WEBVTT - Fed’s Miran Talks Neutral Rate, Tight Policy, Rate Cuts

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<v Speaker 1>Heading into the opening, let's turn to the Federal Reserve.

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<v Speaker 1>The newest Federal Reserve Governor, Stephen Myron, making the case

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<v Speaker 1>for aggressively luring interest rates to avoid damaging the economy,

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<v Speaker 1>diverging from some other FMC members, and pleased to say

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<v Speaker 1>that joining us this morning life from the Federal Reserve

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<v Speaker 1>is Governor Myron himself. Governor, Welcome to the program, sir.

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<v Speaker 1>We've got tons of time to talk about what's going

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<v Speaker 1>to happen next, your force on the labor market, the

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<v Speaker 1>balance of risk, the broader economy. I actually wanted to

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<v Speaker 1>lead the conversation with this one. Governor. What was your

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<v Speaker 1>experience like, I'm sure this was unexpected twelve months ago.

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<v Speaker 1>What was it like walking into the room and was

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<v Speaker 1>it different to what you expected?

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<v Speaker 2>Good morning, and thanks for having me. It's great to

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<v Speaker 2>see you again. Look, you know, walking into the room,

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<v Speaker 2>you know I had had a good briefing ahead of

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<v Speaker 2>time about what the meeting would what the meeting would

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<v Speaker 2>be like, and so that was very helpful. But I

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<v Speaker 2>will say that everyone was extremely friendly and welcoming and

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<v Speaker 2>kind and collegial, and I really appreciated that. And you know,

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<v Speaker 2>it's important to understand that the FMC is a body,

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<v Speaker 2>the Federal Open Mark Committee as a body that makes

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<v Speaker 2>decisions by arguing on the merits of the economics and

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<v Speaker 2>the economics and the merits of policy. And that's how

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<v Speaker 2>it was, and everyone was very collegial and airing their views,

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<v Speaker 2>and I the same, and that's how it will continue

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<v Speaker 2>to be. You know, we make policy, as the chairman

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<v Speaker 2>said last week, by persuasion, and so I will continue

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<v Speaker 2>to try to lay up my views and make the

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<v Speaker 2>case as best as I can.

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<v Speaker 1>Governor, I essentially got the opportunity to articulate your argument.

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<v Speaker 1>Just how much daylight did you sense was there was

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<v Speaker 1>between you and everyone else on the committee?

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<v Speaker 2>Well, I mean, you know, it's sort of funny. If

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<v Speaker 2>you look at the dots and the summary of economic projections,

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<v Speaker 2>you know, obviously there's a divergence between my projection for

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<v Speaker 2>appropriate policy for twenty twenty five versus where the weight

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<v Speaker 2>of everyone else's is. But if you look at next

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<v Speaker 2>year in the year after, you know, I'm sure I'm

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<v Speaker 2>still on the low end, But you know, there's not

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<v Speaker 2>really that much daylight between all the rest of the

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<v Speaker 2>dots and myself and following years. So it's really just

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<v Speaker 2>about the speed where which we come down to what's

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<v Speaker 2>closer to neutral.

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<v Speaker 1>Well, let's get into the neutral argument. I think that's

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<v Speaker 1>what separates you from a lot of people. So you've

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<v Speaker 1>got it in the mid twos, governor, and you think

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<v Speaker 1>we should get there quickly. Can you just build out

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<v Speaker 1>why you believe that's the case and why we should

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<v Speaker 1>get there so fast?

