Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: We begin this hour with stocks adding to record highs
Speaker 2: at a pivotal moment for the Federal Serve, rising inflation
Speaker 2: complicating the rate outlook as a new regime takes hold
Speaker 2: at the top of the Central Bank tomorrow. Joining us
Speaker 2: now in his final broadcast interview as a member of
Speaker 2: the Federal Reserve Board of Governors, Steven Myron, Governor Maren
Speaker 2: good to see you, sir.
Speaker 3: Good to see you. Thanks for having me back.
Speaker 2: We've got a moment to step back and sort of
Speaker 2: reflect on your experience at this institution. We talked lots
Speaker 2: about how you've been received externally. Can we just start
Speaker 2: with how you've been received internally over the last few months.
Speaker 4: Sure, this has actually been one of the biggest surprises,
Speaker 4: you know, given all the drama at the beginning, I've
Speaker 4: been received internally, I think very very politely, very cordially,
Speaker 4: and very kindly. And I think folks have largely enjoyed
Speaker 4: some of the some of the intellectual conversations, some of
Speaker 4: the challenges that I've leveled against some of the ways
Speaker 4: that they had been thinking beforehand. And I think that
Speaker 4: the overall response has been you know, very welcoming and
Speaker 4: very kind, and that's one of the things that I'm
Speaker 4: most grateful for.
Speaker 2: What are the kind of ideas that have been received well,
Speaker 2: that are shaping debates right now that will linger and
Speaker 2: continue beyond your departure.
Speaker 4: Yeah, sure, so one, you know, so an example of
Speaker 4: one of those things is the importance of regulations for
Speaker 4: determining the supply side of the economy. I mean, we
Speaker 4: spend a lot of time, you know, out in the
Speaker 4: financial world at in policy discussing the effects of a
Speaker 4: thirty three versus thirty five percent marginal tax rate. But
Speaker 4: the truth is that regulations are often infinite taxes, and
Speaker 4: being told you're not allowed to do something versus you
Speaker 4: are allowed to do something is a very very strong difference.
Speaker 4: And this had played a very small role in a
Speaker 4: lot of the modeling discussions happening at the FED, in
Speaker 4: a lot of the outlooks that I that I heard
Speaker 4: people present, and I came in and really hammered that idea,
Speaker 4: and I think sort of moved it forward. And now
Speaker 4: a lot of people talk about it very often internally
Speaker 4: and externally, and you know, sort of talk a lot
Speaker 4: about supply shocks. This is a positive supply shock that
Speaker 4: is unfolding and continues to unfold, and will I hope
Speaker 4: mitigate some of the negative supply shocks we also get
Speaker 4: hit by.
Speaker 2: We let's talk about another supply shock. And I think
Speaker 2: it's been central to some of the arguments you've made
Speaker 2: on the commit and that's population growth, the negative population
Speaker 2: growth that we've seen, which is lower the break even
Speaker 2: rate for the labor market, and contribute it to arguments
Speaker 2: in some places for hotter, stickier inflation. You've taken the
Speaker 2: other side of that. Can you just explain that for us?
Speaker 4: Yeah, So I think this is a really subtle issue
Speaker 4: with a lot of moving parts. Now at a very
Speaker 4: high level, what I would say historically is that we've
Speaker 4: seen a lot of countries in different places have declines
Speaker 4: in population growth rates and stagnant populations or shrinking populations.
Speaker 3: And I think the cross country and.
Speaker 4: Historical evidence is that it's unambiguously disinflationary or even eventually deflationary. Now,
Speaker 4: there's a few ways that that works. One is by
Speaker 4: reducing sorry, there's a few consequences of lower population growth.
Speaker 4: One is it does reduce the break even in payroll
Speaker 4: growth rate. So the number of jobs you need to
Speaker 4: create every month to hold the uneploymentary constant that does
Speaker 4: come down. That's a mildly hawkish implication because it means
Speaker 4: you shouldn't get so concerned about very very low job
Speaker 4: creation rates. However, there's also there's also duffish implications as well,
Speaker 4: which are that it lowers than new rate, it brings
Speaker 4: interest rates down over time, and we've sort of seen
Speaker 4: that across countries and historically and historically to be the case.
