Adam Posen Thinks Things Could Get Very 'Messy' for the Fed

Jackson Hole and Central Banking

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1:31Bloomberg Audio Studios. Podcasts. Radio. News. Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Allaway. Tracy, another Jackson Hole episode. You know, I think like with central banking and some of these topics, people are pretty polite.

2:02You know, it's like sometimes you talk to people, it's a little bit hard to know like what they're really thinking about all these topics, what they feel. It's hard to, sometimes I do perceive a certain lack of, I don't want to be, candor. Let's say people are very diplomatic. People are very diplomatic. Thank you for finding the word. That's a diplomatic answer to the point that you're making about diplomacy at an official Fed function. I'm very diplomatic, and I'm pro-diplomacy, but sometimes it's nice to just check in with like someone just like, all right, let's give it to us straight.

2:33I'm waiting for you to describe our next guest. No, I'm saying, all right, I'm just going to jump right into it. No, a guest who I believe when we talk to him, I feel like here's someone who's giving it to us straight, who's not as concerned perhaps with like, you know, being overly diplomatic. Someone who's not afraid to utter the words fiscal dominance. Yeah, someone who's just afraid, someone who just tells it like it is. Anyway, very excited to say, here in Jackson Hole, back with the perfect guest, someone we've had on the podcast multiple times before, Peterson Institute President Adam Poston, also formerly a member of the Bank of England's Monetary Policy Committee.

3:08So, Adam, thank you so much for coming back on Odd Lots. After that intro, thank you so much. There's so much hype. You have to really like throw some fastballs. I don't know whether it's hype or warning. No, you have to throw some fastballs first. But what did you think of – this is the first interview we've done since the speech.

Grading the Fed Chair Speech

3:23Yeah.

Grading the Fed Chair Speech

3:24So what did you think of Sherman Warsh's speech? Yeah. I mean, even though – Okay, there we go. No, no, no, no. Get it closer. I mean, even though I knew that was the question that was coming. You know, if you were grading it, it's a B-minus speech. Okay. It's a B-minus speech by normal standards. Yeah. It's much more positive because of the situation we were in. He – the chair – well, you know, let's be blunt, as you said. The chair had created a huge amount of not just confusion but in central banking circles, in the sophisticated observers like you, about what he really thinks.

4:04And this was both short-term, does he want to raise rates, does he not want to raise rates, but also medium-long-term, what is behind all this task forces and the rhetoric. And then he, obviously, at the July press conference, totally messed things up. Now, to be fair, three of his four predecessors as chair had major stumbles in one of their early press conferences, Greenspan, Yellen, Powell. So, in a sense, if we are able six months from now to look back and say this was a pivot point, and so the stuff that Kevin, excuse me, the chair was saying for the first few months was just growing pains and then he got smacked by reality.

4:43Yeah. All good. And then this speech gets upgraded to a B-plus and we're all happy. And I think there are a number of people now who hope that's true with some confidence more than before because the big thing – and, Teresa and I talked briefly about this before coming on – is how different this was than last year. Because last year was all about the attacks on the Fed and the fears for the independents and the standing ovation for Jay Powell was his last thing, well, the last Jackson Hole as chair. And this year, I think, deliberately, the chair and the team wanted to make it much more normal and it passed much more normal.

5:21The second thing is, as a European central banker said to me at breakfast this morning, but I think it's widely shared sentiment. And for all the anti-forward guidance, he basically said up they have to hike. Now, as you know, and we talked about a few months ago, I've been urging them to hike for a while. I think inflation is real. So, again, I'm glad if they're making that call. But, yeah, at this point, they really guided. So, if – because if you read – there were four sections to the speech. And the fourth section, he basically does the litany of the reasons you would think inflation is not going to stay stable or it's going to persist and maybe go up from here, even if it goes down for a month or two for a while.

6:02And basically, the next sentence is, therefore, we have a tight new guise. Didn't say the next sentence. So, things could get really messy because if they don't hike, then people start saying, was that because of Trump? Was the chair out over his skis, meaning the head of the committee? If the chair is the head of the committee, it's better than being behind the committee, but it's still worrisome. Then the third thing is he did clean up some small but important things.

6:36So, like, he had talked for a while about what's the right target, we don't really know what inflation is, and yesterday he stated very clearly, core PCE 2%, that's the target. Similarly, he said something I think quite useful about he doesn't think wage inflation is a very good predictor of overall inflation, which is a perfectly reasonable position to take. And then later he said, I think financial conditions are important. I know you guys have talked a lot about this at the industry level.

7:07All of these were normal, sound, either mainstream or very defensible central bank things. And so, it would have been sort of, eh, except for the fact that we had these two months, three months of weird stuff. And so, it takes on more credibility. I don't want to go on too long, but two other points, if I may. So, the other two takeaways for me from the speech were, first, he does this whole second section, which is about his principles. And if I were him, I would have made this, and I was surprised, I would have made this a much narrower, much more practical speech.

7:47I basically would have cut that section. It was a long speech for someone who says they don't like forward guidance. Yeah, exactly. No, you're absolutely right, Tracy. I was like, people ask me ahead of time what I thought was going to happen. I thought he was going to compete with Jay Powell from like four years ago for the shortest possible speech. I thought he was just going to, you know, he didn't. So, I think that muddles his message, because some of the principle stuff, it raises more questions than answers. It's either a bromide or what does he really mean by that? And I don't think that was useful.

