Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: We begin this sound with investors searching for direction in
Speaker 2: a pivotal year, potentially for the Federal Reserve. FED Governor
Speaker 2: Stephen Myron dumpling down on his dubbish stants calling for
Speaker 2: the Central Bank tocount interest rates by more than a
Speaker 2: percentage point in twenty twenty six. Governor Myron joins US
Speaker 2: now four more. Governor, good morning, happy.
Speaker 3: New year, happy to hear, thanks for having me back.
Speaker 2: It's good to say. You've been very, very transparent about
Speaker 2: where you were on the dot plot and what your
Speaker 2: forecast is. So let's start there. Where are you for
Speaker 2: this year? Where's your dot? What are you looking for?
Speaker 3: Yeah, so I'm on surprisingly the lowest dot. I'm looking
Speaker 3: for about a point and a half of cuts. A
Speaker 3: lot of that is driven by my view of inflation.
Speaker 3: I gave a speech about this and you know about
Speaker 3: a month ago in December Columbia University. My view is
Speaker 3: that almost all of the excess inflation over target is
Speaker 3: due to quirks of how we calculate inflation. So, as
Speaker 3: you have talked about with many of your guests many
Speaker 3: times before, shelter inflation really really lags a lot, and
Speaker 3: because average tenant rents have caught up to new tenant rents,
Speaker 3: because market rents have been running at a one percent
Speaker 3: rate for a couple of years now, I think it's
Speaker 3: appropriate to sort of think about underlying inflation as abstracting
Speaker 3: from that a little bit. You know, the shelter inflation
Speaker 3: is indicative of a supply demand in balance from twenty
Speaker 3: twenty two to twenty twenty three, not twenty twenty seven.
Speaker 3: We need to be making policy for twenty twenty seven
Speaker 3: because of policy lags. And their side of it is
Speaker 3: the portfolio management fees that I'm sure you've talked about
Speaker 3: again with many of your guests many times stock market
Speaker 3: went up mechanically inflation moves higher despite many of your
Speaker 3: other guests, I'm sure no doubt telling you about fee
Speaker 3: compression and the asset asset management industry for decades. So
Speaker 3: you abstract from those two things. Underlying inflation is running
Speaker 3: at two point three percent. That's with the noise of
Speaker 3: our target. That sounds like an argument for neutral. You're
Speaker 3: making an argument though, for this year, for a combination.
Speaker 3: Where does that come from?
Speaker 2: Why are you looking for a combinative monetary policy stats
Speaker 2: cominggain to Washington.
Speaker 3: Yeah, so a couple things. First of all, as I
Speaker 3: just said, underlying inflation's running within noise of our target,
Speaker 3: and that's a good indication of where overall inflation is
Speaker 3: going to be going in the medium term. But then
Speaker 3: the unemployment rate is four point six percent, right, So
Speaker 3: that means that there's about a million Americans who don't
Speaker 3: have jobs, who could have jobs without causing unwanted and
Speaker 3: without causing unwanted upward pressure on inflation. I don't think
Speaker 3: it's right to tell those people that they shouldn't have
Speaker 3: jobs because we're just mechanically calculating inflation in some silly way.
Speaker 3: I just don't think that makes a lot of sense.
Speaker 3: The other thing is that because we've kept policy tighter
Speaker 3: than I think it ought to be, that makes me
Speaker 3: mark down our growth forecast for the future relative to
Speaker 3: where it should be. And so if we didn't need
Speaker 3: if we hadn't kept been keeping policy in my view
Speaker 3: too tight over the last year or so, it wouldn't
Speaker 3: be necessary to provide that type.
Speaker 2: Correctly, say, marked down in the future. Because they fed
Speaker 2: actually marked up GDP for twenty six What do you
Speaker 2: mean in the future no.
Speaker 3: So like when you look at these dots right in
Speaker 3: the set, they're projections of appropriate policy and projections of
Speaker 3: economic fundamentals like growth and inflation conditional upon appropriate policy.
Speaker 3: So my projections for growth and inflation are conditional upon
Speaker 3: getting my policy forecast right, my policy projection. If I
Speaker 3: don't get my policy projection because the rest of the
Speaker 3: committee is more hawkish than I am, then we wouldn't
Speaker 3: meet my growth and inflation projection. We'd underperform then. And
Speaker 3: so because policy has been in my view too tight
Speaker 3: for the last year, that means that my expectations of
Speaker 3: growth will ultimately be will ultimately be unsatisfied because we
Speaker 3: didn't get the policy that I wanted.
