Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: What is sort of technically your last twenty four hours
Speaker 2: as a FED governor? Your term is up tomorrow, but
Speaker 2: you're staying on. Thanks for having me back. It's good
Speaker 2: to see you again.
Speaker 3: Look, as you say, my term expires over the weekend,
Speaker 3: but for the Federal Reserve Act, I'll be staying in
Speaker 3: my seat until someone is confirmed to replace me, presumably
Speaker 3: Chairman Designate Kevin Walsh. This is common practice and has
Speaker 3: happened many times by other governors who have waited for
Speaker 3: someone else to be confirmed into their seat.
Speaker 4: Now, the question is how long is that going to take?
Speaker 2: Have you had any indication from the White House or
Speaker 2: from anybody on Capitol Hill. We know that Senator Tillis
Speaker 2: is threatening to block denomination, but that could easily be handled.
Speaker 4: That could go away anytime.
Speaker 2: Do you have any idea how long you're going to
Speaker 2: be still at the FED?
Speaker 5: I have no idea. I mean, I wish I knew.
Speaker 3: You know, my confirmation process took what six weeks or
Speaker 3: so a little bit more a little bit more than that,
Speaker 3: So you know, I have no idea how long it
Speaker 3: will take for Chairman designant marsh but you know, I'm
Speaker 3: confident that you know that the process will work and
Speaker 3: the Senate and will come together.
Speaker 2: All right, So you get to March eighteenth, that's the
Speaker 2: next FOMC meeting. You're still going to descend for lower rates.
Speaker 2: And I asked, because this time you only descended for
Speaker 2: twenty five basis points instead of fifty.
Speaker 3: Yeah, so I descended for twenty five instead of fifty
Speaker 3: for a couple of reasons. One of them is that
Speaker 3: we did cut. Since I joined the f and C
Speaker 3: in September, we cut three times. You know, we reduced
Speaker 3: the federal funds rate by seventy five basis points. That
Speaker 3: means we're less far from neutral than we were when
Speaker 3: I arrived in September. Now, I still think rates are
Speaker 3: too restrictive, as I've made very clear. I still think
Speaker 3: we need to cut in straits substantially further from here.
Speaker 5: However, given that we've moved, we've made.
Speaker 3: Some progress reducing rates, we can now sort of I think,
Speaker 3: in my view, proceed at a at a slower pace
Speaker 3: of a quarter point per meeting. It's no longer as
Speaker 3: imperative to move to move in fifty clips as it was.
Speaker 3: The other thing that happened is the labor market data
Speaker 3: did come in a little bit better, and they didn't
Speaker 3: come in to an extent that they alleviated all my
Speaker 3: concerns about the labor market, you know, far from it. Indeed,
Speaker 3: the labor market has been on this gradual cooling trend
Speaker 3: for over two years now, and it should take much
Speaker 3: more than just one data print to make you change
Speaker 3: your mind about the trend of the labor market. But nevertheless,
Speaker 3: we did get a little bit of better data and
Speaker 3: that helped alleviate, you know, some concerns free, but not
Speaker 3: all of them.
Speaker 5: You know, I still have some concerns there.
Speaker 2: Well, we got a four point four percent unemployment rate
Speaker 2: last month, and the next friday we're expecting to get
Speaker 2: the same thing. So that's two months at least of
Speaker 2: evidence that the labor market is somewhat stabilized, which is
Speaker 2: what the Fed was saying in its statement this last time.
Speaker 2: And yet Jay Polish had given the numbers that you've
Speaker 2: got to work with. It looks like PCE inflation on
Speaker 2: the core is going to go to three percent or more.
Speaker 2: The optics don't look good for cutting rates when inflation
Speaker 2: is going up and the labor market is stabilized.
Speaker 5: So I just regar with a couple of things you said.
Speaker 3: First of all, the unemployment rate, even though it's the
Speaker 3: single and most important indicator, is far from the total
Speaker 3: of information that we know about the labor market. There's
Speaker 3: plenty of evidence in the there's plenty of evidence in
Speaker 3: the labor market data that indicates that we can accommodate
Speaker 3: additional demand for labor. There have been signs like it
Speaker 3: taking longer for some folks to find jobs, pockets of
Speaker 3: weakness among you know, younger folks, and folks and folks
Speaker 3: at college degrees. That all indicates that they're you know,
Speaker 3: increased part time work for economic reasons. All this indicates
Speaker 3: that there's additional slack in the labor market beyond what's
Speaker 3: indicated in the.
