WEBVTT - Cleveland Fed President Loretta Mester Talks Inflation Risk

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>As we bring you a special conversation now thanks to

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<v Speaker 2>our colleague Michael McKee, who's joining us from world headquarters

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<v Speaker 2>in New York, and a special conversation with Cleveland Federal

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<v Speaker 2>Reserve Bank President Loretta Mester. Michael, take it away.

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<v Speaker 1>Well, thank you very much, and good afternoon to everybody

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<v Speaker 1>watching us and listening to us on Bloomberg television and

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<v Speaker 1>radio around the world. And I don't know what you

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<v Speaker 1>say to people on the internet who are watching, listening, whatever,

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<v Speaker 1>but thank you very much for joining us. This is

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<v Speaker 1>sort of your farewell tour. You're retiring at the end

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<v Speaker 1>of the month, so let me ask you. You're not

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<v Speaker 1>you've been a voter this year to this point. By December,

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<v Speaker 1>do you think we will see one rate cut, more

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<v Speaker 1>rate cuts, or no rate cuts.

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<v Speaker 3>Well, thanks for inviting me to be here. I mean,

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<v Speaker 3>we all put in our projections at this that was

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<v Speaker 3>held this week, and the medium projection in the SEP

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<v Speaker 3>is pretty close to my own projection for the economy.

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<v Speaker 3>We've made pretty good progress on inflation over the last

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<v Speaker 3>two years. It's still too high the most recent data

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<v Speaker 3>that we received. In fact, we got the CPI report

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<v Speaker 3>on the second day of the meeting, and it was

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<v Speaker 3>it was a great gift for my last FOMC meaning

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<v Speaker 3>to get that report. The good news there, but it

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<v Speaker 3>still means that there's work to do on inflation to

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<v Speaker 3>gain confidence that it is on that downward trajectory to

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<v Speaker 3>two percent. And you know, the unemployment rate has ticked

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<v Speaker 3>up a little bit over the last couple of months. Certainly,

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<v Speaker 3>though if you look overall, the labor market conditions remain

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<v Speaker 3>healthy and that's a great thing too. So I think

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<v Speaker 3>monetary policy right now is well positioned really to ensure

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<v Speaker 3>that inflation does move back down towards two percent over

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<v Speaker 3>time and that labor market conditions remain healthy. And that's

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<v Speaker 3>a good position to be in. And if you look

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<v Speaker 3>at the SEPs overall, what you see is the path

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<v Speaker 3>of the modal path of the SEP across participates as

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<v Speaker 3>at rates will be coming down. The dot plot shows

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<v Speaker 3>that there is weight on one zero two, But it'll

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<v Speaker 3>really depend on how the economy actually evolves, and I

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<v Speaker 3>think that's going to be the work of the committee

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<v Speaker 3>going forward assess incoming information about the economy. Does it

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<v Speaker 3>change your outlook? Is it consistent with the modal outlook,

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<v Speaker 3>and as inflation comes down, and as inflation expectations short

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<v Speaker 3>run a year ahead comes down, then it'll be appropriate

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<v Speaker 3>to reduce that fit funds rate and remove some of

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<v Speaker 3>the restrictiveness.

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<v Speaker 1>Well for their confidence that you're moving towards the two

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<v Speaker 1>percent target is almost a cliche. Now what does that

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<v Speaker 1>actually mean? Does it mean you need to see the

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<v Speaker 1>various inflation indicators keep coming down even if it's only

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<v Speaker 1>say a tenth. Do you have a level of the

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<v Speaker 1>year over a year rate of inflation that you want

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<v Speaker 1>to hit?

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<v Speaker 3>Uh?

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<v Speaker 1>How can people judge what the FED is going to do?

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<v Speaker 1>What they're thinking about?

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<v Speaker 3>So what my view would be is, I'd like to

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<v Speaker 3>see a few more months of inflation reports that are

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<v Speaker 3>positive in the sense of similar to what we got

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<v Speaker 3>last month. I'd like to see that continue. Remember, at

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<v Speaker 3>the beginning of the year January inflation was higher. There

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<v Speaker 3>was some real issues with measurement, you know, residual seasonality

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<v Speaker 3>in that measure. But then we got two more reports

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<v Speaker 3>that were consistent with Wow, there's not been progress this year.

