Speaker 1: Bloomberg Audio Studios, podcasts, radio news, the.
Speaker 2: Bond move continues, yield slightly high for a third consecutive day,
Speaker 2: inflationary fairs making a comeback, and some people out there
Speaker 2: trimming Federay cup bets.
Speaker 3: Federal Reserve.
Speaker 2: Governor Stephen Myron, I'm pleased to say, joined us around
Speaker 2: the table for a conversation about that and a whole
Speaker 2: lot more.
Speaker 3: Governor Maren, good morning.
Speaker 4: Good morning, Thanks for having me, Thank you for being here. Sir.
Speaker 2: Let's start with the shock over the weekend. What is
Speaker 2: the prudent response for policymaker confronting a shock like the
Speaker 2: one plank out in the Middle East.
Speaker 5: Well, at the moment, I think it's too early to
Speaker 5: sort of have any firm views. As a result of that,
Speaker 5: oil's gone up a bit. But the bigger question is
Speaker 5: does oil stay up or does it come back down?
Speaker 5: And that, of course will depend on how things play out.
Speaker 5: But even that said, even if oil stays at these
Speaker 5: types of levels, to me, it's difficult to get a
Speaker 5: lot of read through as a result of that. Sure,
Speaker 5: oil will feed into headline inflation, but the evidence that
Speaker 5: it feeds into core inflation in any sort of material
Speaker 5: way unless there's a huge move in oil prices, I
Speaker 5: think is quite limited. So it's difficult for me to
Speaker 5: get very excited about a policy implication of what's happened
Speaker 5: thus far.
Speaker 2: So some people come on the producgram spike to Leister
Speaker 2: nine said, these federalserv offishals might be conditioned by the
Speaker 2: post pandemic experience coming out of twenty one into twenty
Speaker 2: two and the inflation spike then and the energy shock
Speaker 2: that developed at the time. Emin I think in Russia
Speaker 2: it is this different in a different place.
Speaker 4: I think it is.
Speaker 5: I think that attitude is a little bit of fighting
Speaker 5: the last war, and I think that the Federal Reserve
Speaker 5: for decades has had the view that that headline headline
Speaker 5: inflation shocks like oil are best looked through, and you
Speaker 5: sort of focus on core inflation because it's indicative of
Speaker 5: where inflation is going to go in the future, and
Speaker 5: you focus on the labor market, and that type of
Speaker 5: reasoning lead you.
Speaker 4: To look through an oil shock.
Speaker 5: Now, of course, what happened in twenty twenty two was
Speaker 5: a bit different because the other policy settings were different.
Speaker 4: Right.
Speaker 5: Don't forget monetary policy was as expansionary as it had
Speaker 5: ever been. At the time, fiscal policy was injecting trillions
Speaker 5: of dollars into an economy that was recovering thanks to
Speaker 5: vaccines and medical medical improvements and COVID passing on its own,
Speaker 5: and so the policy environment was very different, and so
Speaker 5: it was very easy for a slightly inflationary shock to
Speaker 5: feed through into the broader economy and create this type
Speaker 5: of persistent inflationary problem that the FED dealt with. We
Speaker 5: don't have that right now. We don't have fiscal policy
Speaker 5: that's slamming on demand. In fact, if anything, supply is
Speaker 5: moving out quite aggressively, and monetary policy is still modestly
Speaker 5: restrictive in my view. So the policy settings the economic
Speaker 5: environment is different. To focus on that, as you described
Speaker 5: moment ago to me is fighting the last war. That
Speaker 5: was a unique circumstance.
Speaker 1: At the same time, some people have argued that the
Speaker 1: January jobs report raised a question about just how weak
Speaker 1: the labor market actually was. Even Governor Chris Waller came
Speaker 1: out and said, Okay, now it's a coin flip for
Speaker 1: whether we should cut rate to the March meeting. If
Speaker 1: we do get confirmation of that strength with the February
Speaker 1: payrolls report that we get on Friday, Would that make
Speaker 1: you rethink whether March was an appropriate time to cut rates.
Speaker 5: So look, for me, we've got two years of a trend,
Speaker 5: two plus years of a trend of gradually weakening labor
Speaker 5: markets that sort of setting in twenty twenty in twenty twenty.
Speaker 4: Three, it's way.
Speaker 5: Too early to reject the notion that that trend continues
Speaker 5: based on one or two.
Speaker 4: Labor market reports.
