In this episode of the Top of Mind podcast, Mike Simonsen sits down with Nick Timiraos, Chief Economics Correspondent for The Wall Street Journal, to talk about how the Fed makes its policy decisions and why these decisions are rocking today’s financial and housing markets. Nick tells the story of the Fed’s remarkable odyssey to save the US economy as the pandemic hit, gives an inside look at the Fed’s decision-making mechanics, busts some common myths about the Fed’s intentions for real estate, and offers a glimpse of what might come next.
About Nick Timiraos
Nick Timiraos is the Chief Economics Correspondent for The Wall Street Journal and is based in Washington. He is responsible for covering the Federal Reserve and other major developments in US economic policy. He’s also the Author of Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic — And Prevented Economic Disaster.
Prior to his current position, Nick covered the Treasury Department, fiscal policy, and broader economic and labor market issues. Before that, he wrote about US housing and mortgage markets as a reporter based in New York. His coverage included the government's response to the foreclosure crisis and the takeover of finance companies Fannie Mae and Freddie Mac. In 2008, Nick contributed to the journal's presidential election coverage and traveled with the campaign of then-Senator Barack Obama. He joined the journal in 2006 and is a graduate of Georgetown University.
Here’s a glimpse of what you’ll learn:
- The story behind the extraordinary lengths the Fed went to in order to save the US economy as the pandemic hit
- How Fed policy impacted the housing market during the pandemic
- Where the Fed went wrong in 2021
- What the Fed is likely to do with interest rates next year
- What the Fed’s goal for housing actually is
- How to look at the inflation numbers like the Fed to help see future policy decisions now
- How the Fed might embrace new data and more real-time data to make better policy decisions
- Whether the trend of de-globalization will derail or preserve American prosperity
- How the Fed might react to challenges facing the dollar from threats like cryptocurrencies and Bitcoin
- Whether the Fed will step in to help resuscitate the housing market if it crashes too hard in 2023
Resources mentioned in this episode:
- Nick Timiraos on LinkedIn
- Nick Timiraos | The Wall Street Journal
- Nick Timiraos on Twitter
- Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic — And Prevented Economic Disaster by Nick Timiraos
- Mike Simonsen on LinkedIn
- Altos Research
About Altos Research
The Top of Mind Podcast is produced by Altos Research.
Each week, Altos tracks every home for sale in the country - all the pricing, and all the changes in pricing - and synthesizes those analytics to make them available before becoming visible through traditional channels.
Schedule a demo to see Altos in action. You can also get a copy of our free eBook: How To Use Market Data to Build Your Real Estate Business.
Welcome to Top of Mind, the show where we talk to real estate industry insiders and experts about the biggest trends impacting the market today. Enjoy the show.
Mike Simonsen 0:13
Mike Simonsen here. Thanks for joining me today. Welcome to the Top of Mind podcast. This is where I talk to the smartest leaders, thinkers and doers in the real estate and broader economic industries. For a few years now, we've been sharing the latest market data every week in our weekly video series. With the new Altos Top of Mind podcast, we're looking to add some context to the discussion about what's happening in the market, from the from the leaders and people who have a different perspective on just the data we look at every day. And and every every week, Altos Research tracks every home for sale in the country, all the pricing all the supply and demand all the changes in that data. And we make it available to you before you see it. In the traditional channels. People desperately need to know what's happening in the housing market right now. It was so hot and so competitive, and then the landscape changed so dramatically and suddenly. And you know, people asked me like, Mike, can I get the data from my local market? The answer is yes. Go to altosresearch.com Get free consultation on how you can use market data in your business today. So without further ado, let me introduce my my guest today. Nick Timiraos is the chief economics correspondent for The Wall Street Journal, Nick covers the Federal Reserve and other major developments in US economic policy for the journal. He's also the author of a fantastic new book called Trillion Dollar Triage: How Jay Powell and the Fed Battled a President in a Pandemic — and Prevented Economic Disaster. This is a riveting account of all the incredible actions required to keep the world afloat as the pandemic rolled in. And it's it's funny to say this about a book about the Federal Reserve, but this is a total page turner. Like, I don't know, maybe that says more about me. But I really enjoyed that book. It was really funny. Like, I'm just like, what happens next, you know, so Nick, welcome. So great to have you here.
Nick Timiraos 2:15
Thanks for having me. And thanks for the kind words about the book.
Mike Simonsen 2:18
It's great. Let's let's get started with you. You're the chief economics correspondent with The Wall Street Journal. That's a big job. You've been there for a long time, actually. Tell me about tell me about the role it a little bit about your journey getting there. And then we'll roll into the book and the policy and all kinds of good stuff.
Nick Timiraos 2:37
Sure. Well, so I've been in the journal for 16 years. And I covered one of the first things I covered was the housing real estate market used to rely on you for for data on listings, you know, 10 years ago, when everybody was trying to figure out if the market had hit a bottom. So I covered the GSEs housing finance space for about five years after the bust. And then I moved down here to Washington, about eight years ago to cover economic policy, more broadly. Treasury Department fiscal policy. And then starting in 2017, I moved pretty much covering the Fed and most of the time. And, and that's been, you know, that's kept me busy.
Mike Simonsen 3:21
Yeah. So, so you're based in in DC now. And really, the focus is, is about, like, covering the Feds is pretty much a full time job.
Nick Timiraos 3:32
It is. I mean, there's, you know, there's other pieces of economic policy. And, you know, in 2017, of course, tax policy was getting a lot of the attention. But really, since the pandemic monetary policy has been because it's been a first responder, first to the downturn. And now, obviously, to this high inflation. You know, we've had very active monetary policy. So there's been a lot to keep track of, and sort out for our readers.
