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We begin this hour with stocks adding to record highs at a pivotal moment for the Federal Serve, rising inflation complicating the rate outlook as a new regime takes hold at the top of the Central Bank tomorrow. Joining us now in his final broadcast interview as a member of the Federal Reserve Board of Governors, Steven Myron, Governor Maren good to see you, sir.
Good to see you. Thanks for having me back.
We've got a moment to step back and sort of reflect on your experience at this institution. We talked lots about how you've been received externally. Can we just start with how you've been received internally over the last few months.
Sure, this has actually been one of the biggest surprises, you know, given all the drama at the beginning, I've been received internally, I think very very politely, very cordially, and very kindly. And I think folks have largely enjoyed some of the some of the intellectual conversations, some of the challenges that I've leveled against some of the ways
that they had been thinking beforehand. And I think that the overall response has been you know, very welcoming and very kind, and that's one of the things that I'm most grateful for.
What are the kind of ideas that have been received well, that are shaping debates right now that will linger and continue beyond your departure.
Yeah, sure, so one, you know, so an example of one of those things is the importance of regulations for determining the supply side of the economy. I mean, we spend a lot of time, you know, out in the financial world at in policy discussing the effects of a thirty three versus thirty five percent marginal tax rate. But the truth is that regulations are often infinite taxes, and being told you're not allowed to do something versus you are allowed to do something is a very very strong difference.
And this had played a very small role in a lot of the modeling discussions happening at the FED, in a lot of the outlooks that I that I heard people present, and I came in and really hammered that idea, and I think sort of moved it forward. And now a lot of people talk about it very often internally and externally, and you know, sort of talk a lot
about supply shocks. This is a positive supply shock that is unfolding and continues to unfold, and will I hope mitigate some of the negative supply shocks we also get hit by.
We let's talk about another supply shock. And I think it's been central to some of the arguments you've made on the commit and that's population growth, the negative population growth that we've seen, which is lower the break even rate for the labor market, and contribute it to arguments in some places for hotter, stickier inflation. You've taken the other side of that. Can you just explain that for us?
Yeah, So I think this is a really subtle issue with a lot of moving parts. Now at a very high level, what I would say historically is that we've seen a lot of countries in different places have declines in population growth rates and stagnant populations or shrinking populations.
And I think the cross country and.
Historical evidence is that it's unambiguously disinflationary or even eventually deflationary. Now, there's a few ways that that works. One is by reducing sorry, there's a few consequences of lower population growth. One is it does reduce the break even in payroll growth rate. So the number of jobs you need to create every month to hold the uneploymentary constant that does come down. That's a mildly hawkish implication because it means you shouldn't get so concerned about very very low job
creation rates. However, there's also there's also duffish implications as well, which are that it lowers than new rate, it brings interest rates down over time, and we've sort of seen that across countries and historically and historically to be the case. And it's also just inflationary through long lived capital and
consumer goods. And if you think about something like housing, right, the supply of houses is relatively fixed in the short run, and if you throw millions of new people into an economy, you're going to drive up the price of rents because they need places to live, right, You're going to create inflation. And that inflation is very very persistent because of the way that housing inflation is calculated, it's very very sticky.
If you have declining population growth, you don't need as much, you don't need as much home price growth, and that very inflationary tailwind gets taken away and ceases to be a major driver inflation. And I think you've sorted, you've been seeing that start to play out in the data market. Rents in this country have been growing at a one
percent rate for the last few years. This is one of the biggest components of the inflation in disease, and I think you're going to continue seeing measured measured PCE and CPI rents and measured pc and CPI shelter inflation continue to converge down to those.
Very low levels.
So I think there's one hawkship of which is the lower break even peril rate. But there's also some very dubblish implications. Was that it reduces the neutral rate and it brings down inflation through some of these long lived capital and investment goods.
This is a longer term structure for how to think about inflation and the benchmark rate of the Federal Reserve and how it sort of it works with the sort of long term inflation rate. Near term though, one thing that you've been known for a hallmark of your time on the Fed was that you voted to cut rates
at least once at every single meeting. Do you think that that still holds even though in the short term it does seem like the inflationary shock is overwhelming potential structural changes that could lead disinflation.
I do, and I think this is I think this is maybe one of the biggest differences between me and a lot of other folks is that I take very seriously the idea of Manterrea policy lacks, very very seriously. Mantera policy doesn't hit the economy right now. If we changed interest rates today, it wouldn't flow through into the
economy until twelve to eighteen months from now. Right now, there's some disagreement of exactly how long those lags are are, but I think twelve to eighteen is the consensus view.
And therefore, for any shock.
