WEBVTT - Federal Reserve Governor Stephen Miran Talks Inflation View 0:00:02.520 --> 0:00:07.080 Bloomberg Audio Studios, podcasts, radio news. 0:00:07.360 --> 0:00:10.880 We welcome our Bloomberg TV and radio audience worldwide. I'm 0:00:10.880 --> 0:00:14.080 Matt Miller alongside Danny Berger. Joining us now is Federal 0:00:14.120 --> 0:00:17.400 Reserve Governor Steven Myron here at the desk. 0:00:17.600 --> 0:00:18.960 We're honored to have you here. 0:00:18.880 --> 0:00:23.120 Along with Michael McKee, our international economics and policy correspondent. 0:00:23.200 --> 0:00:23.880 Might take it away. 0:00:24.280 --> 0:00:26.560 Well, good morning, Steve, Thank you for joining us on 0:00:26.640 --> 0:00:30.880 this non jobs day, job's day. We get no government 0:00:31.040 --> 0:00:35.159 primary economic data because of the shutdown right now, So 0:00:35.360 --> 0:00:38.760 let me start by asking if that continues. As a 0:00:38.760 --> 0:00:41.560 member of the Open Market Committee, would you feel comfortable 0:00:41.880 --> 0:00:44.839 voting for a significant cut in interest rates if you 0:00:44.960 --> 0:00:48.880 don't have data on employment and on inflation. 0:00:49.479 --> 0:00:51.599 Good morning, and thanks for having me. Look, I think 0:00:51.640 --> 0:00:54.760 it's important to recognize, first of all, that, as you're 0:00:54.760 --> 0:00:58.040 pointing out, access to high quality data is of utmost 0:00:58.040 --> 0:01:02.640 importance when making Montary Paul's decisions. However, it's also the 0:01:02.680 --> 0:01:05.280 case that we don't make monetary policisions every day. Right 0:01:05.360 --> 0:01:08.839 The FOMC meets to vote once every six weeks or so. Now, 0:01:09.240 --> 0:01:11.160 I think that's a bit longer than most shutdowns have 0:01:11.240 --> 0:01:13.840 historically lasted, so I'm hopeful that we'll get the data 0:01:13.840 --> 0:01:15.520 by the time we actually have to make the decision. 0:01:16.440 --> 0:01:18.840 Well, despite what the President says, as you well know, 0:01:18.959 --> 0:01:23.120 inflation is rising, food prices are up, gasoline prices higher 0:01:23.120 --> 0:01:26.440 than when he took office. Those are the prices that 0:01:26.480 --> 0:01:29.880 Americans notice and hate. So isn't it a risk to 0:01:29.920 --> 0:01:36.760 cut rates significantly in an regime where where inflation is rising. 0:01:37.319 --> 0:01:39.880 So my view is that policy should be forward looking. Right, 0:01:40.200 --> 0:01:42.160 I don't necessarily have a forecast that those items are 0:01:42.160 --> 0:01:44.000 going to continue rising. In fact, I think that a 0:01:44.040 --> 0:01:48.200 lot of them will actually reverse somewhat. But for my process, 0:01:48.240 --> 0:01:50.400 what matters most of all is the cost of housing, 0:01:50.440 --> 0:01:53.880 because that is the single largest component of the inflation process, 0:01:54.160 --> 0:01:56.200 and it's also one of the things that people notice 0:01:56.240 --> 0:01:58.520 the most. They notice when their rent surges, they notice 0:01:58.520 --> 0:02:00.640 when the cost of shelter increases, and that's why it 0:02:00.640 --> 0:02:03.400 gets the largest weight in the inflation in disease. And 0:02:03.480 --> 0:02:06.160 my expectation is that we've just experienced, you know, the 0:02:06.200 --> 0:02:09.639 biggest population shocks to both the upside and the downside 0:02:09.800 --> 0:02:12.080 in my lifetime, and I think in most people's lifetimes, 0:02:12.320 --> 0:02:14.240 and to me, it'd be very surprising if that left 0:02:14.240 --> 0:02:16.240 no lingering trace on the price of shelter. And so 0:02:16.280 --> 0:02:19.919 I am expecting a significant disinflation to the services component 0:02:20.240 --> 0:02:23.160 of the inflation disease driven by shelter, which is affected 0:02:23.320 --> 0:02:25.600 to an extent by changes in population growth. 