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00:00Governor Marion, good morning. Good to see you once again. Thanks for being here. Thanks for having me back. We've got to start with the labor market. Your reflections on what we saw yesterday. Does it lean one way or the other? Yeah. I mean, I think the implications of yesterday were obviously dovish. And if anyone was on the fence, I would hope that this would move them in the direction of cutting. I mean, you saw the unemployment rate edged up a bit. You know, you saw some other indicators like an increase in permanent layoffs. You know, those are indications that the labor market has been affected by restrictive Fed policy. And given the outlook for inflation, there's not really much of an
00:29need to be as restrictive as we are. And yet on the committee, we have pushback. Almost immediately after that, Fed Governor Michael Barr had this to say, I'm concerned that we're seeing inflation still around 3%. Inflation is closer to 3% than it is to 2%. What do you make of that argument? How persuasive is it? It's not persuasive to me. And I'll tell you why. All of the inflation excess, sorry, almost all of the inflation excess is a mirage. It's not indicative of supply demand and balances. And so, for example, if you look at the housing market, right, market rents have been running at about 1% for a couple
00:59years. Measured inflation in the index is actually much higher than that because it takes a really long time for the index to converge down to where market rents are. That's a statistical artifact, right? That's an artifact of the statistical measurement process. It's indicative of a supply demand and balance that was there in 2022, 2023. Montero policy works with lags. It has to be set now for 2027.
01:20So when you look at the housing data, right, you see market rents running about 1% for a couple years. There's no supply demand and balance there. We should not be setting policy for 2027 based on a supply demand and balance that existed in 2022 or 2023. That doesn't make any sense. There's other things, too, like portfolio management services, which confuse quantities for prices. This stuff is all well known. If you look at market-based measures of inflation, they're much closer to 2% than they are to 3%. So I think that the excess, the overage is a mirage.
01:50It works with the statistical measurement process. And you've got to put out new forecasts on December 10th as well, which is going to be complicated by the fact we've had limited data more recently. How relevant do you think the Canada actually is? Because I'll offer you the perspective on Wall Street at the moment. It goes something like this. The meeting's on the 10th. You don't get the data until the 16th. The Fed's kind of constrained by that. They can't do anything. What's your perspective on that? Yeah, so as I said a moment ago, Montero policy works with lags. It would be much easier if it hit the economy immediately, but it doesn't. It works with lags.
02:20So far as they affect your forecast. It doesn't make sense to be setting policy for where the economy was three or six months ago. We should be setting policy based for where the economy is going to be 12 to 18 months from now. And so if we have data, it gives us the ability to update our forecast. But the lack of data doesn't mean that we don't have a forecast. We did have a forecast. All it gives us is opportunities to falsify our forecast. And there hasn't been anything in the data, in the news, in media stories, in private sector data, alternative data that's available to us, that would make us think that the forecast is somehow nullified and
02:50and there's been a big shock to it. So if anything, all the information that we've got in the interim since September FOMC has inclined to the dovish side. You know, we got weaker inflation than people expected. And we got a higher unemployment rate than folks were expecting. So all of that information should push one in the dovish direction. But there are still Fed officials that are looking for more data. And they have said they're data dependent. They want that insurance that they're cutting right now and it's the right time. Potentially, the unemployment rate might be moving up to 4.5% on December 16th. Would you
03:20be in favor of just moving the meeting if it meant others felt more reassured to cut interest rates in December? So, you know, I haven't really thought about that. And it's not a conversation that it's not a conversation that I've been part of. I mean, I agree the meeting dates seem the meeting dates seem kind of arbitrary. But at the same time, there's a lot of there's a lot of stuff that gets done as a result of those meeting dates.
03:42And, you know, people have have investments and contracts and other decisions that are tied to the to the to the timing of the meeting date. And I don't know to what extent moving those dates would be disruptive for all that. So it's something that I'm not I'm not I'm not sure about. But this ultimately comes down to the question of data dependence is what you do when you don't have a forecast or when you don't have any confidence in your forecast. Right.
