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

Did you ever notice how you spend hours shopping online? Only to pause a checkout because you wonder if you trusted enough to hit by now. Agentic commerce is testing that moment more than ever. That's where PayPal comes in. With 25 years of checkouts, 400 million consumer accounts globally, and the benefit of fraud protection. So no matter where a purchase starts, it ends with trust. Build for payments, growth, and agentic. PayPal open. Build for all business. Visit PayPalopen.com. Some people treat ChachiPT like some kind of smart search engine. And some use it to get work done. ChachiPT work is a new way of working in ChachiPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChachiPT to work on your most ambitious ideas and projects. Get started at chachiPT.com by selecting work mode, available on plus and pro plans. Healthcare doesn't always work great. If you've ever waited on a refill or couldn't schedule an appointment, you get it. That's the kind of stuff Optum is changing. They're using data and technology to integrate patient care, pharmacy, and everything else. So healthcare is connected, not complicated. What's that look like? Cheaper prescriptions that are easier to get and care that looks at the whole person. How you need it. Optum is helping make healthcare work as one for everyone. Learn more at business.optum.com. (upbeat music) - Hello and welcome to another episode of the Avalot's podcast. I'm Joe Lysenthal. - And I'm Chachi Alley. - Chachi, another Jackson Hole. Another Jackson Hole, another Jackson Hole episode. You know, I think like with central banking and some of these topics, people are pretty polite. You 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 a candor. - Let's say people are very diplomatic. - People are very diplomat. Thank you for finding the word. - That's a diplomatic answer to the point that you're making about diplomacy at an official federal government. - It's very diplomatic and then pro diplomacy. But sometimes it's nice to just check in with like, someone just like, all right, let's give it, let's give it to us straight. - I'm waiting for you to describe our next guest. - No, I'm saying, again, 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 we're having with like, you know, being overly diplomatic. - Someone who's not afraid to utter the word's 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 Posin, also formerly a member of the Bank of England's Monetary Policy Committee. So Adam, thank you so much for coming back on AdLots. - After that in trail, thank you so much. - There's so much hype yet, I have to really like throw some fastballs. - I don't know what a type of warning. - No, it's a throw some fastballs first. But what do you think of a, this is the first interview we've done since the speech. - Yeah. - So what do you think of a Sherman Worsher speech? - Yeah, I mean, even though-- - There we go. - No, no, no, no, even though I knew that was the question, because it 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, 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. And this was both short-term, does he want to raise rates? Does he want to raise rates? But also medium-long term, what is behind all this task forces in the rhetoric? And then he obviously at the July press conference totally messed things up. Now to be fair, three of his four predecessors, his 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 grown pains and then he got smacked by reality. - Yeah. - All good. 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 Tracey 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 fears for the independence and the standing ovation for Jay Powell was his last thing. Well, last Jackson Hole is the 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. The second thing is, as a European central banker said to me, it's breakfast this morning, but I think it's widely shared sentiment. For all the anti-forward guidance, he basically set 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's 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, you basically does the litany of the reason you would think inflation is not gonna stay stable or it's gonna persist and maybe go up from here, even if it goes down for a month or two for a while. And basically, the next sentence is, therefore we have a date and you guys 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, 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, if it's to worry some, then the third thing is, he did clean up some small but important things. So he talked for a while about what's the right target. We don't really know what inflation is. And yesterday, he stated very clearly, court PC, 2%, that's the target. Similarly, he said something I think quite useful about, he doesn't think wage inflation is 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. All of these were normal sound, either mainstream or very defensible central bank things. And so that would have been sort of, 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 from 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. I was able to cut that section. It was a long speech for someone who says they don't like forward guidance. Exactly, you know, you're absolutely right, Tracy. I was like, people asked 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 models his message, because some of the principal 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. But you know, that's not a big deal. The big deal that I'm worried about is, and a lot of X-Fed, X-Central Bank people, economics 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. The 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 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 Centra, and then yesterday, is he'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 likes better than others. And that's good. And you don't want them 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. Is it like, I'm going to raise rates every time mandatory 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 had caused trouble for later, because then you had the weekend at Bernie's problem, which is if Greenspan, God forbid, drops dead, and we obviously just lost him recently, but in 1999. I have the image in my head now. 