Jay Powell speech. The world was watching, but he didn't
seem to say anything new. No, but I thought he gave a very
articulate explanation of kind of what policy going forward is going to be
looking at. Right.
Inflation is still too high. You know, we've had monetary policy
actions that brought us into restrictive territory in terms of that.
And now it's just a question of, you know, calibrating that to make sure that
we're on a sustainable and timely downward path to 2%.
So the commitment is there to bring inflation back down to 2%.
And I thought he did a very good job of explaining sort of the risk management
that we're going to all be undertaking in this next phase of policy.
So you've been on record as suggesting that you haven't calibrated enough, that
you probably need a little bit more restraint on the credit markets?
Yeah, I mean, we're going to get more data in before September, of course.
But when you think about sort of what what has changed between June and now,
we have a bit stronger growth than a lot of us had thought.
We have gotten inflation down. But as the chair said, two months data
is not enough to be convinced that it's coming down.
And then we have higher long term rates, which is going to put some downward
pressure on inflation. That said, you know, in my view, you
know, I think that really under tightening would be a worse mistake than
over tightening a little bit because we can course correct that under tightening
means that inflation could remain higher for longer
than 2% for a little bit longer. And I don't think that's something I
would want to entertain when I think about it, as I look at sort of what our
time path for getting inflation back to 2%.
I wouldn't want to see that pushed out well beyond 2025, which is kind of in
the cards now in terms of the forecast. So I'm going to be very cognizant of
that when I put in my new forecast for the next meeting.
So if you're confident that you could course correct a few over tighten, does
that suggest that you think the idea of a hard landing is at this point kind of
off the table and the soft landing is the base case?
Well, I have a base case of a soft landing in my own projections.
And, you know, of course, we're always navigating the economy going forward.
So you can't take anything off the table.
But if you think about how resilient growth has been, I think it's been
higher than many of us had forecast. I do think we're going to have to
continue to moderate demand. We need to see that moderation demand to
bring demand and supply into better balance.
We also have had some positive things going on in the supply side.
We have labor force participation that's moved up.
If you look at sort of those prime ages, that participation rate is now above
what it was pre-pandemic. So that's a good thing.
Supplies adjusting. And, you know, we have the supply chain
disruptions being more normalized. There's still some constraints there.
But again, there's those are improving. So we have both things happening at the
same time. So that gives me more credence to the
view that, you know, a soft landing may be what we're after, but we're going to
have to keep monitoring the economy. The chairman also said today the growth
has been faster than you expected. Do you expect a significant markup in
growth estimates at the next summary of economic projections at the next Fed
meeting? So I can't predict what my colleagues
are going to do. I'm going to probably have to mark up my
own projection to be a little bit stronger than I had in the June
projections. And then that's going to feed into what
I think the appropriate policy path will be.
Do you change your unemployment forecast given the fact that unemployment is not
doing what you've all predicted it would do?
Well, we have seen moderation in the labor market and we kind of need to see
that moderation in the labor market, just as we need to see it on the product
side. And we are starting to see that.
And so that's not a bad thing. The labor market continues to be very
strong. But again, we have to be focused on
making sure that we're bringing demand and both product and labor markets into
better balance with supply and that that'll be the way to get inflation
down. The labor market has, as you say,
loosened and we've seen wages, the wage growth start to slow down.
But has that come down enough or do you still want to put some downward
pressure? Well, I think a wage growth is an
indicator of where we are in inflation growth.
So we don't aim to bring wage growth down, but it's still going up at a pace
that's it's stronger than what we would need to see for 2% inflation.
And I think that's part of what's going to have to happen.
We will probably see wage growth moderate somewhat, but we don't really
target that. We really target the inflation rate.
Now you've got UAW pattern bargaining starting.
Well, it's basically started. And today the UAW takes its official
strike authorization vote. You have a big automobile industry
component of your district. Are you worried about what comes out of
that? Well, it's just a part of what's
happening in the labor market. So we look at all the data that comes
in, and certainly that's going to be a factor that we think about in terms of
what is it telling us about wage growth going forward?
What is it telling us about the strength of the labor market going forward?
So that's the context of. Which I look at it, we don't in the Fed
sort of look at individual industries and sort of that bargaining decision.
That's for them to decide. And then we use that as data.
What's the environment look like? I just wonder, though, if the automobile
industry is so big, not just the big three auto companies, but then you've
got all the suppliers and the the wage demand sort of trickle down.
So then does that lead to trickle up inflation?
Well, I think what we have to look at, we don't see any evidence that there's a
wage price spiral. I mean, I know that was earlier people
were concerned about that. That's not what we're seeing now.
We are seeing the labor market moderate and wage wages moderate.
We just need to see that continue to be really confident that inflation is on
this timely and sustainable path back to 2%.
