Inflation, Disinflation, And Spending: When Fiscal And Monetary Worlds Collide

>> Bill Whalen: It's Thursday, September 28, 2023. And welcome back to Matters of Policy and Politics, a Hoover Institution podcast devoted to governance and balance of power in America and around the globe. I'm Bill Whelan. I'm the Hoover Institution's Virginia Hobbs Carpenter distinguished policy fellow in journalism. But I'm not the only fellow who dabbles in podcasting these days.

And if you don't believe me, go to Hoover Institution website, which is hoover.org, click on the tab at the top of the homepage. It says commentary. Go to where it says multimedia and up will come the audio podcast. There are about a dozen or more in all. I will humbly brag that my podcast is at the top of the list, and that's because I try to get the best of the brightest of the Hoover institution today being no exception.

My guest on this show is Mickey Levy. Mickey is a Hoover Institution visiting scholar and senior economist at Berenberg Capital Markets. His research focuses on monetary and economic policies and how they influence economic and financial performance. I had the pleasure listening to Mickey earlier this year at the Hoover Institution's annual monetary policy conference, he led a discussion on forecasting inflation and output.

Today, we're gonna talk about inflation and a few related economic topics. Mickey, thanks for coming on the podcast.

>> Mickey Levy: My pleasure.

>> Bill Whalen: Now, one thing I left out in my very brief biography of you is that you called inflation a lot before a lot of other people jumped on the inflation bandwagon.

How did you see this coming?

>> Mickey Levy: Well, I looked at really standard models. I saw the $5 trillion increase in deficit spending in response to Covid. And then I saw the Fed lowering interest rates to zero and started massive asset purchases. The Fed ended out purchasing about half of all of the Treasurys increase in debt.

And so just the extraordinary jump in deficit spending that was accommodated and monetized by the Fed. And that led me to believe there was going to be a surge in aggregate demand. And then it all unfolded.

>> Bill Whalen: Now, Mickey, at Hoover, I toil in the vineyard of politics, which means that I have to watch things like the debate last night, which is 2 hours of my life that I wish I had back.

Actually, I'm being cynical, debates are always fascinating in terms of how they are carried off. But I mentioned this for this reason, Mickey, people like me who follow politics for a living, we are forever having a debate about how Donald Trump became president of the United States. And we're gonna be arguing this for the rest of our lives.

I think there are people who see this as a result of immigration policy. They think Democrats were too coastal in their attitudes going into the 2016 election. Some people blame it on Hillary's campaign. Some people blame it on Jim Comey, the electoral College, social media, you name it and they want to somehow assign that to why Trump got elected.

In other words, just not consensus on Trump. And, Mickey, if Trump wins again in 2024, we'll be having the same argument all over again. Here's why I mentioned this. Because you work in economics and you study the Fed and you study inflation. Is there consensus when it comes to what caused high inflation?

And is there consensus in terms of rating or judging the Fed's reaction to it?

>> Mickey Levy: There's more consensus that the Fed misstepped once the economy started rebounding rapidly. And employment started increasing rapidly in response to the fiscal and monetary stimulus, and you start to see a sharp rise in inflation.

The Fed should have not waited so long to raise rates and start to normalize monetary policy. There's pretty much consensus on that. But there is a disagreement about the sources of inflation. As we know, once inflation started rising pretty markedly, the Fed and many argued that, don't worry, it's just transitory due to negative supply shocks.

So think of the broader framework where inflation or a persistent increase in the general price level is driven by excess demand relative to productive capacity. I mentioned at the outset that you had this unprecedented $5 trillion increase in deficit spending, over 25% of GDP and zero rates, and the Fed basically monetizing so much of the debt.

And that in any model should have said, okay, you're gonna see a sharp acceleration in demand. And so that's the side I take a. The Fed and many others took the side, it's just transitory. And this transitory assessment stayed too long at the Fed, even after we saw clear signs of increasing demand.

But even to this day. And finally, Jay Powell, the chair of the Fed, actually, the day after President Biden renominated him as chair. He testified in front of the Senate banking committee, and he says, I guess I'm tired of this term transitory. Let's put it to rest and that led to the Fed saying, okay, now we have to start raising rates a lot.

