Bloomberg Audio Studios, podcasts, radio News. Welcome to over Open Interest on Bloomberg TV and Bloomberg has Intelligence on Bloomberg Radio. To our viewers and listeners around the world. I'm Michael McKee, international Economics and Policy correspondent, and joining me this morning
is Alberto Mussolam. He is the president of the Saint Louis fed Thank you for coming in this morning here in Washington, and we have some news in Washington that we may be getting close to the end of the shutdown, which would release data. But just in case that doesn't happen. Based on what you know, now, what do you think about the economy.
Mike, good morning, Great to be here. I see an economy that has been pretty resilient, where growth has been roughly around potential around one point eight for this year, in spite of a lot of uncertainty. I see a labor market that has been around for full employment is around full employment has been cooling, demand and supply have been cooling. And I see inflation which has been closer to the three percent level than to our two percent target.
Well, we know that when the data comes out, everybody will be parsing it. Carefully, But is it going to add a lot to your knowledge of where the economy is and possibly change any decision you might make.
More data is better than less data, so we will learn it always has additional value. I do feel that we have a pretty good sense of where the economy is. We have availed ourselves during this period of unofficial data dearthlet's call it that, with private sector data. We have been in close contact with all of our constituents, businesses, households, community leaders in our districts. So I feel we have
a pretty good sense of the economy. But I'm very much looking forward to seeing the official data releases because they are the gold standard and they'll provide additional Well at.
Our companies in your district telling.
You, you know, they are saying that the consumption has been resilient. They're saying that growth has been fine. They're saying the libor market has softened a little bit. They see much more, many more applicants per vacancy. They report compensation growth somewhere between three and a half to four percent. So things look reasonably okay.
But the consumption that remains resilient. Obviously, at the upper ends you have the stock market wealth effect driving it. But I know you've been worried about the lower death syles because they're taking out more debt.
That's exactly what's happening. So we estimate that the real consumption growth of the high income folks and of the low income folks hasn't been about the same. But as you said, the higher income households are consuming from the wealth effects they have in the stock market and home prices. By the way, lower income folks are taking on more debt. They're taking on more credit card debt. And that's how the economy has been thus far.
Well, taking on debt to continue consumption. A cynical economist might say, what have we heard that before and how did that turn out? Are you worried that we're setting up for a problem?
By and large when I look at consumer finances, if you look at consumer balance sheets, by and large for the economy, they are okay. Consumer is not over indebted here. Now, over the past year, we saw an increase in subprime loan defaults, We saw an increase in credit card defaults. Now over the past year those have started to stabilize and actually come down some. But you know, at the
lower end of the income spectrum. You always have to worry that, you know, those consumers who live, you know, hand to mouth need to need to wait until the end of the month to make it. You know, could be always could be strained.
Companies, I know have been telling you and your colleagues for some time that they're waiting for clarity, especially on fiscal policy going forward, which doesn't seem to necessarily becoming. Are any of them saying, we're kind of at a point now where we have to raise prices to keep up with our input prices, or we have to cut back on people because our margins are compressing.
Two questions to answers. I think companies tell me that uncertainty has plateaued and that they can understand how to operate in this with this new higher level of uncertainty. So some of that is going on in terms of pass through of higher costs. Companies are experiencing higher costs somewhat related to tariffs, some are related to other things
like insurance, which is totally unrelated to to tariff. TIFF's and companies that are upstream so earlier in the production process are successful in passing on those costs to other companies to build products that they build. Companies that are closer to the consumer and selling to the final purchaser of a good are having more difficulty in passing things on because they are facing some pushback from the final buyer.
The labor market, how fragile is it. We've seen a lot of layoff announcements over the past couple of weeks. Is this a gathering trend? Are we going to start talking about the SAM rule again.
I see the labor market as having cooled in an early way, both because supplying demand have cooled. The latest challenger job announcements, which are you're referring to, you know, I definitely took notice of them, but they don't necessarily mean the labor market, you know, is about to go into deterioration phase in the same week that they were announced. As you know, the weekly claims, which are you know, another very good indicator of layoffs, has has remained stable
so far. So you have to look at all of the data in the labor market and see whether those layoff announcements will actually materialize.
