Julia Coronado on Productivity, Commercial Real Estate, and the Fed’s Soft Landing

As the Fed continues to seek a soft landing in 2024, election year politics and a shaky commercial real estate market are just a couple of the remaining challenges facing the central bank.

Julia Coronado is the president and founder of MacroPolicy Perspectives, a Wall Street research firm. Julia was also recently the president of the National Association of Business Economists, and she has served as an economist on Wall Street and at the Federal Reserve Board of Governors. Julia is also a returning guest to Macro Musings, and she rejoins the podcast to talk about the prospects of a productivity surge, the Fed’s journey to a soft landing, the state of the commercial real estate market, and 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:  Julia, welcome to the show.

Julia Coronado: My pleasure to join you, David.

Beckworth: It's great to have you on, and you are a returning guest, so it's always a delight to have a returning guest on the program. You are also someone I look up to, because you were an economist in academia, in industry, at the Fed, and now you've gone out and become an entrepreneur. You're living the American dream.

Coronado: I really am. I am grateful for all of the opportunities I have had. I have learned so much at each one of them.

Beckworth: It's great to see people like you out there making your own way in the field that we're in. We still have the same areas we covered, but you're doing it as an entrepreneur, so it's very inspiring to those of us out there who wish we could be as bold and as fearless as you are, Julia. So, let's talk about your entrepreneurialism and your firm that you founded, MacroPolicy Perspectives. Now, I know that I participated in a survey that you put out, and you do a lot of research for Wall Street, so talk about the work that you do.

Coronado: My path that you alluded to, David, it involved getting my PhD, then going to the Fed and learning a lot, almost a second graduate degree in forecasting and analyzing the economy in real time for the policymakers making decisions. And, of course, that is also a training ground for becoming a Wall Street economist. So, I got recruited out of the Fed. I went to Wall Street just in time for the global financial crisis. I was at the epicenter at the Barclays Capital-Lehman [Brothers] merger, so that was a great adventure. But then, I spent 15 years doing this work in the private sector, in the financial sector at various banks and hedge funds.

Coronado: And I developed a couple of things. I developed a lot of contacts, a whole group of people, clients that I've been working with for years. And I also developed a methodology, a view of the world, a way to approach this work, and it lent itself very naturally to going out on my own. My last employer, Graham Capital, helped me start the firm, and they're still a client of ours. So, that's, again… I feel very grateful for that kind of opportunity, when it presented itself. So, I am doing the same work that I've been doing, but I'm just doing it on my own, and one of the things that I learned through my work at banks and at hedge funds was that being independent actually can add value to people, because I can be more nimble and more direct in my communication.

Coronado: When you are at a bank where there's a trading desk, there's a lot of regulations about how and when you can communicate with clients. And yet sometimes it's really valuable to have a very quick reaction to something that the Fed chair says or some data that's coming out. And so, that independence can actually be quite helpful to people that are making portfolio allocation decisions. So, that was the idea, was be an independent voice. We can have direct communication with our clients. We have Bloomberg chat rooms with a lot of our clients, and they like that they can ask us questions as they're working through their own analysis and so on. So, it's been really good. We've been at it— we're going into our eighth year. It's worked well for-- when I say we, it's myself, my business partner, and now we have a team. The clients seem to appreciate it and value it, so it's all good.

Beckworth: That is wonderful. Now, who are your clients? No names are needed, but just generally, what are the industries that come to you?

Coronado: Mostly, they're money managers. Mostly, they are of different kinds. We've got hedge funds, we've got mutual funds, we've got insurance companies, some banks. They're all over the world. We've got the bulk of our clients— more than half are in the US, but we've got Brazil, Australia, Canada, the UK. So, we have a global reach. For some people overseas, and even for some domestic money managers, we serve as an outsourced economics team.

Coronado: You might be starting a fund, and you don't have the budget for a full in-house team, but here we are. We're up and running for you, and we can give you full service. And so, that's true for international money managers especially, that the US is very important for everybody, but, again, a Brazilian fund might not have the budget for a whole in-house US team. So, we can interact with their economics team and give them the US perspective.

Beckworth: Now, in addition to the work you're doing for clients on Wall Street and around the world, you also provide insights to the Federal Reserve, your former employer, right?

Coronado: Yes. I've served on a number of advisory boards, [and I] used to be with the New York Fed's economic advisory panel. I'm rotated off that. I'm currently serving on the advisory panel for the Cleveland Fed's [Center for Inflation Research] and also the newly created advisory council for the Dallas Fed. So, I definitely always stick close to my monetary policy roots and try to engage with the Fed in a number of capacities. I am also a regular attendee of Fed conferences and so on. They usually have excellent content.