0:02:25.880 --> 0:02:28.320 Well, we were talking before we came on about your 0:02:28.400 --> 0:02:31.600 view of our start the neutral rate. We've got inflation 0:02:31.720 --> 0:02:35.160 running at basically three percent. You've got unemployment at four 0:02:35.160 --> 0:02:38.600 point three percent, which is historically very low. The Atlanta 0:02:38.639 --> 0:02:41.239 Fed says we're growing three point eight percent, or grow 0:02:41.360 --> 0:02:45.800 three point eight percent in the third quarter. There's no 0:02:45.919 --> 0:02:48.280 economic model that I know of that would get you 0:02:48.400 --> 0:02:53.359 to a near zero neutral rate with those kind of conditions. 0:02:53.880 --> 0:02:54.120 Yeah. 0:02:54.160 --> 0:02:57.320 So, first of all, I have seen some folks argue 0:02:57.360 --> 0:02:59.720 that they think that my conception of the neutral rate 0:02:59.760 --> 0:03:01.520 is he That's not the case. I think that's a 0:03:01.560 --> 0:03:04.080 misreading of the speech. If you read the speech carefully, 0:03:04.080 --> 0:03:05.760 you'll notice that I do a weighted average of a 0:03:05.840 --> 0:03:09.480 model implied X and ty and at market implied XANTY 0:03:09.600 --> 0:03:10.520 rate and gets so. 0:03:10.480 --> 0:03:11.080 About a half. 0:03:11.120 --> 0:03:12.880 And that's consistent with the dot that I put down 0:03:13.200 --> 0:03:16.320 on the statement on the Summary of Economic Projections. And 0:03:16.400 --> 0:03:18.640 so I basically thought, you know, sort of going into 0:03:18.680 --> 0:03:20.799 things last year, there were all these policies that were 0:03:20.800 --> 0:03:24.160 pushing our star higher, Like the highest population growth we'd 0:03:24.160 --> 0:03:28.359 seen in decades, the largest fiscal sustainable fiscal deficits we'd seen, 0:03:28.480 --> 0:03:31.040 sustained fiscal deficits we'd seen in a really long time. 0:03:31.040 --> 0:03:33.079 Those are pushing our star higher. So last year I 0:03:33.080 --> 0:03:34.519 really thought it was at the top of the range 0:03:34.560 --> 0:03:36.360 of where everyone else in the committee thought it was. 0:03:36.400 --> 0:03:38.160 And I think it's now come down this year to 0:03:38.200 --> 0:03:39.440 the bottom end of the range. 0:03:39.200 --> 0:03:41.360 Of where everyone else thinks it is. But you can't 0:03:41.360 --> 0:03:44.720 model that. What do you mean? I can't mombel the models. 0:03:44.760 --> 0:03:46.720 If you put in the numbers that we have right now, 0:03:47.160 --> 0:03:50.200 it wouldn't spit out year zero or half a percent 0:03:50.560 --> 0:03:52.119 oh real rate. 0:03:52.520 --> 0:03:53.680 Well no, but what I've done. 0:03:53.760 --> 0:03:56.880 What I've done is modeled my expectations for inflation based 0:03:56.920 --> 0:04:00.600 on the changes that I see happening from from housing. 0:04:00.640 --> 0:04:01.839 As we talked about a moment ago. 0:04:02.080 --> 0:04:04.120 I've modeled out changes to the output gap that I 0:04:04.120 --> 0:04:06.600 expect to see from policies that expand the supply side 0:04:06.600 --> 0:04:09.160 of the economy therefore expand potential output faster than they 0:04:09.160 --> 0:04:11.839 would expand actual output. And some policies that we've seen 0:04:11.880 --> 0:04:13.440 and acted over the course of this year would push 0:04:13.440 --> 0:04:15.760 out potential and actual by the same amount or bring 0:04:15.800 --> 0:04:18.480 in potential and actual by the same amount. Other policies 0:04:18.480 --> 0:04:20.480 would push out one more than the other. And so 0:04:20.520 --> 0:04:22.280 for an example of one that would push out one 0:04:22.279 --> 0:04:24.920 more than the other would be deregulation, right. I think 0:04:25.000 --> 0:04:27.920 that the regulatory state has been being peeled back over 0:04:27.960 --> 0:04:30.040 the course of this year, and all indications are that 0:04:30.080 --> 0:04:35.160 will accelerate, particularly as the pace of confirmations of appointees 0:04:35.279 --> 0:04:37.400 has just picked up as well. That, in my mind, 0:04:37.440 --> 0:04:40.120 will accelerate the pace of deregulation too. And when you 0:04:40.440 --> 0:04:43.560 remove