speech on inflation and recession

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Powell Talks Rates, Inflation, and More

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Fed Chair Jerome Powell spoke at the San Francisco Federal Reserve Bank’s Macroeconomics and Monetary Policy Conference today.

The conversation, moderated by Marketplace’s Kai Ryssdal, began with a question on inflation . The conference appearance came on the heels of February's PCE report .

The highlights:

Powell Says February Inflation Report Was Good. But More Data Is Needed.

Interest Rates Will Probably Settle Higher

Don’t expect the fed to declare victory, powell wants to avoid ‘disruptive’ quantitative tightening, powell says february inflation report was good. but more data is needed before rate cuts., a ‘steady hand’ on rate cuts is key, powell notes, with inflation down from its peak, the fed is prioritizing its dual mandate more, recession is unlikely this year, fed won't make decisions based on politics, powell responds to critics demanding rate cuts, interest rates, inflation, and what else could come up in powell's speech, latest updates.

Updated 2 days ago

Megan Leonhardt

Powell’s first thought when he saw the February PCE inflation report Friday morning was that the data were “pretty much in-line with our expectations.”

Core PCE, which excludes food and energy prices, was up 2.8% on a 12-month basis. Headline inflation was 2.5% year over year.

“That's what we were expecting and it's good to see something coming in, in line with expectations,” Powell said.

Powell called attention to the very high inflation reading in January and that February's reading was lower. "It's not as low as most of the good readings we got in the second half of last year. But it's definitely more along the lines of what we want to see,” Powell said.

“We expect inflation to move down to 2%—but on a path that is sometimes bumpy," Powell noted later in the conference. "The question then is, are those just bumps or are they something more than bumps? ... We're just going to have to let the data tell us that. There isn't anybody who knows,” Powell said.

The timing of rate cuts hinges on the data. “We don't see it as likely to be appropriate that we would begin to reduce interest rates until the Federal Open Market Committee is confident that inflation is moving down to 2% on a sustained basis,” Powell said, noting that the confidence would come from "more good inflation readings like the ones we were getting last year."

The U.S. economy is growing at a solid pace and the labor market is resilient. That gives the Fed a chance to take its time to gain additional confidence that inflation is cooling before taking the important step of cutting rates.

Powell said to expect policymakers to take that time. “We're not going to take that step [to cut rates] until we are confident.”

Banks Are in a Good Place, but Supervisors Shouldn't Be Afraid to be Forceful

Although last year’s banking crisis seemed to catch regulators off-guard, Powell said he believes the U.S. system is now sound and there are lessons that can be applied.

“I would say the banking system is in a good place now,” Powell said. “I think things have settled down significantly.”

While there are some concerns that commercial real estate losses could impact smaller and regional banks, Powell said the banking system, as a whole, is in a good place. “The commercial real estate problem will be with us for some years,” he said, adding that there are only some banks caught in those headwinds. He said the Fed is working with those banks to ensure they have enough capital and can work through the challenges.

One of the lessons of Silicon Valley Bank's failure was that there are situations where bank supervisors need to be “forceful” when appropriate, Powell said.

“Bank supervision can tend to be pretty process oriented,” Powell said. There's a playbook, a checklist, and Powell said that can be a good thing because the process should be transparent so banks know what's expected and can do what's expected.

But that process can be slow when it needs to be fast. The art of bank supervision is balancing when to jump on things and when to take the time to be process-oriented.

“What's important is that the banks are well-capitalized, that they understand their risks, and manage them,” Powell said. “The more the banks take that on themselves and do a great job at it without us pushing them, the less we need to push.”

Powell said that when determining the path of monetary policy, the central bank’s “hand is a steady hand.” That's key when it comes to weighing economic data, particularly to measure the trajectory of inflation.

“We've been saying all through last year and this year that we're making progress. We've noted that progress, we haven't overreacted to it,” Powell said.

Powell noted that it’s important to be nimble and flexible. “We always have to be humble,” he said, particularly given the outlook is “always much more uncertain than most people think.”

The economy “can and often has recently performed in unexpected ways,” Powell said. But he believes the Fed is ready for that if that's what happens. “It's important to get this right,” Powell added.

There’s been some speculation on what would happen if the Fed cut rates and then had to reverse course. Marketplace’s Ryssdal asked Powell about it: “Would it be terrible if you reduce interest rates by a quarter of a percentage point and then the data changes and you have to change your mind?”

“It wouldn't need to be terrible,” Powell said. If that happens, he said the central bank would react and adjust.

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Watch CBS News

After searing inflation, "American workers are getting ahead," Treasury Secretary Janet Yellen says

By Aimee Picchi , Jo Ling Kent

Edited By Anne Marie Lee , Alain Sherter

Updated on: February 14, 2024 / 7:52 PM EST / CBS News

Treasury Secretary Janet Yellen said "American workers are getting ahead" now that their pay is growing faster than inflation, making the Biden administration's case that the U.S. has rebounded from the economic calamity caused by the pandemic. 

"We know that Americans are experiencing discomfort because some important prices are higher than they were pre-pandemic," Yellen told "CBS Evening News." "But what I think is really important is that wages have gone up along with prices, so people are better off than they were pre-pandemic."

Inflation ranked as the most important problem facing the U.S. in a December poll of American adults by CBS News, even outpacing issues like immigration and the state of democracy. Prices skyrocketed in the aftermath of the COVID-19 pandemic, with inflation reaching a 40-year high of 9.1% in June 2022, squeezing millions of households whose incomes failed to keep pace. 

Inflation has rapidly cooled since then, thanks in part to a series of interest rate hikes by the Federal Reserve starting in March 2022 aimed at dampening consumer demand and slowing economic growth. Experts now say the economy is on solid ground, pointing to strong growth , robust consumer spending and  low unemployment , developments that Yellen stressed in her discussion with CBS News. 

As of the end of 2023, the typical U.S. worker could afford the same goods and services as in 2019, prior to the pandemic, and had an additional $1,400 to spend or save per year, according to a January analysis by Treasury officials. That's partly because wages are now outrunning inflation, with hourly earnings jumping 4.5% in January, compared with an annualized inflation rate of 3.1%.

Despite the pinch of inflation, consumers are continuing to spend — one reason why the U.S. economy has so far defied predictions of a recession. And workers are behaving in ways that suggest they are optimistic about the future, Yellen said.

"We've seen a record number of small businesses formed, and Americans don't start up a small business unless they think the prospects are going to be good," she said. "So I take that as a vote of confidence in where this economy is going."

"A slap in the face"

Still, many Americans don't view the economy through the same lens as bullish economists. And Yellen acknowledged that life remains precarious for millions of people. 

"Childcare is expensive. Education is expensive," Yellen said. "We know that almost half of Americans on one occasion or another have felt they couldn't afford to fill a prescription. It was that or not having enough to eat, so there's no question that Americans have experienced burdens."

Voters in the battleground state of Michigan who spoke with "CBS Evening News" expressed a host of economic worries, from housing prices to student debt. One of them, Demar Byas of Pontiac, referred to experts touting the nation's economic performance as a "slap in the face."

"You're celebrating these numbers, but we are struggling," said Byas, who juggles several jobs to make ends meet. "It's no relief in sight, and just say those numbers and to celebrate that, and as I said stuff becomes a slap in the face."

Underlying many of their concerns is anxiety about the surging cost of  car insurance and housing, as well as a sense that it's more difficult now to achieve the same standard of living as in prior generations. So-called " referred pain ," or fears about the state of the world, from climate change to gun violence, is one reason why some experts believe voters view the economy negatively despite evidence it is doing well. 

Another Michigan resident, Elizabeth Nelson of Ann Arbor, said she worries about the future for her children, ages 19 and 21.

"What I'm reading and hearing about the job market, I'm scared for them. I'm really scared for them," Nelson said. She added, "We're losing some real low rungs on the ladder of economic security across lifetimes."

Where does inflation go from here?

Yellen said that President Joe Biden's policies are aimed at addressing some of the anxieties experienced by voters, from capping insulin prices to bringing down energy costs. She also predicted that inflation will continue to recede.

"Americans should feel confident that inflation will come down to levels that will no longer really be noticeable or worrisome to them," Yellen said. 

She also expects relief on another key issue for many voters — the ongoing increase in home prices and rents. "What we can see is that the rental prices for new apartments are no longer rising. And in some cities they're actually falling," Yellen said. 

As for the broader economy, Yellen said a recession is unlikely at this point. That's a stark change from a year ago, when many economists were predicting a steep downturn. 

"I consider the odds [of a recession] very low," Yellen said. "We have a very well-performing economy that has the ability to keep doing what it's doing, namely grow, create jobs and improve living standards."

• Biden Administration
• Janet Yellen

Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.

