Prof G Markets: Jerome Powell, Disinflation, and Gauging the Recession Threat — with Catherine Rampell

This week on Prof G Markets, Scott speaks with Washington Post Columnist Catherine Rampell about the latest in the Fed’s rate hiking campaign, the lingering threat of a recession, and a solution to many of America’s economic problems. Follow Catherine on Twitter, @crampell. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 0:48Speaker 01

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• 1:18Scott Galloway?

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• 1:48Scott Galloway?

  Welcome to Prof G Markets. Today, we're sharing an interview with Catherine Rampell, a Washington Post columnist covering economics, public policy, immigration, and politics. Catherine joined us directly after the latest Fed meeting in July to discuss Jerome Powell's historic rate hiking campaign, the market's response to increasing interest rates, and the lingering threat of a recession. I really enjoy Catherine. I want to be... Somebody who identifies or, I don't know, brings more sunlight to super young and super talented people. I think there's just too many fucking old people running everything. They've become totally out of control narcissistic. You think they're going to invest in climate change when they're not going to be around to see like if there's going to be a tornado? These people don't even buy green bananas, but we're supposed to expect them shape the future?

• 2:33Scott Galloway?

  Anyways, nothing to do with our conversation with Catherine Rampell, but trust and hope you will enjoy it.

• 2:47Scott Galloway?

  Catherine, where does this podcast find you?

• 2:49Speaker 02

  I am in Massachusetts right now.

• 2:51Scott Galloway?

  Nice, I hope it's vacation.

• 2:53Speaker 02

  Vacation-ish. I can take hikes early in the morning if I want. Not that I have, but I can.

• 2:59Scott Galloway?

  But you could, that's right.

• 3:00Speaker 02

  Exactly.

• 3:00Scott Galloway?

  So let's bust right into it. I thought of you today. This feels like the Fed rate hike that no one cared about. The markets seem to have, it seems like it's a giant yawn. So what is that? Is it the 11th hike in the last, last year?

• 3:15Speaker 02

  Since March 2022. So a year and a half.

• 3:18Scott Galloway?

  Wow, so let's zoom out. 11 hikes over the course of the last 12 months. What are your thoughts on what has been the most aggressive Fed policy in a long, long time? Has it done its job? What have been the unintended consequences? What is your kind of bird's eye view of this?

• 3:33Speaker 02

  The economy has held up way better than anybody anticipated, the Fed included, but also the Fed's many critics, right? If you look at what people have been saying about these, again, very relatively aggressive rate hikes, you heard warnings of recession, not just coming from Republicans, you know, like obviously Republican, some Republicans, I should say, have been sort of cheering for recession for political reasons, but there have been a lot of left wing Democrats who have been warning that recession and intense suffering and job losses were around the corner, and that did not happen. In fact, we have had quite strong job growth. It's slowed some, but it's still quite strong by historical standards.

• 4:16Speaker 02

  The unemployment rate, believe it or not, is today exactly where it was when the Fed began hiking rates in March of 2022. So. We have not had these major dislocations in the labor force that had been predicted. I mean, obviously, we don't know what the counterfactual was, would be, right? Like, we don't know what the world would look like in the absence of these rate hikes. But certainly, those really dark forecasts that had been expected have not materialized. Meanwhile, headline inflation has come down quite a bit, by which I mean the overall numbers that, like, regular consumers pay attention to. You know, we're now in the, I think, the threes in the most recent month of data, year over

• 4:59Speaker 02

  year, as opposed to 9% or so year over year. That's great. That's largely about gas prices falling back to earth, grocery price growth also normalizing. And unfortunately, those are not the things that the Fed cares about. The Fed cares about what they call core inflation, so stripping out those really volatile categories for food and energy prices. And the metric that they target is still quite high. It's not as bad as it was, but it's still quite high. So the Fed, you know, if you listen to what Jay Powell said today, for example, at the press conference, and what other Fed officials have been saying recently, is they've been saying, "Look, you know, like, we're glad things look better, but our job isn't done.

