Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: We'd like to welcome Beth Havock to Bloomberg Television and
Speaker 2: Radio worldwide. You just finished a panel. You made an
Speaker 2: address basically suggesting that risks are two sided. Now you've
Speaker 2: been on the side of inflation being the biggest concern,
Speaker 2: But then we got this jobs report today that sort
Speaker 2: of makes the case for some of the doves on
Speaker 2: the committee. What did you make of it?
Speaker 3: Well, I try not to make too much of anyone
Speaker 3: individual number, and certainly this number was a disappointment, mostly
Speaker 3: because it means that there are more Americans who aren't working.
Speaker 3: That's what disappointed me in this report. We've seen the
Speaker 3: economy overall has been pretty healthy.
Speaker 1: It's been brightening. The outlook has been positive.
Speaker 3: When I'm out in the district talking with businesses, I
Speaker 3: hear them talking about their optimism and that they're looking
Speaker 3: to make more investments in their businesses, and they think
Speaker 3: demand is going to be reasonably robust. But we've had
Speaker 3: a labor market that I would characterize as stabilizing. It's
Speaker 3: been in that four four point four range from an
Speaker 3: unemployment rate perspective. Obviously, the headline job's number has been
Speaker 3: the piece that's been a little bit weaker. When I
Speaker 3: talked to you last it was August, which.
Speaker 1: Was the first of those reports where.
Speaker 3: We saw more softening in the labor market. But it
Speaker 3: does look like it's been stabilizing, and I think part
Speaker 3: of that is due to the accommodation that we put
Speaker 3: into the economy towards the end of last year, and
Speaker 3: now we have a lot of tailwinds I think looking
Speaker 3: ahead in terms of the economy, in terms of growth.
Speaker 3: On the other side of our mandate, inflation has been
Speaker 3: above our target for five years. We've made virtually no
Speaker 3: progress over the past two years. We're still right around
Speaker 3: three percent on inflation, and so we need to make
Speaker 3: sure that we're maintaining a balance of policy that's going
Speaker 3: to help bring inflation back down to target while still
Speaker 3: supporting the labor market. So when I look at things broadly,
Speaker 3: to me, it seems like there are two sided risks
Speaker 3: to rates.
Speaker 2: Well, there's a question on Wall Street that came out
Speaker 2: of the last minutes where it was suggested that some
Speaker 2: members of the Open Market Committee wanted to put the
Speaker 2: two sided risks into the statement. At this point, is
Speaker 2: monetary policy tight enough to address the inflation side.
Speaker 1: That's a great question. I think we're right around neutral.
Speaker 3: You know, there are a lot of different estimates of
Speaker 3: what that neutral rate is. To me, when I see
Speaker 3: the economy continuing to perform reasonably well, I take confidence
Speaker 3: that we're probably not being overly restrictive. When I talk
Speaker 3: to business leaders, they're still willing to make investments, they're
Speaker 3: taking out loans. The banks that I've talked to in
Speaker 3: the district see that their loan growth is improving, and
Speaker 3: so all of that says to me that we are
Speaker 3: around that neutral level, and that we should stay at
Speaker 3: least around neutral to help make sure we're putting the
Speaker 3: right amount of pressure and bring inflation back down to target.
Speaker 2: So we basically can look at the next meeting as
Speaker 2: kind of a wash. It's too early to make any
Speaker 2: decisions based on what's going on with the war, and
Speaker 2: as far as you're concerned, you don't need any more
Speaker 2: accommodation right now.
Speaker 1: Yeah.
Speaker 3: I'm just one person, but as I see it, I
Speaker 3: think we could be on whole for quite some time.
Speaker 2: As a voter, an important person, we're not going to
Speaker 2: do I think all nineteen of us, so one of
Speaker 2: the things that's going to happen over the next few
Speaker 2: months is a new chair is going to come in.
Speaker 2: A lot of people talking about Kevin worsh he's got
Speaker 2: a lower interest rates, but one guy can't do it himself. It's,
Speaker 2: as you say, nineteen people on the committee. So how
Speaker 2: do you think that plays out with a new chair
Speaker 2: you know, who's not Jay Powell anymore.
