- 6 weeks ago
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00:00You've been very, very transparent about where you are and the dot plot and what your forecast is.
00:04So let's start there. Where are you for this year? Where's your dot? What are you looking for?
00:08Yeah, so I'm unsurprisingly the lowest dot. I'm looking for about a point and a half of cuts.
00:12A lot of that is driven by my view of inflation. I gave a speech about this about a month ago in
00:17December at Columbia University. My view is that almost all of the excess inflation over target is
00:22due to quirks of how we calculate inflation. So as you have talked about with many of your guests
00:27many times before, shelter inflation really, really lags a lot. And because average tenant
00:31rents have caught up to new tenant rents, because market rents have been running at a 1% rate
00:34for a couple of years now, I think it's appropriate to sort of think about underlying inflation
00:38as abstracting from that a little bit. You know, the shelter inflation is indicative of a supply
00:44demand imbalance from 2022, 2023, not 2027. We need to be making policy for 2027 because policy
00:49lags. And the other side of it is the portfolio management fees that I'm sure you've talked
00:53about again with many of your guests many times. Stock market went up, mechanically inflation
00:56moves higher, despite many of your other guests, I'm sure, no doubt, telling you about fee compression
01:01in the asset management industry for decades. So you abstract from those two things, underlying
01:06inflation is running at 2.3%. That's within noise of our target.
01:09That sounds like an argument for neutral. You're making an argument, though, for this year,
01:12for accommodation. Where does that come from? Why are you looking for accommodative monetary
01:16policy stance coming out of Washington?
01:18Yes. So a couple of things. First of all, as I just said, underlying inflation is running within
01:22noise of our target. And that's a good indication of where overall inflation is going to be
01:26going in the medium term. But then the unemployment rate is 4.6%, right? So that means that there's
01:31about a million Americans who don't have jobs, who could have jobs without causing unwanted
01:35inflation, without causing unwanted upward pressure and inflation. I don't think it's
01:38right to tell those people that they shouldn't have jobs because we're just mechanically calculating
01:43inflation in some silly way. I just don't think that makes a lot of sense. The other thing is that
01:47because we've kept policy tighter than I think it ought to be, that makes me mark down our growth
01:51forecast for the future relative to where it should be. And so if we hadn't been keeping
01:57policy, in my view, too tight over the last year or so, it wouldn't be necessary to provide
02:02that type of accommodation.
02:03Just quickly, you say mark down in the future because the Fed actually marked up GDP for 26.
02:08Where do you mean in the future?
02:09No. So like when you look at these dots, right, in the SEP, they're projections of appropriate
02:15policy and projections of economic fundamentals like growth and inflation conditional upon
02:19appropriate policy. So my projections for growth and inflation are conditional upon getting my
02:26policy forecast, right, my policy projection. If I don't get my policy projection because the
02:31rest of the committee is more hawkish than I am, then we wouldn't meet my growth and inflation
02:34projections. We'd underperform them. And so because policy has been, in my view, too tight for the
02:39last year, that means that my expectations of growth will ultimately be unsatisfied because
02:46we didn't get the policy that I wanted.
02:47You have GDP 2.6% roughly over the next few years. Are you saying that the appropriate growth
02:53rate is something like that 2% and 2.6% and not necessarily 3% or above?
02:58Well, so that's conditional upon getting the policy projection that I want, right? And I think,
03:04and I think, and part of that is due, and part of the reason why it's a little bit lower than,
03:08I think, 2.8, 2.9 is probably more where it would be if we got, if we sort of had the right policy the
03:14entire time. Part of the reason it's a little bit lower than that is because we got to account
03:18for policy having been too tight over the last 12 months, right?
03:21There's also a question about the reaction function. We've been talking about the data that
03:23we're going to be getting tomorrow. What would you have to see to change your view? I mean,
03:27if we saw, let's say, the unemployment rate go down to 4.4%, would you start to question
03:33whether 150 basis points of cuts is really necessary this year?
