Bill Nelson on How the Fed Fell Behind the Curve

Bill Nelson is the Chief Economist and an Executive Vice President at the Bank Policy Institute. Bill previously was a deputy director at the Division of Monetary Affairs at the Federal Reserve Board where his responsibilities included monetary policy analysis, discount window policy analysis, and financial institution supervision. He also worked closely with the BIS on the design of liquidity regulation. Bill joins David on Macro Musings to discuss the Fed's balance sheet, its reduction plans and how the Fed fell behind the curve. Specifically, David and Bill get into whether the Fed regretted its premature tightening period from 2015 to 2018, how the Fed’s focus on the baseline outlook left it not resilient to alternative developments, how concerns over another taper tantrum impacted the Fed’s decision-making, the Fed’s handling of its FAIT framework, and much more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Bill, welcome back to the show.

Bill Nelson: Thanks for having me, David, it's always fun to talk to you.

Beckworth: Well, it's great to have you on. And we just recently saw each other in-person. We were both at the Hoover Monetary Policy Conference. It was great to have an in-person conference with Fed officials with people in this policy space. And thank you to John Taylor, John Cochrane, and Michael Bordo were organizing such a great conference. A lot of fun things were happening there. A lot of interesting discussions, and maybe later we can get to some of those items. One thing though, Bill that I didn't see a lot of discussion on at the conference was the Fed's balance sheet. And I want to spend some time with you on that. And just to help motivate that, yesterday there was another conference that I watched, and this was online, I wasn't there, but the Atlanta Fed had held its Financial Markets Conference at Amelia Island. They had a really interesting panel discussion on the Fed's balance sheet included President Mester from the Cleveland Fed, Seth Carpenter, Brian Sack, Jeremy Stein.

And it was a really great discussion of the issues. And I want to go through with you some of the issues they raised in that panel discussion. But before we do that, maybe we should outline the Fed's big announcement. This month they announced their plans to reduce the balance sheet. To begin quantitative tightening or QT. So just a few numbers here to kick this off. So they plan to start reducing treasuries by 30 billion a month and eventually work their way up to 60 billion a month over a three month period. And mortgage-backed security 17.5 billion a month, and then get those up to 35 billion a month. And eventually they want to just be holding treasuries. That's their goal over the long run. And I'll stop there with the numbers, maybe turn this over to you. What was your sense of this plan they announced?

Shrinking the Fed’s Balance Sheet

Nelson: It seemed like a reasonable plan and pretty much on expectations. I mean, it's basically a variant of the way they shrunk their portfolio the last time around. Although, a bit more quickly. And which is probably appropriate given the economic situation as well as the much larger balance sheet that they have. It's a little hard to see how this plan is going to ultimately get them back to a predominantly treasury portfolio. Unless you have a very, very long horizon with all of their mortgage-backed securities, duration no doubt, extending rapidly as people stop refinancing their mortgages. And there was no mention of potentially having to sell MBS over time ultimately to bring that about. So that seemed like a piece of the puzzle that wasn't mentioned, but probably isn't needed for sort of near-term considerations.

Beckworth: So does QT matter? I mean, there was a lot of discussion at this panel at the Atlanta Fed Conference and you hear this in other areas as well, that QT might be equivalent to so many basis points of tightening. So there's that story, that understanding. There's also another view that which draws upon the Wallace neutrality view. In fact, we heard Larry Summers invoke it at the Hoover Monetary Policy Conference and John Cochrane, which is basically, you're just doing an asset swap, reserves for treasury bills. So it shouldn't have that much effect. Markets seem to think it matters. What is your sense of doing QT? What will it accomplish economically?

Nelson: So the folk wisdom within the Fed when we were engaged in QE before was that it stimulated the economy. QT is the reverse. So it stimulated the economy, QE, by taking longer term treasury securities out of public hands. And, therefore, sort of raising the price on securities with a lot of duration because of just simple supply and demand effects. And that pushes down their yields. And then you have a normal interest rate aggregate demand channel sort of stimulus. So in theory, QT does the reverse, it ultimately puts duration back in public hands and so pushes up term premiums. Now with all of that said, I have to admit, I mean, when you actually look at the quantity of duration that's already out there and the numbers that you're talking about and you use any kind of reasonable parametrization of investors capacity to hold that, it's really hard to see how economically this adds up to much of anything at all.

It stimulated the economy, QE, by taking longer term treasury securities out of public hands. And, therefore, sort of raising the price on securities with a lot of duration because of just simple supply and demand effects. And that pushes down their yields. And then you have a normal interest rate aggregate demand channel sort of stimulus. So in theory, QT does the reverse, it ultimately puts duration back in public hands and so pushes up term premiums.

On the other hand, just as sort of, there was a lot of talk about last year's, the year before about QE stimulating the stock market, even though there's no real mechanism by which QE would stimulate the stock market. If everyone believes that it does, then it does. And so I think that there's sort of a similar thing with QT. If people believe that QT reduces asset prices, then it's going to reduce asset prices when people see it happening.

Beckworth: So this is the Federal Reserve's Jedi mind trick. It's got people thinking and you will respond as I do QT.

Nelson: Exactly.

Beckworth: Fair enough. So arguably there's not a big economic effect, but there are other effects that are meaningful and important. And one that you've talked about and one that Seth Carpenter brought up on the panel yesterday at the Atlanta Fed conference was the one about the Federal reserve taking losses on its balance sheet.

Nelson: Right.

Beckworth: So maybe you can walk us through that, because he actually, he gave some scenarios. He talked about for example ... And he was thinking going forward. But I know you've had some thoughts on the past year or two. But going forward, he mentioned if you take a $100 billion in profits and let's say it goes down to zeros for the sake of argument, in the next 10 years it's that way, which it can just as a thought experiment, that's a trillion dollars that's not going toward the deficit if you add these numbers up.

And over time that matters. And he said, "Look, this could become a politically sensitive issue for the Fed because they're not helping pay down the deficit.” I would add another point that compliments his and that is, the flip side, on the liability side of the Fed's balance sheet you're paying more and more interest to financial firms, money market funds at the overnight repo facility or banks. And that's going to look awkward as well to people like Senator Elizabeth Warren. So there's this political economy consideration, but help us understand the losses on the Fed's balance sheet. Does it matter?

