What the Collapse of SVB Means For Deposits and Interest Rate Increases

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You're listening to Leaders and Lending from
Upstart, a podcast dedicated to helping consumer

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lenders grow their programs and improve their
product offerings. Each week, here,

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decision makers in the finance industry offer
insights into the future of the lending industry,

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best practices around digital transformation, and
more. Let's get into the show.

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Welcome to Leaders in Lending. I'm
your host, Jeff Keltner. This

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week's episode features my conversation with Nick
Timorrose, the chief economics correspondent for The

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Wall Street Journal. Nick and I
had originally planned to talk mostly about the

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FED, but given that we recorded
this podcast on Thursday, marks the sixteenth,

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less than a week after the collapse
of Silicon Valley Bank and Signature Bank,

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we decided to delve a little bit
into what happened with those institutions,

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what the response from the federal government
has been and how effective it's been,

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and a lot about how that might
impact stimulus monetary policy of the government policy

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moving forward we think the after effects
of those collapses might be. It was

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a very timely conversation and we are
glad that we can have Nick on to

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talk about this very important topic with
us. So it was. It was

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a really interesting conversation. I know, I learned a lot about something that

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doesn't happen all that often and kind
of what the causes and impossible after effects

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are. And I hope you will
as well, So please enjoy this conversation

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with Nick timorros Nick, Welcome to
the podcast. Thanks for making the time

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to join us today. Thanks for
having me. You know, we're recording

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this here on what is it,
Thursday, the sixteenth of March. And

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we talked last week about things we
might talk about, and I feel like

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over the weekend the world changed and
there's maybe timely topics that we don't want

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to ignore that have occurred. So
I thought I might just start off with,

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you know, roughly the takeaways you
have from what happened. Obviously,

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I'm talking about Silicon Valley Bank and
the kind of failure of that bank,

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that stepping in of the federal government, the FDIC, and kind of where

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we're at, Like, what's your
takeaways as we talk about this a couple

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of days after the you know,
the ultimate takeover by the FDIC, of

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what happened and how how we responded. Well, I think there are a

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couple of things. One question has
been, of course, what was going

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to break in this FED interest rate
cycle? Right the Fed? The saying

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is, the Fed always raises rates
until something breaks or someone always goes through

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the windshield. And so now we
now we're beginning to see I mean we

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knew last year obviously Crypto and some
of the other digital assets that had you

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know, gone parabolic in twenty twenty
one came back down. But this is

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you know, now now you're getting
into things that obviously policymakers are more concerned

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about because if you damage credit creation, you know, credits the lifeblood of

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the economy. So now we're beginning
to see some of the casualties of the

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Fed's rate increases, and I think
it's raising questions about how the FED will

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respond because the FED wants the economy
to slow down. They want demand,

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and they want to restrict demand to
bring inflation down yet supply demand into balance,

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but they don't want to do it
by causing a banking crisis. And

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so the analogy I use Jeff is
sometimes you know, the FED doesn't know

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how it's moves are going to affect
the economy. They call those the lags

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of monetary policy, and It's like
hitting that glass ketchup bottle. You keep

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hitting it, nothing comes out,
nothing comes out, and then you smack

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at another time and everything comes out. They want more of a squeezeable bottle

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where they can kind of control it
carefully, but that is not how the

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economy and infrastrate policy works. Is
there anything you think gets them close?

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I love the squeeze bottle analogy,
and I've got the ones now that you

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store upside down, so they're not
only squeezable, but the ketchups right now

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right there for you. Yeah,
is there anything that is it equating to

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that? That? I mean,
obviously not to the upside down squeeze bottle,

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but to the more real time understanding
of the impact of changes to the

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economy that they can respond to,
because that's a that's an interesting analogy.

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I'm curious if you see anything that
moves them closer to a squeeze moodel from

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banging on the fifty seven on the
glass one. Well, you know,

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so, I think the challenge here
for the FED is they have a mandate

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to bring inflation down, but it
is harder to do that if you have

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an unstable financial system. So what
we saw you know this past Sunday was

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they came out. They made two
big moves. The first one was they

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said they would They said, also, by the way, Signature Bank has

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been closed in New York, and
we're gon we're gonna stand behind the uninsured

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depositors of Silicon Valley Bank and Signature
Bank. And they did that by invoking

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what's called the systemic risk exception.
The FDIC has to resolve failed banks in

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the least cost manner for their deposit
insurance fund unless they deem they and the

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Fed and the Treasury deem there to
be a systemic risk, which allows them

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to not focus on the least cost
to the deposit insurance fund. So that

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was the first step. The second
step was because there was some concern,

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there was a lot of concern that
you would have a bank run on Monday

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morning if uninsured depositors of a bank
that was seen, as you know,