• 5:43Speaker 02

  We still need to do more rate hikes, et cetera." And it looks like the overall economy has been resilient enough to withstand that. So that's a good place to be. That doesn't necessarily mean that we will have escaped, in the end, all of the pain that had been warned about. Like, this isn't over. There's a long lag between the time when the Fed makes the decision to raise rates and when it's fully felt throughout the economy. So, look, we still may get a recession at some point, but even the Fed's internal economists right now are no longer forecasting a recession. So, things look a lot better, certainly than they did a year and a half ago, two years ago, both on the inflation front and the rest of the economy, you know, job market,

• 6:28Speaker 02

  economic growth, output, et cetera, front. But we're not out of the woods yet. You know, I don't want to take a victory lap before we actually...

• 6:36Speaker 02

  Before we've seen the end of this cycle.

• 6:39Scott Galloway?

  But I mean, it seems as if we've been a month away from a recession for 18 months. Doesn't this feel like the recession that never happened?

• 6:47Speaker 02

  I have to be careful about how I couch this. There will be a recession someday.

• 6:51Scott Galloway?

  You're not going out on a limb there, Catherine.

• 6:53Speaker 02

  Yeah, I know. It's called a business cycle for a reason. It cycles up and it cycles down. So like, what does it mean to say we're not going to have a recession?

• 7:01Scott Galloway?

  In the next two years.

• 7:03Speaker 02

  In the next two years. Again, it's a little perplexing, like, why the economy has been as resilient as it has been. And I think there are a bunch of different plausible theories, but we don't know the answer yet. It's true that like, this is the, I've heard people refer to it as the Godot recession, you know, like waiting for Godot. Like, people kept thinking it was going to come, it was going to come, it was going to come, and it didn't. And you're right, that if you look at like, the Wall Street Journal surveys, survey of Wall Street economists, we've been hearing that a recession was imminent for, I think, over a year now, at least. I don't know when, when, like, we were, the recession narrative exactly first began, but certainly when the Fed began raising rates, there was increased fear of a recession.

• 7:49Speaker 02

  Because usually when the Fed raises rates to kill inflation, they have historically overshot the mark. You know, they want a cool demand, and they do it, it's like, it's a blunt instrument, you know, it's a, it's a meat cleaver, not a scalpel. And so, when you try to, when you try to like, tamp down demand a little bit, cut demand a little bit, they overshoot. I hope that we will achieve the so-called soft landing that some are now predicting. That it seems more likely to me now, but I don't think it's a done deal. As the Fed has pointed out, inflation is still higher than their target. Markets don't really seem to believe them. If you look at like, where, how much the Fed...

• 8:30Speaker 02

  Says it's going to raise rates versus how much markets have priced in rate hikes. They don't match. So we'll see what happens. But yes, it would certainly be nice if Guto never shows up. Eventually, the big bad recession will come at some point, but hopefully it'll be mild and hopefully it'll be a ways away.

• 8:51Scott Galloway?

  So let me put forward a thesis and you tell me if you agree or disagree. The American economy, maybe the exception of the Kingdom of Saudi Arabia, is the best performing, strongest economy in the world.

• 9:02Speaker 02

  Certainly, we've done better than our peer countries more recently. Inflation looks better. Job growth looks better. The chances of recession look more moderate today than they do in like the EU, for example. I don't know if I would make a global comparison, but like just looking at our peer countries in the OECD, let's say, we're doing quite well. And I think there, again, there are so many different things that have happened simultaneously that it's hard to sort out whom to credit or blame for that fact pattern. Certainly, the President of the United States wants to take credit, right?

• 9:43Speaker 02

  He wants to say it's all Bidenomics and it's all the great stuff that he's done. The truth of the matter is, in my view, that most of the things that he points to that they actually have passed under the rubric of Bidenomics, the industrial policy stuff, it hasn't really worked its way through the economy yet. So it's hard for me to credibly say, oh yeah, it's obviously the infrastructure bill and the CHIPS Act and all that, you know, like, I just don't think we've, I don't think those things have had whatever effects they're going to have for good or for ill. If you look at what the Fed has done for all of the criticism it's gotten, again, including from the left, they have, they started raising rates earlier than their peers in the European Union, you know, the ECB, for example.

