WEBVTT - Loretta Mester Talks Inflation, Rate Policy

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Hi guys, and hello

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<v Speaker 1>to everybody watching and listening around the world on Bloomberg

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<v Speaker 1>Radio and television. I have to say it's tough to

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<v Speaker 1>get people to come to a resort area like this.

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<v Speaker 1>We've got about half the Federal Reserve here, I think,

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<v Speaker 1>including the readavester. Thanks for joining.

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<v Speaker 2>Us today, Thanks for having me.

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<v Speaker 1>They were just talking Carolyn too. We're just talking about

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<v Speaker 1>how we might see another record in the markets today,

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<v Speaker 1>and I'm wondering how you look at that, because everybody

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<v Speaker 1>says the Fed has let financial conditions get too loose

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<v Speaker 1>and that is going to lead to inflation again. But

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<v Speaker 1>financial conditions indexes really measure asset prices, and if asset

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<v Speaker 1>prices go up, then financial conditions get looser. It's sort

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<v Speaker 1>of circular. Do you think that you're restrictive at this point?

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<v Speaker 2>Oh, I think monetary policy is restrictive. We're in restrictive territory.

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<v Speaker 2>But no doubt the economy has performed strong in the

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<v Speaker 2>first you know, three months of the year. Then we

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<v Speaker 2>probably had anticipated than I had anticipated. At the same

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<v Speaker 2>time we saw that inflation progress stalled in the first

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<v Speaker 2>three months. We did get an April CPI report, which

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<v Speaker 2>was welcome news, but I think it's too soon to

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<v Speaker 2>tell what path inflation's on, so we just need to

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<v Speaker 2>collect more information on that. But we're seeing moderation on

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<v Speaker 2>some of the real side of the economy. Still a

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<v Speaker 2>strong economy, but we are seeing the impact of the

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<v Speaker 2>monetary policy that we put in place.

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<v Speaker 1>Well, do you reject the idea that financial conditions got loose,

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<v Speaker 1>and that's the reason the first four months of the

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<v Speaker 1>year we saw inflation level out or go up a

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<v Speaker 1>little bit.

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<v Speaker 2>Yeah, the markets are going to be the markets, right,

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<v Speaker 2>they move up and down. I think the way I

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<v Speaker 2>look at it is, you know, we have a restrictive

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<v Speaker 2>monetary policy in place. It has shown up in terms

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<v Speaker 2>of moderating the labor markets. They're becoming better balance between

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<v Speaker 2>labor demand and labor supply, and so we're seeing that

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<v Speaker 2>kind of work work its way through, and that rebalancing

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<v Speaker 2>is going to put downward pressure on inflation. I think

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<v Speaker 2>as things play out, it's just that we didn't see

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<v Speaker 2>that in the first three months of the year, and

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<v Speaker 2>we're just going to need to gather more evidence on

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<v Speaker 2>what exact path inflation's on in order to sort of

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<v Speaker 2>determine whether it's on that sustainable downward path of two

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<v Speaker 2>percent that we're all looking for.

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<v Speaker 1>There's been some thought because of the nature of changes

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<v Speaker 1>in the economy, part of the Fed's problem is that

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<v Speaker 1>monetary policy doesn't reach a lot of the areas that

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<v Speaker 1>have been showing price increases. Do you think you have

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<v Speaker 1>a broad enough anchor on the economy to bring it

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<v Speaker 1>all down or are there still going to be hotspots

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<v Speaker 1>you have to deal with.

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<v Speaker 2>Well, I think a lot of things happen during the pandemic,

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<v Speaker 2>and we're still seeing sort of those pandemic effects. I

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<v Speaker 2>don't think we can conclude that monetary policy isn't having

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<v Speaker 2>an effect as it used to. But the transmission mechanism

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<v Speaker 2>is something that changes over time, and we'll have to monitor,

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<v Speaker 2>you know, moderate monitor that in order to sort of

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<v Speaker 2>calibrate policy to where the economy is and where it's going,

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<v Speaker 2>balancing those risks of both sides of our mandate. And

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<v Speaker 2>that's what we're in the process of doing that. We

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<v Speaker 2>gather information, right, we look to see where the economy

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<v Speaker 2>is at the moment, where it's headed, and then we

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<v Speaker 2>calibrate our policy in order to reach both parts of

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<v Speaker 2>our dual mandate and really, frankly, in the first part

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<v Speaker 2>of the year, what we saw is the risks that

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<v Speaker 2>we were too restrictive of gone down. You know, last

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<v Speaker 2>year people were worried about, oh, the FED maybe getting

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<v Speaker 2>too restrictive and therefore it's going to dampen the economy.

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<v Speaker 2>Those risks went down. At the same time the risk

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<v Speaker 2>to inflation, I think, are tilted to the upside and

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<v Speaker 2>remain so. And so that's the balancing that we have

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<v Speaker 2>to do. As we said policy going forward.

