Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: The FED Governor Stephen Maron joins us now for more.
Speaker 2: Governor Maren, good.
Speaker 3: Morning, good morning, Thanks for having me.
Speaker 2: It's good to see you as always, sir. So let's
Speaker 2: spend some time. How did you approach the committee meeting
Speaker 2: just last week and what was the argument for fifty
Speaker 2: basis points?
Speaker 3: So I approached it the same way approached the first one,
Speaker 3: which is that I think that the FED is too restrictive.
Speaker 3: I think that neutral is quite a ways below where
Speaker 3: current policy is, and given my rather more sanguine outlook
Speaker 3: on inflation than some of the other members of the committee,
Speaker 3: I don't see a reason for keeping policy as restrictive
Speaker 3: for a long period of time as we are. The
Speaker 3: longer you keep policy restrictive, the more you run the
Speaker 3: risk that monetary policy itself causes a downturn in the economy.
Speaker 2: What was interesting about last week, as you know, is
Speaker 2: that a send cup both ways. We also had this
Speaker 2: argument from Presidents Smith of Kansas City FED, who put
Speaker 2: out a long staymen, I've cherry picked a quote forgive me.
Speaker 2: I see the starts of policy as being only modestly
Speaker 2: restrictive financial market conditions appear to be easy across many metrics.
Speaker 2: When you heard that kind of argument, what was the
Speaker 2: a point to what he's saying in markets?
Speaker 3: Yeah, so I'd say a couple things. First of all,
Speaker 3: I'd say that the financial markets are driven by a
Speaker 3: lot of things, not just monetary policy. They're driven, of course,
Speaker 3: in part by monitary policy, but there's a lot of
Speaker 3: things that drive financial markets. For example, I think on
Speaker 3: this program you probably spend a lot of time thinking
Speaker 3: about AI and new technologies. If you have AI or
Speaker 3: a new technology, it could push financial markets higher, which
Speaker 3: would look like an easing and financial conditions, But that
Speaker 3: doesn't necessarily tell you anything about the stance of monitary policy. Indeed,
Speaker 3: very often, in response to a supply shock or a
Speaker 3: positive supply shock, although of course it depends what kind
Speaker 3: of supply shock, you might think that the appropriate sense
Speaker 3: of monitary policy would be lower and not tighter, all
Speaker 3: lse equal, But of course there's a lot of sort
Speaker 3: of what ifs and thinking about the type of the
Speaker 3: supply shock. But I think that it's a mistake to
Speaker 3: look at financial conditions and sort of conclude something automatically
Speaker 3: about the stance of monitary policy. And I also want
Speaker 3: to point out that some of the financial conditions that
Speaker 3: look the easiest, things like the stock market, things like
Speaker 3: you know, sort of various parts of credit spreads. You know,
Speaker 3: those are not necessarily the financial conditions that feed the
Speaker 3: most into economic activity. Yes, the stock marketing, credit spreads matter,
Speaker 3: they matter a lot, But then you sort of think
Speaker 3: about something like housing. I think housing matters a lot
Speaker 3: more for the cyclical position of the economy, and some
Speaker 3: of these things don't matter, but it's that they're only
Speaker 3: part of the picture. And if you look at financial
Speaker 3: conditions that affect housing, I think they're quite tighter. You
Speaker 3: look at financial conditions that are affecting parts of the
Speaker 3: private credit market, that also looks tighter. And I wonder
Speaker 3: if what we're seeing now in some of the distresses
Speaker 3: that you see in private markets means that financial conditions
Speaker 3: have actually been tighter, but it's been masked by the
Speaker 3: fact that we don't get marks for those on a
Speaker 3: regular basis.
Speaker 2: So, Governor, I think I want to give you some time.
Speaker 2: I think we should give you some time on a
Speaker 2: central lignment of yours that this year you believe policy
Speaker 2: is actually passively tightened through twenty twenty five. And I
Speaker 2: don't think that's an argument I've heard many people make.
Speaker 2: You just spend some time fleshing that out. What do
Speaker 2: you mean by that?
Speaker 3: Sure, So my perspective is that there's been a number
Speaker 3: of shocks that have hit the economy, driven in large
Speaker 3: part by economic policy not from the FED, from outside
Speaker 3: of the FED, that pushed neutral rates higher last year
Speaker 3: and lower this year. And so I think if you
Speaker 3: look where my neutral rate is, it's not that I'm
Speaker 3: out of bound for where the rest of the committee
Speaker 3: is unneutral. It's just that I flipped from having one
Speaker 3: of the highest neutral rates last year to now one
Speaker 3: of the lowest neutral rates. And that's driven by things
Speaker 3: like population growth, right, It's driven by things like fiscal deficits,
Speaker 3: and if you think about population growth, right, that's normally
Speaker 3: considered to be one of the biggest drivers of neutral rates.
