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Speaker 1: From Jackson Hole for our radio and television audiences worldwide.

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Speaker 1: This is a Bloomberg Special interview following up on the

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Speaker 1: JPOW FED chairman's speech. Here in Jackson Hole, we have

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Speaker 1: Philadelphia FED President Patrick Harker joining me, Lisa Bramwitz and

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Speaker 1: Tom Keing, and we'd like to thank you very much,

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Speaker 1: Pat for coming out, sure interrupting your seminar. Rumor has

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Speaker 1: it you're going to cut rates, That's what I hear.

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Speaker 1: You've been somewhat reluctant. Are you on board?

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Speaker 2: No, I'm I said the last couple of days it's

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Speaker 2: time to start a process. And I think it's a process.

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Speaker 2: It's not about a particular number. The process needs to

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Speaker 2: be dictated by the data we see. But we need

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Speaker 2: to start moving rates down, no question about it.

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Speaker 1: Well, if you start moving rates down. The one thing

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Speaker 1: that didn't come through in the speech is by how much?

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Speaker 2: Yeah, and again I think we need to let the

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Speaker 2: data dictate this. I think what matters more than a

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Speaker 2: particular number. Now, I've been out and about my district

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Speaker 2: all summer talking to contacts, and one thing I heard

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Speaker 2: is twenty five point fifty. That doesn't matter so much

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Speaker 2: as commit to a process. Be methodical about the process

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Speaker 2: in particular, because what I've heard, particularly from the bankers,

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Speaker 2: is they need time to absorb the changes. So don't

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Speaker 2: just stop and start. Don't just do a large decrease

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Speaker 2: and then stop and then starting it. Just start a

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Speaker 2: process and keep it moving.

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Speaker 3: This, to me really underscores what Lord or Master was

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Speaker 3: saying formerly of the Cleveland Fed Reserve, where it makes

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Speaker 3: sense for the Federal Reserve to go by twenty five

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Speaker 3: basis points to begin with and then potentially come more

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Speaker 3: significantly later on, because then you're not signaling to markets,

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Speaker 3: you're going to go much further.

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Speaker 4: Is that what you agree with?

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Speaker 2: Yeah, and we'll see how things. You know, there are

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Speaker 2: a lot of risks go out there in the economy

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Speaker 2: and the global economy. So we start with twenty five

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Speaker 2: and we just let it run and keep moving that.

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Speaker 2: And we're already seeing it, right, We're seeing the long

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Speaker 2: end of the curves start to come down. That's been good.

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Speaker 2: The mortgage business is back. You talk to bankers, they're

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Speaker 2: starting to write mortgages again. That's all good news for

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Speaker 2: the economy.

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Speaker 5: I've got to ask the engineer the question Susan Collins

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Speaker 5: was channeling Patrick Chercker here the other day. She says,

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Speaker 5: we need to lose a pessimism. We need to be

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Speaker 5: more optimistic about where we are right now. You, more

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Speaker 5: than anyone I know, listens to business. What are you

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Speaker 5: hearing from business about investment next year? About their confidence forward?

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Speaker 2: Yeah, they're cautiously optimistic, I would say, right now, I

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Speaker 2: think they are optimistic. But depends on the industry and

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Speaker 2: depends on where they are in their own business cycle,

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Speaker 2: right But yeah, generally we're saying take housing for example.

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Speaker 2: Housing is a good example. We know that a lot

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Speaker 2: of developers are sitting on their hands waiting for rates

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Speaker 2: to come down for this process to start. I think

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Speaker 2: that's a good thing because we need them to build

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Speaker 2: affordable houses, loan moderate income houses. I think they will

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Speaker 2: do that as we start this process.

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Speaker 1: When the Chairman spoke today, he suggested that the balance

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Speaker 1: of risks has changed. Inflation is coming down and it's

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Speaker 1: probably not going to shoot up again because of the

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Speaker 1: rising unemployment rate. But the rising unemployment rate in turn

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Speaker 1: is a bigger risk at this point. How much of

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Speaker 1: a risk do you see of downturn from unemployment?

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Speaker 2: So I don't see a large outside risk the employment.

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Speaker 2: Unemployment can go up some right, and it probably will

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Speaker 2: go off a little bit. It will definitely, in our view,

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Speaker 2: not peak above say five percent. I mean it will

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Speaker 2: be below that for sure. No, not for sure. We

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Speaker 2: never nothing for sure. But you got to look at

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Speaker 2: the totality of the data too. It's not just about

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Speaker 2: that number, right, It's about what we're hearing from our contacts,

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Speaker 2: the claims data, the job to job transition data. There's

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Speaker 2: a host of data. You have to look at it.

