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As we bring you a special conversation now thanks to our colleague Michael McKee, who's joining us from world headquarters in New York, and a special conversation with Cleveland Federal Reserve Bank President Loretta Mester. Michael, take it away.
Well, thank you very much, and good afternoon to everybody watching us and listening to us on Bloomberg television and radio around the world. And I don't know what you say to people on the internet who are watching, listening, whatever, but thank you very much for joining us. This is sort of your farewell tour. You're retiring at the end of the month, so let me ask you. You're not
you've been a voter this year to this point. By December, do you think we will see one rate cut, more rate cuts, or no rate cuts.
Well, thanks for inviting me to be here. I mean, we all put in our projections at this that was held this week, and the medium projection in the SEP is pretty close to my own projection for the economy. We've made pretty good progress on inflation over the last two years. It's still too high the most recent data that we received. In fact, we got the CPI report on the second day of the meeting, and it was it was a great gift for my last FOMC meaning
to get that report. The good news there, but it still means that there's work to do on inflation to gain confidence that it is on that downward trajectory to two percent. And you know, the unemployment rate has ticked up a little bit over the last couple of months. Certainly, though if you look overall, the labor market conditions remain
healthy and that's a great thing too. So I think monetary policy right now is well positioned really to ensure that inflation does move back down towards two percent over time and that labor market conditions remain healthy. And that's a good position to be in. And if you look at the SEPs overall, what you see is the path of the modal path of the SEP across participates as
at rates will be coming down. The dot plot shows that there is weight on one zero two, But it'll really depend on how the economy actually evolves, and I think that's going to be the work of the committee going forward assess incoming information about the economy. Does it
change your outlook? Is it consistent with the modal outlook, and as inflation comes down, and as inflation expectations short run a year ahead comes down, then it'll be appropriate to reduce that fit funds rate and remove some of the restrictiveness.
Well for their confidence that you're moving towards the two percent target is almost a cliche. Now what does that actually mean? Does it mean you need to see the various inflation indicators keep coming down even if it's only say a tenth. Do you have a level of the year over a year rate of inflation that you want to hit?
Uh?
How can people judge what the FED is going to do? What they're thinking about?
So what my view would be is, I'd like to see a few more months of inflation reports that are positive in the sense of similar to what we got last month. I'd like to see that continue. Remember, at the beginning of the year January inflation was higher. There was some real issues with measurement, you know, residual seasonality in that measure. But then we got two more reports that were consistent with Wow, there's not been progress this year.
I came into the year not expecting the same l degree of progress that we saw over the second half of last year because a lot of we did get a lot of help from the improvement in supply conditions, both in the labor market and in product markets, and I didn't expect that to continue. And a lot of the work that the Cleveland Fed does in are Center for Inflation Research suggests that it's going to take some time to get inflation back to two percent all the
way back. So my projection is that we probably won't get there until twenty twenty six, but we'll see progress continue in my modal view, and that's enough to then say, Okay, it's time to start the process of bringing rates down and normalizing our propose.
As long as it moves down, it doesn't have to hit a point target.
Yeah, not to me. To my view would be that if I continue to see some of these better inflation reports that we got then we got earlier in the year, if that continues, then I'd feel comfortable starting that process of normalizing rates.
Well, you've said what others have said on the FED that once the momentum is there, it'll keep going down. So you don't want to wait till you get to two so you don't fall below it. But by implication that means you're going to be starting behind the curve. Inflation will already be heading in that direction. Can you put the brakes on fast enough so that it doesn't go back down disinflationary territory?
Well, so let's step back from that. I don't know whether we're behind the curve, right. M Policy affects the economy with a lag, as we know. You know that you know long and variable lags. So we've got to make sure that we're gonna be taking some of the restrictedness off before inflation gets to two percent. And so when we're thinking about it's it's really is it? Are
we confidence on the path back to two percent? But then it's a calibration exercise, right, Taking into part both parts are remanding, right, we wanna maintain healthy labor marketing conditions at the same time ensuring that inflation goes all the way back down to two percent. And so we're gonna the Committee will be calibrating its policy right to achieve both parts of its mandate and taking to account the risks to both parts of this mand aid as
it goes forward. So I think that's the way I view it is that this really is now monetary policy is well positioned no matter which side the risk manifests themselves, and then the work of the committee is to assess those conditions incoming information, how's inform your outlook, how's it affect the risk around the outlook, and what is that the implications for policy. So I think that's what the exercise is going to be going forward.
When you're looking at the outlook for the economy. There's a lot of criticism on Wall Street that the FED being data dependent. It's always looking at what's happened in the past, perhaps not realizing you're constantly talking with people in your district, with CEOs in your district companies and getting their views, and I'm wondering how well their views that they're telling you now end up matching up to the data.
So you're exactly right, Michael. The work that we do in the districts is incredibly important because we talk to a number of contacts, business contacts, community development practitioners, labor market representatives, so we have a really good sense of what is really happening in the economy, and right now, what they're telling us is very similar to what's in the data. Right in terms of the labor market. It is easier to higher now than it was a year ago.