8:18But, you know, that's not a big deal. The big deal that I'm worried about is, and a lot of ex-Fed, ex-Central Bank people, academics are worried about, is he seems to be still, even through yesterday's speech, for all its improvements, trying to maximize his last-minute discretion. Yeah. So, this is the thing I noticed, because at the very end of the speech, he talks about, well, inflation has to be heading in the right direction and at the right speed. And I don't know what the right speed is.

8:48The right speed sounds very subjective to me. Absolutely. And right direction doesn't mean anything unless you're saying the target. I mean, without the speed, just to emphasize your point, without the speed, then we're back with what we had the last four years, which is inflation's above target. Well, we know what the direction should be. But if we don't declare a speed, we're going to bring it back to the target, it doesn't mean anything. So, yeah, I think it's really striking, because that, to me, is the most consistent thing through the stuff he said from his hearings, his confirmation hearings, his first two press conferences, his remarks at ECB-Cintra, and then yesterday.

9:28He's sort of reserving the right to make up his mind at the last minute, before every meeting, without pre-committing what things he's looking at. He gave us a little bit of that. I mean, to his credit, he did say some things about which indicators he likes better than others, and that's good. And you don't want him to be inflexible. But it's really odd for somebody coming from the Hoover Institution, who's been seen as a conservative, who was mentored by the late John Taylor, but also just in a broader central banking context, everybody tries to situate themselves between what's called rules versus discretion.

10:06Is it like, I'm going to raise rates every time monetary growth goes up, or something like that, which generally is a bad idea if you're too strict. Or pure discretion, I'm going to, you know, I don't have to justify, I'm just going to make the right call every time. And that's basically Greenspan circa 1999. And Greenspan could get away with it, partly because he was very good, and partly because by that point he had such dominance over the committee. And partly it caused trouble for later, because then you had the weekend at Bernie's problem, which is if Greenspan, God forbid, drops dead, and then we obviously just lost him recently.

10:42But in 1999, I have the image in my head now. No, no, no. In 1999, you know, you were worried if then already somewhat old Alan Greenspan had a heart attack on the Fed's tennis court, all the credibility went away, because it was all about him. Oh, interesting. And this is why Ben Bernanke, Rick Mishkin, Thomas Laubach, and I pushed the inflation targeting idea. And Ben very consciously, when he was chair, pushed accountability, because he wanted it to be not just all about one person.

11:16And I think this, to me, is not talked about enough and is the most worrying thing about where Chair Warsh has gone.

The Role of the Fed Chair

11:23So this is exactly what my next question was going to be. You have been a central banker at the BOE, not necessarily the Fed, but you have insight into how these monetary policy-making committees actually work. What is the role of the Fed chair in its current form as you envision it? Is Warsh supposed to be trying to get everyone on his side and get them voting in his direction, or is he supposed to be, I don't know, synthesizing a common position from the committee? That's a really good question, Tracy. And in the Fed system, that's not specified.

11:57So, and it varies over time, partly because of the chairman, chair, excuse me, partly because of the chair, partly because of the political surroundings, partly because of the economy. But, for example, at the European Central Bank, it is, for all the attention deservedly President Lagarde gets, it is very much meant to be a consensus-driven organization and really try to get as many people on board as possible. And that's partly because they're representing nations, not districts within one nation.

12:29At the Bank of England, when I served, and still, and this is something Chair Warsh invokes now, invokes, I should say, is it's all about discussion, what Kevin calls friendly debate or whatever. The family fight. Yeah, that's what he says, you're right. And the Bank of England really prioritizes that. The Fed has generally, on average, given more power and deference to the chair, certainly basically since Volcker, so the last 45 years.

12:59It varies over time, but essentially there's always something. So if financial crisis, Ben Bernanke wanted, started running the committee trying to open it up more, more debate, but financial crisis came and you really wanted Ben making the decisions and there wasn't time. And then there were these crazy U.S. rules about you can't have more than four people in the room from the committee at one time without it becoming a public. Then you have to take notes, right? Then you have to take notes and whatever. And so, like, ended up, it would be the New York Fed president, Chair Bernanke, Kevin Warsh, and Don Cohn were the four people in the room.

13:35And that was the right call, given the situation. So anyway, this is part of the reason I worry about the discretion, because the ethic of the committee and the norm of the committee in the Fed system is you don't contradict the chair. You might dissent, but even there, as was pointed out by the former Fed Governor Larry Meyer a while back, there's sort of an informal rule. Only so many people dissent on the committee at any one meeting, and the chair never loses a vote.

14:08Even Volker, once it was clear he was going to lose a vote, he basically said, next meeting is my last meeting. Huh. That's super interesting.

Evaluating Inflation and Global Context

14:18Well, let's actually, so one of the comments Chairman Warsh said, he basically said, I don't know, 64, 65 months of above target inflation. Inflation, that's true. Yep. And he said, but he also said, and this is the Fed's fault. Yep. And so, you know, obviously, that means it's in large part, he claims his predecessor's fault. But it also occurs to me, you know, inflation has been above target around the world in many respects, and it's not just a U.S. problem. I'm curious, like, that comment, like, is it, seems kind of true?

14:51Like, is that fair? Is that correct? I think it's fair. I mean, I think what was unfair in the run-up to his appointment by President Trump and in some of the initial statements, there was a lot of, talk about diplomatic, not diplomatic. There was a lot of pretty nasty-sounding tone about the previous regime, and, you know, I'm going to reform, I'm going to clean house on my watch. It's okay, that was unnecessary, but I do think it is entirely justified to say Care Powell, with the deference and buy-in of the committee, basically started, was late to the game in hiking in 2022, was early, if not, in my view, profoundly mistaken to cut multiple times last year, and is behind the curve again.

