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Speaker 2: Us today, Thanks for having me.
Speaker 1: They were just talking Carolyn too. We're just talking about
Speaker 1: how we might see another record in the markets today,
Speaker 1: and I'm wondering how you look at that, because everybody
Speaker 1: says the Fed has let financial conditions get too loose
Speaker 1: and that is going to lead to inflation again. But
Speaker 1: financial conditions indexes really measure asset prices, and if asset
Speaker 1: prices go up, then financial conditions get looser. It's sort
Speaker 1: of circular. Do you think that you're restrictive at this point?
Speaker 2: Oh, I think monetary policy is restrictive. We're in restrictive territory.
Speaker 2: But no doubt the economy has performed strong in the
Speaker 2: first you know, three months of the year. Then we
Speaker 2: probably had anticipated than I had anticipated. At the same
Speaker 2: time we saw that inflation progress stalled in the first
Speaker 2: three months. We did get an April CPI report, which
Speaker 2: was welcome news, but I think it's too soon to
Speaker 2: tell what path inflation's on, so we just need to
Speaker 2: collect more information on that. But we're seeing moderation on
Speaker 2: some of the real side of the economy. Still a
Speaker 2: strong economy, but we are seeing the impact of the
Speaker 2: monetary policy that we put in place.
Speaker 1: Well, do you reject the idea that financial conditions got loose,
Speaker 1: and that's the reason the first four months of the
Speaker 1: year we saw inflation level out or go up a
Speaker 1: little bit.
Speaker 2: Yeah, the markets are going to be the markets, right,
Speaker 2: they move up and down. I think the way I
Speaker 2: look at it is, you know, we have a restrictive
Speaker 2: monetary policy in place. It has shown up in terms
Speaker 2: of moderating the labor markets. They're becoming better balance between
Speaker 2: labor demand and labor supply, and so we're seeing that
Speaker 2: kind of work work its way through, and that rebalancing
Speaker 2: is going to put downward pressure on inflation. I think
Speaker 2: as things play out, it's just that we didn't see
Speaker 2: that in the first three months of the year, and
Speaker 2: we're just going to need to gather more evidence on
Speaker 2: what exact path inflation's on in order to sort of
Speaker 2: determine whether it's on that sustainable downward path of two
Speaker 2: percent that we're all looking for.
Speaker 1: There's been some thought because of the nature of changes
Speaker 1: in the economy, part of the Fed's problem is that
Speaker 1: monetary policy doesn't reach a lot of the areas that
Speaker 1: have been showing price increases. Do you think you have
Speaker 1: a broad enough anchor on the economy to bring it
Speaker 1: all down or are there still going to be hotspots
Speaker 1: you have to deal with.
Speaker 2: Well, I think a lot of things happen during the pandemic,
Speaker 2: and we're still seeing sort of those pandemic effects. I
Speaker 2: don't think we can conclude that monetary policy isn't having
Speaker 2: an effect as it used to. But the transmission mechanism
Speaker 2: is something that changes over time, and we'll have to monitor,
Speaker 2: you know, moderate monitor that in order to sort of
Speaker 2: calibrate policy to where the economy is and where it's going,
Speaker 2: balancing those risks of both sides of our mandate. And
Speaker 2: that's what we're in the process of doing that. We
Speaker 2: gather information, right, we look to see where the economy
Speaker 2: is at the moment, where it's headed, and then we
Speaker 2: calibrate our policy in order to reach both parts of
Speaker 2: our dual mandate and really, frankly, in the first part
Speaker 2: of the year, what we saw is the risks that
Speaker 2: we were too restrictive of gone down. You know, last
Speaker 2: year people were worried about, oh, the FED maybe getting
Speaker 2: too restrictive and therefore it's going to dampen the economy.
Speaker 2: Those risks went down. At the same time the risk
Speaker 2: to inflation, I think, are tilted to the upside and
Speaker 2: remain so. And so that's the balancing that we have
Speaker 2: to do. As we said policy going forward.
Speaker 1: Well, you and most of your colleges have basically said,
Speaker 1: we don't have to do anything right now. We can
Speaker 1: afford to sit and watch because the economy is in
Speaker 1: pretty good shape. So the markets are fascinated with when
Speaker 1: you will have your first rate cut, are.