But even to this day, you have a number of Fed members, and some Fed research would say, it was largely due to supply shocks, negative supply shocks. So there is this difference of opinion.

>> Bill Whalen: Why do you think the Fed decided to label it transitory? What's your sense?

 

>> Mickey Levy: That's a great question. Here's my assessment. The Fed had this presumption in the last. In the decade prior to the pandemic, that is, the decade following the great financial crisis, you had inflation below the Fed's 2% target. The Fed was worried that if it stayed low, inflationary expectations might fall sharply and the Fed would be constrained by the zero lower bound of interest rates.

And so it actually wanted inflation to go higher. But I think the Fed's perspective was, following the financial crisis, it reduced rates to zero, did its quantitative easing, and inflation stayed low. So the Fed had this presumption that inflation would stay low, whatever they did. And this got reflected in their models and the way they talked about things.

And so that when inflation started rising materially above their 2% long run target, and in fact, even when inflationary expectations became unanchored to 2%, they just presumed it was transitory. And of course, let's admit it, at the same time, there was anecdotal evidence of supply shocks, of disruptions to global supply chains and the like.

So they fed off of the anecdotal evidence and basically didn't acknowledge that their monetary stimulus and all the fiscal stimulus was driving up demand.

>> Bill Whalen: Okay, since you mentioned 2%, Mickey, I have to ask, since I'm economically naive, what is so magical about 2% inflation? I just hear this constantly, 2% inflation, 2% and 2%.

Why 2%?

>> Mickey Levy: I don't think there's anything magical about it, Bill. But what I. So, if we think about it, ever since the full Employment act in 1978, the Fed has had this dual mandate, low inflation and maximum employment. And when Paul Volcker and Alan Greenspan were chairs of the Fed during their reign, they were looking down at lower numbers.

They wanted inflation to go lower, but there was never any official target. And then along came, the central banks of New Zealand and Australia and Canada in the early 90s, that all targeted, and they picked 2%. And then the European Central bank also had 2% as an upward bound.

And so, the Fed finally codified their official target as 2% in 2012. They recently, with their new strategic plan, they rolled out in October of 2020, they released that 2%. Now they have this bias to let it go above two, but basically 2% it's close enough to zero.

They could kinda, call it price stability, but it isn't zero. They wanna have this buffer, so that they think that gives them flexibility to respond to the next economic downturn.

>> Bill Whalen: So the Labor Department put out numbers in mid September, Mickey, and I think the annual inflation rate was 3.7%.

 

>> Mickey Levy: That's right, okay, so the CPI is 3.7, but if you take away the volatile food and energy, it's more like four and a half. And of course, the Fed, since the late 1990s, has focused on the personal consumption expenditure price index. But, yeah, inflation is markedly above, their official target, and the mandate that Congress gave them.

 

>> Bill Whalen: And that's good news in this regard. The inflation rate in 22, Mickey, was about, what, 6.5%, I believe. So, you can talk about it coming down. And we're gonna get to the White House trying to talk about things being better. The frustrations are running into, again, with two rather simple, naive questions for you.

Who's getting hit the worst with inflation, and who's actually benefiting from it?

>> Mickey Levy: Okay, Bill, this is a very interesting question. So, inflation hurts the economy. Inflation reduces real purchasing power. It muddles up the price signals in the economy as households and businesses conduct their business. Who's hurt by inflation?

It has tended to be, middle and lower income earning households, because if you think about it, well, inflation's only 4.5% now and was much higher earlier. The three largest spending items, for middle and lower income households is the cost of shelter, and many of them rent. The cost of energy, which has gone way, way above, the increase in the general price level, and the cost of food.

And that's also gone up much higher than the CPI. It's the lower income people and then if you ask who's benefited from this? Homeowners. The Case-Shiller home price index, has increased over 40%, double, the increase in the general price level. And another beneficiary is owners of the stock market.

And so, if you think about higher income people tend to own their homes, and they've accumulated some wealth and apportions in the stock market. They're the beneficiaries. And so it's really the working class, that are renters who have been hurt.

>> Bill Whalen: And I add my sister and brother in law Mickey, who live in Charleston, South Carolina, and they are both retired.

