Speaker 1: And good morning to all of our Bloomberg television and
Speaker 1: radio audience around the world. I'm Michael McKee. Joining me
Speaker 1: now Austin Goolsby. He is the president of the Chicago
Speaker 1: Federal Reserve Bank, and we can get his reaction to
Speaker 1: an awful lot of news in the last seventy two
Speaker 1: to forty eight hours. First, let's dive right into it
Speaker 1: with last night's up here. It's Cher Powell suggested again
Speaker 1: that March would be too early to cut rates. You
Speaker 1: wouldn't have enough data to justify that at the time.
Speaker 2: Do you agree with him?
Speaker 3: Well, Michael, you know my thing is I never like
Speaker 3: tie in our hands ahead of meetings. When you got
Speaker 3: weeks of data coming through, it feels like the economy's
Speaker 3: been quite strong on the growth front. You got big
Speaker 3: jobs numbers, you got big GDP numbers, better than expected.
Speaker 3: But at the same time, we've had inflation better than
Speaker 3: expected too.
Speaker 4: If you look over the.
Speaker 3: Last seven months, we've had seven months of really quite
Speaker 3: good inflation reports round or even below the Fed's target.
Speaker 3: So if we just keep getting more data like what
Speaker 3: we have gotten, we're well on the I believe that
Speaker 3: we should well be on the path to normalization.
Speaker 1: Well, understand you don't want to tie yourself down, but
Speaker 1: is there really much of a chance of a march
Speaker 1: move The markets think now eighteen percent, and some people
Speaker 1: think that's even high.
Speaker 3: Well, look, Michael, as I say, all we need to
Speaker 3: do is keep getting information like what we've been getting
Speaker 3: for the last seven months, where inflation on a flow
Speaker 3: basis is absolutely under control and is in the range
Speaker 3: of our FED target. And if we keep getting strong
Speaker 3: quantity numbers, that is to say, jobs numbers, GDP numbers,
Speaker 3: growth numbers, while inflation goes down. In the conventional view,
Speaker 3: that's not really supposed to happen. So that would we'd
Speaker 3: have to be entertaining the possibility that we're entering a
Speaker 3: period like the mid to late nineties where you had
Speaker 3: productivity growth faster than expected, faster than trend, and that
Speaker 3: opens up some new possibilities.
Speaker 1: Scott Pelly of CBS last night said that Powell suggested
Speaker 1: that rate cuts would likely be a quarter, maybe a
Speaker 1: half of a percentage point at a time. That doesn't
Speaker 1: appear in the transcript. Was a half percentage point cut
Speaker 1: discussed at the meeting.
Speaker 3: As you know, we don't report on what's discussed at
Speaker 3: the meeting until the transcript comes out. Our standard way
Speaker 3: to think of it from the FOMC is somewhat like
Speaker 3: what's in the Summary of Economic Projections, the SEP, which
Speaker 3: comes out every quarter, and the last time that came
Speaker 3: out in December, you saw that the median member of
Speaker 3: the f S thought there would be three rate cuts
Speaker 3: i e. Seventy five basis points for the year twenty
Speaker 3: twenty four.
Speaker 1: Is there a situation other than perhaps a recession or
Speaker 1: some sort of market failure where you would consider a
Speaker 1: fifty basis point cut.
Speaker 3: Well, look, I just think we you get the data
Speaker 3: and you respond to the data in its totality, so
Speaker 3: it's I don't think it makes sense to speculate about
Speaker 3: hypotheticals of what would happen to make the rate cuts
Speaker 3: be different than what they have been in the past.
Speaker 1: Three percent growth, three point seven percent unemployment, two point
Speaker 1: nine percent PCE inflation, the FED discussing rate cuts.
Speaker 2: Is this a soft landing?
Speaker 1: Can you declare victory?
Speaker 3: I mean twenty twenty three by the measures of the
Speaker 3: dual mandate, which is to say, maximum employment and stabilized prices,
Speaker 3: that was a pretty good year for twenty twenty three
Speaker 3: one of the better dual mandate years that we've seen
Speaker 3: in some time.