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fairly stable. I read that Signature
Bank had by rating from more than half

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of the Wall Street analysts to cover
it. So if you know, people

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wake up on Monday and they say, well, the equity analysts who cover

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this bank couldn't do the credit risk
analysis, what prospect to uninsured depositors have

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you would have had runs on other
banks that we're seeing is not large enough

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to have the government in there.
So they created this facility at the FED

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called the Bank Term Funding Bank Term
Funding Facility. I'm missing one of the

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acronyms there, but essentially it said, if people want to get their money

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out of the bank, we will
provide a way for banks to borrow from

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us in order to meet demands for
withdrawals. And the whole was that that

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would sort of cauterize this problem,
and you know, you don't actually have

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to use it, right, like
Hank Paulson said about backing the GSCs in

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two thousand and eight, if you
have a bazooka, people know you have

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it, maybe you won't have to
use it. So this was really an

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insurance policy to say, all right, if there is if there are deposit

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outflows on Monday, banks are going
to be able to meet them. So

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maybe there won't need to be deposit
outflows on Monday. Yeah. Yeah.

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Do you sense that there is movement
of foot to evaluate I mean, this

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kind of feels like an admission that, on some level, for any reasonable

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institution, we're going to step in
and ensure all deposits, and that feels

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like I think a lot of people. I mean, I think many consumers

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and even businesses don't understand that the
idea that they're ensure the deposits are not

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actually at the bank, that they're
at some risk they're kind of lending the

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bank the money to make loans,
and that there's risk in doing that.

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I mean, I think most of
us just as when you put your money

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in the bank and if you leave
in the bank account, that should be

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the safest place it could be.
It can't go anywhere. And I don't

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know if there's going to be a
movement to actually make that more formal and

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official and more holistic way where it's
kind of implicit for the systemically important financial

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institutions, where it's kind of an
implicit guarantee from the government beyond the standard

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insurance limits and now a questionable one
for at least two institutions, and make

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you assume that in the future such
similar measures might be taken. I'm curious

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if you think there's some movement to
make that a more official stance, to

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make like an unlimited deposit guarantee,
to remove the limits on the deposit insurance.

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It really raises questions about what's the
future for deposit insurance, right because

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regulators said after two thousand and eight
that they had tried to address too big

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to fail, and Silicon Valley Bank
wasn't considered by anybody to be too big

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to fail, the sixteenth largest bank
in the country. But I think a

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couple of things to note here.
One is the speed of the run on

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that bank was just shocking, right, a quarter of the deposits out the

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door in one day, forty two
billion dollars out of deposits being withdrawn.

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And when you look at, you
know, the customers of the bank,

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I mean this was a very concentrated
customer base, non insured deposits. These

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were these were not stable deposits,
right, There was a risk that if

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people thought the bank wasn't safe,
they would run. And so I think

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now you probably are hoping bank supervisors
are going through and looking at other banks

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that are in the same situation where
they might not have such stable deposits.

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So that's one point. I think. You know, this is not new

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though, this problem for regulators,
And I wrote a book last year about

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the Fed's response to the COVID crisis
called trillion dollars triage, and I focus

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a lot on the FED chair J. Powe. He worked at the Treasury

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Department in nineteen ninety one, in
January nineteen ninety one, so this is

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in the thick of resolving the bank
failures that came out of the interest rate

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increases in the nineteen eighties. And
there was a Sunday, I think the

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first weekend of the year ninety one, the Bank of New England was failing

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and they were talking about what to
do with the uninsured depositors. This was

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the thirty third largest bank in the
country at the time. It was going

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to be the third largest bank failure
in the country at the time. One

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point, I want to say,
nineteen billion dollars in deposits, only ten

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percent uninsured. So really the inverse
it was, you know more than you

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know, ninety percent of those deposits
of Silicon Valley Bank were not insured.

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So what did they do. Powell's
boss was a Harvard academic. His name

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was Bob Glauber, and he kind
of got up on his soapbox and he

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said, this is moral hazard.
If we'd step in and bail out these

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uninsured depositors. Then there won't be
any risk discipline, risk taking by bank

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management or you know, the you
know, the wealthy people or customers that

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put their money in the bank,
they should know, you know, what

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that bank was up to. And
the FED then there was a FED governor

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the name of John Laware, and
he said, okay, well, if

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you do that, here's what we
think is going to happen. Every money

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sent there will be a run on
every bank in the country as they're uninjured.

