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00:00How did you approach the committee meeting just last week and what was the argument for 50 basis points?
00:05So I approached it the same way I approached the first one, which is that I think that the Fed is too restrictive.
00:08I think that neutral is quite a ways below where current policy is.
00:12And given my rather more sanguine outlook on inflation than some of the other members of the committee,
00:17I don't see a reason for keeping policy as restrictive for a long period of time as we are.
00:21The longer you keep policy restrictive, the more you run the risk that monetary policy itself causes a downturn in the economy.
00:26What was interesting about last week, as you know, is the dissent cut both ways.
00:30We also had this argument from President Smith of Kansas City Fed, who put out a long statement.
00:35I've cherry picked a quote, forgive me.
00:37I see the starts of policy as being only modestly restrictive.
00:40Financial market conditions appear to be easy across many metrics.
00:43When you heard that kind of argument, what was the counterpoint to what he's seeing in markets?
00:47Yeah, so I'd say a couple of things.
00:49First of all, I'd say that financial markets are driven by a lot of things, not just monetary policy.
00:53They're driven, of course, in part by monetary policy, but there's a lot of things that drive financial markets.
00:58For example, I think on this program you probably spend a lot of time thinking about AI and new technologies.
01:02If you have AI or a new technology, it could push financial markets higher, which would look like an easing of financial conditions.
01:07But that doesn't necessarily tell you anything about the sense of monetary policy.
01:11Indeed, very often in response to a supply shock, a positive supply shock, although, of course, it depends what kind of supply shock,
01:16you might think that the appropriate sense of monetary policy would be lower and not tighter, all else equal.
01:21But, of course, there's a lot of sort of what-ifs and thinking about the type of the supply shock.
01:25But I think that it's a mistake to look at financial conditions and sort of conclude something automatically about the stance of monetary policy.
01:31And I also want to point out that some of the financial conditions that look the easiest, things like the stock market,
01:37things like various parts of credit spreads, those are not necessarily the financial conditions that feed the most into economic activity.
01:46Yes, the stock market and credit spreads matter.
01:47They matter a lot.
01:48But then you sort of think about something like housing.
01:50I think housing matters a lot more for the cyclical position of the economy.
01:54And it's not that these things don't matter, but it's that they're only part of the picture.
01:57And if you look at financial conditions that affect housing, I think they're quite tighter.
02:00You look at financial conditions that are affecting parts of the private credit market, that also looks tighter.
02:04And I wonder if what we're seeing now in some of the distresses that you see in private markets
02:09means that financial conditions have actually been tighter, but it's been masked by the fact that we don't get marks for those on a regular basis.
02:15So, Governor, I think I want to give you some time, I think we should give you some time, on a central argument of yours,
02:19that this year you believe policy is actually passively tightened through 2025.
02:24I don't think that's an argument I've heard many people make.
02:27Can you just spend some time fleshing that out?
02:28What do you mean by that?
02:29Sure.
02:29So my perspective is that there's been a number of shocks that have hit the economy,
02:34driven in large part by economic policy, not from the Fed, from outside of the Fed,
02:39that pushed neutral rates higher last year and lower this year.
02:43And so I think if you look where my neutral rate is, it's not that I'm out of bounds for where the rest of the committee is on neutral.
02:47It's just that I flipped from having one of the highest neutral rates last year to now one of the lowest neutral rates.
02:52And that's driven by things like population growth.
02:55It's driven by things like fiscal deficits.
02:58And if you think about population growth, that's normally considered to be one of the biggest drivers of neutral rates.
03:03And it's part of the reason why people think that neutral usually moves very, very slowly,
03:07because population growth changes only very, very slowly as new technologies and cultural trends drive people to have fewer kids over time.
03:15But we experienced in the last few years 30 years worth of population growth change in only three years.
03:20When you look at the rate of population growth, it changed more in the last three years than it did in the previous 30 years in both directions.
03:26It round-tripped completely.
03:28And so if the drivers of changes in neutral rate accelerate over time, it would only make sense to me that the neutral rate itself would change more rapidly over time as well.
03:36And so that's pushed neutral higher last year and lower this year, which means that policy is passively tightened.
03:41Because what matters for the stance of policy is where you are relative to the neutral rate.
03:46And if neutral is here and policy is up here, you're very tight.
03:48If neutral is here and policy is down here, you're very loose.
03:50But if you stay where you are and then neutral goes down, you've passively tightened because the neutral rate has shifted.
03:57And so policy has grown tighter over the course of the year.
04:00Now, it's not the case that you would expect to see a significant downturn in the economy immediately as a result of that,
04:06because monetary policy works with lags.
04:07It hits the economy with long and variable lags, as we all know.
04:10But if you maintain that very restrictive stance of policy for a long period of time,
04:14you really increase the chances that those lags come to manifest in that monetary policy then itself induces a downturn in the economy.
04:22Why wasn't your dissent bigger?
04:23You were talking about a 50 basis point cut that you would have preferred to see in the September meeting.
04:28Why didn't you go for a 75 basis point cut dissent last month?
04:33Of course.
04:34So, look, I think that we're a fair way from neutral, and I think that we could get there a bit faster.
