Speaker 1: The word that everybody uses is solid.
Speaker 2: And you know, when you have Lorettamester coming up, the
Speaker 2: answer solid doesn't cut it because a mathematicians going, what
Speaker 2: in God's name is solid?
Speaker 1: But there are we have a solid economy? Well know
Speaker 1: what that means?
Speaker 3: Well, we'll find out from Lurettamester, who's sitting us. She
Speaker 3: is former Cleveland FED President Loretta Master. This is the
Speaker 3: first time that she's joining us as a non FED
Speaker 3: member in ten years at this Jackson Hole meeting. Lorettamester,
Speaker 3: President Mester, I will still call you that you've always
Speaker 3: been a thought leader. How much do you hear more
Speaker 3: dissent than usual among members at a time where we
Speaker 3: really are at a pivot.
Speaker 4: I'm not hearing that much to send Frankly, I think
Speaker 4: we're in a good place in terms of where the
Speaker 4: economy is. If you think about inflation, look how much
Speaker 4: it's come down.
Speaker 1: You know, we're in two and.
Speaker 4: A half percent range and the lad market is moderating.
Speaker 4: There's definite signs of that. But it's not weak, right,
Speaker 4: It hasn't turned into a strong you know, weakness coming
Speaker 4: into it. So we're in a good place spot. And
Speaker 4: now what the FED needs to do is make sure
Speaker 4: that it can maintain the momentum of inflation going all
Speaker 4: the way back down to two percent while keeping the
Speaker 4: labor market healthy. And I think that's where the focus
Speaker 4: is gonna be. If you remember at the start of
Speaker 4: the tightening cycle, you know, we had to go very
Speaker 4: aggressively because policy wasn't well calibrated to where the economy
Speaker 4: is and where it was going. Uh or was and
Speaker 4: where it was going. And now we wanna make sure
Speaker 4: that you know, the FED wants to make sure that
Speaker 4: policy stays well calibrated to the economy. So the discussion now,
Speaker 4: I think is about we have a dual mandate. We
Speaker 4: have to focus on both parts of that. We have
Speaker 4: to be forward looking. You know, it's where the economy
Speaker 4: is going, not necessarily where it death is here today,
Speaker 4: but where it's going. And that's why I think now
Speaker 4: it's it's actually appropriate to really be thinking about, Okay,
Speaker 4: it's time now to enter this new phase where we
Speaker 4: can start normalizing the policy rate.
Speaker 2: Wall Street and the financial media wants specificity, they want certitude,
Speaker 2: they want single point statements.
Speaker 1: About exactly where we are.
Speaker 2: The reality is just to look at productivity is a
Speaker 2: capital analysis, a labor analysis, and an all in analysis.
Speaker 2: Call it total factor productivity. The noise in there, to
Speaker 2: me with the overlay of technology is highly uncertain. Do
Speaker 2: you have any handle of the overlay of productivity and
Speaker 2: technologies effect that Cleveland and American economy.
Speaker 4: Well, I mean we've seen over history, right, that technology
Speaker 4: can be very additive to productivity growth, right, I mean,
Speaker 4: that's kind of the engine of an economy that's increasing
Speaker 4: and having potential growth rise. But in any point in time,
Speaker 4: it's very hard to measure productivity growth. Even if we
Speaker 4: didn't have this big technological innovation of AI, it's very
Speaker 4: difficult to measure it. So you have to take into
Speaker 4: account that there's uncertainty around productivity growth. I mean, some
Speaker 4: estimates say that we're still in a low productivity regime.
Speaker 4: Other restamates are saying, well, let's look forward, maybe we're
Speaker 4: going to be in a higher But for the FED
Speaker 4: right now, right, that's not sort of the focus. The
Speaker 4: focus is, you know, are we calibrated, Well, it's policy calibrating.
Speaker 1: Well, to the CAT, you've been great on this. She
Speaker 1: just said they're not focused on productivity.
Speaker 2: We have to be because business leaders every day are
Speaker 2: focused on those outcomes, and they're investment.
Speaker 5: Well, they've sort of been forced to by inflation and
Speaker 5: a lack of workers, and they've been forced to put
Speaker 5: investment into productivity.
Speaker 1: We'll see if it starts to pay off. But Loretta
Speaker 1: is right.
Speaker 5: At the moment, you know, you don't, you're not seeing it.
Speaker 1: But that's not the key for them.
Speaker 5: But I do want to know how you respond to
Speaker 5: the criticism that the Fed has not communicated well what
Speaker 5: it's thinking and what it's planning, or if not planning,
Speaker 5: you know, what are the potential outcomes because we've some
Speaker 5: very wild swings in the markets as data comes around.
Speaker 1: Have you said data dependent too much?
