Speaker 1: Bloomberg Audio Studios, podcasts, radio.
Speaker 2: News, GRAMMT inflation data out just moments ago, in line
Speaker 2: with expectations, CPI month over month coming in at zero
Speaker 2: point two, stripping out food and energy that came in
Speaker 2: at zero point three as expected. The media estimate in
Speaker 2: our survey was zero point three. The equy price sanction
Speaker 2: off the back of it on the S and P
Speaker 2: up by two tenths of one percent. On the NASSNE
Speaker 2: one hundred up by a tenth of one percent, the
Speaker 2: outperformance on a russor of small caps up by eight
Speaker 2: tenths of one percent, as you'd expect with this move
Speaker 2: in the bond market, on a two year tenure and
Speaker 2: thirty year yields lower across the board, the two year
Speaker 2: down by eight basis points, the ten year down by
Speaker 2: about five basis points. On a thirty year with down
Speaker 2: by about three. If you check out foreign exchange switch
Speaker 2: on the board and get to FX, we can look
Speaker 2: at whether the euro is right now. We are training
Speaker 2: just a little bit more positive off the back of
Speaker 2: that data one oh six forty three, and police to
Speaker 2: say that responding to this economic data now is the
Speaker 2: Minneapolis Fed President Neil Kashgari President, Kashgary, good morning.
Speaker 1: Going to see you again. Good morning, good to see you.
Speaker 2: Right to cant sho Up. I saw some comments from
Speaker 2: yesterday and for our audience that might have missed them,
Speaker 2: I'll share them with our audience now we can pick
Speaker 2: up on them. That have to be a surprise on
Speaker 2: the inflation front to change the outlook so dramatically. If
Speaker 2: we saw inflation surprises to the upside between now and then,
Speaker 2: that might give us pause for December. It'd be hard
Speaker 2: to imagine the labor market really heats up between now
Speaker 2: and December. That's just not that much time. Inflation dates
Speaker 2: around just moments ago, and I think in that to
Speaker 2: disrupt this easing bias that seems to have gripped the
Speaker 2: FED over the last few months.
Speaker 3: Well, first of all, it's very fresh data, so I
Speaker 3: haven't had time to go through it in a lot
Speaker 3: of detail, but at least on the headline level, it
Speaker 3: seems to be confirming the path that we're on. We've
Speaker 3: made a lot of progress in the last year or
Speaker 3: so bringing inflation down. I need to go through the
Speaker 3: component of that release, which I have not done yet,
Speaker 3: but generally speaking, goods inflation is back down to where
Speaker 3: we want it to be where it was pre pandemic.
Speaker 3: Services inflation, which is tied to wages, is gently trending down.
Speaker 3: And then finally, housing inflation, we know is a lagon
Speaker 3: the indicator. We know that it takes a couple of
Speaker 3: years for the new least is to turn over. New
Speaker 3: leases are showing that we're heading in the right direction.
Speaker 3: So right now I think that inflation is head in
Speaker 3: the right direction. I've got confidence about that.
Speaker 1: But we need to wait.
Speaker 3: We've got another month or six weeks of data to
Speaker 3: analyze before we make any decisions.
Speaker 4: One of the things that has been very noticeable over
Speaker 4: the last week is the change in investors' views about
Speaker 4: where you're.
Speaker 1: Going to end up.
Speaker 4: If you're looking at SO for futures right now, the
Speaker 4: only price in about seventy five basis point cuts between
Speaker 4: now and the end of twenty twenty five. Are we
Speaker 4: entering a period because we don't know what Donald Trump's
Speaker 4: policies are actually going to be where the dot plot
Speaker 4: the summary of economic projections are kind of off the table,
Speaker 4: can't really put a lot of faith in them, and
Speaker 4: that maybe you're in the lail brainer attenuation phase where
Speaker 4: you slow down everything and people should expect not a
Speaker 4: lot of guidance from the Fed.
Speaker 3: Well, you know, the dot plot is something that I
Speaker 3: at times I'm glad we have it, and in times
Speaker 3: it's more of a frustrat that we have to fill
Speaker 3: it out.
Speaker 1: Because there's so much uncertainty about the economic outlook. Over
Speaker 1: the past year or.
Speaker 3: Two, I've been surprised at the resilience of the US
Speaker 3: economy in the face of seemingly quite high policy rates.
