0:00

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0:02

marketplace, where sales by American companies

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to Chinese consumers added $53 billion

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to the U.S. economy in 2022. Discover

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0:18

From the opinion pages of the Wall

0:20

Street Journal, this is Potomac Watch. Inflation

0:24

comes in hotter than expected for

0:26

the third straight month, staying more

0:29

persistent than the Federal Reserve and the White

0:31

House had hoped at 3.5% for the last

0:33

year. The

0:36

figure jolted financial markets, which

0:39

may not now get the early cuts

0:41

in interest rates that they

0:43

have been anticipating. We'll talk about the

0:46

implications of this inflation news for the

0:48

economy and for the 2024 election. Welcome,

0:52

I'm Paul Chigot with the Wall

0:54

Street Journal opinion page here on

0:56

our Potomac Watch podcast, and I'm

0:58

here with Mary Anastasia O'Grady and

1:00

Joe Sternberg. Welcome to you both.

1:03

So the CPI data consumer price

1:05

index, one of several price index

1:07

came in at 0.4% for March,

1:11

third month in a row that

1:13

it was hotter than expected, and

1:16

therefore stopping the progress down from

1:18

the peak of 9.1% that inflation

1:20

reached towards the Federal

1:23

Reserve's target of 2% annual

1:25

inflation. Mary, what do you make

1:28

of the figures? Well they're going in the

1:30

wrong direction, Paul. That's the first thing

1:32

to observe here. Although I

1:34

think it's a little early to panic. Jay

1:36

Powell never said that he was going to

1:38

deliver six interest rate cuts at 25 basis

1:41

points apiece. A more moderate expectation was

1:43

three. It looks like we may not

1:45

even have three this year. There's

1:48

some question about whether there'll be one and

1:50

whether it will come in June or maybe

1:52

in November after the election.

1:54

But he has said all along that he's

1:56

going to look at the data and

1:59

he is going to hold off cutting until

2:01

he sees the whites of their eyes,

2:03

you know, the actual drop

2:05

in inflation to that 2% number. So

2:08

everything is pretty much in line.

2:10

I think what's surprising is that

2:13

the tighter interest rate regime that

2:15

he has had in place for

2:17

almost going on two years now

2:19

has not slowed the economy to

2:21

the extent that the inflation pressures

2:24

came off. So there's still robust

2:26

job growth, even if it's part-time

2:28

jobs. And companies

2:30

are still earning profits. So

2:32

for those reasons, I think he's just got

2:34

to sit tight where he is and keep

2:37

waiting. Well, let's put that in his

2:39

own words. Here's Chairman of the Fed, Jay

2:41

Powell. For inflation, it is too soon to

2:43

say whether the recent readings represent more than

2:45

just a bump. We

2:47

do not expect that it will be appropriate

2:49

to lower our policy rate until we have

2:52

greater confidence that inflation is moving sustainably down

2:54

toward 2%. Given

2:56

the strength of the economy and progress on inflation

2:58

so far, we have time to

3:00

let the incoming data guide our decisions

3:02

on policy. Of

3:05

course, that outlook is still quite uncertain, and

3:07

we face risks on both sides. Reducing

3:10

rates too soon or too much could result in a

3:12

reversal of the progress we've seen on inflation and

3:15

ultimately require even tighter policy to get

3:17

inflation back to 2%. And

3:20

easing policy too late or too little

3:23

could unduly weaken economic activity and

3:25

employment. So there is a

3:27

noncommittal statement that he's looking at the data,

3:30

Joe. But I think one of the interesting

3:32

questions in the markets now, I've been following

3:34

some time is just whether

3:37

financial conditions are as

3:39

tight as the Fed has

3:41

been thinking and whether its monetary policy

3:43

is as tight as Chairman Powell has

3:45

been saying at his various press conferences.

3:47

I mean, if you look at the

3:49

financial conditions as measured by prices across

3:51

the economy of the stock market since

3:53

the last week of October, at least

3:55

before This week, had really had a

3:57

tremendous run, a tremendous run-up increase. Gold.

