Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: As we bring you a special conversation now thanks to
Speaker 2: our colleague Michael McKee, who's joining us from world headquarters
Speaker 2: in New York, and a special conversation with Cleveland Federal
Speaker 2: Reserve Bank President Loretta Mester. Michael, take it away.
Speaker 1: Well, thank you very much, and good afternoon to everybody
Speaker 1: watching us and listening to us on Bloomberg television and
Speaker 1: radio around the world. And I don't know what you
Speaker 1: say to people on the internet who are watching, listening, whatever,
Speaker 1: but thank you very much for joining us. This is
Speaker 1: sort of your farewell tour. You're retiring at the end
Speaker 1: of the month, so let me ask you. You're not
Speaker 1: you've been a voter this year to this point. By December,
Speaker 1: do you think we will see one rate cut, more
Speaker 1: rate cuts, or no rate cuts.
Speaker 3: Well, thanks for inviting me to be here. I mean,
Speaker 3: we all put in our projections at this that was
Speaker 3: held this week, and the medium projection in the SEP
Speaker 3: is pretty close to my own projection for the economy.
Speaker 3: We've made pretty good progress on inflation over the last
Speaker 3: two years. It's still too high the most recent data
Speaker 3: that we received. In fact, we got the CPI report
Speaker 3: on the second day of the meeting, and it was
Speaker 3: it was a great gift for my last FOMC meaning
Speaker 3: to get that report. The good news there, but it
Speaker 3: still means that there's work to do on inflation to
Speaker 3: gain confidence that it is on that downward trajectory to
Speaker 3: two percent. And you know, the unemployment rate has ticked
Speaker 3: up a little bit over the last couple of months. Certainly,
Speaker 3: though if you look overall, the labor market conditions remain
Speaker 3: healthy and that's a great thing too. So I think
Speaker 3: monetary policy right now is well positioned really to ensure
Speaker 3: that inflation does move back down towards two percent over
Speaker 3: time and that labor market conditions remain healthy. And that's
Speaker 3: a good position to be in. And if you look
Speaker 3: at the SEPs overall, what you see is the path
Speaker 3: of the modal path of the SEP across participates as
Speaker 3: at rates will be coming down. The dot plot shows
Speaker 3: that there is weight on one zero two, But it'll
Speaker 3: really depend on how the economy actually evolves, and I
Speaker 3: think that's going to be the work of the committee
Speaker 3: going forward assess incoming information about the economy. Does it
Speaker 3: change your outlook? Is it consistent with the modal outlook,
Speaker 3: and as inflation comes down, and as inflation expectations short
Speaker 3: run a year ahead comes down, then it'll be appropriate
Speaker 3: to reduce that fit funds rate and remove some of
Speaker 3: the restrictiveness.
Speaker 1: Well for their confidence that you're moving towards the two
Speaker 1: percent target is almost a cliche. Now what does that
Speaker 1: actually mean? Does it mean you need to see the
Speaker 1: various inflation indicators keep coming down even if it's only
Speaker 1: say a tenth. Do you have a level of the
Speaker 1: year over a year rate of inflation that you want
Speaker 1: to hit?
Speaker 3: Uh?
Speaker 1: How can people judge what the FED is going to do?
Speaker 1: What they're thinking about?
Speaker 3: So what my view would be is, I'd like to
Speaker 3: see a few more months of inflation reports that are
Speaker 3: positive in the sense of similar to what we got
Speaker 3: last month. I'd like to see that continue. Remember, at
Speaker 3: the beginning of the year January inflation was higher. There
Speaker 3: was some real issues with measurement, you know, residual seasonality
Speaker 3: in that measure. But then we got two more reports
Speaker 3: that were consistent with Wow, there's not been progress this year.
Speaker 3: I came into the year not expecting the same l
Speaker 3: degree of progress that we saw over the second half
Speaker 3: of last year because a lot of we did get
Speaker 3: a lot of help from the improvement in supply conditions,
Speaker 3: both in the labor market and in product markets, and
Speaker 3: I didn't expect that to continue. And a lot of
Speaker 3: the work that the Cleveland Fed does in are Center
Speaker 3: for Inflation Research suggests that it's going to take some
Speaker 3: time to get inflation back to two percent all the
Speaker 3: way back. So my projection is that we probably won't
Speaker 3: get there until twenty twenty six, but we'll see progress
Speaker 3: continue in my modal view, and that's enough to then say, Okay,
Speaker 3: it's time to start the process of bringing rates down
Speaker 3: and normalizing our propose.
Speaker 1: As long as it moves down, it doesn't have to
Speaker 1: hit a point target.
Speaker 3: Yeah, not to me. To my view would be that
Speaker 3: if I continue to see some of these better inflation
Speaker 3: reports that we got then we got earlier in the year,
Speaker 3: if that continues, then I'd feel comfortable starting that process
Speaker 3: of normalizing rates.
Speaker 1: Well, you've said what others have said on the FED
Speaker 1: that once the momentum is there, it'll keep going down.
