Torsten Slok, Partner and Chief Economist, Apollo Global Management
Oct 16, 2023
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Torsten Slok, Chief Economist at Apollo Global Management, discusses the economy, inflation, and Fed policy. He explains the lagged transmission of monetary policy, the ebbing and flowing of goods versus services inflation, and the need for wage moderation to reduce overall inflation.
The transmission of changes in monetary policy to the real economy has been particularly lagged in this cycle, as individuals and corporations have shielded themselves from rate increases.
There has been fluctuation in inflation rates between goods and services sectors, with services inflation re-emerging as consumers resume activities like traveling, staying in hotels, and attending concerts.
Fiscal and monetary policies have complex interplay, with fiscal policy initiatives countering the efforts of monetary policy to slow down the economy and influencing economic growth and inflation outcomes.
Deep dives
Transmission of Changes in Monetary Policy and Shielding from Rate Increases
During the podcast episode, Torsten Slach discusses the transmission of changes in monetary policy to the real economy and highlights that in this cycle, such transmission has been particularly lagged. He explains that both individuals and corporations have largely shielded themselves from rate increases, which has resulted in a delayed impact on the economy.
Ebbing and Flowing of Goods and Services Inflation
Another key topic discussed in the episode is the ebbing and flowing of goods and services inflation. Torsten Slach mentions that services inflation, which had declined significantly during the pandemic lockdowns, has re-emerged as consumers resume activities like traveling, staying in hotels, and attending concerts. This demonstrates the fluctuation in inflation rates between goods and services sectors.
Impact of Fiscal Policy on the Economy
The podcast also delves into the impact of fiscal policy on the economy. It is noted that fiscal policy, including initiatives like the CHIP's Act, Inflation Reduction Act, and Infrastructure Act, has been providing a boost to the economy, countering the efforts of monetary policy to slow it down. The discussion highlights the complex interplay between fiscal and monetary policies and their implications for economic growth and inflation outcomes.
Inflation Dynamics: Goods vs Services
During the pandemic, demand for goods increased while the supply chains broke down, leading to a spike in goods inflation. However, as supply chains have normalized, goods inflation has returned to pre-pandemic levels. On the other hand, the service sector, which accounts for 70% of the economy, was hit hard during the pandemic as people couldn't dine out, travel, or attend events. With the reopening, there is significant demand for consumer services, keeping service inflation elevated. Wage inflation, a key driver of service inflation, has also remained strong, posing a challenge for the Fed to reach its 2% inflation target.
Factors Driving Higher Long-Term Interest Rates
The recent increase in long-term interest rates is not solely driven by the Federal Reserve. Various structural factors are influencing rates, such as the budget deficit, China's slowing growth impacting demand for US treasuries, the potential impact of Japan's exit from yield control, and concerns over US sovereign downgrade. Another factor is the unwinding of the basis trade. If rates continue to rise due to these factors, the financial system may face challenges, particularly for banks holding treasuries with unrealized losses and potential implications for their equity performance.
Armed with a PhD in economics, Torsten Slok spent several years at the OECD, doing deep dive analysis and making policy recommendations on big picture issues such as pension reform, tax systems and health care policy, before ultimately hitting Wall Street. He spent more than 15 years on the sell-side, a period that included the GFC and Pandemic and the lean rate years between them.
Now a Partner and Chief Economist at Apollo Global Management, Torsten is providing input on the macroeconomic backdrop and the implications for the firm’s investments. Our discussion primarily considers the joint states of the economy and inflation - where we’ve been, where we’re headed and the read through on Fed policy. On the economy, Torsten suggests that in this cycle, the transmission of changes in monetary policy to the real economy is especially lagged as both individuals and corporates have largely shielded themselves from rate increases.
On inflation, Torsten describes the ebbing and flowing of goods versus services inflation. The latter, which fell sharply during the Pandemic lock-downs has re-emerged as consumers travel, stay at hotels and attend concerts. We then talk about wages, which Torsten believes the Fed sees as still too high. Moderation here is a key part of reducing service sector inflation which, in turn, is needed to reduce the overall level of inflation.
I hope you enjoy this episode of the Alpha Exchange, my conversation with Torsten Slok.
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