WEBVTT - Esther George Talks Inflation, Interest Rates

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Let's get a little bit more detail. This is the

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<v Speaker 2>ecan function on the Bloomberg terminal. It really helps to

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<v Speaker 2>break down the different inputs to overall CPI. The yellow

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<v Speaker 2>bars core services, the purple is core goods, then the

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<v Speaker 2>red is energy, and then the blue is food. And

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<v Speaker 2>what I find really interesting about this is a disinflationary

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<v Speaker 2>trend that we saw back in twenty twenty four is

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<v Speaker 2>basically over in this last read. Maybe a little touch

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<v Speaker 2>of a disinflationary trend when it comes to the core goods,

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<v Speaker 2>but for the most part, everything else energy and food

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<v Speaker 2>as well as services is still rising now. Albeit services

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<v Speaker 2>inflation has come off the boil from one of what

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<v Speaker 2>we saw back in twenty twenty four in July, but

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<v Speaker 2>still we're right around forty year highs. And anyway you

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<v Speaker 2>look at it, those prices appear sticky plus for I mean,

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<v Speaker 2>if the disinflation narrative is over, then what then what?

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<v Speaker 1>Let's pose that question to our first guest kicking this

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<v Speaker 1>off to the close is Esther George of course, former

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<v Speaker 1>Kansas City Fed President, and Esther, you've had a lifetime,

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<v Speaker 1>really of doing this you've seen these various inflationary cycles,

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<v Speaker 1>these various economic cycles. Should we be worried about a

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<v Speaker 1>potential resurgence in inflation or is this just that normal

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<v Speaker 1>sort of bumpy road down to what I guess most

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<v Speaker 1>of us hope is going to be that two percent target.

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<v Speaker 3>Yeah, well, thank you for having me today. And I

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<v Speaker 3>think you have to be worried about this inflation, not

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<v Speaker 3>because what we've seen so far tells us that there'll

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<v Speaker 3>be a resurgence, but because this level of inflation has

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<v Speaker 3>remained well above the Fed's target. That, of course, is

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<v Speaker 3>a principal job of the FMC is to make sure

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<v Speaker 3>that inflation rate gets back to its two percent target

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<v Speaker 3>in a timely way. And we've gone on some time

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<v Speaker 3>now with inflation hanging out there ways above that.

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<v Speaker 1>How dangerous is it? Though? I mean we still talk

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<v Speaker 1>at least if you take pals preferred measure the core PCEE,

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<v Speaker 1>I mean we're basically at around three percent on some

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<v Speaker 1>of the headline CPI numbers. We're certainly in an area

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<v Speaker 1>that I think a lot of people can live with,

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<v Speaker 1>whether it's the economy, whether it's corporations, or whether it's

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<v Speaker 1>the market. If the economy is healthy as evidence by

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<v Speaker 1>consumer spending, as evidenced by the labor market. Should we

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<v Speaker 1>still be quibbling over three point three percent on core CPI?

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<v Speaker 3>Well, I think you do want to quibble over it,

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<v Speaker 3>because once in inflation psychology gets embedded in an economy,

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<v Speaker 3>you begin to see inflation expectations change. And it's one

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<v Speaker 3>of the things that would have my attention right now

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<v Speaker 3>is the FED has been able to rely on anchored,

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<v Speaker 3>well anchored inflation expectations over the course of this post

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<v Speaker 3>pandemic period. But if you look at recent prints, you

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<v Speaker 3>will see that those are beginning to drift up and

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<v Speaker 3>even consumer expectations or begin to signal expectations of future inflation.

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<v Speaker 3>And that's why, in addition to the FED zone credibility,

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<v Speaker 3>you want to anchor that inflation at the Fed's stated

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<v Speaker 3>two percent target.

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<v Speaker 2>A lot is being made though esther on seasonality, and

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<v Speaker 2>there's January season atalie sort of post vacation movement there.

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<v Speaker 2>You also had LA wildfires, etc. Do you buy the

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<v Speaker 2>seasonality argument, Well.

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<v Speaker 3>There's always an element there that you have to take

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<v Speaker 3>note of. But I think what's particularly important right now

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<v Speaker 3>is this is just a one off data print. You

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<v Speaker 3>have now seen a succession of reports that are telling

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<v Speaker 3>us that inflation is hanging in there in the three

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<v Speaker 3>percent range. And even though that's not the Fed's preferred

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<v Speaker 3>indicator when they are making decisions, the truth is CPI

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<v Speaker 3>tells us something because so many contracts in our economy

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<v Speaker 3>are based off of this, and so it's not to

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<v Speaker 3>be ignored, I think, and just dismissed at this point,

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<v Speaker 3>and I'd be paying very careful attention to the numbers

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<v Speaker 3>we've seen come in now.

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<v Speaker 2>Clearly at the FED, you guys look at PCEE versus CPI.

