Speaker 1: Bloomberg Audio Studios, podcasts, radio News. Welcome to over Open
Speaker 1: Interest on Bloomberg TV and Bloomberg has Intelligence on Bloomberg Radio.
Speaker 1: To our viewers and listeners around the world. I'm Michael McKee,
Speaker 1: international Economics and Policy correspondent, and joining me this morning
Speaker 1: is Alberto Mussolam. He is the president of the Saint
Speaker 1: Louis fed Thank you for coming in this morning here
Speaker 1: in Washington, and we have some news in Washington that
Speaker 1: we may be getting close to the end of the shutdown,
Speaker 1: which would release data. But just in case that doesn't happen.
Speaker 1: Based on what you know, now, what do you think
Speaker 1: about the economy.
Speaker 2: Mike, good morning, Great to be here. I see an
Speaker 2: economy that has been pretty resilient, where growth has been
Speaker 2: roughly around potential around one point eight for this year,
Speaker 2: in spite of a lot of uncertainty. I see a
Speaker 2: labor market that has been around for full employment is
Speaker 2: around full employment has been cooling, demand and supply have
Speaker 2: been cooling. And I see inflation which has been closer
Speaker 2: to the three percent level than to our two percent target.
Speaker 1: Well, we know that when the data comes out, everybody
Speaker 1: will be parsing it. Carefully, But is it going to
Speaker 1: add a lot to your knowledge of where the economy
Speaker 1: is and possibly change any decision you might make.
Speaker 2: More data is better than less data, so we will
Speaker 2: learn it always has additional value. I do feel that
Speaker 2: we have a pretty good sense of where the economy is.
Speaker 2: We have availed ourselves during this period of unofficial data
Speaker 2: dearthlet's call it that, with private sector data. We have
Speaker 2: been in close contact with all of our constituents, businesses, households,
Speaker 2: community leaders in our districts. So I feel we have
Speaker 2: a pretty good sense of the economy. But I'm very
Speaker 2: much looking forward to seeing the official data releases because
Speaker 2: they are the gold standard and they'll provide additional Well at.
Speaker 1: Our companies in your district telling.
Speaker 2: You, you know, they are saying that the consumption has
Speaker 2: been resilient. They're saying that growth has been fine. They're
Speaker 2: saying the libor market has softened a little bit. They
Speaker 2: see much more, many more applicants per vacancy. They report
Speaker 2: compensation growth somewhere between three and a half to four percent.
Speaker 2: So things look reasonably okay.
Speaker 1: But the consumption that remains resilient. Obviously, at the upper
Speaker 1: ends you have the stock market wealth effect driving it.
Speaker 1: But I know you've been worried about the lower death
Speaker 1: syles because they're taking out more debt.
Speaker 2: That's exactly what's happening. So we estimate that the real
Speaker 2: consumption growth of the high income folks and of the
Speaker 2: low income folks hasn't been about the same. But as
Speaker 2: you said, the higher income households are consuming from the
Speaker 2: wealth effects they have in the stock market and home prices.
Speaker 2: By the way, lower income folks are taking on more debt.
Speaker 2: They're taking on more credit card debt. And that's how
Speaker 2: the economy has been thus far.
Speaker 1: Well, taking on debt to continue consumption. A cynical economist
Speaker 1: might say, what have we heard that before and how
Speaker 1: did that turn out? Are you worried that we're setting
Speaker 1: up for a problem?
Speaker 2: By and large when I look at consumer finances, if
Speaker 2: you look at consumer balance sheets, by and large for
Speaker 2: the economy, they are okay. Consumer is not over indebted here. Now,
Speaker 2: over the past year, we saw an increase in subprime
Speaker 2: loan defaults, We saw an increase in credit card defaults.
Speaker 2: Now over the past year those have started to stabilize
Speaker 2: and actually come down some. But you know, at the
Speaker 2: lower end of the income spectrum. You always have to
Speaker 2: worry that, you know, those consumers who live, you know,
Speaker 2: hand to mouth need to need to wait until the
Speaker 2: end of the month to make it. You know, could
Speaker 2: be always could be strained.