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Depositors try to get their money out
on Monday morning, they will come

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to us and then we will be
dealing with that problem. So you're the

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government, you can do whatever you
want, but that's what we think is

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going to happen. And Powell later
explained, you know, we chose the

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we chose the backstop of the depositors
without dissent. So people, you know,

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are surprised this happened, but this
is it's not surprising really if you

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look at the history of this.
This is how policymakers have responded on this

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on this topic. Yeah, and
I think the comment, I think the

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President made the same comment of kind
of like the equity holders, the bond

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holders those guys are taking risk and
they deserve to be wiped out. But

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I do think there's, at least
in the common man's perspective, a pretty

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big difference between the depositor who and
their money a checking account and the person

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who had equity your bond. And
I thought, I don't know what you're

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taking. But my sense that like
um, that that small businesses were supposed

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to be looking at the financials of
a bank to understand if they had their

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money at a safe bank that was
making responsible lending or not, that that

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was supposed to be a backstop,
when to your point, you know,

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the buyside analysts in the equity markets
were telling me these were good banks,

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you know, both of them having
been through their audits relatively recently and coming

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out with clean bills of health from
auditors. Like it seems to me a

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bit unrealistic to think that the depositor
is the is the one who's supposed to

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impose some sort of financial discipline by
being unlinked deposit with banks making risky moves

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with money. That if that's the
idea that that's a backstop, that seems

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a bit misguided to me. It
does, though, raise questions about all

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right, well, if if every
time this happens, then the government's going

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to step in and you know,
ensure the uninsured depositors. What what are

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we doing with deposit insurance going forward? Should that be priced differently? I

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think the other thing that we saw, you know, this week again it's

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it's March sixteenth or so, but
what we saw the beginning of the week

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was it didn't actually provide maybe the
measure confidence that you might have hoped that

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these actions. Obviously we don't know
the counterfactual. A lot of people think

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it would have been a lot worse
if the government hadn't had done what they

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did. But I think a couple
of people I've talked to have said,

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what's spooked folks about? This is
one Silicon Valley bank, you know,

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the beginning of March, even though
they had had some people knew generally what

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the problems were there. They had
some interest rate risk that was causing problems

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for them. They had bought a
lot of lower yielding long duration mortgages and

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treasury securities when they had all these
deposits coming in in twenty twenty and twenty

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twenty one, think of a kind
of the pandemic tech boom or bubble that

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we had, and so this bank
benefited from that. They put that money

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to work. They didn't manage the
interest rate risk, perhaps as prudently as

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other banks have, and that caught
up to them. But the concern was

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that was seen as a fairly strong, healthy franchise. I talked to somebody

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who said, you know, two
weeks ago, if you had said you

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want to own this franchise, they
would have said, of course I do.

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Then people see how quickly the money
can leave the bank. Now it's

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March sixteenth, no one has bought
the bank. I think the FDIC is

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doing a second auction for the assets
on Friday the seventeenth, and but that

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then people begin to say, well, wait a minute, this thing that

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I thought had great value, the
values gone, the depositors fled. That

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leads to questions now around other similarly
situated midsize regional banks. And that's a

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concern because if the deposits are seen
deposits are usually seen as sticky, and

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if they're now seen as flighty,
at least for these regional players, then

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you have a unstable equilibrium potentially,
especially as deposit rates have been stayed fairly

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low, and the FED is raised
in restrates a lot, and so there's

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a gap you can close there by
raising deposit rates, but that could create

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a negative funding spread for banks or
certainly you know, lower margins. And

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so I think those are the concerns
that haven't been fully addressed or resolved yet.

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Yeah, it's one of the things
when I talk to banks that I

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definitely here is the stickiness of deposits
and the question of if that the historical

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stickiness can be maintained in the future. Particularly, I mean, you know,

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the banks have this idea of beta, like how much they have to

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raise interest rates on deposits to keep
deposits As interest rates in the market's rise,

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do you really have to match that? And the answer has typically been

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not that much. But we've also
for quite a period of time, I

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haven't had interest rates go so far
so quickly that people are going, wait

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a minute, I can go get
three and a half points on a checking

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account at one of these new fintechy
banks, Like, that's a pretty big

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delta from the OZO point five or
whatever I might be getting. And so

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I do think there's more concern that
those deposits are becoming less sticky, both

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because there's a big beta, big
delta in terms of yield available from a

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traditional you know, most banks a
day and the most aggressive banks on the

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forefront. And to your point,
just how rapidly and easy it is for

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people to move money, I mean
not forty two billion dollars in a day

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was just I think terrifying people that
it can just I mean, it's just

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a click on the cell phone away
from moving from A to B. And

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I think that's a new reality that
people are not quite sure what to deal

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with, what to do about,
and how to think about how much stickiness

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of deposits really has been more or
less permanently shed, particularly if there's a

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big, big gap in return rates. Yeah, it's it's I mean people

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have called it the first you know
bank run of the digital age or the

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twenty first century, right, this
kind of social media and you know it's

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a cliche to say perfect storm,
but you did kind of have a perfect

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storm here. You had all these
very you know, these startups that need

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a stable source of funding. They're
on tech, they're talking to each other,

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they're all being financed by some of
the same you know, their portfolio

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companies of the same venture capital firms. So once word went out, get

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your money out of this bank,
you know, there wasn't a whole lot

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to do at that point. It
really and it took I think it took

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the regulators just by surprise because we're
not used to seeing deposits flee that quickly.

