WEBVTT - Former Cleveland Fed President Loretta Mester Talks the Economy 0:00:00.120 --> 0:00:01.880 The word that everybody uses is solid. 0:00:01.920 --> 0:00:03.840 And you know, when you have Lorettamester coming up, the 0:00:03.880 --> 0:00:07.040 answer solid doesn't cut it because a mathematicians going, what 0:00:07.120 --> 0:00:08.640 in God's name is solid? 0:00:08.880 --> 0:00:11.200 But there are we have a solid economy? Well know 0:00:11.280 --> 0:00:11.879 what that means? 0:00:11.960 --> 0:00:14.440 Well, we'll find out from Lurettamester, who's sitting us. She 0:00:14.560 --> 0:00:17.279 is former Cleveland FED President Loretta Master. This is the 0:00:17.320 --> 0:00:20.759 first time that she's joining us as a non FED 0:00:20.800 --> 0:00:25.000 member in ten years at this Jackson Hole meeting. Lorettamester, 0:00:25.239 --> 0:00:27.479 President Mester, I will still call you that you've always 0:00:27.520 --> 0:00:31.240 been a thought leader. How much do you hear more 0:00:31.600 --> 0:00:35.920 dissent than usual among members at a time where we 0:00:36.040 --> 0:00:37.199 really are at a pivot. 0:00:37.880 --> 0:00:40.239 I'm not hearing that much to send Frankly, I think 0:00:40.280 --> 0:00:42.440 we're in a good place in terms of where the 0:00:42.520 --> 0:00:45.639 economy is. If you think about inflation, look how much 0:00:45.680 --> 0:00:46.360 it's come down. 0:00:46.440 --> 0:00:47.680 You know, we're in two and. 0:00:47.600 --> 0:00:51.239 A half percent range and the lad market is moderating. 0:00:51.280 --> 0:00:55.120 There's definite signs of that. But it's not weak, right, 0:00:55.160 --> 0:00:58.400 It hasn't turned into a strong you know, weakness coming 0:00:58.440 --> 0:01:00.520 into it. So we're in a good place spot. And 0:01:00.600 --> 0:01:03.800 now what the FED needs to do is make sure 0:01:03.880 --> 0:01:07.240 that it can maintain the momentum of inflation going all 0:01:07.280 --> 0:01:10.000 the way back down to two percent while keeping the 0:01:10.080 --> 0:01:13.000 labor market healthy. And I think that's where the focus 0:01:13.080 --> 0:01:15.160 is gonna be. If you remember at the start of 0:01:15.240 --> 0:01:18.479 the tightening cycle, you know, we had to go very 0:01:18.520 --> 0:01:23.000 aggressively because policy wasn't well calibrated to where the economy 0:01:23.600 --> 0:01:26.240 is and where it was going. Uh or was and 0:01:26.280 --> 0:01:29.000 where it was going. And now we wanna make sure 0:01:29.040 --> 0:01:30.800 that you know, the FED wants to make sure that 0:01:30.880 --> 0:01:34.960 policy stays well calibrated to the economy. So the discussion now, 0:01:35.040 --> 0:01:37.920 I think is about we have a dual mandate. We 0:01:37.959 --> 0:01:40.280 have to focus on both parts of that. We have 0:01:40.400 --> 0:01:42.920 to be forward looking. You know, it's where the economy 0:01:42.959 --> 0:01:46.080 is going, not necessarily where it death is here today, 0:01:46.200 --> 0:01:48.840 but where it's going. And that's why I think now 0:01:49.280 --> 0:01:52.760 it's it's actually appropriate to really be thinking about, Okay, 0:01:52.800 --> 0:01:56.080 it's time now to enter this new phase where we 0:01:56.120 --> 0:01:58.680 can start normalizing the policy rate. 0:01:59.120 --> 0:02:03.520 Wall Street and the financial media wants specificity, they want certitude, 0:02:03.600 --> 0:02:06.120 they want single point statements. 0:02:05.600 --> 0:02:07.000 About exactly where we are. 0:02:07.600 --> 0:02:10.320 The reality is just to look at productivity is a 0:02:10.360 --> 0:02:14.440 capital analysis, a labor analysis, and an all in analysis. 0:02:14.520 --> 0:02:18.440 Call it total factor productivity. The noise in there, to 0:02:18.520 --> 0:02:23.080 me with the overlay of technology is highly uncertain. Do 0:02:23.120 --> 0:02:27.040 you have any handle of the overlay of productivity and 0:02:27.120 --> 0:02:30.760 technologies effect that Cleveland and American economy. 