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Inflation’s Revenge

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Inflation’s Revenge

Risk Talking podcast June 15, 2022
Economy, finance, and budgets

For years, a cohort of economists, public officials, and journalists confidently proclaimed that inflation was a thing of the past. Demographic trends heralded long-term deflationary pressures, the thinking went, and new ideas in fiscal and monetary policy meant that interest rates could remain low indefinitely. Conditions today put paid to that thesis, but how did so many get things so wrong? In this episode of Risk Talking, economist and Shadow Open Market Committee member Mickey Levy joins Allison Schrager to discuss the state of the macroeconomy, the Federal Reserve’s evolving posture, and the complacency of the doves.

Audio Transcript

Allison Schrager: In 1979, the social scientist and public opinion analyst Daniel Yankelovich wrote about an issue facing the American public that, he said, “had the kind of dominance that no other issue has had since World War II.” It was the most important issue of the day, outweighing even the Cold War and the country’s presence in Vietnam. “It would be necessary,” he wrote, “to go back to the 1930s and the Great Depression to find a peacetime issue that the country is so concerned about. From the public’s point of view, it seems intractable.” That issue, of course, is inflation, and today, it’s back with a vengeance.

In March, the consumer price index grew at its fastest rate in 41 years, reaching 8.5 percent year over year. How did this happen? After years of thinking we’d kicked inflation and it was never coming back, who’s at fault? And more importantly, is this our future? Is there a way to stop this? And what costs are we going to have to pay to get inflation in check?

Welcome to Risk Talking, a podcast about economics. I’m your host, Allison Schrager, and I’m delighted to be joined this week by Mickey Levy. Mickey’s the Chief Economist for the Americas and Asia at Berenberg Capital Markets. He’s also a member of the Shadow Open Markets Committee, an independent group of economists operating under the auspices of the Manhattan Institute. We’re here to talk all things monetary policy and macro economics. Mickey, thank you very much for joining us.

Mickey Levy: Allison, it’s a pleasure to be here.

Allison Schrager: All right. Let’s just get to what went wrong here. I remember when I was writing for an eminent magazine, I had an editor, this was in 2012, who told me quite stridently that both inflation and interest rates would never go up and I was crazy to think otherwise. I’ve always been a bit of an inflation hawk. But a lot of people thought inflation was a thing of the past, that global trends and good monetary policy meant we would never see inflation again. What went wrong?

Mickey Levy: Allison, 2012 is actually a very good starting place because the economy had grown gradually out of the Great Recession and the financial crisis. The Fed had already engaged in unconventional monetary policy, quantitative easing, where they were buying Treasuries and MBS in 2000, beginning late 2008, 2009, 2010, 2011, and in 2012, then Fed chair, Bernanke announced QE3: more asset purchases. It was the presumption then that inflation would stay low because it had been low. And so then the Fed could use quantitative easing to stimulate employment and bring the unemployment rate down—that is, use unconventional monetary policy to push one side of its dual mandate.

Allison Schrager: Just so everyone is clear, unconventional monetary policy, QE, you mean buying long-dated bonds and some corporate debt?

Mickey Levy: And holding them, yes. Now, fast-forward to the pandemic, we had this sharp decline in GDP, and then what happened after that was, on the fiscal side, within 12 months, the fiscal authorities enacted legislation worth 27 percent of GDP in deficit-spending authorization. At just an enormous amount, relative to the decline in GDP and the Federal Reserve reduced rates to zero, and through its asset purchases, ended up purchasing about half of all of the Treasury bonds issued.

Once the economy started rebounding, there was this general presumption within the Federal Reserve that, “Oh, inflation will stay low and subdued, just like it did following the great financial crisis.” The Fed never studied why it stayed low. The reason why it stayed low, in a nutshell, is that all of the Fed’s efforts and the congressional efforts to try to stimulate the economy through monetary and fiscal policies didn’t work, so you never had any acceleration in nominal GDP, current dollar spending. So inflation didn’t rise. Inflation stayed subdued.

