INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics and I'm joined by my two co-hosts, Ryan Sweet. Ryan, why do I keep messing up your last name?

Ryan Sweet:                      I don't know, it's only been 17 years Mark.

Mark Zandi:                      I know. It's just because I'm saying it so fast. I think that's what it is, but welcome, director of Realtime Economics and Cris deRitis' deputy chief economist. Hi guys.

Ryan Sweet:                      Mark, are you excited?

Mark Zandi:                      About what?

Ryan Sweet:                      2026, the World Cup?

Mark Zandi:                      Oh, I saw that.

Cris deRitis:                       Oh yeah.

Ryan Sweet:                      In Philadelphia.

Cris deRitis:                       For sure.

Mark Zandi:                      Yeah, that is exciting. Now, Philly has never hosted a world cup game have they?

Ryan Sweet:                      I don't believe so. No.

Mark Zandi:                      No, probably not. That's going to be cool. Very cool.

Ryan Sweet:                      Are you going to go?

Mark Zandi:                      If I'm still around?

Ryan Sweet:                      Wow.

Cris deRitis:                       All right. Setting the tone for today.

Mark Zandi:                      Things happen. Who knows?

Ryan Sweet:                      He's getting nervous because he realizes his probability of recession's too low.

Mark Zandi:                      Yeah. That's got to be what it is. Yeah, exactly. I was going to say something. What was I going to say? Oh, in the first part of this podcast, we're going to talk about the Fed and lot to talk about there, but then we're going to pivot and bring in a guest, Anna Stansbury, who's a professor at MIT who's done a lot of great work on the socioeconomic composition.

Cris deRitis:                       Diversity.

Mark Zandi:                      Diversity, yeah. Of the economics profession, which isn't so good actually. It's the worst among all PhD programs in the country, or PhD disciplines in the country. So we're going to dig into that a little bit more deeply and get her insights. But before we do that, we let's talk about this Fed. And of course this is Friday afternoon, June 17th in the wake of the Feds or the FOMC, the Federal Open Market Committee's decision to raise interest rates, the Federal Funds rate they control by three quarters of a point. Okay, with that preface, let me turn to Ryan who's a careful observer of what the Fed does. Ryan, just kind of fill us in however you think most appropriate as to what the Fed did this week.

Ryan Sweet:                      Well, they did a lot. I mean they raised the Fed Funds, right? That was the largest increase in 1994 so this is pretty unusual. Usually on the way down, they cut by a large amounts, but on the way up, they usually go by a measured approach. But I think it was the response, rather going 50, which was fully priced in which everyone expected, except for Cris who thought 75.

Mark Zandi:                      50 basis points being a half a percentage point. That's what everyone expected this time last week or not everyone, except maybe Cris.

Ryan Sweet:                      Cris.

Mark Zandi:                      Who was estimating it, but it was widely expected half a point and they came back and raised three quarters of a point.

Ryan Sweet:                      Correct. So not only just that, they tweaked the statement. So before, in the post meeting statement where they explained what their actions were and why they did it, their forward guidance was that they felt pretty comfortable that they could return inflation to 2% without damaging the labor market. They kind of took out the labor market part so it's kind of an indication that maybe they're losing a little bit of confidence that they're going to engineer-

Mark Zandi:                      A little bit confidence?

Ryan Sweet:                      I'm trying to be nice, yeah.

Mark Zandi:                      Okay. All right. I'm not going to be so nice by the way so I'm just.

Ryan Sweet:                      All right.

Mark Zandi:                      Yeah. I'm really confused by this whole thing.

Ryan Sweet:                      And then we also got the summary of economic projections, which includes the Fed's forecast for GDP, inflation, unemployment. It also includes the so-called dot plot, where you can see the median projection of all participants and where basically, it's not set in stone, but it's kind of a look into where the Fed thinks interest rates are headed and they really jacked that up. So at the end of this year, they now expect the Fed Funds rate to be 3.4% and then 3.8% at the end of next year. And then in 2024, they're expecting to cut rates back down to 3.4% so to kind of put that into context, the neutral Fed Funds rate, which is where the Fed Funds rate should be when the economy has no output gap, inflation's at 2%, the labor market at full employment is two and a half percent. So they're really going to be applying-

Mark Zandi:                      By the way, that's their estimate in [inaudible 00:04:19] the same, we're the same.

Ryan Sweet:                      Correct.

Mark Zandi:                      Two and a half percent. Okay.

Ryan Sweet:                      So they're going to be really applying the brakes over the next couple years.