Speaker 3: And it's part of the reason why people think that
Speaker 3: neutral usually moves very very slowly, because population growth changes
Speaker 3: only very very slowly as new technologies and cultural trends
Speaker 3: drive people to have fewer kids over time. But we
Speaker 3: experienced the last few years thirty years worth of population
Speaker 3: growth change in only three years. Right, when you look
Speaker 3: at the rate of population growth, it changed more in
Speaker 3: the last three years than it did in the previous
Speaker 3: thirty years. In both directions. It round tripped completely. And
Speaker 3: so if the drivers, if the drivers of changes the
Speaker 3: neutral rate, accelerate over time, it would only make sense
Speaker 3: to me that the neutral rate itself would change more
Speaker 3: rapidly over time as well. And so that's pushed neutral
Speaker 3: higher last year and lower this year, which means that
Speaker 3: policy is passively tightened. Because what matters for the stance
Speaker 3: of policy is where you are relative to the neutral rate.
Speaker 3: And the neutral is here and policies up here, you're
Speaker 3: very tight. If neutral's here and policies down here, you're
Speaker 3: very loose. But if you stay where you are and
Speaker 3: then neutral goes down, you've passively tightened because the neutral
Speaker 3: rate has shifted, and so policy has grown tighter over
Speaker 3: the course of the year. Now, it's not the case
Speaker 3: that you would expect to see a significant downturn in
Speaker 3: the economy immediately as a result of that, because Montera
Speaker 3: policy works with lags. It hits the economy with long
Speaker 3: and variable lags, as we all know. But if you
Speaker 3: maintain that very restrictive stance of policy for a long
Speaker 3: period of time, you really increase the chances that those
Speaker 3: lags come to manifest and that Montera policy then itself
Speaker 3: induces a downturn in the economy. Why wasn't your descent bigger?
Speaker 1: You were talking about a fifty basis point cut that
Speaker 1: you would have preferred to see in the September meeting.
Speaker 1: Why didn't you go for a seventy five basis basis
Speaker 1: point cut descent last month?
Speaker 3: Of course? So look, you know, I think that we're
Speaker 3: a fair way from neutral, and I think that we
Speaker 3: could get there a bit faster. I could imagine getting
Speaker 3: there in a series of fifty clips. I don't think
Speaker 3: it's the case that we need to get there and
Speaker 3: more than that, because I don't think that I don't
Speaker 3: think the economy is dysfunctional right now. I don't think
Speaker 3: that financial markets are dysfunctional right now. I don't think
Speaker 3: we need to move even faster than that for those
Speaker 3: for those reasons. If I did, then you know, I
Speaker 3: would have no problem voting for voting for bigger cuts.
Speaker 3: But I think sort of getting there in fifties instead
Speaker 3: of twenty five's is fine.
Speaker 1: So you would be open to dissenting again for a
Speaker 1: fifty basis point cut if the rest of the committee
Speaker 1: wasn't around.
Speaker 3: For that next month or in December rather. Yeah, well,
Speaker 3: I don't want to commit to that because a lot
Speaker 3: can happen between now and the next meeting. We're getting
Speaker 3: a lot of data, I hope, between now and then,
Speaker 3: and only data about the near term. The data about
Speaker 3: the recent past as well that we don't have, so
Speaker 3: things could change. But if things play out according to
Speaker 3: my forecast, then yes I would Governor.
Speaker 4: Do you think your advocacy for a fifty bait cut
Speaker 4: is hardening the opposition to cuts at all?
Speaker 3: I don't think so. I think everybody is. Everybody is
Speaker 3: doing their own analysis of the economy and inflation in
Speaker 3: the labor market and financial markets too, and coming to
Speaker 3: a conclusion. And you know, I don't think anybody is
Speaker 3: necessarily changing your mind sort of to not support a
Speaker 3: cut just because I want to cut more.
Speaker 4: Is there a lot of discussion at the FED about
Speaker 4: the fact that you're all doing your own analysis, But
Speaker 4: what data are you all using if we're in the
Speaker 4: mis still in the middle of a government shutdown thirty
Speaker 4: four days today?
