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Moody's Talks - Inside Economics

Episode 58
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May 13, 2022

Regional CPI and R-Star

Mark, Ryan, and Cris discuss the latest data on U.S. consumer prices. The big topic is monetary policy and what the Fed should do and whether the economy is more or less sensitive to changes in interest rates.

Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight. 

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. And I'm joined by my two co-hosts, Ryan, Ryan Sweet director of Realtime Economics. And Chris deRitis, Chris is the deputy chief economist. Hey guys.

Ryan Sweet:                      Hi Mark.

Mark Zandi:                      How's it going? Good? Good. Hey, Cris, I've noticed Ryan is relentless. He's trolling me on Twitter, and he's getting annoyed him because I'm not responding. But Ryan, in my defense, someone's got to work. I'm like, I'm traveling. I can't keep up with, and where do you get these cartoons? I mean.

Ryan Sweet:                      They're not cartoons. They're memes. Mark, my meme game is pretty strong. So you got to.

Mark Zandi:                      Oh I know.

Ryan Sweet:                      Got to step it up.

Mark Zandi:                      It's awesome. I mean, I don't know what to do with it. I mean like I got to sit, you troll, trolls the right word, right? I said, we said trash talk last week but.

Ryan Sweet:                      It's probably trolling. Yeah.

Mark Zandi:                      What's the difference between trash talking and trolling, anyway? Does anyone know?

Ryan Sweet:                      I don't know.

Mark Zandi:                      Are they the same thing?

Cris deRitis:                       Isn't trolling behind the scenes? Like you're...

Mark Zandi:                      Oh, maybe you're surreptitious, you're like a Russian hacker trolling. That's...

Cris deRitis:                       A bot or something.

Mark Zandi:                      A bot.

Cris deRitis:                       Maybe.

Ryan Sweet:                      It's not like, so when we trash talk we're right in your face, right?

Mark Zandi:                      Yeah. I see. I see, that makes sense.

Ryan Sweet:                      That's how I would define it. So you're not checking the timestamps. Because I send these things out at 11 o'clock, midnight. So I'm still working, so.

Mark Zandi:                      Oh, that's a good point.

Ryan Sweet:                      Yeah.

Mark Zandi:                      That is a good point.

Ryan Sweet:                      You're asleep, I'm up doing work.

Cris deRitis:                       But Ryan is the meme master, right? So for anyone in the audience, who's looking for a meme, Ryan's your guy. So.

Mark Zandi:                      That's true. Oh, so you're not trolling me. You're trash talking me. So trash talk is the right word, because you're like in my face.

Ryan Sweet:                      Yeah.

Mark Zandi:                      There's no ambiguity who's saying all this stuff.

Ryan Sweet:                      To be honest, it's been a lot of fun.

Mark Zandi:                      I know, but and I will reengage.

Ryan Sweet:                      That's fine.

Mark Zandi:                      When I have a minute to re-engage.

Ryan Sweet:                      That is fine. Take your time.

Mark Zandi:                      Do I respond to my wife, to the client or to Ryan's trash talking? Which one would you do?

Cris deRitis:                       You got to get your priorities in order.

Mark Zandi:                      I know, I know.

Ryan Sweet:                      Sorry, next Thursday. It's going to be...

Mark Zandi:                      The problem is I got to think about it. You know, he's so clever, I got to think about it. You know?

Ryan Sweet:                      I have an Outlook reminder.

Mark Zandi:                      I can't just come back with anything because if I do, I'm.

Cris deRitis:                       You're just setting yourself up for more.

Mark Zandi:                      I know.

Ryan Sweet:                      I guess the most important question is, do you know what that movie was from? Or that meme from.

Mark Zandi:                      Oh, the one about deafening silence or what was that?

Ryan Sweet:                      No, the one where, they were both related. The one where there's three guys sitting in a car, that's dressed like a dog. And then there was one where I talked about inflation being transitory, and then.

Mark Zandi:                      Oh yeah. No, I don't know where, what movie was that?

Ryan Sweet:                      We need an intervention.

Mark Zandi:                      Do you know Chris? No?

Ryan Sweet:                      Are you serious?

Cris deRitis:                       I don't know what you're talking about. Dumb and Dumber? Do I have to go to Twitter?

Mark Zandi:                      Dumber and dumber. Yeah.

Ryan Sweet:                      Oh, one of the greatest movies.

Mark Zandi:                      It is. But you know, unfortunately I've never watched that movie from start to finish ever. I've only seen clips here and there. You know, my favorite is that, what is that? Will Ferrell, right? Will Ferrell, did you ever see?

Ryan Sweet:                      Jim Carrey is Dumb and Dumber.

Mark Zandi:                      Oh, is it Jim Carey, is Dumb and Dumber? Oh, it's not Will Ferrell.

Ryan Sweet:                      No.

Mark Zandi:                      I'm way off. Well Ferrell though. I like Will Ferrell.

Ryan Sweet:                      Yeah, he's good.

Mark Zandi:                      That one scene where his, I think it's his daughter plays the landlord. Have you ever seen this?

Ryan Sweet:                      Yeah. Yeah. That's really funny.

Mark Zandi:                      I think that is just hilarious.

Ryan Sweet:                      Yeah.

Mark Zandi:                      Anyway, back to business. Consumer price, index, CPI, inflation kind of top of mind here for about a year. Maybe some good news. I think, sort of, maybe. What do you think, Ryan? What do you make of the CPI report?

Ryan Sweet:                      Yeah, well I thought it was a mixed bag. Because the headline CPI, consumer price index, growth in that moderated month, over month and even year over year came down. I mean, we're still north of 8% on a year ago basis. But we're kind of heading in the right direction. I think the one surprise was core prices, which strips out food and energy, which are pretty volatile components, and economists, we look at this because this is a good, pretty good predictor of where future inflation's headed that actually accelerated month over month. But that has energy written all over it. And even though core CPI excludes energy, there's the pass through to other parts of that basket. So look at airfares, higher jet fuel prices led to a double digit increase in airfare prices, transportation, other transportation service prices went up. So I think we're moving in the right direction. It's just, I think it's going to happen a little bit slower.

                                             But all in all, I think if you look at the CPI, and then you look at the producer price index, which came out yesterday, which was encouraging, those two feed into the Fed's preferred measure of core inflation, which is the PC deflator. And the core PC deflator is going to be up three tens of a percent, month over month, compared to the core CPI, which was up six tenths. So less than half, or roughly half. So all in all, when you dig through all the CPI, I mean, I know Chris, he can chime in on the shelter component. There's starting to be a little whiff of that's picking up. So we need a lot of goods disinflation to offset the services inflation that's coming in. I think over the next few months, you're going to see the CPI report show more evidence of that.

Mark Zandi:                      Okay. So there was a lot of crosscurrents in what you just said. So just to level set, CPI, consumer price inflation overall peaked on a year over year basis in March at 8.6%. Came in April down a bit to 8.3%.

Ryan Sweet:                      Correct.

Mark Zandi:                      Did the core CPI also decelerate on a year over year basis?

Ryan Sweet:                      Yeah.

Mark Zandi:                      It did. But and so you're saying, "Okay, broadly speaking, we're moving in the right direction." Maybe not as good as it looks because core CPI, excluding food and energy accelerated a bit in the month. And so we're not kind of, till we see that happens, we can't feel like we're kind of definitively moving in the right direction?

Ryan Sweet:                      Yeah. Until we see the core CPI settle in month over month into that 2.2%, 3%, 0.3% increase on a month to month basis sustained, we're yeah, we've got to get down there first.

Mark Zandi:                      Right. Okay. And sorry, I'm just closing out my Outlook here just to because it's ring going to be ringing the whole time. Showing you how busy I am and why I can't respond to random memes, but anyway. What was I going to say? Oh, there was now this is really getting into DNA very quickly, but I think it's important. There was a large increase in new vehicle prices, CPI prices. And that runs counter to the, we saw a decline in used vehicle prices. And we've been obviously we're looking at vehicle prices because that's kind of the poster child for sectors that have been disrupted by global supply chain issues. And if we start to see vehicle prices kind of roll over, that might make us feel a little bit better about prices for other products that have been disrupted by the supply chains to start coming down too. So can you explain what's going on there? What's the reality of what's going on there?

Ryan Sweet:                      So used car prices have fallen for three consecutive months now. Which I think gets to your point that they're starting to roll over. Maybe not as fast or as large of a rollover that we would want, but new car prices, that stood out. But there was a methodology change by the BLS, the Bureau of Labor Statistics. And they switched from surveying dealerships on what prices were, to using transaction data. So they published the new series versus the old series ahead of the report. And we could see that the new methodology was running hotter than, showing larger increases than the old methodology. And that's one reason why our forecast for the CPI was above the consensus.

Mark Zandi:                      Right. And just to give people a sense of it, how important this is, I mean, correct me if I'm wrong, but if you go back to March when inflation peaked, it was eight and a half, 8.6%. I think in that month, 2%, almost two percentage points of that was vehicle prices, I believe. Is that?

Ryan Sweet:                      Correct. Yep. A little bit more.

Mark Zandi:                      A little bit more than that. So this is a big deal really.

Ryan Sweet:                      It is.

Mark Zandi:                      Directly big deal, but also what it signifies for the rest of what's going on in supply chains, and what it means for prices.

Ryan Sweet:                      So every month what I do is I update our supply chain constrained CPI, which includes basically what we did was we went through all the bowels of the report, and identified what components are being affected by global supply chains. And tops on that list is vehicle prices. But you can add in bedding, furniture, children's apparel. And when you add it all up in April, it added less than two percentage points to the CPI. Whereas the last several months, January, February, March, it was adding well north of two percentage points to year over year growth in the CPI. So that is a little glimmer of hope that if that's sustained, we should see further improvement in the inflation picture.

Mark Zandi:                      And I guess the other big thing here was, again, oil prices, energy prices more broadly. And that actually picked up a little bit in the month. It fell, and do I have this right? No, no. Did it come in, in April? I can't remember.

Ryan Sweet:                      Yeah. It came in, in April.