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. And this is why Ben Bernanke, Rick Michigan, Thomas Labuck, 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. And I think this to me is not talked about enough and it's the worst, most worrying thing about where chairworship's gone. So 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 worst 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 the in the Fed system, that's not specified. So, and it varies over time, partly because of the chairman, chair, excuse me, partly because of the chair, partly because of the political surround, these particles of the economy. But, for example, at the European Central Bank, it is for all the attention, deservedly, President Lugar 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 part because they're representing nations, not districts within one nation. At the Bank of England, when I served, and still, and this is something chairworship folks now, invokes, I should say, is it's all about discussion. What Kevin calls friendly debate or whatever. Family fire. 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 difference to the chair. Certainly, basically, since Fulker. So, the last 45 years, it varies over time, but essentially, there's always something. So, if financial crisis Ben Bernanke 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 US rules about, you can't have more than four people in the room from the committee at one time without it becoming a public big notes, right? 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. And 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 in 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, while back, there's sort of an informal rule, only so many people dissent on the committee at anyone meeting, and the chair never loses a vote. Even Wulker, once it was clear he was going to lose a vote, he basically said, "Next meeting is my last meeting." That's super interesting. Well, let's actually, so one of the comments, Chairman Warsh said, he basically said, I don't know, 64 or 65 months of above target inflation. That's true. And he said, and then he, but it also said, and this is the Fed's fault. And so, you know, obviously, that means it's in large part. He claims his predecessors fault. But it also occurs to me, you know, inflation has been above target of round the world in many respects, and it's not just the US problem. I'm curious, like, that comment, like, is it, seems kind of true? Like, 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 then 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 his on my watch, it's okay. That was unnecessary. But I do think it is entirely justified to say, um, Care Powell, with the deference and buy-in of the committee, basically start, 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. And the international comparison actually doesn't flatter the US. 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 you have to clean up from the predecessor? And then, out of the Fed or any centralized control, how loses your fiscal policy? When you look at that, the Fed is more of an outlier. So the ECB's kept inflation down, the Swiss National Bank's 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 US 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. And 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 heavens, what you quoted him, it's ultimately up to the Fed at one time. If you take that seriously, then all this fiscal laxity in discipline should be another reason to hike. Yeah. Yeah. So anyway, long, much too long, but I think even a sober temperate thing suggests, no, Powell did get it wrong. Now, 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, in the year before, that at Jackson Hole, there was this drumbeat from the Fed staff and members, the labor market could be really weak. The inflation is going down, and there were people like me or Michael Strain, AI, and Diane Swank, and KPMG, who are out there saying, we don't see this. Now, I'm not saying necessarily they had to listen to us, and couldn't. It didn't. But just to say, they actually did get something wrong. There 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. What'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 a Tracy. The, I mean, so the first thing to say is a certain amount of yelling at her scapegoating the Fed is part of the game. And in fact, in previous presidencies, it kind of sometimes was healthy, right? So, it's like, oh, God, Fed has to raise rates to raise 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 vulgar, under Greenspan, under Bernanke, under yelling. I mean, that was always understood. So, a certain amount of not like President Trump tweeting the Fed chairs in the enemy of the state, not using law fair to go after at least a governor cook or now governor pal. I mean, that's outrageous and arguably criminal. But a certain amount of carping about the central bank that's fine. Where 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 US bonds say you have to help me sell US 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 US bonds and your successors sell US bonds and your successors sell US bonds and that means I don't do cheating and manipulation now. I'm here to help you sell the bonds for long term credibility of US 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 preserve bank presidents or quickly turn over the reserve bank presidents not not get rid of them and put in their own political appointees rather than having the staggered terms as as intended. And there was talk about changing the feds mandate and there was and then the things about the feds 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 turnover, hire, remove the functional independence of the fed by messing with who's appointed when. Did you ever notice how you spend hours shopping online only to pause right before you hit buy now that tiny hesitation the one where you wonder if it is trustworthy can make or break the sale now with AI changing the way consumers discover and compare things that split second trust question matters more than ever. That's where PayPal comes in for more than 25 