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Speaker 1: Bloomberg Audio Studios, podcasts, radio news joining.

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Speaker 2: Us around the table. I'm pleased to say here in

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Speaker 2: New York the Fed Governor, Chris Wallach, Governor wantok, good

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Speaker 2: to see us, sir.

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Speaker 3: It's good to see you all again.

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Speaker 2: When we planned this, I thought you'd come in and

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Speaker 2: talk about the labor market, but something else has taken over.

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Speaker 2: What's your assessment of developments in the Middle East and

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Speaker 2: ultimately what it means for you and a committee.

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Speaker 4: Yeah, I mean, I guess that's exactly The thing is,

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Speaker 4: what you're going to see is you're going to see

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Speaker 4: a spike and gasoline prices after the American citizens are

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Speaker 4: going to see when they go to the pump, and

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Speaker 4: they're going to stare at it and be a little

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Speaker 4: shocked in terms of how things go. But for us

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Speaker 4: thinking about policy going forward, this is unlikely to cause

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Speaker 4: sustained inflation. This one reason we don't look at energy

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Speaker 4: prices where we look at core. Core is a better

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Speaker 4: predictor of future inflation. You're going to see this, but

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Speaker 4: once these kind of supply chain issues that you laid out, Lisa,

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Speaker 4: once they unravel, this will start coming back down. So

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Speaker 4: it's kind of a very odd to think about the

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Speaker 4: FEDS maybe changing rates six months from now based on this.

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Speaker 4: If it's unwound in a like as you said, Jonathan,

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Speaker 4: in a couple of weeks or even two months.

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Speaker 3: It's not going to be a big factor down the road.

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Speaker 4: So this is why we never look at energy prices.

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Speaker 4: They bounce up, they come back down. It's not that

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Speaker 4: it's something that we don't feel sympathy for people that

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Speaker 4: that's what they have to pay when they put the

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Speaker 4: gas in their cars. But for us thinking about the

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Speaker 4: longer term in terms of policy, this is something we're

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Speaker 4: just gonna have to kind of put off.

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Speaker 2: Or now, when does it become something bigger?

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Speaker 3: If it's so it.

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Speaker 4: Becomes bigger, if it becomes more permanent, because then what's

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Speaker 4: going to happen. You're going to see this jump in prices,

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Speaker 4: then it'll start bleeding through to other parts of the

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Speaker 4: the economy.

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Speaker 3: Energy is a big part.

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Speaker 4: It feeds into everything else, and then somehow those energy

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Speaker 4: costs get passed along like everything else.

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Speaker 3: Well, that's what we're more worried about.

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Speaker 2: Economists. On any given day, Lisa might myself and they'll

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Speaker 2: talk about the experience of the seven season coming out

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Speaker 2: of the pandemic, and they'll say things like the officials

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Speaker 2: of the fenders of a somewhere, conditions god by some

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Speaker 2: of that. It's not your experience of things.

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Speaker 4: Well, in the seventies, remember we didn't just have one.

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Speaker 4: We had massive oil shocks. If you take seventy three,

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Speaker 4: the price of oil quadrupled overnight.

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Speaker 3: It went from four dollars of barrels at.

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Speaker 4: Twelve dollars a barrow or three, or went from three

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Speaker 4: or whatever the numbers were. But that was a shock,

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Speaker 4: and it never came back down, and then there was

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Speaker 4: another one. Every time he turned around, there was another

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Speaker 4: oil shock. Then I ran oil embargo in seventy nine.

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Speaker 4: So that was kind of the problem with the oil shocks.

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Speaker 4: They just kept coming and coming and coming. So it's

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Speaker 4: not clear this will be one shock after another after another.

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Speaker 4: So that's why I'm more willing to say this is,

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Speaker 4: I hate to say, but more like a one off

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Speaker 4: event than what we saw in the nineteen seventies.

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Speaker 5: Rosenn Rosennadena used to say, it's always something because if

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Speaker 5: it's not just it's not just the oil shocks.

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Speaker 3: It's the whole idea.

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Speaker 5: Now we're going to have a whole new round of

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Speaker 5: tariffs coming through the economy, and we've got this low fire,

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Speaker 5: low higher economy. How long do you think that continues?

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Speaker 5: Does this just push out the time period for companies

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Speaker 5: to sit on their hands not invest because they don't

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Speaker 5: know what's going to happen.

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Speaker 4: Yeah, I mean, this is one of the things I've

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Speaker 4: been concerned about since last June, is how week the

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Speaker 4: labor market has been. There were a lot of factors

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Speaker 4: last summer that we're driving this kind of low higher,

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Speaker 4: low fire. It looked like maybe in January we might

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Speaker 4: be turning a corner. We'll find out today whether that was,

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Speaker 4: as I said last week, signal or noise. But you know,

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Speaker 4: when you're in this world in which the labor market,

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Speaker 4: even with one hundred and thirty thousand jobs, it was

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Speaker 4: really concentrating a couple of sectors eighty percent of the economy,

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Speaker 4: the labor market wasn't doing anything.

