Skanda Amarnath and Preston Mui on the Tribal Transitory Debate and the Future of the Fed’s Framework

Skanda Amarnath is the executive director of Employ America, a think tank that promotes full employment in the American economy, and Preston Mui is also a senior economist at Employ America. Skanda and Preston join Macro Musings to talk about U.S. disinflation and the debates surrounding it, as well as what we can expect from Fed policy in 2024 and beyond, and finally, the Fed’s framework review that is set to begin later this year.

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: Skanda and Preston, welcome to the show.

Skanda Amarnath: Thanks for having us.

Preston Mui: Nice to be here.

Beckworth: Great to have you on. Now, Skanda, you've been on before. This is Preston's first appearance, so we'll make sure that you get a nominal GDP targeting mug, Preston. Of course, Skanda has given me his own mug, the GLI mug, Gross Labor Income targeting mug. They're related, in the same family, and we're going to have a fun time talking about them later, near the end of the show, when we talk about the Fed's framework review, a very important topic. But, before we do all of that and jump into Fed minutia, let's talk about Employ America for a few minutes. Tell us about what you're doing and what you've accomplished.

Amarnath: Alright, so Employ America was founded to focus on the macroeconomic policies relevant to full employment, both helping advance full employment outcomes and sustaining them over time. As we've found out over the last, call it two and a half to three years now, inflation itself has its secondary impacts in terms of what people think is possible on the full employment front. If inflation is high, people think the answer is slack labor markets. That's not how we think about things at Employ America, both because we think full employment is really valuable, but also because there are a lot of other things that affect inflation.

Amarnath: So, among the set of policy advocacy objectives and priorities, we really focused in on a lot of other sources of inflation where there may be something to do on policy that can at least help at the margin, if not more meaningfully. One particular place I'd focus on is energy and specifically the price of crude oil and refined products. That's a place where the Strategic Petroleum Reserve can actually do some pretty helpful things, both in terms of how it chooses to release crude oil, but also how it chooses to buy back crude oil over time. Yes, commodities are in one sense forward-looking markets, but also markets have to clear in spot, and so small changes in supply and demand can actually have some pretty big impacts on price. Commitments to buy in the future can have impacts on investment in the present. And ways of structuring that… we've been pretty active in trying to shape what Department of Energy regulation looks like, what Department of Energy policy looks like. And I’d say— I don't want to toot my own horn too much— but I think we've had a pretty significant impact on what realized policy looks like in this space.

Beckworth: Absolutely. I've been following you guys since 2019. Your former leader, Sam Bell, was on this program with you back in 2019, Skanda, and you guys have been very ambitious. You've done a lot. And I should add, you've also been recognized by Nick Timiraos, of The Wall Street Journal, with your PCE inflation forecast. Is that right?

Amarnath: That's right. PCE is the Fed's inflation gauge. They forecast headline PCE, a measure excluding food and energy, a measure that focuses on non-housing services. There's data that comes out before the official PCE data comes out that allows us to map a big chunk of PCE, I mean, mostly 95% to 99% of it in terms of accuracy. Yet, that takes a lot of detail-oriented work. We are a macro-oriented organization. We try to understand the macro variables in terms of how they're constructed, how they're measured, and really understand the causal structure behind all of this.

Amarnath: So, you have to know what's driving inflation, too. I think that is a much more interesting question, especially over the last three years. And developing careful ways of nowcasting this information, there are a lot of investment banks that do it. Employ America is not an investment bank, but we also have that modeling infrastructure in place to be able to do that well. There are a lot of other third-party research firms that also try to do this type of work. We just pride ourselves on being super detail-oriented. I think that Nick at The Wall Street Journal has been kind enough to also publish our nowcasts, which I think hold up about as well as anyone else's. And I think in terms of the detail and causal richness with which you can describe things, is something that our readers value.

Beckworth: Most of our listeners know who Nick Timiraos is, but for those who don't, he is the Fed beat reporter for The Wall Street Journal. He definitely has the ear and the attention of the people at the Board of Governors, regional banks. A lot of times he'll break news about the Fed, so a very important person in this policy space. What's interesting is that he'll, sometimes, on Twitter, right before the PCE release, he'll put out all of these estimates. You mentioned yours, but as well as Goldman Sachs, Citi, JP Morgan Stanley, UBS. So you're up there being cited by The Wall Street Journal, so that's an impressive feat.

Amarnath: And we didn't take any TARP money to do it.

Beckworth: Fair enough, fair enough. Okay, let's jump into this big debate about what has caused disinflation. So, we had the big inflation surge, so summer of 2022 at least, the CPI reached 9%, a little bit less for PCE. It's come back down quite a bit, about six percentage points down, so a pretty rapid drop since then. And there's been a lot of discussion about what has caused it. Why are we at this point? Did the Fed have some role to play in it? As well as, there's the discussion over who won, team transitory, team permanent? And [we’ll] probably never resolve this issue, but you have done your part, Skanda, to broker the peace among the various parties with an essay you wrote titled, *10 Thoughts on the Tribal Transitory Debate as We Enter 2024.* So, you have 10 points. We'll work through them and you can summarize the points. I'll read them off to you, and you can tell us what's going on with each point. So, the first one is, if people can't agree on what everyone else meant by transitory, the debate is futile. Explain.

The Debate Over “Transitory” Inflation

Amarnath: I think productive debate is based on mutual understanding of the best version of your opponent's argument. That's to say that I really understand where you're coming from, the steel man version of it, not the straw man, and to engage productively, because even your best version of your argument could be wrong. And I think in the case of all of the arguments that have been put forth by a lot of different people who come in various flavors of transitory, various flavors of persistent, or whatever the counterpart, anti-transitory, is, they all came in different shapes and sizes. And it tends to be easier to poke holes at the straw man of each than to actually engage with the most… the richest version of the other.

Amarnath: I think one succinct way of saying the problem with how people talk past each other is, for some, transitory was a description about time. It was about an outright call on how long inflation was going to last. Was it going to be a two-month phenomenon, a two-quarter phenomenon, two years, or something more permanent, or the kind of thing that was more permanent, in the other side, that had to only come down with particular conditional outcomes? Was inflation conditionally high based on where the labor markets were, and possibly a story about inflation expectations?

Amarnath: You could believe that inflation was not being caused by labor market slack or inflation expectations, but also that it might last a long time. That's some of the challenges between outright prediction and conditional prediction. And so, I think there was a lot of talking past one another that probably made for a messy debate, a little bit. I'd say that there's a lot of tribalism here that I think is ultimately unhelpful for trying to uncover some level of consensus and insight in this process. So that's what I meant by the debate is futile, if we don't get to some mutual understanding about what the other side is really saying.

