Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Let's get back now to Bloomberg's Michael McKee in Washington.
Speaker 1: He's sitting down with Fed Governor Christopher Waller. Mike, Well,
Speaker 1: thank you very much.
Speaker 2: And welcome to Bloomberg Television and Radio worldwide. Chris Waller,
Speaker 2: thank you for taking the time to come in today.
Speaker 1: Yeah, thanks, Mike, I appreciate having me on.
Speaker 2: You give a speech a short time ago in which
Speaker 2: you said tariffs are the elephant in the room. Elephant
Speaker 2: seems to have only gotten bigger. You told me you
Speaker 2: were in Saint Louis yesterday for a FED Listens event
Speaker 2: which is supposed to be about your framework review, and
Speaker 2: all anybody wanted to talk about was tariff's.
Speaker 3: Yeah, that's pretty much the talk of the town. It's
Speaker 3: kind of hard not to talk about the economy without
Speaker 3: having to address it.
Speaker 2: Well, the Beige Book yesterday addressed it used the word
Speaker 2: uncertainty eighty times in that companies talking about not growing
Speaker 2: but possible layoffs, getting ready to do something to try
Speaker 2: to mitigate the effects of tariffs. Are you seeing are
Speaker 2: you hearing the same things from companies that they're sort
Speaker 2: of stepping back and just sitting on the sidelines.
Speaker 3: Yeah, And that's the general tone of every person I've
Speaker 3: talked about in the private sector is that they're just
Speaker 3: kind of frozen by what's going to happen with tariffs
Speaker 3: and so cap X everything has just come to a stop.
Speaker 3: It doesn't mean it won't happen later when there's a
Speaker 3: little more clarity, but it has actually just stopped. If
Speaker 3: the tariffs, the large tariffs had stayed on or come
Speaker 3: back on, then firms are trying to figure out how
Speaker 3: they're going to absorb some of that cost. And the
Speaker 3: minute they do that, they're looking at other ways to
Speaker 3: cut costs and labors obviously one way they do that.
Speaker 3: So it will wouldn't surprise me that you might start
Speaker 3: seeing more layoffs tick up in the unemployment rate going forward.
Speaker 3: If the big tariffs are particular, come back on the
Speaker 3: smaller tariff world of ten to twelve percent, most of
Speaker 3: the firms I talk to they figure out they can
Speaker 3: deal with it. They kind of often give me this
Speaker 3: kind of formula of our suppliers will eat a third
Speaker 3: of it, I will eat a third of it, and
Speaker 3: we'll pass a third of it on their consumers. So
Speaker 3: if you're talking about ten to twelve percent tariff. It's
Speaker 3: not a big price hint to the consumers if that's
Speaker 3: all they pass through.
Speaker 2: But economics tells us that the tariffs in general are
Speaker 2: not good. So even if we get the smaller tariffs,
Speaker 2: does that still leave business on the sidelines and growth
Speaker 2: prospects lower?
Speaker 3: Well, if it is a tax, and it's inevitable that
Speaker 3: there's a tax. But however, I've always tried to tell
Speaker 3: people that, you know, given the fiscal situation we're in,
Speaker 3: we need to get some better control of the budget deficit,
Speaker 3: and that means some combination of tax, taxes and spending.
Speaker 3: It's just an argum about what taxes do you want
Speaker 3: to have to raise. So nobody likes taxes. I don't
Speaker 3: like taxes. But if you're going to get any kind
Speaker 3: of fiscal situation, get our fiscal situation and color.
Speaker 1: You're going to have to have some tax revenue.
Speaker 3: And there's no obvious reason why tariffs should have be
Speaker 3: off the table.
Speaker 1: Per se.
Speaker 2: We have some tariffs in place, even though the President
Speaker 2: goes back and forth about other tariffs. But you put
Speaker 2: some one in March. When do we start to see
Speaker 2: that in the hard data.
