高盛-頂級宏觀深度-美聯(lián)儲落后步伐？IS THE FED BEHIND THE CURVE 09042024

GlobalMacroResearch

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ISSUE131|September3,2024|6:40PMEDT

’’’’’’V’’’’’

’’’’

ISTHEFEDBEHINDTHECURVE?

JustasUSin?ationconcernsmovedintotherearview,thelabormarketstartedsendingworryingsignals,withtheJulyjobsreporttriggeringtheSahmrule,raisingthequestionofwhethertheFedisbehindthecurveincuttingratesandtheriskofrecession.FormerregionalFedPresidentsBillDudleyandRobKaplan,SahmrulecreatorClaudiaSahm,andGSGIR’sDavidMericlehavevaryinglevelsofconcernaboutthelabormarket,withDudleymostworriedabouttheriskofanegativefeedbackloopbetweenjoblossesandreducedspendingthatwouldleadtorecession,Sahmsomewhatconcerned,andKaplanandMericlelessworried.TheyalsogenerallydisagreeonwhethertheFedhaswaitedtoolongtocut,withMericle

andKaplanarguingthattheFedisnotmeaningfullybehindthecurve,SahmmoreconcernedthattheFedhasyettoact,andDudleyworriedthattheFedmayalreadybetoolatetoavertrecession.GSstrategistsarguethatmarketsarevulnerabletosharpcorrectionsshouldrecessionoccur,butthatriskyassetswouldhaveroomtorunifitdoesn’t.

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WHAT’SINSIDE

INTERVIEWSWITH:

BillDudley,FormerPresidentoftheFederalReserveBankofNewYork

RobKaplan,FormerPresidentoftheFederalReserveBankofDallas,ViceChairmanatGoldmanSachs

ClaudiaSahm,ChiefEconomistatNewCenturyAdvisors,FormerSectionChiefattheFederalReserveBoardofGovernors

DavidMericle,ChiefUSEconomistatGoldmanSachs

USEQUITIES:FURTHERROOMTORISE

BenSnider,GSUSPortfolioStrategyResearch

CONSUMERDEBT:HEALTHYONNET

Lot?KarouiandVinayViswanathan,GSCreditStrategyResearch

AROUNDUPOFTHEUSCONSUMER

GSEquityResearch

MARKETS:NOTPRICINGRECESSION

VickieChang,GSMarketsResearch

Weareclearlynotseeingalayoffspiral,thefast-movingviciouscircleofjobandincomelossleadingtoreducedspendingandfurtherlayoffsthatwouldbehardforpolicymakerstocounteract.

-DavidMericle

JustastheFedwasbehindthecurveinraisinginterestratesinthiscycle,theFedisnowbehindthecurvein

_

loweringratestomoveclosertoaneutralpolicystance.

-BillDudley

EveniftheSahmruleiscurrentlyoverstatingthe

weakeninginlabordemand,itisstilltellingussomethingusefulaboutthehealthoftheUSlabormarket.

-ClaudiaSahm

-RobK

IfIwerestillinmyseatattheFed,Iwoulddeterminefromariskmanagementperspectivethatit’stimetobegincuttingrates.

EXCHANGERATES:ARECESSIONHEDGE

TeresaAlves,GSMarketsResearch

...ANDMORE

AllisonNathan|allison.nathan@

JennyGrimberg|jenny.grimberg@AshleyRhodes|ashley.rhodes@

Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.ForRegACcerti?cationandotherimportantdisclosures,seetheDisclosureAppendix,orgoto/research/hedge.html.

TheGoldmanSachsGroup,Inc.

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Authorized(BasedonCBOestimates)

Unauthorized(Estimatebasedoncourtcases)Total

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Total,UnderTrumpwithDividedGovernmentTotal,UnderTrumpwithRepublicanSweep

200

100

0

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Forecast

20242025

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80

60

3.6

40

20

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0

-20

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0

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Pandemic-inducedspending:remainselevated

Shifttoonlinegames(keirin,horsebetting,games),takeout(fastfood),outdoors(golf,etc.)

