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00:00We have so much news and headlines about Iran today, and it does affect people's economic lives a lot.
00:09I know you can't make a forecast, but what's the best estimate that your people have been able to come
00:15up with now
00:16for what this is going to do to inflation and how quickly?
00:21Well, I think it will directly go into headline inflation because energy prices are an important component of that.
00:27So I expect headline inflation to actually be elevated in the middle of this year.
00:32Of course, if energy prices come back down or stabilize, then that won't add more to inflation.
00:39So right now, my view on inflation is we're looking at an inflation rate for the year as a whole
00:43of something like 2.75%,
00:45but of course it depends what happens with energy prices.
00:48What could we get to in the meantime?
00:50What's the sort of thinking about where inflation on a numerical basis could end up?
00:56Well, again, it's hard to predict that.
00:59Estimate, not a forecast.
01:01Clearly, we can get into above 3% inflation.
01:04I think markets' expectations right now are for CPI to be something like 3.25% over the next year.
01:13But it really depends on what happens, both in terms of how high do energy prices get,
01:18but also how long they stay high or whether they come back down.
01:21Personally, I'm also very focused on what's happening with underlying inflation, core inflation,
01:26inflation expectations, and other indicators as well, besides what's happening to energy prices,
01:31under seeing the broader picture.
01:33Well, what's happening with core inflation?
01:35Yeah, so there I think the story hasn't changed very much.
01:38Clearly, higher energy prices does add a little bit to core inflation.
01:41You think about airfares, which is part of core inflation, but is influenced by fuel prices.
01:49So I expect that to add maybe a tenth or two to core inflation over the year, the energy price
01:54component.
01:54But we've seen tariff rates come down.
01:56We've seen some other, I think, more positive signs on underlying inflation.
02:01So overall, I'm kind of where I've been for a while with core inflation around 2.5% this year.
02:07Well, how long, how high, how fast would inflation have to move to merit a rate response?
02:15Well, I think really it does go back to kind of the full kind of set of factors influencing inflation.
02:20And I'm going to bring up tariffs because it is a big part of the story so far about why
02:25core inflation has been elevated.
02:26So I am watching, you know, imported to good prices, looking at core inflation, inflation expectations.
02:32And then obviously on top of that, what's happening to food, food and energy.
02:36So to my mind, monetary policy today is really well positioned, given where all of those dynamics have been playing
02:43out and well positioned to kind of wait and see on some of the effects of, you know, what's happening
02:49today.
02:50This isn't, I'm not saying we're just, you know, in some kind of we can't act.
02:54I think this monetary policy is exactly where it needs to be.
02:57And then we can we can respond if the situation changes right now.
03:01I think that monetary policy, though, is pretty well positioned, you know, given what we've been seeing so far.
03:07Monetary policy is well positioned.
03:08But what about the economy?
03:09What's the state of the economy?
03:11Well, you know, if you asked me this a month or two ago, we would be talking about remarkable resilience
03:18of the economy growing at 2% last year, looking to grow even faster this year.
03:22Clearly, with the conflict in the Middle East, that changes that a bit.
03:25And so I'm, you know, consumers of families are going to be paying higher fuel costs, gas price with the
03:31gas price increases.
03:33So I've been bringing down my forecast for growth this year, probably somewhere between two and two and a half
03:38percent for growth this year.
03:39An unemployment rate probably staying around where it is now, 4.3 percent.
03:44And in an economy that's, you know, continuing to grow, but roughly, roughly at trend, again, driven by consumer spending
03:51and investments, especially in AI.
03:54Well, you mentioned unemployment.
03:57You cut rates in the last year.
03:58We were told basically to prop up the labor market.
04:01What is the state of the labor market?
04:03Is that accomplished?
04:05Well, it's hard to read all the tea leaves because it's a pretty complicated situation with the labor market.
04:11We are seeing some, you know, various kind of different signals.
04:15My view is if you look at the unemployment rate, it's today at 4.3 percent.
04:19It's about where it was in July.
