Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: So in the market right now, Equery's near session highs
Speaker 2: up two percent on the SMP. This bond market some
Speaker 2: wild moves earlier on this morning, yields three four percent
Speaker 2: at the front end of the curve high shield we've
Speaker 2: seen since last summer three eighty five. Now, because we've
Speaker 2: pulled back following those headlines, we're down five basis points
Speaker 2: on the session. We've priced out the easing. At one
Speaker 2: point we were talking about price again rate hikes at
Speaker 2: the Federal Reserve. Let's have that conversation right now with
Speaker 2: the Federal Reserve government of Stephen Mara and the lone
Speaker 2: voice dissenting at last week's FMC meeting, continuing his push
Speaker 2: for interest rate cuts. Governor Maron joins us now for more. Steve,
Speaker 2: good to see you, good morning. Thanks for having me back. Governor,
Speaker 2: Where do we begin with these headlines right here? As
Speaker 2: a policymaker, as an official, when things are moving this fast,
Speaker 2: what do you do?
Speaker 1: Well? Look, we've already hands whiplash this morning, and I
Speaker 1: think that underlines that we shouldn't be making policy based
Speaker 1: on short term headlines. Right We should wait for all
Speaker 1: the information to come in before really changing our outlook,
Speaker 1: and I think it's just still premature to have a
Speaker 1: clear view about what this is going to look like
Speaker 1: as you look twelve months out, and because of monetary
Speaker 1: policy lags, we really need to be looking a year
Speaker 1: to a year and a half out, and there's just
Speaker 1: not enough information yet about what that looks like.
Speaker 2: Communication in the near term, of course, matters. The chairman
Speaker 2: in the news conference last week really vowing to anchor
Speaker 2: inflation expectations. Do you think that's a worthwhile pursuit at
Speaker 2: this point?
Speaker 1: I do. Look, you know, traditional central banking Federal Reserve
Speaker 1: wisdom is that oil shocks head headline inflation, but they
Speaker 1: don't really pass that much into core as by as
Speaker 1: much as they do as they do into headline and
Speaker 1: the two ways that you would want to respond to,
Speaker 1: and so therefore you typically look through an oil shock. Now,
Speaker 1: the two exceptions would be if inflation expectations beyond the
Speaker 1: first year start to move higher. That hasn't happened thus far.
Speaker 1: Inflation expectations for the first year out have moved higher,
Speaker 1: of course, But as I look at the CBI swop
Speaker 1: market beyond the first year, there hasn't been that much movement.
Speaker 1: Medium term five year, five year, longer term five year,
Speaker 1: five year forward expectations have actually been come down lately,
Speaker 1: so there's no evidence of that. And the other reason
Speaker 1: why you would want to respond to an oil shock
Speaker 1: is if you saw a wage price spiral, if you
Speaker 1: saw wages responding to oil price increases, gas price increases,
Speaker 1: that could result in the type of reinforcing inflation dynamics
Speaker 1: that you want to forestall. Now Again, thus far, there's
Speaker 1: little evidence of that. In fact, wage pressures have been
Speaker 1: declining for the last few years on a steady, steady,
Speaker 1: steady basis, So that's also something that I don't really
Speaker 1: see right now.
Speaker 2: So the market, the labor market is just not strong
Speaker 2: enough to worry about it.
Speaker 1: I think the labor markets still could use additional support
Speaker 1: from Monterey policy, and that's why I dissented last meeting,
Speaker 1: as I have continued to send for all previous meetings.
Speaker 2: How lonely were you at that committee meeting just last
Speaker 2: week voting for a twenty five basis point reduction in
Speaker 2: the face of an energy shock. How robust was the
Speaker 2: conversation around the table.
Speaker 1: Look, I think a lot of people around the table,
Speaker 1: like me, were hesitant to draw conclusions from the oil
Speaker 1: from the oil news thus far, because as I said before,
Speaker 1: we have to look twelve to eighteen months out, not
Speaker 1: what happened to the oil price yesterday. And so looking
Speaker 1: twelve to eighteen months out, there's still no not enough
Speaker 1: clarity to think that montery policy itself should adjust in
Speaker 1: response to what's happened.
Speaker 2: Well, check out the old futures curve that has changed.
Speaker 2: I've just had one eye on December over the last
Speaker 2: three weeks or something that's gone from the sixties and
Speaker 2: threatening to break out into the nineties at one point
Speaker 2: earlier on this morning. That's a change, that's a real
Speaker 2: step up now.
Speaker 1: It has, and I boosted my you know, in the
Speaker 1: summary of economic projections, I boosted my inflation dot for
Speaker 1: the end of the year to two point seven percent,
Speaker 1: reflecting that in part right, so, there is some expectation
Speaker 1: of higher headline inflation. However, I said before, I think
Speaker 1: it's way too early to draw conclusions that it's bleeding
Speaker 1: beyond headline inflation in a way that matters for monteria policy.
Speaker 1: Don't forget higher oil prices also depressed demand, right, they
Speaker 1: take money out of the pockets of consumers that were
Speaker 1: spending on other goods and services and redirects it towards
Speaker 1: gas and other energy costs, and that depresses demand and
Speaker 1: causes unemployment to move a little bit higher. That offsets
Speaker 1: some of the increase in inflation.
Speaker 2: To your colleagues. This morning, Gustin goesby at the Chicago
Speaker 2: FED speaking to the press saying, we could see a
Speaker 2: circumstance where we'd need to raise interest rates. How high
Speaker 2: is the bar to raise interest rates on circumstances? Would
Speaker 2: you personally need to say? Yeah?