I mentioned them because they got Social Security checks. And guess what they saw in their checks? A nice cola adjustment.

>> Mickey Levy: Yeah, big increases. So that's another, you could say, beneficiary. And you're bringing up this great point. Most entitlement programs, including Social Security, the SNAP program, which is what we used to call food stamps, those are all indexed for inflation.

And so that makes people whole. Most of the components of Medicare and Medicaid are also indexed. But if you get to the cola for Social Security, it was 8.7%. Most people were unaware that this not only made recipients of Social Security whole. But it added over $100 billion to disposable income, through over $100 billion of increased deficit spending by the federal government.

 

>> Bill Whalen: So we know, Mickey, are in an era that we would call, or a phase we would call disinflation as inflation rates are going down. Let's talk a bit about disinflation.

>> Mickey Levy: Well, yes, inflation is coming down. It's been fairly sticky. It's come down, it has not come down, as fast as the Federal Reserve has forecast it would.

And many people are now, including Fed members are alluding to the prospect that reducing it from here to their 2% will be more costly to the economy, than the reductions to date. But let me toss out an important point here. There is disinflation. The rate of inflation is coming down.

That means, the rate of price increases of all these different goods and services counted in either the CPI or PCE price index is slowing, but the general price level is still increasing.

>> Bill Whalen: Right.

>> Mickey Levy: Okay, and so, the Federal Reserve, and people who work in finance, they're all focusing on this disinflation.

And will it come down to 2%? Meanwhile, households and businesses on Main street, are dealing with higher prices that are still increasing. And so, if you look at, you can say, okay, inflation has come down to, three and three quarters percent, or 4.5%, excluding food and energy. And that's down, and that's good.

But cumulatively, the CPI is up 18.5% from just before the pandemic. And if you ask Main street, if you say, gee, we're lucky, the Fed's targeting 2%, that means, prices are only gonna be 2% higher next year. And so, we need to distinguish between the disinflation, which is good, but the general price level.

That is high and is going higher.

>> Bill Whalen: You mentioned a few minutes ago, Mickey, about renters getting hit hard by inflation. Let's talk about mortgages for a second. There is news out this morning. Freddie Mac reporting earlier today that the 30 year fixed mortgage rate is now 7.31%.

Thats the highest since December of 2000. Applications for home mortgages, Mickey, are now 27% lower than they were a year ago at this time. So what's fueling this? And let's just get back to what you mentioned about the stock market doing world inflation. In other words, instead of people buying homes, it doesn't make sense to buy a home at 7% mortgage if you have a 3% mortgage, but are people pushing their money elsewhere because of this?

 

>> Mickey Levy: So we've seen a pretty significant rise in yields on treasury bonds and mortgages in the last couple months, and that has led to a stock market correction recently. So if we think about bond yields and mortgage rates, in 20 and 21, mortgage rates were below 3%. Why were they below 3%?

Because the Fed was keeping rates at zero, buying huge amounts of treasury and MBS securities and signaling to the market they were going to keep rates low for a long, long, long time. 2022 was a rude awakening when the Fed started hiking rates and then actually hiked rates quite rapidly.

Inflationary expectations were above 2%, and so bond yields adjusted. And so a very interesting point of speculation right now is these yields, like on ten-year treasury securities that yield 4.6 in mortgage rates that are seven and a quarter, is that the new normal? And in a way, is our new normal very similar to the old normal that existed prior to the financial crisis, such that the low rates between the financial crisis and the pandemic were the aberration?

So we may have to get used to these rates being above inflation. And, of course, the housing market is being buffeted every which way, because think about those millions of people who bought homes at extremely low mortgage rates in 2020 and 2021. And, of course, all the tens of millions of homeowners that refinanced, they don't wanna sell their homes now because if they bought something else, they'd have to pay your 7.3.

And so this has created a lack of liquidity in the housing market, insufficient supply, and that's keeping prices high. And so when we think about the 7.3% mortgage and the fact that home prices are high, and not just high in New York and San Francisco and LA, but in hundreds of cities around the US.

It is precluding a lot of younger people from buying their first house. So this is all part of the follow through, unintended consequence of the Fed keeping rates so low so long and that very high inflation.