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Speaker 3: It was zero negative.

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Speaker 4: So that kind of fragility wouldn't take much for some

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Speaker 4: sort of a serious shock to sort of start pushing

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Speaker 4: people in another direction. Whether this is that kind of

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Speaker 4: shock or not, we'll start finding out.

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Speaker 5: Yeah, it's early, because of course, these are going to

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Speaker 5: be January numbers. But you've been on record as saying

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Speaker 5: you'd like to cut more because you're still worried about

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Speaker 5: where the labor market is. What would it take to

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Speaker 5: get you to back off on that feeling, Because if

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Speaker 5: we get the same sort of numbers we had in December,

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Speaker 5: it still shows very narrow breadth of hiring, and it

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Speaker 5: still shows some reasonably good numbers for hiring.

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Speaker 4: Yeah, the even with the January report, like I said,

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Speaker 4: it was all concentrated in a couple of sectors, So

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Speaker 4: that was good.

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Speaker 3: They were robust.

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Speaker 4: We got a big number, well above everybody's estimate to

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Speaker 4: break even, But the concentration didn't give me a lot

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Speaker 4: of comfort that the economy as a whole was doing

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Speaker 4: really well. So that's where my brain is telling me.

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Speaker 4: The number was good, the economy looks okay, it was

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Speaker 4: above break even, but my guts are telling me it

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Speaker 4: may not be that good. And that's where I'm waiting

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Speaker 4: to see what today's number is. I'm almost certain it's

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Speaker 4: going to get revised down because they have this has

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Speaker 4: been a pattern in January the last few years.

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Speaker 1: A pair of these two ideas, The idea of the

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Speaker 1: oil shock that's creating some concerns about inflation, and then

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Speaker 1: a labor market that kind of is in question, right,

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Speaker 1: is it decelerating or is it reaccelerating. How much has

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Speaker 1: your reaction changed potential to fridays today's report given the

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Speaker 1: fact that we do see energy prices pushing on inflation.

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Speaker 1: In other words, would you be less inclined to cut

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Speaker 1: rates if there is strength that's demonstrated in the labor

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Speaker 1: market today.

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Speaker 4: Yeah, that's kind of what I was hinting at last

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Speaker 4: week that if we get another solid job report, then

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Speaker 4: last month, this month looks like the labor market's turning around.

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Speaker 4: A lot of the downside risk I've been worried about

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Speaker 4: for six months is kind of going away. We got

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Speaker 4: a hot We're going to get a hot PCE number

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Speaker 4: given what we already have seen coming in, that's going

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Speaker 4: to probably print from everything I've seen about a point four. Okay,

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Speaker 4: usually that comes down again. We've had this January effect.

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Speaker 4: We have some more passories of tariffs, but because that

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Speaker 4: inflation's hot, it's going to look even worse now with

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Speaker 4: the oil prices, at least on headline. And then if

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Speaker 4: you get a solid job it does say there's you

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Speaker 4: can sit there and wait, let's.

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Speaker 1: Say the counterfactual. Let's say we don't get a good print.

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Speaker 1: Let's go we see the weakness that you see right

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Speaker 1: now when you talk to people district and that you

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Speaker 1: speak to in the different districts, as well as beyond.

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Speaker 1: How much do you think the FED should react to

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Speaker 1: this because it's sort of the dual mandate is in

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Speaker 1: conflict and absolutely the wrong way.

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Speaker 4: Yeah, I mean, that's the tension we've had for the

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Speaker 4: last years. I've been more worried about the labor market

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Speaker 4: risk the inflation risk. I've always believed inflation was going

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Speaker 4: to come back down once tear if effects passed through.

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Speaker 4: My other colleagues on the committee are much more concerned

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Speaker 4: about the inflation.

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Speaker 3: It's been high for five years.

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Speaker 4: They're not seeing it coming down, and they think the

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Speaker 4: labor market is.

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Speaker 3: All stabilized, it's all supply side.

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Speaker 4: So these are the two different views that people have

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Speaker 4: about thinking about policy. And I was more willing to

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Speaker 4: cut rates because I was more worried about the labor market,

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Speaker 4: not as worried about inflation coming down. But like I said,

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Speaker 4: if the labor market continues to go weak, if this

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Speaker 4: thing comes in. I mean, ADP was promising the other day.

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Speaker 4: So if the labor market is good, inflation's hotter than

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Speaker 4: we think, it's fine to kind of wait another meeting

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Speaker 4: and kind of see. But if we get a bad

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Speaker 4: number or January's revise down to some really low number

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Speaker 4: like ADP got revised in half length marks is just

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Speaker 4: not that good. And so the question is why are

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Speaker 4: you just sitting on your hands? So I could certainly

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Speaker 4: see this meeting going other way depending on the data

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Speaker 4: this week and the CPI next week comes in.