Speaker 4: You have GDP two point six percent roughly over the
Speaker 4: next few years. Are you saying that the appropriate growth
Speaker 4: rate is something like that two percent and two point
Speaker 4: six percent and not necessarily three percent are.
Speaker 3: Above Well, so that's conditional getting upon getting the policy
Speaker 3: projection that I want, right, I think, and I think,
Speaker 3: and part of that is due. So part of the
Speaker 3: reason why it's a little bit lower than I think
Speaker 3: two point eight two point nine is probably where more
Speaker 3: where it would be if we got if we sort
Speaker 3: of had the right policy the entire time. Part of
Speaker 3: the reason it's a little bit lower than that is
Speaker 3: because we got to account for policy having been too
Speaker 3: tight over the last twelve months.
Speaker 4: There's also a question about the reaction function. We're talking
Speaker 4: about the data that we're going to be getting tomorrow.
Speaker 4: What would you have to see to change your view?
Speaker 4: I mean, if we saw, let's say the unemployment rate
Speaker 4: go down to four point four percent, would you start
Speaker 4: to question whether one hundred and fifty basis points of
Speaker 4: cuts is really necessary this year.
Speaker 3: That's a great question. And before I answer it, let
Speaker 3: me step back a foot and say that my forecast
Speaker 3: is conditional upon shelter inflation coming down, right, And there's
Speaker 3: people who agree with me, by the way, Like you
Speaker 3: look at the research from Goldman Sachs. You know, it's
Speaker 3: pretty similar to where I am on shelter. They've got
Speaker 3: shelter inflation running below the pre COVID rate by the
Speaker 3: end of the year, similar to where I have it.
Speaker 3: Where I differ from a lot of my colleagues again,
Speaker 3: is thinking that goods inflation is not being driven by tariffs.
Speaker 3: Don't see tariffs being driven by goods inflation. I see
Speaker 3: goods inflation. I'm not sure what's driving I listed a
Speaker 3: few possibilities in the speech in December. I think the
Speaker 3: jury is still out on that one. But if I
Speaker 3: end up being right on inflation and gold sorry on shelter.
Speaker 3: If I end up being read in shelter and Goldman
Speaker 3: ends up being read in shelter, and I end up
Speaker 3: being wrong on tariffs and everybody else is right on tariffs,
Speaker 3: then we're going to undershoot our target. Two sided risk
Speaker 3: is back, and I think that people haven't really internalized
Speaker 3: that yet, and I think it's important to appreciate that. Now,
Speaker 3: where would I be wrong Because so much of my
Speaker 3: disinflation forecast is based upon shelter, I'm going to be
Speaker 3: wrong if market rents pick up again.
Speaker 4: So you're saying this is all an inflation issue and
Speaker 4: not anything to do with the labor market.
Speaker 3: Now, as I said before, unemployment is unemployment is somewhat
Speaker 3: above the somewhat above what where I view the natural rate,
Speaker 3: And so it's sixty basis points a million people you
Speaker 3: know of unnecessary unemployment that we could reduce by having
Speaker 3: a more appropriate policies.
Speaker 1: Now it's Toalsa's point. Is there a line in the
Speaker 1: sand and the unemployment rate tomorrow that would maybe have
Speaker 1: you think about this a little bit differently. What if
Speaker 1: the unemployment rate drops down four point five percent or
Speaker 1: even four point four percent.
Speaker 3: Yeah, I would absolutely addst I would absolute adjust my projection.
Speaker 3: So if you look at the September step, right, I
Speaker 3: was fifty business points higher than I was in the
Speaker 3: December step. Part of the reason why I adjusted my
Speaker 3: dot down by fifty basis points is because the labor
Speaker 3: market didn't perform for my expectations that I had in September,
Speaker 3: and because inflation actually I performed to the downside, right,
Speaker 3: So it was appropriate to adjust my dot down. And
Speaker 3: then on top of that, we had the two type
Speaker 3: policies I described. So if the data come in a
Speaker 3: little bit better, yeah, of course I'm going to adjust
Speaker 3: my expectation.
