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00:00You're just out at Washington University with all of the heritage of Murray Weidenbaum and all the optimism of Washington University and growth. Can you be optimistic about the American economic experiment at this time. It depends which one but the current one when we all thinking about it. So how are we going to basically decrease inflation and get back to it to a lower level that I'm not as optimistic as most people. I still think it's going to be very tough. I think inflation has a lot of momentum. I think wage cause is this a very tight labor market. Wage growth these days while the Fed is going to have a hard time slowing down the machine and it has to admit it has to stall the machine or not. We don't want a recession. But you know there's this term called Gulf Recession. I think that this will have to come with some increase in unemployment and maybe some increase in rates beyond what is currently priced in. With all of your work and particularly with a fire powered M.I.T. in the 70s you lived the dismal 70s in the debate over trench entrenched inflation. You ever chart at Peterson Institute of the seven or eight year battle to extract ourselves from 1975. Is that our future out to 2030. No it's the past. It's not the future but it's a warning. You know basically what happened is that the Fed just delayed doing what it had to do. And Paul Volcker came very late in the game and just wanted it. But you had to increase rates by the first 100 basis points to actually get to where he wanted. We're not going to go without the Fed is much smarter. Inflation expectations are not as bad. But you know the hope that we can do all this by having rates going to 2.5 or even 3 I think is a hope. No not in my my book a forecast. The hope is underscored by the mystery of some of the tools that the Fed is using. And I'm thinking most importantly of the Federal Reserve's balance sheet possibly reducing it by one point one trillion dollars over a year. How much do we understand how this reduces inflation. Well you know it's likely to make for long rates a bit higher than they would otherwise be. So to the extent that lower rates I think activity that's going to basically slow down again the machine. And that's the way you reduce inflation. It's basically about making the labor market less time than it is now. How exactly how it works. I think when it comes to the policy rate I think we have some understanding of how it affects the economy when it comes to QE or to a T now. I think we might we know much less. And if I were the Fed I would denounce some past but not feel that I'm committed to it. If it turns out to be the strong dollar weaker than expected do you think we're heading into a period of time where inflation is structurally higher than it has been over the previous few decades because of globalization and because of some of the shifts that we've seen there were accelerated during the pandemic. No I don't think so. I don't think there's any clues link between productivity growth and globalization or any of these structural elements. And the rate of inflation that the economy has. The rate of inflation can be anything. You just have to to have it flat. You basically have to operate the economy at full employment. But hotter than that. No colder than that. But you can have any rate of inflation you want. Olivier you have lived the Vogue's in the religions of the moment. You and I remember where the world stopped. I believe it was on a Thursday afternoon 3:00 p.m. and we'd all count em one em two and three. There's been any number of other religions of economics. What's the religion right now that we need to be aware of that we need to fear. Well I was never kind of fear and want him to interfere with a Jihye Lee or wishful Anna Edwards. It was a religion and not not not not science. I think you know the way to think about good policy works is to have to look at the yield curve. And some of the economic activity depends on the short end of the curve. Some of economic activity depends on the long end in mortgage rates. And basically the higher the yield curve the more tightening days. I think that you know if I had to choose one object as opposed to say I'm want to do whatever I would say just look at the yield curve. And the yield curve I think is telling us rates are going to go up for a while then maybe they'll come down a bit at least. Adjusted for inflation. And I think that's you know that's a tool that the Fed has in the old days. It only played the short end now in place all the way through the yield curve. But that's the object I think we have to look at. What's the tool of real yields. Olivier and I talk about this as the real yields. The inflation adjusted yield on 10 year treasuries moves the highest the least negative I should say going back to March of 2020. Yes. I mean you have to realize that we're still in an era of a very very low bail rate and the short end of a yield curve. Bill rates are very large negative and the longer and less negative than they used to think they are getting closer to zero. I think that's what's needed to get the economy going in the long run. We don't actually know what the long run equilibrium rate if you want to call it this way is but it's probably around zero at this point. So if we were you know if we are cruising along with no more inflation than Target then I would say zero is probably the right number. But we have Jason Kelly before we get to that. We have to get inflation down. So we have to go above zero in terms of real rates.

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Cooling Inflation Will Be 'Very Tough' for Fed, Blanchard Says

Olivier Blanchard, former International Monetary Fund chief economist, says it will "be very, very tough" for the Federal Reserve to slow inflation in the U.S. He speaks on "Bloomberg Surveillance." (Source: Bloomberg)

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