Fed's Mester: Compelling Case To Move Rates Gradually (Audio)

O m c UH. You are looking at an economy that's performing well, and you say the outlook is that it will continue to perform well. But what's the urgency why descent? Is the economy overheating? Well, it's not overheating. And I don't think we're behind the curve yet, but I thought there was a very compelling case for taking another gradual step up on the path. As you know from the Summary of economic projections, the modal path and the or the median path across participants is a gradual

path op. We've made a lot of progress, I think, on both parts of our dual mandate goals. In terms of labor markets, you know we've We've seen a hundred and eighty thousand jobs added per month this year on average, which is a pretty good pace, especially after last year's pace and previous year. So we're doing well on the labor front. Inflation still still below our two percent goal, but again, you know, it's moved up over the past year,

and monetary policy has to be forward looking. So you know, my my view, there was a compelling case for moving the rate up gradually, um taking another step on that gradual path. And you know there's some you know, people who think like, oh, you want to curtail the expansion. Not at all. Right. The reason I think it was appropriate to move the rate up by twenty five basis points is that we want we want the sustainable expansion, and I think moving rates up is consistent with that.

Last week, the numbers on consumers spending were weak enough that the Atlanta Fed cut its GDP tracker down to two point four percent. It had been up as sighs three point eight percent. You know, the first half the GDP barely grew over one percent. Does that make you just think it isn't Maybe the weight could be a little bit longer. There there's a risk of hitting the economy with the rate hike when it's really not all that strong yet. Well, you're right, the first half of

the year growth was around one percent UM. I still think we're going to see a rebound in the second half. Yeah, around two two to three percent in the second half, which about two percent for the year. And my view is that we're going to be growing about two little bit over trend um over the next two years UM. That'll be strong enough to put some downward pressure on the unemployment rate. I expected to go down from where

the current level. And I believe that, you know, the the day is in place for inflation to move gradually back to two UM. And my view inflation expectations are reasonably you know, well anchored. We've seen inflation move up over the past year, and I think the economic conditions are such that we're going to be, you know, going gradually back to our two percent coals. So again we have to be a little pre emptive and sort of making sure that we're moving the interest right up UM

so that we can keep the the expansion sustained. So but still, when I think of the urgency to hike, now many FED officials or some I could try to think of how the f hom C would say a few some several, but a lot of economists and many people of race the issue, but inflation is undershot for so long. Again, what's the urgency is? Would it not only be okay, but would be a good idea to let inflation get up to two percent and let it overshoot the forecast? And you too say not till were

going to see a two percent inflation rate. Look, I mean, I think we've learned over history that the FED should be looking ahead and not just waiting. I want to be consistent with our communications and our summary econ on projections that basically they say a gradual path is appropriate. I think if we wait until you know, some people say wait until you see the inflation get back to your goal. Um, then there's a higher potential that we're gonna have to raise interest rates on a steeper path.

And in the past, when people when when FED and other policy nations have on that in other central banks, it really doesn't turn out to be a good outcome. So again, my preference would be moved rights up gradually. You know, the gradual path. If you look at what's in the SEPs and of course that's the assessment today about what what we think is appropriate. It doesn't mean moving rates up every meeting, right, it's it really is a gradual path, and you know, policy will remain accommodative

even if we take another step on the gradual path. Okay, So the FED has been telling us repeatedly that all meetings are live, there's potential for a policy policy change. Um you argued for hiking rates in September, The FED chair said, recently the cases strengthened for a rate hike if the data stay strong. It seems like the economies on even a better footing for November rate hike. If the outlook doesn't change, if the reports come in strong, are you going to argue for a rate hike in November?

So I think all meetings are live, and I would include November in that all meetings are live. Um As I said in September, I thought the case was compelling to take another another step on the gradual path. If the data come in um as we anticipate, you know, consistent with my forecast over the meeting run, then I would expect, you know, to that the case would remain compelling.