4:00

Price has been up, oil is

4:03

now hitting eighty five bucks a

4:05

barrel or so, and as up

4:07

commodities like Copper which indicate to

4:09

economic strength and demand also up

4:11

now. Maybe that's the electronics, even

4:14

vehicle subsidies? I don't know, but

4:16

Mr. Copper, as they say, is

4:18

often cited by a lot of

4:20

market analysts to indicate strong economy.

4:22

Any course, economy has been growing

4:25

faster than people expected. When you

4:27

think Joe, I think that that

4:29

is a really. Important question that gets

4:31

to the source of problem that the

4:33

said in the rest of his face.

4:36

Hear this issue of what actually our

4:38

financial conditions right now are things tight?

4:40

Are they loose? And the way the

4:42

Fed has been thinking about this problem

4:44

is that part of it as this

4:46

old trade off with the assume exists

4:48

between the labor market and inflation Answer:

4:50

From that perspective they might still be

4:52

concerned the conditions are not tight enough.

4:54

But I think that the more important

4:56

thing that they're aiming at here that

4:58

they assume that there's kind of like

5:00

this underlying. Natural rate of interest

5:02

the kind of exists out there in

5:05

the wild were if interest rates were

5:07

at that level everything would be completely

5:09

neutral. the economy would grow to healthy

5:11

with but you wouldn't have any inflation

5:13

so they're asking themselves or we above

5:15

that level and tight or are we

5:17

below it and loose and I think

5:19

that with they haven't caught up to

5:21

is the fact that that level of

5:23

to shift and in fact it might

5:26

actually be that that rate is higher

5:28

than they have been assuming which would

5:30

then. Actually means is there a

5:32

policy is looser than they thought

5:34

it was an that would definitely

5:36

be consistent with some of what

5:38

we're seeing in the economy right

5:41

now I'm in summer First developments

5:43

my head like a reasonably healthy

5:45

labor market and how a bunch

5:47

of quarters of reasonably healthy gdp

5:49

growth that suggests that actually the

5:51

economy as trucking along very helpful

5:54

a that American entrepreneurship and productivity

5:56

are doing their things and centrally

5:58

boosting prosperity for or. Yuri households.

6:00

But then you also have this

6:03

issue of inflation, which is suggesting

6:05

that something is going haywire. Somewhere.

6:08

In the system and I think that

6:10

the real problem is that the said

6:12

itself doesn't understand where we are on

6:14

that continuum, But if you have inflation

6:16

that tends to suggest that things are

6:18

a bit looser than their models seem

6:20

to think that they actually are. I

6:22

were going to take a break and

6:24

when we come back and talk more

6:26

bad, Some of the economic issues at

6:28

play here are also the political impact

6:30

of inflation as the election approaches when

6:32

we come back. Us.

6:35

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6:37

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6:47

more Alibaba terrorists businesses.com. Welcome

6:54

back on Polish you go with see

6:56

a Wall Street Journal here on our

6:58

Potomac Wants podcast with Mary Ossetia, Grady

7:00

and Job Sternberg. sometime but the dilemma

7:02

the said married said always has these

7:04

difficulties interpreting data, finding out where we

7:07

stand. One of my difficulties has been

7:09

focused on here in one of the

7:11

reasons I think the set would like

7:13

to reduce interest rate is that a

7:15

problem and the banking system Pretty good

7:17

commercial real estate loans which is a

7:19

hangover from the pandemic and has affected

7:22

about of midsize banks. we know. And

7:24

that's one issue. Some of the bags

7:26

as we saw with the Signature bank

7:28

failure a year ago have duration risk

7:30

from having sudden increase in interest rates

7:33

put of assets they hold as losses

7:35

if they had to market which course

7:37

they don't buy that hangs over them

7:39

to let and like to see those

7:41

rates come down quite apart from mortgage

7:43

rates and and the other costs that

7:46

go with high interest rates. Oh yeah,

7:48

I think you're exactly right. I mean

7:50

the big concern for a lot of

7:52

people has been the. Problem with

7:54

commercial real. estate the pandemic changed

7:56

a lot the way to kill

7:59

the urban area as look and

8:01

operate. And, you know, a

8:03

lot of companies are stuck with these

8:05

buildings that are empty. They can't sell

8:07

them. They've borrowed against them. And the

8:09

Fed was hoping, I think, as I

8:12

think most economists were hoping, that interest

8:14

rates would come down and those owners

8:16

could refinance at lower rates. And as

8:18

that idea gets pushed out further and

8:20

further on the timeline, it raises the

8:22

risk that at some point some of

8:25

these owners are just going to hand

8:27

the keys back to the bank and

8:29

walk away. And that would

8:31

obviously cause a lot of problem

8:33

in the financial system. It kind

8:35

of surprises me on the duration

8:37

question, how banks could

8:40

have such a big mismatch if

8:42

there indeed is one in the regional and the

8:44

smaller banks. I don't think it exists in the bigger banks.

