WEBVTT - Fed's Alberto Musalem Talks US Economy, Labor

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio News. Welcome to over Open

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<v Speaker 1>Interest on Bloomberg TV and Bloomberg has Intelligence on Bloomberg Radio.

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

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<v Speaker 1>international Economics and Policy correspondent, and joining me this morning

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<v Speaker 1>is Alberto Mussolam. He is the president of the Saint

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<v Speaker 1>Louis fed Thank you for coming in this morning here

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<v Speaker 1>in Washington, and we have some news in Washington that

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<v Speaker 1>we may be getting close to the end of the shutdown,

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

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<v Speaker 1>Based on what you know, now, what do you think

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<v Speaker 1>about the economy.

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<v Speaker 2>Mike, good morning, Great to be here. I see an

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<v Speaker 2>economy that has been pretty resilient, where growth has been

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<v Speaker 2>roughly around potential around one point eight for this year,

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<v Speaker 2>in spite of a lot of uncertainty. I see a

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<v Speaker 2>labor market that has been around for full employment is

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<v Speaker 2>around full employment has been cooling, demand and supply have

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<v Speaker 2>been cooling. And I see inflation which has been closer

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<v Speaker 2>to the three percent level than to our two percent target.

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<v Speaker 1>Well, we know that when the data comes out, everybody

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<v Speaker 1>will be parsing it. Carefully, But is it going to

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<v Speaker 1>add a lot to your knowledge of where the economy

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<v Speaker 1>is and possibly change any decision you might make.

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<v Speaker 2>More data is better than less data, so we will

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<v Speaker 2>learn it always has additional value. I do feel that

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<v Speaker 2>we have a pretty good sense of where the economy is.

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<v Speaker 2>We have availed ourselves during this period of unofficial data

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

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<v Speaker 2>been in close contact with all of our constituents, businesses, households,

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<v Speaker 2>community leaders in our districts. So I feel we have

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<v Speaker 2>a pretty good sense of the economy. But I'm very

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<v Speaker 2>much looking forward to seeing the official data releases because

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<v Speaker 2>they are the gold standard and they'll provide additional Well at.

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<v Speaker 1>Our companies in your district telling.

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<v Speaker 2>You, you know, they are saying that the consumption has

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<v Speaker 2>been resilient. They're saying that growth has been fine. They're

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<v Speaker 2>saying the libor market has softened a little bit. They

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<v Speaker 2>see much more, many more applicants per vacancy. They report

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<v Speaker 2>compensation growth somewhere between three and a half to four percent.

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<v Speaker 2>So things look reasonably okay.

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<v Speaker 1>But the consumption that remains resilient. Obviously, at the upper

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<v Speaker 1>ends you have the stock market wealth effect driving it.

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<v Speaker 1>But I know you've been worried about the lower death

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<v Speaker 1>syles because they're taking out more debt.

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<v Speaker 2>That's exactly what's happening. So we estimate that the real

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<v Speaker 2>consumption growth of the high income folks and of the

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<v Speaker 2>low income folks hasn't been about the same. But as

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<v Speaker 2>you said, the higher income households are consuming from the

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<v Speaker 2>wealth effects they have in the stock market and home prices.

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<v Speaker 2>By the way, lower income folks are taking on more debt.

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

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<v Speaker 2>the economy has been thus far.

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<v Speaker 1>Well, taking on debt to continue consumption. A cynical economist

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<v Speaker 1>might say, what have we heard that before and how

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<v Speaker 1>did that turn out? Are you worried that we're setting

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<v Speaker 1>up for a problem?

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<v Speaker 2>By and large when I look at consumer finances, if

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<v Speaker 2>you look at consumer balance sheets, by and large for

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

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<v Speaker 2>over the past year, we saw an increase in subprime

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<v Speaker 2>loan defaults, We saw an increase in credit card defaults.

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<v Speaker 2>Now over the past year those have started to stabilize

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<v Speaker 2>and actually come down some. But you know, at the

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<v Speaker 2>lower end of the income spectrum. You always have to

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<v Speaker 2>worry that, you know, those consumers who live, you know,

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<v Speaker 2>hand to mouth need to need to wait until the

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<v Speaker 2>end of the month to make it. You know, could

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<v Speaker 2>be always could be strained.