Speaker 4: I think there's a misunderstanding what data dependant means, and
Speaker 4: that means that I think Chairpal today will be explaining
Speaker 4: where he sees policy going, not necessarily at the next meeting,
Speaker 4: whether fifteen to twenty five, which in some sense is
Speaker 4: really not the big issue. I know for financial markets
Speaker 4: it is, but not in terms of monetary policy. It's
Speaker 4: really what's the path forward? Are we beginning now to
Speaker 4: bring policy down and the pace, of course, and the
Speaker 4: magnitude eventually of how far our indust rates go down
Speaker 4: that's going to depend on how the economy evolves, right,
Speaker 4: But we're going to enter this new phase, I think,
Speaker 4: and appropriately so in July. I probably wouldn't have supported
Speaker 4: actually moving the rate down in July, and of course
Speaker 4: the Committee didn't, but I could have made a case
Speaker 4: for it. And that's a change, right, that's the economy
Speaker 4: has changed enough, Inflation has come down quite a bit.
Speaker 4: It's on a path I think where we can be
Speaker 4: pretty confident it'll get back to two percent. And now
Speaker 4: we really have to balance both sides of the mandate.
Speaker 4: So it's basically keep the momentum going on inflation at
Speaker 4: the same time making sure that labor markets remain healthy.
Speaker 5: What do you think it would take for the committee
Speaker 5: to decide you needed to do more than the standard
Speaker 5: twenty five basis point cut?
Speaker 4: So I think it would have to be that, you know,
Speaker 4: somehow they thought they were a little behind and they
Speaker 4: needed to catch up, and frankly, I don't see that
Speaker 4: in the data. I think they're actually in a very
Speaker 4: good place now. If it turns out that, you know,
Speaker 4: the forecasts are saying, wow, you know, we may be
Speaker 4: seeing the moderation in labor markets being more than moderation
Speaker 4: and we actually see a weakening, they may have to
Speaker 4: adjust that and then do more. But I think there's
Speaker 4: sort of a record if you think about when we
Speaker 4: started to raise rates, right, we started at the twenty five,
Speaker 4: then at fifty, then we did our seventy five, and
Speaker 4: that's sort of the preferred paths. That means you know,
Speaker 4: you're not doing too much too ahead of time. And
Speaker 4: the other thing I think I would be worried about
Speaker 4: is if you do a fifty to start with the
Speaker 4: market send you know, building even more. And I think
Speaker 4: that's a calibration that you have to think about when
Speaker 4: you're doing this. So I think being steady right, thinking
Speaker 4: about what the right pace is gear to how the
Speaker 4: economy is working and evolving, it's the right way to go.
Speaker 3: You said that you expect j. Powell to come out
Speaker 3: and give a sense of where we're going, and I
Speaker 3: think that's actually the frustration for a lot of people
Speaker 3: in markets. We don't know where we're going. We don't
Speaker 3: have a sense of what the neutral rate is. Right now,
Speaker 3: the market has about two hundred basis points of rate
Speaker 3: cuts priced in by the end of next year. Is
Speaker 3: that appropriate? What is neutral?
Speaker 4: Well? Remember what the markets are doing is and appropriately
Speaker 4: so looking at different scenarios, right, and they're waiting and
Speaker 4: then when they when you get those kind of things
Speaker 4: out of the financial markets about how many rate cuts,
Speaker 4: it's balancing different scenarios. When the fence talking about you
Speaker 4: know where they're seeing is they're talking about, here's what
Speaker 4: we think is if the economy evolves as we expect,
Speaker 4: wouldn't be appropriate policy path. But they also have to
Speaker 4: think through alternative scenarios too, So it's kind of a
Speaker 4: different answer or different question answer to a question, and
Speaker 4: that's I think the frustration is that the FED is
Speaker 4: trying to answer a different question is here's where we
Speaker 4: see policy going, But of course they don't want to
Speaker 4: commit themselves to something because the economy could evolve differently,
Speaker 4: and that's been hard to communicate.
Speaker 5: You founded an inflation lab at the Cleveland FED.
Speaker 1: What do you think inflation dynamics are now?
Speaker 5: Is this a completely different kind of situation post pandemic
Speaker 5: than models coming out of other recessions have.
Speaker 4: Worked with well, I think one thing that we saw
Speaker 4: during the pandemic and the aftermath was that the supply side,
Speaker 4: right had a lot to do with inflation dynamics. But
Speaker 4: the key thing to remember is that those supplies shocks
Speaker 4: would not have necessarily resulted in higher inflation if we
Speaker 4: hadn't had a very strong demand side of the economy.
