WEBVTT - Fed Governor Christopher Waller Talks Tariffs and Labor Market 0:00:02.759 --> 0:00:07.240 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.000 --> 0:00:11.360 Let's get back now to Bloomberg's Michael McKee in Washington. 0:00:11.600 --> 0:00:16.040 He's sitting down with Fed Governor Christopher Waller. Mike, Well, 0:00:16.079 --> 0:00:16.840 thank you very much. 0:00:16.800 --> 0:00:20.360 And welcome to Bloomberg Television and Radio worldwide. Chris Waller, 0:00:20.440 --> 0:00:22.680 thank you for taking the time to come in today. 0:00:22.840 --> 0:00:24.799 Yeah, thanks, Mike, I appreciate having me on. 0:00:25.560 --> 0:00:27.440 You give a speech a short time ago in which 0:00:27.480 --> 0:00:31.200 you said tariffs are the elephant in the room. Elephant 0:00:31.200 --> 0:00:33.640 seems to have only gotten bigger. You told me you 0:00:33.640 --> 0:00:36.080 were in Saint Louis yesterday for a FED Listens event 0:00:36.120 --> 0:00:38.920 which is supposed to be about your framework review, and 0:00:38.960 --> 0:00:40.839 all anybody wanted to talk about was tariff's. 0:00:40.960 --> 0:00:43.360 Yeah, that's pretty much the talk of the town. It's 0:00:43.440 --> 0:00:46.280 kind of hard not to talk about the economy without 0:00:46.280 --> 0:00:47.120 having to address it. 0:00:47.640 --> 0:00:50.960 Well, the Beige Book yesterday addressed it used the word 0:00:51.040 --> 0:00:56.760 uncertainty eighty times in that companies talking about not growing 0:00:56.920 --> 0:01:00.480 but possible layoffs, getting ready to do something to try 0:01:00.520 --> 0:01:03.160 to mitigate the effects of tariffs. Are you seeing are 0:01:03.200 --> 0:01:06.120 you hearing the same things from companies that they're sort 0:01:06.160 --> 0:01:09.280 of stepping back and just sitting on the sidelines. 0:01:09.520 --> 0:01:12.760 Yeah, And that's the general tone of every person I've 0:01:12.760 --> 0:01:16.600 talked about in the private sector is that they're just 0:01:16.680 --> 0:01:20.280 kind of frozen by what's going to happen with tariffs 0:01:20.360 --> 0:01:23.240 and so cap X everything has just come to a stop. 0:01:23.240 --> 0:01:25.600 It doesn't mean it won't happen later when there's a 0:01:25.640 --> 0:01:28.679 little more clarity, but it has actually just stopped. If 0:01:28.680 --> 0:01:31.560 the tariffs, the large tariffs had stayed on or come 0:01:31.640 --> 0:01:33.840 back on, then firms are trying to figure out how 0:01:33.880 --> 0:01:36.840 they're going to absorb some of that cost. And the 0:01:36.880 --> 0:01:38.640 minute they do that, they're looking at other ways to 0:01:38.680 --> 0:01:41.240 cut costs and labors obviously one way they do that. 0:01:41.400 --> 0:01:44.600 So it will wouldn't surprise me that you might start 0:01:44.600 --> 0:01:48.880 seeing more layoffs tick up in the unemployment rate going forward. 0:01:49.640 --> 0:01:51.880 If the big tariffs are particular, come back on the 0:01:51.960 --> 0:01:55.040 smaller tariff world of ten to twelve percent, most of 0:01:55.040 --> 0:01:58.120 the firms I talk to they figure out they can 0:01:58.200 --> 0:02:00.200 deal with it. They kind of often give me this 0:02:00.280 --> 0:02:02.600 kind of formula of our suppliers will eat a third 0:02:02.600 --> 0:02:04.240 of it, I will eat a third of it, and 0:02:04.240 --> 0:02:06.840 we'll pass a third of it on their consumers. So 0:02:06.880 --> 0:02:09.040 if you're talking about ten to twelve percent tariff. It's 0:02:09.040 --> 0:02:11.600 not a big price hint to the consumers if that's 0:02:11.639 --> 0:02:12.520 all they pass through. 