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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: I'm SMALLI Batik. I'm here at the Citadel Securities Global

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Speaker 2: Macro Conference, of course for Bloomberg Open Interest, and I'm

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Speaker 2: standing by now with former Kansas City Fed President Esther George.

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Speaker 2: What a great time to have you a day before CPI,

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Speaker 2: just after the last jobsprint. That's actually just where I

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Speaker 2: want to start, because of course, with jobs coming in

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Speaker 2: hotter than every analyst and economy is surveyed by Bloomberg,

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Speaker 2: even revisions for the month before revised hire. Do you think,

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Speaker 2: and I think this is the most direct question here,

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Speaker 2: do you think that fifty basis points was too much?

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Speaker 1: Well, that will be something for history to judge, I

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Speaker 1: think in this scenario. But certainly, how great to see

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Speaker 1: a jobs report like that, But I would just keep

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Speaker 1: in mind it is one that will come in a series,

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Speaker 1: and we have seen because of how this economy is

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Speaker 1: really trying to reach its footing post pandem that we've

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Speaker 1: seen things move up and down from inflation to the

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Speaker 1: job market. So very much a welcome report, but too

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Speaker 1: soon to draw big conclusions about what it might mean

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Speaker 1: longer term.

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Speaker 2: Even in the near term, how much more room do

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Speaker 2: you think it gives the fad to cut for the

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Speaker 2: rest of this year alone.

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Speaker 1: So I think what the FED is trying to figure

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Speaker 1: out is how to balance its two objectives for thinking

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Speaker 1: about the labor market, for making sure that it gets

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Speaker 1: back to its two percent target in a timely way.

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Speaker 1: It means now they have to judge risk around each

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Speaker 1: of those and as those come into better balance, as

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Speaker 1: they say, they're trying to decide where to put the

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Speaker 1: weight on that. And I think when you heard the

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Speaker 1: chairman talk at the NAME conference that we're going to

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Speaker 1: look at our SEP forecast, which shows two more cuts

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Speaker 1: the rest of the year. That's a baseline, but I

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Speaker 1: think not a given yet until we see how some

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Speaker 1: of the other data, including tomorrow's print.

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Speaker 2: Well, let's out go right there. How comfortable are you

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Speaker 2: that we're on a path sustainably to two percent?

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Speaker 1: So I think, like others, I'm confident that we have

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Speaker 1: seen that inflation come down. But I've always been among

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Speaker 1: those that believe this last mile can be the most difficult,

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Speaker 1: because now you're trying to get from something in the

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Speaker 1: neighborhood of three percent inflation to two and over what

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Speaker 1: period of time can you do that and still ensure

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Speaker 1: that the public believes you will get back there, that

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Speaker 1: those inflation expectations stay anchored. So I remain pretty focused

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Speaker 1: on where we are with the current inflation dynamics.

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Speaker 3: Hey Esther Matt Miller here in the studio at seven

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Speaker 3: thirty one. Lex really appreciate you joining us today. I

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Speaker 3: want to ask about the Fed's data dependency. Is it

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Speaker 3: too sort of immediate, too much in the now? Do

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Speaker 3: they need to look ahead if we get, for example,

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Speaker 3: you know, more deficit spending from the US government, bigger debt,

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Speaker 3: inflationary policies from whomever wins the residential election, should the

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Speaker 3: FEDS start to worry about that now or just wait

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Speaker 3: until it happens.

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Speaker 1: Well, they have to worry about it now in terms

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Speaker 1: of developing what I call a set of scenarios that

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Speaker 1: could unfold in the economy. And of course that's at

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Speaker 1: the root of how a committee, how forecasters develop a

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Speaker 1: view of what the future looks like. So yes, they

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Speaker 1: have to look at today's data to help shape that forecast.

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Speaker 1: And that's why you hear them talk about being data dependent,

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Speaker 1: is because each one of those data points has the

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Speaker 1: potential to give them a different read on trends or

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Speaker 1: something that's changing in the economy. But as you've noted,

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Speaker 1: there are many things that right now maybe question marks

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Speaker 1: that lie ahead that they will have to prepare for

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Speaker 1: when they think about it. And I think they have

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Speaker 1: also noted we think our policy is in a good place.

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Speaker 1: In other words, we can move more aggressively the economy weekends,

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Speaker 1: we can stay longer at this interest rate if it

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Speaker 1: looks like things are heating up again, and so they've

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Speaker 1: given themselves some latitude, some options if you will, for

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Speaker 1: how to think about an uncertain future.

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Speaker 3: I also wonder about the FED balance sheet. On the

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Speaker 3: Bloomberg we have a great function. If you type FED

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Speaker 3: bal go you can see the enormity of it. It's

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Speaker 3: come down, of course, from eight and a half trillion dollars,

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Speaker 3: but we're still looking at about more than six and

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Speaker 3: a half trillion. Can the Fed continue to run this off?

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Speaker 3: Is there more room for quantitative tightening?

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Speaker 1: Well, if you follow the FED stated game plan, which

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Speaker 1: is a goal to shrink that balance sheet to the

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Speaker 1: smallest size needed to continue their operating framework, you would

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Speaker 1: have to say yes, there is more room to go,

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Speaker 1: and it's a little bit of a dynamic of saying

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Speaker 1: you are tightening by rolling off your balance sheet while

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Speaker 1: you are easing the short term interest rate. But of

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Speaker 1: course this is important I think in the long run

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Speaker 1: for how the FED conducts monetary policy, for the implications

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Speaker 1: of that balance sheet, should they need more capacity at

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Speaker 1: some point due to a disruption, And of course they

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Speaker 1: don't know this stated endpoint for this. So when people

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Speaker 1: say what will be the size of the balance sheet

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Speaker 1: when they finish, that's an unknown. They have to watch

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Speaker 1: the demand for reserves from the banking system, they have

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Speaker 1: to watch treasury market functioning to make sure that that

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Speaker 1: remains healthy. And so I think it's an unknown destination

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Speaker 1: at this point. The direction of travel, I think really

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Speaker 1: important in terms of how they've laid out their plan

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Speaker 1: to reduce that balance sheet.