Mark Zandi:                      Came in, in April. But it may, oh, actually it may be a source of increased inflation in May, because we saw a little bit of a bounce in oil prices.

Ryan Sweet:                      Correct.

Mark Zandi:                      Yeah. Okay.

Ryan Sweet:                      Yeah. And the other area watch is food prices. Sorry, Chris, just food prices. Because rising commodity prices for wheat, corn. I mean pretty much across the board. Food prices have been increasing quite rapidly over the last several months, and that's likely going to continue.

Mark Zandi:                      Oh, isn't that mostly energy too though? Diesel prices getting things from the farm?

Ryan Sweet:                      Yeah.

Mark Zandi:                      Okay. So all a lot of it good just goes back to oil. So as soon as hopefully oil starts heading south, oil prices start heading south, we should start to see some real relief here on the inflation front. Okay. Chris, I know you're biting at the bit. So what did you want to.

Cris deRitis:                       Oh no, just.

Mark Zandi:                      No, go ahead.

Cris deRitis:                       You were talking about energy, electricity prices were up quite a bit as well. Right? So that's also hitting consumers, right? It's not just oil prices, gas prices directly.

Mark Zandi:                      Yeah. Right. And Ryan alluded to this, but maybe you want to flesh it out Chris, about the cost of housing. So rent growth has been very strong, and that's now bleeding through in full force into the measures that are in the consumer price index.

Cris deRitis:                       Yeah. There's a little bit of acceleration in rents, rent growth as well. And we've talked about this in previous sessions, that rent is a bit lagging in terms of how new rent increase, well increases on new rentals takes time to feed into the CPI calculations. But they are doing so now. And I think 4.8% year over year for rent, and owner's equivalent rent. So that's significant. There was a large increase actually in hotel and motel prices. But that's a relatively small component of the overall CPI. But nonetheless I think it was like 20, 22% year over year, if I'm not mistaken.

Mark Zandi:                      Okay. So if you look at our forecast for CPI inflation, we peaked at 8.5%, excuse me, 8.6% year over year in March. We're going to be closer to five, 5.5% by December. And we're going to be close to 2.5% by the end of 2023, December of 2023. Which is pretty close to, if not on top of the Fed's target. Which is two to two and a half percent, depending on which inflation measure you're using. On the CPI could be about two and a half percent. Does that feel right to you, Chris? Does that still feel roughly consistent with the way you think things are going to play out here?

Cris deRitis:                       Yeah, I think so. I'm still. Maybe it's optimistic, but, or I guess it's realistic in the sense that I think the Fed will slam on the brakes if needed. So we'll get there, but whether we get there gracefully or not, that's the open question.

Mark Zandi:                      Yeah. But great point. One way or the other we're getting there. Either everything kind of sticks to script, the pandemic fades, supply chains iron out, oil prices recede as the worst of the fall from Russia's invasion of Ukraine start to get behind us And we get back to those typical kind of inflation numbers we feel comfortable with on our own. Or if that doesn't happen, recession, then recession. That says enough of thi, I mean, literally just I'm going to push this economy into recession tod get inflation down.

Cris deRitis:                       Yeah.

Mark Zandi:                      Okay.

Cris deRitis:                       I'm a little worried about the lockdowns in China over the next few months, that feeding into inflation. So I agree with you and Chris that the contours of the forecast are correct. It might just be delayed a little bit because of what goes on in China.

Mark Zandi:                      Yeah. And that goes to the COVID lockdowns, right. Related to Omicron. It feels like it's just going on forever now. I mean, and I guess that's the risk. Because we know Omicron you just, how do you stop Omicron? I mean, it's like, I don't know if these lockdowns ultimately work. I mean it feels like you're going to be doing this forever. Trying to keep things at bay.

Cris deRitis:                       It's practically a non-vaccinated, or un-vaccinated population as well. Right. So it's.

Mark Zandi:                      Because they were you all using the kind of the poor quality Chinese vaccine?

Cris deRitis:                       Correct.

Mark Zandi:                      Yeah, right.

Cris deRitis:                       So they're highly susceptible to the spread.

Mark Zandi:                      Right. Hey, let me ask you Ryan, on that front. I know we put a stress index, supply chain stress index to try to capture these things that are going on in the supply chains. Including what's going on in China. Has that started to tick up higher? I mean that, I know it was the stress, the level of stress was very, very high last fall when Delta hit. I think it peaked in the index, and it's an index of freight rates, and reports coming out of purchasing managers. What's going on in the labor market in terms of unfilled positions in transportation, distribution, a bunch of things. That peaked in last September, it started to come in late last year into this. I haven't looked, what's happened in the last month or two or three? Is it moving up again?

Ryan Sweet:                      So, oh, last few months it stabilized. And when we get the new data point, we're just missing one or two inputs that we get next week. It's going to tick back up. And I think that's really tied to what's going on in China with the lockdowns.

Mark Zandi:                      Right.

Ryan Sweet:                      Something that doesn't feed into the index but what I watch is the number of ships that are basically parked offshore on China. And it looks like an enormous parking lot. It's just that there's so many bottlenecks right now.

Mark Zandi:                      Oh boy. Okay. All right. Hopefully companies, US companies have kind of figured out different ways to source what they need. Yeah. Okay. That's the risk. That's their point.

Ryan Sweet:                      Correct. Yep.

Mark Zandi:                      Yeah. Okay. Let me on that, one other question. I mean, obviously going back to vehicle prices in the context of the disruptions to the Chinese production, are we notice, have you noticed? Is global vehicle production still, and it's off bottom, is it improving or is it stalled out? Do you have any sense of that what's going on with global vehicle production?

Ryan Sweet:                      I've seen Mexico, US and Germany. And overall, both of them are rising, but not that quickly. So yeah. I don't know what overall global production is, but for those three, it seems like they're starting to move in the right track.

Mark Zandi:                      That's a big chunk of it. You're missing Japan.

Ryan Sweet:                      Yeah. That's what I thought.

Mark Zandi:                      But that's a big chunk of it, okay. I guess we should watch that very carefully. Okay. Okay. Anything else on this CPI, consumer price report? Anything else on the inflation front? No? Okay. Any other statistics that came out, and I don't want to take away from the game, but if I am then just stop me and we'll go right to the game. But is there any other major statistics that came out that you want to call out before we move on? No?

Ryan Sweet:                      Chris, do you have anything?

Mark Zandi:                      I noticed the University of Michigan survey. Did you notice that? That came out I think today. Kind of called to a new low.

Ryan Sweet:                      Yeah. Well what's crushing that is gasoline prices, And a stock market. Because the University of Michigan's survey is very sensitive to personal finances. Just, this is all based on the questions that they ask, that's related to more are related to finances.

Mark Zandi:                      Yeah. Okay. I mean, I'm not overly worried. I mean, I know historically when sentiment falls by a lot, in a very short period of time, that's a concern. That's kind of a recession indicator. But if it's low and stable, it's not great obviously. But I don't think it's signaling anything going off the rails here. Would that be consistent with your interpretation, Ryan?

Ryan Sweet:                      Yeah. Now I got to get a new number.

Mark Zandi:                      Oh, oh damn.

Ryan Sweet:                      It's all right.

Mark Zandi:                      I would've gotten that right then if we'd played the game.

Ryan Sweet:                      All right, then I'll give it to you. I'll come up with a new number for the game, but 40.9, negative.

Mark Zandi:                      Oh, negative 40.9? Oh, this is your differential between income and, no?

Ryan Sweet:                      Michigan.

Mark Zandi:                      Oh, University of Michigan survey. Negative 40. It's a combination of different measures in the survey, right?

Ryan Sweet:                      Nope. Just.

Mark Zandi:                      Straight up?

Ryan Sweet:                      Straight up.

Mark Zandi:                      It comes right out of the survey?

Ryan Sweet:                      Oh no, no. You got to calculate it but.

Mark Zandi:                      Oh, that's what I mean. You got to calculate it. This is something minus something.

Cris deRitis:                       Is it a decline from peak or something?

Ryan Sweet:                      Yep. Very good, Chris. Yeah.

Cris deRitis:                       Oh.

Ryan Sweet:                      So from its post pandemic peak, not its pre-pandemic peak, but post-pandemic peak, the University of Michigan survey is down 40 points. Which is a lot.

Mark Zandi:                      It's about half almost. Isn't it?

Ryan Sweet:                      Yeah. It's a pretty sizable drop.

Mark Zandi:                      Right. Okay.

Cris deRitis:                       Okay. I'll give you one while we're on the topic. 76 plus.

Mark Zandi:                      Is this part of the game?

Ryan Sweet:                      Yeah, are we doing the game or?

Cris deRitis:                       Well, not really. Because we're talking University of Michigan.

Mark Zandi:                      Okay, this is an appetizer. Go ahead.

Cris deRitis:                       It's the University of Michigan. So we're already in the ballpark here.

Mark Zandi:                      Yeah.

Cris deRitis:                       But I looked at the report as well, 76.1 and 41.2.

Mark Zandi:                      I don't know. There's a lot buried into that survey.

Ryan Sweet:                      There is.

Cris deRitis:                       Probably not fair.

Ryan Sweet:                      Like how deep are you going? Are we going like buying plans?

Cris deRitis:                       No, no. The top level, but.

Mark Zandi:                      Is it regional?

Cris deRitis:                       Demographic split.

Mark Zandi:                      By income group. It's by income group.

Cris deRitis:                       No.

Mark Zandi:                      By Democrat versus Republican.

Cris deRitis:                       Exactly.

Ryan Sweet:                      There you go.

Cris deRitis:                       Republican. So for those of you listening on the podcast, I think you really should hug a Republican, if you know one. Because 41.2 is the lowest level of consumer sentiment in the history of the data. So they're really feeling it.

Mark Zandi:                      Hold on, wait a second. Say that again?

Cris deRitis:                       Republican sentiment.

Mark Zandi:                      Yeah.

Cris deRitis:                       41.2 is the lowest in history of the series.

Mark Zandi:                      That is amazing.

Cris deRitis:                       Yeah. So.

Mark Zandi:                      The lowest in history.

