WEBVTT - Bloomberg Surveillance: Chicago Fed President on Rate Cuts 0:00:00.080 --> 0:00:02.600 And good morning to all of our Bloomberg television and 0:00:02.720 --> 0:00:05.760 radio audience around the world. I'm Michael McKee. Joining me 0:00:05.800 --> 0:00:08.760 now Austin Goolsby. He is the president of the Chicago 0:00:08.880 --> 0:00:11.080 Federal Reserve Bank, and we can get his reaction to 0:00:11.320 --> 0:00:13.680 an awful lot of news in the last seventy two 0:00:13.720 --> 0:00:17.640 to forty eight hours. First, let's dive right into it 0:00:17.680 --> 0:00:21.200 with last night's up here. It's Cher Powell suggested again 0:00:21.840 --> 0:00:24.960 that March would be too early to cut rates. You 0:00:25.000 --> 0:00:28.680 wouldn't have enough data to justify that at the time. 0:00:29.000 --> 0:00:31.040 Do you agree with him? 0:00:31.560 --> 0:00:34.440 Well, Michael, you know my thing is I never like 0:00:34.640 --> 0:00:38.080 tie in our hands ahead of meetings. When you got 0:00:38.080 --> 0:00:41.360 weeks of data coming through, it feels like the economy's 0:00:41.400 --> 0:00:44.360 been quite strong on the growth front. You got big 0:00:44.479 --> 0:00:47.599 jobs numbers, you got big GDP numbers, better than expected. 0:00:48.200 --> 0:00:50.839 But at the same time, we've had inflation better than 0:00:50.880 --> 0:00:52.000 expected too. 0:00:52.080 --> 0:00:53.000 If you look over the. 0:00:53.000 --> 0:00:56.520 Last seven months, we've had seven months of really quite 0:00:56.680 --> 0:01:02.760 good inflation reports round or even below the Fed's target. 0:01:03.160 --> 0:01:06.720 So if we just keep getting more data like what 0:01:06.760 --> 0:01:10.960 we have gotten, we're well on the I believe that 0:01:11.040 --> 0:01:14.880 we should well be on the path to normalization. 0:01:15.520 --> 0:01:18.319 Well, understand you don't want to tie yourself down, but 0:01:18.440 --> 0:01:20.199 is there really much of a chance of a march 0:01:20.280 --> 0:01:23.400 move The markets think now eighteen percent, and some people 0:01:23.400 --> 0:01:26.000 think that's even high. 0:01:26.080 --> 0:01:29.720 Well, look, Michael, as I say, all we need to 0:01:29.760 --> 0:01:33.959 do is keep getting information like what we've been getting 0:01:34.000 --> 0:01:37.600 for the last seven months, where inflation on a flow 0:01:37.640 --> 0:01:42.040 basis is absolutely under control and is in the range 0:01:42.200 --> 0:01:48.280 of our FED target. And if we keep getting strong 0:01:48.960 --> 0:01:53.200 quantity numbers, that is to say, jobs numbers, GDP numbers, 0:01:53.240 --> 0:01:58.080 growth numbers, while inflation goes down. In the conventional view, 0:01:58.120 --> 0:02:02.240 that's not really supposed to happen. So that would we'd 0:02:02.280 --> 0:02:06.360 have to be entertaining the possibility that we're entering a 0:02:06.400 --> 0:02:09.320 period like the mid to late nineties where you had 0:02:09.320 --> 0:02:15.200 productivity growth faster than expected, faster than trend, and that 0:02:15.400 --> 0:02:17.200 opens up some new possibilities. 0:02:17.760 --> 0:02:21.000 Scott Pelly of CBS last night said that Powell suggested 0:02:21.520 --> 0:02:25.080 that rate cuts would likely be a quarter, maybe a 0:02:25.280 --> 0:02:28.000 half of a percentage point at a time. That doesn't 0:02:28.040 --> 0:02:30.800 appear in the transcript. Was a half percentage point cut 0:02:30.840 --> 0:02:31.880 discussed at the meeting. 