15:42And the international comparison actually doesn't flatter the U.S. You have to do a little bit of careful things on the data. But basically, if you control for three things, which is, how dependent on imported energy are you? Okay. How, what was the inflation going into the last few years? So what do you have to clean up from the predecessor? And then, out of the Fed or any centralized control, how loose is your fiscal policy?

16:17When you look at that, the Fed is more of an outlier. So the ECB has kept inflation down. The Swiss National Bank has kept inflation relatively down. Bank of England's almost the same as the Fed. But additionally, this gets into the independent stuff, because part of the reason the U.S. has more inflation, in my view, and many people's view, is because Biden did do a fiscal blowout on coming into office that probably wasn't necessary.

16:48And then there's been no consolidation. And obviously, Trump, in his first year, did this long-term set of tax cuts. And so, but again, it's still, if you take Kevin's, what you quoted him, you know, it's ultimately up to the Fed. If you take that seriously, then all this fiscal laxity in discipline should be another reason to hike. Yeah, yeah. So anyway, much too long, but I think even a sober-temperate thing suggests, no, Powell did get it wrong.

17:21Now, it's not he got it horrendously wrong. It's not he got it wrong for the wrong reasons. But, you know, when you and I talked, the three of us talked about this last year, which is, and the year before, that at Jackson Hole, there was this drumbeat from the Fed staff and members, the labor markets could be really weak, the inflation is going down. And there were people like me or Michael Strain, AEI, and Diane Swank in KPMG, who were out there saying, we don't see this. Now, I'm not saying necessarily they had to listen to us and it didn't, but just to say they actually did get something wrong.

17:57There were people who were saying, no, the labor market is not going to collapse in the next two years. And they kept saying, yes, it will. So, yeah, they did get some things wrong.

Political Interference and Fed Independence

18:04What's the sort of bar for political interference with the Fed? Because, you know, it could be anything from just the president talking about how he thinks rates are artificially high. It could be maybe something a little bit different, like the fiscal dominance idea to the extent that the Fed now feels hamstrung in some way in terms of what it can do with rates. Again, you're right to raise it, Tracy. I mean, so the first thing to say is a certain amount of yelling at or scapegoating the Fed is part of the game.

18:38And, in fact, in previous presidencies, it kind of sometimes was healthy, right? So it's like, oh, God, Fed has to raise rates to deal with inflation. I don't want to be blamed for it. So I'm going to go out there and yell. But meanwhile, in the background, wink, wink, Fed, do your job. And that was under Volcker, under Greenspan, under Bernanke, under Yellen. And, I mean, that was always understood. So a certain amount of, not like President Trump tweeting the Fed chair is an enemy of the state, not using lawfare to go after Lisa Cook, Governor Cook, or now Governor Powell.

19:13I mean, that's outrageous and arguably criminal. But a certain amount of carping about the central bank, that's fine.

19:22Where the rubber hits the road is partly what you said, which is when does the government treasury secretary or president who's trying to sell U.S. bonds say, you have to help me sell U.S. bonds whether or not inflation's high. And in that case, what a central banker should do, a Fed president or a Fed governor should do, is say, I'm here to help you sell U.S. bonds and your successors sell U.S. bonds and your successors sell U.S. bonds.

19:53And that means I don't do cheating and manipulation now. I'm here to help you sell the bonds. You're preserving the long-term credibility of U.S. debt. And so you have to be willing to stand up to that. And that gets us into the potential really big situation now. But the second thing, and this is the part that was really unprecedented under Trump besides the individual illegal attacks on individual members, is they were, and this was very loud last year, they were threatening to take away the votes of some of the Reserve Bank presidents

20:31or quickly turn over the Reserve Bank presidents, not get rid of them and put in their own political appointees rather than having the staggered terms as intended. And there was, you know, talk about changing the Fed's mandate. And there was, and then the things about the Fed's budget. And so the big one, economically speaking, is the caving in in the face of fiscal pressure. But the almost as big and as a means to that one is the threats to politicize, turn over, fire,

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Consensus and the Family Fight

23:53It occurs to me, you're talking about this phrase, family fight, and I hadn't thought much about it, because it's a good-sounding phrase. It's like, great, we want our, we want, like, just, it feels good, right? It feels good. But he's used the phrase a bunch of times now, in both of his press conferences, I believe. And I'm curious now, like, just sort of, like, thinking about a few things that have been said. I asked, last year at this conference, I asked Chicago Fed President Austin Goolsbee,

24:24why are dissents rare at the Fed? And one of his answers is that Chairman Powell was good at building consensus. But now I'm sort of curious, like, was there a perception under the Powell years that he was too good at building consensus? Did members of the FOMC feel that actually that meeting room was not a real site for debate? And when Kevin Warsh says, we want the family fight, is he saying, no, we're, I'm okay with, unlike my predecessor,

24:56I'm actually okay if you don't agree with me. I think he's saying, I think Kevin Warsh is saying what you just said, Joe, that I am okay with more dissent and more debate. I don't believe him. Okay. But if you take it at face value, he's right. And that's what I meant. You think he's right? He's right that debate had gotten too little. Interesting. And it's healthy to have debate. I think, Powell, it's partly he was very good inside the building, but I think it was two other things. I think he smartly and justifiably, first under COVID, and then when the Fed was under such overt attack by Trump,

25:37saying, let's not dissent and create divisions in the committee casually. Let's make the bar very high. So, you know, if you dissent, I understand, but let's not show division because that just gives the attackers on the Fed, or in the case of COVID, that just gives the sense of panic, I think. And there is always this temptation. So, like, when I was on the Bank of England MPC, which was 2009 to 12, so I was there during the financial crisis. And there was a point at which the governor and the Bank of England had a much more live debate, publicly at least, than the Fed.