Cris deRitis:                       Yes. Yes.

Mark Zandi:                      Going back to the sixties?

Cris deRitis:                       Whenever the, I'll look it up.

Mark Zandi:                      Whenever it.

Cris deRitis:                       Yeah. Whenever it started.

Mark Zandi:                      Oh, well I'd love to know the answer to that, how far back. That is incredible.

Cris deRitis:                       Isn't it wild? Yeah.

Mark Zandi:                      That is wild. Oh my gosh. Okay.

Cris deRitis:                       Oh, back to 1980, was the first.

Mark Zandi:                      Well still, that covers, it's Ronald Reagan, back to Ronald Reagan. Yeah. Very, very interesting.

Cris deRitis:                       Yeah. We're talking great recession. You're talking.

Mark Zandi:                      Yeah, you're talking great recession. What was it in the great recession? Oh my gosh. Do you have that in front of you?

Cris deRitis:                       Let me.

Mark Zandi:                      Well while you're doing that, let me explain the game. Because we're going to go dive into the game. And by the way, I should have said up top, the topic at hand here is monetary policy. So we're going to play the game, and then we're going to dive into the Fed. What the Fed has done, what the Fed is going to do, what the Fed should do. Ryan's got a lot of opinions around this. So we're going to dive deep.

Cris deRitis:                       48.2.

Mark Zandi:                      What was it?

Cris deRitis:                       48.2.

Mark Zandi:                      That is just.

Cris deRitis:                       Yeah. So they're.

Mark Zandi:                      Mind blowing.

Cris deRitis:                       When the high, get this, huh? When do you think the Republicans had the highest consumer sentiment?

Mark Zandi:                      When we invaded Afghanistan with, during Bush, early nineties? No. No. Because confidence was really high, and you would've thought Republican have been really, really high. That's not it though.

Cris deRitis:                       I should say there are some gaps in there. So I don't have the full nineties or.

Mark Zandi:                      Oh, okay.

Cris deRitis:                       So really it's consistently reported since 2006.

Mark Zandi:                      When President Trump was elected?

Cris deRitis:                       No, it also did accelerate there. Yeah.

Mark Zandi:                      When?

Cris deRitis:                       February 2020.

Mark Zandi:                      You're kidding. The month before the pandemic.

Cris deRitis:                       Month before the pandemic, it was this weird. I don't know what's going on there, but it hit high of 27.2.

Mark Zandi:                      Well, confidence was high then so.

Ryan Sweet:                      The economy was booming. The stock market was rising.

Mark Zandi:                      Yes. Was the stock market rising at that point? I mean it, yeah, but.

Cris deRitis:                       Well, before, right?

Ryan Sweet:                      Right, before cases in Seattle started showing up. Yeah.

Mark Zandi:                      Right. Wow. So I guess gas prices were low. Oil prices were relatively low. Boy. That is really a.

Cris deRitis:                       The tax cut had been in place. Right.

Mark Zandi:                      Okay. Do you have the Democrats up now too?

Cris deRitis:                       You want Democrats right now?

Mark Zandi:                      Well I want to know when their low point was, and when their high point was. Do you have that offhand?

Cris deRitis:                       Oh, let me.

Mark Zandi:                      Yeah. You find that, I'm going to explain the game. The game. Okay. Statistics game is pretty straightforward. We each put forward a statistic. The rest of us try to figure out what that statistic is by questioning, and guessing, and clue giving. The statistic can't be so easy, well it shouldn't be so easy that we get it right away. Can't be too hard so that we can't get it at all. And the best statistic is one that's relevant to the topic at hand, which is any statistic that came out recently, or anything that's kind of top of mind. Did you get it, Chris? Before we dive in.

Cris deRitis:                       The low was October 2008.

Mark Zandi:                      Okay. That makes sense.

Cris deRitis:                       That makes sense. Right?

Mark Zandi:                      That's the financial crisis. Yep.

Cris deRitis:                       And I'm looking for the high.

Mark Zandi:                      When the Fannie Mae, Freddie Mac and everyone, the financial system went belly up and.

Cris deRitis:                       And the high seems to be April of 2021.

Mark Zandi:                      April, really?

Cris deRitis:                       Yeah, and it really stuck out. Right.

Mark Zandi:                      Well that's the vaccines were rolling out. People were feeling pretty good. They thought the pandemic was over. Right. And the Biden administration at that point was getting a lot of credit for the vaccine rollout.

Cris deRitis:                       Yeah.

Mark Zandi:                      So maybe that was what was going on. Interesting. Anyway, that's fascinating.

Cris deRitis:                       Yeah. It's fascinating.

Mark Zandi:                      That's fascinating. Fascinating. Okay. Who wants to go first? Ryan. Chris? Who wants to go?

Ryan Sweet:                      Well, I got to get a new number. Let Chris go first.

Mark Zandi:                      Okay, Chris, you go.

Cris deRitis:                       Okay. I'll give you a number that came out this week, and I'm going to tie it to another number that came out last week.

Mark Zandi:                      Okay.

Ryan Sweet:                      We're elevating the game now.

Cris deRitis:                       I know, 3.2%. That's the number I want you to guess. And...

Mark Zandi:                      That came out this week?

Cris deRitis:                       Came out this week. 3.2% and 9.9%.

Mark Zandi:                      And it's linked back to something that came out last week?

Cris deRitis:                       Yes.

Ryan Sweet:                      Is it inflation related?

Cris deRitis:                       Yes.

Ryan Sweet:                      All right.

Cris deRitis:                       Price related. Yes.

Mark Zandi:                      Did it come out of the consumer price index report?

Cris deRitis:                       It does.

Ryan Sweet:                      Is it year over year?

Cris deRitis:                       Well the first one does, the other one was last week.

Mark Zandi:                      Yeah. Right. Okay.

Ryan Sweet:                      Is it year over year or month over month?

Mark Zandi:                      It's price related, but it's not the CPI.

Cris deRitis:                       It is year over year.

Mark Zandi:                      3.2% year over year?

Cris deRitis:                       Yes.

Mark Zandi:                      And it's a good or a service? It's a good, or it is...

Cris deRitis:                       It is a service.

Mark Zandi:                      It's a service.

Ryan Sweet:                      3.2. And you're going to tie it back to something last week?

Cris deRitis:                       Yep.

Mark Zandi:                      Yeah. That's interesting. It's not airfares, is it?

Ryan Sweet:                      Oh, no. Airfare is up a lot more than that.

Mark Zandi:                      Year over year. they're up a lot more than that?

Cris deRitis:                       22% or something.

Ryan Sweet:                      Most things are up close to double digits. Are you doing healthcare? Medical care service?

Cris deRitis:                       No. Not healthcare, but you're getting close. Very close.

Mark Zandi:                      Can you give us...

Cris deRitis:                       And it's something very near and dear to Ryan's heart, I think.

Mark Zandi:                      Oh, it's got, recreational activities, got to be like tickets to a ball game or something.

Cris deRitis:                       Nope. Nope.

Ryan Sweet:                      Are we going veterinary services?

Cris deRitis:                       Oh, oh. You're you're circling the drain there.

Mark Zandi:                      Oh my gosh.

Ryan Sweet:                      So it's medical.

Mark Zandi:                      Yes.

Cris deRitis:                       Not medical. Not medical.

Ryan Sweet:                      Yeah. My wife's a Veterinarian.

Mark Zandi:                      Veterinarian. Right. And it's near and dear to Ryan's heart.

Cris deRitis:                       I think it affects him.

Ryan Sweet:                      Dog food.

Cris deRitis:                       No.

Mark Zandi:                      No. It's got to be more than that. A lot more than that. Can you give us any other hints before you give it away?

Cris deRitis:                       Family life.

Ryan Sweet:                      Oh, are you wait, are you going with, wait, does the CPI have baby formula?

Cris deRitis:                       Oh no, but that would be a good one.

Ryan Sweet:                      Have you seen these shortages about baby formula?

Mark Zandi:                      That's crazy.

Ryan Sweet:                      Haven't the prices gone up a lot more for baby formula?

Cris deRitis:                       Well, I would assume. Yeah, I'm out. I might throw up the white flag.

Ryan Sweet:                      White flag?

Mark Zandi:                      Is it, when you look at the CPI, they've got different categories, big top line categories. Is it in medical services?

Cris deRitis:                       I believe it's actually in educational services.

Mark Zandi:                      Oh. Okay.

Ryan Sweet:                      Daycare?

Cris deRitis:                       Daycare, child care.

Ryan Sweet:                      Daycare prices.

Mark Zandi:                      Oh, that's less than I would've thought.

Cris deRitis:                       Yeah. Yeah.

Ryan Sweet:                      That's what I thought.

Cris deRitis:                       3.2%. Can you guess what the 9.9% refers to?

Ryan Sweet:                      Is that the peak to date decline in employment for daycare workers?

Cris deRitis:                       Oh, that's 11%. You're on the right track. 9.9% is the increase in the average hourly earnings of daycare workers.

Mark Zandi:                      Ah, that's a good one.

Cris deRitis:                       Right? So price is up 3.2, but the input cost, the price they're paying and the wage they're paying to childcare workers is up 9.9.

Ryan Sweet:                      That's interesting.

Cris deRitis:                       Not sustainable. Right?

Mark Zandi:                      That is interesting. Although I had a hard time believing it, that it's only 3.2%. Because I thought there was a real shortage of daycare centers available for parents.

Cris deRitis:                       Yeah. So employment's down 11%.

Mark Zandi:                      Yeah. Right.

Cris deRitis:                       From the pre-pandemic. Right. So we're still short.

Mark Zandi:                      Wonder if there's some kind of measurement issue there? What they're measuring exactly.

Cris deRitis:                       I think the contracts are sticky. Right. So I don't think that the price of daycare can adjust that quickly.

Mark Zandi:                      I see.

Ryan Sweet:                      It only goes up like once a year.

Mark Zandi:                      Well you'd think the, well maybe it's a seasonal adjust. Oh maybe it's a seasonal adjustment issue.

Cris deRitis:                       There could be something in there too. Yeah. That could be too.

Mark Zandi:                      Yeah. It could be something like that.