And we're committed to staying the course and making sure that inflation
returns to 2%. Now, we know that inflation, at least
according to all the experts, is going to pop back up a little bit, just sort
of mechanically, how far would it go before you started
to get worried? Well, you know, we we have to get
inflation back down to 2%. You're right.
There's base effects on some of the numbers.
And, you know, that's why I think the way I interpreted what Chair Powell said
today is really to really indicate to people that, you know, one or two great
readings on inflation aren't really enough.
We need to see sort of sustained improvement.
And with core inflation, which is what you take out the food and energy prices
and you take them out because they tend to be volatile.
That's still above 4%. And we really need to see that come
down. And so we're going to stay the course in
terms of our monetary policy, making sure that we are restrictive enough so
that policy so that inflation comes back down.
And then we'll also be evaluating how long to stay restricted as inflation
comes down, the real interest rate. We're in other words, nominal rates
adjusted for inflation, that will actually be, you know, tightening.
So we're going to be having to watch that as we go forward in this, you know,
coming months. And, you know, over the next period, we
went from monthly inflation rates of 6/10 to 5/10 to four.
We're now at 2/10. How much higher would it have to go on a
monthly basis before you thought this is not just base effects, this is something
we have to be more proactive in? Well, it depends on.
Yeah, I mean, you're right. The point estimates are very important
to look at. I mean, year over year, you know,
changes are kind of a good guide. So we look at the monthly numbers
because that tells you about turning points and other things.
But we also have to look at to make sure that inflation is coming down on that
year over year basis because, you know, we're targeting year over year inflation
of 2%. So that's kind of what we look at.
And those monthly indicators give us a good view about whether things are
moving back up. And then we look at the components.
And as Sherpao had in his speech today, he went through sort of the components
that we're watching in terms of rent inflation, which then feeds into house
price inflation. And that service sector, that all
important service sector markets have raised yields in recent weeks
significantly. Is that something that is helping you
and would you worry if they started to go back down again in conditions got
looser? Are they where they should be in terms
of the policy that you want? Well, certainly the higher long term
interest rates put downward pressure on inflation.
Right. So when we think about financial
conditions, they feed into financial conditions.
So that means that we have to think about that.
When we think about calibrating our policy rate.
I think one of the concerns that people have expressed about the higher long
term rates is maybe that's going to have a financial stability or banking
industry of fact adverse effect. And frankly, in talking to the banks in
our district, we see them already taking actions to make sure they have adequate
liquidity. You know, they're taking more caution in
terms of their their lending capacity. They're tightening credit conditions,
and that's exactly the mechanism through which tighter military policy then feeds
through to the broader economy. So I'm not concerned about the higher
interest rates. The market is determining that that's
where they should be. But it's certainly a factor when we look
into terms to calibrate our policy in order to hit our inflation goal of 2%
going forward. This is all about structural changes to
the economy. This conference.
Where do you see the US economy coming out of the pandemic distortions?
Do we go back to a pre pandemic era of low interest rates but low inflation and
low growth rates? Or do we go back to a higher inflation,
higher interest rate environment? Well, I think right now, you know,
that's a little bit in the future. We don't have to think about that
necessarily. But I do think there are arguments on
both sides. And I think a lot of people say we just
haven't had enough data yet to determine where our star is that, you know, long
run interest rate, neutral interest rate and other conditions say that, well, if
we have less global. Zation.
If we have the Chinese economy pulling back, that may mean put upward pressure
on inflation. And so I don't think we know yet where
we're going to settle. But we do know that we're committed to
getting inflation back down to 2%. And we're going to calibrate our policy.
And when we say we're data dependent, we mean we're taking into account all the
data, including the data that we get, that anecdotal information that we get
from our district contacts, which really is forward looking.
So, again, I don't think we can make a determination of where things will
settle down yet. But in this period, we know that there's
still COVID pandemic effects affecting the economy, and we'll just wait and
see. We also have a I knew I coming in.
In fact, the last session was all about sort of productivity growth and what
what that's going to be for the economy going forward.
So I think there's a lot of uncertainty around those things.
But for the the case in point now, we just need to be focused on bringing
inflation down. One of the issues with where you end up
coming out of it and I realize it's in the future, but the housing market is
basically frozen now because interest rates, mortgage rates are very high and
people polled, so many people are locked into very low mortgage loans that they
don't want to move. Are you going to get to a point where
that freezes or are we going to be waiting a generation essentially to turn
over housing and get the housing market going again?
No, I mean, look, we're at a very restrictive stance on housing.
We had to do this because of where inflation was.
You know, my expectation is when we are convinced and inflation is moving down
sustainably to 2% back to 2%, we'll be able to move policy into a lesser, you
know, restrictive stance. And as we do that, we're going to see
mortgage rates come down. So, again, there's dynamics going on
here because we're still in a high inflation environment.
But over time, we're going to be able to normalize our policy and therefore,
we're going to see other interest rates come back down.