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I'm sure they thought they had more
time to try to do what normally

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happens, which is, well,
if this bank is going to make it,

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we're going to find a buyer,
we'll go in, take it over

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on the weekend, announce it after
close a business Friday. But here you

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had the state regulator in California going
in at eight fifty in the morning,

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and I think that also spooked people
that ge that this could just happen that

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fast. Yeah, yeah, I
think it's probably if you looked at the

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depositor to Twitter user ratio at Silicon
valid base quite a bit higher than most

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institutions, and that kind of like
the meme stocks, it kind of went

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crazy on Reddit. I mean,
it was it was an environment where those

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customers were highly concentrated a small number
of information channels, which it could cause

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you know, at least within that
depositor based a high degree of contagion really

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rapidly, which is probably a bit
unique to some of these you know it's

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Silicon Valley Bank and others, but
in the general concept of how much more

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quickly this thing can spread in the
age of social media is probably a very

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real phenomenon for for every institution.
Yeah, definitely. And you know,

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I think it's something where people are
only going to now have to figure out

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how to deal with it. I
mean I saw something from a communications a

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PR shop this week sort of telling
their clients like, you got to get

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on top of this when it happens. Now, you've got to have a

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plan and tell people what it is
you're actually doing so that they if they're

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feeling sick, you can make them
feel well. Yeah. Yeah, I

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do think the other the other piece
of that, if you think of this

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as being a Silicon Valley banks experience
too, with being kind of a combination

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of some mismanaged interest rate and duration
risk along with a kind of very rapid

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bank run. The communications seems to
have been one of the places people want.

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They did not do the best job
of kind of calming their customers and

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their crisis. Communications pr firms I
think are using this as an example did

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not really effectively manage that the communications
and the risk through that as they could

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have. Is probably a good a
good note for others. It was.

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I mean, what the catalyst for
all of this was On Wednesday night they

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announced they were going to raise capital, I think to two point two five

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billion dollars. They were going to
have to sell they were going to have

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to take losses on some of these
hold formaturity securities, and so they were

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going to record a loss and that
just made people ask questions, and so

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you want to try to answer those
questions before people can say, well,

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wait a minute, what else might
we not know? Well, what's going

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on here? Right? So I'd
like to shift a little bit from the

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story to you know, we had
originally talked about talking about the FED,

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and I think a lot of people
are debating what will the FED do now?

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Are they going to stop interest rate
rising? Is? You know,

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how are they going to respond?
And the thing you and I talked about

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that I think is fascinating is getting
beyond this kind of simplistic view of the

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FED as kind of things happen in
the world, and then just the FED

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responds as if it's a monolithic institution
that just is an input output kind of

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you know, we just keep raising
rates until inflation hits the nart number we

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want, and then we decrease rates
intileration. But it's really it's really ultimately

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run by individuals, and particularly Chairman
Powell. And so tell me a little

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bit about how you think his perspective, like, where is he coming from

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when he thinks about I mean,
obviously it was an unusual world pre this

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particular incident in terms of the interest
rate rises we'd seen in the economy we've

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been experiencing. Where do you think
he's coming from and the motivations that are

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driving him? And then and then
I guess after that we talk about what

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you think we might see from the
Fed and moving forward. So Powell,

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just to give some background, He's
spent his career mostly in the private sector.

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As I said before, he worked
in the Bush administration, the first

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Bush administration in the early nineties,
and then private sector, private equity,

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you know, came back to He's
from Washington, so he was living in

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Washington, not really working in twenty
eleven and worked on the debt limit problem.

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He really helped the Geithner. Tim
Guyler, the Treasury Secretary, convinced

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Republicans here was a Republican private equity
guy saying, you guys got to raise

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a debt limit even though you don't
want to, because you'll just really screw

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everything up if you don't. And
so they sort of thanked him for it,

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and they put him on the fedboard. They were also having trouble getting

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Republicans to agree to one of their
nominees for the FED. So he's on

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the FED for five years under Bernanke
and Yellen, and he sort of became

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a centrist. You know, Republicans
were quite unhappy with the policies have been

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Bernankie and Janet Yellen, and Peel
supported them. Donald Trump becomes president and

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he sort of likes Janet Yellen's policies, even though he wants to have his

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own person in the job. So
Peel becomes the FED chair and Powell had

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had taken sort of in that same
tradition of Bernake and yelling of view that

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00:21:07.799 --> 00:21:11.880
you know, the economy needed more
support. After the COVID shock, the

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FED went all in. And the
concern before the COVID shock had been that

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actually growth is too weak across the
world, inflations and interest rates are going

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00:21:22.079 --> 00:21:26.079
to be low. That's going to
leave central banks with less room to stimulate.

