WEBVTT - Fed's Williams Supports June Hike, Sees 2% GDP Growth (Audio) 0:00:00.160 --> 0:00:03.480 Want to welcome our Bloomberg Television audience to our exclusive 0:00:03.520 --> 0:00:07.040 Bloomberg Radio interview with John Williams. He's President of the 0:00:07.040 --> 0:00:09.480 Federal Reserve Bank of St. Louis, joining us today at 0:00:09.520 --> 0:00:13.120 our San Francisco Bloomberg News Bureau. John, Welcome, San Francisco. 0:00:13.240 --> 0:00:16.840 I am President of San Francisco FED. You are which 0:00:16.880 --> 0:00:19.000 one I was just making St. Louis. Well, you know 0:00:19.040 --> 0:00:24.759 I've been my good friend. Here impersonating another FED official 0:00:24.800 --> 0:00:27.680 back could get you in real trouble. John Williams, President 0:00:27.680 --> 0:00:29.159 of San Francisco FED, And here we are in the 0:00:29.160 --> 0:00:31.840 beautiful Bay Area. It's great to be back with you, John. 0:00:31.840 --> 0:00:35.120 I want to drive right in though. Uh. You know 0:00:35.240 --> 0:00:37.680 you've been recently upbeat on the US economy and your 0:00:37.720 --> 0:00:39.680 most recent speech in March, you painted a picture of 0:00:39.680 --> 0:00:43.240 a growing economy. You're looking for two percent GDP growth 0:00:43.280 --> 0:00:46.280 at least this year, confident inflation is going to his 0:00:46.320 --> 0:00:49.479 target by the end of next year, and you've emphasize 0:00:49.520 --> 0:00:52.479 the weakness overseas isn't decisive for the US economy. So, 0:00:52.520 --> 0:00:55.240 with all that in mind, were you on board last 0:00:55.280 --> 0:00:59.960 week with the Fed's decision to not move on interest rates. Yeah, 0:01:00.040 --> 0:01:02.480 say was, I mean, I think we are in a 0:01:02.560 --> 0:01:04.920 very data dependent mode. We want to make sure that 0:01:04.959 --> 0:01:07.440 we have a very good reading and understanding of what's 0:01:07.480 --> 0:01:10.480 happening both in the US economy in terms of growth, jobs, 0:01:10.480 --> 0:01:13.280 and inflation, but also also make sure we have a 0:01:13.280 --> 0:01:16.280 good read and what's happening globally because that does affect 0:01:16.280 --> 0:01:19.440 the US economy. So I I am a supporter of 0:01:19.480 --> 0:01:22.680 the decisions we've made this year. Uh. That said, I 0:01:22.720 --> 0:01:25.679 do also support the statement we put out there, which 0:01:25.720 --> 0:01:28.320 is that I do expect us to be raising rates 0:01:28.360 --> 0:01:30.920 gradually over the next couple of years due to the 0:01:30.959 --> 0:01:33.760 strength and the labor marketing where I see inflation going. So, 0:01:33.800 --> 0:01:35.640 how are you looking at the US economy in light 0:01:35.680 --> 0:01:38.840 of that first quarter GDP figure? John, zero point five percent? 0:01:38.920 --> 0:01:42.240 And I know your team has has discounted it, not 0:01:42.319 --> 0:01:44.680 just discounted it, but analyzed it. And you've looked at 0:01:44.680 --> 0:01:47.200 the seasonality in those first quarter numbers, how they tend 0:01:47.200 --> 0:01:50.040 that first quarter GDP for many years now has tended 0:01:50.080 --> 0:01:54.520 to be slower than forecast by a wide margin. In fact, 0:01:55.720 --> 0:01:58.960 your your economist, Glen Ruda Bush, has argued that if 0:01:59.000 --> 0:02:01.520 you account for that, it was probably closer one point 0:02:01.600 --> 0:02:05.560 six percent in the first quarter. Hasn't that statistical anomaly 0:02:05.640 --> 0:02:08.160 been fixed? Though? Well, you know the Bureau of Economic 0:02:08.200 --> 0:02:10.400 Analysis that they have a lot of people working on 0:02:10.440 --> 0:02:13.520 this issue of what we call residual seasonality um, and 0:02:13.560 --> 0:02:15.400 I think they have made good improvements. They do a 0:02:15.400 --> 0:02:17.960 great job with the data. But this is an anomaly that, 0:02:18.240 --> 0:02:20.760 as you mentioned, we've seen for many years now. So 0:02:20.880 --> 0:02:22.960 my own view is that the data in the first quarter, 0:02:23.000 --> 0:02:24.800 we do have to discount it a bit, and my 0:02:24.960 --> 0:02:27.120 view would be be closer to something like two percent 0:02:27.160 --> 0:02:29.880 growth or more consistent with what I see as underline trend. 