Speaker 1: In just the past few weeks, we've heard from a
Speaker 1: number of your colleagues talking about how actually they feel
Speaker 1: like we're pretty close to neutral. Have you any inroads
Speaker 1: convincing them that they're not right about this the way you.
Speaker 3: See the world, You know, can't I can't speak for them,
Speaker 3: but you know, I think that every month we come
Speaker 3: in and the unemployment rate ticks up a little bit,
Speaker 3: and the inflation, you know, and the inflation data sort
Speaker 3: of seemed to be doing a little bit better. I
Speaker 3: think it's really difficult to argue that policy is neutral,
Speaker 3: especially when we've been on this course of gradual listening
Speaker 3: or the labor market for a couple of years now.
Speaker 3: It's just really difficult in my mind to sort of
Speaker 3: argue that policy is not restricting the economy.
Speaker 2: A couple of words to want to pick out, and one
Speaker 2: is neutral and the other is correct. I think it's
Speaker 2: very difficult to say this is where I think neutral is,
Speaker 2: and this should be the correct policy rate, because it's
Speaker 2: such a guessing game as to where neutral is. And
Speaker 2: I think you understand that. Of course. I also want
Speaker 2: to pick up the difference between being an economist and
Speaker 2: being a policy maker. When you say two way risk,
Speaker 2: I think that really makes us all think about speed
Speaker 2: and the appropriate speed to adjust monetary policy. When there
Speaker 2: is two sided risk, why do you think we should
Speaker 2: be going this fast this year in your mind to
Speaker 2: cut that aggressively in twenty twenty six.
Speaker 3: So same thing as I said in the lest few
Speaker 3: times I've been here, we're still materially above neutral in
Speaker 3: my mind, and there's not really a reason to be
Speaker 3: materially above neutral if the labor market is an a
Speaker 3: weakening path and inflation is underlying inflation's already running close
Speaker 3: stort target and on trajectory to hit it. To hit
Speaker 3: the target, there's just not a real reason to be
Speaker 3: so restrictive. And we're running unnecessary risks on the labor
Speaker 3: market by being so restrictive, and so in my mind,
Speaker 3: it's like we're selling options for nothing, and I don't
Speaker 3: see why we're selling those options.
Speaker 2: This just requires such a strong amount of conviction. Though,
Speaker 2: coming down of the pandemic, I think what we all
Speaker 2: learn was a massive degree of humidity because there were
Speaker 2: so many things that we thought were obvious that actually
Speaker 2: things just turned out to be completely the opposite. And
Speaker 2: I wonder if this year we should have the same
Speaker 2: approach to monetary policy. As a monetary policy official, do
Speaker 2: you have to sit here and say, actually, the prudent
Speaker 2: way to do things is actually to move slowly and
Speaker 2: work things out meeting by meeting, Because that's why I
Speaker 2: hear from other members of the committee, and I'm wondering
Speaker 2: why you see things so differently.
Speaker 3: Sure, So first of all, I'll say that I was
Speaker 3: right about inflation at coming out of the pandemic. And
Speaker 3: if you sort of go back to twenty twenty when
Speaker 3: I was in the Treasury Department, you know, we were
Speaker 3: arguing for a smaller stimulus package because we didn't see
Speaker 3: we didn't see COVID as a similar type of recession
Speaker 3: that we had POSTGFC, post dot com bubble, where you
Speaker 3: had persistently leveraging dragging on demand that caused the balance
Speaker 3: sheet recession with a persistent, slow, crappy recovery. Right, COVID
Speaker 3: was like a switch turned off. Right, people stayed at home,
Speaker 3: and the switch turned on when they started going out again.
Speaker 3: And so there wasn't going to be that slow recovery.
Speaker 3: And that's why we were pushing for for smaller stimulus
Speaker 3: packages because we didn't think that it narrated that type
Speaker 3: of package. We were concerned about inflation picking up. So
Speaker 3: I did I did get that. I did get that right,
Speaker 3: And I do understand the value of of being cautions
Speaker 3: and having humiliating these things. I will say my forecast,
Speaker 3: as I said before, is predicated upon shelter inflation and
Speaker 3: shelter is a weird thing where market rents give us
Speaker 3: a window into measured into the path of measured inflation
Speaker 3: that's very different than other sections of the inflation index.