Speaker 5: Unemployment rate alone.
Speaker 3: If you look at the employment population ratio for younger folks,
Speaker 3: it's been trending downwards for a long period of time,
Speaker 3: and it has shown and it has shown less stabilization
Speaker 3: and the overall unemployment rates. And this is the type
Speaker 3: of thing that is concerning for me. So I disagree
Speaker 3: with the assessment that there's labor market, that there's enough
Speaker 3: labor market stabilization, that we can drop our concerns about
Speaker 3: the labor market.
Speaker 5: I still have some concerns.
Speaker 3: Now I'm not as concerned to some as as some others,
Speaker 3: but those concerns still do exist for me. And on inflation,
Speaker 3: I think you know I've been making this argument that
Speaker 3: almost all of the inflation overage over our target is
Speaker 3: due to quirks of how we measure inflation.
Speaker 5: It's due to two things.
Speaker 3: It's due to the portfolio management services, which pick up
Speaker 3: just the stock market prices. So AI pushes stock prices higher.
Speaker 3: That mechanically feeds through into portfolio management services, which contributed
Speaker 3: thirty six basis points to core year and year. A
Speaker 3: normal year is six basis points, right, So there's over
Speaker 3: a quarter of a point of core inflation access.
Speaker 5: That's basically just the stock market moving higher.
Speaker 3: And all of the professional investors in the audience know
Speaker 3: there's been decades of fee deflation in that industry, not inflation,
Speaker 3: So there's an error in how this thing is measured
Speaker 3: and interpreted.
Speaker 5: The other thing is housing.
Speaker 3: The way the housing inflation is measured, it's picking up
Speaker 3: the housing market rents of twenty twenty two and twenty
Speaker 3: twenty three, not twenty twenty six or twenty twenty seven.
Speaker 3: We shouldn't be making policy based on what happened in
Speaker 3: twenty twenty two. We should be making policy based on
Speaker 3: what's happening in the next twelve months. So, once you
Speaker 3: correct for these two errors, the backward looking nature of
Speaker 3: shelter and the messed up portfolio management fees, you look
Speaker 3: at market based core x housing instead of looking at
Speaker 3: regular core. Inflation is running two point two percent. That's
Speaker 3: within noise of our target. We don't have inflation access
Speaker 3: of any inflation that's relevant for supplyed demand imbalances of
Speaker 3: the type of monetary policy we'll respond to. We should
Speaker 3: not be making monetary policy. We should not be asking
Speaker 3: people to give up their jobs because of quirks of
Speaker 3: how inflation is measured. That just to me, is not
Speaker 3: a good idea for policy. It's a bit it's a
Speaker 3: grotesque interpretation of stable prices.
Speaker 1: I am curious as to you just about how we
Speaker 1: start to measure things going forward.
Speaker 6: And I just want to go back to the labor
Speaker 6: market for.
Speaker 1: A second, because there's been a lot of discussion about
Speaker 1: the stability or maybe the potential instability there I spoke
Speaker 1: this morning with the CEO of American Express, and he
Speaker 1: actually talked a lot about small businesses, the kind of
Speaker 1: middle market businesses, if you will, that at least in
Speaker 1: his view, weren't as healthy as some of the larger businesses.
Speaker 1: And I'm curious that there's been any meaningful discussion at
Speaker 1: the FED about that kind of middle market of our economy.
Speaker 3: You know, excuse me, there is conversations about that. You know,
Speaker 3: people talk a lot about shaped, you know, sort of
Speaker 3: case shaped economies and things like that, and I think
Speaker 3: usually they're talking about households when they talk about that,
Speaker 3: but there certainly is an element of that on the
Speaker 3: firm side as well. You know, from my perspective, some
Speaker 3: of that stuff is helpful for understanding where the economy
Speaker 3: is going. But I don't believe in targeting a specific
Speaker 3: sector of the economy. I believe that, you know, the
Speaker 3: statutes that Congress gave us instructs us to target the
Speaker 3: overall macroeconomy as a whole and then focused on aggregate employments.
Speaker 5: I'm focused on aggregate inflation, and so.
Speaker 3: I do see, you know, there is there are definitely
Speaker 3: are pockets of weakness here and there but I'm focused
Speaker 3: on on the overall levels.
Speaker 1: But there was some discussion a few years back with J.
Speaker 1: Powell when he did start to look at certain segments.
Speaker 1: The idea that when you look at the economy and
Speaker 1: as aggregate, sometimes it obscures you know certain things, whether
Speaker 1: it's to the upside or the downside. Is there not
Speaker 1: any value in maybe trying, I guess, bisect or dissect
Speaker 1: things into different sections.
