Speaker 1: Heading into the opening, let's turn to the Federal Reserve.
Speaker 1: The newest Federal Reserve Governor, Stephen Myron, making the case
Speaker 1: for aggressively luring interest rates to avoid damaging the economy,
Speaker 1: diverging from some other FMC members, and pleased to say
Speaker 1: that joining us this morning life from the Federal Reserve
Speaker 1: is Governor Myron himself. Governor, Welcome to the program, sir.
Speaker 1: We've got tons of time to talk about what's going
Speaker 1: to happen next, your force on the labor market, the
Speaker 1: balance of risk, the broader economy. I actually wanted to
Speaker 1: lead the conversation with this one. Governor. What was your
Speaker 1: experience like, I'm sure this was unexpected twelve months ago.
Speaker 1: What was it like walking into the room and was
Speaker 1: it different to what you expected?
Speaker 2: Good morning, and thanks for having me. It's great to
Speaker 2: see you again. Look, you know, walking into the room,
Speaker 2: you know I had had a good briefing ahead of
Speaker 2: time about what the meeting would what the meeting would
Speaker 2: be like, and so that was very helpful. But I
Speaker 2: will say that everyone was extremely friendly and welcoming and
Speaker 2: kind and collegial, and I really appreciated that. And you know,
Speaker 2: it's important to understand that the FMC is a body,
Speaker 2: the Federal Open Mark Committee as a body that makes
Speaker 2: decisions by arguing on the merits of the economics and
Speaker 2: the economics and the merits of policy. And that's how
Speaker 2: it was, and everyone was very collegial and airing their views,
Speaker 2: and I the same, and that's how it will continue
Speaker 2: to be. You know, we make policy, as the chairman
Speaker 2: said last week, by persuasion, and so I will continue
Speaker 2: to try to lay up my views and make the
Speaker 2: case as best as I can.
Speaker 1: Governor, I essentially got the opportunity to articulate your argument.
Speaker 1: Just how much daylight did you sense was there was
Speaker 1: between you and everyone else on the committee?
Speaker 2: Well, I mean, you know, it's sort of funny. If
Speaker 2: you look at the dots and the summary of economic projections,
Speaker 2: you know, obviously there's a divergence between my projection for
Speaker 2: appropriate policy for twenty twenty five versus where the weight
Speaker 2: of everyone else's is. But if you look at next
Speaker 2: year in the year after, you know, I'm sure I'm
Speaker 2: still on the low end, But you know, there's not
Speaker 2: really that much daylight between all the rest of the
Speaker 2: dots and myself and following years. So it's really just
Speaker 2: about the speed where which we come down to what's
Speaker 2: closer to neutral.
Speaker 1: Well, let's get into the neutral argument. I think that's
Speaker 1: what separates you from a lot of people. So you've
Speaker 1: got it in the mid twos, governor, and you think
Speaker 1: we should get there quickly. Can you just build out
Speaker 1: why you believe that's the case and why we should
Speaker 1: get there so fast?
Speaker 2: Sure? So, look, you know, I discussed a number of
Speaker 2: forces which have kicked in over the course of this
Speaker 2: year and which are I think can start contrast to
Speaker 2: where they were last year. So I've argued that neutral
Speaker 2: was higher in the past than it is now, and
Speaker 2: that neutral was higher for a variety of reasons. But
Speaker 2: I've highlighted recently fiscal policy, you know, sort of driving
Speaker 2: up net national borrowing, decreasing net national savings, as well
Speaker 2: as immigration policy driving what was the biggest positive population
Speaker 2: growth shock in my lifetime and has now turned into
Speaker 2: the biggest negative population growth shock in my lifetime in
Speaker 2: very rapid succession relative to how changes in population growth
Speaker 2: you normally normally occur in the data, and so to me,
Speaker 2: when you have huge swings in that national safe driven
Speaker 2: by fiscal policy and you have huge swings in population
Speaker 2: growth driven by changes to border policy. It would be
Speaker 2: bizarre for me to think that that wouldn't have implications
Speaker 2: for the fundamental structure of the economy that gets reflected
Speaker 2: for montey policy in the neutral rate. So my view
Speaker 2: is that neutral was higher last year because of these reasons,
Speaker 2: and so last year policy was not as tight as
Speaker 2: a lot of people believed. And now neutral has come
Speaker 2: down or is in the process of coming down, and
Speaker 2: now neutral and now policy is more tight than people believe.
