00:00We have some news in Washington that we may be getting close to the end of the shutdown,
00:05which would release data, but just in case that doesn't happen,
00:09based on what you know now, what do you think about the economy?
00:14Mike, good morning. Great to be here.
00:16I see an economy that has been pretty resilient,
00:19where growth has been roughly around potential, around 1.8 for this year,
00:24in spite of a lot of uncertainty.
00:25I see a labor market that has been around full employment, is around full employment,
00:30has been cooling, demand and supply have been cooling.
00:34And I see inflation, which has been closer to the 3% level than to our 2% target.
00:41Well, we know that when the data comes out, everybody will be parsing it carefully,
00:45but is it going to add a lot to your knowledge of where the economy is
00:49and possibly change any decision you might make?
00:52More data is better than less data, so we will learn.
00:54It always has, you know, additional value.
00:58I do feel that we have a pretty good sense of where the economy is.
01:01We have availed ourselves during this period of unofficial data dearth, let's call it that,
01:10with private sector data.
01:13We have been in close contact with all of our constituents, businesses, households,
01:19community leaders in our districts.
01:20I feel we have a pretty good sense of the economy,
01:22but I'm very much looking forward to seeing the official data releases
01:25because they are the gold standard, and they'll provide additional information.
01:29Well, what are companies in your district telling you?
01:32You know, they are saying that consumption has been resilient.
01:36They're saying that growth has been fine.
01:40They're saying the labor market has softened a little bit.
01:43They see many more applicants per vacancy.
01:47They report compensation growth somewhere between 3.5% to 4%.
01:52So things look reasonably okay.
01:55But the consumption that remains resilient, obviously, at the upper ends, you have the stock market wealth effect driving it.
02:04But I know you've been worried about the lower deciles because they're taking on more debt?
02:09That's exactly what's happening.
02:11So we estimate that the real consumption growth of the high-income folks and of the low-income folks hasn't been about the same.
02:20But, as you said, the higher-income households are consuming from the wealth effects they have in the stock market and home prices, by the way.
02:30Lower-income folks are taking on more debt.
02:32They're taking on more credit card debt.
02:33And that's how the economy has been thus far.
02:37Well, taking on debt to continue consumption, a cynical economist might say, where have we heard that before?
02:43And how did that turn out?
02:45Are you worried that we're setting up for a problem?
02:49By and large, when I look at consumer finances, if you look at consumer balance sheets, by and large, for the economy, they're okay.
02:56The consumer is not over-indebted here.
02:59Now, over the past year, we saw an increase in subprime loan defaults.
03:03We saw an increase in credit card defaults.
03:08Now, over the past year, those have started to stabilize and actually come down some.
03:12But, you know, at the lower end of the income spectrum, you always have to worry that, you know, those consumers who live, you know, hand-to-mouth,
03:20need to wait until the end of the month to make it, you know, could be always, could be strained.
03:28Yeah.
03:30Companies, I know, have been telling you and your colleagues for some time that they're waiting for clarity,
03:35especially on fiscal policy going forward, which doesn't seem to necessarily be coming.
03:41Are any of them saying we're kind of at a point now where we have to raise prices to keep up with our input prices
03:47or we have to cut back on people because our margins are compressing?
03:53Two questions, two answers.
03:55Companies tell me that uncertainty has plateaued and that they can understand how to operate in this new, with this new higher level of uncertainty.
04:05So some of that is going on.
04:07In terms of pass-through of higher costs, companies are experiencing higher costs.
04:13Some are related to tariffs.
04:14Some are related to other things like insurance, which is totally unrelated to tariffs.
04:20And companies that are upstream, so earlier in the production process,
04:26are successful in passing on those costs to other companies to build products that they build.
04:31Companies that are closer to the consumer and selling to the final purchaser of a good
04:36are having more difficulty in passing things on because they are facing some pushback from the final buyer.
04:45The labor market, how fragile is it?
04:47We've seen a lot of layoff announcements over the past couple of weeks.
04:51Is this a gathering trend?
04:53Are we going to start talking about the SOM rule again?
04:55I see the labor market as having cooled in an orderly way, both because supply and demand have cooled.
05:06The latest challenger job announcements, which you're referring to, I definitely took notice of them,
05:14but they don't necessarily mean the labor market is about to go into a deterioration phase.
05:20In the same week that they were announced, as you know, the weekly claims, which are another very good indicator of layoffs,
05:28has remained stable so far.
05:30So you have to look at all of the data in the labor market and see whether those layoff announcements will actually materialize.