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Then of course you get hit with
this inflation in twenty twenty one.

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And now, you know, I
think Powell is focused on making sure that

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that he isn't remembered as the central
banker who undoes forty years of relatively successful

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00:21:44.640 --> 00:21:48.559
inflation control, or what was seen
as inflation control by the central bank,

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by the FED, you know,
Vulker, Greenspan, Bernakee and Yellen.

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And obviously there were other forces at
play that helped inflation to stay low as

315
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it came down. But I think
that's the concern now is you can't you

316
00:22:03.839 --> 00:22:07.000
know, if you're the FED and
your job is to maintain price stability and

317
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maximum employment. But the Fed has
already sort of said, you can't have

318
00:22:11.359 --> 00:22:15.759
great employment if you don't have price
stability, if you don't have real wages

319
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going up, what good is a
job? So so that's that, you

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00:22:19.640 --> 00:22:22.039
know, That's I think where he's
coming from, where he's been coming from

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as he raises rates quite aggressively,
is there's no reason for this place to

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exist if we fail on inflation.
Now, one thing he has that Paul

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00:22:32.640 --> 00:22:36.240
Volker didn't have, for better or
worse, is the FED is said they've

324
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set this new American inflation target of
two percent. Volker didn't have to worry

325
00:22:38.759 --> 00:22:41.880
about that. He knew inflation was
too high. He knew he needed to

326
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get it lower. In nineteen eighty
two, as inflation came down from you

327
00:22:45.799 --> 00:22:48.359
know, double digits down to four
or five percent, he said, Okay,

328
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I think I've done enough, and
he backed off. But the Fed

329
00:22:52.319 --> 00:22:55.039
now, and we can talk about
this if you want, he has made

330
00:22:55.039 --> 00:23:00.839
two percent sort of the the what
they need to have. They've set that

331
00:23:00.880 --> 00:23:03.039
as their target, and so there's
a you know, the credibility is at

332
00:23:03.039 --> 00:23:08.880
stake for the institution but also for
Powell, and I think that is important

333
00:23:08.880 --> 00:23:15.160
in thinking about how this institution's approaching
what they're dealing with here. So let's

334
00:23:15.200 --> 00:23:17.279
let's dive into a little bit.
Where did the two percent come from?

335
00:23:17.279 --> 00:23:22.119
What's the nature of the target for
two percent? The rationale for a specific,

336
00:23:22.519 --> 00:23:26.880
specific target on that So two percent
wasn't something that you know, economists

337
00:23:26.960 --> 00:23:34.960
did finally tuned empirical analysis to get
to arrive at it actually came from New

338
00:23:36.039 --> 00:23:40.160
Zealand. New Zealand had had,
like many countries of bad inflation problem in

339
00:23:40.279 --> 00:23:41.880
nineteen eighties, and so in nineteen
ninety they said, all right, we're

340
00:23:41.880 --> 00:23:45.640
going to set a target of zero
or two percent, and actually we could

341
00:23:45.640 --> 00:23:48.640
fire you central bank governor if you
don't hit the target. The idea though,

342
00:23:48.759 --> 00:23:52.119
was if you tell people what it
is you're trying to do. You

343
00:23:52.160 --> 00:23:57.000
know, monetary policy, interest rate
policy operates through the financial sector, and

344
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so before the nineteen nineties, the
FED didn't tell anybody what they were doing

345
00:24:02.240 --> 00:24:04.880
with interest rates. It was all
a big mystery and you just kind of

346
00:24:04.880 --> 00:24:08.519
figured it out from what was happening
in the overnight borrowing market. But there

347
00:24:08.559 --> 00:24:15.599
began to be this revolution glassnost in
monetary policy, where if you actually tell

348
00:24:15.640 --> 00:24:21.000
people what it is you're trying to
do and how you will react incoming data

349
00:24:21.119 --> 00:24:23.920
the Fed's reaction function. If you
tell people what your reaction function is,

350
00:24:25.599 --> 00:24:30.839
then as the economy unfolds, people
in the markets they were guessing, but

351
00:24:30.880 --> 00:24:34.440
they're really educated, well better educated
guesses about how you're going to respond,

352
00:24:34.480 --> 00:24:38.160
and so interest rates began to move
as people began to understand, well,

353
00:24:38.160 --> 00:24:41.640
actually, here's how the Fed's going
to react to this, because we know

354
00:24:41.680 --> 00:24:45.839
the FED is seeking in this case
two percent inflation. So the FED also

