Surveillance: Fed Rate Cut Divergence In Jackson Hole

for the Kansas City Feeds Annual Symposium. He's sitting down with Bloomberg's Michael McKee, and he's facing a really complicated situation at a time when China is now going to issue retaliatory tariffs. Let's head over to Mike McKee. We would like to welcome all of our viewers and listeners on Bloomberg Television and at radio worldwide to Jackson Hall, where the Kansas City fat is holding its annual symposium. Yesterday, the Hawks were in control random selection of who got interviewed.

But we're bringing in a dove now, Jim Bullard. He was one of the first to call for rate cuts, and you're still calling for rate cuts. Although you want basis points, you're not ready to do fifty This next time, I think there will be a robust debate about fifties. So I think it's uh, it's creeping onto the table here. But um, obviously the markets have it as a base

case of twenty five basis points. J Pole characterized the rate cut on July thirty one is a mid course correction, but the markets are basically pricing it as the start of a rate cut cycle. How do you see it?

How much accommodation does the economy need? I like to think about the mid nineties examples, the example and the example, And I know some of your viewers weren't around paying attention to financial markets at that time, but if you look at that, the feed adjust it was worried about let's say the Asian currency crisis, very similar to today, lowered the policy rate by about seventy five basis points.

The US economy actually powered through that whole episode, and then the committee took took those insurance cuts away later. I think that's a great baseline idea about what we're looking at now, with a global trade war, global manufacturing and contraction and possible spillovers to the US. You want to ensure the economy against that and stay out of trouble. So you think maybe seventy basis points where you would see us stopping at this point, I'm saying that's what

they did in the nineties. I don't know where we'll end up, but uh uh, you know, I do think that you've got this yield curve that's massively inverted here, and you got the funds rate as the very highest point on the whole yield curve. That doesn't make a lot of sense. So we have to react to the fact that there's been a down draft in global yield. What is it that you're ensuring against. There doesn't seem to be a demand problem in the US, it doesn't

see to be a cost of credit problem. Now this is a This is a global slowdown, and and there's a trade war going on. I don't think there's resolution likely anytime soon, um. And this trade war is triggering other actions around the world, other countries thinking about reevaluating their own trade relationships. So this could um easily get out of control and easily feed back to the US. That's not my base case, but it is something that could happen. I think we should protect against. But how

does monetary policy to do that? Well, lower rates will will stimulate our economy somewhat compared to what they would be otherwise, and that would help us power through the waters, the churning waters here of the trade war. A lot of people say lower rates won't help because the problem that we're having is companies cutting back because of trade war uncertainty. Not because they think that the economy, but it's the big economy. There are lots of other aspects

to the economy. Uh, you know, intersensitive sectors that are gonna it's gonna matter for them. How much additional growth do you think you can provide to the economy. Well, that's a great question, and there's a long literature, much of it's been presented here at Jackson Hole over the years about you know, what the real effects of monetary

policy are and how much the economy reacts. But if you think about the nineties Asian currency crisis, example, we actually argued in St. Louis during that period that because rates were lower because of the flight to safety, that that helped the economy get through that episode with kind of unscathed and so, uh, you know, maybe we can get an outcome like that this time around. Well, how much of it is the fact the idea that somebody will see lower interest rates and go buy a car.

And how much of it is just reassuring people that somebody's watching out in the economy. Well, we do want to continue the expand, shin, and we're certainly willing to take all actions that we need to to continue the expansion as best we can. How much do you worry about the way Wall Street sees it, the idea that they think there's a recession imminent and they're looking at four additional rate cuts. Do you think they're reading the

economy the outlook wrong? Well, if you look at the look at the yield curve, it's been a good predictor of slowdowns and recessions. And so if you have a recession prediction model, it's going to use the yield curve to try to predict that. So our job is to get the yield curve to be uninverted so that those recession probability models don't work anymore. That would be a great uh, that would be a great thing to do. I'm not interested in testing somebody's theory about this time

is different about the yelk curve. Well, do you think that with the haven trade these days you might not be able to get long rates up because so much money is coming into the US because rates are negative elsewhere. Right. But there's a silver lining to that because that's driving longer term yields low, and that should be helpful to the U s economy. That's what happened during the Asian