Mike Simonsen 3:58
Yeah, for sure. And, of course, everybody has an opinion on what they should be doing and what they think they're doing. And I'm really interested, maybe a little bit later in the conversation about getting your take on, like, how we know what the Fed actually is intending. And as opposed to what we are reading into what they're intending. Those kinds of things that really, those questions are really fascinating to me. Let me start with the book, though. So Trillion Dollar Triage. It's, it's about, you know, shielding the economy from from the the public health disaster and the the resulting financial crisis. Tell us about the book.
Nick Timiraos 4:48
Yeah. So you know, the title itself comes from, you know, the heart of the book is really scoping out what was happening in March of 2020. That required such dramatic interventions from the Fed from the whole government economic policy apparatus. And if you think back to March, at, you know, 2020, when everybody was trying to get their hands around, well, if we shut down commerce, which had happened in China, you know, earlier in the year, what would that look like? And the Fed made an emergency rate cut in early March, march 3, they announced, you know, 50 basis point, emergency cut, which was very surprising. And the attitude at the time was, well, gee, how is easier monetary policy really going to address this, this challenge that we're heading into? And then the following week was when strains really built up in markets. And so the book walks through what was happening, what was breaking down? And why was the Fed responding so quickly, in the matter of days, the Fed had really run through Ben Bernanke is playbook from the 2008 financial crisis. And that was, those were a series of actions that had really taken about 18 months for the Fed to compile and deliver. So within a matter of days, Jay Powell has run through Bernanke, his playbook. And now in the week of March 16, because you know, this, this triage is i term it, which is really sort of, you know, you think of Battlefield medicine, where you're trying an intervention, if it works, great, you don't have to do any more. But if it doesn't work, you have to increase the dosage or increase the, the medicine. And that's what the Fed was doing. So the week of March 16, you start that week with the emergency rate cut, that takes rates to zero, the Fed is buying large scale purchases of Treasury securities and mortgage backed securities. And it's not working. And and the book kind of walks through how Powell and his inner circle was reacting to this, as they saw complete dysfunction in the MBS market, forced sales of Treasury securities by global central banks, because people were were trying to get their hands on dollars. And so, you know, that's kind of where this idea of triage came from. I didn't realise even as I was writing the book that we would see war fiscal policy. And so the the title maybe has another meeting there with respect to the trillions of dollars, that the US Congress and the White House spent to deal with the crisis. But this was an unprecedented shock. And it led to unprecedented policy response, which, obviously, we're still, we're still dealing with that right now.
Mike Simonsen 7:29
Yeah. And it's like, you know, it's funny, because, like, that's why it was such a page turner, it's literally day by day or hour by hour chronicle of what was happening. And one of the things that struck me is, you know, we get into this conventional wisdom, that the, the economy was shutting down, because of the lockdowns because of the government interventions. And, and like the Fed, like the government, broadly is to blame for the challenge we're in. But what the book was, like, when I was noticing is like, there's a big chunk of the book, that's before, you know, we had, we had, you know, barely any cases at all the US, like, with the global economy was just grinding to a halt. way sooner. And I have a couple of anecdotes of like, you know, friends with multimillion dollar tourist companies who went, you know, went like negative, not just negative profit, but negative revenue, you know, before before anything else was happening, like, you know, people were, like it was, it was really incredible in a lot of places.
Nick Timiraos 8:42
That was the issue was how do businesses, how do you prepare for revenues going to zero? I mean, there's just no, there's no way so that necessitated this response. But I also think part of the story is about the people in those jobs because of these decisions are made by people. And, you know, the, the decisions that Jay Powell made are not necessarily the decisions that a different Fed chair would have made, or that they would have made them as quickly as Powell made them. One thing that surprised some of pals, former colleagues was how quickly he moved in March. And the reason he moved quickly was he was concerned that martyr dysfunction was going to lead to a financial crisis on top of this public health crisis. And so he gets after his staff, again, near the end of that week on March 16th. And he says, It feels like we're swimming after a speedboat. And we're going to have to catch up this week, and we need to get ahead of this. And I've been thinking about that a lot this year, because the Fed this year has, at times, I think, felt like it's in a similar situation. And so if you want to understand why Powell is doing the sorts of things he's been doing this year, which obviously policy has been completely different, I think it helps to understand, you know, what makes this person tick, why they're reacting the way they due how they, how they confront a problem, how they solve the problem, how they assess the risks on both sides of it. And this year, the story obviously has been, you know, they fell behind in terms of getting interest rates up and they want to catch up. And their their method of catching up has been to raise interest rates and 75 basis point increments every six weeks, which the Fed hasn't done, you know, since they began using the federal funds rate in the early 1990s. So this isn't just a story about 2020. But that's where the focus of the book is. It's about how these policymakers you know, what, what makes them tick. Who is this guy that Donald Trump plucked from relative obscurity to run, you know, the central bank of the reserve currency of the world?
Mike Simonsen 10:41
Yeah. The people in the stories are like a really compelling part of the writing. And I actually enjoyed, like, the first third of the book is like, it's like the history of the Fed. And there were a couple of things striking about that, is that as an institution, how young it is, and how few times how few, like times, it's had to do these things. So like the policy, using the Fed Funds rates, funds rate is only early 90s policy, we've only had a couple of recessions since then, like, like, it's like, we don't have a lot of training data, you know, on like, how do you do it? How big do you do how fast you do it? And and then the other part of it that was really striking to me, is how it's literally a handful of people sitting around going okay, here we go, like add making world impactful decisions.