0:02:12.880 --> 0:02:16.120 But economics tells us that the tariffs in general are 0:02:16.160 --> 0:02:19.160 not good. So even if we get the smaller tariffs, 0:02:19.200 --> 0:02:23.480 does that still leave business on the sidelines and growth 0:02:23.480 --> 0:02:24.560 prospects lower? 0:02:24.960 --> 0:02:27.560 Well, if it is a tax, and it's inevitable that 0:02:27.560 --> 0:02:30.840 there's a tax. But however, I've always tried to tell 0:02:30.960 --> 0:02:33.880 people that, you know, given the fiscal situation we're in, 0:02:34.000 --> 0:02:37.720 we need to get some better control of the budget deficit, 0:02:37.880 --> 0:02:41.040 and that means some combination of tax, taxes and spending. 0:02:41.639 --> 0:02:43.520 It's just an argum about what taxes do you want 0:02:43.520 --> 0:02:46.000 to have to raise. So nobody likes taxes. I don't 0:02:46.080 --> 0:02:48.799 like taxes. But if you're going to get any kind 0:02:48.800 --> 0:02:51.880 of fiscal situation, get our fiscal situation and color. 0:02:51.680 --> 0:02:53.280 You're going to have to have some tax revenue. 0:02:53.280 --> 0:02:56.080 And there's no obvious reason why tariffs should have be 0:02:56.160 --> 0:02:56.799 off the table. 0:02:56.840 --> 0:02:57.440 Per se. 0:02:58.000 --> 0:03:01.200 We have some tariffs in place, even though the President 0:03:01.280 --> 0:03:03.200 goes back and forth about other tariffs. But you put 0:03:03.240 --> 0:03:05.160 some one in March. When do we start to see 0:03:05.200 --> 0:03:06.000 that in the hard data. 0:03:06.680 --> 0:03:11.360 Well, by taking off the April second tariffs, you postpone 0:03:11.400 --> 0:03:14.799 that decision till July, so we'll see some of the 0:03:15.240 --> 0:03:17.760 ten percent tariffs and the auto tariffs. Some of that 0:03:17.800 --> 0:03:21.240 will start coming through particular sectors, but it's not likely 0:03:21.280 --> 0:03:24.640 to me that by the in July first you're going 0:03:24.720 --> 0:03:28.000 to see really big impacts from it. You will see it, 0:03:28.040 --> 0:03:29.840 like I said, in Capex and things like that have 0:03:30.000 --> 0:03:32.520 just been put off the side, So you probably see 0:03:32.520 --> 0:03:34.960 some softing in the data, but you're probably not likely 0:03:35.000 --> 0:03:40.160 to see anything dramatic happen before we get a better 0:03:40.240 --> 0:03:42.200 decision from the administrators what they're going to do with 0:03:42.240 --> 0:03:45.640 the big tariff package that they initially proposed on April second. 0:03:45.960 --> 0:03:48.120 Well, what will we see first a big rise in 0:03:48.200 --> 0:03:52.560 inflation or slow down in growth, perhaps epitomized by the 0:03:52.640 --> 0:03:53.440 unemployment rate. 0:03:53.920 --> 0:03:56.000 I think you could see both of them almost happen 0:03:56.080 --> 0:03:57.800 at the same time, just in the sense of like 0:03:57.840 --> 0:04:00.280 I said, that firms have to make it as decision 0:04:00.360 --> 0:04:01.000 right away. 0:04:00.760 --> 0:04:01.480 To pass through. 