currency crisis. What are CEOs in your district telling you about what's happening What they see happening, um depends who you talk to. Uh. I would say in manufacturing, they're very much scrambling to reorient supply chains, think about new strategies that will work even in a more uncertain world. Uh. There. If you look at agriculture, that's very much a UM down industry, I would say for now, they've and they're

very much affected by the trade war. So but on the other hand, consumer goods or something more closely tied to US consumer they're doing pretty well. Walmart reported out of our district last week that, you know, very strong sales. So I think there are um good things going on on the consumer side and the household side, which makes

perfect sense. You've got, you know, a great labor market, unemployment near fifty year lows a lot of good things going on in that dimension, well, business has been helding, holding back on spending. Do C e O s tell you that they think there will be demand out there, there will be a reason to invest if they get past the uncertainty of trade wars go away. I think they'd be willing to invest, but they're kind of wondering, Oh wait a minute, now, how should I do this

given the uncertainty that's out there? Uh? Do you worry that the fit is the only game in town and that people are putting too much responsibility for keeping the economy afloat on you? I do think uh, all eyes have turned to central banking, but that's that's over the last decade. And uh, I think a whole people are coming to the realization that you need other types of policies to help you. There are many, many policies pursued by federal and state governments, and it's the sum total

of all those that help your economy. Would you think that the economic situation in the US now calls for a significant fiscal response. You know, we just got a budget deal through and it you know, it is more spending. So I'd like to see an analysis of that on the economy before I go to another spending bill on

top of that. Inflation it was BIPARTISANSI you know, I think, you know, people say, well, there's never bipartisanship, but actually you got that through, So I thought that was pretty good. The minute showed that there was division on the committee in terms of inflation and some people thinking that cutting rates is. One of the reasons for cutting rates is that inflation expectations have slipped in that too low. I presume you're in that camp. Now. I'm very I'm very concerned.

Excuse me about the five year tips break even, which is I'm not sure where it's trading today, but it's been trading very low. And if you subtract our thirty basis points to translate between CPI inflation and pc inflation, it says that markets are only expecting about one percent or maybe one point one percent inflation over the next five years, and we're supposed to hit two percent inflation.

So I think we can afford to be kind of duvish here and get those inflation expectations up and hopefully hit our inflation target over the next five years. Well, again a question about what you can accomplish. Do you think you actually can move inflation expectations. Given that you had rates at zero for seven years and inflation couldn't hit two percent, Well, uh, we have to try while we can, and while we've got the what we're in

the position to do so. I definitely think inflation expectations will move up if we if we uh, player cards right here. How long do you think we need to be in a rate cutting cycle as long as the trade wars are on? You know, I think the trade wars have been priced into markets, uh, in a way

that they weren't earlier. I think as of May or April May time frame this year, markets were kind of putting, you know, making up numbers, but like probability on the idea that there would be a deal with China was just around the corner, just two weeks away, something like that. Now I think that it's shifted the other way, where Wall Street is putting probably a no deal anytime soon, the kind of the notion that that maybe the Chinese will just wait for the election and see if they

can get a new president to negotiate with. So I think the all of that's now been priced in and so there's probably no more kind of downside to that at least. All right, Jim Bullard, St. Louis Fed President, thank you for joining us on Bloomberg Television and radio work. All right, Thanks a lot, Mike, we'll send it back to you in New York. That was Bloomberg's Michael McKee

speaking with St. Louis Fed President James Bullard. We're gonna be hearing right now from Dallas Fed President Robert Kaplan. He is in Jackson Hole at the Kansas City FEDS Annual Symposey. I'm sitting down with Bloomberg's very own Michael McKee. Mike, thank you very much, and welcome to all of our viewers and listeners on Bloomberg Television and radio worldwide. We are with Robert Kaplan, the Dallas Fed President. Thanks for

joining us again here on Bloomberg. A lot of people yesterday you took the comments of the Fed presidents who were interviewed as a sort of hawkish rebellion. But there are doves out there as well. And since you got here, we've been basically telling people you're sympathetic to the rate cut cause yeah, and you know, the disagreement within within the Fed, I think is much more about how to

manage the risks. And the way I see the US economy is the U S consumers strong, and as long as the US consumers stay strong, we're not going to have a downturn or severe downturn. We're going to have solid growth. The issue is manufacturing. This week, global growth is decelerating, and if those intensify, that's going to seep into the rest of the economy. The consumer will be