Beckworth: I wonder if, to some extent, we are framing this question in the wrong way. By that, I mean… the real question I think we should be asking is, was the inflation worth it? Was that a necessary cost to get us through the pandemic? Is it the price we had to pay to avoid a deep recession? What are the trade-offs? Not that, necessarily, we want high inflation or we want to have a sharp contraction, but what are the trade-offs? And, maybe, what is the counterfactual world, as opposed to saying transitory versus permanent, supply versus demand?

Amarnath: Yes, I think this is a critical question for Employ America, much more critical than, actually, who won the team transitory/anti-transitory debate. I think that's a little less important than just drilling down to the stakes of, "Do we need to raise unemployment to solve these challenges?" Let's face it, if you really wanted to hit the 2% target tomorrow, you could say, "Well, we're not going to get there unless we produce mass unemployment, so the solution is, to get to 2%, if we're really serious about it, let's hit the economy with a hammer as much as we can. We'll get pricing power down and problem solved.” But, is the cost worth it to go about policy that way?

Amarnath: Or, can you have enough confidence to say that there are policies that take time to have an effect or else there are dynamics that take time to have an effect? And we're trying to get to 2% over a longer run. There may be some reasons for one-time price level changes. There may be reasons why these shocks are going to have a certain effect on prices, and in the absence of that, it's going to have an effect on output to the downside. That kind of welfare cost trade-off is actually something that's very messy, and I feel like under-discussed in macro oftentimes. Which is to say, we don't always have a great story for the welfare costs of inflation to match the stories about the more identifiable welfare costs associated with recessions, specifically not earning a market income, not being able to consume in the same capacity. Those are very tangible welfare costs.

Amarnath: It's not to say… inflation is clearly frustrating, politically frustrating, I suspect economically frustrating, but that those welfare costs are actually quite messy. I think the Fed is tilting the other way from saying, "There must be pain to solve inflation," towards the story of, "Hang on a sec. Soft landing is feasible. We can aim for something a little bit more balanced and we do not have to cause a recession to manage these inflationary dynamics over time." I think that's a much more optimistic read, but I think it's actually also a more accurate read of where we are right now.

Beckworth: Yes, I think it's great that we're having this conversation and not one about, "Well, how steep is this recession going to be? Could the Fed have done less?" Instead, we're discussing, “Hey, we're having a soft landing. What were the causes of it? Was it the Fed tightening? Was it the natural healing of the market?" That's a much better and [more] pleasant conversation than having 8%, 10% unemployment, and then, what's the best path forward for the Fed? So, I think we should be optimistic. As you said, look at the glass half full, not half empty, moving forward. Let's go to point two in your essay. You say that there's a shift in policymakers' perceptions and it can have generational implications.

A Shift in Policymaking Perception

Amarnath: I would say that for the last, call it, I don't know, few decades now, there has generally been a tendency to say, "Okay, we can have, incrementally, more labor market improvement, but the moment we see inflation, we're going to freak out and we're going to have to tame the beast.” I think that's something that has lurked for a long time, but because we've had low inflation outcomes for much of that period, those trade-offs don't always rear their head.

Amarnath: Once inflation did rear its head in 2021 and 2022, you definitely saw a chorus of economists say, "Well, inflation's so high, it clearly must be about some persistent labor market slack/inflationary force that was going to stay with us forever, and the only way out of it is to raise unemployment." There's this version of the story that actually happened in the summer of 2008, and I think it's a story that I think nominal GDP targeters very much understand or have heard of before, but unfortunately, it has been buried from a lot of memoirs from the 2008 crisis.

Amarnath: Which was that, in the summer of 2008, inflation was increasing. It was getting more broad-based. In my view, it was largely driven by commodity prices and supply-side forces, but it was also leaching into a lot more prices. It caused airfares to spike. There were a lot of other inflationary gauges that were increasing at a time when the economy was descending deeper into recession. And the Fed made a call at that time, collectively at least, that they were going to not try to ease policy to address the demand side of the financial crisis, so much so that even after Lehman Brothers failed and there was a big panic, the Fed did not actually cut rates at that September FOMC meeting, which actually succeeded the failure of Lehman Brothers.

Amarnath: I think that part tends to be buried in a lot of memoirs. I don't want to name names exactly, but I think it's pretty obvious that there's a tendency to paper over this part of history. Something that I know you, David, and your fellow travelers have flagged, which is, "Hey, maybe the Fed couldn't have rescued things totally, but they clearly didn't do all that they could in September 2008 to support the economy." The reason for that was that inflation surged in 2008, I'd say for reasons that had to do a lot with commodity prices. But if you could actually get away from that and say, "Hang on a sec. Let's look through some of this and let's actually realize that inflation can be high, but the answer is not more unemployment." If the Fed comes out of it saying, "We can manage this in a much more balanced manner and not just hit the panic button, not just try to hit the unemployment button,” that has huge effects on the ability for labor markets to stay strong for much longer periods of time, I would say.

Mui: Yes, I think that in this most recent episode, I think the Fed does deserve a lot of credit for resisting the worst of these calls for unemployment. Famously, Larry Summers said that we need 7.5% unemployment to return to 2%. And while the Fed did put out various projections that said that we're willing to take the economy to, say, 4.6% unemployment, they never really bought fully into this view that we really need mass unemployment in order to bring inflation down.

Beckworth: Yes, kudos to Jay Powell and his team at the Fed. Circling back to 2008, Skanda, since you brought it up, it is shocking looking back that the FOMC could be so worried about inflation all the way up until, I believe, September 2008. We had already seen multiple banks and parts of the economy begin to slow down, and yet, inflation was like the laser-like focus of the Fed at that time. Had they been looking at the broader economy or some other measure, maybe they would have taken a different view. But your point is, there's this generational bias, maybe, or there's a way of thinking and looking at the world that fortunately, as Preston said, they didn't use as much in this past experience.

Amarnath: Yes, I think the order of operations in central bank speak and central bank policy tends to be inflation first, you get 2%, and then maybe you get some good labor market outcomes. What if inflation flares up for reasons that have nothing to do with the labor market and not necessarily reasons that are really tightly tied to monetary policy? What do you do then? I think that's actually a very vexing question. It was one that, basically, the European Central Bank failed twice in 2008 and 2011. I think it's a challenge that the Fed… and look, there obviously were a lot of hawkish members at the regional Fed banks at that time. But I would just say, if you look through what Ben Bernanke, Don Kohn, Tim Geithner were saying in summer 2008, it was basically a story of, "We're probably going to have to raise rates in 2008, eventually.”