Speaker 2: And this has happened recently. You know, these policies didn't change,
Speaker 2: you know, sort of overnight. They've been kicking in over
Speaker 2: the course of the year. And that means that policy
Speaker 2: is becoming tighter every day as these policies continue to
Speaker 2: kick in. And my view is not one of enormous
Speaker 2: economic pessimism. You know, I don't think the economy is
Speaker 2: about to create or I don't think the labor market's
Speaker 2: about to fall off a cliff. However, the neutral rate
Speaker 2: is drifting down, and as a result of that, it's
Speaker 2: in comment upon policy to adjust in response. And the
Speaker 2: longer that policy stayed isccessively excessively restrictive, the greater the
Speaker 2: risks to the downside for the economy. If policy stays
Speaker 2: excessively restrictive for too long, then you do get to
Speaker 2: in a situation in which you have a meaningful and
Speaker 2: meaningful increase in unemployment rate and a failure of the
Speaker 2: employment man data.
Speaker 1: So, Governor, that's the tension. I think in your view,
Speaker 1: that's worth exploring just a little bit more. On the
Speaker 1: one hand, you don't think the economies at risks are
Speaker 1: breaking down, but you also think we are excessively tight
Speaker 1: at the moment and getting tighter. There are some people
Speaker 1: who would say, and we've had this conversation around the
Speaker 1: table this morning, if we were as tight as you're suggesting,
Speaker 1: why is the market within one percent of record highs?
Speaker 1: Why credit spreads super tight? And why does this economy
Speaker 1: still doing Okay?
Speaker 2: Yeah, so that's a perfectly natural thing to ask. Sorry,
Speaker 2: and let me see, let me say two things. One,
Speaker 2: I don't think that all financial conditions are universally loose
Speaker 2: like that. In particular, if you look at the housing market,
Speaker 2: I think it's in quite a different state than you know,
Speaker 2: sort of some financial markets and you know, sort of
Speaker 2: security markets. So I don't think that that's necessarily a
Speaker 2: whole stick look at the world of financial conditions in
Speaker 2: the economy. But even that aside, I think that, you know,
Speaker 2: people in financial markets tend to focus a lot on
Speaker 2: monetary policy because interest rates are you know, sort of
Speaker 2: huge tradable instruments, right, But there's so much more that
Speaker 2: goes into determining economic growth and the state of the
Speaker 2: economy and inflation and employment than monetary policy. And I
Speaker 2: think that attributing all changes in financial assets to monetary
Speaker 2: policy can be a mistake. And in particular, that's what
Speaker 2: I tried to do in my speech, you know, was
Speaker 2: to draw out some of these some of these effects
Speaker 2: from non monetary policies that are affecting the economy and
Speaker 2: of course therefore also financial markets. And so if you
Speaker 2: have changes in tax policy, right, like significant incentives for
Speaker 2: investing that lower the effective tax rate on capital, of
Speaker 2: course that's going to get reflected into capital assets. If
Speaker 2: you have significant changes to the regulatory environment where you're
Speaker 2: removing barriers to operations that companies can make more more cheaply,
Speaker 2: which by the way, is disinflationary pushes at the apple gap,
Speaker 2: then of course that's also going to be reflected in
Speaker 2: asset markets. So I think it's a mistake to conflate
Speaker 2: the state of financial conditions with monte policy. They're connected,
Speaker 2: they're related, they affect each other, but they're not exactly
Speaker 2: the same thing. And in the speech, I go line
Speaker 2: by line through these different items. And the reason why
Speaker 2: monetary policy doesn't have to react to the hawkish side
Speaker 2: in response to these act into these policy changes is
Speaker 2: because they push out the supply side of the economy
Speaker 2: at the same time that they push out demand. And
Speaker 2: so if you're increasing supply and demand at the same time,
Speaker 2: there's no change to the apput gap. And of course
Speaker 2: it's Montari's policy job at the end of the day
Speaker 2: to be balancing the apple gap, to be balancing aggregate
Speaker 2: supply and aggregate demandity economy so it doesn't overheat or underheat.