Speaker 3: Yet the labor market has stayed strong and the economic
Speaker 3: growth continues to surprise us. So for me, I've been
Speaker 3: asking questions about where's the neutral rate for the.
Speaker 1: Last year or two. That's not about the election.
Speaker 3: That's just about how the economy has been performing over
Speaker 3: the past year or two. And so you know, for example,
Speaker 3: there's been revisions that suggests that productivity is now higher
Speaker 3: than it had been in prior years. If that higher
Speaker 3: productivity environment is maintained, that would tell me we're probably
Speaker 3: in a somewhat higher neutral rate environment. Again, that's not
Speaker 3: about the election. That's just about how the economy has
Speaker 3: actually been performing. And so for me as a policymaker,
Speaker 3: that's what's leading to my own uncertainty about where's our
Speaker 3: ultimate destination. And I think that people are raising questions
Speaker 3: about what is the new administration going to do, what
Speaker 3: is the new Congress going to do? I think that's
Speaker 3: also adding uncertainty about ultimately what's the growth trajectory of
Speaker 3: the US economy.
Speaker 4: Well, Tom Barkin said yesterday your colleague from the Richmond
Speaker 4: Fed that right now, there's no way to know, so
Speaker 4: one has to just kind of assume that things are
Speaker 4: going to be maybe stuck inflation stuck above two percent.
Speaker 1: Would you join in that sentiment.
Speaker 3: I'm not sure that I'm ready to say that inflation
Speaker 3: is stuck above two percent. I think it's right now
Speaker 3: running in the mid twes on a PCE basis. And
Speaker 3: as I said earlier, goods inflation is backed down. Services
Speaker 3: inflation is tied to wages, and wages are gently trending down.
Speaker 3: And housing inflation, we know, is going to take a
Speaker 3: couple of years before completely before the new leases roll
Speaker 3: all the way through the housing inflation. So I have
Speaker 3: confidence that inflation is headed in the right direction.
Speaker 1: Is it headed there fast enough? Do we want it
Speaker 1: to get there more quickly? You know?
Speaker 3: We will see, but ultimately that and the labor market
Speaker 3: are going to guide our policy decisions.
Speaker 5: Well. Back in September, on the labor market, you said
Speaker 5: that the balance of risks had shifted towards a more
Speaker 5: weakening labor market. Do you think we've backed off that risk?
Speaker 5: Not as acute as it was since we've had the
Speaker 5: data since September.
Speaker 3: Yeah, we had seen some data piling up up until
Speaker 3: that September meeting which was pretty much pointed in one direction,
Speaker 3: which was a softening labor market. We then had a
Speaker 3: surprise and the other way. The labor market looks stronger,
Speaker 3: but then a reversal in the subsequent job report, and
Speaker 3: so I still think the labor market is softening. A
Speaker 3: four point one percent unemployment rate is a good unemployment rate.
Speaker 3: It's a good labor market. It's not as tight as
Speaker 3: it was a year ago or two years ago.
Speaker 1: So it's unquestioned that it has been softening.
Speaker 3: And right now we're in a good place in the
Speaker 3: labor market and we want to keep it there. You know,
Speaker 3: I do a lot of outreach to businesses large and
Speaker 3: small around my region, as well as labor unions around
Speaker 3: my region. Generally, what I hear is costious optimism. People
Speaker 3: feel good about the outlook, but there are some trends
Speaker 3: that it's slowly softening, and we just want to watch
Speaker 3: that carefully.
Speaker 2: Know the election, We've got to talk about the election.
Speaker 2: And I know it's a difficult moment for the Federal Reserve.
Speaker 2: I think it's a difficult moment for munating policy makers
Speaker 2: worldwide for that matter. The chairman down with it in
Speaker 2: the news conference.
Speaker 1: It's pretty clear.
Speaker 2: We don't speculate, we can't make assumptions. But you're at
Speaker 2: the risk management business, and you've been in the risk
Speaker 2: management business for a long time. It predates your experience
Speaker 2: at the Federal Reserve. Do you think we've introduced two
Speaker 2: way risk in twenty twenty five, and when you think
Speaker 2: about the bounce of risk, does that call for slow
Speaker 2: approach to any movement monetary policy one way or the other?
Speaker 1: Well, two way risk, I think we've already had two
Speaker 1: way risks.