Speaker 3: Well, I mean there's been transitions in the chair of
Speaker 3: the Committee since the since the body was founded in
Speaker 3: nineteen thirteen, and so there have been a number of evolutions,
Speaker 3: and I think you saw the transition from Greenspan to Bernaki,
Speaker 3: to Yellen to Powell, and I think this will be
Speaker 3: another transition and the Committee will adapt, and I'm excited
Speaker 3: to work with the new chair. I think that whoever
Speaker 3: walks into that role, the chair seat is a particularly
Speaker 3: influential seat. They historically have tried to bring the committee
Speaker 3: together and get a perspective on where people are. And
Speaker 3: I have every confidence that Kevin, if he assumes the job,
Speaker 3: is going to do his absolute best for the American public,
Speaker 3: like all the rest of the eighteen of us do
Speaker 3: around that table.
Speaker 2: Well, he's wanted to make some changes, and one of
Speaker 2: them is a smaller balance sheet. This is kind of
Speaker 2: your area of going back to your days at Golden Sacks.
Speaker 2: What do you think of that idea.
Speaker 1: I think it's a discussion that we should have.
Speaker 3: I think there are lots of things that we've done
Speaker 3: for a long time, and one of the things I
Speaker 3: love about being on the committee and being part of
Speaker 3: the system is that we have really rigorous, really deep
Speaker 3: debates about what is the right thing to do, what's
Speaker 3: the best thing that we can do to support the economy,
Speaker 3: And so I think it's a fair conversation to say,
Speaker 3: should we have a balance sheet as large as as
Speaker 3: it's been, or should we look at reducing it? What
Speaker 3: are the pros and cons? What are the ramifications. Typically,
Speaker 3: we don't do things very rapidly. We take our time
Speaker 3: and we make sure that we're thoughtful. The magnitude of
Speaker 3: the decisions that we're making are significantly greater than what
Speaker 3: I did in my previous life, So it's appropriate that
Speaker 3: we move a lot more slowly. But I'm excited to
Speaker 3: have these conversations.
Speaker 1: You know.
Speaker 3: One of the other things he's talked about is our
Speaker 3: communication strategy. Do we have the right communication strategy. Should
Speaker 3: we be using words in our statements?
Speaker 1: Are fewer? Words are? The press conference is something.
Speaker 3: So I think there'll be a new leader coming in,
Speaker 3: Like in any organization that has a new leader, I'm
Speaker 3: sure we'll bring fresh ideas, fresh perspectives, and it'll spark
Speaker 3: a bunch of really good discussions.
Speaker 2: Well from your old job perspective of looking at this
Speaker 2: whole system of the balance sheet and everything that's developed
Speaker 2: over the years since you went to interest on reserves,
Speaker 2: would it be very very hard to change again given
Speaker 2: the infrastructure that's arisen around this.
Speaker 3: So I think when we talk about reducing the balance sheet,
Speaker 3: it's really about are we going to be in an
Speaker 3: ample reserves regime or a scarce reserve regime? I think
Speaker 3: is really what the question is around. And obviously the
Speaker 3: details are going to matter on any particular proposal. But
Speaker 3: in order to maintain good rate control, if the banks
Speaker 3: demand a certain amount of reserves, we have to supply
Speaker 3: those reserves. Right now, we're doing that by holding treasuries
Speaker 3: on our balance sheet. If we move to a scarce
Speaker 3: reserve regime, we would do that by engaging in open
Speaker 3: market operations, and so there'd be rep rather than treasuries. Net,
Speaker 3: the size of the balance sheet is still the same,
Speaker 3: it's just the form of.
Speaker 1: Those assets that's different.
Speaker 3: The duration profile, the risk profile is slightly different depending
Speaker 3: on which format you have, And so I think it's
Speaker 3: a reasonable question to say, is it better to be
Speaker 3: in treasuries? Would we rather be in repos that's a
Speaker 3: discussion that we can have. Away from that, the banks
Speaker 3: are going to demand what they want from a reserve perspective.
Speaker 3: A lot of that is driven by our liquidity regulations,
Speaker 3: by their payment flows, and by just their willingness and
Speaker 3: their desire to have safe assets on their balance sheet.
Speaker 3: And so there are a number of factors at play
Speaker 3: that are going to drive that size of what they
Speaker 3: want those reserves to be. But the form in which
Speaker 3: we're supplying them could change.