Amarnath: That was the direction of travel just because inflation is high and there's a risk of expectations de-anchoring. That was a story that was rooted in a lot of price data, reasoning from prices, exclusively. Even as unemployment was going up, nominal aggregates were drastically decelerating over that exact same period, and I think that's a part of the financial crisis story, a part of macroeconomic history that probably warrants a little bit more attention now, especially, because we do see that we came up through an inflation surge and it turns out you can manage that without sacrificing the labor market to solve that problem.

Beckworth: Well, I hope that is the lesson. We take a broader view and a more holistic approach and that we will move forward in this framework review to approaches that actually incorporate those lessons. So, number three I think we've touched on, and number three says, "The transitory debates were unhelpfully conflated with whether inflation was supply versus demand driven or narrow versus broad based." So, let's go to number four, and you say number four [is], "Don't be a supply denialist." Talk us through that.

“Don’t Be a Supply Denialist”

Mui: Yes, so I think supply was undeniably a part of this story. I remember in late 2020, I was trying to buy brake pads for my bicycle, and I couldn't find them anywhere. They just weren't on the shelves at all. And I think a lot of people know about the run-up in used car prices. If you look at the timeline of inflation during this period, you see inflation in durable goods, especially used cars, happens before the labor market gets "tight" with the vacancies exceeding the number of unemployed people. And, over time, the inflation in things like used cars starts to translate into inflation more broadly. You start to see greater increases in prices in transportation services, such as auto insurance, auto repair, auto maintenance, which all have some origin in this supply issue with automobiles.

Mui: Fast forward to 2023, what's happening to auto sales? Auto sales are ramping up. There's a clear recovery in supply. I was reading recently… Mike Konczal at the Roosevelt Institute has a piece where he shows that most of the categories of personal consumption where you see decreases in inflation are categories where quantity is increasing. We had 3% growth in real GDP over the past four quarters. To me, that really speaks to a supply issue in the beginning and a recovery in supply at the end.

Amarnath: I think it's one thing to say that a modest slowdown in, call it GDP growth, real consumption growth, was playing the pivotal role on the demand side. I think there are a lot of people who, I think, understandably buy into the notion of a non-linear Phillips curve, where small changes can have big impacts. The problem is just the direction of the change doesn't seem to be at odds with a lot of the core of the evidence, which is that we got, actually, real GDP acceleration. Productivity growth in 2022 Q3 was -2% year over year. Fast forward four quarters, it became plus 2%. So, even on these big macro variables, there's big swings.

Amarnath: That kind of swing is actually something we don't really see outside of recessions dating back to probably, what, 1965 or 1966? That's a long time. That's like a historic supply shock, I would say. And, if you look especially at the market-based components of consumption, there's a lot of noise where we don't have market prices and it's stuff like nonprofit output and financial services. Cut through some of that noise, and it’s just market-based personal consumption. In real terms, that accelerated. That's pretty remarkable, which is to say, it's really hard to tell a demand driven story exclusively if you're in the context of accelerating real outcomes, which gets us down, probably, to the second part of this, which is just about demand itself.

Amarnath: Don't be a denialist about demand either, right? Demand itself also surged, probably most meaningfully in 2021. There was obviously fiscal policy tailwinds, but there was also just a big tailwind from what I'd call the reopening effect. We had reopening, first of the services sector, which is probably not going to be offset by goods prices, so things like lodging, things like airfares, things like in-person recreation services, going to concerts. The pricing on that was going to probably normalize after capitulating in 2020. That was going to have a price increasing effect relative to quantity.

Amarnath: But in addition to those dynamics, we also have the labor market itself. We went from a labor market that was on to off to on, and going from off to on, in historic scale and speed, is going to add a lot of demand, demand for consumption. When people earn a new paycheck, earn a new market income, that really matters for the spending patterns. We saw this most visibly with market rents surging in 2021 and then subsequently stabilizing. The rent inflation measures in PCE tend to have a methodological reason for a lag, but they seem to follow this demand driven process. I would not describe why rent inflation surged and then is now cooling as a supply side phenomenon.

Amarnath: And I think it's important to look through the cross-sectional details to be able to validate some of these mechanisms. But they're also like… this is kind of a demand phenomenon that's really tied to the growth bulge of 2021. We had a big growth bulge in 2021 and, probably, the first quarter of 2022, outside of GDP. That was probably the biggest reason for why we had, on the demand side, a big surge in inflation. And that effect deserves to be treated seriously. It's something that, there are people who just say it's mostly about supply, can easily dismiss at their peril.

Mui: Yes, I want to point out that this story that Skanda just told about the relationship between the labor market and inflation, where you have this rapid recovery in employment and wages and people have all of this income to spend on things like rent and rent goes up, that's a much different story about the labor market and inflation than a lot of people have been telling about this recent episode. Over the past few years, there's been attempts to try to explain inflation using some measure of labor market tightness, such as the ratio of vacancies to unemployed.

Mui: Those stories are generally about [how] the labor market's tight, so it's hard to find workers, so the marginal cost of hiring that additional worker is really high and that price gets passed on. That's a much different story than the one we're telling. And if you look at things like rent inflation, I'm not really sure what rent inflation is supposed to have to do with the marginal cost of labor. Now, I'm not saying that this labor market tightness didn't matter at all, it may have mattered in certain sectors, but if you look at where we saw a lot of inflation and subsequent disinflation, it doesn't really seem to be something that you can really describe using this marginal cost of labor channel.

Beckworth: Let me ask a question about the supply shock part of the story. To me, clearly you tell a pandemic story, there's got to go be some negative supply shock going on somewhere. You can tell stories of people leaving the labor force, ports being closed, bike pads not being available. I remember trying to get exercise equipment back then, too. I couldn't find that either. So, there was certainly a lot of the supply side going on, but I think something else that was unique about this period, say compared to 2008 and our other more generic supply shock stories, was this big preference shock, too, right?

Beckworth: Households went from— not entirely— but there was a sizable shift from service consumption to goods consumption, right? It was a shift because of the pandemic, because we were locked up, and I know some people call that a supply shock. How would you define that? Because that was a meaningful part of the story, too, right? You simply had a shift from one sector of spending to another. And I think you could say that the goods sector… there were capacity constraints. We couldn't meet everyone's needs suddenly for weights, like I went to go buy weights during the pandemic. How would you frame that or understand that? A supply shock or something else?

