Jared Bernstein on Inflation, The Federal Reserve

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Bloomberg Apr 28 04:19

Jared Bernstein, Chair of the Council of Economic Advisers, breaks down the recent data showing softer growth and hotter inflation, and if there should be any concerns over consumer sentiments. He states that the economy is still very strong and shares his thoughts on how he sees inflation coming down as the Federal Reserve is no longer hiking interest rates. Jared Bernstein speaks with Kailey Leinz and Joe Mathieu on Bloomberg's "Balance of Power."

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Transcript

  • 00:00 What can you tell them about the degree of concern
  • 00:02 they should have?
  • 00:06 Well, first of all, consumers should have whatever degree of concern they have.
  • 00:10 We're not in the business of telling people how they should feel about the economy.
  • 00:13 It is true that the Michigan sentiment indicator is up 25% since November.
  • 00:20 We've seen increases interestingly among Democrats, independents, Republicans, and that's been been good to see.
  • 00:26 And I think it's tracked some of the improvements
  • 00:29 that we saw in inflation, especially the disinflation in the
  • 00:33 latter half of last year.
  • 00:34 Now look, inflation is still down 60%
  • 00:37 from its peak.
  • 00:38 It was nice to hit the
  • 00:39 expectations number for the
  • 00:42 PC both headline and core
  • 00:44 this morning.
  • 00:45 And in terms of the GDP growth, the 3% year over year,
  • 00:48 it is true that there's some noisy sectors there, inventories.
  • 00:51 This is another one along with net exports.
  • 00:53 But as long as real consumer spending fueled by the tight job market rising real wages
  • 00:58 continues to help
  • 01:00 support consumers in their in their spending and their incomes and their rising disposable incomes even after inflation,
  • 01:07 I think that's a good sign for consumers and probably behind that improvement that we've seen over the longer term sentiment indices.
  • 01:14 Well, take us under the hood for a minute here Jared.
  • 01:17 It's great to have you back from the North Lawn.
  • 01:19 By the way,
  • 01:21 the markets had a bit of a freak out yesterday and we saw some relief today.
  • 01:25 But the narrative yesterday
  • 01:27 was that we've plateaued that this this train's running too hot and inflation
  • 01:32 is just going to keep on steaming
  • 01:34 ahead here.
  • 01:35 Forget interest rate cuts for the rest of the year.
  • 01:37 And that part may not
  • 01:39 have changed.
  • 01:40 But you made an interesting point here.
  • 01:42 When you start looking at our our trade imbalance, net
  • 01:46 imports and exports
  • 01:48 and some of the other noise that that created the headline,
  • 01:52 I wonder how you frame the data from yesterday and where we really are here in the fight against inflation.
  • 01:57 I think it's very important to kind of look at as many kind of core or underlying trend indicators as you can.
  • 02:04 Obviously core inflation fulfills that role.
  • 02:06 That's why the Fed elevates it so much.
  • 02:08 But
  • 02:09 if you look at
  • 02:11 the domestic demand measure, PDFP, which you know is
  • 02:15 an acronym for
  • 02:16 all it means is real consumer spending and real business investment.
  • 02:19 Now together those are more than 80% of nominal GDP, but you can think of that as kind of a core GDP.
  • 02:25 It's actually a fact that that measure though combining those two real values
  • 02:29 predicts where GDP is going better than GDP itself and that that was up 3.1% in the quarter.
  • 02:36 We have a blog on that by the way on the CEA blog this morning.
  • 02:39 So check it out, a lot of nice graphics on this point.
  • 02:42 So look, I think underlying the economy is still as strong as ever.
  • 02:46 The job market continues to put out great numbers.
  • 02:49 I don't know if you noticed the
  • 02:50 initial claims that got a little bit buried on Thursday.
  • 02:52 I think it was 207,000.
  • 02:54 I mean that is a really solid job market number
  • 02:58 when it comes to inflation.
  • 02:59 I think the question there we should get into it if if you want, which is,
  • 03:04 is, is the are are the forces that helped with the disinflation in the second-half of this year,