But of course We're going to look at all the data that comes in between now and November, between November and December, as we do all the time as we step through meetings. We'd like to look at all the incoming information. But you're right, if the data comes in as consistent with what we've been seeing, then yes, I would think that it would still remain of compelling, and you would you would vote for a rate hike. Well, I we'll see when we get to the meeting, but again,

the case would be compelling. Uh, it is a few days before an election, and the FED says it's not political. I'm a long time FED watcher. I've seen moves right before elections. I believe it. But it would certainly raise a lot of attention. The markets would notice, are the rules for a rate hike in November, especially this year any different? Does the hurdle for the rate hike get a little bit higher? November said? You said it yourself. We are in a political institution. We have been in

a political institution all along. We're designed to be have an independent monetary policy. I can tell you I've been going to FOMC meetings since I became research director at the Philly Fed, so over the past sixteen years. I've been in the FED thirty years. Yes, we are in a political institution. We don't Politics do not come into our decisions. We look at the economy, we do our best to evaluate it relative to our dual mandate goals,

and we set policy based on the economic outlook. So you'll push and you think other FOMC members will vote for a rate hike if called for even six days before an election. I think we're a political Politics doesn't come into it. President Bill Dudley said today the FED should be cautious raising rates, especially at the time when the key rate is so low, so close to zero. If there's recession, the Fed doesn't have much room to find it. And he built Uley's not the only person

making that argument. How do you respond with it, because its pretty clear you don't share that view. Right again, I'm basing it one monetary policy, well standardized you know, ways of doing policy. I view the economy and I look at our goals. We've made progress on both the employment part of our mandate and on the inflation part of our mandate, and to me, bringing the rate up a little bit is appropriate. Yes, of course, we always

have to think about the risk um going forward. But again I think it's a compelling case taking another little step on our gradual path, which the participants of the on the FOMC continue to see as the appropriate path. Another person I want to site as a fellow FED bank president, another monetary theory expert on the FED, Jim Bullard of St. Louis, because he said on Friday the December is his base case for a rate hike this year because a lot of members want to raise the

key rate by the end of the year. Let's see, doesn't happen in November. Should markets be all but convinced that it will happen in December if it's even Jim Bullard's base case? Now, yeah, So I think that I don't like to look at it in terms of calendar gear. I looked to look at it in terms of of sort of the appropriate path. So you're right, doesn't doesn't

happen in December November? I mean, and that and sent sons, that's less important than is the economic outlook consistent with a gradual increase in the in the level of the interest rate. And each meeting is a liar. You know you mentioned the the steps the Summary of Economic Prevention Projections that includes the dot plots. Of course, each member gives their idea of based on their view of the economy where the interest rates are going two hiks two

hikes in. Is is that a realistic path or does the FOMC risk under delivering Again, I mean that's not quite the same as promising four rate hikes at the beginning of and ending maybe with one, but still okay, So firstly, it's not a promise, that's true. I used

the wrong word. I shouldn't have used that. Basically, we get to get you know, we sit down and each participant decides what they think of the appropriate path of policy has given what they see in the economy happening and what their forecast is over the meeting run um, and you know, we're we're all committed to hitting our goals right and moving the economy in that direction. And then we write down what we think the appropriate policy

path will be. If the economy involves differently than we expect, then that path is going to be moving around and so and if different shocks at the economy, then you'd expect that path to to move around. So again it's not a commitment to the path, but we want to be as transparent as we can with the public about where we are seeing the economy going and what policy is associated with that. Semester we're just getting going, and I'm so glad you've given me an hour here on

Bloomberg Radio to continue this conversation. I want to thank our Bloomberg Television listeners for joining us. Will be continuing this conversation with Loretta Mester, president of the Cleveland FED. I'm Kathleen Hayes. This is Taking Stock with Pim Box and Kathleen Hayes on Bloomberg Radio Very special show today. We're broadcasting live today from the FED to Reserve Bank of Cleveland. The Reddemester, president of Cleveland FED, is my very special guest. Want to thank you again, Lort. It's

still great to be here in Cleveland at the bank. Yeah. I'm glad that you were able to come to a regional reserve bank to sort of see how we work in the regional bank. Everyone focuses on the board of governors, but this regional structure of the FED, I think is

very important. Since you brought that up, explain that because from time to time in a political you're even not in a particular it comes you're up, let's change the fit, and somebody wants you a regional banks or someone wants this explain to our listeners and your constituents, right, why regional banks pay an important role and keep the Federal Reserve doing a good job. Right. So the Federal Reserved with design as an institution that sort of balances private