• 10:28Speaker 02

  So I think that part of it is like, there are some policy choices that we made that were different and those are not necessarily the ones that the politicians want to point to, but those matter. And obviously, the fact that Europe has been hit harder by the war, economically and otherwise, the war in Ukraine, that matters too. But there's a lot of stuff going on and with these cross-country comparisons, it's always difficult to sort out like what.

• 10:57Speaker 02

  What was the defining factor that really mattered? But you could tell a lot of different stories and they're not necessarily falsifiable stories. Right? You can say it's you can say it's about monetary policy. You can say it's about the war. You can say it's about industrial policy. And whatever your preferred explanation is, there's some data points to support you. There are some that I find more credible than others, clearly.

• 11:23Scott Galloway?

  Yeah, I mean, I think of the markets, the best first half for the NASDAQ in four years, best first half of the year, historically low unemployment. I mean, this feels like the Goldilocks economy right now, which is, you know, famous last words, but what? What? I mean, in terms of deflation or disinflation, it's come down faster than almost any of our peers. Is that a function of us being energy and food independent? Is it the threat of AI giving wage? People negotiating for wages, less confidence to ask for wage increases? Is it just pure luck that food and energy costs have come down? What have been the things driving disinflation?

• 12:06Speaker 02

  I think the fact that we are energy independent. And in fact, we, you know, you hear a lot of critiques about the US used to be energy independent and now it's not. I don't know exactly what energy independence means, but if it means we've been exporting more than we're importing in petroleum products, for example, we are energy independent. So we do that. That's the case, or at least that was the case a few months ago when I last looked at the data. I believe it's still the case now. So that helps. We have oil and Europe doesn't.

• 12:33Scott Galloway?

  That's right.

• 12:34Speaker 02

  And Europe has been severely dependent on some adversarial countries for their energy needs, and that has put them that has made them more vulnerable. You know, we've also built a fair amount of renewable. We've invested in a fair amount of renewables. Again, Biden wants to take credit for that, but it's like largely just that there's been a ton of technological progress. You know, Texas, for example, not exactly like a bleeding heart liberal state. They have, I believe, the highest production of renewable energy in the country of any state, and that's because of investments that have been made. Over the years, they've like doubled or tripled their solar capacity in the last year or so.

• 13:13Speaker 02

  In any event, so we do have some like natural features, I would say, going for us. We do have the fact that, again, I think the Fed acted too late. Should have, should have started raising rates sooner, but it started raising rates sooner than the ECB. I think that makes a difference. You know, you can go back and forth about the response, the fiscal response that we had to COVID. Running the economy hot has downsides too, including that that, that probably got our unemployment rate down pretty quickly, our, our really aggressive fiscal response, but also contributed to inflation. But then the Fed has maybe taken some of the, offset some of that, let's say. But again, a lot of stuff going on.

• 13:58Speaker 02

  I don't think it's AI. I think it's too soon to talk about AI affecting job growth and presumably that would affect things here comparably to other developed countries, other, you know, knowledge-based countries, if we're talking about like what jobs are most at risk.

• 14:15Scott Galloway?

  We'll be right back.

• 14:25Scott Galloway?

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• 16:44Scott Galloway?

  So there's been two sectors. One has been surprising, one has been shocking to me, and I want to get your thoughts. It's surprising to me that when you have this acceleration in interest rates, naturally you believe that stocks become less attractive, as fixed-income vehicles become more attractive, and you would think there'd be selling and pressure, downward pressure on stocks. That has not happened. The reverse has happened. And the thing, which is surprising, but you can make an argument that stocks like a more responsible economy, they like the threat of massive hyperinflation being taken off the table. The thing that is really shocking to me, I mean, really shocking, is that real estate has held so strong in the face of mortgages going from 3% to 7%. Give me your thoughts on the market's response to these interest rate hikes and the resilience,

• 17:27Scott Galloway?

  or the surprising resilience, of the real estate sector.