0:02:30.160 --> 0:02:32.560 So overall, I haven't changed my view about what growth 0:02:32.600 --> 0:02:35.160 over the whole year will be around two percent real 0:02:35.200 --> 0:02:37.720 GDP growth, which is what we saw last year. Quite 0:02:37.720 --> 0:02:40.880 apart from GDP though retail sales PC, you know, the 0:02:40.919 --> 0:02:43.600 personal consumption expenditutors, they came in on the week's side 0:02:43.600 --> 0:02:45.799 in the first quarter. Are you are is there a 0:02:45.919 --> 0:02:49.920 risk you overlook that signs other signs that the U. 0:02:49.960 --> 0:02:53.040 S economy actually lost momentum in the first quarter, and 0:02:53.080 --> 0:02:56.080 that's zero point five percent. Isn't such an anomally you know? 0:02:56.120 --> 0:02:58.440 Then you you average growth in the first the fourth quarter. 0:02:58.440 --> 0:03:00.919 In the first quarter, this is a pretty week's are steen, 0:03:00.919 --> 0:03:02.680 which maybe makes that two percent plus a little bit 0:03:02.680 --> 0:03:04.760 harder to achieve. Well, you know, when I when I 0:03:04.800 --> 0:03:06.960 think about this again, we want to be data depending. 0:03:07.040 --> 0:03:09.080 I think this is another reason to be a little 0:03:09.120 --> 0:03:12.320 bit cautious in terms of jumping to conclusions either positive 0:03:12.360 --> 0:03:14.040 or negative based on the first quarter growth. I do 0:03:14.120 --> 0:03:17.120 want to see good consumer spending data in the next 0:03:17.160 --> 0:03:18.800 couple of months. Do you want to see more signs 0:03:18.800 --> 0:03:22.000 that that anomalous reading the first quarter really was anomalous? 0:03:22.000 --> 0:03:24.200 So I agree with that point. I do tend to 0:03:24.240 --> 0:03:27.040 focus more on the employment data. Employment job gains have 0:03:27.120 --> 0:03:29.480 been really strong all the way through the latest data. 0:03:29.480 --> 0:03:31.600 Well we've seen you know, we'll get some more data 0:03:32.160 --> 0:03:35.320 soon as well. But when you look at job growth, 0:03:35.320 --> 0:03:37.720 you look at unemployment, you look at labor force participation, 0:03:37.760 --> 0:03:40.840 in a lot of other indicators, labor market continues to improve. 0:03:40.960 --> 0:03:43.000 I think we're full employment or close to it on 0:03:43.000 --> 0:03:45.400 all these indicators. So I do take a pretty strong 0:03:45.480 --> 0:03:47.840 signal from the from the employment side, not just a 0:03:47.920 --> 0:03:50.119 g d P, which tends to be you know, volatile 0:03:50.160 --> 0:03:52.320 and subject to some of these revisions and other issues. 0:03:52.480 --> 0:03:54.440 So as we look ahead to the next meeting, and 0:03:54.480 --> 0:03:58.080 obviously everyone's looking ahead to that meeting. So my yeah, 0:03:58.120 --> 0:04:00.720 and you're gonna go to Octionton, not St. Louis, but 0:04:00.760 --> 0:04:04.200 from San Francisco. What what do you need to see? 0:04:04.680 --> 0:04:06.760 You know, we've had strong jobs growth, but we haven't 0:04:06.760 --> 0:04:09.200 had inflation picking up very much. So what what does 0:04:09.280 --> 0:04:11.640 John Williams have to see when he sits down at 0:04:11.680 --> 0:04:14.720 the table in June to say yes, I'm arguing for 0:04:14.920 --> 0:04:18.440 I'm on board for the great hike. So I think 0:04:18.440 --> 0:04:20.719 we need to see a continuation of the progress we 0:04:20.800 --> 0:04:23.040 have been seeing over the last year, seeing core or 0:04:23.120 --> 0:04:27.960 underlying measures of inflation continue to move generally up towards 0:04:28.000 --> 0:04:30.680 two percent. I'm not expecting to jump towards supercent, but 0:04:30.760 --> 0:04:33.279 be on a on the right trajectory consistent with my 0:04:33.440 --> 0:04:35.800 forecast that over the next couple of years inflation will 0:04:35.880 --> 0:04:37.960 two years inflation will get back to two percent. I 0:04:38.000 --> 0:04:40.640 also want to see continue good job gains and continued 0:04:40.680 --> 0:04:43.320 signs of the economy as it has still good momentum. 