and this has been going on for at least the last two maybe three years at this point is the hiring rate has been has is low it's low relative to the pandemic. It's low relative um to history and that that's clearly not if you are looking for a job, if you're coming back into the labor market, if you're among the few that have lost your job and look like this is this is really a tough labor market. Um, but the layoff rate is very low, which which is great, right? So, if you have a job and you like your job, this is a really good labor market. But this low, higher, low, fire labor market is unusual. Like that's not a typical one. I think of it as I like to point like it's it's kind of a vulnerable one because if something bad were to happen in the world and sometimes it seems bad things happen in our world uh and and it actually gets companies to the place where they want to they need to lay off workers. If we would have an increase in layoffs in environment with such low hiring the unemployment rate would start moving up very quickly. Now, that hasn't been the case. And again, we got more confirmation today. The unemployment insurance claims, which is a very like kind of broad measure of um people that are being laid off, uh is really low. The initial claims are very low. So, I mean, again, we just not seeing these layoffs and that's a good thing, but we have this kind of bifurcated labor market in a way that's unusual. Again, low hire, low fire is not a typical. We don't see that in history. and and also I find the low hiring rate kind of puzzling given how much you know GDP is chugging along businesses or you know so it's it's a little like um you know there was a lot of um a lot of churn in the labor market after the pandemic there was a lot of moving workers around and it could just be that we ended up with a lot better matches or or like I said there were certainly some industries that kind of did overhiring like tech really kind of like oh the world has changed we're all going to be online like there was a lot of tech se sector hiring and now at least to some extent some of the headlines about we're doing layoffs because of AI are really they're doing layoffs because they overhired right and they're right sizing and and we have a new technology that helps them kind of do the right sizing um so I think there's been a lot of we've had a labor market that was really firing on all cylinders had people moving around wage growth and that's not where we're at now people are kind of hunkered down uh wage growth growth has slowed. Um, but it's still it's still good, right? Like on B like it's it's still a good labor market. Now, the the the other thing I'd say about the labor market that has a development and this really is the last year or so and it fits in our kind of supply shock discussion is because immigration has slowed so dramatically. This did start at the very end of the Biden administration but but certainly picked up in term at the since uh President Trump took office. Um immigration net immigration so there's less immigration into the country there's movement there's deportation there's people who are you know don't want to be here and are leaving. Um but what but that on a in addition to the fact that we have an aging population has meant that the growth in the labor supply is like just vanished and so we really we're not so if you don't have people coming into the workforce well you don't really need to be creating jobs. So we've had several months about 40% of the time since the beginning of last year the monthly payrolls have declined and to have that that like frequency of declines and payrolls that's like a that's like what you see in a recession. So you see these number and you're just like whoa like this is some are we about to fall off the cliff is a problem and it's like well actually if you have labor if your labor supply is basically flat so what like you don't really need to keep the unemployment rate constant you don't really need to be creating many jobs so kind of good in terms of monthly payrolls is pretty close to zero. Well, then you know you have weather happens or there's a strike or there's seasonal adjustment. There's just noise in monthly data. And so that what that ends up happening is then we kind of bounce from like a month of declines to a month of increase, a month of declines, increase. So you get this kind of a lot of ne of these negatives are just cuz you know like good is basically zero. But a low labor supply growth econ like first of all we haven't had that in the United States and second of all it has implications for what's a good payroll number it has implication for what's a good GDP number cuz like big picture GDP growth is growth in the labor force and productivity growth and if you don't have growth in the labor force it's got to all come from productivity or we're going to have a conversation about how like a half a percent is a good GDP number right so like there's There's a lot that's um things are happening under the hood. The labor market's in a good place, but it can be hard to read because again these rules of thumb like, oh, a negative payroll print is a sign of a recession. That is not what's happening. But it's a sign of something like low labor supply. Like that's a that's a really big shift. So lot lots going on in the labor market. Claudia, one of the things you're well known for is that you created an indicator known as the SAM rule. What exactly is that? And what is this indicator telling us right now? >> Yes. So, I uh created this indicator. It's an indicator of recession. So, it's supposed to tell us like we're in a recession. Not not in the recession forecasting business. That is a there's a lot of people in that space. uh what it does is the the intuition for it and this was something I mean I very much picked up as a forecaster uh small changes in the unemployment rate or bad news right there is no there's no level of the unemployment rate that says recession not recession we've gone into recessions in the United States with like you know 3 and a half% unemployment we've gone into them with like 7% unemployment so it really it's not about the level but changes are like if the unemployment rate starts to increase and it can be a pretty modest increase that's bad news. So the the historical pattern and I did this analysis in 2019 as a project of kind of doing automatic stabilizers and how to improve fiscal response to recessions. So the the the formula that is just to look at um the national unemployment rate take the three-month average smooth out the bumps and wiggles for monthly data. Look at the 3-month average. Compare uh the current value to the low of that series over the prior 12 months. If you have a half a percentage point increase, again, this is a modest, right? Half a percentage point. If you have a half a percentage point or more increase, you are you historically have been in the early months of a recession. And again, put this together in 2019. And it's it's not perfect. there like back in the 50s there were some times from 1970 to 2019 it was it worked every time it it didn't trigger outside of recessions it always triggered in a recession now frankly triggering in a recession is not that hard because in a typical recession the unemployment rate goes well in even the the mildest of of recessions like in 2001 uh the unemployment rate went up like 3 percentage points right so eventually in a recession the unemployment rate will go up and of course in some recessions it's gone up a lot more than three percentage points. Um, but the idea is because again I was trying to do a um thinking about a fiscal policy to help a recession. You want something that turns on as quickly as possible and yet as accurately as possible. But the s rule fell victim because I've talked about kind of rules of thumb that supply shocks u mess with you know and I talked about the declines in payrolls. Um the SAM roll fell victim to this in uh 2024 because we did have a half percentage point increase in the unemployment rate. So the samroll triggered in the summer of 2024 and part of it and I had talked about it in the months running up to it. But part of it was that was a period where we had the surge in immigration and and I knew this even when I put it together and Achilles heel if anything using the unemployment rate is like it's the unemployed out of the labor force. So you can have you know if you have shifts in the labor force. So a good news reason for the unemployment rate to go up is if you have an increase in the labor force it takes some time for people to find jobs. And so on the other side of that it's not a recession. like even more growth because you have people have have gotten the job. So, so there was some and the other piece was coming right out of the pandemic which was in the look back for the som um I we had labor shortages the unemployment rate went really low and kind of not I don't call it artificially low but I mean like lower than the economy really could bear because we had these shortages so there were you know these these shifts in the uh but you know it's one and and now part because again the immigration is reversed the other way. The fact that the labor force is growing so slowly, labor force participation rate has come down, it's actually putting downward pressure on the unemployment rate. And some people have talked about as well, we should strip that out and be worried about a recession. And I don't have that view. Again, I