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Speaker 1: Let's turn back to the economy. Of course, that is

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Speaker 1: the story of the morning, and who better to talk

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Speaker 1: about it with than Mike McKee. He is Bloomberg's chief

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Speaker 1: International Economics and Policy correspondent.

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Speaker 2: So we just heard from Julie Sue.

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Speaker 1: Of course you have a great conversation with Austin Goldsby

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Speaker 1: coming up. But you think about the details of what

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Speaker 1: has been agreed to when it comes to the port's

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Speaker 1: sixty two percent wage increase there, what does that mean

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Speaker 1: for inflation?

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Speaker 3: Well, it's a good question, and we do have a

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Speaker 3: maybe inflation coming back is a little more for a

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Speaker 3: little more emphasis with the Fed. But generally, when you

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Speaker 3: have a contract like this, what it means is you

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Speaker 3: get it raised once a year, say January, which is

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Speaker 3: when most people come in that get seasonally adjusted. So

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Speaker 3: you have a one time rise in the inflation rate perhaps,

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Speaker 3: but then it doesn't keep going over the years. So

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Speaker 3: while this is a significant contract increase for the workers

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Speaker 3: on a year over year basis, it won't have a

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Speaker 3: major impact. Each year. You'll ratchet up a little more

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Speaker 3: than you otherwise would. But it's also somewhere around eighty

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Speaker 3: thousand workers who get covered under this contract, and we

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Speaker 3: have one hundred and fifty five million people working in

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Speaker 3: the country, so it probably won't have as much of

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Speaker 3: an inflation impact as it could have if there were

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Speaker 3: more unions that followed this as a pattern bargain.

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Speaker 2: I'm going to be the wet blanket.

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Speaker 4: I think past November a little bit here, because of

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Speaker 4: course you have another FED meeting. Of course, those fifty

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Speaker 4: basis point rate cut bets getting wiped out of the

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Speaker 4: market at the moment, but you still have one hundred

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Speaker 4: and sixty basis points worth of rate cuts through the

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Speaker 4: end of next year. At the end of the day,

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Speaker 4: how muney might the picture be an employment just even

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Speaker 4: through the end of this year, given what we've seen

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Speaker 4: with the hurricane, given contract negotiations not just at the.

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Speaker 3: Ports, well, not quite as muddy as it would have

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Speaker 3: been if the port strike continued. We have Boeings still

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Speaker 3: out on strike. If that's not settled by the time,

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Speaker 3: well by next week, I guess is when we go

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Speaker 3: into the survey week, then will have to subtract thirty

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Speaker 3: eight thousand or from whatever the total is. And then

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Speaker 3: we don't know yet what the hurricane impact is going

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Speaker 3: to be. But we know it's going to be larger

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Speaker 3: than usual, and so the BLS will put a note

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Speaker 3: in their report for October their best estimate of what

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Speaker 3: the impact is, so we can subtract that out. We'll

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Speaker 3: see how much of an impact it has. And the

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Speaker 3: FED will look through both of those things because they

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Speaker 3: know that they're temporary. And what ends up happening with

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Speaker 3: natural disasters is you end up with more spending because

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Speaker 3: of the rebuilding, and probably there will be a lot

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Speaker 3: of jobs that are lost but then recreated after this

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Speaker 3: over a period of time.

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Speaker 1: That's a really interesting point. So in a way, I

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Speaker 1: mean there is an economic benefit here to that rebuilding effort.

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Speaker 3: Yeah, it's always tough to be an economist and say

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Speaker 3: that because obviously this is a major tragedy for the

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Speaker 3: people who are involved. It's a horrible, horrible thing. But

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Speaker 3: history show is that because of the money that's spent

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Speaker 3: to rebuild, you end up with a little bit of

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Speaker 3: a boost to GDP.

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Speaker 1: A boost to GDP, but of course a messier economic report.

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Speaker 1: When it comes to next month's jobs report, it sounds like.

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Speaker 3: A little bit messier, but less so now that the

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Speaker 3: port strike is settled. It comes four days before the election,

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Speaker 3: if you have a report like this, I know one

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Speaker 3: campaign that would be very happy if they got this

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Speaker 3: November first.

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Speaker 4: You know, there's also inflation next week. If anyone's paying attention.

