Sunday School 7/31/22: Extra Credit

Picking up where we left off with your Sunday School, we're back in the Face the Nation classroom with John Dickerson and Neel Kashkari, president of the Minneapolis Federal Reserve. 

If I had to pick a favorite Fed banker, he'd be it; I've learned from and enjoyed his interviews. 

Kashkari's concerned about inflation, of course, saying that it's "higher than we expect. And it's not just a few categories. It's spreading out more broadly across the economy." And that, of course, explains why the Fed is "acting with such urgency" to rein it in.

He said that while wages are going up, they're not keeping up with inflation, so "real wages, real income" are going down. He also gave a simple definition of inflation. 

Just at its basic level, inflation is when demand is outstripping supply. We know supply is low because of supply chains, because of the war in Ukraine, because of COVID. We hoped that supply would come online more quickly. That hasn't happened. So, we have to get demand down into balance. Now, I hope we get some help on the supply side. But that doesn't change the fact that the Federal Reserve has its job to do, and we are committed to doing it.

And what does "help on the supply side" look like? Kashkari said he speaks with "global businesses" that are working on getting their supply chains "sorted out" so they can have products on shelves and meet demand. Some progress is being made, he said, but "it's taking a lot longer than they thought," and longer than he thought, too, which is why the Fed's efforts are needed.

Dickerson mentioned his conversations with Sens. Manchin and Toomey about taxing corporations that aren't paying a minimum tax now. He wondered if that would hurt supplies and increase inflation.

Kashkari said that's the same thing people say about raising interest rates, and he also talked about the difference between the long-term, where both higher taxes and higher interest rates could have an impact, and the short-term, which is where we have to focus now, because 

the demand side effects totally swamp the supply side effects. And so, when I look at a bill that's being considered, that your two senators talked about, my guess is over the next couple of years it's not going to have much of an impact on inflation. It's not going to affect how I analyze inflation over the next few years. I think long-term it may have some effect. But, over the near term, we have an acute mismatch between demand and supply. And it's really up to the Federal Reserve to be able to bring that demand down. 

Recession was a topic, too: whether we're in one, and why it matters - or not. Kashkari said "it really matters when Americans feel it, especially in the job market, especially in the job market, that's the most important part of the economy, so to speak, for Americans is their job." 

Do they have a decent place to work and earning decent wages? And, typically, recessions are -- they demonstrate why job losses, high unemployment, those are terrible for American families. And we're not seeing anything like that. The labor market, so far, is very strong. We are seeing some sectors, like the tech sector, start to shed workers or start to cool down in hiring. But fundamentally, the labor market appears to be very strong.

This is the reason why President Biden said, to equal parts dismay and delight, "that doesn't sound like a recession to me." Kashkari did say that "GDP, the amount the economy is producing, appears to be shrinking." These are the "mixed signals" that everyone's trying to figure out - mostly by talking to Larry Summers, it seems. 

Kashkari isn't focused on that so much.

From my perspective, in terms of getting inflation in check, whether we are technically in a recession or not doesn't change my analysis. I'm focused on the inflation data. I'm focused on the wage data. And, so far, inflation continues to surprise us to the upside. Wages continue to grow. So far, the labor market is very, very strong. And that means whether we are technically in a recession or not doesn't change the fact that the Federal Reserve has its own work to do, and we are committed to doing it.

And, a final thought on GDP: Dickerson said when it goes down, "isn't that kind of what the Fed's trying to do, slow down growth...?" Kashkari said they "definitely want to see some slowing," and that they don't want the economy to overheat. And, he was honest about the situation; he admitted there's "not a great record" of transitioning to a "sustainable economy" without pushing it into recession.

Typically, when the economy slows down, it slows down by quite a bit, especially if it's the central bank that is inducing the slowdown. So, we're going to do everything we can to try to avoid a recession, but we are committed to bringing inflation down and we are going to do what we need to do. And we are a long way away from achieving an economy that is back at 2 percent inflation. And that's where we need to get to.

Are you feeling the recession, or are you just feeling inflation? Or, maybe you're lucky and aren't feeling the pinch at all? Chime in if you like.

See you around campus.