sector and public sector, right, it has. You know, there was a concern about it being too concentrated on Wall Street concerns. The FED, by the regional structure, really brings main street concerns and views to the f MC meeting. So each of the Reserve bank presidents, you know, monitor their district. You had both Taught and David on before umber and our Business Advisory Council, So they bring a lot of regional information to us UM at the Cleveland FED,

and that regional information. I can't emphasize how much that's important for us to get a handle on what's happening in our regional economies and that actually we bring that to d C. So I always make it a point in FMC meanings to talk about what's happening in my region. And of course the other presidents bring what's happening in their region, we talk about it, and then we're making

monetary policy at the national levels. But that information is very important, and the regional structure of the FED is a way of bringing that information so that it can affect national monetary apology. You have any sense, and you've been with the FED for a long time, and you like in monetary policy academically, your expertise you've been following, do you have any sense that that the intent to try to restructure the FIT or change the FED is

any more intense now than it has been. I think that it's reasonable that to given we've been through very hard economic times, that it's time. You know that they're going to be a lot of people who want to relook at things. But I want to point out to people that you know, the FED structure has lasted for over a hundred years, and we've had two attempts at central banking before the Federal Reserve system, and neither one

lasted more than twenty years. So there is something very good about this balance of the regional with d C and you know, with the New York FED coming together and making policy on behalf of the nation, and so one of the good things we could say it again one of things about regional FED bank presidents. They have boards of directors and advisory council, so they're the regional economy. So how do you respond then to people who feel that the Fed is maybe not responsive enough to the

demands of labor. And within that context, I want to mention that the Labor Market Conditions Index, which Janet Yellen has praised, is such a good view of the labor market has as some of a different view of the economy. I would say than the low unemployment rate UH. It's been below its post recession average of plus four every month since January year did date average has been negative out of UH seven eight seven seven out of eight months this year. In the past, this has been a

precursor a signal of recession. Is that something the right ms you and others who want to high rates now need to pay closer attention to. We look at many, many different statistics on the labor market. In fact, one of the authors of that that index is actually here at the Cleveland Fed UM, Bruce falc And so we look at that, we look at a lot of other indicators of the labor markets UM, and I think most ecconists would agree that the labor markets are doing quite well.

In fact, it's one of the strengths of the economy. That said, not everyone in the labor market is doing well, and there are long term issues with labor workforce development issues UM. I recently was in Hazard, Kentucky, part of my district in Appalachia, and you know, there are people

hurting there because of the coal um industry. And you know, I saw a program that's actually making you know, taking you know, coal miners and they were in a course to learn how to be electrical alignment and and firebrock to line it. It's one small program, but I think, you know, one of the roles of the FED and one of the value adds we can do is study

how to scale those programs up. We have a community development function here at the Cleveland FED that does first rate work UM and looking at some of these issues in terms of low and moderate income neighborhoods and what kinds of programs can help transition right from certain industries that are undiversified into more into the jobs that are

going to be in demand in the future. So again, I think the FED can can help that conversation and by providing our objective research on which programs work, which programs don't work, which kinds of policies can the nation UM rely on to actually help these transitional economies. That's different than saying we should use monetary policy as a

tool to affect those longer run issues. Zeroing in on the living recognitions index and the weakness we've seen that you don't take that as a sign that maybe this economy really doesn't need or is really not strong enough to stand another industrate hyke, I don't. I think if you look at across a number of statistics, the unemployment rate is down, The other indicators of labor market health

have improved. UM, hiring rates are going up. You know, if you look at the unemployment rates across race and general gender, they've improved. They're not perfect, obviously, but again, some of those differences reflect longer run issues that monetary

policy really isn't meant to address. So again, I think if you look at the the job creation rates UM, the number of jobs being created at a hundred and eighty thousand per month on average this year, that's well above the range um that most economists say would be the steady state or the sustainable rate, and so I think that's you know, to me, those are good numbers. More with Lotermester, she's president of the Federals or of Bank of Cleveland. Coming up here on taking Stock. This

is Bloomberg. You're listening to taking Stock with Kathleen Hayes and Pim Fox on Bloomberg Radio, our very special show. Today, we're live at the Fed of Reserve Bank of Cleveland with Cleveland Fed President Loretta Mester. Loretta, I want to follow up on some of the things we've been discussing. Actually, I'm getting notes from listeners and others who are who are hanging on your every word. And one question, how deep right now is a split on the Federal Open