03:37That's a great question. And before I answer it, let me step back a foot and say
03:41that my forecast is conditional upon shelter inflation coming down, right? And there's
03:46people who agree with me, by the way. Like, you look at the research from Goldman Sachs. You know,
03:49it's pretty similar to where I am on shelter. They've got shelter inflation running below the
03:53pre-COVID rate by the end of the year, similar to where I have it. Where I differ from a lot of my
03:58colleagues, again, is thinking that goods inflation is not being driven by tariffs. I don't see tariffs
04:03being driven by goods inflation. I see goods inflation. I'm not sure what's driving. I listed
04:07a few possibilities in the speech in December. I think the jury's still out on that one. But if I
04:13end up being right on inflation and gold, sorry, on shelter, if I end up being right on shelter and
04:17Goldman ends up being right on shelter and I end up being wrong on tariffs and everybody else is right
04:21on tariffs, then we're going to undershoot our target. Two-sided risk is back. And I think the
04:25people haven't really internalized that yet. And I think it's important to appreciate that.
04:29Now, where would I be wrong? Because so much of my disinflation forecast is based upon shelter.
04:34I'm going to be wrong if market rents pick up again.
04:37So you're saying this is all an inflation issue and not anything to do with the labor market?
04:40No, as I said before, unemployment is somewhat above where I view the natural rate. And so it's
04:4660 basis points, a million people of unnecessary unemployment that we could reduce by having a
04:52more appropriate policy stance.
04:53But to Lisa's point, is there a line in the sand on the unemployment rate tomorrow that would maybe
04:57have you think about this a little bit differently? What if the unemployment
04:59rate drops down 4.5% or even 4.4%?
05:02Yeah, I would absolutely adjust my projection. So if you look at the September SEP, right,
05:06I was 50 basis points higher than I was in the December SEP. Part of the reason why I adjusted
05:11my dot down by 50 basis points is because the labor market didn't perform per my expectations that I
05:17had in September and because inflation actually outperformed to the downside, right? So it was
05:21appropriate to adjust my dot down. And then on top of that, we had the two type policies I described.
05:25So if the data come in a little bit better, yeah, of course I'm going to adjust my expectation.
05:28In just the past few weeks, we've heard from a number of your colleagues talking about how
05:32actually they feel like we're pretty close to neutral. Have you made any inroads convincing
05:36them that they're not right about this, the way you see the world?
05:40You know, I can't speak for them. But, you know, I think that every month we come in and the
05:44unemployment rate ticks up a little bit and the inflation, you know, the inflation data sort of
05:48seem to be doing a little bit better. I think it's really difficult to argue that policy is
05:52neutral, especially when we've been on this course of gradual loosening of the labor market for a
05:56couple of years now. It's just really difficult in my mind to sort of argue that that policy is not
06:02restricting the economy. There's a couple of words I want to pick out. And one is neutral and the other
06:06is correct. I think it's very difficult to say this is where I think neutral is and this should be
06:11the correct policy rate because it's such a guessing game as to where neutral is. And I think
06:15you understand that, of course. I also want to pick up the difference between being an economist
06:19and being a policymaker. When you say two-way risk, I think that really makes us all think about
06:23speed and the appropriate speed to adjust monetary policy when there is two-sided risk. Why do you
06:28think we should be going this fast this year, in your mind, to cut that aggressively in 2026?
06:35Sure. So the same thing, as I said in the last few times I've been here, we're still materially
06:39above neutral, in my mind. And there's not really a reason to be materially above neutral if the labor
06:44market is on a weakening path and underlying inflation is already running close to our target and
06:49on trajectory to hit the target. There's just not a real reason to be so restrictive. And we're
06:54running unnecessary risks on the labor market by being so restrictive. And so in my mind, it's like
06:59we're selling options for nothing. And I don't see why we're selling those options for nothing.
07:03This just requires such a strong amount of conviction, though. Coming out of the pandemic,
07:06I think what we all learned was a massive degree of humidity because there were so many things that
07:10we thought were obvious that actually things just turned out to be completely the opposite.