04:05We should be forecast dependent, not data dependent. Being excessively data dependent is to be too backward looking. And if you're too backward looking, you necessarily are going to have the wrong policies.
04:14Neil Dutter writes and he says the only question that matters for you is will you descend for 50 if you believe it means not being able to push through a 25 basis point cut?
04:22Yes. So absolutely not. I would absolutely vote for a 25 basis point cut if my vote were the marginal vote. There's there's no there's no question about that.
04:31I you know, to do otherwise would be to cause real harm to to the economy for for purposes of vanity. And that's not who I am.
04:40Going into next year, talking about the forecast of what's going to happen, a lot of economists who come on the show expect a reacceleration on the backs of the tax refunds and some of the other stimulative measures that could come early next year.
04:54How do you factor that into your forecast for ongoing weakness in the labor market and the consumer?
04:59Yeah. Yeah. So I think that, you know, I have not been a what I what I would think of as excessively pessimistic on on the economy.
05:11I do think policy is restrictive and I do think that it's too restrictive and we don't need to be.
05:16And the longer we remain restrictive, the greater the chances that we are the source of an economic downturn, which we should not seek to be.
05:23I think that many of the many of the factors that will be kicking in over the next 12 months that might be supportive of GDP growth are things that necessarily don't have hawkish implications for monetary policy because they affect the supply side.
05:38And when you think about things like relaxing regulations, and I think that that has been going on at actually an impressive an impressive pace.
05:46These are things that push out the supply side of the economy and therefore don't necessarily create a demand excess of supply.
05:53Right. Monetary policy should be tight if demand is an excess is too much in excess of supply.
05:57And if you push out the supply side of the economy, then that's not something you worry about.
06:01There's a duration mismatch here, though.
06:03The idea that if you reduce regulations and you allow people to build supply, that it takes longer time than, say, if you give people two thousand dollar checks right up front that they can spend immediately.
06:13Or if they get a rebate that's a lot bigger from their tax from the tax filings.
06:18How do you factor in that timing mismatch?
06:21Would you look through any bump up in inflation next year from both stimulative measures as well as the price increases that we're excited we're hearing from a lot of retailers that they're going to pass along?
06:30So, you know, I wouldn't look through I wouldn't look through bumps from from from checks like that.
06:38Right. You know, I don't think that I don't think that you'd be able to.
06:40However, a policy like that has been hasn't been formalized. It hasn't been introduced.
06:44We don't know the parameters of it. It's too early to sort of think about basing a forecast on on on something like that.
06:51What we do know is that the is that the labor market data have been coming in not as strong as we'd like them to be in that policy is too restrictive.
06:58Governor, if we can stay on inflation. Do you know when we're going to get some inflation data?
07:02When are we going to get that?
07:03Because we've heard about the payroll schedule. I haven't really heard anything about the CPI schedule. You've got any indication whatsoever of when it's coming?
07:09Yeah, the BLS put it out on its website this week. I think that we're not going to get the November CPI data until after the next FOMC.
07:17So we've got to wait for that, too.
07:19We've got to we've got to wait for that.
07:20Did you see that, Lisa?
07:21Yes, I did. I saw that we have to wait and it's not clear exactly when we're going to get it. But there's a real question going forward about when we might get it.
07:27We don't have the dates yet. But we don't have the dates. The dates are the dates are on the website. Yeah, the BLS has a has a has a has a list of the release dates on the payrolls one.
07:35But I've missed the CPI one. Yeah, which doesn't that just make it an even stronger case just to wait and have this meeting when we've got all this data.
07:42Why is it that we have to wait so much longer for it, Governor? Wait for the data? Yes.
07:46Well, because the government shutdown introduced a whole number of snags into the data collection process.
07:51And so that those snags mean extra time to collect the data, extra time to process the data. People have a logjam of work to get back to.
07:59I mean, we just, you know, sort of spent several years talking about talking talking about bullwhips from supply chains. Right.