Beckworth: We'll come back to your other role as the president of the National Association of Business Economists, which is another way that you keep yourself in that world as well, but you mentioned the Dallas Fed. So, you talk to Lorie Logan, I imagine. You've got a great president there at the Dallas Fed. That's great.

Coronado: We do indeed. We are very excited to have her here in Texas.

Beckworth: Yes, I had her on the podcast in the past. So, you have yourself busy advising central banks, you're involved with conferences related to Fed policy, that space, and then you're also busy in your firm. And one of the things you do there, Julia, is forecast. As you said, you developed a whole toolkit, skill set for forecasting at the Fed. And so, I want to talk to you just briefly about how you forecast, because during the pandemic, I got burned pretty bad throwing my forecast out there. Now, I relied heavily on asset markets, and in particular, Treasury markets. I was very convinced in early 2021--

Coronado: Inverted yield curve?

Beckworth: Yes, the yield curve, but also the TIPS. As listeners of the show know, I wrote an op-ed that said, “quit worrying about inflation” in early 2021, and I was relying largely on breakeven inflations. And, man, they really broke my heart. So, you, as a professional forecaster, how do you use, say, market forecasts, asset prices versus a consensus, expert-driven? How do you weight them? How do you use that information as an input to the work that you do?

Data Utilization as a Professional Forecaster

Coronado: First of all, David, we all got humbled in the pandemic. The pandemic, it was a challenging environment. It was unprecedented, and it's broken a lot of our models, literally broken them, because the volatility in the data is so extreme that it really is hard to filter it out and control for it. So, we were also on team transitory on inflation, also looking at inflation expectations stability, and also just the supply chain nature of the early stages of the inflation. So, I think that one of the things in forecasting is— and actually being in markets… I remember when I first came to financial markets from the Fed, and I was working in forecasting, and I had a portfolio manager explain to me, “We don't expect you to be right all of the time.”

Coronado: “What we expect is that you have a framework that's sensible and disciplined, that you acknowledge when you're wrong and learn from your mistakes,” and that was extremely enlightening to me, because, again, there's all of these jokes about economists and how often we're wrong about things, but it really is more about gauging risks and forces that are acting on the economy and how they might combine and play out. So, we've been right about a lot of things. We've been wrong about a lot of things. We try to adjust as we go along. When we were wrong about inflation, what we did was that we developed a lot of more granular bottoms-up industry-specific analysis.

Coronado: So, we’ve got a lot of new information and data sources, and contacts in the auto industry, new and used, in the shipping industry, in the retail sector. So, in general, our approach has always been— which is something I learned from the Fed— top down, bottoms up. So, you do the macro models, you run all of the macro models, but you also do a lot of sectoral, granular bottoms-up analysis, and then you see, where are the tensions? Are they agreeing with each other? Are they saying something different? What's not in the model that might be evident in the sectoral analysis?

Coronado: And, of course, the data is always changing. There are weaknesses now in the official data because of low response rates, but yet there's more data available from private sector sources and higher frequency, timely data available. So, it's just a constant evolution of bringing in new data and updating your models and developing new models, and always triangulating, triangulating, triangulating. Part of being a forecaster, I think, is that it is a social science. We do like to compare notes with other economists. The NABE engagement is excellent for that, and one of the things that NABE did during the pandemic was develop some deep-dive monthly calls on inflation after the CPI, on employment after the jobs report, where a bunch of data wonks like me and you can get together and compare notes. “What did you take from the employment report? What did you make of this weird report?” It's just constantly, relentlessly gathering information and looking at data.

Beckworth: Yes, so, I would be in that group you mentioned that takes the top-down view, the 30,000-foot perspective. I think less so now, but I'm still heavy from that perspective. But, I definitely have seen a shift in my own thinking and definitely lots of other folks when it comes to, for example, the inflation reports. Today, we had the PCE inflation [report], and we care a lot more about the granular details than we used to. Pre-2020, “Oh, we're below target, woe is us,” but now, it's like, exactly how are we deviating from the--

Coronado: How many basis points are we--?

Beckworth: Is it housing? Is it core, core, core? It pays to really--

Coronado: Supercore…

Beckworth: Yes, so, it's interesting to see this evolution of thinking just in our space over these past few years, and maybe one of the big lasting legacies of the pandemic is that we're better attuned to the granular details of economic data.