Mark Zandi:                      Right, okay. Cris, anything you want to fill in there? Any color on what they did factually? Your interpretation of the facts, which I know are often a little skewed, but compare-

Cris deRitis:                       Well, I think the focus is on expectations and I'd justify their 75 basis point hike by trying to really slam down on the expectations. And I think we did see some result of that in the bond markets so.

Ryan Sweet:                      I'm puzzled by that. They're really putting a lot of emphasis in the University of Michigan survey. And that came up a couple of times in Powell's press conference. So after each FOMC meeting, chair of the Federal reserve, Jerome Powell will come out and give an opening remark and answer questions. And he mentioned University of Michigan survey of consumers inflation expectations, which is driven by food prices, gasoline prices. And I just don't understand why they're putting so much stock in it.

Mark Zandi:                      Hey, can I just frame the discussion around what we think about what they did in this way? In my view, in my humble opinion, let's put it that way. They have two reasonably possible goals that they can achieve. The first, by raising rates here. In the context of the inflation problem, that is obvious. We got to get inflation down. Well, everyone's in agreement about that. Versus slowing growth, they have to slow growth in the economy so that the economy doesn't blow past full employment, that unemployment doesn't go into the low threes, right now it's 3.6, and that would exacerbate the inflation because you'd get into a kind of a wage price kind of dynamic, that would be very counterproductive, spiral.

                                             The second is keep inflation expectations tethered down. You don't want people, businesses, consumers, investors to think inflation is going to be high in the future because if they do, then we are going to get end up with a wage price spiral. Inflation is going to be higher in the future. If workers think that inflation's high in the future, they're going to demand a higher wage and their employer's going to say, "Fine, no problem," because the employer thinks they can pass that along to their customer in the form of a higher price. And you get into this very negative dynamic and inflation becomes more entrenched. So those are two reasonable objectives, right?

                                             I mean, I don't think the Fed has anything to do with this inflation that we're suffering. Now, that's the result of the pandemic, supply chain disruptions, labor market issues, Russian war in Ukraine, oil prices, that has nothing to do with the Fed and Fed directly can't affect those things. But the Fed can make sure the high inflation as a result of those things don't infect inflation expectations, or that the economy blows past full employment because then they have a deeper, bigger inflation problem. So do you think that's a reasonable way to think about it? And if that is, do you think that a 75 basis point move, a three quarters a point hike in the Funds rate, was that necessary? I mean, could they have accomplished those two goals that I articulated with a half point increase, which is again, the markets thought was going to happen a week ago? So wasn't first of all, did I frame it in a way, does that make sense? And then what do you think about what they did?

Ryan Sweet:                      No, I think you framed it right, but 75 was not necessary. I mean their 50 basis point rate hikes have been working, they're getting financial market conditions to tighten the stock markets down, long term interest rates are rising and credit spreads have widened out. They're getting the response that they needed, I don't think they needed to go a supersized rate hike and you can see markets are responding. They were caught a little bit off guard.

Mark Zandi:                      Little bit?

Cris deRitis:                       But that's what they wanted, right? They want the markets.

Mark Zandi:                      Are you sure?

Cris deRitis:                       Yeah, absolutely.

Mark Zandi:                      They want the stock market to be down 25%, not 15 to 20. They want mortgage rates to go skyrocketing over 6%. They want that to happen, you think?

Cris deRitis:                       Well, they wanted everything to be much more gradual, but that hasn't happened, right? Now, they're playing catch up. They have to slam on the brakes.

Mark Zandi:                      You think the three quarter point was a good move.

Cris deRitis:                       I think that was appropriate.

Mark Zandi:                      Oh really?

Cris deRitis:                       We were even talking a hundred, right. There was chatter of a hundred, right? I think that was the panic button.

Mark Zandi:                      In your own mind maybe a hundred.

Cris deRitis:                       But not-

Mark Zandi:                      Was there a chatter, Ryan? I don't follow markets that carefully, were people saying a hundred basis points?

Ryan Sweet:                      Yeah, some people were throwing a hundred.

Mark Zandi:                      Really, okay. Yeah.

Cris deRitis:                       I think that would've been the panic button.

Mark Zandi:                      Right. But here's okay, so this is then the crux of the matter. I mean, how do you measure inflation? If your goal is to slow growth, I say check. That growth is slowing. It was slowing even before this rate hike, it was clear the economy was going to slow down dramatically. I mean, take a look at GDP growth if that's your benchmark, we could get two quarters of negative growth, Q1, Q2. Now, that overstates the case, but it makes a case job growth is slowing. The housing market is in reverse.

Cris deRitis:                       Yeah.