Ryan Sweet:                      We've had this debate before. Mark, if you remember, when we were looking at physician prices.

Mark Zandi:                      Yeah.

Ryan Sweet:                      We had really strong wage growth among physicians, but the CPI for physicians was really, really weak. And we were puzzled. One thing to look at is the response rate. Because the response rate or the share of people that are responding to the BLS with the price, the inflation data has just steadily declined. And it's really, really, it's almost to the point where you just can't believe it.

Mark Zandi:                      Yeah, no, that's a good point. Okay. That was a good one, Chris though. Yeah, very good.

Ryan Sweet:                      That was good one.

Mark Zandi:                      Yeah. A little counterintuitive. I mean, if you had said 12.2%, I would, that would've been more intuitive.

Cris deRitis:                       That's why I chose it.

Mark Zandi:                      Yeah. Yeah.

Cris deRitis:                       And I wanted to prove once and for all that there is no collusion, right?

Ryan Sweet:                      No, no. Okay. That was good. That was good.

Mark Zandi:                      Or there was, and this is a way to do a bit of a head fake.

Ryan Sweet:                      Yeah. Or Mark was just too busy to check his emails.

Mark Zandi:                      I was just too busy. That's exactly. I didn't have time. I didn't have time to check my email. I got too many emails. Yeah. Good point. All right, Ryan, you go. You're up. Did you come up with one, another one?

Ryan Sweet:                      Yeah. I got one.

Mark Zandi:                      Okay. Very good.

Ryan Sweet:                      Minus 50%.

Mark Zandi:                      All these negative numbers. You're coming up with big negative numbers. Negative 50%. Okay. I don't think it's in the CPI report. Is it?

Ryan Sweet:                      No, it's not. It's not inflation related.

Cris deRitis:                       Is it cryptocurrency related?

Ryan Sweet:                      It is not. It's not.

Mark Zandi:                      Is it an asset price?

Ryan Sweet:                      It is not. No.

Mark Zandi:                      No, no asset.

Ryan Sweet:                      It's an economic data.

Mark Zandi:                      Oh, it is an economic. Is it a release that came out this week?

Ryan Sweet:                      It did.

Mark Zandi:                      Oh, is it in the small business survey?

Ryan Sweet:                      It is.

Mark Zandi:                      Is it.

Ryan Sweet:                      Getting warmer?

Mark Zandi:                      Oh, I know what it is. It is the diffusion index for expectations about how the economy's going to do six months from now.

Ryan Sweet:                      Yep. Excellent. Very good.

Cris deRitis:                       That's a cowbell. That's definitely a cowbell.

Mark Zandi:                      Now you guys are, now Chris is thinking I'm colluding with you.

Cris deRitis:                       Yes. I know.

Mark Zandi:                      Ah, that's a good one.

Cris deRitis:                       The tangled web we weave.

Mark Zandi:                      You know why I know that statistic? You know why I know that statistic?

Ryan Sweet:                      Why?

Mark Zandi:                      So because I was as part of my travels, I was at a meeting of economists, it's called the conference board. Oh what is it called? Conference of business economists. These are economists that are in the business community. They're like chief economists of different businesses. Like Jonathan Smoke. Remember we had Jonathan on, from Cox Automotive. He's in this group, and the people present. Well, one of the folks on this and I hope I'm not giving you, I'm saying something, I shouldn't be saying. I don't think so. But anyway, one of the people in this group is Bill Dunkelberg, or dunk for short. Can you believe this, Bill started that survey 50 years ago, 50 years ago.

Cris deRitis:                       Get out of here.

Mark Zandi:                      I'm not kidding. I'm not kidding. And so he was talking about these numbers because they had just come out. And if you take a look at some of the survey results for some of these questions, it's like a floor has dropped out of the survey. Which is spooky, a little spooky. Right? I mean, because I do think a recession is kind of a loss of faith. You kind of lose faith, and you can see that in these sentiment measures, they start caving. Now we haven't seen it in the consumer sentiment indices.

Ryan Sweet:                      Except for Michigan.

Cris deRitis:                       Except for the Republicans. Right?

Mark Zandi:                      Oh except for the, oh and the small business survey is very Republican dominated.

Ryan Sweet:                      I was about to mention that.

Cris deRitis:                       Yeah.

Ryan Sweet:                      You want to tie them together?

Mark Zandi:                      Ah yeah.

Cris deRitis:                       There you go.

Ryan Sweet:                      Circle of life.

Mark Zandi:                      Actually, this would be a good tweet, Ryan. I think I'm going to tweet this out.

Ryan Sweet:                      Yeah. I'll send it to you. In the past, we looked at, how well does the NFIB survey do in predicting economic activity. And it overstates economic activity when there's a Republican president, and it grossly underestimates it when there's a Democratic president. So I think there's some political bias, which it makes sense. I mean small businesses Republicans, tendency are more pro-business. So it's not...

Mark Zandi:                      I would tell you, I'd say at least a quarter of the emails I'm getting are from people that, pretty upset about everything, and they're Republican. I mean, generally, so yeah. Very, very upset. Interesting. That is interesting. Okay. But you were surprised I got that one, Ryan. You thought you had me?

Ryan Sweet:                      Yeah. I was a little, I'm impressed. I'm impressed with that.

Mark Zandi:                      Okay. There you go. Okay. Okay. I've got one. It's a little different. It's a little different. I'm trying to mix things up a little bit too. Right? So just to spice things up. And I'm going to give you part of it already. It's in the CPI report, and it goes to the inflation numbers for cities, metropolitan areas. So the BLS, bureau of labor statistics put this together. They put together CPI numbers for about 28, 25 different cities across the country. Okay. Tell me, and of course, right now, year over year nationwide is 8.3%. Give me, there are four cities who have inflation year over year that's in double digits. If you can give me any of those cities, I consider that to be.

Ryan Sweet:                      I got to remember which ones BLS does. Yeah.

Cris deRitis:                       Is it similar to the ones they do for the employment cost index?

Mark Zandi:                      Yeah. Pretty similar. They're big cities. They're not. Yeah. They're not small areas. These are big areas. And then also I'm going to ask you which cities have had the weakest.

Ryan Sweet:                      The lowest.

Mark Zandi:                      CPI. So take, you want to guess? Think about it logically. Think about it logically. Okay. Think about it. Like where would you expect inflation to be higher regionally? Because areas out of the country that are really rip roaring strong, lot of migration inflows due to remote work. You would expect house prices going skyward. Right?

Ryan Sweet:                      How about Atlanta?

Mark Zandi:                      Atlanta?

Ryan Sweet:                       Oh, I should check. I'm also assuming.

Mark Zandi:                      Sure. I think it is Atlanta.

Ryan Sweet:                      They drive a lot in the south.

Mark Zandi:                      It is Atlanta. It is Atlanta. Absolutely. There you go. Atlanta.

Ryan Sweet:                      All right, Chris, your turn.

Cris deRitis:                       I would guess Austin, but I don't know that it's covered.

Mark Zandi:                      No, that's too small.

Cris deRitis:                       Too small, right?

Mark Zandi:                      Yeah.

Cris deRitis:                       How about a Phoenix?

Mark Zandi:                      Phoenix is one of the four.

Cris deRitis:                       Seattle?

Mark Zandi:                      Seattle? No. No. Okay. No, because that's actually lost people. Right. See I think so. I mean Boise, which is the poster child for, surging housing markets and remote workers coming in. A lot of them were coming from Seattle. Okay.

Cris deRitis:                       Miami?

Mark Zandi:                      No, not Miami.

Cris deRitis:                       Ah.

Mark Zandi:                      Miami's pretty good though. It's pretty right up there. It's just below 10%.

Cris deRitis:                       Well that's not good.

Mark Zandi:                      What do you mean, that's not good?

Cris deRitis:                       You don't want high inflation. You don't want 10% inflation.

Mark Zandi:                      Oh no. But it's, you know what it's indicative of? I think largely the housing market, because when, the biggest component of the CPI is housing. Like a third of the CPI is housing. And if you've got rip roaring housing markets and therefore rapid rent growth, that's going to show up as high inflation in that market. So markets where you got rip roaring housing markets generally have high rates of inflation and vice versa.

Cris deRitis:                       How about Chicago?

Mark Zandi:                      No. No. That's the lowest in the country.

Cris deRitis:                       Really?

Mark Zandi:                      Yeah. Dead in the water. They're losing people like mad. It's a lot of net outflow, remote work.

Cris deRitis:                       I love Chicago. Why would.

Mark Zandi:                      Actually it's not the weakest. The weakest is San Francisco. That's the weakest. And again, same deal. A lot of people leaving San Francisco for.

Cris deRitis:                       Boise.

Mark Zandi:                      Out in the west. Is it Boise? Boise, Boise, Boise.

Ryan Sweet:                      We were corrected on this. I forget.

Mark Zandi:                      I don't remember. Anyway. Okay. You got two more to go, unless you give up.

Cris deRitis:                       LA.

Mark Zandi:                      No, LA's weak. Remember, LA is losing people.

Cris deRitis:                       Yeah, you do. Okay.

Ryan Sweet:                      Yeah. Are there any in the Northeast people? Anything in the Northeast? I would be surprised there.

Cris deRitis:                       All south, Dallas. Dallas. Yeah.

Mark Zandi:                      Dallas, am I speaking into the ether here? Come on.

Ryan Sweet:                      No.

Mark Zandi:                      Areas that are gaining people, not losing people. Actually it also calculates CPIs for broad regions. Right? So you can look at census regions, and then by size of city in the census regions, and the weakest census region in terms of a CPI inflation. And it's not so weak, it's 7%, is New England. So that's the weakest. And Mid-Atlantic where we live in Pennsylvania is pretty darn close. All right. I'm about ready to give up on you guys.

Cris deRitis:                       Dallas. Dallas.

Ryan Sweet:                      Yeah. Chris said Dallas.

Mark Zandi:                      No, no.

Cris deRitis:                       Houston?

Mark Zandi:                      No, no.

Cris deRitis:                       We're just going to name every Metro area in, Galveston.