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Speaker 4: And so this is Katie Greifeld sitting at Samat in

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Speaker 4: seven thirty one.

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Speaker 2: Lex.

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Speaker 4: I do want to build on what Shanali asked you,

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Speaker 4: of course about how much room the Fed has to

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Speaker 4: cut rates. I'm curious about when you look at the

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Speaker 4: dynamics of the inflation that we have in this economy

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Speaker 4: right now. Of course, we got hotter than expected wage

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Speaker 4: growth last Friday and the jobs report. There's some people

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Speaker 4: saying that we could get a hotter than expected CPI

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Speaker 4: report tomorrow. Could you see a scenario where actually the

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Speaker 4: Fed stays on hold in November and potentially entering into

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Speaker 4: service stop and start rate cutting cycle.

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Speaker 1: Well, I think they will have to think about that,

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Speaker 1: depending on how again this report comes in the composition

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Speaker 1: of it very important. So they've seen goods inflation really

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Speaker 1: back off, services inflation has started come down, the housing

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Speaker 1: component is continuing to stay sticky. And so with the

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Speaker 1: CPI currently at a core level running closer to three,

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Speaker 1: the PCE also running well over their target, they have

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Speaker 1: to be very mindful because in the long run, inflation

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Speaker 1: is what their policy toolkit is able to control. The

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Speaker 1: labor market, of course, is a byproduct of how stable

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Speaker 1: that inflationary dynamic is, so it remains a very key

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Speaker 1: aspect of decision making, I think for this committee.

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Speaker 4: And a sir, I know it's an impossible question, but

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Speaker 4: I am curious about where you think the neutral rate

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Speaker 4: might be in this cycle. Of course, in sort of

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Speaker 4: a range. I mean, do you think that we're going

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Speaker 4: back to and a half percent neutral rate or do

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Speaker 4: you think that maybe it could be a little bit

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Speaker 4: higher nowadays.

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Speaker 1: Yeah, Well, my view is that I think it is

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Speaker 1: a little bit higher, And of course we don't know.

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Speaker 1: The economy is still trying to find an equilibrium, I

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Speaker 1: would argue, as is the FED trying to judge. We

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Speaker 1: don't want to stimulate the economy, we don't want to

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Speaker 1: slow it down unnecessarily. But knowing where that neutral rate

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Speaker 1: is is a tough call, and I believe you've heard

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Speaker 1: the Chairman say we're going to kind of feel our way.

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Speaker 1: We'll know it by its works. There are two things

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Speaker 1: that I think though are important to look and why

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Speaker 1: I would think that neutral rate is higher. One is

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Speaker 1: looking at productivity growth, so that can bounce around, but

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Speaker 1: we have seen some pretty interesting productivity come out of

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Speaker 1: this period that could mean that that neutral rate is higher.

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Speaker 1: And of course the other thing is looking at fiscal policy.

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Speaker 1: With the level of interest that's compounding and the deficits

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Speaker 1: that we see underway right now, that could also suggest

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Speaker 1: we're going to have higher levels of interest rates. And

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Speaker 1: this idea that we will be going back pre pandemic

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Speaker 1: looks a little more iffy to me than the period

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Speaker 1: we've just come off.

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Speaker 2: Of now, I want to double down on just that point,

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Speaker 2: because you were a co signer to a report that

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Speaker 2: came out this week from the Committee of a Response

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Speaker 2: for a Responsible Federal Budget that says Vice President Harris,

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Speaker 2: if elected, would add three point five trillion dollars through

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Speaker 2: the federal debt through twenty thirty five. President Trump would however,

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Speaker 2: add seven point five trillion no matter what you have more.

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Speaker 2: But it's the degree of how much more you see

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Speaker 2: through their policies, how much uncertainty does that add to

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Speaker 2: the interest rate outlook in addition to the current out

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Speaker 2: load that you were talking about.

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Speaker 1: So for the Federal Reserve, they're not able to make

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Speaker 1: decisions based on those kinds of potential policy agendas, and

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Speaker 1: of course a lot will have to happen next year

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Speaker 1: for us to see how that unfolds. I think what's

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Speaker 1: really important, and I hope what the sentiment of this

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Speaker 1: letter was, We're already in a place that we need

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Speaker 1: to address our fiscal situation, and depending on how elections

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Speaker 1: go and how Congress and policymakers think about the US

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Speaker 1: fiscal position, it will have dramatic implications for the country.

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Speaker 1: And so the sooner those are addressed. The more specifically

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Speaker 1: they're addressed, the better it will be in terms of

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Speaker 1: tackling what is an enormous problem.

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Speaker 2: We only have about thirty seconds left here, But do

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Speaker 2: you think that there could even be a chance for

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Speaker 2: an interest rate in increase next year if these policies

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Speaker 2: become inflationary, well.

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Speaker 1: I think under different scenarios, of course, that could be

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Speaker 1: an outcome, because that, of course is a direct mandate

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Speaker 1: for the Federal Reserve is to try to head toward

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Speaker 1: its two percent targets. So a lot can happen between

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Speaker 1: now and next year, and we'll have to stay tuned.

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Speaker 1: As I know, the Fed is.

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Speaker 2: Ester George, We thank you so very much for your time.

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Speaker 2: Of course, that is former Kansas City Fed President Ester

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Speaker 2: George