As spring gets underway it seems that Stimulus and the virus receding have Also blown in some some pretty hot Numbers on the economy i'm talking Thinking in particular about the philly Fed Business activity index at the end of The week last week Up to 51.8 it's the highest since 1983. Price is paid at a 41 year high and this Is even before we get the Economy fully openated everyone Vaccinated Could this be a canary sort of in the Economy's Coal mine about a recovery that may even Be stronger Than the fed and others are expecting Well i think we're going to have a very Strong spring and summer You have vaccines rolling out at a very Strong rate uh you have the cases going Down the virus that's obviously the Place Uh this thing all starts now you've got A lot of pent-up demand Um from people like me who've been Isolated for the last year those people Have excess savings in their pocket the Savings rate Has been quite high over the last year And then we've got another 1.9 Trillion dollars of stimulus coming into The economy so i think you're going to
See demand very strong And as i talked to my contacts even this Week as the stimulus checks hit People especially low to medium income Retailers really saw a surge In demand so i think you're going to see That in spades i think the other thing That philly fed Referred to of course is manufacturers Are going to have to work hard to keep Up And i think we're already seeing supply Chain challenges throughout the economy You've got Backups and ports so i think you're Going to see very strong demand i think You're also going to see Some issues in meeting that demand and That is courses but Um i think fueling some inflation Forecasts For some people it's concern maybe it's An opportunity but um I want to put something in front of you Treasury former treasury secretary i Should say larry summers was on Bloomberg television on friday he's been Warning about The economy overheating and boosting Inflation Bond yields are surging the massive Fiscal stimulus is taking hold The virus continues to recede let's Listen to what he said
And also i guess he mentioned the fed Continues its aggressively stimulative Monetary policy It seems to me that what was kindling Is now igniting and i am much more Worried That we'll have either inflation or we Will have a pretty dramatic fiscal Monetary collision I think this is the least Responsible macroeconomic policies we've Had In the last 40 years Concerned uh and and you know we don't We can take out the politics because He's known as a liberal democrat How do you respond as a fed official to That Well i think as i said we're going to See an extremely strong year And i think that strong year is going to Lead to price pressure Some of that price pressure is going to Be because we're rounding over Deflationary comps from last year and as Those leave the baseline you'll just see Prices Jump up part of that is going to be this Supply demand Imbalance that i was talking about Earlier And part is you're starting to see Expectations start to creep up not yet To
Our hurdle but getting closer i think You'll see price pressure this year I want to emphasize inflation's not a One year phenomenon it's a multi-year Phenomenon And so to have inflation over time Which i suspect is what he's talking About you'd have to see expectations Really move you'd have to see uh you Know businesses start to think that Every year they need to see three or Four or five percent price increases You'd have to expect workers to start to See those kind of Compensation increases we certainly Haven't seen that yet And as i'm talking to businesses in my District I still hear them struggling with the Idea of taking price Given all of the disinflationary forces They still perceive whether that be Technology and its ability to let you Price shop or global supply chains or Global talent pools And their impact on labor or the power Of big box retailers To negotiate and so i still don't hear That but of course that's something That i'm trying to stay on top of and Where that to change Our forward guidance and our tools allow Us to do what we need to do I want to quote another fed person
Former new york bank president bill Dudley i spoke to Uh after the fed meeting on wednesday he Said he's not concerned about the rising Bond yields we're seeing now but he sort Of echoed larry summers When he said he's worried about what Happens if the fed is too slow In tightening monetary policy inflation Starts really rising and then the fed Really has to speed up the rate hikes He said that that wouldn't be pleasant For financial markets Larry summers said he sees about a a 30 chance this is what's going to happen And cause a recession Is that a concern at what point does it Become one Well there are a lot of scenarios out There and i'll just say our guidance Suggests we would be raising rates were We to see inflation start to spike past Our Uh targets and so i think we have the Tools To handle it but um i i would agree with Anyone who thinks this amount of fiscal Stimulus At this point is new for us and so you Know we've got a set of forward guidance Out there that We believe i believe allows us to tackle Should the downside scenarios come i'd Remind you we're still looking at 12