years PayPal has been a leader in online payments and now they're at the forefront of agentic commerce making it work for businesses letting them maintain control of their brand and their customer relationships. So even as the way people shop changes the moment that matters most still feels familiar and deeply dependable. Build for payments growth and agentic PayPal open build for all business visit PayPalopen.com to get started. Some people treat chachy pt like some kind of smart search engine and some use it to get work done chachy pt work is a new way of working in chachy pt that can take action across your apps and files stay with a project for hours if needed and turn a goal into finished work. So all the source materials briefs and scattered information that you have to grind through to turn into something useful can just become something useful. Put chachy pt to work on your most ambitious ideas and projects get started at chachy pt.com by selecting work mode available on plus and pro plans. With LPL financial we provide the services to help push you forward. When it comes to your finances, your business, your future, the only question should be, what if you could? Pint advertisement anticenter is not a client of LPL financial LLC and receives compensation to promote LPL, investing in falls risk including potential answer principal LPL financial LLC member, Finder SIPC. It 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 like great. We want our we want 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 a Chicago Fed president Austin Glowsby. Why are dissent rare at the Fed and one of his answers 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 wars says we want the family fight is he saying no we're I'm okay with unlike my predecessor I'm actually okay if you don't agree with me. I think he's saying I think Kevin wars 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 he's right he's he's right that debate had gotten too low at all and it's healthy to have debate I think Powell it's partly he was very good inside the bill and 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 saying let's not dissent and give and create divisions in the committee casually let's let's make the bar very high for till 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 an 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 than the Fed then Governor Mervyn King came in one point and said look quantitative easings 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 well you know according to Vick Sal I'm not sure you know the usual central bank thing I'm giving a talking 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 when you 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 so again I hope I'm wrong I don't think I don't think chairwarch really means it I hope he does but taking it literally yeah we went through a period where there's two little things um so you mentioned Mervyn King just then and King is heading the new task force on Fed communication so I'm curious whether you have any insights or perhaps informed guesses about what what the problem is that Worsh slush King are now trying to solve well I know well two of the three members in a committee so I worked with Governor King he was governor and you know 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 peer sensitive so just full discussion so I I'm not talked to them directly about confidential things but just discussion um I think this is the committee that has the biggest chance of a surprise to being radical um I think people are very concentrated on the balance sheet committee um and I think actually they're likely to come out with much more sober practical smaller scale recommendations and people think they aren't that's just my guess yeah but knowing who's on that committee Raga Raja and Jeremy Stein Karen Dynan who's also a colleague of mine um but I think the communication is going to surprise people because both Mervin and Peter and I'm only referring to their public statements um have gotten pretty radically skeptical about central bank communications and recent years so Mervin King was actually the leader of the inflation targeting movement long before we wrote our book he's the one who in 1992 when the British pound fell out of the exchange rate mechanism and there's basically a crisis we don't we need to have something to anchor in the UK he's the one who left into action with a couple 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 these what used to be known as the fan charts that you would I love the fans yeah well I think I was the only one but I really no no there were a few of us scattered around but it was definitely a niche product um and there are problems that are worse with fan charts in the bank of England has changed it but basically Mervin was leading the effort and we cited this hugely Bernanke had all 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 pretty 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 here's what we centrally think is going to happen here's what's may happens you were trying to give the message this was probabilistic that you know we're making our best guess but 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, that specific time is better. So 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 Worship's 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 Irvin also, 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 reprise and risk. This is the idea that yields are an important policy signal for central bankers or they should be. They should be. Right. And it should be yields and volatility around yields should be higher than it had been. This is their point view, not mine, 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. And then at the same time, that should mean the pricing that the markets give you is more informative. And Peter Fisher, who between, 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 what I know from his public statements, he's very skeptical about central bank's ability forecast and very worried about central banks, certainty about central banks causing bubbles and indiscipline and then clouding market signals. So even though chairwashed 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 