YouSaid · the spoken record

Tim Duy

lines on the record: 40
first: 2022-02-14
most recent: 2022-02-14
sittings or episodes: 1
sources: podcast

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“That's great, and we'll see if inflation moderates back toward 2%, as many people expect, then the Fed is going to look brilliant because we'll be near neutral with a pretty tight job market and inflation back to 2%. And that's the optimal outcome here.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“And so, is there a potential here to get to a better place? And I think the answer is yes. There is that potential. And I just think it's how do you moderate the economy during that adjustment? Because I think what Chairman Paul said has been, I think, generally correct in that if you want to maintain and extend these benefits, you need to basically have inflation under control. And if you don't get inflation under control, we're going to end up with these instabilities that eventually prompt us to create a recession. So even if you're getting a jolt, can you have too much of a good thing in the short run that you actually lose some of those long run benefits? And I think that's the concern that the Fed should have at this juncture.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Right. And I think about this a lot is obviously we want to get back to at least as good place in 2018, 2019, but maybe even a better place, right? Because we'd like to see productivity be higher, right? And maybe does that require some investment? And is that investment something we're only going to see if we run the economy hot? Right.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Firms are telling us right now, so they're telling us essentially they can raise prices and they're not getting any consumer pushback. That tells me two things is that there's lots of nominal spending power. Also that consumers are expecting higher prices and willing to pay it because they have that nominal spending power. That suggests to me, again, sort of more of an embedded inflation dynamic than we would like to see.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that would be really, really amazing. More likely to me is that those long-term inflation expectations adjust as short-term inflation remains sticky above those current long-term inflation numbers. Right now we know that short-term inflation expectations are elevated. And consequently, if that continues to be matched, right? If those expectations continue to be met, then that will probably put upward pressure on inflation expectations over those long term. So I think when the Fed looks at these long-term inflation expectation numbers as if they're really signaling some intense attitudes about long-term inflation on the part of consumers, I think that's probably misleading that those are almost certainly lagging indicators. So especially after a 25-year period of very low inflation. Now, I do think that what”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“So I'm not convinced that consumers right now have a good sense of really what inflation is going to be out five years in the future or 10 years in the future.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Functioning that they need to adjust on that front. And then just say that's going on. Here's what we're doing with interest rates. That's really a separate thing rather than trying to say at the front of this, oh, well, if we do this much QT, we're going to get 50 basis points less of tightening going forward. I think that's something that's just too unknown for the Fed to really commit to.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I think the Fed has to be really careful about how they approach that particular question because Chair Paul said in his most recent press conference that there's some capacity to estimate some trade-offs between QT and rate hikes, but were they something you really wanted to count on? And that's my opinion too. I'm not sure you want to start setting expectations about the path of rate hikes on the basis of what you're doing with the balance sheet, what the Fed really should think about doing is, okay, here's what our objectives for the balance sheet are. And I don't even know if we're clear on what those are yet, right? Is it about giving the size down? Is it about getting MBS down? How quickly do you want to get this down? They need to set the objectives for the balance sheet. And they should probably just let that run in autopilot on the back until there's some kind of concern from financial market.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Before or around a recession. And so that's where I think the Fed would be much more worried that they needed to reassess what their expectations were.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“I agree with you that it's not necessarily stock prices or big tech or bitcoin prices that's going to be influencing monetary policy decisions. Obviously, if we had a 20% drop overnight, that would probably be something interesting. But no, it's not asset prices. I think you're right. It's in credit or market functioning. So obviously the Fed doesn't like the situations we've had where treasury markets don't seem to be functioning properly. So that would be certainly one issue and might apply to quantitative tightening going forward, which we really haven't talked about. The other thing is if you saw corporate debt spreads really widen, that would be, I think, a red flag for the Fed that something was going wrong. They would like credit to be a bit tighter, right? They want a slow activity, but they don't want those credits beds to blow out, as you often see, you know.