Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Well, good morning from San Francisco, and thank you very
Speaker 2: much to all our listeners and viewers around the world,
Speaker 2: and thank you to Mary Daily for joining us today.
Speaker 2: I have to start off by saying, after we had
Speaker 2: the FED decision, Bloomberg had on a Wall Street analyst
Speaker 2: who said, the important thing now is to find out
Speaker 2: what Mary Daily thinks because she was kind of on
Speaker 2: the dubvish side, and yet she's not an extreme dove.
Speaker 2: So I want to get your feelings on it. And
Speaker 2: the story was the dissenters on the bias for the
Speaker 2: forward guidance. Would you agree with their position? You weren't
Speaker 2: a voter, but did you agree with their position?
Speaker 1: You know, I don't see a lot of confusion in
Speaker 1: the public. When I go out in my communities, talk
Speaker 1: to businesses, talk to consumers, households, I don't see a
Speaker 1: lot of confusion. They know the FED is committed to
Speaker 1: price stability, that that's our first priority right now. The
Speaker 1: labor market is stabilized. They see that from the adjustments
Speaker 1: we made last year. So for me, it's really about
Speaker 1: the right policy. Decision was the one everybody agreed to.
Speaker 1: Which is hold the right study, continue to collect information,
Speaker 1: and you see in markets pricing even today, markets are
Speaker 1: priced in equal probabilities of a cut versus a hike,
Speaker 1: and the most likely probability is that we hold study.
Speaker 1: And I think that's well positioned. So for me, the
Speaker 1: real signal about the meeting is that everyone agreed to
Speaker 1: the decision and that the communication that the share maidenance
Speaker 1: press conference is higher for longer relative to last year.
Speaker 1: But the households, businesses and markets that already priced that in.
Speaker 2: Your colleague from Bust and Susan Collins told us yesterday
Speaker 2: that the phrase about additional moves is associated in people's
Speaker 2: minds with a cut now because it's been following so
Speaker 2: many times. Do you still feel that that's the path
Speaker 2: for monetary policy.
Speaker 1: It's sometimes sad for FED officials to realize this, but
Speaker 1: there are very few people other than all of you
Speaker 1: and FED watchers who look at our statement. Most people
Speaker 1: look at how we position ourselves, and there I would
Speaker 1: say that most people aren't worrying about that phrase, and
Speaker 1: so I think the phrasing of the statement is less
Speaker 1: important than the actions of the FMC and the actions
Speaker 1: of the FOMC have been to really focus on price
Speaker 1: stability when we think inflation is rising, and really focus
Speaker 1: on being patient enough to see if the concerns we
Speaker 1: have are even going to materialize. So it all comes
Speaker 1: back to how long does the conflict last? And if
Speaker 1: it's prolonged, then we might see more spillovers of oil
Speaker 1: and other commodity prices into other goods and services. And
Speaker 1: if it comes up quickly it ends soon, then the
Speaker 1: forward contracts on oil or for oil to come back
Speaker 1: down to around seventy five dollars depending on the day.
Speaker 1: And that is something where our businesses are telling us, oh,
Speaker 1: we're looking through the shock right now, because we don't
Speaker 1: it'll last forever, but it won't be forever that we
Speaker 1: can look through it. And consumers are doing the same,
Speaker 1: look at the spending they're mostly looking through.
Speaker 2: But policy wise, is the cutting cycle over now? I
Speaker 2: don't think.
Speaker 1: I think it's really too early to tell. If the
Speaker 1: conflict ends and oil prices come back down and that
Speaker 1: doesn't get passed into the broader economy, then I expect
Speaker 1: the underlying dynamics that we were facing prior to the
Speaker 1: conflict to return, which is policy is slightly restrictive continues
Speaker 1: to put downward pressure on inflation. The labor market is
Speaker 1: stable right now, but it's not creating any inflationary pressures,
Speaker 1: and businesses are cautiously optimistic. So that's a good dynamic
Speaker 1: for the economy and one where I expect inflation to
Speaker 1: come back down to our two percent target. But the
Speaker 1: main issue is what is the risk out there? How
Speaker 1: does the oil price shock move its way through the economy,
Speaker 1: how long does the conflict last? And can we really
Speaker 1: get that two percent target that we've been that we've
Speaker 1: been working towards that, and that's what we're determined.
Speaker 2: To do to chieve that. Can you get to that target?
Speaker 2: The Fed watches inflation expectations. The New York Fed survey
Speaker 2: of consumers today showed inflation expectations rising to three point
Speaker 2: six percent for the next year. Are you in danger
Speaker 2: of having those become unanchored? You know?
