And good morning to all of our Bloomberg television and radio audience around the world. I'm Michael McKee. Joining me now Austin Goolsby. He is the president of the Chicago Federal Reserve Bank, and we can get his reaction to an awful lot of news in the last seventy two to forty eight hours. First, let's dive right into it with last night's up here. It's Cher Powell suggested again that March would be too early to cut rates. You wouldn't have enough data to justify that at the time.
Do you agree with him?
Well, Michael, you know my thing is I never like tie in our hands ahead of meetings. When you got weeks of data coming through, it feels like the economy's been quite strong on the growth front. You got big jobs numbers, you got big GDP numbers, better than expected. But at the same time, we've had inflation better than expected too.
If you look over the.
Last seven months, we've had seven months of really quite good inflation reports round or even below the Fed's target. So if we just keep getting more data like what we have gotten, we're well on the I believe that we should well be on the path to normalization.
Well, understand you don't want to tie yourself down, but is there really much of a chance of a march move The markets think now eighteen percent, and some people think that's even high.
Well, look, Michael, as I say, all we need to do is keep getting information like what we've been getting for the last seven months, where inflation on a flow basis is absolutely under control and is in the range of our FED target. And if we keep getting strong quantity numbers, that is to say, jobs numbers, GDP numbers, growth numbers, while inflation goes down. In the conventional view,
that's not really supposed to happen. So that would we'd have to be entertaining the possibility that we're entering a period like the mid to late nineties where you had productivity growth faster than expected, faster than trend, and that opens up some new possibilities.
Scott Pelly of CBS last night said that Powell suggested that rate cuts would likely be a quarter, maybe a half of a percentage point at a time. That doesn't appear in the transcript. Was a half percentage point cut discussed at the meeting.
As you know, we don't report on what's discussed at the meeting until the transcript comes out. Our standard way to think of it from the FOMC is somewhat like what's in the Summary of Economic Projections, the SEP, which comes out every quarter, and the last time that came out in December, you saw that the median member of the f S thought there would be three rate cuts i e. Seventy five basis points for the year twenty twenty four.
Is there a situation other than perhaps a recession or some sort of market failure where you would consider a fifty basis point cut.
Well, look, I just think we you get the data and you respond to the data in its totality, so it's I don't think it makes sense to speculate about hypotheticals of what would happen to make the rate cuts be different than what they have been in the past.
Three percent growth, three point seven percent unemployment, two point nine percent PCE inflation, the FED discussing rate cuts.
Is this a soft landing?
Can you declare victory?
I mean twenty twenty three by the measures of the dual mandate, which is to say, maximum employment and stabilized prices, that was a pretty good year for twenty twenty three one of the better dual mandate years that we've seen in some time.
You never want to declare victory.
The central banker's job is to remain paranoid about everything because there are external shocks. There are a whole lot of things that can go wrong. But we definitely made progress on the side of the mandate where we had been failing. You know, the inflation rate was way higher than where we wanted it to be. And as I say, for the last seven months we've been at or below the two percent annualized rate.
So we just need more months like that.
That's in the PCE index.
But CPI, especially core CPI, the Cleveland and Dallas Fed's trimmed means, the Atlanta Fed's sticky wage price index have all been running faster and hotter than PCE. Is there an underlying inflation issue that maybe your measure is not picking up?
No, I don't think so.
There if we get down into the weeds, the different measures of inflation measure different things, and so categories like health insurance are better tracked in the PCE measure of inflation than they are in the CPI, and the PCE measure allows consumers to adjust to the prices and change their mix of what they're buying. That's why the FED has chosen the PCE as where they want.
To get to two percent.
The only thing I would like to emphasize is the Fed's goal is not two percent inflation on a Cleveland trimmed means CPI or something like that. They make clear PCE is the measure that we're trying to hit two percent, and in CPI equivalent, that's it's going to be a little bit higher as a run rate on that measure.