04:39I could imagine getting there in a series of 50 clips.
04:43I don't think it's the case that we need to get there and more than that,
04:45because I don't think the economy is dysfunctional right now.
04:49I don't think that financial markets are dysfunctional right now.
04:51I don't think we need to move even faster than that for those reasons.
04:55If I did, then I would have no problem voting for bigger cuts.
05:00But I think sort of getting there in 50s instead of 25s is fine.
05:04So you would be open to dissenting again for a 50 basis point cut if the rest of the committee wasn't around for that next month,
05:10or in December, rather?
05:11Yeah, well, I don't want to commit to that, because a lot can happen between now and the next meeting.
05:15We're getting a lot of data, I hope, between now and then, not only data about the near term,
05:19but data about the recent past as well that we don't have.
05:22So things could change.
05:23But if things play out according to my forecast, then yes, I would.
05:27Governor, do you think your advocacy for a 50-bate cut is hardening the opposition to cuts at all?
05:35I don't think so.
05:36I think everybody is doing their own analysis of the economy and inflation in the labor market
05:42and financial markets, too, and coming to a conclusion.
05:46And I don't think anybody is necessarily changing their mind to not support a cut just because I want to cut more.
05:54Is there a lot of discussion at the Fed about the fact that you're all doing your own analysis,
05:59but what data are you all using if we're still in the middle of a government shutdown, 34 days today?
06:03Yeah, so there's a lot of talk about that.
06:06Let me say a couple things about that.
06:08First of all, you know, it's my perspective that being excessively data-dependent makes you backward-looking
06:13because the data are always backward-looking because of collection lags,
06:16because of the amount of time that you're doing comparisons over, right?
06:19And given monetary policy takes lags to hit the economy, you want to be forward-looking.
06:22So you want to make policy based on your forecast.
06:25Now, there are times when you might not have a lot of confidence in your forecast,
06:28and so you need to be data-dependent.
06:30But you should be data-dependent only to the extent that you don't have confidence in your forecast.
06:34My perspective is that we know the size of the shocks that have hit the economy this year.
06:37Things like population growth, that's a known quantity.
06:40We know what it does to the economy.
06:41We know what it does to neutral.
06:43We know the size of that.
06:44It's not a mystery.
06:45So, therefore, I have a lot of confidence in my forecast.
06:50And, therefore, to the extent that we would get data that would make me change my forecast,
06:54I would then change my policy outlook, right?
06:56So the question is, am I missing data because of the government shutdown that would lead me to change my forecast?
07:01And given so much of my forecast for inflation depends on the housing market and depends on the housing market,
07:08I would assume that I would see that in the reporting that Bloomberg and others do,
07:11even if I'm not getting data in the short term.
07:13Now, something like that lasts a couple of months, right?
07:16Can I continue to sort of have this degree of confidence if we go six months without data?
07:22Absolutely not.
07:23So I do think this is something people are attentive to.
07:25And there's also alternative data, as you guys are aware.
07:28I find the alternative data on inflation to be not super useful.
07:32I do find it to be more useful on the labor market.
07:34And when you sort of look at alternative data on the labor market,
07:36you see data that's consistent with continual ebbing of demand,
07:40which again is a signal that policy is too tight.
07:44If the decline in hiring was a result of negative supply shocks from immigration,
07:49you would see higher wages and you would see firms and people answering surveys
07:53in a way that indicated that jobs were plentiful or it was difficult to find workers from the firm perspective.
07:58You pointed to developments in private credit as well, as evidence that we're restrictive.
08:03Perhaps it was the fault of our peers that this didn't come up much in the news conference.
08:06I was somewhat surprised.
08:07Did it come up much in the meeting, the two-day meeting last week?
08:10Well, I mentioned it at the meeting as a reason why it was potentially a mistake
08:16to make very confident inferences from the stance of equity markets to the stance of monetary policy.
08:24But other than that, I think that sort of folks were focused on private credit as a financial stability risk
08:31and sort of thinking about how much do we care about this?
08:34What are the risks?
08:35You know, what are the risks?
08:36Where could this go?
08:37Just sort of analyzing it from a financial stability perspective.
08:40Whereas I was making the point as well that there's a chance that because we don't get marks on these things very frequently,
08:46that distresses are actually greater than we thought they were,
08:49especially when you think about the share of credit that has been created in private markets in the last few years.
08:54You know, it's slowed down recently, but over the last few years,
08:56it's been a greater share of credit that's been extended to the economy.
08:59And so it could be that we're just not seeing it.
09:01Do you think we're missing something here?
09:02Because so many guests come on the program and say it's idiosyncratic,
09:06just signs of isolated fraud, not a big deal, not systemic, not broad enough.
09:10Do you share that view?
09:10So, you know, look, I think that probably at the end of the day, that's what it is.
09:18However, I do want to make the point that when you get series of seemingly uncorrelated,
09:24non-systematic problem, sorry, non-systematic issues like that,
09:28it can be an indication that monetary policy is restrictive.
09:31We've seen this in the past.
09:33When you have a series of seemingly uncorrelated credit problems that had been masked for a while
09:39and then suddenly come to light, it tells you something about the stance of monetary policy.
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