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Relativelyinfrequentandofteninvolves

long-distancetravel(concerts,themeparks),long-distancetransportation(domesticairtravel,carrental),hotels

Everydayservicesspending:stagnant

Somediningout,relativelyfrequent

leisureservices(fitnessclubs,pachinko),short-distancetransportation(buses,taxi)

Jan-20Oct-20Jul-21Apr-22Jan-23Oct-23Jul-24

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201920202021202220232024*Aug-Dec2024estimatesassumethesamepaceofcreditgrowthasinJuly.

GSe*

TopofMind

Issue131

hEl

Isthe

Fedbehindthecurve?

JustasseveralbenigndataprintspushedUSinflationconcernsintotherearview,theUSlabormarketstartedsendingworryingsignals,withtheJulyemploymentreportshowingafurtherriseintheunemploymentrateto4.3%.Thisincreasetriggeredthe

Sahmrule,awidely-followedrecessionindicatorthathas

accuratelysignaledeveryUSrecessionsince1970.AndthishascomealongsidegrowingconcernsaboutthehealthoftheUS

consumerondownbeatcommentaryfromseveralconsumer-

facingcompaniesaswellasincreasedsignsofweaknessinthemanufacturingsector.Amidthismoreworryingmacro

backdrop,theFedhaskeptratesonholdasithassoughtto

gainmoreconfidencethatinflationisreturningtotargetbeforestartingratecuts.WhileChairPowellclearlysignaledadovishpivotatJacksonHole,statingthat“thetimehascomefor

policytoadjust”,whethertheFedhaswaitedtoolongtoact—andwhatthatmeansforUSrecessionrisk—isTopofMind.

WefirstspeakwithClaudiaSahm,thecreatoroftheSahmrule,BillDudleyandRobKaplan,formerPresidentsoftheNewYorkandDallasFeds,respectively,andDavidMericle,GSChiefUSEconomist,abouthowconcerningtherecenttriggeringofthe

Sahmruleis.Sahmexplainsthattherulereliesonapowerful

negativefeedbackloopinwhichjoblossescauselaid-off

workerstoreducetheirspending,leadingtofurtherjoblossesand,ultimately,recession.ButSahmarguesthatanincreaseinlaborsupply—ratherthanjustlowerdemandforworkers—

drovetherecentriseintheunemploymentrate,whichreducestheriskofthenegativefeedbacklooptakinghold.However,

shecautionsagainstcomplacency,arguingthathiresandquitsrates—twokeyindicatorsoflabormarketstrength—aresendingdisconcertingsignalsaboutthehealthoftheUSlabormarket.

Dudleygoesastepfurther,pointingoutthattheSahmrulehascorrectlyindicatedrecessioneveninperiodsofstronglabor

supplygrowth,meaningthattheriskofthenegativefeedbackloopshouldnotbediscounted.Andhearguesthatrelatively

smallincreasesinunemployment,whetherdrivenbyrising

laborsupplyorjoblosses,havehistoricallybeenfollowedby

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materialincreases,whichwouldhitlow-andmoderate-incomehouseholds—thatarealreadyundersignificantstrainfromhighpricesandinterestrates—particularlyhard.

KaplanandMericle,however,arelessconcerned.WhileKaplanhasgrownmarginallymoreworriedaboutthelabormarketamidrecentsignsofsoftening,hetooquestionstherelevancyoftheSahmruleinthecurrentcycle.Andhesayshiswide-ranging

discussionswithcompaniessuggestthatthelabormarketisnot“fallingoutofbed”,whichispartlywhytheUSconsumer

remainsindecentshapeoverallevenaslower-incomehouseholdsareundoubtedlystruggling.