Fast-forward to the most recent experience. There was such an unprecedented amount of fiscal stimulus financed by the Fed buying those Treasury bonds that, lo and behold, the economy did accelerate, it did respond to all of that stimulus. And so if we look at the inflation that has arisen and operates as a tax on current economic behavior is, there was too much fiscal and monetary stimulus that generated excess demand, so the Fed had this presumption—

Allison Schrager: So let’s compare what happened before, because a lot of people worried about inflation coming out of the financial crisis, and it never happened. Is the difference just scale? Is it just that we went bigger on fiscal stimulus and on easing, or is it also just the nature of the shock was different?

Mickey Levy: I’d say, Allison, it’s a combination of both of those. The magnitude of the fiscal stimulus this time around was multiples of what it was when President Obama, in 2009, passed the American Recovery and Reinvestment Act, five times more relative to the decline in GDP. Monetary policy was equally accommodated with zero rates and much more QE, much more asset purchases. At the same time, the Fed was much more aggressive this time around in providing forward guidance that it would keep rates at zero and would continue QE.

Also we need to keep in mind that in 2020, the Fed rolled out its new strategic plan, which reinterpreted its dual mandate, prioritizing employment. The mandate became Maximum Inclusive Employment. They shifted to an average inflation targeting regime and they basically reduced dramatically their reliance on preemptive tightening. So it all added up to the monetary and fiscal authorities providing much too much stimulus, and then you got this historically rapid growth in nominal spending. That did not happen following the financial crisis.

All of the QE, all of the asset purchases that the Fed made following the financial crisis, remained in the banking system. It just sloshed back and forth between the big banks and the Fed. Perhaps because the Fed started paying interest on excess reserves and changes in capital ratios and the like. So this time around, the stimulus worked to stimulate demand at the same time that we had all these supply bottlenecks. And the supply shortages were not just in production, they were in distribution.

What was so interesting is, as the economy started to rebound sharply from the sharp decline in GDP in the spring of 2020, and inflation started rising, the Fed seemed to presume that inflation would stay low. Every quarterly update in its summary of economic projections adjusted their 2021 forecasts for the inflation that already occurred, but always forecast that inflation, beginning in 2022, would come all the way back to 2 percent. It was based on a presumption. So they supported that presumption, saying, “Oh, all of the increase in inflation is just due to supply constraints, so it’s transitory.”

Allison Schrager: Do you think, being charitable, that there’s a fashion that has arisen in monetary policy: that the Fed mainly controls inflation not through just old fashioned supply and demand, but through expectations? Do you think they were hoping that if they put out wishful thinking that inflation wasn’t going to go up, then that would actually happen?

Mickey Levy: Allison, I think that’s a great point. To a certain extent, yes, and keep in mind, during the very elongated post-financial crisis expansion, as the unemployment rate drifted down, inflation didn’t come back up, and the Fed’s only explanation was, “Oh, the Phillips Curve is flatter than what we thought,” and so as they reduced their reliance on the Phillips Curve, in their thinking and in their model, they heightened their reliance on inflation and inflationary expectations, to the point where, by the end of the expansion, in 2019, the Fed basically gave the impression that, “Don’t worry about inflation, because we can precisely manage inflationary expectations.”

That framework carried the day and the Fed really dithered during a critical time in 2021, when it was clear, just looking at the data, that inflation was rising well above where they wanted it to be. Yet they continued to talk about inflationary expectations being anchored because market-based expectations remained pretty low, even though surveys of consumer inflation expectations had skyrocketed.

Allison Schrager: I’ve always been so amused by this idea that so many market commentators seem to think these bond holders, bond traders, can see the future in a way no one else can. Apparently they can predict recessions and they’re not worried about inflation, so no one else should be. It’s like, who are these magic bond traders, and I’ve never . . . I mean, I’ve met some very nice bond traders. They’re very smart, but they’re not psychics.