Mark Zandi:                      The economy is slowing, no doubt about it.

Cris deRitis:                       Sure.

Mark Zandi:                      And second on inflation expectations. If you looked at bond market measures of inflation expectations before anyone thought they were going to go three quarter of a point, it was roughly where you'd want it to be, right? I mean, at least by my account. Look, if I looked at one year, five year forward, it's based on break evens and I'm not going to go, listener I'm not going to go into any depth here because that would be three hour lecture, but breaking evens and inflation swaps that was down to 2.4%, 2.5%, which is within for the CPI, the Consumer Price Index, that's within target so.

Cris deRitis:                       Well, the five year breakeven wasn't all the way back down. It was coming down, but it wasn't back at the level that we'd like, right.

Mark Zandi:                      Yeah. But I mean within spitting distance and in the swaps, inflation swaps were well within target at least by my reckoning. And then you're what are you pointing to when you say, to Ryan's point, you're pointing to the University of Michigan survey expectations that they're too high? Hit me a break. That's just a direct front function of oil prices, what I'm paying at the pump. I would say Ryan, I'd go so far as to say food prices are a bit player and all that. It's like, what did I pay for gas this time compared to the last time I bought it and that's what I expect inflation's going to be in the future according the 500 people who participate din the University of Michigan survey.

Ryan Sweet:                      Yeah. You're-

Cris deRitis:                       That's not the only one, right. New York Fed, yeah.

Ryan Sweet:                      All right. Well, you mentioned one year inflation expectations. I mean they track gasoline prices almost perfectly.

Mark Zandi:                      Okay. All right. Okay. That's a reasonable debate though. We're debating what are inflation expectations? How do you measure them? What's appropriate? That kind of thing. I feel that's a reasonable, I disagree with you. And of course I'm by extension disagreeing with ostensibly, if you believe what the Fed said, what they're saying, but okay. But let me ask you this question. Do you think it made sense that you would plant a rumor at the Wall Street Journal two days before the event? Again, most everyone thought half a point. The Fed decided because of the last week's Friday CPI report and inflation expectations by the UMich if you, again, if you take them at face value that we go through quarter point and the way they got that into the marketplace before the actual meeting was they planted that in the Wall Street Journal and Wall Street journal report. Let me ask you that. Does that make any... That's ad libbing, that's off script, that's unpaid.

Ryan Sweet:                      That's normal. That's par the course for the Fed.

Mark Zandi:                      Not mid meeting.

Ryan Sweet:                      So they have a blackout period where they can't say anything ahead of the meeting. On Friday, we got the hot May CPI. And then UMich came out an hour and a half later and big jump in inflation expectations. So now the Fed knows they're going to have to do-

Mark Zandi:                      Yeah, I know that. I know why they did it, but they does that make any sense to you that you would go to that length because it now smacks of panic, doesn't it? That, to me, that's an ad lib. That's a I'm going off the music page and I'm going to make it up as I go here. That's what that says, no?

Ryan Sweet:                      Write that down. That's a Zandi-ism. Music page?

Mark Zandi:                      Music page. What do you call it?

Cris deRitis:                       I got it.

Mark Zandi:                      I used to play saxophone by the way, I was-

Ryan Sweet:                      You're in a jazz band.

Mark Zandi:                      Not very good, but I was in a jazz band. Actually, it was pretty cool jazz band. I we'll, we'll talk about that later because-

Cris deRitis:                       So you were always off the music page, right? Jazz is.

Mark Zandi:                      Actually, that's very true. Yeah, it's very true.

Cris deRitis:                       It's always improvised, right?

Mark Zandi:                      And it didn't sound very good. Let me tell you that, which is a metaphor for.

Cris deRitis:                       I see you're bringing your baggage into this.

Mark Zandi:                      Exactly, this is all about me.

Ryan Sweet:                      Well, during the financial-

Cris deRitis:                       I agree with you though. I don't think that was the right move. I think that does smack of conspiracy and.

Mark Zandi:                      Panic.

Cris deRitis:                       To some extent, panic, I mean one of the best tools that the Fed has actually is surprise. And if the idea is if you believe that expectations are off course and you really wanted to send a signal, then you would surprise and you would say, "Oh, you expected 50, here 75. I'm coming in strong."

Mark Zandi:                      Yeah.

Cris deRitis:                       Watch out. "Listen to me," right?

Ryan Sweet:                      Was a little surprising how much they-

Cris deRitis:                       You can disagree with that premise. But yeah, I would argue that would be consistent.

Mark Zandi:                      What were you going to say, Ryan?