>> Bill Whalen: Let's talk a bit about the politics of all this, Mickey, which I cannot resist doing.

I'd point you to a recent NBC News poll which had Republicans enjoying a 21 point advantage on the question of which party better handles the economy. Now, Mickey, I'm gonna offer a big word of caution with that 21 point advantage. The last time the Republicans had that big of lead on that question, it was in 1991.

I worked on the Bush campaign in 1992, I can tell you how that turned out. So maybe that's not the barometer we should look at. But if you look at the Washington Post ABC poll that came out the other day, Mickey, the one that kind of shocked everybody because it had Trump at 52 and Biden at 42, only 30% people polled in that survey approve of the president's performance on the economy.

If you drill down deeper into it, Mickey, 91% said food prices are not so good or poor. 87% felt the same regarding gasoline or energy prices. So seems to be the president has a very simple problem, Mickey. He is going out and trying to sell Bidenomics and trying to have you believe that things are getting better, but people are feeling it in a different way.

It's kinda like watching a football game where they go to instant review on something and you see someone getting clobbered. Then they come back and say, we didn't see a penalty. So the president's telling you all as well, but people are experiencing something different.

>> Mickey Levy: Yes, well, now, Bill, I'm a touch out of my element talking about the political implications of this rather than the economic.

And of course, those polls reflect people's perceptions of a package.

>> Bill Whalen: Right.

>> Mickey Levy: So if people vote with their pocketbooks,

>> Bill Whalen: Right.

>> Mickey Levy: And many do, then they're going to say the old adage, am I better off or worse off? And let's face it, for many, their wages in the last three years did not keep pace with inflation, particularly in after tax dollars, right?

Their rents have gone up by 20% and they really have no defense. Their food they purchase has gone up over 25%. And then, of course, energy prices have gone up. Now, from an economics point of view, you can put the blame on fiscal policy probably more than monetary policy.

 

>> Bill Whalen: Right.

>> Mickey Levy: But then, of course, you could say, wait, perhaps a lot of that fiscal response to the pandemic was part of healthcare policy. When you shut down the economy, then you need to provide income support.

>> Bill Whalen: Well, let's get into fiscal policy here, Mickey, because you wrote a really great piece for the Hoover Defining Ideas web channel, August 23.

For people who want to look it up, the title is fiscal policy and the Fed work at cross purposes. And here's a quote from it, as the Federal Reserve ponders how much further it needs to raise interest rates to lower inflation to its 2% longer run target, it faces unanticipated, not widely understood counterbalance.

Fiscal policy continues to stimulate economic growth, employment, and wages.

>> Mickey Levy: Okay, so the Fed, as we know, has asked itself, how high do we need to raise rates to slow down the economy to get inflation down to 2%? At the same time, following the $5 trillion of spending, which was largely transfers to individuals, cutting checks to them to provide income support, the Biden administration has followed through with the in November 2021 the Infrastructure Investment and Jobs Act, $1 trillion in budget authority.

 

>> Bill Whalen: Over ten years.

>> Mickey Levy: Over ten years. But I think now that they've got their act together, they're starting to spend it a little more rapidly on various infrastructure programs. The CHIPS Act is about 300 billion, including 50 billion for semiconductors. That includes a 25% tax credit for investments in things like building facilities to produce semiconductor chips for battery and battery storage.

These are going through the roof now. They're very strong. And then, of course, you have all of the tax credits for the so called Inflation Reduction act. There is a fair amount of fiscal stimulus that is boosting demand, boosting economic activity. At the same time, the Fed is trying to constrain it.

Now, what is this? Well, of course, it's industrial policy. One can argue, and I think fairly in some cases, that some of the spending and credits are for national security purposes, semiconductors and the like, and batteries. We know historically the track record of the government in picking the right projects and allocating resources is pretty poor.

And so many of the tax credits under the IRA, the Inflation Reduction act, are for green initiatives that in the long run probably have no, or even negative impact on productivity. But in the near term, it's stimulating the economy.

>> Bill Whalen: Right, so this is the question, Mickey. So these are the IIJA, that you mentioned, and the Chips Act, the Chips and Science Act.