Nelson: Sure. Yeah. So as you know, I send out these periodic emails on monetary policy to anybody who wants to receive them. And if they've your listeners who want to receive those emails, should just email me, they're free. And I'm happy to add you. But I sent one out a couple weeks ago, pointing out that the Fed probably lost about $500 billion in the first quarter. And that we'll know in a month or so when the Fed releases its quarterly update of its balance sheet, or maybe even sooner when the New York Fed releases its annual projection of Fed income and balance sheet. But in any case, the logic was fairly simple. The Fed's interest rates rose very sharply in the first quarter. On average the yield curve rose about one and a quarter percentage points.

And the duration of the Fed's securities portfolio, it indicates is about five years. And so if you just do the math, that's a 6% loss. And a 6% loss on eight and a half trillion dollars in securities is about $500 billion. So, that's a loss on their books. Some might argue that that doesn't matter because they'll never realize that loss. But I, really as any good economist, would completely disagree with that. And one way to think about it is really the same view that you were just describing that Seth articulated, which is that the present discounted value of remittances are lower by $500 billion. And you can think about that either as the loss on the securities or the rise in the IORB rate. But basically they're going to be remitting to Treasury and therefore you and I, and everyone else are going to be paying higher taxes with a present value today of $500 billion. That's just what the math tells you.

And the losses of course could be considerably higher as interest rates keep going up. And I agree that primarily the problem here is political. But it is a real loss. If you think about the consolidated balance sheet of the Federal Government, the Fed's QE actions shortened up that balance sheet. They replaced long-term debt with short-term debt. They're borrowing through the Overnight RRP Facility and through reserve balances, that's the new debt. And they retired as it were long-term debt that they bought. So the consolidated balance sheet of the U.S. Government now has a shorter duration. Which means that the government is now more exposed to the rising short-term interest rates then they would've been if the Fed had not taken these actions. And that's a real effect.

The losses of course could be considerably higher as interest rates keep going up. And I agree that primarily the problem here is political. But it is a real loss... the consolidated balance sheet of the U.S. Government now has a shorter duration. Which means that the government is now more exposed to the rising short-term interest rates then they would've been if the Fed had not taken these actions.

Now a hasten to add that a comprehensive view of this needs to take into account the benefits that accrued from the Fed's actions. So, insofar as the Fed's QE stimulated the economy, and that boosts tax revenues, and that's something that needs to be considered as well. Now, I think you could probably make a pretty good case that the Fed's three trillion or so of purchases around in the spring of 2020 to sort of save the financial system were extraordinarily beneficial. In terms of the long flow-based QE program that they then launched into, I am less convinced that that actually added a lot of value. But many would disagree. And so it's that whole picture that needs to be considered.

Beckworth: Yeah, for sure. And it goes back to this question we were asking earlier, does QE matter, does QT matter? And my kind of 30,000 foot answer would be, it definitely matters during the panics, like you mentioned, during the crisis during March and right around that time. And then it does raise questions though after. What are you doing, again, if you invoke Wallace neutrality, other than the signaling channel, which you convinced the markets is doing something and then it does something. But wow, 500 billion, Bill, that's a big number.

And interestingly enough, it's something that we will be coming back to if Seth Carpenter's projections are right. This will be an issue that will continue to be a part of the conversation. This also raises the question about who's the debt manager of public liabilities for the U.S. I mean, this is technically the Treasury's job, but the Fed's doing more and more. Now, I guess, by shrinking the balance sheet of Fed's stepping back some, but it still raises questions about who determines the average maturity of the U.S. government debt.

Nelson: Right. I agree. And, again, the folk wisdom about QE was that the story that, about how it had benefited the economy hinged critically on the idea that treasury was not responding to what the Fed was doing. The Fed was taking duration out of public hands and lowering term premium. If treasury was turning around and lengthening the maturity of its debt, then there's just no mechanism through which QE really would be influencing anything. So it hinged importantly on the idea that treasury wasn't responding. This all raises the point that, well if the stimulus comes from shortening up the consolidated debt of the Federal Government, treasury could do that as well as the Fed. And so, I mean as you know, and as I'm sure we'll probably touch on, I'm a big skeptic of the advisability of the Fed being as huge as it is. And I think one of the ways that would be helpful to make it smaller would be if it were to no longer see its job as adjusting the maturity of the debt in response to economics developments when short-term rates are at zero.

Beckworth: That's the one issue that wasn't discussed at the Atlanta Fed panel. It was a great panel. And one we didn't hear at the Hoover Monetary Policy Conference. And to be fair, we don't hear it much anywhere besides you and me and George Selgin. And that is questioning this, the very premise of a floor operating system or ample reserve operating system. In fact, in the statement the Fed released with its plans for shrinking its balance sheet. It said several times, "We're going to do this in a manner that's consistent with maintaining an ample reserve system." So I think I see two times that's listed here in the document. So they're still very committed to this.

But at the same time, you know what, when I had Lorie Logan on the show -- and she was a great guest, and if people haven't listened to it, I encouraged you to go back -- she stressed this point that banks demand for reserves is time varying. They're not constant, they're not fixed. They can change over time. And that will, to some extent drive what the Fed does. She also emphasized the standing repo facility could affect that demand for reserves in some manner. So it's an open question. And maybe the Fed doesn't want to say, "We're getting rid of the ample preserve system." But you know, maybe it's a long journey down that path and you and I can continue this discussion while others are not, and continue to write papers, do podcasts and the like. Two other questions, actually, one, what about the  Overnight Reverse Repo Facility? What does this QT mean for it?

Nelson: So, the Overnight RRP facility is a liability of the Federal Reserve. They're doing repos. It's always confusing because the Fed refers to repos and reverse repos from the perspective of the counterparty, not from their perspective. So, at the Overnight RRP Facility, primarily money market mutual funds, but GSEs again, also to some extent. And some primary dealers occasionally are investing money in the Fed. They're providing the Fed dollars in exchange for securities overnight, and then reversing that transaction and doing that each day. So it's a way that the Fed funds itself. And it's in addition to reserve balances, which are deposits of depository institutions at the Fed. The Fed kind of ran out of the capacity to borrow from depository institutions, largely because of the supplementary leverage ratio. It was making banks hold a lot of capital for the privilege of lending the Fed money on a riskless basis.

