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Speaker 1: Welcome back to Jackson Hall, Wyoming.

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Speaker 2: I'm Michael McKee, the economics and policy correspondent for Bloomberg,

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Speaker 2: and we are here with Lorettamester, the president of the

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Speaker 2: Cleveland Federal Reserve Bank. As the Kansas City Fed's Economic

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Speaker 2: Symposium continues.

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Speaker 1: Of course, the big news this morning, Loretta, thank you

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Speaker 1: for joining us, is J.

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Speaker 2: Powe's speech. The world was watching, but he didn't seem

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Speaker 2: to say anything.

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Speaker 3: New, no, but I thought it gave a very articulate

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Speaker 3: explanation of kind of what policy going forward is going

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Speaker 3: to be looking at. Right, inflation is still too high.

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Speaker 3: You know, we've had monetary policy actions that brought us

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Speaker 3: into restrictive territory in terms of that, and now it's

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Speaker 3: just a question of, you know, calibrating that to make

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Speaker 3: sure that we're on a sustainable and timely downward path

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Speaker 3: to two percent. So the commitment is there to bring

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Speaker 3: inflation back down to two percent, And I thought he

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Speaker 3: did a very good job of explaining sort of the

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Speaker 3: risk management that we're going to be undertaking in this

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Speaker 3: next phase of policy.

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Speaker 2: Well, you've been on record is suggesting that you haven't

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Speaker 2: calibrated enough that you probably need a little bit more

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Speaker 2: restraint on the credit markets.

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Speaker 3: Yeah, I mean we're going to get more data in

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Speaker 3: before September, of course, But when you think about sort

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Speaker 3: of what has changed between June and now, we have

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Speaker 3: a bit stronger growth than a lot of us have thought.

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Speaker 3: We have gotten inflation down, but as the chair said,

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Speaker 3: two months data is not enough to be convinced that

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Speaker 3: it's coming down, and then we have higher long term rates,

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Speaker 3: which is going to put some downward pressure on inflation.

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Speaker 1: That said, you know.

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Speaker 3: In my view, you know, I think that really under

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Speaker 3: tightening would be a worse mistake than over tightening a

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Speaker 3: little bit, because we can course correct that undertightening means

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Speaker 3: that inflation could remain higher for longer than two percent,

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Speaker 3: for a little bit longer, and I don't think that's

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Speaker 3: something I would want to entertain. The way I think

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Speaker 3: about it is I look at sort of what our

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Speaker 3: time path for getting inflation back to two percent. I

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Speaker 3: wouldn't want to see that pushed out well beyond on

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Speaker 3: twenty twenty five, which is kind of in the cards

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Speaker 3: now in terms of the forecast. So I'm going to

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Speaker 3: be very cognizant of that when I put in my

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Speaker 3: new forecast. For the next meeting.

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Speaker 2: So if you're confident that you could course correct if

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Speaker 2: you overtighten, does that suggest that you think the idea

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Speaker 2: of hard landing is at this point kind of off

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Speaker 2: the table and the soft landing is the base case.

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Speaker 1: Well, I have.

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Speaker 3: A base case of a soft landing in my own projections,

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Speaker 3: and of course we're always navigating the economy going forward,

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Speaker 3: so you can't take anything off the table. But if

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Speaker 3: you think about how resilient growth has been, I think

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Speaker 3: it's been higher than many of us at forecast. I

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Speaker 3: do think we're going to have to continue to moderate demand.

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Speaker 3: We need to see that in moderation demand to bring

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Speaker 3: demand and supply into better balance. We also have had

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Speaker 3: some positive things going on in the supply side. We

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Speaker 3: have labor force participation that's moved up. If you look

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Speaker 3: at sort of those prime ages, that participation rate is

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Speaker 3: now above what it was pre pandemic. So that's a

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Speaker 3: good things. Supplies adjusting, and you know, we have the

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Speaker 3: supply chain disruptions being more normalized. There's still some constraints there,

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Speaker 3: but again those are improving. So we have both things

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Speaker 3: happening at the same time. So that gives me more

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Speaker 3: credence to the view that, you know, a soft landing

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Speaker 3: may be what we're after, but we're going to have

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Speaker 3: to keep monitoring the economy.

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Speaker 2: The Chairman also said today that growth has been faster

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Speaker 2: than you expected. Do you expect a significant markup in

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Speaker 2: growth estimates at the next Summary of Economic projections at

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Speaker 2: the next FED meeting?

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Speaker 3: Yeah, so I can't predict what my colleagues are going

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Speaker 3: to do. I'm going to probably have to mark up

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Speaker 3: my own projection to be a little bit stronger than

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Speaker 3: I had in the Gune projections, and then that's going

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Speaker 3: to feed into what I think the appropriate policy path

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Speaker 3: will be.

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Speaker 2: Do you change your unemployment forecast given the fact that

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Speaker 2: unemployment is not doing what you've all predicted it would

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Speaker 2: do well.

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Speaker 3: We have seen moderation in the labor market, and we

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Speaker 3: kind of need to see that moderation in the labor market.

