WEBVTT - Federal Reserve Governor Chris Waller Talks War-Related Inflation, Private Credit

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news joining.

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<v Speaker 2>Us around the table. I'm pleased to say here in

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<v Speaker 2>New York the Fed Governor, Chris Wallach, Governor wantok, good

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<v Speaker 2>to see us, sir.

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<v Speaker 3>It's good to see you all again.

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<v Speaker 2>When we planned this, I thought you'd come in and

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<v Speaker 2>talk about the labor market, but something else has taken over.

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<v Speaker 2>What's your assessment of developments in the Middle East and

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<v Speaker 2>ultimately what it means for you and a committee.

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<v Speaker 4>Yeah, I mean, I guess that's exactly The thing is,

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<v Speaker 4>what you're going to see is you're going to see

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<v Speaker 4>a spike and gasoline prices after the American citizens are

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<v Speaker 4>going to see when they go to the pump, and

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<v Speaker 4>they're going to stare at it and be a little

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<v Speaker 4>shocked in terms of how things go. But for us

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<v Speaker 4>thinking about policy going forward, this is unlikely to cause

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<v Speaker 4>sustained inflation. This one reason we don't look at energy

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<v Speaker 4>prices where we look at core. Core is a better

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

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<v Speaker 4>once these kind of supply chain issues that you laid out, Lisa,

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<v Speaker 4>once they unravel, this will start coming back down. So

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<v Speaker 4>it's kind of a very odd to think about the

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<v Speaker 4>FEDS maybe changing rates six months from now based on this.

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<v Speaker 4>If it's unwound in a like as you said, Jonathan,

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<v Speaker 4>in a couple of weeks or even two months.

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

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<v Speaker 4>So this is why we never look at energy prices.

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

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<v Speaker 4>it's something that we don't feel sympathy for people that

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<v Speaker 4>that's what they have to pay when they put the

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<v Speaker 4>gas in their cars. But for us thinking about the

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<v Speaker 4>longer term in terms of policy, this is something we're

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<v Speaker 4>just gonna have to kind of put off.

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<v Speaker 2>Or now, when does it become something bigger?

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<v Speaker 3>If it's so it.

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<v Speaker 4>Becomes bigger, if it becomes more permanent, because then what's

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<v Speaker 4>going to happen. You're going to see this jump in prices,

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<v Speaker 4>then it'll start bleeding through to other parts of the

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<v Speaker 4>the economy.

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<v Speaker 3>Energy is a big part.

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<v Speaker 4>It feeds into everything else, and then somehow those energy

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<v Speaker 4>costs get passed along like everything else.

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<v Speaker 3>Well, that's what we're more worried about.

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

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<v Speaker 2>talk about the experience of the seven season coming out

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<v Speaker 2>of the pandemic, and they'll say things like the officials

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<v Speaker 2>of the fenders of a somewhere, conditions god by some

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<v Speaker 2>of that. It's not your experience of things.

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

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<v Speaker 4>We had massive oil shocks. If you take seventy three,

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<v Speaker 4>the price of oil quadrupled overnight.

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<v Speaker 3>It went from four dollars of barrels at.

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<v Speaker 4>Twelve dollars a barrow or three, or went from three

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<v Speaker 4>or whatever the numbers were. But that was a shock,

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<v Speaker 4>and it never came back down, and then there was

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<v Speaker 4>another one. Every time he turned around, there was another

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<v Speaker 4>oil shock. Then I ran oil embargo in seventy nine.

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<v Speaker 4>So that was kind of the problem with the oil shocks.

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<v Speaker 4>They just kept coming and coming and coming. So it's

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<v Speaker 4>not clear this will be one shock after another after another.

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

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<v Speaker 4>I hate to say, but more like a one off

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<v Speaker 4>event than what we saw in the nineteen seventies.

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<v Speaker 5>Rosenn Rosennadena used to say, it's always something because if

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<v Speaker 5>it's not just it's not just the oil shocks.

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<v Speaker 3>It's the whole idea.

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<v Speaker 5>Now we're going to have a whole new round of

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

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<v Speaker 5>low higher economy. How long do you think that continues?

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<v Speaker 5>Does this just push out the time period for companies

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<v Speaker 5>to sit on their hands not invest because they don't

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<v Speaker 5>know what's going to happen.

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<v Speaker 4>Yeah, I mean, this is one of the things I've

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<v Speaker 4>been concerned about since last June, is how week the

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<v Speaker 4>labor market has been. There were a lot of factors

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<v Speaker 4>last summer that we're driving this kind of low higher,

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<v Speaker 4>low fire. It looked like maybe in January we might

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

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<v Speaker 4>as I said last week, signal or noise. But you know,

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<v Speaker 4>when you're in this world in which the labor market,

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<v Speaker 4>even with one hundred and thirty thousand jobs, it was

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<v Speaker 4>really concentrating a couple of sectors eighty percent of the economy,

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<v Speaker 4>the labor market wasn't doing anything.

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<v Speaker 3>It was zero negative.