0:04:43.360 --> 0:04:46.920 So I'm looking for a continuation of what we've been seeing, 0:04:47.040 --> 0:04:50.479 not for a big upside surprise. But obviously I don't 0:04:50.480 --> 0:04:53.680 need to see really strong just a continuation of what 0:04:53.760 --> 0:04:56.560 we have been seeing. So the status quo will be enough. Yeah, 0:04:56.600 --> 0:04:58.880 because again I think it would for me. It would 0:04:58.880 --> 0:05:01.600 resolve some of these little worries about Q one data. 0:05:01.680 --> 0:05:04.080 What was that telling us. I don't take a strong 0:05:04.080 --> 0:05:05.800 signal from it, but I want to make sure that 0:05:05.800 --> 0:05:09.520 that's the right conclusion. And also this issue about uncertainty 0:05:09.560 --> 0:05:12.039 abroad and and in financial market turm Hall early in 0:05:12.040 --> 0:05:13.800 the year, we want to make sure that that didn't 0:05:14.000 --> 0:05:16.160 have a bigger impact on the US economy. So if 0:05:16.160 --> 0:05:18.680 I c S continue to add good number of jobs 0:05:18.680 --> 0:05:21.760 he you know, againing improvements in the economy, and good 0:05:21.760 --> 0:05:25.320 signs on inflation, that would be enough. Good signs on inflation, 0:05:25.400 --> 0:05:28.680 but nothing because it's a forecast so far, right, John, 0:05:28.720 --> 0:05:31.719 and inflation has been undershooting for a long time. So 0:05:31.760 --> 0:05:34.119 in other words, you're willing to say, let's go ahead 0:05:34.160 --> 0:05:38.760 and raise interest rates again June, even if inflation is 0:05:38.760 --> 0:05:41.359 still a forecast and it has moved higher, that's right. 0:05:41.400 --> 0:05:43.760 As long as the inflation they are consistent with the 0:05:43.800 --> 0:05:46.880 forecast I have of moving towards two percent, that would 0:05:46.920 --> 0:05:49.520 be enough. Now, you know, as you you mentioned, we've 0:05:49.560 --> 0:05:52.839 been missing undershooting inflation for quite some time. But you know, 0:05:52.880 --> 0:05:55.240 in terms of the and I take that seriously in 0:05:55.320 --> 0:05:57.400 terms of thinking about what's happening. But in terms of 0:05:57.400 --> 0:06:00.640 Monterey policy, Let's remember, interest rates are still very low. 0:06:01.200 --> 0:06:04.560 I'm not talking about having one interest rate increase, you know, 0:06:04.600 --> 0:06:07.400 in the next few months or whenever. Isn't making tight 0:06:07.480 --> 0:06:10.200 Monterey policy. It's just stepping back a little bit from 0:06:10.200 --> 0:06:12.839 the very a comedy of Monterey policy. So it's not 0:06:12.880 --> 0:06:15.360 about tightening policy so much, it's just pulling back a 0:06:15.360 --> 0:06:18.120 little bit on the accommodation we've had in place. Well, 0:06:18.120 --> 0:06:20.680 because as you know, market expectations are once again a 0:06:20.680 --> 0:06:22.920 little bit out of sync with the FED. Because right now, 0:06:23.120 --> 0:06:25.360 basically you could say the markets are pricing in just 0:06:25.480 --> 0:06:28.160 one interest rate increase. You've had people like Larry Fink 0:06:28.240 --> 0:06:32.679 from Black Rock and Jeff good Luck from a Double 0:06:33.279 --> 0:06:36.960 double line talking about just one interest rate increase this year. 0:06:37.320 --> 0:06:41.000 If that so? Uh, you said even two or three recently, 0:06:41.040 --> 0:06:44.880 not two, but even three rate increases are reasonable this year. 0:06:45.240 --> 0:06:47.200 What is it that you see the markets don't? What 0:06:47.279 --> 0:06:49.320 are the markets missing? Well, first of all, the markets 0:06:49.320 --> 0:06:52.000 aren't one person. There are you know, millions of people 0:06:52.040 --> 0:06:55.080 involved in investing and making you know, uh forecasts and 0:06:55.120 --> 0:06:57.839 decisions around that. So there are different views. When I 0:06:57.839 --> 0:06:59.919 look at the markets, the data from the markets, what 0:07:00.040 --> 0:07:03.520 you see as a kind of a bimodal distribution. A 0:07:03.560 --> 0:07:07.400 lot of people think that