8:47

That's been a problem before. And

8:49

you would think that regulators would be on

8:51

the lookout for that. But obviously they

8:54

weren't in the case of the California

8:56

bank that had so many problems, Silicon

8:58

Valley Bank. Yeah, and the signature as

9:00

well. That's a failure of the Federal Reserve

9:02

of San Francisco in the case of

9:04

the Silicon Valley Bank that they never

9:06

really had the answer for. They

9:09

kind of said, well, you know, it's the banker's

9:11

fault, which is what the regulators always say until

9:13

they ask for more power. And then they say,

9:16

and by the way, give us more power, even

9:18

if we somehow missed the

9:20

buildup of duration risk. Let's

9:23

talk about the Fed. I just want to get your

9:25

view. Do you think the Fed should stand pat here

9:27

for a while? Or are you one of those who

9:29

thinks that this is just a three month lip and

9:31

we're going to be heading down again? You can believe

9:34

both. But I do think that the Fed needs

9:36

to stand pat here because there's been a lot

9:38

of pressure on J-PAL to move that target from

9:40

2% up to 3%. And I think for purposes

9:45

of Fed credibility, he needs to stick

9:47

by that. You know, he, as much

9:49

as anybody understands and as he said

9:51

in that clip you played, there are

9:53

risks on both sides. I mean, if

9:55

he stays tight for too long, they

9:57

tip the economy into a recession.

10:00

It may not be so easy to undo

10:02

that mistake, but right now, I mean,

10:05

one of the problems with central banking is all

10:07

he has is the data that's put before him.

10:09

And for now, I think he needs to stay

10:12

put. And Joe, I heard you say that

10:14

you think Powell needs to stay put. There

10:16

are some people, though, he even said maybe

10:18

the next Fed move might be another increase.

10:20

I have a hard time believing that would

10:22

happen before the election, though. That would put

10:25

the Fed in the crosshairs of Democratic politicians

10:27

in the White House. Yeah, I'm not sure

10:29

I see an increase coming. But I think

10:31

that, you know, an important point here is

10:33

that the Fed has thought all along that

10:35

the tradeoff they were making was between bringing

10:38

inflation down on the one hand and potentially

10:41

having to force a slowdown for

10:43

economic growth of the labor market on the

10:45

other hand. And there isn't

10:47

a lot of historical evidence that's true.

10:50

And what we have seen over the

10:52

past year or so is that actually

10:54

interest rates at their current level can

10:56

be consistent with good

10:58

economic outcomes for households, employment,

11:01

economic growth, that sort of

11:03

thing, at the same time

11:05

that you start bringing inflation under control. So

11:07

I think that the Fed should get out

11:09

of this tradeoff mindset that they were making.

11:12

And so, you know, actually, there

11:14

are financial risks like commercial real

11:16

estate, as Mary mentioned. But

11:18

in terms of the main street economy, maybe

11:20

the rates at their current level aren't

11:22

actually a bad thing. Maybe they are

11:25

helping the economy in some important way.

11:27

No question that zero interest rates or

11:29

near zero interest rates as we had

11:31

for so many years distorted investment decisions.

11:33

When money is essentially free to borrow,

11:36

you tend to let your guard down

11:38

about what are the best ways to

11:40

allocate your money and capital. And this

11:43

rate, you probably now with five and a

11:45

half percent Fed funds and we get the

11:48

10-year is I think up to about 4.6

11:50

percent, two years now about 4.9

11:53

percent. You get

11:55

people having to have pretty

11:57

sharp calculations about what is going to

11:59

allow them to get repaid if they're lending,

12:01

but also return if they're investing. Let's turn

12:03

to the politics of this. And with that,

12:05

I want to focus on a big economic

12:07

number, which is real

12:09

incomes. That is, incomes, how

12:12

much have they increased after inflation?