Speaker 2: Oh?
Speaker 3: No, there absolutely is, because it can help you. It
Speaker 3: can help you predict where the overall is going to go. Right,
Speaker 3: And I did that a moment ago with the with
Speaker 3: the labor market when you as I was saying, if
Speaker 3: you look at if you look at younger folks, if
Speaker 3: you look at folks at college degrees, if you look
Speaker 3: at folks that are marginally attached to the labor market,
Speaker 3: I think that they're often they're leading indicators of where
Speaker 3: the overall labor market is going to go, and they
Speaker 3: portray additional slack beyond what just the unemployment rated stuff
Speaker 3: would give you.
Speaker 5: And I think you know, to the.
Speaker 3: Extent you're seeing weakness in some smaller business some small
Speaker 3: business segments like the annex CEO that you mentioned before
Speaker 3: that is the type of thing that I would be
Speaker 3: interested in knowing more about it in terms what it
Speaker 3: pretends for the overall economy.
Speaker 7: Stephen Myron, I want to talk about Kevin Worsh. Of course,
Speaker 7: that's the big news of this morning, President Trump posting
Speaker 7: on truth Social that he will nominate Kevin Walsh as
Speaker 7: the next FED or as the next Chair of the
Speaker 7: Federal Reserve. This has been the horse race that has
Speaker 7: been captivating Wall Street. I want to bring you this
Speaker 7: note from Neil Dutta over at Renaissance Macro. He writes
Speaker 7: that if you get a few cuts now to appease
Speaker 7: the President, you may well get tougher hikes later. Moreover,
Speaker 7: because Walsh has been a policyhawk his entire life, his
Speaker 7: newfound duvishness looks very suspect. Now that's maybe a little
Speaker 7: bit more blunt than I would have phrased it. But
Speaker 7: there's a lot of people on Wall Street on the
Speaker 7: cell side who share the view. And I'm curious how
Speaker 7: confident you are that you know, as a FED chair,
Speaker 7: Worsh will be the dove that it seems that President
Speaker 7: Trump wants.
Speaker 5: Look, I think Neil is fantastic.
Speaker 3: I'm a huge I'm a huge Neil fan, but I
Speaker 3: think that Chairman design At Warsh has a long and
Speaker 3: illustrious career in history as a very insightful thinker on
Speaker 3: monetary policy. I think he's a fantastic pick for the
Speaker 3: from the President. I think he's got enormous credibility. I
Speaker 3: think he's got enormous gravitas.
Speaker 5: I think he's got.
Speaker 3: Enormous enormous respect from financial markets, from economists, from everyone.
Speaker 3: I think he's going to do just a knockout job.
Speaker 3: What specific policies he supports or he's going to support
Speaker 3: going forward.
Speaker 5: You know, I can't answer that. I'm not him. You
Speaker 5: got to ask him those questions.
Speaker 7: Certain well, I would love to, so fingers crossed there,
Speaker 7: But as a FED governor, I mean, as you know, well,
Speaker 7: the job of the Fed chair is not just their
Speaker 7: opinions on where policies should go, but it's building consensus,
Speaker 7: you know, in the room itself. And so with the
Speaker 7: current makeup of the FLMC, I mean you think about
Speaker 7: some of the views on interest rates on the balance sheet,
Speaker 7: do you think that worsh will be able to basically
Speaker 7: build that consensus with that makeup?
Speaker 3: I do, I do, and The reason is that he's
Speaker 3: been there before. He knows how the place operates, he
Speaker 3: knows a lot of the key figures involved, and he's
Speaker 3: got the respect and the credibility that you need to
Speaker 3: do that. And I think that people want people want
Speaker 3: him to succeed. I think people want the FED to
Speaker 3: sort of have a good role in the economy, a
Speaker 3: good role in the country. And I think that they'll
Speaker 3: want him to succeed. And I think that he will
Speaker 3: be able to marshal the arguments and the evidence.
Speaker 5: That he needs to persuade people of his policy views.
Speaker 4: I want to talk about your experience.
Speaker 2: You came to the FED from the White House, and
Speaker 2: I'm sure you know people said he was just put
Speaker 2: there to do what Donald Trump told him to do.
Speaker 2: Did Donald Trump tell you to do anything in particular?
Speaker 2: And do you think he told Kevin Warsh that even
Speaker 2: if he didn't, how do you how did you and
Speaker 2: how would Kevin fight the perception that he's the President's
Speaker 2: man inside the FED?