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<v Speaker 1>Companies, I know have been telling you and your colleagues

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<v Speaker 1>for some time that they're waiting for clarity, especially on

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

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<v Speaker 1>Are any of them saying, we're kind of at a

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<v Speaker 1>point now where we have to raise prices to keep

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<v Speaker 1>up with our input prices, or we have to cut

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<v Speaker 1>back on people because our margins are compressing.

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<v Speaker 2>Two questions to answers. I think companies tell me that

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<v Speaker 2>uncertainty has plateaued and that they can understand how to

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<v Speaker 2>operate in this with this new higher level of uncertainty.

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<v Speaker 2>So some of that is going on in terms of

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<v Speaker 2>pass through of higher costs. Companies are experiencing higher costs

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<v Speaker 2>somewhat related to tariffs, some are related to other things

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<v Speaker 2>like insurance, which is totally unrelated to to tariff. TIFF's

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<v Speaker 2>and companies that are upstream so earlier in the production

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<v Speaker 2>process are successful in passing on those costs to other

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<v Speaker 2>companies to build products that they build. Companies that are

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<v Speaker 2>closer to the consumer and selling to the final purchaser

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<v Speaker 2>of a good are having more difficulty in passing things

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<v Speaker 2>on because they are facing some pushback from the final buyer.

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

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<v Speaker 1>lot of layoff announcements over the past couple of weeks.

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<v Speaker 1>Is this a gathering trend? Are we going to start

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<v Speaker 1>talking about the SAM rule again.

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<v Speaker 2>I see the labor market as having cooled in an

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<v Speaker 2>early way, both because supplying demand have cooled. The latest

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<v Speaker 2>challenger job announcements, which are you're referring to, you know,

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<v Speaker 2>I definitely took notice of them, but they don't necessarily

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<v Speaker 2>mean the labor market, you know, is about to go

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<v Speaker 2>into deterioration phase in the same week that they were announced.

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<v Speaker 2>As you know, the weekly claims, which are you know,

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<v Speaker 2>another very good indicator of layoffs, has has remained stable

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<v Speaker 2>so far. So you have to look at all of

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<v Speaker 2>the data in the labor market and see whether those

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<v Speaker 2>layoff announcements will actually materialize.

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<v Speaker 1>In terms of supply problems in the labor market. Monetary

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<v Speaker 1>policy can't affect that.

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<v Speaker 2>The traditional way to think about monetary policy is that

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<v Speaker 2>it is more effective with respect to cyclical and demand

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<v Speaker 2>side type of factors. But I think we also need

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<v Speaker 2>to be thinking, if the economy is going through a

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<v Speaker 2>structural transition, what role does monetary policy need to play

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<v Speaker 2>facilitation facilitating that transition. So we have to, in my mind,

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<v Speaker 2>be thinking about those two things. Now.

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<v Speaker 1>There are two arguments that seems to be at the

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<v Speaker 1>FED right now. One is that we need to get

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<v Speaker 1>ahead of a brewing problem, especially in the labor market,

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<v Speaker 1>and the other is if you're in a dark room,

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<v Speaker 1>you want to move carefully and maybe pause. Which one

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<v Speaker 1>do you think carries more weight?

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<v Speaker 2>The way I think about it is, I feel we

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<v Speaker 2>have adequate information to make decisions to cut rates or

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

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<v Speaker 2>that I happen to have and the balance of risks

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<v Speaker 2>that I happen to have with the information that I

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<v Speaker 2>currently have. So, going back to your first part of

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<v Speaker 2>the question, in the past year, the real federal funds

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<v Speaker 2>rate has declined by two hundred and fifty basis points.

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<v Speaker 2>Of that, one hundred and fifty basis points have been

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<v Speaker 2>reductions in the nominal interest rate to provide insurance to

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<v Speaker 2>the labor market and to get ahead of any deterioration

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<v Speaker 2>and to keep it the labor market around full employment.

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<v Speaker 2>And about one hundred basis points of the decline in

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<v Speaker 2>the real federal funds rate has been looking through through

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<v Speaker 2>the rise and expected inflation, mostly due to tariffs. So

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<v Speaker 2>that's how I think about monetary policy right now.

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<v Speaker 1>Well, to the extent that they know, what are companies

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<v Speaker 1>telling you about monetary policy? Do they say that we're

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<v Speaker 1>going to have to raise prices or cut employees if

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<v Speaker 1>you don't cut interest rates?