12:15

Because of course nominal rates of income

12:17

growth can be eroded to almost nothing

12:20

by inflation. And that's kind of what

12:22

has happened across the Biden presidency. I

12:24

was looking at the data after

12:27

this latest inflation report, and of course

12:29

the last two months you've seen actually

12:31

no growth in real incomes. They've grown

12:33

a little bit over the

12:35

last year, but across the Biden

12:37

presidency, they've fallen, Joe,

12:39

2.54%, according to the figures

12:41

that I've seen. And if you

12:43

look at actual dollars over the last

12:45

year, real dollars, constant dollars, the

12:48

figure from the Bureau of Labor Statistics is that

12:50

the real incomes have increased the last 12 months,

12:52

all of seven cents. From

12:54

$11.04 in 1982, $84.00 to $11.11. That's

13:02

not a big return for a full year. Yeah, that's

13:04

seven cents if you multiply it out or for the

13:06

number of hours you work in a day. It's

13:09

not even enough to buy you a cup of coffee

13:11

anymore. Look, I

13:13

mean, this has been the political problem all

13:15

along, and you could have seen it barreling

13:17

down the tracks like a freight train for

13:20

the past couple of years. I mean, I

13:22

think that a bunch of economists and then

13:24

also democratic political strategists have

13:26

been keen to argue that voters will

13:28

be happy by the time November rolls

13:31

around because the inflation rate

13:33

is coming down. And it's undeniably true that

13:35

the inflation rate has come down from its

13:37

peak, but the problem is, as we

13:40

have observed repeatedly on this

13:42

podcast, as long as that

13:44

inflation rate is positive, the price level is

13:46

still going up. So that means

13:49

that households experience that price level in

13:51

terms of the number of dollars that

13:53

they have to pay for groceries or

13:55

for gas or to heat their homes

13:57

or keep the lights on or buy

13:59

school supplies. applies for the kids. And

14:02

those prices have all gone up. That level

14:04

of staying where it is, you know, falling

14:06

inflation does not mean the prices are coming

14:08

down. It just means that they are increasing

14:10

less rapidly. And clearly,

14:12

we see that wages are not keeping

14:14

up with that. And then we're all

14:17

supposed to be surprised that voters aren't

14:19

happy about this. And there's this weird

14:21

form of Marxism in all of this

14:23

is in Chico Marx, who are you

14:26

going to believe your own lying eyes

14:28

are me, you know, that you hear

14:30

from the democratic politicians and

14:32

strategists in this debate. And then you look

14:34

at these inflation data and you understand exactly

14:36

why voters seem to be unhappy about the

14:39

economy. All right, we're gonna take another break.

14:41

When we come back, we'll talk more about

14:43

the political impact of rising prices when we

14:45

come back. Max Levchin was

14:47

one of the original co-founders of PayPal. And

14:50

now he's leading one of the biggest players

14:52

in the buy now pay later business. As

14:55

CEO of a firm, he's going head to head

14:57

with the credit card company. Credit,

14:59

generally speaking, is good. America runs on

15:01

credit. I think we let ourselves illustrate

15:03

when we decided that credit cards is

15:06

the optimal way of borrowing money. Here

15:09

an in-depth version of our conversation

15:11

with Max Levchin for WSJ's take

15:13

on the week plus other exclusive

15:16

content on WSJ special access only

15:19

for WSJ subscribers on Spotify and

15:21

Apple Podcasts. Don't

15:25

forget you can reach the latest

15:27

episode of Potomac Watch anytime. Just

15:29

ask your smart speaker, play

15:31

the opinion Potomac Watch podcast.

15:34

That is play the opinion

15:36

Potomac Watch podcast. From

15:41

the opinion pages of the Wall Street

15:43

Journal, this is Potomac Watch. Welcome

15:47

back. I'm Paul Gigo with Joe Sternberg

15:49

and Mary O'Grady. And Talking about the

15:52

political impact of inflation and Joe's talking,

15:54

Mary, about real incomes. I Think the

15:56

very salient point is that the powers

15:58

that be in. Washington, the President particular

16:01

have i think a lot of the

16:03

press Course they looked at a lot

16:05

of the macro economic data. strong unemployment.