the last thing to go. H. And what what I'm concerned about is if those negatives intensify, you could have a negative jobs report UH in the next X number of months, and then you're gonna see weakness in the consumer. And if we wait to see that, I think we've waited too long. So I'm very open minded and constructive that we may need to make a policy adjustment here in the next X number of months. UH. And but I'm keeping an open mind, and I haven't made a

decision yet, and I'll decide before the September meeting. How big a policy adjustment in the long run do you think we need? There was J Polla his July thirty first Press convert saying mid course correction and yet Wall Street pricing in right now, beginning of a red cut cycle. Yeah, so I've been I've been very open about saying unless I see meaningful further weakness, I view the the adjustments

needed as tactical. They should be limited, restrain, modest. Uh. And I don't see this is the beginning of a rate cunning cycle. But we may need to make some adjustment. And for me, the reality check on that is when I look at the Fed Funds rate, I don't I don't worry as much about the debate between once and tens twos intends and how that's moving. I look at the Fed Funds rate versus the entire treasury curve, and the whole treasury curve has moved down in the last

three or four months. The Fed Funds rate is now above every rate along the treasury curve, including the thirty year. That for me is a reality check that says, maybe policy is tighter than I might have thought three or four months ago, and we may need to make an adjustment. And I think that's a good, uh, good second check for me, which I am cognizant enough so they December a rate increase might have been a mistake, you know.

Um uh, my own view is if you ask me on a what my forecast was for the economy, I would have said two and a half percent growth, and if I was wrong, the risks were to the upside. So in April I would have said I had my concerns, but no, I think policy setting is about right. We then had the China issue. We then had the threat against Mexico, which might have been more significant to number

of businesses I talked to. We've had recent intensification, and now in light of these events since May one, now I think, uh, there's a there's an argument in improving argument, increasing argument that maybe the policy setting needs to be adjusted, but it's as a result of other policies away from monetary policy. Why was the Mexico threat worse than the

China threat? So it's interesting the China threat clearly affected businesses here if you had a market you sold to China, like agricultural, or if you had logistics and supply chains that Mexico is central the so many companies in this

country in terms of logistics and supply chains. When that threat occurred, even though we had a trade agreement not ratified, but a trade agreement that really for the businesses I talked to, Even though it didn't actually happen, it was so significant to their business that after that, most of them I talked to tell me they've now internalized that trade uncertainty is sort of a fact of life now.

I think before that threat, they had thought, if we can resolve some of these agreements, maybe we'll settle down. I think the Mexico threat help business internalize. I think trade uncertainty is gonna be with us. And what I saw businesses do is become more cautious in terms of capex expansion plans. And I think that caution is still here today. Well that's not a cost of credit issue, nor is it a demand issue. So tell me how monetary policy, you guys making a rate cut is going

to help any of this. Yeah, So to your to that point, if I talk to businesses today, every one of them says to me, probably without exception, listen, availability and cost the capital is not my problem. You know. Monetary policy, you guys, are not my problem. My problem is trade uncertainty and other issues related to that that are having challenging impacts on my business. Uh, here's the issue.

If you look out over the horizon, and the job of a central banker is not to look at what the situation is today, is to look at what it's going to be over the next X number of months. If the policy setting is too tight, um then eventually you're going to see credit tighten. You'll see that, ultimately, I believe, tighten financial conditions, which will impact the economy.

I think my job is to look ahead and balance these risks and to try to make risk management decisions so that the policy setting is more appropriate, because I know if it's too tight, it may seem innocuous for a number of months, but eventually I think that will lead my own years that will lead to a tightening and financial conditions down the road, even though we don't see attorny. But are you a hammer in search of

a nail here? In this instant people expect the FED rate cut to solve the economy's problems, and it's not going to do that. So quite the contrary, And you've probably heard me say, I've been very vocal in saying the full crimer the center of gravity and US economic policy.