• 17:30Speaker 02

  Yeah, this has been really a puzzle. I think there had been more of a... Given the huge run-up in home prices, for example, I think that there had been an expectation that we would see, if not a symmetric decline, we would see a bigger decline than we had, and it kind of went down. And now, depending on what index you use, it's either leveled off or even gone back up again. I think there are a few things going on here, but I don't pretend to know for sure about any of them. One is that, you know, some of it's demographic change, right? The millennial generation is aging into prime home-buying, childbearing years. And so there are a lot of people who put off buying a house

• 18:14Speaker 02

  for many years, my generation, and suddenly are finding that they need more space. That was also accelerated. I mean, that was going to happen because of life cycle issues, no matter what. But then the pandemic shift to remote work, et cetera, I think have also helped sustain demand from that generation in particular. You also have really low inventory of homes for sale. And if you have strong demand and not that much supply, then you're going to have high prices or even price growth. And the reason why I think the supply has been really low is partly that it's hard to build. So it's hard to build new homes. That's been the case like forever. Again, because of largely regulatory issues

• 18:59Speaker 02

  at the state and local level, among other things, and labor shortages and other stuff. And then you have a lot of people who refinanced when rates were super low. So you have all these like, you know, boomers, let's say, who would have otherwise downsized. You know, they're empty nesters. They would have moved to some smaller place. They don't need all the extra bedrooms. But they refinanced. If they moved to some place smaller, maybe their monthly payment would be higher. And so they're trapped in these homes, and they don't want to sell. So if you still have a lot of people my age banging down doors, trying to buy, and there's nothing to buy, that's going to elevate home prices. And then like a bunch of other factors, too.

• 19:44Speaker 02

  Like I said, you know, it's hard to build because of permitting issues. It's hard to build because a lot of the input costs are still quite high. We still tariff like basically everything that goes, gets put into a new home, from steel to bathtubs to garage doors to everything else. That doesn't help. It's not the primary driver, but it doesn't help. Some of the things that went, that shot up, like softwood lumber, they've come back down, but they're still, they're still pricey. So there's a lot of stuff going on that I think puts kind of a floor on the price that like new building would cost.

• 20:18Scott Galloway?

  What's your prediction, though? It feels like it feels like the body language is this is a last rate hike. It feels as if the supply chain is getting ungunked and there'll be more supply. If I've heard that essentially households run out of COVID money in about six or eight months. It just feels as if the disinflation will continue and that the Fed has stopped or is at least going to press pause on rate hikes. Doesn't this all set up? And granted, every time someone predicts something, this has been the economy that is what I would call the random walk. And that is everyone's been wrong. No one has called the dynamics here. No one saw the markets going up, historic increase in interest rates as the markets go up, but real estate prices hold strong. I mean, who was calling that?

• 21:02Scott Galloway?

  So what granted, whatever we say, the only thing we know is that we're going to be, you know, somewhat or very wrong. What do you think happens to inflation over the next six or 12 months? And any, you know, any guesses as to how the markets respond, both in the financial markets and in real estate?

• 21:19Speaker 02

  If I knew the answer to your question, I'd be a very rich woman.

• 21:22Scott Galloway?

  Right.

• 21:23Speaker 02

  I think I think that I'll say I am more hopeful than I was that we are going to have a soft landing, by which I mean, again, that like inflation is going to continue to go down without having a major recession. So what does that mean? That means that maybe the Fed won't have to raise rates as much as they would otherwise, right? Like they won't have to raise continue to raise rates so aggressively. And again, like I said, the markets think seem to think that the Fed is done.

• 21:54Scott Galloway?

  They think it's over.