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The White House 1600 Pennsylvania Ave NW Washington, DC 20500

Remarks by President   Biden on the Inflation Reduction Act of   2022

State Dining Room

12:58 P.M. EDT   THE PRESIDENT:  Good afternoon.  Yesterday, I spoke with both Senator Schumer and Manchin and offered my support for a historic agreement to fight inflation and lower costs for American families.  It’s called the Inflation Reduction Act of 2022.  Some of you will see a lot of similarities between the beginning — (laughs) — of the Build Back Better initiative.  It’s not all of it, but we’ve moved a long way.   I’ll be going into detail in a minute.    But simply put, the bill will lower healthcare costs for millions of Americans.  It will — and it will be the most important investment — not hyperbole — the most important investment that we’ve ever made in our energy security, and developing cost savings and job-creating clean energy solutions for the future.  It’s a big deal.   It’ll also, for the first time in a long time, begin to restore fairness to the tax code — begin to restore fairness — by making the largest corporatenations [sic] — the largest corporations in America pay their fair share, with any — without any new taxes on people making under $400,000 a year.    Experts — even some experts who have criticized my administration in the past — agree that this bill — this bill will reduce inflationary pressures on the economy.  This bill will, in fact, reduce inflationary pressure on the economy.   It’s a bill that costs — will cut your cost of living and reduce inflation for — and it lowers the deficit.  It strengthens our economy for — in the long run as well.    This bill has won the support of climate leaders like former Vice President Al Gore who said the bill is, quote, “long overdue and a necessary step to ensure the United States takes decisive action on the climate crisis that helps our economy and provides leadership for the world by example.”    Inflation hawks like former Secretary of Treasury Larry Summers said, quote, “This bill is fighting inflation.”  Let me say it: “This bill is fighting inflation.”   Progressive leaders like Senator Elizabeth Warren said, quote, this bill — “This is a bill that truly is about fighting inflation, bringing down the cost for families, and putting our country on a sounder economic footing.”    Here’s how it works:   First, the bill finally delivers on a promise that Washington has made for decades to the American people.  We are giving Medicare — we’re giving Medicare the power to negotiate for lower prescription drug prices, which means seniors and consumers will pay less for their prescription drugs.  Medicare will save, in the process, about $290 billion.  And, in addition, it also changes the circumstances for people on Medicare by putting a cap of a maximum $2,000 a year.  They have to pay no more than $2,000 a year, no matter how many prescriptions they have, for all their prescription drugs –which is especially important for people with cancer and long-term diseases.  It’s a Godsend.  It’ll literally be a Godsend for many families.    Second, the bill locks in place lower healthcare premiums for the next three years for millions of families that get coverage under the Affordable Care Act.  That will mean an average savings of $800 a year for 13 million people.   Third, it invests $369 billion — granted, I called for 500-plus — but it invests $369 billion to secure our energy future and to address the climate crisis, bringing down family energy bills by hundreds of dollars by providing working families tax credits.  It gives folks rebates buy — to buy new and efficient appliances, to weatherize their homes, and tax credits for heat pumps and rooftop solar.    It also gives consumers a tax credit to buy any electric vehicle or fuel cell vehicle, new or used, and a tax credit for up to $7,500 if those vehicles were made in America.    This investment in environmental justice is real.  It also provides tax credits that will create thousands of good-paying jobs — manufacturing jobs on clean energy construction projects, solar projects, wind projects, clean hydrogen projects, carbon capture projects, and more — by giving tax credits for those who build these projects here in America.    Now, let me be clear: This bill would be the most significant legislation in history to tackle the climate crisis and improve our energy security right away.  And it’ll give us a tool to meet the climate goals that are set — that we’ve agreed to — by cutting emissions and accelerating clean energy.  A huge step forward.    Fourth, this bill requires the largest corporations to begin to — begin to pay toward their fair share of taxes by putting in place a 15 percent corporate minimum tax.

Now, I know you’ve never heard me say this before — it will come as a shock to you — (laughs) — but 55 of the Fortune 500 companies paid no federal income tax in 2020.  I know you only heard me say that about 10,000 times.  But the fact is they paid no taxes on an income — collective income of over $40 billion.

Well, guess what?  This bill ends that.  It’s go- — they’re going to have to pay a minimum of 15 percent tax on that $40 billion or whatever the number turns out to be.

Fifth, this package will reduce the federal deficit by over $300 billion.  Already, on my watch, the deficit has come down my first year by $350 billion and a record $1.7 trillion at the end of this fiscal year.  Now, that — this bill is going keep that progress going.  

Yes, I’ll say it again: This legislation will bring down the deficit.  Bring down the deficit.   The sixth point I want to make is: This bill will not raise taxes on anyone making less than $400,000 a year.  And I promise — a promise I made during the campaign and one which that I ha- — that I’ve have kept.   Now, look, I know it can be — sometimes seem like nothing gets done in Washington.  (Laughs.)  I know it never crossed any of your minds.  But the work of the government can be slow and frustrating and sometimes even infuriating.  Then the hard work of hours and days and months from people who refuse to give up pays off.  History is made.  Lives are changed.     With this legislation, we’re facing up to some of our biggest problems, and we’re a taking a giant step forward as a nation.  That didn’t just happen on this inf- — on this inflation reduction bill.  It also happened yesterday when the Senate made the bipartisan decision as a nation to invest in America’s manufacturing technology of semiconductors, and additional funding for basic research and development in the cutting-edge industries of the 21st century.

If the House passes this bill that I think Speaker — I want to thank Speaker Pelosi — I think she’s going to get it done — for her leadership here.  It has — it has added to the benefit — it has the added benefit of creating tens of thousands of good-paying — additional good-paying jobs, lowering inflation.

It’s going to give us the ability — the ability not only to compete with China for the future, but to lead the world and win the economic competition of the 21st century.

You’ve heard me say a thousand times: We have to invest in research, development, and growth.   I hope that the House is going to pass this bill today.    My plea is: Put politics aside.  Get it done.

We need to lower the cost of automobiles, appliances, smart phones, consumer electronics, and so much more.  And you can’t do it — all of these things are powered — almost everything is pow- — in our lives is powered by these semiconductors and tiny computer chips the size of a fingernail tip. 

Look, we should pass this today and get moving.   I know the compromise on the inflation bill doesn’t include everything that I’ve been pushing for since I got to office.  For example, I’m going to keep fighting in the future to bring down the cost of things for working families and middle-class families that matter by providing for affordable and accessible things like affordable childcare; affordable eldercare; preschool co- — the cost of preschool; housing; keeping students with the co- — and helping students with the cost of college; closing the healthcare coverage gap — you know, that’s a fancy way of saying — “the healthcare coverage gap” — expanding Medicaid in states that refuse to do it; and more. 

Look, this bill is far from perfect.  It’s a compromise.  But it is — it’s often how progress is made: by compromises.

And the fact is that my message to Congress is this: This is the strongest bill you can pass to lower inflation, cut the deficit, reduce healthcare costs, tackle the climate crisis, and pro- — and promote energy security, all the time while reducing the burdens facing working-class and middle-class families.

So, pass it.  Pass it for the American people.  Pass it for America.

I’ll have more to say on this later.    Now I want to thank Leader Schumer and Manchin — Joe Manchin, Senator Manchin — for the extraordinary effort that it took to reach this result.  Thank you.   Now, let me speak to one other issue.    Q    Mr. President?  Mr. President —   THE PRESIDENT:  Let me speak to one other issue: the GDP and whether or not they’re — we are in recession.   Both Chairman Powell and many of the significant banking personnel and economists say we’re not in a recession.    But let me just give you what the facts are in terms of the state of the economy:   Number one, we have a record job market of — record unemployment of 3.6 percent today.  We’ve created 9 million new jobs so far, just since I’ve become President.    Businesses are investing in America at record rates — at record rates.  Foreign businesses like SK and others are investing in America hundreds of millions and trillions of dollars, sum total.   A hundred billion dollars in semiconductor investments already announced by Intel, Samsung, and Texas Instruments.  More than $100 billion in electric vehicle battery investments by Ford, General Motors, Hyundai, Tesla, and more.   And just last week, it had — SK corporation of the Republic of Korea announced $22 billion in new investment in semiconductor batteries, chargers, and medical devices, creating another 16,000 jobs here in America.    And this is powering the strongest rebound in American manufacturing in over three decades, creating 613,000 — 613,000 manufacturing jobs.   Passing the CHIPS bill is going to put another $72 billion for incentives and tax credits to expand semiconductor production.  And the Inflation Reduction Act will add another $370 billion in clean energy tax credits in reconciliation, including incentives to accelerate domestic production of solar panels, wind turbines, batteries, and critical materials processing.   That doesn’t sound like a recession to me.   Thank you very much.   1:10 P.M. EDT

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Powell says Fed wants to see 'more good inflation readings' before it can cut rates

WASHINGTON — Federal Reserve Chair Jerome Powell on Friday reiterated a message he has sounded in recent weeks: While the Fed expects to cut interest rates this year, it won’t be ready to do so until it sees “more good inflation readings’’ and is more confident that annual price increases are falling toward its 2% target.

Speaking at a conference at the Federal Reserve Bank of San Francisco, Powell said he still expected “inflation to come down on a sometimes bumpy path to 2%.’’ But the central bank’s policymakers, he said, need to see further evidence before they would cut rates for the first time since inflation shot to a four-decade peak two years ago.