0:02:35.520 --> 0:02:39.400 As you know, we don't report on what's discussed at 0:02:39.440 --> 0:02:44.919 the meeting until the transcript comes out. Our standard way 0:02:44.960 --> 0:02:49.080 to think of it from the FOMC is somewhat like 0:02:49.200 --> 0:02:53.840 what's in the Summary of Economic Projections, the SEP, which 0:02:53.880 --> 0:02:56.600 comes out every quarter, and the last time that came 0:02:56.639 --> 0:02:59.680 out in December, you saw that the median member of 0:02:59.720 --> 0:03:02.920 the f S thought there would be three rate cuts 0:03:03.120 --> 0:03:06.519 i e. Seventy five basis points for the year twenty 0:03:06.639 --> 0:03:07.200 twenty four. 0:03:08.080 --> 0:03:10.520 Is there a situation other than perhaps a recession or 0:03:10.520 --> 0:03:13.600 some sort of market failure where you would consider a 0:03:13.639 --> 0:03:14.880 fifty basis point cut. 0:03:16.760 --> 0:03:22.040 Well, look, I just think we you get the data 0:03:22.360 --> 0:03:27.880 and you respond to the data in its totality, so 0:03:29.200 --> 0:03:32.600 it's I don't think it makes sense to speculate about 0:03:32.840 --> 0:03:35.880 hypotheticals of what would happen to make the rate cuts 0:03:35.920 --> 0:03:38.400 be different than what they have been in the past. 0:03:38.800 --> 0:03:42.440 Three percent growth, three point seven percent unemployment, two point 0:03:42.560 --> 0:03:47.440 nine percent PCE inflation, the FED discussing rate cuts. 0:03:47.600 --> 0:03:49.520 Is this a soft landing? 0:03:49.600 --> 0:03:52.960 Can you declare victory? 0:03:53.320 --> 0:03:57.560 I mean twenty twenty three by the measures of the 0:03:57.640 --> 0:04:02.680 dual mandate, which is to say, maximum employment and stabilized prices, 0:04:02.960 --> 0:04:05.600 that was a pretty good year for twenty twenty three 0:04:05.680 --> 0:04:08.560 one of the better dual mandate years that we've seen 0:04:08.640 --> 0:04:09.400 in some time. 0:04:10.560 --> 0:04:12.160 You never want to declare victory. 0:04:12.200 --> 0:04:15.800 The central banker's job is to remain paranoid about everything 0:04:15.880 --> 0:04:18.280 because there are external shocks. There are a whole lot 0:04:18.320 --> 0:04:21.560 of things that can go wrong. But we definitely made 0:04:21.600 --> 0:04:24.839 progress on the side of the mandate where we had 0:04:24.920 --> 0:04:28.040 been failing. You know, the inflation rate was way higher 0:04:28.080 --> 0:04:31.560 than where we wanted it to be. And as I say, 0:04:31.600 --> 0:04:35.080 for the last seven months we've been at or below 0:04:35.600 --> 0:04:37.560 the two percent annualized rate. 0:04:37.680 --> 0:04:39.520 So we just need more months like that. 0:04:40.360 --> 0:04:42.279 That's in the PCE index. 0:04:42.680 --> 0:04:47.240 But CPI, especially core CPI, the Cleveland and Dallas Fed's 0:04:47.279 --> 0:04:52.479 trimmed means, the Atlanta Fed's sticky wage price index have 0:04:52.560 --> 0:04:56.080 all been running faster and hotter than PCE. Is there 0:04:56.080 --> 0:04:59.200 an underlying inflation issue that maybe your measure is not 0:04:59.240 --> 0:04:59.760 picking up? 0:05:01.880 --> 0:05:03.240 No, I don't think so. 0:05:04.120 --> 0:05:07.240 There if we get down into the weeds, the different 0:05:07.279 --> 0:05:11.480 measures of inflation measure different things, and so categories like 0:05:11.839 --> 0:05:17.279 health insurance are better tracked in the PCE measure of 0:05:17.279 --> 0:05:20.880 inflation than they are in the CPI, and the PCE 0:05:21.320 --> 0:05:25.719 measure allows consumers to adjust to the prices and change 0:05:25.760 --> 0:05:30.000 their mix of what they're buying. That's why the FED 0:05:30.040 --> 0:05:33.360 has chosen the PCE as where they want. 0:05:33.160 --> 0:05:35.320 To get to two percent. 0:05:36.760 --> 0:05:38.880 The only thing I would like to emphasize is the 0:05:38.920 --> 0:05:43.360 Fed's goal is not two percent inflation on a Cleveland 0:05:43.440 --> 0:05:47.640 trimmed means CPI or something like that. They make clear 0:05:48.000 --> 0:05:51.040 PCE is the measure that we're trying to hit two percent, 0:05:51.200 --> 0:05:54.960 and in CPI equivalent, that's it's going to be a 0:05:55.040 --> 0:05:58.120 little bit higher as a run rate on that measure. 0:05:58.839 --> 0:06:00.680 Now that you've had time to think about it, what 0:06:00.720 --> 0:06:03.560 do you make of the acceleration in hiring over the 0:06:03.600 --> 0:06:06.840 past two months. Optimists say it shows the economy is 0:06:06.960 --> 0:06:09.359 very strong and maybe the FED doesn't have pressure to 0:06:09.400 --> 0:06:12.880 cut rates, and pessimists say, can't be right. Seasonal adjustment 0:06:12.880 --> 0:06:14.640 factors have fudged the numbers. 0:06:16.360 --> 0:06:20.240 Well, it's this very important category. They did not fudge 0:06:20.279 --> 0:06:21.400 the numbers. That's crazy. 0:06:21.480 --> 0:06:24.120 But the thing that I. 0:06:24.200 --> 0:06:28.320 Want to emphasize when you see big prints like the 0:06:28.320 --> 0:06:31.840 ones that we saw on Friday, with big positive jobs numbers, 0:06:32.120 --> 0:06:37.000 there is a tendency, if from pre COVID times to say, ooh, 0:06:37.120 --> 0:06:40.560 that must mean the economy is overheating. And I just 0:06:40.600 --> 0:06:45.000 want to make clear, and periods of positive supply shocks 0:06:45.680 --> 0:06:49.840 or improving productivity that's better than you expected. You cannot 0:06:49.920 --> 0:06:54.680 look at the quantities and determine whether the economy is overheated, 0:06:54.960 --> 0:07:00.280 because the same thing that's inflating the quantities is alsoinging 0:07:00.320 --> 0:07:05.960 down the inflation, so you can it affords new possibilities 0:07:06.200 --> 0:07:10.280 for monetary policy that are more positive than in a 0:07:10.360 --> 0:07:14.000 normal demand driven frame, and we saw that in the 0:07:14.040 --> 0:07:17.520 mid to late nineties, and so we've just got to 0:07:17.560 --> 0:07:21.320 be mindful in seeing these big strong jobs numbers and 0:07:21.440 --> 0:07:24.800 big GDP numbers that they do not have to mean 0:07:25.280 --> 0:07:27.240 overheating in the traditional sense. 0:07:27.680 --> 0:07:30.120 If the supply side is moving around. 0:07:30.600 --> 0:07:32.280 The EU curve, and you can pick any of them 0:07:32.440 --> 0:07:37.520 still inverted, started flattening, but then has now started inverting 0:07:37.680 --> 0:07:40.480 more Again, does that tell you anything. 0:07:40.240 --> 0:07:41.360 About the economy? 0:07:41.840 --> 0:07:45.720 Supposedly it signals a recession within six to twelve months, 0:07:45.800 --> 0:07:49.800 but it's been fourteen months now and so far no recession. 0:07:51.720 --> 0:07:51.920 Yeah. 0:07:52.040 --> 0:07:55.920 Look, the thing about the inverted Eel curve is a 0:07:56.000 --> 0:08:00.840 great predictor of recession. When recessions are caused by the 0:08:00.920 --> 0:08:06.280 normal demand flows of aggregate demand. But all bets are 0:08:06.320 --> 0:08:10.119 off when the supply side starts going bonkers. And we've 0:08:10.160 --> 0:08:14.440 seen that going through COVID. And now as we unwind 0:08:14.600 --> 0:08:20.559 those deteriorated supply chain, we're getting labor force participation back 0:08:20.680 --> 0:08:26.840 up to healthy levels. You can get these inverted yield curves, 0:08:26.880 --> 0:08:29.280 I think just from the anticipation of. 0:08:31.000 --> 0:08:32.959 What folks think the FED is going to do. 0:08:33.679 --> 0:08:40.000 If the FED is cutting rates not because of demand shocks, 0:08:40.559 --> 0:08:42.760 which is what happens in the normal times, then the 0:08:42.960 --> 0:08:46.240 inverted yield curve doesn't need to be an indicator of recession. 0:08:46.520 --> 0:08:49.600 I realized there were too many no's in that sentence. 0:08:51.080 --> 0:08:54.640 I don't think that the inverted yield curve as a 0:08:54.760 --> 0:08:59.800 rule of thumb, is really as applicable as a recession. 0:09:01.000 --> 0:09:05.120 And you certainly saw that in twenty twenty three. Everyone 0:09:05.640 --> 0:09:08.240 was saying that it was very likely to be a recession, 0:09:08.280 --> 0:09:10.760 and it was nothing even remotely like a recession. 0:09:10.960 --> 0:09:15.760 NYCB Bank New York Community Bank, revived fears of regional 0:09:15.800 --> 0:09:19.559 bank issues last week. What are bankers in your district 0:09:19.600 --> 0:09:23.440 telling you about their situation? Is NYCB a one off 0:09:23.520 --> 0:09:24.600 or is it a canary? 0:09:26.600 --> 0:09:27.800 Well? 0:09:27.840 --> 0:09:31.080 I would paid close attention to that, of course, because 0:09:31.400 --> 0:09:36.680 the Chicago FEDS that has the largest number of banks 0:09:36.760 --> 0:09:40.280 that and financial institutions that we supervise, I believe, of 0:09:40.440 --> 0:09:44.560 all the FED districts. The thing is, in this case, 0:09:45.160 --> 0:09:50.520 the bank had bought the assets of signature, and that 0:09:50.640 --> 0:09:54.120 moved them up into a higher category where there's a 0:09:54.240 --> 0:09:59.120 little more scrutiny and some higher capital requirements. So thus 0:09:59.280 --> 0:10:04.120 far that doesn't really seem like it's a commercial real 0:10:04.240 --> 0:10:06.559 estate blowing up or something like that. 0:10:06.640 --> 0:10:08.800 But of course we're monitoring. 0:10:09.120 --> 0:10:12.559 As I say, this job of central banker is to 0:10:12.720 --> 0:10:15.880 monitor everything that can go wrong and to prepare yourself 0:10:15.920 --> 0:10:16.200 for it. 0:10:17.240 --> 0:10:21.280 Well, one more question about preparing yourself. What are the 0:10:21.320 --> 0:10:25.280 bankers telling you about lending at this point with real 0:10:25.360 --> 0:10:26.600 rates going up, et cetera. 0:10:26.720 --> 0:10:27.920 Are they tightening credit? 0:10:28.320 --> 0:10:32.400 Are they tightening credit standards, making fewer loans, making more loans? 0:10:32.400 --> 0:10:34.920 We get the Senior Loan Officer Survey this week. 0:10:34.960 --> 0:10:35.880 What are we going to see? 0:10:37.720 --> 0:10:42.240 Yeah, the Beige Book comes out every FMC meeting where 0:10:42.240 --> 0:10:45.480 we talk to contacts, We talk to each of our 0:10:45.600 --> 0:10:49.840 reserve banks, talk to our own board of directors, as 0:10:49.880 --> 0:10:53.920 well as people out in the community. Over the last 0:10:54.720 --> 0:10:58.760 year year and a half, you've seen a decidedly tighter 0:10:58.880 --> 0:11:03.240 credit market, for sure, mostly I think just because the 0:11:03.320 --> 0:11:07.439 rates are higher. We had a fear in the spring 0:11:07.640 --> 0:11:12.080 last year with the collapse of Silicon Valley Bank and 0:11:12.120 --> 0:11:14.920 a few others, that it would lead to a credit crunch. 0:11:15.160 --> 0:11:20.520 We mostly haven't seen more credit tightening than what you 0:11:20.559 --> 0:11:23.760 would expect just from the monetary policy and the rates 0:11:24.080 --> 0:11:28.120 I would characterize. And that still feels like more of 0:11:28.160 --> 0:11:32.320 the same. And now you've had the long rates, which 0:11:32.360 --> 0:11:34.400 the Fed does not directly control. 0:11:35.360 --> 0:11:36.680 They've been on a journey. 0:11:36.800 --> 0:11:39.760 You know, they were up, then they're down, and we've 0:11:40.040 --> 0:11:45.319 fluctuated back and forth. A little feels like credit remains tight, 0:11:45.480 --> 0:11:51.400 and especially at the lower part of the credit spectrum 0:11:51.440 --> 0:11:59.200 of both consumers, small business and higher rate credits. They're 0:11:59.320 --> 0:12:03.520 getting a squeak and we hear that from our bankers 0:12:03.320 --> 0:12:05.800 as well as from the businesses themselves. 0:12:06.400 --> 0:12:08.760 Austin Goby, thank you very much for joining us. 0:12:08.760 --> 0:12:10.920 We would have called at our age, of course, the 0:12:11.520 --> 0:12:13.840 Journey of the ten year an e ticket ride at 0:12:14.160 --> 0:12:17.680 Disney World, but they don't charge that way anymore. 0:12:18.200 --> 0:12:19.559 Thanks for joining us to. 0:12:20.200 --> 0:12:22.480 It's been a long time great to see again. 0:12:22.559 --> 0:12:25.600 Vichael Austin goes to be the president of the Chicago 0:12:25.760 --> 0:12:26.839 Federal Reserve Bank,