just think that we've got under the hood there's a lot like the kind of structure of the economy and the labor labor supply, but it's it it just shows that a lot of the rules of thumb and the sum rule wasn't the only one. the yield curve took it on the chin uh that in 2024 as well. Like it's just when when the fundamentals are shifting around our rules of thumb particularly rules of thumb based on demand shocks which is a lot of what recessions are right like I mean sometimes they have a there's a contributing supply shock as a factor but usually it's some income shortfall crisis of confidence something like that and those rules of thumb just don't quite work. Now, I still I still like the idea of automatic stabilizers, the idea of putting fiscal policy tied to economic conditions and not political whims. But I will admit that like having rules for like rulebased, it's it's hard to find rules that are always going to work. >> Well, especially if you go through a period like we've seen in the last 5 years where the government's just pumping trillions and trillions of dollars into the economy, there's a lot of I guess it creates a lot of upheaval, right? >> Yeah, absolutely. And I think you know the with these kind of fiscal rules we were trying to develop, it wasn't just about turning stimulus on in a recession, it was also about when would you turn it off, right? Because there's a lot of these temporary programs and trying to tie like in the US we often will do extra jobless benefits in a recession and and generally politicians can agree like let's let's send money like you know we're all Keynesians in a foxhole, right? there's then a huge political debate about when do you turn those programs off and do you tailor them to local conditions. So I think there's a there like I said I still think these policy rules and that's why it's called some rule. It's about a policy. It's not like a rule of the economy. It's like trying to um type policy but it it but it's really hard to characterize an economy that's that's always you know as as dynamic as it I mean, that's a great problem to have a dynamic economy, but um but I do think it's like trying to get some uh even if even if it doesn't take the discretion entirely away from policy makers, just give them some good guard rails or just more guidance, more kind of concrete guidance. So >> Jamie Diamond was speaking at the NOR's investment conference recently and he stated that he's very concerned with the federal debt levels and he thinks they could trigger some sort of crisis in the bond market and I'm curious if you share his concerns. We got the 10-year trading around 430 440. The uh 30 years approaching 5% if it's not already there. But do you have his concerns that we could see some sort of crisis in the bond market? And if so, what would that look like? >> So, it's this uh concern about federal debt levels. This is this has been ongoing for many years now. And and I think that's exact like what would the moment the the crisis look like? What is like I I don't have I don't have the crystal ball on this one. Uh what I will say is like in in economics there there's been you know research over time trying to like what's the debt to GDP ratio or what's the debt service to GDP like trying to figure out like at what point is this a problem right like at what point do we really go past um you know the point of no return and I think that you know the the US and we're not the only country but it's like if you issue debt in your own currency And like I think they it could be pretty far out there, right? In terms of like how much debt could be taken on before things really fall apart though borrowing costs are going to puts upward pressure on borrowing costs for sure. I guess with the US my I often come back to as opposed to thinking about a particular level of debt or getting you know exercised about you know these massive amounts like go back to like why do we have this debt right in in the US if you are concerned about uh the federal debt and debt sustainability like it comes back to we have entitlement programs our you know old age programs social security Medicare to a lesser extent, but also Medicaid is like health insurance for lower income individuals. Like those entitlement programs are the keep grow because again it's the aging population like the US is not unique in this but it's kind of like that's you can't fix debt sustainability by discretionary fiscal program. Like there aren't enough programs for the poor in the United States. there are no programs for like education at the federal level that you could cut all of it and we still would have this federal debt like on a trajectory that is is worrisome. So So to me it's like okay but entitlement reform is extremely politically thorny and and the idea you know is kind of like we should be talking about that. We should be trying like if you're serious about debt sustainability, you got to be serious about this this kind of what do we do with the entitlement stuff. The politics, you know, economists have for like when I uh trained as a research assistant in uh 2000 at the Brookings Institution, we talked about like the economics of how you fix social security are really straightforward. The politics of how you fix social security are just like immensely difficult. And so it probably will take some kind of a crisis to get the polit like to get politicians to actually make the changes that make the debt sustainability. But you know one one could hope we could avoid that and like actually go why why is the debt then and it's not just in entitlements like there are other issues in terms of like the fiscal um space but to me I' I'd rather do kind of the the bottoms up like what are we doing with this money? what are these programs? What can like and fine-tune them as opposed to there's some GDP level or debt to GDP level which it's going to fall apart. But I do think, you know, kicking the can, not having these conversations, not going in and like working on the policies themselves. Well, yeah, as time goes on, the risks go up and it'll be very messy. And with a lot of the entitlement programs, the kind of the fixes that you would do, the sooner you do the fix, the less painful it is. So, like the longer we wait to make adjustments to like social security benefits, the benefits or the tax, like we're going to have to do more. So, it's it's a frustrating uh situation, but like I said, I tend to go at it from the like the nuts and bolts of what's in the debt as opposed to the financial market blow up. Um but I you know I I can we are at levels where um I I mean I share the concern but I don't I don't see the signs any imminent signs of it in even like say looking out at 30-year bond like it's just it's really hard it's hard to see it. Um but but I do agree that at some point I mean confidence can be lost pretty quickly especially in markets. >> So just to summarize a lot of the points we touched on it sounds like overall you're I guess I I should say uh optimistic about the economy. You're you're more positive than negative. Do I have that right? >> Yeah. And I think and especially the the longer the horizon is I'm optimistic. I am like I I'm certainly so I so I am optimistic. I think we didn't talk really at all about AI but I mean I think that's one where there's some there's some positive productivity uh in in train and um I am but I am worried. So if I if I look at all the economic stuff, it's like pretty pretty positive. I think we're going to push through this resilient economy like you know there but I do worry we've had a whole series of shocks you know back to my whiplash economy and it's like each one of them in isolation of the tariffs and the gas price like we can muddle through and so far we have muddled through them but the I get worried about the layering like the frequency and and the also just very um big picture uncertainty, right? I just I think we um in the US the economy has like people have really pushed through what I think has been a a kind of um extraordinary amount of policy uncertainty in the last year. I mean the president that Trump part of his um approach is kind of shock and awe and move fast and break things. I mean they they've said that right like that's just and there's a there is a logic to it. It's not one that I um embrace. I think it's a very risky uh at this point things have we've kind of navigated it but I do worry that it can wear down institutions. So like with the Federal Reserve I think the uh pressure the White House has put on the Fed to lower interest rates I think has been incredibly counterproductive. I don't think you you know Fed Governor Lisa Cook the president trying to fire her and a criminal investigation of Fed chair J P like these are not this is not good this is this is putting a lot of pressure on the institution up to this point the institution has continued to do monetary policy as usual like following the data doing the best they can but I do worry that institutions and the Fed is is not the only institution under pressure but institutions if put under enough pressure for enough time will break. And I that that the fact that we are even having those conversations makes me really worried, right? Cuz the institutions like the foundation of the economy, rule of law, institutions that work like those are being they're being tested. So I, you know, I have so maybe I'm just a very like um bipolar view here. Like if I look at kind of the regular stuff and I kind of look at the and I'm very very pro American business, American consumer, like don't bet against the American consumer. I mean they like if they can they will go for it. But like but then when I think about some of the the institutions that like I just it makes me worried like there are some so so basically positive but with a very weary eye on some of the things that are happening. Well, Claudia, this has been a great discussion. I want to thank you very much for spending time with us today. If some of our viewers would like to read more about you or see some of your research, where can they go? >> Yeah, thank you. And it was a joy to be here today. So, I have, as I mentioned before, a Substack stay-at-home macro s. That's one place. And I do write pretty regularly on Bloomberg opinion and show up on LinkedIn some. So, there's there's plenty of places to find find my ideas. So, >> and I will make sure I include those links below in the show notes. Claudia, once again, thank you and good luck in the markets. >> Great. Thank you. You, too.
