1 00:00:02,440 --> 00:00:08,360 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Hi guys, and hello 2 00:00:08,400 --> 00:00:11,240 Speaker 1: to everybody watching and listening around the world on Bloomberg 3 00:00:11,360 --> 00:00:14,320 Speaker 1: Radio and television. I have to say it's tough to 4 00:00:14,360 --> 00:00:16,680 Speaker 1: get people to come to a resort area like this. 5 00:00:17,040 --> 00:00:19,799 Speaker 1: We've got about half the Federal Reserve here, I think, 6 00:00:20,000 --> 00:00:22,400 Speaker 1: including the readavester. Thanks for joining. 7 00:00:22,239 --> 00:00:23,760 Speaker 2: Us today, Thanks for having me. 8 00:00:24,280 --> 00:00:26,360 Speaker 1: They were just talking Carolyn too. We're just talking about 9 00:00:26,360 --> 00:00:29,840 Speaker 1: how we might see another record in the markets today, 10 00:00:30,120 --> 00:00:33,320 Speaker 1: and I'm wondering how you look at that, because everybody 11 00:00:33,320 --> 00:00:36,640 Speaker 1: says the Fed has let financial conditions get too loose 12 00:00:37,120 --> 00:00:40,239 Speaker 1: and that is going to lead to inflation again. But 13 00:00:40,280 --> 00:00:44,560 Speaker 1: financial conditions indexes really measure asset prices, and if asset 14 00:00:44,600 --> 00:00:48,320 Speaker 1: prices go up, then financial conditions get looser. It's sort 15 00:00:48,360 --> 00:00:51,920 Speaker 1: of circular. Do you think that you're restrictive at this point? 16 00:00:52,560 --> 00:00:56,440 Speaker 2: Oh, I think monetary policy is restrictive. We're in restrictive territory. 17 00:00:56,560 --> 00:01:00,480 Speaker 2: But no doubt the economy has performed strong in the 18 00:01:00,520 --> 00:01:03,240 Speaker 2: first you know, three months of the year. Then we 19 00:01:03,280 --> 00:01:06,720 Speaker 2: probably had anticipated than I had anticipated. At the same 20 00:01:06,800 --> 00:01:10,640 Speaker 2: time we saw that inflation progress stalled in the first 21 00:01:10,640 --> 00:01:14,480 Speaker 2: three months. We did get an April CPI report, which 22 00:01:14,560 --> 00:01:17,360 Speaker 2: was welcome news, but I think it's too soon to 23 00:01:17,400 --> 00:01:20,040 Speaker 2: tell what path inflation's on, so we just need to 24 00:01:20,080 --> 00:01:23,600 Speaker 2: collect more information on that. But we're seeing moderation on 25 00:01:23,680 --> 00:01:25,840 Speaker 2: some of the real side of the economy. Still a 26 00:01:25,920 --> 00:01:29,400 Speaker 2: strong economy, but we are seeing the impact of the 27 00:01:29,600 --> 00:01:32,160 Speaker 2: monetary policy that we put in place. 28 00:01:32,480 --> 00:01:35,440 Speaker 1: Well, do you reject the idea that financial conditions got loose, 29 00:01:35,480 --> 00:01:37,920 Speaker 1: and that's the reason the first four months of the 30 00:01:37,959 --> 00:01:40,000 Speaker 1: year we saw inflation level out or go up a 31 00:01:40,000 --> 00:01:40,399 Speaker 1: little bit. 32 00:01:40,560 --> 00:01:42,479 Speaker 2: Yeah, the markets are going to be the markets, right, 33 00:01:42,560 --> 00:01:44,399 Speaker 2: they move up and down. I think the way I 34 00:01:44,440 --> 00:01:46,880 Speaker 2: look at it is, you know, we have a restrictive 35 00:01:46,880 --> 00:01:50,520 Speaker 2: monetary policy in place. It has shown up in terms 36 00:01:50,600 --> 00:01:55,360 Speaker 2: of moderating the labor markets. They're becoming better balance between 37 00:01:55,400 --> 00:01:58,200 Speaker 2: labor demand and labor supply, and so we're seeing that 38 00:01:58,320 --> 00:02:01,520 Speaker 2: kind