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Consequently, that would cause them to slow back or pull back on activity. You could also think about whether how this is operating through home mortgages. So there's a number of channels, but clearly one way that we've always thought of this is that you're trying to”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“There's this typical idea of a Phillips curve where the idea of the rate hike is to raise unemployment. Essentially, there's a trade-off between unemployment and inflation. And we didn't really see that in the pre-pandemic era. We thought the Phillips curve was fairly flat. So that was a mechanism we weren't necessarily relying on as heavily. Instead of relying on, I think what would be more vague idea that its financial conditions tightened that we'd see possibly monetary policy evolve through a number of different channels, whether it be the exchange rate would possibly be higher and that would create a slowing of demand where firms would find themselves facing higher interest costs and that would slow their cash flow and”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“The boomers were aging out of the workforce and being replaced by the Gen Xers, which is a demographic whole. And so we actually have the opposite right now where now the millennials are going to be aging into their prime working years and their home buying years. There might have been a bit of a demographic weight on the economy in that post-great financial crisis period. Again, it's easy to criticize after the fact, but I'm not sure the Fed could have done. you know, this magic job that we all sort of thought at the time that they should be doing.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“I think, again, that's a good question. Is in that post-Greek financial crisis period that was certainly a slow period of recovery relative to what we would have optimally expected? And I do think this sometimes gets you the question of what can you expect out of monetary policy. And I think, again, if we go back to that period of time, we all, I think basically universally agree that we should have had more fiscal policy. And maybe that would have been the thing that would have boosted job growth. Now, it may be that neither of those things would have been as important as we'd like to think it was that for whatever structural reasons, the economy was just in a low growth mode as we had to recover, rebuild the financial system from the great financial crisis and sort of rebuild the economy from the housing bubble. And also, I think demographics were probably in play there.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Because you can't take the chance of tipping yourself into a recession when you're this close to the zero bound. So this is kind of one interesting thing. I don't know if it's been properly or completely recognized is the Fed really can't sort of do average inflation targeting at 2% right now, right? They can't sort of go into the future and say we want average 2% over the next five years, average inflation of 2% over the next five years because that's going to imply some period of less than 2% inflation and they can't do that.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“You know, there's a big view that we should be aiming for inflation greater than 2%. We should have picked a 3% or 4% target given our proximity to the lower bound, that maybe that would raise what we consider the neutral rate of nominal interest rates. And I do think there's some truth to that story, certainly given the current circumstances. I don't know that it's really politically possible for the Fed to target something other than 2%. I think they'd have a hard time basically creating support within Congress for a higher inflation target, even though there's reason to think the economy could operate at 3%. Now, at the same time, I think right now monetary policy almost has to have an inflationary bias because of the proximity to the lower bound. You can't really target something less than 2%.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Brought us to a good outcome. And we all ended up complaining because inflation was 20th basis points below 2%. And maybe we should have appreciated that response more than we did at the time”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a good question. The policy error would have been made prior to that point, right? One thing I think about is in retrospect, the Fed actually did a pretty good job in the post Great Financial Crisis era. And at the time, myself included, criticized the Fed for maybe moving too aggressively. But we still ended up in the 2017, 2018, 2019 economy, which I think we can all agree was really an excellent economy. We'd like to be back there. And that was managed by essentially guidance, loose guidance on a Phillips curve. And then I would argue later in the crisis and later in the expansion, some loose guidance on the basis of not letting the yield curve invert. And that sort of slow and steady return.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“In that case, fairly easy to see how you could guide the economy back to target without a recession. If you're 200, 400 basis points away from target, the historical data suggests you guide it back toward a lower number by inducing a recession. So that's something that's been just sticking in the back of my mind as a real risk going into 2023, in particular in 2024, just tells me how much we're all leveraged on the idea that inflation is going to ease by the end of this year sort of on its own accord.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“This is something that struck me, just looking at the charts of wage growth and particularly inflation in that sort of the aeronaut associated with 2% inflation, that really once you sort of shifted your equilibrium, it was pretty sticky. Wage growth really stayed at whatever its pre-recession level was until you came to a recession. And the same was really true of inflation. It really started to look in the data, like to me, that changing these dynamics was actually very hard once they had become established. And it was probably going to be harder than we anticipated, especially since all of the models, I think right now are calibrated on this pre-pandemic period. So when inflation never really deviates more than, say, core inflation never deviates more than 20%.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Prepared to adjust policy in the second half of this year as necessary. And that would mean, you know, I think starting out with, it's always a question, should you start out with 50 basis points? I think ultimately you'd like to be at 150 basis points by the second half of this year. And the Fed's not positioned to do that and hasn't really primed markets to expect that kind of rate hike. That's what I would be thinking about pretty aggressively if I was the Fed.