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Speaker 1: I think they are. I would imagine that they are

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Speaker 1: paying attention to inflation. And of course next month's jobs report,

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Speaker 1: which is the final jobs report before the election, which

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Speaker 1: of course the Federal Reserve will be paying close attention to.

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Speaker 2: And I know that coming up.

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Speaker 1: You have a great conversation right now.

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Speaker 3: Yes, we're going to turn our attention now to the

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Speaker 3: Federal Reserve and Chicago Fed President Austin Goulsby, who joins

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Speaker 3: us now to talk about the numbers that we've just

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Speaker 3: gotten and what it may mean for him and what

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Speaker 3: it may mean for the Fed. Good morning, Austin, Thank

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Speaker 3: you for being with us, and you knowing good morning

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Speaker 3: to you know where I got to go first. You're

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Speaker 3: the one that said we need to cut significantly in

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Speaker 3: the future in order to keep the unemployment rate from rising.

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Speaker 3: Do you still feel that way after the unemployment rate

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Speaker 3: fell and if it was rounded down by two hundreds

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Speaker 3: of a percentage, but it would have been four percent.

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Speaker 2: Yeah.

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Speaker 5: Look, my statement was about over the next year and

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Speaker 5: what's the long arc This job's number today and the

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Speaker 5: whole report is a superb report. You really couldn't ask

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Speaker 5: realistically for a better report for the economy. Coupled with

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Speaker 5: the finding out that the port strike is not going

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Speaker 5: to be an extended matter, and then that at least

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Speaker 5: for months this is not going to be an issue,

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Speaker 5: those are two pieces of very good news for the economy.

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Speaker 5: I still think as a central bank you don't want

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Speaker 5: to react too much to one month's report, but the

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Speaker 5: revisions of the previous months upward in jobs growth and

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Speaker 5: the unemployment rate coming down. If we get more reports

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Speaker 5: like this, I'm going to feel a lot more confident

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Speaker 5: that we are in fact settling in at full employment.

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Speaker 3: I know this has only been out now for a

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Speaker 3: little more than an hour. Has your staff where you

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Speaker 3: looked into it enough to try to figure out why

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Speaker 3: the report was so good?

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Speaker 2: Well, I mean you're getting a lot of.

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Speaker 5: The estimates of GDP growth still continuing to suggest that

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Speaker 5: growth remains robust. So I think the first thing about

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Speaker 5: job growth is that it's tied to how the economy

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Speaker 5: is doing.

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Speaker 2: So if you.

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Speaker 5: Get strong reports, that's likely to be correlated with strong

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Speaker 5: GDP growth.

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Speaker 2: As I say, we've.

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Speaker 5: Got some cross currents and we need to take the

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Speaker 5: longer arc we've had. We had previous to this one

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Speaker 5: two disappointing numbers. Now we have a superb number and

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Speaker 5: we need to keep monitoring it. If we get more

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Speaker 5: reports like this, as I say, I think we should

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Speaker 5: have more confidence that we are in fact settling in

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Speaker 5: at the landing spot that we want from a dual

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Speaker 5: mandate perspective. Inflation has been coming in right around two percent.

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Speaker 5: If the unemployment rate is going to settle down, something

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Speaker 5: just over for you would love to freeze, frame that

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Speaker 5: and put the picture on the wall.

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Speaker 3: Does this perhaps change the emphasis a little bit for

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Speaker 3: the Open Market Committee? Jay Powell saying at his last

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Speaker 3: news conference that the risks to inflation and to employment

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Speaker 3: are about balanced, but we're more worried about employment. Do

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Speaker 3: you have to add more weight on the inflation side now.

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Speaker 2: I don't know.

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Speaker 5: I agreed absolutely with what Chair Pell said the press

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Speaker 5: conference that we went through a period where getting inflation

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Speaker 5: down from its extreme highs was the order of the day,

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Speaker 5: that was really almost the sole focus. And now when

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Speaker 5: we had two disappointing jobs numbers. It made clear we're

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Speaker 5: in a balanced environment with balance risks. That we got

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Speaker 5: a superb number I'm extremely happy with. But let's not

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Speaker 5: lose sight of what's the longer thread over the next year.