In terms of supply problems in the labor market. Monetary policy can't affect that.
The traditional way to think about monetary policy is that it is more effective with respect to cyclical and demand side type of factors. But I think we also need to be thinking, if the economy is going through a structural transition, what role does monetary policy need to play facilitation facilitating that transition. So we have to, in my mind, be thinking about those two things. Now.
There are two arguments that seems to be at the FED right now. One is that we need to get ahead of a brewing problem, especially in the labor market, and the other is if you're in a dark room, you want to move carefully and maybe pause. Which one do you think carries more weight?
The way I think about it is, I feel we have adequate information to make decisions to cut rates or not to cut rates. For me, it's about the outlook that I happen to have and the balance of risks that I happen to have with the information that I currently have. So, going back to your first part of the question, in the past year, the real federal funds rate has declined by two hundred and fifty basis points.
Of that, one hundred and fifty basis points have been reductions in the nominal interest rate to provide insurance to the labor market and to get ahead of any deterioration and to keep it the labor market around full employment. And about one hundred basis points of the decline in the real federal funds rate has been looking through through the rise and expected inflation, mostly due to tariffs. So that's how I think about monetary policy right now.
Well, to the extent that they know, what are companies telling you about monetary policy? Do they say that we're going to have to raise prices or cut employees if you don't cut interest rates?
Not necessarily. I don't hear that from companies. Companies often are more concerned about non interest costs that are increasing. For example, I mentioned insurance, but you know raw matarial costs and other costs to produce things all the way from building homes to producing manufactured goods, and so I hear more about that than about interest costs being something that needs to be passed on to consumers. So it's
very important that we continue to focus. I'm bringing inflation back down towards two percent.
Well, we hear a lot from your colleagues. We heard from Chair Powell about the risk of cutting too fast versus the risk of not cutting soon enough. What about the risk credibility if you cut but then inflation doesn't go down and you have to start thinking about raising rates again.
As Chairpeal said, there's no risk free path. And if we focus too much on the lave market and then cut too aggressively, we can have an undesired outcome on the inflation side. If we focus too much on the inflation side and leave market to teer rates, we're going
to have an undesired outcome. And so right now, what our strategy montary policy Strategy document says is that when you have some tension between your two goals, you have to follow a balanced approach, which is to a steer monetary policy to attend to both goals.
Well, which way would you steer it in December? Based on what you know now?
I think again it's very important that we treade with caution here. I think there is limited room to ease policy further without policy becoming overly accommodative. Montary policy, in my estimation, is somewhere between modestly restrictive and neutral, probably
closer to neutral. If you look at the real federal funds rate, it now is around one percent and one percent happens to be the long run neutral rate in real terms for the federal funds rate of the entire committee, of the medium, I should say, of the entire committee. So I think we need to continue to lean against inflation to make sure we bring inflation back down towards our two percent target while providing some insurance to the
labor market. One thing I hear often when I visit with folks in my district is that people are having more month than money increasingly number one. Number two, I hear that folks are increasingly going to food pantries, including middle income folks. And I hear that aid institutions are increasingly getting requests for utility assistance, probably related to higher
electricity energy prices, I should say electricity prices. So those three things tell me that it's really important that we bring inflation back forwards two percent to allow households to catch up with our real incomes.
I've only got about thirty seconds left. Markets are up this morning. They're cheered by the possibility of a shutdown deal. But when the sun comes up in the east, they've been going up cheerfully lately. Are you worried about the level of asset prices.
Financial conditions are very accommodative of economic activity and of employment. The FED the Board just released as Financial Stability Report, where it says that asset valuations are notable and it's not our job to oppine on particular valuations of markets. But if you look at that report suggests that house prices are seam elevated relative historical standards, stock prices seem elevated, and to me, it's just the flip side of accommodated financial conditions.
Alberta Miselle, thank you very much for joining us this morning. The president of the Saint Louis Fete