Now that you've had time to think about it, what do you make of the acceleration in hiring over the past two months. Optimists say it shows the economy is very strong and maybe the FED doesn't have pressure to cut rates, and pessimists say, can't be right. Seasonal adjustment factors have fudged the numbers.
Well, it's this very important category. They did not fudge the numbers. That's crazy.
But the thing that I.
Want to emphasize when you see big prints like the ones that we saw on Friday, with big positive jobs numbers, there is a tendency, if from pre COVID times to say, ooh, that must mean the economy is overheating. And I just want to make clear, and periods of positive supply shocks
or improving productivity that's better than you expected. You cannot look at the quantities and determine whether the economy is overheated, because the same thing that's inflating the quantities is alsoinging down the inflation, so you can it affords new possibilities for monetary policy that are more positive than in a normal demand driven frame, and we saw that in the mid to late nineties, and so we've just got to be mindful in seeing these big strong jobs numbers and
big GDP numbers that they do not have to mean overheating in the traditional sense.
If the supply side is moving around.
The EU curve, and you can pick any of them still inverted, started flattening, but then has now started inverting more Again, does that tell you anything.
About the economy?
Supposedly it signals a recession within six to twelve months, but it's been fourteen months now and so far no recession.
Yeah.
Look, the thing about the inverted Eel curve is a great predictor of recession. When recessions are caused by the normal demand flows of aggregate demand. But all bets are off when the supply side starts going bonkers. And we've seen that going through COVID. And now as we unwind those deteriorated supply chain, we're getting labor force participation back up to healthy levels. You can get these inverted yield curves, I think just from the anticipation of.
What folks think the FED is going to do.
If the FED is cutting rates not because of demand shocks, which is what happens in the normal times, then the inverted yield curve doesn't need to be an indicator of recession.
I realized there were too many no's in that sentence.
I don't think that the inverted yield curve as a rule of thumb, is really as applicable as a recession. And you certainly saw that in twenty twenty three. Everyone was saying that it was very likely to be a recession, and it was nothing even remotely like a recession.
NYCB Bank New York Community Bank, revived fears of regional bank issues last week. What are bankers in your district telling you about their situation? Is NYCB a one off or is it a canary?
Well?
I would paid close attention to that, of course, because the Chicago FEDS that has the largest number of banks that and financial institutions that we supervise, I believe, of all the FED districts. The thing is, in this case, the bank had bought the assets of signature, and that moved them up into a higher category where there's a little more scrutiny and some higher capital requirements. So thus far that doesn't really seem like it's a commercial real estate blowing up or something like that.
But of course we're monitoring.
As I say, this job of central banker is to monitor everything that can go wrong and to prepare yourself for it.
Well, one more question about preparing yourself. What are the bankers telling you about lending at this point with real rates going up, et cetera.
Are they tightening credit?
Are they tightening credit standards, making fewer loans, making more loans? We get the Senior Loan Officer Survey this week.
What are we going to see?
Yeah, the Beige Book comes out every FMC meeting where we talk to contacts, We talk to each of our reserve banks, talk to our own board of directors, as well as people out in the community. Over the last year year and a half, you've seen a decidedly tighter credit market, for sure, mostly I think just because the rates are higher. We had a fear in the spring last year with the collapse of Silicon Valley Bank and a few others, that it would lead to a credit crunch.
We mostly haven't seen more credit tightening than what you would expect just from the monetary policy and the rates I would characterize. And that still feels like more of the same. And now you've had the long rates, which the Fed does not directly control.
They've been on a journey.
You know, they were up, then they're down, and we've fluctuated back and forth. A little feels like credit remains tight, and especially at the lower part of the credit spectrum of both consumers, small business and higher rate credits. They're getting a squeak and we hear that from our bankers as well as from the businesses themselves.
Austin Goby, thank you very much for joining us.
We would have called at our age, of course, the Journey of the ten year an e ticket ride at Disney World, but they don't charge that way anymore.
Thanks for joining us to.
It's been a long time great to see again.
Vichael Austin goes to be the president of the Chicago Federal Reserve Bank,