355
00:24:47.039 --> 00:24:52.200
up until that point in nineteen ninety
six, inflation hadn't you know, inflation

356
00:24:52.240 --> 00:24:55.119
had been too high, and so
they always knew the direction of travel was

357
00:24:55.160 --> 00:24:59.400
we want to bring inflation down.
But by the early two thousands, and

358
00:24:59.519 --> 00:25:03.599
you yet to worry maybe about interest
rates went to one percent in two thousand

359
00:25:03.640 --> 00:25:08.119
and three, there were concerns that
maybe the problem could be too low as

360
00:25:08.119 --> 00:25:12.640
opposed to too high on inflation.
Japan was dealing with deflation and it was

361
00:25:12.680 --> 00:25:17.279
a very difficult problem for that central
bank to get out of. It has

362
00:25:17.279 --> 00:25:22.880
been up until very recently. So
Burnanky Ben Burnanky goes and says, we

363
00:25:22.880 --> 00:25:27.359
should set an inflation target. And
they had sort of already informally been conducting

364
00:25:27.400 --> 00:25:30.119
policy with the eye of you know, one maybe it was one and a

365
00:25:30.160 --> 00:25:33.960
half, maybe it was two percent. Finally, the financial crisis hits in

366
00:25:33.960 --> 00:25:37.400
two thousand and eight and they say, okay, this is you know,

367
00:25:37.480 --> 00:25:40.799
this is it. We could have
deflation here, Let's set a target,

368
00:25:40.880 --> 00:25:45.000
let's announce what it's going to be. And there's a great quote from Bernanke.

369
00:25:45.200 --> 00:25:48.400
Before he became chair, he was
a governor at the FED, and

370
00:25:48.480 --> 00:25:52.279
in two thousand and three at an
FOMC meeting, he said to his colleagues,

371
00:25:52.799 --> 00:25:59.319
you know, ambiguity has its uses
in games like poker, but monetary

372
00:25:59.359 --> 00:26:03.599
policy is a cooperative endeavor, and
so if we tell people what it is

373
00:26:03.640 --> 00:26:07.039
that we're trying to do, we
actually improve our odds of achieving it.

374
00:26:07.119 --> 00:26:11.440
And so that's really where this two
percent inflation targeting came from, and it's

375
00:26:11.480 --> 00:26:17.039
something that's become a global standard.
Really, most central banks around the world

376
00:26:17.119 --> 00:26:23.880
have inflation targets, with maybe some
differences, but generally two percent has sort

377
00:26:23.920 --> 00:26:29.640
of become the standard that the goal
thin. What do you think happens if

378
00:26:30.599 --> 00:26:34.160
impacts like like what we saw this
weekend are in conflict with two percent because

379
00:26:34.160 --> 00:26:38.119
inflation is obviously not there yet,
and yet there's some sense that maybe they

380
00:26:38.160 --> 00:26:44.160
will stop raising rates for a little
while based on the reaction to the failures

381
00:26:44.160 --> 00:26:48.079
of the banks, the concerns about
contagion. How do you think they weigh

382
00:26:48.279 --> 00:26:52.039
different factors in the economy against that
inflation target, because that becomes once you've

383
00:26:52.039 --> 00:26:55.559
got an explicit target and you're not
there you kind of ties your hands if

384
00:26:55.559 --> 00:26:56.480
you At the same time, there
are other things that you might want to

385
00:26:56.480 --> 00:27:00.559
take into consideration that might change your
point of view. It curious how you

386
00:27:00.559 --> 00:27:03.759
think the FED up weighing things.
So before the banking issues, the FED

387
00:27:03.799 --> 00:27:07.480
had been able to say, well, this is pretty easy inflations. We

388
00:27:07.519 --> 00:27:11.519
have two mandates and kind of a
silent third mandate. The two mandates are

389
00:27:11.680 --> 00:27:15.559
inflation, employment, maximum employment.
The silent third mandate, I think is

390
00:27:15.640 --> 00:27:22.319
financial stability. But financial stability was
fine and employment was three point six percent

391
00:27:22.400 --> 00:27:25.000
unemployment in February. What's not to
like about that? So they were saying,

392
00:27:25.039 --> 00:27:27.440
well, we can just go all
in on fighting inflation. Now if

393
00:27:27.519 --> 00:27:33.200
unemployment rises or if you have financial
instability. Now you have to actually say,

394
00:27:33.440 --> 00:27:36.480
what are the trade offs? How
do we manage these tradeoffs. One

395
00:27:36.519 --> 00:27:38.799
way they can manage it, and
you hear some people talking about this is

396
00:27:38.839 --> 00:27:44.240
well, we never said we have
to get to two percent tomorrow, right,

397
00:27:44.400 --> 00:27:47.319
you can get to two percent over
time. And so right now a

398
00:27:47.319 --> 00:27:52.240
lot of their forecasts and projections are
consistent with getting their buy twenty twenty five,

399
00:27:52.400 --> 00:27:56.960
So they're giving themselves two or three
years to get to two percent you

400
00:27:56.960 --> 00:28:02.599
don't need to get you ten percent
of the work force unemployed tomorrow to try

401
00:28:02.599 --> 00:28:07.440
to get two percent by December.
This is referred to sometimes as optimal control.