26:13And then Governor Mervyn King came at one point and said, look, quantitative easing is really controversial. We're going to take the vote. You'll vote however you want. But once we've done it, can we have a moratorium on people asking whether or not quantitative easing works or not for a while? And I totally supported that. I mean, again, it's an emergency. You don't want to just, oh, well, you know, according to Vixell, I'm not sure, you know, the usual central bank thing.

26:44I'm giving a talk in Glasgow and I just sort of wander off into monetary theory. So, I think not through bad motivations, but I think Powell ended up between the COVID panic and then the rallying solidarity and people not wanting to look like they were undermining the chairman while the Fed was under attack, you did end up getting much lower than usual dissents. And then what happens, which shouldn't but does happen, is it builds momentum. So, if you've gone 12 meetings, 15 meetings without anybody dissenting, the bar psychologically becomes higher for someone to dissent.

27:21So, again, I hope I'm wrong. I don't think Chair Warsh really means it. I hope he does. But taking it literally, yeah, we went through a period where there was too little dissent.

Communications Task Force and Market Signals

27:33So, you mentioned Mervyn King just then and King is heading the new task force on Fed communications. So, I'm curious whether you have any insights or perhaps informed guesses about what the problem is that Warsh slash King are now trying to solve. Well, I know well two of the three members of that committee. So, I worked with Governor King. He was governor and I knew him before that when I was at the Bank of England. And Peter Fisher, the former New York Fed and U.S. Treasury senior official, is on the board of directors of the Pearson Institute.

28:05So, just full disclosure. So, I've not talked to them directly about confidential things, but just disclosure. I think this is the committee that has the biggest chance of a surprise to being radical. I think people are very concentrated on the balance sheet committee. And I think actually they are likely to come out with much more sober, practical, smaller scale recommendations than people think they are.

28:38That's just my guess. Yeah. But knowing who's on that committee, Raghu Rajan, Jeremy Stein, Karen Dynan, who's also a colleague of mine. But I think the communications fund is going to surprise people because both Mervyn and Peter, and I'm only referring to their public statements, have gotten pretty radically skeptical about central bank communications in recent years. So, Mervyn King was actually the leader of the inflation targeting movement, long before we wrote our book.

29:08He's the one who, in 1992, when the British pound fell out of the exchange rate mechanism and there was basically a crisis, we need to have something to anchor in the UK. He's the one who leapt into action with a couple of key staffers. He was chief economist at the bank at the time and said, look, these little countries are trying inflation targeting, but we think it can work for us. And he did. And so he was the father or the parent of what used to be known as the fan charts that you would. I love the fan charts. Yeah. Well, I think I was the only one, but I really like that.

29:39No, no, no. There were a few of us scattered around, but it was definitely a niche product. And there are problems that are worse with fan charts, and the Bank of England has changed it. But basically, Mervyn was leading the effort, and we cited this hugely, Bernanke et al. cited this hugely in our book, that they were, again, back to the combination of accountability and transparency, that you were sending out a forecast. You were being much more explicit than central banks usually were about the forecast. You were with the fan charts, which are essentially colored spreads about how likely a given outcome would be.

30:14Here's what we centrally think is going to happen. Here's what may happen. You were trying to give the message this was probabilistic, that we're making our best guess, but it's probably going to air on the high side, and it's going to be somewhere around here. So anyway, it was very, very much about transparency, accountability, and more information is better, regular information is better, commitment to specific releases at specific times is better.

30:46So you have a track record, and the committee has to admit when it changes its mind or learn something. Anyway, in more recent years, since Governor King left the bank, retired, he's become quite loud in the spirit of some of the things Chair Warsh has been saying, that it's too much noise, central banks can't forecast, we're lousy at forecasting. Given that, we shouldn't be putting out all this information that's not really misleading, and Mervyn also is, from even before that, was very concerned about this idea of the markets getting too dependent on the information and the future plans of the central bank, and then not giving as much information back, and also having more moral hazard that they're not going to take the price and risk.

31:38This is the idea that yields are an important policy signal for central bankers, or they should be. They should be, and it should be a two-way street. It should be yields, and volatility around yields should be higher than it had been. This is their point of view, not mine. It should be higher than it had been, because that forces markets to take risk more seriously and price things better, and so you have less, not zero, but you have less chance of a bubble, and less inequality of things running out of them.

32:08And then at the same time, that should mean the pricing that the markets give you is more informative. Right. And Peter Fisher, who, after he was at Fed New York and Treasury, was head of Asia and other senior roles at BlackRock, he feels very strongly these two points as well, at least in what I know from his public statements. He's very skeptical about central banks' ability to forecast and very worried about central banks' certainty about central banks causing bubbles and indiscipline and then clouding market signals.

32:41So even though Chair Warsh in the speech here at Jackson Hole backed off a little bit of some of the more extreme statements of that, he admitted that he had this thing about a hall of mirrors image in the speech, which is a way of admitting the market isn't always right, and if the Fed chases the market noise, you may get a weird dynamic. And I was glad he said that much better than play the ball, not the referee, which was garbage.

33:11That was the previous message, was like, oh, market, you're the ball, like, off you go. Yeah, that was really bad. But anyway, no, I mean, of all the things that annoyed the central banking community, that may have been the most annoying.