The Fed responded to that bout of inflation by aggressively raising its benchmark rate beginning in March 2022. Eventually, it would raise its key rate 11 times to a 23-year high of around 5.4%. The resulting higher borrowing costs helped bring inflation down — from a peak of 9.1% in June 2022 to 3.2% last month. But year-over-year price increases still remain above the Fed’s 2% target.

Forecasters had expected higher rates to send the United States tumbling into recession. Instead, the economy just kept growing — expanding at an annual rate of 2% or more for six straight quarters. The job market, too, has remained strong. The unemployment rate has come in below 4% for more than two years, longest such streak since the 1960s.

The combination of sturdy growth and decelerating inflation has raised hopes that the Fed is engineering a “soft landing’’ — taming inflation without causing a recession. The central bank has signaled that it expects to reverse policy and cut rates three times this year.

But the economy’s strength, Powell said, means the Fed isn’t under pressure to cut rates and can wait to see how the inflation numbers come in.

Asked by the moderator of Friday’s discussion, Kai Ryssdal of public radio’s “Marketplace’’ program, if he would ever be ready to declare victory over inflation, Powell demurred:

“We’ll jinx it,’’ he said. ”I’m a superstitious person.’’

New US inflation data 'along the lines' of what Fed wants, Powell says

'WE WILL BE CAREFUL'

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Reporting by Howard Schneider; Editing by Dan Burns, Chizu Nomiyama and Paul Simao

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Covers the U.S. Federal Reserve, monetary policy and the economy, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the local staff of the Washington Post.

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Fed Chair Recalls Inflation ‘Head Fakes’ and Pledges to Do More if Needed

Jerome H. Powell, the Federal Reserve chair, said officials would proceed carefully. But if more policy action is needed, he pledged to take it.

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By Jeanna Smialek

Jerome H. Powell, the chair of the Federal Reserve, on Thursday expressed little urgency to make another interest rate increase imminently — but he reiterated that officials would adjust policy further if doing so proved necessary to cool the economy and fully restrain inflation.

Mr. Powell and his Fed colleagues left interest rates unchanged in a range of 5.25 to 5.5 percent this month, up from near zero as recently as March 2022. The Fed has raised borrowing costs over the past year and a half to wrangle rapid inflation by slowing demand across the economy.

Because inflation has faded notably from its peak in the summer of 2022, and because the Fed has already adjusted policy so much, officials are debating whether they might be done. Once they think rates are at a sufficiently elevated level, they plan to leave them there for a time, essentially putting steady pressure on the economy.

Mr. Powell, speaking at a research conference in Washington hosted by the International Monetary Fund, reiterated on Thursday that policymakers wanted to make sure that rates were sufficiently restrictive. He said Fed officials were “not confident that we have achieved such a stance” yet.

“We’re trying to make a judgment, at this point, about whether we need to do more,” Mr. Powell said in response to a question at the event. “We don’t want to go too far, but at the same time, we know that the biggest mistake we could make would be, really, to fail to get inflation under control.”

He made clear that the Fed did not want to take a continued steady slowdown in inflation for granted. While the Fed’s preferred inflation measure has cooled to 3.4 percent from above 7 percent last year, squeezing price increases back to the central bank’s 2 percent goal could still prove to be a bumpy process. Much of the added inflation that remains is coming from stubborn service prices.

“We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes,” Mr. Powell said. “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

But the Fed does not want to raise interest rates blindly. It takes time for monetary policy changes to have their full effect on the economy, so the Fed could crimp the economy more painfully than it wants to if it raises rates quickly and without trying to calibrate the moves.

While central bankers want to cool the economy to bring down inflation, they would like to avoid causing a recession in the process.

“We will continue to move carefully,” Mr. Powell said. He said that would allow officials “to address both the risk of being misled by a few good months of data and the risk of over-tightening.”

The risk of overdoing it is why central bankers are contemplating whether they need to make another move, or whether inflation is on a steady path back to normal.

As of their September economic projections, officials thought that one final rate increase might be necessary, investors doubt that they will raise rates again in the coming months. In fact, market pricing suggests that the Fed could start cutting interest rates as soon as the middle of next year.

Markets are betting there is only a sliver of a chance that the Fed will adjust policy at its final meeting of 2023, which will conclude on Dec. 13, and Mr. Powell did little to signal that a rate increase is imminent.

Still, his remarks pushed back on the growing conviction among investors that the central bank is decisively finished.

“We still believe the Fed is done hiking for this cycle, but today’s speech should serve as notice that their rhetoric must stay hawkish until they’ve seen further improvement in inflation,” Michael Feroli, chief U.S. economist at J.P. Morgan, wrote in a research note.

Some economists have been anticipating that a recent jump in longer-term interest rates might persuade the Fed to hold off on raising borrowing costs again. While the Fed sets shorter-term interest rates, longer-term ones are based on market movements and can take time to adjust — but when they do, mortgages, business loans and other types of borrowing become more expensive.

Fed officials are watching market moves, including whether they last and what is causing them, Mr. Powell acknowledged. He said officials would watch how the moves shaped up.

“We’re moving carefully now, we’ve moved very fast, and rates are now restrictive,” Mr. Powell said. “It’s not something we’re trying to make a decision on right now.”

He also used his speech to discuss some longer-term issues in monetary policy, including whether interest rates, which had lingered near rock-bottom levels for much of the decade preceding the pandemic, will eventually return to a much lower setting.

Some economists have speculated that borrowing costs might remain permanently higher than they were in the years after the deep 2007-9 recession. But Mr. Powell said that it was too early to know, and that Fed researchers would ponder the question as part of their next long-run policy review.

“We will begin our next five-year review in the latter half of 2024 and announce the results about a year later,” Mr. Powell explained.

The last review concluded in 2020 and was focused on how to set policy in a low-interest rate world, a backdrop that quickly changed with the advent of rapid inflation in 2021.

Jeanna Smialek covers the Federal Reserve and the economy for The Times from Washington. More about Jeanna Smialek

Opinion: Free Expression

Wednesday, january 25, 2023, inflation, recession, the fed - and free speech on campus.

On this episode of Free Expression, former U.S. Treasury Secretary Lawrence H. Summers tells Wall Street Journal Editor at Large Gerry Baker how much further the Federal Reserve will need to go to contain inflation, whether it will cause a recession and weighs in on the threat to expression and intellectual diversity in universities. 

Full Transcript

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

Speaker 1: From the opinion pages of the Wall Street Journal, this is Free Expression with Gerard Baker.

Gerard Baker: Hello and welcome to Free Expression with me, Gerard Baker from the Wall Street Journal editorial page. Thanks very much for listening. If you're not already subscribe, please do sign up at Apple Podcast, Spotify, wherever you listen to your podcasts. Please leave us a nice review. This week, inflation, recession, the Federal Reserve and all that, plus the state of free speech in America. I'm talking with Larry Summers leading economist, former treasury secretary and influential voice in the Democratic Party on what's next for the US and global economy. Is inflation close to being beaten? How much further will the Fed need to go to contain it, and will we manage to avoid a deep recession? Also, of course, Summers was once president of Harvard University and I'll be asking him of his concerns about the threats to free expression in American education and the growing danger of a lack of ideological and intellectual diversity on campus. Larry Summers joins me now. You are the first of my guests, come back for a repeat visit, so thank you very much indeed. Thanks for being here.

Larry Summers: Glad to be with you.

Gerard Baker: When we spoke just under a year ago, you were saying then, as you had been saying for some time that inflation was a much more serious threat to the US economy and indeed to the global economy, particularly to the US than many people both in the administration and in the Federal Reserve had been saying, you have heard this many, many times by now you approve, right. They were wrong or you were at least much more right than they were. We did see inflation being far from transitory and the Fed has been racing to catch up and raising interest rates very aggressively. In the last few weeks I think it's fair to say with evidence of some quite significant moderation in the rate of inflation, headline inflation and core inflation, and with continuing evidence that the economy remains relatively robust. We don't know yet the fourth quarter figures, but it looks like the fourth quarter '22 was reasonably solid for the US. The labor market remains pretty strong, unemployment, very down to a 50 year low job growth continuing steadily. Markets certainly seem to be thinking well that elusive soft landing that the Fed's been trying for that everybody thinks is self improved a losery, maybe we can actually pull it off this time maybe in the infamous words of the markets this time is different. What's your sense? Do you think we can achieve a soft landing?