Nick Timiraos 11:39
Yeah, no, that's right. I mean, they're, you know, the the modern fad that you could really date it to the end of World War Two that was were sort of the Fed, as it exists today. took shape. And the fed the the Fed Chair during the 90s, in 1950s, and 1960s, William McChesney Martin, Jr, he reminds me a little bit of Jay Powell, because he is not an academic. He's not a PhD economist. He actually jokes to somebody during his career that you know, the Fed, we have a lot of economists, but I prefer to keep them in the basement. This is somebody who's worked in the government, he's worked in the private sector, he ran the New York Stock Exchange before World War Two. And he comes up with this idea that the Fed should really lean against the inflationary winds. So when the economy's doing well, that's when you raise rates, you want to tamp down on excesses and overheating. And when the economy's weak in a recession, that's when you want to provide more stimulus, he wasn't a Keynesian, he wasn't devoted to the views of John Maynard Keynes. But that was sort of where the economics profession was moving through his tenure. And so he's, he's the Fed chair that sort of makes the fed into the institution that it is today. And then the Fed goes through this searing episode of the 1970s inflation, which, you know, creates even more the institution as it exists today, it's in the last 30 years have been about building on and defending the legacy of, of a credible inflation fighting central bank, so that you don't have to go through something like what the US went through in the 1970s.
Mike Simonsen 13:17
Yeah. So that actually, let's divert from the book for a second to talk about, you know, the, as you mentioned, the impact on the policy today, you know, we're we're in is this you know, surprise, surprise, yet again, unprecedented times, right? Yeah. And, and so the Fed is, you know, is cranking up rates really quickly. And of course, all of the pundits in the world are in the, you know, the Feds gonna bring us to a recession. And, and then, and then the secondary is, is like all of the reading into what the Fed wants to do, or what, you know, unspoken, but they really want to do this. What what are we? What are we? What do we need to know, in the next for the next year about what's coming in Fed policy? And, and maybe even as it as it relates to the mortgage security market? And and, and then therefore, real estate?
Nick Timiraos 14:17
So that's a great question. And if you'd asked me a year ago, what the next year would hold, I would have given you an answer that couldn't have been more wrong. So I'm a little bit hesitant to predict what the next year is going to bring. But, you know, the Fed has been very clear about where their focus is, right now. Inflation has been much too high. And the challenge, I think, is that they have been expecting inflation to diminish. At some point. We have the supply chain bottlenecks. We had a shift in the composition of spending from services to goods that pushed up prices of things like used cars by 40% last year, and the Fed has been expecting that that would come back down to earth. And it hasn't done it and so That's, you know that that's one of the reasons why inflation has been stubbornly high as they haven't gotten the goods disinflation that they were expecting you layer on top of that, the the hit from the commodity shock out of the Ukraine war. And then so you know, those are two things that you expect could could improve commodities have come down a lot. Over the past couple of months, the supply chain is getting better. And so a lot of people say, Well, gee, shouldn't that bring inflation down, at least to 3% by the end of next year. And that's pretty much what the Fed is expecting that those things will help bring inflation down to 3% by the end of the next year. So why is the Fed, so concerned right now, and so willing to err on the side of causing a hard landing of recession to get inflation down, and it's because they are concerned about the labor market, and wages and wage growth feeding through to more persistent inflation. And so it seems likely that the Fed will continue to keep interest rates to keep raising interest rates until they're confident that the labor market is going to soften. The worry right now, that you hear from current and former Fed officials is that wage, if you look at real wage growth, it's actually negative take 5% wage growth annually against seven or 8% inflation, so workers are getting real wage cuts. But if you change jobs, right, now, you're getting double digit pay increases. So job switchers are, are coming out ahead with this high inflation. And if more and more people decide that that's what they have to do, to have a real wage gain, and you have more jobs switching, and those people are getting higher and increases in wages, then you bake in higher wages, overall into the economy. And if you think about, you know, the main ingredient, when you go out for a restaurant meal, you know, when you spend on something in the service sector, it's labor intensive wage costs are the main ingredient there. And so the Fed is concerned that even if the labor market didn't start this inflation, that that is what could sustain higher prices. And it's a risk that they find unacceptable, to get into a situation where people can come to expect inflation to stay high, would run a risk of the 1970s repeating. And they don't want to go through 1979 8081. And so the lesson is, if you can, if you can get rid of that now, if you can prevent that psychology from taking hold, you know, hopefully, they will get the help from the supply chain, but they're not sure it's going to be enough. And that's why they've been raising rates as aggressively as they've been.
Mike Simonsen 17:40
That's fascinating. So the job switchers, getting the getting that feeling the the inflationary pressures and that sense a good sense for them to wage gains. It's kind of like parallel to, to the real estate market, like you know, home prices climb so high. But But everybody's locked into a cheap 30 year mortgage. So most of the country doesn't notice that. It's only the people who are moving.
Nick Timiraos 18:11
Right. All right. And that's different from you know, central banks across the world are raising interest rates. And then these countries like Canada, the UK, or Australia, where they're raising rates, and everybody has an adjustable monetary policy is going to feed through a lot faster into the economy, you're gonna get a very hard slowdown in housing here. But if if that transmission, if that transmission mechanism doesn't lead to weakness, then that may encourage the Fed, they, you know, to conclude they have to do more. So I think the challenge right now is a lot of people, because of the way the Fed operator over the last 15 years was, well, if the economy slowed down, the Fed would ease and that was because the Fed thought growth was was too slow, inflation was low. And so they could do that, you know, they see some shock coming in the equity markets responding to that the Fed responded to it to this is completely different, because we haven't been through a high inflation environment in such a long time. And so I think it calls for some humility in in how the Fed is going to respond to this. And you can assume that, you know, the way that they reacted in 2016, or 2012. is going to be the case this time.
Mike Simonsen 19:22
Yeah. That actually brings up an interesting point. So the, because the US, all the US homeowners are locked into ultra low mortgage rates. The you're saying that that the that the Fed is actually less able to slow the economy?