regulations, you expand the potential output of the economy 0:04:43.600 --> 0:04:46.280 faster than actual output, and so that creates a positive 0:04:46.279 --> 0:04:46.960 output gap. 0:04:47.320 --> 0:04:50.360 I actually, you know, I'm not as deep into this 0:04:50.600 --> 0:04:53.520 as Mike, and certainly neither of us is as deep 0:04:53.520 --> 0:04:55.440 into it as you. But I have the tailor rule 0:04:55.480 --> 0:04:58.159 function on my Bloomberg terminal. I love to play with it, 0:04:58.200 --> 0:05:01.680 and I always ask important economists when they come on 0:05:02.320 --> 0:05:04.080 what variables they would plug into it. 0:05:04.240 --> 0:05:05.760 I put in zero point. 0:05:05.560 --> 0:05:09.080 Five for you in the neutral rate here and I 0:05:09.120 --> 0:05:12.960 put in four percent in the Nehru, I'm still only 0:05:12.960 --> 0:05:16.480 getting three and a half for the tailor rule estimate. 0:05:17.040 --> 0:05:20.120 I know this is a very elementary, you know function 0:05:20.240 --> 0:05:22.440 here on the Bloomberg, But what would you change to 0:05:22.480 --> 0:05:26.040 get you know, your rate down to where you think 0:05:26.040 --> 0:05:27.920 it should be, which is even I think less than 0:05:28.080 --> 0:05:30.440 the three percent terminal rate that the market is pricing in. 0:05:30.680 --> 0:05:33.839 Yes, so let me be clear, montary policy works with lacks, right, 0:05:34.160 --> 0:05:36.640 And yes, those lags are long and variable, but nevertheless 0:05:36.680 --> 0:05:39.400 they exist. And so I think it's inappropriate to put 0:05:39.480 --> 0:05:42.400 in the currents backward looking data as opposed to where 0:05:42.400 --> 0:05:44.080 you expect those data to be in the near term, 0:05:44.200 --> 0:05:45.600 right over the course of the next. 0:05:45.400 --> 0:05:46.400 Year to two years or so. 0:05:46.800 --> 0:05:49.200 And so that's why when I work through the calculations 0:05:49.200 --> 0:05:51.200 that I work through in the speech, which also used 0:05:51.240 --> 0:05:53.760 actually a couple of different specifications of the tailor rule, 0:05:54.000 --> 0:05:55.680 I put in my expectations for. 0:05:55.640 --> 0:05:57.200 Where I think inflation is going to be. 0:05:57.360 --> 0:06:00.479 I put in my expectations for where I think where 0:06:00.480 --> 0:06:02.320 I think the output gap is going to be. And 0:06:02.400 --> 0:06:04.400 so when you look at inflation now on a year 0:06:04.400 --> 0:06:06.800 over year basis, you're including lots of stuff that occurred 0:06:07.000 --> 0:06:10.240 before the overall policy space shifted. And as I just 0:06:10.240 --> 0:06:12.919 said a moment ago, we just lived through the largest 0:06:13.040 --> 0:06:16.280 population growth shocks on both the upside and the downside 0:06:16.440 --> 0:06:19.560 in very rapid succession to a variable the structure of 0:06:19.600 --> 0:06:22.799 the economy. Population growth that usually changes only very very slowly, 0:06:23.120 --> 0:06:27.159 changed incredibly rapidly in both directions. Right to use backward 0:06:27.200 --> 0:06:31.520 looking data that just ignores that shock on the upside 0:06:31.520 --> 0:06:34.640 of the downside, which was of monumental historical significance to 0:06:34.680 --> 0:06:37.560 the US economy, I think is deeply misguided. I think 0:06:37.560 --> 0:06:41.040 it's imperative to use forward looking forecasts that incorporate something 0:06:41.080 --> 0:06:41.400 like that. 0:06:41.600 --> 0:06:43.839 While we can do that with the tailor rule on 0:06:43.839 --> 0:06:45.560 the Bloomberg terminal. As I'm sure you know, if you 0:06:45.560 --> 0:06:48.840 click on the second tab of the function, you can 0:06:48.880 --> 0:06:53.159 put in your inflation forecasts and your unemployment forecast going forward. 