0:04:01.520 --> 0:04:04.040 Now they have a lot of firms told me they 0:04:04.080 --> 0:04:07.360 have price contracts, so they're protected for a little while 0:04:07.440 --> 0:04:10.600 until they have to renegotiate those price contracts, but they're 0:04:10.640 --> 0:04:14.040 all anticipating it, particularly the bigger tariffs. They're all anticipating 0:04:14.040 --> 0:04:16.800 they're going to have to cut costs somewhere. And the 0:04:17.080 --> 0:04:19.279 easiest thing to do when firms have sixty five to 0:04:19.320 --> 0:04:22.360 seventy percent of their cost is labor, to start shedding 0:04:22.360 --> 0:04:24.760 some labor. So you might see layoffs start to happen 0:04:24.800 --> 0:04:28.520 about the same time you start seeing prices going up. 0:04:28.560 --> 0:04:30.480 So I'm not so convinced that it's going to be 0:04:30.520 --> 0:04:32.719 one first and then the other. You can see them 0:04:32.760 --> 0:04:34.960 both happen roughly at the same time. We're very close 0:04:35.160 --> 0:04:35.840 close together. 0:04:36.279 --> 0:04:38.160 I assume that we're not going to see any move 0:04:38.200 --> 0:04:41.400 from the Fed on May seventh, But when would you 0:04:41.600 --> 0:04:44.160 have enough data you think to be able to make 0:04:44.200 --> 0:04:46.040 a decision one way or another on whether you need 0:04:46.080 --> 0:04:46.719 to move rates. 0:04:47.000 --> 0:04:48.880 Well, as I was saying, the President's put off any 0:04:48.960 --> 0:04:52.120 decision on the large tariff world that was proposed in 0:04:52.120 --> 0:04:55.240 April second un till July. So all you're going to see, 0:04:55.240 --> 0:04:57.800 probably tills you lie, is whatever the existing tariffs are 0:04:57.800 --> 0:05:00.360 in place. And as I said, I don't think you're 0:05:00.360 --> 0:05:04.240 going to see enough happen in the real data in 0:05:04.279 --> 0:05:06.400 the next couple of months until you get past July. 0:05:06.839 --> 0:05:08.360 When you get to the second half of the year, 0:05:08.400 --> 0:05:10.560 I think we'll start having better ideas what's going to 0:05:10.600 --> 0:05:14.520 happen with the tariff world that the administration is considering, 0:05:14.880 --> 0:05:17.120 And by then you'll start seeing more in the form 0:05:17.160 --> 0:05:21.279 of tariff price pass through and also stuff on the 0:05:21.279 --> 0:05:24.200 real side. But like, you're not going to see anything 0:05:24.200 --> 0:05:26.039 on the real side because of all the uncertainty in 0:05:26.120 --> 0:05:28.400 terms of freezing decisions spending decisions. 0:05:28.480 --> 0:05:32.000 Well, let's put some parameters around your thinking. On the 0:05:32.000 --> 0:05:34.919 employment mandate side, what level of unemployment would bother. 0:05:34.839 --> 0:05:38.200 You, Well, it's more the speed of which would start 0:05:38.240 --> 0:05:40.640 going up. I mean, if it just ticked up one tenth, 0:05:41.440 --> 0:05:44.120 ticked up one tenth, ticked up one tenth, kind of 0:05:44.160 --> 0:05:46.159 like what we saw last year, it would be concerning, 0:05:46.160 --> 0:05:48.160 but it wouldn't be a big problem. But if it 0:05:48.200 --> 0:05:51.520 starts going up two tenths, three tenths a month, then 0:05:51.640 --> 0:05:54.000 that's going to happen because you're seeing layoffs starting to 0:05:54.040 --> 0:05:56.320 take off. And if labor market's in kind of a 0:05:56.360 --> 0:05:58.880 good spot, it's not like twenty twenty two where you 0:05:58.880 --> 0:06:03.240 could reduce vacancy. Now, if labor demand pulled back, it's 0:06:03.240 --> 0:06:05.480 going to be in terms of bodies, so you'll see 0:06:05.520 --> 0:06:09.000 employees start to drop. So I'm more concerned about the 0:06:09.040 --> 0:06:11.600 speed at which the unemployment rate starts going off. And 0:06:11.839 --> 0:06:14.680 if there's a big reaction to big tariffs, it could 0:06:14.720 --> 0:06:15.640 go up very quickly. 