Coronado: I hope so. Even before the pandemic, I think that sectoral macro… it's super useful. We can see that the Fed has kind of become more oriented towards understanding the distribution of things and another layer down from the aggregate data, and I think we learn a lot from that and particularly during the pandemic. And, yes, now even Chair Powell is talking about basis points on inflation, and translations of PPI to PCE, just all kinds of crazy stuff that— I certainly don't remember that when I was at the Fed, that we were following every 100th of the PPI.

Beckworth: Yes, and it's been useful to take a look at these distributional accounts, even for someone like me, in the past, who hasn't really paid close attention, because things such as, well, there's still people holding a fair amount of liquidity in their checking accounts and money market accounts. Well, who are the folks actually holding it, really wealthy people who may not spend it or lower income [people]? You can't really capture that insight looking at the aggregate data. And, fortunately, the Fed is providing a greater breakdown of that information.

Coronado: Absolutely. It's important, and it can influence the aggregate outcome.

Beckworth: Now, we've touched on it, but the National Association of Business Economists, or NABE, you were the president [from] 2022 to 2023, is that right? Did I get the year right?

Coronado: Yes.

Beckworth: So, tell us more about that organization and what it aims to do.

What is the National Association of Business Economists (NABE)?

Coronado: So, it's been around a long time. I think, let's see, it was established in— I was just looking at this— in 1959. So, it's been around a long time. It's always been the organization for private sector economists, policy economists, government economists, basically the non-academic branch of our profession. There are academics who are very active in NABE, just because they're empirically oriented, and we often bring in a lot of— our panels at conferences will include academic researchers— but it really is an organization that is for private sector economists, and it has evolved with the profession.

Coronado: So, for example, NABE now has a whole new conference and area of the organization for tech economists. We have a tech conference every year. It is the job fair platform. It is more than the AEA. It is at the NABE Tech Conference that employers and employees and job seekers match up. So, it's become the fastest growing segment of private sector economists. And so, that's a whole new branch of our organization. So, it's always been for the finance economists, for the corporate economists, for the policy-oriented economists that are tracking the economy in real time.

Coronado: We have several conferences every year, a policy conference in DC, an annual meeting that moves around the country. We try to cover the topics of the open questions in our economy, both from a policy perspective [and] from a business perspective. It is an extremely valuable and collegial organization. One of the things I love about NABE and business economists is that they're friendlier than academics, I find. We're really nice people, and people are just generally not jerks to each other. It's not like that kind of seminar culture where everybody's one-upping each other. It's much more about seeking truth together.

Beckworth: Yes, that's for sure.

Coronado: So, it's also a real nice organization.

Beckworth: That's great to hear, and it's also fascinating to hear that this conference is fast becoming a place where you go to find work or you find someone to work for you, because my sense is that the AEA annual meeting is going the other direction, because now you can do interviews via Zoom. So, most of the people who went to the AEA meetings didn't get to participate in it. It was always the elite economists. There's very little incentive to go to the AEA annual meeting if all you're doing is going to watch someone else speak, and you can interview people elsewhere. So, NABE may be what the AEA has been in the past, so that's very fascinating. Now, you guys also have a journal. I should mention that before we move on. You’ve got your own journal as well.

Coronado: Yes, the Journal of Business Economics, exactly, yes. So, we do have a journal. We encourage people to submit articles, again, looking for timely, empirical work.

Beckworth: Okay, well, let's move on to some actual developments happening in the economy. I'm thrilled to get you on to talk about them. I've seen you, on Twitter, make a few comments here and there about them. I'm sure that, in your notes to your clients, you've written extensively about this, but the first one I want to touch on is what appears to be a productivity surge. We went from an inflation surge to a productivity surge, which is the best ending to a story of inflation, to be in this world.

Coronado: Absolutely, knock on wood.

Beckworth: Tell us about that. Is this for real or is it a head fake? Can we bank on this happening?

Evaluating the Recent Productivity Surge

Coronado: We do know that, at least a piece of it, certainly last year, was such a stellar performance, at least according to current estimates. And at least some piece of this is just the ending of pandemic frictions. We had so much sand in the gears of the supply side of the economy during the pandemic, after the pandemic, and really, last year we started hitting our stride again [with] supply chains moving well. Of course, there's always issues; the bridge in Baltimore, the Red Sea developments. There [are] always developments that throw sand in the gears. But, in general, supply chains have been working a lot better and components are available and products can be moved.