Speaker 3: Look, the President has never ever asked me to do
Speaker 3: anything on Montaria policy. He has never asked me to
Speaker 3: do any specific action on Montara policy. He's told me
Speaker 3: his views on Montera policy. But he tells the whole
Speaker 3: world his views on Montera policy. You know them as
Speaker 3: well as I do. Right, that's not a secret. He's
Speaker 3: never asked me to do anything. And I wasn't in
Speaker 3: the room with any of you know, Chairman Designant Warshes
Speaker 3: conversations with the President or anybody else involved in this
Speaker 3: selection process, So I don't know what those conversations were like.
Speaker 3: But if they were anything like the conversations I had
Speaker 3: with the President about Montera policy, then.
Speaker 5: He wouldn't have asked him to take any specific actions.
Speaker 2: Well, how do you get the public to realize that?
Speaker 3: You do that by taking policy actions that are consistent
Speaker 3: with the data. And I think that, you know, I've
Speaker 3: laid out a case where the inflation measures that are
Speaker 3: consistent with supplied demand and balances in the economy, the
Speaker 3: inflation measures that are relevant for Montaria policy are indicating
Speaker 3: that there's no material overheating, that there's no material inflation.
Speaker 5: Issues in this country right now.
Speaker 3: So by taking policy steps that are consistent with the
Speaker 3: economic data that are justified by the state of the economy,
Speaker 3: I think you're delivering the right policy.
Speaker 5: At the end of the day, the.
Speaker 3: Financial markets, the economy respond to whether the policy is
Speaker 3: the appropriate policy or not right.
Speaker 5: They don't respond to why the policy is there. Right.
Speaker 3: The interest rate doesn't really care why, you know, the
Speaker 3: long end of the yield curve ultimately doesn't really care
Speaker 3: why the short rate is where the short rate is.
Speaker 3: It cares whether the short rate is appropriately set and
Speaker 3: what the consequences of the short rate are for the economy.
Speaker 3: The motives of the people who went into started setting
Speaker 3: the short rate, those aren't really important. Is it the
Speaker 3: right policy for the economy or not is what matters.
Speaker 3: And I think that that's what I've that's what I've
Speaker 3: labored to labored to work for is to sort of
Speaker 3: is to do a lot of a lot of analysis
Speaker 3: of the inflation scenario, a lot of analysis of the
Speaker 3: labor market, a lot of analysis of the economy, and
Speaker 3: put that all out there. And I put all of
Speaker 3: my analysis out there all the time. I try and
Speaker 3: be as transparent as possibly can with my calculations.
Speaker 5: Everybody knows exactly why I hold the views I hold.
Speaker 1: See, I am curious, once you move on back to
Speaker 1: your original role over at the National Economic Council, how
Speaker 1: is fiscal policy meaning fiscal policy dictated from the White
Speaker 1: House and obviously through Congress itself.
Speaker 6: Is that going to be in sync?
Speaker 1: Do you think with what at least what you know
Speaker 1: now with regards to the Fed's thinking and Kevin warsh
Speaker 1: is thinking, is that going to be in sync?
Speaker 3: Well, first, let me say that I honestly have no
Speaker 3: idea what I'm going to be doing. Uh, you know,
Speaker 3: after after chairman doesn't at wash is confirmed, I have
Speaker 3: no idea.
Speaker 6: You're not to come back to the White House.
Speaker 5: I have no idea. I have no idea. You know,
Speaker 5: it's it's people want to go back.
Speaker 3: Well, you know, I think I'm going to be doing
Speaker 3: a lot of thinking over overcoming weeks about about you know,
Speaker 3: about what will happen and what things will look like.
Speaker 5: But I don't know. You know, we'll we'll see, we'll see,
Speaker 5: we'll see how things shake out.
Speaker 3: But you know, with respect to fiscal policy, you know,
Speaker 3: as a member of the FED Board, it's it's just
Speaker 3: it's not really appropriate for me to comment on it
Speaker 3: one way or another. And you'd have to talk to folks,
Speaker 3: you know, in the White House and in Treasury, and
Speaker 3: I'm sure they've got plenty of views on appropriate fiscal policy.
Speaker 5: That they'd be very happy to give you if.
Speaker 6: You want to come work here. You make a great
Speaker 6: co host. Well they know, I mean, no offense. Mikey's
Speaker 6: great too, but you.
Speaker 3: Know, I mean there are some pretty great snacks there,
Speaker 3: so you know, it's it's it's it's not unappealing.
