WEBVTT - St. Louis Fed President Alberto Musalem Talks Monetary Policy and Outlook 0:00:02.600 --> 0:00:06.960 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.119 --> 0:00:11.399 ALBERTA. Muslim is a newly minted president of Saint Louis 0:00:11.440 --> 0:00:15.440 fed Wall Street experience with Tutor investments out of the LC. 0:00:16.000 --> 0:00:20.480 The PhD from Pennsylvania are Michael McKee in conversation with 0:00:20.600 --> 0:00:21.560 Alberto Busslim. 0:00:22.560 --> 0:00:25.720 So we're within reach of the dual of the dual 0:00:25.800 --> 0:00:30.320 mandate goals UH and Monterrey policies well positioned. It's moderately 0:00:30.360 --> 0:00:35.360 restrictive and appropriately so because inflation is running above our 0:00:35.400 --> 0:00:38.600 target and therefore interest rates are above the neutral rate. 0:00:39.240 --> 0:00:44.080 So that's the backdrop. Also, policy could be you know, 0:00:44.159 --> 0:00:48.400 the the h could be accelerated, could be slowed, or 0:00:48.400 --> 0:00:51.800 could be paused. So there's some optionality depending on how 0:00:52.760 --> 0:00:57.720 the environment and the outlook evolve. So that's that's the 0:00:57.760 --> 0:01:01.639 backdrop for the semi where I can speak about myself. 0:01:02.200 --> 0:01:05.600 I'm keeping all my options open. There's more data coming 0:01:06.160 --> 0:01:13.040 we have, you know, CPI, pp I, unemployment, Retail sales PMI. 0:01:13.160 --> 0:01:15.000 There's a lot of data coming between now and the 0:01:15.040 --> 0:01:17.920 December meeting. So I'm going to wait till I see 0:01:17.920 --> 0:01:21.440 that data, until i can be assured in which way 0:01:21.480 --> 0:01:25.720 I'm leaning. So I think I'm keeping you know, optionality 0:01:25.720 --> 0:01:28.280 for December in my in my assessment, but I do 0:01:28.319 --> 0:01:30.480 think in the in the broader arc of what we're 0:01:30.480 --> 0:01:33.200 trying to do, the broader arc is we want to 0:01:33.240 --> 0:01:36.800 continue to bring inflation down towards two percent while supporting 0:01:36.800 --> 0:01:41.200 the labor market. And in that broader arc, you know, 0:01:41.319 --> 0:01:43.520 it doesn't have to be a linear process where you're 0:01:44.120 --> 0:01:46.840 going in that direction. No matter what you know, the 0:01:46.880 --> 0:01:52.000 economy needs to tell us how fast to go or 0:01:52.000 --> 0:01:54.120 how slow to go. And right now I see an 0:01:54.160 --> 0:01:58.800 economy that is growing above potential, Labor markets have full employment, 0:01:59.320 --> 0:02:04.720 inflation is above target. My assessment of risks around the 0:02:04.800 --> 0:02:08.760 dual mandate have as I said that the risk that 0:02:09.040 --> 0:02:13.480 inflation may have stalled, may be stalling, not the central scenario, 0:02:13.480 --> 0:02:17.400 but there's a risk of that have increased since September. 0:02:18.040 --> 0:02:22.000 And you know, all those things, plus uncertainty about where 0:02:22.040 --> 0:02:25.600 the final destination is the neutral rate, and uncertainty about 0:02:25.600 --> 0:02:28.920 productivity trends, all those things suggest to me that the 0:02:28.960 --> 0:02:33.680 time may be coming to consider the possibility of slowing 0:02:33.720 --> 0:02:35.200 down or possibly pausing. 0:02:35.520 --> 0:02:38.000 What is it that you want if the economy is 0:02:38.040 --> 0:02:40.080 speaking to you, what is it that you want the 0:02:40.120 --> 0:02:42.799 economy to say, that will help you make a decision. 0:02:43.080 --> 0:02:47.880 If we have data come in as forecast on Wall Street, 0:02:48.520 --> 0:02:53.360 as anticipated by you're fed forecasts, are we at the 0:02:53.480 --> 0:02:57.680 kind of place in the economy where you would be 0:02:57.760 --> 0:02:59.000 comfortable pausing. 