Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: There's been a lot of talk about how persistent inflation
Speaker 2: has shown itself to be. You're pretty early on, at
Speaker 2: least amongst FED members are saying don't get too ahead
Speaker 2: of yourselves and talking about cutting rates.
Speaker 1: A lot's change, at least from the.
Speaker 2: Data that we've gotten over the last I don't know
Speaker 2: three months or so. Has that changed your view as
Speaker 2: well about staying where we are?
Speaker 3: Well?
Speaker 4: The second half of twenty twenty three surprised us at
Speaker 4: how rapidly inflation fell. That was really good news, and
Speaker 4: the economy remains strong. We all hope that was going
Speaker 4: to continue. The first quarter of this year, it seems.
Speaker 3: Like it's stalled out.
Speaker 4: So it's a little too soon to declare that we're
Speaker 4: definitely stalled out, or maybe it's just taking more time.
Speaker 4: I think we're in a good place right now. Labor
Speaker 4: market is still strong. We could take our time to
Speaker 4: get more data to see if disinflation is going to continue,
Speaker 4: and if it does, great, If.
Speaker 3: It doesn't, then we need to take that on board.
Speaker 1: What is the complexion right now of disinflation?
Speaker 2: What actually drove us at least down to the level
Speaker 2: where we're at right now.
Speaker 4: Most of the gains that we saw last year were
Speaker 4: supply side improvements, Supply chains getting better, Americans coming back
Speaker 4: to work, a lot more workers entering the labor force.
Speaker 3: That's really positive.
Speaker 4: I don't think monetary policy actually brought demand down that much,
Speaker 4: and so most of the gains well because of the
Speaker 4: supply side. Now, the question is if monetary policy has
Speaker 4: to take us the rest of the way there, is
Speaker 4: it tight enough to do that. I wrote an essay
Speaker 4: today on our website raising that question, and I'm not
Speaker 4: sure how tight monetary policy is.
Speaker 3: We need more data to assess it.
Speaker 5: How do we know that the inflationary process has still
Speaker 5: some ways to go, or how do we know that
Speaker 5: maybe this is it, this is the new normal.
Speaker 4: Well, it's not the new normal because it's three percent
Speaker 4: and the Fed can and will achieve two percent. The
Speaker 4: question is if disinflation is still underway, then maybe it'll
Speaker 4: continue on its own, and we.
Speaker 3: Can then take that on board. If we need to
Speaker 3: hold rates where they.
Speaker 4: Are for an extended period of time to tap the
Speaker 4: brakes on the economy, or if we even needed to
Speaker 4: raise we would do what we need to do to
Speaker 4: get inflation back down.
Speaker 1: I have to dis ask you though about two percent.
Speaker 2: And I know why the FED stands by that two percent,
Speaker 2: But I talk to people around the room this week
Speaker 2: here and their cost of capital. They're basing that more
Speaker 2: on closer to a three percent rate. And the idea
Speaker 2: is they're saying, look, the two percent target that needs
Speaker 2: to come up. That that's not the reality long term structurally,
Speaker 2: at least not for the folks in this room.
Speaker 3: Yeah, I disagree with that. I mean, I think that.
Speaker 4: Ultimately the central bank, whether it's the FED or the
Speaker 4: ECB or the Bank of England, can determine whatever the
Speaker 4: inflation rate is, and over time, if they conduct their
Speaker 4: policy appropriately, people will come to understand that will adjust
Speaker 4: their behavior.
Speaker 3: We're committed to.
Speaker 4: Two percent, we will get to two percent, and we
Speaker 4: will get an interest rate environment necessary in order to
Speaker 4: achieve two percent.
Speaker 5: You know, one of the arguments, though, Neil, is that
Speaker 5: the idea of near shoring, bringing things back home, building
Speaker 5: chips in America, that's going to create They're going to
Speaker 5: be more expensive than if we were building them overseas,
Speaker 5: and that is going to be you know, consistent inflationary
Speaker 5: pressures longer term, there are some macro forces underway, why
Speaker 5: not think that it's got to be about two percent?
Speaker 4: I think those trends are real, but those would suggest
Speaker 4: to me a one time increase in the price level,
Speaker 4: not necessarily an ongoing increase of inflation at a higher
Speaker 4: level that we believe and I believe that the monetary
Speaker 4: authority can ultimately long run determine the inflation of the economy,
Speaker 4: but the rate environment necessary to achieve that may be
Speaker 4: different depending on these broader macro forces.