of work work its way through, and that rebalancing 39 00:02:01,640 --> 00:02:06,120 Speaker 2: is going to put downward pressure on inflation. I think 40 00:02:06,760 --> 00:02:09,120 Speaker 2: as things play out, it's just that we didn't see 41 00:02:09,160 --> 00:02:11,679 Speaker 2: that in the first three months of the year, and 42 00:02:11,720 --> 00:02:14,680 Speaker 2: we're just going to need to gather more evidence on 43 00:02:14,360 --> 00:02:18,280 Speaker 2: what exact path inflation's on in order to sort of 44 00:02:18,360 --> 00:02:21,160 Speaker 2: determine whether it's on that sustainable downward path of two 45 00:02:21,160 --> 00:02:22,480 Speaker 2: percent that we're all looking for. 46 00:02:22,960 --> 00:02:26,120 Speaker 1: There's been some thought because of the nature of changes 47 00:02:26,120 --> 00:02:29,359 Speaker 1: in the economy, part of the Fed's problem is that 48 00:02:29,520 --> 00:02:32,720 Speaker 1: monetary policy doesn't reach a lot of the areas that 49 00:02:32,760 --> 00:02:35,840 Speaker 1: have been showing price increases. Do you think you have 50 00:02:35,880 --> 00:02:39,800 Speaker 1: a broad enough anchor on the economy to bring it 51 00:02:39,840 --> 00:02:41,480 Speaker 1: all down or are there still going to be hotspots 52 00:02:41,520 --> 00:02:42,200 Speaker 1: you have to deal with. 53 00:02:42,400 --> 00:02:45,079 Speaker 2: Well, I think a lot of things happen during the pandemic, 54 00:02:45,120 --> 00:02:48,040 Speaker 2: and we're still seeing sort of those pandemic effects. I 55 00:02:48,040 --> 00:02:50,760 Speaker 2: don't think we can conclude that monetary policy isn't having 56 00:02:50,800 --> 00:02:54,040 Speaker 2: an effect as it used to. But the transmission mechanism 57 00:02:54,080 --> 00:02:57,040 Speaker 2: is something that changes over time, and we'll have to monitor, 58 00:02:57,480 --> 00:03:01,400 Speaker 2: you know, moderate monitor that in order to sort of 59 00:03:01,440 --> 00:03:04,640 Speaker 2: calibrate policy to where the economy is and where it's going, 60 00:03:05,160 --> 00:03:07,600 Speaker 2: balancing those risks of both sides of our mandate. And 61 00:03:07,600 --> 00:03:09,280 Speaker 2: that's what we're in the process of doing that. We 62 00:03:09,360 --> 00:03:12,800 Speaker 2: gather information, right, we look to see where the economy 63 00:03:12,960 --> 00:03:15,640 Speaker 2: is at the moment, where it's headed, and then we 64 00:03:15,720 --> 00:03:18,120 Speaker 2: calibrate our policy in order to reach both parts of 65 00:03:18,160 --> 00:03:21,440 Speaker 2: our dual mandate and really, frankly, in the first part 66 00:03:21,440 --> 00:03:23,600 Speaker 2: of the year, what we saw is the risks that 67 00:03:23,639 --> 00:03:26,079 Speaker 2: we were too restrictive of gone down. You know, last 68 00:03:26,160 --> 00:03:28,720 Speaker 2: year people were worried about, oh, the FED maybe getting 69 00:03:28,720 --> 00:03:31,239 Speaker 2: too restrictive and therefore it's going to dampen the economy. 70 00:03:31,280 --> 00:03:33,720 Speaker 2: Those risks went down. At the same time the risk 71 00:03:33,800 --> 00:03:35,800 Speaker 2: to inflation, I think, are tilted to the upside and 72 00:03:35,880 --> 00:03:38,520 Speaker 2: remain so. And so that's the balancing that we have 73 00:03:38,600 --> 00:03:41,200 Speaker 2: to do. As we said policy going forward. 