Speaker 7: Yeah, we have a lot of good snacks on the
Speaker 7: desk right now. Actually, but we should talk about the
Speaker 7: balance sheet because one of the differentiating factors of Kevin
Speaker 7: worsh is also his views on the balance sheet. We
Speaker 7: know that he's skeptical about expanding it to the extent
Speaker 7: that the Central Bank has very skeptical about QI as well.
Speaker 7: And the point has been made to me today on
Speaker 7: Bloomberg Television. You know, if the Fed is going to
Speaker 7: step away from a stance where it's using the balance
Speaker 7: sheet to influence the shape of the curve, that you
Speaker 7: could see long end rates go high or that obviously
Speaker 7: wouldn't be good news for mortgage rates with China that
Speaker 7: President Trump is very focused on. And I wonder you know,
Speaker 7: whether those views hold any water with you.
Speaker 5: About about whether to do something with the balance sheet.
Speaker 7: Yeah, whether or not you know, stepping away from expanding
Speaker 7: the balance sheet will translate into higher long end rates.
Speaker 3: So you know, my perspective is that it is a
Speaker 3: good idea to shrink the balance sheet.
Speaker 5: I've said this numerous times.
Speaker 3: But I also think that in order to shrink the
Speaker 3: balance sheet, we need to do some regulatory reform because
Speaker 3: there are regulatory requirements that create demand for reserves in
Speaker 3: the banks. We require the banks to hold reserves because
Speaker 3: of the various requirements under the Bossle system. Right, So
Speaker 3: once we do some regulatory reform, then I think we
Speaker 3: can get back to shrinking the balance sheet. It is
Speaker 3: something that I would like to do. Whether that has
Speaker 3: an effect on long rates, I think depends on a
Speaker 3: lot of stuff. It depends on how you're shrinking the
Speaker 3: balance sheet, whether you're doing roll off or or whether
Speaker 3: you're selling securities.
Speaker 5: I think doing roll off is.
Speaker 3: Passive and is less likely to have a substantial effect
Speaker 3: on long rates. But I think at the end of
Speaker 3: the day, you know what really matters is the overall
Speaker 3: stands of policy as combined short rates and balance sheet policy.
Speaker 3: And if you're at the zero lower bound, then the
Speaker 3: short rate can't do anything, and then it's the balance
Speaker 3: sheet policy that's really setting.
Speaker 5: The tone for the bodom market. Right.
Speaker 3: But if you're not the zero lower bound, then in theory,
Speaker 3: you can be moving the short right around to offset
Speaker 3: whatever you're doing on the balance sheet. And so what
Speaker 3: you're doing when you set policies, you're targeting a particular
Speaker 3: level of financial conditions that let you hit your monetary
Speaker 3: policy targets statle prices and maximum employment. And if for
Speaker 3: some reason financial conditions were to deviate from what allowed
Speaker 3: you to hit stalar prices and maximum employment, you can
Speaker 3: change the short rate to offset that and thereby get
Speaker 3: back to stalar prices and maximum employment. So if you
Speaker 3: want to shrink the balance sheet because you have a
Speaker 3: principle that you want the FED to have a minimal
Speaker 3: footprint in the economy, for example, right, then if that
Speaker 3: were to cause an increase in long rates, you can
Speaker 3: offset that tightening of financial conditions by reducing the short rate.
Speaker 3: So as long as you're not the zero lower bounds,
Speaker 3: you have multiple tools to affect this situation.
Speaker 4: One last question.
Speaker 2: We know now who the next chair of the FED
Speaker 2: is likely to be, but we don't know what's going
Speaker 2: to happen to the current chair of the fed. Would
Speaker 2: it be uncomfortable for the committee? Would be difficult to
Speaker 2: have J. Powell stay and be in the room when
Speaker 2: Kevin warsh is trying to lead people perhaps in a
Speaker 2: different direction.
Speaker 3: Look, you know, I think that I think that Chairman Powell,
Speaker 3: uh you know, deserves a thank you from all Americans.
Speaker 3: I think his work during the during the pandemic recession,
Speaker 3: uh you know, was part of a critical effort that
Speaker 3: really helped save the country from a second Great depression.
Speaker 3: And everyone, everyone knows him a thank you for that. However,
Speaker 3: I really can't tell you what he's going to design
Speaker 3: to do, uh you know. And you got to get it,
Speaker 3: you know, you got to get it from the source,
Speaker 3: you know.
Speaker 5: I don't I don't know.