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<v Speaker 2>So is there a level for PCEE that you guys

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<v Speaker 2>used to talk about. Okay, that's a hurdle for say,

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<v Speaker 2>talking about hikes.

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<v Speaker 3>Well, I don't think there was a particular level to

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<v Speaker 3>talk about hikes, because what you're always trying to figure

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<v Speaker 3>out is that that core level telling us something. Is

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<v Speaker 3>that the headline, which can be volatile, as people know

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<v Speaker 3>with food and energy cost. I think what we've seen

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<v Speaker 3>over the past few years, though, is something quite different.

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<v Speaker 3>This is really telling us that there is real inflation

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<v Speaker 3>in the economy, and the FED has been quite clear

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<v Speaker 3>as I think they have to be that they will

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<v Speaker 3>not be satisfied that they have achieved their mandate until

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<v Speaker 3>they get back to two percent on a sustainable basis,

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<v Speaker 3>and so there's more work to do here.

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<v Speaker 1>Clearly, are you, generally, though, satisfied with the communication that

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<v Speaker 1>we're getting out of the Fed, whether it's coming directly

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<v Speaker 1>from Bow or from some of the other FOMC members,

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<v Speaker 1>Is that helping.

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<v Speaker 3>Well? The markets I think have already begun to take

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<v Speaker 3>note that this idea of a steady pace of rate

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<v Speaker 3>cuts is not likely to happen. And of course, with

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<v Speaker 3>a hundred basis points of cuts last year, the most

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<v Speaker 3>recent one in December, those expectations are beginning to shift.

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<v Speaker 3>And I hear that in the communications from the FED,

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<v Speaker 3>which is to say, we are not going to be moving.

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<v Speaker 3>We have time. We want to watch and see what

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<v Speaker 3>happens with the data. And this is true not only

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<v Speaker 3>for inflation, but you see a number of other policy

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<v Speaker 3>implications coming down the road as the new administration begins

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<v Speaker 3>to look at various levers they have for the economy.

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<v Speaker 1>Does the FED have that luxury of just waiting and

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<v Speaker 1>seeing and they've been waiting and seeing for a while now.

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<v Speaker 1>We played some comments earlier from Muhammadel area, and he

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<v Speaker 1>gave an interview on Bloomberg Television where he talked about,

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<v Speaker 1>in his words, what he sees as a lack of

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<v Speaker 1>strategic vision on the part of the FED, this idea

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<v Speaker 1>of just wait for the whites of the eyes before

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<v Speaker 1>you shoot. And now he seems and certain folks in

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<v Speaker 1>the market also seem to think that maybe the FED

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<v Speaker 1>should be a bit more proactive.

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<v Speaker 3>So I think the FED is certainly going to have

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<v Speaker 3>to be talking about this. And if you listen to

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<v Speaker 3>their language, they continue to refer to current interest rates

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<v Speaker 3>even at that four and a quarter four and a

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<v Speaker 3>half to be in restrictive territory. Some refer to it

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<v Speaker 3>as meaningfully restrictive. Some have said maybe it's getting close

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<v Speaker 3>to neutral.

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<v Speaker 2>And so I.

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<v Speaker 3>Suspected their upcoming meeting this has to be a real

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<v Speaker 3>point of discussion, is really narrowing in on where they

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<v Speaker 3>think they are and how they will communicate what their

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<v Speaker 3>stance is going to be relative to the objective that's

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<v Speaker 3>in front of them.

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<v Speaker 2>Esther, isn't it all confusing as to why it seems

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<v Speaker 2>like the feed through from rates from monetary policy to

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<v Speaker 2>the real economy has been somewhat stemied.

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<v Speaker 3>Yeah, I think that's been interesting to see whether the

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<v Speaker 3>transmission of policy has changed, and you can look at

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<v Speaker 3>some of the reasons why that might be. For example,

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<v Speaker 3>just look at a market that tends to get hit

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<v Speaker 3>directly in real estate, and particularly residential real estate, when

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<v Speaker 3>most of the mortgage holders have locked in low rates,

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<v Speaker 3>it will make the transmission of that policy different this

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<v Speaker 3>time and slower. You also see that I think when

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<v Speaker 3>you look at services, a services economy has a different

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<v Speaker 3>traction I would guess as it relates to that policy transmission.

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<v Speaker 3>So it is a challenge for the FED coming off

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<v Speaker 3>the pandemic, coming off the supply chain issues that were

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<v Speaker 3>complicating their analysis to really understand transmission. I think the risk,

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<v Speaker 3>of course, and one they must be very mindful of,

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<v Speaker 3>is that waiting too long carries important risks until they

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<v Speaker 3>bring that inflation right back down.

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<v Speaker 2>Esther, was a true pleasure to get your perspective. Thank

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<v Speaker 2>you so much, Esther George, former President and Chief Executive

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<v Speaker 2>of the Federal Reserve Bank of Kansas City,