33:24But anyway, so just to say, I think Chair Warsh's true beliefs and instincts, though, are much more in the, we can't get any forecasts right, market has much more information on a lot of things than we do. We have a moral hazard issue of not spoon-feeding the markets. So I think the communications committee is probably where we're going to get the biggest surprise. Yeah, I find myself, like, thinking, like, maybe all these things, various charts, dots, et cetera, like, served a real purpose, maybe opposed GFC, and maybe it's just a lot of noise right now.

Economists Joining AI Companies

34:02Since we're talking about this sort of, you know, monetary policy at the theoretical level and a lot of, which is great, but. Oh, yeah. And, you know, this, I'm just sort of, maybe sort of seg a little bit here, and I'm curious, you know, from Think Tank World, what do you think about so many social scientists, including a lot of economists, suddenly either leaving universities or leaving think tanks and joining one of two, two very big AI companies? And when you think about the sort of future of social scientists, not so much like, well, we use models, which I'm sure there's going to be tons of that, but just the sort of, depending on which side you're on, either vortex or brain drain of people of stature moving into these companies.

34:49What do you think? How does that make you feel? I mean, as someone whose main job is to hire, develop, and retain talent, I think about this a lot. And it is, as I think you applied, Joe, I mean, I think it's not unprecedented. So during the internet boom, when Amazon was first coming up and Google was first coming up, they hired economists. They were hiring them more to be useful, like Amazon's pricing model, useful in terms of internal production.

35:20Design and auction systems. Right. So like the very famous MIT microeconomist, Halvarian, became Google's first chief economist and brought with him and hired a bunch of really smart people. But they also were there to talk about policy and help explain why the technology was good and what kinds of regulations they wanted and didn't want. And that's normal. I mean, that's okay. But there was also a little bit of this sense, which we're seeing now, an order of magnitude higher. Oh, my God, I can make real money.

35:50Oh, my God, that's where the cool people are. Oh, my God, I can be part of changing the world. So it's very seductive. And we've seen this in other fields. When genetic engineering had a boom lit many decades ago, all these Nobel Prize winners and grad students would leave academic jobs and set up startups to, you know, college and end tech, things like that.

36:14Right now, I think it's challenging. It's challenging because the case that can be made, and I know I have colleagues I know who have gone in-house at some of these companies. The case that can be made that this is the most transformative technology of a century, and it has the potential to do enormous good for the world, is legit. It may be overhyped.

36:45It may take longer to get there. We may have to care more about how many people we displace and what happens on way. But the idea that that is a valid view and you want to be part of that, I think, is real. And so beyond the money and the sense of I want to be doing the cool stuff, which matter, because think tanks, you pay well compared to average American salaries, which you don't pay like those people.

37:12You know, I understand it. You can also go one step further, which is unlike, say, Google or Amazon when they were coming up, where there were policy issues. Actually, a lot of us didn't realize what all the policy issues were, and the economists who were hired, some of them worked on policy, but most of them were, like we said, working on sort of internal tools. Now, a lot of what the hiring, say, for example, Anthropic is doing is, by their own account, about trying to envision what the right policies are to make the transition for AI work.

37:51And at least among the economists I know who've gone there, that's a sincere belief. But it does make it more awkward, because it's one thing to say, oh, I work for Amazon, I came up with the pricing auction model, and that's why you get that. And people say, you're ripping me off, and you say, no, I'm not. But when it's like someone who's a world-class expert on the economics of innovation or of growth or whatever goes in and then starts saying, well, you know, they're going to create three times as many jobs as they destroy, and the singularity is near, and so you can't regulate it right now because we're on the cusp of something.

38:33They may sincerely believe it, but people understandably discount their views once they're in-house and getting money. And also, and I was talking about this, a very noted academic who has been pursued by all these places who turned it down not to go. I mean, zero. Well, and this is a person who's very techno-optimist, I mean, so it's not about that. But there's also just, you do inherently, these are still companies.

39:06I mean, you're becoming part of a hierarchy, you're losing your independent voice. What you choose to work on, you know, you may choose not to work on that, which you might have worked on because now you work for this company. So, again, is it outright corruption of the sort we're seeing in the Trump administration? No. But it is unsettling. And I think there's a role for this academic colleague of mine, the people at the Peterson Institute and like institutes, to, I hope, be willing to settle for the low six-figure salaries, which are still pretty darn good, and influence policy without going on staff.

39:44Just on the AI side of things, so at the moment, if you look at the economic impact, it's very much sort of short-term effects on prices and inflation and capital investment and everything else, you know, the impact on productivity, even jobs, is much further off into the future and very theoretical.

AI Impact on Labor and Productivity

40:03Do you see any evidence of an impact on the labor market side or productivity here and now? Much more indicative evidence of improvement in productivity, Tracy, than on effects on the labor market. Okay. So, speaking of colleagues of mine, Martin Trozempa and Jed Kolko are both top economists who work at Peterson and work on these issues. Anton Koronek is affiliated with Peterson, is on leave this year. He went to work at Anthropic this year.

40:33But anyway, if you look at their work, and in particular, I would cite the work of Jed Kolko, and he was chief economist at the U.S. Department of Commerce under Biden. He was at Indeed. Was it Indeed or ADP? Yeah, Indeed, I believe. Yeah. And, you know, so he's a real practical labor market economist. And he, and there are a number of others, there's another think tank called Economic Innovation Group. There are a bunch of them. And you're just not seeing it in the data. So, the number of hires, even of coders, you know, if you had to pick the two jobs where you most thought they're toast, would be long-haul truckers and coders, and lower-level coders.