04:20So we've seen some, you know, stability there in terms of the unemployment rate and in job openings and some
04:27of the other indicators.
04:28So I feel like we've gotten the labor market.
04:30We've seen the labor market more much more stable now.
04:33Definitely not a labor market that's weakening based on the economic indicators.
04:37That said, if you look at the surveys, including the survey that we do and the conference board survey, that's
04:43not how people are, you know, kind of feeling about the labor market.
04:47Definitely we've seen a continued process of people being more pessimistic about the labor market.
04:52Not about a recession or something, but just a view that this is a pretty low hire, low fire labor
04:58market.
04:59And maybe the kind of views are not as strong as you would think just looking at the aggregate payroll
05:06and unemployment data.
05:07You're well positioned to do whatever you need to do to help the economy.
05:11But can monetary policy really do a lot in these situations?
05:14What's the lag?
05:16Jay Powell was talking about it could be a year from now before it hits the economy, whatever you did.
05:20Yeah, absolutely.
05:21So monetary policy, based on all the kind of historical evidence, takes about a year to have its full effect
05:27on the economy and even longer on inflation.
05:30So we always have to be forward looking.
05:31We have to be thinking about where is the economy going to be rather than where it is today or
05:35where it's been in the past.
05:37So that means trying to, you know, think through where is inflation going to be, you know, later this year
05:43or next year, where is the economy going to be?
05:45Now, I do, you know, I go back to kind of the analysis we've done.
05:49I do expect underlying inflation eventually later this year to start coming back down because the effects of the tariffs
05:56on inflation will start to wane.
05:59I do expect, you know, a continuation of the kind of good, you know, positive movement and underlying inflation.
06:05But we'll have to watch is that does that continue?
06:07And again, what happens in terms of the conflict and its effects on inflation?
06:12We're worried about the Iran war.
06:15We're worried about tariffs.
06:17People are worried about A.I.
06:19And you mentioned the consumer sentiment numbers.
06:22But the economy has been fairly resilient.
06:26Why?
06:27Well, I think I think America has the best productivity, highest productivity in the world.
06:33It's got the highest among the highest productivity growth.
06:36We are a remarkably resilient, innovative, dynamic economy.
06:41And I think, you know, new technology is making a big difference, not just A.I., but more broadly.
06:47We've seen productivity growth.
06:48It's actually been, you know, above par for the past six years.
06:51So I think there's there are some fundamentals that are driving, you know, solid gains in productivity, in real incomes
06:58and, you know, demand for, you know, demand to hire people.
07:03But there's, you know, there's these various cross currency you mentioned.
07:06So, again, last year, the story with the surprise was the economy was so resilient, despite the uncertainty, despite other
07:13factors like the tariffs.
07:14This year, it's, you know, it's another test of that resilience.
07:17But investment in A.I. and data centers is, I think, will continue to be strong this year.
07:23And for, you know, as long as the economy continues to grow, I think consumer spending will continue to be
07:29a very positive factor.
07:30Well, along those lines, what's your read on average hourly earnings or wages or whatever measure you want to use?
07:39Average hourly earnings came down to three and a half percent.
07:42What's the sweet spot?
07:43What's a level at which it won't be a concern?
07:47Yeah, I think we're at that level.
07:49If you look at, you know, all the different indicators and now we have some very good real time indicators.
07:54We have, you know, the standard official statistics.
07:57I think pretty much all of them are telling us that compensation is continuing to grow really.
08:03Compensation is growing.
08:05And it's growing in a way that's consistent with productivity growth we're seeing.
08:09So, to my mind, the labor market and, you know, whether you look at the unemployment rate and you look
08:14at wage growth,
08:15these are not factors pushing up inflation at all.
08:18So, I feel like we're at a good place for that, and I think that's consistent with what we're seeing
08:24in the labor market in general.
08:26You've been traveling around the state of New York lately.
08:30What are you hearing from CEOs?
08:32For a long time, the story has been, we're just sitting there because we don't know what's going to happen.
08:38I think that story has changed a bit.