the modal or the baseline cases, 0:07:07.560 --> 0:07:09.279 the one that I've laid out of, you know, unemployment 0:07:09.320 --> 0:07:12.240 continue to come down, good job growth to present GDP, 0:07:12.320 --> 0:07:14.480 and inflation moving back. You see this in the survey 0:07:14.560 --> 0:07:17.040 of professional forecasts, the blue chip surveys. You see it 0:07:17.080 --> 0:07:19.560 from my own colleagues, in our own dot plots, in 0:07:19.600 --> 0:07:22.480 our own SEP forecast. There is this other part of 0:07:22.480 --> 0:07:24.440 the distribution which I under you know, I think of 0:07:24.520 --> 0:07:27.880 as related to concerns about Asia, concerns about Europe and Japan, 0:07:27.920 --> 0:07:30.640 the rest of the world. That there's this downside scenario 0:07:30.680 --> 0:07:33.520 where global growth really slows, other things happen, and that 0:07:33.720 --> 0:07:36.160 that's a negative shock to the US. So obviously that's 0:07:36.280 --> 0:07:39.480 priced into the market, the possibility of a negative scenario 0:07:39.800 --> 0:07:42.160 that seems to get a lot of weight and investors minds. 0:07:42.200 --> 0:07:45.600 So my view that we should be gradually raising interest 0:07:45.720 --> 0:07:47.840 rates this year is based on the notion that we 0:07:47.920 --> 0:07:50.840 follow this baseline scenario, that the data continue to come 0:07:50.880 --> 0:07:52.600 in show the U s eCOM and continues to be 0:07:52.640 --> 0:07:55.360 on the good track, and under those conditions we should 0:07:55.440 --> 0:07:58.360 raise rates. Clearly, if the downside, you know, risk really 0:07:58.400 --> 0:08:01.480 do happen, uh, the we see really negative effects in 0:08:01.480 --> 0:08:04.000 the US economy, then we should uh pause and and 0:08:04.120 --> 0:08:06.640 wait until it's appropriate to raise right. So I see 0:08:06.680 --> 0:08:09.160 the markets have trained kind of balance these two different 0:08:09.160 --> 0:08:11.680 scenarios and come to their best estimates of what we 0:08:11.680 --> 0:08:14.320 should do. Uh. But you know again, I'm my My 0:08:14.400 --> 0:08:17.040 answer to your question really is, is the my baseline 0:08:17.080 --> 0:08:19.720 scenario where which is pretty optimistic and there was downtrack 0:08:20.520 --> 0:08:23.000 dependent raw on track, then the June rate hike is 0:08:23.200 --> 0:08:25.760 of a likelihood in your view, and certainly something you 0:08:25.800 --> 0:08:27.880 would support at the very least. Well, So I don't 0:08:27.880 --> 0:08:29.800 want to see likelihood because you know, we're never supposed 0:08:29.840 --> 0:08:31.520 to talk about what's going to happen at f HOMC 0:08:31.680 --> 0:08:33.440 means where my colleagues are going to say, and then 0:08:33.480 --> 0:08:35.079 of course we're gonna get a lot of data between 0:08:35.080 --> 0:08:37.200 now and then, and we love good discussions. But in 0:08:37.200 --> 0:08:40.520 my view, yes, it would be appropriate given all of 0:08:40.520 --> 0:08:43.040 the things we've talked about to to go on that 0:08:43.040 --> 0:08:45.040 that next step, But you know, a lot can happen 0:08:45.120 --> 0:08:47.160 between now in the middle of June, that's for sure. 0:08:47.240 --> 0:08:48.640 What do you make of some of the data we've 0:08:48.640 --> 0:08:51.280 seen today, certainly the markets reacting to the slow down 0:08:51.280 --> 0:08:54.640 and manufacturing in China and slow down U Cake, We've 0:08:54.679 --> 0:08:56.520 got some mixed numbers earlier in the week, and of 0:08:56.520 --> 0:08:59.520 course our own one of our key manufacturing engages from 0:08:59.520 --> 0:09:03.240 the supply management heading back towards fifty again, does that 0:09:03.280 --> 0:09:05.680 give you any positure? Well, you know, I think again 0:09:05.720 --> 0:09:07.640 you have to look at all the data and analyze 0:09:07.679 --> 0:09:09.880 it very carefully. And in terms of China, I think 0:09:09.880 --> 0:09:11.760 the story we're seeing, we've been seeing for the last 0:09:11.760 --> 0:09:14.120 couple of years, is that this pivot in China from 0:09:14.120 --> 0:09:17.439 a