16:07

Strong. Gdp growth and they say

16:09

man, happy days or here can why

16:11

don't you folks get And their basic

16:14

argument is. Look. At the problem

16:16

is of us, it's you. It's you

16:18

American consumers. You don't get it. You

16:20

don't know how good your habit. Always

16:22

a dicey political argument. Well I think

16:24

job put a singer on at their

16:26

when he says talking about the price

16:29

level because. The. Price level is

16:31

what people are looking at. They're

16:33

not looking at how much prices

16:35

went up between last month and

16:37

this month, but they know said

16:39

sense this inflation problem started. The

16:41

price level is up significantly, wages

16:43

not so much. And you know

16:45

I think one of the things

16:47

that we forget in this country

16:49

because we have not suffered the

16:51

kind of inflation that for example

16:53

you've seen Latin America is. Generally

16:55

people don't catch up, you never

16:58

touch up. This is why you.

17:00

Try with everything you have at the

17:02

central bank not to get in this

17:04

problem because if you try to catch

17:06

wages up to the change in the

17:08

price level, you end up with the

17:10

spiral. So you hold down wages. To.

17:13

Knock out the inflation problems, you

17:15

know. The other thing is that

17:17

I think it's just maddening for

17:19

a lot of people that the

17:21

Biden Administration created this thing that

17:24

they called the Inflation Reduction Act,

17:26

which is basically throwing a lot

17:28

more money into the economy. in

17:30

the former, subsidies and a lot

17:32

of structural things have changed. For

17:34

one thing that has not changed

17:36

is that inflation is still too

17:38

many dollars chasing to few goods.

17:40

And that's the problem that Jay

17:42

Powell. Is trying to deal with

17:44

here by draining accommodation, the fiscal

17:47

side, the balance sheet, the executive.

17:49

the government's could help him by

17:51

doing two things: one. Stop.

17:54

Throwing money into the economy in the

17:56

form of subsidies, And to

17:58

do more to stimulate. The

18:00

Supply. Side Productions: We still get

18:02

a lot of mixed messages from

18:04

the By Demonstration about energy production

18:07

and if he wants to do

18:09

something about that gasoline price, he

18:11

should. Encourage more oil drilling

18:13

in this country, but he doesn't

18:15

to that President said in a

18:18

response to the merge Consumer Price

18:20

Index in a statement fighting inflation

18:22

remains my top economic priorities. Yikes!

18:25

What if it's was a lower economic priority

18:27

will what had happened. But the let's listen

18:29

to the President give us something of a

18:32

mixed message here on social spending. Also,

18:34

restore the expanded saw fair

18:36

tax credit. Filtered.

18:41

Out a foreign power they

18:44

have got a that are

18:46

out synchronous. Our fathers of

18:49

friends that that expire. Well we got

18:51

a spark up all their political. Together

18:56

for them to bring it back

18:58

together Us: We're going to bring

19:00

about subsidy back. The President talks

19:02

about subs cross the board mean

19:04

the electric vehicle subsidies are going

19:06

to be upwards of and trillion

19:08

dollars trillion dollars over the course

19:10

of several years. Her from the

19:12

inflation reduction acts and all that

19:14

Joe has contributed to inflation. So

19:16

the President I mean to. Be fair

19:18

to him, this is the economic model he's

19:20

grown up with says economic advisors think so

19:22

right? It's the old spending multiplier you get

19:24

a dollar spending in to get one point

19:27

seven. Dollars. Worth of return

19:29

on gross that would are ignoring

19:31

for well that's nonsense. I think

19:33

me economic evidence of shows that

19:35

that multiplayer really isn't that high.