74 00:03:41,080 --> 00:03:43,240 Speaker 1: Well, you and most of your colleges have basically said, 75 00:03:43,240 --> 00:03:44,840 Speaker 1: we don't have to do anything right now. We can 76 00:03:44,920 --> 00:03:47,800 Speaker 1: afford to sit and watch because the economy is in 77 00:03:47,880 --> 00:03:51,560 Speaker 1: pretty good shape. So the markets are fascinated with when 78 00:03:51,560 --> 00:03:53,360 Speaker 1: you will have your first rate cut, are. 79 00:03:53,280 --> 00:03:56,240 Speaker 2: You well, I don't think about it in terms of 80 00:03:56,280 --> 00:03:59,320 Speaker 2: when right. It really is dependent on how the economy 81 00:03:59,400 --> 00:04:02,640 Speaker 2: is fair and where it's going and is in the 82 00:04:02,680 --> 00:04:05,320 Speaker 2: progress on our dual mandate goals. So what we're going 83 00:04:05,400 --> 00:04:07,880 Speaker 2: to be doing is looking at that progress. The first 84 00:04:07,880 --> 00:04:09,960 Speaker 2: three months of the year we didn't see progress. The 85 00:04:10,000 --> 00:04:14,920 Speaker 2: CPI report welcome numbers, but still elevated too high inflation 86 00:04:15,640 --> 00:04:19,200 Speaker 2: and in fact there's monthly reading in April was higher 87 00:04:19,240 --> 00:04:21,760 Speaker 2: than what we saw last year. Now, I wasn't one 88 00:04:21,760 --> 00:04:23,919 Speaker 2: of the people who thought that we would continue to 89 00:04:23,960 --> 00:04:26,160 Speaker 2: see the great progress who saw in the second half 90 00:04:26,200 --> 00:04:28,600 Speaker 2: of the year continue this year. I always thought we'd 91 00:04:28,640 --> 00:04:31,600 Speaker 2: see some slowing progress, partly because I think we got 92 00:04:31,600 --> 00:04:33,880 Speaker 2: a lot of help from the supply side last year, 93 00:04:34,320 --> 00:04:38,440 Speaker 2: and at supply Chaine have become more normal, and as 94 00:04:38,520 --> 00:04:40,960 Speaker 2: labor markets have become in better balance, I wouldn't have 95 00:04:41,040 --> 00:04:44,960 Speaker 2: expected to see as much progress. Nonetheless, the lack of progress, 96 00:04:45,160 --> 00:04:48,520 Speaker 2: I think is something that certainly I didn't find welcome 97 00:04:48,560 --> 00:04:50,600 Speaker 2: at all, and so that's why we have to continue 98 00:04:50,640 --> 00:04:53,200 Speaker 2: to gather data and really see it. But as you say, 99 00:04:53,839 --> 00:04:56,039 Speaker 2: there's no real risk in doing that at the moment, 100 00:04:56,160 --> 00:04:59,760 Speaker 2: because the real side of the economy growth, labor markets 101 00:04:59,760 --> 00:05:01,400 Speaker 2: earn in good shape. 102 00:05:01,200 --> 00:05:05,679 Speaker 1: Well as old sort of saw. The recessions don't happen slowly. 103 00:05:05,839 --> 00:05:09,000 Speaker 1: They come on rather immediately, and there are people on 104 00:05:09,040 --> 00:05:12,119 Speaker 1: Wall Street who are worried that if that'll be behind 105 00:05:12,160 --> 00:05:14,800 Speaker 1: the curve on growth. Do you have any concerns that 106 00:05:15,080 --> 00:05:18,400 Speaker 1: there may be something happening that you're not able to 107 00:05:18,440 --> 00:05:19,800 Speaker 1: measure correctly well? 108 00:05:19,880 --> 00:05:22,880 Speaker 2: You know, we look at data for sure, we have models, 109 00:05:22,920 --> 00:05:26,280 Speaker 2: for sure, but we do a lot of speaking to businesses. 