Coronado: So, part of it is that. The other thing on the labor market side was that we saw record amounts of turnover during the pandemic. That settled down starting in late 2022 into 2023. So, as people just— again, almost mechanically, as people are in their jobs longer, they get trained up, they become more productive. Now, those two elements might be a temporary boost to productivity that won't continue boosting productivity on an ongoing basis, so, a level shift, not a source of growth. I think there's at least several reasons to be optimistic about a better trend.

Coronado: One is, that record turnover in the labor market, from all of our research in labor economics, says that that should deliver more efficient matches between employees and employers, and that should be an ongoing source of operational efficiency. So, that's one reason for optimism, that we ran it hot, and there should be some dividends in terms of the labor market from that. Then, in terms of business investment, it's been strong. It's one of the cycles without any real business investment recession. Before we even get to generative AI, we've had years of really incredible technological developments.

Coronado: AI, just regular AI, machine learning, software advances that companies have been investing in, testing, perfecting. Of course, that hot labor market really concentrated hearts and minds. One, people had to invest really quickly in order to manage the challenges of the pandemic. The hot labor market incentivized them to invest, so, we've just seen a very strong investment cycle, and if firms are good at what they do, we should realize dividends from that investment, not just one time, but over time. The one metric that confirms increased business dynamism is business applications.

Coronado: They shot up during the pandemic. They've stayed high. We have mapped that into job gains and there is a relationship. So, the companies where we see the business applications are hiring and growing, and so, that's, again, one indication that things are a bit more dynamic. The last one is, last cycle, we were in a deleveraging cycle. Households’ debt-to-income ratios were declining for 10 years. When we think about money— money multipliers, and money in the system— and the velocity, that is a real big tax on velocity of money, and we did see velocity decline. We did see a negative credit impulse.

Coronado: It took me a while to wrap my head around that when I would look at flow of funds data and you see negative credit growth. What is happening? And it had macroeconomic consequences. And even before the pandemic, we were seeing debt-to-income stabilize. We were seeing households less debt averse. They weren't releveraging, they were just stabilizing. Taking away a headwind is somewhat of a tailwind. And then, I think that what we saw with the response to monetary policy during the pandemic, one of the reasons the Fed did so much, [is that] it was used to its tools being impotent. It was used to taking rates to zero and nothing happening. They took rates to zero and kaboom.

Coronado: People were taking out home equity, refinancing, taking out home equity. There were all kinds of responses to it, so, I think that the absence of just a healthier credit impulse, a healthier velocity of money, means that there's going to be more to invest in and less uncertainty about the state of the economy. I say that with great trepidation, but, in any case, the lack of deleveraging should, I think, also be something that allows us to be more productive, this cycle versus last cycle. Is that above trend productivity? Is that below? I'm more agnostic about whether the trend itself is higher, but at least we're not in this subpar environment like we were in the recovery from the global housing crisis.

Beckworth: That's a very hopeful message there. You take that message, add it to the incredibly strong labor markets. People are finding jobs, staying employed. That makes you feel good about the future. At least for now, things look very bright. That's wonderful. So, I'm wondering, to go back and revisit conversations that we had as a profession prior to the pandemic, and you've touched on this a little bit, but just to be explicit about it, there were lots of people-- maybe not lots. There are a number of people talking about running the economy hot so that you could actually add to the supply side or the potential GDP as opposed to just hitting full employment. And I think what we saw during this pandemic--

Coronado: A high-pressure economy, yes.

Beckworth: We did. And some, including myself, maybe we did a little too much pressure, but I do want to take the win here, that we did quickly recover from the recession. We bounced back quickly and we maybe— again, [it’s] debatable [that] we overshot it, but it did lead to a hot economy. And one of the claims before the pandemic was, if you do that, you're going to get the opposite of hysteresis. You're going to get gains to the productive side of the economy, and I'm guessing it's probably too early to verify that claim or test that claim, but, I guess, could one say that the evidence so far provides support for that claim?

Coronado: Definitely, I think, definitely. I think that now that we've got some of these supply side tailwinds, the wind in our sails, and inflation is moderating for reasons that seem to be less directly tied to monetary policy, somewhat obviously— Of course it's doing its job, but it's not just that— we can start having the conversation about just how great this recovery has been and just how resilient and unexpectedly resilient this labor market has been. And is that a reflection of the macro experiment we ran? I think, so far, yes. 

Coronado: It’s certainly early to draw strong conclusions, but you don't want to also just pretend it's not happening. These are some really good dynamics, and we've been trying [for] a long time to get them. Prime age labor force participation is above pre pandemic, and women are at an all-time high. That's the opposite of hysteresis that we were shooting for, and there is plenty of capacity there, because labor force participation-wise, the US is still on the low side of advanced economies.