Speaker 5: And when you look at thetality of labor market data,
Speaker 5: there's still evidence to me that it needs more support
Speaker 5: from Montaria policy. When I look at things like employment
Speaker 5: levels of young folks and folks without college degrees. When
Speaker 5: I look at people who are umployed for long periods
Speaker 5: of time, long term unemployment, to me, that's indicative of
Speaker 5: their still being slackened the labor market that Montara policy
Speaker 5: can accommodate. So I think it's too early to reject
Speaker 5: the notion that a two plus your trend is over
Speaker 5: on the back of one print.
Speaker 1: Are you concerned though, that right now the market is
Speaker 1: moving the way that any rate cut would be perceived
Speaker 1: as heightening long term inflation pressures just by virtue of
Speaker 1: some of the supply shocks that we're seeing, and frankly,
Speaker 1: the fact that people do see strength re emerging in
Speaker 1: certain pockets of the economy. I mean, how worried are
Speaker 1: you that a rate cut in March could be potentially
Speaker 1: counterproductive and cause the long en of the yield curve
Speaker 1: to rise?
Speaker 4: Yeah?
Speaker 5: So if you saw evidence in inflation markets that markets
Speaker 5: were concerned about longer and inflation expectations, that's the type
Speaker 5: of thing that would give me pause.
Speaker 4: But I don't see evidence of that so far.
Speaker 5: Short run inflation expectations have come up quite a bit,
Speaker 5: and you look at CPI swaps, but that's just because
Speaker 5: the mechanical read through of oil prices into headline inflation.
Speaker 5: When you look at longer tenors, there hasn't been much
Speaker 5: of a move, and so as a result, I don't
Speaker 5: get the impression the market is concerned about long run
Speaker 5: inflation expectation.
Speaker 2: You've used this phrase modestly restrictive a few times in
Speaker 2: the conversation already. What is modestly restrictive to you? Can
Speaker 2: you put numbers on that kind of thing?
Speaker 4: Yeah?
Speaker 5: I think we're probably about a point above neutral now,
Speaker 5: and so my view is that we ought to start
Speaker 5: by getting getting back towards neutral.
Speaker 2: So the one hundred basis points and reductions you want
Speaker 2: this year is not to become accommodative. You believe it's
Speaker 2: to get back to a neutral setting.
Speaker 4: Yeah, pretty much.
Speaker 2: What would it take for you to start thinking about
Speaker 2: the need to get accommodative?
Speaker 5: So I would want to start thinking about inflation coming
Speaker 5: in below the target, which is a risk that I've
Speaker 5: highlighted if I end up being you know, I've emphasized.
Speaker 2: That risk, governor, what would be the source of that
Speaker 2: risk to get below target inflation?
Speaker 5: Sure, I've emphasized housing markets a lot that I'm expecting
Speaker 5: a faster convergence down of renewal rents to new rents,
Speaker 5: which will lead housing inflation to converge quickly to new
Speaker 5: rent levels. And there's reasons for that that I've talked
Speaker 5: about at length. I don't need to repeat them unless
Speaker 5: you want me to. But if I end up being
Speaker 5: right about housing and wrong about tariffs, and so I've
Speaker 5: also argued, I've also argued that I don't view tariffs
Speaker 5: as driving goods inflation. You know, I don't view that
Speaker 5: because imported prices, imported good prices are not inflating faster
Speaker 5: than all.
Speaker 4: Good prices, which is what you'd expect to see.
Speaker 5: And given that backdrop, I don't view tariffs as driving
Speaker 5: and as driving goods prices. So if I end up
Speaker 5: being right about housing and we get a sharp descileration
Speaker 5: in housing this year because of quirks of how housing
Speaker 5: is measured and because of dynamics of renewal rents versus
Speaker 5: new rents, UH, and I end up being wrong about
Speaker 5: goods prices and goods inflation comes down quickly over the
Speaker 5: course of this year, then we're going to undershoot.
Speaker 4: We're going to undershoot our target.
Speaker 3: And you think that's a risk we need to get
Speaker 3: ahead of.
Speaker 5: No, I'm not saying we're gonna we need to get
Speaker 5: ahead of that. That would get me to argue we
Speaker 5: go Bloon's.
Speaker 2: Conversation we're having about how preemptive you might need to
Speaker 2: be in a moment like this when it's on the committee,
Speaker 2: thinking let's wait and see whit and see what happens.
Speaker 2: Lisa was asking, how would you vote the March committee meeting.