manufacturing export driven economy has been moving more to 0:09:17.640 --> 0:09:20.480 consumer goods, more to services, and so we've seen a 0:09:20.559 --> 0:09:24.760 kind of sequence of disappointments around Chinese manufacturing data, which 0:09:24.760 --> 0:09:27.360 I don't think really reflects the overall economy so much. 0:09:27.480 --> 0:09:29.880 Is the fact that they are really are moving their 0:09:29.920 --> 0:09:32.880 economy from one um you know, kind of one focused 0:09:33.080 --> 0:09:35.600 to another, and I expect to see a continuation of 0:09:35.679 --> 0:09:39.080 kind of weaker manufacturing readings from China, but that but 0:09:39.160 --> 0:09:43.200 seeing stronger spending on consumer consumer spending and other indicators. 0:09:43.320 --> 0:09:46.160 In terms of the US, I think the manufacturing sector 0:09:46.240 --> 0:09:49.800 clearly has been hit by the fallen oil prices, which 0:09:49.840 --> 0:09:53.000 cuts back on drilling and oil uh you know, uh, 0:09:53.080 --> 0:09:56.240 drilling in those activities, which is buys off steel and 0:09:56.280 --> 0:09:58.880 things like that. And obviously the strong dollar has affected 0:09:58.880 --> 0:10:01.840 a manufacturing sector. But I read the ice M. Actually 0:10:01.880 --> 0:10:04.679 data is is being pretty neutral. It's not that manufacturing 0:10:04.760 --> 0:10:07.880 is contracting or something, but just is growing modestly. Okay. 0:10:08.040 --> 0:10:09.960 You know, one of the things a lot of FED officials, 0:10:09.960 --> 0:10:12.600 including you, have downplayed is the weakness and oil prices. 0:10:12.679 --> 0:10:15.760 Is a strong dollar there transitory? How do you know 0:10:15.800 --> 0:10:18.520 those forces are transitory? And what if they're not, because 0:10:18.520 --> 0:10:20.800 they've certainly been holding inflation down for a while. And again, 0:10:21.200 --> 0:10:23.360 the FED has this dual objective and one of them 0:10:23.400 --> 0:10:26.920 is hitting that inflation target. Yeah, And just to clarify 0:10:27.440 --> 0:10:29.600 is I don't view the oil prices as transitory. By 0:10:29.679 --> 0:10:32.920 their effect on inflation, as you suggested, is more transitory. 0:10:33.000 --> 0:10:34.840 We're seeing that, you know what, all the prices move 0:10:34.920 --> 0:10:37.760 up and down overall inflation moves up and down, but 0:10:37.800 --> 0:10:40.520 we're not seeing any obvious signs from movements and oil 0:10:40.559 --> 0:10:44.680 prices onto major moves. UH can't pass through the core 0:10:44.880 --> 0:10:48.000 inflation rounderlying inflation, and that's kind of the second round 0:10:48.000 --> 0:10:50.160 effects that you worry about when you think about movements 0:10:50.160 --> 0:10:53.000 in commodity prices. Right now, I actually see, you know, 0:10:53.080 --> 0:10:56.400 oil prices have been factor pushing down inflation will add 0:10:56.880 --> 0:11:00.600 just with time, and the underlying inflation in services especially 0:11:01.040 --> 0:11:03.360 has been moving up. So again I'm kind of I'm 0:11:03.360 --> 0:11:06.040 pretty confident that we're on the right track and inflation. Okay, Well, 0:11:06.040 --> 0:11:09.360 we're going to continue our conversation with San Francisco FED 0:11:09.440 --> 0:11:13.640 President John Williams on Bloomberg taking Stock for our radio program, 0:11:13.640 --> 0:11:17.320 and we certainly thank our Bloomberg TV listeners for joining 0:11:17.400 --> 0:11:21.920 us today. So John, we want to continue now with 0:11:22.000 --> 0:11:25.200 this look at all the various factors that the markets 0:11:25.280 --> 0:11:27.679 are going over so or so Closely, I want to 0:11:27.679 --> 0:11:29.959 get back to this question inflation because I've been talking 0:11:29.960 --> 0:11:32.400 to a lot of Federal Reserve officials in St. Louis, 0:11:32.880 --> 0:11:35.679 Chicago here in San Francisco now, and one of the 0:11:35.679 --> 0:11:39.080 things I've heard is that inflation has undershot its target 0:11:39.120 --> 0:11:42.920 for so long that it's not only possibly not a 0:11:43.080 --> 0:11:47.640 bad idea, but actually a good idea to have