Ed Harrison Explains What the Fed Is Really Trying to Accomplish

Joe Weisenthal (0:10)

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

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, we know a couple of things about the economy right now. We know that inflation is high.

It's way too hot for the Fed and the general public, and that the Fed, as of the moment, plans to hike aggressively over the next several meetings in order to bring down inflation. I don't think we actually know much more than that.

Tracy Alloway (0:39)

Yeah, I think there are a lot of open questions on what exactly, well, A, what impact are hikes actually going to have on the economy? How do interest rate hikes actually work to slow down price levels? And of course, there's this big open question about whether or not we should be targeting demand when supply seems to be more of an issue. But the other thing we don't really know is how does the Fed react once the impact or the effects of those hikes start working their way through the economy? What level of inflation is acceptable? Does it have to go back to 2%?

Is the Fed willing to, I don't know, accept slightly higher levels of inflation in order to preserve, I guess, functioning financial markets and things like that?

Joe Weisenthal (1:26)

Or an expansion. Or an expansion, yeah. Like the question of, okay, would the Fed be happy with 3.5% inflation if it means it doesn't push us into a recession?

Tracy Alloway (1:38)

Yeah.

Joe Weisenthal (1:39)

Strikes me as like an interesting question.

Tracy Alloway (1:41)

It feels like, and I know we've been saying this for two years now, but it feels like we are actually in a different type of economic cycle. And so there are a lot of open questions swirling around exactly what that looks like and how potentially it ends.

Joe Weisenthal (1:55)

Yes, so I think there's this view that, okay, maybe the inflation is expected to come down significantly, but it's unlikely to get back down to target by the end of the year.

And so then the question is like, well, how hard does the Fed push for those last one or 2% or does it ease off a little bit? But then also again, and it's a question that never really comes up, which is can the Fed articulate how rate hikes help, how they tame inflation? We have this idea, you hike rates, inflation in theory goes down, but I think the Fed is getting a little bit more explicit about this. It's like, yeah, well, maybe there's gonna be some pain. Maybe unemployment is gonna rise.

But again, most parts of the economy aren't really rate sensitive. It's like housing is obviously the big one, maybe autos. And so the connection between rate hikes and actually getting inflation at target, at least to me, I think there's still some ambiguity.

Tracy Alloway (2:48)

Yeah. And I mean, I think most of the people at the Fed would readily admit that, and they're still talking about it and trying to work their way through it as well.

Joe Weisenthal (2:56)

So it's a weird time. And I think that, right, there's all these questions about what is the Fed's goal? How does it accomplish them? What's it really trying to achieve? What's success look like? So we're going to talk about that today.

We're gonna be speaking to one of our colleagues at Bloomberg, one of the sharpest people here, one of the great writer, and someone that we've been fans of for years before he even came to Bloomberg. So it's a real treat that he's a colleague. We're gonna be speaking with Ed Harrison. He's a senior editor on the markets team, and he will answer, he will tell us all the answers to these questions.

Tracy Alloway (3:29)

So he has the answers.

Joe Weisenthal (3:31)

He's gonna give us an edit. Thank you so much for coming on Odd Lots.

Edward Harrison (3:34)

Well, thank you for having me, and I hope I have some of the answers.

Joe Weisenthal (3:37)

How long have you been our colleague now at Bloomberg?

Edward Harrison (3:39)

Coming up on a year, actually. Next month, it will be one year.

Joe Weisenthal (3:43)

I don't wanna sidetrack, because this is not the topic of the conversation, although maybe we could get into it. But I've been reading your blog and your newsletter credit write-downs for years, probably coming out in a decade. And I was thinking, I was actually talking to someone about it the other day, and they're sort of like indispensable source during the Euro crisis.