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Speaker 1: Live from Jackson Hole, Wyoming for our audience worldwide. Good morning,

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Speaker 1: good morning. This is Bloomberg Surveillance on TV and radio

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Speaker 1: alongside Lisa around with Sam Jonathan Ferrow alongside us. Now

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Speaker 1: is Bloomberg's Mike McKee and make I don't think we

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Speaker 1: should waste any time. Joining us is Patrick Karker, the

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Speaker 1: Philadelphia FED President. Patrick, Good morning, good morning. Let's start

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Speaker 1: right here, not what shaman Pal said, but what your

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Speaker 1: colleague over at the Boston Fed said in the last

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Speaker 1: twenty four hours, that this resilience of this economy suggests

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Speaker 1: maybe we might have to do more. You take a

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Speaker 1: different view.

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Speaker 2: Why so, Look, we have to get inflation down to

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Speaker 2: two percent. We all agree on that, I mean everybody is.

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Speaker 2: We're all committed to that. The question is how to

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Speaker 2: get there. We are at a restrictive stance in my view,

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Speaker 2: and we're putting pressure on the economy to slow inflation.

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Speaker 2: The question is whether we need to increase the pressure

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Speaker 2: or just keep pushing, pushing, pushing. And I'm in the

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Speaker 2: camp right now, just keep the pressure going. Let this

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Speaker 2: work through again. The data may dictate that we change

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Speaker 2: course or I change course, But for right now, what

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Speaker 2: I'm seeing and what I'm hearing, particularly soft data. What

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Speaker 2: I'm hearing I've been around my district all summer talking

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Speaker 2: to people, is that the plea I hear is you've

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Speaker 2: done a lot very quickly, right, You've taken a lot

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Speaker 2: of pressure quickly. Now let us work through that, Let

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Speaker 2: the banking system work through it, let the corporations work

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Speaker 2: through that. So that I agree with that. I think

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Speaker 2: we just keep the pressure on and see how things

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Speaker 2: turn out.

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Speaker 3: JPL didn't really say anything new, but he did sort

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Speaker 3: of cast it in a hawkish light, and he talked

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Speaker 3: about how the economy is perhaps growing faster than anticipated

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Speaker 3: and that could increase inflationary pressures. So what would it

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Speaker 3: take to get you to change your view and think

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Speaker 3: we need to raise rates more?

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Speaker 2: If we saw that the decreases in inflation, we're stalling right,

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Speaker 2: that we weren't making that progress that we need to make.

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Speaker 3: Well, what would that How would that manifest itself? Because

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Speaker 3: people who calculate CPI, the analysts suggest we're going to

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Speaker 3: see it go back up to essentially for mechanical reasons.

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Speaker 2: On the headline side, yeah, for sure, but we also

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Speaker 2: were going to see shelter inflation come down, right that

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Speaker 2: it's coming down now. You see this with real time rents.

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Speaker 2: So if service inflation in particular, or core service inflation,

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Speaker 2: whatever you want to call it, supercore, if that continues

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Speaker 2: to stall, then I'd say.

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Speaker 4: We have to do more.

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Speaker 2: But again, I really want to emphasized we are doing

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Speaker 2: something right now. It's not as though keeping rates where

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Speaker 2: they are is doing nothing. We're actually continuing to put

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Speaker 2: pressure on the economy.

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Speaker 5: You said, and Jay Powell just said that it was

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Speaker 5: important to get inflation back down to two percent. That

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Speaker 5: was unequivocal. Does it matter when I mean right now

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Speaker 5: you can see in the dots that it's not until

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Speaker 5: after twenty twenty five. If it takes till twenty thirty,

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Speaker 5: does it matter.

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Speaker 2: Yeah, twenty thirty is a long way off twenty six.

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Speaker 2: Get under four this year, under three next year, and

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Speaker 2: then get to two in twenty twenty five. So yeah,

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Speaker 2: it's going to take some time. Well, what really matters

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Speaker 2: what I hear all the time is not just a headline,

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Speaker 2: not supercore, but think about the essentials of life, the

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Speaker 2: things that people really need shelter, food, transportation, energy. As

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Speaker 2: long as they're moving in the right direction. Americans are

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Speaker 2: better off, and we need to be committed to that.

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Speaker 1: You clearly think we're sufficiently restrictive. Other people think we don't.

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Speaker 1: So let's go through that points. Unemployment is still three

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Speaker 1: point five percent growth this quarter could come in at.

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Speaker 3: About three percent.

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Speaker 4: Yep.

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Speaker 1: What is the evidence that we're sufficient and restrictive? What

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Speaker 1: can you actually point to beyond the soft date? So

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Speaker 1: let's talk about the real hard.

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Speaker 2: Data starting to soppen. We are hearing story after story

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Speaker 2: I'm hearing of and.

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Speaker 1: You think that's connected to where interest rates are right now?

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Speaker 4: Yaha?

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Speaker 2: Markets are Labor markets are definitely easing up. We're hearing

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Speaker 2: this over and over again. It's easier to get employees.