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<v Speaker 1>Well, you and most of your colleges have basically said,

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<v Speaker 1>we don't have to do anything right now. We can

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<v Speaker 1>afford to sit and watch because the economy is in

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<v Speaker 1>pretty good shape. So the markets are fascinated with when

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<v Speaker 1>you will have your first rate cut, are.

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<v Speaker 2>You well, I don't think about it in terms of

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<v Speaker 2>when right. It really is dependent on how the economy

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<v Speaker 2>is fair and where it's going and is in the

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<v Speaker 2>progress on our dual mandate goals. So what we're going

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<v Speaker 2>to be doing is looking at that progress. The first

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<v Speaker 2>three months of the year we didn't see progress. The

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<v Speaker 2>CPI report welcome numbers, but still elevated too high inflation

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<v Speaker 2>and in fact there's monthly reading in April was higher

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<v Speaker 2>than what we saw last year. Now, I wasn't one

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<v Speaker 2>of the people who thought that we would continue to

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<v Speaker 2>see the great progress who saw in the second half

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<v Speaker 2>of the year continue this year. I always thought we'd

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<v Speaker 2>see some slowing progress, partly because I think we got

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<v Speaker 2>a lot of help from the supply side last year,

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<v Speaker 2>and at supply Chaine have become more normal, and as

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<v Speaker 2>labor markets have become in better balance, I wouldn't have

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<v Speaker 2>expected to see as much progress. Nonetheless, the lack of progress,

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<v Speaker 2>I think is something that certainly I didn't find welcome

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<v Speaker 2>at all, and so that's why we have to continue

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<v Speaker 2>to gather data and really see it. But as you say,

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<v Speaker 2>there's no real risk in doing that at the moment,

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<v Speaker 2>because the real side of the economy growth, labor markets

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<v Speaker 2>earn in good shape.

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<v Speaker 1>Well as old sort of saw. The recessions don't happen slowly.

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<v Speaker 1>They come on rather immediately, and there are people on

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<v Speaker 1>Wall Street who are worried that if that'll be behind

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<v Speaker 1>the curve on growth. Do you have any concerns that

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<v Speaker 1>there may be something happening that you're not able to

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<v Speaker 1>measure correctly well?

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<v Speaker 2>You know, we look at data for sure, we have models,

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<v Speaker 2>for sure, but we do a lot of speaking to businesses.

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<v Speaker 2>We gather a lot of information from contacts all across

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<v Speaker 2>My district is supports district, but every president of a

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<v Speaker 2>federal reserve is doing the same thing, and so that's

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<v Speaker 2>very good information because it's more forward looking than the data.

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<v Speaker 2>And a lot of the people that we talked to

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<v Speaker 2>in the first quarter of the year were actually telling

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<v Speaker 2>us that, Wow, things are stronger than even we anticipated

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<v Speaker 2>that they would be. So it wasn't just the data

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<v Speaker 2>showing strong it was they were also saying. Nonetheless, they

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<v Speaker 2>did say that they're being more cautious, you know, and

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<v Speaker 2>more careful. Some projects have been put on hold because

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<v Speaker 2>they want to sort of see how the economy fares.

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<v Speaker 2>And that's kind of the mechanism that monetary policy is having.

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<v Speaker 2>It is starting to moderate demand. It just hasn't moderated

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<v Speaker 2>as fast as some of us might have expected it

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<v Speaker 2>to this year. In fact, the last time we put

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<v Speaker 2>in forecasts, you know, I had up my forecast for

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<v Speaker 2>growth this year to be above trend as opposed to

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<v Speaker 2>below trends. So I think we're all sort of looking

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<v Speaker 2>at the data businesses are doing so, we're doing so,

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<v Speaker 2>and we're trying to calibrate to where the economy is

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<v Speaker 2>and where it's going.

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<v Speaker 1>Well, speaking of forecasts, you get to put in one

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<v Speaker 1>more before you're retirement at the correct and of June.

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<v Speaker 1>What's your outlook for inflation the rest of the year.

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<v Speaker 2>Yeah, well, you know, we're going to gather all the

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<v Speaker 2>data that we're going to put together, and I'm going

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<v Speaker 2>to put my forecasts in there. I still think, broadly speaking,

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<v Speaker 2>that inflation is going to come down. That's my modal

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<v Speaker 2>forecast that we'll see inflation come down. I just don't

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<v Speaker 2>think it's going to come down quickly. And so that's

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<v Speaker 2>why it's really going to be this risk management kind

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<v Speaker 2>of proposition, as the Fed always has to do, is

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<v Speaker 2>sort of managing the risks around both of our dual

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<v Speaker 2>mandate goals. If you remember back to the beginning when

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<v Speaker 2>we started raising rates, monetary policy was not well positioned

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<v Speaker 2>for the high inflation readings we were getting, and so

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<v Speaker 2>we had to increase rates at a very quick uh

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<v Speaker 2>pace and to a high level. You know, right now,

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<v Speaker 2>I think monetary policy is well positioned for risk on

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<v Speaker 2>either side, and so that's kind of what I think

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<v Speaker 2>what we're gonna be doing going forward is making sure

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<v Speaker 2>that we're well calibrated for whatever risk end up happening.