Speaker 4: And it's also just inflationary through long lived capital and
Speaker 4: consumer goods. And if you think about something like housing, right,
Speaker 4: the supply of houses is relatively fixed in the short run,
Speaker 4: and if you throw millions of new people into an economy,
Speaker 4: you're going to drive up the price of rents because
Speaker 4: they need places to live, right, You're going to create inflation.
Speaker 4: And that inflation is very very persistent because of the
Speaker 4: way that housing inflation is calculated, it's very very sticky.
Speaker 4: If you have declining population growth, you don't need as much,
Speaker 4: you don't need as much home price growth, and that
Speaker 4: very inflationary tailwind gets taken away and ceases to be
Speaker 4: a major driver inflation. And I think you've sorted, you've
Speaker 4: been seeing that start to play out in the data market.
Speaker 4: Rents in this country have been growing at a one
Speaker 4: percent rate for the last few years. This is one
Speaker 4: of the biggest components of the inflation in disease, and
Speaker 4: I think you're going to continue seeing measured measured PCE
Speaker 4: and CPI rents and measured pc and CPI shelter inflation
Speaker 4: continue to converge down to those.
Speaker 3: Very low levels.
Speaker 4: So I think there's one hawkship of which is the
Speaker 4: lower break even peril rate. But there's also some very
Speaker 4: dubblish implications. Was that it reduces the neutral rate and
Speaker 4: it brings down inflation through some of these long lived
Speaker 4: capital and investment goods.
Speaker 1: This is a longer term structure for how to think
Speaker 1: about inflation and the benchmark rate of the Federal Reserve
Speaker 1: and how it sort of it works with the sort
Speaker 1: of long term inflation rate. Near term though, one thing
Speaker 1: that you've been known for a hallmark of your time
Speaker 1: on the Fed was that you voted to cut rates
Speaker 1: at least once at every single meeting. Do you think
Speaker 1: that that still holds even though in the short term
Speaker 1: it does seem like the inflationary shock is overwhelming potential
Speaker 1: structural changes that could lead disinflation.
Speaker 4: I do, and I think this is I think this
Speaker 4: is maybe one of the biggest differences between me and
Speaker 4: a lot of other folks is that I take very
Speaker 4: seriously the idea of Manterrea policy lacks, very very seriously.
Speaker 4: Mantera policy doesn't hit the economy right now. If we
Speaker 4: changed interest rates today, it wouldn't flow through into the
Speaker 4: economy until twelve to eighteen months from now. Right now,
Speaker 4: there's some disagreement of exactly how long those lags are are,
Speaker 4: but I think twelve to eighteen is the consensus view.
Speaker 3: And therefore, for any shock.
Speaker 4: That's hitting the economy today, you can't think about what
Speaker 4: the effect in the next few months is. You need
Speaker 4: to think about what the effect in the next twelve
Speaker 4: to eighteen months is, and sorry, the effect twelve to
Speaker 4: eighteen months out. So if oil goes higher, it's a
Speaker 4: supply shock. Straits and hore moves are closed, right, that's
Speaker 4: going to boost the oil price today. And with a
Speaker 4: bunch of other stuff that's very tightly tied to energy
Speaker 4: prices like airfares, right, that's going to go higher very
Speaker 4: quickly within the course of a few months and we've
Speaker 4: been living through that, and that is very real, right,
Speaker 4: there's no way that is very real inflation. But it
Speaker 4: is not inflation that Montara policy can affect. Monteria policy
Speaker 4: can affect twelve to eighteen months from now. So there's
Speaker 4: got to be a reason that you think airfares and
Speaker 4: oil prices are going to be moving higher in the
Speaker 4: summer of twenty twenty seven, in the fall of twenty
Speaker 4: twenty seven, not the summer and fall of twenty twenty six.
Speaker 4: And so it's those lags that really should be driving
Speaker 4: where you think about Ford looking montary policy should be.
Speaker 4: And that's a lot of what I've tried to hone
Speaker 4: into when thinking about population growth and deregulation and saying
Speaker 4: that the traditional view that we should look through in
Speaker 4: oil shock should prevail. This is very you know, vanilla
Speaker 4: basic traditional mandary policy.
Speaker 1: Part of the problem is that the market doesn't agree,
Speaker 1: at least not in terms of where longer dated bonds
Speaker 1: are trading and where yields are shifting. Where you see
Speaker 1: them shifting higher even as the front end stays where
Speaker 1: it is. Do you think that in this type of
Speaker 1: environment it's imperative to have some sort of Fed Treasury
Speaker 1: accord akin to what people have been talking about, where
Speaker 1: the Treasury steps in to sort of influence the long
Speaker 1: end while the FED cuts rates on the short end.