Speaker 2: Is this a moment to white and sea or a
Speaker 2: moment to act?
Speaker 4: No?
Speaker 5: I think I think it's a moment to continue acting.
Speaker 5: I have policy. I have projections for unemployment. I have
Speaker 5: projections for labor markets, so to my for inflation, so
Speaker 5: do my colleagues, and I believe it's appropriate to continue
Speaker 5: acting in accordance with those projections until you get evidence
Speaker 5: that you have to change your projections. And thus far
Speaker 5: the evidence from event from events over the weekend haven't
Speaker 5: led me to change any of my forecast for the
Speaker 5: labor market for inflation over the medium terms, so it's
Speaker 5: too early to respond to them.
Speaker 1: You said that you think that the neutralia is a
Speaker 1: point below the three point seventy five where we currently are,
Speaker 1: and I'm just wondering how quickly you think it's important
Speaker 1: to get to neutral based on the uncertainty, based on
Speaker 1: the disagreements that people have about A where neutral is
Speaker 1: and B how things are going to transpire.
Speaker 4: Yeah.
Speaker 5: So last year I was voting for fifties because we
Speaker 5: were higher away from it, and then as we made
Speaker 5: progress cutting and getting closer towards neutral, I felt it
Speaker 5: was appropriate to say, Okay, now I moving in twenty
Speaker 5: five clips. I prefer to still continue moving in twenty
Speaker 5: five clips until we got to neutral, and then to
Speaker 5: reevaluate because at the end of the day, I don't
Speaker 5: see an inflation problem in the United States now. Of course,
Speaker 5: if we get evidence that what's happening in the Middle
Speaker 5: East is leading through into broader inflation, then that would
Speaker 5: change my mind.
Speaker 4: But thus far there's no evidence.
Speaker 2: Kevin, what would that evidence look like? What would you
Speaker 2: look for? Specifically?
Speaker 5: I'd look for inflation expectations starting to move as a result,
Speaker 5: starting to move on it Cosmavice, I tend to think
Speaker 5: that the market based ones are are are more important,
Speaker 5: are more important to me, or evidence that or evidence
Speaker 5: the economy is starting to in some sense overheat again,
Speaker 5: then I would be comfortable sort of changing that view
Speaker 5: and moving more, moving even more slowly. But at the moment,
Speaker 5: you know, I see it as appropriate to continue continue cutting.
Speaker 1: Do you have any company on the committee?
Speaker 4: Uh, you know.
Speaker 5: I can't speak for an I can't speak for anyone else.
Speaker 5: And I think most people probably end up sharing my
Speaker 5: view that it's too early to draw dramatic conclusions.
Speaker 4: As a result of them.
Speaker 1: To a very different conclusion about what to do. As
Speaker 1: a result of not drawing conclusions, they say, then don't move.
Speaker 1: You're saying keep moving.
Speaker 3: So I mean that's this.
Speaker 4: They started and differ every everybody is.
Speaker 5: I think people are generally where they were last week, right,
Speaker 5: and it's just too early to change your mind based
Speaker 5: on based on what's going on. My my forecast for
Speaker 5: inflation and employment and my view call for continuing continuing
Speaker 5: industry cuts. Other people disagree, you know, and so they
Speaker 5: also haven't haven't moved yet. But as we get information
Speaker 5: about it.
Speaker 2: Timil thinks the worksthrope. So the credit jed is one
Speaker 2: an AI another. I want to squeeze them both then
Speaker 2: if we can. So let's start with the AI jitter.
Speaker 2: So Block, a fintech company came out in the last
Speaker 2: week or so and cut almost half of its staff
Speaker 2: and they said them making a massive AI productivity bed.
Speaker 2: As a policy maker for you, do you consider that
Speaker 2: noise or signal?
Speaker 4: What is that?
Speaker 5: So that's you know, that's one, that's one company. It's
Speaker 5: indicative of what you could have more of. But this
Speaker 5: is just how this is how productivity gains and technology work.
Speaker 5: They allow you to produce more with fewer, fewer inputs,
Speaker 5: with fewer fewer resources. And so if you were able
Speaker 5: to produce the same amount with fewer workers and less capital.
Speaker 5: Then your productivity goes up. That frees those workers not
Speaker 5: necessarily into unemployment, but to do other work.
Speaker 4: And this is this has always been the.
Speaker 5: Story of human technological progress and human economic growth. We
Speaker 5: create new technologies, they destroy some jobs, and then they
Speaker 5: create new jobs.