Speaker 5: So rate cut this year?
Speaker 3: Should we take it off the table?
Speaker 5: Is it still a possibility?
Speaker 3: It's certainly still a possibility. We need to let the
Speaker 3: inflation data tell us.
Speaker 4: I mean, I think my colleagues and I we all
Speaker 4: have a range of views on where the economy is going,
Speaker 4: but we're all committed to letting the data guide us.
Speaker 3: And if the data.
Speaker 4: Comes in in a pause, the manner suggesting disinflation continues
Speaker 4: will adjust.
Speaker 1: Oh, go ahead, But is it just housing pressure?
Speaker 5: Like you write a lot about housing pressure, We talk
Speaker 5: about it, We're talking to with a lot of people
Speaker 5: in the real estate sector. There's not enough supply of
Speaker 5: houses out there, and that's creating inflation on the housing front.
Speaker 1: Is it just housing pressures that you guys.
Speaker 5: Are really focusing on, or that you're focusing on.
Speaker 4: I'm focusing on housing first of all, because it's traditionally
Speaker 4: the most interst rate sensitive sector of the economy.
Speaker 3: And if the most interst rate.
Speaker 4: Sensitive sector is not showing as much disinflation as I
Speaker 4: would have thought, for example, new lease rates appear to
Speaker 4: be climbing back again.
Speaker 3: Yeah, that's surprising to me. Why is that?
Speaker 4: That makes me wonder is policy as tight as I
Speaker 4: would have otherwise assumed. We are seeing some effect of
Speaker 4: monetary policy on credit card delinquencies, on auto loan delinquencies,
Speaker 4: especially for lower credit score borrowers. So it is having
Speaker 4: some effect, but it's not having as much effect as
Speaker 4: I would have guessed.
Speaker 1: By now, I know we have the benefit of hindsight.
Speaker 2: But you go back to when the rate high king
Speaker 2: cycle effectively pause. Do you think that the Feds should
Speaker 2: have kept going with hikes meeting additional heights.
Speaker 3: I don't know.
Speaker 4: I mean, I think that there are lags in monetary policy,
Speaker 4: and we saw such rapid disinflation in the second half
Speaker 4: of last year.
Speaker 3: I mean, it was a really.
Speaker 4: Wonderful scenario that was real and that surprised us, and
Speaker 4: so it's reasonable to say, let's just let that continue.
Speaker 3: Maybe it'll take us all the way home. It ended
Speaker 3: up shawling out at least for a little bit.
Speaker 2: You feel like you can accurately assess those lags, what
Speaker 2: those lags are, because even when you talk about this inflation,
Speaker 2: you acknowledge yourself a lot of that is driven by
Speaker 2: supply side issues and not just monetary policy.
Speaker 1: How do you assess what the balance is?
Speaker 3: Yeah, it's hard.
Speaker 2: You know.
Speaker 4: For example, in the housing market, which we're talking about,
Speaker 4: we know a lot of Americans refinanced their homes that
Speaker 4: when the mortgage rates were very low, and so they're
Speaker 4: not feeling the pinch of higher rates because they have
Speaker 4: not had to refinance. And so that happens that happened
Speaker 4: in the late nineteen seventies and early eighties as well.
Speaker 4: That's of the lag in the policy process. So we
Speaker 4: have a lot of data that we look at and
Speaker 4: we ultimately have to use judgment to try to put
Speaker 4: it together.
Speaker 5: Speaking of data growth, we're doing okay. Jay Powell consistently
Speaker 5: reminds us this is a good thing.
Speaker 1: We hear it.
Speaker 5: We feel it here at Milken. Is there the possibility
Speaker 5: that you don't even have to cut rights at all
Speaker 5: this year because the economy is strong?
Speaker 3: Well, no, that's you're right.
Speaker 4: So if inflation moves sideways, and if the labor market
Speaker 4: continues to be strong and growth continues to be strong,
Speaker 4: then I would be in the camp of we shouldn't
Speaker 4: do anything, just let this play out for an extended
Speaker 4: period of time. If, on the other hand, we start
Speaker 4: to see inflation come back down or meaningful weakness in
Speaker 4: the labor market, then that might say we need to
Speaker 4: start dialing back, or if inflation proves to.