They do not monetary policy. Uh, it's trade uncertainty, it's probably immigration policy to some extent, it's policies that relate to improve skill training, UH, infrastructure spending, but particularly for the insuring, trade policy and immigration policy, policies that could help us grow the workforce. That's the center of gravity and US economic policy. It's not that monetary policy doesn't have a key role to play, but it's not the

full crimb of economic policy. And I regularly call that out because no, I don't believe monetary policy is causing if we have a slowdown, I don't think it's causing the slowdown. And if we have a severe slowdown, I don't think monetary policy See isn't going to be enough to arrest it either, But it still has a key role to play, and so we've got to make good decisions about it to play that key role. You probably know more about Wall Street than anybody else. I'm a

fed given your background at Goldban Sacks. UH. Do you worry that by cutting rates you're going to just encourage financial shall we say, misallocations? So, um, you always worry, And this is one of the reasons why I've said, even though I'm open to an adjustment, UH, either in September over the next few meetings, I'd prefer not to have to make any adjustment because if you lower the Fed Funds rate, it reduced save, it reduce the rate

for savers, it encourages risk taking. UM. Now, I will also acknowledge if you look ahole along the whole treasury curve to some extent, that horse has already left the bar. And I mean for investors, Uh, your fixed income alternatives have all declines substantially. The only rate that hasn't declined with it is the Fed Funds rate. So I think, uh, to some extent, the incentive to increase debt or leverage, which I've called out, that's already there because the treasury

curve is where most businesses borrow. A number of them borrow on floating rate basis, but but a lot of them to fund share repurchase or mergers use the treasury curve.

So I'm balancing that and I'm concerned about it. But I think most importantly, my my foremost in my mind right now is can we take steps that will help moderate this sloaning we're seeing, or help with the global slowing which might transmit to the United States and manufacturing weakness that that that appears could seep into the rest of the economy. That's those are the issues I'm trying to balance. But can't you be seen as if you're trying to bring FED funds down to the treasury curve

being led around by Wall Street. I'm not trying to bring it down to the treasury curve, but I think the treasury curve being low is a signal that maybe a monetary policy is two tight. So no, we're not going to be led around by Wall Street. I think the curve is far more driven, not by monetary policy. Again, but if I watched the curve extremely carefully, been watching markets carefully for my whole adult life, the big moves in the treasure curve haven't been, to my eye, haven't

been response to monetary policy. Action or rhetoric have been in response to trade uncertainty and other economic policies away from monetary policy. Last question, do you think we can talk ourselves into recession? Well? Yes, Psychology is a critical part of the economy, and I noticed that the August

consumer sentiment numbers were a little bit weaker. And I think if you have continued uncertainty, um, if you have intensification of trade uncertainty or trade and not just with China, I mean more broadly with other countries globally uh visa the United States. Consumers pay attention to that and and this chain of events I mentioned earlier about weakness and manufacturing seeping to other parts of the economy eventually affecting

the jobs market. Consumers are watching that chain of events too, and a very cognizant of in their own industry. And so sure, yet the psychology con turned negative and affect the economy, and we have to be cognizant of that. Robert Caplan, Dallas FED, thank you very much for joining us. Thank this morning. We'll send it back to you in New York. That was Bloomberg's Michael McKee speaking with Dallas FED President Robert Kaplan. We're gonna be hearing from Cleveland

FED President Laretta Muster in just a few moments. She's in Jackson Hole, Wyoming for the Kansas City FEDS Annual Symposium. She's sitting down with Michael McKee a lot of questions about what the FED can do to counter the uncertainty and markets, as well as what they are willing to do. So let us head over now to Bloomberg's very own Michael McKee, Thank you very much, and we'd like to welcome Lorettamester, the President of the Federal Reserve Bank of Cleveland,

to Bloomberg Television and Radio worldwide. Good morning to you, and thank you for coming out on a chilly morning here in the mountains of Wyoming. Uh. You have said that if the economy the data come in about as they have been, you don't necessarily see a need for

another rate cut in September. But monetary policy works with long and variable lags, as we know, and now it appears with these additional tariffs from China coming on this morning, the trade wars aren't going to be going away anytime soon. So when you look at the economy six eight months from now, are you still confident that you don't need accommodation. Well, that's the key question, right is is we know trade policy uncertainty has been weighing on the outlook. You know,

we talked to our business contacts. We've seen already business spending the weekend because of that tariff situation and the uncertainty around the tariff situation. And as this continues, we have to keep monitoring whether firms are going to continue to react the way they have and with caution whether it will begin to spill over in their hiring plans as well as they're spending plans, and whether that will then spill over to the consumer sector. And so I'm

very focused on those risks to the outlook. So again, you do have to be forward looking, and that's a key risk, a downside risk of the outlook going forward, and I'm very attuned to that. And you know, when I talk to my contact, that's one of the key things that I'm asking, Are you changing investment plans? Are you continue on your hiring plans? Wages are moving up,