Mericle,forhispart,isnotconvincedthat“wehavea

meaningfullabormarketproblem”asheseesnoevidenceofanegativefeedbackloopbetweenjoblossesandreduced

spendingthatcouldpushtheeconomyintorecession,with

strongrealincomegrowthdrivenbyastill-healthylabormarketandrecord-stronghouseholdbalancesheetslikelytocontinuetosupporttheUSconsumer.Indeed,whileGSseniorcredit

strategistsLotfiKarouiandVinayViswanathannotepocketsof

stressforlower-incomeconsumers,consistentwiththe

cautionarymessageGSequityanalystsheardfromconsumer-facingcompaniesinQ2earningscommentary(seepgs.20-21),Mericle,Karoui,andViswanathanarguethattheUSconsumerinaggregateisreasonablyhealthyandshouldremainsoin

comingmonths.

Despitetheirvaryinglevelsofconcernaboutthelabormarket,ourintervieweesagree:thecurrentstanceofmonetarypolicyistoorestrictive.Mericlesaysthatwiththelabormarkethaving

rebalancedandinflationexpectationshavingreturnedtotarget-compatiblelevelsbytheendoflastyear,theinflationproblemhasessentiallybeensolvedforsometimenow.AndKaplan

believesthat,giventhesubstantialprogressondisinflationandsofteninglabormarket,“it’stimetobegincuttingrates”,

thoughhearguesthattheFedshouldremainvigilantinitsinflationfight.ButtheybotharguethattheFedisnot

meaningfullybehindthecurve,andseeonly20%oddsofrecessionoverthenextyear.

ButSahmissomewhatmoreconcernedthattheFedhasyettoactgiventheworryingdirectionoftravelinthelabormarket,

whichleadshertoascribethehighestrecessionoddsthatshehasinthiscycle—around25%.Bychoosingtowaituntilthe

disinflationtrendwasveryclearinthedata,SahmbelievesthattheFedmustnowactquicklyanddecisivelytoavoid

recession—which,ifitdoesoccur,shesayswouldbetheresultofa“huge,unforcedpolicyerror.”Butshethinksthat

sequential25bpcutsstartingattheSeptemberFOMCmeetingwouldprobablysufficetoavoidthisnegativeoutcome.

Dudley,however,believesthattheFedhasfallenfurtherbehindthecurveandworriesthatevenmoreaggressiveFedaction

maynotbeenoughatthispointtostaveoffrecession.He

notesthatthelongandvariablelagsofmonetarypolicymeanthatithashistoricallyprovenveryhardfortheFedtointervene“quicklyenoughonsignsofeconomicweaknesstopreventafull-fledgeddownturn.”So,Dudleysees50-60%oddsofaUSrecessionoverthenextyear.

Giventheuncertaintyaroundrecessionriskandwhetherthe

Fedcandoenoughatthispointtostaveitoff,wethendigintowhat’spricedintoassetstoday.GSseniormarketstrategist

VickieChangandseniorUSequitystrategistBenSniderargue

thatmarketsarenotcurrentlypricedforrecessionary

outcomes,leavingriskyassetsvulnerabletosharpcorrectionsintheeventofrecession,whichGSmarketstrategistTeresaAlvesfindscouldbehedgedagainstthroughlongpositionsintheYenandSwissFrancaswellasshortpositionsinthe

MexicanPeso,AustralianDollar,andBritishPound.However,withGSeconomistsarguingthatcontinuedUSeconomic

expansionremainsfarmorelikelythanrecession,ChangandSniderseeroomtorunforriskyassetsahead.

AllisonNathan,Editor

Email:allison.nathan@

Tel:212-357-7504

GoldmanSachs&Co.LLC

GoldmanSachsGlobalInvestmentResearch3

Issue131

TopofMind

hEl

InterviewwithDavidMericle

DavidMericleisChiefUSEconomistatGoldmanSachs.Below,hearguesthattheFedis

unlikelymeaningfullybehindthecurve,asrecentlabormarketdevelopmentsdon’tappearasconcerningaswhentheunemploymentrateroseinthepastandtheUSconsumeroutlookremainsreasonablyhealthy.

AllisonNathan:ChairPowellclearlystatedatJacksonHolethatthe

balanceofriskshasshiftedtothe

employmentsideoftheFed’s

mandate,implyinganimminent

starttoratecuts.ButistheFed

neverthelessbehindthecurve,

increasingtheriskofUSrecession?