Speaker 3: Be more entrench we could have to go up.
Speaker 1: Yeah, but is the economy is it strong for everyone?
Speaker 3: Well, no, it's of course not. And we know that.
Speaker 4: We know that the way policy works, it slows down
Speaker 4: parts of the economy, and the lower income workers tend
Speaker 4: to feel.
Speaker 3: Pain the most. And that's I mean, I wish that
Speaker 3: were not the case.
Speaker 4: It's also frustrating that every time there's a piece of
Speaker 4: good news, you see Wall Street rally, euphoria returns to
Speaker 4: Wall Street, and yet there are people who are.
Speaker 3: Feeling the pain.
Speaker 4: So it's definitely uneven how this gets felt you did
Speaker 4: mention that.
Speaker 5: If inflation starts to go up, I thought I heard
Speaker 5: you say we could have to increase the FED. That's
Speaker 5: a smart narrative still to have out there, that you
Speaker 5: could that the FED could possibly have to raise rates again.
Speaker 3: Well, of course, I mean, we are data dependent.
Speaker 4: We are committed to getting inflation back to our two
Speaker 4: percent target, and we will do what we need to do.
Speaker 4: Nobody has taken any rates completely off the table.
Speaker 3: I think the bar is high.
Speaker 4: Much more likely we would stay put for an extended
Speaker 4: period of time and then we'll see where we are.
Speaker 1: How would you actually prepare those the markets for that.
Speaker 2: That's not the kind of thing you just want to
Speaker 2: go into a meeting and surprise the markets line, I mean,
Speaker 2: you need a little build up there.
Speaker 4: I agree, But like there's no shortage OFFFED, there is
Speaker 4: no shortage of ass to signal when people's perspectives are changing.
Speaker 1: Is that FED communication?
Speaker 3: Though?
Speaker 2: Do you think it's fair? And by that, I mean
Speaker 2: is it too much? Because you get so many different
Speaker 2: opinions and in the media it's great, we love it,
Speaker 2: but I feel like for investors sometimes it feels like, Okay,
Speaker 2: we're getting too many people.
Speaker 3: Telling them I understand their concerns. They're twelve ers are banks.
Speaker 4: We represent regions of the country, so people across the
Speaker 4: six states that the Minneapolis FED represents want to hear
Speaker 4: from us.
Speaker 3: Often I turn down ninety.
Speaker 4: Five percent of my speaking invitations that I get, so
Speaker 4: I go out across the district. I'm usually saying the
Speaker 4: same thing, but in the spirit of transparency, I live
Speaker 4: stream it so that can so I'm not giving any
Speaker 4: secrets away, and if people want to watch it and
Speaker 4: cover it, I can't control that, And so it's a
Speaker 4: balancing act where we want to be transparent to the
Speaker 4: constituents that we represent, and yet we also want to
Speaker 4: show that we're not giving secrets away.
Speaker 3: Doesn't cost curry.
Speaker 5: I feel like there is more clarity of thought about
Speaker 5: what the FED may do next, certainly here at milcine
Speaker 5: this year around. But having talked to you, we could
Speaker 5: cut rates, we could raise rates through data dependent I
Speaker 5: get it. Do you at the FED and the FMC
Speaker 5: feel like there is We're clarity about kind of where
Speaker 5: we are in the economy and where the.
Speaker 1: Trouble spots are. Well.
Speaker 4: I think there's more clarity on our reaction function, which
Speaker 4: is we are all committed to watching the data. We've
Speaker 4: been Our models have not worked very well in the
Speaker 4: last few years, so we have to watch the actual
Speaker 4: inflation data that will guide us. We all agree on
Speaker 4: that now, whether inflation goes sideways or continues to fall,
Speaker 4: we have a range of perspectives on that. That's where
Speaker 4: the deviations lie. But our commitments are doing what we
Speaker 4: need to do. There's no deviation around the table on that.
Speaker 2: Are you still paying a lot of attention to financial
Speaker 2: markets and how they are reacting to Absolutely?
Speaker 4: I mean it is a channel through which monetary policy
Speaker 4: affects the real economy.
Speaker 3: And when you know it took three negative inflation prints
Speaker 3: in a row.
Speaker 4: Markets started to take that on board, and then one
Speaker 4: positive job report euphoria returns