Mark Zandi:                      Okay. All right, stop, stop. I'm going to put you out of your misery.

Cris deRitis:                       Orlando.

Mark Zandi:                      Tampa.

Cris deRitis:                       Tampa.

Mark Zandi:                      Tampa. Okay. Yeah. Tampa, it's like.

Cris deRitis:                       Everything goes back to Tampa.

Mark Zandi:                      Yeah. Right. And here's the other one, it makes logical sense. Riverside, California. Because Riverside is the county that's east of LA. So all those folks from LA actually.

Cris deRitis:                       Beneficiary.

Mark Zandi:                      Migration. We know this from the Equifax credit fraud data. So we track people's address changes month to month, and the biggest movement of people, county to county, you know what that is? LA to Riverside. That is the largest, in sheer numbers of people. That's the largest number of outflows in the country, from LA to Riverside. So Riverside's been booming and San Francisco is really weak. Chicago's really weak. New York is really weak. DC is weak. When I say weak, it's not really weak. I mean it's 7, 8%. But anyway, I don't know. What'd you think? Think that was a pretty good statistic, or was I?

Ryan Sweet:                      Yeah, that was a good one.

Mark Zandi:                      That was a good one, right? Yeah. Kind of cool. Yeah. And people out there want us to talk about regions, and I thought that was pretty graceful the way I did that. Yeah. Okay. Anyway. Okay. Anything else on the game before we move on?

Cris deRitis:                       Five stars, leave a comment.

Mark Zandi:                      Yes. Right. Okay. Let's talk about monetary policy. A lot to talk about there. Let me begin the conversation this way. Do you think, obviously we've got big economic problems now it's inflation. Inflation is raging. And the Fed is gone on the high alert, laid out a path for much higher interest rates going forward to try to quell slow growth. So we don't, the economy doesn't blow past full employment, and exacerbate the wage and price pressures, and try to get inflation back down. How much of what we're observing today on the inflation front is the Fed's fault? Do you think the Fed has any culpability in these high inflation numbers? Ryan? What do you think?

Ryan Sweet:                      I'll let Chris go first.

Mark Zandi:                      Okay. You're going to do the thumper principle. If you can't say anything nice, you're not going to say anything at all.

Ryan Sweet:                      Yeah. I'm going to start. I'm trying to use the thumper principle.

Mark Zandi:                      By the way, you sent me. Did you send me the clip? Oh, no. One of our clients sent me the clip, it was the movie clip. And I got it, I think I got it exactly right. Anyway, Chris, what do you think? Do they deserve any blame for this mess we're in?

Cris deRitis:                       So it's a good question. I think there's a fair amount of Monday morning quarterbacking going on, right. In retrospect. Sure. We can look back and say, "Oh, well clearly they should have been raising rates, or engaging in quantitative tightening earlier on to fight off the inflation." But if you think back and you put yourself in those months when we had Delta, Omicron, or even further back, if you're thinking about the vaccines, and what was going on there and all the projections of a very extended period of time. I think they did the best they could. And actually, I think we are paying the price of our success in avoiding a depression, with the inflation. So could they have done certain things better? Yes. I never understood the MBS purchases going out for so long with the housing market so hot. So that I would fault them.

Mark Zandi:                      Oh, okay. MBS, mortgage back securities.

Cris deRitis:                       Yeah.

Mark Zandi:                      They were, that's part of their quantitative easing, their bond buying. They bought treasuries, they bought mortgage back securities, that brought down mortgage rates. And you're saying, "Why are you buying those securities and bringing down mortgage rates when the housing market is."

Cris deRitis:                       It's on fire, right.

Mark Zandi:                      On fire, on fire.

Cris deRitis:                       Right. So, okay. Yeah. I can, we can critique and say, there are things that could have done better, certainly. And maybe they could have started the tightening process a bit earlier. But what are we talking about? Three months? Maximum six months? I don't know that you would've started a year ago given the evidence that you had. So I don't know. I still give them a, you want a letter grade? A B plus at least. All right.

Mark Zandi:                      Yeah. Okay. What about you, Ryan? What do you think? I know you're a tough grader. You're a prof, I believe.

Ryan Sweet:                      Yeah. Yeah. I got to do grades this weekend.

Mark Zandi:                      Oh, really?

Ryan Sweet:                      Their final. Yeah. They had to complete their final tonight.

Mark Zandi:                      Do you want to scare your students right now and say anything about how it looks?

Ryan Sweet:                      Yeah. The average grade's going to be less than Chris' grade for the Fed.

Mark Zandi:                      They're quaking now, baby.

Ryan Sweet:                      I'm just kidding, they all did really well.

Mark Zandi:                      They all did well?

Ryan Sweet:                      It was a good group.

Mark Zandi:                      Alrighty.

Cris deRitis:                       Everyone's above average.

Ryan Sweet:                      They get a little bit of the blame, but if I had to rank order, why we have the inflation we have today? I would say pandemic. Fiscal policy, energy, fed. So, I mean, they're lowest on the list of reasons for inflation.

Mark Zandi:                      And what the Fed, because they were just too slow to pivot and start raising rates, or what?

Ryan Sweet:                      No, I think they did quantitative easing for too long. They could have started dialing that back sooner. Maybe get a little bit of tightening.

Mark Zandi:                      But frankly that's on the margin, right?

Ryan Sweet:                      Oh yeah. All this is. Yeah. I don't. That's why the Fed's the lowest on the totem pole. So, I think the number one reason we have inflation is the pandemic, followed by fiscal policy, and then the energy price shock.

Mark Zandi:                      Really, fiscal policy?

Ryan Sweet:                      Yeah. It was too much money all at once. Why do we have supply chain issues? Because the supply chains were stressed, and then the US consumer bought a boatload of things. That just amplified it.

Mark Zandi:                      You haven't been listening to me on this podcast carefully enough.

Ryan Sweet:                      I'm listening.

Mark Zandi:                      All right. Well okay. I'm with you on the pandemic, right? Because that's an echo of supply chains and scrambled labor markets. You wouldn't put the Russian, right now, and with the inflation we're experiencing right now, you wouldn't put higher oil prices and Russian invasion higher than fiscal policy?

Ryan Sweet:                      Oh no. I'm ranking it since.

Mark Zandi:                      Straight up on energy prices. That's adding two, two and half percentage points to inflation.

Ryan Sweet:                      Yeah, I'm doing it overall since.

Mark Zandi:                      No, but right now. Inflation right now.

Ryan Sweet:                      All right. If you want, we can flip flop fiscal policy and energy.

Mark Zandi:                      Now I feel a lot better. Okay. I'm with you on that. Okay. All right. So we have pandemic, we have the Russian invasion, and the surge in oil prices. You say fiscal policy. I don't think that's.

Ryan Sweet:                      Yeah, it's definitely fiscal.

Mark Zandi:                      I'd say the Fed doesn't really deserve any blame here.

Cris deRitis:                       I'm with you.

Mark Zandi:                      I mean, the only thing that is a little cautionary and maybe we'll learn something from this, is when they changed policy and said, "Look, we want." They actually add, they added to their objectives. Like in, from the beginning of time, since they were put on the planet, I believe in 1913. Their objective was low, stable inflation. And ultimately they were added to that was full employment. And then they said, "Okay, the next thing they added was we have to be more inclusive in terms of the growth that we receive." And obviously that is a very laudable objective, that's great. We need to do that. But can monetary policy actually accomplish that in a way that doesn't result in broader problems? And there, I'm not so sure. And I think that might have contributed to the decision to wait longer, to begin to react, end QE earlier and begin to start talking to the marketplace and saying, "Hey, start preparing for rate increases and get long term interest rates up a little bit faster." And they had to take some of the juice out of the housing market economy.

                                             So I don't want to stretch that too far, but I just throw that out there as maybe something they should have, they should be thinking about more carefully. It felt like they slipped that in on the fly. It felt good when they said it and everyone's kind of shaking their head. Yeah. That's what we should do, but really can the Fed actually accomplish all of those objectives in a reasonable way? And I'm not so sure. I worry.

Ryan Sweet:                      Not with their primary tool, the Fed funds rate. That's a blunt instrument.

Mark Zandi:                      Yes. They got one tool really? Right. Maybe two. Now they can buy, well, I view QE just as an extension of normal monetary policy.

Ryan Sweet:                      I'm just, yeah. It's the new normal now.

Mark Zandi:                      Yeah. So you got one tool and now you've got three objectives, that becomes goals. That becomes pretty tough.

Ryan Sweet:                      Well, actually.

Cris deRitis:                       Well, they've got other tools too, right? There's regulation. They can.

Mark Zandi:                      Yeah. Okay. I'm all for that. Okay. Yeah. I'm all for that. That goes to things like CRA, and inclusive credit, extending credit in the banking system, that kind of stuff. But in terms of monetary, the conduct of monetary policy, which is what we're talking about in terms of inflation.

Cris deRitis:                       Do you think that was a consideration, this cycle?

Ryan Sweet:                      It was in all their speeches. It was like a talking point.

Cris deRitis:                       I don't think that was the primary. I think it was really.

Mark Zandi:                      Oh no, not primary. Definitely not primary.

Cris deRitis:                       It was all about the pandemic for me.

Mark Zandi:                      Well, here's the other thing that, and I wonder. So they changed their framework and said, "Look, we're not targeting 2% inflation at any point in time, we're targeting 2%, and this is the core consumer expenditure deflator. Which is a lower rate of inflation than the CPI. But we're targeting core PCE at 2%, not at a point in time, but through the business cycle." So that means if I'm suffering through low inflation below two, for an extended period, which was happening for a decade after the financial crisis, I need to be above two for an extended period. I don't think that's a mistake. I actually think that's good policy.

Cris deRitis:                       I agree.

Mark Zandi:                      Yeah. Okay. All right.

Cris deRitis:                       Yeah. I mean, I think they just got dealt bad luck. I mean, inflation was peaking, and then the Delta variant hit and then supply chains just went AWOL, and inflation accelerated.