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<v Speaker 2>Not necessarily. I don't hear that from companies. Companies often

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<v Speaker 2>are more concerned about non interest costs that are increasing.

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<v Speaker 2>For example, I mentioned insurance, but you know raw matarial

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<v Speaker 2>costs and other costs to produce things all the way

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<v Speaker 2>from building homes to producing manufactured goods, and so I

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<v Speaker 2>hear more about that than about interest costs being something

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<v Speaker 2>that needs to be passed on to consumers. So it's

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<v Speaker 2>very important that we continue to focus. I'm bringing inflation

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<v Speaker 2>back down towards two percent.

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<v Speaker 1>Well, we hear a lot from your colleagues. We heard

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<v Speaker 1>from Chair Powell about the risk of cutting too fast

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<v Speaker 1>versus the risk of not cutting soon enough. What about

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<v Speaker 1>the risk credibility if you cut but then inflation doesn't

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<v Speaker 1>go down and you have to start thinking about raising

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<v Speaker 1>rates again.

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

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<v Speaker 2>we focus too much on the lave market and then

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<v Speaker 2>cut too aggressively, we can have an undesired outcome on

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<v Speaker 2>the inflation side. If we focus too much on the

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<v Speaker 2>inflation side and leave market to teer rates, we're going

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<v Speaker 2>to have an undesired outcome. And so right now, what

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<v Speaker 2>our strategy montary policy Strategy document says is that when

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<v Speaker 2>you have some tension between your two goals, you have

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<v Speaker 2>to follow a balanced approach, which is to a steer

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<v Speaker 2>monetary policy to attend to both goals.

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<v Speaker 1>Well, which way would you steer it in December? Based

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<v Speaker 1>on what you know now?

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<v Speaker 2>I think again it's very important that we treade with

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<v Speaker 2>caution here. I think there is limited room to ease

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<v Speaker 2>policy further without policy becoming overly accommodative. Montary policy, in

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<v Speaker 2>my estimation, is somewhere between modestly restrictive and neutral, probably

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<v Speaker 2>closer to neutral. If you look at the real federal

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<v Speaker 2>funds rate, it now is around one percent and one

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<v Speaker 2>percent happens to be the long run neutral rate in

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<v Speaker 2>real terms for the federal funds rate of the entire committee,

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<v Speaker 2>of the medium, I should say, of the entire committee.

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<v Speaker 2>So I think we need to continue to lean against

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<v Speaker 2>inflation to make sure we bring inflation back down towards

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<v Speaker 2>our two percent target while providing some insurance to the

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<v Speaker 2>labor market. One thing I hear often when I visit

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<v Speaker 2>with folks in my district is that people are having

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<v Speaker 2>more month than money increasingly number one. Number two, I

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<v Speaker 2>hear that folks are increasingly going to food pantries, including

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<v Speaker 2>middle income folks. And I hear that aid institutions are

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<v Speaker 2>increasingly getting requests for utility assistance, probably related to higher

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<v Speaker 2>electricity energy prices, I should say electricity prices. So those

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<v Speaker 2>three things tell me that it's really important that we

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<v Speaker 2>bring inflation back forwards two percent to allow households to

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<v Speaker 2>catch up with our real incomes.

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<v Speaker 1>I've only got about thirty seconds left. Markets are up

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

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<v Speaker 1>But when the sun comes up in the east, they've

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<v Speaker 1>been going up cheerfully lately. Are you worried about the

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<v Speaker 1>level of asset prices.

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<v Speaker 2>Financial conditions are very accommodative of economic activity and of employment.

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<v Speaker 2>The FED the Board just released as Financial Stability Report,

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<v Speaker 2>where it says that asset valuations are notable and it's

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<v Speaker 2>not our job to oppine on particular valuations of markets.

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<v Speaker 2>But if you look at that report suggests that house

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<v Speaker 2>prices are seam elevated relative historical standards, stock prices seem elevated,

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<v Speaker 2>and to me, it's just the flip side of accommodated

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<v Speaker 2>financial conditions.

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<v Speaker 1>Alberta Miselle, thank you very much for joining us this morning.

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<v Speaker 1>The president of the Saint Louis Fete