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00:00We've got a moment to step back and sort of reflect on your experience at this institution.
00:04We've talked lots about how you've been received externally.
00:07Can we just start with how you've been received internally over the last few months?
00:11Sure. This has actually been one of the biggest surprises, you know, given all the drama at the beginning.
00:15I've been received internally, I think, very, very politely, very cordially and very kindly.
00:19And I think folks have largely enjoyed some of the intellectual conversations,
00:24some of the challenges that I've leveled against some of the ways that they've been thinking beforehand.
00:29And I think that the overall response has been, you know, very welcoming and very kind.
00:33And that's one of the things that I'm most grateful for.
00:35What are the kind of ideas that have been received well that are shaping debates right now that will linger
00:40and continue beyond your departure?
00:43Yeah, sure. So one, you know, so an example of one of those things is the importance of regulations for
00:48determining the supply side of the economy.
00:50I mean, we spend a lot of time, you know, out in the financial world, out in policy, discussing the
00:54effects of a 33 versus 35 percent marginal tax rate.
00:57But the truth is that regulations are often infinite taxes.
01:01And being told you're not allowed to do something versus you are allowed to do something is a very, very
01:05strong difference.
01:05And this had played a very small role in a lot of the modeling discussions happening at the Fed, in
01:10a lot of the outlooks that I sort of that I heard people present.
01:13And I came in and really hammered that idea and I think sort of moved it forward.
01:17And now a lot of people talk about it very often internally and externally and, you know, sort of talk
01:22a lot about supply shocks.
01:23This is a positive supply shock that is unfolding and continues to unfold and will, I hope, mitigate some of
01:29the negative supply shocks.
01:29We also get hit by it. Let's talk about another supply shock.
01:32And I think it's been central to some of the arguments you've made on the committee.
01:34And that's population growth. The negative population growth that we've seen, which has lowered the break even rate for the
01:40labor market and contributed to arguments in some places for hotter, stickier inflation.
01:45You've taken the other side of that. Can you just explain that for us?
01:49Yeah. So I think this is a really subtle issue with a lot of moving parts.
01:52Now, at a very high level, what I would say historically is that we've seen a lot of countries in
01:57different places have declines in population growth rates and stagnant populations or shrinking populations.
02:01And I think the cross country and historical evidence is that it's unambiguously disinflationary or even eventually deflationary.
02:08Now, there's a few there's a few ways that that works.
02:11One is by reducing. Sorry, there's a few consequences of lower population growth.
02:15One is it does reduce the break even in payroll growth rate.
02:19So the number of jobs you need to create every month to hold the unemployment rate constant, that does come
02:23down.
02:24That's a mildly hawkish implication because it means you shouldn't get so concerned about very, very low job creation rates.
02:30However, there's also there's also dovish implications as well, which are that it lowers the neutral rate.
02:35It brings interest rates down over time.
02:37And we've sort of seen that across countries and historically and historically to be the case.
02:41And it's also disinflationary through long lived capital and consumer goods.
02:46And if you think about something like housing, right, the supply of houses is relatively fixed in the short run.
02:51And if you throw millions of new people into an economy, you're going to drive up the price of rents
02:55because they need places to live.
02:56Right. You're going to create inflation.
02:57And that inflation is very, very persistent because of the way that housing inflation is calculated.
03:01It's very, very sticky.
03:03If you have declining population growth, you don't need as much you don't need as much home price growth.
03:07And that very inflationary tailwind gets taken away and ceases to be a major driver of inflation.
03:13And I think you've sort of you've been seeing that start to play out in the data.
03:16Market rents in this country have been growing at a one percent rate for the last few years.
03:20This is one of the biggest components of the inflation indices.
03:23And I think you're going to continue seeing measured measured PCE and CPI rents and measured PCE and CPI shelter
03:30inflation continue to converge down to those very low levels.
03:33So I think there's one hawkish implication, which is the lower break-even payroll rate.
03:37But there's also some very dovish implications because it reduces the neutral rate and it brings down inflation through some
03:42of these long-lived capital and investment goods.
03:44This is a longer-term structure for how to think about inflation and the benchmark rate of the Federal Reserve
03:50and how it sort of works with the sort of long-term inflation rate.
03:55Near-term, though, one thing that you've been known for, a hallmark of your time on the Fed, was that
03:59you voted to cut rates at least once at every single meeting.
04:03Do you think that that still holds, even though in the short term, it does seem like the inflationary shock
04:10is overwhelming potential structural changes that could lead to disinflation?
04:14I do.
04:15And I think this is maybe one of the biggest differences between me and a lot of other folks is
04:20that I take very seriously the idea of monetary policy lags, very, very seriously.
04:25Monetary policy doesn't hit the economy right now.
04:26If we changed interest rates today, it wouldn't flow through into the economy until 12 to 18 months from now.
04:32Right now, there's some disagreement over exactly how long those lags are, but I think 12 to 18 is the
04:36consensus view.
04:37And, therefore, for any shock that's hitting the economy today, you can't think about what the effect in the next
04:42few months is.
04:43You need to think about what the effect in the next 12 to 18 months is.