Amarnath: I think the honest answer, even if it seems mealy-mouthed, is both. I think there really was a goods demand impulse, and there was an initial ability to supply goods that eroded over the course of the pandemic as inventories fell and more supply chain stresses showed up. And the economy was able to handle a certain amount of flow of goods production and distribution. But, we did hit supply shocks there, because these are things that are relatively untested, right? Goods demand seemed like it was in structural decline for a long time, but it turned out that if the demand and the circumstance is right, there would be some binding constraints there.

Amarnath: We saw a lot of rotation and services looked like they were very slack. It's very telling to me that real consumption looks to be running at a very steady trend in a lot of ways. In the aggregate, it looks quite steady. In the sub-aggregates, there's a lot of level shifts up and down in various components to point to. And so that big rotation was probably something the economy was not, in the short run, prepared for. And I think now we've seen more of a meaningful reversion to something that looks more normal between goods and services. I think of that as, there is a supply component to it, and there is a demand component to it. It would be kind of foolish to say it doesn't have… that there's only one and at the expense of the other.

Amarnath: And I think, taking one step back, it's also… this stuff is really tied to the pandemic, right? And especially in 2021, I think there was an assumption, "Okay, shots in arms, people are going to be vaccinated, industry is going to open up, boom. We're just going to get going to a normal economy." That actual process took a lot longer than most of us anticipated, and I throw my hand up here completely, which was, the pandemic's effects lingered on for a lot longer. The reopening effects lingered on a lot longer.

Amarnath: Maybe some of that has to do with fiscal policy, but some of that is also just about how Omicron was a pretty important thing for air travel pricing and air travel output in Q1 of 2022. The reopening effects probably filter into a lot of recreation services well into 2022 and even parts of 2023. These are all things that… these shocks lasted a lot longer, the impulses were more relevant for a lot longer. I still see a lot of echoes of it, which is why I wouldn't want to write a finite chapter on, "Oh, this is the end of inflation." I think this is still a work in progress.

Beckworth: I agree with you and that was kind of a leading question because I think both stories can be told, both supply and demand, in that preference shock between services and goods. And I heard Jon Steinsson tell this story, he's an economist at Berkeley, and I like his interpretation of it. He goes, look, there was a sudden increase in demand, real demand for goods, hits a capacity constraint. So, for a given level of funding or spending, you have two choices. Either the prices of goods go up, and that's it, or you can have goods prices go up, services fall, or you can have just services fall, some kind of adjustment.

Beckworth: And policymakers clearly did not want service prices to fall because that's where you have a lot of the economy. You also have wages. There's a lot going on there, so they opted for the price of goods to go up and they provided the policy accommodation to allow that. So, it was a supply shock accommodated by demand support. And again, before we pass judgment on that, the question to ask, I think, is, what was the counterfactual? Maybe it was a very awful, deep recession. But let me switch gears, then, to the demand side question here. So, Skanda, if you do come across someone who is a demand denialist, what is your go-to— or Preston, yours too— what is your go-to reply? "Oh, yes, well, what about this fact here? This tells me that demand played some role in the inflation surge."

Responding to Demand Denialism

Amarnath: I would immediately jump to rent. That's a very obvious point where you had historically strong levels of rent inflation in the CPI and PCE measures in 2022 and 2023. Those measures are very understandably lagged market rents which surged in 2021, and I don't think there's a good supply story there, to be perfectly honest. I think there is not a… this is like a big chunk of core CPI and core PCE. It is a big reason for the inflation overshoot that still remains, is that it has to do with rent and rent lagging. The reason for that bulge is very hard to describe in terms of this altered supply of housing.

Amarnath: That doesn't make a lot of sense, at least in terms of, the housing supply wasn’t actively constrained the way I'd say the production of automobiles was constrained. The production of a lot of commodities globally after the Russian invasion of Ukraine was constrained, or at least there was a lot of risk attached to it. In the case of housing and rent, that bulge is mostly about demand. And I think that's something to be almost at peace with on some level because, obviously, the rent increases are very painful, and I don't think they're, ultimately… then we have to find better solutions here.

Amarnath: I don't mean to cast doubt on it, but I also want to say that we had a surging employment recovery, and part of what comes with that territory is the likelihood of some areas where supply is generally inelastic, right? I think that's not because there is any unique inelasticity about housing. It's just about when people have jobs, they tend to be renters, especially when they didn't have jobs previously. And that rental demand effect is an aggregate demand story, and it's also a story that shows up in ways that are pretty reliable over time. This is probably one of the few areas that are reliably considered… call it slack-sensitive inflation, at least according to Stock and Watson. Their slack and cyclical inflation paper identifies this as a key vector through which demand really does show up on the inflation front.

Amarnath: Again, we should try to figure out better solutions here so it doesn't surge the next time we want to have a strong labor market recovery, but I do think, at a first cut, this is a part that— I wouldn't say concede— [but] I think I would own to say that this is something that is a very identifiable effect that we can see, that the growth bulge of 2021 was going to have this type of impact. And I would say, I would like to have the job growth of 2021. I'm glad it happened. At Employ America, I am very supportive of a rapid recovery in labor market conditions. I think some of the other aspects of the inflationary episode, we can hopefully learn and handle better, but it is true that this is one place where it shows up.

Beckworth: Okay, so Skanda and Preston, what I love about you guys is that you look underneath the hood. You get down into the engine, you get into the disaggregated data, and you can pinpoint, "This is where we have evidence for demand. Here's evidence for supply." I'm more of a macro guy, as you know this, right? I step back. I look at the hood of the engine. Is it getting hot? Is it getting a little too warm? And so, let me throw out my data points, and I want you to correct me, okay? I want you to rein me in because that's the job of smart people like you.

Beckworth: I'll give two things. One, the US government borrowed about $5 trillion, and about $3 trillion of that was a helicopter drop, it was financed through the Fed. Anytime you add something that sizable to the economy, you're going to, somewhere, even in a normal state, you're going to, somewhere, get price pressures. And again, I'm not saying it was inappropriate. Maybe it was what was needed for the pandemic, I'm willing to concede that point. But, to me, that clearly is a data point that suggests there were some strong demand pressures. And [then] the other point I brought up to Skanda before, and that is simply the dollar size of the economy. It's about $2 trillion larger than its trajectory path.

Beckworth: Now that's nominal GDP, and I know Skanda has corrected me [about how] that may not be a good measure because of the imprecise issues with nominal GDP. So, I'll throw out market-based PCE, which is about $1.7 trillion higher than its pre-pandemic trend. So, I look at those two things, the fact that the dollar size got so much larger than anyone would have expected, and the fact that fiscal policy was so big. Am I being too strong here? Am I reaching too far? How would you respond to those observations?