0:06:53.160 --> 0:06:56.600 I won't ask you what all of your variables were, 0:06:56.640 --> 0:06:59.279 but I will ask about inflation, because, as a kid 0:06:59.320 --> 0:07:02.560 who grew up under Ronald Reagan, I've always been skeptical 0:07:02.640 --> 0:07:07.080 of government policy when it comes to inflation. I've been 0:07:07.120 --> 0:07:09.640 hearing for so many years that the FED wants to 0:07:09.640 --> 0:07:12.400 get it to two percent, but I find it hard 0:07:12.440 --> 0:07:15.960 to believe. And we've averaged three percent essentially on the 0:07:16.000 --> 0:07:19.080 core since World War Two? Do you think most people 0:07:19.120 --> 0:07:21.760 feel comfortable with that level? With a three percent level? 0:07:22.400 --> 0:07:25.080 Well, you know, I think what you're asking sort of 0:07:25.320 --> 0:07:28.120 invites a previous question, which is what did Congress assigned 0:07:28.120 --> 0:07:29.960 the FED to do? And Congress assigned the FED to 0:07:30.000 --> 0:07:33.360 pursue stable prices? Now, historically the FED has had lots 0:07:33.400 --> 0:07:35.360 of leeway and how to interpret that, and it's chosen 0:07:35.400 --> 0:07:38.239 to interpret that as two percent growth and measured personal 0:07:38.280 --> 0:07:39.920 consumption expenditure inflation. 0:07:40.160 --> 0:07:40.400 Right. 0:07:41.600 --> 0:07:44.680 The way that you calculate inflation is sort of you know, 0:07:44.920 --> 0:07:47.840 it's a very complex thing and there's lots of methological 0:07:47.920 --> 0:07:50.360 choices that get made when you're sort of deciding how 0:07:50.360 --> 0:07:52.960 the sausage gets made, and it can really affect how 0:07:53.000 --> 0:07:55.040 things are measured. Right, And so when you say, do 0:07:55.400 --> 0:07:59.120 households have faith that the FED is pursuing and achieving 0:07:59.280 --> 0:08:03.440 its inflation? I think that, you know, sort of small 0:08:03.520 --> 0:08:06.960 changes in measured inflation are difficult for households to detect 0:08:07.000 --> 0:08:09.160 because they can be you know, because the way that 0:08:09.200 --> 0:08:11.960 measured inflation is measured is there's lots of noise in it, 0:08:11.960 --> 0:08:14.120 and I think that small changes in measured inflation are 0:08:14.200 --> 0:08:17.600 usually dominated by the noise relative to what households are experiencing. 0:08:17.880 --> 0:08:20.800 But nevertheless, when you look at inflation expectations, I think 0:08:20.840 --> 0:08:24.120 that they remain reasonably well anchored, which indicates that households 0:08:24.160 --> 0:08:26.200 and firms the United States have faith in the Fed's 0:08:26.520 --> 0:08:31.440 ability and willingness and future of hitting its inflation it's 0:08:31.480 --> 0:08:32.120 inflation target. 0:08:32.240 --> 0:08:35.560 Governor Martin, you've been extremely transparent with your view and 0:08:35.600 --> 0:08:38.000 have been very generous with that. You've always been very 0:08:38.080 --> 0:08:40.959 transparent with your views. You're probably the most prolific social 0:08:41.040 --> 0:08:43.520 media poster of anyone that the Fed's ever had. In 0:08:43.559 --> 0:08:46.600 twenty twenty three, I saw you had tweeted something out saying, basically, 0:08:46.679 --> 0:08:50.360 the case against adjustment cuts is that financial conditions have 0:08:50.440 --> 0:08:54.720 eased massively, and policy works via financial conditions. Real rates 0:08:54.720 --> 0:08:57.640 don't exist in a vacuum. Given that view, the fact 0:08:57.679 --> 0:09:00.280 we have record high stock prices right now, well, is 0:09:00.320 --> 0:09:03.680 it a sign of unsustainable froth of even a bubble 0:09:04.040 --> 0:09:06.720 that will make bringing down inflation that much more difficult. 0:09:06.880 --> 0:09:07.840 Yeah, So that's a great point. 0:09:07.920 --> 0:09:11.000 Financial conditions are the channel through wich monetary policy works, 0:09:11.000 --> 0:09:13.520 and so they matter when you're thinking about where monetary policy. 0:09:13.240 --> 0:09:14.400 Should be set now. 0:09:14.480 --> 0:09:16.679 As we were saying moments ago, my view is that 0:09:16.800 --> 0:09:20.600 last year neutral was much higher because immigration was much higher, 0:09:20.880 --> 0:09:23.520 because fiscal deficits were much higher than I expect. 