04:46And, sorry, the effect 12 to 18 months out.
04:49So, if oil goes higher, it's a supply shock.
04:52Straits of Hormuz are closed, right?
04:54That's going to boost the oil price today, and with it a bunch of other stuff that's very tightly tied
04:57to energy prices, like airfares, right?
05:00That's going to go higher very quickly within the course of a few months.
05:03And we've been living through that.
05:04And that is very real, right?
05:06There's no way – that is very real inflation.
05:08But it is not inflation that monetary policy can affect.
05:10Monetary policy can affect 12 to 18 months from now.
05:13So, there's got to be a reason that you think airfares and oil prices are going to be moving higher
05:18in the summer of 2027 and the fall of 2027, not the summer and fall of 2026.
05:25And so, it's those lags that really should be driving where you think about forward-looking monetary policy should be.
05:32And that's a lot of what I've tried to hone into when thinking about population growth and deregulation and saying
05:37that the traditional view that we should look through in oil shock should prevail.
05:41This is very, you know, vanilla, basic, sort of traditional monetary policy.
05:45Part of the problem is that the market doesn't agree, at least not in terms of where longer-dated bonds
05:50are trading and where yields are shifting, where you see them shifting higher even as the front end stays where
05:56it is.
05:57Do you think that in this type of environment it's imperative to have some sort of Fed-Treasury accord, akin
06:03to what people have been talking about, where the Treasury steps in to sort of influence the long end while
06:09the Fed cuts rates in the short end?
06:11So, let me address this separately. So, the market not agreeing is in part a hall-of-mirrors issue because
06:16if you have – if the Fed says we're very backward-looking and inflation over the last 12 months is
06:22going to determine policy that affects 12 to 18 months from now, meaning the economy in 2027 is affected by
06:29data in 2025 in that world, right?
06:31So, very, very backward-looking. If that's how the Fed communicates that it's setting policy, then the market is going
06:36to start to reflect that.
06:37And so, the market reflecting a lack of interest rate cuts, right, is in part because the Fed is telling
06:44them we're backward-looking, right?
06:45And so, that's going to create a self-reinforcement problem.
06:49Now, on the Fed-Treasury accord, you know, so first of all, you know, I won't be involved in that
06:54if it happens.
06:55But, you know, I have done some work on the balance sheet, and I do think it is important that
06:59one of the problems with having a very large balance sheet and lots of securities, lots of Treasury securities on
07:04the Federal Reserve's balance sheet, is it does start to get the Fed involved in questions that have some fiscal
07:09implications, right?
07:10If we own a huge chunk of debt, then that means that we're impinging on decisions that traditionally are the
07:20realm of the fiscal authority, of what is the distribution of public debt that it issues that's held by the
07:25public.
07:26And so, I do think it is important that if you have a large balance sheet, there needs to be,
07:30you know, sort of some clear delineation about who's doing what.
07:35And to me, these questions are really murky, and they, you know, they implicate independence to an extent, and therefore,
07:41it's one of the reasons among many that I would favor having a smaller balance sheet.
07:45How close do you think the Fed should work with the Treasury to achieve that?
07:48How closely should the Fed work with the administration?
07:51Yeah, so my view is that the Fed having a big balance sheet starts to implicate a lot of those
07:57lines and becomes problematic.
07:59So, the Fed should strive to have as small a balance sheet as it can, right, to achieve its goals
08:04and implementation framework.
08:05And if we can sort of improve that implementation framework and make it smarter to reduce the minimum size of
08:11the balance sheet that we need, then that's a great thing.
08:13And that was a major thrust of the paper that I wrote in the spring with Alessandro Barbarino and Anthony
08:19Dirks and Alyssa Anderson.
08:25And so, that was a major thrust of that work.
08:28That was really important.
08:30Now, in terms of coordinating, right, the Fed should do what it should do for monetary policy.
08:35And the Treasury should do what it should do in terms of fiscal policy.
08:38And the level of coordination should, I think, be, you know, sort of separate, right?
08:44They should be doing what they want to do for each of their own priorities.
08:48However, there are times when there is going to have to be that type of coordination.
08:52So, for example, you know, right now we're doing these reserve management purchases where we're expanding our balance sheet to
08:59sort of provide a minimum level of reserves into the economy to meet reserve demand.
09:03We're, you know, we're buying Treasury bills.
09:06We're letting mortgages continue to mature off of our balance sheet and place them with Treasury bills, right?
09:10Like, in theory, if we did enough, you know, sort of conversion of our balance sheet, of our existing balance
09:15sheet into Treasury bills, we might be absorbing all of the supply, right?
09:20And then some.
09:20So, this is an example of a time where there would have to be very tight coordination.
09:24We've got an administration right now very interested in financial markets.
09:28The President often looks at where the index level is in the equity market.
09:31We've got a Treasury Secretary that used to trade this stuff.
09:33Did you speak to them in your time at the Federal Reserve?
09:35Did the President ever pick up the phone and say, hey, Steve, what's happening?
09:39Tell me what you're seeing in the market and the economy.
09:41Yeah.