And so it had to broaden out its set of counterparties to money funds to borrow enough. And so, it's now borrowing about $2 trillion from the money fund industry at the Overnight RRP Facility each day to fund its very massive holdings of securities. Interestingly, you could reasonably expect that as the Fed gets smaller over time, the Overnight RRP Facility borrowings will shrink. And the reserve balances borrowings by the Fed from banks will both shrink, because the Fed will be smaller. It won't need as much funding. But there could be some interesting dynamics in that process. At least interesting to sort of uber geeks like you and me who are deep in the weeds on these sorts of things. But maybe interesting to your audience. I think it's interesting. It could start playing out very soon, which is as the Fed raises rates, and this isn't even really a balance sheet thing. As the Fed raises rates, because normally deposit rates are below the Fed Funds Rate, but they've all been squeezed at zero and as that gap reasserts itself, then you're going to probably see a lot of the hot money that was left at banks in deposits moving into money market mutual funds. So money market mutual funds could conceivably have a lot more investments that they need to place. And simultaneously the supply of treasury bills is going to be falling. So the bottom line is you could have this dynamic where the Overnight RRP Facility grows substantially further.

And, I don't actually can really approximate how much, but conceivably quite a bit. There's been a huge deposit inflow into the banking system, a lot of which was really just sort of left there. So that could flow out. If that happens because the Fed's balance sheet must balance, reserve balances will decline.

And they could decline rapidly. So, as I've written a lot about, the problem with the floor system that the Fed is using is that it's conceptualized on this view of the demand for reserve balances that's really based on sort of how interest rates and reserve balances behave over the course of the day back before the Fed paid interest on reserves. It's really not a very good model for thinking about things like longer term demand for reserve balances. In fact, banks use the reserve balances that they have and they can't just shed them rapidly. So there could be an ironic development as the Fed launches QT and the Overnight RRP Facility rises and reserve balances fall sharply, that they may have to inject reserves. I doubt that they would do so by slowing QT.

I think what they would do is they would use repos to have to inject reserves in order to sort of smooth things out, which really calls into question the logic. If that happens, it would certainly call into question the logic of the whole floor system, which is supposed to be a set it and forget it monetary policy framework.

Beckworth: Right. It’s supposed to make life easier for the New York Fed marketing desk, right?

Nelson: Right. I would say that it's totally a fiction, by the way. Because, and I was there for 20 years and I was attending the meetings. It was easy to conduct the corridor system and the Fed's control of interest rates was excellent. And the staff of the New York Fed now, the desk is probably three times the size that it was back then.

Beckworth: That's a good point, but that's fascinating. So if I can summarize what you've just said, there's going to be two channels potentially through which this may operate. One is the obvious quantitative tightening. So the Fed's balance sheet shrinks and by definition, reserves have to shrink as the Fed decreases the asset side liability side has to shrink as well. But then in addition to that, because spreads among the different overnight rates are changing, what's left in the banking system of reserves may migrate rather quickly into money market funds and be parked, instead of being parked as reserves of the Federal be parked as overnight reverse repo facilities. So this would be like a double whammy, which is fascinating, I hadn't heard that. And so what could happen then? It sounds like to me, if the Fed's not careful, they could end up at another September 2019 repo moment where things are volatile and panicky, and you get a bunch of commentary that over hyperventilates and overreacts.

This is where it's important then for the standing repo facility to be up and running. And I want to segue to that briefly, because this could play a very helpful role in a situation like that. And you had a conference, the Bank Policy Institute had a conference some time ago and it was really great. You brought in a bunch of people, you brought in academics, you brought in the actual market practitioners, people who were on the other side. And one of the things that I got from this conference was that they weren't very energetic and excited about standing repo facility. And we talked about this on the last show, but I want to read to you something from the March FOMC minutes, which gave me some hope. So after your conference and we talked about this last time on the podcast, it was a little, I don't know down about the standing repo facility. Didn't seem too much buy-in.

But this is what the March FOMC minute said. And this is talking about Lorie Logan, they're talking about the manager, she's the manager. Says, "Finally, the manager provided an update on the standing repo facility. The desk had onboarded four depository institutions as counterparties and noted that a number of additional banks were currently under review. The desk plan to adjust the counterparty eligibility requirements in early April to make the standing repo facility accessible to a broader range of banks." So, that seemed encouraging. There's the number of banks under review. Of course, we know the primary dealers are automatically a part of this. So are you a little more hopeful now that this facility will be used in an event of a repeat of something like September 2019 if we have this double whammy you just described?

Nelson: So by the way, I'm not sure that the double whammy I described would result in a repo market kerfuffle like we had. That was also importantly the result of a big supply demand mismatch in the repo market.

But nevertheless, there could be some deviation of rates from where the Fed wants them to be, certainly. So on the standing repo facility, yeah, it was surprising how sort of downbeat the bank treasurers we heard from. I brought in a regional bank treasurer to talk about that. And as she described, you actually have to jump through a lot of hoops to sign up for the facility. And moreover the facility operates over the tri-party repo platform. And if you're not a GSA, but really big bank, you're probably not already hooked up to operate through the tri-party repo platform.

And it costs money to get set up to do that. And as a bank thinking about, "Well, do I want to go to the trouble of signing up for this facility? I'm probably not going to use it because it's charging a rate 25 basis points above repo rates. I've already got access to the discount window, which charges a rate 25 basis points above the repo rate. And moreover at this point, it's not at all clear whether I can even sort of reap the liquidity benefits in terms of liquidity requirements on my bank of having established this access." So, banks are subject to a whole range of liquidity requirements, including perhaps the most bindingly that they're required to do internal liquidity stress tests at many different horizons and report the results to supervisors. And the supervisors look over the way they do it.

And part of that is demonstrating that you can convert whatever assets you have into liquidity when you need it. So the critical question then is, if you sign up for the standing repo facility, which is intended to be sort of a reliable means to convert treasuries in ABS and mortgage-backed securities at, agency mortgage-backed securities into reserve balances, can I say to my supervisor, my examiner, "Yeah, my plan to convert all of these agency MBS into liquidity is to use the standing repo facility." It's not at all clear that the Fed has sort of given the signal that that's allowed. It's not allowed to say, "I plan on using the discount window to convert my things to liquidity." Inexplicably, given the way the Fed's regulations and supervisory letters are written, but nevertheless so the Fed needs to, if they really want this thing to work, they really need to kind of stand up and loudly declare, "Moreover, you can rely on this under stress. That's sort of the point."