Speaker 1: The short term inflation expectations are a reflection of what
Speaker 1: people are feeling right now at the gas pomp in
Speaker 1: the grocery stores, etcsme, fertilizers and other things start to
Speaker 1: spill over. That is not something that indicates a drift
Speaker 1: of the anchor. What we really have to focus on
Speaker 1: is does that translate into a move in medium term
Speaker 1: inflation expectations or longer run inflation expectations. You really don't
Speaker 1: see that right now, but that's not satisfying to say
Speaker 1: we don't see it, so it's not there. You have
Speaker 1: to dig deeper. What are we really seeing in terms
Speaker 1: of wage negotiations? What do we see in terms of
Speaker 1: firms passing a long thing? So I spend a lot
Speaker 1: of time, as you know, going around the twelve districts,
Speaker 1: and I just don't find a lot of producers and
Speaker 1: sellers feeling like they can pass through the price increases
Speaker 1: to consumers that have consumers stay in the game. So
Speaker 1: you're seeing some surg charges emerge on energy, but other
Speaker 1: than that, you're not seeing a lot of pass through
Speaker 1: as of yet. So I think the economy is in
Speaker 1: a place where I wouldn't jump to the conclusion that
Speaker 1: we're going to have persistently high inflation. I would jump
Speaker 1: to the data and say, what can we see? And
Speaker 1: the inflation expectations being well anchored is an important component
Speaker 1: of our ability to be patient.
Speaker 2: Well, we've been largely talking about energy inflation here tariffs
Speaker 2: are still on and according to the administration, there are
Speaker 2: more coming within the next month or so. What are
Speaker 2: companies saying about how they're dealing with this now that
Speaker 2: they're a year into it.
Speaker 1: Well, right now they're trying to get refunds if they're
Speaker 1: eligible for them, and they're working towards that. But they didn't,
Speaker 1: you know, not all of them pass through the full
Speaker 1: tariff burden. They split it up on things, and they
Speaker 1: see those burdens as rolling off that is more or
Speaker 1: less coming back to normal. You know, tariffs are a
Speaker 1: one time price adjustment, and they they calculate how much,
Speaker 1: how much can I take out of margins, how much
Speaker 1: can I share with other producers, how much do I
Speaker 1: need to pass along to consumers? So I would say
Speaker 1: that's in train and moving into direction we had anticipated.
Speaker 1: The new information is that we've got an oil price
Speaker 1: shock added to that, while inflation has been elevated since
Speaker 1: for almost five years or five years, and so consumers
Speaker 1: are just feeling the ongoing pressure of dealing with higher
Speaker 1: price levels and inflation that's above our target. So you know,
Speaker 1: the way I think about that is we have to
Speaker 1: continue to work towards restoring price stability, but overreacting to
Speaker 1: the news or then expectation that something's coming down the
Speaker 1: pipe can be as damaging to the economy as underreacting.
Speaker 1: So you have to balance both of those risks and
Speaker 1: really watch the information that we have, not just the
Speaker 1: backward looking information about what inflation did last month, but
Speaker 1: the forward looking information about how consumers, producers, and sellers
Speaker 1: are really responding to the challenges ahead of that.
Speaker 2: Well, Jeremy Polliny's news conference suggested that there is a concern,
Speaker 2: or at least he has a concern that after a
Speaker 2: number of supply side shocks in the last five to
Speaker 2: ten years, consumers are no longer thinking that two percent
Speaker 2: is normal.
Speaker 1: Well, that's what we have to treat absolutely. So there
Speaker 1: is this whole concern, and it's in the research literature, etc.
Speaker 1: That you can only put so much pressure on the
Speaker 1: goal if we print higher and higher above the goal,
Speaker 1: that that actually bleeds into people's expectations. So that's one
Speaker 1: of the things I think is really important to study.
Speaker 1: I know we're both going down to Hoover tomorrow and
Speaker 1: it's going to be a topic of conversations. The focus
Speaker 1: of my research team's work and the research. I think
Speaker 1: we're doing in academia to really think does this bleed through?
Speaker 1: But for now, what we're doing is looking at all
Speaker 1: the other information and asking has it happened? And I
Speaker 1: don't see a lot of evidence in the data that
Speaker 1: longer or medium run inflation expectations have drifted off the
Speaker 1: two percent anchor, and certainly wage inflation is consistent right
Speaker 1: now with the two percent target. So you know, it's
Speaker 1: right to look, it's right to study that, it's right
Speaker 1: to ask the question. You can't jump to the conclusion
Speaker 1: that just because it might be true, it is true.
Speaker 2: You'll have a new boss, not boss because of the
Speaker 2: way the Fed's set up, but a new chair next week,
Speaker 2: probably my fifth chair by the way. Congratulations. I'd like
Speaker 2: to run through a number of Kevin Walsh's ideas and
Speaker 2: see what you think of them. And the first one
Speaker 2: is a smaller balance sheet, And there are two ways
Speaker 2: of looking at that. One is just to bring the
Speaker 2: balance sheet down and use various ways to ensure there's liquidity,
Speaker 2: and the other is to go back to a scarce
Speaker 2: reserve system. How do you think about either one of those?
Speaker 1: You know, it's interesting, I think this has been a
Speaker 1: topic for a long time that is really important for
Speaker 1: us to grapple with. The balance sheet comes with optics
Speaker 1: that are hard to control, and people worry about the footprint, etc.
