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Speaker 1: Bloomberg Audio Studios, podcasts, radio News. Welcome to over Open

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Speaker 1: Interest on Bloomberg TV and Bloomberg has Intelligence on Bloomberg Radio.

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Speaker 1: To our viewers and listeners around the world. I'm Michael McKee,

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Speaker 1: international Economics and Policy correspondent, and joining me this morning

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Speaker 1: is Alberto Mussolam. He is the president of the Saint

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Speaker 1: Louis fed Thank you for coming in this morning here

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Speaker 1: in Washington, and we have some news in Washington that

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Speaker 1: we may be getting close to the end of the shutdown,

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Speaker 1: which would release data. But just in case that doesn't happen.

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Speaker 1: Based on what you know, now, what do you think

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Speaker 1: about the economy.

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Speaker 2: Mike, good morning, Great to be here. I see an

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Speaker 2: economy that has been pretty resilient, where growth has been

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Speaker 2: roughly around potential around one point eight for this year,

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Speaker 2: in spite of a lot of uncertainty. I see a

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Speaker 2: labor market that has been around for full employment is

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Speaker 2: around full employment has been cooling, demand and supply have

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Speaker 2: been cooling. And I see inflation which has been closer

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Speaker 2: to the three percent level than to our two percent target.

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Speaker 1: Well, we know that when the data comes out, everybody

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Speaker 1: will be parsing it. Carefully, But is it going to

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Speaker 1: add a lot to your knowledge of where the economy

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Speaker 1: is and possibly change any decision you might make.

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Speaker 2: More data is better than less data, so we will

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Speaker 2: learn it always has additional value. I do feel that

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Speaker 2: we have a pretty good sense of where the economy is.

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Speaker 2: We have availed ourselves during this period of unofficial data

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Speaker 2: dearthlet's call it that, with private sector data. We have

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Speaker 2: been in close contact with all of our constituents, businesses, households,

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Speaker 2: community leaders in our districts. So I feel we have

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Speaker 2: a pretty good sense of the economy. But I'm very

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Speaker 2: much looking forward to seeing the official data releases because

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Speaker 2: they are the gold standard and they'll provide additional Well at.

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Speaker 1: Our companies in your district telling.

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Speaker 2: You, you know, they are saying that the consumption has

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Speaker 2: been resilient. They're saying that growth has been fine. They're

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Speaker 2: saying the libor market has softened a little bit. They

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Speaker 2: see much more, many more applicants per vacancy. They report

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Speaker 2: compensation growth somewhere between three and a half to four percent.

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Speaker 2: So things look reasonably okay.

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Speaker 1: But the consumption that remains resilient. Obviously, at the upper

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Speaker 1: ends you have the stock market wealth effect driving it.

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Speaker 1: But I know you've been worried about the lower death

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Speaker 1: syles because they're taking out more debt.

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Speaker 2: That's exactly what's happening. So we estimate that the real

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Speaker 2: consumption growth of the high income folks and of the

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Speaker 2: low income folks hasn't been about the same. But as

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Speaker 2: you said, the higher income households are consuming from the

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Speaker 2: wealth effects they have in the stock market and home prices.

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Speaker 2: By the way, lower income folks are taking on more debt.

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Speaker 2: They're taking on more credit card debt. And that's how

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Speaker 2: the economy has been thus far.

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Speaker 1: Well, taking on debt to continue consumption. A cynical economist

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Speaker 1: might say, what have we heard that before and how

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Speaker 1: did that turn out? Are you worried that we're setting

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Speaker 1: up for a problem?

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Speaker 2: By and large when I look at consumer finances, if

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Speaker 2: you look at consumer balance sheets, by and large for

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Speaker 2: the economy, they are okay. Consumer is not over indebted here. Now,

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Speaker 2: over the past year, we saw an increase in subprime

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Speaker 2: loan defaults, We saw an increase in credit card defaults.

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Speaker 2: Now over the past year those have started to stabilize

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Speaker 2: and actually come down some. But you know, at the

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Speaker 2: lower end of the income spectrum. You always have to

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Speaker 2: worry that, you know, those consumers who live, you know,

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Speaker 2: hand to mouth need to need to wait until the

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Speaker 2: end of the month to make it. You know, could

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Speaker 2: be always could be strained.