Coronado: So, could we do more? Potentially, yes. I don't sense that we're running into hard constraints. We're in that endogenous part of the labor market where the stronger the labor market is, the more people come in. And, of course, we've also had an immigration recovery, too. So, there's a lot of things that say that, yes, the supply side landscape looks better, and some of that, at least, is likely tied to that “run-it-hot”, high-pressure economy approach to the recession.

Beckworth: Well, that provides a nice segue into the next topic I wanted to talk to you about, and that is the Fed and its attempt to engineer a soft landing. It's remarkable, at least to me, that the Fed has had rates as high as it has had them, as long as it's had them, and we still had a great year last year. We alluded to the Treasury yield curve not living up to its billing as a forecaster of recessions. It was predicting a recession last year. It didn't happen.

Beckworth: Even this first quarter, it looks like it's going to be maybe close to 2%, that’s what the GDPNow estimate is saying. So, things are still looking great, and then even as we talked about earlier, inflation is coming down. So, it looks like, at least for now, that we're going to have a soft— maybe bumpy at times— but definitely a soft-ish landing. What are your thoughts on that? How did we get to this place where it's even possible, when we were talking about a recession last year?

The Journey to a Soft Landing

Coronado: There's a couple of features of our economy that muted the— So, there's this whole debate about lags in monetary policy. Are they shorter? Are they longer? The argument that they're shorter is that the Fed engages in much more aggressive forward guidance, and capital markets pick that up very quickly and tighten conditions well in advance of the actual rate hikes, et cetera, which is absolutely true. So, I think that capital markets’ lags are much faster because of forward guidance, but the credit lags are a lot slower, and they've allowed this to be spread out over time.

Coronado: So, the fact that everybody refinanced to a 3% mortgage rate and [are] holding on to those mortgages for dear life means that the biggest piece of debt on household balance sheets has not reset to higher rates. We do see, at the margin, higher rates dampening auto demand. Certainly, there's been no equity withdrawal of housing equity, because it's expensive. We see that banks, reflecting some of the inverted yield curve as well as the potential losses on commercial real estate, have tightened things up. So, I think we still do have lags playing through, and that these fixed rate structures that we have in our economy play the role of spreading it out over time rather than a big shock.

Coronado: You have that headwind dampening things over time. So, the way I think of it— plus we've had this big tailwind from productivity, some of that pandemic related, some of it potentially tied to the macro policies we selected, but all of that together means that you've had this nice, gradual credit tightening. You've had this nice offset from productivity. Policy might have bit harder had we not had that. So, it's a complex combination of things that's turned out to be very favorable. I think most people on the FOMC probably thought you did need a recession to bring inflation down, in their heart of hearts.

Coronado: They always had a soft landing in the Summary of Economic Projections, but remember the pain speech from Chair Powell? “It's going to be painful. Stop getting excited about a soft landing.” He's not singing that tune anymore, because we've made enough progress on inflation that he's like, “Okay, maybe we have a soft landing.” Actually, I think he's probably downright giddy if you got him-- if you could sit down with Chair Powell over a nice cold beer, I bet he’d be super excited about what is happening.

Beckworth: Off the record.

Coronado: But you cannot say that. You have to be the stern, cautious, sensible central bank chair.

Beckworth: You can never be reckless in your official statements.

Coronado: No, you can't say like, “Woo-hoo! Did you see 2023? Booyah!”

Beckworth: Maybe at home with his wife he does, a few close friends.

Coronado: I hope so. I hope he toasts with somebody, judiciously, cautiously.

Beckworth: What you're describing is like all of the stars have just aligned perfectly to get us where we are today. Of course, Jay Powell has had this famous speech, “Navigating By the Stars,” a little bit different, but it's interesting, the turn of the phrase there, all of the stars have lined up. One question about policy today. We know the Fed is tightening and it's also shrinking its balance sheet. So, it's attempting to tighten financial conditions. What about fiscal policy? We are still running big deficits. Is that adding a tailwind to all of this?

