Speaker 1: Bloomberg Audio Studios, Podcasts Radio. An important conversation we want
Speaker 1: to bring you now to in New York Bloomberg Salaams
Speaker 1: and sitting down with the newest member of the FED
Speaker 1: Governor Stephen Myron. This is at the Economic Club of
Speaker 1: New York, a fireside chat live on Bloomberg, and.
Speaker 2: That it wasn't bad. And so my initial thought was
Speaker 2: that I was going to be given I was going
Speaker 2: to be asked to run the buer of labor sistics
Speaker 2: as a second job. That's what I initially expected when
Speaker 2: I walked into the Oval office that day. But yeah,
Speaker 2: that's that's not how it turned out.
Speaker 3: Yeah, they couldn't find you personnel decision could be firing
Speaker 3: or would you like to be a FED governor?
Speaker 2: Yes, So that's that's what it turned out to be. Yeah.
Speaker 3: Yeah, So you're on leave from working for President Trump,
Speaker 3: where in your job you provided economic analysis for the
Speaker 3: White House. Trump says in the White House says that
Speaker 3: the US economy is doing great. They recently put a
Speaker 3: post up on the website that talks about how Americans
Speaker 3: adding like never before, they are earning more, and the
Speaker 3: industrial renaissance is here.
Speaker 4: Yet. As a FED governor.
Speaker 3: Last week you wrote down a forecast for a total
Speaker 3: of one hundred and fifty basis point cuts in three meetings,
Speaker 3: which is usually panic territory. How can both points be
Speaker 3: true at the same time that the economy is doing great,
Speaker 3: but a rapid interest rate reduction is necessary.
Speaker 2: Yeah. So, look, I mean, as I said a few
Speaker 2: moments ago, I expect the second half of the year
Speaker 2: and into next year to be better in terms of growth.
Speaker 2: In the first half of this year in large part
Speaker 2: because a lot of the effects of the tax bill
Speaker 2: are going to be kicking in and trade uncertainty is dissipating.
Speaker 2: But I view a lot of that as also expanding
Speaker 2: the supply side at the same time as the as
Speaker 2: the demand side, And so, as I said, if actual
Speaker 2: output and potential output are moving up at the same time,
Speaker 2: it doesn't imply a necessarily hawkish or much tigher policy
Speaker 2: because the apple cap isn't expanding if they're both moving
Speaker 2: at the same time. Instead, my view is that policy
Speaker 2: is roughly two points too restrictive, which is considerably restrictive.
Speaker 2: And even though I am expecting growth to be a
Speaker 2: little bit better in the future, that could get derailed
Speaker 2: unnecessarily so and create an apup of gap where one
Speaker 2: need not exist if we don't get policy closer to neutral.
Speaker 2: Now that said, because of the distance neutral, my view
Speaker 2: is it's better to move there more quickly than less quickly.
Speaker 2: It's not a panic, you know. I think a panicky
Speaker 2: move would be something like seventy five business points or
Speaker 2: even more. I'm not panicked. I just see that the
Speaker 2: risks grow the longer you remain significantly above neutral.
Speaker 3: You have company among your new colleagues at the FED
Speaker 3: in your neutral rate forecast that nobody wants to move
Speaker 3: quite as quickly as you do.
Speaker 4: What is it that concerns you about the labor market?
Speaker 2: Well, we learned that the first half of the year
Speaker 2: was not as strong as we would have liked it
Speaker 2: to have been. We learned that the labor marketing continued
Speaker 2: to lose momentum throughout last year and into the first
Speaker 2: half of this year. And that to me means that
Speaker 2: even though I think that growth is going to pick
Speaker 2: up for various reasons, there are concerns that, hey, things
Speaker 2: had been moving in the wrong direction, and if you
Speaker 2: keep policy this degree of restrictive for too long, you're
Speaker 2: not going to allow things to move in the other direction,
Speaker 2: and so you're going to create a situation which napokap expands.
Speaker 2: And so in my opinion, it's imperative that we get
Speaker 2: closer to neutral quickly. And so I thought three, you know,
Speaker 2: sort of a series of fifties to recalibrate interest rates
Speaker 2: was the appropriate policy.
Speaker 4: And you don't see that as panic, No.
Speaker 2: I don't see that as panic. I mean, if I
Speaker 2: were panicking, I would tell people I were panicking.