0:09:23.240 --> 0:09:24.040 Them to be going forward. 0:09:24.320 --> 0:09:27.319 If you look at fiscal deficits this year in February 0:09:27.360 --> 0:09:29.439 through August, which are the data that we have available 0:09:29.640 --> 0:09:32.640 and that encompass after the policy space changed, there are 0:09:32.640 --> 0:09:35.720 about four hundred billion dollars at an annualized rate below 0:09:35.920 --> 0:09:37.960 where they were in the comparable period in the previous 0:09:38.000 --> 0:09:40.840 fiscal year. So physical deficits are coming in also, and 0:09:40.880 --> 0:09:43.560 that also helps drive down our star. So my view 0:09:43.600 --> 0:09:46.520 is that policy, even though financial conditions appear to be 0:09:46.600 --> 0:09:50.160 on some measures loose, policy has actually grown tighter because 0:09:50.200 --> 0:09:51.760 neutral has migrated down. 0:09:52.120 --> 0:09:52.360 Now. 0:09:52.400 --> 0:09:54.520 I do want to be clear that financial conditions can 0:09:54.520 --> 0:09:57.559 also be driven by variety of non monetary factors. There 0:09:57.559 --> 0:10:00.480 have been substantial changes to the supply side of economy 0:10:00.520 --> 0:10:02.520 this year, both through the tax code and through the 0:10:02.559 --> 0:10:06.720 regulatory code, as well as trade renegotiation. Right, all of 0:10:06.760 --> 0:10:10.800 that can affect financial conditions for non monetary purposes, sorry, 0:10:10.840 --> 0:10:13.439 through non monetary channels. And so it can be a 0:10:13.440 --> 0:10:15.280 little bit of a mistake to look at financial conditions 0:10:15.280 --> 0:10:18.480 and infer something necessarily about the stance of monetary policy, 0:10:18.559 --> 0:10:20.000 because they can be driven up by other things. 0:10:20.000 --> 0:10:21.319 And also they're not all loose. 0:10:21.360 --> 0:10:24.800 I mean, you know, housing finances arguably still a relatively 0:10:24.800 --> 0:10:25.400 tight short. 0:10:25.280 --> 0:10:27.680 But a lot of this view is incredibly forwardlooking. And 0:10:27.720 --> 0:10:30.000 that's the point, right that we're not looking at backward data. 0:10:30.040 --> 0:10:33.160 But is there any data that we could get Governor 0:10:33.200 --> 0:10:35.840 Myron that would change your mind, and it would change 0:10:35.880 --> 0:10:37.840 your mind to have you believe that we should not 0:10:37.960 --> 0:10:39.840 be pushing towards more rate cuts right now? 0:10:39.920 --> 0:10:40.800 Oh? Absolutely. 0:10:40.800 --> 0:10:43.400 Look, my view is that services inflation is the most 0:10:43.400 --> 0:10:46.040 persistent and sticky part of inflation. A lot of my 0:10:46.120 --> 0:10:48.960 view about services inflation is driven by the housing sector, 0:10:49.320 --> 0:10:52.800 as shelter costs are the largest costs for most families. 0:10:53.240 --> 0:10:55.680 My view about shelter inflation, as I said, is driven 0:10:56.000 --> 0:10:57.800 by two things, as I said in the speech, One 0:10:58.080 --> 0:11:01.040 the facts that average rents have finally up to market rents, 0:11:01.080 --> 0:11:03.120 meaning the catch a period is done. You know, people 0:11:03.120 --> 0:11:05.440 don't reset their leases every day, they reset every year, 0:11:05.440 --> 0:11:07.600 every couple of years, and so that means that a 0:11:07.720 --> 0:11:09.880 change in market rents takes time to feed through to 0:11:09.920 --> 0:11:12.200 when it's experienced by households. When you look at the data, 0:11:12.240 --> 0:11:14.160 it seems to me that that catch a period is done, 0:11:14.200 --> 0:11:16.280 which means that I expect shelter rents to come down 0:11:16.480 --> 0:11:19.120 CPI rents to come down, bring shelter inflation down. The 0:11:19.160 --> 0:11:21.280 second thing is the immigration shock that we talked about. 0:11:21.520 --> 0:11:24.080 My view is that immigration was pushing rents up in 0:11:24.120 --> 0:11:26.240 previous years, and now that shock has not only gone 0:11:26.240 --> 0:11:27.960 to zero, I think it's actually reversed. I think we 0:11:27.960 --> 0:11:29.840 have negative net migration when it comes. 