Speaker 2: Let me go back to the making of monetary policy
Speaker 2: and ask you about when you go around the Cleveland district,
Speaker 2: what are you hearing from companies about their plans. We
Speaker 2: were told for a long time by all kinds of
Speaker 2: feed officials and companies are saying, we're sitting on our
Speaker 2: hands because we're waiting to see what's going to happen.
Speaker 2: Has that changed?
Speaker 1: At all. That's changed.
Speaker 3: Companies are no longer sitting on their hands. I think
Speaker 3: they recognized somewhere around last fall that we were living
Speaker 3: in a world of uncertainty and that was not going
Speaker 3: to change and they had to keep operating their businesses.
Speaker 3: So when I was out in Akron a few weeks ago,
Speaker 3: we were talking with some business leaders and they were
Speaker 3: talking about trying to go out and hire, you know,
Speaker 3: saying if they could find ten workers, it hire ten
Speaker 3: workers because they're seeing the demand and they want to
Speaker 3: be able to meet that. What I hear most often
Speaker 3: in the district is that it's hard to find skilled
Speaker 3: labors and tradesmen and that's been a real barrier to
Speaker 3: growth for a number of the companies in the fourth district.
Speaker 2: If they are considering raising prices, are we going to
Speaker 2: see more of that? We did see a big jump
Speaker 2: in goods prices in the last PPI.
Speaker 3: Yeah, it's you know, the pricing pressures have been reasonably consistent.
Speaker 3: Because we talked about we've been closer to three percent
Speaker 3: than our objective of two percent.
Speaker 1: It's coming from a variety of sectors.
Speaker 3: You know. Some of it is driven by energy costs,
Speaker 3: some of it is driven by insurance costs.
Speaker 1: I hear that very regularly when I'm out.
Speaker 3: In the district with businesses, that those two pricing pressures
Speaker 3: are really significant. You know, talking to a grocery a grocer,
Speaker 3: they were talking about how their energy costs have been
Speaker 3: really elevated and they have to factor in how much
Speaker 3: of that do they want to put into the food
Speaker 3: costs that they're selling things for. And so businesses are
Speaker 3: continuing to really deal with these pricing pressures. One of
Speaker 3: the things if you look at the data is you
Speaker 3: do see PPI significantly higher than CPI, right, so the
Speaker 3: producer prices are going up a lot more than the
Speaker 3: prices to consumers, which means that businesses are buffering that
Speaker 3: that's eating into their margins. And one of the questions
Speaker 3: that we continue to ask businesses is how long can
Speaker 3: that persist? At what point will you need to pass
Speaker 3: on those pricing pressures. Right now, they've been nervous to
Speaker 3: price on more because they're worried about the demand outlook
Speaker 3: and they don't feel that they necessarily have all the
Speaker 3: ability to price it on without impacting demand. But that's
Speaker 3: something that we'll be giving a close eye on what.
Speaker 2: Are you discerning from people in your district, both in
Speaker 2: the executive suite and then regular people about the war
Speaker 2: and the price rises which is going to be gasoline
Speaker 2: for most people in the short run, because it could
Speaker 2: have an effect on consumer sentiment. Now we know they're
Speaker 2: not as related as they used to be. Consumer sentiment
Speaker 2: and consume we're spending. But do you worry that this
Speaker 2: could lead us to something like stagflation?
Speaker 3: You know, we run in Cleveland, the Center for Inflation Research,
Speaker 3: and our team has done a lot of work around
Speaker 3: what the impact of higher energy prices is on consumers,
Speaker 3: and there is evidence to show that it can impact
Speaker 3: consumer's outlook, their spending, and their willingness to invest. I
Speaker 3: think the economy right now is in a reasonably good place,
Speaker 3: but obviously all these developments, the macro developments, bear watching.
Speaker 3: You know, the impact of oil prices, it's too soon
Speaker 3: to say. What I'm going to be looking for is how.
Speaker 1: Big and for how long?
Speaker 3: So the magnitude and persistence of any potential increase in
Speaker 3: oil prices, what's that going to mean? How long is
Speaker 3: that going to persist? And how will that flow through?
Speaker 3: It could be that it puts more persistent inflationary pressure there,
Speaker 3: but it also could mean that there's a drop off
Speaker 3: in demand because of it as well, and so there
Speaker 3: really are two sided risks that are worth watching.
Speaker 2: Beth Hammick, thank you very much for joining us. The
Speaker 2: President of the Federal Reserve Bank of Cleveland,