Speaker 2: You well, I don't think about it in terms of
Speaker 2: when right. It really is dependent on how the economy
Speaker 2: is fair and where it's going and is in the
Speaker 2: progress on our dual mandate goals. So what we're going
Speaker 2: to be doing is looking at that progress. The first
Speaker 2: three months of the year we didn't see progress. The
Speaker 2: CPI report welcome numbers, but still elevated too high inflation
Speaker 2: and in fact there's monthly reading in April was higher
Speaker 2: than what we saw last year. Now, I wasn't one
Speaker 2: of the people who thought that we would continue to
Speaker 2: see the great progress who saw in the second half
Speaker 2: of the year continue this year. I always thought we'd
Speaker 2: see some slowing progress, partly because I think we got
Speaker 2: a lot of help from the supply side last year,
Speaker 2: and at supply Chaine have become more normal, and as
Speaker 2: labor markets have become in better balance, I wouldn't have
Speaker 2: expected to see as much progress. Nonetheless, the lack of progress,
Speaker 2: I think is something that certainly I didn't find welcome
Speaker 2: at all, and so that's why we have to continue
Speaker 2: to gather data and really see it. But as you say,
Speaker 2: there's no real risk in doing that at the moment,
Speaker 2: because the real side of the economy growth, labor markets
Speaker 2: earn in good shape.
Speaker 1: Well as old sort of saw. The recessions don't happen slowly.
Speaker 1: They come on rather immediately, and there are people on
Speaker 1: Wall Street who are worried that if that'll be behind
Speaker 1: the curve on growth. Do you have any concerns that
Speaker 1: there may be something happening that you're not able to
Speaker 1: measure correctly well?
Speaker 2: You know, we look at data for sure, we have models,
Speaker 2: for sure, but we do a lot of speaking to businesses.
Speaker 2: We gather a lot of information from contacts all across
Speaker 2: My district is supports district, but every president of a
Speaker 2: federal reserve is doing the same thing, and so that's
Speaker 2: very good information because it's more forward looking than the data.
Speaker 2: And a lot of the people that we talked to
Speaker 2: in the first quarter of the year were actually telling
Speaker 2: us that, Wow, things are stronger than even we anticipated
Speaker 2: that they would be. So it wasn't just the data
Speaker 2: showing strong it was they were also saying. Nonetheless, they
Speaker 2: did say that they're being more cautious, you know, and
Speaker 2: more careful. Some projects have been put on hold because
Speaker 2: they want to sort of see how the economy fares.
Speaker 2: And that's kind of the mechanism that monetary policy is having.
Speaker 2: It is starting to moderate demand. It just hasn't moderated
Speaker 2: as fast as some of us might have expected it
Speaker 2: to this year. In fact, the last time we put
Speaker 2: in forecasts, you know, I had up my forecast for
Speaker 2: growth this year to be above trend as opposed to
Speaker 2: below trends. So I think we're all sort of looking
Speaker 2: at the data businesses are doing so, we're doing so,
Speaker 2: and we're trying to calibrate to where the economy is
Speaker 2: and where it's going.
Speaker 1: Well, speaking of forecasts, you get to put in one
Speaker 1: more before you're retirement at the correct and of June.
Speaker 1: What's your outlook for inflation the rest of the year.
Speaker 2: Yeah, well, you know, we're going to gather all the
Speaker 2: data that we're going to put together, and I'm going
Speaker 2: to put my forecasts in there. I still think, broadly speaking,
Speaker 2: that inflation is going to come down. That's my modal
Speaker 2: forecast that we'll see inflation come down. I just don't
Speaker 2: think it's going to come down quickly. And so that's
Speaker 2: why it's really going to be this risk management kind
Speaker 2: of proposition, as the Fed always has to do, is
Speaker 2: sort of managing the risks around both of our dual
Speaker 2: mandate goals. If you remember back to the beginning when
Speaker 2: we started raising rates, monetary policy was not well positioned
Speaker 2: for the high inflation readings we were getting, and so
Speaker 2: we had to increase rates at a very quick uh
Speaker 2: pace and to a high level. You know, right now,
Speaker 2: I think monetary policy is well positioned for risk on
Speaker 2: either side, and so that's kind of what I think
Speaker 2: what we're gonna be doing going forward is making sure
Speaker 2: that we're well calibrated for whatever risk end up happening.