Speaker 3: All right, A lot of businesses say that you talk
Speaker 3: in your speech and just now about how rates are
Speaker 3: too restrictive, But a lot of businesses that I've been
Speaker 3: hearing from reading different reports and analyzes, show that some
Speaker 3: of the pullback and investments is not to the restrictive
Speaker 3: rate environment, but has to do with policy related uncertainty.
Speaker 4: How do you counter that, well.
Speaker 2: I mean I think that you know, there's a lot
Speaker 2: of different interest rates in the economy and a lot
Speaker 2: of different types of investment, and so for sure, there
Speaker 2: are parts of the economy that have been affected by that.
Speaker 2: And as I said before, I do think that that
Speaker 2: that type of uncertainty is not totally on, but I
Speaker 2: think it's certainly less than it was a few months ago. However,
Speaker 2: if you look at other sectors like housing, you know,
Speaker 2: I think it's very clear that rates are that rates
Speaker 2: are you know, that rates are the primary impetitive and
Speaker 2: to investing in housing and building more housing at the moment.
Speaker 2: You know, I don't think that that's a function of
Speaker 2: trade policy uncertainty.
Speaker 4: You threw a lot of numbers.
Speaker 2: I apologize everyone.
Speaker 3: Yes, I'm sure everyone's going to go back and look
Speaker 3: at this speech and the table. Can you break down
Speaker 3: just a little bit what your economic growth forecast is
Speaker 3: for twenty twenty six.
Speaker 4: Where do you see the economy ending the.
Speaker 2: Year so conditional upon economy, sorry, conditional upon on getting
Speaker 2: rates closer to neutral as I had in the SEP,
Speaker 2: I think growth is going to be in the you know,
Speaker 2: sort of in the mid two area.
Speaker 4: And where do you see the federal funds rate.
Speaker 2: Again in the mid in the in the mid two area.
Speaker 3: So if your forecasts are right, it might be time
Speaker 3: for rates to go up at that time.
Speaker 2: Uh no, because some of the so so there's a
Speaker 2: difference between So in the speech I said two to
Speaker 2: two and a half percent was the correct rate, but
Speaker 2: my dots actually have a slight divergence from that because
Speaker 2: some of the effects kick in differentially over time. And
Speaker 2: so there are some effects that you know, I think
Speaker 2: we'll be kicking in immediately, but then sort of the
Speaker 2: rent disinflation accelerates over time, and the apple gaps kind
Speaker 2: of ameliorate over time as potential, sorry, as actual catches
Speaker 2: up to potential, and so there's a so so it's
Speaker 2: not the case that you would sort of just collapse
Speaker 2: down immediately to two to two and a half percent
Speaker 2: and then gradually raise back up over time. Because of that,
Speaker 2: there's actually there's you know, my view is get relatively
Speaker 2: close neutral quickly, and then there's a little bit more
Speaker 2: cutting next year, and then a little bit more cutting
Speaker 2: the year after that, and then sort of back up
Speaker 2: to neutral thereafter.
Speaker 3: So I want to talk to you about a paper
Speaker 3: that you wrote for the Manhattan Institute last year. It
Speaker 3: came out in March of twenty twenty four. You name
Speaker 3: Lalel Brainard, specifically criticizing her for being among the Central
Speaker 3: Bank officials who have rotated between the White House and
Speaker 3: the Federal Reserve. Of course, that officials are most of
Speaker 3: them are nominated by the president, and so there's a
Speaker 3: natural link there. You named that Brainard specifically took one
Speaker 3: single weekend between a political role at the White House
Speaker 3: and a role as an independent member of the Federal Reserve.
Speaker 3: A quote that jumps out from the paper is to
Speaker 3: pretend that no one to pretend that one can easily
Speaker 3: shift between highly political and allegedly non political roles without
Speaker 3: letting political bias informed policy is at best naive and
Speaker 3: at worst, sinister Governor Myron, how is your being on
Speaker 3: leave from working directly from President Trump different?