Optimistic on the U.S. Economy | Claudia Sahm and Jimmy Connor
Summary
Transcript
Claudia, thank you very much for joining us today. We have seen a lot of economic data here in the last few days, so you're the perfect person to speak to. The CPI continues to be very strong. The most recent number came in at 3.5% annualized, including fuel and food. GDP, Q1 GDP came in at 2% annualized. And I want to dive into both of these numbers. But before we do that, why don't we just start with a very top down highle approach. What is your overall assessment of the US economy as it stands right now? Are you bullish or bearish? >> Oh goodness. Confused? No. I mean, I I'm pro I'm more on the bullish side than the bearish side, but but we certainly have some we have a lot to navigate, you know, and and I think until we get more clarity on what's happening in the Middle East and with the energy supply, it's it's until that that is resolved, it's hard for me to be bearish because there's still some pretty bad pretty bad outcomes on the path. But but I will say you know looking at the US economy you've been and not just AI investment which is certainly uh really firing on all cylinders but the American consumer overall has been been pretty resilient and I think the US labor market overall is pretty good and and that is despite the fact that it has been we've been hit by a lot of big policy changes since President Trump came in uh to office and a lot of uncertainty and you know just keep motoring along. So I don't I don't want to like um I don't want to bet against the US economy right now but we but I do worry I think there are definitely risks out there and you put enough pressure on even a great economy and it it's going to start to show some wear and tear >> and I think you hit the nail right on the head when you use that word uncertainty. We hear that quite a bit from Jay Powell and uh but it's amazing how this how resilient the economy is and also the stock market. And I know the stock market is not the economy, but it continues to climb this wall of worry. Like every day the S&P and the NASDAQ just keep grinding higher, >> right? And I've I've described this economy. So I write on a Substack stay-at-home macro play on my last name some and I have a piece recently about the whiplash economy, right? So this is part of it's not just this uncertainty piece but one of the thing that particularly in the last five or six years the US economy and also the global economy to a large extent has just been hit by one supply shock after another and supply shocks you know and these are like the pandemic which the the snarled uh global supply chains. We also had a lot of disruptions to labor markets because of the pandemic. people trying to avoid the disease and then we have you know big energy shocks with Russia and Ukraine and then now with the Middle East and in the US the the increase in tariffs I mean that's another cause shock and one that I spend a lot of time because I look a lot at labor markets is we've had huge swings in immigration uh from a big buildup right after the pandemic to in recent years a really sharp decline and these are all and then we're talking about AI right we're in the early innings of that but that's another supply shock and these are just it's like you're rewiring the fundamentals of the economy. The details matter. It's very hard to forecast the time horizons like how long it takes to adjust to these things. Um and it can really mess with some of our rules of thumb like how to read the economy or for policy makers how to handle it. The Fed's tools are are reasonably good at like demand management. supply shocks are a lot harder because it especially say for the Fed, it puts their dual mandate in tension because a negative supply shock pushes up prices and pushes down employment and growth. And so then there's there's this tension and so I just think this has been kind of unusual the frequency of these shocks and it it gives a lot to kind of think about the structure of the economy. So um and they've been big in terms of you know in terms of how how big the shocks are. So that that's been a a thing that's really been preoccupying me is kind of thinking about how to read that whiplash economy. >> So you mentioned the Fed a couple of times and we just had a meeting. So uh when we started this year we were expecting I I think two or three rate cuts and then here we are a few months later and of course what's happening in the Middle East has changed all that. But during the recent meeting the Fed kept interest rates unchanged. The vote was 8 to4. It's the first time we've had four to center since 1992. What were your thoughts on what Jay Powell said during the presser? >> Right. So, the Fed had uh at the beginning of the year went on pause. They they had done some rate cuts the end of last year, some concerns about risks in the labor market and and so but when they started this year, labor market looked like it was stabilizing and there were still concerns. I mean, inflation still elevated. And I will point out with today's data, we got the March uh personal consumption expenditure, which is the Fed's kind of target measure of inflation, and we have now hit a full 5 years of inflation above the Fed's 2% target. Now, we are much closer to the target, kind of running something in the 3% range or a little above 3%. It's not the 9% that we saw in, you know, 2022, but it's still above uh it's above. It's above what Americans have been used to. Kind of the pre- pandemic pace was actually a little below 2%. And and it does add up. Every year you're off on inflation. The price level just keeps drifting up higher. So that is a you know that's a that's a sour note, right? For someone finishing up their 10 years as Fed chair. I certainly don't blame J. Powell for all of the inflation. the Fed made some mistakes in terms of probably timing of you know low raising rates and you know not doing the balance sheet expansion quite as long we would have had inflation anyways but it's still that's part of his legacy is walk away with that 5 years above target so but the Fed even before the conflict in the Middle East was kind of in this holding pattern they wanted to see good news on inflation and the story had been a lot of and I think it it held up with the data I don't think it's just a story that uh core goods inflation So take out the food and energy, but look at the core goods. It had been uh really picked up last year. Fits a lot with the tariff story because tariffs are a tax on imported goods and often, you know, business are going to pass those those extra costs on to consumers. And also, you know, tariffs make a less competitive environment. So other companies that don't have to deal with the tariffs, they may raise their prices, too. So it very much looks like in the data the core goods inflation is elevated and pretty pretty notably elevated and so but with a tariff the the standard uh thinking on it is well it's it's a tax so it's going to fit into the price level as it's adjusting up the price level it is going to increase inflation because it's a change in the price level but if it's a one-time adjustment in prices which makes sense given you know as long as the tariff sits still and President Trump could move tariffs around a lot. But if once they sit still, you have a one level one time adjustment in the price level and then once that adjustment in the price level is done, then inflation should drift back down. And that and there's been a lot of research both at the Fed, other academics, people using, you know, various types of data, and you can kind of see the tariff effects. And we're at about the time where those should start rolling off. Now this Fed having been burned by you know being transitory pandemic inflation and again supply shocks are very hard to uh forecast and we also had a lot stronger demand picture um back coming right out of the pandemic but so now the Fed has been very much in a risk management. They have a baseline tariffs are going to run off but they want to see it. They want to see evidence of that rolling over on the tariffs before they start cutting rates. So that was the idea of like this we'd start to see this the middle of the year. I think there's some hints of it in the data. Not quite yet, but there's some hints. And then in the second half of the year, you'd have some good news cuts. Like the Fed could say, "Oh, inflation is back. We'll