in which 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 great. That was the previous message, was like, oh, market, you're the ball, like, off you go. Yeah, that was really bad. But anyway, of all the things that annoyed central bank community, that may have been the most annoying. But anyway, so just to say, I think chairwashed's true beliefs and instincts though are much more in the, we can't get any forecasts, right? It 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, sort of like serve the real purpose, maybe a post GFC and maybe it's just a lot of noise right now. But we're talking about the sort of monetary policy at the theoretical level and a lot of, which is great. Oh, yes. And all this. I'm just sort of, maybe sort of said 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 ThinkTanks and joining one of two, two very big AI companies. And when you think about the sort of future of social sciences, not so much like, well, we use models, which I'm sure there's going to be a ton 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, what do you think, how does that make you care? I mean, as someone whose main job is to hire developed 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 and they were hiring them more to be useful like Amazon's pricing model. Yeah. Useful in terms of internal production. Right. So like the very famous MIT micro-economist, how variant 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. Oh my god, that's where the cool people are. Yeah. 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 genetic and things like that. Right 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. It may take longer to get there. We may have to care more about how many people we just place in what happens on the 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, thanks, you pay well compared to average American salaries, which don't pay like those. Yeah. You 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, but actually a lot of us didn't realize what all the policy issues were. And the economists who are hired, some of them worked on policy, but most of them were like we said, working on 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. And 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 fine. But when it's like someone who's, you know, world-class expert on the economics of innovation or 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 customer side. It may sincerely believe it, but it gets it. 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. Zero. Well, and this is a person who's very technical optimist. I mean, so it's not about that. But there's also just you do inherently, these are still companies. I 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, do I help be willing to settle for the low six figure salaries, which are still pretty darn good and influence policy without going on staff? Just 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. Do you see any evidence of an impact on the labor market side or productivity here and now? Much more indicative evidence of improvement and productivity, Tracy, than on effects on the labor market. So speaking of colleagues of mine, Martin Truzempa and Jed Kolko are both top economists to work. at Peterson and work on these issues and on Coronac is affiliated with Peterson is on leave this year. He went to work at Anthropic this year. But 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. So he's a real practical labor market economist. And he and their number of others is another thing called economic innovation group or a bunch of them. And you're just not seeing the data. So the number of hires even of coders, you know, if you had to pick the two jobs where you most thought their toast would be long haul truckers and coders and lower level coders. And 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 Bjornielson at Stanford or Luis Garcano at London School of Economics about why, those are his two examples, but they've done great work, about why we haven't seen the job to this placement yet. And partly, it's a matter of time as you indicate at 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 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, probably less than 10 years, 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. Again, long haul truckers are not trying to make fun of them. I mean, they may be the ones, but and so Bjorn Bjornielson 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. The businesses have people have to make decisions and implement things it takes time. Another argument which Luis Garcano 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. But most almost every job, 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 armist leading. And we know this from the past that again, in the Industrial Revolution in 19th century England, the analogue 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. Anyway, so the job stuff, it's probably coming. If it is coming, it is showing up in the lack of hiring of younger people. Yeah, and Tervor have to throw away line in the speech or say, 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. And so you can't automatically say the lack of hiring is AI. I mean, it may be contributing, but there's other stuff. The 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 hard. You got to limit 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? I'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, excuse me, the AI productivity boosts the growth, kicked in until very recently, last year and a half. But 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. I would never say such a thing. He's a man for all seasons. I'm very diplomatic. 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. But we ain't there yet. I think, by the way, I find the message jobs theory to be quite compelling. And by the way, the long haul truckers would absolutely say, look, there's a lot more to this. Oh, I agree. I didn't include, you know, like all the things that they had to do with the warehouse. I don't know, I know, but I think it did, but like people, let me tell you what's actually involved. Right. Another one, you know, people point out, Adam O'Sumick has pointed out that people still get hired to play the piano at party. 