110 00:05:26,320 --> 00:05:29,480 Speaker 2: We gather a lot of information from contacts all across 111 00:05:30,279 --> 00:05:32,720 Speaker 2: My district is supports district, but every president of a 112 00:05:32,800 --> 00:05:35,479 Speaker 2: federal reserve is doing the same thing, and so that's 113 00:05:35,680 --> 00:05:38,880 Speaker 2: very good information because it's more forward looking than the data. 114 00:05:39,520 --> 00:05:41,520 Speaker 2: And a lot of the people that we talked to 115 00:05:41,920 --> 00:05:44,760 Speaker 2: in the first quarter of the year were actually telling 116 00:05:44,839 --> 00:05:47,960 Speaker 2: us that, Wow, things are stronger than even we anticipated 117 00:05:47,960 --> 00:05:49,880 Speaker 2: that they would be. So it wasn't just the data 118 00:05:49,920 --> 00:05:53,240 Speaker 2: showing strong it was they were also saying. Nonetheless, they 119 00:05:53,240 --> 00:05:55,560 Speaker 2: did say that they're being more cautious, you know, and 120 00:05:55,600 --> 00:05:59,280 Speaker 2: more careful. Some projects have been put on hold because 121 00:05:59,279 --> 00:06:01,520 Speaker 2: they want to sort of see how the economy fares. 122 00:06:01,800 --> 00:06:05,040 Speaker 2: And that's kind of the mechanism that monetary policy is having. 123 00:06:05,480 --> 00:06:08,520 Speaker 2: It is starting to moderate demand. It just hasn't moderated 124 00:06:08,560 --> 00:06:11,120 Speaker 2: as fast as some of us might have expected it 125 00:06:11,120 --> 00:06:13,680 Speaker 2: to this year. In fact, the last time we put 126 00:06:13,720 --> 00:06:17,200 Speaker 2: in forecasts, you know, I had up my forecast for 127 00:06:17,320 --> 00:06:19,960 Speaker 2: growth this year to be above trend as opposed to 128 00:06:20,040 --> 00:06:22,359 Speaker 2: below trends. So I think we're all sort of looking 129 00:06:22,400 --> 00:06:25,640 Speaker 2: at the data businesses are doing so, we're doing so, 130 00:06:25,720 --> 00:06:28,000 Speaker 2: and we're trying to calibrate to where the economy is 131 00:06:28,040 --> 00:06:28,799 Speaker 2: and where it's going. 132 00:06:29,200 --> 00:06:32,000 Speaker 1: Well, speaking of forecasts, you get to put in one 133 00:06:32,080 --> 00:06:35,240 Speaker 1: more before you're retirement at the correct and of June. 134 00:06:35,720 --> 00:06:38,120 Speaker 1: What's your outlook for inflation the rest of the year. 135 00:06:38,240 --> 00:06:40,040 Speaker 2: Yeah, well, you know, we're going to gather all the 136 00:06:40,120 --> 00:06:42,279 Speaker 2: data that we're going to put together, and I'm going 137 00:06:42,360 --> 00:06:46,120 Speaker 2: to put my forecasts in there. I still think, broadly speaking, 138 00:06:46,200 --> 00:06:49,280 Speaker 2: that inflation is going to come down. That's my modal 139 00:06:49,320 --> 00:06:52,120 Speaker 2: forecast that we'll see inflation come down. I just don't 140 00:06:52,120 --> 00:06:55,200 Speaker 2: think it's going to come down quickly. And so that's 141 00:06:55,240 --> 00:06:59,160 Speaker 2: why it's really going to be this risk management kind 142 00:06:59,200 --> 00:07:01,320 Speaker 2: of proposition, as the Fed always has to do, is 143 00:07:01,360 --> 00:07:03,719 Speaker 2: sort of managing the risks around both of our dual 144 00:07:03,760 --> 00:07:06,400 Speaker 2: mandate goals. If you remember back to the beginning when 145 00:07:06,440 --> 00:07:10,440 Speaker 2: we started raising rates, monetary policy was not well positioned 146 00:07:10,480 --> 00:07:12,320 Speaker 2: for the high inflation readings we were getting, and so 147 00:07:12,360 --> 00:07:15,960 Speaker 2: we had to increase rates at a very quick uh 148 00:07:16,040 --> 00:07:18,880 Speaker 2: pace and to a high level. You know, right now, 149 00:07:19,000 --> 00:07:21,880 Speaker 2: I think monetary policy is well positioned for risk on 150 00:07:22,000 --> 00:07:24,640 Speaker 2: either side, and so that's kind of what I think 151 00:07:24,680 --> 00:07:26,800 Speaker 2: what we're gonna be doing going forward is making sure 152 00:07:26,840 --> 00:07:30,360 Speaker 2: that we're well calibrated for whatever risk end up happening. 