Nick Timiraos 19:40
Well, that, you know, it's that's certainly a possibility, right. If, if housing is their first, you know, transmission mechanism, obviously, it'll show up elsewhere. But what the Fed wants right now is to slow aggregate demand, right? There's, there's there there's too much chasing too little and so With that, you know that the housing market benefited the most when the Fed was trying to stimulate the economy during the pandemic, and coming out of the pandemic last year. And now it's just the complete opposite, right? It's like a switch has been flipped. Probably from mid June, when the Fed accelerated the pace of rate increases to 75 basis point. hikes. I mean, I wrote a story back in May, sort of asking the question, well, gee, if there is this shift in demand, because the pandemic changed people's demand for housing, and if supplies are constrained, maybe five and a quarter, a five and a half percent mortgage rate, which really did slow the housing market at the end of 2018, maybe won't have the same impact now. And then just within weeks, you know, we were we were well past five and a half percent mortgage rates, because the Fed was, was dialing, dialing up the increases.
Mike Simonsen 20:54
Yeah. And, you know, we're watching the data. And what's fascinating is that we can watch, we watch in in August, rates were kind of easing back down mortgage rates easing back down around five, and people were buying houses, right, then September one, they spiked from five to seven, and over a short period of time, and and the brakes went on hard, right? It's really It looks to me, like that's a, that's a threshold where our consumers are, like, going to be operating. But it gets to two other questions I have. One is, is in. So one of the things that the Fed did uniquely during the triage, was started buying mortgage backed securities. And as a result, one of the consequences that was that mortgage rates fell to ultra ultra low levels. And so the question is, and so now they're like unwinding that. Right. And that's one of the reasons that that rates are jumping up, the higher. So let's say, and it sure looks to me, like the Fed, overshot and kept buying those too long. Kept when we could, everybody knew that the real estate market was too hot. You know, two years ago, we could see it, you know, it's like the pandemic was was already way underway. was barely underway. And but but the the real estate market moves super fast. So so the Fed overshot on that side? I would say. Now, the other side is, rates are 7%. The brakes are on hard on demand. And what is the likelihood that the Fed it like? So then let's say we have a hard crash and housing next year? No buyers anywhere? Let's hypothetically right, what's the what's the what's the chance that the Fed says, Oops, and now starts using that mortgage securities lever in a non crisis moment? Or is that gone forever? Like, is that now a common lever that they're gonna use?
Nick Timiraos 23:14
It's, it's hard. It's hard to know, I guess what I would say is, you know, I think there's some confusion about why the Fed buys mortgage backed securities, because obviously, obviously, it's a transmission mechanism into the housing market. But there was a debate a couple of years ago, when the Fed was done buying, you know, their their final round of purchases from the last decade, it ended in 2014. They kept their holding steady for a while, then they began to shrink their balance sheet, passively allowing some of those securities to run off in 1718 and 19. And there was a debate around whether the Fed would buy MBs, again, in a crisis because a lot of people, the Fed are more conservative, you know, MBS as a credit product. We shouldn't buy anything other than US government securities. We don't want to allocate credit to one sector or the other. And there was a conference where Bill Dudley, who is now the former New York Fed President, he may have still been the New York Fed President at the time, the New York Fed presidents very important, one of the one of the most senior officials in the system, because they run that process of purchasing these securities. And he made the point that said no look in the next downturn, the Fed can buy MBS because the Fed sees it as a duration product. It's a product that doesn't have credit risk. If you assume that the government has backstopped the GSEs so they're not taking any credit risk. They're taking it's a rates product, they are taking duration out of the market, and if you want it when the Fed purchases long term Treasury securities, it's because they've cut interest rates to zero and they want to provide more stimulus and the way they think they can do that is pushing pushing down yields across the curve. And so buying if you see it as a duration product the Fed buying MBS isn't because they want to put their thumb on this bail for the housing market per se, it's because they want to bring down yields more broadly than that. And so that was the rationale, partly for continuing MBs, purchases and 2020. I mean, first they went in because the MBS market was broken, the Treasury market was was breaking down. So they went in and they were buying large portions of those securities. A lot of the reason mortgage rates went down so much was because the 10 year Treasury yield was down below 1%. And the Fed was tightening spreads a little bit by purchasing MBS on top of treasuries, but it was a way to bring down the whole yield structure. And so that was their argument for continuing to buy MBS last year, even when it was obvious that the housing market was was very well, you know, they're aware of what was happening with mortgage rates. But they saw that they saw the two moving together, that it's a 30 year duration product that we're able to purchase, because we can't buy as much duration in the US Treasury market.
Mike Simonsen 25:58
That's fascinating. So so the argument is that, that the Fed may, like still has this arrow at its quiver, big in the view that it's it's such a big market. And that add, it's actually like that as a as a as an instrument of broader rate curve, rather than that it actually cares, per se about housing.