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 cannot do. They could say like, oh, like maybe this crowd looks like a neat tempo thing. So I do think, no, I do think like the message these jobs are much more probably. I'm glad to hear you say that. And again, I was using the truckers just because that's the example. But I agree with you. And Adam O'Sumick, who's at EIG is one of the other people. I think it's 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 real important point you said about the message jobs is like the 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 shot from the AI community, not in economists. There are no economist big shots. From the AI community was talking and a pretty famous academic economist asked this person, 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, 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. You know, I mean, that's what you need about the live piano player. I mean, I didn't need AI to have spot, 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, did, did, did. Some people treat Chachy PT like some kind of smart search engine. Chachy PT work is a new way of working in Chachy PT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. So all the source materials, briefs and scattered information that you have to grind through to turn into something useful can just become something useful. Put Chachy PT to work on your most ambitious ideas and projects. Get started at Chachy PT dot com by selecting work mode available on plus and pro plans. What if you could have more wins, more support, more sound effects? At LPL Financial, we like the sound of that because LPL offers more. Advisors, what if you could have more ways to help your clients? Ready to invest? What if you could find an advisor that really understands you? When it comes to your finances, your business, your future? At LPL, we ask, what if you could? Pay an advertisement, investing involves risk, including potential loss of principle, LPL Financial LLC member FINRA SIPC. Join Bloomberg for the Canadian Finance Conference, proudly sponsored by National Bank of Canada Capital Markets on September 29th in New York. Here from influential corporate and government leaders as they discuss the strategies shaping Canada's economic future. Connect with senior decision-makers, gain actionable insights, and be part of the conversation's driving business forward. Register at bloomberglive.com/canadianfinance. That's bloomberglive.com/canadianfinance. 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 in manufactured elsewhere, largely Taiwan, et cetera, whether they're being adequately captured in data and there was this report out, I thought we should have added point 3% to GDP. Which is not that much in the sense that like, oh, the big techno optimist, right? It's not. But it's not like that. I'm sure it's what you think. It is real money. On the other hand, when I look at it, I said, 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. No, but it's very much. Tell us what your thoughts on this discussion. 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, and on a national basis. And 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 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 misimagine of saying Nvidia or the other top tech companies, again, doesn't really change the fundamental path. But 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. A colleague of mine, I already mentioned Martin Terzema at Peterson is doing some work on this. Former Fed official at Peterson, Joe Gagnon is also written about this. So there's, I mean, there are a lot of subtleties, but which I don't even understand, but there are basically two issues. One is sometimes when companies that are based in the US, using US technology, produce stuff abroad, the allocation of how much stuff is actually produced in the US versus not, and therefore how, whether it's GDP versus GNP, what's importance, what's exports, gets messed up. And so with these very complicated supply chains, there is an issue of trying to figure out what stuff gets allocated to the domestic pile versus the important pile. This is the old value add argument. Yeah, sorry. 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, Gagnon or Martin Terzema or tweet. I'm afraid I don't want to, but just essentially there is a discussion over how much is domestic versus national. But as you said, Joe, in the end, the markets, you're either selling stuff for your not. I mean, NVIDIA's bottom line actually doesn't change based on any of this under bottom line. The people who are working at NVIDIA designing the chips at the US are still getting paid and not. Absolutely. And all the money that comes into NVIDIA, you know, some of it goes to 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. The 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. And usually the economist's 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 market, it's great, but the market value is what we're supposed to think about. 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 to what you were saying about the timing and the productivity or the J curve, right? So we already have GPT clause, whatever, I don't want to cite any particular brand name. We have the AI and you or I can go in and type, give me the cheapest possible ticket to Jackson hole. I don't want to have to think about it, but don't see me next to a baby. And that provides you to-- Tracy when she does it and she says, don't see me next to Joe. Oh, I thought it was don't see me next to him. Oh, we've spent enough time together. We really need another four hours on a plane. No, keep going. No, no, no, no. And so that's giving me units, you know, 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. 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, for the end of the track, I should say, not the pipeline. When the businesses start transforming. So it was really cool that Intel and Texas Instraints 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 economists, I think it might even have the, 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 addition it was at that time. We're so much better than the previous graphics. We should have them back on now that we should do that. All right. I have just one more question. We 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. 