Mickey Levy: Very smart. They’re not psychics, and they don’t have a particularly good track record of forecasting recessions. But, keep in mind, when we talk about market-based expectations of inflation, we tend to look at break-evens on the TIPS (treasury inflation-protected securities)—and the Fed was the biggest buyer of TIPS. So the Fed was looking to market-based expectations of inflation for its guidance and comfort. And at the same time, the Fed was the major player in the market that influenced the market-based expectations of inflation. Very, very odd.

Allison Schrager: Well going forward, something I’m really rethinking, that I think I was wrong about is, like a lot of economists of my vintage, I was schooled in the idea that the Fed could control inflation largely through the expectations channel. And now I’m starting to wonder, maybe the Fed can control the inflation level. Maybe it can just control how volatile inflation is. And if that’s true, I mean, do we have to really revisit inflation targeting altogether?

Mickey Levy: No, Allison. I think inflation targeting is very, very valuable, and all of the important research on inflation targeting occurred during a period, from the early 1980s through early 2000, called the Great Moderation. Out of that, leading economists emphasized the importance of targeting inflation, and then out of that, of course, one of the leaders was John Taylor with the Taylor Rule, which said a rules-based approach to targeting 2 percent inflation was the best way to go. So that’s very, very important.

Allison Schrager: Can the Fed control the inflation level, though, or is it really that it can manage volatility around it?

Mickey Levy: I guess you could say it can manage volatility around it. I mean, basically, let’s think about the following. The Fed through monetary policy has a heavy influence on nominal spending growth, a portion of which is real, the residuals inflation. So inflation’s generated when you have persistent excess demand relative to productive capacity. So if you think about potential growth of being say, two, then if you could conduct monetary policy, adjusted for fiscal policy and like, to have nominal spending growth, nominal GDP at four, you’re going to end up with 2 percent inflation, 2 percent real growth. That’s a logical framework, but the Fed cannot precisely control inflation. Certainly can’t predict inflation.

One of the Fed’s characteristics is it tends to, through its discretionary approach to monetary policy, has this tendency to fine tune things too much, get too deep into the weeds, and there’s no way to manage monetary policy to always have nominal spending growth be a certain amount. So the Fed’s tendency to rely on its discretion has led it to make mistakes where you get these larger-than-desired swings in aggregate demand.

Allison Schrager: Do you think forward guidance was a mistake? Forward guidance to me always felt like a way of doing discretion without really doing discretion.

Mickey Levy: The Fed relies on it too much.

Allison Schrager: Although, actually, I’m told that one of the reasons why it didn’t increase rates sooner was the forward guidance. So I guess it was more credible than I give them credit for, but not in a good way.

Mickey Levy: Forward guidance was originally conceived by the Fed to give markets guidance about what the Fed was going to do, between now and the next meeting. And then it expanded. Let’s just put it this way. It’s hard to be completely transparent and clear about what you’re trying to achieve if you really don’t have a strategic plan. So the Fed uses this forward guidance and conveys what it wants to, to markets in the public, using a really arcane language that is so convoluted, that it’s created more problems in strategy and communications than what the Fed really wanted it to do.

Allison Schrager: I recently heard a famous economist say that this is part of the problem: the Fed overcommunicates exactly what it’s going to do, creating this idea that they have more control than they do, or an ability to forecast things that they don’t. Maybe there was something to the Greenspan way of being a little spooky and opaque about what he was going to do. At the time when Bernanke, I felt, really pushed clear, consistent communication, I thought that was a good thing, but maybe that was overrated.

Mickey Levy: Well, Allison, when you mention Alan Greenspan, if we think about the Volcker-Greenspan era, particularly during the Great Moderation, they were very clear about what their primary objective was and what they thought the proper scope of monetary policy was. They basically said, “Stable, low inflation is the best foundation for sustained maximum economic growth and employment.” Okay, so that was their foundation and that was critically important.