Market Committee, the FEDS policy making body. Three dissenters the most people. I don't know if people realize in fact, you don't people like you don't dissent lightly, it's a big deal. Three people descended how deep is a split? Well, if you look at the vote count, yeah, you'll say three to centers. But I don't think we're that far apart. I think we all as as Cherry Ellen Senator press conference. You know, the case has strengthened. We said that in

our statement after the meeting. It's just really a matter of where you see the risk and where you see the economy. I think one of the things that struck me over time is the resiliency the U S economy is shown into a number of bumps in the road on this road to of expansion. So if you just think over the past year. We started the year, we had that volatility UM in January and February and the

financial markets we got over that. We had the readjustment to sort of fears about the growth rate in China being revised down. UM, economy made it through. UM. We had the Brexit vote UM again, lots of concern about that, and the economy made it through. So to my mind, you know, we've continued to make this progress UM and we focus on the monetary policy goals. To my mind, that means that it's a compelling case to take another step. So the FETE has been cautious up till now about

how it's moved RACE. I think that strategy has really served us well. But in an economy where we're continuing to make progress on our goals, and we expect to make further progress on our goals. I think being prudence sometimes means moving the rate up, and that's kind of

where I was, and other people had different views. Well, we're going to get a little better a view of this when we get the FOMC minutes, but that's not for uh, Well on the week and a half or so, the dynamic at the meeting where there were If we get those f and FMC minutes, are we going to see that there were a number of people, not just as centers, who were more in favor of moving in September? How did that? Can you give us a sense of of you just said that, No, maybe the split is

in as deep as we might think. Is that because there's more people who were leading in that direction they just didn't dissent. The meetings always have every participant, whether a vote or not. You bring your view about the both the economy and policy to the table, so there's a rich discussion. I always come into the meetings very um, very much looking forward to the other view points I'm going to hear around the table. Of course, I come in with my idea of where I think things have

been and where they're going. You know my forecast and then what I think of the appropriate policy is. But it's a very good discussion. We exchange views. I commend Janet Yalen, the chairman, for allowing that kind of give and take and for encouraging it. So my my fundamental is that when you know you bring a diversity of views, you actually get and have that discussion, you actually get

better policy as an outcome. So how worried are you are you You're not so much in the financial bubbles camp, but are you a bit worried that investors are reaching for yield and they've gone into commercial real estate? Is Eric rosen Grand from the Boston emphasized junk bonds et cetera, and if people start exiting all at once, that that

could deed stabilize the markets. And that is something that you're putting on the plate when you make that list of reasons why the Fed should move now and raise that rate. Okay, we certainly always have to look at all the risks that our policies in gender um. My case was based on the progress we've made on our

dual mandated goals. UM, but you know it would we have to take into account that we've had interest rates at very very low levels um for a very long time, and so of course you're going to be looking for whether financial when balances are building up. I don't see them, um right now is building up you know, and and the reason to race rates, But it's certainly something that

we're going to have to continue to monitor. We did see some froth in the commerce in the commercial real estate market, which is what Eric rosing Grin has pointed to. That seems to have settled down a bit now, but nonetheless we want to continue to monitor that this is a bit in the future. But again, inquiring minds want to know, um, when would be the appropriate time to

start unwinding the balance sheet? Is there a level of fud funds rate you can point to, because after all, you're you're looking for a rate hike this year, so are a lot of other people to write rate hikes

next year? How is the Fed calibrating this? As the majority seems to be more on board for this gradual moves, still, at some point you gotta look at the balance sheet, right So as the fetists said that, you know, we want to communicate our policy based on the funds rate path, and that's what we've been doing, um and then later on we can herman whether we want to stop reinvesting of the portfolio. So my view of of of the mechanism is that the portfolio you know, is an accommodated

is a tool of accommodation. And so as we get you know, the economy continues to expand and we're bringing the funds rate up, then we could consider sort of stopping the reinvestments, whether a one percent level of the funds rate. I think different people would have different views about that, but the same issues about why the funds rate should come back up eventually will also mean that that that we can stop reinvesting in the in the portfolio can gradually, um, you know, get smaller in about

fifteen seconds. That this means because it's another form of tightening when you stop reinvesting the proceeds. So you have to be doing it at a time and the economy is pretty strong, well you'd want to do it. Take into account that that's added downward pressure on long yields. So of course, right we'd we'd look at all our tools at that point, but again the main tool policy tool at this point is interest rates for term interest rates.