The Impact of Fiscal Policy and the Dollar Size of the Economy

Amarnath: I think at some surface level, it's like, "If you hit this stuff to an extreme, are you going to see it show up?" is the argument I'm hearing. And I'm not divisive at all. I think it's actually like… at the margin, if you hit this stuff, there's some effect. Hit this stuff to an extreme, there should therefore be some effect. It's a logical argument. There are reasons why that stuff doesn't always happen in a lot of cases, right, where we think about money supply measures. Sometimes they predict inflation so precisely and other times they are a complete dud. In terms of 2009 and '10, a lot of people used various aggregates that were wrong. It's like, "Well, money supply obviously affects inflation at the margin, so surely it shouldn't matter." But it's like, which one? What's the causal mechanism?

Amarnath: So, I do think it's good to have high-level intuitions. I'm not here to dismiss those, but I also think it's good to validate, what was the mechanism here? The deficit itself, to me, is less important than what is the actual contribution, to call it the flows in nominal expenditure, which there were, just to be clear, right? There were clearly big changes in transfer payments that show up almost instantaneously as changes in consumption and consumer spending. So, It's clearly there. And I think, to a large part, if the goal was to get a rapid recovery in labor market outcomes, if there was a goal of making sure consumption outcomes were reasonably kept whole, those actually look pretty good, but it's probably the case that you are going to strain certain things.

Amarnath: I think that the challenge is, there are other cross-cutting dynamics in this whole episode that are really hard to disentangle. I don't think it's impossible, but I do think that part of economics is about causal inference. It is about trying to be able to disentangle what actually happened and mattered, right? There are a lot of things that matter at the margin, but what really mattered, and we say how much, not just say, well, okay, yes, fiscal policy, clearly demand would be weaker, labor market would be weaker if we had less fiscal policy. That's probably true too, right? But that's also the kind of thing that is… it's good to put some numbers behind this stuff to be able to say, "I see where these effects really show up."

Amarnath: To be fair, there are evidentiary gaps on all sides. That's the part that's the most exciting and interesting about this whole episode is that we got to fill in those gaps to say, "How much did this really matter? Did it matter a little bit, a lot? What other things can we really connect the dots [to] all the way through to inflation, all the way through to consumption?" I'd say, yes, nominal consumption is a lot stronger than it was pre-pandemic. That probably does matter. Why was nominal consumption also stronger? I would say that nominal consumption aggregates are less supply distorted, but they also do show in various segments of nominal spending, that when you get to inelastic points on the supply curve, prices spike more than quantity drops. And so, it's not totally clean either, in a way of just saying, this is all very messy. There are ways to unpack it, I think, but I don't think that this is where… I'm sure there will be economists who want to study this episode in particular in the years and decades to come.

Beckworth: Oh, for sure. Let's move on to some of your other points. We won't have time for all of them, but your next one, I think, is important, and it takes us forward to where we are today, and that is the role of Fed policy on consumption, because one argument being made is, the reason we have this disinflation is because the Fed has pushed up rates so rapidly. And as a result, it's part of the reason consumption demand has gone down, but you make the claim that the role of the Fed in consumption demand is far from settled. Walk us through that.

Consumption Demand and the Role of the Fed

Amarnath: Yes, I think that there's an obvious connection between the Fed policy and, let's call it, asset prices. I don't think it's hard to see that when the Fed hikes rates, it raises discount rates. It lowers asset prices across all asset classes. And it's not hard to see how it's affecting the housing market. We saw housing permits, starts, [and] sales all decline pretty much after the Fed began hiking interest rates. The problem with this story is that all of this stuff is not necessarily tied to consumption. As I said, it has run quite strong. It's still quite strong in nominal consumption terms, and the level of nominal consumption here is quite strong. And real consumption growth is actually accelerated in 2022. And so, yes, lower asset prices also have a wealth effect that's negative, should slow consumer spending. But, at the margin, sure, but when I say unsettled, what I'm really talking about is how much. How much did this really matter? That part is a little unclear. I think this is something where real consumption accelerating is a very odd thing to see happen alongside Fed tightening.

Amarnath: One of the ways in which Fed policy is supposed to affect consumption, also, is higher interest rates on auto loans, automobiles become more difficult to buy, and therefore real consumption of automobiles declines, while prices also decline with it. The problem with it is, in 2023, we saw unit sales accelerate at the same time that prices were deflating or at least disinflating. That combination is something you would describe more in supply terms and demand terms.

Amarnath: Again, where do we connect the dots? That's the tricky thing here. It could be by the labor market. There was a labor market slowdown. Maybe they slowed down the growth bulge from 2021 to get that down to something more sustainable. The Fed undeniably had a counterfactual effect, and you could even hear a lot of anecdotal stories about layoffs in the tech sector because tech valuations took a hit. But, the how much, it all feels very unsatisfying because a lot of the stuff that was slowing down began slowing down in 2021 itself.

Amarnath: Labor turnovers peaked in 2021 and started declining. There was a decline in hiring, just as you got past the churn of reopening, the churn of people going back to their old jobs or entering new sectors, the re-allocative effects that were happening during the reopening process. So, I think that makes this a much trickier story to unpack. It doesn't mean the answer is zero. It does mean that the Fed effects here are just not decisive. Then, I'm stunned on one level that 525 basis points… I don't see the smoking gun evidence yet. I don't know, Preston, if you see things here that are worth flagging as far as… some of these data puzzles. It just seems like it's still quite vexing.

Beckworth: Let's move on to the other points. And, again, we don't have time for all of them because I want to get to your other interesting stuff. But let's end on the last two, because I think this is important to this debate. I'm going to say both of them, and then I think you can tie them together. Number 9, you say, “less point scoring, please,” and number 10, “more gratitude, please.” So, help us be better people in this debate.

Mui: I think that the point-scoring point is just that everyone got a lot wrong. This is a very unique historical episode. I wonder what people would have said during the Korean War inflation. That inflation surged to even higher heights then and then came down without a recession. There were a lot of different policies that were implemented at that time, but this is really messy, and I think that the best thing to do is look inwards in terms of where you got forecasts wrong and try to learn from them. I do think that there's a lot of tribalism that I see on Twitter, at least, about, "Well, it must be about the Fed. It must be that it was actually transitory, that it was right or it was wrong," and I just think that is not very helpful for understanding and building off of this episode for better macro policy in the future. What I will say is that I'm really grateful that the labor market has at least withstood most of this very well.

Mui: We have first-world problems, to what you were discussing earlier, which is that we have a labor market standing on its own two feet for right now at least. Maybe that deteriorates, in which case we hope to see the Fed kick into action more aggressively, but in the absence of that, it's at least worth noting that we have a labor market that's on strong footing, and that's worth celebrating, even as we see inflation outcomes that are moving closer and closer to target consistent outcomes.