Speaker 2: Yeah, so first, let me let me address me let
Speaker 2: me go backwards with that. Right, So, first, the on
Speaker 2: leave is just because it's a four month job. And
Speaker 2: if it were a longer than four month job, I
Speaker 2: would of course resign, you know, immediately. If there were
Speaker 2: some reason that I would think that I would be
Speaker 2: in the seat past January, i'd resign. Now at the moment,
Speaker 2: I don't have such a reason, you know. And I
Speaker 2: think that there's no question that the FED had previously
Speaker 2: gotten over its skis in terms of politics, and I
Speaker 2: think my analysis is borne out by the history. The
Speaker 2: FED decided that it was going to be the organization
Speaker 2: to take on climate change and to join various international
Speaker 2: networks for bringing the financial system. The FED decided that
Speaker 2: it was going to get involved in credit allocation, deciding
Speaker 2: that this sector of the economy is worthy of credit
Speaker 2: and this sector that we don't politically favor is not
Speaker 2: worthy of credit. The FED decided that it was going
Speaker 2: to intervene in heavily political issues of racism and police,
Speaker 2: and FED officials started giving speeches about police brutality and
Speaker 2: arguing that we were overincarcerated the you know. The FED
Speaker 2: decided that it was going to become more and more
Speaker 2: political along these lines, and I viewed that as a
Speaker 2: significant problem. That's the context in which I in which
Speaker 2: I in which I wrote that the proposals that in
Speaker 2: that paper are a package deal, a system of checks
Speaker 2: and balances, and everything that I wrote in there requires
Speaker 2: the entire system of checks and balances to be effective.
Speaker 2: If you just took one check and you ignored all
Speaker 2: the others, all you do is empower the one that
Speaker 2: you're protecting. So it's a it's a it all has
Speaker 2: to be viewed in the context of a total system,
Speaker 2: as opposed to sort of in isolation. Now, I was
Speaker 2: asked to take this role by the President of the
Speaker 2: United States. I took the role. I will do the
Speaker 2: best at it that I possibly can. That means for
Speaker 2: forming my own views independently based on what I think
Speaker 2: is appropriate economics, based on what I think is appropriate analysis,
Speaker 2: and because of exactly the things that you're discussing are
Speaker 2: why I want to be so transparent and as transparent
Speaker 2: as I possibly can be. I didn't just make the
Speaker 2: number up for the SAP, right, I just read everyone
Speaker 2: the analysis. And I know I probably bored people to
Speaker 2: death with this many numbers. But the reason why I
Speaker 2: did so is that people know these numbers aren't just
Speaker 2: made up. There's a reason every single line there has
Speaker 2: a number on it, and every single line has an elasticity,
Speaker 2: a size of the change, and then these policy outcome,
Speaker 2: which is basically the two multiplied to each other. And
Speaker 2: if you're going to disagree with me, I invite you
Speaker 2: to disagree with me. Tell me, do you think the
Speaker 2: elcicsity is wrong or do you think that the size
Speaker 2: of the size of the changing the changing parameter is wrong?
Speaker 2: The changing variable is wrong? Right? Because you may think
Speaker 2: that you know that there's other estimates of the effects
Speaker 2: of immigrants on rental prices on rents right that you
Speaker 2: know are higher or lower, and I should be using
Speaker 2: a higher and lower elisticity, right like, please have the conversation, right.
Speaker 2: But I am being as transparent as I possibly can,
Speaker 2: precisely because of the concerns that you just listed, and
Speaker 2: I invite everyone to do so. Well.
Speaker 3: There's nothing boring about what's coming out of the Federal
Speaker 3: Reserve these days, I assure you, the President, Let's talk
Speaker 3: about the context you shared, the context against which you
Speaker 3: wrote the March twenty twenty four paper for the Manhattan Institute.
Speaker 3: The context right now is that the President has said
Speaker 3: many times that he will have a majority soon at
Speaker 3: the FED, more of his appointees than anyone else. A
Speaker 3: lot of academic studies show that a loss of central
Speaker 3: bank independence is often associated with higher borrowing costs. Do
Speaker 3: you think that there is a risk to the President
Speaker 3: being so directly involved in selecting governors who have a
Speaker 3: certain view on rates. Let's set aside DEI and climate risks,
Speaker 3: but we're talking monetary policy where the rate path should be.