41:13And we're just not seeing it. Job growth continues in those industries. I think there's been a lot of, yes, theory, but really important theory work done, not by my team, but by people like Eric Bjornolfson at Stanford, or Luis Garacano at London School of Economics, about why, those are just two examples, but they've done great work, about why we haven't seen the job displacement yet.

41:44And partly, it's a matter of time, as you indicated. Time keeps coming up. It's how fast things happen. That there is arguably a period in which it is efficient to have the human and the AI working together, especially as the AI is in sort of learning mode, and especially as the businesses, just like with the internet, you have the technology, and then you have to figure out how to reform your business to make use of it. So there's a period there, we don't know if it's one year, five years, it's probably less than 10 years, it's probably closer to five, but there's a period there where the businesses are changing, and the specialized applications are being created, and things like robotics are being integrated, and during that period, we probably don't lose many jobs.

42:31Because, again, long-haul truckers are not trying to make fun of them. I mean, they may be the ones, but, and so, Jorke Brynjolfsson has spoken about a J-curve, that it takes time for this to happen, and it's similar to the argument I made with you all about the effect of tariffs and migration last time I was on, that businesses, people have to make decisions and implement things, it takes time. Another argument, which Luis Garricano and his co-authors have made, is what they call messy jobs, which is the idea that, actually, again, you can try to come up with the sort of extreme case long-haul trucker job.

43:09But most, almost every job, and even arguably long-haul truckers, have a lot more specific knowledge and are embedded in a lot of relationships that there's much more complementarity and much more, I don't want to say uniqueness, but specialization than people appreciate. And so, just sort of doing a lot of these things that get published by consulting firms or international institutions, like, these are the most exposed sectors, these are the most exposed sectors, probably are misleading.

43:42And we know this from the past, that, again, in the Industrial Revolution in 19th century England, the analog to the long-haul truck driver was the skilled artisan who did weaving. And so, those people literally did get replaced by the automated weaving stuff. But, if you had done this kind of study before the Industrial Revolution, outside of that very narrow, they're real people, but that very narrow job description, the displacement was very different than you would have expected.

44:14Anyway, so, the job stuff, it's probably coming. If it is coming, it is showing up in the lack of hiring of younger people. So, yeah. And Chair Moore had a throwaway line in his speech yesterday, but it happens to be one I agree with, and again, we've talked about this previously, that a lot of the lack of hiring, I think, is overhang from the huge shifting around of people and redefining jobs after COVID and the re-employment.

44:45And so, you can't automatically say the lack of hiring is AI. I mean, it may be contributing, but there's other stuff. Productivity is different. So, there, I think there's a legitimate active debate. And it's not a debate ideologically or anything. It's because it's generally, it's hard. You've got to limit an amount of data, and you're trying to figure out what's going on. I think there's a legitimate debate about how much productivity growth we've got that's due to AI. Is it the real big money stuff yet? How soon?

45:15I'm at probably just this side of pessimistic on that in the sense that I think, going back to the jobs reshuffling after COVID, I don't think the AI productivity kicked in. The AI productivity boost to growth kicked in until very recently, last year and a half. But it is, that is, that is much more an open debate. Nobody except some really, really crazy techno-optimists who talk about staying in your lane, who are not economists.

45:48I think. You mean Joe? No, no, no, no, no. I would never say such a thing. He's a man for all seasons. Finally, someone says that. I'm very, I'm very, I'm very diplomatic. They, you know, I think the extreme calls about, you know, huge amounts of productivity growth, as my grandmother used to say, we should be so lucky. Yeah. But we ain't there yet. Yeah, I think, by the way, I find the messy jobs theory to be quite compelling.

46:21And by the way, the long-haul truckers would absolutely say, look, there's a lot more to this job. Oh, I agree. And include, you know, like all the things that they have to do with the warehouse. No, I didn't mean to. No, no, I know. But I think it, but like people think of that. It illustrates that point. It illustrates that point. Yes, exactly. Let me tell you what's actually involved. Right. Another one, you know, people point out, Adam Ozemeck has pointed out that people still get hired to play the piano at parties. Yeah, yeah. But, you know, as others would argue, well, the person responds to the crowd. They see what the mood is. These things that the player panel could not do, they could say like, oh, like maybe this crowd looks like it needs an uptempo thing.

46:56So I do think, I do think like the message, these jobs are much more probably complex. I'm glad to hear you say that. And again, I was using the truckers just because that's the example. No, no, I know. But I think it's a good thing. But I agree with you. And Adam Ozemeck, who's at EIG, is one of the other people I think is doing great work on this and comes down in this sort of it may come yet, but it hasn't happened yet. But I think the really important point you said about the messy jobs is like with the piano. So I was in a meeting, supposed to be off the record, I won't go into details, but a very big, big, big, big, big, big shot from the AI community, not an economist.

47:30There are no economist big shots. Big, big, from the AI community was talking and a pretty famous academic economist asked this person, well, you kept telling everyone there's going to be a job apocalypse, hasn't happened. Why do you think that is? Just open question. And among other things, this person said, the big, big, big, big shot said, well, you know, it turns out people really like dealing with humans and don't always want to deal with machines. And even among the not exactly emotional IQ high economist community, we're all kind of like, duh.

48:06You know, I mean, that's what you mean about the live piano player. I mean, I didn't need AI to have Spotify, I mean, current generation AI to have Spotify, you know, like figure out if I like Paul Simon and Billy Joel. And then I did. Yeah. Yeah. Yeah.

