So, Larry, welcome back.
It's been a very consequential week. We, of course, had the Fed chair giving
a news conference with the decision. We had ECI data and then we had the jobs
numbers at the end. What do you make of it all?
Well, look, there's been a lot of movement, but I don't know that we're in
a fundamentally different place than we were at the beginning of the week.
We have been realizing now for several months that disinflation is not on the
secure path that the Fed had hoped it would be a few months ago.
That's why the market has moved to go from six cuts this year to about one cut
this year. And that has been a broadly appropriate
move on the part of the market. And it was a blunder, frankly, of the
Fed to be as confident as it was about the prospect of disinflation.
If you add up this week's numbers, what did you get?
You got an ECI that was disturbing on the high side, suggesting that wage
inflation wasn't coming down, that service sector inflation wasn't likely
to be coming down in the way people hoped.
You got a housing numbers suggesting more housing inflation than many people
had been expecting in the presence of 7% mortgages.
And then you got a relatively soft number this morning and some
corroborative evidence for that that reminded
everybody that the economy may well not be on fire, that inflation may not
accelerate. So I think you're at the end of it all
about where you were at the beginning of the week with a sense that the most
likely thing is no cut or a little bit of cutting this year, that there's some
risk that as sometimes happens, the economy will slide off suddenly.
But probably greater than that risk is the no landing kind of scenario where
inflation remains robust. So I think everybody's going to have to
be watching all this data very closely. And ironically, the more we learn, it's
not really true that the more we know in terms of the uncertainties about the
economy at this point. So I suspect that Chair Powell would
agree with you. We need more data.
He likes to wait for data. Is the data dependent, as they say?
At the same time, what I took away, at least from his news conference this
week, was a little bit different from the no landing possibility.
It was sort of we're on the right course.
It's just going to take us longer to get there.
We are restrictive in what we're doing and we will get there and we don't need
to consider hikes. Is that a fair interpretation of what he
said? And if so, is that where he should be?
I think he's much more confident the policy is restrictive than is warranted
in light of the various factors we've talked about pushing up the neutral
interest rate in light of good reasons to think that spending may be less
interest sensitive than had previously been supposed, because, for example,
higher interest rates, with all the government's short term debt, mean more
income for people. I think that the chair is making a
mistake if he is confident that policy is meaningfully restrictive.
Right. Right now.
So, yeah, I have never said that. I expect the next move to be a hike.
I just think there's more of a possibility that that's going to be
necessary. Then I think is being the view at the
Fed and to some extent has been the view in the markets.
But I think you're characterizing the chair's attitude.
Right. I think if you look at the Fed,
their tendency going back quite far, most notably in 2021, has been to take
strong views when the data run against those strong views to retreat less
rapidly than they should of from the strong views that they have taken.
And I think we're seeing another example of that.
On the question of whether monetary policy is significantly restrictive, we
don't know. It could turn out to be, but we don't
have a. Basis for confidence that it is.
So, Larry, besides the data, the wealth of data that came in on big topic in the
news this week was the Japanese yen. And what's going on exactly with the
yen, with the government there is intervening or not intervening to sort
of support the yen went up to 160, actually.
You have some experience with intervention and currencies.
Give us where you think we are right now.
Of course, this is related to the Fed because part of the issue is if the Fed
stays higher for longer, it supports the strength of the US dollar, given the
massive size of the capital markets. I think the evidence is reasonably clear
that intervention doesn't work even in the scales that the Japanese engaged in.
It's just overwhelmed by the broad magnitude of private sector capital
flows. That said, nations tend to intervene
when currencies have gotten very far from normal levels and when they've
gotten very far from normal levels, they sometimes bounce back.
So I wouldn't want to confidently presume that the yen will devalue
further from here. It could go either way.
But even if the yen does have appreciate, I'm going to attribute that
much more to snapback, then I'm going to attribute it to the efficacy of
intervention. But I think this points up an important
issue, which is that the dollar is extremely strong right now.
That's been a factor that's contributed to our relatively favorable inflation
performance. Larry, I'm sad to say that the disputes
on college campuses growing out of the Israeli Gaza situation have continued.
Some ways have gotten worse. Actually, this week we saw police going
in various places here in New York and Columbia, but across the country.
You've been outspoken in the past on this issue as a former college president
yourself at Harvard and is now a scholar at Harvard.
What do you think is going on? And more important, perhaps, what should
the colleges be doing? What should the leadership be doing
right now? This is very depressing and worrisome to
me. As I've said on your show before, David.
I think the United States is in the most dangerous geopolitical moment we've been
in probably two generations. Given what's happening in China, Russia,
Iran, North Korea and so forth. And it seems to me that anybody sitting
in one of those countries has to be taking great encouragement from the
spectacle that is being made by our young future elites on so many of our
leading college campuses, and even more by the craven responses that are
typifying university leaderships. I have not been as appalled by Harvard
ever as I am by the fact that a keffiyeh has rested over the John Harvard statue
and a Palestinian flag has been placed in the hand of John Harvard, that iconic
statue on the Harvard campus. And you can debate whether
administrators should be sending in police.
And I think that should always be a last resort.
But they can't keep John Harvard unadorned with Hamas supporting symbols.
That just is appalling to me.
I don't think there's any question that there's a double standard throughout the
Ivy League and elite higher education on anti-Semitism and other forms of
prejudice. The lawsuits are largely correct in
making that suggestion. And I think this is a failure of a
fundamental part of education, the imbuing people with an ability to
contemplate serious moral issues in serious ways.
There is idealism among some of those protesting, though some of them are
being driven by outside agitation and outside funding.
And I respect the idealism of those who live by a theory of civil disobedience
and are prepared for their cause to accept punishment.
But when I see spectacles like the Law Review of Columbia University demanding
that exams be cancelled or grading be stopped this year because of what
happened on that campus, I think that bespeaks a kind of decadence that causes
me to be very worried about the future of our universities and about the
future, therefore, of our country. I wish we could find ways of getting
things back on track.