Speaker 2: You know, again, the president is entitled to his views
Speaker 2: on monetary policy. I think everyone's entailed to their views
Speaker 2: on monitary policy, and I'm delighted to hear views from
Speaker 2: all I think it's very important to avoid groupthink. That
Speaker 2: means hearing all views from all perspectives, and I'm very
Speaker 2: happy to hear the President's views. But at the end
Speaker 2: of the day, I make my analysis based on my
Speaker 2: own understanding of economics and how the economy works, and
Speaker 2: I just read it all out loud to everybody, and
Speaker 2: I would hope that everyone else who is appointed the
Speaker 2: Federal Reserve does the same. You know, presidents have always
Speaker 2: appointed people to the Federal Reserve who thought about policy
Speaker 2: in a way that they wanted to appoint people to
Speaker 2: the FED.
Speaker 3: You did stay on Friday on Live TV that you
Speaker 3: had spoken to the President the day that you were confirmed.
Speaker 4: That was just a congratulatory call.
Speaker 2: You said, Yes, he called me to congratulate me after
Speaker 2: I'd been sworn in.
Speaker 3: If I'm curious what you would do if, in a
Speaker 3: phone call the President directly asked you to vie for
Speaker 3: a specific decision at the FED.
Speaker 2: I would respectfully listen to his view and his analysis
Speaker 2: of why interest rates should be wherever they think that
Speaker 2: they should be. And he has been very forthright in
Speaker 2: his view, right, which is not exactly the same as
Speaker 2: the numbers that I put out there. There is a difference, right.
Speaker 2: I would respectfully listen to his view. I would consider
Speaker 2: his arguments, consider whether they had any merit, and then
Speaker 2: I would make up my own mind based on my
Speaker 2: own analysis. And I would do that whether it's the
Speaker 2: President or anyone or any other you know, political actor.
Speaker 3: Would you share publicly if that conversation were to take.
Speaker 2: Place, Well, you know, as you can imagine, I've had
Speaker 2: a number of conversations with the President about the economy,
Speaker 2: about economic policy over the last you know, nine months,
Speaker 2: about the economy, economic policy. A number of those conversations
Speaker 2: that touched in the FED. Also, he's never asked me
Speaker 2: to set policy in a specific way. So Amy never
Speaker 2: asked me. It's never happened.
Speaker 3: From my understanding. On the day that you were nominated,
Speaker 3: you were interviewed, I believe by Scott Bessen, the treasure Secretary,
Speaker 3: Susie Wiles, the White House Chief of Staff, and the President.
Speaker 4: Did the rate path come up in those conversations.
Speaker 2: No, he never asked me. He never asked me to
Speaker 2: set policy in a specific way. He shared his view
Speaker 2: about Monterey policy, the same view he says on TV
Speaker 2: several times a week. You know, there's nothing about his
Speaker 2: view about Monterey policy that I know that you don't know.
Speaker 2: But he never asked me to set policy in a
Speaker 2: specific way in nine months.
Speaker 3: In nine months. So last Monday night you're confirmed by this.
Speaker 3: Then Tuesday morning you have a phone call from the
Speaker 3: president and then you walk into your very first FOMC meeting.
Speaker 3: Can you share just a little bit about what it
Speaker 3: is like to walk in? It was a historic meeting
Speaker 3: on Monday. We didn't know who was going to be
Speaker 3: in the room. Would you be confirmed? Would Lisa Cook
Speaker 3: still be able to participate?
Speaker 4: What was that like?
Speaker 2: It was? It was cordial, it was collegial, It was friendly,
Speaker 2: it was respectful, and I was very appreciative of that.
Speaker 2: Everybody was very welcoming, you know, and it was a
Speaker 2: good discussion. And you know, the way that it works
Speaker 2: is the staff make their presentation, Participants are allowed to
Speaker 2: ask the staff questions. Participants read their views of the
Speaker 2: economy and about appropriate monetary policy, and there was a
Speaker 2: forthright exchange of views, and you know, lots of diversity
Speaker 2: of views. And I appreciated that conversation and everybody was
Speaker 2: just very kind, and you know that meant a lot
Speaker 2: to me. And you know, in the press conference, Chairman
Speaker 2: Powell said something which I think really resonated, which is
Speaker 2: that the way the FMC works is by persuasion. Right.
Speaker 2: People go there, they have their view, and they try
Speaker 2: and convince other people of their view. Now, I don't
Speaker 2: think that persuasion actually tends to happen at the meeting because,
Speaker 2: let's face it, with nineteen people in just a few hours,
Speaker 2: you're never going to really reach a consensus on a
Speaker 2: lot of issues in that short amount of time. Conversation.