In fact, if you go back to that period, inflation stayed fairly low. The cycles were fairly moderate. Part of that was following Volcker’s aggressive anti-inflationary policies beginning in 1979 to 1982, the Fed was much more timely in its rate hikes, so it was truly a good period because of that key foundation. The best contribution monetary policy can make to maximum employment is stable, low inflation.

Now think about that simple framework, compared to the current framework, where the Fed has redefined its dual mandate as maximum inclusive employment, but without any numbers or parameters about it, while at the same time acknowledging that labor-market outcomes are determined by things outside the scope of monetary policy, including education and skills, training, regulations, fiscal policy, a host of other things beyond.

Allison Schrager: Or even the inclusive part, I mean, discrimination is a problem in the labor market.

Mickey Levy: Sure.

Allison Schrager: But how is monetary policy going to fix that?

Mickey Levy: That’s right. Then if you look at their new flexible average inflation targeting scheme, they didn’t put any parameters on the numbers, so the market has to guess at what the Fed’s thinking about. Then in mid-2021, when the economy was soaring and labor markets were hitting it on all cylinders, the term the Fed used is, “We can’t even think about tapering financial assets until we’ve made substantial progress toward our maximum,” without putting any numbers on these things.

Allison Schrager: So the problem is they’ve been too vague.

Mickey Levy: Yeah, that’s right. They talk a lot—

Allison Schrager: About things they can’t control.

Mickey Levy: —about things they can’t control, and they don’t seem to have a general framework for achieving their dual mandate.

Allison Schrager: Well, I thought it was sad yet sweet that when they changed to be like, “We’re about maximum employment now and inflation secondary,” that people were like, “Finally, the Fed has given up its obsession with inflation.” I mean, you just had this phenomenal paper talking about mistakes the Fed made throughout the twentieth century. I’m like, “We’ve seen this movie before.” It’s not like the Fed was always obsessed with inflation because it was superstitious or whatever. It realized that this is a false choice.

Mickey Levy: Yeah, but Allison, before I get there, I want to mention a term you used earlier. Quantitative easing, okay. So after the financial crisis, it was called quantitative easing, and now it’s called asset purchases.

Allison Schrager: And before that, Operation Twist.

Mickey Levy: Operation Twist is a little different. Has the Fed ever described to the public the channels through which this quantitative easing, or asset purchases, affects employment and their maximum inclusive employment gain? Can you through quantitative easing or asset purchases achieve your employment mandate or your inflation mandate? They’ve never described that. Maybe there’s a way, but I don’t even think they have a good beat on it.

Allison Schrager: Is there a way? I’ve never heard a good explanation. I don’t understand the mechanism at all.

Mickey Levy: That’s right. But it’s part of the Fed’s toolkit and look, let me step back a second. I think the central bank is making things too complex. It needs to simplify and step back and say, “What are our objectives?” And the dual mandate’s a very fine objective, “What’s the best way to achieve it within the scope of what monetary policy is capable of achieving?”

Allison Schrager: This quantitative easing, what does it do?

Mickey Levy: Presumably it’s supposed to keep bond yields lower than they would be otherwise. That is a type of substitute for easing.

Allison Schrager: Does it?

Mickey Levy: Empirical work doesn’t support that.

Allison Schrager: I was at a meeting of central bankers in 2019, European central bankers and American ones, and rates were near zero, and we had no idea what was coming but we knew something would come eventually. Remember we talked about this in 2019? “Do you have the tools to deal with the recession if it comes?” I feel like long-term forward guidance or QE happens just because they ran out of things to do and felt like they were supposed to do something.

Mickey Levy: The Fed has this tendency to want to do something, to use monetary policy to fine-tune the economy. Once again, what we’ve seen over time is, in various steps, using different tools, the Fed has definitely, not just expanded the scope of monetary policy, but it perceives this proper role of monetary policy to achieve more. And that’s a problem.

Allison Schrager: Well, now the Fed does have to do something, right?