Larry Summers: Gerard, I've said many times that soft landings of the triumph of hope over experience, but sometimes hope does triumph over experience. So I think a fair-minded person would have to say that a soft landing looks more likely today than it looked three months ago, and I think that is in no small part, a tribute to the fact that the Fed has moved substantially towards regaining credibility by moving very aggressively and that the Fed has moved to an extent that markets would've thought a year or year and a half ago that the probability that they would move this far this fast was less than 1%. And so they've taken basically the path that was recommended by those of us who are most anxious about inflation and I think they've regained a substantial credibility in that process. Where do we go from here? I think it's important to remember that there are a variety of components of inflation, not just food and energy, but used cars, hotels, airlines, variety of components of inflation that have very substantial month to month flexibility, that those components all bounced up over the last two years. That's why we recorded 7% or 8% inflation when I never felt the underlying rate of inflation in the United States was more than five or five and a half, which seemed to me to be plenty problematic. If those components that rose very rapidly now return to their normal level, that will lead inflation to be below its underlying rate for some interval and indeed if rates were seven to eight and the underlying rate is four to five, you could easily see periods when the inflation rate was 2%. So I think it's a mistake to over extrapolate from the relatively favorable inflation figures. I prefer to put a lot of emphasis on wage inflation in looking at this. I think of wage inflation as a kind of super core measure of inflation and I'd have to say that wage inflation appears to be slowing a bit more than I would've expected with a labor market this tight with a gap between vacancies and unemployment this tight. And if so, that is very encouraging about the prospects that somehow underlying inflation will come down without a substantial sacrifice in terms of lost output and reduced employment. I'm not prepared to predict that yet. I will be looking very, very closely at the employment cost index figure when it comes out at the end of January, but if we get a significantly encouraging employment cost index figure, I think that will be a basis for upgrading one sense of optimism. I do think the Fed has to be very careful here not to stop treating the disease prematurely because doing that is the best way to cause it to come back and come back in a more virulent form.

Gerard Baker: I want to come onto the Fed in specifically in detail, but we'll pick you up on that labor market issue. What's your best explanation for why the labor market is behaving as it is? It does seem that workers, as you said, there's been a moderation in wage increases, they remain quite significantly below price inflation. Workers in this position seem to be accepting real wage declines, even as you say, as the labor market remains historically tight by any of the measures that we have, including with, as you said, with an unemployment rate at a 50 year low. Is this just phrases like money illusion, are we storing up a stronger wage demands for the future? I mean your lifetime of economic research parti in this area, labor economics, what's going on?

Larry Summers: Well, first of all, I think at the moment they're seeing real wage increases. Okay, because at the moment the CPIs running well below the rate of wage growth and I think that's part of the story why people have not escalated their wage demands. I think that's one part of the answer. I think another part of the answer is, and the worrying part of the answer is that there is a fair amount of sluggishness in wages and employers do signing bonuses. Employers do loyalty bonuses. Employers do a lot of things before they move to across the board wage increases and I think the ground for concern is that they're running out of the ability to do those things and that may mean substantial wage pressure going forward. So I think it is a fair question. I think it may be if it turns out that wage inflation is slowing that some of the substantial increase in wage inflation that we saw after COVID may have been in the nature of a one-time adjustment. I also think it's hard to measure wages right now. A lot of people are working at home and when we say wages often that's how much somebody got paid for a week divided by how many hours they worked. Well, people may not be working quite as many hours relative to the number of hours they say they're working and they may not be working quite as hard when they're out of the office. So I also wonder whether the wage inflation numbers that we measure are quite representative of actual wage inflation and that is supported by the fact that the productivity statistics have not been very strong right for the last several years, last few quarters.

Gerard Baker: It's also possible that maybe we've seen a significant amount of excess savings say that the savings rate increased obviously dramatically during the pandemic. We saw these big, big government support programs. I was talking to a senior banker who said there's still quite a lot of cash in people's accounts. Are they maybe offsetting maybe a slightly lower than they might expect to get their wage increase by drawing down more on their savings? Is that possible?

Larry Summers: I think that's possible as well, but people always want more. So even if they have savings, if their employer would really be able to give them more, I'm not sure why they wouldn't bargain for more and threaten to quit more in a tight labor market. So I think I'm probably a little more skeptical of the savings hypothesis, but that would certainly be one possible explanation.

Gerard Baker: We're going to take a break there. We're going to come back. I'll be talking more about the outlook for the economy with Larry Summers, but also about the condition of American education, the troubling decline in free speech and genuine diversity of opinion among professors and students alike. Stay with us.

Speaker 1: You're listening to Free Expression with Gerard Baker. Don't forget, you can listen to the latest episode anytime on your smart speaker. Just say, play the Opinion Free Expression Podcast. Now back to Gerard Baker.

Gerard Baker: Welcome back. I'm talking with Larry Summers about the state of the economy and I'll also be asking him about the state of free speech for American universities. Let's move on to the Fed now. There's a misalignment right now between markets expectations and the Fed Zone expectations as demonstrated in the FOMC for the Federal Open Market Committee members economic forecasts. The Fed expects the push up rates from the current roundabout just under four and a half to five, maybe a little bit higher in the course of the next few months, and then pretty well to stay there. Markets I think probably obviously expecting a sharp economic slowdown and the usual kind of fed response function are expecting rates to come down quite quickly that we'll reach the peak of the Fed fund rate and then get over the hill and come down quite quickly, whereas the Fed expects more of a plateau. Who's right in your view?

Larry Summers: I don't have a strong view. I don't think that if I was the Fed, I would be working quite as hard as the Fed seems to convince people that for sure there won't be reductions in the second half of the year. The economy might go into recession and if it does, it may well be appropriate to cut rates. So in general, I am not a big fan of forward guidance. My feeling about forward guidance when Central Banks give it is that the market doesn't believe it that much so it doesn't actually influence economic behavior that much, but the Central Bank takes it very seriously down the road in terms of preserving credibility. So I think forward guidance has a tendency to constrain future action to very little benefit at the time when it is given. So I think if I were the Fed and I wanted to signal more determination, I might move a little more strongly in the short term and leave a little more open the question of how I was going to adjust monetary policy down the road.

Gerard Baker: I mean this is maybe a little unfair on the Fed, but are we seeing possibly a kind of Fed funds premium as a result of the damage to the Fed's credibility over the last couple of years that explains that the Fed is having to, as you say, reinforce its message that no, no, we are for real. We're going to inflict pain on the economy to keep it there primarily because they lost so much credibility on the other side.

Larry Summers: I think there's an element of snapback in fed behavior. Certainly I think the idea that people at the Fed want to be remembered as Paul Volcker and his colleagues rather than as Arthur Burns and his colleagues is a very, very important aspect at the Fed.

Gerard Baker: Let's talk about the longer term economic picture of some of the structural issues. Now, you wrote a lot and were very much advocate of the theory, an old theory, but one which you were very much associated with reviving what we saw, we were seeing that period from, especially in the 2010s, and actually by going back to 2000 throughout the first 20 years of the 21st century, what you talk about secular stagnation that we were seeing in an insufficiency of demand in the economy and that we needed to do much more to generate demand and that's why we had this extraordinary period of low interest rates and relatively low growth. And a lot of people agreed with you, but there were certainly without any question that financial conditions generally certainly suggested something unusual was happening. Do you think the pandemic and the period that's followed the pandemic is a kind of brief interruption from that phase of economic history or do you think we've now passed a kind of a turning point in that we're into maybe some broader different structural conditions in the economy?

Larry Summers: I think that's the central question for financial markets, Gerard, and I think you posed it very well and I go back and forth as to the answer on the side of it's a brief interval and we will go back to secular stagnation. You have the observations that the fundamental forces of lower price capital goods, demography, increased inequality, more investment in intangible things are still very much operative and to inhibit demand. On the other side, you have the fact that we have accumulated and will accumulate substantially more government debt than we had before. We will run substantially larger budget deficits in this decade than we did during the decade of the nods and the investment program that has been laid out both to meet green challenges and to meet resilience. If you need to build two of everything, then you're investing more. All of those things, the deficits, the green investment, the resilience investment, the increased debt, those things all point towards higher real rates and away from secular stagnation. And I don't think anybody can know which of those views is right and there may be elements of truth in both of them. I think my guess is we're not going to go all the way back to the period of secular stagnation that we had. It's interesting to study history. People thought we had secular stagnation in the late 1930s, then we had World War II, which blew that out of the water because we had such massive fiscal stimulus. The general view of leading economists in 1943 or 1944 was that it would be back to secular stagnation after World War II and that turned out not to be the case at all. So I could go either way on it. I think my best guess is it will not be secular stagnation as virulent as the secular stagnation we suffered.

Gerard Baker: One of the factors that people cite to say that we might be entering a new era of economic development, particularly interesting to get your views on this because you know were deputy treasury and then you were treasury secretary and the Clinton administration very much at that time when this period of globalization was really not beginning but really taking off. We were seeing China emerge dramatically in the 1990s into the world economy enter the WTO when you were at the treasury, there was a lot of optimism that we'd entered the period in which international trade flows, international capital flows even migration was expanding. This were lowering costs, it was producing all kinds of benefits for the global economy. We have obviously seen, and again this could be short-term factors, we've seen a political backlash to some extent against globalization, which is taking effect. We've seen geopolitical tensions, which are some extent reversing or stalling globalization. We've seen supply chain concerns, companies, reshoring, nearshoring, French shoring, whatever you want to call it. And we've seen again this sort of broader geopolitical risk. Do you think that that phase in which, again you can measure it in the numbers we saw the proportion of global GDP accounted for by trade and capital flows, things like that is that at an end or again, is it too early to say.