They passed with bipartisan support, and they passed with bipartisan support for one simple reason. They promise lots and lots of jobs. I think in the case of the infrastructure bill, like a million new jobs, I think, Mickey. But this is the question, which I think I cut you off before, you were about to explain.

Can government better stimulate the economy than private sector?

>> Mickey Levy: Not in the long run, no. That's my short answer. The government has a poor track record. The markets and interest rates can allocate resources. The private sector tends to be very efficient at investing and allocating resources, and that's the best avenue for increasing long-run productivity.

However, the Biden administration is going to go down in history as emphasizing government spending, not just for transfer payments, as it did, but also for all of these infrastructure spending initiatives. We're not gonna know for years the final deliberation on what it means for productivity. But nevertheless, there is spending now.

And as you point out, it is creating jobs. And I might note, in some areas, like construction, it's adding to labor shortages.

>> Bill Whalen: Right, but maybe the question put another way, Mickey, you spent $1 trillion over ten years. Is this a good return on investment? What do we have to wait ten years to see how it turned out?

 

>> Mickey Levy: No, well, let's say it a different way. Is there a better way to allocate $1 trillion? And the answer, I would much rather have a streamlined tax reform that lowers the cost of capital and encourages investment. Once again, in a streamlined, predictable way that kind of basically creates this healthy environment for investing over the long term.

That's how you get the best allocation of capital and the best productivity outcome.

>> Bill Whalen: Mickey, I want to bring up two other issues with you which tie into the economy in this regard that also may cause political problems for the president in the year ahead. The first one's automobiles.

You saw the president went to Detroit the other day and walked the picket line with the auto workers who are out on strike. I mentioned it for these reasons, Mickey. First of all, if you look at vehicles coming from the Detroit three right now, they're sitting in inventory an average of 52 days before being sold in August.

That's up from 31 days at the start of the year, this is according to data. So cars are not moving as fast as they used to. Mickey, the average price of a new vehicle has jumped from $39,900 to about $48,800. This is according to the Kelley Blue Book.

And right now you have a strike over, among other things, higher wages. Unions won, I think, a 36% raise, 21% as a counter. What that suggests, Mickey, is that automobiles will become more expensive to make and ultimately passed along to the buyers. So here you have a problem for the president.

You may be looking at people getting more sticker shot with automobiles. So your thoughts on this?

>> Mickey Levy: Well, let me add something to what you just laid out. Not only are new car prices up 22% and used car prices up 38%. But over 80% of all new cars are financed.

And the average interest rate on financing is about 7.8%. So the monthly cost of buying a new car, it's gone up dramatically. And I'll tell you what's been surprising is even though interest rates have gone up so much, auto sales, through August, have actually held their own and gone up over the last two years, which is very surprising that they've been quite resilient.

And if you look at inventories, yes, the inventories have moved up lately, but the inventory to sales ratio for autos is still below its pre-pandemic level. And, yes, the auto industry faces some real issues in terms of costs of production. And, of course, trying to be on the leading edge of this transition from combustible to electric vehicles.

They face a heap of issues. I would say politically, the biggest issue is the UAW. This is just so symbolic and at the heart of the electorate's vision of unionization. And I think it'll be a critical issue as the presidential campaign as they debate this.

>> Bill Whalen: Yeah, the second issue I want to raise with you, Mickey, is Amazon.

The Federal Trade Commission in 17 states are suing Amazon under the guise of the, quote, unquote, everything store, unfairly promotes its platform and services at the expense of third party sellers who rely on the company. Company's e-commerce marketplace for distribution. I would point out Amazon is not the only big tech giant under the gun for alleged antitrust violations.

Google and Meta also are facing legal action. But I mentioned Amazon, Mickey, because Amazon, a, is convenient for a lot of people, as they discovered during the pandemic, stuff can show up at your doorstep and show up there fast. But also, Mickey, Amazon sells stuff cheap. So if you mess around with Amazon, then do you create a situation where prices are going to go up on Amazon and people are going to feel that as well?

So again, Im just interested in the politics of messing around with something that for a lot of people they see as a venue to affordable products.

