A New Way for the Fed to Fight a Market Crisis

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:23)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, we are here in Jackson Hole for the economic symposium held by the Kansas Fed, Kansas City Fed, every year. And every year they choose a theme for the conference. So last year, I think it was structural shifts in the global economy, something fairly generic, actually. This year, it is all about the transmission of monetary policy.

Joe Weisenthal (0:48)

That's right. And there's some pretty big questions. So it's like we all have this idea that you slow the economy or you fight inflation by hiking interest rates or then you lower interest rates if you want to stimulate things. But how does that like actually work? And this cycle has raised a lot of questions in particular because things that you might have expected to see, such as a sharp rise in the unemployment raid amid the fall in the rate of inflation, hasn't really happened. So, I think there's a lot of ambiguity still about like, what is the process via which monetary policy, which is both interest rate policy and I guess balance sheet policy, what is the process through which these decisions actually transmit to the real economy?

Tracy Alloway (1:29)

Right. And we're going back to the debate that was popular maybe a year or two ago, which was if you have major disruptions in the economy, like with shipping or whatever, and prices increase because of that, is increasing interest rates actually going to do anything about those particular constraints. But then just beyond those discussions, which we've been having for a long time and we now seem to be having in reverse, there are also a lot of things that central banks have done over the past couple of years that are unusual in one way or another. I think today we probably, 2020 was four years ago now and so we've learned to live with them. But if you think back, for instance, to the Fed's treasury program in March of 2020, right? That was a big deal and they rolled it out really quickly.

Joe Weisenthal (2:19)

And they also bought a bunch of types of assets or entered into a number of markets. I mean, they-

Tracy Alloway (2:24)

Corporate bonds.

Joe Weisenthal (2:25)

Yeah, corporate bonds, so other markets through which the Fed has almost never touched in the past. The other thing that's worth noting here in the preface to this conversation is that for the vast majority of people that are even vaguely aware of this thing called Jackson Hole, it's to the extent that Chairman Jerome Powell gave the speech. But, it is an academic economic conference, and there are a number of papers and presented. There is more here than just one speech from one guy.

Tracy Alloway (2:50)

No, absolutely. There is a series of presentations and papers that are presented, and I am very happy to say that today we are going to be digging into this question of transmission of monetary policy, and we are going to be speaking with one of the panelists from the event, and he's going to give us a sort of inside look at how all of this works. And what they're talking about. Yeah, so I am very excited. We have the perfect guest. We are speaking with Anil Kashyap. He is a professor of economics and finance at the Chicago Booth School. That's a very ominous.

Joe Weisenthal (3:22)

Yeah, thunder. That's all right, we can keep that in the record.

Tracy Alloway (3:25)

Sound effect. There's a mountain storm rolling in right now. Anil, thank you so much for coming on Odd Lots.

Anil Kashyap (3:31)

Thank you. Mother nature is going to supply liquidity.

Tracy Alloway (3:35)

It seems like it. OK, so how does this work? How is it that you come to be at Jackson Hole, and you are asked to give a presentation on... You were on the transmission of Monetary Policy panel, but the particular angle that you were taking or the paper you were presenting was monetary policy implications of market maker of last resort operations. So how does that come to be as a sort of subject, a topic for discussion?

Anil Kashyap (4:05)

Well, they start trying to put the program together sometime around January, and they contact a bunch of people saying, this year the theme is going to be X. You've written on some issue adjacent to X. Would you be interested in preparing a paper? So first thing that has to happen is they got to ask you, but you also have to have room in your schedule to actually produce something. Now, I was on a panel, and the panel was about the linkages between the financial system and monetary policy transmission. So that was our little bit of it.