Speaker 4: They free people to do new activities.
Speaker 3: I don't think it's different this time.
Speaker 5: You know, I don't have a reason for. Like I
Speaker 5: said before, you know, it's too early to rejected to
Speaker 5: year trend of labor market moving in gradual cooling direction.
Speaker 5: It's too early to reject tens of thousands of years
Speaker 5: trend of how technology works in the economy.
Speaker 3: We've talked about.
Speaker 2: These sources of risk and one has been the geopolitical problems.
Speaker 2: This is another two and the third one is connected
Speaker 2: in some cases to what's happening with AI. It's also
Speaker 2: the credit jitters as well. So this writses the question
Speaker 2: about potential financial risk for you and the committee. How
Speaker 2: are you thinking about things as they develop?
Speaker 4: But just one one last part.
Speaker 5: An AI, even as it destroys old jobs and creates
Speaker 5: new jobs, that is the type of that is the
Speaker 5: type of job transition that is typically accommodated by a
Speaker 5: central bank. Right, You don't want to prevent the new
Speaker 5: jobs being created by having policy that's too restrictive. If
Speaker 5: you have an increase in job loss due to new technology,
Speaker 5: you have to accommodate that and allow the new jobs
Speaker 5: to get created instead of preventing it.
Speaker 3: Pull what's development and credit?
Speaker 4: Sorry?
Speaker 3: Oh, pull what's developing and credit?
Speaker 5: So look, you know, I am, like with vents in
Speaker 5: the Middle East, I'm not at the point where I
Speaker 5: have a strong read through from what's going on in
Speaker 5: credit into the economy. I'm not at the point where
Speaker 5: I think where I think there's any sort of policy
Speaker 5: response that's necessary or adjustment to forecast this necessary. One
Speaker 5: thing that I think is interesting about what's going on
Speaker 5: in credit is, to me, it highlights the potential shortcoming
Speaker 5: of our financial conditions and disease.
Speaker 4: We've got a lot of people who.
Speaker 5: Argue it's inappropriate to cut because financial conditions are so loose.
Speaker 5: They've been arguing that for a long time. But one
Speaker 5: hypothesis of mind that I'm exploring is that those financial
Speaker 5: conditions and disease aren't showing you what's going on in
Speaker 5: private credit because you don't get the marks for them,
Speaker 5: and to the extent that private credit has been a
Speaker 5: major driver of credit growth over the last half decade
Speaker 5: or so, that's missing from the financial conditions and disease.
Speaker 5: So when we get these jitters in private credit markets
Speaker 5: and then say, oh, financial conditions are so loose, it's
Speaker 5: just because we decided not to look at the part
Speaker 5: of the financial markets that are tight.
Speaker 2: So I do you think we are seeing it unwarranted
Speaker 2: tyning of financial conditions so far?
Speaker 5: Well, you know, sort of unwarranted is a bit of
Speaker 5: a is a bit of a heavy load. But I
Speaker 5: do think I do think it's it's I would be
Speaker 5: cautious about concluding that financial conditions are so loose when
Speaker 5: you're getting these these things happening in private credit markets.
Speaker 1: I just want to ask, have you talked to President
Speaker 1: Trump recently?
Speaker 4: Not since I resigned, now since you resigned.
Speaker 1: I'm just wondering how difficult it is to conduct policy
Speaker 1: with a huge unknown hanging over the committee about who
Speaker 1: is going to be the next FED chair and what
Speaker 1: this process is going to look like past April.
Speaker 5: Well, I mean, I think we have a pretty good
Speaker 5: idea of who's going to be the next the next
Speaker 5: FED chairman. We don't have a good idea yet of
Speaker 5: exactly when he will become the next FED chairman, but
Speaker 5: I'm hopeful that we get that type of that type
Speaker 5: of clarity soon. I think it would be I think
Speaker 5: it would be great to have that type of clarity.
Speaker 2: And it's a way of being on the Federal Reserve
Speaker 2: and not knowing when you're going to exit, just sort
Speaker 2: of like there with an open ended calendar on what's
Speaker 2: going to happen next.
Speaker 4: It makes it difficult to plan.
Speaker 3: I bet it for personal reasons.
Speaker 2: Governor's good to see you, Thanks for having me, thanks
Speaker 2: for making time for us. We appreciate it. Governor Stephen
Speaker 2: Moren there of the Federal Reserve,