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<v Speaker 2>And so we're well calibrated now if if there is

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<v Speaker 2>some deterioration on the real sun of the economy that

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<v Speaker 2>we aren't foreseeing, as you said, you know, we're well

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<v Speaker 2>positioned to address that by lowering rates. If it turns

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<v Speaker 2>out that inflation is stalling out not my base case,

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<v Speaker 2>or even going up, not my base case, we're well

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<v Speaker 2>positioned to deal with that too, either by holding rates

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<v Speaker 2>at current levels for longer or if if appropriate, raising

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<v Speaker 2>the rate. That again, that's not my base case. My

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<v Speaker 2>base case is that inflation is going to start moving

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<v Speaker 2>back down on a slow, gradual path back to two percent.

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<v Speaker 2>But we'll have to see, and that's what we're going

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<v Speaker 2>to be doing, is gathering information.

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<v Speaker 1>What odds would you put on the idea of inflation

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<v Speaker 1>accelerating again forcing you to maybe raise rates.

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<v Speaker 2>Well, I think there are upside risks my base cases

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<v Speaker 2>that inflation will gradually move back down, But I think

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<v Speaker 2>we have to be open to the fact that, you know,

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<v Speaker 2>the economy can surprise you. We've seen that during this

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<v Speaker 2>episode of high inflation, Partly, I think because the pandemic

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<v Speaker 2>was a significant event and then the reaction to it

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<v Speaker 2>was significant, and the economy may be changing, and so

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<v Speaker 2>we have to be open to the possibility and be

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<v Speaker 2>prepared for it. But again, my motive forecast is that

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<v Speaker 2>we'll see inflation move down. But that's why we're going

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<v Speaker 2>to be having to be very careful and monitoring what's

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<v Speaker 2>actually happening in the economy.

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<v Speaker 1>When you do start cutting rates, how far do you

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<v Speaker 1>think the FED will go what would be maybe the

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<v Speaker 1>kind of neutral rate that Americans should expect.

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<v Speaker 2>So I we do think that there are reasons to

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<v Speaker 2>believe that the neutral rate is higher than it used

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<v Speaker 2>to be. And in fact, as you mentioned, we put

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<v Speaker 2>in these forecasts four times a year, and the last

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<v Speaker 2>one I actually raised my view of the long run

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<v Speaker 2>neutral rate. But you know, we're gonna be setting policy

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<v Speaker 2>again to to achieve our dual mandate goals, and so

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<v Speaker 2>that's kind of what guides are everyday policy decisions over

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<v Speaker 2>over the coming months and over the next year or so.

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<v Speaker 2>And that's where we're kind of getting to the reason

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<v Speaker 2>I thought that it was it was likely that the

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<v Speaker 2>real rate would have to be higher than it was

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<v Speaker 2>pre pandemic is because there are reasons to think that

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<v Speaker 2>investment will be higher. It's this balance between investments and

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<v Speaker 2>savings that kind of drive where that neutral rate is.

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<v Speaker 2>And there are reasons to think that investments higher, that

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<v Speaker 2>productivity growth may end up being higher than it's been

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<v Speaker 2>pre pandemic. And we've seen a lot of automation going

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<v Speaker 2>into firms that had to deal with labor shortages, and

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<v Speaker 2>that automation will pay off in terms of higher productivity growth.

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<v Speaker 2>So again, you know, not saying necessarily that we know

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<v Speaker 2>where the neutral rate is, because we know that that

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<v Speaker 2>can be estimated with a great uncertainty, But I do

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<v Speaker 2>think there's reason to think that it may be higher

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<v Speaker 2>now than it was in the past.

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<v Speaker 1>Only got about thirty seconds left, but one last question.

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<v Speaker 1>This is gonna be your last time to vote on

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<v Speaker 1>policy and to put out a duct plot. Where's your

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<v Speaker 1>dot going to be? How many moves?

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<v Speaker 2>Well, I haven't determined that yet. You know, I was

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<v Speaker 2>on the record before saying I was at the media,

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<v Speaker 2>which was three the developments I've seen in the economy

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<v Speaker 2>right now, I would not think that that's still appropriate

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<v Speaker 2>because the inflation risks are moved up given the progress

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<v Speaker 2>on inflation. It's stalled out in the first quarter, and

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<v Speaker 2>frankly the real sight is a little bit stronger than

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<v Speaker 2>I anticipated. So but again we're going to be guided

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<v Speaker 2>by progress on those dual mandate goals and we need

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<v Speaker 2>to be more confident that is one, that sustainable downward

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<v Speaker 2>path of two percent before we cut all.

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<v Speaker 1>Right, I'll take that as somewhere between zero and three,

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<v Speaker 1>probably not three. Loreena Vester, thank you very much for

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<v Speaker 1>joining us today here at Amelia Island.