Speaker 3: So we've got risks of the labor market continuing to
Speaker 3: soften and over softening, and then we've got risks of
Speaker 3: inflation potentially getting stuck. I'm not seeing a lot of
Speaker 3: upside risks yet, we don't know what's going to get
Speaker 3: it acted. I'm not seeing a lot of upside risk
Speaker 3: that inflation is going to take off from here. The
Speaker 3: bigger risk that I'd be concerned about in the inflation
Speaker 3: front is just if we're landing it around a two
Speaker 3: and a half percent level instead of back down to
Speaker 3: two percent level. I think that those risks existed before
Speaker 3: the election, and I think that there continues to be
Speaker 3: uncertainty now and we need to just be take our time,
Speaker 3: let the data come to us, and let that guide us. Ultimately,
Speaker 3: for me, this goes back to the discussion we had
Speaker 3: a moment ago about where's the neutral rate. There's this
Speaker 3: uncertainty in my mind about where the neutral rate is,
Speaker 3: and the longer the economy continues to exceed expectations, the
Speaker 3: more signal I take that we must not be as
Speaker 3: restrictive as I would have assumed.
Speaker 6: FED staff analyzed though, during the first iteration of Trump,
Speaker 6: the impact of the tariffs, and everyone coalesce around this
Speaker 6: idea that there is a one off increase in inflation.
Speaker 6: You can look through it. It wasn't going to be
Speaker 6: this vicious cycle and ongoing inflation threat. Did you agree
Speaker 6: with that assessment at the time, and do you still
Speaker 6: think that that's what tariffs could do.
Speaker 1: In terms of inflation. I agree with that assessment at
Speaker 1: the time.
Speaker 3: I still agree with that, but I think your prior
Speaker 3: guest touched on it, which is it really depends on
Speaker 3: what the other countries end up doing. If there ends
Speaker 3: up being a tip for tat and one country raises tariffs,
Speaker 3: they respond and you go.
Speaker 1: Back and forth.
Speaker 3: In definitely that could lead to a longer term imprint
Speaker 3: on inflation and potentially inflation expectations. And of course we
Speaker 3: don't know what our own tariffs are going to be,
Speaker 3: let alone what other countries are going to respond with,
Speaker 3: and so we just need to be patient.
Speaker 4: And see I had a note come in from one
Speaker 4: of the Wall Street analysts that had a line that
Speaker 4: I thought was really valid, and that is that if
Speaker 4: you're going to forecast inflation, you have to have a
Speaker 4: theory of inflation and what's causing inflation. We've got relatively
Speaker 4: strong labor markets right now, and we've got concern about inflation.
Speaker 4: Real interest rates just keep rising and they're working in
Speaker 4: opposition to your rate cuts. What's your theory of inflation
Speaker 4: and how come we're seeing this kind of real rate reaction.
Speaker 3: Well, I've done a lot of soul searching on why
Speaker 3: I missed the inflation run up in the first place.
Speaker 3: I was surprised on the run up. I was also
Speaker 3: surprised on the disinflation that followed it. And the one
Speaker 3: thing that's been constant is it was not the labor market.
Speaker 1: On the run up or the disinflation.
Speaker 3: It was mostly supply factors, and so supply chains got
Speaker 3: gummed up that took a lot longer to resolve.
Speaker 1: The inflation took off.
Speaker 3: You the war in Ukraine also pushing inflation up, and
Speaker 3: then many of those factors unwound or didn't get worse,
Speaker 3: bringing inflation back down. So monetary policies role, in my
Speaker 3: judgment in this episode has been to keep in long
Speaker 3: run inflation expectations anchored, and it has provided some gentle
Speaker 3: cooling to the labor market. I don't think the supply
Speaker 3: factors are what have caused the labor market to gently cool.
Speaker 3: I do think monetary policy has been doing that. And
Speaker 3: so you put all that together, it says that when
Speaker 3: I thought we were applying two feet on the brakes
Speaker 3: of the economy with monetary policy, we might only have
Speaker 3: been applying one foot on the brake, and so this
Speaker 3: goes back to where ultimately are we going to settle.
Speaker 3: We're going to have to let the economy guide us.
Speaker 4: We are now paying as much attention to CPI again
Speaker 4: as we are to the labor market. But the labor
Speaker 4: market comes up in early December. We had a really
Speaker 4: really strong September and a really really weak October. You
Speaker 4: where is the labor market as far as you're concerned,
Speaker 4: I think.