402
00:28:07.720 --> 00:28:11.880
Right where you're trying you you know, you know, you want to

403
00:28:11.920 --> 00:28:15.039
balance these two things or these three
things. The banking problems, though,

404
00:28:15.119 --> 00:28:21.200
I think, are you know,
a wild card certainly for the FED right

405
00:28:21.240 --> 00:28:22.920
now if they can, you know, if they can deal with these with

406
00:28:23.039 --> 00:28:26.559
other tools, like the things that
they came out with on Sunday, that

407
00:28:26.559 --> 00:28:30.200
would be their first choice is not
to have to use monetary policy to deal

408
00:28:30.240 --> 00:28:33.279
with you know, the right tool
for the right job, so monitor,

409
00:28:33.319 --> 00:28:38.559
if monetary policy is the tool you're
using to deal with macroeconomic management and inflation,

410
00:28:40.759 --> 00:28:45.599
then you come up with other tools. Sometimes they're called macroprudential tools,

411
00:28:45.799 --> 00:28:49.519
regulatory tools. You know, you
can intervene in the markets, but continue

412
00:28:49.559 --> 00:28:55.000
to focus interest rates on bring inflation
down. But if the if the banking

413
00:28:55.039 --> 00:29:00.359
crisis gets really bad, then you're
going to have much tougher conversations I think,

414
00:29:00.359 --> 00:29:03.279
and decisions around that. And I
would just you know, point to

415
00:29:04.880 --> 00:29:07.720
two thousand and eight. You know, the day after Lehman went down,

416
00:29:07.839 --> 00:29:11.200
there was a FED meeting, and
the transcript is public, so anybody can

417
00:29:11.240 --> 00:29:17.519
go look up what they were talking
about at the FOMC meeting on September sixteenth,

418
00:29:17.559 --> 00:29:22.319
two thousand and eight, and it
makes for fascinating reading because there was

419
00:29:22.359 --> 00:29:26.799
an inflation problem. Actually, that
summer, oil prices went to one forty

420
00:29:26.799 --> 00:29:32.160
a barrel CPI, the consumer price
index went above five percent. Now core,

421
00:29:32.240 --> 00:29:33.880
which is what the FED is more
focused on, wasn't so high,

422
00:29:33.920 --> 00:29:37.759
but they were worried about inflation.
And you read what people were saying that

423
00:29:37.880 --> 00:29:41.319
day, and I'm not you know, this isn't a gotcha exercise. You

424
00:29:41.319 --> 00:29:44.559
can see that there were a lot
of people around the table who were worried

425
00:29:44.559 --> 00:29:48.240
about inflation as they were about financial
sector instability. And in hindsight, you

426
00:29:48.279 --> 00:29:52.200
say, oh my gosh, how
could you You know inflation wasn't going to

427
00:29:52.240 --> 00:29:55.880
be a problem anymore and we had
the financial crisis, But at that point

428
00:29:55.880 --> 00:30:00.440
in time, you know, so
I've been wondering for months, wh happens

429
00:30:00.440 --> 00:30:03.200
if we get into a situation like
that. And I'm not saying we're in

430
00:30:03.200 --> 00:30:07.079
a situation like that, but if
we were in a place where you're worried

431
00:30:07.079 --> 00:30:10.680
about inflation, you feel like your
hands are taught. Even there's a financial

432
00:30:10.720 --> 00:30:12.440
stability issue, but you feel like
your hands are tied because you really got

433
00:30:12.440 --> 00:30:19.400
to focus on inflation. Um the
you know, it's it's It creates much

434
00:30:19.880 --> 00:30:26.079
much more difficult decisions. Yeah,
and I do think the concept of financial

435
00:30:26.119 --> 00:30:30.160
instability at large scale feels more real
and recent. I think the idea that

436
00:30:30.160 --> 00:30:33.160
that is a thing that can happen, I think after two thousand and eight

437
00:30:33.359 --> 00:30:40.279
probably doesn't feel as abstract to policymakers
as it does as it might have at

438
00:30:40.279 --> 00:30:45.920
that time. In some ways,
maybe a little recency bias in having seen

439
00:30:45.960 --> 00:30:49.359
some of those all right, last
topic areas. I know we're running up

440
00:30:49.359 --> 00:30:52.079
on the time I told you we
take, but you mentioned the kind of