08:05And, you know, it gets gets pulled in at once. And when you have a government shutdown, all the government employees aren't working and they come back to work and they've got a ton of work to do all at once.
08:12And so, you know, we have those those bullwhips in in government data right now. And, you know, if that were a market, you'd see some inflation in the price of data.
08:21But it's not a market. So give me for coming out with the hawkish hits. But we got another one in the last 24 hours, too.
08:26And it came from Beth Hammock. Luring interest rates to support the labor market risk, prolonging this period of elevated inflation.
08:32And it could also encourage risk taking and financial markets. Can we finish on that last point? Risk taking and financial markets.
08:38How excessive is it? And should it be on the radar of the FOMC? Sure.
08:42So, first of all, as I said before, the excess of inflation is a quirk of the statistical process.
08:47And it is a mistake to ask people to lose their jobs as a result of a quirk of the statistical process on financial markets.
08:53You know, look, I think that lots of things affect financial markets. Tax policy does. Regulation does.
08:58Technology like artificial intelligence does. It's a mistake to conflate the stance of the status of financial markets with the status of monetary policy.
09:05Right. Even when you look at something as a financial market as deeply connected to monetary policy like interest rates, we've lived through periods of conundrums.
09:16Right. We're passing through of the Fed funds rate into longer term interest rates was confusing to people.
09:22So it's just a mistake to do a one for one mapping of these things.
09:26And I think that when you look at financial conditions, the financial condition that matters most for the real economy is and remain has been and remains housing.
09:32Right. And this is an area where financial conditions are not tight, are not loose.
09:36This is an area where financial conditions are still quite tight.
09:39Going out, getting a mortgage, you know, this is this is not something that's not not a financial condition that I would consider to be excessively easy.
09:46And so I think it's I think it's a mistake. And I think it's also a mistake, as I said before, to ask people to experience job losses because you think the stock market is too high.
09:58I don't know what the right level for the stock market is.
10:00And I think that it's it's a very challenging question to be able to answer credibly and to say that we need to create job losses in order to sort of restore the stock market to some level that we think is more reflective of fair value is just not a policy view that I hold.
10:14A lot of people have come on the show and said that right now the Fed is stuck between a conundrum of the K-shaped economy where you have people at the upper end who are doing just fine and are supporting consumption.
10:24And people on the lower end who are experiencing a lack of wage gains and they're experiencing those job losses more significantly.
10:31How concerned are you about sort of your dual roles of trying to help prop up and prevent some of those job losses from really escalating while at the same time potentially cutting rates would exacerbate that K-shaped and only exacerbate what you're seeing with respect to the wealth divide.
10:48So Congress didn't task us with addressing all social problems in the world inequality one of them.
10:56They tasked us with tackling aggregate maximum employment and stable prices.
11:01And so therefore the right policy to take is to stabilize employment and prices.
11:06And that's the policy that's the policy that I support.
11:09I do think though while discussing the subject of inequality it would be much worse for the people at the lower end of the income distribution if the unemployment rate continued to go up as a result of our policies.
11:20That's not something that they would be that they would welcome and it's not something that I would welcome either.
11:24Governor I was with the president this week in the Oval Office and I asked him about the Fed interviews.
11:28He says lots of names.
11:29We may go the standard way.
11:30Quote it's nice every once in a while to go politically correct.
11:34Out of the names that we know that are being interviewed who is politically correct.
11:37You know I don't really know the answer to that question.
11:40Well you worked for the president so you understand how his mind works.
11:43Do you think it means someone that is currently on the board like a Governor Waller or someone that's very close to him and your former colleague Kevin Hassett?
11:51Yeah so I mean it should be pretty clear that I just always say what's on my mind and therefore I don't even know what politically correct is.
11:56So I don't even know how to begin addressing that.
11:59You know but look I don't make personal decisions.
12:00You're a little too politically correct right now actually.
12:02Am I?
12:03I've never been accused of that before.
12:04So hey you know I'm happy to have a first.
12:06Governor very diplomatic.
12:07It's good to see you.
12:08Thanks for dropping by.
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