Let's turn back to the economy. Of course, that is the story of the morning, and who better to talk about it with than Mike McKee. He is Bloomberg's chief International Economics and Policy correspondent.
So we just heard from Julie Sue.
Of course you have a great conversation with Austin Goldsby coming up. But you think about the details of what has been agreed to when it comes to the port's sixty two percent wage increase there, what does that mean for inflation?
Well, it's a good question, and we do have a maybe inflation coming back is a little more for a little more emphasis with the Fed. But generally, when you have a contract like this, what it means is you get it raised once a year, say January, which is when most people come in that get seasonally adjusted. So you have a one time rise in the inflation rate perhaps,
but then it doesn't keep going over the years. So while this is a significant contract increase for the workers on a year over year basis, it won't have a major impact. Each year. You'll ratchet up a little more
than you otherwise would. But it's also somewhere around eighty thousand workers who get covered under this contract, and we have one hundred and fifty five million people working in the country, so it probably won't have as much of an inflation impact as it could have if there were more unions that followed this as a pattern bargain.
I'm going to be the wet blanket.
I think past November a little bit here, because of course you have another FED meeting. Of course, those fifty basis point rate cut bets getting wiped out of the market at the moment, but you still have one hundred and sixty basis points worth of rate cuts through the end of next year. At the end of the day, how muney might the picture be an employment just even through the end of this year, given what we've seen with the hurricane, given contract negotiations not just at the.
Ports, well, not quite as muddy as it would have been if the port strike continued. We have Boeings still out on strike. If that's not settled by the time, well by next week, I guess is when we go into the survey week, then will have to subtract thirty eight thousand or from whatever the total is. And then we don't know yet what the hurricane impact is going
to be. But we know it's going to be larger than usual, and so the BLS will put a note in their report for October their best estimate of what the impact is, so we can subtract that out. We'll see how much of an impact it has. And the FED will look through both of those things because they
know that they're temporary. And what ends up happening with natural disasters is you end up with more spending because of the rebuilding, and probably there will be a lot of jobs that are lost but then recreated after this over a period of time.
That's a really interesting point. So in a way, I mean there is an economic benefit here to that rebuilding effort.
Yeah, it's always tough to be an economist and say that because obviously this is a major tragedy for the people who are involved. It's a horrible, horrible thing. But history show is that because of the money that's spent to rebuild, you end up with a little bit of a boost to GDP.
A boost to GDP, but of course a messier economic report. When it comes to next month's jobs report, it sounds like.
A little bit messier, but less so now that the port strike is settled. It comes four days before the election, if you have a report like this, I know one campaign that would be very happy if they got this November first.
You know, there's also inflation next week. If anyone's paying attention.
I think they are. I would imagine that they are paying attention to inflation. And of course next month's jobs report, which is the final jobs report before the election, which of course the Federal Reserve will be paying close attention to.
And I know that coming up.
You have a great conversation right now.
Yes, we're going to turn our attention now to the Federal Reserve and Chicago Fed President Austin Goulsby, who joins us now to talk about the numbers that we've just gotten and what it may mean for him and what it may mean for the Fed. Good morning, Austin, Thank you for being with us, and you knowing good morning to you know where I got to go first. You're the one that said we need to cut significantly in the future in order to keep the unemployment rate from rising.
Do you still feel that way after the unemployment rate fell and if it was rounded down by two hundreds of a percentage, but it would have been four percent.
Yeah.
Look, my statement was about over the next year and what's the long arc This job's number today and the whole report is a superb report. You really couldn't ask realistically for a better report for the economy. Coupled with the finding out that the port strike is not going to be an extended matter, and then that at least for months this is not going to be an issue, those are two pieces of very good news for the economy.
I still think as a central bank you don't want to react too much to one month's report, but the revisions of the previous months upward in jobs growth and the unemployment rate coming down. If we get more reports like this, I'm going to feel a lot more confident that we are in fact settling in at full employment.
I know this has only been out now for a little more than an hour. Has your staff where you looked into it enough to try to figure out why the report was so good?
Well, I mean you're getting a lot of.
The estimates of GDP growth still continuing to suggest that growth remains robust. So I think the first thing about job growth is that it's tied to how the economy is doing.
So if you.
Get strong reports, that's likely to be correlated with strong GDP growth.
As I say, we've.
Got some cross currents and we need to take the longer arc we've had. We had previous to this one two disappointing numbers. Now we have a superb number and we need to keep monitoring it. If we get more reports like this, as I say, I think we should have more confidence that we are in fact settling in at the landing spot that we want from a dual mandate perspective. Inflation has been coming in right around two percent.
If the unemployment rate is going to settle down, something just over for you would love to freeze, frame that and put the picture on the wall.
Does this perhaps change the emphasis a little bit for the Open Market Committee? Jay Powell saying at his last news conference that the risks to inflation and to employment are about balanced, but we're more worried about employment. Do you have to add more weight on the inflation side now.
I don't know.
I agreed absolutely with what Chair Pell said the press conference that we went through a period where getting inflation down from its extreme highs was the order of the day, that was really almost the sole focus. And now when we had two disappointing jobs numbers. It made clear we're in a balanced environment with balance risks. That we got a superb number I'm extremely happy with. But let's not lose sight of what's the longer thread over the next year.