Mickey Levy: Right. But wait, now I’m getting back to this earlier question about inflation, and the Fed has to do something. So when we think about it, inflation is a tax. It reduces real purchasing power. Right now it’s reducing real wages.

Allison Schrager: I think there’s another tax that people don’t think about with inflation, which is that it adds uncertainty to people’s lives. If it makes everything you buy, you don’t know how much it’s going to cost, you don’t know what’s going to cost next year. I mean, an asset that’s riskier has a higher return, right? Lower risk assets are considered more valuable, so if all of a sudden, your purchasing power is more variable, then all your purchases are, in a way, less valuable.

Mickey Levy: And it just distorts your decisions on how to allocate your assets, what to buy.

Allison Schrager: Yeah, so it’s not only like a straight-up wage cut, which effectively it is, it also is a secondary tax.

Mickey Levy: Let me add to this issue about the negatives that inflation imposes on economic performance. One of my frustrations in 2021, when inflation started soaring, is that it was portrayed as a political issue. It just seemed that many, many people just said, “Oh, it’s transitory. People are just making too much out of it.” And I’d say, “Why is this a political issue?” It’s just absolutely clear that, if you think about the average middle- and lower-income earner, the three biggest spending items in their market basket are food, shelter, and energy. So when they face inflation, their own inflation is way, way above the average. So basically, we have policies in place now that are hurting exactly the people the policies are intended to help and it’s turned into a political issue that’s so convoluted.

Allison Schrager: I was really surprised at that point, how I had to explain to people that inflation was worse for low-income people. I mean, maybe this was because it had been so long. Remember when the White House was saying it was a high-class problem? I had to explain to a lot of journalists that, no, inflation is worse for low-income people. And I felt like that was just so obvious, but people really didn’t believe it. Now they do.

Mickey Levy: Now they do. And getting back to your, your introduction, inflation has been elevated to the biggest political issue since 1979. And it is. So we have this combination that you have very high inflation and you have negative wages, that is, increasing wages aren’t keeping up with inflation, and you have interest rates and bond yields below inflation. All of this is very unhealthy and we’re going to feel it. I actually think inflation’s going to begin to subside, although it’s going to subside but remain very elevated—way, way, way above where the Fed’s forecasting. But even if inflation subsides, prices are still going up, and the inflation has a cumulative impact on purchasing power. It continues to distort people’s pocket books and adds uncertainty.

Allison Schrager: So I mean, it’s going to subside maybe naturally, because some of these supply-chain issues will get worked out. Hopefully the war in Ukraine will get worked out. But does it require some serious policy intervention, and is there a path forward that doesn’t involve a recession?

Mickey Levy: Well, the policy intervention, nothing’s going to happen in fiscal policy. The Federal Reserve has to intervene, raise rates. But the difficulty here is the Fed has to raise rates enough to slow down product demand, which dampens price and wage increases. But if it raises rates too much, then it slows demand too much, and the economy tumbles into recession.

By the way, there’s a whole history of the Fed remaining easy too long, and then hiking rates late. If you look back at the history, there have been occasions where it generated a soft economic landing. But more often than not, it ends in recession. But Allison, even if we avoid recession this time, part of the Fed’s disinflationary policies will squeeze business margins, reduce profits and lead to some weakness in labor markets, we just don’t know how much. So we’re going to pay the price for this. We just are.

Allison Schrager: I mean, do you think the Fed is finally on the right path? Do you think it should be hiking more, less? How high?

Mickey Levy: Finally it’s on the right path. I mean, finally they’ve admitted they’ve made a mistake without really admitting it. And now they’re on the right path, and now the various Fed members are saying, “Yes, we need to hike aggressively.” The issue here is, just to get back to a neutral monetary policy, they have to raise rates at least to the rate of inflation. They’ve never been in this deep a hole with the federal funds rate so far below inflation.