Month inflation of one and a half Percent so we're Very worried about the future but the Presence still doesn't show it But were it to show we have the tools to Handle that Glad you talked about ford ford guidance Because Also speaking about the last meeting you It looks like a slight shift in forward Guidance because seven of 18 Fomc officials now see rate hikes by 2022 or 2023. that's a jump From the december meeting did are you on Board with that did you change your dot Well i wouldn't call it a shift in Forward guidance at all the guidance is Exactly Uh the same as what it was before word For word Um what i would say is that uh there Have been some of us who have shifted Our forecast And so our forward guidance which is Outcome based Says we would start to move rates when The outcomes move And so uh you know one big thing that's Happened Since the last scp was of course the Passage not just of the 900 billion Fiscal package in january or december But also this most recent 1.9 Trillion and so it's not shouldn't be
Surprising that Uh you know with a couple two or three Trillion extra dollars of stimulus into The economy People would forecast uh a faster Growing economy and that some of those People would say Therefore that inflation would rise Faster our forward guidance would be met And they would raise rates sooner well Yeah But it's interesting to me because it Jay powell fair Chair powell did seem to just kind of Dismiss down play the importance of the Dots At his press conference now in the past It seemed the fed had promoted dots Certainly when they first came out as a Way to To augment forward guidance give Investors Give the public give you know congress a Sense of Where the pop the fed is going um Such that it seemed like dots were a Policy tool But uh what you've said and jay powell's Dismissal of them Seems to indicate what they're less Important now they're no longer a policy Tool Well i have a lot of empathy for the Chair because uh
He's now doing a press conference every Time and when he does those press Conferences He stands up and has to defend the dots I'll just remind the audience of how the Process works which is There's a memo which comes out every Meeting that is voted on by the Committee And is heavily litigated back and forth In terms of what precise word we're Going to use in what precise paragraph And then today with 18 members of the Fomc there are 18 of us Who individually with our teams come up With a forecast And you know it's almost like You know a card game where we all show Our cards we want there's no effort To try to align that to uh Massage it to manage it to talk about What it is it is It is what it is which is 18 individuals Uh individual forecasts and that does Tell you something i i find it to be a Very good exercise frankly to discipline My thinking About uh where the economy is likely to Go and you know where Rates are likely to go in that context But there's nothing about that that Is managed to be the voice of the Committee And so i assume there are times when the
Chair as he You know defends our memo which is what We vote on right Feels good about having that forecast Because it emphasizes What he's trying to say and i'm sure There are times where he's got to say Okay i've got to respond to this because It doesn't exactly come out with Okay so this is not necessary so we Should no longer consider it for Guidance or part of the Policy toolkit of the fed I think it is a transparency toolkit it Is a transparency tool Um but it's not policy policy is uh Dictated by the the rate we decide to go And the memo we Vote on okay um i want to talk to you Now about the supplementary leverage Ratio because uh This was a pretty big uh story on friday I think not unexpected that the fed Decided it wouldn't extend it and of Course it was a step taken during the Pandemic To help banks to help them keep buying Treasuries holding treasuries by Removing it Banks it will make them potentially all The things equal Make it cost a little more for them to Hold treasuries at a time when the when The
Government is selling an awful lot of Them uh if they don't want to hold as Many and buy as many Meals could go up right so um the fed Seems Accepting of that and i know one more The one person i've talked to thinks Maybe this is Like like almost like the first step the First flirtation Of the fed with tapering with not doing Quite so much To support or suppress lower bond yields Well i think i put it a little Differently which is um In march a year ago um things were Highly uncertain uh markets were having Real trouble functioning Um you know we intervened in a very Significant way And there are a lot of interventions uh We set out there Uh that we've now uh at the point where We can roll back i mean the facilities That didn't expire at the end of December uh with the exception of the Ppplf They're all expiring at the end of march And i think this is just one more Extraordinary Measure that is i think naturally Expiring as we get to the back End of this i think there are fair Questions about what the right
Leverage ratio is and that's why we're Going to take a a full look put it out For comment Do what we do when we take a fair look At it but i think it's probably good News that a lot of these extraordinary Measures That were launched a year ago were now Close enough to the back end of this That we can see them expiring If you'll keep rising i know that you And the fed chair have both said look People are more optimistic about the Economy so it's kind of you should Expect higher rates I think a lot of people get that but if They keep rising and the treasury sells More and more bonds and they keep Rising is there a point where the well Where you would be on board With buying increasing the quantity the Bond purchases the 120 billion Uh maybe even re instituting um Yield trip control which the fed up Until now has been kind of reluctant to Do Well i have to say um we do have tools Like the ones you've suggested Uh you know were we to need it in times Either of a Uh a second wave of their fourth wave of This or Market malfunction of some sort of Course you know we have those tools