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Speaker 5: If you look at the SEPs and the dot plot,

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Speaker 5: a large majority of the Committee feels that conditions are

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Speaker 5: going to improve on inflation, that we're going to keep

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Speaker 5: getting closer to two percent target, that the unemployment rate

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Speaker 5: is going to stabilize at full employment, and that rates

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Speaker 5: are going to come down a lot over the next

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Speaker 5: year twelve days, eighteen months, and that seems quite appropriate.

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Speaker 5: You know, if you are in a good spot on

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Speaker 5: the dual mandate, that inflation and unemployment are where you

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Speaker 5: want them, you just got to be careful keeping the

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Speaker 5: rates as restrictive as they are, so far above where

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Speaker 5: committee members think they need to settle.

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Speaker 2: If you're not careful.

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Speaker 5: About that, you will lose the freeze frame that you

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Speaker 5: want on either inflation or on employment. And if you

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Speaker 5: look at expectations, there are some signs that inflation might

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Speaker 5: undershoot the two percent target, and we want to be

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Speaker 5: mindful of that too.

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Speaker 3: Well, let me ask you if you're looking at inflation

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Speaker 3: that might undershoot the target. Are you you think you're

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Speaker 3: too restrictive? But yet we're seeing growth of three point

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Speaker 3: one percent according to the now casters, and we're seeing

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Speaker 3: a two hundred and fifty four thousand jobs print. Are

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Speaker 3: we really that restrictive?

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Speaker 5: Well, you have cross currents, That's what I'm trying to emphasize.

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Speaker 5: There are pieces of strong data and then there are

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Speaker 5: pieces of weakness. And the if you just look at

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Speaker 5: the dot blots, where does the committee feel that it

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Speaker 5: will be appropriate for rates to settle.

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Speaker 2: It's a long way below where it is now.

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Speaker 5: If you think of that as as what our star

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Speaker 5: neutral rates would be. So that is the sense in which,

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Speaker 5: over a long period we need to get what's the

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Speaker 5: through line, and we need to try to maintain conditions

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Speaker 5: very much like what they are now. So if we

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Speaker 5: get more reports where GDP is strong and the unemployment

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Speaker 5: rate is staying in the four point one range or

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Speaker 5: even going down, then we i have a lot more

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Speaker 5: confidence that we're hitting the target that we want.

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Speaker 3: Well, do you think the neutral rate is higher? Now?

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Speaker 3: Where would you put it? Given the strength of the

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Speaker 3: economy that we see.

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Speaker 5: It's hard to say exactly what it is. I think

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Speaker 5: it is definitely higher in my mind than the zero

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Speaker 5: where we were for a lot of years before COVID.

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Speaker 5: If you just kind of look at those dot plots

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Speaker 5: the settling down range, the bulk of it looks to

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Speaker 5: be kind of in the two and a half to

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Speaker 5: three and a half sort of range. We're still a

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Speaker 5: ways off from having to sort that out. I guess

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Speaker 5: I would say, if you're at five and people think

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Speaker 5: you're going to end up between two and a half

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Speaker 5: and three and a half, you have both time and

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Speaker 5: runway to figure out where the settling point is.

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Speaker 2: Well.

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Speaker 3: The narrative coming into today was that companies weren't firing people,

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Speaker 3: but they weren't hiring people either, and obviously that was

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Speaker 3: not correct in the last month. What are you hearing

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Speaker 3: from companies in your district about their employment plans?

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Speaker 5: A lot of the we have thirty thirty five different

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Speaker 5: business roundtables throughout the year where we go and contact executives,

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Speaker 5: community leaders, community development, financial institutions, and we ask what

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Speaker 5: is the experience on the ground, and we have a

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Speaker 5: lot of business contacts. Mostly what I have heard has

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Speaker 5: been of the more of the same, steady, not going down,

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Speaker 5: but not really accelerating. So it'll be interesting to see

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Speaker 5: as we come through to the end of the year

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Speaker 5: here if the GDP now casts are correct that growth

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Speaker 5: is going to be higher than trend, let's call it

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Speaker 5: higher than expected. Will we start to see that in

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Speaker 5: the reflected in the comments for the Beage book and others.

