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00:00This flip-flopping of policy that we're seeing from President Trump, I'm just wondering,
00:04is it adding to the lack of clarity for the Fed?
00:09Well, uncertainty is something that we are absolutely dealing with at the Fed as we're
00:13trying to navigate where inflation is going and where the labor market is going. And as I reach
00:17out to businesses all across my part of America that the Minneapolis Fed covers, uncertainty is
00:23top of mind for businesses large and small. They're all looking for some vision of where's
00:29the destination? Where are these trade negotiations going to settle so they can then move forward with
00:34their investment decisions? Until they get that kind of clarity, this uncertainty is overhanging
00:38the U.S. economy and potentially weighing on economic activity and obviously creating challenges for us
00:44because we're not sure where things are going to settle and therefore where we should go with
00:48monetary policy. We've heard from the Fed again and again that it wants clarity before making a
00:54decision on a move. Is there a sense that perhaps you could get some clarity before September?
01:01Might that allow the Fed to make a move before September?
01:07I mean, anything is possible. I don't want between now and September, it's several months,
01:12obviously, worth of data that we're going to be looking at. The labor market has so far been
01:17remarkably resilient in the face of this uncertainty, though I hear from businesses that they are running
01:22scenarios, contingency planning, that if this uncertainty lasts for much longer, they are likely
01:27going to have to take some actions to reduce their workforce, to position themselves to maintain some
01:32level of profitability. And so is that clarity going to be, is it going to be clear enough by
01:38September? I'm just not sure right now. Ultimately, we'll have to see what the data says, but we'll also
01:43have to see how the negotiations are going. Obviously, if major announcements are struck, meaningful
01:49announcements between the U.S. and our major trading partners over the next, next few months, that
01:54should be, that should provide a lot of the clarity that we're looking for. So right now, we just have
01:59to wait along with everybody else.
02:02Neil, why, why the need for clarity? Why not just be data dependent for the next three and a half years?
02:10Well, we are going to be data dependent. I mean, certainly we have been data dependent and that's
02:14one of our hallmarks of our policy process. One of the challenges we have right now is the data,
02:19of course, is lagging. And when we know that these tariffs have been put in place, we know that some
02:25American businesses knew tariffs were coming. And so they pre-ordered a lot of goods from abroad.
02:30So we're not yet seeing the full effect of the tariffs and the trade wars on the American consumer.
02:36You know, when I go out to stores in the U.S., store shelves are still full.
02:41So we're not seeing the impact of Target or Walmart not bringing in goods that they used
02:46to bring in because of tariffs. And so some of the data we know is going to be lagged.
02:50And then ultimately, these negotiations, how long are they going to take? And is there
02:54going to be a tit for tat? These are the dynamics that we're trying to navigate.
03:00The thing is, Neil, we've had you say that you're confident the economy is on solid footing.
03:05I spoke to Jamie Dimon just last week. He says that we should actually prepare for
03:09stagflation. How do you square that?
03:15Well, the fundamentals of the economy coming into this year were absolutely strong.
03:19We had inflation that was trending down, not quite back to our 2 percent, running at about
03:23a 2.5 percent level, and GDP growth that continued to exceed our own expectations for the last few
03:29years. So those fundamentals were very, very strong. And now there's been a policy uncertainty
03:34that has been introduced to it. And that's what's causing this environment that we're trying to
03:39navigate. A stagflationary shock, if Jamie Dimon is correct, pushes up inflation, pushes down economic
03:45activity. But our monetary policy instruments either push up economic activity and inflation
03:51or push them both down at the same time. And that's a particularly challenging environment for
03:56policymakers to navigate. And that's why so many of my colleagues and I are saying we're really in a
04:01wait-and-see mode until we see which of these two effects, activity or inflation, which is the
04:07bigger effect that ultimately should drive our policy path.
04:12As it stands now, Neil, how would you rate the chances of a stagflation? 30 percent? 40 percent?