Speaker 3: I think there are a lot of people, Governor Myron,
Speaker 3: who'd agree with you that probably the neutral rate is
Speaker 3: quite a bit below where we are now. You said,
Speaker 3: even the other FED governors did seem to agree with that,
Speaker 3: but not necessarily the speed. And I'm still unclear why
Speaker 3: do you think it is so important to get rates
Speaker 3: down by one hundred and twenty five or one hundred
Speaker 3: five one hundred and fifty basis points more this year
Speaker 3: if inflation is still running hot and you're not seeing
Speaker 3: anything alarming in the underlying economy.
Speaker 2: Yeah, so this year is merely a function of where
Speaker 2: the calendar is. So my view is that policy is
Speaker 2: quite restrictive, and so I'd like to adjust quickly to
Speaker 2: get back to a more neutral area. Right, that just
Speaker 2: means a series of fifties until you get until you
Speaker 2: get much closer to zero. The fact that it's this
Speaker 2: year is just a function, just to function of the calendar.
Speaker 2: But again it comes back to the longer that you
Speaker 2: stay restrictive, the greater the risks. And let me put
Speaker 2: it this way, like it was just a few years
Speaker 2: ago that we were having endless conversations about declining population
Speaker 2: growth rates in the whole world's becoming Japan in terms
Speaker 2: of interest rate profiles. Right, those forces are still real,
Speaker 2: those dynamics are still real. They didn't go away. Those channels,
Speaker 2: you know, those channels by which population growth affects neutral
Speaker 2: rates didn't disappear. I would rather react, I would rather
Speaker 2: act proactively. Right, And sort of we know that we
Speaker 2: just had the biggest population growth shock in many people's lifetimes,
Speaker 2: mine included. I would we know what the consequences of
Speaker 2: those are Economically, I would rather act proactively in lower
Speaker 2: rates as a result ahead of time, rather than wait
Speaker 2: for some giant catastrophe to occur, because you suddenly wake
Speaker 2: up and find out that you are sort of resuming
Speaker 2: those dynamics. In my mind, if you wait to sort
Speaker 2: of to see the result of that, you have waited
Speaker 2: too long, and there will be there will have been
Speaker 2: a potentially quite material downside myst to the employment mandate.
Speaker 3: A lot of people on the show have been wondering
Speaker 3: what the reaction mechanism is going to be for a
Speaker 3: federal reserve. This does start to see inflation as transitory.
Speaker 3: Once again, the idea that we have been above two
Speaker 3: percent the two percent target for the federal reserve for
Speaker 3: fifty three consecutive months, for more than four years. If
Speaker 3: there is an upsurge in inflation, how long are you
Speaker 3: willing to look through that? If you are cutting rates
Speaker 3: before you say, hold on a second, maybe we need
Speaker 3: to stop.