Beckworth: Absolutely. We love to see the labor market healthy, at full employment, avoid hysteresis. There are so many people's lives who are being affected by this, not just now, but over the long run. We know you're in the labor market, it has the bearing on your health, your mental well-being, all of these things that are essential to a well-functioning economy. Alright, let's transition into another paper that both of you put out. This one is titled, *Three Motivations for Interest Rate Normalization: A Playbook for Fed Policy in 2024.* So, this brings us to the present. Here we are, you've just touched on this. Maybe the Fed will need to do very aggressive rate cuts. Preston, why don't you start us off on this paper?

A Playbook for Fed Policy in 2024

Mui: I just want to step back for a bit and talk about the context when we were writing this. We put this out the week before the December 2023 FOMC meeting. At that time, pretty much no one on the committee wanted to talk about the prospects of rate cuts. Waller had just started talking about it. Bostic had talked about it for a while, but he was the one who was most open about talking about rate cuts. But if you asked Powell about it, Powell would say that it's premature to start talking about rate cuts. He asked Kashkari about it. Kashkari says, "There's no discussion amongst me or my colleagues about rate cuts."

Mui: So, we got to thinking about, what might the rate cut path look like in 2024, specifically in the scenario where inflation is falling, but it doesn't look like there are any obvious signs of unemployment risk or financial stability risk? Because, it's well understood that if inflation remains high, then rates are going to stay high, and if there is a severe increase in unemployment, the Fed is going to pivot in some way. But what about the scenario where inflation is getting back to target as we have been seeing lately? And the labor market still looks reasonably okay, which has been the story for most of 2023, although—and we can talk about this later— although the last month looks a little troubling.

Mui: We call this rate normalization. Basically, what would be the case for cutting rates in the path to the soft landing? And the timing was really fortunate because right after we put the piece out, we got really favorable inflation data, so favorable, in fact, that the Fed did pivot at the December meeting, acknowledged a lot of the disinflation. And now, you have people talking left and right about, “What is the Fed rate path going to look like in 2024?” is really the hot topic, not just amongst the market participants, but the FOMC as well. So, to that end, we have three motivations for wanting to cut rates in 2024 in the soft landing scenario, and associated with each motivation is a strategy for policy.

Amarnath: I think the first one is, in some ways, recognizable. Let's just say that the downside risks are nonlinear and somewhat unpredictable in terms of how they materialize. I'm specifically talking about the downside risks to the labor market and financial stability. And these are risks that, in terms of easing generally, if there's visible deterioration in financial markets, if there's visible deterioration in labor markets, the case for aggressive easing is not that hard to figure out. I think most people understand it.

Amarnath: What's a little trickier to conceive of is that these things also tend to snowball so quickly that just letting policy stance stay significantly restrictive comes with its own perils and problems. I think back to… what happened in 2007 has some of its origin story in what the Fed was doing. The Fed raised rates pretty aggressively to 5.25% and broke the housing market, in part, I'd say, not entirely due to the Fed, but the Fed's policies did eventually led to contractions in residential fixed investment, it led to contractions in construction employment that spread to the labor market, and [if] you leave these policies in place for long enough, they do have an impact.

Amarnath: They had an effect on the corporate credit market when the Fed kept raising rates aggressively. They had the same effect in 1990, from… the savings and loans crisis has some of its interactions with Fed policy. A lot of business decisions were made based on interest rates that were lower than where they are right now, and so this is an adjustment cost and issues that are at the core of, say, the SVB crisis in March, where we had interest rate assumptions that were just offsides, and it did help spawn some of the bank run dynamics that we saw among regional banks.

Amarnath: That's all just the reason to say that some of this stuff is out of sight, not perfectly foreseeable, but is an upshot of keeping interest rates significantly restrictive for too long, and now that the inflation outlook has improved, the need to take active risk on the financial stability side, active risk in terms of labor market deterioration, is also diminishing. And that itself is a reason to walk away from significantly restrictive policy rates, in our view at least. And I think that the strategy around the interest rate path has some pretty big upshots there too.

Beckworth: So, this non-linear downside risk, is it similar to this notion of the last mile being really tough, or potentially really tough, the last mile of getting to 2%, or is that a distinct notion?

Amarnath: I think that's a distinct notion in the sense that I think this is more about how asymmetric-- Once unemployment gets beyond a certain point, once things start to snowball, that's a better way to put it. These sorts of things, once they attain a certain critical mass, it's very hard to reverse. It's very hard to play catch up. The Fed cut rates a lot in 2001, and it just proved to be way too late.

Amarnath: And similarly, you could say the Fed actually did cut rates quite a bit in 2007, 2008. It just happened to be after a lot of the damage was already forming, a lot of the cracks were starting to emerge. It's better to walk away from this a little earlier, a little sooner, and it can actually lead to a more sustainable outcome over the longer run than just say, "I'm only going to cut after we see a lot of visible damage in either labor markets or financial markets." These things, they're not irreversible, but they're very hard to reverse once they're in motion.

Mui: Skanda talked already about the financial risk and how that can speak up on you. When it comes to unemployment, for example, something you can do is graph the change in unemployment and do it on a histogram or something, and you can see that when unemployment goes up, it increases really quickly over a short period of time, whereas when unemployment falls, it takes a long time and it falls more steadily.

Mui: So, Basically, by the time you've seen the whites of unemployment's eyes, it's too late. You were supposed to act yesterday, not today. And so we think that the appropriate policy response here is to front-load cuts. You can go on the margin, you can go faster when you have higher confidence that you're significantly restrictive, which we are now, and as you get something that's closer to something that looks like a neutral policy stance, you can go marginally slower. So, we think that as the Fed cuts rates, they should probably do so faster at the beginning and then they can slow down as time goes on.

Amarnath: We're talking about this in the context of being forward-looking and preemptive. If we actually see visible deterioration, there's a stronger case for aggressive easing. What we're talking about here is just getting away from significantly restrictive. Neutral is always debatable about, where is the neutral interest rate, where is neutral policy stance? And there's a healthy debate to be had, but I don't think that, as we get closer to that, move slower, move more prudently, makes sense, but right now we're at 5.33% interest rates, and that's a lot of risk that the Fed is bitten off.

Amarnath: I think we see signs right now in the labor market and the fog of the data. There may be points of deterioration in certain areas that might be real, they might be noise, but I just want to make sure we're separating out— there is a case for aggressively responding to active deterioration and that might mean much more aggressive easing. And then there is the case for just trying to get interest rates into a slightly more normalized place and policy stance into a more normalized place after moving them to more restrictive territory in a pretty aggressive and rapid manner.