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<v Speaker 4>So that kind of fragility wouldn't take much for some

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<v Speaker 4>sort of a serious shock to sort of start pushing

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<v Speaker 4>people in another direction. Whether this is that kind of

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<v Speaker 4>shock or not, we'll start finding out.

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<v Speaker 5>Yeah, it's early, because of course, these are going to

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<v Speaker 5>be January numbers. But you've been on record as saying

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<v Speaker 5>you'd like to cut more because you're still worried about

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<v Speaker 5>where the labor market is. What would it take to

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<v Speaker 5>get you to back off on that feeling, Because if

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<v Speaker 5>we get the same sort of numbers we had in December,

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<v Speaker 5>it still shows very narrow breadth of hiring, and it

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<v Speaker 5>still shows some reasonably good numbers for hiring.

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<v Speaker 4>Yeah, the even with the January report, like I said,

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<v Speaker 4>it was all concentrated in a couple of sectors, So

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<v Speaker 4>that was good.

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<v Speaker 3>They were robust.

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<v Speaker 4>We got a big number, well above everybody's estimate to

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<v Speaker 4>break even, But the concentration didn't give me a lot

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<v Speaker 4>of comfort that the economy as a whole was doing

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<v Speaker 4>really well. So that's where my brain is telling me.

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<v Speaker 4>The number was good, the economy looks okay, it was

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<v Speaker 4>above break even, but my guts are telling me it

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<v Speaker 4>may not be that good. And that's where I'm waiting

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

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<v Speaker 4>going to get revised down because they have this has

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<v Speaker 4>been a pattern in January the last few years.

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<v Speaker 1>A pair of these two ideas, The idea of the

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<v Speaker 1>oil shock that's creating some concerns about inflation, and then

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<v Speaker 1>a labor market that kind of is in question, right,

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<v Speaker 1>is it decelerating or is it reaccelerating. How much has

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<v Speaker 1>your reaction changed potential to fridays today's report given the

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<v Speaker 1>fact that we do see energy prices pushing on inflation.

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<v Speaker 1>In other words, would you be less inclined to cut

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<v Speaker 1>rates if there is strength that's demonstrated in the labor

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<v Speaker 1>market today.

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<v Speaker 4>Yeah, that's kind of what I was hinting at last

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<v Speaker 4>week that if we get another solid job report, then

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

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<v Speaker 4>A lot of the downside risk I've been worried about

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<v Speaker 4>for six months is kind of going away. We got

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<v Speaker 4>a hot We're going to get a hot PCE number

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<v Speaker 4>given what we already have seen coming in, that's going

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

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<v Speaker 4>usually that comes down again. We've had this January effect.

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<v Speaker 4>We have some more passories of tariffs, but because that

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<v Speaker 4>inflation's hot, it's going to look even worse now with

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<v Speaker 4>the oil prices, at least on headline. And then if

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<v Speaker 4>you get a solid job it does say there's you

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<v Speaker 4>can sit there and wait, let's.

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

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<v Speaker 1>Let's go we see the weakness that you see right

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<v Speaker 1>now when you talk to people district and that you

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<v Speaker 1>speak to in the different districts, as well as beyond.

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<v Speaker 1>How much do you think the FED should react to

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<v Speaker 1>this because it's sort of the dual mandate is in

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<v Speaker 1>conflict and absolutely the wrong way.

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<v Speaker 4>Yeah, I mean, that's the tension we've had for the

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<v Speaker 4>last years. I've been more worried about the labor market

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<v Speaker 4>risk the inflation risk. I've always believed inflation was going

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<v Speaker 4>to come back down once tear if effects passed through.

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<v Speaker 4>My other colleagues on the committee are much more concerned

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<v Speaker 4>about the inflation.

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<v Speaker 3>It's been high for five years.

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<v Speaker 4>They're not seeing it coming down, and they think the

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<v Speaker 4>labor market is.

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<v Speaker 3>All stabilized, it's all supply side.

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<v Speaker 4>So these are the two different views that people have

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<v Speaker 4>about thinking about policy. And I was more willing to

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<v Speaker 4>cut rates because I was more worried about the labor market,

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<v Speaker 4>not as worried about inflation coming down. But like I said,

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<v Speaker 4>if the labor market continues to go weak, if this

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<v Speaker 4>thing comes in. I mean, ADP was promising the other day.

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<v Speaker 4>So if the labor market is good, inflation's hotter than

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<v Speaker 4>we think, it's fine to kind of wait another meeting

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<v Speaker 4>and kind of see. But if we get a bad

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<v Speaker 4>number or January's revise down to some really low number

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<v Speaker 4>like ADP got revised in half length marks is just

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<v Speaker 4>not that good. And so the question is why are

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<v Speaker 4>you just sitting on your hands? So I could certainly

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<v Speaker 4>see this meeting going other way depending on the data

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<v Speaker 4>this week and the CPI next week comes in.

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<v Speaker 2>I hate to be the ones who asked this question,

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<v Speaker 2>but what's a good report? Because at eight thirty easton

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

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<v Speaker 2>to you? What does good look like?

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<v Speaker 3>Well?