Speaker 3: So let me address those separately.
Speaker 4: So the market not agreeing is part a hall of
Speaker 4: mirrors issue, because if you have if the FED says
Speaker 4: we're very backward looking and inflation over the last twelve
Speaker 4: months is going to determine policy that affects twelve to
Speaker 4: eighteen months from now, meaning the economy in twenty twenty
Speaker 4: seven is affected by data in twenty twenty five in
Speaker 4: that world, right, so very very backward looking. If that's
Speaker 4: how the FED communicates that it's setting policy, then the
Speaker 4: market is going to start to reflect that. And so
Speaker 4: the market reflecting a lack of interest rate cuts, right,
Speaker 4: is in part because the FED is telling them we're
Speaker 4: backward looking, right, And so so that that's going to
Speaker 4: create a self reinforcement problem. Now on the Fed Treasury accord,
Speaker 4: you know, so first of all, you know, I won't
Speaker 4: be involved in that if it happens, but you know,
Speaker 4: I have done some work on the balance sheet, and
Speaker 4: I do think it is important that the one of
Speaker 4: the problems with having a very large balance sheet and
Speaker 4: lots of securities, lots of treasure securities on the Federal
Speaker 4: Reserve's balance sheet is it does start to get the
Speaker 4: FED involved in questions that have some fiscal implications.
Speaker 3: Right, if we own a huge.
Speaker 4: Chunk of debt, then that means that we're we're we're
Speaker 4: impinging on decisions that traditionally are the realm of the
Speaker 4: fiscal authority. What is the distribution of public death public
Speaker 4: debt that it issues that that's held by the public.
Speaker 4: And so I do think it is important that if
Speaker 4: you have a large balance sheet, there needs to be
Speaker 4: there needs to be, you know, some clear delineation about
Speaker 4: who's doing who's doing what. And to me, these questions
Speaker 4: are really murky and they you know, they implicate independence
Speaker 4: to an extent, and therefore it's one of the reasons
Speaker 4: among many that I would favor having a smaller balance sheet.
Speaker 2: How close do you think the FED should work with
Speaker 2: the Treasury to achieve that? How closely should the FED
Speaker 2: work with the administration?
Speaker 4: Yeah, So, so my view is that the FED having
Speaker 4: a big balance sheet starts to implicate a lot of
Speaker 4: those lines and becomes and becomes problematic. So the FED
Speaker 4: should strive to have as small a balance sheet as
Speaker 4: it can right to achieve its goals and implementation framework.
Speaker 4: And if we can sort of improve that implementation framework
Speaker 4: and make it smarter to reduce the minimum size the
Speaker 4: balance sheet that we need, then that's a great thing.
Speaker 4: And that was a major thrust of the paper that
Speaker 4: I wrote in the spring with Alessandra Barbarino and Anthony
Speaker 4: Dirks and and and a less say Anderson and and
Speaker 4: so that was a that was a major thrust of
Speaker 4: that work. That was that was really important now in
Speaker 4: terms of coordinating, Right, the FED should do what it
Speaker 4: should do for montera policy, and the Treasury should do
Speaker 4: what it should do in terms of fiscal policy. And
Speaker 4: the level of coordination should I think should I think
Speaker 4: be you know, sort of separate. Right, they should be
Speaker 4: doing what they what they want to do for each
Speaker 4: of their own priorities. However, there are times when there
Speaker 4: is going to be half when there is going to
Speaker 4: have to be that type of coordination. So for example,
Speaker 4: you know, right now we're doing the reserve these reserve
Speaker 4: management purchases where we're we're expanding our balance sheet to
Speaker 4: sort of provide a minimum level of reserves into the
Speaker 4: economy to meet reserve demand. Where you know, we're we're
Speaker 4: buying treasury bills, We're letting mortgages continue to mature off
Speaker 4: of our balance sheet or in place them the treasury bills. Right,
Speaker 4: Like in theory, if we did enough, you know, sort
Speaker 4: of conversion of our balance sheet, of our existing balance
Speaker 4: sheet into treasury bills, we may be absorbing all of
Speaker 4: the supply, right and then some. So this is an
Speaker 4: example of a time where there would have to be
Speaker 4: very tight coordination.