Coronado: For sure. I would say fiscal policy— both federal fiscal policy and, actually, also, state and local government finances— are an important element to this cycle as well, and they're the mirror image of last cycle. Yes, we're running big deficits. They're not getting bigger, so, the delta from that is fading over time. But, the fact that that last wave of fiscal deficit spending was structural in nature— that is, the CHIPS Act, the infrastructure bill, the Inflation Reduction Act— a lot of that has a long tail. This is an investment. It's going into the economy over several years. So, we've got several years where we're going to have this positive impulse. At the state and local level, after the housing crash, they were all against the wall and cutting public services and cutting employment. And over the last year, one of the greatest sources of resiliency and hiring has been state and local governments hiring back workers, and they can afford to because they are mostly—You know, California is struggling, because they're experiencing the tech recession, but most other states are in a surplus and their finances have rebounded. 

Coronado: We didn't have a housing decline, so their property tax revenues are fine. The sales tax revenues are fine. The income tax revenues are fine. So, we actually have a very positive orientation. Government tends to be— historically, has been a steady positive source of about a half a percent of GDP growth or so, and that's what we've seen a little bit more last year. But, we're in that range, whereas, again, after the global financial crisis, we were subtracting half a percent from government. It was a massive headwind, and monetary policy was trying to do all of the work, and it was very inefficient and ineffective. We have a much better policy setting. Of course, we can argue about whether we should have a more balanced fiscal situation, but boy, I'm sure the Fed is just super happy that they don't have to do all of the work, and that probably means that interest rates can stay higher this cycle without tipping the economy over. Obviously not [at] 5.5% forever, but is R-Star, for this cycle, higher than the last one? Probably so.

Beckworth: So, you've touched on this idea that, potentially, the interest rate, the equilibrium or the rate that keeps the economy stable, may be higher, at least temporarily, given the health of the economy, productivity growth, spending, all of those things. There is one area, though, where people have expressed concern. This is an area where you have commented widely, I believe. I've read you in The Washington Post. I've heard you on another podcast. And this is commercial real estate. I hear some people say that this is the other shoe to drop. This is the other shoe to fall, and just wait, and maybe these lags from high interest rates will eventually be manifested in a severe contraction in that sector, which affects everybody else. What are your thoughts about commercial real estate?

The State of the Commercial Real Estate Market

Coronado: So, it is a headwind. It's hitting right now. You've seen, in the last month or so, several really large office buildings get marked down below the debt outstanding and banks having to take losses. We are in that process right now, and it's going to have a long tail, the office sector in particular. I'm in Austin. That's what I've been observing. It is super crazy, David. You were here recently. It is nothing but cranes across the skyline, still. Multifamily and office are both still— because of the long lags in planning and developing and executing a project— we're still in a building boom here and in a lot of areas in Texas.

Coronado: So, it's the Sun Belt where the population boom happened during the pandemic, and there has been a building boom. And, really, the rubber's hitting the road now with the office sector and the multifamily [sector]. Now, [with] multifamily, we underbuilt for so many years. I'm less concerned about— ultimately, we're hoping, and we think it's quite possible, that we've got this excess supply in multifamily in the Sun Belt that's putting downward pressure on rents. That's great for inflation. Ultimately, you do want rates to go lower, so that there will be new projects eventually, though, once we work off this excess supply. I'm pretty optimistic about the multifamily prospects.

Coronado: [The] Office [sector] is in a secular adjustment. Again, certain cities, not everywhere, but certain cities really have overbuilt, and there's going to be losses on those projects. I've been very curious listening to Chair Powell about this, that after the bank failures of last year, I think that they really dialed into the supervisory oversight of this in particular, and they're making sure that they're very close, in close communication with the banks that they're supervising. And it sounds to me like they are trying to encourage a proactive working with borrowers, spreading this adjustment out over time, managing that as judiciously as you can, without it culminating in a big shock.

Coronado: That that was one of the lessons learned [from] SVB. It wasn't commercial real estate that was at the epicenter of SVB, but we all know that commercial real estate is the looming area. If there was misallocation or bad debt coming out of this cycle, that's probably where it is. He doesn't sound worried, but other Fed officials that— again, this is where the regional bank presidents are quite helpful to listen to on this topic. So, I think that they're trying to work this out, and, again, spreading that adjustment over time means that it's not that you're not going to take those losses. You will. There will be losses taken.

Coronado: There will be some excess supply that needs to be worked off. There might need to be some repurposing of certain space. But if you spread it out over time, then it's a sectoral issue. It's not a macro issue. I'm pretty convinced that we've overbuilt office space in Austin, Texas, but I'm also optimistic that we can work that out over time, and that, in general, the CRE and the banking-- Will there be other bank failures of smaller banks that are particularly exposed? That's possible, and we may have some, again, scares or wobbles that are tied to this.