Speaker 2: It happens in between, right, And that's what I'm trying
Speaker 2: to do today, right, is I'm trying to tell people
Speaker 2: there's a reason why policy rates are too high. It's
Speaker 2: because there's been substantial changes in immigration, there's been substantial
Speaker 2: changes in tariff revenue. And these need to be incorporated
Speaker 2: into our economic models because they're relevant for how monetary
Speaker 2: policy is set. And that's how I'm going to approach
Speaker 2: my time at the Federal Reserve is to lay up
Speaker 2: my economic arguments as clearly and transparently as I can,
Speaker 2: and hope to persuade people by the force of the economics.
Speaker 2: I don't think, I really don't think the idea that
Speaker 2: population growth affects neutral interest rates as a controversial view.
Speaker 2: This was a universally held accepted fact. Probably nearly there's
Speaker 2: always an exception. Probably a nearly universally held accepted fact.
Speaker 2: Five or six years ago, everyone would have almost everybody
Speaker 2: would have agreed sure population growth effects neutral interest rates.
Speaker 2: Countries with high population growth have high neutral interest rates.
Speaker 2: Countries low population growth have loan neutral interest rates. Well,
Speaker 2: we just had a major swing in population growth because
Speaker 2: of the changes in border policy, and in my mind,
Speaker 2: it's incumbent upon us as policy makers to think about
Speaker 2: that when we think about where appropriate mantar policy should be.
Speaker 3: Governor Martin, you're talking about your approach while you're at
Speaker 3: the FED. You have a few short months, and it
Speaker 3: seems like a little bit of a caretaker role that
Speaker 3: should be taken seriously. You've also come out of the
Speaker 3: gate quite strong. You had your descent last week. We
Speaker 3: saw you on the airwaves on Friday, and now you've
Speaker 3: laid out in detail your views to be transparent. As
Speaker 3: you said, what should we make of your approach are
Speaker 3: you hoping to spend these few short months persuading on
Speaker 3: a board that is run by a chair whose ultimate
Speaker 3: job is to forge consensus.
Speaker 2: Yeah, I mean, look, you know, I'm I think at
Speaker 2: the end of the day, you know, I just try
Speaker 2: and think things through myself and ask questions to try
Speaker 2: and figure out where consensus might be complacent and wrong.
Speaker 2: And I've always done that and I think you sort
Speaker 2: of see that on you know, some of my previous
Speaker 2: writing on tariffs, for instance, right, you know, the idea
Speaker 2: that you would be able to implement these things without
Speaker 2: significant retaliation was once very out of consensus, and now
Speaker 2: I think a lot of folks are coming along to
Speaker 2: that direct, you know, sort of to that view. The
Speaker 2: same is true of this. I will be as independent
Speaker 2: as I can in thinking through monetary policy, and that
Speaker 2: means not only in a political sense, but in an
Speaker 2: intellectual sense as well. On the FMC, and I view
Speaker 2: my job as trying to provoke an interesting discussion that
Speaker 2: will help that will help the FOMC arrive at arrive
Speaker 2: at arrive at clear clearer understandings of the way the
Speaker 2: economy works and where Monterey policy should be set. It's
Speaker 2: a few short mind. But you know, I've got I
Speaker 2: think a lot of a lot of content to work through.
Speaker 3: In those months, you shared that you're using CEA data
Speaker 3: right now, but you're looking forward to working with FED
Speaker 3: staff as well as you move forward. You talked about
Speaker 3: population growth and other data points that you're looking at.
Speaker 3: Can you share with us a little bit about your
Speaker 3: views on the power of a descent. We saw governors
Speaker 3: Mickey Bowman and Chris Waller over the summer descent against
Speaker 3: Powell or the board. A few months prior, Governor Waller
Speaker 3: was on Bloomberg TV actually talking about how he views
Speaker 3: dissent as you do it once and then you've made
Speaker 3: your point, and maybe you back off and see how
Speaker 3: the economy develops and how the discussion goes. First, I'm
Speaker 3: curious your views on that, and then I'm curious about
Speaker 3: how you're going to be the October meeting.
Speaker 2: Yeah, I mean, look, you know, I arrive at a view.