DavidMericle:SomeFOMC

participantswereprobablytooconcernedaboutinflationfortoolong,andthatheldtheFOMCbackabit.Ourviewhasbeen

thatthelabormarkethadalreadyrebalancedandinflation

expectationshadreturnedtotarget-compatiblelevelsbythe

endoflastyear,soatthatpointtheproblemwasessentially

over,andthatmostoftheremainingovershootof2%isjust

laggedcatch-upinflationthatisfadingnaturally.Soyes,theFedcouldhavecutonemeetingearlier.ButIdon’tthinkitmattersmuch.I’mnotyetconvincedthatwehaveameaningfullabor

marketproblem,andifwedohaveaproblem,itisatmosta

moderateone.Anydelayindeliveringthefirstratecutcan

easilybemadeupifthelabormarketweakensfurther,and

marketshavealreadypricedasufficientlyaggressivecutting

cycletodeliverthesameeasinginfinancialconditionsthattheFOMCwouldhavebystartingabitearlier.

_

Yes,theFedcouldhavecutonemeetingearlier.ButIdon’tthinkitmattersmuch.I’mnotyetconvincedthatwehaveameaningfullabormarketproblem.”

AllisonNathan:Butthemuchweaker-than-expectedJulyemploymentreporttriggeredtheSahmrule,whichhas

accuratelyindicatedeveryUSrecessionsince1970.Whydon’tyoubelievethattobethecasethistimearound?

DavidMericle:I’mlessworriedabouttheriseinthe

unemploymentratethanthepatterninUShistorymight

suggest.First,thepatternhasbeenlessreliableinotherG10

economies.Second,weareclearlynotseeingalayoffspiral,

thefast-movingviciouscircleofjobandincomelossleadingtoreducedspendingandfurtherlayoffsthatwouldbehardfor

policymakerstocounteract.Thatdoesn’tprovethatwedon’t

haveaproblem—evenwithoutlayoffs,wecouldhaveamore

moderateandslow-movingproblemwherelabordemandisa

bittooweaktoabsorbthegrowthinlaborsupplyandthe

unemploymentratekeepscrawlinghigher.Butthatleadstothethirdpoint:labordemandlooksfine.Trendjobgrowthis

runningat~160k/month,jobopeningsarestillatouchhigherthanpre-pandemiclevels,andindeeditwouldbeoddiflabor

demandweresuddenlyweakeningexcessivelybecauseGDPisgrowingrobustly.So,labordemandappearstobeattheright

levelforanormalenvironment;itjustwasn’tquitestrong

enoughtoabsorbtheadditionallaborsupplyfromthepeakoftheimmigrationsurge.Andnewimmigrants—especiallythosewithoutworkpermits—haveahardertimefindingjobsatfirst.Butnowthattheimmigrationboosttolaborsupplyisslowing,theunemploymentrateshouldholdroughlysteady.

AllisonNathan:EvenifthereisreasontobelievethattheSahmrulemaynotapplyinthiscycle,haven’tlabor

marketindicatorsweakenedafairbitatthispoint?

DavidMericle:Yes,andI’dsaythey’veweakenedatouch

morethannecessary.2022featuredperhapsthetightest

peacetimelabormarketinUShistory,anditmadesenseas

partoftheinflationfighttotrytoreverttopre-Covidconditions,whenthelabormarketwasverystrongbutdidnotpresentaninflationproblem.Themessagefromarangeoflabormarket

measures—theunemploymentrate,ourjobs-workersgap,thequitsrate,andsurveymeasures—isthatoverthelastcoupleofmonths,we’veundershotthatpre-pandemicbalancealittle.

Thisisabitnitpicky,butIdon’tthinkthatwasnecessaryto

solvetheinflationproblem,andChairPowellhintedatJacksonHolethathedoesn’teither.