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Speaker 1: Well, this is a confidence question for sessions, there are

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Speaker 1: always a confidence question. You're talking about confidence CEOs that

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Speaker 1: the business is going to be okay. But what do

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Speaker 1: you hear from the average person who could pull back

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Speaker 1: if they see the unemployment rate going up.

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Speaker 2: It really is a tale of two consumers, to simplify things.

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Speaker 2: Those who have the money are spending the money. They're

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Speaker 2: not that concern. Low moderate income households are really still

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Speaker 2: feeling the pain. They're feeling your pain of housing prices,

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Speaker 2: food prices, you name it. So they are very concerned.

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Speaker 2: So it really depends it's not one size fits all.

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Speaker 2: There's not the average consumer. That person doesn't exist in

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Speaker 2: our economy.

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Speaker 3: So everyone's talking about this process, right, you talked about

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Speaker 3: that too. This is the beginning of a process. One

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Speaker 3: thing that I noticed was missing was the word gradual

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Speaker 3: from Jpala speech.

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Speaker 4: We can get to that in a second. Do you

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Speaker 4: have a sense of where we're heading?

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Speaker 2: Yeah, so I like the word methodical. That's what I'm

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Speaker 2: hearing from my contacts. Please just make it so that

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Speaker 2: we know where you're going in a very clear way.

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Speaker 2: And then you start that process, and don't you stop

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Speaker 2: and start.

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Speaker 4: As I said earlier, so where are you going.

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Speaker 2: Well, we're going to go back to whatever that new

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Speaker 2: neutral rate.

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Speaker 4: Is, so we have an idea of what that could be.

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Speaker 2: Yeah, I mean, we don't know exactly what it is.

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Speaker 2: We'll know when we get there. Let's be honest. You

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Speaker 2: can't know it a priori. But you know that's probably

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Speaker 2: around something around three percent issure, you know, somewhere around there,

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Speaker 2: But we don't know that for sure.

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Speaker 5: One of the new things that social media is wonderful people.

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Speaker 5: There's a guy named Triple Net Investor that's out there

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Speaker 5: revealing empty office buildings trading for next to nothing. We

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Speaker 5: got good news. Philadelphia is not on the latest list

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Speaker 5: of this city that city and the other city from

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Speaker 5: where you stand and from all your contexts, and Philadelphia

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Speaker 5: is let on this. Where are we on the wash

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Speaker 5: out and clean up of commercial real estate?

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Speaker 2: Again, let's commercial real estate isn't one size fits all thing.

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Speaker 2: So downtown office is what we're talking about. The dentist

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Speaker 2: in the suburban office mall is doing just fine. Right,

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Speaker 2: it's that downtown office space. We are starting to see

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Speaker 2: that clean out some It's again it's going to take

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Speaker 2: some time, whether it's new businesses moving into that space

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Speaker 2: at much lower rents or conversion. We're seeing a lot

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Speaker 2: of conversion activity as well.

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Speaker 5: Do you have a confidence that the banking industry is

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Speaker 5: resilient to that conversion that's so far?

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Speaker 2: Yes, I do, but it's something we clearly need to

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Speaker 2: keep our eye on.

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Speaker 1: Sticky with real estate, let's talk about the residential side.

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Speaker 1: You were optimistic at the start of the interview here

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Speaker 1: talking about mortgages coming back. There's been a lot of criticism.

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Speaker 1: Have fed maybe breaking the mortgage market because interest rates

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Speaker 1: rose above what the majority of people had for their

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Speaker 1: mortgage rate.

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Speaker 4: Do you have an.

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Speaker 1: Idea of what level housing it takes for housing to

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Speaker 1: come back, and is that figuring into your calculations where

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Speaker 1: neutral should be.

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Speaker 2: Yeah, So we had to do what we did to

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Speaker 2: get inflation under control. So I don't know apologies that

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Speaker 2: we took rates up quickly. I think about my generation,

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Speaker 2: the baby boomer, it's the largest generation to go into retirement.

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Speaker 2: We're sitting on these low mortgages. We want to move.

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Speaker 2: We don't want that big house anymore. That lock in effect,

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Speaker 2: it will start to ease as rates come down, and

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Speaker 2: we're already starting to see a little bit of that again.