start cutting." Well, I mean, the conflict in the Middle East has completely upended that timeline. We are still waiting, and Pow has said this, we're still waiting to see those tariff effects roll off. So the Fed was going to be in wait and see anyways. And now there's the issue of energy prices and and having to watch very carefully for any spillovers where it starts seeping into core. And so that's just that's going to take a lot of time to you know even once kind of the once we get to a place where there's some resolution on the conflict itself it takes time to kind of heal the energy supply chains get the stuff going and you know and it's and it still is a wild card with the American consumer because after 5 years of higher inflation the Fed does worry that people are just going to throw in the towel and be like it's just 3%. Like we're not going back. And so I think they're, you know, it's they're very much in a hold position. Uh that was the policy decision yesterday. It's we don't have there's nothing in the evidence, nothing in inflation expectations that's or kind of regular experience with energy shocks that really says this is going to be the worst case and inflation expectation will be un like we just don't see anything that looks like that yet. But they're going to be um very careful and hold. But the the vote so was eight individuals voting for a hold, four voting against uh against the the hold in the statements and one person so Steven Myron who's come from the White House to the Fed he voted once again for a rate cut. Uh but the other three dissenters they agreed that the Fed should hold but they felt it was important that the statement make clear that the next move that the Fed makes could be a hike. No normal human being would read the Fed's statement and see oh the next move is a cut. But the way the statement has evolved and kind of the thinking of it because it talks about further adjustments. The adjustments they've made so far have all been cuts. And so the Fed still has this messaging that the the majority of the the members think that it is most likely that the next move is a cut. But there is a growing contingent and I think Powell was saying you know the way things are going it might be a majority by the next time they meet in June. Right? The news has not been good on the oil and you know price front but the majority still felt like it was okay to kind of signal next move cut though they're on pause. But but there's a growing contingent that really wants to start at least setting it up as a a real possibility that there's a a hike. So that's a it's a pretty marketked shift. And I' um the when uh Kevin Worsh takes the reigns as FedEure and he is well on his way. He hasn't had his full Senate confirmation yet, but he made it through committee uh yesterday. This it's going to be tough, especially if he thinks rates need to come down. This is not a Fed that is positioned to be cutting rates anytime soon. >> And you raised a very good point there because a big job of what the chair has to do is form a consensus. Do you think he's going to be able to do that? >> It's going to take time and you know Kevin Worsh so I um I worked at the Federal Reserve from 2007 to 2019. So I overlapped. I remember Kevin Worsh as a governor. He was there from 2006 to 2011. uh and you know he he's been there like he he knows how the institution works. He knows how I mean he's you know he was a policy maker right like he was one of those one of those 12 votes um but you know the the chair is is a very important role it the chair has one vote just like the other 12 members of the committee so there's um there's seven governors the chair is is a governor at the board in DC and then on a rotating basis five of the 12 reserve banks which are all across the country uh vote so that's how you get your 12 every meeting there's all 19 of them like talking away with their views. So they really do work as a whole body but in terms of who votes there's there's 12 of them and the the chair only has one vote and sometimes from the outside people have this view of like the Fed is the chair like whatever the chair wants is what they get and this is really not the way it works. Uh but the fair the the Fed chair sets the agenda is the leader and I mean of course if you set the agenda for a meeting you you do have a lot of pull in terms of where the direction the meeting can could go in. Um the the Fed chairs often was needs to be in constant communication with all of the other uh Fed officials to kind of understand where they're at. kind of thinks about, you know, strate like kind of moving a discussion along. And then the Fed chair has, I'd say, more resources because all of the the Fed staff and there's like 400 plus economists at the the board in DC. I mean, there's many more like attorneys and like there's just lots of people, but they all report to the chair. So, if he has things, I mean, he's talked about want a new theory of inflation and wants to look at productivity. I mean he has an army of trained to go off and do analysis on questions that he is interested in. So there is a you know there's an advantage uh to being chair but it is an institution that people take their jobs very seriously. They're very um datadriven evidence and so frankly it's like the world the world really drives the Fed. I mean, it's what's happening, you know, what happens in the Middle East, what happens with the I mean, that really kind of sets up the possible options. Um, and and there's often outside of a crisis, the Fed is not a fastmoving body, right? Like they're going to they will change and they will pivot, but it's it's deliberative, right? So I so there could be some we might see some changes particularly maybe in communication or the press conferences. Kevin Wars has a style that is different than a lot of uh Fed officials. So we'll we'll notice a change when he um takes takes the reigns in June which is not that far away. Uh, but I do not expect big changes in interest rates, big changes in the balance sheet anytime soon. And really, it's going to hinge on learning more about the economy. I think the Fed is is really is in this wait and see or pause for for quite some time. >> I'm going to digress for a moment um before we start talking economics again, but I'm kind of curious. Do all the governors get together in person or do some show up over video conference or a Zoom call or how do they do it? >> So, in in the time that I was there, uh the governors are in residence, right? Like so they'll they show up and there's regular staff briefings, regular meetings that they're in. They all have, you know, fancy offices and I mean the the the building, of course, this is what's been part of the criminal investigation. The building is under renovation. the main the Eckles building the main uh board building but they all have space and it's a pretty collegial place like that they can kind of go down the hall and talk to each other now there have been times I don't know that this is at this moment but there have been times where people were more remote like and and in the world after the world of Zoom I mean everything can be done like by having people video in to to meetings and such uh but I I think in general you you have people that are present now the the the um Reserve Bank presidents again are scattered all across the country. So they're they're just coming in for the Fed meets eight times a year and so they they come in um for those meetings but you know there's a lot of discussion I'm pretty I mean the chair is talking to everybody uh before meeting like it's not you know they they're in communication uh with each other but yeah there's a they you know the governors they're they're together it's a big group so >> yeah very interesting. So the other big news that came out of yesterday's presser was that Powell has opted to stay on the board as a governor. It would mark the first time a sitting chair didn't leave the board of governors since Eckles in 1948. And at that time Eckles was under pressure from Truman to cut interest rates just like Jay Powell is now. Uh he's under pressure to cut by Trump. But what are your thoughts on this and on Jay Powell staying on it as a governor? Is he being political or is he being patriotic? >> Right. So, first one one little historical footnote. Uh so Truman uh in World War II, the Fed had worked with Treasury and the White House to keep interest rates low to help finance the war effort. And as they came out of World War II, the Fed Treasury I mean they like low interest rates, right? All right. So, I agree like Truman wanted to lower the interest rates low and the Fed was trying to uh get back having control over interest rates because there have been some bouts of inflation. So, it is a very similar like the Fed at that time felt interest rates should be higher than the White House did. And and furthermore, it was um who who should be in control of interest rates, who should decide what the interest rates were. Again, during the war, there had been an agreement that the White House Treasury would say what it is. The Fed was trying to move out of it. Then in 1951 they did have the Fed Treasury Accord which said the Fed has control over like they get to decide the interest rates. Um but yes there absolutely are parallels between now and then. And and pal in talking you know this was a big question. People were curious was he going to stay or go? The way the Fed works the the seven governors are