Larry Summers: It's surely too early to say, there clearly will be changes that will come from globalization. My suspicion is that barring geopolitical catastrophe, which certainly is conceivable but is not what I would expect. I think that globalization will progress. I think resilience needs will be met with increased diversification of supply chains and that increased diversification in many cases mean more globalization rather than less. I think technology is really transformative. It was not that many years ago when I would think to myself consciously, I'm making an international phone call now. That's not something that even occurs to me now. It was only five years ago that it would've been a novelty to engage in a video conference with someone who was located in another country. So I think that the technology and the technology's way of opening things up is going to be very, very important in terms of what happens to globalization. And my sense is that the core dynamic where people in one country are going to have their lives ever more affected by things that happen outside their country, I think that's something that's likely to continue barring again, geopolitical catastrophe.

Gerard Baker: Trump came in obviously six years ago, had this very robust approach towards China and post tariffs on the Wall Street Journal editorial page we didn't think was a very good idea and it didn't turn out to be a particularly good idea, but it took a very much more robust approach. But it does seem as the Biden administration, some of the tariffs remain in place. President Biden still got to decide with remove those, but it's also taken a pretty tough line with China economically, particularly in the field of technology and transfer. We've seen significant new restrictions on transfer of technology and on imports of technology. Again, given the way the administration has to weigh the geopolitical challenge that China obviously represents, nobody would really deny that. Weighing that against the kind of economic virtues of economic integration and globalization we've talked about, do you think they're getting that balance right?

Larry Summers: It's very difficult to judge national security balances without classified information of a kind that I don't have. I think the right principle is that we obviously need to protect our national security where sensitive technologies are involved and I think that's got to be something that a serious country like ourselves does. I worry when we extend the set of technologies in which we need to have leadership towards various green technologies which aren't much related to military hardware, I worry when we extend it in other directions that isn't centrally related to our national security. Because I think for us to run a policy that appears to be suppressing China economically would really be quite dangerous. And I think we need to define a policy, I've called it calibrated integration that does restrict things for our national security, but which needs to be presented in a way where there's no sense that it's our economic objective to hold down China rather than to allow China to define its own greatness, but to do so in ways that have appropriate safeguards.

Gerard Baker: While we're on the talk of China, how do you see China's economy? Obviously it's been again a very turbulent couple of years. They had the Zero COVID policy, which obviously led to significant slowdown. They lifted the Zero COVID policy just a couple of months ago. We don't really know yet the consequence of that. We did have some interesting GDP figures just released, but then they faced these larger structural issues of a developing economy, more consumer-led growth, clearly structural factors leading to what seems to be a secular slowdown in growth potential. And then there's the whole issue of excesses in the financial sector, particularly in real estate. There's been Xi Jinping's turn away from the kind of liberalizing approach that his predecessors are taken. A few years ago everybody seemed to be convinced that China was on a path to take the United States, not just obviously in total nominal GDP, but even maybe ultimately in GDP ahead, where's the Chinese economy heading? And it's obviously so important for the rest of the world because it's been such an important contributor to growth for the world in the last 20 years.

Larry Summers: Short term I think experience of countries is that when they put COVID in the rear view mirror, there's a big growth spurt and I think that China is going to get there pretty quickly probably by the end of the first quarter. So I'd be looking for pretty rapid phase of recovery growth in China. Medium term I put substantial weight, no one can know for sure, on the possibility that China will look in history as Russia did in 1960 or as Japan did in 1990. An economy that has recently grown quite rapidly, an economy that puts a lot of emphasis on discipline and central direction and economy with a very high capital investment rate and economy with less emphasis on consumption and more emphasis on production with emphasis on manufacturing production. But the growth process in both Russia and Japan ran out of gas in a certain sense despite the enormous technological achievements that caused America to be quite fearful of Russia in 1990 and Russia 1960 and Japan in 1990. And my instinct is that some of that is what we're going to see with respect to China.

Gerard Baker: Finally, Larry shift of gears away from the pure topic of applied economics as we've been discussing it here to a topic that I know you concerns you, you are concerned about, you're an academic, you were president of Harvard University, you remain a professor obviously at Harvard University. There is clearly a kind of an intellectual ferment going on in higher education that we've seen steadily over a long period over generation or so, but which does seem to be accelerating in the last few years. A tendency towards the discouragement, shall we say, of dissenting views from what might be called a kind of progressive orthodoxy. People talk about cancel culture, it's a bit of an overused cliché, but the condition of many universities, including excluding some of our finest universities are both in the United States and in the UK, does seem to be fostering a climate of restrictions on free speech and on free expression for academics. Is that overdone? Is that something that we on the right go overboard about or is it someone from you, from a democratic, from a progressive democratic perspective is that something that you think we should be worrying about?

Larry Summers: I think you on the right are highly selective in the way you frame the issue. Somehow when Governor DeSantis proposes to ban certain books from libraries or when proposes to outlaw the teaching of critical race theory approaches, you tend to remain silent. You don't seem to recall with any vividness that your ancestors were determined to purge those who had ever attended a communist rally from American universities in the 1950s. So I think it's a grave mistake to suppose that the desire to limit uncomfortable discourse is something that's felt only on the left. I think it is felt on the left and on the right.

Gerard Baker: People on the right don't control universities do they, which is the primary channel in which ideas probably germinate in this country and around the world. What Governor Sanders does is not going to have much-

Larry Summers: In fairness, more students attend universities controlled by Governor DeSantis than attend-

Gerard Baker: Governor DeSantis can't tell the University of Florida what to do with its certain-

Larry Summers: Passes legislation, talking about certain courses and certain kinds of curriculums are outlawed, and more students attend the various Florida universities than attend the entirety of the Ivy League.

Gerard Baker: Do you think those state universities in Florida are teaching a kind of right wing orthodox?

Larry Summers: Certainly in the high schools and increasingly there is pressure on state universities.So I think we will all be better on this issue if we approach it not in terms of the content that we like or don't like, but in terms of principles of openness to even debate over ideas that we loathe. And I think there is a serious problem in a number of our elite universities of ruling out in various ways, perspectives that are uncomfortable. I always said to students when I was president that if your education does not cause you a number of moments of acute discomfort, your education will have been a major failure. So I do think we should all stand up for the idea that universities should be places that revere thoughtful iconoclasm and vigorous debate and that we'll probably be more successful in confronting these issues if we recognize that no perspective has a monopoly on sin or a monopoly on virtue.

Gerard Baker: This is not necessarily a completely tightly related question, but do you think it's a problem that surveys, which are pretty reliable shows again and again and again that in major universities, and by the way this includes state universities as well as the major private universities, the vast number of academics, the vast preponderance of academics are self-identify as liberals, as progressives, and the proportion who are conservatives is shrinking to minimus number. Now that is not inconsistent with the notion that you would allow free speech, but is that a problem? Is the fact that we have such a heavy preponderance of people of a particular ideological disposition in charge of the teaching of our major universities? Is that in itself a problem?

Larry Summers: Gerard, I'd say three things about that. First, I think it matters what field you're talking about. I don't think it really matters at all whether a teacher of introductory physics is a progressive or a conservative, but I wouldn't say the same thing about history or economics. Second, I think it's important to understand what is probably the most important social process that produces that outcome and it's this, if you like capitalism, there are a wide range of choices open to you, including going to work for all kinds of companies. If you are hostile to commerce and capitalism, you have a much narrower range of choices. And I think that helps to explain why journalists are also disproportionately-

Gerard Baker: True, very true, guilty as justice.

Larry Summers: Progressive. So I think it would be a serious mistake to assume that this represents discrimination. But third, I do think that intellectual diversity is as important to the mission of higher education as demographic diversity and that it's appropriate to make more efforts in our major universities to promote intellectual diversity. And that's certainly something I tried to do during my time as president of Harvard. But I do think that it is a mistake to assume that if the world operates without discrimination, every category will be represented in every activity in proportion to its proportion in the population. And that certainly applies here as well.

Gerard Baker: On that, I think we can agree. Larry Summers, thanks very much indeed for joining us on Free Expression.

Larry Summers: Thank you.

Gerard Baker: Well, that's it for this episode of Free Expression. Thanks for joining us. I'll be back next week with another exploration of one of the pressing topics facing our world. In the meantime, have a great week and goodbye.

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Gerard Baker

Editor at large, the wall street journal.

Gerry Baker is Editor at Large of The Wall Street Journal. His weekly column for the editorial page, “Free Expression,” appears in The Wall Street Journal each Tuesday. Mr. Baker is also host of “WSJ at Large with Gerry Baker,” a weekly news and current affairs interview show on the Fox Business Network, and the weekly WSJ Opinion podcast " Free Expression " where he speaks with some of the world's leading writers, influencers and thinkers about a variety of subjects.

Mr. Baker previously served as Editor in Chief of The Wall Street Journal and Dow Jones from 2013-2018. Prior to that, Mr. Baker was Deputy Editor in Chief of The Wall Street Journal from 2009-2013. He has been a journalist for more than 30 years, writing and broadcasting for some of the world’s most famous news organizations, including his tenure at The Financial Times, The Times of London, and The BBC.