Speaker 3: Yeah, so there's a lot of talk about that. Let
Speaker 3: me say a couple things about that. First of all,
Speaker 3: you know, it's my perspective that being excessively data dependent
Speaker 3: makes you backward looking because the data are always backward looking,
Speaker 3: and because of collection lags, because the amount of time
Speaker 3: that you're doing comparisons over right, and given montary policy
Speaker 3: takes lags to hit the economy. You want to be
Speaker 3: forward looking, so you want to make policy based in
Speaker 3: your forecast. Now, there are times when you might not
Speaker 3: have a lot of confidence in your forecast, and so
Speaker 3: you need to be data dependent, but you should be
Speaker 3: data dependent only to the extent that you don't have
Speaker 3: confidence in your forecast. My perspective is that we know
Speaker 3: the size of the shocks that have hit the economy
Speaker 3: this year, things like population growth. That's a known quantity.
Speaker 3: We know what it does to the economy, we know
Speaker 3: what it does to neutral we know the size of that.
Speaker 3: It's not a mystery. So therefore I have a lot
Speaker 3: of confidence in my forecast. And therefore, to the extent
Speaker 3: that we would get data that would make me change
Speaker 3: my forecast, I would then change my policy outlook. Right,
Speaker 3: So the question is that am I missing data because
Speaker 3: of the government shutdown, that would lead me to change
Speaker 3: my forecast. And given so much of my forecast for
Speaker 3: inflation depends on the housing market and depends on the
Speaker 3: housing market, I would assume that I would see that
Speaker 3: in the reporting that Bloomberg and others do, even if
Speaker 3: I'm not getting data in the short term. Now, something
Speaker 3: like that lasts a couple of months, right, Can I
Speaker 3: continue to sort of have this degree of confidence if
Speaker 3: we go six months without data? Absolutely not. So. I
Speaker 3: do think this is something people are attentive to, And
Speaker 3: there's also alternative data, as you guys are aware. I
Speaker 3: find the alternative data on inflation to be not super useful.
Speaker 3: I do find it to be more useful on the
Speaker 3: labor market. And when you sort of look at alternative
Speaker 3: data on the labor market, you see data that's consistent
Speaker 3: with continual ebbing of demand, which again is a signal
Speaker 3: that policy is too tight. If the decline in hiring
Speaker 3: was a result of negative supply shocks from immigration, you
Speaker 3: would see higher wages, and you would see and you
Speaker 3: would see firms and people giving answering surveys in a
Speaker 3: way that indicated that jobs were plentiful or it was
Speaker 3: difficult to find workers. From the firm perspective, you're not seeing.
Speaker 2: Say, developments in private credit as as well as evidence
Speaker 2: that we're restrictive. Perhaps it was the fault of our
Speaker 2: pairs that this didn't come up much of the news conference.
Speaker 2: I was somewhat surprised did it come up much in
Speaker 2: the meeting, the two day meeting last week.
Speaker 3: Well, I mentioned it at the meetings as a reason
Speaker 3: why it was potentially a mistake to make to make
Speaker 3: very confident inferences from the stance of equity markets to
Speaker 3: the stance of monetary policy. But other than that, I
Speaker 3: think that sort of folks were focused on it on
Speaker 3: private credit as a financial stability risk and sort of
Speaker 3: thinking about how much should we care about this? What
Speaker 3: are the risks? You know, you know, what are the risks?
Speaker 3: Where could this go? Just sort of analyzing it from
Speaker 3: a financial stability perspective, Whereas I was making the point
Speaker 3: as well that there's a chance that because we don't
Speaker 3: get marks on these things very frequently, that distresses are
Speaker 3: actually greater than we thought they were, especially when you
Speaker 3: think about the share of credit that has been created
Speaker 3: in private markets in the last few years, you know,
Speaker 3: so it's slowed down recently, but over the last few
Speaker 3: years it's been a greater share of credit that's been
Speaker 3: extend into the economy, and so it could be that
Speaker 3: we're just not seeing it.
Speaker 2: Do you think we're missing something here because somebody guests
Speaker 2: come on the program and say it's idiosyncratic, just signs
Speaker 2: of isolated fraud, not a big deal, not systemic, not
Speaker 2: broad enough.
Speaker 3: Do you share that view? So, you know, look, I
Speaker 3: think that probably at the end of the day, that's
Speaker 3: what it is. However, I do want to make the
Speaker 3: point that when you get series of seemingly uncorrelated, non
Speaker 3: systematic problem sorry, non systematic issues like that, it can
Speaker 3: be an indication that montary policy is restrictive. We've seen
Speaker 3: this in the past. When you have a series of
Speaker 3: seemingly uncorrelated, uncorrelated credit problems that had been masked for
Speaker 3: a while and then suddenly come to light, it tells
Speaker 3: you something about the stance of montary policy.