Speaker 1: So you don't want to wait till you get to
Speaker 1: two so you don't fall below it. But by implication
Speaker 1: that means you're going to be starting behind the curve.
Speaker 1: Inflation will already be heading in that direction. Can you
Speaker 1: put the brakes on fast enough so that it doesn't
Speaker 1: go back down disinflationary territory?
Speaker 3: Well, so let's step back from that. I don't know
Speaker 3: whether we're behind the curve, right. M Policy affects the
Speaker 3: economy with a lag, as we know. You know that
Speaker 3: you know long and variable lags. So we've got to
Speaker 3: make sure that we're gonna be taking some of the
Speaker 3: restrictedness off before inflation gets to two percent. And so
Speaker 3: when we're thinking about it's it's really is it? Are
Speaker 3: we confidence on the path back to two percent? But
Speaker 3: then it's a calibration exercise, right, Taking into part both
Speaker 3: parts are remanding, right, we wanna maintain healthy labor marketing
Speaker 3: conditions at the same time ensuring that inflation goes all
Speaker 3: the way back down to two percent. And so we're
Speaker 3: gonna the Committee will be calibrating its policy right to
Speaker 3: achieve both parts of its mandate and taking to account
Speaker 3: the risks to both parts of this mand aid as
Speaker 3: it goes forward. So I think that's the way I
Speaker 3: view it is that this really is now monetary policy
Speaker 3: is well positioned no matter which side the risk manifests themselves,
Speaker 3: and then the work of the committee is to assess
Speaker 3: those conditions incoming information, how's inform your outlook, how's it
Speaker 3: affect the risk around the outlook, and what is that
Speaker 3: the implications for policy. So I think that's what the
Speaker 3: exercise is going to be going forward.
Speaker 1: When you're looking at the outlook for the economy. There's
Speaker 1: a lot of criticism on Wall Street that the FED
Speaker 1: being data dependent. It's always looking at what's happened in
Speaker 1: the past, perhaps not realizing you're constantly talking with people
Speaker 1: in your district, with CEOs in your district companies and
Speaker 1: getting their views, and I'm wondering how well their views
Speaker 1: that they're telling you now end up matching up to
Speaker 1: the data.
Speaker 3: So you're exactly right, Michael. The work that we do
Speaker 3: in the districts is incredibly important because we talk to
Speaker 3: a number of contacts, business contacts, community development practitioners, labor
Speaker 3: market representatives, so we have a really good sense of
Speaker 3: what is really happening in the economy, and right now,
Speaker 3: what they're telling us is very similar to what's in
Speaker 3: the data. Right in terms of the labor market. It
Speaker 3: is easier to higher now than it was a year ago.
Speaker 3: It is easier to retain workers than it was a
Speaker 3: year ago. The offers they have to make on wages
Speaker 3: are lower than they were a year ago. They averaged
Speaker 3: for our district expectation for this year is four percent,
Speaker 3: a year ago is five percent. So that n sort
Speaker 3: of balancing between supply and demand is happening when you
Speaker 3: talk to businesses about what they're seeing out there. Similarly,
Speaker 3: you know there are firms that are telling us that, wow,
Speaker 3: I wish, wish I had raised my prices higher last year,
Speaker 3: because now it's much harder to raise prices cause price pressures,
Speaker 3: and the you know, whether the consumers will accept the
Speaker 3: the price increases is coming down. They don't have as
Speaker 3: much pricing power as they did before. Nonetheless, there's still
Speaker 3: some and so that's another thing indication that, Okay, we've
Speaker 3: done pretty well on inflation getting it down, but we're
Speaker 3: not all the way back to two percent, and that's
Speaker 3: gonna again be something that the Committee is going to
Speaker 3: have to keep assessing. But I would say that what
Speaker 3: we're hearing from our context is very similar to what's
Speaker 3: in the data you know, demand has moderated a bit
Speaker 3: across firms in our district. There are several firms that
Speaker 3: say the infrastructure spending and the support from the federal
Speaker 3: programs is they've benefited from it and they expect to
Speaker 3: continue to benefit from it. So again, you know, the
Speaker 3: economy seems to be still on a good, solid, firm stance,
Speaker 3: and now it's a question of like, let's get inflation
Speaker 3: back to two percent, let's keep those labor markets healthy.
Speaker 1: Well, we're going to get a couple more inflation reports
Speaker 1: obviously before the next meeting. Would you say that July
Speaker 1: is actually a live meeting in play? Would September be
Speaker 1: the first one?
Speaker 3: I mean, I think all meetings are always in play. Again,
Speaker 3: it's really going to be about what happens in the economy.
Speaker 3: So rather than think in calendar time, I think the
Speaker 3: better approach is to think about, how is the economy evolving?
Speaker 3: Do you have has your confidence been raised that given
Speaker 3: the reports that have come in, that inflation is on
Speaker 3: that sustainable path back to two percent? And I think
Speaker 3: that committee is going to do that careful analysis and
Speaker 3: also being assessing what's happening in the labor market. We
Speaker 3: have seen the uninflorment rate move up. It's moved up
Speaker 3: I think six tenths of percent since early last year.