which is a good thing. Consumers have been very robust in terms of their spending over this period of uncertainty, and that's the kind of thing that we need to keep watching. But again, I want to take the time that we have until the next steff I'm seeing in

and beyond to continue with the assessings. And if it does turn out that those risks are manifesting themselves in a wider um across the wider part of the economy and things are stepping down, then right, that's an argument for why we might need to recalivate our policy downward because you by doing nothing in that scenario, you in a sense or tightening policy. And so that's the key question again. I think it's very important and we watch

the data. Um if we were ever data dependent before, we have to be uber data dependant now and really be reacting to what's happening in the economy, not just as changes in sentiment, because uncertainty causes people to be sort of like, oh, I'm a little bit concerned about what's going forward, but are they actually making decisions based on that uncertainty And in that case then we might

have to move things. What a business leaders telling you do they say things have gotten worse than they might be seeing a step down because of the impact of what's going on. So every business contact I talked to across a wad Strath always mentioned trade policy, uncertainty, UM and the teariffs as being something that there is a concern of theirs. The majority of the firms that I talked to still say they're on their plan for investment

for the year. They're certainly still seeing tight labor markets. They're still trying to hire um and they're increasing wages to retain and to attract workers. The larger firms that have more multinational connections are affected by both the slow down and global growth and the trade policy and certain and they're reassessing their plans. So again it's sort of

a mixed picture. But I would say that our firms, at least in the fourth district, and we have you know, exposure to manufacturing entiree, have been more robust and been able to actually respond pretty well to this uncertainty. They're very concerned about it. And you know, we have the next potential leg here of the expansion of the terrorists

to the consumer side. I think that could be a catalyst for for changes and plans, but we haven't seen it yet, and I'd like to wait until we actually get some more information on how firms are reacting to that before responding in advance to it. Suppose you have to respond, Suppose you cut rates. This isn't a demand issue or a cost of credit issue. So how does monetary policy help. Well, it would be a demand issue at that point if firms stopped spending, right and then

they stop hiring. You know, we're weak in their hiring and we see consumers pulling back because of the caution that is a demand issue, and in that case, lower interest rates as the equilibrium rate and the economy goes down as the appropriate thing to do. But again, we need to be looking at that hard data, looking at

the information we gained from our business context. I think this information that we're gaining from Main Street, when we're going on and talking to businesses and talking to consumers and talking to labor market participants is going to be very important to us as we evaluate how we go forward here. When you look at what's happened on global Wall Street and the pricing in of many rate cuts going forward, do you worry that if too much burden is being placed on you and the FED to save

the economy. So there's no doubt that bond investors have a more pessimistic view of the U S economy than perhaps some of the economists students and I do UM and have to take a signal from that. We can't just ignore what's happening there. Um. But there's also other reasons that those bond yields are down. One is that the US is a safe haven flow and that relatively speaking, our economy is doing better than other places and in the global economy. UM. I think the you know, the FED.

My my main focus always when I'm sending policy is where are we where is the economy relative to our dual mandate goals. They're the beacons that we try to strive for, and we set our policy in order to hit those goals. And that's how we can do monetary policy, I think in the best way, systematically focusing on those goals, looking at the data, doing the best evaluation we kind of where the economy is going, and making sure that our monetary policy is appropriate for hitting those goals and

maintaining those goals. There's other policies that can be brought to bear um in the economy. We know, work force development issues are something very relevant in the fourth district of course, you know, making sure that people have the skill sets to actually take the jobs that are available

and to train for the future jobs. So there's other policies that can be you know, brought to bear to make sure that in the long run, our economy is healthy and that everyone can participate in a healthy economy. But again, monetary policy, dual mandate goals, that's got to be our focus. You work for a long time concerned that inflation would break out as the economy expanded, have you given up on that idea? So I think inflation

actually is in a pretty good spot. We're clearly, you know, below our mandate, but you know, we've been pretty stable on the price front. And new research actually coming out of the Cleveland fin which looked at a cyclical fact parts of the inflation prices, and the cyclical part actually shows that as a labor markets have gotten tighter, those

cyclical prices have been moving up. So I'm more confident that we're going to see this gradual increase of inflation back to our goal um because it does seem to be behaving the way we do. We may have to wait a little longer because there is a large part of inflation that is real a cycle well doesn't move with the labor market because of other factors that affect prices. So again, I think patient is called for. I'm not that concerned that we've been below target for quite a while.

