00:00Right now, in terms of balancing the risks around them, let me just talk about the baseline outlook before talking
00:07about risks,
00:08because it's really important that the risks are around the baseline outlook.
00:13So let me start with the baseline outlook, talk about risk, and talk about policy in a minute.
00:16So my baseline outlook is the economy this year looks like it's going to grow at or above potential.
00:23Potential is somewhere around 2%.
00:25There are a lot of tailwinds that are going to propel the economy forward.
00:31There's fiscal policy tailwinds.
00:33We have ease policy by 175 basis points.
00:35That's going to help.
00:37Financial conditions are accommodative.
00:39Financing conditions are accommodative.
00:42And we have deregulation of the financial system.
00:46So all those things, and deregulation in other parts, I think will propel growth at or above potential.
00:53I see the labor market as having cooled, but I see it stabilizing around the current situation, which is the
01:00unemployment rate around what we think is the natural rate of unemployment,
01:05so a rate of about 4.3%, 4.4%.
01:08And on the inflation side, we're starting off, as I said a minute ago, with inflation above our target by
01:13a meaningful amount.
01:15Half of that excess inflation comes from tariffs, as best as we can measure it.
01:21The other half doesn't come from tariffs.
01:23I expect the part that is attributable to tariffs to fade as the year progresses, and then inflation to then
01:29resume a trajectory towards our 2% target.
01:32So that's the baseline.
01:33In terms of risks, what could go wrong?
01:36In terms of risks, I see two risks.
01:39The labor market, while I see it stabilizing, the recent job creation has been somewhat narrow, so it's been focused
01:46on one or two sectors, so the healthcare and education sector.
01:51And because it's a narrow job creation environment, the job market is vulnerable to an increase in layoffs.
01:58If there were an increase in layoffs with low job creation, you could have a risk that the labor market
02:04could deteriorate further.
02:05It's not my base case, but I think it could happen.
02:09On the inflation side, there is a possibility that inflation could stay higher than we would all like it to
02:17be for longer,
02:19so that the tariffs wane, but inflation doesn't come down back to target.
02:24So these two risks, in my assessment, are roughly balanced right now, and I think policy right now, in its
02:32current setting, is balancing between those two risks in a very appropriate way.
02:37My sense is that policy is neutral right now, in real terms.
02:44So if you look at the interest rate that we control, the federal funds rate, it's about 3.6%.
02:52Inflation is running at about 3%.
02:54So if you subtract inflation from the federal funds rate, you get that the real federal funds rate is south
03:00of 1%, or right around 1%.
03:04And 1% is the real interest rate that the committee, the FOMC, judges is the neutral rate.
03:11So we're right around that neutral rate.
03:13So I think policy is very well positioned here to react to either side of our dual mandate.
03:20Hp.
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