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<v Speaker 3>I came into the year not expecting the same l

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<v Speaker 3>degree of progress that we saw over the second half

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<v Speaker 3>of last year because a lot of we did get

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<v Speaker 3>a lot of help from the improvement in supply conditions,

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<v Speaker 3>both in the labor market and in product markets, and

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<v Speaker 3>I didn't expect that to continue. And a lot of

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<v Speaker 3>the work that the Cleveland Fed does in are Center

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<v Speaker 3>for Inflation Research suggests that it's going to take some

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<v Speaker 3>time to get inflation back to two percent all the

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<v Speaker 3>way back. So my projection is that we probably won't

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<v Speaker 3>get there until twenty twenty six, but we'll see progress

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<v Speaker 3>continue in my modal view, and that's enough to then say, Okay,

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<v Speaker 3>it's time to start the process of bringing rates down

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<v Speaker 3>and normalizing our propose.

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<v Speaker 1>As long as it moves down, it doesn't have to

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<v Speaker 1>hit a point target.

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<v Speaker 3>Yeah, not to me. To my view would be that

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<v Speaker 3>if I continue to see some of these better inflation

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<v Speaker 3>reports that we got then we got earlier in the year,

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<v Speaker 3>if that continues, then I'd feel comfortable starting that process

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<v Speaker 3>of normalizing rates.

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<v Speaker 1>Well, you've said what others have said on the FED

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<v Speaker 1>that once the momentum is there, it'll keep going down.

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<v Speaker 1>So you don't want to wait till you get to

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<v Speaker 1>two so you don't fall below it. But by implication

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<v Speaker 1>that means you're going to be starting behind the curve.

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<v Speaker 1>Inflation will already be heading in that direction. Can you

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<v Speaker 1>put the brakes on fast enough so that it doesn't

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<v Speaker 1>go back down disinflationary territory?

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<v Speaker 3>Well, so let's step back from that. I don't know

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<v Speaker 3>whether we're behind the curve, right. M Policy affects the

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<v Speaker 3>economy with a lag, as we know. You know that

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<v Speaker 3>you know long and variable lags. So we've got to

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<v Speaker 3>make sure that we're gonna be taking some of the

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<v Speaker 3>restrictedness off before inflation gets to two percent. And so

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<v Speaker 3>when we're thinking about it's it's really is it? Are

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<v Speaker 3>we confidence on the path back to two percent? But

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<v Speaker 3>then it's a calibration exercise, right, Taking into part both

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<v Speaker 3>parts are remanding, right, we wanna maintain healthy labor marketing

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<v Speaker 3>conditions at the same time ensuring that inflation goes all

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<v Speaker 3>the way back down to two percent. And so we're

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<v Speaker 3>gonna the Committee will be calibrating its policy right to

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<v Speaker 3>achieve both parts of its mandate and taking to account

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<v Speaker 3>the risks to both parts of this mand aid as

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<v Speaker 3>it goes forward. So I think that's the way I

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<v Speaker 3>view it is that this really is now monetary policy

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<v Speaker 3>is well positioned no matter which side the risk manifests themselves,

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<v Speaker 3>and then the work of the committee is to assess

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<v Speaker 3>those conditions incoming information, how's inform your outlook, how's it

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<v Speaker 3>affect the risk around the outlook, and what is that

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<v Speaker 3>the implications for policy. So I think that's what the

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<v Speaker 3>exercise is going to be going forward.

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<v Speaker 1>When you're looking at the outlook for the economy. There's

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<v Speaker 1>a lot of criticism on Wall Street that the FED

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<v Speaker 1>being data dependent. It's always looking at what's happened in

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<v Speaker 1>the past, perhaps not realizing you're constantly talking with people

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<v Speaker 1>in your district, with CEOs in your district companies and

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<v Speaker 1>getting their views, and I'm wondering how well their views

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<v Speaker 1>that they're telling you now end up matching up to

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<v Speaker 1>the data.

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<v Speaker 3>So you're exactly right, Michael. The work that we do

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<v Speaker 3>in the districts is incredibly important because we talk to

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<v Speaker 3>a number of contacts, business contacts, community development practitioners, labor

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<v Speaker 3>market representatives, so we have a really good sense of

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<v Speaker 3>what is really happening in the economy, and right now,

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<v Speaker 3>what they're telling us is very similar to what's in

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<v Speaker 3>the data. Right in terms of the labor market. It

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<v Speaker 3>is easier to higher now than it was a year ago.