Beckworth: Your second motivation is to be consistent on inflation. How so?

How to Be Consistent on Inflation

Amarnath: I think that the legibility of Fed policy, to a first approximation, is pretty sensible, that 5.33% fed funds rate is a result of high inflation. That's the main reason. There was maybe a lot of discussion about an overheated labor market, but the labor market also, on a lot of measures, has shown a lot of cooling. Job turnovers have come down to pre-pandemic rates. Wages are broadly decelerating. These are all things that are happening, even if labor market slack may not be as visible.

Amarnath: And so, the main reason… if inflation is the reason why we're at this point, and if inflation is falling, normalized labor market outcomes, normalized inflation outcomes should mean normalized interest rate outcomes. I think the Fed… in terms of the hiking cycle and why they chose to take interest rates to where they are, I think of what they did with Taylor rules as an aspirational upper bound for policy rates. They kind of knew that inflation… not all of it would stick. We weren't going to stay at 9% CPI, we're not going to stay at these wildly high [inaudible] inflation rates even, but they didn't know how far they were going to fall, and so it's good to have some cognizance for, what are Taylor rules implying? We should at least get somewhere close to where they currently imply, and so as an aspirational upper bound.

Amarnath: Now, on the way down, inflation's also falling pretty fast. We would not advise that the Fed mechanically follow Taylor rules in any case, but I think it is telling if there's a big deviation emerging between what rules imply and where the Fed's policy stance is. When you get pretty far away, I think, at least think about them as an aspirational lower bound. You can lag where the Taylor rule actually says policy rates should go. Lag if you must, but follow inflation proportionally, that there should be some proportional… the larger the inflation overshoot, the higher policy rates are. The lower the inflation overshoot or the higher the undershoot, potentially… God, that might seem unthinkable, but it at least seems plausible over the course of the next four to six quarters. 

Amarnath: If we see that, interest rates should move proportionally on that side too, and we'll see how this stuff plays out, but I think that proportionality would be wise. That proportionality also comes with certain more specific interest rate prescriptions. As I said, we can follow this stuff with a lag, don't follow mechanically, but it does have some implication for how the Fed should manage policy rates. Preston?

Mui: I think one important reason why is that, as Skanda mentioned, on the way up, the reaction function was pretty legible. Inflation comes in higher than expected and the Fed’s going to raise the rate path. Now we're in the opposite direction, so inflation as a price to the downside relative to Fed projections. So, six-month core PCE is running under 2%. It might not stay there, but at least that's what it is right now. The 12-month core PCE growth is sitting at 3.2%, ending in November. So, we're currently beating every projection, every one of the Summary of Economic Projections since December ‘22, which had a five and one-eighths terminal federal funds rate projection. And if you look at, for example… if you go to the Cleveland Fed, they publish this site where they show the Taylor rule prescriptions from a bunch of different variants on the Taylor rule, and they're all generally implying that we're currently higher than what those rules would suggest.

Mui: If we stay high while inflation is going down, this introduces a lot of uncertainty for market participants, because it really raises questions about, what is the Fed's reaction function? And it becomes less predictable. If we stay high, the Fed is going to have to communicate somehow around why they're staying high, why they think there are inflation risks, or if they think R-star is higher. Once you get into that, it can be totally impossible to nowcast and market participants are going to be very-- It introduces a lot of possibility for confusion there.

Amarnath: I think that if you look at a Taylor rule prescription here, you're going to get some… the Taylor principle says 150 basis points for every 100 basis points change in inflation. We'll see how fast this goes. It could mean something that averages out to 25 basis points per meeting. It could be slower, it could be something marginally faster, but that's a general prescription for pace, and as you said, the downside risks give some reason for moving a little faster, sooner on the cuts, but also slowing down as you go. These are all things to keep in mind as you move through this process, just how much… proportionality is important on both sides, being symmetric. With the lag, obviously, I would say that the Fed is operating with lag already and we're not here to tell them, “You have to react to a six-month core PCE,” but the more this snowballs, the more compelling the case for cuts becomes.

Beckworth: We're going to move on now to our final topic, but listeners, there is more to this article, so we'll provide the link to it, check it out. They have another point they make. Again, the title of the paper was, *Three Motivations for Interest Rate Normalization: A Playbook for Fed Policy in 2024.* We know that Fed officials are listening too, guys, so maybe they'll be taking notes as they listen to the show, but I want to move on to the Fed's framework review because this is something near and dear to my heart and I believe to your heart as well. And I want to motivate it by going back to a speech that Jay Powell gave in November of last year, and it was at an IMF conference. I'm just going to summarize that, and we'll provide a link to the speech. 

Beckworth: But, three things he does in that speech, number one, he goes back and he assesses this whole experience, just like we've been doing today. He goes back, he reflects, looks over it, and he says, "One of the things we're taught, Central Banking 101, is to see through supply shocks. We're an inflation targeter, see through supply shocks." And he went on and he said, "What's interesting is that it's very hard in real time to distinguish inflation caused by supply shocks versus inflation caused by demand shocks." So, the first point I want to highlight, he stresses that there's this knowledge problem. We don't know… How do I know this month's inflation was due to some demand shock or supply shock? It's not very practical.

Beckworth: Second thing he points out is that, even if it is a supply shock, and even though we're told to look through it, if it lasts long enough, or if it's persistent enough, he's now more worried about inflation expectations becoming unanchored. In other words, he's worried that this advice might actually lead to the Fed losing inflation credibility. So, these first two points are, how do we deal with supply shocks in a way that can acknowledge our ignorance, but also keep inflation anchored?

Beckworth: And the third thing he said at this speech which, again, ties into what we're talking about is, we are going to do a Fed framework review. He announced it at the end of this talk. So, Skanda and Preston, when I read this, I was like, wow, this speech is screaming nominal GDP targeting or labor income targeting. It's just crying out, "Help me. Give me some new framework." So, I don't know, what have you been thinking about [in terms of] the framework coming up this year? What are your hopes and, maybe, what are your expectations for it?

Hopes and Expectations for the Fed’s Upcoming Framework Review

Amarnath: I think that my expectations and hopes overlap quite a bit. Nominal GDP or nominal gross labor income targeting, or nominal consumer spending targeting, you want to take any of those sorts of lenses… they overlap quite a bit. These are all things that… I think their biggest benefit is in the fog of supply shocks, in the fog of when price inflation can rear its head. Sometimes it coincides with income growth also being really strong, as I would describe it for much of 2021 and 2022, and even parts of 2023, for that matter. Income growth is also strong for much of this period. Spending growth is also strong, in nominal terms.