Speaker 4: So it's this balance between supplying demand. Typically right in
Speaker 4: the past, right, it was all about demand. Supply you
Speaker 4: could sort of say it was sort of stable, and
Speaker 4: it was all about how demand was moving around. In
Speaker 4: this event, right, it was both supply and demand, and
Speaker 4: that made it more challenging. And so in that sense,
Speaker 4: I think there's a renewed understanding that dynamics on inflation.
Speaker 4: It's both sides, it's supply and demand, and understanding both
Speaker 4: I think is going to be a focus going forward.
Speaker 5: Well as if it goes into its review process for
Speaker 5: its monetary policy framework, does what happened change the way
Speaker 5: you think the committee should look at policy? In other words,
Speaker 5: maybe you want to be a little bit more preemptive
Speaker 5: than you were.
Speaker 4: So, I know a lot of people characterized the FED
Speaker 4: in the framework that came out in twenty twenty as
Speaker 4: walking away from being preempted, But if you actually look
Speaker 4: at the language in there still says preempto. I agree
Speaker 4: with you that it sounded like we were just being
Speaker 4: data dependent in the moment, But we've always were focused
Speaker 4: on where is the economy going? So it's data coming in.
Speaker 4: Assess that data relative to your outlook. If it's materially
Speaker 4: different than you expect, you might have to change your outlook,
Speaker 4: and therefore you might have to change policy, your policy
Speaker 4: expected policy paths. So I think we've always been forward looking.
Speaker 4: I expect the FED to remain forward looking. They may
Speaker 4: change the language in the statement so that that's a
Speaker 4: little bit more transparent, if you will, so that people
Speaker 4: actually understand that, you know, policy has to look forward.
Speaker 2: I would never ask you this question if you're on
Speaker 2: the watch, But now that you're gainfully retired and in
Speaker 2: the real world, I'm going to ask you this question.
Speaker 2: Cleveland has reasonable real estate, but Shaker Heights as a boom.
Speaker 1: Real estate economy.
Speaker 2: And part of that asset success of Shaker Heights in
Speaker 2: the Shaker Heights of America is the gains the halves
Speaker 2: are getting from this financial system. How does the FED
Speaker 2: distribute the benefit more across America? Rather than this illusion
Speaker 2: that only the have nots that own the havelves that
Speaker 2: own Nvidia are making way.
Speaker 4: Yeah, I mean, the FED always focuses on the macro economy, right,
Speaker 4: it doesn't have tools that can really do much about
Speaker 4: red distributing or fairness or making sure that everyone gains.
Speaker 4: But what we can do at the FED, and what
Speaker 4: the new committee will be doing at the FED, is
Speaker 4: making sure that we maintain healthy labor markets, which again
Speaker 4: helps distribute and brings inflation, and you know, the inflation
Speaker 4: rate down and getting back to price stability is also
Speaker 4: very key to having a strong economy so that everyone
Speaker 4: can prosper from the economy. The FED really can't do
Speaker 4: the other part of what you're talking about, and that's
Speaker 4: what the federal government policies are about, and the fiscal
Speaker 4: policy is about.
Speaker 3: We thought that you were going to retire and pelt
Speaker 3: homes you try to offset some of the supply issues. Lreida,
Speaker 3: there is this question Mike was talking about how the
Speaker 3: Queen of Inflation studies and how the Cleveland FED really
Speaker 3: does have an incredible metric for that. Do you have
Speaker 3: a sense of how much more inflationary this post pandemic
Speaker 3: economy is and that really speaks to what is the
Speaker 3: new neutral.
Speaker 4: Well, there are certain factors that really affect inflation, right,
Speaker 4: But the basics are similar to what we saw before. Right.
Speaker 4: Inflation expectations are still an important driver of inflation. Making
Speaker 4: sure they remain stable is helping to keep inflation moving down,
Speaker 4: which is important. Supply side conditions matter, and the labor
Speaker 4: market tightness matters. We're going to hear a paper at
Speaker 4: Jackson Home that's really addressing that how much tightness in
Speaker 4: the labor market affects what you might see when demand
Speaker 4: gets out of whack with supply. So again it's the
Speaker 4: same basic factors, but of course the supply side during
Speaker 4: the pandemic changed quite a bit, and those factors are
Speaker 4: going to be I think more significant going forward than
Speaker 4: perhaps they were in the past.
Speaker 3: Are you having more fun now that you're not on
Speaker 3: the committee?
Speaker 4: I'm having fun.
Speaker 3: Well, hopefully you can go hiking or enjoy the beautiful
Speaker 3: Wyoming Lordemester formerly of the Cleveland Federal Reserve. Just going
Speaker 3: back to the end of June when you step down,
Speaker 3: and she is here for the first time in ten years,
Speaker 3: not as a member of the committee, but as a
Speaker 3: civilian who is planning to do lots of things in
Speaker 3: her free time.