153 00:07:30,400 --> 00:07:33,120 Speaker 2: And so we're well calibrated now if if there is 154 00:07:33,160 --> 00:07:35,440 Speaker 2: some deterioration on the real sun of the economy that 155 00:07:35,480 --> 00:07:37,840 Speaker 2: we aren't foreseeing, as you said, you know, we're well 156 00:07:37,840 --> 00:07:41,360 Speaker 2: positioned to address that by lowering rates. If it turns 157 00:07:41,400 --> 00:07:44,679 Speaker 2: out that inflation is stalling out not my base case, 158 00:07:44,880 --> 00:07:47,320 Speaker 2: or even going up, not my base case, we're well 159 00:07:47,360 --> 00:07:49,920 Speaker 2: positioned to deal with that too, either by holding rates 160 00:07:49,920 --> 00:07:54,360 Speaker 2: at current levels for longer or if if appropriate, raising 161 00:07:54,400 --> 00:07:56,520 Speaker 2: the rate. That again, that's not my base case. My 162 00:07:56,560 --> 00:07:59,760 Speaker 2: base case is that inflation is going to start moving 163 00:07:59,760 --> 00:08:02,920 Speaker 2: back down on a slow, gradual path back to two percent. 164 00:08:03,000 --> 00:08:04,560 Speaker 2: But we'll have to see, and that's what we're going 165 00:08:04,640 --> 00:08:06,120 Speaker 2: to be doing, is gathering information. 166 00:08:06,480 --> 00:08:08,679 Speaker 1: What odds would you put on the idea of inflation 167 00:08:08,760 --> 00:08:11,720 Speaker 1: accelerating again forcing you to maybe raise rates. 168 00:08:12,000 --> 00:08:14,600 Speaker 2: Well, I think there are upside risks my base cases 169 00:08:14,640 --> 00:08:17,440 Speaker 2: that inflation will gradually move back down, But I think 170 00:08:17,440 --> 00:08:19,440 Speaker 2: we have to be open to the fact that, you know, 171 00:08:19,480 --> 00:08:23,280 Speaker 2: the economy can surprise you. We've seen that during this 172 00:08:23,360 --> 00:08:27,440 Speaker 2: episode of high inflation, Partly, I think because the pandemic 173 00:08:27,720 --> 00:08:30,640 Speaker 2: was a significant event and then the reaction to it 174 00:08:30,720 --> 00:08:34,080 Speaker 2: was significant, and the economy may be changing, and so 175 00:08:34,120 --> 00:08:37,240 Speaker 2: we have to be open to the possibility and be 176 00:08:37,320 --> 00:08:40,000 Speaker 2: prepared for it. But again, my motive forecast is that 177 00:08:40,040 --> 00:08:43,320 Speaker 2: we'll see inflation move down. But that's why we're going 178 00:08:43,400 --> 00:08:47,079 Speaker 2: to be having to be very careful and monitoring what's 179 00:08:47,120 --> 00:08:48,559 Speaker 2: actually happening in the economy. 180 00:08:48,760 --> 00:08:51,040 Speaker 1: When you do start cutting rates, how far do you 181 00:08:51,080 --> 00:08:55,480 Speaker 1: think the FED will go what would be maybe the 182 00:08:55,559 --> 00:08:58,440 Speaker 1: kind of neutral rate that Americans should expect. 183 00:08:59,120 --> 00:09:02,280 Speaker 2: So I we do think that there are reasons to 184 00:09:02,360 --> 00:09:06,559 Speaker 2: believe that the neutral rate is higher than it used 185 00:09:06,559 --> 00:09:08,480 Speaker 2: to be. And in fact, as you mentioned, we put 186 00:09:08,480 --> 00:09:10,600 Speaker 2: in these forecasts four times a year, and the last 187 00:09:10,640 --> 00:09:13,720 Speaker 2: one I actually raised my view of the long run 188 00:09:13,800 --> 00:09:17,160 Speaker 2: neutral rate. But you know, we're gonna