00:00As a policymaker, as an official, when things are moving this fast, what do you do?
00:04Well, look, we've already had some whiplash this morning, and I think that underlines that we shouldn't be making policy
00:10based on short-term headlines, right?
00:13We should wait for all the information to come in before really changing our outlook.
00:17And I think it's just still premature to have a clear view about what this is going to look like
00:21as you look 12 months out.
00:23And because of monetary policy lags, we really need to be looking a year to a year and a half
00:26out.
00:27And there's just not enough information yet about what that looks like.
00:30Communication in the near term, of course, matters.
00:32The chairman of the news conference last week really vowing to anchor inflation expectations.
00:37Do you think that's a worthwhile pursuit at this point?
00:40I do.
00:40Look, traditional central banking, Federal Reserve wisdom is that oil shocks headline inflation, but they don't really pass that much
00:48into core by as much as they do into headline.
00:51And the two ways that you would want to respond to it, and so therefore you typically look through an
00:57oil shock.
00:57Now, the two exceptions would be if inflation expectations beyond the first year start to move higher.
01:03That hasn't happened thus far.
01:04Inflation expectations for the first year out have moved higher, of course.
01:07But as I look at the CPI swap market, beyond the first year, there hasn't been that much movement.
01:12Medium-term, five-year, five-year, longer-term, five-year, five-year forward expectations have actually been coming down lately.
01:17Right?
01:17So there's no evidence of that.
01:19And the other reason why you would want to respond to an oil shock is if you saw a wage
01:22price spiral, if you saw wages responding to oil price increases, gas price increases, that could result in the type
01:28of reinforcing inflation dynamics that you want to forestall.
01:31Now, again, thus far, there's little evidence of that.
01:34In fact, wage pressures have been declining for the last few years on a steady, steady, steady basis.
01:39So that's also something that I don't really see right now.
01:41So the market, the labor market, is just not strong enough to worry about it?
01:44I think the labor market still could use additional support from monetary policy.
01:48And that's why I dissented last meeting, as I have continued to dissent for all previous meetings.
01:52How lonely were you at that committee meeting just last week, voting for a 25 basis point reduction in the
01:58face of an energy shock?
01:59How robust was the conversation around the table?
02:01Look, I think a lot of people around the table, like me, were hesitant to draw conclusions from the oil
02:07news thus far.
02:08Because, as I said before, we have to look 12 to 18 months out, not what happened to the oil
02:12price yesterday.
02:14And so looking 12 to 18 months out, there's still not enough clarity to think that monetary policy itself should
02:19adjust in response to what's happened.
02:21Well, check out the oil futures curve.
02:22That has changed.
02:23I've just had one eye on December over the last three weeks or so.
02:26That's gone from the 60s and threatening to break out into the 90s at one point earlier on this morning.
02:31That's a change.
02:32That's a real step up, no?
02:33It has.
02:34And I boosted my, you know, in the summary of economic projections, I boosted my inflation dot for the end
02:38of the year to 2.7 percent, reflecting that in part.
02:41Right?
02:41So there is some expectation of higher headline inflation.
02:44However, as I said before, I think it's way too early to draw conclusions that it's bleeding beyond headline inflation
02:49in a way that matters for monetary policy.
02:51Don't forget, higher oil prices also depress demand.
02:54Right?
02:54They take money out of the pockets of consumers that we're spending on other goods and services and redirects it
02:59towards gas and other energy costs.
03:00And that depresses demand and causes unemployment to move a little bit higher.
03:04That offsets some of the increase in inflation.
03:06One of your colleagues this morning, Austin Galsby at the Chicago Fed, speaking to the press saying we could see
03:10a circumstance where we'd need to raise interest rates.
03:13How high is the bar to raise interest rates?
03:16What kind of circumstances would you personally need to see?
03:19Yeah.
03:19So I just laid out a couple of them before.
03:21Right?
03:21If it looks like the oil shock is bleeding into inflation expectations beyond the first year, then you get really
03:27concerned about second-round effects.
03:31First-round effects are not something you traditionally respond to as a central bank.