Speaker 3: So again you've got to assess both parts of the mandate.
Speaker 3: When we started raising rates, we were focused wholly on
Speaker 3: the inflation part of the mandate because labor markets were
Speaker 3: strong and inflation was hot. Now, as inflation has come down,
Speaker 3: both parts of the mandate now become very important for
Speaker 3: us to be assessing risk around it. And so I'm
Speaker 3: confident that the Committee will continue to do that as
Speaker 3: it calibrates its policy rates to the economy as it's
Speaker 3: evolving and as they expect it to continue to evolve.
Speaker 1: You've got a big calendar data in the middle of
Speaker 1: your meetings that I know you would say doesn't have
Speaker 1: anything to do with us the election. But would you
Speaker 1: say a rate move if inflation continues to cooperate, is
Speaker 1: more likely before or after.
Speaker 3: I honestly can tell you. And I've gone to a
Speaker 3: lot of FOMCTE meetings. Someone told me I went over
Speaker 3: two hundred FOMC meetings in my career, not all as
Speaker 3: a policy maker course as a research director at the
Speaker 3: Philly Fed. Politics doesn't enter the room. It really is
Speaker 3: about what can we do with our policy to achieve
Speaker 3: our dual mandate goals, taking into account what the incoming
Speaker 3: information is telling you about the outlook for the economy,
Speaker 3: taking into account what the risks around achieving our dual
Speaker 3: mandate goals is telling us. And there's nothing about politics
Speaker 3: that enters these decisions.
Speaker 1: Well, it could have an effect next year in the
Speaker 1: sense that if we got a new president, we'd have
Speaker 1: new fiscal policies. We've got a lot of problems coming
Speaker 1: up in Washington next year with the debt ceiling, with
Speaker 1: budget negotiations, with taxes. How much faith can we put
Speaker 1: in the dot plot for twenty twenty five and for
Speaker 1: the forecast in twenty twenty five, It seems like there's
Speaker 1: somebody unknowns that the Fed really can't have any idea
Speaker 1: what's going to happen.
Speaker 3: Well, we do have an idea because we have to
Speaker 3: do a forecast. Right whenever you're setting monetary policy, because
Speaker 3: you know it doesn't affect the economy immediately, it takes
Speaker 3: some time to play out. You have to think about
Speaker 3: what's happening with the economy. I think every business does that.
Speaker 3: They're all setting sessing what's going to happen to my company.
Speaker 3: Where do I think the environment is. We're doing the
Speaker 3: same thing. We have a review of where the economy
Speaker 3: is most likely to go, but we also understand that
Speaker 3: as you go further out in the horizon, it could
Speaker 3: evolve differently than our current expectation. Is right, it could
Speaker 3: be that labor markets, you know, detriguer faster than we're effected.
Speaker 3: Now that's not my base case, but it's possibility. It
Speaker 3: could be that inflation, you know, even though we've gotten
Speaker 3: a couple of reports, maybe hangs up there a little
Speaker 3: bit longer. You know, the research that we do with
Speaker 3: the Cleveland Fed suggests that it's going to take some
Speaker 3: time for inflation to come back down, but it is
Speaker 3: going to come back down. And so that is always true.
Speaker 3: And the longer time you go out right, the less
Speaker 3: certainty there is about things. So you know, my expectation
Speaker 3: is that will be systematic and how we adjust policy
Speaker 3: based on what's coming in in terms of telling us
Speaker 3: about where the economy is going and what the risk are.
Speaker 3: And that's I think the way to view this.
Speaker 1: Right.
Speaker 3: The committee can't be precient, right, We can't know for
Speaker 3: sure what's going to happen. But what we can do
Speaker 3: is we can assess us best we can where the
Speaker 3: economy is going and there's risks, and set our policy appropriately,
Speaker 3: and if information comes in that suggests that, oh, the
Speaker 3: economy is evolving differently than we might have thought, will
Speaker 3: adjust policy in response to that.
Speaker 1: We have about thirty seconds left, one last time for
Speaker 1: all the people on trading desks who are watching you
Speaker 1: right now. Any forward guidance for Wall Street.
Speaker 3: No, but just understand that the Committee and the institution
Speaker 3: at the FED really does focus on setting policy to
Speaker 3: achieve our dual mandate goals. We're very committed to doing that,
Speaker 3: and we're committed to getting price stability again, inflation down
Speaker 3: to two percent, while maintaining healthy labor markets. And I
Speaker 3: think that's the key thing for the Wall Street to understand.
Speaker 1: Oh, by the way, Cleveland, Indians weren't supposed to be
Speaker 1: any good this year there at first place? Is that
Speaker 1: because of Fed monetary policy?
Speaker 3: Oh? Of course that's definitely the pause.
Speaker 1: Thank you very much, Loreena Vester, president of the Cleveland
Speaker 1: FED for two more weeks. Thank you for joining us
Speaker 1: today here on Bloomerick