Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Let's get a little bit more detail. This is the
Speaker 2: ecan function on the Bloomberg terminal. It really helps to
Speaker 2: break down the different inputs to overall CPI. The yellow
Speaker 2: bars core services, the purple is core goods, then the
Speaker 2: red is energy, and then the blue is food. And
Speaker 2: what I find really interesting about this is a disinflationary
Speaker 2: trend that we saw back in twenty twenty four is
Speaker 2: basically over in this last read. Maybe a little touch
Speaker 2: of a disinflationary trend when it comes to the core goods,
Speaker 2: but for the most part, everything else energy and food
Speaker 2: as well as services is still rising now. Albeit services
Speaker 2: inflation has come off the boil from one of what
Speaker 2: we saw back in twenty twenty four in July, but
Speaker 2: still we're right around forty year highs. And anyway you
Speaker 2: look at it, those prices appear sticky plus for I mean,
Speaker 2: if the disinflation narrative is over, then what then what?
Speaker 1: Let's pose that question to our first guest kicking this
Speaker 1: off to the close is Esther George of course, former
Speaker 1: Kansas City Fed President, and Esther, you've had a lifetime,
Speaker 1: really of doing this you've seen these various inflationary cycles,
Speaker 1: these various economic cycles. Should we be worried about a
Speaker 1: potential resurgence in inflation or is this just that normal
Speaker 1: sort of bumpy road down to what I guess most
Speaker 1: of us hope is going to be that two percent target.
Speaker 3: Yeah, well, thank you for having me today. And I
Speaker 3: think you have to be worried about this inflation, not
Speaker 3: because what we've seen so far tells us that there'll
Speaker 3: be a resurgence, but because this level of inflation has
Speaker 3: remained well above the Fed's target. That, of course, is
Speaker 3: a principal job of the FMC is to make sure
Speaker 3: that inflation rate gets back to its two percent target
Speaker 3: in a timely way. And we've gone on some time
Speaker 3: now with inflation hanging out there ways above that.
Speaker 1: How dangerous is it? Though? I mean we still talk
Speaker 1: at least if you take pals preferred measure the core PCEE,
Speaker 1: I mean we're basically at around three percent on some
Speaker 1: of the headline CPI numbers. We're certainly in an area
Speaker 1: that I think a lot of people can live with,
Speaker 1: whether it's the economy, whether it's corporations, or whether it's
Speaker 1: the market. If the economy is healthy as evidence by
Speaker 1: consumer spending, as evidenced by the labor market. Should we
Speaker 1: still be quibbling over three point three percent on core CPI?
Speaker 3: Well, I think you do want to quibble over it,
Speaker 3: because once in inflation psychology gets embedded in an economy,
Speaker 3: you begin to see inflation expectations change. And it's one
Speaker 3: of the things that would have my attention right now
Speaker 3: is the FED has been able to rely on anchored,
Speaker 3: well anchored inflation expectations over the course of this post
Speaker 3: pandemic period. But if you look at recent prints, you
Speaker 3: will see that those are beginning to drift up and
Speaker 3: even consumer expectations or begin to signal expectations of future inflation.
Speaker 3: And that's why, in addition to the FED zone credibility,
Speaker 3: you want to anchor that inflation at the Fed's stated
Speaker 3: two percent target.
Speaker 2: A lot is being made though esther on seasonality, and
Speaker 2: there's January season atalie sort of post vacation movement there.
Speaker 2: You also had LA wildfires, etc. Do you buy the
Speaker 2: seasonality argument, Well.
Speaker 3: There's always an element there that you have to take
Speaker 3: note of. But I think what's particularly important right now
Speaker 3: is this is just a one off data print. You
Speaker 3: have now seen a succession of reports that are telling
Speaker 3: us that inflation is hanging in there in the three
Speaker 3: percent range. And even though that's not the Fed's preferred
Speaker 3: indicator when they are making decisions, the truth is CPI
Speaker 3: tells us something because so many contracts in our economy
Speaker 3: are based off of this, and so it's not to
Speaker 3: be ignored, I think, and just dismissed at this point,
Speaker 3: and I'd be paying very careful attention to the numbers
Speaker 3: we've seen come in now.
Speaker 2: Clearly at the FED, you guys look at PCEE versus CPI.