0:03:01.600 --> 0:03:04.800 I think what I would like to see going forward 0:03:05.000 --> 0:03:10.040 is with rates above their neutral level, because inflation is 0:03:10.400 --> 0:03:13.880 above two percent. I would like that to continue to 0:03:14.480 --> 0:03:18.079 exert downward pressure on inflation. And as that is happening 0:03:18.639 --> 0:03:21.400 or expected to happen, that then interest rates can come 0:03:21.440 --> 0:03:23.400 down to neutral. So that's what I would like to see. 0:03:24.240 --> 0:03:25.640 Of course, we need to look at the other side 0:03:25.639 --> 0:03:28.760 of the dual mandate, which is the labor market, and 0:03:28.800 --> 0:03:31.720 the labor market looks looks pretty healthy. As I said 0:03:31.760 --> 0:03:35.040 of my remarks, I am watching the gross flows, so 0:03:35.360 --> 0:03:40.400 the unemployment rate is rather low, consistent with full employment. 0:03:40.520 --> 0:03:42.480 But if you look underneath that, the gross flows and 0:03:42.520 --> 0:03:45.880 the labor market have slowed materially, and it's important to 0:03:45.960 --> 0:03:47.480 keep an eye on that to make sure that that's 0:03:47.520 --> 0:03:52.520 not a sign of a potentially this or the adjustment 0:03:52.640 --> 0:03:55.840 labor market. I think the chances of that at present 0:03:55.920 --> 0:04:02.480 are low. As I said, businesses are healthy there is 0:04:02.920 --> 0:04:06.520 a little reason for layoffs to begin to happen. But 0:04:06.520 --> 0:04:08.120 I'm attentive to that side of the mandate. 0:04:08.160 --> 0:04:11.440 Also, what are the CEOs in your district telling you 0:04:11.760 --> 0:04:13.920 about their employment plans? What are you hearing? 0:04:15.600 --> 0:04:20.360 So they say that the labor market has normalized relative 0:04:20.400 --> 0:04:23.240 two year or two years ago when they had meaningful 0:04:23.320 --> 0:04:27.080 labor market labor shortages where hiring people was difficult, where 0:04:27.120 --> 0:04:33.520 they had to pay up for new hires. That has normalized, 0:04:33.560 --> 0:04:39.000 so the labor market is more normal. Some CEOs, particularly 0:04:39.360 --> 0:04:41.320 CEOs that have to employ a lot of skilled labor, 0:04:41.320 --> 0:04:45.200 are still reporting shortages of skilled labor and still having 0:04:45.240 --> 0:04:50.760 to pay up to replace folks. They are reporting, for example, 0:04:50.800 --> 0:04:54.440 that turnover in the labor market that they observe has 0:04:54.760 --> 0:04:57.960 come down, consistent with the aggregate data that I that 0:04:58.000 --> 0:05:02.880 I talked about minute ago. There are more job applicants 0:05:02.920 --> 0:05:07.480 per vacancy, so the labor market has eased and it's 0:05:07.520 --> 0:05:14.520 getting easier to fill positions. They report wage gains in 0:05:14.560 --> 0:05:17.640 the three and a half to four percent range, which 0:05:17.680 --> 0:05:25.240 is consistent with the aggurate data. And that's yeah, that's it. 0:05:25.240 --> 0:05:28.960 It sounds like you're describing something that would fall into 0:05:29.000 --> 0:05:31.280 the category of soft lending or goldilocks. 0:05:32.400 --> 0:05:34.600 You know, I try to stay away from labels like 0:05:34.680 --> 0:05:37.120 goldilocks or soft landing. You know, I just I think 0:05:37.120 --> 0:05:38.719 of very clinically and I think, you know, we have 0:05:38.760 --> 0:05:41.279 a dual mandate and we have to hit that dual mandate. 0:05:41.440 --> 0:05:44.120 I don't try to put labels around it. I know 0:05:44.800 --> 0:05:46.680 folks in the press love to put labels on it, 0:05:46.960 --> 0:05:50.800 and that's fine. You know, I think the as I 0:05:50.800 --> 0:05:54.640 said when I began the remarks, you know, the achieving 0:05:54.640 --> 0:05:57.760 the dual mandate is within sight. You know, if you 0:05:57.800 --> 0:06:02.040 look at headline PC inflation is three above target, which 0:06:02.080 --> 0:06:04.239 is within the margin of error, within the standard deviation. 