Speaker 2: I do a lot of careful thinking. I arrive at
Speaker 2: a view, and then I will sort of continue, you know,
Speaker 2: until my view change. I will continue arguing for that view.
Speaker 2: And if that means continuing to descent, that means continuing
Speaker 2: to dissent. I don't view you know, look, I will
Speaker 2: always be polite and collegial, but I don't view voting
Speaker 2: with the consensus for the sake of establishing an appearance
Speaker 2: of a consensus, even if I disagree with it, to
Speaker 2: be more important than trying to argue for what I
Speaker 2: consider to be the correct policy. And if that means
Speaker 2: that I keep on being I think, you know, sort
Speaker 2: of sticking out from the crowd and sort of being
Speaker 2: more individual in my views and more adiosyncratic in my
Speaker 2: views I think than maybe the rest of the pumcy,
Speaker 2: then that's the way it's going to be. I'm not
Speaker 2: going to I'm not going to vote for something I
Speaker 2: don't believe in just for the sake of creating an
Speaker 2: illusion of consensus where where there is none.
Speaker 3: So, depending on how the economy unfolds and what data
Speaker 3: we see between now and the end of October, you
Speaker 3: are willing to be the loan descent again in October
Speaker 3: with fifty basis point dot on the plot?
Speaker 4: Or are you hoping that more people join you?
Speaker 2: Yeah, unless something unless something changes that would lead me
Speaker 2: to change my economic view, right, I mean something could
Speaker 2: change that would that would make change my economic view.
Speaker 2: You know, there's any number of things that could that
Speaker 2: could leave that, But as long as my current view
Speaker 2: remains my operative view, I don't see why I would
Speaker 2: vote for anything that's not my view.
Speaker 3: You have a way of getting the attention of the
Speaker 3: world of finance and economics with the words and phrases
Speaker 3: that you use. A few months ago, it was the
Speaker 3: notion of a mar A Lago accord that had a
Speaker 3: lot of people buzzing, especially in the Bloomberg that I
Speaker 3: live in. And now it's this concept of a third mandate,
Speaker 3: which is a word or phrase that you did not
Speaker 3: actually use.
Speaker 4: Let's talk about this.
Speaker 3: In your testimony, you brought up a piece of the
Speaker 3: FED legislative mandate.
Speaker 4: You noted the moderate.
Speaker 3: Long term interest rates that comes right after the duel
Speaker 3: that everyone looks at. Do you see the FED using
Speaker 3: securities purchases to reduce long term rates?
Speaker 2: Sure? So let me let me address there. The two
Speaker 2: things you mentioned are related, right, and so like I
Speaker 2: just have a personality that I like thoroughness, and I
Speaker 2: like to, you know, sort of explore all the angles,
Speaker 2: and I like to be exhaustive if I can. And
Speaker 2: when I wrote that paper and trade policy last year
Speaker 2: before joining any policy role, I was attempting to be
Speaker 2: exhaustive and list every policy I could possibly imagine as
Speaker 2: being able to affect the as being able to reduce
Speaker 2: narrow the national accounts. I never advocated for that mar
Speaker 2: Lago accord. In fact, it wasn't even my idea. I
Speaker 2: was quoting somebody else's idea and gave him due credit
Speaker 2: in the citations and in the text as a result
Speaker 2: of it, and I underlined that it wasn't a policyroposal.
Speaker 2: It wasn't. Sorry, it wasn't policy advocacy, but I like
Speaker 2: to be a thorough and so I included it. Uh,
Speaker 2: And it was uh. You know, it continued to haunt
Speaker 2: me for many months after that, just despite despite that,
Speaker 2: this this third mandate stuff is the same thing, right,
Speaker 2: Like you know, like I take a job seriously, and
Speaker 2: if I get asked to go to the Federal Reserve Board,
Speaker 2: I will look up the statutes that and I'm a lawyer,
Speaker 2: but you know I can read. And so I'll look
Speaker 2: up the statutes that govern the Federal Reserve Board, and
Speaker 2: I see that the Congress assigned the FED stable prices,
Speaker 2: maximumployment and moderate long term interest rates. So when I'm
Speaker 2: testifying in front of the Congress, I will just repeat
Speaker 2: their own words back to them. There's nothing more to
Speaker 2: it than that, you know. I think most people generally
Speaker 2: leave the third part out because they think that it's
Speaker 2: implied by the first two, like that if you are
Speaker 2: going to achieve stable prices and you're going to achieve
Speaker 2: maximum employment, then moderate long term interstrates will necessarily fall
Speaker 2: out of that. I think that's what most people typically do.