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Speaker 2: And the retail numbers I'm a little suspicious of because

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Speaker 2: what we're hearing, for example, from a major supplier to

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Speaker 2: the back of the school market is sales are not

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Speaker 2: what they expected. So we are starting to see these

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Speaker 2: early signs, but they're early, right, and so I don't

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Speaker 2: think we need to react.

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Speaker 4: Either way right now. Just let us ride a little bit.

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Speaker 4: Let it. Let's just keep putting the pressure on.

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Speaker 3: Well, if you keep the pressure on, but even don't

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Speaker 3: raise rates, how long do you need to keep the

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Speaker 3: pressure on When would you see moving away from the peak?

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Speaker 2: Clearly not until next year at the earliest. And when

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Speaker 2: next year, again, the data will have to dictate that.

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Speaker 3: Well. There is a question about if inflation keeps coming down,

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Speaker 3: real rates continue to rise and put additional pressure on

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Speaker 3: the economy, would you see the FEDS recalibrate its peak

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Speaker 3: rate to keep the pressure steady as opposed to letting

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Speaker 3: it grow. I realized this is a fine point for

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Speaker 3: the market area and if you get the wrong if

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Speaker 3: you say this the wrong way, they're all going to

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Speaker 3: start pricing in rate cuts.

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Speaker 4: Like it's possible.

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Speaker 2: Right, But at this point, we really need to see

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Speaker 2: inflation moving down, and we're saying early signs of that again,

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Speaker 2: and I'm getting story after story from all our contacts

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Speaker 2: that it is starting to happen. But I want to

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Speaker 2: keep breaks where they are right now, and then we'll

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Speaker 2: decide later what we do.

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Speaker 3: What do you think is happening with labor market wages

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Speaker 3: at this point, because that was the big concern, especially

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Speaker 3: with JPL's non housing services. These guys were talking about

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Speaker 3: the United Auto Workers negotiations going on. Have we broken

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Speaker 3: the back of rising wages rising at a too fast

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Speaker 3: a pace.

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Speaker 2: Too early to tell right now, but it does seem

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Speaker 2: like what I'm hearing from all our contacts is that

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Speaker 2: it is starting to ease, right. I mean, we're not

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Speaker 2: where we were where midyear increases, they're there. Nobody's considering that.

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Speaker 2: So we are starting to see some easy particularly in

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Speaker 2: the service area, hotels, restaurants, and so forth. We are

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Speaker 2: starting to see it getting a little easier to get

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Speaker 2: the table at the restaurants, you know. And one of

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Speaker 2: the things that I think about, one of the potential

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Speaker 2: risks is that when student loan payments come back in.

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Speaker 2: I don't think it's a big economic issue. I mean,

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Speaker 2: when you run the numbers, it not. But it's a

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Speaker 2: psychological issue here. I've not gotten that three, four or

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Speaker 2: five hundred dollars bill. Now I get it. And so

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Speaker 2: I've been talked to a lot of people of that

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Speaker 2: generation per saying, yeah, you know, I may have to

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Speaker 2: back off some of my spending.

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Speaker 5: Well, but this goes to this question of okay, well,

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Speaker 5: the savings are going to get born down, and then

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Speaker 5: we're going to start to see the real economy expose itself. Right,

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Speaker 5: A lot of people have questioned that, But I am wondering,

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Speaker 5: what kind of neutral rate, what kind of you know,

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Speaker 5: sort of longer term expectation for the FED do you

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Speaker 5: expect in the new normal?

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Speaker 2: What does it look like? Yeah, so we don't know

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Speaker 2: for sure, right, let's start there. We don't know exactly

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Speaker 2: what that new normal looks like. But one of the

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Speaker 2: things I think about is what's fundamentally shifted in the

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Speaker 2: economy between before the pandemic and now, remember before the

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Speaker 2: pandemic hard to remember for all of us, right, given

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Speaker 2: what we've been through, but we had low interest rates,

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Speaker 2: low unemployment, and low inflation. What's fundamentally shifted? There have

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Speaker 2: been a lot of things supply We're going to talk

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Speaker 2: about this in this meeting. There's supply chain issues that

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Speaker 2: are shifting and being re engineered. But fundamentally, I think

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Speaker 2: it's plausible that we can get back to that. No,

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Speaker 2: I'm not predicting that right now, but it is plausible.

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Speaker 2: So I think we have to realize that we lived

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Speaker 2: in that world. We've proven that that can happen, and

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Speaker 2: so could it happen again?

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Speaker 1: Yes, it sounds like a base case. When I listen

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Speaker 1: to you, is.

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Speaker 4: That I don't know.

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Speaker 2: I mean, at this point, I'm not quite sure. But

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Speaker 2: clearly we're going to get we think, and we'll get

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Speaker 2: back to trend growth in a couple of years. We'll

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Speaker 2: get inflation under control in a couple of years, and

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Speaker 2: inflation and unemployment will tick up, but really in the

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Speaker 2: flourish range, back to the neutral rate.

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Speaker 1: You've offered example after example in the last eight minutes.

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Speaker 1: It's highly anecdotal. Is the basebook now more important to

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Speaker 1: us than us retailselves?