07:15And I wonder if this year we should have the same approach to monetary policy. As a monetary policy
07:19official, do you have to sit here and say actually the prudent way to do things is actually to move
07:23slowly and work things out meeting by meeting? Because that's what I hear from other members of
07:26the committee. And I'm wondering why you see things so differently. Sure. So first of all, I'll say that
07:31I was right about inflation coming out of the pandemic. And if you sort of go back to 2020, when I was the
07:36Treasury Department, you know, we were arguing for a smaller stimulus package because we didn't see
07:40COVID as a similar type of recession that we had post-GFC, post-dot-com bubble, where you had
07:46persistent deleveraging, dragging on demand that caused a balance sheet recession with a persistent,
07:51slow, crappy recovery, right? COVID was like a switch turned off, right? People stayed home,
07:56and the switch turned on when they started going out again. And so there wasn't going to be that
07:59slow recovery. And that's why we were pushing for smaller stimulus packages, because we didn't
08:04think that it merited that type of package. We were concerned about inflation picking up. So
08:07I did get that right. And I do understand the value of being cautious and having humility in
08:17these things. I will say my forecast, as I said before, is predicated upon shelter inflation.
08:22And shelter is a weird thing where market rents give us a window into the path of measured inflation
08:27that's very different than other sections of the inflation index. We know that market rents,
08:33a weighted average of single-family, multifamily market rents, have been growing at a 1% rate for two
08:37years now. We know that average tenant rents have caught up to new tenant rents, right?
08:40There are statistically mechanical relationships that give you a lot of confidence that measured
08:45shelter inflation is going to come down a lot, right? You don't have that type of confidence
08:49when you're talking about goods. I said before, I don't know what's driving goods inflation,
08:52right? I don't have this forecast that goods inflation is going to come down because it's just
08:57driven by tariffs that my colleagues seem to have, right? I don't have that type of confidence on
09:03areas of the index that I think are much more difficult to understand. Shelter is a
09:06mechanical thing from market rents to measured inflation. And therefore, it's in my mind
09:11appropriate to have that high degree of confidence. And to Lisa's point, where would I be wrong?
09:15If the market rents pick up again. If the market rents pick up, then I'm going to say my mechanical
09:20pass-through from market rents into measured shelter inflation is getting invalidated. And we'll see
09:25that.
09:25Just to hone in a little bit on the housing aspect, since that has been a really hot topic,
09:30how much signal would you take if you did start cutting more aggressively at the Federal Reserve,
09:34and 10-year yields rose? And that actually created an issue for mortgage rates and the
09:38pass-through there. It might actually help with disinflation, but it might not exactly be
09:42the outcome that you're looking for.
09:44Yeah. So this is an area where I'd want to not jump to conclusions because I'd want to sort of
09:50try and analyze it very carefully and think about what the market is saying, think about what the
09:54economy is doing. And if it's the case that you cut rates and you sort of get a burst of activity in
09:59some sector of the economy that's not housing, and that ends up crowding out housing, then you
10:04wouldn't really mind. You're focused on aggregates. You're focused on aggregate inflation. You're
10:08focused on aggregate unemployment. If it looks like you cut rates and the bond market is giving
10:14you a very clear signal, and I'm not just talking about trading behavior for a week. I'm talking
10:19about a very clear signal over the course of a period of time that it's not the right move,
10:24then I think, yeah, you want to take that signal and you want to think about what's the market
10:28telling me that I missed. Is the market right? Am I wrong? Let me rethink my framework.
10:32You're going to miss this when it's all over. It feels like you're enjoying this.
10:35Are you going to miss this when you have to leave the Federal Reserve?
10:39Well, you know, that's not part of my forecast.
10:43Are you going to hang around?
10:44Oh, I have no idea. You know, we'll see. I don't make personnel decisions.
10:47Okay. You've heard nothing at all from anybody.
10:51You know, I think that, you know, we're very clearly now getting into the new year and the present,
10:56you know, the president has said in the past that he would make announcements as we got there. So,
11:00you know, I imagine we'll be getting some at some point, but, you know, I don't know. I don't know
11:06anything about my future, so I wouldn't mind it. What a position to be in. We're all sitting here
11:10waiting, just like you. Governor, thank you. It's good to see you.
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