Speaker 1: Companies, I know have been telling you and your colleagues
Speaker 1: for some time that they're waiting for clarity, especially on
Speaker 1: fiscal policy going forward, which doesn't seem to necessarily becoming.
Speaker 1: Are any of them saying, we're kind of at a
Speaker 1: point now where we have to raise prices to keep
Speaker 1: up with our input prices, or we have to cut
Speaker 1: back on people because our margins are compressing.
Speaker 2: Two questions to answers. I think companies tell me that
Speaker 2: uncertainty has plateaued and that they can understand how to
Speaker 2: operate in this with this new higher level of uncertainty.
Speaker 2: So some of that is going on in terms of
Speaker 2: pass through of higher costs. Companies are experiencing higher costs
Speaker 2: somewhat related to tariffs, some are related to other things
Speaker 2: like insurance, which is totally unrelated to to tariff. TIFF's
Speaker 2: and companies that are upstream so earlier in the production
Speaker 2: process are successful in passing on those costs to other
Speaker 2: companies to build products that they build. Companies that are
Speaker 2: closer to the consumer and selling to the final purchaser
Speaker 2: of a good are having more difficulty in passing things
Speaker 2: on because they are facing some pushback from the final buyer.
Speaker 1: The labor market, how fragile is it. We've seen a
Speaker 1: lot of layoff announcements over the past couple of weeks.
Speaker 1: Is this a gathering trend? Are we going to start
Speaker 1: talking about the SAM rule again.
Speaker 2: I see the labor market as having cooled in an
Speaker 2: early way, both because supplying demand have cooled. The latest
Speaker 2: challenger job announcements, which are you're referring to, you know,
Speaker 2: I definitely took notice of them, but they don't necessarily
Speaker 2: mean the labor market, you know, is about to go
Speaker 2: into deterioration phase in the same week that they were announced.
Speaker 2: As you know, the weekly claims, which are you know,
Speaker 2: another very good indicator of layoffs, has has remained stable
Speaker 2: so far. So you have to look at all of
Speaker 2: the data in the labor market and see whether those
Speaker 2: layoff announcements will actually materialize.
Speaker 1: In terms of supply problems in the labor market. Monetary
Speaker 1: policy can't affect that.
Speaker 2: The traditional way to think about monetary policy is that
Speaker 2: it is more effective with respect to cyclical and demand
Speaker 2: side type of factors. But I think we also need
Speaker 2: to be thinking, if the economy is going through a
Speaker 2: structural transition, what role does monetary policy need to play
Speaker 2: facilitation facilitating that transition. So we have to, in my mind,
Speaker 2: be thinking about those two things. Now.
Speaker 1: There are two arguments that seems to be at the
Speaker 1: FED right now. One is that we need to get
Speaker 1: ahead of a brewing problem, especially in the labor market,
Speaker 1: and the other is if you're in a dark room,
Speaker 1: you want to move carefully and maybe pause. Which one
Speaker 1: do you think carries more weight?
Speaker 2: The way I think about it is, I feel we
Speaker 2: have adequate information to make decisions to cut rates or
Speaker 2: not to cut rates. For me, it's about the outlook
Speaker 2: that I happen to have and the balance of risks
Speaker 2: that I happen to have with the information that I
Speaker 2: currently have. So, going back to your first part of
Speaker 2: the question, in the past year, the real federal funds
Speaker 2: rate has declined by two hundred and fifty basis points.
Speaker 2: Of that, one hundred and fifty basis points have been
Speaker 2: reductions in the nominal interest rate to provide insurance to
Speaker 2: the labor market and to get ahead of any deterioration
Speaker 2: and to keep it the labor market around full employment.
Speaker 2: And about one hundred basis points of the decline in
Speaker 2: the real federal funds rate has been looking through through
Speaker 2: the rise and expected inflation, mostly due to tariffs. So
Speaker 2: that's how I think about monetary policy right now.
