STEVE INSKEEP, HOST:
The Federal Reserve begins a two-day meeting today. The Board of Governors has signaled they plan another interest rate hike, the eighth in the space of less than a year. The Fed has been acting against inflation, of course, which now seems to be easing. So have they done enough? Ken Kuttner is a professor of economics at Williams College and a former assistant vice president of research at the Fed. Welcome to the program.
KEN KUTTNER: Good morning. Nice to be with you, Steve.
INSKEEP: I'm glad you've been inside the Fed because I, from the outside, see inflation anecdotally, you know? Gas prices are up for me and later they're down. And lately, maybe they've been back up a little bit again. The grocery bill seems high. But now that we are in this uncertain period, how does inflation look to people inside the Fed?
KUTTNER: Well, I'm sure there's a lot of nail-biting going on inside the Fed. As you say, there's a lot of ups and downs from month to month. But obviously, the Fed people are most concerned with where that's headed, where the trend is. And so they're trying to look past those ups and downs in gas prices to figure out what the underlying trend is going to be in inflation.
INSKEEP: And what does it look like to you?
KUTTNER: Well, I think, to me, it looks like it's edging down a bit. But it certainly hasn't fallen back to where the Fed wants it to be.
INSKEEP: Which is what? Two percent is their ideal, is that right?
KUTTNER: Yeah, 2% - two-ish. In that range. I think they'd be happy if they got anywhere within shouting distance to two at this point.
INSKEEP: Well, have they done enough in interest rates or will they, after today, have done enough, do you think, to crush inflation or at least squeeze it down near that two?
KUTTNER: Well, I wish I knew the answer to that. In the - you know, in the past - the reason it's tricky is that in the past, in order to bring inflation down, the Fed has had to slow the economy to make it to below its - really, its full employment level. Whether that means creating recession or just a period of slow growth is not clear. But the question is, you know, have they - it's more than just bringing it in for a soft landing. They really need to engineer a slowdown. And the question is, how much do they need to do, No. 1? And No. 2, have the rate increases they've done so far enough to engineer just the right amount of slowdown without overdoing it?
INSKEEP: You just said a really interesting thing. You said the Fed would need to slow down the economy to the point where it gets below full employment, meaning, to put it ruthlessly, more of us need to be laid off for the economy to slow down. Isn't employment still very, very high despite a lot of high-profile layoffs?
KUTTNER: Yes, employment is still very, very high. And that's one of the things that's been a bit of a puzzle in the current - the way the economy's developed. Some indicators looking - are looking very bad, whereas employment and GDP growth continue to be solid.
INSKEEP: I want to ask a couple of follow-ups about that, about different things that economists and experts have said. Larry Summers, the former treasury secretary who famously warned about inflation before it got quite so bad, gave a mathematical formula some time back. He said, look; if you got 6% inflation, you're going to need interest rates of at least 6%, maybe a good deal higher than that to choke it off. Is that the way the math works, which would imply - to me, anyway, as an outsider - the Fed would have to keep raising rates more and more?
KUTTNER: That's exactly right. And what Larry is saying is you need to get a positive inflation adjusted interest rate. So even if the Fed raises the interest rate to 4.75 tomorrow, if the rate of inflation is running about at that same rate, you're still talking about a zero inflation-adjusted rate, which is - which in the past has really not been enough to create a slowdown in the economy.
INSKEEP: We have to get to the point - right? - where it is so expensive to borrow money that people just do less economic activity. And you're telling me it's not quite there.
KUTTNER: At least by the standards of historical benchmarks, we're not quite there yet.
INSKEEP: Well, let's talk through another thing. Mark Zandi, the economist, was on the program the other day and gave us - I don't know if optimistic is the word. He expected a rough year, for 2023 to be a rough year. But he thought it was now likely that the United States could avoid a recession, in other words, that the Fed would not have to raise interest rates so dramatically that it would turn us negative. Granting that you can't predict the future, what are your thoughts about that?
KUTTNER: Well, again, it's a question of, does it actually have to be negative growth? Or does it have to be a bona fide recession? Or can just a period of somewhat slower than normal growth do the trick? That's a good question. In the past, bringing inflation down has required some - a bit of a dip in the economy. But that may have changed. And I'll try to be optimistic along with Zandi on that.
INSKEEP: Do you think Wall Street is optimistic or has confidence in Jerome Powell, whatever he may do?
KUTTNER: (Laughter) That's a good question. Does he have confidence in Jerome Powell and his colleagues? I think, for the most part, they do. I think they've got a little bit nervous of the Fed having let things get out of control this far. But I think, since then, the Fed has done a good job of trying to reestablish its credibility.
INSKEEP: Ken Kuttner at Williams College. Thanks so much.
KUTTNER: You're welcome. Nice to be with you. Transcript provided by NPR, Copyright NPR.
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