0:06:04.839 --> 0:06:06.720 If you look at the labor market, you know, the 0:06:06.800 --> 0:06:09.440 unployment rate is at four point one percent. That's below 0:06:10.160 --> 0:06:16.080 a level a natural rate. So we're getting rather close. 0:06:16.960 --> 0:06:20.320 But the job isn't done, and you know, we're very committed. 0:06:20.839 --> 0:06:23.320 I am committed. My colleagues are very committed to finishing 0:06:23.320 --> 0:06:23.720 that job. 0:06:24.480 --> 0:06:26.400 I take it from the way you've set this up 0:06:26.400 --> 0:06:31.240 that you think policy is restrictive now is it significantly so? 0:06:31.240 --> 0:06:35.279 So context before we began to using cycle in September, 0:06:35.839 --> 0:06:40.080 I think one could one could say policy was either 0:06:40.160 --> 0:06:43.960 restrictive or perhaps very restrictive. A way to think of 0:06:44.000 --> 0:06:47.839 it is the policy or rate was above by some 0:06:48.000 --> 0:06:51.800 margin what policy rules will suggest to you that it 0:06:51.839 --> 0:06:53.840 should be. And you can see it in the economy 0:06:53.920 --> 0:06:56.120 when you look at the housing market, when you look 0:06:56.160 --> 0:07:00.200 at low modern income households which are under financial pressure. 0:07:00.520 --> 0:07:04.960 You can see it in small businesses that are levered, 0:07:06.000 --> 0:07:09.480 also having financial and financing pressure. So you can see 0:07:09.480 --> 0:07:13.080 it in different parts of the economy where the restrictiveness 0:07:12.760 --> 0:07:22.000 wasn't is binding. We've begun a process of recalibration and 0:07:22.760 --> 0:07:26.320 we've brought down the interest rate by seventy five basis points. 0:07:26.840 --> 0:07:29.000 In my assessment, I think, as I said of my remarks, 0:07:29.080 --> 0:07:33.080 we're getting closer to a policy rate consistent with those 0:07:33.120 --> 0:07:37.600 policy rules. So that policy rule doesn't mean you're at neutral. 0:07:37.680 --> 0:07:42.400 It means you are at neutral plus a premium for 0:07:42.440 --> 0:07:45.920 the fact that inflation is still above target. So I 0:07:45.960 --> 0:07:49.160 think policy is still restrictive. I think it's moderately restrictive. 0:07:50.160 --> 0:07:56.040 I tend to look at very broadly at things, and 0:07:56.200 --> 0:08:00.720 you know, if you look at businesses or households that 0:08:00.760 --> 0:08:05.000 have access to capital markets, financing, or have savings and 0:08:05.080 --> 0:08:09.960 wealth in capital markets, that part is rather accommodative, you know, 0:08:10.040 --> 0:08:16.480 rather supportive. Capital markets are rather supportive, so financial conditions 0:08:16.480 --> 0:08:20.280 are accommodative there. If you look at businesses or households 0:08:20.280 --> 0:08:22.360 that don't have access to capital marks, that need to 0:08:22.360 --> 0:08:29.040 finance themselves in banks and don't have wealth effects, So 0:08:29.280 --> 0:08:31.160 not on the fans cancide, but on the investment side, 0:08:31.200 --> 0:08:35.280 cannot avail themselves of wealth effects, you know, those folks. 0:08:35.320 --> 0:08:41.319 For those folks, businesses or households, Manterrey policy is rather restrictive. 0:08:41.760 --> 0:08:45.120 So on balance, I think it is still restrictive. You know, 0:08:45.120 --> 0:08:48.200 given the Materrey policy that you think is optimal, what 0:08:48.280 --> 0:08:51.199 is the outcome for the economy. You know, there are 0:08:51.640 --> 0:08:54.560 several Well, how do we do that? Let me go 0:08:54.600 --> 0:08:57.440 through process. How we do this is we take a 0:08:57.440 --> 0:09:00.640 lot of input from an array of models. We take 0:09:00.679 --> 0:09:04.280 a lot of input from talking to businesses and households 0:09:04.640 --> 0:09:08.000 all over the country. We talk to professional forecasters and 0:09:08.120 --> 0:09:11.679 understand you know, their perspectives. So we take a lot 0:09:11.720 --> 0:09:15.880 