03:36Now, I'll say one thing beyond that, which is that these oil shocks have been things that this Fed has
03:42looked through for a long time.
03:44Right?
03:44It would be highly unusual for the Fed to start looking through them now.
03:47And when you think about what happened in 2021 and 2022, we did have negative supply shocks, like the oil
03:53shock from the Russia-Ukraine invasion.
03:55But in my view, part of the reason why it was able to reverberate through the economy the way it
03:59did was because policy settings at the time were very different.
04:02Monetary policy and fiscal policy were at all-time historical accommodative levels.
04:07We were doing $120 billion a month of QE.
04:10We were doing $2 trillion fiscal packages at a time.
04:12That's not the case right now.
04:14We're not hitting the gas on demand that would interact with the higher oil price in a way that would
04:19reverberate these prices through the economy now.
04:21That's not the case at all.
04:22But right now, we're just seeing price spike on paper market.
04:27But what's happening in the physical market is actually a void.
04:29We are seeing not just shut-ins, but some of these installations going to take years to rebuild.
04:34At what point does that start to potentially de-anchor inflation expectations?
04:39Yes, so you'd want to see the oil price shock start to reverberate through supply chains and pushing up prices
04:46more broadly.
04:47We are, though, in terms of airlines, diesel.
04:49That means that it's going to be more expensive in terms of some goods and services that are delivered by
04:53truck.
04:54Yeah, there's been a few instances.
04:55But you want to see that in a broad-based way that starts to bleed into core inflation and boost
04:59it in a way that's sort of not just a one-off time.
05:01But you start to see really second-round effects that are concerning for the longer term.
05:05And if that starts to happen, then you start to get concerned about inflation.
05:08And I think that that is what you did see happen in 21, 22.
05:12And thus far, I don't see it happening on a broad basis.
05:15Now, it could happen, right?
05:16But thus far, it hasn't happened on a broad basis.
05:18You get some idiosyncratic stories like airline prices that are more directly tied to jet fuel.
05:23But beyond that, you haven't really seen it.
05:25And I think part of the reason why is because we're not hitting the gas on demand.
05:30We're not boosting demand with all-time record accommodative policy in a way that would allow pricing to accommodate a
05:36supply shock like that.
05:37It's fair to say that I think a lot of Fed watchers watching this right now, and I'm getting some
05:41reaction from them in real time, agree with you that this isn't the environment to hike rates.
05:45The opposite, though, is a difficult argument to make.
05:48Is it the right time to cut interest rates this quickly, this soon?
05:52Yeah, so, as I said before, traditionally, you would look through an oil price shock like this, which means that
05:57my policy outlook from before is unchanged.
05:59And my policy outlook from before would be gradual cuts of interest rates.
06:02I had about six cuts for the year at the last SEP in December.
06:06I reduced that to four cuts for the year in response to the inflation data, right, that we received between
06:12the two projection periods.
06:14So I'm maintaining my outlook that I had before the year in response.
06:16It's not just that the outlook doesn't change, Governor.
06:18Forgive me for jumping in.
06:19But the balance of risks around the outlook should change.
06:21That should change off the back of energy shock.
06:24Isn't that a fair summary of where we should be?
06:26Well, the balance of risk does change, but I think it's actually changed on both sides equally.
06:30The inflation risks have got a little more concerning, but the unemployment risks have gotten more concerning, too.
06:34Because the negative supply shock that is the oil price is also a negative demand shock.
06:38You're taking money out of goods and services that are not energy that would have been spent on those goods
06:42and services anyway.
06:43And I viewed the labor market as continuing its gradual softening trend of the last three years.
06:48That trend has been in place for three years.
06:49I've seen nothing that would convince me the trend has stopped, right?
06:52That's a very, very powerful medium-term trend that's been in place for several years now.
06:56And taking money out of goods and services that's not energy to devote to higher energy prices is exactly the
07:02type of thing that worries me that that trend might accelerate.
07:04So the balance of risk changed, but I think it got worse on both sides.
07:08I don't think it changed asymmetrically.
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