be setting policy 189 00:09:17,240 --> 00:09:20,400 Speaker 2: again to to achieve our dual mandate goals, and so 190 00:09:20,520 --> 00:09:24,520 Speaker 2: that's kind of what guides are everyday policy decisions over 191 00:09:24,800 --> 00:09:27,600 Speaker 2: over the coming months and over the next year or so. 192 00:09:27,640 --> 00:09:30,400 Speaker 2: And that's where we're kind of getting to the reason 193 00:09:30,400 --> 00:09:34,120 Speaker 2: I thought that it was it was likely that the 194 00:09:34,200 --> 00:09:36,480 Speaker 2: real rate would have to be higher than it was 195 00:09:36,559 --> 00:09:39,720 Speaker 2: pre pandemic is because there are reasons to think that 196 00:09:40,160 --> 00:09:44,199 Speaker 2: investment will be higher. It's this balance between investments and 197 00:09:44,280 --> 00:09:46,800 Speaker 2: savings that kind of drive where that neutral rate is. 198 00:09:47,360 --> 00:09:49,880 Speaker 2: And there are reasons to think that investments higher, that 199 00:09:49,960 --> 00:09:53,000 Speaker 2: productivity growth may end up being higher than it's been 200 00:09:53,440 --> 00:09:56,240 Speaker 2: pre pandemic. And we've seen a lot of automation going 201 00:09:56,280 --> 00:09:59,800 Speaker 2: into firms that had to deal with labor shortages, and 202 00:09:59,800 --> 00:10:03,079 Speaker 2: that automation will pay off in terms of higher productivity growth. 203 00:10:03,080 --> 00:10:06,800 Speaker 2: So again, you know, not saying necessarily that we know 204 00:10:06,920 --> 00:10:09,640 Speaker 2: where the neutral rate is, because we know that that 205 00:10:09,679 --> 00:10:12,719 Speaker 2: can be estimated with a great uncertainty, But I do 206 00:10:12,760 --> 00:10:14,680 Speaker 2: think there's reason to think that it may be higher 207 00:10:14,720 --> 00:10:15,920 Speaker 2: now than it was in the past. 208 00:10:16,280 --> 00:10:18,559 Speaker 1: Only got about thirty seconds left, but one last question. 209 00:10:18,600 --> 00:10:21,400 Speaker 1: This is gonna be your last time to vote on 210 00:10:21,840 --> 00:10:26,080 Speaker 1: policy and to put out a duct plot. Where's your 211 00:10:26,160 --> 00:10:27,600 Speaker 1: dot going to be? How many moves? 212 00:10:28,080 --> 00:10:31,600 Speaker 2: Well, I haven't determined that yet. You know, I was 213 00:10:31,640 --> 00:10:34,160 Speaker 2: on the record before saying I was at the media, 214 00:10:34,280 --> 00:10:37,600 Speaker 2: which was three the developments I've seen in the economy 215 00:10:37,679 --> 00:10:40,760 Speaker 2: right now, I would not think that that's still appropriate 216 00:10:41,200 --> 00:10:44,440 Speaker 2: because the inflation risks are moved up given the progress 217 00:10:44,440 --> 00:10:47,480 Speaker 2: on inflation. It's stalled out in the first quarter, and 218 00:10:47,880 --> 00:10:49,959 Speaker 2: frankly the real sight is a little bit stronger than 219 00:10:49,960 --> 00:10:53,160 Speaker 2: I anticipated. So but again we're going to be guided 220 00:10:53,200 --> 00:10:57,000 Speaker 2: by progress on those dual mandate goals and we need 221 00:10:57,040 --> 00:11:01,560 Speaker 2: to be more confident that is one, that sustainable downward 222 00:11:01,640 --> 00:11:03,880 Speaker 2: path of two percent before we cut all. 223 00:11:03,840 --> 00:11:06,120 Speaker 1: Right, I'll take that as somewhere between zero and three, 224 00:11:06,800 --> 00:11:10,160 Speaker 1: probably not three. Loreena Vester, thank you very much for 225 00:11:10,280 --> 00:11:12,120 Speaker 1: joining us today here at Amelia Island.