Speaker 2: So is there a level for PCEE that you guys
Speaker 2: used to talk about. Okay, that's a hurdle for say,
Speaker 2: talking about hikes.
Speaker 3: Well, I don't think there was a particular level to
Speaker 3: talk about hikes, because what you're always trying to figure
Speaker 3: out is that that core level telling us something. Is
Speaker 3: that the headline, which can be volatile, as people know
Speaker 3: with food and energy cost. I think what we've seen
Speaker 3: over the past few years, though, is something quite different.
Speaker 3: This is really telling us that there is real inflation
Speaker 3: in the economy, and the FED has been quite clear
Speaker 3: as I think they have to be that they will
Speaker 3: not be satisfied that they have achieved their mandate until
Speaker 3: they get back to two percent on a sustainable basis,
Speaker 3: and so there's more work to do here.
Speaker 1: Clearly, are you, generally, though, satisfied with the communication that
Speaker 1: we're getting out of the Fed, whether it's coming directly
Speaker 1: from Bow or from some of the other FOMC members,
Speaker 1: Is that helping.
Speaker 3: Well? The markets I think have already begun to take
Speaker 3: note that this idea of a steady pace of rate
Speaker 3: cuts is not likely to happen. And of course, with
Speaker 3: a hundred basis points of cuts last year, the most
Speaker 3: recent one in December, those expectations are beginning to shift.
Speaker 3: And I hear that in the communications from the FED,
Speaker 3: which is to say, we are not going to be moving.
Speaker 3: We have time. We want to watch and see what
Speaker 3: happens with the data. And this is true not only
Speaker 3: for inflation, but you see a number of other policy
Speaker 3: implications coming down the road as the new administration begins
Speaker 3: to look at various levers they have for the economy.
Speaker 1: Does the FED have that luxury of just waiting and
Speaker 1: seeing and they've been waiting and seeing for a while now.
Speaker 1: We played some comments earlier from Muhammadel area, and he
Speaker 1: gave an interview on Bloomberg Television where he talked about,
Speaker 1: in his words, what he sees as a lack of
Speaker 1: strategic vision on the part of the FED, this idea
Speaker 1: of just wait for the whites of the eyes before
Speaker 1: you shoot. And now he seems and certain folks in
Speaker 1: the market also seem to think that maybe the FED
Speaker 1: should be a bit more proactive.
Speaker 3: So I think the FED is certainly going to have
Speaker 3: to be talking about this. And if you listen to
Speaker 3: their language, they continue to refer to current interest rates
Speaker 3: even at that four and a quarter four and a
Speaker 3: half to be in restrictive territory. Some refer to it
Speaker 3: as meaningfully restrictive. Some have said maybe it's getting close
Speaker 3: to neutral.
Speaker 2: And so I.
Speaker 3: Suspected their upcoming meeting this has to be a real
Speaker 3: point of discussion, is really narrowing in on where they
Speaker 3: think they are and how they will communicate what their
Speaker 3: stance is going to be relative to the objective that's
Speaker 3: in front of them.
Speaker 2: Esther, isn't it all confusing as to why it seems
Speaker 2: like the feed through from rates from monetary policy to
Speaker 2: the real economy has been somewhat stemied.
Speaker 3: Yeah, I think that's been interesting to see whether the
Speaker 3: transmission of policy has changed, and you can look at
Speaker 3: some of the reasons why that might be. For example,
Speaker 3: just look at a market that tends to get hit
Speaker 3: directly in real estate, and particularly residential real estate, when
Speaker 3: most of the mortgage holders have locked in low rates,
Speaker 3: it will make the transmission of that policy different this
Speaker 3: time and slower. You also see that I think when
Speaker 3: you look at services, a services economy has a different
Speaker 3: traction I would guess as it relates to that policy transmission.
Speaker 3: So it is a challenge for the FED coming off
Speaker 3: the pandemic, coming off the supply chain issues that were
Speaker 3: complicating their analysis to really understand transmission. I think the risk,
Speaker 3: of course, and one they must be very mindful of,
Speaker 3: is that waiting too long carries important risks until they
Speaker 3: bring that inflation right back down.
Speaker 2: Esther, was a true pleasure to get your perspective. Thank
Speaker 2: you so much, Esther George, former President and Chief Executive
Speaker 2: of the Federal Reserve Bank of Kansas City,