He was educated at Corpus Christi College, Oxford University, where he graduated in 1983 with a 1st Class Honors Degree in Philosophy, Politics and Economics.

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Special Briefing on Inflation and Recession Risks for States and Cities

Watch A Special Briefing on Inflation and Recession Risks for States and Cities

Thursday, April 21, 2022, at 11 a.m. EDT

The Volcker Alliance and Penn Institute for Urban Research hosted a Special Briefing on the outlook for inflation, interest rates, the possibility of a recession, and what this means for state and local finance. The event began with Jerome H. Powell, Chair of the Board of Governors of the Federal Reserve System, delivering brief welcoming remarks in appreciation of Paul A. Volcker (1927-2019), former Federal Reserve Chair and founding Chairman of the Volcker Alliance.

Our panel of experts included Mark Zandi, chief economist, Moody’s Analytics; Matt Gress, budget director, Arizona; Natalie Cohen, founder, National Municipal Research; and Les Richmond, vice president and actuary, Build America Mutual Assurance.

Moderated by William Glasgall , Volcker Alliance senior director, public finance and Penn IUR Fellow, and Susan Wachter , co-director of Penn IUR, this briefing is the thirtieth in a series of sixty-minute online conversations featuring experts from the Volcker Alliance's national research network and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders. 

Special Briefings are made possible by funding from The Century Foundation , the Volcker Alliance, and members of the Penn IUR Advisory Board.

Recordings of the entire Special Briefings series are available on the Volcker Alliance website: SPECIAL BRIEFING SERIES ARCHIVE .

Special Briefing Episode Summary:

States and Cities Gird for Rising Interest Rates, Recession as Inflation Surges

By Stephen Kleege, Volcker Alliance Special Project Consultant 

States and cities are well positioned to weather surging inflation and the slower growth that may follow, according to panelists at an April 21 Special Briefing -- a webinar hosted by the Volcker Alliance and the Penn Institute for Urban Research and highlighted by an appearance by Federal Reserve Chairman Jerome H. Powell.

With the Covid-19 pandemic winding down, governments are benefiting from a strong economic rebound, better-than-expected tax receipts, flush rainy-day funds, and trillions of dollars of federal money for Covid relief and infrastructure programs. At the same time, panelists said, inflation is already putting wage pressure on states and localities and threatening to increase the costs of funding their pension programs. And the Federal Reserve has started raising interest rates in a bid to stabilize prices, potentially slowing the economy.

Powell kicked off the session with a recorded tribute to Paul A. Volcker, founding Chairman of the Volcker Alliance. Volcker raised interest rates aggressively to stamp out inflation as Federal Reserve Chairman from 1979 to 1987, leading to a long period of price stability, Powell said.

"Paul Volcker knew that in order to tame inflation and heal the economy, he had to stay the course,” Powell said. “He demonstrated resolve and integrity by refusing to be swayed by political expediency."

Moderated by William Glasgall , Volcker Alliance senior director, public finance and Penn IUR Fellow, and Susan Wachter , co-director of Penn IUR, this briefing was the thirtieth in a series of sixty-minute online conversations featuring experts from the Volcker Alliance's national research network and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders. Panelists included Mark Zandi, chief economist of Moody’s Analytics; Matt Gress, budget director, Arizona; Les Richmond, vice president and actuary for Build America Mutual Assurance; and Natalie Cohen, founder, National Municipal Research.

 “The most likely scenario for the U.S. economy over the next twelve to twenty-four months is for it to evolve into a self-sustaining economic expansion,” Zandi said. He predicted inflation will fall close to the Fed’s target of about 2 percent by the end of 2023, from more than 8 percent in March.

Zandi based that forecast on the assumption that the pandemic will continue to wind down, that oil and natural gas price increases due to Russia’s invasion of Ukraine will ease, and that the Fed will be “up to the task” of stabilizing prices while maintaining growth. Zandi estimated that the probability of recession over the next 12 months has risen to one in three, though he said if a recession does occur it would be mild, thanks to strong corporate and government balance sheets and the strengthening of the financial system following the Great Recession.

Gress said inflation has been running at 10.9 percent in the Phoenix metropolitan area, about three percentage points higher than the national average, and the fastest rate among the areas tracked by Bureau of Labor Statistics. “The typical Arizona household has spent more than $4,500 for the same goods and services over the past 14 months than they would have on average compared to 2020 prices. And that is including $600 more in gasoline alone.”

Arizona sales tax receipts have risen 17 percent through March from a year earlier, with about 40 percent of the increase due to inflation, he said. While higher prices have had a positive effect on revenue, inflation is also increasing wage pressure in the state, where 57 percent of the budget is attributable to personnel costs. “This year we’ve included over $200 million in the governor’s budget for wage increases for state employees,” Gress said. “That’s the largest state wage increase we’ve made in over a decade.”

Pension risks are also rising for states, which will have to increase contributions to plans as wages rise, or if higher interest rates lead to declines in the stock market.   “In higher inflation environment, the stage is set for underperforming assets versus what actuaries expected,” Build America Mutual’s Richmond said. “When that happens unfunded liabilities grow, and budgetary requirements that are needed to pay for them will grow as well.”

“It seems all signs are pointing to the negative in terms of pension risk,” Richmond said. One potential positive could occur, he said, if interest rates rise enough to allow well-funded public sector pension plans to avail themselves of pension risk transfer, or paying an insurance company to provide an insured annuity to take the obligation away from the pension plan.

Cohen, of National Municipal Research, said rising interest rates have already cut into municipal bond sales, which had topped $480 billion in each of the past two years. Part of that volume was driven by issuance of taxable bonds, which allowed municipalities to save money by refinancing debt, a tactic that’s not economical with higher interest rates. “I would not be surprised to see significantly lower volume through the rest of 2022,” she said. “Maybe we’ll end up $100 billion lower than last year.”

Though she cited several examples of infrastructure projects, Cohen said inflation also may dampen infrastructure spending. “Planning a capital budget is a lot trickier with such inflated costs,” she said.

During a question-and-answer session, Zandi said there’s little risk of a return to stagflation of the 1970s, characterized by high unemployment and high inflation.

“That’s a policy choice. Paul Volcker would really have a problem with us committing that error again,” Zandi said. “That’s the lesson we learned from the Volcker period, and I think that’s the lesson that’s been clearly inculcated in Powell and other Fed members, and I just don’t see them making that mistake again.”

Jerome H. Powell  took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028.

Prior to his appointment to the Board, Mr. Powell was a visiting scholar at the Bipartisan Policy Center in Washington, DC, where he focused on federal and state fiscal issues. From 1997 through 2005, Mr. Powell was a partner at The Carlyle Group.

Mr. Powell served as an Assistant Secretary and as Under Secretary of the US Department of the Treasury under President George H.W. Bush, with responsibility for policy on financial institutions, the Treasury debt market, and related areas. Prior to joining the Bush administration, Mr. Powell worked as a lawyer and investment banker in New York City.

In addition to service on corporate boards, he has served on the boards of charitable and educational institutions, including the Bendheim Center for Finance at Princeton University and the Nature Conservancy of Washington, DC, and Maryland.

Mr. Powell was born in February 1953 in Washington, DC. He received an AB in politics from Princeton University in 1975 and earned a law degree from Georgetown University in 1979. While at Georgetown, he was editor-in-chief of the  Georgetown Law Journal .

Mr. Powell is married with three children.

Dr. Zandi is the author of Paying the Price: Ending the Great Recession and Beginning a New American Century, which provides an assessment of the monetary and fiscal policy response to the Great Recession. His other book, Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis, is described by the New York Times as the “clearest guide” to the financial crisis. Dr. Zandi earned his BS from the Wharton School at the University of Pennsylvania and his PhD at the University of Pennsylvania.

Natalie Cohen is president and founder of National Municipal Research, a consulting and research company focused on U.S. state and local government finance. She publishes on these topics at The Public Purse. A seasoned analyst, writer and speaker, she started her career at New York City OMB, worked at a rating agency, several bond insurers and is known for her published work on municipal bond defaults. She most recently spent eight years building and branding municipal research at Wells Fargo Securities. She was awarded the Lifetime Achievement award by Smith’s Research and Gradings and the Women Trailblazers award from the Bond Buyer.

She has an MPA from New York University's Wagner School of Public Service and a BA from Hampshire College in Amherst, Massachusetts. She has been a member of the Government Accounting Standards Advisory Council, a former board member of the National Federation of Municipal Analysts. She served two terms on the Government Finance Officers Association standing budget committee and is on the GFOA Committee on Retirement Benefits Administration. She is also a board member of Build America Mutual, a bond insurer, and chairs the Audit Committee.

Les Richmond evaluates the credit risks related to pension and other postemployment benefit plans for all of the municipal issuers BAM guarantees – to date more than 5,000 individual borrowers with more than $85 billion par outstanding. His methodology includes creating comparisons between plans using a set of standardized, conservative assumptions. Les also provides support to BAM’s credit committee in developing its underwriting guidelines for analyzing pension risks and responding to emerging issues in the field. 