Noneofthisisamajorproblemyet,butweshouldn’tletitgo

anyfurther.Again,mybestguessisthatwithlabordemandstillhealthyandtheimmigrationboosttolaborsupplygrowth

slowing,thelabormarketwon’tsoftenmateriallyfurther.But

uncertaintyishighandaplausibleriskexiststhatlabordemandwillproveabittooweak.Ifevidencebuildsinthatdirection,theFOMCshoulderronthesideofcautionandreactforcefully,

andPowell’sJacksonHolespeechsuggeststhatitwill.

AllisonNathan:ManyinvestorsalsoseemworriedabouttheconsumergivennegativestatementsfromconsumercompaniesduringQ2earnings.Doesn’tthatworryyou?

DavidMericle:Afterlabormarketconcerns,thebiggestdriverofrenewedrecessionfearsamongclientshasbeenasense

thatthebottom-upmessagefromearningsseasonpresentedamorenegativepictureofconsumerspendingthanofficialdatahadyetrevealed.I’mskeptical.Isuspectthemarketnarrative

justoverweightedmorenegativeanecdotes,asaggregate

companyrevenuessuggestdecelerationbutnotdeclinetoa

still-respectable~2.5%realgrowthpace.Inanycase,Iputalotmoreweightontheofficialdata;consumerspendinggrewata2.9%rateinQ2androsestronglyagaininJuly.So,consumerfearslookmisplaced,andwestillseetheconsumeroutlookashealthyandstraightforward—strongrealincomegrowthdrivenbyahealthylabormarketplusrecord-stronghouseholdbalancesheetsshouldgeneratesolidconsumptiongrowth.

GoldmanSachsGlobalInvestmentResearch4

TopofMind

hEl

AllisonNathan:Butdon’tconsumerbalancesheetslookincreasinglystressed?Andwon’ttheweakeninginlabormarketindicatorsmakethatworse?

DavidMericle:Muchoftheincreaseindelinquencyand

defaultratesinconsumerbalancesheetsreflectedtwothings.First,normalizationfromunusuallylowratesafewyearsago

whenspecialpandemicfiscaltransfersmadeiteasierfor

peopletopaytheirbills.Andsecond,inadvertentlyriskylendingbybanksthatdidn’trealizecreditscoreshadbeentemporarilyinflatedbythatstimulus-aidedperiodoflowdelinquencies.

Higherinterestratesonconsumerdebtanddifficultiessome

familiesfacedinadjustingtheirspendingbackinlinewiththeirincomeafterthefiscaltransfersendedalsolikelycausedsomedistress.Butthekeypointisthattheriseinthedelinquency

rateisnotmainlyasignofweakhouseholdfinances,andthe

negativeimpactonaggregateconsumerspendingofsome

householdshittingcreditconstraintsislikelymodestcomparedtothepositiveimpactofrisingaggregatehouseholdwealth.

Ialsowouldn’tinterpretthesofterlabormarketsignalsas

indicatingdownsideforconsumerspending.Realwagesandpayrollshavegrownatagoodpace.Becausetheriseintheunemploymentratehasbeendrivennotbylayoffsbutbyajumpinlaborsupply,theimplicationforspendingisnotthatsomeworkersnowhavelessincometospend,whichwouldpushconsumptiongrowthbelowtrend,butratherthatwe

missedanopportunitytoputeveryonetoworkandgrowconsumptionevenfurtherabovetrendthanwedid.

AllisonNathan:So,what’slikelynextforFedpolicy?

DavidMericle:Thesignsofsoftnessinthelabormarketsofarseemenoughtoaccelerateeasingfromtheoriginalplanof

quarterlytoconsecutive25bpcuts,butnotyetto50bpcuts.So,weexpect25bpcutsinSeptember,November,and

December.RecentFOMCcommentaryhasbeenconsistent

withourforecastofa25bpcut.Theyseemtobethinkingin

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linewithhistoricalprecedent,wheretheFedhastendedtoonlytakemoredrasticactionsuchasintermeetingorlargercutsin

themoreurgentcontextofanobviouscrisisoratleastalayoffspiral.ButiftheAugustjobsreportisn’tbetterthantheJuly

report,thentheFOMCwouldlikelydelivera50bpcutinstead.