Ryan Sweet:                      I think the one surprise was the dot plot.

Mark Zandi:                      That was really surprising. Really. I mean as you point out big, big increase in the expectation by the Fed members, FOMC members, of future rate increases, it was almost a point higher, wasn't it?

Ryan Sweet:                      Yeah.

Mark Zandi:                      Because I think now is 3.8 or something, right? Is that right? Yeah. Yeah, here's the other thing that I find, what's the right word? Perplexed by. Perplexed. On the border of annoyed, but let's call it perplexed and that is, it's like they're waving a white flag on the economy. They're saying, "Oh, very high probability now, almost yeah. You can count on it, we're going into recession." And that goes back to what you're saying about the statement, right? Right. There was a sentence that after the last of FOMC meeting back in, when was that? That was May, wasn't it? Was it May? I believe it was May.

Ryan Sweet:                      Yeah, May.

Mark Zandi:                      It said basically our policy would be appropriate to get inflation back down to target and to keep the economy at full employment. That's what they said. The same sentence, they took out the part about full employment. This is consistent with getting the inflation rate back down to target. Nothing about the economy, which is a clear signal that okay.

Ryan Sweet:                      They're going to break inflation and break the economy.

Mark Zandi:                      Yeah. And break the economy.

Cris deRitis:                       But this is really whatever it takes moment. They're focusing all the attention on inflation. That, they've been criticized for not doing so of course they're going to pivot that. They're saying yes, they are saying we are willing to accept higher unemployment in order to bring.

Mark Zandi:                      We're willing accept recession is what they're saying, right.

Cris deRitis:                       I don't that they go that far.

Mark Zandi:                      Oh.

Cris deRitis:                       In the projections, they don't have recession.

Mark Zandi:                      Ryan, what do you think? I mean, I think it was all but saying we're going into recession.

Ryan Sweet:                      I mean, if you listen to Powell's press conference. Yeah. I mean, his tone was oh yeah, we could still pull it off.

Mark Zandi:                      We might be able to pull.

Ryan Sweet:                      Yeah.

Cris deRitis:                       So you don't think the dot plots are reflecting their true opinion.

Ryan Sweet:                      Well, I mean they have-

Cris deRitis:                       None of them have.

Mark Zandi:                      Well, that's an actually interesting question. That's a really interesting point. I hadn't thought about it that way. That if we were going in into recession, could the Funds rate actually achieve 3.8% by this time next year.

Ryan Sweet:                      No, we're not going to get out the 3.8.

Mark Zandi:                      You're saying we're going into recession and there's no way the Fund rate's getting that high.

Ryan Sweet:                      Correct.

Mark Zandi:                      Hmm. Yeah.

Ryan Sweet:                      I mean it's related, but the Fed, so I think Powell testifies next week before Congress. And before his testimony, the Fed puts the monetary policy report, which should he give to Congress. And in there it says the Fed's commitment-

Mark Zandi:                      Did that come out today?

Ryan Sweet:                      It came out today and it comes out Friday so ahead of his testimony, it said the Fed's commitment is unconditional to bringing down inflation.

Mark Zandi:                      I saw that.

Ryan Sweet:                      Well, there you go.

Mark Zandi:                      So Cris.

Cris deRitis:                       Yeah.

Mark Zandi:                      Again, in my humble opinion, the recession is a loss of faith and consumers lose faith that they're going to be able to hold onto their job. Businesses lose faith that the consumer's going to be there to buy whatever they produce and they cut back on expansion plans, ultimately lay off workers in a recession.

Cris deRitis:                       Yep.

Mark Zandi:                      And generally, there's some major problem in the economy, economic fundamental problem and the balance sheet of the economy, leverage, overbuilding, too much inventory, whatever it is. And that loss of faith combined with that imbalance sends you into recession. Here we are sitting today. The economy's in, fundamentally has no problems as far as I can tell. No significant problems, it's got high inflation but that has nothing to do with anything other than the pandemic and the Russian invasion. Nobody's fault, nothing wrong with the [inaudible 00:18:11]. So it's all about if you're going a recession, a loss of faith by saying to the world I think we're going into recession, that just exacerbate and you get the market reaction we got. Stocks sold off five, 10% because people are losing faith. We're talking ourselves under a recession when we don't really need a recession. Why? Why do we need that? Why do we have to do that? Why wave the white flag?

Cris deRitis:                       Again, I don't see them as declaring recession. The issue is inflation and loss of faith of the consumer is directly tied to inflation at this point.