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<v Speaker 3>It is easier to retain workers than it was a

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<v Speaker 3>year ago. The offers they have to make on wages

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<v Speaker 3>are lower than they were a year ago. They averaged

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<v Speaker 3>for our district expectation for this year is four percent,

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<v Speaker 3>a year ago is five percent. So that n sort

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<v Speaker 3>of balancing between supply and demand is happening when you

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<v Speaker 3>talk to businesses about what they're seeing out there. Similarly,

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<v Speaker 3>you know there are firms that are telling us that, wow,

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<v Speaker 3>I wish, wish I had raised my prices higher last year,

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<v Speaker 3>because now it's much harder to raise prices cause price pressures,

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<v Speaker 3>and the you know, whether the consumers will accept the

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<v Speaker 3>the price increases is coming down. They don't have as

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<v Speaker 3>much pricing power as they did before. Nonetheless, there's still

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<v Speaker 3>some and so that's another thing indication that, Okay, we've

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<v Speaker 3>done pretty well on inflation getting it down, but we're

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<v Speaker 3>not all the way back to two percent, and that's

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<v Speaker 3>gonna again be something that the Committee is going to

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<v Speaker 3>have to keep assessing. But I would say that what

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<v Speaker 3>we're hearing from our context is very similar to what's

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<v Speaker 3>in the data you know, demand has moderated a bit

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<v Speaker 3>across firms in our district. There are several firms that

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<v Speaker 3>say the infrastructure spending and the support from the federal

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<v Speaker 3>programs is they've benefited from it and they expect to

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<v Speaker 3>continue to benefit from it. So again, you know, the

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<v Speaker 3>economy seems to be still on a good, solid, firm stance,

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<v Speaker 3>and now it's a question of like, let's get inflation

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<v Speaker 3>back to two percent, let's keep those labor markets healthy.

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<v Speaker 1>Well, we're going to get a couple more inflation reports

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<v Speaker 1>obviously before the next meeting. Would you say that July

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<v Speaker 1>is actually a live meeting in play? Would September be

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<v Speaker 1>the first one?

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<v Speaker 3>I mean, I think all meetings are always in play. Again,

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<v Speaker 3>it's really going to be about what happens in the economy.

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<v Speaker 3>So rather than think in calendar time, I think the

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<v Speaker 3>better approach is to think about, how is the economy evolving?

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<v Speaker 3>Do you have has your confidence been raised that given

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<v Speaker 3>the reports that have come in, that inflation is on

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<v Speaker 3>that sustainable path back to two percent? And I think

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<v Speaker 3>that committee is going to do that careful analysis and

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<v Speaker 3>also being assessing what's happening in the labor market. We

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<v Speaker 3>have seen the uninflorment rate move up. It's moved up

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<v Speaker 3>I think six tenths of percent since early last year.

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<v Speaker 3>So again you've got to assess both parts of the mandate.

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<v Speaker 3>When we started raising rates, we were focused wholly on

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<v Speaker 3>the inflation part of the mandate because labor markets were

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<v Speaker 3>strong and inflation was hot. Now, as inflation has come down,

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<v Speaker 3>both parts of the mandate now become very important for

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<v Speaker 3>us to be assessing risk around it. And so I'm

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<v Speaker 3>confident that the Committee will continue to do that as

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<v Speaker 3>it calibrates its policy rates to the economy as it's

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<v Speaker 3>evolving and as they expect it to continue to evolve.

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<v Speaker 1>You've got a big calendar data in the middle of

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<v Speaker 1>your meetings that I know you would say doesn't have

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<v Speaker 1>anything to do with us the election. But would you

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<v Speaker 1>say a rate move if inflation continues to cooperate, is

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<v Speaker 1>more likely before or after.

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<v Speaker 3>I honestly can tell you. And I've gone to a

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<v Speaker 3>lot of FOMCTE meetings. Someone told me I went over

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<v Speaker 3>two hundred FOMC meetings in my career, not all as

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<v Speaker 3>a policy maker course as a research director at the

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<v Speaker 3>Philly Fed. Politics doesn't enter the room. It really is

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<v Speaker 3>about what can we do with our policy to achieve

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<v Speaker 3>our dual mandate goals, taking into account what the incoming

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<v Speaker 3>information is telling you about the outlook for the economy,

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<v Speaker 3>taking into account what the risks around achieving our dual

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<v Speaker 3>mandate goals is telling us. And there's nothing about politics

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<v Speaker 3>that enters these decisions.