of input into this and there's always uncertainty, and how 0:09:15.920 --> 0:09:19.120 we manage that uncertainty is, you know, we have the 0:09:19.440 --> 0:09:22.160 baseline scenario and there's balance of risks around them, and 0:09:22.200 --> 0:09:24.480 we write those down and we submit them, and some 0:09:24.559 --> 0:09:28.640 Wall Street analysts have gathered all that balance of risk 0:09:28.720 --> 0:09:31.640 data that we submit, that all the reserve banks submit, 0:09:31.720 --> 0:09:34.360 and they're you know, making statements about the reaction function 0:09:34.400 --> 0:09:38.440 of the FED based on that balance of risks. So, 0:09:38.440 --> 0:09:42.960 so going to your question, there are several several policies 0:09:42.960 --> 0:09:45.600 that have been proposed during the campaign and look like 0:09:45.600 --> 0:09:49.400 they're going to be implemented over the course of this 0:09:49.520 --> 0:09:52.440 year and next year and perhaps the years to come. 0:09:53.640 --> 0:09:56.760 I think we cannot wait until all that uncertainty is 0:09:56.800 --> 0:10:00.880 resolved to continue our SUPM forecast. So we have to 0:10:00.920 --> 0:10:03.840 continue to do our job and continue to do the 0:10:03.920 --> 0:10:06.640 s A P forecasting, which is and input into our 0:10:06.679 --> 0:10:12.000 decision making every quarter. And as we progress over time, 0:10:12.480 --> 0:10:16.760 that resolution of uncertainty about you know, which policies, what 0:10:16.840 --> 0:10:20.240 are their contours, what is the timing of the policies, 0:10:20.280 --> 0:10:24.520 the sequencing, what is the net effect on demand, on supply, 0:10:24.679 --> 0:10:29.480 on prices, on quantities you know will be revealed. Now 0:10:29.520 --> 0:10:33.600 we can't. I think I think it would be not 0:10:33.679 --> 0:10:36.280 good service to the people that we serve if we 0:10:36.960 --> 0:10:40.679 abstained from engaging in s a p forecasts between now 0:10:40.840 --> 0:10:43.959 and the time that that resolution of that full uncertainty 0:10:44.040 --> 0:10:48.160 is is is achieved, which could take a year or two. 0:10:48.920 --> 0:10:52.400 Uh So we're going to gradually absorb information as it 0:10:52.559 --> 0:10:56.720 as it as it is available to us and incorporate, uh, 0:10:57.480 --> 0:11:00.680 you know, new policies into our forecast. One the contours 0:11:00.679 --> 0:11:04.280 of those policies are understood, and we can quantify things 0:11:04.280 --> 0:11:07.720 and understand how they affect would affect the dual mandate. 0:11:07.920 --> 0:11:10.080 Well, you're looking are you going to say you're data 0:11:10.120 --> 0:11:14.880 dependent in terms of what the new fiscal policies might be? 0:11:15.679 --> 0:11:19.240 Are you going to be able to make estimates of 0:11:19.240 --> 0:11:21.439 what's going to happen and react on those. 0:11:21.960 --> 0:11:27.559 So my staff is already making, you know, doing exercises 0:11:27.640 --> 0:11:31.800 of you know, for different tariff configurations, how might that 0:11:31.880 --> 0:11:37.360 affect the economy, for different fiscal configurations, how might that 0:11:37.400 --> 0:11:43.720 affect the economy. So we're beginning to exercise our muscle 0:11:43.760 --> 0:11:46.360 memory or or you know, forecasting muscle in terms of 0:11:46.720 --> 0:11:50.480 understanding so that when you get the final configuration of 0:11:50.520 --> 0:11:54.280 these policies, we can then go back to all these 0:11:54.280 --> 0:11:57.760 exercises that we are beginning to do and understand. Okay, 0:11:57.880 --> 0:12:01.600 given what we have to take those as inputs, to 0:12:01.640 --> 0:12:05.280 take those policies inputs, and then go and analyze how 0:12:05.760 --> 0:12:07.680 that could possibly affect our dual. 0:12:07.720 --> 0:12:10.440 Many goals Alberta mus still in the Saint Louis fed 0:12:10.480 --> 0:12:12.040 in conversation with Michael Keith