Prior to joining BAM in 2013, Les was with Hay Group, where he was a Senior Principal. Duties included being the Project Leader of a four-year engagement to conduct an actuarial audit of the five New York City Retirement Systems. He also conducted special pension studies for the New York City Office of the Comptroller. Prior to that, he was a Senior Vice President of Aon Consulting, which he joined in 1986, with responsibility for providing actuarial consulting on pensions, post-retirement health and life insurance benefits and executive benefits. 

Les is an Associate of the Society of Actuaries and an Enrolled Actuary. He is also a member of the American Academy of Actuaries, Fellow of the Conference of Consulting Actuaries and a member of the American Society of Pension Professionals and Actuaries. He holds a B.A. in Mathematics from Rutgers College. He is a member of the National Federation of Municipal Analysts and the Municipal Analyst Group of New York.

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Powell: ‘No reason’ to think economy is close to recession

Federal Reserve Chair Jerome Powell said Friday that there’s “no reason” to think the U.S. economy is close to a recession.

“Growth is strong,” Powell said at a conference in San Francisco. “As I mentioned, the economy is in a good place. There is no reason to think the economy is in a recession or is at the edge of one.”

The U.S. economy has largely defied expectations over the past year and a half, avoiding the recession that many economists were anticipating at the end of 2022.

In what many have declared a “soft landing,” inflation has come down significantly without triggering a major economic downturn. After peaking at 9.1 percent in June 2022, one measure of inflation, the consumer price index (CPI), has since fallen to 3.2 percent. 

The labor market has also remained surprisingly resilient in the face of repeated interest rate hikes by the Fed, as the central bank has attempted to tamp down inflation. 

The economy added 275,000 jobs last month, while the unemployment rate sat at 3.9 percent, continuing the longest sub-4 percent streak since the late 1960s.

At its latest meeting earlier this month, the Fed opted to hold its baseline interest rate steady once again at a range of 5.25 to 5.5 percent, where it has remained since last summer. Powell has maintained that the central bank needs to see more “good” data before cutting rates.

“Inflation has eased substantially while the labor market has remained strong. And that is very good news,” Powell said at a press conference last week. “But inflation is still too high. Ongoing progress in bringing it down is not assured. And the path forward is uncertain.”

A separate inflation gauge closely monitored by the Fed, the personal consumption expenditures (PCE) price index, showed a slight uptick last month, according to new data released Friday. 

PCE inflation rose 0.3 percent over the previous month and 2.5 percent year-over-year in February, the data showed.

However, Powell said Friday that the latest numbers were “pretty much in line with our expectations,” emphasizing that the Fed still expects inflation to gradually “come down on a sometimes bumpy path.”

For the latest news, weather, sports, and streaming video, head to The Hill.

Nearly half of all investors expect a ‘no landing’ scenario for the economy where inflation remains but there’s no recession, Deutsche Bank survey shows

Just a year ago, most investment banks and Wall Street investors were forecasting a U.S. recession due to the impact of persistent inflation and higher interest rates. Some 65% of economists polled by Bloomberg in March 2023 were convinced the U.S. economy was headed for a serious downturn within 12 months. But with U.S. consumers and businesses proving their resilience over the past year, Wall Street’s top minds have mostly abandoned their recession predictions. Even what was long considered to be the obvious alternative to a recession—a “ soft landing ” in which inflation fades, but economic growth is weak—is increasingly in doubt.

Instead, 45% of investors now believe the U.S. economy is headed for a “no landing” scenario where inflation sticks slightly above the Federal Reserve’s 2% target and economic growth remains robust, according to Deutsche Bank’s March Global Markets Survey. Some 38% of respondents to Deutsche Bank’s survey still expect a “soft landing,” but just 17% expect a recession or “hard landing”—a considerable shift from how economists felt just a year ago.

The news comes after Fed Chair Jerome Powell brushed off two hotter-than-expected consumer price index reports in January and February that had some investors concerned about the threat of persistent inflation and a more hawkish Fed. Powell told reporters at a March 20 press conference that the hot inflation reports “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2%.”

Deutsche Bank’s global head of economics and thematics research, Jim Reid, described many investors’ new “no landing” outlook after the Fed chair’s comments.

“So, you could say [it’s] an implied Goldilocks ‘no landing’ for now with the economy running hot but with central banks not leaning against it and the markets quite liking their porridge on the warmer side for now,” he wrote in an email to clients Monday.

Reid argued that only “time will tell” if investors are being overly optimistic about what the “no landing” scenario means for markets, but he outlined why he believes many are bullish.

Basically, investors are forecasting slightly above target inflation, which is typically bad for stocks because it signals higher interest rates—or at least fewer rate cuts than previously forecast. But this time, with the Fed brushing off recent hot inflation reports and economic growth proving resilient, we could be stuck in a Goldilocks zone in the near term, according to Reid. The Wall Street veteran noted U.S. stocks had their best week of 2024 after Powell’s comments last week because the Fed seemed “very confident of their ability to cut rates in June even with recent elevated inflation prints.”

Another reason that markets are performing so well even as investors raise their inflation forecasts could be their faith in the Fed’s willingness to ignore minor increases in consumer prices moving forward, too. Reid noted that 47% of survey respondents believe “central banks should tolerate an extended inflation overshoot.” 

For now, it seems investors are more worried about inflation than a recession, and they don’t seem all that concerned about an aggressive Fed coming in to wreck the party if inflation does return. As a result, only 13% of respondents to Deutsche Bank’s survey said they expect a U.S. recession this year, down from 59% just three months ago.

Still, in a sign that 2024 really is the year of economic uncertainty , many experts are struggling to forecast the future of the U.S. economy. Some 19% of respondents said they “don’t know” when the next U.S. recession will occur, up from just 3% a year ago.

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The Recession Question

President, Federal Reserve Bank of Richmond

Risk Management Association – RVA Chapter Triple Crossing Richmond, Va.

Highlights:

• Inflation is too high. But the Fed has the tools to contain inflation over the medium-term, and we are committed to returning inflation to our target.
• The elevated concern about a recession is understandable. But the challenge in predicting a recession tomorrow is the strength of the aggregate data today.
• A slowdown from our current situation must be kept in perspective. We are out of balance today. Returning to normal doesn’t have to require a calamitous decline in activity.
• The Fed has the credibility with households, businesses and markets required to return inflation back to normal levels. There is of course recession risk along the way, but there’s also the prospect of the economy returning closer to normal.

I like giving speeches. The economy matters to everyone. When I speak, I get to share what the Fed is learning and doing, in what I hope is plain English. But my favorite part of every speech is when it ends. Of course, I hope that won’t be your favorite part today.

I like ending a speech because that’s when I get to hear from you. Through your comments and questions, I learn how you’re experiencing the economy and what’s top of mind. Before the pandemic, the most popular question was when our lengthy expansion would end. Then, of course it was the impact of COVID-19. Once stimulus passed, it became the deficit. Last year, audiences moved on to the definition of “transitory” and the value of cryptocurrencies. And so far this year, it’s been all about rate increases.

So, what am I hearing today? Two questions. The first would have been hard to imagine just two years ago: “Will inflation go back down to normal levels?” Remember it had lagged our two percent target ever since the Great Recession. The second goes full circle, asking again, “Are we headed into a recession?”

Today, I want to try to tackle those questions. I caution that these are my thoughts and not those of anyone else in the Federal Reserve System. I also feel obliged to repeat the joke that economic forecasters were created to make weather forecasters look good. After all, when I answered recession questions three years ago, I certainly didn’t talk about a pandemic shock.

So, first: “Will inflation return to normal?” That answer is simple: yes. Inflation is too high. But the Fed has the tools to contain inflation over the medium-term, and we are committed to returning inflation to our target. You’ve likely seen that over our last three meetings we have raised rates 150 basis points, started shrinking our balance sheet and signaled there are more rate increases to come. We are meeting the test we face and have made clear we will do what it takes.

But that commitment, which hopefully you welcome, directly leads to the second question: “Are we headed into a recession?” I would caution that no one canceled the business cycle, so one can never fully rule out a recession — it’s just a question of timing. But I get why the concern might be elevated today.

First, consumer and business sentiment are quite negative. In the most recent Michigan Survey, consumer sentiment fell to its lowest level on record. In addition, the percentage of small business owners who expect better conditions over the next six months dropped to the lowest level in that survey’s history in May. Both surveys show inflation driving this pessimism. Typically, sentiment this low is associated with a weakening in consumer spending and business investment.

At the same time, fiscal support from the pandemic is waning, and — as I mentioned — inflation is moving the Fed to increase rates. Higher rates tend to slow the economy by increasing borrowing costs and disincentivizing spending and investment. Historically, eight of the last 11 Fed tightening cycles have been followed by some sort of a recession. 1

That change in policy may well be making markets skittish. That’s understandable: The Fed hasn’t moved this quickly in over 20 years. And forecasters are predicting that our current rate increase cycle will go higher than its predecessor’s relatively low 2.4 percent 2019 peak. Now, the stock market is not the economy. But if markets were to crater, that could slow the economy by leading individuals and firms to pull back their spending and investment.