Speaker 1: Well, to the extent that they know, what are companies
Speaker 1: telling you about monetary policy? Do they say that we're
Speaker 1: going to have to raise prices or cut employees if
Speaker 1: you don't cut interest rates?
Speaker 2: Not necessarily. I don't hear that from companies. Companies often
Speaker 2: are more concerned about non interest costs that are increasing.
Speaker 2: For example, I mentioned insurance, but you know raw matarial
Speaker 2: costs and other costs to produce things all the way
Speaker 2: from building homes to producing manufactured goods, and so I
Speaker 2: hear more about that than about interest costs being something
Speaker 2: that needs to be passed on to consumers. So it's
Speaker 2: very important that we continue to focus. I'm bringing inflation
Speaker 2: back down towards two percent.
Speaker 1: Well, we hear a lot from your colleagues. We heard
Speaker 1: from Chair Powell about the risk of cutting too fast
Speaker 1: versus the risk of not cutting soon enough. What about
Speaker 1: the risk credibility if you cut but then inflation doesn't
Speaker 1: go down and you have to start thinking about raising
Speaker 1: rates again.
Speaker 2: As Chairpeal said, there's no risk free path. And if
Speaker 2: we focus too much on the lave market and then
Speaker 2: cut too aggressively, we can have an undesired outcome on
Speaker 2: the inflation side. If we focus too much on the
Speaker 2: inflation side and leave market to teer rates, we're going
Speaker 2: to have an undesired outcome. And so right now, what
Speaker 2: our strategy montary policy Strategy document says is that when
Speaker 2: you have some tension between your two goals, you have
Speaker 2: to follow a balanced approach, which is to a steer
Speaker 2: monetary policy to attend to both goals.
Speaker 1: Well, which way would you steer it in December? Based
Speaker 1: on what you know now?
Speaker 2: I think again it's very important that we treade with
Speaker 2: caution here. I think there is limited room to ease
Speaker 2: policy further without policy becoming overly accommodative. Montary policy, in
Speaker 2: my estimation, is somewhere between modestly restrictive and neutral, probably
Speaker 2: closer to neutral. If you look at the real federal
Speaker 2: funds rate, it now is around one percent and one
Speaker 2: percent happens to be the long run neutral rate in
Speaker 2: real terms for the federal funds rate of the entire committee,
Speaker 2: of the medium, I should say, of the entire committee.
Speaker 2: So I think we need to continue to lean against
Speaker 2: inflation to make sure we bring inflation back down towards
Speaker 2: our two percent target while providing some insurance to the
Speaker 2: labor market. One thing I hear often when I visit
Speaker 2: with folks in my district is that people are having
Speaker 2: more month than money increasingly number one. Number two, I
Speaker 2: hear that folks are increasingly going to food pantries, including
Speaker 2: middle income folks. And I hear that aid institutions are
Speaker 2: increasingly getting requests for utility assistance, probably related to higher
Speaker 2: electricity energy prices, I should say electricity prices. So those
Speaker 2: three things tell me that it's really important that we
Speaker 2: bring inflation back forwards two percent to allow households to
Speaker 2: catch up with our real incomes.
Speaker 1: I've only got about thirty seconds left. Markets are up
Speaker 1: this morning. They're cheered by the possibility of a shutdown deal.
Speaker 1: But when the sun comes up in the east, they've
Speaker 1: been going up cheerfully lately. Are you worried about the
Speaker 1: level of asset prices.
Speaker 2: Financial conditions are very accommodative of economic activity and of employment.
Speaker 2: The FED the Board just released as Financial Stability Report,
Speaker 2: where it says that asset valuations are notable and it's
Speaker 2: not our job to oppine on particular valuations of markets.
Speaker 2: But if you look at that report suggests that house
Speaker 2: prices are seam elevated relative historical standards, stock prices seem elevated,
Speaker 2: and to me, it's just the flip side of accommodated
Speaker 2: financial conditions.
Speaker 1: Alberta Miselle, thank you very much for joining us this morning.
Speaker 1: The president of the Saint Louis Fete