0:02:31.160 --> 0:02:35.000 Well, I mean we've seen over history, right, that technology 0:02:35.040 --> 0:02:38.160 can be very additive to productivity growth, right, I mean, 0:02:38.200 --> 0:02:42.240 that's kind of the engine of an economy that's increasing 0:02:42.320 --> 0:02:47.600 and having potential growth rise. But in any point in time, 0:02:47.639 --> 0:02:50.160 it's very hard to measure productivity growth. Even if we 0:02:50.200 --> 0:02:54.880 didn't have this big technological innovation of AI, it's very 0:02:54.880 --> 0:02:57.239 difficult to measure it. So you have to take into 0:02:57.280 --> 0:03:00.480 account that there's uncertainty around productivity growth. I mean, some 0:03:00.600 --> 0:03:03.360 estimates say that we're still in a low productivity regime. 0:03:04.760 --> 0:03:07.680 Other restamates are saying, well, let's look forward, maybe we're 0:03:07.720 --> 0:03:09.800 going to be in a higher But for the FED 0:03:09.960 --> 0:03:12.560 right now, right, that's not sort of the focus. The 0:03:12.600 --> 0:03:17.880 focus is, you know, are we calibrated, Well, it's policy calibrating. 0:03:17.919 --> 0:03:20.600 Well, to the CAT, you've been great on this. She 0:03:20.800 --> 0:03:23.040 just said they're not focused on productivity. 0:03:23.320 --> 0:03:27.519 We have to be because business leaders every day are 0:03:27.560 --> 0:03:30.000 focused on those outcomes, and they're investment. 0:03:30.040 --> 0:03:32.640 Well, they've sort of been forced to by inflation and 0:03:32.680 --> 0:03:35.000 a lack of workers, and they've been forced to put 0:03:35.800 --> 0:03:37.640 investment into productivity. 0:03:37.720 --> 0:03:40.440 We'll see if it starts to pay off. But Loretta 0:03:40.520 --> 0:03:40.840 is right. 0:03:40.720 --> 0:03:42.960 At the moment, you know, you don't, you're not seeing it. 0:03:43.040 --> 0:03:45.160 But that's not the key for them. 0:03:45.640 --> 0:03:48.720 But I do want to know how you respond to 0:03:48.760 --> 0:03:52.880 the criticism that the Fed has not communicated well what 0:03:53.040 --> 0:03:57.440 it's thinking and what it's planning, or if not planning, 0:03:57.480 --> 0:04:00.360 you know, what are the potential outcomes because we've some 0:04:00.440 --> 0:04:03.080 very wild swings in the markets as data comes around. 0:04:03.560 --> 0:04:05.680 Have you said data dependent too much? 0:04:06.560 --> 0:04:09.720 I think there's a misunderstanding what data dependant means, and 0:04:09.760 --> 0:04:13.760 that means that I think Chairpal today will be explaining 0:04:14.360 --> 0:04:18.880 where he sees policy going, not necessarily at the next meeting, 0:04:18.920 --> 0:04:21.279 whether fifteen to twenty five, which in some sense is 0:04:21.320 --> 0:04:24.359 really not the big issue. I know for financial markets 0:04:24.640 --> 0:04:27.120 it is, but not in terms of monetary policy. It's 0:04:27.160 --> 0:04:30.599 really what's the path forward? Are we beginning now to 0:04:30.760 --> 0:04:34.760 bring policy down and the pace, of course, and the 0:04:35.000 --> 0:04:38.560 magnitude eventually of how far our indust rates go down 0:04:38.640 --> 0:04:41.680 that's going to depend on how the economy evolves, right, 0:04:41.720 --> 0:04:44.000 But we're going to enter this new phase, I think, 0:04:44.120 --> 0:04:48.039 and appropriately so in July. I probably wouldn't have supported 0:04:48.560 --> 0:04:50.640 actually moving the rate down in July, and of course 0:04:50.680 --> 0:04:53.080 the Committee didn't, but I could have made a case 0:04:53.160 --> 0:04:56.040 for it. And that's a change, right, that's the economy 0:04:56.080 --> 0:04:59.000 has changed enough, Inflation has come down quite a bit. 0:04:59.440 --> 0:05:01.640 It's on a path I think where we can be 0:05:01.680 --> 0:05:04.200 pretty confident it'll get back to two percent. And now 0:05:04.279 --> 0:05:06.359 we really have to balance both sides of the mandate. 