• 21:55Speaker 02

  The Fed is saying, yeah, the Fed is saying otherwise. And if we get an upside surprise in inflation, then presumably that could happen. But if we don't, if things continue as they have been, and I think that's a reasonable prediction, then hopefully that means, you know, we got super lucky and we don't have to deal with higher rate hikes. Because already, interest rates are at their highest level in what, 22 years? In nominal terms, anyway? And what does that mean for for all these other markets? Well? There is a lot of, there's some known unknowns and unknown unknowns, right, about real estate. So like I said, we kind of know what the demographic issues are and

• 22:38Speaker 02

  how that's going to affect demand to some extent. We have some sense of how much less house people can buy when rates go up by a certain amount and how that's going to affect demand. We have some sense of those things. But in the commercial real estate market, I think there's a lot more reason to be nervous, given that a lot of commercial mortgage holders refinanced when rates were super low. They're resetting this year. They are suddenly having to deal with much higher carrying costs. On top of that, a lot of the commercial real estate market, I don't have to tell you, is really struggling, even like without

• 23:23Speaker 02

  those higher borrowing costs because of work from home and the geographic trends and all of that. So if you are, you know, if you're a commercial office building in a metropolitan, you know, in some city where you used to rely on a lot of commuters, for example, and now those commuters are staying home in New Jersey and working from home, and you're having to deal with higher rates, and all of your tenants are canceling or defaulting or whatever, that's really bad for you. And any further, even if rates don't go up any further, let's say, those companies are going to really be in trouble. And presumably, you know, the market, the downstream markets from that will obviously

• 24:07Speaker 02

  be affected. Those are the areas I think we know a little bit less about, like, because we don't know how remote work is going to shake out. Like, I think a lot of employers are still fighting with their workforces about that. I know at my company, that's still an issue. So...

• 24:24Speaker 02

  It's really hard to say like how much trouble that subset of the real estate market is likely to be in.

• 24:30Scott Galloway?

  Say you're a working professional just starting to save some money or maybe have some momentum around saving money and you have a portfolio. How should the kind of historic acceleration in interest rates impact the way you view your investment portfolio? Should you be reallocating or having a greater percentage? I mean, I always thought, I've always heard 60 40, right? 60 equities, 40 credit instruments. Do you think young people or people who still have, who have some money but still have some time on the clock to build wealth should be approaching their portfolio differently?

• 25:02Speaker 02

  I think, or at least I hope that people will be a little bit more conservative. Young people will be a little bit more conservative than they've been in the last few years. I mean, given that money was stupid cheap for a really long time, people made a lot of stupid investments. And that's why you saw all of these bubbles in everything from like silly, you know, new crypto to like meme stocks and various other things. And I think it seemed costless at the time because it was close to costless because money was so cheap. And people made a lot of dumb moves and probably a lot of them lost their shirts.

• 25:45Speaker 02

  And for those who are relatively unsophisticated, you know, regular retail investors, you know, I actually have a lot of sympathy for them because I think that people got caught up in the Reddit universe or whatever. They saw tons of hyped coverage of NFTs and various other things and they made dumb bets. And my hope is that like, they're not even, they weren't even making the calculation of 60 40, you know, credit versus, credit versus equities. It was like, as long as they're staying away from the stupid dangerous stuff, I think that would be an improvement.

• 26:27Speaker 02

  And I hope that market conditions nudge people more in that direction.

• 26:33Scott Galloway?

  Stay with us.

• 26:45Scott Galloway?

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• 28:41Scott Galloway?

  So the biggest, we have the 2024 election. We have the war in Ukraine. Those, to me, seem like the most impactful events. Do you think the outcome there, or is there an exogenous shock that you're worried about that could, in fact, put us into a recession?

• 28:55Speaker 02

  The nature of black swans is that you don't necessarily know when they're coming, right?

• 29:00Scott Galloway?

  Hard to spot.

• 29:00Speaker 02

  Yeah. A turn in the war, I think, is the most obvious risk, for humanitarian reasons above all, but certainly there will have, there will be economic consequences of that as well. I think that's the biggest risk that is foreseeable. Again, there are the known unknowns and the unknown unknowns, and lots of other things could happen. I mean, we've had some weird climatological effects this year, among others, and, you know, you could have a terrible hurricane or something like that that disrupts petroleum processing or what have you.