Speaker 1: And so you know, I gave a speech back last
Speaker 1: year on how do we communicate the balance sheet? Whatever
Speaker 1: it is? The truth is, you figure out what you
Speaker 1: need to do, and I think providing liquidity is an
Speaker 1: important component. We don't want to risk, you know, businesses
Speaker 1: like we did in the financial crisis, not being able
Speaker 1: to get liquidity even though they're well capitalized, simply because
Speaker 1: they didn't have the counterparty.
Speaker 2: So that's scarce.
Speaker 1: Liquidity is just a challenge for the financial system. But
Speaker 1: there are many ways to provide liquidity without actually, you know,
Speaker 1: being in the situation we're in. And I look forward
Speaker 1: to working with Kevin Warris Sho as chair and also
Speaker 1: all my colleagues to really think through that. I think
Speaker 1: the thing that the American people should know, your listeners
Speaker 1: should know is there's two components of balance sheet policy.
Speaker 1: One is the plumbing, how do you actually do it?
Speaker 1: And the second is the explanation. How do you explain
Speaker 1: what you're doing and how do you ensure that markets
Speaker 1: understand where you're going with the balance sheet, that we
Speaker 1: know that the public understands why it's growing or shrinking,
Speaker 1: and that ultimately we're we're putting those two things together there.
Speaker 1: You know, the ECB does a different thing. They have
Speaker 1: ample on demand run an ample on supply. Certainly we
Speaker 1: can consider those types of things as well. So I'm
Speaker 1: in the point of it's a good thing for us
Speaker 1: to study, and I don't want to prejudge the conclusion
Speaker 1: because there's a lot of work we can do to
Speaker 1: figure out what the optimal way to do it is,
Speaker 1: not just from the plumbing, but also from the communication.
Speaker 2: What about the SEP the dot plot. You have moved
Speaker 2: to talking about scenarios rather than exact forecast. Is that
Speaker 2: something that FED should do well?
Speaker 1: You know, again, I'll leave it to the deliberations we
Speaker 1: take at the FMC, but I do think scenarios in
Speaker 1: of time when you have a lot of shocks coming
Speaker 1: your way, are really important.
Speaker 2: You know, the.
Speaker 1: Strict forward guidance and this goes all the way back
Speaker 1: to Bernanki and predates him when he was an academic.
Speaker 1: Not that chair, is that you know the idea that
Speaker 1: you're going to provide a lot of precision. When you don't,
Speaker 1: you have a very uncertain future. Is just it's a
Speaker 1: false precision. We don't have it, So what do you do?
Speaker 2: Well?
Speaker 1: Then, scenarios can be helpful because they help the public
Speaker 1: understand what is most critical to understand the fed's reaction function.
Speaker 1: You know, there are point testaments about what we think
Speaker 1: will happen in a month or two months or six months,
Speaker 1: and then what we would do if it happened. Those
Speaker 1: are much less interesting.
Speaker 2: Would you get rid of the SEP? Would you get
Speaker 2: rid of the doctor? I am?
Speaker 1: You know you're going to be dissatisfied with this, Mike,
Speaker 1: But I'm going to say that I think that I
Speaker 1: look forward to deliberations on all of these topics. Ultimately,
Speaker 1: the fed's communication has to and I've talked about this
Speaker 1: many times. Transparency and communication are critical to having an
Speaker 1: accountable FED a reserve, and how we communicate should be
Speaker 1: you know, studied, maybe change to meet the moments that
Speaker 1: we have in front of us. And I think that's
Speaker 1: the real evolution I'm looking forward to. But I don't
Speaker 1: want to prejudge or stake out any territory about my
Speaker 1: thinking until we all have a chance to deliberate it collectively.
Speaker 2: Okay, one last question. Kevin Warsh has suggested that y'all
Speaker 2: talk too much. There's too much fed canmmunication. What do
Speaker 2: you think of that? And would you be willing to
Speaker 2: cut back on communication except when doing interviews with us?
Speaker 1: Ah, Yes, this is what everybody's going to ask us.
Speaker 1: But the thing that I think is really important is
Speaker 1: to ask ourselves why do we communicate? What are we accomplishing?
Speaker 1: Here's how I think of it for myself. We're trying
Speaker 1: to explain what our reaction function is and why the
Speaker 1: policy choices that we're making or thinking about are really
Speaker 1: for the American people. What variables are we thinking about,
Speaker 1: et cetera. Where I and you know this because it
Speaker 1: often causes dissatisfaction. Where we're going to go next week?
Speaker 1: What my thinking is today is much less relevant about
Speaker 1: the point estimates on the policy decision. It's what's much
Speaker 1: more important is how would I react to economic situations
Speaker 1: coming forward. So again, I look forward to to having
Speaker 1: Kevin join our Kevin worsh when he's confirmed, having him
Speaker 1: join the FMC, having him chair it and lead it.
Speaker 1: And I also look forward to the debates that you know.
Speaker 1: I know Kevin well enough to say that he does
Speaker 1: mean what he says when he says he wants to
Speaker 1: have real debates, real discussions, and I look forward to those.
Speaker 2: Well, we look forward to you continuing to talk to us,
Speaker 2: even if Kevin says you can't talk to anybody. We'll
Speaker 2: see how that goes. Very daily. The president of the
Speaker 2: San Francisco FED, thank you very much,