0:05:06.520 --> 0:05:10.040 So it's basically keep the momentum going on inflation at 0:05:10.040 --> 0:05:13.560 the same time making sure that labor markets remain healthy. 0:05:14.040 --> 0:05:16.320 What do you think it would take for the committee 0:05:16.320 --> 0:05:18.920 to decide you needed to do more than the standard 0:05:18.920 --> 0:05:20.880 twenty five basis point cut? 0:05:21.160 --> 0:05:24.040 So I think it would have to be that, you know, 0:05:24.560 --> 0:05:27.440 somehow they thought they were a little behind and they 0:05:27.480 --> 0:05:29.640 needed to catch up, and frankly, I don't see that 0:05:29.720 --> 0:05:31.839 in the data. I think they're actually in a very 0:05:31.839 --> 0:05:35.080 good place now. If it turns out that, you know, 0:05:35.160 --> 0:05:37.720 the forecasts are saying, wow, you know, we may be 0:05:37.960 --> 0:05:43.760 seeing the moderation in labor markets being more than moderation 0:05:43.839 --> 0:05:46.520 and we actually see a weakening, they may have to 0:05:46.560 --> 0:05:49.720 adjust that and then do more. But I think there's 0:05:49.720 --> 0:05:51.919 sort of a record if you think about when we 0:05:52.000 --> 0:05:55.560 started to raise rates, right, we started at the twenty five, 0:05:55.600 --> 0:05:57.640 then at fifty, then we did our seventy five, and 0:05:57.680 --> 0:06:00.919 that's sort of the preferred paths. That means you know, 0:06:01.320 --> 0:06:04.080 you're not doing too much too ahead of time. And 0:06:04.120 --> 0:06:06.200 the other thing I think I would be worried about 0:06:06.279 --> 0:06:09.200 is if you do a fifty to start with the 0:06:09.240 --> 0:06:12.120 market send you know, building even more. And I think 0:06:12.160 --> 0:06:14.400 that's a calibration that you have to think about when 0:06:14.440 --> 0:06:18.760 you're doing this. So I think being steady right, thinking 0:06:18.800 --> 0:06:22.080 about what the right pace is gear to how the 0:06:22.120 --> 0:06:25.080 economy is working and evolving, it's the right way to go. 0:06:25.360 --> 0:06:27.560 You said that you expect j. Powell to come out 0:06:27.600 --> 0:06:29.279 and give a sense of where we're going, and I 0:06:29.279 --> 0:06:31.200 think that's actually the frustration for a lot of people 0:06:31.240 --> 0:06:33.680 in markets. We don't know where we're going. We don't 0:06:33.720 --> 0:06:36.080 have a sense of what the neutral rate is. Right now, 0:06:36.080 --> 0:06:38.360 the market has about two hundred basis points of rate 0:06:38.400 --> 0:06:40.680 cuts priced in by the end of next year. Is 0:06:40.720 --> 0:06:42.520 that appropriate? What is neutral? 0:06:42.640 --> 0:06:45.919 Well? Remember what the markets are doing is and appropriately 0:06:45.960 --> 0:06:48.599 so looking at different scenarios, right, and they're waiting and 0:06:48.600 --> 0:06:50.800 then when they when you get those kind of things 0:06:50.800 --> 0:06:52.719 out of the financial markets about how many rate cuts, 0:06:52.720 --> 0:06:56.039 it's balancing different scenarios. When the fence talking about you 0:06:56.080 --> 0:06:58.800 know where they're seeing is they're talking about, here's what 0:06:58.839 --> 0:07:02.000 we think is if the economy evolves as we expect, 0:07:02.520 --> 0:07:05.760 wouldn't be appropriate policy path. But they also have to 0:07:05.800 --> 0:07:08.839 think through alternative scenarios too, So it's kind of a 0:07:09.000 --> 0:07:13.280 different answer or different question answer to a question, and 0:07:13.320 --> 0:07:17.080 that's I think the frustration is that the FED is 0:07:17.120 --> 0:07:19.760 trying to answer a different question is here's where we 0:07:19.800 --> 0:07:22.720 see policy going, But of course they don't want to 0:07:22.720 --> 0:07:25.800 commit themselves to something because the economy could evolve differently, 0:07:26.080 --> 0:07:27.600 and that's been hard to communicate. 