Tim Duy on the Huge Challenge the Fed Now Has in 2022

Joe Weisenthal (0:10)

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

Tracy Alloway (0:17)

And I'm Tracy Alloway.

Joe Weisenthal (0:19)

Tracy, I was thinking, outside of crisis, like outside of spring of 2020, and obviously the year, year and a half, surrounding the great financial crisis, I think right now is probably maybe the most interesting time we've seen in a long time for the Fed and the central banking.

Tracy Alloway (0:42)

Yeah, absolutely. I would agree with that. I mean, we spent, you know, immediately after 2008, there was obviously a lot to digest, but then it was just years and years of basically the same thing, really low inflation and the central banks kind of arguing whether or not to wind down various stimulus programs, what exits were gonna look like.

But now it feels like that conversation has just been ramped up, you know, times 100, because you actually do have inflation, you still have a lot of emergency liquidity lingering in the system, and the question is what are central banks going to do about it, and can they actually navigate clamping down on price pressures without destabilizing the entire economic recovery?

Joe Weisenthal (1:30)

A hundred percent. Like, you know, we paid a lot of attention to the Fed and other big central banks, like, you know, for the last 10 years. But in retrospect, like it's kind of always the same story. It's like inflation is mild. It's not quite at target. Maybe it will be.

How low can employment go? Oh, it turns out it can go lower. Maybe they'll try to hike a bit. Maybe they, it was a little premature.

It's like, it was like pretty repetitive.

And right now, what I think is interesting is beyond just the price pressure, like an extremely wide disagreement. And some people think, oh, it's gonna fade because things are gonna normalize. People worry about some sort of wage price, inflationary spiraling. Lots of legitimate economists and people sort of like coming at the problem or the question in good faith can arrive at extremely different views for the next couple of years, I would say, from this starting point.

Tracy Alloway (2:23)

Absolutely. And I think we've spoken about this before, but the thing that complicates everything is that we don't really have a historical framework or parallel to look at because we didn't experience anything like the 2020 pandemic.

Well, I guess we had Spanish flu, but the crisis response wasn't quite the same. And so everyone is sort of trying to figure out what exactly is going on. And to be honest, I don't think anyone has a foolproof or bulletproof playbook just yet.

Joe Weisenthal (2:55)

Right. And of course, in addition to the pandemic itself, we had an extraordinary amount of fiscal stimulus, this time around. We had the Fed at the summer of 2020, sort of adopting a new framework where they would intentionally allow things to overshoot. So there is a lot to unpack. It's very new.

Everything is different. And we're going to talk about how to make heads or tails of this and what's going on.

Tracy Alloway (3:21)

Excellent. Looking forward to it.

Joe Weisenthal (3:22)

So our guest has actually been on the podcast before, but a very long time ago, way back in 2016, and we just talked to him back then about the sort of the art of Fed watching. Well, now Fed watching is actually really putting it into practice these days.

We're going to be speaking to Tim Duy. He is the Chief US Economist at SGH Macro. He is also a Professor of Economics at the University of Oregon. And I think he's had a very good feel for both inflationary pressures and how the Fed would likely respond to them over the last year in his writings on Twitter and so forth. So Tim, thank you so much for coming back on Odd Lots.

Tim Duy (4:07)

Well, thank you for having me. I appreciate the opportunity.

Joe Weisenthal (4:10)

Yeah, absolutely. So in retrospect, are we right that like 2015, 2016, 2017, pretty boring from a Fed perspective, at least compared to what we're dealing with now.

Tim Duy (4:20)

Yeah, the never ending expansion was gonna get old there pretty soon from a Fed watching perspective. That's for sure.

Of course, you didn't want it to end the way it ended, unfortunately.

Tracy Alloway (4:32)

So what is it about the current period that makes it so unusual or so interesting for central bank watchers such as yourself?

Tim Duy (4:42)

Well, it's the uncertainty.

We had gone into the pandemic with a sense that we knew, we knew the basic economic framework that we were going to be working with for the foreseeable future. And that basic framework assumed that demand was really always and everywhere a problem in the sense of being too low. And we also thought that inflation was very, very sticky around 2%.