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GDP Measurement and Tech Supply Chains

50:28Since we're talking about some of these questions and measurement and limited data, I wanted to get your take on, I think you may have, I don't know if you saw it, there are these questions about, it came up with NVIDIA specifically, and whether some of the chips that they design, but which are manufactured elsewhere, largely Taiwan, etc., whether they're being adequately captured in data. And there was this report out, it said, oh, we should have added 0.3% to GDP, which is not that much in the sense that, like, oh, the big techno-optimists were right, etc.

51:00No, no, but it's real money. So that's what you think, it is real money. On the other hand, when I look at it, I say, well, the market certainly noticed that NVIDIA has been doing very well. The Fed doesn't target GDP, so it doesn't really imply anything about, oh, we would have done something different monetary policy-wise. Tell us what your thoughts on this discussion is. So, I mean, GDP, measuring how much income we get for how much production and how much labor, that's what GDP is meant to do, on a national basis.

51:31And it is much more science than art, but there are pieces of it where it's not very simple. And so there are multiple definitions that get, there's something called GDI, and then there's gross final demand, and there's these various things. And they're all meant to be a check on each other. And over time, they basically move together. So what you're saying, Joe, about this discussion of mismeasuring of, say, NVIDIA or the other top tech companies, again, doesn't really change the fundamental path.

52:07But going back to what you both raised, if we're trying to assess how much we've seen a big transformation in productivity, this matters. If this 0.3%, say, a year was overlooked and it is directly attributable to the AI sector, then that tells a different story about productivity. So it does matter.

52:29A colleague of mine I already mentioned, Martin Chorzempa at Peterson, is doing some work on this. Former Fed official at Peterson, Joe Gagnon, has also written about this. So there's, I mean, there are a lot of subtleties, which I don't even understand. But there are basically two issues. One is sometimes when companies that are based in the U.S., using U.S. technology, produce stuff abroad, the allocation of how much stuff is actually produced in the U.S. versus not, and therefore how, whether it's GDP versus GNP, what's imports, what's exports, gets messed up.

53:07And so with these very complicated supply chains, there is a issue of trying to figure out what stuff gets allocated to the domestic pile versus the import pile. This is the old value-add argument, right? Yeah, sort of. Again, I'm worried I'm going to screw up on nuance. So look on our website for a paper by Joe or a paper by Joe Gagnon or Martin Chorzempa or a tweet. I'm afraid I don't want it. But just essentially, there is a discussion over how much is domestic versus national.

53:40But as you said, Joe, in the end, the markets, you're either selling stuff or you're not. I mean, NVIDIA's bottom line actually doesn't change based on any of this. Right. And the bottom line – We all know they're making a ton of money regardless of the government. But also – Also, the people who are working at NVIDIA designing the chips in the U.S. are still getting paid and that's reflected. Absolutely. And all the money that comes into NVIDIA, some of it goes to the shareholders, some of it goes to investment, some of it goes to the workers. You know, so again, this is worth worrying about, but this is not a major distortion.

54:15The second thing, though, which is the more contentious part, is there are always in technological revolutions, there are recurrent statements that GDP or whatever economists are using are just not capturing the true value. Yeah. And usually the economists' response to that is some combination of, A, well, we're capturing the true market value. So if people are getting more out of it than what they're paying the markets, great, but the market value is what we're supposed to think about.

54:45Yeah. So that's one response. The second response is, oh, well, there are these various things like hedonic indexing where we try to adjust for quality. And this shows up more on the inflation side than the growth side, but that helps you figure out what's real growth and what's not. So let's look at this specific sector and try and fix that. So there is still a controversy about that. I mean, but this goes back, Tracy, to what you were saying about the timing and the productivity or the J-curve, right? So we already have GPT, Claude, whatever.

55:18I don't want to cite any particular brand name. We have the AI. And you or I can go in and type, get me the cheapest possible ticket to Jackson Hole, and I don't want to have to think about it, but don't seat me next to a baby. And that provides utils. Tracy, when she does it, and she says, don't seat me next to Joe. Don't seat me next to Joe. I thought it was don't seat me next to economists. Oh, we spend enough time together. We really need another four hours on a plane. No. Keep going. No, no, no, no.

55:48And so that's giving me utils. You know, it's saving me some time. It gets me a better experience. I don't get annoyed with the AA or United or Delta website because somebody else is dealing with it for me. Like, does that show up in GDP? No. So this is why we usually think the big productivity gains and the disinflation stuff comes further down the pipeline. It's when, further down the track, I should say, not the pipeline. When the businesses start transforming.

56:20So, like, it was really cool that Intel and Texas Instruments and whoever else was building chips in the 90s, you know, were following Moore's Law and all that. And that showed up a bit in GDP. But the gains really happened when McDonald's and Walmart and UPS and everybody transformed their businesses to take advantage of it. Joe, do you remember when Goldman Economist, I think it might even have been Hatsius. Yeah, they put out a note saying that productivity was being mismeasured because the graphics in the new Grand Theft Auto game, I can't remember what edition it was at that time, were so much better than the previous graphics.

56:55We should have them back on now that the new one's coming out. Because the new GTA 6 is coming out. Yeah, we should do that. All right. I have just one more question.

Inflation Outlook and Rate Hikes

57:02We could talk for hours. And unfortunately, we don't have that much time. But just in terms of the pure inflation outlook, the last time we had you on, it was right after you published a paper saying that you thought inflation was going to be 4% by the end of the year. I can't remember if you were looking at PCE or CPI. No, I was saying at that time, I was saying 4% on PCE and a little higher on CPI. Yeah, okay. Well, I mean, at least on CPI, we got to over 4% earlier in the year, and I think a lot of people were surprised by that direction of travel.