Speaker 3: We know that market rents, a weighted average of single
Speaker 3: family multi family market rents have been growing at a
Speaker 3: one percent rate for two years now. We know that
Speaker 3: average tenant rents have caught up to new tenant rents.
Speaker 4: Right.
Speaker 3: There are statistically mechanical relationships that give you a lot
Speaker 3: of confidence that measured shelter inflation is going to come
Speaker 3: down a lot.
Speaker 4: Right.
Speaker 3: You don't have that type of confidence when you're talking
Speaker 3: about goods. I said before, I don't know what's driving
Speaker 3: goods inflation, Right, I don't have this forecast that goods
Speaker 3: inflation is going to come down because it's just driven
Speaker 3: by tariffs that my colleagues seem to have.
Speaker 4: Right.
Speaker 3: I don't have that type of confidence on areas the
Speaker 3: index that I think are much more difficult to understand.
Speaker 3: Shelter is a mechanical thing from market rents to measured inflation,
Speaker 3: and therefore it's in my mind appropriate to have that
Speaker 3: high degree confidence. And to least's point, where would I
Speaker 3: be wrong if the market rents pick up again. If
Speaker 3: the market rents pick up, then I'm going to say
Speaker 3: my mechanical pass through from market rents into measured shelter
Speaker 3: inflation is getting invalided, and we'll see that.
Speaker 4: Just to hone in a little bit on the housing aspect,
Speaker 4: since that has been a really hot topic, how much
Speaker 4: signal would you take if you did start cutting more
Speaker 4: aggressively at the fetcher reserve and tenure yield rows and
Speaker 4: that actually created an issue for mortgage rights and the
Speaker 4: pass through there. It might actually help with disinflation, but
Speaker 4: it might as exactly be the outcome that you're looking for.
Speaker 3: Yeah, so this is an area where i'd want to
Speaker 3: where I'd want to have I'd want to not jump
Speaker 3: to conclusions because I want to sort of try and
Speaker 3: analyze and very carefully and thinking about what the market
Speaker 3: is saying, think about what the economy is doing. And
Speaker 3: if it's the case that you cut rates and you
Speaker 3: sort of get a burst of activity in some sector
Speaker 3: of the economy that's not housing and that ends up
Speaker 3: crowding out housing, then you know, you wouldn't really mind.
Speaker 3: You're focused on aggregates, you're focused on inflation, on area inflation,
Speaker 3: You're focused on aggregate unemployment. Right, If it looks like
Speaker 3: you cut rates and the bottom market is giving you
Speaker 3: a very clear signal. And I'm not just talking about like,
Speaker 3: you know, trading behavior for a week. I'm talking about
Speaker 3: a very clear signal over the course of a period
Speaker 3: of time that it's not the right move, then I think, yeah,
Speaker 3: you want to you want to take that signal, and
Speaker 3: you want to think about what's the market telling me
Speaker 3: that I missed? Is the market right? Am I wrong?
Speaker 3: Let me rethink my framework.
Speaker 2: You're going to miss this when it sort of it
Speaker 2: feels like you're enjoying this? Are you going to miss
Speaker 2: this when you have to leave the Federal Reserve?
Speaker 3: Well, you know, uh, that's not part of my forecast.
Speaker 2: How are you going to hang around?
Speaker 3: Oh? I have no idea. You know, we'll see. I
Speaker 3: don't I don't make personal decisions.
Speaker 2: Okay, you've had nothing at all from anybody.
Speaker 3: Uh, you know, I think that you know, we're very
Speaker 3: clearly now getting into getting into the new year, and
Speaker 3: the president. You know, the President has said in the
Speaker 3: past that he would make announcements as we got there,
Speaker 3: So you know, I imagine we'll be getting some at
Speaker 3: some point. But you know, I don't know. I don't
Speaker 3: know anything about my future, so I would, I would,
Speaker 3: I wouldn't mind it.
Speaker 2: What a position to be in. We're all sitting here waiting,
Speaker 2: just like you. Governor. Thank you, it's good to see you.
Speaker 2: Thanks for having thanks for saying so generous with your time.
Speaker 2: The Federal Reserve Governor there, Stephen Myron