I think there's ways to explain that in terms of how deep the recession wasn't going forward, and I think inflation is pretty much moving up back along path well. As one of the bigger inflation hawks on the open market committee. What do you think of the idea of letting the economy run a little hot and asymmetric higher inflation rate for a while. There are various strategies to do that, but it all comes down to letting inflation run above your target, right. So I don't character myself

characterize myself as a hawk. I'm trying to always balance our dual mandate goals in terms of price stability and full employment, and trying to calorate policy to hit those in a balanced way. Um So again, I do think that it's important that we always focus on those goals and take a balanced approach when we approach those. I always want to strive. If I had to pick an animal to be an owl, wh hopefully the question here is always whether you're a hawkr Adef. So I'm the

ornithologist here trying to figure these things out. Do you worry though, that people are getting too used to the idea that there is no inflation in the economy? Obviously the FED keeps a very close eye on inflation expectations both consumers and markets. Have you lost control of inflation? So I don't believe we have. I think in the

long run, inflation is a monetary phenomenon. I do think that some of the dynamics and inflation have changed, and in fact that Cleveland Fed has established a Center for Inflation research precisely because there's a lot about the dynamics that we still need to know about. I'm confident that, you know, inflation will move back up to target, and I'm confident that the Federal Reserve is going to set our policy rate to try to hit those dual mandate

goals and maintain them. Do you leave the policy rate as low as it is or even lower for as far as the eye can see. So, you know, there's a lot of research that's gone into what we're the actual interests ad in the economy, the equaliment interest rate in the economy is, and there is real good reasons to think that it's lower now than it was in

the past. Demographic reasons, uh, demand for safe haven assets or safe assets, and so there's a reason to think that interest rates are going to be lower going forward than they were in the past. And so, yes, interest rates likely will be lower than in the past. And then the question is, well, how do you manage monetary policy around then That's part of what the Framework Study of the FED is all about that we've been doing

for the last year or so. Really is okay if we're in a low interest rate environment, what's the best way for the FED to actually set policy to hit our domandate goals? And do you have an answer yet?

I think there's certain things you can do. I mean, I think you know, when you think about the inflation UH rate, and you know the conversation we've been having about you know, how we hit the goal where we go, you know, just thinking about it in terms of instead of a point estimate like two percent, maybe think about it as a range, not necessarily making up for past d v A ations, but thinking about it in terms of a range, and that may actually be a better

way to communicate where we are relative to our goal and going forward, given the precision with which right the measurements are, and how we can hit that and maintain it over time. One of the questions that's come up is whether or not we can talk ourselves into recession. You have a lot of tweets coming out of Washington, you have negative comments coming out of companies with earning season, and of course you have Wall Street UH absent that would we be in trouble. We're at a very lengthy

recession recovery now. So it's an interesting thing that you bring that up because I've had a number of business contexts use that exact same thing. I think we're talking ourselves into a recession, and they're basing that on the fact that they look at their order book and they look at their loan demand, and they look at you know, depending on what sect that they're in, and they say, look, I look at things and I think, you know, we're about on trend. I think the growth is on trend.

And yet they turn on the television and they read what's happening in the financial markings. They're saying, wow, you know, people are really cautious. So there is this difference between perceptions and sentiment and the reality on the ground so far. But I do think that, you know, if firms do take into account, oh things are more you know, uncertain than I've seen in the past, that can have a

real impact on investment, spending, hiring, etcetera. Going forward. And that's a key rosk that we need to be a tuned to be going forward. Laretta Ester, thank you very much from the Cleveland Federal Reserve. Thanks for joining us, Thank you very much. How's Bloomberg Michael mckeeb sitting down with Cleveland Fed President Loretta Mester. We are now going to hear from Philadelphia Fed President Patrick Harker. He's in Jackson Hole, Wyoming for Kansas Cities Annual Kids at Kansas

City FEDS Annual SYMPOSI. I'm sitting down with Bloomberg's own Michael McKee, talking about some of these issues, the FEDS reaction function in light of trade tensions. Let's hid to Mike McKee. Thank you very much, and again welcome to all of our viewers and listeners on Bloomberg Television and radio worldwide. And thank you to Patrick Harker for joining us this morning on a chilly morning here, we're only a few minutes away from j Pal's speech and we

can't preempt him. But yesterday you said you'd be happy to leave rates where they are if the economy stays about where it is. But this morning we had further evidence from China that we may see the trade war extend for quite some time. Policy works with long and variable lags, as they always say, so when you look out eight months to a year, can you say you would be you would want to stay on hold, or do you need to act now to get ahead of something now? I think right now we are where we

need to be. That said, there are clearly these downside rest of the economy, and I think we would have to act as appropriate if those come to fruition or even look like they're coming to fruition. The biggest concern I have right now is when you talk to business leaders. Nobody I talked to says that the cost of capital is inhibiting business investment, and that has been the drag on the economy right now. Is business investment not the consumer?