Speaker 2: And so we're well calibrated now if if there is
Speaker 2: some deterioration on the real sun of the economy that
Speaker 2: we aren't foreseeing, as you said, you know, we're well
Speaker 2: positioned to address that by lowering rates. If it turns
Speaker 2: out that inflation is stalling out not my base case,
Speaker 2: or even going up, not my base case, we're well
Speaker 2: positioned to deal with that too, either by holding rates
Speaker 2: at current levels for longer or if if appropriate, raising
Speaker 2: the rate. That again, that's not my base case. My
Speaker 2: base case is that inflation is going to start moving
Speaker 2: back down on a slow, gradual path back to two percent.
Speaker 2: But we'll have to see, and that's what we're going
Speaker 2: to be doing, is gathering information.
Speaker 1: What odds would you put on the idea of inflation
Speaker 1: accelerating again forcing you to maybe raise rates.
Speaker 2: Well, I think there are upside risks my base cases
Speaker 2: that inflation will gradually move back down, But I think
Speaker 2: we have to be open to the fact that, you know,
Speaker 2: the economy can surprise you. We've seen that during this
Speaker 2: episode of high inflation, Partly, I think because the pandemic
Speaker 2: was a significant event and then the reaction to it
Speaker 2: was significant, and the economy may be changing, and so
Speaker 2: we have to be open to the possibility and be
Speaker 2: prepared for it. But again, my motive forecast is that
Speaker 2: we'll see inflation move down. But that's why we're going
Speaker 2: to be having to be very careful and monitoring what's
Speaker 2: actually happening in the economy.
Speaker 1: When you do start cutting rates, how far do you
Speaker 1: think the FED will go what would be maybe the
Speaker 1: kind of neutral rate that Americans should expect.
Speaker 2: So I we do think that there are reasons to
Speaker 2: believe that the neutral rate is higher than it used
Speaker 2: to be. And in fact, as you mentioned, we put
Speaker 2: in these forecasts four times a year, and the last
Speaker 2: one I actually raised my view of the long run
Speaker 2: neutral rate. But you know, we're gonna be setting policy
Speaker 2: again to to achieve our dual mandate goals, and so
Speaker 2: that's kind of what guides are everyday policy decisions over
Speaker 2: over the coming months and over the next year or so.
Speaker 2: And that's where we're kind of getting to the reason
Speaker 2: I thought that it was it was likely that the
Speaker 2: real rate would have to be higher than it was
Speaker 2: pre pandemic is because there are reasons to think that
Speaker 2: investment will be higher. It's this balance between investments and
Speaker 2: savings that kind of drive where that neutral rate is.
Speaker 2: And there are reasons to think that investments higher, that
Speaker 2: productivity growth may end up being higher than it's been
Speaker 2: pre pandemic. And we've seen a lot of automation going
Speaker 2: into firms that had to deal with labor shortages, and
Speaker 2: that automation will pay off in terms of higher productivity growth.
Speaker 2: So again, you know, not saying necessarily that we know
Speaker 2: where the neutral rate is, because we know that that
Speaker 2: can be estimated with a great uncertainty, But I do
Speaker 2: think there's reason to think that it may be higher
Speaker 2: now than it was in the past.
Speaker 1: Only got about thirty seconds left, but one last question.
Speaker 1: This is gonna be your last time to vote on
Speaker 1: policy and to put out a duct plot. Where's your
Speaker 1: dot going to be? How many moves?
Speaker 2: Well, I haven't determined that yet. You know, I was
Speaker 2: on the record before saying I was at the media,
Speaker 2: which was three the developments I've seen in the economy
Speaker 2: right now, I would not think that that's still appropriate
Speaker 2: because the inflation risks are moved up given the progress
Speaker 2: on inflation. It's stalled out in the first quarter, and
Speaker 2: frankly the real sight is a little bit stronger than
Speaker 2: I anticipated. So but again we're going to be guided
Speaker 2: by progress on those dual mandate goals and we need
Speaker 2: to be more confident that is one, that sustainable downward
Speaker 2: path of two percent before we cut all.
Speaker 1: Right, I'll take that as somewhere between zero and three,
Speaker 1: probably not three. Loreena Vester, thank you very much for
Speaker 1: joining us today here at Amelia Island.