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00:00You have expressed some reservations about this new policy of letting the economy run a little hot till we can average inflation because you've expressed concern that that could unmoored inflation expectations. Do you think that the Fed in particular Jay Powell over the last couple of weeks and with his address on Friday maybe put a little bit of those concerns to rest by emphasizing the fact that the Fed is going to stay focused on inflation. Somewhat but I think. I think the feds in a tough spot. That the danger that they face from this inflation surge. We have inflation on a six month basis higher than it's been since 1983. The danger is that that persists. Ron Kaplan was talking on Friday about the extent to which businesses were reporting that they expect these supply constraints to continue. But then beyond that getting embedded in inflation expectations and I think that's the real key risk that the Fed is running these days. So I was glad to see that Powell addressed that in his remarks on Friday. He's and he's done that elsewhere as well as trying to reassure the public that yes if inflation persists at a high level we have the tools to deal with that. But it's somewhat like a friend of mine likened it to you know a doctor telling you you have gangrene in your leg. And don't worry we have the tools to deal with it. But it's the tools are the amputation kit. And they include a big sore. So what we went through in the early 80s to get inflation down was exceptionally painful. And that's what motivated those of us who over time advocated more preemptive policy. The Fed's moved away from that in its strategy statement last year. The risk it runs is that that shift last year is sort of akin to going off Bretton Woods. And in that it gives people the license to believes that there's an entirely new regime in place now with regard to inflation in terms of tools. One of the papers presented on Friday at Jackson Hole suggested that our star the level of interest rates that would be neutral is much lower than it had been. So does the Fed really have tools. Can they raise rates and cut off inflation without sending the economy into recession. I think they very clearly can. And you know more to the point I think they can nudge up the public expected policy path. You know over the coming year and I expect you're going to have to do that to keep inflation expectations contained. So I think they have the tools to combat it. I mean it's they're blunt. We haven't used them in a long time. But yeah I think the Fed has the tools to do that. If a. Well let me put it this way. Can they go back to jaw. Jaw. To paraphrase Winston Churchill and Jawbone the economy into place or is it going to take action to get Wall Street's attention. Now I think I think actions have always spoken louder than words in this throughout the 70s. The Fed loudly proclaimed its opposition to inflation and its desire to have inflation be lower. It just didn't take the actions to back that up until Volcker in 1980 81 started letting interest rates rise and engineered the recession that it brought inflation expectations down. Jeff Lacker Tom Keene good morning to you. You mentioned the pre-emptive nature of a theory that Richmond is let on that I think of the late Marvin Goodfriend with a cause for concern over inflation the whole Shadow Open Market Committee. What we saw out of Carnegie Mellon as well. Where did the inflation is does get it wrong on your watch. So I think that the stability of inflation expectations coming out of the recession was a bit of a surprise. I mean a bit. They were a bit more strongly anchored than I and several others expected. So the upside risk to inflation didn't emerge. I'd point out at the same time that inflation doves were also also missed that they were afraid of dramatic sag and inflation jumped. Jeff this came up over the weekend and this is a critical question in defense of the inflation Easters. The idea that the reason we didn't see the inflation is we just remove the inflationary impulse over to an increased our asset allocation and an asset balance sheet inequities in real estate all the summer properties Michael McKee can't afford. Sorry about that Mike. Good to be with you Tom. So I think what people lost sight of the huge increase in the Fed's balance sheet is that the monetary liabilities who was pumping into the economy were being absorbed by a tremendously tremendously large demand for liquid assets by the banking system driven by the banks natural reaction to what happened in 2008 but also regulatory you know impetus provided for them to hold larger liquid buffers. And that means that demand for money is essentially flat at the interest rate on reserves. And we could increase the money supply a lot. Until we start forcing banks to hold more liquidity than they want and where we were a ways away from that. So the size of the balance sheet wasn't really doing much for the economy. On the flip side of the inflation debate Jeff is the employment picture and we're gonna get a better read on that perhaps on Friday if you were still on the Fed. What would you be looking for to determine just how much slack or how tight the labor market really is. It's a really good question. You know we we had all these debates about what maximum employment matter what that number was. It's really a long run and long horizon kind of thing. It's like after all the sectoral reallocation has occurred after all the matching that has to go on between people looking for another job. What kind of career is that going to be. I want a different occupation. I want to be in a restaurant anymore. And firms looking for where they're going to find someone with the skills that I need after that process plays out. Yeah maximum employment might be a lower unemployment rate. We have now but that takes time and maximum employment. In September of 2021 it's really close to where we are right now. We're really close to September 20 21 maximum employment. We can't we can't get maximum employment much up above where it's going to be in September. So I think that you have to keep in mind a dynamic process in which labor markets heal. Some recent research by Bob Hall and Marianna crudely CAC in that regard is painting a very different picture labor market. You think of the unemployment rate as shooting up in a recession coming down but you know it looks like it just comes down at the same pace every every expansion. Jeff you were very much in inflation Easter when you were on the board. And I'm wondering if you've seen what the current Fed seems to be arguing that inflation dynamics have changed. And there is as Jay Powell said on Friday a natural disinflation in the global economy. I'm not sure I buy it. What people have been increasing the weight they place on inflation expectations and inflation dynamics over the last couple of decades. I know you know the early 2000s people thought it was all sort of a backward looking process. The important thing to remember and I think people neglect about inflation expectations people talk about it as if it's some exaggerates external force of nature or some collective psychological whim or something. It's really expectations about what the Fed is going to do in the near future. And so when you look at inflation expectations that's really the credibility of the Fed and that can change. And the process by which that shifts and changes over time is is not one that's deeply deeply understood in the economics profession.

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Inflation Putting Fed in a Tough Spot, Lacker Says

Former Federal Reserve Bank of Richmond President Jeffrey Lacker says he's concerned the Fed is letting inflation get too high. He speaks with Bloomberg's Mike McKee, Tom Keene and Lisa Abramowicz on "Bloomberg Surveillance." (Source: Bloomberg)

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