08:40You know, when you think about how do you respond to uncertainty, the first thing you probably do is you,
08:46you know,
08:46pause any longer-term plans around hiring and investment and try to figure out, you know, what to do.
08:53I think a lot of CEOs have said, well, we're past that.
08:55So, now we just have to navigate a world with higher uncertainty, make the decisions that make sense, make the
09:01investments that make sense.
09:02And you hear about that a lot with AI and investments in AI.
09:07So, I think we're kind of in the second stage, if you will, of responding to uncertainty.
09:12It's really about, okay, we need to make decisions.
09:14Let's move forward.
09:16And I think that's consistent with what we're seeing.
09:17You know, we're seeing positive job growth.
09:19We're seeing an economy that continues to grow and invest.
09:22Well, are people talking at all about cutting back?
09:25Well, it's interesting on that.
09:27I mean, going to the AI-specific question, I think most of the conversation that CEOs, most of them are
09:33talking about,
09:34is really about making smart decisions, hiring people with AI skills, not hiring in areas that, you know, may be
09:42jobs we don't need because we could use AI.
09:44So, there's a lot of, I think, thought going into that, but not in terms of, you know, we need
09:49to cut back our labor force.
09:51You know, of course, you see this with the data, too.
09:53We're not seeing high levels at all of initial claims for unemployment or layoffs.
09:59So, I think it's a low-hire, low-fire, and low-unemployment economy.
10:03It's an unusual mix, but I think that's what we're still seeing even today.
10:08The next FOMC meeting at the end of the month is Jay Powell's last as chair, maybe.
10:15What's your understanding as the vice chair of the Open Market Committee about what happens if Kevin Warsh is not
10:21confirmed by then?
10:22Well, Chair Powell already spoke to that recently in terms of the Board of Governors.
10:27I'll speak to the FOMC, the Federal Open Market Committee.
10:30I mean, every January, we have a vote about, you know, selecting a chair and a vice chair, and that
10:35vote is in place throughout the year.
10:38So, there's no issue of continuity.
10:41There's no issue of anything.
10:43You know, we're, you know, that's all in place.
10:46Typically, we have this vote in January for the chair of the FOMC, and or if a new chair is
10:53confirmed by the Senate, then that person becomes the chair of the FOMC.
10:58But I would just highlight the most important thing here is that, you know, we're just focused on doing our
11:03work.
11:03There's no issue about continuity or things like that at the FOMC.
11:08We're just, you know, doing what we always do, which is digging into all the data, you know, trying to
11:13do our very best to achieve our maximum employment and price stability goals.
11:16So, basically, if Warsh is not confirmed, you don't have to do anything.
11:20You just continue on.
11:24Exactly.
11:24At the FOMC, just continue on.
11:26Now, Kevin has come in, come out and said that there's a lot of things he would like to change,
11:32and we won't go down the whole laundry list.
11:35But how effective do you think with this FOMC, with this board, can he be in affecting change in the
11:43short run?
11:44Are we looking at some sort of massive change in the way things are done, or is this going to
11:50be a process that takes place over years?
11:53Well, at first, you know, Kevin Warsh understands the Federal Reserve very well.
11:57He was a governor.
11:57I knew him then.
11:58I think he has a keen understanding of what our mission is and the importance of what we do.
12:04You know, I can't speak for him, and I haven't, you know, spoken to him lately.
12:08But I do expect that when he does get confirmed by the Senate, that he will share his views and
12:16perspectives as he thinks about, you know, what he wants to accomplish as chair.
12:20And, you know, I've worked now with four different chairs and many governors and very many presidents.
12:27And the most, you know, I think the most common element of all this is when people come into the
12:32Federal Reserve, they understand the importance of the work we do, the importance of the mission to the American people.
12:37And that's exactly what I expect when Kevin Warsh rejoins, if you will, the Federal Reserve.
12:43Now, one of the open questions is what happens to Chairman Powell when he's no longer chairman but still a
12:51governor.
12:51Would you like to see him stay on?
12:53Well, that's a decision for Chair Powell, and I don't have any comment on that.
12:59I leave that to him.
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