The consumer has been the hero of the American economy. So if that's true, right the business investment is not being held back by the cost of capital, US reducing interest rates will have no effect. What's holding it back is uncertainty around policy, particularly trade policy. So is there anything for the FED to do at this moment? Are you feeling pressured to be the savior of the economy because you're the only game in town? So I think we have to act as appropriate when we see the

economy having a shock. I don't see that right now, So I don't think we need to act right now. Do you anticipate from what your business contacts are telling you that the economy is going to deteriorate or are they kind of on hold too? A lot of them are on hold. I mean perfectly reasonable. If you're sitting in a board right now, a corporate board, not to make a big bet until some of this uncertainty resolves itself.

It's an absolutely reasonable thing to do. What are they telling you about their economic outlook in the absence of trade wars? Would they be expanding? Yeah? What we hear is if the especially around manufacturing, right, if we had more certainty around manufacturing, particularly globally. I mean there are clear global risks, but those export lead economies like Germany

are facing large challenges right now because of this uncertainty. Yeah, if that resolved itself, I think people would be making those investments. There's enough demand in the economy. Look at the consumer. The American consumer continues to buy. Would the consumer be the last person though, to feel the change. If you're waiting for retail sales to fall off or you're gonna then get a signal that's too late now?

But why is the consumer buying? Because the job market continues to be strong, right, the labor markets continue to be strong, and so household incomes continue to be strong. Well, you've got to reaction function that has been based on the idea for decades of controlling inflation and keeping inflation down. Inflation has gone away as far as most people are concerned right now, and unemployment keeps going lower and lower. Do you need to change the way you look at

the economy now? I think look, inflation clearly is a conundrum. That is, we don't really understand why it's been low for so long and just but it's not necessarily the case. And we see this around the world that if you have a more accommodative monetary policy, you're going to suddenly

move inflation. That's not happened in other countries. And said, there's some underlying trends with the economy that are different today than before that we continue to try and understand in that situation where there's uncertainty, I don't think we should move precipitously in either direction. I think we should stay the course and see how things unfold. We do worry that Wall Street or Global Wall Street as it were,

might overreact to FED rate cuts and miss allocate capital. Yes, I mean one of the concerns as financial stability, that is, with rates going even lower, leverage rising, and that is a concern for the economy. Do you see it anywhere yet? A little bit in leverage lending, But it's something we need to keep her. It's only something I'm watching. I wouldn't say it's a situation that weren't any action at

this point. One of the things that came out of the minutes this week was the idea that the FED should be acting, at least some people on the committee think so. To try to bring inflation up interest rates though we're at zero for seven years didn't work. So how much validity does that argument have anymore? So again, I think we're there's some underlying transfer inflation, but if you look at the latest CPI print, it's moving in

the right direction. We are moving around two and we're close enough in my mind where I don't think we need to take action at this point. Well, as a FED continues, it's a review. One of the issues that's come up is do you let the economy run hut that inflation run above target for a while to make up how do you feel about that? So, yeah, average inflation targeting of some form. So that's an appealing idea

in theory. In practice it's a little difficult because you are asking a future committee to act in a way that the current committee wants it to act, and that's very difficult. But if you let that happen, do you worry that inflation could get out of control again? Or are you fairly sanguine about the prospects for prices? So at this point I don't see inflation running out of

control in most scenarios. Of course there are a few, but generally no, I don't see that as a risk right now, Well, then what is the FITS reaction function going to be? What are you gonna look at? So I can't speak to the FED. I can only speak for myself. And again I look at a strong labor market and rising wages, again slowly but rising wages. Look at inflation, and one of the things we continue to

factor in is the financial stability question. When you look at the labor market and you see slowing hiring um still above the replacement rate. But is that because companies can't find workers or because they're getting more caut Is I think a mix of it too. But what I hear more than they're getting cautious is they just can't find the people, and not just people of the skilled positions.