Speaker 2: They leave it unsaid for that reason. But just because
Speaker 2: I'm a thorough person and because I was in front
Speaker 2: of the Congress, I wanted to be respectful of their
Speaker 2: words and not my interpretation of their words.
Speaker 3: There's been a lot of talk about the balance sheet.
Speaker 3: Treasure Secretary Scott Bessant has laid out in detail in
Speaker 3: a lengthy essay about the Federal Reserve and his views
Speaker 3: on it. We've heard about it from Kevin Worrish, a
Speaker 3: former FED official who is in the running to possibly
Speaker 3: be nominated FED chair. I'm curious what you make of
Speaker 3: Beson's criticism of the Fed's large balance sheets and mission
Speaker 3: creep that he points to.
Speaker 2: So you know, I've also been very critical of mission creep.
Speaker 2: We talked a little bit about it before in the
Speaker 2: discussion about FED independence. The balance sheet. I believe the
Speaker 2: balance sheet became as big as it is in part
Speaker 2: because of previous asset purchases that weren't strictly necessary. You know,
Speaker 2: I think that if you look at you know, the
Speaker 2: FED was still buying mortgage securities when housing prices were
Speaker 2: up double digits or twenty percent, I think twenty percent
Speaker 2: year year in the way of the pandemic. So I
Speaker 2: don't think there was a need for the balance sheet
Speaker 2: to get as large as it has. I think the
Speaker 2: FED has been doing a good job of bringing it,
Speaker 2: of reducing it. In my mind, though, focusing excessively on
Speaker 2: the size of the balance sheet is more like focusing
Speaker 2: on on on the symptom rather than cause. And like
Speaker 2: I said a few days ago, you know, my view
Speaker 2: is that the balance sheet size that you ultimately need
Speaker 2: is ultimately falls out of the regulatory framework, because if
Speaker 2: the regulatory framework requires a certain amount of reserves in
Speaker 2: the system, the FED needs to provide that size of
Speaker 2: a balance sheet in order to in order to allow
Speaker 2: the banking system to have the capital and needs under
Speaker 2: the regulatory framework, and so my view is that sort
Speaker 2: of focusing on the on the balance sheet size is
Speaker 2: focusing on the wrong on the wrong thing, and that
Speaker 2: it's better to focus on the regulation and to get
Speaker 2: the regulatory framework that you want correct, and then the
Speaker 2: right size the balance sheet will kind of fall out
Speaker 2: of that.
Speaker 3: Do you think that the there should be more done
Speaker 3: to focus on long term rates the way the President
Speaker 3: says using the balance sheet?
Speaker 4: Perhaps?
Speaker 2: Uh? No, I mean I think that that you know
Speaker 2: is historically the FED sets short term interest rates, right,
Speaker 2: and then that affects financial a broad array of financial conditions,
Speaker 2: including long term financial sort including long term interest rates.
Speaker 2: And as long as you are, you know, sort of
Speaker 2: not near the zero lower bound, you know, I think
Speaker 2: that there's no need to sort of move towards trying
Speaker 2: to capture additional instruments.
Speaker 3: So you agree with that the FED has a dual mandate.
Speaker 3: There's confusion out there after you listed, like you said,
Speaker 3: read back the law of Congress that there's now a
Speaker 3: third mandate policy, especially with the President talking about lowering
Speaker 3: long term interest right.
Speaker 2: Yeah, Well, look, Congress gave the Congress gave the Fed
Speaker 2: those words that I read that I read in front
Speaker 2: of them, and that you quoted before. Now, as I
Speaker 2: said before, I don't think moderate long term interest rates
Speaker 2: are necessarily you know, in action item at the present, right,
Speaker 2: Like I'm focused on bringing inflation down sustainably to two percent,
Speaker 2: I'm focused on preventing deterioration the labor market that would
Speaker 2: expand an apple gap, And I think those are the
Speaker 2: primary focus the listing. The third thing is just an
Speaker 2: you know, an item of completeness. But it's not for
Speaker 2: me to tell Congress they didn't say something. They've said, sorry,
Speaker 2: they didn't enact something. They enacted.