Speaker 3: Well, by taking off the April second tariffs, you postpone
Speaker 3: that decision till July, so we'll see some of the
Speaker 3: ten percent tariffs and the auto tariffs. Some of that
Speaker 3: will start coming through particular sectors, but it's not likely
Speaker 3: to me that by the in July first you're going
Speaker 3: to see really big impacts from it. You will see it,
Speaker 3: like I said, in Capex and things like that have
Speaker 3: just been put off the side, So you probably see
Speaker 3: some softing in the data, but you're probably not likely
Speaker 3: to see anything dramatic happen before we get a better
Speaker 3: decision from the administrators what they're going to do with
Speaker 3: the big tariff package that they initially proposed on April second.
Speaker 2: Well, what will we see first a big rise in
Speaker 2: inflation or slow down in growth, perhaps epitomized by the
Speaker 2: unemployment rate.
Speaker 3: I think you could see both of them almost happen
Speaker 3: at the same time, just in the sense of like
Speaker 3: I said, that firms have to make it as decision
Speaker 3: right away.
Speaker 1: To pass through.
Speaker 3: Now they have a lot of firms told me they
Speaker 3: have price contracts, so they're protected for a little while
Speaker 3: until they have to renegotiate those price contracts, but they're
Speaker 3: all anticipating it, particularly the bigger tariffs. They're all anticipating
Speaker 3: they're going to have to cut costs somewhere. And the
Speaker 3: easiest thing to do when firms have sixty five to
Speaker 3: seventy percent of their cost is labor, to start shedding
Speaker 3: some labor. So you might see layoffs start to happen
Speaker 3: about the same time you start seeing prices going up.
Speaker 3: So I'm not so convinced that it's going to be
Speaker 3: one first and then the other. You can see them
Speaker 3: both happen roughly at the same time. We're very close
Speaker 3: close together.
Speaker 2: I assume that we're not going to see any move
Speaker 2: from the Fed on May seventh, But when would you
Speaker 2: have enough data you think to be able to make
Speaker 2: a decision one way or another on whether you need
Speaker 2: to move rates.
Speaker 3: Well, as I was saying, the President's put off any
Speaker 3: decision on the large tariff world that was proposed in
Speaker 3: April second un till July. So all you're going to see,
Speaker 3: probably tills you lie, is whatever the existing tariffs are
Speaker 3: in place. And as I said, I don't think you're
Speaker 3: going to see enough happen in the real data in
Speaker 3: the next couple of months until you get past July.
Speaker 3: When you get to the second half of the year,
Speaker 3: I think we'll start having better ideas what's going to
Speaker 3: happen with the tariff world that the administration is considering,
Speaker 3: And by then you'll start seeing more in the form
Speaker 3: of tariff price pass through and also stuff on the
Speaker 3: real side. But like, you're not going to see anything
Speaker 3: on the real side because of all the uncertainty in
Speaker 3: terms of freezing decisions spending decisions.
Speaker 2: Well, let's put some parameters around your thinking. On the
Speaker 2: employment mandate side, what level of unemployment would bother.
Speaker 3: You, Well, it's more the speed of which would start
Speaker 3: going up. I mean, if it just ticked up one tenth,
Speaker 3: ticked up one tenth, ticked up one tenth, kind of
Speaker 3: like what we saw last year, it would be concerning,
Speaker 3: but it wouldn't be a big problem. But if it
Speaker 3: starts going up two tenths, three tenths a month, then
Speaker 3: that's going to happen because you're seeing layoffs starting to
Speaker 3: take off. And if labor market's in kind of a
Speaker 3: good spot, it's not like twenty twenty two where you
Speaker 3: could reduce vacancy. Now, if labor demand pulled back, it's
Speaker 3: going to be in terms of bodies, so you'll see
Speaker 3: employees start to drop. So I'm more concerned about the
Speaker 3: speed at which the unemployment rate starts going off. And
Speaker 3: if there's a big reaction to big tariffs, it could
Speaker 3: go up very quickly.
