Modern Fed is 'a fairly dovish bunch' now: Economics professor

Alan Blinder, former Federal Reserve Vice Chair and Princeton University professor of economics and public affairs, joins Yahoo Finance Live to discuss current Fed policy and how it compares on a historical level.

Video Transcript


- Well, that does it for today's trading action. Again, a little bit of selling here in the final couple of minutes of trading, Dow closing well off the lows of the day, though, off just around 107 points. S&P off about 8/10 of the percent. NASDAQ off just over 1%. Again, investors digesting the news that we got in terms of rates and also what we're seeing play out with FedEx. FedEx releasing its earnings reports later-- or excuse me, earlier than expected. All right. Well, speaking of the market action, we have stocks falling for a second day in a row following the Fed's latest 75 basis point hike, as investors worry about the likelihood of a recession.

And the Fed may not slow down any time soon. Fed Chair Jay Powell saying that he would have to be, quote, "confident that inflation is coming down before considering a pause or a pivot." Well, we want to bring in Alan Blinder, Princeton University professor of economics and public affairs and author of the upcoming book "A Monetary and Fiscal History of the United States." Mr. Blinder, it's great to see you. So the market obviously reacting negatively to the latest rate hike, another 75 basis point hike. From your perspective, I guess, is this soft landing still in the cards?

ALAN BLINDER: It's in the cards, but at the bottom of the deck. If you're a betting person, you should bet against it at this point. But I wouldn't give it a zero probability. And neither does the Fed. Jay Powell, starting with Jackson Hole, has been showing the Fed's teeth. And that's got the market-- that and the rate hikes have got the markets jittery, to say the least. But if you look at the Fed's projections, they don't have the unemployment rate going above 4.4%. That's not a very hard landing.

- Larry Summers, for one, does not buy that projection. He thinks it's far too rosy. Do you?

ALAN BLINDER: I think it's a little on the rosy side. I wouldn't go all the way to the Larry Summers position. I mean, Larry has been sort of the grim reaper on this. Look, maybe he'll be right. But I think a number of the things you want to keep in mind is that the Fed is basically a pretty dovish bunch now. The personality of the Federal Open Market Committee changes as the personnel changes. And it's a fairly dovish bunch. Now that said, they're serious about bringing inflation down. But they're not going to want to hammer the economy into the ground. And I don't think they have to.

- Well, I guess how high then do you see the unemployment rate potentially going?

ALAN BLINDER: I could see it going to five. Yeah. I mean, it's a guess at this point. Maybe we'll do better than that. Maybe we'll do worse. But that would sort of be around my central projection for the highest. The highest. That doesn't mean it's up around five for a long time. But the highest.

- So when you look at the economic fundamentals, how does this rate rising environment compared to previous occasions where the Fed has had to be this aggressive?

ALAN BLINDER: I think the natural comparison that many people have made is to the early '80s, the late '70s, early 80s when Paul Volcker really waged war against inflation. And there are some analogies. But there are two very, very, very big differences. One is the job in front of Paul Volcker when he took the helm of the Fed was to bring the inflation rate down, oh, there was no target then, but maybe seven, eight percentage points.

The job of Jay Powell and the Fed now is to bring the core PCE inflation rate-- now we have a target and a specific measure-- down to by maybe two to two and a half percentage points. So that's a much smaller piece of work to be done. And the second thing is back around 1980, high inflation had been deeply ingrained in the brains of households and businesses.

And that makes it harder. They start building that into their expectations, their price setting, their wage setting, and so on. Now, this is something a lot of people are forgetting, this is a young inflation. If you go back a year and a half, the inflation rate was about a percentage and a half, 1 and 1/2%, a year and a half ago. This is not ancient history. So people are not going to think it's that impossible to get down to 2%, 2 and 1/2% inflation.

- Powell is late to the party. Do you like what he's doing now? Is there any advice you'd offer him how to get it back to 2%, 2 and 1/2%?

ALAN BLINDER: No. I think now he's doing-- first of all, you're right. He was late to the party. And if I was giving him advice then-- I sort of was, but not literally. And he was getting even more advice from a lot of other people. I would have asked them to start sooner, at least to stop buying MBS. For the life of me, I don't understand why they were doing that. But I think lately he's been doing quite well. I mean, for example, I would not be pushing him to be going faster on rates. We've just had 375 basis point increases in a row. It takes time for markets and the economy to digest things like that. So I think given the mistake that he and the FOMC made of not getting started sooner, right now they're doing pretty well.

- And just in terms of I guess tightening into a midterm election cycle, does this complicate the Fed's, I guess, calculus thinking around this? And does it maybe make it a little bit more complex if we weren't in an election year?

ALAN BLINDER: I don't think so. If it was a presidential election. I might say, well, a teeny, teeny bit. But for the most part, and certainly in a midterm, the Fed just forgets about where we are in the political cycle. It's a nonpartisan organization really. Some things say they're not partisan, but they don't look very nonpartisan. The Fed really is very nonpartisan.

I imagine Jay Powell himself is nonpartisan at this point. He used to be a Republican. I haven't asked him lately. I doubt that he's a Republican any more. But that's beside the point. Politics just doesn't enter. It's like if you say something political around the FOMC table, they look at you like you were slurping your soup. It's just not done.

- Bad form indeed. Now, your upcoming book, "A Monetary and Fiscal History of the United States 1961 to 2021," now, this hit shelves on October 11. What lessons are you hoping to impart to readers as to where the economy may be headed?

ALAN BLINDER: Well, some of them are about this soft or hard landing. The Fed has-- in the period covered by this book, the Fed has tightened monetary policy 11 previous times. This is the 12th. Some of them landed the economy very, very hard. Some of them landed it very softly. There was the so-called perfect soft landing in the '90s when I was vice chairman of the Fed. I remember that one very, very well of course.

So history shows that it is possible to do a soft landing. And that's getting a lot of attention now. History shows a number of other things, such as it wasn't always taken as axiomatic the way people do now that the central bank should be independent. If you go back in US history-- and I don't mean ancient history. I mean, go back to just before Bill Clinton to the George HW Bush administration and further back than that. It was normal for presidents to badger the Fed and try to get the Fed to do their will. The Nixon case is the most egregious. But there were many others. But it's changed a lot now. And I think that's been a change for the better.

The other thing I'd say in answer to your question is the title is a monetary and fiscal history. So the interaction of those two things fiscal policy, which can be restraining the economy or pushing it ahead, and monetary policy, ditto, has changed tremendously over time. Way back in the beginning in the '60s, fiscal policy was in the driver's seat and monetary policy, believe it or not, was not thought that important.

John F Kennedy when he was president half joked I think that he only remembered which was monetary policy because, Martin, the head of the Fed, his name started with M like money. And by the time we got into the '80s, it was really, really different from that. And in a lot of the '90s, the idea that fiscal policy would steer the economy was considered ludicrous. It just didn't happen.

But then we had the tremendous crash in the financial crisis where fiscal and monetary policy had to go shoulder to shoulder and dig the economy out. And then the pandemic crash, the same. Fiscal and monetary policy had to dig the economy out together because monetary policy-- you'll remember Ben Bernanke saying this and Jay Powell. Monetary policy alone wasn't strong enough.

- Indeed. Alan Blinder, great to have you on. Can't we read the book October 11, hits shelves. Good to see you, sir. Thanks very much.

ALAN BLINDER: Thanks a lot.