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Speaker 1: Companies, I know have been telling you and your colleagues

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Speaker 1: for some time that they're waiting for clarity, especially on

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Speaker 1: fiscal policy going forward, which doesn't seem to necessarily becoming.

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Speaker 1: Are any of them saying, we're kind of at a

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Speaker 1: point now where we have to raise prices to keep

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Speaker 1: up with our input prices, or we have to cut

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Speaker 1: back on people because our margins are compressing.

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Speaker 2: Two questions to answers. I think companies tell me that

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Speaker 2: uncertainty has plateaued and that they can understand how to

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Speaker 2: operate in this with this new higher level of uncertainty.

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Speaker 2: So some of that is going on in terms of

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Speaker 2: pass through of higher costs. Companies are experiencing higher costs

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Speaker 2: somewhat related to tariffs, some are related to other things

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Speaker 2: like insurance, which is totally unrelated to to tariff. TIFF's

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Speaker 2: and companies that are upstream so earlier in the production

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Speaker 2: process are successful in passing on those costs to other

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Speaker 2: companies to build products that they build. Companies that are

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Speaker 2: closer to the consumer and selling to the final purchaser

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Speaker 2: of a good are having more difficulty in passing things

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Speaker 2: on because they are facing some pushback from the final buyer.

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Speaker 1: The labor market, how fragile is it. We've seen a

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Speaker 1: lot of layoff announcements over the past couple of weeks.

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Speaker 1: Is this a gathering trend? Are we going to start

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Speaker 1: talking about the SAM rule again.

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Speaker 2: I see the labor market as having cooled in an

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Speaker 2: early way, both because supplying demand have cooled. The latest

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Speaker 2: challenger job announcements, which are you're referring to, you know,

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Speaker 2: I definitely took notice of them, but they don't necessarily

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Speaker 2: mean the labor market, you know, is about to go

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Speaker 2: into deterioration phase in the same week that they were announced.

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Speaker 2: As you know, the weekly claims, which are you know,

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Speaker 2: another very good indicator of layoffs, has has remained stable

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Speaker 2: so far. So you have to look at all of

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Speaker 2: the data in the labor market and see whether those

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Speaker 2: layoff announcements will actually materialize.

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Speaker 1: In terms of supply problems in the labor market. Monetary

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Speaker 1: policy can't affect that.

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Speaker 2: The traditional way to think about monetary policy is that

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Speaker 2: it is more effective with respect to cyclical and demand

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Speaker 2: side type of factors. But I think we also need

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Speaker 2: to be thinking, if the economy is going through a

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Speaker 2: structural transition, what role does monetary policy need to play

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Speaker 2: facilitation facilitating that transition. So we have to, in my mind,

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Speaker 2: be thinking about those two things. Now.

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Speaker 1: There are two arguments that seems to be at the

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Speaker 1: FED right now. One is that we need to get

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Speaker 1: ahead of a brewing problem, especially in the labor market,

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Speaker 1: and the other is if you're in a dark room,

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Speaker 1: you want to move carefully and maybe pause. Which one

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Speaker 1: do you think carries more weight?

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Speaker 2: The way I think about it is, I feel we

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Speaker 2: have adequate information to make decisions to cut rates or

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Speaker 2: not to cut rates. For me, it's about the outlook

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Speaker 2: that I happen to have and the balance of risks

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Speaker 2: that I happen to have with the information that I

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Speaker 2: currently have. So, going back to your first part of

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Speaker 2: the question, in the past year, the real federal funds

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Speaker 2: rate has declined by two hundred and fifty basis points.

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Speaker 2: Of that, one hundred and fifty basis points have been

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Speaker 2: reductions in the nominal interest rate to provide insurance to

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Speaker 2: the labor market and to get ahead of any deterioration

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Speaker 2: and to keep it the labor market around full employment.

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Speaker 2: And about one hundred basis points of the decline in

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Speaker 2: the real federal funds rate has been looking through through

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Speaker 2: the rise and expected inflation, mostly due to tariffs. So

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Speaker 2: that's how I think about monetary policy right now.