Speaker 2: We've got an administration right now, very interested in financial markets.
Speaker 2: The President often looks at where the index level is
Speaker 2: and the equity market. We've got a Treasury secretary. They
Speaker 2: used to try this stuff. Did you speak to them
Speaker 2: in your time at the Federal Reserve. Did the President
Speaker 2: ever pick up the phone and say, hey, Steve, what's happening?
Speaker 2: Tell me what you're saying in the market, in the economy.
Speaker 4: Yeah, So I spoke to the president when I when
Speaker 4: I went to go resign from the Council of Economic Advisors,
Speaker 4: I went to bring my my recommen sorry, my resignation letter.
Speaker 3: But you know, he doesn't tell me anything. He doesn't
Speaker 3: tell the whole.
Speaker 4: World right this This president is very forthright with his views,
Speaker 4: and he tells journalists all the time, including Bloomberg journalists, exactly,
Speaker 4: you know, exactly what's on his mind about policy, where
Speaker 4: and where it should be.
Speaker 3: So no, I didn't.
Speaker 4: I'm not in receipt of any information that's not that's
Speaker 4: not public.
Speaker 2: Because we've started this conversation by talking about how you
Speaker 2: were received internally externally, I thought unfairly at times. Basically
Speaker 2: everything you said about interest rates and on the economy
Speaker 2: was always described as just doing the president's bidding at
Speaker 2: the Institution, at the Federal Reserve. Did people see it
Speaker 2: that way internally when you put your hand up and said,
Speaker 2: I want to write out twenty five basis points I'm dissenting.
Speaker 2: Was there a roll of the eyes. Here we go,
Speaker 2: this is the president and Sky during the president's bidding.
Speaker 3: Well, thank you for those words.
Speaker 4: I do think it's I do think it's clear that
Speaker 4: I've disagreed with with lots of people on policy on
Speaker 4: lots of times. There have been times when there have
Speaker 4: been signals out of the White House that they wanted
Speaker 4: policy rates lower than I had my dots, and there
Speaker 4: have been times when there's been signals out of the White.
Speaker 3: House where they thought that I was too dubbish.
Speaker 1: Right.
Speaker 4: So for example, the NEC director after my first vote
Speaker 4: said that he would have preferred a twenty five basis point.
Speaker 3: God right.
Speaker 4: So I clearly do my own thing and have my views,
Speaker 4: and they're all I think grounded in very traditional economics.
Speaker 4: And we were talking about population growth before, like this
Speaker 4: is not new, right, Like six years ago we all
Speaker 4: have been talking about it is everybody becoming Japan, you know,
Speaker 4: that would have come up several times a week, right, Like,
Speaker 4: none of this is new, None of this is is
Speaker 4: heterodox economics. None of this sort of says we need
Speaker 4: to discard with the entire framework. It's all within the
Speaker 4: traditional framework. And this is part of why I think
Speaker 4: the reception internally has been has been generally pretty good,
Speaker 4: is because I'm engaging with folks on their ground, right,
Speaker 4: Like I'm within the world of normal economics. When we're
Speaker 4: talking about what drives the interest rate and popul the
Speaker 4: neutral interest rate, and does population growth drive it? And
Speaker 4: is it inflationary or disinflationary? This is all well within
Speaker 4: sort of normal.
Speaker 2: We're trying to figure out what kind of an institution
Speaker 2: Kevin Walsh is walking into, how he'll be treated, how
Speaker 2: difficult will be to get people on his side as
Speaker 2: he starts to think about changing this institution, particularly when
Speaker 2: the form of FED share. We'll be sitting there as
Speaker 2: a governor on the Board of Governors. Can you help
Speaker 2: us understand that from a man inside the building, what
Speaker 2: that might look like in the next few months.
Speaker 3: Yeah.
Speaker 4: So, I think one thing that's important to understand is
Speaker 4: that people have FED are responsive to arguments, and as
Speaker 4: I said before, you know, I've been hammering deregulation among
Speaker 4: other things since the day I got there, and you know,
Speaker 4: they start to respond, but it takes time, right, you know,
Speaker 4: it's it's it's a it's a it's a bit of
Speaker 4: a slow moving, slow moving process.
Speaker 2: How being there make it harder?