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a great question because I think this is potentially a really challenging time for monetary policy because if these inflationary pressures have become embedded deeper than the Fed, Fed really believes, then you're really coming to the party too late. And you're going to have a hard time really, really containing these inflationary pressures without creating a recession. I think the Fed should do a little bit more clearly what I think they're kind of positioned to do. And that's to try to get rates up to something closer to neutral as quickly as they can. So I would probably define that objective, at least right now, so that you'd be better prepared to find that objective more clearly so you'd be prepared.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“That financial markets had rebounded and were functioning quite well by that point. So we did years of QE that I don't wasn't probably necessary to support the economy. Now we have to sort of think how is the Fed going to unwind that? The other thing that I think a critical space here was the Fed, you know, from my perception was cheerleading fiscal policy. And I think that they really push back or couldn't do any sort of fiscal or monetary offset even after that last blast of fiscal stimulus we had that really gave the economy a good push in 2021. And I think that might have been a real, real error on the Fed's part is by not sort of writing off any hope of any fiscal pushback pretty early in the process also kind of set the stage in motion. For the possible persistence of these inflationary pressures”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Right. And given the lags and these processes, was by the time we did the fiscal stimulus and the monetary stimulus, and by the time we got to 2020, the end of 2021, or excuse me, the end of 2020, the beginning of 2021, was this pretty much already baked in the cake? Really what we're thinking about is how persistent these inflationary pressures would be going forward. So for me a couple things that I think that the Fed probably should have thought of differently. One is basically the asset purchases, QE. Those were really initially put in place to deal with financial market functioning, right? If you remember the spring of 2020, it's not clear that such emergency measures were necessary really even past the middle of 2020.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that institutions in general can be slow to pivot. And you see this, I think, in any kinds of bureaucratic structures. So once you've spent 10 years developing your models and your framework, you're going to have a hard time breaking from that framework. So I think that's just a natural consequence of what happens within institutions that the Fed could not adjust as quickly as maybe they should have.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“We saw in the post crisis era estimates of the short run natural rate of unemployment rise. And we all now think, we all look back at that and say, no, that was crazy, right? That never happened. And so we sort of took that same framework and applied it to this crisis. And we didn't raise our estimates of the short-term rate of natural unemployment. And maybe we should have, right? And so, you know, it's kind of a question, do you always get caught fighting the last war? And I think, again, I have no problem. It was the right thing to think of in the spring of 2020. That was our framework and that was a reasonable framework. It was kind of just a slow adjustment to maybe that framework's not quite the right way we should be thinking about the economy and the post-pandemic era.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“So I think we could argue that in the post-financial crisis era, the Fed did make an error, and I think, again, for the same reason, we became enamored with a pre-financial market sort of framework, a financial crisis sort of framework.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“I think the Fed did not basically adjust their models as quickly as the data would suggest that they should. I think that they became, although the Fed says that they think full employment is a moving target, they became very much attached to the pre-pandemic economy. We all liked the pre-pandemic economy. I think 2019 would have been, you know, we would have thought 2019 was a great year if we'd been able to enjoy it because 2020 came down on us so hard. So there was really good reason to look at that 2018-2019 period and think that's where we need to get back to. And I think the Fed just did not just held on to that vision for too long. And as a consequence, sort of missed the development of what I think are still substantial inflationary pressures. Even if, you know,”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Recession periods, it really started to say to me that there's a lot more pressure in this economy than I think the Fed at the point was thinking about and was probably the Fed at that point I think had estimates of where full employment was going to be that were optimistic relative to what I was seeing in the labor market so that sort of said to me look There's going to be a lot of pressure in this labor market. It's going to be put a lot of pressure in upward upward pressure on wages. That's going to be the kind of thing that can really sustain inflationary pressures over time. And I felt eventually that was something that was going to catch up to the Fed.