Mark Zandi:                      Yeah. And they could not predict Delta coming along and knocking out global supply chains, and stopping vehicle production, and causing vehicle prices going north. You can't, everyone thought with the vaccines, this thing was over, or close to it. Certainly didn't envision these supply chain issues. And then no way that you can have in your thinking, Russian invasion of Ukraine. Right. That just was, you can't do that. Can't be part of your thinking. And so those two things, those two massive supply shocks came along very surprising, and they've had to adjust. So I don't, I just have a very difficult time blaming, putting any real blame on them for.

Ryan Sweet:                      I mean, in hindsight.

Cris deRitis:                       What do you think of my MBS argument?

Ryan Sweet:                      I'm with you on that.

Mark Zandi:                      I'm not sure. I mean, I think a key channel, and we're going to get to this in a second. But a key channel through which monetary policy affects economic activities through asset prices, right? You lower interest rates, that causes stock prices to rise, that causes housing values to rise. So they're using that as a real tool, lever to get the economy growing more quickly and ensure that we don't go into recession. And it also is very beneficial, because it helps with refinancing activity, right? Because you've got rates so low down to 3%, below 3% at one point, I think it got down to 2.65 on a 30 year fixed. Everyone's in the money. Everyone can re-fi. And they can lock in these low interest rates. Which by the way, does call into question the efficacy of higher interest rates going forward.

                                             But anyway, we'll come back to that. But I don't know, maybe, maybe they went overboard on the MBS. It does complicate things now, because I think the MBS they purchased is MBS nobody wants to buy. Makes sense. When you're in a crisis, you buy the stuff nobody wants to buy. That's stuff that has higher prepayment rates, right. And you don't, if you're an investor, you don't want a high prepayment rate. So selling that's going to be more difficult. And so it makes it more difficult for them to get out of this, in terms of quantitative tightening. So yeah, maybe you're right on that one. I give you, I have to think about that some more, but I think it's reasonable. All right. Well, I think we've come to the conclusion that the Fed may be on the list of culprits here, but way at the bottom of the list, and debatable whether this should be on the list at all.

                                             Okay. All right. Let's turn to looking forward. What is the appropriate monetary policy? And to get a sense of that, what is the market now expecting the Fed do? And II think this is important. Because I don't think I've ever, I've been following the Fed for a long time, 30 years. I don't think I've ever remembered a time when the Fed has been so explicit about what it wants to do with interest rates going forward. It's like, it feels like it's crystal clear. So what is embedded in market expectations is probably a very good representation of the reality of where the Fed wants to take the economy at this point. So let me, Ryan turn back to you. What's what are the markets saying? What are future's market saying about future monetary policy?

Ryan Sweet:                      Yeah. So based on Fed funds futures, they have two more aggressive rate hikes by the Federal Reserve. So 50 basis points in June, another 50 basis points in July. And then they're followed by more modest 25 basis points increments at each of the following meetings for the rest of the year. So futures expect the Fed funds rates to be close to the Fed's estimate of the neutral fed funds rate, where interest rates are neither stimulatory or contractionary for the economy by the end of the year, which is around two, two and a half percent. But then they expect the Fed to have to do even more heavy lifting and go even higher. So they have the Fed fund rate peaking at 3.1%, this tightening cycle. Then the Fed pauses for an extended period of time, and then starts cutting rates in early 2024, or late 2023. So markets think they're going to, to Chris's points earlier, slam on the brakes, and then try to navigate a soft landing by easing down the road.

Mark Zandi:                      Oh, I didn't realize that. So if you look at future's markets out into the distance into 20, you said 2024 is when the markets expect the fed to start cutting rates? Oh, okay. Oh, that's interesting. Okay. So our forecast isn't quite as aggressive. We have the funds rate. We have a half point increase in June. We have a half point increase in July. We have the funds rate at the equilibrium, our star of about two and a half percent by the end of the year. And just to make that clear, our star equilibrium is kind of what people think, what the Fed thinks, what we think is consistent with an economy that is at full employment, growing at potential with inflation at target. Of course, we have none of that. So we're saying we're going to go above that. But in our forecast, we have the peak of rates, the so-called terminal rate at 2.75%. So just a quarter point above the equilibrium rate. And then it comes in a little bit in '24 and '25, comes back down to the equilibrium rate, which is about two and a half percent. So we're about, I think we're about 50 basis points. The terminal rate in our forecast is about 50, at least a quarter point, 50 basis points, a half a point below the market expectations. Did I have that right? Roughly right?

Ryan Sweet:                      Right. Yeah, exactly right.

Mark Zandi:                      Okay. What do you think of that forecast, do you think? Well, that's it. What do you think of that forecast? That's our forecast, by the way. That's our baseline outlook for the Federal Reserve, which is different from what the market thinks, different from what the Fed wants the market to think. So we're a little bit out of consensus here, right?

Ryan Sweet:                      Yeah. But that's where we should be. Because I mean, the market's doing some of the Fed's work for them.

Cris deRitis:                       Yeah.

Ryan Sweet:                      Financial market conditions have tightened quite substantially recently. That reduces the need for some rate hikes down the road. So I think being below where the consensus expects us to be is where we should be. And I think that's what the Fed's going to do.

Mark Zandi:                      You think, ultimately, that the economy's going to slow, inflation's going to soften, inflation expectations are going to normalize to a sufficient degree, that 2.75 terminal rate is good enough. That we don't need to go higher than that.

Ryan Sweet:                      No, I don't think they need to go any higher than that.

Mark Zandi:                      But you do think that that path is going to result in recession?

Ryan Sweet:                      Yeah. I mean, one reason why I don't think we might risk the forecast, I would say are actually weighted towards fewer rate hikes. Cause I think the Fed's going to break something before we get to 2.75%. I mean, just look at what's going on now. I mean, financial market conditions are going to tighten further, the Fed put, the Powell put, which is this idea that stocks can only fall so much before the Fed rides in on their white horse and saves the day, is a lot lower than what I think people are anticipating, I mean, Powell wants financial market conditions to continue to tighten. So I think he's getting what he wants. And we'll just see if the economy can weather it.

Mark Zandi:                      Yeah. Okay. So just because I assumed a lot. There's folks out there that don't know that you, we've had discussions in the past on this podcast about recession risks. And you have said in previous episodes, last week maybe, certainly when Nouriel Roubini was on, you were feasting on his darkness. You were all in, you put the recession odds at what? At 65%. I think over the next...

Ryan Sweet:                      I think it was 75.

Cris deRitis:                       I think it was 75.

Mark Zandi:                      75%. Okay.

Ryan Sweet:                      So before you start jumping off the thumper principle, did you see that, I think was it Cris' LinkedIn poll asked who do you agree with? My recession odds, 75%, Chris's which is 50%, which is right down the middle of the fairway. And then your 35%.

Mark Zandi:                      Mine was.

Cris deRitis:                       35.

Mark Zandi:                      Well, no. Is it 30? No. Over the next couple of years.

Cris deRitis:                       I think 40 over 18 months.

Mark Zandi:                      All right, fair enough. I'm at the bottom. Yeah.

Cris deRitis:                       Okay. But the majority of the people or with me.

Mark Zandi:                      Oh, that means you're doomed. Yeah. You're doomed. The consensus is always wrong.

Cris deRitis:                       By a sample.

Mark Zandi:                      How many people responded, by the way?

Ryan Sweet:                      Oh, that's not important. That is not important.

Mark Zandi:                      All right.

Cris deRitis:                       There were six people that responded.

Mark Zandi:                      How many times did you respond to this survey?

Ryan Sweet:                      Once.

Mark Zandi:                      Oh my gosh.

Cris deRitis:                       Because I was afraid I was going to be the lowest one. I was like, oh, I got to bump this up.

Mark Zandi:                      That's rude. But at least you're honest. That's a very [crosstalk 00:55:06]. I'm not sure I would've fessed up to that, but. Okay. All right, Cris, what do you think? You see our forecast. It's 2.75 terminal rate, 2.75 terminal rate, the market. Just to be sure, Ryan, is the terminal rate for the market 3.25, or 3.5?

Ryan Sweet:                      3.1.

Mark Zandi:                      Oh, it's only 3.1. Okay. We're not even that far off. Okay. All right. I thought it was higher than that. Okay. Cris, what do you think of our forecast?

Cris deRitis:                       Yeah, I think that's right. It's reasonable to me. I think actually the hiking will be front loaded. Right. So I think we'll get 50 in June, July.

Mark Zandi:                      Yeah.

Cris deRitis:                       And then easing off. But yeah, the contours in terms of going to 2.50, 2.75 by this time next year, I think that makes sense.

Mark Zandi:                      Okay. So you guys, what you guys are saying, I believe. Is that financial conditions, and I'm going to define that in a second. But financial conditions are consistent, already consistent with an economy that's going to slow, and inflation's going to moderate. We don't need to see stock prices fall anymore. We don't need to see mortgage interest rates rise anymore. We don't need to see corporate spreads wide, and we don't need to see the value of the dollar increase. By the way, those are all different measures of financial conditions. And this is important because one of the key ways that monetary policy interest rate changes impact the real economy, is through first through its impact on financial conditions, on financial markets, on lending financial institutions. So stock prices, mortgage yields, corporate interest rate, interest rates on corporate bonds, the value of the dollar, lending standards, all those kinds of things. So you're saying, you feel like where these markets are now, where the stock market is now, where the dollar is now, that's consistent with where monetary policy should be. We don't need any more corrections in these markets. Is that right? Do I have that roughly right?

Cris deRitis:                       Yeah.

Mark Zandi:                      Okay.

Cris deRitis:                       Yeah. Abstracting from some volatility, right. You could certainly see markets go up and down a bit here, but yeah.

Mark Zandi:                      We're pretty much where we need to be.

Ryan Sweet:                      One thing we should probably debate, not necessarily on the podcast, but for the next forecast is I think there's a reasonable scenario where the Fed gets rates up to their estimate of the neutral Fed funds rate, which is currently 2.4%, and then they pause, whether it's six months, nine months, just to kind of reassess. I mean, they've done that in the past. Like kind of, let's make sure we didn't break anything before we go even higher.