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Speaker 3: It's just as we need to see it in the

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Speaker 3: product side, and we are starting to see that, and

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Speaker 3: so that's not a bad thing. The labor market continues

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Speaker 3: to be very strong, but again we have to be

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Speaker 3: focused on making sure that we're bringing demand and both

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Speaker 3: product and labor markets into better balance with supply, and

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Speaker 3: that'll be the way to get inflation down.

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Speaker 2: The labor market has, as you say, loosened, and we've

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Speaker 2: seen wages the wage growth start to slow down. But

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Speaker 2: has that come down enough.

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Speaker 1: Or do you still want to put some downward pressure.

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Speaker 3: Well, I think a wage growth is an indicator of

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Speaker 3: where we are in inflation growth. So we don't aim

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Speaker 3: to bring wage growth down. But it's still going up

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Speaker 3: at a pace that's stronger than what we would need

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Speaker 3: to see for two percent inflation, and I think that's

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Speaker 3: part of what's going to have to happen. We will

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Speaker 3: probably see wage growth moderate somewhat, but we don't really

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Speaker 3: target that. We really target the inflation rate.

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Speaker 2: Now you've got UAW pattern marketing starting, well, it's basically started,

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Speaker 2: and today the UAW tickets official strike author is vote.

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Speaker 2: You have a big automobile industry component of your district.

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Speaker 1: Are you worried about what comes out of that, Well, it's.

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Speaker 3: Just a part of what's happening in the labor market.

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Speaker 3: So we look at all the data that comes in

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Speaker 3: and certainly that's going to be a factor that we

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Speaker 3: think about in terms of what is it telling us

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Speaker 3: about wage growth going forward? What is it telling us

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Speaker 3: about the strength of the labor market going forward. So

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Speaker 3: that's the context in which I look at it. We

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Speaker 3: don't in the FED sort of look at individual industries

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Speaker 3: and sort of that bargaining decisions. That's for them to decide,

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Speaker 3: and then we use that as data. What's the environment

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Speaker 3: look like.

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Speaker 2: I just wonder though, the automobile industry is so big,

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Speaker 2: not just the big three auto companies, but then you've

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Speaker 2: got all the suppliers and the wage demands sort of

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Speaker 2: trickle down.

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Speaker 1: So then does that lead to trickle up inflation?

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Speaker 3: Well, I think what we have to look at we

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Speaker 3: don't see any evidence that there's a wage price spiral.

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Speaker 3: I mean, I know that was earlier that people were

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Speaker 3: concerned about that. That's not what we're seeing now. We

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Speaker 3: are seeing the labor market moderate end wage we just moderate.

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Speaker 3: We just need to see that continue to be really

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Speaker 3: confident that inflation is on this timely and sustainable path

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Speaker 3: back to two percent, and we're committed to staying the

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Speaker 3: course and making sure that inflation returns to two percent.

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Speaker 2: Now we know that inflation, at least according to all

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Speaker 2: the experts, is going to pop back up a little

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Speaker 2: bit just sort of mechanically, how far would it go

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Speaker 2: before you started to get worried.

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Speaker 3: Well, you know, we have to get inflation back down

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Speaker 3: to two percent. You're right, there's base effects in some

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Speaker 3: of the numbers. And you know, that's why I think

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Speaker 3: the way I interpreted what Shairpal said today is really

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Speaker 3: to really indicate to people that, you know, one or

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Speaker 3: two great breedings on inflation aren't really enough. We need

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Speaker 3: to see sort of sustain improvement. And with core inflation,

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Speaker 3: which is what you take out the food and energy

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Speaker 3: prices and you take them out because they tend to

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Speaker 3: be volatile, that's still above four percent, and we really

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Speaker 3: need to see that come down. And so we're going

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Speaker 3: to stay the course in terms of our monetary policy,

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Speaker 3: making sure that we are restricted enough so that policy

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Speaker 3: so that inflation comes back down, and then we'll also

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Speaker 3: be evaluating how long to stay restricted. As inflation comes down,

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Speaker 3: the real interest rate were in other words, nominal rates

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Speaker 3: adjusted for inflation, that'll actually be you know, tightening. So

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Speaker 3: we're going to be having to watch that as we

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Speaker 3: go forward in this you know coming months and you know,

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Speaker 3: over the next period we.

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Speaker 2: Would from monthly inflation rates of six tenths to five

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Speaker 2: tenths too, we're now at two tenths. How much higher

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Speaker 2: would it have to go on a monthly basis? Before

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Speaker 2: you thought, this is not just base effects, this is

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Speaker 2: something we have to be more proactive.

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Speaker 3: Well, it depends on yeah, I mean, you're right. The

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Speaker 3: point estimates are very important to look at. I mean,

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Speaker 3: year over year, you know, changes are kind of a

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Speaker 3: good guide. So we look at the monthly numbers because

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Speaker 3: that tells you about turning points and other things. But

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Speaker 3: we also have to look at to make sure that

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Speaker 3: inflation is coming down on that year over year basis,

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Speaker 3: because you know, we're targeting ear inflation of two percent,

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Speaker 3: So that's kind of what we look at. And those

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Speaker 3: monthly indicators give us a good view about whether things

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Speaker 3: are moving back up, and then we look at the components.