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<v Speaker 1>Well, it could have an effect next year in the

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<v Speaker 1>sense that if we got a new president, we'd have

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<v Speaker 1>new fiscal policies. We've got a lot of problems coming

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<v Speaker 1>up in Washington next year with the debt ceiling, with

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<v Speaker 1>budget negotiations, with taxes. How much faith can we put

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<v Speaker 1>in the dot plot for twenty twenty five and for

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<v Speaker 1>the forecast in twenty twenty five, It seems like there's

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<v Speaker 1>somebody unknowns that the Fed really can't have any idea

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<v Speaker 1>what's going to happen.

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<v Speaker 3>Well, we do have an idea because we have to

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<v Speaker 3>do a forecast. Right whenever you're setting monetary policy, because

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<v Speaker 3>you know it doesn't affect the economy immediately, it takes

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<v Speaker 3>some time to play out. You have to think about

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<v Speaker 3>what's happening with the economy. I think every business does that.

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<v Speaker 3>They're all setting sessing what's going to happen to my company.

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<v Speaker 3>Where do I think the environment is. We're doing the

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<v Speaker 3>same thing. We have a review of where the economy

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<v Speaker 3>is most likely to go, but we also understand that

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<v Speaker 3>as you go further out in the horizon, it could

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<v Speaker 3>evolve differently than our current expectation. Is right, it could

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<v Speaker 3>be that labor markets, you know, detriguer faster than we're effected.

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<v Speaker 3>Now that's not my base case, but it's possibility. It

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<v Speaker 3>could be that inflation, you know, even though we've gotten

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<v Speaker 3>a couple of reports, maybe hangs up there a little

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<v Speaker 3>bit longer. You know, the research that we do with

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<v Speaker 3>the Cleveland Fed suggests that it's going to take some

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<v Speaker 3>time for inflation to come back down, but it is

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<v Speaker 3>going to come back down. And so that is always true.

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<v Speaker 3>And the longer time you go out right, the less

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<v Speaker 3>certainty there is about things. So you know, my expectation

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<v Speaker 3>is that will be systematic and how we adjust policy

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<v Speaker 3>based on what's coming in in terms of telling us

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<v Speaker 3>about where the economy is going and what the risk are.

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<v Speaker 3>And that's I think the way to view this.

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<v Speaker 1>Right.

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<v Speaker 3>The committee can't be precient, right, We can't know for

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<v Speaker 3>sure what's going to happen. But what we can do

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<v Speaker 3>is we can assess us best we can where the

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<v Speaker 3>economy is going and there's risks, and set our policy appropriately,

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<v Speaker 3>and if information comes in that suggests that, oh, the

0:12:49.120 --> 0:12:52.600
<v Speaker 3>economy is evolving differently than we might have thought, will

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<v Speaker 3>adjust policy in response to that.

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<v Speaker 1>We have about thirty seconds left, one last time for

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<v Speaker 1>all the people on trading desks who are watching you

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<v Speaker 1>right now. Any forward guidance for Wall Street.

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<v Speaker 3>No, but just understand that the Committee and the institution

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<v Speaker 3>at the FED really does focus on setting policy to

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<v Speaker 3>achieve our dual mandate goals. We're very committed to doing that,

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<v Speaker 3>and we're committed to getting price stability again, inflation down

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<v Speaker 3>to two percent, while maintaining healthy labor markets. And I

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<v Speaker 3>think that's the key thing for the Wall Street to understand.

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<v Speaker 1>Oh, by the way, Cleveland, Indians weren't supposed to be

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<v Speaker 1>any good this year there at first place? Is that

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<v Speaker 1>because of Fed monetary policy?

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<v Speaker 3>Oh? Of course that's definitely the pause.

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<v Speaker 1>Thank you very much, Loreena Vester, president of the Cleveland

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<v Speaker 1>FED for two more weeks. Thank you for joining us

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<v Speaker 1>today here on Bloomerick