05:39In terms of supply problems in the labor market, monetary policy can't affect that.
05:44The traditional way to think about monetary policy is that it is more effective with respect to cyclical and demand-side type of factors.
05:59But I think we also need to be thinking, if the economy is going through a structural transition,
06:05what role does monetary policy need to play in facilitating that transition?
06:10So we have to, in my mind, be thinking about those two things.
06:15Now, there are two arguments that seems to be at the Fed right now.
06:21One is that we need to get ahead of a brewing problem, especially in the labor market.
06:26And the other is, if you're in a dark room, you want to move carefully and maybe pause.
06:32Which one do you think carries more weight?
06:35The way I think about it is, I feel we have adequate information to make decisions to cut rates or not to cut rates.
06:45For me, it's about the outlook that I happen to have and the balance of risk that I happen to have with the information that I currently have.
06:54So, going back to your first part of the question, in the past year, the real federal funds rate has declined by 250 basis points.
07:07Of that, 150 basis points have been reductions in the nominal interest rate to provide insurance to the labor market
07:16and to get ahead of any deterioration in it and to keep the labor market around full employment.
07:23And about 100 basis points of the decline in the real federal funds rate has been looking through the rise in expected inflation,
07:32mostly due to tariffs.
07:34So, that's how I think about monetary policy right now.
07:37Well, to the extent that they know, what are companies telling you about monetary policy?
07:44Do they say that we're going to have to raise prices or cut employees if you don't cut interest rates?
07:52Not necessarily.
07:53I don't hear that from companies.
07:56Companies often are more concerned about non-interest costs that are increasing.
08:04For example, I mentioned insurance, but, you know, raw material costs and other costs to produce things,
08:10all the way from, you know, building homes to producing, you know, manufactured goods.
08:16And so, I hear more about that than about interest costs being something that needs to be passed on to consumers.
08:25So, it's very important that we continue to focus on bringing inflation back down towards 2 percent.
08:31Well, we hear a lot from your colleagues.
08:34We heard from Chair Powell about the risk of cutting too fast versus the risk of not cutting soon enough.
08:41What about the risk to credibility if you cut, but then inflation doesn't go down and you have to start thinking about raising rates again?
08:48As Chair Powell said, there's no risk-free path.
08:53And, you know, if we focus too much on the labor market and then cut too aggressively, we're going to have an undesired outcome on the inflation side.
09:01If we focus too much on the inflation side and the labor market deteriorates, we're going to have an undesired outcome.
09:07And so, right now, what our monetary policy strategy document says is that when you have some tension between your two goals,
09:17you have to follow a balanced approach, which is to steer monetary policy to attend to both goals.
09:24Well, which way would you steer it in December based on what you know now?
09:29I think, again, it's very important that we tread with caution here.
09:35I think there is limited room to ease policy further without policy becoming overly accommodative.
09:43Monetary policy, in my estimation, is somewhere between modestly restrictive and neutral, probably closer to neutral.
09:50If you look at the real federal funds rate, it now is around 1%.
09:56And 1% happens to be the long-run neutral rate, in real terms, for the federal funds rate of the entire committee.
10:04The median, I should say, of the entire committee.
10:07So, I think we need to continue to lean against inflation to make sure we bring inflation back down towards our 2% target,
10:14while providing some insurance to the labor market.
10:16One thing I hear often when I visit with folks in my district is that people are having more month than money increasingly, number one.
10:27Number two, I hear that folks are increasingly going to food pantries, including middle-income folks.
10:33And I hear that aid institutions are increasingly getting requests for utility assistance, probably related to higher electricity and energy prices.
10:45I should say electricity prices.
10:46So, those three things tell me that it's really important that we bring inflation back towards 2% to allow households to catch up with their real incomes.
10:54We've only got about 30 seconds left.
10:55Markets are up this morning.
10:56They're cheered by the possibility of a shutdown deal.
11:00But when the sun comes up in the east, they've been going up cheerfully lately.
11:04Are you worried about the level of asset prices?
11:07Financial conditions are very accommodative of economic activity and of employment.
11:16The Fed, the board, just released this financial stability report where it says that asset valuations are notable.
11:25And, you know, it's not our job to opine on particular valuations of markets.
11:32But if you look at that report, it suggests that, you know, house prices seem elevated relative to historical standards.
11:38Stock prices seem elevated.
11:40And to me, it's just the flip side of accommodative financial conditions.
11:44You know, so there's the consigo for people who use it as the
12:02lifeness.
12:03Council cars are healthy.
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