04:20Well, I think there's no question that the shock of tariffs are stagflationary. The question is going
04:27to be, ultimately, how high do they settle at? Right now they're at a very high level, highest in 100
04:32years. And how long a period, both is this uncertain environment and how long are the tariffs going to
04:38last? If we have high tariffs for a month or two, but then they're negotiated much lower, the
04:43stagflationary imprint of that is going to be much, much lower. If we ultimately settle at a high rate
04:50for the foreseeable future, then the stagflationary impact will be much larger. And so is it stagflationary?
04:56Yes. But the question now is the magnitude of the stagflationary impulse. And we just don't know yet.
05:04Let's talk about yields. It is a higher yield environment and much higher than before Liberation
05:10Day. We have 30-year yields in access of 5 percent. What are you making of the rising yields for longer
05:17dated bonds? Well, there's a few different components that go into yields. One is the
05:23expected path of monetary policy. The second is inflation, inflation expectations. Our job is to
05:29keep that component down to keep inflation expectations at 2 percent. And then there's
05:33just investor preferences, what people call the term premium. And if you look at the reason the U.S.
05:39has had a trade deficit is because it's just the flip side of a coin. The U.S. has been the premium
05:44destination for investment capital around the world. If the U.S. no longer seeks to have a trade
05:50deficit, then we would no longer have to be the premier destination for trade or for investment
05:56from around the world. And so I think what you're partially seeing is investors are reassessing
06:00where do they want to allocate capital to, to America, to Europe, to Asia. And I think as that
06:06rebalancing takes place, you will see yields around the world start to adjust to this new equilibrium.
06:12Of course, we're also seeing yields around the world all go up at the same time. So it's
06:17not simply a reassessing of the relative strength of these economies, but also questions about,
06:22I think, the debt dynamics and the growth dynamics of the global economy as a whole.
06:28So wouldn't you say that the market's in a sense of voting on the tax bill in the U.S.?
06:36Well, I think there's a lot going into it. Right now, the U.S. is facing a number of different
06:41major potential policy changes. One are tariffs and trade policy that we just talked about.
06:46Another one is a dramatic shift in immigration policy. The U.S. had very high immigration levels
06:52the last few years that have really been brought way down now this year. And that's going to affect
06:56how fast our economy grows in terms of less consumption, but also less production, less
07:01on the supply side of the economy. Then you've also got the fiscal policy changes,
07:06the tax bill that you just talked about, as well as regulatory changes. So I think markets are
07:11digesting all of these changes at the same time. And it's hard to attribute how much goes to one versus
07:18how much goes to another of those components. Do you see the forces influencing the longer-term yields also
07:30pushing fund rates higher for longer?
07:36Well, ultimately, we have to set the federal funds rate around our assessment of neutral.
07:42The neutral rate, the real neutral rate, is where savings and investment balance out. And if there's less investment
07:48capital flowing into the U.S., then you would expect, all else being equal, that the neutral rate will be higher.
07:56And that would mean that the Federal Reserve, as we set the policy rate, would have to be responding
08:00to that higher neutral rate. And so I think depending how this shakes out over the long run,
08:06it could have an effect on the neutral rate. And then that will affect what the Federal Reserve,
08:10how the Federal Reserve sets policy to keep inflation expectations anchored at two percent.
08:16When Moody's downgraded, the U.S. did say that there are expectations that perhaps if the tax bill goes through,
08:22the U.S. would end up using 30 percent of its revenues just to pay interest. And should that happen,
08:29we might see mortgage rates go as high as seven percent. Is that a base case for you?
08:34How are you looking at that possibility?
08:38Well, that's really not the job of the Fed. Our jobs, the assignment that we've been given from Congress,
08:43is stable prices, two percent inflation and maximum employment, and how the government funds itself,
08:49how much they want to tax, what they want to spend on, how they service the debt. That's the domain of
08:54the U.S. Treasury Department and of Congress. So we leave it to them to think about those issues.
08:59We know our jobs, and that's to get inflation back down to two percent and hopefully keep the labor
09:04market strong at the same time. And that's what we're focused on.
09:07Neil, what are the companies in your district saying? Are they waiting and seeing? Are they delaying big investments?