Nick Timiraos 26:28
Right now. Now, you know, there's a question about next time will the Fed even need to buy treasuries and MBS in a downturn, because if you've raised interest rates to four or 5%, you have more room to cut, the big concern inside the Fed, before the pandemic hit was, you're going to be in a situation like Japan or Europe or interest rates or pins near zero, and in Japan and Europe they had, and Japan still has negative rates, and you're just monetary policy is going to have no juice, there's going to be no juice left to squeeze out of that piece of fruit. And so the whole, you know, apparatus was geared towards when you hit the lower bound, act boldly, so that you actually don't get stuck there for a long period of time. And that was the Fed had completed this whole review in 2019. And so when the pandemic hits, they say, Oh, my gosh, this is the shock we've been worrying about. And it's a much bigger shock, because of the unemployment rate was, you know, north of 14%. They didn't realize things were going to reverse as quickly as they did. And so then lat you get into last year, what were the mistakes the Fed made last year, just to quickly run through them, you know, they had, they had provided this guidance that said, we're not going to raise interest rates until we are confident that inflation is not just going to be at our 2% target, but a little bit above it. Nobody, when they rolled out that guidance thought this was going to be a problem. And they conditioned their pullback of stimulus on the labor market, getting back to around where it was before the pandemic. So last year, they were very focused on the labor market, even as inflation was starting to run very high well above their their plans for a modest overshoot of 2%. Then, of course, they got the forecast wrong, like a lot of private sector economists, they thought inflation would come back quickly. This is tied to the pandemic, the pandemic has a beginning, middle and end, so to will this inflation, and they didn't recognize how strong demand was and how it was going to fuel inflation for longer. And then, you know, you have the fiscal stimulus, they don't respond to the fiscal stimulus that Biden approves right away. The last point I would make is they were very concerned about the taper tantrum episode of 2013. They didn't want to prematurely tighten policy, because of confusion. So they thought they had to be very deliberate in terms of socializing the idea that we're going to pull back on these bond purchases, we don't want anybody to get confused. We don't want treasury yields to jump by 100 basis points the way they did in 2013. And if you were in the housing and mortgage market, then you remember what happened. In the second half of 2013, there was a pullback, and so they were so concerned about not repeating the mistakes that they thought they had made with prematurely, tapering, raising rates too soon, in 2015. They were they were very geared towards not making those mistakes again, and that explains partly why they fell behind, you know, why were they buying MBS earlier this year? Well, they had tried to avoid the taper tantrum. And so when you, you know, when you fight the last war, you you run the risk of making new mistakes. And that's where we are now. I mean, that gets to one of your questions as well if you're so geared now towards not preventing a repeat of 7576 7778, etc. Are you going to, you know, have something else to break in the market next year that you're going to be responding to, and that is a risk of course that you know, there could be some financial stability thing, that that is what forces the Fed, maybe not to back off of their plans. to raise interest rates, but to come back into the market in some way, what you've been seeing, you know, in late September or early October, with the Bank of England having to go into their long end of their debt market.
Mike Simonsen 30:13
Yeah. Wow. So so much though, that's one thread I want to pull out here is when we got down where a REIT, we're in this really low or 0% interest rate environment. And one of the the, the sort of threads in your book is, before the pandemic. Powell was in an interesting situation with Trump, where he was actually where Trump was throwing his his trade wars and his tariffs. And these were actually putting real brakes on the economy. And so Powell was in a situation where he was that, like, the Fed is forced to lower rates to help support the economy in the face of the policies. And so the question I have what I had when I was reading that as is, what's the legacy of that, like, in that situation? You know, like, what, in retrospect, is that? Is that Is that a big deal? That like, got us into a situation where like, wow, we have to do more, we have to buy the mortgage securities, because we can't, we can't lower the the short end of the curve anymore.
Nick Timiraos 31:28
Yeah, I mean, in 2019, if you if you look back at the Powell fed, I think the most internal opposition he may have faced would have been in the summer of 2019, when it was termed the mid cycle adjustment, this idea that you would cut rates, not, you know, in a full rate cutting cycle, because we weren't in a recession. But maybe there was a concern, either. Maybe the Fed had gone too far in 2018. And or the trade war was kicking up all this uncertainty that was leading growth to slow more than had been anticipated when the Fed was raising interest rates in 2018. So they cut rates three times. Politics, dissents on all of those cuts, he takes three dissents at one of the meetings, which is a lot. You know, I think the issue there is that the pandemic hit in March of 2020. And so completely screwed up our ability to see well, what was the economy going to do after that? We'll never really know whether I mean, there's some people who think 2019 was, you know, a successful intervention, Powell achieved the soft landing, we would have had two more years, three more years of an expansion if the pandemic hadn't hit. And, you know, that would have looked like a great job of interest rate control, fine tuning things, there are other people who think no, no, that ignited a, you know, a Bobby, we're seeding bubbles, you were keeping rates too low. But the truth is, I don't think we'll ever really know because what happened in March 2020 was just so explosive and destabilizing the Fed had to go all in. And, and so, you know, it's hard to make sense of kind of the legacy of 2018 that cetera
Mike Simonsen 33:07
Okay, so fair enough. And I can, if we look at the real estate data, per se, the, we can see that the mortgage rates rose in 2018. And, and in 2019, actually, inventory rose, you know, you every year for the first time in a decade, because, like, like it had a real impact. And and by the end of 2019, home prices were pretty much flat year over year. So we started 2020 Then all of a sudden, there's there is real demand kicking in early in 2020, prior to pandemic stimulus, that that may have been the legacy of the 2019 changes that you're talking about that some of the some people were able to look at that and go I can see that the the asset bubble forming already starting there. Is that what we're talking about?
Nick Timiraos 34:04
It's possible. I mean, like I said, it's just, it's, it's one of these counterfactuals the what if game that academics like to play, and it will just be too hard to know, because of because the shock was so mad was so massive.