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<v Speaker 2>Sure? So, look, you know, I discussed a number of

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<v Speaker 2>forces which have kicked in over the course of this

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<v Speaker 2>year and which are I think can start contrast to

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<v Speaker 2>where they were last year. So I've argued that neutral

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<v Speaker 2>was higher in the past than it is now, and

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<v Speaker 2>that neutral was higher for a variety of reasons. But

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<v Speaker 2>I've highlighted recently fiscal policy, you know, sort of driving

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<v Speaker 2>up net national borrowing, decreasing net national savings, as well

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<v Speaker 2>as immigration policy driving what was the biggest positive population

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<v Speaker 2>growth shock in my lifetime and has now turned into

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<v Speaker 2>the biggest negative population growth shock in my lifetime in

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<v Speaker 2>very rapid succession relative to how changes in population growth

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<v Speaker 2>you normally normally occur in the data, and so to me,

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<v Speaker 2>when you have huge swings in that national safe driven

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<v Speaker 2>by fiscal policy and you have huge swings in population

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<v Speaker 2>growth driven by changes to border policy. It would be

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<v Speaker 2>bizarre for me to think that that wouldn't have implications

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<v Speaker 2>for the fundamental structure of the economy that gets reflected

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<v Speaker 2>for montey policy in the neutral rate. So my view

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<v Speaker 2>is that neutral was higher last year because of these reasons,

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<v Speaker 2>and so last year policy was not as tight as

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<v Speaker 2>a lot of people believed. And now neutral has come

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<v Speaker 2>down or is in the process of coming down, and

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<v Speaker 2>now neutral and now policy is more tight than people believe.

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<v Speaker 2>And this has happened recently. You know, these policies didn't change,

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<v Speaker 2>you know, sort of overnight. They've been kicking in over

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<v Speaker 2>the course of the year. And that means that policy

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<v Speaker 2>is becoming tighter every day as these policies continue to

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<v Speaker 2>kick in. And my view is not one of enormous

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<v Speaker 2>economic pessimism. You know, I don't think the economy is

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<v Speaker 2>about to create or I don't think the labor market's

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<v Speaker 2>about to fall off a cliff. However, the neutral rate

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<v Speaker 2>is drifting down, and as a result of that, it's

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<v Speaker 2>in comment upon policy to adjust in response. And the

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<v Speaker 2>longer that policy stayed isccessively excessively restrictive, the greater the

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<v Speaker 2>risks to the downside for the economy. If policy stays

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<v Speaker 2>excessively restrictive for too long, then you do get to

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<v Speaker 2>in a situation in which you have a meaningful and

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<v Speaker 2>meaningful increase in unemployment rate and a failure of the

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<v Speaker 2>employment man data.

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<v Speaker 1>So, Governor, that's the tension. I think in your view,

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<v Speaker 1>that's worth exploring just a little bit more. On the

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<v Speaker 1>one hand, you don't think the economies at risks are

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<v Speaker 1>breaking down, but you also think we are excessively tight

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<v Speaker 1>at the moment and getting tighter. There are some people

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<v Speaker 1>who would say, and we've had this conversation around the

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<v Speaker 1>table this morning, if we were as tight as you're suggesting,

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<v Speaker 1>why is the market within one percent of record highs?

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<v Speaker 1>Why credit spreads super tight? And why does this economy

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<v Speaker 1>still doing Okay?

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<v Speaker 2>Yeah, so that's a perfectly natural thing to ask. Sorry,

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<v Speaker 2>and let me see, let me say two things. One,

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<v Speaker 2>I don't think that all financial conditions are universally loose

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<v Speaker 2>like that. In particular, if you look at the housing market,

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<v Speaker 2>I think it's in quite a different state than you know,

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<v Speaker 2>sort of some financial markets and you know, sort of

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<v Speaker 2>security markets. So I don't think that that's necessarily a

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<v Speaker 2>whole stick look at the world of financial conditions in

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<v Speaker 2>the economy. But even that aside, I think that, you know,

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<v Speaker 2>people in financial markets tend to focus a lot on

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<v Speaker 2>monetary policy because interest rates are you know, sort of

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<v Speaker 2>huge tradable instruments, right, But there's so much more that

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<v Speaker 2>goes into determining economic growth and the state of the

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<v Speaker 2>economy and inflation and employment than monetary policy. And I

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<v Speaker 2>think that attributing all changes in financial assets to monetary