0:06:16.080 --> 0:06:17.920 Four and a half percent? Is I guess the Psalm 0:06:18.080 --> 0:06:18.719 rule trigger? 0:06:18.839 --> 0:06:21.440 Would that be a trigger for you? 0:06:21.440 --> 0:06:23.560 You know, I gave a speecial last September I kind 0:06:23.600 --> 0:06:26.680 of discounted the same rule as a mechanical description of 0:06:26.839 --> 0:06:29.479 the data and what it really is capturing as shocks 0:06:29.880 --> 0:06:34.120 that hit the economy. A big tariff regime being put 0:06:34.160 --> 0:06:36.880 back on in July and being put in place for 0:06:36.960 --> 0:06:39.320 the foreseeable future, that would be that kind of a 0:06:39.320 --> 0:06:41.839 big shock. So it's not so much the Sam rule 0:06:41.920 --> 0:06:44.000 as the fact that the Sam rule is really always 0:06:44.040 --> 0:06:46.240 picking up some big shock to the economy, and the 0:06:46.279 --> 0:06:48.680 big tariff regime as it was on April second, would 0:06:48.760 --> 0:06:50.440 end up being a big shock to the economy. 0:06:50.839 --> 0:06:54.240 Well, on the inflation mandate side, since you expect some 0:06:54.400 --> 0:06:58.560 inflation from tariffs, is it the speed with which it 0:06:58.640 --> 0:07:02.440 rises as well? Because we've seen a lot of volatility 0:07:02.480 --> 0:07:04.440 and inflation numbers recently. 0:07:05.120 --> 0:07:07.960 Yeah, that's been the struggle for me for the last 0:07:08.120 --> 0:07:12.000 basically eighteen months, is that inflation progress to our two 0:07:12.040 --> 0:07:14.920 percent goal has been this kind of seesaw. You're making 0:07:14.960 --> 0:07:16.680 progress going down, but then you get a couple of 0:07:16.760 --> 0:07:19.280 bad months and it comes back down and it's just 0:07:19.360 --> 0:07:21.400 slower than I ever thought it would have been, saying 0:07:21.440 --> 0:07:22.640 December of twenty three. 0:07:23.440 --> 0:07:24.760 But the tariffs are at one time. 0:07:24.880 --> 0:07:27.880 I still strongly believe just the economic seales me that 0:07:28.520 --> 0:07:32.200 the tariffs are a one time price level effect that's 0:07:32.200 --> 0:07:34.400 going to pass through. Now it's one time level, doesn't 0:07:34.440 --> 0:07:36.760 mean it's small or big. It's just a one time 0:07:36.920 --> 0:07:39.440 So I still think even if it was fairly large, 0:07:39.440 --> 0:07:42.480 you would see a one time price level effect. The 0:07:42.520 --> 0:07:45.640 demand slow down would offset some of that, is consumers 0:07:45.720 --> 0:07:49.960 back off, employment goes down, unemployment rises, wealth continues to 0:07:50.400 --> 0:07:54.040 financial wealth declines. You will see demand effects from that 0:07:54.040 --> 0:07:56.360 that'll put downward pressure on inflation. So it may not 0:07:56.400 --> 0:08:00.280 be as high as people think, but the critical thing 0:08:00.320 --> 0:08:03.600 is it's going to be. It's going to be take 0:08:03.640 --> 0:08:07.520 some courage to stare down these tariff increases and prices 0:08:07.560 --> 0:08:10.520 with the belief that they are transitory I'm not going 0:08:10.600 --> 0:08:13.800 to lie that we all have twenty one in our 0:08:13.840 --> 0:08:16.680 minds when we think about how we go forward. But 0:08:18.120 --> 0:08:20.600 you know, the question is what are the things that 0:08:20.640 --> 0:08:25.720 will cause this inflation to persist through the initial tariff increases, 0:08:26.040 --> 0:08:28.160 And I just have a hard time seeing exactly what 0:08:28.200 --> 0:08:28.720 that would be. 0:08:29.160 --> 0:08:30.760 Well, do you think if we start to see the 0:08:30.800 --> 0:08:36.040 economy slow that you would be more reluctant to cut 0:08:36.160 --> 0:08:41.000 rates because you expect that tariffs and the higher inflation 0:08:41.120 --> 0:08:43.240 will come down because of the demand effect. 