We often focus on those by just talking to a major homebuilder who said, I can't find people to carry bricks and sticks on the site, right, and so I'm limited in terms of how many homes I can build. So is this about as good as it gets that? I don't know. I mean, it's been surprising in a good way that we're bringing more people off the sidelines into the American economy. That's a good thing for the

person and for the American economy. And I think there may be a little bit more to run, probably not a lot more to run. So have you changed your economic outlook based on the trade wars, based on what's happening? Not yet. I mean, we we have predicted going back to trained growth to percent growth with the employment numbers coming down to about a hundred hundred and ten thousand a month. Now, we haven't changed that because the volatility in the policy itself, it's hard to predict and hard

to put into any model. Well, if you haven't changed your views, Uh, where do you think the proper setting for monetary policy is Several participants in the Open Market Committee deliberations have told me, you look at the FED funds rate above the Yeel curve, and that just tells you you're too tight. Now, I think we're about where we need to be in terms of I think we're

about neutral right now. Do you think that it is a problem that we're going to see slowing in funding in financial conditions, if uh, tightening of financial conditions, if the current settings stay, it's a risk, and it's a risk of monitoring, but right now I'm not forecasting that now. So you don't see the markets as disrupting at this point. Well, there's a lot of altill the market, for sure, and the people watching them that interrupting the path of the economy.

Now not at this point. I think the larger risk is this policy on certainty, particularly trade on certainty, and there's nothing you can do. But there's nothing we need to react as appropriate to that. But no, we can't. We don't drive that policy. Do you worry if you're trying to react that you're gonna be too late? Well, if I knew what it was and we could plan, but right now again, the volatility in the actual policy

is too great for me to predict. How hard is it for you to do your job on a daily basis given the tweeted criticism of the FED. And I don't mean in the room when you're making policy decisions, because every FED person will tell you it doesn't affect us. But you go out and you talk to your constituents, do you do you detect a change in attitude among

people these days? The main thing I hear when I'm out and about, and I was out and about in my district all summer meeting with people is the concern that FED independence is being threatened. I mean, everybody I talked to you said that FED, even though we're not perfect and we don't always make perfect decisions, that independence of the Federal Reserve is absolutely critical for the American economy. You're not hearing people come up to you and say, you guys are the bad guys. I don't hear much

of that now. In fact, all summer, I didn't hear any of that. How much of a threat do you think there is to the FED independence? Is this more of a media creation than anything else? No, I think we are a creature of Congress, and we are responsible to Congress, and and so Congress could change the laws. I don't think that's in the foreseeable future, but we have to recognize that Congress has the absolute right to

do that. But we need every day to earn the trust of the American people by acting on their behalf. The last question is the same question I put to all of your colleagues, and that is do you worry we can talk ourselves into recession? Yeah? I mean, I think the lack of animal spirits, you know, if that diminishes, that's real. I don't sense that that is widespread right now.

I think there are some concerns, particular manufacturing. Although our last manufacturing business outlooks survey out of Philadelphia was good. So while even across the board manufacturing looks like it's weakening, there are pockets where it's still strong. So you're optimistic about where we go from here. I think we're I'm cautiously optimistic, is the way I would say, Well, what does cautiously optimistic mean? How much of a threat do

you think is well? I think if again, particularly if it's policy uncertainty around trade, UH gets worse, we would have to act as appropriate. You keep using the same phrase that j Pile uses as zoos conferences and things like that. You mean cutting rates at that point, even if you think it doesn't work, Uh, well, yeah, because if it starts to affect the consumer. Right, So, on the business side, I don't think it had that channel

is not very strong. But if it starts to affect the consumer and consumer confidence, because the consumer is the economy, that would have a real impact. So if we could do something in a way that would restore confidence to the consumer and put a little bit more money in their pocket through refinancing or whatever, that would be a good thing. You think they would respond then to lower interest rates. People respond to refinancing their mortgages for sure.

Does there much of that left? It depends on where the rates are, right, all right, Pat Harker, thank you very much for the Philadelphia said thank you for joining us on Bloomberg Radio to Television this morning. We'll send it back to you. That's Bloomberg's Michael McKee speaking with Philotaph. You've fed President Patrick Harker. Thanks for listening to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio