WEBVTT - Jeff Schmid Talks Inflation, Fed Policy

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Well, thank you for

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<v Speaker 1>joining us. This is your first round of interviews one

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<v Speaker 1>year into the job.

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<v Speaker 2>Well here as of today.

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<v Speaker 1>Actually, yeah, the FED minutes that were out this week

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<v Speaker 1>suggested that a majority of the members agreed that it

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<v Speaker 1>would be worth cutting rates in September. But I presume,

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<v Speaker 1>given your comments after the meeting that you're waiting for

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<v Speaker 1>more evidence that you were not among them.

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<v Speaker 2>So yeah, I think it made sense, or it makes

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<v Speaker 2>sense for me to really look at some of the

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<v Speaker 2>data that comes in the next few weeks. And I

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<v Speaker 2>think this mandate on the inflation site's really important. I

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<v Speaker 2>think we seem to be getting some really good movement

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<v Speaker 2>that direction. But before we act, at least before I

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<v Speaker 2>act or recommend acting, I think we need to see

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<v Speaker 2>a little bit more.

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<v Speaker 1>Well we essentially on the path to it, in other words,

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<v Speaker 1>of we get as predicted inflation numbers, jobs numbers in

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<v Speaker 1>the next month. Would you agree it's time?

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<v Speaker 2>You know, I like the word path, and I also

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<v Speaker 2>believe that we've seen some cooling in the labor market

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<v Speaker 2>that also kind of works in tandem a little bit

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<v Speaker 2>with that. Not exactly sure, I would go there just

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<v Speaker 2>yet I think it kind of is the nature of

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<v Speaker 2>what happened with the inflation numbers and how much of

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<v Speaker 2>those inflation numbers were kind of supply driven that got cured,

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<v Speaker 2>and then how much is is the policy restrictive? And

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<v Speaker 2>I think while it's restrictive, I don't know if it's

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<v Speaker 2>overly restrictive. So you know, for me, policy as implies

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<v Speaker 2>patients and I would say, let's be patient.

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<v Speaker 1>Well, what are you worried about? What would be the

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<v Speaker 1>scenario that would drive inflation back up again?

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<v Speaker 2>So if we get any kind of spark and demand,

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<v Speaker 2>I mean I go around the tenth district quite a bit.

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<v Speaker 2>We still have employed numbers, unemployment numbers in the two

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<v Speaker 2>and a half three and a half percent range. I

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<v Speaker 2>think a lot of people are looking at how do

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<v Speaker 2>we hire skilled labor over the next twelve months. So

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<v Speaker 2>I still think we could see a little bit of

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<v Speaker 2>demand pick up if we're not careful with the decisioning,

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<v Speaker 2>at least from the tenth district standpoint. I'm a big

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<v Speaker 2>fan of the Beije book. I try to understand what's

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<v Speaker 2>happening in tenth district and then try to see what's

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<v Speaker 2>happening regionally. With the other eleven banks. And I think

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<v Speaker 2>there's from a trend standpoint, things look pretty good. But

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<v Speaker 2>I still think we have some time.

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<v Speaker 1>Well, in terms of trend, it seems that we are

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<v Speaker 1>seeing a slowdown in salaries and wages and that people

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<v Speaker 1>have spent a lot, if not all, of their pandemic

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<v Speaker 1>bonuses that they got. So what are the people in

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<v Speaker 1>your district saying, companies in your district saying about whether

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<v Speaker 1>there would be another spark of demand?

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<v Speaker 2>Yeah, so there everybody seems to be pretty busy still.

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<v Speaker 2>And I think in some cases, I would say the

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<v Speaker 2>housing market, the healthcare market is still has a high

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<v Speaker 2>demand factor for people skilled people, and I think, you know,

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<v Speaker 2>the margins and some of the healthcare industry are narrowing,

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<v Speaker 2>and so you could see some inflationary factor in some

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<v Speaker 2>of these areas. And I still think we've got to

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<v Speaker 2>fix this housing supply market, and I think there's going

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<v Speaker 2>to be more demand in that market over the next

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<v Speaker 2>two or three years.

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<v Speaker 1>Well that's going to be a question is how does

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<v Speaker 1>the FED get the housing market going again since the

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<v Speaker 1>FED essentially put a stop to it, or do you

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<v Speaker 1>think that's your responsibility?

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<v Speaker 2>So I would probably say that the rates are less

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<v Speaker 2>impactful about buying a home today than what's happened with

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<v Speaker 2>the cost of home through the pandemic. I mean, there

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<v Speaker 2>were the supply issues that we had in twenty two

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<v Speaker 2>and twenty three really show the housing market from a

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<v Speaker 2>cost standpoint. And I think as I go around the district,

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<v Speaker 2>the whole issue of that first time home buyer, affordable housing,

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<v Speaker 2>that seems to be the number one issue. So I

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<v Speaker 2>think we've got some work to do in that area,

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<v Speaker 2>but I think it's less rate sensitive as it is

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<v Speaker 2>just pure cost driven.

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<v Speaker 1>Now you were a banker, your whole career has been

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<v Speaker 1>in banking. What's the banking side of the ledger look

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<v Speaker 1>like in the tenth district in terms of being able

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<v Speaker 1>to create and supply credit both to businesses and in

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<v Speaker 1>agriculture is a big deal, And of course that's sort

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<v Speaker 1>of a separate banking business.

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<v Speaker 2>It is. So I've been to several bank association groups,

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<v Speaker 2>I've visited with a lot of bankers one on one

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<v Speaker 2>and with their boards. The one thing I do say

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<v Speaker 2>is I'm actually pleased and quite proud of how the

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<v Speaker 2>industry is adapted itself through this kind of rate policy

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<v Speaker 2>move Since twenty two. It seems like they've adapted their

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<v Speaker 2>funding bases, their clients, their credit side, and so earnings

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<v Speaker 2>and capital seem to be in pretty good shape. And

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<v Speaker 2>so I think now the conversation comes around really the

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<v Speaker 2>liquidity funding. We talk a lot about the discount window

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<v Speaker 2>and how that integrates and so. But by and large,

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<v Speaker 2>the banking industry, not just in the tent district, but

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<v Speaker 2>by large numbers look pretty good. I don't see any

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<v Speaker 2>black clouds forming in that regard. Now. As the monetary

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<v Speaker 2>policy discussions continue, we'll see how it affects things like

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<v Speaker 2>the yield curve and things like that, which I think

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<v Speaker 2>are really important to the banking business.

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<v Speaker 1>Well, banks deal obviously in reserves, and right now there

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<v Speaker 1>are a lot of them. As that comes down, what

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<v Speaker 1>a lot of analysts say is it's going to come

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<v Speaker 1>down unequally, especially for smaller banks. Are you worried at

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<v Speaker 1>all about the smaller banks in your strict having liquidity problems?

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<v Speaker 2>I don't see that today there is. I would say

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<v Speaker 2>that we talk a lot at the monetary policy table

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<v Speaker 2>about the balance sheet about abundant reserve reserves. I think

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<v Speaker 2>over time, the analytics about what abundant reserves is and

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<v Speaker 2>then we have a really robust supervisory team that keeps

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<v Speaker 2>very close track of things like liquidity and reserves. There

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<v Speaker 2>doesn't seem to be a lot of concern in the industry,

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<v Speaker 2>and I think, frankly, maybe even after the Silicon Valley experience,

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<v Speaker 2>I think bankers are generally a little bit more conservative

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<v Speaker 2>on the whole liquidity metrics in their banks.

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<v Speaker 1>I have to ask you, I think I know the answer,

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<v Speaker 1>but I'll let you tell me what you thought of

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<v Speaker 1>the report that the euro of Labor Statistics put out

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<v Speaker 1>at eight hundred and eighteen thousand fewer jobs over the

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<v Speaker 1>twelve months to the first quarter of this year.

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<v Speaker 2>Yeah, So the first thing that comes to mind is

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<v Speaker 2>are we getting the data wrong in that regard? The

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<v Speaker 2>second is, if you look at it seems like a

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<v Speaker 2>large number until you put it in perspective of the

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<v Speaker 2>twelve months, and so you know, while it's a big number,

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<v Speaker 2>it doesn't really change the path of the way I

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<v Speaker 2>think of things when I think about monetary policy and

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<v Speaker 2>the effect of the labor force and what's going on.

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<v Speaker 2>I'm actually really interested in the dynamics of the labor

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<v Speaker 2>force really coming out of the pandemic. You know, the behaviors,

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<v Speaker 2>the compensation structures, the demographics. I think studying those relative

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<v Speaker 2>to the future labor force, maybe thinking a little bit

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<v Speaker 2>about what AI generated AI does to things like productivity.

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<v Speaker 2>I think those are important things to look at. Now

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<v Speaker 2>we have to look at some of the data relative

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<v Speaker 2>to what we do with policy in the labor force.

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<v Speaker 2>But the recent print here isn't a big concern for me.

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<v Speaker 1>So you wouldn't agree with the argument that some make

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<v Speaker 1>on Wall Street that the FED is behind the curve.

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<v Speaker 2>No, I don't really agree with that. I mean here

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<v Speaker 2>here again, I think we've got to get as a

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<v Speaker 2>FED better at at the data sets that we're using.

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<v Speaker 2>I'm a new central banker. I'd like to see us

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<v Speaker 2>move toward a more real time data set versus there

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<v Speaker 2>still seems to be some lags, some serious lags in

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<v Speaker 2>some of the data that we get. So using new technologies,

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<v Speaker 2>maybe some of the AI technologies, maybe we get better

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<v Speaker 2>data as we move forward. But we've got to really

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<v Speaker 2>focus on that with our economists and our and our

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<v Speaker 2>analysts about you know, where's the data coming from and

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<v Speaker 2>can we rely on it well?

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<v Speaker 1>To follow up on that as as sort of and

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<v Speaker 1>wrap things up. We have the framework review coming up

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<v Speaker 1>this fall. Is that number one for you? Is the

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<v Speaker 1>data or what else would you like to see looked at?

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<v Speaker 1>I realized generally to say what would change, but what

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<v Speaker 1>would you like to see looked at?

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<v Speaker 2>So Joe Gruber is our chief economist and head of research,

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<v Speaker 2>and his team came up with this transmission of monetary

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<v Speaker 2>policy subject matter for this Jackson Hole event. Perfect timing.

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<v Speaker 2>So I think we're going to some of these research

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<v Speaker 2>All these researchers are going to release their paper soon,

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<v Speaker 2>and I think there's going to be some really good

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<v Speaker 2>insights into the data collection, the analytics, and how we

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<v Speaker 2>transmit and communicate monetary policy going forward. So I think

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<v Speaker 2>there's going to be a very robust discussion about how

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<v Speaker 2>that's done as we move into the future.

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<v Speaker 1>Well, one aspect of that that really interests people on

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<v Speaker 1>trading desk on Wall Street is, and you would experience

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<v Speaker 1>this as a banker. The whole financial system has changed

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<v Speaker 1>since the Great Financial Crisis, and now everything's run on

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<v Speaker 1>repo and you need a lot of paper out there

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<v Speaker 1>to satisfy the banks, and you've set up all these

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<v Speaker 1>systems to make sure it works. Has it gotten too complex?

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<v Speaker 2>I don't think so. I mean, look, I came from

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<v Speaker 2>that world. You can overcomplicate it if you're not careful.

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<v Speaker 2>I just think that community bankers understand their markets, They

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<v Speaker 2>understand the demands that their clients have, that they understand

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<v Speaker 2>how to move capital and credit to build their communities

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<v Speaker 2>and regions. So I don't see the business as over complicated.

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<v Speaker 2>I do believe there are some things that are happening,

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<v Speaker 2>let's say FORED like for instance, FED now, where you're

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<v Speaker 2>going to see money moving twenty four hours, seven days

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<v Speaker 2>a week. People are going to do business on Sundays

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<v Speaker 2>relative to banks and the business they do with banks.

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<v Speaker 2>So there is some complexities in there. But I think

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<v Speaker 2>some of the technology, some of the policies, conversations we're

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<v Speaker 2>going to have around things like modernizing the discount window

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<v Speaker 2>on their behalf, I think those are going to be

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<v Speaker 2>really net ads for the banking business.

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<v Speaker 1>One last question on this subject, Buzzle Vazzel endgame as

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<v Speaker 1>they call it, which we know is never going to

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<v Speaker 1>be an endgame. But as a banker and now a

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<v Speaker 1>central banker, what's your.

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<v Speaker 2>Perspective, So you know, in my former life as a

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<v Speaker 2>community banker. It was always interesting to me, we really

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<v Speaker 2>need to try to understand as regulators, how do we

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<v Speaker 2>even the playing field. Capital is a big one. I've

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<v Speaker 2>talked to bankers around my district and they believe that, look,

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<v Speaker 2>we've got to try to figure out how to make

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<v Speaker 2>that field equal. That you've got tangible capital ratios with

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<v Speaker 2>small banks that are running at nine ten percent, some

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<v Speaker 2>of the larger banks run it at you know that,

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<v Speaker 2>six and seven. So I think the capital conversation is

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<v Speaker 2>an important one. I think Vice Chair bar On the

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<v Speaker 2>Board is on his team and along with a lot

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<v Speaker 2>of our supervisors around the Federal Reserve System, are having

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<v Speaker 2>a very active conversation about it. I think we also

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<v Speaker 2>have to align things like the Community Reinvestment Act to

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<v Speaker 2>what's happening in community banks. I think those are real,

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<v Speaker 2>big policy matters that we need to really get aligned

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<v Speaker 2>well with the industry.