Speaker 3: The labor market is in a good place right now. Again,
Speaker 3: the anecdotes that I get, I look at the data,
Speaker 3: the official statistics, which always have uncertainty. There's even more
Speaker 3: uncertainty about the labor market statistics, not just because of
Speaker 3: the hurricane and the Boeing strike, but because of the
Speaker 3: large immigration flows, which are we're not exactly sure how
Speaker 3: big they are and their time varying. So what is
Speaker 3: this month's break even level of job growth? You know,
Speaker 3: your guest is as good as mine. So I look
Speaker 3: at the official statistics, and then I marry it to
Speaker 3: what we're all here in my colleagues and I from
Speaker 3: all of our contacts around the country. The labor market
Speaker 3: right now is strong it's a healthy labor market. Jobs
Speaker 3: are available, businesses are feeling good. We want to keep
Speaker 3: it that way, and.
Speaker 1: So as we get the data in, I'm going to
Speaker 1: continue to do.
Speaker 3: My own outreach, and all of the other presidents are
Speaker 3: going to do their outreach to the businesses large and small,
Speaker 3: and labor groups to get a sense of is the
Speaker 3: labor market cooling slowly, is it heating up, or is
Speaker 3: it cooling quickly? And that will those will be important
Speaker 3: judgments into our policy deliberations.
Speaker 5: Your former colleague Bill Dudley wrote a Bloomberg opinion piece
Speaker 5: earlier this week basically saying that there's this possibility that
Speaker 5: Trump enacts policy quickly and forced lye in a way
Speaker 5: that doesn't give the Fed enough time to respond and
Speaker 5: without the proper tools to respect. Is that a concern
Speaker 5: you also share.
Speaker 3: I think fiscal policy is always an input into our
Speaker 3: deliberations and into our analysis and assessment of the economy.
Speaker 3: I don't think that's new now, And it's not just
Speaker 3: US fiscal policy. It's what happens with other countries, what
Speaker 3: happens with our trading partners, and so that type of
Speaker 3: uncertainty we're used to dealing with it. Obviously, we would
Speaker 3: like to have less uncertainty. That'd be great, but it's
Speaker 3: the world that we live in, and we will take
Speaker 3: all the information we can as we get it and
Speaker 3: incorporate it into our thinking.
Speaker 6: Speaking of uncertainty, there's been a lot of concern about
Speaker 6: what Trump two point zer would mean in tern of
Speaker 6: job voting the FED and how he felt about j.
Speaker 3: Powell.
Speaker 6: The FOMC had this plan during the first iteration of
Speaker 6: Trump that maybe they even move Powell to chair of
Speaker 6: the FOMC if he was going to take over the
Speaker 6: chairmanship of the actual FED. Would you basically all act
Speaker 6: as a group to potentially thwart anything that was coming
Speaker 6: at you that would negate the FED independence.
Speaker 1: We are all.
Speaker 3: Committed to our dual mandate goals, everybody around the table,
Speaker 3: all of my colleagues, stable prices and maximum deployment. So
Speaker 3: number one, we're all committed to those goals. Number two,
Speaker 3: I don't think those goals are controversial. I think everybody
Speaker 3: across the political spectrum wants us to get inflation all
Speaker 3: the way back down to two percent and wants to
Speaker 3: keep a strong labor market. So I think that also
Speaker 3: provides us a lot of support. And then there's built
Speaker 3: in continuity into the structure of the FED that Congress
Speaker 3: designed governors serve up to fourteen year terms. The presidents
Speaker 3: are independent, the presidents of the twelve reserve banks. These
Speaker 3: structures help us provide continuity. I'm confident that between the
Speaker 3: people who are there are commitment to our dual mandate
Speaker 3: goals and the structures that are in place, I'm confident
Speaker 3: that we will do the right thing and focus on
Speaker 3: the economy.
Speaker 4: The housing market. How do you explain what's going on
Speaker 4: the fact that prices aren't coming down and if you
Speaker 4: keep rates higher than anticipated, We've already seen mortgage rates
Speaker 4: go up since you started cutting the housing market dead well, the.