Speaker 1: So, I just laid out a couple of them before. Right,
Speaker 1: If it looks like the oil like the oil shock,
Speaker 1: is bleeding into inflation expectations beyond the first year, then
Speaker 1: you get really concerned about second rend effects. Or it
Speaker 1: looks like you're starting to cause a wage price spiral,
Speaker 1: then you get really concerned about second rend effects. First
Speaker 1: und effects are not something you traditionally respond to as
Speaker 1: a central bank. Now, I'll say one thing beyond that,
Speaker 1: which is that these oil shocks have been things that
Speaker 1: this FED has looked through for a long time. Right,
Speaker 1: it would be highly unusual for the FED to start
Speaker 1: looking through them now, and when you think about what
Speaker 1: happened in twenty twenty one and twenty twenty two, we
Speaker 1: did have negative supply shocks, like the oil shock from
Speaker 1: the Russia Ukraine invasion. But in my view, part of
Speaker 1: the reason why it was able to reverberate through the
Speaker 1: economy the way it did was because policy settings of
Speaker 1: the time were very different. Monetary policy and fiscal policy
Speaker 1: were at all time historical accommodative levels. We were doing
Speaker 1: one hundred and twenty billion dollars a month of QWI,
Speaker 1: we were doing two trillion dollars fiscal packages at a time.
Speaker 1: That's not the case right now. We're not hitting the
Speaker 1: gas on demand that would interact with the higher oil
Speaker 1: price in a way that reverberate these prices through the economy.
Speaker 1: Now that's not the case at all.
Speaker 3: But right now we're just seeing price spike on paper market.
Speaker 3: But what's happening in the physical market is actually avoid
Speaker 3: We are seeing not just shut in, but some of
Speaker 3: these installations going to take years to rebuild. At what
Speaker 3: point does that start to potentially de anchor inflation expectations?
Speaker 1: Yes, so you'd want to see you'd want to see
Speaker 1: the oil price shocks start to reverberate through supply chains
Speaker 1: and pushing up prices. More broadly, we are.
Speaker 3: There in terms of airlines diesel. That means that it's
Speaker 3: going to be more expensive in terms of some goods
Speaker 3: and services that are delivered by truck.
Speaker 1: Yeah, there's been a few instances, but you want to
Speaker 1: see that in a broad based way that starts to
Speaker 1: bleed into core inflation and boost it and boost it
Speaker 1: in a way that's sort of not just a one
Speaker 1: off time, but you start to see really second round
Speaker 1: effects that are concerning for the longer term. And if
Speaker 1: that starts to happen, then you start to get concerned
Speaker 1: about inflation. And I think that that is that is
Speaker 1: what you did see happen in twenty one twenty two,
Speaker 1: and thus far I don't see it happening on a
Speaker 1: broad basis. Now it could happen, right, but thus far
Speaker 1: it hasn't happened on a broad base. You get some
Speaker 1: usyncratic stories like airline prices that are more directly tied
Speaker 1: to jet fuel, but beyond that you haven't really seen it.
Speaker 1: And I think part of the reason why is because
Speaker 1: we're not hitting on the gas we're not hitting the
Speaker 1: gas on demand. We're not boosting demand with all time
Speaker 1: record accommodative policy in a way that would allow pricing
Speaker 1: to accommodate a supply shock like that.
Speaker 2: It's fair to say that I think a lot of
Speaker 2: FED watchers watching this right now, and I'm getting some
Speaker 2: reaction from them in real time, agree with you that
Speaker 2: this isn't the environment to high grate. The opposite, though,
Speaker 2: is a difficult argument to make. Is it the right
Speaker 2: time to cut interest rates this quickly, this soon? Yeah?
Speaker 1: So, as I said before, traditionally you would look through
Speaker 1: an oil price shock like this, which means that my
Speaker 1: policy outlook from before is unchanged, and my policy outlook
Speaker 1: from before would be gradual cuts of interest rates. I
Speaker 1: had about six cuts for the year at the last
Speaker 1: step in December. I reduced that to four cuts for
Speaker 1: the year in response to the inflation data right that
Speaker 1: we received between the two between the two projection periods.
Speaker 1: So I'm maintaining my outlook.
Speaker 2: That doesn't change government forgive me for jumping in, but
Speaker 2: the balance of risks around the outlook should change. That
Speaker 2: should change off the Bank of energy shock. Isn't that
Speaker 2: a fair summary of where we should be.
Speaker 1: Well, the balance of rice does change, but I think
Speaker 1: it's actually changed on both sides equally. The inflation risks
Speaker 1: have got a little more concerning, but the unemployment risks
Speaker 1: have gotten more concerning too, because the negative supply shock
Speaker 1: that is the oil price is also a negative demand shock.
Speaker 1: You're taking money out of goods and services that are
Speaker 1: not energy that would have been spent on those goods
Speaker 1: and services anyway. And I view the labor market as
Speaker 1: continuing its gradual softening trend for the last three years.
Speaker 1: That trend has been in place for three years. I've
Speaker 1: seen nothing that would convince me the trend is stopped.
Speaker 2: Right.
Speaker 1: That's a very very powerful medium term trend that's been
Speaker 1: in place for several years now. And taking money out
Speaker 1: of goods and services that's not energy to devote to
Speaker 1: higher energy prices is exactly the type of thing that
Speaker 1: worries me that trend might accelerate. So the balance of
Speaker 1: risk changed, but I think it got worse on both sides.
Speaker 1: I don't think it changed asymmetrically.
Speaker 2: Governor. It's good to say that's what making time for us.
Speaker 2: As always, we appreciate it, Sir Governor, Stephen Maren at
Speaker 2: the Federal Reserve on the argument for lower interest rights
Speaker 2: following a major energy shock,