on 14-year terms and they're staggered. That's that was one of the protections of the Fed's independence is Congress created these these terms that um don't turn over every time a president changes, right? Like you got to you got to wait until you you know a term comes up and so but the um chair is a four-year term. So you have to like you're a governor and then you like get elevated to be a chair. Uh, and so that meant that Powell was finishes on May 15th, his his second four-year term as chair. So, he was first elevated, well, he's so fas the end of an era really for DC, but Pal was actually put on the board by President Obama. Powell is a Republican, but this was back in the time where at the Fed there was often kind of a cross party. Um this again is something that's completely dis disappeared from DC but POW was put on the board by Obama and then it was uh President Trump in his first term who made him chair and immediately regretted making him chair but he did make him chair and then he was renewed by President Biden. So Pal has this very interesting like a cross party kind of um setup, but he will finish on May 15th as chair, but his uh term as governor because his 14-year term is not done until January of 2028. So I mean he's he's on the clock like he can stay legally he still has a position. It won't be chair after May 15th. But typically his traditionally chairs once their chair term has they have left to give space to the incoming person. But uh Pal is saying he was very clear that he is only staying because there are some you know loose ends with the investigation regarding the building renovation. There have been some really unusual efforts by the White House to pressure the Fed to lower interest rates and he's going to stay on in the spirit of, you know, protecting Fed independence. So, and and again, this is very similar. Eckles had a a similar theme to it. I will note that Eckles's name is now on the Fed building. I mean, this was a big deal what Eckle stayed to do. So, we'll we'll see if Powell gets uh some real estate named after him many years in the future. But he but he was also extremely clear at the press conference and I absolutely believe him that he will follow through on this that there is only one chair when his position is as chair is done. He is no longer chair. He is a governor. Kevin Wars will be chair and he will be there to be supportive as a colleague. like he is not staying because he's concerned about the direction of monetary policy or the balance sheet or he wants to like get in the way of Kevin Worsh because he could if he wanted to. Like Pal is very popular at the Fed, but he's like I'm not going to do that. I'm just I'm just here to see through some of the extraordinary pressure being put on the Fed. And I think that's really smart for a lot of reasons, but it it is it comes with a risk, too. Like not everybody's happy about um Palang. And if this if it provokes the White House more and something else happen like it yeah it's not without its risk but I think it'll and and hopefully it'll resolve and it'll be it'll be a really great day when Pal says I'm ready to retire. It's okay. I can go now. I'm really hoping for that. So we'll see. You mentioned that Jay Powell's legacy is going to be the fact that inflation stayed above the 2% um target rate for five consecutive years. I can't believe it's been five years, but um do you think 2% inflation is a thing of the past? Are we ever going to see it again? Or maybe is 3% the new number? >> Yeah, this is where you know and I talked about in the beginning with the supply shocks, right? and and any given supply sh as long as it's kind of within bounds, it's like a it's a hit to the price level pop to inflation, but it ought to be temporary. But if you get really bad supply shocks, and the pandemic really was a mess. I mean, globally it was a mess. Um, or like what we've seen in the last so many years, you get a whole like a rapid succession of lots of shocks. Well, then you get a bunch of them and they all push up. I mean then inflation looks like it's just running higher because you've had a successive stocks but as I said with the supply shift you're rewiring the economy right there's nothing 2% inflation target like the you know the I mean one one can debate the history of it but in in a lot of ways it was 2% was chosen because that's kind of where the economy had settled like that was you know it was a reflection back of oh it looks like in normal times when things are going well I mean this is kind of into the say in the '9s or early 2000s that's kind of what inflation was if you averaged it across so many years it was just 2% um in the United States and actually there are a lot of countries kind of peer country that like 2% kind of just looked like where the economy wanted to settle and that's and then it's like choosing that as a target kind of reinforces and and and there was a Um, and I don't want to act like, you know, oh, it's a supply shock. The Fed or or a central bank can't react. That's not true. I mean, you can pull demand out of the economy even if there's a supply, you know, so like there is an aspect of I mean, Kevin Worsh likes to talk about like inflation is a choice, like a very monetrist kind of idea and like, yeah, yeah, you can you can choose 2%. But but if the economy kind of tends to that, it's a lot easier than if the economy is tending to 3%. And I don't the discussion about a target is a really fraught one to have when you're off the target because it can feel very much like a moving the goalpost. But I think it is useful for us to at least kind of understand like as as one example with the the the not just with the tariff trade wars but I think there there have been other pieces of like how we think about global supply chains. One of the reasons inflation has been low like the core goods inflation as I was talking about before like is we had we opened up trade and there was a lot more trade for the US. It was particularly important when we started having a lot more trade from uh China that was helping like push down consumer good prices. Um it's not the only thing that was pushing down prices but it was in the mix. And if you start reversing that well like that can you can you get the 2% if you don't have that constant kind of uh you know pulling down on inflation from cheaper and cheaper goods. Uh so I think it's something that we do have to keep an eye on. I think, you know, over time there are some countries that have gone to something that's more of a a range, you know, looking at something that's not as precise on 2%, but I don't think that really gets at this question of what's what's kind of what's good, like what what's a reasonable thing um to shoot for. And you know and I will say like I I emphasize you know under PO we've had this 5 years of elevated inflation but inflation also came down without a recession. We came down from you know really notably elevated inflation in 2022 and there were a lot of economists these words never came out of my mouth but plenty of my peers that were like the only way to get inflation down is we have to have a recession. And you know we didn't get in inflation didn't come all the way down to the 2% target but we have not had a recession. I mean the the US economy whether you look at the labor market you look at inflationadjusted consumer spending I mean a lot of metrics of how we think of like well-being like the broad aggregates it's really impressive. So then it's you know and the Fed you know not all central banks have this but because the Fed has an explicit dual mandate there is an aspect of trading off between the employment side and the inflation side. Um the Fed has been explicit about a 2% target on the inflation and doesn't have kind of an explicit on the employment side and really there's I mean the inflation is it is has a very um is very focal right but but there is still this idea of like at 3% inflation is that really worth a recession like you and I think the Fed in the last two years when they've done their cutting cycle it is stepping because they got worried about the downside risks to employment and then we're going to protect that you know recovery. So these are all really I mean these are super difficult uh trade-offs to make even if you have like great data and understand what's going on then it comes down to a value you know kind of a a judgment and I think the power fed over time and both learning by doing learning from mistake I think has gotten to a place where this kind of risk management follow the data like I think this is a good way to approach this these supply shocks but you know It's it's too soon to really write the verdict on this because you might come back and say, "Well, no, those economists were right. A recession really would have been smart. We just get that down to 2% and reset the clock." So, I that's not my view, but I think it's a uh it's been certainly an interesting time to work through. >> So, one of the big things that's leading to all this uncertainty in the economy is with what's happening with the oil price and what's happening in the Middle East. No one has any idea on how this is going to be resolved, but um even though energy is a small component of the CPI, we still see a lot of negative headlines associated with it. Delta came out and said that they're going to have to spend an additional $2 billion on fuel in Q2. I'm sure all the other airlines are saying the same sort of thing. Amazon, FedEx, UPS