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Speaker 5: The one thing is we're more intensive in manufacturing here

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Speaker 5: in the Midwest, and there is, as you know, a

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Speaker 5: bit of a shift back of consumer spending towards services

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Speaker 5: and away from physical goods as we fully come out

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Speaker 5: of the pandemic, So that weighs down economic activity a

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Speaker 5: little bit in the manufacturing sectors. But you've mostly been

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Speaker 5: hearing steady as she goes, not reacceleration and not real

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Speaker 5: drop off.

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Speaker 3: Well, then if it were up to you, I know

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Speaker 3: you're not a voter this year, you will be next year.

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Speaker 3: Does this report change the idea of how much the

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Speaker 3: Fed might want to cut in November?

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Speaker 2: And is it.

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Speaker 3: Possible we get another report that's good even if it's

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Speaker 3: not this good that you just stay on hold.

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Speaker 5: You know, I don't like pre committing before we've had

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Speaker 5: the discussion meetings for what the rate should be over

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Speaker 5: the longer run, which is what a central bank. The

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Speaker 5: hardest thing that central bank has to do is get

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Speaker 5: the timing exactly right when there are moments of transition.

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Speaker 2: So this isn't it easy process. There's definitely an art

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Speaker 2: to it.

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Speaker 5: If we get more reports like this, and I'm going

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Speaker 5: to have more confidence that we are settling in at

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Speaker 5: a full employment, low inflation kind of a baseline. If

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Speaker 5: you take the broad job market, I don't want us

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Speaker 5: to overreact to one month's report. We've seen if you

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Speaker 5: take vacancies to unemployment ratios, if you take the hiring rate,

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Speaker 5: the quit rate, a series of labor market indicators, they

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Speaker 5: suggest the job market has been cooling, but the level

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Speaker 5: is is quite favorable. And if we can settle in

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Speaker 5: at this level and things not get worse where that

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Speaker 5: would be a very very comfortable outcome.

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Speaker 3: Well, right now, we're looking at, as you mentioned, somewhere

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Speaker 3: between one hundred and fifty two hundred basis points of

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Speaker 3: additional reduction in the Fed funds rate by the end

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Speaker 3: of next year. Do you think that if we settle

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Speaker 3: in as you say, that would be significantly less.

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Speaker 5: If we have improving jobs numbers and GDP growth of

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Speaker 5: three percent from now to whatever we would I think

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Speaker 5: the first thing we'd start doing is say, is the

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Speaker 5: rapid productivity growth that we've observed for the last year

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Speaker 5: and a half, are we in a new period like

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Speaker 5: what we saw in the mid nineties. And if so,

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Speaker 5: we're going to have to recalibrate what is expected potential growth.

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Speaker 2: Well, if we get yeah.

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Speaker 5: You want more on that, well, I was going to say,

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Speaker 5: what the ultimate our star neutral rate that we're going

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Speaker 5: to settle down at depends a lot on what you

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Speaker 5: think that potential growth rate is. So if productivity growth

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Speaker 5: keeps booming like this, that does.

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Speaker 2: Imply a faster growth rate.

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Speaker 5: I think that does imply, just in the economics, that

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Speaker 5: there would be a higher our Star. But in a

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Speaker 5: way that would be the glorious version. It's only because

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Speaker 5: the economy could handle it.

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Speaker 3: All right, let me ask you one last question here.

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Speaker 3: Did we hit a soft landing?

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Speaker 5: Well, you know, the problem with the analogy of the

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Speaker 5: soft landing is that it cannotes stopping. The economy never stops,

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Speaker 5: so there's never there's never a mission accomplished. We hit

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Speaker 5: what I called the golden path already in twenty twenty three,

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Speaker 5: which was we got in inflation down substantially, almost as

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Speaker 5: much as it has ever fallen in a single year

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Speaker 5: without having recession. That's basically never been done before. If

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Speaker 5: now what we're what we're going to be able to do,

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Speaker 5: If we could keep unemployment in this between four and

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Speaker 5: four and a half percent with inflation of hovering around

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Speaker 5: the two percent target, that's exactly what the intention has

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Speaker 5: been all along for the FED, and everybody should be

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Speaker 5: happy if we can pull.

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Speaker 3: That off, all right, thanks to Austin Goolsby, he's the

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Speaker 3: president of the Federal Reserve Bank of Chicago. We'll see

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Speaker 3: on November seventh what the FED does next. Next employment

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Speaker 3: report is November first. This is Bloomberg