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<v Speaker 2>policy can be a mistake. And in particular, that's what

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<v Speaker 2>I tried to do in my speech, you know, was

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<v Speaker 2>to draw out some of these some of these effects

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<v Speaker 2>from non monetary policies that are affecting the economy and

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<v Speaker 2>of course therefore also financial markets. And so if you

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<v Speaker 2>have changes in tax policy, right, like significant incentives for

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<v Speaker 2>investing that lower the effective tax rate on capital, of

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<v Speaker 2>course that's going to get reflected into capital assets. If

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<v Speaker 2>you have significant changes to the regulatory environment where you're

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<v Speaker 2>removing barriers to operations that companies can make more more cheaply,

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<v Speaker 2>which by the way, is disinflationary pushes at the apple gap,

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<v Speaker 2>then of course that's also going to be reflected in

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<v Speaker 2>asset markets. So I think it's a mistake to conflate

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<v Speaker 2>the state of financial conditions with monte policy. They're connected,

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<v Speaker 2>they're related, they affect each other, but they're not exactly

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<v Speaker 2>the same thing. And in the speech, I go line

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<v Speaker 2>by line through these different items. And the reason why

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<v Speaker 2>monetary policy doesn't have to react to the hawkish side

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<v Speaker 2>in response to these act into these policy changes is

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<v Speaker 2>because they push out the supply side of the economy

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<v Speaker 2>at the same time that they push out demand. And

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<v Speaker 2>so if you're increasing supply and demand at the same time,

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<v Speaker 2>there's no change to the apput gap. And of course

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<v Speaker 2>it's Montari's policy job at the end of the day

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<v Speaker 2>to be balancing the apple gap, to be balancing aggregate

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<v Speaker 2>supply and aggregate demandity economy so it doesn't overheat or underheat.

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<v Speaker 3>I think there are a lot of people, Governor Myron,

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<v Speaker 3>who'd agree with you that probably the neutral rate is

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<v Speaker 3>quite a bit below where we are now. You said,

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<v Speaker 3>even the other FED governors did seem to agree with that,

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<v Speaker 3>but not necessarily the speed. And I'm still unclear why

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<v Speaker 3>do you think it is so important to get rates

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<v Speaker 3>down by one hundred and twenty five or one hundred

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<v Speaker 3>five one hundred and fifty basis points more this year

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<v Speaker 3>if inflation is still running hot and you're not seeing

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<v Speaker 3>anything alarming in the underlying economy.

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<v Speaker 2>Yeah, so this year is merely a function of where

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<v Speaker 2>the calendar is. So my view is that policy is

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<v Speaker 2>quite restrictive, and so I'd like to adjust quickly to

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<v Speaker 2>get back to a more neutral area. Right, that just

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<v Speaker 2>means a series of fifties until you get until you

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<v Speaker 2>get much closer to zero. The fact that it's this

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<v Speaker 2>year is just a function, just to function of the calendar.

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<v Speaker 2>But again it comes back to the longer that you

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<v Speaker 2>stay restrictive, the greater the risks. And let me put

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<v Speaker 2>it this way, like it was just a few years

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<v Speaker 2>ago that we were having endless conversations about declining population

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<v Speaker 2>growth rates in the whole world's becoming Japan in terms

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<v Speaker 2>of interest rate profiles. Right, those forces are still real,

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<v Speaker 2>those dynamics are still real. They didn't go away. Those channels,

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<v Speaker 2>you know, those channels by which population growth affects neutral

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<v Speaker 2>rates didn't disappear. I would rather react, I would rather

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<v Speaker 2>act proactively. Right, And sort of we know that we

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<v Speaker 2>just had the biggest population growth shock in many people's lifetimes,

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<v Speaker 2>mine included. I would we know what the consequences of

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<v Speaker 2>those are Economically, I would rather act proactively in lower

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<v Speaker 2>rates as a result ahead of time, rather than wait

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<v Speaker 2>for some giant catastrophe to occur, because you suddenly wake

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<v Speaker 2>up and find out that you are sort of resuming

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<v Speaker 2>those dynamics. In my mind, if you wait to sort

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<v Speaker 2>of to see the result of that, you have waited

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<v Speaker 2>too long, and there will be there will have been

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<v Speaker 2>a potentially quite material downside myst to the employment mandate.