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Speaker 2: When I step back and I think about myself, and

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Speaker 2: I can only speak for myself. Right when we were

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Speaker 2: going through the early part of the pandemic, and we

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Speaker 2: were saying that inflation was transitory, Uh, it was just

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Speaker 2: used vehicles and so forth, what we're hearing, what I

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Speaker 2: was hearing from my contacts was now, really it's more persistent.

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Speaker 2: And I didn't factor that in. The mistake I made.

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Speaker 2: If I made a mistake, was I didn't factor that.

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Speaker 2: It's really soft data, that anecdotal data. It's more than

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Speaker 2: anecdotal data. It's what people are really feeling real time

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Speaker 2: in the economy. Now, we've done a lot of things

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Speaker 2: like done real time pulse surveys, and so forth to

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Speaker 2: get our get ahead of that now. I don't want

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Speaker 2: to make that same mistake twice. And so what I'm

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Speaker 2: hearing right now from those same contacts is things seem

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Speaker 2: to be slowing more than the data's showing.

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Speaker 4: That could be wrong, and that's why we have to.

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Speaker 2: As Chair Pal said, risk management is an important issue here.

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Speaker 2: But if they're right, if that soft data is right,

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Speaker 2: then I think it really then just solidifies my view

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Speaker 2: that we stay putting pressure on slowly increasing right now

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Speaker 2: to see how that all resolves itself.

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Speaker 3: Nerd question for our friends on the trading guests out there,

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Speaker 3: especially the bond guys. The balance sheet has been coming down,

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Speaker 3: but very slowly because of the caps and the way

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Speaker 3: that works. You haven't hit maximum reduction yet on a

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Speaker 3: month by month basis, and at the same time we

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Speaker 3: have seen financial conditions remain easier than you would expect.

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Speaker 3: So the question is do you do more with the

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Speaker 3: balance sheet because it has an effect on how tight

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Speaker 3: the policy is.

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Speaker 2: At this point, I don't see us changing course on

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Speaker 2: how we're reducing the balance sheet. Again, circumstances could dictate

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Speaker 2: something else, but for right now, I think we just

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Speaker 2: stay the course, keep that on, as I've said or

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Speaker 2: many times before, on autopilot, just let it run, and

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Speaker 2: if we need to adjust policy, we adjust that.

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Speaker 3: With the bed fund trade, well, there has been a

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Speaker 3: question on the other side of how close you are

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Speaker 3: to stopping balance sheet reduction when you reach the level

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Speaker 3: of demand.

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Speaker 4: Yeah.

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Speaker 2: I don't think we're there yet, but we do clearly

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Speaker 2: have to monitor that. If you go back to the

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Speaker 2: last time we did this, we knew we were at

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Speaker 2: that point where we needed to stop when we saw

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Speaker 2: the market indicators, the volatility in the markets. We've not

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Speaker 2: seen that yet, but we could.

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Speaker 5: We have seen real yields climb significantly. Today five year

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Speaker 5: real yields in place for adjusted yields rose the highest

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Speaker 5: levels going back to two thousand and eight. Are you

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Speaker 5: watching that closely as an indication of the transmission mechanism

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Speaker 5: at the balance you run off?

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Speaker 4: Sure?

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Speaker 2: Yeah, I mean that's one of many, and it's also

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Speaker 2: just a simple trading.

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Speaker 4: And things like the phatas market and so forth.

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Speaker 2: Not at this point, I mean, but it is clearly

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Speaker 2: something we need to keep watching.

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Speaker 1: Can I finish on this? It's pretty provocative. Have you

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Speaker 1: destroyed the mortgage market in America for generation I.

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Speaker 4: Don't think so.

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Speaker 2: I mean, well, it is clearly tough when you talk

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Speaker 2: to bankers. Beyond tough people, yeah, the first time home

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Speaker 2: buyer really really hard because there's no inventory. Even if

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Speaker 2: they could they could afford the mortgage, they can't find

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Speaker 2: a home because people are locked into that low mortgage rate,

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Speaker 2: you know, in their existing home. That's why I think

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Speaker 2: we don't keep going with rates right, so that we

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Speaker 2: can stay steady and at some point as we reduce rates,

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Speaker 2: we can bring those mortgage rates back down.

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Speaker 4: There's no question that's initiation.

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Speaker 1: But we're not going back to two percent mortgages over

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Speaker 1: thirty years, are we. So that inventory is offline maybe

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Speaker 1: for generations.

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Speaker 4: Less.

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Speaker 2: You're not there yet, yeah, because what we're hearing from

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Speaker 2: some of the home builders is they keep selling.

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Speaker 1: They're having a great time, having a great high, a

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Speaker 1: huge favorite. We're talking about whether this housing market can

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Speaker 1: really recover in the next several years. Given that this

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Speaker 1: feels quite generational, this feels like a there's a lot.

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Speaker 2: Of toy coming online, I can tell you in Philadelphia

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Speaker 2: and across many cities I know, but Philadelphia, for example,

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Speaker 2: a lot of multifamilies coming online the next few years,

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Speaker 2: so we are increasing inventory.

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Speaker 1: Patrick, it's good to see you as always. Thank you,

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Speaker 1: Sir Patrick Harker, the Philadelphia Fed President,