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. What's your thinking now? I guess, thank you for such an accuracy. I guess what I was saying, and it was things I was saying, and then a joint piece with Peter Arsac of Lizard. What we were saying was going back to where we were with the criticisms that the power fed that I think were legitimate. The U.S. labor market is much more resilient than they thought. Credit was much more available in terms of the financial conditions were not as tight as they thought. Physical 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. I had no idea that the President of the United States would bomb Iran and ignore the fact that disrupting the state so hormones might have some inflationary effects, beyond whatever else you'd 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 10-to-2 because of the energy market, whatever. But as Chair Worsh said, as many FOMC members have said, this is not good. You've got persistence. You've got persistent inflation in the century. The core measures that are services and not imported goods. You've got, as the Chair said 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. 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. I expect if they hike in September, they're still going to hike in December. And so, six months from now, Fed funds will be 75 bits or 100 bits higher than it is now. And inflation will start coming down for reels, as the kids say. But until then, we're going to be in this three and a half to four and a half range with some up-side risks. All right. Adam Pozen. Always great catching up with you. Especially this beautiful location. Thank you so much for coming back on my buns. Thank you for having me. I'm a big listener. Thank you so much. Thank you. [MUSIC] Tracy, 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. just like to see how Paul's legacy ages. Like I think that's gonna be, you know, as Kevin were said, 64 or 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 is held out, like people will have think of him finally, despite the fact that he presided over a financial crisis in several years of high unemployment, it doesn't seem like from a reputational perspective, high unemployment under your watch, get sort of penalized the same degree as high inflation. - Oh people really seem to hate inflation. You're right, like it's kind of skewed. - Yeah, it clearly, 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, et cetera, and you go over five years of above target inflation? I just think it'll be really interesting just to like how people are talking about power on 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 dissenting. - Yeah, I think it's-- - Oh, yeah, yeah, yeah. 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, and 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 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 these minor things that we don't even articulate about what human judgment looks like, that they're not there yet, they may yet get there. They may get there by the end of the year, but they're not quite there yet. But just like on the conversation, I do think it's interesting. You know, the term that I've been thinking about with the worst speech, it's, I found it to be hawkish, which is like, with a dash between the hawk and the ish. As in, it was clearly more like, yes, clear that there's a plan to fight it, that there is going to be work to do to get inflation because he said the two things that were key, which is inflation is going in the wrong direction and policy has been insufficiently restricted. Therefore, the third thing that the silent part is therefore high grades, which he didn't say. So like, that is hawkish. On the other hand, it was not hawkish in the sense that we are now about to embark on an aggressive, it was not Apollo 2022 where it's just, we're gonna 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, and yet he opted 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 here much to think about. - All right, shall we leave it there? - Let's leave it there. This has been another episode of the AdLots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. - And I'm Jill Wisenthal. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez, @CarmenArmondDash. She'll bend it at Dashbot, Kale Brooks and Kale Brooks, and Kevin Luzano at Kevin Lloyd, Luzano. - And for more AdLots content, you should check out our daily newsletter. You can find that at Bloomberg.com/Authlots. - And you can chat about all of these topics 24/7 in our Discord.gg/Authlots. And if you enjoyed this conversation, then please leave a comment or like the video or better yet, subscribe. - Thanks for watching and listening. (upbeat music) (upbeat music) - If you listen to financial news, you know a lot of time to spend thinking about what's next. The next opportunity, the next investment, the next move. But sometimes what matters most is being ready for what you never saw coming. For more than 75 years, Cincinnati Insurance has worked with independent agents to help protect businesses, homes, valuables, and more. Because planning for the future isn't only about knowing what's next. It's about making sure you're ready for what you can't predict. Let Cincinnati Insurance make your bad day better. Find an independent agent at CINFIN.com. - With LPL Financial, we provide the services to help push you forward. - Pid Appretized Banana Country is not a client of LPL Financial LLC and receives compensation to promote LPL investing in Falseries, including potential answer principle LPL Financial LLC member FINRES IPC. - Hi, I'm Barry Rittultz inviting you to join me for the Masters in Business Podcast. Every week we bring you conversations with the people who shake markets, investing, and business. I speak with CEOs, Nobel laureates, market innovators, and legendary investors. Whether you own stock bonds, real estate commodities, even crypto, these are discussions you absolutely need to hear. - Subscribe to the Masters in Business Podcast on Apple Spotify or anywhere you listen.