Speaker 3: One thing that the President is acutely focused on is
Speaker 3: housing costs for the average American. Is there anything more
Speaker 3: that the FED could do to influence mortgage rates or
Speaker 3: just alleviate some of that pressure in the economy.
Speaker 2: Yeah, So, as I said a moment ago, you know,
Speaker 2: the FED controls the short term interust rate, the overnight
Speaker 2: industrate in the economy, right, and financial conditions more broadly
Speaker 2: across a range of items, including longer term interist rates,
Speaker 2: credit spreads, the dollar, mortgage rates. Right, they all sort
Speaker 2: of can be responsive to changes in short term interest rates.
Speaker 2: And so if the FED continues to ease policy. Presumably
Speaker 2: that will bring mortgage rates down to an extent. Right,
Speaker 2: bringing mortgage rates down will help, you know, unlock additional
Speaker 2: home building, will help unlock additional investment in housing. However,
Speaker 2: you know the degree to which mortgage rates come down
Speaker 2: versus other financial conditions. Listening, you know, I don't. I
Speaker 2: don't have a firm sense of exactly which which one
Speaker 2: is being pulled at this given moment.
Speaker 3: Talk to us a little bit about the Fed's inflation.
Speaker 3: Do you think that the two percent range is the
Speaker 3: appropriate goal?
Speaker 2: Sure? So, first, let me reiterate my commitment to bring
Speaker 2: inflation sustainably down. Second, let me say that any perspective
Speaker 2: changes to an inflation target should only ever be entertained
Speaker 2: after after a material period of the FED achieving its
Speaker 2: inflation target. To avoid any appearance of moving the goalposts,
Speaker 2: you should never even entertain that idea after after being
Speaker 2: off target for a period of time. That said, you know,
Speaker 2: my view is that measuring inflation is incredibly difficult. And
Speaker 2: you know, when you look at when you when you
Speaker 2: get into the guts of how inflation is measured, there's
Speaker 2: all sorts of things that you know are strange, Right, So,
Speaker 2: for instance, you know, probably a lot of people in
Speaker 2: this room in finished services. Right. So when the stock
Speaker 2: market moves higher, financial managers, advisors, asset managers, they get
Speaker 2: more income because the base is higher, right, and sort
Speaker 2: of a constant fee times a higher base. Right. The
Speaker 2: way that inflation is calculated then generates inflation in the
Speaker 2: portfolio management section of the personal consumption expenditures index. Right.
Speaker 2: So the fact that the stock market goes up mechanically
Speaker 2: leads to higher inflation the way it's measured. Right. So
Speaker 2: you know, obviously if you'd if you'd took that literally,
Speaker 2: the FED would hiking response to that, right. So my
Speaker 2: view is that that's sort of like a weird that's
Speaker 2: a weird thing, right, And I just think that inflation
Speaker 2: is very, very difficult to measure, and so having a
Speaker 2: very precise inflation target like that can lead to excessive micromanagement. Instead,
Speaker 2: if you look before twenty twelve, the FED didn't have
Speaker 2: a formal target at all. They pursued low and stable prices.
Speaker 2: Right to me, that's an interesting way of doing things. Also,
Speaker 2: you know, the target was really introduced in twenty twelve
Speaker 2: as a bulwark against deflationary risk in the wake of
Speaker 2: the Great Financial Crisis, when the FED was at the
Speaker 2: zero lower bound and felt the need to further credibly
Speaker 2: enforce a commitment to positive inflation. And so, you know,
Speaker 2: I think there's sort of very interesting questions about how
Speaker 2: would you actually want to set MANTA policy over the
Speaker 2: longer term. But I do want to emphasize that these
Speaker 2: questions should only ever be entertained in terms of changing
Speaker 2: the framework after the FED has successfully achieved its target
Speaker 2: for a sustained period of time, to make sure that
Speaker 2: there's no appearance whatsoever moving goalposts.
Speaker 3: Governor Marion, thank you so much for taking my questions great.
Speaker 2: Thank you all very much. And let's scrawling around with callus.
Speaker 2: Thank you both. So you have it.
Speaker 1: Live from the Economic Club of New York, Stephen Myron,
Speaker 1: the FED Governor, the newest member of the FED, sitting
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