Mike Simonsen 34:15
So I have another question in this in this policy stuff, is that, you know, one of the challenges the Feds has is what you might call lagging data, especially in real estate, like the you know, the the real estate inflation numbers are based on rents that really action we could see six 8, 10 months ago, right. And so, but everybody knows it, so is the Fed still stuck there? Or is there more Is there a way to get change that to make better policy to like, like so. If the Fed uses the headline CPI now and says, Well, you know, exactly should still high, we need that to be not. But that's a big chunk of that is based on on rents, right? And rents that have increased a long time ago. And that's no longer happening, like, how are we any chance that we that the feds using the better data I've heard some talk about using none that
Nick Timiraos 35:18
they it's not that they have better data, but they're aware of how, you know, the BLS constructs this panel to measure rents that has a lag because they're looking at, at what everybody's paying, and not just what new tenants are paying. And so they're trying to account for that. And so you see higher highs in new rent. And it looks you know, it's it didn't rise as much last year, the BLS series around the rental primary residence series. So but when it gets to this data is lagged. And obviously the Fed is aware of this. So they're coming up with a forecast. The question I get is, well, what are they looking at right now? Are they looking at headlines, I mean, obviously, they look at everything. But if you had to look at only one or two things to try to understand what they're going to respond to, don't look at year over year, look at month over month, look at core inflation, it can be CPI, it can be PCE. They're looking at both CPI comes out two weeks earlier than PCE. So that's kind of our first look. And you can usually take and the Fed does take the PCE is, is calculated from different inputs into the CPI, and a third gauge the PPI. So if you know what the CPI and the PPI are, you can kind of guess PCE but anyway, Core CPI, let's stick with that for a minute. You know, that's been running point 5% month over month and certain months, that's high that is, you know, to get 2% annualized inflation, you need the monthly readings to be much closer to point two than 2.5. So that's the first thing to look at is where is core inflation coming in. And, you know, yes, housing and rent is a is punching above its weight right now, but maybe not as much as you think if you look at the last inflation report, or the one before from August, if you look at the August CPI, that came out in mid September, if you take housing out, and you look at just core services, you know, there's core goods and core services are the two components of core inflation. So if you do core services, excluding housing, it's still printing high. There are other kind of alternate gauges, you can look at median CPI, looks at the you know, all of the different inputs into into the inflation and looks at kind of the median of all those different items in the price basket, and you take out housing, median CPI is still high. So the concern for the Fed, yes, they see that inflation may be slowing in the in the shelter complex. But if it's broadening across services, that's going to be cause for concern, because that would reinforce their fear that you have a very tight labor market, that is putting pressure on wages. And that is, you know, filtering through to the rest of the service sector. So you look at inflation, right now, you may get goods coming down, you're hopefully going to see commodities coming down if if energy prices stay low. But it's really that services basket, and you can look at it with or without housing. And if you see the without housing part getting better than that, you know, that could be a sign of comfort, because you may expect to be getting the relief, you know, six or seven months from now, from the rental numbers that you already do see the deceleration there.
Mike Simonsen 38:36
Got it. So if the if the decision makers there, see those the other elements in the inflation numbers coming down, even though the the rent, especially rent is lagging and still high? Is it so that implies that they go okay, we know that the rent rent is lagging? Like maybe we can make our decision based on the elements that we do see coming into line like is that arguing that we might like that, that they might be able to act more quickly? Like one of my fears is that, you know, based on what I you know, like I was talking with Adam osmek, who's an economist, who was who was pointed out that there is if you work in the amount of rent increases that we've had, and the amount that have already shown up in the inflation numbers, there's still like, two thirds of that rent gain does still get into the inflation numbers. And so, like, that's scary to me that like if they're going directly on that lagging data, and so is there a chance that they sort of ignore it, you know, because of the elements they can see.
Nick Timiraos 39:50
Well, yeah, and I think that, you know, they construct a forecast, and they are aware of how these legs operate. So they're looking at sort of the primary You know, whether it's real page or permanent list or whatever, whatever index you want to take that measures apartment rent, they can see what's happening with new leases just like everybody else, and they can come up with a forecast. But if you know if that's getting better, but nothing else is getting better, that may lead you to do something different than if that's getting better. And everything else is getting better, too. You know, one of the things where the Fed got in trouble last year was doing this kind of micro approach. Well, we'll look at airfares, well, we'll look at used cars. You know, those are bad, but everything else isn't bad. But it ended up being a macro problem. There was a lot of demand in the system. And the supply chain couldn't handle it. But part of the reason that supply chain couldn't handle it was because there was a lot of demand right now, as you hear kind of anecdotally, in the construction space. Some of the builders I've heard, they're not worried as much about labor supply anymore. They're saying, well, labor shortages are kind of fixing themselves, because demand has come down so much. And so that kind of gets at it is is it a supply problem here? Or is it a demand problem? And this if it's both, you know that the Fed is going to want to see evidence, not just that one component is getting better, but that the other components are also not getting worse?
Mike Simonsen 41:17
So fascinating. So fascinating. Okay, tell it. Let's back to the book for a few minutes. Let's so when you were researching the book, were there things that surprised you, that you learned along the way?
Nick Timiraos 41:29
Yeah, I think one of the surprises was a little bit. You know, you've heard the saying that history doesn't repeat, but it rhymes. And and that sort of came through. I mean, the idea that when when Trump was beating up on Powell and the Fed a few years ago, you know, it was a little bit of a surprise to people who would follow the Fed closely. Only because it hadn't happened in about 25 years, there had been this unwritten rule that Bill Clinton began to enforce, which was, you actually might get better monetary policy, if you don't pressure the Fed, because then the Fed doesn't have to take into account that they're showing their resolve that they're defending their independence, there was an episode in 1992, where in the run up to his doomed reelection, George Bush Senior had given an interview to the New York Times, and he had pressured the Fed to cut rates a little bit more, he said the Fed was too tight. And you can actually read the transcripts from the Fed policy meetings, they're public. And you can see that that interview was discussed at the meeting, there were a couple of Fed officials who said, Well, gee, maybe because we're under pressure from the President, we shouldn't give him what he wants, because then it'll look like monetary policies become more political. So that led to Clinton and and, you know, George W. Bush continued that precedent of not pressuring the Fed publicly telling the Fed what to do, Obama continued that President Trump ended it. But we had this history of presidents actually pressuring the Fed. And, and, you know, Truman was, was the one who really had gotten upset with the Fed, because the Fed had fixed interest rates during World War Two, and had committed to fix interest rates by buying government debt. And whatever quantities were necessary even after the war. And the Feds independence came when, in 1950, and early 1951, the Fed said, we can't do this anymore. We think we're causing too much inflation. And Truman actually summons the entire Open Market Committee to the Oval Office to the White House, that's never happened before. Never happened since and he says, we're going to warn Korea, if you don't give me the policy I need, then you're helping Stalin. And so the Fed actually held its ground said, we need to do this. Truman was in a weak position politically. And so he couldn't fight the Fed at that point. And you ended up with sort of the, that was where this idea of an independent fed came from.