have all said they're going to start imposing search charges. uh do you think like if we continue to see oil trade at a hundred bucks or above a hundred bucks, what kind of negative impact will that have on the economy and also on consumer spending? >> So with the the US economy with with an higher energy prices, you got to be careful because there's there's a lot of a lot of moving pieces. Let's let's start with the consumers. Um the staying the kind of like seeing these oil prices hundred some you know somewhere between the 100 115 range kind of um this is this will be I mean it's and it's going to be a weight you know kind of a downdraft on consumer because it does cut into disposable income energy or say gasoline is a you know kind of the the most direct energy good that's being affected and in and in the US We saw um national gas prices I think as of yesterday were at like $4.30. Uh in the month of March they jumped by a full dollar. So I mean it's not just the level like these aren't historically like really outrageously high levels but things moved really fast right so like things have moved up and and it's not clear we're done with this right in terms of um oil prices moving higher which has show been gas. So at this point it's not like this kind of these these type of gasoline prices even if they were to go on for months and months this is not a bring the economy down kind of um price level. Um, I think oil prices would have to go a lot higher and stay higher longer and and you know I think the some of the market reaction after the first ceasefire was called was a a kind of oh the worstc case scenarios are much less likely now like the kind of mass destruction of the energy supply networks in the Middle East that seems less likely that we're going to kind of grind through this but it it is still um uh just first on the economic effects I mean, it is, you know, the gasoline. This is this is not a negotiable for most people. Like, you got to get to work, you got to pick your kids up at school. So, so that means that when it's just it's like money just flying out of your wallet, right? So, you're going to have to adjust somehow. And for, you know, many Americans cut it pretty close by choice or by preference in terms of, you know, money coming in, money going out. So, if they're paying more for their gasoline, it's going to cut into other kind of discretionary purchases. Um, some people just can work through it with their savings, but it it should have a hit to spending. So far, I mean, we've only really got the March spending data. It doesn't look too worrisome. I mean, things are still holding up, but like one month in is not enough to to understand the the response, but it it should be a drag for consumers because it hits into their disposable income. But again, I think it's within um within what's kind of manageable. But gasoline is a very um kind of in-your-face price in the US. So, it has a lot of political like it's a very politically charged price. And this year in the fall, we will have midterm elections. and and so $4 and you know there are parts of the US that are already up at $5. California is at $6, you know, because there's variation because of the taxes uh across the the gas tax across the country, but I mean those it people are already pretty pretty unhappy, right? And the consumer sentiment surveys really show this quite clearly. Uh so I think that's uh that adds to the complication for like the White House that they're going to have to you know these are these are prices people respond to and then as you said like the energy prices you the diesel diesel fuel prices in the US have gone up even more uh than you know gasoline has and that for there's some consumers that use diesel but it's also it seeps into all of these other um you know freight costs some of the packaging like it just it can show up And that is the that's the piece that the Fed other central banks you kind of trying to look for these these um where it's bleeding in now historically from and and you know the the reality of the economy over many decades is we've had energy shocks from time to time. So there's a lot of evidence to look at and that that seepage has tended to be pretty modest. So unless you get a really big energy shock, you're not going to have really big broadbase shocks, but things like airline ticket like there are places where I mean we can already see it in just the the March data and and they will um have an effect. So that's just that's all on the consumer side. It is not good. It is a negative though I think it is one that we will push through. the US because it is a large energy producer does have something of a buffer relative to some of maybe some of our other peer countries that like there there is a plus when energy prices are higher that tends to be that's that's very profitable for energy producing firms. Um there aren't many signs right now that we've had a big step or any step up in in energy production, but that could happen particularly if it's prolonged. And that kind of gives economywide something of a buffer. But like most Americans don't hold energy stocks, so like they're not better off from this. But but it does make the the I mean it's the US is more insulated from the negative economic consequences of this shock than probably almost any other country and kind of started this. So it is it it's kind of an unfortunate but the US is not um spared from it right the price effects are are there >> well I think to your point because you see it every day you know what the price of gas is uh it becomes like perception becomes reality and I know that's the case with me I started so I'm based in Toronto in January of this year I was paying $1.15 Canadian per liter now I'm paying about 17580 if you do a conversion that works out to $5 a gallon. Um, which is getting up there, right? >> Mhm. >> Not as bad as the state of California, thank God. But, uh, it's getting up there. >> Yeah. No, and people do notice it. I mean it it really is the one price that we are most exposed to and and certainly in 2022 after Russia invaded Ukraine and the gas prices started moving the US. I mean that really was at a point where the the switch flipped with the Fed cuz they're like that that's it, you know, not only was inflation going but it's like this is spreading and it's so salient that that's the place where that kind of the inflation expectations going unhinged. And so, uh, yeah, it's just it's a and for anything in the US, like it had been one of the selling points for the administration, how low gas prices had been, and that really that that disappeared really fast. So, >> so let's uh move on and talk about the unemployment rate. Now, um, I guess we're going to see the April unemployment numbers here in the next couple of days, but the last number we saw, the unemployment rate was at 4.3%. and it continues to tick higher, but you know, historically speaking, still relatively low. But what's your your take on the jobs numbers? Are you concerned? Do you think we're like moving toward a normalization period? Maybe we overhired during the pandemic and now we're stagnant in terms of hiring. >> Yeah. So, the unemployment rate at 4.3% and it's been, you know, on balance pretty stable uh since last fall. So it's this is a it's a low number historically. I do like to point out it's you know we have an older workforce more educa. So like there there's a re like it should be like this is really it's a good number and it's and it's a pretty appropriate kind of you know the Fed doesn't have an exact number for maximum employment but if you look at demographics this is this is pretty much like where you would where you would want to be. Um now it is the unemployment rate has risen since it's low after the pandemic and it's it's a little unusual again I think this whole the soft landing the getting inflation down the Fed what you know the 5 percentage point increase in the federal funds rate it did cool off the labor market so I mean we can see some signs like I said of the the unemployment rate drifting up and historically it's unusual as much as it's drifted up without a recession but it happened very gradually right So, and again at 4.3% where we're sitting now, this is uh seems uh like a good like a labor market imbalance. Now, there's a couple things going on that have as uh pal has referred to it as a curious kind of balance. So, one thing that is has been pretty notable and this has been going on for at least the last two maybe three years at this point is the hiring rate has been has is low it's low relative to the pandemic. It's low relative um to history and that that's clearly not if you are looking for a job, if you're coming back into the labor market, if you're among the few that have lost your job and look like this is this is really a tough labor market. Um, but the layoff rate is very low, which which is great, right? So, if you have a job and you like your job, this is a really good labor market. But this low, higher, low, fire labor market is unusual. Like that's not a typical one. I think of it as I like to point like it's it's kind of a vulnerable one because if something bad were to happen in the world and sometimes it seems bad things happen in our world uh and and it actually gets companies to the place where they want to they need to lay off workers. If we would have an increase in layoffs in environment with such low hiring the unemployment rate would start moving up very quickly. Now, that