Coronado: And in the commercial real estate space, there are other offsetting sectors that are doing well. The manufacturing building is off the charts. It's a hockey stick up because of the CHIPS Act. And then some of the reshoring— Mexico is experiencing a huge boom because of the reshoring and the nearshoring of manufacturing activity. In Texas, what we see is that that requires, therefore, warehousing. So, warehousing is an area that is doing-- If we're going to reshore and have more stuff coming from Mexico, we're going to need the warehouses to go along with that and the railroads and the transportation. So, it's not like every sector of commercial real estate is hurting. There are sectors that are doing well. So, on balance, overall, that also adds to the conclusion that this might be, certainly, a headwind for the banking sector, certainly, a headwind for the economy and that sector of construction, but maybe not enough to derail the whole thing.

Beckworth: It's interesting that you mentioned Austin in Texas, because, as you noted, I was there just recently. I drove down to the east of the city, and I saw this really, really big Tesla plant. The Uber driver told me it was going to be the largest building in the US when it's finished. So, you see plants being built around Austin as industry is moving there, as Elon Musk is moving there. He told me, I believe, that SpaceX is also somewhere in Texas being launched off the coast.

Coronado: Yes, south Texas.

Beckworth: Yes, so, there's a lot of that going well, and that offsets the office space issue. 

Coronado: You know the other thing that's booming in Texas? Renewable energy. It is, by far— the biggest renewable energy boom is in Texas. It was wind at first, and now it's solar, and the capacity and the speed of investment in this is mindboggling, which is great. We need it to have the energy for this growth, particularly with AI and all of the crypto demands, and all of the energy demands and the hotter temperatures. Good Lord. We've been having to use more air conditioning. 

Beckworth: Also, those extreme winters you went through where you lost power too, right?

Coronado: Yes. We were a part of the great freeze. We lost power. It was traumatizing. So, we need the capacity, but the renewables have been where all of the growth is coming in. It's been phenomenal. So, that's directly a result from the Inflation reduction Act. It's been happening before that, but that's been a turbocharger for renewable energy construction in Texas.

Beckworth: That is so interesting, because you wouldn't imagine Texas as being the first place [where] renewables would be built up.

Coronado: No. I know, right?

Beckworth: You both have Elon Musk coming in with this--

Coronado: You give people incentives, and they will grab that money and do something with it.

Beckworth: And you have the renewables come in. So, hey, Texas is a great playground for experiments, for industry, for growth. It’s maybe the future of this country, so it’s great to see it happening down there. Let's move on to another issue in the time that we have left. This one might be a bit more speculative, but I think it’s interesting and important, and I imagine it’s important for your clients, too. And that is, we're heading into an election year, or we are in an election year, and there's going to be increasing criticism of the Federal Reserve, its interest rate, potential cuts later this year. People on the right will be saying, “You're doing this to get Biden reelected.” People on the left, “You're not doing it fast enough, you're hurting the full employment mandate.” So, I guess the question is, can the Fed navigate these political waters and thread the needle and get to the destination without being harmed too much, because of this election year?

Can the Fed Successfully Navigate the Politics of 2024?

Coronado: In terms of their independence— I mean, look, Chair Powell addressed that today, actually, in an appearance at the San Francisco Fed. I think if anybody's going to thread that needle, Jay Powell is well positioned to. He is somebody that communicates extraordinarily well with both sides of the aisle. He was very insistent that the timing of their interest rate decisions would have nothing to do with the political calendar and only be reflective of the data. I know this to be the case, that the deliberations are really not about the political cycle. They're about the economy and the data. So, I think they're going to thread it as well as they can in an election year.

Coronado: He noted that today, too. They've got critics on both sides, and the volume of that noise will probably only be turned up. But if anybody's going to keep their head down and lead the committee through this, I think that Chair Powell is well-positioned to do that. So, I think that's what they're going to try to do. Ultimately, the Fed is a creature of Congress. They can't be immune from politics, but I very much share this institutional value of, a lot of the value of the dollar as the reserve currency, and the stability of our financial system comes from the Fed being that independent, steady hand.

Coronado: He said, “We're going to do our best to preserve the value of this for the next generations.” I like that. That warms my heart. We've achieved so much in terms of financial stability, and sometimes people, especially investors in markets, can take that for granted. It's a huge benefit that the US has. It's just such a huge source of value that helps us be resilient and outperform, and I think that they're going to do the best that they can. And I think, hopefully, we'll come out on the other side with the Fed intact.