0:07:28.400 --> 0:07:33.520 You founded an inflation lab at the Cleveland FED. 0:07:34.360 --> 0:07:37.040 What do you think inflation dynamics are now? 0:07:37.120 --> 0:07:41.200 Is this a completely different kind of situation post pandemic 0:07:41.560 --> 0:07:45.640 than models coming out of other recessions have. 0:07:46.880 --> 0:07:49.480 Worked with well, I think one thing that we saw 0:07:49.640 --> 0:07:53.160 during the pandemic and the aftermath was that the supply side, 0:07:53.800 --> 0:07:56.800 right had a lot to do with inflation dynamics. But 0:07:57.000 --> 0:08:00.640 the key thing to remember is that those supplies shocks 0:08:01.040 --> 0:08:05.080 would not have necessarily resulted in higher inflation if we 0:08:05.160 --> 0:08:08.720 hadn't had a very strong demand side of the economy. 0:08:08.760 --> 0:08:11.920 So it's this balance between supplying demand. Typically right in 0:08:11.960 --> 0:08:14.720 the past, right, it was all about demand. Supply you 0:08:14.720 --> 0:08:17.920 could sort of say it was sort of stable, and 0:08:17.960 --> 0:08:20.080 it was all about how demand was moving around. In 0:08:20.120 --> 0:08:23.520 this event, right, it was both supply and demand, and 0:08:23.560 --> 0:08:26.040 that made it more challenging. And so in that sense, 0:08:26.120 --> 0:08:30.520 I think there's a renewed understanding that dynamics on inflation. 0:08:31.200 --> 0:08:34.520 It's both sides, it's supply and demand, and understanding both 0:08:34.960 --> 0:08:37.040 I think is going to be a focus going forward. 0:08:37.160 --> 0:08:39.360 Well as if it goes into its review process for 0:08:39.480 --> 0:08:44.640 its monetary policy framework, does what happened change the way 0:08:44.679 --> 0:08:48.079 you think the committee should look at policy? In other words, 0:08:48.200 --> 0:08:50.680 maybe you want to be a little bit more preemptive 0:08:50.720 --> 0:08:51.240 than you were. 0:08:51.840 --> 0:08:54.800 So, I know a lot of people characterized the FED 0:08:55.200 --> 0:08:57.800 in the framework that came out in twenty twenty as 0:08:58.440 --> 0:09:01.240 walking away from being preempted, But if you actually look 0:09:01.240 --> 0:09:04.280 at the language in there still says preempto. I agree 0:09:04.280 --> 0:09:07.079 with you that it sounded like we were just being 0:09:07.160 --> 0:09:10.800 data dependent in the moment, But we've always were focused 0:09:10.840 --> 0:09:13.640 on where is the economy going? So it's data coming in. 0:09:14.400 --> 0:09:18.479 Assess that data relative to your outlook. If it's materially 0:09:18.520 --> 0:09:20.920 different than you expect, you might have to change your outlook, 0:09:21.000 --> 0:09:24.520 and therefore you might have to change policy, your policy 0:09:24.559 --> 0:09:28.199 expected policy paths. So I think we've always been forward looking. 0:09:28.320 --> 0:09:31.320 I expect the FED to remain forward looking. They may 0:09:31.480 --> 0:09:34.480 change the language in the statement so that that's a 0:09:34.480 --> 0:09:37.280 little bit more transparent, if you will, so that people 0:09:37.280 --> 0:09:40.720 actually understand that, you know, policy has to look forward. 0:09:41.000 --> 0:09:42.920 I would never ask you this question if you're on 0:09:42.960 --> 0:09:45.400 the watch, But now that you're gainfully retired and in 0:09:45.440 --> 0:09:47.440 the real world, I'm going to ask you this question. 0:09:47.960 --> 0:09:52.559 Cleveland has reasonable real estate, but Shaker Heights as a boom. 0:09:52.480 --> 0:09:53.840 Real estate economy. 