Speaker 1: Four and a half percent? Is I guess the Psalm
Speaker 1: rule trigger?
Speaker 2: Would that be a trigger for you?
Speaker 3: You know, I gave a speecial last September I kind
Speaker 3: of discounted the same rule as a mechanical description of
Speaker 3: the data and what it really is capturing as shocks
Speaker 3: that hit the economy. A big tariff regime being put
Speaker 3: back on in July and being put in place for
Speaker 3: the foreseeable future, that would be that kind of a
Speaker 3: big shock. So it's not so much the Sam rule
Speaker 3: as the fact that the Sam rule is really always
Speaker 3: picking up some big shock to the economy, and the
Speaker 3: big tariff regime as it was on April second, would
Speaker 3: end up being a big shock to the economy.
Speaker 2: Well, on the inflation mandate side, since you expect some
Speaker 2: inflation from tariffs, is it the speed with which it
Speaker 2: rises as well? Because we've seen a lot of volatility
Speaker 2: and inflation numbers recently.
Speaker 3: Yeah, that's been the struggle for me for the last
Speaker 3: basically eighteen months, is that inflation progress to our two
Speaker 3: percent goal has been this kind of seesaw. You're making
Speaker 3: progress going down, but then you get a couple of
Speaker 3: bad months and it comes back down and it's just
Speaker 3: slower than I ever thought it would have been, saying
Speaker 3: December of twenty three.
Speaker 1: But the tariffs are at one time.
Speaker 3: I still strongly believe just the economic seales me that
Speaker 3: the tariffs are a one time price level effect that's
Speaker 3: going to pass through. Now it's one time level, doesn't
Speaker 3: mean it's small or big. It's just a one time
Speaker 3: So I still think even if it was fairly large,
Speaker 3: you would see a one time price level effect. The
Speaker 3: demand slow down would offset some of that, is consumers
Speaker 3: back off, employment goes down, unemployment rises, wealth continues to
Speaker 3: financial wealth declines. You will see demand effects from that
Speaker 3: that'll put downward pressure on inflation. So it may not
Speaker 3: be as high as people think, but the critical thing
Speaker 3: is it's going to be. It's going to be take
Speaker 3: some courage to stare down these tariff increases and prices
Speaker 3: with the belief that they are transitory I'm not going
Speaker 3: to lie that we all have twenty one in our
Speaker 3: minds when we think about how we go forward. But
Speaker 3: you know, the question is what are the things that
Speaker 3: will cause this inflation to persist through the initial tariff increases,
Speaker 3: And I just have a hard time seeing exactly what
Speaker 3: that would be.
Speaker 2: Well, do you think if we start to see the
Speaker 2: economy slow that you would be more reluctant to cut
Speaker 2: rates because you expect that tariffs and the higher inflation
Speaker 2: will come down because of the demand effect.
Speaker 3: See, I'm willing to look through whatever tariff price effects are,
Speaker 3: and I've said that so for me, then I'm not
Speaker 3: going to overreact to any increase in inflation that.
Speaker 1: I think is attributable to the tariffs.
Speaker 3: But if I see a significant drop in the labor market,
Speaker 3: then the employment side of the mandate I think is
Speaker 3: important and we step in and we would have to start.
Speaker 1: I said this last week in my speech.
Speaker 3: You know I would expect more rate cuts and sooner
Speaker 3: once I start seeing some serious deterioration in the labor market.
Speaker 2: Now, some people looked at your speech last week and said,
Speaker 2: Chris Waller's on the opposite side of all this from
Speaker 2: chair Powell. Do you think there's division on the Open
Speaker 2: Market Committee about what should be done?
Speaker 1: Well, that's the beauty of not having group thing.
Speaker 3: People have different views about how the economy is evolving
Speaker 3: and how policies should be done.
Speaker 1: I think that's actually a healthy thing.