That's hitting the economy today, you can't think about what the effect in the next few months is. You need to think about what the effect in the next twelve to eighteen months is, and sorry, the effect twelve to eighteen months out. So if oil goes higher, it's a supply shock. Straits and hore moves are closed, right, that's
going to boost the oil price today. And with a bunch of other stuff that's very tightly tied to energy prices like airfares, right, that's going to go higher very quickly within the course of a few months and we've been living through that, and that is very real, right, there's no way that is very real inflation. But it is not inflation that Montara policy can affect. Monteria policy
can affect twelve to eighteen months from now. So there's got to be a reason that you think airfares and oil prices are going to be moving higher in the summer of twenty twenty seven, in the fall of twenty twenty seven, not the summer and fall of twenty twenty six. And so it's those lags that really should be driving where you think about Ford looking montary policy should be.
And that's a lot of what I've tried to hone into when thinking about population growth and deregulation and saying that the traditional view that we should look through in oil shock should prevail. This is very you know, vanilla basic traditional mandary policy.
Part of the problem is that the market doesn't agree, at least not in terms of where longer dated bonds are trading and where yields are shifting. Where you see them shifting higher even as the front end stays where it is. Do you think that in this type of environment it's imperative to have some sort of Fed Treasury accord akin to what people have been talking about, where the Treasury steps in to sort of influence the long end while the FED cuts rates on the short end.
So let me address those separately.
So the market not agreeing is part a hall of mirrors issue, because if you have if the FED says we're very backward looking and inflation over the last twelve months is going to determine policy that affects twelve to eighteen months from now, meaning the economy in twenty twenty seven is affected by data in twenty twenty five in that world, right, so very very backward looking. If that's how the FED communicates that it's setting policy, then the
market is going to start to reflect that. And so the market reflecting a lack of interest rate cuts, right, is in part because the FED is telling them we're backward looking, right, And so so that that's going to
create a self reinforcement problem. Now on the Fed Treasury accord, you know, so first of all, you know, I won't be involved in that if it happens, but you know, I have done some work on the balance sheet, and I do think it is important that the one of the problems with having a very large balance sheet and lots of securities, lots of treasure securities on the Federal Reserve's balance sheet is it does start to get the FED involved in questions that have some fiscal implications.
Right, if we own a huge.
Chunk of debt, then that means that we're we're we're impinging on decisions that traditionally are the realm of the fiscal authority. What is the distribution of public death public debt that it issues that that's held by the public. And so I do think it is important that if you have a large balance sheet, there needs to be there needs to be, you know, some clear delineation about
who's doing who's doing what. And to me, these questions are really murky and they you know, they implicate independence to an extent, and therefore it's one of the reasons among many that I would favor having a smaller balance sheet.
How close do you think the FED should work with the Treasury to achieve that? How closely should the FED work with the administration?
Yeah, So, so my view is that the FED having a big balance sheet starts to implicate a lot of those lines and becomes and becomes problematic. So the FED should strive to have as small a balance sheet as it can right to achieve its goals and implementation framework. And if we can sort of improve that implementation framework and make it smarter to reduce the minimum size the balance sheet that we need, then that's a great thing.
And that was a major thrust of the paper that I wrote in the spring with Alessandra Barbarino and Anthony Dirks and and and a less say Anderson and and so that was a that was a major thrust of that work. That was that was really important now in terms of coordinating, Right, the FED should do what it should do for montera policy, and the Treasury should do what it should do in terms of fiscal policy. And the level of coordination should I think should I think
be you know, sort of separate. Right, they should be doing what they what they want to do for each of their own priorities. However, there are times when there is going to be half when there is going to have to be that type of coordination. So for example, you know, right now we're doing the reserve these reserve management purchases where we're we're expanding our balance sheet to sort of provide a minimum level of reserves into the
economy to meet reserve demand. Where you know, we're we're buying treasury bills, We're letting mortgages continue to mature off of our balance sheet or in place them the treasury bills. Right, Like in theory, if we did enough, you know, sort of conversion of our balance sheet, of our existing balance sheet into treasury bills, we may be absorbing all of the supply, right and then some. So this is an example of a time where there would have to be very tight coordination.
We've got an administration right now, very interested in financial markets. The President often looks at where the index level is and the equity market. We've got a Treasury secretary. They used to try this stuff. Did you speak to them in your time at the Federal Reserve. Did the President ever pick up the phone and say, hey, Steve, what's happening? Tell me what you're saying in the market, in the economy.
Yeah, So I spoke to the president when I when I went to go resign from the Council of Economic Advisors, I went to bring my my recommen sorry, my resignation letter.
But you know, he doesn't tell me anything. He doesn't tell the whole.
World right this This president is very forthright with his views, and he tells journalists all the time, including Bloomberg journalists, exactly, you know, exactly what's on his mind about policy, where and where it should be.
So no, I didn't.
I'm not in receipt of any information that's not that's not public.