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<v Speaker 3>A lot of people on the show have been wondering

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<v Speaker 3>what the reaction mechanism is going to be for a

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<v Speaker 3>federal reserve. This does start to see inflation as transitory.

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<v Speaker 3>Once again, the idea that we have been above two

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<v Speaker 3>percent the two percent target for the federal reserve for

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<v Speaker 3>fifty three consecutive months, for more than four years. If

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<v Speaker 3>there is an upsurge in inflation, how long are you

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<v Speaker 3>willing to look through that? If you are cutting rates

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<v Speaker 3>before you say, hold on a second, maybe we need

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<v Speaker 3>to stop.

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<v Speaker 2>Yeah. So I would want to understand why there was

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<v Speaker 2>an ubsurge in inflation and what was driving it, and

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<v Speaker 2>and then sort of think about whether that shock is

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<v Speaker 2>likely to be persistent or whether the shock is likely

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<v Speaker 2>to be transitory. And it's the nature. It's the nature

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<v Speaker 2>of the shock. It's not just as inflation higher for

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<v Speaker 2>a certain number of months, it's why is it higher

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<v Speaker 2>or why is it lower? And how long are those

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<v Speaker 2>and how long are those shocks likely to persist? And

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<v Speaker 2>if you have a situation in which inflation is much

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<v Speaker 2>higher because there's you know, sort of let's say a

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<v Speaker 2>very significant expansion in national borrowing that drives up demand,

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<v Speaker 2>could be driven by fiscal it could be driven by

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<v Speaker 2>something else. That might be the type of thing that

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<v Speaker 2>you would expect to be to be more persistent. In

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<v Speaker 2>my mind, if you have the type of shock that's

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<v Speaker 2>driven by a you know, basically one off change to

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<v Speaker 2>tax rates, right, whether that's a vat tax or tariffs

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<v Speaker 2>or anything else, you know, that, in my mind is

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<v Speaker 2>not the type of shock that would lead you to

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<v Speaker 2>think that inflation is is going to be sticky for

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<v Speaker 2>a long period of time. And in fact, there's you know,

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<v Speaker 2>most central banks around the world, I think actually all

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<v Speaker 2>of them would sort of you know, encounter this in

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<v Speaker 2>a much more direct manner through changes in value at taxes,

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<v Speaker 2>and they always look through them, you know, they always say, Okay,

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<v Speaker 2>look the VAT went up or the VAT went down,

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<v Speaker 2>and that's going to affect the inflations stistics for a

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<v Speaker 2>period of time. But then we all know that this

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<v Speaker 2>was basically a fiscally mandated price change, and monetary policies

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<v Speaker 2>shouldn't respond necessarily to fiscally mandated price changes because that's

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<v Speaker 2>not indicative of changes to the underlying supply demand balance

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<v Speaker 2>in the economy, which ultimately drives the type of persons

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<v Speaker 2>in inflation that the Central Bank cares about.

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<v Speaker 4>Governor Martin, I'd love to get your thoughts a little

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<v Speaker 4>bit more deeper on housing this thing. Matt Misk and

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<v Speaker 4>Neil Dudda have talked a lot on this program about

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<v Speaker 4>going into next year. Do you think the housing market

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<v Speaker 4>will weigh on a deceleration of inflation? Is that part

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<v Speaker 4>of your thesis on inflation coming down?

