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We'd like to welcome Beth Havock to Bloomberg Television and Radio worldwide. You just finished a panel. You made an address basically suggesting that risks are two sided. Now you've been on the side of inflation being the biggest concern, But then we got this jobs report today that sort of makes the case for some of the doves on the committee. What did you make of it?
Well, I try not to make too much of anyone individual number, and certainly this number was a disappointment, mostly because it means that there are more Americans who aren't working. That's what disappointed me in this report. We've seen the economy overall has been pretty healthy.
It's been brightening. The outlook has been positive.
When I'm out in the district talking with businesses, I hear them talking about their optimism and that they're looking to make more investments in their businesses, and they think demand is going to be reasonably robust. But we've had a labor market that I would characterize as stabilizing. It's been in that four four point four range from an unemployment rate perspective. Obviously, the headline job's number has been
the piece that's been a little bit weaker. When I talked to you last it was August, which.
Was the first of those reports where.
We saw more softening in the labor market. But it does look like it's been stabilizing, and I think part of that is due to the accommodation that we put into the economy towards the end of last year, and now we have a lot of tailwinds I think looking ahead in terms of the economy, in terms of growth. On the other side of our mandate, inflation has been above our target for five years. We've made virtually no
progress over the past two years. We're still right around three percent on inflation, and so we need to make sure that we're maintaining a balance of policy that's going to help bring inflation back down to target while still supporting the labor market. So when I look at things broadly, to me, it seems like there are two sided risks to rates.
Well, there's a question on Wall Street that came out of the last minutes where it was suggested that some members of the Open Market Committee wanted to put the two sided risks into the statement. At this point, is monetary policy tight enough to address the inflation side.
That's a great question. I think we're right around neutral.
You know, there are a lot of different estimates of what that neutral rate is. To me, when I see the economy continuing to perform reasonably well, I take confidence that we're probably not being overly restrictive. When I talk to business leaders, they're still willing to make investments, they're
taking out loans. The banks that I've talked to in the district see that their loan growth is improving, and so all of that says to me that we are around that neutral level, and that we should stay at least around neutral to help make sure we're putting the right amount of pressure and bring inflation back down to target.
So we basically can look at the next meeting as kind of a wash. It's too early to make any decisions based on what's going on with the war, and as far as you're concerned, you don't need any more accommodation right now.
Yeah.
I'm just one person, but as I see it, I think we could be on whole for quite some time.
As a voter, an important person, we're not going to do I think all nineteen of us, so one of the things that's going to happen over the next few months is a new chair is going to come in. A lot of people talking about Kevin worsh he's got a lower interest rates, but one guy can't do it himself. It's, as you say, nineteen people on the committee. So how do you think that plays out with a new chair you know, who's not Jay Powell anymore.
Well, I mean there's been transitions in the chair of the Committee since the since the body was founded in nineteen thirteen, and so there have been a number of evolutions, and I think you saw the transition from Greenspan to Bernaki, to Yellen to Powell, and I think this will be another transition and the Committee will adapt, and I'm excited to work with the new chair. I think that whoever walks into that role, the chair seat is a particularly
influential seat. They historically have tried to bring the committee together and get a perspective on where people are. And I have every confidence that Kevin, if he assumes the job, is going to do his absolute best for the American public, like all the rest of the eighteen of us do around that table.
Well, he's wanted to make some changes, and one of them is a smaller balance sheet. This is kind of your area of going back to your days at Golden Sacks. What do you think of that idea.
I think it's a discussion that we should have.
I think there are lots of things that we've done for a long time, and one of the things I love about being on the committee and being part of the system is that we have really rigorous, really deep debates about what is the right thing to do, what's the best thing that we can do to support the economy, And so I think it's a fair conversation to say, should we have a balance sheet as large as as it's been, or should we look at reducing it? What
are the pros and cons? What are the ramifications. Typically, we don't do things very rapidly. We take our time and we make sure that we're thoughtful. The magnitude of the decisions that we're making are significantly greater than what I did in my previous life, So it's appropriate that we move a lot more slowly. But I'm excited to have these conversations.
You know.
One of the other things he's talked about is our communication strategy. Do we have the right communication strategy. Should we be using words in our statements?
Are fewer? Words are? The press conference is something.