However, the difficulty they have this time is, there’s no question but that some some of the rise in inflation is due to supply shortages that we hope will dissipate. So what is the true underlying rate of inflation? It’s not 2 percent. So the Fed has to guess at how much of the rise in inflation has been due to supply constraints and be honest about it and how much is due to the excess demand that they can dampen and then aim to raise the funds rate there. Tough task.

Allison Schrager: So people who are, I guess, more dovish, argue that inflation’s mainly driven by these supply constraints. Although, it seems weird to me, because I remember in 2020, everyone was like, “We need more demand policy. Anyway, we’ve shut the economy down.” And every economist was like, “But it’s a supply problem,” and then they’re like, “No, but we need more demand,” and so then we created all this inflation by having constrained supply and a lot of demand. Now that we have inflation with the supply contracted and higher demand, it feels like those same people who thought we needed more demand are like, “But it’s a supply problem.”

Mickey Levy: You’re bringing out a great point.

Allison Schrager: But I have a pointed question. Will Fed policy be helpful with inflation if it is largely a supply issue?

Mickey Levy: No. Look, if the rise in inflation from where it was, 1.75 percent, to where it is now, if it were all supply and the Fed hiked rates aggressively, that would not be the right solution because that would be constraining demand, which would not address the supply issue. But let’s go back to the pandemic.

Part of the government’s policies were to shut down the economy, so you have the economy, due to the pandemic and government shutdowns, reduced GDP by 9 percent. Within the first year, Congress passed deficit spending legislation worth 27 percent of GDP. So it was the proper role of the government to replace the decline in aggregate demand, but to replace it by a threefold increase in deficit spending? No. That was just over the top. I would note that the economy was already surging in early 2021 and President Biden’s first piece of legislation was $1.9 trillion in deficit spending, 10 percent of GDP, and they called it the American Rescue Plan when the economy was already roaring ahead.

What frustrated me about that—it was well-intentioned. At the time, there were a lot of people who were unemployed and distressed. But why do you have to write $1,400 checks to virtually everybody? Eighty or 90 percent of the checks went to people who already had jobs. Why not give three times more to people who really need it and do some thinking about it?

Allison Schrager: Well, I think we gave them that too.

Mickey Levy: And keep in mind, Fed chairman Powell also urged more fiscal stimulus at the time. So once again, the government was very well intentioned. The CARES Act, which was enacted within a month of the beginning of the pandemic, let’s give Congress a lot of credit to respond so quickly and effectively, but then with another year to think about things, that’s the best they could come up with?

Allison Schrager: Well, Europe didn’t do this level of stimulus, but they also have inflation.

Mickey Levy: Well, okay. Allison, Europe’s inflation is a bit different than the U.S. Core inflation, that is excluding food and energy, in Europe is much, much lower than the U.S., and the bulk of the inflation there is energy. This, of course, reflects, to some extent, European energy policy, where they basically said, “We’re not going to drill for oil or gas. We’re going to shut down our nuclear plants and we’ll just rely on all of our energy from Russia at whatever price they want to charge.” They had been warned that’s not a particularly good long-run policy and now it’s just come back to haunt them. So their inflation is somewhat of a different nature than the U.S. inflation, and the ECB is going to go much, much more slowly.

Allison Schrager: You have some expertise in Asia and I think we hear a lot less about what’s going on with their economies. Apparently, after years of deflation, Japan has inflation now too.

Mickey Levy: A little bit. Yeah, not much. Their inflation’s a little above 2 percent.

Allison Schrager: Well, that’s high if you’re used to deflation.

Mickey Levy: Japan’s economy, its domestic economy, is pretty slow, but their export-related manufacturing is strong, although it has a over-reliance on exports to China and Asia. So unfortunately, Japan’s economy is driven too much by what happens in China and how that affects the rest of the Asian region. But I would point out, I mentioned, that a new Prime Minister came in, and last November, within a month of being in office, was successful in enacting a fiscal stimulus worth almost 10 percent of GDP in deficit spending. A lot of it was almost like U.S. style, included a lot of writing checks to people with children under 18 years old. What happened to the stimulus? It was all saved. It all went into saving, so it didn’t—

Allison Schrager: In Japanese bonds?