Beckworth: Well, I appreciate those comments from Powell, too. I think we do underappreciate the fact that we have this dollar that's the dominant currency of the world and all of the blessings and privileges it affords us. And I would go as far as to argue that the Fed has, unwittingly even, made it stronger because of its responses. So, in 2008, 2020— this is an argument that I made on here many times before— by stepping in to stabilize dollar markets, money markets, both here and overseas, it effectively has solidified and reinforced investors' confidence that their dollar investments are secure. And so, if anything, the demand for dollars around the world has gone up on the margin. As people know, if push comes to shove, the Federal Reserve will be there to backstop the global dollar market.

Coronado: Yes, and they've been flexible and creative, and while that sometimes attracts a lot of criticism, that's the job, is to maintain an elastic currency and make sure it's stable. And they've done what they've needed to do to do that. There's been some discussion around the Russia sanctions and [how] using the banking system is something that puts the dollar at risk, because if people know that if they have a difference, politically, that the US will come down hard on their banking system.

Coronado: I take the other side of that. I think that if the world economy is going to go back to more Cold War-style blocs of trading and economic interaction, that's a political decision. It does not mean that the US needs to accommodate rogue nations who are breaking laws and undermining the rule of law. Go to your bloc, that's fine. We're the market bloc. We're the market, stable, freer trade bloc of the global economy, and if there's going to be rogue nations like Russia, then you don't need to be part of that.

Beckworth: Well, I recently had Steve Kamin on the show, who used to lead the international finance division at the Fed, and then Mark Sobel, his counterpart at Treasury, who oversaw the Treasury's engagement with other finance ministries. Mark Sobel had a great comment. He said, "Look, if now is not the time to use our ability to impose financial sanctions, then what is?" This is the exact time to use a tool for the right reason. And there's been a number of studies— in fact, I had them on because they had a paper, but there's been several other papers coming out this year that are looking back at all of the noise and excitement in '22 and '23 of dollars losing their place, de-dollarization. By most metrics, not much has changed.

Coronado: Nothing has changed.

Beckworth: It was a lot of excitement over nothing.

Coronado: And, like you said— actually, [with] crypto, Governor Waller made this point recently [on] stablecoins and the crypto ecosystem. Stablecoins want to be stable relative to the dollar. If anything, that solidifies, ironically somewhat, the dollar's global position, because you do need a benchmark. You need an anchor. What's your best anchor? It's still the dollar.

Beckworth: Well, Julia, one last topic before we close the show, and that is something near and dear to my heart, and that's the Fed’s framework review. As you know, I'm a big fan of nominal GDP targeting. This is the one moment when I get to shout through my megaphone, “Please, please, please.” I don't have any pretense that the Fed's ever going to go there anytime soon, but it is an opportunity to discuss options. What is your expectation for what they will actually do during this particular framework review, starting later this year?

Expectations for the Fed’s Upcoming Framework Review

Coronado: That is such a great question. I think it will be very different from the last framework review, which was kind of narrowly focused on this average inflation targeting concept. And there's a lot of criticism of that, that the way the Fed operationalized that during the pandemic was misguided or ended up overshooting. And I think that that is true. The promise to not raise rates until we hit maximum employment, in retrospect, [did not look like] a balanced way to operationalize that. That doesn't mean that the framework itself was the source of the problem, in my view. So, I think that that framework still holds okay. What I would like to see is a broader-- I'm sympathetic to your nominal GDP targeting idea. I'm not sure that that's going to make it on the table, but I'm sympathetic to it.

Beckworth: Thank you.

Coronado: And I, also, would like to see some recognition that there maybe needs to be a broadening of frameworks used to evaluate inflation— inflation that has many mothers— and some sectoral analysis, some market structure. There's a lot of things that you can bring to bear, and then even the ECB— they're a bit more flexible in their thinking when it comes to thinking about the drivers of inflation than the Fed can be. So, my personal wish list would be that they broaden their framework for thinking about pressures on inflation, and how do you evaluate them, and systematizing that the way only the Fed can.

Coronado: The SEP is very Phillips curve; unemployment, inflation, and growth. And I think that we need to think in a much more nuanced fashion when we're thinking about global inflation pressures and supply-side inflation pressures. We've got a good expectations framework, but what about market structure, and price setting, and the non-linearities, and the interactions, and the feedbacks? I think that we can do a better job, and the Fed should be the epicenter of the expertise on that.

Beckworth: Okay, well, with that, our time is up. Our guest today has been Julia Coronado. Julia, thank you for coming back on the program.

Coronado: My pleasure, David.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.