I have to say i'm really hopeful we're On the back end of this that You know we're talking about uh where we Started 1.9 trillion of stimulus on top Of 900 billion of stimulus vaccines Rolling out Virus coming down hospitalizations Coming down Deaths coming down an economy that i Think is Going to have a very strong back half of The year so You know with all of that in play i'm Really hopeful that we're going to be Talking about You know how great it is the economy's Back rather than how many more tools We're going to have to use to try to Support it but We'll have to see well implicit in that Then are you saying that Look if yields rise that's fine if They're rising on the back of a strong Economy if they're rising because More people are investing there's more Demand for capital You know folks just get used to it That's that's what the economy does is That what we can take away From from your view from uh jay powell's View I won't speak for jay but i'll i'll just Say i take great signal from what seems To be driving
Yields up um part of it is rising Inflation expectations which Whether it be you know medium term or Long term seem to be moving Toward not yet over uh our target levels Um many of the days where there have Been movements have been days where You've had really good news on the Vaccines Or really good news on fiscal stimulus And to the extent that Yields are responding to the economy i Think that's what you want them to do Um i guess what i'd like to ask you Before we finish up is in Calling on your your many years as a as A businessman Before you came to the federal reserve And got into monetary policy You have a vast network of people you Worked with you continue to talk to What are you hearing from them now are They more confident about the economy Are they getting ready to take steps They wouldn't have taken What are you hearing i hear strong Optimism I think strong optimism uh first and Foremost because of Roll out of vaccine dropping rates of The virus I hear as i think i said earlier that This latest stimulus package like the One in january really has hit the
Consumer economy Strong and that means we have a very Strong Start to the spring i do hear Concerns about supply chain concerns About Manufacturing concerns about being able To meet demand Also true on the hospitality side where People are nervous about Getting workers and and it's a funny Situation because if you're in Technology or in manufacturing or in Healthcare or in construction You really can't find workers right now On the other hand you've got Somewhere around nine nine and a half Million of excess Personal contact service workers many of Whom will be called back in the next Three or four months but probably not All of them and so you've got tightness In the labor market In parts but not obviously uh in Total um okay but again i might my view On what's gonna happen isn't driven by Uh models i think you're right i spend My time uh talking to Businesses big and small and trying to Figure out what's happening on the front Line and right now I think they're pretty optimistic well i Just want to ask a very quick question Uh to fit in before we have to let you
Go um All of this you're talking about makes Me think of two things one Isn't this a reason inflation could get Hotter uh and Is there a possibility that that as long As their stimulus checks some people Will will be more inclined to stay home And wait for things to get even better Or get back that job they once had Rather than going back To work well so on your First question uh like i said i think we Will see price pressure Uh this year whether that turns into Inflation over multiple years Goes down to expectations and again i i Have not seen A sign of that yet but i i certainly am Watching that Um uh in terms of getting back to work I i think it is a really interesting uh Challenge on two dimensions first of all I do think you have a lot of parents Primary caregivers Also elder care who have been stuck at Home Because kids haven't been in school Because child care hasn't Worked for them and i am worried about What percentage of those won't come back In the market this is not Related to stimulus it's related to i'll Call it anti-stimulus
The fact that um you know so many of the Support functions that parents depend on Have uh suffered trauma during this Thing so that's one part i'm worried About Then there's another part of which is You were once a waiter Um you're waiting for your job to come Back there's still a lot of people in The economy who declare their job losses Temporary But it hasn't come back yet but you're Still waiting for it to reopen You're not retraining community college Enrollment is down right and so i do Worry about that Mismatch as well not so much driven by The stimulus or the support More driven by the trauma in the economy And And frankly the fact that the jobs that Are hiring may not be good fits for the People who are Out of work well