But in any case, I mean, it took the Fed a long time to figure out what exactly it was going to do. And deeply embedded in that conflict is the fact that 11 reserve banks don't have a repo market. And so they're interested in how their banks can actually benefit from this. Whereas, this is really a New York Fed repo market kind of phenomena. So if you're going to offer this facility, which is being extended to institutions, the primary dealers. But not easily and obviously to the 3,000 banks, and I don't know how many thousands of thrifts and credit unions that are out there that can borrow from the discount window. It sort of raises the question of, "Well, why is that fair?"

So the Fed has faced a challenge of demonstrating that this is something that all banks ultimately will be able to use. And as we've just been discussing it, they haven't really succeeded so far, but maybe these new changes will take them further along that road. I thought it'll be interesting to see what they are. But ultimately, it all depends upon the standing repo facility being perceived differently than the discount window, because banks are very reluctant to borrow from the discount window because of a longstanding perception of it as an indication that something went wrong. It's a problem that goes back to the founding of the Fed. It's not easily explained by anything other than the fact that it's hard to use to offer a backup source of liquidity and not have stigma become associated with it, because you've turned to your backup source of liquidity. And so for the SLR to work, they kind of need to somehow spin it differently.

And the idea was, even though this is just another way of borrowing money from the Fed, it's going to look and feel differently than the discount window. And we hope that it won't have stigma associated with it. From what you and I heard at that symposium, it doesn't sound like things are necessarily going so well. So I doubt that it will actually have much of an effect on anything, honestly.

Beckworth: Well, that's a downer, Bill. Well look, if there are any bank supervisors listening to the podcast, you know what you got to do.

Nelson: Exactly.

Beckworth: And if you're a Fed official or maybe, I don't know, FDIC official, state bank regulators need to really look and think hard about making the standing repo facility a normal course of business for banks so that they can put it on their liquidity stress test. I wonder also if not having a vice chair for bank supervision at the Fed is also maybe slowing this down. Maybe if you had someone at the top pushing this through. But any event, I hope Fed officials are promoting this because, Bill, you just outlined a double whammy that could hit us relatively soon. And you need to have all your tools at your disposal.

So well, let's segue from Fed's balance sheet to the term that seems to be floating around a lot, and that is falling behind the curve. The Fed is falling behind the curve. In fact, the Hoover Monetary Policy Conference, that was a big part of the discussion. How did the Fed fall behind the curve? And I encourage our listeners to check out the videos when they're made available. We'll provide links if they're available when the show comes out in a few weeks. But the first panel was particularly interesting. We had Larry Summers, John Taylor, and Richard Clarida on the panel. And Larry Summers did not hold back. He delivered a bunch of punches. In fact, probably the most memorable one was he said, "Everything about the FAIT, he would throw out, he would redo," as Richard Clarida was sitting right next to him. So I was feeling Richard's pain up there as he endured that.

But let's talk about how they fell behind. And you had a really great essay you wrote, and the essay's title was, “Plane Crashes and Falling Behind the Curve.” Walk us through, give us an overview. What are you doing in this essay and how is it related to falling behind the curve?

How the Fed Has Fallen Behind the Curve

Nelson: So, I was using the analogy of a plane crash to reference Malcolm Gladwell's book Outliers. For two reasons, one sort of at the outset and one at the end. And maybe we'll get to the end as we talk about this. But at the outset I was highlighting the fact that in the book he points out that planes don't really crash for one reason. Usually a whole bunch of things have to go wrong sequentially to result in a plane crash. He says the typical plane crash involves seven consecutive errors. And I wanted to conjure up that image, that pointing to one thing for how it is that inflation got so high with the Fed still sort of dragging its feet. It doesn't seem to be dragging its feet now, but that's a pretty recent change. For a lot of different reasons that were all interrelated and that go all the way back to 2015 to '18, 2017, 2018.

And they all kind of added one on top of the other. So that was where I was coming from with this. This was also one of the emails that I send out. So again, happy to send these to anybody who would like.

Beckworth: Yeah, and we will provide a link to it as well that's available online. And, as we speak, today is May 11th. So the CPI was released today and it came in at 8.3, the headline number, which is down from 8.5, but still pretty high. I think the expectation was to be down to 8.1 or closer to eight.

Nelson: Yeah, the month numbers were high. And the core was high. And so based on a quick reading of it this morning, it did not look good for inflation.

Beckworth: Yeah, in fact, my quick look at the interest rates in the market. So they actually, two year went up actually because they anticipated the Fed would have more reason to tighten aggressively. But let's talk through how we got to this place that we're having 8% inflation, and you have 14 different missteps. So like the plane going down had multiple things go wrong. You have 14, we'll try to get through all them in the time we have left, we may have to maybe combine some of them, but let me start with number one, because I think you really anchor everything around number one. I'm going to read it and then you can comment on it, but you write, number one, lingering regret about having tightened policy in 2015 through 2018 in reaction to the prospect of rising inflation that did not materialize. In particular regret that the tightening may have choked off growth in the wages of lower income workers.

Does the Fed Regret Premature Tightening from 2015 – 18?

Nelson: Right. So I think that this was just completely foundational in understanding what ultimately happened. So, the Fed tightened policy back in the mid '10s, not because inflation had actually risen, but because they were concerned that inflation would rise given the low level of the unemployment rate that had been achieved. But that tight labor market was finally bringing about something that everybody at the Fed had hoped for, for a long time, which was some meaningful growth in the wages of lower income workers. And so, sort of holding out the prospect of doing something about income inequality, and then the inflation never did materialize. And I think that left a lot of people feeling like that was unnecessary, an unnecessary tightening and the economy could have been allowed to continue to grow as strongly as it had been growing.

Beckworth: Yeah, I remember Chair Powell before Congress admitting that they had miscalculated the natural rate of unemployment. That it was actually lower than they had thought or any of those stars, U-star R-star. And you can see it in the FMC projections that the interest rate drifts down over time, the U-star drifts down over time. So, that you say is foundational to their thinking. So there's another way of saying this then is they're fighting the last war, one of the key problems?

Nelson: Well, I guess that's right. I mean, I'd also highlight, there's been some really interesting work by, I think it was by David Wilcox and David Reifschneider sort of demonstrating that the whole idea of that aggregate supply and aggregate demand are separate, is questionable. That you really can have aggregate demand growth pulling in more aggregate supply. And once you start viewing things that way, it sort of changes your whole view of what can be achieved. But I would say, that sense of not making that mistake again was definitely part of what held their hand and influenced a lot of what they did.