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Speaker 1: Well, to the extent that they know, what are companies

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Speaker 1: telling you about monetary policy? Do they say that we're

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Speaker 1: going to have to raise prices or cut employees if

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Speaker 1: you don't cut interest rates?

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Speaker 2: Not necessarily. I don't hear that from companies. Companies often

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Speaker 2: are more concerned about non interest costs that are increasing.

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Speaker 2: For example, I mentioned insurance, but you know raw matarial

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Speaker 2: costs and other costs to produce things all the way

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Speaker 2: from building homes to producing manufactured goods, and so I

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Speaker 2: hear more about that than about interest costs being something

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Speaker 2: that needs to be passed on to consumers. So it's

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Speaker 2: very important that we continue to focus. I'm bringing inflation

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Speaker 2: back down towards two percent.

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Speaker 1: Well, we hear a lot from your colleagues. We heard

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Speaker 1: from Chair Powell about the risk of cutting too fast

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Speaker 1: versus the risk of not cutting soon enough. What about

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Speaker 1: the risk credibility if you cut but then inflation doesn't

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Speaker 1: go down and you have to start thinking about raising

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Speaker 1: rates again.

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Speaker 2: As Chairpeal said, there's no risk free path. And if

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Speaker 2: we focus too much on the lave market and then

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Speaker 2: cut too aggressively, we can have an undesired outcome on

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Speaker 2: the inflation side. If we focus too much on the

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Speaker 2: inflation side and leave market to teer rates, we're going

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Speaker 2: to have an undesired outcome. And so right now, what

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Speaker 2: our strategy montary policy Strategy document says is that when

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Speaker 2: you have some tension between your two goals, you have

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Speaker 2: to follow a balanced approach, which is to a steer

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Speaker 2: monetary policy to attend to both goals.

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Speaker 1: Well, which way would you steer it in December? Based

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Speaker 1: on what you know now?

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Speaker 2: I think again it's very important that we treade with

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Speaker 2: caution here. I think there is limited room to ease

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Speaker 2: policy further without policy becoming overly accommodative. Montary policy, in

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Speaker 2: my estimation, is somewhere between modestly restrictive and neutral, probably

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Speaker 2: closer to neutral. If you look at the real federal

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Speaker 2: funds rate, it now is around one percent and one

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Speaker 2: percent happens to be the long run neutral rate in

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Speaker 2: real terms for the federal funds rate of the entire committee,

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Speaker 2: of the medium, I should say, of the entire committee.

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Speaker 2: So I think we need to continue to lean against

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Speaker 2: inflation to make sure we bring inflation back down towards

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Speaker 2: our two percent target while providing some insurance to the

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Speaker 2: labor market. One thing I hear often when I visit

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Speaker 2: with folks in my district is that people are having

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Speaker 2: more month than money increasingly number one. Number two, I

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Speaker 2: hear that folks are increasingly going to food pantries, including

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Speaker 2: middle income folks. And I hear that aid institutions are

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Speaker 2: increasingly getting requests for utility assistance, probably related to higher

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Speaker 2: electricity energy prices, I should say electricity prices. So those

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Speaker 2: three things tell me that it's really important that we

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Speaker 2: bring inflation back forwards two percent to allow households to

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Speaker 2: catch up with our real incomes.

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Speaker 1: I've only got about thirty seconds left. Markets are up

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Speaker 1: this morning. They're cheered by the possibility of a shutdown deal.

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Speaker 1: But when the sun comes up in the east, they've

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Speaker 1: been going up cheerfully lately. Are you worried about the

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Speaker 1: level of asset prices.

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Speaker 2: Financial conditions are very accommodative of economic activity and of employment.

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Speaker 2: The FED the Board just released as Financial Stability Report,

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Speaker 2: where it says that asset valuations are notable and it's

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Speaker 2: not our job to oppine on particular valuations of markets.

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Speaker 2: But if you look at that report suggests that house

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Speaker 2: prices are seam elevated relative historical standards, stock prices seem elevated,

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Speaker 2: and to me, it's just the flip side of accommodated

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Speaker 2: financial conditions.

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Speaker 1: Alberta Miselle, thank you very much for joining us this morning.

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Speaker 1: The president of the Saint Louis Fete