Mickey Levy: Yeah. It didn’t save much. Japan has, its economy, it’s very productive. The productivity of the working-age population is very, very high. But it has demographic problems and other issues.

Allison Schrager: Well, what about China? I mean, what about its economy? I mean, I think coming out of lockdowns, it’s become a question mark. Where do you see that going?

Mickey Levy: China’s not just a big question mark. It faces major challenges way beyond the shutdowns. Its potential growth has been slowing for quite a while, and Allison, as its potential growth has slowed, which is just quite natural, after several decades of outsized growth, the Chinese leaders targeted their GDP way above potential, and the way they achieved that high GDP target was through excessive government investment, largely in real estate, so that led to the excesses in real estate, the bubbles that are generating a huge wealth loss.

The bottom line is, China will remain the global hub for manufacturing and exports, but its consumption and domestic demand is very weak. The citizens have not been responding to all of the various dimensions of fiscal stimulus. You see this in auto sales, retail sales, and the like. This is going to have a very large ripple effect around the world, particularly for nations that are exporters, not just of commodities and materials to China, but also Germany and other major advanced nations that export a lot of automobiles and industrial components to China. They’re all going to feel it. China is not going to be the engine of global growth that it has been the last couple decades.

Allison Schrager: Is that because people just aren’t spending, they’re saving too much, the Chinese consumer?

Mickey Levy: They’re saving, rather than spending. I think China has had these extraordinarily successful policies over so many years and now they’re up against potential. And the way the Chinese government is allocating resources—putting more and more resources toward the state-owned enterprises that are their biggest political base that are just large lumbering organizations that are inefficient—is constraining the big cap, social media, and IT firms that are the most advanced. They’re just constraining their economy, and it’s really a major problem. Could China be facing slow enough growth that it leads to flat employment, which starts generating social unrest? It’s a possibility.

But let me add one other point, because this whole podcast has been about inflation. For decades, China, as the hub of global manufacturing, achieved that through exporting low labor costs and exported low inflation around the world. Those days are over.

Allison Schrager: So that means our days of 2 percent inflation might also be over.

Mickey Levy: I think that’s right.

Allison Schrager: So we’re running out of time. I could do this all day. I want to ask one last question, which is, I feel like you have these moments, and you said you’re not only a macroeconomist, but you’re also, I think of you as a monetary historian, and moments like this really can change how we think about monetary policy. Do you think we’ll come out of this with a new regime, a new way of thinking, new tools?

Mickey Levy: Unfortunately not.

Allison Schrager: Do you think people are still going to think that the Phillips Curve is flat?

Mickey Levy: Well, depends on what happens to the Phillips Curve and then the Fed will adjust to that and change its mind. To me, the question you’re asking is, is this bout of inflation enough to force a reset? So the Fed basically says, “Wait a second, our whole reliance on just relying on our best judgment and discretion hasn’t worked that well. Let’s go to a more rules based approach that would still require discretion at certain times.” Is that in the cards? No. It’s just not part of the Fed’s DNA, and so here you run into the problem. Will the Fed learn from this lesson? Yes. It’ll learn that, “Oh yes, inflation can come back,” but when you look through history, has the Fed really learned all the appropriate lessons from history? No.

Allison Schrager: And they never will.

Mickey Levy: I wish they would. I care a lot about the institution, but it’s just not in the cards.

Allison Schrager: Ah. Well, thank you so much for joining me. That’s all with Mickey Levy. You can find some of his writing on the Manhattan Institute website and at the Shadow Open Markets Committee and we’ll link to these pages in the description. You can also find City Journal on Twitter, @cityjournal and on Instagram, at @cityjournal_mi. And as always, if you like what you heard on this podcast, please give us a five-star rating on iTunes. Mickey, thank you again for joining.

 

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