Speaker 4: Well, you know, I don't I don't know about I
Speaker 4: don't know about that. You know, certainly charm Powell built
Speaker 4: a lot of the institutions and processes that exist that
Speaker 4: exist there, and so you know, so that dynamic may
Speaker 4: you know, sort of may may play into it. I
Speaker 4: don't know, but that'll be an issue for for for chairman,
Speaker 4: doesn't it wash to to deal with when you guess and.
Speaker 2: When you heard the chairman in the news conference present
Speaker 2: to the press and sort of world that he was
Speaker 2: staying gone as a governor. Was that the first time
Speaker 2: you heard of it? Or did he town the Board
Speaker 2: of Governors ahead of time that that was his plan?
Speaker 3: No, he didn't.
Speaker 4: He didn't tell me ahead of time that that was
Speaker 4: his plan. But he'd always said that, you know, publicly
Speaker 4: and privately there's something that it's something he might do.
Speaker 3: And so it wasn't It wasn't entirely a surprise. What
Speaker 3: was your reaction to it? You know, Look, my reaction
Speaker 3: to that is that when I was.
Speaker 4: The incoming chairman of the Council of Economic Advisors last year,
Speaker 4: I was very grateful to the previous chairman, Jared Bernstein,
Speaker 4: for spending time with me on the phone, being very
Speaker 4: generous with his time several hours, over over over over
Speaker 4: days and weeks, giving me advice for how to be
Speaker 4: a good cea chairman. And I really appreciated that and
Speaker 4: sort of how does the place run, and you know,
Speaker 4: what are your responsibilities and how do you do a
Speaker 4: good job? And I thought that that was really generous
Speaker 4: of him and I was really appreciative that, and then
Speaker 4: I went out of my way to make sure they
Speaker 4: very quickly put his portrait on the wall of former
Speaker 4: CEA chairmen in the offices and nyes and how are building.
Speaker 4: You know, it's to make sure that happened, that happened
Speaker 4: quickly without delay, and I was.
Speaker 3: Really grate for So.
Speaker 4: Look, transitions are important, and I think that you know,
Speaker 4: it is maybe helpful to have someone there to give advice.
Speaker 4: Here's how to be an effective chairman, Here's how to
Speaker 4: lead the committee's you know, here's how the building works,
Speaker 4: maybe a little bit different than it was twenty years ago, right,
Speaker 4: I think that can be helpful. But I still think
Speaker 4: it's important that it be a transition because you want
Speaker 4: to have people's loyalties undivided. You want to have there
Speaker 4: be very clearly one chairman. You want to have a
Speaker 4: place where there's no question about no question about who's
Speaker 4: in charge, and there's no talk of rival factions and
Speaker 4: things being split. I think you want to have you
Speaker 4: want to have a sense of unanimity and clarity, and
Speaker 4: so transitions are important, and I think it can be
Speaker 4: helpful to have to have help and transition.
Speaker 3: But I still think it's important that it is a transition, Steve,
Speaker 3: and it's going to say you thanks for band care.
Speaker 3: You know, I just wanted to finish on this.
Speaker 2: I think a lot of people might describe your tenure
Speaker 2: at the Federal Reserve as somewhat controversial. I see it
Speaker 2: completely differently. I've seen this play out now over a
Speaker 2: number of months, and I've said this repeatedly. You've had
Speaker 2: energized debate at the FMC that's spilled out publicly in
Speaker 2: a way that we haven't seen in a long long time,
Speaker 2: if ever, at the Federal Reserve, where people are being
Speaker 2: much more opinionated about where we are in this moment.
Speaker 2: And the one complaint, the consistent complaint I've had about
Speaker 2: the Federal Reserve is one that you've had too, which
Speaker 2: is a group think. And it's very very difficult right
Speaker 2: now to describe this committee and that anyone working at
Speaker 2: the Federal Reserve is part of group think right now,
Speaker 2: because everyone's expressing themselves in a much newer, fresh, and
Speaker 2: more welcoming way.
Speaker 1: Yeah, it seems like right now no one could accuse
Speaker 1: it this committee of group think, given how fractured it is,
Speaker 1: and frankly, all of the commentary coming out, so over
Speaker 1: to you, Kevin Walsh, to come.
Speaker 2: In and have that diatest to luck. Steve's going to
Speaker 2: see you appreciate it. Stephen Maron their fed governor Stephen
Speaker 2: Maron