Mark Zandi:                      I mean, what they seem to be saying to me is the only way we're going to get inflation down is if I drive this economy into the ditch and I'm just saying why? Why do we think that we-

Cris deRitis:                       It's a quarter point, first of all right? More than-

Mark Zandi:                      I hear you. I agree with that. I agree with-

Cris deRitis:                       I think it actually, it could actually open the door for a less aggressive hike in September, for example. So instead of-

Mark Zandi:                      25 basis, quarter point?

Cris deRitis:                       It's a possibility now. Had they gone 50 now, 50 was a guarantee.

Ryan Sweet:                      50 is the new norm until they get over to or over.

Mark Zandi:                      Here's the other thing I don't like. And I didn't like this before, and I don't like it now about this I need to see the whites of the eyes. Remember back when they wanted to get inflation up, they said, "I'm not going to tighten monetary policy until I see the whites of the eyes of inflation." Now they basically are saying, "I'm not going to ease policy until I see the whites of the eyes of," well, I don't know, you get my drift. You can fill in the blanks, that doesn't make any sense to me because-

Ryan Sweet:                      It didn't work back then.

Mark Zandi:                      It didn't work back then, it's not going to work now either. You're just threatening to go from one side, boom, boom, boom. From one side to the other, I don't know. I'm a little perplexed by the whole thing. Unless it could be to your point, Cris, they could be playing four dimensional chess, and I'm still stuck in a two dimensional world. Maybe this is strategic.

Cris deRitis:                       I think so.

Mark Zandi:                      Yeah. Maybe every CEO on the planet, they want to make sure every CEO, every CFO, everybody knows this economy is likely going into a ditch unless inflation comes down. Therefore, you can't count on keep increasing prices like you are, you can't count on big wage increases, you better scale it back and by so doing, makes it less likely you go in the ditch. Is that what you're saying?

Cris deRitis:                       That's what I think, that's the plan.

Mark Zandi:                      Well, you belong on this Fed. That's all I'd say.

Cris deRitis:                       Thank, I take it as complement.

Ryan Sweet:                      I haven't seen Mark this critical of the Fed in a very long time.

Mark Zandi:                      Yeah, never. I've been doing this for 30 years. I'm 99.5% there. I just don't get this. I just don't understand this. And then you're right, it's one move, right? Let's see what happens here.

Cris deRitis:                       Yeah, it's a move they should have taken back in whatever, January.

Mark Zandi:                      Yeah. The only reason I'm a little more exercised is because it feels like to me, they're going to keep going until we are actually in recession and I don't believe that's necessary. I just don't think that's necessary at this point. Again, if inflation expectations, by the way, I don't put any weight on the University of Michigan survey, zero weight. I don't think it means anything, zero. And I actually don't put a whole lot of weight on forecast by economists either including myself because we don't change a forecast until it's patently obvious that something has changed. Ryan's not like that, Cris is not, I'm like that. I'm a bit slow so I put all my faith almost a lot of it on.

Cris deRitis:                       Market?

Mark Zandi:                      On the market, on the bond market.

Ryan Sweet:                      They're putting their money where their mouth is.

Mark Zandi:                      Money where their mouth is.

Ryan Sweet:                      Yeah, exactly.

Mark Zandi:                      Exactly. Ryan and I are synced, did you see that? Here's a music term for you, there was a little bit of a phase shift there, but otherwise... Just to prove I did play the saxophone when I was in high school.

Ryan Sweet:                      Mark's just fired up because the Fed's going to kill his low probability of recession.

Mark Zandi:                      That is actually very true. Oh, that's actually very true.

Ryan Sweet:                      When they release their-

Mark Zandi:                      They're messing with my forecast.

Ryan Sweet:                      Yeah, they're messing with your forecast.

Mark Zandi:                      They're messing with my forecast. All right, okay. What else on the Fed? I kind of drove the train here on the discussion, the framing, maybe there's a different way to think about this so fire away.

Cris deRitis:                       Interesting they didn't mention quantitative easing at all, or the plans for the balance sheet. I guess, yeah sorry. Well, the reversal of [inaudible 00:22:53].

Mark Zandi:                      Did they not, did they mention that at all?

Ryan Sweet:                      They mentioned it last-

Cris deRitis:                       Just the standard.

Ryan Sweet:                      That thing's on autopilot.

Cris deRitis:                       Okay.

Ryan Sweet:                      Yeah. Reducing the balance sheet, they want it to be like watching paint dry. They don't want to make any big wiggles.

Cris deRitis:                       So you don't read anything into that as though they're not going... Again, I see that as not panicking, they're not pulling out all the stops. They went an extra 25.