Beckworth: I wonder though if this fighting the last war may actually be the war again in the future and in the following sense that, once we get past this high inflation and maybe it requires a recession, I'm convinced that we still have many of the same challenges that led us to the low inflation pre-2020. We have an aging population, so demographics, which pushes down the equilibrium interest rate, which affects spending and the inflation rate. Also, emerging markets, low productivity growth. In fact, President Jim Bullard at the St. Louis Fed listed these things off. He had answered a question I had, "What do you guys think is going to eventually happen?" And what he painted his scenario, getting back into the, what Larry Summers would say, secular stagnation, that kind of world. So maybe we do end up back there, but right now, I guess the fight in front of us is the high inflation before we get to that point. Do you have any thoughts on that? Do you think we'll return after this is over to something like pre-2020?

Nelson: I do. I think that as inflation starts to fall, it's going to fall. It's going to fall from where it is now, because all of those prices that were pushed up by bottlenecks will decline. They'll not just grow more slowly, they'll decline, and that's going to impart a reduction in inflation, but it will remain elevated perhaps after that, the effect of that reduction. Just because we're all, the inflation psychology is just radically different. It's like nothing that we've seen for a very long time. And so, it seems likely that inflation will be above where the Fed wants it to be, and that will linger. Actually, I think what will ultimately happen is that the Fed will take this as an opportunity to raise its inflation target to 3%.

I think what will ultimately happen is that the Fed will take this as an opportunity to raise its inflation target to 3%. Now, the Chair recently said they were absolutely not going to do that, but of course that's what you have to say, even if you're planning on doing it, because the whole idea is to anchor inflation expectations.

Now, the Chair recently said they were absolutely not going to do that, but of course that's what you have to say, even if you're planning on doing it, because the whole idea is to anchor inflation expectations. And if it could be two and it could be three, well, then a rational forecast would be something like two and a half. But even if that's not, and I don't think that's the explanation. I think that they probably don't plan on doing that, but I think when it comes down to it and then there's this question of, well, we're at three, do we really need to sort of throw people out of work to get down to two, especially given how painful two has been in terms of hitting the zero lower bound twice within a relatively short period of time? So, I think what will happen is that they'll move that inflation target up.

Beckworth: Well, that's interesting. And it speaks to another issue for central bank leaders like Chair Powell, and how they have to be careful in what they say. So you're right. He couldn't come out and admit it, even if he believed it. And it was interesting. I was thinking the same thing in terms of the questions he got from journalists about, "Well, are we going to have a recession? Are we going to push up unemployment?" And he kept stressing, "There is a way forward." In fact, he had this line that's kind of a meme now, "There is a path forward to a soft or soft-ish landing." So here's the thing, even if he did believe that it required a recession, he couldn't say that. I mean, it would be awful, it would roil markets, it would create panic if he said, "Yes, probably within the next six months I have a probability of 40% chance of recession." That would just be central bank, their malfeasance. You don't do that. So I think it is important for them to say the right things.

Let's go back to your list. We went through number one, which is I'm going to summarize this fight in the last war. It's a little more nuanced than that, but let's go to number two. Number two says, plans and communications that focused on the baseline outlook at the expense of resiliency to alternative developments.

The Fed Lacked Resilience to Unanticipated Developments

Nelson: And so that I think it was just sort of a consistent unforced error on the part of the Fed over the last two years. And this is the clearest examples is sort of the forward guidance that I discuss in some of my reasons further down the list. But you can just contrast the forward guidance that the Fed has been using over the last two years. With the forward guidance that Charlie Evans first sort of described, and then the Yellen FOMC adopted. Which the previous forward guidance, that was, "Well, we're going to stay at zero, at least until the unemployment rate gets down or until sort of our forecast of inflations go up." And that gives you an ability to push things out in terms of the expectations of how long things are going to be at zero. While at the same time building in the ability to raise rates, if one or the other leg of the dual mandate doesn't go the way you expect it to go.

And by contrast, the forward guidance the Fed has been using, used in 2020 and 2021 was along the lines of, "We are going to keep rates at zero until both legs of our mandate are either met or substantially on the way to being met." And Chair Powell was asked very closely about that in Congress, "Do you really mean that?" And he said, his answer was a very succinct, "Yes." And so they shortly thereafter reneged on that. But nevertheless, you can see that that's forward guidance that isn't resilient to inflation going up, or the unemployment rate falling very rapidly or something happening, which would want you to respond, because you need both parts of your promise. So in the language that we would use a lot in the Fed and is the previous guidance was threshold based, and this was trigger based. You needed to have both of these triggers pulled before you were going to rise. And it's an approach, and I think that there's other examples, it's just an approach that isn't resilient to off the baseline path.

It works well if things work out the way you think that they're going to work out. But that's kind of, it doesn't appear to have been a plan that worked really well along the other possible ways that things are going to work out, and in fact seem to have worked out.

Beckworth: So it's not a time consistent way of doing forward guidance?

Nelson: Well, no, I think it isn't. I mean, it may not be, certainly. And you can be time inconsistent with the threshold based guidance too. It's just that it's not a form of forward guidance that gives you any real flexibility to respond if things go wrong and not according to plan.

Beckworth: Let's go on to number three, stumbling into a massive flow-based asset purchase program that included from the start a conviction not to cause a taper tantrum when winding it down.

The Fed Was Wary of Another Taper Tantrum

Nelson: Right. So, following the Fed in real time and commenting a lot on what was going on, it really felt like they bought massively in response to the troubles in the spring. And to be fair, everybody was worried that we were going to have another Great Depression. The outlook for the economy was abysmal. And so they kept buying and then they sort of established a pace for buying and it was interesting, their explanation for why they were doing what they were doing morphed over time, even though what they were doing didn't actually change over time. So initially they described what they were doing. And I forget the monthly pace now, I'm going to think, I think it was $120 billion, in sum.

Beckworth: Yeah, I think so.

Everybody was worried that we were going to have another Great Depression. The outlook for the economy was abysmal. And so they kept buying and then they sort of established a pace for buying and it was interesting, their explanation for why they were doing what they were doing morphed over time, even though what they were doing didn't actually change over time.

Nelson: Well, they sort of established that following their massive intervention with relatively vague forward guidance. And then they turned that into another flow-based asset purchase program. And I would say the last flow-based asset purchase program, which was initially sort of promised by the staff to be a $750 billion program, but then ultimately was a, I forget $1.4 trillion program was sort of the first step to where we have ended up now with such a gargantuan Fed with its involved in all sorts of different financial markets. But nevertheless, I thought it was unfortunate that Fed once again just sort of turned what they were doing, or initially described as for market functioning purposes, later described as for stimulating the economy purposes into a flow-based asset purchase program with the requirement that they have substantial progress toward both full inclusive employment and that average inflation of 2%, substantial progress towards both before stopping.