0:11:29.679 --> 0:11:32.120 To the United States this year. Right. So my view 0:11:32.160 --> 0:11:33.320 is driven by two things. 0:11:33.400 --> 0:11:36.520 Shelter sorry services are the more persistent and sticky part 0:11:36.559 --> 0:11:39.400 of inflation. Services are driven in large part by housing, 0:11:39.600 --> 0:11:42.720 and I expect housing inflation to come down through those channels. 0:11:42.960 --> 0:11:45.360 If something were to happen that were to tell me 0:11:45.400 --> 0:11:48.360 that that channel is invalidated, that there's some shock that's 0:11:48.400 --> 0:11:53.679 going to be pushing rents materially higher, the benign inflation 0:11:53.760 --> 0:11:56.600 forecast that I have would have to be adjusted as 0:11:56.600 --> 0:11:59.360 a result. All else EQL right. If nothing else were 0:11:59.400 --> 0:12:01.719 to change to off set that. But to me, that's 0:12:01.760 --> 0:12:04.520 the core of my inflation view, and I would want 0:12:04.520 --> 0:12:07.000 to see something come along and tell me that that 0:12:07.160 --> 0:12:09.360 channel is wrong and that I'm thinking about it the 0:12:09.400 --> 0:12:09.840 wrong way. 0:12:10.280 --> 0:12:12.320 I want to ask you about something in your speech 0:12:12.360 --> 0:12:15.120 that has confused a lot of people, including me. You 0:12:15.400 --> 0:12:18.280 argue that tax cuts are going to help lower the 0:12:18.320 --> 0:12:22.680 deficit by increasing economic activity, and at the same time 0:12:22.800 --> 0:12:27.840 you argue that tariffs, which are taxes on the American people, 0:12:28.040 --> 0:12:31.240 are going to lower the deficit. You have one way 0:12:31.559 --> 0:12:35.240 raising taxes and the other cutting taxes at the same 0:12:35.320 --> 0:12:36.559 time lowering the deficit. 0:12:36.600 --> 0:12:38.199 How does that work? Yeah, So. 0:12:39.760 --> 0:12:41.640 You know, it's important when you think about economics to 0:12:41.640 --> 0:12:45.400 think about the elsses of supply and demand. And when 0:12:45.400 --> 0:12:49.480 you cut taxes on American production, whether that's labor or 0:12:49.520 --> 0:12:52.920 whether it's corporate income, you want to think about theses 0:12:53.240 --> 0:12:55.319 supply of those activity and is going to lead to 0:12:55.360 --> 0:12:56.240 additional labor supply? 0:12:56.320 --> 0:12:58.160 Is it going to lead to additional investment? Right? 0:12:58.440 --> 0:13:00.720 And so that's the way that cutting access can actually 0:13:00.800 --> 0:13:04.520 generate economic growth in the United States. When you think 0:13:04.559 --> 0:13:07.360 about tariffs again, you think about the ASSSITT as a 0:13:07.360 --> 0:13:10.760 demand and supply. And in this case, American consumers and 0:13:10.800 --> 0:13:14.760 firms are the demand and foreign producers are the supply. Now, 0:13:14.880 --> 0:13:18.760 the economic evidence is overwhelmingly that the elasticity of the 0:13:18.800 --> 0:13:22.400 demand in imports is much higher than the elasticity of 0:13:22.480 --> 0:13:26.079 the supply. Put another way, foreign producers are inelastic. Right, 0:13:26.080 --> 0:13:29.080 You've got a factory in China or somewhere else, and 0:13:29.120 --> 0:13:32.120 it's stuck in China or wherever it is, it's installed capital. 0:13:32.120 --> 0:13:33.000 It's inelastic. 0:13:33.360 --> 0:13:37.480 Whereas American consumers can, American importers can alter their demand 0:13:37.559 --> 0:13:38.560 power patterns. 