AllisonNathan:WhatareyouexpectingfortheAugustjobsreport,andhowmightyourexpectationsforthe

SeptemberFOMCchangeifitisweakerthanexpected?

DavidMericle:Weestimatethattheunderlyingtrendrateofjobgrowthiscloserto160k/monththanthe114kwegotin

July,andweexpectatleastsomeofthejumpintemporary

layoffsinJulytoreverseinAugust.So,wesuspecttheAugustreportwilllookbetterthantheJulyreport,withpayrollsat

~155kandtheunemploymentrateroundingto4.2%.Inthatcase,I’mconfidentwe’dgeta25bpratecut.

Butaworsereportiscertainlypossible,sothebondmarketisjustifiedinpricingdecentoddsofa50bpcut,eventhoughit’s

notmybasecase.Andevenifwe’rerightonthefundamentals,simplemonthlyvolatilityorstatisticalnoisecouldeasilyproduceaprintbadenoughtopushtheFedtowardalargercut.~35%ofthetimetheinitialpayrollsprintisatleast60kbelowour

Issue131

statisticalestimateofthetrend,whichwouldimplyAugust

payrollgainsbelow100k.Andthatisaparticularriskthismonthbecausepayrollgrowthhasanegativefirst-printbiasinAugust.

EveninascenariowheretheincominglabormarketdataareabitworsethanIexpect,I’dseemoredownsideforthefunds

ratethanfortheeconomy.Again,atworst,wehaveaproblemwherelabordemandisabittoosofttoabsorbtemporarily

elevatedlaborsupplygrowth,whichwouldbeamoderate,

slow-moving,andlikelyultimatelysolvableproblemfortheFed.

AllisonNathan:Beyondtheupcomingemploymentreport,whatareyouwatchingtogaugetheUSeconomyandFedpathahead,andwhatwouldleadyoutobecomemore

concernedaboutUSrecessionrisk?

DavidMericle:Fornow,thelabormarketdataseemtobethemostimportantdriverfortheFedandthemostcriticaldataformonitoringdownsideriskstotheeconomy,ifonlybecause

downsiderisksseemlimitedelsewhere.Ofcourse,notonlytheemploymentreport,butalsojobopenings,areimportant.

Inflationdatacouldalsobeatiebreakeriftheemployment

reportisrightontheedge,butthemessagefromJacksonHolewasthatFedleadershiphasnowdecisivelymovedpastfears

ofstickyinflation.Consumerspendingdataarealsokey—if

finaldemandisstillgrowingatagoodpace,it’shardtoworrytoomuchaboutlabordemand.But,regrettably,consumptiondataarevolatileandnotentirelyreliableatahighfrequency,soI’dbemorehesitanttochangemyviewabruptlythere.

It’salsoworthrememberingthatmostrecessionshavean

obviouscatalyst.It’srarethatconsumerspendingorthelabormarketspontaneouslydropsoffwithoutanegativeshock.I

don’tcurrentlyseeanymajorvulnerabilities,suchassevere

financialimbalances.Butanunexpectedfinancialorgeopoliticalshockor,aswelearned,apandemiccanalwaysoccur.Such

eventsarehardtopredictandarethemainreasonthatthe

baseline12-monthrecessionprobabilityis15%evenwhen

everythingseemsfine.We’reat20%recessionoddscurrently.

AllisonNathan:IftheeconomyturnsouttobeweakerthanyouexpectandtheFedcutsby50bp,howeffectivewouldthatbeconsideringthatmonetarypolicyworkswithalagandthatitseemstohavehadlessimpactrecently?