  • 03:10 are they just on a break or are they gone?
  • 03:12 And obviously,
  • 03:13 we we, we've argued that they are
  • 03:16 that, that they're still there and that we expect inflation to continue a bumpy path
  • 03:22 down towards target.
  • 03:24 Well, Mr.
  • 03:25 Chairman, yeah, we do want to talk more about inflation with you because as you, as you say, there's this question as to whether or not progress is going to continue.
  • 03:33 And I wonder to what degree you assign progress
  • 03:36 on the fact that we do have tighter monetary policy right now that the Fed embarked.
  • 03:40 And I know you won't comment directly on that policy itself, but that we have seen things tighten substantially in a very short period of time.
  • 03:47 And we did see inflation come down.
  • 03:49 We're no longer actively tightening the feds, not talking about hiking rates further.
  • 03:54 So if that doesn't happen, how confident are you that the rest of the way
  • 03:58 of the inflation progress will actually be made?
  • 04:02 Well, look, there's an old kind of rule of thumb that says as
  • 04:06 as inflation comes down
  • 04:08 the real interest rate, if you hold the
  • 04:11 Fed policy constant, the real interest rate does get tighter.
  • 04:13 And we've seen
  • 04:15 the real interest rate come up
  • 04:18 significantly over this.
  • 04:19 So I think you can't just
  • 04:21 look at steady as she goes without taking into account some of the moving variables
  • 04:25 when it comes to the housing market, which is where of course
  • 04:28 Fed policy always bites first.
  • 04:30 I mean there is a really
  • 04:32 remarkable kind of a gap between the effective mortgage rate which is the average of all the outstanding mortgages, it's in the three to 4% range
  • 04:40 and the mortgage rate you know that's 7% if you go out and get a new mortgage
  • 04:44 that's the lock in effect right there that that spread that's a really important kind of overlook spread.
  • 04:49 And so I think Fed policy is very much
  • 04:52 again I won't talk about the granular policy, but I think it's
  • 04:55 it's incorrect to conclude that it isn't having you know an effect or even much an effect on the.
  • 05:00 Economy.
  • 05:00 Now I understand the idea that this is, this is another way of saying the neutral interest rate must be higher because you know we're posting some great numbers with a a relatively high feds fund rate that's a
  • 05:10 a complicated and
  • 05:12 that's one of those conversations that involves invisible variables.
  • 05:15 So that's
  • 05:15 that's always tricky to talk about.
  • 05:17 But I do think there's definitely some bite from interest rates.
  • 05:21 Jared, there's reporting today
  • 05:23 that some of Donald Trump's allies are suggesting to him that he restructure the Federal Reserve and in fact if
  • 05:30 we're elected again
  • 05:32 would make the commander in chief, would make the president actually involved in setting interest rate decisions and Fed policy subject essentially to White House approval.
  • 05:42 You tend to
  • 05:43 bend yourself into a pretzel to not comment on the Fed, which I realize it's kind of the opposite world that you're living in right now.
  • 05:49 But I wonder, I just wonder, is the is that
  • 05:52 actually something that the president, whether it's yours or any other could do?
  • 05:56 Watch me try to thread a needle here.
  • 05:58 So look,
  • 05:59 you've just
  • 06:00 you've just raised two issues that
  • 06:03 I can't talk about.
  • 06:03 One is Federal Reserve monetary policy.
  • 06:06 The other is, you know, politics.
  • 06:07 But
  • 06:08 I'm not going to
  • 06:09 stay silent on this because I think it's so important.
  • 06:12 Let me say the following
  • 06:14 I am AI, am a
  • 06:15 I I, I am a very
  • 06:17 active reader
  • 06:19 of the history of monetary policy,
  • 06:21 and I can spend a long time talking to you
  • 06:25 about economies that have been brought to their knees
  • 06:28 when the independence of the central bank has been compromised.
  • 06:32 That's one of the main reasons why this president takes the stance that he does and follows it assiduously.
  • 06:38 And it's one,
  • 06:40 it's a history that people should think about when evaluating the question you just asked me.
  • 06:44 Let me just leave that there.