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<v Speaker 4>I think good would be if you saw another number

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<v Speaker 4>like January, that would be really good because you're well

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<v Speaker 4>above everybody's break even estimates at that point, and that'd

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<v Speaker 4>be two in a row.

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<v Speaker 3>Looks like it's going through.

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<v Speaker 4>We got very good numbers off the ISM manufacturing and

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<v Speaker 4>services this week. That's another indication that maybe things are

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

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<v Speaker 4>see less downside risk now on the tariff stuff, I

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<v Speaker 4>still have a view that all the tariff risk is

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<v Speaker 4>to the downside. I just don't see big increases in

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

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<v Speaker 4>to come down. Estimates of this are coming down. Deals

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<v Speaker 4>are going to potentially get made. So I don't see

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<v Speaker 4>a lot of terror for risk going even though there's

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

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<v Speaker 4>lot of price pressures from what we think could happen

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<v Speaker 4>going forward. So that's going to bring I think that's

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<v Speaker 4>going to bring inflation down or take pressure off, and

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<v Speaker 4>it'll take some of the uncertainty off.

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<v Speaker 5>At some point, well, it becomes a question of what

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<v Speaker 5>problem are you trying to solve and what tool are

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<v Speaker 5>you using to do it. How would cutting rates by

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<v Speaker 5>twenty five or fifty basis points help the labor market.

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<v Speaker 5>If companies are sitting on their hands because they're still

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<v Speaker 5>waiting for tariff news and we've got a war going.

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<v Speaker 4>On, yeah, I mean we can always say, ah, we

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<v Speaker 4>can't do anything, just sit there.

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<v Speaker 3>That's not my job.

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<v Speaker 4>My job is trying to help the economy and achieve

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

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<v Speaker 4>then I have to make this trade off.

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<v Speaker 5>But does it make a difference to the CEOs?

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<v Speaker 3>Well, maybe not. I mean that's what I'm saying.

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<v Speaker 4>We could argue about whether monetary policy has any effect

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<v Speaker 4>in general on the labor market. There's you know, you

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<v Speaker 4>go back in economics, back to the eighties and nineties,

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<v Speaker 4>there's a whole camp people that said marchur policy is

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<v Speaker 4>completely irrelevant for the economy.

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<v Speaker 3>So quit wasting your time.

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

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<v Speaker 2>whole bitt we can spend a long time on. I

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<v Speaker 2>wanted to squeeze this in. I actually think it's one

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<v Speaker 2>of the more important topics at the moment. We're not

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<v Speaker 2>seeing a tightning of financial conditions of material one in

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<v Speaker 2>public markets. I don't see that in stocks, I don't

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<v Speaker 2>see that in bonb yeats. I'm wondering what on earth

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<v Speaker 2>you see in private markets. Because every day there's another

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<v Speaker 2>headline about another fund, another company struggling to meet redemptions.

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<v Speaker 2>What is the Federal Reserve assessment of what is happening?

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<v Speaker 2>Because that is powered this economy, some people might say,

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<v Speaker 2>in a bigger way than the feeder reserve or for

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<v Speaker 2>that matter, public markets have.

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<v Speaker 3>What is going on, Well, there's a couple things.

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<v Speaker 4>I mean, in general, I'm not I don't see big,

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<v Speaker 4>really big, widespread problems in the private credit market. What

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<v Speaker 4>you're seeing is a couple of cases of certainly fraud.

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<v Speaker 3>Is that fraud widespread? I don't.

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<v Speaker 4>You know, it's hard to believe that the entire correct

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<v Speaker 4>private credit market is being driven by fraud or bubble

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<v Speaker 4>posting of collateral. So these are kind of these one

0:10:00.400 --> 0:10:02.080
<v Speaker 4>off things that get a lot of headlines, but it's

0:10:02.160 --> 0:10:04.559
<v Speaker 4>not clear it's systemic. You have to kind of look

0:10:04.559 --> 0:10:08.040
<v Speaker 4>at whether there are a lot of you know, there's

0:10:08.120 --> 0:10:11.119
<v Speaker 4>different types of private credit. There's stuff that's in high yield,

0:10:11.320 --> 0:10:13.600
<v Speaker 4>you know, risky junk bond stuff, and there's other stuff

0:10:13.600 --> 0:10:16.160
<v Speaker 4>that's better quality in terms of what they're funding.

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<v Speaker 3>So I don't think as a whole.

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<v Speaker 4>The private credit market is in any serious trouble. But

0:10:21.960 --> 0:10:24.120
<v Speaker 4>you're going to have these things popping up here and there.

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<v Speaker 4>But I don't think there's enough of it that's going

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<v Speaker 4>to somehow drive down the financial markets and create any

0:10:29.800 --> 0:10:31.920
<v Speaker 4>kind of financial stability problems.

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<v Speaker 2>Going to see it all, thank you so longer conversation

0:10:36.240 --> 0:10:39.120
<v Speaker 2>about your row in the future. Looking forward to that, Governor.

0:10:39.160 --> 0:10:42.320
<v Speaker 2>Thank you, Federal Zev Governor Chris Waller. There on the economy,

0:10:42.440 --> 0:10:44.520
<v Speaker 2>the shock in the Middle East and on markets too,