19:38

but the other thing is it

19:40

discounts inflation. And. The impact on

19:42

prices and the president in the same

19:44

as really at pains to try to

19:46

say things are just terrific in our

19:48

prices are still too high for housing

19:50

and groceries he says. even as

19:53

prices freaky household items like milk and

19:55

eggs are lower than a year ago

19:57

my milk and eggs are lower but

19:59

they're still up enormously from what they

20:01

had been. So this is a bad

20:03

political story for him. Yes, and it

20:06

is only going to get worse because,

20:08

as you pointed out, Paul, he and

20:10

his advisors just don't have a clear

20:12

handle on what the solution was. And

20:14

I mean, that solution is kind of

20:16

staring us in the face. I mean,

20:18

Mary described inflation as too much money

20:21

chasing too few goods. And there are

20:23

two solutions to that. You

20:25

can reduce the amount of money that's chasing

20:27

all of those goods. That's what the Fed

20:29

has been trying to do. That is what

20:32

the Biden administration is not doing when they

20:34

create all of these subsidies that are supposed

20:36

to pour out into the economy for consumption

20:39

of certain goods like EVs or solar panels

20:41

or any of the rest of it. But

20:43

the other thing you can do is attack

20:46

the other half and produce more. You know,

20:48

Mary hit on one important point. You could

20:50

produce more energy. You could look at tax

20:53

or regulatory policies that would encourage more

20:55

production in the economy. And

20:57

yet that is the solution that

21:00

the Biden administration and a lot

21:03

of his Democratic allies steadfastly resist,

21:05

even though that is also the

21:07

key to unlocking real wage growth

21:10

for households. You know, your wages

21:12

go up in inflation adjusted terms

21:15

when the economy is more productive.

21:17

But you can only get there

21:19

with the kind of policies the

21:21

Biden administration is resisting so

21:24

stubbornly. And so because they

21:26

have those ideological blinkers of

21:28

potential solutions to this problem,

21:30

it's just hard to see it getting

21:33

any better for them between now and

21:35

the election. Donald Trump, of course, jumped

21:37

on inflation and out the list of

21:39

all the goods and the percentage that

21:41

they've increased, according to a Bureau of

21:43

Labor Statistics, over the course of the

21:45

Biden presidency. Donald Trump really isn't saying

21:48

he'll control spending either, which is a

21:50

problem. He's not focused on any solution

21:52

himself, I think, to inflation other than

21:54

to criticize Biden. Maybe he will get

21:56

there before this election campaign is over.

21:58

But I think... Just as

22:01

abortion policy is emerging as

22:03

the biggest Republican vulnerability in

22:05

the selection, inflation remains the

22:07

biggest Democratic vulnerability, that and

22:09

the border, I think. But

22:11

inflation more than anything else.

22:13

And I say that because

22:15

of the fact that it

22:17

affects particularly low-income voters and

22:19

working-class voters, because they have

22:21

the less ability to get

22:23

increases in wages, and

22:25

they're the ones who feel it most acutely

22:27

when they buy energy, buy food, the two

22:29

staples of household spending, or if

22:31

their rent goes up, or if their

22:34

child is in their 20s and wants to

22:36

buy a home. Suddenly it's a pretty

22:38

big nut if you want to borrow. Yeah. I

22:41

mean, Paul, back in the dark ages when you

22:43

and I were just writing

22:45

about Paul Volcker and the last big struggle

22:47

we had... It was with a gold

22:49

on his marriage. There

22:51

was something called the misery index, where

22:54

you combine the inflation with the unemployment

22:56

rate. I think there's

22:58

a new misery index, which it's

23:00

heavily still about inflation, but it's

23:02

also about other things in the

23:05

economic basket that are affecting people

23:07

and general quality of life. So

23:09

you have this inflation pressure, which means

23:12

that the discretionary income in your household

23:14

is shrinking. And

23:17

then you're looking at crummy public

23:19

schools. You're looking at crime problems.

23:22

So when I think about the disadvantages

23:24

that the Democrats are up against, inflation

23:27

is kind of behind a lot of

23:29

these other things that I would classify

23:31

as quality of life. And

23:33

in the end, when you do all the

23:35

math, the conclusion you come to is that

23:38

you're not better off under Joe Biden and

23:40

you want change. All right. I think we

23:42

shall leave it there. We'll see where the inflation

23:44

story goes in the coming months. It's going to

23:46

be a big impact on the election, no matter

23:49

which way it goes. Thanks,

23:51

Mary. Thanks, Joe. Thank you all for listening. We're here

23:53

every day on Potomac Watch. And

23:56

thank you for listening. marketplace

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