BONUS EPISODE: Bloomberg Surveillance in Jackson Hole

Tom Keane (0:00)

This is a special edition of Bloomberg Surveillance in your Odd Lots podcast feed. We're in Jackson Hole, Wyoming, along with Joe and Tracy, covering the Fed's annual symposium.

Keep listening for conversations with Peterson Institute president Adam Posen and Philadelphia Fed president Patrick Harker. That's coming up on this special edition of Bloomberg Surveillance.

Thank you This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best in economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance On Demand, on Apple, Spotify and anywhere you get your podcasts. And always on bloomberg.com, the Bloomberg Terminal and the Bloomberg Business App.

Mohamed Aly El-Erian (0:54)

Perfect guest for reaction to this speech is Mohamed El-Erian of Bloomberg Opinion and Queens' College Cambridge.

Jonathan Farrow (0:59)

Mohamed, thanks for being with us and being with us through that speech as well.

Joe Weisenthal (1:03)

What were your thoughts when you heard some of those words from Chairman Powell just moments ago?

Mohamed Aly El-Erian (1:07)

I had three takeaways, John. First is the speech that said very little that is new. He repeated what he has said in the past and he has retained maximum policy optionality.

Second, he reminded us that with the exception of the inflation target, which he said is 2% and will remain 2%, everything else is uncertain. And his reference to our star in particular was very interesting. And third, what I thought was also curious is how he ended the speech. He ended the speech talking about we will follow the stars in a cloudy sky.

Everybody sees the cloudy sky, but what's interesting is that the rest of Jackson Hall will be about moving stars. All the structural changes that are going on domestically and internationally, and that just adds to the topic that the three of you have been talking that it's a very complex world out there and the Fed has to navigate a lot of moving pieces.

Barry Eichengreen (2:07)

Mohamed, one conversation you and I have had over the last several weeks, the last several months for that matter, people having this discussion here as well. Are we, from your standpoint, in your opinion, sufficiently restrictive?

Mohamed Aly El-Erian (2:19)

John, this goes immediately to what is the right inflation target. If the right inflation target is 2% and they want to get there in a credible period of time, then we are not sufficiently restrictive.

If the right inflation target, as you've heard many people say, including Adam Posen today, is above 2% given all the structural changes, and the way we're going to get there is not by announcing the new target, but by following a shadow target, and then once we see it stable, and adopting it, I think that's the most likely outcome, by the way, then we are sufficiently restrictive.

Lisa Abramowitz (3:00)

Mohamed, does it concern you that we've heard a lot of people who sound pretty happy, actually, other than Jay Powell, who is taking sort of the adult tone of, we're not there yet, stop declaring victory, there's a lot more down the pike. Everybody else sounds like things are going really well, and the Fed policy is achieving exactly what it's ought to.

Mohamed Aly El-Erian (3:20)

So I don't think it's everybody else, but most people are, especially in the marketplace, not so the economists.

You have Larry Summers, for example, reminding us this morning that if you look at the 70s inflation cycle, this one looks very similar.

He has two graphs up, and he's sort of warning implicitly that we may see a pickup in inflation. So I think the marketplace is much more complacent than the economists are. The economists recognize that there are many moving pieces, whereas the marketplace thinks that we've gotten to a new equilibrium, and from here, it's going to be cut next year. That remains to be seen.

Lisa Abramowitz (4:03)

Do you think, Mohamed, that it's important for the Fed to get ahead of a potential resurgence in inflation, or do you think that Jay Powell's approach of watching the stars and seeing what they are will be sufficient to curtail some sort of more embedded inflation?

Mohamed Aly El-Erian (4:18)

It's hard, Lisa, because as you know, they have not, like past Feds, opted for a strategic view of inflation, nor do they have a functional monetary policy framework. So they've become highly data dependent, which means that they are using instruments with lags on backward-looking data. So they are in a bit of a tough situation.

They're going to remain data dependent. So I don't think he knows what they will do in September. He's going to wait to see what the jobs report is. He's going to wait for the CPI numbers, and then they're going to decide what to do.