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“I think the first thing is that even with that wave in the late 2021, early 2020. I think even at that point, we started to recognize that subsequent waves of the virus were going to have less and less of an economic impact. And so that became a critical sort of element of my thinking going forward is that we were going to continue to have COVID, that it was going to be more endemic than certainly zero COVID at that point was not really a possibility. And that we would learn to live around the pandemic. So that was one element. The other element that I just couldn't shake was how tight job markets were getting. And this really speaks to the perhaps finely balanced economy prior to the pandemic. When I saw how quickly job openings surged, the fairly slow response of labor supply, and I'd say the fairly slow response of labor supply is pretty typical that we see in”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“So forecasting is hard, and the underlying structure of the economy could shift. And so, you know, this is something that could hammer an economist no matter what their initial framework is. And so I try to be fairly humble in thinking about these kinds of economic developments, because I really do believe you have to be flexible to basically react in real time to what the data is telling you. And I don't know if there's really a failure of any one given sort of strand of economic thought or macroeconomic framework. It's more of what I see just a willingness to evolve from whatever your fixed position is as that incoming data arrives.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that's it. That's a great question. That would be the subject of a thousand PhD dissertations in the future. I don't know that I'm able to take a stand on that at this point. Really, this comes down to in some sense really what kind of framework you had going into the crisis or were adjusting that framework. I think when we started seeing the economy bounce back in the middle of 2020, it really started to strike me that there's a lot of underlying structural or there's a lot of underlying structural recovery going on here. And we probably don't need quite the amount of stimulus as we're putting into the system. But in some sense, that was a hunch, a feel for the data more than anything else.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“The fact that recovery did happen very quickly probably helped contribute to inflationary pressures when you take into account the additional stimulus that we added onto the system. In some ways it comes down to me for there's a question of was the original COVID shock like a big demand shock like the financial crisis in 2007-2009 era Or was it more like a snowstorm and you would expect a fairly rapid recovery after a snowstorm and that's that's kind of what we've seen and I do think that that the additional stimulus we put on top of that then helped contribute to to the inflationary pressures we see now”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“The rapid recovery of the labor market was certainly unexpected. And the Federal Reserve and the US government dumped enormous amounts of resources into the economy on the assumption that it would not recover very quickly. And it did. Had we known really that COVID, you know, the COVID shock in 2022 was going to be more like a snowstorm than a persistent source of demand loss of demand. I'm not sure that we would have dumped that much policy stimulus into it. We'd be in a situation where the labor market did recover quickly. It's very much true that going into the pandemic, we would not have expected labor demand to rebound quite as quickly as it did. And that was really our experience in the last couple of years.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Look forward into the future. I do think it still depends a lot about how much consumers are able to and willing to accept. And it looks right now that they have the capacity to continue to absorb price increases. And I suspect we'll continue to do so, although maybe not at a 6 or 7 or 8 percent annualized rate as we've been seeing.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“I get concerned when we try to say that things are either demand or supply related because I'm not sure that we can really tease out those factors as easily as we think we can. Demand and supplier, like two sides of a, let's like a pair of scissors, right? And so both are cutting the paper. So which blade is doing the job is hard to, in many cases, determine. I've thought that demand was a large factor here that if we look at factors like nominal spending power on the part of consumers, that they really were spending more in nominal terms and basically stretching the ability of the economy to produce those goods and services. So I've thought that the supply angle has been overplayed and the demand angle underplayed. So that's where I sit on this subject.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that's an excellent question. I think particularly with respect to the inflation story, that inflation trend, the pre-pandemic trend of 2% inflation we've seen for 25 years, that was presumably a very sticky trend. And there's good reason to think that you don't want to just sort of turn your back on a deeply established trend like that. Now, on the other hand, one idea that I play around with quite a bit is that”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Term because a lot of those predictions of persistently weak demand, persistently slow job growth, persistently low inflation near 2%, all of those predictions just did not work out as expected in the post-pandemic era.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it's the uncertainty. We had gone into the pandemic with a sense that we knew the basic economic framework that we were going to be working with for the foreseeable future. And that basic framework assumed that demand was really always and everywhere a problem in the sense of being too low. And we also thought that inflation was very, very sticky around 2%. And these were reasonable things to believe in the pre-pandemic period because that's the story that actually worked out well and seemed to be proved by the evidence and especially the sticky inflation part. We'd seen sticky inflation for 25 years around 2%. We went into the pandemic with really established consensus framework about how the economy worked. And the pandemic has really blown that apart, at least in the near”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, the never-ending expansion was going to get old there pretty soon from a Fed watching perspective, that's for sure. Of course, you didn't want it to end the way it ended, unfortunately.”
2022-02-14 · Odd Lots · Tim Duy on the Huge Challenge the Fed Now Has in 2022 · IDENTIFIED FROM THE TRANSCRIPT · source