00:00Coming out of the last two years, the focus seemed to be on the unemployment rate, on the labor market
00:06and cutting rates to get ahead of a problem with the labor market.
00:10But listening to you this morning, it sounds like you're more concerned about inflation, that inflation may have become the
00:17primary risk.
00:18Yeah, I would say in my head in 23 and 24, since I've been on the Fed, inflation has never
00:28gone away as a central focus.
00:32When the labor market is deteriorating, it comes back in a major way.
00:39But I'm a little more concerned about inflation right now because I think the job market is pretty steady.
00:47I think growth is pretty steady.
00:50I think there's some promising stuff in the inflation reports, but there's also some warning signs.
00:58So, as I say, I'm not hawkish about rates.
01:02I'm pretty optimistic that we can get rates down further, multiple cuts in 2026, as long as we see the
01:12progress on inflation.
01:15Forecasters have been forecasting that it's supposed to start coming down.
01:18And I just want us to see some progress on that front and not get ahead of ourselves.
01:25Well, you talk about that a little bit, and it's a question I asked Jay Powell once.
01:28It seems like every time you put out a summary of economic projections, the economic outlook by the various members
01:34of the Open Market Committee, the 2% target gets hit two years from now.
01:38The next one, it's two years from now.
01:40That's exactly what we don't want.
01:41So what goes wrong?
01:43A lot of things can go wrong.
01:47In this case, what I want to make sure is not going wrong is that we need inflation not to
01:55be persistent.
01:58The part of inflation that has come from tariffs is supposed to go away, is supposed to be transitory.
02:06And when you see things like the forecast say inflation is going to peak out and then start falling by
02:15the end of 2025, and then that moves the goalpost.
02:21Well, maybe it'll be the first quarter of 26.
02:25And now they're saying, well, maybe it will be the second quarter of 26.
02:29That's not a great sign.
02:31We need to see, we should see, especially on the good side, if the tariff inflation is transitory, it's supposed
02:42to start going away.
02:44And as soon as we start getting some evidence that we're back on the path to 2%, as I say,
02:51I think rates can still keep going down.
02:53And if you look at the at the SEP dot plot, a large group of the committee thinks that where
03:00rates will eventually settle is still well below where we are today.
03:06It's just we we must get inflation down from this 3% level that we've been stalled out at for
03:16now a year or more.
03:17Well, now you've got this whole new tariff uncertainty from the Supreme Court.
03:20President's going to impose what started today, a 10% tariff universally brings down the tariff rate some.
03:26But they say they're going to use other means to get the tariffs rates back up to about where they
03:32were.
03:33So now you'll have this dip, perhaps, in inflation, and then it could go back out again.
03:37So you said you want to see inflation going down.
03:43Does that get pushed out?
03:44Does it become later in this year when you can even think about it?
03:48I think when I'm out in this 7th district in the Midwest talking to folks, they talk a lot about
03:54uncertainty, policy uncertainties, geopolitical uncertainties.
04:00The thing to remember about the tariffs, even if the tariffs stay exactly as they were, just in a different
04:08form, the inflation impact is supposed to go away.
04:13So if the rates are lower than what they were before, that should make it even more true that we
04:23should see the inflation going down.
04:24I think that the policy uncertainty, we're seeing more on the labor side.
04:31I think the low hiring, low firing environment is what you would expect when there's a lot of uncertainty.
04:39That's not really what the beginning of a recession looks like.
04:44Low hiring with high layoffs, that's what the beginning of a recession looks like.
04:49For both of those to be low is a bit of a weird duck and I think is explained by
04:56a lot of we want to wait and see what's going to happen.
05:02And so if you have question marks coming from the Supreme Court, coming from other policy responses, I think you're
05:10likely to see continuation of that low hiring, low firing environment.
05:14Well, what are CEOs telling you they want to see before they would be willing to hire again?
05:21What what they tend to say is we want to know what the rules of the road are going to
05:26be.
05:26And right now we don't know what the rules of the road are going to be.
05:29And there could be very significant changes.
05:34And look, I'm sympathetic with that.
05:36The rules are moving around.
05:38If you're in a business like the auto industry, our Chicago Fed District has by far the most auto production
05:46in the United States.
05:48It's a global supply chain for the auto industries.
05:51They're very amped up about what will be the treatment of parts, components, supplies that they use to to make
06:00the cars.
06:01So far, they were pleasantly surprised that anything USMCA compliant was was kind of exempted.
06:12Now, if the rumors are to be true that whatever there they might renegotiate the USMCA or would Canada be
06:23in the USMCA, of course, that's what they're going to express uncertainty about things like that.
06:30And it's going to affect their decisions in the short run.
06:35And over the long run, as I say, I still think the American consumer has been pretty solid.
06:43We've got a steady job market.
06:45If we make progress on inflation, I think rates are are trending now.
06:51Well, we've seen productivity rise a little bit in the last couple of months.
06:57When you look at what the companies are telling you, are they saying maybe we don't need to hire as
07:04many people because we're getting this job done?
07:06We're keeping up with orders?