0:08:43.480 --> 0:08:46.480 See, I'm willing to look through whatever tariff price effects are, 0:08:46.520 --> 0:08:49.040 and I've said that so for me, then I'm not 0:08:49.080 --> 0:08:51.679 going to overreact to any increase in inflation that. 0:08:51.679 --> 0:08:53.480 I think is attributable to the tariffs. 0:08:53.800 --> 0:08:56.840 But if I see a significant drop in the labor market, 0:08:57.040 --> 0:08:58.880 then the employment side of the mandate I think is 0:08:58.920 --> 0:09:01.400 important and we step in and we would have to start. 0:09:01.480 --> 0:09:02.959 I said this last week in my speech. 0:09:03.240 --> 0:09:05.360 You know I would expect more rate cuts and sooner 0:09:05.720 --> 0:09:08.959 once I start seeing some serious deterioration in the labor market. 0:09:09.280 --> 0:09:11.640 Now, some people looked at your speech last week and said, 0:09:12.000 --> 0:09:14.560 Chris Waller's on the opposite side of all this from 0:09:14.640 --> 0:09:18.680 chair Powell. Do you think there's division on the Open 0:09:18.720 --> 0:09:20.320 Market Committee about what should be done? 0:09:20.400 --> 0:09:22.600 Well, that's the beauty of not having group thing. 0:09:22.679 --> 0:09:25.520 People have different views about how the economy is evolving 0:09:25.520 --> 0:09:26.679 and how policies should be done. 0:09:26.720 --> 0:09:28.200 I think that's actually a healthy thing. 0:09:28.520 --> 0:09:31.760 As far as I've heard exactly that comment that Waller's 0:09:31.760 --> 0:09:34.560 outside of consensus away from the chair, and I've had 0:09:34.600 --> 0:09:36.680 other people tell me I didn't really hear much different 0:09:36.679 --> 0:09:38.319 from what the Chair said two days later. 0:09:38.440 --> 0:09:39.920 So this is. 0:09:39.920 --> 0:09:42.760 Always a funny thing about communication. I can say something 0:09:43.280 --> 0:09:46.440 and people perceive it one way to the left, or 0:09:46.480 --> 0:09:47.120 they perceive it. 0:09:47.040 --> 0:09:47.920 The other way to the right. 0:09:48.040 --> 0:09:51.800 So how people receive what I say is not always, 0:09:52.160 --> 0:09:54.320 you know, one clear vision of what it is. So 0:09:54.480 --> 0:09:56.440 I'll leave it up to people to decide whether there's 0:09:56.480 --> 0:09:59.160 a difference between the Chair or I. But all I 0:09:59.160 --> 0:10:00.800 can do is say what my views are, and I'm 0:10:00.880 --> 0:10:02.360 trying to be very clear what they are. 0:10:02.960 --> 0:10:06.040 A lot of people are thinking at this point that 0:10:07.120 --> 0:10:11.960 Trump being Trump and marterial that the tariffs could change 0:10:12.240 --> 0:10:16.080 at any moment. Would you be reluctant to move rates 0:10:16.320 --> 0:10:20.160 not knowing that you've got any certainty about what's going 0:10:20.240 --> 0:10:20.760 to be happening. 0:10:20.920 --> 0:10:22.400 Well, like I said, what we're going to look at 0:10:22.480 --> 0:10:24.439 is the data. I mean, that's how we always. 0:10:24.240 --> 0:10:26.040 Determin Does that leave you behind the curve? 