441
00:30:52.160 --> 00:30:56.400
data and responsiveness of the FAT and
I wanted to ask what you see in

442
00:30:56.519 --> 00:31:00.480
terms of, obviously the kinds of
data that uses there. I know there's

443
00:31:00.480 --> 00:31:03.960
a lot of survey data that goes
into this, and at least in my

444
00:31:04.079 --> 00:31:10.000
world, in a lot of consumer
spaces that the validity and kind of usefulness

445
00:31:10.039 --> 00:31:12.799
assertive day data is coming into questions
that becomes less People are less responsive to

446
00:31:12.880 --> 00:31:17.480
various ways that we've taken surveys we're
trying to find new ways? Are are

447
00:31:17.480 --> 00:31:21.400
there interesting trends you see in the
kinds of types of data that are available

448
00:31:21.440 --> 00:31:23.920
to policymakers at the FED and other
places and shifts maybe and how they think

449
00:31:23.920 --> 00:31:29.559
about those data sources as they try
and respond to pretty rapidly changing conditions.

450
00:31:29.559 --> 00:31:32.759
I mean, even right now,
like waiting for a survey response feels out

451
00:31:32.759 --> 00:31:36.319
of date compared to how quickly you
might have to make choices in some of

452
00:31:36.319 --> 00:31:38.519
these situations. So I'm curious if
you see the trends kind of data side

453
00:31:38.519 --> 00:31:41.519
of how they look at what I
think. You know, I think big

454
00:31:41.599 --> 00:31:47.160
data or these new data sources do
offer opportunities. I think one of the

455
00:31:47.279 --> 00:31:49.720
drawbacks is maybe that there isn't a
long time history with some of them.

456
00:31:49.839 --> 00:31:53.200
So you know, the great thing
about the payroll report is it goes back

457
00:31:53.240 --> 00:31:57.119
to nineteen forty eight. You know, there have been changes over time,

458
00:31:57.119 --> 00:32:02.000
but you do have a long time
series on it um where you where you've

459
00:32:02.039 --> 00:32:06.920
seen some of these newer data sources
being really helpful. I think during the

460
00:32:06.920 --> 00:32:10.480
pandemic, you know, the open
table um and some of the you know,

461
00:32:10.519 --> 00:32:16.759
there was small business payment processors Wampley
there was a home base, which

462
00:32:16.880 --> 00:32:23.759
was way to tracks kind of small
business payroll, those real time sources when

463
00:32:23.839 --> 00:32:28.880
something really crazy was happening, we
were shutting down the economy, or people

464
00:32:28.880 --> 00:32:31.279
were staying home out of their own
choice because they were afraid of getting sick,

465
00:32:31.720 --> 00:32:35.839
and so you were trying to figure
out, well, what's happening out

466
00:32:35.839 --> 00:32:40.160
there were you know what we're um, what's mobility like, what's what's foot

467
00:32:40.160 --> 00:32:45.440
traffic like? You could use some
of these data sources to try to figure

468
00:32:45.440 --> 00:32:47.920
out if we were actually getting out
of the worst of it. Uh And

469
00:32:47.920 --> 00:32:53.279
and the FED did use those insided
some of those um just in their kind

470
00:32:53.279 --> 00:32:59.519
of um analysis of the US economy. And so it will be interesting to

471
00:32:59.559 --> 00:33:02.400
see if more of those data sources, you know, the FED gets some

472
00:33:02.519 --> 00:33:07.720
I think credit card data, real
time credit card data. If you have

473
00:33:07.960 --> 00:33:10.920
you know, if you have companies
that are that have a fairly good market

474
00:33:12.000 --> 00:33:15.119
share, then and the market share
is stable, you're not having to worry

475
00:33:15.160 --> 00:33:22.240
about mixed shifts polluting the data.
There is more data that might be you

476
00:33:22.279 --> 00:33:27.039
can bring to bear to try to
figure out where those turning points are in

477
00:33:27.079 --> 00:33:30.799
the economy. Yeah, well,
certainly I'll add that to my list of

478
00:33:30.839 --> 00:33:35.240
interesting things to watch, Nick.
I appreciate you taking the time today.

479
00:33:35.279 --> 00:33:37.839
I know it's a very timely conversation. I guess we'll all be watching what

480
00:33:38.000 --> 00:33:42.119
actually happens over the next couple of
weeks, because I said, this a

481
00:33:42.119 --> 00:33:45.279
pretty fast moving environment and it'll be
curious to see how how things play out

482
00:33:45.319 --> 00:33:47.799
compared to some of the things we
talked about today. So I appreciate your

483
00:33:47.839 --> 00:33:51.680
coming and sharing your perspective. Thank
you, Jeff. Pleasure to be with

484
00:33:51.720 --> 00:33:57.039
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