Mark Zandi:                      They don't need to because the bond market is selling off rapidly. They don't need the Q2. I mean, I mean the 10 year yield is back in a little bit, but it's at what? 3.25. That's a pretty big move. And as I said, mortgage rates, 30 year fixed mortgage rates are over six, I didn't look today but.

Cris deRitis:                       So they're getting what they want.

Mark Zandi:                      They're getting what they want.

Cris deRitis:                       On that end.

Mark Zandi:                      Yeah.

Ryan Sweet:                      Yeah. The issue is that they might get more than they bargained for and this tightening in financial markets is going to really cut into growth in the second half of this year.

Mark Zandi:                      Hey, okay. Let's now do this. Where are they headed now? So what's the forecast? I thought I knew the script. I thought they were on script and now they're ad libbing so I'm not sure. So what is it? I guess the answer to that, and I know Ryan you think recession, which is a reasonable forecast, but we're still, that's not our baseline.

Ryan Sweet:                      No. It's not the baseline.

Mark Zandi:                      We're going to skirt. It's going to be very uncomfortable here. Growth is coming to a standstill. But actually if that were the case in inflation came in, that would be a pretty good scenario. Let's assume that's the scenario. What is the Funds rate target? At the end of this year and what is its terminal rate? Where is it going to peak and when is it going to start coming back down towards equilibrium? So Cris, I'll begin with you. I'll begin with you, Ryan. Where do you think we're going based on that baseline forecast for the economy?

Ryan Sweet:                      I think we're all pretty much on the same page, that they're going to go 50 basis points at each of the next two meetings and then 25 basis points in December. 25 basis points after that per meeting until they get to three and half percent. And that would be early next year that they get to three and a half.

Mark Zandi:                      Right. Because they're at 1.75 now.

Ryan Sweet:                      Correct.

Mark Zandi:                      So they do half point in, no wait. They do a half point in July. They do a half point in September. That's 2.75 then they do.

Ryan Sweet:                      25 in November.

Mark Zandi:                      Nothing in November?

Ryan Sweet:                      They raise rates 25 in November.

Mark Zandi:                      25 in December. So that's now 3.25 and then January, next January? That's 3.5. And you think that's the peak, the terminal rate.

Ryan Sweet:                      So yeah. And then they'll pause for an extended period of time until they're probably.

Mark Zandi:                      Until they sure inflation is where it's supposed to be.

Ryan Sweet:                      Or they realize that the economy is falling apart.

Cris deRitis:                       And they start cutting.

Mark Zandi:                      And then you say they go from three and a half down to the equilibrium r-star two and a half in 2024. That's when they start.

Ryan Sweet:                      So a 25 basis point cut at every other meeting.

Mark Zandi:                      Yeah. And so by the end of 24, going into 2025, they're back to equilibrium.

Ryan Sweet:                      Correct.

Mark Zandi:                      Got it. What do you think Cris?

Cris deRitis:                       Reasonable for the baseline. I am sympathetic with Ryan's view that something else could happen before this plan works out so we may not actually get up to those levels. We might be cutting before that.

Mark Zandi:                      Okay. And you would also agree in the, I don't mean to put words in your mouth, just put the straw man out there. You would agree that the most likely baseline scenario still at this point is an economy that skirts recession, but doesn't go into a full blown recession.

Cris deRitis:                       Yes, but we're getting awfully close.

Mark Zandi:                      Okay. So let's go there. So what are your probability, your recession odds? What's the probability of recession in the next 12 months, so by this time next year and the next 24 months? And Cris I'll go with you first, what is it?

Cris deRitis:                       Same. 40/60, 40% in 12, 60%.

Ryan Sweet:                      That was my, I've been there for a while.

Mark Zandi:                      I think that's his, that's what he's been. 40/60.

Ryan Sweet:                      How did you not change it after that meeting?

Mark Zandi:                      Why that rating?

Ryan Sweet:                      Well, that's what he wanted-

Cris deRitis:                       Go into script.

Mark Zandi:                      He forecasted that he actually, yeah, he's a good forecaster. I have to say. Yeah, I got to listen to him more.

Cris deRitis:                       I hinted last week.

Mark Zandi:                      You did.

Ryan Sweet:                      You did.

Mark Zandi:                      I just ignored you. Yeah. Okay. So Ryan, what were you before and now what are you? What was your recession odds?

Cris deRitis:                       He was coming in.

Ryan Sweet:                      I was coming in, but that's 60.

Mark Zandi:                      Okay so forget about what it was. What is it now? What's next 12 and 24 months.

Ryan Sweet:                      The next 12 months? I'd say 65%. And then 85% probability in the next two years.