All right, we're Amester, We're gonna keep going. She's president of the Federal Reserve Bank Cleveland, joining me today for an exclusive interview. I'm Kathleen Hayes on taking Stock, and this is Bloomberg. You're listening to taking Stock with Kathleen Hayes and Pim Fox on Bloomberg Radio. Very special edition of taking Stock today on Bloomberg Radio. I'm Kathleen Hayes

along with Lorettamester. She's President of the Cleveland Fed. Loretta getting got a great response here on our conversation, so I want to thank you again for taking the time today. It's a pretty special to sit down for an hour the Fed Bank president. Thanks for coming. Well, I want to ask you about we got the IYSET Manufacturing Index. Okay, anything above fifty is signaling growth, anything below contraction in manufacturing. It climbed a fifty one point five in September. Uh,

it was negative the month before. Lackluster. People aren't very excited about what they're seeing. So that's one part of the equation that I said. Manufacturing closely watched. I know folks the Fed watch it and it's not just UH, the I s M Manufacturing index, the I s M Services index is at a seventy nine month low. Again, with these signs of an economy that's still struggling in a lot of ways. It's not strong. Is a rate hike now maybe just not the most prudent thing to do.

So you're right. Growth has been struggling a bit, right. We had you know, one percent growth in the first half of the year. Our NIO casts suggests that we're going to see a pickup and growth in the second half of the year. UM. The consumer has been the strength side of the economy. It's been doing very well. Consumer spending is held up, consumer confidence is held out up, UM, household balance sheets of strength, and over time, UH, employment

is part of that driver. Right. We've seen the income is rising UM and at other parts and at lower parts of the income distribution as well moving up, So that those are all very very positive things. Business investment, as you point out, and manufacturing has been hit UM has been weak, and so a certain extent we understand

part of that, right. You know that the oil price shock UM really hurt the energy part of the economy and investment in the brig counts are down and and that was really a bigger shock UM that effected the Cleveland Fed district as well, because we have oil and um gas exploration going on in our region as well. But the other part is that it's broader than just energy and there you know, you've seen that low interest rates some firms instead of investing or buying back their stock. UM,

the weakness has been a little bit more. They're just there does appear to be a sense of caution on the part of a lot of businesses, and so that's somewhat of a puzzle. UM. I do think that as the economy continues to expand, we'll see some increase in business investment. But you know, if that continues to be as low as it's been, in productivity growth as low as it's been, it could be that trend growth as lower than the troopers and I pay it at manufacturing

very important in your region across the Midwest. Dollar rate hike, stronger dollar not good for manufacturing. How concerns are you about that? Right? So we certainly have, UM, some firms in our district who reported that the dollar really affecting them. They're the ones who have you know, or dependent on international sales, but the manufacturer in the district that are

domestically focused, they've seen improvement over time. So again it's you know, you have to take into account the heterogeneity of the economy. So yes, manufacturing is week. We have signs that at least in our district economy, and I would say more generally in the nation that the ones that have been less tied to international which we're exports have been hurt, have seen some improved activity over time.

What about markets and of course the exchange rate, but then there are stocks as well to consider if the FED starts back on the rate hiking path, while other central banks from the European Central Bank to the Bank of Japan are trying to find ways to stimulate their economies more, they've had negative rates for crying outlet. So we operate it in a global economy, of course, you know, we're we're interlinked in many ways. Trade is one channel,

financial services is another. But again, right, we set our domestic policy here in the US to try to hit our goals of two percent inflation, price stability, and full employment. And again just looking at how the progress we've made and what we expect to continue to make on those goals. Taking a little step up on the path of graduating in interest rates seems appropriate. We're still going to be accommodative, right, So this is not an idea that we're gonna tighten quickly.