DavidMericle:Idon’tthinkthatmonetarypolicylagsare

actuallythatlong.ThetransmissionfromaFedpivottoeasierfinancialconditionswouldlikelybeimmediate—ifthedatais

worse,themarketwilllikelypriceafastercuttingcyclebeforeFedofficialsannounceit.Andwefindthatthetransmissionlagfromeasierfinancialconditionstotherealeconomyisshorterthanwidelybelieved.Someidiosyncrasiesofthepandemic

cyclelikelydampenedsomeofthetransmissionchannelsof

monetarypolicytotherealeconomy,andatleastsomeof

thoseforcesapplysymmetrically,tohikesandcuts.Totake

oneobviousexample,ratecutswillprovidelesscashflow

boostthroughtherefinancingchannelthanusualbecauseso

manyhomeownersalreadyhavesuchlowmortgagerates.But,I’mnotthatworriedaboutanyofthis—again,wehaveatworstamoderateproblem,andtheFedhas525bpofroomtocut.

GoldmanSachsGlobalInvestmentResearch5

Issue131

TopofMind

hEl

InterviewwithBillDudley

BillDudleyisformerPresidentoftheFederalReserveBankofNewYork(2009-18).Below,hearguesthattheFedisbehindthecurveinloweringratesanditcouldbedifficultforittocatchupquicklyenoughtopreventarecessiongiventhelongandvariablelagsofmonetarypolicy.

TheviewsstatedhereinarethoseoftheintervieweeanddonotnecessarilyreflectthoseofGoldmanSachs.

AllisonNathan:InJune2022,you

arguedthattheFedwasbehindthecurveandneededtohike

aggressivelytotameinflation,

whichwouldinevitablypushtheUSeconomyintorecessionwithin12-

18months.TheFeddidultimatelyhikeaggressively,butrecessiondidnotensue.WhatallowedtheUStoavoidrecession?

BillDudley:Myargumentin2022thatUSrecessionriskwaselevatedwasasimpleone:TheFed’smonetarypolicy

frameworkmeantthatitwouldnottightenmonetarypolicy

until2%inflationandfullemploymentwasachieved,which

wouldmeanthattheFedwouldbelateandthereforelikely

havetotightenpolicysubstantiallyandinduceasizableriseintheunemploymentratetotameinflation.And,accordingtotheSahmrule,ariseinthethree-monthmovingaverageofthe

unemploymentrateofatleast0.5ppaboveits12mlowhas,

since1970,alwaysbeenaccompaniedbyaUSrecession.So,ifmonetarypolicyhadtobetightenoughtoleadtoareasonableincreaseintheunemploymentrate,recessionwouldbethe

mostlikelyoutcome.

However,twofactorsallowedtheUStoavoidrecession.First,inflationexpectationsremainedwellanchored,likelyowingtotheFed’sstronginflation-fightingcredibilityandFedChair

Powell’sconsistentmessagingthattheFedwasdeterminedtobringinflationbackdownto2%,whichlimitedtheamountof

_

tighteningrequiredtotameinflation.Second,thelabormarketnormalizedinabenignmannerastheunwindingofpandemic-eradistortionslargelyprovedenoughtorebalancethelabor

market,ahotlydebatedbeliefatthetimethatturnedouttoberight.ThesefactorsenabledtheFedtotameinflationwithoutalargeriseinunemployment,settingthestageforasoftlanding.

AllisonNathan:InJuly2024,you“switchedallegiance”

fromFedhawktodove,arguingthattheFedisonceagain

behindthecurvebutintheotherdirection,raisingrecessionrisk.Whatledtothisshift?

BillDudley:TheFedhastwoobjectives:maximumsustainable

employmentandpricestability,whichtheyjudgeas2%

inflation.WhenIlookedattheeconomy,riskstotheprice

stabilitymandatethathadbeensoinfocusinrecentyears

werediminishing,whileriskstotheemploymentmandate

wererising.Inflationpressuresinrecentyearsstemmedfrompandemic-eradistortionsinsupplychainsandatightlabor

market.Andwageinflationprovedespeciallysticky,runningat4.0-5.5%foranextendedperiod,dependingonthespecific

indicator.Butwagegrowthhasnowdeclinedconsiderably,asreflectedbothinaveragehourlyearningsof3.6%yoyinthe

lastemploymentreportandmeaningfuldeclinesinthe

employm