Cris deRitis:                       Oh wow, you really did not like this report.

Ryan Sweet:                      No, they messed up.

Mark Zandi:                      The report or the-

Cris deRitis:                       The action. Sorry. The action.

Mark Zandi:                      Yeah. What the Fed did.

Ryan Sweet:                      It was working. 50 basis points were working, there's no need to do-

Mark Zandi:                      So, but 65, that's a very strategic number as we know it is.

Ryan Sweet:                      Yes.

Mark Zandi:                      Because if it's 66, we change our baseline forecast.

Ryan Sweet:                      Yeah so we're teetering on them.

Mark Zandi:                      Ooh.

Ryan Sweet:                      We're getting a lot of client questions about when we would adopt a recession in their baseline. So I tell them our rule of thumb.

Mark Zandi:                      Yeah. Our rule of thumb, if we make a major change in assumptions or our forecast and obviously going to a recessionary forecast, we have to be very confident. And what that means is that we have to believe subjectively obviously that there's a two thirds probability in whatever it is we want to change the forecast to so two thirds probability that there's going to be a recession or more than we would change for the baseline forecast. And Ryan went right up to the line, the 65.

Ryan Sweet:                      Yeah, we're close.

Mark Zandi:                      Yeah, okay.

Cris deRitis:                       Yield curve is still positive by the way, just if that changes your opinion at all Ryan.

Mark Zandi:                      Say that again?

Cris deRitis:                       Yeah. Yield curve is still pos.

Mark Zandi:                      Okay. I'm going to talk about that because that goes to my forecast.

Cris deRitis:                       Okay, go ahead.

Mark Zandi:                      So I previously I think I was one third probability over the next 12 months in close to even odds, but not over 50% for two years.

Cris deRitis:                       Right.

Mark Zandi:                      I would say it's I've gone up because of events because of what the Fed did and is doing, I'd say 40% probability in the next 12 months.

Cris deRitis:                       Good.

Mark Zandi:                      And I'd say still even odds over the next two years. And here's why, it goes to where people put their money where their mouth is in the bond market. So if I go look at the bond market, inflation expectations are back where they need to be. Check. So don't lose your mind here. We don't need to go 75 basis point hikes. We are where we need to be. Financial conditions in my view, the stock market decline, the rise and long term rates, mortgage rates. That's all now the strength of, I don't know if you've been looking at a dollar recently, but the strength of the dollar.

Ryan Sweet:                      Yeah.

Mark Zandi:                      All suggests that mission accomplished, you did what you needed to do. Let's just let things play out. You don't need to crush the economy. And here's the second thing. The yield curve, my favorite barometer of recession, 10 year treasury versus two years is actually still, it's narrow, but still positive.

Ryan Sweet:                      Razor thin.

Mark Zandi:                      Yeah, but that's okay. That's consistent with an economy that comes right up to the line and it doesn't go into recession. That's consistent with the forecast of no recession, but close to recession.

Ryan Sweet:                      Know what you should do over the weekend? Think about this scenario where we get a recession without an inverted yield curve.

Mark Zandi:                      Well, what does that mean? That yeah, certainly everything is possible, but why should I think about that exactly?

Cris deRitis:                       Because it's Ryan's dream.

Ryan Sweet:                      That is.

Cris deRitis:                       That's his dream state that we can retire this whole argument.

Ryan Sweet:                      Yeah. I don't want to a recession, but if we did get a recession and the yield curve didn't invert, that would be it.

Mark Zandi:                      Okay, here's one more.

Cris deRitis:                       You don't want it. But you're saying it's coming 65, 85.

Ryan Sweet:                      I'm not-

Mark Zandi:                      I said 40 in almost even odds. Not quite even odds, okay. I was going to say one other thing. Darn, it was a really good thing too. Geez.

Cris deRitis:                       What's the timing if it does?

Mark Zandi:                      Oh, that's it. That's the timing.

Cris deRitis:                       I'm with you.

Mark Zandi:                      That's just-

Cris deRitis:                       For the zone here.

Mark Zandi:                      That was very cool. Obviously, we're on the same track. Same track here. Okay, here's what I don't get. Here's what I don't get. If we're going to suffer recession how in the world could it be more than a year from now? Right? I mean, it feels like the economy's, if it's going to happen, it's got to happen soon, right? Because we're slowing very rapidly. And we make it again, two quarters of negative GDP growth, which is not necessarily recession, but people are going to say it's a recession. And then how can the housing market really getting crushed here with the mortgage rate with stock market down like it is with every CEO and CFO, every survey, every single CFO in one of those recent surveys said we're going into a recession. How's that possible it's going to take a year to actually go into recession? That I don't get because that's consistent with what you're saying though, Cris 40%.