07:09Some.
07:10I mean, the economy is extremely diverse.
07:13And the answer to the question of what are the labor market prospects and do they need to hire depends
07:21very much on the industry.
07:22If you talk to software companies, a lot of them are saying, hey, the AI technologies, there's some uncertainty.
07:30But the only uncertainty is, should we not hire or should we actually let people go?
07:37But if you look in the health care sector, it's a booming sector.
07:43Employment continues to expand in that sector.
07:46And you you don't hear some of those.
07:49So the answer to that depends a lot on who you're talking to.
07:52Well, productivity is going to be a big issue for the Fed coming up with the new chairman coming in,
07:58Kevin Warsh,
07:59who's pretty much wed to the idea that AI is going to create a lot of additional productivity, which will
08:04bring inflation down.
08:06Now, having talked to you, I know that you're not as sure about that.
08:11Yeah, look, I I I hope that that that is what happens.
08:16Let's remember productivity growth is the thing that makes us rich.
08:19So if we get high productivity growth, incomes are going to go up.
08:24There are a balance of things that happen when productivity goes up, though, that that we should remember.
08:31It can be deflationary at the same time, it can stim and you have seen it.
08:39It can stimulate a lot of investment.
08:41And in the short run, people counting on future productivity growth can overheat the economy just in the near term.
08:51And as you go around the country, you hear a lot of discussion about data center investment demand, using up
09:00all the HVAC people,
09:02buying up all the electrical equipment, using up computer chips and in a way making prices higher for the rest
09:11of the economy.
09:13We just got to think about some of those issues.
09:16What what are the implications of high productivity growth?
09:19But overall, I if that is Kevin Warsh's position, I've known him a long time.
09:26I respect him a great deal.
09:28I mostly agree with him.
09:29Now, in March, you have to come up with a new summary of economic projections, a set of forecasts for
09:35where you think the economy will go.
09:38So you're probably going to be waiting a while till you have to actually put those on paper.
09:42But let me ask this.
09:43How much confidence are you going to have, given everything that's going on right now in the numbers you put
09:48down?
09:50Do you want to view that as as much confidence as we ever have or it's not very much confidence?
09:57Both of those can be true.
09:59There's a lot of uncertainty and we have to make decisions with the with the data we have.
10:06So I take my own views and that of my staff with a heavy grain of salt when things are
10:15changing a lot.
10:15We've seen in the last three years.
10:20Unexpected, unprecedented shocks hitting us.
10:23I'm sure we'll get some more in 26.
10:27But as I say, I'm still optimistic that we're basically cruising along with solid growth, a steady labor market.
10:37We've got some encouraging and some discouraging signs coming on the inflation side.
10:43If we can just get some improvement, I feel like we could still get back on the golden path that
10:50we were on before.
10:51Another Kevin Warsh idea is that the Fed should go back to a scarce reserves way of managing monetary policy.
11:01Would you support that?
11:03We should constantly be evaluating as a body what we're doing and the efficacy of doing that.
11:12We switched out of that scarce reserves based regime to the to do what we do now, because in crisis,
11:23there were some holes in a scarce reserves regime.
11:28It's it's possible we we should study it.
11:32We should contemplate it if we're going to seriously think about doing that.
11:38We probably do want to revisit some of the some of the logic of how we got to where we
11:44are now and moved away from that.
11:47Coming up is the J.
11:50Powell's in theory, he'll leave the chairmanship.
11:53He could stay on the board.
11:55A lot of people looked at the last decision and noted that in January you always choose the chairman for
12:02the rest of the year for the Open Market Committee.
12:05And that's what you did this time instead of, as has been done in the past, saying chairman until successors
12:11in place.
12:12If Kevin Warsh is not confirmed by then, would you support J.
12:17Powell remaining as chairman of the Open Market Committee?
12:19I don't know.
12:21It sounds like you have a lot more expertise on the language of these decisions.
12:27I've said unapologetically, I think J.
12:30Powell's a first ballot Hall of Fame Fed chair and and I'm a big supporter of his.
12:35I don't know what the what the rules are.
12:41When people's terms expire as chair, are they allowed to stay on?
12:46If they are, I'm a I'm a I'm a big J.
12:48Powell supporter.
12:49Well, J.
12:49Powell can stay on as a governor, certainly.
12:52And would you like to see him do that?
12:54I don't know.
12:55I like I like being him being around for sure.
13:00So you're not going to have you talk to him about it at all?
13:03I haven't talked to him about that.
13:06It's not it's not my place.
13:07You know, the rules of the thing are we speak only for ourselves.
13:11We're not supposed to talk about what anybody else's thoughts are, opinions or speak for the committee.
13:17So I don't really have anything to add on.
13:20Last question.
13:20All politics are local for the Chicago district.
13:23This is a message for you.
13:24Do you support the Bears going to Indiana?
13:28Uh, look, the Chicago Bears, wherever they build a stadium, they better be called the Chicago Bears.
13:40But where the public financing, that's out of the feds.
13:44That's out of the feds lane.
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