0:10:27.480 --> 0:10:28.920 You know, there's always at risk. 0:10:29.000 --> 0:10:31.160 You're saying, you're looking at these things like if this 0:10:31.320 --> 0:10:33.760 inflation are going to get worse? Is in unemployment going 0:10:33.800 --> 0:10:35.560 to get worse? And you have to it's a balancing 0:10:35.600 --> 0:10:40.560 act to make that decision. Hopefully you're not late. And 0:10:40.640 --> 0:10:42.559 I think if we saw That's why I said, if 0:10:42.559 --> 0:10:45.079 I saw enough movement in the unemployment rate to make 0:10:45.120 --> 0:10:48.360 me think that things were going bad, or or growth 0:10:48.360 --> 0:10:52.200 prospects started tanking, or consumer spending started really going down, 0:10:52.600 --> 0:10:54.720 then I'd be ready to go. I wouldn't be sitting 0:10:54.760 --> 0:10:59.000 here waiting to determine whether the inflation is transitory or not. 0:10:59.080 --> 0:11:01.240 It's time to worry about the real side of the economy. 0:11:01.760 --> 0:11:04.319 I can't let you go without asking about FED independence, 0:11:04.360 --> 0:11:08.320 because it's obviously the other elephant in the room these days. 0:11:09.040 --> 0:11:12.439 Will the president backing off of his comments on firing 0:11:12.559 --> 0:11:14.680 j poll make it a little bit easier for you 0:11:14.760 --> 0:11:15.240 all to. 0:11:15.120 --> 0:11:16.920 Do your job? Well, I just try to. 0:11:17.080 --> 0:11:19.840 I try to ignore all this stuff and just focus 0:11:19.880 --> 0:11:23.079 on the data and focus on doing my job. That's 0:11:23.120 --> 0:11:26.439 what I try to do every day. Criticism of what 0:11:26.480 --> 0:11:29.839 we do, that's the job. If you don't like being criticized, 0:11:29.880 --> 0:11:32.760 don't take the job. So, and the President's free to 0:11:32.800 --> 0:11:35.520 say whatever they want to probasey just like anybody else. 0:11:36.000 --> 0:11:39.000 But central bank independence, as we saw I think on Monday, 0:11:39.160 --> 0:11:42.160 is critical to the well functioning of the US economy. 0:11:42.440 --> 0:11:43.520 It has served us well. 0:11:44.000 --> 0:11:46.439 It allows us to do things in a non political way, 0:11:46.960 --> 0:11:50.320 and it's something I worked on in my academic life 0:11:50.400 --> 0:11:53.040 research wise for twenty years about the value of it. 0:11:53.080 --> 0:11:55.840 And I don't think there's ever been anything in the 0:11:56.000 --> 0:11:58.800 data that shows you that lack of independence is a 0:11:58.800 --> 0:11:59.280 good thing. 0:12:00.120 --> 0:12:03.120 Would ad hominem attacks like we've seen on a chair 0:12:03.200 --> 0:12:05.640 make it harder for the next chair to do the job? 0:12:06.040 --> 0:12:08.280 Does a job itself get harmed? 0:12:08.720 --> 0:12:10.439 I think it's up to the Like I said, it's 0:12:10.520 --> 0:12:12.240 up to the person that's in the chair. You know, 0:12:12.360 --> 0:12:15.040 you take the job knowing you're going to be criticized 0:12:15.120 --> 0:12:19.680 from markets, from fed watchers, from average consumers. That's part 0:12:19.679 --> 0:12:21.679 of the job. And if you don't like to be criticized, 0:12:21.679 --> 0:12:24.319 don't take the job. So It's really going to be 0:12:24.360 --> 0:12:26.400 a question of whoever the next chair is, are they 0:12:26.440 --> 0:12:28.840 going to come in and keep the tradition of central 0:12:28.840 --> 0:12:32.520 bank independence making policy in a non political way, And 0:12:32.559 --> 0:12:34.680 for me that's critical for whatever the next whoever the 0:12:34.679 --> 0:12:35.160 next chair 0:12:35.240 --> 0:12:37.600 Is, Chris Waller, thank you very much for your time 0:12:37.600 --> 0:12:38.079 this morning.