And moreover, you could tell by the way they were describing what they were doing from the very start that the folks designing it were saying, "Look, last time, there was this big jump in problem in markets when we stopped. And we're not going to let that happen this time. So we're going to promise from the start that we're going to provide an extremely long runway. Before we start tapering we're going to give people a big heads up. We're going to taper very gradually. Everyone's going to know what we're doing." I mean, that was in from the very start. And that of course puts constraints on how rapidly you can stop doing that. When you add that to the Fed's decision that they really couldn't raise rates until they'd stopped acquiring securities.

Those two things, they could certainly have raised rates before they stopped acquiring securities. But nevertheless, they decided that would be, I mean, that would present ... They would get asked some awkward questions under those circumstances. But nevertheless, that means that you really are putting off raising rates until not only until you end purchases, and that ending of purchases has to happen after a long runway. And that long runway can only really begin once you're convinced that you've made substantial progress towards both of those goals. So it really sort of moves backward in time. It really extends the length of time before you can really start tightening policy, far beyond when you start beginning to feel that you might have to.

Beckworth: Yeah. So this raises two observations. Number one, it explains why the Fed has taken so long to get to QT, right?

Nelson: It's part of it for sure. Yeah.

Beckworth: Even as we speak right now, they're not doing it, they're going to do it in starting in June and many ask, "Well, why didn't they do it say late last year, early this year when the Fed began to change course?" I mean, they were talking up rate hikes, markets were beginning to reflect that, but they were still doing QE. The other observation I'll bring on this is that I had Nick Timiraos on the show a few weeks back, his new book. I don't know if you've got a chance to look at it? And he tells an interesting story in there that I believe it was surrounding QE2, that it was Jerome Powell and I think Jeremy Stein. And Betsy Duke. So the three of them, I believe that I have that right. But Jerome Powell was definitely one of those three. They were concerned about the end game, the QE2, how are they going to handle it? How are they going to do it? And so they went and talked to Bernanke, like they wanted some kind of, some assurance that this would not go on forever. And then soon after that Bernanke commits the taper tantrum. And in the book, Jerome Powell goes to him and he feels awful, like, "Oh, I'm the reason you put yourself into this mess." And Bernanke's like, "No, no, don't worry about it. We'll get through this, Jay." So I wonder if that experience also played into this desire to avoid a taper tantrum? He was really burned the first time. And coming from the very top.

Nelson: Yeah, great point and great book, I agree. And that very well could have been part of the considerations. The QE3, I think you mean actually was the flow-based asset purchase program.

Beckworth: QE3, yeah.

Nelson: But when discussing QE3 at the Fed, it was, well, I don't know how far I should go into it. I wrote an article for FT Alphaville that I recommend about how the Fed ended up buying such a massive amount of securities in QE3. The decision making that went into it and the sort of the tension between how the staff was projecting and discussing the program originally and how the Fed leadership was discussing the program originally. Whereas others like Jay Powell and Betsy Duke and Jeremy Stein were saying from the outset, "I just don't see how this could be a $500 billion asset purchase program, because it requires a substantial improvement in the labor market. And we're not forecasting anything like that for a very long time. So why isn't this a $1 trillion increase?"

So you go back and read the transcripts and you can see that. Now one of the explanations for that was, "well, we've built in these escape hatches." This what was called the efficacy and cost escape hatches. And the idea was, "well, if it goes on a really long time, well we'll stand up and announce that it's just not working So we're going to stop doing it." Which honestly, is the FOMC ever really going to stand up and say, "this one big program that we've got going to try to stimulate the economy and prevent a deflationary spiral, we're going to stop doing it because it's just not working." This actually goes all the way back to our discussion of whether QE works at the very beginning.

I'd written a memo with Brian Sack in 2003 and I have it, and I'd be glad to share it with you. Basically saying, if the Fed gets to zero, there's nothing they can do. Because we know QE doesn't work. And we know that you can't really do much with forward guidance because you can't promise to do much that you weren't going to do anyway. And so that should already be billed into expectations. And when the Fed did hit zero, I remember talking to our division director at the time. Both that he and I would get in very early. And so we'd have these conversations and basically saying, "Well, that's the end of the game. There's nothing really much that they can do." And the response was, "Well, if you think this FOMC is going to reach the conclusion that there's nothing that they're going to do, then you're sadly mistaken."

And so when thinking about does QT work and the conclusions that were reached that it does work, you kind of need to think about it in that context. As you know, there was a really interesting bit of research done comparing the assessments of the efficacy of QT done by central bank economists versus outside economists. And the central bank economists consistently found greater efficacy of QT than the outside economist did. Sorry, that was a long digression.

Beckworth: No, no, this is good. I actually had those authors on the podcast. I think it's called “50 Shades of QE.” So it's a really remarkable paper. And I even asked them, "Did you get some negative blow back from central bankers, like, 'Oh yeah.'" In any event, interesting discussion for sure. For the sake of time we can't go through all 14. And again, to our listeners, we're going through the list of steps that would lead to the point where we are today, which the Fed is falling behind the curve. And Bill was using the analogy of a plane crash. But Bill, yes, if you can send us a link to the Financial Times piece and your memo, we'll put those up on the show notes for our listeners so they can check it out as well. I'm sure many of them will be interested to do that.

So, let's jump down to number seven, Bill. And again, listeners can look at the whole list with the link we'll provide on the show notes. Number seven says, a new strategic framework that included both not tightening until inflation rose above 2% and seeking broad-based inclusive, full employment. And that also removed the statement that the Fed would take a balanced approach that the two parts of the mandate were in conflict.

Impact of the Fed’s FAIT Framework

Nelson: Right. So as I'm sure your listeners are aware, sort of to great fanfare the Fed announced a brand new strategic framework. Honestly, it was not really so much a strategic framework as it was a tactical plan for dealing with the zero lower bound. But nevertheless, it said, it indicated that they were going to be concerned about average inflation. And inflation is low, so they were going to let inflation be high, that they wanted it to be above two for a while. And also, that they were going to broaden out their definition of employment to be inclusive, to look at the employment across the income spectrum at different races and genders. And all of that I think was sort of in the context of that first point that we talked about. Also in the context of the social justice protests in the wake of the murder of George Floyd. And all of this, I think built in a desire to let the economy get ripping before even beginning to raise rates. It just contributed to that plan.