If you look at the SEPs and the dot plot, a large majority of the Committee feels that conditions are going to improve on inflation, that we're going to keep getting closer to two percent target, that the unemployment rate is going to stabilize at full employment, and that rates are going to come down a lot over the next year twelve days, eighteen months, and that seems quite appropriate.
You know, if you are in a good spot on the dual mandate, that inflation and unemployment are where you want them, you just got to be careful keeping the rates as restrictive as they are, so far above where committee members think they need to settle.
If you're not careful.
About that, you will lose the freeze frame that you want on either inflation or on employment. And if you look at expectations, there are some signs that inflation might undershoot the two percent target, and we want to be mindful of that too.
Well, let me ask you if you're looking at inflation that might undershoot the target. Are you you think you're too restrictive? But yet we're seeing growth of three point one percent according to the now casters, and we're seeing a two hundred and fifty four thousand jobs print. Are we really that restrictive?
Well, you have cross currents, That's what I'm trying to emphasize. There are pieces of strong data and then there are pieces of weakness. And the if you just look at the dot blots, where does the committee feel that it will be appropriate for rates to settle.
It's a long way below where it is now.
If you think of that as as what our star neutral rates would be. So that is the sense in which, over a long period we need to get what's the through line, and we need to try to maintain conditions very much like what they are now. So if we get more reports where GDP is strong and the unemployment rate is staying in the four point one range or even going down, then we i have a lot more confidence that we're hitting the target that we want.
Well, do you think the neutral rate is higher? Now? Where would you put it? Given the strength of the economy that we see.
It's hard to say exactly what it is. I think it is definitely higher in my mind than the zero where we were for a lot of years before COVID. If you just kind of look at those dot plots the settling down range, the bulk of it looks to be kind of in the two and a half to three and a half sort of range. We're still a
ways off from having to sort that out. I guess I would say, if you're at five and people think you're going to end up between two and a half and three and a half, you have both time and runway to figure out where the settling point is.
Well.
The narrative coming into today was that companies weren't firing people, but they weren't hiring people either, and obviously that was not correct in the last month. What are you hearing from companies in your district about their employment plans?
A lot of the we have thirty thirty five different business roundtables throughout the year where we go and contact executives, community leaders, community development, financial institutions, and we ask what is the experience on the ground, and we have a lot of business contacts. Mostly what I have heard has been of the more of the same, steady, not going down,
but not really accelerating. So it'll be interesting to see as we come through to the end of the year here if the GDP now casts are correct that growth is going to be higher than trend, let's call it higher than expected. Will we start to see that in the reflected in the comments for the Beage book and others.
The one thing is we're more intensive in manufacturing here in the Midwest, and there is, as you know, a bit of a shift back of consumer spending towards services and away from physical goods as we fully come out of the pandemic, So that weighs down economic activity a little bit in the manufacturing sectors. But you've mostly been hearing steady as she goes, not reacceleration and not real drop off.
Well, then if it were up to you, I know you're not a voter this year, you will be next year. Does this report change the idea of how much the Fed might want to cut in November?
And is it.
Possible we get another report that's good even if it's not this good that you just stay on hold.
You know, I don't like pre committing before we've had the discussion meetings for what the rate should be over the longer run, which is what a central bank. The hardest thing that central bank has to do is get the timing exactly right when there are moments of transition.
So this isn't it easy process. There's definitely an art to it.
If we get more reports like this, and I'm going to have more confidence that we are settling in at a full employment, low inflation kind of a baseline. If you take the broad job market, I don't want us to overreact to one month's report. We've seen if you take vacancies to unemployment ratios, if you take the hiring rate, the quit rate, a series of labor market indicators, they suggest the job market has been cooling, but the level
is is quite favorable. And if we can settle in at this level and things not get worse where that would be a very very comfortable outcome.
Well, right now, we're looking at, as you mentioned, somewhere between one hundred and fifty two hundred basis points of additional reduction in the Fed funds rate by the end of next year. Do you think that if we settle in as you say, that would be significantly less.
If we have improving jobs numbers and GDP growth of three percent from now to whatever we would I think the first thing we'd start doing is say, is the rapid productivity growth that we've observed for the last year and a half, are we in a new period like what we saw in the mid nineties. And if so, we're going to have to recalibrate what is expected potential growth.
Well, if we get yeah.
You want more on that, well, I was going to say, what the ultimate our star neutral rate that we're going to settle down at depends a lot on what you think that potential growth rate is. So if productivity growth keeps booming like this, that does.
Imply a faster growth rate.
I think that does imply, just in the economics, that there would be a higher our Star. But in a way that would be the glorious version. It's only because the economy could handle it.
All right, let me ask you one last question here. Did we hit a soft landing?
Well, you know, the problem with the analogy of the soft landing is that it cannotes stopping. The economy never stops, so there's never there's never a mission accomplished. We hit what I called the golden path already in twenty twenty three, which was we got in inflation down substantially, almost as much as it has ever fallen in a single year
without having recession. That's basically never been done before. If now what we're what we're going to be able to do, If we could keep unemployment in this between four and four and a half percent with inflation of hovering around the two percent target, that's exactly what the intention has been all along for the FED, and everybody should be happy if we can pull.
That off, all right, thanks to Austin Goolsby, he's the president of the Federal Reserve Bank of Chicago. We'll see on November seventh what the FED does next. Next employment report is November first. This is Bloomberg