Speaker 3: As far as I've heard exactly that comment that Waller's
Speaker 3: outside of consensus away from the chair, and I've had
Speaker 3: other people tell me I didn't really hear much different
Speaker 3: from what the Chair said two days later.
Speaker 1: So this is.
Speaker 3: Always a funny thing about communication. I can say something
Speaker 3: and people perceive it one way to the left, or
Speaker 3: they perceive it.
Speaker 1: The other way to the right.
Speaker 3: So how people receive what I say is not always,
Speaker 3: you know, one clear vision of what it is. So
Speaker 3: I'll leave it up to people to decide whether there's
Speaker 3: a difference between the Chair or I. But all I
Speaker 3: can do is say what my views are, and I'm
Speaker 3: trying to be very clear what they are.
Speaker 2: A lot of people are thinking at this point that
Speaker 2: Trump being Trump and marterial that the tariffs could change
Speaker 2: at any moment. Would you be reluctant to move rates
Speaker 2: not knowing that you've got any certainty about what's going
Speaker 2: to be happening.
Speaker 3: Well, like I said, what we're going to look at
Speaker 3: is the data. I mean, that's how we always.
Speaker 2: Determin Does that leave you behind the curve?
Speaker 1: You know, there's always at risk.
Speaker 3: You're saying, you're looking at these things like if this
Speaker 3: inflation are going to get worse? Is in unemployment going
Speaker 3: to get worse? And you have to it's a balancing
Speaker 3: act to make that decision. Hopefully you're not late. And
Speaker 3: I think if we saw That's why I said, if
Speaker 3: I saw enough movement in the unemployment rate to make
Speaker 3: me think that things were going bad, or or growth
Speaker 3: prospects started tanking, or consumer spending started really going down,
Speaker 3: then I'd be ready to go. I wouldn't be sitting
Speaker 3: here waiting to determine whether the inflation is transitory or not.
Speaker 3: It's time to worry about the real side of the economy.
Speaker 2: I can't let you go without asking about FED independence,
Speaker 2: because it's obviously the other elephant in the room these days.
Speaker 2: Will the president backing off of his comments on firing
Speaker 2: j poll make it a little bit easier for you
Speaker 2: all to.
Speaker 1: Do your job? Well, I just try to.
Speaker 3: I try to ignore all this stuff and just focus
Speaker 3: on the data and focus on doing my job. That's
Speaker 3: what I try to do every day. Criticism of what
Speaker 3: we do, that's the job. If you don't like being criticized,
Speaker 3: don't take the job. So, and the President's free to
Speaker 3: say whatever they want to probasey just like anybody else.
Speaker 3: But central bank independence, as we saw I think on Monday,
Speaker 3: is critical to the well functioning of the US economy.
Speaker 1: It has served us well.
Speaker 3: It allows us to do things in a non political way,
Speaker 3: and it's something I worked on in my academic life
Speaker 3: research wise for twenty years about the value of it.
Speaker 3: And I don't think there's ever been anything in the
Speaker 3: data that shows you that lack of independence is a
Speaker 3: good thing.
Speaker 2: Would ad hominem attacks like we've seen on a chair
Speaker 2: make it harder for the next chair to do the job?
Speaker 2: Does a job itself get harmed?
Speaker 3: I think it's up to the Like I said, it's
Speaker 3: up to the person that's in the chair. You know,
Speaker 3: you take the job knowing you're going to be criticized
Speaker 3: from markets, from fed watchers, from average consumers. That's part
Speaker 3: of the job. And if you don't like to be criticized,
Speaker 3: don't take the job. So It's really going to be
Speaker 3: a question of whoever the next chair is, are they
Speaker 3: going to come in and keep the tradition of central
Speaker 3: bank independence making policy in a non political way, And
Speaker 3: for me that's critical for whatever the next whoever the
Speaker 3: next chair
Speaker 2: Is, Chris Waller, thank you very much for your time
Speaker 2: this morning.