Mike Simonsen 43:57
The that's, yeah, that the history part of the book is really, really, really fascinating, though. Okay, let's, let's shift gears to the future. So I actually, like one of the things I like to do with my guests is, is get your take on, you know, where the future like what's in store for us next year and beyond? And, and as a journalist, you know, if you want, if you say like, you could share what you think or you could share, I'd be interested in, like, Who do you think has really interesting takes on the future that we should be paying attention to? Like, I'm interested in looking, what are the trends? What are the things that I should know about looking forward for next year and beyond?
Nick Timiraos 44:36
For next year in the economy or in housing? I mean, I would ask you about housing.
Mike Simonsen 44:40
Yeah. So let's talk about the economy.
Nick Timiraos 44:43
Well, you know, obviously things are going to slow down I think the question is, how much and and then what is the Fed do I mean, so these interest rate increases? Are the this is the easy part, right? This is the low hanging fruit, it's easy to be aggressive, and say you're really gonna come after inflation, when policy rates have been very low and the unemployment rate right now is, you know, we're at three and a half percent unemployment rate. So I think the question I have is, what is the how does that begin to change as the unemployment rate rises. And you know, when you're talking about very low levels of job growth, or, you know, a contracting labor market, then I think, you know, the decisions and deliberations will get a lot more challenging for the Fed. Because it's going to be hard to know, you know, when to when to call pause? And then do you cut? Do you stay at a higher level for time than you otherwise would have? You know, the Fed is concerned about the stop go episode of the 1970s, where, you know, the Fed chair in the 1970s, Arthur burns, he's considered it a to be somebody who wasn't tough enough on inflation, but he actually had a reputation as an inflation fighter, and they raised interest rates a lot in 1973 1974. But then they cut interest rates after that, as the economy went into a pretty bad recession. And the lesson from it was, well, you hadn't done enough. So I think that's going to be one of the big questions, once the economy actually starts to face weakness, and then, you know, politically, it's going to be harder for the Fed to because you're going to have more people in kind of the political space saying, You're doing too much. You're, you know, Powell is crazy. What's he doing here? raising rates so recklessly Can't you see that you've already fixed inflation. And so you know, I'm not taking an opinion on whether that's the right thing to do or the wrong thing to do. But I think that's where the challenge is going to be the Fed uses what they call a risk management approach, which is really, you know, there are two mistakes you can make, right? There's the mistake you can make of doing too much raising rates too much. And there's the mistake, you can make them not raising rates enough. And so how are you going to manage those risks? Where do you? Which one do you see is the easier problem to fix? If you do make a mistake? And and then you kind of work from there.
Mike Simonsen 47:03
Yeah. So you actually see the Feds job in the next year? It's getting more difficult than it has been this year? Yeah. Oh, yeah.
Nick Timiraos 47:13
I mean, again, this is, you know, it's easy. It's easy when you're starting the race to run fast. But, you know, what are you going to do when your your muscles are aching, and you're, you know, you're thirsty. And, and, and you've still got to go? Right?
Mike Simonsen 47:28
Yeah, that's, for sure. And, and the, the, the, looking at the, the right, it's, you know, from my side, my amateur eyes here, it's, it's like the, you know, the Fed gets is already under so much criticism, you know, from people, you know, all over, you know, the spectrum. Like that. If this is the easy part, man, we're, you know, we're in for some real challenge in the next year.
Nick Timiraos 47:57
Yeah. Well, and you are hearing now from people saying, you know, that they're making a real risk now of of overcorrecting, right of, if they're embarrassed about, obviously, in hindsight, they left things too easy. For too long, it didn't seem that way when they were doing it, but the data broke hard, you know, in their face about a year ago, the unemployment rate was at 5.9%. In June of 21, it fell to 3.9%. By the end of the year, that's the kind of drop the speed of that drop to that low level we've never seen outside of the Korean War. So you know, the data broke out against them last year. And now it looks obvious that they should have raised rates sooner, but it didn't feel that way at the time. And so if you and I are talking the year from now, maybe we'll say, Geez, it was obvious they shouldn't, you know, they shouldn't have raised those, those interest rates in November and December. But the other risks they have to take into account is, what if inflation really is, you know, getting baked into the system here, and it's much more persistent. And you'd rather go to a 5% Fed funds rate in early 23, than defined a year from now, oh, gee, we didn't go high enough. And even though the economy's you know, really weak, we gotta we gotta restart this thing here and go to six. You know, that won't be any fun for anybody either.
Mike Simonsen 49:13
Yeah. And, and, you know, mortgage rates at 7% or higher, is like was so far outside of my right view, right? Even, you know, six months ago, like, what does that look like next year?
Nick Timiraos 49:29
You hear people say, well, six and a half isn't historically, you know, a terrible rate, but we repriced the entire housing stock at a sub four and a half 4% mortgage, right. So, you know, the home prices we've seen over the past decade, have been conditioned on everybody refinancing or purchasing with an interest rate below five, maybe significantly below five and so yeah, you get these people who aren't gonna move because, you know, their monthly payment, you just can't You can't beat it and Ah, yeah. So that's it's it's not going to be fun for the housing space for a while here.
Mike Simonsen 50:05
Yeah, it's, it's really fasting we've been talking with, with the Fed sort of at the center of the universe. It, are there macro risks or factors that you see that that may be even longer term things that that, that you're interested in that we should like that are worth noting right now.