So I think there'll be a new leader coming in, Like in any organization that has a new leader, I'm sure we'll bring fresh ideas, fresh perspectives, and it'll spark a bunch of really good discussions.
Well from your old job perspective of looking at this whole system of the balance sheet and everything that's developed over the years since you went to interest on reserves, would it be very very hard to change again given the infrastructure that's arisen around this.
So I think when we talk about reducing the balance sheet, it's really about are we going to be in an ample reserves regime or a scarce reserve regime? I think is really what the question is around. And obviously the details are going to matter on any particular proposal. But in order to maintain good rate control, if the banks demand a certain amount of reserves, we have to supply those reserves. Right now, we're doing that by holding treasuries
on our balance sheet. If we move to a scarce reserve regime, we would do that by engaging in open market operations, and so there'd be rep rather than treasuries. Net, the size of the balance sheet is still the same, it's just the form of.
Those assets that's different.
The duration profile, the risk profile is slightly different depending on which format you have, And so I think it's a reasonable question to say, is it better to be in treasuries? Would we rather be in repos that's a discussion that we can have. Away from that, the banks are going to demand what they want from a reserve perspective.
A lot of that is driven by our liquidity regulations, by their payment flows, and by just their willingness and their desire to have safe assets on their balance sheet. And so there are a number of factors at play that are going to drive that size of what they want those reserves to be. But the form in which we're supplying them could change.
Let me go back to the making of monetary policy and ask you about when you go around the Cleveland district, what are you hearing from companies about their plans. We were told for a long time by all kinds of feed officials and companies are saying, we're sitting on our hands because we're waiting to see what's going to happen. Has that changed?
At all. That's changed.
Companies are no longer sitting on their hands. I think they recognized somewhere around last fall that we were living in a world of uncertainty and that was not going to change and they had to keep operating their businesses. So when I was out in Akron a few weeks ago, we were talking with some business leaders and they were talking about trying to go out and hire, you know, saying if they could find ten workers, it hire ten workers because they're seeing the demand and they want to
be able to meet that. What I hear most often in the district is that it's hard to find skilled labors and tradesmen and that's been a real barrier to growth for a number of the companies in the fourth district.
If they are considering raising prices, are we going to see more of that? We did see a big jump in goods prices in the last PPI.
Yeah, it's you know, the pricing pressures have been reasonably consistent. Because we talked about we've been closer to three percent than our objective of two percent.
It's coming from a variety of sectors.
You know. Some of it is driven by energy costs, some of it is driven by insurance costs.
I hear that very regularly when I'm out.
In the district with businesses, that those two pricing pressures are really significant. You know, talking to a grocery a grocer, they were talking about how their energy costs have been really elevated and they have to factor in how much of that do they want to put into the food costs that they're selling things for. And so businesses are
continuing to really deal with these pricing pressures. One of the things if you look at the data is you do see PPI significantly higher than CPI, right, so the producer prices are going up a lot more than the prices to consumers, which means that businesses are buffering that that's eating into their margins. And one of the questions that we continue to ask businesses is how long can that persist? At what point will you need to pass
on those pricing pressures. Right now, they've been nervous to price on more because they're worried about the demand outlook and they don't feel that they necessarily have all the ability to price it on without impacting demand. But that's something that we'll be giving a close eye on what.
Are you discerning from people in your district, both in the executive suite and then regular people about the war and the price rises which is going to be gasoline for most people in the short run, because it could have an effect on consumer sentiment. Now we know they're not as related as they used to be. Consumer sentiment and consume we're spending. But do you worry that this could lead us to something like stagflation?
You know, we run in Cleveland, the Center for Inflation Research, and our team has done a lot of work around what the impact of higher energy prices is on consumers, and there is evidence to show that it can impact consumer's outlook, their spending, and their willingness to invest. I think the economy right now is in a reasonably good place, but obviously all these developments, the macro developments, bear watching. You know, the impact of oil prices, it's too soon
to say. What I'm going to be looking for is how.
Big and for how long?
So the magnitude and persistence of any potential increase in oil prices, what's that going to mean? How long is that going to persist? And how will that flow through? It could be that it puts more persistent inflationary pressure there, but it also could mean that there's a drop off in demand because of it as well, and so there really are two sided risks that are worth watching.
Beth Hammick, thank you very much for joining us. The President of the Federal Reserve Bank of Cleveland,