09:41So, I spoke to the President when I went to go resign from the Council of Economic Advisors.
09:46I went to bring my resignation letter.
09:50But, you know, he doesn't tell me anything.
09:52He doesn't tell the whole world, right?
09:53This President is very forthright with his views, and he tells journalists all the time, including Bloomberg journalists, exactly, you
10:01know, exactly what's on his mind about policy and where it should be.
10:04So, no, I'm not in receipt of any information that's not public.
10:08Because we've started this conversation by talking about how you were received internally, externally.
10:13I thought unfairly at times, basically everything you said about interest rates and on the economy was always described as
10:21just doing the President's bidding at the institution, at the Federal Reserve.
10:25Did people see it that way internally?
10:28When you put your hand up and said, I want a rate cut, 25 basis points, I'm dissenting.
10:32Was there a roll of the eyes? Here we go. This is the President's guy doing the President's bidding.
10:37Well, thank you. Thank you for those words.
10:38I do think it's clear that I've disagreed with lots of people on policy on lots of times.
10:44There have been times when there have been signals out of the White House that they wanted policy rates lower
10:48than I had my dots.
10:49And there have been times when there's been signals out of the White House where they thought that I was
10:53too dovish, right?
10:53So, for example, the NEC director, after my first vote, said that he would have preferred a 25 basis point
10:58cut, right?
10:59So I clearly do my own thing and have my views.
11:01And they're all, I think, grounded in very traditional economics.
11:04And we were talking about population growth before.
11:07Like, this is not new, right?
11:08Like, six years ago, we all would have been talking about, is everybody becoming Japan?
11:12You know, that would have come up several times a week, right?
11:14Like, none of this is new.
11:16None of this is heterodox economics.
11:18None of this sort of says we need to discard with the entire framework.
11:21It's all within the traditional framework.
11:23And this is part of why I think the reception internally has been generally pretty good.
11:29It's because I'm engaging with folks on their ground, right?
11:32Like, I'm within the world of normal economics.
11:35And we're talking about what drives the interest rate and does the neutral interest rate and does population growth drive
11:40it?
11:40And is it inflationary or disinflationary?
11:42This is all well within sort of normal.
11:45We're trying to figure out what kind of an institution Kevin Walsh is walking into, how he'll be treated,
11:50how difficult it will be to get people on his side as he starts to think about changing this institution,
11:55particularly when the former Fed chair will be sitting there as a governor on the Board of Governors.
12:01Can you help us understand that from a man inside the building, what that might look like in the next
12:05few months?
12:06Yeah.
12:06So I think one thing that's important to understand is that people at the Fed are responsive to arguments.
12:14And as I said before, you know, I've been hammering deregulation, among other things, since the day I got there.
12:19And, you know, they start to respond.
12:22But it takes time, right?
12:23You know, it's a bit of a slow-moving process.
12:28Does Powell being there make it harder?
12:31Well, you know, I don't know about that.
12:35You know, certainly Chairman Powell built a lot of the institutions and processes that exist there.
12:41And so, you know, so that dynamic may, you know, sort of may play into it.
12:46I don't know.
12:47But that'll be an issue for Chairman Designate Walsh to deal with when he gets there.
12:51When you heard the chairman in the news conference present to the press and to the world that he was
12:55staying gone as a governor,
12:56was that the first time you heard of it?
12:58Or did he tell the Board of Governors ahead of time that that was his plan?
13:00No, he didn't tell me ahead of time that that was his plan.
13:03But he'd always said that, you know, publicly and privately that it's something he might do.
13:08And so it wasn't entirely a surprise.
13:10What was your reaction to it?
13:13You know, look, my reaction to that is that when I was the incoming Chairman of the Council of Economic
13:17Advisors last year,
13:18I was very grateful to the previous Chairman, Jared Bernstein, for spending time with me on the phone,
13:24being very generous with his time several hours over days and weeks.
13:29It's giving me advice for how to be a good CEA chairman.
13:32And I really appreciated that.
13:33And sort of how does the place run?
13:35And, you know, what are your responsibilities?
13:36And how do you do a good job?
13:38And I thought that was really generous of him.
13:40And I was really appreciative of that.
13:41And then I went out of my way to make sure they very quickly put his portrait on the wall
13:44of former CEA chairman in the offices in the Eisenhower building.
13:48You know, just to make sure that happened quickly without delay.
13:51And I was really grateful.
13:52So, look, transitions are important.
13:53And I think that, you know, it is maybe helpful to have someone there to give advice.
13:58Here's how to be an effective chairman.
13:59Here's how to lead the committee.
14:00Here's, you know, here's how the building works.
14:02It may be a little bit different than it was 20 years ago, right?
14:05I think that can be helpful.
14:06But I still think it's important that it be a transition because you want to have people's loyalties undivided.
14:11You want to have there be very clearly one chairman.
14:13You want to have a place where there's no question about who's in charge.
14:17And there's no talk of rival factions and things being split.
14:21I think you want to have you want to have a sense of unanimity and clarity.
14:25And so transitions are important.
14:26And I think it can be helpful to have to have help in transition.
14:29But I still think it's important that it is a transition.
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