Speaker 3: Housing market as I've studied it, and this is a
Speaker 3: you all around the country, the lack of affordability not
Speaker 3: just for low income workers, but for middle class families
Speaker 3: and more. It's really one that we've underbuilt housing for
Speaker 3: the last decade following the Great Financial Crisis. We just
Speaker 3: structurally underbuild housing. So there's a sense a shortage. And
Speaker 3: as I think about back to the notion of a
Speaker 3: neutral interest rate, think about a neutral mortgage rate. If
Speaker 3: we have structurally underbuilt housing, and there's a lot of
Speaker 3: demand for housing. What interest rate is going to clear
Speaker 3: that market? All else being equal, you would think a higher.
Speaker 1: Interest rate will clear that market.
Speaker 3: And so I think the housing market has its own
Speaker 3: unique dynamics that are going on that are driving these
Speaker 3: more than just a macroeconomic landscape and more than just
Speaker 3: monetary policy.
Speaker 4: So the FED raises its hands and says, it's not
Speaker 4: something we can fix.
Speaker 1: Yeah, we can't fix it.
Speaker 3: I mean if we said we're going to cut interest
Speaker 3: rates to try to support housing affordability, setting aside the
Speaker 3: rest of our goals, what would that probably do? That
Speaker 3: would probably push up the price of housing, and so
Speaker 3: would that actually improve affordability? And so I don't think
Speaker 3: monetary policy is well suited to address the structural issues
Speaker 3: that are going on in the housing market.
Speaker 2: We've touched on absolutely everything. Can we finish on financial markets?
Speaker 1: Sure?
Speaker 2: You know them?
Speaker 4: Well?
Speaker 2: Are you worried about coming into an asset bubble?
Speaker 1: You know?
Speaker 3: I always go back to when chair then Chairman Green
Speaker 3: spent in nineteen ninety five declared irrational and xuberant. So
Speaker 3: nineteen ninety five you declared it, and the stock market
Speaker 3: went out for the next four years. I look at
Speaker 3: that episode and think if the FED had tried to
Speaker 3: use monetary policy to address that bubble, it would have
Speaker 3: done more harm to the economy than the fairly mild
Speaker 3: recession that followed when the tech bubble burst. And so
Speaker 3: I just think monetary policy is the wrong tool to
Speaker 3: try to address asset bubbles.
Speaker 2: Do you think there's something that needs to be addressed.
Speaker 3: Well, you know, bubbles are easy to spot in hindsight.
Speaker 3: If we really are in a higher productivity environment, if
Speaker 3: we're in a higher growth environment and corporate earnings are
Speaker 3: going to continue to climb, one might look back and say, hey,
Speaker 3: these asset prices are not irrational. So it's hard to
Speaker 3: judge right now if I knew where productivity was going
Speaker 3: to be able to give you a more definitive answer.
Speaker 2: Just look at the markets right now. Equity is very
Speaker 2: close to old time highs. We've got credit spreads that
Speaker 2: are at incredibly tight levels for investment grade, tight to
Speaker 2: than anything we've seen so far this century. For high yield,
Speaker 2: I think you've got to go back to PREGFC and
Speaker 2: you know what happened next. We kind of interest rates
Speaker 2: into that we have authorities down in Washington, d C.
Speaker 2: It's some second administration that could be cutting taxes going
Speaker 2: into that as well. What is on your rate down
Speaker 2: with regards to that, What would you watch to say,
Speaker 2: actually something coming on here that maybe we need to
Speaker 2: pay a little bit more attention to well.
Speaker 3: From a financial stability perspective, traditionally, the biggest sources of
Speaker 3: financial instability are leverage and maturity transformation, and the intersection
Speaker 3: of those two.
Speaker 1: That's why banks are inherently risky. Leverage tend to want
Speaker 1: or more.
Speaker 3: They take overnight money and then they lend long into it.
Speaker 1: So, for example, a.
Speaker 3: Lot of people have looked at private credit and said,
Speaker 3: this is a huge growing asset class.
Speaker 1: Isn't as scary as I've looked into it.
Speaker 3: They seem to be much less levered than banks, and
Speaker 3: they generally have longer term funding. On those two primary
Speaker 3: dimension of financial instability, leverage and maturity transformation, it doesn't
Speaker 3: seem to be riskier than banks, probably less risky than banks.
Speaker 3: So we continue to look for leverage, we continue to
Speaker 3: look for maturity transformation.
Speaker 2: No smile as always, good to see you, Good to
Speaker 2: see you, Thanks for tim Thank you sir, Neil Kashcaneri
Speaker 2: there the Minneapolis Fed president