And so I just think that this was all part of what slowed things down. It's notable that that framework really doesn't seem to have lasted very long. It hasn't exactly been a timeless framework. And so maybe they'll come out with a new framework. But that could just be going back to the original framework, because as Richard Clarida explained shortly after this was released, is that, "Well, really, once we get away from zero we're back in the flexible inflation targeting regime that everybody's been using for decades." So that would seem to be where we are.

It's notable that that framework really doesn't seem to have lasted very long. It hasn't exactly been a timeless framework. And so maybe they'll come out with a new framework. But that could just be going back to the original framework, because as Richard Clarida explained shortly after this was released, is that, "Well, really, once we get away from zero we're back in the flexible inflation targeting regime that everybody's been using for decades."

Beckworth: Yeah. So the framework is called flexible average inflation targeting or FAIT. And the previous one was flexible inflation targeting, so FIT or F-I-T. And so there's two parts to it. One is this makeup part, which was driven, if you've got a zero lower bound, you can actually make up for past misses. So the average, and this is a misunderstanding that many people have, the average really only relates to undershooting, they don't correct overshoot. They only do undershoots. But with that said, there's a makeup element. And the other big changes, as you mentioned, is this changing the definition or the way you deal with employment. So they talked about shortfalls from maximum employment as opposed to deviation, which is more of a symmetric understanding. So of those two elements, which one do you think contributed the most? I mean, it sounds like the maximum employment part contributed the most to falling behind the curve. Do you think that's the case or did the makeup part also play a role?

Nelson: So honestly to me it's always kind of felt like the FOMC over the last couple years has been following sort of a pretty sort of practical doing what feels right, right now approach. And so while this framework, I think articulated their views of the moment, I'm not sure in the end, ultimately, other than sort of a reflection of what was actually going on, how long it delayed them from moving once inflation moved up. But this idea of we're not going to really respond until inflation actually gets high. There was certainly a period where inflation was high last year, where this gets back to down to some of those other points. So, the mantra initially was, "We're going to wait for real inflation. We're not going to worry about forecasts." And that was, I think, all going back to tightening too soon, and it's reflected in this framework as well.

And that sort of was the mantra. And then interestingly, once inflation moved up, it quickly became, "Well, we're not worried about where inflation is right now, because we're forecasting that it's going to go back down." So suddenly they flipped quickly into being guided by forecast again. But so I think these were sort of all of a piece contributing to an idea that we want to let inflation go up. We're not going to be responding, overly responding to transitory inflation. We're going to let the economy get a lot of momentum before we're going to respond. That all led to a slow, we're not going to have a long runway on our asset purchases. We're not going to tighten until those are done. It was the plane crash analogy, right? There was all these sort of different reasons. And we could probably could skip to 13. I think that that's actually kind of critical right now if you want, but happy to talk about all of these things too before we do.

Beckworth: Yeah. Before we get to 13, just, I want to come back to this discussion of the framework just briefly here. So here's where I want to maybe push back and maybe try to salvage FAIT for the Fed. So I think you could tell a story that what FAIT aimed to do, at least on the inflation side, so put aside the maximum employment change, is to restore inflation had fallen low because of aggregate demand shocks. And so it should focus on low inflation caused by low demands. In other words, run inflation hot so you get back up to the average where you're at 2%. But anything above that should be offset. So I guess one way I could rationalize or reconcile the two is, the Fed was doing that up to a point, but then it actually overshot, it actually ran the economy too hot, allowed it to run too hot.

And so demand pressures. It wasn't just supply inflation, right? It was demand pressures. And honestly, one of the critiques I have of inflation targeting is it's hard to know in real time whether inflation's being caused by demand or supply. And I think it's a tough year, 2021 where this big mistake or falling behind the curve. A lot of uncertainty, was the Delta variant going to slow things down, Omicron all those things? So I think you can still appreciate the makeup part and just say they didn't do it right. They didn't implement, they should have tightened sooner had they known the inflation was demand driven, not supply driven.

Incorrect Lessons on Pacing from Previous Tightening Episodes

Beckworth: All right, let's go on to number 11 before we jump to the one at the end, Bill. Let's look at that one. That's an important one too. Taking too much signal about the likely necessary pace of tightening from the prior two tightening episodes that had both occurred in an environment of low inflation.

Nelson: And I think that this has been the story of how the market, but also FOMC participants, when you look at their SAP dot plots, there just appear to be quite a bit of time where they were ultimately thinking about tightening along the lines of the last time, which was 25 basis points every meeting. And with that is the framework, the idea of tightening every meeting, it's hard to recall that now. But the idea of tightening by 25 basis points every meeting was for a while the rapid alternative that would indicate a degree of rashness. Whereas yeah, as I discussed all the way back in remarks at the Money Marketeers in the spring of last year, that's not the right model for thinking about the current situation.

Those tightenings took place in environments of low inflation. We're now in an environment of high inflation. Just as the Taylor principle will tell you, you need to move up beyond that high inflation and get above that in order to have the necessary restraint to impart restraint on the economy. And so, when you sort of add up how far the Fed had to go and how quickly it was going to have to do it, you came up with numbers like 50 basis points a meeting that really should have been on everyone's mind for both market participants, I think, and FOMC participants for a year now. But it seemed like it would just took a while for everybody to move their mind away from sort of the experience that I suppose a lot of market participants, it's the only experiences they've had with tightenings, right? In which 25, every other meeting was sort of gradual. And 25, every meeting was really brisk, but it certainly wasn't viewed as brisk in real time.

Beckworth: Real quick on that. So you alluded to what I think is the Taylor principle that the rate has to be above the inflation level. One plus some amount, maybe 1.25, 1.5, higher. So, that Taylor principles is a well established in the literature. But it's also the case. You can take a dynamic view of that. You can say, you don't have to have it right now, for example, you don't have to raise at 9%.

Nelson: That's right.

Beckworth: Maybe, but over like a path going forward. So if we forecast say medium to long-run inflation, five year forward, you want it to be at least at that level or higher. And this occurs, I believe because of forward guidance. For example, the two-year yield right now is 2.5% or higher. So the Fed can actually lead the financial tightening, even with the modest rate hikes it has and satisfy the Taylor principle over a medium to long-run horizon.

