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Fed Needs to Get Out of the Way of Growth: Economist Sahm

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Bloomberg Dec 2, 2024 23:00 · 12.4k Views

Claudia Sahm, chief economist at New Century Advisors, sees the US economy experiencing “a real pickup in growth” and says policymakers must focus on preserving the “productivity renaissance” that is feeding US growth.

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Transcript

  • 00:00 I think we should start there.
  • 00:01 The supply side of the economy
  • 00:03 and how much of the hard work that's been doing so far
  • 00:05 over the course of 2024 and why it leaves the Federal Reserve as it thinks about 2025 and beyond, right?
  • 00:13 Well, it is so important that we don't just look at a GDP number and say, oh, it's almost 3%
  • 00:18 and and move along.
  • 00:20 We need to stop and eat what is going on.
  • 00:21 Why is growth so good?
  • 00:23 Are we overheating?
  • 00:23 If we're overheating, then the Fed steps in, they raise rates, they cool things down.
  • 00:27 That is not what's happening.
  • 00:29 We have seen a real pickup in growth.
  • 00:32 Remember, we were promised a recession
  • 00:35 and we got an acceleration
  • 00:36 and we've seen for two years running now almost 3% growth.
  • 00:40 And a lot of that, if you look under the hood is coming from productivity.
  • 00:45 And that is the Holy Grail of economic prosperity.
  • 00:48 And we should be spending a lot of time trying to figure out exactly how did we get to this place that we've seen a pick up in growth.
  • 00:54 And this is something the US is seeing and our pure countries are not.
  • 00:57 So it's a really important question to dig into,
  • 00:59 Claudia, given that people believe in yourself as one, as one of them,
  • 01:03 that this is becoming a a productivity story.
  • 01:06 Does this mean that from your perspective it's not inflationary, that it doesn't necessarily preclude the Federal Reserve from cutting in a couple weeks time,
  • 01:15 right?
  • 01:15 Inflation happens when demand is outstripping supply.
  • 01:19 That's, that's the one O 1.
  • 01:20 There's more to it, but in general, if we have too much demand and not enough supply,
  • 01:24 then we're going to get price increases to kind of, you know, make the market work.
  • 01:28 But if we can get more supply in there, and that is that is the lesson.
  • 01:31 We did not get the big disinflation without a recession, without this supply side help.
  • 01:37 And we got it not just from supply chains.
  • 01:38 We got it from workers coming online.
  • 01:40 And we also got this kick of getting people in more productive positions, getting more capital in their hands to do their jobs.
  • 01:48 And and like that was such the way to solve the problem of the high inflation.
  • 01:52 Well, that's not the only problem
  • 01:54 that a good supply side solves.
  • 01:56 It also can really help us thinking about growth over the long term.
  • 01:59 But we got to get out of our head that it's like all
  • 02:03 growth and the Fed does interest rates, like productivity is a really tough nut to crack.
  • 02:07 And it actually is not primarily about the Federal Reserve.
  • 02:10 Claudia, how does Fed Chair Jay Powell message this at a time when he is going to be speaking on Wednesday at a moderated conversation ahead of a time where inevitably, as we've been hearing from a host of analysts, the Fed is likely to revise a lot of its projections
  • 02:25 with inflation going up, with unemployment going down, down and with growth also going up.
  • 02:30 Given the fact that you have seen those upside surprises to growth.
  • 02:35 Paul has made a real effort on this.
  • 02:38 And I would just kind of tell him to, you know, double down on it.
  • 02:40 He said multiple times the Fed doesn't have a growth mandate,
  • 02:43 but that's a kind of a wishy washy say way of saying that sometimes when growth is high, the Fed needs to step in and sometimes when growth is high, the Fed needs to get out of the way.
  • 02:51 And this is one of those times where the Fed needs to get out of the way because it is there's productivity there
  • 02:57 and high interest rates being
  • 02:59 unnecessarily restrictive on the economy relative the dual mandate,
  • 03:03 it has cost this high growth is not guaranteed.
  • 03:07 Unfortunately.
  • 03:08 That is the thing about productivity that we have learned from the past is,
  • 03:12 yes, sometimes we get it and holding on to it is what is really hard.
  • 03:15 So like we should not be taking this lightly that we've got this kind of growth pick up this productivity renaissance.
  • 03:21 The question should be what can all policy makers, and frankly, a lot of these levers are not with the Fed, they're with fiscal
  • 03:27 or other government authorities.
  • 03:28 But like what levers can we pull to keep this going?
  • 03:31 And Powell continuing to go back to his dual mandate of the price stability and the labor market.
  • 03:37 The maximum employment I think is important because the more we've dug into and research with this productivity boom,
  • 03:43 it goes back to the labor market.
  • 03:45 The dynamic labor market is very much tied back to the dynamic economy, the higher productivity.