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Speaker 3: In his chair of how had in his speech today

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Speaker 3: he went through sort of the components that we're watching

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Speaker 3: in terms of rent inflation, which then feeds into house

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Speaker 3: price inflation. And that service sector that all important service sector.

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Speaker 2: Markets have raised yields in recent weeks significantly.

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Speaker 1: Is that something that is helping you?

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Speaker 2: And would you worry if they started to go back

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Speaker 2: down again and conditions got looser. Are they where they

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Speaker 2: should be in terms of the policy that you want.

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Speaker 3: Well, certainly the higher long term interust rates put downward

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Speaker 3: pressure on inflation, right, so when we think about financial conditions,

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Speaker 3: they feed into the financial conditions. So that means that

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Speaker 3: we have to think about that when we think about

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Speaker 3: calibrating our policy rate. I think one of the concerns

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Speaker 3: that people have expressed about the higher long term rates

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Speaker 3: is maybe that that's going to have a financial stability

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Speaker 3: or banking industry effect adverse effect. And frankly, in talking

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Speaker 3: to the banks in our district, we see them already

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Speaker 3: taking actions to make sure they have adequate liquidity. You know,

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Speaker 3: they're taking more caution in terms of their lending capacity,

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Speaker 3: They're tightening credit conditions, and that's exactly the mechanism through

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Speaker 3: which tighter monetary policy then feeds through to the broader economy.

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Speaker 3: So I'm not concerned about the higher interest rates. The

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Speaker 3: market is determining that that's where they should be, But

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Speaker 3: it's certainly a factor when we look into terms to

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Speaker 3: calibrate our policy in order to hit our inflation goal

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Speaker 3: of two percent going.

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Speaker 2: Forward to This is all about structural changes to the

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Speaker 2: economy of this conference, Where do you see the US

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Speaker 2: economy coming out of the pandemic distortions. Do we go

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Speaker 2: back to a pre pandemic era of low interest rates

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Speaker 2: but low inflation and low growth rates, or do we

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Speaker 2: go back to a higher inflation, higher interest rate environment.

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Speaker 3: Well, I think right now, you know that's a little

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Speaker 3: bit in the future. We don't have to think about

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Speaker 3: that necessarily. But I do think there are arguments on

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Speaker 3: both sides, and I think a lot of people say

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Speaker 3: we just haven't had enough data yet to determine where

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Speaker 3: our star is that you know, long run interust rate,

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Speaker 3: neutral interst rate and other conditions. Say that, well, if

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Speaker 3: we have less globalization, if we have the Chinese economy

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Speaker 3: pulling back, that may mean put upward pressure on inflation.

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Speaker 3: So I don't think we know yet where we're going

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Speaker 3: to settle, but we do know that we're committed to

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Speaker 3: getting inflation back down to two percent, and we're going

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Speaker 3: to calibrate our policy. And when we say we're data dependent,

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Speaker 3: we mean we're taking into account all the data, including

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Speaker 3: the data that we get that antecdotal information that we

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Speaker 3: get from our district contacts, which really is forward looking.

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Speaker 3: So again, I don't think we can make a determination

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Speaker 3: of where things will settle down yet. But in this period,

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Speaker 3: we know that there's still COVID pandemic effects affecting the economy,

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Speaker 3: and we'll just to wait and see. We also have

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Speaker 3: AI you know, New III coming in. In fact, the last

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Speaker 3: session was all about sort of productivity growth and what

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Speaker 3: that's going to be for the economy going forward. So

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Speaker 3: I think there's a lot of uncertainty around those things.

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Speaker 3: But for the case and point now, we just need

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Speaker 3: to be focused on bringing inflation down.

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Speaker 2: Well, one are the issues with where you end up

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Speaker 2: coming out of it, and I realized it's in the future.

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Speaker 2: But the housing market is basically frozen now because interest rates,

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Speaker 2: mortgage rates are very high and people pulled, so many

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Speaker 2: people are locked into very low mortgage loans that they

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Speaker 2: don't want to move. Are you going to get to

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Speaker 2: a point where that unfreezes or are we going to

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Speaker 2: be waiting a generation essentially to turn over housing and

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Speaker 2: get the housing market going again.

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Speaker 3: Now, I mean what we're at a very restrictive stance

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Speaker 3: on policy. We had to do this because of where

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Speaker 3: inflation was. You know, my expectation is when we are

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Speaker 3: instant inflation is moving down sustainably to two percent, back

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Speaker 3: to two percent, we'll be able to move policy into

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Speaker 3: a lesser restrictive stance. And as we do that, we're

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Speaker 3: going to see mortgage rates come down. So again, right,

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Speaker 3: there's dynamics going on here because we're still in a

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Speaker 3: higher inflation environment. But over time, right, we're going to

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Speaker 3: be able to normalize our policy, and therefore we're going

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Speaker 3: to see other interest rates come back down.

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Speaker 2: Alreadmester, thank you very much for joining us. Cleveland Fed

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Speaker 2: Bank President