Speaker 4: You never want to declare victory.
Speaker 3: The central banker's job is to remain paranoid about everything
Speaker 3: because there are external shocks. There are a whole lot
Speaker 3: of things that can go wrong. But we definitely made
Speaker 3: progress on the side of the mandate where we had
Speaker 3: been failing. You know, the inflation rate was way higher
Speaker 3: than where we wanted it to be. And as I say,
Speaker 3: for the last seven months we've been at or below
Speaker 3: the two percent annualized rate.
Speaker 4: So we just need more months like that.
Speaker 2: That's in the PCE index.
Speaker 1: But CPI, especially core CPI, the Cleveland and Dallas Fed's
Speaker 1: trimmed means, the Atlanta Fed's sticky wage price index have
Speaker 1: all been running faster and hotter than PCE. Is there
Speaker 1: an underlying inflation issue that maybe your measure is not
Speaker 1: picking up?
Speaker 4: No, I don't think so.
Speaker 3: There if we get down into the weeds, the different
Speaker 3: measures of inflation measure different things, and so categories like
Speaker 3: health insurance are better tracked in the PCE measure of
Speaker 3: inflation than they are in the CPI, and the PCE
Speaker 3: measure allows consumers to adjust to the prices and change
Speaker 3: their mix of what they're buying. That's why the FED
Speaker 3: has chosen the PCE as where they want.
Speaker 4: To get to two percent.
Speaker 3: The only thing I would like to emphasize is the
Speaker 3: Fed's goal is not two percent inflation on a Cleveland
Speaker 3: trimmed means CPI or something like that. They make clear
Speaker 3: PCE is the measure that we're trying to hit two percent,
Speaker 3: and in CPI equivalent, that's it's going to be a
Speaker 3: little bit higher as a run rate on that measure.
Speaker 1: Now that you've had time to think about it, what
Speaker 1: do you make of the acceleration in hiring over the
Speaker 1: past two months. Optimists say it shows the economy is
Speaker 1: very strong and maybe the FED doesn't have pressure to
Speaker 1: cut rates, and pessimists say, can't be right. Seasonal adjustment
Speaker 1: factors have fudged the numbers.
Speaker 3: Well, it's this very important category. They did not fudge
Speaker 3: the numbers. That's crazy.
Speaker 4: But the thing that I.
Speaker 3: Want to emphasize when you see big prints like the
Speaker 3: ones that we saw on Friday, with big positive jobs numbers,
Speaker 3: there is a tendency, if from pre COVID times to say, ooh,
Speaker 3: that must mean the economy is overheating. And I just
Speaker 3: want to make clear, and periods of positive supply shocks
Speaker 3: or improving productivity that's better than you expected. You cannot
Speaker 3: look at the quantities and determine whether the economy is overheated,
Speaker 3: because the same thing that's inflating the quantities is alsoinging
Speaker 3: down the inflation, so you can it affords new possibilities
Speaker 3: for monetary policy that are more positive than in a
Speaker 3: normal demand driven frame, and we saw that in the
Speaker 3: mid to late nineties, and so we've just got to
Speaker 3: be mindful in seeing these big strong jobs numbers and
Speaker 3: big GDP numbers that they do not have to mean
Speaker 3: overheating in the traditional sense.
Speaker 4: If the supply side is moving around.
Speaker 1: The EU curve, and you can pick any of them
Speaker 1: still inverted, started flattening, but then has now started inverting
Speaker 1: more Again, does that tell you anything.
Speaker 2: About the economy?
Speaker 1: Supposedly it signals a recession within six to twelve months,
Speaker 1: but it's been fourteen months now and so far no recession.
Speaker 4: Yeah.