>> Mickey Levy: Well, you're bringing up a very good point that Amazon, as it grew, transformed the whole industry of distributing goods and reduced the costs and made much more efficient the distribution of goods and citizens, households benefited and businesses benefited tremendously.

Once the government starts regulating and over-regulating, there you create inefficiencies. And households end out paying for it one way or another. I mean, we could go off in any direction you want, but that's really the sum of it. Of course, you want Amazon to be a good citizen.

There are very complex issues surrounding its practices, but regulators like to regulate, and there are trade-offs here. And so I caution against higher regulations. Although getting back to the major theme of today, its impact on the outlook for inflation is really quite minor.

>> Bill Whalen: Yeah, it interests me, Mickey, in this regard, when government goes after monopolies, there's usually the message that ultimately we're doing this because this is good for the little guy.

For example, I'm old enough to remember when Ma Bell was broken up for BOCs, Bell Operating Companies. And this is good, obvious it's gonna drive down the cost of your telephone bill. But im not sure I understand how going after Amazon is going to make goods cheaper at Amazon.

So again, I think you're tinkering with somebody maybe you don't want to tinker with. I know the politics are attractive. You want to go after big tap, you want to talk about small companies getting punished and so forth. But I'm thinking about the consumers, those out there who are struggling with inflation right now.

 

>> Mickey Levy: I think that's right. And consumers now, and they've been quite resilient in the last year, we don't want to undercut consumers. We don't want to undercut their real purchasing power in any way. And we do want an environment where employment continues to rise. And we also want an environment where real wages are rising.

We want increases in real purchasing power. And boy, have we been through a rough time the last three years. It looks like, by statements in action, the Fed, having been through this rough patch, is basically coming around to saying, okay, we're going to take the appropriate steps to keep inflation low.

I'll tell you what's interesting here and should be a major concern. Well, the Federal Reserve has rediscovered its fundamentals and its mandate after a rough patch. You look at fiscal policy, and it's absolutely dysfunctional and rudderless. And seems to have no rules and no values and doesn't seem to learn any lessons from anything.

And this is an enormous concern.

>> Bill Whalen: Well, you are a great podcast guest, because you just teed up my final segment, which is really the long term implications to the Fed in terms of credibility. You wrote a piece in the Wall Street Journal where you criticized, politely, I'd mention, but you criticized the Fed for saying that they didn't really seem to have a game plan going into this last time around the same, I think the word you used was ad libbing.

 

>> Mickey Levy: Well, so I join John Taylor and other scholars at Hoover in urging the Fed to have a systematic approach to monetary policy. And use certain rules, not formulaically, but as guidelines for the conduct of policy. And what you see is the Fed craves its discretion. And its discretion, once again, during the pandemic led it to bad policies.

And so, in a sense, the Fed's winging it, and they've done more of the right things. When you look at it was just 18 months ago, and the Fed had the federal funds rate anchored to zero when inflation was over 6%. That's no way to bring inflation down.

But in 2022, they very aggressively raised rates. And now the Fed is in a pretty good position. It has its policy rate 5.5%, it's modestly above inflation. It has been lucky, and the private sector has been very resourceful. And the consumers have been resilient, and the economy has held its own through all this.

So far, so good, the Fed's back on the right track. I still wish it would take more seriously a more systematic approach to its conduct of policy.

>> Bill Whalen: How might this impact choices of future Fed members? If I put you in a position of authority where either you were interviewing the members or had to vote from them, what would you want to know?

 

>> Mickey Levy: Well, I would certainly want to know what their objectives are, and how they would interpret their dual mandate and how they would go about achieving it. Of course, keep in mind Congress gave them this dual mandate. The Fed has interpreted it with a 2% inflation. I would question them on their new strategic plan, which seems a very weak basis for achieving their long run goals.

I can ask all sorts of questions, but guess what? I'm not gonna be asking those presidents, the Fed governors, including the chair, are nominated by the president and confirmed by the Senate. And so they're gonna be political choices. And whereas in history, the Federal Reserve bank presidents were nominated by their own separate boards and, you know, largely accepted by the Fed, very infrequently vetoed.