Mark Zandi:                      Right, right. Yeah, that kind of makes sense. That kind of makes sense. So they 50 basis points next month, 50 basis points, half a point the following month, get it up to the two and a half. I'm using two and a half because it's just rounding. And that's where it was before last meeting. Although by the way, that might come down lower, because we have two new board members coming on, I believe.

Ryan Sweet:                      That's right.

Cris deRitis:                       Correct. And if they join with like what the consensus is among the Fed governors for what the neutral Fed fund rate is, it could drop to 2.1.

Mark Zandi:                      Oh really? That low. Okay. Very interesting. Okay. I want to come back to that in a second. But you're saying that, what were you saying about that? I just.

Cris deRitis:                       I don't know. Oh, they would pause.

Mark Zandi:                      They would pause. They would pause, right. Yeah. Which makes a lot of sense. Okay. So I mentioned number of measures of financial conditions, equity prices, mortgage yields, corporate bond yields, value of the dollar, lending standards. Am I missing anything? Is that an exhaustive list? Or are there anything else that would go into, I know there's different financial condition indices that are created. Those are kind of the standard affair, right?

Cris deRitis:                       Cryptocurrency. Yeah.

Mark Zandi:                      Oh, cryptocurrency, right. Yeah. Well yeah. That's broken too. Right? That came down quite a bit.

Cris deRitis:                       Yeah.

Mark Zandi:                      Okay.

Cris deRitis:                       That's a good sign, right?

Ryan Sweet:                      Yeah. Real interest rates.

Mark Zandi:                      Yeah. So let's talk. So there are other measures that are important in trying to understand if monetary policy, how it's going to affect the real economy and growth. And one other way people look at it, well, we mentioned financial conditions. The other is real interest, real short term interest rates. So take the short term interest rate, the Fed pegs the funds rate at, and then subtract, I suppose you should subtract inflation expectations, right?

Cris deRitis:                       Yes.

Ryan Sweet:                      Yeah.

Mark Zandi:                      Right. To get to the real yield. Right now, if we get to the terminal rate of two and a half, inflation expectations certainly kind of one year, five year forwards, or five year, five year break evens is higher than that, right?

Cris deRitis:                       Yep.

Mark Zandi:                      So it's closer to two and a half to three, depending on the measure. So that means real yields even when we're at the equilibrium rate, the R star will be negative, right. Two and a half less inflation expectations. You're in negative territory. That doesn't feel like that's enough, right. To slow the economy's growth rate. How do you think about that?

Cris deRitis:                       I think we're arguing that expectations are going to come in, right.

Mark Zandi:                      Okay. Oh, so you think expectations are going to come in below two and a half, come back down into that two to two and a half percent range. So we get a positive real yield. Still very low though, in the grand scheme of things.

Cris deRitis:                       Yeah.

Mark Zandi:                      Yeah. Okay. All right. Let me ask you other question about this while we're on the topic. Why is 2.4%, 2.5%, 2.1%. What makes that so magical? I mean, how are people getting at that number? I mean, I've got my way of getting to it, and I don't really want to go into it because it's like a pretty long explanation. But do you have a sense of that? I mean, why do people think that's the equilibrium yield interest rate? Any sense of it, Chris or Ryan?

Cris deRitis:                       That's where the IS curve crosses potentially.

Mark Zandi:                      Okay. There you go. That, okay. That explains it.

Ryan Sweet:                      You got to draw it out now.

Mark Zandi:                      Yeah. Okay. I get it in theory. But why empirically is that where it's landing? Why do people think that's where it's landing? Is there anything rooted in our empirical world that says that's the right number? I mean, why did we settle on that?

Cris deRitis:                       Well, there's some econometric models, right? The, well, I can't remember, but Ryan will know, LW, HLW. W

Ryan Sweet:                      LIBOC Williams.

Mark Zandi:                      Yeah. But they Edison that, they don't even publish that anymore.

Ryan Sweet:                      No, they still do.

Mark Zandi:                      Do they? I thought they stopped. I thought they got broken and they weren't publishing it anymore.

Cris deRitis:                       Yeah. I thought they stopped during the pandemic. But if you go before the pandemic, right.

Mark Zandi:                      Yeah. But it wasn't, [crosstalk 01:01:44] was a lot lower than two and a half. Right?

Ryan Sweet:                      Yeah.

Mark Zandi:                      A lot lower than two and a half.

Cris deRitis:                       I thought it was two and a half. I thought it was.

Mark Zandi:                      All right. Okay. That's the best explanation we can come up with. Is this kind of number that everyone says, "Okay, it's two and a half." But no one really knows why it's two and a half. Do you want me to explain to you why I think it's 2.5?

Ryan Sweet:                      It's kind of similar with inflation. Why does the Fed aim for 2% inflation?

Mark Zandi:                      Well, that, I mean, I think that's because at 2%, no major part of the economy is going to be suffering deflation. Because once you start suffering deflation, that's pretty hard to manage through. And you're going to hurt that industry, that part of the economy. But if you keep it at two, then no people, some parts of the economy will have less inflation than that, but it's not deflation. It's still positive inflation, right?

Cris deRitis:                       Why not three?

Mark Zandi:                      And I don't know if two percent's the right number. It could be higher. It should be higher. I think it should be higher than that but.

Ryan Sweet:                      I agree.

Mark Zandi:                      But that's the logic, I think the logic behind it. But what's the logic behind two and a half? Okay.

Cris deRitis:                       I mean definitionally, that's the rate that they think the Fed funds rate should be with timing full employment and stable prices.

Mark Zandi:                      Okay. How did you get there empirically? How did you get to two point a half percent?

Cris deRitis:                       You want me to explain how the summary of economic projections?

Mark Zandi:                      No, no. You're playing coy with me. You're playing coy. No, I, yeah. Oh, okay. All right. Here. Let me, it's kind of like .

Cris deRitis:                       It's kind of like naru.

Mark Zandi:                      Full employment. This is how I, we have two and a half percent in our forecast. Right? So you're saying, "Well, Mark, why is it two and a half? What is the two and a half?" Okay. I have an anchor for the teen year treasury yield. In the long run. The tenure treasury yield should equal the economy's nominal potential growth rate. I think that's theoretically and empirically has held true. And nominal potential growth is 4% when the economy is at full employment, and growing at its potential, inflation is at two. It's 2% real growth. That's 2% inflation. 4% ten year ten-year Treasury yield. Then I say, in the long run through the business cycles, the spread between the 10 year and the Fed funds rate is 150 basis points. And you can go calculate. So I take four, I minus one and a half, I get to two and a half percent. That's how I get to two and half percent. But I don't know another way of getting there, and why other people think it's two and half percent. Because I don't think very many people have kind of that framework in their minds when they're thinking about the rate. Does that make sense though? The way I described it, would you buy into that?

Cris deRitis:                       It does, but isn't it total logical? So the Fed set their Fed funds rate previously at this magical number. And now you're saying, "Oh, well, the spread to the magical number is 150, so."

Mark Zandi:                      Well, that's what, yeah. What's magical, what's the stake in the ground, what is economically determined is that long term interest rate. And you do need some difference between, because there's lots of reasons why there's a difference between short and long rates, and that inflation expectations, volatility of inflation, volatility of real economic growth. And when you look at it historically, that is roughly 150 basis points, or 1.5 percentage points over through the business cycle. And that's how you get to two and half percent. Anyway, I know I belabor this, because it bothers me to no end that we kind of just take this as given, but I'm not sure why. I'm not sure why.

Cris deRitis:                       Well, it's like all these theoretical concepts. So what is the full employment? Right? What's Naru? What's potential GDP?

Mark Zandi:                      But they're rooted in some empirical, there's some empirical basis to it, right?

Cris deRitis:                       Well, they're rooted in some theory. Primarily, and then we try to come up with some empirical basis, but it's our history is limited. Right. So.

Mark Zandi:                      So you're saying I shouldn't be so annoyed that no one can explain to me why it's two and a half percent?

Ryan Sweet:                      But it also changes. So if you look at the Fed's media projection. Yeah, so throughout the last expansion\, we started north of probably four, got down closer to three. So.

Mark Zandi:                      Yeah, but I, but that empirical rule that the 10 year should equal nominal GDP. That's over a long period of time. There can be long periods of time where they don't hold for lots of different reasons, which I think I've talked about in previous podcasts, but I won't do that here. Okay. All right. I don't want to belabor that. I do want to ask this though. And this is also bothering me about monetary policy, the appropriate monetary policy in our forecast.

                                             Do you think there are things that are idiosyncratic to the situation that we're in, that will make the relationship between monetary policy and economic growth that has historically held on average, different this time around? Meaning less sensitive, the economy's going to be less sensitive to monetary policy, or more sensitive to monetary policy? Now, if I do that in my own, I'm not going to say anything more than say when I think about that question, I land in a place that says the economy is going to be less sensitive to economic activity. Therefore the Fed is going to have to raise rates more aggressively than we think not 2.75, not 3.1, not three and a half, but something higher than that to get the economy to slow. So what do you think of that? Any views on that? And I can go through my reasoning around that, but I'm just curious if you've got a view on that.

Cris deRitis:                       I mean, the one that jumps out is that, the share of more like just debt outstanding that's fixed is a lot higher now, essentially.

Mark Zandi:                      Yeah, exactly. So.

Ryan Sweet:                      That's the first one that I always go to.

Mark Zandi:                      Like, like debt service for household sector. That's the share of income that you're devoting to principal and interest on debt to remain current on it is pretty close to a record low. And it looks like it's going to be very hard for that thing to rise because everyone's locked in, through the refinancing waves they got into 30 and 15 year mortgages. So that feels like debt service isn't going to rise very quickly here, and that obviously makes it more difficult for the Fed to slow the economy.

Ryan Sweet:                      And a lot of corporate debts fixed.

Mark Zandi:                      Is that true? I don't know that as well. Is that right?

Ryan Sweet:                      It's more than it was in past decades.

Mark Zandi:                      Is that right? Can we get, I haven't seen that data. Do you have that data?

Ryan Sweet:                      There's still a lot of refinancing that has to happen just naturally, but yeah. Businesses aren't taken out these variable rates, so.