Speaker 2: Yeah. So I would want to understand why there was
Speaker 2: an ubsurge in inflation and what was driving it, and
Speaker 2: and then sort of think about whether that shock is
Speaker 2: likely to be persistent or whether the shock is likely
Speaker 2: to be transitory. And it's the nature. It's the nature
Speaker 2: of the shock. It's not just as inflation higher for
Speaker 2: a certain number of months, it's why is it higher
Speaker 2: or why is it lower? And how long are those
Speaker 2: and how long are those shocks likely to persist? And
Speaker 2: if you have a situation in which inflation is much
Speaker 2: higher because there's you know, sort of let's say a
Speaker 2: very significant expansion in national borrowing that drives up demand,
Speaker 2: could be driven by fiscal it could be driven by
Speaker 2: something else. That might be the type of thing that
Speaker 2: you would expect to be to be more persistent. In
Speaker 2: my mind, if you have the type of shock that's
Speaker 2: driven by a you know, basically one off change to
Speaker 2: tax rates, right, whether that's a vat tax or tariffs
Speaker 2: or anything else, you know, that, in my mind is
Speaker 2: not the type of shock that would lead you to
Speaker 2: think that inflation is is going to be sticky for
Speaker 2: a long period of time. And in fact, there's you know,
Speaker 2: most central banks around the world, I think actually all
Speaker 2: of them would sort of you know, encounter this in
Speaker 2: a much more direct manner through changes in value at taxes,
Speaker 2: and they always look through them, you know, they always say, Okay,
Speaker 2: look the VAT went up or the VAT went down,
Speaker 2: and that's going to affect the inflations stistics for a
Speaker 2: period of time. But then we all know that this
Speaker 2: was basically a fiscally mandated price change, and monetary policies
Speaker 2: shouldn't respond necessarily to fiscally mandated price changes because that's
Speaker 2: not indicative of changes to the underlying supply demand balance
Speaker 2: in the economy, which ultimately drives the type of persons
Speaker 2: in inflation that the Central Bank cares about.
Speaker 4: Governor Martin, I'd love to get your thoughts a little
Speaker 4: bit more deeper on housing this thing. Matt Misk and
Speaker 4: Neil Dudda have talked a lot on this program about
Speaker 4: going into next year. Do you think the housing market
Speaker 4: will weigh on a deceleration of inflation? Is that part
Speaker 4: of your thesis on inflation coming down?
Speaker 2: Yeah? I mean it explicitly is I mean? Look, you know,
Speaker 2: supply and demand dominates all things economically, right, and if
Speaker 2: you're increasing the demand for housing by dramatically increasing population
Speaker 2: growth without a material increase in the supply of housing
Speaker 2: at the same time, of course, you are going to
Speaker 2: get upward pressure on shelter inflation, and then vice versa.
Speaker 2: If you start decreasing population growth because of a change
Speaker 2: in border policies without destroying shelter supply, or if shelter
Speaker 2: supply keeps an expanding at a rate that it has
Speaker 2: been in previous years, then you get a relative change
Speaker 2: in shelter inflation once again. So it's just it's simple,
Speaker 2: you know, it's simple supply and demand. If we have
Speaker 2: a material downward population shock because we have negative net migration,
Speaker 2: that's an increase in the supply of shelter. And I
Speaker 2: think that the study that I cited in the speech
Speaker 2: on Monday work where Albert says found that in Needless
Speaker 2: city of one basically that a one percent increase in
Speaker 2: the in the in the number of immigrant renters leads
Speaker 2: to a one percentage point change in the rents.
Speaker 4: Right, But immigration is short term, right, this is a
Speaker 4: short term story. Would you be willing to revise up
Speaker 4: neutral if immigration is not much of a drag?
Speaker 2: Well, I mean, you know, I have good reason for
Speaker 2: expecting that the immigration story is going to persist at
Speaker 2: least for another three and a half years, and I
Speaker 2: quite likely potentially after that also, So I'm not convinced
Speaker 2: that immigration is really a short term story.
Speaker 1: He Governor, just before you go, because I know you've
Speaker 1: got to run. Have you got a taste for this?
Speaker 1: Is this a position you'd like to keep beyond the
Speaker 1: end of this year?
Speaker 2: Look, you know, I love this country and I'm happy
Speaker 2: to serve this country in any way that I'm asked
Speaker 2: to do so. But personal decisions are not decisions that
Speaker 2: I make.
Speaker 1: Governor Maron, appreciate your time. Diplomatic end, Thank you, sir,
Speaker 1: Thank you very much, Governor Maron from the Federal Reserve.
Speaker 1: Are the next views from the FED and his argument
Speaker 1: very much lower neutral rate