hasn't been the case. And again, we got more confirmation today. The unemployment insurance claims, which is a very like kind of broad measure of um people that are being laid off, uh is really low. The initial claims are very low. So, I mean, again, we just not seeing these layoffs and that's a good thing, but we have this kind of bifurcated labor market in a way that's unusual. Again, low hire, low fire is not a typical. We don't see that in history. and and also I find the low hiring rate kind of puzzling given how much you know GDP is chugging along businesses or you know so it's it's a little like um you know there was a lot of um a lot of churn in the labor market after the pandemic there was a lot of moving workers around and it could just be that we ended up with a lot better matches or or like I said there were certainly some industries that kind of did overhiring like tech really kind of like oh the world has changed we're all going to be online like there was a lot of tech se sector hiring and now at least to some extent some of the headlines about we're doing layoffs because of AI are really they're doing layoffs because they overhired right and they're right sizing and and we have a new technology that helps them kind of do the right sizing um so I think there's been a lot of we've had a labor market that was really firing on all cylinders had people moving around wage growth and that's not where we're at now people are kind of hunkered down uh wage growth growth has slowed. Um, but it's still it's still good, right? Like on B like it's it's still a good labor market. Now, the the the other thing I'd say about the labor market that has a development and this really is the last year or so and it fits in our kind of supply shock discussion is because immigration has slowed so dramatically. This did start at the very end of the Biden administration but but certainly picked up in term at the since uh President Trump took office. Um immigration net immigration so there's less immigration into the country there's movement there's deportation there's people who are you know don't want to be here and are leaving. Um but what but that on a in addition to the fact that we have an aging population has meant that the growth in the labor supply is like just vanished and so we really we're not so if you don't have people coming into the workforce well you don't really need to be creating jobs. So we've had several months about 40% of the time since the beginning of last year the monthly payrolls have declined and to have that that like frequency of declines and payrolls that's like a that's like what you see in a recession. So you see these number and you're just like whoa like this is some are we about to fall off the cliff is a problem and it's like well actually if you have labor if your labor supply is basically flat so what like you don't really need to keep the unemployment rate constant you don't really need to be creating many jobs so kind of good in terms of monthly payrolls is pretty close to zero. Well, then you know you have weather happens or there's a strike or there's seasonal adjustment. There's just noise in monthly data. And so that what that ends up happening is then we kind of bounce from like a month of declines to a month of increase, a month of declines, increase. So you get this kind of a lot of ne of these negatives are just cuz you know like good is basically zero. But a low labor supply growth econ like first of all we haven't had that in the United States and second of all it has implications for what's a good payroll number it has implication for what's a good GDP number cuz like big picture GDP growth is growth in the labor force and productivity growth and if you don't have growth in the labor force it's got to all come from productivity or we're going to have a conversation about how like a half a percent is a good GDP number right so like there's There's a lot that's um things are happening under the hood. The labor market's in a good place, but it can be hard to read because again these rules of thumb like, oh, a negative payroll print is a sign of a recession. That is not what's happening. But it's a sign of something like low labor supply. Like that's a that's a really big shift. So lot lots going on in the labor market. Claudia, one of the things you're well known for is that you created an indicator known as the SAM rule. What exactly is that? And what is this indicator telling us right now? >> Yes. So, I uh created this indicator. It's an indicator of recession. So, it's supposed to tell us like we're in a recession. Not not in the recession forecasting business. That is a there's a lot of people in that space. uh what it does is the the intuition for it and this was something I mean I very much picked up as a forecaster uh small changes in the unemployment rate or bad news right there is no there's no level of the unemployment rate that says recession not recession we've gone into recessions in the United States with like you know 3 and a half% unemployment we've gone into them with like 7% unemployment so it really it's not about the level but changes are like if the unemployment rate starts to increase and it can be a pretty modest increase that's bad news. So the the historical pattern and I did this analysis in 2019 as a project of kind of doing automatic stabilizers and how to improve fiscal response to recessions. So the the the formula that is just to look at um the national unemployment rate take the three-month average smooth out the bumps and wiggles for monthly data. Look at the 3-month average. Compare uh the current value to the low of that series over the prior 12 months. If you have a half a percentage point increase, again, this is a modest, right? Half a percentage point. If you have a half a percentage point or more increase, you are you historically have been in the early months of a recession. And again, put this together in 2019. And it's it's not perfect. there like back in the 50s there were some times from 1970 to 2019 it was it worked every time it it didn't trigger outside of recessions it always triggered in a recession now frankly triggering in a recession is not that hard because in a typical recession the unemployment rate goes well in even the the mildest of of recessions like in 2001 uh the unemployment rate went up like 3 percentage points right so eventually in a recession the unemployment rate will go up and of course in some recessions it's gone up a lot more than three percentage points. Um, but the idea is because again I was trying to do a um thinking about a fiscal policy to help a recession. You want something that turns on as quickly as possible and yet as accurately as possible. But the s rule fell victim because I've talked about kind of rules of thumb that supply shocks u mess with you know and I talked about the declines in payrolls. Um the SAM roll fell victim to this in uh 2024 because we did have a half percentage point increase in the unemployment rate. So the samroll triggered in the summer of 2024 and part of it and I had talked about it in the months running up to it. But part of it was that was a period where we had the surge in immigration and and I knew this even when I put it together and Achilles heel if anything using the unemployment rate is like it's the unemployed out of the labor force. So you can have you know if you have shifts in the labor force. So a good news reason for the unemployment rate to go up is if you have an increase in the labor force it takes some time for people to find jobs. And so on the other side of that it's not a recession. like even more growth because you have people have have gotten the job. So, so there was some and the other piece was coming right out of the pandemic which was in the look back for the som um I we had labor shortages the unemployment rate went really low and kind of not I don't call it artificially low but I mean like lower than the economy really could bear because we had these shortages so there were you know these these shifts in the uh but you know it's one and and now part because again the immigration is reversed the other way. The fact that the labor force is growing so slowly, labor force participation rate has come down, it's actually putting downward pressure on the unemployment rate. And some people have talked about as well, we should strip that out and be worried about a recession. And I don't have that view. Again, I just think that we've got under the hood there's a lot like the kind of structure of the economy and the labor labor supply, but it's it it just shows that a lot of the rules of thumb and the sum rule wasn't the only one. the yield curve took it on the chin uh that in 2024 as well. Like it's just when when the fundamentals are shifting around our rules of thumb particularly rules of thumb based on demand shocks which is a lot of what recessions are right like I mean sometimes they have a there's a contributing supply shock as a factor but usually it's some income shortfall crisis of confidence something like that and those rules of thumb just don't quite work. Now, I still I still like the idea of automatic stabilizers, the idea of putting fiscal policy tied to economic conditions and not political whims. But I will admit that like having rules for like rulebased, it's it's hard to find rules that are always going to work. >> Well, especially if you go through a period like we've seen in the last 5 years where the government's just pumping