Mark Zandi:                      Yeah, if you've got, I'd love to see that data. I haven't seen that data, but what do you think Cris? What do you think, Cris, do you think the economy's more or less sensitive or is it all a wash? I'm just splitting hairs here.

Cris deRitis:                       No, I agree with you. I was going to go with the moral hazard argument. Because we've put all this support into the economy now through the last two cycles, that have been kind of along the lines of the Powell Put that consumers, investors are going to be expecting it. Right? So the sensitivity then is going to be reduced. Right? They have to be even more aggressive to really send the message that we're on the case.

Mark Zandi:                      Oh, everyone thinks, everyone thinks, oh, you're going to, you're.

Cris deRitis:                       You're going to bail me out.

Mark Zandi:                      You can't tolerate any economic pain. I am not worried, things start going off the rails. You're going to cut interest rates and bail me out. Therefore, I'm not going to stop anything that I'm doing. I'm not going to curtail expansion plans. I'm going to keep hiring, that kind of thing. That's interesting. Yeah. What do you think of that explanation, Ryan?

Cris deRitis:                       He's not buying it.

Mark Zandi:                      He's not?

Cris deRitis:                       Oh, you are. Okay.

Ryan Sweet:                      Think about it the other way around. So with interest rates so low, when there's any sign of economic weakness or looming recession, they're much more, they don't wait. They take it down to zero as fast as they can. And then they restart QE. So I think on the other side, the flip side, it works the same way.

Mark Zandi:                      Yeah. Here's a couple, here's a few other things that I think make the economy feel like it's a little less sensitive to what the Fed has in mind. Pent up vehicle demand. People couldn't buy cars because of the pandemic supply chain, disruptions, lack of inventory. They still want the cars. So and when those cars become available as supply chains iron out, and there's more production, we'll see vehicle sales increase. Even though historically at this point when the Fed's tightening monetary policy, and auto lending rates are rising, it puts downward pressure on vehicle sales. So instead of vehicle sales falling like they typically do, they're going to rise. What do you think of that explanation, or that theory?

Ryan Sweet:                      Well, don't you think affordability is going to continue to erode? Like as the higher rates go up, and if new vehicle prices don't fall as fast as we think then yeah, you may want a car, but.

Mark Zandi:                      But we know there's pent up demand there. We know there's latent pent up demand. People want to buy cars, right?

Ryan Sweet:                      Yeah. They want to buy a car. Yeah. There's a difference between willing and able to buy a car.

Mark Zandi:                      Yeah. Okay. So you think that they just won't be able to purchase the car? Well, I'm assuming you get supply chains ironing out more production, more inventory prices start coming in. And that the price declines, obviously auto loan rates are going up. But the net of all that may be, also gasoline prices are going to come in, if everything sticks to script. But we know that people wanted to buy cars and haven't been able to buy cars, and some people will need to buy cars, right?

Ryan Sweet:                      Yes.

Mark Zandi:                      Regardless. Okay. How about this? Home building? There's a shortage of homes, a span of shortage of homes. We pegged this shortfall, we've talked about this many times, 1.5, 1.6 million housing units. That's what's the shortfall in new housing construction relative to underlying demand. Maybe home building doesn't, and generally in most cycles you raise mortgage rates, housing gets crushed and home building gets hammered, right? And that's the principle way that rates affects the housing markets in the economy. Because really home sales fall, but that's no big deal to economic output. It's really about home building. That's what really matters. But maybe home building does not fall, or doesn't fall nearly to the same degree because you've got all this pent up kind of vacancy rates are very low. Rents are very high. A lot of incentives to build. What do you think, Cris?

Cris deRitis:                       Yeah, I think there's some, I think it relates to the auto argument. So it might smooth things out. I don't know that that trend gets reversed though. Right? Meaning I don't expect home building to remain at its level regardless of what happens to interest rates. Right. But maybe it doesn't decline as much as you otherwise would expect. So.

Mark Zandi:                      Cris, we have a bet on this one. Don't we?

Cris deRitis:                       We do. You do.

Mark Zandi:                      Right.

Cris deRitis:                       I'm winning, but.

Mark Zandi:                      You think you're winning, in your mind you're winning. In your mind.

Cris deRitis:                       Oh I forgot, revisions. Yes. Yeah.

Ryan Sweet:                      Mark's going to hang onto that revision.

Mark Zandi:                      We're only three months in, what are you talking about I'm winning three months in? Geez, Louise. What was I going to say?

Cris deRitis:                       Three months in, that's a quarter of the way there.

Mark Zandi:                      Okay. How about this one? How about excess savings? All the cash sitting in people's checking accounts because of COVID, sheltering in place, all the government support, and high income households, they're sitting on a lot of cash. What do we estimate the total excess saving at? $2.6 Trillion over 10% of GDP. Right? Most of that's high income households. So stock market comes down, historically that had an effect on spending, right? Because I'm less wealthy. I'm going to spend less, there's a wealth effect. Negative wealth. Maybe there's no wealth effect because, "Okay. Stock prices are down. But I still got a lot of cash sitting in the bank account. I'm going to keep on spending." What do you think?

Cris deRitis:                       I think the psychological piece is there.

Mark Zandi:                      You do.

Cris deRitis:                       Yeah. Yeah.

Ryan Sweet:                      But I'm with you though. I think it cushions the blow from yeah. Yeah. Dropping stock market. Help cushion the blow to the economy from higher gasoline prices. But yeah, when you're seeing market moves like this, sentiment.

Mark Zandi:                      This is all to go to say this. I'm not sure in our, I believe in our forecast. I'm nervous about it.

Ryan Sweet:                      I don't know if you want to say that publicly.

Cris deRitis:                       How about, let me push back. How about some spent up, right. We saw durable goods spending go through the roof during the pandemic. How about some spent up demand on, I don't know, power washers, and Pelotons and every, all the other durable goods out there. Right. So there's some counter effect here, right? Yeah. But we've already pulled forward a lot of the spending

Mark Zandi:                      True. But overall consumer spending all in, goods, services, is precisely where it should be. If there have been no pandemic, it's not like there's any big pent up or spent up demand here. Generally coming into recessions, you got a lot of spent up demand. The people have spent well beyond their means, saving rates are low. Debt loads are high. You don't, there's no cash. People have run out of cash. They've levered up. You don't see any of that. You don't see any of that.

Cris deRitis:                       Yeah. But the distribution's all out of whack. Right?

Mark Zandi:                      What do mean?

Cris deRitis:                       Meaning that they've already done their durable goods spending. Right. So going forward, they're not going to spend, are you arguing that they're going to double up on services? Take two trips?

Mark Zandi:                      Yeah. That's what I'm arguing. They're going to go travel. They're going to go to restaurants. They're going to go to ball games. Yeah, that's exactly.

Cris deRitis:                       You're saying beyond the trend, right.

Mark Zandi:                      Yes. Beyond trend. There's spent up demand for non-vehicle goods. A lot of pent up demand for vehicles, which is very rate sensitive. And pent up demand for services, healthcare, travel, everything on the service side that I couldn't do in the pandemic.

Cris deRitis:                       So Ryan's going to go eat two dinners tonight instead of one.

Ryan Sweet:                      Right. That's what I was about to say. I don't know what's going on in the Zandi household.

Mark Zandi:                      No, no, no, no, no. It's higher, I'm not going to Applebee's. I'm going to go to, wherever you go, that's higher end, on the beach or something. I don't know, but don't worry. I can figure out how to spend that money. I can double and I get three.

Cris deRitis:                       Even with 15% inflation.

Mark Zandi:                      I get dessert I didn't get before. I get two cocktails, not one. Maybe three, more likely two, but I'm just saying. Anyway. All right. So here's what I'm saying. I'm just throwing it out there. I like what you're saying, Ryan, about they take it up to that neutral rate. They take it there really fast. So by the end of the year, we're there, two and a half percent. They stop, they take a look around. And then they figure out maybe this economy's not slowing as much as I thought it was slowing. And then they, it's not 2.75. It's something measurable higher than that. And obviously that becomes even trickier for the economy going forward. But anyway, I think we covered a lot of ground. Anything I missed on monetary policy you wanted to say? That you think.

Cris deRitis:                       Under that scenario, is that recession then?

Mark Zandi:                      I think that it lowers the odds of recession in the near term, right, in the next 12, maybe 18 months. But it raises the odds of recession a little bit further down the road as you move into the mid part of the decade. Yeah. That's what it would do. Yeah.

Cris deRitis:                       So really it's bimodal again. Either we're going to skate through this, skin of the teeth, or we're going to recession, right? There's not a whole lot of in between.

Mark Zandi:                      Or maybe the Fed kind of looks through everything I just said, and they just do what the market's thinking. They're going to three and a quarter, three and a half, it's steadily by.

Ryan Sweet:                      That'd be a mistake.

Mark Zandi:                      Yeah. But maybe that's what they're doing, they will do. I don't know. But it's obviously pretty tricky here. Okay. All right. I think that was a pretty fulsome discussion around the Fed. I think at the end of the day, we decided not to change our forecast though. Well, we'll have to.

Ryan Sweet:                      Okay. We got some time. I'll talk you into the pause.

Mark Zandi:                      Oh, the pause. Right? We got to get the pause. Well, it's actually, if you look at the forecast, it's not, I only go, we only go a quarter point above the two and a half. It feels like, it's a quasi-pause. I'm not too far off from what you're saying, but yeah. Okay. All right. Very good. So if you want to follow Ryan's memes, and his trash talking/trolling and my non-response, you can do that on Twitter. What's your handle, Ryan?

Ryan Sweet:                      @RealTime_econ

Mark Zandi:                      Very good. And I'm @MarkZandi. And Chris is on LinkedIn. Not on Twitter. Anything else I should be saying to the folks out there? Oh, respond to that survey about recession probabilities. That would be good. We'll call, because we're going to do a special podcast. Evergreen podcast, we call them evergreens, on Monday around recession. So be on the watch out for that. And we'll talk about the recession probability side. So with that, we will call it a podcast. See ya next week. Take care now.