Because we've started this conversation by talking about how you were received internally externally, I thought unfairly at times. Basically everything you said about interest rates and on the economy was always described as just doing the president's bidding at the Institution, at the Federal Reserve. Did people see it that way internally when you put your hand up and said, I want to write out twenty five basis points I'm dissenting.
Was there a roll of the eyes. Here we go, this is the president and Sky during the president's bidding.
Well, thank you for those words.
I do think it's I do think it's clear that I've disagreed with with lots of people on policy on lots of times. There have been times when there have been signals out of the White House that they wanted policy rates lower than I had my dots, and there have been times when there's been signals out of the White.
House where they thought that I was too dubbish.
Right.
So for example, the NEC director after my first vote said that he would have preferred a twenty five basis point.
God right.
So I clearly do my own thing and have my views, and they're all I think grounded in very traditional economics. And we were talking about population growth before, like this is not new, right, Like six years ago we all have been talking about it is everybody becoming Japan, you know, that would have come up several times a week, right, Like, none of this is new, None of this is is heterodox economics. None of this sort of says we need to discard with the entire framework. It's all within the
traditional framework. And this is part of why I think the reception internally has been has been generally pretty good, is because I'm engaging with folks on their ground, right, Like I'm within the world of normal economics. When we're talking about what drives the interest rate and popul the neutral interest rate, and does population growth drive it? And is it inflationary or disinflationary? This is all well within sort of normal.
We're trying to figure out what kind of an institution Kevin Walsh is walking into, how he'll be treated, how difficult will be to get people on his side as he starts to think about changing this institution, particularly when the form of FED share. We'll be sitting there as a governor on the Board of Governors. Can you help us understand that from a man inside the building, what that might look like in the next few months.
Yeah.
So, I think one thing that's important to understand is that people have FED are responsive to arguments, and as I said before, you know, I've been hammering deregulation among other things since the day I got there, and you know, they start to respond, but it takes time, right, you know, it's it's it's a it's a it's a bit of a slow moving, slow moving process.
How being there make it harder?
Well, you know, I don't I don't know about I don't know about that. You know, certainly charm Powell built a lot of the institutions and processes that exist that exist there, and so you know, so that dynamic may you know, sort of may may play into it. I don't know, but that'll be an issue for for for chairman, doesn't it wash to to deal with when you guess and.
When you heard the chairman in the news conference present to the press and sort of world that he was staying gone as a governor. Was that the first time you heard of it? Or did he town the Board of Governors ahead of time that that was his plan?
No, he didn't.
He didn't tell me ahead of time that that was his plan. But he'd always said that, you know, publicly and privately there's something that it's something he might do.
And so it wasn't It wasn't entirely a surprise. What was your reaction to it? You know, Look, my reaction to that is that when I was.
The incoming chairman of the Council of Economic Advisors last year, I was very grateful to the previous chairman, Jared Bernstein, for spending time with me on the phone, being very generous with his time several hours, over over over over days and weeks, giving me advice for how to be a good cea chairman. And I really appreciated that and sort of how does the place run, and you know, what are your responsibilities and how do you do a
good job? And I thought that that was really generous of him and I was really appreciative that, and then I went out of my way to make sure they very quickly put his portrait on the wall of former CEA chairmen in the offices and nyes and how are building. You know, it's to make sure that happened, that happened quickly without delay, and I was.
Really grate for So.
Look, transitions are important, and I think that you know, it is maybe helpful to have someone there to give advice. Here's how to be an effective chairman, Here's how to lead the committee's you know, here's how the building works, maybe a little bit different than it was twenty years ago, right, I think that can be helpful. But I still think it's important that it be a transition because you want to have people's loyalties undivided. You want to have there
be very clearly one chairman. You want to have a place where there's no question about no question about who's in charge, and there's no talk of rival factions and things being split. I think you want to have you want to have a sense of unanimity and clarity, and so transitions are important, and I think it can be helpful to have to have help and transition.
But I still think it's important that it is a transition, Steve, and it's going to say you thanks for band care. You know, I just wanted to finish on this.
I think a lot of people might describe your tenure at the Federal Reserve as somewhat controversial. I see it completely differently. I've seen this play out now over a number of months, and I've said this repeatedly. You've had energized debate at the FMC that's spilled out publicly in a way that we haven't seen in a long long time, if ever, at the Federal Reserve, where people are being much more opinionated about where we are in this moment.
And the one complaint, the consistent complaint I've had about the Federal Reserve is one that you've had too, which is a group think. And it's very very difficult right now to describe this committee and that anyone working at the Federal Reserve is part of group think right now, because everyone's expressing themselves in a much newer, fresh, and more welcoming way.
Yeah, it seems like right now no one could accuse it this committee of group think, given how fractured it is, and frankly, all of the commentary coming out, so over to you, Kevin Walsh, to come.
In and have that diatest to luck. Steve's going to see you appreciate it. Stephen Maron their fed governor Stephen Maron