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Speaker 2: I hate to be the ones who asked this question,

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Speaker 2: but what's a good report? Because at eight thirty easton

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Speaker 2: sign but A'll be asking that question aboutselves. What's good

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Speaker 2: to you? What does good look like?

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Speaker 3: Well?

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Speaker 4: I think good would be if you saw another number

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Speaker 4: like January, that would be really good because you're well

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Speaker 4: above everybody's break even estimates at that point, and that'd

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Speaker 4: be two in a row.

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Speaker 3: Looks like it's going through.

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Speaker 4: We got very good numbers off the ISM manufacturing and

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Speaker 4: services this week. That's another indication that maybe things are

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Speaker 4: turning around. So if that's the case, I'm starting to

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Speaker 4: see less downside risk now on the tariff stuff, I

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Speaker 4: still have a view that all the tariff risk is

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Speaker 4: to the downside. I just don't see big increases in

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Speaker 4: tariffs spread all over the place. If anything, they're going

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Speaker 4: to come down. Estimates of this are coming down. Deals

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Speaker 4: are going to potentially get made. So I don't see

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Speaker 4: a lot of terror for risk going even though there's

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Speaker 4: more uncertain there's always the uncertainty. I don't see a

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Speaker 4: lot of price pressures from what we think could happen

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Speaker 4: going forward. So that's going to bring I think that's

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Speaker 4: going to bring inflation down or take pressure off, and

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Speaker 4: it'll take some of the uncertainty off.

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Speaker 5: At some point, well, it becomes a question of what

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Speaker 5: problem are you trying to solve and what tool are

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Speaker 5: you using to do it. How would cutting rates by

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Speaker 5: twenty five or fifty basis points help the labor market.

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Speaker 5: If companies are sitting on their hands because they're still

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Speaker 5: waiting for tariff news and we've got a war going.

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Speaker 4: On, yeah, I mean we can always say, ah, we

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Speaker 4: can't do anything, just sit there.

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Speaker 3: That's not my job.

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Speaker 4: My job is trying to help the economy and achieve

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Speaker 4: our dual mandate. And if the labor market's not looking good,

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Speaker 4: then I have to make this trade off.

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Speaker 5: But does it make a difference to the CEOs?

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Speaker 3: Well, maybe not. I mean that's what I'm saying.

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Speaker 4: We could argue about whether monetary policy has any effect

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Speaker 4: in general on the labor market. There's you know, you

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Speaker 4: go back in economics, back to the eighties and nineties,

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Speaker 4: there's a whole camp people that said marchur policy is

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Speaker 4: completely irrelevant for the economy.

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Speaker 3: So quit wasting your time.

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Speaker 2: You're opening up a very different conversation. Yeah, that's a

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Speaker 2: whole bitt we can spend a long time on. I

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Speaker 2: wanted to squeeze this in. I actually think it's one

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Speaker 2: of the more important topics at the moment. We're not

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Speaker 2: seeing a tightning of financial conditions of material one in

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Speaker 2: public markets. I don't see that in stocks, I don't

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Speaker 2: see that in bonb yeats. I'm wondering what on earth

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Speaker 2: you see in private markets. Because every day there's another

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Speaker 2: headline about another fund, another company struggling to meet redemptions.

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Speaker 2: What is the Federal Reserve assessment of what is happening?

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Speaker 2: Because that is powered this economy, some people might say,

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Speaker 2: in a bigger way than the feeder reserve or for

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Speaker 2: that matter, public markets have.

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Speaker 3: What is going on, Well, there's a couple things.

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Speaker 4: I mean, in general, I'm not I don't see big,

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Speaker 4: really big, widespread problems in the private credit market. What

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Speaker 4: you're seeing is a couple of cases of certainly fraud.

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Speaker 3: Is that fraud widespread? I don't.

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Speaker 4: You know, it's hard to believe that the entire correct

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Speaker 4: private credit market is being driven by fraud or bubble

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Speaker 4: posting of collateral. So these are kind of these one

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Speaker 4: off things that get a lot of headlines, but it's

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Speaker 4: not clear it's systemic. You have to kind of look

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Speaker 4: at whether there are a lot of you know, there's

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Speaker 4: different types of private credit. There's stuff that's in high yield,

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Speaker 4: you know, risky junk bond stuff, and there's other stuff

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Speaker 4: that's better quality in terms of what they're funding.

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Speaker 3: So I don't think as a whole.

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Speaker 4: The private credit market is in any serious trouble. But

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Speaker 4: you're going to have these things popping up here and there.

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Speaker 4: But I don't think there's enough of it that's going

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Speaker 4: to somehow drive down the financial markets and create any

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Speaker 4: kind of financial stability problems.

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Speaker 2: Going to see it all, thank you so longer conversation

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Speaker 2: about your row in the future. Looking forward to that, Governor.

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Speaker 2: Thank you, Federal Zev Governor Chris Waller. There on the economy,

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Speaker 2: the shock in the Middle East and on markets too,