Speaker 3: Look, the thing about the inverted Eel curve is a
Speaker 3: great predictor of recession. When recessions are caused by the
Speaker 3: normal demand flows of aggregate demand. But all bets are
Speaker 3: off when the supply side starts going bonkers. And we've
Speaker 3: seen that going through COVID. And now as we unwind
Speaker 3: those deteriorated supply chain, we're getting labor force participation back
Speaker 3: up to healthy levels. You can get these inverted yield curves,
Speaker 3: I think just from the anticipation of.
Speaker 4: What folks think the FED is going to do.
Speaker 3: If the FED is cutting rates not because of demand shocks,
Speaker 3: which is what happens in the normal times, then the
Speaker 3: inverted yield curve doesn't need to be an indicator of recession.
Speaker 4: I realized there were too many no's in that sentence.
Speaker 3: I don't think that the inverted yield curve as a
Speaker 3: rule of thumb, is really as applicable as a recession.
Speaker 3: And you certainly saw that in twenty twenty three. Everyone
Speaker 3: was saying that it was very likely to be a recession,
Speaker 3: and it was nothing even remotely like a recession.
Speaker 1: NYCB Bank New York Community Bank, revived fears of regional
Speaker 1: bank issues last week. What are bankers in your district
Speaker 1: telling you about their situation? Is NYCB a one off
Speaker 1: or is it a canary?
Speaker 4: Well?
Speaker 3: I would paid close attention to that, of course, because
Speaker 3: the Chicago FEDS that has the largest number of banks
Speaker 3: that and financial institutions that we supervise, I believe, of
Speaker 3: all the FED districts. The thing is, in this case,
Speaker 3: the bank had bought the assets of signature, and that
Speaker 3: moved them up into a higher category where there's a
Speaker 3: little more scrutiny and some higher capital requirements. So thus
Speaker 3: far that doesn't really seem like it's a commercial real
Speaker 3: estate blowing up or something like that.
Speaker 4: But of course we're monitoring.
Speaker 3: As I say, this job of central banker is to
Speaker 3: monitor everything that can go wrong and to prepare yourself
Speaker 3: for it.
Speaker 1: Well, one more question about preparing yourself. What are the
Speaker 1: bankers telling you about lending at this point with real
Speaker 1: rates going up, et cetera.
Speaker 2: Are they tightening credit?
Speaker 1: Are they tightening credit standards, making fewer loans, making more loans?
Speaker 1: We get the Senior Loan Officer Survey this week.
Speaker 2: What are we going to see?
Speaker 3: Yeah, the Beige Book comes out every FMC meeting where
Speaker 3: we talk to contacts, We talk to each of our
Speaker 3: reserve banks, talk to our own board of directors, as
Speaker 3: well as people out in the community. Over the last
Speaker 3: year year and a half, you've seen a decidedly tighter
Speaker 3: credit market, for sure, mostly I think just because the
Speaker 3: rates are higher. We had a fear in the spring
Speaker 3: last year with the collapse of Silicon Valley Bank and
Speaker 3: a few others, that it would lead to a credit crunch.
Speaker 3: We mostly haven't seen more credit tightening than what you
Speaker 3: would expect just from the monetary policy and the rates
Speaker 3: I would characterize. And that still feels like more of
Speaker 3: the same. And now you've had the long rates, which
Speaker 3: the Fed does not directly control.
Speaker 4: They've been on a journey.
Speaker 3: You know, they were up, then they're down, and we've
Speaker 3: fluctuated back and forth. A little feels like credit remains tight,
Speaker 3: and especially at the lower part of the credit spectrum
Speaker 3: of both consumers, small business and higher rate credits. They're
Speaker 3: getting a squeak and we hear that from our bankers
Speaker 3: as well as from the businesses themselves.
Speaker 2: Austin Goby, thank you very much for joining us.
Speaker 1: We would have called at our age, of course, the
Speaker 1: Journey of the ten year an e ticket ride at
Speaker 1: Disney World, but they don't charge that way anymore.
Speaker 2: Thanks for joining us to.
Speaker 4: It's been a long time great to see again.
Speaker 1: Vichael Austin goes to be the president of the Chicago
Speaker 1: Federal Reserve Bank,