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Speaker 2: I talked to the bankers. They're writing mortgages again, not

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Speaker 2: just refise, but they're writing new mortgages again. That combined

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Speaker 2: with the new supply that'll come on the market, I'm

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Speaker 2: pretty optimistic we can get there.

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Speaker 5: This is a critical statement from mister Harker. The idea like,

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Speaker 5: when the rate comes down, where does the fevers step in? Again?

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Speaker 5: Are you looking in Jackson?

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Speaker 1: It would take a lot, a lot, It would take

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Speaker 1: a lot for that to happen. Another question that comes

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Speaker 1: up now that you're essentially starting the path to rate

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Speaker 1: cuts is what do you do about the balance sheet?

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Speaker 1: Because in theory they work in opposition to each other,

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Speaker 1: and it had been sort of the fence policy that

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Speaker 1: we wouldn't do them simultaneously. But it looks like you're

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Speaker 1: going to be doing that.

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Speaker 2: Yeah, and that's okay. I think again. We I've always

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Speaker 2: been in the camp of putting the balance sheet on autopilot,

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Speaker 2: essentially starting the process, letting it run until we get

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Speaker 2: and get there. We definitely don't know exactly where that's

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Speaker 2: going to end. The data will dictate when we end

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Speaker 2: that process. I'm okay with doing that because it's in

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Speaker 2: the background, it's running. We need to get back to

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Speaker 2: ample of reserves. We don't know what that number is,

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Speaker 2: but we'll know what won't.

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Speaker 1: You get an estimate about when that might be.

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Speaker 2: I do, but I'm not going to it's so uncertain.

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Speaker 2: We had an estimate last time we did this, right,

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Speaker 2: We're off, so I'm cautious about that.

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Speaker 4: If he told you, you'd have to kill you.

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Speaker 3: I think that there's this question right now about heading

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Speaker 3: into year end, and Adam Posen was really highlighting this earlier.

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Speaker 4: There's this anxiety.

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Speaker 3: About what the fiscal backdrop will do to derail some

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Speaker 3: of the calm, the methodical aspects of FED policy. I

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Speaker 3: don't know that you can or want to comment on

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Speaker 3: basically what that policy could be.

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Speaker 4: But how much does that keep FED officials up at night?

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Speaker 3: How much is that part of the discussion what you

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Speaker 3: have to do to respond to any potential expansion of

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Speaker 3: the deficit that could be inflationary next year.

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Speaker 2: So I say, out of fiscal policy, honestly, you have

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Speaker 2: to respect we have to respond to it exactly. And

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Speaker 2: so I can't speak for the FED either, but for myself.

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Speaker 2: What keeps me up are many risks. That's one of them. Right,

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Speaker 2: There's also if we see what we're seeing around the world,

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Speaker 2: these conflicts get worse. I mean that would be tragic

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Speaker 2: to humanitarian tragedy alone, but the tragedy also to the economy.

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Speaker 2: Hurt to the economy. So there are a lot of

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Speaker 2: risks that keep me up at night. That's just one

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Speaker 2: of them.

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Speaker 3: Well, well, do tariffs worry more or the deficit depends?

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Speaker 2: It depends the devils into detail, like what's specific about

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Speaker 2: the tires, what specifically we're investing in in terms of deficit.

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Speaker 2: You know, I'm a simple guy. I think if we're

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Speaker 2: investing is something that's improving the productivity of the American economy,

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Speaker 2: that's a good thing. If we're spending money that doesn't

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Speaker 2: do that, that worries me more. So. Again, it's not

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Speaker 2: just one thing. It really depends on what we're doing.

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Speaker 1: So you mentioned productivity. We had the big revision to

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Speaker 1: the non farm payrolls this week, but that should raise productivity.

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Speaker 1: You view that as good news offsetting the bad news

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Speaker 1: of Lord John.

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Speaker 2: That's an interesting that's an interesting way of thinking about it.

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Speaker 2: We were expecting this adjustment. We looked at in Philly FED.

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Speaker 2: We've been looking at this the payroll adjustments, and we

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Speaker 2: knew this was coming. It was a little larger than

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Speaker 2: we expected, but we knew it was coming, so that

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Speaker 2: wasn't a surprise. And it's still a good number overall,

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Speaker 2: if you average out over twelve months, we're still doing

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Speaker 2: just fine in the American economy. But there's a risk there.

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Speaker 2: That's why we need to start to take action now.

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Speaker 1: Well, we'll see you on September eighteenth. Patrick Harker, President

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Speaker 1: of the Philadelphia FED, thank you very much for joining

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Speaker 1: us on Luberg Radio and Television.