Those who look more closely for signals may be pointing to flashing lights coming from the 2-10 yield curve, a closely watched recession predictor that inverted briefly in March and again in mid-June. When short-term interest rates are higher than long-term ones, markets see risk on the horizon. The 2-10 yield curve has predicted eight of the last seven recessions. I should note that Fed research suggests it’s the short end of the yield curve that is a cleaner signal — and that end remains steep.

Another frequently cited signal has been the dramatic recent increase in oil prices, which has occurred in advance of most of our past recessions.

There’s also a fear about what else may come our way. We’ve already seen multiple supply side challenges, including pandemic-era shortages, the war in Ukraine and the lockdowns in China. Each has fanned the flames of inflation and raised questions about future demand. Who knows what is to come next?

So, I understand why some are forecasting a recession. And risk managers like you need to consider this risk in your scenario planning. But the challenge in predicting a recession for tomorrow is the strength of the aggregate data today.

Consumer spending is about two-thirds of the economy, and it remains quite healthy, supported by strong personal balance sheets, excess savings accrued during the pandemic and freedom from COVID-19 restrictions. Just try to book a trip this summer. We are seeing spending pivot from goods to services (affecting some retailers), and early signs of stress for those with lower incomes — but not enough to affect the overall numbers. The negative first quarter GDP was driven by one-time reversals in inventories and net exports and should rebound this quarter. The unemployment rate is historically low at 3.6 percent, and there are still 1.9 job openings for every unemployed person. While rates are rising expeditiously, they have not yet reached the level which constrains the economy. I have noted pullbacks in auto and home sales, but — with prices still rising — attribute both mostly to continuing supply shortages.

And household and bank balance sheets look healthy. Households and financial institutions deleveraged after the Great Recession. By the start of the pandemic, households had returned to debt levels last seen in 2001, 2 and many used stimulus funds to pay debt down even further. You can see the different dynamics in play by looking at the housing market. If the phrase of the day before the Great Recession was “subprime mortgages,” today it’s “cash offer.” We are in a very different place.

So, data on today’s economy still looks relatively healthy. Tomorrow is of course unclear. Our path forward depends on three significant uncertainties. First, how long will it take the pandemic’s impact on spending, labor supply and supply chains to normalize? Second, how high does the Fed need to raise rates to calm demand, bring inflation down and keep inflation expectations anchored? And third, what other outside forces will push demand and/or inflation up or down?

Barring an unanticipated event, I see rising rates stabilizing any drift in inflation expectations and in so doing, increasing real interest rates and quieting demand. Companies will slow down their hiring. Revenge spending will settle. Savings will be held a little tighter. At the same time, supply chains will ease; you have to believe chips will get back into cars at some point. That means inflation should come down over time — but it will take time.

This moderation of demand could happen without crossing the line into the technical definition of a recession. But my dad was a depression child, and he taught me not to expect the best case and run the risk of being disappointed. Instead, I always have my mind around the downside, and welcome it if I’m positively surprised. Perhaps many of you in risk management think the same way. A recession downside would of course be unwanted, but not all recessions are equal. We’ve been scarred by our memories of the Great Recession and the Volcker recession, but it’s worth remembering that most other recessions aren’t that long or that deep.

And a slowdown from our current situation must be kept in perspective: We are out of balance today because stimulus-supported excess demand overwhelmed supply constrained by the pandemic and global commodity shocks. Returning to normal means products on shelves, restaurants fully staffed and cars at auto dealers. It doesn’t have to require a calamitous decline in activity. As for financial markets, they are hardly the whole economy, but even they could benefit from reaffirmation that trees don’t grow to the sky and a reminder that valuations are always worth a fresh look.

Most importantly, moderating demand has a higher purpose squarely in our mandate: containing inflation. If there is any lesson that’s been relearned in the last year, it is that everyone hates inflation. Workers who feel they have earned wage gains feel arbitrarily pinched at the gas pump. Homeowners like their sale price but can’t believe their purchase price. Businesses work to capture value through pricing but feel they’re being taken advantage of by suppliers.

Why do they hate inflation? Inflation creates uncertainty. As prices rise unevenly, it becomes unclear when to spend, when to save or where to invest. Inflation is exhausting. It takes work to shop around for better prices and for firms to handle complaints from unhappy customers and negotiate with insistent suppliers. And inflation seems unfair. In the ‘70s, those who owned a house with a cheap mortgage benefited; those on fixed incomes did not.

The Fed is on a path to return inflation back to normal levels. We have the credibility with households, businesses and markets required to deliver that outcome. We may or may not get help from global events and supply chains. There is of course recession risk along the way, but there’s also the prospect of the economy returning closer to normal.

And now for the part I like the best. I’d like to hear your sentiment on the economy. I’m interested in how businesses might be changing their hiring, investment and pricing plans. I’m curious how supply chains, labor markets and spending patterns are evolving. We at the Fed have a commitment to open communication, but it’s not a one-way street. What I learn from you is as important as what I get to share. And I welcome your questions (and perhaps advice for my next speech).

“ Alan Blinder on Landings Hard and Soft: The Fed, 1965-2020 .” Princeton University Bendheim Center for Finance. February 11, 2022.

Household debt level is here measured as credit to households and nonprofit institutions serving households from all sectors at market value as a percentage of GDP via the Bank for International Settlements (Source: BIS total credit statistics ).

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More From Forbes

25% food and dining inflation indicates recession.

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The food basket keeps requiring more currency

Food prices, both "at home" (think grocery stores) and "away from home" (think restaurants), are up 25% during the Covid period from January 2020. This high cost change of a consumer necessity is cause for recessionary actions.

Reuters just published this timely article that explains the food inflation's reality effects: " Fast-food companies seeing low-income diners pare orders " (March 27 - Underlining is mine).

"Runaway prices at U.S. fast-food joints and restaurants have made people skittish down the income ladder and executives at chains including McDonald's MCD and Wendy’s recently said they worry about losing business from those on the tightest budgets.

" Roughly a quarter of low-income consumers, defined as those making less than $50,000 a year, said they were eating less fast food and about half said they were making fewer trips to fast-casual and full-service dining establishments , according to polling in February by Revenue Management Solutions, a consulting firm."

While consumer spending on food continues to be about 14% of the total spending in the CPI, the portion spent on eating out has dropped from 45% to 40% of food spending. Therein lies the recession indicator (as has happened in past inflationary periods).

Best High-Yield Savings Accounts Of 2024

Best 5% interest savings accounts of 2024.

While the Reuters article deals with lower-income consumers, the effect of a 25% increase in food and restaurant prices is widespread. Similar to $10.00 meals now costing $12.50, $100 meals are now up to $125. That sizable drop in restaurant spending shows the effect goes beyond low-income diners.

Restaurants other major cost: Labor

Employee shortages and overall inflation have also pushed labor costs up 25%. This graph shows the 25% rises for the three measures:

Different paths, but similar results

The bottom line - Inflation boosts recession probability

Focusing on top line numbers like GDP misses the uneven and adverse effects of inflation. Much of today’s business and investment commentary focuses on the Fed lowering the interest rate to make times bright again. However, negative undercurrents are building that will upend those rosy hopes.

Look beyond the $trillion companies and the $billionaires' successes. The numbers that mean more now are the adversely affected population statistics. From the Reuters' article ( underlining is mine):

"In the Fed’s most recent Beige Book compendium of anecdotal reports gathered from business and community contacts around the country, 7 of 12 regional Fed districts reported low-income consumers were changing spending habits in search of bargains, seeking more help from community groups, or struggling to access credit .

"About one-third of Black American households, and 21% of white American households, earned less than $35,000 in 2022 , according to the latest available U.S. census data."

History offers the lessons being relearned today. As the 1966 to 1982 inflation period rolled out, it kept revealing more adverse effects. The problem is, when a country's currency is in decline, "everyone" (no matter their occupation, rank, income, or wealth) reacts - both to protect themselves and to take advantage of "anomalies" (AKA others' hard luck).

Want to see this thinking in action now? Here is what the low-end restaurant execs are saying (from the Reuters' article - underlining and bold are mine):

"For fast-food companies that often promote an image of affordability, low-income consumers are a significant portion of the customer base and a bellwether for longer-term trends. But they are typically the first to cut back spending and the last to come back.

"But now, chains may be less likely to chase customers as hard as they have in the past because even with a drop in traffic, sales have remained consistent supported by increased prices .

" Fast-food companies aren't 'in a hurry to take traffic over profit the way they were a decade ago ,' said Mike Lukianoff, CEO of SignalFlare.ai and a veteran consultant in the fast-food industry."

Will this "new" strategy of putting profits ahead of customer count and product sales succeed? No. This is a typical, unrealistic stopgap measure when things go awry. Note the profit-first payoff areas: Stock price and stock options. As happened before, this strategy will collapse as soon as the first competitors drop prices to capture customer market share.

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