It is easier to retain workers than it was a year ago. The offers they have to make on wages are lower than they were a year ago. They averaged for our district expectation for this year is four percent, a year ago is five percent. So that n sort of balancing between supply and demand is happening when you
talk to businesses about what they're seeing out there. Similarly, you know there are firms that are telling us that, wow, I wish, wish I had raised my prices higher last year, because now it's much harder to raise prices cause price pressures, and the you know, whether the consumers will accept the the price increases is coming down. They don't have as
much pricing power as they did before. Nonetheless, there's still some and so that's another thing indication that, Okay, we've done pretty well on inflation getting it down, but we're not all the way back to two percent, and that's gonna again be something that the Committee is going to have to keep assessing. But I would say that what we're hearing from our context is very similar to what's in the data you know, demand has moderated a bit
across firms in our district. There are several firms that say the infrastructure spending and the support from the federal programs is they've benefited from it and they expect to continue to benefit from it. So again, you know, the economy seems to be still on a good, solid, firm stance, and now it's a question of like, let's get inflation back to two percent, let's keep those labor markets healthy.
Well, we're going to get a couple more inflation reports obviously before the next meeting. Would you say that July is actually a live meeting in play? Would September be the first one?
I mean, I think all meetings are always in play. Again, it's really going to be about what happens in the economy. So rather than think in calendar time, I think the better approach is to think about, how is the economy evolving? Do you have has your confidence been raised that given the reports that have come in, that inflation is on that sustainable path back to two percent? And I think that committee is going to do that careful analysis and
also being assessing what's happening in the labor market. We have seen the uninflorment rate move up. It's moved up I think six tenths of percent since early last year. So again you've got to assess both parts of the mandate. When we started raising rates, we were focused wholly on the inflation part of the mandate because labor markets were strong and inflation was hot. Now, as inflation has come down, both parts of the mandate now become very important for
us to be assessing risk around it. And so I'm confident that the Committee will continue to do that as it calibrates its policy rates to the economy as it's evolving and as they expect it to continue to evolve.
You've got a big calendar data in the middle of your meetings that I know you would say doesn't have anything to do with us the election. But would you say a rate move if inflation continues to cooperate, is more likely before or after.
I honestly can tell you. And I've gone to a lot of FOMCTE meetings. Someone told me I went over two hundred FOMC meetings in my career, not all as a policy maker course as a research director at the Philly Fed. Politics doesn't enter the room. It really is about what can we do with our policy to achieve our dual mandate goals, taking into account what the incoming information is telling you about the outlook for the economy, taking into account what the risks around achieving our dual
mandate goals is telling us. And there's nothing about politics that enters these decisions.
Well, it could have an effect next year in the sense that if we got a new president, we'd have new fiscal policies. We've got a lot of problems coming up in Washington next year with the debt ceiling, with budget negotiations, with taxes. How much faith can we put in the dot plot for twenty twenty five and for the forecast in twenty twenty five, It seems like there's somebody unknowns that the Fed really can't have any idea what's going to happen.
Well, we do have an idea because we have to do a forecast. Right whenever you're setting monetary policy, because you know it doesn't affect the economy immediately, it takes some time to play out. You have to think about what's happening with the economy. I think every business does that. They're all setting sessing what's going to happen to my company. Where do I think the environment is. We're doing the
same thing. We have a review of where the economy is most likely to go, but we also understand that as you go further out in the horizon, it could evolve differently than our current expectation. Is right, it could be that labor markets, you know, detriguer faster than we're effected. Now that's not my base case, but it's possibility. It could be that inflation, you know, even though we've gotten a couple of reports, maybe hangs up there a little
bit longer. You know, the research that we do with the Cleveland Fed suggests that it's going to take some time for inflation to come back down, but it is going to come back down. And so that is always true. And the longer time you go out right, the less certainty there is about things. So you know, my expectation is that will be systematic and how we adjust policy based on what's coming in in terms of telling us about where the economy is going and what the risk are.
And that's I think the way to view this.
Right.
The committee can't be precient, right, We can't know for sure what's going to happen. But what we can do is we can assess us best we can where the economy is going and there's risks, and set our policy appropriately, and if information comes in that suggests that, oh, the economy is evolving differently than we might have thought, will adjust policy in response to that.
We have about thirty seconds left, one last time for all the people on trading desks who are watching you right now. Any forward guidance for Wall Street.
No, but just understand that the Committee and the institution at the FED really does focus on setting policy to achieve our dual mandate goals. We're very committed to doing that, and we're committed to getting price stability again, inflation down to two percent, while maintaining healthy labor markets. And I think that's the key thing for the Wall Street to understand.
Oh, by the way, Cleveland, Indians weren't supposed to be any good this year there at first place? Is that because of Fed monetary policy?
Oh? Of course that's definitely the pause.
Thank you very much, Loreena Vester, president of the Cleveland FED for two more weeks. Thank you for joining us today here on Bloomerick