inflation 0:11:47.840 --> 0:11:50.480 at or above target for a while. But I don't 0:11:50.520 --> 0:11:52.559 think you're on board with that now. I don't think 0:11:52.559 --> 0:11:55.880 we want to aim for inflation above our two percent 0:11:55.960 --> 0:11:58.440 longer run goal on on purpose. What I would love 0:11:58.440 --> 0:12:01.560 to see is inflation be on reach two percent, sometimes 0:12:01.640 --> 0:12:03.760 half the time above, half the time a little below, 0:12:03.960 --> 0:12:07.160 but really just fluctuating around that two percent. So being 0:12:07.200 --> 0:12:09.000 a little bit above two percent is not something I 0:12:09.040 --> 0:12:12.040 worry about being uh you know, that doesn't worry me. 0:12:12.120 --> 0:12:14.040 But again, I don't see us it's trying to target 0:12:14.080 --> 0:12:17.840 a high inflation rate, uh in the future. Now, you know, 0:12:17.880 --> 0:12:20.520 one of the things that we've made clear earlier with 0:12:20.559 --> 0:12:22.800 our one of our statements was that the goal was 0:12:22.880 --> 0:12:26.000 some metric, so two percents, not our ceiling. Really is 0:12:26.040 --> 0:12:29.200 the midpoint of where we want to see inflation, uh be. Now, 0:12:29.280 --> 0:12:31.839 my own forecast over the last year, I sometimes, based 0:12:31.880 --> 0:12:34.520 on my own views, you have inflation just moving right 0:12:34.559 --> 0:12:36.640 to two percent sometimes that we're shooting a little bit 0:12:36.679 --> 0:12:39.120 due to the dynamics and inflation. Again, that that to 0:12:39.120 --> 0:12:40.679 me is not an important issue. A little bit of 0:12:40.679 --> 0:12:43.240 overshooting isn't a problem, but we don't want to purposefully 0:12:43.280 --> 0:12:47.520 try to create higher inflation. UH. In my view. UH, 0:12:47.760 --> 0:12:49.800 there's an interesting statistic I wonder if you've had a 0:12:49.880 --> 0:12:51.720 chance to look at, and that is, if you look 0:12:51.720 --> 0:12:54.720 at UH the year to date inflation rate for about 0:12:54.760 --> 0:12:59.319 two decades now, it is consistently run below two percent. 0:12:59.360 --> 0:13:04.440 If you look at it that way, it's considered consistently undershot. UH. 0:13:04.800 --> 0:13:07.360 What does that tell us about perhaps some kind of 0:13:07.400 --> 0:13:12.000 secular change in this economy globally there's so much global disinflation, 0:13:12.040 --> 0:13:14.959 there's with some global deflation. As you studied this for 0:13:15.000 --> 0:13:18.000 so long over the years, John, not only UH as 0:13:18.040 --> 0:13:20.680 San Francisco FED president, but director of research and in 0:13:20.800 --> 0:13:23.800 all your academic studies, are you raising questions about this 0:13:23.840 --> 0:13:26.280 now yourself? Well, you know, I I'm I may not 0:13:26.360 --> 0:13:28.040 be I may not be totally alone in this, but 0:13:28.080 --> 0:13:29.400 I'm one of the few people says I think the 0:13:29.400 --> 0:13:31.920 Phillips curve is alive. And well, I think that our 0:13:32.000 --> 0:13:35.320 understanding inflation has is UH, the models we've used over 0:13:35.360 --> 0:13:37.920 the last few decades. I think our good indicators you 0:13:37.960 --> 0:13:40.560 look at underlying inflation. So core inflation is run about 0:13:40.600 --> 0:13:43.000 one point six percent of the last year UH. Some 0:13:43.120 --> 0:13:45.920 of that is due to lagged effects of a weaker economy, 0:13:46.160 --> 0:13:48.360 a lot of it's due to the strong dollar and 0:13:48.480 --> 0:13:51.560 some pass through energy prices into the core UH. If 0:13:51.559 --> 0:13:53.480 you look at the trim mean from the Dallas FED again, 0:13:53.520 --> 0:13:55.080 it's telling you the same kind of thing, about one 0:13:55.120 --> 0:13:56.960 or three chorus per cent or something like that. I 0:13:56.960 --> 0:14:00.280 don't think the inflation behavior right now is inconsistent with 0:14:00.520 --> 0:14:03.040 standard models of inflation. It reflects the fact that we've 0:14:03.040 --> 0:14:05.360 been hit by a whole bunch of big shocks, the 0:14:05.400 --> 0:14:08.160 dollar strengthening by over for