Cris deRitis:                       Yeah.

Mark Zandi:                      60%. So explain.

Cris deRitis:                       Yeah, you're assuming no other shock, right? And I'm assuming-

Mark Zandi:                      No other shock.

Cris deRitis:                       Something else is going to come along within the two year time period to.

Mark Zandi:                      Oh, you're saying, oh interesting. Our forecasts are the same, except that you're assuming something else is going to go off the road.

Cris deRitis:                       Something's going to happen.

Mark Zandi:                      Oh.

Ryan Sweet:                      And you got to hint what that something could be this week.

Cris deRitis:                       I'm not disputing that. Could be a Fed mistake. I don't think this was the Fed mistake that you're referring but there could be another.

Ryan Sweet:                      There's another one.

Cris deRitis:                       Oh, another?

Ryan Sweet:                      European Central Bank had an emergency meeting.

Cris deRitis:                       Oh yeah.

Ryan Sweet:                      Because yields across Europe are just through the roof.

Mark Zandi:                      Oh, your sovereign debt crisis in Europe or somewhere.

Ryan Sweet:                      What was it? 2012?

Mark Zandi:                      Interesting. Yeah, because I think Italian spread gapped out. That's interesting Cris, I didn't understand what you were saying, but that's very interesting. Your forecast and my forecast, the recession odds would probably be the same, but I'm saying we're going to be a little lucky and you're saying no. No chance of that.

Cris deRitis:                       Well, 60 is still not 85.

Mark Zandi:                      Yeah. Okay. I get it.

Cris deRitis:                       All right.

Mark Zandi:                      That's pretty.

Cris deRitis:                       You're coming.

Mark Zandi:                      Yeah. That's pretty clever.

Cris deRitis:                       I got you on the 40. I got to work you on 60 there.

Mark Zandi:                      That's pretty clever.

Cris deRitis:                       I'll get you there.

Mark Zandi:                      Yeah. Very good.

Cris deRitis:                       So at the timing, I think you're right unless again, something else happens.

Mark Zandi:                      Yeah. So Ryan you think a recession, you said, what did you say your 12 month probability is?

Ryan Sweet:                      65.

Mark Zandi:                      65. Okay, fine. You're still, if it's going to happen, it's going to happen soon.

Ryan Sweet:                      Yeah, it's going to happen soon.

Mark Zandi:                      Yeah.

Ryan Sweet:                      And they had a survey of economists and they said if a recession does happen, 70% said that it would be in first half of next year.

Mark Zandi:                      I think it's going to be the second half of this year. I don't think we make it to the first half of next year.

Ryan Sweet:                      Yeah, especially if GDP falls in the second quarter. Yeah. I mean just the press coverage of, we're in a recession. That's just going to feed on itself.

Mark Zandi:                      Yeah, really? We're just talking ourselves into this. What a mess anyway. All right.

Ryan Sweet:                      I think you're so angry at the Fed because you're now going to lose a bet with Cris. The housing starts.

Mark Zandi:                      I always lose bets with Cris. It's like I never have won a bet with Cris.

Cris deRitis:                       I didn't want to bring that up but it's.

Ryan Sweet:                      Well, it's timely. Housing starts came up this week.

Cris deRitis:                       Yeah, absolutely.

Mark Zandi:                      Cris really thinks about these bets. I got to start thinking more carefully about these bets.

Cris deRitis:                       The value of a dollar.

Mark Zandi:                      And you're a good forecast. I admit it, you're a good forecaster. You're a really good forecaster. Yeah. Ryan. No, actually Ryan wins awards for forecasting props actually. Yeah.

Cris deRitis:                       Okay. I'm going to be excerpting that audio and posting it to my-

Mark Zandi:                      I wouldn't go that far, but.

Cris deRitis:                       Thank you.

Mark Zandi:                      Yeah. But no, you guys are really, I mean in all honestly, you guys are good.

Cris deRitis:                       So housing starts are coming in? The next to release?

Mark Zandi:                      Do we really want to go there? Let's wait until the next podcast because there's lot.

Cris deRitis:                       Fair enough.

Mark Zandi:                      We got to keep this a little short because we have a guest, Anna Stansbury from MIT who's going to talk to us about a problem in the economics profession. Certainly top of mind for me, because we employ over a hundred economists across the globe and this is important. So we're going to bring Anna in for that conversation around the socioeconomic diversity of the economics profession. So Anna, it's good to have you on board.