57:36What's your thinking now? I guess – thank you for citing that, Tracy. I guess what I was saying, and it was things I was saying and then a joint piece with Peter Orszag of Lazard. What we were saying was, going back to where we were with the criticisms of the Powell Fed that I think were legitimate. The U.S. labor market was much more resilient than they thought. Credit was much more available, or in the terms, the financial conditions were not as tight as they thought.

58:07Fiscal policy was a little looser than we thought. And the Fed, having not brought down inflation for 64 months or whatever it was then, 55 months, did have some momentum built up. And then additionally, one thing we talked about was, as I said, I think there was a J-curve in the impact of tariffs and anti-migration policies. Over time, it took time for it to kick in. But anyway, the big point was, whenever the next inflation shock comes, it's going to go worse.

58:39I had no idea that the President of the United States would bomb Iran and ignore the fact that disrupting the Straits of Hormones might have some inflationary effects beyond whatever else you think of it. But I knew there was going to be an inflation shock, and we were primed to have more. So the next couple of months, inflation may trickle down a tenth or two because of the energy market, whatever. But as Chair Warsh said, as many FOMC members have said, this is not good.

59:10You've got persistence. You've got persistent inflation in essentially the core measures that are services and not imported goods. Because you've got, you know, as the Chair cited in a speech, you've got three, six, 12 months where the moving average looks like it's going up. It's in the high threes rather than four, but it's going up. You know, so my view is the Fed is going to hike. If they don't hike in September, they're certainly going to hike in December.

59:40I expect if they hike in September, they're still going to hike in December. You know, and so six months from now, Fed funds will be 75 bps or 100 bps higher than it is now. And inflation will start coming down for reals, as the kids say.

59:57But until then, we're going to be in this three and a half to four and a half range with some upside risk. All right. Adam Posen, always great catching up with you, especially this beautiful location. Thank you so much for coming back on Outbox. Thank you for having me. I'm a big listener. Thank you so much. Thank you. Love to hear it.

Reflecting on Fed Legacy and AI Realities

1:00:26Tracy, I love chatting with Adam. It's so good. It's always really good. I'm really glad we made it happen. You know what's interesting? I'll be curious to see how Powell's legacy ages. Like, I think there's going to be, you know, as Kevin Wurst said, 64, 65 months of above target inflation. When you think back at the last several Fed shares, a lot of generally, like the one who people like really think that was a bad tenure was Arthur Burns. Right. Despite, and Bernanke has held out, like people think of him fondly, despite the fact that he presided over a financial crisis and several years of high unemployment.

1:01:05It doesn't seem like from a reputational perspective, high unemployment under your watch gets sort of penalized the same degree as high inflation. People really seem to hate inflation. You're right. Like, it's kind of skewed. Yeah, it clearly is. So, you know, between like the questions like, well, did the Fed gather this sense of momentum where people were not dissenting for maybe reasons that were sort of inevitable or structural, etc.? And you go over five years of above target inflation.

1:01:36I just think it'll be really interesting to see like how people are talking about Powell in the years ahead. It was also interesting to hear that there seems to be a sort of unspoken norm that you can only have a handful of dissents per meeting. The other thing I was thinking about, just on the messy jobs note, I was, you know, there is this thinking out there that, oh, well, for instance, contractors can get replaced because now you can just ask chat GPT how you're supposed to, I don't know, fix your toilet or something like that. But I was thinking, so my husband and I, we were doing a project where we were roofing an outdoor shed and we asked chat GPT how to do it.

1:02:13And we watched a couple of YouTube videos and it told us to use this one product, like to stick on the shingles and things. And then after we had started doing it, we realized that that product only worked in environments that were above 60 degrees Fahrenheit. And we were in New England and the bots and the YouTube videos were incapable of spotting that we were, in fact, in Connecticut versus Florida. So, you know, there's there's some nuance left for humans. Yeah, I think that's right. I feel strongly like for all the extraordinary things that the models can do, that there are just so many of these minor things that we don't even articulate about what human judgment looks like, that they're not there yet.

1:02:53They may yet get there. They may get there by the end of the year, but they're not quite there yet. No, I, but just like on the conversation, I do think it's interesting. You know, the term that I've been thinking about with the, the worst speech, it's, I found it to be hawk-ish, which is like, like with a dash between the hawk and the ish. As in, it was clearly like more like, yes, clear that the, there's a plan to fight and that there is going to be work to do to get inflation.

1:03:26Because he said the two things that were key, which is inflation is going in the wrong direction and policy has been insufficiently restricted. Which therefore the third thing that the silent part is therefore high grades, which he didn't say. Right. So like, that is hawk-ish. On the other hand, it was not hawk-ish in the sense that we are now about to embark on an aggressive, it was not Apollo 2022, where it's just, we're going to get inflation down and I'll see you next year. Well, it also begs the question of, okay, you could have said the exact same things at the July meeting.

1:03:58Yeah. And yet he opted not to hike because he said he wanted to see more information, but more information is always coming out. And also in this environment, it feels like more shocks are also constantly happening. And so, you know, you have to wonder what the threshold actually is. Yeah. Well, anyway, I'm glad, big year, much to think about. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart.

1:04:29Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more Odd Lots content, you should check out our daily newsletter. You can find that at Bloomberg.com forward slash Odd Lots. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash Odd Lots. And if you enjoyed this conversation, then please leave a comment or like the video or better yet, subscribe. Thanks for watching and listening.

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