09:17That's what they're telling me, that they're waiting and seeing. You know, if they can respond,
09:23if they knew where the tariffs would ultimately settle, they can then redesign their supply chain
09:28and optimize it around that new destination for tariffs and global, global tariffs, not just U.S. and
09:35China, but global tariffs. But right now they don't know. And so they don't know whether they should
09:39build that new factory in Mexico, in the U.S., in Vietnam, in China or India, for example, just because
09:46they don't know where this is ultimately going to settle. And until they know, there really are
09:51just waiting and seeing and saying, let's just pause and hold here. And the question is, how long
09:56can they hold there if all businesses are doing the same thing or consumers are doing the same thing?
10:02That obviously can have quite a depressing effect on the economic growth and the economic resilience of
10:08the U.S. economy.
10:12Neil, we're seeing gyrations in asset classes, including cryptocurrencies. You are a crypto skeptic.
10:18The last we spoke, you said that you're going to keep an open mind. When U.S. assets tumbled last week,
10:25the U.S. dollar, equities, even treasuries, we saw Bitcoin railing. What do you make of the movements?
10:32I mean, it's so tempting to see or say rather that perhaps Bitcoin was the adult in the room.
10:41Well, I'm skeptical of that conclusion. Certainly when inflation took off and the Federal Reserve
10:48raised rates aggressively, Bitcoin got crushed. And first we were told that it was going to be a
10:53great payment device. It's basically useless for payments in an advanced economy. Then we were told
10:59it's a great inflation hedge. And when inflation took off and the Federal Reserve raised rates,
11:03Bitcoin got crushed. And so, you know, the use case for Bitcoin and the advocate that the advocates
11:08make, it just keeps changing one from the next to the next to the next. It's been 15 years. I'll keep
11:14an open mind looking for some use case in in an advanced economy where you actually follow in the
11:21rule of law. I have yet to see it other than as an instrument of speculation. If people want to
11:26speculate on it, they're more than welcome to. Of course, stable coins also making headlines.
11:32Let's take a listen to what Scott Bassin had to say. What we want to do is apply the highest U.S.
11:40regulatory and AML standards to digital assets, especially stable coins. And I've seen estimates
11:50that just over the short term stable coins could create two trillion of demand for U.S. treasuries
11:58and treasury bills. To put that in context, the number is probably about 300 billion.
12:07Of course, we heard from the crypto czar saying that that stable coin bill will be pushed through
12:11as well. Your take on it. Again, this is the domain of Congress and the executive branch to decide how
12:19to regulate assets. I appreciated the secretary saying that you need to have appropriate regulations
12:25around the stable quote unquote stable coins. I mean, ultimately, what is a stable coin? It is
12:30basically a bank. And so if it's basically a bank and it operates like a bank, then it ought to have bank
12:37like regulations to make sure that it is operating in a safe and sound manner. And so I applaud the
12:43secretary's comments there. And I look forward to seeing ultimately what Congress and the executive
12:47branch decide to do. Neil, I appreciate that it is not the area that the Fed looks at. I'm just
12:54wondering still, though, whether there needs to be a clause, because there seems to be a conflict of
12:59interest. We know that the Trump family is involved in stable coins in the crypto space. Is there a need
13:05for a clause preventing the president and his family from benefiting from such a bill?
13:13You know, that is things that are outside the domain of the Federal Reserve. That's about as far away
13:18as you could possibly go. That is purely up to congressional leaders and legal scholars to opine on.
13:26Not for me. Neil, as you take a look at the economy in the next 12, 24 months, what do you deem
13:33as the biggest risk? Well, I think the biggest risk is overhang. You know, how long the overhang
13:41of the uncertainty. Historically, trade negotiations and trade deals have taken a long time, months,
13:47if not years, to settle out. I certainly hope that the negotiations that are taking place can happen
13:53much more quickly than that, so that some clarity can be provided to businesses and consumers in the
13:59U.S. and around the world. That is a big overhang that I think we're all going to watch very, very
14:03carefully. But then that's just a tariff piece of this. Immigration, as I mentioned earlier,
14:08is another major policy change. The fiscal policy situation is another one. And then I'm also,
14:14of course, watching yields, global yields, the long yields all around the world to try to understand
14:20what investors are saying about the future of the global economy and competitiveness and obviously the
14:25balance between savings and investment. And so I think there are a lot of things to watch right now
14:30that's making this quite a tricky environment to navigate.
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