0:09:54.160 --> 0:09:57.280 And part of that asset success of Shaker Heights in 0:09:57.320 --> 0:10:01.320 the Shaker Heights of America is the gains the halves 0:10:01.400 --> 0:10:05.480 are getting from this financial system. How does the FED 0:10:05.600 --> 0:10:10.079 distribute the benefit more across America? Rather than this illusion 0:10:10.400 --> 0:10:13.080 that only the have nots that own the havelves that 0:10:13.160 --> 0:10:14.880 own Nvidia are making way. 0:10:14.960 --> 0:10:19.920 Yeah, I mean, the FED always focuses on the macro economy, right, 0:10:19.960 --> 0:10:23.280 it doesn't have tools that can really do much about 0:10:23.440 --> 0:10:28.400 red distributing or fairness or making sure that everyone gains. 0:10:28.440 --> 0:10:30.920 But what we can do at the FED, and what 0:10:31.000 --> 0:10:33.200 the new committee will be doing at the FED, is 0:10:33.280 --> 0:10:37.360 making sure that we maintain healthy labor markets, which again 0:10:37.480 --> 0:10:43.040 helps distribute and brings inflation, and you know, the inflation 0:10:43.200 --> 0:10:46.439 rate down and getting back to price stability is also 0:10:46.600 --> 0:10:49.120 very key to having a strong economy so that everyone 0:10:49.120 --> 0:10:52.080 can prosper from the economy. The FED really can't do 0:10:52.160 --> 0:10:54.320 the other part of what you're talking about, and that's 0:10:54.360 --> 0:10:57.440 what the federal government policies are about, and the fiscal 0:10:57.480 --> 0:10:58.319 policy is about. 0:10:58.640 --> 0:10:59.960 We thought that you were going to retire and pelt 0:11:00.120 --> 0:11:03.880 homes you try to offset some of the supply issues. Lreida, 0:11:03.920 --> 0:11:06.959 there is this question Mike was talking about how the 0:11:07.000 --> 0:11:09.800 Queen of Inflation studies and how the Cleveland FED really 0:11:09.800 --> 0:11:12.560 does have an incredible metric for that. Do you have 0:11:12.600 --> 0:11:15.520 a sense of how much more inflationary this post pandemic 0:11:15.520 --> 0:11:18.480 economy is and that really speaks to what is the 0:11:18.520 --> 0:11:19.120 new neutral. 0:11:21.320 --> 0:11:25.280 Well, there are certain factors that really affect inflation, right, 0:11:25.320 --> 0:11:28.480 But the basics are similar to what we saw before. Right. 0:11:28.640 --> 0:11:32.360 Inflation expectations are still an important driver of inflation. Making 0:11:32.360 --> 0:11:36.680 sure they remain stable is helping to keep inflation moving down, 0:11:36.760 --> 0:11:40.480 which is important. Supply side conditions matter, and the labor 0:11:40.480 --> 0:11:42.720 market tightness matters. We're going to hear a paper at 0:11:42.760 --> 0:11:46.240 Jackson Home that's really addressing that how much tightness in 0:11:46.240 --> 0:11:50.240 the labor market affects what you might see when demand 0:11:50.280 --> 0:11:53.200 gets out of whack with supply. So again it's the 0:11:53.280 --> 0:11:56.520 same basic factors, but of course the supply side during 0:11:56.520 --> 0:11:59.520 the pandemic changed quite a bit, and those factors are 0:11:59.559 --> 0:12:02.200 going to be I think more significant going forward than 0:12:02.320 --> 0:12:03.680 perhaps they were in the past. 0:12:03.800 --> 0:12:05.720 Are you having more fun now that you're not on 0:12:06.040 --> 0:12:06.719 the committee? 0:12:06.800 --> 0:12:07.560 I'm having fun. 0:12:08.960 --> 0:12:12.120 Well, hopefully you can go hiking or enjoy the beautiful 0:12:12.240 --> 0:12:16.680 Wyoming Lordemester formerly of the Cleveland Federal Reserve. Just going 0:12:16.720 --> 0:12:19.160 back to the end of June when you step down, 0:12:19.240 --> 0:12:22.119 and she is here for the first time in ten years, 0:12:22.760 --> 0:12:25.280 not as a member of the committee, but as a 0:12:25.320 --> 0:12:28.120 civilian who is planning to do lots of things in 0:12:28.160 --> 0:12:28.840 her free time.