0:13:38.760 --> 0:13:39.680 They could import from. 0:13:39.640 --> 0:13:41.840 China, but they also could import from Vietnam, or they 0:13:41.880 --> 0:13:45.080 could or they could make stuff at home. That flexibility 0:13:45.160 --> 0:13:49.800 gives them the ability to avoid the burden of the tariff. Now, 0:13:49.960 --> 0:13:53.240 this is just tax incidence theory in public finance economics 0:13:53.240 --> 0:13:55.080 one oh one. And when you look at it this way, 0:13:55.120 --> 0:13:58.120 the argument that economists always reached. The conclusion that economists 0:13:58.160 --> 0:14:01.080 always reach is that the burden of a tax, a tariff, 0:14:01.120 --> 0:14:04.920 a substate, anything falls on the more inelastic party. Right now, 0:14:04.960 --> 0:14:07.439 the evidence is overwhelmingly that the FIGM producers are the 0:14:07.440 --> 0:14:09.839 more inelastic party because the factory is stuck in place 0:14:09.880 --> 0:14:13.840 it can't move, whereas import demand can can substitute across borders. 0:14:14.040 --> 0:14:16.760 So it is the case that the negative effects of 0:14:16.840 --> 0:14:20.520 any tariff fall on the fall on the more inelastic party, 0:14:20.680 --> 0:14:24.360 which is overwhelmingly the exporter and not the importer. And 0:14:24.400 --> 0:14:27.920 so as a result, the positive effects of tax cuts 0:14:28.000 --> 0:14:30.760 in the United States get felt by production and they 0:14:30.800 --> 0:14:34.240 increase economic growth. Where is the negative effects of raising 0:14:34.280 --> 0:14:37.920 revenue from tariffs get born by the get born by 0:14:37.920 --> 0:14:38.640 the exporting country. 0:14:38.720 --> 0:14:40.840 Well, we haven't seen any evidence in import prices that 0:14:40.920 --> 0:14:41.560 that's happening. 0:14:42.360 --> 0:14:45.960 Well, you know, import prices, as your points, dollar denominated 0:14:46.000 --> 0:14:48.960 import prices, as you're pointing out, have been relatively flat. 0:14:49.040 --> 0:14:51.200 However, I want to and people. 0:14:50.920 --> 0:14:53.560 I think you're you're alluding to an argument that people make, 0:14:53.640 --> 0:14:55.360 which is that you would think you would see import 0:14:55.360 --> 0:14:58.680 prices decline if foreigners were reducing their selling prices. Is 0:14:58.720 --> 0:15:01.400 that that's the argument referring to Yeah. To me, that 0:15:01.480 --> 0:15:04.800 logic doesn't follow for two reasons. One, you know, it's 0:15:04.960 --> 0:15:07.800 there's an implicit all else equal clause that's not being stated, 0:15:07.880 --> 0:15:09.880 and all else is not equal. Because we also had 0:15:09.880 --> 0:15:11.920 to move down to the dollar this year, which ought 0:15:11.920 --> 0:15:15.080 to increase import prices by a comparable amount, and so 0:15:15.160 --> 0:15:18.080 the fact that import prices look relatively flat could just 0:15:18.200 --> 0:15:21.560 be the increase in import prices from the weeker dollar 0:15:22.080 --> 0:15:25.240 just offsetting the decrease in dollar prices from the incidents 0:15:25.240 --> 0:15:28.040 of the tariff being borne by the exporter. The other 0:15:28.120 --> 0:15:31.160 reason why it doesn't really make sense to me is 0:15:31.200 --> 0:15:35.040 because I think that a lot of the a lot 0:15:35.080 --> 0:15:39.240 of the importers of record are ultimately US subsidiaries of 0:15:39.320 --> 0:15:42.840 foreign companies. And so you've got a Japanese or German 0:15:43.040 --> 0:15:46.320 exporter selling to the United States, but the exports are 0:15:46.360 --> 0:15:51.120 bought by the exports are bought by US subsidiary of them, 0:15:51.160 --> 0:15:54.000 so Mitsubishi Japan or whoever is selling to Mitsubishi US 0:15:54.040 --> 0:15:56.600 or whoever right. And then if this is the case, 0:15:56.640 --> 0:15:59.560 then what winds up happening is that the incidence ends 0:15:59.640 --> 0:16:03.840 up falling on the falling on the importer of record, 0:16:04.000 --> 0:16:07.920 without necessarily pushing a decline down in import prices. And 0:16:08.000 --> 0:16:09.920 so I'm not exactly sure on the magnitude of this 0:16:10.000 --> 0:16:12.240 channel yet. It's something that I'm looking into, but it 0:16:12.320 --> 0:16:15.680 is a possible disruptor of that argument. 0:16:15.760 --> 0:16:17.920 But in any case, for sure, what we're. 0:16:17.720 --> 0:16:21.000 Seeing is not a broad based increase in consumer inflation 0:16:21.000 --> 0:16:22.000 as resultive tariffs. 