• 29:44Speaker 02

  There are all sorts of things that, I'm not betting on them happening, but presumably could be the kind of shock that could be a major disruption to a particular market, potentially a politically important market, energy, and one that consumers, rightly or wrongly, blame on the politicians in power, which in turn, obviously, feeds into the election next year. But I think the most obvious thing, as you said, is the war. It's dragged on a lot longer than those who know more than I do, you know, the Russia experts predicted, and Putin is unpredictable.

• 30:23Scott Galloway?

  And what do you see as sort of the biggest threat, long term, to the health of the US economy? Is it demographic, where we're, we've seen birth rates decline and the amount of money that GDP and just government spending that needs to go to seniors goes up every year? Is it income inequality? Is it the ballooning deficit? If you were to advise the White House and say, this is, you know, if you're going to focus on one problem, this is what I would keep your eyes on?

• 30:47Speaker 02

  Most of the things you just mentioned, I would say... Have a common useful solution. So maybe I would frame it that way, which is more immigration. You talked about demographic challenges. Yes, we have significant demographic challenges in the sense that fertility rates have declined substantially. People are living longer and our fiscal picture is basically getting increasingly upside down. You know, we don't want to end up in the situation that Japan is in where you have a very high ratio of retirees to working age people. What's the solution for that? You could try to get people to have more babies and we have tried and other countries have tried.

• 31:30Speaker 02

  And you know, you can make some differences on the margin potentially with things like child, you know, access to childcare, flexible work arrangements or whatever. But fastest way to do that is to increase the working age population here. A lot of people, a lot of talented people who want to come to the United States, who can't get here because our legal immigration system is a convoluted mess. Same thing with deficits, you know, those are all related, right? Like we need more taxpayers paying into the system. What were the other things you mentioned? I'm trying to remember.

• 32:01Scott Galloway?

  Income inequality.

• 32:02Speaker 02

  Income inequality.

• 32:06Speaker 02

  Income inequality, I think, is more of a political challenge than an outright economic challenge. Political and social challenge, I'll put it that way. And that's not to say that it's not an important issue, but I think it's unlikely to weigh on growth. And it's in, I care about inequality personally to the extent that it means the wages at the bottom or in the middle are not rising. I kind of, like, there are people who are like, oh, billionaires should not exist. And my feeling is I don't care if billionaires exist as long as like we are not letting people starve.

• 32:48Speaker 02

  You know, as long as, as long as the living standards at the bottom and the middle are improving, I don't care if they're improving way more at the top, like. It causes more resentment, among other things. But what I care most about is that the United States be a place where people can get adequate health coverage, nutrition, education. They have opportunities and we are not there. So, you know, the existence of inequality is obviously a politically motivating force, a socially motivating force. It engenders a lot more populism, and we've seen that on left and right.

• 33:29Speaker 02

  But I think the thing we should, what I would prefer we pay more attention to is actually improving the living situations of low and moderate income people.

• 33:38Scott Galloway?

  I love what you said, that immigration is not a silver bullet, but it addresses a lot of these issues, and it should be a bipartisan solution. Let's leave it there. Catherine Rampell is an opinion columnist at The Washington Post, where she covers economics, public policy, immigration, and politics, with an emphasis on data-driven journalism. She's also an economic and political commentator for CNN, a special correspondent for the PBS NewsHour, and a contributor to Marketplace. Catherine joins us from Massachusetts, where she is sort of vacationing. Catherine, we always appreciate your time and your perspective.

• 34:11Speaker 02

  Thanks so much, Scott.

• 34:13Scott Galloway?

  This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavros and Catherine Dillon. Miel Severio is our research lead, and Drew Burrows is our technical director. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. Join us on Wednesday for Office Hours, and we'll be back with a fresh take on markets every Monday.

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