Nick Timiraos 50:30
Yeah, I think one, you know, one question I have is, you know, it was easy for the Fed, comparatively speaking, to bring interest rates to have interest rates lower for longer. Because inflation, there were forces that helped keep inflation low. You think about demographics. You know, the end of the Cold War, and the integration of China into the global economy, brought one and a half billion people into the workforce, globally, and that exerted downward pressure on prices. You had, you know, you had abundance in in energy and mineral resources. That helped in the US a lot over the last decade, we developed, you know, domestic oil sources that we didn't know we had. So the question I guess I'm getting at is, what happens if those things are reversing? What if globalization is maybe not completely undoing itself, but well, you don't know how reliable your supply chain is going to be? So you sourced from multiple buyers now, and that builds in higher cost, and you want to have a more resilient supply chain. And so what used to be kind of just in time inventory management. Now it's just in case and that builds in higher cost, demographics provide provided a tailwind, we have a lot more cheap labor abroad. What if that's going away, that creates not necessarily higher inflation, because the central bank can respond to it, but it does create higher inflationary pressures, which leads to just more volatility in the economy and interest rates. And so, you know, in the middle of the first decade of this century, there was this term of the Great Moderation, right, the 1990s, and the early 2000s, were referred to as this Great Moderation. But what you know, what if what if the past that we had isn't, isn't what we're going to have going forward? What does that mean, for policy, that's one of the things that I spent a lot of time talking to folks about right now. And there are interesting arguments on both sides.
Mike Simonsen 52:30
Fascinating. De globalization is indeed a big macro risk that, that I worry about, like I, my entire professional career has been in it in a in a environment of accelerating globalization, and therefore costs coming down and, and wide open borders, and then all of a sudden, we get trade wars and tariffs, and yeah, and we get onshoring. And we get, like some of the, some of the Trump and Bernie Sanders rhetoric is, is like, I mean, that's straight out of, you know, the 70s. And so, and like, so, you know, my, you know, my mind 1990s Business School vocabulary is how, like, Well, that was wrong. And so, so like this, this, you know, this De globalization trend is, is like, I have no idea how to think about the implications of that.
Nick Timiraos 53:25
Yeah, and I mean, just look at the US mortgage market, right, the, the MBS market attracted international money, so American homeowners benefited because investors in Asia wanted to buy, you know, pooled securities backed by us mortgages, and that brought interest rates for homeowners down, I'm not suggesting that's not going to continue. But, you know, there, you know, there are these kind of unknown unknowns out there, well, what happens if, you know, parts of the world decide to try to break away or challenge the dominance of the dollar or become concerned that the dollar you know, you saw the dollar was weaponized in the Ukraine war? Because we didn't want to actually go to war with Russia. So we use these aggressive sanctions and and you know, that there's longer term implications of all of that.
Mike Simonsen 54:15
That's really surprised you brought that up the weaponized dollar in the Ukraine war, that's one of the crypto crowd uses that as an example of why why cryptocurrency and Bitcoin in particular is, is, you know, the is critical or the the path of the future. And so is there and this is sort of going in the weeds at the end of the interview, but I gotta, I gotta go here because it's really fascinating. Tell me about like, so if the dollar the dollar is under pressure, because because it's so dominant, what what are the options? Is it crypto Is it is it Kippie that you won, right? Well,
Nick Timiraos 55:02
I mean, I think I think you kind of get the contradiction in the question. If the dollar is so dominant, what are people going to use? Right? It's it's like the Yogi Berra is no one that restaurants, too crowded. No one goes there anymore. Yeah, there was, you know, there was an interesting speech, that, that Mark Carney who was at the time the governor of the Bank of England gave at the Feds Jackson Hole conference in August of 2019. It didn't get a lot of attention at the time because Trump attack the Fed that day. But if you go read the speech, Mark Carney, August 2019, he sort of suggests that, you know, the rest of the world monetary policy has become because of the what the Fed does has such an effect overseas, that we're almost we're incredibly beholden to the Fed in setting global monetary policy. And could we come up with a better system, and he sort of proposes a digital central bank currency from multiple jurisdictions would be very difficult, obviously, to get this thing off the ground. But if you could do it, you know, that's sort of the one time I've heard something where well, is the yuan really going to replace the dollar? Because you have capital controls in China, you have questions about, you know, rule of law, and those are important kind of fundamental elements, you know, in a currency system and a political system that has the reserve currency. But can you come up with some sort of, you know, multi hegemonic, digital central bank currency use the blockchain, he sort of laid it out and, and speech. And, and so that's, you know, obviously, logistically very difficult to get something like that launched. But if enough people wanted to get together, maybe they could do it now since then. I mean, I, when I wrote my book, you know, there was there was a real threat there. The US Treasury market wasn't going to be secured. And the Fed acted right away. Right, they ran in and said, This is the benchmark asset risk free asset, we're going to make sure it's there. There were dollar swap lines, they relaunched with foreign central banks. And so you almost come out. It's such there's a chance you actually come out of these episodes of greater international turmoil, with the dollars position, even more entrenched, because of how US policymakers have responded.
Mike Simonsen 57:20
So it's so many things to be able to get to. We're unfortunately at the top of our hour, though. So Nick, I really appreciate you taking the time. I love the book. I recommend it to a lot of people. It's a page turner, man. It's really good. So So let's leave it there. Nick Timiraos, Wall Street Journal. You're on Twitter. You do like you know, it's your easy to find.
Nick Timiraos 57:52
And he very much Mike, I appreciated the chance to chat with you and your audience.
Mike Simonsen 57:57
Looking forward to looking forward to watching the next year. Oh, Yeah, same
Nick Timiraos 58:01
here. Take care. Thanks.
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