How Nearly Two Decades Of Fed Policy Contributed To Bubbles, Busts, And A Boom In Debt

Joe Weisenthal (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal, and unfortunately, Tracy Alloway is out this week. But the good news is we have one of our favorite recurring guests on the podcast today. We're going to be speaking with Srinivas Thiruvadanthai. He's the Director of Research at the Jerome Levy Forecasting Center.

Great voice and great insights on markets and economics. Today, we're going to be talking a little bit about the Fed, monetary policy, bubbles, economic volatility, and things like that. There's a lot of belief out there that the Fed contributes to instability, bubbles. But a lot of the thinking is muddled, overly simplistic ideas about a low rate just lead to a surge in speculation.

Srinivas has some more insightful complex ideas about the nature of central banking over the last several decades, and how it's contributed to less than ideal outcomes in the economy. We're going to talk to him now. So Sri, thank you very much for joining us.

Srinivas Thiruvadanthai (1:19)

Thank you. Thank you, Joe, and good to be back.

Joe Weisenthal (1:21)

You know what's interesting?

Before we get into, you wrote this paper recently on inflation targeting. But before we get into that, it's funny. I was looking at a chart recently of just inflation. You can measure it, obviously, several different ways and strip out of things.

Over the last 15 years and probably further, if you strip out oil prices, it's almost impossible to find any meaningful up or down trend at all. Even the economic collapse, the boom, the whatever. It kind of just stays the same.

Srinivas Thiruvadanthai (1:54)

It's dead flat. That is right.

Joe Weisenthal (1:56)

If people over read, like this always strikes me, they get really excited like, oh, the three-month annualized rate of change in core CPI, excluding health care and services is at its fastest level in three years, and they get really excited. But then you zoom out, it's like inflation hasn't changed dynamics in years.

Srinivas Thiruvadanthai (2:13)

Yeah, and we have got used to that stability. I mean, that even a small tick up in the three months gets people excited.

Joe Weisenthal (2:21)

How much of that can be attributed to Fed policy in your view? The fact that inflation trends are so stable.

Srinivas Thiruvadanthai (2:29)

I mean, what happens when inflation trends are stable? How much can it be attributed to Fed? I think certainly Fed has contributed to it. I mean, if you look at the Fed policy in the last 20, 30 years, what it has done is implicitly they're not trying to, I mean, a lot of people attribute a lot of motives to Fed. I just want to be careful. They're not trying to do anything. They are trying to go within their mandate.

Now, it may be that the framework is wrong, which is what I believe.

But what they have tried to do is they take two things very seriously, low and stable. The stable part of it is a lot more problematic than just the low part, in my opinion. If you have low with a little bit of volatility around it, that would be okay, probably okay. Maybe you need to cheat it up a little bit. But the stability that you're pointing out is partly the Fed's doing.

Joe Weisenthal (3:22)

So let's start. You wrote this paper and you took aim at a particular approach to monetary policy or framework, I guess maybe one would call it inflation targeting. What is inflation targeting?

When did it start? When did the Fed adopt this current framework in your view?

Srinivas Thiruvadanthai (3:39)

The Fed actually officially started inflation targeting only in 2012

But implicitly, if you look back, they probably have been doing it since the early 90s or maybe mid 90s at least, they've been doing that. And even before that, if you look at the 70s when people really got, of course, upset about inflation, so the original Humphrey-Oakins Act actually called for low and stable inflation and inflation to be like 0% or eventually they said that is not possible, 2% over a long period of time. So it's been there implicitly, we have been doing inflation targeting in one form or the other at least since the mid 90s.

Joe Weisenthal (4:18)

What is it? So it's just this idea that it's not enough to just have low inflation, but that they should really worry about any sort of volatility in that.

What is the main approach to achieving that goal?

Srinivas Thiruvadanthai (4:33)

So the main approach to achieving this goal, and this is the tricky part because the mechanism is never really clarified. When you ask monetaries or when you ask the economists, they would tell you, it's all through expectations. But these expectations channels, if you really look at inflation expectations, they have really not changed much or they don't seem to have any relation to reality sometimes.