More and more, the Fed is the governors, and the board of governors in Washington is having more input to the types of people they want in the Federal Reserve, at the president's level, at the district bank. So, unfortunately, these are political decisions, and we'll see what happens. But I think that the process of picking the Fed members is becoming more politicized and less based on how they would achieve the dual mandate.

 

>> Bill Whalen: Right, let's end this podcast on a sour note which is insulting your academic qualities, your brilliance or insightfulness and ask you a rank pundit question which is do you see us on a path to 2% inflation? How soon you think that's achievable? But then also just how you think inflation is going to play out in the next twelve months or so?

Do you think we're just gonna be in a status quo of higher prices for the time being or do you think there will be any kinda change dramatic enough, Mickey, that people might actually notice it?

>> Mickey Levy: I think inflation will drift down a bit, excluding food and energy, food prices.

Even though commodity foods prices have come down, food prices, both in restaurants and for purchasing food at home will stay high because wages and distribution costs are so high. Energy prices are clearly going up in the near term and you're gonna feel it near this winter in your home heating oil and the like.

I think core inflation will drift down when you ask the question about 2% while the Fed has it as kind of a long run objective. If you ask the question, will the Fed continue to raise rates and keep rates high to push inflation down to 2% right away?

The answer, I think, is no. And I think this reflects how the Fed is changing. And once again, the cost of getting inflation down to 2% right now may be higher than they're willing to bear, but things are better and will people feel the difference. No, once again, people, households and businesses respond to prices and the slow reduction inflation will not resonate as much to households and businesses as it will to the Fed and to financial markets.

 

>> Bill Whalen: Okay, and final, final question, McCain, I promise this is it. For those listening who want to follow inflation more closely, make better sense of the economy. Where would you steer them if they wanted to read two or three? If they go to one or two or three publications every day to just keep abreast of information, where would you go?

 

>> Mickey Levy: I think the Wall Street Journal, the Financial Times out of London. I take a look at the weekly, the economist magazine. The Wall Street Journal covers the Federal Reserve. I think it's important to try to dig underneath the headlines in the news and try to really understand how the economy's working, what makes it tick on this point, empirical work shows that when things are changing rapidly, like inflation, consumers have a better track record in forecasting what's going to happen than professional forecasters of the Fed.

 

>> Bill Whalen: Yeah, on the other hand crowd. I'd add, by the way, the reading list, John Cochran's excellent blog, the Grumpy economist. John just does a terrific job of parsing information and just laying stuff out and easy to understand. So easy that I can understand it.

>> Mickey Levy: I fully agree with that.

 

>> Bill Whalen: Well, Mickey, I enjoyed the conversation. Anything else you'd like to add or if you've had enough of trying to do econ one on one with me today?

>> Mickey Levy: No, so the one point I would make is we've been through a very, very rough patch. The Fed certainly didn't anticipate this even though you could use any simple model to forecast this and the Fed didn't.

And one of the critical questions here is have the policymakers learned their lesson and will they do things right after this? The answer is really unclear, I worry that they haven't, but let me conclude on one final point. And that is 20 years from now when historians look back on this period, what are they going to say about the pandemic and the policy responses to the pandemic and the inflation?

And I think what they may conclude is there were a clear excesses on deficit spending and fiscal policy and there were clear excesses by the Federal Reserve, but households and businesses were extraordinarily efficient in responding. Households saved a lot of the checks that were written to them so that they built up this cushion and then they could use that.

They used that cushion as higher inflation bid into their real purchasing power. Businesses did a marvelous job of maintaining low operating costs, keeping their businesses afloat, keeping inventories low. And so the private sector once again showed how resilient it can be, even through a period where there were pretty egregious policy mistakes.

 

>> Bill Whalen: That's well put. Well, Mickey, I appreciate your time today and I hope you enjoy your affiliation with the Hoover. I know we enjoy having you as part of our team. And the monetary policies conferences, by the way, for folks listening, you can find them online. You can read Mickey's papers.

I think a couple of his presentations might actually have video of it, so definitely check that out. So Mickey, thanks again for doing the podcast today.

>> Mickey Levy: Thank you very much.

>> Bill Whalen: You've been listening to matters of policy and politics, the Hoover Institution podcast, devoted governance and balance of power here in America and around the globe.

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