0:16:22.360 --> 0:16:25.400 Governor, I want to ask about a piece that Mark 0:16:25.440 --> 0:16:30.200 Summerlin wrote in the Wall Street Journal Today previously of 0:16:30.240 --> 0:16:35.360 the NEEC under the Bush administration. Basically says that the 0:16:35.400 --> 0:16:38.840 FED suffers from the same kind of bias inherent in 0:16:39.320 --> 0:16:44.280 media or academia because it's so focused in the northeast. Right, 0:16:44.320 --> 0:16:48.520 we have four FED banks between Richmond and Boston, and 0:16:48.640 --> 0:16:52.320 only one west of Kansas, right, only two in the South. 0:16:52.600 --> 0:16:55.440 He says there should be a FED bank in Miami 0:16:55.520 --> 0:16:57.360 and Phoenix, which would make sense. 0:16:58.160 --> 0:17:00.320 He also points out that of the six. 0:17:00.320 --> 0:17:03.080 Hundred thousand dollars donated by FED staffers in the twenty 0:17:03.120 --> 0:17:06.800 twenty four election cycle, ninety two percent went to Democratic candidates. 0:17:07.560 --> 0:17:10.720 I assume that's because they're in the Northeast and they're 0:17:11.000 --> 0:17:12.560 underpaid relative to Wall Street. 0:17:12.640 --> 0:17:15.240 So can you make reforms. 0:17:14.960 --> 0:17:17.359 Especially on those two issues, while you're at the FED. 0:17:17.800 --> 0:17:20.320 Well, look, you know, reforms to the Federal Reserve, to 0:17:20.320 --> 0:17:22.399 the structure of the Federal Reserve are ultimately an issue 0:17:22.400 --> 0:17:24.480 for Congress to take up and not one for me 0:17:24.560 --> 0:17:27.960 to address. But I do see part of my job 0:17:28.280 --> 0:17:33.320 as bringing fresh an out of consensus ideas to what 0:17:33.359 --> 0:17:36.119 can be you know, at times a settled way of thinking. 0:17:36.160 --> 0:17:38.119 And that's what I'm going to continue doing. And so, 0:17:38.160 --> 0:17:40.399 for example, you know, you sort of you think about 0:17:41.040 --> 0:17:43.800 tariffs and whether they're causing inflation or not. I think 0:17:43.840 --> 0:17:46.119 there's an attitude among a lot of people which is 0:17:46.160 --> 0:17:49.280 that the correct counterfactual for thinking about tariffs is to 0:17:49.359 --> 0:17:52.159 compare them to pre trends for what was the trend 0:17:52.200 --> 0:17:55.280 in those goods before the pandemic? Right, to me, that's 0:17:55.320 --> 0:17:57.639 the wrong counterfactional because there was so much else different 0:17:57.680 --> 0:17:59.719 about the structure of the economy. When you look at 0:17:59.720 --> 0:18:02.520 long from trends before the pandemic, they include you know, 0:18:03.480 --> 0:18:05.360 you look at twenty year trends before the pandemic, which 0:18:05.359 --> 0:18:07.000 is what a lot of people do. It includes the 0:18:07.080 --> 0:18:09.600 entry of China to the WTO and shipping deflation to 0:18:09.640 --> 0:18:12.680 the entire world. Is that the correct counterfactual for thinking 0:18:12.680 --> 0:18:16.400 about the impact of tariffs on the economy today if 0:18:16.400 --> 0:18:18.640 we're not experiencing the same deflation we experienced in two 0:18:18.640 --> 0:18:21.040 thousand and four and goods when China had just entered 0:18:21.040 --> 0:18:25.280 the WTO, and then attributing all excess inflation relative to 0:18:25.280 --> 0:18:27.640 that pre trend to tariffs. I think that's the wrong 0:18:27.680 --> 0:18:30.919 counterfactual for me. My mind is the right counterfactual is 0:18:30.960 --> 0:18:33.240 non import goods. And that's why the way that I've 0:18:33.240 --> 0:18:36.320 looked at it is to compare the prices of import intensive. 0:18:35.920 --> 0:18:37.960 Core goods to overall core goods. 0:18:38.160 --> 0:18:40.720 And I would think that if terrorists are driving inflation, 0:18:41.240 --> 0:18:44.240 import intensive core goods would inflate at a materially higher 0:18:44.280 --> 0:18:46.119 rate than overall core goods. And that is just not 0:18:46.240 --> 0:18:48.040 the case. That is not what you see in the data. 0:18:48.160 --> 0:18:49.439