Nelson: So, yes and no, I think. Yeah, I'm not saying that the funds rate needs right now to be 12% or whatever is 1.5 times eight. But the underlying idea of John's rule, and I think it would be hard to find a macro economist, I think, or an economist that would really disagree with it, which is that when inflation goes up, if you started at neutral and inflation goes up, then you need to raise the funds rate, at least as much as inflation has risen in order to maintain neutrality. That the neutral funds rate is a real concept. And if the level of inflation rises in a consistent, permanent way, then you would need to adjust the nominal neutral rate by that full amount.

And so, the overnight rate, it's an overnight rate. Do you need to use the overnight and expected inflation rate? No, nobody really thinks that. But you certainly don't want to use the long-run inflation rate.

Beckworth: Right.

Nelson: Nobody thinks that either. And this really gets into my point 13, which is, the Fed seems to be using neutral right now as a kind of a coy code word for two and a half. Where two and a half is sort of people think the neutral real rates to have, and the Fed's long-run inflation target is two, but that's not neutral. Neutral policy right now is a policy that would neither stimulate, nor slow the economy. That's how I think is a reasonable definition of neutral to working people, maybe not DSGE modelers, but nevertheless to people who think about, about monetary policy in a practical level.

And that level should be sort of where inflation is running, looking maybe through transitory movements, but nevertheless, where inflation is running plus our star. Plus the amount, the real rate that brings you to neutral. And inflation is currently running a lot higher than two. Even looking through transitory the near or medium-term inflation rate is running much higher than two. And so just to be neutral, the nominal funds rate needs to be at some level north of that inflation. So we can argue where inflation's running. Let's say it's running at, that the underlying rate of inflation is running at 4%, just pick a number, then neutral's 4.5% right now. Neutral is a time varying concept, it is not a time and variant concept, because it depends upon the underlying level of inflation and where it's running.

And so, obviously the Fed's communications right now about moving expeditiously to something closer to neutral, or like neutral. That's just code for, "We're going to go at 50 basis points a meeting until we get to two and a half, and then we're going to look around for a while." But it's important that that code not obscure the fact that that isn't a neutral stance for monetary policy right now. And it's certainly not a formula that's going to give you the restrictive policy that's necessary to reduce growth below trend, hopefully not into a recession, but nevertheless, below trend by enough to ease things up.

Beckworth: All right, Bill, our time has come to an end and I want to circle back for the last part to the Hoover Monetary Policy Conference. At the very end of the day, the last panel they had Fed officials up on the panel. They had Jim Bullard, they had also Randy Quarles, former Fed official, and they had Chris Waller. And one of the questions that was asked, in fact, it was asked by Andy Levin, who was sitting next to me. He said, "Hey, what are you guys going to do at the end of the year you got 5% inflation?"

And Chris Waller just said, "It's not going to happen. It's not going to happen." And then someone else asked, "Are you guys willing to raise to do what's necessary? Even if it includes a higher unemployment rate?" And of course, Jim and Chris didn't want to answer that, but Randy Quarles said, "Yes, definitely."

Nelson: Right, right.

Beckworth: He can say that now that he's out. But I want to take that framing and throw it at you. Do you think the Fed will do what's necessary to get this inflation under control? Or are you worried that there's some drift here? There's trend inflation's going to permanently drift higher. There's the Fed's not in control as we think it is. Is the Fed responding appropriately at this point?

Nelson: Well, I'd say that they're on a path to be responding appropriately. I'm concerned that the reversal of the bottlenecks, which will, as we discussed earlier, result in some slowing of the rate of inflation will be leaped at as an indication that they're off the hook. And will again, slow things down inappropriately. That coupled with this idea that two and a half seems like a good place to sit and wait around. So, I mean, I think the important lesson is that whether you're behind the curve or ahead of the curve, a central bank that's behind the curve and a central bank that's ahead of the curve, both end up increasing rates. It just, if you're doing it from behind the curve, you have to do it by more and probably in a disorderly fashion.

So, I do have confidence that the Fed will in the end bring inflation back down, maybe not to two, as I said, maybe it'll be a higher inflation target. But I remain concerned that they won't necessarily do it in the most expeditious, to use their word, manner possible. That said, I think that the function between policy and economic growth should be a continuous one. So there should be a path that brings about growth below trend that can slow inflation ultimately to where the Fed wants it to be without a recession. But it's a pretty hard job.

Beckworth: Well, Bill, I said that would be our last question, but you raised one other question, and this will be the last, last question. Based on what you just said, doesn't make sense to have the Fed have more meetings, have more regular meetings so they can adjust the rate in a more timely fashion as opposed to waiting and then big pops?

Nelson: Well, one quick observation on that point is that I would never expect the Fed to raise rates at an unannounced meeting. I mean, the Fed, when you look at how the Fed does things, when they ease, they measure the success of their easing by the amount of surprise that it imparts in markets. When they tighten, they don't want there to be any surprise. And inter meeting moves are always surprising. That said, it's so easy now to get a group of people together to meet. We all are doing it all the time, people from all around the place and doing it virtually costlessly, that you could have the committee meet more regularly. And I think in the end there would be sort of an internal debate as to whether or not given all the work that the staff would have to do in order to make that happen, whether there was enough useful information actually accumulated over those three weeks to warrant another discussion.

So I think, continuing to tighten as appropriately every six weeks should be sufficient to do the trick. I will jump in with my final point on my list that we haven't mentioned, because not only is it important, but it allows me to use my clever Malcolm Gladwell analogy to its completion, which is that the point of his book in the end was that, when you see that certain cultures end up having much more plane crashes and it ends up being the cultures for which underlings are very uneasy about telling the captain that something is wrong. The Fed is quite good at having a big study, a big thing that looks at a big problem and comes up with sensible recommendations.

This is conceivably the biggest monetary policy mistake that's happened in decades. So I sure hope that they're giving themselves a good, honest, hard look about what happened and not just attributing it to sort of bad luck and a bunch of bad policy shocks. But giving it a hard look and coming up with the hard answers to those questions and that they're all internalizing that. Rather than sort of pushing forward with the view that, well, we didn't make any mistakes in real time. All the mistakes were just revealed with 20/20 hindsight because of these bad shocks.

Beckworth: All right. With that our time is up. Our guest today has been Bill Nelson. Bill, thank you so much for coming back on the show.

Nelson: It's always a pleasure, David, and thanks for having me.

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