trillions and trillions of dollars into the economy, there's a lot of I guess it creates a lot of upheaval, right? >> Yeah, absolutely. And I think you know the with these kind of fiscal rules we were trying to develop, it wasn't just about turning stimulus on in a recession, it was also about when would you turn it off, right? Because there's a lot of these temporary programs and trying to tie like in the US we often will do extra jobless benefits in a recession and and generally politicians can agree like let's let's send money like you know we're all Keynesians in a foxhole, right? there's then a huge political debate about when do you turn those programs off and do you tailor them to local conditions. So I think there's a there like I said I still think these policy rules and that's why it's called some rule. It's about a policy. It's not like a rule of the economy. It's like trying to um type policy but it it but it's really hard to characterize an economy that's that's always you know as as dynamic as it I mean, that's a great problem to have a dynamic economy, but um but I do think it's like trying to get some uh even if even if it doesn't take the discretion entirely away from policy makers, just give them some good guard rails or just more guidance, more kind of concrete guidance. So >> Jamie Diamond was speaking at the NOR's investment conference recently and he stated that he's very concerned with the federal debt levels and he thinks they could trigger some sort of crisis in the bond market and I'm curious if you share his concerns. We got the 10-year trading around 430 440. The uh 30 years approaching 5% if it's not already there. But do you have his concerns that we could see some sort of crisis in the bond market? And if so, what would that look like? >> So, it's this uh concern about federal debt levels. This is this has been ongoing for many years now. And and I think that's exact like what would the moment the the crisis look like? What is like I I don't have I don't have the crystal ball on this one. Uh what I will say is like in in economics there there's been you know research over time trying to like what's the debt to GDP ratio or what's the debt service to GDP like trying to figure out like at what point is this a problem right like at what point do we really go past um you know the point of no return and I think that you know the the US and we're not the only country but it's like if you issue debt in your own currency And like I think they it could be pretty far out there, right? In terms of like how much debt could be taken on before things really fall apart though borrowing costs are going to puts upward pressure on borrowing costs for sure. I guess with the US my I often come back to as opposed to thinking about a particular level of debt or getting you know exercised about you know these massive amounts like go back to like why do we have this debt right in in the US if you are concerned about uh the federal debt and debt sustainability like it comes back to we have entitlement programs our you know old age programs social security Medicare to a lesser extent, but also Medicaid is like health insurance for lower income individuals. Like those entitlement programs are the keep grow because again it's the aging population like the US is not unique in this but it's kind of like that's you can't fix debt sustainability by discretionary fiscal program. Like there aren't enough programs for the poor in the United States. there are no programs for like education at the federal level that you could cut all of it and we still would have this federal debt like on a trajectory that is is worrisome. So So to me it's like okay but entitlement reform is extremely politically thorny and and the idea you know is kind of like we should be talking about that. We should be trying like if you're serious about debt sustainability, you got to be serious about this this kind of what do we do with the entitlement stuff. The politics, you know, economists have for like when I uh trained as a research assistant in uh 2000 at the Brookings Institution, we talked about like the economics of how you fix social security are really straightforward. The politics of how you fix social security are just like immensely difficult. And so it probably will take some kind of a crisis to get the polit like to get politicians to actually make the changes that make the debt sustainability. But you know one one could hope we could avoid that and like actually go why why is the debt then and it's not just in entitlements like there are other issues in terms of like the fiscal um space but to me I' I'd rather do kind of the the bottoms up like what are we doing with this money? what are these programs? What can like and fine-tune them as opposed to there's some GDP level or debt to GDP level which it's going to fall apart. But I do think, you know, kicking the can, not having these conversations, not going in and like working on the policies themselves. Well, yeah, as time goes on, the risks go up and it'll be very messy. And with a lot of the entitlement programs, the kind of the fixes that you would do, the sooner you do the fix, the less painful it is. So, like the longer we wait to make adjustments to like social security benefits, the benefits or the tax, like we're going to have to do more. So, it's it's a frustrating uh situation, but like I said, I tend to go at it from the like the nuts and bolts of what's in the debt as opposed to the financial market blow up. Um but I you know I I can we are at levels where um I I mean I share the concern but I don't I don't see the signs any imminent signs of it in even like say looking out at 30-year bond like it's just it's really hard it's hard to see it. Um but but I do agree that at some point I mean confidence can be lost pretty quickly especially in markets. >> So just to summarize a lot of the points we touched on it sounds like overall you're I guess I I should say uh optimistic about the economy. You're you're more positive than negative. Do I have that right? >> Yeah. And I think and especially the the longer the horizon is I'm optimistic. I am like I I'm certainly so I so I am optimistic. I think we didn't talk really at all about AI but I mean I think that's one where there's some there's some positive productivity uh in in train and um I am but I am worried. So if I if I look at all the economic stuff, it's like pretty pretty positive. I think we're going to push through this resilient economy like you know there but I do worry we've had a whole series of shocks you know back to my whiplash economy and it's like each one of them in isolation of the tariffs and the gas price like we can muddle through and so far we have muddled through them but the I get worried about the layering like the frequency and and the also just very um big picture uncertainty, right? I just I think we um in the US the economy has like people have really pushed through what I think has been a a kind of um extraordinary amount of policy uncertainty in the last year. I mean the president that Trump part of his um approach is kind of shock and awe and move fast and break things. I mean they they've said that right like that's just and there's a there is a logic to it. It's not one that I um embrace. I think it's a very risky uh at this point things have we've kind of navigated it but I do worry that it can wear down institutions. So like with the Federal Reserve I think the uh pressure the White House has put on the Fed to lower interest rates I think has been incredibly counterproductive. I don't think you you know Fed Governor Lisa Cook the president trying to fire her and a criminal investigation of Fed chair J P like these are not this is not good this is this is putting a lot of pressure on the institution up to this point the institution has continued to do monetary policy as usual like following the data doing the best they can but I do worry that institutions and the Fed is is not the only institution under pressure but institutions if put under enough pressure for enough time will break. And I that that the fact that we are even having those conversations makes me really worried, right? Cuz the institutions like the foundation of the economy, rule of law, institutions that work like those are being they're being tested. So I, you know, I have so maybe I'm just a very like um bipolar view here. Like if I look at kind of the regular stuff and I kind of look at the and I'm very very pro American business, American consumer, like don't bet against the American consumer. I mean they like if they can they will go for it. But like but then when I think about some of the the institutions that like I just it makes me worried like there are some so so basically positive but with a very weary eye on some of the things that are happening. Well, Claudia, this has been a great discussion. I want to thank you very much for spending time with us today. If some of our viewers would like to read more about you or see some of your research, where can they go? >> Yeah, thank you. And it was a joy to be here today. So, I have, as I mentioned before, a Substack stay-at-home macro s. That's one place. And I do write pretty regularly on Bloomberg opinion and show up on LinkedIn some. So, there's there's plenty of places to find find my ideas. So, >> and I will make sure I include those links below in the show notes. Claudia, once again, thank you and good luck in the markets. >> Great. Thank you. You, too.