a while. Now it's come 0:14:08.240 --> 0:14:10.760 back a bit um, you know, the decline in oil 0:14:10.800 --> 0:14:14.760 prices and weak global growth more generally, so, I think 0:14:14.760 --> 0:14:17.439 these are factors have held us down on inflation the 0:14:17.520 --> 0:14:21.560 last few years. Obviously, the recession had a huge effect 0:14:21.600 --> 0:14:24.320 inflation in the US UH for many years. But again 0:14:24.360 --> 0:14:26.520 I don't see this as some kind of break in 0:14:26.600 --> 0:14:29.320 the trend or behavior of inflation. I do think the 0:14:29.360 --> 0:14:31.120 good news here that we don't want to forget is 0:14:31.160 --> 0:14:34.640 we do have reasonably well anchored inflation expectations of the US. 0:14:34.760 --> 0:14:38.040 So you know that meant that we avoided deflation during 0:14:38.040 --> 0:14:41.000 the Great Recession, which was very important and today I think, 0:14:41.200 --> 0:14:44.120 you know, having well anchored inflation expectations is an important 0:14:44.160 --> 0:14:46.680 part of helping us get back to our our two 0:14:46.720 --> 0:14:49.760 percent goal um, and that's just something we want to preserve. 0:14:50.400 --> 0:14:53.720 When ask you also, can you mentioned uh that uh 0:14:54.560 --> 0:14:57.480 the markets and market reaction and of course the first 0:14:57.680 --> 0:15:01.080 three months of the year, Uh, they're was a big 0:15:01.240 --> 0:15:05.360 market sell off watching China. Uh. One of the things 0:15:05.360 --> 0:15:07.640 that seemed to slow the Fed in its tracks because 0:15:07.920 --> 0:15:11.680 after looking at four interest rate increases in December at 0:15:11.680 --> 0:15:14.040 the f MC meeting by marsh the Fed said, you 0:15:14.080 --> 0:15:17.440 know what it looks like, two are more prudent. Genet. Yellen, 0:15:17.520 --> 0:15:21.120 in her testimonies to Congress has has talked about the 0:15:21.160 --> 0:15:25.720 how the market impact really provide a certain amount of 0:15:25.720 --> 0:15:29.880 offset to some potential downward pressure on the US economy 0:15:29.880 --> 0:15:32.960 from the market turmoil, certainly bond yields being lower. You've 0:15:33.280 --> 0:15:37.000 you downplayed the only recent speech John the what the 0:15:37.000 --> 0:15:39.160 market was reacting to. You said, it wasn't so much 0:15:39.200 --> 0:15:42.240 just some rate move on the FEDS part. It was 0:15:42.280 --> 0:15:44.720 all these other factors. But so many people in the 0:15:44.760 --> 0:15:48.120 markets have interpreted No. Number One, that the market saw 0:15:48.120 --> 0:15:50.240 the FED starting embarking on a series of rate hikes 0:15:50.320 --> 0:15:53.480 Number one, and then the FEDS seeing that and in 0:15:53.480 --> 0:15:57.440 a sense acknowledging in fact that this had unstabilized the 0:15:57.480 --> 0:15:59.400 market to degree that it less than the need for 0:15:59.480 --> 0:16:02.640 rate hikes this year. Or did you how did you 0:16:02.680 --> 0:16:05.840 look at that change then in the rate hike forecast 0:16:06.080 --> 0:16:09.560 for did you not think it was necessary? Or did 0:16:09.600 --> 0:16:12.400 I sort of misunderstand you in that speech where you 0:16:12.440 --> 0:16:14.560 downplay the market when what we're reacting to, Well, I 0:16:14.600 --> 0:16:16.720 do think that the markets reacting a lot of different things, 0:16:16.720 --> 0:16:19.120 and obviously, talking to people in the markets, I hear 0:16:19.200 --> 0:16:22.840 this story about the Fed's role and concerns around that. 0:16:23.400 --> 0:16:25.360 My view is a lot of the reaction earlier this 0:16:25.440 --> 0:16:29.080 year was concerns about China slowing growth, concerns about very 0:16:29.120 --> 0:16:32.480 low inflation in the in the in the Euro Area, UH, 0:16:32.560 --> 0:16:35.680 struggles in other countries as well. UH. So I think 0:16:35.680 --> 0:16:37.360 that a lot of it's really driven by things are 0:16:37.360 --> 0:16:41.080 happening outside the country. Importantly, though, those things happening outside 0:16:41.120 --> 0:16:44.040 the US come back and affect the US economy too, 0:16:44.040 --> 0:16:46.440 So we have to take that into account. The strengthening 0:16:46.520 --> 0:16:49.400 the dollar obviously was a big factor that pushes down inflation, 0:16:49.600 --> 0:16:52.720 slows our growth, uh you know, weak or growth abroad 0:16:53.040 --> 0:16:55.880 has those uh slows our growth in exports as well, 0:16:56.000 --> 0:16:58.400 so we have to take them into account. So again, 0:16:58.440 --> 0:17:00.640 I think our forecasts have come down on for growth 0:17:00.640 --> 0:17:04.040 for sixteen um, you know. And I think that's consistent 0:17:04.080 --> 0:17:05.919 with the fact that there are changes in financial and 0:17:05.920 --> 0:17:09.159 global conditions that uh, that affect the US economy and 0:17:09.160 --> 0:17:11.679 then that feeds into the appropriate path for policy. So 0:17:11.760 --> 0:17:14.320 to me, it's not as huge as surprise that you know, 0:17:14.359 --> 0:17:17.000 the dots you know have moved out. Again, I'm not 0:17:17.000 --> 0:17:20.200 speaking for why my colleagues had their own views. One 0:17:20.200 --> 0:17:22.040 of the things that I would just raise is based 0:17:22.040 --> 0:17:23.760 on you know, research a lot of people have done, 0:17:24.080 --> 0:17:26.840 is I think that as this recovery and expansion it 0:17:26.880 --> 0:17:29.320 goes on and on with very low interest rates, yet 0:17:29.320 --> 0:17:32.399 we're still only getting at or slightly above trend growth. 0:17:32.640 --> 0:17:34.520 It does make me think that this kind of neutral 0:17:34.600 --> 0:17:38.000 or equilibrium interest rate is lower than we previously thought. 0:17:38.000 --> 0:17:39.920 And you can see this in the kind of long 0:17:40.000 --> 0:17:42.560 run interest rate projections from my colleagues. But a lot 0:17:42.600 --> 0:17:46.240 of economic academic literature is showing that, I think pretty 0:17:46.240 --> 0:17:49.119 persuasively that the new normal for interest rates is just 0:17:49.200 --> 0:17:52.760 much lower than we thought safe ten years ago. So 0:17:52.840 --> 0:17:55.600 today that the Median dot has the FED funds rate 0:17:55.720 --> 0:17:57.600 ending up a three and a quarter percent. If you 0:17:57.600 --> 0:18:00.560 would ask that same question fifteen, you know, years ago 0:18:00.600 --> 0:18:03.119 people were probably said something like, uh, four in a 0:18:03.200 --> 0:18:04.880 quarter or four and a half percent with a two 0:18:04.880 --> 0:18:07.800 percent inflation rate. I actually think there's some downside to this. 0:18:07.880 --> 0:18:10.359 I think that maybe the new normal, the new natural 0:18:10.359 --> 0:18:12.879 interest rate, if you will, maybe even lower than one 0:18:12.920 --> 0:18:14.760 in a quarter. I think that some of these long 0:18:14.880 --> 0:18:18.639 run slowdowns and demographics proactivity growth. I know that you 0:18:18.640 --> 0:18:20.880 can talk to John fernald In my colleague who's a 0:18:20.960 --> 0:18:24.720 leading expert on proctivty trans and studied this very extensively. Uh, 0:18:24.720 --> 0:18:26.960 and he's in his views on peractivity have been formed 0:18:27.440 --> 0:18:30.320 me on this is that you know, with slower growth 0:18:30.359 --> 0:18:32.520 globally and in the U S and many other countries, 0:18:33.720 --> 0:18:35.840 I think it does argue that the natural rate or 0:18:35.880 --> 0:18:38.600 normal interest rates are just gonna be much lower in 0:18:38.600 --> 0:18:42.119 the future. And we're also speaking to Mary Daily in 0:18:42.160 --> 0:18:45.600 this hour. She's ahead of researcher at the San Francisco 0:18:45.680 --> 0:18:48.439 fed UM. One more question, again a criticism I've heard 0:18:48.440 --> 0:18:50.399 of a couple of economists lately that maybe you know 0:18:50.400 --> 0:18:53.480 you're stressing the strength of labor market, that you're stressing 0:18:54.040 --> 0:18:57.119 head count over the demand for labor services. But basically, 0:18:57.520 --> 0:19:01.880 the number of jobs created exaggerates demand for labor services 0:19:01.920 --> 0:19:05.480 because accounts full time and part time workers equally, downplays 0:19:05.480 --> 0:19:08.080