Federal Reserve’s blunt inflation tool ‘entails some pain’: Former Fed official
Yahoo Finance Video
Former Fed Vice Chairman Alan Blinder joins Yahoo Finance Live's Brian Cheung in Jackson Hole, Wyoming, to discuss Fed Chair Powell's speech, inflation, interest rate hikes, the labor market, and the outlook for the economy.
Video Transcript
AKIKO FUJITA: Let's get back out to Jackson Hole again, where that symposium is underway. Our very own Brian Cheung standing by with former Fed vice chairman Alan Blinder. Brian.
BRIAN CHEUNG: Thanks, Akiko. Yeah, here, live in Jackson Hole, after the first morning sessions of the Jackson Hole Economic Symposium, here with former Fed vice chair Alan Blinder, now a professor of economics at Princeton University. Thanks for joining us this morning.
ALAN BLINDER: Glad to.
BRIAN CHEUNG: So let's talk about the remarks that we heard from Jay Powell this morning. Unusually short. What was your takeaway from the speech?
ALAN BLINDER: I think he made it unusually short to get right to the point. So nobody's going to miss the point. And the point was the Fed is serious about getting inflation back to 2%. And you shouldn't think we aren't.
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And more concretely, I think what they were trying to do-- I've heard this from several people around the Fed in general, not from Powell himself, that they're bothered by the idea that you see in the markets a lot that by early next year, they're going to be cutting rates already. I don't think anybody on the Federal Reserve thinks that's very likely. And I think that was a message of-- he didn't quite-- he almost said that right out, straight out.
BRIAN CHEUNG: Yeah, well, I guess that direct message then, is that because of what you just said, that market expectations and pricing had suggested a different Federal Reserve reaction function? Was there anything new, though, in what he said compared to--
ALAN BLINDER: No, I don't think so. I mean, I have been saying on air and things like this to anybody that it's very unrealistic to think that they're going to be cutting rates by early '23. And I'm a kind of a dovish sort of guy. You know, I don't want them to cause a deep recession. And neither do they. But the idea that this was-- that monetary policy acts so quickly that by early '23, you can actually be reversing and going down again was always, to me, very unrealistic.
BRIAN CHEUNG: Now one other thing from the speech that I took was that he was warning households and businesses that there might be some pain involved, which one translation of that might be this is going to be a bit of a bumpy landing. You've done extensive research on soft landings. How do you think the Fed is doing four consecutive rate hikes into the process?
ALAN BLINDER: Well, I think they're doing fine. But as you said, it's into the process. They are not finished. And he made that very, very clear. Look, when the Fed fights inflation, it's got a pretty blunt tool, its main tool-- raising interest rates. What does raising interest rates do? Less homebuilding, less car buying, things that are interest sensitive, and that costs people jobs. And if they go too far, it'll actually cause a recession. And it'll cost a lot of people jobs.
So I think Powell and other Fed spokespersons have been clear, they're not out to cause a recession. They're seeking this elusive soft landing, or as I put it, soft-ish landing. But even that entails some pain. It means the unemployment rate is not going to stay at 3 and 1/2%, for example.
BRIAN CHEUNG: What is the track record of the Fed in engineering a soft or soft-ish landing?
ALAN BLINDER: You know, I did a webinar and then I did a paper on this. It's better than people think. The myth is that they've only achieved a soft landing once, in the mid '90s. And if you're fussy about definitions, that's true. But if you're willing to accept soft-ish landings, they've done it a lot, many more times than that. So what I mean by a soft-ish landing is maybe you have a recession, but it's a small one, like in 2000. That recession was so small that in annual data, it disappears. You see it in some down quarters, but you don't see a down year.
BRIAN CHEUNG: At the same time, Americans that are tuned into all of this are wondering, well, recession, soft-ish or hard, is still bad. If unemployment goes up, and we're at 3.5% right now, historically low, that's great. How high do you think the Fed might have to see job losses to get ahead of inflation and get it back down to 2%? Is there a tradeoff? How sharp is that?
ALAN BLINDER: There is definitely a tradeoff. And I would say when I talk about a soft-ish landing or when they do, they're never going to be numerical as I'm about to be. They shouldn't be. But you may be talking about the unemployment rate going from 3 and 1/2% to 4 and 1/2%. 4 and 1/2% is still pretty low by historical standards. But a more serious recession, you're talking about another point or maybe more of unemployment over the 4 and 1/2. That's why they don't want to go.
I'm sure if Jay Powell could wave a magic wand to make the world behave exactly as he wanted, he would be-- and he won't say this. He'd probably be looking for a number like 4 and 1/2.
BRIAN CHEUNG: Yeah, and--
ALAN BLINDER: They're still pretty low.
BRIAN CHEUNG: And he hasn't necessarily targeted or set a specific number.
ALAN BLINDER: No, and he won't.
BRIAN CHEUNG: Last question here, recession, right? A lot of conversation about whether we're in one now or not. Your thoughts?
ALAN BLINDER: I think not. No, let me take that back. I think we are not going to know the answer to that for some time. We've already had the two negative quarters, which is kind of the media definition of a recession. But as I pointed out the other day to an audience, over those six months, job creation has been running almost 500,000 a month-- over those six months of the two down quarters. That doesn't look like a recession to me.
What's going to happen in the next few quarters will determine whether the National Bureau of Economic Research, which is the official arbiter of this, declares this a recession. If that period goes badly, I think they'll go back to the two negative quarters and say the recession started there. But if it goes pretty well, they may never date a recession.
BRIAN CHEUNG: All right, we'll have to see. Former Fed vice chair Alan Blinder and professor of economics at Princeton, thanks so much. Appreciate it.
ALAN BLINDER: You're welcome.
BRIAN CHEUNG: Back to you, Akiko.
AKIKO FUJITA: All right. Thanks so much for that, Brian. Appreciate all the coverage on the ground there.