Amarnath: So, the fixation on inflation ultimately didn't catch the Fed offsides, all the way through, but it did make things messy about how much did the Fed need to raise rates, how long does the Fed need to keep interest rates high, especially since some of these phenomena can be very volatile. What is scarier is what happened in 2008, in the sense that we had the divergence of nominal aggregates and nominal spending growth and nominal income growth, relative to inflation itself, which was accelerating. So, that is a place where I would say supply shocks can distort nominal aggregates and price aggregates both, but they distort price aggregates a lot more, or at least they affect them a lot more.

Amarnath: And so, if you want something more stable, this is one method for being able to really see through that fog. It's not perfect, but nominal aggregates are much more robust in the face of these types of dynamics. There's a lot of weird stuff that can move prices around that don't really have anything to do with what monetary policy should be trying to shape. And I think that's a big chunk of what you just cited about what motivates Powell to think about a framework review here, and I think it's the right place to look. I would say that that's one of the main reasons why I favor moving to something that looks more like nominal labor income targeting, because the volume of labor income growth is a better guide to these types of macro pressures rather than what CPI or PCE would say in any given moment.

Beckworth: Now, Employ America puts out a gross labor income measure, don't you, every quarter?

Amarnath: Yes. We look at multiple measures, but there are a couple of metrics on job growth and wage growth that are particularly important and significant to us. They do point to normalization here. We probably had really strong rates of gross labor income growth for much of 2021, which is, in some ways, part of what catch-up job growth needed to look like for us to get back to pre-pandemic rates of employment. We still have it pretty strong in 2022 and even 2023. Now those measures look much more in line with pre-pandemic outcomes, and if anything, a little soft, just because job growth has cooled quite a bit on some of the key measures we look at. That, to us, just tells us, "Yes, we're in a more normalized state of the world now." Nominal growth has definitely come in line, and it also means the Fed should pay attention to that, too.

Beckworth: And this is one of the critiques of this approach is, well, you guys don't have the good data. And we just talked about Skanda's measure at Employ America, and I would argue more generally that the data you have is endogenous to the framework you pick. If we were to pick this approach, the Fed could generate more of the data that would help it inform its decision-making. So, I think the data concern is a little overstated. Another critique that is often stated is the communication issue to this approach. I often hear people say, "Oh, everyone understands inflation." I'm not sure about that. I think we both agree that people, households confuse gas prices with inflation often. I even had a chance to share this with Chair Powell. I was at a Fed Listens event, and in-between a session, I chatted to him, and I even asked him, "Hey, what do you think about nominal GDP targeting?" And his concern was communication.

Beckworth: I think that the argument we can make— and I'd like to hear your thoughts on this— is that if you are talking to different groups, you can still make this pitch. So, if I'm talking to a labor group, you say, "Hey, we're trying to stabilize labor incomes." If I'm talking to a trade group, "We're trying to stabilize total sales," because they're the flip side of each other, at least in the aggregate. And to me, that's very intuitive, and on some level more intuitive than telling someone, "Hey, we want to increase your prices. We think that inflation has to go up for the economy to stabilize."

Responding to the Communication Critique

Amarnath: Yes, and I think that what you're saying here is also something that gets at the causality issues, in some ways very clearly, which is, what is the Fed actually influencing in direct terms? I would say that financial conditions are a really important signal for how economic actors respond in terms of spending decisions, spending on hiring, spending on their operating budget, capital budget. Mortgage rates affect willingness to buy a house. That's like the stuff of monetary transmission mechanisms.

Amarnath: The pricing of goods and services… I mean, I'd be curious about, how much does someone in Amazon pay attention, who sets prices, how much do they pay attention to what Jay Powell is saying, or even what Jay Powell is directly signaling? These things get refracted through more lenses by the time you get to prices. It's not to say that prices also have a macro component to them, but it's just that it gets messy. I think that Preston's also noted this in his work, that this stuff has got a lot of—The parsing of this stuff is very difficult in the context of price aggregates. Preston?

Mui: Just think about the conversation we've been having today, trying to think about what's driving inflation or disinflation. Is it supply? Is it demand? Is it going to be transitory? Is it not? Skanda and I have our view, but we're not even that confident, necessarily, about the magnitudes of each factor, and other people definitely disagree with us. Powell has to talk about the three categories of inflation all the time, and I think he's getting sick of talking about goods, housing, and core non-housing services. I think it's going to be much easier if he just moves to thinking about the nominal aggregate rather than trying to think about what's happening to the price index, and is this month's print being driven by imputed financial services or something like that?

Amarnath: There's a lot of silly stuff in this so-called super core inflation that the Fed is citing. It's called core non-housing services, [and it] includes a bunch of junk, for lack of a better term. It's a lot of stuff that the Fed should not be paying attention to, various things where there's no market price, various things where it's sensitive to the price of equities directly because it's portfolio management services. This is not the stuff that's actually… you think this is good communication? Do we think this is actually a clear, transparent way of getting at the cost of living struggles that people are facing?

Amarnath: I would say that the Fed, when the economy looks hot, is obviously concerned about making sure the volume of nominal consumption growth is sustainable for what the economy can supply. That's why you should be attentive to nominal consumption growth. And I would say that its cousin, or the other side of the coin, is the nominal labor income growth side. We want to make sure that people have enough incomes to be able to spend. Those two things are very connected for very fundamental, causal reasons. Labor income growth and consumer spending growth go hand in hand, managing those to keep them in a sustainable range over time.

Amarnath: Obviously, supply is dynamic. Supply does mean that sometimes the economy can accommodate more volume of nominal consumer spending growth, and sometimes less, but that's the thing that the Fed's trying to manage. There are a lot of collateral damage issues that still remain, but it still is clearer communication to say, "We're trying to manage paycheck growth in the aggregate. We're trying to manage consumer spending growth in the aggregate," and make sure those things really line up well. I think that's much cleaner than saying, I don't know, core non-housing services. These things are… again, you're drilling down X food, X energy, X housing, X goods. It starts to not really sound very publicly understandable.

Beckworth: No, absolutely. And I think that this year is going to be an interesting one to follow with this conversation. I know that Employ America and the Mercatus Center will be engaged in this topic. And I really hope that the Fed framework review is a fruitful, serious consideration of ways to make the Fed more effective, communicate better, and to consider all of the options possible. Well, with that, our time is up. Our guests today have been Skanda Amarnath and Preston Mui. Skanda and Preston, thank you so much for coming on the show.

Mui: Our pleasure.

Amarnath: Thanks for having us.