And in fact, one of the reasons I think there's a compelling case to take that next step on the gradual path is so that we don't find our self in a situation where markets tighten enough labor, you know, labor markets tightened so much that prices become more price pressures, and then we'll have to move rights up more steeply in the future. So again, this is really negotiating a gradual return back um to our goals. And of course

it's it's not just the dollar right now. Earlier in the year, when the FED was all primed for for interest rate increases, one of the things that happened, of course, first it was the volatility in in Yuan China that hit. Then of course the bregsit vote in Midsummer. Well, now we've got big dark clouds on hanging over some big European banks, and it's not just Deutsche Bank in Germany. People look at Italian banks as well. If the FED starts hiking rates in the middle of that, don't they

or do you risk exacerbating this term oil. I don't think that the FED moving the funds right up by twenty five basis point is going to affect the conditions and Italian banks and German banks. UM. One thing about the US is that our banking system is much better capitalized than it was during the crisis, so we're relatively um good. But we can't ignore the fact that there are problems in some other countries in terms of their banking system, and that is a risk. But again we

take prudent, you know, account of that. We're certainly monitoring the situation UM and that's part of this monitoring in between f MC meetings that we did precisely to make sure that we understand the mechanisms and how it could affect US markets. Little finer point on this, UH, we have seen lately that some of the European and Japanese banks are having a little bit harder time getting dollar funding because the various challenges they're facing. Could a rate

hike exacerbate that problem? Again, the level of interest rates we're talking about, UM, I don't see that that's going to be a major problem for us or for them either. Another kind of question, oil, Okay, we've got a deal that maybe we've got we've got a deal to talk about a deal in Opeq. If they're successful this time, UH, led by the saudiast to get a cut in production, presumably oil prices will move higher. Does this represent a

significant factor for inflation? Uh? Does it increase your concern about about inflation and the FED not moving fast enough? But first of all, guess what do you what do you think of the deal? How are you say? Okay? So, one of the things that should remember is the reason that inflation has been low is because of the sharp decline in oil prices since mid to the beginning of this year. As those the effect of that lower oil prices work through, we've seen inflation move gradually back up,

and the oil prices have been relatively stable. Now we've seen more stability and inflation moving back up towards our

target over gradually over time. Obviously, one of we're going to be monitoring what's going to happen to the oil price, but at the moment, there's no reason to think that things are going to be so different that we are out medium run outlook will change necessarily and so, but it is certainly one of the factors that we're going to take into account when we're assessing conditions going forward.

If oil prices moved significantly higher, again, is it more of a yippie we got inflation moving up or is it, oh my gosh, now people face higher oil prices and it's a it's a tough thing for consumers and not so great for the economy. Well, that's the balancing act

that we do. Right. It's going to have those both of those effects, and the question is how much will it have an impact on inflation, how much on the economy, And the timing also matters, right, So oil prices can affect inflation um relatively soon in terms of the headline numbers, right, And it will also have an impact, you know, more drawn out on the real side of the economy. But that's the kind of balance than we do as we

weigh our dual mandate goals. Diversity. People talk a lot about that at the FED, and Janet Yell and our FED chairs made it pretty clear that the FED is really pushing in that direction. You're a woman, You're a one who has Risen at the top of the academic economic sphere of the FED. What what do you what would you have to say about women economics, women at the Federal Reserve, women in this sphere of the economy

and endeavor. I think everyone should become an economist. I'm just pro economists, So no matter what you know, part of the part of the spectrum you're in, I think becoming an economist is a great thing, and I would encourage everybody to do that. Now, seriously, the FED does take diversity very um seriously. I think we've made some progress, but there's certainly more progress we can do over time.

I think that's true of the economics profession as a whole, and I think that's one of the challenges we face in terms of our own diversity within the Federal Reserve system. But you know, we're a institution that really values diversity of views, and diversity of views is informed by your experience, and so having a diverse workforce, having diversity on our boards of directors, having diversity and our leadership is very

important because ultimately it results in better policy. At ten seconds, would you encourage young women to look at economics it's all more open to women now that it used to be when we were doing it, and Beget definitely encouraged. And I think it's a fascinating field, um, and I think we need as many good minds, you know, working on these topics as we can get. Laurettamester a great mind working on this topic. Thank you so very much for joining me. Thank you for having and coming to Cleveland.

The Reddamester, President, Federal Reserve Bank of Cleveland, joining us today for an in depth conversation about monarch write policy and the economy.