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<v Speaker 2>Yeah? I mean it explicitly is I mean? Look, you know,

0:10:43.040 --> 0:10:46.560
<v Speaker 2>supply and demand dominates all things economically, right, and if

0:10:46.600 --> 0:10:50.520
<v Speaker 2>you're increasing the demand for housing by dramatically increasing population

0:10:50.640 --> 0:10:53.720
<v Speaker 2>growth without a material increase in the supply of housing

0:10:53.760 --> 0:10:56.200
<v Speaker 2>at the same time, of course, you are going to

0:10:56.240 --> 0:10:59.880
<v Speaker 2>get upward pressure on shelter inflation, and then vice versa.

0:11:00.040 --> 0:11:03.160
<v Speaker 2>If you start decreasing population growth because of a change

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<v Speaker 2>in border policies without destroying shelter supply, or if shelter

0:11:07.360 --> 0:11:09.280
<v Speaker 2>supply keeps an expanding at a rate that it has

0:11:09.320 --> 0:11:12.920
<v Speaker 2>been in previous years, then you get a relative change

0:11:13.000 --> 0:11:17.120
<v Speaker 2>in shelter inflation once again. So it's just it's simple,

0:11:17.240 --> 0:11:19.160
<v Speaker 2>you know, it's simple supply and demand. If we have

0:11:19.760 --> 0:11:24.040
<v Speaker 2>a material downward population shock because we have negative net migration,

0:11:24.840 --> 0:11:27.400
<v Speaker 2>that's an increase in the supply of shelter. And I

0:11:27.440 --> 0:11:29.440
<v Speaker 2>think that the study that I cited in the speech

0:11:29.440 --> 0:11:33.280
<v Speaker 2>on Monday work where Albert says found that in Needless

0:11:33.280 --> 0:11:35.800
<v Speaker 2>city of one basically that a one percent increase in

0:11:35.920 --> 0:11:39.400
<v Speaker 2>the in the in the number of immigrant renters leads

0:11:39.400 --> 0:11:41.600
<v Speaker 2>to a one percentage point change in the rents.

0:11:41.679 --> 0:11:44.000
<v Speaker 4>Right, But immigration is short term, right, this is a

0:11:44.000 --> 0:11:46.400
<v Speaker 4>short term story. Would you be willing to revise up

0:11:46.480 --> 0:11:49.080
<v Speaker 4>neutral if immigration is not much of a drag?

0:11:51.040 --> 0:11:54.240
<v Speaker 2>Well, I mean, you know, I have good reason for

0:11:54.280 --> 0:11:56.400
<v Speaker 2>expecting that the immigration story is going to persist at

0:11:56.480 --> 0:12:00.080
<v Speaker 2>least for another three and a half years, and I

0:12:00.280 --> 0:12:03.360
<v Speaker 2>quite likely potentially after that also, So I'm not convinced

0:12:03.360 --> 0:12:04.959
<v Speaker 2>that immigration is really a short term story.

0:12:05.120 --> 0:12:06.960
<v Speaker 1>He Governor, just before you go, because I know you've

0:12:07.000 --> 0:12:08.600
<v Speaker 1>got to run. Have you got a taste for this?

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<v Speaker 1>Is this a position you'd like to keep beyond the

0:12:11.720 --> 0:12:12.280
<v Speaker 1>end of this year?

0:12:13.400 --> 0:12:15.720
<v Speaker 2>Look, you know, I love this country and I'm happy

0:12:15.800 --> 0:12:17.280
<v Speaker 2>to serve this country in any way that I'm asked

0:12:17.320 --> 0:12:19.920
<v Speaker 2>to do so. But personal decisions are not decisions that

0:12:19.960 --> 0:12:20.240
<v Speaker 2>I make.

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<v Speaker 1>Governor Maron, appreciate your time. Diplomatic end, Thank you, sir,

0:12:23.440 --> 0:12:25.960
<v Speaker 1>Thank you very much, Governor Maron from the Federal Reserve.

0:12:26.120 --> 0:12:28.199
<v Speaker 1>Are the next views from the FED and his argument

0:12:28.520 --> 0:12:29.920
<v Speaker 1>very much lower neutral rate